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Loans and Allowance for Credit Losses
6 Months Ended
Jun. 30, 2011
Loans and Allowance for Credit Losses [Abstract]  
Loans and Allowance for Credit Losses

Note 5    Loans and Allowance for Credit Losses
 
The composition of the loan portfolio was as follows:
 
                                       
    June 30, 2011         December 31, 2010    
          Percent
              Percent
   
(Dollars in Millions)   Amount     of Total         Amount     of Total    
Commercial
                                     
Commercial
  $ 44,658       22.4   %     $ 42,272       21.5   %
Lease financing
    5,892       2.9           6,126       3.1    
                                       
Total commercial
    50,550       25.3           48,398       24.6    
Commercial real estate
                                     
Commercial mortgages
    28,643       14.3           27,254       13.8    
Construction and development
    6,847       3.4           7,441       3.8    
                                       
Total commercial real estate
    35,490       17.7           34,695       17.6    
Residential mortgages
                                     
Residential mortgages
    26,261       13.2           24,315       12.3    
Home equity loans, first liens
    6,849       3.4           6,417       3.3    
                                       
Total residential mortgages
    33,110       16.6           30,732       15.6    
Retail
                                     
Credit card
    16,111       8.1           16,803       8.5    
Retail leasing
    4,973       2.5           4,569       2.3    
Home equity and second mortgages
    18,597       9.3           18,940       9.6    
Other retail
                                     
Revolving credit
    3,324       1.6           3,472       1.8    
Installment
    5,350       2.7           5,459       2.8    
Automobile
    11,143       5.6           10,897       5.5    
Student
    4,833       2.4           5,054       2.5    
                                       
Total other retail
    24,650       12.3           24,882       12.6    
                                       
Total retail
    64,331       32.2           65,194       33.0    
                                       
Total loans, excluding covered loans
    183,481       91.8           179,019       90.8    
Covered loans
    16,401       8.2           18,042       9.2    
                                       
Total loans
  $ 199,882       100.0   %     $ 197,061       100.0   %
                                       
The Company had loans of $60.4 billion at June 30, 2011, and $62.8 billion at December 31, 2010, pledged at the Federal Home Loan Bank (“FHLB”), and loans of $44.6 billion at both June 30, 2011, and December 31, 2010, pledged at the Federal Reserve Bank.
Originated loans are presented net of unearned interest and deferred fees and costs, which amounted to $1.2 billion at June 30, 2011, and $1.3 billion at December 31, 2010. In accordance with applicable authoritative accounting guidance, all purchased loans and related indemnification assets are recorded at fair value at the date of purchase. The Company evaluates purchased loans for impairment in accordance with applicable authoritative accounting guidance. Purchased loans with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are considered “purchased impaired loans”. All other purchased loans are considered “purchased nonimpaired loans”.
 
Covered assets represent loans and other assets acquired from the FDIC subject to loss sharing agreements in the Downey Savings and Loan Association, F.A.; PFF Bank and Trust; and First Bank of Oak Park Corporation transactions and included expected reimbursements from the FDIC of approximately $2.8 billion at June 30, 2011 and $3.1 billion at December 31, 2010. The carrying amount of the covered assets consisted of purchased impaired loans, purchased nonimpaired loans, and other assets as shown in the following table:
 
                                                                           
    June 30, 2011         December 31, 2010    
    Purchased
    Purchased
                      Purchased
    Purchased
                 
    impaired
    nonimpaired
      Other
              impaired
    nonimpaired
      Other
         
(Dollars in Millions)   loans     loans       assets     Total         loans     loans       assets     Total    
Commercial loans
  $ 70     $ 195       $     $ 265         $ 70     $ 260       $     $ 330    
Commercial real estate loans
    2,185       4,966               7,151           2,254       5,952               8,206    
Residential mortgage loans
    3,821       1,475               5,296           3,819       1,620               5,439    
Retail loans
          899               899                 930               930    
Losses reimbursable by the FDIC
                  2,790       2,790                         3,137       3,137    
                                                                           
Covered loans
    6,076       7,535         2,790       16,401           6,143       8,762         3,137       18,042    
Foreclosed real estate
                  348       348                         453       453    
                                                                           
Total covered assets
  $ 6,076     $ 7,535       $ 3,138     $ 16,749         $ 6,143     $ 8,762       $ 3,590     $ 18,495    
                                                                           
