We classify loans that we have the intent and ability to hold for the foreseeable future or until maturity as LHFI. We report LHFI at their amortized cost, which includes the outstanding principal balance adjusted for any unamortized premiums, discounts, deferred fees and costs. The accrued interest receivable on loans held-for-investment totaled $38.8 million at June 30, 2020 and $36.9 million at December 31, 2019 and was reported in other assets on the Consolidated Statements of Financial Condition.


	June 30, 2020		December 31, 2019
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	2,716	$	3,154
Home equity	978		1,024
Other	898		729
Total consumer loans	4,592		4,907
Commercial loans
Commercial real estate	3,016		2,828
Commercial and industrial	1,968		1,634
Warehouse lending	5,232		2,760
Total commercial loans	10,216		7,222
Total loans held-for-investment	$	14,808	$	12,129


	Six Months Ended June 30,
	2020		2019
	(Dollars in millions)
Loans Sold (1)
Performing loans	$	38	$	139
Total loans sold	$	38	$	139
Net gain associated with loan sales (2)	$	—	$	2
Loans Purchased
Home equity	$	—	$	149
Other consumer	63		51
Total loans purchased	$	63	$	200
Premium associated with loans purchased	$	—	$	7

We have pledged certain LHFI, LHFS, and loans with government guarantees to collateralize lines of credit and/or borrowings with the FHLB of Indianapolis and the FRB of Chicago. At June 30, 2020 we had pledged loans of $11.6 billion, compared to $9.1 billion at December 31, 2019.

We determine the estimate of the allowance for loan losses on at least a quarterly basis. The allowance for loan losses represents management's estimate of lifetime losses in our LHFI portfolio, excluding loans carried under the fair value option. We establish an allowance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance uses a loan-level, model-based approach, to estimate the expected lifetime credit losses. For non-performing loans, we've elected to use the collateral dependent practical expedient. The reserve for collateral dependent loans is established as the difference between fair value of the collateral less cost to sell and the amortized cost of the loan. Management applies judgment and assigns qualitative factors to each loan portfolio segment or the portfolio as a whole based upon the consideration of the following factors: levels of and trends in

delinquencies and performance of loans, levels of and trends in write-offs and recoveries collected, changes in the nature and volume of the portfolio, changes in reasonable and supportable economic forecasts, changes in lending policies and procedures, changes in economic and business conditions, changes in lending management, changes in credit quality statistics, changes in the quality of the loan review system, changes in prepayment expectations or other factors affecting assessments of loan contractual term, changes in concentrations of credit, industry conditions and other internal or external factor changes.

A specific allowance is established on impaired loans when it is probable all amounts due will not be collected pursuant to the original contractual terms of the loan and the recorded investment in the loan exceeds its fair value. The required allowance is measured using either the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent.

A general allowance is established for lifetime losses inherent on non-impaired loans by segmenting the portfolio based upon common risk characteristics. Our consumer loan portfolio is segmented into Residential First Mortgage, Home Equity and Other Consumer. Loan characteristics impacting these segments include lien position, credit quality, and loan structure. At a high-level our commercial loans are segmented into Commercial Real Estate, Commercial and Industrial, and Warehouse Lending. Loan characteristics impacting these segments include credit quality and loan structure.

We measure the allowance using the applicable dual risk rating model which measures probability of default, loss given default and exposure at default. As of June 30, 2020, we estimated losses over a two-year reasonable and supportable forecast period using macroeconomic scenarios before reverting economic variables over a one-year period to their long-term historical averages on a straight-line basis. As of June 30, 2020, we utilized the Moody’s June scenarios in our forecast: a growth forecast, weighted at 30 percent; a baseline forecast, weighted at 40 percent; and an adverse forecast, weighted at 30 percent. The resulting composite forecast for the second quarter of 2020 was worse than the scenario used in the first quarter 2020. Unemployment ends the year at 10 percent and recovers only slightly in 2021. GDP recovers only slightly by the end of the year from current levels and does not return to the pre-COVID level until mid-2022. HPI decreases 2 percent from early 2020 through 2021.

