5. Credit Loss Reserves

An analysis of credit loss reserves was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(in millions)
Credit loss reserves at beginning of period	$	4,608		$	4,590		$	5,952		$	5,512
Provision for credit losses⁽¹⁾		287			2,182			1,816			3,473
Net charge-offs:
Charge-offs		(488	)		(973	)		(2,266	)		(3,468	)
Recoveries		22			112			225			394

Total net charge-offs		(466	)		(861	)		(2,041	)		(3,074	)
Reserves on receivables transferred to held for sale		-			-			(1,298	)		-

Credit loss reserves at end of period	$	4,429		$	5,911		$	4,429		$	5,911

⁽¹⁾

Includes $112 million during the nine months ended September 30, 2012 related to the lower of amortized cost or fair value attributable to credit for personal non-credit card receivables transferred to held for sale during the second quarter of 2012. See Note 6, “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 September 30, 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 6, “Receivables Held for Sale,” for additional information.

We estimate probable losses for real estate secured loans which do not qualify as troubled debt restructures 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 loans collectively evaluated for impairment using a roll rate migration analysis which results in approximately 7 months of loss coverage in our credit loss reserves. A loss coverage of 12 months in our credit loss reserves would be more aligned with U.S. bank industry practice. Our regulators have indicated they would like us to more closely align our loss coverage period with industry practice. During the fourth quarter of 2012, we will review our estimate of loss emergence to determine what changes should be made to our credit loss reserve estimate which is expected to result in an increase to our credit loss reserves in the fourth quarter of 2012 in an amount that is not expected to exceed 10 percent of our total credit loss reserves at September 30, 2012.

The following table summarizes the changes in credit loss reserves by product/class and the related receivable balance by product during the three and nine months ended September 30, 2012 and 2011:


	Real Estate Secured						Personal Non- Credit Card			Other		Total
	First Lien			Second Lien			Personal Non- Credit Card			Other		Total
	(in millions)
Three Months Ended September 30, 2012:
*Credit loss reserve analysis:*
Credit loss reserve balances at beginning of period	$	3,858		$	750		$	-		$	-	$	4,608
Provision for credit losses		242			50			(5	)⁽³⁾		-		287
Net charge-offs:
Charge-offs		(379	)		(109	)		-			-		(488	)
Recoveries		3			14			5			-		22

Net charge-offs		(376	)		(95	)		5	⁽³⁾		-		(466	)

Credit loss reserve balance at end of period	$	3,724		$	705		$	-		$	-	$	4,429

*Reserve components:*
Collectively evaluated for impairment	$	572		$	178		$	-		$	-	$	750
Individually evaluated for impairment⁽¹⁾		3,065			525			-					3,590
Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell		82			1			-			-		83
Loans acquired with deteriorated credit quality		5			1			-			-		6

Total credit loss reserves	$	3,724		$	705		$	-		$	-	$	4,429

*Receivables:*
Collectively evaluated for impairment	$	17,501		$	2,640		$	-		$	-	$	20,141
Individually evaluated for impairment⁽¹⁾		10,854			1,112			-			-		11,966
Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell		1,775			65			-			-		1,840
Receivables acquired with deteriorated credit quality		13			3			-			-		16

Total receivables	$	30,143		$	3,820		$	-		$	-	$	33,963

Three Months Ended September 30, 2011:
*Credit loss reserve analysis:*
Credit loss reserve balances at beginning of period	$	3,002		$	635		$	953		$	-	$	4,590
Provision for credit losses		1,534			375			273			-		2,182
Net charge-offs:
Charge-offs		(578	)		(168	)		(227	)		-		(973	)
Recoveries		7			15			90			-		112

Net charge-offs		(571	)		(153	)		(137	)		-		(861	)

Credit loss reserve balance at end of period	$	3,965		$	857		$	1,089		$	-	$	5,911

*Reserve components:*
Collectively evaluated for impairment	$	786		$	355		$	1,089		$	-	$	2,230
Individually evaluated for impairment⁽¹⁾		2,737			499			-			-		3,236
Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell		433			2			-			-		435
Loans acquired with deteriorated credit quality		9			1			-			-		10

Total credit loss reserves	$	3,965		$	857		$	1,089		$	-	$	5,911

*Receivables:*
Collectively evaluated for impairment	$	23,996		$	3,707		$	4,285		$	3	$	31,991
Individually evaluated for impairment⁽¹⁾		9,926			933			1,315			-		12,174
Receivables carried at the lower of amortized cost or fair value of the collateral less cost to sell		5,504			89			-			-		5,593
Receivables acquired with deteriorated credit quality		35			6			-			-		41

Total receivables	$	39,461		$	4,735		$	5,600		$	3	$	49,799


	Real Estate Secured						Personal Non- Credit Card			Other		Total
	First Lien			Second Lien			Personal Non- Credit Card			Other		Total

	(in millions)
Nine Months Ended September 30, 2012:
*Credit loss reserve analysis:*
Credit loss reserve balances at beginning of period	$	4,089		$	823		$	1,040		$	-	$	5,952
Provision for credit losses		1,392			271			153	⁽²⁾		-		1,816
Net charge-offs:
Charge-offs		(1,444	)		(433	)		(389	)		-		(2,266	)
Recoveries		20			44			161			-		225

Net charge-offs		(1,424	)		(389	)		(228	)		-		(2,041	)
Reserves on receivables transferred to held for sale		(333	)		-			(965	)		-		(1,298	)

Credit loss reserve balance at end of period	$	3,724		$	705		$	-		$	-	$	4,429

Nine Months Ended September 30, 2011:
*Credit loss reserve analysis:*
Credit loss reserve balances at beginning of period	$	3,355		$	832		$	1,325		$	-	$	5,512
Provision for credit losses		2,525			613			335			-		3,473
Net charge-offs:
Charge-offs		(1,941	)		(636	)		(891	)		-		(3,468	)
Recoveries		26			48			320			-		394

Net charge-offs		(1,915	)		(588	)		(571	)		-		(3,074	)

Credit loss reserve balance at end of period	$	3,965		$	857		$	1,089		$	-	$	5,911

⁽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 $1.0 billion and $2.2 billion at September 30, 2012 and 2011, 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 $61 million and $139 million at September 30, 2012 and 2011, 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⁾

⁽³⁾

While provision for credit losses and charge-offs are no longer recorded on receivables following the transfer of those receivables to the held for sale classification, during the quarter we received recoveries on fully charged-off personal non-credit card receivables that were not transferred to held for sale. These recoveries are reflected in the table above.