PNC Bank 2011 Annual Report Download - page 100

funds. Included in direct investments are investment activities
of two private equity funds that are consolidated for financial
reporting purposes. The noncontrolling interests of these funds
totaled $241 million as of December 31, 2011. The indirect
private equity funds are not redeemable, but PNC receives
distributions over the life of the partnership from liquidation
of the underlying investments by the investee.
Our unfunded commitments related to private equity totaled
$247 million at December 31, 2011 compared with $319
million at December 31, 2010.
Visa
At December 31, 2011, our investment in Visa Class B
common shares totaled approximately 23 million shares. In
March 2011, Visa funded $400 million to their litigation
escrow account and reduced the conversion ratio of Visa B to
A shares. We consequently recognized our estimated $38
million share of the $400 million as a reduction of our
previously established indemnification liability and a
reduction of noninterest expense. In December 2011, Visa
funded $1.6 billion to their litigation escrow account and
reduced the conversion ratio of Visa B to A shares. We
consequently recognized $32 million as a reduction of our
previously established indemnification liability and a
reduction of noninterest expense. As of December 31, 2011,
our recognized Visa indemnification liability was zero. As we
continue to have an obligation to indemnify Visa for
judgments and settlements for the remaining specified
litigation, we may have additional exposure in the future to the
specified Visa litigation.
As of December 31, 2011, we had recognized $456 million of
our Visa ownership. Based on the December 31, 2011 closing
price of $101.53 for the Visa Class A shares, the market value
of our total investment was approximately $1.0 billion at the
current conversion ratio which considers all litigation funding
by Visa to date. The Visa Class B common shares we own
generally will not be transferable, except under limited
circumstances, until they can be converted into shares of the
publicly traded class of stock, which cannot happen until the
settlement of all of the specified litigation. It is expected that
Visa will continue to adjust the conversion ratio of Visa Class
B to Class A shares in connection with any settlements in
excess of any amounts then in escrow for that purpose and
will also reduce the conversion ratio to the extent that it adds
any funds to the escrow in the future.
Note 23 Commitments and Guarantees in the Notes To
Consolidated Financial Statements in Item 8 of this Report has
further information on our Visa indemnification obligation.
Other Investments
We also make investments in affiliated and non-affiliated
funds with both traditional and alternative investment
strategies. The economic values could be driven by either the
fixed-income market or the equity markets, or both. At
December 31, 2011, other investments totaled $250 million
compared with $318 million at December 31, 2010. We
recognized net gains related to these investments of $1 million
during 2011, compared with $43 million during 2010.
Given the nature of these investments, if market conditions
affecting their valuation were to worsen, we could incur future
losses.
Our unfunded commitments related to other investments
totaled $3 million at December 31, 2011 and $11 million at
December 31, 2010.
I MPACT OF I NFLATION
Our assets and liabilities are primarily financial in nature and
typically have varying maturity dates. Accordingly, future
changes in prices do not affect the obligations to pay or
receive fixed and determinable amounts of money. However,
during periods of inflation, there may be a subsequent impact
affecting certain fixed costs or expenses, an erosion of
consumer and customer purchasing power, and fluctuations in
the needs or demand for our products and services. Should
significant levels of inflation occur, our business could
potentially be impacted by, among other things, reducing our
tolerance for extending credit or causing us to incur additional
credit losses resulting from possible increased default rates.
F INANCIAL D ERIVATIVES
We use a variety of financial derivatives as part of the overall
asset and liability risk management process to help manage
interest rate, market and credit risk inherent in our business
activities. Substantially all such instruments are used to
manage risk related to changes in interest rates. Interest rate
and total return swaps, interest rate caps and floors, swaptions,
options, forwards and futures contracts are the primary
instruments we use for interest rate risk management. We also
enter into derivatives with customers to facilitate their risk
management activities.
Financial derivatives involve, to varying degrees, interest rate,
market and credit risk. For interest rate swaps and total return
swaps, options and futures contracts, only periodic cash
payments and, with respect to options, premiums are
exchanged. Therefore, cash requirements and exposure to
credit risk are significantly less than the notional amount on
these instruments.
Further information on our financial derivatives is presented
in Note 1 Accounting Policies and Note 16 Financial
Derivatives in the Notes To Consolidated Financial
Statements in Item 8 of this Report, which is incorporated here
by reference.
Not all elements of interest rate, market and credit risk are
addressed through the use of financial or other derivatives,
and such instruments may be ineffective for their intended
purposes due to unanticipated market changes, among other
reasons.
The PNC Financial Services Group, Inc. – Form 10-K 91