PNC Bank 2008 Annual Report Download - page 98

ineffectiveness is reflected in the income statement in the
same financial statement category as the hedged item.
For derivatives designated as cash flow hedges (i.e., hedging
the exposure to variability in expected future cash flows), the
effective portions of the gain or loss on derivatives are
reported as a component of accumulated other comprehensive
income (loss) and subsequently reclassified to interest income
in the same period or periods during which the hedged
transaction affects earnings. The change in fair value of any
ineffective portion of the hedging derivative is recognized
immediately in noninterest income.
We discontinue hedge accounting when it is determined that
the derivative is no longer qualifying as an effective hedge;
the derivative expires or is sold, terminated or exercised; or
the derivative is de-designated as a fair value or cash flow
hedge or, for a cash flow hedge, it is no longer probable that
the forecasted transaction will occur by the end of the
originally specified time period. If we determine that the
derivative no longer qualifies as a fair value or cash flow
hedge and hedge accounting is discontinued, the derivative
will continue to be recorded on the balance sheet at its fair
value with changes in fair value included in current earnings.
For a discontinued fair value hedge, the previously hedged
item is no longer adjusted for changes in fair value.
When hedge accounting is discontinued because it is no longer
probable that a forecasted transaction will occur, the
derivative will continue to be recorded on the balance sheet at
its fair value with changes in fair value included in current
earnings, and the gains and losses in accumulated other
comprehensive income (loss) will be recognized immediately
into earnings. When we discontinue hedge accounting because
the hedging instrument is sold, terminated or no longer
designated, the amount reported in accumulated other
comprehensive income (loss) up to the date of sale,
termination or de-designation, continues to be reported in
other comprehensive income or loss until the forecasted
transaction affects earnings. We did not terminate any cash
flow hedges in 2008, 2007 or 2006 due to a determination that
a forecasted transaction was no longer probable of occurring.
We occasionally purchase or originate financial instruments
that contain an embedded derivative. At the inception of the
transaction, we assess if the economic characteristics of the
embedded derivative are clearly and closely related to the
economic characteristics of the financial instrument (host
contract), whether the financial instrument that embodied both
the embedded derivative and the host contract are measured at
fair value with changes in fair value reported in earnings, and
whether a separate instrument with the same terms as the
embedded instrument would not meet the definition of a
derivative. If the embedded derivative does not meet these
three conditions, the embedded derivative would qualify as a
derivative and be recorded apart from the host contract and
carried at fair value with changes recorded in current earnings.
On January 1, 2006, we adopted SFAS 155, which, among
other provisions, permits a fair value election for hybrid
financial instruments requiring bifurcation on an
instrument-by-instrument basis. Beginning January 1, 2006,
we elected to account for certain previously bifurcated hybrid
instruments and certain newly acquired hybrid instruments
under this fair value election on an instrument-by-instrument
basis. As such, certain previously reported embedded
derivatives are reported with their host contracts at fair value
in loans or other borrowed funds.
We enter into commitments to make residential real estate
loans and loans whereby the interest rate on the loan is set
prior to funding (interest rate lock commitments). We also
enter into commitments to purchase or sell commercial
mortgage loans. Loan commitments and interest rate lock
commitments for loans to be classified as held for sale and
commitments to buy or sell mortgage loans are accounted for
as free-standing derivatives and are recorded at fair value in
other assets or other liabilities on the Consolidated Balance
Sheet. Any gain or loss from the change in fair value after the
inception of the commitment is recognized in noninterest
income.
I NCOME T AXES
We account for income taxes under the asset and 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 we expect will apply at the
time when we believe the differences will reverse. The
realization of deferred tax assets requires an assessment to
determine the realization of such assets. Realization refers to
the incremental benefit achieved through the reduction in
future taxes payable or refunds receivable from the deferred
tax assets, assuming that the underlying deductible differences
and carryforwards are the last items to enter into the
determination of future taxable income. We establish a
valuation allowance for tax assets when it is more likely than
not that they will not be realized, based upon all available
positive and negative evidence.
E ARNINGS P ER C OMMON S HARE
We calculate basic earnings per common share 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 are based on net income
available to common stockholders. We increase the weighted-
average number of shares of common stock outstanding 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 warrants and the issuance of incentive shares using the
treasury stock method. These adjustments to the weighted-
average number of shares of common stock outstanding are
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