PNC Bank 2014 Annual Report Download - page 207

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 received on the loans. In the 12
months that follow December 31, 2014, we expect to
reclassify from the amount currently reported in Accumulated
other comprehensive income, net derivative gains of $245
million pretax, or $159 million after-tax, in association with
interest received on the hedged loans. This amount could
differ from amounts actually recognized due to changes in
interest rates, hedge de-designations, and the addition of
other hedges subsequent to December 31, 2014. 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
investment securities. 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, 2014, we
expect to reclassify from the amount currently reported in
Accumulated other comprehensive income, net derivative
gains of $26 million pretax, or $17 million after-tax, as
adjustments of yield on investment securities. As of
December 31, 2014, the maximum length of time over which
forecasted purchase contracts are hedged is two months.
There were no components of derivative gains or losses
excluded from the assessment of hedge effectiveness related
to either cash flow hedge strategy.
During 2014, 2013, and 2012, 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.
Further detail regarding gains (losses) on derivatives and related cash flows is presented in the following table:
Table 127: Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges (a) (b)
Year ended
December 31
In millions 2014 2013 2012
Gains (losses) on derivatives recognized in OCI – (effective portion) $431 $(141) $ 312
Less: Gains (losses) reclassified from accumulated OCI into income – (effective portion)
Interest income 263 337 456
Noninterest income –4976
Total gains (losses) reclassified from accumulated OCI into income – (effective portion) 263 386 532
Net unrealized gains (losses) on cash flow hedge derivatives $168 $(527) $(220)
(a) All cash flow hedge derivatives are interest rate contracts as of December 31, 2014, December 31, 2013 and December 31, 2012.
(b) The amount of cash flow hedge ineffectiveness recognized in income was not material for the periods presented.
Net Investment Hedges
We enter into foreign currency forward contracts to hedge non-U.S. Dollar (USD) net investments in foreign subsidiaries against
adverse changes in foreign exchange rates. We assess whether the hedging relationship is highly effective in achieving offsetting
changes in the value of the hedge and hedged item by qualitatively verifying that the critical terms of the hedge and hedged item
match at the inception of the hedging relationship and on an ongoing basis. There were no components of derivative gains or losses
excluded from the assessment of the hedge effectiveness.
For 2014, 2013, and 2012, there was no net investment hedge ineffectiveness.
Further detail on gains (losses) on net investment hedge derivatives is presented in the following table:
Table 128: Gains (Losses) on Derivatives – Net Investment Hedges
Year ended
December 31
In millions 2014 2013 2012
Gains (losses) on derivatives recognized in OCI (effective portion)
Foreign exchange contracts $54 $(21) $(27)
The PNC Financial Services Group, Inc. – Form 10-K 189