NOTE 5

Loans and Allowance for Credit Losses

The composition of the loan portfolio at December 31, disaggregated by class and underlying specific portfolio type, was as follows:


(Dollars in Millions)	2012		2011
Commercial
Commercial	$	60,742	$	50,734
Lease financing		5,481		5,914
Total commercial		66,223		56,648
Commercial Real Estate
Commercial mortgages		31,005		29,664
Construction and development		5,948		6,187
Total commercial real estate		36,953		35,851
Residential Mortgages
Residential mortgages		32,648		28,669
Home equity loans, first liens		11,370		8,413
Total residential mortgages		44,018		37,082
Credit Card		17,115		17,360
Other Retail
Retail leasing		5,419		5,118
Home equity and second mortgages		16,726		18,131
Revolving credit		3,332		3,344
Installment		5,463		5,348
Automobile		12,593		11,508
Student		4,179		4,658
Total other retail		47,712		48,107
Total loans, excluding covered loans		212,021		195,048
Covered Loans		11,308		14,787
Total loans	$	223,329	$	209,835

The Company had loans of $74.1 billion at December 31, 2012, and $67.0 billion at December 31, 2011, pledged at the Federal Home Loan Bank (“FHLB”), and loans of $48.6 billion at December 31, 2012, and $47.2 billion at December 31, 2011, pledged at the Federal Reserve Bank.

The majority of the Company’s loans are to borrowers in the states in which it has Consumer and Small Business Banking offices. Collateral for commercial loans may include marketable securities, accounts receivable, inventory and equipment. For details of the Company’s commercial portfolio by industry group and geography as of December 31, 2012 and 2011, see Table 7 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.

For detail of the Company’s commercial real estate portfolio by property type and geography as of December 31, 2012 and 2011, see Table 8 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements. Such loans are collateralized by the related property. The Company has an equity interest in a joint venture, that it accounts for under the equity method, whose principal activities are to lend to entities that develop land, and construct and sell residential homes. The Company provides a warehousing line to this joint venture. Warehousing advances to this joint venture are repaid when the sale of loans is completed or the real estate is permanently refinanced by others. At December 31, 2012 and 2011, the Company had $486 million and $716 million, respectively, of outstanding advances to this joint venture. These advances are included in commercial real estate loans.

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 December 31, 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 2012 acquisition of BankEast, a subsidiary of BankEast Corporation, from the 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, for the years ended December 31, were as follows:


(Dollars in Millions)	2012			2011			2010
Balance at beginning of period	$	2,619		$	2,890		$	2,845
Purchases		13			100			–
Accretion		(437	)		(451	)		(421	)
Disposals		(208	)		(67	)		(27	)
Reclassifications (to)/from nonaccretable difference (a)		454			184			536
Other (b)		(732	)		(37	)		(43	)
Balance at end of period	$	1,709		$	2,619		$	2,890

(a)

Primarily relates to changes in expected credit performance.

(b)

Primarily relates to changes in variable rates, and in 2012 to a change in the Company’s expectations regarding potential sale of modified covered loans at the end of the indemnification agreements which results in a reduction in the expected contractual interest payments included in the accretable balance for those loans that may be sold.

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.

Activity in 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
Balance at December 31, 2009	$	1,208		$	1,001		$	672		$	1,495		$	871		$	5,247		$	17		$	5,264
Add
Provision for credit losses		723			1,135			694			1,100			681			4,333			23			4,356
Deduct
Loans charged off		918			871			554			1,270			863			4,476			20			4,496
Less recoveries of loans charged off		(91	)		(26	)		(8	)		(70	)		(118	)		(313	)		(2	)		(315	)
Net loans charged off		827			845			546			1,200			745			4,163			18			4,181
Net change for credit losses to be reimbursed by the FDIC		–			–			–			–			–			–			92			92
Balance at December 31, 2010	$	1,104		$	1,291		$	820		$	1,395		$	807		$	5,417		$	114		$	5,531
Add
Provision for credit losses		312			361			596			431			628			2,328			15			2,343
Deduct
Loans charged off		516			543			502			922			733			3,216			13			3,229
Less recoveries of loans charged off		(110	)		(45	)		(13	)		(88	)		(129	)		(385	)		(1	)		(386	)
Net loans charged off		406			498			489			834			604			2,831			12			2,843
Net change for credit losses to be reimbursed by the FDIC		–			–			–			–			–			–			(17	)		(17	)
Balance at December 31, 2011	$	1,010		$	1,154		$	927		$	992		$	831		$	4,914		$	100		$	5,014
Add
Provision for credit losses		316			(131	)		446			571			558			1,760			122			1,882
Deduct
Loans charged off		378			242			461			769			666			2,516			11			2,527
Less recoveries of loans charged off		(103	)		(76	)		(23	)		(102	)		(125	)		(429	)		(1	)		(430	)
Net loans charged off		275			166			438			667			541			2,087			10			2,097
Net change for credit losses to be reimbursed by the FDIC		–			–			–			–			–			–			(33	)		(33	)
Other changes		–			–			–			(33	)		–			(33	)		–			(33	)
Balance at December 31, 2012	$	1,051		$	857		$	935		$	863		$	848		$	4,554		$	179		$	4,733

