PNC Bank 2008 Annual Report Download - page 137

million were paid on January 30, 2007. The award payments
were funded by 17% in cash from BlackRock and
approximately one million shares of BlackRock common
stock transferred by PNC and distributed to LTIP participants.
As permitted under the award agreements, employees elected
to put 95% of the stock portion of the awards back to
BlackRock. These shares were retained by BlackRock as
treasury stock. 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 other noninterest income and
reflected the excess of market value over book value of the
one million shares transferred in January 2007. Additional
BlackRock shares were distributed to LTIP participants during
the first quarter of 2008, resulting in a $3 million pretax gain
in other noninterest income.
BlackRock granted awards in 2007 under an additional LTIP
program, 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 awards
vesting in 2011 and the amount remaining would then be
available for future awards.
Noninterest income for 2008 included a $243 million pretax
gain related to our commitment to fund additional BlackRock
LTIP programs. This gain represented the mark-to-market
adjustment related to our remaining BlackRock LTIP common
shares obligation as of December 31, 2008 and resulted from
the decrease in the market value of BlackRock common shares
for 2008. Noninterest income for 2007 and 2006 included
pretax charges totaling $209 million and $12 million,
respectively, related to an increase in the market value of
BlackRock common shares for these periods.
Additionally, we reported noninterest expense of $33 million
in 2006 related to the BlackRock LTIP awards.
N OTE 17 F INANCIAL D ERIVATIVES
We use a variety of derivative financial instruments to help
manage interest rate, market and credit risk and reduce the
effects that changes in interest rates may have on net income,
fair value of assets and liabilities, and cash flows. These
instruments include interest rate swaps, interest rate caps and
floors, futures contracts, and total return swaps.
Fair Value Hedging Strategies
We enter into interest rate swaps, caps, floors and futures
derivative contracts to hedge bank notes, Federal Home Loan
Bank borrowings, senior debt and subordinated debt for
changes in fair value primarily due to changes in interest rates.
Adjustments related to the ineffective portion of fair value
hedging instruments are recorded in interest expense or
noninterest income depending on the hedged item.
Cash Flow Hedging Strategies
We enter into interest rate swap contracts to modify the
interest rate characteristics of designated commercial loans
from variable to fixed in order to reduce the impact of changes
in future cash flows due to interest rate changes. We hedged
our exposure to the variability of future cash flows for all
forecasted transactions for a maximum of 10 years for hedges
converting floating-rate commercial loans to fixed. The fair
value of these derivatives is reported in other assets or other
liabilities and offset in accumulated other comprehensive
income (loss) for the effective portion of the derivatives. We
subsequently reclassify any unrealized gains or losses related
to these swap contracts from accumulated other
comprehensive income (loss) into interest income in the same
period or periods during which the hedged forecasted
transaction affects earnings. Ineffectiveness of the strategies,
if any, is recognized immediately in earnings.
During the next twelve months, we expect to reclassify to
earnings $230 million of pretax net gains, or $149 million
after-tax, on cash flow hedge derivatives currently reported in
accumulated other comprehensive loss. This amount could
differ from amounts actually recognized due to changes in
interest rates and the addition of other hedges subsequent to
December 31, 2008. These net gains are anticipated to result
from net cash flows on receive fixed interest rate swaps that
would impact interest income recognized on the related
floating rate commercial loans.
As of December 31, 2008 we have determined that there were
no hedging positions where it was probable that certain
forecasted transactions may not occur within the originally
designated time period.
The ineffective portion of the change in value of our fair value
and cash flow hedge derivatives resulted in a net gain of $8
million for 2008, a net loss of $1 million for 2007, and a net
loss of $4 million in 2006.
Free-Standing Derivatives
To accommodate customer needs, we also enter into financial
derivative transactions primarily consisting of interest rate
swaps, interest rate caps and floors, futures, swaptions, and
foreign exchange and equity contracts. We primarily manage
our market risk exposure from customer positions through
transactions with third-party dealers. The credit risk associated
with derivatives executed with customers is essentially the
same as that involved in extending loans and is subject to
normal credit policies. We may obtain collateral based on our
assessment of the customer. For derivatives not designated as
an accounting hedge, the gain or loss is recognized in
noninterest income.
Also included in free-standing derivatives are transactions that
we enter into for risk management and proprietary purposes
that are not designated as accounting hedges, primarily
interest rate, basis and total rate of return swaps, interest rate
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