PNC Bank 2011 Annual Report Download - page 120

method or the cost method of accounting. We use the
equity method for general and limited partner
ownership interests and limited liability companies in
which we are considered to have significant influence
over the operations of the investee and when the net
asset value of our investment reflects our economic
interest in the underlying investment. Under the
equity method, we record our equity ownership share
of net income or loss of the investee in noninterest
income. We use the cost method for all other
investments. Under the cost method, there is no
change to the cost basis unless there is an other-than-
temporary decline in value or dividends are received.
If the decline is determined to be other-than-
temporary, we write down the cost basis of the
investment to a new cost basis that represents
realizable value. The amount of the write-down is
accounted for as a loss included in Other noninterest
income. Distributions received from the income of an
investee on cost method investments are included in
noninterest income. Investments described above are
included in the caption Equity investments on the
Consolidated Balance Sheet.
Private Equity Investments
We report private equity investments, which include direct
investments in companies, affiliated partnership interests and
indirect investments in private equity funds, at estimated fair
value. These estimates are based on available information and
may not necessarily represent amounts that we will ultimately
realize through distribution, sale or liquidation of the
investments. Fair value of publicly traded direct investments are
determined using quoted market prices and are subject to
various discount factors for legal or contractual sales
restrictions, when appropriate. The valuation procedures applied
to direct investments in private companies include techniques
such as multiples of adjusted earnings of the entity, independent
appraisals, anticipated financing and sale transactions with third
parties, or the pricing used to value the entity in a recent
financing transaction. We value affiliated partnership interests
based on the underlying investments of the partnership using
procedures consistent with those applied to direct investments.
On October 1, 2009, we adopted ASU 2009-12 – Fair Value
Measurements and Disclosures (Topic 820) – Investments in
Certain Entities That Calculate Net Asset Value per Share (or
Its Equivalent). Based on the guidance, we value indirect
investments in private equity funds based on net asset value as
provided in the financial statements that we receive from their
managers. Due to the time lag in our receipt of the financial
information and based on a review of investments and valuation
techniques applied, adjustments to the manager-provided values
are made when available recent portfolio company information
or market information indicates significant changes in value
from that provided by the manager of the fund. We include all
private equity investments on the Consolidated Balance Sheet in
the caption Equity investments. Changes in the fair value of
private equity investments are recognized in noninterest
income.
We consolidate affiliated partnerships when we are the
general partner and have determined that we have control of
the partnership or are the primary beneficiary of the VIE. The
portion we do not own is reflected in the caption
Noncontrolling interests on the Consolidated Balance Sheet.
L OANS
Loans are classified as held for investment when management
has both the intent and ability to hold the loan for the
foreseeable future, or until maturity or payoff. Management’s
intent and view of the foreseeable future may change based on
changes in business strategies, the economic environment,
market conditions and the availability of government
programs.
Measurement of delinquency status is based on the contractual
terms of each loan. Loans that are 30 days or more past due in
terms of payment are considered delinquent.
Except as described below, loans held for investment are
stated at the principal amounts outstanding, net of unearned
income, unamortized deferred fees and costs on originated
loans, and premiums or discounts on purchased loans. Interest
on performing loans originated (excluding purchased impaired
loans, which are further discussed below) are accrued based
on the principal amount outstanding and recorded in interest
income as earned using the constant effective yield method.
Loan origination fees, direct loan origination costs, and loan
premiums and discounts are deferred and accreted or
amortized into net interest income, over periods not exceeding
the contractual life of the loan.
When loans are redesignated from held for investment to held
for sale, specific reserves and allocated pooled reserves
included in the allowance for loan and lease losses (ALLL) are
charged-off to reduce the basis of the loans to the lower of
cost or estimated fair value less cost to sell.
In addition to originating loans, we also acquire loans through
portfolio purchases or acquisitions of other financial services
companies. For certain acquired loans that have experienced a
deterioration of credit quality, we follow the guidance
contained in ASC 310-30 – Loans and Debt Securities
Acquired with Deteriorated Credit Quality. Under this
guidance, acquired purchased impaired loans are to be
recorded at fair value without the carryover of any existing
valuation allowances. Evidence of credit quality deterioration
may include information and statistics regarding bankruptcy
events, updated borrower credit scores, such as Fair Isaac
Corporation scores (FICO), past due status, and updated
loan-to-value (LTV) ratios. We review the loans acquired for
evidence of credit quality deterioration and determine if it is
probable that we will be unable to collect all contractual
amounts due, including both principal and interest. When both
conditions exist, we estimate the amount and timing of
undiscounted expected cash flows at acquisition for each loan
either individually or on a pool basis. We estimate the cash
The PNC Financial Services Group, Inc. – Form 10-K 111