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Fair Value
 12 Months Ended
Dec. 31, 2014
Fair Value [Abstract]  
Fair Value

Note 7 Fair Value

Fair Value Measurement

Fair value is defined in GAAP as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date. GAAP focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP establishes a fair value reporting hierarchy to maximize the use of observable inputs when measuring fair value and defines the three levels of inputs as noted below.

Level 1

Fair value is determined using a quoted price in an active market for identical assets or liabilities. Level 1 assets and liabilities may include debt securities, equity securities and listed derivative contracts that are traded in an active exchange market and certain U.S. Treasury securities that are actively traded in over-the-counter markets.

Level 2

Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable for assets or liabilities, either directly or indirectly. The majority of Level 2 assets and liabilities include debt securities, equity securities and listed derivative contracts with quoted prices that are traded in markets that are not active, and certain debt and equity securities and over-the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable inputs.

Level 3

Fair value is estimated using unobservable inputs that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models and discounted cash flow methodologies, or similar techniques for which the significant valuation inputs are not observable and the determination of fair value requires significant management judgment or estimation.

Certain assets which have been adjusted due to impairment are accounted for at lower of amortized cost or fair value on a nonrecurring basis and consist primarily of certain nonaccrual loans, loans held for sale, commercial mortgage servicing rights (in years prior to 2014), equity investments and other assets. These assets, which are generally classified as Level 3, are included in Table 86 in this Note 7.

We characterize active markets as those where transaction volumes are sufficient to provide objective pricing information, with reasonably narrow bid/ask spreads and where dealer quotes received do not vary widely and are based on current information. Inactive markets are typically characterized by low transaction volumes, price quotations that vary substantially among market participants or are not based on current information, wide bid/ask spreads, a significant increase in implied liquidity risk premiums, yields, or performance indicators for observed transactions or quoted prices compared to historical periods, a significant decline or absence of a market for new issuance, or any combination of the above factors. We also consider nonperformance risks including credit risk as part of our valuation methodology for all assets and liabilities measured at fair value.

Any models used to determine fair values or to validate dealer quotes based on the descriptions below are subject to review and independent testing as part of our model validation and internal control testing processes. Our Model Risk Management Committee reviews significant models on at least an annual basis. In addition, the Valuation Committee approves valuation methodologies and reviews the results of independent valuation reviews and processes for assets and liabilities measured at fair value on a recurring basis.

Assets and liabilities measured at fair value, by their nature, result in a higher degree of financial statement volatility. Assets and liabilities classified within Level 3 inherently require the use of various assumptions, estimates and judgments when measuring their fair value. As observable market activity is commonly not available to use when estimating the fair value of Level 3 assets and liabilities, we must estimate fair value using various modeling techniques. These techniques include the use of a variety of inputs/assumptions including credit quality, liquidity, interest rates or other relevant inputs across the entire population of our Level 3 assets and liabilities. Changes in the significant underlying factors or assumptions (either an increase or a decrease) in any of these areas underlying our estimates may result in a significant increase/decrease in the Level 3 fair value measurement of a particular asset and/or liability from period to period.

Financial Instruments Accounted For at Fair Value on a Recurring Basis

Securities Available for Sale and Trading Securities

Securities accounted for at fair value include both the available for sale and trading portfolios. We primarily use prices obtained from pricing services, dealer quotes, or recent trades to determine the fair value of securities. As of December 31, 2014, 78% of the positions in these portfolios were priced by using pricing services provided by third-party vendors. The third-party vendors use a variety of methods when pricing securities that incorporate relevant market data to arrive at an estimate of what a buyer in the marketplace would pay for a security under current market conditions. One of the vendor’s prices are set with reference to market activity for highly liquid assets, such as U.S. Treasury and agency securities and agency residential mortgage-backed securities, and matrix pricing for other asset classes, such as commercial mortgage-backed and other asset-backed securities. Another vendor primarily uses discounted cash flow pricing models considering adjustments for spreads and prepayments for the instruments we value using this service, such as non-agency residential mortgage-backed securities, agency adjustable rate mortgage securities, agency collateralized mortgage obligations (CMOs), commercial mortgage-backed securities and municipal bonds. The vendors we use provide pricing services on a global basis and have quality management processes in place to monitor the integrity of the valuation inputs and the prices provided to users, including procedures to consider and incorporate information received from pricing service users who may challenge a price. We monitor and validate the reliability of vendor pricing on an ongoing basis through pricing methodology reviews, by performing detailed reviews of the assumptions and inputs used by the vendor to price individual securities, and through price validation testing. Price validation testing is performed independent of the risk-taking function and involves corroborating the prices received from third-party vendors with prices from another third-party source, by reviewing valuations of comparable instruments, by comparison to internal valuations, or by reference to recent sales of similar securities. Securities not priced by one of our pricing vendors may be valued using a dealer quote. Dealer quotes received are typically non-binding. Securities priced using a dealer quote are subject to corroboration either with another dealer quote, by comparison to similar securities priced by either a third-party vendor or another dealer, or through internal valuation in order to validate that the quote is representative of the market. Security prices are also validated through actual cash settlement upon sale of a security.

Securities are classified within the fair value hierarchy after giving consideration to the activity level in the market for the security type and the observability of the inputs used to determine the fair value. When a quoted price in an active market exists for the identical security, this price is used to determine fair value and the security is classified within Level 1 of the hierarchy. Level 1 securities include certain U.S. Treasury securities and exchange-traded equities. When a quoted price in an active market for the identical security is not available, fair value is estimated using either an alternative market approach, such as a recent trade or matrix pricing, or an income approach, such as a discounted cash flow pricing model. If the inputs to the valuation are based primarily on market observable information, then the security is classified within Level 2 of the hierarchy. Level 2 securities include agency debt securities, agency residential mortgage-backed securities, agency and non-agency commercial mortgage-backed securities, certain non-agency residential mortgage-backed securities, asset-backed securities collateralized by non-mortgage-related consumer loans, municipal securities, and other debt securities. Level 2 securities are predominantly priced by third parties, either a pricing vendor or dealer.

In certain cases where there is limited activity or less transparency around the inputs to the valuation, securities are classified within Level 3 of the hierarchy. Securities classified as Level 3 consist primarily of non-agency residential mortgage-backed and asset-backed securities collateralized by first- and second-lien residential mortgage loans. Fair value for these securities is primarily estimated using pricing obtained from third-party vendors. In some cases, fair value is estimated using a dealer quote, by reference to prices of securities of a similar vintage and collateral type or by reference to recent sales of similar securities. Market activity for these security types is limited with little price transparency. As a result, these securities are generally valued by the third-party vendor using a discounted cash flow approach that incorporates observable market activity where available. Significant inputs to the valuation include prepayment projections and credit loss assumptions (default rate and loss severity) and discount rates that are deemed representative of current market conditions. The discount rates used incorporate a spread over the benchmark curve that takes into consideration liquidity risk and potential credit risk not already included in the credit loss assumptions. Significant increases (decreases) in any of those assumptions in isolation would result in a significantly lower (higher) fair value measurement. Prepayment estimates generally increase when market interest rates decline and decrease when market interest rates rise. Credit loss estimates are driven by the ability of borrowers to pay their loans and housing market prices and are impacted by changes in overall macroeconomic conditions, typically increasing when economic conditions worsen and decreasing when conditions improve. An increase in the estimated prepayment rate typically results in a decrease in estimated credit losses and vice versa. Discount rates typically increase when market interest rates increase and/or credit and liquidity risks increase. Similarly, discount rates typically decrease when market interest rates decline and/or credit and liquidity conditions improve. Price validation procedures performed for these securities include comparing current prices to historical pricing trends by collateral type and vintage, and by obtaining corroborating prices from another third-party source.

Certain infrequently traded debt securities within the State and municipal and Other debt securities available-for-sale and Trading securities categories are also classified in Level 3. The significant unobservable inputs used to estimate the fair value of these securities include an estimate of expected credit losses and a discount for liquidity risk. These inputs are incorporated into the fair value measurement by either increasing the spread over the benchmark curve or by applying a credit and liquidity discount to the par value of the security. Significant increases (decreases) in credit and/or liquidity risk could result in a significantly lower (higher) fair value estimate.

Financial Derivatives

Exchange-traded derivatives are valued using quoted market prices and are classified as Level 1. However, the majority of derivatives that we enter into are executed over-the-counter and are valued using internal models. These derivatives are primarily classified as Level 2 as the readily observable market inputs to these models are validated to external sources. The external sources for these inputs include industry pricing services, or are corroborated through recent trades, dealer quotes, yield curves, implied volatility or other market-related data. Level 2 financial derivatives are primarily estimated using a combination of Eurodollar future prices and observable benchmark interest rate swaps to construct projected discounted cash flows. Financial derivatives that are priced using significant management judgment or assumptions are classified as Level 3.

