PNC Bank 2006 Annual Report Download - page 106

events occur. Based on this review, no adjustment for
goodwill impairment was deemed necessary for 2006. The fair
value of our reporting units is determined by using discounted
cash flow and market comparability methodologies.
N OTE 10 P REMISES ,E QUIPMENT AND
L EASEHOLD I MPROVEMENTS
Premises, equipment and leasehold improvements, stated at
cost less accumulated depreciation and amortization, were as
follows:
December 31 - in millions 2006 2005
Land $187 $186
Buildings 937 881
Equipment 1,771 1,735
Leasehold improvements 385 453
Total 3,280 3,255
Accumulated depreciation and amortization (1,578) (1,538)
Net book value $1,702 $1,717
Depreciation expense on premises, equipment and leasehold
improvements totaled $180 million in 2006, $192 million in
2005 and $159 million in 2004. Amortization expense,
primarily for capitalized internally developed software, was
$44 million in 2006 and $43 million for both 2005 and 2004.
We lease certain facilities and equipment under agreements
expiring at various dates through the year 2071. We account
for substantially all such leases as operating leases. Rental
expense on such leases amounted to $193 million in 2006,
$189 million in 2005 and $174 million in 2004.
Required minimum annual rentals that we owe on
noncancelable leases having initial or remaining terms in
excess of one year totaled $965 million at December 31, 2006
and $998 million at December 31, 2005. Minimum annual
rentals for the years 2007 through 2012 and thereafter are as
follows:
• 2007: $140 million,
• 2008: $125 million,
• 2009: $108 million,
• 2010: $94 million,
• 2011: $84 million, and
• 2012 and thereafter: $414 million.
N OTE 11 S ECURITIZATIONS AND R ETAINED
I NTERESTS
During 2006, 2005 and 2004, we sold commercial mortgage
loans totaling $307 million, $284 million and $460 million,
respectively, in securitization transactions through programs
with the Government National Mortgage Association
(“GNMA”). The transactions and resulting receipt and
subsequent sale of securities qualify as sales under the
appropriate accounting criteria and resulted in pretax gains of
$8 million in 2006, $7 million in 2005 and $8 million in 2004.
In addition to the cash proceeds from the sales transactions
above, net cash flows between the securitization vehicles and
PNC, including servicing fees, in 2006, 2005 and 2004 related
to those transactions were not significant.
Additionally, we sold commercial mortgage and commercial
loans of $2.9 billion in 2006, $3.1 billion in 2005 and
$1.6 billion in 2004 for cash in other loan sales transactions.
These transactions resulted in pretax gains of $55 million in
2006, $54 million in 2005 and $42 million in 2004. See Note 9
Goodwill and Other Intangible Assets for additional
information regarding servicing assets.
For the transactions above, we continue to perform servicing
and recognized servicing assets of $26 million in 2006, $23
million in 2005 and $14 million in 2004. We also purchased
servicing rights for commercial mortgage loans from third
parties of approximately $150 million in 2006, $112 million in
2005 and $47 million in 2004.
During the fourth quarter of 2006, we sold residential
mortgage loans totaling $358 million in securitization
transactions through third party programs. Additionally, we
sold residential mortgage loans of $26 million in the fourth
quarter of 2006 for cash in other loan sales transactions. For
these transactions, we serve as the servicer of record and
recognized servicing assets of $4 million in 2006. In
accordance with SFAS 156, these servicing assets were
initially measured at fair value and we have elected the fair
value method to value these residential mortgage servicing
assets. The changes in fair value during 2006 and the servicing
fees received in 2006 were not significant.
Changes in the mortgage and other loan servicing assets were
as follows:
Mortgage and Other Loan Servicing Assets
In millions 2006 2005
Balance at January 1 $344 $242
Additions 180 135
Retirements (a)
Amortization expense (47) (33)
Balance at December 31 $477 $344
(a) 2006 and 2005 included $2 million and $25 million, respectively, of fully amortized
retirements.
Assuming a prepayment speed of 7%-16% for the respective
strata discounted at 8%-10%, the estimated fair value of
commercial mortgage servicing rights was $546 million at
December 31, 2006. A 10% and 20% adverse change in all
assumptions used to determine fair value at December 31,
2006, results in a $33 million and $66 million decrease in fair
value, respectively. No valuation allowance was necessary at
December 31, 2006 or December 31, 2005.
Assuming a prepayment speed of 12% for the respective strata
discounted at 9.5%-10%, the estimated fair value of
commercial loan servicing rights was $2 million at
December 31, 2006. A 10% and 20% adverse change in all
assumptions used to determine fair value at December 31,
2006, results in an insignificant decrease in fair value. No
valuation allowance was necessary at December 31, 2006.
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