PNC Bank 2006 Annual Report Download

Download and view the complete annual report

Please find the complete 2006 PNC Bank annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 147

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147

LEADING THE WAY
PNC 2006 ANNUAL REPORT

Table of contents

  • Page 1
    PNC 2006 ANNUAL REPORT LEADING THE WAY

  • Page 2
    ... view, looking over the horizon to navigate complexity and eliminate obstacles. For everyone from corporate executives to small business owners. From new parents to grandparents. From Wall Street to Main Street. For more than 150 years, PNC has helped them achieve their goals on the journey of life.

  • Page 3
    ... costs and a $31 million loss on the repositioning of PNC's mortgage loan portfolio. PNC's reported 2005 net income was $1.3 billion. ** PNC's 2006 peer group includes Bank of New York Company, BB&T Corporation, Fifth Third Bancorp, KeyCorp, National City Corporation, Regions Financial Corporation...

  • Page 4
    ... value of our BlackRock investment for PNC shareholders and continued our strong support for the community and the environment. Our business model drove year-over-year net income growth by 14 percent on an adjusted basis*. We grew customers, revenue, average loans and average deposits. At the end...

  • Page 5
    ... have national reach, with commercial real estate lending and servicing, asset-based lending, treasury management, capital markets, and the mergers and acquisitions advisory services of Harris Williams. PNC 11-Company Peer Group Average** S&P Index For the period ending December 31, 2006 EARNINGS...

  • Page 6
    ... business checking accounts and more capital markets services. Meanwhile, at BlackRock, an expanded product line and truly global reach should help our asset management segment contribute significantly more to PNC in the years ahead. And, scale continues to be important in the processing business...

  • Page 7
    ... for the year ahead. BlackRock WAY PNC unlocked a portion of the value of its BlackRock investment in 2006 when BlackRock acquired Merrill Lynch Investment Managers. The transaction made BlackRock one of the world's largest publicly traded asset managers, and added $1.6 billion to PNC's capital...

  • Page 8
    ... in exposure. Furthermore, our commercial loans are targeted to companies where we see opportunity to leverage lending relationships into sales of other fee-based products. On the consumer side, our principal lending activity is in home equity. This has led to strong asset quality, with a lower...

  • Page 9
    ... efficient and more competitive company. By the end of 2006, 2,400 ideas had been completed or implemented, and PNC was close to meeting its goal of $100 million per quarter in overall benefit. The One PNC program is expected to wrap up in June of 2007, but its lessons will continue as part of a new...

  • Page 10
    ... Three PNC Plaza. Located at our Pittsburgh headquarters, Three PNC Plaza will be the largest mixed-use green building in the world. Awards. Recognition. Record earnings. The hard work of our many employees and the strong leadership of our board of directors helped make 2006 the best year yet at PNC...

  • Page 11
    ... DC 20549 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2006 Commission file number 001-09718 FORM 10-K THE PNC FINANCIAL SERVICES GROUP, INC. (Exact name of registrant as specified in its charter) Pennsylvania (State or...

  • Page 12
    ... States based on assets, with businesses engaged in retail banking, corporate and institutional banking, asset management and global fund processing services. We provide many of our products and services nationally and others in our primary geographic markets located in Pennsylvania; New Jersey...

  • Page 13
    ... products include secured and unsecured loans, letters of credit and equipment leases. Treasury management services include cash and investment management, receivables management, disbursement services, funds transfer services, information reporting and global trade services. Capital markets-related...

  • Page 14
    ... Statements in Item 8 of this Report, included here by reference, for additional information regarding our regulatory issues. Applicable laws and regulations restrict permissible activities and investments and require compliance with protections for loan, deposit, brokerage, fiduciary, mutual fund...

  • Page 15
    ... operating entities, such as its subsidiary broker-dealers, investment managers, investment companies, insurance companies and banks, also subject to the jurisdiction of various federal and state "functional" regulators with normal regulatory responsibility for companies in their lines of business...

  • Page 16
    ... a financial subsidiary of a national bank, including insurance underwriting, insurance investments, real estate investment or development, and merchant banking. If one of our subsidiary banks were to fail to meet the "well capitalized" or "well managed" and related criteria, PNC Bank, N.A. would be...

  • Page 17
    ...consumer finance companies, leasing companies and other non-bank lenders, and institutional investors including CLO managers, hedge funds, mutual fund complexes and private equity firms. Loan pricing, structure and credit standards are under competitive pressure as lenders seek to deploy capital and...

  • Page 18
    ... charge to shareholders. Our common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "PNC." Our Chairman and Chief Executive Officer submitted the required annual CEO's Certification regarding the NYSE's corporate governance 8 SEC REPORTS AND CORPORATE GOVERNANCE INFORMATION...

  • Page 19
    ... for credit losses, and valuation adjustments on loans held for sale. Although many of our businesses are national and some are international in scope, our retail banking business is concentrated within our retail branch network footprint (Delaware, Indiana, Kentucky, New Jersey, Ohio, Pennsylvania...

