PNC Financial Services (PNC)

PNC’s customer retention efforts were successful and met expectations. The required branch divestitures impacted statistics for net new consumer and business checking relationships, online banking active customers and online bill payment active customers during the third quarter of 2009. Excluding the impact of the required divestitures, checking relationships grew 1 percent and active online banking and online bill payment customers grew 3 percent and 4 percent, respectively, during the quarter.

Average deposit balances declined $3.6 billion from the second quarter due to the planned run off of higher rate certificates of deposit net of successful retention of customer relationships and the impact of branch divestitures. The deposit strategy of Retail Banking is to remain disciplined on pricing while targeting specific products and markets for growth. A continued decline in certificates of deposit is expected for the remainder of 2009 and into 2010.

Average loan balances decreased $371 million compared with the linked quarter as education loan growth was offset by declines in commercial, floor plan, residential mortgage and home equity loans. In the current environment, consumer and commercial loan demand is being outpaced by refinances, paydowns and charge-offs.

Net interest income for the third quarter of 2009 declined $38 million, or 4 percent, compared with the second quarter primarily as a result of declining yields assigned to deposits.

Noninterest income for the quarter increased $5 million, or 1 percent, compared with the linked quarter as a result of higher service charges on deposits.

Noninterest expense for the third quarter declined $25 million, or 2 percent, compared with the second quarter. Expenses were well managed as continued investments in distribution channels were partially offset by reductions in expenses from acquisitions and the required branch divestitures.

Provision for credit losses was $313 million for the third quarter of 2009 compared with $304 million in the second quarter.

Retail Banking had 2,553 branches and an ATM network of 6,463 machines at September 30, 2009 giving PNC one of the largest distribution networks among U.S. banks. During the third quarter of 2009, PNC opened 7 traditional branches and 3 in-store branches, consolidated 2 branches, added 62 ATMs, and divested 61 branches and 73 ATMs.

PNC’s customer retention efforts were successful and met expectations. Net new consumer and business checking relationships grew by 14,000 during the second quarter of 2009. Additionally, online banking and online bill payment active customers each grew 2 percent during the quarter.

Employee engagement and customer satisfaction/loyalty results are tracking at all time highs. PNC recently received the “Gallup Great Workplace Award” in recognition of its extraordinary ability to create an engaged workplace culture.

Average deposit balances increased $2.0 billion over the linked quarter due to demand, money market and savings deposit growth that was partially offset by the planned run off of higher rate certificates of deposit net of the successful retention of customer relationships. The deposit strategy of Retail Banking is to remain disciplined on pricing while targeting specific products and markets for growth. A continued decline in certificates of deposit is expected for the remainder of 2009.

Average loan balances decreased $453 million compared with the linked quarter as education loan growth was offset by declines in commercial, home equity and residential mortgage loans. In the current environment, demand for commercial and home equity loans is being outpaced by paydowns and charge-offs.

Net interest income for the second quarter of 2009 declined $19 million, or 2 percent, compared with the linked quarter primarily as a result of declining loan portfolio spreads and balances.

Noninterest income for the quarter increased $44 million, or 8 percent, compared with the linked quarter as service charges on deposits and consumer service fees increased 8 percent and 9 percent, respectively, while brokerage fees remained relatively flat.

Noninterest expense for the second quarter increased 1 percent compared with the linked quarter. Expenses were well managed as continued investments in distribution channels were partially offset by reductions in expenses from acquisitions.

Provision for credit losses was $304 million for both the second and first quarters of 2009.

Retail Banking had 2,606 branches and an ATM network of 6,474 machines at June 30, 2009 giving PNC one of the largest distribution networks among U.S. banks. During the second quarter of 2009, PNC opened 4 traditional branches and 23 in-store branches, consolidated 6 branches and added 72 ATMs.

Net new consumer and business checking relationships for legacy PNC grew by 18,000 during the first quarter of 2009 compared with 9,000 a year earlier, excluding relationships added from National City and other acquisitions.

Average deposits were $135 billion for the first quarter of 2009. During the quarter demand and money market deposits grew as higher rate certificates declined. The deposit strategy of Retail Banking is to remain disciplined on pricing while targeting specific products and markets for growth.