At June 30, 2011, $.3 billion of the purchased impaired loans included in covered loans were classified as nonperforming assets, compared with $.5 billion at December 31, 2010, because the expected cash flows are primarily based on the liquidation of underlying collateral and the timing and amount of the cash flows could not be reasonably estimated. Interest income is recognized on other purchased impaired loans through accretion of the difference between the carrying amount of those loans and their expected cash flows. The initial determination of the fair value of the purchased loans includes the impact of expected credit losses and, therefore, no allowance for credit losses is recorded at the purchase date. To the extent credit deterioration occurs after the date of acquisition, the Company records an allowance for credit losses.
On the acquisition date, the preliminary estimate of the contractually required payments receivable for all purchased impaired loans acquired in the FCB transaction were $502 million, the cash flows expected to be collected were $338 million including interest, and the estimated fair values of the loans were $238 million. These amounts were determined based upon the estimated remaining life of the underlying loans, which includes the effects of estimated prepayments. For the purchased nonimpaired loans acquired in the FCB transaction, the preliminary estimate as of the acquisition date of the contractually required payments receivable were $1.2 billion, the contractual cash flows not expected to be collected were $184 million, and the estimated fair value of the loans was $828 million.
Changes in the accretable balance for all purchased impaired loans, including those acquired in the FCB transaction, were as follows:
 
                                       
    Three Months Ended
        Six Months Ended
   
    June 30,         June 30,    
(Dollars in Millions)   2011     2010         2011     2010    
Balance at beginning of period
  $ 2,801     $ 2,825         $ 2,890     $ 2,845    
Purchases
                    100          
Accretion
    (115 )     (104 )         (227 )     (205 )  
Disposals
    (2 )     (11 )         (4 )     (18 )  
Reclassifications (to)/from nonaccretable difference (a)
    335       68           287       160    
Other
    (4 )     (29 )         (31 )     (33 )  
                                       
Balance at end of period
  $ 3,015     $ 2,749         $ 3,015     $ 2,749    
                                       
(a) Primarily relates to improvements in expected credit performance and changes in variable rates.
The allowance for credit losses reserves for probable and estimable losses incurred in the Company’s loan and lease portfolio and includes certain amounts that do not represent loss exposure to the Company because those losses are recoverable under loss sharing agreements with the FDIC. Management evaluates the allowance each quarter to ensure it appropriately reserves for incurred losses. Several factors are taken into consideration in evaluating the allowance for credit losses, including the risk profile of the portfolios, loan net charge-offs during the period, the level of nonperforming assets, accruing loans 90 days or more past due, delinquency ratios and changes in loan balances classified as TDRs. Management also considers the uncertainty related to certain industry sectors, and the extent of credit exposure to specific borrowers within the portfolio. In addition, concentration risks associated with commercial real estate and the mix of loans, including credit cards, loans originated through the consumer finance division and residential mortgage balances, and their relative credit risks, are evaluated. Finally, the Company considers current economic conditions that might impact the portfolio. This evaluation is inherently subjective as it requires estimates, including amounts of future cash collections expected on nonaccrual loans, which may be susceptible to significant change. The allowance for credit losses relating to originated loans that have become impaired is based on expected cash flows discounted using the original effective interest rate, the observable market price, or the fair value of the collateral for certain collateral-dependent loans. To the extent credit deterioration occurs on purchased loans after the date of acquisition, the Company records an allowance for credit losses.
The Company determines the amount of the allowance required for certain sectors based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is generally based on quarterly reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous commercial and consumer loans is based on an analysis of product mix, risk characteristics of the portfolio, bankruptcy experiences, and historical losses, adjusted for current trends, for each homogenous category or group of loans. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.
The Company also assesses the credit risk associated with off-balance sheet loan commitments, letters of credit, and derivatives. Credit risk associated with derivatives is reflected in the fair values recorded for those positions. The liability for off-balance sheet credit exposure related to loan commitments and other credit guarantees is included in other liabilities. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments.
Activity in the allowance for credit losses by portfolio type was as follows:
 
                                                                   
                                    Total Loans,
             
          Commercial
    Residential
    Credit
      Other
    Excluding
    Covered
    Total
 
(Dollars in Millions)   Commercial     Real Estate     Mortgages     Card       Retail     Covered Loans     Loans     Loans  
Three months ended June 30, 2011:
                                                                 
Balance at beginning of period
  $ 1,139     $ 1,275     $ 819     $ 1,276       $ 854     $ 5,363     $ 135     $ 5,498  
Add
                                                                 
