Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2009

Commission file number 001-09718

THE PNC FINANCIAL SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)

 

   

Pennsylvania

      

25-1435979

   
  (State or other jurisdiction of incorporation or organization)      (I.R.S. Employer Identification No.)  

One PNC Plaza

249 Fifth Avenue

Pittsburgh, Pennsylvania 15222-2707

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code - (412) 762-2000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class      

  Name of Each Exchange

    on Which Registered    

Common Stock, par value $5.00

    New York Stock Exchange

$1.60 Cumulative Convertible Preferred Stock-Series C, par value $1.00

    New York Stock Exchange

$1.80 Cumulative Convertible Preferred Stock-Series D, par value $1.00

Depositary Shares Each Representing 1/4000 Interest in a Share of 9.875% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series L, par value $1.00

   

New York Stock Exchange

New York Stock Exchange

12.000% Fixed-to-Floating Rate Normal Automatic Preferred Enhanced Capital Securities (issued by National City Capital Trust I)

    New York Stock Exchange

6.625% Trust Preferred Securities (issued by National City Capital Trust II)

    New York Stock Exchange

6.625% Trust Preferred Securities (issued by National City Capital Trust III)

    New York Stock Exchange

8.000% Trust Preferred Securities (issued by National City Capital Trust IV)

    New York Stock Exchange

6.125% Capital Securities (issued by PNC Capital Trust D)

    New York Stock Exchange

7 3/4% Trust Preferred Securities (issued by PNC Capital Trust E)

    New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

$1.80 Cumulative Convertible Preferred Stock - Series A, par value $1.00

$1.80 Cumulative Convertible Preferred Stock - Series B, par value $1.00

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No     

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes      No X

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No     

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No     

Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer X   Accelerated filer        Non-accelerated filer        Smaller reporting company     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes      No X

The aggregate market value of the registrant’s outstanding voting common stock held by nonaffiliates on June 30, 2009, determined using the per share closing price on that date on the New York Stock Exchange of $38.81, was approximately $17.8 billion. There is no non-voting common equity of the registrant outstanding.

Number of shares of registrant’s common stock outstanding at February 26, 2010: 517,408,663

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement of The PNC Financial Services Group, Inc. to be filed pursuant to Regulation 14A for the 2010 annual meeting of shareholders (Proxy Statement) are incorporated by reference into Part III of this Form 10-K.


TABLE OF CONTENTS

 

PART I         Page  

Item 1

 

Business.

  2

Item 1A

 

Risk Factors.

  10

Item 1B

 

Unresolved Staff Comments.

  16

Item 2

 

Properties.

  16

Item 3

 

Legal Proceedings.

  17

Item 4

 

Reserved

  17

Executive Officers of the Registrant

Directors of the Registrant

  17

17

PART II

 

Item 5

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

  18
 

Common Stock Performance Graph

  19

Item 6

 

Selected Financial Data.

  20

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  22

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk.

  86

Item 8

 

Financial Statements and Supplementary Data.

  87

Item 9

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

  175

Item 9A

 

Controls and Procedures.

  175

Item 9B

 

Other Information.

  176

PART III

 

Item 10

 

Directors, Executive Officers and Corporate Governance.

  176

Item 11

 

Executive Compensation.

  176

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

  176

Item 13

 

Certain Relationships and Related Transactions, and Director Independence.

  178

Item 14

 

Principal Accounting Fees and Services.

  178

PART IV

   

Item 15

 

Exhibits, Financial Statement Schedules.

  178

SIGNATURES

  179

EXHIBIT INDEX

  E-1

PART I

Forward-Looking Statements: From time to time, The PNC Financial Services Group, Inc. (PNC or the Corporation) has made and may continue to make written or oral forward-looking statements regarding our outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on our business operations or performance. This Annual Report on Form 10-K (the Report or Form 10-K) also includes forward-looking statements. With respect to all such forward-looking statements, you should review our Risk Factors discussion in Item 1A and our Risk Management, Critical Accounting Policies and Judgments, and Cautionary Statement Regarding Forward-Looking Information sections included in Item 7 of this Report.

 

ITEM 1 – BUSINESS

BUSINESS OVERVIEW Headquartered in Pittsburgh, Pennsylvania, we are one of the largest diversified financial services companies in the United States. We have businesses engaged in retail banking, corporate and institutional banking, asset management, residential mortgage banking and global investment servicing, providing many of our products and services nationally and others in our primary geographic markets located in Pennsylvania, Ohio, New Jersey, Michigan, Maryland, Illinois, Indiana, Kentucky, Florida, Missouri, Virginia, Delaware, Washington, D.C., and Wisconsin. We also provide certain investment servicing internationally. At December 31, 2009, our consolidated total assets, deposits and shareholders’ equity were $269.9 billion, $186.9 billion and $29.9 billion, respectively.

As described further below and elsewhere in this Report, on December 31, 2008, PNC acquired National City Corporation (National City). Our consolidated financial statements for 2009 reflect the impact of National City.

We were incorporated under the laws of the Commonwealth of Pennsylvania in 1983 with the consolidation of Pittsburgh National Corporation and Provident National Corporation. Since 1983, we have diversified our geographical presence, business mix and product capabilities through internal growth, strategic bank and non-bank acquisitions and equity investments, and the formation of various non-banking subsidiaries.

ACQUISITION OF NATIONAL CITY CORPORATION

On December 31, 2008, we acquired National City for approximately $6.1 billion. The total consideration included approximately $5.6 billion of PNC common stock, $150 million of preferred stock, and cash of $379 million paid to warrant holders by National City.

Following the closing, PNC received $7.6 billion from the US Department of the Treasury (US Treasury) under the Emergency Economic Stabilization Act of 2008 (EESA) in exchange for the issuance of preferred stock and a warrant. These proceeds were used to enhance National City Bank’s regulatory capital position to well-capitalized in order to continue serving the credit and deposit needs of existing and new customers. On a consolidated basis, these proceeds resulted in further improvement to our capital and liquidity positions. See Repurchase of Outstanding TARP Preferred Stock below for additional information.

National City, based in Cleveland, Ohio, was one of the nation’s largest financial services companies. In connection with obtaining regulatory approvals for the acquisition, PNC agreed to divest 61 of National City Bank’s branches in Western Pennsylvania. This divestiture, which included $4.1 billion of deposits and $.8 billion of loans, was completed during the third quarter of 2009.


 

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Additional information regarding our acquisition of National City can be found in Item 7 and Item 8 of this Report.

REPURCHASE OF OUTSTANDING TARP PREFERRED STOCK

See Note 19 Equity in the Notes To Consolidated Financial Statements in Item 8 of this Report regarding our December 31, 2008, issuance of $7.6 billion of Fixed Rate Cumulative Perpetual Preferred Shares, Series N (Series N Preferred Stock), and the related warrant to the US Treasury under the US Treasury’s Troubled Asset Relief Program (TARP) Capital Purchase Program.

As approved by the Federal Reserve Board, the US Treasury and our other banking regulators, on February 10, 2010, we redeemed all 75,792 shares of our Series N Preferred Stock totaling $7.6 billion held by the US Treasury. We used the net proceeds from our February 2010 common stock and senior notes offerings and other funds to redeem the Series N Preferred Stock. We did not exercise our right to seek to repurchase the related warrant at the time we redeemed the Series N Preferred Stock.

Note 28 Subsequent Events in Item 8 of this Report has additional information regarding the redemption of the Series N Preferred Stock and the February 2010 common stock and senior notes offerings.

PENDING SALE OF PNC GLOBAL INVESTMENT SERVICING

On February 2, 2010, we entered into a definitive agreement to sell PNC Global Investment Servicing Inc. (GIS), a leading provider of processing, technology and business intelligence services to asset managers, broker-dealers and financial advisors worldwide, for $2.3 billion in cash. Upon completion of the sale, we expect to report an after-tax gain of approximately $455 million.

We currently anticipate closing the transaction in the third quarter of 2010. Completion of the transaction is subject to regulatory approvals and certain other closing conditions. If the sale of GIS has not been completed by November 1, 2010, we will be required, on or before that date, to raise $700 million in additional Tier 1 common capital. We would do this either through the sale of assets approved by the Federal Reserve Board and/or through the issuance of additional common stock. See Item 1A Risk Factors for further information.

In addition to National City and GIS, we include information on other significant acquisitions and divestitures in Note 2 Acquisitions and Divestitures in Item 8 of this Report and here by reference.

REVIEW OF LINES OF BUSINESS In the first quarter of 2009, we made changes to our business organization structure and management reporting in conjunction with the National City acquisition. In addition to the following information relating to our lines of business, we incorporate information under the captions Line of Business Highlights, Product Revenue, and

Business Segments Review in Item 7 of this Report here by reference. Also, we include financial and other information by business in Note 27 Segment Reporting in the Notes To Consolidated Financial Statements in Item 8 of this Report here by reference.

Assets, revenue and earnings attributable to foreign activities were not material in the periods presented. Business segment results for periods prior to 2009 have been reclassified to reflect current methodologies and current business and management structure and to present those periods on the same basis but do not include the impact of National City, which we acquired on December 31, 2008. As a result of its pending sale, GIS is no longer a reportable business segment.

Retail Banking provides deposit, lending, brokerage, trust, investment management, and cash management services to consumer and small business customers within our primary geographic markets. Our customers are serviced through our branch network, call centers and the internet. The branch network is located primarily in Pennsylvania, Ohio, New Jersey, Michigan, Maryland, Illinois, Indiana, Kentucky, Florida, Missouri, Virginia, Delaware, Washington, DC and Wisconsin.

Our core strategy is to acquire and retain customers who maintain their primary checking and transaction relationships with PNC. We also seek revenue growth by deepening our share of our customers’ financial assets, including savings and liquidity deposits, loans and investable assets. A key element of our strategy is to expand the use of alternative distribution channels while continuing to optimize the traditional branch network. In addition, we have a disciplined process to continually improve the engagement of both our employees and customers, which is a strong indicator for customer growth, retention and relationship expansion.

Corporate & Institutional Banking provides lending, treasury management, and capital markets-related products and services to mid-sized corporations, government and not-for-profit entities, and selectively to large corporations. Lending products include secured and unsecured loans, letters of credit and equipment leases. Treasury management services include cash and investment management, receivables management, disbursement services, funds transfer services, information reporting, and global trade services. Capital markets-related products and services include foreign exchange, derivatives, loan syndications, mergers and acquisitions advisory and related services to middle-market companies, securities underwriting, and securities sales and trading. Corporate & Institutional Banking also provides commercial loan servicing, and real estate advisory and technology solutions for the commercial real estate finance industry. Corporate & Institutional Banking provides products and services generally within our primary geographic markets with certain products and services offered nationally.


 

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Corporate & Institutional Banking is focused on becoming a premier provider of financial services in each of the markets it serves. The value proposition to its customers is driven by providing a broad range of competitive and high quality products and services by a team fully committed to delivering the comprehensive resources of PNC to help each client succeed. Corporate & Institutional Banking’s primary goals are to achieve market share growth and enhanced returns by means of expansion and retention of customer relationships and prudent risk and expense management.

Asset Management Group includes personal wealth management for high net worth and ultra high net worth clients and institutional asset management. Wealth management products and services include financial planning, customized investment management, private banking, tailored credit solutions and trust management and administration for individuals and their families. Institutional asset management provides investment management, custody, and retirement planning services. The institutional clients include corporations, foundations and unions and charitable endowments located primarily in our geographic footprint. This segment includes the asset management businesses acquired through the National City acquisition and the legacy PNC wealth management business previously included in the Retail Banking segment.

Asset Management Group is focused on becoming one of the premier bank-held wealth and institutional asset managers in each of the markets it serves. The business seeks to deliver high quality advice and investment management to our high net worth, ultra high net worth and institutional client sectors through a full array of products and services. Asset Management Group’s primary goals are to service its clients, grow its business and deliver solid financial performance with prudent risk and expense management.

Residential Mortgage Banking directly originates primarily first lien residential mortgage loans on a nationwide basis with a significant presence within our retail banking footprint and also originates loans through joint venture partners. Mortgage loans represent loans collateralized by one-to-four-family residential real estate and are made to borrowers in good credit standing. These loans are typically underwritten to government agency and/or third party standards, and sold, servicing retained, to primary mortgage market conduits Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Home Loan Banks and third-party investors, or are securitized and issued under the Government National Mortgage Association (Ginnie Mae) program. The mortgage servicing operation performs all functions related to servicing first mortgage loans for various investors. Certain loans originated through our joint ventures are serviced by a joint venture partner. In November 2009, we reduced our joint venture relationship related to our legacy PNC business and rebranded the former National City Mortgage as PNC Mortgage.

 

Residential Mortgage Banking is focused on adding value to the PNC franchise by building stronger customer relationships, providing quality investment loans, and delivering acceptable returns under a moderate risk profile. Our national distribution capability provides volume that drives economies of scale, risk dispersion, and cost-effective extension of the retail banking footprint for cross-selling opportunities.

BlackRock is the largest publicly traded investment management firm in the world. BlackRock manages assets on behalf of institutional and individual investors worldwide through a variety of equity, fixed income, multi-asset class, alternative and cash management separate accounts and funds. In addition, BlackRock provides market risk management, financial markets advisory and enterprise investment system services globally to a broad base of clients.

At December 31, 2009, our share of BlackRock’s earnings was approximately 23%. Our investment in BlackRock is a strategic asset of PNC and a key component of our diversified earnings stream. The ability of BlackRock to grow assets under management is the key driver of increases in its revenue, earnings and, ultimately, shareholder value. BlackRock’s strategies for growth in assets under management include a focus on achieving client investment performance objectives in a manner consistent with their risk preferences and delivering excellent client service. The business dedicates significant resources to attracting and retaining talented professionals and to the ongoing enhancement of its investment technology and operating capabilities to deliver on this strategy.

Distressed Assets Portfolio includes commercial residential development loans, cross-border leases, consumer brokered home equity loans, retail mortgages, non-prime mortgages, and residential construction loans. These loans require special servicing and management oversight given current market conditions. The majority of these loans are from acquisitions, primarily National City. Total loans were $18.5 billion at December 31, 2009.

The business activities of this segment are focused on maximizing the value of the assets while mitigating risk. Business intent drives the inclusion of assets in this business segment. Not all impaired loans are included in this business segment, nor are all of the loans included in this business segment considered impaired. The fair value marks taken upon our acquisition of National City, the team we have in place and targeted asset resolution strategies help us to manage these assets. Additionally, our capital and liquidity positions provide us flexibility in a challenging environment to optimize returns on this portfolio for our shareholders.

SUBSIDIARIES Our corporate legal structure at December 31, 2009 consisted of one domestic subsidiary bank, including its subsidiaries, and approximately 153 active non-bank


 

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subsidiaries. Our bank subsidiary is PNC Bank, National Association (PNC Bank, N.A.), headquartered in Pittsburgh, Pennsylvania.

We merged the charter of PNC Bank Delaware into PNC Bank, N.A. in August 2009 and merged the charter of National City Bank into PNC Bank, N.A. in November 2009. Our non-bank subsidiary, GIS, has a banking license in Ireland and a branch in Luxembourg, which allow GIS to provide depositary services as part of its business. For additional information on our subsidiaries, see Exhibit 21 to this Report.

STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES The following statistical information is included on the indicated pages of this Report and is incorporated herein by reference:

 

      Form 10-K page

Average Consolidated Balance Sheet And Net Interest Analysis

   171

Analysis Of Year-To-Year Changes In Net Interest Income

   170

Book Values Of Securities

   33-37 and 113-117

Maturities And Weighted-Average Yield Of Securities

   116

Loan Types

   30, 108 and 172

Selected Loan Maturities And Interest Sensitivity

   174-175

Nonaccrual, Past Due And Restructured Loans And Other Nonperforming Assets

   67-70, 110 and 172

Potential Problem Loans And Loans Held For Sale

   37 and 67-70

Summary Of Loan Loss Experience

   68-70 and 173

Assignment Of Allowance For Loan And Lease Losses

   68-70 and 173

Average Amount And Average Rate Paid On Deposits

   171

Time Deposits Of $100,000 Or More

   132 and 175

Selected Consolidated Financial Data

   20-21

SUPERVISION AND REGULATION

OVERVIEW

PNC is a bank holding company registered under the Bank Holding Company Act of 1956 as amended (BHC Act) and a financial holding company under the Gramm-Leach-Bliley Act (GLB Act).

We are subject to numerous governmental regulations, some of which are highlighted below. You should also read Note 23 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report, included here by reference, for additional information regarding our regulatory matters. Applicable laws and regulations restrict permissible activities and investments and require compliance with

protections for loan, deposit, brokerage, fiduciary, mutual fund and other customers, among other things. They also restrict our ability to repurchase stock or to receive dividends from bank subsidiaries and impose capital adequacy requirements. The consequences of noncompliance can include substantial monetary and nonmonetary sanctions.

In addition, we are subject to comprehensive examination and supervision by, among other regulatory bodies, the Board of Governors of the Federal Reserve System (Federal Reserve) and the Office of the Comptroller of the Currency (OCC), which results in examination reports and ratings (which are not publicly available) that can impact the conduct and growth of our businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. An examination downgrade by any of our federal bank regulators potentially can result in the imposition of significant limitations on our activities and growth. These regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies. This supervisory framework could materially impact the conduct, growth and profitability of our operations.

We are also subject to regulation by the Securities and Exchange Commission (SEC) by virtue of our status as a public company and due to the nature of some of our businesses.

As a regulated financial services firm, our relationships and good standing with regulators are of fundamental importance to the continuation and growth of our businesses. The Federal Reserve, OCC, SEC, and other domestic and foreign regulators have broad enforcement powers, and powers to approve, deny, or refuse to act upon our applications or notices to conduct new activities, acquire or divest businesses or assets and deposits, or reconfigure existing operations.

Due to the current economic environment and issues facing the financial services industry, we anticipate new legislative and regulatory initiatives over the next several years, including many focused specifically on banking and other financial services in which we are engaged. These initiatives will be in addition to the actions already taken by Congress and the regulators, including EESA, the American Recovery and Reinvestment Act of 2009 (Recovery Act), the Credit CARD Act of 2009 (Credit CARD Act), and the Secure and Fair Enforcement for Mortgage Licensing Act (the SAFE Act), as well as changes to the regulations implementing the Real Estate Settlement Procedures Act, the Federal Truth in Lending Act, and the Electronic Fund Transfer Act. Developments to date, as well as those that come in the future,


 

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have had and are likely to continue to have an impact on the conduct of our business. The more detailed description of the significant regulations to which we are subject that follows is based on the current regulatory environment and is subject to potentially material change.

On May 7, 2009, the Board of Governors of the Federal Reserve System announced the results of the stress tests conducted by banking regulators under the Supervisory Capital Assessment Program with respect to the 19 largest bank holding companies. As a result of this test, the Federal Reserve concluded that PNC was well capitalized but that, in order to provide a greater cushion against the risk that economic conditions over the next two years are worse than currently anticipated, PNC needed to augment the composition of its capital by increasing the common shareholders’ equity component of Tier 1 capital. In May 2009 we raised $624 million in new common equity at market prices through the issuance of 15 million shares of common stock. In connection with the Supervisory Capital Assessment Program, we submitted a capital plan which was accepted by the Federal Reserve.

In light of the economic uncertainties and the actions taken by Congress, the US Department of the Treasury and other regulatory agencies to address the credit crisis, there is an increased focus by regulators on lending activities by banks and the relationship between those activities and governmental efforts to improve this situation. Also at least in part driven by the current economic and financial situation, there is an increased focus on fair lending and other issues related to the mortgage industry. Ongoing mortgage-related regulatory reforms include measures aimed at limiting mortgage foreclosures.

There has been a heightened focus recently on consumer protection issues generally, including those related to the protection of confidential customer information and fees assessed on deposits and credit card accounts.

Among other areas that have been receiving a high level of regulatory focus over the last several years has been compliance with anti-money laundering rules and regulations.

Additional legislation, changes in rules promulgated by the Federal Reserve, the OCC, the FDIC, the SEC, other federal and state regulatory authorities and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules may directly affect the method of operation and profitability of our businesses. The profitability of our businesses could also be affected by rules and regulations that impact the business and financial communities in general, including changes to the laws governing taxation, antitrust regulation and electronic commerce.

There are numerous rules governing the regulation of financial services institutions and their holding companies. Accord-

ingly, the following discussion is general in nature and does not purport to be complete or to describe all of the laws and regulations that apply to us.

BANK REGULATION

As a bank holding company and a financial holding company, we are subject to supervision and regular inspection by the Federal Reserve. PNC Bank, N.A. and its subsidiaries are subject to supervision and examination by applicable federal banking agencies, principally the OCC.

Because of PNC’s voting ownership interest in BlackRock, BlackRock is subject to the supervision and regulation of the Federal Reserve.

Parent Company Liquidity and Dividends. The principal source of our liquidity at the parent company level is dividends from PNC Bank, N.A. PNC Bank, N.A. is subject to various federal restrictions on its ability to pay dividends to PNC Bancorp, Inc., its direct parent. PNC Bank N.A. is also subject to federal laws limiting extensions of credit to its parent holding company and non-bank affiliates as discussed in Note 23 Regulatory Matters included in the Notes To Consolidated Financial Statements in Item 8 of this Report, which is incorporated herein by reference. Further information on bank level liquidity and parent company liquidity and on certain contractual restrictions is also available in the Liquidity Risk Management section and in the “Perpetual Trust Securities”, “PNC Capital Trust E Trust Preferred Securities”, and “Acquired Entity Trust Preferred Securities” sections of the Off-Balance Sheet Arrangements and VIEs section of Item 7 of this Report.

Under Federal Reserve policy, a bank holding company is expected to serve as a source of financial strength to its subsidiary bank and to commit resources to support such bank. Consistent with the “source of strength” policy for subsidiary banks, the Federal Reserve has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the corporation’s capital needs, asset quality and overall financial condition.

