10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

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, 2010

or

 

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

For the transition period from                     to                     

Commission file number 001-09718

The PNC Financial Services Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   25-1435979

(State or other jurisdiction of

incorporation or organization)

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

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

(Address of principal executive offices, including zip code)

(412) 762-2000

(Registrant’s telephone number, including area code)

 

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

 

 

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

Yes  x    No   ¨

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

Yes  x    No   ¨

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

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

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

Yes  ¨    No   x

As of October 29, 2010, there were 525,796,405 shares of the registrant’s common stock ($5 par value) outstanding.

 

 

 


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The PNC Financial Services Group, Inc.

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

 

     Pages  

PART I – FINANCIAL INFORMATION

  

Item 1.Financial Statements (Unaudited).

  

Consolidated Income Statement

     59   

Consolidated Balance Sheet

     60   

Consolidated Statement Of Cash Flows

     61   

Notes To Consolidated Financial Statements (Unaudited)

  

Note 1   Accounting Policies

     62   

Note 2   Divestiture

     64   

Note 3   Loan Sale and Servicing Activities and Variable Interest Entities

     64   

Note 4   Loans and Commitments To Extend Credit

     69   

Note 5   Asset Quality

     70   

Note 6   Purchased Impaired Loans Related to National City

     71   

Note 7   Investment Securities

     72   

Note 8   Fair Value

     77   

Note 9   Goodwill and Other Intangible Assets

     89   

Note 10 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities

     91   

Note 11 Certain Employee Benefit And Stock-Based Compensation Plans

     92   

Note 12 Financial Derivatives

     94   

Note 13 Earnings Per Share

     101   

Note 14 Total Equity And Other Comprehensive Income

     102   

Note 15 Income Taxes

     103   

Note 16 Summarized Financial Information of BlackRock

     104   

Note 17 Legal Proceedings

     104   

Note 18 Commitments and Guarantees

     106   

Note 19 Segment Reporting

     109   

Statistical Information (Unaudited)

  

Average Consolidated Balance Sheet And Net Interest Analysis

     112-113   

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

     1-58   

Financial Review

  

Consolidated Financial Highlights

     1-2   

Executive Summary

     3   

Consolidated Income Statement Review

     9   

Consolidated Balance Sheet Review

     12   

Off-Balance Sheet Arrangements And Variable Interest Entities

     22   

Fair Value Measurements

     26   

Business Segments Review

     27   

Critical Accounting Estimates And Judgments

     38   

Status Of Qualified Defined Benefit Pension Plan

     40   

Risk Management

     41   

Internal Controls And Disclosure Controls And Procedures

     53   

Glossary Of Terms

     53   

Cautionary Statement Regarding Forward-Looking Information

     56   

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

     41-52 and 94-100  

Item 4.Controls and Procedures.

     53   

PART II – OTHER INFORMATION

  

Item 1.Legal Proceedings.

     114   

Item 1A.Risk Factors.

     114   

Item 2.Unregistered Sales Of Equity Securities And Use Of Proceeds.

     114   

Item 6.Exhibits.

     115   

Exhibit Index.

     115   

Signature

     115   

Corporate Information

     116   


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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        2010             2009             2010             2009      

FINANCIAL RESULTS (a)

          

Revenue

          

Net interest income

   $ 2,215      $ 2,224      $ 7,029      $ 6,737   

Noninterest income

     1,383        1,629        4,244        4,605   

Total revenue

     3,598        3,853        11,273        11,342   

Noninterest expense

     2,158        2,214        6,273        6,864   

Pretax, pre-provision earnings (b)

   $ 1,440      $ 1,639      $ 5,000      $ 4,478   

Provision for credit losses

   $ 486      $ 914      $ 2,060      $ 2,881   

Income from continuing operations before noncontrolling interests

   $ 775      $ 540      $ 2,204      $ 1,255   

Income from discontinued operations, net of income taxes (c)

   $ 328      $ 19      $ 373      $ 41   

Net income

   $ 1,103      $ 559      $ 2,577      $ 1,296   

Net income attributable to common shareholders (d)

   $ 1,094      $ 467      $ 2,213      $ 992   

Diluted earnings per common share

          

