Note 7 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit

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 portfolios as of the balance sheet date. We use the two main portfolio segments – Commercial Lending and Consumer Lending – and we develop and document the ALLL under separate methodologies for each of these segments as further discussed and presented below.

For all loans, except purchased impaired loans, the ALLL is the sum of three components: (1) asset specific/individual impaired reserves, (2) quantitative (formulaic or pooled) reserves, and (3) qualitative (judgmental) reserves. See Note 6 Purchased Loans for additional ALLL information. While we make allocations to specific loans and pools of loans, the total reserve is available for all loan and lease losses. Although quantitative modeling factors as discussed below are updated as the financial strength of the borrower and overall economic conditions change, there were no significant changes to our ALLL methodology during the first six months of 2012.

Commercial nonperforming loans and all TDRs are considered impaired and are allocated a specific reserve. See Note 1 Accounting Policies for additional information.

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 EAD. Based upon loan risk ratings we assign PDs and LGDs. Each of these statistical parameters is determined based on historical data, including 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 LTV, and guarantees by related parties.

Quantitative estimates within the consumer lending portfolio segment are calculated using a roll-rate model based on statistical relationships, calculated from historical data that estimate the movement of loan outstandings through the various stages of delinquency and ultimately charge-off.

While our reserve methodologies strive to reflect all relevant risk factors, there continues to be uncertainty associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal variations between estimates and actual outcomes. We provide additional reserves that are designed to provide coverage for losses attributable to such risks. The ALLL also includes factors which may not be directly measured in the determination of specific or pooled reserves. Such qualitative factors include:

ALLL for RBC Bank (USA) purchased non-impaired loans is determined based upon the methodologies described above compared to the remaining acquisition date fair value discount that has yet to be accreted into interest income. After making the comparison, an ALLL is recorded for the amount greater than the discount, or no ALLL is recorded if the discount is greater.

ALLL for purchased impaired loans is determined in accordance with ASC 310-30 by comparing the net present value of the cash flows expected to be collected to the Recorded Investment for a given loan (or pool of loans). In cases where the net present value of expected cash flows is lower than Recorded Investment, ALLL is established. Cash flows expected to be collected represent management's best estimate of the cash flows expected over the life of a loan (or pool of loans). For large balance commercial loans, cash flows are separately estimated and compared to the Recorded Investment at the loan level. For smaller balance pooled loans, cash flows are estimated using cash flow models and compared at the risk pool level, which was defined at acquisition based on risk characteristics of the loan. Our cash flow models use loan data including, but not limited to, delinquency status of the loan, updated borrower FICO credit scores, geographic information, historical loss experience, and updated LTVs, as well as best estimates for unemployment rates, home prices and other economic factors to determine estimated cash flows.

Table 81: Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data

				Commercial			Consumer
In millions				Lending			Lending				Total
June 30, 2012
	ALLOWANCE FOR LOAN AND LEASE LOSSES
		January 1		$	1,995		$	2,352		$	4,347
		Charge-offs			(403)			(526)			(929)
		Recoveries			214			67			281
			Net charge-offs		(189)			(459)			(648)
		Provision for credit losses			88			353			441
		Net change in allowance for unfunded loan commitments and letters of credit			7			9			16
			June 30	$	1,901		$	2,255		$	4,156
		TDRs individually evaluated for impairment		$	45		$	527		$	572
		Other loans individually evaluated for impairment			419						419
		Loans collectively evaluated for impairment			1,210			920			2,130
		Purchased impaired loans			227			808			1,035
			June 30	$	1,901		$	2,255		$	4,156
	LOAN PORTFOLIO
		TDRs individually evaluated for impairment		$	483		$	1,836		$	2,319
		Other loans individually evaluated for impairment			1,523						1,523
		Loans collectively evaluated for impairment			100,607			67,893			168,500
		Purchased impaired loans			1,532			6,551			8,083
			June 30	$	104,145		$	76,280		$	180,425
	Portfolio Segment ALLL as a percentage of total ALLL				46	%		54	%		100	%
	Ratio of the allowance for loan and lease losses to total loans				1.83	%		2.96	%		2.30	%
June 30, 2011
	ALLOWANCE FOR LOAN AND LEASE LOSSES
		January 1		$	2,567		$	2,320		$	4,887
		Charge-offs			(671)			(587)			(1,258)
		Recoveries			242			69			311
			Net charge-offs		(429)			(518)			(947)
		Provision for credit losses			242			459			701
		Net change in allowance for unfunded loan commitments and letters of credit			11			(25)			(14)
			June 30	$	2,391		$	2,236		$	4,627
		TDRs individually evaluated for impairment (a)		$	27		$	550		$	577
		Other loans individually evaluated for impairment			705						705
		Loans collectively evaluated for impairment			1,382			1,014			2,396
		Purchased impaired loans			277			672			949
			June 30	$	2,391		$	2,236		$	4,627
	LOAN PORTFOLIO
		TDRs individually evaluated for impairment (a)		$	305		$	1,614		$	1,919
		Other loans individually evaluated for impairment			2,445						2,445
		Loans collectively evaluated for impairment			77,279			61,420			138,699
		Purchased impaired loans			1,120			6,136			7,256
			June 30	$	81,149		$	69,170		$	150,319
	Portfolio segment ALLL as a percentage of total ALLL				52	%		48	%		100	%
	Ratio of the allowance for loan and lease losses to total loans				2.95	%		3.23	%		3.08	%
(a)	Includes only TDRs individually evaluated for impairment prior to the adoption of ASU 2011-02.

We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable credit losses on these unfunded credit facilities as of the balance sheet date. See Note 1 Accounting Policies for additional information.