PNC Bank 2005 Annual Report Download - page 102

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The weighted-average grant-date fair value of incentive share
and restricted stock awards granted in 2005, 2004 and 2003
was $53.81, $54.46 and $44.23 per share, respectively. We
recognized compensation expense for incentive share and
restricted stock awards totaling $44 million, $25 million and
$20 million in 2005, 2004 and 2003, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Our ESPP has approximately 1.5 million shares available for
issuance. Full-time employees with six months and part-time
employees with 12 mo nths of continuous employment with
us are eligible to participate in the ESPP at the
commencement of the next six-month offering period.
Beginning in June 2003, participants could purchase our
common stock at 95% of the fair market value on the last day
of each six-month offering period. Previously, participants
could purchase our common stock at 85% of the lesser of fair
market value on the first or last day of each offering period.
No charge to earnings is recorded with respect to the ESPP.
Shares issued pursuant to the ESPP were as follows:
Year ended December 31 Shares Price Per Share
2005 138,754 $51.74 and 58.74
2004 156,753 50.43 and 54.57
2003 361,064 35.87 and 51.99
PRO FORMA EFFECTS
A table is included in Note 1 Accounting Policies that sets
forth pro forma net income and basic and diluted earnings
per share as if compensation expense had been recognized
under SFAS 123, as amended, for stock options and the
ESPP for 2005, 2004 and 2003.
For purposes of computing 2005 stock option expense and
pro forma results, we estimated the fair value of stock
options and ESPP shares using the Black-Scholes option
pricing model. The model requires the use of numerous
assumptions, many of which are highly subjective in nature.
Therefore, the pro forma results are estimates of results of
operations as if compensation expense had been recognized
for all stock-based compensation plans and are not
indicative of the impact on future periods.
The following assumptions were used in the option pricing
model for purposes of estimating pro forma results as well
as 2005 stock option expense.
• The risk-free interest rate is based on the US
Treasury yield curve,
• The dividend yield represents average yields over
the previous three-year period,
• Volatility is measured using the fluctuation in
month-end closing stock prices over a five-year
period, and
• The expected life assumption represents the period
of time that options granted are expected to be
outstanding and is based on a weighted average of
historical option activity.
Option Pricing Assumptions
Year ended December 31 2005 2004 2003
Risk-free interest rate 3.8% 3.4% 3.1%
Dividend yield 3.8 3.6 3.5
Volatility 25.7 28.9 30.9
Expected life 4.8 yrs. 4.9 yrs. 5.0 yrs.
2002 BLACKROCK LONG-TERM RETENTION AND
INCENTIVE PLAN
BlackRock’ s long-term retention and incentive plan (“LTIP”)
permits the grant of up to $240 million in deferred
compensation awards (the “LTIP Awards”), subject to the
achievement of certain performance hurdles by BlackRock no
later than March 2007. If the performance hurdles are
achieved, up to $200 million of the LTIP Awards will be
funded with up to 4 million shares of BlackRock Class A
common stock to be surrendered by PNC and distributed to
LTIP participants in 2007, less income tax withholding.
Shares attributable to value in excess of our $200 million
LTIP funding requirement will be available to support
BlackRock’ s future long-term retention and incentive
programs but are not subject to surrender until the programs
are approved by BlackRock’ s Compensation Committee of its
Board of Directors and, as the majority shareholder, PNC. In
connection with the Merrill Lynch transaction (see Note 26
Subsequent Event), we have confirmed our commitment to
make available the full 4 million shares for use in the LTIP
and future long-term incentive programs and clarified with
BlackRock the circumstances under which any shares
remaining after satisfaction of our obligations with respect to
the LTIP will be made available. As a result of establishing
the circumstances under which we will make these shares
available, upon completion of the Merrill Lynch transaction,
we will no longer have any approval rights with respect to any
future program meeting the agreed upon standards. In
addition, shares distributed to LTIP participants in 2007 will
include an option to put such distributed shares back to
BlackRock at fair market value. BlackRock will fund the
remainder of the LTIP Awards with up to $40 million in cash.
BlackRock has granted approximately $230 million in LTIP
Awards, net of forfeitures.
The LTIP Awards vest at the end of any three-month period
beginning on or after January 1, 2005 and ending on or prior
to March 30, 2007 during which the average closing price of
BlackRock’ s common stock is at least $62 per share. During
the first quarter of 2005, BlackRock’ s average closing stock
price exceeded the $62 threshold and the stock price provision
was met. In addition to the stock price threshold, the vesting of
awards is contingent on the participants’ continued
employment with BlackRock for periods ranging from two to
five years through the payment date in early 2007.
We reported pretax charges in 2004 totaling $110 million in
connection with the LTIP, including $96 million in the third
quarter, based upon management’ s determination during the
third quarter of 2004 that the likelihood of vesting of the LTIP
Awards was probable of reaching the stock price threshold.
These amounts included a pro rata share of the estimated
dilution of our investment in BlackRock that is expected to
occur in 2007 when we transfer shares of BlackRock stock
owned by PNC to fund a portion of the LTIP Awards.
We reported pretax expense of $64 million in 2005, including
$16 million during the fourth quarter, related to the LTIP
Awards.