CREDIT QUALITY AND ALLOWANCE FOR CREDIT LOSSES

The following table summarizes nonperforming assets.



(in millions)	June 30, 2012		December 31, 2011
Nonaccrual loans	$	719	$	860
Reduced-rate loans (a)	28		27
Total nonperforming loans	747		887
Foreclosed property	67		94
Total nonperforming assets	$	814	$	981


(a)	Reduced-rate business loans totaled $9 million and $8 million, respectively, and reduced-rate retail loans totaled $19 million at both June 30, 2012 and December 31, 2011.

The following table presents an aging analysis of the recorded balance of loans.



	Loans Past Due and Still Accruing
(in millions)	30-59 Days		60-89 Days		90 Days or More		Total		Nonaccrual Loans		Current Loans (c)		Total Loans
June 30, 2012
Business loans:
Commercial	$	93	$	43	$	11	$	147	$	175	$	26,694	$	27,016
Real estate construction:
Commercial Real Estate business line (a)	—		1		—		1		60		930		991
Other business lines (b)	—		—		—		—		9		377		386
Total real estate construction	—		1		—		1		69		1,307		1,377
Commercial mortgage:
Commercial Real Estate business line (a)	21		12		11		44		155		2,116		2,315
Other business lines (b)	43		14		15		72		220		7,223		7,515
Total commercial mortgage	64		26		26		116		375		9,339		9,830
Lease financing	—		—		—		—		4		854		858
International	—		1		—		1		—		1,223		1,224
Total business loans	157		71		37		265		623		39,417		40,305
Retail loans:
Residential mortgage	16		4		—		20		76		1,373		1,469
Consumer:
Home equity	8		4		—		12		16		1,556		1,584
Other consumer	8		2		6		16		4		614		634
Total consumer	16		6		6		28		20		2,170		2,218
Total retail loans	32		10		6		48		96		3,543		3,687
Total loans	$	189	$	81	$	43	$	313	$	719	$	42,960	$	43,992

December 31, 2011
Business loans:
Commercial	$	45	$	6	$	8	$	59	$	237	$	24,700	$	24,996
Real estate construction:
Commercial Real Estate business line (a)	15		5		—		20		93		990		1,103
Other business lines (b)	1		1		1		3		8		419		430
Total real estate construction	16		6		1		23		101		1,409		1,533
Commercial mortgage:
Commercial Real Estate business line (a)	62		16		1		79		159		2,269		2,507
Other business lines (b)	34		22		31		87		268		7,402		7,757
Total commercial mortgage	96		38		32		166		427		9,671		10,264
Lease financing	—		—		—		—		5		900		905
International	2		—		—		2		8		1,160		1,170
Total business loans	159		50		41		250		778		37,840		38,868
Retail loans:
Residential mortgage	28		6		6		40		71		1,415		1,526
Consumer:
Home equity	11		8		6		25		5		1,625		1,655
Other consumer	11		2		5		18		6		606		630
Total consumer	22		10		11		43		11		2,231		2,285
Total retail loans	50		16		17		83		82		3,646		3,811
Total loans	$	209	$	66	$	58	$	333	$	860	$	41,486	$	42,679


(a)	Primarily loans to real estate investors and developers.


(b)	Primarily loans secured by owner-occupied real estate.


(c)	Included acquired purchase credit-impaired (PCI) loans with a total carrying value of $62 million and $87 million at June 30, 2012 and December 31, 2011, respectively.

The following table presents loans by credit quality indicator, based on internal risk ratings assigned to each business loan at the time of approval and subjected to subsequent reviews, generally at least annually, and to pools of retail loans with similar risk characteristics.



