PNC Financial Services - 10-Q quarterly report FY

EXECUTIVE SUMMARY

THE PNC FINANCIAL SERVICES GROUP, INC.

PNC is one of the largest diversified financial services companies in the United States and is headquartered in Pittsburgh, Pennsylvania.

As further described in Note 2 Acquisitions and Divestitures in our 2008 Form 10-K and Note 2 National City Acquisition of this Report, on December 31, 2008, PNC acquired National City Corporation (National City). Our consolidated financial statements for the third quarter and first nine months of 2009 reflect the impact of National City. The impact of National City is described where appropriate throughout this Report; however, certain information may not be available subsequent to the first major conversion of National City customers to the PNC platform scheduled for completion by November 9, 2009.

PNC has businesses engaged in retail banking, corporate and institutional banking, asset management, residential mortgage banking and global investment servicing, providing many of its products and services nationally and others in PNC’s primary geographic markets located in Pennsylvania, Ohio, New Jersey, Michigan, Maryland, Illinois, Indiana, Kentucky, Florida, Missouri, Virginia, Delaware, Washington, D.C., and Wisconsin. PNC also provides certain investment servicing internationally.

We expect to incur total merger and integration costs of approximately $1.2 billion pretax in connection with the acquisition of National City. This total includes $575 million pretax recognized in the fourth quarter of 2008 and $265 million pretax recognized in the first nine months of 2009, including $89 million pretax in the third quarter. The

transaction is expected to result in the reduction of more than $1.2 billion of combined company annualized noninterest expense through the elimination of operational and administrative redundancies.

We are in the process of integrating the businesses and operations of National City with those of PNC.

KEY STRATEGIC GOALS

We manage our company for the long term and are focused on returning to a moderate risk profile while maintaining strong capital and liquidity positions, investing in our markets and products, and embracing our corporate responsibility to the communities where we do business.

Our strategy to enhance shareholder value centers on driving pre-tax, pre-provision earnings that exceed credit costs by achieving growth in revenue from our balance sheet and diverse business mix that exceeds growth in expenses controlled through disciplined cost management. The primary drivers of revenue growth are the acquisition, expansion and retention of customer relationships. We strive to expand our customer base by offering convenient banking options and leading technology solutions, providing a broad range of fee-based and credit products and services, focusing on customer service, and through a significantly enhanced branding initiative. We may also grow revenue through appropriate and targeted acquisitions and, in certain businesses, by expanding into new geographical markets.

We are focused on our strategies for quality growth. We are committed to returning to a moderate risk profile characterized by disciplined credit management and limited

exposure to earnings volatility resulting from interest rate fluctuations and the shape of the interest rate yield curve. Our actions have created a well-positioned balance sheet, strong bank level liquidity and investment flexibility to adjust, where appropriate and permissible, to changing interest rates and market conditions.

We also continue to be focused on building capital in the current environment characterized by economic and regulatory uncertainty. See the Funding and Capital Sources section of the Consolidated Balance Sheet Review section and the Liquidity Risk Management section of this Financial Review regarding certain restrictions on dividends and common share repurchases resulting from PNC’s participation on December 31, 2008 in the US Department of the Treasury’s Troubled Asset Relief Program (TARP) Capital Purchase Program and other regulatory restrictions on dividend capacity.

On March 1, 2009, our board of directors decided to reduce PNC’s quarterly common stock dividend from $.66 to $.10 per share. Accordingly, the board of directors declared a quarterly common stock cash dividend of $.10 per share in April, July and October 2009. Our Board recognizes the importance of the dividend to our shareholders. While our overall capital and liquidity positions are strong, extreme economic and market deterioration and the changing regulatory environment drove this difficult but prudent decision. This proactive measure will help us build capital by approximately $1 billion annually, further strengthen our balance sheet and enable us to continue to serve our customers.

SUPERVISORY CAPITAL ASSESSMENT PROGRAM (“STRESS TESTS”)

On May 7, 2009, the Board of Governors of the Federal Reserve System announced the results of the stress tests conducted by banking regulators under the Supervisory Capital Assessment Program with respect to the 19 largest bank holding companies. As a result of this test, the Federal Reserve concluded that PNC was well capitalized but that, in order to provide a greater cushion against the risk that economic conditions over the next two years are worse than currently anticipated, PNC needed to augment the composition of its capital by increasing the common shareholders’ equity component of Tier 1 capital. In May 2009 we raised $624 million in new common equity at market prices through the issuance of 15 million shares of common stock. In connection with the Supervisory Capital Assessment Program, we submitted a capital plan which was accepted by the Federal Reserve.

RECENT MARKET AND INDUSTRY DEVELOPMENTS

Since the middle of 2007 and with a heightened level of activity during the past 20 months, there has been unprecedented turmoil, volatility and illiquidity in worldwide financial markets, accompanied by uncertain prospects for sustaining a fragile economic recovery that began mid-year

2009. In addition, there have been dramatic changes in the competitive landscape of the financial services industry during this time.

Recent efforts by the Federal government, including the US Department of the Treasury, the Federal Reserve, the FDIC, and the Securities and Exchange Commission, to stabilize and restore confidence in the financial services industry have impacted and will likely continue to impact PNC and our stakeholders. These efforts, which will continue to evolve, include the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009, and other legislative, administrative and regulatory initiatives, including the US Treasury’s TARP Capital Purchase Program, the FDIC’s Temporary Liquidity Guarantee Program (TLGP) and the Federal Reserve’s Commercial Paper Funding Facility (CPFF).

These programs, some of which are further described in Item 7 of our 2008 Form 10-K, include the following:

TARP Capital Purchase Program – On December 31, 2008, PNC issued to the US Treasury $7.6 billion of preferred stock together with a related warrant to purchase shares of common stock of PNC, in accordance with the terms of the TARP Capital Purchase Program. Funds from this sale count as Tier 1 capital. Holders of this preferred stock are entitled to a cumulative cash dividend at the annual rate per share of 5% of the liquidation preference per year for the first five years after its issuance. After December 31, 2013, if these shares are still outstanding, the annual dividend rate will increase to 9% per year. We plan to redeem the US Treasury’s investment as soon as appropriate and in a shareholder-friendly manner, subject to approval by our banking regulators. We do not contemplate exchanging any of the shares of preferred stock issued to the US Treasury under the TARP Capital Purchase Program for shares of mandatorily convertible preferred stock.

Further information on these securities is included in Note 19 Shareholders’ Equity included in our Notes to Consolidated Financial Statements within Item 8 of our 2008 Form 10-K.

