Edgar Filing: PNC FINANCIAL SERVICES GROUP INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-09718

The PNC Financial Services Group, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania

25-1435979

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707

(Address of principal executive offices, including zip code)

(412) 762-2000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of July 30, 2010, there were 525,399,769 shares of the registrant’s common stock ($5 par value) outstanding.

The PNC Financial Services Group, Inc.

Cross-Reference Index to Second Quarter 2010 Form 10-Q


		Pages
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

Consolidated Income Statement		58
Consolidated Balance Sheet		59
Consolidated Statement Of Cash Flows		60

Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies		61
Note 2 Divestiture		62
Note 3 Loan Sale and Servicing Activities and Variable Interest Entities		63
Note 4 Loans and Commitments To Extend Credit		68
Note 5 Asset Quality		69
Note 6 Purchased Impaired Loans Related to National City		70
Note 7 Investment Securities		71
Note 8 Fair Value		76
Note 9 Goodwill and Other Intangible Assets		88
Note 10 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities		90
Note 11 Certain Employee Benefit And Stock-Based Compensation Plans		91
Note 12 Financial Derivatives		93
Note 13 Earnings Per Share		100
Note 14 Total Equity And Other Comprehensive Income		101
Note 15 Income Taxes		102
Note 16 Summarized Financial Information of BlackRock		103
Note 17 Legal Proceedings		103
Note 18 Commitments and Guarantees		105
Note 19 Segment Reporting		108

Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis		111-112

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		1-57

Financial Review

Consolidated Financial Highlights		1-2
Executive Summary		3
Consolidated Income Statement Review		8
Consolidated Balance Sheet Review		11
Off-Balance Sheet Arrangements And Variable Interest Entities		21
Fair Value Measurements		27
Business Segments Review		28
Critical Accounting Estimates And Judgments		39
Status Of Qualified Defined Benefit Pension Plan		41
Risk Management		42
Internal Controls And Disclosure Controls And Procedures		52
Glossary Of Terms		52
Cautionary Statement Regarding Forward-Looking Information		55

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		42-51 and 93-99

Item 4. Controls and Procedures.		52

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.		113
Item 1A. Risk Factors.		113
Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds.		113
Item 6. Exhibits.		114
Exhibit Index.		114
Signature		114

Corporate Information		115

FINANCIAL REVIEW

CONSOLIDATED FINANCIAL HIGHLIGHTS

THE PNC FINANCIAL SERVICES GROUP, INC.


Dollars in millions, except per share data	Three months ended June 30						Six months ended June 30
Unaudited	2010			2009			2010			2009
FINANCIAL RESULTS (a)
Revenue
Net interest income	$	2,435		$	2,193		$	4,814		$	4,513
Noninterest income		1,477			1,610			2,861			2,976
Total revenue		3,912			3,803			7,675			7,489
Noninterest expense		2,002			2,492			4,115			4,650
Pretax, pre-provision earnings (b)	$	1,910		$	1,311		$	3,560		$	2,839
Provision for credit losses	$	823		$	1,087		$	1,574		$	1,967
Income from continuing operations before noncontrolling interests	$	781		$	195		$	1,429		$	715
Income from discontinued operations, net of income taxes (c)	$	22		$	12		$	45		$	22
Net income	$	803		$	207		$	1,474		$	737
Net income attributable to common shareholders (d)	$	786		$	65		$	1,119		$	525
Diluted earnings per common share
Continuing operations	$	1.43		$	.11		$	2.06		$	1.11
Discontinued operations (c)		.04			.03			.09			.05
Net income	$	1.47		$	.14		$	2.15		$	1.16
Cash dividends declared per common share	$	.10		$	.10		$	.20		$	.76
Total preferred dividends declared, including TARP	$	25		$	119		$	118		$	170
TARP Capital Purchase Program preferred dividends (d)				$	95		$	89		$	142
Impact of TARP Capital Purchase Program preferred dividends per diluted common share				$	.21		$	.17		$	.32
Redemption of TARP preferred stock discount accretion (d)							$	250
PERFORMANCE RATIOS
From continuing operations
Noninterest income to total revenue		38	%		42	%		37	%		40	%
Efficiency		51			66			54			62
From net income
Net interest margin (e)		4.35	%		3.60	%		4.29	%		3.70	%
Return on:
Average common shareholders’ equity		11.52			1.52			8.63			5.72
Average assets		1.22			.30			1.12			.53

See page 52 for a glossary of certain terms used in this Report.

Certain prior period amounts have been reclassified to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements.

(a)	The Executive Summary and Consolidated Income Statement Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.

(b)	We believe that pretax, pre-provision earnings, a non-GAAP measure, is useful as a tool to help evaluate our ability to provide for credit costs through operations.

(c)

Includes results of operations for PNC Global Investment Servicing Inc. (GIS) for all periods presented. We entered into a definitive agreement to sell GIS in February 2010, and closed the sale on July 1, 2010. See Sale of PNC Global Investment Servicing in the Executive Summary section of the Financial Review section of this Report and Note 2 Divestiture in the Notes To Consolidated Financial Statements of this Report for additional information.

(d)

(e)

Calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from Federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP in the Consolidated Income Statement. The taxable-equivalent adjustments to net interest income for the three months ended June 30, 2010 and June 30, 2009 were $19 million and $16 million, respectively. The taxable-equivalent adjustments to net interest income for the six months ended June 30, 2010 and June 30, 2009 were $37 million and $31 million, respectively.

CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED) (a)


Unaudited	June 30 2010			December 31 2009			June 30 2009
BALANCE SHEET DATA (dollars in millions, except per share data)
Assets	$	261,695		$	269,863		$	279,754
Loans (b) (c)		154,342			157,543			165,009
Allowance for loan and lease losses (b)		5,336			5,072			4,569
Interest-earning deposits with banks (b)		5,028			4,488			10,190
Investment securities (b)		53,717			56,027			49,969
Loans held for sale (c)		2,756			2,539			4,662
Goodwill and other intangible assets		12,138			12,909			12,890
Equity investments (b)		10,159			10,254			8,168
Noninterest-bearing deposits		44,312			44,384			41,806
Interest-bearing deposits		134,487			142,538			148,633
Total deposits		178,799			186,922			190,439
Transaction deposits		125,712			126,244			120,324
Borrowed funds (b)		40,427			39,261			44,681
Shareholders’ equity		28,377			29,942			27,294
Common shareholders’ equity		27,725			22,011			19,363
Accumulated other comprehensive loss		442			1,962			3,101
Book value per common share		52.77			47.68			42.00
Common shares outstanding (millions)		525			462			461
Loans to deposits		86	%		84	%		87	%

ASSETS UNDER ADMINISTRATION (billions)
Discretionary assets under management	$	99		$	103		$	98
Nondiscretionary assets under administration		100			102			124
Total assets under administration	$	199		$	205		$	222

CAPITAL RATIOS
Tier 1 risk-based (d) (e)		10.7	%		11.4	%		10.5	%
Tier 1 common (e)		8.3			6.0			5.3
Total risk-based (d)		14.3			15.0			14.1
Leverage (d)		9.1			10.1			9.1
Common shareholders’ equity to assets		10.6			8.2			6.9

ASSET QUALITY RATIOS
Nonperforming loans to total loans		3.31	%		3.60	%		2.52	%
Nonperforming assets to total loans and foreclosed and other assets		3.81			3.99			2.81
Nonperforming assets to total assets		2.26			2.34			1.66
Net charge-offs to average loans (for the three months ended) (annualized)		2.18			2.09			1.89
Allowance for loan and lease losses to total loans		3.46			3.22			2.77
Allowance for loan and lease losses to nonperforming loans (f)		104			89			110

(a)	The Executive Summary and Consolidated Balance Sheet Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.

(b)

Amounts include consolidated variable interest entities. Some June 30, 2010 amounts include consolidated variable interest entities that we consolidated effective January 1, 2010 based on guidance in ASC 810, Consolidation. See Consolidated Balance Sheet in Part I, Item 1 of this Report for additional information.

(c)	Amounts include items for which we have elected the fair value option. See Consolidated Balance Sheet in Part I, Item 1 of this Report for additional information.

(d)	The regulatory minimums are 4.0% for Tier 1 risk-based, 8.0% for Total risk-based, and 4.0% for Leverage capital ratios. The well-capitalized levels are 6.0% for Tier 1 risk-based, 10.0% for Total risk-based, and 5.0% for Leverage capital ratios.

(e)

Our Tier 1 risk-based capital ratio and our Tier 1 common capital ratio would have been 11.3% and 9.0%, respectively, at June 30, 2010 had they included the net impact of the July 1, 2010 sale of GIS. A reconciliation of these ratios reflecting the estimated impact of the sale of GIS to the ratios set forth in the table above is included in the Risk-Based Capital portion of the Financial Review section of this Report. We believe that the disclosure of these ratios reflecting the estimated impact of the sale of GIS provides additional meaningful information regarding the risk-based capital ratios at that date and the impact of this event on these ratios.

(f)	Nonperforming loans do not include purchased impaired loans or loans held for sale. Allowance for loan and lease losses includes impairment reserves attributable to purchased impaired loans.

FINANCIAL REVIEW

THE PNC FINANCIAL SERVICES GROUP, INC.

This Financial Review, including the Consolidated Financial Highlights, should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report and with Items 6, 7, 8 and 9A of our 2009 Annual Report on Form 10-K (2009 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business and regulatory risks, see the Risk Management section in this Financial Review and Items 1A and 7 of our 2009 Form 10-K and Item 1A included in Part II of this Report. Also, see the Cautionary Statement Regarding Forward-Looking Information and Critical Accounting Estimates And Judgments sections in this Financial Review for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and those anticipated in the forward-looking statements included in this Report. See Note 19 Segment Reporting in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report for a reconciliation of total business segment earnings to total PNC consolidated net income from continuing operations before noncontrolling interests as reported on a generally accepted accounting principles (GAAP) basis.

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.

PNC has businesses engaged in retail banking, corporate and institutional banking, asset management, and residential mortgage banking, 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, Virginia, Missouri, Delaware, Washington, D.C., and Wisconsin.

SALE OF PNC GLOBAL INVESTMENT SERVICING

On July 1, 2010, we sold PNC Global Investment Servicing Inc. (GIS), a leading provider of processing, technology and business intelligence services to asset managers, broker-dealers and financial advisors worldwide, for $2.3 billion in cash pursuant to a definitive agreement entered into on February 2, 2010. The estimated after-tax gain of $335 million related to this sale will be recognized in the third quarter of 2010. The sale is expected to add $1.4 billion to regulatory capital and improve Tier 1 risk-based and Tier 1 common capital ratios by approximately 60 basis points and 70 basis points, respectively.

Results of operations of GIS are presented as income from discontinued operations, net of income taxes, on our Consolidated Income Statement for the periods presented in this Report. Once we entered into the sales agreement, GIS was no longer a reportable business segment.

Further information regarding the GIS sale is included in Note 2 Divestiture in our Notes To Consolidated Financial Statements in this Report.

NATIONAL CITY INTEGRATION COSTS

A summary of pretax merger and integration costs in connection with our December 31, 2008 acquisition of National City Corporation (National City) follows.

NATIONAL CITY INTEGRATION COSTS


In millions	Second Quarter		First Six Months		Full Year
2010	$	100	$	213	$	343	(a)
2009	$	125	$	177	$	421
2008		—		—	$	575	(b)

(a)	Estimated.

(b)	Includes $504 million conforming provision for credit losses.

The transaction is expected to result in the reduction of more than $1.8 billion of combined company annualized noninterest expense through the elimination of operational and administrative redundancies. We have completed the customer and branch conversions to our technology platforms and continue to integrate 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 re-establishing 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 in excess of 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 re-establishing 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. We made substantial progress in transitioning our balance sheet throughout 2009 and in the first six months of 2010, working to institute our moderate risk philosophy throughout our expanded franchise. 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.

RECENT MARKET AND INDUSTRY DEVELOPMENTS

The economic turmoil that began in the middle of 2007 and continued through most of 2008 has now settled into a slow economic recovery with, at this time, somewhat uncertain prospects. This has been accompanied by dramatic changes in the competitive landscape of the financial services industry and a wholesale reformation of the legislative and regulatory landscape with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was signed into law by President Obama on July 21, 2010.

Dodd-Frank is extensive, complicated and comprehensive legislation that impacts practically all aspects of a banking organization. Dodd-Frank will negatively impact revenue and increase both the direct and indirect costs of doing business for PNC, as it includes provisions that could increase regulatory fees and deposit insurance assessments and impose heightened capital and prudential standards, while at the same time impacting the nature and costs of PNC’s businesses, including consumer lending, private equity investment, derivatives transactions, interchange fees on debit card transactions, and asset securitizations.

Until such time as the regulatory agencies issue proposed and final regulations implementing the numerous provisions of Dodd-Frank, a process that will extend at least over the next 12 months and might last several years, PNC will not be able to fully assess the impact the legislation will have on its businesses. However, we believe that the expected changes will be manageable for PNC and will have a smaller impact on us than many Wall Street banks.

Items 1 and 7 of our 2009 Form 10-K include information regarding efforts over the past 18 months by the Federal government, including the US Congress, 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 that 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, Dodd-Frank and other legislative, administrative and regulatory initiatives.

Developments during the first half of 2010 related to these matters are summarized below.

TARP Capital Purchase Program

We redeemed the Series N (TARP) Preferred Stock on February 10, 2010. In connection with the redemption, we accelerated the accretion of the remaining issuance discount on the Series N Preferred Stock and recorded a corresponding reduction in retained earnings of $250 million in the first quarter of 2010. This resulted in a one-time, noncash reduction in net income attributable to common shareholders and related basic and diluted earnings per share. See Repurchase of Outstanding TARP Preferred Stock and Sale by US Treasury of TARP Warrant in Note 14 Total Equity And Other Comprehensive Income in the Notes To Consolidated Financial Statements in this Report for additional information.

FDIC Temporary Liquidity Guarantee Program

The FDIC’s TLGP is designed to strengthen confidence and encourage liquidity in the banking system by:

•

Guaranteeing newly issued senior unsecured debt of eligible institutions, including FDIC-insured banks and thrifts, as well as certain holding companies (TLGP-Debt Guarantee Program), and

•

Providing full deposit insurance coverage for non-interest bearing transaction accounts in FDIC-insured institutions, regardless of the dollar amount (TLGP-Transaction Account Guarantee Program).

