PNC Bank 2007 Annual Report Download - page 42

Retail Banking’s 2007 earnings increased $128 million, to
$893 million, up 17% compared with 2006. The increase in
earnings over the prior year was driven by acquisitions and
strong fee income and customer growth, partially offset by
increases in the provision for credit losses and continued
investments in the business.
Retail Banking’s performance during 2007 included the
following:
• The Mercantile acquisition added approximately $10.3
billion of loans and $12.0 billion of deposits to Retail
Banking. The acquisition also:
– Added 235 branches and 256 ATMs,
– Significantly increased our presence in Maryland,
– Added to our presence in Delaware, Virginia and the
Washington, DC area,
– Significantly increased the size of our small business
banking franchise by adding approximately $7.7
billion of commercial and commercial real estate
loans,
– Expanded our customer base with the addition of
approximately 286,000 checking relationships, and
– Expanded our wealth management business with the
addition of $22 billion in assets under management.
• The Yardville acquisition has resulted in a leading
deposit share in several wealthy counties in central New
Jersey and added 35 branches and 39 ATMs.
• The pending acquisition of Sterling, which did not impact
2007, is expected to result in a leading deposit share in
the Central Pennsylvania footprint and enhance our
presence in surrounding markets.
• Customer service and customer retention continues to be
our focus. In 2007, we partnered with the Gallup
organization to help evaluate and improve customer and
employee satisfaction.
• Consumer and small business checking relationships
increased 318,000 during 2007, not including the impact
of Yardville.
• Our investment in online banking capabilities continues
to pay off. Since December 31, 2006, the percentage of
consumer checking households using online bill payment
increased from 23% to 33%.
• In September 2006, we launched our PNC-branded credit
card product. As of December 31, 2007, more than
155,000 cards have been issued and we have $244
million in receivable balances. The results to date have
exceeded our expectations.
• In addition to the acquisitions, we opened 21 new
branches and consolidated 34 branches in 2007 for a total
of 1,109 branches at December 31, 2007. We continue to
optimize our network by opening new branches in high
growth areas, relocating branches to areas of higher
market opportunity, and consolidating branches in areas
of declining opportunity.
• Our wealth management and brokerage businesses have
benefited from acquisitions, market conditions and strong
business development in 2007. Asset management and
brokerage fees increased $147 million, or 25%, over 2006.
Total revenue for 2007 was $3.801 billion compared with
$3.125 billion last year. Taxable-equivalent net interest
income of $2.065 billion increased $387 million, or 23%,
compared with 2006 due to a 20% increase in average deposits
and a 37% increase in average loan balances. Net interest
income growth was the result of acquisitions and core
business growth, although this growth has stabilized in recent
quarters. In the current interest rate environment, Retail
Banking deposits will be less valuable, and are expected to
result in lower net interest income for this business segment in
2008 compared with 2007.
Noninterest income increased $289 million, to $1.736 billion,
up 20% compared with 2006. This growth can be attributed
primarily to the following:
• The acquisitions,
• Comparatively favorable equity markets,
• Increased brokerage revenue and volumes,
• Increased volume-related consumer fees,
• Increased third party loan servicing activities,
• New PNC-branded credit card product, and
• Customer growth.
In the past, we have sold education loans to issuers of asset-
backed paper when the loans are placed into repayment status.
Recently, the secondary markets for education loans have been
impacted by liquidity issues similar to other asset classes. As a
result, we believe the ability to sell education loans and generate
related gains will be limited in 2008. Given this outlook and the
economic and customer relationship value inherent in this
product, in February 2008, we transferred the loans at lower of
cost or market value from held for sale to the loan portfolio.
The provision for credit losses increased $57 million in 2007,
to $138 million, compared with 2006. Net charge-offs were
$131 million in 2007, an increase of $46 million compared
with 2006. The increases in provision and net charge-offs
were primarily a result of residential real estate development
exposure, continued growth in our commercial loan portfolio
and charge-offs returning to a more normal level given the
current credit conditions. Charge-offs over the last few years
have been low compared with historical averages. Given the
current environment, we believe provision levels and
nonperforming assets will continue to increase in 2008.
Noninterest expense in 2007 totaled $2.239 billion, an
increase of $412 million, or 23%, compared with 2006.
Increases were primarily attributable to acquisitions (77% of
the increase), higher volume-related expenses tied to
noninterest income growth, continued investment in new
branches, and investments in various initiatives such as the
new PNC-branded credit card.
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