PNC Bank 2010 Annual Report Download - page 68
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Please find page 68 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.hierarchy for disclosure of assets and liabilities recorded at
fair value. The classification of assets and liabilities within the
hierarchy is based on whether the inputs to the valuation
methodology used in the measurement are observable or
unobservable.
The following sections of this Report provide further
information on this type of activity:
• Fair Value Measurements included within this
Item 7, and
• Note 8 Fair Value included in the Notes To
Consolidated Financial Statements in Item 8 of this
Report.
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 incurred 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,
• Value of collateral, and
• Qualitative factors such as changes in economic
conditions that may not be reflected in historical
results.
In determining the adequacy of the ALLL, we make specific
allocations to impaired loans and allocations to portfolios of
commercial and consumer loans. We also allocate reserves to
provide coverage for probable losses incurred 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.
Commercial lending is the largest category of credits and is
the most sensitive to changes in assumptions and judgments
underlying the determination of the ALLL. We have allocated
approximately $2.6 billion, or 53%, of the ALLL at
December 31, 2010 to the commercial lending category.
Consumer lending allocations are made based on historical
loss experience adjusted for recent activity. Approximately
$2.3 billion, or 47%, of the ALLL at December 31, 2010 have
been allocated to these consumer lending categories.
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 ALLL and allowance
for unfunded loan commitments and letters of credit
assuming we increased pool reserve loss rates for
certain loan categories), and
• Note 5 Asset Quality and Allowances for Loan and
Lease Losses and Unfunded Loan Commitments and
Letters of Credit in the Notes To Consolidated
Financial Statements and Allocation Of Allowance
For Loan And Lease Losses in the Statistical
Information (Unaudited) section of Item 8 of this
Report.
Estimated Cash Flows on Purchased Impaired Loans
ASC Sub-Topic 310-30 – Loans and Debt Securities Acquired
with Deteriorated Credit Quality (formerly SOP 03-3)
provides the GAAP guidance for accounting for certain loans.
These loans have experienced a deterioration of credit quality
from origination to acquisition for which it is probable that the
investor will be unable to collect all contractually required
payments receivable, including both principal and interest.
In our assessment of credit quality deterioration, we must
make numerous assumptions, interpretations and judgments,
using internal and third-party credit quality information to
determine whether it is probable that we will be able to collect
all contractually required payments. This point in time
assessment is inherently subjective due to the nature of the
available information and judgment involved.
Those loans that qualify under Sub-Topic 310-30 are recorded
at fair value at acquisition, which involves estimating the
expected cash flows to be received. Measurement of the fair
value of the loan is based on the provisions of Topic 820.
Also, GAAP prohibits the carryover or establishment of an
allowance for loan losses on the acquisition date.
Subsequent to the acquisition of the loan, GAAP requires that
we continue to estimate cash flows expected to be collected
over the life of the loan. The measurement of expected cash
flows involves assumptions and judgments as to credit risk,
interest rate risk, prepayment risk, default rates, loss severity,
payment speeds and collateral values. All of these factors are
inherently subjective and can result in significant changes in
the cash flow estimates over the life of the loan. Such changes
in expected cash flows could increase future earnings
volatility due to increases or decreases in the accretable yield
(i.e., the difference between the undiscounted expected cash
flows and the recorded investment in the loan). The accretable
yield is recognized as interest income on a constant effective
yield method over the life of the loan. In addition, changes in
expected cash flows could result in the recognition of
impairment through provision for credit losses if the decline in
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