XNYS:PNC PNC Financial Services Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to

Commission file number 001-09718

The PNC Financial Services Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   25-1435979

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707

(Address of principal executive offices, including zip code)

(412) 762-2000

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

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

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

As of August 1, 2012, there were 529,405,539 shares of the registrant’s common stock ($5 par value) outstanding.

 

 

 


Table of Contents

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2012 Form 10-Q

 

     Pages  

PART I – FINANCIAL INFORMATION

  

Item 1.     Financial Statements (Unaudited).

  

Consolidated Income Statement

     77   

Consolidated Statement of Comprehensive Income

     78   

Consolidated Balance Sheet

     79   

Consolidated Statement Of Cash Flows

     80   

Notes To Consolidated Financial Statements (Unaudited)

  

Note 1   Accounting Policies

     82   

Note 2   Acquisition and Divestiture Activity

     85   

Note 3   Loan Sale and Servicing Activities and Variable Interest Entities

     87   

Note 4   Loans and Commitments to Extend Credit

     93   

Note 5   Asset Quality

     94   

Note 6   Purchased Loans

     108   

Note 7    Allowances for Loan and Lease Losses and Unfunded Loan
Commitments and Letters of Credit

     111   

Note 8   Investment Securities

     115   

Note 9   Fair Value

     121   

Note 10 Goodwill and Other Intangible Assets

     139   

Note 11 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities

     141   

Note 12 Certain Employee Benefit And Stock Based Compensation Plans

     142   

Note 13 Financial Derivatives

     145   

Note 14 Earnings Per Share

     152   

Note 15 Total Equity And Other Comprehensive Income

     153   

Note 16 Income Taxes

     157   

Note 17 Legal Proceedings

     158   

Note 18 Commitments and Guarantees

     160   

Note 19 Segment Reporting

     164   

Note 20 Subsequent Events

     167   

Statistical Information (Unaudited)

  

Average Consolidated Balance Sheet And Net Interest Analysis

     168   

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations.

  

Financial Review

  

Consolidated Financial Highlights

     1   

Executive Summary

     3   

Consolidated Income Statement Review

     9   

Consolidated Balance Sheet Review

     13   

Off-Balance Sheet Arrangements And Variable Interest Entities

     24   

Fair Value Measurements

     25   

European Exposure

     26   

Business Segments Review

     27   

Critical Accounting Estimates And Judgments

     43   

Status Of Qualified Defined Benefit Pension Plan

     45   

Recourse And Repurchase Obligations

     45   

Risk Management

     49   

Internal Controls And Disclosure Controls And Procedures

     71   

Glossary Of Terms

     71   

Cautionary Statement Regarding Forward-Looking Information

     75   

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.

     49-70 and 145-152   

Item 4.     Controls and Procedures.

     71   

PART II – OTHER INFORMATION

  

Item 1.     Legal Proceedings.

     170   

Item 1A.  Risk Factors.

     170   

Item 2.     Unregistered Sales Of Equity Securities And Use Of Proceeds.

     170   

Item 6.     Exhibits.

     170   

Exhibit Index.

     170   

Signature   

     170   

Corporate Information

     171   


Table of Contents

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2012 Form 10-Q (continued)

 

MD&A TABLE REFERENCE

 

Table

  

Description

   Page  
1   

Consolidated Financial Highlights

     1   
2   

Net Interest Income and Net Interest Margin

     9   
3   

Summarized Balance Sheet Data

     13   
4   

Details Of Loans

     14   
5   

Accretion – Purchased Impaired Loans

     15   
6   

Accretable Net Interest – Purchased Impaired Loans

     15   
7   

Valuation of Purchased Impaired Loans

     15   
8   

Weighted Average Life of the Purchased Impaired Portfolios

     16   
9   

Accretable Difference Sensitivity – Total Purchased Impaired Loans

     16   
10   

Net Unfunded Credit Commitments

     16   
11   

Details of Investment Securities

     17   
12   

Vintage, Current Credit Rating, and FICO Score for Asset-Backed Securities

     18   
13   

Other-Than-Temporary Impairments

     19   
14   

Net Unrealized Gains and Losses on Non-Agency Securities

     20   
15   

Loans Held For Sale

     21   
16   

Details Of Funding Sources

     22   
17   

Risk-Based Capital

     23   
18   

Fair Value Measurements – Summary

     25   
19   

Summary of European Exposure

     26   
20   

Results Of Businesses – Summary

     28   
21   

Retail Banking Table

     29   
22   

Corporate & Institutional Banking Table

     33   
23   

Asset Management Group Table

     36   
24   

Residential Mortgage Banking Table

     39   
25   

BlackRock Table

     40   
26   

Non-Strategic Assets Portfolio Table

     42   
27   

Pension Expense – Sensitivity Analysis

     45   
28   

Analysis of Quarterly Residential Mortgage Repurchase Claims by Vintage

     47   
29   

Analysis of Quarterly Residential Mortgage Unresolved Asserted Indemnification and Repurchase Claims

     47   
30   

Analysis of Residential Mortgage Indemnification and Repurchase Claim Settlement Activity

     47   
31   

Analysis of Home Equity Unresolved Asserted Indemnification and Repurchase Claims

     49   
32   

Analysis of Home Equity Indemnification and Repurchase Claim Settlement Activity

     49   
33   

Nonperforming Assets By Type

     52   
34   

OREO and Foreclosed Assets

     53   
35   

Change in Nonperforming Assets

     53   
36   

Accruing Loans Past Due 30 To 59 Days

     54   
37   

Accruing Loans Past Due 60 To 89 Days

     54   
38   

Accruing Loans Past Due 90 Days Or More

     55   
39   

Home Equity Lines of Credit – Draw Period End Dates

     56   
40   

Bank-Owned Consumer Real Estate Related Loan Modifications

     57   
41   

Bank-Owned Consumer Real Estate Related Loan Modifications Re-Default by Vintage

     58   
42   

Summary of Troubled Debt Restructurings

     59   
43   

Loan Charge-Offs And Recoveries

     60   
44   

Allowance for Loan and Lease Losses

     61   
45   

Credit ratings as of June 30, 2012 for PNC and PNC Bank, N.A.

     64   
46   

Contractual Obligations

     65   
47   

Other Commitments

     65   
48   

Interest Sensitivity Analysis

     66   
49   

Net Interest Income Sensitivity to Alternative Rate Scenarios (Second Quarter 2012)

     66   
50   

Alternate Interest Rate Scenarios: One Year Forward

     67   
51   

Enterprise-Wide Trading-Related Gains/Losses Versus Value at Risk

     67   
52   

Trading Revenue

     68   
53   

Equity Investments Summary

     68   
54   

Financial Derivatives

     70   


Table of Contents

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2012 Form 10-Q (continued)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE

 

Table

  

Description

   Page  
55   

RBC Bank (USA) Purchase Accounting

     86   
56   

RBC Bank (USA) Intangible Assets

     86   
57   

RBC Bank (USA) and PNC Pro Forma Results

     87   
58   

Certain Financial Information and Cash Flows Associated with Loan Sale and Servicing Activities

     89   
59   

Consolidated VIEs – Carrying Value

     90   
60   

Assets and Liabilities of Consolidated VIEs

     91   
61   

Non-Consolidated VIEs

     91   
62   

Loans Outstanding

     93   
63   

Net Unfunded Credit Commitments

     93   
64   

Age Analysis of Past Due Accruing Loans

     94   
65   

Nonperforming Assets

     95   
66   

Commercial Lending Asset Quality Indicators

     97   
67   

Home Equity and Residential Real Estate Balances

     98   
68   

Consumer Real Estate Secured Asset Quality Indicators – Excluding Purchased Impaired Loans

     98   
69   

Consumer Real Estate Secured Asset Quality Indicators – Purchased Impaired Loans

     100   
70   

Credit Card and Other Consumer Loan Classes Asset Quality Indicators

     102   
71   

Summary of Troubled Debt Restructurings

     103   
72   

Financial Impact and TDRs by Concession Type

     104   
73   

TDRs which have Subsequently Defaulted

     106   
74   

Impaired Loans

     108   
75   

Purchased Impaired Loans – Balances

     109   
76   

Accretable Yield

     109   
77   

RBC Bank (USA) Acquisition – Purchased Loans Balances

     110   
78   

Purchased Impaired Loans – RBC Bank (USA) Acquisition

     110   
79   

Purchased Non-Impaired Loans – Fair Value

     111   
80   

Purchased Non-Impaired Loans – Cash Flows

     111   
81   

Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data

     113   
82   

Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit

     114   
83   

Investment Securities Summary

     115   
84   

Gross Unrealized Loss and Fair Value of Securities Available for Sale

     116   
85   

Credit Impairment Assessment Assumptions – Non-Agency Residential Mortgage-Backed
and Asset-Backed Securities

     117   
86   

Summary of OTTI Credit Losses Recognized in Earnings

     118   
87   

Summary of OTTI Noncredit (Losses) Recoveries Included in Accumulated Other Comprehensive Loss

     118   
88   

Rollforward of Cumulative OTTI Credit Losses Recognized in Earnings

     119   
89   

Gains (Losses) on Sales of Securities Available for Sale

     119   
90   

Contractual Maturity of Debt Securities

     120   
91   

Weighted-Average Expected Maturity of Mortgage and Other Asset-Backed Debt Securities

     120   
92   

Fair Value of Securities Pledged and Accepted as Collateral

     120   
93   

Fair Value Measurements – Summary

     126   
94   

Reconciliation of Level 3 Assets and Liabilities

     127   
95   

Fair Value Measurement – Recurring Quantitative Information

     131   
96   

Fair Value Measurements – Nonrecurring

     134   
97   

Fair Value Measurements – Nonrecurring Quantitative Information

     134   
98   

Fair Value Option – Changes in Fair Value

     135   
99   

Fair Value Option – Fair Value and Principal Balances

     136   
100   

Additional Fair Value Information Related to Financial Instruments

     137   
101   

Changes in Goodwill by Business Segment

     139   
102   

Summary of Changes in Goodwill and Other Intangible Assets

     139   
103   

Other Intangible Assets

     139   
104   

Amortization Expense on Existing Intangible Assets

     140   

 


Table of Contents

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2012 Form 10-Q (continued)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE (Continued)

Table

  

Description

   Page  
105   

Commercial Mortgage Servicing Rights

     140   
106   

Residential Mortgage Servicing Rights

     140   
107   

Commercial Mortgage Loan Servicing Assets – Key Valuation Assumptions

     141   
108   

Residential Mortgage Loan Servicing Assets – Key Valuation Assumptions

     141   
109   

Fees from Mortgage and Other Loan Servicing

     141   
110   

Net Periodic Pension and Postretirement Benefits Costs

     143   
111   

Option Pricing Assumptions

     143   
112   

Stock Option Rollforward

     144   
113   

Nonvested Incentive/Performance Unit Share Awards and Restricted Stock/Unit Awards – Rollforward

     144   
114   

Nonvested Cash-Payable Restricted Share Unit – Rollforward

     145   
115   

Derivatives Total Notional or Contractual Amounts and Estimated Net Fair Values

     148   
116   

Derivatives Designated in GAAP Hedge Relationships – Fair Value Hedges

     149   
117   

Derivatives Designated in GAAP Hedge Relationships – Cash Flow Hedges

     149   
118   

Derivatives Designated in GAAP Hedge Relationships – Net Investment Hedges

     150   
119   

Gains (Losses) on Derivatives Not Designated as Hedging Instruments under GAAP

     150   
120   

Credit Default Swaps

     151   
121   

Credit Ratings of Credit Default Swaps

     151   
122   

Referenced/Underlying Assets of Credit Default Swaps

     151   
123   

Risk Participation Agreements Sold

     152   
124   

Internal Credit Ratings of Risk Participation Agreements Sold

     152   
125   

Basic and Diluted Earnings per Common Share

     152   
126   

Rollforward of Total Equity

     153   
127   

Other Comprehensive Income

     154   
128   

Accumulated Other Comprehensive Income (Loss) Components

     157   
129   

Net Operating Loss Carryforwards and Tax Credit Carryforwards

     157   
130   

Net Outstanding Standby Letters of Credit

     160   
131   

Analysis of Commercial Mortgage Recourse Obligations

     162   
132   

Analysis of Indemnification and Repurchase Liability for Asserted Claims and Unasserted Claims

     163   
133   

Reinsurance Agreements Exposure

     163   
134   

Reinsurance Reserves – Rollforward

     163   
135   

Results Of Businesses

     166   


Table of Contents

FINANCIAL REVIEW

TABLE 1: CONSOLIDATED FINANCIAL HIGHLIGHTS

THE PNC FINANCIAL SERVICES GROUP, INC.

 

Dollars in millions, except per share data    Three months ended June 30      Six months ended June 30  
Unaudited    2012     2011      2012      2011  

Financial Results (a)

            

Revenue

            

Net interest income

   $ 2,526      $ 2,150       $ 4,817       $ 4,326   

Noninterest income

     1,097        1,452         2,538         2,907   

Total revenue

     3,623        3,602         7,355         7,233   

Noninterest expense

     2,648        2,176         5,103         4,246   

Pretax, pre-provision earnings (b)

     975        1,426         2,252         2,987   

Provision for credit losses

     256        280         441         701   

Income before income taxes and noncontrolling interests (pretax earnings)

   $ 719      $ 1,146       $ 1,811       $ 2,286   

Net Income

   $ 546      $ 912       $ 1,357       $ 1,744   

Less: Net income (loss) attributable to noncontrolling interests

     (5     (1      1         (6

     Preferred stock dividends and discount accretion

     25        25         64         29   

Net income attributable to common shareholders

   $ 526      $ 888       $ 1,292       $ 1,721   
 

Diluted earnings per common share

   $ .98      $ 1.67       $ 2.42       $ 3.24   
 

Cash dividends declared per common share

   $ .40      $ .35       $ .75       $ .45   

Integration costs:

            

Pretax

   $ 52      $ 5       $ 197       $ 6   

After-tax

   $ 34      $ 3       $ 128       $ 4   

Impact on diluted earnings per share

   $ .06      $ .01       $ .24       $ .01   
 

Noncash charges for unamortized discounts related to redemption of trust preferred securities:

            

Pretax

   $ 130         $ 130        

After-tax

   $ 85         $ 85        

Impact on diluted earnings per share

   $ .16         $ .16        
 

Provision for residential mortgage repurchase obligations:

            

Pretax

   $ 438      $ 21       $ 470       $ 35   

After-tax

   $ 284      $ 14       $ 305       $ 23   

Impact on diluted earnings per share

   $ .54      $ .03       $ .58       $ .04   

Performance Ratios

            

Net interest margin (c)

     4.08     3.93      3.99      3.93

Noninterest income to total revenue

     30        40         35         40   

Efficiency

     73        60         69         59   

Return on:

            

Average common shareholders’ equity

     6.23        11.44         7.80         11.29   

Average assets

     .74        1.40         .94         1.34   

See page 71 for a glossary of certain terms used in this Report.