Additional Powers Under the GLB Act. The GLB Act permits a qualifying bank holding company to become a “financial holding company” and thereby to affiliate with financial companies engaging in a broader range of activities than would otherwise be permitted for a bank holding company. Permitted affiliates include securities underwriters and dealers, insurance companies and companies engaged in other activities that are determined by the Federal Reserve, in consultation with the Secretary of the Treasury, to be “financial in nature or incidental thereto” or are determined by the Federal Reserve unilaterally to be “complementary” to financial activities. We became a financial holding company as of March 13, 2000.


 

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The Federal Reserve is the “umbrella” regulator of a financial holding company, with its operating entities, such as its subsidiary broker-dealers, investment managers, investment companies, insurance companies and banks, also subject to the jurisdiction of various federal and state “functional” regulators with normal regulatory responsibility for companies in their lines of business.

As subsidiaries of a financial holding company under the GLB Act, our non-bank subsidiaries are allowed to conduct new financial activities or acquire non-bank financial companies with after-the-fact notice to the Federal Reserve. In addition, our non-bank subsidiaries (and any financial subsidiaries of subsidiary banks) are now permitted to engage in certain activities that were not permitted for banks and bank holding companies prior to enactment of the GLB Act, and to engage on less restrictive terms in certain activities that were previously permitted. Among other activities, we currently rely on our status as a financial holding company to conduct mutual fund distribution activities, merchant banking activities, and securities underwriting and dealing activities.

In addition, the GLB Act permits national banks, such as PNC Bank, N.A., to engage in expanded activities through the formation of a “financial subsidiary.” In order to qualify to establish or acquire a financial subsidiary, PNC Bank, N.A. must be “well capitalized” and “well managed” and may not have a less than “satisfactory” Community Reinvestment Act (CRA) rating. A national bank that is one of the largest 50 insured banks in the United States, such as PNC Bank, N.A., must also have issued debt (which, for this purpose, may include the uninsured portion of a national bank’s long-term certificates of deposit) with certain minimum ratings. PNC Bank, N.A. has filed a financial subsidiary certification with the OCC and currently engages in insurance agency activities through financial subsidiaries. PNC Bank, N.A. may also generally engage through a financial subsidiary in any activity that is financial in nature or incidental to a financial activity. Certain activities, however, are impermissible for a financial subsidiary of a national bank, including insurance under-writing, insurance investments, real estate investment or development, and merchant banking.

Other Federal Reserve and OCC Regulation. The federal banking agencies possess broad powers to take corrective action as deemed appropriate for an insured depository institution and its holding company. The extent of these powers depends upon whether the institution in question is considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Generally, the smaller an institution’s capital base in relation to its risk-weighted assets, the greater the scope and severity of the agencies’ powers, ultimately permitting the agencies to appoint a receiver for the institution. Business activities may also be influenced by an institution’s capital classification. For instance, only a “well capitalized” depository institution may accept

brokered deposits without prior regulatory approval and an “adequately capitalized” depository institution may accept brokered deposits only with prior regulatory approval. At December 31, 2009, PNC Bank, N.A. exceeded the required ratios for classification as “well capitalized.” For additional discussion of capital adequacy requirements, we refer you to “Funding and Capital Sources” in the Consolidated Balance Sheet Review section of Item 7 of this Report and to Note 23 Regulatory Matters included in the Notes To Consolidated Financial Statements in Item 8 of this Report.

Laws and regulations limit the scope of our permitted activities and investments. In addition to the activities that would be permitted to be conducted by a financial subsidiary, national banks (such as PNC Bank, N.A.) and their operating subsidiaries may engage in any activities that are determined by the OCC to be part of or incidental to the business of banking.

Moreover, examination ratings of “3” or lower, lower capital ratios than peer group institutions, regulatory concerns regarding management, controls, assets, operations or other factors, can all potentially result in practical limitations on the ability of a bank or bank holding company to engage in new activities, grow, acquire new businesses, repurchase its stock or pay dividends, or to continue to conduct existing activities.

The Federal Reserve’s prior approval is required whenever we propose to acquire all or substantially all of the assets of any bank or thrift, to acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank or thrift, or to merge or consolidate with any other bank holding company or thrift holding company. When reviewing bank acquisition applications for approval, the Federal Reserve considers, among other things, each subsidiary bank’s record in meeting the credit needs of the communities it serves in accordance with the CRA. Our ability to grow through acquisitions could be limited by these approval requirements.

At December 31, 2009, PNC Bank, N.A. was rated “outstanding” with respect to CRA.

FDIC Insurance. PNC Bank, N.A. is insured by the FDIC and subject to premium assessments. Regulatory matters could increase the cost of FDIC deposit insurance premiums to an insured bank as FDIC deposit insurance premiums are “risk based.” Therefore, higher fee percentages would be charged to banks that have lower capital ratios or higher risk profiles. These risk profiles take into account weaknesses that are found by the primary banking regulator through its examination and supervision of the bank. A negative evaluation by the FDIC or a bank’s primary federal banking regulator could increase the costs to a bank and result in an aggregate cost of deposit funds higher than that of competing banks in a lower risk category.


 

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SECURITIES AND RELATED REGULATION

The SEC, together with either the OCC or the Federal Reserve, regulates our registered broker-dealer subsidiaries. These subsidiaries are also subject to rules and regulations promulgated by the Financial Industry Regulatory Authority (FINRA), among others.

Several of our subsidiaries are registered with the SEC as investment advisers and provide services both directly to clients and to PNC affiliates and related entities, including registered investment companies. Our investment advisor subsidiaries are subject to the requirements of the Investment Advisers Act of 1940, as amended, and the SEC’s regulations thereunder. The principal purpose of the regulations applicable to investment advisers is the protection of clients and the securities markets, rather than the protection of creditors and shareholders of investment advisors. The regulations applicable to investment advisers cover all aspects of the investment advisory business, including limitations on the ability of investment advisers to charge performance-based or non-refundable fees to clients; record-keeping; operational, marketing and reporting requirements; disclosure requirements; limitations on principal transactions between an adviser or its affiliates and advisory clients; as well as general anti-fraud prohibitions. These investment advisory subsidiaries also may be subject to state securities laws and regulations.

In addition, our investment advisory subsidiaries that are investment advisors to registered investment companies and other managed accounts are subject to the requirements of the Investment Company Act of 1940, as amended, and the SEC’s regulations thereunder, including PNC Capital Advisors, LLC, a wholly-owned subsidiary of PNC Bank, N.A. and registered investment advisor. GIS is subject to regulation by the SEC as a service provider to registered investment companies.

Over the past several years, the SEC and other governmental agencies have been investigating the mutual fund and hedge fund industries, including PNC Capital Advisors, LLC, GIS and other industry participants. The SEC has proposed various rules, and legislation has been introduced in Congress, intended to reform the regulation of these industries. The effect of regulatory reform has, and is likely to continue to, increase the extent of regulation of the mutual fund and hedge fund industries and impose additional compliance obligations and costs on our subsidiaries involved with those industries.

Under provisions of the federal securities laws applicable to broker-dealers, investment advisers and registered investment companies and their service providers, a determination by a court or regulatory agency that certain violations have occurred at a company or its affiliates can result in fines, restitution, a limitation on permitted activities, disqualification to continue to conduct certain activities and an inability to rely on certain favorable exemptions. Certain types of infractions and violations can also affect a public company in its timing

and ability to expeditiously issue new securities into the capital markets. In addition, certain changes in the activities of a broker-dealer require approval from FINRA, and FINRA takes into account a variety of considerations in acting upon applications for such approval, including internal controls, capital, management experience and quality, prior enforcement and disciplinary history and supervisory concerns.

Our securities businesses with operations outside the United States, including BlackRock and GIS, are also subject to regulation by appropriate authorities in the foreign jurisdictions in which they do business.

BlackRock has subsidiaries in securities and related businesses subject to SEC and FINRA regulation, as described above, and a federally chartered nondepository trust company subsidiary subject to the supervision and regulation of the OCC. For additional information about the regulation of BlackRock, we refer you to the discussion under the “Regulation” section of Item 1 Business in BlackRock’s most recent Annual Report on Form 10-K, which may be obtained electronically at the SEC’s website at www.sec.gov.

COMPETITION

We are subject to intense competition from various financial institutions and from non-bank entities that engage in similar activities without being subject to bank regulatory supervision and restrictions.

In making loans, PNC Bank, N.A. competes with traditional banking institutions as well as consumer finance companies, leasing companies and other non-bank lenders, and institutional investors including CLO managers, hedge funds, mutual fund complexes and private equity firms. Loan pricing, structure and credit standards are extremely important in the current environment as we seek to achieve risk-adjusted returns. Traditional deposit activities are subject to pricing pressures and customer migration as a result of intense competition for consumer investment dollars.

PNC Bank, N.A. competes for deposits with the following:

   

Other commercial banks,

   

Savings banks,

   

Savings and loan associations,

   

Credit unions,

   

Treasury management service companies,

   

Insurance companies, and

   

Issuers of commercial paper and other securities, including mutual funds.

Our various non-bank businesses engaged in investment banking and private equity activities compete with the following:

   

Commercial banks,

   

Investment banking firms,

   

Merchant banks,


 

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Insurance companies,

   

Private equity firms, and

   

Other investment vehicles.

In providing asset management services, our businesses compete with the following:

   

Investment management firms,

   

Large banks and other financial institutions,

   

Brokerage firms,

   

Mutual fund complexes, and

   

Insurance companies.

We include here by reference the additional information regarding competition included in the Item 1A Risk Factors section of this Report.

EMPLOYEES Employees totaled 55,820 at December 31, 2009. This total includes 49,761 full-time and 6,059 part-time employees. This total also includes 4,450 GIS employees.

SEC REPORTS AND CORPORATE GOVERNANCE INFORMATION

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), and, in accordance with the Exchange Act, we file annual, quarterly and current reports, proxy statements, and other information with the SEC. Our SEC File Number is 001-09718. You may read and copy this information at the SEC’s Public Reference Room located at 100 F Street NE, Room 1580, Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

You can also obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, NE, Washington, D.C. 20549, at prescribed rates.

The SEC also maintains an internet website that contains reports, proxy and information statements, and other information about issuers, like us, who file electronically with the SEC. The address of that site is www.sec.gov. You can also inspect reports, proxy statements and other information about us at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.

We also make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge on or through our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. PNC’s corporate internet address is www.pnc.com and you can find this information at www.pnc.com/secfilings. Shareholders and bondholders may also obtain copies of these filings without charge by contacting Shareholder Services at 800-982-7652 or via the online contact form at www.computershare.com/contactus for copies without

exhibits, or by contacting Shareholder Relations at 800-843-2206 or via e-mail at investor.relations@pnc.com for copies of exhibits. The interactive data file (XBRL) exhibit is only available electronically.

Information about our Board and its committees and corporate governance at PNC is available on PNC’s corporate website at www.pnc.com/corporategovernance. Our PNC Code of Business Conduct and Ethics is available on our corporate website at www.pnc.com/corporategovernance. In addition, any future amendments to, or waivers from, a provision of the PNC Code of Business Conduct and Ethics that applies to our directors or executive officers (including the Chairman and Chief Executive Officer, the Chief Financial Officer and the Controller) will be posted at this internet address.

Shareholders who would like to request printed copies of the PNC Code of Business Conduct and Ethics or our Corporate Governance Guidelines or the charters of our Board’s Audit, Nominating and Governance, or Personnel and Compensation Committees (all of which are posted on the PNC corporate website) may do so by sending their requests to George P. Long, III, Corporate Secretary, at corporate headquarters at One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707. Copies will be provided without charge to shareholders.

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol “PNC.”

INTERNET INFORMATION

The PNC Financial Services Group, Inc.’s financial reports and information about its products and services are available on the internet at www.pnc.com. We provide information for investors in portions of our corporate website, such as the Investor Events and Financial Information areas that you can find under “About PNC – Investor Relations.” In this section, we will from time to time post information that we believe may be important or useful to investors. We generally post the following shortly before or promptly following its first use or release: financially-related press releases (including earnings releases), various SEC filings, presentation materials associated with earnings and other investor conference calls or events, and access to live and taped audio from such calls or events. When warranted, we will also use our website to expedite public access to time-critical information regarding PNC in advance of distribution of a press release or a filing with the SEC disclosing the same information. You can also find the SEC reports and corporate governance information described in the section above in the Investor Relations section of our website.

Where we have included web addresses in this Report, such as our web address and web addresses of the SEC and of BlackRock, we have included those web addresses as inactive textual references only. Except as specifically incorporated by reference into this Report, information on those websites is not part of this Report.


 

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ITEM 1ARISK FACTORS

We are subject to a number of risks potentially impacting our business, financial condition, results of operations and cash flows. Indeed, as a financial services organization, certain elements of risk are inherent in every one of our transactions and are present in every business decision we make. Thus, we encounter risk as part of the normal course of our business, and we design risk management processes to help manage these risks.

There are risks that are known to exist at the outset of a transaction. For example, every loan transaction presents credit risk (the risk that the borrower may not perform in accordance with contractual terms) and interest rate risk (a potential loss in earnings or economic value due to adverse movement in market interest rates or credit spreads), with the nature and extent of these risks principally depending on the identity of the borrower and overall economic conditions. These risks are inherent in every loan transaction; if we wish to make loans, we must manage these risks through the terms and structure of the loans and through management of our deposits and other funding sources.

Risk management is an important part of our business model. The success of our business is dependent on our ability to identify, understand and manage the risks presented by our business activities so that we can balance appropriately revenue generation and profitability with these inherent risks. Our shareholders have been well served by our focus on maintaining a moderate risk profile. At December 31, 2008 with an economy then in severe recession and with our then recent acquisition of National City, our Consolidated Balance Sheet did not reflect that desired risk profile. However, by December 31, 2009 we had made significant progress in bringing our risk issues back into alignment and in transitioning our balance sheet to reflect our business model. We remain committed to returning to a moderate risk profile characterized by disciplined credit management and limited exposure to earnings volatility resulting from interest rate fluctuations and the shape of the interest rate yield curve. We discuss our principal risk management processes and, in appropriate places, related historical performance in the Risk Management section included in Item 7 of this Report.

The following are the key risk factors that affect us. In general, each of these risk factors presents the risk of a material impact on our results of operations or financial condition, in addition to other possible consequences described below. These risk factors and other risks are also discussed further in other parts of this Report.

Risks related to current economic conditions

The failure or slowing of the current modest economic recovery from recessionary conditions, or further turmoil or volatility in the financial markets, would likely have an adverse effect on our business, financial position and results of operations.

 

The economy in the United States and globally began to recover from severe recessionary conditions near mid-year 2009 and is currently in the midst of a modest economic recovery. The sustainability of the modest recovery is dependent on a number of factors that are not within our control, such as a return to private sector job growth, strengthening of housing sales and construction, continuation of the economic recovery globally, and the timing of the exit from government credit easing policies. We continue to face risks resulting from the aftermath of the severe recession generally and the modest pace of the current recovery. A slowing or failure of the economic recovery could bring a return to some or all of the adverse effects of the earlier recessionary conditions.

Since the middle of 2007 and with a heightened level of activity in 2008 and 2009, there has been disruption and turmoil in financial markets around the world. Throughout much of the United States there were dramatic declines in the housing market, with falling home prices and increasing foreclosures, and deepening recessionary conditions in the economy led to increased unemployment and underemployment and to reduced earnings, or in some cases losses, for businesses across many industries, with reduced investments in growth.

This overall environment resulted in significant stress for the financial services industry, and led to distress in credit markets, reduced liquidity for many types of securities, and concerns regarding the financial strength and adequacy of the capitalization of financial institutions. Some financial institutions around the world have failed, some have needed significant additional capital, and others have been forced to seek acquisition partners.

Reflecting concern about the stability of the financial markets generally and the strength of counterparties, as well as concern about their own capital and liquidity positions, many lenders and institutional investors reduced or ceased providing funding to borrowers. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets exacerbated the state of economic distress and hampered, and to some extent continues to hamper, efforts to bring about and sustain an economic recovery.

The United States and other governments have taken unprecedented steps to stabilize and restore confidence in the financial system, including making significant investments in financial institutions and guaranteeing or otherwise supporting troubled assets held by financial institutions. The US federal government has continued in its efforts to provide economic stimulus and financial market stability and to enhance the liquidity and solvency of financial institutions and markets, as well as to protect consumers and investors from financial abuse. These efforts, which will continue to evolve and which have impacted and will likely continue to impact PNC and its stakeholders, include EESA, the Recovery Act, and the Credit


 

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CARD Act, among other legislative, administrative and regulatory initiatives, and also include changes in or additions to the statutes or regulations related to these and other programs.

These economic conditions have had an adverse effect on our business and financial performance. While the economy is currently in a modest recovery, we expect these conditions to continue to have an ongoing negative impact on us. A slowing or failure of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial institutions industry.

In particular, we may face the following risks in connection with the current economic and market environment:

   

We have seen and expect to face further increased regulation of our industry, including as a result of the EESA, the Recovery Act, the Credit CARD Act, and other current or future initiatives intended to provide economic stimulus, financial market stability and enhanced regulation of financial services companies and to enhance the liquidity and solvency of financial institutions and markets. Compliance with such regulation may increase our costs, reduce our revenue, and limit our ability to pursue business opportunities.

   

Investors may have less confidence in the equity markets in general and in financial services industry stocks in particular, which could place downward pressure on PNC’s stock price and resulting market valuation.

   

Economic and market developments may further affect consumer and business confidence levels and may cause declines in credit usage and adverse changes in payment patterns, causing increases in delinquencies and default rates.

   

Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite our customers become less predictive of future behaviors.

   

The process we use to estimate losses incurred in our credit exposure requires difficult, subjective, and complex judgments, including the review of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans, which may no longer be capable of accurate estimation, which may, in turn, impact the reliability of the process.

   

We could suffer decreases in customer desire to do business with us, whether as a result of a decreased demand for loans or other financial products and services or decreased deposits or other investments in accounts with PNC.

   

Competition in our industry could intensify as a result of the increasing consolidation of financial

   

services companies in connection with current market conditions. Governmental support provided to financial institutions could alter the competitive landscape.

   

Increased regulation of compensation at financial services companies as part of government efforts to reform the industry may hinder our ability to attract and retain well-qualified individuals in key positions.

   

We may be required to pay significantly higher Federal Deposit Insurance Corporation premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. Higher premiums may also result from FDIC proposals regarding risk-based premiums.

   

Investors in mortgage loans that we sell are more likely to seek indemnification against losses on loans or otherwise seek to have us share in such losses or to request us to repurchase loans that the investors do not believe comply with applicable representations.

   

We may be subject to additional fees and taxes as the government seeks to recover some of the costs of its recovery efforts, in particular from the financial services industry.

Some of these risks and others are discussed in more detail below.

The failure or slowing of the current modest recovery from recessionary conditions, as well as the lingering effects of the recession, would likely adversely affect our lending businesses and the value of the loans and debt securities we hold.

Given the high percentage of our assets represented directly or indirectly by loans, and the importance of lending to our overall business, the aftermath of recessionary conditions is likely to continue to have a negative impact on our business and our results of operations as the positive effects of economic recovery are likely to be slow and uneven in spreading to our customers. This could adversely impact loan utilization rates as well as delinquencies, defaults and customer ability to meet obligations under the loans.

Further, a failure or slowing of the current modest recovery from recessionary conditions would likely have a negative impact on our business, our ability to serve our customers, and our results of operations. Such conditions are likely to lead to increases in the number of borrowers who become delinquent or default or otherwise demonstrate a decreased ability to meet their obligations under their loans. This would result in higher levels of non-performing loans, net charge-offs, provision for credit losses and valuation adjustments on loans held for sale. The value to us of other assets such as investment securities, most of which are debt securities or represent securitizations of loans, similarly would be negatively impacted by widespread decreases in credit quality resulting from a weakening of the economy.


 

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Our regional concentrations make us particularly at risk for economic conditions in our primary retail banking footprint.

Although many of our businesses are national and some are international in scope, our retail banking business is concentrated within our retail branch network footprint, located primarily in Pennsylvania, Ohio, New Jersey, Michigan, Maryland, Illinois, Indiana, Kentucky, Florida, Missouri, Virginia, Delaware, Washington, D.C., and Wisconsin. Thus, we are particularly vulnerable to adverse changes in economic conditions in these states or the Mid-Atlantic and Midwest regions more generally.

Our business and performance are vulnerable to the impact of continued volatility in debt and equity markets.

As most of our assets and liabilities are financial in nature, we tend to be particularly sensitive to the performance of the financial markets. Since the middle of 2007 and with a heightened level of activity during 2008 and 2009, there has been unprecedented turmoil, volatility and illiquidity in worldwide financial markets, accompanied by uncertain prospects for sustaining the modest economic recovery that began mid-year 2009. In addition, there have been dramatic changes in the competitive landscape of the financial services industry during this time. This turmoil and volatility has been a contributory factor to overall economic conditions, leading to some of the risks discussed above, including impairing the ability of borrowers and other counterparties to meet obligations to us. Financial market volatility also can have some of the following adverse effects on PNC and our business and financial performance:

   

It can affect the value or liquidity of our on-balance sheet and off-balance sheet financial instruments.

   

It can affect the value of servicing rights, including those we carry at fair value.

   

It can affect, to the extent we access capital markets to raise funds to support our business and overall liquidity position, the cost of such funds or our ability to raise such funds. The inability to access capital markets at a desirable cost could affect our liquidity or results of operations.

   

It can affect the value of the assets that we manage or otherwise administer for others or the assets for which we provide processing and information services. Although we are not directly impacted by changes in the value of assets that we manage or administer for others or for which we provide processing and information services, decreases in the value of those assets would affect our fee income relating to those assets and could result in decreased demand for our services.

   

It can affect the required funding of our pension obligations to the extent that the value of the assets supporting those obligations drops below minimum levels.

   

In general, it can impact the nature, profitability or risk profile of the financial transactions in which we engage.

Volatility in the markets for real estate and other assets commonly securing financial products has been and is likely to continue to be a significant contributor to overall volatility in financial markets.

Our business and financial performance is impacted significantly by market interest rates and movements in those rates. The monetary, tax and other policies of governmental agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance over which we have no control and which we may not be able to predict adequately.