Fair value information for Level 3 financial derivatives is presented separately for interest rate contracts and other contracts. Interest rate contracts include residential and commercial mortgage interest rate lock commitments and certain interest rate options. Other contracts include risk participation agreements, swaps related to the sale of certain Visa Class B common shares and other types of contracts.

The fair values of residential mortgage loan commitment assets as of December 31, 2014 and 2013 are included in the Insignificant Level 3 assets, net of liabilities line item in Table 85 in this Note 7. Significant unobservable inputs for these commitments include the probability of funding and embedded servicing. The probability of funding for residential mortgage loan commitments represents the expected proportion of loan commitments in the pipeline that will fund. Additionally, embedded in the market price of the underlying loan is a value for retaining servicing of the loan once it is sold. Significant increases (decreases) in the fair value of a residential mortgage loan commitment asset (liability) result when the probability of funding increases (decreases) and when the embedded servicing value increases (decreases).

The fair values of commercial mortgage loan commitment assets and liabilities as of December 31, 2014 and 2013 are included in the Insignificant Level 3 assets, net of liabilities line item in Table 85 in this Note 7. Significant unobservable inputs for these commitments include spread over the benchmark interest rate and the estimated servicing cash flows for loans sold to the agencies with servicing retained. The spread over the benchmark curve reflects management assumptions regarding credit and liquidity risks. Significant increases (decreases) in the fair value of commercial mortgage loan commitments result when the spread over the benchmark curve decreases (increases) or the estimated servicing cash flows for loans sold to the agencies with servicing retained increases (decreases).

The fair values of interest rate option assets and liabilities as of December 31, 2014 and 2013 are included in the Insignificant Level 3 assets, net of liabilities line item in Table 85 in this Note 7. The significant unobservable input used in the fair value measurement of the interest rate options is expected interest rate volatility. Significant increases (decreases) in interest rate volatility would result in a significantly higher (lower) fair value measurement.

The fair values of risk participation agreement assets and liabilities as of December 31, 2014 and 2013 are included in the Insignificant Level 3 assets, net of liabilities line item in Table 85 in this Note 7. The significant unobservable inputs used in the fair value measurement of risk participation agreements are probability of default and loss severity. Significant increases (decreases) in probability of default and loss severity would result in a significantly higher (lower) fair value measurement.

In connection with the sales of portions of our Visa Class B common shares, we entered into swap agreements with the purchaser of the shares to account for any future risk of converting Class B common shares to Class A common shares and to account for the corresponding change in value to the Class B shares. These adjustments result from resolution of the specified litigation or the changes in the amount in the litigation escrow account funded by Visa as well as from changes in the estimated litigation resolution date (see Note 21 Legal Proceedings and Note 22 Commitments and Guarantees for additional information). These swaps also require payments calculated by reference to the market price of the Class A common shares and a fixed rate of interest. The swaps are classified as Level 3 instruments and the fair values of the liability positions totaled $135 million at December 31, 2014 and $90 million at December 31, 2013, respectively. The fair values of the swap agreements are determined using a discounted cash flow methodology. The significant unobservable inputs to the valuations are estimated changes in the conversion rate of the Class B common shares into Class A common shares and the estimated growth rate of the Class A share price. A decrease in the conversion rate will have a negative impact on the fair value of the swaps and vice versa. Independent of changes in the conversion rate, an increase in the estimated growth rate of the Class A share price will have a negative impact on the fair value of the swaps and vice versa, through its impact on periodic payments due to the counterparty until the maturity dates of the swaps.

The fair values of our derivatives include a credit valuation adjustment (CVA) to reflect our own and our counterparties’ nonperformance risk. Our CVA is computed using new loan pricing and considers externally available bond spreads, in conjunction with internal historical recovery observations.

Residential Mortgage Loans Held for Sale

We account for certain residential mortgage loans originated for sale at fair value on a recurring basis. The election of the fair value option aligns the accounting for the residential mortgages with the related hedges. Additionally, we have elected to account for loans repurchased due to breaches of representations and warranties at fair value.

Residential mortgage loans are valued based on quoted market prices, where available, prices for other traded mortgage loans with similar characteristics, and purchase commitments and bid information received from market participants. The prices are adjusted as necessary to include the embedded servicing value in the loans and to take into consideration the specific characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation but are not considered significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans. Accordingly, the majority of residential mortgage loans held for sale are classified as Level 2. This category also includes repurchased and temporarily unsalable residential mortgage loans. These loans are repurchased due to a breach of representations and warranties in the loan sales agreement and typically occur after the loan is in default. The temporarily unsalable loans have an origination defect that makes them currently unable to be sold into the performing loan sales market. Because transaction details regarding sales of this type of loan are often unavailable, unobservable bid information from brokers and investors is heavily relied upon. Accordingly, based on the significance of unobservable inputs, these loans are classified as Level 3.

Trading Loans

We have elected to account for certain trading loans at fair value. The fair value for trading loans is based on pricing from average bid broker quotes received from a loan pricing service, sale commitments, or a model based on indications received in marketing the credit or on the loan’s characteristics in comparison to market data on similar loans. These instruments are primarily classified as Level 2.

Commercial Mortgage Servicing Rights

As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial mortgage servicing rights (MSRs) at fair value in order to eliminate any potential measurement mismatch between our economic hedges and the commercial MSRs. We recognize recurring gains/(losses) on changes in the fair value of commercial MSRs as a result of the election. Assumptions incorporated into the commercial valuation model reflect management’s best estimate of factors that a market participant would use in valuing the commercial MSRs. Although sales of commercial MSRs do occur, commercial MSRs do not trade in an active, open market with readily observable prices so the precise terms and conditions of sales are not available. Due to the nature of the valuation inputs and the limited availability of market pricing, commercial MSRs are classified as Level 3.

The fair value of commercial MSRs is estimated by using a discounted cash flow model incorporating unobservable inputs for assumptions such as constant prepayment rates, discount rates and other factors. Significant increases/(decreases) in constant prepayment rates and discount rates would result in significantly lower/(higher) commercial MSR value determined based on current market conditions and expectations.

Residential Mortgage Servicing Rights

Residential MSRs are carried at fair value on a recurring basis. Assumptions incorporated into the residential MSRs valuation model reflect management’s best estimate of factors that a market participant would use in valuing the residential MSRs. Although sales of residential MSRs do occur, residential MSRs do not trade in an active, open market with readily observable prices so the precise terms and conditions of sales are not available. As a benchmark for the reasonableness of its residential MSRs fair value, PNC obtained opinions of value from independent parties (“brokers”). These brokers provided a range (+/- 10 bps) based upon their own discounted cash flow calculations of our portfolio that reflect conditions in the secondary market and any recently executed servicing transactions. PNC compares its internally-developed residential MSRs value to the ranges of values received from the brokers. If our residential MSRs fair value falls outside of the brokers’ ranges, management will assess whether a valuation adjustment is warranted. For the periods presented, PNC’s residential MSRs value did not fall outside of the brokers’ ranges. We consider our residential MSRs value to represent a reasonable estimate of fair value. Due to the nature of the unobservable valuation inputs, residential MSRs are classified as Level 3.

The significant unobservable inputs used in the fair value measurement of residential MSRs are constant prepayment rates and spread over the benchmark curve. Significant increases (decreases) in prepayment rates and spread over the benchmark curve would result in lower (higher) fair market value of residential MSRs.

Commercial Mortgage Loans Held for Sale

We account for certain commercial mortgage loans classified as held for sale in whole loan transactions at fair value. In addition, as of September 1, 2014, we have elected to apply the fair value option to commercial mortgage loans held for sale to agencies. This election applies to all new commercial mortgage loans held for sale originated for sale to the agencies effective on or after September 1, 2014. The election of the fair value option aligns the accounting for the commercial mortgages with the related commitments to sell the loans.