PNC did not issue any securities under the TLGP-Debt Guarantee Program during the first six months of 2010.

From October 14, 2008 through December 31, 2009, PNC Bank, National Association (PNC Bank, N.A.) participated in the TLGP-Transaction Account Guarantee Program. Beginning January 1, 2010, PNC Bank, N.A. is no longer participating in this program, but Dodd-Frank extends the program for all banks for two years, beginning December 31, 2010.

Public-Private Investment Fund Programs (PPIFs)

PNC did not participate in these programs during the first six months of 2010.

Home Affordable Modification Program (HAMP)

PNC began participating in HAMP for GSE mortgages in May 2009 and for non-GSE mortgages in July 2009, and intends to begin participation in the Second Lien Program in August 2010. HAMP is scheduled to terminate as of December 31, 2012.

Home Affordable Refinance Program (HARP)

PNC began participating in HARP in May 2009. The program terminated as of June 10, 2010.

As noted above, Dodd-Frank and its implementation, as well as other statutory and regulatory initiatives that will be ongoing, will introduce numerous regulatory changes over the next several years. While we believe that we are well positioned to navigate through this process, we cannot predict the ultimate impact of these actions on PNC’s business plans and strategies.

KEY FACTORS AFFECTING FINANCIAL PERFORMANCE

Our financial performance is substantially affected by several external factors outside of our control including the following:

•

General economic conditions, including the speed and stamina of the moderate economic recovery that began last year in general and on our customers in particular,

•

The level of, and direction, timing and magnitude of movement in, interest rates and the shape of the interest rate yield curve,

•

The functioning and other performance of, and availability of liquidity in, the capital and other financial markets,

•

Loan demand, utilization of credit commitments and standby letters of credit, and asset quality,

•

Customer demand for other products and services,

•

Changes in the competitive and regulatory landscape and in counterparty creditworthiness and performance as the financial services industry restructures in the current environment,

•

The impact of the extensive reforms enacted in the Dodd-Frank legislation and other legislative, regulatory and administrative initiatives, including those outlined above, and

•

The impact of market credit spreads on asset valuations.

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

•

Further success in the acquisition, growth and retention of customers,

•

Completion of the integration of the National City acquisition,

•

Continued development of the geographic markets related to our recent acquisitions, including full deployment of our product offerings,

•

Revenue growth,

•

A sustained focus on expense management, including achieving our cost savings targets associated with our National City integration, and creating positive pretax, pre-provision earnings,

•

Managing the distressed assets portfolio and other impaired assets,

•

Improving our overall asset quality and continuing to meet evolving regulatory capital standards,

•

Continuing to maintain and grow our deposit base as a low-cost funding source,

•

Prudent risk and capital management related to our efforts to re-establish our desired moderate risk profile, and

•

Actions we take within the capital and other financial markets.

SUMMARY FINANCIAL RESULTS


	Three months ended June 30						Six months ended June 30
	2010			2009			2010			2009
Net income, in millions	$	803		$	207		$	1,474		$	737
Diluted earnings per common share
Continuing operations	$	1.43		$	.11		$	2.06		$	1.11
Discontinued operations		.04			.03			.09			.05
Net income	$	1.47		$	.14		$	2.15		$	1.16
Return from net income on:
Average common shareholders’ equity		11.52	%		1.52	%		8.63	%		5.72	%
Average assets		1.22	%		.30	%		1.12	%		.53	%

Income Statement Highlights

•

Strong earnings in the second quarter of 2010 were driven by higher revenue, lower expenses and stabilizing credit quality. Pretax, pre-provision earnings for the second quarter of 2010 were $1.9 billion compared with $1.3 billion for the second quarter of 2009.

•

Total revenue increased to $3.9 billion and was derived from well-diversified sources. Net interest income increased over the second quarter of 2009 due to lower funding costs while noninterest income decreased primarily due to lower residential mortgage revenues.

•

Noninterest expense of $2.0 billion declined compared with the second quarter of 2009 reflecting disciplined expense management, additional acquisition-related cost savings and the reversal of certain accrued liabilities.

Balance Sheet Highlights

•

We remain committed to responsible lending to support economic growth. Loans and commitments originated and renewed totaled approximately $40 billion in the second quarter and $72 billion for the first half of 2010. At June 30, 2010, loans totaled $154 billion and decreased $2.9 billion during the quarter primarily due to loan repayments, dispositions and net charge-offs that exceeded customer loan demand.

•

The average rate paid on deposits declined by 10 basis points to .71% in the second quarter of 2010 from .81% in the first quarter primarily due to repricing certificates of deposit and other time

deposits which decreased $3.1 billion or 6% during the second quarter. Total deposits declined by $3.7 billion during the quarter to $179 billion at June 30, 2010.

•

We remained core funded with a loan to deposit ratio of 86% at June 30, 2010 providing a strong bank liquidity position to support growth.

•

PNC’s Tier 1 common capital ratio grew to 8.3% at June 30, 2010 and on a pro forma basis would have been an estimated 9.0% based on the sale of GIS on July 1, 2010. Further details regarding the pro forma impact of the sale of GIS are provided in the Risk-Based Capital portion of our Consolidated Balance Sheet Review section of this Financial Review.

Credit Quality Highlights

•

Credit quality showed signs of stabilization during the second quarter of 2010. Nonperforming assets declined by $636 million in the quarter to $5.9 billion as of June 30, 2010. Accruing loans past due improved during the quarter. The allowance for loan and lease losses was $5.3 billion, or 3.46% of total loans and 104% of nonperforming loans, as of June 30, 2010. Net charge-offs to average loans of 2.18% compared favorably to industry ratios.

•

Sales of residential mortgage and brokered home equity loans from the distressed assets portfolio with unpaid principal balances of approximately $2.0 billion at June 30, 2010 are expected to close in the third quarter of 2010. As a result, we recorded an additional provision for credit losses of $109 million and net charge-offs of $75 million in the second quarter of 2010.

Integration Highlights

•

We successfully completed the National City conversion of 16 million accounts, 6 million customers and 1,300 branches in nine states in one of the largest branch conversions in US banking history. PNC achieved acquisition cost savings of $1.6 billion on an annualized basis in the second quarter of 2010, well ahead of the original target amount and schedule, and established a new goal of $1.8 billion by the end of 2010.

Our Consolidated Income Statement and Consolidated Balance Sheet Review sections of this Financial Review describe in greater detail the various items that impacted our results for the second quarter and first half of 2010 and 2009.

AVERAGE CONSOLIDATED BALANCE 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 acquisitions, divestitures or consolidations of variable interest entities.

The Consolidated Balance Sheet Review section of this Financial Review provides information on changes in selected Consolidated Balance Sheet categories at June 30, 2010 compared with December 31, 2009.

Total average assets were $265.7 billion for the first six months of 2010 compared with $280.9 billion for the first six months of 2009.

Average interest-earning assets were $225.8 billion for the first half of 2010, compared with $243.7 billion in the first half of 2009. A decrease of $14.5 billion in loans was reflected in the decrease in average interest-earning assets.

Average noninterest-earning assets totaled $40.0 billion in the first six months of 2010 compared with $37.1 billion in the prior year period.

The decrease in average total loans reflected a decline in commercial loans of $10.5 billion and commercial real estate loans of $3.8 billion. Loans represented 69% of average interest-earning assets for the first six months of 2010 and 70% for the first six months of 2009.

Average securities available for sale increased $2.4 billion, to $49.0 billion, in the first half of 2010 compared with the first half of 2009. Average US Treasury and government agencies securities increased $5.4 billion compared with the first six months of 2009 while average other debt securities increased $1.4 billion in the comparison. These increases were partially offset by a decline of $3.9 billion in average residential mortgage-backed securities compared with the prior year period.

Average securities held to maturity increased $3.3 billion, to $7.0 billion, in the first six months of 2010 compared with the first six months of 2009. The increase reflected purchases of asset-backed and non-agency commercial mortgage-backed securities, the transfer of securities from the available for sale portfolio, and the impact of the Market Street Funding LLC (Market Street) consolidation effective January 1, 2010.

Total investment securities comprised 25% of average interest-earning assets for the first six months of 2010 and 21% for the first six months of 2009.

Average total deposits were $182.7 billion for the first half of 2010 compared with $192.5 billion for the first half of 2009. Average deposits declined from the prior year period primarily as a result of decreases in retail certificates of deposit and other time deposits, which were partially offset by increases in money market balances, demand and other noninterest-bearing deposits. Average total deposits represented 69% of average total assets for the first six months of both 2010 and 2009.

Average transaction deposits were $126.6 billion for the first six months of 2010 compared with $116.8 billion for the first six months of 2009.

Average borrowed funds were $41.7 billion for the first half of 2010 compared with $47.0 billion for the first half of 2009. A $7.4 billion decline in Federal Home Loan Bank borrowings drove the decline in the comparison, partially offset by higher average commercial paper borrowings that reflected the consolidation of Market Street.

LINE OF BUSINESS HIGHLIGHTS

We have six reportable business segments:

•

Retail Banking

•

Corporate & Institutional Banking

•

Asset Management Group

•

Residential Mortgage Banking

•

BlackRock

•

Distressed Assets Portfolio

Total business segment earnings were $1.294 billion for the first six months of 2010 and $1.178 billion for the first six months of 2009. Highlights of results for the first six months and second quarter of 2010 and 2009 are included below. The Business Segments Review section of this Financial Review includes a Results of Business-Summary table and further analysis of our business segment results over the first six months of 2010 and 2009 including presentation differences from Note 19 Segment Reporting.

We provide a reconciliation of total business segment earnings to PNC consolidated income from continuing operations before noncontrolling interests as reported on a GAAP basis in Note 19 Segment Reporting.

Retail Banking

Retail Banking earned $109 million for the first six months of 2010 compared with earnings of $111 million for the same period a year ago. Earnings declined from the prior year due primarily to lower revenues as a result of lower interest credits assigned to deposits and a decline in fees which were partially offset by well-managed expenses. In addition, credit costs were up slightly from the prior year. Retail Banking continued to maintain its focus on growing customers and deposits, customer and employee satisfaction, investing in the business for future growth, as well as disciplined expense management during this period of market and economic uncertainty.

Retail Banking earned $85 million in the second quarter of 2010 and $61 million in the second quarter of 2009. The higher earnings for 2010 resulted from lower credit costs and well-managed expenses partially offset by lower interest credits assigned to deposits and a decline in fees.

Corporate & Institutional Banking

Corporate & Institutional Banking earned $803 million in the first six months of 2010 compared with $466 million in the

first six months of 2009. Significantly higher earnings for the first half of 2010 reflected a lower provision for credit losses and lower noninterest expense which more than offset a decline in net interest income compared with the 2009 period.

Corporate & Institutional Banking earned $443 million in the second quarter of 2010 compared with $107 million in the second quarter of 2009. Earnings increased in the comparison primarily due to a lower provision for credit losses and higher net interest income in the second quarter of 2010, partially offset by a decline in noninterest income.

Asset Management Group

Asset Management Group earned $68 million for the first half of 2010 compared with $47 million for the same period in 2009. Assets under administration were $199 billion at June 30, 2010. The first six months of 2010 reflected a lower provision for credit losses, lower expenses from disciplined expense management and higher noninterest income. These improvements were partially offset by a decrease in net interest income from lower yields on loans.

Earnings for Asset Management Group totaled $29 million for the second quarter of 2010 compared with $8 million for the second quarter of 2009. The increase in earnings from the prior year quarter reflected a lower provision for credit losses, lower expenses and growth in asset management fees.

Residential Mortgage Banking

Residential Mortgage Banking earned $174 million for the first half of 2010 compared with $319 million in the first half of 2009. Earnings decreased from the six months of 2009 primarily due to reduced loan sales revenue and lower net hedging gains on mortgage servicing rights, partially offset by lower noninterest expense. Residential Mortgage Banking earned $92 million in the second quarter of both 2010 and 2009.

BlackRock

Our BlackRock business segment earned $154 million in the first half of 2010 and $77 million in the first half of 2009. Second quarter 2010 business segment earnings from BlackRock were $77 million compared with $54 million in the second quarter of 2009. Improved capital market conditions and the benefits of BlackRock’s December 2009 acquisition of Barclays Global Investors (BGI) contributed to higher earnings at BlackRock.

Distressed Assets Portfolio

The Distressed Assets Portfolio had a loss of $14 million for the first six months of 2010, compared with earnings of $158 million for the first six months of 2009. A $280 million increase in the provision for credit losses drove the decrease in earnings in the comparison.

For the second quarter of 2010, Distressed Assets Portfolio had a loss of $86 million compared with earnings of $155

million for the second quarter of 2009 as the provision for credit losses increased $374 million.

Other

“Other” reported earnings of $135 million for the first half of 2010 compared with a net loss of $463 million for the first half of 2009. The net loss for the 2009 period included higher other-than-temporary impairment (OTTI) charges compared with the 2010 period, alternative investment writedowns, a $133 million special FDIC assessment, and equity management losses.

“Other” reported earnings of $141 million for the second quarter of 2010 compared with a net loss of $282 million for the second quarter of 2009. The increase compared with the prior year quarter reflected the reversal of certain accrued liabilities, higher positive impact of net securities gains, lower OTTI charges on securities, higher results from private equity and alternative investments and lower integration costs. The net loss in the 2009 quarter also included the special FDIC assessment.

CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for the first six months of 2010 was $1,474 million compared with $737 million for the first six months of 2009. Net income for the second quarter of 2010 was $803 million compared with $207 million for the second quarter of 2009. Total revenue for the first six months of 2010 was $7.7 billion compared with $7.5 billion for the first six months of 2009. Total revenue for the second quarter of 2010 increased 3% to $3.9 billion from $3.8 billion for the second quarter of 2009. We expect total revenue for full year 2010 to be relatively consistent with the level for full year 2009 apart from the impact of the $1.1 billion pretax gain we recognized in the fourth quarter of 2009 in connection with BlackRock’s acquisition of BGI.

