Note 3—Loans and Allowance for Loan Losses

The following table provides the outstanding balances of loans at September 30, 2012 and December 31, 2011.


(Dollars in millions)	September 30, 2012			December 31, 2011
Loans held for investment:
Commercial and industrial	$	20,124		$	19,226
Commercial mortgage		8,293			8,175
Construction		678			870
Lease financing		962			965

Total commercial portfolio		30,057			29,236

Residential mortgage		21,335			19,625
Home equity and other consumer loans		3,494			3,730

Total consumer portfolio		24,829			23,355

Total loans held for investment, excluding FDIC covered loans		54,886			52,591
FDIC covered loans		524			949

Total loans held for investment⁽¹⁾		55,410			53,540
Allowance for loan losses		(668	)		(764	)

Loans held for investment, net	$	54,742		$	52,776

⁽¹⁾	Includes $6 million and ($30) million at September 30, 2012 and December 31, 2011, respectively, for net unamortized discounts and premiums and deferred fees and costs.

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 recorded at the acquisition date represents the estimated credit losses in the acquired loan portfolios at the acquisition date.

The accretable yield for purchased credit-impaired loans for the three and nine months ended September 30, 2012 and 2011 was as follows:


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Dollars in millions)	2012			2011			2012			2011
Accretable yield, beginning of period	$	474		$	350		$	424		$	231
Accretion		(78	)		(54	)		(213	)		(132	)
Reclassifications from nonaccretable difference during the period		12			111			197			308

Accretable yield, end of period	$	408		$	407		$	408		$	407

The carrying amount and outstanding balance for the purchased credit-impaired loans as of September 30, 2012 and December 31, 2011 and as of the respective acquisition dates were as follows:


(Dollars in millions)	September 30, 2012		December 31, 2011		Acquisition Date
Total outstanding balance	$	1,355	$	2,066	$	3,153

Carrying amount	$	494	$	902	$	1,725

FDIC covered loans also include revolving lines of credit, which had a carrying amount of $30 million and $47 million as of September 30, 2012 and December 31, 2011, 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 Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for loan losses is based on our regular, quarterly assessments of the estimated probable losses inherent in the loan portfolio. The Company’s methodology for measuring the appropriate level of the allowance relies on several key elements, which include the formula allowance, the specific allowance for impaired loans and the unallocated allowance.

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


	For the Three Months Ended September 30, 2012
(Dollars in millions)	Commercial			Consumer		FDIC Covered Loans		Unallocated		Total
Allowance for loan losses, beginning of period	$	388		$	126	$	4	$	138	$	656
(Reversal of) provision for loan losses		(17	)		30		—		30		43
(Reversal of) provision for FDIC covered loan losses not subject to FDIC indemnification		—			—		2		—		2
Increase in allowance covered by FDIC indemnification		—			—		8		—		8
Other		1			—		—		—		1
Loans charged off		13			41		3		—		57
Recoveries of loans previously charged off		13			1		1		—		15

Allowance for loan losses, end of period	$	372		$	116	$	12	$	168	$	668


	For the Three Months Ended September 30, 2011
(Dollars in millions)	Commercial			Consumer		FDIC Covered Loans		Unallocated			Total
Allowance for loan losses, beginning of period	$	475		$	151	$	17	$	183		$	826
(Reversal of) provision for loan losses		30			13		—		(56	)		(13	)
(Reversal of) provision for FDIC covered loan losses not subject to FDIC indemnification		—			—		—		—			—
Decrease in allowance covered by FDIC indemnification		—			—		—		—			—
Other		(1	)		—		—		—			(1	)
Loans charged off		35			21		1		—			57
Recoveries of loans previously charged off		10			2		1		—			13

