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)	2018		2017
Commercial		$40,857		$37,562
Commercial real estate	13,023		11,308
Leases	2,903		3,161
Total commercial loans and leases	56,783		52,031
Residential mortgages	18,978		17,045
Home equity loans	1,073		1,392
Home equity lines of credit	12,710		13,483
Home equity loans serviced by others	399		542
Home equity lines of credit serviced by others	104		149
Automobile	12,106		13,204
Education	8,900		8,134
Credit cards	1,991		1,848
Other retail	3,616		2,789
Total retail loans	59,877		58,586
Total loans and leases ⁽¹⁾⁽²⁾		$116,660		$110,617

⁽¹⁾ Excluded from the table above are loans held for sale totaling $1.3 billion and $718 million as of December 31, 2018 and 2017, respectively.

⁽²⁾Mortgage loans serviced for others by the Company’s subsidiaries are not included above, and amounted to $69.6 billion and $20.3 billion at December 31, 2018 and 2017, 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. Citizens 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.

During the year ended December 31, 2018 the Company purchased $457 million of education loans. During the year ended December 31, 2017, Citizens purchased $862 million of education loans and $153 million of automobile loans.

During the year ended December 31, 2018, the Company sold $553 million of commercial loans. During the year ended December 31, 2017, the Company sold $603 million of commercial loans, $254 million of residential mortgage loans and $29 million of home equity loans. Also during the year ended December 31, 2017, Citizens sold $78 million of TDRs, 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.

Loans held for sale at fair value totaled $1.2 billion and $497 million at December 31, 2018 and 2017, respectively. The December 31, 2018 balance consisted of residential mortgages originated for sale of $967 million and loans in the commercial trading portfolio of $252 million. The December 31, 2017 balance consisted of residential mortgages originated for sale of $326 million and loans in the commercial trading portfolio of $171 million. Other loans held for sale totaled $101 million and $221 million as of December 31, 2018 and 2017, respectively, and consisted of loans associated with the Company’s syndication business.

Loans pledged as collateral for FHLB borrowed funds, primarily residential mortgages and home equity loans, totaled $25.6 billion and $24.9 billion at December 31, 2018 and 2017, 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 $16.8 billion and $18.1 billion at December 31, 2018 and 2017, respectively.

Citizens 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)	2018		2017
Direct financing leases		$2,863		$3,122
Leveraged leases	40		39
Total leases		$2,903		$3,161

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



	December 31,
(in millions)	2018			2017
Total future minimum lease rentals		$2,075			$2,347
Estimated residual value of leased equipment (non-guaranteed)	1,091			1,072
Initial direct costs	13			15
Unearned income on minimum lease rentals and estimated residual value of leased equipment	(276		)	(273		)
Total leases		$2,903			$3,161

The future minimum lease rentals on direct financing and leveraged leases at December 31, 2018 are presented below:



Year	(in millions)
2019		$589
2020	461
2021	340
2022	258
2023	180
Thereafter	247
Total		$2,075