PNC Bank 2010 Annual Report Download - page 138
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Please find page 138 of the 2010 PNC Bank annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.assessments, as well as other factors, in determining whether
the impairment is other-than-temporary.
For debt securities, a critical component of the evaluation for
OTTI is the identification of credit-impaired securities, where
management does not expect to receive cash flows sufficient
to recover the entire amortized cost basis of the security. The
paragraphs below describe our process for identifying credit
impairment for our most significant categories of securities
not backed by the US government or its agencies.
Non-Agency Residential Mortgage-Backed Securities and
Asset-Backed Securities Collateralized by First-Lien and
Second-Lien Residential Mortgage Loans
To measure credit losses for these securities, we compile
relevant collateral details and performance statistics on a
security-by-security basis. The securities are then processed
through a series of pre-established filters based upon ratings,
collateral performance, projected losses, market prices and
judgment to identify bonds that have the potential to be credit
impaired.
Securities not passing all of the filters are subjected to further
analysis. Cash flows are projected for the underlying collateral
and are applied to the securities according to the deal structure
using a third-party cash flow allocation model. Collateral cash
flows are estimated using assumptions for prepayment rates,
future defaults, and loss severity rates. The assumptions are
security specific and are based on collateral characteristics,
historical performance, and future expected performance.
Based on the results of the cash flow analysis, we determine
whether we will recover the amortized cost basis of our
security.
Credit Impairment Assessment Assumptions – Non-Agency
Residential Mortgage-Backed and Asset-Backed
Securities (a)
December 31, 2010 Range
Weighted-
average (b)
Long-term prepayment rate (annual CPR)
Prime 7-20% 14%
Alt-A 3-12 5
Remaining collateral expected to default
Prime 0-51% 19%
Alt-A 0-84 44
Loss severity
Prime 15-63% 45%
Alt-A 30-80 57
(a) Collateralized by first and second-lien non-agency residential mortgage loans.
(b) Calculated by weighting the relevant assumption for each individual security by the
current outstanding cost basis of the security.
Non-Agency Commercial Mortgage-Backed Securities
Credit losses on these securities are measured using property-
level cash flow projections and forward-looking property
valuations. Cash flows are allocated according to deal
structure using a third-party model and are projected using a
detailed analysis of net operating income (NOI) by property
type which, in turn, is based on the analysis of NOI
performance over the past several business cycles combined
with PNC’s economic outlook for the current cycle. Loss
severities are based on property price projections, which are
calculated using capitalization rate projections. The
capitalization rate projections are based on a combination of
historical capitalization rates and expected capitalization rates
implied by current market activity, our outlook and relevant
independent industry research, analysis and forecast.
Securities exhibiting weaker performance within the model
are subject to further analysis. This analysis is performed at
the loan level, and includes assessing local market conditions,
reserves, occupancy, rent rolls and master/special servicer
details.
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