Oct. 22, 2009 (PR Newswire) -- PITTSBURGH, Oct. 22 /PRNewswire-FirstCall/ -- The PNC Financial Services Group, Inc. (NYSE: PNC) today reported net income of $559 million, or $1.00 per diluted common share, for the third quarter of 2009 compared with net income of $207 million, or $.14 per diluted common share, for the second quarter of 2009. For the first nine months of 2009, the company earned net income of $1.30 billion, or $2.17 per diluted common share. Net income was $1.16 billion, or $3.23 per diluted common share, for the first nine months of 2008.

"PNC continued to demonstrate its resiliency in the economic downturn with strong third quarter earnings growth," said James E. Rohr, chairman and chief executive officer. "Once again we delivered pretax pre-provision earnings significantly in excess of our credit costs resulting in growth in capital. We strengthened our balance sheet which we believe is well positioned as the economy begins to recover and the pace of credit quality deterioration eases. Sales across the franchise were strong and we see growing momentum as we added clients and deepened customer relationships in the quarter. We are building on the value of our combined company and are well prepared for the first wave of National City client conversions in early November. As our results demonstrate, we continue to execute against our plans to deliver significant shareholder value now and in the future."

HIGHLIGHTS

--  Pretax pre-provision earnings of $1.7 billion exceeded the provision for
credit losses by more than $750 million in the third quarter of 2009.
--  Total revenue of $4.0 billion for the quarter reflected strong net
interest income and noninterest income as PNC's diverse sources of
revenue continued to deliver high quality results. The net interest
margin increased 16 basis points linked quarter to 3.76 percent for the
third quarter of 2009 primarily due to a substantial reduction in the
overall cost of funds.
--  Expenses remained well controlled and declined $279 million, or 10
percent, compared with the linked quarter.
--  Capital ratios strengthened as PNC increased the estimated Tier 1
risk-based capital ratio by 30 basis points to 10.8 percent at September
30, 2009 and added 20 basis points to the estimated Tier 1 common equity
ratio which was 5.5 percent at September 30, 2009. PNC plans to redeem
the preferred shares issued under the TARP Capital Purchase Program when
appropriate and in a shareholder-friendly manner, subject to approval by
its banking regulators.
--  PNC continued to maintain a strong liquidity position with an 87 percent
loan to deposit ratio at September 30, 2009 combined with significant
liquid assets and borrowing capacity. Transaction deposits increased $1
billion during the third quarter, reflecting growth of approximately $3
billion before the impact of the required branch divestitures that
included $2 billion of transaction deposits. During the quarter the
company continued to manage deposit pricing, reducing nonrelationship
certificates of deposit.
--  Loans declined 3 percent during the quarter to $161 billion reflecting
paydowns and reduced demand as customers decreased debt, as well as net
charge-offs. PNC remains committed to responsible lending, and loans and
commitments of approximately $28 billion were originated and renewed
during the third quarter as the company continued to make credit
available.
--  Credit quality deterioration occurred at a slower pace during the third
quarter. PNC strengthened loan loss reserves. The provision for credit
losses exceeded net charge-offs by $264 million and the ratio of
allowance for loan and lease losses to total loans increased to 2.99
percent at September 30, 2009 from 2.77 percent at June 30, 2009. Net
charge-offs to average loans were 1.59 percent on an annualized basis
for the third quarter down from 1.89 percent for the second quarter of
2009. The allowance for loan and lease losses of $4.8 billion combined
with the fair value marks of $6.6 billion on acquired impaired loans
represented approximately 7 percent of loans outstanding at September
30, 2009.
--  Overall the acquisition of National City Corporation continued to exceed
expectations.
--  The transaction was accretive to year-to-date earnings and is
expected to be accretive for the full year.
--  Cost savings of approximately $200 million were realized in the
third quarter, an increase of $60 million from the second quarter.
This brings cumulative savings to more than $460 million, ahead of
plan and on track to exceed the $1.2 billion two-year goal.
--  The required divestiture of 61 branches including $4.1 billion of
deposits and $.8 billion of loans was completed by September 4,
2009.
--  The first major conversion of National City customers to the PNC
platform is scheduled for completion by November 9, 2009, with the
remaining conversions to be completed by June 2010.
--  Consolidation of bank charters is planned for early November 2009.

--  The combined company is committed to delivering the PNC brand for
client and business growth.

PNC acquired National City on December 31, 2008. Consolidated financial information for all 2009 periods presented includes the impact of the acquisition. The increase in income statement comparisons to the prior year, except as noted, is primarily due to operating results of National City.

CONSOLIDATED REVENUE REVIEW

Net interest income was $2.2 billion for both the third and second quarters of 2009 and $1.0 billion for the third quarter of 2008. The net interest margin increased to 3.76 percent for the third quarter compared with 3.46 percent for the third quarter of 2008 and 3.60 percent for the second quarter of 2009. The increase in the net interest margin in the linked quarter comparison was primarily due to a decline in deposit costs largely from deposit pricing initiatives and the reduction of high cost nonrelationship certificates of deposit and to a lower cost of borrowed funds. PNC continued to invest a portion of its available liquidity in lower risk assets, such as treasury, government agency and agency residential mortgage-backed securities, and to reduce borrowed funds.