  • Page 20
    ... Reserve is to regulate the national supply of bank credit and market interest rates. The actions of the Federal Reserve influence the rates of interest that we charge on loans and that we pay on borrowings and interest-bearing deposits and can also affect the value of our on-balance sheet and off...

  • Page 21
    ... clients and, in particular, their ability to attract and retain customers. Changes in interest rates or a sustained weakness, weakening or volatility in the debt and equity markets could (in addition to affecting directly the value of assets administered as discussed above) influence an investor...

  • Page 22
    ... or current reports under the Exchange Act that are pending resolution. ITEM 2 - PROPERTIES Our executive and administrative offices are located at One PNC Plaza, Pittsburgh, Pennsylvania. The thirty-story structure is owned by PNC Bank, N. A. We occupy the entire building. In addition, PNC Bank...

  • Page 23
    ..., we agreed to pay a licensing fee to RAKTL. The amount of the fee is not material to PNC. In its Form 10-Q for the quarter ended March 31, 2005, Riggs disclosed a number of pending lawsuits. All material lawsuits have been finally resolved, except one where a settlement agreement has been reached...

  • Page 24
    ... 2001 and before and all other unaffiliated third parties (other than AIG Financial Products and its predecessors, successors, parents, subsidiaries, affiliates and their respective directors, officers and employees (collectively, "AIG")) relating to the subject matter of this lawsuit. Insurance...

  • Page 25
    ... in the mutual fund industry including market timing, late day trading, employee trading in mutual funds and other matters, several of our subsidiaries have received requests for information and other inquiries from state and federal governmental and regulatory authorities. These subsidiaries...

  • Page 26
    ...• EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES • (a) Our common stock is listed on the New York Stock Exchange and is traded under the symbol "PNC." At the close of business on February 16, 2007, there were 41,285 common shareholders of record. Holders of PNC...

  • Page 27
    ...Incorporated and exclude The Bank of New York Company, Inc. Each yearly point for the Peer Group is determined by calculating the cumulative total shareholder return for each company in the Peer Group from December 31, 2001 to December 31 of that year (End of Month Dividend Reinvestment Assumed) and...

  • Page 28
    ...financial statements. See Note 2 Acquisitions in the Notes To Consolidated Financial Statements in Item 8 of this Report for information on significant recent and planned business acquisitions. For information regarding certain business risks, see Item 1A Risk Factors and the Risk Management section...

  • Page 29
    ... FUND ASSETS SERVICED (in billions) Accounting/administration net assets Custody assets SELECTED RATIOS From Continuing Operations Net interest margin Noninterest income to total revenue Efficiency From Net Income Return on Average common shareholders' equity Average assets Loans to deposits...

  • Page 30
    ... States based on assets, with businesses engaged in retail banking, corporate and institutional banking, asset management and global fund processing services. We provide many of our products and services nationally and others in our primary geographic markets located in Pennsylvania; New Jersey...

  • Page 31
    ... mortgage loans related to PNC's third quarter 2006 balance sheet repositioning. Apart from the impact of these actions, the increase was largely due to growth in commercial, residential mortgage and commercial real estate loans. Average total deposits increased $5.7 billion, or 10%, compared...

  • Page 32
    ... total deposits was driven primarily by the impact of higher certificates of deposit, money market account and noninterestbearing deposit balances, and by higher Eurodollar deposits. Growth in deposits from commercial mortgage loan servicing activities also contributed to the increase compared...

  • Page 33
    ...• Third quarter 2006 balance sheet repositioning activities amounting to $158 million, and • BlackRock/MLIM integration costs of $47 million. "Other" for 2005 included the impact of implementation costs related to the One PNC initiative totaling $35 million aftertax, net securities losses of $27...

  • Page 34
    ... the first quarter of 2006, which was partially offset by new business, asset inflows from existing customers, and equity market appreciation. Service charges on deposits increased $40 million, to $313 million, for 2006 compared with 2005. Customer growth, expansion of the branch network, including...

  • Page 35
    ... capital markets-related products and services, commercial loan servicing, and equipment leasing 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, totaled $424 million for 2006...

  • Page 36
    ... tax rate for PNC would be approximately 32%. CONSOLIDATED BALANCE SHEET REVIEW SUMMARIZED BALANCE SHEET DATA December 31 - in millions 2006 2005 Assets Loans, net of unearned income Securities available for sale Loans held for sale Equity investments Other Total assets Liabilities Funding sources...

  • Page 37
    ... service providers Real estate related Financial services Health care Other Total commercial Commercial real estate Real estate projects Mortgage Total commercial real estate Equipment lease financing Total commercial lending Consumer Home equity Automobile Other Total consumer Residential mortgage...

  • Page 38
    ... consolidated results of operations or financial position. SECURITIES Details Of Securities (a) In millions Amortized Cost Fair Value December 31, 2006 SECURITIES AVAILABLE FOR SALE Debt securities U.S. Treasury and government agencies Mortgage-backed Commercial mortgage-backed Asset-backed State...

