PNC Bank 2007 Annual Report Download - page 48

C RITICAL A CCOUNTING P OLICIES
A ND J UDGMENTS
Our consolidated financial statements are prepared by
applying certain accounting policies. Note 1 Accounting
Policies in the Notes To Consolidated Financial Statements in
Item 8 of this Report describes the most significant accounting
policies that we use. Certain of these policies require us to
make estimates and strategic or economic assumptions that
may prove inaccurate or be subject to variations that may
significantly affect our reported results and financial position
for the period or in future periods.
We must use estimates, assumptions, and judgments when
financial assets and liabilities are required to be recorded at, or
adjusted to reflect, fair value. Assets and liabilities carried at
fair value inherently result in a higher degree of financial
statement volatility. Fair values and the information used to
record valuation adjustments for certain assets and liabilities are
based on either quoted market prices or are provided by other
independent third-party sources, when available. When such
third-party information is not available, we estimate fair value
primarily by using cash flow and other financial modeling
techniques. Changes in underlying factors, assumptions, or
estimates in any of these areas could materially impact our
future financial condition and results of operations.
Allowances For Loan And Lease Losses And Unfunded
Loan Commitments And Letters Of Credit
We maintain allowances for loan and lease losses and
unfunded loan commitments and letters of credit at levels that
we believe to be adequate to absorb estimated probable credit
losses inherent in the loan portfolio. We determine the
adequacy of the allowances based on periodic evaluations of
the loan and lease portfolios and other relevant factors.
However, this evaluation is inherently subjective as it requires
material estimates, all of which may be susceptible to
significant change, including, among others:
• Probability of default,
• Loss given default,
• Exposure at date of default,
• Amounts and timing of expected future cash flows on
impaired loans,
• Value of collateral,
• Historical loss exposure on consumer loans,
residential mortgages and commercial lending, 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,
allocations to pools of watchlist and non-watchlist loans, and
allocations 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 factors. While allocations
are made to specific loans and pools of loans, the total reserve
is available for all credit losses.
Commercial loans are the largest category of credits and are
the most sensitive to changes in assumptions and judgments
underlying the determination of the allowance for loan and
lease losses. We have allocated approximately $560 million,
or 67%, of the allowance for loan and lease losses at
December 31, 2007 to the commercial loan category.
Consumer and residential mortgage loan allocations are made
at a total portfolio level based on historical loss experience
adjusted for portfolio activity. Approximately $77 million, or
9.3%, of the allowance for loan and lease losses at
December 31, 2007 have been allocated to these loans. The
remainder of the allowance is allocated primarily to
commercial real estate and lease financing loans.
To the extent actual outcomes differ from our estimates,
additional provision for credit losses may be required that
would reduce future earnings. See the following for additional
information:
• Allowances For Loan And Lease Losses And
Unfunded Loan Commitments And Letters Of Credit
in the Credit Risk Management section of this Item 7
(which includes an illustration of the estimated
impact on the aggregate of the allowance for loan and
lease losses and allowance for unfunded loan
commitments and letters of credit assuming we
increased pool reserve loss rates for certain loan
categories), and
• In Item 8 of this Report, Note 6 Asset Quality in the
Notes To Consolidated Financial Statements, and
Allocation Of Allowance For Loan And Lease Losses
in the Statistical Information (Unaudited) section.
Private Equity Asset Valuation
At December 31, 2007, private equity investments carried at
estimated fair value totaled $561 million compared with $463
million at December 31, 2006. We value private equity assets at
each balance sheet date based primarily on either, in the case of
limited partnership investments, the financial statements received
from the general partner which reflect fair value or, for direct
investments, the estimated fair value of the investments. There is
a time lag in our receipt of the financial information that is the
primary basis for the valuation of our limited partnership
interests. As a result, we recognized in the fourth quarter of 2007
valuation changes related to limited partnership investments that
reflected the impact of third quarter 2007 market conditions and
performance of the underlying companies.
Due to the nature of the direct investments, we must make
assumptions as to future performance, financial condition,
liquidity, availability of capital, and market conditions, among
others, to determine the estimated fair value of the investments.
The valuation procedures that we apply to direct investments
include techniques such as multiples of adjusted earnings for
the entity, independent appraisals of the entity or the pricing
used to value the entity in a recent financing transaction.
We value affiliated partnership interests based on the
underlying investments of the partnership utilizing procedures
consistent with those applied to direct investments.
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