Noninterest income was $1.8 billion for both the third and second quarters of 2009 and $654 million for the third quarter of 2008. Relationship-based fees grew in the linked quarter comparison as asset management revenue, service charges on deposits, consumer service fees and fund servicing revenue increased. Corporate services revenue decreased 5 percent from the second quarter primarily related to commercial mortgage servicing rights, and residential mortgage fees declined 16 percent from the linked quarter driven by lower loan origination revenue from a reduction in loan refinancing volume.

Net securities gains were $168 million for the third quarter of 2009 compared with $55 million for the third quarter of 2008 and $182 million in the second quarter of 2009. The third quarter 2009 securities gains related primarily to sales of non-agency and agency residential mortgage-backed securities. The net credit component of other-than-temporary impairments of securities recognized in earnings was a loss of $129 million in the third quarter of 2009, down from a loss of $155 million in the second quarter. Other noninterest income of $314 million in the third quarter of 2009 increased $17 million in the linked quarter comparison and included net asset valuation improvements.

CONSOLIDATED EXPENSE REVIEW

Noninterest expense for the third quarter of 2009 was $2.4 billion compared with $1.1 billion in the prior year third quarter and $2.7 billion for the second quarter of 2009. The linked quarter decrease of $279 million, or 10 percent, was primarily due to a special FDIC assessment of $133 million in the second quarter of 2009, reversal of $66 million of an indemnification charge related to certain Visa litigation in the third quarter, cost savings related to the acquisition and lower integration costs. Integration costs in noninterest expense were $89 million for the third quarter of 2009, $125 million for the second quarter of 2009 and $14 million for the third quarter of 2008. The company realized approximately $200 million in cost savings related to the acquisition in the third quarter, an increase of $60 million from the second quarter of 2009. This brings cumulative savings to more than $460 million, on track to exceed the $1.2 billion two-year goal of reducing combined company annualized noninterest expense.

CONSOLIDATED BALANCE SHEET REVIEW

Total assets were $271 billion at September 30, 2009 compared with $280 billion at June 30, 2009. The decrease was primarily due to a decline in the loan portfolio of $4.4 billion and lower interest-earning deposits with banks of $9.1 billion resulting from funding the branch divestitures, which included the sale of $4.1 billion of deposits and $.8 billion of loans, and funding a reduction in deposits and borrowed funds. These declines were somewhat offset by a $4.4 billion increase in investment securities.

Average loans were $162 billion for the third quarter and decreased $7.0 billion, or 4 percent, compared with the second quarter of 2009. Average commercial loans declined by $5.1 billion, or 8 percent, average residential mortgage loans decreased by $1.0 billion, or 5 percent, and average commercial real estate loans were lower by $.9 billion, or 4 percent. Reduced loan demand, paydowns, lower utilization levels on commercial loans and net charge-offs contributed to the decreases. PNC is committed to providing credit and liquidity to qualified borrowers, and total loan originations and new commitments and renewals were approximately $28 billion in the third quarter of 2009, including $3.6 billion of originations for first mortgages, compared with $29 billion in the second quarter of 2009.

Average loans held for sale declined 22 percent to $3.7 billion in the third quarter of 2009 compared with $4.8 billion for the second quarter as a result of lower residential mortgage loan originations.

Average investment securities for the third quarter of 2009 were $53 billion, an increase of 4 percent compared with $51 billion in the linked quarter, driven by net securities purchases and improving valuations. During the third quarter, PNC continued to invest a portion of its available liquidity in lower risk investment securities, primarily treasury, government agency and agency residential mortgage-backed securities. This increase was partially offset by sales, primarily of agency residential mortgage-backed securities, prepayments and maturities. The September 30, 2009 investment securities balance included a net unrealized pretax loss of $2.2 billion representing the difference between fair value and amortized cost compared with net unrealized pretax losses of $3.8 billion at June 30, 2009 and $5.4 billion at December 31, 2008. The net unrealized pretax loss declined compared with both prior periods due to improving liquidity and pricing in non-agency securities markets primarily related to residential and commercial mortgage-backed securities.

Total deposits were $184 billion at September 30, 2009, a decrease of $6.6 billion from June 30, 2009. Branch deposits of $4.1 billion were divested during the third quarter of 2009, comprised of $2.2 billion of transaction and savings deposits and $1.9 billion of certificates of deposit. Average deposits declined to $189 billion for the third quarter of 2009 compared with $193 billion in the linked quarter. Average transaction deposits for the third quarter of $122 billion, consisting of money market, interest-bearing demand and demand and other noninterest-bearing deposits, increased $2.3 billion, or 2 percent, during the quarter including the impact of the branch divestitures. The net increase in transaction deposits resulted from strong customer relationship growth in many of PNC's markets, seasonality of certain corporate client balances and customer preferences for liquidity in the low rate environment. Average retail certificates of deposit declined by $3.9 billion reflecting the run off of high cost nonrelationship accounts and the impact of the branch divestitures. Average other time deposits declined $2.4 billion, or 46 percent, during the quarter primarily as a result of the allowed run off of brokered certificates of deposit.