Certain prior period amounts have been reclassified to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. The after-tax amounts in this table and notes below were calculated using a marginal federal income tax rate of 35% and include applicable income tax adjustments.

(a) The Executive Summary and Consolidated Income Statement Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.
(b) We believe that pretax, pre-provision earnings, a non-GAAP measure, is useful as a tool to help evaluate the ability to provide for credit costs through operations.
(c) Calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under generally accepted accounting principles (GAAP) in the Consolidated Income Statement. The taxable-equivalent adjustments to net interest income for the three months ended June 30, 2012 and June 30, 2011 were $35 million and $25 million, respectively. The taxable-equivalent adjustments to net interest income for the six months ended June 30, 2012 and June 30, 2011 were $66 million and $49 million.

 

The PNC Financial Services Group, Inc. – Form 10-Q    1


Table of Contents

TABLE 1: CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED) (a)

 

Unaudited    June 30
2012
     December 31
2011
     June 30
2011
 

Balance Sheet Data (dollars in millions, except per share data)

          

Assets

   $ 299,575      $ 271,205      $ 263,117  

Loans (b) (c)

     180,425        159,014        150,319  

Allowance for loan and lease losses (b)

     4,156        4,347        4,627  

Interest-earning deposits with banks (b)

     3,995        1,169        4,508  

Investment securities (b)

     61,937        60,634        59,414  

Loans held for sale (c)

     3,333        2,936        2,679  

Goodwill and other intangible assets

     10,962        10,144        10,594  

Equity investments (b) (d)

     10,617        10,134        9,776  
 

Noninterest-bearing deposits

     64,476        59,048        52,683  

Interest-bearing deposits

     142,447        128,918        129,208  

Total deposits

     206,923        187,966        181,891  

Transaction deposits

     166,043        147,637        137,109  

Borrowed funds (b)

     43,689        36,704        35,176  

Shareholders’ equity

     37,005        34,053        32,235  

Common shareholders’ equity

     33,884        32,417        31,588  

Accumulated other comprehensive income (loss)

     402        (105      69  
 

Book value per common share

     64.00        61.52        60.02  

Common shares outstanding (millions)

     529        527        526  

Loans to deposits

     87      85      83
 

Client Assets (billions)

          

Discretionary assets under management

   $ 109      $ 107      $ 109  

Nondiscretionary assets under administration

     105        103        110  

Total assets under administration

     214        210        219  

Brokerage account assets

     36        34        35  

Total client assets

   $ 250      $ 244      $ 254  
 

Capital Ratios

          

Tier 1 common

     9.3      10.3      10.5

Tier 1 risk-based (e)

     11.4        12.6        12.8  

Total risk-based (e)

     14.2        15.8        16.2  

Leverage (e)

     10.1        11.1        11.0  

Common shareholders’ equity to assets

     11.3        12.0        12.0  
 

Asset Quality

          

Nonperforming loans to total loans

     1.92      2.24      2.57

Nonperforming assets to total loans, OREO and foreclosed assets

     2.31        2.60        2.97  

Nonperforming assets to total assets

     1.39        1.53        1.70  

Net charge-offs to average loans (for the three months ended) (annualized)

     .71        .83        1.11  

Allowance for loan and lease losses to total loans

     2.30        2.73        3.08  

Allowance for loan and lease losses to nonperforming loans (f)

     120        122        120  

Accruing loans past due 90 days or more (g)

   $ 2,483      $ 2,973      $ 2,646  
(a) The Executive Summary and Consolidated Balance Sheet Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.
(b) Amounts include consolidated variable interest entities. See Consolidated Balance Sheet in Part I, Item 1 of this Report for additional information.
(c) Amounts include assets for which we have elected the fair value option. See Consolidated Balance Sheet in Part I, Item 1 of this Report for additional information.
(d) Amounts include our equity interest in BlackRock.
(e) The minimum US regulatory capital ratios under Basel I are 4.0% for Tier 1 risk-based, 8.0% for Total risk-based, and 4.0% for Leverage. The comparable well-capitalized levels are 6.0% for Tier 1 risk-based, 10.0% for Total risk-based, and 5.0% for Leverage.
(f) The allowance for loan and lease losses includes impairment reserves attributable to purchased impaired loans. Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans.
(g) Excludes loans held for sale and purchased impaired loans. In the first quarter of 2012, we adopted a policy stating that home equity loans past due 90 days or more would be placed on nonaccrual status. Prior policy required that these loans be past due 180 days before being placed on nonaccrual status.

 

2    The PNC Financial Services Group, Inc. – Form 10-Q


Table of Contents

FINANCIAL REVIEW

THE PNC FINANCIAL SERVICES GROUP, INC.

This Financial Review, including the Consolidated Financial Highlights, should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report and with Items 6, 7, 8 and 9A of our 2011 Annual Report on Form 10-K as amended by Amendment No. 1 on Form 10-K/A (2011 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business, regulatory and legal risks, see the following sections as they appear in this Report and in our 2011 Form 10-K and our First Quarter 2012 Form 10-Q: the Risk Management section of the Financial Review portion of the respective report; Item 1A Risk Factors included in our 2011 Form 10-K; and the Legal Proceedings and Commitments and Guarantees Notes of the Notes to Consolidated Financial Statements included in the respective report. Also, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and the Critical Accounting Estimates And Judgments section in this Financial Review and in our 2011 Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this Report. See Note 19 Segment Reporting in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a generally accepted accounting principles (GAAP) basis.

 

EXECUTIVE SUMMARY

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

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

KEY STRATEGIC GOALS

We manage our company for the long term and seek to manage risk in keeping with a moderate risk philosophy. We emphasize maintaining strong capital and liquidity positions, investing in our markets and products, and embracing our corporate responsibility to the communities where we do business.

Our strategy to enhance shareholder value centers on driving growth in pre-tax, pre-provision earnings by achieving growth in revenue from our balance sheet and a diverse business mix that exceeds growth in expenses controlled through disciplined cost management.

The primary drivers of revenue are the acquisition, expansion and retention of customer relationships. We strive to expand our customer base by offering convenient banking options and leading technology solutions, providing a broad range of fee-based and credit products and services, focusing on customer service, and managing a significantly enhanced branding initiative. This strategy is designed to give our customers choices based on their needs. Rather than striving

to optimize fee revenue in the short term, our approach is focused on effectively growing targeted market share and “share of wallet.” We may also grow revenue through appropriate and targeted acquisitions and, in certain businesses, by expanding into new geographical markets.

PNC faces a variety of risks that may impact different aspects of our risk profile from time to time, the extent of each varies depending on factors such as the current economic, political and regulatory environment, the impact of mergers and acquisition activity, and operational challenges. Many of these risks and our risk management strategies are described in more detail in our 2011 Form 10-K and elsewhere in this Report.

We expect to build capital via retained earnings while having opportunities to return capital to shareholders during 2012. See the 2012 Capital and Liquidity Actions section of this Executive Summary, the Funding and Capital Sources section of the Consolidated Balance Sheet Review section and the Liquidity Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 of our 2011 Form 10-K.

RBC BANK (USA) ACQUISITION

On March 2, 2012, we acquired 100% of the issued and outstanding common stock of RBC Bank (USA), the US retail banking subsidiary of Royal Bank of Canada. As part of the acquisition, PNC also purchased a credit card portfolio from RBC Bank (Georgia), National Association. PNC paid $3.6 billion in cash as the consideration for the acquisition of both RBC Bank (USA) and the credit card portfolio. The transaction added approximately $18.1 billion in deposits, $14.5 billion of loans and $1.1 billion of goodwill and intangible assets to PNC’s Consolidated Balance Sheet. Our Consolidated Income Statement includes the impact of business activity associated with the RBC Bank (USA) acquisition subsequent to March 2, 2012.

 

 

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RBC Bank (USA), based in Raleigh, North Carolina, operated more than 400 branches in North Carolina, Florida, Alabama, Georgia, Virginia and South Carolina. The primary reasons for the acquisition of RBC Bank (USA) were to enhance shareholder value, to improve PNC’s competitive position in the financial services industry, and to further expand PNC’s existing branch network in the states where it currently operates as well as expanding into new markets. When combined with PNC’s existing network, PNC now has 2,888 branches across 17 states and the District of Columbia, ranking it fifth among U.S. banks in branches. See Note 2 Acquisition and Divestiture Activity in the Notes To Consolidated Financial Statements in this Report for additional information regarding this acquisition and 2011 branch acquisition activity.

PENDING SALE OF SMARTSTREET

On April 20, 2012, PNC signed a purchase and assumption agreement with Union Bank, N.A. pursuant to which Union Bank will assume the deposits and acquire certain assets of the Smartstreet business unit, which was acquired by PNC as part of the RBC Bank (USA) acquisition. Smartstreet is a nationwide business focused on homeowner or community association managers and has approximately $1 billion of assets and deposits as of June 30, 2012. The transaction is expected to close in the fall of 2012 and is subject to certain closing conditions, including regulatory approval.

2012 CAPITAL AND LIQUIDITY ACTIONS

Our ability to take certain capital actions, including plans to pay or increase common stock dividends or to repurchase shares under current or future programs, is subject to the results of the supervisory assessment of capital adequacy undertaken by the Board of Governors of the Federal Reserve System (Federal Reserve) and our primary bank regulators as part of the Comprehensive Capital Analysis and Review (CCAR) process. This capital adequacy assessment is based on a review of a comprehensive capital plan submitted to the Federal Reserve. In connection with the annual review process for 2012 (2012 CCAR), PNC filed its capital plan with the Federal Reserve on January 9, 2012. As we announced on March 13, 2012, the Federal Reserve accepted the capital plan that we submitted for their review and did not object to our capital actions proposed as part of that plan. The capital actions included recommendations to increase the quarterly common stock dividend and a modest share repurchase program. For additional information concerning the CCAR process and the factors the Federal Reserve takes into consideration in evaluating capital plans, see Item 1 Business – Supervision and Regulation included in our 2011 Form 10-K.

On April 5, 2012, consistent with our capital plan submitted to the Federal Reserve in 2012, our Board of Directors approved an increase to PNC’s quarterly common stock dividend from $.35 per common share to $.40 per common share. Additionally, also consistent with that capital plan, PNC plans

to purchase up to $250 million of common stock under our existing 25 million share repurchase program in open market or privately negotiated transactions during 2012. Such purchases were initiated in the second quarter with approximately $50 million repurchased as of June 30, 2012. The discussion of capital within the Consolidated Balance Sheet Review section of this Financial Review includes additional information regarding our common stock repurchase program.

On March 8, 2012, PNC Funding Corp issued $1 billion of senior notes, unconditionally guaranteed by The PNC Financial Services Group, Inc., due March 8, 2022. Interest is paid semi-annually at a fixed annual rate of 3.30%. The offering resulted in gross proceeds to us of $990 million before offering related expenses. We intend to use the net proceeds from this offering for general corporate purposes, which may include: advances to PNC and its subsidiaries to finance their activities, repayment of outstanding indebtedness, and repurchases and redemptions of issued and outstanding securities of PNC and its subsidiaries.

On April 24, 2012, we issued 60 million depositary shares, each representing a 1/4,000th interest in a share of our Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series P, in an underwritten public offering resulting in gross proceeds of $1.5 billion to us before commissions and expenses. We intend to use the net proceeds from the sale of the depositary shares for general corporate purposes, which may include repurchases and redemptions of issued and outstanding securities of PNC and its subsidiaries, including trust preferred securities.

On April 25, 2012 we redeemed $300 million of trust preferred securities issued by PNC Capital Trust D with a current distribution rate of 6.125% and $6 million of trust preferred securities issued by Yardville Capital Trust III with a current distribution rate of 10.18%. In addition, on May 25, 2012 we redeemed $500 million of trust preferred securities issued by National City Capital Trust III with a current distribution rate of 6.625%. These redemptions together resulted in a noncash charge for unamortized discounts of approximately $130 million in the second quarter of 2012.

On June 20, 2012, PNC Bank, N.A. issued $1.0 billion of senior extendible floating rate bank notes with an initial maturity date of July 20, 2013, subject to the holder’s monthly option to extend, and a final maturity date of June 20, 2014. Interest is paid at the 3-month LIBOR rate, reset quarterly, plus a spread of 22.5 basis points, which spread is subject to four potential one basis point increases in the event of certain extensions of maturity by the holder.

On June 28, 2012 we announced the July 30, 2012 redemption of $450 million of trust preferred securities issued by PNC Capital Trust E with a current distribution rate of 7.750% and $517.5 million of enhanced trust preferred securities issued by

 

 

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National City Capital Trust IV with a current distribution rate of 8.000%. These redemptions together will result in a noncash charge for unamortized discounts of approximately $95 million in the third quarter of 2012. As a result of these redemptions and assuming the redemption of other trust preferred securities redeemable at par in the fourth quarter of 2012, PNC expects its total second half noncash charges to be $162 million rather than $150 million, as disclosed in PNC’s first quarter 2012 Form 10-Q.

Our Tier 1 risk-based capital ratio at June 30, 2012 reflected second quarter capital actions of issuing approximately $1.5 billion of preferred stock and redeeming or announcing the redemption of approximately $1.8 billion of trust preferred securities. The discussion of capital within the Consolidated Balance Sheet Review section of this Financial Review includes additional information regarding our capital ratios.

RECENT MARKET AND INDUSTRY DEVELOPMENTS

The following updates our previous disclosures on recent market and industry developments, including with respect to regulatory developments, mortgage matters and governmental programs. We provide additional information on these matters in the Recent Market and Industry Developments, Residential Mortgage Matters and PNC’s Participation in Select Government Programs sections of the Financial Review in Item 7 of our 2011 Form 10-K and Part I, Item 2 of our First Quarter 2012 Form 10-Q. We also refer you to Item 1 Business–Supervision and Regulation and Item 1A Risk Factors included in our 2011 Form 10-K with respect to reforms and regulatory developments affecting PNC and the financial services industry.

Among the recent legislative and regulatory developments affecting the banking industry are evolving regulatory capital standards for banking organizations. These evolving standards include the so-called “Basel III” initiatives that are part of the effort by international banking supervisors to improve the ability of the banking sector to absorb shocks in periods of financial and economic stress and changes by the federal banking agencies to reduce the use of credit ratings in the rules governing regulatory capital.

In June 2012, the US banking regulators requested comment on three sets of proposed rules that implement the Basel III capital framework and also make other changes to US regulatory capital standards for banking institutions. The Basel III proposed rules include heightened capital requirements for banking institutions in terms of both higher quality capital and higher regulatory capital ratios. These proposed rules, among other things, would revise the capital levels at which a banking institution would be subject to the prompt corrective action framework (including the establishment of a new tier 1 common capital requirement), eliminate or reduce the ability of certain types of capital instruments to count as regulatory capital, eliminate the Tier 1 treatment of trust preferred securities (as required by Dodd-

Frank) following a phase-in period beginning in 2013, and require new deductions from capital for investments in unconsolidated financial institutions, mortgage servicing assets and deferred tax assets that exceed specified thresholds. The proposed rules also would establish a new capital conservation buffer and, for large or internationally active banks, a supplemental leverage capital requirement that would take into account certain off-balance sheet exposures and a countercyclical capital buffer that would initially be set at zero. The proposed Basel III rules would become effective under a phase-in period beginning January 1, 2013 and to be in full effect on January 1, 2019.

