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: (i) asset specific/individual impaired reserves, (ii) quantitative (formulaic or pooled) reserves and (iii) qualitative (judgmental) reserves. See Note 6 Purchased Loans for additional ALLL information. The reserve calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.

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 outstanding balance of the loan. Based upon loan risk ratings, we assign PDs and LGDs. Each of these statistical parameters is determined based on internal historical data and 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 that may not be directly measured in the determination of specific or pooled reserves. Such qualitative factors may 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 the 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 78: Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data

				Commercial			Consumer
In millions				Lending			Lending				Total
June 30, 2013
	Allowance for Loan and Lease Losses
		January 1		$	1,774		$	2,262		$	4,036
		Charge-offs			(336)			(589)			(925)
		Recoveries			185			76			261
			Net charge-offs		(151)			(513)			(664)
		Provision for credit losses			28			365			393
		Net change in allowance for unfunded loan commitments and letters of credit			8						8
		Other			(1)						(1)
			June 30	$	1,658		$	2,114		$	3,772
		TDRs individually evaluated for impairment		$	25		$	482		$	507
		Other loans individually evaluated for impairment			203						203
		Loans collectively evaluated for impairment			1,247			698			1,945
		Purchased impaired loans			183			934			1,117
			June 30	$	1,658		$	2,114		$	3,772
	Loan Portfolio
		TDRs individually evaluated for impairment		$	599		$	2,243		$	2,842
		Other loans individually evaluated for impairment			840						840
		Loans collectively evaluated for impairment (a)			110,863			68,452			179,315
		Purchased impaired loans			968			5,810			6,778
			June 30	$	113,270		$	76,505		$	189,775
	Portfolio Segment ALLL as a percentage of total ALLL				44	%		56	%		100	%
	Ratio of the allowance for loan and lease losses to total loans				1.46	%		2.76	%		1.99	%
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	%
(a)	Includes $291 million of loans collectively evaluated for impairment based upon collateral values and written down to the respective collateral value less costs to sell. Accordingly, there is no allowance recorded for these loans.

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.