We determine the fair value of commercial mortgage loans held for sale based upon discounted cash flows. Fair value is determined using sale valuation assumptions that management believes a market participant would use in pricing the loans. Valuation assumptions may include observable inputs based on the benchmark interest rate swap curves, whole loan sales and agency sales transactions. The significant unobservable inputs are management’s assumption of the spread applied to the benchmark rate and the estimated servicing cash flows for loans sold to the agencies with servicing retained. The spread over the benchmark curve includes management’s assumptions of the impact of credit and liquidity risk. Significant increases (decreases) in the spread applied to the benchmark would result in a significantly lower (higher) asset value. The wide range of the spread over the benchmark curve is due to the varying risk and underlying property characteristics within our portfolio. Significant increases (decreases) in the estimated servicing cash flows would result in significantly higher (lower) asset value. Based on the significance of unobservable inputs, we classified this portfolio as Level 3.

Equity Investments

The valuation of direct and indirect private equity investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such investments. The carrying values of direct and affiliated partnership interests reflect the expected exit price and are based on various techniques including multiples of adjusted earnings of the entity, independent appraisals, anticipated financing and sale transactions with third parties, or the pricing used to value the entity in a recent financing transaction. A multiple of adjusted earnings calculation is the valuation technique utilized most frequently and the multiple of earnings is the primary and most significant unobservable input used in such calculation. The multiple of earnings is utilized in conjunction with portfolio company financial results and our ownership interest in portfolio company securities to determine PNC’s interest in the enterprise value of the portfolio company. Significant decreases (increases) in the multiple of earnings could result in a significantly lower (higher) fair value measurement. The magnitude of the change in fair value is dependent on the significance of the change in the multiple of earnings and the significance of portfolio company adjusted earnings. Valuation inputs or analysis are supported by portfolio company or market documentation. Due to the size, private and unique nature of each portfolio company, lack of liquidity and the long-term nature of investments, relevant benchmarking is not always feasible. A valuation committee reviews the portfolio company valuations on a quarterly basis and oversight is provided by senior management of the business.

We value indirect investments in private equity funds based on net asset value as provided in the financial statements that we receive from their managers. Due to the time lag in our receipt of the financial information and based on a review of investments and valuation techniques applied, adjustments to the manager-provided value are made when available recent portfolio company information or market information indicates a significant change in value from that provided by the manager of the fund. These investments are classified as Level 3.

Customer Resale Agreements

We have elected to account for structured resale agreements, which are economically hedged using free-standing financial derivatives, at fair value. The fair value for structured resale agreements is determined using a model that includes observable market data such as interest rates as inputs. Readily observable market inputs to this model can be validated to external sources, including yield curves, implied volatility or other market-related data. These instruments are classified as Level 2.

Loans

Loans accounted for at fair value consist primarily of residential mortgage loans. These loans are generally valued similarly to residential mortgage loans held for sale and are classified as Level 2. However, similar to residential mortgage loans held for sale, if these loans are repurchased and unsalable, they are classified as Level 3. In addition, repurchased VA loans, where only a portion of the principal will be reimbursed, are classified as Level 3. The fair value is determined using a discounted cash flow calculation based on our historical loss rate. Due to the unobservable nature of this pool level approach, these loans are classified as Level 3. Significant increases (decreases) in these assumptions would result in a significantly lower (higher) fair value measurement.

During 2013, we elected to account for certain home equity lines of credit at fair value. These loans are classified as Level 3. This category also includes repurchased brokered home equity loans. These loans are repurchased due to a breach of representations or warranties in the loan sales agreement and occur typically after the loan is in default. Similar to existing loans classified as Level 3 due to being repurchased and unsalable, the fair value price is based on bids and market observations of transactions of similar vintage. Because transaction details regarding the credit and underwriting quality are often unavailable, unobservable bid information from brokers and investors is heavily relied upon. Accordingly, based on the significance of unobservable inputs, these loans are classified as Level 3. The fair value of these loans is included in the Loans – Home equity line item in Table 85 in this Note 7.

Significant inputs to the valuation of residential mortgage loans include credit and liquidity discount, cumulative default rate, loss severity and gross discount rate and are deemed representative of current market conditions. Significant increases (decreases) in an assumption would result in a significantly lower (higher) fair value measurement.

BlackRock Series C Preferred Stock

We have elected to account for the shares of BlackRock Series C Preferred Stock received in a stock exchange with BlackRock at fair value. On January 31, 2013, we transferred .2 million shares to BlackRock pursuant to our obligation to partially fund a portion of certain BlackRock LTIP programs. After this transfer and at December 31, 2014, we hold approximately 1.3 million shares of BlackRock Series C Preferred Stock, which are available to fund our obligation in connection with the BlackRock LTIP programs. The Series C Preferred Stock economically hedges the BlackRock LTIP liability that is accounted for as a derivative. The fair value of the Series C Preferred Stock is determined using a third-party modeling approach, which includes both observable and unobservable inputs. This approach considers expectations of a default/liquidation event and the use of liquidity discounts based on our inability to sell the security at a fair, open market price in a timely manner. Although dividends are equal to common shares and other preferred series, significant transfer restrictions exist on our Series C shares for any purpose other than to satisfy the BlackRock LTIP obligation. Due to the significance of unobservable inputs, this security is classified as Level 3. Significant increases (decreases) in the liquidity discount would result in a significantly lower (higher) asset value for the BlackRock Series C and vice versa for the BlackRock LTIP liability.

Other Assets and Liabilities

We have entered into a prepaid forward contract with a financial institution to mitigate the risk on a portion of PNC’s deferred compensation, supplemental incentive savings plan liabilities and certain stock based compensation awards that are based on PNC’s stock price and are subject to market risk. The prepaid forward contract is initially valued at the transaction price and is subsequently valued by reference to the market price of PNC’s stock and is recorded in either Other Assets or Other Liabilities at fair value and is classified as Level 2. In addition, deferred compensation and supplemental incentive savings plan participants may also invest based on fixed income and equity-based funds. PNC utilizes a Rabbi Trust to hedge the returns by purchasing similar funds on which the participant returns are based. The Rabbi Trust balances are recorded in Other Assets at fair value using the quoted market price. These assets are primarily being classified in Levels 1 and 2. The other asset category also includes FHLB interests and the retained interests related to the Small Business Administration (SBA) securitizations which are classified as Level 3. The other liabilities category includes a contingent liability which is classified as Level 3. All Level 3 other assets and liabilities are included in the Insignificant Level 3 assets, net of liabilities line item in Table 85 in this Note 7.

Other Borrowed Funds

During the first quarter of 2013, we elected to account for certain other borrowed funds consisting primarily of secured debt at fair value. These other borrowed funds are classified as Level 3. Significant unobservable inputs for these borrowed funds include credit and liquidity discount and spread over the benchmark curve. Significant increases (decreases) in these assumptions would result in significantly lower (higher) fair value measurement.

Other borrowed funds also includes the related liability for transferred loans over which PNC regained effective control pursuant to ASC 860. These other borrowed funds are classified as either Level 2 or Level 3 consistent with the corresponding loans described above. All Level 3 amounts are included in the Insignificant Level 3 assets, net of liabilities line item in Table 85 in this Note 7.

