PNC Bank 2010 Annual Report Download - page 116
Download and view the complete annual report
Please find page 116 of the 2010 PNC Bank annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Specific reserve allocations are determined as follows:
• For nonperforming loans greater than or equal to a
defined dollar threshold and TDRs, 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 LGD percentage multiplied by the
balance of the loans.
When applicable, this process is applied across all the loan
classes in a similar manner. However, as previously discussed,
certain consumer loans and lines of credit, not secured by
residential real estate, are charged off instead of being
classified as nonperforming.
Our credit risk management policies, procedures and practices
are designed to promote sound and fair lending standards
while achieving prudent credit risk management. We have
policies, procedures and practices that address financial
statement requirements, collateral review and appraisal
requirements, advance rates based upon collateral types,
appropriate levels of exposure, cross-border risk, lending to
specialized industries or borrower type, guarantor
requirements, and regulatory compliance.
See Note 5 Asset Quality and Allowances for Loan and Lease
Losses and Unfunded Loan Commitments and Letters of
Credit for additional information.
A
LLOWANCE
F
OR
U
NFUNDED
L
OAN
C
OMMITMENTS
A
ND
L
ETTERS
O
F
C
REDIT
We maintain the allowance for unfunded loan commitments
and letters of credit at a level we believe is adequate to absorb
estimated probable losses related to these unfunded credit
facilities. We determine the adequacy of the allowance based
on periodic evaluations of the unfunded credit facilities,
including an assessment of the probability of commitment
usage, credit risk factors, and the terms and expiration dates of
the unfunded credit facilities. The allowance for unfunded
loan commitments and letters of credit is recorded as a
liability on the Consolidated Balance Sheet. Net adjustments
to the allowance for unfunded loan commitments and letters of
credit are included in the provision for credit losses.
The reserve for unfunded loan commitments is estimated in a
manner similar to the methodology used for determining
reserves for similar funded exposures. However, there is one
important distinction. This distinction lies in the estimation of
the amount of these unfunded commitments that will become
funded. This is determined using a cash conversion factor or
loan equivalency factor, which is a statistical estimate of the
amount of an unfunded commitment that will fund over a
given period of time. Once the future funded amount is
estimated, the calculation of the allowance follows similar
methodologies to those employed for on-balance sheet
exposure.
See Note 5 Asset Quality and Allowances for Loan and Lease
Losses and Unfunded Loan Commitments and Letters of
Credit for additional information.
M
ORTGAGE
A
ND
O
THER
S
ERVICING
R
IGHTS
We provide servicing under various loan servicing contracts
for commercial, residential and other consumer loans. These
contracts are either purchased in the open market or retained
as part of a loan securitization or loan sale. All newly acquired
or originated servicing rights are initially measured at fair
value. Fair value is based on the present value of the expected
future cash flows, including assumptions as to:
• Deposit balances and interest rates for escrow and
reserve earnings,
• Discount rates,
• Stated note rates,
• Estimated prepayment speeds, and
• Estimated servicing costs.
For subsequent measurements of these assets, we have elected
to utilize either the amortization method or fair value
measurement based upon the asset class and our risk
management strategy for managing these assets. For
commercial mortgage loan servicing rights, we use the
amortization method. This election was made based on the
unique characteristics of the commercial mortgage loans
underlying these servicing rights with regard to market inputs
used in determining fair value and how we manage the risks
inherent in the commercial mortgage servicing rights assets.
Specific risk characteristics of commercial mortgages include
loan type, currency or exchange rate, interest rates, expected
cash flows and changes in the cost of servicing. We record
these servicing assets as Other intangible assets and amortize
them over their estimated lives based on estimated net
servicing income. On a quarterly basis, we test the assets for
impairment by categorizing the pools of assets underlying the
servicing rights into various strata. If the estimated fair value
of the assets is less than the carrying value, an impairment loss
is recognized and a valuation reserve is established.
For servicing rights related to residential real estate loans, we
apply the fair value method. This election was made to be
consistent with our risk management strategy to hedge
changes in the fair value of these assets. We manage this risk
by hedging the fair value of this asset with derivatives and
securities which are expected to increase in value when the
value of the servicing right declines. The fair value of these
servicing rights is estimated by using a cash flow valuation
model which calculates the present value of estimated future
net servicing cash flows, taking into consideration actual and
expected mortgage loan prepayment rates, discount rates,
servicing costs, and other economic factors which are
determined based on current market conditions. Expected
108