Purchased Loans

6 Months Ended

Jun. 30, 2013

Purchased Loans [Abstract]

Purchased Loans

Note 6 Purchased Loans

Purchased Impaired Loans

Purchased impaired loan accounting addresses differences between contractual cash flows and cash flows expected to be collected from the initial investment in loans if those differences are attributable, at least in part, to credit quality. Several factors were considered when evaluating whether a loan was considered a purchased impaired loan, including the delinquency status of the loan, updated borrower credit status, geographic information, and updated loan-to-values (LTV). GAAP allows purchasers to aggregate purchased impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Purchased impaired homogeneous consumer, residential real estate and smaller balance commercial loans with common risk characteristics are aggregated into pools where appropriate. Commercial loans with a total commitment greater than a defined threshold are accounted for individually. The excess of undiscounted cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the loan using the constant effective yield method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Subsequent changes in the expected cash flows of individual or pooled purchased impaired loans from the date of acquisition will either impact the accretable yield or result in an impairment charge to provision for credit losses in the period in which the changes become probable. Decreases to the net present value of expected cash flows will generally result in an impairment charge recorded as a provision for credit losses, resulting in an increase to the allowance for loan and lease losses, and a reclassification from accretable yield to nonaccretable difference. Prepayments and interest rate decreases for variable rate notes are treated as a reduction of expected and contractual cash flows such that the nonaccretable difference is not affected. Thus, for decreases in cash flows expected to be collected resulting from prepayments and interest rate decreases for variable rate notes, the effect will be to reduce the yield prospectively.

The following table provides purchased impaired loans at June 30, 2013 and December 31, 2012:

Table 76: Purchased Impaired Loans - Balances
			June 30, 2013				December 31, 2012
In millions		Recorded Investment		Outstanding Balance		Recorded Investment		Outstanding Balance
Commercial lending
	Commercial	$	231	$	391	$	308	$	524
	Commercial real estate		737		908		941		1,156
Total commercial lending			968		1,299		1,249		1,680
Consumer lending
	Consumer		2,474		2,754		2,621		2,988
	Residential real estate		3,336		3,341		3,536		3,651
Total consumer lending			5,810		6,095		6,157		6,639
	Total	$	6,778	$	7,394	$	7,406	$	8,319

During the first six months of 2013,$90million of provision and $70million of charge-offs were recorded on purchased impaired loans. At June 30, 2013, the allowance for loan and lease losses was$1.1billion on $6.2billion of purchased impaired loans while the remaining $.6billion of purchased impaired loans required no allowance as the net present value of expected cash flows equaled or exceeded the recorded investment. As of December 31, 2012, the allowance for loan and lease losses related to purchased impaired loans was $1.1billion.If any allowance for loan losses is recognized on a purchased impaired pool, which is accounted for as a single asset, the entire balance of that pool would be disclosed as requiring an allowance.Subsequent increases in the net present value of cash flows will result in a recovery of any previously recorded allowance for loan and lease losses, to the extent applicable, and/or a reclassification from non-accretable difference to accretable yield, which will be recognized prospectively. Disposals of loans, which may include sales of loans or foreclosures, result in removal of the loan for cash flow estimation purposes. The cash flow re-estimation process is completed quarterly to evaluate the appropriateness of the allowance associated with the purchased impaired loans.

Activity for the accretable yield for the first six months of 2013 follows:
Table 77: Purchased Impaired Loans - Accretable Yield
In millions		2013
January 1		$	2,166
Accretion (including excess cash recoveries)			(368)
Net reclassifications to accretable from non-accretable (a)			379
Disposals			(13)
June 30		$	2,164
(a)	Approximately 58% of the net reclassifications were driven by the consumer portfolio and were due to improvements of cash expected to be collected on both RBC Bank (USA) and National City loans in future periods. The remaining net reclassifications were predominantly due to future cash flow changes in the commercial portfolio.