Average loans were $57 billion for the first quarter of 2009. Loan activity during the quarter related primarily to originations of home equity, credit card and education loans as PNC made credit available to qualified borrowers.

Net interest income for the first quarter of 2009 of $928 million was impacted by a lower interest credit attributed to deposits in the unprecedented low rate environment.

Noninterest income for the first quarter of 2009 was $517 million. Service charges on deposits and consumer service fees represented 83 percent of noninterest income. These consumer related fees were negatively impacted during the quarter by recessionary economic conditions that resulted in lower consumer spending as well as seasonality of certain fees.

Noninterest expense was $1.1 billion for the first quarter of 2009 reflecting disciplined expense management somewhat offset by continued investments in the business and rising FDIC insurance costs.

Provision for credit losses was $303 million for the first quarter of 2009 and $88 million in the linked quarter. The increase reflected the acquired loan portfolio which more than doubled the size of the loan portfolio, higher net charge-offs and continued downward credit migration in the now larger commercial and consumer loan portfolios.

PNC Retail Banking had 2,585 branches and an ATM network of 6,402 machines at March 31, 2009, giving PNC one of the largest distribution networks among U.S. banks. During the first quarter of 2009, PNC opened 7 traditional branches and 14 in-store branches, consolidated 16 branches, and added 170 ATM machines. As previously announced, agreements were reached to divest 61 branches during the third quarter of 2009.

Net new consumer and business checking relationships grew by 72,000 in 2008 compared with 32,000 a year earlier, excluding relationships added from acquisitions.

Average deposit balances increased $4.7 billion, or 8 percent, over the previous year fourth quarter and $1.8 billion, or 3 percent, compared with the linked quarter. The increases over the prior periods were primarily the result of growth in money market deposits. The prior year comparison also benefitted from acquisitions. The deposit strategy of Retail Banking is to remain disciplined on pricing while targeting specific products and markets for growth.

Average loan balances increased $3.6 billion, or 10 percent, over the year-ago quarter and 1 percent from the linked quarter. Growth over the prior year quarter primarily resulted from acquisitions and the transfer of education loans from held for sale to the loan portfolio during the first quarter of 2008. In the linked quarter comparison higher education loans more than offset declines in the commercial and commercial real estate loan portfolio.

Net interest income for the fourth quarter of 2008 declined $40 million, or 7 percent, compared with the fourth quarter of 2007 and increased $9 million, or 2 percent, compared with the linked quarter. The decrease from the prior year quarter reflected the negative impact of a lower interest credit attributed to deposits in the declining rate environment partially offset by benefits from acquisitions.

Noninterest income for the quarter declined $25 million, or 6 percent, compared with the prior year fourth quarter and decreased $13 million, or 3 percent, compared with the third quarter of 2008. The declines in both periods were primarily driven by lower asset management fees as a result of lower values in the equity markets. The decrease in the prior year quarter comparison was partially offset by a combined 7 percent increase in service charges on deposits, brokerage fees, and consumer service fees. The prior year quarter comparison was also impacted by gains on sales of education loans and other gains in the fourth quarter of 2007.

Noninterest expense for the fourth quarter increased $47 million, or 9 percent, compared with the prior year fourth quarter and decreased $9 million, or 2 percent, from the linked quarter. The increase over the prior year quarter was attributable to the impact of acquisitions, continued investments in the business and expense directly associated with fee income-related activities.

Provision for credit losses was $262 million for the fourth quarter of 2008 compared with $70 million in the prior year quarter and $156 million in the linked quarter. The increases in the provision reflected the deteriorating economic environment which resulted in higher commercial and consumer loan net charge-offs and continued credit migration in commercial and consumer loan portfolios.

PNC Retail Banking had 1,148 branches and an ATM network of 4,041 machines at December 31, 2008. Combined with National City those totals grew to 2,589 branches and an ATM network of 6,232 machines, giving PNC one of the largest distribution networks among U.S. banks.

Assets under management on a combined basis with National City were $110 billion at December 31, 2008. Of that total, PNC Retail Banking had assets under management of $57 billion at December 31, 2008 compared with $69 billion at December 31, 2007 and $64 billion at September 30, 2008. Declines in assets under management primarily resulted from the negative impact of market conditions on asset values.