  • Page 39
    ..., total shareholders' equity did not change as a result of these actions. See the Consolidated Income Statement Review portion of the 2005 Versus 2004 section of this Item 7 for details of steps taken in the second quarter of 2005 regarding the sale of securities available for sale and related...

  • Page 40
    ... short-term investments. CAPITAL AND FUNDING SOURCES Details Of Funding Sources December 31 - in millions Deposits Money market Demand Retail certificates of deposit Savings Other time Time deposits in foreign offices Total deposits Borrowed funds Federal funds purchased Repurchase agreements Bank...

  • Page 41
    ... benefit plan adjustments Net unrealized securities losses Net unrealized losses (gains) on cash flow hedge derivatives Equity investments in nonfinancial companies Other, net Tier 1 risk-based capital Subordinated debt Eligible allowance for credit losses Total risk-based capital Assets...

  • Page 42
    ... of the expected historical losses for the pool of assets and is sized to generally meet rating agency standards for comparably structured transactions. Credit enhancement is provided in part by PNC Bank, N.A. in the form of a cash collateral account that is funded by a loan facility that expires...

  • Page 43
    ...private placement. PNC REIT Corp. had previously acquired the Trust Securities from the trust in exchange for an equivalent amount of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Securities (the "LLC Preferred Securities"), of PNC Preferred Funding LLC (the "LLC"), held by PNC REIT Corp...

  • Page 44
    ... 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...

  • Page 45
    ...certain trading activities, equity management activities and minority interest in income of BlackRock up to September 29, 2006, differences between business segment performance reporting and financial statement reporting (GAAP), and most corporate overhead. Results Of Businesses - Summary Year ended...

  • Page 46
    ...-bearing demand 1,529 1,560 Money market 2,684 2,849 Certificates of deposit 645 412 Off-balance sheet (c) Small business sweep checking 1,619 1,305 Total managed deposits 10,836 10,479 Brokerage statistics: Margin loans $163 $217 Financial consultants (d) 758 779 Full service brokerage offices...

  • Page 47
    ... company's branch network, including our new greater Washington, DC area market, the consolidation of PNC's merchant services activities, expansion of the private client group, investments in various initiatives such as the new simplified checking account product line and new PNC-branded credit card...

  • Page 48
    balances per account. Two features of the new product line, free access to ATMs worldwide and a first time overdraft fee waiver, will, however, negatively impact growth rates on service charges on deposits fee income and noninterest expenses. Full-time employees at December 31, 2006 totaled 9,549, a...

  • Page 49
    ... INFORMATION Consolidated revenue from (c): Treasury management Capital markets Midland Loan Services Total loans (d) Nonperforming assets (d) (e) Net charge-offs (recoveries) Full-time employees (d) Net gains on commercial mortgage loan sales Net carrying amount of commercial mortgage servicing...

  • Page 50
    ... employees were primarily due to acquisition activity, customer growth, continuing investments, and the increase in the commercial mortgage servicing portfolio. See the additional revenue discussion regarding treasury management, capital markets and Midland Loan Services under the caption Product...

  • Page 51
    ... acquisition of MLIM at the end of the third quarter of 2006 as further discussed below. PNC's investment in BlackRock was $3.9 billion at December 31, 2006. Based upon BlackRock's closing market price of $151.90 per common share at December 31, 2006, the market value of our investment in BlackRock...

  • Page 52
    ... participants. As of January 31, 2007, when the BlackRock closing market price was $167.76 per share, the unrecognized value related to the remaining 3 million LTIP shares was approximately $225 million and the unrecognized value of our total BlackRock investment was approximately $3.4 billion. 42

  • Page 53
    ... Total Asset type (in billions) Money market Equity Fixed income Other Total Custody fund assets (in billions) Shareholder accounts (in millions) Transfer agency Subaccounting Total OTHER INFORMATION Full-time employees (d) (a) Net of nonoperating expense. (b) Total operating income divided by total...

  • Page 54
    ...The increases in these line items reflect the increased 12b-1 fees (marketing, sales and servicing fees associated with investment funds) during the fourth quarter of 2006 received by PFPC from fund accounts and then passed on to PFPC's fund clients as a result of the BlackRock/MLIM transaction. The...

  • Page 55
    ...the Notes To Consolidated Financial Statements, and Allocation Of Allowance For Loan And Lease Losses in the Statistical Information (Unaudited) section. Private Equity Asset Valuation At December 31, 2006, private equity investments carried at estimated fair value totaled $463 million compared with...

  • Page 56
    ... management and fund servicing, • Customer deposits, • Loan servicing, • Brokerage services, • Merger and acquisition advisory services, • Sale of loans and securities, • Certain private equity activities, and • Securities and derivatives trading activities including foreign exchange...

