| Notes to Financial Statements | |
| 6 Months Ended
Jun. 30, 2009
USD / shares
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| Notes to Financial Statements [Abstract] | |
| Business |
Business
PNC is one of the largest diversified financial services companies in the United States and is headquartered in Pittsburgh, Pennsylvania.
As described in Note 2 National City Acquisition, on December31, 2008, PNC acquired National City Corporation (National City). Our consolidated financial statements for 2009 reflect the impact of National City.
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 PNCs 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.
We are in the process of integrating the businesses and operations of National City with those of PNC.
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| NOTE 1 ACCOUNTING POLICIES |
NOTE 1 ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
Our consolidated financial statements include the accounts of the parent company and its subsidiaries, most of which are wholly owned, and certain partnership interests and variable interest entities.
Effective July1, 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. (SFAS) 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No.162 (FASB ASC 105-10, Generally Accepted Accounting Principles). The FASB Accounting Standards Codification TM (FASB ASC) will be the single source of authoritative nongovernmental generally accepted accounting principles (GAAP) in the United States of America. The FASB ASC will be effective for financial statements that cover interim and annual periods ending after September15, 2009. Other than resolving certain minor inconsistencies in current GAAP, the FASB ASC is not intended to change GAAP, but rather to make it easier to review and research GAAP applicable to a particular transaction or specific accounting issue. Technical references to GAAP included in these Notes To Consolidated Financial Statements are provided under the new FASB ASC structure with the prior terminology included parenthetically when first used.
On December31, 2008, we acquired National City. Our Consolidated Balance Sheet as of June30, 2009 and December31, 2008, our Consolidated Income Statement for
the three months and six months ended June30, 2009, and our Consolidated Statement of Cash Flows for the six months ended June30, 2009 include the impact of the National City acquisition. See Note 2 National City Acquisition for additional information.
We prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. We have eliminated intercompany accounts and transactions. We have also reclassified certain prior year amounts to conform with the 2009 presentation, including reclassifications required in connection with the adoption of new guidance impacting FASB ASC 810-10, Consolidation (SFAS 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No.51). These reclassifications did not have a material impact on our consolidated financial condition or results of operations.
In our opinion, the unaudited interim consolidated financial statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
When preparing these unaudited interim consolidated financial statements, we have assumed that you have read the audited consolidated financial statements included in our 2008 Annual Report on Form 10-K (2008 Form 10-K). Reference is made to Note 1 Accounting Policies in the 2008 Form 10-K for a detailed description of the significant accounting policies followed by PNC. |
| NOTE 2 NATIONAL CITY ACQUISITION |
NOTE 2 NATIONAL CITY ACQUISITION
On December31, 2008, we acquired National City for approximately $6.1 billion. The total consideration included approximately $5.6 billion of common stock, representing approximately 95million shares, $150 million of preferred stock and cash of $379 million paid to warrant holders by National City. The transaction requires no future contingent consideration payments. National City, based in Cleveland, Ohio, was one of the nations largest financial services companies. At December31, 2008, prior to our acquisition, National City had total assets of approximately $153 billion and total deposits of approximately $101 billion.
This acquisition was accounted for under the purchase method of accounting. The purchase price was allocated to the National City assets acquired and liabilities assumed using their estimated fair values as of the acquisition date.
During the first six months of 2009, additional information was obtained about the fair value of assets acquired and liabilities assumed as of December31, 2008 which resulted in adjustments to the initial purchase price allocation. Most significantly, additional information was obtained on the credit quality of certain loans as of the acquisition date which resulted in additional fair value writedowns on acquired impaired loans. These adjustments resulted in the allocation of $446 million to other intangible assets and $891 million to premises and equipment which had been reduced in the initial purchase price allocation. Goodwill totaling $349 million has been recognized on the National City acquisition as of June30, 2009. A summary of adjustments to the initial purchase price allocation are summarized below.
National City AcquisitionSummary Purchase Price Allocation
In billions
Excess of fair value of adjusted net assets acquired over purchase price December 31, 2008 $ (1.3 )
Additional fair value marks and other adjustments on acquired impaired loans December 31, 2008 1.8
Other adjustments, net (0.2 )
Excess of purchase price over fair value of adjusted net assets acquired June30, 2009 $ 0.3
We are still awaiting and evaluating further information regarding pre-acquisition contingencies, including legal claims and other legal matters, and the finalization of restructuring plans and asset divestitures related to the National City acquisition. Therefore, in accordance with GAAP, further modifications to the purchase price allocation may occur, resulting in the recognition of goodwill and liabilities in future periods.
Condensed Statement of National City Net Assets Acquired
The following condensed statement of net assets reflects the revised values assigned to National City net assets as of the December31, 2008 acquisition date. The net assets acquired are net of the cash paid by National City to its warrant holders of $379 million.
(In millions)
Assets
Cash and due from banks $ 2,144
Federal funds sold and resale agreements 7,335
Trading assets, interest-earning deposits with banks, and other short-term investments 9,244
Loans held for sale |
| NOTE 3 VARIABLE INTEREST ENTITIES |
NOTE 3 VARIABLE INTEREST ENTITIES
As discussed in our 2008 Form 10-K, we are involved with various entities in the normal course of business that were deemed to be VIEs. We consolidated certain VIEs as of June30, 2009 and December31, 2008 for which we were determined to be the primary beneficiary. These consolidated VIEs and relationships with PNC are described in our 2008 Form 10-K.
