PNC Bank 2001 Annual Report Download - page 58

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OTHER DERIVATIVES
To accommodate customer needs, PNC enters into
customer-related financial derivative transactions primarily
consisting of interest rate swaps, caps, floors and foreign
exchange contracts. Risk exposure from customer positions
is managed through transactions with other dealers.
Additionally, the Corporation enters into other derivative
transactions for risk management purposes that are not
designated as accounting hedges, primarily consisting of
interest rate floors and caps and basis swaps. Other
noninterest income for 2001 included $31 million of net
gains related to the derivatives held for risk management
purposes not designated as accounting hedges. Prior to 2001,
changes in the fair value of these derivatives that were
previously accounted for under the accrual method were not
reflected in operating results.
Other Derivatives
At December 31, 2001 2001
Positive Ne
g
ative Avera
g
e
Notiona
l
Fair Fair Net Asse
t
Fair
In millions Value Value Value (Liability) Value
Customer-related
Interest rate
Swaps $20,317 $336 $(335) $1 $(6)
Caps/floors
Sold 3,493 (34) (34) (25)
Purchased 2,791 27 27 21
Foreign exchange 4,429 43 (39) 4 11
Other 2,957 65 (55) 10 4
Total customer-related 33,987 471 (463) 8 5
Other risk management and proprietary
Interest rate
Basis swaps 2,408 8 8 10
Caps/floors
Sold 250 (2) (2) (1)
Purchased 4,650 2 2 1
Other 547 8 (3) 5 7
Total other risk management and
proprietary 7,855 18 (5) 13 17
Total other derivatives $41,842 $489 $(468) $21 $22
“OFF-BALANCE-SHEET” ACTIVITIES
PNC has reputation, legal, operational and fiduciary risks in
virtually every area of its business, many of which are not
reflected in assets and liabilities recorded on the balance
sheet, and some of which are conducted through limited
purpose entities known as “special purpose entities.” These
activities are part of the banking business and would be
found in most larger financial institutions with the size and
activities of PNC. Most of these involve financial products
distributed to customers, trust and custody services, and
processing and funds transfer services, and the amounts
involved can be quite large in relation to the Corporation’s
assets, equity and earnings. The primary accounting for these
activities on PNC’s records is to reflect the earned income,
operating expenses and any receivables or liabilities for
transaction settlements. For example: PNC Bank provides
credit and liquidity to customers through loan commitments
and letters of credit (see the Other Commitments table in the
Liquidity Risk section of Risk Management in this Financial
Review); BlackRock provides investment advisory and
administration services for others through registered
investment companies, separate accounts, and other legal
entities - additional information about BlackRock is available
in its filings with the SEC and may be obtained electronically
at the SEC’s home page at www.sec.gov; PFPC processes
mutual fund transactions, provides securities lending services
and maintains custody of certain fund assets; PNC Advisors
provides trust services and holds assets for personal and
institutional customers; Hilliard Lyons maintains brokerage
assets of customers; and Columbia Housing administers and
manages funds that invest in affordable housing projects that
generate tax credits to investors; among others. In addition
to these activities, PNC has other activities or financial
interests that involve credit risk and market risk (including
interest rate risk) that are not fully reflected on the balance
sheet. The most significant of these activities include the
following:
• PNC sponsors Market Street Funding Corporation
(“Market Street”), a multi-seller asset-backed
commercial paper conduit -- see discussion that follows