Provision for credit losses
    66       147       141       80         136       570       2       572  
Deduct
                                                                 
Loans charged off
    125       175       123       241         181       845       5       850  
Less recoveries of loans charged off
    (29 )     (11 )     (4 )     (25 )       (34 )     (103 )           (103 )
                                                                   
Net loans charged off
    96       164       119       216         147       742       5       747  
Net change for credit losses to be reimbursed by the FDIC
                                          (15 )     (15 )
Balance at end of period
  $ 1,109     $ 1,258     $ 841     $ 1,140       $ 843     $ 5,191     $ 117     $ 5,308  
                                                                   
Six months ended June 30, 2011:
                                                                 
Balance at beginning of period
  $ 1,104     $ 1,291     $ 820     $ 1,395       $ 807     $ 5,417     $ 114     $ 5,531  
Add
                                                                 
Provision for credit losses
    240       256       269       208         346       1,319       8       1,327  
Deduct
                                                                 
Loans charged off
    286       315       256       509         376       1,742       7       1,749  
Less recoveries of loans charged off
    (51 )     (26 )     (8 )     (46 )       (66 )     (197 )           (197 )
                                                                   
Net loans charged off
    235       289       248       463         310       1,545       7       1,552  
Net change for credit losses to be reimbursed by the FDIC
                                          2       2  
Balance at end of period
  $ 1,109     $ 1,258     $ 841     $ 1,140       $ 843     $ 5,191     $ 117     $ 5,308  
                                                                   
 
Additional detail of the allowance for credit losses by portfolio type was as follows:
 
                                                                   
                                    Total Loans,
             
          Commercial
    Residential
    Credit
      Other
    Excluding
    Covered
    Total
 
(Dollars in Millions)   Commercial     Real Estate     Mortgages     Card       Retail     Covered Loans     Loans     Loans  
Allowance balance at June 30, 2011 related to:
                                                                 
Loans individually evaluated for impairment (a)
  $ 13     $ 68     $     $       $     $ 81     $     $ 81  
TDRs collectively evaluated for impairment
    30             341       218         49       638             638  
Other loans collectively evaluated for impairment
    1,066       1,188       500       922         794       4,470       24       4,494  
Loans acquired with deteriorated credit quality
          2                           2       93       95  
                                                                   
Total allowance for credit losses
  $ 1,109     $ 1,258     $ 841     $ 1,140       $ 843     $ 5,191     $ 117     $ 5,308  
                                                                   
Allowance balance at December 31, 2010 related to:
                                                                 
Loans individually evaluated for impairment (a)
  $ 38     $ 55     $     $       $     $ 93     $     $ 93  
TDRs collectively evaluated for impairment
                320       223         30       573             573  
Other loans collectively evaluated for impairment
    1,066       1,235       500       1,172         777       4,750       28       4,778  
Loans acquired with deteriorated credit quality
          1                           1       86       87  
                                                                   
Total allowance for credit losses
  $ 1,104     $ 1,291     $ 820     $ 1,395       $ 807     $ 5,417     $ 114     $ 5,531  
                                                                   
(a) Represents the allowance for credit losses related to commercial and commercial real estate loans that are greater than $5 million and are classified as nonperforming or TDRs.
Additional detail of loan balances by portfolio type was as follows:
                                                                   
                                    Total Loans,
             
          Commercial
    Residential
    Credit
      Other
    Excluding
    Covered
    Total
 
(Dollars in Millions)   Commercial     Real Estate     Mortgages     Card       Retail     Covered Loans     Loans     Loans  
June 30, 2011:
                                                                 
Loans individually evaluated for impairment (a)
  $ 140     $ 931     $     $       $     $ 1,071     $     $ 1,071  
TDRs collectively evaluated for impairment
    61             2,100       468         122       2,751             2,751  
Other loans collectively evaluated for impairment
    50,334       34,325       30,998       15,643         48,098       179,398       10,325       189,723  
Loans acquired with deteriorated credit quality
    15       234       12                     261       6,076       6,337  
                                                                   
Total loans
  $ 50,550     $ 35,490     $ 33,110     $ 16,111       $ 48,220     $ 183,481     $ 16,401 (b)   $ 199,882  
                                                                   
December 31, 2010:
                                                                 
Loans individually evaluated for impairment (a)
  $ 295     $ 801     $     $       $     $ 1,096     $     $ 1,096  
TDRs collectively evaluated for impairment
                1,957       452         114       2,523             2,523  
Other loans collectively evaluated for impairment
    48,103       33,834       28,775       16,351         48,277       175,340       11,899       187,239  
Loans acquired with deteriorated credit quality
          60                           60       6,143       6,203  
                                                                   
Total loans
  $ 48,398     $ 34,695     $ 30,732     $ 16,803       $ 48,391     $ 179,019     $ 18,042 (b)   $ 197,061  
                                                                   
(a) Represents commercial and commercial real estate loans that are greater than $5 million and are classified as nonperforming or TDRs.
(b) Includes expected reimbursements from the FDIC under loss sharing agreements.
 
