PNC Financial Services (PNC)

Net interest income for the third quarter of 2009 was $915 million, an increase of $29 million compared with the second quarter of 2009 primarily due to higher loan spreads during the third quarter.

Corporate service fees were $226 million in the third quarter of 2009 compared with $236 million in the linked quarter. The major components of corporate service fees are treasury management, corporate finance fees and commercial mortgage servicing revenue. The linked quarter decrease was primarily the result of a $16 million recovery in the valuation of commercial mortgage servicing rights in the previous quarter.

Other noninterest income increased $14 million to $175 million in the third quarter of 2009 compared with the second quarter mainly due to higher gains on sales of impaired and unimpaired loans from portfolio management activities.

Noninterest expense was $459 million in the third quarter of 2009 compared with $467 million in the second quarter. The decrease was primarily from lower asset impairment costs.

Provision for credit losses was $426 million in the third quarter of 2009 compared with $649 million in the second quarter of 2009. The provision related primarily to real estate, middle market and transportation related portfolios. Net charge-offs for the third quarter were $222 million, a $100 million decrease compared with the linked quarter. The largest decline in net charge-offs was in the middle market portfolio.

Average loans were $70 billion for the third quarter of 2009 compared with $74 billion in the second quarter of 2009. The decrease was due to lower utilization levels among middle market and large corporate clients and asset-based lending clients who had lower inventory and receivable levels.

Average deposits were $39 billion in the third quarter of 2009, an increase of $3.4 billion, or 9 percent, compared with the second quarter. Continued growth occurred primarily in noninterest-bearing demand and money market deposits, and included seasonal increases related to tax receipts of municipal and school district customers.

The commercial mortgage servicing portfolio was $275 billion at September 30, 2009 compared with $269 billion at June 30, 2009 and $247 billion at September 30, 2008. Continued growth in the agency and conventional servicing portfolios was somewhat offset by a decline in the commercial mortgage-backed securities servicing portfolio.

Net interest income for the second quarter of 2009 was $885 million, a decrease of $138 million compared with the first quarter of 2009 primarily due to a decline in higher risk and relatively higher yielding loans.

Corporate service fees were $236 million in the second quarter of 2009 compared with $218 million in the linked quarter. The increase was primarily from new business activity and higher corporate finance fees.

Other noninterest income increased $115 million to $169 million in the second quarter of 2009 compared with the first quarter mainly due to higher capital markets activity.

Noninterest expense was $470 million in the second quarter of 2009 compared with $436 million in the first quarter of 2009. The increase was primarily due to higher credit-related costs, a loss on the disposition of repossessed assets and a lease residual impairment.

Provision for credit losses was $649 million in the second quarter of 2009 compared with $287 million in the first quarter and resulted from credit deterioration primarily in real estate and transportation related portfolios. Net charge-offs for the second quarter were $322 million, a $152 million increase compared with the linked quarter.

Average loans were $74 billion for the second quarter of 2009 compared with $78 billion in the first quarter of 2009. The decrease was due to slower loan demand across the customer base reflecting reduced originations as well as lower utilization levels, paydowns and higher net charge-offs.

Average deposits were $36 billion in the second quarter of 2009, an increase of $3 billion, or 10 percent, compared with the first quarter of 2009. PNC continued to experience deposit growth, particularly in money market and noninterest-bearing demand, driven largely by customer safety considerations.

The commercial mortgage servicing portfolio was $269 billion at June 30, 2009 compared with $248 billion at June 30, 2008 and $269 billion at March 31, 2009. Servicing portfolio additions continued to be modest and focused on agency portfolios, and were offset in the second quarter of 2009 by repayments and transfers.

Net interest income for the first quarter of 2009 was $1.0 billion, or 79 percent of total revenue, driven by strong loan spreads.

