PNC Bank 2011 Annual Report Download - page 207

parties. We also enter into certain types of agreements,
including leases, assignments of leases, and subleases, in
which we agree to indemnify third parties for acts by our
agents, assignees and/or sublessees, and employees. We also
enter into contracts for the delivery of technology service in
which we indemnify the other party against claims of patent
and copyright infringement by third parties. Due to the nature
of these indemnification provisions, we cannot calculate our
aggregate potential exposure under them.
We engage in certain insurance activities that require our
employees to be bonded. We satisfy this bonding requirement
by issuing letters of credit, which were insignificant in amount
at December 31, 2011.
In the ordinary course of business, we enter into contracts with
third parties under which the third parties provide services on
behalf of PNC. In many of these contracts, we agree to
indemnify the third party service provider under certain
circumstances. The terms of the indemnity vary from contract
to contract and the amount of the indemnification liability, if
any, cannot be determined.
We are a general or limited partner in certain asset
management and investment limited partnerships, many of
which contain indemnification provisions that would require
us to make payments in excess of our remaining unfunded
commitments. While in certain of these partnerships the
maximum liability to us is limited to the sum of our unfunded
commitments and partnership distributions received by us, in
the others the indemnification liability is unlimited. As a
result, we cannot determine our aggregate potential exposure
for these indemnifications.
In some cases, indemnification obligations of the types
described above arise under arrangements entered into by
predecessor companies for which we become responsible as a
result of the acquisition.
Pursuant to their bylaws, PNC and its subsidiaries provide
indemnification to directors, officers and, in some cases,
employees and agents against certain liabilities incurred as a
result of their service on behalf of or at the request of PNC
and its subsidiaries. PNC and its subsidiaries also advance on
behalf of covered individuals costs incurred in connection
with certain claims or proceedings, subject to written
undertakings by each such individual to repay all amounts
advanced if it is ultimately determined that the individual is
not entitled to indemnification. We generally are responsible
for similar indemnifications and advancement obligations that
companies we acquire had to their officers, directors and
sometimes employees and agents at the time of acquisition.
We advanced such costs on behalf of several such individuals
with respect to pending litigation or investigations during
2011. It is not possible for us to determine the aggregate
potential exposure resulting from the obligation to provide this
indemnity or to advance such costs.
In connection with the sale of GIS, and in addition to
indemnification provisions as part of the divestiture
agreements, PNC agreed to continue to act for the benefit of
GIS as securities lending agent for certain of GIS’s clients. In
such role, we provided indemnification to those clients against
the failure of the borrowers to return the securities. The
market value of the securities lent was fully secured on a daily
basis; therefore, the exposure to us was limited to temporary
shortfalls in the collateral as a result of short-term fluctuations
in trading prices of the loaned securities. In addition, the
purchaser of GIS, BNY-Mellon, has entered into an agreement
to indemnify PNC with respect to such exposure on the terms
set forth in such indemnification agreement. Effective July 18,
2011, PNC Bank, National Association assigned its securities
lending agent responsibilities to BNY-Mellon and no longer
acts as securities lending agent for any of GIS’s clients. Also
in connection with the GIS divestiture, PNC has agreed to
indemnify the buyer generally as described above.
VISA I NDEMNIFICATION
Our payment services business issues and acquires credit and
debit card transactions through Visa U.S.A. Inc. card
association or its affiliates (Visa).
In October 2007, Visa completed a restructuring and issued
shares of Visa Inc. common stock to its financial institution
members (Visa Reorganization) in contemplation of its initial
public offering (IPO). As part of the Visa Reorganization, we
received our proportionate share of a class of Visa Inc.
common stock allocated to the US members. Prior to the IPO,
the US members, which included PNC, were obligated to
indemnify Visa for judgments and settlements related to the
specified litigation.
As a result of the acquisition of National City, we became
party to judgment and loss sharing agreements with Visa and
certain other banks. The judgment and loss sharing
agreements were designed to apportion financial
responsibilities arising from any potential adverse judgment or
negotiated settlements related to the specified litigation.
In March 2011, Visa funded $400 million to their litigation
escrow account and reduced the conversion ratio of Visa B to
A shares. We consequently recognized our estimated $38
million share of the $400 million as a reduction of our
previously established indemnification liability and a
reduction of noninterest expense.
In December 2011, Visa funded $1.6 billion to their litigation
escrow account. We consequently recognized $32 million as a
reduction of our previously established indemnification
liability and a reduction of noninterest expense. As of
December 31, 2011, our recognized Visa indemnification
liability was zero. As we continue to have an obligation to
indemnify Visa for judgments and settlements for the
remaining specified litigation, we may have additional
exposure in the future to the specified Visa litigation.
198 The PNC Financial Services Group, Inc. – Form 10-K