  • Page 57
    ... We calculate the expense associated with the pension plan in accordance with SFAS 87, "Employers' Accounting for Pensions," and we use assumptions and methods that are compatible with the requirements of SFAS 87, including a policy of reflecting trust assets at their fair market value. On an annual...

  • Page 58
    ... time we open an account or approve a loan for a customer, process a payment, hire a new employee, or implement a new computer system, we incur a certain amount of risk. As an organization, we must balance revenue generation and profitability with the risks associated with our business activities...

  • Page 59
    ... for loan and lease losses, we maintain an allowance for unfunded loan commitments and letters of credit. We report this allowance as a liability on our Consolidated Balance Sheet. We determine this amount using estimates of the probability of the ultimate funding and losses related to those credit...

  • Page 60
    ... allocation. 50 Charge-Offs And Recoveries Year ended December 31 Dollars in millions Net Percent of Charge-offs Average Charge-offs Recoveries (Recoveries) Loans 2006 Commercial Commercial real estate Consumer Residential mortgage Lease financing Total 2005 Commercial (a) Commercial real estate...

  • Page 61
    ... in the Trading line item on our Consolidated Income Statement and were not significant in 2006 or 2005. OPERATIONAL RISK MANAGEMENT Operational risk is defined as the risk of financial loss or other damage to us resulting from inadequate or failed internal processes or systems, human factors...

  • Page 62
    ... PNC shareholders, share repurchases, debt service, the funding of non-bank affiliates, and acquisitions. Parent company liquidity guidelines are designed to help ensure that sufficient liquidity is available to meet these requirements over the succeeding 12-month period. In managing parent company...

  • Page 63
    ... 2007, we filed two new shelf registration statements which will enable us to issue additional debt and equity securities, including certain hybrid capital instruments. During February 2007, in connection with our planned acquisition of Mercantile, we issued $1.9 billion of debt to fund the cash...

  • Page 64
    ... of taking deposits and extending loans, • Private equity and other investments and activities whose economic values are directly impacted by market factors, and • Trading in fixed income products, equities, derivatives, and foreign exchange, as a result of customer activities, underwriting...

  • Page 65
    ...and balance sheet flexibility to adjust, where appropriate, to changing interest rates and market conditions. MARKET RISK MANAGEMENT - TRADING RISK Our trading activities primarily include customer-driven trading in fixed income securities, equities, derivatives, and foreign exchange contracts. They...

  • Page 66
    ... is economic capital. In November 2006, we invested an aggregate of $100 million in FIM Holdings, LLC ("FIM") as a non-managing member with a 1.25% ownership interest. FIM acquired a 51% 56 (a) Includes changes in fair value for certain loans accounted for at fair value. Average trading assets and...

  • Page 67
    ...into account changes in interest rates, which are an important determinant of our earnings. FINANCIAL DERIVATIVES We use a variety of financial derivatives as part of the overall asset and liability risk management process to help manage interest rate, market and credit risk inherent in our business...

  • Page 68
    ... mortgage banking risk management Pay fixed interest rate swaps (a) Total commercial mortgage banking risk management Total accounting hedges (c) Free-Standing Derivatives Customer-related Interest rate Swaps Caps/floors Sold Purchased Futures Foreign exchange Equity Swaptions Other Total customer...

  • Page 69
    ... Pay fixed interest rate swaps (a) Pay total return swaps designated to loans held for sale (a) Total commercial mortgage banking risk management Total accounting hedges (b) Free-Standing Derivatives Customer-related Interest rate Swaps Caps/floors Sold Purchased Futures Foreign exchange Equity...

  • Page 70
    ... and small business channels, free checking positively impacted customer and demand deposit growth as well as other deposit-related fees. Brokerage fees increased $6 million, to $225 million, for 2005 compared with the prior year. The increase was primarily due to higher mutual fund-related revenues...

  • Page 71
    ... gain related to the sale of our modified coinsurance contracts, and • A second quarter $13 million gain recognized in connection with BlackRock's sale of its interest in Trepp LLC, a provider of commercial mortgagebacked security information, analytics and technology. Noninterest Expense Total...

  • Page 72
    ... a full year of activity. Assets under management - Assets over which we have sole or shared investment authority for our customers/clients. We do not include these assets on our Consolidated Balance Sheet. Basis point - One hundredth of a percentage point. Charge-off - Process of removing a loan or...

  • Page 73
    ... are included in the appropriate asset categories on the Consolidated Balance Sheet as if physically held by us. Derivatives -Financial contracts whose value is derived from publicly traded securities, interest rates, currency exchange rates or market indices. Derivatives cover a wide assortment...

  • Page 74
    ...based capital ratio - Tier 1 risk-based capital divided by period-end risk-weighted assets. Total fund assets serviced - Total domestic and offshore fund investment assets for which we provide related processing services. We do not include these assets on our Consolidated Balance Sheet. Total return...