Consolidated VIEsPNC Is Primary Beneficiary
In millions
Aggregate
Assets Aggregate Liabilities
Partnership interests in tax credit investments (b)
June30, 2009 $ 1,414 $ 798
December31, 2008 $ 1,499 $ 863 (a)
Credit Risk Transfer Transaction
June30, 2009 $ 946 $ 946
December31, 2008 $ 1,070 $ 1,070
(a) We have revised this amount due to PNCs adoption of FASB ASC 810-10 (SFAS 160) as noncontrolling interests are no longer classified as aggregate liabilities.
(b) Amounts reported primarily represent low income housing projects.
We hold significant variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. Information on these VIEs follows:
Non-Consolidated VIEsSignificant Variable Interests
In millions Aggregate Assets Aggregate Liabilities
PNCRisk
of Loss
June30, 2009
Market Street $ 4,604 $ 4,664 $ 6,913 (a)
Partnership interests in tax credit investments (b)(c) 1,148 671 833
Collateralized debt obligations 20 2
Total $ 5,772 $ 5,335 $ 7,748
December31, 2008
Market Street $ 4,916 $ 5,010 $ 6,965 (a)
Partnership interests in tax credit investments (b)(c) 1,095 652 920
Collateralized debt obligations 20 2
Total $ 6,031 $ 5,662 $ 7,887
(a) PNCs risk of loss consists of off-balance sheet liquidity commitments to Market Street of $6.3 billion and other credit enhancements of $.6 billion at June30, 2009. The comparable amounts were $6.4 billion and $.6 billion at December31, 2008.
(b) Amounts reported primarily represent low income housing projects.
(c) Aggregate assets and aggregate liabilities represent approximate balances due to limited availability of financial information associated with the acquired National City partnerships that we did not sponsor.
Market Street
Market Street is a multi-seller asset-backed commercial paper conduit that is owned by an independent third party. Market Streets 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 Poors, Moodys, and Fitch, respectively, and
is supported by pool-specific credit enhancements, liquidity facilities and program-level credit enhancement. Generally, Market Street mitigates its potential interest rate risk by entering into agreements with it |
| NOTE 4 LOANS AND COMMITMENTS TO EXTEND CREDIT |
NOTE 4 LOANS AND COMMITMENTS TO EXTEND CREDIT
Loans outstanding were as follows:
In millions
June30
2009 December31 2008
Commercial $ 60,594 $ 69,220
Commercial real estate 24,865 25,736
Consumer 51,937 52,489
Residential real estate 21,521 21,583
Equipment lease financing 6,092 6,461
Total loans $ 165,009 $ 175,489
Loans are presented net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $3.4 billion and $4.1 billion at June30, 2009 and December31, 2008, respectively.
Net Unfunded Credit Commitments
In millions
June30
2009 December31 2008
Commercial and commercial real estate $ 59,816 $ 60,020
Home equity lines of credit 21,599 23,195
Consumer credit card lines 19,210 19,028
Other 2,433 2,645
Total $ 103,058 $ 104,888
Commitments to extend credit represent arrangements to lend funds subject to specified contractual conditions. At June30, 2009 commercial commitments are reported net of $9.4 billion of participations, assignments and syndications, primarily to financial services companies. The comparable amount at December31, 2008 was $8.6 billion.
Commitments generally have fixed expiration dates, may require payment of a fee, and contain termination clauses in the event the customers credit quality deteriorates. Based on our historical experience, most commitments expire unfunded, and therefore cash requirements are substantially less than the total commitment. Consumer home equity lines of credit accounted for 53% of consumer unfunded credit commitments at June30, 2009.
Unfunded credit commitments related to Market Street totaled $6.3 billion at June30, 2009 and $6.4 billion at December31,2008 and are included in the preceding table primarily within the Commercial and Commercial Real Estate category.
At June30, 2009, we pledged $27.2 billion of loans to the Federal Reserve Bank and $45.9 billion of loans to the Federal Home Loan Banks as collateral for the contingent ability to borrow, if necessary.
Certain loans are accounted for at fair value with changes in the fair value reported in current period earnings. The fair value of these loans was $72 million, or approximately .04% of the total loan portfolio, at June30, 2009.
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| NOTE 5 ASSET QUALITY |
NOTE 5 ASSET QUALITY
The following table sets forth nonperforming assets and related information.
These amounts exclude loans impaired in accordance with FASB ASC 310-30, Receivables Loans and Debt Securities Acquired with Deteriorated Credit Quality. See Note 6 Certain Loans Acquired in a Transfer for further information.