NET INTEREST INCOME AND NET INTEREST MARGIN


	Three months ended June 30						Six months ended June 30
Dollars in millions	2010			2009			2010			2009
Net interest income	$	2,435		$	2,193		$	4,814		$	4,513
Net interest margin		4.35	%		3.60	%		4.29	%		3.70	%

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 the first half of 2010 compared with the first half of 2009 primarily resulted from the impact of lower deposit and borrowing costs somewhat offset by lower revenue from our investment securities portfolio and lower loan volume. Our deposit strategy included the retention and repricing at lower rates of relationship-based certificates of deposit and the planned run off of maturing non-relationship certificates of deposit.

We have approximately $14 billion of relationship-based certificates of deposit with an average rate of more than 2% that are scheduled to mature during the remainder of 2010. Assuming interest rates stay low, we believe that we will continue to reprice these deposits and lower our funding costs even further. 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 4.29% for the first six months of 2010 and 3.70% for the first six months of 2009. The following factors impacted the comparison:

•

A decrease in the rate accrued on interest-bearing liabilities of 71 basis points. The rate accrued on interest-bearing deposits, the largest component, decreased 59 basis points.

•

The yield on loans, which represented the largest portion of our earning assets in the first six months of 2010, increased 7 basis points but was more than offset by the decline in yield on investment securities.

•

In addition, the impact of noninterest-bearing sources of funding decreased 11 basis points primarily due to the decline in interest rates.

The net interest margin was 4.35% for the second quarter of 2010 and 3.60% for the second quarter of 2009. The following factors impacted the comparison:

•

A decrease in the rate accrued on interest-bearing liabilities of 67 basis points. The rate accrued on interest-bearing deposits, the largest component, decreased 54 basis points.

•

A 19 basis point increase in the yield on interest-earning assets. The yield on loans increased 36 basis points and was partially offset by the net impact of changes in other interest-earning assets.

•

In addition, the impact of noninterest-bearing sources of funding decreased 11 basis points primarily due to the decline in interest rates.

We expect the yield on interest-earning assets to decline, which will put pressure on our net interest income and net interest margin in the second half of 2010. For the third quarter of 2010, we expect net interest income and net interest margin to be lower than the second quarter of 2010 due to lower purchase accounting accretion, continued soft loan demand and the low interest rate environment. See page 14 for

a discussion of certain corrections reflected in second quarter 2010 results that impacted net interest income and net interest margin.

NONINTEREST INCOME

Summary

Noninterest income totaled $2.861 billion for the first six months of 2010, a decline of $115 million or 4% compared with the first six months of 2009. A decrease in residential mortgage loan sales revenue and net hedging gains on mortgage servicing rights was the primary factor in the first half comparison, partially offset by higher other noninterest income and asset management fees along with lower OTTI charges. In addition, the 2009 period included gains of $103 million related to our BlackRock LTIP shares adjustment in the first quarter of that year.

Noninterest income totaled $1.477 billion for the second quarter of 2010, a decline of $133 million or 8% compared with $1.610 billion for the second quarter of 2009. The decline compared with the second quarter of 2009 was primarily due to lower residential mortgage loan sales revenue and customer-related trading income somewhat offset by improved results on private equity and alternative investments and lower OTTI charges.

Additional Analysis

Asset management revenue was $502 million in the first six months of 2010 compared with $397 million in the first six months of 2009. Asset management revenue was $243 million in the second quarter of 2010 compared with $208 million in the second quarter of 2009. These increases reflected higher equity earnings from our BlackRock investment, improved equity markets and client growth. Assets managed at June 30, 2010 totaled $99 billion compared with $98 billion at June 30, 2009.

For the first half of 2010, consumer services fees totaled $611 million compared with $645 million in the first half of 2009. Consumer services fees were $315 million for the second quarter of 2010 compared with $329 million for the second quarter of 2009. Lower consumer service fees for 2010 in both comparisons reflected lower brokerage fees and the impact of the consolidation of the securitized credit card portfolio, partially offset by higher volume-related transaction fees. As further discussed in the Retail Banking section of the Business Segments Review portion of this Financial Review, we expect that the Credit CARD Act of 2009 will negatively impact full year 2010 revenues by approximately $65 million.

Corporate services revenue totaled $529 million in the first six months of 2010 and $509 million in the first six months of 2009. Corporate services revenue declined slightly in the second quarter of 2010, to $261 million, compared with $264 million for the second quarter of 2009. The increase in the six-month comparison was primarily due to higher commercial mortgage special servicing ancillary income

partially offset by higher impairment of mortgage servicing rights. Corporate services fees include the noninterest component of treasury management fees, which continued to be a strong contributor to revenue.

Residential mortgage revenue totaled $326 million in the first half of 2010 compared with $676 million in the first half of 2009. Second quarter 2010 residential mortgage revenue totaled $179 million compared with $245 million in the second quarter of 2009. The decline in both comparisons reflected reduced loan sales revenue given the strong loan origination refinance volume in the 2009 period and lower net hedging gains on mortgage servicing rights in the six month comparison.

Service charges on deposits totaled $409 million for the first six months of 2010 and $466 million for the first six months of 2009. Service charges on deposits totaled $209 million for the second quarter of 2010 compared with $242 million for the second quarter of 2009. The decrease in both instances was due to lower overdraft charges and required branch divestitures in the third quarter of 2009. As further discussed in the Retail Banking section of the Business Segments Review portion of this Financial Review, we expect that the new Regulation E rules related to overdraft charges will negatively impact our second half 2010 revenue by an estimated $145 million.

Net gains on sales of securities totaled $237 million for the first half of 2010 and $238 million for the first half of 2009. Second quarter net gains on sales of securities were $147 million in 2010 and $182 million in 2009.

The net credit component of OTTI of securities recognized in earnings was a loss of $210 million in the first six months of 2010, including $94 million in the second quarter, compared with losses of $304 million and $155 million, respectively, for the same periods in 2009. We anticipate ongoing improvement in OTTI as the economy stabilizes and begins to recover.

Other noninterest income totaled $457 million for the first half of 2010 compared with $349 million for the first half of 2009. The first six months of 2010 included net gains on private equity and alternative investments of $140 million and trading income of $78 million. Amounts for the first six months of 2009 included gains of $103 million related to our equity investment in BlackRock, net losses on private equity and alternative investments of $151 million and trading income of $80 million.

Other noninterest income for the second quarter of 2010 totaled $217 million compared with $295 million for the second quarter of 2009. Lower customer trading income was a primary factor in the quarterly decline.

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 believe that as the economy recovers, there are greater opportunities for growth in client-related fee-based income. We also expect that the conversions of National City branches to the PNC platform, completed in June 2010, 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 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 $600 million for the first six months of 2010, an increase of $40 million or 7% compared with the first six months of 2009. For the second quarter of 2010, treasury management revenue was $302 million, an increase of $18 million or 6% compared with the second quarter of 2009. This increase was 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 $292 million in the first half of 2010 compared with $191 million in the first half of 2009, an increase of $101 million or 53%. Higher gains on loan sales, underwriting, mergers and acquisition advisory fees, and syndications fees contributed to the improved results. Second quarter 2010 revenue was $128 million compared with $148 million for the second quarter of 2009, a decline of $20 million or 14%. Second quarter 2010 results reflect increased adverse impact of counterparty credit risk on valuations of customer derivative positions. This was partially offset by increased mergers and acquisition advisory fees and syndications fees.

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 $162 million in the first six months of 2010, a decrease of $71 million or 30% compared with the first six months of 2009. For the second quarter of 2010, revenue from

commercial mortgage banking activities totaled $47 million, a decrease of $92 million or 66% compared with the second quarter of 2009. These decreases were primarily due to valuations associated with commercial mortgage loans held for sale, net of hedges, higher impairment of mortgage servicing rights, and the sale during the second quarter 2010 of a duplicative agency servicing operation acquired with National City. These decreases were partially offset by higher special servicing revenue.

PROVISION FOR CREDIT LOSSES

The provision for credit losses totaled $1.6 billion for the first six months of 2010 compared with $2.0 billion for the first six months of 2009. For the second quarter of 2010, the provision for credit losses totaled $823 million compared with $1.1 billion for the second quarter of 2009. The lower provision in both comparisons reflected credit quality that showed further signs of stabilization during the second quarter of 2010.

Sales of residential mortgage and brokered home equity loans from the Distressed Assets Portfolio business segment with unpaid principal balances of approximately $2.0 billion at June 30, 2010 are expected to close in the third quarter of 2010. As a result, PNC recorded an additional provision for credit losses of $109 million and net charge-offs of $75 million in the second quarter of 2010.

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 believe that our provision for credit losses in the second half of 2010 may be lower than the first half of 2010. Future provision levels will depend primarily on the level of nonperforming loans, our related coverage ratios, the pace of economic recovery and the nature of regulatory reforms.

NONINTEREST EXPENSE

Noninterest expense for the first six months of 2010 was $4.1 billion compared with $4.7 billion for the first six months of 2009, a decline of $535 million or 12%. Noninterest expense totaled $2.0 billion in the second quarter of 2010 compared with $2.5 billion in the second quarter of 2009, a decrease of $490 million or 20%. Lower noninterest expense in both comparisons was primarily due to the impact of higher cost savings related to the National City acquisition and the reversal of certain accrued liabilities in the second quarter of 2010, with $73 million associated with a franchise tax settlement and $47 million associated with an indemnification for certain Visa litigation. We expect noninterest expense to be higher in the third quarter of 2010 relative to the second quarter of 2010 due to the reversal of these accrued liabilities recorded in the second quarter of 2010. We also recorded a special FDIC assessment, intended to build the FDIC’s Deposit Insurance Fund, of $133 million in the second quarter of 2009.

See “National City Integration Costs” in the Executive Summary section of this Financial Review for details of integration costs incurred, including through the first half of 2010 and 2009.

We achieved National City acquisition cost savings of $1.6 billion on an annualized basis in the second quarter of 2010, higher and earlier than the original goal of $1.2 billion, and established a new annualized acquisition cost savings goal of $1.8 billion by the end of 2010.

EFFECTIVE TAX RATE

The effective tax rate was 28.0% for the first six months of 2010 compared with 18.0% for the first six months of 2009. For the second quarter of 2010, our effective tax rate was 28.2% compared with 12.9% for the second quarter of 2009. The effective tax rate was lower in 2009 primarily as a result of relatively equal levels of favorable permanent differences (tax exempt income, tax credits and dividend received deductions) on lower pretax income in 2009.

In July 2010, we received a favorable IRS letter ruling resolving a tax position taken on a previous return which will result in a tax benefit of approximately $89 million. The impact of this ruling will be recognized in the third quarter of 2010 and is expected to result in a reduction of the full year effective tax rate from 28% as of June 30, 2010 to a range of 25% to 26%.

CONSOLIDATED BALANCE SHEET

REVIEW

SUMMARIZED BALANCE SHEET DATA


In millions	June 30 2010		Dec. 31 2009
Assets
Loans	$	154,342	$	157,543
Investment securities		53,717		56,027
Cash and short-term investments		11,677		13,290
Loans held for sale		2,756		2,539
Goodwill and other intangible assets		12,138		12,909
Equity investments		10,159		10,254
Other		16,906		17,301
Total assets	$	261,695	$	269,863
Liabilities
Deposits	$	178,799	$	186,922
Borrowed funds		40,427		39,261
Other		11,479		11,113
Total liabilities		230,705		237,296
Total shareholders’ equity		28,377		29,942
Noncontrolling interests		2,613		2,625
Total equity		30,990		32,567
Total liabilities and equity	$	261,695	$	269,863

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 June 30, 2010 compared with December 31, 2009 was primarily due to decreases in loans and investment securities as more fully discussed below.

Total assets and liabilities at June 30, 2010 included $5.3 billion and $4.4 billion, respectively related to Market Street and a credit card securitization trust as more fully described in the Off-Balance Sheet Arrangements And Variable Interest Entities section of this Financial Review and Note 3 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements of this Report.

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 $2.8 billion at June 30, 2010 and $3.2 billion at December 31, 2009. The balances do not include accretable net interest on the purchased impaired loans.

Loans decreased $3.2 billion, or 2%, as of June 30, 2010 compared with December 31, 2009. An increase in loans of $3.5 billion from consolidating Market Street and the securitized credit card portfolio was more than offset by the impact of soft customer loan demand combined with loan repayments and payoffs in the distressed assets portfolio. However, we believe that the pace of loan demand contraction appears to be slowing in the third quarter of 2010.

Loans represented 59% of total assets at June 30, 2010 and 58% of total assets at December 31, 2009. Commercial lending represented 53% of the loan portfolio and consumer lending represented 47% at June 30, 2010.

Commercial real estate loans represented 8% of total assets at June 30, 2010 and 9% of total assets at December 31, 2009.

Details Of Loans


In millions	June 30 2010		Dec. 31 2009
Commercial
Retail/wholesale	$	9,576	$	9,515
Manufacturing		9,728		9,880
Other service providers		8,289		8,256
Real estate related (a)		7,269		7,403
Financial services		4,302		3,874
Health care		3,099		2,970
Other		11,969		12,920
Total commercial		54,232		54,818
Commercial real estate
Real estate projects		13,914		15,582
Commercial mortgage		6,450		7,549
Total commercial real estate		20,364		23,131
Equipment lease financing		6,630		6,202
TOTAL COMMERCIAL LENDING (b)		81,226		84,151
Consumer
Home equity
Lines of credit		23,901		24,236
Installment		11,060		11,711
Education		8,867		7,468
Automobile		2,697		2,013
Credit card and other unsecured lines of credit		4,920		3,536
Other		3,834		4,618
Total consumer		55,279		53,582
Residential real estate
Residential mortgage		16,618		18,190
Residential construction		1,219		1,620
Total residential real estate		17,837		19,810
TOTAL CONSUMER LENDING		73,116		73,392
Total loans	$	154,342	$	157,543

(a)	Includes loans to customers in the real estate and construction industries.

(b)	Construction loans with interest reserves, A Note/B Note restructurings and guaranteed commercial loans are not significant to PNC.

Total loans above include purchased impaired loans related to National City amounting to $9.1 billion, or 6% of total loans, at June 30, 2010, and $10.3 billion, or 7% of total loans, at December 31, 2009.