The worsening of our economic forecast increased the ACL by $31 million from March 31, 2020. In addition to this increase, we judgmentally increased the qualitative reserves by $39 million primarily in our CRE and C&I portfolios, guided by the model output from Moody's adverse scenario and our judgment relating to industries and borrowers we believe could be more exposed to the stressful conditions in our forecast. In addition, we reviewed our loans in deferral status and proactively downgraded loans totaling approximately $180 million UPB from "pass" status during the quarter, resulting in an increase of $24 million to the ACL. This resulted in an increase to our reserves of approximately $98 million during the second quarter, which includes an increase in our reserves for unfunded commitments of $1 million.


	Residential First Mortgage (1)		Home Equity		Other Consumer		Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total
	(Dollars in millions)
Three Months Ended June 30, 2020
Beginning balance	$	46	$	23	$	16	$	28	$	18	$	1	$	132
Provision	16		5		19		55		5		—		100
Charge-offs	(2)		(1)		(2)		—		—		—		(5)
Recoveries	—		1		1		—		—		—		2
Ending allowance balance	$	60	$	28	$	34	$	83	$	23	$	1	$	229
Three Months Ended June 30, 2019
Beginning balance	$	35	$	16	$	4	$	36	$	30	$	6	$	127
Provision (benefit)	(8)		—		3		(1)		24		(1)		17
Charge-offs	(1)		—		(3)		—		(31)		—		(35)
Recoveries	—		—		1		—		—		—		1
Ending allowance balance	$	26	$	16	$	5	$	35	$	23	$	5	$	110

Six Months Ended June 30, 2020
Beginning balance, prior to adoption of ASC 326	$	22	$	14	$	6	$	38	$	22	$	5	$	107
Impact of adopting ASC 326	25		12		10		(14)		(6)		(4)		23
Provision	16		2		20		59		7		—		104
Charge-offs	(3)		(2)		(3)		—		—		—		(8)
Recoveries	—		2		1		—		—		—		3
Ending allowance balance	$	60	$	28	$	34	$	83	$	23	$	1	$	229
Six Months Ended June 30, 2019
Beginning balance	$	38	$	15	$	3	$	48	$	18	$	6	$	128
Provision (benefit)	(10)		—		5		(13)		36		(1)		17
Charge-offs	(2)		—		(4)		—		(31)		—		(37)
Recoveries	—		1		1		—		—		—		2
Ending allowance balance	$	26	$	16	$	5	$	35	$	23	$	5	$	110

The allowance for loan losses was $229 million at June 30, 2020 and $110 million at June 30, 2019. The increase in the allowance is reflective of the adoption of CECL and changes in the economic forecast used in the ACL models as a result of the ongoing COVID-19 pandemic.

Loans are considered to be past due when any payment of principal or interest is 30 days past the scheduled payment date. While it is the goal of management to collect on loans, we attempt to work out a satisfactory repayment schedule or modification with past due borrowers and will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our practices regarding past due loans are designed to both assist borrowers in meeting their contractual obligations and minimize losses incurred by the Bank.

Beginning in March 2020, as a response to COVID-19, customers facing COVID-19 related difficulties were offered forbearance in an effort to help our borrowers get to the other side of the health crisis when we believe they will be able to fulfill all of their contractual commitments.

We cease the accrual of interest on all classes of consumer and commercial loans upon the earlier of, becoming 90 days past due, or when doubt exists as to the ultimate collection of principal or interest (classified as nonaccrual or nonperforming loans). When a loan is placed on nonaccrual status, the accrued interest income is reversed and the loan may only return to accrual status when principal and interest become current and are anticipated to be fully collectible. We do not measure an allowance for credit losses for accrued interest receivables as accrued interest is written off in a timely manner. We are not aging receivables for customers who have been granted a payment deferral in response to COVID-19 which remain in the aging category they were in at the time of payment deferral. We continue to accrue interest on these loans, consistent with our forbearance programs.


