Financial Derivatives

9 Months Ended

Sep. 30, 2011

Financial Derivatives [Abstract]

Financial Derivatives

Note12Financial Derivatives

We use derivative financial instruments (derivatives) primarily to help manage exposure to interest rate, market and credit risk and reduce the effects that changes in interest rates may have on net income, fair value of assets and liabilities, and cash flows. We also enter into derivatives with customers to facilitate their risk management activities.

Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract. Derivative transactions are often measured in terms of notional amount, but this amount is generally not exchanged and it is not recorded on the balance sheet. The notional amount is the basis to which the underlying is applied to determine required payments under the derivative contract. The underlying is a referenced interest rate(commonly LIBOR), security price, credit spread or other index. Certain contracts and commitments, such as residential and commercial real estate loan commitments associated with loans to be sold, also qualify as derivative instruments.

All derivatives are carried on our Consolidated Balance Sheet at fair value. Derivative balances are presented on a net basis taking into consideration the effects of legally enforceable master netting agreements. Cash collateral exchanged with counterparties is also netted against the applicable derivative fair values.

Further discussion on how derivatives are accounted for is included in Note 1 Accounting Policies in our 2010Form 10-K.

Derivatives Designated in Hedge Relationships

Certain derivatives used to manage interest rate risk as part of our asset and liability risk management activities are designated as accounting hedges under GAAP. Derivatives hedging the risks associated with changes in the fair value of assets or liabilities are considered fair value hedges, while derivatives hedging the variability of expected future cash flows are considered cash flow hedges. Designating derivatives as accounting hedges allows for gains and losses on those derivatives, to the extent effective, to be recognized in the income statement in the same period the hedged items affect earnings.

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 receipts on the loans. In the 12 months that follow September 30, 2011, we expect to reclassify from the amount currently reported in accumulated other comprehensive income net derivative gains of $416million pretax, or $270 million after-tax, in association with interest receipts on the hedged loans. This amount could differ from amounts actually recognized due to changes in interest rates, hedge dedesignations, and the addition of other hedges subsequent to September 30,2011. The maximum length of time over which forecasted loan cash flows are hedged is 10years. 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 September 30, 2011, we expect to reclassify from the amount currently reported in accumulated other comprehensive loss, net derivative gains of $54 million pretax, or $35million after-tax, as adjustments of yield on investment securities. The maximum length of time we are hedging forecasted purchases is four months. There were no amounts in accumulated other comprehensive income related to the forecasted sale of securities at September 30, 2011.

There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to either cash flow hedge strategy.

During the first nine months of 2011and 2010, 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. The amount of cash flow hedge ineffectiveness recognized in income for the first nine months of 2011 and 2010 was not material to PNC's results of operations.

Fair Value Hedges

We enter into receive-fixed, pay-variable interest rate swaps to hedge changes in the fair value of outstanding fixed-rate debt and borrowings caused by fluctuations in market interest rates. The specific products hedged may includebank notes, Federal Home Loan Bank borrowings, and senior and subordinated debt. We also enter into pay-fixed, receive-variable interest rate swaps, and zero-coupon swaps to hedge changes in the fair value of fixed rate and zero-coupon investment securities caused by fluctuations in market interest rates. The specific products hedged include US Treasury, government agency and other debt securities. For these hedge relationships, we use statistical regression analysis to assess hedge effectiveness at both the inception of the hedge relationship and on an ongoing basis. There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness.

Further detail regarding the notional amounts, fair values and gains and losses recognized related to derivatives used in fair value and cash flow hedge strategies is presented in the tables that follow.

The ineffective portion of the change in value of our fair value hedge derivatives resulted in net losses of $15million for the first nine monthsof 2011 compared with net losses of $8 million for the first nine months of 2010.

Derivatives Not Designated in Hedge Relationships

We also enter into derivatives that are not designated as accounting hedges under GAAP.

