Edgar Filing: PNC FINANCIAL SERVICES GROUP INC

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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 September 30, 2011

¨	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.

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 October 28, 2011, there were 526,112,070 shares of the registrant’s common stock ($5 par value) outstanding.

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Third Quarter 2011 Form 10-Q


	Pages
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

Consolidated Income Statement		66
Consolidated Balance Sheet		67
Consolidated Statement Of Cash Flows		68

Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies		70
Note 2 Acquisition and Divestiture Activity		75
Note 3 Loan Sale and Servicing Activities and Variable Interest Entities		75
Note 4 Loans and Commitments to Extend Credit		81
Note 5 Asset Quality and Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit		82
Note 6 Purchased Impaired Loans		94
Note 7 Investment Securities		95
Note 8 Fair Value		102
Note 9 Goodwill and Other Intangible Assets		115
Note 10 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities		117
Note 11 Certain Employee Benefit And Stock-Based Compensation Plans		118
Note 12 Financial Derivatives		120
Note 13 Earnings Per Share		128
Note 14 Total Equity And Other Comprehensive Income		129
Note 15 Income Taxes		130
Note 16 Legal Proceedings		131
Note 17 Commitments and Guarantees		133
Note 18 Segment Reporting		137
Note 19 Subsequent Event		141

Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis		142

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

Financial Review

Consolidated Financial Highlights		1
Executive Summary		3
Consolidated Income Statement Review		10
Consolidated Balance Sheet Review		13
Off-Balance Sheet Arrangements And Variable Interest Entities		22
Fair Value Measurements		23
Business Segments Review		24
Critical Accounting Estimates And Judgments		37
Status Of Qualified Defined Benefit Pension Plan		38
Recourse And Repurchase Obligations		39
Risk Management		43
Internal Controls And Disclosure Controls And Procedures		60
Glossary Of Terms		60
Cautionary Statement Regarding Forward-Looking Information		64

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		43-59 and 120-127

Item 4. Controls and Procedures.		60

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.		144
Item 1A. Risk Factors.		144
Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds.		144
Item 6. Exhibits.		145
Exhibit Index.		145
Signature		145

Corporate Information		146

FINANCIAL REVIEW

CONSOLIDATED FINANCIAL HIGHLIGHTS

THE PNC FINANCIAL SERVICES GROUP, INC.


Dollars in millions, except per share data	Three months ended September 30						Nine months ended September 30
Unaudited	2011			2010			2011			2010
Financial Results (a)
Revenue
Net interest income	$	2,175		$	2,215		$	6,501		$	7,029
Noninterest income		1,369			1,383			4,276			4,244
Total revenue		3,544			3,598			10,777			11,273
Noninterest expense		2,140			2,158			6,386			6,273
Pretax, pre-provision earnings from continuing operations (b)		1,404			1,440			4,391			5,000
Provision for credit losses		261			486			962			2,060
Income from continuing operations before income taxes and noncontrolling interests (pretax earnings)	$	1,143		$	954		$	3,429		$	2,940
Income from continuing operations before noncontrolling interests	$	834		$	775		$	2,578		$	2,204
Income from discontinued operations, net of income taxes (c)					328						373
Net income	$	834		$	1,103		$	2,578		$	2,577
Less:
Net income (loss) attributable to noncontrolling interests		4			2			(2	)		(12	)
Preferred stock dividends, including TARP (d)		4			4			32			122
Preferred stock discount accretion and redemptions, including redemption of TARP preferred stock discount accretion (d)					3			1			254
Net income attributable to common shareholders (d)	$	826		$	1,094		$	2,547		$	2,213
Diluted earnings per common share
Continuing operations	$	1.55		$	1.45		$	4.79		$	3.52
Discontinued operations (c)					.62						.72
Net income	$	1.55		$	2.07		$	4.79		$	4.24
Cash dividends declared per common share	$	.35		$	.10		$	.80		$	.30
Performance Ratios
Net interest margin (e)		3.89	%		3.96	%		3.92	%		4.18	%
Noninterest income to total revenue		39			38			40			38
Efficiency		60			60			59			56
Return on:
Average common shareholders’ equity		10.25			15.12			10.93			10.98
Average assets		1.24			1.65			1.31			1.30

See page 60 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 from continuing operations, 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) through June 30, 2010 and the related after-tax gain on sale. We sold GIS effective July 1, 2010, resulting in a gain of $639 million, or $328 million after taxes, recognized during the third quarter of 2010. See Sale of PNC Global Investment Servicing in the Executive Summary section of the Financial Review section of this Report and Note 2 Acquisition and Divestiture Activity in the Notes To Consolidated Financial Statements of this Report for additional information.

(d)

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 noncash reduction in net income attributable to common shareholders and related basic and diluted earnings per share. The impact on diluted earnings per share was $.48 for the nine months ended September 30, 2010. Total dividends declared during the first nine months of 2010 included $89 million on the Series N Preferred Stock.

(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 net interest 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 generally accepted accounting principles (GAAP) in the Consolidated Income Statement. The taxable-equivalent adjustments to net interest income for the three months ended September 30, 2011 and September 30, 2010 were $27 million and $22 million, respectively. The taxable-equivalent adjustments to net interest income for the nine months ended September 30, 2011 and September 30, 2010 were $76 million and $59 million, respectively.

CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED) (a)


Unaudited	September 30 2011			December 31 2010			September 30 2010
Balance Sheet Data (dollars in millions, except per share data)
Assets	$	269,470		$	264,284		$	260,133
Loans (b) (c)		154,543			150,595			150,127
Allowance for loan and lease losses (b)		4,507			4,887			5,231
Interest-earning deposits with banks (b)		2,773			1,610			415
Investment securities (b)		62,105			64,262			63,461
Loans held for sale (c)		2,491			3,492			3,275
Goodwill and other intangible assets		10,156			10,753			10,518
Equity investments (b) (d)		9,915			9,220			10,137

Noninterest-bearing deposits		55,180			50,019			46,065
Interest-bearing deposits		132,552			133,371			133,118
Total deposits		187,732			183,390			179,183
Transaction deposits		143,015			134,654			128,197
Borrowed funds (b)		35,102			39,488			39,763
Shareholders’ equity		34,219			30,242			30,042
Common shareholders’ equity		32,583			29,596			29,394
Accumulated other comprehensive income (loss)		397			(431	)		146

Book value per common share		61.92			56.29			55.91
Common shares outstanding (millions)		526			526			526
Loans to deposits		82	%		82	%		84	%

Assets Under Administration (billions)
Discretionary assets under management	$	103		$	108		$	105
Nondiscretionary assets under administration		99			104			101
Total assets under administration		202			212			206
Brokerage account assets		33			34			33
Total client assets	$	235		$	246		$	239

Capital Ratios
Tier 1 common		10.5	%		9.8	%		9.6	%
Tier 1 risk-based (e)		13.1			12.1			11.9
Total risk-based (e)		16.5			15.6			15.6
Leverage (e)		11.4			10.2			9.9
Common shareholders’ equity to assets		12.1			11.2			11.3

Asset Quality Ratios
Nonperforming loans to total loans		2.39	%		2.97	%		3.22	%
Nonperforming assets to total loans, OREO and foreclosed assets		2.77			3.39			3.65
Nonperforming assets to total assets		1.59			1.94			2.12
Net charge-offs to average loans (for the three months ended) (annualized)		.95			2.09			1.61
Allowance for loan and lease losses to total loans		2.92			3.25			3.48
Allowance for loan and lease losses to nonperforming loans (f)		122			109			108

(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. See Consolidated Balance Sheet in Part I, Item 1 of this Report for additional information.

(c)	Amounts include assets 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)	Amounts include our equity interest in BlackRock.

(e)	The minimum US regulatory capital ratios under Basel I are 4.0% for Tier 1 risk-based, 8.0% for Total risk-based, and 4.0% for Leverage. The well-capitalized levels are 6.0% for Tier 1 risk-based, 10.0% for Total risk-based, and 5.0% for Leverage.

(f)	The allowance for loan and lease losses includes impairment reserves attributable to purchased impaired loans. Nonperforming loans do not include government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and 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 2010 Annual Report on Form 10-K (2010 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, regulatory and legal risks, see the following sections as they appear in this Report, in our 2010 Form 10-K and in our first and second quarter 2011 Form 10-Qs: the Risk Management section of the Financial Review portion of the respective report; Item 1A Risk Factors included in the respective report; and the Legal Proceedings and Commitments and Guarantees Notes of the Notes to Consolidated Financial Statements included in the respective 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 from those anticipated in the forward-looking statements included in this Report. See Note 18 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

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. PNC also provides certain products and services internationally.

KEY STRATEGIC GOALS

We manage our company for the long term and focus on operating within 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. For several quarters, PNC has been focused on managing towards a moderate risk profile. At this point, we have improved PNC’s risk profile to moderate which is primarily attributable to continued improvement in our credit profile as we have experienced overall positive trends in a number of key credit metrics such as the charge-off ratio, nonperforming assets and criticized exposures.

Our strategy to enhance shareholder value centers on driving growth in pre-tax, pre-provision earnings 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 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 managing a significantly enhanced branding initiative. This strategy is designed to give our customers choices based on their needs. Rather than striving to optimize fee revenue in the short term, our approach is focused on effectively growing targeted market share and “share of wallet.” 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 remain committed to maintaining a moderate risk philosophy 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 have made substantial progress in transitioning our balance sheet over the past two years, working to return to our moderate risk profile throughout our expanded franchise. Our actions have resulted in strong capital measures, created a well-positioned balance sheet, and helped us to maintain strong bank level liquidity and investment flexibility to adjust, where appropriate and permissible, to changing interest rates and market conditions.

PENDING ACQUISITION OF RBC BANK (USA)

On June 19, 2011, PNC entered into a definitive agreement to acquire RBC Bank (USA), the US retail banking subsidiary of Royal Bank of Canada, with 424 branches in North Carolina, Florida, Alabama, Georgia, Virginia and South Carolina. The transaction is expected to add approximately $19 billion of deposits and $16 billion of loans to PNC’s Consolidated Balance Sheet and to close in March 2012, subject to customary closing conditions, including receipt of regulatory approvals. Note 2 Acquisition and Divestiture Activity in the Notes To Consolidated Financial Statements of this Report and our Current Report on Form 8-K dated June 19, 2011 contain additional information regarding this pending acquisition.

PENDING ACQUISITION OF FLAGSTAR BRANCHES

On July 26, 2011, PNC signed a definitive agreement to acquire 27 branches in metropolitan Atlanta, Georgia from Flagstar Bank, FSB, a subsidiary of Flagstar Bancorp, Inc., and assume approximately $240 million of deposits associated with those branches based on balances as of June 30, 2011. Under the agreement, PNC will purchase 21 branches and lease six branches located in a seven-county area primarily north of Atlanta. Acquired real estate and fixed assets associated with the branches will be purchased for net book value, of approximately $42 million. No deposit premium will be paid and no loans will be acquired in the transaction, which is expected to close in December 2011 subject to customary closing conditions. PNC and Flagstar have both received regulatory approval in relation to the respective applications filed with the regulators.

BANKATLANTIC BRANCH ACQUISITION

Effective June 6, 2011, we acquired 19 branches from BankAtlantic in the Tampa, Florida area adding approximately $325 million of assets to our Consolidated Balance sheet, including $257 million in cash and $41 million of goodwill. In addition, we added $324 million of deposits in connection with this acquisition. Our Consolidated Income Statement includes the impact of the branch activity subsequent to our June 6, 2011 acquisition.

2011 CAPITAL AND LIQUIDITY ACTIONS

Our ability to take certain capital actions has been subject to the results of the supervisory assessment of capital adequacy undertaken by the Board of Governors of the Federal Reserve System (Federal Reserve) and our primary bank regulators as part of the capital adequacy assessment of the 19 bank holding companies that participate in the Supervisory Capital Assessment Program. As we announced on March 18, 2011, the Federal Reserve accepted the capital plan that we submitted for their review and did not object to our capital actions proposed as part of that plan.

