PNC Bank 2009 Annual Report Download - page 147

O PTION P RICING A SSUMPTIONS
For purposes of computing stock option expense, we
estimated the fair value of stock options primarily by using the
Black-Scholes option-pricing model. Option pricing models
require the use of numerous assumptions, many of which are
very subjective.
We used the following assumptions in the option pricing
models to determine 2009, 2008 and 2007 option expense:
• The risk-free interest rate is based on the US
Treasury yield curve,
• The dividend yield represents average yields over the
previous three-year period, except for 2009 where
(starting with the grants made after the first quarter)
we used a yield indicative of our currently reduced
dividend rate,
• Volatility is measured using the fluctuation in
month-end closing stock prices over a period which
corresponds with the average expected option life,
but in no case less than a five-year period, and
• The expected life assumption represents the period of
time that options granted are expected to be
outstanding and is based on a weighted average of
historical option activity.
Weighted-average for the year ended
December 31 2009 2008 2007
Risk-free interest rate 1.9% 3.1% 4.8%
Dividend yield 3.5 3.3 3.4
Volatility 27.3 18.5 18.8
Expected life 5.6 yrs. 5.7 yrs. 4.3 yrs.
A summary of stock option activity follows:
PNC
PNC Options
Converted From
National City Total
Year ended December 31, 2009
In thousands, except weighted-average data Shares
Weighted-
Average
Exercise
Price Shares
Weighted-
Average
Exercise
Price Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
Outstanding, January 1 14,537 $63.39 1,744 $636.33 16,281 $124.74
Granted 4,334 31.39 4,334 31.39
Exercised (121) 42.40 (121) 42.40
Cancelled (254) 57.90 (222) 627.28 (476) 323.18
Outstanding, December 31 18,496 $56.10 1,522 $637.64 20,018 $100.32 5.6 years $98,919
Vested and expected to vest, December 31 (a) 18,176 $56.14 1,522 $637.64 19,698 $101.07 5.6 years $96,794
Exercisable, December 31 11,200 $63.87 1,522 $637.64 12,722 $132.52 3.9 years $ 6,565
(a) Adjusted for estimated forfeitures on unvested options.
The weighted-average grant-date fair value of options granted
in 2009, 2008 and 2007 was $5.73, $7.27 and $11.37 per
option, respectively. To determine stock-based compensation
expense, the grant-date fair value is applied to the options
granted with a reduction made for estimated forfeitures. We
recognized compensation expense for stock options on a
straight-line basis over the pro rata vesting period.
At December 31, 2008 and 2007, options for 11,373,000 and
10,496,000 shares of common stock, respectively, were
exercisable at a weighted-average price of $151.03 and
$59.95, respectively. The total intrinsic value of options
exercised during 2009, 2008 and 2007 was $1 million, $59
million and $52 million, respectively.
Cash received from option exercises under all Incentive Plans
for 2009, 2008 and 2007 was approximately $5 million, $167
million and $111 million, respectively. The actual tax benefit
realized for tax deduction purposes from option exercises
under all Incentive Plans for 2009, 2008 and 2007 was
approximately $2 million, $58 million and $39 million,
respectively.
There were no options granted in excess of market value in
2009, 2008 or 2007. Shares of common stock available during
the next year for the granting of options and other awards
under the Incentive Plans were 30,683,564 at December 31,
2009. Total shares of PNC common stock authorized for
future issuance under equity compensation plans totaled
32,525,028 shares at December 31, 2009, which includes
shares available for issuance under the Incentive Plans and the
Employee Stock Purchase Plan as described below.
During 2009, we issued approximately 121,000 shares from
treasury stock in connection with stock option exercise
activity. As with past exercise activity, we currently intend to
utilize treasury stock for any future stock option exercises.
Awards granted to non-employee directors in 2009, 2008 and
2007 include 39,552; 25,381; and 20,944 deferred stock units,
respectively, awarded under the Outside Directors Deferred
Stock Unit Plan. A deferred stock unit is a phantom share of
our common stock, which requires liability accounting
treatment until such awards are paid to the participants as
cash. As there are no vesting or service requirements on these
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