
Note 3		Loans and Allowance for Credit Losses

The composition of the loan portfolio, disaggregated by class and underlying specific portfolio type, was as follows:


	September 30, 2012					December 31, 2011
(Dollars in Millions)	Amount		Percent of Total			Amount		Percent of Total
Commercial
Commercial	$	57,415		26.3	%	$	50,734		24.2	%
Lease financing		5,495		2.5			5,914		2.8
Total commercial		62,910		28.8			56,648		27.0
Commercial real estate
Commercial mortgages		30,831		14.1			29,664		14.1
Construction and development		5,982		2.8			6,187		3.0
Total commercial real estate		36,813		16.9			35,851		17.1
Residential mortgages
Residential mortgages		31,504		14.4			28,669		13.7
Home equity loans, first liens		10,398		4.8			8,413		4.0
Total residential mortgages		41,902		19.2			37,082		17.7
Credit card		16,402		7.5			17,360		8.3
Other retail
Retail leasing		5,332		2.4			5,118		2.4
Home equity and second mortgages		17,119		7.9			18,131		8.6
Revolving credit		3,320		1.5			3,344		1.6
Installment		5,474		2.5			5,348		2.6
Automobile		12,431		5.7			11,508		5.5
Student		4,289		2.0			4,658		2.2
Total other retail		47,965		22.0			48,107		22.9
Total loans, excluding covered loans		205,992		94.4			195,048		93.0
Covered loans		12,158		5.6			14,787		7.0
Total loans	$	218,150		100.0	%	$	209,835		100.0	%

The Company had loans of $73.2 billion at September 30, 2012, and $67.0 billion at December 31, 2011, pledged at the Federal Home Loan Bank (“FHLB”), and loans of $47.2 billion at September 30, 2012, and $47.2 billion at December 31, 2011, pledged at the Federal Reserve Bank.

Originated loans are reported at the principal amount outstanding, net of unearned interest and deferred fees and costs. Net unearned interest and deferred fees and costs amounted to $.8 billion at September 30, 2012, and $1.1 billion at December 31, 2011. All purchased loans and related indemnification assets are recorded at fair value at the date of purchase. The Company evaluates purchased loans for impairment at the date of purchase 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.”

On the acquisition date, the estimate of the contractually required payments receivable for all purchased impaired loans acquired in the first quarter 2012 acquisition of BankEast, a subsidiary of BankEast Corporation, from the Federal Deposit Insurance Corporation (“FDIC”) was $63 million, the cash flows expected to be collected was $41 million including interest, and the estimated fair value of the loans was $28 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 BankEast transaction, the estimate as of the acquisition date of the contractually required payments receivable was $135 million, the contractual cash flows not expected to be collected was $22 million, and the estimated fair value of the loans was $96 million. The BankEast transaction did not include a loss sharing agreement.

Changes in the accretable balance for all purchased impaired loans, including those acquired in the BankEast transaction, were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions)	2012			2011			2012			2011
Balance at beginning of period	$	2,431		$	3,015		$	2,619		$	2,890
Purchases		–			–			13			100
Accretion		(109	)		(110	)		(337	)		(337	)
Disposals		(37	)		(43	)		(135	)		(47	)
Reclassifications (to)/from nonaccretable difference (a)		58			(170	)		191			117
Other		(14	)		(7	)		(22	)		(38	)

Balance at end of period	$	2,329		$	2,685		$	2,329		$	2,685

(a)

Primarily relates to changes in expected credit performance.

Allowance for Credit Losses 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. The allowance for credit losses is increased through provisions charged to operating earnings and reduced by net charge-offs. Management evaluates the allowance each quarter to ensure it appropriately reserves for incurred losses.

