PNC Bank 2006 Annual Report Download - page 44

$200 million Floating Rate Junior Subordinated Notes issued
on June 9, 1998. We agreed in the Covenant that neither we
nor our subsidiaries (other than PNC Bank, N.A. and its
subsidiaries) would purchase the Trust Securities, the LLC
Preferred Securities or the PNC Bank Preferred Stock
(collectively, the “Covenant Securities”) unless: (i) we have
received the prior approval of the Federal Reserve Board, if
such approval is then required by the Federal Reserve Board
and (ii) during the 180-day period prior to the date of
purchase, we or our subsidiaries, as applicable, have received
proceeds from the sale of Qualifying Securities in the amounts
specified in the Covenant (which amounts will vary based on
the type of securities sold). “Qualifying Securities” means
debt and equity securities having terms and provisions
specified in the Covenant and that, generally described, are
intended to contribute to our capital base in a manner that is
similar to the contribution to our capital base made by the
Covenant Securities. The Covenant does not apply to
redemptions of the Covered Securities by the issuers of those
securities. We filed a copy of the Covenant with the SEC as
Exhibit 99.1 to PNC’s Form 8-K filed on December 8, 2006.
PNC Bank, N.A. has contractually committed to PNC
Preferred Funding Trust I that if full dividends are not paid in
a dividend period on the Trust Securities, LLC Preferred
Securities or any other parity equity securities issued by the
LLC, neither PNC Bank, N. A. nor its subsidiaries will declare
or pay dividends or other distributions with respect to, or
redeem, purchase or acquire or make a liquidation payment
with respect to, any of its equity capital securities during the
next succeeding dividend period (other than to holders of the
LLC Preferred Securities and any parity equity securities
issued by the LLC) except: (i) in the case of dividends payable
to subsidiaries of PNC Bank, N.A., to PNC Bank, N.A. or
another wholly-owned subsidiary of PNC Bank, N.A. or (ii) in
the case of dividends payable to persons that are not
subsidiaries of PNC Bank, N.A., to such persons only if,
(A) in the case of a cash dividend, PNC has first irrevocably
committed to contribute amounts at least equal to such cash
dividend or (B) in the case of in-kind dividends payable by
PNC REIT Corp., PNC has committed to purchase such
in-kind dividend from the applicable PNC REIT Corp. holders
in exchange for a cash payment representing the market value
of such in-kind dividend, and PNC has committed to
contribute such in-kind dividend to PNC Bank. N.A.
B USINESS S EGMENTS R EVIEW
We have four major businesses engaged in providing banking,
asset management and global fund processing services: Retail
Banking; Corporate & Institutional Banking; BlackRock; and
PFPC.
Certain of our products and services are offered through
Corporate & Institutional Banking and marketed by several
businesses across PNC, such as our treasury management
activities, which include cash and investment management,
receivables management, disbursement services, funds
transfer services, information reporting, and global trade
services; capital markets-related products and services, which
include foreign exchange, derivatives, loan syndications,
securities underwriting, securities sales and trading, and
mergers and acquisitions advisory and related services to
middle-market companies; commercial loan servicing, real
estate advisory and technology solutions for the commercial
real estate finance industry; and equipment leasing products.
Results of individual businesses are presented based on our
management accounting practices and our operating structure.
There is no comprehensive, authoritative body of guidance for
management accounting equivalent to GAAP; therefore, the
financial results of individual businesses are not necessarily
comparable with similar information for any other company.
We refine our methodologies from time to time as our
management accounting practices are enhanced and our
businesses and management structure change. Financial
results are presented, to the extent practicable, as if each
business operated on a stand-alone basis. As permitted under
GAAP, we have aggregated the business results for certain
operating segments for financial reporting purposes.
Our capital measurement methodology is based on the concept
of economic capital for our banking businesses. However, we
have increased the capital assigned to Retail Banking to 6% of
funds to reflect the capital required for well-capitalized banks
and to approximate market comparables for this business. The
capital for PFPC has been increased to reflect its legal entity
shareholders’ equity.
BlackRock business segment results for the nine months
ended September 30, 2006 and full year 2005 reflected our
majority ownership in BlackRock during those periods.
Subsequent to the September 29, 2006 BlackRock/MLIM
transaction closing, our investment in BlackRock and capital
position increased significantly but our ownership interest was
reduced to approximately 34%. BlackRock is now accounted
for under the equity method and continues to be a separate
reportable business segment. For our business segment
reporting presentation, we have reclassified historical
BlackRock segment results to conform to our current
approach, as further described on page 41.
We have allocated the allowances for loan and lease losses
and unfunded loan commitments and letters of credit based on
our assessment of risk inherent in the loan portfolios. Our
allocation of the costs incurred by operations and other
support areas not directly aligned with the businesses is
primarily based on the use of services.
Total business segment financial results differ from total
consolidated results. The impact of these differences is
reflected in the “Intercompany Eliminations” and “Other”
categories. “Intercompany Eliminations” reflects activities
conducted among our businesses that are eliminated in the
consolidated results. “Other” includes residual activities that
do not meet the criteria for disclosure as a separate reportable
34