PNC Bank 2008 Annual Report Download - page 107

Consolidated Balance Sheet. In addition, we increase our
recognized investments and recognize a liability for all legally
binding unfunded equity commitments. These liabilities are
reflected in Other Liabilities on our Consolidated Balance
Sheet.
C REDIT R ISK T RANSFER T RANSACTION
National City Bank (“NCB”) sponsored a special purpose
entity (“SPE”) trust and concurrently entered into a credit risk
transfer agreement with an independent third party to mitigate
credit losses on a pool of nonconforming mortgage loans
originated by its former First Franklin business unit. The SPE
was formed with a small contribution from NCB and was
structured as a bankruptcy-remote entity so that its creditors
have no recourse to NCB. In exchange for a perfected security
interest in the cash flows of the nonconforming mortgage
loans, the SPE issued to NCB asset-backed securities in the
form of senior, mezzanine, and subordinated equity notes.
NCB has incurred credit losses equal to the subordinated
equity notes. NCB currently holds the right to put the
mezzanine notes to the independent third-party at par. As of
December 31, 2008, the value of the mezzanine notes was
$169 million. NCB holds the senior notes and will be
responsible for credit losses in excess of this amount.
The SPE was deemed to be a VIE as its equity was not
sufficient to finance its activities. NCB was determined to be
the primary beneficiary of the SPE as it would absorb the
majority of the expected losses of the SPE through its holding
of all of the asset-backed securities. Accordingly, this SPE
was consolidated and all of the entity’s assets, liabilities, and
equity are intercompany balances and are eliminated in
consolidation. Nonconforming mortgage loans, including
foreclosed properties, pledged as collateral to the SPE remain
on the balance sheet and totaled $719 million at December 31,
2008 reflecting the impact of fair value adjustments recorded
by PNC in conjunction with the acquisition.
P ERPETUAL T RUST S ECURITIES
We issue certain hybrid capital vehicles that qualify as capital
for regulatory purposes.
In February 2008, PNC Preferred Funding LLC (the “LLC”),
one of our indirect subsidiaries, sold $375 million of 8.700%
Fixed-to-Floating Rate Non-Cumulative Exchangeable
Perpetual Trust Securities of PNC Preferred Funding Trust III
(“Trust III”) to third parties in a private placement. In
connection with the private placement, Trust III acquired $375
million of Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Securities of the LLC (the “LLC Preferred
Securities”). The sale was similar to the March 2007 private
placement by the LLC of $500 million of 6.113%
Fixed-to-Floating Rate Non-Cumulative Exchangeable Trust
Securities (the “Trust II Securities”) of PNC Preferred
Funding Trust II (“Trust II”) in which Trust II acquired $500
million of LLC Preferred Securities and to the December 2006
private placement by PNC REIT Corp. of $500 million of
6.517% Fixed-to-Floating Rate Non-Cumulative
Exchangeable Perpetual Trust Securities (the “Trust I
Securities”) of PNC Preferred Funding Trust I (“Trust I”) in
which Trust I acquired $500 million of LLC Preferred
Securities. PNC REIT Corp. owns 100% of LLC’s common
voting securities. As a result, LLC is an indirect subsidiary of
PNC and is consolidated on our Consolidated Balance Sheet.
Trust I, II and III’s investment in LLC Preferred Securities is
characterized as a minority interest on our Consolidated
Balance Sheet since we are not the primary beneficiary of
Trust I, Trust II and Trust III. This minority interest totaled
approximately $1.3 billion at December 31, 2008.
PNC has contractually committed to Trust II and Trust III that
if full dividends are not paid in a dividend period on the Trust
II Securities or the Trust III Securities, as applicable, or the
LLC Preferred Securities held by Trust II or Trust III, as
applicable, PNC will not declare or pay dividends with respect
to, or redeem, purchase or acquire, any of its equity capital
securities during the next succeeding dividend period, other
than: (i) purchases, redemptions or other acquisitions of shares
of capital stock of PNC in connection with any employment
contract, benefit plan or other similar arrangement with or for
the benefit of employees, officers, directors or consultants,
(ii) purchases of shares of common stock of PNC pursuant to a
contractually binding requirement to buy stock existing prior
to the commencement of the extension period, including under
a contractually binding stock repurchase plan, (iii) any
dividend in connection with the implementation of a
shareholders’ rights plan, or the redemption or repurchase of
any rights under any such plan, (iv) as a result of an exchange
or conversion of any class or series of PNC’s capital stock for
any other class or series of PNC’s capital stock, (v) the
purchase of fractional interests in shares of PNC capital stock
pursuant to the conversion or exchange provisions of such
stock or the security being converted or exchanged or (vi) any
stock dividends paid by PNC where the dividend stock is the
same stock as that on which the dividend is being paid.
PNC Bank, N.A. has contractually committed to Trust I that if
full dividends are not paid in a dividend period on the Trust I
Securities, LLC Preferred Securities or any other parity equity
securities issued by the LLC, neither PNC Bank, N.A. nor its
subsidiaries will declare or pay dividends or other
distributions with respect to, or redeem, purchase or acquire or
make a liquidation payment with respect to, any of its equity
capital securities during the next succeeding period (other than
to holders of the LLC Preferred Securities and any parity
equity securities issued by the LLC) except: (i) in the case of
dividends payable to subsidiaries of PNC Bank, N.A., to PNC
Bank, N.A. or another wholly-owned subsidiary of PNC Bank,
N.A. or (ii) in the case of dividends payable to persons that are
not subsidiaries of PNC Bank, N.A., to such persons only if,
(A) in the case of a cash dividend, PNC has first irrevocably
committed to contribute amounts at least equal to such cash
dividend or (B) in the case of in-kind dividends payable by
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