PNC Bank 2005 Annual Report Download - page 27

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Aggregate residual value at risk on the total commercial
lease portfolio at December 31, 2005 was $1.1 billion. We
have taken steps to mitigate $.6 billion of this residual risk,
including residual value insurance coverage with third
parties, third party guarantees, and other actions.
Upon completing examination of our 1998-2000
consolidated federal income tax returns, the IRS provided us
with an examination report which proposed increases in our
tax liability, principally arising from adjustments to several
of our cross-border lease transactions.
The proposed adjustments would reverse the tax treatment
of these transactions as we reported them on our filed tax
returns. We believe the method we used to report these
transactions is supported by appropriate tax law and have
filed a protest and begun discussions of the IRS examination
findings with the IRS appeals office. While we cannot
predict with certainty the result of filing the protest and
resultant discussions, any resolution would most likely
involve a change in the timing of tax deductions which, in
turn, depending on the exact resolution, could significantly
impact the economics of these transactions. The IRS has
begun an audit of our 2001-2003 consolidated federal
income tax returns. We expect them to again make
adjustments to the cross-border lease transactions referred to
above as well as to new cross-border lease transactions
entered into during those years. We believe our reserves for
these exposures were adequate at December 31, 2005.
In July 2005, the Financial Accounting Standards Board
(“FASB”) issued a proposed staff position to consider
whether any change in the timing of tax benefits associated
with these types of transactions should result in a
recalculation under Statement of Financial Accounting
Standards No. (“SFAS”) 13, “Accounting for Leases.” The
FASB has had further discussions on this proposal in 2006.
The FASB’ s current position is that any cumulative
adjustment will be recognized through opening retained
earnings in the year of adoption under the provisions of
SFAS 154, “Accounting Changes and Error Corrections – a
replacement of APB Opinion No. 20 and FASB Statement
No. 3.” See Note 1 Accounting Policies in the Notes To
Consolidated Financial Statements in Item 8 of this Report
for additional information on SFAS 154. Assuming that the
FASB staff position becomes effective January 1, 2007, we
believe that the cumulative adjustment from the
recalculations would be in the range of approximately $140
million to $160 million after-tax. Under the leveraged
leasing accounting rules, any immediate or future reductions
in earnings from the change in accounting would be
recovered in subsequent years.
In addition to the transactions referred to above, three lease-
to-service contract transactions that we were party to were
structured as partnerships for tax purposes. These
partnerships are under audit by the IRS. However, we do not
believe that our exposure from these transactions is material
to our consolidated results of operations or financial
position.
Aircraft and Vehicle Leasing Businesses
On September 1, 2004, we acquired the business of the
Aviation Finance Group, LLC (“AFG”), an Idaho-based
company that specializes in loans to finance private aircraft.
By combining the business of AFG with our existing
business, we have increased our ability to offer a variety of
loans and leasing products to corporate aircraft customers.
See Note 2 Acquisitions in the Notes To Consolidated
Financial Statements in Item 8 of this Report for additional
information.
During the second quarter of 2004, we completed the sale of
our subsidiary, PNC Vehicle Leasing LLC, and the related
vehicle lease portfolio and other assets. In connection with
this transaction, we also terminated our related residual
insurance policies with our remaining residual insurance
carrier. As a result of these actions, we have completed the
exit of the consumer vehicle leasing business, including our
related exposures to the used vehicle market and the
payment of future residual insurance claims. We recognized
a pretax net loss of $3 million related to this sale during the
second quarter of 2004.
Net Unfunded Credit Commitments
December 31 - in millions 2005 2004
Commercial $27,774 $20,969
Consumer 9,471 7,655
Commercial real estate 2,337 1,199
Other 596 483
Total $40,178 $30,306
Commitments to extend credit represent arrangements to
lend funds or provide liquidity subject to specified
contractual conditions. Commercial commitments are
reported net of participations, assignments and syndications,
primarily to financial institutions, totaling $6.7 billion at
both December 31, 2005 and December 31, 2004.
As a result of deconsolidating Market Street in October
2005, amounts related to Market Street were considered
third party unfunded commitments at December 31, 2005.
These unfunded credit commitments totaled $4.6 billion at
December 31, 2005 and are included in the preceding table
primarily within the “Commercial” and “Consumer”
categories. See the Off-Balance Sheet Arrangements And
Consolidated VIEs section of Item 7 and Note 3 Variable
Interest Entities in the Notes To Consolidated Financial
Statements in Item 8 of this Report for further information
regarding Market Street.
The remaining increase in consumer net unfunded
commitments at December 31, 2005 compared with the
balance at December 31, 2004 was primarily due to net
unfunded commitments related to growth in open-ended
home equity loans.
In addition to credit commitments, our net outstanding
standby letters of credit totaled $4.2 billion at December 31,
2005 and $3.7 billion at December 31, 2004. Standby letters
of credit commit us to make payments on behalf of our
customers if specified future events occur.