Corporate service fees were $219 million in the first quarter of 2009. The major components of corporate service fees were treasury management, corporate finance fees and commercial mortgage servicing revenue. Treasury management fees continued to be a strong contributor to revenue.

Other noninterest income was $55 million for the first quarter of 2009 and primarily consisted of leasing revenues.

Noninterest expense of $454 million reflected tight expense discipline for the first quarter of 2009.

Provision for credit losses was $285 million in the first quarter of 2009 reflecting general credit deterioration, particularly in real estate. Net charge-offs for the first quarter were $169 million. The higher provision in the fourth quarter of 2008, which did not include National City, was largely driven by the downward credit migration of residential real estate development loans.

Average loans were $79 billion for the first quarter of 2009 and were comprised of 66 percent corporate loans, 25 percent commercial real estate and related loans, and 9 percent asset based lending. During the quarter, loan growth slowed across the customer base reflecting reduced originations, lower utilization levels and paydowns.

Average deposits were $33 billion for the first quarter, including 53 percent noninterest bearing demand and 25 percent money market. During the quarter PNC continued to experience deposit growth due to a flight to quality including the return of deposits from National City customers who had previously moved funds to other institutions.

The commercial mortgage servicing portfolio was $269 billion at March 31, 2009 and $249 billion at December 31, 2008. Servicing portfolio additions continued to be modest due to the declining volumes in the commercial mortgage securitization market.

Net interest income for the fourth quarter of 2008 grew $55 million, or 23 percent, compared with the fourth quarter of 2007 and $38 million, or 15 percent, compared with the third quarter of 2008. The increases were due to loan growth and, in the prior year quarter comparison, as a result of acquisitions and higher interest on loans held for sale.

Corporate service fees were $118 million in the fourth quarter of 2008 compared with $137 million in the fourth quarter of 2007 and $159 million in the third quarter of 2008. The fourth quarter of 2008 included a $35 million impairment charge on commercial mortgage servicing rights due to the effect of lower interest rates.

Other noninterest income increased $10 million compared with the fourth quarter of 2007 and increased $86 million in the linked quarter comparison. Gains on commercial mortgage loans held for sale, net of hedges were $16 million in the fourth quarter of 2008 compared with a loss of $75 million in the third quarter of 2008 and a loss of $19 million in the prior year quarter.

Noninterest expense was essentially flat compared with the fourth quarter of 2007 as lower incentive compensation associated with fee income activities offset investments in growth initiatives. Compared with the third quarter of 2008, noninterest expense decreased $15 million, or 6 percent, primarily due to lower incentive compensation.

Provision for credit losses was $214 million in the fourth quarter of 2008 compared with $69 million in the fourth quarter of 2007 and $31 million in the prior quarter. The provision for the fourth quarter of 2008 reflected the impact of both accelerated credit quality migration and growth in total credit exposure.

Average loan balances increased $5.8 billion, or 25 percent, from the prior year fourth quarter and $2.1 billion, or 8 percent, compared with the third quarter of 2008. The increases were due to higher utilization of credit facilities, organic loan growth from new and existing clients and acquisitions in the prior year quarter comparison.

Average deposit balances for the quarter increased $1.2 billion, or 8 percent, compared with the fourth quarter of 2007 and $.8 billion, or 5 percent, compared with the linked quarter. The increase over the fourth quarter of 2007 resulted primarily from higher time and money market deposits. The increase over the third quarter of 2008 was mainly due to higher demand deposits related to treasury management and higher commercial mortgage servicing deposits.

The commercial mortgage servicing portfolio on a combined basis with National City was $286 billion at December 31, 2008. Of that total, PNC Corporate & Institutional Banking commercial mortgage servicing portfolio was $249 billion compared with $243 billion at December 31, 2007 and $247 billion at September 30, 2008. Servicing portfolio additions have been modest since the third quarter of 2007 due to the declining volumes in the commercial mortgage securitization market.