FDIC Temporary Liquidity Guarantee Program (TLGP) – In December 2008, PNC Funding Corp issued fixed and floating rate senior notes totaling $2.9 billion under the FDIC’s TLGP-Debt Guarantee Program. In March 2009, PNC Funding Corp issued floating rate senior notes totaling $1.0 billion under this program. Each of these series of senior notes is guaranteed by the FDIC and is backed by the full faith and credit of the United States through December 31, 2012.

Since October 14, 2008, both PNC Bank, National Association (PNC Bank, N.A.) and National City Bank have participated in the TLGP-Transaction Account Guarantee Program. Under this program, all non-interest bearing transaction accounts are fully guaranteed by the FDIC for the

entire amount in the account. Coverage under this program is in addition to, and separate from, the coverage available under the FDIC’s general deposit insurance rules. Beginning January 1, 2010, PNC Bank, N.A. will no longer participate in the TLGP-Transaction Account Guarantee Program. Thus, after December 31, 2009, funds held in noninterest-bearing transaction accounts will no longer be guaranteed in full under the TLGP-Transaction Account Guarantee Program, but will be insured up to $250,000 under the FDIC’s general deposit insurance rules.

Federal Reserve Commercial Paper Funding Facility (CPFF) – Effective October 28, 2008, Market Street Funding LLC (Market Street) was approved to participate in the Federal Reserve’s CPFF. The CPFF commitment to purchase up to $5.4 billion of three-month Market Street commercial paper expires on February 1, 2010. Market Street had no borrowings under this facility at September 30, 2009.

Public-Private Investment Fund Programs (PPIFs) – On March 23, 2009, the US Treasury and the FDIC announced that they will establish the Legacy Loans Program (LLP) to remove troubled loans and other assets from banks. The FDIC will provide oversight for the formation, funding, and operation of new PPIFs that will purchase loans and other assets from depository institutions. The LLP will attract private capital through an FDIC debt guarantee and Treasury equity co-investment. All FDIC-insured depository institutions will be eligible to participate in the program.

On March 23, 2009, the US Treasury also announced the establishment of the Legacy Securities PPIFs, which are designed to address issues raised by troubled assets. These Legacy Securities PPIFs are specifically focused on legacy securities and are part of a plan that directs both equity capital and debt financing into the market for legacy assets. This program is designed to draw in private capital to these markets by providing matching equity capital from the US Treasury and debt financing from the Federal Reserve via the Term Asset-Backed Loan Facility (TALF) and the US Treasury.

PNC is in the process of determining to what extent, if any, it will participate in these programs.

Home Affordable Modification Program (HAMP) – As part of its effort to stabilize the US housing market, in March 2009 the Obama Administration published detailed guidelines implementing HAMP, and authorized servicers to begin loan modifications. PNC began participating in the HAMP for GSE mortgages in May and for non-GSE mortgages in July, and plans to evaluate participation in the Second Lien Program. This program is scheduled to terminate as of December 31, 2012.

Home Affordable Refinance Program (HARP) – Another part of its efforts to stabilize the US housing market is the Obama Administration’s Home Affordable Refinance Program

(HARP), which provides a means for certain borrowers to refinance their mortgage loans. PNC began participating in HARP in May 2009. The program is scheduled to terminate as of June 10, 2010.

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In June 2009 the US Treasury issued a report entitled “Financial Regulatory Reform: A New Foundation” which outlined five key objectives:

To implement the proposals set forth in the US Treasury report, as well as to provide economic stimulus and financial market stability and to enhance the liquidity and solvency of financial institutions and markets, the US Congress and federal banking agencies have announced, and are continuing to develop, additional legislation, regulations and programs. These proposals include changes in or additions to the statutes or regulations related to existing programs, including those described above.

It is not possible at this time to predict the ultimate impact of these actions on PNC’s business plans and strategies.

KEY FACTORSAFFECTING FINANCIAL PERFORMANCE

Our financial performance is substantially affected by several external factors outside of our control including the following, some of which may be affected by legislative, regulatory and administrative initiatives, such as the Federal government initiatives outlined above:

In addition, our success will depend, among other things, upon:

SUMMARY FINANCIAL RESULTS

Highlights of the third quarter of 2009 included the following:

Our Consolidated Income Statement Review section of this Financial Review describes in greater detail the various items that impacted our results for the third quarter and first nine months of 2009 and 2008.

AVERAGE CONSOLIDATEDBALANCE SHEET HIGHLIGHTS

Various seasonal and other factors impact our period-end balances whereas average balances are generally more indicative of underlying business trends apart from the impact of recent acquisitions.

Our Average Consolidated Balance Sheet for the first nine months of 2009 included the impact of National City, which was the primary driver of increases compared with the first nine months of 2008. The Consolidated Balance Sheet Review section of this Financial Review provides information on changes in selected Consolidated Balance Sheet categories at September 30, 2009 compared with December 31, 2008.

Total average assets were $278.6 billion for the first nine months of 2009 compared with $141.7 billion for the first nine months of 2008. Total average assets for the first nine months of 2009 included $129.4 billion related to National City.

Average interest-earning assets were $241.0 billion for the first nine months of 2009, including $117.9 billion related to National City, compared with $113.4 billion in the first nine months of 2008. An increase of $96.3 billion in loans, including $94.1 billion related to National City, and a $15.6 billion increase in securities available for sale, including $11.4 billion related to National City, were reflected in the increase in average interest-earning assets. In addition, securities held to maturity, including those transferred by PNC in the fourth quarter of 2008 from the available for sale portfolio, averaged $3.9 billion in the first nine months of 2009.

Average noninterest-earning assets totaled $37.6 billion in the first nine months of 2009 compared with $28.2 billion in the prior year period. For the first nine months of 2009, average noninterest-earning assets related to National City totaled $10.7 billion.

The increase in average total loans, which includes the impact of National City as indicated above, reflected growth in commercial loans of $32.4 billion, consumer loans of $32.0 billion, commercial real estate loans of $15.9 billion and residential mortgage loans of $12.4 billion. Loans represented 70% of average interest-earning assets for the first nine months of 2009 and 63% for the first nine months of 2008.

Average residential mortgage-backed securities increased $12.6 billion compared with the first nine months of 2008. Average US Treasury and government agencies securities increased $3.8 billion, average other debt increased $.9 billion, and average state and municipal securities increased $.7 billion in the comparison. These increases were largely as a result of the National City acquisition and were partially

offset by declines of $1.1 billion in average commercial mortgage-backed securities and $1.3 billion in average asset-backed securities compared with the prior year period. Investment securities comprised 21% of average interest-earning assets for the first nine months of 2009 and 28% for the first nine months of 2008.