The majority of these derivatives are used to manage risk related to residential and commercial mortgage banking activities and are considered economic hedges. Although these derivatives are used to hedge risk, they are not designated as accounting hedges because the contracts they are hedging are typically also carried at fair value on the balance sheet, resulting in symmetrical accounting treatment for both the hedging instrument and the hedged item.

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 loan sale contracts as well as 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 (including caps, floors, and swaptions), 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.

Certain commercial mortgage loans are also sold into the secondary market as part of our commercial mortgage banking activities and 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.

The residential and commercial 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, foreign exchange contracts, and equity contracts. We primarily manage our market risk exposure from customer transactions by entering into offsetting derivative transactions with third-party dealers. Gains and losses on customer-related derivatives are included in other noninterest income.

The derivatives portfolio also includes derivatives used for other risk management activities. These derivatives are entered into based on stated risk management objectives.

This segment of the portfolio includes credit default swaps (CDS) used to mitigate the risk of economic loss on a portion of our loan exposure. We also sell loss protection to mitigate the net premium cost and the impact of mark-to-market accounting on CDS purchases to hedge the loan portfolio. 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.

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. At September 30, 2011, the fair value of the written caps and floors liability on our Consolidated Balance Sheet was $7 million compared with $15 million at December 31, 2010. Our ultimate obligation under written options is based on future market conditions and is only quantifiable at settlement.

Further detail regarding the derivatives not designated in hedging relationships is presented in the tables that follow.

Derivative Counterparty Credit Risk

By entering into derivative contracts we are exposed to credit risk. We seek to minimize credit risk through internal credit approvals, limits, monitoring procedures, executing master netting agreements and collateral requirements. We generally enter into transactions with counterparties that carry high quality credit ratings. Nonperformance risk including credit risk is included in the determination of the estimated net fair value.

We generally have established agreements with our major derivative dealer counterparties that provide for exchanges of marketable securities or cash to collateralize either party's positions. At September 30, 2011, we held cash, US government securities and mortgage-backed securities totaling $1.3billion under these agreements. We pledged cash of $793million under these agreements. To the extent not netted against derivative fair values under a master netting agreement, cash pledged is included in Other assets and cash held is included in Other borrowed funds on our Consolidated Balance Sheet.

The credit risk associated with derivatives executed with customers is essentially the same as that involved in extending loans and is subject to normal credit policies. We may obtain collateral based on our assessment of the customer's credit quality.

We periodically enter into risk participation agreements to share some of the credit exposure with other counterparties related to interest rate derivative contracts or to take on credit exposure to generate revenue. We will make/receive payments under these agreements if a customer defaults on its obligation to perform under certain derivative swap contracts. Risk participation agreements are included in thederivatives table that follows. Our exposure related to risk participations where we sold protection is discussed in the Credit Derivatives section below.

Contingent Features

Some of PNC's derivative instruments contain provisions that require PNC's debt to maintain an investment grade credit rating from each of the major credit rating agencies. If PNC's debt ratings were to fall below investment grade, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions.

The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on September 30, 2011was $927million for which PNC had posted collateral of $777million in the normal course of business. The maximum amount of collateral PNC would have been required to post if the credit-risk-related contingent features underlying these agreements had been triggered on September 30, 2011, would be an additional $150million.

