PNC Bank 2009 Annual Report Download - page 102

of both. Modified loans classified as TDRs are included in
nonperforming loans until returned to performing status.
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.
Foreclosed assets are comprised of any asset seized or
property acquired through a foreclosure proceeding or
acceptance of a deed-in-lieu of foreclosure. Other real estate
owned is comprised principally of commercial and residential
real estate properties obtained in partial or total satisfaction of
loan obligations. 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 we acquire the deed, we transfer the
loans to other real estate owned included in Other assets on
our Consolidated Balance Sheet. Property obtained in
satisfaction of a loan is recorded at the estimated fair value
less anticipated selling costs. We estimate fair values
primarily based on appraisals, when available, or quoted
market prices on liquid assets. Anticipated recoveries from
private mortgage insurance and government guarantees are
also considered in evaluating the potential impairment of
loans at the date of transfer. When the anticipated future cash
flows associated with a loan are less than its net carrying
value, a charge-off is recognized against the allowance for
loan losses.
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 incurred in the loan portfolio as of the balance
sheet date. 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:
• 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, and
• Qualitative factors include amounts for changes in
economic conditions that may not be reflected in
historical results.
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
inherent in the portfolio at the balance sheet date based upon
current market conditions, which may not be reflected in
historical loss data. While allocations are made to specific
loans and pools of loans, the total reserve is available for all
credit losses.
Nonperforming loans are considered impaired under FASB
ASC Receivables (Topic 310) and are allocated a specific
reserve.
Specific reserve allocations are determined as follows:
• For nonperforming loans greater than or equal to the
“defined dollar threshold”, specific reserves are
based on an analysis of the present value of the loan’s
expected future cash flows, the loan’s observable
market price or the fair value of the collateral.
• For nonperforming loans below the “defined dollar
threshold”, the loans are aggregated for purposes of
measuring specific reserve impairment using the
applicable loan’s Loss Given Default (LGD)
percentage multiplied by the balance of the loan.
Allocations to loan pools are developed by product and industry
with estimated losses based on probability of default and loss
given default credit 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
• Industry 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 current risk factors.
While our pool reserve methodologies strive to reflect all risk
factors, there continues to be a certain element of uncertainty
associated with, but not limited to, potential imprecision in the
estimation process due to the inherent time lag of obtaining
information. We provide additional reserves that are designed
to provide coverage for losses attributable to such risks. These
reserves also include factors which may not be directly
measured in the determination of specific or pooled reserves.
Such qualitative factors include:
• Credit quality trends,
• Recent loss experience in particular segments of the
portfolio,
98