 
Credit Quality The quality of the Company’s loan portfolios is assessed as a function of net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by the Company. These credit quality ratings are an important part of the Company’s overall credit risk management process and evaluation of its allowance for credit losses.
Generally, commercial loans (including impaired loans) are placed on nonaccrual status when the collection of interest or principal has become 90 days past due or is otherwise considered doubtful. When a loan is placed on nonaccrual status, unpaid accrued interest is reversed. Future interest payments are generally applied against principal. Commercial loans are generally fully or partially charged down to the fair value of collateral securing the loan, less costs to sell, when the loan is deemed to be uncollectible, repayment is deemed beyond reasonable time frames, the borrower has filed for bankruptcy, or the loan is unsecured and greater than six months past due. Loans secured by 1-4 family properties are generally charged down to fair value, less costs to sell, at 180 days past due, and placed on nonaccrual status in instances where a partial charge-off occurs. Revolving consumer lines and credit cards are charged off at 180 days past due and closed-end consumer loans, other than loans secured by 1-4 family properties, are charged off at 120 days past due and are, therefore, generally not placed on nonaccrual status. Certain retail customers having financial difficulties may have the terms of their credit card and other loan agreements modified to require only principal payments and, as such, are reported as nonaccrual.
Generally, purchased impaired loans are considered accruing loans. However, the timing and amount of future cash flows for some loans is not reasonably estimable. Those loans are classified as nonaccrual loans and interest income is not recognized until the timing and amount of the future cash flows can be reasonably estimated.
 
The following table provides a summary of loans by portfolio type, including the delinquency status of those that continue to accrue interest, and those that are nonperforming:
 
                                                   
      Accruing                  
              30-89 Days
      90 Days or
                 
(Dollars in Millions)     Current       Past Due       More Past Due       Nonperforming       Total  
June 30, 2011:
                                                 
Commercial
    $ 49,851       $ 264       $ 43       $ 392       $ 50,550  
Commercial real estate
      33,965         159         2         1,364         35,490  
Residential mortgages
      31,696         368         375         671         33,110  
Credit card
      15,426         216         213         256         16,111  
Other retail
      47,667         309         171         73         48,220  
                                                   
Total loans, excluding covered loans
      178,605         1,316         804         2,756         183,481  
Covered loans
      13,842         590         928         1,041         16,401  
                                                   
Total loans
    $ 192,447       $ 1,906       $ 1,732       $ 3,797       $ 199,882  
                                                   
December 31, 2010:
                                                 
Commercial
    $ 47,412       $ 325       $ 64       $ 597       $ 48,398  
Commercial real estate
      32,986         415         1         1,293         34,695  
Residential mortgages
      29,140         456         500         636         30,732  
Credit card
      15,993         269         313         228         16,803  
Other retail
      47,706         404         216         65         48,391  
                                                   
Total loans, excluding covered loans
      173,237         1,869         1,094         2,819         179,019  
Covered loans
      14,951         757         1,090         1,244         18,042  
                                                   
Total loans
    $ 188,188       $ 2,626       $ 2,184       $ 4,063       $ 197,061  
                                                   
The Company classifies its loan portfolios using internal credit quality ratings on a quarterly basis. These ratings include: pass, special mention and classified, and are an important part of the Company’s overall credit risk management process and evaluation of the allowance for credit losses. Loans with a pass rating represent those not classified on the Company’s rating scale for problem credits, as minimal credit risk has been identified. Special mention loans are those that have a potential weakness deserving management’s close attention. Classified loans are those where a well-defined weakness has been identified that may put full collection of contractual cash flows at risk. It is possible that others, given the same information, may reach different reasonable conclusions regarding the credit quality rating classification of specific loans.
 
