PNC Bank 2014 Annual Report Download - page 209

(a) Included in Other assets on our Consolidated Balance Sheet.
(b) Included in Other liabilities on our Consolidated Balance Sheet.
(c) Futures contracts settle in cash daily and, therefore, no derivative asset or derivative liability is recognized on our Consolidated Balance Sheet.
(d) Includes PNC’s obligation to fund a portion of certain BlackRock LTIP programs and the swaps entered into in connection with sales of a portion of Visa Class B common shares.
Refer to Note 7 Fair Value for additional information on the Visa swaps.
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
contracts to sell mortgage-backed securities, as well as U.S.
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
used to hedge the fair value of residential mortgage servicing
rights include interest rate futures, swaps, options, and
forward contracts to purchase mortgage-backed securities.
Gains and losses on residential mortgage servicing rights and
the related derivatives used for hedging are included in
Residential mortgage noninterest income.
Commercial mortgage loans held for sale and the related loan
commitments, which are considered derivatives, are accounted
for at fair value. Derivatives used to economically hedge these
loans and commitments from changes in fair value due to
interest rate risk and credit risk include forward loan sale
contracts, interest rate swaps, and credit default swaps. Gains
and losses on the commitments, loans and derivatives are
included in Other noninterest income. Derivatives used to
economically hedge the change in value of commercial
mortgage servicing rights include interest rate futures, swaps
and options. Gains or losses on these derivatives are included
in Corporate services noninterest income.
The residential and commercial mortgage loan commitments
associated with loans to be sold which are accounted for as
derivatives are valued based on the estimated fair value of the
underlying loan and the probability that the loan will fund
within the terms of the commitment. The fair value also takes
into account the fair value of the embedded servicing right.
We offer derivatives to our customers in connection with their
risk management needs. These derivatives primarily consist of
interest rate swaps, interest rate caps, floors, swaptions and
foreign exchange contracts. We primarily manage our market
risk exposure from customer transactions by entering into a
variety of hedging transactions with third-party dealers. Gains
and losses on customer-related derivatives are included in
Other noninterest income.
Included in the customer, mortgage banking risk management,
and other risk management portfolios are written interest-rate
caps and floors entered into with customers and for risk
management purposes. We receive an upfront premium from
the counterparty and are obligated to make payments to the
counterparty if the underlying market interest rate rises above
or falls below a certain level designated in the contract. Our
ultimate obligation under written options is based on future
market conditions.
The derivatives portfolio also includes derivatives used for
other risk management activities. These derivatives are entered
into based on stated risk management objectives and include
credit default swaps (CDSs) used to mitigate the risk of
economic loss on a portion of our loan exposure. We enter into
credit default swaps under which we buy loss protection from
or sell loss protection to a counterparty for the occurrence of a
credit event related to a referenced entity or index. The fair
values of these derivatives typically are based on related credit
spreads. Gains and losses on the derivatives entered into for
other risk management are included in Other noninterest
income. CDSs are included in these derivative tables: Tables
129, 130, 131, 132 and 133.
The PNC Financial Services Group, Inc. – Form 10-K 191