The allowance recorded for loans in the commercial lending segment is based on reviews of individual credit relationships and considers the migration analysis of commercial lending segment loans and actual loss experience. The Company currently uses an 11-year period of historical losses in considering actual loss experience. This timeframe and the results of the analysis are evaluated quarterly to determine the appropriateness. The allowance recorded for impaired loans greater than $5 million in the commercial lending segment is based on an individual loan analysis utilizing expected cash flows discounted using the original effective interest rate, the observable market price, or the fair value of the collateral for collateral-dependent loans. The allowance recorded for all other commercial lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, and historical losses, adjusted for current trends. The Company also considers the impacts of any loan modifications made to commercial lending segment loans and any subsequent payment defaults to its expectations of cash flows, principal balance, and current expectations about the borrower’s ability to pay in determining the allowance for credit losses.

The allowance recorded for purchased impaired and Troubled Debt Restructuring (“TDR”) loans in the consumer lending segment is determined on a homogenous pool basis utilizing expected cash flows discounted using the original effective interest rate of the pool. The allowance for collateral-dependent loans in the consumer lending segment is determined based on the fair value of the collateral. The allowance recorded for all other consumer lending segment loans is determined on a homogenous pool basis and includes consideration of product mix, risk characteristics of the portfolio, bankruptcy experience, delinquency status and historical losses, adjusted for current trends. The Company also considers any modifications made to consumer lending segment loans including the impacts of any subsequent payment defaults since modification in determining the allowance for credit losses, such as borrower’s ability to pay under the restructured terms, and the timing and amount of payments.

Covered assets represent loans and other assets acquired from the FDIC, subject to loss sharing agreements, and include expected reimbursements from the FDIC. The allowance for covered segment loans is evaluated each quarter in a manner similar to that described for non-covered loans and represents any decreases in expected cash flows of those loans after the acquisition date. The provision for credit losses for covered segment loans considers the indemnification provided by the FDIC.

In addition, subsequent payment defaults on loan modifications considered TDRs are considered in the underlying factors used in the determination of the appropriateness of the allowance for credit losses. For each loan segment, the Company estimates future loan charge-offs through a variety of analysis, trends and underlying assumptions. With respect to the commercial lending segment, TDRs may be collectively evaluated for impairment where observed performance history, including defaults, is a primary driver of the loss allocation. For commercial TDRs individually evaluated for impairment, attributes of the borrower are the primary factors in determining the allowance for credit losses. However, incorporation of loss history is factored into the allowance methodology applied to this category of loans. With respect to the consumer lending segment, performance of the portfolio, including defaults on TDRs, is considered when estimating future cash flows.

The Company’s methodology for determining the appropriate allowance for credit losses for all the loan segments also considers the imprecision inherent in the methodologies used. As a result, in addition to the amounts determined under the methodologies described above, management also considers the potential impact of other qualitative factors which include, but are not limited to, economic factors; geographic and other concentration risks; delinquency and nonaccrual trends; current business conditions; changes in lending policy, underwriting standards, internal review and other relevant business practices; and the regulatory environment. The consideration of these items results in adjustments to allowance amounts included in the Company’s allowance for credit losses for each of the above loan segments.

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 class was as follows:


Three Months Ended September 30 (Dollars in Millions)	Commercial			Commercial Real Estate			Residential Mortgages			Credit Card			Other Retail			Total Loans, Excluding Covered Loans			Covered Loans			Total Loans
2012
Balance at beginning of period	$	1,037		$	941		$	939		$	996		$	828		$	4,741		$	123		$	4,864
Add
Provision for credit losses		63			(22	)		143			119			185			488			–			488
Deduct
Loans charged off		90			47			127			186			187			637			2			639
Less recoveries of loans charged off		(24	)		(22	)		(6	)		(19	)		(30	)		(101	)		–			(101	)

Net loans charged off		66			25			121			167			157			536			2			538
Net change for credit losses to be reimbursed by the FDIC		–			–			–			–			–			–			(10	)		(10	)
Other changes		–			–			–			(33	)		–			(33	)		–			(33	)

Balance at end of period	$	1,034		$	894		$	961		$	915		$	856		$	4,660		$	111		$	4,771