	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due (1)		Total Past Due		Current		Total LHFI (3) (4)
	(Dollars in millions)
June 30, 2020
Consumer loans
Residential first mortgage	$	6	$	5	$	27	$	38	$	2,678	$	2,716
Home equity	1		—		5		6		972		978
Other	2		1		1		4		894		898
Total consumer loans	9		6		33		48		4,544		4,592
Commercial loans
Commercial real estate	—		—		—		—		3,016		3,016
Commercial and industrial (1)	—		—		—		—		1,968		1,968
Warehouse lending	—		—		—		—		5,232		5,232
Total commercial loans	—		—		—		—		10,216		10,216
Total loans (2)	$	9	$	6	$	33	$	48	$	14,760	$	14,808
December 31, 2019
Consumer loans
Residential first mortgage	$	5	$	4	$	21	$	30	$	3,124	$	3,154
Home Equity	1		—		4		5		1,019		1,024
Other	3		1		1		5		724		729
Total consumer loans	9		5		26		40		4,867		4,907
Commercial loans
Commercial real estate	—		—		—		—		2,828		2,828
Commercial and industrial	—		—		—		—		1,634		1,634
Warehouse lending	—		—		—		—		2,760		2,760
Total commercial loans	—		—		—		—		7,222		7,222
Total loans (2)	$	9	$	5	$	26	$	40	$	12,089	$	12,129

Interest income is recognized on nonaccrual loans using a cash basis method. The interest income recognized on impaired loans was $1 million and less than $1 million at June 30, 2020 and December 31, 2019, respectively. At June 30, 2020 and December 31, 2019, we had no loans 90 days past due and still accruing interest.

We estimated expected credit losses over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The reserve for unfunded commitments is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

The reserve for unfunded commitments is reflected in other liabilities on the Consolidated Statements of Financial Condition and was $21 million as of June 30, 2020, compared to $3 million as of June 30, 2019. The increase in the reserve is reflective of the adoption of CECL which required us to record an allowance for our estimate of lifetime losses and an increase due to changes in the economic forecast used in the ACL models as a result of the ongoing COVID-19 pandemic.

The following categories of off-balance sheet credit exposures have been identified: unfunded loans with available balances, new commitments to lend that are not yet funded, and standby and commercial letters of credit. For further information, see Note 15 - Legal Proceedings, Contingencies and Commitments.

We may modify certain loans in both our consumer and commercial loan portfolios to retain customers or to maximize collection of the outstanding loan balance. TDRs are modified loans in which a borrower demonstrates financial difficulties and for which a concession has been granted as a result. Nonperforming TDRs are included in nonaccrual loans. TDRs remain in nonperforming status until a borrower has made payments and is current for at least six consecutive months. Performing TDRs are not considered to be nonaccrual so long as we believe that all contractual principal and interest due under the restructured terms will be collected. Performing and nonperforming TDRs remain impaired as interest and principal will not be received in accordance with the original contractual terms of the loan agreement. Refer to Note 1- Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2019 for a description of the methodology used to determine TDRs.

Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, but may give rise to potential incremental losses. We measure impairments using a discounted cash flow method for performing TDRs and measure impairment based on collateral values for nonperforming TDRs.

Beginning in March 2020, as a response to COVID-19, we offered our consumer and commercial customers principal and interest payment deferrals and extensions. We considered these programs in the context of whether or not the short-term modifications of these loans would constitute a TDR. We considered the CARES Act, interagency guidance and related guidance from the FASB, which provided that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not required to be accounted for as TDRs. As a result, we have determined that these loans are not TDRs.


