PNC Bank 2012 Annual Report Download - page 148

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
flows expected to be collected using internal models that
incorporate management’s best estimate of current key
assumptions, such as default rates, loss severity and payment
speeds. Collateral values are also incorporated into cash flow
estimates. Late fees, which are contractual but not expected to
be collected, are excluded from expected future cash flows.
The accretable yield is calculated based upon the difference
between the undiscounted expected future cash flows of the
loans and the recorded investment in the loans. This amount is
accreted into income over the life of the loan or pool using the
constant effective yield method. Subsequent decreases in
expected cash flows that are attributable, at least in part, to
credit quality are recognized as impairments through a charge
to the provision for credit losses resulting in an increase in the
ALLL. Subsequent increases in expected cash flows are
recognized as a recovery of previously recorded ALLL or
prospectively through an adjustment of the loan’s or pool’s
yield over its remaining life.
The nonaccretable yield represents the difference between the
expected undiscounted cash flows of the loans and the total
contractual cash flows (including principal and future interest
payments) at acquisition and throughout the remaining lives of
the loans.
L EASES
We provide financing for various types of equipment
including aircraft, energy and power systems and vehicles
through a variety of lease arrangements. Direct financing
leases are carried at the aggregate of lease payments plus
estimated residual value of the leased property, less unearned
income. Leveraged leases, a form of financing lease, are
carried net of nonrecourse debt. We recognize income over
the term of the lease using the constant effective yield method.
Lease residual values are reviewed for other-than-temporary
impairment at least annually. Gains or losses on the sale of
leased assets are included in Other noninterest income while
valuation adjustments on lease residuals are included in Other
noninterest expense.
L OAN S ALES ,L OAN S ECURITIZATIONS A ND R ETAINED
I NTERESTS
We recognize the sale of loans or other financial assets when
the transferred assets are legally isolated from our creditors
and the appropriate accounting criteria are met. We have sold
mortgage, credit card and other loans through securitization
transactions. In a securitization, financial assets are transferred
into trusts or to SPEs in transactions to effectively legally
isolate the assets from PNC. Where the transferor is a
depository institution, legal isolation is accomplished through
compliance with specific rules and regulations of the relevant
regulatory authorities. Where the transferor is not a depository
institution, legal isolation is accomplished through utilization
of a two-step securitization structure.
ASC Topic 860 Accounting For Transfers of Financial Assets
requires a true sale legal analysis to address several relevant
factors, such as the nature and level of recourse to the
transferor, and the amount and nature of retained interests in
the loans sold. The analytical conclusion as to a true sale is
never absolute and unconditional, but contains qualifications
based on the inherent equitable powers of a bankruptcy court,
as well as the unsettled state of the common law, or powers of
the FDIC as a conservator or receiver. Once the legal isolation
test has been met, other factors concerning the nature and
extent of the transferor’s control and the rights of the
transferee over the transferred assets are taken into account in
order to determine whether derecognition of assets is
warranted.
In a securitization, the trust or SPE issues beneficial interests
in the form of senior and subordinated securities backed or
collateralized by the assets sold to the trust. The senior classes
of the asset-backed securities typically receive investment
grade credit ratings at the time of issuance. These ratings are
generally achieved through the creation of lower-rated
subordinated classes of asset-backed securities, as well as
subordinated or residual interests. In certain cases, we may
retain a portion or all of the securities issued, interest-only
strips, one or more subordinated tranches, servicing rights and,
in some cases, cash reserve accounts. Securitized loans are
removed from the balance sheet and a net gain or loss is
recognized in noninterest income at the time of initial sale.
Gains or losses recognized on the sale of the loans depend on
the fair value of the loans sold and the retained interests at the
date of sale. We generally estimate the fair value of the
retained interests based on the present value of future expected
cash flows using assumptions as to discount rates, interest
rates, prepayment speeds, credit losses and servicing costs, if
applicable.
With the exception of loan sales to certain US government
chartered entities, our loan sales and securitizations are
generally structured without recourse to us except for
representations and warranties and with no restrictions on the
retained interests. We originate, sell and service mortgage
The PNC Financial Services Group, Inc. – Form 10-K 129