PNC Bank 2015 Annual Report Download - page 200

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, 2015, we expect to reclassify from the amount
currently reported in Accumulated other comprehensive
income, net derivative gains of $190 million pretax, or $124
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, 2015. The maximum length of time over which
forecasted loan cash flows are hedged is 7 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, 2015, we
expect to reclassify from the amount currently reported in
Accumulated other comprehensive income, net derivative
gains of $24 million pretax, or $16 million after-tax, as
adjustments of yield on investment securities. As of
December 31, 2015, the maximum length of time over which
forecasted purchase contracts are hedged is 2 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 2015, 2014 and 2013, 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 114: Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges (a) (b)
Year ended
December 31
In millions 2015 2014 2013
Gains (losses) on derivatives recognized in OCI – (effective portion) $415 $431 $(141)
Less: Gains (losses) reclassified from accumulated OCI into income – (effective portion)
Interest income 293 263 337
Noninterest income (5) 49
Total gains (losses) reclassified from accumulated OCI into income – (effective portion) $288 $263 $ 386
Net unrealized gains (losses) on cash flow hedge derivatives $127 $168 $(527)
(a) All cash flow hedge derivatives are interest rate contracts as of December 31, 2015, December 31, 2014 and December 31, 2013.
(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. Net investment hedge derivatives are classified as
foreign exchange contracts. There were no components of derivative gains or losses excluded from the assessment of the hedge
effectiveness. For 2015, 2014 and 2013, there was no net investment hedge ineffectiveness. Gains (losses) on net investment hedge
derivatives recognized in OCI was net gains of $60 million as of December 31, 2015, net gains of $54 million at December 31,
2014 and net losses of $21 million at December 31, 2013.
Derivatives Not Designated As Hedging Instruments under GAAP
We also enter into derivatives that are not designated as accounting hedges under GAAP.
182 The PNC Financial Services Group, Inc. – Form 10-K