Average total deposits were $191.2 billion for the first nine months of 2009, including $102.3 billion related to National City, compared with $83.5 billion for the first nine months of 2008. Average deposits grew from the prior year period primarily as a result of increases in retail certificates of deposit, money market balances, and demand and other noninterest-bearing deposits. Average total deposits represented 69% of average total assets for the first nine months of 2009 and 59% for the first nine months of 2008.

Average transaction deposits were $118.7 billion for the first nine months of 2009, including $51.9 billion related to National City, compared with $54.8 billion for the first nine months of 2008.

Average borrowed funds were $45.7 billion for the first nine months of 2009, including $18.9 billion related to National City, compared with $31.8 billion for the first nine months of 2008.

BUSINESS SEGMENT HIGHLIGHTS

In the first quarter of 2009, we made changes to our business organization structure and management reporting in conjunction with the acquisition of National City. As a result, we now have seven reportable business segments, which include:

Business segment results for the third quarter and first nine months of 2008 have been reclassified to reflect current methodologies and current business and management structure and present prior periods on the same basis.

Total business segment earnings were $1.8 billion for the first nine months of 2009 and $910 million for the first nine months of 2008. Third quarter 2009 business segment earnings totaled $598 million compared with $245 million for the third quarter of 2008. Results for the first nine months and third quarter of 2009 for all of our business segments except BlackRock and Global Investment Servicing reflect the impact of revenues and expenses associated with businesses acquired with National City. Highlights of results for the third quarter and first nine months of 2009 and 2008 are included below.

The Business Segments Review section of this Financial Review includes further analysis of our business segment results over these periods.

We provide a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a GAAP basis in Note 19 Segment Reporting.

Retail Banking

Retail Banking’s earnings were $161 million for the first nine months of 2009 compared with $260 million for the same period in 2008. For the third quarter of 2009, Retail Banking’s earnings were $50 million compared with $36 million for the third quarter of 2008. Results were challenged in this environment by ongoing credit deterioration, a lower yield assigned to our deposits, reduced consumer spending and increased FDIC insurance costs. Pre-tax, pre-provision earnings were $1.2 billion for the first nine months of 2009 and $394 million for the third quarter of 2009. Retail Banking continues 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.

Corporate & Institutional Banking

Corporate & Institutional Banking earned $749 million in the first nine months of 2009 compared with $271 million for the same period in 2008. For the first nine months of 2009, total revenue of $3.9 billion was strong given the current environment, driven primarily by net interest income. Noninterest expense was tightly managed, and earnings were impacted by the higher provision for credit losses, indicative of deteriorating credit quality and the weakened economy. For the third quarter of 2009, Corporate & Institutional Banking’s earnings were $283 million compared with $90 million for the third quarter of 2008. The increase was primarily due to higher net interest income.

Asset Management Group

Asset Management Group’s earnings were $82 million for the first nine months of 2009 compared with $97 million for the same period in 2008. Results for 2009 reflected a 63% increase in discretionary assets under management that drove higher asset management fees and strong revenue growth. The 15% decline in earnings over the prior year was driven by an increased provision for credit losses. The business achieved pretax, pre-provision earnings growth of 29% over the first nine months of 2008 as the business remained focused on client growth, retention and satisfaction, expense management and the National City integration. Earnings for the Asset Management Group totaled $35 million for the third quarter of 2009 compared with $26 million for the third quarter of 2008.

Residential Mortgage Banking

Residential Mortgage Banking earned $410 million for the first nine months of 2009, including $91 million in the third

quarter, driven by strong loan origination activity and net mortgage servicing rights hedging gains. This business segment consists primarily of activities acquired with National City. We do not expect to sustain this level of earnings in the near term.

BlackRock

Our BlackRock business segment earned $151 million in the first nine months of 2009 and $185 million in the first nine months of 2008. Lower equity markets in the first quarter of 2009 impacted BlackRock’s results in this comparison. Third quarter 2009 business segment earnings from BlackRock were $74 million compared with $56 million in the third quarter of 2008 as rallies in equity and fixed income markets along with improved investor sentiment drove improved results.

Global Investment Servicing

Global Investment Servicing earned $41 million for the first nine months of 2009 compared with $97 million for the same period of 2008. For the third quarter of 2009, Global Investment Servicing earned $19 million compared with $34 million for the third quarter of 2008. Results for 2009 were negatively impacted by declines in asset values, fund redemptions, and account closures as a result of the deterioration of the financial markets and the settlement of a legal matter in the first half of 2009.

Distressed Assets Portfolio

This business segment consists primarily of assets acquired with National City. The Distressed Assets Portfolio had earnings of $197 million for the first nine months of 2009, including $39 million in the third quarter. Earnings for the first nine months of 2009 were comprised largely of net interest income of $861 million. The provision for credit losses was $416 million, which reflected credit quality deterioration particularly in the residential development construction and mortgage portfolios. Noninterest expense was $197 million for the first nine months of 2009, comprised primarily of costs associated with foreclosed assets and servicing costs.

Other

“Other” reported a net loss of $495 million for the first nine months of 2009 compared with earnings of $250 million for the first nine months of 2008. The loss for 2009 included the after-tax impact of other-than-temporary impairment charges and alternative investment writedowns, integration costs related primarily to the National City acquisition, a special FDIC assessment, and equity management losses. These items were somewhat offset by a gain related to PNC’s BlackRock LTIP shares obligation in the first quarter and net gains on sales of securities. Earnings for 2008 reflected net securities gains and the partial reduction of the Visa indemnification liability, partially offset by trading losses.

“Other” reported a net loss of $39 million for the third quarter of 2009 compared with earnings of $14 million for the third quarter of 2008. The net loss in the 2009 quarter was primarily due to integration costs related largely to the National City acquisition.

CONSOLIDATED INCOME STATEMENT REVIEW

Our Consolidated Income Statement is presented in Part I, Item 1 of this Report.

Net income for the first nine months of 2009 was $1.3 billion and for the first nine months of 2008 was $1.2 billion. Net income for the third quarter of 2009 was $559 million compared with net income of $259 million for the third quarter of 2008. Our Consolidated Income Statement for the third quarter and first nine months of 2009 includes operating results of National City. As a result, increases in income statement comparisons to the comparable 2008 periods, except as noted, are primarily due to the operating results of National City.

Total revenue for the first nine months of 2009 was $11.9 billion compared with $5.5 billion for the first nine months of 2008. Total revenue for the third quarter of 2009 increased to $4.0 billion from $1.7 billion for the third quarter of 2008.