Customer growth continued. Reported checking relationships increased by a net 103,000 since June 30, 2008, reflecting the conversion of Sterling Financial Corporation accounts and strong organic net growth of 36,000 checking relationships.

Net interest income for the third quarter of 2008 declined $42 million, or 8 percent, compared with the third quarter of 2007 and declined $6 million, or 1 percent, compared with the linked quarter. Both decreases reflected the negative impact of a lower interest credit attributed to deposits in the declining rate environment partially offset by benefits from acquisitions in the prior year quarter comparison.

Noninterest income for the quarter declined $6 million, or 2 percent, compared with the prior year third quarter and declined $1 million compared with the second quarter of 2008. Declines in both comparisons primarily resulted from gains in both prior periods partially offset by growth in service charges on deposits and consumer service fees including branch brokerage activities and debit card, credit card and merchant revenue. The prior year quarter comparison benefitted from acquisitions.

Noninterest expense for the quarter increased $63 million, or 12 percent, compared with the prior year third quarter and $24 million, or 4 percent, over the linked quarter. The increases were attributable to expense directly associated with fee income-related activities and investments in the business and in the prior year comparison the impact of acquisitions.

Provision for credit losses was $156 million for the third quarter of 2008 compared with $8 million in the prior year quarter and $90 million in the linked quarter. The increases in the provision reflected the economic and credit environment in PNC’s markets, mainly driven by credit migration of portfolios primarily in Maryland, Virginia and New Jersey related to residential real estate development and related sectors.

Average loan balances increased $4.2 billion, or 12 percent, over the year-ago quarter and declined $.2 billion, or 1 percent, compared with the second quarter of 2008. Growth over the prior year primarily resulted from acquisitions and the transfer of education loans from held for sale to the loan portfolio during the first quarter of 2008. In the linked quarter comparison managed declines in the commercial and commercial real estate loan portfolio were somewhat offset by higher education loans.

Average deposit balances increased $3.4 billion, or 6 percent, over the previous year third quarter and $.8 billion, or 1 percent, compared with the linked quarter. The increase over the prior year primarily was due to acquisitions. Both comparisons benefitted from growth in money market deposits. The deposit strategy of Retail Banking is to remain disciplined on pricing while targeting specific products and markets for growth.

PNC had 1,142 branches and an ATM network of 4,018 machines at September 30, 2008. PNC opened four new branches and consolidated 15 branches during the third quarter.

Assets under management were $63 billion at September 30, 2008 compared with $72 billion at September 30, 2007 and $66 billion at June 30, 2008. Declines in assets under management were related to the impact of market conditions on asset values. New business sales efforts and new client acquisition and growth were ahead of expectations.

Customer growth continued. Reported checking relationships increased by a net 23,000 since March 31, 2008.

Net interest income for the second quarter of 2008 declined $34 million, or 6 percent, compared with the second quarter of 2007 and was flat with the linked quarter. Both comparisons were negatively impacted by a lower value attributed to deposits in the declining rate environment partially offset by benefits from acquisitions.

Noninterest income for the quarter increased $2 million compared with the prior year second quarter and declined $71 million, or 15 percent, compared with the first quarter of 2008. The decline compared with the linked quarter was driven by the Visa gain of $95 million in the first quarter. Both period comparisons benefitted from acquisitions and higher consumer related fees.

Noninterest expense for the quarter increased $40 million, or 8 percent, compared with the prior year second quarter and $31 million, or 6 percent, over the linked quarter. The increases in expense were attributable to acquisitions, expense directly associated with fee income-related activities and investments in the business.

Provision for credit losses was $90 million for the second quarter of 2008 compared with $37 million in the prior year quarter and $104 million in the linked quarter. The provision over the last several quarters is reflective of the current economic and credit environment in PNC’s markets, mainly driven by credit migration of portfolios primarily in Maryland, Virginia and New Jersey related to residential real estate development and related sectors.

Average loan balances increased $4.6 billion, or 13 percent, over the year-ago quarter and $2.5 billion, or 7 percent, compared with the first quarter of 2008. The growth over both periods of comparison primarily resulted from acquisitions and the transfer of education loans from held for sale to the loan portfolio during the first quarter of 2008.