Continuing operations

   $ 1.45      $ .96      $ 3.52      $ 2.08   

Discontinued operations (c)

     .62        .04        .72        .09   

Net income

   $ 2.07      $ 1.00      $ 4.24      $ 2.17   

Cash dividends declared per common share

   $ .10      $ .10      $ .30      $ .86   

Total preferred dividends declared, including TARP

   $ 4      $ 99      $ 122      $ 269   

TARP Capital Purchase Program preferred dividends (d)

     $ 95      $ 89      $ 237   

Impact of TARP Capital Purchase Program preferred dividends per diluted common share

     $ .21      $ .17      $ .52   

Redemption of TARP preferred stock discount accretion (d)

                   $ 250           

PERFORMANCE RATIOS

          

From continuing operations

          

Noninterest income to total revenue

     38     42     38     41

Efficiency

     60        57        56        61   

From net income

          

Net interest margin (e)

     3.96     3.76     4.18     3.72

Return on:

          

Average common shareholders’ equity

     15.12        8.70        10.98        6.77   

Average assets

     1.65        .81        1.30        .62   

See page 53 for a glossary of certain terms used in this Report.

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

(a) The Executive Summary and Consolidated Income Statement Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.
(b) We believe that pretax, pre-provision earnings, a non-GAAP measure, is useful as a tool to help evaluate our ability to provide for credit costs through operations.
(c) Includes results of operations for PNC Global Investment Servicing Inc. (GIS) 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 Divestiture 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 one-time, noncash reduction in net income attributable to common shareholders and related basic and diluted earnings per share.
(e) Calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from Federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP in the Consolidated Income Statement. The taxable-equivalent adjustments to net interest income for the three months ended September 30, 2010 and September 30, 2009 were $22 million and $16 million, respectively. The taxable-equivalent adjustments to net interest income for the nine months ended September 30, 2010 and September 30, 2009 were $59 million and $47 million, respectively.

 

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CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED) (a)

 

Unaudited    September 30
2010
    December 31
2009
    September 30
2009
 

BALANCE SHEET DATA (dollars in millions, except per share data)

        

Assets

   $ 260,133      $ 269,863      $ 271,407   

Loans (b) (c)

     150,127        157,543        160,608   

Allowance for loan and lease losses (b)

     5,231        5,072        4,810   

Interest-earning deposits with banks (b)

     415        4,488        1,129   

Investment securities (b)

     63,461        56,027        54,413   

Loans held for sale (c)

     3,275        2,539        3,509   

Goodwill and other intangible assets

     10,518        12,909        12,734   

Equity investments (b)

     10,137        10,254        8,684   

Noninterest-bearing deposits

     46,065        44,384        43,025   

Interest-bearing deposits

     133,118        142,538        140,784   

Total deposits

     179,183        186,922        183,809   

Transaction deposits

     128,197        126,244        121,631   

Borrowed funds (b)

     39,763        39,261        41,910   

Shareholders’ equity

     30,042        29,942        28,928   

Common shareholders’ equity

     29,394        22,011        20,997   

Accumulated other comprehensive income (loss)

     146        (1,962     (1,947

Book value per common share

     55.91        47.68        45.52   

Common shares outstanding (millions)

     526        462        461   

Loans to deposits

     84     84     87
 

ASSETS UNDER ADMINISTRATION (billions)

        

Discretionary assets under management

   $ 105      $ 103      $ 104   

Nondiscretionary assets under administration

     101        102        113   

Total assets under administration

     206        205        217   
 

CAPITAL RATIOS

        

Tier 1 risk-based (d)

     11.9     11.4     10.9

Tier 1 common

     9.6        6.0        5.5   

Total risk-based (d)

     15.6        15.0        14.5   

Leverage (d)

     9.9        10.1        9.6   

Common shareholders’ equity to assets

     11.3        8.2        7.7   
 

ASSET QUALITY RATIOS

        

Nonperforming loans to total loans

     3.22     3.60     3.19

Nonperforming assets to total loans and foreclosed and other assets

     3.76        3.99        3.50   

Nonperforming assets to total assets

     2.18        2.34        2.08   

Net charge-offs to average loans (for the three months ended) (annualized)

