Purchased Loans

9 Months Ended

Sep. 30, 2014

Note 5 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 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. For pooled loans, proceeds of individual loans are not applied individually to each loan within a pool, but to the pool’s recorded investment since it is accounted for as a single asset. Upon final disposition of a loan within a pool (e.g., payoff, short-sale, foreclosure, etc.), the loan’s carrying value is removed from the pool and any gains or losses associated with the transaction are retained in the pool’s recorded investment. For example, upon final disposition of a loan by short-sale, the proceeds of the short-sale may be less (or more) than the loan’s recorded investment. This shortfall or loss (excess or gain) is not accounted for as an individual loan sale in our income statement and is instead retained as part of the pool’s recorded investment consistent with our accounting for the pool as a single asset. Accordingly, a pool’s recorded investment includes the net accumulation of realized losses or gains attributable to these final dispositions. The recorded investment is evaluated for collectability based upon the net present value of the pools’ expected cash flows when establishing our allowance for loan losses. See Note 1 Accounting Policies and Note 6 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional information. 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 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.

The following table provides purchased impaired loans at September 30, 2014 and December 31, 2013:

Table 69: Purchased Impaired Loans - Balances

		September 30, 2014						December 31, 2013
In millions		OutstandingBalance (a)		Recorded Investment		Carrying Value			OutstandingBalance (a)		Recorded Investment		Carrying Value
Commercial lending
	Commercial	$	183	$	82	$	64		$	282	$	157	$	131
	Commercial real estate		390		323		245			655		516		409
Total commercial lending			573		405		309			937		673		540
Consumer lending
	Consumer		2,244		2,065		1,794			2,523		2,312		1,971
	Residential real estate		2,551		2,697		2,173			3,025		3,121		2,591
Total consumer lending			4,795		4,762		3,967			5,548		5,433		4,562
	Total	$	5,368	$	5,167	$	4,276		$	6,485	$	6,106	$	5,102
(a) Outstanding balance represents the balance on the loan servicing system for active loans. It is possible for the outstanding balance to be lower than the recorded investment for certain loans due to the use of pool accounting.

During the first nine months of 2014, $86 million of provision recovery and $28 million (specifically for commercial loans greater than a defined threshold) of charge-offs were recorded on purchased impaired loans. The comparative amounts for the nine months ended September 30, 2013, were $59 million of provision and $95 million of charge-offs. At September 30, 2014, the allowance for loan and lease losses was $.9 billion on $4.7 billion of purchased impaired loans while the remaining $.5 billion 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, 2013, the allowance for loan and lease losses related to purchased impaired loans was $1.0 billion. 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. Individual loan transactions where final dispositions have occurred (as noted above) result in removal of the loans 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 during the first nine months of 2014 and 2013 follows:

Table 70: Purchased Impaired Loans - Accretable Yield

In millions		2014		2013
January 1		$	2,055	$	2,166
Accretion (including excess cash recoveries)			(449)		(539)
Net reclassifications to accretable from non-accretable (a)			237		577
Disposals			(24)		(20)
September 30		$	1,819	$	2,184
(a)	Approximately 68% and 60% of the net reclassifications for the nine months ended September 30, 2014 and 2013, respectively, were within the consumer portfolio primarily due to increases in the expected average life of residential and home equity loans. The remaining net reclassifications were predominantly due to future cash flow improvements within the commercial portfolio.