PNC Bank 2015 Annual Report Download - page 178

Financial Assets Accounted for at Fair Value on a
Nonrecurring Basis
We may be required to measure certain 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 77 and Table 78.
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If an appraisal is outdated due to changed project or market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.
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.
Equity Investments
Equity investments represent the carrying value of Low
Income Housing Tax Credit (LIHTC) investments held for
sale calculated using a discounted cash flow model. The
significant unobservable input is management’s estimate of
required market rate of return. The market rate of return is
based on comparison to recent LIHTC sales in the market.
Significant increases (decreases) in this input would result in a
significantly lower (higher) carrying value of the investments.
OREO and Foreclosed Assets
OREO and foreclosed assets represent the carrying value of
OREO and foreclosed assets for which valuation adjustments
were recorded subsequent to the transfer to OREO and
foreclosed assets. Valuation adjustments are based on the fair
value less cost to sell of the property. Fair value is based on
appraised value or sales price.
The appraisal process for OREO and foreclosed properties is
the same as described above for nonaccrual loans. In instances
where we have agreed to sell the property to a third party, the
fair value is based on the contractual sale price adjusted for
160 The PNC Financial Services Group, Inc. – Form 10-K