     1.61        2.09        1.59   

Allowance for loan and lease losses to total loans

     3.48        3.22        2.99   

Allowance for loan and lease losses to nonperforming loans (e)

     108        89        94   
(a) The Executive Summary and Consolidated Balance Sheet Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.
(b) Amounts include consolidated variable interest entities. Some September 30, 2010 amounts include consolidated variable interest entities that we consolidated effective January 1, 2010 based on guidance in ASC 810, Consolidation. See Consolidated Balance Sheet in Part I, Item 1 of this Report for additional information.
(c) Amounts include items for which we have elected the fair value option. See Consolidated Balance Sheet in Part I, Item 1 of this Report for additional information.
(d) The regulatory minimums are 4.0% for Tier 1 risk-based, 8.0% for Total risk-based, and 4.0% for Leverage capital ratios. The well-capitalized levels are 6.0% for Tier 1 risk-based, 10.0% for Total risk-based, and 5.0% for Leverage capital ratios.
(e) The allowance for loan and lease losses includes impairment reserves attributable to purchased impaired loans. Nonperforming loans do not include purchased impaired loans or loans held for sale.

 

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FINANCIAL REVIEW

THE PNC FINANCIAL SERVICES GROUP, INC.

This Financial Review, including the Consolidated Financial Highlights, should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report and with Items 6, 7, 8 and 9A of our 2009 Annual Report on Form 10-K (2009 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business and regulatory risks, see the Risk Management section in this Financial Review and Items 1A and 7 of our 2009 Form 10-K and Item 1A included in Part II of our second quarter 2010 report on Form 10-Q and in Part II of this Report. Also, see the Cautionary Statement Regarding Forward-Looking Information and Critical Accounting Estimates And Judgments sections in this Financial Review for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and those anticipated in the forward-looking statements included in this Report. See Note 19 Segment Reporting in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report for a reconciliation of total business segment earnings to total PNC consolidated net income from continuing operations before noncontrolling interests as reported on a generally accepted accounting principles (GAAP) basis.

 

EXECUTIVE SUMMARY

THE PNC FINANCIAL SERVICES GROUP, INC.

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

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

KEY STRATEGIC GOALS

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

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

We are focused on our strategies for quality growth. We are committed to re-establishing a moderate risk profile characterized by disciplined credit management and limited exposure to earnings volatility resulting from interest rate

fluctuations and the shape of the interest rate yield curve. We made substantial progress in transitioning our balance sheet throughout 2009 and in the first nine months of 2010, working to return to our moderate risk philosophy throughout our expanded franchise. Our actions have created a well- positioned balance sheet, strong bank level liquidity and investment flexibility to adjust, where appropriate and permissible, to changing interest rates and market conditions.

We also continue to be focused on building capital in the current environment characterized by economic and regulatory uncertainty. See the Funding and Capital Sources section of the Consolidated Balance Sheet Review section and the Liquidity Risk Management section of this Financial Review.

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 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 and the related after-tax gain on sale in the third quarter of 2010 are presented as income from discontinued operations, net of income taxes, on our Consolidated Income Statement for the periods presented in this Report. Once we entered into the sales agreement, GIS was no longer a reportable business segment. Further information regarding the GIS sale is included in Note 2 Divestiture in our Notes To Consolidated Financial Statements in this Report.

NATIONAL CITY INTEGRATION COSTS

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


 

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National City Integration Costs

 

In millions    Third
Quarter
    

First

Nine
Months

    

Full

Year

 

2010

   $ 96       $ 309       $ 370 (a) 

2009

   $ 89       $ 266       $ 421   

2008

                   $ 575 (b) 
(a) Projected.
(b) Includes $504 million conforming provision for credit losses.

The National City transaction is expected to result in the reduction of more than $1.8 billion of combined company annualized noninterest expense by the end of 2010 through the elimination of operational and administrative redundancies. We have completed the customer and branch conversions to our technology platforms and have integrated the businesses and operations of National City with those of PNC.

RECENT MARKET AND INDUSTRY DEVELOPMENTS

The economic turmoil that began in the middle of 2007 and continued through most of 2008 and 2009 has now settled into a slow economic recovery with, at this time, somewhat uncertain prospects. This has been accompanied by dramatic changes in the competitive landscape of the financial services industry and a wholesale reformation of the legislative and regulatory landscape with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was signed into law by President Obama on July 21, 2010.

