PNC Bank 2007 Annual Report Download - page 117

In connection with the lending of securities facilitated by
PFPC as an intermediary on behalf of certain of its clients, we
provide indemnification to those clients against the failure of
the borrowers to return the securities. The market value of the
securities lent is fully secured on a daily basis; therefore, the
exposure to us is limited to temporary shortfalls in the
collateral as a result of short-term fluctuations in trading
prices of the loaned securities. At December 31, 2007, the
total maximum potential exposure as a result of these
indemnity obligations was $10.4 billion, although the
collateral at the time exceeded that amount.
V ISA I NDEMNIFICATION
Our payment services business issues and acquires credit and
debit card transactions through Visa U.S.A. Inc. card
association or its affiliates (“Visa”). In October 2007, Visa
completed a restructuring and issued shares of Visa Inc.
common stock to its financial institution members in
contemplation of its initial public offering (“IPO”) currently
anticipated in the first quarter of 2008 (the “Visa
Reorganization”). As part of the Visa Reorganization, we
received our proportionate share of a class of Visa Inc.
common stock allocated to the U.S. members. Visa expects
that a portion of these shares will be redeemed for cash out of
the proceeds of the IPO. The U.S. members are obligated to
indemnify Visa for judgments and settlements related to
specified litigation. Visa will set aside a portion of the
proceeds from the IPO in an escrow account for the benefit of
the U.S. member financial institutions to fund the expenses of
the litigation as well as the members’ proportionate share of
any judgments or settlements that may arise out of the
litigation. Prior to the IPO, the U.S. members are obligated to
indemnify Visa with respect to this litigation. In accordance
with GAAP, we recorded a liability and operating expense
totaling $82 million before taxes in the fourth quarter of 2007
representing our estimate of the fair value of our
indemnification obligation for potential losses arising from
this litigation. Our estimate was subjective, based on publicly
available information and other information made available to
all of the affected Visa members. It did not reflect any direct
knowledge of the relative strengths and weaknesses of the
litigation still pending or the status of any ongoing settlement
discussions. We believe that the IPO will be completed and
cash will be available through the escrow to satisfy litigation
settlements. In addition, based on estimates provided by Visa
regarding its planned IPO, we believe that our ownership
interest in Visa has a value significantly in excess of our
indemnification liability. Our Visa shares will not generally be
transferable until they can be converted into shares of the
publicly traded class of stock, which cannot happen until the
later of three years after the IPO or settlement of all of the
specified litigation.
R ECOURSE A GREEMENT WITH F EDERAL N ATIONAL
M ORTGAGE A SSOCIATION
In connection with our July 2007 acquisition of ARCS, we are
authorized to originate, underwrite, close and service
commercial mortgage loans and then sell them to Fannie Mae
under Fannie Mae’s DUS program.
Under this program, we assume up to one-third of the risk of
loss on unpaid principal balances. At December 31, 2007, the
maximum liability was $3.5 billion. Accordingly, we maintain
a reserve for such potential losses which approximates the fair
value of this liability. At December 31, 2007, the unpaid
principal balance outstanding of loans sold by ARCS as a
participant in this program was $11.6 billion. The fair value of
the guarantee, in the form of reserves for losses under this
program, totaled $39 million as of December 31, 2007 and is
included in Other liabilities on our Consolidated Balance
Sheet. If payment is required under this program, we would
not have an interest in the collateral underlying the mortgage
loans on which losses occurred. The serviced loans are not
included on our Consolidated Balance Sheet.
O
THER G UARANTEES
We write caps and floors for customers, risk management and
proprietary trading purposes. At December 31, 2007, the fair
value of the written caps and floors liability on our
Consolidated Balance Sheet was $87 million. Our ultimate
obligation under written options is based on future market
conditions and is only quantifiable at settlement. We manage
our market risk exposure from customer positions through
transactions with third-party dealers.
We also enter into credit default swaps under which we buy
loss protection from or sell loss protection to a counterparty
for the occurrence of a credit event of a reference entity. The
fair value of the contracts sold on our Consolidated Balance
Sheet was a net liability of $51 million at December 31, 2007.
The maximum amount we would be required to pay under the
credit default swaps in which we sold protection, assuming all
reference obligations experience a credit event at a total loss,
without recoveries, was $1.9 billion at December 31, 2007.
We have entered into various contingent performance
guarantees through credit risk participation arrangements with
terms ranging from less than one year to 10 years. We will be
required to make payments under these guarantees if a
customer defaults on its obligation to perform under certain
credit agreements with third parties. Our exposure under these
agreements was approximately $572 million at December 31,
2007.
C ONTINGENT P AYMENTS I N C ONNECTION W ITH C ERTAIN
A CQUISITIONS
A number of the acquisition agreements to which we are a
party and under which we have purchased various types of
assets, including the purchase of entire businesses, partial
interests in companies, or other types of assets, require us to
make additional payments in future years if certain
predetermined goals are achieved or not achieved within a
specific time period. Due to the nature of the contract
provisions, we cannot quantify our total exposure that may
result from these agreements.
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