On April 7, 2011, consistent with our capital plan submitted to the Federal Reserve earlier in 2011, our Board of Directors approved an increase to PNC’s quarterly common stock dividend from $.10 per common share to $.35 per common share, which was paid on May 5, 2011. Additionally, also consistent with that capital plan, our Board of Directors confirmed that PNC may begin to purchase common stock under its existing 25 million share repurchase program in open market or privately negotiated transactions. We have submitted an updated capital plan reflecting the proposed acquisition of RBC Bank (USA) to the Federal Reserve for review and approval. We have placed on hold our plans to repurchase up to $500 million of common stock during the remainder of 2011 until we obtain regulatory approval for the RBC Bank (USA) acquisition, and will reevaluate share repurchase plans at that time. The discussion of capital within the Consolidated Balance Sheet Review section of this Financial Review includes additional information regarding our common stock repurchase program.

On July 27, 2011, we issued one million depositary shares, each representing a 1/100^th interest in a share of our Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series O, in an underwritten public offering resulting in gross proceeds to us before commissions and expenses of $1 billion. We intend to use the net proceeds from this offering for general corporate purposes, including funding for the pending RBC Bank (USA) acquisition.

On September 19, 2011, PNC Funding Corp issued $1.25 billion of senior notes due September 2016. Interest is paid semi-annually at a fixed rate of 2.70%. The offering resulted in gross proceeds to us before offering related expenses of $1.24 billion. We intend to use the net proceeds from this offering for general corporate purposes, including funding for the pending RBC Bank (USA) acquisition.

On October 14, 2011, we announced that November 15, 2011 will be the redemption date of $750 million of trust preferred securities issued by National City Capital Trust II with a current distribution rate of 6.625% and an original scheduled maturity date of November 15, 2036. The redemption price will be $25 per trust preferred security plus any accrued and unpaid distributions to the redemption date of November 15, 2011. The redemption will result in a noncash charge for the unamortized discount of $198 million in the fourth quarter of 2011.

RECENT MARKET AND INDUSTRY DEVELOPMENTS

There have been numerous legislative and regulatory developments and dramatic changes in the competitive landscape of our industry over the last several years.

The United States and other governments have undertaken major reform of the regulation of the financial services industry, including engaging in new efforts to impose requirements designed to strengthen the stability of the financial system and protect consumers and investors from financial abuse. We expect to face further increased regulation of our industry as a result of current and future initiatives intended to provide economic stimulus, financial market stability and enhanced regulation of financial services companies and to enhance the liquidity and solvency of financial institutions and markets. We also expect in many cases more intense scrutiny from our bank supervisors in the examination process and more aggressive enforcement of regulations on both the federal and state levels. Compliance with new regulations will increase our costs and reduce our revenue. Some new regulations may limit our ability to pursue certain desirable business opportunities.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) mandates the most wide-ranging overhaul of financial industry regulation in decades. Dodd-Frank was signed into law on July 21, 2010. Although Dodd-Frank and other reforms will affect a number of the areas in which we do business, it is not clear at this time the full extent

of the adjustments that will be required and the extent to which we will be able to adjust our businesses in response to the requirements. Many parts of the law are now in effect and others are now in the implementation stage, which is likely to continue for several years. The law requires that regulators, some of which are new regulatory bodies created by Dodd-Frank, draft, review and approve more than 300 implementing regulations and conduct numerous studies that are likely to lead to more regulations, a process that, while well underway, is proceeding somewhat slower than originally anticipated, thus extending the uncertainty surrounding the ultimate impact of Dodd-Frank on us.

A number of reform provisions are likely to significantly impact the ways in which banks and bank holding companies, including PNC, do business. We provide additional information on a number of these provisions (including new

consumer protection regulation, enhanced capital requirements, limitations on investment in and sponsorship of funds, risk retention by securitization participants, new regulation of derivatives, potential applicability of state consumer protection laws, and limitations on interchange fees) and some of their potential impacts on PNC in Item 1A Risk Factors included in Part II of our second quarter 2011 Form 10-Q.

RESIDENTIAL MORTGAGE FORECLOSURE MATTERS

Beginning in the third quarter of 2010, mortgage foreclosure documentation practices among US financial institutions received heightened attention by regulators and the media. PNC’s US market share for residential servicing based on retail origination volume is approximately 1.6%. The vast majority of our servicing business is on behalf of other investors, principally the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA). Following the initial reports regarding

these practices, we conducted an internal review of our foreclosure procedures. Based upon our review, we believe that PNC has systems designed to ensure that no foreclosure proceeds unless the loan is genuinely in default.

Similar to other banks, however, we identified issues regarding some of our foreclosure practices. Accordingly, after implementing a delay in pursuing individual foreclosures, we have been moving forward in most jurisdictions on such matters under procedures designed to address as appropriate any documentation issues. We are also proceeding with new foreclosures under enhanced procedures designed as part of this review to minimize the risk of errors related to the processing of documentation in foreclosure cases.

The Federal Reserve and the Office of the Comptroller of the Currency (OCC), together with the FDIC and others, conducted a publicly-disclosed interagency horizontal review of residential mortgage servicing operations at PNC and thirteen other federally regulated mortgage servicers. As a result of that review, in April 2011 PNC entered into a consent order with the Federal Reserve and PNC Bank, National

Association (PNC Bank) entered into a consent order with the OCC. Collectively, these consent orders describe certain foreclosure-related practices and controls that the regulators found to be deficient and require PNC and PNC Bank to, among other things, develop and implement plans and programs to enhance PNC’s residential mortgage servicing and foreclosure processes, retain an independent consultant to review certain residential mortgage foreclosure actions, take certain remedial actions, and oversee compliance with the orders and the new plans and programs. The independent consultant’s review is underway, and PNC is committed to meeting all applicable legal or regulatory requirements. The two orders do not preclude the potential for civil money penalties from either of these regulators.

Other governmental, legislative and regulatory inquiries on this topic are ongoing, and may result in significant additional actions, penalties or other remedies.

For additional information, including with respect to some of these other ongoing governmental, legislative and regulatory inquiries, please see Note 16 Legal Proceedings and Note 17 Commitments and Guarantees in the Notes To Consolidated Financial Statements in this Report and in our second quarter 2011 Form 10-Q and see our Current Report on Form 8-K dated April 14, 2011, and Item 1A Risk Factors in our 2010 Form 10-K.

KEY FACTORS AFFECTING FINANCIAL PERFORMANCE

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

•

General economic conditions, including the continuity, speed and stamina of the moderate economic recovery 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 non-loan 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 elsewhere in this Report, 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,

•

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

•

Progress towards closing the pending RBC Bank (USA) and Flagstar branches acquisitions,

•

Revenue growth and our ability to provide innovative and valued products to our customers,

•

Our ability to utilize technology to develop and deliver products and services to our customers,

•

Our ability to manage and implement strategic business objectives within the changing regulatory environment,

•

A sustained focus on expense management,

•

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 maintain our desired moderate risk profile,

•

Actions we take within the capital and other financial markets, and

•

The impact of legal and regulatory contingencies.

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 pretax gain recorded in the third quarter of 2010 related to this sale was $639 million, or $328 million after taxes.

Results of operations of GIS through June 30, 2010 are presented as income from discontinued operations, net of income taxes, on our Consolidated Income Statement in this Report. Once we entered into the sales agreement, GIS was no longer a reportable business segment. See Note 2 Acquisition and Divestiture Activity in our Notes To Consolidated Financial Statements in this Report.

INCOME STATEMENT HIGHLIGHTS

•

Strong third quarter 2011 results reflected growth in clients, loans and deposits with improving credit quality and disciplined expense management.

•

Net interest income of $2.2 billion for the third quarter 2011 decreased $40 million compared with third quarter 2010 primarily due to the impact of lower purchase accounting accretion.

•

Noninterest income of $1.4 billion for third quarter 2011 declined $14 million compared to third quarter 2010.

•

The provision for credit losses of $261 million for the third quarter declined from $486 million in the third quarter of 2010 as overall credit quality continued to improve.

•

Noninterest expense of $2.1 billion declined $18 million compared with the third quarter of 2010 reflecting the impact of integration costs during the third quarter of 2010 partially offset by various nominal increases in expenses incurred in the third quarter of 2011.

CREDIT QUALITY HIGHLIGHTS

•

Overall credit quality continued to improve in the third quarter of 2011.

•

Nonperforming assets declined $825 million, or 16 percent, to $4.3 billion at September 30, 2011 compared with December 31, 2010.

•

Accruing loans past due decreased 5% to $4.3 billion at September 30, 2011 from $4.5 billion at December 31, 2010. Balances generally declined with the exception of government insured loans, primarily other consumer education, and home equity, which increased.

•

Net charge-offs declined to $365 million in the third quarter compared with $614 million in the third quarter of 2010.

•

The allowance for loan and lease losses was 2.92% of total loans and 122% of nonperforming loans as of September 30, 2011 compared with 3.25% and 109% as of December 31, 2010.

BALANCE SHEET HIGHLIGHTS

•

PNC grew clients throughout its businesses during the third quarter of 2011.

•

Retail banking net checking relationships grew by 95,000 during the third quarter of 2011 and 49,000 in the third quarter of 2010. Net new checking relationships grew by 225,000 in the first nine months of 2011, excluding the impact of the second quarter 2011 acquisition of branches from BankAtlantic.

•

New client acquisitions in Corporate Banking are on pace to exceed the 1,000 new primary client goal for 2011 and increased 10 percent over the third quarter of 2010.

•

Asset Management Group delivered its highest levels of the year in new sales, new primary clients and referrals from PNC’s retail, corporate and commercial bankers during the third quarter of 2011.

•

Total loans of $155 billion at September 30, 2011 grew $3.9 billion compared with December 31, 2010.

•

Commercial lending grew $5.3 billion, which was partially offset by a $1.4 billion decline in consumer lending.

•

Loans and commitments originated and renewed totaled approximately $39 billion in the third quarter of 2011, including $1 billion of small business loans.

•

Total deposits were $188 billion at September 30, 2011, up $4.3 billion from December 31, 2010.

•

Transaction deposits increased $8.4 billion to $143 billion compared with December 31, 2010.

•

Higher cost retail certificates of deposit continued to decline with a net reduction of $2.0 billion, or 6 percent, in the third quarter.

•

PNC’s high quality balance sheet reflected a moderate risk profile, remained core funded with a loans to deposits ratio of 82 percent at September 30, 2011, and had strong capital and liquidity positions to support growth.

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 first nine months and third quarters of 2011 and 2010 and balances at September 30, 2011 and December 31, 2010, respectively.

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 and divestitures. The Consolidated Balance Sheet Review section of this Financial Review provides information on changes in selected Consolidated Balance Sheet categories at September 30, 2011 compared with December 31, 2010.

Total average assets were $263.5 billion for the first nine months of 2011 compared with $265.4 billion for the first nine months of 2010. Average interest-earning assets were $223.0 billion for the first nine months of 2011, compared with $225.1 billion in the first nine months of 2010. In both comparisons, the declines were primarily driven by a $4.5 billion decrease in average total loans partially offset by a $2.9 billion increase in average total investment securities. The overall decline in average loans reflected lower loan demand, loan repayments, dispositions and net charge-offs. The increase in total investment securities reflected net investments of excess liquidity primarily in agency residential mortgage-backed securities.

Average total loans decreased $4.5 billion, to $150.6 billion for the first nine months of 2011 compared with the first nine months of 2010. The decrease in average total loans primarily reflected declines in commercial real estate of $4.2 billion and residential real estate of $3.2 billion, partially offset by a $3.6 billion increase in commercial loans. Commercial real estate

loans declined due to loan sales, paydowns, and charge-offs. The decrease in residential real estate was impacted by portfolio management activities, paydowns and net charge-offs. Commercial loans increased due to a combination of new client acquisition and improved utilization. Loans represented 68% of average interest-earning assets for the first nine months of 2011 and 69% of average interest-earning assets for the first nine months of 2010.

