PNC Bank 2009 Annual Report Download - page 110

facilities to Market Street in exchange for fees negotiated
based on market rates. Program administrator fees related to
PNC’s portion of liquidity facilities were $43 million for the
year ended December 31, 2009 and $21 million for the year
ended December 31, 2008. Commitment fees related to PNC’s
portion of the liquidity facilities for 2009 and 2008 were
insignificant.
The commercial paper obligations at December 31, 2009 and
December 31, 2008 were effectively collateralized by Market
Street’s assets. While PNC may be obligated to fund under the
$5.6 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 $.4
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.
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 $8.0 million as
of December 31, 2009. 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 GAAP. Based on this analysis, we
were not the primary beneficiary and therefore the assets and
liabilities of Market Street were not included on 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.
See Note 1 Accounting Policies regarding accounting
guidance that impacts the accounting for Market Street
effective January 1, 2010.
T
AX C REDIT I NVESTMENTS
We make certain equity investments in various limited
partnerships or limited liability companies (LLCs) 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 investments 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 or
non-managing member.
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
or managing member and sell limited partnership or
non-managing member interests to third parties, and in some
cases may also purchase a limited partnership or
non-managing member 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,
generate servicing fees by managing the funds, and earn tax
credits to reduce our tax liability. General partner or managing
member 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/LLCs 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 due to passive 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 classified in Other liabilities and third
party investors’ interests included in the Equity section as
Noncontrolling interests. 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.
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