PNC Bank 2012 Annual Report Download - page 152

M ORTGAGE A ND O THER S ERVICING R IGHTS
We provide servicing under various loan servicing contracts
for commercial, residential and other consumer loans. These
contracts are either purchased in the open market or retained
as part of a loan securitization or loan sale. All newly acquired
or originated servicing rights are initially measured at fair
value. Fair value is based on the present value of the expected
future cash flows, including assumptions as to:
• Deposit balances and interest rates for escrow and
commercial reserve earnings,
• Discount rates,
• Stated note rates,
• Estimated prepayment speeds, and
• Estimated servicing costs.
For subsequent measurements of these assets, we have elected
to utilize either the amortization method or fair value
measurement based upon the asset class and our risk
management strategy for managing these assets. For
commercial mortgage loan servicing rights, we use the
amortization method. This election was made based on the
unique characteristics of the commercial mortgage loans
underlying these servicing rights with regard to market inputs
used in determining fair value and how we manage the risks
inherent in the commercial mortgage servicing rights assets.
Specific risk characteristics of commercial mortgages include
loan type, currency or exchange rate, interest rates, expected
cash flows and changes in the cost of servicing. We record
these servicing assets as Other intangible assets and amortize
them over their estimated lives based on estimated net
servicing income. On a quarterly basis, we test the assets for
impairment by categorizing the pools of assets underlying the
servicing rights into various strata. If the estimated fair value
of the assets is less than the carrying value, an impairment loss
is recognized and a valuation reserve is established.
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
are detailed in Note 9 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 structured 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, unrealized gains or losses on
derivatives designated as cash flow hedges, and changes in
pension and other postretirement benefit plan liability
adjustments. Details of each component are included in Note
20 Other Comprehensive Income.
The PNC Financial Services Group, Inc. – Form 10-K 133