Average securities available for sale increased $1.5 billion, to $50.9 billion, in the first nine months of 2011 compared with the first nine months of 2010. Average agency residential mortgage-backed securities increased $4.2 billion, asset-backed securities increased $1.2 billion and other debt securities increased $1.1 billion in the comparison while US Treasury and government agency securities decreased $3.4 billion and non-agency residential mortgage-backed securities declined $1.9 billion. The impact of purchases of agency residential mortgage-backed securities and other debt was partially offset by paydowns, sales and transfers of other security types.

Average securities held to maturity increased $1.4 billion, to $8.5 billion, in the first nine months of 2011 compared with the first nine months of 2010. The increase primarily reflected the transfer during the second quarter of 2011 of securities with a fair value of $3.4 billion from available for sale to held to maturity, including $2.8 billion of agency residential mortgage-backed securities, $285 million of agency commercial mortgage-backed securities and $365 million of agency guaranteed other debt securities, and the transfer during the third quarter of 2011 of securities with a fair value of $2.9 billion from available for sale to held to maturity, including $1.9 billion of agency residential mortgage-backed securities and $323 million of agency commercial mortgage-backed securities. These transfers were the primary cause for the increases of $.8 billion in average commercial mortgage-backed securities and $1.7 billion in average residential mortgage-backed securities in the first nine months of 2011 compared with the first nine months of 2010. These increases more than offset a $1.4 billion decrease in average asset-backed securities in the comparison.

Total investment securities comprised 27% of average interest-earning assets for the first nine months of 2011 and 25% for the first nine months of 2010.

Average noninterest-earning assets totaled $40.5 billion in the first nine months of 2011 compared with $40.3 billion in the first nine months of 2010.

Average total deposits were $181.9 billion for the first nine months of 2011 compared with $182.0 billion for the first nine months of 2010. Average deposits remained flat from the prior year period primarily as a result of decreases of $9.1 billion in average retail certificates of deposit and $.5 billion in average other time deposits, which were offset by increases of $6.2

billion in average noninterest-bearing deposits, $2.1 billion in average demand deposits and $1.1 billion in average savings deposits. Total deposits at September 30, 2011 were $187.7 billion compared with $183.4 billion at December 31, 2010 and are further discussed within the Consolidated Balance Sheet Review section of this Report.

Average total deposits represented 69% of average total assets for the first nine months of both 2011 and 2010.

Average transaction deposits were $136.0 billion for the first nine months of 2011 compared with $127.2 billion for the first nine months of 2010. The continued execution of the retail deposit strategy and customer preference for liquidity contributed to the year-over-year increase in average balances. In addition, commercial and corporate deposit growth has been very strong, particularly in the third quarter 2011. The prolonged period of low interest rates has led to a preference for liquidity by commercial and corporate customers as well; this, combined with the attraction of FDIC insurance, has resulted in an industry-wide trend of commercial customers maintaining higher levels of noninterest-bearing demand deposits.

Average borrowed funds were $35.7 billion for the first nine months of 2011 compared with $40.8 billion for the first nine months of 2010. Maturities of Federal Home Loan Bank (FHLB) borrowings drove the decline compared with the first nine months of 2010. Total borrowed funds at September 30, 2011 were $35.1 billion compared with $39.5 billion at December 31, 2010 and are further discussed within the Consolidated Balance Sheet Review section of this Financial Review. The Liquidity Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding our sources and uses of borrowed funds.

BUSINESS SEGMENT HIGHLIGHTS

Total business segment earnings were $2.1 billion for the first nine months of 2011 and $2.0 billion for the first nine months of 2010. Highlights of results for the third quarters of 2011 and 2010 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 nine months of 2011 and 2010 including presentation differences from Note 18 Segment Reporting in our Notes To Consolidated Financial Statements of this Report.

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 18 Segment Reporting in our Notes To Consolidated Financial Statements of this Report.

Retail Banking

Retail Banking earned $59 million in the first nine months of 2011 compared with earnings of $100 million for the same period a year ago. Earnings declined from the prior year as lower revenues from the impact of Regulation E rules related to overdraft fees and a low interest rate environment were partially offset by a lower provision for credit losses. Retail Banking continued to maintain its focus on growing customers and deposits, improving customer and employee satisfaction, investing in the business for future growth, and disciplined expense management during this period of market and economic uncertainty.

Retail Banking earned $33 million for the third quarter of 2011 compared with a loss of $4 million for third quarter 2010. The increase over third quarter 2010 resulted from a lower provision for credit losses somewhat offset by a decline in revenue from the impact of Regulation E rules related to overdraft fees and lower net interest income.

Corporate & Institutional Banking

Corporate & Institutional Banking earned $1.3 billion in the first nine months of 2011 and 2010. The comparison was impacted by a lower provision for credit losses in 2011, offset by a decline in net interest income and lower commercial mortgage loan servicing income combined with higher commercial mortgage servicing rights impairment. We continued to focus on adding new clients and increased our cross selling to serve our clients’ needs, particularly in the western markets, and remained committed to strong expense discipline.

Corporate & Institutional Banking earned $419 million in the third quarter of 2011 compared with $435 million in the third quarter of 2010. The decline from 2010 was impacted by a higher provision for credit losses that more than offset an increase in revenue.

Asset Management Group

Asset Management Group earned $124 million in the first nine months of 2011 compared with $109 million in the first nine months of 2010. Assets under administration were $202 billion at September 30, 2011. Earnings for the first nine months of 2011 reflected a benefit from the provision for credit losses and growth in noninterest income. Noninterest expense increased due to continued investments in the business including additional headcount and the roll-out of our new reporting technology, PNC Wealth Insight^SM. The core growth strategies for the business include: increasing channel penetration; investing in higher growth geographies; and investing in differentiated client-facing technology such as PNC Wealth Insight^SM. During the first nine months of 2011, the business delivered strong sales production, grew high value clients and benefitted from significant referrals from other PNC lines of business. Over time, the successful execution of these strategies and the accumulation of our

strong sales performance are expected to create meaningful growth in assets under management and noninterest income.

Asset Management Group earned $33 million in the third quarter of 2011 compared with $43 million in the third quarter of 2010. The earnings decline in the comparison with third quarter 2010 was primarily attributable to higher noninterest expense from strategic business investments. During the third quarter of 2011, the business delivered its highest levels of the year in new sales, referrals and new primary client acquisition. In addition, PNC Wealth Insight^SM has now reached 12,000 clients and new clients continue to be enrolled.

Residential Mortgage Banking

Residential Mortgage Banking earned $148 million in the first nine months of 2011 compared with $266 million in the first nine months of 2010. Earnings declined from the prior year period primarily as a result of higher noninterest expense, lower net interest income and a higher provision for credit losses.

Residential Mortgage Banking earned $22 million in the third quarter of 2011 compared with $97 million in the third quarter of 2010. The decline in earnings from the prior year third quarter primarily resulted from higher noninterest expense and lower net hedging gains on mortgage servicing rights.

BlackRock

Our BlackRock business segment earned $271 million in the first nine months of 2011 and $253 million in the first nine months of 2010. Third quarter 2011 business segment earnings from BlackRock were $92 million compared with $99 million in the third quarter of 2010. The lower business

segment earnings from BlackRock for the third quarter of 2011 compared to the third quarter of 2010 was primarily due to a decrease in PNC’s share of BlackRock earnings.

Distressed Assets Portfolio

This business segment consists primarily of acquired non-strategic assets. The business activities of the segment are focused on maximizing value when exiting the under-performing portion of the portfolio. Distressed Assets Portfolio had earnings of $202 million for the first nine months of 2011 compared with $14 million in the first nine months of 2010. The increase was driven primarily by a lower provision for credit losses partially offset by a decline in net interest income.

Distressed Assets Portfolio segment had earnings of $93 million for the third quarter of 2011 compared with $20 million for the third quarter of 2010. The increase from the third quarter 2010 resulted from a lower provision for credit losses.

Other

“Other” reported earnings of $475 million for the nine months of 2011 compared with earnings of $211 million for the first nine months of 2010. The increase in earnings over the first nine months of 2010 primarily reflected the impact of integration costs incurred in the 2010 period.

“Other” reported earnings of $142 million in the third quarter of 2011 and $85 million in the third quarter of 2010. The increase in earnings over the third quarter of 2010 primarily reflected the impact of integration costs incurred in the 2010 period.

CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for both the first nine months of 2011 and 2010 was $2.6 billion. Net income for the third quarter of 2011 was $.8 billion compared with $1.1 billion for the third quarter of 2010. Net income for third quarter 2010 included the $328 million after-tax gain on our sale of GIS. Strong earnings for the first nine months and third quarter of 2011 reflected growth in customers, loans and deposits with improving overall credit quality and disciplined expense management.

Total revenue for the first nine months of 2011 was $10.8 billion compared with $11.3 billion for the first nine months of 2010. Total revenue for the third quarter of 2011 was $3.5 billion compared with $3.6 billion for the third quarter of 2010. The decline in both comparisons reflected lower net interest income in the 2011 periods attributable to lower purchase accounting accretion.

NET INTEREST INCOME AND NET INTEREST MARGIN


	Three months ended September 30						Nine months ended September 30
Dollars in millions	2011			2010			2011			2010
Net interest income	$	2,175		$	2,215		$	6,501		$	7,029
Net interest margin		3.89	%		3.96	%		3.92	%		4.18	%

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 (Unaudited) – Average Consolidated Balance Sheet And Net Interest Analysis section of this Report for additional information.

The decreases in net interest income and net interest margin compared with both the third quarter of 2010 and the first nine months of 2010 were primarily attributable to lower purchase accounting accretion. A decline in average loan balances and the low interest rate environment, partially offset by lower funding costs, also contributed to the decrease in the nine month periods.

The net interest margin was 3.92% for the first nine months of 2011 and 4.18% for the first nine months of 2010. The following factors impacted the comparison:

•

A 43 basis point decrease in the yield on interest-earning assets. The yield on loans, the largest portion of our earning assets, decreased 38 basis points.

•

These factors were partially offset by a weighted-average 16 basis point decline in the rate accrued on interest-bearing liabilities. The rate accrued on interest-bearing deposits, the largest component,

decreased 19 basis points, the impact of which was partially offset by a 9 basis point increase in the rate accrued on total borrowed funds.

The net interest margin was 3.89% for the third quarter of 2011 and 3.96% for the third quarter of 2010. The following factors impacted the comparison:

•

A 30 basis point decrease in the yield on interest-earning assets. The yield on loans, the largest portion of our earning assets, decreased 24 basis points.

•

These factors were partially offset by a weighted-average 24 basis point decline in the rate accrued on interest-bearing liabilities.

We expect our fourth quarter 2011 net interest income to remain stable compared to third quarter 2011 as core net interest income should continue to grow offset by the expected decline in purchase accounting accretion. Approximately $6 billion of higher cost retail consumer CDs are scheduled to mature in the fourth quarter of 2011 at a weighted-average rate of about 2%. We expect that these will be redeemed or re-priced on average at a significantly lower rate, which will benefit our funding costs.

NONINTEREST INCOME

Noninterest income totaled $4.3 billion for the first nine months of 2011 and $4.2 billion for the first nine months of 2010. Noninterest income was $1.4 billion for the third quarter of both 2011 and 2010. Noninterest income for the third quarter of 2011 reflected higher asset management fees that were offset by lower service charges on deposits from the impact of Regulation E rules pertaining to overdraft fees and lower residential mortgage banking revenue.

Asset management revenue, including BlackRock, increased $87 million to $838 million in the first nine months of 2011 compared with the first nine months of 2010. Asset management revenue was $287 million in the third quarter of 2011 compared with $249 million in the third quarter of 2010. These increases were driven by strong sales performance in both comparisons and by higher equity earnings from our BlackRock investment in the year-to-date comparison. Discretionary assets under management at September 30, 2011 totaled $103 billion compared with $105 billion at September 30, 2010.

For the first nine months of 2011, consumer services fees totaled $974 million compared with $939 million in the first nine months of 2010. Consumer services fees were $330 million in the third quarter of 2011 compared with $328 million in the third quarter of 2010. The increases reflected higher volume-related transaction fees, such as debit and credit cards and merchant services.

