PNC Bank 2015 Annual Report Download - page 131

Losses and Unfunded Loan Commitments and Letters of
Credit for additional loan data and application of the policies
disclosed herein.
Leases
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 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.
Loan Sales, Loan Securitizations And Retained Interests
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.
ASC 860 – Transfers and Servicing 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 to support whether
the transferred loans would be legally isolated from the
transferor’s assets in the case of bankruptcy. 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 commercial
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 21 Commitments and Guarantees for
more information about our obligations related to sales of
loans under these programs.
Loans Held For Sale
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. Sale proceeds that are in excess of the new cost basis
upon transfer and are received within 90 days of classifying the
loan as held for sale are recorded as a recovery to the ALLL up
to the amount previously charged off. Any remaining proceeds
that exist after recovery are recorded as a gain on sale included
in Other noninterest income. Sale proceeds that are less than the
new cost basis upon transfer and are received within 90 days of
classifying the loan as held for sale are recorded as a charge off
to the ALLL. Any proceeds received after 90 days of
classifying the loan as held for sale are recorded as a gain or
loss on sale and included in Other noninterest income.
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 7 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.
In certain circumstances, loans designated as held for sale may
be transferred to held for investment based on a change in
strategy. We transfer these loans at the lower of cost or
estimated fair value; however, any loans originated or
purchased for held for sale and designated at fair value remain
at fair value for the life of the loan.
The PNC Financial Services Group, Inc. – Form 10-K 113