Loans and Leases | 6. LOANS AND LEASES Following is a summary of loans and leases, net of unearned income: (in thousands) Originated Loans and Acquired Total Loans and December 31, 2016 Commercial real estate $ 4,095,817 $ 1,339,345 $ 5,435,162 Commercial and industrial 2,711,886 330,895 3,042,781 Commercial leases 196,636 — 196,636 Total commercial loans and leases 7,004,339 1,670,240 8,674,579 Direct installment 1,765,257 79,142 1,844,399 Residential mortgages 1,446,776 397,798 1,844,574 Indirect installment 1,196,110 203 1,196,313 Consumer lines of credit 1,099,627 201,573 1,301,200 Other 35,878 — 35,878 Total loans and leases, net of unearned income $ 12,547,987 $ 2,348,956 $ 14,896,943 December 31, 2015 Commercial real estate $ 3,531,146 $ 577,910 $ 4,109,056 Commercial and industrial 2,534,351 67,371 2,601,722 Commercial leases 204,553 — 204,553 Total commercial loans and leases 6,270,050 645,281 6,915,331 Direct installment 1,660,717 45,919 1,706,636 Residential mortgages 1,044,689 351,282 1,395,971 Indirect installment 996,175 554 996,729 Consumer lines of credit 1,021,830 115,425 1,137,255 Other 38,518 — 38,518 Total loans and leases, net of unearned income $ 11,031,979 $ 1,158,461 $ 12,190,440 The loans and leases portfolio categories are comprised of the following: • Commercial real estate includes both owner-occupied and non-owner-occupied • Commercial and industrial includes loans to businesses that are not secured by real estate; • Commercial leases consist of leases for new or used equipment; • Direct installment is comprised of fixed-rate, closed-end • Residential mortgages consist of conventional and jumbo mortgage loans for 1-4 • Indirect installment is comprised of loans originated by approved third parties and underwritten by us, primarily automobile loans; • Consumer lines of credit include home equity lines of credit (HELOC) and consumer lines of credit that are either unsecured or secured by collateral other than home equity; and • Other is comprised primarily of credit cards, mezzanine loans and student loans. The loans and leases portfolio consists principally of loans to individuals and small- and medium-sized The loans and leases portfolio also contains Regency consumer finance loans to individuals in Pennsylvania, Ohio, Tennessee and Kentucky. Due to the relative size of the consumer finance loan portfolio, these loans are not segregated from other consumer loans. The following table shows certain information relating to the Regency consumer finance loans: December 31 2016 2015 (dollars in thousands) Regency consumer finance loans $ 184,687 $ 186,162 Percent of total loans and leases 1.2 % 1.5 % The following table shows certain information relating to commercial real estate loans: December 31 2016 2015 (dollars in thousands) Commercial construction loans $ 459,995 $ 352,322 Percent of total loans and leases 3.1 % 2.9 % Commercial real estate: Percent owner-occupied 36.2 % 38.1 % Percent non-owner-occupied 63.8 % 61.9 % 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 2016: (in thousands) Balance at beginning of period $ 41,801 New loans 4,246 Repayments (4,013 ) Other (20,465 ) Balance at end of period $ 21,569 Other represents the net change in loan balances resulting from changes in related parties during 2016. Acquired Loans All acquired loans were initially recorded at fair value at the acquisition date. Refer to the Acquired Loans section in Note 1, “Summary of Significant Accounting Policies,” for a discussion of ASC 310-20 310-30 December 31 2016 2015 (in thousands) Accounted for under ASC 310-30: Outstanding balance $ 2,346,687 $ 1,258,418 Carrying amount 2,015,904 1,011,139 Accounted for under ASC 310-20: Outstanding balance 342,015 146,161 Carrying amount 325,784 140,595 Total acquired loans: Outstanding balance 2,688,702 1,404,579 Carrying amount 2,341,688 1,151,734 The carrying amount of purchased credit impaired loans included in the table above totaled $2.8 million at December 31, 2016 and $5.9 million at December 31, 2015, representing less than 1% of the carrying amount of total acquired loans as of each date. The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. 