ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES

9 Months Ended

Sep. 30, 2021

ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES

Beginning January 1, 2020, the former incurred loss method was replaced with the CECL method to calculate estimated loan losses. The CECL model takes into consideration the expected credit losses over the expected life of the loan compared to the incurred loss model under the prior standard. At the time of CECL adoption, we recorded a one-time cumulative-effect adjustment of $50.6 million as a reduction to Retained Earnings. The ACL balance increased by $105 million and included a “gross-up" to purchased credit impaired (PCD under CECL) loan balances and the ACL of $50 million. Included in the CECL adoption impact was a Day 1 increase to our AULC of $10 million.

The ACL addresses credit losses expected in the existing loan and lease portfolio and is presented as a reserve against loans and leases on the Consolidated Balance Sheets. Loan and lease losses are charged off against the ACL, with recoveries of amounts previously charged off credited to the ACL. Provisions for credit losses are charged to operations based on management’s periodic evaluation of the appropriate level of the ACL. Included in Table 5.1 is the impact to the ACL from our CECL (ASC 326) adoption on January 1, 2020.

Following is a summary of changes in the ACL, by loan and lease class:

TABLE 5.1


(in millions)	Balance at Beginning of Period		Charge- Offs		Recoveries		Net Charge- Offs		Provision for Credit Losses		Balance at End of Period
Three Months Ended September 30, 2021
Commercial real estate	$	176	$	(3)	$	2	$	(1)	$	(14)	$	161
Commercial and industrial	81		(2)		2		—		6		87
Commercial leases	16		—		—		—		—		16
Other	1		—		—		—		1		2
Total commercial loans and leases	274		(5)		4		(1)		(7)		266
Direct installment	27		(1)		—		(1)		—		26
Residential mortgages	33		—		—		—		—		33
Indirect installment	12		—		—		—		1		13
Consumer lines of credit	11		(1)		1		—		—		11
Total consumer loans	83		(2)		1		(1)		1		83
Total allowance for credit losses on loans and leases	357		(7)		5		(2)		(6)		349
Allowance for unfunded loan commitments	14		—		—		—		4		18
Total allowance for credit losses on loans and leases and allowance for unfunded loan commitments	$	371	$	(7)	$	5	$	(2)	$	(2)	$	367
Nine Months Ended September 30, 2021
Commercial real estate	$	181	$	(9)	$	5	$	(4)	$	(16)	$	161
Commercial and industrial	81		(11)		4		(7)		13		87
Commercial leases	17		—		1		1		(2)		16
Other	1		(2)		1		(1)		2		2
Total commercial loans and leases	280		(22)		11		(11)		(3)		266
Direct installment	26		(1)		—		(1)		1		26
Residential mortgages	34		—		—		—		(1)		33
Indirect installment	11		(3)		2		(1)		3		13
Consumer lines of credit	12		(1)		1		—		(1)		11
Total consumer loans	83		(5)		3		(2)		2		83
Total allowance for credit losses on loans and leases	363		(27)		14		(13)		(1)		349
Allowance for unfunded loan commitments	14		—		—		—		4		18
Total allowance for credit losses on loans and leases and allowance for unfunded loan commitments	$	377	$	(27)	$	14	$	(13)	$	3	$	367


(in millions)	Balance at Beginning of Period		Charge- Offs		Recoveries		Net Charge- Offs		Provision for Credit Losses		ASC 326 Adoption Impact		Initial ACL on PCD Loans		Balance at End of Period
Three Months Ended September 30, 2020
Commercial real estate	$	163	$	(3)	$	1	$	(2)	$	23	$	—	$	—	$	184
Commercial and industrial	98		(17)		1		(16)		11		—		—		93
Commercial leases	17		—		—		—		—		—		—		17
Other	1		(1)		—		(1)		1		—		—		1
Total commercial loans and leases	279		(21)		2		(19)		35		—		—		295
Direct installment	25		—		—		—		(1)		—		—		24
Residential mortgages	33		(1)		1		—		(2)		—		—		31
Indirect installment	17		(1)		1		—		(5)		—		—		12
Consumer lines of credit	11		—		—		—		—		—		—		11
Total consumer loans	86		(2)		2		—		(8)		—		—		78
Total allowance for credit losses on loans and leases	365		(23)		4		(19)		27		—		—		373
Allowance for unfunded loan commitments (1)	15		—		—		—		—		—		—		15
Total allowance for credit losses on loans and leases and allowance for unfunded loan commitments	$	380	$	(23)	$	4	$	(19)	$	27	$	—	$	—	$	388
Nine Months Ended September 30, 2020
Commercial real estate	$	60	$	(8)	$	6	$	(2)	$	48	$	38	$	40	$	184
Commercial and industrial	53		(25)		3		(22)		50		8		4		93
Commercial leases	11		—		—		—		6		—		—		17
Other	9		(3)		—		(3)		4		(9)		—		1
Total commercial loans and leases	133		(36)		9		(27)		108		37		44		295
Direct installment	13		(1)		—		(1)		1		10		1		24
Residential mortgages	22		(1)		1		—		(1)		6		4		31
Indirect installment	19		(6)		3		(3)		(6)		2		—		12
Consumer lines of credit	9		(2)		—		(2)		3		—		1		11
Total consumer loans	63		(10)		4		(6)		(3)		18		6		78
Total allowance for credit losses on loans and leases	196		(46)		13		(33)		105		55		50		373
Allowance for unfunded loan commitments (1)	3		—		—		—		2		10		—		15
Total allowance for credit losses on loans and leases and allowance for unfunded loan commitments	$	199	$	(46)	$	13	$	(33)	$	107	$	65	$	50	$	388
(1) The net benefit of $0.3 million for the quarter and $2 million for the year-to-date provision for the AULC is included in other non-interest expense on the Consolidated Statements of Income.

