PNC Bank 2013 Annual Report Download - page 80

A 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 loan and lease portfolio and on these
unfunded credit facilities as of the balance sheet date. Our
determination of the allowances is based on periodic
evaluations of the loan and lease portfolios and unfunded
credit facilities and other relevant factors. These critical
estimates include 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 these allowances. 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),
• Exposure at date of default (EAD),
• 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.
In determining the appropriateness 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.
Commercial lending is the largest category of credits and is
sensitive to changes in assumptions and judgments underlying
the determination of the ALLL. We have allocated
approximately $1.5 billion, or 43%, of the ALLL at
December 31, 2013 to the commercial lending category.
Consumer lending allocations are made based on historical loss
experience adjusted for recent activity. Approximately $2.1
billion, or 57%, of the ALLL at December 31, 2013 has 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 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.
E
STIMATED C ASH F LOWS ON P URCHASED I MPAIRED L OANS
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.
See Note 6 Purchased Loans and Note 7 Allowances for Loan
and Lease Losses and Unfunded Loan Commitments and
Letters of Credit in the Notes To Consolidated Financial
Statements in Item 8 of this Report for additional information.
G OODWILL
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.
62 The PNC Financial Services Group, Inc. – Form 10-K