NET INTEREST INCOME AND NET INTEREST MARGIN

Changes in net interest income and margin result from the interaction of the volume and composition of interest-earning assets and related yields, interest-bearing liabilities and related rates paid, and noninterest-bearing sources of funding. See the Statistical Information – Average Consolidated Balance Sheet And Net Interest Analysis section of this Report for additional information.

The increase in net interest income for both 2009 periods shown above compared with the respective 2008 periods reflected the increase in average interest-earning assets due to National City and the improvement in the net interest margin described below.

We expect our net interest income for the fourth quarter of 2009 to be relatively flat and our net interest margin to improve as we capture the remaining benefit from re-pricing our high-cost deposits and deploying some of our balance sheet liquidity into the investment securities portfolio in light of soft loan demand. This assumes our current expectations for interest rates and economic conditions – we include our current economic assumptions underlying our forward-looking statements in the Cautionary Statement Regarding Forward-Looking Information section of this Financial Review.

The net interest margin was 3.72% for the first nine months of 2009 and 3.34% for the first nine months of 2008. The following factors impacted the comparison:

The net interest margin was 3.76% for the third quarter of 2009 and 3.46% for the third quarter of 2008. The following factors impacted the comparison:

For comparing to the broader market, the average Federal funds rate was .17% for the first nine months of 2009 compared with 2.40% for the first nine months of 2008. The average Federal funds rate was .15% for the third quarter of 2009 compared with 1.96% for the third quarter of 2008.

NONINTEREST INCOME

Summary

Noninterest income totaled $5.2 billion for the first nine months of 2009, compared with $2.7 billion for the first nine months of 2008.

Noninterest income for the first nine months of 2009 included the following:

Noninterest income for the first nine months of 2008 included the impact of the following:

Noninterest income totaled $1.8 billion for the third quarter of 2009, compared with $654 million for the third quarter of 2008. The third quarter of 2009 included net gains on sales of securities of $168 million and net credit-related OTTI on debt and equity securities of $129 million. The third quarter of 2008 included net OTTI on debt and equity securities of $129 million, net losses on private equity and alternative investments of $79 million, net trading losses of $54 million and a loss of $51 million related to our BlackRock LTIP shares adjustment.

Additional Analysis

Fund servicing fees totaled $586 million in the first nine months of 2009 compared with $695 million in the first nine months of 2008. For the third quarter of 2009, fund servicing fees were $194 million compared with $233 million in the third quarter of 2008. Fund servicing fees were negatively impacted by declines in asset values associated with the lower equity markets during the first nine months of 2009, particularly during the first quarter.

Global Investment Servicing provided fund accounting/ administration services for $795 billion of net fund investment assets and provided custody services for $427 billion of fund investment assets at September 30, 2009, compared with $774 billion and $399 billion, respectively at June 30, 2009 and $907 billion and $415 billion, respectively, at September 30, 2008. Increases in both categories compared with the balances at June 30, 2009 reflected the recovering market and client inflows. The decrease in accounting/administration net fund assets compared with the prior year balance was due to market levels and the loss of a client.

Asset management revenue increased $50 million to $639 million in the first nine months of 2009 compared with the first nine months of 2008. Asset management revenue increased $62 million in the third quarter of 2009, to $242 million, compared with the third quarter of 2008. These increases reflected improving equity markets, new business

generation and a shift in assets into higher yielding equity investments during the third quarter of 2009. Assets managed at September 30, 2009 totaled $104 billion compared with $98 billion at June 30, 2009 and $64 billion at September 30, 2008. Amounts for 2009 include the impact of National City. Higher equity earnings from our BlackRock investment also contributed to the improved third quarter results.

For the first nine months of 2009, consumer services fees totaled $975 million compared with $472 million in the first nine months of 2008. Consumer service fees were $330 million for the third quarter of 2009 compared with $153 million for the third quarter of 2008. Higher consumer service fees in the 2009 periods more than offset reduced fees from lower merchant and brokerage transaction volumes related to the recession.

Corporate services revenue totaled $761 million in the first nine months of 2009 and $547 million in the first nine months of 2008. For the third quarter of 2009, corporate services revenue totaled $252 million compared with $198 million for the third quarter of 2008. Corporate services fees include treasury management fees, which continued to be a strong contributor to revenue.

Residential mortgage fees totaled $883 million in the first nine months of 2009, including $207 million in the third quarter. Fees from strong mortgage refinancing volumes, especially in the first quarter, and $320 million of net hedging gains from mortgage servicing rights were reflected in the first nine months of 2009. Net hedging gains were $60 million in the third quarter. We do not expect to repeat this strong nine-month performance in the near term.

Service charges on deposits totaled $714 million for the first nine months of 2009 and $271 million for the first nine months of 2008. Service charges on deposits totaled $248 million for the third quarter of 2009 compared with $97 million for the third quarter of 2008. In both comparisons, service charges on deposits held firm as checking account growth offset declining customer transaction amounts and volumes.

Net gains on sales of securities totaled $406 million for the first nine months of 2009 and $104 million for the first nine months of 2008. Third quarter net gains on sales of securities were $168 million in 2009 and $55 million in 2008. Third quarter 2009 securities gains related primarily to sales of non-agency and agency residential mortgage-backed securities.

The net credit component of OTTI of securities recognized in earnings was a loss of $433 million in the first nine months of 2009, including $129 million in the third quarter. OTTI for the first nine months and third quarter of 2008 were $138 million and $129 million, respectively.

Other noninterest income totaled $666 million for the first nine months of 2009 compared with $143 million for the first nine months of 2008. Other noninterest income for the first nine months of 2009 included gains on sales of loans of $174 million, trading income of $111 million, gains of $103 million related to our equity investment in BlackRock and net losses on private equity and alternative investments of $130 million.

Other noninterest income for the first nine months of 2008 included the $114 million gain from the sale of Hilliard Lyons, the $95 million Visa gain, gains of $69 million related to our equity investment in BlackRock, and losses related to our commercial mortgage loans held for sale, net of hedges, of $213 million.

Other noninterest income for the third quarter of 2009 totaled $314 million compared with a negative $133 million for the third quarter of 2008. The third quarter of 2009 included $88 million of gains on sales of loans. The third quarter of 2008 included net losses on private equity and alternative investments of $79 million, net trading losses of $54 million and a loss of $51 million related to our BlackRock LTIP shares adjustment.

Other noninterest income typically fluctuates from period to period depending on the nature and magnitude of transactions completed. Further details regarding our trading activities are included in the Market Risk Management – Trading Risk portion of the Risk Management section of this Financial Review, further details regarding private equity and alternative investments are included in the Market Risk Management-Equity and Other Investment Risk section and further details regarding gains or losses related to our equity investment in BlackRock are included in the Business Segments Review section.