2011
Balance at beginning of period	$	1,109		$	1,258		$	841		$	1,140		$	843		$	5,191		$	117		$	5,308
Add
Provision for credit losses		15			88			168			106			131			508			11			519
Deduct
Loans charged off		126			131			124			203			175			759			3			762
Less recoveries of loans charged off		(27	)		(6	)		(2	)		(25	)		(33	)		(93	)		–			(93	)

Net loans charged off		99			125			122			178			142			666			3			669
Net change for credit losses to be reimbursed by the FDIC		–			–			–			–			–			–			32			32

Balance at end of period	$	1,025		$	1,221		$	887		$	1,068		$	832		$	5,033		$	157		$	5,190


Nine Months Ended September 30 (Dollars in Millions)	Commercial			Commercial Real Estate			Residential Mortgages			Credit Card			Other Retail			Total Loans, Excluding Covered Loans			Covered Loans			Total Loans
2012
Balance at beginning of period	$	1,010		$	1,154		$	927		$	992		$	831		$	4,914		$	100		$	5,014
Add
Provision for credit losses		247			(111	)		376			462			431			1,405			34			1,439
Deduct
Loans charged off		296			206			357			585			503			1,947			4			1,951
Less recoveries of loans charged off		(73	)		(57	)		(15	)		(79	)		(97	)		(321	)		(1	)		(322	)

Net loans charged off		223			149			342			506			406			1,626			3			1,629
Net change for credit losses to be reimbursed by the FDIC		–			–			–			–			–			–			(20	)		(20	)
Other change		–			–			–			(33	)		–			(33	)		–			(33	)

Balance at end of period	$	1,034		$	894		$	961		$	915		$	856		$	4,660		$	111		$	4,771

2011
Balance at beginning of period	$	1,104		$	1,291		$	820		$	1,395		$	807		$	5,417		$	114		$	5,531
Add
Provision for credit losses		255			344			437			314			477			1,827			19			1,846
Deduct
Loans charged off		412			446			380			712			551			2,501			10			2,511
Less recoveries of loans charged off		(78	)		(32	)		(10	)		(71	)		(99	)		(290	)		–			(290	)

Net loans charged off		334			414			370			641			452			2,211			10			2,221
Net change for credit losses to be reimbursed by the FDIC		–			–			–			–			–			–			34			34

Balance at end of period	$	1,025		$	1,221		$	887		$	1,068		$	832		$	5,033		$	157		$	5,190

Additional detail of the allowance for credit losses by portfolio class was as follows:


(Dollars in Millions)	Commercial		Commercial Real Estate		Residential Mortgages		Credit Card		Other Retail		Total Loans, Excluding Covered Loans		Covered Loans		Total Loans
Allowance balance at September 30, 2012 related to
Loans individually evaluated for impairment (a)	$	6	$	33	$	–	$	–	$	–	$	39	$	–	$	39
TDRs collectively evaluated for impairment		31		28		464		167		59		749		1		750
Other loans collectively evaluated for impairment		997		828		497		748		797		3,867		21		3,888
Loans acquired with deteriorated credit quality		–		5		–		–		–		5		89		94

Total allowance for credit losses	$	1,034	$	894	$	961	$	915	$	856	$	4,660	$	111	$	4,771

Allowance balance at December 31, 2011 related to
Loans individually evaluated for impairment (a)	$	16	$	61	$	1	$	–	$	–	$	78	$	2	$	80
TDRs collectively evaluated for impairment		40		33		490		219		57		839		–		839
Other loans collectively evaluated for impairment		954		1,057		436		773		774		3,994		22		4,016
Loans acquired with deteriorated credit quality		–		3		–		–		–		3		76		79

Total allowance for credit losses	$	1,010	$	1,154	$	927	$	992	$	831	$	4,914	$	100	$	5,014

(a)

Represents the allowance for credit losses related to loans greater than $5 million classified as nonperforming or TDRs.

