LOANS AND LEASES

Loans held for investment are reported at the amount of their outstanding principal, net of charge-offs, unearned income, deferred loan origination fees and costs, and unamortized premiums or discounts on purchased loans. Deferred loan origination fees and costs and purchase premiums and discounts are amortized as an adjustment of yield over the life of the loan, using the effective interest method. Unamortized amounts remaining upon prepayment or sale are recorded as interest income or gain (loss) on sale, respectively. Credit card receivables include billed and uncollected interest and fees.

Interest income on loans is determined using the effective interest method. This method calculates periodic interest income at a constant effective yield on the net investment in the loan, to provide a constant rate of return over the term. Loans accounted for using the fair value option, are measured at fair value with corresponding changes recognized in noninterest income.

Loan commitment fees for loans that are likely to be drawn down, and other credit related fees, are deferred (together with any incremental costs) and recognized as an adjustment to the effective interest rate over the loan term. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognized over the commitment period on a straight-line basis.

Leases are classified at the inception of the lease. Direct financing lease receivables are reported at the aggregate of minimum lease payments receivable plus the estimated residual value of the leased property, less unearned and deferred income, including unamortized investment credits. Leveraged leases, which are a form of direct financing leases, are recorded net of related non-recourse debt. Lease residual values are reviewed at least annually for other-than-temporary impairment; with valuation adjustments recognized currently against other income for direct financing and leveraged leases. Unearned income is recognized as a constant percentage of outstanding lease financing balances over the lease term in interest income.

Loans and leases are disclosed in portfolio segments and classes. The Company’s loan and lease portfolio segments are commercial and retail. The classes of loans and leases are: commercial, commercial real estate, leases, residential mortgages, home equity loans, home equity lines of credit, home equity loans serviced by others, home equity lines of credit serviced by others, automobile, education, credit cards and other retail. The Company’s SBO portfolio consists of purchased home equity loans and lines that were originally serviced by others, which the Company now services a portion of internally.

A summary of the loans and leases portfolio is presented below:



	December 31,
(in millions)	2017		2016
Commercial		$37,562		$37,274
Commercial real estate	11,308		10,624
Leases	3,161		3,753
Total commercial loans and leases	52,031		51,651
Residential mortgages	17,045		15,115
Home equity loans	1,392		1,858
Home equity lines of credit	13,483		14,100
Home equity loans serviced by others	542		750
Home equity lines of credit serviced by others	149		219
Automobile	13,204		13,938
Education⁽¹⁾	8,134		6,610
Credit cards	1,848		1,691
Other retail	2,789		1,737
Total retail loans	58,586		56,018
Total loans and leases ⁽²⁾⁽³⁾		$110,617		$107,669

⁽¹⁾During first quarter 2017, student loans were renamed “education” loans. Refer to Note 1 “Significant Accountant Policies” for more information.

⁽²⁾ Excluded from the table above are loans held for sale totaling $718 million and $625 million as of December 31, 2017 and 2016, respectively.

⁽³⁾Mortgage loans serviced for others by the Company’s subsidiaries are not included above, and amounted to $20.3 billion and $17.3 billion at December 31, 2017 and 2016, respectively.

Loans are classified upon origination or acquisition as either held-for-investment or held-for-sale. This classification is based on management’s initial intent and ability to hold the loans for the foreseeable future. Loans held for sale are carried at the lower of cost or fair value, with any write-downs or subsequent recoveries charged to other income. The Company accounts for certain loans held for sale, including those loans associated with its mortgage banking business and secondary loan trading desk, under the fair value option at fair value. Refer to Note 19, “Fair Value Measurements” for additional discussion.

The following tables present balances of loan purchases and sales:



	Year Ended December 31, 2017
(in millions)	Education		Automobile		Residential mortgages		Home equity loans		Commercial		Total
Purchases		$862		$153		$—		$—		$—		$1,015
Sales	—		—		254		29		603		886



	Year Ended December 31, 2016
(in millions)	Education		Automobile		Residential mortgages		Home equity loans		Commercial		Total
Purchases		$1,224		$695		$539		$—		$—		$2,458
Sales	—		—		699		55		147		901

Reflected in the previous table are retail TDR sales during the year ended December 31, 2017 of $78 million, including $49 million of residential mortgages and $29 million of home equity loans, which resulted in a pre-tax gain of $17 million reported in other income on the Consolidated Statements of Operations. Also reflected in the previous table are $6 million of commercial TDR sales during the year ended December 31, 2017. During the year ended December 31, 2016, the Company sold $310 million of TDRs, including $255 million of residential mortgages and $55 million of home equity loans, which resulted in a pre-tax gain of $72 million reported in other income on the Consolidated Statements of Operations.

Loans held for sale at fair value totaled $497 million and $583 million at December 31, 2017 and 2016, respectively, and consisted of residential mortgages originated for sale of $326 million and loans in the commercial trading portfolio of $171 million as of December 31, 2017. As of December 31, 2016, of the $583 million, residential mortgages originated for sale were $504 million and loans in the commercial trading portfolio totaled $79 million. Other loans held for sale totaled $221 million and $42 million as of December 31, 2017 and 2016, respectively, and consisted of commercial loan syndications.

Loans pledged as collateral for FHLB borrowed funds, primarily residential mortgages and home equity loans, totaled $24.9 billion and $24.0 billion at December 31, 2017 and 2016, respectively. Loans pledged as collateral to support the contingent ability to borrow at the FRB discount window, if necessary, was primarily comprised of auto and commercial loans, and totaled $18.1 billion and $16.8 billion at December 31, 2017 and 2016, respectively.

The Company is engaged in the leasing of equipment for commercial use, with primary lease concentrations to Fortune 1000 companies for large capital equipment acquisitions. A lessee is evaluated from a credit perspective using the same underwriting standards and procedures as for a loan borrower. A lessee is expected to make rental payments based on its cash flows and the viability of its operations. Leases are usually not evaluated as collateral-based transactions, and therefore the lessee’s overall financial strength is the most important credit evaluation factor.

A summary of the investment in leases, before the ALLL, is presented below:



	December 31,
(in millions)	2017		2016
Direct financing leases		$3,122		$3,670
Leveraged leases	39		83
Total leases		$3,161		$3,753

The components of the investment in leases, before the ALLL, are presented below:



	December 31,
(in millions)	2017			2016
Total future minimum lease rentals		$2,347			$2,922
Estimated residual value of leased equipment (non-guaranteed)	1,072			1,166
Initial direct costs	15			20
Unearned income on minimum lease rentals and estimated residual value of leased equipment	(273		)	(355		)
Total leases		$3,161			$3,753

The future minimum lease rentals on direct financing and leveraged leases at December 31, 2017 are presented below:



Year	(in millions)
2018		$602
2019	553
2020	399
2021	300
2022	201
Thereafter	292
Total		$2,347