We expect client-related noninterest income to continue to improve in the fourth quarter of 2009. We also expect that the first conversion of National City customers to the PNC platform in early November 2009 will create more product cross-selling opportunities.

PRODUCT REVENUE

In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management and capital markets-related products and services and commercial mortgage banking activities, that are marketed by several businesses to commercial and retail customers.

Treasury management revenue, which includes fees as well as net interest income from customer deposit balances, totaled $840 million for the first nine months of 2009 and $415 million for the first nine months of 2008. For the third quarter of 2009, treasury management revenue was $281 million compared with $141 million for the third quarter of 2008. In addition to the impact of National City, these increases were primarily related to deposit growth and continued growth in legacy offerings such as purchasing cards and services provided to the Federal government and healthcare customers.

Revenue from capital markets-related products and services totaled $346 million in the first nine months of 2009 compared with $260 million in the first nine months of 2008. Third quarter 2009 revenue was $155 million compared with $80 million for the third quarter of 2008. The impact of National City-related revenue in both comparisons helped to offset declines in merger and acquisition revenues reflecting the difficult financing environment.

Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (including net interest income and noninterest income from loan servicing and ancillary services), and revenue derived from commercial mortgage loans intended for sale and related hedges (including loan origination fees, net interest income, valuation adjustments and gains or losses on sales).

Commercial mortgage banking activities resulted in revenue of $352 million in the first nine months of 2009 compared with $11 million in the first nine months of 2008. For the third quarter of 2009, revenue from commercial mortgage banking activities totaled $119 million compared with a loss of $1 million for the third quarter of 2008. The first nine months of 2009 included gains of $62 million on commercial mortgage loans held for sale, net of hedges. Losses of $213 million on commercial mortgage loans held for sale, net of hedges, reduced revenue for the first nine months of 2008.

PROVISION FOR CREDIT LOSSES

The provision for credit losses totaled $2.9 billion for the first nine months of 2009 compared with $527 million for the first nine months of 2008. For the third quarter of 2009, the provision for credit losses totaled $914 million compared with $190 million for the third quarter of 2008. The provisions for credit losses for the first nine months and third quarter of 2009 were in excess of net charge-offs of $1.9 billion and $650 million, respectively, due to required increases to our allowance for loan and lease losses reflecting continued deterioration in the credit markets and the resulting increase in nonperforming loans.

The Credit Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding factors impacting the provision for credit losses.

We expect the provision for credit losses in the fourth quarter of 2009 to be relatively consistent with the provision recognized in the third quarter of 2009.

NONINTEREST EXPENSE

Noninterest expense for the first nine months of 2009 was $7.4 billion compared with $3.3 billion in the first nine months of 2008. Noninterest expense totaled $2.4 billion in the third quarter of 2009 compared with $1.1 billion in the third quarter of 2008. The increases in both comparisons were substantially related to National City. We also recorded a special FDIC assessment of $133 million in the second quarter of 2009. This assessment was intended to build the FDIC’s Deposit Insurance Fund.

Integration costs totaled $266 million in the first nine months of 2009 compared with $41 million in the first nine months of 2008. Integration costs in the third quarter of 2009 totaled $89 million compared with $14 million in the third quarter of 2008.

Annualized National City acquisition cost savings of approximately $800 million were realized by the third quarter of 2009, on track to exceed our $600 million goal for 2009 and exceed our $1.2 billion two-year goal of reducing combined company annualized noninterest expense.

We expect total noninterest expense for the fourth quarter of 2009 to be approximately the same level as the third quarter of 2009 as ongoing integration costs should be offset by higher cost saves.

EFFECTIVE TAX RATE

Our effective tax rate was 21.9% for the first nine months of 2009 and 32.5% for the first nine months of 2008. For the third quarter of 2009, our effective tax rate was 26.0% compared with 22.2% for the third quarter of 2008. Both 2009 effective tax rates were significantly lower than the statutory rate due to the relationship of pretax income to tax credits and earnings that are not subject to tax.

CONSOLIDATED BALANCE SHEET REVIEW

SUMMARIZED BALANCE SHEET DATA

The summarized balance sheet data above is based upon our Consolidated Balance Sheet in Part I, Item 1 of this Report.

The decline in total assets at September 30, 2009 compared with December 31, 2008 was primarily due to reduced loan demand and lower interest-earning deposits with banks, partially offset by an increase in lower risk investment securities.

An analysis of changes in selected balance sheet categories follows.

LOANS

A summary of the major categories of loans outstanding follows. Outstanding loan balances reflect unearned income, unamortized discount and premium, and purchase discounts and premiums totaling $3.2 billion at September 30, 2009 and $4.1 billion at December 31, 2008, respectively. Absent a significant improvement in the economy or higher loan demand, we expect our total loan portfolio at December 31, 2009 will decline compared with the balance at September 30, 2009.

Loans decreased $14.9 billion, or 8%, as of September 30, 2009 compared with December 31, 2008. Loans represented 59% of total assets at September 30, 2009 and 60% of total assets at December 31, 2008.

Commercial lending represented 54% of the loan portfolio and consumer lending represented 46% at September 30, 2009. Commercial lending declined 14% at September 30, 2009

compared with December 31, 2008. Commercial loans, which comprised 65% of total commercial lending, declined due to reduced demand for new loans, lower utilization levels and paydowns as clients continued to deleverage their balance sheets. Total consumer lending decreased slightly at September 30, 2009 from December 31, 2008.

Details Of Loans

Our loan portfolio continued to be diversified among numerous industries and types of businesses. The loans that we hold are also concentrated in, and diversified across, our principal geographic markets.

Commercial lending is the largest category and is the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan and lease losses. We have allocated $3.3 billion, or 69%, of the total allowance for loan and lease losses at September 30, 2009 to these loans.

We allocated $1.5 billion, or 31%, of the remaining allowance at that date to consumer lending. This allocation also considers other relevant factors such as:

Higher Risk Loans

Our home equity lines of credit and installment loans outstanding totaled $36.4 billion at September 30, 2009. In this portfolio, we consider the higher risk loans to be those with a recent FICO credit score of less than or equal to 660 and a loan-to-value ratio greater than 90%. Such loans totaled $1.2 billion or approximately 3% of the total home equity line and installment loans at September 30, 2009. These higher risk loans were concentrated in our geographic footprint with 29% in Pennsylvania, 14% in Ohio, 11% in New Jersey, 7% in Illinois, 6% Missouri, and 5% in Kentucky, with the remaining loans dispersed across several other states. Option ARM loans and negative amortization loans in this portfolio were not significant. Within the higher risk home equity portfolio, approximately 11% are in some stage of delinquency and 5% are in late stage (90+ days) delinquency status.

