PNC Bank 2008 Annual Report Download - page 11

insurance agency activities through financial subsidiaries. PNC
Bank, N.A. and National City Bank may also generally engage
through a financial subsidiary in any activity that is financial in
nature or incidental to a financial activity. Certain activities,
however, are impermissible for a financial subsidiary of a
national bank, including insurance underwriting, insurance
investments, real estate investment or development, and
merchant banking.
Because of issues regarding the operations of National City
Bank, PNC has entered into an agreement with the Federal
Reserve, and PNC Bank, N.A. and National City Bank have
entered into agreements with the OCC, pursuant to which we
are providing a plan for National City Bank to address these
issues. If PNC fails to satisfy the concerns of the regulators
within six-months of the acquisition of National City Bank
(that is, by June 30, 2009), and no extension of the time period
is granted, the Federal Reserve would have broad authority to
limit PNC’s activities, including a requirement that we
conform existing non-banking activities to activities that were
permissible prior to the enactment of the GLB Act. In
addition, pursuant to the agreements with the OCC, the OCC
could limit the activities of PNC Bank, N.A. and National City
Bank if the concerns are not addressed satisfactorily by
June 30, 2009, or within any additional time granted by the
OCC. PNC Bank, N.A. and National City Bank could be
required to conform the activities of their financial
subsidiaries to activities in which a national bank could
engage directly. The potential impact of these consequences
for PNC and the two banks is primarily on the conduct of
existing merchant banking, securities underwriting and
dealing, and insurance activities that in part can be addressed
through alternative means of conducting these activities and
that in any event is not expected to be material to PNC’s
consolidated business.
Other Federal Reserve and OCC Regulation. The federal
banking agencies possess broad powers to take corrective action
as deemed appropriate for an insured depository institution and
its holding company. The extent of these powers depends upon
whether the institution in question is considered “well
capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized.”
Generally, the smaller an institution’s capital base in relation to
its risk-weighted assets, the greater the scope and severity of the
agencies’ powers, ultimately permitting the agencies to appoint
a receiver for the institution. Business activities may also be
influenced by an institution’s capital classification. For instance,
only a “well capitalized” depository institution may accept
brokered deposits without prior regulatory approval and an
“adequately capitalized” depository institution may accept
brokered deposits only with prior regulatory approval. At
December 31, 2008, each of our domestic subsidiary banks
exceeded the required ratios for classification as “well
capitalized.” For additional discussion of capital adequacy
requirements, we refer you to “Funding and Capital Sources” in
the Consolidated Balance Sheet Review section of Item 7 of
this Report and to Note 23 Regulatory Matters included in the
Notes To Consolidated Financial Statements in Item 8 of this
Report.
Laws and regulations limit the scope of our permitted
activities and investments. In addition to the activities that
would be permitted to be conducted by a financial subsidiary,
national banks (such as PNC Bank, N.A. and National City
Bank) and their operating subsidiaries may engage in any
activities that are determined by the OCC to be part of or
incidental to the business of banking.
Moreover, examination ratings of “3” or lower, lower capital
ratios than peer group institutions, regulatory concerns
regarding management, controls, assets, operations or other
factors, can all potentially result in practical limitations on the
ability of a bank or bank holding company to engage in new
activities, grow, acquire new businesses, repurchase its stock
or pay dividends, or to continue to conduct existing activities.
The Federal Reserve’s prior approval is required whenever we
propose to acquire all or substantially all of the assets of any
bank or thrift, to acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank or
thrift, or to merge or consolidate with any other bank holding
company or thrift holding company. When reviewing bank
acquisition applications for approval, the Federal Reserve
considers, among other things, each subsidiary bank’s record
in meeting the credit needs of the communities it serves in
accordance with the CRA. Our ability to grow through
acquisitions could be limited by these approval requirements.
At December 31, 2008, PNC Bank, N.A., National City Bank,
and PNC Bank, Delaware were rated “outstanding” with
respect to CRA.
FDIC Insurance. All three of our domestic subsidiary banks
are insured by the FDIC and subject to premium assessments.
Regulatory matters could increase the cost of FDIC deposit
insurance premiums to an insured bank as FDIC deposit
insurance premiums are “risk based.” Therefore, higher fee
percentages would be charged to banks that have lower capital
ratios or higher risk profiles. These risk profiles take into
account weaknesses that are found by the primary banking
regulator through its examination and supervision of the bank.
A negative evaluation by the FDIC or a bank’s primary federal
banking regulator could increase the costs to a bank and result
in an aggregate cost of deposit funds higher than that of
competing banks in a lower risk category.
Our subsidiary banks are subject to “cross-guarantee”
provisions under federal law that provide that if one of these
banks fails or requires FDIC assistance, the FDIC may assess
a “commonly-controlled” bank for the estimated losses
suffered by the FDIC. Such liability could have a material
adverse effect on our financial condition or that of the
assessed bank. While the FDIC’s claim is junior to the claims
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