Dollars in millions June30, 2009 December31, 2008
Nonaccrual loans
Commercial $ 1,450 $ 576
Commercial real estate 1,656 766
Equipment lease financing 120 97
TOTAL COMMERCIAL LENDING 3,226 1,439
Consumer
Home equity 108 66
Other 34 4
Total consumer 142 70
Residential real estate
Residential mortgage 595 139
Residential construction 69 14
Total residential real estate 664 153
TOTAL CONSUMER LENDING 806 223
Total nonaccrual/nonperforming loans 4,032 1,662
Foreclosed and other assets
Commercial lending 113 50
Consumer lending 387 469
Total foreclosed and other assets 500 519
Total nonperforming assets $ 4,532 $ 2,181
Nonperforming loans to total loans 2.44 % .95 %
Nonperforming assets to total loans and foreclosed and other assets 2.74 1.24
Nonperforming assets to total assets 1.62 .75
Loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties where we do not receive adequate compensation are considered troubled debt restructurings. Troubled debt restructurings typically result from our loss mitigation activities and could include rate reductions, principal forgiveness, forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. Troubled debt restructurings completed during 2009 totaled $176 million at June30, 2009.
Net interest income less the provision for credit losses was $2.520 billion for the first six months of 2009 compared with $1.494 billion for the first six months of 2008. Comparable amounts for the second quarter of 2009 and the second quarter of 2008 were $1.095 billion and $791 million, respectively.
Changes in the allowance for loan and lease losses follow:
In millions 2009 2008
January1 $ 3,917 $ 830
Charge-offs (1,413 ) (240 )
Recoveries 187 30
Net charge-offs (1,226 ) (210 )
Provision for credit losses 1,967 337
Acquired allowance (a) (114 ) 20
Net change in allowance for unfunded loan commitments and letters of credit 25 11
June30 $ 4,569 $ 988
(a) Amount for 2009 reflects adjustments to the National City allowance acquired December31, 2008 due to additional impairment of loans effective at that date. Amount for 2008 reflects the Sterling acquisition.
See Note 6 for a discussion of the release of reserves related to additional impai |
| NOTE 6 LOANS ACQUIRED IN A TRANSFER |
NOTE 6 LOANS ACQUIRED IN A TRANSFER
At December31, 2008, PNC identified certain loans related to the National City acquisition, for which there was evidence of credit quality deterioration since origination and it was probable that PNC would be unable to collect all contractually required principal and interest payments. These loans are accounted for under FASB ASC 310-30, Receivables Loans and Debt Securities Acquired with Deteriorated Credit Quality. References to impaired loans in this Note 6 refer to loans accounted for under FASB ASC 310-30. Evidence of credit quality deterioration includes statistics such as past due status, declines in current borrower FICO credit scores, geographic concentration and declines in current loan-to-value ratios. GAAP requires these loans to be recorded at fair value at acquisition date and prohibits the carrying over or the creation of valuation allowances in the initial accounting for loans acquired in a transfer that are within the scope of FASB ASC 310-30.
FASB ASC 310-30 allows purchasers to aggregate impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. With respect to the National City acquisition, we aggregated homogeneous consumer and residential mortgage loans into pools with common risk characteristics. We account for commercial and commercial real estate loans individually.
During the first six months of 2009, additional information was obtained about the credit quality of acquired loans as of the acquisition date. As a result, an additional $2.6 billion of acquired loans were deemed impaired under FASB ASC 310-30 as of December31, 2008 and the carryover allowance for loan losses attributable to these loans of $114 million was released. Adjustments to the fair value of impaired loans of $1.6 billion were also recognized.
At June30, 2009 and December31, 2008, acquired loans within the scope of FASB ASC 310-30 had a carrying value of $12.6 billion and $12.9 billion, respectively. During the first six months of 2009, the amount of impaired loans decreased by a net $.3 billion as a result of payments and other exit activities primarily offset by the purchase accounting adjustments described above and accretion of purchase accounting discount. The unpaid principal balance of these
loans was $20.2 billion at June30, 2009 and $21.9 billion at December31, 2008, as detailed below:
FASB ASC 310-30 (SOP 03-3) PURCHASED IMPAIRED LOANS
June30, 2009 December31, 2008
In millions Recorded Investment Outstanding Balance Recorded Investment Outstanding Balance
Commercial (a) $ 880 $ 2,200 $ 1,006 $ 2,466
Commercial real estate 1,926 3,804 1,908 3,846
Consumer 3,864 5,943 3,910 6,618
Residential real estate 5,887 8,282 6,064 8,959
Total $ 12,557 $ 20,229 $ 12,888 $ 21,889
(a) Includes $89 million of purchased impaired loans held for sale at |
| NOTE 7 INVESTMENT SECURITIES |
NOTE 7 INVESTMENT SECURITIES
Amortized
Cost (a) Unrealized
Fair
Value
In millions Gains Losses
June30, 2009
SECURITIES AVAILABLE FOR SALE
Debt securities
US Treasury and government agencies $ 5,371 $ 8 $ (96 ) $ 5,283
Residential mortgage-backed
Agency 21,951 403 (69 ) 22,285
Non-Agency 12,008 257 (3,251 ) 9,014
Commercial mortgage-backed
Agency 1,037 8 (8 ) 1,037
Non-Agency 4,198 (540 ) 3,658
Asset-backed 1,931 15 (542 ) 1,404
State and municipal 1,374 33 (72 ) 1,335
Other debt 1,575 11 (13 ) 1,573
Total debt securities 49,445 735 (4,591 ) 45,589
Corporate stocks and other 400 16 416
Total securities available for sale $ 49,845 $ 751 $ (4,591 ) $ 46,005
SECURITIES HELD TO MATURITY
Debt securities
Commercial mortgage-backed (non-agency) $ 2,006 $ 115 $ 2,121
Asset-backed 1,949 94 $ (20 ) 2,023