In our $18.5 billion residential mortgage portfolio, loans with a recent FICO credit score of less than or equal to 660 and a loan-to-value ratio greater than 90% totaled $0.5 billion and comprised approximately 3% of this portfolio at September 30, 2009. Fifteen percent of the higher risk loans are located in California, 14% in Illinois, 13% in Florida, 9% in Maryland, 6% in Pennsylvania, 6% in Ohio, and 6% in New Jersey, with the remaining loans dispersed across several other states. Option ARM loans and negative amortization loans in this portfolio were not significant. Within the higher risk residential mortgage portfolio, approximately 48% are in some stage of delinquency and 36% are in 90+ days late stage delinquency status.

Our higher risk loans as defined above exclude government insured/government guaranteed loans. We believe that government insured/government guaranteed loans will not result in a significant loss because of their structure.

Within our home equity lines of credit, installment loans and residential mortgage portfolios, approximately 3% of the aggregate $54.9 billion loan outstandings have loan-to-value ratios in excess of 100%. The impact of housing price depreciation is reflected in the allowance for loans and lease losses as a result of the consumer reserve methodology process. The consumer reserve process is sensitive to collateral values which in turn affect loan loss severity. While our consumer reserve methodology strives to reflect all significant risk factors, there is an element of uncertainty

associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information such as housing price depreciation. We provide additional reserves where appropriate to provide coverage for losses attributable to such risks.

We obtain updated property values annually for select residential mortgage loan portfolios. We are expanding this valuation process to update the property values on the majority of our real estate secured consumer loan portfolios.

Valuation of FASB ASC 310-30 Purchased Impaired Loans

Subsequent to December 31, 2008, an additional $2.6 billion of acquired National City loans were identified as impaired under FASB ASC 310-30. A total fair value mark of $1.8 billion was recorded, resulting in a $.8 billion net investment. These impairments were effective December 31, 2008 based on additional information regarding the borrowers and credit conditions that existed as of the acquisition date.

The unpaid principal balance of purchased impaired loans declined from $21.9 billion at December 31, 2008 to $17.7 billion at September 30, 2009 due to amounts determined to be uncollectible, payoffs and disposals. The remaining fair value mark at September 30, 2009 was $6.6 billion and declined from $9.2 billion at December 31, 2008 primarily due to amounts determined to be uncollectible. The net investment of $12.7 billion at December 31, 2008 declined to $11.1 billion at September 30, 2009 due to payoffs and disposals, partially offset by accretion during the first nine months of 2009. We currently expect to collect total cash flows of $14.2 billion on purchased impaired loans, representing the $11.1 billion recorded investment at September 30, 2009 and the accretable net interest of $3.1 billion shown in the table.

Information related to purchase accounting accretion and accretable net interest recognized during 2009 in connection with our acquisition of National City follows.

Purchase Accounting Accretion

Accretable Net Interest

Adjustments to the recorded investment in purchased impaired loans include purchase accounting accretion, reclassifications from nonaccretable to accretable interest as a result of increases in estimated cash flows, and reductions in the accretable amount as a result of additional loan impairments as of the National City acquisition close date of December 31, 2008.

Net unfunded credit commitments are comprised of the following:

Net Unfunded Credit Commitments

Unfunded commitments are concentrated in our primary geographic markets. Commitments to extend credit represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. Commercial commitments are reported net of participations, assignments and syndications, primarily to financial institutions, totaling $9.6 billion at September 30, 2009 and $8.6 billion at December 31, 2008.

Unfunded liquidity facility commitments and standby bond purchase agreements totaled $6.4 billion at September 30, 2009 and $7.0 billion at December 31, 2008 and are included in the preceding table primarily within the “Commercial and commercial real estate” category.

In addition to credit commitments, our net outstanding standby letters of credit totaled $9.9 billion at September 30, 2009 and $10.3 billion at December 31, 2008. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

INVESTMENT SECURITIES

Details of Investment Securities

The carrying amount of investment securities totaled $54.4 billion at September 30, 2009 and $43.5 billion at December 31, 2008 and represented 20% of total assets at September 30, 2009 compared with 15% of total assets at December 31, 2008. The increase in securities of $10.9 billion since December 31, 2008 primarily reflected the purchase of US Treasury and government agency securities as well as price appreciation in the available for sale portfolio, partially offset by maturities, prepayments and sales.

We evaluate our portfolio of investment securities in light of changing market conditions and other factors and, where appropriate, take steps intended to improve our overall positioning. Overall, we consider the portfolio to be well-diversified and high quality. US Treasury and government agencies, agency residential mortgage-backed securities and agency commercial mortgage-backed securities collectively represented 59% of the investment securities portfolio at September 30, 2009.

At September 30, 2009, the securities available for sale portfolio included a net unrealized loss of $2.2 billion, which represented the difference between fair value and amortized cost. The comparable amount at December 31, 2008 was a net unrealized loss of $5.4 billion. The fair value of investment

securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally decreases when credit spreads widen and vice versa. The net unrealized losses at September 30, 2009 did not reflect significant credit quality concerns with the underlying assets. The decline in the unrealized pretax loss from year-end was primarily the result of improving fair values in non-agency residential mortgage-backed and non-agency commercial mortgage-backed securities. Net unrealized gains and losses in the securities available for sale portfolio are included in shareholders’ equity as accumulated other comprehensive income or loss, net of tax.

The expected weighted-average life of investment securities (excluding corporate stocks and other) was 4.0 years at September 30, 2009 and 3.1 years at December 31, 2008.

We estimate that at September 30, 2009 the effective duration of investment securities was 2.6 years for an immediate 50 basis points parallel increase in interest rates and 2.5 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2008 were 3.7 years and 3.1 years, respectively.

At least quarterly we conduct a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine whether the loss represents OTTI. Our assessment considers the security structure, recent security collateral performance metrics, external credit ratings, failure of the issuer to make scheduled interest or principal payments, our judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts. We also consider the severity of the impairment and the length of time that the security has been impaired in our assessment. Results of the periodic assessment are reviewed by a cross-functional senior management team representing Asset & Liability Management, Finance, and Balance Sheet Risk Management. The senior management team considers the results of the assessments, as well as other factors, in determining whether the impairment is other than temporary.

