PNC Bank 2007 Annual Report Download - page 102

instruments, and unrealized gains or losses should not be
interpreted as a forecast of future earnings and cash flows. The
derived fair values are subjective in nature and involve
uncertainties and significant judgment. Therefore, they cannot
be determined with precision. Changes in our assumptions
could significantly impact the derived fair value estimates.
We used the following methods and assumptions to estimate
fair value amounts for financial instruments.
G
ENERAL
For short-term financial instruments realizable in three months
or less, the carrying amount reported in the consolidated
balance sheet approximates fair value. Unless otherwise
stated, the rates used in discounted cash flow analyses are
based on market yield curves.
C
ASH A ND S HORT -T ERM A SSETS
The carrying amounts reported in our Consolidated Balance
Sheet for cash and short-term investments approximate fair
values primarily due to their short-term nature. For purposes
of this disclosure only, short-term assets include the
following:
• due from banks,
• interest-earning deposits with banks,
• federal funds sold and resale agreements,
• trading securities,
• cash collateral,
• customers’ acceptance liability, and
• accrued interest receivable.
S ECURITIES
The fair value of securities is based on quoted market prices or
observable inputs from active markets. Investments that are
not readily marketable are valued using dealer quotes, pricing
models or quoted prices for instruments with similar
characteristics.
N ET L OANS A ND L OANS H ELD F OR S ALE
Fair values are estimated based on the discounted value of
expected net cash flows incorporating assumptions about
prepayment rates, credit losses, 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. We determine the fair value of commercial
mortgage loans held for sale by obtaining observable market
data including, but not limited to, pricing, subordination levels
and yield curves. We determine the fair value of student loans
held for sale by obtaining observable market data including
recent securitizations for the portfolio that is Federally
guaranteed and an external analysis of the net present value on
the privately guaranteed portfolio. Loans are presented above
net of the allowance for loan and lease losses.
O THER A SSETS
Other assets as shown in the accompanying table include the
following:
• noncertificated interest-only strips,
• FHLB and FRB stock,
• equity investments carried at cost and fair value, and
• private equity investments carried at fair value.
Investments accounted for under the equity method, including
our investment in BlackRock, are not included in the
accompanying table.
The carrying amounts of private equity investments are
recorded at fair value. The valuation procedures applied to
direct investments include techniques such as multiples of
adjusted earnings of the entities, independent appraisals of the
entity or the pricing used to value the entity in a recent
financing transaction. We value affiliated partnership interests
based on the underlying investments of the partnership using
procedures consistent with those applied to direct investments.
We generally value limited partnership investments based on
the financial statements we receive from the general partner.
Fair value of the noncertificated interest-only strips is
estimated based on the discounted value of expected net cash
flows. The equity investments carried at cost, including the
FHLB and FRB stock, have a carrying value of approximately
$766 million as of December 31, 2007, and $365 million as of
December 31, 2006, both of which approximate fair value at
each date.
M ORTGAGE A ND O THER L OAN S ERVICING A SSETS
Fair value is based on the present value of the future cash
flows, including assumptions as to prepayment speeds,
discount rates, interest rates, cost to service and other factors.
For commercial mortgage loan servicing assets, key valuation
assumptions at December 31, 2007 and December 31, 2006
included prepayment rates ranging from 10% – 16% and 7% –
16%, respectively, and discount rates ranging from 8% – 10%
for both periods, which resulted in an estimated fair value of
$773 million and $546 million, respectively.
D EPOSITS
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.
B ORROWED F UNDS
The carrying amounts of federal funds purchased, commercial
paper, repurchase agreements, proprietary trading short, cash
collateral, other short-term borrowings, 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.
U NFUNDED L OAN C OMMITMENTS A ND L ETTERS O F
C REDIT
The fair value of unfunded loan commitments and letters of
credit is our estimate of the cost to terminate them. For
purposes of this disclosure, this fair value is the sum of the
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