Other debt 9 1 10
Total debt securities 3,964 210 (20 ) 4,154
Total securities held to maturity $ 3,964 $ 210 $ (20 ) $ 4,154
Amortized
Cost Unrealized
Fair
Value
In millions Gains Losses
December31, 2008
SECURITIES AVAILABLE FOR SALE
Debt securities
US Treasury and government agencies $ 738 $ 1 $ 739
Residential mortgage-backed
Agency 22,744 371 $ (9 ) 23,106
Non-Agency 13,205 (4,374 ) 8,831
Commercial mortgage-backed (non-agency) 4,305 (859 ) 3,446
Asset-backed 2,069 4 (446 ) 1,627
State and municipal 1,326 13 (76 ) 1,263
Other debt 563 11 (15 ) 559
Total debt securities 44,950 400 (5,779 ) 39,571
Corporate stocks and other 575 (4 ) 571
Total securities available for sale $ 45,525 $ 400 $ (5,783 ) $ 40,142
SECURITIES HELD TO MATURITY
Debt securities
Commercial mortgage-backed (non-agency) $ 1,945 $ 10 $ (59 ) $ 1,896
Asset-backed 1,376 7 (25 ) 1,358
Other debt 10 10
Total debt securities 3,331 17 (84 ) 3,264
Total securities held to maturity $ 3,331 $ 17 $ (84 ) $ 3,264
(a) The amortized cost for debt securities for which an OTTI was recorded prior to January1, 2009 was adjusted for the pretax cumulative effect adjustment recorded under new guidance impacting FASB ASC 320-10, Investments Debt and Equity Securities. |
| NOTE 8 FAIR VALUE |
NOTE 8 FAIR VALUE
Fair Value Measurement
FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or the price paid to transfer a liability on the measurement date. The standard 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. GAAP establishes a fair value reporting hierarchy to maximize the use of observable inputs when measuring fair value and defines the three levels of inputs as noted below.
Level 1
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities may include debt securities, equity securities and listed derivative contracts that are traded in an active exchange market and certain US Government agency securities that are actively traded in over-the-counter markets.
Level 2
Observable inputs other than Level 1 such as: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated to observable market data for substantially the full term of the asset or liability. Level 2 assets and liabilities may include debt securities, equity securities and listed derivative contracts with quoted prices that are traded in markets that are not active, and certain debt and equity securities and over-the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable inputs. This category generally includes agency residential and commercial mortgage-backed debt securities, asset-backed securities, corporate debt securities, residential mortgage loans held for sale, and derivative contracts.
Level 3
Unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities may include financial instruments whose value is determined using pricing models with internally developed assumptions, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain available for sale securities, commercial mortgage loans held for sale, private equity investments, trading securities, residential mortgage servicing rights, BlackRock Series C Preferred Stock and financial derivative contracts. The available for sale and trading securities within Level 3 include non-agency residential mortgage-backed securities, non-agency commercial mortgage-backed securities, auction rate securities, certain private-issuer asset-backed securities and corporate debt securities. Nonrecurring items, primarily certain nonaccrual and other loans held for sale, commercial mortgage servicing rights, equity investments and other assets are also included in this category.
Assets and liabilities measured at fair value on a recurring basis, including instruments for which PNC has elected the |
| NOTE 9 GOODWILL AND OTHER INTANGIBLE ASSETS |
NOTE 9 GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in goodwill and other intangible assets during the first six months of 2009 follow:
Changes in Goodwill and Other Intangible Assets
In millions Goodwill Customer- Related
Servicing
Rights
January1, 2009 $ 8,868 $ 930 $ 1,890
Additions/adjustments:
National City acquisition 349 517 10
Mortgage and other loan
servicing rights 493
BlackRock (11 )
Impairment (charge) reversal (1 ) 29
Amortization (123 ) (61 )
June30, 2009 $ 9,206 $ 1,323 $ 2,361
An interim impairment test of goodwill was performed during the first quarter of 2009. This test did not result in any impairment. Changes in goodwill by business segment during the first six months of 2009 follow:
Goodwill
In millions
January1
2009
Additions/
Adjustments
June30
2009
Retail Banking $ 5,968 $ (915 ) $ 5,053
Corporate Institutional Banking 1,609 913 2,522
Global Investment Servicing 1,233 2 1,235
BlackRock 44 (11 ) 33
Asset Management Group 14 14
Other (a) 349 349
Total $ 8,868 $ 338 $ 9,206
(a) Represents goodwill recognized during the second quarter of 2009 related to the National City acquisition which has not yet been allocated to the other business segments. This allocation is expected to be completed in the third quarter of 2009 pending completion of the appropriate distribution basis methodology.
Assets and liabilities of acquired entities are recorded at estimated fair value as of the acquisition date and are subject to refinement as information relative to the fair values at the date of acquisition becomes available.
As of June30, 2009, goodwill totaling $349 million has been recognized in connection with the National City acquisition. We are still awaiting and evaluating further information regarding pre-acquisition contingencies, including legal claims and other legal matters, and the finalization of restructuring plans and asset divestitures related to the National City acquisition. Therefore, in accordance with GAAP, further modifications to the purchase price allocation may occur, resulting in the recognition of goodwill and liabilities in future periods.
