Purchased Loans

12 Months Ended

Dec. 31, 2015

Note 4 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 account for loans individually or 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, whereas commercial loans with a total commitment greater than a defined threshold are accounted for individually. 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.

Prior to December 31, 2015, upon final disposition of a loan within a pool and for loans that had nominal collateral value/expected cash flows, the loan’s carrying value was removed from the pool and any gain or loss associated with the transaction was retained in the pool’s recorded investment. Effective December 31, 2015, in anticipation of the end of the life of our purchased impaired pooled consumer and residential real estate loans, and pursuant to supervisory direction, we changed our derecognition policy for these loans such that we will write-off the loan’s recorded investment and derecognize the associated ALLL upon final disposition. Gains and losses on such loans will be recognized as either an adjustment to the pool’s associated ALLL, or yield, as appropriate. The transition to this new policy on December 31, 2015 resulted in a $468 million derecognition of recorded investment and associated ALLL on such loans. See the discussion below and Note 1 Accounting Policies and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional information.

The following table provides balances of purchased impaired loans at December 31, 2015 and December 31, 2014:

Table 65: Purchased Impaired Loans - Balances

		December 31, 2015						December 31, 2014
In millions		OutstandingBalance (a)		Recorded Investment		Carrying Value			OutstandingBalance (a)		Recorded Investment		Carrying Value
Commercial lending
	Commercial	$	94	$	36	$	24		$	159	$	74	$	57
	Commercial real estate		155		133		96			307		236		174
Total commercial lending			249		169		120			466		310		231
Consumer lending
	Consumer		1,769		1,407		1,392			2,145		1,989		1,661
	Residential real estate		1,915		1,946		1,700			2,396		2,559		2,094
Total consumer lending			3,684		3,353		3,092			4,541		4,548		3,755
	Total	$	3,933	$	3,522	$	3,212		$	5,007	$	4,858	$	3,986
(a)	Outstanding balance represents the balance on the loan servicing system. Recorded investment may be greater than the outstanding balance due to expected recoveries of collateral.

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 non-accretable difference and is not recognized in income. 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 ALLL, and a reclassification from accretable yield to non-accretable difference.

During 2015, $82 million of provision recapture was recorded for purchased impaired loans compared to $91 million of provision recapture during 2014. Charge-offs (which were specifically for commercial loans greater than a defined threshold) during 2015 were $12 million compared to $42 million during 2014. At December 31, 2015 and December 31, 2014, the ALLL on total purchased impaired loans was $.3 billion and $.9 billion, respectively. The decline in ALLL was primarily due to the change in our derecognition policy. For purchased impaired loan pools where an allowance has been recognized, subsequent increases in the net present value of cash flows will result in a provision recapture of any previously recorded ALLL 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 from their applicable pools for cash flow estimation purposes. The cash flow re-estimation process is completed quarterly to evaluate the appropriateness of the ALLL associated with the purchased impaired loans.

Activity for the accretable yield during 2015 and 2014 follows:

Table 66: Purchased Impaired Loans - Accretable Yield

In millions	2015		2014
January 1	$	1,558	$	2,055
Accretion (including excess cash recoveries)		(466)		(587)
Net reclassifications to accretable from non-accretable		226		208
Disposals		(68)		(118)
December 31	$	1,250	$	1,558