Corporate services revenue totaled $632 million in the first nine months of 2011 and $712 million in the first nine months of 2010. Corporate services revenue was $187 million in the third quarter of 2011 compared with $183 million in the third

quarter of 2010. Higher commercial mortgage servicing rights impairment charges drove the year-to-date decline, while the quarterly comparison was essentially flat. Corporate services fees include the noninterest component of treasury management fees, which continued to be a strong contributor to revenue.

Residential mortgage revenue totaled $556 million in the first nine months of 2011 and $542 million in the first nine months of 2010. Third quarter 2011 residential mortgage revenue totaled $198 million compared with $216 million in the third quarter of 2010. Higher loans sales revenue drove the year-to-date comparison, while lower servicing fees and lower net hedging gains on mortgage servicing rights were reflected in the quarterly decline.

Service charges on deposits totaled $394 million for the first nine months of 2011 and $573 million for the first nine months of 2010. Service charges on deposits totaled $140 million for the third quarter of 2011 and $164 million for third quarter of 2010. The decline in both comparisons resulted primarily from the impact of Regulation E rules pertaining to overdraft fees.

Net gains on sales of securities totaled $187 million for the first nine months of 2011 and $358 million for the first nine months of 2010. Net gains on sales of securities were $68 million for the third quarter of 2011 and $121 million for third quarter of 2010.

The net credit component of OTTI of securities recognized in earnings was a loss of $108 million in the nine months of 2011, including $35 million in the third quarter, compared with losses of $281 million and $71 million, respectively for the same periods in 2010.

Other noninterest income totaled $803 million for the first nine months of 2011 compared with $650 million for the first nine months of 2010. Other noninterest income totaled $194 million for third quarter of 2011 compared with $193 million for third quarter of 2010. Both increases over the comparable 2010 periods were driven by several individually insignificant items.

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 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.

Looking to fourth quarter 2011, we see opportunities for growth in our fee-based revenues as a result of our larger

franchise, our ability to cross-sell our products and services to existing clients and our progress in adding new clients. At the same time, we will see the continued impact of ongoing regulatory reforms. The Dodd-Frank limits related to interchange rates on debit card transactions were effective October 1, 2011 and are expected to have a negative impact on revenues of approximately $75 million in the fourth quarter of 2011 and an additional incremental reduction in future periods’ annual revenue of approximately $175 million, based on expected 2011 transaction volumes. In addition, in the fourth quarter of 2011 we do not expect impairments of a similar magnitude for commercial mortgage servicing rights as experienced in the third quarter of 2011. We believe noninterest income in the fourth quarter should be relatively flat compared to the current third quarter level. The diversity of our revenue streams should enable us to achieve a solid performance in an environment that will continue to be affected by regulatory reform headwinds and implementation challenges.

PRODUCT REVENUE

In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management, capital markets-related products and services, and commercial real estate loan servicing for customers in all business segments. A portion of the revenue and expense related to these products is reflected in Corporate & Institutional Banking and the remainder is reflected in the results of other businesses. The Other Information section in the Corporate & Institutional Banking table in the Business Segments Review section of this Financial Review includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.

Treasury management revenue, which includes fees as well as net interest income from customer deposit balances, totaled $891 million for the first nine months of 2011 and $915 million for the first nine months of 2010. For the third quarter of 2011, treasury management revenue was $298 million compared with $320 million for the third quarter of 2010. Declining deposit spreads more than offset increases in core processing products, such as lockbox and information reporting, and in growth products such as commercial card and healthcare related services.

Revenue from capital markets-related products and services totaled $462 million in the first nine months of 2011 compared with $401 million in the first nine months of 2010. Third quarter 2011 revenue was $158 million compared with $116 million for the third quarter of 2010. Both comparisons were driven by higher valuations on derivatives executed for clients, higher sales volumes and an increase in merger and acquisition advisory 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, net of commercial mortgage servicing rights amortization, and commercial mortgage servicing rights valuations), 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 $26 million in the first nine months of 2011 compared with $146 million in the first nine months of 2010. For the third quarter of 2011, losses from commercial mortgage banking activities totaled $27 million compared with losses of $16 million for the third quarter of 2010. The decline in the nine month comparison was primarily due to a reduction in the value of commercial mortgage servicing rights largely driven by lower interest rates and higher loan prepayment rates. The nine months of 2010 included a higher level of ancillary commercial mortgage servicing fees and revenue from a duplicative agency servicing operation that was sold last year which contributed to the year-over-year decrease. Income from commercial mortgage loans held for sale benefited the nine month comparison.

PROVISION FOR CREDIT LOSSES

The provision for credit losses totaled $1.0 billion for the first nine months of 2011 compared with $2.1 billion for the first nine months of 2010. The provision for credit losses totaled $261 million for the third quarter of 2011 compared with $486 million for the third quarter of 2010. The decline in both comparisons was driven by overall credit quality improvement and continuation of actions to reduce exposure levels.

We expect our provision for credit losses in the fourth quarter of 2011 to remain relatively consistent with the third quarter 2011 level.

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.

NONINTEREST EXPENSE

Noninterest expense was $6.4 billion for the first nine months of 2011 and $6.3 billion for the first nine months of 2010. Noninterest expense totaled $2.1 billion for the third quarter of 2011 and declined $18 million compared with noninterest expense for the third quarter of 2010. The decline reflects the impact of integration costs during the third quarter of 2010 partially offset by various nominal increases in expenses incurred in the third quarter of 2011. Integration costs included in noninterest expense totaled $309 million for the first nine months of 2010, including $96 million in the third quarter of that year. Noninterest expense for the first nine months of 2011 included higher foreclosure-related costs and, in the second quarter, the impact of approximately $40 million related to accruals for legal contingencies primarily associated with pending lawsuits net of anticipated insurance recoveries.

Apart from the possible impact of legal and regulatory contingencies and the impact of the $198 million non-cash charge for the unamortized discount related to redemption of $750 million of trust preferred securities during the fourth quarter of 2011, we expect that total noninterest expense for fourth quarter 2011 will be relatively consistent with third quarter 2011 expenses. This expectation reflects the shift in the deposit insurance base calculations from deposits to average assets less Tier 1 capital which was effective April 1, 2011 under Dodd Frank. The difference in premium is not material.

EFFECTIVE INCOME TAX RATE

The effective income tax rate was 24.8% in the first nine months of 2011 compared with 25.0% in the first nine months of 2010. For the third quarter of 2011, our effective income tax rate was 27.0% compared with 18.8% for the third quarter of 2010. The lower rate in the third quarter of 2010 was primarily the result of a tax benefit of $89 million related to a favorable IRS ruling that resolved a prior tax position. We anticipate that the effective income tax rate will be approximately 27% for the fourth quarter of 2011.

CONSOLIDATED BALANCE SHEET REVIEW

SUMMARIZED BALANCE SHEET DATA


In millions	Sept. 30 2011		Dec. 31 2010
Assets
Loans	$	154,543	$	150,595
Investment securities		62,105		64,262
Cash and short-term investments		11,521		10,437
Loans held for sale		2,491		3,492
Goodwill and other intangible assets		10,156		10,753
Equity investments		9,915		9,220
Other, net		18,739		15,525
Total assets	$	269,470	$	264,284
Liabilities
Deposits	$	187,732	$	183,390
Borrowed funds		35,102		39,488
Other		9,394		8,568
Total liabilities		232,228		231,446
Total shareholders’ equity		34,219		30,242
Noncontrolling interests		3,023		2,596
Total equity		37,242		32,838
Total liabilities and equity	$	269,470	$	264,284

The summarized balance sheet data above is based upon our Consolidated Balance Sheet in this Report.

The increase in total assets at September 30, 2011 compared with December 31, 2010 was primarily due to an increase in loans and other assets, partially offset by a decrease in investment securities.

An analysis of changes in selected balance sheet categories follows.

LOANS

A summary of the major categories of loans outstanding follows. Outstanding loan balances of $154.5 billion at September 30, 2011 and $150.6 billion at December 31, 2010 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums of $2.4 billion at September 30, 2011 and $2.7 billion at December 31, 2010, respectively. The balances do not include future accretable net interest (i.e., the difference between the undiscounted expected cash flows and the carrying value of the loan) on the purchased impaired loans.

Loans increased $3.9 billion as of September 30, 2011 compared with December 31, 2010. Growth in commercial loans of $7.1 billion and auto loans of $1.5 billion was partially offset by declines of $1.5 billion in commercial real estate loans, $1.3 billion of residential real estate loans and $1.1 billion of home equity loans compared with year end. Commercial loans increased due to a combination of new client acquisition and improved utilization. Auto loans

increased due to the expansion of sales force and product introduction to acquired markets, as well as overall increases in auto sales. Commercial and residential real estate loans declined due to loan sales, paydowns, and charge-offs. Home equity loans declined during the first nine months of 2011 as paydowns, charge-offs, and portfolio management activities exceeded new loan production and draws on existing lines.

Loans represented 57% of total assets at September 30, 2011 and December 31, 2010. Commercial lending represented 55% of the loan portfolio at September 30, 2011 and 53% at December 31, 2010. Consumer lending represented 45% at September 30, 2011 and 47% at December 31, 2010.

Commercial real estate loans represented 6% of total assets at September 30, 2011 and 7% of total assets at December 31, 2010.

Details Of Loans


In millions	Sept. 30 2011		Dec. 31 2010
Commercial
Retail/wholesale trade	$	11,287	$	9,901
Manufacturing		10,980		9,334
Service providers		9,326		8,866
Real estate related (a)		8,073		7,500
Financial services		5,676		4,573
Health care		4,668		3,481
Other industries		12,240		11,522
Total commercial		62,250		55,177
Commercial real estate
Real estate projects		10,936		12,211
Commercial mortgage		5,477		5,723
Total commercial real estate		16,413		17,934
Equipment lease financing		6,186		6,393
TOTAL COMMERCIAL LENDING (b)		84,849		79,504
Consumer
Home equity
Lines of credit		22,677		23,473
Installment		10,486		10,753
Residential real estate
Residential mortgage		14,022		15,292
Residential construction		633		707
Credit card		3,785		3,920
Other consumer
Education		9,154		9,196
Automobile		4,447		2,983
Other		4,490		4,767
TOTAL CONSUMER LENDING		69,694		71,091
Total loans	$	154,543	$	150,595

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

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

Total loans above include purchased impaired loans of $6.9 billion, or 4% of total loans, at September 30, 2011, and $7.8 billion, or 5% of total loans, at December 31, 2010.

We are committed to providing credit and liquidity to qualified borrowers. Total loan originations and new commitments and renewals totaled $104 billion for the first nine months of 2011.

Our loan portfolio continued to be diversified among numerous industries and types of businesses in 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 (ALLL). This estimate 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 includes certain loans deemed to be higher risk and therefore more likely to result in credit losses. As of September 30, 2011, we established specific and pooled reserves on the total commercial lending category of $2.2 billion. This commercial lending reserve included what we believe to be appropriate loss coverage on the higher risk commercial loans in the total commercial portfolio. The commercial lending reserve represented 49% of the total ALLL of $4.5 billion at that date. The remaining 51% of ALLL 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 or guaranteed loans to be higher risk as defaults are materially mitigated by payments of insurance or guarantee amounts for approved claims. Additional information regarding our higher risk loans is included in Note 5 Asset Quality and Allowances for Loan and Lease Losses and Unfunded Loan Commitments and

Letters of Credit in our Notes To Consolidated Financial Statements included in this Report.

Information related to purchased impaired loans, purchase accounting accretion and accretable net interest recognized during the first nine months of 2011 and 2010 follows.