Average deposit balances increased $1.3 billion, or 2 percent, over the previous year second quarter and $2.7 billion, or 5 percent, compared with the linked quarter. Increases over both periods of comparison primarily resulted from acquisitions and in the linked quarter comparison money market deposits experienced core growth. Increases in both comparisons were partially offset by lower certificates of deposit apart from acquisitions as a result of a focus on relationship customers rather than rate-seeking single service customers. The deposit strategy of Retail Banking is to remain disciplined on pricing while targeting specific products and markets for growth.

PNC had 1,153 branches and an ATM network of 4,015 machines at June 30, 2008. The Sterling acquisition contributed 65 branches and 62 ATMs. PNC opened three new branches and consolidated 11 branches during the second quarter.

Customer growth continued. Reported checking relationships increased by a net 33,000 since December 31, 2007 comprised of growth in checking relationships of approximately 12,000 and the impact of the Yardville conversion.

Net interest income on a taxable-equivalent basis for the first quarter of 2008 grew $47 million, or 10 percent, compared with the first quarter of 2007 and declined $44 million or 8 percent compared with the linked quarter. The growth in net interest income over the year-ago quarter was driven by acquisitions. Both comparisons were negatively impacted by a lower value attributed to deposits in the declining rate environment.

Noninterest income for the quarter increased $235 million, or 61 percent, compared with the prior year first quarter and increased $166 million, or 36 percent, compared with the fourth quarter of 2007. The growth in noninterest income from the first quarter of 2007 was primarily due to gains related to the Visa initial public offering and sale of Hilliard Lyons and the impact of acquisitions. The increase compared with the linked quarter reflected these gains partially offset by lower service charges on deposits and consumer service fees as a result of seasonality.

Noninterest expense for the quarter increased $85 million, or 17 percent, compared with the prior year first quarter and declined slightly from the fourth quarter of 2007. The increase from the year-ago quarter resulted from acquisitions, expenses directly associated with fee income-related businesses and investments in the branch network.

Provision for credit losses was $104 million for the first quarter of 2008 compared with $70 million in the linked quarter. The increased provision was mainly driven by commercial loan credit migration of portfolios primarily in Maryland and Virginia related to residential real estate development.

Average loan balances increased $8.9 billion, or 32 percent, over the year-ago quarter and increased 3 percent compared with the fourth quarter of 2007. The growth over the prior year first quarter primarily resulted from acquisitions, continued growth in small business lending and in both quarters of comparison the transfer of $1.8 billion, or $.7 billion average, education loans from held for sale to the loan portfolio during the first quarter of 2008.

Average deposit balances increased $5.5 billion, or 11 percent, over the previous year first quarter and declined slightly compared with the linked quarter. The growth over the prior year first quarter was primarily due to acquisitions. The deposit strategy of Retail Banking is to remain disciplined on pricing while targeting specific products and markets for growth.

Assets under management were $65 billion at March 31, 2008, a decline of $11 billion compared with March 31, 2007 and $8 billion compared with December 31, 2007. The decreases were mainly due to the effects of divestitures and comparatively lower equity markets in the first quarter of 2008.

PNC had 1,096 branches and an ATM network of 3,903 machines at March 31, 2008. PNC opened five new branches and consolidated 18 branches during the first quarter.

Net interest income on a taxable equivalent basis for the fourth quarter of 2007 grew $124 million, or 30 percent, compared with the fourth quarter of 2006 primarily as a result of acquisitions and core business growth. Compared with the linked quarter, net interest income was stable.

Noninterest income for the quarter increased $76 million, or 20 percent, compared with the prior year fourth quarter and was relatively flat compared with the third quarter of 2007. The growth in fee income from the fourth quarter of 2006 was driven by acquisitions, higher brokerage and asset management fees, and increased volume-related consumer fees. Fourth quarter 2007 fees were impacted by recent market conditions, including lower consumer spending and the lack of market liquidity affecting loan sales.

Noninterest expense for the fourth quarter of 2007 increased $116 million, or 25 percent, compared with the prior year fourth quarter and remained relatively flat with the third quarter of 2007. The increase in expense from fourth quarter 2006 was driven by acquisitions, expenses directly associated with fee income-related businesses and investments in new branches.