Allowance for loan losses, end of period	$	479		$	145	$	17	$	127		$	768


	For the Nine Months Ended September 30, 2012
(Dollars in millions)	Commercial			Consumer		FDIC Covered Loans			Unallocated		Total
Allowance for loan losses, beginning of period	$	474		$	138	$	17		$	135	$	764
(Reversal of) provision for loan losses		(58	)		56		—			33		31
(Reversal of) provision for FDIC covered loan losses not subject to FDIC indemnification		—			—		(1	)		—		(1	)
Decrease in allowance covered by FDIC indemnification		—			—		(1	)		—		(1	)
Other		1			—		—			—		1
Loans charged off		79			80		5			—		164
Recoveries of loans previously charged off		34			2		2			—		38

Allowance for loan losses, end of period	$	372		$	116	$	12		$	168	$	668


	For the Nine Months Ended September 30, 2011
(Dollars in millions)	Commercial			Consumer		FDIC Covered Loans			Unallocated			Total
Allowance for loan losses, beginning of period	$	683		$	185	$	25		$	298		$	1,191
(Reversal of) provision for loan losses		(62	)		26		—			(171	)		(207	)
Provision for FDIC covered loan losses not subject to FDIC indemnification		—			—		(2	)		—			(2	)
Decrease in allowance covered by FDIC indemnification		—			—		(5	)		—			(5	)
Other		(1	)		—		—			—			(1	)
Loans charged off		182			69		2			—			253
Recoveries of loans previously charged off		41			3		1			—			45

Allowance for loan losses, end of period	$	479		$	145	$	17		$	127		$	768

The following tables show the allowance for loan losses and related loan balances by portfolio segment as of September 30, 2012 and December 31, 2011:


	September 30, 2012
(Dollars in millions)	Commercial		Consumer		FDIC covered loans		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	20	$	49	$	—	$	—	$	69
Collectively evaluated for impairment		352		67		—		168		587
Purchased credit-impaired loans		—		—		12		—		12

Total allowance for loan losses	$	372	$	116	$	12	$	168	$	668

Loans held for investment:
Individually evaluated for impairment	$	350	$	262	$	8	$	—	$	620
Collectively evaluated for impairment		29,707		24,567		22		—		54,296
Purchased credit-impaired loans		—		—		494		—		494

Total loans held for investment	$	30,057	$	24,829	$	524	$	—	$	55,410


	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

Nonaccrual and Past Due Loans

The following table presents nonaccrual loans as of September 30, 2012 and December 31, 2011:


(Dollars in millions)	September 30, 2012		December 31, 2011
Commercial and industrial	$	36	$	127
Commercial mortgage		91		139
Construction		—		16

Total commercial portfolio		127		282

Residential mortgage		325		285
Home equity and other consumer loans		52		24

Total consumer portfolio		377		309

Total nonaccrual loans, excluding FDIC covered loans		504		591
FDIC covered loans		30		47

Total nonaccrual loans	$	534	$	638

Troubled debt restructured loans that continue to accrue interest	$	364	$	252

Troubled debt restructured nonaccrual loans (included in the total nonaccrual loans above)	$	228	$	221

In accordance with recently issued federal banking agency supervisory guidance, the Company classifies junior lien loans as nonperforming when the first lien loan becomes 90 days or more past due even if the junior lien loan is performing. Effective in the second quarter of 2012, $21 million of performing home equity loans was reclassified to nonaccrual.

The following table shows an aging of the balance of loans held for investment, excluding FDIC covered loans, by class as of September 30, 2012 and December 31, 2011:


	September 30, 2012
	Aging Analysis of Loans
(Dollars in millions)	Current		30 to 89 Days Past Due		90 Days or More Past Due		Total Past Due		Total
Commercial and industrial	$	21,015	$	68	$	3	$	71	$	21,086
Commercial mortgage		8,255		32		6		38		8,293
Construction		678		—		—		—		678

Total commercial portfolio		29,948		100		9		109		30,057

Residential mortgage		20,952		187		196		383		21,335
Home equity and other consumer loans		3,428		47		19		66		3,494

Total consumer portfolio		24,380		234		215		449		24,829

Total loans held for investment, excluding FDIC covered loans	$	54,328	$	334	$	224	$	558	$	54,886


	December 31, 2011
	Aging Analysis of Loans
(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
Commercial mortgage		8,111		49		15		64		8,175
Construction		855		—		15		15		870

Total commercial portfolio		28,999		170		67		237		29,236

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

Loans 90 days or more past due and still accruing totaled $1 million at both September 30, 2012 and December 31, 2011.

