Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2011

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

Note 3—Loans and Allowance for Loan Losses

A summary of loans, net of unearned discount/premiums and deferred fees of $30 million and $70 million at December 31, 2011 and 2010, respectively, is as follows:

	December 31,
(Dollars in millions)	2011			2010
Loans held for investment, excluding FDIC covered loans:
Commercial and industrial	$	19,226		$	15,162
Commercial mortgage		8,175			7,816
Construction		870			1,460
Lease financing		965			757
Total commercial portfolio		29,236			25,195
Residential mortgage		19,625			17,531
Home equity and other consumer loans		3,730			3,858
Total consumer portfolio		23,355			21,389
Total loans held for investment, excluding FDIC covered loans		52,591			46,584
FDIC covered loans		949			1,510
Total loans held for investment		53,540			48,094
Allowance for loan losses		(764	)		(1,191	)
Loans held for investment, net	$	52,776		$	46,903

Loans Acquired in Business Combinations

The Company evaluated loans acquired in the Frontier and Tamalpais transactions in accordance with accounting guidance related to loans acquired with deteriorated credit quality as of the acquisition date. Management elected to account for all acquired loans, except for revolving lines of credit, within the scope of the accounting guidance related to loans acquired with deteriorated credit quality.

The acquired loans are referred to as “FDIC covered loans” as the Bank will be reimbursed for a substantial portion of any future losses on them under the terms of the FDIC loss share agreements. As of acquisition dates, the estimated fair value of the purchased credit-impaired loan portfolios of Frontier and Tamalpais subject to the loss share agreements represents the present value of expected cash flows from the portfolio. The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference represents the estimated credit losses in the acquired loan portfolios at the acquisition date.

The accretable yield for purchased credit-impaired loans for the years ended December 31, 2011 and 2010 was as follows:

	For the Years Ended December 31,
(Dollars in millions)	2011			2010
Accretable yield, beginning of year	$	231		$	—
Additions		—			335
Accretion		(192	)		(86	)
Reclassifications from nonaccretable difference during the period		385			(18	)
Accretable yield, end of period	$	424		$	231

The carrying amount and outstanding balance for the purchased credit-impaired loans as of December 31, 2011 and 2010, and as of the respective acquisition dates were as follows:

(Dollars in millions)	December 31, 2011		December 31, 2010		Acquisition Date
Total outstanding balance	$	2,066	$	2,829	$	3,153
Carrying amount	$	902	$	1,394	$	1,725

The carrying amount of other acquired loans totaled $47 million and $116 million as of December 31, 2011 and 2010, respectively. Acquired loans were recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses was not carried over or recorded as of the respective acquisition dates. The acquired loans are subject to the Bank’s internal credit review. When credit deterioration is noted subsequent to the respective acquisition dates, a provision for loan losses is charged to earnings, with a partial offset reflecting the increase to the FDIC indemnification asset for FDIC covered loans.

Allowance for Loan Losses

The following table provides a reconciliation of changes in the allowance for loan losses by portfolio segments.

	For the Year Ended December 31, 2011														For the Year Ended December 31, 2010
(Dollars in millions)	Commercial			Consumer		FDIC covered loans			Unallocated			Total			Total
Allowance for loan losses, beginning of period	$	683		$	185	$	25		$	298		$	1,191		$	1,357
(Reversal of) provision for loan losses		(74	)		37		—			(163	)		(200	)		174
(Reversal of) provision for FDIC covered loan losses not subject to FDIC indemnification		—			—		(2	)		—			(2	)		8
(Decrease) increase in allowance covered by FDIC indemnification		—			—		(5	)		—			(5	)		17
Other(1)		16			—		—			—			16			1
Loans charged off		217			87		3			—			307			445
Recoveries of loans previously charged off		66			3		2			—			71			79
Allowance for loan losses, end of period	$	474		$	138	$	17		$	135		$	764		$	1,191

⁽¹⁾  Other includes a $16 million allowance for loan losses transfer attributed to an internal reorganization on October 1, 2011 in which The Bank of Tokyo-Mitsubishi UFJ transferred its trust company, The Bank of Tokyo-Mitsubishi UFJ Trust Company (BTMUT) to the Company.