  • Page 75
    ... and market interest rates, can affect our activities and financial results. Competition can have an impact on customer acquisition, growth and retention, as well as on our credit spreads and product pricing, which can affect market share, deposits and revenues. Our ability to implement our business...

  • Page 76
    ..., including changes to laws and regulations involving tax, pension, and the protection of confidential customer information; and (e) changes in accounting policies and principles. Our business and operating results are affected by our ability to identify and effectively manage risks inherent in our...

  • Page 77
    ...PNC Financial Services Group, Inc. Pittsburgh, Pennsylvania We have audited the accompanying consolidated balance sheet of The PNC Financial Services Group, Inc. and subsidiaries (the "Company") as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders' equity...

  • Page 78
    ... Fund servicing Service charges on deposits Brokerage Consumer services Corporate services Equity management gains Net securities gains (losses) Trading Net gains related to BlackRock Other Total noninterest income Noninterest Expense Compensation Employee benefits Net occupancy Equipment Marketing...

  • Page 79
    CONSOLIDATED BALANCE SHEET THE PNC FINANCIAL SERVICES GROUP, INC. In millions, except par value December 31 2006 2005 Assets Cash and due from banks Federal funds sold and resale agreements Other short-term investments, including trading securities Loans held for sale Securities available for sale ...

  • Page 80
    CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY THE PNC FINANCIAL SERVICES GROUP, INC. Shares Outstanding Common Stock Accumulated Other Comprehensive Income (Loss) In millions Common Stock Capital Surplus Retained Earnings Treasury Stock Total Balance at January 1, 2004 (a) Net income Net ...

  • Page 81
    CONSOLIDATED STATEMENT OF CASH FLOWS THE PNC FINANCIAL SERVICES GROUP, INC. In millions Year ended December 31 2006 2005 2004 Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities Provision for credit losses Depreciation, amortization and ...

  • Page 82
    ... on assets, with businesses engaged in: • Retail banking, • Corporate and institutional banking, • Asset management, and • Global fund processing services. We provide many of our products and services nationally and others in our primary geographic markets located in Pennsylvania; New Jersey...

  • Page 83
    ... of the fair value of the fund assets and the number of shareholder accounts we service. Service charges on deposit accounts are recognized as charged. Brokerage fees and gains on the sale of securities and certain derivatives are recognized on a trade-date basis. We record private equity income or...

  • Page 84
    ... on the type of investment. We include nonmarketable equity securities in Other Assets on the Consolidated Balance Sheet. Debt securities not classified as held to maturity or trading are designated as securities available for sale and carried at fair value with unrealized gains and losses, net of...

  • Page 85
    ... a positive intent to sell them. We transfer loans and commitments to the loans held for sale category at the lower of cost or fair market value. At the time of transfer, related write-downs on the loans and commitments are recorded as charge-offs or as a separate liability. We establish a new cost...

  • Page 86
    ... of loans to other real estate owned ("OREO") will be completed. These assets are recorded on the date acquired at the lower of the related loan balance or market value of the collateral less estimated disposition costs. We estimate market values primarily based on appraisals when available or...

  • Page 87
    ... and commercial loans underlying these servicing rights with regard to market inputs used in determining fair value and how we manage the risks inherent in the commercial servicing rights assets. Specific risk characteristics of the commercial mortgages include loan type, currency or exchange rate...

  • Page 88
    ... are charged to noninterest expense. Costs associated with designing software configuration and interfaces, installation, coding programs and testing systems are capitalized and amortized using the straight-line method over periods ranging from one to seven years. REPURCHASE AND RESALE AGREEMENTS...

  • Page 89
    ... FASB issued SFAS 123R "Share Based Payment," which replaced SFAS 123 and superseded APB 25. SFAS 123R requires compensation cost related to share-based payments to employees to be recognized in the financial statements based on their fair value. We adopted SFAS 123R effective January 1, 2006, using...

  • Page 90
    ...net of tax. SFAS 158 was effective for PNC as of December 31, 2006, with no restatements permitted for prior year-end reporting periods. The year-end 2006 adjustment to our plans' funded status for all unamortized net actuarial losses and prior service costs was $132 million after tax. The following...

  • Page 91
    ... the equity method. This accounting has resulted in a reduction in certain revenue and noninterest expense categories on PNC's Consolidated Income Statement as our share of BlackRock's net income is now reported within asset management noninterest income. As described under the Loans And Leases...

  • Page 92
    ... stock valued at $356 million. HARRIS WILLIAMS & CO. On October 11, 2005, we acquired Harris Williams & Co., one of the nation's largest firms focused on providing mergers and acquisitions advisory and related services to middle market companies, including private equity firms and private and public...

  • Page 93
    ... of the expected historical losses for the pool of assets and is sized to generally meet rating agency standards for comparably structured transactions. Credit enhancement is provided in part by PNC Bank, N.A. in the form of a cash collateral account that is funded by a loan facility that expires...