We are committed to providing credit and liquidity to qualified borrowers. Total loan originations and new commitments and renewals totaled $72 billion for the first six months of 2010, including $40 billion in the second quarter. Included in these amounts were originations for first mortgages of $4.3 billion and $2.3 billion, respectively.

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 $3.2 billion, or 60%, of the total allowance for loan and lease losses at June 30, 2010 to these loans. We allocated $2.1 billion, or 40%, of the total allowance at that date to consumer lending. This allocation also considers other relevant factors such as:

•

Actual versus estimated losses,

•

Regional and national economic conditions,

•

Business segment and portfolio concentrations,

•

Industry conditions,

•

The impact of government regulations, and

•

Risk of potential estimation or judgmental errors, including the accuracy of risk ratings.

Higher Risk Loans

Our loan portfolio contains higher risk loans that are more likely to result in credit losses. We established specific and pooled reserves on the total commercial lending category, including higher risk loans, of $3.2 billion at June 30, 2010. This represented 60% of the total allowance for loan and lease losses of $5.3 billion at that date. The remaining 40% of the allowance for loan and lease losses pertained to the total consumer lending category. This category of loans is more homogenous in nature and has certain characteristics that can be assessed at a total portfolio level in terms of loans representing higher risk. We do not consider government insured/government guaranteed loans to be higher risk as we do not believe these loans will result in a significant loss because of their structure. These loans are excluded from the following assessment of higher risk loans.

Our home equity lines of credit and installment loans outstanding totaled $35.0 billion at June 30, 2010. 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 $1.3 billion or approximately 4% of the total home equity line and installment loans at June 30, 2010. These higher risk loans were concentrated in our geographic footprint with 28% in Pennsylvania, 13% in Ohio, 11% in New Jersey, 7% in Illinois, 5% in Michigan, 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 14% are in some stage of delinquency and 8% are in late stage (90+ days) delinquency status.

In our $16.6 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 $.7 billion and comprised approximately 4% of this portfolio at June 30, 2010. Twenty-two percent of the higher risk loans are located in California, 13% in Florida, 10% in Illinois, 8% in Maryland, and 5% 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 of $.7 billion, approximately 41% are in some stage of delinquency and 31% are in 90+ days late stage delinquency status.

Within our home equity lines of credit, installment loans and residential mortgage portfolios, approximately 5% of the aggregate $51.6 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.

Information related to purchased impaired loans, purchase accounting accretion and accretable net interest recognized during the first six months of 2010 in connection with our acquisition of National City follows.

Valuation of Purchased Impaired Loans


	December 31, 2008					December 31, 2009					June 30, 2010
Dollars in billions	Balance			Net Investment		Balance			Net Investment		Balance			Net Investment
Commercial and commercial real estate loans:
Unpaid principal balance	$	6.3				$	3.5				$	2.3
Purchase impaired mark		(3.4	)				(1.3	)				(.7	)
Recorded investment		2.9					2.2					1.6
Allowance for loan losses							(.2	)				(.4	)
Net investment		2.9		46	%		2.0		57	%		1.2		52	%
Consumer and residential mortgage loans:
Unpaid principal balance		15.6					11.7					10.1
Purchase impaired mark		(5.8	)				(3.6	)				(2.6	)
Recorded investment		9.8					8.1					7.5
Allowance for loan losses							(.3	)				(.5	)
Net investment		9.8		63	%		7.8		67	%		7.0		69	%
Total purchased impaired loans:
Unpaid principal balance		21.9					15.2					12.4
Purchase impaired mark (a)		(9.2	)				(4.9	)				(3.3	)
Recorded investment		12.7					10.3					9.1
Allowance for loan losses							(.5	)				(.9	)(b)
Net investment	$	12.7		58	%	$	9.8		64	%	$	8.2		66	%

(a)	Comprised of $5.5 billion of nonaccretable and $3.7 billion of accretable at December 31, 2008, $1.4 billion of nonaccretable and $3.5 billion of accretable at December 31, 2009, and $1.0 billion of nonaccretable and $2.3 billion of accretable at June 30, 2010.

(b)	While additional impairment reserves of $.9 billion have been provided for further deterioration, incremental accretable interest of $.4 billion has been reclassified since acquisition date on those purchased impaired loans with improving estimated cash flows.

The unpaid principal balance of purchased impaired loans declined from $21.9 billion at December 31, 2008 to $12.4 billion at June 30, 2010 due to amounts determined to be uncollectible, payoffs and disposals. The remaining purchased impaired mark at June 30, 2010 was $3.3 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 $8.2 billion at June 30, 2010 primarily due to payoffs, disposals and further impairment partially offset by accretion during 2009 and the

first six months of 2010. At June 30, 2010, our largest purchased impaired loan had a recorded investment of $32 million.

We currently expect to collect total cash flows of $11.4 billion on purchased impaired loans, representing the $9.1 billion recorded investment at June 30, 2010 and the accretable net interest of $2.3 billion shown in the Accretable Net Interest table that follows.

Purchase Accounting Accretion


	Three months ended June 30						Six months ended June 30
In millions	2010			2009			2010			2009
Non-impaired loans	$	111		$	168		$	223		$	490
Impaired loans		258			220			523			477
Reversal of contractual interest on impaired loans		(136	)		(194	)		(270	)		(417	)
Net impaired loans		122			26			253			60
Securities		13			41			24			72
Deposits		144			264			311			576
Borrowings (a)		(14	)		(52	)		(70	)		(137	)
Total	$	376		$	447		$	741		$	1,061

(a)

Interest expense for the second quarter of 2010 included a $29 million pretax adjustment related to the accretion of the purchase accounting adjustment for borrowings assumed in the National City acquisition. This correction should have been recorded in 2009. Management believes that the impact of this correction is not material to current or prior period consolidated financial statements.

Cash received in excess of recorded investment from sales or payoffs of impaired commercial loans (cash recoveries) totaled $239 million for the first half of 2010, including $164 million in the second quarter. We do not expect this level of cash recoveries to be sustainable on a quarterly basis. The second quarter of 2010 included a $64 million pretax adjustment to net interest income to reflect additional interest on purchased impaired loans. This correction to net interest income should have been recorded in 2009. Management believes that the impact of this correction is not material to current or prior period consolidated financial statements.

Remaining Purchase Accounting Accretion


In billions	Dec. 31 2008			Dec. 31 2009			June 30 2010
Non-impaired loans	$	2.4		$	1.6		$	1.4
Impaired loans (a)		3.7			3.5			2.3
Total loans (gross)		6.1			5.1			3.7
Securities		.2			.1			.1
Deposits		2.1			1.0			.7
Borrowings		(1.5	)		(1.2	)		(1.2	)
Total	$	6.9		$	5.0		$	3.3

(a)

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

Accretable Net Interest – Purchased Impaired Loans


In billions
January 1, 2010	$	3.5
Accretion (including cash recoveries)		(.8	)
Net reclassifications from accretable to non-accretable		(.3	)
Disposals		(.1	)
June 30, 2010	$	2.3


In billions
January 1, 2009	$	3.7
Accretion (including cash recoveries)		(1.9	)
Adjustments resulting from changes in purchase price allocation		.3
Net reclassifications from non-accretable to accretable		.6
Disposals		(.4	)
June 30, 2010	$	2.3

Net unfunded credit commitments are comprised of the following:

Net Unfunded Credit Commitments


In millions	June 30 2010		Dec. 31 2009
Commercial / commercial real estate (a)	$	56,854	$	60,143
Home equity lines of credit		19,973		20,367
Consumer credit card and other unsecured lines		17,833		18,800
Other		1,115		1,485
Total	$	95,775	$	100,795

(a)	Less than 3% of these amounts relate to commercial real estate.

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 $14.7 billion at June 30, 2010 and $13.2 billion at December 31, 2009.

Unfunded credit commitments related to purchased customer receivables totaled $2.7 billion at June 30, 2010. These receivables are included due to the consolidation of Market Street and are now a component of PNC’s total unfunded credit commitments. These amounts are included in the preceding table within the “Commercial / commercial real estate” category.

In addition to credit commitments, our net outstanding standby letters of credit totaled $9.9 billion at June 30, 2010 and $10.0 billion at December 31, 2009. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

Unfunded liquidity facility commitments and standby bond purchase agreements totaled $545 million at June 30, 2010 and $6.2 billion at December 31, 2009 and are included in the preceding table primarily within the “Commercial / commercial real estate” category. Due to the consolidation of

Market Street, $5.1 billion of unfunded liquidity facility commitments were no longer included in the amounts in the preceding table as of June 30, 2010.

INVESTMENT SECURITIES

Details of Investment Securities


In millions	Amortized Cost		Fair Value
June 30, 2010
SECURITIES AVAILABLE FOR SALE
Debt securities
US Treasury and government agencies	$	7,849	$	8,093
Residential mortgage-backed
Agency		19,985		20,579
Non-agency		8,993		7,635
Commercial mortgage-backed
Agency		1,293		1,342
Non-agency		1,757		1,718
Asset-backed		1,785		1,526
State and municipal		1,333		1,334
Other debt		3,044		3,131
Corporate stocks and other		492		492
Total securities available for sale	$	46,531	$	45,850
SECURITIES HELD TO MATURITY
Debt securities
Commercial mortgage-backed (non-agency)	$	4,174	$	4,376
Asset-backed		3,684		3,762
Other debt		9		10
Total securities held to maturity	$	7,867	$	8,148
December 31, 2009
SECURITIES AVAILABLE FOR SALE
Debt securities
US Treasury and government agencies	$	7,548	$	7,520
Residential mortgage-backed
Agency		24,076		24,438
Non-agency		10,419		8,302
Commercial mortgage-backed
Agency		1,299		1,297
Non-agency		4,028		3,848
Asset-backed		2,019		1,668
State and municipal		1,346		1,350
Other debt		1,984		2,015
Corporate stocks and other		360		360
Total securities available for sale	$	53,079	$	50,798
SECURITIES HELD TO MATURITY
Debt securities
Commercial mortgage-backed (non-agency)	$	2,030	$	2,225
Asset-backed		3,040		3,136
Other debt		159		160
Total securities held to maturity	$	5,229	$	5,521

The carrying amount of investment securities totaled $53.7 billion at June 30, 2010 and $56.0 billion at December 31, 2009. The decline in investment securities reflected a $4.9 billion decline in securities available for sale partially offset by a $2.6 billion increase in securities held to maturity. Investment securities represented 21% of total assets at both June 30, 2010 and December 31, 2009.

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 56% of the investment securities portfolio at June 30, 2010.

In March 2010, we transferred $2.2 billion of available for sale commercial mortgage-backed non-agency securities to the held to maturity portfolio. The transfer involved high-quality securities where management’s intent to hold changed. In reassessing the classification of these securities, management considered the potential for the fair value of the securities to be adversely impacted, even where there is no indication of credit impairment.

At June 30, 2010, the securities available for sale portfolio included a net unrealized loss of $.7 billion, which represented the difference between fair value and amortized cost. The comparable amount at December 31, 2009 was a net unrealized loss of $2.3 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 decline in the net unrealized loss from December 31, 2009 was primarily the result of lower market interest rates and improving liquidity and credit spreads on 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 from continuing operations, net of tax.

Unrealized gains and losses on available for sale securities do not impact liquidity or risk-based capital. However, reductions in the credit ratings of these securities would have an impact on the determination of risk-weighted assets which could reduce our regulatory capital ratios. In addition, the amount representing the credit-related portion of OTTI on available for sale securities would reduce our earnings and regulatory capital ratios.

The expected weighted-average life of investment securities (excluding corporate stocks and other) was 4.1 years at June 30, 2010 and December 31, 2009.

We estimate that at June 30, 2010 the effective duration of investment securities was 2.7 years for an immediate 50 basis points parallel increase in interest rates and 2.3 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2009 were 2.9 years and 2.5 years, respectively.

The following table provides detail regarding the vintage, current credit rating, and FICO score of the underlying collateral at origination for residential mortgage-backed, commercial mortgage-backed and other asset-backed securities held in the available for sale and held to maturity portfolios:


	June 30, 2010
	Agency						Non-agency
Dollars in millions	Residential Mortgage-Backed Securities			Commercial Mortgage-Backed Securities			Residential Mortgage-Backed Securities			Commercial Mortgage-Backed Securities			Asset-Backed Securities
Fair Value – Available for Sale	$	20,579		$	1,342		$	7,635		$	1,718		$	1,526
Fair Value – Held to Maturity											4,376			3,762
Total Fair Value	$	20,579		$	1,342		$	7,635		$	6,094		$	5,288
% of Fair Value:
By Vintage
2010		18	%		16	%								7	%
2009		29	%		51	%					3	%		25	%
2008		12	%		3	%								15	%
2007		9	%		4	%		17	%		17	%		18	%
2006		11	%		9	%		23	%		32	%		17	%
2005 and earlier		21	%		17	%		60	%		48	%		18	%
Total		100	%		100	%		100	%		100	%		100	%
By Credit Rating
Agency		100	%		100	%
AAA								8	%		88	%		62	%
AA								4	%		4	%		9	%
A								5	%		4	%		6	%
BBB								5	%		3	%		1	%
BB								11	%		1	%		1	%
B								19	%					4	%
Lower than B								48	%					12	%
No rating														5	%
Total		100	%		100	%		100	%		100	%		100	%
By FICO Score
>720								58	%					3	%
<720 and >660								33	%					11	%
<660														8	%
No FICO score		N/A			N/A			9	%		N/A			78	%
Total								100	%					100	%

We conduct a comprehensive security-level impairment assessment quarterly 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.

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

We recognized OTTI for the first six months and second quarter of 2010 and 2009 as follows:

Other-Than-Temporary Impairments


	Three months ended June 30						Six months ended June 30
In millions	2010			2009			2010			2009
Credit portion of OTTI losses (a)	$	(94	)	$	(155	)	$	(210	)	$	(304	)
Noncredit portion of OTTI losses (b)		(24	)		(298	)		(148	)		(835	)
Total OTTI losses	$	(118	)	$	(453	)	$	(358	)	$	(1,139	)

(a)	Reduction of noninterest income in our Consolidated Income Statement.