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

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

Items 1 and 7 of our 2009 Form 10-K include information regarding efforts beginning in late 2008 by the Federal government, including the US Congress, the US Department of the Treasury, the Federal Reserve, the FDIC, and the Securities and Exchange Commission, to stabilize and restore confidence in the financial services industry that have impacted and will likely continue to impact PNC and our

stakeholders. These efforts, which will continue to evolve, include the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009, Dodd-Frank and other legislative, administrative and regulatory initiatives.

Included in these efforts are evolving regulatory capital standards for financial institutions. 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. Evolving standards also include the so-called “Basel III” initiatives that are part of the Basel II effort by international banking supervisors to update the original international bank capital accord (Basel I), which has been in effect since 1988. The recent Basel III capital initiative, which has the support of US banking regulators, includes heightened capital requirements for major banking institutions in terms of both higher quality capital and higher regulatory capital ratios. Basel III capital standards will require implementing regulations by the banking regulators and are expected to include a phase-in period beginning in 2013 and ending January 1, 2019.

Residential Mortgage Foreclosure Matters

Beginning in the third quarter of 2010, mortgage foreclosure documentation practices among US financial institutions have received heightened attention by regulators and the media. PNC’s market share for residential servicing is less than 2%. 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). Regardless, we have been conducting an internal review of our foreclosure procedures. Based upon our review thus far, we believe that PNC has systems designed to ensure that no foreclosure proceeds unless the loan is genuinely in default. On average, our residential mortgage loans in foreclosure are more than one year delinquent.

Similar to other banks, we have identified issues regarding some of our documentation. Accordingly, we are delaying pursuing individual foreclosures when we commenced our review until we are confident that any pending documentation issues have been resolved. We are currently 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.

For additional information, please see Note 17 Legal Proceedings and Note 18 Commitments and Guarantees in our Notes To Consolidated Financial Statements in Part I of this Report and Item 1A Risk Factors in Part II of this Report.

TARP Capital Purchase Program

We redeemed the Series N (TARP) Preferred Stock on February 10, 2010. In connection with the redemption, we accelerated the accretion of the remaining issuance discount on the Series N Preferred Stock and recorded a corresponding


 

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reduction in retained earnings of $250 million in the first quarter of 2010. This resulted in a one-time, noncash reduction in net income attributable to common shareholders and related basic and diluted earnings per share. See Repurchase of Outstanding TARP Preferred Stock and Sale by US Treasury of TARP Warrant in Note 14 Total Equity And Other Comprehensive Income in the Notes To Consolidated Financial Statements in this Report for additional information.

FDIC Temporary Liquidity Guarantee Program

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

   

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

   

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

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

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

Public-Private Investment Fund Programs (PPIFs)

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

Home Affordable Modification Program (HAMP)

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

Home Affordable Refinance Program (HARP)

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

As noted above, Dodd-Frank and its implementation, as well as other statutory and regulatory initiatives that will be ongoing, will introduce numerous regulatory changes over the next several years. While we believe that we are well

positioned to navigate through this process, we cannot predict the ultimate impact of these actions on PNC’s business plans and strategies.

KEY FACTORS AFFECTING FINANCIAL PERFORMANCE

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

   

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

   

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

   

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

   

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

   

Customer demand for other products and services,

   

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

   

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

   

The impact of market credit spreads on asset valuations.

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

   

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

   

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

   

Revenue growth,

   

A sustained focus on expense management, and creating positive pre-tax, pre-provision earnings,

   

Managing the distressed assets portfolio and other impaired assets,

   

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

   

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

   

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

   

Actions we take within the capital and other financial markets.