Assets and liabilities measured at fair value on a recurring basis, including instruments for which PNC has elected the fair value option, follow.
Table 83: Fair Value Measurements - Recurring Basis Summary
December 31, 2014December 31, 2013
Total Total
In millionsLevel 1Level 2Level 3Fair ValueLevel 1Level 2Level 3Fair Value
Assets
Securities available for sale
U.S. Treasury and government agencies$ 4,795 $ 627 $ 5,422 $ 3,460 $658 $4,118
Residential mortgage-backed
Agency (a) 18,043 18,043 21,714 21,714
Non-agency 144 $ 4,798 4,942 247$5,3585,605
Commercial mortgage-backed
Agency (a) 2,187 2,187 1,7631,763
Non-agency 4,162 4,162 4,0424,042
Asset-backed 4,624 563 5,187 5,1316415,772
State and municipal 1,904 134 2,038 2,2843332,617
Other debt 1,783 30 1,813 2,505382,543
Total debt securities 4,795 33,474 5,525 43,794 3,46038,3446,37048,174
Corporate stocks and other 426 15 441 41716433
Total securities available for sale 5,221 33,489 5,525 44,235 3,87738,3606,370 48,607
Financial derivatives (b) (c)
Interest rate contracts 4 4,874 40 4,918 254,540344,599
Other contracts 314 2 316 1922194
Total financial derivatives 4 5,188 42 5,234 254,732364,793
Residential mortgage loans held for sale (d) 1,255 6 1,261 1,30781,315
Trading securities (e)
Debt (f) 1,340 960 32 2,332 2,159862323,053
Equity 21 21 20 20
Total trading securities 1,361 960 32 2,353 2,179862323,073
Trading loans (b) 30 7 37 6 6
Residential mortgage servicing rights (g) 845 845 1,0871,087
Commercial mortgage servicing rights (g) (h) 506 506
Commercial mortgage loans held for sale (d) 893 893 586586
Equity investments (b) (i)
Direct investments 1,152 1,152 1,0691,069
Indirect investments (j) 469 469 595595
Total equity investments 1,621 1,621 1,6641,664
Customer resale agreements (k) 155 155 207 207
Loans (l) (m) 637 397 1,034 623527 1,150
Other assets (b)
BlackRock Series C Preferred Stock (n) 375 375 332 332
Other 190 226 8 424 209 184 8 401
Total other assets 190 226 383 799 209 184 340 733
Total assets$ 6,776 $ 41,940 $ 10,257 $ 58,973 $ 6,290 $ 46,281 $ 10,650 $ 63,221
Liabilities
Financial derivatives (c) (o)
Interest rate contracts$ 3,260 $ 12 $ 3,272 $ 6 $3,307$13$3,326
BlackRock LTIP 375 375 332332
Other contracts 241 139 380 18294276
Total financial derivatives 3,501 526 4,027 63,4894393,934
Trading securities sold short (p)
Debt $ 1,479 11 1,490 1,34111,342
Total trading securities sold short 1,479 11 1,490 1,34111,342
Other borrowed funds (m) (p) 92 181 273 110199309
Other liabilities (o) 9 9
Total liabilities$ 1,479 $ 3,604 $ 716 $ 5,799 $1,347$3,600$638$5,585
(a)In our third quarter 2014 10-Q, these line items were corrected as of December 31, 2013 due to a misclassification of Government National Mortgage Association (GNMA) securities collateralized by project loans. $1.1 billion was previously reported as residential mortgage-backed agency securities and was reclassified to commercial mortgage-backed agency securities.
(b)Included in Other assets on our Consolidated Balance Sheet.
(c)Amounts at December 31, 2014 and December 31, 2013 are presented gross and are not reduced by the impact of legally enforceable master netting agreements that allow PNC to net positive and negative positions and cash collateral held or placed with the same counterparty. The net asset amounts were $2.6 billion at December 31, 2014 and $1.7 billion at December 31, 2013, and the net liability amounts were $1.4 billion and $.9 billion, respectively.
(d)Included in Loans held for sale on our Consolidated Balance Sheet. PNC has elected the fair value option for certain residential and commercial mortgage loans held for sale.
(e)Fair value includes net unrealized gains of $54 million at December 31, 2014 compared with net unrealized gains of $11 million at December 31, 2013.
(f)Approximately 34% of these securities are residential mortgage-backed securities and 57% are U.S. Treasury and government agencies securities at December 31, 2014. Comparable amounts at December 31, 2013 were 17% and 69%, respectively.
(g)Included in Other intangible assets on our Consolidated Balance Sheet.
(h)As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial MSRs at fair value. Accordingly, beginning with the first quarter of 2014, commercial MSRs are measured at fair value on a recurring basis.
(i)Our adoption of ASU 2013-08, Financial Services - Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements, did not result in a change in classification or status of our accounting for investment companies.
(j)The indirect equity funds are not redeemable, but PNC receives distributions over the life of the partnership from liquidation of the underlying investments by the investee, which we expect to occur over the next twelve years. The amount of unfunded contractual commitments as of December 31, 2014 related to indirect equity investments was $112 million and related to direct equity investments was $28 million, respectively. Comparable amounts at December 31, 2013 were $128 million and $36 million, respectively.
(k)Included in Federal funds sold and resale agreements on our Consolidated Balance Sheet. PNC has elected the fair value option for these items.
(l)Included in Loans on our Consolidated Balance Sheet.
(m)In our third quarter 2014 10-Q, these line items were corrected as of December 31, 2013 to include transferred loans over which PNC regained effective control and the related liabilities that are recorded pursuant to ASC 860. This resulted in a $125 million increase of both Loans and Other borrowed funds as of December 31, 2013.
(n)PNC has elected the fair value option for these shares.
(o)Included in Other liabilities on our Consolidated Balance Sheet.
(p)Included in Other borrowed funds on our Consolidated Balance Sheet.

Reconciliations of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for 2014 and 2013 follow.
Table 84: Reconciliation of Level 3 Assets and Liabilities
Year Ended December 31, 2014
Unrealized
gains (losses)
Total realized / unrealizedon assets and
gains or losses for the period (a) liabilities held on
Included Consolidated
Level 3 InstrumentsFair Valuein Other TransfersTransfersFair ValueBalance Sheet
OnlyDec. 31,Included incomprehensive intoout of Dec. 31,at Dec. 31,
In millions2013Earnings incomePurchasesSalesIssuancesSettlementsLevel 3 (b)Level 3 (b)20142014 (c)
Assets
Securities available for
sale
Residential mortgage-
backed non-agency$ 5,358 $ 120 $ 64 $(821)$ 77 $ 4,798 $(10)
Commercial mortgage 1 (1)
backed non-agency
Asset-backed 641 13 23 (114) 563 (1)
State and municipal 333 (2) 15 (198)$(14) 134
Other debt 38 1 $ 1 $(8)(2) 30
Total securities
available for sale 6,370 133 102 1 (8) (1,136) 77 (14) 5,525 (11)
Financial derivatives 36 226 3 (223) 42 142
Residential mortgage
loans held for sale 8 1 15 (3)(1) 11 (25) 6 1
Trading securities - Debt 32 2 (31) 29 32 2
Trading loans 7 7
Residential mortgage
servicing rights 1,087 (238) 45 $ 85 (134) 845 (231)
Commercial mortgage
servicing rights (53) 43 53 463 (g) 506 (53)
Commercial mortgage
loans held for sale 586 38 1,790 (1,521) 893 6
Equity investments
Direct investments 1,069 184 306 (407) 1,152 134
Indirect investments 595 78 23 (223)(4) 469 74
Total equity
investments 1,664 262 329 (630)(4) 1,621 208
Loans 527 74 120 (153)(86) 20 (105) 397 46
Other assets
BlackRock Series C
Preferred Stock 332 43 375 43
Other 8 8
Total other assets 340 43 383 43
Total assets$ 10,650 $ 488 (e)$ 102 $ 556 $(794)$ 1,928 $(2,673)$ 144 $(144)$ 10,257 $ 153 (f)
Liabilities
Financial derivatives (d)$ 439 $ 222 $ 1 $(136)$ 526 $(51)
Other borrowed funds 199 5 $ 57 (80) 181
Other liabilities 9 9
Total liabilities $ 638 $ 227 (e) $ 1 $ 57 $(207) $ 716 $(51)(f)

Year Ended December 31, 2013
Unrealized
gains (losses)
Total realized / unrealizedon assets and
gains or losses for the period (a) liabilities held on
Included Consolidated
Level 3 InstrumentsFair Valuein Other TransfersTransfersFair ValueBalance Sheet
OnlyDec. 31,Included incomprehensive intoout ofDec. 31,at Dec. 31,
In millions2012Earnings incomePurchasesSalesIssuancesSettlementsLevel 3 (b)Level 3 (b)20132013 (c)
Assets
Securities available for
sale
Residential mortgage-
backed non-agency$ 6,107 $ 189 $ 147 $(1,085)$ 5,358 $(10)
Commercial mortgage-
backed non-agency 3 (3)
Asset-backed 708 9 53 (129) 641 (6)
State and municipal 339 1 2 $ 4 (13) 333
Other debt 48 3 $(10)(3) 38
Total securities
available for sale 7,202 202 202 7 (10)(1,233) 6,370 (16)
Financial derivatives 106 297 4 (369)$(2) 36 166
Residential mortgage
loans held for sale 27 2 61 (3) 4 $ 13 (96) 8 2
Trading securities - Debt 32 32
Residential mortgage
servicing rights 650 366 110 (4)$ 158 (193) 1,087 354
Commercial mortgage
loans held for sale 772 (11)(130)(45) 586 (12)
Equity investments
Direct investments 1,171 141 177 (420) 1,069 62
Indirect investments 642 81 (3) 26 (151) 595 76
Total equity
investments 1,813 222 (3) 203 (571) 1,664 138
Loans (h) 134 46 1 (1) 83 292 (28) 527 34
Other assets
BlackRock Series C
Preferred Stock 243 122 (33) 332 122
Other 9 (1) 8
Total other assets 252 122 (1)(33) 340 122
Total assets$ 10,988 $ 1,246 (e)$ 198 $ 386 $(719)$ 158 $(1,786)$ 305 $(126)$ 10,650 $ 788 (f)
Liabilities
Financial derivatives (d)$ 376 $ 317 $ 2 $(256)$ 439 $ 181
Other borrowed funds (h) 9 175 $ 15 199
Total liabilities$ 376 $ 326 (e)$ 2 $(81)$ 15 $ 638 $ 181 (f)
(a)Losses for assets are bracketed while losses for liabilities are not.
(b)PNC's policy is to recognize transfers in and transfers out as of the end of the reporting period.
(c)The amount of the total gains or losses for the period included in earnings that is attributable to the change in unrealized gains or losses related to those assets and liabilities held at the end of the reporting period.
(d)Includes swaps entered into in connection with sales of certain Visa Class B common shares.
(e)Net gains (realized and unrealized) included in earnings relating to Level 3 assets and liabilities were $261 million for 2014 compared with net gains (realized and unrealized) of $920 million for 2013. These amounts also included amortization and accretion of $146 million for 2014 compared with $217 million for 2013. The amortization and accretion amounts were included in Interest income on the Consolidated Income Statement, and the remaining net gains/(losses) (realized and unrealized) were included in Noninterest income on the Consolidated Income Statement.
(f)Net unrealized gains relating to those assets and liabilities held at the end of the reporting period were $204 million for 2014, compared with net unrealized gains of $607 million for 2013. These amounts were included in Noninterest income on the Consolidated Income Statement.
(g)Settlements relating to commercial MSRs of $552 million represent the fair value as of January 1, 2014 as a result of an irrevocable election to measure all classes of commercial MSRs at fair value. Refer to Note 8 Goodwill and Other Intangible Assets for additional information on commercial MSRs.
(h)These line items were corrected for the year ended December 31, 2013 to include transferred loans over which PNC regained effective control and the related liabilities that are recorded pursuant to ASC 860. This resulted in additional transfers into Level 3 of $15 million for both Loans and Other borrowed funds.

An instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification (transfer) of assets or liabilities between hierarchy levels. PNC’s policy is to recognize transfers in and transfers out as of the end of the reporting period.

During 2014, there were transfers of one available for sale residential mortgage-backed non-agency security and one debt trading security of $77 million and $29 million, respectively, from Level 2 to Level 3 due to valuation inputs that were deemed to be unobservable. Additionally, there were transfers of available for sale state and municipal securities from Level 3 to Level 2 of $14 million due to an increase in valuation inputs that were deemed to be observable. Also during 2014, there were transfers of residential mortgage loans held for sale from Level 2 to Level 3 of $11 million as a result of reduced marketability in the secondary residential mortgage sales market which reduced the observability of valuation inputs. In addition, there were also transfers out of Level 3 residential mortgage loans held for sale and loans of $5 million and $105 million, respectively, primarily due to the transfer of residential mortgage loans held for sale and loans to OREO. Finally, there was approximately $20 million of Level 3 residential mortgage loans held for sale reclassified to Level 3 loans during 2014 due to the loans being reclassified from held for sale loans to held in portfolio loans. This amount was included in Transfers out of Level 3 residential mortgages loans held for sale and Transfers into Level 3 loans within Table 84.

During 2013, there were transfers of residential mortgage loans held for sale and loans from Level 2 to Level 3 of $13 million and $29 million, respectively, as a result of reduced marketability in the secondary residential mortgage sales market which reduced the observability of valuation inputs. In addition, there were transfers of residential mortgage loans of $164 million that were reclassified from Level 2 to Level 3 due to the unobservable nature of the pool level pricing methodology. Also during 2013, there were transfers out of Level 3 residential mortgage loans held for sale and loans of $12 million and $28 million, respectively, primarily due to the transfer of residential mortgage loans held for sale and loans to OREO. In addition, there was approximately $84 million of Level 3 residential mortgage loans held for sale reclassified to Level 3 loans during 2013 due to the loans being reclassified from held for sale loans to held in portfolio loans. This amount was included in Transfers out of Level 3 residential mortgage loans held for sale and Transfers into Level 3 loans within Table 84. Furthermore, there were transfers of $15 million into Level 3 loans and other borrowed funds reflecting the correction to include transferred loans over which PNC regained effective control and the related liabilities recorded pursuant to ASC 860.

Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities follows.
Table 85: Fair Value Measurements - Recurring Quantitative Information
December 31, 2014
Level 3 Instruments Only
Dollars in millionsFair ValueValuation TechniquesUnobservable InputsRange (Weighted Average)
Residential mortgage-backed
non-agency securities$ 4,798 Priced by a third-party vendorConstant prepayment rate (CPR) 1.0%-28.9% (6.8%)(a)
using a discounted cash flowConstant default rate (CDR) 0%-16.7% (5.6%)(a)
pricing model (a)Loss severity 6.1%-100.0% (53.1%)(a)
Spread over the benchmark curve (b)249bps weighted average(a)
Asset-backed securities 563 Priced by a third-party vendorConstant prepayment rate (CPR) 1.0%-15.7% (5.9%)(a)
using a discounted cash flowConstant default rate (CDR) 1.7%-13.9% (7.6%)(a)
pricing model (a)Loss severity 14.6%-100% (73.5%)(a)
Spread over the benchmark curve (b)352bps weighted average(a)
State and municipal securities 132 Discounted cash flowSpread over the benchmark curve (b)55bps-165bps (67bps)
2 Consensus pricing (c)Credit and Liquidity discount0%-20.0% (14.9%)
Other debt securities 30 Consensus pricing (c)Credit and Liquidity discount7.0%-95.0% (88.6%)
Trading securities - Debt 32 Consensus pricing (c)Credit and Liquidity discount0.0%-15.0% (8.0%)
Residential mortgage servicing rights 845 Discounted cash flowConstant prepayment rate (CPR)3.8%-32.7% (11.2%)
Spread over the benchmark curve (b)889bps-1,888bps (1,036bps)
Commercial mortgage servicing 506 Discounted cash flowConstant prepayment rate (CPR)7.0%-16.8% (8.0%)
rightsDiscount rate2.5%-8.6% (6.6%)
Commercial mortgage loans held 893 Discounted cash flowSpread over the benchmark curve (b)37bps-4,025bps (549bps)
for saleEstimated servicing cash flows0.0%-2.0% (1.2%)
Equity investments - Direct investments 1,152 Multiple of adjusted earnings Multiple of earnings3.2x-13.9x (7.7x)
Equity investments - Indirect (d) 469 Net asset valueNet asset value
Loans - Residential real estate 114 Consensus pricing (c)Cumulative default rate2.0%-100% (90.5%)
Loss severity0%-100% (35.6%)
Discount rate5.4%-7.0% (6.4%)
154 Discounted cash flowLoss severity8.0% weighted average
Discount rate3.4% weighted average
Loans - Home equity 129 Consensus pricing (c)Credit and Liquidity discount26.0%-99.0% (51.0%)
BlackRock Series C Preferred Stock 375 Consensus pricing (c)Liquidity discount20.0%
BlackRock LTIP(375) Consensus pricing (c)Liquidity discount20.0%
Swaps related to sales of certain Visa(135)Discounted cash flowEstimated conversion factor of
Class B common sharesClass B shares into Class A shares41.1%
Estimated growth rate of Visa
Class A share price14.8%
Other borrowed funds - non-agency
securitization(166)Consensus pricing (c)Credit and Liquidity discount0%-99.0% (18.0%)
Spread over the benchmark curve (b)113bps
Insignificant Level 3 assets, net of
liabilities (e) 23
Total Level 3 assets, net of liabilities (f)$ 9,541

