PNC Bank 2015 Annual Report Download - page 185

Changes in commercial MSRs during 2013, prior to the
irrevocable fair value election, follow:
Table 84: Commercial Mortgage Servicing Rights Accounted
for Under the Amortization Method
In millions 2013
Commercial Mortgage Servicing Rights – Net Carrying
Amount
January 1 $ 420
Additions (a) 138
Amortization expense (97)
Change in valuation allowance 88
December 31 $ 549
Servicing advances at December 31 $ 412
Commercial Mortgage Servicing Rights – Valuation
Allowance
January 1 $(176)
Provision (21)
Recoveries 108
Other 1
December 31 $ (88)
(a) Additions for 2013 included $53 million from loans sold with servicing retained and
$85 million from purchases of servicing rights from third parties.
Residential Mortgage Servicing Rights
We recognize mortgage servicing right assets on residential
real estate loans when we retain the obligation to service these
loans upon sale and the servicing fee is more than adequate
compensation. Residential MSRs are subject to declines in
value from actual or expected prepayment of the underlying
loans and defaults as well as market driven changes in interest
rates. We manage this risk by economically hedging the fair
value of residential MSRs with securities and derivative
instruments which are expected to increase (or decrease) in
value when the value of residential MSRs declines (or
increases).
The fair value of residential MSRs is estimated by using a
discounted 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.
Changes in the residential MSRs follow:
Table 85: Residential Mortgage Servicing Rights
In millions 2015 2014 2013
January 1 $ 845 $ 1,087 $ 650
Additions:
From loans sold with
servicing retained 78 85 158
Purchases 316 45 110
Sales (4)
Changes in fair value due to:
Time and payoffs (a) (178) (134) (193)
Other (b) 2 (238) 366
December 31 $ 1,063 $ 845 $ 1,087
Unpaid principal balance of
loans serviced for others at
December 31 $123,466 $108,010 $113,994
Servicing advances at
December 31 $ 411 $ 501 $ 571
(a) Represents decrease in MSR value due to passage of time, including the impact from
both regularly scheduled loan principal payments and loans that were paid down or
paid off during the period.
(b) Represents MSR value changes resulting primarily from market-driven changes in
interest rates.
Sensitivity Analysis
The fair value of commercial and residential MSRs and
significant inputs to the valuation models as of December 31,
2015 are shown in the tables below. The expected and actual
rates of mortgage loan prepayments are significant factors
driving the fair value. Management uses both internal
proprietary models and a third-party model to estimate future
commercial mortgage loan prepayments and a third-party
model to estimate future residential mortgage loan
prepayments. These models have been refined based on
current market conditions and management judgment. Future
interest rates are another important factor in the valuation of
MSRs. Management utilizes market implied forward interest
rates to estimate the future direction of mortgage and discount
rates. The forward rates utilized are derived from the current
yield curve for U.S. dollar interest rate swaps and are
consistent with pricing of capital markets instruments.
Changes in the shape and slope of the forward curve in future
periods may result in volatility in the fair value estimate.
A sensitivity analysis of the hypothetical effect on the fair
value of MSRs to adverse changes in key assumptions is
presented below. These sensitivities do not include the impact
of the related hedging activities. Changes in fair value
generally cannot be extrapolated because the relationship of
the change in the assumption to the change in fair value may
not be linear. Also, the effect of a variation in a particular
assumption on the fair value of the MSRs is calculated
independently without changing any other assumption. In
reality, changes in one factor may result in changes in another
(for example, changes in mortgage interest rates, which drive
The PNC Financial Services Group, Inc. – Form 10-K 167