(b)	Included in Accumulated other comprehensive loss on our Consolidated Balance Sheet.

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. A summary of all OTTI credit losses recognized for the first half of 2010 by investment type is included in Note 7 Investment Securities in the Notes To Consolidated Financial Statements of this Report.


	June 30, 2010
In millions	Residential Mortgage- Backed Securities					Commercial Mortgage- Backed Securities					Asset-Backed Securities (a)
AVAILABLE FOR SALE SECURITIES NON-AGENCY
	Fair Value		Net Unrealized Gain (Loss)			Fair Value		Net Unrealized Gain (Loss)			Fair Value		Net Unrealized Gain (Loss)
By Credit Rating
AAA	$	594	$	(27	)	$	1,021	$	18		$	326	$	(4	)
Other Investment Grade (AA, A, BBB)		1,122		(91	)		647		(48	)		325		(7	)
Total Investment Grade		1,716		(118	)		1,668		(30	)		651		(11	)
BB		854		(187	)		46		(11	)		46		(11	)
B		1,432		(308	)		4		2			180		(40	)
Lower than B		3,632		(745	)							614		(174	)
No Rating		1										31		(23	)
Total Sub-Investment Grade		5,919		(1,240	)		50		(9	)		871		(248	)
Total	$	7,635	$	(1,358	)	$	1,718	$	(39	)	$	1,522	$	(259	)
Investment Grade:
OTTI has been recognized	$	117	$	(4	)
No OTTI recognized to date		1,599		(114	)	$	1,668	$	(30	)	$	651	$	(11	)
Total Investment Grade	$	1,716	$	(118	)	$	1,668	$	(30	)	$	651	$	(11	)
Sub-Investment Grade:
OTTI has been recognized	$	3,115	$	(854	)	$	17	$	(2	)	$	635	$	(199	)
No OTTI recognized to date		2,804		(386	)		33		(7	)		236		(49	)
Total Sub-Investment Grade	$	5,919	$	(1,240	)	$	50	$	(9	)	$	871	$	(248	)
SECURITIES HELD TO MATURITY NON-AGENCY
By Credit Rating
AAA						$	4,364	$	202		$	2,942	$	60
Other Investment Grade (AA, A, BBB)							12					523		9
Total Investment Grade							4,376		202			3,465		69
BB												29		1
B												3
Lower than B
No Rating												253		8
Total Sub-Investment Grade												285		9
Total						$	4,376	$	202		$	3,750	$	78

(a)	Table excludes $4 million and $12 million of available for sale and held to maturity agency asset-backed securities, respectively.

Residential Mortgage-Backed Securities

At June 30, 2010, our residential mortgage-backed securities portfolio was comprised of $20.6 billion fair value of US government agency-backed securities and $7.6 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 half of 2010, we recorded OTTI credit losses of $154 million on non-agency residential mortgage-backed securities, including $81 million in the second quarter. As of June 30, 2010, $150 million of the year-to-date credit losses related to securities rated below investment grade. As of June 30, 2010, the noncredit portion of OTTI losses recorded in accumulated other comprehensive loss for non-agency residential mortgage-backed securities totaled $858 million and the related securities had a fair value of $3.2 billion.

The fair value of sub-investment grade investment securities for which we have not recorded an OTTI credit loss as of June 30, 2010 totaled $2.8 billion, with unrealized net losses of $386 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 $6.1 billion at June 30, 2010 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 $1.3 billion fair value at June 30, 2010 consisting of multi-family housing. Substantially all of the securities are the most senior tranches in the subordination structure.

During the first six months of 2010, we recorded OTTI credit losses of $3 million on commercial mortgage-backed securities, all in the second quarter. As of June 30, 2010, the noncredit portion of OTTI losses recorded in accumulated other comprehensive loss for commercial mortgage-backed securities totaled $2 million and the related securities had a fair value of $17 million. All of the impaired securities were rated below investment grade. The remaining fair value for which OTTI was previously recorded approximates zero.

Asset-Backed Securities

The fair value of the asset-backed securities portfolio was $5.3 billion at June 30, 2010 and consisted of fixed-rate and floating-rate, private-issuer securities collateralized primarily by various consumer credit products, including 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 six months of 2010, we recorded OTTI credit losses of $53 million on asset-backed securities, including $10 million in the second quarter. All of the securities were collateralized by first and second lien residential mortgage loans and were rated below investment grade. As of June 30, 2010, the noncredit portion of OTTI losses recorded in accumulated other comprehensive loss for asset-backed securities totaled $199 million and the related securities had a fair value of $635 million.

For the sub-investment grade investment securities for which we have not recorded an OTTI loss through June 30, 2010, the remaining fair value was $521 million, with unrealized net losses of $40 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 current housing and economic conditions 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


In millions	June 30 2010		Dec. 31 2009
Commercial mortgages at fair value	$	1,036	$	1,050
Commercial mortgages at lower of cost or market		203		251
Total commercial mortgages		1,239		1,301
Residential mortgages at fair value		1,220		1,012
Residential mortgages at lower of cost or market		116
Total residential mortgages		1,336		1,012
Other		181		226
Total	$	2,756	$	2,539

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. We sold $44 million of commercial mortgage loans held for sale carried at fair value in the first six months of 2010 and sold $166 million in the first six months of 2009.

We recognized net losses of $13 million in the first six months of 2010 on the valuation and sale of commercial mortgage loans held for sale, net of hedges, including $22 million in the second quarter. Net gains of $34 million on the valuation and sale of commercial mortgages loans held for sale, net of hedges, were recognized in the first six months of 2009, including $35 million in the second quarter.

Residential mortgage loan origination volume was $4.3 billion in the first half of 2010. Substantially all such loans were originated to agency or FHA standards. We sold $4.2 billion of loans and recognized related gains of $88 million during the first half of 2010, of which $49 million occurred in the second quarter. The comparable amounts for the first half of 2009 were $12.0 billion and $326 million, respectively, including $151 million in the second quarter.

Net interest income on residential mortgage loans held for sale was $153 million for the first half of 2010, including $73 million in the second quarter. Comparable amounts in 2009 were $178 million and $87 million, respectively.

FUNDING AND CAPITAL SOURCES

Details Of Funding Sources


In millions	June 30 2010		Dec. 31 2009
Deposits
Money market	$	82,345	$	85,838
Demand		43,367		40,406
Retail certificates of deposit		42,717		48,622
Savings		7,074		6,401
Other time		837		1,088
Time deposits in foreign offices		2,459		4,567
Total deposits		178,799		186,922
Borrowed funds
Federal funds purchased and repurchase agreements		3,690		3,998
Federal Home Loan Bank borrowings		8,119		10,761
Bank notes and senior debt		12,617		12,362
Subordinated debt		10,184		9,907
Other		5,817		2,233
Total borrowed funds		40,427		39,261
Total	$	219,226	$	226,183

Total funding sources decreased $7.0 billion, or 3%, at June 30, 2010 compared with December 31, 2009.

Total deposits decreased $8.1 billion at June 30, 2010 compared with December 31, 2009. Deposits decreased in the comparison due to the decline of retail certificates of deposit and lower time deposits in foreign offices.

Interest-bearing deposits represented 75% of total deposits at June 30, 2010 compared with 76% at December 31, 2009.

Total borrowed funds increased $1.2 billion since December 31, 2009. Other borrowed funds increased $3.6 billion in the comparison primarily due to an increase in commercial paper borrowings of $2.6 billion with the consolidation of Market Street. This increase was partially offset by a decline of $2.6 billion in Federal Home Loan Bank borrowings since December 31, 2009.

Capital

PNC increased common equity during the first half of 2010 as outlined below. 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.

Total shareholders’ equity decreased $1.6 billion, to $28.4 billion, at June 30, 2010 compared with December 31, 2009 primarily due to the following:

•

A decline of $7.3 billion in capital surplus preferred stock in connection with our February 2010 redemption of the Series N (TARP) Preferred Stock as explained further in Note 14 Total Equity And Other Comprehensive Income in the Notes To Consolidated Financial Statements in this Report,

•

The first quarter 2010 issuance of 63.9 million shares of common stock in an underwritten offering at $54 per share resulted in a $3.4 billion increase in total shareholders’ equity, and

•

A decline of $1.5 billion in accumulated other comprehensive loss primarily as a result of decreases in net unrealized securities losses as more fully described in the Investment Securities portion of this Consolidated Balance Sheet Review.

Common shares outstanding were 525 million at June 30, 2010 and 462 million at December 31, 2009. Our first quarter 2010 common stock offering referred to above drove this increase.

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. Since our acquisition of National City on December 31, 2008, we have increased total common shareholders’ equity by 59%.

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 six months of 2010 under this program and, as described in our 2009 Form 10-K, were restricted from doing so under the TARP Capital Purchase Program prior to our February 2010 redemption of the Series N Preferred Stock.

Risk-Based Capital


Dollars in millions	June 30 2010			Dec. 31 2009
Capital components
Shareholders’ equity
Common	$	27,725		$	21,967
Preferred		652			7,975
Trust preferred capital securities		3,011			2,996
Noncontrolling interests		1,449			1,611
Goodwill and other intangible assets		(10,450	)		(10,652	)
Eligible deferred income taxes on goodwill and other intangible assets		704			738
Pension, other postretirement benefit plan adjustments		406			542
Net unrealized securities losses, after-tax		501			1,575
Net unrealized losses (gains) on cash flow hedge derivatives, after-tax		(497	)		(166	)
Other		(216	)		(63	)
Tier 1 risk-based capital		23,285			26,523
Subordinated debt		5,148			5,356
Eligible allowance for credit losses		2,762			2,934
Total risk-based capital	$	31,195		$	34,813
Tier 1 common capital
Tier 1 risk-based capital	$	23,285		$	26,523
Preferred equity		(652	)		(7,975	)
Trust preferred capital securities		(3,011	)		(2,996	)
Noncontrolling interests		(1,449	)		(1,611	)
Tier 1 common capital	$	18,173		$	13,941
Assets
Risk-weighted assets, including off-balance sheet instruments and market risk equivalent assets	$	218,141		$	232,257
Adjusted average total assets		255,533			263,103
Capital ratios
Tier 1 risk-based		10.7	%		11.4	%
Tier 1 common		8.3			6.0
Total risk-based		14.3			15.0
Leverage		9.1			10.1

Federal banking regulators have stated that they expect all bank holding companies to have a level and composition of Tier 1 capital well in excess of the 4% regulatory minimum, and they have required the largest US bank holding companies, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet credit needs of their customers through the economic downturn. They have also stated their view that common equity should be the dominant form of Tier 1 capital. As a result, regulators are now emphasizing the Tier 1 common capital ratio in their evaluation of bank holding company capital levels, although this metric is not provided for in the regulations. We seek to manage our capital consistent with these regulatory principles, and believe that our June 30, 2010 capital levels were aligned with them.

Dodd-Frank requires the Federal Reserve Board to establish capital requirements that would, among other things, eliminate

the Tier 1 treatment of trust preferred securities following a phase-in period expected to begin in 2013. Accordingly, PNC will evaluate its alternatives, including the potential for early redemption of some or all of its trust preferred securities, based on such considerations as it may consider relevant, including dividend rates, the specifics of the future capital requirements, capital market conditions and other factors.

PNC’s Tier 1 risk-based capital ratio decreased by 70 basis points to 10.7% at June 30, 2010 from 11.4% at December 31, 2009 due to our redemption of the Series N Preferred Stock. See Note 14 Total Equity And Other Comprehensive Income in the Notes To Consolidated Financial Statements in this Report.

Our Tier 1 common capital ratio was 8.3% at June 30, 2010, an increase of 230 basis points compared with 6.0% at December 31, 2009. Our first half 2010 earnings and common stock offering were reflected in the higher Tier 1 common capital ratio.


Dollars in billions	Tier 1 risk-based			Tier 1 common
Ratios – as reported		10.7	%		8.3	%
Capital – as reported	$	23.3		$	18.2
Adjustment:
Net impact of July 1, 2010 sale of GIS (a)		1.4			1.4
Capital – pro forma	$	24.7		$	19.6
Ratios – pro forma		11.3	%		9.0	%

(a)	The estimated net impact of this sale was as follows:


Dollars in billions
Sales price	$	2.3
Less:
Book equity / intercompany debt		(1.7	)
Pretax gain		.6
Income taxes		(.3	)
After-tax gain		.3
Elimination of net intangible assets:
Goodwill and other intangible assets		1.3
Eligible deferred income taxes on goodwill and other intangible assets		(.2	)
Net intangible assets		1.1
Net impact of sale of GIS	$	1.4

We believe that the disclosure of these ratios reflecting the estimated impact of the sale of GIS provides additional meaningful information regarding the risk-based capital ratios at that date and the impact of this event on these ratios.

At June 30, 2010, PNC Bank, N.A., our domestic bank subsidiary, was considered “well capitalized” based on US regulatory capital ratio requirements, which are indicated on page 2 of this Report. We believe PNC Bank, N.A. will continue to meet these requirements during the remainder of 2010.

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.

OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

We engage in a variety of activities that involve unconsolidated entities or that are otherwise not reflected in our Consolidated Balance Sheet that are generally referred to as “off-balance sheet arrangements.” Additional information on these types of activities is included in the following sections of this Report:

•

Commitments, including contractual obligations and other commitments, included within the Risk Management section of this Financial Review,

•

Note 3 Loan Sale and Servicing Activities and Variable Interest Entities, and

•

Note 18 Commitments and Guarantees in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

On January 1, 2010, we adopted ASU 2009-17 – Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This guidance removes the scope exception for qualifying special-purpose entities, contains new criteria for determining the primary beneficiary of a variable interest entity (VIE) and increases the frequency of required reassessments to determine whether an entity is the primary beneficiary of a VIE. VIEs are assessed for consolidation under Topic 810 when we hold variable interests in these entities. PNC consolidates VIEs when we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Effective January 1, 2010, we consolidated Market Street, a credit card securitization trust, and certain Low Income Housing Tax Credit (LIHTC) investments. We recorded consolidated assets of $4.2 billion, consolidated liabilities of $4.2 billion, and an after-tax cumulative effect adjustment to retained earnings of $92 million upon adoption.