The other proposed rules issued by the US banking regulators in June 2012 would revise the manner in which a banking institution determines its risk-weighted assets for risk-based capital purposes under the Basel II framework applicable to large or internationally active banks (referred to as the advanced approach) and under the Basel I framework applicable to all banking institutions (referred to as the standardized approach). These rules would replace references to credit ratings with alternative methodologies for assessing creditworthiness. In addition, among other things, the advanced approach proposal would implement the changes to counterparty credit risk weightings included in the Basel III capital framework, and the standardized approach would modify the risk-weighting framework for residential mortgage assets. The standardized approach changes to the Basel I risk-weighting rules are proposed to become effective no later than July 1, 2015.

In June 2012, the US banking regulators also adopted final market risk capital rules to implement the enhancements to the market risk framework adopted by the Basel Committee (commonly referred to as “Basel II.5”). The final rules are effective January 1, 2013 and, among other things, establish new stressed Value at Risk (“VaR”) and incremental risk charges for covered trading positions and replace references to credit ratings in the market risk rules with alternative methodologies for assessing credit risk.

KEY FACTORS AFFECTING FINANCIAL PERFORMANCE

Our financial performance is substantially affected by a number of external factors outside of our control, including the following:

   

General economic conditions, including the continuity, speed and stamina of the moderate economic recovery in general and on our customers in particular,

   

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

   

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

   

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

 

 

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Customer demand for non-loan products and services,

   

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

   

The impact of the extensive reforms enacted in the Dodd-Frank legislation and other legislative, regulatory and administrative initiatives, including those outlined in our 2011 Form 10-K, our First Quarter 2012 Form 10-Q and elsewhere in this Report, and

   

The impact of market credit spreads on asset valuations.

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

   

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

   

Continued development of the geographic markets related to our recent acquisitions, including full deployment of our product offerings and integration of the acquired RBC Bank (USA) businesses into PNC,

   

Revenue growth and our ability to provide innovative and valued products to our customers,

   

Our ability to utilize technology to develop and deliver products and services to our customers,

   

Our ability to manage and implement strategic business objectives within the changing regulatory environment,

   

A sustained focus on expense management,

   

Managing the non-strategic assets portfolio and impaired assets,

   

Improving our overall asset quality,

   

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

   

Prudent risk and capital management related to our efforts to manage risk in keeping with a moderate risk philosophy, and to meet evolving regulatory capital standards,

   

Actions we take within the capital and other financial markets,

   

The impact of legal and regulatory-related contingencies, and

   

The appropriateness of reserves needed for critical estimates and related contingencies.

For additional information, please see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2011 Form 10-K.

INCOME STATEMENT HIGHLIGHTS

   

Net income for the second quarter of 2012 of $546 million decreased 40 percent compared to the second quarter of 2011. Net income for the second quarter of 2012 was reduced by higher provision for residential mortgage repurchase obligations, noncash charges

   

related to redemption of trust preferred securities, and higher integration costs. For additional detail, please see the Consolidated Income Statement Review section in this Financial Review.

   

Net interest income of $2.5 billion for the second quarter of 2012 increased 17 percent compared with the second quarter of 2011 due to the full quarter benefit of the RBC Bank (USA) acquisition, organic loan growth and lower funding costs.

   

Net interest margin increased to 4.08% for the second quarter of 2012 compared to 3.93% for the second quarter of 2011, primarily driven by a decline in the cost of interest-bearing deposits and borrowed funds and the contribution to margin of the loans acquired in the RBC Bank (USA) acquisition.

   

Noninterest income of $1.1 billion for the second quarter of 2012 decreased $355 million compared to the second quarter of 2011. The overall decrease was primarily due to higher provision for residential mortgage repurchase obligations and lower consumer service fees from the regulatory impact of lower interchange fees on debit card transactions. These declines were partially offset by an increase in residential mortgage loan sales revenue related to an increase in loan origination volume as well as higher corporate services fee income from higher commercial mortgage banking revenue and higher merger and advisory fees.

   

The provision for credit losses declined to $256 million for the second quarter of 2012 compared to $280 million for the second quarter of 2011 as overall credit quality improved, partially offset by credit provisions related to the RBC Bank (USA) acquisition.

   

Noninterest expense of $2.6 billion for the second quarter of 2012 increased $472 million compared with the second quarter of 2011 primarily driven by operating expense for the RBC Bank (USA) acquisition, noncash charges related to redemption of trust preferred securities, higher integration costs, additions to legal reserves, increased expenses for other real estate owned and residential mortgage foreclosure-related matters, and higher pension costs.

CREDIT QUALITY HIGHLIGHTS

   

Overall credit quality improved during the second quarter of 2012.

   

Nonperforming assets of $4.2 billion at June 30, 2012 declined 4 percent during the second quarter of 2012 and remained flat compared to December 31, 2011.

   

Accruing loans past due 90 days or more of $2.5 billion at June 30, 2012 decreased $490 million, or 16 percent, from December 31, 2011, primarily due to a change in policy for home equity loans past due 90 days being placed on nonaccrual status, compared to prior policy of past due 180 days and a decline in government insured residential real estate loans.

 

 

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Net charge-offs of $315 million declined $18 million, or 5 percent, during the second quarter and declined 24 percent compared to the second quarter of 2011. Net charge-offs for the six months ended June 30, 2012 were $648 million or an annualized .76% of average loans, compared to $947 million or an annualized 1.27% of average loans for the six months ended June 30, 2011, which is a decrease of 32 percent in net charge-offs in the comparison.

   

The allowance for loan and lease losses was 2.30% of total loans and 120% of nonperforming loans at June 30, 2012, compared with 2.73% and 122% at December 31, 2011.

BALANCE SHEET HIGHLIGHTS

   

PNC continued to expand and deepen customer relationships through new client acquisition and cross sales.

   

In Retail Banking, net checking relationships grew 128,000 organically in the first half of 2012, or 4 percent on an annualized basis.

   

Nearly 500 new primary clients in corporate banking were added in the first half of 2012.

   

Total loans increased by $21 billion, or 13 percent, to $180 billion at June 30, 2012 compared to December 31, 2011.

   

Total commercial lending continued to have strong growth, increasing $15.8 billion, or 18 percent, from December 31, 2011, which includes the impact from the RBC Bank (USA) acquisition.

   

Total consumer lending increased $5.6 billion from December 31, 2011 primarily in home equity and automobile loans, including the impact from the RBC Bank (USA) acquisition.

   

Total deposits were $207 billion at June 30, 2012 compared with $188 billion at December 31, 2011.

   

Transaction deposits increased by $18.4 billion, or 12 percent, to $166 billion, or 80 percent of deposits, at June 30, 2012 compared to December 31, 2011, which includes the impact from the RBC Bank (USA) acquisition.

   

Time deposits increased by $2.5 billion at June 30, 2012 compared to December 31, 2011 reflecting higher Eurodollar deposits in the second quarter.

   

Retail certificates of deposit declined by $3.2 billion at June 30, 2012 from December 31, 2011 as the final wave of higher rate accounts matured in the second quarter.

   

PNC’s balance sheet remained core funded with a loans to deposits ratio of 87 percent at June 30, 2012 and retained a strong bank holding company liquidity position.

   

PNC maintained strong capital levels with a Tier 1 common capital ratio of 9.3 percent at June 30, 2012 and 10.3 percent at December 31, 2011. The impact

   

on the ratio of the acquisition of RBC Bank (USA) was a decrease of approximately 1.2 percentage points.

   

PNC expects to reach its Basel III Tier 1 common capital ratio goal of 8.0 to 8.5 percent by year end 2013 without benefit of phase-ins, based on Basel III proposed rules and including application of Basel II (including proposed modifications) and Basel II.5 rules as issued by the US banking agencies.

   

Among other effects, the recently issued notices of proposed rules suggest an estimated benefit of approximately 90 basis points to our Basel III Tier 1 common capital ratio as a result of the treatment of sub-investment grade securities under the proposed rules, as compared to the Basel III framework.

   

The Tier 1 risk-based capital ratio of 11.4 percent at June 30, 2012 reflected second quarter capital actions of issuing approximately $1.5 billion of preferred stock and redeeming or announcing the redemption of approximately $1.8 billion of trust preferred securities.

   

In April 2012 the PNC board of directors raised the quarterly cash dividend on common stock to 40 cents per share, an increase of 5 cents per share, or 14 percent. PNC plans to purchase up to $250 million of common stock under its existing 25 million share repurchase program in open market or privately negotiated transactions during 2012. Such purchases were initiated in the second quarter with approximately $50 million repurchased as of June 30, 2012.

Our Consolidated Income Statement and Consolidated Balance Sheet Review sections of this Financial Review describe in greater detail the various items that impacted our results for the first six months of 2012 and 2011 and balances at June 30, 2012 and December 31, 2011, respectively.

AVERAGE CONSOLIDATED BALANCE SHEET HIGHLIGHTS

Various seasonal and other factors impact our period-end balances whereas average balances are generally more indicative of underlying business trends apart from the impact of acquisitions and divestitures. The Consolidated Balance Sheet Review section of this Financial Review provides information on changes in selected Consolidated Balance Sheet categories at June 30, 2012 compared with December 31, 2011.

Total average assets were $288.8 billion for the first six months of 2012 compared with $261.8 billion for the first six months of 2011, primarily due to assets added from the March 2, 2012 acquisition of RBC Bank (USA). Average interest-earning assets were $243.9 billion for the first six months of 2012, compared with $222.4 billion in the first six months of 2011, primarily driven by a $21.2 billion increase

 

 

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in average total loans reflecting the impact of loans added from the RBC Bank (USA) acquisition and organic growth.

Average total loans increased by $21.2 billion to $171.2 billion for the first six months of 2012 compared with the first six months of 2011, primarily due to an increase in average commercial loans of $16.1 billion and an increase in average consumer loans of $4.3 billion.

Loans represented 70% of average interest-earning assets for the first six months of 2012 and 67% of average interest-earning assets for the first six months of 2011.

Average investment securities increased $1.1 billion to $61.5 billion in the first six months of 2012 compared with the first six months of 2011. Total investment securities comprised 25% of average interest-earning assets for the first six months of 2012 and 27% for the first six months of 2011.

Average noninterest-earning assets totaled $44.9 billion in the first six months of 2012 compared with $39.4 billion in the first six months of 2011. The increase primarily related to the impact of the RBC Bank (USA) acquisition, including goodwill recorded from the acquisition, as well as the impact of increases in valuations on securities and increases in equity investments.

Average total deposits were $197.4 billion for the first six months of 2012 compared with $180.8 billion for the first six months of 2011. The increase of $16.6 billion resulted from an increase in average noninterest-bearing deposits of $10.4 billion, an increase in average interest-bearing demand deposits of $6.4 billion and an increase in average money market deposits of $5.5 billion, partially offset by a decrease in retail certificates of deposit of $7.6 billion. The growth also reflects customer preferences for liquidity in this prolonged period of low interest rates, in addition to the impact of deposits added in the RBC Bank (USA) acquisition. The decline in retail certificates of deposit included the impact of higher rate acquired accounts that matured in the past 12 months. Total deposits at June 30, 2012 were $206.9 billion compared with $188.0 billion at December 31, 2011 and are further discussed within the Consolidated Balance Sheet Review section of this Report.

Average total deposits represented 68% of average total assets for the first six months of 2012 and 69% for the first six months of 2011.

Average transaction deposits were $156.2 billion for the first six months of 2012 compared with $133.9 billion for the first six months of 2011. Organic deposit growth along with the continued corporate and personal customer preference for liquidity, as well as the impact from the RBC Bank (USA) acquisition, contributed to the year-over-year increase in average balances.

Average borrowed funds increased to $41.7 billion for the first six months of 2012 compared with $36.7 billion for the first six months of 2011 primarily to fund loan growth. Net issuances of Federal Home Loan Bank (FHLB) borrowings during the first six months of 2012 and an increase in commercial paper issued drove the increase compared with the first six months of 2011. Total borrowed funds at June 30, 2012 were $43.7 billion compared with $36.7 billion at December 31, 2011 and are further discussed within the Consolidated Balance Sheet Review section of this Financial Review. The Liquidity Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding our sources and uses of borrowed funds.

Business Segment Highlights

Total business segment earnings were $1.6 billion for the first six months of 2012 and the first six months of 2011. Highlights of results for the first six months and the second quarters of 2012 and 2011 are included below. Enhancements were made to the internal funds transfer pricing methodology during the second quarter of 2012. Prior period amounts have been reclassified to conform with the current period presentation, which we believe is more meaningful to readers of our financial statements. The Business Segments Review section of this Financial Review includes a Results of Businesses-Summary table and further analysis of our business segment results over the first six months of 2012 and 2011 including presentation differences from Note 19 Segment Reporting in our Notes To Consolidated Financial Statements of this Report.

We provide a reconciliation of total business segment earnings to PNC total consolidated net income as reported on a GAAP basis in Note 19 Segment Reporting in our Notes To Consolidated Financial Statements of this Report.

Retail Banking

Retail Banking earned $283 million in the first six months of 2012 compared with $188 million for the same period a year ago. Earnings increased from the prior year as a result of improved net interest income and a lower provision for credit losses partially offset by higher noninterest expense and a decline in noninterest income. Retail Banking continued to maintain its focus on growing core customers, selectively investing in the business for future growth, and disciplined expense management.

In the second quarter of 2012, Retail Banking earned $136 million compared with earnings of $129 million for the second quarter 2011. The increase was primarily due to an increase in net interest income and a lower provision for credit losses partially offset by higher noninterest expense and a decline in noninterest income. The increase in net interest income was attributable to higher deposit balances and improvements in spread as the business continued to execute on customer

 

 

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growth initiatives. The increase in noninterest expense was due to a full quarter of operating expense for the RBC Bank (USA) acquisition and higher additions to legal reserves.

Corporate & Institutional Banking

Corporate & Institutional Banking earned $1.1 billion in the first six months of 2012 as compared with $.9 billion in the first six months of 2011. The increase in earnings was primarily due to higher net interest income resulting from higher average loans and deposits. We continued to focus on adding new clients, increasing cross sales and remaining committed to strong expense discipline.

In the second quarter of 2012, Corporate & Institutional Banking earned $577 million compared with earnings of $462 million in the second quarter of 2011. The increase reflected higher net interest income primarily due to the full quarter benefit of the RBC Bank (USA) acquisition and higher loan balances.