  • Page 94
    ...December 31, 2006. NOTE 4 REGULATORY MATTERS We are subject to the regulations of certain federal and state agencies and undergo periodic examinations by such regulatory authorities. The access to and cost of funding new business initiatives including acquisitions, the ability to pay dividends, the...

  • Page 95
    ...the ability of national banks to pay dividends or make other capital distributions. The amount available for dividend payments to the parent company by PNC Bank, N.A. without prior regulatory approval was approximately $625 million at December 31, 2006. Under federal law, bank subsidiaries generally...

  • Page 96
    ..., we agreed to pay a licensing fee to RAKTL. The amount of the fee is not material to PNC. In its Form 10-Q for the quarter ended March 31, 2005, Riggs disclosed a number of pending lawsuits. All material lawsuits have been finally resolved, except one where a settlement agreement has been reached...

  • Page 97
    ... Agreement. The Department of Labor has communicated with IFS in connection with the engagement. We received a letter in June 2003 on behalf of an alleged shareholder demanding that we take appropriate legal action against our Chairman and Chief Executive Officer, our former Chief Financial Officer...

  • Page 98
    ... in the mutual fund industry including market timing, late day trading, employee trading in mutual funds and other matters, several of our subsidiaries have received requests for information and other inquiries from state and federal governmental and regulatory authorities. These subsidiaries...

  • Page 99
    ... Cost Unrealized Gains Losses Fair Value December 31, 2006 SECURITIES AVAILABLE FOR SALE (a) Debt securities U.S. Treasury and government agencies Mortgage-backed Commercial mortgage-backed Asset-backed State and municipal Other debt Total debt securities Corporate stocks and other Total securities...

  • Page 100
    ... loss position 12 months or more Unrealized Loss Fair Value Total Unrealized Loss Fair Value Securities available for sale Debt securities U.S. Treasury and government agencies Mortgage-backed Commercial mortgage-backed Asset-backed State and municipal Other debt Total debt securities Corporate...

  • Page 101
    ... unrealized losses reported for commercial mortgage-backed securities relate primarily to fixed rate securities. The $9 million unrealized losses associated with asset-backed securities relate primarily to securities collateralized by home equity, automobile and credit card loans. The majority...

  • Page 102
    ... COMMITMENTS TO EXTEND CREDIT AND CONCENTRATIONS OF CREDIT RISK Loans outstanding were as follows: December 31 - in millions 2006 2005 Commercial Commercial real estate Consumer Residential mortgage Lease financing Other Total loans Unearned income Total loans, net of unearned income $20,584 3,532...

  • Page 103
    ... substantially less than the total commitment. Consumer home equity lines of credit accounted for 74% of consumer unfunded credit commitments. As a result of deconsolidating Market Street in October 2005, amounts related to Market Street were considered third party unfunded commitments at December...

  • Page 104
    ... assets and related information: December 31 - dollars in millions 2006 2005 Nonaccrual loans Commercial Commercial real estate Consumer Residential mortgage Lease financing Total nonaccrual loans Total nonperforming loans Nonperforming loans held for sale (a) Foreclosed and other assets Lease...

  • Page 105
    ... both commercial and residential mortgage servicing assets and liabilities generated contractually specified servicing fees, net interest income from servicing portfolio deposit balances and ancillary fees totaling $139 million for the year ended December 31, 2006. We also generate servicing revenue...

  • Page 106
    ... 2006. The fair value of our reporting units is determined by using discounted cash flow and market comparability methodologies. PNC, including servicing fees, in 2006, 2005 and 2004 related to those transactions were not significant. Additionally, we sold commercial mortgage and commercial loans...

  • Page 107
    ... a liability for this Agreement at December 31, 2006. See Note 14 Capital Securities of Subsidiary Trusts for information about the $1.1 billion of junior subordinated debt. NOTE 13 BORROWED FUNDS Bank notes at December 31, 2006 totaling $1.1 billion have interest rates ranging from 2.75% to...

  • Page 108
    ... consolidated into PNC's financial results. Junior subordinated debt of $206 million owed by PNC to this Trust is included in PNC's balance sheet, with the related service cost included in interest expense. The $50 million of acquired capital securities are included as securities available for sale...

  • Page 109
    ... 2006, we had reserved approximately 44.3 million common shares to be issued in connection with certain stock plans and the conversion of certain debt and equity securities. In February 2005, our Board of Directors authorized the purchase of up to 20 million shares of our common stock in open market...

  • Page 110
    ...value Credit risk In millions ACCOUNTING HEDGES Fair value hedges Cash flow hedges Total FREE-STANDING DERIVATIVES Interest rate contracts Equity contracts Foreign exchange contracts Credit derivatives Options Risk participation agreements Commitments related to mortgage-related assets Other Total...

  • Page 111
    ...beginning of year Riggs acquisition Actual return on plan assets Employer contribution Participant contributions Federal Medicare subsidy on benefits paid Benefits paid Fair value of plan assets at end of year Funded status Unrecognized net actuarial loss Unrecognized prior service cost (credit) Net...