Derivatives Total Notional or Contractual Amounts and Estimated Net Fair Values
					Asset Derivatives								Liability Derivatives
					September 30, 2011				December 31, 2010				September 30, 2011			December 31, 2010
					Notional/				Notional/				Notional/				Notional/
					Contract		Fair		Contract		Fair		Contract		Fair		Contract		Fair
In millions					Amount		Value (a)		Amount		Value (a)		Amount		Value (b)		Amount		Value (b)
Derivatives designated as hedging
	instruments under GAAP
	Interest rate contracts:
		Cash flow hedges		$	14,683	$	642	$	13,635	$	377	$	1,180	$	5	$	3,167	$	53
		Fair value hedges			9,394		1,322		9,878		878		3,083		127		1,594		32
Total derivatives designated as
	hedging instruments			$	24,077	$	1,964	$	23,513	$	1,255	$	4,263	$	132	$	4,761	$	85
Derivatives not designated as hedging
	instruments under GAAP
Derivatives used for residential
	mortgage banking activities:
Residential mortgage servicing
	Interest rate contracts			$	122,737	$	3,393	$	112,236	$	1,490	$	69,383	$	2,853	$	66,476	$	1,419
Loan sales
	Interest rate contracts				8,036		76		11,765		119		4,400		45		3,585		31
			Subtotal	$	130,773	$	3,469	$	124,001	$	1,609	$	73,783	$	2,898	$	70,061	$	1,450
Derivatives used for commercial
	mortgage banking activities:
	Interest rate contracts			$	1,685	$	69	$	1,159	$	75	$	896	$	90	$	1,813	$	111
	Credit contracts:
		Credit default swaps			95		6		210		8
			Subtotal	$	1,780	$	75	$	1,369	$	83	$	896	$	90	$	1,813	$	111
Derivatives used for
	customer-related activities:
	Interest rate contracts			$	62,607	$	3,778	$	54,060	$	2,611	$	59,434	$	3,869	$	49,619	$	2,703
	Foreign exchange contracts				6,206		285		3,659		149		5,249		204		4,254		155
	Equity contracts				201		16		195		16		142		18		139		19
	Credit contracts:
		Risk participation agreements			1,411		7		1,371		5		1,668		5		1,367		2
			Subtotal	$	70,425	$	4,086	$	59,285	$	2,781	$	66,493	$	4,096	$	55,379	$	2,879
Derivatives used for other risk
	management activities:
	Interest rate contracts			$	1,459	$	6	$	3,420	$	20	$	2,024	$	36	$	1,099	$	9
	Foreign exchange contracts												27		2		32		4
	Credit contracts:
		Credit default swaps			258		8		376		9		140		1		175		1
	Other contracts (c)												111		174		209		396
			Subtotal	$	1,717	$	14	$	3,796	$	29	$	2,302	$	213	$	1,515	$	410
Total derivatives not designated
	as hedging instruments			$	204,695	$	7,644	$	188,451	$	4,502	$	143,474	$	7,297	$	128,768	$	4,850
Total Gross Derivatives				$	228,772	$	9,608	$	211,964	$	5,757	$	147,737	$	7,429	$	133,529	$	4,935
Less: Legally enforceable master
	netting agreements						5,664				3,203				5,664				3,203
Less: Cash collateral							809				659				773				674
Total Net Derivatives						$	3,135			$	1,895			$	992			$	1,058
(a)		Included in Other Assets on our Consolidated Balance Sheet.
(b)		Included in Other Liabilities on our Consolidated Balance Sheet.
(c)		Includes PNC's obligation to fund a portion of certain BlackRock LTIP programs.