	Internally Assigned Rating
(in millions)	Pass (a)		Special Mention (b)		Substandard (c)		Nonaccrual (d)		Total
June 30, 2012
Business loans:
Commercial	$	25,332	$	905	$	604	$	175	$	27,016
Real estate construction:
Commercial Real Estate business line (e)	777		121		33		60		991
Other business lines (f)	354		5		18		9		386
Total real estate construction	1,131		126		51		69		1,377
Commercial mortgage:
Commercial Real Estate business line (e)	1,658		324		178		155		2,315
Other business lines (f)	6,524		318		453		220		7,515
Total commercial mortgage	8,182		642		631		375		9,830
Lease financing	834		13		7		4		858
International	1,155		19		50		—		1,224
Total business loans	36,634		1,705		1,343		623		40,305
Retail loans:
Residential mortgage	1,378		7		8		76		1,469
Consumer:
Home equity	1,546		16		6		16		1,584
Other consumer	599		23		8		4		634
Total consumer	2,145		39		14		20		2,218
Total retail loans	3,523		46		22		96		3,687
Total loans	$	40,157	$	1,751	$	1,365	$	719	$	43,992
December 31, 2011
Business loans:
Commercial	$	23,206	$	898	$	655	$	237	$	24,996
Real estate construction:
Commercial Real Estate business line (e)	768		139		103		93		1,103
Other business lines (f)	370		23		29		8		430
Total real estate construction	1,138		162		132		101		1,533
Commercial mortgage:
Commercial Real Estate business line (e)	1,728		409		211		159		2,507
Other business lines (f)	6,541		415		533		268		7,757
Total commercial mortgage	8,269		824		744		427		10,264
Lease financing	865		18		17		5		905
International	1,097		33		32		8		1,170
Total business loans	34,575		1,935		1,580		778		38,868
Retail loans:
Residential mortgage	1,434		12		9		71		1,526
Consumer:
Home equity	1,600		22		28		5		1,655
Other consumer	603		12		9		6		630
Total consumer	2,203		34		37		11		2,285
Total retail loans	3,637		46		46		82		3,811
Total loans	$	38,212	$	1,981	$	1,626	$	860	$	42,679


(a)	Includes all loans not included in the categories of special mention, substandard or nonaccrual.

(b)

Special mention loans are accruing loans that have potential credit weaknesses that deserve management’s close attention, such as loans to borrowers who may be experiencing financial difficulties that may result in deterioration of repayment prospects from the borrower at some future date. Included in the special mention category were $366 million and $481 million at June 30, 2012 and December 31, 2011, respectively, of loans proactively monitored by management that were considered “pass” by regulatory authorities.

(c)

Substandard loans are accruing loans that have a well-defined weakness, or weaknesses, such as loans to borrowers who may be experiencing losses from operations or inadequate liquidity of a degree and duration that jeopardizes the orderly repayment of the loan. Substandard loans also are distinguished by the distinct possibility of loss in the future if these weaknesses are not corrected. PCI loans are included in the substandard category. This category is generally consistent with the "substandard" category as defined by regulatory authorities.

(d)

Nonaccrual loans are loans for which the accrual of interest has been discontinued. For further information regarding nonaccrual loans, refer to the Nonperforming Assets subheading in Note 1 - Summary of Significant Accounting Policies - on page F-59 in the Corporation's 2011 Annual Report and to Note 1 of these interim consolidated financial statements. A significant majority of nonaccrual loans are generally consistent with the "substandard" category and the remainder are generally consistent with the "doubtful" category as defined by regulatory authorities.


(e)	Primarily loans to real estate investors and developers.


(f)	Primarily loans secured by owner-occupied real estate.

Allowance for Credit Losses

The following table details the changes in the allowance for loan losses and related loan amounts.



	2012									2011
(in millions)	Business Loans			Retail Loans			Total			Business Loans			Retail Loans			Total
Three Months Ended June 30
Allowance for loan losses:
Balance at beginning of period	$	632		$	72		$	704		$	771		$	78		$	849
Loan charge-offs	(56		)	(8		)	(64		)	(109		)	(16		)	(125		)
Recoveries on loans previously charged-off	15			4			19			33			2			35
Net loan charge-offs	(41		)	(4		)	(45		)	(76		)	(14		)	(90		)
Provision for loan losses	2			6			8			31			16			47
Balance at end of period	$	593		$	74		$	667		$	726		$	80		$	806

