PNC Bank 2012 Annual Report Download - page 91

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 7 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 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 ASC 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 ASC 820. ASC
310-30 prohibits the carryover or establishment of an
allowance for loan losses on the acquisition date.
Subsequent to the acquisition of the loan, we are required to
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
expected cash flows is attributable to a decline in credit
quality.
Goodwill
Goodwill arising from business acquisitions represents the
value attributable to unidentifiable intangible elements in the
business acquired. Most of our goodwill relates to value
inherent in the Retail Banking and Corporate & Institutional
Banking businesses. The value of this goodwill is dependent
upon our ability to provide quality, cost-effective services in
the face of competition from other market participants on a
national and, with respect to some products and services, an
international basis. We also rely upon continuing investments
in processing systems, the development of value-added
service features, and the ease of access by customers to our
services.
As such, the value of goodwill is supported by earnings, which
is driven by transaction volume and, for certain businesses, the
market value of assets under administration or for which
processing services are provided. Lower earnings resulting
from a lack of growth or our inability to deliver cost-effective
services over sustained periods can lead to impairment of
goodwill, which could result in a current period charge to
earnings. At least annually, in the fourth quarter, or more
frequently if events occur or circumstances have changed
significantly from the annual test date, management reviews
the current operating environment and strategic direction of
each reporting unit taking into consideration any events or
changes in circumstances that may have an effect on the unit.
For this review, inputs are generated and used in calculating
the fair value of the reporting unit, which is compared to its
carrying amount (“Step 1” of the goodwill impairment test) as
further discussed below. The fair values of our reporting units
are determined using a discounted cash flow valuation model
with assumptions based upon market comparables.
Additionally, we may also evaluate certain financial metrics
that are indicative of fair value, including price to earnings
ratios and recent acquisitions involving other financial
institutions. A reporting unit is defined as an operating
segment or one level below an operating segment. If the fair
value of the reporting unit exceeds its carrying amount, the
reporting unit is not considered impaired. However, if the fair
value of the reporting unit is less than its carrying amount, the
reporting unit’s goodwill would be evaluated for impairment.
In this circumstance, the implied fair value of reporting unit
goodwill would be compared to the carrying amount of that
goodwill (“Step 2” of the goodwill impairment test). If the
carrying amount of goodwill exceeds the implied fair value of
goodwill, the difference is recognized as an impairment loss.
The implied fair value of reporting unit goodwill is
determined by assigning the fair value of a reporting unit to its
assets and liabilities (including any unrecognized intangible
assets) with the residual amount equal to the implied fair value
of goodwill as if the reporting unit had been acquired in a
business combination.
72 The PNC Financial Services Group, Inc. – Form 10-K