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LOANS AND LEASES

6 Months Ended

Jun. 30, 2020

The loan and lease portfolio categories were generally unchanged with the CECL adoption. Accrued interest receivable on loans and leases, which totaled $65.6 million at June 30, 2020, is excluded from the estimate of credit losses and recorded separately in other assets in the Consolidated Balance Sheets for both periods and not included in the tables below. Upon adoption of CECL, PCD assets were adjusted to reflect the addition of a $50.3 million ACL and a remaining noncredit discount of $110.0 million included in the amortized cost.

Loans and Leases by Portfolio Segment

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

TABLE 4.1



(in millions)	June 30, 2020		December 31, 2019
Commercial real estate	$	9,305	$	8,960
Commercial and industrial	7,709		5,308
Commercial leases	497		432
Other	40		21
Total commercial loans and leases	17,551		14,721
Direct installment	1,947		1,821
Residential mortgages	3,520		3,374
Indirect installment	1,767		1,922
Consumer lines of credit	1,377		1,451
Total consumer loans	8,611		8,568
Total loans and leases, net of unearned income	$	26,162	$	23,289

The loans and leases portfolio categories are comprised of the following where in each case the loss given default is dependent on the nature and value of the respective collateral:

•Commercial real estate includes both owner-occupied and non-owner-occupied loans secured by commercial properties where rents received by our borrowers from their tenant(s) on both a property and global basis are the primary default risk drivers, including rents paid by stand-alone business customers for owner-occupied properties;

•Commercial and industrial includes loans to businesses that are not secured by real estate where the borrower's leverage and cash flows from operations are the primary default risk drivers;

•Commercial leases consist of leases for new or used equipment where the borrower's cash flow from operations is the primary default risk driver;

•Other is comprised primarily of credit cards and mezzanine loans where the borrower's cash flow from operations is the primary default risk driver;

•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 where the primary default risk driver is the borrower's employment status and income;

•Residential mortgages consist of conventional and jumbo mortgage loans for 1-4 family properties where the primary default risk driver is the borrower's employment status and income;

•Indirect installment is comprised of loans originated by approved third parties and underwritten by us, primarily automobile loans where the primary default risk driver is the borrower's employment status and income; 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 where the primary default risk driver is the borrower's employment status and income.

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 primary market coverage spans several major metropolitan areas including: Pittsburgh, Pennsylvania; Baltimore, Maryland; Cleveland, Ohio; Washington, D.C.; 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 4.2


(dollars in millions)	June 30, 2020		December 31, 2019
Commercial real estate:
Percent owner-occupied	29.0	%	30.6	%
Percent non-owner-occupied	71.0		69.4

Paycheck Protection Program

The CARES Act included an allocation of $349 billion for loans to be issued by financial institutions through the SBA, utilizing the PPP. The Paycheck Protection Program and Health Care Enhancement Act (PPP/HCEA Act) was passed by Congress on April 23, 2020 and signed into law on April 24, 2020. The PPP/HCEA Act authorized an additional $320 billion of funding for PPP loans.

PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. Loans closed prior to June 5 2020, carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments are deferred until after a forgiveness determination is made, if submitted within ten months of the end of the loan forgiveness covered period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. This fee is recognized in interest income over the contractual life of the loan under the effective yield method. On June 5, 2020, the President signed the Paycheck Protection Flexibility Act permitting a lender to extend a PPP loan up to a 5-year term by mutual agreement of the lender and borrower; it gives the borrower 24 weeks to distribute the funds, and a borrower can remain eligible for loan forgiveness by using at least 60% of the funds for payroll costs. The SBA announced that lenders will have 60 days to review PPP loan forgiveness applications and that the SBA will remit the forgiveness payments within 90 days of receipt of approved forgiveness applications. The SBA has also stated that it will commence the loan forgiveness process on August 10, 2020.

As of June 30, 2020, there were approximately $2.5 billion of PPP net loans outstanding. PPP loan balances are included in the commercial and industrial category. Loan origination fees or costs, premiums or discounts are deferred and amortized over the contractual term of the loan or loan commitment period as an adjustment to the related loan yield. Given the 100% guarantee by the SBA, there is reduced risk of loss to us on these loans.

Credit Quality

Management monitors the credit quality of our loan portfolio using several performance measures based on payment activity and borrower performance. We use an internal risk rating assigned to a commercial loan or lease at origination, summarized below.

TABLE 4.3


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 establish the basis for the reasonable and supportable forecast portion of the credit risk. Our internal credit risk grading system is based on past experiences with similarly graded loans and leases and conforms to 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.