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. For further information related to the credit quality indicators the Company uses to monitor the portfolio, see Note 3 to the consolidated financial statements in the Company’s 2011 Form 10-K.

The following tables summarize the loans in the commercial portfolio segment monitored for credit quality based on internal ratings, excluding $460 million and $864 million covered by FDIC loss share agreements, at September 30, 2012 and December 31, 2011, respectively. The amounts presented reflect unpaid principal balances less charge-offs.


	September 30, 2012
(Dollars in millions)	Commercial and Industrial		Construction		Commercial Mortgage		Total
Pass	$	20,007	$	636	$	7,551	$	28,194
Special Mention		609		37		249		895
Classified		318		4		303		625

Total	$	20,934	$	677	$	8,103	$	29,714


	December 31, 2011
(Dollars in millions)	Commercial and Industrial		Construction		Commercial Mortgage		Total
Pass	$	18,594	$	674	$	7,201	$	26,469
Special Mention		466		126		453		1,045
Classified		390		71		501		962

Total	$	19,450	$	871	$	8,155	$	28,476

Amounts reported for pass and criticized loans at December 31, 2011 have been restated to include $266 million and $87 million, respectively, of loans that were not originally reported in the Company’s 2011 Form 10-K.

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 $64 million and $85 million of loans covered by FDIC loss share agreements, at September 30, 2012 and December 31, 2011, respectively:


	September 30, 2012
(Dollars in millions)	Accrual		Nonaccrual		Total
Residential mortgage	$	21,010	$	325	$	21,335
Home equity and other consumer loans		3,442		52		3,494

Total	$	24,452	$	377	$	24,829


	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

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 weighted average loan-to-value (LTV) ratios. FICO credit scores are refreshed at least quarterly to monitor the quality of the portfolio. Refreshed LTV measures the carrying amount 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 amount 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 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 September 30, 2012 and December 31, 2011. These tables exclude loans serviced by third-parties and loans covered by FDIC loss share agreements, as discussed above. The amounts presented reflect unpaid principal balances less partial charge-offs.


	September 30, 2012
(Dollars in millions)	Residential mortgage		Home equity and other consumer loans		Total		Percentage of total
FICO scores:
720 and above	$	16,024	$	2,381	$	18,405		76	%
Below 720		4,305		967		5,272		22
No FICO available⁽¹⁾		418		68		486		2

Total	$	20,747	$	3,416	$	24,163		100	%


	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).


	September 30, 2012
(Dollars in millions)	Residential mortgage		Home equity loans		Total		Percentage of total
LTV ratios:
Less than 80 percent	$	16,369	$	2,089	$	18,458		77	%
80-100 percent		2,984		586		3,570		15
Greater than 100 percent		1,296		590		1,886		7
No LTV available⁽¹⁾		99		65		164		1

Total	$	20,748	$	3,330	$	24,078		100	%


	December 31, 2011
(Dollars in millions)	Residential mortgage		Home equity loans		Total		Percentage of total
LTV ratios:
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 following table provides a summary of the Company’s recorded investment in troubled debt restructurings (TDRs) as of September 30, 2012 and December 31, 2011. The summary includes those TDRs that are on nonaccrual status and those that continue to accrue interest. The Company had $41 million in commitments to lend additional funds to borrowers with loan modifications classified as TDRs as of September 30, 2012.


