PNC Bank 2011 Annual Report Download - page 105

established by the protection buyer and protection seller at the
inception of a transaction, and such events include
bankruptcy, insolvency and failure to meet payment
obligations when due. The buyer of the credit derivative pays
a periodic fee in return for a payment by the protection seller
upon the occurrence, if any, of a credit event.
Credit spread – The difference in yield between debt issues of
similar maturity. The excess of yield attributable to credit
spread is often used as a measure of relative creditworthiness,
with a reduction in the credit spread reflecting an
improvement in the borrower’s perceived creditworthiness.
Derivatives – Financial contracts whose value is derived from
changes in publicly traded securities, interest rates, currency
exchange rates or market indices. Derivatives cover a wide
assortment of financial contracts, including but not limited to
forward contracts, futures, options and swaps.
Duration of equity – An estimate of the rate sensitivity of our
economic value of equity. A negative duration of equity is
associated with asset sensitivity (i.e., positioned for rising
interest rates), while a positive value implies liability
sensitivity (i.e., positioned for declining interest rates). For
example, if the duration of equity is +1.5 years, the economic
value of equity declines by 1.5% for each 100 basis point
increase in interest rates.
Earning assets – Assets that generate income, which include:
Federal funds sold; resale agreements; trading securities;
interest-earning deposits with banks; loans held for sale;
loans; investment securities; and certain other assets.
Economic capital – Represents the amount of resources that a
business or business segment should hold to guard against
potentially large losses that could cause insolvency and is
based on a measurement of economic risk. The economic
capital measurement process involves converting a risk
distribution to the capital that is required to support the risk,
consistent with our target credit rating. As such, economic risk
serves as a “common currency” of risk that allows us to
compare different risks on a similar basis.
Effective duration – A measurement, expressed in years, that,
when multiplied by a change in interest rates, would
approximate the percentage change in value of on- and off-
balance sheet positions.
Efficiency – Noninterest expense divided by total revenue.
Fair value – The price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
FICO score – A credit bureau-based industry standard score
created by Fair Isaac Co. which predicts the likelihood of
borrower default. We use FICO scores both in underwriting
and assessing credit risk in our consumer lending portfolio.
Lower FICO scores indicate likely higher risk of default,
while higher FICO scores indicate likely lower risk of default.
FICO scores are updated on a periodic basis.
Foreign exchange contracts – Contracts that provide for the
future receipt and delivery of foreign currency at previously
agreed-upon terms.
Funds transfer pricing – A management accounting
methodology designed to recognize the net interest income
effects of sources and uses of funds provided by the assets and
liabilities of a business segment. We assign these balances
LIBOR-based funding rates at origination that represent the
interest cost for us to raise/invest funds with similar maturity
and repricing structures.
Futures and forward contracts – Contracts in which the buyer
agrees to purchase and the seller agrees to deliver a specific
financial instrument at a predetermined price or yield. May be
settled either in cash or by delivery of the underlying financial
instrument.
GAAP – Accounting principles generally accepted in the
United States of America.
Home Price Index (HPI) – A broad measure of the movement
of single-family house prices in the U.S.
Interest rate floors and caps – Interest rate protection
instruments that involve payment from the protection seller to
the protection buyer of an interest differential, which
represents the difference between a short-term rate (e.g., three-
month LIBOR) and an agreed-upon rate (the strike rate)
applied to a notional principal amount.
Interest rate swap contracts – Contracts that are entered into
primarily as an asset/liability management strategy to reduce
interest rate risk. Interest rate swap contracts are exchanges of
interest rate payments, such as fixed-rate payments for
floating-rate payments, based on notional principal amounts.
Intrinsic value – The difference between the price, if any,
required to be paid for stock issued pursuant to an equity
compensation arrangement and the fair market value of the
underlying stock.
Investment securities – Collectively, securities available for
sale and securities held to maturity.
Leverage ratio – Tier 1 risk-based capital divided by adjusted
average total assets.
LIBOR – Acronym for London InterBank Offered Rate.
LIBOR is the average interest rate charged when banks in the
London wholesale money market (or interbank market)
borrow unsecured funds from each other. LIBOR rates are
used as a benchmark for interest rates on a global basis.
PNC’s product set includes loans priced using LIBOR as a
benchmark.
Loan-to-value ratio (LTV) – A calculation of a loan’s
collateral coverage that is used both in underwriting and
assessing credit risk in our lending portfolio. LTV is the sum
total of loan obligations secured by collateral divided by the
96 The PNC Financial Services Group, Inc. – Form 10-K