During the first quarter of 2020, the World Health Organization declared COVID-19 a pandemic. Subsequent to that declaration, the U.S. declared a national emergency concerning the COVID-19 contagion and certain states and local governments within our market footprint have likewise declared emergency conditions that have resulted in orders and guidelines that prohibited or imposed significant restriction on the operations of non-essential businesses. Interagency guidance was released to encourage bankers to work with their customers to provide some relief through loan modifications or other temporary concessions. We have been working with borrowers during the first half of 2020 to provide them with certain relief that falls within this guidance and within our underwriting standards. Therefore, for any payment or interest deferrals and modifications relating to COVID-19 for borrowers who were in good standing before COVID-19, they are not included in any past due, non-accrual, or TDR data presented in the following tables.

The following table summarizes designated loan rating category by loan class including term loans on an amortized cost basis by origination year:

TABLE 4.4


(in millions)
June 30, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
COMMERCIAL
Commercial Real Estate:
Risk Rating:
Pass	$	760	$	1,848	$	1,320	$	1,209	$	1,056	$	2,350	$	192	$	8,735
Special Mention	2		10		43		51		44		159		3		312
Substandard	—		3		12		47		59		132		5		258

Total commercial real estate	762		1,861		1,375		1,307		1,159		2,641		200		9,305
Commercial and Industrial:
Risk Rating:
Pass	3,249		1,169		727		453		162		420		1,113		7,293
Special Mention	5		20		59		31		16		31		61		223
Substandard	1		18		26		20		6		36		86		193

Total commercial and industrial	3,255		1,207		812		504		184		487		1,260		7,709
Commercial Leases:
Risk Rating:
Pass	122		159		105		67		9		6		—		468
Special Mention	9		1		4		4		2		2		—		22
Substandard	1		2		2		1		1		—		—		7

Total commercial leases	132		162		111		72		12		8		—		497
Other Commercial:
Risk Rating:
Pass	—		—		—		—		—		3		36		39

Substandard	—		—		—		—		—		1		—		1

Total other commercial	—		—		—		—		—		4		36		40
Total commercial	4,149		3,230		2,298		1,883		1,355		3,140		1,496		17,551

CONSUMER
Direct Installment:
Current	355		406		251		177		206		534		—		1,929
Past due	—		—		1		1		2		14		—		18
Total direct installment	355		406		252		178		208		548		—		1,947
Residential Mortgages:
Current	544		864		433		498		402		748		1		3,490
Past due	—		3		2		3		3		19		—		30
Total residential mortgages	544		867		435		501		405		767		1		3,520
Indirect Installment:
Current	199		571		595		242		104		45		—		1,756
Past due	1		3		3		2		1		1		—		11
Total indirect installment	200		574		598		244		105		46		—		1,767
Consumer Lines of Credit:
Current	3		9		12		5		6		131		1,198		1,364
Past due	—		—		—		—		—		12		1		13
Total consumer lines of credit	3		9		12		5		6		143		1,199		1,377
Total consumer	1,102		1,856		1,297		928		724		1,504		1,200		8,611
Total loans and leases	$	5,251	$	5,086	$	3,595	$	2,811	$	2,079	$	4,644	$	2,696	$	26,162

We use delinquency transition matrices within the consumer and other loan classes to establish the basis for the reasonable and supportable forecast portion of the credit risk. Each month, management analyzes payment and volume activity, Fair Isaac Corporation (FICO) scores and Debt-to-Income (DTI) scores and other external factors such as unemployment, to determine how consumer loans are performing.

The following tables present the December 31, 2019 summary of our commercial loans and leases by credit quality category segregated by loans and leases originated and loans acquired:

TABLE 4.5


	Commercial Loan and Lease Credit Quality Categories
(in millions)	Pass		Special Mention		Substandard		Doubtful		Total
Originated Loans and Leases
December 31, 2019
Commercial real estate	$	6,821	$	171	$	121	$	1	$	7,114
Commercial and industrial	4,768		149		144		2		5,063
Commercial leases	423		3		6		—		432
Other	20		—		1		—		21
Total originated commercial loans and leases	$	12,032	$	323	$	272	$	3	$	12,630
Loans Acquired in a Business Combination
December 31, 2019
Commercial real estate	$	1,603	$	116	$	127	$	—	$	1,846
Commercial and industrial	201		19		25		—		245
Total commercial loans acquired in a business combination	$	1,804	$	135	$	152	$	—	$	2,091

