PNC Bank 2011 Annual Report Download - page 154

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
Potential credit losses on these securities are evaluated on a
security by security basis. Collateral performance assumptions
are developed for each security after reviewing collateral
composition and collateral performance statistics. This
includes analyzing recent delinquency roll rates, loss
severities, voluntary prepayments, and various other collateral
and performance metrics. This information is then combined
with general expectations on the housing market and other
economic factors to develop estimates of future performance.
Security level assumptions for prepayments, loan defaults, and
loss given default are applied to every security using a third-
party cash flow model. The third-party cash flow model then
generates projected cash flows according to the structure of
each security. Based on the results of the cash flow analysis,
we determine whether we will recover the amortized cost
basis of our security.
The following table provides detail on the significant
assumptions used to determine credit impairment for
non-agency residential mortgage-backed and asset-backed
securities:
Credit Impairment Assessment Assumptions – Non-Agency
Residential Mortgage-Backed and Asset-Backed
Securities (a)
December 31, 2011 Range
Weighted-
average (b)
Long-term prepayment rate (annual CPR)
Prime 7-20% 14%
Alt-A 5-12 6
Option ARM 3-6 3
Remaining collateral expected to default
Prime 1-49% 19%
Alt-A 1-59 34
Option ARM 16-81 61
Loss severity
Prime 5-70% 46%
Alt-A 18-82 57
Option ARM 41-69 58
(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 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. 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 forecasts. 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.
The PNC Financial Services Group, Inc. – Form 10-K 145