The following table shows the allowance for loan losses and related loan balances by portfolio segment as of December 31, 2011 and 2010.

	December 31, 2011
(Dollars in millions)	Commercial		Consumer		FDIC covered loans		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	54	$	14	$	1	$	—	$	69
Collectively evaluated for impairment		420		124		—		135		679
Purchased credit-impaired loans		—		—		16		—		16
Total allowance for loan losses	$	474	$	138	$	17	$	135	$	764
Loans held for investment:
Individually evaluated for impairment	$	416	$	144	$	12	$	—	$	572
Collectively evaluated for impairment		28,820		23,211		35		—		52,066
Purchased credit-impaired loans		—		—		902		—		902
Total loans held for investment	$	29,236	$	23,355	$	949	$	—	$	53,540
	December 31, 2010
(Dollars in millions)	Commercial		Consumer		FDIC covered loans		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	112	$	8	$	—	$	—	$	120
Collectively evaluated for impairment		571		177		—		298		1,046
Purchased credit-impaired loans		—		—		25		—		25
Total allowance for loan losses	$	683	$	185	$	25	$	298	$	1,191
Loans held for investment:
Individually evaluated for impairment	$	572	$	79	$	26	$	—	$	677
Collectively evaluated for impairment		24,623		21,310		90		—		46,023
Purchased credit-impaired loans		—		—		1,394		—		1,394
Total loans held for investment	$	25,195	$	21,389	$	1,510	$	—	$	48,094

The Company maintains an allowance for credit losses (defined as both the allowance for loan losses and the allowance for off-balance sheet commitment losses) to absorb losses inherent in the loan portfolio as well as for off-balance sheet commitments. The allowance for credit losses is based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio and unused commitments to provide financing. The Company’s methodology for measuring the appropriate level of the allowances relies on several key elements, which include the formula allowance, the specific allowance for impaired loans, the unallocated allowance and the allowance for off-balance sheet commitments.

Nonaccrual and Past Due Loans

Nonaccrual loans, excluding FDIC covered loans, totaled $0.6 billion and $0.8 billion at December 31, 2011 and 2010, respectively. There were $473 million and $220 million of TDR loans at December 31, 2011 and 2010, respectively. Loans 90 days or more past due and still accruing totaled $1 million and $2 million at December 31, 2011 and 2010, respectively.

The following table presents nonaccrual loans as of December 31, 2011 and 2010.

(Dollars in millions)	December 31, 2011		December 31, 2010
Commercial and industrial	$	127	$	115
Commercial mortgage		139		329
Construction		16		140
Total commercial portfolio		282		584
Residential mortgage		285		243
Home equity and other consumer loans		24		22
Total consumer portfolio		309		265
Total nonaccrual loans, excluding FDIC covered loans		591		849
FDIC covered loans		47		116
Total nonaccrual loans	$	638	$	965
Troubled debt restructured loans that continue to accrue interest	$	252	$	22
Troubled debt restructured nonaccrual loans (included in the total nonaccrual loans above)	$	221	$	198

The following table shows an aging of the balance of loans held for investment, excluding FDIC covered loans, by class as of December 31, 2011 and 2010.

	December 31, 2011
	Aging Analysis of Loans										90 days or more past due and still accruing
(Dollars in millions)	Current		30 to 89 days past due		90 days or more past due		Total past due		Total
Commercial and industrial	$	20,033	$	121	$	37	$	158	$	20,191	$	1
Commercial mortgage		8,111		49		15		64		8,175		—
Construction		855		—		15		15		870		—
Total commercial portfolio		28,999		170		67		237		29,236		1
Residential mortgage		19,228		188		209		397		19,625		—
Home equity and other consumer loans		3,686		24		20		44		3,730		—
Total consumer portfolio		22,914		212		229		441		23,355		—
Total loans held for investment, excluding FDIC covered loans	$	51,913	$	382	$	296	$	678	$	52,591	$	1
	December 31, 2010
	Aging Analysis of Loans										90 days or more past due and still accruing
(Dollars in millions)	Current		30 to 89 days past due		90 days or more past due		Total past due		Total
Commercial and industrial	$	15,866	$	22	$	31	$	53	$	15,919	$	2
Commercial mortgage		7,695		71		50		121		7,816		—
Construction		1,378		41		41		82		1,460		—
Total commercial portfolio		24,939		134		122		256		25,195		2
Residential mortgage		17,181		148		202		350		17,531		—
Home equity and other consumer loans		3,819		20		19		39		3,858		—
Total consumer portfolio		21,000		168		221		389		21,389		—
Total loans held for investment, excluding FDIC covered loans	$	45,939	$	302	$	343	$	645	$	46,584	$	2