Total Purchase Accounting Accretion


	Three months ended September 30						Nine months ended September 30
In millions	2011			2010			2011			2010
Non-impaired loans	$	68		$	70		$	208		$	293
Impaired loans
Scheduled accretion		166			187			512			710
Excess cash recoveries		72			111			193			350
Reversal of contractual interest on impaired loans		(99	)		(138	)		(293	)		(408	)
Total impaired loans		139			160			412			652
Securities		15			15			38			39
Deposits		90			122			281			433
Borrowings		(20	)		(42	)		(76	)		(112	)
Total	$	292		$	325		$	863		$	1,305

Total Remaining Purchase Accounting Accretion


In billions	Sept. 30 2011			Dec. 31 2010
Non-impaired loans	$	1.0		$	1.2
Impaired loans		2.3			2.2
Total loans (gross)		3.3			3.4
Securities		.4			.5
Deposits		.2			.5
Borrowings		(1.0	)		(1.1	)
Total	$	2.9		$	3.3

Accretable Net Interest – Purchased Impaired Loans


In billions	2011			2010
January 1	$	2.2		$	3.5
Accretion		(.5	)		(.7	)
Excess cash recoveries		(.2	)		(.4	)
Net reclassifications to accretable from non-accretable		.9			.1
Disposals		(.1	)		(.2	)
September 30	$	2.3		$	2.3

Valuation of Purchased Impaired Loans


	September 30, 2011						December 31, 2010
Dollars in billions	Balance			Net Investment			Balance			Net Investment
Commercial and commercial real estate loans:
Unpaid principal balance	$	1.1					$	1.8
Purchased impaired mark		(.2	)					(.4	)
Recorded investment		.9						1.4
Allowance for loan losses		(.2	)					(.3	)
Net investment		.7			64	%		1.1			61	%
Consumer and residential mortgage loans:
Unpaid principal balance		6.8						7.9
Purchased impaired mark		(.8	)					(1.5	)
Recorded investment		6.0						6.4
Allowance for loan losses		(.8	)					(.6	)
Net investment		5.2			76	%		5.8			73	%
Total purchased impaired loans:
Unpaid principal balance		7.9						9.7
Purchased impaired mark		(1.0	)					(1.9	)
Recorded investment		6.9						7.8
Allowance for loan losses		(1.0	)					(.9	)
Net investment	$	5.9			75	%	$	6.9			71	%

The unpaid principal balance of purchased impaired loans declined from $9.7 billion at December 31, 2010 to $7.9 billion at September 30, 2011 due to payments, disposals, and charge-offs of amounts determined to be uncollectible. The remaining purchased impaired mark at September 30, 2011 was $1.0 billion, which was a decline from $1.9 billion at December 31, 2010. The associated allowance for loan losses increased slightly by $.1 billion to $1.0 billion at September 30, 2011. The net investment of $6.9 billion at December 31, 2010 declined 14% to $5.9 billion at September 30, 2011. At September 30, 2011, our largest individual purchased impaired loan had a recorded investment of $25 million.

We currently expect to collect total cash flows of $8.2 billion on purchased impaired loans, representing the $5.9 billion net investment at September 30, 2011 and the accretable net interest of $2.3 billion shown in the Accretable Net Interest-Purchased Impaired Loans table. These represent the net future cash flows on purchased impaired loans, as contractual interest will be reversed.

Net unfunded credit commitments are comprised of the following:

Net Unfunded Credit Commitments


	September 30, 2011		December 31, 2010
Commercial / commercial real estate (a)	$	65,497	$	59,256
Home equity lines of credit		18,613		19,172
Credit card		15,699		14,725
Other		3,427		2,652
Total	$	103,236	$	95,805

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

Commitments to extend credit represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. Commercial commitments reported above exclude syndications, assignments and participations, primarily to financial institutions, totaling $19.7 billion at September 30, 2011 and $16.7 billion at December 31, 2010.

Unfunded liquidity facility commitments and standby bond purchase agreements totaled $701 million at September 30, 2011 and $458 million at December 31, 2010 and are included in the preceding table primarily within the “Commercial / commercial real estate” category.

In addition to the credit commitments set forth in the table above, our net outstanding standby letters of credit totaled $10.9 billion at September 30, 2011 and $10.1 billion at December 31, 2010. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

INVESTMENT SECURITIES

Details of Investment Securities


In millions	Amortized Cost		Fair Value
September 30, 2011
Securities Available for Sale
Debt securities
US Treasury and government agencies	$	3,397	$	3,751
Residential mortgage-backed
Agency		26,963		27,683
Non-agency		6,949		5,988
Commercial mortgage-backed
Agency		956		991
Non-agency		2,646		2,646
Asset-backed		3,914		3,751
State and municipal		1,714		1,728
Other debt		2,741		2,825
Corporate stocks and other		352		352
Total securities available for sale	$	49,632	$	49,715
Securities Held to Maturity
Debt securities
US Treasury and government agencies	$	219	$	256
Residential mortgage-backed (agency)		4,588		4,692
Commercial mortgage-backed
Agency		1,290		1,331
Non-agency		3,770		3,871
Asset-backed		1,489		1,508
State and municipal		670		689
Other debt		364		377
Total securities held to maturity	$	12,390	$	12,724
December 31, 2010
Securities Available for Sale
Debt securities
US Treasury and government agencies	$	5,575	$	5,710
Residential mortgage-backed
Agency		31,697		31,720
Non-agency		8,193		7,233
Commercial mortgage-backed
Agency		1,763		1,797
Non-agency		1,794		1,856
Asset-backed		2,780		2,582
State and municipal		1,999		1,957
Other debt		3,992		4,077
Corporate stocks and other		378		378
Total securities available for sale	$	58,171	$	57,310
Securities Held to Maturity
Debt securities
Commercial mortgage-backed (non-agency)	$	4,316	$	4,490
Asset-backed		2,626		2,676
Other debt		10		11
Total securities held to maturity	$	6,952	$	7,177

The carrying amount of investment securities totaled $62.1 billion at September 30, 2011, a decrease of $2.2 billion, or 3%, from $64.3 billion at December 31, 2010. The decline resulted from principal payments and net sales activity related

to US Treasury and government agency and non-agency residential mortgage-backed securities. Investment securities represented 23% of total assets at September 30, 2011 and 24% of total assets at December 31, 2010.

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. We consider the portfolio to be well-diversified and of high quality. US Treasury and government agencies, agency residential mortgage-backed securities and agency commercial mortgage-backed securities collectively represented 62% of the investment securities portfolio at September 30, 2011.

During the third quarter of 2011, we transferred securities with a fair value of $2.9 billion from available for sale to held to maturity. The securities transferred included $1.9 billion of agency residential mortgage-backed securities, $323 million of agency commercial mortgage-backed securities, and $662 million of state and municipal debt securities. We changed our intent and committed to hold these high-quality securities to maturity. The reclassification was made at fair value at the date of transfer, resulting in no impact on net income. Net pretax unrealized gains in accumulated other comprehensive income totaled $143 million at the transfer date and will be accreted over the remaining life of the related securities as an adjustment of yield in a manner consistent with the amortization of a premium.

In the second quarter of 2011, we transferred available for sale securities with a fair value of $3.4 billion to the held to maturity portfolio. The reclassification was made at fair value at the date of transfer. Net pretax unrealized gains in accumulated other comprehensive income totaled $40 million at the transfer date and will be accreted over the remaining life of the related securities as an adjustment of yield in a manner consistent with the amortization of a premium.

At September 30, 2011, the securities available for sale portfolio included a net unrealized gain of $83 million, which represented the difference between fair value and amortized cost. The comparable amount at December 31, 2010 was a net unrealized loss of $861 million. 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 improvement in the net unrealized pretax loss compared with December 31, 2010 was primarily due to the effect of lower market interest rates. 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 could 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 3.9 years at September 30, 2011 and 4.7 years at December 31, 2010.

We estimate that, at September 30, 2011, the effective duration of investment securities was 2.7 years for an immediate 50 basis points parallel increase in interest rates and 2.5 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2010 were 3.1 years and 2.9 years, respectively.

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


	September 30, 2011
	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	$	27,683		$	991		$	5,988		$	2,646		$	3,751
Fair Value – Held to Maturity		4,692			1,331						3,871			1,508
Total Fair Value	$	32,375		$	2,322		$	5,988		$	6,517		$	5,259
% of Fair Value:
By Vintage
2011		27	%		35	%					4	%
2010		31	%		21	%					4	%		5	%
2009		14	%		20	%					2	%		12	%
2008		4	%		2	%								7	%
2007		6	%		2	%		18	%		9	%		7	%
2006		3	%		4	%		24	%		27	%		9	%
2005 and earlier		10	%		11	%		58	%		53	%		11	%
Not Available		5	%		5	%					1	%		49	%
Total		100	%		100	%		100	%		100	%		100	%
By Credit Rating
Agency		100	%		100	%
AAA								3	%		80	%		81	%
AA								1	%		6	%		1	%
A								2	%		9	%		1	%
BBB								7	%		3	%
BB								8	%		1	%
B								7	%					4	%
Lower than B								71	%					10	%
No rating								1	%		1	%		3	%
Total		100	%		100	%		100	%		100	%		100	%
By FICO Score
>720								56	%					3	%
<720 and >660								34	%					8	%
<660								1	%					2	%
No FICO score								9	%					87	%
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 Market 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 we do not intend to sell and believe we will not be required to sell the securities prior to expected recovery. The noncredit portion of OTTI is included in accumulated other comprehensive loss.

We recognized OTTI for the third quarter and first nine months of 2011 and 2010 as follows:

Other-Than-Temporary Impairments


	Three months ended September 30						Nine months ended September 30
In millions	2011			2010			2011			2010
Credit portion of OTTI losses (a)
Non-agency residential mortgage-backed	$	(30	)	$	(57	)	$	(93	)	$	(211	)
Non-agency commercial mortgage-backed											(3	)
Asset-backed		(5	)		(14	)		(14	)		(67	)
Other debt								(1	)
Total credit portion of OTTI losses		(35	)		(71	)		(108	)		(281	)
Noncredit portion of OTTI losses (b)		(87	)		(46	)		(117	)		(194	)
Total OTTI losses	$	(122	)	$	(117	)	$	(225	)	$	(475	)

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

(b)	Included in Accumulated other comprehensive loss, net of tax, on our Consolidated Balance Sheet.

The following table summarizes net unrealized gains and losses recorded on non-agency residential and commercial mortgage-backed and other asset-backed securities, which represent our most significant categories of securities not backed by the US government or its agencies. A summary of all OTTI credit losses recognized for the first nine months of 2011 by investment type is included in Note 7 Investment Securities in the Notes To Consolidated Financial Statements in this Report.


	September 30, 2011
In millions	Residential Mortgage- Backed Securities					Commercial Mortgage- Backed Securities					Asset-Backed Securities
Available for Sale Securities (Non-Agency)
	Fair Value		Net Unrealized Gain (Loss)			Fair Value		Net Unrealized Gain (Loss)			Fair Value		Net Unrealized Gain (Loss)
Credit Rating Analysis
AAA	$	169	$	(22	)	$	1,554	$	34		$	2,870	$	3
Other Investment Grade (AA, A, BBB)		616		(24	)		979		(30	)		120		(5	)
Total Investment Grade		785		(46	)		2,533		4			2,990		(2	)
BB		465		(58	)		38		(4	)
B		444		(62	)							182		(28	)
Lower than B		4,256		(796	)							550		(114	)
Total Sub-Investment Grade		5,165		(916	)		38		(4	)		732		(142	)
Total No Rating		38		1			75					25		(19	)
Total	$	5,988	$	(961	)	$	2,646				$	3,747	$	(163	)
OTTI Analysis
Investment Grade:
OTTI has been recognized
No OTTI recognized to date	$	785	$	(46	)	$	2,533	$	4		$	2,990	$	(2	)
Total Investment Grade		785		(46	)		2,533		4			2,990		(2	)
Sub-Investment Grade:
OTTI has been recognized		3,416		(790	)		1					588		(154	)
No OTTI recognized to date		1,749		(126	)		37		(4	)		144		12
Total Sub-Investment Grade		5,165		(916	)		38		(4	)		732		(142	)
No Rating:
OTTI has been recognized												25		(19	)
No OTTI recognized to date		38		1			75
Total No Rating		38		1			75					25		(19	)
Total	$	5,988	$	(961	)	$	2,646				$	3,747	$	(163	)
Securities Held to Maturity (Non-Agency)
Credit Rating Analysis
AAA						$	3,668	$	100		$	1,371	$	14
Other Investment Grade (AA, A, BBB)							203		1			23		(1	)
Total Investment Grade							3,871		101			1,394		13
BB												5
B												1
Lower than B
Total Sub-Investment Grade												6
Total No Rating												100		6
Total						$	3,871	$	101		$	1,500	$	19

Residential Mortgage-Backed Securities

At September 30, 2011, our residential mortgage-backed securities portfolio was comprised of $32.4 billion fair value of US government agency-backed securities and $6.0 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 non-agency securities are senior tranches in the securitization structure and at origination had credit protection in the form of credit enhancement, over-collateralization and/or excess spread accounts.