As a result of the high percentage of our assets and liabilities that are in the form of interest-bearing or interest-related instruments, changes in interest rates, in the shape of the yield curve or in spreads between different market interest rates can have a material effect on our business, our profitability and the value of our financial assets and liabilities. For example:

   

Changes in interest rates or interest rate spreads can affect the difference between the interest that we earn on assets and the interest that we pay on liabilities, which impacts our overall net interest income.

   

Such changes can affect the ability of borrowers to meet obligations under variable or adjustable rate debt instruments.

   

Such changes may decrease the demand for interest-rate based products and services, including loans and deposit accounts.

   

Such changes can also affect our ability to hedge various forms of market and interest rate risk and may decrease the profitability or increase the risk associated with such hedges.

   

Movements in interest rates also affect mortgage prepayment speeds and could result in impairments of mortgage servicing assets.

The monetary, tax and other policies of the government and its agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance. These governmental policies can thus affect the activities and results of operations of banking companies such as PNC. An important function of the Federal Reserve is to regulate the national supply of bank credit and market interest rates. The actions of the Federal Reserve influence the rates of interest that we charge on loans and that we pay on borrowings and interest-bearing deposits and can also affect the value of our on-balance sheet and off-balance sheet financial instruments. Both due to the impact on rates and by controlling access to direct funding from the Federal Reserve Banks, the Federal Reserve’s policies also influence, to a significant extent, our cost of funding. We cannot predict the


 

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nature or timing of future changes in monetary, tax and other policies or the effect that they may have on our activities and financial results.

The soundness of other financial institutions could adversely affect us.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us.

Risks resulting from 2008-2010 transactions

Our acquisition of National City presents substantial risks and uncertainties, which could limit our ability to realize the anticipated benefits from this transaction.

On December 31, 2008, we acquired National City through a merger in which PNC continued as the surviving entity. We provide additional information about this acquisition in Note 2 Acquisitions and Divestitures included in the Notes To Consolidated Financial Statements in Item 8 of this Report.

This acquisition presents us with a number of risks and uncertainties related both to the acquisition itself and to the integration of the acquired businesses into PNC. These risks and uncertainties include the following risks to PNC:

   

Like PNC, National City was a large financial institution with retail and other banking operations in numerous markets in which PNC had little or no experience. National City also had major operations in areas in which PNC did not have a significant presence, including residential mortgage lending, residential mortgage servicing, credit card lending and equipment leasing. Prior to completion of the merger, PNC and National City operated as separate independent entities, and National City operated under its own systems and procedures, operating models and controls. As a result of these factors as well as the relative size of the acquisition, there are significant integration-related risks, which are greater than in other recent acquisitions by PNC.

   

Prior to our acquisition, National City’s results were impacted negatively by a significant amount of asset impairments. Our results following the acquisition depend on our ability to manage these assets, which require special servicing and management oversight, including disposition if appropriate. As the integration process continues, we may identify other

   

issues with respect to National City’s asset valuation or accounting procedures that may lead to further impairments or write-downs.

   

National City’s pre-acquisition financial performance and resulting stock price performance and other pre-acquisition activities have led to legal proceedings and other claims and governmental investigations and more may be made or commenced in the future. As a result of this acquisition, we now bear the risks associated with legal proceedings and other claims and governmental investigations relating to National City’s business and activities before the acquisition, the full extent of the potential adverse impact of which cannot currently be predicted with reasonable certainty. See Note 24 Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information.

Our failure to complete the sale of GIS by November 1, 2010 would result in a requirement that we sell other assets or raise additional common equity.

As part of the regulatory approval for the redemption of the Series N Preferred Stock issued to the US Treasury, we will be required to raise additional Tier 1 common capital through the sale of assets approved by the Federal Reserve Board or through the issuance of additional common stock if the sale of GIS has not been completed by November 1, 2010. We will need to raise this additional Tier 1 common capital by November 1 in the amount of $700 million.

Risks related to the ordinary course of PNC’s business

We operate in a highly competitive environment, both in terms of the products and services we offer, the geographic markets in which we conduct business, as well as our labor markets and competition for talented employees. Competition could adversely impact our customer acquisition, growth and retention, as well as our credit spreads and product pricing, causing us to lose market share and deposits and revenues.

We are subject to intense competition from various financial institutions as well as from non-bank entities that engage in similar activities without being subject to bank regulatory supervision and restrictions. This competition is described in Item 1 of this Report under “Competition.”

In all, the principal bases for competition are pricing (including the interest rates charged on loans or paid on interest-bearing deposits), product structure, the range of products and services offered, and the quality of customer service (including convenience and responsiveness to customer needs and concerns). The ability to access and use technology is an increasingly important competitive factor in the financial services industry. Technology is important not only with respect to delivery of financial services but also in


 

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processing information. Each of our businesses consistently must make significant technological investments to remain competitive.

A failure to address adequately the competitive pressures we face could make it harder for us to attract and retain customers across our businesses. On the other hand, meeting these competitive pressures could require us to incur significant additional expenses or to accept risk beyond what we would otherwise view as desirable under the circumstances. In addition, in our interest sensitive businesses, pressures to increase rates on deposits or decrease rates on loans could reduce our net interest margin with a resulting negative impact on our net interest income.

We grow our business in part by acquiring from time to time other financial services companies, and these acquisitions present us with a number of risks and uncertainties related both to the acquisition transactions themselves and to the integration of the acquired businesses into PNC after closing.

Acquisitions of other financial services companies in general present risks to PNC in addition to those presented by the nature of the business acquired. We describe some of the integration risks presented by our acquisition of National City above. Many of these risks are common to some extent in acquisition transactions.

In general, acquisitions may be substantially more expensive to complete (including unanticipated costs incurred in connection with the integration of the acquired company) and the anticipated benefits (including anticipated cost savings and strategic gains) may be significantly harder or take longer to achieve than expected. In some cases, acquisitions involve our entry into new businesses or new geographic or other markets, and these situations also present risks resulting from our inexperience in these new areas. As a regulated financial institution, our pursuit of attractive acquisition opportunities could be negatively impacted due to regulatory delays or other regulatory issues. Regulatory and/or legal issues relating to the pre-acquisition operations of an acquired business may cause reputational harm to PNC following the acquisition and integration of the acquired business into ours and may result in additional future costs or regulatory limitations arising as a result of those issues.

The performance of our asset management businesses may be adversely affected by the relative performance of our products compared with alternative investments as well as by overall economic and market conditions.

Asset management revenue is primarily based on a percentage of the value of assets under management and, in some cases, performance fees, in most cases expressed as a percentage of the returns realized on assets under management, and thus is impacted by general changes in capital markets valuations as

well as by customer preferences and needs. In addition, investment performance is an important factor influencing the level of assets under management. Poor investment performance could impair revenue and growth as existing clients might withdraw funds in favor of better performing products. Also, performance fees could be lower or nonexistent. Additionally, the ability to attract funds from existing and new clients might diminish. Overall economic conditions may limit the amount that customers are able or willing to invest.

The failure or negative performance of products of other financial institutions could lead to a loss of confidence in similar products offered by us without regard to the performance of our products. Such a negative contagion could lead to withdrawals, redemptions and liquidity issues in such products and have a material adverse impact on our assets under management and asset management revenues and earnings.

The performance of our fund servicing business may be adversely affected by changes in investor preferences, or changes in existing or potential fund servicing clients or alternative providers.

Fund servicing fees are primarily derived from the market value of the assets and the number of shareholder accounts that we administer for our clients. The performance of our fund processing business is thus partially dependent on the underlying performance of its fund clients and, in particular, their ability to attract and retain customers. Changes in interest rates or a sustained weakness, weakening or volatility in the debt and equity markets could (in addition to affecting directly the value of assets administered as discussed above) influence an investor’s decision to invest or maintain an investment in a particular mutual fund or other pooled investment product. Other factors beyond our control may impact the ability of our fund clients to attract or retain customers or customer funds, including changes in preferences as to certain investment styles. Further, to the extent that our fund clients’ businesses are adversely affected by ongoing governmental investigations into the practices of the mutual and hedge fund industries, our fund processing business’ results also could be adversely impacted. As a result of these types of factors, fluctuations may occur in the level or value of assets for which we provide processing services. In addition, this regulatory and business environment is likely to continue to result in operating margin pressure for our various services.

As a regulated financial services firm, we are subject to numerous governmental regulations and to comprehensive examination and supervision by regulators, which affects our business as well as our competitive position.

PNC is a bank and financial holding company and is subject to numerous governmental regulations involving both its


 

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business and organization. PNC services its obligations primarily with dividends and advances that it receives from its subsidiaries.

Our businesses are subject to regulation by multiple bank regulatory bodies as well as multiple securities industry regulators. Applicable laws and regulations restrict our ability to repurchase stock or to receive dividends from subsidiaries that operate in the banking and securities businesses and impose capital adequacy requirements. They also restrict permissible activities and investments and require compliance with protections for loan, deposit, brokerage, fiduciary, mutual fund and other customers, and for the protection of customer information, among other things. The consequences of noncompliance can include substantial monetary and nonmonetary sanctions as well as damage to our reputation and businesses.

In addition, we are subject to comprehensive examination and supervision by banking and other regulatory bodies. Examination reports and ratings (which often are not publicly available) and other aspects of this supervisory framework can materially impact the conduct, growth, and profitability of our businesses.

Due to the current economic environment and issues facing the financial services industry, we anticipate new legislative and regulatory initiatives over the next several years, including many focused specifically on banking and other financial services in which we are engaged. These initiatives will be in addition to the actions already taken by Congress and the regulators, including EESA, the Recovery Act, the Credit CARD Act, and the SAFE Act, as well as changes to the regulations implementing the Real Estate Settlement Procedures Act, the Federal Truth in Lending Act, and the Electronic Fund Transfer Act. Developments to date, as well as those that come in the future, have had and are likely to continue to have an impact on the conduct of our business. This impact could include rules and regulations that affect the nature and profitability of our business activities, how we use our capital, how we compensate and incent our employees, and other matters potentially having a negative effect on our overall business results and prospects.

Under the regulations of the Federal Reserve, a bank holding company is expected to act as a source of financial strength for its subsidiary banks. As a result of this regulatory policy, the Federal Reserve might require PNC to commit resources to PNC Bank, N.A. when doing so is not otherwise in the interests of PNC or its shareholders or creditors.

Our ability to pay dividends to shareholders is largely dependent on dividends from our operating subsidiaries, principally PNC Bank, N.A. Banks are subject to regulation on the amount and circumstances of dividends they can pay to their holding companies.

 

We discuss these and other regulatory issues applicable to PNC, including some particular areas of current regulatory focus or concern, in the Supervision and Regulation section included in Item 1 of this Report and in Note 23 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report and here by reference.

A failure to have adequate procedures to comply with regulatory requirements could expose us to damages, fines and regulatory penalties, which could be significant, and could also injure our reputation with customers and others with whom we do business.

We must comply with generally accepted accounting principles established by the Financial Accounting Standards Board, accounting, disclosure and other rules set forth by the SEC, income tax and other regulations established by the US Department of the Treasury, and revenue rulings and other guidance issued by the Internal Revenue Service, which affect our financial condition and results of operations.

Changes in accounting standards, or interpretations of those standards, can impact our revenue recognition and expense policies and affect our estimation methods used to prepare the consolidated financial statements. Changes in income tax regulations, revenue rulings, revenue procedures, and other guidance can impact our tax liability and alter the timing of cash flows associated with tax deductions and payments. New guidance often dictates how changes to standards and regulations are to be presented in our consolidated financial statements, as either an adjustment to beginning retained earnings for the period or as income or expense in current period earnings. In some cases, changes may be applied to previously reported disclosures.

The determination of the amount of loss allowances and impairments taken on our assets is highly subjective and could materially impact our results of operations or financial position.

The determination of the amount of loss allowances and asset impairments varies by asset type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. There can be no assurance that our management has accurately assessed the level of impairments taken and allowances reflected in our financial statements. Furthermore, additional impairments may need to be taken or allowances provided for in the future. Historical trends may not be indicative of future impairments or allowances.


 

15


Our asset valuation may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to asset valuations that may materially adversely affect our results of operations or financial condition.

We must use estimates, assumptions, and judgments when financial assets and liabilities are measured and reported at fair value. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices and/or other observable inputs provided by independent third-party sources, when available. When such third-party information is not available, we estimate fair value primarily by using cash flows and other financial modeling techniques utilizing assumptions such as credit quality, liquidity, interest rates and other relevant inputs. Changes in underlying factors, assumptions, or estimates in any of the areas underlying our estimates could materially impact our future financial condition and results of operations.

During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be more difficult to value certain of our assets if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the current financial environment. In such cases, certain asset valuations may require more subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of assets as reported within our consolidated financial statements, and the period-to-period changes in value could vary significantly.

Our business and financial results could be impacted materially by adverse results in legal proceedings.

Many aspects of our business involve substantial risk of legal liability. We have been named as defendants in various legal proceedings arising from our business activities (and in some cases from the activities of companies we have acquired). In addition, we are regularly the subject of governmental investigations and other forms of regulatory inquiry. The results of these legal proceedings and governmental investigations and inquiries could lead to significant monetary damages or penalties, restrictions on the way in which we conduct our business, or reputational harm.

Some of our customers could be adversely affected by climate-related conditions which could have an impact on our business.

Our business could be negatively impacted by adverse changes in the creditworthiness of our customers and by

adverse changes in customer demand for our products and services to the extent that our customers are negatively impacted by climate-related physical changes and hazards or by legislative and regulatory initiatives relating to climate change or other conditions.

Our business and financial performance could be adversely affected, directly or indirectly, by natural disasters, by terrorist activities or by international hostilities.

The impact of natural disasters, terrorist activities and international hostilities cannot be predicted with respect to severity or duration. However, any of these could impact us directly (for example, by causing significant damage to our facilities or preventing us from conducting our business in the ordinary course), or could impact us indirectly through a direct impact on our borrowers, depositors, other customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that natural disasters, terrorist activities or international hostilities affect the economy and capital and other financial markets generally. These types of impacts could lead, for example, to an increase in delinquencies, bankruptcies or defaults that could result in our experiencing higher levels of nonperforming assets, net charge-offs and provisions for credit losses.

Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning, including our ability to anticipate the nature of any such event that occurs. The adverse impact of natural disasters or terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses that we deal with, particularly those that we depend upon.

ITEM 1BUNRESOLVED STAFF COMMENTS

There are no SEC staff comments regarding PNC’s periodic or current reports under the Exchange Act that are pending resolution.

ITEM 2 – PROPERTIES

Our executive and administrative offices are located at One PNC Plaza, Pittsburgh, Pennsylvania. The thirty-story structure is owned by PNC Bank, N.A.

We own or lease numerous other premises for use in conducting business activities, including operations centers, offices, and branch and other facilities. We consider the facilities owned or occupied under lease by our subsidiaries to be adequate. We include here by reference the additional information regarding our properties in Note 11 Premises, Equipment and Leasehold Improvements in the Notes To Consolidated Financial Statements in Item 8 of this Report.


 

16


ITEM 3 – LEGAL PROCEEDINGS

See the information set forth in Note 24 Legal Proceedings included in the Notes To Consolidated Financial Statements in Item 8 of this Report, which is incorporated here by reference.

During 2009 National City paid penalties of $400,000 imposed under §6707A(b)(2) of the Internal Revenue Code for failure to include certain reportable transaction information in its 2004 federal income tax return related to listed transactions.

ITEM 4 – RESERVED

EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding each of our executive officers as of February 26, 2010 is set forth below. Executive officers do not have a stated term of office. Each executive officer has held the position or positions indicated or another executive position with the same entity or one of its affiliates for the past five years unless otherwise indicated below.

 

Name   Age    Position with PNC   

Year

Employed (1)

James E. Rohr

  61   

Chairman and Chief Executive Officer (2)

   1972

Joseph C. Guyaux

  59   

President

   1972

William S. Demchak

  47   

Senior Vice Chairman

   2002

Timothy G. Shack

  59   

Vice Chairman

   1976

Thomas K. Whitford

  53   

Vice Chairman and Chief Risk Officer

   1983

Joan L. Gulley

  62   

Executive Vice President and Chief Human Resources Officer

   1986

Michael J. Hannon

  53   

Executive Vice President and Chief Credit Officer

   1982

Richard J. Johnson

  53   

Executive Vice President and Chief Financial Officer

   2002

Helen P. Pudlin

  60   

Executive Vice President and General Counsel

   1989

Robert Q. Reilly

  45   

Executive Vice President

   1987

Samuel R. Patterson

  51   

Senior Vice President and Controller

   1986
(1) Where applicable, refers to year employed by predecessor company.
(2) Also serves as a director of PNC.

William S. Demchak was appointed Senior Vice Chairman in February 2009. He joined PNC as Vice Chairman and Chief Financial Officer in September 2002. Since August 2005, he has had oversight responsibilities for the Corporation’s Corporate & Institutional Banking business. He also oversees PNC’s asset and liability management and equity management activities.

Timothy G. Shack was appointed Vice Chairman in February 2009. He was Executive Vice President from July 1991 to February 2009, and also served as Chief Information Officer from April 1998 to May 2008.

 

Thomas K. Whitford was appointed Chief Risk Officer in November 2009 in addition to serving as Vice Chairman since February 2009. He was appointed Chief Administrative Officer in May 2007. From April 2002 through May 2007, he served as Chief Risk Officer.

Joan L. Gulley was Chief Executive Officer for PNC’s wealth management business from 2002 to 2006. In 2006 she was appointed Executive Vice President of PNC Bank, N.A. and was responsible for product and segment management, as well as advertising and brand management for PNC. In April 2008 she was appointed Senior Vice President and Chief Human Resources Officer for PNC and in February 2009 she was appointed Executive Vice President of PNC.

Michael J. Hannon was appointed Executive Vice President and Chief Credit Officer in November 2009. From February 2009 to November 2009 he was Executive Vice President and Chief Risk Officer and was previously Senior Vice President and Chief Credit Officer.

Richard J. Johnson joined PNC in December 2002 and served as Senior Vice President and Director of Finance until his appointment as Chief Financial Officer of the Corporation effective in August 2005. He was appointed Executive Vice President in February 2009.

Helen P. Pudlin was appointed Executive Vice President and General Counsel in February 2009 and was previously Senior Vice President and General Counsel.

Robert Q. Reilly joined PNC Bank, N.A. in September 1987. He currently serves as the head of PNC’s Asset Management Group. Previously, he has held numerous management roles in both Corporate Banking and Asset Management. He was appointed Executive Vice President of PNC in February 2009.

DIRECTORS OF THE REGISTRANT

The name, age and principal occupation of each of our directors as of February 26, 2010, and the year he or she first became a director is set forth below:

   

Richard O. Berndt, 67, Managing Partner of Gallagher, Evelius & Jones LLP (law firm) (2007)

   

Charles E. Bunch, 60, Chairman and Chief Executive Officer of PPG Industries, Inc. (coatings, sealants and glass products) (2007)

   

Paul W. Chellgren, 67, Operating Partner, Snow Phipps Group, LLC (private equity) (1995)

   

Robert N. Clay, 63, President and Chief Executive Officer of Clay Holding Company (investments) (1987)

   

Kay Coles James, 60, President and Founder of The Gloucester Institute (non-profit) (2006)

   

Richard B. Kelson, 63, Operating Advisor, Pegasus Capital Advisors, L.P. (private equity) (2002)

   

Bruce C. Lindsay, 68, Chairman and Managing Member of 2117 Associates, LLC (advisory company) (1995)


 

17


   

Anthony A. Massaro, 65, Retired Chairman and Chief Executive Officer of Lincoln Electric Holdings, Inc. (manufacturer of welding and cutting products) (2002)

   

Jane G. Pepper, 64, President of the Pennsylvania Horticultural Society (non-profit) (1997)

   

James E. Rohr, 61, Chairman and Chief Executive Officer of PNC (1990)

   

Donald J. Shepard, 63, Non-executive Chairman of AEGON U.S. Holding Corporation (insurance) (2007)

   

Lorene K. Steffes, 64, Independent Business Advisor (technology and technical services) (2000)

   

Dennis F. Strigl, 63, Retired President and Chief Operating Officer of Verizon Communications Inc. (telecommunications) (2001)

   

Stephen G. Thieke, 63, Retired Chairman, Risk Management Committee of J.P. Morgan (financial and investment banking services) (2002)

   

Thomas J. Usher, 67, Non-executive Chairman of Marathon Oil Corporation (oil and gas industry) (1992)

   

George H. Walls, Jr., 67, former Chief Deputy Auditor for the State of North Carolina (2006)

   

Helge H. Wehmeier, 67, Retired Vice Chairman of Bayer Corporation (healthcare, crop protection, and chemicals) (1992)

PART II

ITEM 5 – MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) (1) Our common stock is listed on the New York Stock Exchange and is traded under the symbol “PNC.” At the close of business on February 26, 2010, there were 81,425 common shareholders of record.

Holders of PNC common stock are entitled to receive dividends when declared by the Board of Directors out of funds legally available for this purpose. Our Board of Directors may not pay or set apart dividends on the common stock until dividends for all past dividend periods on any series of outstanding preferred stock have been paid or declared and set apart for payment. The Board presently intends to continue the policy of paying quarterly cash dividends. The amount of any future dividends will depend on economic and market conditions, our financial condition and operating results, and other factors, including contractual restrictions and applicable government regulations and policies (such as those relating to the ability of bank and non-bank subsidiaries to pay dividends to the parent company).

The Federal Reserve has the power to prohibit us from paying dividends without its approval. For further information concerning dividend restrictions and restrictions on loans,

dividends or advances from bank subsidiaries to the parent company, you may review “Supervision and Regulation” in Item 1 of this Report, “Funding and Capital Sources” in the Consolidated Balance Sheet Review section, “Liquidity Risk Management” in the Risk Management section, and “Perpetual Trust Securities”, “PNC Capital Trust E Trust Preferred Securities” and “Acquired Entity Trust Preferred Securities” in the Off-Balance Sheet Arrangements and VIEs section of Item 7 of this Report, and Note 23 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report, which we include here by reference.

