PNC Bank 2014 Annual Report Download - page 137

Foreclosed assets are comprised of any asset seized or
property acquired through a foreclosure proceeding or
acceptance of a deed-in-lieu of foreclosure. Other real estate
owned is comprised principally of commercial real estate and
residential real estate properties obtained in partial or total
satisfaction of loan obligations. After obtaining a foreclosure
judgment, or in some jurisdictions the initiation of
proceedings under a power of sale in the loan instruments, the
property will be sold. When we are awarded title, we transfer
the loan to foreclosed assets included in Other assets on our
Consolidated Balance Sheet. Property obtained in satisfaction
of a loan is initially recorded at estimated fair value less cost
to sell. Based upon the estimated fair value less cost to sell,
the recorded investment of the loan is adjusted and, typically,
a charge-off/recovery is recognized to the Allowance for Loan
and Lease Losses (ALLL). We estimate fair values primarily
based on appraisals, or sales agreements with third parties.
Fair value also considers the proceeds expected from
government insurance and guarantees upon the conveyance of
the other real estate owned (OREO).
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 3 Asset Quality and Note 5 Allowances for Loan and
Lease Losses and Unfunded Loan Commitments and Letters
of Credit for additional data and application of the policies
disclosed herein.
Allowance for Loan and Lease Losses
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 significant use
of PNC’s own historical data and complex methods to
interpret this data. 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.
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.
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.
Asset Specific/Individual Component
Nonperforming loans that are considered impaired under ASC
310 – Receivables, which include all commercial and
consumer TDRs, are evaluated for a specific reserve. Specific
reserve allocations are determined as follows:
• For commercial nonperforming loans and
commercial 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
commercial TDRs below the defined dollar
threshold, the individual loan’s loss given default
(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 consumer TDRs. For
consumer 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.
Commercial Lending Quantitative Component
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 loan-to-value ratio
(LTV) and guarantees by related parties.
The PNC Financial Services Group, Inc. – Form 10-K 119