Credit Loss Reserves

An analysis of credit loss reserves for receivables in continuing operations was as follows:



	2012			2011			2010
	(in millions)
Credit loss reserves at beginning of period	$	5,952		$	5,512		$	7,275
Provision for credit losses⁽¹⁾⁽²⁾	2,224			4,418			5,346
Net charge-offs:
Charge-offs	(3,021		)	(4,481		)	(7,596		)
Recoveries	417			503			487
Total net charge-offs	(2,604		)	(3,978		)	(7,109		)
Reserves on receivables transferred to held for sale	(965		)	—			—
Credit loss reserves at end of period	$	4,607		$	5,952		$	5,512


⁽¹⁾	Provision for credit losses during 2011 included approximately $925 million related to the adoption of new accounting guidance for TDR Loans in the third quarter of 2011 as discussed above.

⁽²⁾

Provision for credit losses during 2012 includes $112 million related to the portion of the lower of amortized cost or fair value adjustment that was attributable to credit for personal non-credit card receivables transferred to held for sale during the second quarter of 2012. See Note 7, “Receivables Held for Sale,” for additional information. This amount was recorded as a provision for credit losses and included in the total of reserves on receivables transferred to held for sale. There was no lower of cost or fair value adjustment allocated to credit for the real estate secured receivables as these receivables were previously carried at the lower of amortized cost or fair value of the collateral less cost to sell prior to the transfer of the loans to held for sale.

As discussed above, credit loss reserves at December 31, 2012 have been impacted by the transfer of our entire portfolio of personal non-credit card receivables and certain real estate secured receivables to held for sale. See Note 7, “Receivables Held for Sale,” for additional information.

We historically have estimated probable losses for real estate secured receivables collectively evaluated for impairment which do not qualify as a troubled debt restructure using a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency and ultimately charge-off. This has historically resulted in the identification of a loss emergence period for these real estate secured receivables collectively evaluated for impairment using a roll rate migration analysis which results in approximately 7 months of losses in our credit loss reserves. A loss coverage of 12 months using a roll rate migration analysis would be more aligned with U.S. bank industry practice. As previously disclosed in the third quarter of 2012, our regulators indicated they would like us to more closely align our loss coverage period implicit within the roll rate methodology with U.S. bank industry practice. During the fourth quarter of 2012, we extended our loss emergence period to 12 months for U.S. GAAP. As a result, during the fourth quarter of 2012, we increased credit loss reserves by approximately $350 million for these loans. We will perform an annual review of our portfolio going forward to assess the period of time utilized in our roll rate migration period.

The following table summarizes the changes in credit loss reserves by product/class and the related receivable balance by product during the years ended December 31, 2012, 2011 and 2010:



	Real Estate Secured						Personal Non- Credit Card			Other		Total
	First Lien			Second Lien			Personal Non- Credit Card			Other		Total
	(in millions)
Year ended December 31, 2012:
Credit loss reserve balances at beginning of period	$	4,089		$	823		$	1,040		$	—	$	5,952
Provision for credit losses⁽²⁾	1,812			397			15			—		2,224
Net charge-offs:
Charge-offs	(2,094		)	(538		)	(389		)	—		(3,021		)
Recoveries	60			58			299			—		417
Total net charge-offs	(2,034		)	(480		)	(90		)	—		(2,604		)
Reserves on receivables transferred to held for sale	—			—			(965		)	—		(965		)
Credit loss reserve balance at end of period	$	3,867		$	740		$	—		$	—	$	4,607
Reserve components:
Collectively evaluated for impairment	$	722		$	215		$	—		$	—	$	937
Individually evaluated for impairment⁽¹⁾	3,010			523			—			—		3,533
Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell	131			1			—			—		132
Receivables acquired with deteriorated credit quality	4			1			—			—		5
Total credit loss reserves	$	3,867		$	740		$	—		$	—	$	4,607
Receivables:
Collectively evaluated for impairment	$	16,012		$	2,414		$	—		$	—	$	18,426
Individually evaluated for impairment⁽¹⁾	11,233			1,155			—			—		12,388
Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell	2,043			66			—			—		2,109
Receivables acquired with deteriorated credit quality	13			3			—			—		16
Total receivables	$	29,301		$	3,638		$	—		$	—	$	32,939
Year ended December 31, 2011:



