PNC Bank 2009 Annual Report Download - page 130

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 $3.0 billion at
December 31, 2009 and $3.1 billion as of December 31, 2008,
both of which approximate fair value at each date.
M ORTGAGE A ND 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 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, 2009 and December 31, 2008
included prepayment rates ranging from 6% – 19% and 4% –
16%, respectively, and discount rates ranging from 7% – 10%
for both periods, which resulted in an estimated fair value of
$1.0 billion and $873 million, respectively.
For residential mortgage servicing assets, key assumptions at
December 31, 2009 were a weighted average constant
prepayment rate of 19.92%, weighted average life of 4.5 years
and a discount rate, calculated as the spread over forward
interest rate swap rates, of 12.16%, resulting in a fair value of
$1.3 billion. The comparable amounts for December 31, 2008
were a weighted average constant prepayment rate of 33.04%,
weighted average life of 2.3 years and a discount rate of
6.37%, resulting in a fair value of $1.0 billion.
C USTOMER R ESALE A GREEMENTS
Refer to the Fair Value Option section of this Note 8 regarding
the fair value of customer resale agreements and bank notes.
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 (excluding cash collateral netted
against derivative fair values), 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
primarily based on dealer quotes.
U NFUNDED L OAN C OMMITMENTS A ND L ETTERS O F
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. Amounts for financial
derivatives are presented on a gross basis.
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