PNC Bank 2006 Annual Report Download - page 51

B LACK R OCK
Our BlackRock business segment earned $187 million in 2006
and $152 million in 2005. For this PNC business segment
presentation, our share of MLIM transaction integration costs
for 2006 have been reclassified from BlackRock to “Other.” In
addition, these business segment earnings have been reduced
by minority interest in income of BlackRock, excluding
MLIM transaction integration costs, totaling $65 million and
$71 million in 2006 and 2005, respectively. Also, these
business segment earnings are net of additional PNC income
taxes recorded on PNC’s share of BlackRock’s earnings.
PNC’s BlackRock business segment earnings increased
$35 million, or 23%, compared with 2005. We have modified
the presentation of historical BlackRock business segment
results as described above to conform with the current
business segment reporting presentation in this Item 7. Higher
earnings in 2006 reflected higher investment advisory and
administrative fees due to an increase in assets under
management, including BlackRock’s acquisition of MLIM at
the end of the third quarter of 2006 as further discussed below.
PNC’s investment in BlackRock was $3.9 billion at
December 31, 2006. Based upon BlackRock’s closing market
price of $151.90 per common share at December 31, 2006, the
market value of our investment in BlackRock was
approximately $6.7 billion at that date. As such, an additional
$2.8 billion of value was not recognized in our investment
account at that date.
B LACK R OCK /MLIM T RANSACTION
On September 29, 2006, Merrill Lynch contributed its
investment management business to BlackRock in exchange
for 65 million shares of newly issued BlackRock common and
preferred stock. BlackRock accounted for the MLIM
transaction under the purchase method of accounting.
Immediately following the closing, PNC continued to own
approximately 44 million shares of BlackRock common stock,
representing an ownership interest of approximately 34% of
the combined company after the closing (as compared with
69% immediately prior to the closing). Although PNC’s share
ownership percentage declined, PNC’s investment in
BlackRock increased due to the increase in total equity
recorded by BlackRock as a result of the MLIM transaction.
Upon the closing of the BlackRock/MLIM transaction, the
carrying value of our investment in BlackRock increased by
approximately $3.1 billion to $3.8 billion, primarily reflecting
PNC’s portion of the increase in BlackRock’s equity resulting
from the value of shares issued in that transaction.
We also recorded a liability at September 30, 2006 for
deferred taxes of approximately $.9 billion, related to the
excess of the book value over the tax basis of our investment
in BlackRock, and a liability of approximately $.6 billion
related to our obligation to provide shares of BlackRock
common stock to help fund BlackRock LTIP programs
described below. The LTIP liability will be adjusted quarterly
based on changes in BlackRock’s common stock price and the
number of remaining committed shares. Accordingly, at each
quarter-end PNC will record a charge to earnings if the market
price of BlackRock’s common stock increases and will record
a credit to earnings if BlackRock’s stock price declines.
The overall balance sheet impact of the BlackRock/MLIM
transaction was an increase to our shareholders’ equity of
approximately $1.6 billion. The increase to equity was
comprised of an after-tax gain of approximately $1.3 billion,
net of the expense associated with the LTIP liability and the
deferred taxes, and an after-tax increase to capital surplus of
approximately $.3 billion. The recognition of the gain is
consistent with our existing accounting policy for the sale or
issuance by subsidiaries of their stock to third parties. The
gain represents the difference between our basis in BlackRock
stock prior to the BlackRock/MLIM transaction and the new
book value per share and resulting increase in value of our
investment realized from the transaction. The direct increase
to capital surplus rather than inclusion in the gain resulted
from the accounting treatment required due to existing
BlackRock repurchase commitments or programs.
For 2005 and the nine months ended September 30, 2006, our
Consolidated Income Statement included our former
approximately 69% - 70% ownership interest in BlackRock’s
net income through the closing date. However, beginning
September 30, 2006, our Consolidated Balance Sheet no
longer reflected the consolidation of BlackRock’s balance
sheet but recognized our ownership interest in BlackRock as
an investment accounted for under the equity method. This
accounting has resulted in a reduction in certain revenue and
noninterest expense categories on PNC’s Consolidated Income
Statement as our share of BlackRock’s net income is now
reported within asset management noninterest income.
B LACK R OCK LTIP P ROGRAMS
BlackRock adopted the 2002 LTIP program to help attract and
retain qualified professionals. At that time, we agreed to
transfer 4 million of the shares of BlackRock common stock
then held by us to fund the 2002 and future programs
approved by BlackRock’s board of directors, subject to certain
conditions and limitations. PNC’s noninterest income in the
fourth quarter of 2006 included a $12 million charge related to
our commitment to fund BlackRock LTIP programs. This
charge represents the mark-to-market of our BlackRock LTIP
obligation as of December 31, 2006 and is a result of the
fourth quarter increase in the market value of BlackRock
common shares. This increase in price also increased the
unrecognized value of our investment in BlackRock at
December 31, 2006 by approximately $128 million.
Prior to 2006, BlackRock granted awards under the 2002 LTIP
program of approximately $230 million, of which
approximately $210 million was paid on January 30, 2007.
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