Net interest income for the third quarter of 2008 grew $50 million, or 25 percent, compared with the third quarter of 2007 and $4 million, or 2 percent, compared with the second quarter of 2008. The increases were due to organic loan growth and, in the prior year comparison, as a result of acquisitions and higher loans held for sale.

Corporate service fees were $159 million in the third quarter of 2008 compared with $161 million in the third quarter of 2007 and $145 million in the second quarter of 2008. The decrease compared with the third quarter of 2007 primarily resulted from lower commercial mortgage loan servicing revenue and merger and acquisition advisory fees somewhat offset by higher treasury management fees. The increase over the linked quarter was driven by higher merger and acquisition advisory fees.

Other noninterest income was negative $51 million for the third quarter of 2008 compared with $23 million in the prior year third quarter and $87 million in the second quarter of 2008. Third quarter 2008 reflected $82 million of valuation losses on commercial mortgage loans held for sale intended for securitization, net of hedges, compared with income of $21 million in the second quarter. Trading revenue from customer activity was lower compared with the strong results in the linked quarter.

Noninterest expense increased $25 million, or 12 percent, compared with the third quarter of 2007 and $26 million, or 12 percent, compared with the linked quarter. The increase compared with the third quarter of 2007 was due to growth initiatives mainly in treasury management and writedowns of other real estate owned in both comparisons. The increase compared with the second quarter of 2008 was also due to expense associated with revenue-related activities and growth initiatives, and increased passive losses associated with low income housing tax credit investments.

Provision for credit losses was $31 million in the third quarter of 2008 compared with $55 million in the third quarter of 2007 and $72 million in the linked quarter. The provision for the third quarter of 2008 reflected the positive impact of a model refinement for the expected life of amortizing loans and lower growth in the specific allowance for loans considered impaired.

Average loan balances increased $5.2 billion, or 24 percent, from the prior year third quarter and $1.2 billion, or 5 percent, compared with the second quarter of 2008. The increases were largely due to organic loan growth from new and existing clients and acquisitions in the year-ago quarter comparison.

Average deposit balances for the quarter increased $1.5 billion, or 11 percent, compared with the third quarter of 2007 and $.2 billion, or 1 percent, compared with the linked quarter. The increase over the 2007 quarter was mainly due to higher time and money market deposits.

The commercial mortgage servicing portfolio was $247 billion at September 30, 2008 compared with $244 billion at September 30, 2007 and $248 billion at June 30, 2008. Servicing portfolio additions have been modest since the third quarter of 2007 due to the declining volumes in the commercial mortgage securitization market.

Net interest income for the second quarter of 2008 grew $56 million, or 29 percent, compared with the second quarter of 2007 and $9 million, or 4 percent, compared with the first quarter of 2008. The increases were due to organic loan growth and, in the prior year comparison, as a result of higher loans held for sale and acquisitions.

Corporate service fees were $145 million in the second quarter of 2008 compared with $139 million in the second quarter of 2007 and $123 million in the first quarter of 2008. The increases were driven by higher capital markets and treasury management fee revenue somewhat offset by lower merger and acquisition advisory fees. In the linked quarter comparison the increase was also due to higher commercial mortgage loan servicing revenue.

Other noninterest income was $87 million for the second quarter of 2008 compared with $48 million in the prior year second quarter and negative $122 million in the first quarter of 2008. Second quarter 2008 reflected $21 million of income related to valuations of commercial mortgage loans and commitments held for sale, net of hedges, compared with losses of $177 million in the linked quarter. Trading revenue from customer activity also increased in both comparisons.

Noninterest expense increased $18 million, or 9 percent, compared with the second quarter of 2007 and decreased $5 million, or 2 percent, compared with the linked quarter. The increase over second quarter 2007 was primarily due to the impact of the acquisition of ARCS Commercial Mortgage in July 2007 and expense associated with other growth initiatives.