Six Months Ended June 30
Allowance for loan losses:
Balance at beginning of period	$	648		$	78		$	726		$	824		$	77		$	901
Loan charge-offs	(111		)	(15		)	(126		)	(222		)	(26		)	(248		)
Recoveries on loans previously charged-off	29			7			36			54			3			57
Net loan charge-offs	(82		)	(8		)	(90		)	(168		)	(23		)	(191		)
Provision for loan losses	27			4			31			70			26			96
Balance at end of period	$	593		$	74		$	667		$	726		$	80		$	806

As a percentage of total loans	1.47		%	2.02		%	1.52		%	2.05		%	2.16		%	2.06		%

June 30
Allowance for loan losses:
Individually evaluated for impairment	$	119		$	3		$	122		$	172		$	4		$	176
Collectively evaluated for impairment	474			71			545			554			76			630
Total allowance for loan losses	$	593		$	74		$	667		$	726		$	80		$	806
Loans:
Individually evaluated for impairment	$	569		$	49		$	618		$	808		$	49		$	857
Collectively evaluated for impairment	39,681			3,631			43,312			34,662			3,674			38,336
PCI loans (a)	55			7			62			—			—			—
Total loans evaluated for impairment	$	40,305		$	3,687		$	43,992		$	35,470		$	3,723		$	39,193

(a) No allowance for loan losses was required for PCI loans at June 30, 2012.

Changes in the allowance for credit losses on lending-related commitments, included in "accrued expenses and other liabilities" on the consolidated balance sheets, are summarized in the following table.



	Three Months Ended June 30,					Six Months Ended June 30,
(in millions)	2012		2011			2012		2011
Balance at beginning of period	$	25	$	32		$	26	$	35
Provision for credit losses on lending-related commitments	11		(2		)	10		(5		)
Balance at end of period	$	36	$	30		$	36	$	30

Unfunded lending-related commitments sold	$	—	$	3		$	—	$	5

Individually Evaluated Impaired Loans

The following table presents additional information regarding individually evaluated impaired loans.



	Recorded Investment In:
(in millions)	Impaired Loans with No Related Allowance		Impaired Loans with Related Allowance		Total Impaired Loans		Unpaid Principal Balance		Related Allowance for Loan Losses
June 30, 2012
Business loans:
Commercial	$	—	$	202	$	202	$	313	$	47
Real estate construction:
Commercial Real Estate business line (a)	—		54		54		76		6
Other business lines (b)	—		6		6		7		2
Total real estate construction	—		60		60		83		8
Commercial mortgage:
Commercial Real Estate business line (a)	—		134		134		207		28
Other business lines (b)	—		170		170		232		35
Total commercial mortgage	—		304		304		439		63
Lease financing	—		3		3		6		1
Total business loans	—		569		569		841		119
Retail loans:
Residential mortgage	8		33		41		45		3
Consumer:
Home equity	3		2		5		6		—
Other consumer	—		3		3		9		—
Total consumer	3		5		8		15		—
Total retail loans	11		38		49		60		3
Total individually evaluated impaired loans	$	11	$	607	$	618	$	901	$	122

December 31, 2011
Business loans:
Commercial	$	2	$	244	$	246	$	348	$	57
Real estate construction:
Commercial Real Estate business line (a)	—		102		102		146		18
Other business lines (b)	—		5		5		7		1
Total real estate construction	—		107		107		153		19
Commercial mortgage:
Commercial Real Estate business line (a)	—		148		148		198		34
Other business lines (b)	6		201		207		299		36
Total commercial mortgage	6		349		355		497		70
Lease financing	—		3		3		6		1
International	—		8		8		10		2
Total business loans	8		711		719		1,014		149
Retail loans:
Residential mortgage	16		30		46		51		3
Consumer:
Home equity	—		1		1		1		—
Other consumer	—		5		5		12		1
Total consumer	—		6		6		13		1
Total retail loans	16		36		52		64		4
Total individually evaluated impaired loans	$	24	$	747	$	771	$	1,078	$	153


(a)	Primarily loans to real estate investors and developers.


