PNC Bank 2001 Annual Report Download - page 74

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NOTE 2 DISCONTINUED OPERATIONS
In the first quarter of 2001, PNC closed the sale of its
residential mortgage banking business. Certain closing date
adjustments are currently in dispute between PNC and the
buyer, Washington Mutual Bank, FA. The ultimate financial
impact of the sale will not be determined until the disputed
matters are finally resolved. See Note 24 Legal Proceedings.
The income and net assets of the residential mortgage banking
business, which are presented on one line in the income
statement and balance sheet, respectively, are as follows:
Income From Discontinued Operations
Year ended December 31 - in millions 2001 2000 1999
Income from operations, after tax $15 $65 $62
Net loss on sale of business, after tax (a) (10)
Total income from discontinued
operations $5 $65 $62
(a) Includes recognition of $35 million of previously unrealized securities losses in
accumulated other comprehensive income.
Investment In Discontinued Operations
December 31 - in millions 2000
Loans held for sale $3,003
Securities available for sale 3,016
Loans, net of unearned income 739
Goodwill and other amortizable assets 1,925
All other assets 1,168
Total assets 9,851
De
p
osits 1,150
Borrowed funds 7,601
Other liabilities 744
Total liabilities 9,495
Net assets $356
The notional and fair value of financial derivatives used for
residential mortgage banking risk management were $15.2
billion and $124 million, respectively, at December 31, 2000.
NOTE 3 RESTATEMENTS
In connection with the repositioning of its institutional
lending and venture capital businesses, PNC completed three
transactions during 2001, one each in June, September, and
November. In each of these transactions, assets were sold or
transferred to a subsidiary of a third party financial
institution and PNC received preferred interests in the
subsidiaries.
The transactions in the aggregate involved the sale of
loan assets of $592 million and venture capital assets of $170
million. Of the loan assets sold, $132 million were classified
as nonperforming assets at the date of sale. Loan assets sold
included loans previously held for sale and other loans that
were reclassified from loans to loans held for sale and
marked to the lower of cost or market prior to the sale. This
resulted in charge-offs at the date transferred of $24 million
on loans and valuation adjustments of $4 million for those
loans that previously had been classified as held for sale.
Including previous charge-offs and valuation adjustments,
loans transferred had been charged down by approximately
$108 million prior to sale. In addition to the loan and venture
capital assets, PNC also transferred cash amounting to $403
million. In return, PNC received one hundred percent of the
Class A convertible preferred shares in each subsidiary. The
Class A convertible preferred shares owned by PNC have no
voting rights. PNC, as holder of the Class A convertible
preferred shares, may convert such preferred shares to Class
A common shares and cause the liquidation of the
subsidiary. A noncumulative annual dividend may be paid on
the preferred stock.
The third party financial institution formed each of the
entities, contributed three percent equity in the form of cash
and received one hundred percent of the Class B preferred
shares and one hundred percent of the Class B common
shares of each entity. The proceeds received by the
applicable entity from the issuance of the Class A preferred
and all of the Class B shares were used by each entity to fund
certain operating expenses, future commitments under the
loan and venture capital agreements, investment in a
managed asset account and to purchase U. S. Treasury zero
coupon securities. The third party financial institution is the
managing member of each of the entities and holds one
hundred percent of the voting power. All management and
operating decisions regarding the assets are at the discretion
of the managing member. The managing member is paid an
annual fee for its services. PNC is the servicer of the loans
and venture capital assets and is paid a servicing fee.
At the time of the transactions, the loans and venture
capital investments were removed from PNC’s balance sheet
and the preferred interests in the entities were recorded as
securities available for sale in conformity with accounting
guidance received from PNC’s independent auditors. In
January 2002, the Federal Reserve Board staff advised PNC
that under generally accepted accounting principles the
subsidiaries of the third party financial institution should be
consolidated into the financial statements of PNC in
preparing bank holding company reports. After considering
all the circumstances, PNC restated its consolidated financial
statements for the second and third quarters of 2001 to
conform financial reporting with regulatory reporting
requirements.