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 December 31, 2012 Related to
Loans individually evaluated for impairment (a)	$	10	$	30	$	–	$	–	$	–	$	40	$	–	$	40
TDRs collectively evaluated for impairment		28		29		446		153		97		753		1		754
Other loans collectively evaluated for impairment		1,013		791		489		710		751		3,754		17		3,771
Loans acquired with deteriorated credit quality		–		7		–		–		–		7		161		168
Total allowance for credit losses	$	1,051	$	857	$	935	$	863	$	848	$	4,554	$	179	$	4,733
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
December 31, 2012
Loans individually evaluated for impairment (a)	$	171	$	510	$	–	$	–	$	–	$	681	$	48	$	729
TDRs collectively evaluated for impairment		185		391		4,199		442		313		5,530		145		5,675
Other loans collectively evaluated for impairment		65,863		35,952		39,813		16,673		47,399		205,700		5,814		211,514
Loans acquired with deteriorated credit quality		4		100		6		–		–		110		5,301		5,411
Total loans	$	66,223	$	36,953	$	44,018	$	17,115	$	47,712	$	212,021	$	11,308	$	223,329
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. 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.

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
December 31, 2012
Commercial	$	65,701	$	341	$	58	$	123	$	66,223
Commercial real estate		36,241		158		8		546		36,953
Residential mortgages (a)		42,728		348		281		661		44,018
Credit card		16,525		227		217		146		17,115
Other retail		47,109		290		96		217		47,712
Total loans, excluding covered loans		208,304		1,364		660		1,693		212,021
Covered loans		9,900		359		663		386		11,308
Total loans	$	218,204	$	1,723	$	1,323	$	2,079	$	223,329
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 December 31, 2012, $441 million of loans 30 – 89 days past due and $3.2 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.

Total nonperforming assets include nonaccrual loans, restructured loans not performing in accordance with modified terms, other real estate and other nonperforming assets owned by the Company. For details of the Company’s nonperforming assets as of December 31, 2012 and 2011, see Table 16 included in Management’s Discussion and Analysis which is incorporated by reference into these Notes to Consolidated Financial Statements.

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
December 31, 2012
Commercial	$	63,906	$	1,114	$	1,203	$	2,317	$	66,223
Commercial real estate		34,096		621		2,236		2,857		36,953
Residential mortgages (b)		42,897		18		1,103		1,121		44,018
Credit card		16,752		–		363		363		17,115
Other retail		47,294		36		382		418		47,712
Total loans, excluding covered loans		204,945		1,789		5,287		7,076		212,021
Covered loans		10,786		61		461		522		11,308
Total loans	$	215,731	$	1,850	$	5,748	$	7,598	$	223,329
Total outstanding commitments	$	442,047	$	3,231	$	6,563	$	9,794	$	451,841
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 December 31, 2012, $3.2 billion of GNMA loans 90 days or more past due and $2.4 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. A summary of impaired loans, which include all nonaccrual and TDR 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
December 31, 2012
Commercial	$	404	$	1,200	$	40	$	39
Commercial real estate		1,077		2,251		70		4
Residential mortgages		2,748		3,341		415		–
Credit card		442		442		153		–
Other retail		443		486		101		3
Total impaired loans, excluding GNMA and covered loans		5,114		7,720		779		46
Loans purchased from GNMA mortgage pools		1,778		1,778		39		–
Covered loans		767		1,584		20		12
Total	$	7,659	$	11,082	$	838	$	58
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 December 31, 2012 and 2011, had an associated allowance for credit losses. The total amount of interest income recognized during 2012 on loans classified as impaired at December 31, 2012, excluding those acquired with deteriorated credit quality, was $222 million, compared to what would have been recognized at the original contractual terms of the loans of $410 million.