During the first nine months of 2011, we recorded OTTI credit losses of $93 million on non-agency residential mortgage-backed securities, including $30 million in the third quarter. Almost all of the losses were associated with securities rated below investment grade. As of September 30, 2011, the noncredit portion of OTTI losses recorded in accumulated other comprehensive loss for non-agency residential mortgage-backed securities totaled $790 million and the related securities had a fair value of $3.4 billion.

The fair value of sub-investment grade investment securities for which we have not recorded an OTTI credit loss as of September 30, 2011 totaled $1.7 billion, with unrealized net losses of $126 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 in 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 $6.5 billion at September 30, 2011 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 $2.3 billion fair value at September 30, 2011 consisting of multi-family housing. Substantially all of the securities are the most senior tranches in the subordination structure.

There were no OTTI credit losses on commercial mortgage- backed securities during the first nine months of 2011.

Asset-Backed Securities

The fair value of the asset-backed securities portfolio was $5.3 billion at September 30, 2011 and consisted of fixed-rate and floating-rate, private-issuer securities collateralized primarily by various consumer credit products, including residential mortgage loans, credit cards, automobile loans, and student 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.

We recorded OTTI credit losses of $14 million on asset-backed securities during the first nine months of 2011, including $5 million during the third quarter. All of the securities are collateralized by first and second lien residential mortgage loans and are rated below investment grade. As of September 30, 2011, the noncredit portion of OTTI losses recorded in accumulated other comprehensive loss for asset-backed securities totaled $173 million and the related securities had a fair value of $613 million.

For the sub-investment grade investment securities (available for sale and held to maturity) for which we have not recorded an OTTI loss through September 30, 2011, the remaining fair value was $150 million, with unrealized net gains of $12 million. The results of our security-level assessments indicate that we will recover the cost basis of these securities. Note 7 Investment Securities in the Notes To Consolidated Financial Statements in this Report provides further detail regarding our process for assessing OTTI for these securities.

If current housing and economic conditions were to worsen, and if market volatility and illiquidity were to 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	September 30 2011		December 31 2010
Commercial mortgages at fair value	$	831	$	877
Commercial mortgages at lower of cost or market		250		330
Total commercial mortgages		1,081		1,207
Residential mortgages at fair value		1,353		1,878
Residential mortgages at lower of cost or market				12
Total residential mortgages		1,353		1,890
Other		57		395
Total	$	2,491	$	3,492

We stopped originating certain commercial mortgage loans designated as held for sale in 2008 and continue pursuing opportunities to reduce these positions at appropriate prices. We sold $25 million of commercial mortgage loans held for sale carried at fair value in the first nine months of 2011 and sold $82 million in the first nine months of 2010.

We recognized net gains of $26 million in the first nine months of 2011, including $6 million in the third quarter, on the valuation and sale of commercial mortgage loans held for sale, net of hedges. Net losses of $6 million on the valuation and sale of commercial mortgage loans held for sale, net of hedges, were recognized in the first nine months of 2010, including net gains of $7 million in the third quarter.

Residential mortgage loan origination volume was $8.4 billion in the first nine months of 2011. Substantially all such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $9.2 billion of loans and recognized related gains of $208 million during the first nine months of 2011, of which $72 million occurred in the third quarter. The comparable amounts for the first nine months of 2010 were $6.6 billion and $165 million, respectively, including $77 million in the third quarter.

Interest income on loans held for sale was $153 million in the first nine months of 2011, including $46 million in the third quarter. Comparable amounts for 2010 were $208 million and $55 million, respectively. These amounts are included in Other interest income on our Consolidated Income Statement.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets totaled $10.2 billion at September 30, 2011 and $10.8 billion at December 31, 2010. See Note 9 Goodwill and Other Intangible Assets included in the Notes To Consolidated Financial Statements in this Report.

FUNDING AND CAPITAL SOURCES

Details Of Funding Sources


In millions	September 30 2011		December 31 2010
Deposits
Money market	$	87,458	$	84,581
Demand		55,549		50,069
Retail certificates of deposit		32,380		37,337
Savings		8,396		7,340
Other time		338		549
Time deposits in foreign offices		3,611		3,514
Total deposits		187,732		183,390
Borrowed funds
Federal funds purchased and repurchase agreements		3,105		4,144
Federal Home Loan Bank borrowings		5,015		6,043
Bank notes and senior debt		11,990		12,904
Subordinated debt		9,564		9,842
Other		5,428		6,555
Total borrowed funds		35,102		39,488
Total	$	222,834	$	222,878

Total funding sources remained relatively flat at September 30, 2011 compared with December 31, 2010.

Total deposits increased $4.3 billion, or 2%, at September 30, 2011 compared with December 31, 2010 due to an increase in money market and demand deposits, partially offset by the redemption of retail certificates of deposit. Interest-bearing deposits represented 71% of total deposits at September 30, 2011 compared to 73% at December 31, 2010. Total borrowed funds decreased $4.4 billion since December 31, 2010. The decline from December 31, 2010 was primarily due to net maturities.

Capital

See 2011 Capital and Liquidity Actions in the Executive Summary section of this Financial Review for additional information regarding our July 2011 issuance of depository shares representing preferred stock, our April 2011 increase to PNC’s quarterly common stock dividend, and our plans regarding purchase of shares under PNC’s existing common stock repurchase program.

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 increased $4.0 billion, to $34.2 billion, at September 30, 2011 compared with December 31, 2010 as retained earnings increased $2.1 billion. The issuance of $1.0 billion of preferred stock in July 2011 contributed to the increase in capital surplus – preferred stock from $.6 billion at December 31, 2010 to $1.6 billion at September 30, 2011. Accumulated other comprehensive income increased $.8 billion, to $.4 billion, at September 30, 2011 compared with a loss of $.4 billion at December 31, 2010 due to net unrealized gains on securities and cash flow hedge derivatives. Common shares outstanding were 526 million at both September 30, 2011 and December 31, 2010.

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 in the first nine months of 2011 under this program.

Risk-Based Capital


Dollars in millions	September 30 2011			December 31 2010
Capital components
Shareholders’ equity
Common	$	32,583		$	29,596
Preferred		1,636			646
Trust preferred capital securities		2,905			2,907
Noncontrolling interests		1,350			1,351
Goodwill and other intangible assets		(8,990	)		(9,053	)
Eligible deferred income taxes on goodwill and other intangible assets		438			461
Pension, other postretirement benefit plan adjustments		370			380
Net unrealized securities (gains) losses, after-tax		(48	)		550
Net unrealized gains on cash flow hedge derivatives, after-tax		(731	)		(522	)
Other		(174	)		(224	)
Tier 1 risk-based capital		29,339			26,092
Subordinated debt		4,758			4,899
Eligible allowance for credit losses		2,819			2,733
Total risk-based capital	$	36,916		$	33,724
Tier 1 common capital
Tier 1 risk-based capital	$	29,339		$	26,092
Preferred equity		(1,636	)		(646	)
Trust preferred capital securities		(2,905	)		(2,907	)
Noncontrolling interests		(1,350	)		(1,351	)
Tier 1 common capital	$	23,448		$	21,188
Assets
Risk-weighted assets, including off-balance sheet instruments and market risk equivalent assets	$	223,564		$	216,283
Adjusted average total assets		257,663			254,693
Capital ratios
Tier 1 common		10.5	%		9.8	%
Tier 1 risk-based		13.1			12.1
Total risk-based		16.5			15.6
Leverage		11.4			10.2

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 estimated stress scenarios. 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 a

formal ratio for this metric is not provided for in current regulations. We seek to manage our capital consistent with these regulatory principles, and believe that our September 30, 2011 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 redemption on the first call date of some or all of its trust preferred securities, based on such considerations it may consider relevant, including dividend rates, the specifics of the future capital requirements, capital market conditions and other factors. See 2011 Capital and Liquidity Actions in the Executive Summary section of this Financial Review for additional information regarding our upcoming November 2011 redemption of trust preferred securities. PNC is also subject to replacement capital covenants with respect to certain of its trust preferred securities as discussed in Note 13 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in Item 8 of our 2010 Form 10-K.

Our Tier 1 common capital ratio was 10.5% at September 30, 2011, compared with 9.8% at December 31, 2010. Our Tier 1 risk-based capital ratio increased 100 basis points to 13.1% at September 30, 2011 from 12.1% at December 31, 2010. Retention of earnings in 2011 contributed to the increases in both ratios, and the issuance of $1.0 billion of Series O preferred shares in July 2011 also contributed to the increase in our Tier 1 risk-based capital ratio.

At September 30, 2011, PNC Bank, our domestic bank subsidiary, was considered “well capitalized” based on US regulatory capital ratio requirements under Basel I. To qualify as “well-capitalized”, regulators currently require banks to maintain capital ratios of at least 6% for Tier 1 risk-based, 10% for total risk-based, and 5% for leverage, which are indicated on page 3 of this Report. We believe PNC Bank, will continue to meet these requirements during the remainder of 2011.

The access to, and cost of, funding for 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.

We provide additional information regarding enhanced capital requirements and some of their potential impacts on PNC in Item 1A Risk Factors included in Part II of our second quarter 2011 Form 10-Q.

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 our 2010 Form 10-K and 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 in the Notes To Consolidated Financial Statements,

•

Note 10 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in the Notes To Consolidated Financial Statements, and

•

Note 17 Commitments and Guarantees in the Notes To Consolidated Financial Statements.

PNC consolidates variable interest entities (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.

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 September 30, 2011 and December 31, 2010 is included in Note 3 of this Report.

Trust Preferred Securities

In connection with the $950 million in principal amount of junior subordinated debentures associated with the trust preferred securities issued by PNC Capital Trusts C, D and E, as well as in connection with the obligations assumed by PNC with respect to $2.6 billion in principal amount of junior subordinated debentures issued by acquired entities in association with trust preferred securities issued by various subsidiary statutory trusts, we are subject to certain restrictions, including restrictions on dividend payments. Generally, if there is an event of default under the debentures, PNC elects to defer interest on the debentures , 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, as specified in the applicable governing documents, 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 in Note 13 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in our 2010 Form 10-K. See 2011 Capital and Liquidity Actions in the Executive Summary section of this Financial Review for additional information regarding our upcoming November 2011 redemption of trust preferred securities.

Also, in connection with the Trust E Securities sale, we are subject to a replacement capital covenant, which is described in Note 13 in our 2010 Form 10-K.

FAIR VALUE MEASUREMENTS

In addition to the following, see Note 8 Fair Value in the Notes To Consolidated Financial Statements in this Report for further information regarding fair value.

Assets recorded at fair value represented 25% of total assets at September 30, 2011 and 27% at December 31, 2010. Liabilities recorded at fair value represented 4% of total liabilities at September 30, 2011 and 3% at December 31, 2010, 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.


	September 30, 2011					December 31, 2010
In millions	Total Fair Value		Level 3			Total Fair Value		Level 3
Assets
Securities available for sale	$	49,715	$	7,268		$	57,310	$	8,583
Financial derivatives		9,608		88			5,757		77
Residential mortgage loans held for sale		1,353					1,878
Trading securities		2,960		47			1,826		69
Residential mortgage servicing rights		684		684			1,033		1,033
Commercial mortgage loans held for sale		831		831			877		877
Equity investments		1,520		1,520			1,384		1,384
Customer resale agreements		802					866
Loans		226		4			116		2
Other assets		622		181			853		403
Total assets	$	68,321	$	10,623		$	71,900	$	12,428
Level 3 assets as a percentage of total assets at fair value				16	%				17	%
Level 3 assets as a percentage of consolidated assets				4	%				5	%
Liabilities
Financial derivatives	$	7,429	$	192		$	4,935	$	460
Trading securities sold short		796					2,530
Other liabilities		5					6
Total liabilities	$	8,230	$	192		$	7,471	$	460
Level 3 liabilities as a percentage of total liabilities at fair value				2	%				6	%
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 market activity.

