PNC Bank 2008 Annual Report Download - page 106

The commercial paper obligations at December 31, 2008 and
December 31, 2007 were effectively collateralized by Market
Street’s assets. While PNC may be obligated to fund under the
$6.4 billion of liquidity facilities for events such as
commercial paper market disruptions, borrower bankruptcies,
collateral deficiencies or covenant violations, our credit risk
under the liquidity facilities is secondary to the risk of first
loss provided by the borrower or another third party in the
form of deal-specific credit enhancement, such as by the over
collateralization of the assets. Deal-specific credit
enhancement that supports the commercial paper issued by
Market Street is generally structured to cover a multiple of
expected losses for the pool of assets and is sized to generally
meet rating agency standards for comparably structured
transactions. In addition, PNC would be required to fund $1.0
billion of the liquidity facilities if the underlying assets are in
default. See Note 25 Commitments and Guarantees for
additional information.
PNC provides program-level credit enhancement to cover net
losses in the amount of 10% of commitments, excluding
explicitly rated AAA/Aaa facilities. PNC provides 100% of
the enhancement in the form of a cash collateral account
funded by a loan facility. This facility expires in March 2013.
Until November 25, 2008, PNC provided only 25% of the
enhancement in the form of a cash collateral account funded
by a loan facility and provided a liquidity facility for the
remaining 75% of program-level enhancement.
Market Street has entered into a Subordinated Note Purchase
Agreement (“Note”) with an unrelated third party. The Note
provides first loss coverage whereby the investor absorbs
losses up to the amount of the Note, which was $6.6 million as
of December 31, 2008. Proceeds from the issuance of the Note
are held by Market Street in a first loss reserve account that
will be used to reimburse any losses incurred by Market
Street, PNC Bank, N.A. or other providers under the liquidity
facilities and the credit enhancement arrangements.
We evaluated the design of Market Street, its capital structure,
the Note and relationships among the variable interest holders
under the provisions of FIN 46R. Based on this analysis, we
are not the primary beneficiary as defined by FIN 46R and
therefore the assets and liabilities of Market Street are not
reflected in our Consolidated Balance Sheet.
PNC considers changes to the variable interest holders (such
as new expected loss note investors and changes to program-
level credit enhancement providers), changes to the terms of
expected loss notes, and new types of risks related to 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.
L
OW I NCOME H OUSING P ROJECTS
We make certain equity investments in various limited
partnerships that sponsor affordable housing projects utilizing
the Low Income Housing Tax Credit (“LIHTC”) pursuant to
Sections 42 and 47 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. We typically invest in these partnerships as a limited
partner.
Also, we are a national syndicator of affordable housing
equity (together with the investments described above, the
“LIHTC investments”). In these syndication transactions, we
create funds in which our subsidiaries are the general partner
and sell limited partnership interests to third parties, and in
some cases may also purchase a limited partnership interest in
the fund and/or provide mezzanine financing to the fund. 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.
We evaluate our interests and third party interests in the
limited partnerships in determining whether we are the
primary beneficiary. The primary beneficiary determination is
based on which party absorbs a majority of the variability. The
primary sources of variability in LIHTC investments are the
tax credits, tax benefits of losses on the investments and
development and operating cash flows. We have consolidated
LIHTC investments in which we absorb a majority of the
variability and thus are considered the primary beneficiary.
The assets are primarily included in Equity Investments and
Other Assets on our Consolidated Balance Sheet with the
liabilities primarily classified in Other Liabilities and Minority
Interest. Neither creditors nor equity investors in the LIHTC
investments have any recourse to our general credit. The
consolidated aggregate assets and liabilities of these LIHTC
investments are provided in the Consolidated VIEs – PNC Is
Primary Beneficiary table and reflected in the “Other”
business segment.
We also have LIHTC investments in which we are not the
primary beneficiary, but are considered to have a significant
variable interest based on our interests in the partnership.
These investments are disclosed in the Non-Consolidated
VIEs – Significant Variable Interests table. The table also
reflects our maximum exposure to loss. Our maximum
exposure to loss is equal to our legally binding equity
commitments adjusted for recorded impairment and
partnership results. We use the equity and cost methods to
account for our investment in these entities with the
investments reflected in Equity Investments on our
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