Asset Management Group

Asset Management Group earned $74 million in the first six months of 2012 compared with $103 million in the first six months of 2011. Assets under administration were $214 billion at June 30, 2012 and $219 billion at June 30, 2011. Earnings for the first six months of 2012 reflected an increase in the provision for credit losses and an increase in noninterest expense partially offset by growth in net interest income and noninterest income. Noninterest expense increased due to continued investments in the business including additional headcount. The core growth strategies for the business continue to include: investing in higher growth geographies, increasing internal referral sales and adding new front line sales staff.

In the second quarter of 2012, Asset Management Group earned $38 million compared with $54 million in the second quarter of 2011. The decrease is primarily due to a lower benefit from provision for credit losses and higher noninterest expense from strategic business investments.

Residential Mortgage Banking

Residential Mortgage Banking reported a loss of $152 million in the first six months of 2012 compared with earnings of $127 million in the first six months of 2011. Earnings declined from the prior year period primarily as a result of lower noninterest income reflecting the impact of higher provision for residential mortgage repurchase obligations and higher noninterest expense, partially offset by increased loan sales revenue driven by higher loan origination volume.

In the second quarter of 2012, Residential Mortgage Banking reported a loss of $213 million compared with earnings of $55 million in the second quarter of 2011 driven by the provision for residential mortgage repurchase obligations, partially offset by increased loan sales revenue driven by higher loan origination volume.

BlackRock

Our BlackRock business segment earned $178 million in the first six months of 2012 and $179 million in the first six months of 2011. Second quarter 2012 business segment earnings from BlackRock were $88 million compared with $93 million in the second quarter of 2011. The lower business segment earnings from BlackRock for the second quarter of 2012 compared to the second quarter of 2011 was primarily due to PNC’s lower earnings from BlackRock.

Non-Strategic Assets Portfolio

This business segment consists primarily of acquired non-strategic assets. Non-Strategic Assets Portfolio had earnings of $138 million for the first six months of 2012 compared with $109 million in the first six months of 2011. The increase was driven primarily by a lower provision for credit losses partially offset by a decline in revenue.

In the second quarter of 2012, Non-Strategic Assets Portfolio had earnings of $67 million compared with $84 million for the second quarter of 2011. The decrease was due to a decline in net interest income from lower loan yields and loan balances partially offset by a decrease in the provision for credit losses reflecting overall improvement in credit quality. Our intent is to wind-down this portfolio.

Other

“Other” reported a loss of $236 million for the six months of 2012 compared with earnings of $132 million for the first six months of 2011. In the second quarter of 2012, “Other” reported a loss of $147 million compared with earnings of $35 million in the second quarter of 2011. The decreases in both 2012 periods were primarily due to higher integration costs and noncash charges related to redemption of trust preferred securities.

CONSOLIDATED INCOME STATEMENT REVIEW

Our Consolidated Income Statement is presented in Part I, Item 1 of this Report.

Net income for the first six months of 2012 was $1.4 billion, a decrease of 22 percent compared with $1.7 billion for the first six months of 2011. Net income for the second quarter of 2012 was $546 million, a decrease of 40 percent, compared with $912 million for the second quarter of 2011. Net income for both periods in 2012 was reduced by higher provision for residential mortgage repurchase obligations, noncash charges related to redemption of trust preferred securities, and higher integration costs.

Table 2: Net Interest Income and Net Interest Margin

 

     Three months ended
June 30
    Six months ended
June 30
 
Dollars in millions    2012     2011     2012     2011  

Net interest income

   $ 2,526     $ 2,150     $ 4,817     $ 4,326  

Net interest margin

     4.08     3.93     3.99     3.93
 

 

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

The increases in net interest income compared with both the second quarter of 2011 and the first six months of 2011 were primarily due to the full quarter benefit of the RBC Bank (USA) acquisition, organic loan growth, and lower funding costs.

The net interest margin was 3.99% for the first six months of 2012 and 3.93% for the first six months of 2011. The following factors impacted the comparison:

   

A weighted-average 32 basis point decrease in the rate accrued on interest-bearing liabilities. The rate accrued on interest-bearing deposits, the largest component, decreased 28 basis points, and the rate on total borrowed funds decreased by 54 basis points. The rate on interest-bearing deposits declined primarily due to higher rate retail certificates of deposit that matured in the last 12 months. The decline in the rate on total borrowed funds is primarily attributable to the redemption of trust preferred securities in the second quarter of 2012.

   

These factors were partially offset by a 20 basis point decrease in the yield on interest-earning assets. The yield on loans, the largest portion of our earning assets, decreased 26 basis points primarily due to lower rates on new loan volume in the current low rate environment.

The net interest margin was 4.08% for the second quarter of 2012 and 3.93% for the second quarter of 2011. The following factors impacted the comparison:

   

A weighted-average 37 basis decrease in the rate accrued on interest-bearing liabilities. The rate accrued on interest-bearing deposits, the largest component, decreased 31 basis points, and the rate on total borrowed funds decreased by 74 basis points. Similar to the six months comparison, the decreases were primarily due to higher rate retail certificates of deposit that matured in the last 12 months as well as the redemption of trust preferred securities during the second quarter.

   

These factors were partially offset by a 13 basis point decrease in the yield on interest-earning assets. The yield on loans, the largest portion of our earning assets, decreased 21 basis points, due to lower rates on new loan volume in the current low rate environment.

 

We believe our net interest margin will come under pressure in future quarters, assuming the current low rate environment continues.

Based on commercial loan growth, reduced deposit and funding costs and the impact of acquisitions, we expect our net interest income for full year 2012 versus 2011 to increase in percentage terms by 10 to 12 percent, assuming the economic outlook for the remainder of 2012 will be a continuation of the recent trends. We expect future benefits to our funding costs related to calling certain trust preferred securities. In addition to the $806 million of trust preferred securities redeemed in the second quarter with an average rate of almost 6.5 percent, we redeemed $968 million of trust preferred securities in July of 2012 with an average rate of almost 8 percent. By utilizing the regulatory call feature of these securities as discussed in our Form 8-K filed on June 28, 2012, we will save an additional $25 million between the redemption date of July 30, 2012 and what would otherwise have been their first available par redemption dates. Our Tier 1 risk-based capital ratio at June 30, 2012 reflected both the second quarter and the announced July redemptions of $1.8 billion of trust preferred securities.

As we look beyond 2012 and given our anticipation of the continuing low rate environment, our ability to sustain or grow our net interest income will be dependent primarily on our ability to grow loans and lower-cost deposits.

Noninterest Income

Noninterest income totaled $2.5 billion for the first six months of 2012 and $2.9 billion for the first six months of 2011. Noninterest income was $1.1 billion for the second quarter of 2012 and $1.5 billion for the second quarter of 2011. The decreases were primarily due to the higher provision for residential mortgage repurchase obligations and lower consumer service fees from the regulatory impact of lower interchange fees on debit card transactions. These declines were partially offset by an increase in residential mortgage loan sales revenue related to an increase in loan origination volume as well as higher commercial mortgage banking revenue and higher merger and acquisition advisory fees.

Asset management revenue, including BlackRock, increased $11 million to $562 million in the first six months of 2012 compared with the first six months of 2011, primarily due to higher earnings from our BlackRock investment. Asset management revenue was $278 million in the second quarter of 2012 compared with $288 million in the second quarter of 2011 due to lower earnings during the second quarter 2012 from our BlackRock investment. Discretionary assets under management totaled $109 billion at both June 30, 2012 and June 30, 2011.

 

 

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For the first six months of 2012, consumer services fees totaled $554 million compared with $644 million in the first six months of 2011. Consumer services fees were $290 million in the second quarter of 2012 compared with $333 million in the second quarter of 2011. Lower consumer services fees for both periods reflected the regulatory impact of lower interchange fees on debit card transactions partially offset by higher volumes of customer-initiated transactions. As further discussed in the Retail Banking section of the Business Segments Review portion of this Financial Review, the Dodd-Frank limits on interchange rates were effective October 1, 2011 and had a negative impact on revenues of approximately $150 million in the first six months of 2012, including $80 million in the second quarter of 2012.

Corporate services revenue totaled $522 million in the first six months of 2012 and $445 million in the first six months of 2011. Corporate services revenue was $290 million in the second quarter of 2012 compared with $228 million in the second quarter of 2011. Higher commercial mortgage banking revenue and merger and acquisition advisory fees led to the increase in corporate services revenue for both periods.

Residential mortgage revenue totaled $57 million in the first six months of 2012 and $358 million in the first six months of 2011. The second quarter comparables were a loss of $173 million for the second quarter of 2012 and revenue of $163 million in the second quarter of 2011. Residential mortgage revenue for the first six months of 2012 included provision for residential mortgage repurchase obligations of $470 million compared to $35 million for the first six months of 2011. The comparable amounts for the second quarters of 2012 and 2011 were $438 million and $21 million, respectively. These decreases in residential mortgage revenue for both periods were partially offset by an increase in loan sales revenue driven by higher loan origination volume.

We have recently and expect to continue to experience elevated levels of residential mortgage repurchase demands, primarily related to the 2006 to 2008 vintages of loans, particularly those that defaulted more than two years ago. As a result, we have increased our residential mortgage repurchase reserve to $462 million at June 30, 2012, resulting in the provision of $438 million for the second quarter of 2012. Management believes our indemnification and repurchase liability appropriately reflects the estimated probable losses on indemnification and repurchase claims for all loans sold and outstanding as of June 30, 2012 and 2011. In making these estimates, we consider the losses that we expect to incur over the life of the sold loans. Our expected lifetime losses on our total portfolio are $1.7 billion, which includes $1.2 billion of losses incurred to date. Barring a significant change in the expected future behaviors and demand patterns of our investors or other unforeseen circumstances, we believe we are appropriately reserved.

Service charges on deposits totaled $271 million for the first six months of 2012 and $254 million for the first six months of 2011. Service charges on deposits totaled $144 million for the second quarter of 2012 and $131 million for the second quarter of 2011. The increases in both periods reflected success in growing customers, as well as the impact of the RBC Bank (USA) acquisition.

Net gains on sales of securities totaled $119 million for both the first six months of 2012 and 2011. Net gains on sales of securities were $62 million for the second quarter of 2012 and $82 million for the second quarter of 2011.

The net credit component of OTTI of securities recognized in earnings was a loss of $72 million in the first six months of 2012, including a loss of $34 million in the second quarter, compared with losses of $73 million and $39 million for the same periods in 2011, respectively.

Other noninterest income totaled $525 million for the first six months of 2012 compared with $609 million for the first six months of 2011. Other noninterest income totaled $240 million for the second quarter of 2012 and $266 million for the second quarter of 2011. The decreases over the comparable periods were driven by several individually insignificant items.

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

Looking to full year 2012, we expect noninterest income to be essentially flat and continue to see total revenue increasing in the high single digits in percentage terms, excluding any future significant provisions for residential mortgage repurchase obligations and assuming the economic outlook for 2012 will be a continuation of the current environment.

Product Revenue

In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management, capital markets-related products and services, and commercial mortgage banking activities for customers in all business segments. A portion of the revenue and expense related to these products is reflected in the Corporate & Institutional Banking segment results and the remainder is reflected in the results of other businesses. The Other Information section in the Corporate &

 

 

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Institutional Banking table in the Business Segments Review section of this Financial Review includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.

Treasury management revenue, which includes fees as well as net interest income from customer deposit balances, totaled $697 million for the first six months of 2012 and $624 million for the first six months of 2011. For the second quarter of 2012, treasury management revenue was $354 million compared with $309 million for the second quarter of 2011. Higher deposit balances along with strong growth in commercial card and lockbox products led to the favorable results.

Revenue from capital markets-related products and services totaled $307 million in the first six months of 2012 compared with $304 million in the first six months of 2011. The year-to-date comparison reflects higher mergers and acquisition advisory fees and strong customer driven capital markets activity, offset by lower loan sale activity and the increased impact of counterparty credit risk on the valuations of customer derivatives positions. For the second quarter of 2012, capital markets-related revenue was $151 million compared with $165 million for the second quarter of 2011. This comparison reflects the increased impact of counterparty credit risk on the valuations of customer derivatives positions and lower loan syndications and underwriting fees, partially offset by higher mergers and acquisition advisory fees and higher client sales revenues.

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

Commercial mortgage banking activities resulted in revenue of $129 million in the first six months of 2012 compared with $64 million in the first six months of 2011. For the second quarter of 2012, revenue from commercial mortgage banking activities was $81 million compared to $18 million for the second quarter of 2011. Both comparisons benefited from higher revenue from commercial mortgage servicing, and in the second quarter comparison, higher revenue from loan originations.

Provision For Credit Losses

The provision for credit losses totaled $441 million for the first six months of 2012 compared with $701 million for the first six months of 2011. The provision for credit losses totaled $256 million for the second quarter of 2012 compared

with $280 million for the second quarter of 2011. The decline in the comparison was driven by overall credit quality improvement and continuation of actions to reduce exposure levels, partially offset by credit provisions related to the RBC Bank (USA) acquisition.

We expect our provision for credit losses for full year 2012 to improve relative to full year 2011 assuming the economic outlook for the full year 2012 will be a continuation of the current environment and excluding unexpected legal and regulatory-related contingencies to the extent that the nature of the resolution of such contingencies causes us to recognize additional provision.

The Credit Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding factors impacting the provision for credit losses.

Noninterest Expense

Noninterest expense was $5.1 billion for the first six months of 2012 and $4.2 billion for the first six months of 2011. Noninterest expense for the first six months of 2012 included integration costs of $197 million, operating expenses of $189 million for the RBC Bank (USA) acquisition and noncash charges of $130 million related to redemption of trust preferred securities. The impacts of these items were not significant to noninterest expense for the first six months of 2011. In addition to the above items, additions to legal reserves, increased expenses for other real estate owned and higher pension costs contributed to the increase in noninterest expense in the first six months of 2012.

Noninterest expense totaled $2.6 billion for the second quarter of 2012 compared with noninterest expense of $2.2 billion for the second quarter of 2011. Second quarter 2012 expense included a full quarter of operating expenses for the RBC Bank (USA) acquisition of $149 million, noncash charges of $130 million related to redemption of trust preferred securities and integration costs of $52 million. The impacts of these items were not significant to noninterest expense for the second quarter of 2011. Similar to the six month comparison, additions to legal reserves, increased expenses for other real estate owned and higher pension costs also contributed to the increase in noninterest expense compared to the prior year quarter.

Excluding noncash charges for trust preferred securities redemptions and integration expenses for both years, we expect that total noninterest expense for full year 2012 will increase in percentage terms by high single-digits compared to full year 2011. This expectation is primarily due to the inclusion of RBC Bank (USA) related expenses. This guidance excludes future significant legal and regulatory-related costs.

 

 

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We expect integration costs of $68 million and $28 million in the third and fourth quarters of 2012, respectively, and we are looking to achieve a total of $550 million in annualized cost savings at PNC and in integration savings at RBC Bank (USA). Noninterest expense for the third quarter of 2012 will include $95 million in non-cash charges for trust preferred securities redemptions and we expect potentially an additional $67 million in the fourth quarter assuming another redemption of approximately $500 million.