Credit Quality Indicators

Management analyzes the Company’s loan portfolios by applying specific monitoring policies and procedures that vary according to the relative risk profile and other characteristics within the various loan portfolios. Loans within the Company’s commercial portfolio segment are classified as either pass or criticized. Criticized credits are those that are internally risk graded as special mention, substandard or doubtful. Special mention credits are potentially weak, as the borrower has begun to exhibit deteriorating trends, which, if not corrected, may jeopardize repayment of the loan and result in further downgrade. Adversely classified credits are those that are internally risk graded as substandard or doubtful. Substandard credits have well-defined weaknesses, which, if not corrected, could jeopardize the full satisfaction of the debt. A credit classified as doubtful has critical weaknesses that make full collection improbable on the basis of currently existing facts and conditions.

The monitoring process for larger commercial and industrial, construction and commercial mortgage loan portfolios includes a periodic review of individual loans. Loans that are performing, but have shown some signs of weakness, are subjected to more stringent monitoring and oversight. These loans are reviewed to assess the ability of the borrowing entity to continue to service all of its interest and principal obligations and, as a result, the Company may adjust the risk grade of the loan accordingly. In the event that full collection of principal and interest is not reasonably assured, the loan’s risk grade is reviewed. Such reviews are performed on a regular basis. Loan loss factors developed through the migration analysis application are applied to each risk grade and aggregated to estimate the allowance for both pass graded and criticized graded credits.

The following tables summarize the loans in the commercial portfolio segment monitored for credit quality based on internal ratings, excluding $0.9 billion and $1.4 billion covered by FDIC loss share agreements, at December 31, 2011 and 2010, respectively. Amounts also exclude $528 million and $635 million at December 31, 2011 and 2010, respectively, of small business loans, which are monitored by business credit score and delinquency status; unamortized nonrefundable loan fees; and related direct loan origination costs.

	December 31, 2011
(Dollars in millions)	Commercial and industrial		Construction		Commercial mortgage		Total
Pass	$	18,330	$	712	$	7,161	$	26,203
Criticized		809		147		964		1,920
Total	$	19,139	$	859	$	8,125	$	28,123
	December 31, 2010
(Dollars in millions)	Commercial and industrial		Construction		Commercial mortgage		Total
Pass	$	13,982	$	902	$	6,205	$	21,089
Criticized		1,235		623		1,526		3,384
Total	$	15,217	$	1,525	$	7,731	$	24,473

The Company monitors the credit quality of its consumer segment based primarily on payment status. The following tables summarize the loans in the consumer portfolio segment, which excludes $85 million and $122 million of loans covered by FDIC loss share agreements, at December 31, 2011 and 2010, respectively.

	December 31, 2011
(Dollars in millions)	Accrual		Nonaccrual		Total
Residential mortgage	$	19,340	$	285	$	19,625
Home equity and other consumer loans		3,706		24		3,730
Total	$	23,046	$	309	$	23,355
	December 31, 2010
(Dollars in millions)	Accrual		Nonaccrual		Total
Residential mortgage	$	17,288	$	243	$	17,531
Home equity and other consumer loans		3,836		22		3,858
Total	$	21,124	$	265	$	21,389

The Company also monitors the credit quality for substantially all of its consumer portfolio segment using credit scores provided by Fair Isaac Corporation (FICO) and refreshed LTV ratios. FICO credit scores are refreshed at least quarterly to monitor the quality of the portfolio. Refreshed LTV measures the carrying value of the loan as a percentage of the estimated current value of the property securing the loan. Home equity loans are evaluated using combined LTV, which measures the carrying value of the combined loans that have liens against the property (including unused amounts for home equity line products) as a percentage of the estimated current value of the property securing the loans. The LTV ratios are refreshed on a quarterly basis, using the most recent Core Logic home pricing index (HPI) data available for the property location.

