PNC Bank 2002 Annual Report Download - page 61

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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 2002 and 2001 included $7 million and
$31 million, respectively, 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, 2002 2002
Positive Negative Average
Notional Fair Fair Net Asset Fair
In millions Value Value Value (Liability) Value
Customer-related
Interest rate
Swaps $26,773 $597 $(612) $(15) $(18)
Caps/floors
Sold 2,181 (32) (32) (33)
Purchased 1,951 26 26 27
Futures 1,090 2 2 2
Foreign exchange 3,190 55 (55) 4
Equity 1,385 62 (58) 4 5
Other 234 13 (3) 10 6
Total customer-related 36,804 755 (760) (5) (7)
Other risk management and proprietary
Interest-rate basis swaps 1,697 3 3 5
Other 509 7 (1) 6 6
Total other risk management and
proprietary 2,206 10 (1) 9 11
Total other derivatives $39,010 $765 $(761) $4 $4
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. Currently, 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
section of the Consolidated Balance Sheet Review 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 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. 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 administers Market Street, a multi-seller asset-
backed commercial paper conduit -- see discussion that
follows and the Other Commitments table under
Liquidity in the Consolidated Balance Sheet Review
section of this Financial Review.
• Loan commitments and letters of credit -- see the Other
Commitments table under Liquidity and Credit Risk in the
Consolidated Balance Sheet Review section of this