During the first nine months of 2011, 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

Once we entered into an agreement to sell GIS, it was no longer a reportable business segment. We sold GIS on July 1, 2010.

Business segment results, including inter-segment revenues, and a description of each business are included in Note 18 Segment Reporting included in the Notes To Consolidated Financial Statements of this Report. Certain amounts included in this Financial Review differ from those amounts shown in Note 18 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. 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 our business segments using our risk-based economic capital model, including consideration of the goodwill and other intangible assets at those business segments, as well as the diversification of risk among the business segments. We have revised certain capital allocations among our business segments, including amounts for prior periods. PNC’s total capital did not change as a result of these adjustments for any periods presented. However, capital allocations to the segments were lower in the year-over-year comparisons primarily due to improving credit quality.

We have allocated the ALLL and unfunded loan commitments and letters of credit based on our assessment of risk 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, which itself excludes the earnings and revenue attributable to GIS through June 30, 2010 and the related third quarter 2010 after-tax gain on the sale of GIS that are reflected in discontinued operations. 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 long-term incentive plan (LTIP) share distributions and obligations, integration costs, asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities and certain trading activities, exited businesses, equity management activities, alternative investments, intercompany eliminations, most corporate overhead, tax adjustments that are not allocated to business segments, and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests.

Results Of Businesses – Summary

(Unaudited)


	Income				Revenue				Average Assets (a)
Nine months ended September 30 - in millions	2011		2010		2011		2010		2011		2010
Retail Banking	$	59	$	100	$	3,801	$	4,108	$	66,193	$	67,782
Corporate & Institutional Banking		1,299		1,251		3,398		3,574		79,315		77,835
Asset Management Group		124		109		665		660		6,744		6,977
Residential Mortgage Banking		148		266		729		764		11,103		8,903
BlackRock		271		253		351		326		5,441		6,275
Distressed Assets Portfolio		202		14		753		936		13,392		18,246
Total business segments		2,103		1,993		9,697		10,368		182,188		186,018
Other (b) (c)		475		211		1,080		905		81,331		79,337
Income from continuing operations before noncontrolling interests (d)	$	2,578	$	2,204	$	10,777	$	11,273	$	263,519	$	265,355

(a)	Period-end balances for BlackRock.

(b)	For our segment reporting presentation in this Financial Review, “Other” for the first nine months of 2010 included $309 million of pretax integration costs related to acquisitions.

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

(d)	Amounts are presented on a continuing operations basis and therefore exclude the earnings, revenue, and assets of GIS for the first six months of 2010 and the related third quarter 2010 gain on the sale of GIS.

RETAIL BANKING

(Unaudited)


Nine months ended September 30 Dollars in millions, except as noted	2011			2010
Income Statement
Net interest income	$	2,448		$	2,609
Noninterest income
Service charges on deposits		375			556
Brokerage		153			161
Consumer services		732			673
Other		93			109
Total noninterest income		1,353			1,499
Total revenue		3,801			4,108
Provision for credit losses		662			946
Noninterest expense		3,047			3,008
Pretax earnings		92			154
Income taxes		33			54
Earnings	$	59		$	100
Average Balance Sheet
Loans
Consumer
Home equity	$	25,907		$	26,538
Indirect auto		2,825			2,024
Indirect other		1,520			1,936
Education		9,036			8,409
Credit cards		3,715			3,975
Other		1,835			1,792
Total consumer		44,838			44,674
Commercial and commercial real estate		10,634			11,271
Floor plan		1,449			1,287
Residential mortgage		1,210			1,669
Total loans		58,131			58,901
Goodwill and other intangible assets		5,756			5,881
Other assets		2,306			3,000
Total assets	$	66,193		$	67,782
Deposits
Noninterest-bearing demand	$	18,209		$	17,055
Interest-bearing demand		21,729			19,654
Money market		40,788			40,045
Total transaction deposits		80,726			76,754
Savings		7,979			6,864
Certificates of deposit		34,020			42,749
Total deposits		122,725			126,367
Other liabilities		898			1,583
Capital		8,173			8,478
Total liabilities and equity	$	131,796		$	136,428
Performance Ratios
Return on average capital		1	%		2	%
Return on average assets		.12			.20
Noninterest income to total revenue		36			36
Efficiency		80			73
Other Information (a)
Credit-related statistics:
Commercial nonperforming assets	$	330		$	262
Consumer nonperforming assets		454			400
Total nonperforming assets (b)	$	784		$	662
Impaired loans (c)	$	786		$	939
Commercial lending net charge-offs	$	171		$	281
Credit card lending net charge-offs		167			248
Consumer lending (excluding credit card) net charge-offs		324			316
Total net charge-offs	$	662		$	845
Commercial lending annualized net charge-off ratio		1.89	%		2.99	%
Credit card lending annualized net charge-off ratio		6.01	%		8.34	%
Consumer lending (excluding credit card) annualized net charge-off ratio		1.02	%		1.00	%
Total annualized net charge-off ratio		1.52	%		1.92	%


At September 30 Dollars in millions, except as noted	2011			2010
Other Information (Continued) (a)
Home equity portfolio credit statistics: (d)
% of first lien positions (e)		38	%		35	%
Weighted-average loan-to-value ratios (e)		72	%		73	%
Weighted-average FICO scores (f)		743			725
Annualized net charge-off ratio		1.11	%		.87	%
Loans 30 – 59 days past due		.58	%		.49	%
Loans 60 – 89 days past due		.32	%		.30	%
Loans 90 days past due		1.12	%		.94	%
Other statistics:
ATMs		6,754			6,626
Branches (g)		2,469			2,461
Customer-related statistics: (in thousands)
Retail Banking checking relationships		5,722			5,438
Retail online banking active customers		3,479			2,968
Retail online bill payment active customers		1,079			942
Brokerage statistics:
Financial consultants (h)		703			713
Full service brokerage offices		37			40
Brokerage account assets (billions)	$	33		$	33

(a)	Presented as of September 30, except for net charge-offs and annualized net charge-off ratios, which are for the nine months ended.

(b)	Includes nonperforming loans of $748 million at September 30, 2011 and $638 million at September 30, 2010.

(c)	Recorded investment of purchased impaired loans related to acquisitions.

(d)	Home equity lien position, loan to value, FICO and delinquency statistics are based on borrower contractual amounts and include purchased impaired loans.

(e)	Includes loans from acquired portfolios for which lien position and loan-to-value information was limited. Additionally, excludes brokered home equity loans.

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

(g)	Excludes certain satellite offices that provide limited products and/or services.

(h)	Financial consultants provide services in full service brokerage offices and traditional bank branches.

Highlights of Retail Banking’s performance for the first nine months of 2011 include the following:

•

Net new checking relationships grew 225,000 in the first nine months of 2011 exclusive of the 32,000 added with the BankAtlantic branch acquisition, which reflects strong results and gains in all of our markets. We are seeing strong customer retention in the overall network.

•

Success in implementing Retail Banking’s deposit strategy resulted in growth in average demand deposits for the first nine months of 2011 of $3.2 billion, or 9%, over the first nine months of 2010. Average certificates of deposit declined $8.7 billion, or 20%, over the same period in accordance with our business plan.

•

Our investment in online banking capabilities continues to pay off. Excluding the impact of the BankAtlantic branch acquisition, active online

banking customers and active online bill payment customers grew by 13% and 10%, respectively, during the first nine months of 2011.

•

The planned acquisition of RBC Bank (USA), which is currently scheduled to close in March 2012 subject to customary closing conditions, including regulatory approvals, is expected to expand PNC’s footprint to 19 states and over 2,800 branches.

•

On July 26, 2011, PNC signed a definitive agreement to acquire 27 branches and related deposits in metropolitan Atlanta, Georgia from Flagstar Bank, FSB, a subsidiary of Flagstar Bancorp, Inc. The transaction is currently expected to close in December 2011 subject to customary closing conditions. PNC and Flagstar have both received regulatory approval in relation to the respective applications filed with the regulators.

•

In June, Retail Banking added approximately $280 million in deposits, 32,000 checking relationships, 19 branches and 27 ATMs through the acquisition from BankAtlantic in the Tampa, Florida area.

•

Retail Banking launched new checking account and credit card products during the first quarter. These new products are designed to provide more choices for customers.

•

PNC’s expansive branch footprint covers nearly one-third of the U.S. population in 15 states and Washington, DC with a network of 2,469 branches and 6,754 ATMs at September 30, 2011.

Total revenue for the first nine months of 2011 was $3.8 billion compared with $4.1 billion for the same period of 2010. Net interest income of $2.4 billion declined $161 million compared with the first nine months of 2010. The decrease over the prior period resulted from lower interest credits assigned to deposits, reflective of the rate environment, and lower average loan balances while benefiting from higher demand deposit balances.

Noninterest income for the first nine months of 2011 declined $146 million compared to the first nine months of 2010. The decline was driven by lower overdraft fees resulting from the impact of Regulation E rules partially offset by higher volumes of customer-initiated transactions including debit and credit cards.

For 2011, Retail Banking revenue has declined for the year-to-date period compared to same period of 2010 as a result of the rules set forth in Regulation E related to overdraft fees and will further decline in the fourth quarter based on the Dodd-Frank limits related to interchange rates on debit card transactions. The Dodd-Frank limits related to interchange rates on debit cards were effective October 1, 2011 and are expected to have a negative impact on revenues of approximately $75 million in the fourth quarter of 2011 and an additional incremental reduction in future periods’ annual revenue of approximately $175 million, based on expected

2011 transaction volumes. These estimates do not include any additional financial impact to revenue of other or additional regulatory requirements. There could be other aspects of regulatory reform that further impact these or other areas of our business as regulatory agencies, including the new Consumer Financial Protection Bureau (CFPB), issue proposed and final regulations pursuant to Dodd-Frank and other legislation. See additional information regarding legislative and regulatory developments in the Executive Summary section of this Financial Review.

For 2011, the incremental decline compared to 2010 from the impact of the Credit CARD Act was not material.

The provision for credit losses was $662 million through September 30, 2011 compared with $946 million over the same period in 2010. Net charge-offs were $662 million for the first nine months of 2011 compared with $845 million in the same period last year. Improvements in credit quality are evident in the small business, credit card and indirect portfolios; however, we have experienced some volatility in our home equity portfolio as we continued to work with borrowers as employment and home values have been slow to recover in this economy. The level of provisioning will be dependent on general economic conditions, loan growth, utilization of credit commitments and asset quality.

Noninterest expense for the first nine months of the year increased $39 million from the same period last year. The increase resulted from investments in the business partially offset by lower FDIC expenses resulting from an FDIC required methodology change.

Growing core checking deposits, as a low-cost funding source and as the cornerstone product to build customer relationships, is the primary objective of our retail strategy. Furthermore, core checking accounts are critical to growing our overall 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 nine months of 2011, average total deposits of $122.7 billion decreased $3.6 billion, or 3%, compared with the first nine months of 2010.

•

Average demand deposits increased $3.2 billion, or 9%, over the first nine months of 2010. The increase was primarily driven by customer growth and customer preferences for liquidity.

•

Average money market deposits increased $743 million, or 2%, from the first nine months of 2010. The increase was primarily due to core money market growth as customers generally prefer more liquid deposits in a low rate environment.

•

Average savings deposits increased $1.1 billion, or 16%, over the first nine months of 2010. The increase is attributable to net customer growth and new product offerings.

•

In the first nine months of 2011, average consumer certificates of deposit decreased $8.7 billion or 20% from the same period last year. The decline is expected to continue through 2012 due to the continued run-off of higher rate certificates of deposit.

Currently, our primary focus is on a relationship-based lending strategy that targets specific customer sectors (mass consumers, homeowners, students, small businesses and auto dealerships). In the first nine months of 2011, average total loans were $58.1 billion, a decrease of $770 million, or 1%, over the same period last year.