(Dollars in millions)	September 30, 2012		December 31, 2011
Commercial and industrial	$	173	$	151
Commercial mortgage		112		104
Construction		39		66

Total commercial portfolio		324		321

Residential mortgage		244		142
Home equity and other consumer loans		18		2

Total consumer portfolio		262		144

FDIC covered loans		6		8

Total restructured loans	$	592	$	473

For the nine months ended September 30, 2012, TDR modifications in the commercial portfolio segment were primarily composed of interest rate changes, maturity extensions, principal paydowns, covenant waivers and payment deferrals, or some combination thereof. In the consumer portfolio segment, substantially all of the modifications were composed of interest rate reductions and maturity extensions. Due to the implementation of recent OCC regulatory accounting guidance in the third quarter of 2012, the Company considers single family residential mortgages and home equity loans as TDRs when the loan has been discharged in Chapter 7 bankruptcy and the borrower has not reaffirmed the debt. As a result of implementing this guidance, the Company recorded $67 million of consumer loans as TDRs, $35 million of which were placed on nonaccrual at September 30, 2012. The Company also recorded incremental charge-offs of $17 million in the third quarter of 2012 reflecting the write-down to collateral value of loans subjected to this guidance. 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 tables provide the pre- and post-modification outstanding recorded investment amounts of TDRs as of the date of the restructuring that occurred during the three and nine months ended September 30, 2012:


	For the Three Months Ended September 30, 2012				For the Nine Months Ended September 30, 2012
(Dollars in millions)	Pre-Modification Outstanding Recorded Investment⁽¹⁾		Post-Modification Outstanding Recorded Investment⁽²⁾		Pre-Modification Outstanding Recorded Investment⁽¹⁾		Post-Modification Outstanding Recorded Investment⁽²⁾
Commercial and industrial	$	29	$	27	$	103	$	97
Commercial mortgage		1		1		22		20
Construction		7		7		7		7

Total commercial portfolio		37		35		132		124

Residential mortgage		74		69		127		122
Home equity and other consumer loans		28		16		28		16

Total consumer portfolio		102		85		155		138

FDIC covered loans		3		2		4		3

Total	$	142	$	122	$	291	$	265

⁽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 effect 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 three and nine months ended September 30, 2012, 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)	As of the Three Months Ended September 30, 2012		As of the Nine Months Ended September 30, 2012
Commercial and industrial	$	—	$	2
Commercial mortgage		—		1
Construction		—		15

Total commercial portfolio		—		18

Residential mortgage		3		15

Total consumer portfolio		3		15

FDIC covered loans		—		6

Total	$	3	$	39

For the consumer portfolio, 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 September 30, 2012 and December 31, 2011:


	September 30, 2012
	Recorded Investment						Allowance for Impaired Loans		Average Balance		Unpaid Principal Balance
(Dollars in millions)	With an Allowance		Without an Allowance		Total		Allowance for Impaired Loans		Average Balance		With an Allowance		Without an Allowance
Commercial and industrial	$	125	$	65	$	190	$	18	$	201	$	131	$	66
Commercial mortgage		17		104		121		2		121		21		127
Construction		4		35		39		—		52		4		38

Total commercial portfolio		146		204		350		20		374		156		231

Residential mortgage		260		—		260		48		188		297		—
Home equity and other consumer loans		2		—		2		1		2		2		—

Total consumer portfolio		262		—		262		49		190		299		—

Total, excluding FDIC covered loans		408		204		612		69		564		455		231
FDIC covered loans		—		8		8		—		10		1		17

Total	$	408	$	212	$	620	$	69	$	574	$	456	$	248


	December 31, 2011
	Recorded Investment						Allowance for Impaired Loans		Average Balance		Unpaid Principal Balance
(Dollars in millions)	With an Allowance		Without an Allowance		Total		Allowance for Impaired Loans		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

Interest income recognized for impaired loans during the third quarter of 2012 for the commercial, consumer and FDIC covered loan portfolio segments were $5 million, $5 million and less than $1 million, respectively. Interest income recognized for impaired loans during the nine months ended September 30, 2012 for the commercial, consumer and FDIC covered loan portfolio segments were $9 million, $8 million and $1 million, respectively.

The Company transferred a net $200 million of loans from held for investment to held for sale and sold $233 million in loans during the nine months ended September 30, 2012.