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:

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General economic conditions, including the continuity, speed and stamina of the moderate economic recovery in general and on our customers in particular,

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

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

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

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Customer demand for non-loan products and services,

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

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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

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The impact of market credit spreads on asset valuations.

 

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

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

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

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

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

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

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

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A sustained focus on expense management,

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Managing the distressed assets portfolio and other impaired assets,

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

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

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Prudent risk and capital management related to our efforts to maintain our desired moderate risk profile,

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

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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

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

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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.

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

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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.

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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

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

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

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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.

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

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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

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

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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.

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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.

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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.

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

 

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

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

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

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

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

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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:

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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.

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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:

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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.

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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

 

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