The following provides a summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements as of June 30, 2010 and December 31, 2009, respectively.

Consolidated VIEs – Carrying Value (a)

June 30, 2010

In millions

Market
Street

Credit Card
Securitization
Trust

Tax Credit

Investments (b)

Credit Risk

Transfer
Transaction

Total

Assets

Cash and due from banks

Interest-earning deposits with banks

463

467

Investment securities

571

Loans

2,036

2,165

470

4,671

Allowance for loan and lease losses

(210

)

(216

)

Equity investments

1,420

Other assets

299

503

821

Total assets

2,906

2,427

1,930

474

7,737

Liabilities

Other borrowed funds

2,616

1,512

134

4,262

Accrued expenses

Other liabilities

290

510

800

Total liabilities

2,906

1,512

736

5,154

(a)	Amounts represent carrying value on PNC’s Consolidated Balance Sheet.

(b)	Amounts reported primarily represent LIHTC investments.

Consolidated VIEs

In millions

Aggregate

Assets (a)

Aggregate

Liabilities (a)

June 30, 2010

Market Street

3,468

3,477

Credit Card Securitization Trust

2,672

1,622

Tax Credit Investments (b)

1,954

804

Credit Risk Transfer Transaction

795

December 31, 2009

Tax Credit Investments (b)

1,933

808

Credit Risk Transfer Transaction

860

(a)	Aggregate assets and aggregate liabilities differ from the consolidated carrying value of assets and liabilities due to elimination of intercompany assets and liabilities held by the consolidated VIE.

(b)	Amounts reported primarily represent LIHTC investments.

Non-Consolidated VIEs


In millions	Aggregate Assets		Aggregate Liabilities		PNC Risk of Loss			Carrying Value of Assets			Carrying Value of Liabilities
June 30, 2010
Tax Credit Investments (a)	$	3,583	$	1,873	$	830		$	830	(c)	$	336	(d)
Commercial Mortgage-Backed Securitizations (b)		79,238		79,238		2,080			2,080	(e)
Residential Mortgage-Backed Securitizations (b)		44,847		44,847		1,860			1,857	(e)		3	(d)
Collateralized Debt Obligations		23				2			2	(c)
Total	$	127,691	$	125,958	$	4,772		$	4,769		$	339

In millions	Aggregate Assets		Aggregate Liabilities		PNC Risk of Loss
December 31, 2009
Market Street	$	3,698	$	3,718	$	6,155	(f)
Tax Credit Investments (a)		1,786		1,156		743
Collateralized Debt Obligations		23				2
Total	$	5,507	$	4,874	$	6,900

(a)	Amounts reported primarily represent LIHTC investments. Aggregate assets and aggregate liabilities represent estimated balances due to limited availability of financial information associated with certain acquired National City partnerships.

(b)

Amounts reported reflect involvement with securitization SPEs where PNC transferred to and/or services loans for a SPE and we hold securities issued by that SPE. We also invest in other mortgage and asset-backed securities issued by third-party VIEs with which we have no continuing involvement. Further information on these securities is included in Note 7 Investment Securities and values disclosed represent our maximum exposure to loss for those securities’ holdings.

(c)	Included in Equity investments on our Consolidated Balance Sheet.

(d)	Included in Other liabilities on our Consolidated Balance Sheet.

(e)	Included in Trading securities, Investment securities, Other intangible assets, and Other assets on our Consolidated Balance Sheet.

(f)	PNC’s risk of loss consisted of off-balance sheet liquidity commitments to Market Street of $5.6 billion and other credit enhancements of $.6 billion at December 31, 2009.

Market Street

Market Street is a multi-seller asset-backed commercial paper conduit that is owned by an independent third party. Market Street’s activities primarily involve purchasing assets or making loans secured by interests in pools of receivables from US corporations that desire access to the commercial paper market. Market Street funds the purchases of assets or loans by issuing commercial paper and is supported by pool-specific credit enhancements, liquidity facilities and program-level credit enhancement. Generally, Market Street mitigates its potential interest rate risk by entering into agreements with its borrowers that reflect interest rates based upon its weighted average commercial paper cost of funds. During 2009 and the

first six months of 2010, Market Street met all of its funding needs through the issuance of commercial paper.

Market Street commercial paper outstanding was $2.6 billion at June 30, 2010 and $3.1 billion at December 31, 2009. The weighted average maturity of the commercial paper was 33 days at June 30, 2010 and 36 days at December 31, 2009.

During 2009, PNC Capital Markets, acting as a placement agent for Market Street, held a maximum daily position in Market Street commercial paper of $135 million with an average balance of $19 million. This compares with a maximum daily position and an average balance of zero for

the first half of 2010. PNC Capital Markets owned no Market Street commercial paper at June 30, 2010 and December 31, 2009. PNC Bank, N.A. made no purchases of Market Street commercial paper during the first half of 2010.

PNC Bank, N.A. provides certain administrative services, the program-level credit enhancement and all of the liquidity facilities to Market Street in exchange for fees negotiated based on market rates. Through these arrangements, PNC has the power to direct the activities of the special purpose entity (SPE) that most significantly affect its economic performance and these arrangements expose PNC to expected losses or residual returns that are significant to Market Street.

The commercial paper obligations at June 30, 2010 and December 31, 2009 were supported by Market Street’s assets. While PNC may be obligated to fund under the $5.1 billion of liquidity facilities for events such as commercial paper market disruptions, borrower bankruptcies, collateral deficiencies or covenant violations, our credit risk under the liquidity facilities is secondary to the risk of first loss provided by the borrower such as by the over- collateralization of the assets or by another third party in the form of deal-specific credit enhancement. Deal-specific credit enhancement that supports the commercial paper issued by Market Street is generally structured to cover a multiple of expected losses for the pool of assets and is sized to generally meet rating agency standards for comparably structured transactions. In addition, PNC would be required to fund $236 million of the liquidity facilities if the underlying assets are in default. Market Street creditors have no direct recourse to PNC.

PNC provides program-level credit enhancement to cover net losses in the amount of 10% of commitments, excluding explicitly rated AAA/Aaa facilities. PNC provides 100% of the enhancement in the form of a cash collateral account funded by a loan facility. This facility expires in March 2013. At June 30, 2010, $567 million was outstanding on this facility. This amount was eliminated in PNC’s Consolidated Balance Sheet as of June 30, 2010 due to the consolidation of Market Street. We are not required to nor have we provided additional financial support to the SPE.

Assets of Market Street (a)


In millions	Outstanding		Commitments		Weighted Average Remaining Maturity In Years
December 31, 2009
Trade receivables	$	1,551	$	4,105	2.01
Automobile financing		480		480	4.20
Auto fleet leasing		412		543	.85
Collateralized loan obligations		126		150	.36
Residential mortgage		13		13	26.01
Other		534		567	1.65
Cash and miscellaneous receivables		582
Total	$	3,698	$	5,858	2.06

(a)	Market Street did not recognize an asset impairment charge or experience any material rating downgrades during 2009.

Market Street Commitments by Credit Rating (a)


	June 30, 2010		December 31, 2009
AAA/Aaa	17	%	14	%
AA/Aa	64		50
A/A	18		34
BBB/Baa	1		2
Total	100	%	100	%

(a)	The majority of our facilities are not explicitly rated by the rating agencies. All facilities are structured to meet rating agency standards for applicable rating levels.

Credit Card Securitization Trust

We are the sponsor of several credit card securitizations facilitated through an SPE trust. This bankruptcy-remote SPE or VIE was established to purchase credit card receivables from the sponsor and to issue and sell asset-backed securities created by it to independent third-parties. The SPE was financed primarily through the sale of these asset-backed securities. These transactions were originally structured as a form of liquidity and to afford favorable capital treatment. At June 30, 2010, Series 2005-1, 2006-1, 2007-1, and 2008-3 issued by the SPE were outstanding. Series 2005-1 is scheduled to payoff in August 2010.

Our continuing involvement in these securitization transactions consists primarily of holding certain retained interests and acting as the primary servicer. For each securitization series, our retained interests held are in the form of a pro-rata undivided interest, or sellers’ interest, in the transferred receivables, subordinated tranches of asset-backed securities, interest-only strips, discount receivables, and subordinated interests in accrued interest and fees in securitized receivables. We consolidated the SPE as of January 1, 2010 as we are deemed the primary beneficiary of the entity based upon our level of continuing involvement. Our role as primary servicer gives us the power to direct the activities of the SPE that most significantly affect its

economic performance and our holding of retained interests gives us the obligation to absorb or receive expected losses or residual returns that are significant to the SPE. Accordingly, all retained interests held in the credit card SPE are eliminated in consolidation. The underlying assets of the consolidated SPE are restricted only for payment of the beneficial interest issued by the SPE. We are not required to nor have we provided additional financial support to the SPE. Additionally, creditors of the SPE have no direct recourse to PNC.

Tax Credit Investments

We make certain equity investments in various limited partnerships or limited liability companies (LLCs) that sponsor affordable housing projects utilizing the LIHTC pursuant to Sections 42 and 47 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings and to assist us in achieving goals associated with the Community Reinvestment Act. The primary activities of the investments include the identification, development and operation of multi-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity. We typically invest in these partnerships as a limited partner or non-managing member.

Also, we are a national syndicator of affordable housing equity (together with the investments described above, the “LIHTC investments”). In these syndication transactions, we create funds in which our subsidiaries are the general partner or managing member and sell limited partnership or non-managing member interests to third parties, and in some cases may also purchase a limited partnership or non-managing member interest in the fund and/or provide mezzanine financing to the fund. The purpose of this business is to generate income from the syndication of these funds, generate servicing fees by managing the funds, and earn tax credits to reduce our tax liability. General partner or managing member activities include selecting, evaluating, structuring, negotiating, and closing the fund investments in operating limited partnerships, as well as oversight of the ongoing operations of the fund portfolio.

Typically, the general partner or managing member will be the party that has the right to make decisions that will most significantly impact the economic performance of the entity. The primary sources of losses and benefits in LIHTC investments are the tax credits, tax benefits due to passive losses on the investments, and development and operating cash flows. We have consolidated LIHTC investments in which we are the general partner or managing member and have a limited partnership interest or non-managing member interest that could potentially absorb losses or receive benefits that are significant. The assets are primarily included in Equity investments and Other assets on our Consolidated Balance Sheet with the liabilities classified in Other liabilities and third party investors’ interests included in the Equity

section as Noncontrolling interests. Neither creditors nor equity investors in the LIHTC investments have any recourse to our general credit. There are no terms or conditions that have required or could require us, as the primary beneficiary, to provide financial support. Also, we have not provided nor do we intend to provide financial or other support to the limited partnership or LLC that we are not contractually obligated to provide. The consolidated aggregate assets and liabilities of these LIHTC investments are provided in the Consolidated VIEs table and reflected in the “Other” business segment.

We also have LIHTC investments in which we are not the general partner and do not have the right to make decisions that will most significantly impact the economic performance of the entity. Accordingly, we are not the primary beneficiary of these investments and thus they are not consolidated. These investments are disclosed in the Non-Consolidated VIEs table. The table also reflects our maximum exposure to loss. Our maximum exposure to loss is equal to our legally binding equity commitments adjusted for recorded impairment and partnership results. We use the equity method to account for our investment in these entities with the investments reflected in Equity investments on our Consolidated Balance Sheet. In addition, we increase our recognized investments and recognize a liability for all legally binding unfunded equity commitments. These liabilities are reflected in Other liabilities on our Consolidated Balance Sheet.

Credit Risk Transfer Transaction

National City Bank (which merged into PNC Bank, N.A. in November 2009) sponsored an SPE and concurrently entered into a credit risk transfer agreement with an independent third party to mitigate credit losses on a pool of nonconforming residential mortgage loans originated by its former First Franklin business unit. The SPE or VIE was formed with a small equity contribution and was structured as a bankruptcy-remote entity so that its creditors have no recourse to the sponsor. In exchange for a perfected security interest in the cash flows of the nonconforming mortgage loans, the SPE issued asset-backed securities to the sponsor in the form of senior, mezzanine, and subordinated equity notes.

The credit risk transfer agreement associated with this transaction is no longer outstanding as a result of certain actions taken by us and the independent third-party in 2009. Refer to our 2009 Form 10-K for further details of these actions. We continue to hold all asset-backed securities issued by the SPE and are also the depositor in this transaction. As a result, we are deemed the primary beneficiary of the SPE. Our rights as depositor give us the power to direct the activities of the SPE that most significantly affect its economic performance and our holding of all asset-backed securities gives us the obligation to absorb or receive expected losses or residual returns that are significant to the SPE. Accordingly, this SPE is consolidated and all of the entity’s assets, liabilities, and equity associated with the securities held by us

are intercompany balances and are eliminated in consolidation. The underlying assets of the consolidated SPE are restricted only for payment of the asset-backed securities issued by the SPE. We are not required to nor have we provided additional financial support to the SPE.

Residential and Commercial Mortgage-Backed Securitizations

In connection with each Agency and Non-Agency securitization discussed in Note 3 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements of this Report, we evaluate each SPE utilized in these transactions for consolidation. In performing these assessments, we evaluate our level of continuing involvement in these transactions as the magnitude of our involvement ultimately determines whether or not we hold a variable interest and/or are the primary beneficiary of the SPE. Factors we consider in our consolidation assessment include the significance of (1) our role as servicer, (2) our holdings of mortgage-backed securities issued by the securitization SPE, and (3) the rights of third-party variable interest holders.

Our first step in our assessment is to determine whether we hold a variable interest in the securitization SPE. We hold a variable interest in an Agency and Non-Agency securitization SPE through our holding of mortgage-backed securities issued by the SPE and/or our recourse obligations. Each SPE in which we hold a variable interest is evaluated to determine whether we are the primary beneficiary of the entity. For Agency securitization transactions, our contractual role as servicer does not give us the power to direct the activities that most significantly affect the economic performance of the SPEs. Thus, we are not the primary beneficiary of these entities. For Non-Agency securitization transactions, we would be the primary beneficiary to the extent our servicing activities give us the power to direct the activities that most significantly affect the economic performance of the SPE and we hold a more than insignificant variable interest in the entity. At June 30, 2010, our level of continuing involvement in Non-Agency securitization SPEs did not result in PNC being deemed the primary beneficiary of any of these entities. Details about the Agency and Non-Agency securitization SPEs where we hold a variable interest and are not the primary beneficiary are included in the table above. Our maximum exposure to loss as a result of our involvement with these SPEs is the carrying value of the mortgage-backed securities, servicing assets, servicing advances, and our liabilities associated with our recourse obligations. Creditors of the securitization SPEs have no recourse to PNC’s assets or general credit.