December 31, 2013
Level 3 Instruments Only
Dollars in millionsFair ValueValuation TechniquesUnobservable InputsRange (Weighted Average)
Residential mortgage-backed
non-agency securities$ 5,358 Priced by a third-party vendorConstant prepayment rate (CPR) 1.0%-32.1% (6.0%)(a)
using a discounted cash flowConstant default rate (CDR) 0%-21.9% (6.6%)(a)
pricing model (a)Loss severity 6.1%-92.9% (52.3%)(a)
Spread over the benchmark curve (b)237bps weighted average(a)
Asset-backed securities 641 Priced by a third-party vendorConstant prepayment rate (CPR) 1.0%-11.1% (5.0%)(a)
using a discounted cash flowConstant default rate (CDR) 1.0%-13.9% (8.7%)(a)
pricing model (a)Loss severity 10.0%-100% (70.1%)(a)
Spread over the benchmark curve (b)326bps weighted average(a)
State and municipal securities 132 Discounted cash flowSpread over the benchmark curve (b)80bps-240bps (97bps)
201 Consensus pricing (c)Credit and Liquidity discount0%-25.0% (8.3%)
Other debt securities 38 Consensus pricing (c)Credit and Liquidity discount7.0%-95.0% (88.4%)
Trading securities - Debt 32 Consensus pricing (c)Credit and Liquidity discount0%-20.0% (8.3%)
Residential mortgage servicing rights 1,087 Discounted cash flowConstant prepayment rate (CPR)2.2%-32.9% (7.6%)
Spread over the benchmark curve (b)889bps-1,888bps (1,024bps)
Commercial mortgage loans held
for sale 586 Discounted cash flowSpread over the benchmark curve (b)460bps-6,655bps (972bps)
Equity investments - Direct investments 1,069 Multiple of adjusted earnings Multiple of earnings4.5x-10.8x (7.2x)
Equity investments - Indirect (d) 595 Net asset valueNet asset value
Loans - Residential real estate 225 Consensus pricing (c)Cumulative default rate2.0%-100% (80.0%)
Loss severity0%-100% (48.4%)
Discount rate12.0%-13.0% (12.2%)
179 Discounted cash flowLoss severity8.0% weighted average
Discount rate10.0% weighted average
Loans - Home equity 123 Consensus pricing (c)Credit and Liquidity discount36.0%-99.0% (55.0%)
BlackRock Series C Preferred Stock 332 Consensus pricing (c)Liquidity discount20.0%
BlackRock LTIP(332) Consensus pricing (c)Liquidity discount20.0%
Swaps related to sales of certain(90)Discounted cash flowEstimated conversion factor of
Visa Class B common sharesClass B shares into Class A shares41.7%
Estimated growth rate of Visa Class
A share price8.6%
Other borrowed funds - non-agency
securitization(184)Consensus pricing (c)Credit and Liquidity discount0%-99.0% (18.0%)
Spread over the benchmark curve (b)13bps
Insignificant Level 3 assets, net of
liabilities (e) 20
Total Level 3 assets, net of liabilities (f)$ 10,012
(a)Level 3 residential mortgage-backed non-agency and asset-backed securities with fair values as of December 31, 2014 totaling $4,081 million and $532 million, respectively, were priced by a third-party vendor using a discounted cash flow pricing model that incorporates consensus pricing, where available. The comparable amounts as of December 31, 2013 were $4,672 million and $610 million, respectively. The significant unobservable inputs for these securities were provided by the third-party vendor and are disclosed in the table. Our procedures to validate the prices provided by the third-party vendor related to these securities are discussed further in the Fair Value Measurement section of this Note 7. Certain Level 3 residential mortgage-backed non-agency and asset-backed securities with fair values as of December 31, 2014 of $717 million and $31 million, respectively, were valued using a pricing source, such as a dealer quote or comparable security price, for which the significant unobservable inputs used to determine the price were not reasonably available. The comparable amounts as of December 31, 2013 were $686 million and $31 million, respectively.
(b)The assumed yield spread over the benchmark curve for each instrument is generally intended to incorporate non-interest-rate risks, such as credit and liquidity risks.
(c)Consensus pricing refers to fair value estimates that are generally internally developed using information such as dealer quotes or other third-party provided valuations or comparable asset prices.
(d)The range on these indirect equity investments has not been disclosed since these investments are recorded at their net asset redemption values.
(e)Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes certain financial derivative assets and liabilities, residential mortgage loans held for sale, trading loans, other assets, other borrowed funds (ROAPs) and other liabilities. For additional information, please see the Fair Value Measurement discussion included in this Note 7.
(f)Consisted of total Level 3 assets of $10,257 million and total Level 3 liabilities of $716 million as of December 31, 2014 and $10,650 million and $638 million as of December 31, 2013, respectively.

Financial Assets Accounted for at Fair Value on a Nonrecurring Basis

We may be required to measure certain other financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment and are included in Table 86 and Table 87.

Nonaccrual Loans

Nonaccrual loans represent the fair value of those loans which have been adjusted due to impairment. The impairment is primarily based on the appraised value of the collateral or LGD percentage. The LGD percentage is used to determine the weighted average loss severity of the nonaccrual loans.

As part of the appraisal process, persons ordering or reviewing appraisals are independent of the asset manager. Appraisals must be provided by licensed or certified appraisers and conform to the Uniform Standards of Professional Appraisal Practice. For loans secured by commercial properties where the underlying collateral is in excess of $250,000, appraisals are obtained at least annually. In certain instances (e.g., physical changes in the property), a more recent appraisal is obtained. Additionally, borrower ordered appraisals are not permitted, and PNC ordered appraisals are regularly reviewed. For loans secured by commercial properties where the underlying collateral is $250,000 and less, there is no requirement to obtain an appraisal. In instances where an appraisal is not obtained, the collateral value is determined consistent with external third-party appraisal standards by an internal person independent of the asset manager. PNC has a real estate valuation services group whose sole function is to manage the real estate appraisal solicitation and evaluation process for commercial loans. All third-party appraisals are reviewed by this group, including consideration of comments/questions on the appraisal by the reviewer, customer relationship manager, credit officer, and underwriter. Upon resolving these comments/questions through discussions with the third-party appraiser, adjustments to the initial appraisal may occur and be incorporated into the final issued appraisal report.

If an appraisal is outdated due to changed project or market conditions, or if the net book value is utilized, management uses an LGD percentage which represents the exposure PNC expects to lose in the event a borrower defaults on an obligation. Accordingly, LGD, which represents the loss severity, is a function of collateral recovery rates and loan-to-value. Those rates are established based upon actual PNC loss experience and external market data. In instances where we have agreed to sell the property to a third party, the fair value is based on the contractual sales price adjusted for costs to sell. In these instances, the most significant unobservable input is the appraised value or the sales price. The estimated costs to sell are incremental direct costs to transact a sale such as broker commissions, legal, closing costs and title transfer fees. The costs must be essential to the sale and would not have been incurred if the decision to sell had not been made. The costs to sell are based on costs associated with our actual sales of commercial and residential OREO and foreclosed assets, which are assessed annually.

Loans Held for Sale

Loans held for sale includes syndicated commercial loan inventory. The fair value of the syndicated commercial loan inventory is primarily determined based on prices provided by a third-party vendor. The third-party vendor prices are based upon dealer quotes. For nonrecurring fair value measurements, these instruments are classified within Level 2. There were no loans held for sale categorized as Level 2 at December 31, 2013.

Prior to September 1, 2014, loans held for sale also included the carrying value of commercial mortgage loans which are intended to be sold to agencies with servicing retained. The fair value of the commercial mortgage loans held for sale is determined using discounted cash flows. Significant observable market data includes the applicable benchmark interest rates. These instruments are classified within Level 3. Significant unobservable inputs include a spread over the benchmark curve and the estimated servicing cash flows for loans sold to the agencies with servicing retained. Significant increases (decreases) to the spread over the benchmark curve would result in a significantly lower (higher) carrying value of the assets. Significant increases (decreases) in the estimated servicing cash flows for loans sold to the agencies with servicing retained would result in significantly higher (lower) carrying value.

Refer to the Fair Value Measurement section of this Note 7 for information on commercial mortgages held for sale to agencies subsequent to our September 1, 2014 election of fair value option.

Equity Investments

Equity investments represent the carrying value of Low Income Housing Tax Credit (LIHTC) investments held for sale calculated using a discounted cash flow model. The significant unobservable input is management’s estimate of required market rate of return. The market rate of return is based on comparison to recent LIHTC sales in the market. Significant increases (decreases) in this input would result in a significantly lower (higher) carrying value of the investments.

Commercial Mortgage Servicing Rights

As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial MSRs at fair value in order to eliminate any potential measurement mismatch between our economic hedges and the commercial MSRs. Refer to the Fair Value Measurement section of this Note 7 regarding the fair value of commercial MSRs.

Prior to 2014, commercial MSRs were initially recorded at fair value and subsequently accounted for at the lower of amortized cost or fair value. They were periodically evaluated for impairment and the amounts in Table 86 reflect an impairment of three strata at December 31, 2013 and two strata at December 31, 2012, respectively. For purposes of impairment, the commercial MSRs were stratified based on asset type, which characterizes the predominant risk of the underlying financial asset. The fair value of commercial MSRs was estimated by using a discounted cash flow model incorporating unobservable inputs for assumptions as to constant prepayment rates, discount rates and other factors. Significant increases (decreases) in constant prepayment rates and discount rates would result in significantly lower (higher) commercial MSR value determined based on current market conditions and expectations.

