PNC Bank 2006 Annual Report Download - page 86

Consumer loans well-secured by residential real estate,
including home equity and home equity lines of credit, are
classified as nonaccrual at 12 months past due. Loans are
considered well secured if the fair market value of the
property, less 15% to cover potential foreclosure expenses, is
greater than or equal to the principal balance including any
superior liens. A fair market value assessment of the property
is initiated when the loan becomes 80 to 90 days past due. The
procedures for foreclosure of these loans is consistent with our
general foreclosure process discussed below. The
classification of consumer loans well-secured by residential
real estate as nonaccrual loans at 12 months past due is in
accordance with Federal Financial Institutions Examination
Council guidelines. We charge off these loans based on the
facts and circumstances of the individual loan.
Consumer loans not well-secured or in the process of
collection are classified as nonaccrual at 120 days past due if
they are home equity loans and at 180 days past due if they are
home equity lines of credit. These loans are recorded at the
lower of cost or market value, less liquidation costs and the
unsecured portion of these loans is generally charged off in
the month they become nonaccrual.
A loan is categorized as a troubled debt restructuring in the
period of restructuring if a significant concession is granted
due to deterioration in the financial condition of the borrower.
Nonperforming loans are generally not returned to performing
status until the obligation is brought current and the borrower
has performed in accordance with the contractual terms for a
reasonable period of time and collection of the contractual
principal and interest is no longer doubtful. Nonaccrual
commercial and commercial real estate loans and troubled
debt restructurings are designated as impaired loans. We
recognize interest collected on these loans on the cash basis or
cost recovery method.
Foreclosed assets are comprised of any asset seized or
property acquired through a foreclosure proceeding or
acceptance of a deed-in-lieu of foreclosure. Depending on
various state statutes, legal proceedings are initiated on or
about the 65th day of delinquency. If no other remedies arise
from the legal proceedings, the final outcome will result in the
sheriff’s sale of the property. When PNC acquires the deed,
the transfer of loans to other real estate owned (“OREO”) will
be completed. These assets are recorded on the date acquired
at the lower of the related loan balance or market value of the
collateral less estimated disposition costs. We estimate market
values primarily based on appraisals when available or quoted
market prices on liquid assets. Subsequently, foreclosed assets
are valued at the lower of the amount recorded at acquisition
date or the current market value less estimated disposition
costs. Valuation adjustments on these assets and gains or
losses realized from disposition of such property are reflected
in noninterest expense.
A LLOWANCE F OR L OAN A ND L EASE L OSSES
We maintain the allowance for loan and lease losses at a level
that we believe to be adequate to absorb estimated probable
credit losses inherent in the loan portfolio. The allowance is
increased by the provision for credit losses, which is charged
against operating results, and decreased by the amount of
charge-offs, net of recoveries. Our determination of the
adequacy of the allowance is based on periodic evaluations of
the loan and lease portfolios and other relevant factors. This
evaluation is inherently subjective as it requires material
estimates, all of which may be susceptible to significant
change, including, among others:
• Expected default probabilities,
• Loss given default,
• Exposure at default,
• Amounts and timing of expected future cash flows on
impaired loans,
• Value of collateral,
• Estimated losses on consumer loans and residential
mortgages, and
• Amounts for changes in economic conditions and
potential estimation or judgmental imprecision.
In determining the adequacy of the allowance for loan and
lease losses, we make specific allocations to impaired loans, to
pools of watchlist and nonwatchlist loans and to consumer and
residential mortgage loans. We also allocate reserves to
provide coverage for probable losses not covered in specific,
pool and consumer reserve methodologies related to
qualitative and measurement factors. While allocations are
made to specific loans and pools of loans, the total reserve is
available for all credit losses.
Specific allocations are made to significant individual
impaired loans and are determined in accordance with SFAS
114, “Accounting by Creditors for Impairment of a Loan,”
with impairment measured based on the present value of the
loan’s expected cash flows, the loan’s observable market price
or the fair value of the loan’s collateral. We establish a
specific allowance on all other impaired loans based on their
loss given default credit risk rating.
Allocations to loan pools are developed by business segment
based on probability of default and loss given default risk
ratings by using historical loss trends and our judgment
concerning those trends and other relevant factors. These
factors may include, among others:
• Actual versus estimated losses,
• Regional and national economic conditions, and
• Business segment and portfolio concentrations.
Loss factors are based on industry and/or internal experience
and may be adjusted for significant factors that, based on our
judgment, impact the collectibility of the portfolio as of the
balance sheet date. Consumer and residential mortgage loan
allocations are made at a total portfolio level based on
historical loss experience adjusted for portfolio activity.
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