Additional information on impaired loans for the years ended December 31 follows:


(Dollars in Millions)	Average Recorded Investment		Interest Income Recognized
2012
Commercial	$	470	$	18
Commercial real estate		1,314		43
Residential mortgages		2,717		130
Credit card		510		28
Other retail		301		19
Total impaired loans, excluding GNMA and covered loans		5,312		238
Loans purchased from GNMA mortgage pools		1,448		73
Covered loans		980		29
Total	$	7,740	$	340
2011
Commercial	$	534	$	12
Commercial real estate		1,537		18
Residential mortgages		2,557		100
Credit card		485		15
Other retail		164		5
Total impaired loans, excluding GNMA and covered loans		5,277		150
Loans purchased from GNMA mortgage pools		710		25
Covered loans		780		11
Total	$	6,767	$	186
2010
Commercial	$	693	$	8
Commercial real estate		1,601		2
Residential mortgages		2,297		72
Credit card		418		11
Other retail		150		6
Total	$	5,159	$	99

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. The following table provides a summary of loans modified as TDRs for the years ended December 31, by portfolio class:


(Dollars in Millions)	Number of Loans		Pre-Modification Outstanding Loan Balance		Post-Modification Outstanding Loan Balance
2012
Commercial		4,843	$	307	$	272
Commercial real estate		312		493		461
Residential mortgages		4,616		638		623
Credit card		49,320		241		255
Other retail		10,461		279		275
Total loans, excluding GNMA and covered loans		69,552		1,958		1,886
Loans purchased from GNMA mortgage pools		9,518		1,280		1,245
Covered loans		192		277		263
Total loans		79,262	$	3,515	$	3,394
2011
Commercial		5,285	$	456	$	427
Commercial real estate		506		1,078		1,060
Residential mortgages		3,611		708		704
Credit card		55,951		322		321
Other retail		4,028		73		72
Total loans, excluding GNMA and covered loans		69,381		2,637		2,584
Loans purchased from GNMA mortgage pools		9,569		1,277		1,356
Covered loans		283		604		575
Total loans		79,233	$	4,518	$	4,515

Residential mortgages, home equity and second mortgages, and loans purchased from Government National Mortgage Association (“GNMA”) mortgage pools 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 December 31, 2012, 156 residential mortgages, 36 home equity and second mortgage loans and 583 loans purchased from GNMA mortgage pools with outstanding balances of $24 million, $2 million and $93 million, respectively, were in a trial period and have estimated post-modification balances of $24 million, $2 million, and $85 million, respectively, assuming permanent modification occurs at the end of the trial period.

The following table provides a summary of TDR loans that defaulted (fully or partially charged-off or became 90 days or more past due) for the years ended December 31, that were modified as TDRs within 12 months previous to default.


(Dollars in Millions)	Number of Loans		Amount Defaulted
2012
Commercial		859	$	48
Commercial real estate		111		232
Residential mortgages		1,073		146
Credit card		9,774		54
Other retail		1,818		56
Total loans, excluding GNMA and covered loans		13,635		536
Loans purchased from GNMA mortgage pools		1,245		177
Covered loans		68		97
Total loans		14,948	$	810
2011
Commercial		665	$	26
Commercial real estate		64		67
Residential mortgages		623		127
Credit card		7,108		36
Other retail		557		13
Total loans, excluding GNMA and covered loans		9,017		269
Loans purchased from GNMA mortgage pools		857		124
Covered loans		11		26
Total loans		9,885	$	419

In addition to the defaults in the table above, for the year ended December 31, 2012, the Company had a estimated 789 residential mortgage loans, home equity and second mortgage loans, and loans purchased from GNMA mortgage pools with aggregate outstanding balances of $121 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 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 at December 31, consisted of purchased impaired loans, purchased nonimpaired loans, and other assets as shown in the following table:


	2012								2011
(Dollars in Millions)	Purchased Impaired Loans		Purchased Nonimpaired Loans		Other Assets		Total		Purchased Impaired Loans		Purchased Nonimpaired Loans		Other Assets		Total
Commercial loans	$	–	$	143	$	–	$	143	$	68	$	137	$	–	$	205
Commercial real estate loans		1,323		2,695		–		4,018		1,956		4,037		–		5,993
Residential mortgage loans		3,978		1,109		–		5,087		3,830		1,360		–		5,190
Credit card loans		–		5		–		5		–		6		–		6
Other retail loans		–		775		–		775		–		867		–		867
Losses reimbursable by the FDIC (a)		–		–		1,280		1,280		–		–		2,526		2,526
Covered loans		5,301		4,727		1,280		11,308		5,854		6,407		2,526		14,787
Foreclosed real estate		–		–		197		197		–		–		274		274
Total covered assets	$	5,301	$	4,727	$	1,477	$	11,505	$	5,854	$	6,407	$	2,800	$	15,061

(a)

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

At December 31, 2012, $82 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.