We include here by reference additional information relating to PNC common stock under the caption “Common Stock Prices/Dividends Declared” in the Statistical Information (Unaudited) section of Item 8 of this Report.

We include here by reference the information regarding our compensation plans under which PNC equity securities are authorized for issuance as of December 31, 2009 in the table (with introductory paragraph and notes) that appears under Item 12 of this Report.

Our registrar, stock transfer agent, and dividend disbursing agent is:

Computershare Investor Services, LLC

250 Royall Street

Canton, MA 02021

800-982-7652

We include here by reference the information that appears under the caption “Common Stock Performance Graph” at the end of this Item 5.

 

(a) (2) None.

 

(b) Not applicable.

 

(c) Details of our repurchases of PNC common stock during the fourth quarter of 2009 are included in the following table:

In thousands, except per share data

 

2009 period   Total shares
purchased
(a)
  Average
price
paid per
share
  Total shares
purchased as
part of
publicly
announced
programs (b)
 

Maximum

number of

shares that

may yet be

purchased

under the

programs (b)

October 1 –

October 31

  359   $ 48.97       24,710

November 1 –

November 30

  462   $ 54.87       24,710

December 1 –

December 31

  386   $ 53.72       24,710

Total

  1,207   $ 52.75        
(a) Reflects PNC common stock purchased in connection with our various employee benefit plans. No shares were purchased under the program referred to in note (b) to this table during the fourth quarter of 2009.
(b) Our current stock repurchase program allows us to purchase up to 25 million shares on the open market or in privately negotiated transactions. This program was authorized on October 4, 2007 and will remain in effect until fully utilized or until modified, superseded or terminated.

 

18


Common Stock Performance Graph

This graph shows the cumulative total shareholder return (i.e., price change plus reinvestment of dividends) on our common stock during the five-year period ended December 31, 2009, as compared with: (1) a selected peer group of our competitors, called the “Peer Group;” (2) an overall stock market index, the S&P 500 Index; and (3) a published industry index, the S&P 500 Banks. The yearly points marked on the horizontal axis of the graph correspond to December 31 of that year. The stock performance graph assumes that $100 was invested on January 1, 2005 for the five-year period and that any dividends were reinvested. The table below the graph shows the resultant compound annual growth rate for the performance period.

LOGO

 

    Base
Period
 

Assumes $100 investment at Close of
Market on December 31, 2004

Total Return = Price change plus

reinvestment of dividends

 

5-Year

Compound

Growth
Rate

 
     Dec. 04   Dec. 05   Dec. 06   Dec. 07   Dec. 08   Dec. 09       

PNC

  $ 100   111.66   138.01   126.57   98.50   108.61   1.67

S&P 500 Index

  $ 100   104.91   121.48   128.15   80.74   102.11   0.42

S&P 500 Banks

  $ 100   98.57   114.46   80.37   42.20   39.42   (16.99 %) 

Peer Group

  $ 100   102.39   121.14   82.07   46.97   59.95   (9.73 %) 

 

The Peer Group for the preceding chart and table consists of the following companies: BB&T Corporation; Bank of America Corporation; Capital One Financial, Inc.; Comerica Inc.; Fifth Third Bancorp; JPMorgan Chase; KeyCorp; M&T

Bank; The PNC Financial Services Group, Inc.; Regions Financial Corporation; SunTrust Banks, Inc.; U.S. Bancorp; and Wells Fargo & Co. This Peer Group was approved by the Board’s Personnel and Compensation Committee (the Committee) for 2009. The Committee has approved the same Peer Group for 2010.

Each yearly point for the Peer Group is determined by calculating the cumulative total shareholder return for each company in the Peer Group from December 31, 2004 to December 31 of that year (End of Month Dividend Reinvestment Assumed) and then using the median of these returns as the yearly plot point.

In accordance with the rules of the SEC, this section, captioned “Common Stock Performance Graph,” shall not be incorporated by reference into any of our future filings made under the Securities Exchange Act of 1934 or the Securities Act of 1933. The Common Stock Performance Graph, including its accompanying table and footnotes, is not deemed to be soliciting material or to be filed under the Exchange Act or the Securities Act.


 

19


ITEM 6 – SELECTED FINANCIAL DATA

 

     Year ended December 31
Dollars in millions, except per share data    2009 (a)           2008    2007    2006    2005
   

SUMMARY OF OPERATIONS

                   

Interest income

   $     12,086          $     6,301    $     6,144    $     4,592    $     3,720

Interest expense

     3,003            2,447      3,197      2,309      1,533

Net interest income

     9,083            3,854      2,947      2,283      2,187

Noninterest income (b)

     7,145            2,442      2,944      5,422      3,297

Total revenue

     16,228            6,296      5,891      7,705      5,484

Provision for credit losses (c)

     3,930            1,517      315      124      21

Noninterest expense

     9,073            3,685      3,652      3,795      3,662

Income from continuing operations before income taxes and noncontrolling interests

     3,225            1,094      1,924      3,786      1,801

Income taxes

     867            298      561      1,311      547

Income from continuing operations before noncontrolling interests

     2,358            796      1,363      2,475      1,254

Income from discontinued operations (net of income taxes of $54, $63, $66, $52 and $57) (d)

     45            118      128      124      104

Net income

     2,403            914      1,491      2,599      1,358

Less: Net income (loss) attributable to noncontrolling interests

     (44         32      24      4      33

Preferred stock dividends (e)

     388            21         1      1

Preferred stock discount accretion

     56                                  

Net income attributable to common shareholders

   $ 2,003          $ 861    $ 1,467    $ 2,594    $ 1,324
   

PER COMMON SHARE

                   

Basic earnings

                   

Continuing operations

   $ 4.30          $ 2.15    $ 4.02    $ 8.39    $ 4.24

Discontinued operations (d)

     .10            .34      .38      .42      .36

Net income

   $ 4.40          $ 2.49    $ 4.40    $ 8.81    $ 4.60

Diluted earnings

                   

Continuing operations

   $ 4.26          $ 2.10    $ 3.94    $ 8.29    $ 4.17

Discontinued operations (d)

     .10            .34      .38      .42      .36

Net income

   $ 4.36          $ 2.44    $ 4.32    $ 8.71    $ 4.53

Book value

   $ 47.68          $ 39.44    $ 43.60    $ 36.80    $ 29.21

Cash dividends declared

   $ .96          $ 2.61    $ 2.44    $ 2.15    $ 2.00
(a) Includes the impact of National City, which we acquired on December 31, 2008.
(b) Amount for 2009 included $1.076 billion gain related to BlackRock’s acquisition of Barclays Global Investors (BGI) on December 1, 2009.
(c) Amount for 2008 included $504 million conforming provision for credit losses related to our National City acquisition.
(d) Reflects results of operations for PNC Global Investment Servicing for all years presented. See Pending Sale of PNC Global Investment Servicing in the Executive Summary section of Item 7 and Note 2 Acquisitions and Divestitures in the Notes To Consolidated Financial Statements included in Item 8 of this Report for additional information.
(e) Amount for 2009 included $332 million paid under the TARP Capital Purchase Program.

Certain prior-period amounts have been reclassified to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. See Note 2 Acquisitions and Divestitures in the Notes To Consolidated Financial Statements in Item 8 of this Report for information on significant recent business acquisitions and divestitures, including our December 31, 2008 acquisition of National City and our pending 2010 sale of GIS.

For information regarding certain business risks, see Item 1A Risk Factors and the Risk Management section of Item 7 of this Report. Also, see our Cautionary Statement Regarding Forward-Looking Information included in Item 7 of this Report for certain risks and uncertainties that could cause actual results to differ materially from those anticipated in forward-looking statements or from historical performance.

 

20


     At or for the year ended December 31  
Dollars in millions, except as noted    2009 (a)          2008 (b)     2007     2006     2005  
   

BALANCE SHEET HIGHLIGHTS

               

Assets

   $ 269,863         $ 291,081      $ 138,920      $ 101,820      $ 91,954   

Loans

     157,543           175,489        68,319        50,105        49,101   

Allowance for loan and lease losses

     5,072           3,917        830        560        596   

Interest-earning deposits with banks

     4,488           14,859        346        339        669   

Investment securities

     56,027           43,473        30,225        23,191        20,710   

Loans held for sale

     2,539           4,366        3,927        2,366        2,449   

Goodwill and other intangible assets

     12,909           11,688        9,551        4,043        4,466   

Equity investments (c)

     10,254           8,554        6,045        5,330        1,323   

Noninterest-bearing deposits

     44,384           37,148        19,440        16,070        14,988   

Interest-bearing deposits

     142,538           155,717        63,256        50,231        45,287   

Total deposits

     186,922           192,865        82,696        66,301        60,275   

Borrowed funds (d)

     39,261           52,240        30,931        15,028        16,897   

Shareholders’ equity

     29,942           25,422        14,854        10,788        8,563   

Common shareholders’ equity

     22,011           17,490        14,847        10,781        8,555   
   

ASSETS UNDER ADMINISTRATION (billions)

               

Discretionary assets under management (e)

   $ 103         $ 103      $ 74      $ 55      $ 495   

Nondiscretionary assets under management

     102           125        112        85        83   

Total assets under administration

   $ 205         $ 228      $ 186      $ 140      $ 578   
   

SELECTED RATIOS

               

From continuing operations

               

Noninterest income to total revenue

     44           39        50        70        60   

Efficiency

     56           59        62        49        67   

From net income

               

Net interest margin (f)

     3.82        3.37     3.00     2.92     3.00

Return on

               

Average common shareholders’ equity

     9.78           6.52        10.70        28.01        17.00   

Average assets

     .87           .64        1.21        2.74        1.53   

Loans to deposits

     84           91        83        76        81   

Dividend payout

     21.4           104.6        55.0        24.4        43.4   

Tier 1 risk-based

     11.4           9.7        6.8        10.4        8.3   

Tier 1 common

     6.0           4.8        5.4        8.7        6.1   

Common shareholders’ equity to total assets

     8.2           6.0        10.7        10.6        9.3   

Average common shareholders’ equity to average assets

     7.2           9.6        11.3        9.8        9.0   
   

SELECTED STATISTICS

               

Employees

     55,820           59,595        28,320        23,783        25,348   

Retail Banking branches

     2,512           2,580        1,102        848        835   

ATMs

     6,473           6,233        3,900        3,581        3,721   

Residential mortgage servicing portfolio (billions)

   $ 158         $ 187           

Commercial mortgage servicing portfolio (billions)

   $ 287         $ 270      $ 243      $ 200      $ 136   
(a) Includes the impact of National City, which we acquired on December 31, 2008.
(b) Includes the impact of National City except for the following Selected Ratios: Noninterest income to total revenue, Efficiency, Net interest margin, Return on Average common shareholders’ equity, Return on Average assets, Dividend payout, and Average common shareholders’ equity to average assets.
(c) Includes our investment in BlackRock beginning with the 2006 balance. BlackRock was a consolidated entity at December 31, 2005.
(d) Includes long-term borrowings of $26.3 billion, $33.6 billion, $12.6 billion, $6.6 billion and $6.8 billion for 2009, 2008, 2007, 2006 and 2005, respectively. Borrowings which mature more than one year after December 31, 2009 are considered to be long-term.
(e) Assets under management at December 31, 2005 include BlackRock’s assets under management. We deconsolidated BlackRock effective September 29, 2006.
(f) Calculated as taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP on the Consolidated Income Statement. The taxable-equivalent adjustments to net interest income for the years 2009, 2008, 2007, 2006 and 2005 were $65 million, $36 million, $27 million, $25 million and $33 million, respectively.

 

21


ITEM 7 – MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE SUMMARY

PNC is one of the largest diversified financial services companies in the United States and is headquartered in Pittsburgh, Pennsylvania.

PNC has businesses engaged in retail banking, corporate and institutional banking, asset management, residential mortgage banking and global investment servicing, providing many of its products and services nationally and others in PNC’s primary geographic markets located in Pennsylvania, Ohio, New Jersey, Michigan, Maryland, Illinois, Indiana, Kentucky, Florida, Missouri, Virginia, Delaware, Washington, D.C., and Wisconsin. PNC also provides certain investment servicing internationally.

On December 31, 2008, PNC acquired National City Corporation (National City). Our consolidated financial statements for 2009 reflect the impact of National City. The impact of National City is described where appropriate throughout this Report.

We expect to incur additional merger and integration costs in 2010 of approximately $285 million pretax in connection with the acquisition of National City. We previously recognized $421 million pretax in 2009, including $155 million pretax in the fourth quarter, and $575 million pretax in the fourth quarter of 2008. The transaction is expected to result in the reduction of more than $1.5 billion of combined company annualized noninterest expense through the elimination of operational and administrative redundancies.

We continue to integrate the businesses and operations of National City with those of PNC.

REPURCHASE OF OUTSTANDING TARP PREFERRED STOCK

As further described in Note 19 Equity in the Notes To Consolidated Financial Statements in Item 8 of this Report, on December 31, 2008, we issued $7.6 billion of Fixed Rate Cumulative Perpetual Preferred Shares, Series N (Series N Preferred Stock), and the related warrant to the US Treasury under the US Treasury’s Troubled Asset Relief Program (TARP) Capital Purchase Program.

As approved by the Federal Reserve Board, the US Treasury and our other banking regulators, on February 10, 2010, we redeemed all 75,792 shares of our Series N Preferred Stock held by the US Treasury totaling $7.6 billion. We used the net proceeds from our February 2010 common stock and senior notes offerings, described further in the Liquidity Risk Management section of this Item 7, and other funds to redeem the Series N Preferred Stock.

 

Dividends of $89 million were paid on February 10, 2010 when the Series N Preferred Stock was redeemed. PNC paid total dividends of $421 million to the US Treasury while the Series N Preferred Stock was outstanding.

We did not exercise our right to seek to repurchase the related warrant at the time we redeemed the Series N Preferred Stock.

PENDING SALE OF PNC GLOBAL INVESTMENT SERVICING

On February 2, 2010, we entered into a definitive agreement to sell PNC Global Investment Servicing Inc. (GIS), a leading provider of processing, technology and business intelligence services to asset managers, broker-dealers and financial advisors worldwide, for $2.3 billion in cash. Upon completion of the sale, we expect to report an after-tax gain of approximately $455 million.

We currently anticipate closing the transaction in the third quarter of 2010. Completion of the transaction is subject to regulatory approvals and certain other closing conditions. If the sale of GIS is not completed by November 1, 2010, we will be required, on or before that date, to raise $700 million in additional Tier 1 common capital. We would do this either through the sale of assets approved by the Federal Reserve Board and/or through the issuance of additional common stock. See Item 1A Risk Factors in this Report for additional information.

Further information regarding the National City acquisition and the pending sale of GIS is included in Note 2 Acquisitions and Divestitures in our Notes To Consolidated Financial Statements within Item 8 of this Report.

KEY STRATEGIC GOALS

We manage our company for the long term and are focused on returning to a moderate risk profile while maintaining strong capital and liquidity positions, investing in our markets and products, and embracing our corporate responsibility to the communities where we do business.

Our strategy to enhance shareholder value centers on driving pre-tax, pre-provision earnings in excess of credit costs by achieving growth in revenue from our balance sheet and diverse business mix that exceeds growth in expenses controlled through disciplined cost management. The primary drivers of revenue growth are the acquisition, expansion and retention of customer relationships. We strive to expand our customer base by offering convenient banking options and leading technology solutions, providing a broad range of fee-based and credit products and services, focusing on customer service, and through a significantly enhanced branding initiative. We may also grow revenue through appropriate and targeted acquisitions and, in certain businesses, by expanding into new geographical markets.

We are focused on our strategies for quality growth. We are committed to returning to a moderate risk profile


 

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characterized by disciplined credit management and limited exposure to earnings volatility resulting from interest rate fluctuations and the shape of the interest rate yield curve. We made substantial progress in transitioning our balance sheet throughout 2009, working to institute our moderate risk philosophy throughout our expanded franchise. Our actions have created a well-positioned balance sheet, strong bank level liquidity and investment flexibility to adjust, where appropriate and permissible, to changing interest rates and market conditions.

We also continue to be focused on building capital in the current environment characterized by economic and regulatory uncertainty. See the Funding and Capital Sources section of the Consolidated Balance Sheet Review section and the Liquidity Risk Management section of this Item 7.

SUPERVISORY CAPITAL ASSESSMENT PROGRAM (STRESS TESTS)

On May 7, 2009, the Board of Governors of the Federal Reserve System announced the results of the stress tests conducted by banking regulators under the Supervisory Capital Assessment Program with respect to the 19 largest bank holding companies. As a result of this test, the Federal Reserve concluded that PNC was well capitalized but that, in order to provide a greater cushion against the risk that economic conditions over the next two years are worse than currently anticipated, PNC needed to augment the composition of its capital by increasing the common shareholders’ equity component of Tier 1 capital. In May 2009 we raised $624 million in new common equity through the issuance of 15 million shares of common stock. In connection with the Supervisory Capital Assessment Program, we submitted a capital plan which was accepted by the Federal Reserve.

RECENT MARKET AND INDUSTRY DEVELOPMENTS

Since the middle of 2007 and with a heightened level of activity during 2008 and 2009, there has been unprecedented turmoil, volatility and illiquidity in worldwide financial markets, accompanied by uncertain prospects for sustaining a fragile economic recovery that began mid-year 2009. In addition, there have been dramatic changes in the competitive landscape of the financial services industry during this time.

Recent efforts by the Federal government, including the US Congress, the US Department of the Treasury, the Federal Reserve, the FDIC, and the Securities and Exchange Commission, to stabilize and restore confidence in the financial services industry have impacted and will likely continue to impact PNC and our stakeholders. These efforts, which will continue to evolve, include the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009, and other legislative, administrative and regulatory initiatives, including the US Treasury’s TARP Capital Purchase Program, the FDIC’s Temporary Liquidity Guarantee Program (TLGP) and the

Federal Reserve’s Commercial Paper Funding Facility (CPFF).

These programs include the following:

TARP CAPITAL PURCHASE PROGRAM

The TARP Capital Purchase Program enabled US financial institutions to build capital through the sale to the US Treasury of senior preferred shares of stock to increase the flow of financing to US businesses and consumers and to support the US economy.

Note 19 Equity included in our Notes To Consolidated Financial Statements within Item 8 of this Report includes information regarding the preferred stock and the related warrant that we issued under this program. See Repurchase of Outstanding TARP Preferred Stock above.

FDIC TEMPORARY LIQUIDITY GUARANTEE PROGRAM

The FDIC’s TLGP is designed to strengthen confidence and encourage liquidity in the banking system by:

   

Guaranteeing newly issued senior unsecured debt of eligible institutions, including FDIC-insured banks and thrifts, as well as certain holding companies (TLGP-Debt Guarantee Program), and

   

Providing full deposit insurance coverage for non-interest bearing transaction accounts in FDIC-insured institutions, regardless of the dollar amount (TLGP -Transaction Account Guarantee Program).

In December 2008, PNC Funding Corp issued fixed and floating rate senior notes totaling $2.9 billion under the FDIC’s TLGP-Debt Guarantee Program. In March 2009, PNC Funding Corp issued floating rate senior notes totaling $1.0 billion under this program. Each of these series of senior notes is guaranteed through maturity by the FDIC.

From October 14, 2008 through December 31, 2009, PNC Bank, National Association (PNC Bank, N.A.) participated in the TLGP-Transaction Account Guarantee Program. Under this program, all non-interest bearing transaction accounts were fully guaranteed by the FDIC for the entire amount in the account. Coverage under this program is in addition to, and separate from, the coverage available under the FDIC’s general deposit insurance rules.

Beginning January 1, 2010, PNC Bank, N.A. is no longer participating in the TLGP-Transaction Account Guarantee Program. Thus, as of December 31, 2009, funds held in noninterest-bearing transaction accounts were no longer guaranteed in full under the TLGP—Transaction Account Guarantee Program, but are insured up to $250,000 under the FDIC’s general deposit insurance rules.

Federal Reserve Commercial Paper Funding Facility (CPFF)

Effective October 28, 2008, Market Street Funding LLC (Market Street) was approved to participate in the Federal


 

23


Reserve’s CPFF. The CPFF commitment to purchase up to $5.4 billion of three-month Market Street commercial paper expired on February 1, 2010. Market Street had no borrowings under this facility at December 31, 2009 or during the year then ended.

Public-Private Investment Fund Programs (PPIFs) – In March 2009, the US Treasury and the FDIC announced that they would establish the Legacy Loans Program (LLP) to remove troubled loans and other assets from banks. The FDIC will provide oversight for the formation, funding, and operation of new PPIFs that will purchase loans and other assets from depository institutions. The LLP will attract private capital through an FDIC debt guarantee and Treasury equity co-investment. All FDIC-insured depository institutions will be eligible to participate in the program.

In March 2009, the US Treasury also announced the establishment of the Legacy Securities PPIFs, which are designed to address issues raised by troubled assets. These Legacy Securities PPIFs are specifically focused on legacy securities and are part of a plan that directs both equity capital and debt financing into the market for legacy assets. This program is designed to draw in private capital to these markets by providing matching equity capital from the US Treasury and debt financing from the Federal Reserve via the Term Asset-Backed Loan Facility (TALF) and the US Treasury.

PNC has not participated in these programs and is determining to what extent, if any, it will participate in these programs.

Home Affordable Modification Program (HAMP) – As part of its effort to stabilize the US housing market, in March 2009 the Obama Administration published detailed guidelines implementing HAMP, and authorized servicers to begin loan modifications. PNC began participating in HAMP for GSE mortgages in May and for non-GSE mortgages in July, and is evaluating participation in the Second Lien Program. This program is scheduled to terminate as of December 31, 2012.

Home Affordable Refinance Program (HARP) – Another part of its efforts to stabilize the US housing market is the Obama Administration’s Home Affordable Refinance Program (HARP), which provides a means for certain borrowers to refinance their mortgage loans. PNC began participating in HARP in May 2009. The program is scheduled to terminate as of June 10, 2010.

