PNC Bank 2010 Annual Report Download - page 168
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Please find page 168 of the 2010 PNC Bank annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.flows are considered cash flow hedges. Designating
derivatives as accounting hedges allows for gains and losses
on those derivatives, to the extent effective, to be recognized
in the income statement in the same period the hedged items
affect earnings.
Cash Flow Hedges
We enter into receive-fixed, pay-variable interest rate swaps to
modify the interest rate characteristics of designated
commercial loans from variable to fixed in order to reduce the
impact of changes in future cash flows due to market interest
rate changes. For these cash flow hedges, any changes in the
fair value of the derivatives that are effective in offsetting
changes in the forecasted interest cash flows are recorded in
accumulated other comprehensive income and are reclassified
to interest income in conjunction with the recognition of
interest receipts on the loans. In the 12 months that follow
December 31, 2010, we expect to reclassify from the amount
currently reported in accumulated other comprehensive
income net derivative gains of $340 million pretax, or $221
million after-tax, in association with interest receipts on the
hedged loans. This amount could differ from amounts actually
recognized due to changes in interest rates, hedge
dedesignations, and the addition of other hedges subsequent to
December 31, 2010. The maximum length of time over which
forecasted loan cash flows are hedged is 10 years. We use
statistical regression analysis to assess the effectiveness of
these hedge relationships at both the inception of the hedge
relationship and on an ongoing basis.
We also periodically enter into forward purchase and sale
contracts to hedge the variability of the consideration that will
be paid or received related to the purchase or sale of debt
securities classified as available for sale. The forecasted
purchase or sale is consummated upon gross settlement of the
forward contract itself. As a result, hedge ineffectiveness, if
any, is typically minimal. Gains and losses on these forward
contracts are recorded in accumulated other comprehensive
income and are recognized in earnings when the hedged cash
flows affect earnings. In the 12 months that follow
December 31, 2010, we expect to reclassify from the amount
currently reported in accumulated other comprehensive
income, net derivative gains of $28 million pretax, or $18
million after-tax, as adjustments of yield on securities
available for sale. The maximum length of time we are
hedging forecasted purchases is three months. There were no
amounts in accumulated other comprehensive income related
to the forecasted sale of securities at December 31, 2010.
There were no components of derivative gains or losses
excluded from the assessment of hedge effectiveness related
to either cash flow hedge strategy.
During 2010 and 2009, there were no gains or losses from
cash flow hedge derivatives reclassified to earnings because it
became probable that the original forecasted transaction would
not occur.
Fair Value Hedges
We enter into receive-fixed, pay-variable interest rate swaps to
hedge changes in the fair value of outstanding fixed-rate debt
and borrowings caused by fluctuations in market interest rates.
The specific products hedged include bank notes, Federal
Home Loan Bank borrowings, and senior and subordinated
debt. We also enter into pay-fixed, receive- variable interest
rate swaps to hedge changes in the fair value of fixed rate
investment securities caused by fluctuations in market interest
rates. The specific products hedged include US Treasury,
government agency and other debt securities. For these hedge
relationships, we use statistical regression analysis to assess
hedge effectiveness at both the inception of the hedge
relationship and on an ongoing basis. There were no
components of derivative gains or losses excluded from the
assessment of hedge effectiveness.
Further detail regarding the notional amounts, fair values and
gains and losses recognized related to derivatives used in fair
value and cash flow hedge strategies is presented in the tables
that follow.
The ineffective portion of the change in value of our fair value
and cash flow hedge derivatives resulted in net losses of $31
million for 2010 compared with a net loss of $45 million for
2009 and a net gain of $8 million for 2008.
D
ERIVATIVES
N
OT
D
ESIGNATED IN
H
EDGE
R
ELATIONSHIPS
We also enter into derivatives which are not designated as
accounting hedges under GAAP.
The majority of these derivatives is used to manage risk
related to residential and commercial mortgage banking
activities and are considered economic hedges. Although these
derivatives are used to hedge risk, they are not designated as
accounting hedges because the contracts they are hedging are
typically also carried at fair value on the balance sheet,
resulting in symmetrical accounting treatment for both the
hedging instrument and the hedged item.
Our residential mortgage banking activities consist of
originating, selling and servicing mortgage loans. Residential
mortgage loans that will be sold in the secondary market, and
the related loan commitments, which are considered
derivatives, are accounted for at fair value. Changes in the fair
value of the loans and commitments due to interest rate risk
are hedged with forward loan sale contracts and Treasury and
Eurodollar futures and options. Gains and losses on the loans
and commitments held for sale and the derivatives used to
economically hedge them are included in residential mortgage
noninterest income on the Consolidated Income Statement.
We typically retain the servicing rights related to residential
mortgage loans that we sell. Residential mortgage servicing
rights are accounted for at fair value with changes in fair value
influenced primarily by changes in interest rates. Derivatives
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