PNC Bank 2009 Annual Report Download - page 111

We also have LIHTC investments in which we are not the
primary beneficiary, but are considered to have a significant
variable interest based on our interests in the partnership/LLC.
These investments are disclosed in the Non-Consolidated
VIEs – Significant Variable Interests table. The table also
reflects our maximum exposure to loss. Our maximum
exposure to loss is equal to our legally binding equity
commitments adjusted for recorded impairment and
partnership results. We use the equity and cost methods to
account for our investment in these entities with the
investments reflected in Equity investments on our
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 (a former PNC subsidiary which merged
into PNC Bank, N.A. in November 2009) sponsored a special
purpose entity (SPE) 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 equity contribution and was
structured as a bankruptcy-remote entity so that its creditors
have no recourse to us. In exchange for a perfected security
interest in the cash flows of the nonconforming mortgage
loans, the SPE issued to us asset-backed securities in the form
of senior, mezzanine, and subordinated equity notes.
The SPE was deemed to be a VIE as its equity was not
sufficient to finance its activities. We were determined to be
the primary beneficiary of the SPE as we would absorb the
majority of the expected losses of the SPE through our
holding of the asset-backed securities. Accordingly, this SPE
was consolidated and all of the entity’s assets, liabilities, and
equity associated with the note tranches held by us 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 at a net carrying value of $587 million at
December 31, 2009.
In connection with the credit risk transfer agreement, we held
the right to put the mezzanine notes to the independent third-
party once credit losses in the mortgage loan pool exceeded
the principal balance of the subordinated equity notes. During
2009, cumulative credit losses in the mortgage loan pool
surpassed the principal balance of the subordinated equity
notes which resulted in us exercising our put option on two of
the subordinate mezzanine notes. Cash proceeds received
from the third party for the exercise of these put options
totaled $36 million. In addition, during 2009 we entered into
an agreement with the third party to terminate each party’s
rights and obligations under the credit risk transfer agreement
for the remaining mezzanine notes. We agreed to terminate
our contractual right to put the remaining mezzanine notes to
the third party for a cash payment of $126 million. A pretax
gain of $10 million was recognized in noninterest income as a
result of these transactions.
We assessed what impact the reconsideration events above
had on determining whether we would remain the primary
beneficiary of the SPE. Management concluded that we would
remain the primary beneficiary and accordingly should
continue to consolidate the SPE.
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
noncontrolling interest on our Consolidated Balance Sheet
since we are not the primary beneficiary of Trust I, Trust II
and Trust III. This noncontrolling interest totaled
approximately $1.3 billion at December 31, 2009.
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
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