Perpetual Trust Securities

We issue certain hybrid capital vehicles that qualify as capital for regulatory and rating agency purposes.

In February 2008, PNC Preferred Funding LLC (the LLC), one of our indirect subsidiaries, sold $375 million of 8.700%

Fixed-to-Floating Rate Non-Cumulative Exchangeable Perpetual Trust Securities of PNC Preferred Funding Trust III (Trust III) to third parties in a private placement. In connection with the private placement, Trust III acquired $375 million of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Securities of the LLC (the LLC Preferred Securities). The sale was similar to the March 2007 private placement by the LLC of $500 million of 6.113% Fixed-to-Floating Rate Non-Cumulative Exchangeable Trust Securities (the Trust II Securities) of PNC Preferred Funding Trust II (Trust II) in which Trust II acquired $500 million of LLC Preferred Securities and to the December 2006 private placement by PNC REIT Corp. of $500 million of 6.517% Fixed-to-Floating Rate Non-Cumulative Exchangeable Perpetual Trust Securities (the Trust I Securities) of PNC Preferred Funding Trust I (Trust I) in which Trust I acquired $500 million of LLC Preferred Securities.

Each Trust III Security is automatically exchangeable into a share of Series J Non-Cumulative Perpetual Preferred Stock of PNC, each Trust II Security is automatically exchangeable into a share of Series I Non-Cumulative Perpetual Preferred Stock of PNC (Series I Preferred Stock), and each Trust I Security is automatically exchangeable into a share of Series F Non-Cumulative Perpetual Preferred Stock of PNC Bank, N.A. (PNC Bank Preferred Stock), in each case under certain conditions relating to the capitalization or the financial condition of PNC Bank, N.A. and upon the direction of the Office of the Comptroller of the Currency.

Our 2009 Form 10-K includes additional information regarding the Trust I and Trust II Securities, including descriptions of replacement capital covenants.

PNC has contractually committed to Trust II and Trust III that if full dividends are not paid in a dividend period on the Trust II Securities or the Trust III Securities, as applicable, or the LLC Preferred Securities held by Trust II or Trust III, as applicable, PNC will not declare or pay dividends with respect to, or redeem, purchase or acquire, any of its equity capital securities during the next succeeding dividend period, other than: (i) purchases, redemptions or other acquisitions of shares of capital stock of PNC in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of employees, officers, directors or consultants, (ii) purchases of shares of common stock of PNC pursuant to a contractually binding requirement to buy stock existing prior to the commencement of the extension period, including under a contractually binding stock repurchase plan, (iii) any dividend in connection with the implementation of a shareholders’ rights plan, or the redemption or repurchase of any rights under any such plan, (iv) as a result of an exchange or conversion of any class or series of PNC’s capital stock for any other class or series of PNC’s capital stock, (v) the purchase of fractional interests in shares of PNC capital stock pursuant to the conversion or exchange provisions of such stock or the security being converted or exchanged or (vi) any

stock dividends paid by PNC where the dividend stock is the same stock as that on which the dividend is being paid.

PNC Bank, N.A. has contractually committed to Trust I that if full dividends are not paid in a dividend period on the Trust I Securities, LLC Preferred Securities or any other parity equity securities issued by the LLC, neither PNC Bank, N.A. nor its subsidiaries will declare or pay dividends or other distributions with respect to, or redeem, purchase or acquire or make a liquidation payment with respect to, any of its equity capital securities during the next succeeding period (other than to holders of the LLC Preferred Securities and any parity equity securities issued by the LLC) except: (i) in the case of dividends payable to subsidiaries of PNC Bank, N.A., to PNC Bank, N.A. or another wholly-owned subsidiary of PNC Bank, N.A. or (ii) in the case of dividends payable to persons that are not subsidiaries of PNC Bank, N.A., to such persons only if, (A) in the case of a cash dividend, PNC has first irrevocably committed to contribute amounts at least equal to such cash dividend or (B) in the case of in-kind dividends payable by PNC REIT Corp., PNC has committed to purchase such in-kind dividend from the applicable PNC REIT Corp. holders in exchange for a cash payment representing the market value of such in-kind dividend, and PNC has committed to contribute such in-kind dividend to PNC Bank, N.A.

PNC Capital Trust E Trust Preferred Securities

In February 2008, PNC Capital Trust E issued $450 million of 7.75% Trust Preferred Securities due March 15, 2068 (the Trust E Securities). PNC Capital Trust E’s only assets are $450 million of 7.75% Junior Subordinated Notes due March 15, 2068 and issued by PNC (the JSNs). The Trust E Securities are fully and unconditionally guaranteed by PNC. We may, at our option, redeem the JSNs at 100% of their principal amount on or after March 15, 2013.

In connection with the closing of the Trust E Securities sale, we agreed that, if we have given notice of our election to defer

interest payments on the JSNs or a related deferral period is continuing, then PNC would be subject during such period to restrictions on dividends and other provisions protecting the status of the JSN debenture holder similar to or in some ways more restrictive than those potentially imposed under the Exchange Agreements with Trust II and Trust III, as described above. PNC Capital Trusts C and D have similar protective provisions with respect to $500 million in principal amount of junior subordinated debentures. Also, in connection with the closing of the Trust E Securities sale, we entered into a replacement capital covenant as described more fully in our 2009 Form 10-K.

Acquired Entity Trust Preferred Securities

As a result of the National City acquisition, we assumed obligations with respect to $2.4 billion in principal amount of junior subordinated debentures issued by the acquired entity. As a result of the Mercantile, Yardville and Sterling acquisitions, we assumed obligations with respect to $158 million in principal amount of junior subordinated debentures issued by the acquired entities. Under the terms of these debentures, if there is an event of default under the debentures or PNC exercises its right to defer payments on the related trust preferred securities issued by the statutory trusts or there is a default under PNC’s guarantee of such payment obligations, PNC would be subject during the period of such default or deferral to restrictions on dividends and other provisions protecting the status of the debenture holders similar to or in some ways more restrictive than those potentially imposed under the Exchange Agreements with Trust II and Trust III, as described above.

As more fully described in our 2009 Form 10-K, we are subject to replacement capital covenants with respect to four tranches of junior subordinated debentures inherited from National City as well as a replacement capital covenant with respect to our Series L Preferred Stock.

FAIR VALUE MEASUREMENTS

In addition to the following, see Note 8 Fair Value in the Notes To Consolidated Financial Statements under Part 1, Item 1 of this Report for further information regarding fair value. New GAAP was effective for PNC in January 2010 which requires additional disclosures regarding transfers in and out of Levels 1 and 2 and additional details of asset and liability categories.

At both June 30, 2010 and December 31, 2009, assets recorded at fair value represented 23% of total assets. Liabilities recorded at fair value represented 3% and 2% of total liabilities at June 30, 2010 and December 31, 2009, respectively.

The following table includes the assets and liabilities measured at fair value and the portion of such assets and liabilities that are classified within Level 3 of the valuation hierarchy.


	June 30, 2010					December 31, 2009
In millions	Total Fair Value		Level 3			Total Fair Value		Level 3
Assets
Securities available for sale	$	45,850	$	9,151		$	50,798	$	9,933
Financial derivatives		6,415		85			3,916		50
Residential mortgage loans held for sale		1,220					1,012
Trading securities		882		73			2,124		89
Residential mortgage servicing rights		963		963			1,332		1,332
Commercial mortgage loans held for sale		1,036		1,036			1,050		1,050
Equity investments		1,268		1,268			1,188		1,188
Customer resale agreements		915					990
Loans		110					107
Other assets		727		305			716		509
Total assets	$	59,386	$	12,881		$	63,233	$	14,151
Level 3 assets as a percentage of Total Assets at Fair Value				22	%				22	%
Level 3 assets as a percentage of Consolidated Assets				5	%				5	%
Liabilities
Financial derivatives	$	5,037	$	355		$	3,839	$	506
Trading securities sold short		939					1,344
Other liabilities		2					6
Total liabilities	$	5,978	$	355		$	5,189	$	506
Level 3 liabilities as a percentage of Total Liabilities at Fair Value				6	%				10	%
Level 3 liabilities as a percentage of Consolidated Liabilities				<1	%				<1	%

The majority of Level 3 assets represent non-agency residential mortgage-backed and asset-backed securities in the available for sale securities portfolio for which there was a lack of observable trading activity.

During the first six months of 2010, no material transfers of assets or liabilities between the hierarchy levels occurred.

BUSINESS SEGMENTS REVIEW

We have six reportable business segments:

•

Retail Banking

•

Corporate & Institutional Banking

•

Asset Management Group

•

Residential Mortgage Banking

•

BlackRock

•

Distressed Assets Portfolio

Business segment results, including inter-segment revenues, and a description of each business are included in Note 19 Segment Reporting included in the Notes To Consolidated Financial Statements of this Report. Certain amounts included in this Financial Review differ from those in Note 19 primarily due to the presentation in this Financial Review of business net interest revenue on a taxable-equivalent basis.

Results of individual businesses are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of our individual businesses are not necessarily comparable with similar information for any other company. We refine our methodologies from time to time as our management accounting practices are enhanced and our businesses and management structure change. Certain prior period amounts have been reclassified to reflect current methodologies and our current business and management structure. As a result of its sale, GIS is no longer a reportable business segment. Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. We have aggregated the business results for certain similar operating segments for financial reporting purposes.

Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product maturities, duration and other factors. Capital is intended to cover unexpected losses and is assigned to the banking and servicing businesses using our risk-based economic capital model. We have assigned capital equal to 6% of funds to Retail Banking to reflect the capital required for well-capitalized domestic banks and to approximate market comparables for this business.

We have allocated the allowances for loan and lease losses and unfunded loan commitments and letters of credit based on our assessment of risk inherent in the business segment loan portfolios. Our allocation of the costs incurred by operations and other shared support areas not directly aligned with the businesses is primarily based on the use of services.

Total business segment financial results differ from total consolidated results from continuing operations before noncontrolling interests and exclude the earnings and revenue attributable to GIS. The impact of these differences is reflected in the “Other” category. “Other” for purposes of this Business Segments Review and the Business Segment Highlights in the Executive Summary includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as gains or losses related to BlackRock transactions including LTIP share distributions and obligations, integration costs, asset and liability management activities including net securities gains or losses and certain trading activities, exited businesses, equity management activities, alternative investments, intercompany eliminations, most corporate overhead, and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests.

Period-end Employees


	June 30 2010	Dec. 31 2009	June 30 2009
Full-time employees
Retail Banking	21,380	21,416	22,102
Corporate & Institutional Banking	3,601	3,746	4,038
Asset Management Group	2,951	2,960	3,150
Residential Mortgage Banking	3,348	3,267	3,693
Distressed Assets Portfolio	179	175	131
Other
Operations & Technology	8,970	9,275	9,350
Staff Services and other (a)	9,061	8,922	8,898
Total Other	18,031	18,197	18,248
Total full-time employees	49,490	49,761	51,362
Retail Banking part-time employees	4,790	4,737	5,199
Other part-time employees	1,104	1,322	1,509
Total part-time employees	5,894	6,059	6,708
Total	55,384	55,820	58,070

(a)	Includes employees of GIS totaling 4,528 at June 30, 2010; 4,450 at December 31, 2009; and 4,663 at June 30, 2009.

Employee data as reported by each business segment in the table above reflects staff directly employed by the respective businesses and excludes operations, technology and staff services employees reported in the Other segment. Total employees have decreased since June 30, 2009 primarily as a result of integration and conversion activities related to our National City acquisition.

Results Of Businesses – Summary

(Unaudited)


	Earnings (Loss)						Revenue					Average Assets (a)
Six months ended June 30 – in millions	2010			2009			2010		2009			2010		2009
Retail Banking (b)	$	109		$	111		$	2,754	$	2,908		$	67,782	$	65,397
Corporate & Institutional Banking		803			466			2,467		2,573			78,227		89,005
Asset Management Group		68			47			448		476			7,094		7,442
Residential Mortgage Banking		174			319			489		860			8,834		7,909
BlackRock		154			77			198		93			6,125		4,383
Distressed Assets Portfolio		(14	)		158			675		678			19,009		24,295
Total business segments		1,294			1,178			7,031		7,588			187,071		198,431
Other (b) (c) (d)		135			(463	)		644		(99	)		78,678		82,422
Results from continuing operations before noncontrolling interests (e)	$	1,429		$	715		$	7,675	$	7,489		$	265,749	$	280,853

(a)	Period-end balances for BlackRock.

(b)	Amounts for 2009 include the results of the 61 branches divested by early September 2009.

(c)	For our segment reporting presentation in this Financial Review, “Other” for the first six months of 2010 and 2009 included $213 million and $177 million, respectively, of pretax integration costs primarily related to National City.

(d)	“Other” average assets include securities available for sale associated with asset and liability management activities.

(e)	Amounts are presented on a continuing operations basis and therefore exclude the earnings, revenue, and assets of GIS.

