PNC Bank 2005 Annual Report Download - page 77

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In May 2004, the FASB issued FSP 106-2, “Accounting and
Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of
2003.” FSP 106-2 provides guidance on accounting for the
federal subsidy and other provisions of The Medicare
Prescription Drug, Improvement and Modernization Act of
2003. We adopted FSP 106-2 in the third quarter of 2004.
See Note 17 Employee Benefit Plans for additional
information.
In December 2003, the American Institute of Certified Public
Accountants issued Statement of Position 03-3, “Accounting
for Loans and Debt Securities Acquired in a Transfer” (“SOP
03-3”). SOP 03-3 addresses accounting for differences
between contractual cash flows and cash flows expected to be
collected from an initial investment in loans or debt securities
acquired in a transfer if those differences relate, at least in
part, to a deterioration of credit quality. SOP 03-3 prohibits
companies from carrying over valuation allowances in the
initial accounting for such loans and limits the yield that may
be accreted to the excess of undiscounted expected cash
flows over the initial investment in the loan. Decreases in
expected cash flows are recognized as impairment and
increases are recognized prospectively through an adjustment
of the loan yield. SOP 03-3 was effective for loans and debt
securities acquired by PNC on or after January 1, 2005.
Application of this guidance did not have a significant effect
on our financial condition or results of operations in 2005.
NOTE 2 ACQUISITIONS
2005 ACQUISITIONS
SSRM HOLDINGS, INC.
Effective January 31, 2005, our majority-owned subsidiary,
BlackRock, closed the acquisition of SSRM Holdings, Inc.
(“SSRM”), the holding company of State Street Research &
Management Company and SSR Realty Advisors Inc., from
MetLife, Inc. (“MetLife”) for an adjusted purchase price of
approximately $265 million in cash and approximately
550,000 shares of BlackRock restricted class A common
stock valued at $37 million. SSRM, through its subsidiaries,
actively manages stock, bond, balanced and real estate
portfolios for both institutional and individual investors.
Substantially all of SSRM’ s operations were integrated into
BlackRock as of the closing date. BlackRock acquired assets
under management totaling $50 billion in connection with
this transaction.
The stock purchase agreement for the SSRM transaction
provides for an additional payment to MetLife of up to $75
million based on BlackRock achieving specified retention
levels of assets under management and run-rate revenue for
the year ended January 31, 2006. Based on assets under
management levels and run-rate revenue as of January 31,
2006, the additional liability on this contingency is $50
million. In addition, the stock purchase agreement provides
for two other contingent payments. MetLife will receive 32.5%
of any performance fees earned, as of March 31, 2006, on a
certain large institutional real estate client. As of December 31,
2005, no performance fees had been earned on this
institutional real estate client as the measurement period had
not concluded. In addition, on the fifth anniversary of the
closing of the SSRM transaction, MetLife could receive an
additional payment up to a maximum of $10 million based on
BlackRock’ s retained assets under management associated
with the MetLife defined benefit and defined contribution
plans.
As of December 31, 2005, BlackRock was unable to estimate
the potential obligations under these contingent payments
because it was unable to predict at that time what specific
retention levels of run-rate revenue would be for certain
acquired accounts on the first anniversary of closing the SSRM
transaction, what performance fees would be earned on the
institutional real estate client and what BlackRock’ s retained
assets under management would be on the fifth anniversary of
the closing date of the SSRM transaction.
Contingent payments settled subsequent to the SSRM closing
on January 31, 2005 but prior to December 31, 2005 reduced
the contingent liability established at the closing to $39.5
million at December 31, 2005. The $50 million contingency
payment due January 31, 2006 eliminated this contingent
liability balance. The $10.5 million excess of the January 31,
2006 contingency payment over the contingent liability
balance at December 31, 2005 and additional contingency
payments, if any, will be reflected as additional purchase price
and recorded as goodwill.
On January 18, 2005, our ownership in BlackRock was
transferred from PNC Bank, N.A. to PNC Bancorp, Inc., our
intermediate bank holding company. The transfer was effected
primarily to give BlackRock more operating flexibility,
particularly in connection with its acquisition of SSRM. As a
result of the transfer, certain deferred tax liabilities recorded by
PNC were reversed in the first quarter of 2005 in accordance
with SFAS 109, “Accounting for Income Taxes.” The reversal
of deferred tax liabilities increased our earnings by $45 million,
or approximately $.16 per diluted share, in the first quarter of
2005.
In January 2005, BlackRock issued a bridge promissory note
for $150 million, using the proceeds to fund a portion of the
purchase price for the SSRM acquisition. In February 2005,
BlackRock issued $250 million aggregate principal amount of
convertible debentures. BlackRock used a portion of the net
proceeds from this issuance to retire the bridge promissory
note. These convertible debentures are included with bank
notes and senior debt on our Consolidated Balance Sheet at
December 31, 2005.