PNC Bank 2007 Annual Report Download - page 36

Market Street Commitments by Credit Rating (a)
December 31, 2007 December 31, 2006
AAA/Aaa 19% 10%
AA/Aa 65
A/A 72 77
BBB/Baa 38
Total 100% 100%
a) Not all Facilities are explicitly rated by the rating agencies. Facilities are
structured to meet rating agency standards for comparably structured
transactions.
As a result of the Note issuance, we reevaluated the design of
Market Street, its capital structure and relationships among the
variable interest holders under the provisions of FASB
Interpretation No. 46, (Revised 2003) “Consolidation of
Variable Interest entities (“FIN 46R”). Based on this analysis,
we determined that we were no longer the primary beneficiary
as defined by FIN 46R and deconsolidated Market Street from
our Consolidated Balance Sheet effective October 17, 2005.
PNC considers changes to the variable interest holders (such
as new expected loss note investors and changes to program-
level credit enhancement providers), terms of expected loss
notes, and new types of risks (such as foreign currency or
interest rate) in Market Street as reconsideration events. PNC
reviews the activities of Market Street on at least a quarterly
basis to determine if a reconsideration event has occurred. As
indicated earlier, 75% of the program-level credit
enhancement is provided by Ambac in the form of a surety
bond. PNC Bank, N.A., in the role of program administrator,
is closely following market developments relative to the rating
agency outlooks of monoline insurers. Ambac is currently
rated AAA by two of the three major rating agencies and AA
by the other agency. This rating change has not impacted the
Market Street commercial paper ratings of A1/P1. Various
alternatives to the program-level enhancement are under
consideration if future rating changes impact either the ratings
of Market Street commercial paper or its financial results.
Based on current accounting guidance and market conditions,
we do not have to consolidate Market Street into our
consolidated financial statements. However, if PNC would be
determined to be the primary beneficiary under FIN 46R, we
would consolidate the conduit at that time. To the extent that
the par value of the assets in Market Street exceeded the fair
value of the assets upon consolidation, the difference would
be recognized by PNC as a loss in our Consolidated Income
Statement in that period. Based on the fair value of the assets
held by Market Street at December 31, 2007, this reduction in
earnings would not have had a material impact on our risk-
based capital ratios, credit ratings or debt covenants.
Consolidated VIEs – PNC Is Primary Beneficiary
In millions
Aggregate
Assets
Aggregate
Liabilities
Partnership interests in low income
housing projects
December 31, 2007 $1,110 $1,110
December 31, 2006 $ 834 $ 834
The table above reflects the aggregate assets and liabilities of
VIEs that we have consolidated in our financial statements.
Low Income Housing Projects
We make certain equity investments in various limited
partnerships that sponsor affordable housing projects utilizing
the Low Income Housing Tax Credit (“LIHTC”) pursuant to
Section 42 of the Internal Revenue Code. The purpose of these
investments is to achieve a satisfactory return on capital, to
facilitate the sale of additional affordable housing product
offerings and to assist us in achieving goals associated with the
Community Reinvestment Act. The primary activities of the
limited partnerships include the identification, development and
operation of multi-family housing that is leased to qualifying
residential tenants. Generally, these types of investments are
funded through a combination of debt and equity, with equity
typically comprising 30% to 60% of the total project capital.
We consolidated those LIHTC investments in which we own a
majority of the limited partnership interests and are deemed to
be primary beneficiary. We also consolidated entities in which
we, as a national syndicator of affordable housing equity, serve
as the general partner, and no other entity owns a majority of
the limited partnership interests (together with the investments
described above, the “LIHTC investments”). In these
syndication transactions, we create funds in which our
subsidiary is the general partner and sells limited partnership
interests to third parties, and in some cases may also purchase a
limited partnership interest in the fund. The fund’s limited
partners can generally remove the general partner without cause
at any time. The purpose of this business is to generate income
from the syndication of these funds and to generate servicing
fees by managing the funds. General partner activities include
selecting, evaluating, structuring, negotiating, and closing the
fund investments in operating limited partnerships, as well as
oversight of the ongoing operations of the fund portfolio. The
assets are primarily included in Equity Investments on our
Consolidated Balance Sheet. Neither creditors nor equity
investors in the LIHTC investments have any recourse to our
general credit. The consolidated aggregate assets and debt of
these LIHTC investments are provided in the Consolidated
VIEs – PNC Is Primary Beneficiary table and reflected in the
“Other” business segment.
We have a significant variable interest in certain other limited
partnerships that sponsor affordable housing projects. We do not
own a majority of the limited partnership interests in these
entities and are not the primary beneficiary. We use the equity
method to account for our investment in these entities.
31