Additional detail of loan balances by portfolio class was as follows:


(Dollars in Millions)	Commercial		Commercial Real Estate		Residential Mortgages		Credit Card		Other Retail		Total Loans, Excluding Covered Loans		Covered Loans (b)		Total Loans
September 30, 2012
Loans individually evaluated for impairment (a)	$	132	$	612	$	–	$	–	$	–	$	744	$	73	$	817
TDRs collectively evaluated for impairment		179		383		4,033		462		269		5,326		137		5,463
Other loans collectively evaluated for impairment		62,594		35,699		37,863		15,940		47,696		199,792		6,564		206,356
Loans acquired with deteriorated credit quality		5		119		6		–		–		130		5,384		5,514

Total loans	$	62,910	$	36,813	$	41,902	$	16,402	$	47,965	$	205,992	$	12,158	$	218,150

December 31, 2011
Loans individually evaluated for impairment (a)	$	222	$	812	$	6	$	–	$	–	$	1,040	$	204	$	1,244
TDRs collectively evaluated for impairment		277		331		3,430		584		148		4,770		113		4,883
Other loans collectively evaluated for impairment		56,138		34,574		33,642		16,776		47,959		189,089		8,616		197,705
Loans acquired with deteriorated credit quality		11		134		4		–		–		149		5,854		6,003

Total loans	$	56,648	$	35,851	$	37,082	$	17,360	$	48,107	$	195,048	$	14,787	$	209,835

(a)

Represents loans greater than $5 million 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.

For all loan classes, loans are considered past due based on the number of days delinquent except for monthly amortizing loans which are classified delinquent based upon the number of contractually required payments not made (for example, two missed payments is considered 30 days delinquent).

Commercial lending segment loans are generally placed on nonaccrual status when the collection of principal and interest has become 90 days past due or is otherwise considered doubtful. When a loan is placed on nonaccrual status, unpaid accrued interest is reversed. Commercial lending segment loans are generally fully or partially charged down to the fair value of the collateral securing the loan, less costs to sell, when the loan is considered uncollectible.

Consumer lending segment loans are generally charged-off at a specific number of days or payments past due. Residential mortgages and other retail loans secured by 1-4 family properties are generally charged down to the fair market value of the collateral securing the loan, less costs to sell, at 180 days past due, and placed on nonaccrual status in instances where a partial charge-off occurs unless the loan is well secured and in the process of collection. Loans and lines in a junior lien position secured by 1-4 family properties are placed on nonaccrual status at 120 days past due or when behind a first lien that has become 180 days or greater past due or placed on nonaccrual status. Any secured consumer lending segment loan whose borrower has had debt discharged through bankruptcy, for which the loan amount exceeds the fair value of the collateral, is charged down to the fair value of the related collateral and the remaining balance is placed on nonaccrual status. Credit card loans continue to accrue interest until the account is charged off. Credit cards are charged off at 180 days past due. Other retail loans not secured by 1-4 family properties are charged-off at 120 days past due; and revolving consumer lines are charged off at 180 days past due. Similar to credit cards, other retail loans are generally not placed on nonaccrual status because of the relative short period of time to charge-off. 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.

For all loan classes, interest payments received on nonaccrual loans are generally recorded as a reduction to the loan carrying amount. Interest payments are generally recorded as reductions to a loan’s carrying amount while a loan is on nonaccrual and are recognized as interest income upon payoff of the loan. Interest income may be recognized for interest payments if the remaining carrying amount of the loan is believed to be collectible. In certain circumstances, loans in any class may be restored to accrual status, such as when none of the principal and interest is past due and prospects for future payment are no longer in doubt; or the loan becomes well secured and is in the process of collection. Loans where there has been a partial charge-off may be returned to accrual status if all principal and interest (including amounts previously charged-off) is expected to be collected and the loan is current.