Provision for credit losses was $72 million in the second quarter of 2008 compared with $17 million in the second quarter of 2007 and $49 million in the linked quarter. The increases in the provision were primarily due to credit quality migration mainly related to residential real estate development and related sectors along with growth in total credit exposure.

Average loan balances increased $4.4 billion, or 21 percent, from the prior year second quarter and $1.2 billion, or 5 percent, compared with the first quarter of 2008. The increases primarily resulted from organic loan growth and acquisitions.

Average deposit balances for the quarter increased $2.2 billion, or 17 percent, compared with the second quarter of 2007 and $.4 billion, or 2 percent, compared with the linked quarter. The increase over the 2007 quarter was mainly due to higher client time deposits and the impact of acquisitions. The linked quarter increase primarily resulted from higher client money market and time deposits.

The commercial mortgage servicing portfolio was $248 billion at June 30, 2008 compared with $222 billion at June 30, 2007 and $244 billion at March 31, 2008. The increase over the prior year second quarter relates in part to the ARCS acquisition, which added $13 billion of commercial mortgage servicing.

Net interest income on a taxable-equivalent basis for the first quarter of 2008 grew $58 million, or 32 percent, compared with the first quarter of 2007 and $4 million, or 2 percent, compared with the fourth quarter of 2007. The increase over the prior year first quarter was primarily a result of acquisitions, an increase in commercial loans held for sale and organic loan growth.

Corporate service fees were $123 million in the first quarter of 2008 compared with $127 million in the first quarter of 2007 and $137 million in the fourth quarter of 2007. The decrease compared with the linked quarter was primarily due to seasonally lower affordable housing revenue.

Other noninterest income was negative $122 million for the first quarter of 2008 compared with income of $60 million in the prior year first quarter and $25 million in the fourth quarter of 2007. First quarter 2008 reflected valuation losses of $177 million on commercial mortgage loans and commitments held for sale, net of hedges, compared with valuation losses of $30 million in the linked quarter.

Noninterest expense increased $22 million, or 11 percent, compared with the first quarter of 2007 and decreased $7 million, or 3 percent, compared with the linked quarter. The increase over first quarter 2007 was primarily due to the impact of acquisitions of Mercantile and ARCS Commercial Mortgage and expense associated with other growth initiatives.

Provision for credit losses was $49 million in the first quarter of 2008 compared with a net recovery of $16 million in the first quarter of 2007 and a provision of $69 million in the linked quarter. The increase in the provision compared with the year-ago quarter was primarily due to credit quality migration primarily related to commercial real estate exposure and growth in total credit exposure. The linked quarter decrease in the provision reflected a slowdown in credit deterioration.

Average loan balances increased $4.9 billion, or 25 percent, from the prior year first quarter and $1.3 billion, or 6 percent, compared with the fourth quarter of 2007. The increases resulted from organic loan growth in corporate and commercial real estate loans and in the comparison with the first quarter of 2007 the Mercantile and Yardville acquisitions.

Average deposit balances for the quarter increased $2.0 billion, or 16 percent, compared with the first quarter of 2007 and were essentially unchanged linked quarter. The increase resulted primarily from higher client time deposits and the impact of acquisitions.

The commercial mortgage servicing portfolio was $244 billion at March 31, 2008, an increase of 18 percent from March 31, 2007 and essentially unchanged linked quarter. The increase over the prior year first quarter relates in part to the ARCS acquisition in the third quarter of 2007, which added $13 billion of commercial mortgage servicing.

Net interest income on a taxable-equivalent basis for the fourth quarter of 2007 grew $51 million, or 27 percent, compared with the fourth quarter of 2006 and $33 million, or 16 percent, compared with the third quarter of 2007. The increases were a result of deposit and loan growth and in the prior year quarter the comparative impact of the Mercantile acquisition.