In June 2009 the US Treasury issued a report entitled “Financial Regulatory Reform: A New Foundation” which outlined five key objectives:

   

Promote robust supervision and regulation of financial firms,

   

Establish comprehensive supervision of financial markets,

   

Protect consumers and investors from financial abuse,

   

Provide the US government with the tools it needs to manage financial crises, and

   

Raise international regulatory standards and improve international cooperation.

To implement the proposals set forth in the US Treasury report, as well as to provide economic stimulus and financial market stability and to enhance the liquidity and solvency of financial institutions and markets, the US Congress and federal banking agencies have announced, and are continuing to develop, additional legislation, regulations and programs. These proposals include changes in or additions to the statutes or regulations related to existing programs, including those described above.

The current regulatory environment remains uncertain and we expect greater reforms and additional regulatory changes. While we believe that we are well positioned to navigate through this process, we cannot predict the ultimate impact of these actions on PNC’s business plans and strategies.

KEY FACTORS AFFECTING FINANCIAL PERFORMANCE

Our financial performance is substantially affected by several external factors outside of our control including the following, some of which may be affected by legislative, regulatory and administrative initiatives, such as the Federal government initiatives outlined above:

   

General economic conditions, including the speed and stamina of the fragile recovery,

   

The level of, and direction, timing and magnitude of movement in, interest rates and the shape of the interest rate yield curve,

   

The functioning and other performance of, and availability of liquidity in, the capital and other financial markets,

   

Loan demand, utilization of credit commitments and standby letters of credit, and asset quality,

   

Customer demand for other products and services,

   

Changes in the competitive and regulatory landscape and in counterparty creditworthiness and performance as the financial services industry restructures in the current environment, and

   

The impact of market credit spreads on asset valuations.

In addition, our success will depend, among other things, upon:

   

Further success in the acquisition, growth and retention of customers,

   

Progress toward completion of the integration of the National City acquisition,

   

The closing of our planned 2010 sale of GIS,

   

Continued development of the geographic markets related to our recent acquisitions, including full deployment of our product offerings,


 

24


   

Revenue growth,

   

A sustained focus on expense management, including achieving our cost savings targets associated with our National City integration, and creating positive pre-tax, pre-provision earnings,

   

Managing the distressed assets portfolio and other impaired assets,

   

Maintaining our overall asset quality and continuing to meet evolving regulatory capital standards,

   

Continuing to maintain and grow our deposit base as a low-cost funding source,

   

Prudent risk and capital management leading to a return to our desired moderate risk profile, and

   

Actions we take within the capital and other financial markets.

Summary Financial Results

     Year ended December 31  
      2009     2008  

Net income, in millions

   $ 2,403      $ 914   

Diluted earnings per common share

      

Continuing operations

   $ 4.26      $ 2.10   

Discontinued operations

     .10        .34   

Net income

   $ 4.36      $ 2.44   

Return on

      

Average common shareholders’ equity

     9.78     6.52

Average assets

     .87     .64

On December 1, 2009, BlackRock acquired Barclays Global Investors (BGI) from Barclays Bank PLC. PNC recognized a pretax gain of $1.076 billion, or $687 million after taxes, in the fourth quarter of 2009 related to this transaction. Additional information regarding this transaction is included within the BlackRock section of our Business Segments Review section of this Item 7.

Our earnings and related per share amounts for 2008 do not include the impact of National City, which we acquired effective December 31, 2008, other than a conforming adjustment to our provision for credit losses of $504 million and other integration costs of $71 million, both of which were recognized in the fourth quarter of 2008. Our Consolidated Balance Sheet at December 31, 2008 includes National City’s assets and liabilities at estimated fair value.

Our performance in 2009 included the following:

   

We remain committed to responsible lending to support economic growth. Loans and commitments originated and renewed totaled approximately $110 billion in 2009. Included were $4 billion of small business loans originated and renewed in 2009, and we have enhanced our second-look programs for small business loan applications. As of December 31, 2009, we had funded approximately 2,100 refinances totaling $.4 billion through the Home Affordable Refinance Program and over 70,000 solicitations

   

under the Home Affordable Modification Program had been sent to eligible borrowers.

   

Loans totaled $158 billion at December 31, 2009 and declined 2% during the fourth quarter reflecting a slower pace of decline compared with the first nine months of 2009.

   

We effectively managed deposit pricing and realigned the deposit mix during 2009, growing transaction deposits by $15 billion, or 14%, and reducing nonrelationship certificates of deposit by approximately $16 billion.

   

Pretax, pre-provision earnings of $7.2 billion exceeded the provision for credit losses by $3.2 billion for 2009.

   

Total revenue was $16.2 billion for 2009, reflecting our diverse revenue sources. The net interest margin increased 45 basis points to 3.82% in 2009 compared with 2008.

   

Noninterest expense totaled $9.1 billion in 2009, including $421 million of integration costs offset by $800 million of acquisition cost savings.

   

The pace of credit quality deterioration continued to ease during the fourth quarter of 2009. Nonperforming assets increased $.7 billion over the third quarter to $6.3 billion, a lower increase compared with the $1.0 billion increase in the third quarter. We strengthened loan loss reserves for the 11th consecutive quarter. The allowance for loan and lease losses of $5.1 billion combined with $4.9 billion of marks on acquired impaired loans represented approximately 6% of loans outstanding at December 31, 2009.

   

Capital ratios continued to grow. The Tier 1 common equity ratio increased by 50 basis points to 6.0% at December 31, 2009 and the Tier 1 risk-based capital ratio increased by 50 basis points to 11.4% as of year-end.

   

We continued to maintain a strong bank liquidity position with an 84% loan to deposit ratio at December 31, 2009. Holding company liquidity remained strong with sufficient liquid assets to fund 2010 debt maturities and other corporate obligations.

   

The acquisition of National City Corporation exceeded our expectations during 2009.

  - The transaction was accretive to 2009 earnings.
  - Cost savings of over $800 million were realized in 2009. We increased our multi-year acquisition-related annualized cost savings goal to $1.5 billion from $1.2 billion and are on track to meet the new goal.
  - We have successfully completed two major conversions of National City customers to the PNC platform – one in November 2009 and another in February 2010. We expect to complete the two remaining conversions by June 2010, ahead of original plans.
  - We completed the consolidation of bank charters in November 2009.

 

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Our Consolidated Income Statement Review and Consolidated Balance Sheet Review sections of this Item 7 describe in greater detail the various items that impacted our results for 2009 and 2008.

LINE OF BUSINESS HIGHLIGHTS

In the first quarter of 2009, we made changes to our business organization structure and management reporting in conjunction with the acquisition of National City.

Business segment results for 2008 and 2007 in this Report have been reclassified to reflect current methodologies and current business and management structure and to present all periods on the same basis. As a result of its pending sale, GIS is no longer a reportable business segment.

Results for 2009 for all of our business segments except BlackRock reflect the impact of revenues and expenses associated with businesses acquired with National City.

Highlights of results for 2009 and 2008 are included below.

We refer you to Item 1 of this Report under the captions Business Overview and Review of Lines of Business for an overview of our business segments and to the Business Segments Review section of this Item 7 for a Results Of Businesses – Summary table and further analysis of business segment results for 2009 and 2008, including presentation differences from Note 27 Segment Reporting in the Notes To Consolidated Financial Statements in Item 8 of this Report.

We provide a reconciliation of total business segment earnings to PNC consolidated income from continuing operations as reported on a GAAP basis in Note 27.

Retail Banking

Retail Banking’s earnings were $136 million for 2009 compared with $328 million for 2008. Results were challenged in this environment by increased credit costs, lower interest credits assigned to the segment’s deposits, reduced consumer spending and increased FDIC insurance costs. Pre-tax, pre-provision earnings were $1.6 billion for 2009, a 65% increase over 2008. Retail Banking continues to maintain its focus on customer, loan and deposit growth, employee and customer satisfaction, investing in the business for future growth, as well as disciplined expense management during this period of market and economic uncertainty.

Corporate & Institutional Banking

Corporate & Institutional Banking earned $1.2 billion in 2009 compared with $215 million in 2008. The acquisition of National City positively impacted operating results as revenues nearly tripled while noninterest expense approximately doubled. As a result, operating leverage of $2.6 billion more than offset a $1.0 billion increase in the provision for credit losses.

 

Asset Management Group

Asset Management Group earned $105 million for 2009 compared with $119 million for 2008. Asset Management Group achieved strong total revenue of $919 million, with $308 million in net interest income and $611 million in noninterest income. The business increased pretax, pre-provision earnings by $69 million or 35% over 2008, as the business grew clients, managed expenses and successfully executed the National City integration. The earnings decline from 2008 was primarily driven by a $91 million increase in provision for credit losses reflective of a weakened economy.

Residential Mortgage Banking

Residential Mortgage Banking earned $435 million in 2009 driven by strong loan origination activity and net mortgage servicing rights hedging gains. This business segment consists primarily of activities acquired with National City.

BlackRock

Our BlackRock business segment earned $207 million in both 2009 and 2008. These results reflect our share of BlackRock’s reported GAAP earnings during both periods and the additional income taxes on these earnings incurred by PNC.

Distressed Assets Portfolio

The Distressed Assets Portfolio had earnings of $84 million for 2009. Earnings were largely driven by net interest income of $1.1 billion. The provision for credit losses was $771 million in 2009, which reflected credit quality deterioration, particularly in the commercial residential development and consumer residential construction portfolios. Noninterest expense was $246 million for 2009, comprised primarily of costs associated with foreclosed assets and servicing costs.

Other

“Other” earnings were $201 million in 2009 compared with a loss of $73 million in 2008. Results for 2009 included the $687 million after-tax impact of the BlackRock/BGI gain partially offset by the after-tax impact of other-than-temporary impairment charges and alternative investment writedowns, integration costs related primarily to the National City acquisition, a special FDIC assessment, and equity management losses.

“Other” for 2008 included the impact of integration costs, including the National City conforming provision for credit losses, totaling $422 million after taxes. In addition, net securities losses in 2008 totaled $134 million after taxes. These factors were partially offset by strong growth in net interest income related to asset and liability management activities, a gain related to PNC’s remaining BlackRock long-term incentive plan programs (LTIP) shares obligation, the reversal of a legal contingency reserve established in connection with an acquisition due to a settlement, the partial reversal of the Visa indemnification liability and the gain from our sale of Hilliard Lyons.


 

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CONSOLIDATED INCOME STATEMENT REVIEW

Net income for 2009 was $2.4 billion and for 2008 was $914 million. Amounts for 2009 include operating results of National City and the fourth quarter impact of a $687 million after-tax gain related to BlackRock’s acquisition of BGI. Increases in income statement comparisons to 2008, except as noted, are primarily due to the operating results of National City. Our Consolidated Income Statement is presented in Item 8 of this Report.

NET INTEREST INCOME AND NET INTEREST MARGIN

 

Year ended December 31

Dollars in millions

   2009     2008  

Net interest income

   $ 9,083      $ 3,854   

Net interest margin

     3.82     3.37

Changes in net interest income and margin result from the interaction of the volume and composition of interest-earning assets and related yields, interest-bearing liabilities and related rates paid, and noninterest-bearing sources of funding. See Statistical Information – Analysis Of Year-To-Year Changes In Net Interest (Unaudited) Income And Average Consolidated Balance Sheet and Net Interest Analysis in Item 8 of this Report for additional information.

Higher net interest income for 2009 compared with 2008 reflected the increase in average interest-earning assets due to National City and the improvement in the net interest margin.

The net interest margin was 3.82% for 2009 and 3.37% for 2008. The following factors impacted the comparison:

   

A decrease in the rate accrued on interest-bearing liabilities of 97 basis points. The rate accrued on interest-bearing deposits, the largest component, decreased 107 basis points.

   

These factors were partially offset by a 45 basis point decrease in the yield on interest-earning assets. The yield on loans, which represented the largest portion of our earning assets in 2009, decreased 30 basis points.

   

In addition, the impact of noninterest-bearing sources of funding decreased 7 basis points.

For comparing to the broader market, the average Federal funds rate was .16% for 2009 compared with 1.94% for 2008. We expect our net interest income for 2010 will likely be modestly lower as a result of cash recoveries on purchased impaired loans in 2009 and additional run-off of higher-yielding assets, which could be mitigated by rising interest rates. This assumes our current expectations for interest rates and economic conditions – we include our current economic assumptions underlying our forward-looking statements in the Cautionary Statement Regarding Forward-Looking Information section of this Item 7.

 

NONINTEREST INCOME

Summary

Noninterest income was $7.1 billion for 2009 and $2.4 billion for 2008.

Noninterest income for 2009 included the following:

   

The gain on BlackRock/BGI transaction of $1.076 billion,

   

Net credit-related other-than-temporary impairments (OTTI) on debt and equity securities of $577 million,

   

Net gains on sales of securities of $550 million,

   

Gains on hedging of residential mortgage servicing rights of $355 million,

   

Valuation and sale income related to our commercial mortgage loans held for sale, net of hedges, of $107 million,

   

Gains of $103 million related to our BlackRock LTIP shares adjustment in the first quarter, and net losses on private equity and alternative investments of $93 million.

Noninterest income for 2008 included the following:

   

Net OTTI on debt and equity securities of $312 million,

   

Gains of $246 million related to our BlackRock LTIP shares adjustment,

   

Valuation and sale losses related to our commercial mortgage loans held for sale, net of hedges, of $197 million,

   

Impairment and other losses related to private equity and alternative investments of $180 million,

   

Income from Hilliard Lyons totaling $164 million, including the first quarter gain of $114 million from the sale of this business,

   

Net gains on sales of securities of $106 million, and

   

A gain of $95 million related to the redemption of a portion of our Visa Class B common shares related to Visa’s March 2008 initial public offering.

Additional analysis

Asset management revenue increased $172 million to $858 million in 2009, compared with $686 million in 2008. This increase reflected improving equity markets, new business generation and a shift in assets into higher yielding equity investments during the second half of 2009. Assets managed totaled $103 billion at both December 31, 2009 and 2008, including the impact of National City. The Asset Management Group section of the Business Segments Review section of this Item 7 includes further discussion of assets under management.

Consumer services fees totaled $1.290 billion in 2009 compared with $623 million in 2008. Service charges on deposits totaled $950 million for 2009 and $372 million for 2008. Both increases were primarily driven by the impact of the National City acquisition. Reduced consumer spending,


 

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given economic conditions, hindered PNC legacy growth during 2009 in both categories.

Corporate services revenue totaled $1.021 billion in 2009 compared with $704 million in 2008. Corporate services fees include treasury management fees which increased $221 million in 2009 compared with 2008.

Residential mortgage fees totaled $990 million in 2009. Fees from strong mortgage refinancing volumes, especially in the first quarter, and $355 million of net hedging gains from mortgage servicing rights contributed to this total. We do not expect to repeat this strong performance in 2010.

Other noninterest income totaled $987 million for 2009 compared with $263 million for 2008. Other noninterest income for 2009 included trading income of $170 million, valuation and sale income related to our commercial mortgage loans held for sale, net of hedges, of $107 million, other gains of $103 million related to our equity investment in BlackRock and net losses on private equity and alternative investments of $93 million.

Other noninterest income for 2008 included the $114 million gain from the sale of Hilliard Lyons, the $95 million Visa gain, gains of $246 million related to our equity investment in BlackRock, and losses related to our commercial mortgage loans held for sale, net of hedges, of $197 million.

Other noninterest income typically fluctuates from period to period depending on the nature and magnitude of transactions completed. Further details regarding our trading activities are included in the Market Risk Management – Trading Risk portion of the Risk Management section of this Item 7, information regarding private equity and alternative investments are included in the Market Risk Management-Equity and Other Investment Risk section, and discussion regarding gains related to our equity investment in BlackRock are included in the Business Segments Review section.

With the exception of hedging gains related to residential mortgage servicing and the BlackRock/BGI gain, we expect noninterest income to be relatively flat in 2010 compared with 2009 levels. We also expect that the conversions of National City customers to the PNC platform scheduled for completion by June 2010 will create more product cross-selling opportunities.

 

PRODUCT REVENUE

In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management and capital markets-related products and services and commercial mortgage banking activities, that are marketed by several businesses to commercial and retail customers.

Treasury management revenue, which includes fees as well as net interest income from customer deposit balances, totaled $1.137 billion for 2009 and $567 million for 2008. In addition to the impact of National City, the increase was primarily related to deposit growth and continued growth in legacy offerings such as purchasing cards and services provided to the Federal government and healthcare customers.

Revenue from capital markets-related products and services totaled $533 million in 2009 compared with $336 million in 2008. The impact of National City-related revenue helped to offset declines in merger and acquisition revenues reflecting the difficult economic environment.

Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (including net interest income and noninterest income from loan servicing and ancillary services), and revenue derived from commercial mortgage loans intended for sale and related hedges (including loan origination fees, net interest income, valuation adjustments and gains or losses on sales).

Commercial mortgage banking activities resulted in revenue of $485 million in 2009 compared with $65 million in 2008. The impact of National City-related revenue was reflected in the 2009 increase. Revenue for 2009 included gains of $107 million on commercial mortgage loans held for sale, net of hedges. Losses of $197 million on commercial mortgage loans held for sale, net of hedges, reduced revenue for 2008.


 

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PROVISION FOR CREDIT LOSSES

The provision for credit losses totaled $3.9 billion for 2009 compared with $1.5 billion for 2008. The provision for credit losses for 2009 was in excess of net charge-offs of $2.7 billion primarily due to required increases to our allowance for loan and lease losses reflecting continued deterioration in the credit markets and the resulting increase in nonperforming loans.

The Credit Risk Management portion of the Risk Management section of this Item 7 includes additional information regarding factors impacting the provision for credit losses. See also Item 1A Risk Factors and the Cautionary Statement Regarding Forward-Looking Information section of Item 7 of this Report.

We expect the provision for credit losses in the first quarter of 2010 to be similar to the provision recognized in the third quarter of 2009.

NONINTEREST EXPENSE

Noninterest expense for 2009 was $9.1 billion compared with $3.7 billion in 2008. Acquisition cost savings totaled $800 million in 2009. The increase was substantially related to

National City. We also recorded a special FDIC assessment of $133 million in the second quarter of 2009, which was intended to build the FDIC’s Deposit Insurance Fund.

Integration costs included in noninterest expense totaled $421 million in 2009 compared with $122 million in 2008. Our quarterly run rate of acquisition cost savings related to National City increased to $300 million in the fourth quarter of 2009, or $1.2 billion per year.

We anticipate meaningful expense reductions in 2010, driven by acquisition cost saves, as we continue to focus on effectively managing expenses and achieving cost savings targets and credit cost improvements.

EFFECTIVE TAX RATE

Our effective tax rate was 26.9% for 2009 and 27.2% for 2008. The decrease in the effective tax rate for 2009 compared with 2008 was principally due to additional tax expense in 2008 related to the sale of Hilliard Lyons partially offset by additional tax expense associated with an increase in the level of pretax earnings in 2009.


 

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CONSOLIDATED BALANCE SHEET REVIEW

SUMMARIZED BALANCE SHEET DATA

 

In millions   

Dec. 31

2009

   Dec. 31
2008

Assets

       

Loans

   $ 157,543    $ 175,489

Investment securities

     56,027      43,473

Cash and short-term investments

     13,290      22,911

Loans held for sale

     2,539      4,366

Goodwill and other intangible assets

     12,909      11,688

Equity investments

     10,254      8,554

Other

     17,301      24,600

Total assets

   $ 269,863    $ 291,081

Liabilities

       

Deposits

   $ 186,922    $ 192,865

Borrowed funds

     39,261      52,240

Other

     11,113      18,328

Total liabilities

     237,296      263,433

Total shareholders’ equity

     29,942      25,422

Noncontrolling interests

     2,625      2,226

Total equity

     32,567      27,648

Total liabilities and equity

   $ 269,863    $ 291,081

The summarized balance sheet data above is based upon our Consolidated Balance Sheet in Item 8 of this Report.

The decline in total assets at December 31, 2009 compared with December 31, 2008 was primarily due to reduced loan demand and lower interest-earning deposits with banks, partially offset by an increase in lower risk investment securities.

An analysis of changes in selected balance sheet categories follows.

LOANS

A summary of the major categories of loans outstanding follows. Outstanding loan balances reflect unearned income, unamortized discount and premium, and purchase discounts and premiums totaling $3.2 billion at December 31, 2009 and $4.3 billion at December 31, 2008, respectively. The balances do not include accretable net interest on the purchased impaired loans.

Loans decreased $17.9 billion, or 10%, as of December 31, 2009 compared with December 31, 2008. Loans represented 58% of total assets at December 31, 2009 and 60% of total assets at December 31, 2008. The decline in loans during 2009 was driven primarily by lower utilization levels for commercial lending among middle market and large corporate clients, although this trend in utilization rates appeared to have eased in the fourth quarter of 2009. Given current economic conditions, we expect continued weak loan demand and low utilization rates until the economy improves.

 

Commercial lending represented 53% of the loan portfolio and consumer lending represented 47% at December 31, 2009. Commercial lending declined 17% at December 31, 2009 compared with December 31, 2008. Commercial loans, which comprised 65% of total commercial lending, declined 21% due to reduced demand for new loans, lower utilization levels and paydowns as clients continued to deleverage their balance sheets. Total consumer lending decreased slightly at December 31, 2009 from December 31, 2008.

Details Of Loans

 

In millions

   Dec. 31
2009
   Dec. 31
2008

Commercial

       

Retail/wholesale

   $ 9,515    $ 11,482

Manufacturing

     9,880      13,263

Other service providers

     8,256      9,038

Real estate related (a)

     7,403      9,107

Financial services

     3,874      5,194

Health care

     2,970      3,201

Other

     12,920      17,935

Total commercial

     54,818      69,220

Commercial real estate

       

Real estate projects

     15,582      17,176

Commercial mortgage

     7,549      8,560

Total commercial real estate

     23,131      25,736

Equipment lease financing

     6,202      6,461

TOTAL COMMERCIAL LENDING

     84,151      101,417

Consumer

       

Home equity

       

Lines of credit

     24,236      24,024

Installment

     11,711      14,252

Education

     7,468      4,211

Automobile

     2,013      1,667

Credit card and other unsecured lines of credit

     3,536      3,163

Other

     4,618      5,172

Total consumer

     53,582      52,489

Residential real estate

       

Residential mortgage

     18,190      18,783

Residential construction

     1,620      2,800

Total residential real estate

     19,810      21,583

TOTAL CONSUMER LENDING

     73,392      74,072

Total loans

   $ 157,543    $ 175,489
(a) Includes loans to customers in the real estate and construction industries.