New US GAAP issued in April 2009 amended OTTI guidance for debt securities regarding recognition and disclosure. The major change in the guidance was the requirement to recognize only the credit portion of OTTI charges in current earnings for those debt securities where there is no intent to sell and it is not more likely than not that the entity would be

required to sell the security prior to expected recovery. The remaining portion of OTTI charges is included in accumulated other comprehensive loss.

PNC adopted this guidance effective January 1, 2009. Upon adoption, we recorded a cumulative effect adjustment of $110 million to retained earnings at January 1, 2009 to reclassify the noncredit component of OTTI recognized in 2008 from retained earnings to accumulated other comprehensive loss. During the first nine months of 2009, we recognized OTTI losses of $1.5 billion, of which $433 million represented the credit portion of the losses recognized as a reduction of noninterest income in our Consolidated Income Statement. The remaining noncredit portion of the OTTI losses totaled $1.1 billion and was recognized in accumulated other comprehensive loss on the Consolidated Balance Sheet at September 30, 2009. The credit portion of OTTI recognized in our Consolidated Income Statement for the third quarter of 2009 was $129 million. Included below is detail on the net

unrealized losses and OTTI credit losses recorded on non-agency residential and commercial mortgage-backed and

other asset-backed securities, which represent the portfolios that have generated the majority of the OTTI losses.

Residential Mortgage-Backed Securities

At September 30, 2009, our residential mortgage-backed securities portfolio was comprised of $23.8 billion fair value of US government agency-backed securities and $8.8 billion fair value of non-agency (private issuer) securities. The agency securities are generally collateralized by 1-4 family, conforming, fixed-rate residential mortgages. The non-agency securities are also generally collateralized by 1-4 family residential mortgages. The mortgage loans underlying the non-agency securities are generally non-conforming (i.e., original balances in excess of the amount qualifying for agency securities) and predominately have interest rates that are fixed for a period of time, after which the rate adjusts to a floating rate based upon a contractual spread that is indexed to a market rate (i.e., a “hybrid ARM”), or interest rates that are fixed for the term of the loan.

Substantially all of the securities are senior tranches in the securitization structure and have credit protection in the form

of credit enhancement, over-collateralization and/or excess spread accounts.

During the first nine months of 2009, we recorded OTTI credit losses of $340 million on non-agency residential mortgage-backed securities, including $92 million in the third quarter. As of September 30, 2009, $302 million of the year-to-date credit losses related to securities rated below investment grade. As of September 30, 2009, the noncredit portion of OTTI losses recorded in accumulated other comprehensive loss for non-agency residential mortgage-backed securities totaled $882 million and the related securities had a fair value of $2.1 billion.

The fair value of sub-investment grade investment securities for which we have not recorded an OTTI credit loss as of September 30, 2009 totaled $3.1 billion, with unrealized net losses of $882 million. The results of our security-level assessments indicate that we will recover the entire cost basis

of these securities. Note 7 Investment Securities in the Notes To Consolidated Financial Statements of this Report provides further detail regarding our process for assessing OTTI for these securities.

Commercial Mortgage-Backed Securities

The fair value of the non-agency commercial mortgage-backed securities portfolio was $5.9 billion at September 30, 2009 and consisted of fixed-rate, private-issuer securities collateralized by non-residential properties, primarily retail properties, office buildings, and multi-family housing. The agency commercial mortgage-backed securities portfolio was $1.1 billion fair value at September 30, 2009 consisting of multi-family housing. Substantially all of the securities are the most senior tranches in the subordination structure.

During the first nine months of 2009, we recorded OTTI credit losses of $6 million on non-agency commercial mortgage-backed securities. There were no OTTI credit losses on commercial mortgage-backed securities recorded during the third quarter. The remaining fair value of the securities for which OTTI was recorded approximates zero. All of the impaired securities were rated below investment grade.

Other Asset-Backed Securities

The fair value of the asset-backed securities portfolio was $4.1 billion at September 30, 2009 and consisted of fixed-rate and floating-rate, private-issuer securities collateralized primarily by various consumer credit products, including second-lien residential mortgage loans, credit cards, and automobile loans. Substantially all of the securities are senior tranches in the securitization structure and have credit protection in the form of credit enhancement, over-collateralization and/or excess spread accounts.

During the first nine months of 2009, we recorded OTTI credit losses of $76 million on other asset-backed securities, including $34 million in the third quarter of 2009. All of the securities were collateralized by second-lien residential mortgage loans and were rated below investment grade. As of September 30, 2009, the noncredit portion of OTTI losses recorded in accumulated other comprehensive loss for other asset-backed securities totaled $238 million and the related securities had a fair value of $495 million.

For the sub-investment grade investment securities for which we have not recorded an OTTI loss through September 30, 2009, the remaining fair value was $391 million, with unrealized net losses of $146 million. The results of our security-level assessments indicate that we will recover the entire cost basis of these securities. Note 7 Investment Securities in the Notes To Consolidated Financial Statements of this Report provides further detail regarding our process for assessing OTTI for these securities.

If the current housing and economic crisis were to continue for the foreseeable future or worsen, if market volatility and illiquidity were to continue or worsen, or if market interest

rates were to increase appreciably, the valuation of our investment securities portfolio could continue to be adversely affected and we could incur additional OTTI credit losses that would impact our Consolidated Income Statement.

Loans Held For Sale

We stopped originating certain commercial mortgage loans designated as held for sale during the first quarter of 2008 and intend to continue pursuing opportunities to reduce these positions at appropriate prices. Strong origination volumes partially offset sales to government agencies of $4.0 billion of commercial mortgages held for sale at lower of cost or market during the first nine months of 2009, including $0.8 billion in the third quarter.

We recognized net gains of $62 million in the first nine months of 2009 on the valuation and sale of commercial mortgage loans held for sale, net of hedges, including $28 million in the third quarter. Losses of $213 million on the valuation and sale of commercial mortgage loans held for sale carried at fair value, net of hedges, were recognized in the first nine months of 2008, including losses of $75 million in the third quarter of that year. We sold $.2 billion and $.5 billion, respectively, of commercial mortgage loans held for sale carried at fair value in the first nine months of 2009 and 2008.

Residential mortgage loans held for sale decreased during the first nine months of 2009 despite strong refinancing volumes, especially in the first quarter. Loan origination volume was $16.9 billion, including $3.6 billion in the third quarter. Substantially all such loans were originated to agency standards. We sold $17.0 billion of loans and recognized related gains of $409 million during the first nine months of 2009, of which $83 million occurred in the third quarter.

Net interest income on residential mortgage loans held for sale was $261 million for the first nine months of 2009, including $83 million in the third quarter.

