PNC Bank 2015 Annual Report Download - page 96

We establish specific allowances for loans considered
impaired using methods prescribed by GAAP. All impaired
loans are subject to individual analysis, except leases and
large groups of smaller-balance homogeneous loans which
may include, but are not limited to, credit card, residential real
estate secured and consumer installment loans. Specific
allowances for individual loans (including commercial and
consumer TDRs) are determined based on an analysis of the
present value of expected future cash flows from the loans
discounted at their effective interest rate, observable market
price or the fair value of the underlying collateral.
Reserves allocated to non-impaired commercial loan classes
are based on PD and LGD credit risk ratings.
Our commercial pool reserve methodology is sensitive to
changes in key risk parameters such as PD and LGD. The
results of these parameters are then applied to the loan balance
and unfunded loan commitments and letters of credit to
determine the amount of the respective reserves. Our PDs and
LGDs are primarily determined using internal commercial
loan loss data. This internal data is supplemented with third-
party data and management judgment, as deemed necessary.
We continue to evaluate and enhance our use of internal
commercial loss data and will periodically update our PDs and
LGDs as well as consider third-party data, regulatory guidance
and management judgment.
The majority of the commercial portfolio is secured by
collateral, including loans to asset-based lending customers,
which generally demonstrate lower LGD compared to loans
not secured by collateral. Additionally, guarantees on loans
greater than $1 million and owner guarantees for small
business loans do not significantly impact our ALLL.
Allocations to non-impaired consumer loan classes are
primarily based upon a roll-rate model which uses statistical
relationships, calculated from historical data that estimate the
movement of loan outstandings through the various stages of
delinquency and ultimately charge-off.
A portion of the ALLL is related to qualitative and
measurement factors. These factors may include, but are not
limited to, the following:
• 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.
PNC’s determination of the ALLL for non-impaired loans is
sensitive to the risk grades assigned to commercial loans and
loss rates for consumer loans. There are several other
qualitative and quantitative factors considered in determining
the ALLL. This sensitivity analysis does not necessarily
reflect the nature and extent of future changes in the ALLL. It
is intended to provide insight into the impact of adverse
changes to risk grades and loss rates only and does not imply
any expectation of future deterioration in the risk ratings or
loss rates. Given the current processes used, we believe the
risk grades and loss rates currently assigned are appropriate.
In the hypothetical event that the aggregate weighted average
commercial loan risk grades would experience a 1%
deterioration, assuming all other variables remain constant, the
allowance for commercial loans would increase by
approximately $44 million as of December 31, 2015. In the
hypothetical event that consumer loss rates would increase by
10%, assuming all other variables remain constant, the
allowance for consumer loans would increase by
approximately $24 million at December 31, 2015.
Purchased impaired loans are initially recorded at fair value
and applicable accounting guidance prohibits the carry over or
creation of valuation allowances at acquisition. Because the
initial fair values of these loans already reflect a credit
component, additional reserves are established when
performance is expected to be worse than our expectations as
of the acquisition date. At December 31, 2015, we had
established reserves of $.3 billion for purchased impaired
loans. In addition, loans (purchased impaired and non-
impaired) acquired after January 1, 2009 were recorded at fair
value.No allowance for loan losses was carried over and no
allowance was created at the date of acquisition. See Note 4
Purchased Loans in the Notes To Consolidated Financial
Statements in Item 8 of this Report for additional information.
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 $1.6 billion, or 59%, of the
ALLL at December 31, 2015 to the commercial lending
category. Consumer lending allocations are made based on
historical loss experience adjusted for recent activity.
Approximately $1.1 billion, or 41%, of the ALLL at
December 31, 2015 has been allocated to these consumer
lending categories.
In addition to the ALLL, we maintain an allowance for
unfunded loan commitments and letters of credit. We report
this allowance as a liability on our Consolidated Balance
Sheet. We maintain the allowance for unfunded loan
commitments and letters of credit at a level we believe is
appropriate to absorb estimated probable losses on these
unfunded credit facilities. We determine this amount using
78 The PNC Financial Services Group, Inc. – Form 10-K