Our investment in BlackRock changes when BlackRock repurchases its shares in the open market or issues shares for an acquisition or pursuant to its employee compensation plans. We adjust goodwill when BlackRock repurchases its shares at an amount greater (or less) than book value per share which results in an increase (or decrease) in our percentage ownership interest.
The gross carrying amount, accumulated amortization and net carrying amount of other intangible assets by major category consisted of the following:
Other Intangible Assets
In millions
June30
2009 December31 2008
Customer-related and other intangibles |
| NOTE 10 LOAN SALES AND SECURITIZATIONS |
NOTE 10 LOAN SALES AND SECURITIZATIONS
Loan Sales
We sell residential and commercial mortgage loans to government-sponsored enterprises (GSEs) and in certain instances to other third-party investors. The GSEs, such as Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC), generally securitize our transferred loans into mortgage-backed securities for sale into the secondary market. Generally, we do not retain any interest in the transferred loans other than mortgage servicing rights. Refer to Note 9 Goodwill and Other Intangible Assets for further discussion on our residential and commercial mortgage servicing rights assets. During the first six months of 2009, residential and commercial mortgage loans sold totaled $12.0 billion and $3.4 billion, respectively. During the second quarter of 2009, residential and commercial mortgage loans sold totaled $5.7 billion and $1.6 billion, respectively.
During the first six months of 2008, commercial mortgage loans sold totaled $1.8 billion, including $1.1 billion during the second quarter. There were no residential mortgage loans sales in the first six months of 2008 as these activities were obtained through our acquisition of National City.
Our continuing involvement in these loan sales consists primarily of servicing and limited repurchase obligations for loan and servicer breaches in representations and warranties. Generally, we hold a cleanup call repurchase option for loans sold with servicing retained to the other third-party investors. In certain circumstances as servicer, we advance principal and interest payments to the GSEs and other third-party investors and also may make collateral protection advances. Our risk of loss in these servicing advances has historically been minimal.
We maintain a liability for estimated losses on loans expected to be repurchased as a result of breaches in loan and servicer representations and warranties. We have also entered into recourse arrangements associated with commercial mortgage loans sold to FNMA and FHLMC. Refer to Note 18 Commitments and Guarantees for further discussion on our repurchase liability and recourse arrangements. Our maximum exposure to loss in our loan sale activities is limited to these repurchase and recourse obligations.
In addition, for certain loans sold to GNMA and FNMA, we hold an option to repurchase individual delinquent loans that meet certain criteria. Without prior authorization from these GSEs, this option gives PNC the ability to repurchase the delinquent loan at par. Under FASB ASC 860-10, once we have the unilateral ability to repurchase the delinquent loan, effective control over the loan has been regained and we are required to recognize the loan and a corresponding repurchase liability on the balance sheet regardless of our intent to repurchase the loan. At June30, 2009 and December31, 2008, the balance of our repurchase option asset and liability totaled $1.1 billion and $476 million, respectively.
Securitizations
In securitizations, loans are typically transferred to a qualifying special purpose entity (QSPE |
| NOTE 11 CAPITAL SECURITIES OF SUBSIDIARY TRUSTS |
NOTE 11 CAPITAL SECURITIES OF SUBSIDIARY TRUSTS
Our capital securities of subsidiary trusts are described in Note 14 Capital Securities of Subsidiary Trusts in our 2008 Form 10-K. All of these Trusts are wholly owned finance subsidiaries of PNC. In the event of certain changes or amendments to regulatory requirements or federal tax rules, the capital securities are redeemable. The financial statements of the Trusts are not included in PNCs consolidated financial statements in accordance with GAAP.
The obligations of the respective parent of each Trust, when taken collectively, are the equivalent of a full and unconditional guarantee of the obligations of such Trust under the terms of the Capital Securities. Such guarantee is subordinate in right of payment in the same manner as other junior subordinated debt. There are certain restrictions on PNCs overall ability to obtain funds from its subsidiaries. For additional disclosure on these funding restrictions, including an explanation of dividend and intercompany loan limitations, see Note 23 Regulatory Matters in our 2008 Form 10-K.
PNC is subject to restrictions on dividends and other provisions similar to or in some ways more restrictive than those potentially imposed under the Exchange Agreements with Trust II and Trust III, as described in Note 3 Variable Interest Entities in our 2008 Form 10-K. PNC is also subject to dividend restrictions as a result of our issuance of preferred stock to the US Treasury under the TARP Capital Purchase Program as described in Note 19 Shareholders Equity in our 2008 Form 10-K.
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| NOTE 12 CERTAIN EMPLOYEE BENEFIT AND STOCK-BASED COMPENSATION PLANS |
NOTE 12 CERTAIN EMPLOYEE BENEFIT AND STOCK-BASED COMPENSATION PLANS
PENSION AND POSTRETIREMENT PLANS
As described in Note 15 Employee Benefit Plans in our 2008 Form 10-K, we have a noncontributory, qualified defined benefit pension plan (plan or pension plan) covering eligible employees. National City had a qualified pension plan covering substantially all employees hired prior to April 1, 2006, which was merged with our qualified pension plan on December 31, 2008. Both the PNC and National City portions of the plan derive benefits from cash balance formulas based on compensation levels, age, and length of service. Pension contributions are based on an actuarially determined amount necessary to fund total benefits payable to plan participants. As of the plan merger date, no changes to either plan design or benefits occurred.