The following tables summarize the loans in the consumer portfolio segment monitored for credit quality based on refreshed FICO scores and refreshed LTV ratios at December 31, 2011, excluding loans serviced by third-party service providers and loans covered by FDIC loss share agreements, as discussed above. Amounts also exclude unamortized nonrefundable loan fees, related direct loan origination costs and the Company’s privatization adjustments.

	December 31, 2011
(Dollars in millions)	Residential mortgage		Home equity and other consumer loans		Total		Percentage of total
FICO scores:
720 and above	$	14,553	$	2,533	$	17,086		75	%
Below 720		4,319		1,044		5,363		24
No FICO available(1)		247		69		316		1
Total	$	19,119	$	3,646	$	22,765		100	%

⁽¹⁾  Represents loans for which management was not able to obtain an updated FICO score (e.g., due to recent profile changes).

	December 31, 2011
(Dollars in millions)	Residential mortgage		Home equity loans		Total		Percentage of total
LTV scores:
Less than 80 percent	$	12,464	$	2,028	$	14,492		64	%
80-100 percent		4,415		612		5,027		22	%
Greater than 100 percent		2,146		675		2,821		12	%
No LTV available(1)		94		236		330		2	%
Total	$	19,119	$	3,551	$	22,670		100	%

⁽¹⁾ Represents loans for which management was not able to obtain refreshed property values.

Troubled Debt Restructurings

The Company adopted ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU 2011-02) as of July 1, 2011. This update provides additional guidance to creditors on evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring (TDR) and clarifies the existing guidance on whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing financial difficulties. Applying this new guidance, the Company reassessed its TDR determination for all loan modifications made to borrowers experiencing financial difficulty occurring on or after January 1, 2011. As of September 30, 2011, the initial quarter of implementation, the recorded investment in TDRs for which the allowance for loan losses was previously measured under a formula allowance and is now measured on an individual loan basis was $215 million, and the related allowance for loan losses was $22 million. There was no significant impact to our allowance for loan losses as a result of adopting this guidance.

The following table provides a summary of the Company’s TDRs as of December 31, 2011 and 2010. The summary includes those TDRs that are on nonaccrual status and those that continue to accrue interest. The Company had $31 million in commitments to lend additional funds to borrowers with loan modifications classified as TDRs as of December 31, 2011.

	December 31,
(Dollars in millions)	2011		2010
Commercial and industrial	$	151	$	30
Commercial mortgage		104		111
Construction		66		—
Total commercial portfolio		321		141
Residential mortgage		142		79
Home equity and other consumer loans		2		—
Total consumer portfolio		144		79
FDIC covered loans		8		—
Total troubled debt restructured loans	$	473	$	220

In 2011, the significant TDR modifications made within our commercial and consumer portfolio segments were primarily long-term in nature. In the commercial and industrial, commercial mortgage and construction loan classes, modifications were primarily composed of interest rate concessions, maturity extensions, and payment deferrals, or some combination thereof. In the residential mortgage and home equity and other consumer loan classes, substantially all of the modifications were composed of interest rate reductions and maturity extensions. Charge-offs related to these TDR loan modifications were insignificant for the year ended December 30, 2011. For the commercial and consumer portfolio segments, the allowance for loan losses for TDRs is measured on an individual loan basis or in pools with similar risk characteristics.

The following table provides the pre- and post-modification outstanding recorded investment amounts as of the date of the restructuring of TDRs recorded for the year ended December 31, 2011.

	For the Year Ended December 31, 2011
(Dollars in millions)	Pre-modification outstanding recorded investment (1)		Post- modification outstanding recorded investment (2)
Commercial and industrial	$	220	$	215
Commercial mortgage		120		115
Construction		91		91
Total commercial portfolio		431		421
Residential mortgage		82		82
Home equity and other consumer loans		2		2
Total consumer portfolio		84		84
FDIC covered loans		8		8
Total troubled debt restructurings	$	523	$	513

⁽¹⁾  Represents the recorded investment in the loan immediately prior to the restructuring event.

