PNC Bank 2009 Annual Report Download - page 100

undiscounted expected cash flows at acquisition for each loan
either individually or on a pool basis. We estimate the cash
flows expected to be collected using internal and third-party
models that incorporate management’s best estimate of current
key assumptions, such as default rates, loss severity and
payment speeds. Collateral values are also incorporated into
cash flow estimates. Late fees, which are contractual but not
expected to be collected, are excluded from expected future
cash flows. The accretable yield is calculated based upon the
difference between the undiscounted expected future cash
flows of the loans and the recorded investment in the loans.
This amount is accreted into income over the life of the loan
or pool using the constant effective yield method. Subsequent
decreases in expected cash flows that are attributable, at least
in part, to credit quality are recognized as impairments
through a charge to the provision for credit losses resulting in
an increase in the allowance for loan and lease losses.
Subsequent increases in expected cash flows are recognized as
a recovery of previously recorded allowance for loan and lease
losses or prospectively through an adjustment of the loan’s or
pool’s yield over its remaining life.
The nonaccretable yield represents the difference between the
expected undiscounted cash flows of the loans and the total
contractual cash flows (including principal and future interest
payments) at acquisition and throughout the remaining lives of
the loans.
L
EASES
We provide financing for various types of equipment, aircraft,
energy and power systems, and rolling stock and automobiles
through a variety of lease arrangements. Direct financing
leases are carried at the aggregate of lease payments plus
estimated residual value of the leased property, less unearned
income. Leveraged leases, a form of financing lease, are
carried net of nonrecourse debt. We recognize income over
the term of the lease using the constant effective yield method.
Lease residual values are reviewed for other-than-temporary
impairment on a quarterly basis. Gains or losses on the sale of
leased assets are included in other noninterest income while
valuation adjustments on lease residuals are included in other
noninterest expense.
L OAN S ALES ,L OAN S ECURITIZATIONS A ND R ETAINED
I NTERESTS
We recognize the sale of loans or other financial assets when
the transferred assets are legally isolated from our creditors
and the appropriate accounting criteria are met. We also sell
mortgage, credit card and other loans through securitization
transactions. In a securitization, financial assets are transferred
into trusts or to special-purpose entities (SPEs) in transactions
to effectively legally isolate the assets from PNC. Where the
transferor is a depository institution, legal isolation is
accomplished through compliance with specific rules and
regulations of the relevant regulatory authorities. Where the
transferor is not a depository institution, legal isolation is
accomplished through utilization of a two-step securitization
structure.
Transfers and Servicing (Topic 860) – Accounting For
Transfers of Financial Assets requires a true sale legal analysis
to be obtained to address several relevant factors, such as the
nature and level of recourse to the transferor, and the amount
and nature of retained interests in the loans sold. The
analytical conclusion as to a true sale is never absolute and
unconditional, but contains qualifications based on the
inherent equitable powers of a bankruptcy court, as well as the
unsettled state of the common law. Once the legal isolation
test has been met under GAAP, other factors concerning the
nature and extent of the transferor’s control over the
transferred assets are taken into account in order to determine
whether derecognition of assets is warranted, including
whether the SPE has complied with rules concerning
qualifying special-purpose entities.
In a securitization, the trust or SPE issues beneficial interests
in the form of senior and subordinated asset-backed securities
backed or collateralized by the assets sold to the trust. The
senior classes of the asset-backed securities typically receive
investment grade credit ratings at the time of issuance. These
ratings are generally achieved through the creation of lower-
rated subordinated classes of asset-backed securities, as well
as subordinated or residual interests. In certain cases, we may
retain a portion or all of the securities issued, interest-only
strips, one or more subordinated tranches, servicing rights and,
in some cases, cash reserve accounts. Refer to Note 10
Securitization Activity for further details. In accordance with
GAAP, securitized loans are removed from the balance sheet
and a net gain or loss is recognized in noninterest income at
the time of initial sale, and each subsequent sale for revolving
securitization structures. Gains or losses recognized on the
sale of the loans depend on the allocation of carrying value
between the loans sold and the retained interests, based on
their relative fair market values at the date of sale. We
generally estimate the fair value of the retained interests based
on the present value of future expected cash flows using
assumptions as to discount rates, interest rates, prepayment
speeds, credit losses and servicing costs, if applicable.
Our loan sales and securitizations are generally structured
without recourse to us and with no restrictions on the retained
interests with the exception of loan sales to certain US
government chartered entities.
When we are obligated for loss-sharing or recourse in a sale,
our policy is to record such liabilities at fair value upon sale
based on the guidance contained in applicable GAAP.
We originate, sell and service mortgage loans under the
Federal National Mortgage Association (FNMA) Delegated
Underwriting and Servicing (DUS) program. Under the
provisions of the DUS program, we participate in a loss-
sharing arrangement with FNMA. We participate in a similar
program with the Federal Home Loan Mortgage Corporation
(FHLMC). Refer to Note 25 Commitments and Guarantees for
more information about our obligations related to sales of
loans under these programs.
96