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. Although quantitative modeling factors as discussed below are updated as the financial strength of the borrower and overall economic conditions change. During the third quarter of 2012, enhancements were made to certain processes and assumptions used to estimate our ALLL. Specifically, PNC increased the amount of internally observed data used in estimating commercial lending PDs and LGDs.

Commercial nonperforming loans and all TDRs are considered impaired and are evaluated for 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 internal 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
September 30, 2012
	ALLOWANCE FOR LOAN AND LEASE LOSSES
		January 1		$	1,995		$	2,352		$	4,347
		Charge-offs			(602)			(808)			(1,410)
		Recoveries			331			100			431
			Net charge-offs		(271)			(708)			(979)
		Provision for credit losses			93			576			669
		Net change in allowance for unfunded loan commitments and letters of credit			1						1
		Other			1						1
			September 30	$	1,819		$	2,220		$	4,039
		TDRs individually evaluated for impairment		$	43		$	527		$	570
		Other loans individually evaluated for impairment			287						287
		Loans collectively evaluated for impairment			1,260			854			2,114
		Purchased impaired loans			229			839			1,068
			September 30	$	1,819		$	2,220		$	4,039
	LOAN PORTFOLIO
		TDRs individually evaluated for impairment		$	556		$	2,019		$	2,575
		Other loans individually evaluated for impairment			1,336						1,336
		Loans collectively evaluated for impairment			101,906			68,298			170,204
		Purchased impaired loans			1,402			6,347			7,749
			September 30	$	105,200		$	76,664		$	181,864
	Portfolio Segment ALLL as a percentage of total ALLL				45	%		55	%		100	%
	Ratio of the allowance for loan and lease losses to total loans				1.73	%		2.90	%		2.22	%
September 30, 2011
	ALLOWANCE FOR LOAN AND LEASE LOSSES
		January 1		$	2,567		$	2,320		$	4,887
		Charge-offs			(959)			(823)			(1,782)
		Recoveries			358			112			470
			Net charge-offs		(601)			(711)			(1,312)
		Provision for credit losses			268			694			962
		Net change in allowance for unfunded loan commitments and letters of credit			(13)			(16)			(29)
		Other			(1)						(1)
			September 30	$	2,220		$	2,287		$	4,507
		TDRs individually evaluated for impairment		$	28		$	511		$	539
		Other loans individually evaluated for impairment			583						583
		Loans collectively evaluated for impairment			1,366			1,033			2,399
		Purchased impaired loans			243			743			986
			September 30	$	2,220		$	2,287		$	4,507
	LOAN PORTFOLIO
		TDRs individually evaluated for impairment		$	396		$	1,751		$	2,147
		Other loans individually evaluated for impairment			2,076						2,076
		Loans collectively evaluated for impairment			81,420			61,973			143,393
		Purchased impaired loans			957			5,970			6,927
			September 30	$	84,849		$	69,694		$	154,543
	Portfolio segment ALLL as a percentage of total ALLL				49	%		51	%		100	%
	Ratio of the allowance for loan and lease losses to total loans				2.62	%		3.28	%		2.92	%

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.