•

Average indirect auto loans increased $801 million, or 40%, over the first nine months of 2010. The increase was due to the expansion of our indirect sales force and product introduction to acquired markets, as well as overall increases in auto sales. The indirect other portfolio is primarily a run-off portfolio comprised of marine, RV, and other indirect loan products.

•

Average education loans grew $627 million, or 7%, compared with the first nine months of 2010, primarily due to portfolio purchases in December 2010 and July 2011.

•

Average auto dealer floor plan loans grew $162 million, or 13%, compared with the first nine months of 2010, primarily resulting from additional dealer relationships and higher line utilization.

•

Average credit card balances decreased $260 million, or 7%, over the first nine months of 2010. The decrease was primarily the result of fewer active accounts generating balances coupled with increased paydowns on existing accounts.

•

Average commercial and commercial real estate loans declined $637 million, or 6%, compared with the first nine months of 2010. The decline was primarily due to loan demand being outpaced by refinancings, paydowns, and charge-offs.

•

Average home equity loans declined $631 million, or 2%, compared with the first nine months of 2010. Home equity loan demand remained soft in the current economic climate. 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 indirect other and residential mortgages are primarily run-off portfolios and declined $416 million and $459 million, respectively, compared with the first nine months of 2010. The indirect other portfolio is comprised of marine, RV, and other indirect loan products.

CORPORATE & INSTITUTIONAL BANKING

(Unaudited)


Nine months ended September 30 Dollars in millions, except as noted	2011		2010
Income Statement
Net interest income	$	2,513	$	2,670
Noninterest income
Corporate service fees		537		627
Other		348		277
Noninterest income		885		904
Total revenue		3,398		3,574
Provision for credit losses		12		285
Noninterest expense		1,336		1,315
Pretax earnings		2,050		1,974
Income taxes		751		723
Earnings	$	1,299	$	1,251
Average Balance Sheet
Loans
Commercial	$	34,771	$	33,088
Commercial real estate		13,949		16,948
Commercial – real estate related		3,553		3,016
Asset-based lending		7,928		6,124
Equipment lease financing		5,499		5,447
Total loans		65,700		64,623
Goodwill and other intangible assets		3,444		3,669
Loans held for sale		1,251		1,415
Other assets		8,920		8,128
Total assets	$	79,315	$	77,835
Deposits
Noninterest-bearing demand	$	30,010	$	23,759
Money market		12,770		12,246
Other		5,662		7,097
Total deposits		48,442		43,102
Other liabilities		13,064		11,541
Capital		7,927		8,762
Total liabilities and equity	$	69,433	$	63,405


Nine months ended September 30 Dollars in millions, except as noted	2011			2010
Performance Ratios
Return on average capital		22	%		19	%
Return on average assets		2.19			2.15
Noninterest income to total revenue		26			25
Efficiency		39			37
Commercial Mortgage Servicing Portfolio (in billions)
Beginning of period	$	266		$	287
Acquisitions/additions		31			23
Repayments/transfers		(30	)		(47	)
End of period	$	267		$	263
Other Information
Consolidated revenue from: (a)
Treasury Management	$	891		$	915
Capital Markets	$	462		$	401
Commercial mortgage loans held for sale (b)	$	75		$	49
Commercial mortgage loan servicing income, net of amortization (c)		108			196
Commercial mortgage servicing rights (impairment)/recovery		(157	)		(99	)
Total commercial mortgage banking activities	$	26		$	146
Total loans (d)	$	70,307		$	62,477
Credit-related statistics:
Nonperforming assets (d) (e)	$	2,033		$	3,064
Impaired loans (d) (f)	$	472		$	890
Net charge-offs	$	332		$	725
Net carrying amount of commercial mortgage servicing rights (d)	$	482		$	616

(a)	Represents consolidated PNC amounts. See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of the Consolidated Income Statement Review.

(b)	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.

(c)

Includes net interest income and noninterest income from loan servicing and ancillary services, net of commercial mortgage servicing rights amortization. Commercial mortgage servicing rights (impairment)/recovery is shown separately. Higher amortization and impairment charges in 2011 were due primarily to decreased interest rates and related prepayments by borrowers.

(d)	As of September 30.

(e)	Includes nonperforming loans of $1.8 billion at September 30, 2011 and $2.9 billion at September 30, 2010.

(f)	Recorded investment of purchased impaired loans related to acquisitions.

Highlights of Corporate & Institutional Banking’s performance during the first nine months of 2011 include the following:

•

Overall results benefited from successful sales efforts to new clients and product penetration of the existing customer base. New client acquisitions in our Corporate Banking business were on pace to exceed the 1,000 new primary client goal for the year and increased 21% compared to the first nine months of 2010.

•

Loan commitments, primarily in our Business Credit, Healthcare, and Public Finance businesses, grew from 2010 due to new clients and higher commitments to selected existing clients.

•

Loan balances have increased since the fourth quarter of 2010, including an increase in average loans for the third quarter of 2011 of $5.0 billion or 8% in the comparison.

•

Our Treasury Management business, which is one of the top providers in the country, continued to invest in markets, products and infrastructure as well as major initiatives such as healthcare. The healthcare initiative is designed to help provide our customers in that industry opportunity to reduce operating costs.

•

Cross sales of treasury management and capital markets products to customers in PNC’s western markets continued to be successful and were ahead of both targets and the first nine months of 2010.

•

Midland Loan Services, one of the leading third-party providers of servicing for the commercial real estate industry, received the highest U.S. servicer and special servicer ratings from Fitch Ratings and Standard & Poor’s and is in its 11th consecutive year of achieving these ratings.

•

Midland was the number one servicer of FNMA and FHLMC multifamily and healthcare loans and was the second leading servicer of commercial and multifamily loans by volume as of June 30, 2011 according to Mortgage Bankers Association.

•

Mergers and Acquisitions Journal named Harris Williams & Co. Advisor of the Year in its March 2011 issue.

Net interest income for the first nine months of 2011 was $2.5 billion, a 6% decline from the first nine months of 2010, reflecting lower purchase accounting accretion and lower interest credits assigned to deposits, partially offset by an increase in average deposits and an increase in average loans.

Corporate service fees were $537 million for the first nine months of 2011, a decrease of $90 million from the first nine months of 2010, primarily due to a reduction in the value of commercial mortgage servicing rights largely driven by lower interest rates and higher loan prepayment rates, and lower ancillary commercial mortgage servicing fees. The major components of corporate service fees are treasury management, corporate finance fees and commercial mortgage servicing revenue.

Other noninterest income was $348 million for the first nine months of 2011 compared with $277 million in the first nine months of 2010. The increase of $71 million was primarily due to valuations associated with the commercial mortgage held-for-sale portfolio and derivatives executed for clients.

The provision for credit losses was $12 million in the first nine months of 2011 compared with $285 million in 2010. The improvement reflected continued positive migration in portfolio credit quality. Net charge-offs for the first nine months of 2011 of $332 million decreased $393 million, or 54%, compared with the 2010 period. The decline was attributable primarily to the commercial real estate and equipment finance portfolios. Nonperforming assets declined for the sixth consecutive quarter, and at $2.0 billion were a third lower than they were at September 30, 2010.

Noninterest expense was $1.3 billion in both the first nine months of 2011and 2010. Higher compensation-related costs were mostly offset by the impact of the sale of a duplicative agency servicing operation in the second quarter of 2010.

Average loans were $65.7 billion for the first nine months of 2011 compared with $64.6 billion in the first nine months of 2010, an increase of 2%.

•

The Corporate Banking business provides lending, treasury management, and capital markets-related products and services to mid-sized corporations, government and not-for-profit entities and selectively to large corporations. Average loans for this business increased $1.3 billion or 4% in the first nine months of 2011 compared with the first nine months of 2010. Loan commitments have increased since the second quarter of 2010 due to the impact of new customers and increased demand.

•

PNC Real Estate provides commercial real estate and real-estate related lending and is one of the industry’s top providers of both conventional and affordable multifamily financing. Average loans for this business declined $1.7 billion or 10% in the first nine months of 2011 compared with the first nine months of 2010 due to loan sales, paydowns and charge-offs.

•

PNC Business Credit is one of the top asset-based lenders in the country. The loan portfolio is relatively high yielding, with moderate risk, as the loans are mainly secured by liquid assets. Average loans increased $1.8 billion or 30% in the first nine months of 2011 compared with the first nine months of 2010 due to customers seeking stable lending sources, loan usage rates, and market expansion. We also expanded our operations with the acquisition of an asset-based lending group in the United Kingdom, completed in November 2010. Total loans acquired were approximately $300 million.

•

PNC Equipment Finance is the 4th largest bank-affiliated leasing company with over $9 billion in equipment finance assets.

Average deposits were $48 billion for the first nine months of 2011, an increase of $5.3 billion, or 12%, compared with the first nine months of 2010.

•

Deposit growth has been very strong, particularly in the third quarter 2011, and is an industry-wide trend as clients are holding record levels of cash and liquidity.

•

Deposit inflows into noninterest-bearing demand deposits continued as FDIC insurance has been an attraction for customers maintaining liquidity during this prolonged period of low interest rates.

•

The repeal of Regulation Q limitations on interest-bearing commercial demand deposit accounts became effective in the third quarter of 2011. As

expected, interest in this product has been muted due to the current rate environment and the limited amount of FDIC insurance coverage.

The commercial mortgage servicing portfolio was $267 billion at September 30, 2011 compared with $263 billion at September 30, 2010. The increase was largely the result of servicing additions, net of portfolio run-off.

See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of the Consolidated Income Statement Review.

ASSET MANAGEMENT GROUP

(Unaudited)


Nine months ended September 30 Dollars in millions, except as noted	2011			2010
Income Statement
Net interest income	$	177		$	191
Noninterest income		488			469
Total revenue		665			660
Provision for credit losses (benefit)		(34	)		11
Noninterest expense		503			476
Pretax earnings		196			173
Income taxes		72			64
Earnings	$	124		$	109
Average Balance Sheet
Loans
Consumer	$	4,086		$	4,005
Commercial and commercial real estate		1,337			1,437
Residential mortgage		710			893
Total loans		6,133			6,335
Goodwill and other intangible assets		365			404
Other assets		246			238
Total assets	$	6,744		$	6,977
Deposits
Noninterest-bearing demand	$	1,177		$	1,288
Interest-bearing demand		2,305			1,768
Money market		3,577			3,245
Total transaction deposits		7,059			6,301
CDs/IRAs/savings deposits		646			767
Total deposits		7,705			7,068
Other liabilities		73			94
Capital		347			410
Total liabilities and equity	$	8,125		$	7,572
Performance Ratios
Return on average capital		48	%		36	%
Return on average assets		2.46			2.09
Noninterest income to total revenue		73			71
Efficiency		76			72
Other Information
Total nonperforming assets (a) (b)	$	69		$	102
Impaired loans (a) (c)	$	134		$	155
Total net charge-offs (recoveries)	$	(6	)	$	21
Assets Under Administration (in billions) (a) (d)
Personal	$	95		$	95
Institutional		107			111
Total	$	202		$	206
Asset Type
Equity	$	104		$	107
Fixed Income		66			66
Liquidity/Other		32			33
Total	$	202		$	206
Discretionary assets under management
Personal	$	65		$	67
Institutional		38			38
Total	$	103		$	105
Asset Type
Equity	$	49		$	51
Fixed Income		38			38
Liquidity/Other		16			16
Total	$	103		$	105
Nondiscretionary assets under administration
Personal	$	30		$	28
Institutional		69			73
Total	$	99		$	101
Asset Type
Equity	$	55		$	56
Fixed Income		28			28
Liquidity/Other		16			17
Total	$	99		$	101

(a)	As of September 30.

(b)	Includes nonperforming loans of $64 million at September 30, 2011 and $94 million at September 30, 2010.

(c)	Recorded investment of purchased impaired loans related to acquisitions.

(d)	Excludes brokerage account assets.

Highlights of Asset Management Group’s performance during the first nine months of 2011 include the following:

•

Strong sales production, up nearly 50% over the prior year including a 34% increase in the acquisition of new high value clients;

•

Significant referrals from other PNC lines of business, an increase of approximately 90% over the same period in 2010;

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company