OREO and Foreclosed Assets

OREO and foreclosed assets represent the carrying value of OREO and foreclosed assets for which valuation adjustments were recorded subsequent to the transfer to OREO and foreclosed assets. Valuation adjustments are based on the fair value less cost to sell of the property. Fair value is based on appraised value or sales price.

The appraisal process for OREO and foreclosed properties is the same as described above for nonaccrual loans. In instances where we have agreed to sell the property to a third party, the fair value is based on the contractual sale price adjusted for costs to sell. The significant unobservable inputs for OREO and foreclosed assets are the appraised value or the sales price. The estimated costs to sell are incremental direct costs to transact a sale such as broker commissions, legal, closing costs and title transfer fees. The costs must be essential to the sale and would not have been incurred if the decision to sell had not been made. The costs to sell are based on costs associated with our sales of commercial and residential OREO and foreclosed assets, which are assessed annually.

Long-Lived Assets Held for Sale

Long-lived assets held for sale represent the carrying value of the asset for which valuation adjustments were recorded during the current year and subsequent to the transfer to Long-lived assets held for sale. Valuation adjustments are based on the fair value of the property less an estimated cost to sell. Fair value is determined either by a recent appraisal, recent sales offer or changes in market or property conditions. Appraisals are provided by licensed or certified appraisers. Where we have agreed to sell the property to a third party, the fair value is based on the contractual sale price. The significant unobservable inputs for Long-lived assets held for sale are the appraised value, the sales price or the changes in market or property conditions. Changes in market or property conditions are subjectively determined by management through observation of the physical condition of the property along with the condition of properties in the surrounding market place. The availability and recent sales of similar properties is also considered. The range of fair values can vary significantly as this category often includes smaller properties such as offsite ATM locations and smaller rural branches up to large commercial buildings, operation centers or urban branches.

Table 86: Fair Value Measurements - Nonrecurring
Fair Value
December 31December 31
In millions20142013
Assets (a)
Nonaccrual loans$54 $ 35
Loans held for sale (b)8 224
Equity investments 17 6
Commercial mortgage servicing rights (c) 543
OREO and foreclosed assets168 181
Long-lived assets held for sale22 51
Total assets$269 $ 1,040
Year ended December 31Gains (Losses)
In millions201420132012
Assets
Nonaccrual loans$ (19)$ (8)$ (68)
Loans held for sale (b) (7) (4)
Equity investments (2) (1)
Commercial mortgage servicing rights (c) 88 (5)
OREO and foreclosed assets (19) (26) (73)
Long-lived assets held for sale (14) (40) (20)
Total assets$ (54)$ 6 $ (170)
(a)All Level 3 as of December 31, 2014 and 2013 except for $8 million included in Loans held for sale which was categorized as Level 2 as of December 31, 2014.
(b)As of September 1, 2014, PNC elected to account for agency loans held for sale at fair value. Accordingly, beginning on September 1, 2014, all new commercial mortgage loans held for sale originated for sale to the agencies are measured at fair value on a recurring basis.
(c)As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial MSRs at fair value. Accordingly, beginning with the first quarter of 2014, commercial MSRs are measured at fair value on a recurring basis.

Quantitative information about the significant unobservable inputs within Level 3 nonrecurring assets follows.
Table 87: Fair Value Measurements - Nonrecurring Quantitative Information
Level 3 Instruments Only
Dollars in millionsFair ValueValuation TechniquesUnobservable InputsRange (Weighted Average)
December 31, 2014
Assets
Nonaccrual loans (a)$ 29 LGD percentage (b)Loss severity2.9%-68.5% (42.1%)
Equity investments 17 Discounted cash flowMarket rate of return6.0%
Other (c) 215 Fair value of property or collateralAppraised value/sales priceNot meaningful
Total Assets$ 261
December 31, 2013
Assets
Nonaccrual loans (a)$ 21 LGD percentage (b)Loss severity7.0%-84.9% (36.6%)
Loans held for sale (d) 224 Discounted cash flowSpread over the benchmark curve (e)35bps-220bps (144bps)
Estimated servicing cash flows.8%-3.5% (2.0%)
Equity investments 6 Discounted cash flowMarket rate of return6.5%
Commercial mortgage 543 Discounted cash flowConstant prepayment rate (CPR)7.1%-11.8% (7.7%)
servicing rights (f) Discount rate5.4%-7.6% (6.7%)
Other (c) 246 Fair value of property or collateralAppraised value/sales priceNot meaningful
Total Assets$ 1,040
(a)The fair value of nonaccrual loans included in this line item is determined based on internal loss rates. The fair value of nonaccrual loans where the fair value is determined based on the appraised value or sales price is included within Other, below.
(b)LGD percentage represents the amount that PNC expects to lose in the event a borrower defaults on an obligation.
(c)Other included Nonaccrual loans of $25 million, OREO and foreclosed assets of $168 million and Long-lived assets held for sale of $22 million as of December 31, 2014. Comparably, as of December 31, 2013, Other included Nonaccrual loans of $14 million, OREO and foreclosed assets of $181 million and Long-lived assets held for sale of $51 million. The fair value of these assets is determined based on appraised value or sales price, the range of which is not meaningful to disclose.
(d)As of September 1, 2014, PNC elected to account for agency loans held for sale at fair value. Accordingly, beginning on September 1, 2014, all new commercial mortgage loans held for sale originated for sale to the agencies are measured at fair value on a recurring basis.
(e)The assumed yield spread over benchmark curve for each instrument is generally intended to incorporate non-interest-rate risks such as credit and liquidity risks.
(f)As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial MSRs at fair value. Accordingly, beginning with the first quarter of 2014, commercial MSRs are measured at fair value on a recurring basis.

Financial Instruments Accounted For Under Fair Value Option

We elect the fair value option to account for certain financial instruments. For more information on these financial instruments for which the fair value option election has been made, please refer to the Fair Value Measurement section of this Note 7. These financial instruments are initially measured at fair value, gains and losses from initial measurement and any changes in fair value are subsequently recognized in earnings. Additional information about the financial instruments for which we elected the fair value option follows.

Customer Resale Agreements

Interest income on structured resale agreements is reported on the Consolidated Income Statement in Other interest income. Changes in fair value due to instrument-specific credit risk for 2014 and 2013 were not material.

Residential Mortgage-Backed Agency Securities with Embedded Derivatives

Interest income on these securities is reported on the Consolidated Income Statement in Other interest income.

Trading Loans

Interest income on trading loans is reported on the Consolidated Income Statement in Other interest income.

Commercial Mortgage Loans Held for Sale

Interest income on these loans is recorded as earned and reported on the Consolidated Income Statement in Other interest income. The impact on earnings of offsetting economic hedges is not reflected in these amounts. Changes in fair value due to instrument-specific credit risk for both 2014 and 2013 were not material.

Residential Mortgage Loans Held for Sale

Interest income on these loans is recorded as earned and reported on the Consolidated Income Statement in Other interest income. Throughout 2014 and 2013, certain residential mortgage loans for which we elected the fair value option were subsequently reclassified to portfolio loans. Changes in fair value due to instrument-specific credit risk for 2014 and 2013 were not material.

Residential Mortgage Loans – Portfolio

Interest income on these loans is recorded as earned and reported on the Consolidated Income Statement in either Loan interest income or Other interest income. Interest income on the Home Equity Lines of Credit for which we elected the fair value option during first quarter 2013 is reported on the Consolidated Income Statement in Loan interest income.

Other Borrowed Funds

Interest expense on the Other borrowed funds for which we have elected the fair value option is reported on the Consolidated Income Statement in Borrowed funds interest expense.

The changes in fair value included in Noninterest income for items for which we elected the fair value option follow.

Table 88: Fair Value Option - Changes in Fair Value (a)
Year ended December 31Gains (Losses)
In millions201420132012
Assets
Customer resale agreements$(3)$(7)$(10)
Residential mortgage-backed agency securities with embedded derivatives (b)13
Trading loans2 3 2
Commercial mortgage loans held for sale50 (10)(5)
Residential mortgage loans held for sale (c)212 213 (223)
Residential mortgage loans – portfolio (c)157 60 7
BlackRock Series C Preferred Stock43 122 33
Liabilities
Other borrowed funds(5)(9)
(a)The impact on earnings of offsetting hedged items or hedging instruments is not reflected in these amounts.
(b)At December 31, 2014, 2013 and 2012, the balance of residential mortgage-backed agency securities with embedded derivatives carried in Trading securities was zero.
(c)Prior periods were corrected for the allocation between Residential mortgage loans held for sale and Residential mortgage loans - portfolio. This resulted in a decrease of $34 million from gains on Residential mortgage loans held for sale and an increase of $33 million to gains on Residential mortgage loans - portfolio for 2013. Comparable amounts for 2012 were a decrease of $43 million from gains on Residential mortgage loans held for sale and an increase of $43 million to gains on Residential mortgage loans - portfolio.