Following is a table showing the December 31, 2019 consumer loans by payment status:

TABLE 4.6


	Consumer Loan Credit Quality by Payment Status
(in millions)	Performing		Non- Performing		Total
Originated Loans
December 31, 2019
Direct installment	$	1,745	$	13	$	1,758
Residential mortgages	2,978		17		2,995
Indirect installment	1,919		3		1,922
Consumer lines of credit	1,086		6		1,092
Total originated consumer loans	$	7,728	$	39	$	7,767
Loans Acquired in a Business Combination
December 31, 2019
Direct installment	$	63	$	—	$	63
Residential mortgages	379		—		379

Consumer lines of credit	358		1		359
Total consumer loans acquired in a business combination	$	800	$	1	$	801

Non-Performing and Past Due

The following tables provide an analysis of the aging of loans by class.

TABLE 4.7


(in millions)	30-89 Days Past Due		> 90 Days Past Due and Still Accruing		Non- Accrual		Total Past Due		Current		Total Loans and Leases		Non-accrual with No ACL

June 30, 2020
Commercial real estate	$	18	$	—	$	77	$	95	$	9,210	$	9,305	$	22
Commercial and industrial	11		—		58		69		7,640		7,709		3
Commercial leases	1		—		3		4		493		497		—
Other	1		—		1		2		38		40		—
Total commercial loans and leases	31		—		139		170		17,381		17,551		25
Direct installment	4		1		10		15		1,932		1,947		—
Residential mortgages	17		3		13		33		3,487		3,520		—
Indirect installment	7		1		2		10		1,757		1,767		—
Consumer lines of credit	5		2		6		13		1,364		1,377		—
Total consumer loans	33		7		31		71		8,540		8,611		—
Total loans and leases	$	64	$	7	$	170	$	241	$	25,921	$	26,162	$	25


(in millions)	30-89 Days Past Due		> 90 Days Past Due and Still Accruing		Non- Accrual		Total Past Due		Current		Total Loans and Leases
Originated Loans and Leases
December 31, 2019
Commercial real estate	$	10	$	—	$	26	$	36	$	7,078	$	7,114
Commercial and industrial	9		—		28		37		5,026		5,063
Commercial leases	5		—		1		6		426		432
Other	—		—		1		1		20		21
Total commercial loans and leases	24		—		56		80		12,550		12,630
Direct installment	7		1		7		15		1,743		1,758
Residential mortgages	12		2		8		22		2,973		2,995
Indirect installment	15		1		3		19		1,903		1,922
Consumer lines of credit	5		1		3		9		1,083		1,092
Total consumer loans	39		5		21		65		7,702		7,767
Total originated loans and leases	$	63	$	5	$	77	$	145	$	20,252	$	20,397


(in millions)	30-89 Days Past Due		> 90 Days Past Due and Still Accruing		Non- Accrual		Total Past Due (1) (2)		Current		(Discount) Premium		Total Loans
Loans Acquired in a Business Combination
December 31, 2019
Commercial real estate	$	12	$	28	$	3	$	43	$	1,942	$	(139)	$	1,846
Commercial and industrial	2		3		—		5		259		(19)		245
Total commercial loans	14		31		3		48		2,201		(158)		2,091
Direct installment	3		—		—		3		60		—		63
Residential mortgages	8		4		—		12		382		(15)		379

Consumer lines of credit	7		2		1		10		357		(8)		359
Total consumer loans	18		6		1		25		799		(23)		801
Total loans acquired in a business combination	$	32	$	37	$	4	$	73	$	3,000	$	(181)	$	2,892

(1) Prior to the adoption of CECL on January 1, 2020, loans acquired in a business combination were considered performing upon acquisition, regardless of whether the customer was contractually delinquent, if we could reasonably estimate the timing and amount of expected cash flows on such loans. In these instances, we did not consider acquired contractually delinquent loans to be non-accrual or non-performing and continued to recognize interest income on these loans using the accretion method. After the adoption of CECL on January 1, 2020, 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.

(2) Past due information for loans acquired in a business combination is based on the contractual balance outstanding at December 31, 2019.