310-20 Year Ended December 31 2016 2015 (in thousands) Balance at beginning of period $ 256,120 $ 331,899 Acquisitions 308,312 — Reduction due to unexpected early payoffs (86,046 ) (47,075 ) Reclass from non-accretable 92,823 32,141 Disposals/transfers (409 ) (674 ) Accretion (103,730 ) (60,171 ) Balance at end of period $ 467,070 $ 256,120 Cash flows expected to be collected on acquired loans 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. During 2016, there was an overall improvement in cash flow expectations which resulted in a reclassification of $92.8 million from the non-accretable non-accretable The following table reflects amounts at acquisition for all purchased loans subject to ASC 310-30 non-impaired (in thousands) Acquired Acquired Performing Loans Total Contractually required cash flows at acquisition $ 99,611 $ 2,191,476 $ 2,291,087 Non-accretable (52,995 ) (264,233 ) (317,228 ) Cash flows expected to be collected at acquisition 46,616 1,927,243 1,973,859 Accretable yield (1,063 ) (307,248 ) (308,311 ) Basis in acquired loans at acquisition $ 45,553 $ 1,619,995 $ 1,665,548 In addition, loans purchased in the METR acquisition and Fifth Third branch purchase that were not subject to ASC 310-30 Credit Quality Management monitors the credit quality of our loan portfolio and uses several performance measures to do so based on payment activity and borrower performance. Non-performing non-accrual non-performing non-accrual non-accrual non-accrual non-accrual non-accrual non-accrual non-accrual Non-accrual Following is a summary of non-performing December 31 2016 2015 (dollars in thousands) Non-accrual $ 65,479 $ 49,897 Troubled debt restructurings 20,428 22,028 Total non-performing 85,907 71,925 Other real estate owned (OREO) 32,490 38,918 Total non-performing $ 118,397 $ 110,843 Asset quality ratios: Non-performing 0.58 % 0.59 % Non-performing 0.79 % 0.91 % Non-performing 0.54 % 0.63 % The carrying value of residential 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 $5.3 million at December 31, 2016. Also, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at December 31, 2016 amounted to $12.0 million. The following tables provide an analysis of the aging of loans by class segregated by loans and leases originated and loans acquired: (in thousands) 30-89 Days Past Due ³ 90 Days and Still Non- Accrual Total Past Due Current Total Loans and Originated Loans and Leases December 31, 2016 Commercial real estate $ 8,452 $ 1 $ 20,114 $ 28,567 $ 4,067,250 $ 4,095,817 Commercial and industrial 16,019 3 24,141 40,163 2,671,723 2,711,886 Commercial leases 973 1 3,429 4,403 192,233 196,636 Total commercial loans and leases 25,444 5 47,684 73,133 6,931,206 7,004,339 Direct installment 10,573 4,386 6,484 21,443 1,743,814 1,765,257 Residential mortgages 10,594 3,014 3,316 16,924 1,429,852 1,446,776 Indirect installment 9,312 513 1,983 11,808 1,184,302 1,196,110 Consumer lines of credit 3,529 1,112 1,616 6,257 1,093,370 1,099,627 Other 398 83 1,000 1,481 34,397 35,878 Total originated loans and leases $ 59,850 $ 9,113 $ 62,083 $ 131,046 $ 12,416,941 $ 12,547,987 December 31, 2015 Commercial real estate $ 11,006 $ 1 $ 23,503 $ 34,510 $ 3,496,636 $ 3,531,146 Commercial and industrial 5,409 3 14,382 19,794 2,514,557 2,534,351 Commercial leases 924 — 659 1,583 202,970 204,553 Total commercial loans and leases 17,339 4 38,544 55,887 6,214,163 6,270,050 Direct installment 9,254 3,813 4,806 17,873 1,642,844 1,660,717 Residential mortgages 8,135 1,470 2,882 12,487 1,032,202 1,044,689 Indirect installment 9,472 379 1,361 11,212 984,963 996,175 Consumer lines of credit 2,410 1,189 1,181 4,780 1,017,050 1,021,830 Other 73 169 — 242 38,276 38,518 Total originated loans and leases $ 46,683 $ 7,024 $ 48,774 $ 102,481 $ 10,929,498 $ 11,031,979 (in thousands) 30-89 Days Past Due ³ 90 Days and still Non- Accrual Total Past Due (1)(2) Current (Discount)/ Premium Total Loans Acquired Loans December 31, 2016 Commercial real estate $ 9,501 $ 23,890 $ 949 $ 34,340 $ 1,384,752 $ (79,747 ) $ 1,339,345 Commercial and industrial 1,789 2,942 2,111 6,842 353,494 (29,441 ) 330,895 Total commercial loans 11,290 26,832 3,060 41,182 1,738,246 (109,188 ) 1,670,240 Direct installment 2,317 1,344 — 3,661 73,479 2,002 