Total loans in the table above include purchased impaired loans related to National City, adjusted to reflect additional loan impairments effective December 31, 2008, amounting to $10.3 billion, or 7% of total loans, at December 31, 2009 and $12.7 billion, or 7% of total loans, at December 31, 2008.

We are committed to providing credit and liquidity to qualified borrowers. Total loan originations and new commitments and renewals totaled $110 billion for 2009, including originations for first mortgages of $19 billion and small business loans of $4 billion.


 

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Our loan portfolio continued to be diversified among numerous industries and types of businesses. The loans that we hold are also concentrated in, and diversified across, our principal geographic markets.

Commercial lending is the largest category and is the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan and lease losses. We have allocated $3.4 billion, or 66%, of the total allowance for loan and lease losses at December 31, 2009 to these loans. We allocated $1.7 billion, or 34%, of the remaining allowance at that date to consumer lending. This allocation also considers other relevant factors such as:

  (a) Actual versus estimated losses,
  (b) Regional and national economic conditions,
  (c) Business segment and portfolio concentrations,
  (d) Industry conditions,
  (e) The impact of government regulations, and
  (f) Risk of potential estimation or judgmental errors, including the accuracy of risk ratings.

Higher Risk Loans

Our loan portfolio contains higher risk loans that are more likely to result in credit losses. We established specific and pooled reserves on the total commercial lending category, including higher risk loans, of $3.4 billion at December 31, 2009. This represented approximately two-thirds of the total allowance for loan and lease losses of $5.1 billion at that date. The remaining one-third of the allowance for loan and lease losses pertained to the total consumer lending category. This category of loans is more homogenous in nature and has certain characteristics that can be assessed at a total portfolio level in terms of loans representing higher risk. We do not consider government insured/government guaranteed loans to be higher risk as we do not believe these loans will result in a significant loss because of their structure. These loans are excluded from the following assessment of higher risk loans.

Our home equity lines of credit and installment loans outstanding totaled $35.9 billion at December 31, 2009. In this portfolio, we consider the higher risk loans to be those with a recent FICO credit score of less than or equal to 660 and a loan-to-value ratio greater than 90%. Such loans totaled $1.2 billion or approximately 3% of the total home equity line and installment loans at December 31, 2009. These higher risk loans were concentrated in our geographic footprint with 28% in Pennsylvania, 14% in Ohio, 11% in New Jersey, 7% in Illinois, 6% Missouri, and 5% in Kentucky, with the

remaining loans dispersed across several other states. Option ARM loans and negative amortization loans in this portfolio were not significant. Within the higher risk home equity portfolio, approximately 10% are in some stage of delinquency and 5% are in late stage (90+ days) delinquency status.

In our $18.2 billion residential mortgage portfolio, loans with a recent FICO credit score of less than or equal to 660 and a loan-to-value ratio greater than 90% totaled $.8 billion and comprised approximately 5% of this portfolio at December 31, 2009. Twenty-two percent of the higher risk loans are located in California, 13% in Florida, 10% in Illinois, 8% in Maryland, 5% in Pennsylvania, and 5% in New Jersey, with the remaining loans dispersed across several other states. Option ARM loans and negative amortization loans in this portfolio were not significant. Within the higher risk residential mortgage portfolio of $.8 billion, approximately 53% are in some stage of delinquency and 41% are in 90+ days late stage delinquency status.

Within our home equity lines of credit, installment loans and residential mortgage portfolios, approximately 5% of the aggregate $54.1 billion loan outstandings at December 31, 2009 have loan-to-value ratios in excess of 100%. The impact of housing price depreciation is reflected in the allowance for loans and lease losses as a result of the consumer reserve methodology process. The consumer reserve process is sensitive to collateral values which in turn affect loan loss severity. While our consumer reserve methodology strives to reflect all significant risk factors, there is an element of uncertainty associated with, but not limited to, potential

imprecision in the estimation process due to the inherent time lag of obtaining information such as housing price depreciation. We provide additional reserves where appropriate to provide coverage for losses attributable to such risks.

We obtain updated property values annually for select residential mortgage loan portfolios. We are expanding this valuation process to update the property values on the majority of our real estate secured consumer loan portfolios.

Information related to purchased impaired loans, purchase accounting accretion and accretable net interest recognized during 2009 in connection with our acquisition of National City follows.


 

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Valuation of FASB ASC 310-30 Purchased Impaired Loans

 

     December 31, 2008 (a)     December 31, 2009  
Dollars in billions    Balance     Net Investment     Balance     Net Investment  

Commercial and commercial real estate loans:

          

Unpaid principal balance

   $ 6.3        $ 3.5       

Purchased impaired mark

     (3.4           (1.3      

Recorded investment

     2.9          2.2       

Allowance for loan losses

                   (.2      

Net investment

     2.9      46     2.0      57

Consumer and residential mortgage loans:

          

Unpaid principal balance

     15.6          11.7       

Purchased impaired mark

     (5.8           (3.6      

Recorded investment

     9.8          8.1       

Allowance for loan losses

                   (.3      

Net investment

     9.8      63     7.8      67

Total FASB ASC 310-30 purchased impaired loans:

          

Unpaid principal balance

     21.9          15.2       

Purchased impaired mark

     (9.2 )(b)            (4.9 )(b)       

Recorded investment

     12.7          10.3       

Allowance for loan losses

                   (.5 )(c)       

Net investment

   $ 12.7      58   $ 9.8      64
(a) Subsequent to December 31, 2008, an additional $2.6 billion of acquired National City loans were identified as impaired under FASB ASC 310-30. A total fair value mark of $1.8 billion was recorded, resulting in a $.8 billion net investment. These impairments were effective December 31, 2008 based on additional information regarding the borrowers and credit conditions that existed as of the acquisition date.
(b) Comprised of $5.5 billion of nonaccretable and $3.7 billion of accretable at December 31, 2008 and $1.4 billion of nonaccretable and $3.5 billion of accretable at December 31, 2009.
(c) An additional allowance for loan losses of $.5 billion does not recognize the incremental accretable yield of $.9 billion related to certain purchased impaired loans with improving estimated cash flows. This income will be recognized over time.

 

The unpaid principal balance of purchased impaired loans declined from $21.9 billion at December 31, 2008 to $15.2 billion at December 31, 2009 due to amounts determined to be uncollectible, payoffs and disposals. The remaining purchased impaired mark at December 31, 2009 was $4.9 billion and declined from $9.2 billion at December 31, 2008 primarily due to amounts determined to be uncollectible. The net investment of $12.7 billion at December 31, 2008 declined to $9.8 billion at December 31, 2009 primarily due to payoffs, disposals and further impairment partially offset by accretion during 2009.

We currently expect to collect total cash flows of $13.8 billion on purchased impaired loans, representing the $10.3 billion recorded investment at December 31, 2009 and the accretable net interest of $3.5 billion shown in the Accretable Net Interest table that follows.

 

Purchase Accounting Net Interest Accretion

 

Year ended December 31- in billions    2009  

Non-impaired loans

     $.8   

Impaired loans

    

Accretion

     .9   

Cash recoveries

     .2   

Total impaired loans

     1.1   

Reversal of contractual interest on impaired loans

     (.7

Net impaired loans

     .4   

Securities

     .1   

Deposits

     1.0   

Borrowings

     (.3

Total

   $ 2.0   

Accretable Net Interest

 

In billions    Dec. 31
2008
    Dec. 31
2009
 

Non-impaired loans

   $ 2.4      $ 1.6   

Impaired loans (a)

     3.7        3.5   

Total loans (gross)

     6.1        5.1   

Securities

     .2        .1   

Deposits (b)

     2.1        1.0   

Borrowings

     (1.5     (1.2

Total

   $ 6.9      $ 5.0   
(a) Adjustments to accretable net interest include purchase accounting accretion, reclassifications from non-accretable to accretable interest as a result of increases in estimated cash flows, and reductions in the accretable amount as a result of additional loan impairments.
(b) Adjustments to accretable net interest include the impact of branch divestitures.

 

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Accretable Net Interest – Purchased Impaired Loans

 

In billions        

January 1, 2009

     $3.7   

Accretion

     (1.1

Adjustments resulting from changes in purchase price allocation

     .3   

Reclassifications from nonaccretable to accretable

     .8   

Disposals

     (.2

December 31, 2009

   $ 3.5   

Net unfunded credit commitments are comprised of the following:

Net Unfunded Credit Commitments

 

In millions   

Dec. 31

2009

   Dec. 31
2008

Commercial/commercial real estate (a)

   $ 60,143    $ 60,020

Home equity lines of credit

     20,367      23,195

Consumer credit card and other unsecured lines

     18,800      20,207

Other

     1,485      1,466

Total

   $ 100,795    $ 104,888
(a) Less than 4% of these amounts relate to commercial real estate.

Unfunded commitments are concentrated in our primary geographic markets. Commitments to extend credit represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. Commercial commitments are reported net of participations, assignments and syndications, primarily to financial institutions, totaling $13.2 billion at December 31, 2009 and $8.6 billion at December 31, 2008.

Unfunded liquidity facility commitments and standby bond purchase agreements totaled $6.2 billion at December 31, 2009 and $7.0 billion at December 31, 2008 and are included in the preceding table primarily within the “Commercial/commercial real estate” category.

In addition to credit commitments, our net outstanding standby letters of credit totaled $10.0 billion at December 31, 2009 and $10.3 billion at December 31, 2008. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

 

INVESTMENT SECURITIES

Details of Investment Securities

 

In millions    Amortized
Cost
   Fair
Value

December 31, 2009

       

SECURITIES AVAILABLE FOR SALE

       

Debt securities

       

US Treasury and government agencies

   $ 7,548    $ 7,520

Residential mortgage-backed

       

Agency

     24,076      24,438

Non-agency

     10,419      8,302

Commercial mortgage-backed

       

Agency

     1,299      1,297

Non-agency

     4,028      3,848

Asset-backed

     2,019      1,668

State and municipal

     1,346      1,350

Other debt

     1,984      2,015

Corporate stocks and other

     360      360

Total securities available for sale

   $ 53,079    $ 50,798

SECURITIES HELD TO MATURITY

       

Debt securities

       

Commercial mortgage-backed
(non-agency)

   $ 2,030    $ 2,225

Asset-backed

     3,040      3,136

Other debt

     159      160

Total securities held to maturity

   $ 5,229    $ 5,521

December 31, 2008

       

SECURITIES AVAILABLE FOR SALE

       

Debt securities

       

US Treasury and government agencies

   $ 738    $ 739

Residential mortgage-backed

       

Agency

     22,744      23,106

Non-agency

     13,205      8,831

Commercial mortgage-backed
(non-agency)

     4,305      3,446

Asset-backed

     2,069      1,627

State and municipal

     1,326      1,263

Other debt

     563      559

Corporate stocks and other

     575      571

Total securities available for sale

   $ 45,525    $ 40,142

SECURITIES HELD TO MATURITY

       

Debt securities

       

Commercial mortgage-backed
(non-agency)

   $ 1,945    $ 1,896

Asset-backed

     1,376      1,358

Other debt

     10      10

Total securities held to maturity

   $ 3,331    $ 3,264

The carrying amount of investment securities totaled $56.0 billion at December 31, 2009 and $43.5 billion at December 31, 2008 and represented 21% of total assets at December 31, 2009 compared with 15% of total assets at December 31, 2008. The increase in securities of $12.6 billion since December 31, 2008 primarily reflected the purchase of US Treasury and government agency securities as well as price appreciation in the available for sale portfolio, partially offset by maturities, prepayments and sales.


 

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We evaluate our portfolio of investment securities in light of changing market conditions and other factors and, where appropriate, take steps intended to improve our overall positioning. Overall, we consider the portfolio to be well-diversified and high quality. US Treasury and government agencies, agency residential mortgage-backed securities and agency commercial mortgage-backed securities collectively represented 59% of the investment securities portfolio at December 31, 2009.

At December 31, 2009, the securities available for sale portfolio included a net unrealized loss of $2.3 billion, which represented the difference between fair value and amortized cost. The comparable amount at December 31, 2008 was a net unrealized loss of $5.4 billion. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally decreases when credit spreads widen and vice versa. The decline in the net unrealized loss from the prior year-end was primarily the result of improving fair values in non-agency residential mortgage-backed and non-agency commercial mortgage-backed securities. Net unrealized gains and losses in

the securities available for sale portfolio are included in shareholders’ equity as accumulated other comprehensive income or loss, net of tax.

Unrealized gains and losses on available for sale securities do not impact liquidity or risk-based capital. However, reductions in the credit ratings of these securities would have an impact on the determination of risk-weighted assets which could reduce our regulatory capital ratios. In addition, the amount representing the credit-related portion of other-than-temporary impairments on available for sale securities would reduce our earnings and regulatory capital ratios.

The expected weighted-average life of investment securities (excluding corporate stocks and other) was 4.1 years at December 31, 2009 and 3.1 years at December 31, 2008.

We estimate that at December 31, 2009 the effective duration of investment securities was 2.9 years for an immediate 50 basis points parallel increase in interest rates and 2.5 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2008 were 3.7 years and 3.1 years, respectively.


 

34


The following table provides detail regarding the vintage, current credit rating, and FICO score of the underlying collateral at origination for residential mortgage-backed, commercial mortgage-backed and other asset-backed securities held in the available for sale and held to maturity portfolios:

 

     December 31, 2009  
     Agency     Non-agency         
Dollars in millions    Residential
Mortgage-
Backed
Securities
    Commercial
Mortgage-
Backed
Securities
    Residential
Mortgage-
Backed
Securities
    Commercial
Mortgage-
Backed
Securities
    Asset-
Backed
Securities
 

Fair Value – Available for Sale

   $ 24,438      $ 1,297      $ 8,302      $ 3,848      $ 1,668   

Fair Value – Held to Maturity

                             2,225        3,136   

Total Fair Value

   $ 24,438      $ 1,297      $ 8,302      $ 6,073      $ 4,804   

% of Fair Value:

                

By Vintage

                

2009

     40     73       2     34

2008

     17     2           11

2007

     9         16     16     17

2006

     11     3     23     33     18

2005 and earlier

     23     22     61     49     20

Total

     100     100     100     100     100
     

By Credit Rating

                

Agency

     100     100          

AAA

           12     91     74

AA

           7     2     5

A

           8     3    

BBB

           12     3     1

BB

           16     1     5

B

           15         5

Lower than B

           30         8

No rating

                                     2

Total

     100     100     100     100     100
     

By FICO Score

                

>720

           61         4

<720 and >660

           30         10

<660

                 4

No FICO score

     N/A        N/A        9     N/A        82

Total

                     100             100

 

We conduct a comprehensive security-level impairment assessment quarterly on all securities in an unrealized loss position to determine whether the loss represents OTTI. Our assessment considers the security structure, recent security collateral performance metrics, external credit ratings, failure of the issuer to make scheduled interest or principal payments, our judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts.

We also consider the severity of the impairment and the length of time that the security has been impaired in our assessment. Results of the periodic assessment are reviewed by a cross-functional senior management team representing Asset & Liability Management, Finance, and Balance Sheet Risk Management. The senior management team considers the results of the assessments, as well as other factors, in determining whether the impairment is other-than-temporary. New US GAAP issued in 2009 amended OTTI guidance for debt securities regarding recognition and disclosure. The

major change in the guidance was the requirement to recognize only the credit portion of OTTI charges in current earnings for those debt securities where there is no intent to

sell and it is not more likely than not that the entity would be required to sell the security prior to expected recovery. The remaining portion of OTTI charges is included in accumulated other comprehensive loss.

PNC adopted this guidance effective January 1, 2009. Upon adoption, we recorded a cumulative effect adjustment of $110 million to retained earnings at January 1, 2009 to reclassify the noncredit component of OTTI recognized in 2008 from retained earnings to accumulated other comprehensive loss. During 2009, we recognized OTTI losses of $1.9 billion, of which $577 million represented the credit portion of the losses recognized as a reduction of noninterest income on our Consolidated Income Statement. The remaining noncredit portion of the OTTI losses totaled $1.4 billion and was recognized in accumulated other comprehensive loss on the


 

35


Consolidated Balance Sheet at December 31, 2009. Included below is detail on the net unrealized losses and OTTI credit losses recorded on non-agency residential and commercial mortgage-backed and other asset-backed securities, which

represent the portfolios that have generated the majority of the OTTI losses.

 

A summary of all OTTI credit losses recognized in 2009 by investment type is included in Note 7 Investment Securities in the Notes To Consolidated Financial Statements of this Report.


 

     December 31, 2009  
In millions    Residential Mortgage-
Backed Securities
    Commercial
Mortgage-Backed
Securities
   

Asset-Backed

Securities (a)

 

AVAILABLE FOR SALE SECURITIES NON-AGENCY

                     
     Fair
Value
   Net
Unrealized
Gain
(Loss)
    Fair
Value
   Net
Unrealized
Gain
(Loss)
    Fair
Value
   Net
Unrealized
Gain
(Loss)
 

By Credit Rating

                     

AAA

   $ 977    $ (143   $ 3,314    $ (30   $ 729    $ (23

Other Investment Grade (AA, A, BBB)

     2,259      (287     492      (131     76      (6

Total Investment Grade

     3,236      (430     3,806      (161     805      (29

BB

     1,306      (392     38      (20     203      (67

B

     1,260      (448     4      1        235      (43

Lower than B

     2,497      (847            388      (188

No Rating

     3                             33      (24

Total Sub-Investment Grade

     5,066      (1,687     42      (19     859      (322

Total

   $ 8,302    $ (2,117   $ 3,848    $ (180   $ 1,664    $ (351

Investment Grade:

                     

OTTI has been recognized

   $ 152    $ (45              

No OTTI recognized to date

     3,084      (385   $ 3,806    $ (161   $ 805    $ (29

Total Investment Grade

   $ 3,236    $ (430   $ 3,806    $ (161   $ 805    $ (29

Sub-Investment Grade:

                     

OTTI has been recognized

   $ 2,491    $ (1,029          $ 562    $ (221

No OTTI recognized to date

     2,575      (658   $ 42    $ (19     297      (101

Total Sub-Investment Grade

   $ 5,066    $ (1,687   $ 42    $ (19   $ 859    $ (322

SECURITIES HELD TO MATURITY NON-AGENCY

                     

By Credit Rating

                     

AAA

          $ 2,225    $ 195      $ 2,822    $ 95   

Other Investment Grade (AA, A, BBB)

                                   215      10   

Total Investment Grade

                    2,225      195        3,037      105   

BB

                   25      1   

B

                   4     

No Rating

                                   55      (10

Total Sub-Investment Grade

                                   84      (9

Total

                  $ 2,225    $ 195      $ 3,121    $ 96   
(a) Table excludes $4 million and $15 million of available for sale and held to maturity agency asset-backed securities, respectively.

 

Residential Mortgage-Backed Securities

At December 31, 2009, our residential mortgage-backed securities portfolio was comprised of $24.4 billion fair value of US government agency-backed securities and $8.3 billion fair value of non-agency (private issuer) securities. The agency securities are generally collateralized by 1-4 family, conforming, fixed-rate residential mortgages. The non-agency securities are also generally collateralized by 1-4 family residential mortgages. The mortgage loans underlying the non-agency securities are generally non-conforming (i.e., original balances in excess of the amount qualifying for agency securities) and predominately have interest rates that

are fixed for a period of time, after which the rate adjusts to a floating rate based upon a contractual spread that is indexed to a market rate (i.e., a “hybrid ARM”), or interest rates that are fixed for the term of the loan.

Substantially all of the securities are senior tranches in the securitization structure and have credit protection in the form of credit enhancement, over-collateralization and/or excess spread accounts.

During 2009, we recorded OTTI credit losses of $444 million on non-agency residential mortgage-backed securities. As of


 

36


December 31, 2009, $397 million of the credit losses related to securities rated below investment grade. As of December 31, 2009, the noncredit portion of OTTI losses recorded in accumulated other comprehensive loss for non-agency residential mortgage-backed securities totaled $1.1 billion and the related securities had a fair value of $2.6 billion.

The fair value of sub-investment grade investment securities for which we have not recorded an OTTI credit loss as of December 31, 2009 totaled $2.6 billion, with unrealized net losses of $658 million. The results of our security-level assessments indicate that we will recover the entire cost basis of these securities. Note 7 Investment Securities in the Notes To Consolidated Financial Statements of this Report provides further detail regarding our process for assessing OTTI for these securities.

Commercial Mortgage-Backed Securities

The fair value of the non-agency commercial mortgage-backed securities portfolio was $6.1 billion at December 31, 2009 and consisted of fixed-rate, private-issuer securities collateralized by non-residential properties, primarily retail properties, office buildings, and multi-family housing. The agency commercial mortgage-backed securities portfolio was $1.3 billion fair value at December 31, 2009 consisting of multi-family housing. Substantially all of the securities are the most senior tranches in the subordination structure.

We recorded OTTI credit losses of $6 million on non-agency commercial mortgage-backed securities during 2009. The remaining fair value of the securities for which OTTI was recorded approximates zero. All of the credit-impaired securities were rated below investment grade.

Asset-Backed Securities

The fair value of the asset-backed securities portfolio was $4.8 billion at December 31, 2009 and consisted of fixed-rate and floating-rate, private-issuer securities collateralized primarily by various consumer credit products, including residential mortgage loans, credit cards, and automobile loans. Substantially all of the securities are senior tranches in the securitization structure and have credit protection in the form of credit enhancement, over-collateralization and/or excess spread accounts.

We recorded OTTI credit losses of $111 million on asset-backed securities during 2009. All of the securities were collateralized by first and second lien residential mortgage loans and were rated below investment grade. As of December 31, 2009, the noncredit portion of OTTI losses recorded in accumulated other comprehensive loss for asset-backed securities totaled $221 million and the related securities had a fair value of $562 million.