Provision for credit losses was $70 million for the fourth quarter of 2007 compared with $35 million in the year ago quarter and $8 million in the linked quarter. The increases were primarily due to residential real estate development exposure. Despite the increase in the provision, asset quality remained relatively strong given the credit environment.

Average loan balances increased $11.6 billion, or 48 percent, over the year-ago quarter and increased slightly compared with the third quarter of 2007. The growth over the prior year quarter was primarily driven by acquisitions and continued growth in small business lending.

Average deposit balances increased $9.8 billion, or 21 percent, over the previous year quarter and increased slightly when compared with the third quarter of 2007. The growth over the prior periods was primarily due to acquisitions partially offset by lower certificates of deposit as a result of a focus on relationship customers rather than pursuing higher-rate single service products. The deposit strategy of Retail Banking is to remain disciplined on pricing while targeting specific markets for growth.

Assets under management were $73 billion at December 31, 2007, an increase of $19 billion, or 35 percent, compared with December 31, 2006 primarily due to the Mercantile acquisition.

PNC had 1,109 branches and an ATM network of 3,900 machines at December 31, 2007. The Yardville acquisition contributed 35 branches and 39 ATMs. In addition PNC opened five new branches and consolidated three branches during the fourth quarter from continued focus on branch network optimization.

Customer growth continued. Checking relationships grew by a net 22,000 since June 30, 2007, excluding Mercantile activity. The systems conversion in mid-September of 231 Mercantile branches and 286,000 checking relationships expands PNC’s distribution opportunities to deliver differentiated customer service.

Noninterest income to total revenue was 46 percent for the third quarter of 2007. Noninterest income for the quarter increased $86 million, or 24 percent, compared with the prior year third quarter and $7 million, or 2 percent, compared with the second quarter of 2007. The growth in fee income from third quarter 2006 was driven by the Mercantile acquisition, higher brokerage and asset management fees, customer growth, and increased revenue from third party loan servicing activities.

Net interest income for the third quarter of 2007 grew $108 million, or 25 percent, compared with the third quarter of 2006 primarily as a result of the Mercantile acquisition. Compared with the linked quarter, net interest income was stable.

Noninterest expense for the third quarter of 2007 increased $121 million, or 27 percent, compared with the prior year third quarter and remained flat with the second quarter of 2007. The increase in expense from third quarter 2006 was due to the Mercantile acquisition, expenses directly associated with fee income-related businesses and investments in new branches and the credit card program.

Average loan balances increased $10.4 billion, or 42 percent, over the year-ago quarter and were relatively flat compared to the second quarter of 2007. The growth over the prior year quarter was primarily driven by the Mercantile acquisition and continued growth in small business lending.

Average deposit balances increased 21 percent over the previous year quarter largely due to the Mercantile acquisition. Average deposit balances declined 2 percent from the linked quarter primarily as a result of PNC’s strategy to focus on relationship customers rather than pursuing higher-rate single service products.

Assets under management were $77 billion at September 30, 2007, an increase of $25 billion, or 48 percent, compared with September 30, 2006. The increase resulted from the Mercantile acquisition which added $22 billion in assets under management and market performance. Assets under management also benefited from a continued focus on sales activities.

PNC had 1,072 branches and an ATM network of 3,870 machines at September 30, 2007. Three new branches were opened during the quarter and 15 branches were consolidated, with five consolidations related to the Mercantile integration. PNC continues to focus on branch network optimization.

Asset quality remained strong.

Customer growth was reflected in a net increase of 5,000 checking relationships since March 31, 2007, excluding Mercantile. In order to continue to acquire and retain customers, PNC continues to focus on delivering differentiated customer service and improving the customer experience through its branch network and call center. PNC’s redesigned web site has resulted in improved customer satisfaction and an improved consumer online experience that has driven increased traffic and sales.

Average loan balances increased $10.3 billion, or 42 percent, over the year-ago quarter and $6.8 billion, or 24 percent, over the first quarter of 2007 primarily driven by the Mercantile acquisition and continued growth in small business lending. Average small business loans grew 10 percent over the prior year quarter and 3 percent over the linked quarter, excluding the impact of Mercantile.

Average deposit balances increased 25 percent over the previous year quarter and 14 percent over the prior quarter, both largely the result of the Mercantile acquisition.