Effective Income Tax Rate

The effective income tax rate was 25.1% in the first six months of 2012 compared with 23.7% in the first six months of 2011. For the second quarter of 2012, our effective income tax rate was 24.1% compared with 20.4% for the second quarter of 2011. The increase in the effective tax rate in both comparisons was primarily attributable to a $54 million benefit in the second quarter of 2011 related to the reversal of deferred tax liabilities.

CONSOLIDATED BALANCE SHEET REVIEW

Table 3: Summarized Balance Sheet Data

 

In millions    June 30
2012
     Dec. 31
2011
 

Assets

       

Loans

   $ 180,425      $ 159,014  

Investment securities

     61,937        60,634  

Cash and short-term investments

     11,898        9,992  

Loans held for sale

     3,333        2,936  

Goodwill and other intangible assets

     10,962        10,144  

Equity investments

     10,617        10,134  

Other, net

     20,403        18,351  

Total assets

   $ 299,575      $ 271,205  

Liabilities

       

Deposits

   $ 206,923      $ 187,966  

Borrowed funds

     43,689        36,704  

Other

     8,749        9,289  

Total liabilities

     259,361        233,959  

Total shareholders’ equity

     37,005        34,053  

Noncontrolling interests

     3,209        3,193  

Total equity

     40,214        37,246  

Total liabilities and equity

   $ 299,575      $ 271,205  

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

The increase in total assets of $28.4 billion at June 30, 2012 compared with December 31, 2011 was primarily due to the addition of assets from the RBC Bank (USA) acquisition and organic loan growth. Total liabilities increased $25.4 billion from June 30, 2012 compared with December 31, 2011 primarily due to the addition of deposits from the RBC Bank (USA) acquisition and an increase in borrowed funds activity.

An analysis of changes in selected balance sheet categories follows.

LOANS

A summary of the major categories of loans outstanding follows. Outstanding loan balances of $180.4 billion at June 30, 2012 and $159.0 billion at December 31, 2011 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums of $3.1 billion at June 30, 2012 and $2.3 billion at December 31, 2011, respectively. The balances do not include future accretable net interest (i.e., the difference between the undiscounted expected cash flows and the carrying value of the loan) on the purchased impaired loans.

Loans increased $21.4 billion as of June 30, 2012 compared with December 31, 2011. On March 2, 2012, our RBC Bank (USA) acquisition added $14.5 billion of loans, which included $6.4 billion of commercial, $2.5 billion of commercial real estate, $3.4 billion of consumer (including $3.0 billion of home equity loans and $.3 billion of credit card loans), $2.1 billion of residential real estate, and $.1 billion of equipment lease financing loans. Excluding acquisition activity, the growth in commercial loans was due to organic growth in the portfolio while the growth in consumer loans was primarily driven by automobile loans due to automobile paper securitizations and indirect automobile lending. In addition, excluding acquisition activity, the decline in residential real estate loans was due to loan demand being outpaced by paydowns, refinancing, and charge-offs.

Loans represented 60% of total assets at June 30, 2012 and 59% of total assets at December 31, 2011. Commercial lending represented 58% of the loan portfolio at June 30, 2012 and 56% at December 31, 2011. Consumer lending represented 42% at June 30, 2012 and 44% at December 31, 2011.

Commercial real estate loans represented 10% of total loans and 6% of total assets at both June 30, 2012 and December 31, 2011. See the Credit Risk Management portion of the Risk Management section of this Financial Review for additional details of loans.

 

 

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Table 4: Details Of Loans

 

In millions    June 30
2012
     Dec. 31
2011
 

Commercial Lending

       

Commercial

       

Retail/wholesale trade

   $ 13,434      $ 11,539  

Manufacturing

     13,442        11,453  

Service providers

     11,875        9,717  

Real estate related (a)

     10,051        8,488  

Financial services

     9,397        6,646  

Health care

     6,240        5,068  

Other industries

     14,462        12,783  

Total commercial

     78,901        65,694  

Commercial real estate

       

Real estate projects

     12,837        10,640  

Commercial mortgage

     5,643        5,564  

Total commercial real estate

     18,480        16,204  

Equipment lease financing

     6,764        6,416  

Total Commercial Lending

     104,145        88,314  

Consumer Lending

       

Home equity

       

Lines of credit

     24,360        22,491  

Installment

     11,478        10,598  

Total home equity

     35,838        33,089  

Residential real estate

       

Residential mortgage

     14,927        13,885  

Residential construction

     896        584  

Total residential real estate

     15,823        14,469  

Credit card

     4,123        3,976  

Other consumer

       

Education

     8,807        9,582  

Automobile

     7,166        5,181  

Other

     4,523        4,403  

Total other consumer

     20,496        19,166  

Total Consumer Lending

     76,280        70,700  

Total loans (b)

   $ 180,425      $ 159,014  
(a) Includes loans to customers in the real estate and construction industries.
(b) Construction loans with interest reserves, and A/B Note restructurings are not significant to PNC.

Total loans above include purchased impaired loans of $8.1 billion, or 4% of total loans, at June 30, 2012, and $6.7 billion, or 4% of total loans, at December 31, 2011. The increase is related to the addition of purchased impaired loans from the RBC Bank (USA) acquisition.

We are committed to providing credit and liquidity to qualified borrowers. Total loan originations and new commitments and renewals totaled $76 billion for the first six months of 2012, including $41 billion in the second quarter.

Our loan portfolio continued to be diversified among numerous industries and types of businesses in our principal geographic markets.

Commercial lending is the largest category and is the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan and lease losses (ALLL). This estimate considers factors such as:

   

Industry concentrations and conditions,

   

Recent credit quality trends,

   

Recent loss experience in particular portfolios,

   

Recent macro economic factors,

   

Changes in risk selection and underwriting standards, and

   

Timing of available information.

 

Higher Risk Loans

Our total ALLL of $4.2 billion at June 30, 2012 consisted of $1.9 billion and $2.3 billion established for the commercial lending and consumer lending categories, respectively. The ALLL included what we believe to be appropriate loss coverage on higher risk loans in the commercial and consumer portfolios. We do not consider government insured or guaranteed loans to be higher risk as defaults are materially mitigated by payments of insurance or guarantee amounts for approved claims. Additional information regarding our higher risk loans and ALLL is included in Note 5 Asset Quality and Note 7 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in our Notes To Consolidated Financial Statements included in this Report.

Purchase Accounting Accretion and Valuation of Purchased Impaired Loans

Information related to purchase accounting accretion and valuation for purchased impaired loans for the second quarter and first six months of 2012 and 2011 follows.

 

 

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Table 5: Accretion – Purchased Impaired Loans

 

     Three months ended
June 30
     Six months ended
June 30
 
In millions    2012 (a)     2011 (b)      2012 (a)      2011 (b)  

Impaired loans

            

Scheduled accretion

   $ 178     $ 186      $ 336      $ 346  

Reversal of contractual interest on impaired loans

     (111     (88      (208      (194

Scheduled accretion net of contractual interest

     67       98        128        152  

Excess cash recoveries

     51       40        91        121  

Total impaired loans

   $ 118     $ 138      $ 219      $ 273  
(a) Represents National City and RBC Bank (USA) acquisitions.
(b) Represents National City acquisition.

Table 6: Accretable Net Interest – Purchased Impaired Loans

 

In billions    2012     2011  

January 1

   $ 2.1     $ 2.2  

Addition of accretable yield due to RBC Bank (USA) acquisition on March 2, 2012

     .6      

Accretion

     (.3     (.4

Excess cash recoveries

     (.1     (.1

Net reclassifications to accretable from non-accretable and other activity

     .1       .6  

June 30 (a)

   $ 2.4     $ 2.3  
(a) As of June 30, 2012, we estimate that the reversal of contractual interest on purchased impaired loans will total approximately $1.5 billion in future periods. This will offset the total net accretable interest in future interest income of $2.4 billion on purchased impaired loans.

Table 7: Valuation of Purchased Impaired Loans

 

     June 30, 2012 (a)     December 31, 2011 (b)  
Dollars in billions    Balance      Net Investment     Balance      Net Investment  

Commercial and commercial real estate loans:

            

Unpaid principal balance

   $ 2.2        $ 1.0       

Purchased impaired mark

     (.7        (.1     

Recorded investment

     1.5          .9       

Allowance for loan losses

     (.2        (.2     

Net investment

     1.3        59     .7        70

Consumer and residential mortgage loans:

            
            

Unpaid principal balance

     7.3          6.5       

Purchased impaired mark

     (.7        (.7     

Recorded investment

     6.6          5.8       

Allowance for loan losses

     (.8        (.8     

Net investment

     5.8        79     5.0        77

Total purchased impaired loans:

            
            

Unpaid principal balance

     9.5          7.5       

Purchased impaired mark

     (1.4        (.8     

Recorded investment

     8.1          6.7       

Allowance for loan losses

     (1.0        (1.0     

Net investment

   $ 7.1        75   $ 5.7        76
(a) Represents National City and RBC Bank (USA) acquisitions.
(b) Represents National City acquisition.

 

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The unpaid principal balance of purchased impaired loans increased from $7.5 billion at December 31, 2011 to $9.5 billion at June 30, 2012 due to the acquisition of RBC Bank (USA), partially offset by payments, disposals, and charge-offs of amounts determined to be uncollectible. The remaining purchased impaired mark at June 30, 2012 was $1.4 billion, which was an increase from $0.8 billion at December 31, 2011. The associated allowance for loan losses remained flat at June 30, 2012 compared to December 31, 2011. The net investment of $5.7 billion at December 31, 2011 also increased 25% to $7.1 billion at June 30, 2012. At June 30, 2012, our largest individual purchased impaired loan had a recorded investment of $17.5 million.

We currently expect to collect total cash flows of $9.5 billion on purchased impaired loans, representing the $7.1 billion net investment (carrying value) at June 30, 2012 and the accretable net interest of $2.4 billion shown in the Accretable Net Interest-Purchased Impaired Loans table. These represent the net future expected cash flows on purchased impaired loans, as contractual interest will be reversed.

Weighted Average Life of the Purchased Impaired Portfolios

The table below provides the weighted average life (WAL) for each of the purchased impaired portfolios as of the second quarter of 2012.

Table 8: Weighted Average Life of the Purchased Impaired Portfolios

 

in millions    Recorded
Investment
     WAL (a)  

Commercial

   $ 405        2.6 years   

Commercial real estate

     1,127        2.2 years   

Consumer (b)

     2,774        4.5 years   

Residential real estate

     3,777        4.7 years   

Total

   $ 8,083        4.2 years   
(a) Weighted average life represents the average number of years for which each dollar of unpaid principal remains outstanding.
(b) Portfolio primarily consists of nonrevolving home equity products.

Purchased Impaired Loans – Accretable Difference Sensitivity Analysis

The following table provides a sensitivity analysis on the Purchased Impaired Loan portfolio. The analysis reflects hypothetical changes in key drivers for expected cash flows under declining and improving conditions. Any unusual significant economic events or changes, as well as other variables not considered below (e.g., natural disasters), could result in impacts outside of the ranges represented below. Additionally, commercial and commercial real estate loan settlements or sales proceeds can vary widely from appraised values due to a number of factors including, but not limited to special use considerations, liquidity premiums, and improvements / deterioration in other income sources.

Table 9: Accretable Difference Sensitivity – Total Purchased Impaired Loans

 

In billions    For quarter ended
June 30, 2012
   

Declining

Scenario (a)

   

Improving

Scenario (b)

 

Expected Cash Flows

   $ 9.5     $ (0.5   $ 0.8  

Accretable Difference

     2.4       (0.1     0.5  

Allowance for Loan and Lease Losses

     (1.0     (0.4     0.3  
(a) Declining Scenario – Reflects hypothetical changes that would decrease future cash flow expectations. For consumer loans we assume home price forecast decreases by 10% and unemployment rate forecast increases by 2 percentage points; for commercial loans we assume that collateral values decrease by 10%.
(b) Improving Scenario – Reflects hypothetical changes that would increase future cash flow expectations. For consumer loans we assume home price forecast increases by 10%, unemployment rate forecast decreases by 2 percentage points and interest rate forecast increases by 2 percentage points; for commercial loans we assume that collateral values increase by 10%.

The impact of declining cash flows is primarily reflected as immediate impairment (allowance for loan losses). The impact of increased cash flows is first recognized as a reversal of the allowance with any additional cash flow increases reflected as an increase in accretable yield over the life of the loan.

Net Unfunded Credit Commitments

Net unfunded credit commitments are comprised of the following:

Table 10: Net Unfunded Credit Commitments

 

In millions    June 30
2012
     December 31
2011
 

Commercial / commercial real estate (a)

   $ 70,808      $ 64,955  

Home equity lines of credit

     20,486        18,317  

Credit card

     17,896        16,216  

Other

     4,446        3,783  

Total

   $ 113,636      $ 103,271  
(a) Less than 5% of these amounts at each date relate to commercial real estate.

Commitments to extend credit represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. Commercial commitments reported above exclude syndications, assignments and participations, primarily to financial institutions, totaling $20.7 billion at June 30, 2012 and $20.2 billion at December 31, 2011.

Unfunded liquidity facility commitments and standby bond purchase agreements totaled $780 million at June 30, 2012 and $742 million at December 31, 2011 and are included in the preceding table primarily within the Commercial / commercial real estate category.

In addition to the credit commitments set forth in the table above, our net outstanding standby letters of credit totaled $11.3 billion at June 30, 2012 and $10.8 billion at December 31, 2011. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

 

 

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Information regarding our allowance for unfunded loan commitments and letters of credit is included in Note 7 Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in our Notes To Consolidated Financial Statements of this Report.

INVESTMENT SECURITIES

Table 11: Details of Investment Securities

 

     June 30, 2012      December 31, 2011  
In millions    Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Securities available for sale (a)

   $ 50,585      $ 51,251      $ 48,609      $ 48,568  

Securities held to maturity

     10,686        11,146        12,066        12,450  

Total securities

   $ 61,271      $ 62,397      $ 60,675      $ 61,018  
(a) Includes $355 million of both amortized cost and fair value of securities classified as corporate stocks and other at June 30, 2012. Comparably, at December 31, 2011, amortized cost and fair value of these corporate stocks and other was $368 million.

The carrying amount of investment securities totaled $61.9 billion at June 30, 2012, an increase of $1.3 billion, or 2%, from $60.6 billion at December 31, 2011. The increase primarily reflected an increase of $1.8 billion in available for sale asset-backed securities which is primarily due to securities added in the RBC Bank (USA) acquisition and an increase of $1.0 billion in available for sale agency residential mortgage-backed securities due to net purchase activity. These increases were partially offset by a $1.4 billion decrease in held to maturity debt securities due to principal payments of the held to maturity securities. Investment securities represented 21% of total assets at June 30, 2012 and 22% at December 31, 2011.

