PNC Bank 2015 Annual Report Download - page 130

investments in private companies include techniques such as
multiples of adjusted earnings of the entity, independent
appraisals, anticipated financing and sale transactions with
third parties, or the pricing used to value the entity in a recent
financing transaction. We value affiliated partnership interests
based on the underlying investments of the partnership using
procedures consistent with those applied to direct investments.
We value indirect investments in private equity funds based
on net asset value as provided in the financial statements that
we receive from their managers. Due to the time lag in our
receipt of the financial information and based on a review of
investments and valuation techniques applied, adjustments to
the manager-provided values are made when available recent
portfolio company information or market information
indicates significant changes in value from that provided by
the manager of the fund. We include all private equity
investments on the Consolidated Balance Sheet in the caption
Equity investments. Changes in the fair value of private equity
investments are recognized in Noninterest income.
We consolidate affiliated partnerships when we are the
general partner and have determined that we have control of
the partnership or are the primary beneficiary if the entity is a
VIE. The portion we do not own is reflected in the caption
Noncontrolling interests on the Consolidated Balance Sheet.
Loans
Loans are classified as held for investment when management
has both the intent and ability to hold the loan for the
foreseeable future, or until maturity or payoff. Management’s
intent and view of the foreseeable future may change based on
changes in business strategies, the economic environment,
market conditions and the availability of government programs.
Measurement of delinquency status is based on the contractual
terms of each loan. Loans that are 30 days or more past due in
terms of payment are considered delinquent.
Except as described below, loans held for investment are
stated at the principal amounts outstanding, net of unearned
income, unamortized deferred fees and costs on originated
loans, and premiums or discounts on purchased loans. Interest
on performing loans (excluding interest on purchased
impaired loans, which is further discussed below) is accrued
based on the principal amount outstanding and recorded in
Interest income as earned using the constant effective yield
method. Loan origination fees, direct loan origination costs,
and loan premiums and discounts are deferred and accreted or
amortized into Net interest income, over periods not
exceeding the contractual life of the loan.
When loans are redesignated from held for investment to held
for sale, specific reserves and allocated pooled reserves
included in the Allowance for loan and lease losses (ALLL)
are charged-off to reduce the basis of the loans to the lower of
cost or estimated fair value less cost to sell.
In addition to originating loans, we also acquire loans through
portfolio purchases or acquisitions of other financial services
companies. For certain acquired loans that have experienced a
deterioration of credit quality, we follow the guidance
contained in ASC 310-30—Loans and Debt Securities
Acquired with Deteriorated Credit Quality. Under this
guidance, acquired purchased impaired loans are to be
recorded at fair 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 excess of cash flows expected to be collected on a
purchased impaired loan (or pool of loans) over its carrying
value represents the accretable yield which is recognized into
interest income over the remaining life of the loan (or pool of
loans) using the constant effective yield method. 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. 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 provision recapture of
previously recorded ALLL or prospectively through an
adjustment of the loan’s or pool’s yield over its remaining life.
Prior to December 31, 2015, upon final disposition of a loan
within a pool and for loans that had nominal collateral value/
expected cash flows, the loan’s carrying value was removed
from the pool and any gain or loss associated with the
transaction was retained in the pool’s recorded investment.
Effective December 31, 2015, in anticipation of the end of the
life of our purchased impaired pooled consumer and
residential real estate loans and pursuant to supervisory
direction, we changed our derecognition policy for these loans
such that we will write-off the loan’s recorded investment and
derecognize the associated ALLL upon final disposition.
Gains and losses on such loans will be recognized as either an
adjustment to the pool’s associated ALLL, or yield as
appropriate. The transition to this new policy on December 31,
2015 resulted in a $468 million derecognition of recorded
investment and associated ALLL on such loans. See Note 4
Purchased Loans and Note 5 Allowances for Loan and Lease
112 The PNC Financial Services Group, Inc. – Form 10-K