PNC Bank 2002 Annual Report Download - page 81

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Derivative Instruments And Hedging Activities – Pre-
SFAS No. 133
Prior to January 1, 2001, interest rate swaps, caps and floors
that modified the interest rate characteristics (such as from
fixed to variable, variable to fixed, or one variable index to
another) of designated interest-bearing assets or liabilities were
accounted for under the accrual method. The net amount
payable or receivable from the derivative contract was accrued
as an adjustment to interest income or interest expense of the
designated instrument. Premiums on contracts were deferred
and amortized over the life of the agreement as an adjustment
to interest income or interest expense of the designated
instruments. Unamortized premiums were included in other
assets.
Changes in the fair value of financial derivatives accounted
for under the accrual method were not reflected in results of
operations. Realized gains and losses, except losses on
terminated interest rate caps and floors, were deferred as an
adjustment to the carrying amount of the designated
instruments and amortized over the shorter of the remaining
original life of the agreements or the designated instruments.
Losses on terminated interest rate caps and floors were
recognized immediately in results of operations. If the
designated instruments were disposed of, the fair value of the
associated derivative contracts and any unamortized deferred
gains or losses were included in the determination of gain or
loss on the disposition of such instruments. Contracts not
qualifying for accrual accounting were marked to market with
gains or losses included in noninterest income.
For credit default swaps that qualified for hedge
accounting treatment, the premium paid to enter into the
credit default swaps was recorded in other assets and deferred
and amortized to noninterest expense over the life of the
agreement. Changes in the fair value of credit default swaps
qualifying for hedge accounting treatment were not reflected
in the Corporation’s financial position and had no impact on
results of operations.
If the credit default swap did not qualify for hedge
accounting treatment or if the Corporation was the seller of
credit protection, the credit default swap was marked to
market with gains or losses included in noninterest income.
ASSET MANAGEMENT AND FUND SERVICING FEES
Asset management and fund servicing fees are recognized
primarily as the services are performed. Asset management
fees are primarily based on a percentage of the fair value of the
assets under management and performance fees based on a
percentage of the returns on such assets. Fund servicing fees
are primarily based on a percentage of the fair value of the
assets, and the number of shareholder accounts, administered
by the Corporation.
INCOME TAXES
Income taxes are accounted for under the liability method.
Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates and laws that are expected to be in effect when the
differences are expected to reverse.
EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net
income adjusted for preferred stock dividends declared by the
weighted-average number of shares of common stock
outstanding.
Diluted earnings per common share is based on net
income adjusted for dividends declared on nonconvertible
preferred stock. The weighted-average number of shares of
common stock outstanding is increased by the assumed
conversion of outstanding convertible preferred stock and
debentures from the beginning of the year or date of issuance,
if later, and the number of shares of common stock that
would be issued assuming the exercise of stock options and
the issuance of incentive shares. Such adjustments to net
income and the weighted-average number of shares of
common stock outstanding are made only when such
adjustments are expected to dilute earnings per common
share.