PNC Bank 2007 Annual Report Download - page 46

B LACK R OCK
Our BlackRock business segment earned $253 million in 2007
and $187 million in 2006. Subsequent to the September 29,
2006 deconsolidation of BlackRock, these business segment
earnings are determined by taking our proportionate share of
BlackRock’s earnings and subtracting our additional income
taxes recorded on our share of BlackRock’s earnings. Also,
for this business segment presentation, after-tax BlackRock/
MLIM transaction integration costs totaling $3 million and
$65 million in 2007 and 2006, respectively, have been
reclassified from BlackRock to “Other.” In addition, the 2006
business segment earnings have been reduced by minority
interest in income of BlackRock, excluding MLIM transaction
integration costs, totaling $65 million and additional income
taxes recorded on our share of BlackRock’s earnings totaling
$7 million.
PNC’s investment in BlackRock was $4.1 billion at
December 31, 2007 and $3.9 billion at December 31, 2006.
Based upon BlackRock’s closing market price of $216.80 per
common share at December 31, 2007, the market value of our
investment in BlackRock was $9.4 billion at that date. As
such, an additional $5.3 billion of pretax value was not
recognized in our equity investment account at that date.
On October 1, 2007, BlackRock acquired the fund of funds
business of Quellos Group, LLC (“Quellos”). The combined
fund of funds platform operates under the name BlackRock
Alternative Advisors and is comprised one of the largest fund
of funds platforms in the world, with over $25 billion in assets
under management. In connection with the acquisition,
BlackRock paid $562 million in cash to Quellos and placed
1.2 million shares of BlackRock common stock into an escrow
account. The shares of BlackRock common stock will be held
in the escrow account for up to three years and will be
available to satisfy certain indemnification obligations of
Quellos under the acquisition agreement.
Therefore, any gain to be recognized by PNC resulting from
the issuance of these shares and corresponding increase in
PNC’s investment in BlackRock will be deferred pending the
release of shares from the escrow account. In addition,
Quellos may receive up to an additional $969 million in cash
and BlackRock common stock through December 31, 2010
contingent on certain measures.
B LACK R OCK /MLIM T RANSACTION
On September 29, 2006 Merrill Lynch contributed its
investment management business (“MLIM”) 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.
Further information regarding this transaction is included in
Note 2 Acquisitions and Divestitures included in the Notes To
Consolidated Financial Statements in Item 8 of this Report.
B LACK R OCK LTIP P ROGRAMS
BlackRock adopted the 2002 LTIP program to help attract and
retain qualified professionals. At that time, PNC agreed to
transfer up to four million of the shares of BlackRock
common stock then held by us to help fund the 2002 LTIP and
future programs approved by BlackRock’s board of directors,
subject to certain conditions and limitations. Prior to 2006,
BlackRock granted awards of approximately $233 million
under the 2002 LTIP program, of which approximately $208
million were paid on January 30, 2007. The award payments
were funded by 17% in cash from BlackRock and one million
shares of BlackRock common stock transferred by PNC and
distributed to LTIP participants. We recognized a pretax gain
of $82 million in the first quarter of 2007 from the transfer of
BlackRock shares. The gain was included in noninterest
income and reflected the excess of market value over book
value of the one million shares transferred in January 2007.
PNC’s noninterest income in 2007 also included a $209
million pretax charge related to our commitment to fund
additional BlackRock LTIP programs. This charge represents
the mark-to-market adjustment related to our remaining
BlackRock LTIP shares obligation as of December 31, 2007
and resulted from the increase in the market value of
BlackRock common shares during 2007. We recognized a
similar charge for $12 million in 2006.
BlackRock granted additional restricted stock unit awards in
January 2007, all of which are subject to achieving earnings
performance goals prior to the vesting date of September 29,
2011. Of the shares of BlackRock common stock that we have
agreed to transfer to fund their LTIP programs, approximately
1.6 million shares have been committed to fund the restricted
stock unit awards vesting in 2011 and the amount remaining
would then be available for future awards.
We may continue to see volatility in earnings as we mark to
market our LTIP shares obligation each quarter-end. However,
additional gains based on the difference between the market
value and the book value of the committed BlackRock
common shares will generally not be recognized until the
shares are distributed to LTIP participants.
41