PNC Bank 2014 Annual Report Download - page 182

Financial Assets Accounted for at Fair Value on a
Nonrecurring Basis
We may be required to measure certain other financial assets at
fair value on a nonrecurring basis. These adjustments to fair value
usually result from the application of lower of amortized cost or
fair value accounting or write-downs of individual assets due to
impairment and are included in Table 86 and Table 87.
Nonaccrual Loans
Nonaccrual loans represent the fair value of those loans which
have been adjusted due to impairment. The impairment is
primarily based on the appraised value of the collateral or
LGD percentage. The LGD percentage is used to determine
the weighted average loss severity of the nonaccrual loans.
As part of the appraisal process, persons ordering or reviewing
appraisals are independent of the asset manager. Appraisals
must be provided by licensed or certified appraisers and
conform to the Uniform Standards of Professional Appraisal
Practice. For loans secured by commercial properties where the
underlying collateral is in excess of $250,000, appraisals are
obtained at least annually. In certain instances (e.g., physical
changes in the property), a more recent appraisal is obtained.
Additionally, borrower ordered appraisals are not permitted,
and PNC ordered appraisals are regularly reviewed. For loans
secured by commercial properties where the underlying
collateral is $250,000 and less, there is no requirement to obtain
an appraisal. In instances where an appraisal is not obtained, the
collateral value is determined consistent with external third-
party appraisal standards by an internal person independent of
the asset manager. PNC has a real estate valuation services
group whose sole function is to manage the real estate appraisal
solicitation and evaluation process for commercial loans. All
third-party appraisals are reviewed by this group, including
consideration of comments/questions on the appraisal by the
reviewer, customer relationship manager, credit officer, and
underwriter. Upon resolving these comments/questions through
discussions with the third-party appraiser, adjustments to the
initial appraisal may occur and be incorporated into the final
issued appraisal report.
If an appraisal is outdated due to changed project or market
conditions, or if the net book value is utilized, management
uses an LGD percentage which represents the exposure PNC
expects to lose in the event a borrower defaults on an
obligation. Accordingly, LGD, which represents the loss
severity, is a function of collateral recovery rates and loan-to-
value. Those rates are established based upon actual PNC loss
experience and external market data. In instances where we
have agreed to sell the property to a third party, the fair value
is based on the contractual sales price adjusted for costs to
sell. In these instances, the most significant unobservable
input is the appraised value or the sales price. The estimated
costs to sell are incremental direct costs to transact a sale such
as broker commissions, legal, closing costs and title transfer
fees. The costs must be essential to the sale and would not
have been incurred if the decision to sell had not been made.
The costs to sell are based on costs associated with our actual
sales of commercial and residential OREO and foreclosed
assets, which are assessed annually.
Loans Held for Sale
Loans held for sale includes syndicated commercial loan
inventory. The fair value of the syndicated commercial loan
inventory is primarily determined based on prices provided by a
third-party vendor. The third-party vendor prices are based upon
dealer quotes. For nonrecurring fair value measurements, these
instruments are classified within Level 2. There were no loans
held for sale categorized as Level 2 at December 31, 2013.
Prior to September 1, 2014, loans held for sale also included the
carrying value of commercial mortgage loans which are
intended to be sold to agencies with servicing retained. The fair
value of the commercial mortgage loans held for sale is
determined using discounted cash flows. Significant observable
market data includes the applicable benchmark interest rates.
These instruments are classified within Level 3. Significant
unobservable inputs include a spread over the benchmark curve
and the estimated servicing cash flows for loans sold to the
agencies with servicing retained. Significant increases
(decreases) to the spread over the benchmark curve would result
in a significantly lower (higher) carrying value of the assets.
Significant increases (decreases) in the estimated servicing cash
flows for loans sold to the agencies with servicing retained
would result in significantly higher (lower) carrying value.
Refer to the Fair Value Measurement section of this Note 7 for
information on commercial mortgages held for sale to
agencies subsequent to our September 1, 2014 election of fair
value option.
164 The PNC Financial Services Group, Inc. – Form 10-K