PNC Bank 2009 Annual Report Download - page 149

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.
As permitted under the award agreements, employees elected
to put approximately 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.
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 included pretax gains of $98
million in 2009 and $243 million in 2008 related to our
BlackRock LTIP shares obligation. These gains represented
the mark-to-market adjustment related to our remaining
BlackRock LTIP common shares obligation and resulted from
the decrease in the market value of BlackRock common shares
in those periods. Noninterest income for 2007 included pretax
charges totaling $209 million related to an increase in the
market value of BlackRock common shares in that period.
As previously reported, PNC entered into an Exchange
Agreement with BlackRock on December 26, 2008. The
transactions that resulted from this agreement restructured
PNC’s ownership of BlackRock equity without altering, to
any meaningful extent, PNC’s economic interest in
BlackRock. PNC continues to be subject to the limitations on
its voting rights in its existing agreements with BlackRock.
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 that occurred 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 contemplated by these agreements was
completed on February 27, 2009. On that date, 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 acquired 2.9 million shares of
Series C Preferred Stock from BlackRock in exchange for
common shares on that same date. PNC accounts for these
preferred shares at fair value, which offsets the impact of
marking-to-market the obligation to deliver these shares to
BlackRock as we aligned the fair value marks on this asset
and liability. The fair value of the BlackRock Series C
Preferred Stock is included on our Consolidated Balance Sheet
in Other assets. Additional information regarding the
valuation of the BlackRock Series C Preferred Stock is
included in Note 8.
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, swaptions, interest
rate caps and floors, credit default swaps, futures contracts,
and total return swaps. All derivatives are carried at fair value.
Derivatives Designated in Hedge Relationships
We enter into interest rate swaps to hedge the fair value of
bank notes, Federal Home Loan Bank borrowings, senior debt
and subordinated debt for changes in interest rates.
Adjustments related to the ineffective portion of fair value
hedging instruments are recorded in interest expense.
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 $317 million of pretax net gains, or $206 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, 2009. 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.
During 2009, there were no gains or losses from cash flow
hedge derivatives that were reclassified to earnings arising
from the determination that the original forecasted transaction
would not occur.
145