PNC Bank 2008 Annual Report Download - page 56

B LACK R OCK
Our BlackRock business segment earned $207 million in 2008
and $253 million in 2007. These results reflect our
approximately 33% share of BlackRock’s reported GAAP
earnings and the additional income taxes on these earnings
incurred by PNC.
PNC’s investment in BlackRock was $4.2 billion at
December 31, 2008 and $4.1 billion at December 31, 2007.
The book value per share was $98.32 at December 31, 2008.
B LACK R OCK LTIP P ROGRAMS AND E XCHANGE A GREEMENTS
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
approximately 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 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, and during January 2009, resulting in a $1 million
pretax gain.
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.
PNC’s 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. PNC’s
noninterest income for 2007 included a pretax charge of $209
million for an increase in the market value of BlackRock
common shares for that period.
As further described in PNC’s Current Report on Form 8-K
filed December 30, 2008, PNC entered into an Exchange
Agreement with BlackRock on December 26, 2008. The
transactions contemplated by this agreement will restructure
PNC’s ownership of BlackRock equity without altering, to
any meaningful extent, PNC’s economic interest in
BlackRock. PNC will continue to be subject to the limitations
on its voting rights in its existing agreements with BlackRock.
These transactions will also allow PNC to reduce its net
income volatility associated with the quarterly
marking-to-market of obligations related to PNC’s delivery of
BlackRock stock under the BlackRock LTIP.
Also on December 26, 2008, BlackRock entered into an
Exchange Agreement with Merrill Lynch in anticipation of the
consummation of the merger of Bank of America Corporation
and Merrill Lynch which was completed on January 1, 2009.
The PNC and Merrill Lynch Exchange Agreements
restructured PNC’s and Merrill Lynch’s respective ownership
of BlackRock common and preferred equity. The exchange
was completed on February 27, 2009.
PNC will continue to account for its investment in BlackRock
under the equity method of accounting, with its share of
BlackRock’s earnings reduced from approximately 33% to
31%, solely as a result of the exchange of 2.9 million of its
shares of BlackRock common stock for new BlackRock Series
C Preferred Stock. The Series C Preferred Stock will not be
taken into consideration in determining PNC’s share of
BlackRock earnings under the equity method. PNC’s
percentage ownership of BlackRock common stock is
expected to increase from approximately 36.5% to 46.5%. The
increase will result from a substantial exchange of Merrill
Lynch’s BlackRock common stock for BlackRock preferred
stock. As a result of the BlackRock preferred stock currently
held by Merrill Lynch and the new BlackRock preferred stock
being issued to Merrill Lynch and PNC under the Exchange
Agreements, PNC’s share of BlackRock common stock has
been, and will continue to be, higher than its overall share of
BlackRock’s equity and earnings.
On February 27, 2009, PNC’s obligation to deliver BlackRock
common shares was replaced with an obligation to deliver
shares of BlackRock’s new Series C Preferred Stock. PNC
will account for these preferred shares at fair value as
permitted under SFAS 159, which will offset the impact of
marking-to-market the liability to deliver these shares to
BlackRock.
The transactions related to the Exchange Agreements will not
affect our right to receive dividends declared by BlackRock.
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