We evaluate our portfolio of investment securities in light of changing market conditions and other factors and, where appropriate, take steps intended to improve our overall positioning. We consider the portfolio to be well-diversified and of high quality. US Treasury and government agencies, agency residential mortgage-backed and agency commercial mortgage-backed securities collectively represented 60% of the investment securities portfolio at June 30, 2012.

At June 30, 2012, the securities available for sale portfolio included a net unrealized gain of $666 million, which represented the difference between fair value and amortized

cost. The comparable amount at December 31, 2011 was a net unrealized loss of $41 million. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally decreases when credit spreads widen and vice versa.

The improvement in the net unrealized gain as compared with a loss at December 31, 2011 was primarily due to the effect of higher valuations of non-agency residential mortgage-backed securities which had a decrease in net unrealized losses of $430 million. Net unrealized gains and losses in the securities available for sale portfolio are included in Shareholders’ equity as Accumulated other comprehensive income or loss from continuing operations, net of tax on our Consolidated Balance Sheet.

Additional information regarding our investment securities is included in Note 8 Investment Securities and Note 9 Fair Value in our Notes to Consolidated Financial Statements included in this Report.

Unrealized gains and losses on available for sale securities do not impact liquidity or risk-based capital under currently effective capital rules. However, reductions in the credit ratings of these securities could have an impact on the liquidity of the securities or the determination of risk-weighted assets which could reduce our regulatory capital ratios under currently effective capital rules. In addition, the amount representing the credit-related portion of OTTI on available for sale securities would reduce our earnings and regulatory capital ratios. Reductions in credit ratings of these securities would not have a direct impact on the risk-weightings of these securities under the proposed capital rules issued by the US banking regulators in June 2012.

The expected weighted-average life of investment securities (excluding corporate stocks and other) was 3.9 years at June 30, 2012 and 3.7 years at December 31, 2011.

We estimate that, at June 30, 2012, the effective duration of investment securities was 2.4 years for an immediate 50 basis points parallel increase in interest rates and 2.3 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2011 were 2.6 years and 2.4 years, respectively.

 

 

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

Table 12: Vintage, Current Credit Rating, and FICO Score for Asset-Backed Securities

 

     June 30, 2012  
     Agency      Non-agency          
Dollars in millions    Residential
Mortgage-
Backed
Securities
    Commercial
Mortgage-
Backed
Securities
     Residential
Mortgage-
Backed
Securities
    Commercial
Mortgage-
Backed
Securities
     Asset-
Backed
Securities
 

Fair Value – Available for Sale

   $ 27,814      $ 876       $ 5,887      $ 2,802       $ 5,423   

Fair Value – Held to Maturity

     4,324        1,367                 3,102         984   

Total Fair Value

   $ 32,138      $ 2,243       $ 5,887      $ 5,904       $ 6,407   

% of Fair Value:

                  

By Vintage

                  

2012

     10     1        4     

2011

     29     43        5     

2010

     28     17        4      4

2009

     11     20        3      3

2008

     3     2             3

2007

     3     2      24     8      4

2006

     1     4      22     22      6

2005 and earlier

     7     11      53     52      6

Not Available

     8              1     2      74

Total

     100     100      100     100      100

By Credit Rating (at June 30, 2012)

                  

Agency

     100     100            

AAA

            1     77      60

AA

            1     7      28

A

            2     10      1

BBB

            5     2     

BB

            12     2     

B

            7          1

Lower than B

            71          8

No rating

                      1     2      2

Total

     100     100      100     100      100

By FICO Score (at origination)

                  

>720

            56          2

<720 and >660

            30          6

<660

                   3

No FICO score

                      14              89

Total

                      100              100

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

We also consider the severity of the impairment and the length of time that the security has been impaired in our assessment. Results of the periodic assessment are reviewed by a cross-functional senior management team representing Asset & Liability Management, Finance, and Market Risk Management. The senior management team considers the results of the assessments, as well as other factors, in determining whether the impairment is other-than-temporary.

 

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We recognize the credit portion of OTTI charges in current earnings for those debt securities where we do not intend to sell and believe we will not be required to sell the securities prior to expected recovery. The noncredit portion of OTTI is included in Accumulated other comprehensive income (loss). Also see our Consolidated Statement of Comprehensive Income.

We recognized OTTI for the second quarter and first six months of 2012 and 2011 as follows:

Table 13: Other-Than-Temporary Impairments

 

     Three months ended
June 30
     Six months ended
June 30
 
In millions    2012     2011      2012     2011  

Credit portion of OTTI losses (a)

           

Non-agency residential mortgage-backed

   $ 31     $ 35      $ 63     $ 63  

Asset-backed

     3       4        8       9  

Other debt

                      1       1  

Total credit portion of OTTI losses

     34       39        72       73  

Noncredit portion of OTTI (recoveries) (b)

     (2     34        (24     30  

Total OTTI losses

   $ 32     $ 73      $ 48     $ 103  
(a) Reduction of Noninterest income on our Consolidated Income Statement.
(b) Included in Accumulated other comprehensive income (loss), net of tax, on our Consolidated Balance Sheet. Also see our Consolidated Statement of Comprehensive Income.

 

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The following table summarizes net unrealized gains and losses recorded on non-agency residential and commercial mortgage-backed securities and other asset-backed securities, which represent our most significant categories of securities not backed by the US government or its agencies. A summary of all OTTI credit losses recognized for the first six months of 2012 by investment type is included in Note 8 Investment Securities in the Notes To Consolidated Financial Statements in this Report.

Table 14: Net Unrealized Gains and Losses on Non-Agency Securities

 

     June 30, 2012  
In millions    Residential Mortgage-
Backed Securities
     Commercial Mortgage-
Backed Securities
    

Asset-Backed

Securities (a)

 

Available for Sale Securities (Non-Agency)

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

Credit Rating Analysis

                       

AAA

   $ 81            $ 1,675       $ 70       $ 3,148       $ 15   

Other Investment Grade (AA, A, BBB)

     507       $ 13         925         51         1,662         2   

Total Investment Grade

     588         13         2,600         121         4,810         17   

BB

     710         (107      94         1         4        

B

     369         (27              56         (4

Lower than B

     4,190         (565                        529         (110

Total Sub-Investment Grade

     5,269         (699      94         1         589         (114

Total No Rating

     30                  108         3         21         (19

Total

   $ 5,887       $ (686    $ 2,802       $ 125       $ 5,420       $ (116

OTTI Analysis

                       

Investment Grade:

                       

OTTI has been recognized

                       

No OTTI recognized to date

   $ 588       $ 13       $ 2,600       $ 121       $ 4,810       $ 17   

Total Investment Grade

     588         13         2,600         121         4,810         17   

Sub-Investment Grade:

                       

OTTI has been recognized

     3,393         (627              555         (110

No OTTI recognized to date

     1,876         (72      94         1         34         (4

Total Sub-Investment Grade

     5,269         (699      94         1         589         (114

No Rating:

                       

OTTI has been recognized

                     21         (19

No OTTI recognized to date

     30                  108         3                     

Total No Rating

     30                  108         3         21         (19

Total

   $ 5,887       $ (686    $ 2,802       $ 125       $ 5,420       $ (116

Securities Held to Maturity (Non-Agency)

                       

Credit Rating Analysis

                       

AAA

           $ 2,861       $ 89       $ 655       $ 4   

Other Investment Grade (AA, A, BBB)

                       241         8         220         1   

Total Investment Grade

                       3,102         97         875         5   

BB

                     4        

B

                       

Lower than B

                                                     

Total Sub-Investment Grade

                                         4            

Total No Rating

                                         99         4   

Total

                     $ 3,102       $ 97       $ 978       $ 9   
(a) Excludes $3 million and $6 million of available for sale and held to maturity agency asset-backed securities, respectively.

 

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Residential Mortgage-Backed Securities

At June 30, 2012, our residential mortgage-backed securities portfolio was comprised of $32.1 billion fair value of US government agency-backed securities and $5.9 billion fair value of non-agency (private issuer) securities. The agency securities are generally collateralized by 1-4 family, conforming, fixed-rate residential mortgages. The non-agency securities are also generally collateralized by 1-4 family residential mortgages. The mortgage loans underlying the non-agency securities are generally non-conforming (i.e., original balances in excess of the amount qualifying for agency securities) and predominately have interest rates that are fixed for a period of time, after which the rate adjusts to a floating rate based upon a contractual spread that is indexed to a market rate (i.e., a “hybrid ARM”), or interest rates that are fixed for the term of the loan.

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

During the first half of 2012, we recorded OTTI credit losses of $63 million on non-agency residential mortgage-backed securities. All of the losses were associated with securities rated below investment grade. As of June 30, 2012, the noncredit portion of OTTI losses recorded in Accumulated other comprehensive income for non-agency residential mortgage-backed securities totaled $627 million and the related securities had a fair value of $3.4 billion.

The fair value of sub-investment grade investment securities for which we have not recorded an OTTI credit loss as of June 30, 2012 totaled $1.9 billion, with unrealized net losses of $72 million. The results of our security-level assessments indicate that we will recover the entire cost basis of these securities. Note 8 Investment Securities in the Notes To Consolidated Financial Statements in this Report provides further detail regarding our process for assessing OTTI for these securities.

Commercial Mortgage-Backed Securities

The fair value of the non-agency commercial mortgage-backed securities portfolio was $5.9 billion at June 30, 2012 and consisted of fixed-rate, private-issuer securities collateralized by non-residential properties, primarily retail properties, office buildings, and multi-family housing. The agency commercial mortgage-backed securities portfolio was $2.2 billion fair value at June 30, 2012 consisting of multi-family housing. Substantially all of the securities are the most senior tranches in the subordination structure.

There were no OTTI credit losses on commercial mortgage-backed securities during the first six months of 2012.

Asset-Backed Securities

The fair value of the asset-backed securities portfolio was $6.4 billion at June 30, 2012 and consisted of fixed-rate and floating-rate, private-issuer securities collateralized primarily by various consumer credit products, including residential mortgage loans, credit cards, automobile loans, and student loans. Substantially all of the securities are senior tranches in the securitization structure and have credit protection in the form of credit enhancement, over-collateralization and/or excess spread accounts.

We recorded OTTI credit losses of $8 million on asset-backed securities during the first six months of 2012. All of the securities are collateralized by first lien and second lien residential mortgage loans and are rated below investment grade. As of June 30, 2012, the noncredit portion of OTTI losses recorded in Accumulated other comprehensive income for asset-backed securities totaled $129 million and the related securities had a fair value of $576 million.

For the sub-investment grade investment securities (available for sale and held to maturity) for which we have not recorded an OTTI loss through June 30, 2012, the remaining fair value was $38 million, with unrealized net losses of $4 million. The results of our security-level assessments indicate that we will recover the cost basis of these securities. Note 8 Investment Securities in the Notes To Consolidated Financial Statements in this Report provides further detail regarding our process for assessing OTTI for these securities.

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

Table 15: Loans Held For Sale

 

In millions    June 30
2012
     December 31
2011
 

Commercial mortgages at fair value

   $ 837      $ 843  

Commercial mortgages at lower of cost or fair value

     184        451  

Total commercial mortgages

     1,021        1,294  

Residential mortgages at fair value

     1,939        1,522  

Other

     373        120  

Total

   $ 3,333       $ 2,936  

We stopped originating certain commercial mortgage loans designated as held for sale in 2008 and continue pursuing opportunities to reduce these positions at appropriate prices. We sold $10 million in unpaid principal balance of these commercial mortgage loans held for sale carried at fair value in the first six months of 2012. We sold $25 million of these loans in the first six months of 2011.

 

 

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We recognized total net gains of $15 million in the first six months of 2012, including gains of $18 million in the second quarter, on the valuation and sale of commercial mortgage loans held for sale, net of hedges. Total net gains of $20 million on the valuation and sale of commercial mortgage loans held for sale, net of hedges, were recognized in the first six months of 2011, including gains of $7 million in the second quarter.

Residential mortgage loan origination volume was $7.0 billion in the first six months of 2012 compared to $5.8 billion for the first six months of 2011. Substantially all such loans were originated under agency or Federal Housing Administration (FHA) standards.

We sold $6.4 billion of loans and recognized related gains of $318 million during the first six months of 2012, of which $177 million occurred in the second quarter. The comparable amounts for the first six months of 2011 were $6.5 billion and $171 million, respectively, including $73 million in the second quarter.

Interest income on loans held for sale was $95 million in the first six months of 2012, including $45 million in the second quarter. Comparable amounts for 2011 were $107 million and $38 million, respectively. These amounts are included in Other interest income on our Consolidated Income Statement.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets totaled $11.0 billion at June 30, 2012 and $10.1 billion at December 31, 2011. During the first six months of 2012, PNC recorded goodwill of $944 million and other intangible assets of $180 million associated with the RBC Bank (USA) acquisition. See Note 2 Acquisition and Divestiture Activity and Note 10 Goodwill and Other Intangible Assets included in the Notes To Consolidated Financial Statements in this Report.

FUNDING AND CAPITAL SOURCES

Table 16: Details Of Funding Sources

 

In millions    June 30
2012
     December 31
2011
 

Deposits

       

Money market

   $ 99,661      $ 89,912  

Demand

     66,378        57,717  

Retail certificates of deposit

     26,274        29,518  

Savings

     10,068        8,705  

Time deposits in foreign offices and other time

     4,542        2,114  

Total deposits

     206,923        187,966  

Borrowed funds

       

Federal funds purchased and repurchase agreements

     4,166        2,984  

Federal Home Loan Bank borrowings

     10,440        6,967  

Bank notes and senior debt

     10,185        11,793  

Subordinated debt

     7,593        8,321  

Other

     11,305        6,639  

Total borrowed funds

     43,689        36,704  

Total

   $ 250,612      $ 224,670  

Total funding sources increased $25.9 billion at June 30, 2012 compared with December 31, 2011.

Total deposits increased $19.0 billion, or 10%, at June 30, 2012 compared with December 31, 2011. On March 2, 2012, our RBC Bank (USA) acquisition added $18.1 billion of deposits, including $6.9 billion of money market, $6.7 billion of demand deposit, $4.1 billion of retail certificates of deposit, and $.4 billion of savings accounts. Excluding acquisition activity, money market, demand deposits, savings and time deposits in foreign offices and other time deposit accounts increased for the six months ended June 30, 2012, partially offset by the maturity of retail certificates of deposit. Interest-bearing deposits represented 69% of total deposits at both June 30, 2012 and December 31, 2011. Total borrowed funds increased $7.0 billion since December 31, 2011. The change from December 31, 2011 was due to an increase in Federal funds purchased and repurchase agreements along with an increase in FHLB borrowings, commercial paper, and the issuance of $2.1 billion of bank notes and senior debt, partially offset by repayments, maturities and the redemption of trust preferred securities.

