PNC Bank 2001 Annual Report Download - page 94

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92
NET LOANS AND LOANS HELD FOR SALE
Fair values are estimated based on the discounted value of
expected net cash flows incorporating assumptions about
prepayment rates, credit losses and servicing fees and costs.
For revolving home equity loans, this fair value does not
include any amount for new loans or the related fees that will
be generated from the existing customer relationships. In the
case of nonaccrual loans, scheduled cash flows exclude
interest payments. The carrying value of loans held for sale
approximates fair value.
COMMERCIAL MORTGAGE SERVICING RIGHTS
The fair value of commercial mortgage servicing rights is
estimated based on the present value of future cash flows.
These fair values are based on assumptions as to prepayment
speeds, discount rate and the weighted-average life of the
related commercial loans.
DEPOSITS
The carrying amounts of noninterest-bearing demand and
interest-bearing money market and savings deposits
approximate fair values. For time deposits, which include
foreign deposits, fair values are estimated based on the
discounted value of expected net cash flows assuming
current interest rates.
BORROWED FUNDS
The carrying amounts of federal funds purchased,
commercial paper, acceptances outstanding and accrued
interest payable are considered to be their fair value because
of their short-term nature. For all other borrowed funds, fair
values are estimated based on the discounted value of
expected net cash flows assuming current interest rates.
UNFUNDED LOAN COMMITMENTS AND LETTERS OF
CREDIT
Fair values for commitments to extend credit and letters of
credit are estimated based on the amount of deferred fees
and the creditworthiness of the counterparties.
FINANCIAL AND OTHER DERIVATIVES
The fair value of derivatives is based on the discounted value
of the expected net cash flows. These fair values represent
the amounts the Corporation would receive or pay to
terminate the contracts, assuming current interest rates.
NOTE 29 UNUSED LINE OF CREDIT
At December 31, 2001, the Corporation maintained a line of
credit in the amount of $500 million, none of which was
drawn. This line is available for general corporate purposes
and expires in 2003.
NOTE 30 SUBSEQUENT EVENTS
In January 2002, PNC Business Credit acquired a portion of
the U.S. asset-based lending business of NBOC. As a result
of this acquisition, PNC Business Credit established six new
marketing offices and enhanced its presence as one of the
premier asset-based lenders for the middle market customer
segment. At the acquisition date, credit exposure acquired
was approximately $2.6 billion including $1.5 billion of loan
outstandings. None of the loans were nonperforming at
acquisition.
Additionally, PNC Business Credit agreed to service a
portion of NBOC’s remaining U.S. asset-based loan
portfolio (“serviced portfolio”) for a period of eighteen
months. The serviced portfolio consisted of approximately
$670 million of credit exposure including $463 million of
outstandings as of the acquisition date. At closing, $138
million of these outstandings were classified as
nonperforming. The serviced portfolio’s credit exposure and
outstandings are expected to be reduced through managed
liquidation and runoff during the eighteen-month servicing
period. At the end of the servicing term, NBOC has the right
to transfer the then remaining serviced portfolio to PNC
Business Credit. PNC Business Credit established a liability
of $112 million in 2002 as part of the allocation of the
purchase price to reflect this obligation. The amount of this
liability will be assessed quarterly with any changes
recognized in earnings. During the servicing term, NBOC
will be responsible for realized credit losses with respect to
the serviced portfolio to a maximum of $50 million. If the
right to transfer is exercised, the Corporation is responsible
for realized credit losses on the serviced portfolio that may
occur during the eighteen-month period in excess of certain
NBOC specific reserves related to those assets, when
applicable (available only on specified credits), and the $50
million first loss position. PNC Business Credit management
currently expects the amounts indicated above to be
adequate to cover potential losses in connection with the
serviced portfolio.
On January 3, 2002, the Board of Directors authorized
the Corporation to purchase up to 35 million shares of its
common stock through February 29, 2004. These shares may
be purchased in the open market or privately negotiated
transactions. This authorization terminated any prior
authorization. The extent and timing of any share
repurchases will depend on a number of factors including,
among others, progress in disposing of loans held for sale,
regulatory capital considerations, alternative uses of capital
and receipt of regulatory approvals if then required.