We also maintain nonqualified supplemental retirement plans for certain employees. On December31, 2008, the participants of National Citys supplemental executive retirement plans became 100% vested due to the change in control. We also provide certain health care and life insurance benefits for qualifying retired employees (postretirement benefits) through various plans. The nonqualified pension and postretirement benefit plans are unfunded. The Company reserves the right to terminate or make plan changes at any time.
The components of our net periodic pension and post-retirement benefit cost for the second quarter and first half of 2009 and 2008 were as follows:
Qualified Pension Plan Nonqualified RetirementPlans Postretirement Benefits
Three months ended
June30
In millions 2009 2008 2009 2008 2009 2008
Net periodic cost consists of:
Service cost $ 22 $ 10 $ 1 $ 1
Interest cost 49 21 $ 4 $ 2 5 3
Expected return on plan assets (64 ) (40 )
Amortization of prior service cost (1 ) (1 ) (2 )
Amortization of actuarial losses 21
Net periodic cost (benefit) $ 28 $ (10 ) $ 4 $ 2 $ 5 $ 2
Qualified Pension Plan Nonqualified RetirementPlans Postretirement Benefits
Six months ended
June30
In millions 2009 2008 2009 2008 2009 2008
Net periodic cost consists of:
Service cost $ 45 $ 22 $ 1 $ 1 $ 2 $ 2
Interest cost 103 43 7 3 10 7
Expected return on plan assets (130 ) (80 )
Amortization of prior service cost (1 ) (1 ) (2 ) (4 )
Amortization of actuarial losses 42 1 1
Net periodic cost (benefit) $ 59 $ (16 ) $ 9 $ 5 $ 10 $ 5
STOCK-BASED COMPENSATION PLANS
As more fully described in Note 16 Stock-Based Compensation Plans in our 2008 Form 10-K, we have long-term incentive award plans (Incentive Plans) that provide |
| NOTE 13 FINANCIAL DERIVATIVES |
NOTE 13 FINANCIAL DERIVATIVES
We use a variety of derivative financial instruments to help manage interest rate, market and credit risk and reduce the effects that changes in interest rates may have on net income, fair value of assets and liabilities, and cash flows. These instruments include interest rate swaps, interest rate caps and floors, credit default swaps, futures contracts, and total return swaps. All derivatives are carried at fair value.
Derivatives Designated in Hedge Relationships
We enter into interest rate swaps to hedge the fair value of bank notes, Federal Home Loan Bank borrowings, senior debt and subordinated debt for changes in interest rates. Adjustments related to the ineffective portion of fair value hedging instruments are recorded in interest expense.
We enter into interest rate swap contracts to modify the interest rate characteristics of designated commercial loans from variable to fixed in order to reduce the impact of changes in future cash flows due to interest rate changes. We hedged our exposure to the variability of future cash flows for all forecasted transactions for a maximum of 10 years for hedges converting floating-rate commercial loans to fixed. The fair value of these derivatives is reported in other assets or other liabilities and offset in accumulated other comprehensive income (loss) for the effective portion of the derivatives. We subsequently reclassify any unrealized gains or losses related to these swap contracts from accumulated other comprehensive income (loss) into interest income in the same period or periods during which the hedged forecasted transaction affects earnings. Ineffectiveness of the strategies, if any, is recognized immediately in earnings.
During the next twelve months, we expect to reclassify to earnings $287 million of pretax net gains, or $186 million after-tax, on cash flow hedge derivatives currently reported in accumulated other comprehensive loss. This amount could differ from amounts actually recognized due to changes in interest rates and the addition of other hedges subsequent to June30, 2009. These net gains are anticipated to result from net cash flows on receive fixed interest rate swaps that would impact interest income recognized on the related floating rate commercial loans.
As of June30, 2009 we have determined that there were no hedging positions where it was probable that certain forecasted transactions may not occur within the originally designated time period.
The ineffective portion of the change in value of our fair value and cash flow hedge derivatives resulted in net gains of less than $1 million for the first six months of 2009 and $2 million for the first six months of 2008.