Following is a summary of changes in the AULC by portfolio segment:

TABLE 5.2


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
(in millions)
Balance at beginning of period	$	14	$	15	$	14	$	3
Provision for unfunded loan commitments and letters of credit:
Commercial portfolio	4		—		4		—
Consumer portfolio	—		—		—		—
Other adjustments:
Commercial portfolio	—		—		—		2

ASC 326 adoption impact:
Commercial portfolio	—		—		—		8
Consumer portfolio	—		—		—		2
Balance at end of period	$	18	$	15	$	18	$	15

The model used to calculate the ACL is dependent on the portfolio composition and credit quality, as well as historical experience, current conditions and forecasts of economic conditions and interest rates. Specifically, the following considerations are incorporated into the ACL calculation:

•a third-party macroeconomic forecast scenario;

•a 24-month R&S forecast period for macroeconomic factors with a reversion to the historical mean on a straight-line basis over a 12-month period; and

•the historical through-the-cycle mean was calculated using an expanded period to include a prior recessionary period.

COVID-19 Impacts on the ACL

Beginning in March 2020, the broader economy experienced a significant deterioration in the macroeconomic environment driven by the COVID-19 pandemic resulting in notable adverse changes to forecasted economic variables utilized in our ACL modeling process. Based on these changes, we utilized a third-party pandemic recessionary scenario from the first quarter of 2020 through the third quarter of 2020 for ACL modeling purposes. At September 30, 2021 and December 31, 2020, we utilized a third-party consensus macroeconomic forecast due to the improving macroeconomic environment. Macroeconomic variables that we utilized from this scenario for our ACL calculation as of December 31, 2020 included, but were not limited to: (i) gross domestic product, which reflects growth of 4% in 2021, (ii) the Dow Jones Total Stock Market Index, which grows steadily throughout the R&S forecast period, (iii) unemployment, which steadily declines and averages 6% over the R&S forecast period and (iv) the Volatility Index, which remains stable over the R&S forecast period. For our ACL calculation at September 30, 2021, the macroeconomic variables that we utilized included, but were not limited to: (i) the purchase only Housing Price Index, which reflects growth of 6.1% over our R&S forecast period, (ii) a Commercial Real Estate Price Index, which reflects growth of 9.5% over our R&S forecast period, (iii) S&P Volatility, which increases 7.7% in 2022 before declining 2.7% in 2023 and (iv) bankruptcies, which increase steadily over the R&S forecast period but average below historical levels. While we have not changed our ACL modeling methodology, we continually assess our key macroeconomic variables and their correlation to our historical and expected portfolio performance. During the quarter, we changed certain macroeconomic variables used for ACL modeling purposes as the new variables better correlate to our historical performance over the economic cycles.

The ACL of $349.3 million at September 30, 2021 decreased $13.9 million, or 3.8%, from December 31, 2020 due to the improving macroeconomic environment and positive credit quality trends. Our ending ACL coverage ratio at September 30, 2021 was 1.41%, compared to 1.43% at December 31, 2020. Total provision for credit losses for the three months ended September 30, 2021 was a net benefit of $1.8 million. Net charge-offs were $1.6 million during the three months ended September 30, 2021, compared to $19.3 million during the three months ended September 30, 2020, reflecting COVID-19 impacts on certain segments of the loan portfolio. Total provision for credit losses for the nine months ended September 30,

2021 was $3.0 million. Net charge-offs were $12.5 million during the nine months ended September 30, 2021, compared to $33.4 million during the nine months ended September 30, 2020.