  • Page 112
    ... equity securities and US government, agency, and corporate debt securities and real estate investments. Plan assets do not include common or preferred stock or any debt of PNC. The Pension Plan Administrative Committee (the "Committee") adopted the current Pension Plan Investment Policy Statement...

  • Page 113
    ...as follows: Year ended December 31 - in millions Qualified Pension Plan 2006 2005 2004 Nonqualified Pension Plan 2006 2005 2004 Postretirement Benefits 2006 2005 2004 Service cost Interest cost Expected return on plan assets Amortization of prior service cost Amortization of actuarial losses (gains...

  • Page 114
    ... trend rates would have the following effects: Year ended December 31, 2006 In millions Increase Decrease invested in a number of investment options available under the plan, including a PNC common stock fund and several BlackRock mutual funds, at the direction of the employee. All shares of PNC...

  • Page 115
    ... portion of their plan account invested in shares of PNC common stock into other investments available within the plan. Prior to this amendment, only participants age 50 or older were permitted to exercise this diversification option. Employee benefits expense for this plan, which was effective...

  • Page 116
    ... over the corresponding vesting and/or performance periods for each type of program. Total compensation expense recognized related to PNC incentive/performance unit share and restricted stock awards during 2006 was approximately $45 million compared with $44 million in 2005 and $25 million in 2004...

  • Page 117
    ... of the fair market value on the last day of each six-month offering period. No charge to earnings is recorded with respect to the ESPP. Shares issued pursuant to the ESPP were as follows: Year ended December 31 Shares Price Per Share in cash by BlackRock and the remainder in BlackRock common stock...

  • Page 118
    ... 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 years 2005 and 2004 reflected our majority ownership...

  • Page 119
    ...products include secured and unsecured loans, letters of credit and equipment leases. Treasury management services include cash and investment management, receivables management, disbursement services, funds transfer services, information reporting, and global trade services. Capital markets-related...

  • Page 120
    Results Of Businesses Year ended December 31 In millions Retail Banking Corporate & Institutional Banking BlackRock PFPC Other Intercompany Eliminations Consolidated 2006 INCOME STATEMENT Net interest income (expense) Noninterest income Total revenue Provision for credit losses Depreciation and ...

  • Page 121
    ...accumulated balances related to each component of other comprehensive income (loss) are as follows: December 31 - in millions 2006 2005 Net unrealized securities gains (losses) Net unrealized gains (losses) on cash flow hedge derivatives Pension, other postretirement and postemployment benefit plan...

  • Page 122
    ...: • real and personal property, • lease financing, • loan customer relationships, • deposit customer intangibles, • retail branch networks, • fee-based businesses, such as asset management and brokerage, and • trademarks and brand names. Fair value is defined as the estimated amount at...

  • Page 123
    ...subordinated debt securities with an equity component. Funding of this investment is expected to occur over a five-year period. The remaining unfunded commitment on December 31, 2006 was $155 million. The limited partnership is consolidated for financial reporting purposes as PNC has a 57% ownership...

  • Page 124
    ... related to Market Street. INDEMNIFICATIONS We are a party to numerous acquisition or divestiture agreements under which we have purchased or sold, or agreed to purchase or sell, various types of assets. These agreements can cover the purchase or sale of: • Entire businesses, • Loan portfolios...

  • Page 125
    ...$1,197 Balance Sheet December 31 - in millions 2006 2005 ASSETS Cash and due from banks Short-term investments with subsidiary bank Securities available for sale Investments in: Bank subsidiaries and bank holding company Non-bank subsidiaries Other assets Total assets LIABILITIES Subordinated debt...

  • Page 126
    ... paper and all other debt issued by PNC Funding Corp, a wholly owned finance subsidiary, is fully and unconditionally guaranteed by the parent company. In addition, in connection with certain affiliates' commercial mortgage servicing operations, the parent company has committed to maintain such...

  • Page 127
    ...; and mortgage loan portfolio repositioning loss of $48 million. (e) Noninterest expense for the third quarter of 2006 included the pretax impact of BlackRock/MLIM transaction integration costs of $72 million. (f) See Note 2 Acquisitions in the Notes To Consolidated Financial Statements regarding...

  • Page 128
    ... real estate Consumer Residential mortgage Lease financing Other Total loans, net of unearned income Loans held for sale Federal funds sold and resale agreements Other Total interest-earning assets Interest-Bearing Liabilities Interest-bearing deposits Money market Demand Savings Retail certificates...

  • Page 129
    ... municipal Corporate stocks and other Total securities available for sale Loans, net of unearned income Commercial Commercial real estate Consumer Residential mortgage Lease financing Other Total loans, net of unearned income Loans held for sale Federal funds sold and resale agreements Other Total...

  • Page 130
    ... related to Market Street, which was deconsolidated effective October 17, 2005. NONPERFORMING ASSETS AND RELATED INFORMATION December 31 - dollars in millions 2006 2005 2004 2003 2002 Nonaccrual loans Commercial Lease financing Commercial real estate Consumer Residential mortgage Total nonaccrual...