	TDRs
	Performing		Nonperforming		Total
	(Dollars in millions)
June 30, 2020
Consumer loans
Residential first mortgage	$	20	$	8	$	28
Home equity	15		2		17
Commercial Real Estate	5		—		5
Total TDRs (1)(2)	$	40	$	10	$	50
December 31, 2019
Consumer loans
Residential first mortgage	$	20	$	8	$	28
Home Equity	18		2		20
Total TDRs (1)(2)	$	38	$	10	$	48


	New TDRs
	Number of Accounts	Pre-Modification Unpaid Principal Balance		Post-Modification Unpaid Principal Balance (1)
	(Dollars in millions)
Three Months Ended June 30, 2020



Commercial Real Estate	1	$	5	$	5
Total TDR loans	1	$	5	$	5
Three Months Ended June 30, 2019
Home equity (2)(3)	2	—		—
Total TDR loans	2	$	—	$	—

Six Months Ended June 30, 2020
Residential first mortgages	5	$	1	$	1
Home equity (2)(3)	2	—		—
Consumer	1	—		—
Commercial Real Estate	1	$	5	$	5
Total TDR loans	9	6		6
Six Months Ended June 30, 2019
Residential first mortgages	2	$	—	$	—
Home equity (2)(3)	4	1		1
Total TDR loans	6	$	1	$	1

There was one residential first mortgage loan modified in the previous 12 months that subsequently defaulted during the three and six months ended June 30, 2020. There were no residential first mortgage loans modified in the previous 12 months that subsequently defaulted during the three and six months ended June 30, 2019. The increase in allowance at modification was less than $1 million for the three months ended June 30, 2020 and June 30, 2019. All TDR classes within the consumer and commercial portfolios are considered subsequently defaulted when they are greater than 90 days past due within 12 months of the restructuring date.

Watch. Watch assets are defined as pass rated assets that exhibit elevated risk characteristics or other factors that deserve management’s close attention and increased monitoring. However, the asset does not exhibit a potential or well-defined weakness that would warrant a downgrade to criticized or adverse classification.

Special mention. Assets identified as special mention possess credit deficiencies or potential weaknesses deserving management's close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk that, if not corrected, could weaken the assets and increase risk in the future. Special mention assets are criticized, but do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Assets identified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the full collection or liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. For home equity loans and other consumer loans, we evaluate credit quality based on the aging and status of payment activity and any other known credit characteristics that call into question full repayment of the asset. Substandard loans may be placed on either accrual or non-accrual status.

Doubtful. An asset classified as doubtful has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. A doubtful asset has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral, and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Due to the high probability of loss, doubtful assets are placed on non-accrual.

Loss. An asset classified as loss is considered uncollectible and of such little value that the continuance as a bankable asset is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather that it is not practical or desirable to defer writing off the asset even though partial recovery may be affected in the future.

Consumer loans consist of open and closed-end loans extended to individuals for household, family, and other personal expenditures, and includes consumer loans, and loans to individuals secured by their personal residence, including first mortgage, home equity, and home improvement loans. Because consumer loans are usually relatively small-balance, homogeneous exposures, consumer loans are rated based primarily on payment performance. Payment performance is a proxy for the strength of repayment capacity and loans are generally classified based on their payment status rather than by an individual review of each loan.


															Revolving Loans Converted to Term Loans Amortized Cost Basis
													Revolving Loans Amortized Cost Basis						Total		December 31, 2019
	Term Loans
	Amortized Cost Basis by Origination Year
As of June 30, 2020	2020		2019		2018		2017		2016		Prior
Consumer Loans	(Dollars in millions)
Residential First Mortgage
Pass	$	152	$	709	$	325	$	418	$	367	$	568	$	105	$	11	$	2,655	$	3,107
Watch	—		1		2		1		1		19		1		—		25		23
Substandard	—		1		6		2		—		13		—		—		22		15
Home Equity
Pass	6		42		19		9		3		15		827		38		959		1,002
Watch	—		—		—		—		—		13		1		—		14		16
Substandard	—		—		—		—		—		1		1		1		3		3
Other Consumer
Pass	126		368		183		4		2		11		202		—		896		727
Watch	—		—		1		—		—		—		—		—		1		1
Substandard	—		—		1		—		—		—		—		—		1		1
Total Consumer Loans (1)	$	284	$	1,121	$	537	$	434	$	373	$	640	$	1,137	$	50	$	4,576	$	4,895