Goodwill and Other Intangible Assets

Goodwill increased $418 million and other intangible assets increased $628 million at September 30, 2009 compared with December 31, 2008. Note 2 National City Acquisition and

Note 9 Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements of this Report have further details on the National City-related items that were the primary drivers of these increases.

FUNDING AND CAPITAL SOURCES

Details Of Funding Sources

Total funding sources decreased $19.4 billion at September 30, 2009 compared with December 31, 2008 driven by declines in other time deposits, retail certificates of deposit and Federal Home Loan Bank borrowings.

Total deposits decreased $9.1 billion at September 30, 2009 compared with December 31, 2008. Relationship-growth driven increases in money market, demand and savings deposits were more than offset by declines in other time deposits, reflecting a planned run-off of brokered certificates of deposits, and retail certificates of deposits. Interest-bearing deposits represented 77% of total deposits at September 30, 2009 compared with 81% at December 31, 2008.

The $10.3 billion decline in borrowed funds since December 31, 2008 primarily resulted from repayments of Federal Home Loan Bank borrowings. During the first quarter of 2009, PNC issued $1.0 billion of senior notes guaranteed by the FDIC under the Temporary Liquidity Guarantee Program. In addition, PNC issued $1.5 billion of senior notes during the second and third quarters of 2009, which were not issued under the Temporary Liquidity Guarantee Program. The Liquidity Risk Management section of this Financial Review contains further details regarding actions we have taken which impacted our borrowed funds balances in 2009.

Capital

We manage our capital position by making adjustments to our balance sheet size and composition, issuing debt, equity or hybrid instruments, executing treasury stock transactions, managing dividend policies and retaining earnings. The

reduction in our quarterly common stock dividend that began in April 2009 is expected to add $1 billion annually to PNC’s common equity and cash positions, resulting in annual improvement in capital ratios of approximately 40 basis points.

Total shareholders’ equity increased $3.5 billion, to $28.9 billion, at September 30, 2009 compared with December 31, 2008 primarily due to the following:

Common shares outstanding were 461 million at September 30, 2009 and 443 million at December 31, 2008. As described in the Executive Summary section of this Financial Review, in May 2009 we raised $624 million in new common equity at market prices through the issuance of 15 million shares of common stock. The offering was related to our plan for increasing common equity following the results of the stress tests conducted under the Supervisory Capital Assessment Program by the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency.

We expect to continue to increase our common equity as a proportion of total capital through growth in retained earnings and will consider other capital opportunities as appropriate. We do not contemplate exchanging any of the shares of preferred stock issued to the US Treasury under the TARP Capital Purchase Program for shares of mandatorily convertible preferred stock.

Our current common stock repurchase program permits us to purchase up to 25 million shares of PNC common stock on the open market or in privately negotiated transactions. This program will remain in effect until fully utilized or until modified, superseded or terminated. The extent and timing of share repurchases under this program will depend on a number of factors including, among others, market and general economic conditions, economic and regulatory capital considerations, alternative uses of capital, regulatory and contractual limitations, and the potential impact on our credit ratings. We did not purchase any shares during the first nine months of 2009 under this program and, as described below, are restricted from doing so under the TARP Capital Purchase Program.

Under the TARP Capital Purchase Program, there are restrictions on dividends and common share repurchases associated with the preferred stock that we issued to the US Treasury in accordance with that program. As is typical with

cumulative preferred stock, dividend payments for this preferred stock must be current before dividends may be paid on junior shares, including our common stock, or junior shares can be repurchased or redeemed. Also, under the TARP Capital Purchase Program agreements, the US Treasury’s consent will be required for any increase in common dividends per share above $.66 per share quarterly until the third anniversary of the preferred stock issuance as long as the US Treasury continues to hold any of the preferred stock. Further, during that same period, the US Treasury’s consent will be required, unless the preferred stock is no longer held by the US Treasury, for any share repurchases with limited exceptions, most significantly purchases of common shares in connection with any benefit plan in the ordinary course of business consistent with past practice. Any increase in our dividends while we remain subject to these restrictions would depend on the status of our efforts to put ourselves into position to redeem the US Treasury’s investment in PNC.

Risk-Based Capital

Capital levels were strengthened during the first nine months of 2009. Higher capital levels were net of dividend payments including $237 million paid to the US Department of the Treasury during the first nine months of 2009, of which $95 million was paid during the third quarter, on $7.6 billion of preferred stock. We plan to redeem the Treasury Department’s investment as soon as appropriate and in a shareholder-friendly manner, subject to approval by our banking regulators.

PNC’s Tier 1 risk-based capital ratio increased by 110 basis points to 10.8% at September 30, 2009 from 9.7% at December 31, 2008. The increase in the ratio was due to higher risk-based capital primarily from retained earnings and the May 2009 common equity issuance coupled with a decline in risk-weighted assets. Our Tier 1 common capital ratio was 5.5% at September 30, 2009 compared with 4.8% at December 31, 2008.

The leverage ratio at December 31, 2008 reflected the favorable impact on Tier 1 risk-based capital from the issuance of securities under TARP and the issuance of PNC common stock in connection with the National City acquisition, both of which occurred on December 31, 2008. In addition, the ratio as of that date did not reflect any impact of National City on PNC’s adjusted average total assets.

The access to, and cost of, funding new business initiatives including acquisitions, the ability to engage in expanded business activities, the ability to pay dividends, the level of deposit insurance costs, and the level and nature of regulatory oversight depend, in part, on a financial institution’s capital strength. At September 30, 2009 and December 31, 2008, each of our domestic bank subsidiaries was considered “well capitalized” based on US regulatory capital ratio requirements, which are indicated on page 2 of this Report. We believe our bank subsidiaries will continue to meet these requirements during the remainder of 2009. We merged the charter of PNC Bank Delaware into PNC Bank, N.A. during August 2009. We are merging the charter of National City Bank into PNC Bank, N.A. effective as of the close of business on November 6, 2009.

OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTERESTENTITIES

We engage in a variety of activities that involve unconsolidated entities including qualified special purpose entities (QSPEs) or that are otherwise not reflected in our Consolidated Balance Sheet that are generally referred to as “off-balance sheet arrangements.” The following sections of this Report provide further information on these types of activities:

The following provides a summary of variable interest entities (VIEs), including those that we have consolidated and those in which we hold a significant variable interest but have not consolidated into our financial statements as of September 30, 2009 and December 31, 2008.

Consolidated VIEs – PNC Is Primary Beneficiary

Non-Consolidated VIEs – Significant Variable Interests