(b)	Primarily loans secured by owner-occupied real estate.

The following table presents information regarding average individually evaluated impaired loans and the related interest recognized. Interest income recognized for the period primarily related to reduced-rate loans.



	Individually Evaluated Impaired Loans
	2012				2011
(in millions)	Average Balance for the Period		Interest Income Recognized for the Period		Average Balance for the Period		Interest Income Recognized for the Period
Three Months Ended June 30
Business loans:
Commercial	$	215	$	1	$	242	$	2
Real estate construction:
Commercial Real Estate business line (a)	61		—		159		—
Other business lines (b)	5		—		1		—
Total real estate construction	66		—		160		—
Commercial mortgage:
Commercial Real Estate business line (a)	156		—		192		—
Other business lines (b)	194		1		224		1
Total commercial mortgage	350		1		416		1
Lease financing	3		—		7		—
International	2		—		6		—
Total business loans	636		2		831		3
Retail loans:
Residential mortgage	41		—		41		—
Consumer loans:
Home equity	5		—		—		—
Other consumer	3		—		7		—
Total consumer	8		—		7		—
Total retail loans	49		—		48		—
Total individually evaluated impaired loans	$	685	$	2	$	879	$	3

Six Months Ended June 30
Business loans:
Commercial	$	225	$	2	$	244	$	3
Real estate construction:
Commercial Real Estate business line (a)	74		—		189		—
Other business lines (b)	5		—		1		—
Total real estate construction	79		—		190		—
Commercial mortgage:
Commercial Real Estate business line (a)	153		—		187		—
Other business lines (b)	199		2		231		2
Total commercial mortgage	352		2		418		2
Lease financing	3		—		7		—
International	4		—		4		—
Total business loans	663		4		863		5
Retail loans:
Residential mortgage	43		—		39		—
Consumer loans:
Home equity	3		—		—		—
Other consumer	4		—		8		—
Total consumer	7		—		8		—
Total retail loans	50		—		47		—
Total individually evaluated impaired loans	$	713	$	4	$	910	$	5


(a)	Primarily loans to real estate investors and developers.


(b)	Primarily loans secured by owner-occupied real estate.

Troubled Debt Restructurings (TDRs)

The following tables detail the recorded balance at June 30, 2012 and 2011 of loans considered to be TDRs that were restructured during the three- and six-month periods ended June 30, 2012 and 2011, by type of modification. In cases of loans with more than one type of modification, the loans were categorized based on the most significant modification.



	2012								2011
	Type of Modification								Type of Modification
(in millions)	Principal Deferrals (a)		Interest Rate Reductions		AB Note Restructures (b)		Total Modifications		Principal Deferrals (a)		Interest Rate Reductions		AB Note Restructures (b)		Total Modifications
Three Months Ended June 30
Business loans:
Commercial	$	6	$	1	$	—	$	7	$	28	$	—	$	7	$	35
Commercial mortgage:
Commercial Real Estate business line (c)	16		—		—		16		3		—		—		3
Other business lines (d)	5		2		—		7		9		—		6		15
Total commercial mortgage	21		2		—		23		12		—		6		18
Total business loans	27		3		—		30		40		—		13		53
Retail loans:
Residential mortgage	—		1		—		1		—		3		—		3
Total retail loans	—		1		—		1		—		3		—		3
Total loans	$	27	$	4	$	—	$	31	$	40	$	3	$	13	$	56

Six Months Ended June 30
Business loans:
Commercial	$	27	$	1	$	—	$	28	$	60	$	3	$	7	$	70
Commercial mortgage:
Commercial Real Estate business line (c)	16		—		3		19		3		—		—		3
Other business lines (d)	14		2		—		16		23		4		6		33
Total commercial mortgage	30		2		3		35		26		4		6		36
Total business loans	57		3		3		63		86		7		13		106
Retail loans:
Residential mortgage	—		1		—		1		—		5		—		5
Total retail loans	—		1		—		1		—		5		—		5
Total loans	$	57	$	4	$	3	$	64	$	86	$	12	$	13	$	111


(a)	Primarily represents loan balances where terms were extended 90 days or more at or above contractual interest rates.