Net interest income for the second quarter of 2007 grew $111 million, or 26 percent, compared with the second quarter of 2006 and $83 million, or 18 percent, compared with the first quarter of 2007 primarily as a result of the Mercantile acquisition.

Noninterest income to total revenue was 45 percent for the second quarter of 2007. Noninterest income for the quarter increased $85 million, or 24 percent, compared with the prior year second quarter and $56 million, or 14 percent, compared with the first quarter of 2007. The Mercantile acquisition represented a substantial portion of the increases. Noninterest income also grew in the quarters of comparison as a result of higher brokerage and asset management fees and increased revenue from third party loan servicing activities.

Noninterest expense for the second quarter of 2007 increased $119 million, or 26 percent, compared with the prior year second quarter and $83 million, or 17 percent, compared with the first quarter of 2007. The increase in expense for both comparisons was a result of the Mercantile acquisition, expenses directly associated with fee income related businesses and a number of growth initiatives including new branches, credit card, and the private client group.

Asset quality remained strong. The provision for credit losses was $37 million and net charge-offs were $25 million for the quarter. The incremental increase in provision over net charge-offs in the current quarter was primarily due to continued growth in the commercial loan portfolio.

Assets under management were $77 billion at June 30, 2007, an increase of $27 billion, or 54 percent, compared with June 30, 2006 and an increase of $1 billion compared with March 31, 2007. The Mercantile acquisition added $22 billion in assets under management in the first quarter. Strong market conditions and sales efforts contributed to portfolio growth in both comparisons.

PNC had 1,084 branches and an ATM network of 3,917 machines at June 30, 2007. Seven new branches were opened in the quarter.

Average loan balances increased $3.7 billion, or 15 percent, over the year-ago quarter and prior quarter. The increases were primarily driven by $3.6 billion of loans related to the Mercantile acquisition and ongoing success in small business lending. Excluding the impact of Mercantile, average small business loans grew 12 percent over the prior year quarter and 2 percent over the linked quarter.

Average deposit balances increased 11 percent over the prior year quarter and 8 percent over the prior quarter, both largely the result of the Mercantile acquisition.

Assets under management were $76 billion at March 31, 2007, an increase of $26 billion, or 52 percent, compared with March 31, 2006 and an increase of $22 billion, or 41 percent, compared with December 31, 2006. The growth from year end is a result of the Mercantile acquisition. Growth from March 31, 2006 is a result of the Mercantile acquisition and $4 billion of PNC’s portfolio growth.

Noninterest income for the first quarter of 2007 increased $42 million, or 12 percent, compared with the prior year first quarter and $7 million, or 2 percent, compared with the fourth quarter of 2006. The growth in fee income from the prior year first quarter was driven by the Mercantile acquisition, higher gains on asset sales, increased revenues from our brokerage and asset management businesses given the favorable equity markets, and new business initiatives. Excluding the impact of Mercantile, which added $18 million in noninterest income, noninterest income is down $11 million from the fourth quarter of 2006 primarily as a result of seasonality in consumer fees and lower gains on asset sales. Excluding Mercantile, noninterest income is up $24 million from the prior year.

Noninterest expense for the first quarter of 2007 increased $56 million, or 13 percent, compared with the prior year first quarter and $25 million, or 5 percent, compared with the fourth quarter of 2006. The growth in expenses for both comparisons was primarily a result of the Mercantile acquisition, which added $35 million in expenses. Excluding the impact of Mercantile, expenses were down $10 million from the fourth quarter of 2006 but up $21 million from the prior year as a result of expenses directly associated with fee income related businesses and a number of growth initiatives (new branches, credit card, private client group) in the business.

The Mercantile acquisition contributed 235 branches and 256 ATMs. PNC now has 1,077 branches, and the ATM network exceeds 3,800 machines. Outside of Mercantile, PNC opened six new branches and consolidated 16 branches in the first quarter as it continued to focus on branch optimization.

Asset quality continues to be strong, with provision decreasing 34 percent compared with the linked quarter.

Excluding the impact of the Mercantile acquisition, checking relationships grew by a net 8,000 since December 31, 2006. The growth is a result of a new checking product line and sales and marketing efforts. We continued to focus on consolidating low-activity, low-balance accounts and seeking out higher quality relationships.