PNC Bank 2013 Annual Report Download - page 135

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. This analytical conclusion also
considers all arrangements or agreements made
contemporaneously with or in contemplation of a transfer when
applying surrender of control conditions. 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 U.S. 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
loans under the Federal National Mortgage Association
(FNMA) Delegated Underwriting and Servicing (DUS)
program. Under the provisions of the DUS program, we
participate in a loss-sharing arrangement with FNMA. We
participated in a similar program with the Federal Home Loan
Mortgage Corporation (FHLMC). When we are obligated for
loss-sharing or recourse, our policy is to record such liabilities
initially at fair value and subsequently reserve for estimated
losses in accordance with guidance contained in applicable
GAAP. Refer to Note 24 Commitments and Guarantees for
more information about our obligations related to sales of
loans under these programs.
L OANS H ELD F OR S ALE
We designate loans as held for sale when we have the intent to
sell them. We transfer loans to the Loans held for sale
category at the lower of cost or estimated fair value less cost
to sell. At the time of transfer, write-downs on the loans are
recorded as charge-offs. We establish a new cost basis upon
transfer. Any subsequent lower-of-cost-or-market adjustment
is determined on an individual loan basis and is recognized as
a valuation allowance with any charges included in Other
noninterest income. Gains or losses on the sale of these loans
are included in Other noninterest income when realized.
We have elected to account for certain commercial and
residential mortgage loans held for sale at fair value. The
changes in the fair value of the commercial mortgage loans
are measured and recorded in Other noninterest income while
the residential mortgage loans are measured and recorded in
Residential mortgage noninterest income each period. See
Note 9 Fair Value for additional information.
Interest income with respect to loans held for sale is accrued
based on the principal amount outstanding and the loan’s
contractual interest rate.
The PNC Financial Services Group, Inc. – Form 10-K 117