Noninterest income decreased $42 million, or 21 percent, compared with the prior year quarter and $22 million, or 12 percent, compared with the third quarter of 2007. The decreases in both comparisons were driven by a $26 million valuation adjustment for commercial mortgage loans held for sale in the fourth quarter of 2007 and lower merger and acquisition advisory fees somewhat offset by higher fees from other corporate services. The comparison to the prior year quarter also reflects reduced loan sale gains.

Noninterest expense increased $23 million, or 12 percent, compared with the fourth quarter of 2006 and $11 million, or 5 percent, compared with the linked quarter. The increases were attributable to business growth and in the prior year comparison the acquisitions of Mercantile and ARCS Commercial Mortgage.

Average loan balances increased $4.3 billion, or 23 percent, from the prior year fourth quarter and $1.5 billion, or 7 percent, compared with the third quarter of 2007. The increase from the prior year quarter resulted from the Mercantile acquisition and organic loan growth. In the linked quarter comparison the Yardville acquisition and loan growth across all customer segments contributed to the increase.

Average deposit balances for the quarter increased $2.9 billion, or 25 percent, compared with the fourth quarter of 2006 and $1.0 billion, or 8 percent, compared with the linked quarter. The increase compared with the prior year quarter was the result of higher corporate deposits in money market accounts and noninterest-bearing deposit growth due to the Mercantile acquisition and business growth. On a linked quarter basis, the increase related to growth in treasury management services and commercial mortgage servicing deposits.

Provision for credit losses was $69 million in the fourth quarter compared with $6 million in the fourth quarter of 2006 and $55 million in the linked quarter. The increase in the provision was due to growth in total credit exposure and credit quality migration primarily related to real estate lending.

The commercial mortgage servicing portfolio was $243 billion at December 31, 2007, an increase of 22 percent from December 31, 2006. The increase relates in part to the ARCS acquisition which added $13 billion of commercial mortgage servicing.

Noninterest income to total revenue was 47 percent for the third quarter of 2007. Corporate service fees increased $30 million, or 23 percent, compared with the prior year quarter and $22 million, or 16 percent, compared with the linked quarter as a result of higher fees from mergers and acquisitions advisory services and commercial mortgage servicing. Other noninterest income declined in the comparisons due to reduced trading revenue and lower net gains on commercial mortgage loan sales as a result of market conditions.

Net interest income for the third quarter of 2007 grew $26 million, or 15 percent, compared with the third quarter of 2006 and $10 million, or 5 percent, compared with the second quarter of 2007. The increases were a result of deposit and loan growth, the acquisition of ARCS Commercial Mortgage and in the prior year quarter comparison the acquisition of Mercantile.

Noninterest expense increased $30 million, or 17 percent, compared with the third quarter of 2006 and $19 million, or 10 percent, compared with the linked quarter. The increases relate to the ARCS acquisition, business growth and in the prior year comparison the Mercantile acquisition.

Average loan balances increased $2.9 billion over the prior year third quarter and $.5 billion compared with the second quarter of 2007. The growth from the prior year quarter resulted primarily from the Mercantile acquisition.

Average deposit balances for the quarter increased $3.1 billion, or 30 percent, compared with the third quarter of 2006. The increase was mainly the result of higher corporate deposits in money market accounts and noninterest-bearing deposits driven by the increase in the commercial mortgage servicing portfolio. On a linked quarter basis, average deposits increased $.9 billion, or 7 percent, due to new client and treasury management services growth.

Provision for credit losses was $55 million in the third quarter compared with $7 million in the third quarter of 2006 and $17 million in the linked quarter. The increase in the provision was primarily due to growth in total credit exposure and modest credit quality migration.

The commercial mortgage servicing portfolio was $244 billion at September 30, 2007, an increase of 36 percent from September 30, 2006 and on a linked quarter basis an increase of 10 percent. On July 2, PNC completed its acquisition of ARCS Commercial Mortgage, a leading originator and servicer of multifamily loans for Fannie Mae and Freddie Mac. This acquisition added $13 billion of commercial mortgage servicing in the third quarter.