Gains (losses) on derivative instruments and related hedged items follow:
Derivatives Designated in GAAP Hedge Relationships – Fair Value Hedges
				September 30, 2011				September 30, 2010
					Gain (Loss)				Gain (Loss)
			Gain		on Related		Gain		on Related
			(Loss) on		Hedged		(Loss) on		Hedged
			Derivatives		Items		Derivatives		Items
			Recognized		Recognized		Recognized		Recognized
Nine months ended			in Income		in Income		in Income		in Income
In millions	Hedged Items	Location	Amount		Amount		Amount		Amount
Interest rate contracts	US Treasury and	Investment securities
	Government Agencies	(interest income)
	Securities		$	(154)	$	161	$	(75)	$	71
Interest rate contracts	Other Debt Securities	Investment securities
		(interest income)		(24)		24
Interest rate contracts	Federal Home Loan	Borrowed funds
	Bank borrowings	(interest expense)						(65)		63
Interest rate contracts	Subordinated debt	Borrowed funds
		(interest expense)		223		(236)		395		(409)
Interest rate contracts	Bank notes and	Borrowed funds
	senior debt	(interest expense)		269		(278)		359		(347)
Total			$	314	$	(329)	$	614	$	(622)
				September 30, 2011				September 30, 2010
					Gain (Loss)				Gain (Loss)
			Gain		on Related		Gain		on Related
			(Loss) on		Hedged		(Loss) on		Hedged
			Derivatives		Items		Derivatives		Items
			Recognized		Recognized		Recognized		Recognized
Three months ended			in Income		in Income		in Income		in Income
In millions	Hedged Items	Location	Amount		Amount		Amount		Amount
Interest rate contracts	US Treasury and	Investment securities
	Government Agencies	(interest income)
	Securities		$	(129)	$	135	$	(48)	$	45
Interest rate contracts	Other Debt Securities	Investment securities
		(interest income)		(15)		15
Interest rate contracts	Federal Home Loan	Borrowed funds
	Bank borrowings	(interest expense)						(17)		16
Interest rate contracts	Subordinated debt	Borrowed funds
		(interest expense)		193		(193)		135		(137)
Interest rate contracts	Bank notes and	Borrowed funds
	senior debt	(interest expense)		221		(220)		145		(149)
Total			$	270	$	(263)	$	215	$	(225)

Derivatives Designated in GAAP Hedge Relationships – Cash Flow Hedges
		Gain (Loss) on Derivatives		Gain (Loss) Reclassified from Accumulated			Gain (Loss) Recognized in Income
Nine months ended		Recognized in OCI		OCI into Income			on Derivatives
In millions		(Effective Portion)		(Effective Portion)			(Ineffective Portion)
				Location	Amount		Location	Amount
September 30, 2011	Interest rate contracts	$	703	Interest income	$	332	Interest income
				Noninterest income		41
September 30, 2010	Interest rate contracts	$	1,066	Interest income	$	259	Interest income
				Noninterest income		33
		Gain (Loss) on Derivatives		Gain (Loss) Reclassified from Accumulated			Gain (Loss) Recognized in Income
Three months ended		Recognized in OCI		OCI into Income			on Derivatives
In millions		(Effective Portion)		(Effective Portion)			(Ineffective Portion)
				Location	Amount		Location	Amount
September 30, 2011	Interest rate contracts	$	423	Interest income	$	120	Interest income
				Noninterest income		8
September 30, 2010	Interest rate contracts	$	341	Interest income	$	84	Interest income	$	(2)
				Noninterest income		8

Derivatives Not Designated as Hedging Instruments under GAAP
				Three months ended			Nine months ended
				September 30				September 30
In millions				2011		2010		2011		2010
Derivatives used for residential mortgage banking activities:
Residential mortgage servicing
	Interest rate contracts		$	339	$	231	$	504	$	652
Loan sales
	Interest rate contracts			(12)		(15)		(15)		(92)
		Gains (losses) included in residential mortgage banking activities (a)	$	327	$	216	$	489	$	560
Derivatives used for commercial mortgage banking activities:
	Interest rate contracts		$	(7)	$	(17)	$	(12)	$	(88)
	Credit contracts			4		(9)		8		(18)
		Gains (losses) from commercial mortgage banking activities (b)	$	(3)	$	(26)	$	(4)	$	(106)
Derivatives used for customer-related activities:
	Interest rate contracts		$	6	$	(12)	$	46	$	(39)
	Foreign exchange contracts			42		22		64		28
	Equity contracts			1		(1)		(2)
	Credit contracts			2				4		(2)
		Gains (losses) from customer-related activities (b)	$	51	$	9	$	112	$	(13)
Derivatives used for other risk management activities:
	Interest rate contracts		$	(40)		(2)	$	(42)	$	(16)
	Foreign exchange contracts			3		(5)				(3)
	Credit contracts			1		1		(1)		5
	Other contracts (c)			80		(56)		50		128
		Gains (losses) from other risk management activities (b)	$	44	$	(62)	$	7	$	114
Total gains (losses) from derivatives not designated as hedging instruments			$	419	$	137	$	604	$	555
(a)		Included in residential mortgage noninterest income.
(b)		Included in other noninterest income.
(c)		Relates to BlackRock LTIP.