(b)	Loan restructurings whereby the original loan is restructured into two notes: an "A" note, which generally reflects the portion of the modified loan which is expected to be collected; and a "B" note, which is either fully charged off or exchanged for an equity interest.


(c)	Primarily loans to real estate investors and developers.


(d)	Primarily loans secured by owner-occupied real estate.

At June 30, 2012 and December 31, 2011, commitments to lend additional funds to borrowers whose terms have been modified in TDRs totaled $8 million and $13 million, respectively.

The majority of the modifications considered to be TDRs that occurred during the three- and six-month periods ended June 30, 2012 and 2011 were principal deferrals. The Corporation charges interest on principal balances outstanding during deferral periods. Additionally, none of the modifications involved forgiveness of principal. As a result, the current and future financial effects of the recorded balance of loans considered to be TDRs that were restructured during the three- and six-month periods ended June 30, 2012 and 2011 were insignificant.

On an ongoing basis, the Corporation monitors the performance of modified loans to their restructured terms. For reduced-rate loans and AB Note restructures, a subsequent payment default is defined in terms of delinquency, when a principal or interest payment is 90 days past due. During the twelve-month period from July 1, 2011 to June 30, 2012, loans with a carrying value of $30 million at June 30, 2012 had been modified by reducing the rate on the loans. Of these modifications, $5 million and $6 million, primarily consisting of commercial mortgage loans included in other business lines and real estate construction loans included in the Commercial Real Estate business line, subsequently defaulted during the three- and six-month periods ended June 30, 2012, respectively. During the twelve-month period from July 1, 2011 to June 30, 2012, loans with a carrying value of

$29 million at June 30, 2012 had been restructured into two notes. Of these modifications, $3 million of commercial loans subsequently defaulted during both the three- and six-month periods ended June 30, 2012. For principal deferrals, incremental deterioration in the credit quality of the loan, represented by a downgrade in the risk rating of the loan, for example, due to missed interest payments or a reduction of collateral value, is considered a subsequent default. During the twelve-month period from July 1, 2011 to June 30, 2012, loans with a carrying value of $156 million at June 30, 2012 had been modified by principal deferral. Of these principal deferral modifications, $38 million and $55 million, primarily consisting of commercial loans and commercial mortgage loans included in the Commercial Real Estate and other business lines, subsequently experienced a change in the risk rating such that the loans are currently included in non-performing loans during the three- and six-month periods ended June 30, 2012, respectively. In the event of a subsequent default, the allowance for loan losses continues to be reassessed on the basis of an individual evaluation of the loan.

Purchased Credit-Impaired (PCI) Loans

In connection with the acquisition of Sterling Bancshares, Inc. (Sterling) on July 28, 2011, the Corporation acquired loans both with and without evidence of credit quality deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan losses.

Loans acquired with evidence of credit quality deterioration at acquisition for which it was probable that the Corporation would not be able to collect all contractual amounts due were accounted for as PCI. The Corporation aggregated the acquired PCI loans into pools of loans based on common risk characteristics.

The carrying amount of acquired PCI loans included in the consolidated balance sheet and the related outstanding balance at June 30, 2012 and December 31, 2011 were as follows. The outstanding balance represents the total amount owed as of June 30, 2012 and December 31, 2011, including accrued but unpaid interest and any amounts previously charged off. No allowance for loan losses was required on the acquired PCI loan pools at both June 30, 2012 and December 31, 2011.



(in millions)	June 30, 2012		December 31, 2011
Acquired PCI loans:
Carrying amount	$	62	$	87
Outstanding balance	181		234

Changes in the accretable yield for acquired PCI loans for the three- and six-month periods ended June 30, 2012 were as follows.



(in millions)	Three Months Ended June 30, 2012			Six Months Ended June 30, 2012
Balance at beginning of period	$	20		$	25
Accretion	(4		)	(9		)
Balance at end of period	$	16		$	16