For the sub-investment grade investment securities for which we have not recorded an OTTI loss through December 31, 2009, the remaining fair value was $381 million, with

unrealized net losses of $110 million. The results of our security-level assessments indicate that we will recover the entire cost basis of these securities. Note 7 Investment Securities in the Notes To Consolidated Financial Statements of this Report provides further detail regarding our process for assessing OTTI for these securities.

If the current housing and economic conditions were to continue for the foreseeable future or worsen, if market volatility and illiquidity were to continue or worsen, or if market interest rates were to increase appreciably, the valuation of our investment securities portfolio could continue to be adversely affected and we could incur additional OTTI credit losses that would impact our Consolidated Income Statement.

Loans Held For Sale

 

In millions   

Dec. 31

2009

  

Dec. 31

2008

Commercial mortgages at fair value

   $ 1,050    $ 1,401

Commercial mortgages at lower of cost or market

     251      747

Total commercial mortgages

     1,301      2,148

Residential mortgages at fair value

     1,012      1,824

Residential mortgages at lower of cost or market

            138

Total residential mortgages

     1,012      1,962

Other

     226      256

Total

   $ 2,539    $ 4,366

We stopped originating commercial mortgage loans held for sale designated at fair value during the first quarter of 2008 and intend to continue pursuing opportunities to reduce these positions at appropriate prices. For commercial mortgages held for sale carried at the lower of cost or market, strong origination volumes partially offset sales to government agencies of $5.4 billion during 2009.

We recognized net gains of $107 million in 2009 on the valuation and sale of commercial mortgage loans held for sale, net of hedges, carried at fair value and lower of cost or market compared with losses of $197 million in 2008. We sold $.3 billion and $.6 billion, respectively, of commercial mortgage loans held for sale carried at fair value in 2009 and 2008.

Residential mortgage loans held for sale decreased during 2009 despite strong refinancing volumes, especially in the first quarter. Loan origination volume was $19.1 billion. Substantially all such loans were originated to agency standards. We sold $19.8 billion of loans and recognized related gains of $435 million during 2009.

Net interest income on residential mortgage loans held for sale was $332 million for 2009.


 

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Goodwill and Other Intangible Assets

Goodwill increased $637 million and other intangible assets increased $584 million at December 31, 2009 compared with December 31, 2008. Note 2 Acquisitions and Divestitures and Note 9 Goodwill and Other Intangible Assets in the Notes To Consolidated Financial Statements in Item 8 of this Report have further details on the National City-related items that were the primary drivers of these increases.

FUNDING AND CAPITAL SOURCES

Details Of Funding Sources

 

In millions   

Dec. 31

2009

  

Dec. 31

2008

Deposits

       

Money market

   $ 85,838    $ 77,889

Demand

     40,406      33,001

Retail certificates of deposit

     48,622      58,315

Savings

     6,401      6,056

Other time

     1,088      13,620

Time deposits in foreign offices

     4,567      3,984

Total deposits

     186,922      192,865

Borrowed funds

       

Federal funds purchased and repurchase agreements

     3,998      5,153

Federal Home Loan Bank borrowings

     10,761      18,126

Bank notes and senior debt

     12,362      13,664

Subordinated debt

     9,907      11,208

Other

     2,233      4,089

Total borrowed funds

     39,261      52,240

        Total

   $ 226,183    $ 245,105

Total funding sources decreased $18.9 billion at December 31, 2009 compared with December 31, 2008 driven by declines in other time deposits, retail certificates of deposit and Federal Home Loan Bank borrowings, partially offset by increases in money market and demand deposits.

Total deposits decreased $5.9 billion at December 31, 2009 compared with December 31, 2008. Relationship-growth driven increases in money market, demand and savings deposits were more than offset by declines in other time deposits, reflecting a planned run-off of brokered certificates of deposits, and non-relationship retail certificates of deposits. We anticipate that growth in relationship-based deposits will be offset by additional run-off of higher-cost retail time deposits in 2010.

Interest-bearing deposits represented 76% of total deposits at December 31, 2009 compared with 81% at December 31, 2008.

The $13.0 billion decline in borrowed funds since December 31, 2008 primarily resulted from repayments of Federal Home Loan Bank borrowings along with decreases in all other borrowed fund categories.

In March 2009, PNC issued $1.0 billion of floating rate senior notes guaranteed by the FDIC under the TLGP. In addition,

PNC issued $1.5 billion of senior notes during the second and third quarters of 2009, which were not issued under the TLGP. The Liquidity Risk Management section of this Item 7 contains further details regarding actions we have taken which impacted our borrowed funds balances in 2009.

In February 2010, PNC issued $2.0 billion of senior notes as described further in the Liquidity Risk Management section of this Item 7.

Capital

We manage our capital position by making adjustments to our balance sheet size and composition, issuing debt, equity or hybrid instruments, executing treasury stock transactions, managing dividend policies and retaining earnings. On March 1, 2009, we took the proactive step to build capital and further strengthen our balance sheet when the Board of Directors decided to reduce PNC’s quarterly common stock dividend from $0.66 to $0.10 per share. The reduction added $766 million in 2009, and is expected to add approximately $1 billion on an annualized basis, to PNC’s common equity and cash positions, resulting in annual improvement in capital ratios of approximately 40 basis points.

Total shareholders’ equity increased $4.5 billion, to $29.9 billion, at December 31, 2009 compared with December 31, 2008 primarily due to the following:

   

A decline of $2.0 billion in accumulated other comprehensive loss primarily as a result of decreases in net unrealized securities losses as more fully described in the Investment Securities portion of this Consolidated Balance Sheet Review,

   

An increase of $1.7 billion in retained earnings, and

   

An increase of $.6 billion in capital surplus-common stock and other, primarily due to the May 2009 common stock issuance.

Common shares outstanding were 462 million at December 31, 2009 and 443 million at December 31, 2008. As described in the Executive Summary section of this Item 7, in May 2009 we raised $624 million in new common equity through the issuance of 15 million shares of common stock. The offering was related to our plan for increasing common equity following the results of the stress tests conducted under the Supervisory Capital Assessment Program by the Board of Governors of the Federal Reserve System and the OCC.

We expect to continue to increase our common equity as a proportion of total capital through growth in retained earnings and will consider other capital opportunities as appropriate. See Repurchase of Outstanding TARP Preferred Stock in the Executive Summary section and information regarding our February 2010 common stock offering in the Liquidity Risk Management section of this Report.

Our current common stock repurchase program permits us to purchase up to 25 million shares of PNC common stock on the open market or in privately negotiated transactions. This


 

38


program will remain in effect until fully utilized or until modified, superseded or terminated. The extent and timing of share repurchases under this program will depend on a number of factors including, among others, market and general economic conditions, economic and regulatory capital considerations, alternative uses of capital, regulatory and contractual limitations, and the potential impact on our credit ratings. We did not purchase any shares during 2009 under this program.

Risk-Based Capital

 

Dollars in millions   

Dec. 31

2009

    Dec. 31
2008
 

Capital components

      

Shareholders’ equity

      

Common

   $ 21,967      $ 17,490   

Preferred

     7,975        7,932   

Trust preferred capital securities

     2,996        2,898   

Noncontrolling interests

     1,611        1,506   

Goodwill and other intangible assets

     (10,652     (9,800

Eligible deferred income taxes on goodwill and other intangible assets

     738        594   

Pension, other postretirement benefit plan adjustments

     542        666   

Net unrealized securities losses, after-tax

     1,575        3,618   

Net unrealized losses (gains) on cash flow hedge derivatives, after-tax

     (166     (374

Other

     (63     (243

Tier 1 risk-based capital

     26,523        24,287   

Subordinated debt

     5,356        5,676   

Eligible allowance for credit losses

     2,934        3,153   

Total risk-based capital

   $ 34,813      $ 33,116   

Tier 1 common capital

      

Tier 1 risk-based capital

   $ 26,523      $ 24,287   

Preferred equity

     (7,975     (7,932

Trust preferred capital securities

     (2,996     (2,898

Noncontrolling interests

     (1,611     (1,506

Tier 1 common capital

   $ 13,941      $ 11,951   

Assets

      

Risk-weighted assets, including off- balance sheet instruments and market risk equivalent assets

   $ 232,257      $ 251,106   
Adjusted average total assets      263,103        138,689   

Capital ratios

      

Tier 1 risk-based

     11.4     9.7

Tier 1 common

     6.0        4.8   

Total risk-based

     15.0        13.2   

Leverage

     10.1        17.5   

Federal banking regulators have stated that they expect all bank holding companies to have a level and composition of Tier 1 capital well in excess of the 4% regulatory minimum, and they have required the largest US bank holding companies, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet credit needs of their customers through the economic downturn. They have

also stated their view that common equity should be the dominant form of Tier 1 capital. As a result, regulators are now emphasizing the Tier 1 common capital ratio in their evaluation of bank holding company capital levels, although this metric is not provided for in the regulations. We seek to manage our capital consistent with these regulatory principles, and believe that our year-end capital levels were aligned with them. Actions that we have taken since year-end that increase our Tier 1 common capital ratio on a pro forma basis are described below.

Capital levels were strengthened during 2009. Higher capital levels were net of dividend payments including $332 million paid to the US Department of the Treasury during 2009 on $7.6 billion of preferred stock. See Repurchase of Outstanding TARP Preferred Stock and Pending Sale of PNC Global Investment Servicing in the Executive Summary section of Item 7. Our Tier 1 risk-based capital ratio and our Tier 1 common capital ratio would have been 10.3% and 8.0%, respectively, at December 31, 2009 had they included the estimated net impact of the redemption of the outstanding TARP preferred stock, our February 2010 equity offering discussed further in the Liquidity Risk Management section of Item 7, and the pending sale of GIS. We provide a reconciliation of these ratios reflecting the impact of the TARP redemption, common equity offering and sale of GIS to the ratios set forth in the Risk-Based Capital table above in the Statistical Information (Unaudited) section in Item 8 of this Report.

PNC’s Tier 1 risk-based capital ratio increased by 170 basis points to 11.4% at December 31, 2009 from 9.7% at December 31, 2008. The increase in the ratio was due to higher risk-based capital primarily from retained earnings and the May 2009 common equity issuance coupled with a decline in risk-weighted assets. Our Tier 1 common capital ratio was 6.0% at December 31, 2009 compared with 4.8% at December 31, 2008.

The leverage ratio at December 31, 2008 reflected the favorable impact on Tier 1 risk-based capital from the issuance of securities under TARP and the issuance of PNC common stock in connection with the National City acquisition, both of which occurred on December 31, 2008. In addition, the ratio as of that date did not reflect any impact of National City on PNC’s adjusted average total assets.

The access to, and cost of, funding new business initiatives including acquisitions, the ability to engage in expanded business activities, the ability to pay dividends, the level of deposit insurance costs, and the level and nature of regulatory oversight depend, in part, on a financial institution’s capital strength.

We merged the charter of PNC Bank Delaware into PNC Bank, N.A. during August 2009 and merged the charter of National City Bank into PNC Bank, N.A. in November 2009.


 

39


At December 31, 2009, PNC Bank, N.A., our domestic bank subsidiary, was considered “well capitalized” based on US regulatory capital ratio requirements. See the Supervision And Regulation section of Item 1 of this Report and Note 23 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information. We believe PNC Bank, N.A. will continue to meet these requirements during 2010.

OFF-BALANCE SHEET ARRANGEMENTS AND VIES

We engage in a variety of activities that involve unconsolidated entities including qualified special purpose entities (QSPEs) or that are otherwise not reflected on our Consolidated Balance Sheet that are generally referred to as “off-balance sheet arrangements.” The following sections of this Report provide further information on these types of activities:

   

Commitments, including contractual obligations and other commitments, included within the Risk Management section of this Item 7, and

   

Note 10 Loan Sales and Securitizations and Note 25 Commitments and Guarantees in the Notes To Consolidated Financial Statements included in Item 8 of this Report.

The following provides a summary of variable interest entities (VIEs), including those that we have consolidated and those in which we hold a significant variable interest but have not consolidated into our financial statements as of December 31, 2009 and December 31, 2008.

Consolidated VIEs – PNC Is Primary Beneficiary

 

In millions   

Aggregate

Assets

   Aggregate
Liabilities

Tax credit investments (a)

       

December 31, 2009

   $ 1,933    $ 808

December 31, 2008

   $ 1,690    $ 921
 

Credit Risk Transfer Transaction

       

December 31, 2009

   $ 860    $ 860

December 31, 2008

   $ 1,070    $ 1,070
(a) Amounts reported primarily represent investments in low income housing projects.

Impact of New Accounting Guidance in 2010

We transfer loans to QSPEs sponsored by PNC or third parties in connection with loan sales and securitization transactions. These transactions effectively transfer the risk to the QSPE and permit the loans to be excluded from our Consolidated Balance Sheet. See Note 10 Loan Sales and Securitizations included in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information.

The FASB issued guidance during 2009 that removes the nonconsolidation exception for QSPEs and includes new criteria for determining the primary beneficiary of a VIE. The

guidance also increases the frequency of required reassessments to determine whether an entity is the primary beneficiary of a VIE and requires enhanced disclosures. We adopted this guidance effective January 1, 2010. Based on the new guidance, we consolidated Market Street effective January 1, 2010. Accordingly, we recognized the assets, liabilities and noncontrolling interests of Market Street on our Consolidated Balance Sheet based on their respective carrying amounts as prescribed by the guidance. We also consolidated the QSPE associated with the securitization of credit card loans effective January 1, 2010. These changes had a minimal impact on our capital ratios. We are continuing to analyze other entities, including non-PNC sponsored securitization trusts where we provide loan servicing, for possible consolidation of the trusts.

The impact on total assets of adopting this new accounting standard on January 1, 2010 for those VIEs that were consolidated is as follows:

 

In millions   

Incremental

Assets

Market Street

   $ 2,486

Credit card loans

     1,480

Total

   $ 3,966

Non-Consolidated VIEs – Significant Variable Interests

 

In millions    Aggregate
Assets
   Aggregate
Liabilities
  

PNC Risk

of Loss

 

December 31, 2009

          

Market Street

   $ 3,698    $ 3,718    $ 6,155 (a) 

Tax credit investments (b) (c)

     1,786      1,156      743   

Collateralized debt obligations

     23             2   

Total

   $ 5,507    $ 4,874    $ 6,900   

December 31, 2008

          

Market Street

   $ 4,916    $ 5,010    $ 6,965 (a) 

Tax credit investments (b) (c)

     1,517      1,041      811   

Collateralized debt obligations

     20             2   

Total

   $ 6,453    $ 6,051    $ 7,778   
(a) PNC’s risk of loss consists of off-balance sheet liquidity commitments to Market Street of $5.6 billion and other credit enhancements of $.6 billion at December 31, 2009. The comparable amounts were $6.4 billion and $.6 billion at December 31, 2008.
(b) Amounts reported primarily represent investments in low income housing projects.
(c) Aggregate assets and aggregate liabilities represent estimated balances due to limited availability of financial information associated with certain acquired National City partnerships.

Market Street

Market Street is a multi-seller asset-backed commercial paper conduit that is owned by an independent third party. Market Street’s activities primarily involve purchasing assets or making loans secured by interests in pools of receivables from US corporations that desire access to the commercial paper market. Market Street funds the purchases of assets or loans by issuing commercial paper which has been rated A1/P1/F1 by Standard & Poor’s, Moody’s, and Fitch, respectively, and is supported by pool-specific credit enhancements, liquidity facilities and program-level credit enhancement. Generally,


 

40


Market Street mitigates its potential interest rate risk by entering into agreements with its borrowers that reflect interest rates based upon its weighted average commercial paper cost of funds. During 2008 and 2009, Market Street met all of its funding needs through the issuance of commercial paper.

Market Street commercial paper outstanding was $3.1 billion at December 31, 2009 and $4.4 billion at December 31, 2008. The weighted average maturity of the commercial paper was 36 days at December 31, 2009 and 24 days at December 31, 2008.

Effective October 28, 2008, Market Street was approved to participate in the Federal Reserve’s CPFF authorized under

Section 13(3) of the Federal Reserve Act. The CPFF commitment to purchase up to $5.4 billion of three-month Market Street commercial paper expired on February 1, 2010. Market Street had no borrowings under this facility at December 31, 2009 or during the year then ended.

During 2009, PNC Capital Markets, acting as a placement agent for Market Street, held a maximum daily position in Market Street commercial paper of $135 million with an average balance of $19 million. This compares with a maximum daily position of $75 million with an average balance of $12 million during 2008. PNC Capital Markets owned no Market Street commercial paper at December 31, 2009 and December 31, 2008. PNC Bank, N.A. made no purchases of Market Street commercial paper during 2009.

PNC Bank, N.A. provides certain administrative services, the program-level credit enhancement and all of the liquidity facilities to Market Street in exchange for fees negotiated based on market rates. Program administrator fees related to PNC’s portion of liquidity facilities were $43 million for 2009 and $21 million for 2008. Commitment fees related to PNC’s portion of the liquidity facilities for 2009 and 2008 were insignificant.

The commercial paper obligations at December 31, 2009 and December 31, 2008 were effectively collateralized by Market Street’s assets. While PNC may be obligated to fund under the $5.6 billion of liquidity facilities for events such as commercial paper market disruptions, borrower bankruptcies, collateral deficiencies or covenant violations, our credit risk under the liquidity facilities is secondary to the risk of first loss provided by the borrower or another third party in the form of deal-specific credit enhancement, such as by the over-collateralization of the assets. Deal-specific credit enhancement that supports the commercial paper issued by Market Street is generally structured to cover a multiple of expected losses for the pool of assets and is sized to generally

meet rating agency standards for comparably structured transactions. In addition, PNC would be required to fund $.4 billion of the liquidity facilities if the underlying assets are in default. See Note 25 Commitments And Guarantees included in the Notes To Consolidated Financial Statements of this Report for additional information.

PNC provides program-level credit enhancement to cover net losses in the amount of 10% of commitments, excluding explicitly rated AAA/Aaa facilities. PNC provides 100% of the enhancement in the form of a cash collateral account funded by a loan facility. This facility expires in March 2013.

Market Street has entered into a Subordinated Note Purchase Agreement (Note) with an unrelated third party. The Note provides first loss coverage whereby the investor absorbs losses up to the amount of the Note, which was $8.0 million as of December 31, 2009. Proceeds from the issuance of the Note are held by Market Street in a first loss reserve account that will be used to reimburse any losses incurred by Market Street, PNC Bank, N.A. or other providers under the liquidity facilities and the credit enhancement arrangements.

Assets of Market Street (a)

 

In millions    Outstanding    Commitments    Weighted
Average
Remaining
Maturity
In Years

December 31, 2009

          

Trade receivables

   $ 1,551    $ 4,105    2.01

Automobile financing

     480      480    4.20

Auto fleet leasing

     412      543    .85

Collateralized loan obligations

     126      150    .36

Residential mortgage

     13      13    26.01

Other

     534      567    1.65

Cash and miscellaneous receivables

     582            

Total

   $ 3,698    $ 5,858    2.06

December 31, 2008

          

Trade receivables

   $ 1,516    $ 3,370    2.34

Automobile financing

     992      992    3.94

Auto fleet leasing

     473      560    1.34

Collateralized loan obligations

     306      405    1.58

Credit cards

     400      400    .19

Residential mortgage

     14      14    27.00

Other

     695      765    2.06

Cash and miscellaneous receivables

     520            

Total

   $ 4,916    $ 6,506    2.34
(a) Market Street did not recognize an asset impairment charge or experience any material rating downgrades during 2008 or 2009.

 

41


Market Street Commitments by Credit Rating (a)

 

    

December 31,

2009

   

December 31,

2008

 

AAA/Aaa

   14   19

AA/Aa

   50      6   

A/A

   34      72   

BBB/Baa

   2      3   

Total

   100   100
(a) The majority of our facilities are not explicitly rated by the rating agencies. All facilities are structured to meet rating agency standards for applicable rating levels.

We evaluated the design of Market Street, its capital structure, the Note, and relationships among the variable interest holders. Based on this analysis and under accounting guidance effective during 2009 and 2008, we are not the primary beneficiary and therefore the assets and liabilities of Market Street are not included on our Consolidated Balance Sheet.

We considered changes to the variable interest holders (such as new expected loss note investors and changes to program-level credit enhancement providers), terms of expected loss notes, and new types of risks related to Market Street as reconsideration events. We reviewed the activities of Market Street on at least a quarterly basis to determine if a reconsideration event has occurred.

Tax Credit Investments

We make certain equity investments in various limited partnerships or limited liability companies (LLCs) that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC) pursuant to Sections 42 and 47 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings and to assist us in achieving goals associated with the Community Reinvestment Act. The primary activities of the investments include the identification, development and operation of multi-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity. We typically invest in these partnerships as a limited partner or non-managing member.

Also, we are a national syndicator of affordable housing equity (together with the investments described above, the “LIHTC investments”). In these syndication transactions, we create funds in which our subsidiaries are the general partner or managing member and sell limited partnership or non-managing member interests to third parties, and in some cases may also purchase a limited partnership or non-managing member interest in the fund. The purpose of this business is to generate income from the syndication of these funds, generate servicing fees by managing the funds, and earn tax credits to reduce our tax liability. General partner or managing member activities include selecting, evaluating, structuring, negotiating, and closing the fund investments in operating limited partnerships, as well as oversight of the ongoing operations of the fund portfolio.

 

We evaluate our interests and third party interests in the limited partnerships/LLCs in determining whether we are the primary beneficiary. The primary beneficiary determination is based on which party absorbs a majority of the variability. The primary sources of variability in LIHTC investments are the tax credits, tax benefits due to passive losses on the investments and development and operating cash flows. We have consolidated LIHTC investments in which we absorb a majority of the variability and thus are considered the primary beneficiary. The assets are primarily included in Equity investments and Other assets on our Consolidated Balance Sheet with the liabilities classified in Other liabilities and third party investors’ interests included in the Equity section as Noncontrolling interests. Neither creditors nor equity investors in the LIHTC investments have any recourse to our general credit. The consolidated aggregate assets and liabilities of these LIHTC investments are provided in the Consolidated VIEs – PNC Is Primary Beneficiary table and reflected in the “Other” business segment.

