PNC Bank 2012 Annual Report Download - page 181

N OTE 7A LLOWANCES FOR L OAN AND L EASE
L OSSES AND U NFUNDED L OAN C OMMITMENTS
AND L ETTERS OF C REDIT
We maintain the ALLL and the Allowance for Unfunded Loan
Commitments and Letters of Credit at levels that we believe to
be appropriate to absorb estimated probable credit losses
incurred in the portfolios as of the balance sheet date. We use
the two main portfolio segments – Commercial Lending and
Consumer Lending – and we develop and document the ALLL
under separate methodologies for each of these segments as
further discussed and presented below.
A LLOWANCE FOR L OAN AND L EASE L OSSES C OMPONENTS
For all loans, except purchased impaired loans, the ALLL is
the sum of three components: (i) asset specific/individual
impaired reserves, (ii) quantitative (formulaic or pooled)
reserves, and (iii) qualitative (judgmental) reserves. See Note
6 Purchased Loans for additional ALLL information. The
reserve calculation and determination process is dependent on
the use of key assumptions. Key reserve assumptions and
estimation processes react to and are influenced by observed
changes in loan portfolio performance experience, the
financial strength of the borrower, and economic conditions.
Key reserve assumptions are periodically updated. During the
third quarter of 2012, PNC increased the amount of internally
observed data used in estimating the key commercial lending
assumptions of PD and LGD.
A SSET S PECIFIC /I NDIVIDUAL C OMPONENT
Commercial nonperforming loans and all TDRs are
considered impaired and are evaluated for a specific reserve.
See Note 1 Accounting Policies for additional information.
C OMMERCIAL L ENDING Q UANTITATIVE C OMPONENT
The estimates of the quantitative component of ALLL for
incurred losses within the commercial lending portfolio
segment are determined through statistical loss modeling
utilizing PD, LGD, and outstanding balance of the loan. Based
upon loan risk ratings we assign PDs and LGDs. Each of these
statistical parameters is determined based on internal
historical data and market data. PD is influenced by such
factors as liquidity, industry, obligor financial structure,
access to capital, and cash flow. LGD is influenced by
collateral type, original and/or updated LTV, and guarantees
by related parties.
C ONSUMER L ENDING Q UANTITATIVE C OMPONENT
Quantitative estimates within the consumer lending portfolio
segment are calculated using a roll-rate model based on
statistical relationships, calculated from historical data that
estimate the movement of loan outstandings through the
various stages of delinquency and ultimately charge-off.
Qualitative Component
While our reserve methodologies strive to reflect all relevant
risk factors, there continues to be uncertainty associated with,
but not limited to, potential imprecision in the estimation
process due to the inherent time lag of obtaining information
and normal variations between estimates and actual outcomes.
We provide additional reserves that are designed to provide
coverage for losses attributable to such risks. The ALLL also
includes factors which may not be directly measured in the
determination of specific or pooled reserves. Such qualitative
factors include:
• Industry concentrations and conditions,
• Recent credit quality trends,
• Recent loss experience in particular portfolios,
• Recent macro-economic factors,
• Changes in risk selection and underwriting standards,
and
• Timing of available information, including the
performance of first lien positions.
A LLOWANCE FOR RBC B ANK (USA) P URCHASED
N ON -I MPAIRED L OANS
ALLL for RBC Bank (USA) purchased non-impaired loans is
determined based upon the methodologies described above
compared to the remaining acquisition date fair value discount
that has yet to be accreted into interest income. After making
the comparison, an ALLL is recorded for the amount greater
than the discount, or no ALLL is recorded if the discount is
greater.
A LLOWANCE FOR P URCHASED I MPAIRED L OANS
ALLL for purchased impaired loans is determined in
accordance with ASC 310-30 by comparing the net present
value of the cash flows expected to be collected to the
Recorded Investment for a given loan (or pool of loans). In
cases where the net present value of expected cash flows is
lower than Recorded Investment, ALLL is established. Cash
flows expected to be collected represent management’s best
estimate of the cash flows expected over the life of a loan (or
pool of loans). For large balance commercial loans, cash flows
are separately estimated and compared to the Recorded
Investment at the loan level. For smaller balance pooled loans,
cash flows are estimated using cash flow models and
compared at the risk pool level, which was defined at
acquisition based on risk characteristics of the loan. Our cash
flow models use loan data including, but not limited to,
delinquency status of the loan, updated borrower FICO credit
scores, geographic information, historical loss experience, and
updated LTVs, as well as estimates for unemployment rates,
home prices and other economic factors to determine
estimated cash flows.
162 The PNC Financial Services Group, Inc. – Form 10-K