  • Page 131
    ... Recoveries Commercial (a) Commercial real estate Consumer Residential mortgage Lease financing Total recoveries Net charge-offs (a) Provision for credit losses Acquisitions Net change in allowance for unfunded loan commitments and letters of credit Allowance for loan and lease losses at end of year...

  • Page 132
    ...that converted the floating rate (1 month LIBOR, 3 month LIBOR and Prime) on the underlying commercial loans to a fixed rate as part of risk management strategies. TIME DEPOSITS OF $100,000 OR MORE Time deposits in foreign offices totaled $3.0 billion at December 31, 2006, substantially all of which...

  • Page 133
    ... PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of The PNC Financial Services Group, Inc. Pittsburgh, Pennsylvania We have audited management's assessment, included in the accompanying "Management's Responsibility For Internal Control Over Financial Reporting" that The PNC...

  • Page 134
    ...with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2006 and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended of the Company and our report dated March 1, 2007...

  • Page 135
    ... Ownership of Directors, Nominees and Executive Officers" in our Proxy Statement to be filed for the annual meeting of shareholders to be held on April 24, 2007 and is incorporated herein by reference. Information regarding our compensation plans under which PNC equity securities are authorized...

  • Page 136
    ..., FINANCIAL STATEMENT SCHEDULES The information required by this item is included under the captions "Transactions Involving Directors And Executive Officers" and "Corporate Governance At PNC - Director Independence" in our Proxy Statement to be filed for the annual meeting of shareholders to be...

  • Page 137
    ...the undersigned, thereunto duly authorized. THE PNC FINANCIAL SERVICES GROUP, INC. (Registrant) By: /s/ Richard J. Johnson Richard J. Johnson Chief Financial Officer March 1, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following...

  • Page 138
    ...Computershare Investor the Corporation's Annual Report on Form 10-K Services, LLC dated January 1, 2003 for the year ended December 31, 2002 ("2002 Form 10-K") Form of PNC Bank, National Association Global Bank Note for Incorporated herein by reference to Exhibit 4.9 of Fixed Rate Global Senior Bank...

  • Page 139
    ... Company, as trustee of the Corporation's 3rd Quarter 2005 Form 10-Q* Trust Agreement between PNC Investment Corp., as Settler, and Incorporated herein by reference to Exhibit 10.34 PNC Bank, National Association, as trustee of the Corporation's 3rd Quarter 2005 Form 10-Q* The Corporation's Employee...

  • Page 140
    ... ("BlackRock February 22, 2006 Form 8-K") Initial Public Offering Agreement, dated September 30, 1999, Incorporated by reference to BlackRock, Inc.'s among BlackRock, Inc., The PNC Financial Services Group, Registration Statement on Form S-1 Inc., formerly PNC Bank Corp., and PNC Asset Management...

  • Page 141
    ...., PNC Asset Management, Inc. and certain employees of BlackRock, Inc. and its affiliates Implementation and Stockholder Agreement, dated as of February 15, 2006, among BlackRock, Inc., New Boise, Inc. and the Corporation PNC Bank, National Association US $20,000,000,000 Global Bank Note Program for...

  • Page 142
    EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, James E. Rohr, certify that: 1. 2. I have reviewed this report on Form 10-K for the year ended December 31, 2006 of The PNC Financial Services Group, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material ...

  • Page 143
    EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Richard J. Johnson, certify that: 1. 2. I have reviewed this report on Form 10-K for the year ended December 31, 2006 of The PNC Financial Services Group, Inc.; Based on my knowledge, this report does not contain any untrue statement of a ...

  • Page 144
    ...with the Annual Report on Form 10-K for the year ended December 31, 2006 of The PNC Financial Services Group, Inc. (Corporation) as filed with the Securities and Exchange Commission on the date hereof (Report), I, James E. Rohr, Chairman and Chief Executive Officer of the Corporation, hereby certify...

  • Page 145
    ... with the Annual Report on Form 10-K for the year ended December 31, 2006 of The PNC Financial Services Group, Inc. (Corporation) as filed with the Securities and Exchange Commission on the date hereof (Report), I, Richard J. Johnson, Chief Financial Officer of the Corporation, hereby certify...

  • Page 146
    ...The PNC Financial Services Group, Inc.'s financial reports and information about its products and services are available on the Internet at www.pnc.com. Financial Information We are subject to the informational requirements of the Securities Exchange Act of 1934. Therefore, we file annual, quarterly...

  • Page 147
    ...Pennsylvania 901 State Street Erie, PA 16501 Regional President: Marlene D. Mosco PNC Bank, Ohio & Northern Kentucky 201 East Fifth Street Cincinnati, OH 45202 Regional President: John T. Taylor PNC Bank, Philadelphia & Southern New Jersey 1600 Market Street Philadelphia, PA 19103 Regional President...