Covered loans not considered to be purchased impaired are evaluated for delinquency, nonaccrual status and charge-off consistent with the class of loan they would be included in had the loss share coverage not been in place. 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 class, including the delinquency status of those that continue to accrue interest, and those that are nonperforming:


	Accruing
(Dollars in Millions)	Current		30-89 Days Past Due		90 Days or More Past Due		Nonperforming		Total
September 30, 2012
Commercial	$	62,502	$	216	$	40	$	152	$	62,910
Commercial real estate		36,105		65		12		631		36,813
Residential mortgages (a)		40,451		393		301		757		41,902
Credit card		15,815		230		194		163		16,402
Other retail		47,358		300		97		210		47,965

Total loans, excluding covered loans		202,231		1,204		644		1,913		205,992
Covered loans		10,758		269		682		449		12,158

Total loans	$	212,989	$	1,473	$	1,326	$	2,362	$	218,150

December 31, 2011
Commercial	$	55,991	$	300	$	45	$	312	$	56,648
Commercial real estate		34,800		138		14		899		35,851
Residential mortgages (a)		35,664		404		364		650		37,082
Credit card		16,662		238		236		224		17,360
Other retail		47,516		340		184		67		48,107

Total loans, excluding covered loans		190,633		1,420		843		2,152		195,048
Covered loans		12,589		362		910		926		14,787

Total loans	$	203,222	$	1,782	$	1,753	$	3,078	$	209,835

(a)

At September 30, 2012, $462 million of loans 30 – 89 days past due and $3.0 billion of loans 90 days or more past due purchased from Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, were classified as current, compared with $545 million and $2.6 billion at December 31, 2011, respectively.

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 class and the Company’s internal credit quality rating:


			Criticized
(Dollars in Millions)	Pass		Special Mention		Classified (a)		Total Criticized		Total
September 30, 2012
Commercial	$	60,403	$	1,265	$	1,242	$	2,507	$	62,910
Commercial real estate		33,326		785		2,702		3,487		36,813
Residential mortgages (b)		40,666		24		1,212		1,236		41,902
Credit card		16,046		–		356		356		16,402
Other retail		47,522		43		400		443		47,965

Total loans, excluding covered loans		197,963		2,117		5,912		8,029		205,992
Covered loans		11,544		96		518		614		12,158

Total loans	$	209,507	$	2,213	$	6,430	$	8,643	$	218,150

Total outstanding commitments	$	431,162	$	3,725	$	7,276	$	11,001	$	442,163

December 31, 2011
Commercial	$	54,003	$	1,047	$	1,598	$	2,645	$	56,648
Commercial real estate		30,733		793		4,325		5,118		35,851
Residential mortgages (b)		35,814		19		1,249		1,268		37,082
Credit card		16,910		–		450		450		17,360
Other retail		47,665		24		418		442		48,107

Total loans, excluding covered loans		185,125		1,883		8,040		9,923		195,048
Covered loans		13,966		187		634		821		14,787

Total loans	$	199,091	$	2,070	$	8,674	$	10,744	$	209,835

Total outstanding commitments	$	410,457	$	3,418	$	9,690	$	13,108	$	423,565

(a)

Classified rating on consumer loans primarily based on delinquency status.

(b)

At September 30, 2012, $3.0 billion of GNMA loans 90 days or more past due and $2.2 billion of restructured GNMA loans whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs were classified with a pass rating, compared with $2.6 billion and $2.0 billion at December 31, 2011, respectively.

For all loan classes, 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 all nonaccrual and TDR loans. For all loan classes, interest income on TDR loans is recognized 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. Interest income is not recognized on other impaired loans until the loan is paid off.

Factors used by the Company in determining whether all principal and interest payments due on commercial and commercial real estate loans will be collected and therefore whether those loans are impaired include, but are not limited to, the financial condition of the borrower, collateral and/or guarantees on the loan, and the borrower’s estimated future ability to pay based on industry, geographic location and certain financial ratios. The evaluation of impairment on residential mortgages, credit card and other retail loans is primarily driven by delinquency status of individual loans or whether a loan has been modified. Individual covered loans, whose future losses are covered by loss sharing agreements with the FDIC that substantially reduce the risk of credit losses to the Company, are evaluated for impairment and accounted for in a manner consistent with the class of loan they would have been included in had the loss sharing coverage not been in place.