	Real Estate Secured						Personal Non- Credit Card			Other		Total
	First Lien			Second Lien			Personal Non- Credit Card			Other		Total
	(in millions)
Credit loss reserve balances at beginning of period	$	3,355		$	832		$	1,325		$	—	$	5,512
Provision for credit losses⁽³⁾	3,227			758			433			—		4,418
Net charge-offs:
Charge-offs	(2,527		)	(827		)	(1,127		)	—		(4,481		)
Recoveries	34			60			409			—		503
Net charge-offs	(2,493		)	(767		)	(718		)	—		(3,978		)
Credit loss reserve balance at end of period	$	4,089		$	823		$	1,040		$	—	$	5,952
Reserve components:
Collectively evaluated for impairment	$	632		$	286		$	334		$	—	$	1,252
Individually evaluated for impairment⁽¹⁾	3,026			534			706			—		4,266
Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell	423			2			—			—		425
Receivables acquired with deteriorated credit quality	8			1			—			—		9
Total credit loss reserves	$	4,089		$	823		$	1,040		$	—	$	5,952
Receivables:
Collectively evaluated for impairment	$	21,660		$	3,358		$	3,855		$	3	$	28,876
Individually evaluated for impairment⁽¹⁾	10,693			1,024			1,341			—		13,058
Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell	5,847			90			—			—		5,937
Receivables acquired with deteriorated credit quality	35			6			—			—		41
Total receivables	$	38,235		$	4,478		$	5,196		$	3	$	47,912
Year ended December 31, 2010:
Balance at beginning of period	$	3,997		$	1,430		$	1,848		$	—	$	7,275
Provision for credit losses	3,126			789			1,431			—		5,346
Net charge-offs:
Charge-offs	(3,811		)	(1,456		)	(2,329		)	—		(7,596		)
Recoveries	43			69			375			—		487
Net charge-offs	(3,768		)	(1,387		)	(1,954		)	—		(7,109		)
Balance at end of period	$	3,355		$	832		$	1,325		$	—	$	5,512
Reserve components:
Collectively evaluated for impairment	$	1,544		$	570		$	930		$	—	$	3,044
Individually evaluated for impairment⁽¹⁾	1,701			258			395			—		2,354
Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell	94			1			—			—		95
Receivables acquired with deteriorated credit quality	16			3			—			—		19
Total credit loss reserves	$	3,355		$	832		$	1,325		$	—	$	5,512
Receivables:
Collectively evaluated for impairment	$	31,556		$	4,762		$	6,413		$	3	$	42,734
Individually evaluated for impairment⁽¹⁾	7,240			635			704			—		8,579
Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell	5,022			73			—			—		5,095
Receivables acquired with deteriorated credit quality	41			7			—			—		48
Total receivables	$	43,859		$	5,477		$	7,117		$	3	$	56,456

⁽¹⁾

These amounts represent TDR Loans for which we evaluate reserves using a discounted cash flow methodology. Each loan is individually identified as a TDR Loan and then grouped together with other TDR Loans with similar characteristics. The discounted cash flow impairment analysis is then applied to these groups of TDR Loans. The receivable balance above excludes TDR Loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell which totaled $1.5 billion, $2.5 billion and $1.5 billion at December 31, 2012, 2011 and 2010, respectively. The reserve component above excludes credit loss reserves for TDR Loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell which totaled $94 million, $143 million and $27 million at December 31, 2012, 2011 and 2010, respectively. These credit loss reserves are reflected within receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell in the table above.

⁽²⁾

Provision for credit losses during 2012 includes $112 million related to the portion of the lower of amortized cost or fair value that was attributable to credit for personal non-credit card receivables transferred to held for sale during the second quarter of 2012. See Note 7, “Receivables Held for Sale,” for additional information. This amount was recorded as a provision for credit losses and included in the total of reserves on receivables transferred to held for sale. There was no lower of cost or fair value adjustment allocated to credit for the real estate secured receivables as these receivables were previously carried at the lower of amortized cost or fair value of the collateral less cost to sell prior to the transfer of the loans to held for sale.


⁽³⁾	Provision for credit losses during 2011 included approximately $925 million related to the adoption of new accounting guidance for TDR Loans in the third quarter of 2011 as discussed above.

During the third quarter of 2011, we reviewed our existing models for determining credit loss reserves. As part of this process, we considered recent environmental activity including the impact of foreclosure delays, unique characteristics of our run-off portfolio and changes in how loans are ultimately running off. As a result, we made certain enhancements to our credit loss reserve estimation process during the third quarter of 2011. These changes in estimation were necessary because previous estimation techniques no longer represented the composition of the run-off portfolio or the current environment. These changes involved enhancements to the process for determining loss severity associated with real estate loans; revisions to our estimate of projected cash flows for TDR Loans; and increased segmentation of the loan portfolio based on the risk characteristics of the underlying loans.