PNC Bank 2014 Annual Report Download - page 167

prior to recovery of its amortized cost basis. In this situation,
the amount of loss recognized in income is equal to the
difference between the fair value and the amortized cost basis
of the security. Even if we do not expect to sell the security,
we must evaluate the expected cash flows to be received to
determine if we believe a credit loss has occurred. In the event
of a credit loss, only the amount of impairment associated
with the credit loss is recognized in income. The portion of the
unrealized loss relating to other factors, such as liquidity
conditions in the market or changes in market interest rates, is
recorded in accumulated other comprehensive income (loss).
The security-level assessment is performed on each security,
regardless of the classification of the security as available for
sale or held to maturity. Our assessment considers the security
structure, recent security collateral performance metrics if
applicable, external credit ratings, failure of the issuer to make
scheduled interest or principal payments, our judgment and
expectations of future performance, and relevant independent
industry research, analysis and forecasts. Results of the
periodic assessment are reviewed by a cross-functional senior
management team representing Asset & Liability
Management, Finance, and Market Risk Management. The
senior management team considers the results of the
assessments, as well as other factors, in determining whether
the impairment is other-than-temporary.
Substantially all of the credit impairment we have recognized
relates to non-agency residential mortgage-backed securities and
asset-backed securities collateralized by first-lien and second-
lien non-agency 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, employment and other macroeconomic factors
to develop estimates of future performance.
Security level assumptions for prepayments, loan defaults and
loss given default are applied to each non-agency residential
mortgage-backed security and asset-backed security
collateralized by first-lien and second-lien non-agency residential
mortgage loans 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 expect that 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 collateralized by
first-lien and second-lien non-agency residential mortgage loans.
Table 77: Credit Impairment Assessment Assumptions –
Non-Agency Residential Mortgage-Backed and Asset-
Backed Securities
December 31, 2014 Range
Weighted-
average (a)
Long-term prepayment rate (annual CPR)
Prime 7 – 20% 13%
Alt-A 5 – 12 6
Option ARM 3 – 6 3
Remaining collateral expected to default
Prime 0 – 32% 13%
Alt-A 6 – 50 27
Option ARM 11 –53 36
Loss severity
Prime 20 – 70% 41%
Alt-A 30 – 83 60
Option ARM 45 – 71 62
(a) Calculated by weighting the relevant assumption for each individual security by the
current outstanding cost basis of the security.
The following table presents a rollforward of the cumulative
OTTI credit losses recognized in earnings for all debt
securities for which a portion of an OTTI loss was recognized
in Accumulated other comprehensive income (loss).
Table 78: Rollforward of Cumulative OTTI Credit Losses
Recognized in Earnings
Year ended December 31
In millions 2014 2013
Balance at beginning of period $(1,160) $(1,201)
Loss where impairment was not previously
recognized (6)
Additional loss where credit impairment was
previously recognized (5) (16)
Reduction due to credit impaired securities
sold or matured 7 57
Balance at end of period $(1,164) $(1,160)
The PNC Financial Services Group, Inc. – Form 10-K 149