PNC Bank 2008 Annual Report Download - page 2

We remain focused on strengthening our balance sheet including capital and liquidity positions, prudent
risk and expense management, and driving customer satisfaction. Application of these business strategies
should propel PNC on its continuing journey to become a great company.
Our capital and liquidity remained strong. In the current environment, we see capital and liquidity as
key differentiators. PNC significantly strengthened regulatory capital throughout 2008, ending the year
with a Tier 1 risk-based capital ratio of 9.7 percent, a dramatic improvement from the 2007 year-end level
of 6.8 percent.
PNC maintained a strong liquidity position and full-year average deposits increased by 10 percent.
Following the acquisition of National City, PNC remained a core-funded bank with a loan-to-deposit ratio
of 91 percent.
Our recent dividend reduction is expected to add approximately $1 billion annually to PNC’s common
equity position, further increasing our strong capital and liquidity positions.
We are focused on risk management. At PNC we view risk management as the responsibility of every
employee, and our enterprise-wide risk program monitors credit, liquidity, market, operational,
reputational and strategic risk.
We recognize that credit risk is a primary concern, and while our businesses performed relatively well in
2008, we were not immune to economic or market challenges. Credit quality deterioration of our loan
portfolio accelerated in the fourth quarter, and we expect a difficult economy to persist throughout 2009.
With an economy in severe recession and our recent acquisition of National City, our balance sheet does
not currently reflect our desired moderate risk position. However, we remain committed to managing to
an overall moderate risk business model, and we are working to bring our risk issues back into alignment.
Reflecting that approach, we conducted a comprehensive review of the risk on National City’s balance
sheet. As a result, we recorded $7.4 billion of fair value adjustments on $19.3 billion of acquired loans we
identified as impaired and recorded fair value adjustments and loan loss reserves totaling $5.2 billion on
performing loans. We believe we recorded appropriate reserves at year end for the credit risk associated
with loans acquired from National City. This puts us in a strong position as we have marked to market a
substantial portion of our new balance sheet. The actions taken with National City’s loan portfolio and
our overall increased allowance for loan losses resulted in increased loss coverage for both performing
loans and nonperforming loans, and are key steps in transitioning our balance sheet back to our desired
moderate risk profile.
We support U.S. Treasury Secretary Timothy Geithner’s proposal for comprehensive stress tests for all
major U.S. banks. Stress testing is an integral aspect of being a well-run financial institution. At PNC we
routinely perform stress tests as part of our disciplined approach to risk management.
We improved our operating leverage. We created positive operating leverage on a full-year basis by
growing our diverse, high-quality revenue streams faster than expenses.
Full-year revenue growth was primarily driven by a strong increase in net interest income. Our liability-
sensitive balance sheet was well positioned for the rapid decline in short-term rates that took place during
2008, reducing our overall cost of funds. We use a coordinated approach across business segments and
staff functions to efficiently fund the balance sheet.
We also saw improved credit spreads and loan growth, and our client-based fee income categories posted
good results overall for the full year.
Expenses increased as we invested in new products and markets, but at a lower rate than revenues,
reflecting PNC’s culture of continuous improvement. This focus on expenses is critical especially as we
expect credit costs will continue to increase in 2009.
We continued to increase the number of customers we serve. Enhanced brand recognition and
investments in innovative products and services increased customer purchase consideration and attracted
new clients to PNC in 2008.
Checking accounts are the cornerstone product in our Retail Banking client acquisition strategy, and
through organic growth, we added more than 72,000 net new consumer and business checking
relationships in 2008.