PNC Bank 2008 Annual Report Download - page 153

National City sold residential mortgage loans and home equity
lines of credit (collectively, loans) in the normal course of
business. These agreements usually require certain
representations concerning credit information, loan
documentation, collateral, and insurability. On a regular basis,
investors may request PNC to indemnify them against losses
on certain loans or to repurchase loans which the investors
believe do not comply with applicable representations. Upon
completion of its own investigation as to the validity of the
claim, PNC will repurchase or provide indemnification on
such loans. Indemnification requests are generally received
within two years subsequent to the date of sale.
Management maintains a liability for estimated losses on
loans expected to be repurchased, or on which indemnification
is expected to be provided, and regularly evaluates the
adequacy of this recourse liability based on trends in
repurchase and indemnification requests, actual loss
experience, known and inherent risks in the loans, and current
economic conditions. At December 31, 2008 the liability for
estimated losses on repurchase and indemnification claims
was $406 million.
O THER G UARANTEES
We write caps and floors for customers, risk management and
proprietary trading purposes. At December 31, 2008, the fair
value of the written caps and floors liability on our
Consolidated Balance Sheet was $12 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.
CREDIT DEFAULT SWAPS
December 31, 2008
Dollars in millions
Notional
amount
Estimated
net fair
value
Weighted-
Average
Remaining
Maturity
In Years
Credit Default Swaps – Guarantees
Single name $ 278 $ (38) 3.84
Index traded 677 (42) 4.84
Total (a) $ 955 $ (80) 4.54
Credit Default Swaps –
Beneficiaries
Single name $ 974 $ 84 3.82
Index traded 1,008 201 31.82
Total (b) $1,982 $285 18.06
Total (c) $2,937 $205 13.67
(a) Includes $883 million of investment grade credit default swaps with a rating of Baa3
or above and $72 million of subinvestment grade based on published rating agency
information.
(b) Includes $1.7 billion of investment grade credit default swaps with a rating of Baa3
or above and $263 million of subinvestment grade based on published rating agency
information.
(c) The referenced/underlying assets for these credit default swaps is approximately
70% corporate debt, 27% commercial mortgage backed securities and 3% related to
loans.
We 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 $80 million at December 31, 2008. 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 $955 million at December 31, 2008.
We have also entered into various contingent performance
guarantees through credit risk participation arrangements with
terms ranging from less than one year to 23 years. As of
December 31, 2008 the notional amount of risk participations
agreements was $1.9 billion with a weighted-average
remaining maturity of 3 years. The fair value of these
agreements on our Consolidated Balance Sheet was a net
liability of $3 million. Based on the Corporation’s internal risk
rating process, 98% of the notional amount of the risk
participations agreements outstanding had underlying swap
counterparties with internal credit ratings of pass, indicating
the expected risk of loss is currently low, while 2% had
underlying swap counterparties with internal risk ratings
below pass, indicating a higher degree of risk of default. 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. Assuming all underlying
swap counterparties defaulted, the maximum potential
exposure from these agreements as of December 31, 2008
would be $128 million based on the fair value of the
underlying swaps.
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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