Derivatives Not Designated in Hedge Relationships
The derivative portfolio also includes free standing derivative financial instruments not included in FASB ASC 815-10-50, Derivatives and Hedging, hedging strategies. These derivatives are entered into for risk management and economic hedge purposes, to meet customer needs, and for proprietary purposes. They primarily consist of interest rate, basis and total rate of return swaps, interest rate caps, floors and |
| NOTE 14 EARNINGS PER SHARE |
NOTE 14 EARNINGS PER SHARE
The following table sets forth basic and diluted earnings per common share calculations:
Three months ended June30
Six months ended
June30
In millions, except share and per share data 2009 2008 2009 2008
Basic
Net income $ 207 $ 517 $ 737 $ 901
Less:
Net income attributable to noncontrolling interests 9 12 13 19
Dividends distributed to common shareholders 45 227 336 440
Dividends distributed to preferred shareholders 119 170
Dividends distributed to nonvested restricted shares 2 1 3
Preferred stock discount accretion 14 29
Undistributed net income $ 20 $ 276 $ 188 $ 439
Percentage of undistributed income allocated to common shares 99.7 % 99.5 % 99.7 % 99.5 %
Undistributed income allocated to common shares $ 19 $ 275 $ 187 $ 437
Plus common dividends 45 227 336 440
Net income attributable to basic common shares $ 64 $ 502 $ 523 $ 877
Basic weighted-average common shares outstanding 451,386 344,069 447,241 341,633
Basic earnings per common share $ .14 $ 1.46 $ 1.17 $ 2.57
Diluted
Net income attributable to basic common shares $ 64 $ 502 $ 523 $ 877
Less: BlackRock common stock equivalents 2 2 3 5
Net income attributable to diluted common shares $ 62 $ 500 $ 520 $ 872
Basic weighted average common shares outstanding 451,386 344,069 447,241 341,633
Weighted-average common shares to be issued:
Convertible preferred stock 537 568 539 575
Convertible debentures 1 1
Stock options (a) 347 1,136 60 1,074
Warrants (b)
Other performance awards 253 240 226 239
Diluted weighted-average common shares outstanding 452,523 346,014 448,066 343,522
Diluted earnings per common share $ .14 $ 1.45 $ 1.16 $ 2.54
(a)Excludes stock options considered to be anti-dilutive (in thousands) 16,138 6,329 16,769 6,676
(b)Excludes warrants considered to be anti-dilutive (in thousands) 21,929 21,929
Basic earnings per share is calculated using the two-class method to determine income attributable to common stockholders. The two-class method requires undistributed earnings for the period, which represents net income less common and participating security dividends (if applicable) declared or paid, to be allocated between the common and participating security stockholders based upon their respective rights to receive dividends. Participating securities include unvested restricted shares that conta |
| NOTE 15 TOTAL EQUITY AND OTHER COMPREHENSIVE INCOME |
NOTE 15 TOTAL EQUITY AND OTHER COMPREHENSIVE INCOME
Activity in total equity for the first six months of 2009 follows. The par value of our preferred stock outstanding at June30, 2009 totaled less than $.5 million and, therefore, is excluded from the table.
Shareholders Equity
In millions, except per share data
Shares Outstanding
Common Stock Common Stock Capital Surplus Preferred Stock Capital Surplus Common Stock and Other Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Noncontrolling Interests Total Equity
Balance at December31, 2008 443 $ 2,261 $ 7,918 $ 8,328 $ 11,461 $ (3,949 ) $ (597 ) $ 2,226 $ 27,648
Cumulative effect of adopting
FASB ASC 320-10 110 (110 )
Balance at January1, 2009 443 2,261 7,918 8,328 11,571 (4,059 ) (597 ) 2,226 27,648
Net income 724 13 737
Other comprehensive income (loss), net of tax
Other-than-temporary impairment on debt securities (493 ) (493 )
Net unrealized securities gains 1,626 1,626
Net unrealized losses on cash flow hedge derivatives (223 ) (223 )
Pension, other postretirement and postemployment benefit plan adjustments 36 36
Other (a) 12 12
Comprehensive income 13 1,695
Cash dividends declared
Common ($.76 per share) (338 ) (338 )
Preferred (170 ) (170 )
Preferred stock discount accretion 29 (29 )
Supervisory Capital Assessment Program issuance 15 75 549 624
Common stock activity 1 6 43 49
Treasury stock activity 2 (148 ) 162 14
Other 11 (66 ) (55 )
Balance at June30, 2009 461 $ 2,342 $ 7,947 $ 8,783 $ 11,758 $ (3,101 ) $ (435 ) $ 2,173 $ 29,467
Comprehensive loss for the first six months of 2008 was $198 million.
A summary of the components of the change in accumulated other comprehensive income (loss) follows:
Six months ended June30, 2009
In millions Pretax Tax(Expense) Benefit After-tax
Change in net unrealized securities losses:
Decrease in net unrealized losses on securities held at period end $ 2,731 $ (1,000 ) $ 1,731
Less: Net gain |
| NOTE 16 SUMMARIZED FINANCIAL INFORMATION OF BLACKROCK |
NOTE 16 SUMMARIZED FINANCIAL INFORMATION OF BLACKROCK
As required by SEC Regulation S-X, summarized consolidated financial information of BlackRock follows.
In millions Threemonthsended June30 Six months ended June30
2009 2008 2009 2008
Total revenue $ 1,029 $ 1,387 $ 2,016 $ 2,687
Total expenses 768 982 1,484 1,886
Operating income 261 405 532 801
Non-operating income (expense) 77 (4 ) (102 ) (24 )
Income before income taxes 338 401 430 777
Income tax expense 94 147 124 277
Net income 244 254 306 500
Less: net income (loss) attributable to non-controlling interests 26 (20 ) 4 (15 )
Net income attributable to BlackRock $ 218 $ 274 $ 302 $ 515
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| NOTE 17 LEGAL PROCEEDINGS |
NOTE 17 LEGAL PROCEEDINGS
The disclosure below updates the description of legal proceedings in Note 24 Legal Proceedings in Part II, Item8 of our 2008 Annual Report on Form 10-K and in Note 17 Legal Proceedings in Part I, Item1 of our first quarter 2009 Quarterly Report on Form 10-Q.