															Revolving Loans Converted to Term Loans Amortized Cost Basis
	FICO Band																		Revolving Loans Amortized Cost Basis	Total
	Amortized Cost Basis by Origination Year
As of June 30, 2020	2020		2019		2018		2017		2016		Prior
Consumer Loans	(Dollars in millions)
Residential First Mortgage
>750	$	87	$	372	$	172	$	293	$	278	$	333	$	61	$	4	$	1,600
700-750	45		234		128		112		83		165		31		4		802
<700	20		105		33		16		7		102		14		3		300
Home Equity
>750	2		13		6		3		1		9		366		12		412
700-750	2		16		7		4		1		11		331		16		388
<700	2		13		6		2		1		9		132		11		176
Other Consumer
>750	86		235		99		2		1		9		109		—		541
700-750	36		121		68		1		—		1		65		—		292
<700	4		12		18		1		1		1		28		—		65
Total Consumer Loans (1)	$	284	$	1,121	$	537	$	434	$	373	$	640	$	1,137	$	50	$	4,576


															Revolving Loans Converted to Term Loans Amortized Cost Basis
	LTV Band																		Revolving Loans Amortized Cost Basis	Total
	Amortized Cost Basis by Origination Year
As of June 30, 2020	2020		2019		2018		2017		2016		Prior
Consumer Loans	(Dollars in millions)
Residential first mortgage
>90	$	45	$	303	$	167	$	45	$	3	$	23	$	—	$	—	$	586
71-90	68		243		96		141		96		298		—		—		942
55-70	27		95		33		119		139		167		—		—		580
<55	12		70		37		116		130		112		106		11		594
Home Equity
>90	—		—		—		1		2		14		1		—		18
71-90	4		32		14		6		1		11		648		25		741
<=70	2		10		5		2		—		4		180		14		217
Total (1)	$	158	$	753	$	352	$	430	$	371	$	629	$	935	$	50	$	3,678

Internal audit conducts periodic examinations which serve as an independent verification of the accuracy of the ratings assigned. All loans are examined on an at least annual basis. Loan grades are based on different factors within the borrowing relationship: entity sales, debt service coverage, debt/total net worth, liquidity, balance sheet and income statement trends, management experience, business stability, financing structure, and financial reporting requirements. The underlying collateral is also rated based on the specific type of collateral and corresponding LTV. The combination of the borrower and collateral risk ratings results in the final rating for the borrowing relationship.


															Revolving Loans Converted to Term Loans Amortized Cost Basis
	Term Loans																				Revolving Loans Amortized Cost Basis	Total	December 31, 2019
	Amortized Cost Basis by Origination Year
As of June 30, 2020	2020		2019		2018		2017		2016		Prior
Commercial Loans	(Dollars in million)
Commercial real estate
Pass	$	184	$	950	$	477	$	486	$	353	$	286	$	(1)	$	—	$	2,735	$	2,794
Watch	23		32		88		33		38		36		—		—		250		24
Special mention	—		—		3		20		—		—		—		—		23		5
Substandard	—		—		3		5		—		—		—		—		8		5
Commercial and industrial
Pass	119		580		248		317		113		110		22		—		1,509		1,533
Watch	1		2		10		—		—		—		1		—		14		72
Special mention	1		12		4		14		—		6		—		—		37		24
Substandard	21		—		10		4		—		—		—		—		35		5
Payroll protection program
Pass	373		—		—		—		—		—		—		—		373		—
Warehouse
Pass	—		—		—		—		—		—		4,942		—		4,942		2,556
Watch	—		—		—		—		—		—		255		—		255		189
Special mention	—		—		—		—		—		—		35		—		35		15
Substandard	—		—		—		—		—		—		—		—		—		—
Total commercial loans	$	722	$	1,576	$	843	$	879	$	504	$	438	$	5,254	$	—	$	10,216	$	7,222