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.

Credit Risk Transfer Transaction

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


 

42


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


 

43


any other class or series of PNC’s capital stock, (v) the purchase of fractional interests in shares of PNC capital stock pursuant to the conversion or exchange provisions of such stock or the security being converted or exchanged or (vi) any stock dividends paid by PNC where the dividend stock is the same stock as that on which the dividend is being paid.

PNC Bank, N.A. has contractually committed to Trust I that if full dividends are not paid in a dividend period on the Trust I Securities, LLC Preferred Securities or any other parity equity securities issued by the LLC, neither PNC Bank, N.A. nor its subsidiaries will declare or pay dividends or other distributions with respect to, or redeem, purchase or acquire or make a liquidation payment with respect to, any of its equity capital securities during the next succeeding period (other than to holders of the LLC Preferred Securities and any parity equity securities issued by the LLC) except: (i) in the case of dividends payable to subsidiaries of PNC Bank, N.A., to PNC Bank, N.A. or another wholly-owned subsidiary of PNC Bank, N.A. or (ii) in the case of dividends payable to persons that are not subsidiaries of PNC Bank, N.A., to such persons only if, (A) in the case of a cash dividend, PNC has first irrevocably committed to contribute amounts at least equal to such cash dividend or (B) in the case of in-kind dividends payable by PNC REIT Corp., PNC has committed to purchase such in-kind dividend from the applicable PNC REIT Corp. holders in exchange for a cash payment representing the market value of such in-kind dividend, and PNC has committed to contribute such in-kind dividend to PNC Bank, N.A.

PNC Capital Trust E Trust Preferred Securities

In February 2008, PNC Capital Trust E issued $450 million of 7.75% Trust Preferred Securities due March 15, 2068 (the Trust E Securities). PNC Capital Trust E’s only assets are $450 million of 7.75% Junior Subordinated Notes due March 15, 2068 and issued by PNC (the JSNs). The Trust E Securities are fully and unconditionally guaranteed by PNC. We may, at our option, redeem the JSNs at 100% of their principal amount on or after March 15, 2013.

In connection with the closing of the Trust E Securities sale, we agreed that, if we have given notice of our election to defer interest payments on the JSNs or a related deferral period is continuing, then PNC would be subject during such period to restrictions on dividends and other provisions protecting the status of the JSN debenture holder similar to or in some ways more restrictive than those potentially imposed under the Exchange Agreements with Trust II and Trust III, as described above. PNC Capital Trusts C and D have similar protective provisions with respect to $500 million in principal amount of junior subordinated debentures. Also, in connection with the closing of the Trust E Securities sale, we entered into a replacement capital covenant, a copy of which was attached as Exhibit 99.1 to PNC’s Form 8-K filed on February 13, 2008 and which is described in Note 14 Capital Securities of Subsidiary Trusts in Item 8 of this Report.

 

Acquired Entity Trust Preferred Securities

As a result of the National City acquisition, we assumed obligations with respect to $2.4 billion in principal amount of junior subordinated debentures issued by the acquired entity. As a result of the Mercantile, Yardville and Sterling acquisitions, we assumed obligations with respect to $158 million in principal amount of junior subordinated debentures issued by the acquired entities. Under the terms of these debentures, if there is an event of default under the debentures or PNC exercises its right to defer payments on the related trust preferred securities issued by the statutory trusts or there is a default under PNC’s guarantee of such payment obligations, PNC would be subject during the period of such default or deferral to restrictions on dividends and other provisions protecting the status of the debenture holders similar to or in some ways more restrictive than those potentially imposed under the Exchange Agreements with Trust II and Trust III, as described above.

We are subject to replacement capital covenants (RCCs) with respect to four tranches of junior subordinated debentures inherited from National City, copies of which RCCs were attached, respectively, as Exhibit 99.2 to the National City Form 8-K filed on February 4, 2008 and Exhibit 99.1 to the National City Forms 8-K filed on November 9, 2006, May 25, 2007 and August 30, 2007. See Note 14 Capital Securities of Subsidiary Trusts. Similarly, we are subject to a replacement capital covenant with respect to our Series L Preferred Stock, a copy of which was attached as Exhibit 99.1 to National City’s Form 8-K filed on February 4, 2008. See Note 19 Equity in Item 8 of this Report.

FAIR VALUE MEASUREMENTS AND FAIR VALUE OPTION

In addition to the following, see Note 8 Fair Value in the Notes To Consolidated Financial Statements under Part II, Item 8 of this Report for further information regarding fair value. New GAAP was issued in 2009 for estimating fair values when the volume and level of activity for the asset or liability have significantly decreased. It also provides guidance on identifying circumstances that indicate a transaction is not orderly. As permitted, PNC adopted this guidance effective January 1, 2009.

Assets and liabilities measured at fair value on a recurring basis, including instruments for which PNC has elected the fair value option, are summarized below. As prescribed by GAAP, the assets and liabilities acquired from National City on December 31, 2008 are excluded from the following disclosures as of that date, but are included as of and for the year ended December 31, 2009.

At December 31, 2009, assets recorded at fair value represented 23% of total assets and fair value liabilities represented 2% of total liabilities compared with 13% of total assets and 2% of total liabilities as of December 31, 2008.


 

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Fair Value Measurements – Summary

 

     December 31, 2009      December 31, 2008 (j)
In millions    Level 1    Level 2    Level 3    Total Fair
Value
     Level 1    Level 2    Level 3    Total Fair
Value

Assets

                           

Securities available for sale

   $ 7,256    $ 33,609    $ 9,933    $ 50,798        $ 347    $ 21,633    $ 4,837    $ 26,817

Financial derivatives (a)

     27      3,839      50      3,916         16      5,582      125      5,723

Residential mortgage loans held for sale (b)

        1,012         1,012                 

Trading securities (c)

     1,736      299      89      2,124         89      529      73      691

Residential mortgage servicing rights (d)

           1,332      1,332               6      6

Commercial mortgage loans held for sale (b)

           1,050      1,050               1,400      1,400

Equity investments

           1,188      1,188               571      571

Customer resale agreements (e)

        990         990            1,072         1,072

Loans (f)

        107         107                 

Other assets (g)

            207      509      716                144             144

Total assets

   $ 9,019    $ 40,063    $ 14,151    $ 63,233       $ 452    $ 28,960    $ 7,012    $ 36,424

Liabilities

                           

Financial derivatives (h)

   $ 2    $ 3,331    $ 295    $ 3,628       $ 2    $ 4,387    $ 22    $ 4,411

Trading securities sold short (i)

     1,302      42         1,344         182      207         389

Other liabilities

            6             6                9             9

Total liabilities

   $ 1,304    $ 3,379    $ 295    $ 4,978       $ 184    $ 4,603    $ 22    $ 4,809
(a) Included in other assets on the Consolidated Balance Sheet.
(b) Included in loans held for sale on the Consolidated Balance Sheet. PNC has elected the fair value option for certain commercial and residential mortgage loans held for sale.
(c) Included in trading securities on the Consolidated Balance Sheet. Fair value includes net unrealized gains of $9 million at December 31, 2009 compared with net unrealized losses of $28 million at December 31, 2008.
(d) Included in other intangible assets on the Consolidated Balance Sheet.
(e) Included in Federal funds sold and resale agreements on the Consolidated Balance Sheet. PNC has elected the fair value option for this item.
(f) Included in loans on the Consolidated Balance Sheet. PNC has elected the fair value option for residential mortgage loans originated for sale. Certain of these loans have been subsequently reclassified into portfolio loans.
(g) Includes BlackRock Series C Preferred Stock.
(h) Included in other liabilities on the Consolidated Balance Sheet.
(i) Included in other borrowed funds on the Consolidated Balance Sheet.
(j) Excludes assets and liabilities associated with the acquisition of National City.

 

Valuation Hierarchy

The following is an outline of the valuation methodologies used for measuring fair value for the major items above. GAAP focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market participants and establishes a reporting hierarchy to maximize the use of observable inputs. The fair value hierarchy (i.e., Level 1, Level 2, and Level 3) is described in detail in Note 8 Fair Value in the Notes To Consolidated Financial Statements under Part II, Item 8 of this Report.

We characterize active markets as those where transaction volumes are sufficient to provide objective pricing information, with reasonably narrow bid/ask spreads and where dealer quotes received do not vary widely and are based on current information. Inactive markets are typically characterized by low transaction volumes, price quotations which vary substantially among market participants or are not based on current information, wide bid/ask spreads, a significant increase in implied liquidity risk premiums, yields, or performance indicators for observed transactions or quoted prices compared to historical periods, a significant decline or absence of a market for new issuance, or any combination of the above factors. We also consider nonperformance risks

including credit risk as part of our valuation methodology for all assets and liabilities measured at fair value.

Any models used to determine fair values or to validate dealer quotes based on the descriptions below are subject to review and independent testing as part of our model validation and internal control testing processes. Our Model Validation Committee tests significant models on at least an annual basis. In addition, we have teams, independent of the traders, verify marks and assumptions used for valuations at each period end.

Securities Available for Sale and Trading Securities

Securities measured at fair value include both the available for sale and trading portfolios. We use prices obtained from pricing services, dealer quotes or recent trades to determine the fair value of securities. Approximately 60% of our positions are valued using prices obtained from pricing services provided by the Barclay’s Capital Index, formerly known as the Lehman Index, and Interactive Data Corp. (IDC). For approximately 15% or more of our positions, we use prices obtained from the pricing services as the primary input into the valuation process. Barclay’s Capital Index prices are set with reference to market activity for highly liquid assets such as agency mortgage-backed securities, and matrix pricing for other assets, such as CMBS and asset-


 

45


backed securities. IDC primarily uses pricing models considering adjustments for ratings, spreads, matrix pricing and prepayments for the instruments we value using this service, such as non-agency residential mortgage-backed securities, agency adjustable rate mortgage securities, agency CMOs and municipal bonds. Dealer quotes received are typically non-binding and corroborated with other dealers’ quotes, by reviewing valuations of comparable instruments, or by comparison to internal valuations. In circumstances where relevant market prices are limited or unavailable, valuations may require significant management judgments or adjustments to determine fair value. In these cases, the securities are classified as Level 3.

The valuation techniques used for securities classified as Level 3 include using a discounted cash flow approach or, in certain instances, identifying a proxy security, market transaction or index. For certain security types, primarily non-agency residential securities, the fair value methodology incorporates values obtained from a discounted cash flow model. The modeling process incorporates assumptions management believes willing market participants would use to value the security under current market conditions. The assumptions used include prepayment projections, credit loss assumptions, and discount rates, which include a risk premium due to liquidity and uncertainty that are based on both observable and unobservable inputs. We use the discounted cash flow analysis, in conjunction with other relevant pricing information obtained from either pricing services or broker quotes to establish the fair value that management believes is representative under current market conditions. For purposes of determining fair value at December 31, 2009, the relevant pricing service information was the predominant input.

In the proxy approach, the proxy selected generally has similar credit, tenor, duration, pricing and structuring attributes to the PNC position. The price, market spread, or yield on the proxy is then used to calculate an indicative market price for the security. Depending on the nature of the PNC position and its attributes relative to the proxy, management may make additional adjustments to account for market conditions, liquidity, and nonperformance risk, based on various inputs including recent trades of similar securities, single dealer quotes, and/or other observable and unobservable inputs.

Financial Derivatives

Exchange-traded derivatives are valued using quoted market prices and are classified as Level 1. However, the majority of derivatives that we enter into are executed over-the-counter and are valued using internal techniques. Readily observable market inputs to these models can be validated to external sources, including industry pricing services, or corroborated through recent trades, dealer quotes, yield curves, implied volatility or other market-related data. Certain derivatives, such as total rate of return swaps, are corroborated to the CMBX index. These derivatives are classified as Level 2.

Derivatives priced using significant management judgment or assumptions are classified as Level 3.

The fair values of our derivatives are adjusted for nonperformance risk including credit risk as appropriate. Our nonperformance risk adjustment is computed using new loan pricing and considers externally available bond spreads, in conjunction with internal historical recovery observations. The credit risk adjustment is not currently material to the overall derivatives valuation.

Residential Mortgage Loans Held for Sale

We account for residential mortgage loans originated for sale on a recurring basis at fair value. Residential mortgage loans are valued based on quoted market prices, where available, prices for other traded mortgage loans with similar characteristics, and purchase commitments and bid information received from market participants. These loans are regularly traded in active markets and observable pricing information is available from market participants. The prices are adjusted as necessary to include the embedded servicing value in the loans and to take into consideration the specific characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation but are not considered significant to the fair value of the loans. Accordingly, residential mortgage loans held for sale are classified as Level 2.

Residential Mortgage Servicing Rights

Residential mortgage servicing rights (MSRs) are carried at fair value on a recurring basis. These residential MSRs do not trade in an active open market with readily observable prices. Although sales of servicing assets do occur, the precise terms and conditions typically would not be available. Accordingly, management determines the fair value of its residential MSRs using a discounted cash flow model incorporating assumptions about loan prepayment rates, discount rates, servicing costs, and other economic factors. As part of the pricing process, management compares its fair value estimates to third-party valuations on a quarterly basis to assess the reasonableness of the fair values calculated by its internal valuation models. Due to the nature of the valuation inputs, residential MSRs are classified as Level 3.

Commercial Mortgage Loans Held for Sale

We account for certain commercial mortgage loans classified as held for sale at fair value. The election of the fair value option aligns the accounting for the commercial mortgages with the related hedges. At origination, these loans were intended for securitization.

Due to inactivity in the CMBS securitization market in 2009 and 2008, we determine the fair value of commercial mortgage loans held for sale by using a whole loan methodology. Fair value is determined using assumptions that management believes a market participant would use in


 

46


pricing the loans. When available, valuation assumptions included observable inputs based on whole loan sales. Adjustments are made to these assumptions to account for situations when uncertainties exist, including market conditions and liquidity. Credit risk is included as part of our valuation process for these loans by considering expected rates of return for market participants for similar loans in the marketplace. Based on the significance of unobservable inputs, we classify this portfolio as Level 3.

Equity Investments

The valuation of direct and indirect private equity investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such investments. The carrying values of direct and affiliated partnership interests reflect the expected exit price and are based on various techniques including publicly traded price, multiples of adjusted earnings of the entity, independent appraisals, anticipated financing and sale transactions with third parties, or the pricing used to value the entity in a recent financing transaction. In September 2009, the FASB issued ASU 2009-12 – Fair Value Measurements and Disclosures (Topic 820) – Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). Based on the guidance, we value indirect investments in private equity funds based on net asset value as provided in the financial statements that we receive from their managers. Due to the time lag in our receipt of the financial information and based on a review of investments and valuation techniques applied, adjustments to the manager-provided value are made when available recent portfolio company information or market information indicates a significant change in value from that provided by the manager of the fund. These investments are classified as Level 3.

 

Customer Resale Agreements

We account for structured resale agreements, which are economically hedged using free-standing financial derivatives, at fair value. The fair value for structured resale agreements is determined using a model which includes observable market data such as interest rates as inputs. Readily observable market inputs to this model can be validated to external sources, including yield curves, implied volatility or other market-related data. These instruments are classified as Level 2.

BlackRock Series C Preferred Stock

Effective February 27, 2009, we elected to account for the approximately 2.9 million shares of the BlackRock Series C Preferred Stock received in a stock exchange with BlackRock at fair value. The Series C Preferred Stock economically hedges the BlackRock LTIP liability that is accounted for as a derivative. The fair value of the Series C Preferred Stock is determined using a third-party modeling approach, which includes both observable and unobservable inputs. This approach considers expectations of a default/liquidation event and the use of liquidity discounts based on our inability to sell the security at a fair, open market price in a timely manner. Due to the significance of unobservable inputs, this security is classified as Level 3.

Level 3 Assets and Liabilities

Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.


 

Level 3 Assets and Liabilities

 

Dollars in millions   

Total
Level 3

Assets

   Total
Level 3
Liabilities
  

% of Total
Assets

at Fair Value

   

% of Total
Liabilities

at Fair Value

    % of
Consolidated
Assets
    % of
Consolidated
Liabilities
 

December 31, 2009

   $ 14,151    $ 295    22   6   5   < 1

December 31, 2008

     7,012      22    19   < 1   2   < 1

 

During 2009, securities transferred into Level 3 from Level 2 exceeded securities transferred out by $4.4 billion. Total securities measured at fair value and classified in Level 3 at December 31, 2009 and December 31, 2008 included securities available for sale and trading securities consisting primarily of non-agency residential mortgage-backed securities and asset-backed securities where management determined that the volume and level of activity for these assets had significantly decreased. There have been no recent new “private label” issues

in the residential mortgage-backed securities market. The lack of relevant market activity for these securities resulted in management modifying its valuation methodology for the instruments transferred in 2009. Other Level 3 assets include certain commercial mortgage loans held for sale, certain equity securities, auction rate securities, corporate debt securities, private equity investments, residential mortgage servicing rights and other assets.


 

47


BUSINESS SEGMENTS REVIEW

In the first quarter of 2009, we made changes to our business organization structure and management reporting in conjunction with the acquisition of National City.

Business segment results for 2008 have been reclassified to reflect current methodologies and current business and management structure and to present prior periods on the same basis. As a result of its pending sale, GIS is no longer a reportable business segment.

Results for 2009 for all of our business segments except BlackRock include revenues and expenses associated with businesses acquired with National City.

Business segment results, including inter-segment revenues, and a description of each business are included in Note 27 Segment Reporting included in the Notes To Consolidated Financial Statements of this Report. Certain revenue and expense amounts included in this Item 7 differ from the amounts shown in Note 27 primarily due to the presentation in this Item 7 of business net interest revenue on a taxable-equivalent basis.

Results of individual businesses are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of our individual businesses are not necessarily comparable with similar information for any other company. We refine our methodologies from time to time as our management accounting practices are enhanced and our businesses and management structure change. We typically update key cost allocation components annually. Certain prior period amounts have been reclassified to reflect current methodologies and our current business and management structure. Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. We have aggregated the business results for certain similar operating segments for financial reporting purposes.

Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product maturities, duration and other factors. Capital is intended to cover unexpected losses and is assigned to the banking and servicing businesses using our risk-based economic capital model. We have assigned capital equal to 6% of funds to Retail Banking to approximate market comparables for this business.

We have allocated the allowances for loan and lease losses and unfunded loan commitments and letters of credit based on our assessment of risk inherent in the business segment loan portfolios. Our allocation of the costs incurred by operations and other shared support areas not directly aligned with the businesses is primarily based on the use of services.

 

Total business segment financial results differ from consolidated results from continuing operations. The impact of these differences is reflected in the “Other” category. “Other” for purposes of this Business Segments Review and the Business Segment Highlights in the Executive Summary includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as gains or losses related to BlackRock transactions including LTIP share distributions and obligations, earnings and gains related to Hilliard Lyons for the first quarter of 2008, integration costs, asset and liability management activities including net securities gains or losses and certain trading activities, exited businesses, equity management activities, tax credit investments, alternative investments, intercompany eliminations, most corporate overhead, and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests.

Period-end Employees

 

     

Dec. 31

2009

  

Dec. 31

2008

Full-time employees

       

Retail Banking

   21,416    22,461

Corporate & Institutional Banking

   3,746    4,264

Asset Management Group

   2,960    3,204

Residential Mortgage Banking

   3,267    3,637

Distressed Assets Portfolio

   175    106

Other

       

Operations & Technology

   9,275    9,350

Staff Services and other (a)

   8,922    9,586

Total Other

   18,197    18,936

Total full-time employees

   49,761    52,608

Retail Banking part-time employees

   4,737    5,448

Other part-time employees

   1,322    1,539

Total part-time employees

   6,059    6,987

Total

   55,820    59,595
(a) Includes employees of Global Investment Servicing totaling 4,450 at December 31, 2009 and 4,934 at December 31, 2008.

Employee data as reported by each business segment in the table above reflects staff directly employed by the respective businesses and excludes operations, technology and staff services employees reported in the Other segment. In addition to reductions of full-time and part-time employees since the closing of the National City acquisition, we significantly reduced outside contract programmers related to National City systems scheduled for conversion to PNC systems.


 

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Results Of Businesses – Summary

 

Year ended December 31 - in millions    Earnings     Revenue    Average Assets (a)
   2009    2008     2009    2008    2009    2008

Retail Banking (b)

   $ 136    $ 328      $ 5,721    $ 2,731    $ 65,320    $ 32,922

Corporate & Institutional Banking

     1,190      215        5,266      1,859      84,689      47,050

Asset Management Group

     105      119        919      559      7,341      3,001

Residential Mortgage Banking

     435        1,328         8,420     

Distressed Assets Portfolio

     84        1,153         22,844     

BlackRock

     207      207        262      261      6,249      4,240

Total business segments

     2,157      869        14,469      5,410      194,863      87,213

Other (b) (c) (d)

     201      (73     1,579      886      82,013      54,807

Results from continuing operations

   $ 2,358    $ 796      $ 16,228    $ 6,296    $ 276,876    $ 142,020
(a) Period-end balances for BlackRock.
(b) Amounts for 2009 include the results of the 61 branches divested by early September 2009. Amounts for 2008 reflect the reclassification of the results of Hilliard Lyons, which we sold on March 31, 2008, and the related gain on sale, from Retail Banking to “Other.”
(c) “Other” earnings and revenue for 2009 include a $687 million after-tax ($1.076 billion pretax) gain related to the BlackRock/BGI transaction and “Other” earnings for 2009 also includes $274 million of after-tax ($421 million pretax) integration costs primarily related to National City. “Other” earnings for 2008 includes $422 million of after-tax ($649 million pretax) integration costs, including conforming provision for credit losses, primarily related to National City.
(d) “Other” average assets include securities available for sale associated with asset and liability management activities.

 

49


RETAIL BANKING

(Unaudited)

 

Year ended December 31

Dollars in millions

   2009 (a)     2008  

INCOME STATEMENT

      

Net interest income

   $ 3,522      $ 1,594   

Noninterest income

      

Service charges on deposits

     930        359   

Brokerage

     245        152 &