79,142 Residential mortgages 8,428 10,816 — 19,244 416,561 (38,007 ) 397,798 Indirect installment 19 4 — 23 96 84 203 Consumer lines of credit 2,156 1,528 336 4,020 201,958 (4,405 ) 201,573 Total acquired loans $ 24,210 $ 40,524 $ 3,396 $ 68,130 $ 2,430,340 $ (149,514 ) $ 2,348,956 December 31, 2015 Commercial real estate $ 6,399 $ 12,752 $ 931 $ 20,082 $ 593,128 $ (35,300 ) $ 577,910 Commercial and industrial 1,065 616 103 1,784 72,037 (6,450 ) 67,371 Total commercial loans 7,464 13,368 1,034 21,866 665,165 (41,750 ) 645,281 Direct installment 837 659 — 1,496 43,596 827 45,919 Residential mortgages 5,871 15,136 — 21,007 366,742 (36,467 ) 351,282 Indirect installment 32 9 — 41 571 (58 ) 554 Consumer lines of credit 830 546 89 1,465 117,443 (3,483 ) 115,425 Total acquired loans $ 15,034 $ 29,718 $ 1,123 $ 45,875 $ 1,193,517 $ (80,931 ) $ 1,158,461 (1) Past due information for loans acquired is based on the contractual balance outstanding at December 31, 2016 and 2015. (2) Acquired loans 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 non-performing non-accrual non-performing non-accrual non-performing. We utilize the following categories to monitor credit quality within our commercial loan and lease portfolio: Rating 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 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 conforms with regulatory categories. In general, loan risk ratings within each category are reviewed on an ongoing basis according to our policy for each class of loans. 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 portfolio. Loans within the Pass credit category or that migrate toward the Pass credit category generally have a lower risk of loss compared to loans 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 by credit quality category segregated by loans and leases originated and loans acquired: Commercial Loan and Lease Credit Quality Categories (in thousands) Pass Special Substandard Doubtful Total Originated Loans and Leases December 31, 2016 Commercial real estate $ 3,895,764 $ 130,452 $ 69,588 $ 13 $ 4,095,817 Commercial and industrial 2,475,955 104,652 128,089 3,190 2,711,886 Commercial leases 188,662 3,789 4,185 — 196,636 Total originated commercial loans and leases $ 6,560,381 $ 238,893 $ 201,862 $ 3,203 $ 7,004,339 December 31, 2015 Commercial real estate $ 3,416,527 $ 52,887 $ 61,411 $ 321 $ 3,531,146 Commercial and industrial 2,335,103 109,539 87,380 2,329 2,534,351 Commercial leases 198,207 2,447 3,899 — 204,553 Total originated commercial loans and leases $ 5,949,837 $ 164,873 $ 152,690 $ 2,650 $ 6,270,050 Acquired Loans December 31, 2016 Commercial real estate $ 1,144,676 $ 85,894 $ 108,128 $ 647 $ 1,339,345 Commercial and industrial 274,819 20,593 34,967 516 330,895 Total acquired commercial loans $ 1,419,495 $ 106,487 $ 143,095 $ 1,163 $ 1,670,240 December 31, 2015 Commercial real estate $ 464,162 $ 47,619 $ 66,129 — $ 577,910 Commercial and industrial 56,446 3,182 7,743 — 67,371 Total acquired commercial loans $ 520,608 $ 50,801 $ 73,872 — $ 645,281 Credit quality information for acquired loans is based on the contractual balance outstanding at December 31, 2016 and 2015. 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 originated consumer and other loans by payment status: Consumer Loan Credit Quality by Payment Status (in thousands) Performing Non-Performing Total December 31, 2016 Direct installment $ 1,750,305 $ 14,952 $ 1,765,257 Residential mortgages 1,433,409 13,367 1,446,776 Indirect installment 1,193,930 2,180 1,196,110 Consumer lines of credit 1,096,642 2,985 1,099,627 Total originated consumer loans $ 5,474,286 $ 33,484 $ 5,507,770 December 31, 2015 Direct installment $ 1,646,925 $ 13,792 $ 1,660,717 Residential mortgages 1,031,926 12,763 1,044,689 Indirect installment 994,661 1,514 996,175 Consumer lines of credit 1,019,783 2,047 1,021,830 Total originated consumer loans $ 4,693,295 $ 30,116 $ 4,723,411 Loans and leases 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 and leases for impairment unless a sustained period of delinquency (i.e., 90-plus non-accrual, Following is a summary of information pertaining to originated loans and leases considered to be impaired, by class