PNC Bank 2008 Annual Report Download - page 119

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. Refer to the Fair Value Option section of this Note
8 regarding the fair value of commercial mortgage loans held
for sale. Residential mortgage loans are valued based on
quoted market prices, where available, prices for other traded
mortgage loans with similar characteristics, and purchase
commitments and bid information received from market
participants. These loans are regularly traded in active markets
and observable pricing information is available from market
participants. The prices are adjusted as necessary to include
the embedded servicing value in the loans and to take into
consideration the specific characteristics of certain loans that
are priced based on the pricing of similar loans. These
adjustments represent unobservable inputs to the valuation but
are not considered significant to the fair value of the loans.
Loans are presented 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 entity, independent appraisals,
anticipated financing and sales transactions with third parties,
or the pricing used to value the entity in a recent financing
transaction. We value indirect investments in private equity
funds based on the financial statements that we receive from
their managers. Due to the time lag in our receipt of the
financial information and based on a review of investments
and valuation techniques applied, adjustments to the manager
provided value are made when available recent investment
portfolio company or market information indicates a
significant change in value from that provided by the general
partner.
Fair value of the noncertificated interest-only strips is
estimated based on the discounted value of expected net cash
flows. The aggregate carrying value of our equity investments
carried at cost and FHLB and FRB stock was $3.1 billion at
December 31, 2008 and $766 million as of December 31,
2007, both of which approximate fair value at each date.
M ORTGAGE AND O THER L OAN S ERVICING A SSETS
Fair value is based on the present value of the estimated future
cash flows, incorporating assumptions as to prepayment
speeds, discount rates, escrow balances, interest rates, cost to
service and other factors. We have numerous controls in place
intended to ensure that our fair values are appropriate. An
independent model review group reviews our valuation
models and validates them for their intended use.
For commercial mortgage loan servicing assets, key valuation
assumptions at December 31, 2008 and December 31, 2007
included prepayment rates ranging from 4% – 16% and 10% –
16%, respectively, and discount rates ranging from 8% – 10%
for both periods, which resulted in an estimated fair value of
$873 million and $773 million, respectively.
For residential mortgage servicing assets, key assumptions at
December 31, 2008 were a weighted average constant
prepayment rate of 33%, weighted average life of 2.3 years
and a discount rate, calculated as the spread over forward
interest rate swap rates of 6.37%, resulting in a fair value of
$1.0 billion.
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
positions, 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 dealer quotes.
U NFUNDED L OAN C OMMITMENTS AND L ETTERS OF
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
deferred fees currently recorded by us on these facilities and
the liability established on these facilities related to their
creditworthiness.
F INANCIAL D ERIVATIVES
For exchange-traded contracts, fair value is based on quoted
market prices. For nonexchange-traded contracts, fair value is
based on dealer quotes, pricing models or quoted prices for
instruments with similar characteristics.
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