RETAIL BANKING

(Unaudited)


Six months ended June 30 Dollars in millions	2010 (a) (b)			2009
INCOME STATEMENT
Net interest income	$	1,758		$	1,824
Noninterest income
Service charges on deposits		399			457
Brokerage		108			123
Consumer services		431			435
Other		58			69
Total noninterest income		996			1,084
Total revenue		2,754			2,908
Provision for credit losses		619			608
Noninterest expense		1,969			2,118
Pretax earnings		166			182
Income taxes		57			71
Earnings	$	109		$	111
AVERAGE BALANCE SHEET
Loans
Consumer
Home equity	$	26,665		$	27,565
Indirect		3,959			4,080
Education		8,202			5,041
Credit cards		4,013			2,137
Other consumer		1,784			1,795
Total consumer		44,623			40,618
Commercial and commercial real estate		11,399			12,652
Floor plan		1,297			1,433
Residential mortgage		1,741			2,183
Total loans		59,060			56,886
Goodwill and other intangible assets		5,904			5,795
Other assets		2,818			2,716
Total assets	$	67,782		$	65,397
Deposits
Noninterest-bearing demand	$	17,009		$	16,115
Interest-bearing demand		19,597			18,272
Money market		39,992			39,222
Total transaction deposits		76,598			73,609
Savings		6,780			6,565
Certificates of deposit		43,955			56,074
Total deposits		127,333			136,248
Other liabilities		1,672			60
Capital		8,261			8,584
Total liabilities and equity	$	137,266		$	144,892
PERFORMANCE RATIOS
Return on average capital		3	%		3	%
Return on average assets		.32			.34
Noninterest income to total revenue		36			37
Efficiency		71			73
OTHER INFORMATION (C)
Credit-related statistics:
Commercial nonperforming assets	$	297		$	246
Consumer nonperforming assets		336			156
Total nonperforming assets (d)	$	633		$	402
Impaired loans (e)	$	974		$	1,266
Commercial lending net charge-offs	$	196		$	173
Credit card lending net charge-offs (on balance sheet)		185			99
Consumer lending (excluding credit card) net charge-offs		228			181
Total net charge-offs	$	609		$	453
Commercial lending annualized net charge-off ratio		3.11	%		2.48	%
Credit card annualized net charge-off ratio (on balance sheet)		9.30	%		9.34	%
Consumer lending (excluding credit card) annualized net charge-off ratio		1.09	%		.90	%
Total annualized net charge-off ratio		2.08	%		1.61	%
Other statistics:
ATMs		6,539			6,474
Branches (f)		2,458			2,607


At June 30 Dollars in millions, except as noted	2010 (a) (b)			2009
OTHER INFORMATION (CONTINUED) (c)
Home equity portfolio credit statistics:
% of first lien positions (g)		35	%		35	%
Weighted average loan-to-value ratios (g)		73	%		74	%
Weighted average FICO scores (h)		727			728
Annualized net charge-off ratio		.86	%		.57	%
Loans 30 – 89 days past due		.74	%		.70	%
Loans 90 days past due		.91	%		.72	%
Customer-related statistics (i):
Retail Banking checking relationships		5,056,000			5,148,000
Retail online banking active customers		2,774,000			2,676,000
Retail online bill payment active customers		870,000			744,000
Brokerage statistics:
Financial consultants (j)		711			658
Full service brokerage offices		41			42
Brokerage account assets (billions)	$	31		$	28

(a)	Information as of and for the six months ended June 30, 2010 reflects the impact of the required divestiture of 61 branches that was completed by early September 2009.

(b)	Information for 2010 reflects the impact of the consolidation in our financial statements for the securitized credit card portfolio of approximately $1.6 billion of credit card loans as of January 1, 2010.

(c)	Presented as of June 30 except for net charge-offs and annualized net charge-off ratios, which are for the six months ended.

(d)	Includes nonperforming loans of $612 million at June 30, 2010 and $385 million at June 30, 2009.

(e)	Recorded investment of purchased impaired loans related to National City, adjusted to reflect additional loan impairments effective December 31, 2008.

(f)	Excludes certain satellite branches that provide limited products and/or services.

(g)	Includes loans from acquired portfolios for which lien position and loan-to-value information is not available.

(h)	Represents the most recent FICO scores we have on file.

(i)	Amounts for 2009 and 2010 include the impact of National City prior to the completion of all application system conversions. Therefore, these amounts may be refined in the third quarter of 2010.

(j)	Financial consultants provide services in full service brokerage offices and PNC traditional branches.

Highlights of Retail Banking’s performance for the first six months of 2010 include the following:

•

Information for the first six months of 2010 reflects the impact of the consolidation in our financial statements for the securitized credit card portfolio of approximately $1.6 billion of credit card loans as of January 1, 2010. This consolidation impacted primarily the loan and borrowings categories on the balance sheet and nearly all major categories of our income statement.

•

PNC successfully completed the conversion of customers at over 1,300 branches across nine states from National

City Bank to PNC, providing further growth opportunities throughout our expanded footprint.

•

Success in implementing Retail Banking’s deposit strategy resulted in growth in average demand deposits of $2.2 billion, or 6%, over the prior year. Excluding approximately $1.0 billion of average demand deposits from year-to-date 2009 balances related to the 61 required branch divestitures completed in early September 2009, average demand deposits increased $3.2 billion, or 10%, over the prior year.

•

Growth in demand deposits reflected the continued focus of Retail Banking on expanding and deepening customer relationships. Checking relationships grew by 14,000 from the beginning of 2010, better than expected considering the impact of branch conversion activities in many markets. Customer retention was stronger than expected and helped offset lower acquisition of new relationships in branch conversion markets. Markets not impacted by conversion activities had strong checking relationship results. Excluding the impact of the required branch divestitures in the third quarter of 2009, net new customer and business checking relationships grew 59,000 over the prior year.

•

Our investment in online banking capabilities continues to pay off. Active online bill payment and online banking customers grew by 12% and 1%, respectively, during the first half of 2010. Excluding the impact of the required branch divestitures, active online bill pay and active online banking customers have increased 19% and 6%, respectively since June 30, 2009.

•

For the second consecutive year, the Retail Bank was named a Gallup Great WorkPlace Award Winner, reflecting our brand attributes of ease, confidence and achievement. This recognition reflects our commitment to having an engaged workforce, as engagement delivers real bottom-line benefits.

•

At June 30, 2010, Retail Banking had 2,458 branches and an ATM network of 6,539 machines giving PNC one of the largest distribution networks among US banks. We continue to invest in the branch network. In the first six months of 2010, we opened 11 traditional and 13 in-store branches, and consolidated 79 branches. The decrease in branches was primarily driven by acquisition-related branch consolidations.

Total revenue for the first half of 2010 was $2.754 billion compared with $2.908 billion for the same period in 2009. Net interest income of $1.758 billion declined $66 million compared with the first half of 2009. Net interest income was negatively impacted by lower interest credits assigned to deposits, reflective of the rate environment, and benefited from the consolidation of the securitized credit card portfolio, higher demand deposits, and increased education loans.

Noninterest income declined $88 million over the first six months of 2009. The decrease can be attributed to the negative impact of the consolidation of the securitized credit card

portfolio, a decrease in service charges on deposits related to lower overdraft charges, lower brokerage fees, and the impact of the required branch divestitures, but benefited as a result of higher transaction volume-related fees within consumer services.

In 2010, Retail Banking revenue will be negatively impacted in a more significant manner by: 1) the new rules set forth in Regulation E related to overdraft charges, 2) the Credit CARD Act of 2009, and 3) the education lending portions of the Health Care and Education Reconciliation Act of 2010 (HCERA).

Current estimates are that second half 2010 revenues will be negatively impacted by approximately $145 million related to Regulation E and full year 2010 revenues will be negatively impacted by approximately $65 million attributable to the Credit CARD Act. These estimates do not include any additional impact to revenue for other changes that may be made in 2010 responding to market conditions or other/additional regulatory requirements, or any offsetting impact of changes to products and/or pricing.

The education lending business will be adversely impacted by provisions of HCERA that went into effect on July 1, 2010. The law will essentially eliminate the Federal Family Education Loan Program (FFELP), the federally guaranteed portion of this business available to private lenders. For 2009, we originated $2.6 billion of federally guaranteed loans under FFELP. We plan to continue to provide private education loans as another source of funding for students and families.

See additional information regarding Dodd-Frank in the Executive Summary section of this Financial Review. Over at least the next 12 months, as regulatory agencies issue proposed and final regulations and as the new Consumer Financial Protection Bureau is organized, we will continue to evaluate the impact of Dodd-Frank.

The provision for credit losses was $619 million through June 30, 2010 compared with $608 million over the same period in 2009. Net charge-offs were $609 million for the first half of 2010 compared with $453 million in the same period last year. The year-over-year increase in provision and net charge-offs is due to the deteriorating economy that occurred throughout 2009, as well as an increase of $1.9 billion in average credit card loans primarily due to the consolidation of the $1.6 billion of credit card loans as of January 1, 2010 as previously mentioned. Credit quality has shown signs of stabilization during the first half of 2010.

Noninterest expense for the first half of the year declined $149 million from the same period last year. Expenses were well-managed as continued investments in distribution channels were more than offset by acquisition cost savings and the required branch divestitures.

Growing core checking deposits as a lower-cost funding source and as the cornerstone product to build customer relationships is the primary objective of our deposit strategy. Furthermore, core checking accounts are critical to our strategy of expanding our payments business. The deposit strategy of Retail Banking is to remain disciplined on pricing, target specific products and markets for growth, and focus on the retention and growth of balances for relationship customers.

In the first half of 2010, average total deposits decreased $8.9 billion, or 7%, compared with 2009.

•

Average demand deposits increased $2.2 billion, or 6%, over the first six months of 2009. The increase was primarily driven by customer growth and customer preferences for liquidity.

•

Average money market deposits increased $770 million from the first half of 2009. The increase was primarily due to core money market growth as customers generally prefer more liquid deposits in a low rate environment.

•

In the first half of 2010, average certificates of deposit decreased $12.1 billion from the same period last year. A continued decline in certificates of deposit is expected in 2010 due to the planned run off of higher rate certificates of deposit that were primarily obtained through the National City acquisition.

Currently, we plan to maintain our focus on a relationship-based lending strategy that targets specific customer sectors (mass consumers, homeowners, students, small businesses and auto dealerships) and our moderate risk lending approach. In the first half of 2010, average total loans were $59.1 billion, an increase of $2.2 billion, or 4%, over the same period last year.

•

Average education loans grew $3.2 billion compared with the first half of 2009 due primarily to increases in federal loan volumes as a result of non-bank competitors exiting from the business, portfolio purchases in the fourth quarter of 2009, and the impact of our current strategy of holding education loans on the balance sheet. As previously disclosed in this section, the federally guaranteed portion of this business will be essentially eliminated on July 1, 2010 due to HCERA.

•

Average credit card balances increased $1.9 billion over the first half of 2009. The increase was primarily the result of the consolidation of the securitized credit card portfolio effective January 1, 2010.

•

Average home equity loans declined $900 million over the same period of 2009. Consumer loan demand has slowed as a result of the current economic environment. The decline is driven by loan demand being outpaced by paydowns, refinancings, and charge-offs. Retail Banking’s home equity loan portfolio is relationship based, with 96% of the portfolio attributable to borrowers in our primary geographic footprint. The nonperforming assets and charge-offs that we have experienced are within our expectations given current market conditions.

•

Average commercial and commercial real estate loans declined $1.3 billion compared with the first half of 2009. The decline was primarily due to the required branch divestitures (approximately $0.3 billion of decline on average) and loan demand being outpaced by refinancings, paydowns, and charge-offs.

CORPORATE & INSTITUTIONAL BANKING

(Unaudited)


Six months ended June 30 Dollars in millions except as noted	2010 (a)		2009
INCOME STATEMENT
Net interest income	$	1,800	$	1,909
Noninterest income
Corporate service fees		479		454
Other		188		210
Noninterest income		667		664
Total revenue		2,467		2,573
Provision for credit losses		333		936
Noninterest expense		866		897
Pretax earnings		1,268		740
Income taxes		465		274
Earnings	$	803	$	466
AVERAGE BALANCE SHEET
Loans
Commercial	$	33,477	$	40,264
Commercial real estate		17,482		19,564
Commercial – real estate related		3,014		4,074
Asset-based lending		6,003		6,709
Equipment lease financing		5,290		5,467
Total loans		65,266		76,078
Goodwill and other intangible assets		3,727		3,444
Loans held for sale		1,409		1,804
Other assets		7,825		7,679
Total assets	$	78,227	$	89,005
Deposits
Noninterest-bearing demand	$	22,997	$	17,924
Money market		12,317		8,736
Other		7,231		7,447
Total deposits		42,545		34,107
Other liabilities		10,833		9,862
Capital		7,774		7,753
Total liabilities and equity	$	61,152	$	51,722


Six months ended June 30 Dollars in millions except as noted	2010 (a)			2009
PERFORMANCE RATIOS
Return on average capital		21	%		12	%
Return on average assets		2.07			1.06
Noninterest income to total revenue		27			26
Efficiency		35			35
COMMERCIAL MORTGAGE SERVICING PORTFOLIO (in billions)
Beginning of period	$	287		$	270
Acquisitions/additions		15			16
Repayments/transfers		(37	)		(17	)
End of period	$	265		$	269
OTHER INFORMATION
Consolidated revenue from: (b)
Treasury Management	$	600		$	560
Capital Markets	$	292		$	191
Commercial mortgage loans held for sale (c)	$	25		$	85
Commercial mortgage loan servicing (d)		137			148
Total commercial mortgage banking activities	$	162		$	233
Total loans (e)	$	63,910		$	71,077
Credit-related statistics:
Nonperforming assets (e) (f)	$	3,103		$	2,317
Impaired loans (e) (g)	$	923		$	1,601
Net charge-offs	$	514		$	489
Net carrying amount of commercial mortgage servicing rights (e)	$	722		$	895

(a)	Information as of six months ended June 30, 2010 reflects the impact of the consolidation in our financial statements of Market Street effective January 1, 2010. Includes $1.5 billion of loans, net of eliminations, and $2.7 billion of commercial paper borrowings included in Other liabilities.

(b)	Represents consolidated PNC amounts.

(c)	Includes valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, origination fees, gains on sale of loans held for sale and net interest income on loans held for sale.

(d)	Includes net interest income and noninterest income from loan servicing and ancillary services.

(e)	As of period end.

(f)	Includes nonperforming loans of $3.0 billion at June 30, 2010 and $2.2 billion at June 30, 2009.

(g)	Recorded investment of purchased impaired loans related to National City, adjusted to reflect additional loan impairments effective December 31, 2008.

Corporate & Institutional Banking earned $803 million in the first six months of 2010 compared with $466 million in the first six months of 2009. Significantly higher earnings for the first half of 2010 reflected a lower provision for credit losses and lower noninterest expense which more than offset a decline in net interest income compared with the 2009 period.

Highlights of Corporate & Institutional Banking performance over the first six months of 2010 include:

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