PNC Bank 2007 Annual Report Download - page 29

Other noninterest income increased $29 million, to $344
million, in 2007 compared with 2006. Other noninterest
income for 2007 included the negative impact in the fourth
quarter of a $26 million valuation adjustment for commercial
mortgage loans held for sale. In early 2008, spreads have been
widening and there has been limited activity in the CMBS
securitization market. We value our commercial mortgage
loans held for sale based on securitization prices. Therefore, if
these conditions continue, additional losses will be incurred
that will be significantly higher than the losses incurred during
the fourth quarter of 2007. However, we do not expect the
impact to be significant to our capital position. Currently,
these valuation losses are unrealized (non-cash) and all of the
loans in this portfolio are performing.
Other noninterest income for 2006 included a $48 million loss
incurred in the third quarter in connection with the rebalancing
of our residential mortgage portfolio.
Other noninterest income typically fluctuates from period to
period depending on the nature and magnitude of transactions
completed and market price fluctuations.
P RODUCT R EVENUE
In addition to credit products to commercial customers,
Corporate & Institutional Banking offers other services,
including treasury management and capital markets-related
products and services, commercial loan servicing and insurance
products that are marketed by several businesses across PNC.
Treasury management revenue, which includes fees as well as
net interest income from customer deposit balances, increased
14% to $476 million for 2007 compared with $418 million for
2006. The higher revenue reflected continued expansion and
client utilization of commercial payment card services, strong
revenue growth in investment products and in various
electronic payment and information services.
Revenue from capital markets-related products and services
totaled $290 million for 2007 compared with $283 million in
2006. This increase was driven primarily by merger and
acquisition advisory and related services.
Midland Loan Services offers servicing, real estate advisory
and technology solutions for the commercial real estate
finance industry. Midland’s revenue, which includes servicing
fees and net interest income from servicing portfolio deposit
balances, totaled $220 million for 2007 and $184 million for
2006, an increase of 20%. The revenue growth was primarily
driven by growth in the commercial mortgage servicing
portfolio and related services.
As a component of our advisory services to clients, we
provide a select set of insurance products to fulfill specific
customer financial needs. Primary insurance offerings include
annuities, life, credit life, health, and disability. Revenue from
these products increased 4% to $74 million for 2007 compared
with $71 million for 2006.
PNC, through subsidiary company Alpine Indemnity Limited,
participates as a direct writer for its general liability,
automobile liability, workers’ compensation, property and
terrorism insurance programs. In the normal course of
business, Alpine Indemnity Limited maintains insurance
reserves for reported claims and for claims incurred but not
reported based on actuarial assessments. We believe these
reserves were adequate at December 31, 2007.
N ONINTEREST E XPENSE
Total noninterest expense was $4.296 billion for 2007, a
decrease of $147 million compared with $4.443 billion for
2006.
Item 6 of this Report includes our efficiency ratios for 2007
and 2006, along with information regarding certain significant
items impacting noninterest income and expense in 2006.
Noninterest expense for 2007 included the following:
• Acquisition integration costs of $102 million, and
• A charge of $82 million for an indemnification
obligation related to certain Visa litigation.
Noninterest expense for 2006 included the following:
• The first nine months of 2006 included $765 million
of expenses related to BlackRock, which was still
consolidated during that time, and
• BlackRock/MLIM transaction integration costs
totaling $91 million.
Apart from the impact of these items, noninterest expense
increased $525 million, or 15%, in 2007 compared with 2006.
These increases were largely a result of the acquisition of
Mercantile. Investments in growth initiatives were mitigated
by disciplined expense management.
We expect to incur pretax integration costs of approximately
$70 million in 2008 primarily related to our planned
acquisition of Sterling and additional costs related to the
Yardville and Albridge acquisitions.
E FFECTIVE T AX R ATE
Our effective tax rate was 29.9% for 2007 and 34% for 2006.
The lower effective tax rate in 2007 compared with the prior
year reflected the impact of the following matters:
• An increase in income taxes related to the gain from,
and a $57 million cumulative adjustment to increase
deferred income taxes in connection with, the
BlackRock/MLIM transaction in 2006, and
• Lower pretax income for the fourth quarter of 2007
had the impact of reducing the effective tax rate for
the full year.
Our effective tax rate is sensitive to levels of pretax income as
certain income tax credits and items not subject to income tax
remain relatively constant. Based upon current projections, we
believe that the effective tax rate will be approximately 31%
in 2008, before considering the impact of the pending sale of
Hilliard Lyons.
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