Average borrowed funds for the third quarter of 2009 were $43 billion, a decline of $3.2 billion, or 7 percent, compared with the second quarter of 2009. The decrease was primarily due to maturities of $2.8 billion of Federal Home Loan Bank borrowings and $1.4 billion of bank notes partially offset by the third quarter issuance of $500 million of senior notes.

Capital levels grew during the third quarter of 2009. PNC increased the estimated Tier 1 risk-based capital ratio by 30 basis points to 10.8 percent at September 30, 2009 from 10.5 percent at June 30, 2009. The estimated Tier 1 common equity ratio increased by 20 basis points to 5.5 percent at September 30, 2009 from 5.3 percent at June 30, 2009. The increase in the ratios was primarily due to higher capital from retained earnings combined with a reduction in risk-weighted assets. Total shareholders' equity grew by $3.5 billion during the year to date to $28.9 billion at September 30, 2009 from $25.4 billion at December 31, 2008.

PNC paid preferred stock dividends of $237 million in the first nine months of 2009 to the U.S. Department of the Treasury under the TARP Capital Purchase Program on $7.6 billion of preferred stock. PNC plans to redeem the Treasury Department's investment when appropriate and in a shareholder-friendly manner, subject to approval by its banking regulators. In July and October 2009, the PNC board of directors declared a quarterly common stock cash dividend of 10 cents per share.

ASSET QUALITY REVIEW

Credit quality deterioration occurred at a slower pace during the third quarter of 2009. PNC's pretax pre-provision earnings of $1.7 billion exceeded the provision for credit losses for the third quarter of $914 million by $755 million. The provision for credit losses was $1.1 billion in the second quarter of 2009. The company increased the allowance for loan and lease losses during the third quarter to $4.8 billion at September 30, 2009 from $4.6 billion at June 30, 2009. The allowance for loan and lease losses to total loans increased to 2.99 percent at September 30, 2009 compared with 2.77 percent at June 30, 2009. Net charge-offs for the third quarter of 2009 declined to $650 million, or 1.59 percent of average loans on an annualized basis, compared with $795 million, or 1.89 percent, for the second quarter of 2009. The decrease of $145 million in net charge-offs was primarily due to lower net charge-offs of $102 million in commercial real estate loans.

Nonperforming assets were $5.6 billion at September 30, 2009 compared with $4.7 billion at June 30, 2009, an increase of $988 million and lower than the increase in nonperforming assets between June 30 and March 31, 2009 of $1.1 billion. Nonperforming assets increased during the third quarter to 3.50 percent of total loans and foreclosed and other assets at September 30, 2009 compared with 2.81 percent at June 30, 2009. The increase related primarily to a $380 million increase in nonperforming commercial loans, a $296 million increase in nonperforming residential real estate loans and a $216 million increase in nonperforming commercial real estate loans, mainly residential real estate development projects. Nonperforming assets to total assets were 2.08 percent at September 30, 2009 compared with 1.66 percent at June 30, 2009. The allowance for loan and lease losses to nonperforming loans was 94 percent at September 30, 2009 and 110 percent at June 30, 2009.

The allowance for loan and lease losses of $4.8 billion combined with the fair value marks of $6.6 billion on acquired impaired loans represented approximately 7 percent of loans outstanding at September 30, 2009.

BUSINESS SEGMENT RESULTS

PNC has three new reportable business segments in 2009: Asset Management Group, Residential Mortgage Banking, and Distressed Assets Portfolio. Certain prior period information has been reclassified to reflect current methodologies and current business and management structure. Operating results prior to 2009 do not reflect any impact of National City.

Retail Banking

Retail Banking earned $50 million for the third quarter of 2009 compared with $61 million in the second quarter of 2009. Retail Banking continued to maintain its focus on customer and deposit growth, employee and customer satisfaction, investing in the business for future growth, as well as disciplined expense management during this period of market and economic uncertainty.

Retail Banking overview:

--  PNC's customer retention efforts were successful and met expectations.
The required branch divestitures impacted statistics for net new
consumer and business checking relationships, online banking active
customers and online bill payment active customers during the third
quarter of 2009. Excluding the impact of the required divestitures,
checking relationships grew 1 percent and active online banking and
online bill payment customers grew 3 percent and 4 percent,
respectively, during the quarter.
--  Average deposit balances declined $3.6 billion from the second quarter
due to the planned run off of higher rate certificates of deposit net of
successful retention of customer relationships and the impact of branch
divestitures. The deposit strategy of Retail Banking is to remain
disciplined on pricing while targeting specific products and markets for
growth. A continued decline in certificates of deposit is expected for
the remainder of 2009 and into 2010.
--  Average loan balances decreased $371 million compared with the linked
quarter as education loan growth was offset by declines in commercial,
floor plan, residential mortgage and home equity loans.