Noninterest income to total revenue was 49 percent for the second quarter of 2007. Noninterest income decreased $22 million, or 11 percent, compared with the prior year quarter as a result of reduced trading revenue and lower net gains on commercial mortgage loan sales and related hedges somewhat offset by higher corporate service fees from treasury management and commercial mortgage servicing. On a linked quarter basis, noninterest income was unchanged at $187 million as higher corporate service fees from affordable housing distribution income, syndication revenue and treasury management fees were offset by lower net gains on commercial mortgage loan sales.

Noninterest expense was essentially flat compared with both prior quarters as investments in growth initiatives were offset by effective cost management.

PNC continued to manage the risk-adjusted return of credit products. Net interest income for the second quarter of 2007 grew $25 million, or 15 percent, compared with the second quarter of 2006 and $11 million, or 6 percent, compared with the first quarter of 2007 as a result of the Mercantile acquisition and deposit growth. Average loan balances increased $2.7 billion from the prior year second quarter and $1.7 billion compared with the first quarter of 2007 resulting from the Mercantile acquisition and growth in corporate loans.

Average deposit balances for the quarter increased $3.3 billion, or 35 percent, compared with the second quarter of 2006. The increase was mainly the result of higher corporate deposits in money market accounts and noninterest-bearing deposits from the servicing portfolio at Midland Loan Services. On a linked quarter basis, average deposits increased $180 million in part due to higher corporate deposits in money market and other interest-bearing accounts.

Asset quality remained strong. Provision for credit losses was $17 million in the second quarter compared with $17 million in the second quarter of 2006 and a credit of $16 million in the linked quarter, which related to a first quarter reduction in default factors based on improvement in company and industry experience used to determine required reserves.

The commercial mortgage servicing portfolio was $222 billion at June 30, 2007, an increase of 47 percent from June 30, 2006. On a linked quarter basis, the commercial mortgage servicing portfolio increased by 8 percent. On July 2, PNC completed its acquisition of ARCS Commercial Mortgage, a leading provider of agency financing for multifamily real estate.

Noninterest income increased 13 percent compared with the prior year quarter and decreased 8 percent compared with the fourth quarter of 2006. The growth compared with the prior year quarter was the result of higher corporate services revenue from mergers and acquisitions advisory fees and treasury management. The decrease compared with the linked quarter was due to lower corporate services revenue, including the normal seasonal decline in affordable housing distribution and lower syndications income.

Noninterest expense increased $18 million, or 10 percent, compared with the first quarter of 2006 as a result of continued investment in various growth initiatives. First quarter 2007 expenses decreased $6 million, or 3 percent, compared with the prior quarter.

Average loan balances increased $1.6 billion from the prior year first quarter due to higher commercial real estate, corporate and commercial real estate-related loans and higher asset-based lending as well as the Mercantile acquisition. Average loans increased $597 million compared with the fourth quarter of 2006 largely as a result of higher commercial real estate and commercial real estate-related loans due to the Mercantile acquisition. Excluding Mercantile, exposure declined when compared with the linked quarter as PNC continued to manage the credit book for better risk-adjusted return.

Average deposit balances for the quarter increased $3.0 billion, or 31 percent, compared with the first quarter of 2006. The increase was largely the result of corporate deposits in money market accounts and increased noninterest-bearing deposits at Midland Loan Services. On a linked quarter basis, average deposits increased $764 million, or 6 percent. The increase compared with the linked quarter was due to corporate deposits in money market accounts.

The commercial mortgage servicing portfolio was $206 billion at March 31, 2007, an increase of 47 percent from March 31, 2006.

Asset quality continued to be strong with nonperforming assets declining 42 percent compared with the first quarter of 2006 and flat in the linked quarter comparison, excluding the impact of Mercantile. Net charge-offs declined compared with the linked quarter.