PNC Bank 2011 Annual Report Download - page 150

pool is then accounted for as a single asset with a single
composite interest rate and an aggregate expectation of cash
flows. With respect to the National City acquisition, we
aggregated homogeneous consumer and residential real estate
loans into pools with common risk characteristics. We account
for commercial and commercial real estate loans individually.
Purchased Impaired Loans
December 31, 2011 December 31, 2010
In millions
Recorded
Investment
Outstanding
Balance
Recorded
Investment
Outstanding
Balance
Commercial $ 140 $ 245 $ 249 $ 408
Commercial real estate 712 743 1,153 1,391
Consumer 2,766 3,405 3,024 4,121
Residential real estate 3,049 3,128 3,354 3,803
Total $6,667 $7,521 $7,780 $9,723
The excess of cash flows expected to be collected over the
carrying value is referred to as the accretable yield and is
recognized in interest income over the remaining life of the
loan using the constant effective yield method. The difference
between contractually required payments and the cash flows
expected to be collected is referred to as the nonaccretable
difference. Changes in the expected cash flows of individual
or pooled purchased impaired loans will either impact the
accretable yield or result in an impairment charge to the
provision for credit losses in the period in which the changes
become probable.
Subsequent decreases to the net present value of expected cash
flows will generally result in an impairment charge to the
provision for credit losses, resulting in an increase to the
ALLL, and a reclassification from accretable yield to
nonaccretable difference. Subsequent increases to the net
present value of expected cash flows will generally result in a
recapture of any previously recorded ALLL, to the extent
applicable, and/or a reclassification from nonaccretable
difference to accretable yield, which is recognized
prospectively. Other items affecting the accretable yield may
include adjustments to the expected cash flows to be collected
from contractual interest rate changes on variable rate notes,
and changes in prepayment assumptions. Interest rate
decreases for variable rate notes are treated as a reduction of
both expected and contractual cash flows such that the
nonaccretable difference is not affected. Thus, for decreases in
cash flows expected to be collected resulting from interest rate
decreases for variable rate notes, the effect will be to reduce
the yield prospectively.
Purchased impaired commercial and commercial real estate
loans are charged off when the entire customer loan balance is
deemed uncollectible. As purchased impaired consumer and
residential real estate loans are accounted for in pools,
uncollectible amounts on individual loans remain in the pools
and are not reported as charge-offs. Disposals of loans, which
may include sales of loans or foreclosures, result in removal of
the loan from the purchased impaired loan portfolio at its
carrying amount.
During 2011, $262 million of provision and $161 million of
charge-offs were recorded on purchased impaired loans. As of
December 31, 2011, decreases in the net present value of
expected cash flows from the date of acquisition of purchased
impaired loans resulted in an allowance for loan and lease
losses of $998 million on $6.5 billion of the purchased
impaired loans while the remaining $.2 billion of purchased
impaired loans required no allowance as net present value of
expected cash flows improved or remained the same.
Activity for the accretable yield for 2011 follows.
Accretable Yield
In millions 2011
January 1 $2,185
Accretion (including excess cash recoveries) (920)
Net reclassifications to accretable from non-accretable (a) 908
Disposals (64)
December 31 $2,109
(a) The net reclass includes the impact of improvements in the excess cash expected to
be collected from credit improvements, as well as accretable differences related to
cash flow extensions.
The PNC Financial Services Group, Inc. – Form 10-K 141