Purchased Loans

12 Months Ended

Dec. 31, 2014

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 (e.g., payoff, short-sale, foreclosure, etc.), the loan’s carrying value is removed from the pool and any gain or loss associated with the transaction is 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. This treatment is designed to maintain a constant effective yield for recognition of interest income. Accordingly, a pool’s recorded investment includes the net accumulation of realized losses or gains attributable to these final dispositions. As there are no future expected cash flows related to these dispositions, their net carrying value is $0. The recorded investment, including these realized losses and gains, is evaluated for collectability based upon the net present value of the pool’s remaining expected cash flows when establishing our allowance for loan losses. See 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, 2014 and December 31, 2013:

Table 71: Purchased Impaired Loans - Balances

		December 31, 2014						December 31, 2013
In millions		OutstandingBalance (a)		Recorded Investment		Carrying Value			OutstandingBalance (a)		Recorded Investment		Carrying Value
Commercial lending
	Commercial	$	159	$	74	$	57		$	282	$	157	$	131
	Commercial real estate		307		236		174			655		516		409
Total commercial lending			466		310		231			937		673		540
Consumer lending
	Consumer		2,145		1,989		1,661			2,523		2,312		1,971
	Residential real estate		2,396		2,559		2,094			3,025		3,121		2,591
Total consumer lending			4,541		4,548		3,755			5,548		5,433		4,562
	Total	$	5,007	$	4,858	$	3,986		$	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.

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 allowance for loan and lease losses, and a reclassification from accretable yield to non-accretable difference.

During 2014, $91 million of provision recapture was recorded for purchased impaired loans compared to $11 million of provision expense for 2013. The charge-offs (which were specifically for commercial loans greater than a defined threshold) during 2014 were $42 million compared to $104 million for 2013. At December 31, 2014, the allowance for loan and lease losses was $.9 billion on $4.4 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 provision recapture 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 from their applicable pools 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 2014 and 2013 follows:

Table 72: Purchased Impaired Loans - Accretable Yield

In millions		2014		2013
January 1		$	2,055	$	2,166
Accretion (including excess cash recoveries)			(587)		(695)
Net reclassifications to accretable from non-accretable (a)			208		613
Disposals			(118)		(29)
December 31		$	1,558	$	2,055
(a)	Approximately 93% of net reclassifications for the year ended December 31, 2014 were within the commercial portfolio as compared to 37% for year ended December 31, 2013.