PNC Bank 2013 Annual Report Download - page 138

Subsequently, foreclosed assets are valued at the lower of the
amount recorded at acquisition date or estimated fair value
less cost to sell. Valuation adjustments on these assets and
gains or losses realized from disposition of such property are
reflected in Other noninterest expense.
See Note 5 Asset Quality and Note 7 Allowances for Loan and
Lease Losses and Unfunded Loan Commitments and Letters
of Credit for additional information.
A LLOWANCE F OR L OAN A ND L EASE L OSSES
We maintain the ALLL at a level that we believe to be
appropriate to absorb estimated probable credit losses incurred
in the loan and lease portfolios as of the balance sheet date.
Our determination of the allowance is based on periodic
evaluations of these loan and lease portfolios and other
relevant factors. This critical estimate includes the use of
significant amounts of PNC’s own historical data and complex
methods to interpret them. We have an ongoing process to
evaluate and enhance the quality, quantity and timeliness of
our data and interpretation methods used in the determination
of this allowance. These evaluations are inherently subjective,
as they require material estimates and may be susceptible to
significant change, and include, among others:
• Probability of default (PD),
• Loss given default (LGD),
• Outstanding balance of the loan,
• Movement through delinquency stages,
• Amounts and timing of expected future cash flows,
• Value of collateral, which may be obtained from
third parties, and
• Qualitative factors, such as changes in current
economic conditions, that may not be reflected in
modeled results.
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 may include:
• Industry concentrations and conditions,
• Recent credit quality trends,
• Recent loss experience in particular portfolios,
• Recent macro-economic factors,
• Model imprecision,
• Changes in lending policies and procedures,
• Timing of available information, including the
performance of first lien positions, and
• Limitations of available historical data.
In determining the appropriateness of the ALLL, we make
specific allocations to impaired loans and allocations to
portfolios of commercial and consumer loans.
Nonperforming loans that are considered impaired under ASC
310 – Receivables are evaluated for a specific reserve.
Specific reserve allocations are determined as follows:
• For commercial nonperforming loans and TDRs
greater than or equal to a defined dollar threshold,
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 commercial nonperforming loans and TDRs
below the defined dollar threshold, the individual
loan’s LGD percentage is multiplied by the loan
balance and the results are aggregated for purposes of
measuring specific reserve impairment.
• Consumer nonperforming loans are collectively
reserved for unless classified as TDRs. For TDRs,
specific reserves are determined through an analysis
of the present value of the loan’s expected future
cash flows, except for those instances where loans
have been deemed collateral dependent, including
loans where borrowers have been discharged from
personal liability through Chapter 7 bankruptcy and
have not formally reaffirmed their loan obligations to
PNC. Once that determination has been made, those
TDRs are charged down to the fair value of the
collateral less costs to sell at each period end.
• For purchased impaired loans, 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.
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.
Our credit risk management policies, procedures and practices
are designed to promote sound lending standards and 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 Note 7 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 appropriate to
absorb estimated probable credit losses on these unfunded
credit facilities as of the balance sheet date. We determine the
allowance based on periodic evaluations of the unfunded
120 The PNC Financial Services Group, Inc. – Form 10-K