Capital

See 2012 Capital and Liquidity Actions in the Executive Summary section of this Financial Review for additional information regarding our June 2012 announcement of the July 2012 redemption of trust preferred securities, our June 2012 issuance of senior bank notes, our May 2012 redemption of trust preferred securities, our plans to purchase shares under PNC’s existing common stock repurchase program (described

 

 

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below) during 2012, our April 2012 increase to PNC’s quarterly common stock dividend, redemption of trust preferred securities and issuance of preferred securities, and our March 2012 issuance of senior notes.

We manage our capital position by making adjustments to our balance sheet size and composition, issuing debt, equity or hybrid instruments, executing treasury stock transactions, managing dividend policies and retaining earnings.

Total shareholders’ equity increased $3.0 billion, to $37.0 billion, at June 30, 2012 compared with December 31, 2011 and included an increase in retained earnings of $0.9 billion. The issuance of $1.5 billion of preferred stock in April 2012 contributed to the increase in capital surplus. Accumulated other comprehensive income increased $0.5 billion, to $0.4 billion, at June 30, 2012 compared with a loss of $0.1 billion at December 31, 2011 primarily due to higher net unrealized gains on securities and lower OTTI losses on debt securities. Common shares outstanding were 529 million at June 30, 2012 and 527 million at December 31, 2011.

Our current common stock repurchase program permits us to purchase up to 25 million shares of PNC common stock on the open market or in privately negotiated transactions. This program will remain in effect until fully utilized or until modified, superseded or terminated. The extent and timing of share repurchases under this program will depend on a number of factors including, among others, market and general economic conditions, economic and regulatory capital considerations, alternative uses of capital, regulatory and contractual limitations, and the potential impact on our credit ratings. Consistent with our capital plan submitted to the Federal Reserve in the first quarter of 2012, we plan to purchase up to $250 million of common stock under this program during 2012. Such purchases were initiated in the second quarter with approximately $50 million repurchased as of June 30, 2012.

Table 17: Risk-Based Capital

 

Dollars in millions    June 30
2012
    December 31
2011
 

Capital components

      

Shareholders’ equity

      

Common

   $ 33,885     $ 32,417  

Preferred

     3,120       1,636  

Trust preferred capital securities

     770       2,354  

Noncontrolling interests

     1,346       1,351  

Goodwill and other intangible assets

     (9,981     (9,027

Eligible deferred income taxes on goodwill and other intangible assets

     372       431  

Pension, other postretirement benefit plan adjustments

     699       755  

Net unrealized securities (gains) losses, after-tax

     (472     41  

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

     (664     (717

Other

     (148     (168

Tier 1 risk-based capital

     28,927       29,073  

Subordinated debt

     4,084       4,571  

Eligible allowance for credit losses

     3,201       2,904  

Total risk-based capital

   $ 36,212     $ 36,548  

Tier 1 common capital

      

Tier 1 risk-based capital

   $ 28,927     $ 29,073  

Preferred equity

     (3,120     (1,636

Trust preferred capital securities

     (770     (2,354

Noncontrolling interests

     (1,346     (1,351

Tier 1 common capital

   $ 23,691     $ 23,732  

Assets

      

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

   $ 254,875     $ 230,705  

Adjusted average total assets

     285,788       261,958  

Capital ratios

      

Tier 1 common

     9.3     10.3

Tier 1 risk-based

     11.4       12.6  

Total risk-based

     14.2       15.8  

Leverage

     10.1       11.1  

Federal banking regulators have stated that they expect all bank holding companies to have a level and composition of Tier 1 capital well in excess of the 4% regulatory minimum, and they have required the largest US bank holding companies, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet credit needs of their customers through estimated stress scenarios. They have also stated their view that common equity should be the dominant form of Tier 1 capital. As a result, regulators are now emphasizing the Tier 1 common capital ratio in their evaluation of bank holding company capital levels, although a

 

 

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formal ratio for this metric is not provided for in current regulations. We seek to manage our capital consistent with these regulatory principles, and believe that our June 30, 2012 capital levels were aligned with them.

Dodd-Frank requires the Federal Reserve Board to establish capital requirements that would, among other things, eliminate the Tier 1 treatment of trust preferred securities following a phase-in period expected to begin in 2013. Accordingly, PNC has started to and will further consider redeeming on the first call date some of its trust preferred securities, based on such considerations as dividend rates, future capital requirements, capital market conditions and other factors. See 2012 Capital and Liquidity Actions in the Executive Summary section of this Financial Review for additional information regarding our April 2012 and May 2012 redemptions of trust preferred securities and June 2012 announcement of the July 2012 redemption of trust preferred securities. See Note 13 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in Item 8 of our 2011 Form 10-K and Note 11 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in the Notes to Consolidated Financial Statements in this Report for additional information on trust preferred securities.

Our Tier 1 common capital ratio was 9.3% at June 30, 2012, compared with 10.3% at December 31, 2011. Our Tier 1 risk-based capital ratio decreased 120 basis points to 11.4% at June 30, 2012 from 12.6% at December 31, 2011. Our total risk-based capital ratio declined 160 basis points to 14.2% at June 30, 2012 from 15.8% at December 31, 2011. The decline in these ratios was primarily due to an increase in goodwill and risk-weighted assets as a result of the RBC Bank (USA) acquisition. Our Tier 1 risk-based capital ratio reflected second quarter 2012 capital actions of issuing approximately $1.5 billion of preferred stock and redeeming or announcing the redemption of approximately $1.8 billion of trust preferred securities. Risk-weighted assets increased $23.3 billion from $230.7 billion at December 31, 2011 to $254.0 billion at June 30, 2012 due to the RBC Bank (USA) acquisition and loan growth for the first six months of 2012.

At June 30, 2012, PNC and PNC Bank, National Association (PNC Bank), our domestic bank subsidiary, were both considered “well capitalized” based on US regulatory capital ratio requirements under Basel I. To qualify as “well-capitalized”, regulators currently require bank holding companies and banks to maintain capital ratios of at least 6% for Tier 1 risk-based, 10% for total risk-based, and 5% for leverage. We believe PNC and PNC Bank will continue to meet these requirements during the remainder of 2012.

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

We provide additional information regarding enhanced capital requirements and some of their potential impacts on PNC in Item 1A Risk Factors included in our 2011 Form 10-K.

OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

We engage in a variety of activities that involve unconsolidated entities or that are otherwise not reflected in our Consolidated Balance Sheet that are generally referred to as “off-balance sheet arrangements.” Additional information on these types of activities is included in our 2011 Form 10-K and in the following sections of this Report:

   

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

   

Note 3 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements,

   

Note 11 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in the Notes To Consolidated Financial Statements, and

   

Note 18 Commitments and Guarantees in the Notes To Consolidated Financial Statements.

PNC consolidates variable interest entities (VIEs) when we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.

A summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements, as of June 30, 2012 and December 31, 2011 is included in Note 3 of this Report.

Trust Preferred Securities

In connection with $1.9 billion in principal amount of junior subordinated debentures associated with trust preferred securities outstanding as of June 30, 2012 that were issued by various subsidiary statutory trusts, we are subject to certain restrictions, including restrictions on dividend payments. Generally, if there is (i) an event of default under the debentures, (ii) PNC elects to defer interest on the debentures, (iii) PNC exercises its right to defer payments on the related trust preferred securities issued by the statutory trusts, or (iv) there is a default under PNC’s guarantee of such payment obligations, as specified in the applicable governing documents, then PNC would be subject during the period of such default or deferral to restrictions on dividends and other provisions protecting the status of the debenture holders similar to or in some ways more restrictive than those potentially imposed under the Exchange Agreements with

 

 

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PNC Preferred Funding Trust II and Trust III, as described in Note 13 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in our 2011 Form 10-K. See 2012 Capital and Liquidity Actions in the Executive Summary section of this Financial Review for additional information regarding our April 2012 and May 2012 redemptions of trust preferred securities and June 2012 announcement of the July 2012 redemption of trust preferred securities.

 

The replacement capital covenant described in Note 13 in our 2011 Form 10-K, for which the holders of our 6 7/8% Subordinated Notes due May 15, 2019 are the beneficiaries, is no longer applicable due to the July 2012 redemption of trust preferred securities issued by PNC Capital Trust E.

 

 

FAIR VALUE MEASUREMENTS

In addition to the following, see Note 9 Fair Value in the Notes To Consolidated Financial Statements in this Report for further information regarding fair value.

The following table summarizes the assets and liabilities measured at fair value and the portion of such assets and liabilities that are classified within Level 3 of the valuation hierarchy.

Table 18: Fair Value Measurements – Summary

 

     June 30, 2012      December 31, 2011  
In millions    Total Fair
Value
    Level 3      Total Fair
Value
     Level 3  

Total assets

   $ 69,521      $ 10,391       $ 66,658       $ 10,051   

Total assets at fair value as a percentage of consolidated assets

     23          25     

Level 3 assets as a percentage of total assets at fair value

       15         15

Level 3 assets as a percentage of consolidated assets

             3               4

Total liabilities

   $ 8,363      $ 289         8,625         308   

Total liabilities at fair value as a percentage of consolidated liabilities

     3          4     

Level 3 liabilities as a percentage of total liabilities at fair value

       3         4

Level 3 liabilities as a percentage of consolidated liabilities

             <1               <1

The majority of assets recorded at fair value are included in the securities available for sale portfolio. The majority of Level 3 assets represent non-agency residential mortgage-backed and asset-backed securities in the securities available for sale portfolio for which there was limited market activity.

An instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. PNC reviews and updates fair value hierarchy classifications quarterly. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification (transfer) of assets or liabilities between hierarchy levels. During the first six months of 2012 there were transfers of assets and liabilities from Level 2 to Level 3 of $460 million consisting primarily of mortgage-backed securities as a result of a ratings downgrade which reduced the observability of valuation inputs. During the first six months of 2012 and 2011 there were no other material transfers of assets or liabilities between the hierarchy levels.

 

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EUROPEAN EXPOSURE

Table 19: Summary of European Exposure

 

In millions    Direct      Indirect      Total  

June 30, 2012

          

Greece, Ireland, Italy, Portugal, and Spain (“GIIPS”)

   $ 121       $ 28       $ 149   

Belgium, France, and Turkey

     174         912         1,086   

Subtotal

     295         940         1,235   

United Kingdom

     978         466         1,444   

Others (a)

     872         859         1,731   

Total

   $ 2,145       $ 2,265       $ 4,410   

December 31, 2011

          

Greece, Ireland, Italy, Portugal, and Spain (“GIIPS”)

   $ 118       $ 63       $ 181   

Belgium, France, and Turkey

     154         770         924   

Subtotal

     272         833         1,105   

United Kingdom

     847         396         1,243   

Others (a)

     968         803         1,771   

Total

   $ 2,087       $ 2,032       $ 4,119   
(a) Others consist of Denmark, Germany, the Netherlands, Sweden, and Switzerland.

European entities are defined as supranational, sovereign, financial institutions and non-financial entities within the countries that comprise the European Union, European Union candidate countries and other European countries. Foreign exposure underwriting and approvals are centralized. PNC currently underwrites new foreign activities if the credit is generally associated with activities of its US commercial customers, and in the case of PNC Business Credit’s UK operations, transactions that are predominantly well collateralized by self liquidating assets such as receivables, inventories or in limited situations, the borrower’s appraised value of certain fixed assets, such that PNC is at minimal risk of loss. Formerly PNC had underwritten foreign infrastructure leases supported by highly rated bank letters of credit, US Treasury securities and the underlying assets of the lease. Country exposures are monitored and reported on a regular basis. We actively monitor sovereign risk, banking system health, and market conditions and adjust limits as appropriate. We rely on information from internal and external sources, including international financial institutions, economists and analysts, industry trade organizations, rating agencies, econometric data analytical service providers, and geopolitical news analysis services.

Direct exposure primarily consists of loans, leases, securities, derivatives, letters of credit and unfunded contractual commitments with European entities, and totaled $2.1 billion at June 30, 2012. Direct exposure outstanding was $1.6 billion and other direct exposure was $498 million primarily for unfunded contractual commitments. The $1.6 billion outstanding balance (.55% of PNC total assets) primarily represents $635 million for cross-border leases in support of

national infrastructure, which are supported by letters of credit and other collateral having trigger mechanisms that require replacement or collateral in the form of cash or United States Treasury or government securities, $555 million for United Kingdom foreign office loans and $224 million of securities issued by AAA-rated sovereigns. The remaining $498 million of our direct exposure is largely comprised of $436 million for unfunded contractual commitments primarily for United Kingdom local office commitments to PNC Business Credit corporate customers on a secured basis or activities supporting our domestic customers export activities through the confirmation of trade letters of credit.

The comparable level of direct exposure at December 31, 2011 was $2.1 billion, including $1.6 billion outstanding and $485 million primarily for unfunded contractual commitments. The $1.6 billion outstanding balance (.59% of PNC total assets) primarily included $625 million for cross-border leases in support of national infrastructure, $382 million for United Kingdom foreign office loans and $357 million of securities issued by AAA-rated sovereigns. The remaining $485 million of our direct exposure is largely comprised of $440 million for unfunded contractual commitments primarily for United Kingdom local office commitments to PNC Business Credit corporate customers on a secured basis.

We also track European financial exposures where PNC is appointed as a fronting bank by our clients and we elect to assume the joint probability of default risk. As of June 30, 2012 and December 31, 2011, PNC had $2.3 billion and $2.0 billion, respectively, of indirect exposure. For PNC to incur a loss in these indirect exposures, both the obligor and the financial counterparty participating bank would need to default. PNC assesses both the corporate customer and the participating banks for counterparty risk and where PNC has found that a participating bank exposes PNC to unacceptable risk, PNC will reject the participating bank as an acceptable counterparty and will ask the corporate customer to find an acceptable participating bank.

Among the regions and nations that PNC monitors, we have identified eight countries for which we are more closely monitoring their economic and financial situation. The basis for the increased monitoring includes, but is not limited to, sovereign debt burden, near term financing risk, political instability, GDP trends, balance of payments, market confidence, banking system distress and/or holdings of stressed sovereign debt. The countries identified are: Greece, Ireland, Italy, Portugal, Spain (collectively “GIIPS”), Belgium, France and Turkey.

Direct and indirect exposure to entities in the GIIPS countries totaled $149 million as of June 30, 2012, of which $120

 

 

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million is direct exposure for cross-border leases within Portugal and indirect exposure of $28 million for letters of credit with strong underlying obligors within Ireland, Italy and Spain. The comparable amounts as of December 31, 2011 were total direct and indirect exposure of $181 million, consisting of $118 million of direct exposure for cross-border leases within Portugal, indirect exposure of $48 million for letters of credit with strong underlying obligors within Ireland, Italy and Spain and $15 million for unfunded contractual commitments to Spain.

