Purchased Loans

3 Months Ended

Mar. 31, 2016

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.

Upon final disposition of a loan within a pool and for loans that have nominal collateral value/expected cash flows, the loan’s recorded investment is written-off and the associated ALLL is derecognized, thus removing it from the carrying value of the pool. Gains and losses on such loans are recognized as either an adjustment to the pool’s associated ALLL, or yield, as appropriate. For more information regarding our derecognition policy, see Note 1 Accounting Policies in our 2015 Form 10-K.

The following table provides balances of purchased impaired loans at March 31, 2016 and December 31, 2015:

Table 56: Purchased Impaired Loans - Balances

		March 31, 2016						December 31, 2015
In millions		OutstandingBalance (a)		Recorded Investment		Carrying Value			OutstandingBalance (a)		Recorded Investment		Carrying Value
Commercial lending
	Commercial	$	78	$	29	$	18		$	94	$	36	$	24
	Commercial real estate		128		120		81			155		133		96
Total commercial lending			206		149		99			249		169		120
Consumer lending
	Consumer		1,694		1,338		1,313			1,769		1,407		1,392
	Residential real estate		1,843		1,893		1,656			1,915		1,946		1,700
Total consumer lending			3,537		3,231		2,969			3,684		3,353		3,092
	Total	$	3,743	$	3,380	$	3,068		$	3,933	$	3,522	$	3,212
(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.

At March 31, 2016 and December 31, 2015, the ALLL on total purchased impaired loans was $.3 billion. 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 the first three months of 2016 and 2015 follows:

Table 57: Purchased Impaired Loans - Accretable Yield

In millions	2016		2015
January 1	$	1,250	$	1,558
Accretion (including excess cash recoveries)		(107)		(132)
Net reclassifications to accretable from non-accretable		17		64
Disposals		(4)		(6)
March 31	$	1,156	$	1,484