The following table provides a summary of loans by portfolio type and the Company’s internal credit quality rating:
 
                                                   
              Criticized          
              Special
              Total
         
(Dollars in Millions)     Pass       Mention       Classified (a)       Criticized       Total  
June 30, 2011:
                                                 
Commercial
    $ 47,140       $ 1,312       $ 2,098       $ 3,410       $ 50,550  
Commercial real estate
      29,602         1,267         4,621         5,888         35,490  
Residential mortgages
      31,820         28         1,262         1,290         33,110  
Credit card
      15,642                 469         469         16,111  
Other retail
      47,777         47         396         443         48,220  
                                                   
Total loans, excluding covered loans
      171,981         2,654         8,846         11,500         183,481  
Covered loans
      15,388         204         809         1,013         16,401  
                                                   
Total loans
    $ 187,369       $ 2,858       $ 9,655       $ 12,513       $ 199,882  
                                                   
Total outstanding commitments
    $ 382,717       $ 4,409       $ 10,720       $ 15,129       $ 397,846  
                                                   
December 31, 2010:
                                                 
Commercial
    $ 44,595       $ 1,545       $ 2,258       $ 3,803       $ 48,398  
Commercial real estate
      28,155         1,540         5,000         6,540         34,695  
Residential mortgages
      29,355         29         1,348         1,377         30,732  
Credit card
      16,262                 541         541         16,803  
Other retail
      47,906         70         415         485         48,391  
                                                   
Total loans, excluding covered loans
      166,273         3,184         9,562         12,746         179,019  
Covered loans
      17,073         283         686         969         18,042  
                                                   
Total loans
    $ 183,346       $ 3,467       $ 10,248       $ 13,715       $ 197,061  
                                                   
Total outstanding commitments
    $ 370,031       $ 4,923       $ 11,576       $ 16,499       $ 386,530  
                                                   
(a) Classified rating on consumer loans based on delinguency status.
A loan is considered to be impaired when, based on current events or information, it is probable the Company will be unable to collect all amounts due per the contractual terms of the loan agreement. Impaired loans include certain nonaccrual commercial loans, loans for which a charge-off has been recorded based upon the fair value of the underlying collateral and loans modified as TDRs. Interest income is recognized on impaired loans under the modified terms and conditions if the borrower has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. Purchased impaired loans are not reported as impaired loans if the timing and amount of the cash flows expected to be collected are reasonably estimable and the loans continue to perform at least as well as expected at acquisition. Nonaccrual commercial leases of $43 million and $78 million at June 30, 2011 and December 31, 2010, respectively, were excluded from impaired loans as commercial leases are accounted for under authoritative accounting guidance for leases, and are excluded from the definition of an impaired loan under loan impairment guidance.
 
A summary of impaired loans, excluding covered loans, was as follows:
 
                                   
                        Commitments
 
    Period-end
    Unpaid
            to Lend
 
    Recorded
    Principal
      Valuation
    Additional
 
(Dollars in Millions)   Investment     Balance       Allowance     Funds  
June 30, 2011:
                                 
Commercial
  $ 414     $ 1,488       $ 68     $ 12  
Commercial real estate
    1,589       3,227         122       26  
Residential mortgages
    2,610       3,065         351       6  
Credit card
    468       468         218        
Other retail
    164       202         50        
                                   
Total
  $ 5,245     $ 8,450       $ 809     $ 44  
                                   
December 31, 2010:
                                 
Commercial
  $ 596     $ 1,631       $ 59     $ 80  
Commercial real estate
    1,308       2,659         118       17  
Residential mortgages
    2,440       2,877         334        
Credit card
    452       452         218        
Other retail
    152       189         32        
                                   
Total
  $ 4,948     $ 7,808       $ 761     $ 97  
                                   
Additional information on impaired loans follows:
 
                                   
    Three Months Ended
      Six Months Ended
 
    June 30, 2011       June 30, 2011  
    Average
    Interest
      Average
    Interest
 
    Recorded
    Income
      Recorded
    Income
 
(Dollars in Millions)   Investment     Recognized       Investment     Recognized  
Commercial
  $ 503     $ 2       $ 525     $ 3  
Commercial real estate
    1,517       2         1,499       4  
Residential mortgages
    2,541       25         2,524       50  
Credit card
    462       3         461       6  
Other retail
    159       1         158       2  
                                   
Total
  $ 5,182     $ 33       $ 5,167     $ 65  
                                   
Net gains on the sale of loans of $51 million and $92 million for the three months ended June 30, 2011 and 2010, respectively, and $266 million and $203 million for the six months ended June 30, 2011 and 2010, respectively, were included in noninterest income, primarily in mortgage banking revenue.