PNC Bank 2009 Annual Report Download - page 167

In July 2009, Visa funded $700 million to an escrow account
and reduced the conversion ratio of Visa B to A shares. We
consequently recognized our estimated $66 million share of
the $700 million as a reduction of our indemnification liability
and a reduction of noninterest expense.
Our Visa indemnification liability included on our
Consolidated Balance Sheet at December 31, 2009 totaled
$194 million as a result of the indemnification provision in
Section 2.05j of the Visa By-Laws and/or the indemnification
provided through the judgment and loss sharing agreements.
Any ultimate exposure to the specified Visa litigation may be
different than this amount.
R ECOURSE A GREEMENTS
We are authorized to underwrite, originate, fund, sell and
service commercial mortgage loans and then sell them to
FNMA under FNMA’s DUS program. We have similar
arrangements with FHLMC.
Under these programs, we generally assume up to one-third of
the risk of loss on unpaid principal balances through a loss
share arrangement. At December 31, 2009, the potential
exposure to loss was $6.0 billion. Accordingly, we maintain a
reserve for such potential losses which approximates the fair
value of this exposure. At December 31, 2009, the unpaid
principal balance outstanding of loans sold as a participant in
these programs was $19.7 billion. The approximate fair value
of the loss share arrangement in the form of reserves for losses
under these programs, totaled $71 million as of December 31,
2009 and is included in other liabilities on our Consolidated
Balance Sheet. If payment is required under these programs,
we would not have a contractual interest in the collateral
underlying the mortgage loans on which losses occurred,
although the value of the collateral is taken into account in
determining our share of such losses. The serviced loans are
not included on our Consolidated Balance Sheet.
We sell residential mortgage loans pursuant to agreements
which contain representations concerning subjects such as
credit information, loan documentation, collateral, and
insurability. Prior to the acquisition, National City also sold
home equity loans/lines of credit pursuant to such agreements.
On a regular basis, investors may request PNC to indemnify
them against losses on certain loans or to repurchase loans
which the investors believe do not comply with applicable
representations. During 2009 the frequency of such requests
increased in relation to prior years. This increase was driven
by higher loan delinquencies, resulting from deterioration in
overall economic conditions and trends, particularly those
impacting the residential housing sector.
Upon completion of its own investigation as to the validity of
the claim, PNC will repurchase or provide indemnification on
such loans. This may take the form of an outright repurchase
of the loan or a settlement payment to the investor. If the loan
is repurchased it is properly considered in our nonperforming
loan disclosures and statistics. Indemnification requests are
generally received within two years subsequent to the date of
sale.
Management maintains a liability for estimated losses on
loans expected to be repurchased, or on which indemnification
is expected to be provided, and regularly evaluates the
adequacy of this recourse liability based on trends in
repurchase and indemnification requests, actual loss
experience, known and inherent risks in the loans, and current
economic conditions. As part of its evaluation of the adequacy
of this recourse liability, management considers estimated loss
projections over the life of the subject loan portfolio. At
December 31, 2009 the liability for estimated losses on
repurchase and indemnification claims was $275 million,
which is reported in other liabilities on the Consolidated
Balance Sheet.
R EINSURANCE A GREEMENTS
We have two wholly-owned captive insurance subsidiaries
which provide reinsurance to third-party insurers related to
insurance sold to our customers. These subsidiaries enter into
various types of reinsurance agreements with third-party
insurers where the subsidiary assumes the risk of loss through
either an excess of loss or quota share agreement up to 100%
reinsurance. In excess of loss agreements, these subsidiaries
assume the risk of loss for an excess layer of coverage up to
specified limits, once a defined first loss percentage is met. In
quota share agreements, the subsidiaries and third-party
insurers share the responsibility for payment of all claims.
Reserves were recognized for probable losses on these
policies of $220 million at December 31, 2009 and $207
million at December 31, 2008. The aggregate maximum
exposure up to the specified limits for all reinsurance contracts
was $1.7 billion as of December 31, 2009.
163