PNC Bank 2014 Annual Report Download - page 112

Visa
During 2014, we sold 3.5 million Visa Class B common shares,
in addition to the 13 million shares sold in the previous two
years. We have entered into swap agreements with the purchaser
of the shares as part of these sales. See Note 7 Fair Value in the
Notes To Consolidated Financial Statements in Item 8 of this
Report for additional information. At December 31, 2014, our
investment in Visa Class B common shares totaled
approximately 7 million shares and had a carrying value of $77
million. Based on the December 31, 2014 closing price of
$262.20 for the Visa Class A common shares, the fair value of
our total investment was approximately $742 million at the
current conversion rate, which reflects adjustments in respect of
all litigation funding by Visa to date. The Visa Class B common
shares that we own are transferable only under limited
circumstances (including those applicable to the sales in 2014
and the previous two years) 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.
Note 21 Legal Proceedings and Note 22 Commitments and
Guarantees in the Notes To Consolidated Financial Statements
in Item 8 of this Report have additional information regarding
the October 2007 Visa restructuring, our involvement with
judgment and loss sharing agreements with Visa and certain
other banks, and the status of pending interchange litigation.
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, 2014, other investments totaled $155 million
compared with $234 million at December 31, 2013. We
recognized net gains related to these investments of $19
million during 2014, compared with $39 million during 2013.
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 were
immaterial at both December 31, 2014 and December 31, 2013.
See the Supervision and Regulation section of Item 1 Business
and Item 1A Risk Factors of this Report for additional
information on the potential impact of the Volcker Rule on
PNC’s investments in and relationships with private funds that
are covered by that rule, as well as PNC’s ability to maximize
the value of its investments in such funds.
Impact of Inflation
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 need 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.
Financial Derivatives
We use a variety of financial derivatives as part of the overall
asset and liability risk management process to help manage
exposure to 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, 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, Note 7 Fair Value and Note 15
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 market and credit risk are addressed
through the use of financial derivatives, and such instruments
may be ineffective for their intended purposes due to
unanticipated market changes, among other reasons.
94 The PNC Financial Services Group, Inc. – Form 10-K