Fair values and aggregate unpaid principal balances of items for which we elected the fair value option follow.
Table 89: Fair Value Option - Fair Value and Principal Balances
Aggregate Unpaid
In millionsFair ValuePrincipal BalanceDifference
December 31, 2014
Assets
Customer resale agreements$155 $148 $ 7
Trading loans37 37
Residential mortgage loans held for sale
Performing loans1,236 1,176 60
Accruing loans 90 days or more past due9 9
Nonaccrual loans16 17 (1)
Total1,261 1,202 59
Commercial mortgage loans held for sale (a)
Performing loans873 908 (35)
Nonaccrual loans20 64 (44)
Total893 972 (79)
Residential mortgage loans - portfolio
Performing loans194 256 (62)
Accruing loans 90 days or more past due (b)570 573 (3)
Nonaccrual loans270 449 (179)
Total1,034 1,278 (244)
Liabilities
Other borrowed funds $273 $312 $ (39)
December 31, 2013
Assets
Customer resale agreements$207 $196 $ 11
Trading loans6 6
Residential mortgage loans held for sale
Performing loans1,298 1,260 38
Accruing loans 90 days or more past due2 2
Nonaccrual loans15 18 (3)
Total1,315 1,280 35
Commercial mortgage loans held for sale (a)
Performing loans583 669 (86)
Nonaccrual loans3 9 (6)
Total586 678 (92)
Residential mortgage loans - portfolio (c)
Performing loans233 332 (99)
Accruing loans 90 days or more past due (b)552 626 (74)
Nonaccrual loans365 598 (233)
Total1,150 1,556 (406)
Liabilities
Other borrowed funds (c) $309 $353 $(44)
(a)There were no accruing loans 90 days or more past due within this category at December 31, 2014 or December 31, 2013.
(b)Included in this population are government insured loans and non-government insured home equity loans. Loans that are insured by the government result in a higher fair value than those that do not have that guarantee.
(c)Prior period amounts were corrected in our third quarter 2014 10-Q to include transferred loans over which PNC regained effective control and the related liabilities that are recorded pursuant to ASC 860. This resulted in increases of $125 million in fair value and $128 million in aggregate unpaid principal balance for both Residential mortgage loans - portfolio and Other borrowed funds as of December 31, 2013.

Additional Fair Value Information Related to Other Financial Instruments

The following table presents the carrying amounts and estimated fair values, including the level within the fair value hierarchy, of all other financial instruments that are not measured on the consolidated financial statements at fair value as of December 31, 2014 and 2013.

Table 90: Additional Fair Value Information Related to Other Financial Instruments
CarryingFair Value
In millionsAmount TotalLevel 1Level 2Level 3
December 31, 2014
Assets
Cash and due from banks$4,360$4,360$4,360
Short-term assets34,38034,380$34,380
Securities held to maturity11,58811,98429211,683$9
Loans held for sale1081085652
Net loans (excludes leases)192,573194,564194,564
Other assets1,8792,5441,802742(a)
Total Assets$244,888$247,940$4,652$47,921$195,367
Liabilities
Demand, savings and money market deposits$210,838$210,838$210,838
Time deposits21,39621,39221,392
Borrowed funds55,32956,01154,574$1,437
Unfunded loan commitments and letters of credit240240240
Total Liabilities$287,803$288,481$286,804$1,677
December 31, 2013
Assets
Cash and due from banks$4,043$4,043$4,043
Short-term assets14,90614,906$14,906
Securities held to maturity11,68711,76524311,505$17
Loans held for sale354355355
Net loans (excludes leases)183,155184,737184,737
Other assets1,7652,5781,607971(a)
Total Assets$215,910$218,384$4,286$28,018$186,080
Liabilities
Demand, savings and money market deposits$197,465$197,465$197,465
Time deposits23,46623,48723,487
Borrowed funds44,77645,60744,320$1,287
Unfunded loan commitments and letters of credit224224224
Total Liabilities$265,931$266,783$265,272$1,511
(a)Represents estimated fair value of Visa Class B common shares, which was estimated solely based upon the December 31, 2014 and December 31, 2013 closing price for the Visa Class A common shares, respectively, and the Visa Class B common share conversion rate, which reflects adjustments in respect of all litigation funding by Visa as of that date. The transfer restrictions on the Visa Class B common shares could impact the aforementioned estimate, until they can be converted to Class A common shares. See Note 22 Commitments and Guarantees for additional information.

The aggregate fair values in the preceding table represent only a portion of the total market value of PNC’s assets and liabilities as, in accordance with the guidance related to fair values of financial instruments, Table 90 excludes the following:

  • financial instruments recorded at fair value on a recurring basis,
  • real and personal property,
  • lease financing,
  • loan customer relationships,
  • deposit customer intangibles,
  • mortgage servicing rights,
  • retail branch networks,
  • fee-based businesses, such as asset management and brokerage, and
  • trademarks and brand names.

We used the following methods and assumptions to estimate the fair value amounts for financial instruments included in Table 90.

General

For short-term financial instruments realizable in three months or less, the carrying amount reported on our Consolidated Balance Sheet approximates fair value. Unless otherwise stated, the rates used in discounted cash flow analyses are based on market yield curves.

Cash and due from banks

The carrying amounts reported on our Consolidated Balance Sheet for cash and due from banks approximate fair values. For purposes of this disclosure only, cash and due from banks includes the following:

  • due from banks, and
  • non-interest-earning deposits with banks.

Short-Term Assets

The carrying amounts reported on our Consolidated Balance Sheet for short-term investments approximate fair values primarily due to their short-term nature. For purposes of this disclosure only, short-term assets include the following:

  • federal funds sold and resale agreements,
  • cash collateral,
  • customers’ acceptances,
  • accrued interest receivable, and
  • interest-earning deposits with banks.

Securities held to maturity

We primarily use prices obtained from pricing services, dealer quotes or recent trades to determine the fair value of securities. As of December 31, 2014, 94% of the positions in the held to maturity portfolio were priced by pricing services provided by third-party vendors. Refer to the Fair Value Measurement section of this Note 7 for additional information relating to our pricing processes and procedures.

Net Loans And Loans Held For Sale

Fair values are estimated based on the discounted value of expected net cash flows incorporating assumptions about prepayment rates, net credit losses and servicing fees. For purchased impaired loans, fair value is assumed to equal PNC’s carrying value, which represents the present value of expected future principal and interest cash flows, as adjusted for any ALLL recorded for these loans. See Note 4 Purchased Loans for additional information. For revolving home equity loans and commercial credit lines, this fair value does not include any amount for new loans or the related fees that will be generated from the existing customer relationships. Nonaccrual loans are valued at their estimated recovery value. Loans are presented net of the ALLL and do not include future accretable discounts related to purchased impaired loans.

Other Assets

Other assets as shown in Table 90 includes equity investments carried at cost as well as FHLB and FRB stock. The aggregate carrying value of our FHLB and FRB stock was $1.8 billion at December 31, 2014 and was $1.6 billion at December 31, 2013, which approximates fair value at each date.

Investments accounted for under the equity method, including our investment in BlackRock, are not included in Table 90.

Deposits

For deposits with no defined maturity, such as noninterest-bearing and interest-bearing demand and interest-bearing money market and savings deposits, carrying values approximate fair values. For time deposits, fair values are estimated by discounting contractual cash flows using current market rates for instruments with similar maturities. The value of long-term relationships with depositors was not taken into account in estimating fair values.

Borrowed Funds

For short-term borrowings, including Federal funds purchased, commercial paper, repurchase agreements, and certain other short-term borrowings and payables, carrying values approximated fair values. For long-term borrowed funds, quoted market prices are used, when available, to estimate fair value. When quoted market prices are not available, fair value is estimated based on current market interest rates and credit spreads for debt with similar terms and maturities.

Unfunded Loan Commitments And Letters Of Credit

The fair value of unfunded loan commitments and letters of credit is determined from a market participant’s view including the impact of changes in interest rates and credit. Because our obligation on substantially all unfunded loan commitments and letters of credit varies with changes in interest rates, these instruments are subject to little fluctuation in fair value due to changes in interest rates. We establish a liability on these facilities related to the creditworthiness of our counterparty.