Credit Derivatives

The credit derivative underlying is based on the credit risk of a specific entity, entities, or an index. As discussed above, we enter into credit derivatives, specifically credit default swaps and risk participation agreements, as part of our commercial mortgage banking hedging activities and for customer and other risk management purposes. Detail regarding credit default swaps and risk participations sold follows:

Credit Default Swaps
			September 30, 2011					December 31, 2010
						Weighted-					Weighted-
						Average					Average
				Estimated		Remaining			Estimated		Remaining
		Notional		Net Fair		Maturity	Notional		Net Fair		Maturity
Dollars in millions		Amount		Value		In Years	Amount		Value		In Years
Credit Default Swaps – Sold
Single name		$	45	$	1	2.1	$	45	$	4	2.8
Index traded			118			1.9		189		2	2.0
	Total	$	163	$	1	1.9	$	234	$	6	2.2
Credit Default Swaps – Purchased
Single name		$	270	$	6	3.3	$	317	$	2	2.6
Index traded			60		6	37.5		210		8	38.8
	Total	$	330	$	12	9.5	$	527	$	10	17.0
Total		$	493	$	13	7.0	$	761	$	16	12.5

The notional amount of these credit default swaps by credit rating follows:

Credit Ratings of Credit Default Swaps
		September 30,			December 31,
Dollars in millions			2011			2010
Credit Default Swaps – Sold
Investment grade (a)			$	139		$	220
Subinvestment grade (b)				24			14
	Total		$	163		$	234
Credit Default Swaps – Purchased
Investment grade (a)			$	235		$	385
Subinvestment grade (b)				95			142
	Total		$	330		$	527
Total			$	493		$	761
(a)	Investment grade with a rating of BBB-/Baa3 or above based on published rating agency information.
(b)	Subinvestment grade with a rating below BBB-/Baa3 based on published rating agency information.

The referenced/underlying assets for these credit default swaps follow:

Referenced/Underlying Assets of Credit Default Swaps
		Commercial
	Corporate	mortgage-backed
	Debt	securities	Loans
September 30, 2011	75%	12%	13%
December 31, 2010	62%	28%	10%

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 maximum amount we would be required to pay under the credit default swaps in which we sold protection, assuming all referenced underlyings experience a credit event at a total loss, without recoveries, was $163 million at September 30, 2011and$234 million at December 31, 2010.

Risk Participation Agreements

We have sold risk participation agreements with terms ranging from less than 1 year to 25 years. We will be required to make payments under these agreements if a customer defaults on its obligation to perform under certain derivative swap contracts with third parties.

Risk Participation Agreements Sold
					Weighted-Average
	Notional		Estimated		Remaining Maturity
Dollars in millions	Amount		Net Fair Value		In Years
September 30, 2011	$	1,668	$	(5)	7.3
December 31, 2010	$	1,367	$	(2)	2.0

Based on our internal risk rating process of the underlying third parties to the swap contracts, the percentages of the exposure amount of risk participation agreements sold by internal credit rating follow:

Internal Credit Ratings of Risk Participation Agreements Sold
		September 30, 2011		December 31, 2010
Pass (a)		99	%	95	%
Below pass (b)		1	%	5	%
(a)	Indicates the expected risk of default is currently low.
(b)	Indicates a higher degree of risk of default.

Assuming all underlying swap counterparties defaulted at September 30, 2011, the exposure from these agreements would be $146million based on the fair value of the underlying swaps, compared with $49million at December 31, 2010.