National City Matters
Derivative Cases
In the derivative litigation pending in the United States District Court for the Northern District of Ohio, a magistrate judge has recommended dismissal of the derivative claims. The magistrate judge has also recommended granting plaintiffs motion to amend the derivative complaint to allow the assertion of a class claim challenging the decision by the National City directors to enter into the merger agreement with PNC. The recommendations are subject to approval by the district court.
Securities and State Law Fiduciary Cases
In the lawsuit filed in January 2008 in the United States District Court for the Northern District of Ohio, a magistrate judge has recommended dismissal of the lawsuit without
prejudice, with a right for plaintiffs to file an amended complaint within 30 days. That recommendation is subject to approval by the district court.
In the lawsuit filed in April 2008 in the Cuyahoga County, Ohio, Court of Common Pleas against National City, certain officers and directors of National City, the defendants filed a motion to dismiss the amended complaint in May 2009. National Citys auditor is no longer a defendant in this lawsuit.
National City Acquisition-Related Litigation
In July 2009, the Delaware Chancery Court approved the settlement of the lawsuit pending in that court, which included settlement of one of the cases pending in the Cuyahoga County, Ohio Court of Common Pleas and the merger-related claims in the derivative case pending in Ohio state court. This approval remains subject to appeal.
Adelphia
The United States District Court for the Southern District of New York has rescheduled the trial in the lawsuit being prosecuted by the Adelphia Recovery Trust to commence in April 2010.
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| NOTE 18 COMMITMENTS AND GUARANTEES |
NOTE 18 COMMITMENTS AND GUARANTEES
EQUITY FUNDING AND OTHER COMMITMENTS
Our unfunded commitments at June30, 2009 included private equity investments of $484 million and other investments of $129 million.
STANDBY LETTERS OF CREDIT
We issue standby letters of credit and have risk participations in standby letters of credit and bankers acceptances issued by other financial institutions, in each case to support obligations of our customers to third parties, such as remarketing programs for customers variable rate demand notes. Net outstanding standby letters of credit totaled $10.1 billion at June30, 2009 and $10.3 billion at December31, 2008. Based on PNCs internal risk rating process for standby letters of credit as of June30, 2009, 84% of the net outstanding balance had internal credit ratings of pass, indicating the expected risk of loss is currently low compared to 88% as of December31, 2008, while 16% of the net outstanding balance as of June30, 2009 had internal risk ratings below pass, indicating a higher degree of risk of default compared to 12% as of December31, 2008.
If the customer fails to meet its financial or performance obligation to the third party under the terms of the contract or there is a need to support a remarketing program, then upon the request of the guaranteed party, we would be obligated to make payment to them. The standby letters of credit and risk participations in standby letters of credit and bankers acceptances outstanding on June30, 2009 had terms ranging from less than one year to nine years. The aggregate maximum amount of future payments PNC could be required to make under outstanding standby letters of credit and risk participations in standby letters of credit and bankers acceptances was $13.4 billion at June30, 2009, of which $5.6 billion support remarketing programs.
As of June30, 2009, assets of approximately $.9 billion secured certain specifically identified standby letters of credit. Approximately $3.3 billion in recourse provisions from third parties was also available for this purpose as of June30, 2009. In addition, a portion of the remaining standby letters of credit and letter of credit risk participations issued on behalf of specific customers is also secured by collateral or guarantees that secure the customers other obligations to us. The carrying amount of the liability for our obligations related to standby letters of credit and risk participations in standby letters of credit and bankers acceptances was $217 million at June30, 2009.
STANDBY BOND PURCHASE AGREEMENTS AND OTHER LIQUIDITY FACILITIES
We enter into standby bond purchase agreements to support municipal bond obligations. At June30, 2009, the aggregate of our commitments under these facilities was $505 million. We also enter into certain other liquidity facilities to support
individual pools of receivables acquired by commercial paper conduits including Market Street. At June30, 2009, our total commitments under these facilities were $6.5 billion, of which $6.3 billion was related to Market Street.
INDEMNIFICATIONS
As further described in our 2008 Form 10-K, we are a party to numerous acquisition or dives |
| NOTE 19 SEGMENT REPORTING |
NOTE 19 SEGMENT REPORTING
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. As a result, we now have seven reportable business segments which include:
Retail Banking
Corporate Institutional Banking
Asset Management Group
Residential Mortgage Banking
BlackRock
Global Investment Servicing
Distressed Assets Portfolio
Business segment results for the second quarter and first half of 2008 have been reclassified to present those periods on the same 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.
Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. As permitted under GAAP, 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 to Retail Banking equal to 6% of funds to reflect the capital required for well-capitalized domestic banks and to approximate market comparables for this business. The capital assigned for Global Investment Servicing reflects its legal entity shareholders equity.
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 each business segments loan portfolio. 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 total consolidated results. The impact of these differences is reflected in the Other category in the business segment tables. Other includes residual activities that do not meet the criteria for disclosure as a separate reportable business, 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, alternative investments, intercompany eliminations, most corporate overhead, and differences between business segment performance reporting and financial statem |
