PNC Bank 2010 Annual Report Download - page 69
Download and view the complete annual report
Please find page 69 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.expected cash flows is attributable to a decline in credit
quality.
Goodwill
Goodwill arising from business acquisitions represents the
value attributable to unidentifiable intangible elements in the
business acquired. Most of our goodwill relates to value
inherent in the Retail Banking and Corporate & Institutional
Banking businesses. The value of this goodwill is dependent
upon our ability to provide quality, cost effective services in
the face of competition from other market participants on a
national and, with respect to some products and services, an
international basis. We also rely upon continuing investments
in processing systems, the development of value-added
service features, and the ease of access by customers to our
services.
As such, the value of goodwill is ultimately supported by
earnings, which is driven by transaction volume and, for
certain businesses, the market value of assets under
administration or for which processing services are provided.
Lower earnings resulting from a lack of growth or our
inability to deliver cost-effective services over sustained
periods can lead to impairment of goodwill, which could
result in a current period charge to earnings. At least annually,
in the fourth quarter, management reviews the current
operating environment and strategic direction of each
reporting unit taking into consideration any events or changes
in circumstances that may have an effect on the unit. A
reporting unit is defined as an operating segment or one level
below an operating segment. This input is then used to
calculate the fair value of the reporting unit, which is
compared to its carrying value. If the fair value of the
reporting unit exceeds its carrying amount, the reporting unit
is not considered impaired. However, if the fair value of the
reporting unit is less than its carrying amount, the reporting
unit’s goodwill would be evaluated for impairment.
The fair values of our reporting units are determined using a
discounted cash flow valuation model with assumptions based
upon market comparables. Based on the results of our
analysis, there have been no impairment charges related to
goodwill in 2010, 2009 or 2008. See Note 9 Goodwill and
Other Intangible Assets in the Notes To Consolidated
Financial Statements in Item 8 of this Report for additional
information.
Lease Residuals
We provide financing for various types of equipment, aircraft,
energy and power systems, and rolling stock through a variety
of lease arrangements. Direct financing leases are carried at
the sum of lease payments and the estimated residual value of
the leased property, less unearned income. Residual value
insurance or guarantees by governmental entities provide
support for a significant portion of the residual value. Residual
values are subject to judgments as to the value of the
underlying equipment that can be affected by changes in
economic and market conditions and the financial viability of
the residual guarantors and insurers. Residual values are
derived from historical remarketing experience, secondary
market contacts, and industry publications. To the extent not
guaranteed or assumed by a third party, or otherwise insured
against, we bear the risk of ownership of the leased assets.
This includes the risk that the actual value of the leased assets
at the end of the lease term will be less than the residual value,
which could result in an impairment charge and reduce
earnings in the future. Residual values are reviewed for
impairment on a quarterly basis.
Revenue Recognition
We derive net interest and noninterest income from various
sources, including:
• Lending,
• Securities portfolio,
• Asset management and fund servicing,
• Customer deposits,
• Loan servicing,
• Brokerage services,
• Merger and acquisition advisory services,
• Sale of loans and securities,
• Certain private equity activities, and
• Securities and derivatives trading activities including
foreign exchange.
We also earn fees and commissions from issuing loan
commitments, standby letters of credit and financial
guarantees, selling various insurance products, providing
treasury management services and participating in certain
capital markets transactions. Revenue earned on interest-
earning assets including the accretion of fair value
adjustments on discounts for purchased loans is recognized
based on the effective yield of the financial instrument.
The timing and amount of revenue that we recognize in any
period is dependent on estimates, judgments, assumptions, and
interpretation of contractual terms. Changes in these factors
can have a significant impact on revenue recognized in any
period due to changes in products, market conditions or
industry norms.
Residential Mortgage Servicing Rights
In conjunction with the acquisition of National City, PNC
acquired servicing rights for residential real estate loans.
We have elected to measure these mortgage servicing rights
(MSRs) at fair value. MSRs are established and valued using
discounted cash flow modeling techniques which require
management to make estimates regarding future net servicing
cash flows, taking into consideration actual and expected
mortgage loan prepayment rates, discount rates, servicing
costs, and numerous other factors.
PNC employs a risk management strategy designed to protect
the value of MSRs from changes in interest rates and related
market factors. MSR values are economically hedged with
61