A summary of impaired loans by portfolio class was as follows:


(Dollars in Millions)	Period-end Recorded Investment (a)		Unpaid Principal Balance		Valuation Allowance		Commitments to Lend Additional Funds
September 30, 2012
Commercial	$	382	$	1,341	$	40	$	23
Commercial real estate		1,214		2,466		75		5
Residential mortgages		2,833		3,524		437		–
Credit card		463		462		167		–
Other retail		408		455		64		7

Total impaired loans, excluding GNMA and covered loans		5,300		8,248		783		35
Loans purchased from GNMA mortgage pools		1,631		1,631		36		–
Covered loans		820		1,612		18		13

Total	$	7,751	$	11,491	$	837	$	48

December 31, 2011
Commercial	$	657	$	1,437	$	62	$	68
Commercial real estate		1,436		2,503		124		25
Residential mortgages		2,652		3,193		482		2
Credit card		584		584		219		–
Other retail		188		197		57		–

Total impaired loans, excluding GNMA and covered loans		5,517		7,914		944		95
Loans purchased from GNMA mortgage pools		1,265		1,265		18		–
Covered loans		1,170		1,642		43		49

Total	$	7,952	$	10,821	$	1,005	$	144

(a)

Substantially all loans classified as impaired at September 30, 2012 and December 31, 2011, had an associated allowance for credit losses.

Additional information on impaired loans follows:


	2012				2011
(Dollars in Millions)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Three months ended September 30
Commercial	$	413	$	6	$	536	$	4
Commercial real estate		1,250		12		1,558		6
Residential mortgages		2,752		31		2,573		24
Credit card		495		6		492		4
Other retail		354		3		165		1

Total impaired loans, excluding GNMA and covered loans		5,264		58		5,324		39
Loans purchased from GNMA mortgage pools		1,492		20		710		10
Covered loans		883		7		1,145		7

Total	$	7,639	$	85	$	7,179	$	56

Nine months ended September 30
Commercial	$	496	$	11	$	529	$	7
Commercial real estate		1,371		29		1,519		10
Residential mortgages		2,692		87		2,540		74
Credit card		529		22		471		10
Other retail		259		7		160		3

Total impaired loans, excluding GNMA and covered loans		5,347		156		5,219		104
Loans purchased from GNMA mortgage pools		1,363		51		433		19
Covered loans		1,042		20		584		34

Total	$	7,752	$	227	$	6,236	$	157

Troubled Debt Restructurings In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. Concessionary modifications are classified as TDRs unless the modification results in only an insignificant delay in payments to be received. The Company recognizes interest on TDRs if the borrower complies with the revised terms and conditions as agreed upon with the Company and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. To the extent a previous restructuring was insignificant, the Company considers the cumulative effect of past restructurings related to the receivable when determining whether a current restructuring is a TDR. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

The following table provides a summary of loans modified as TDRs during the periods presented, by portfolio class:


	2012						2011
(Dollars in Millions)	Number of Loans		Pre-Modification Outstanding Loan Balance		Post-Modification Outstanding Loan Balance		Number of Loans		Pre-Modification Outstanding Loan Balance		Post-Modification Outstanding Loan Balance
Three months ended September 30
Commercial		1,754	$	54	$	58		1,137	$	89	$	74
Commercial real estate		63		91		80		115		124		115
Residential mortgages		2,717		344		336		748		155		156
Credit card		14,137		52		67		14,942		78		77
Other retail		6,231		159		156		956		15		16

Total loans, excluding GNMA and covered loans		24,902		700		697		17,898		461		438
Loans purchased from GNMA mortgage pools		4,859		660		589		2,110		291		312
Covered loans		73		49		46		67		148		133