of loan and lease: (in thousands) Unpaid Principal Balance Recorded Investment Reserve Recorded Investment Specific Reserve Total Recorded Investment Specific Average Recorded Investment At or for the Year Ended December 31, 2016 Commercial real estate $ 23,771 $ 19,699 $ 464 $ 20,163 $ 13 $ 19,217 Commercial and industrial 25,719 14,781 8,996 23,777 3,190 29,730 Commercial leases 3,429 3,429 — 3,429 — 3,394 Total commercial loans and leases 52,919 37,909 9,460 47,369 3,203 52,341 Direct installment 16,440 14,952 — 14,952 — 14,997 Residential mortgages 14,090 13,367 — 13,367 — 13,200 Indirect installment 5,172 2,180 — 2,180 — 2,037 Consumer lines of credit 3,858 2,985 — 2,985 — 2,813 Other 1,000 1,000 — 1,000 — 1,000 Total $ 93,479 $ 72,393 $ 9,460 $ 81,853 $ 3,203 $ 86,388 At or for the Year Ended December 31, 2015 Commercial real estate $ 33,780 $ 24,423 $ 772 $ 25,195 $ 321 $ 26,143 Commercial and industrial 15,860 9,176 5,543 14,719 2,329 12,298 Commercial leases 659 659 — 659 — 747 Total commercial loans and leases 50,299 34,258 6,315 40,573 2,650 39,188 Direct installment 14,679 13,792 — 13,792 — 13,267 Residential mortgages 13,394 12,763 — 12,763 — 12,896 Indirect installment 3,745 1,514 — 1,514 — 1,401 Consumer lines of credit 2,408 2,047 — 2,047 — 2,198 Total $ 84,525 $ 64,374 $ 6,315 $ 70,689 $ 2,650 $ 68,950 Interest income continued to accrue on impaired loans that were still accruing and totaled approximately $4.6 million, $4.1 million and $3.7 million during 2016, 2015 and 2014, respectively. The above tables do not reflect the additional allowance for credit losses relating to acquired loans in the following pools and categories: December 31 2016 2015 (in thousands) Commercial real estate $ 4,538 $ 3,073 Commercial and industrial 500 695 Total commercial loans 5,038 3,768 Direct installment 1,005 1,557 Residential mortgages 632 659 Indirect installment 221 221 Consumer lines of credit 372 522 Total allowance on acquired loans $ 7,268 $ 6,727 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: December 31 2016 2015 (in thousands) Accruing: Performing $ 17,470 $ 15,165 Non-performing 20,428 22,028 Non-accrual 9,035 8,307 Total TDRs $ 46,933 $ 45,500 TDRs that are accruing and performing include loans that met the criteria for non-accrual non-performing non-accrual Excluding purchased impaired loans, commercial loans over $500,000 whose terms have been modified in a TDR are generally placed on non-accrual, charged-off December 31 2016 2015 (in thousands) Specific reserves for commercial TDRs $ 291 $ 300 Pooled reserves for individual commercial loans under $500 276 929 All other classes of loans, which are primarily secured by residential properties 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 $3.7 million and $3.5 million at December 31, 2016 and 2015, respectively. Upon default of an individual loan, our charge-off The majority of TDRs are the result of interest rate concessions for a limited period of time. Following is a summary of loans, by class, that have been restructured: Year Ended December 31 2016 2015 (dollars in thousands) Number of Contracts Pre-Modification Recorded Investment Post- Outstanding Recorded Investment Number of Contracts Pre-Modification Recorded Investment Post- Outstanding Recorded Investment Commercial real estate 4 $ 778 $ 737 3 $ 1,165 $ 960 Commercial and industrial 3 1,727 1,504 1 5 4 Total commercial loans 7 2,505 2,241 4 1,170 964 Direct installment 527 6,090 5,566 489 6,712 6,314 Residential mortgages 45 2,155 2,081 45 1,667 1,660 Indirect installment 19 51 51 17 55 48 Consumer lines of credit 81 1,419 1,283 58 950 832 Total 679 $ 12,220 $ 11,222 613 $ 10,554 $ 9,818 Following is a summary of originated TDRs, by class, for which there was a payment default, excluding loans that were either charged-off Year Ended December 31 2016 2015 (dollars in thousands) Number Contracts Recorded Investment Number Contracts Recorded Investment Commercial real estate — $ — 1 $ 26 Commercial and industrial — — — — Total commercial loans — — 1 26 Direct installment 90 313 97 510 Residential mortgages 7 285 7 306 Indirect installment 18 35 9 14 Consumer lines of credit 3 394 — — Total 118 $ 1,027 114 $ 856 |