⁽²⁾ Represents the recorded investment in the loan immediately following the restructuring event. It includes the effects of paydowns that were required as part of the restructuring terms.

The following table provides the recorded investment amounts of TDRs at the date of default, for which there was a payment default during the year ended December 31, 2011, and where the default occurred within the first twelve months after modification into a TDR. A payment default is defined as the loan being 60 days or more past due.

(Dollars in millions)	For the year ended December 31, 2011
Commercial and industrial	$	10
Commercial mortgage		77
Construction		17
Total commercial portfolio		104
Residential mortgage		6
Home equity and other consumer loans		—
Total consumer portfolio		6
FDIC covered loans		11
Total troubled debt restructurings	$	121

Historical payment defaults and the propensity to redefault are some of the factors considered when determining the allowance for loan losses for situations where impairment is measured using the present value of expected future cash flows discounted at the loan’s effective interest rate. The Company also may use the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent to measure impairment.

Loan Impairment

The Company’s impaired loans generally include larger commercial and industrial, construction, commercial mortgage loans, and TDRs where it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When the value of an impaired loan is less than the recorded investment in the loan, the Company records an impairment allowance.

The following tables show information about impaired loans by class as of December 31, 2011 and 2010.

	December 31, 2011
	Recorded Investment						Allowance for impaired loans				Unpaid principal balance
(Dollars in millions)	With an allowance		Without an allowance		Total				Average balance		With an allowance		Without an allowance
Commercial and industrial	$	182	$	38	$	220	$	46	$	185	$	191	$	40
Commercial mortgage		27		103		130		2		191		39		124
Construction		26		40		66		6		56		29		43
Total commercial portfolio		235		181		416		54		432		259		207
Residential mortgage		142		—		142		14		117		148		—
Home equity and other consumer loans		2		—		2		—		2		2		—
Total consumer portfolio		144		—		144		14		119		150		—
Total, excluding FDIC covered loans		379		181		560		68		551		409		207
FDIC covered loans		1		11		12		1		16		5		22
Total	$	380	$	192	$	572	$	69	$	567	$	414	$	229
	December 31, 2010
	Recorded Investment						Allowance for impaired loans				Unpaid principal balance
(Dollars in millions)	With an allowance		Without an allowance		Total				Average balance		With an allowance		Without an allowance
Commercial and industrial	$	110	$	3	$	113	$	31	$	210	$	138	$	10
Commercial mortgage		308		12		320		66		434		371		18
Construction		134		5		139		15		301		162		6
Total commercial portfolio		552		20		572		112		945		671		34
Residential mortgage		79		—		79		8		40		79		—
Total consumer portfolio		79		—		79		8		40		79		—
Total, excluding FDIC covered loans		631		20		651		120		985		750		34
FDIC covered loans		1		25		26		—		5		11		45
Total	$	632	$	45	$	677	$	120	$	990	$	761	$	79

Interest income recognized for impaired loans during 2011, 2010 and 2009 for the commercial, consumer and FDIC covered loan portfolio segments were $17 million, $32 million and $10 million, respectively.

The Company transferred $288 million of loans from held for investment to held for sale and sold $229 million in loans during 2011.

Related Party Loans

The Company, in some cases, makes loans to related parties, including its directors, executive officers, and their affiliated companies. Such loans are recorded in loans on the consolidated balance sheet. Related party loans outstanding to individuals who served as directors or executive officers and their affiliated companies at any time during the year totaled $5 million and $8 million at December 31, 2011 and 2010, respectively. In the opinion of management, these related party loans were made on substantially the same terms, including interest rates and collateral requirements, as those terms prevailing in the market at the date these loans were made. During 2011 and 2010, there were no loans to related parties that were charged off. Additionally, at December 31, 2011 and 2010, there were no loans to related parties that were nonperforming.

The Company extended credit to BTMU, in the form of daylight overdrafts in BTMU’s accounts with the Company in the ordinary course of business. There were no overdraft balances outstanding as of December 31, 2011 and 2010.