PNC Bank 2011 Annual Report Download - page 125

For servicing rights related to residential real estate loans, we
apply the fair value method. This election was made to be
consistent with our risk management strategy to hedge
changes in the fair value of these assets. We manage this risk
by hedging the fair value of this asset with derivatives and
securities which are expected to increase in value when the
value of the servicing right declines. The fair value of these
servicing rights is estimated by using a cash flow valuation
model which calculates the present value of estimated future
net servicing cash flows, taking into consideration actual and
expected mortgage loan prepayment rates, discount rates,
servicing costs, and other economic factors which are
determined based on current market conditions.
Revenue from the various loan servicing contracts for
commercial, residential and other consumer loans is reported
on the Consolidated Income Statement in line items Corporate
services, Residential mortgage and Consumer services.
F AIR V ALUE O F F INANCIAL I NSTRUMENTS
The fair value of financial instruments and the methods and
assumptions used in estimating fair value amounts and
financial assets and liabilities for which fair value was elected
based on the fair value guidance are detailed in Note 8 Fair
Value.
G OODWILL A ND O THER I NTANGIBLE A SSETS
We assess goodwill for impairment at least annually, in the
fourth quarter, or when events or changes in circumstances
indicate the assets might be impaired. Finite-lived intangible
assets are amortized to expense using accelerated or straight-
line methods over their respective estimated useful lives. We
review finite-lived intangible assets for impairment when
events or changes in circumstances indicate that the asset’s
carrying amount may not be recoverable from undiscounted
future cash flows or that it may exceed its fair value.
D EPRECIATION A ND A MORTIZATION
For financial reporting purposes, we depreciate premises and
equipment, net of salvage value, principally using the straight-
line method over their estimated useful lives.
We use estimated useful lives for furniture and equipment
ranging from one to 10 years, and depreciate buildings over an
estimated useful life of up to 40 years. We amortize leasehold
improvements over their estimated useful lives of up to 15
years or the respective lease terms, whichever is shorter.
We purchase, as well as internally develop and customize,
certain software to enhance or perform internal business
functions. Software development costs incurred in the
planning and post-development project stages are charged to
noninterest expense. Costs associated with designing software
configuration and interfaces, installation, coding programs and
testing systems are capitalized and amortized using the
straight-line method over periods ranging from one to seven
years.
R EPURCHASE A ND R ESALE A GREEMENTS
Repurchase and resale agreements are treated as collateralized
financing transactions and are carried at the amounts at which
the securities will be subsequently reacquired or resold,
including accrued interest, as specified in the respective
agreements. Our policy is to take possession of securities
purchased under agreements to resell. We monitor the market
value of securities to be repurchased and resold and additional
collateral may be obtained where considered appropriate to
protect against credit exposure. We have elected to account
for resale agreements at fair value.
O
THER C OMPREHENSIVE I NCOME
Other comprehensive income consists, on an after-tax basis,
primarily of unrealized gains or losses, excluding OTTI
attributable to credit deterioration, on investment securities
classified as available for sale, derivatives designated as cash
flow hedges, and changes in pension, other postretirement and
postemployment benefit plan liability adjustments. Details of
each component are included in Note 19 Other
Comprehensive Income.
T REASURY S TOCK
We record common stock purchased for treasury at cost. At
the date of subsequent reissue, the treasury stock account is
reduced by the cost of such stock on the first-in, first-out
basis.
D ERIVATIVE I NSTRUMENTS A ND H EDGING A CTIVITIES
We use a variety of financial derivatives as part of our overall
asset and liability risk management process to help manage
interest rate, market and credit risk inherent in our business
activities. Interest rate and total return swaps, swaptions,
interest rate caps and floors and futures contracts are the
primary instruments we use for interest rate risk management.
Financial derivatives involve, to varying degrees, interest rate,
market and credit risk. We manage these risks as part of our
asset and liability management process and through credit
policies and procedures. We seek to minimize counterparty
credit risk by entering into transactions with only high-quality
institutions, establishing credit limits, and generally requiring
bilateral netting and collateral agreements.
We recognize all derivative instruments at fair value as either
Other assets or Other liabilities on the Consolidated Balance
Sheet and the related cash flows in the Operating Activities
section of the Consolidated Statement Of Cash Flows.
Adjustments for counterparty credit risk are included in the
determination of their fair value. The accounting for changes in
the fair value of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship.
For derivatives not designated as an accounting hedge, changes in
fair value are recognized in noninterest income.
We utilize a net presentation for derivative instruments on the
Consolidated Balance Sheet taking into consideration the
effects of legally enforceable master netting agreements. Cash
116 The PNC Financial Services Group, Inc. – Form 10-K