Following is a summary of non-performing assets:

TABLE 4.8


(dollars in millions)	June 30, 2020			December 31, 2019
Non-accrual loans	$	170		$	81
Troubled debt restructurings	—			22
Total non-performing loans	170			103
Other real estate owned	21			26
Total non-performing assets	$	191		$	129
Asset quality ratios:
Non-performing loans / total loans and leases	0.65		%	0.44		%
Non-performing assets + 90 days past due + OREO / total loans and leases + OREO	0.75		%	0.73		%

The carrying value of residential-secured consumer OREO 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 $2.9 million at June 30, 2020 and $3.3 million at December 31, 2019. The recorded investment of residential-secured consumer OREO for which formal foreclosure proceedings are in process at June 30, 2020 and December 31, 2019 totaled $0.1 million and $9.2 million, respectively.

Approximately $73 million of commercial loans are collateral dependent at June 30, 2020. Repayment is expected to be substantially through the operation or sale of the collateral on the loan. These loans are primarily secured by business assets or commercial real estate.

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. Consistent with the CARES Act and interagency guidance which allows temporary relief for current borrowers affected by COVID-19, we are working with borrowers and granting certain modifications through programs related to COVID-19 relief. As of June 30, 2020, we had $2.4 billion in loans that have been granted short-term modifications as a result of financial disruptions associated with the COVID-19 pandemic. Also, consistent with the CARES Act and the interagency guidelines, such modifications are not included in our TDR totals.

Following is a summary of the composition of total TDRs:

TABLE 4.9


(in millions)	June 30, 2020		December 31, 2019
Accruing	$	63	$	41
Non-accrual	34		15
Total TDRs	$	97	$	56

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 the six months ended June 30, 2020, we returned to accruing status $6.1 million in restructured residential mortgage loans that have consistently met their modified obligations for more than six months. 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 ACL.

Commercial loans over $1.0 million whose terms have been modified in a TDR are generally placed on non-accrual, individually analyzed and measured based on the fair value of the underlying collateral. Our ACL included specific reserves for commercial TDRs and pooled reserves for individually analyzed loans under $1.0 million based on loan segment loss given default. Our ACL includes specific reserves for commercial TDRs of $1.6 million at both June 30, 2020 and December 31, 2019, and pooled reserves for individual loans of $3.4 million and $0.8 million for those same periods, respectively, 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 ACL.

All other classes of loans whose terms have been modified in a TDR are pooled and measured based on the loan segment loss given default. Our ACL included pooled reserves for these classes of loans of $5.0 million for June 30, 2020 and $4.1 million for December 31, 2019. 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, for loans that were modified during the periods indicated:

TABLE 4.10


	Three Months Ended June 30, 2020								Six Months Ended June 30, 2020
(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	11	$	5	$	5	16	$	6	$	5
Commercial and industrial	9	2		1		16	3		2
Other	—	—		—		1	—		—
Total commercial loans	20	7		6		33	9		7
Direct installment	19	1		1		38	3		3
Residential mortgages	2	1		1		16	2		2

Consumer lines of credit	13	—		—		28	1		1
Total consumer loans	34	2		2		82	6		6
Total	54	$	9	$	8	115	$	15	$	13


	Three Months Ended June 30, 2019								Six Months Ended June 30, 2019
(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	11	$	3	$	4	12	$	4	$	4
Commercial and industrial	2	4		3		13	5		4
Total commercial loans	13	7		7		25	9		8
Direct installment	14	1		1		32	1		1
Residential mortgages	7	—		—		10	1		1

Consumer lines of credit	7	—		—		14	—		—
Total consumer loans	28	1		1		56	2		2
Total	41	$	8	$	8	81	$	11	$	10

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

Following is a summary of 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 4.11


	Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
(dollars in millions)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial real estate	4	$	1	8	$	3
Commercial and industrial	1	—		2	—
Total commercial loans	5	1		10	3
Direct installment	3	$	—	7	$	—
Residential mortgages	1	—		2	—

Consumer lines of credit	2	—		2	—
Total consumer loans	6	—		11	—
Total	11	$	1	21	$	3

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.

TABLE 4.12


	Three Months Ended June 30, 2019				Six Months Ended June 30, 2019
(dollars in millions)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial real estate	—	$	—	1	$	—

Total commercial loans	—	—		1	—
Direct installment	—	—		3	—
Residential mortgages	—	—		1	—

Consumer lines of credit	—	—		1	—
Total consumer loans	—	—		5	—
Total	—	$	—	6	$	—

Loans Acquired in a Business Combination

Prior to January 1, 2020, all loans acquired in a business combination were initially recorded at fair value at the acquisition date with no associated ACL. Refer to the Loans Acquired in a Business Combination section in Note 1 to the Consolidated Financial Statements included in our 2019 Annual Report on Form 10-K for a discussion of ASC 310-20 and ASC 310-30 loans.