PNC Bank 2009 Annual Report Download - page 47

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.
Perpetual Trust Securities
We issue certain hybrid capital vehicles that qualify as capital
for regulatory and rating agency 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.
Each Trust III Security is automatically exchangeable into a
share of Series J Non-Cumulative Perpetual Preferred Stock of
PNC, each Trust II Security is automatically exchangeable
into a share of Series I Non-Cumulative Perpetual Preferred
Stock of PNC (Series I Preferred Stock), and each Trust I
Security is automatically exchangeable into a share of Series F
Non-Cumulative Perpetual Preferred Stock of PNC Bank,
N.A. (PNC Bank Preferred Stock), in each case under certain
conditions relating to the capitalization or the financial
condition of PNC Bank, N.A. and upon the direction of the
Office of the Comptroller of the Currency.
We entered into a replacement capital covenant in connection
with the closing of the Trust I Securities sale (the Trust RCC)
whereby we agreed that neither we nor our subsidiaries (other
than PNC Bank, N.A. and its subsidiaries) would purchase the
Trust Securities, the LLC Preferred Securities or the PNC
Bank Preferred Stock unless such repurchases or redemptions
are made from the proceeds of the issuance of certain
qualified securities and pursuant to the other terms and
conditions set forth in the replacement capital covenant with
respect to the Trust RCC.
We also entered into a replacement capital covenant in
connection with the closing of the Trust II Securities sale (the
Trust II RCC) whereby we agreed until March 29, 2017 that
neither we nor our subsidiaries would purchase or redeem the
Trust II Securities, the LLC Preferred Securities or the Series I
Preferred Stock unless such repurchases or redemptions are
made from the proceeds of the issuance of certain qualified
securities and pursuant to the other terms and conditions set
forth in the replacement capital covenant with respect to the
Trust RCC.
As of December 31, 2009, each of the Trust RCC and the
Trust II RCC are for the benefit of holders of our $200 million
of Floating Rate Junior Subordinated Notes issued in June
1998. We filed a copy of each of the Trust RCC and the Trust
II RCC with the SEC as Exhibit 99.1 to PNC’s Form 8-K filed
on December 8, 2006 and as Exhibit 99.1 to PNC’s Form 8-K
filed on March 30, 2007, respectively.
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
dividend in connection with the implementation of a
shareholders’ rights plan, or the redemption or repurchase of
any rights under any such plan, (iv) as a result of an exchange
or conversion of any class or series of PNC’s capital stock for
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