Total loans		29,834	$	1,409	$	1,332		20,075	$	900	$	883

Nine months ended September 30
Commercial		4,081	$	215	$	195		3,984	$	337	$	310
Commercial real estate		245		416		390		380		906		896
Residential mortgages		3,788		529		517		2,571		515		512
Credit card		39,040		189		203		41,610		239		238
Other retail		8,028		194		191		3,020		55		55

Total loans, excluding GNMA and covered loans		55,182		1,543		1,496		51,565		2,052		2,011
Loans purchased from GNMA mortgage pools		8,436		1,116		1,087		6,042		813		871
Covered loans		166		246		234		233		456		430

Total loans		63,784	$	2,905	$	2,817		57,840	$	3,321	$	3,312

Residential mortgages, home equity and second mortgages, and loans purchased from GNMA mortgage pools TDRs in the table above include trial period arrangements offered to customers during the periods presented. The post-modification balances for these loans reflect the current outstanding balance until a permanent modification is made. In addition, the post-modification balances typically include capitalization of unpaid accrued interest and/or fees under the various modification programs. At September 30, 2012, 250 residential mortgages, 29 home equity and second mortgage loans and 2,180 loans purchased from GNMA mortgage pools with outstanding balances of $43 million, $2 million and $263 million, respectively, were in a trial period and have estimated post-modification balances of $44 million, $2 million, and $271 million, respectively, assuming permanent modification occurs at the end of the trial period.

Many of the Company’s TDRs are determined on a case-by-case basis in connection with ongoing loan collection processes. However, the Company has also implemented certain restructuring programs that may result in TDRs.

For the commercial lending segment, modifications generally result in the Company working with borrowers on a case-by-case basis. Commercial and commercial real estate modifications generally include extensions of the maturity date and may be accompanied by an increase or decrease to the interest rate, which may not be deemed a market rate of interest. In addition, the Company may work with the borrower in identifying other changes that mitigate loss to the Company, which may include additional collateral or guarantees to support the loan. To a lesser extent, the Company may waive contractual principal. The Company classifies these concessions as TDRs to the extent the Company determines that the borrower is experiencing financial difficulty.

Modifications for the consumer lending segment are generally part of programs the Company has initiated. The Company participates in the U.S. Department of Treasury Home Affordable Modification Program (“HAMP”). HAMP gives qualifying homeowners an opportunity to permanently modify residential mortgage loans and achieve more affordable monthly payments, with the U.S. Department of Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. The Company also modifies residential mortgage loans under Federal Housing Administration, Department of Veterans Affairs, or other internal programs. Under these programs, the Company provides concessions to qualifying borrowers experiencing financial difficulties. The concessions may include adjustments to interest rates, conversion of adjustable rates to fixed rates, extension of maturity dates or deferrals of payments, capitalization of accrued interest and/or outstanding advances, or in limited situations, partial forgiveness of loan principal. In most instances, participation in residential mortgage loan restructuring programs requires the customer to complete a short-term trial period. A permanent loan modification is contingent on the customer successfully completing the trial period arrangement and the loan documents are not modified until that time. The Company reports loans in a trial period arrangement as TDRs.

Credit card and other retail loan modifications are generally part of two distinct restructuring programs. The Company offers workout programs providing customers experiencing financial difficulty with modifications whereby balances may be amortized up to 60 months, and generally include waiver of fees and reduced interest rates. The Company also provides modification programs to qualifying customers experiencing a temporary financial hardship in which reductions are made to monthly required minimum payments for up to 12 months. Balances related to these programs are generally frozen, however, accounts may be reopened upon successful exit of the program, in which account privileges may be restored. In addition, the Company considers secured loans to consumer borrowers that have debt discharged through bankruptcy where the borrower has not reaffirmed the debt to be TDRs.

Modifications to loans in the covered segment are similar in nature to that described above for non-covered loans, and the evaluation and determination of TDR status is similar, except that acquired loans restructured after acquisition are not considered TDRs for purposes of the Company’s accounting and disclosure if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. Losses associated with the modification on covered loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under loss sharing agreements with the FDIC.

