PNC Bank 2014 Annual Report Download - page 81

In determining a reporting unit’s fair value and comparing it
to its carrying value, we generally utilize the highest of these
three amounts (the “targeted equity”) in our discounted cash
flow methodology. Under this methodology, if necessary, we
will infuse capital to achieve the targeted equity amount. As of
October 1, 2014 (annual impairment testing date), unallocated
excess capital (difference between shareholders’ equity minus
total economic capital assigned and increased by the
incremental targeted equity capital infusion) represented
capital reserved for potential future capital needs.
The results of our annual 2014 impairment test indicated that
the estimated fair values of our reporting units exceeded their
carrying values by at least 10% and are not considered to be at
risk of not passing Step 1. By definition, assumptions utilized
in estimating the fair value of a reporting unit are judgmental
and inherently uncertain, but absent a significant change in
economic conditions of a reporting unit, we would not expect
the fair values of these reporting units to decrease below their
respective carrying values. Similarly, there were no
impairment charges related to goodwill in 2013.
During 2012, our residential mortgage banking business,
similar to other residential mortgage banking businesses,
experienced higher operating costs and increased uncertainties
such as elevated indemnification and repurchase liabilities and
foreclosure related issues. As a result of our annual
impairment test, we determined that the carrying amount of
goodwill relating to the Residential Mortgage Banking
reporting unit was impaired. We recorded an impairment
charge of $45 million within noninterest expense which
reduced the carrying value of goodwill attributed to
Residential Mortgage Banking to zero.
See Note 8 Goodwill and Other Intangible Assets in the Notes
To Consolidated Financial Statements in Item 8 of this Report
for additional information.
Lease Residuals
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 sum of lease payments and the
estimated residual value of the leased property, less unearned
income. Residual values are subject to judgments as to the
value of the underlying equipment that can be affected by
changes in economic and market conditions and the financial
viability of the residual guarantors. Residual values are
derived from historical remarketing experience, secondary
market contacts, and industry publications. To the extent not
guaranteed or assumed by a third-party, we bear the risk of
ownership of the leased assets. This includes the risk that the
actual value of the leased assets at the end of the lease term
will be less than the estimated residual value, which could
result in an impairment charge and reduce earnings in the
future. Residual values are reviewed for impairment at least
annually.
Revenue Recognition
We earn net interest and noninterest income from various
sources, including:
• Lending,
• Securities portfolio,
• Asset management,
• Customer deposits,
• Loan sales and servicing,
• Brokerage services,
• Sale of loans and securities,
• Certain private equity activities, and
• Securities, derivatives and foreign exchange
activities.
We also earn fees and commissions from issuing loan
commitments, standby letters of credit and financial
guarantees, selling various insurance products, providing
treasury management services, providing merger and
acquisition advisory and related services, and participating in
certain capital markets transactions. Revenue earned on
interest-earning assets, including the accretion of discounts
recognized on acquired or purchased loans recorded at fair
value, is recognized based on the constant effective yield of
the financial instrument or based on other applicable
accounting guidance.
The timing and amount of revenue that we recognize in any
period is dependent on estimates, judgments, assumptions, and
interpretation of contractual terms. Changes in these factors
can have a significant impact on revenue recognized in any
period due to changes in products, market conditions or
industry norms.
Residential And Commercial Mortgage Servicing Rights
We elect to measure our residential mortgage servicing rights
(MSRs) at fair value. This election was made to be consistent
with our risk management strategy to hedge changes in the
fair value of these assets as described below. The fair value of
residential MSRs is estimated by using a 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.
As of January 1, 2014, PNC made an irrevocable election to
subsequently measure all classes of commercial MSRs at fair
value in order to eliminate any potential measurement
mismatch between our economic hedges and the commercial
MSRs. The impact of this election was not material. The fair
value of commercial MSRs is estimated by using a discounted
cash flow model incorporating inputs for assumptions as to
constant prepayment rates, discount rates and other factors
determined based on current market conditions and
The PNC Financial Services Group, Inc. – Form 10-K 63