Direct and indirect exposure to entities in Belgium, France, and Turkey totaled $1.1 billion as of June 30, 2012. Direct exposure of $174 million primarily consists of $70 million for cross-border leases within Belgium, and $62 million for unfunded contractual commitments in France and $29 million of covered bonds issued by a financial institution in France. Indirect exposure is $912 million for letters of credit with strong underlying obligors in France and Belgium. The comparable amounts as of December 31, 2011 were total direct and indirect exposure of $924 million as of December 31, 2011 of which there was $154 million of direct exposure primarily consisting of $75 million for cross-border leases within Belgium, $62 million for unfunded contractual commitments in France and $11 million for 90% Overseas Private Investment Corporation (“OPIC”) guaranteed Turkish loans. Indirect exposure was $770 million for letters of credit with strong underlying obligors in France and Belgium.

BUSINESS SEGMENTS REVIEW

We have six reportable business segments:

   

Retail Banking

   

Corporate & Institutional Banking

   

Asset Management Group

   

Residential Mortgage Banking

   

BlackRock

   

Non-Strategic Assets Portfolio

Business segment results, including inter-segment revenues, and a description of each business are included in Note 19 Segment Reporting included in the Notes To Consolidated Financial Statements of this Report. Certain amounts included in this Financial Review differ from those amounts shown in Note 19 primarily due to the presentation in this Financial Review of business net interest revenue on a taxable-equivalent basis.

Results of individual businesses are presented based on our internal management reporting practices. 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 periodically refine our internal methodologies

as management reporting practices are enhanced. Retrospective application of new methodologies is made to prior period reportable business segment results and disclosures to create comparability to the current period presentation to reflect any such refinements. Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. We have aggregated the business results for certain similar operating segments for financial reporting purposes.

Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product maturities, duration and other factors. During the second quarter of 2012, enhancements were made to the funds transfer pricing methodology. Retrospective application of our new funds transfer pricing methodology has been made to the prior period reportable business segment results and disclosures to create comparability to the current period presentation, which we believe is more meaningful to readers of our financial statements.

A portion of capital is intended to cover unexpected losses and is assigned to our business segments using our risk-based economic capital model, including consideration of the goodwill and other intangible assets at those business segments, as well as the diversification of risk among the business segments.

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

Total business segment financial results differ from total consolidated net income. The impact of these differences is reflected in the “Other” category. “Other” for purposes of this Business Segments Review and the Business Segment Highlights in the Executive Summary includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as gains or losses related to BlackRock transactions, integration costs, asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities and certain trading activities, exited businesses, alternative investments, including private equity, intercompany eliminations, most corporate overhead, tax adjustments that are not allocated to business segments, and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests.

 

 

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Table 20: Results Of Businesses – Summary (a)

(Unaudited)

 

     Income      Revenue      Average Assets (b)  
Six months ended June 30 – in millions    2012     2011      2012      2011      2012      2011  

Retail Banking

   $ 283      $ 188       $ 2,987       $ 2,773       $ 71,420       $ 66,211   

Corporate & Institutional Banking

     1,072        906         2,705         2,320         97,866         78,002   

Asset Management Group

     74        103         483         467         6,613         6,786   

Residential Mortgage Banking

     (152     127         184         478         11,745         11,218   

BlackRock

     178        179         227         229         5,597         5,596   

Non-Strategic Assets Portfolio

     138        109         421         515         12,407         13,743   

Total business segments

     1,593        1,612         7,007         6,782         205,648         181,556   

Other (c) (d)

     (236     132         348         451         83,199         80,270   

Net income

   $ 1,357      $ 1,744       $ 7,355       $ 7,233       $ 288,847       $ 261,826   
(a) During the second quarter of 2012, enhancements were made to the funds transfer pricing methodology. Retrospective application of our new funds transfer pricing methodology has been made to the prior period reportable business segment results and disclosures to create comparability to the current period presentation, which we believe is more meaningful to readers of our financial statements.
(b) Period-end balances for BlackRock.
(c) For our segment reporting presentation in this Financial Review, “Other” for the first six months of 2012 included $197 million of pretax integration costs related to acquisitions.
(d) “Other” average assets include securities available for sale associated with asset and liability management activities.

 

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Retail Banking

(Unaudited)

Table 21: Retail Banking Table

 

Six months ended June 30

Dollars in millions, except as noted

   2012      2011  

Income Statement

       

Net interest income

   $ 2,159       $ 1,878   

Noninterest income

       

Service charges on deposits

     258         242   

Brokerage

     94         105   

Consumer services

     404         481   

Other

     72         67   

Total noninterest income

     828         895   

Total revenue

     2,987         2,773   

Provision for credit losses

     300         456   

Noninterest expense

     2,240         2,021   

Pretax earnings

     447         296   

Income taxes

     164         108   

Earnings

   $ 283       $ 188   

Average Balance Sheet

       

Loans

       

Consumer

       

Home equity

   $ 27,499       $ 25,984   

Indirect auto

     4,735         2,579   

Indirect other

     1,242         1,565   

Education

     9,270         8,991   

Credit cards

     4,001         3,705   

Other

     2,222         1,816   

Total consumer

     48,969         44,640   

Commercial and commercial real estate

     11,083         10,711   

Floor plan

     1,733         1,523   

Residential mortgage

     1,002         1,241   

Total loans

     62,787         58,115   

Goodwill and other intangible assets

     6,058         5,759   

Other assets

     2,575         2,337   

Total assets

   $ 71,420       $ 66,211   

Deposits

       

Noninterest-bearing demand

   $ 19,572       $ 18,274   

Interest-bearing demand

     26,986         21,397   

Money market

     45,436         40,583   

Total transaction deposits

     91,994         80,254   

Savings

     9,489         7,858   

Certificates of deposit

     27,309         34,709   

Total deposits

     128,792         122,821   

Other liabilities

     410         955   

Capital

     8,391         8,148   

Total liabilities and equity

   $ 137,593       $ 131,924   

 

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Six months ended June 30

Dollars in millions, except as noted

   2012      2011  

Performance Ratios

       

Return on average capital

     7      5

Return on average assets

     .80         .57   

Noninterest income to total revenue

     28         32   

Efficiency

     75         73   

Other Information (a)

       

Credit-related statistics:

       

Commercial nonperforming assets

   $ 275       $ 301   

Consumer nonperforming assets

     685         403   

Total nonperforming assets (b)

   $ 960       $ 704   

Purchased impaired loans (c)

   $ 886       $ 826   

Commercial lending net charge-offs

   $ 66       $ 132   

Credit card lending net charge-offs

     99         122   

Consumer lending (excluding credit card) net charge-offs

     213         226   

Total net charge-offs

   $ 378       $ 480   

Commercial lending annualized net charge-off ratio

     1.04      2.18

Credit card lending annualized net charge-off ratio

     4.98      6.64

Consumer lending (excluding credit card) annualized net charge-off ratio

     .93      1.08

Total annualized net charge-off ratio

     1.21      1.67

Home equity portfolio credit statistics: (d)

       

% of first lien positions at origination

     39      37

Weighted-average loan-to-value ratios (LTVs) (e)

     78      73

Weighted-average updated FICO scores (f)

     742         743   

Annualized net charge-off ratio

     1.01      1.16

Loans 30 – 59 days past due

     .54      .48

Loans 60 – 89 days past due

     .33      .30

Loans 90 days past due (g)

     1.24      1.02

Other statistics:

       

ATMs

     7,206         6,734   

Branches (h)

     2,888         2,459   

Customer-related statistics: (in thousands)

       

Retail Banking checking relationships

     6,349         5,627   

Retail online banking active customers

     3,953         3,354   

Retail online bill payment active customers

     1,189         1,045   

Brokerage statistics:

       

Financial consultants (i)

     684         712   

Full service brokerage offices

     40         37   

Brokerage account assets (billions)

   $ 36       $ 35   
(a) Presented as of June 30, except for net charge-offs and annualized net charge-off ratios, which are for the six months ended.
(b) Includes nonperforming loans of $924 million at June 30, 2012 and $679 million at June 30, 2011. In the first quarter of 2012, we adopted a policy stating that Home equity loans past due 90 days or more would be placed on nonaccrual status. The prior policy required that these loans be past due 180 days before being placed on nonaccrual status.
(c) Recorded investment of purchased impaired loans related to acquisitions.
(d) Lien position, LTV, FICO and delinquency statistics are based upon balances and other data that exclude the impact of accounting for acquired loans.
(e) Updated LTV is reported for June 30, 2012. For June 30, 2011, LTV is based upon data from loan origination. Original LTV excludes certain acquired portfolio loans where this data is not available.
(f) Represents FICO scores that are updated monthly for home equity lines and quarterly for the home equity installment loans.
(g) Includes non-accrual loans.
(h) Excludes satellite offices (e.g., drive-ups, electronic branches, and retirement centers) that provide limited products and/or services.
(i) Financial consultants provide services in full service brokerage offices and traditional bank branches.

 

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Retail Banking earned $283 million for the first six months of 2012 compared with earnings of $188 million for the same period a year ago. The increase in earnings resulted from a lower provision for credit losses, organic growth in loan and transaction deposit balances, lower rates paid on deposits, higher levels of customer-initiated transactions, and the impact of the RBC Bank (USA) acquisition, partially offset by the regulatory impact of lower interchange fees on debit card transactions and additions to legal reserves.

The results for the first six months of 2012 include the impact of the retail business associated with the acquisition of RBC Bank (USA) and the credit card portfolio purchase from RBC Bank (Georgia), National Association in March 2012. Retail Banking added approximately $12.1 billion in deposits, $4.9 billion in loans, 460,000 checking relationships, over 400 branches, and over 400 ATMs through this acquisition. Retail Banking’s footprint extends across 17 states and Washington, D.C. covering nearly half the US population and serving 5,612,000 consumers and 737,000 small businesses with 2,888 branches and 7,206 ATM’s.

Retail Banking’s core strategy is to grow consumer and small business checking households by providing an experience that builds customer loyalty and creates opportunities to sell other products and services including loans, savings, investment products and money management services. Net new checking relationships grew 588,000 in the first six months of 2012, including 460,000 from the RBC Bank (USA) acquisition. The growth reflects strong results and gains in all of our markets as well as strong customer retention in the overall network. The business is also focused on expanding the use of technology, using services such as online banking and mobile deposit taking to improve customer service convenience and lower our service delivery costs. Active online banking customers and active online bill payment customers increased by 18% and 14%, respectively, from June 30 of the prior year.

Total revenue for the first six months of 2012 was $3.0 billion compared with $2.8 billion for the same period of 2011. Net interest income of $2.2 billion increased $281 million compared with the first six months of 2011. The increase resulted from higher organic loan and transaction deposit balances, lower rates paid on deposits, and the impact of the RBC (USA) acquisition.

Noninterest income declined $67 million compared to the first half of 2011. The decline was driven by the regulatory impact of lower interchange fees on debit card transactions, and lower brokerage annuity fees as a result of the low rate environment, partially offset by higher volumes of customer-initiated transactions, including debit and credit cards, and the impact of RBC Bank (USA). The Dodd-Frank limits related to interchange rates on debit card transactions were effective October 1, 2011. In the first six months of 2012, the negative impact on Retail Banking revenue from these limits was approximately $150 million.

The provision for credit losses was $300 million in the first six months of 2012 compared with $456 million in prior year. Net charge-offs were $378 million for the first half of 2012 compared with $480 million for the same period in 2011. Improvements in credit quality over the prior year were evident in the small business, home equity and credit card portfolios. The level of provisioning going forward will be dependent on general economic conditions, loan growth, utilization of credit commitments and asset quality.

Noninterest expense increased $219 million in the first six months of 2012 compared to the same period of 2011. The increase was primarily attributable to the operating expenses associated with RBC Bank (USA) and additions to legal reserves.

Growing core checking deposits is key to Retail Banking’s growth and to providing a source of low-cost funding to PNC. The deposit product strategy of Retail Banking is to remain disciplined on pricing, target specific products and markets for growth, and focus on the retention and growth of balances for relationship customers. In the first six months of 2012, average total deposits of $128.8 billion increased $6.0 billion, or 5%, compared with the same period in 2011.

   

Average transaction deposits grew $11.7 billion, or 15% and average savings deposit balances grew $1.6 billion or 21% year over year as a result of organic deposit growth along with the continued customer preference for liquidity and the RBC Bank (USA) acquisition. In the first half of 2012, compared with the same period a year ago, average demand deposits increased $6.9 billion, or 17% to $46.6 billion; average money market deposits increased $4.9 billion, or 12% to $45.4 billion.

   

Total average certificates of deposit decreased $7.4 billion or 21% compared to the same period in 2011. The decline in average certificates of deposit was due to the run-off of high rate certificates of deposit partially offset by the impact of the RBC Bank (USA) acquisition.

Retail Banking continues to focus on a relationship-based lending strategy that targets specific customer sectors, including mass and mass affluent consumers, small businesses and auto dealerships. In the first six months of 2012, average total loans were $62.8 billion, an increase of $4.7 billion, or 8%, over the same period in 2011, of which $3.1 billion was attributable to the RBC Bank (USA) acquisition, primarily in the home equity portfolio.

   

Average indirect auto loans increased $2.2 billion, or 84%, over the first six months of 2011. The increase was due to the expansion of our indirect sales force and product introduction to acquired markets, as well as overall increases in auto sales.

   

Average home equity loans increased $1.5 billion, or 6%, compared with the same period in 2011. The increase was due to the RBC Bank (USA)

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    31


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acquisition. The remainder of the portfolio showed a decline as loan demand was outpaced by paydowns, refinancings, and charge-offs. Retail Banking’s home equity loan portfolio is relationship based, with 97% of the portfolio attributable to borrowers in our primary geographic footprint.

   

Average commercial and commercial real estate loans increased $372 million, or 3%, compared with the same period in 2011. The increase was due to the acquisition of RBC Bank (USA). The remainder of the portfolio showed a decline as loan demand was outpaced by paydowns, refinancings, and charge-offs.

   

Average credit card balances increased $296 million, or 8%, compared with the first six months of 2011 as a result of an increase in active accounts and the portfolio purchase from RBC Bank (Georgia), National Association in March 2012.

   

Average education loans were $279 million, or 3%, higher in the first half of 2012 compared with the same period in 2011, primarily due to portfolio purchases in July 2011 and November 2011 of approximately $445 million and $560 million, respectively.

   

Average auto dealer floor plan loans grew $210 million, or 14%, compared with the first six months of 2011, primarily resulting from dealer line utilization and additional dealer relationships.

   

Average indirect other and residential mortgages in this segment are primarily run-off portfolios and declined $323 million and $239 million, respectively, compared with the same period in 2011. The indirect other portfolio is comprised of marine, RV, and other indirect loan products.

 

 

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Corporate & Institutional Banking

(Unaudited)

Table 22: Corporate & Institutional Banking Table

 

Six months ended June 30

Dollars in millions, except as noted

   2012     2011  

Income Statement

      

Net interest income

   $ 2,023      $ 1,697   

Noninterest income

      

Corporate service fees

     448        376   

Other