The following table provides a summary of TDR loans that defaulted (fully or partially charged-off or became 90 days or more past due) during the periods presented that were modified as TDRs within 12 months previous to default.


	2012				2011
(Dollars in Millions)	Number of Loans		Amount Defaulted		Number of Loans		Amount Defaulted
Three months ended September 30
Commercial		195	$	2		245	$	13
Commercial real estate		13		12		29		32
Residential mortgages		116		30		96		20
Credit card		2,536		14		1,803		9
Other retail		189		4		141		2

Total loans, excluding GNMA and covered loans		3,049		62		2,314		76
Loans purchased from GNMA mortgage pools		248		34		222		31
Covered loans		8		3		–		–

Total loans		3,305	$	99		2,536	$	107

Nine months ended September 30
Commercial		652	$	33		513	$	23
Commercial real estate		96		176		37		37
Residential mortgages		427		64		536		112
Credit card		7,452		42		5,366		27
Other retail		531		8		397		9

Total loans, excluding GNMA and covered loans		9,158		323		6,849		208
Loans purchased from GNMA mortgage pools		731		106		475		66
Covered loans		49		90		–		–

Total loans		9,938	$	519		7,324	$	274

In addition to the defaults in the table above, during the three months ended September 30, 2012, the Company had 309 residential mortgage loans, home equity and second mortgage loans, and loans purchased from GNMA mortgage pools with aggregate outstanding balances of $50 million where borrowers did not successfully complete the trial period arrangement and therefore are no longer eligible for a permanent modification under the applicable modification program.

Covered assets represent loans and other assets acquired from the FDIC, subject to loss sharing agreements, and include expected reimbursements from the FDIC. The carrying amount of the covered assets consisted of purchased impaired loans, purchased nonimpaired loans, and other assets as shown in the following table:


	September 30, 2012								December 31, 2011
(Dollars in Millions)	Purchased Impaired Loans		Purchased Nonimpaired Loans		Other Assets		Total		Purchased Impaired Loans		Purchased Nonimpaired Loans		Other Assets		Total
Commercial loans	$	15	$	144	$	–	$	159	$	68	$	137	$	–	$	205
Commercial real estate loans		1,519		3,104		–		4,623		1,956		4,037		–		5,993
Residential mortgage loans		3,850		1,184		–		5,034		3,830		1,360		–		5,190
Credit card loans		–		5		–		5		–		6		–		6
Other retail loans		–		798		–		798		–		867		–		867
Losses reimbursable by the FDIC (a)		–		–		1,539		1,539		–		–		2,526		2,526

Covered loans		5,384		5,235		1,539		12,158		5,854		6,407		2,526		14,787
Foreclosed real estate		–		–		198		198		–		–		274		274

Total covered assets	$	5,384	$	5,235	$	1,737	$	12,356	$	5,854	$	6,407	$	2,800	$	15,061

(a)

Relates to loss sharing agreements with remaining terms from 2 to 7 years.

In October 2012, the Financial Accounting Standards Board issued accounting guidance, effective January 1, 2013, applicable to indemnification assets related to FDIC loss-sharing agreements. The guidance requires any reduction in the FDIC indemnification assets resulting from increases in expected cash flows of the covered assets, when there are no previous valuation allowances to reverse, to be amortized over the shorter of the remaining contractual term of the indemnification agreements or the remaining life of the covered assets. Currently, the Company amortizes these changes over the expected life of the covered assets. The Company is currently assessing the impact that this guidance will have on its financial statements.

At September 30, 2012, $93 million of the purchased impaired loans included in covered loans were classified as nonperforming assets, compared with $189 million at December 31, 2011, 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.

Net gains on the sale of loans of $419 million and $74 million for the three months ended September 30, 2012 and 2011, respectively, and $998 million and $340 million for the nine months ended September 30, 2012 and 2011, respectively, were included in noninterest income, primarily in mortgage banking revenue.