 

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SUMMARY FINANCIAL RESULTS

 

     Three months ended
September 30
    Nine months ended
September 30
 
      2010     2009     2010     2009  

Net income (millions)

   $ 1,103      $ 559      $ 2,577      $ 1,296   

Diluted earnings per common share

          

Continuing operations

   $ 1.45      $ .96      $ 3.52      $ 2.08   

Discontinued operations

     .62        .04        .72        .09   

Net income

   $ 2.07      $ 1.00      $ 4.24      $ 2.17   

Return from net income on:

          

Average common shareholders’ equity

     15.12     8.70     10.98     6.77

Average assets

     1.65     .81     1.30     .62

Income Statement Highlights for the Third Quarter

   

Strong earnings for the third quarter of 2010 reflected an improvement in the provision for credit losses compared with the third quarter of 2009 as we continue to focus on returning to a moderate risk profile. Pretax pre-provision earnings of $1.4 billion significantly exceeded the provision for credit losses of $.5 billion.

   

Net interest income declined $220 million to $2.2 billion and the net interest margin fell 39 basis points to 3.96% compared with the second quarter of 2010 due to lower purchase accounting accretion, loan sales, continued soft loan demand and the low interest rate environment.

   

Noninterest income totaled $1.4 billion for the third quarter and was derived from diversified sources. The $246 million decline compared with the third quarter of 2009 was mainly due to a decrease in overdraft charges, the reduction in value of commercial mortgage servicing rights and the third quarter 2009 gain on sales of commercial loans.

   

The provision for credit losses declined to $486 million in the third quarter compared with $914 million in the third quarter of 2009 reflecting overall credit quality improvement driven by improving credit migration and actions taken to reduce exposure levels.

   

We continued our disciplined expense management while investing in our businesses. Noninterest expense of $2.2 billion declined $56 million, or 3%, compared with the third quarter of 2009 primarily due to higher acquisition-related cost savings.

   

We achieved acquisition cost savings of $1.7 billion on an annualized basis in the third quarter of 2010, well ahead of the original target amount and schedule, and are on track to meet our higher goal of $1.8 billion by the end of 2010.

   

The July 1, 2010 sale of GIS resulted in an after-tax gain of $328 million reported in discontinued operations. Goodwill and other intangible assets net of deferred income taxes removed from the Consolidated Balance Sheet as a result of the transaction were $1.1 billion.

Credit Quality Highlights

   

Overall credit quality showed continued signs of improvement during the third quarter of 2010. Net charge-offs to average loans improved to 1.61% in the third quarter from 2.18% in the second quarter of 2010. Nonperforming assets declined $235 million to $5.7 billion as of September 30, 2010. Delinquencies continued to improve during the quarter. The allowance for loan and lease losses was $5.2 billion, or 3.48% of total loans and 108% of nonperforming loans, as of September 30, 2010.

Balance Sheet Highlights

   

PNC remains committed to responsible lending to support economic growth. Loans and commitments originated and renewed totaled approximately $39 billion in the third quarter and $112 billion for the first nine months of 2010, including $2.6 billion of small business loans. Total loans were $150.1 billion at September 30, 2010 and decreased $4.2 billion compared with June 30, 2010 primarily due to loan repayments, dispositions and net charge-offs that exceeded customer loan demand.

   

Total deposits were $179.2 billion at September 30, 2010. Transaction deposits grew $2.5 billion, or 2%, while certificates of deposit declined by $2.0 billion, or 5%, compared with June 30, 2010 further reducing the average rate paid on deposits by 3 basis points to .68% in the third quarter.

   

PNC’s well-positioned balance sheet reflected core funding with a loan to deposit ratio of 84% at September 30, 2010 and a strong bank liquidity position to support growth.

   

Investment securities of $63.5 billion at September 30, 2010 increased by 18% compared with June 30, 2010 as excess liquidity was invested in short duration, high quality securities.

   

The Tier 1 common capital ratio was 9.6% at September 30, 2010, up from 8.3% at June 30, 2010 and 6.0% at December 31, 2009.

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 third quarter and first nine months of 2010 and 2009.


 

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AVERAGE CONSOLIDATED BALANCE SHEET HIGHLIGHTS

Various seasonal and other factors impact our period-end balances whereas average balances are generally more indicative of underlying business trends apart from the impact of acquisitions, divestitures and consolidations of variable interest entities.

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

Total average assets were $265.4 billion for the first nine months of 2010 compared with $278.6 billion for the first nine months of 2009.

Average interest-earning assets were $225.1 billion for the first nine months of 2010, compared with $241.0 billion in the first nine months of 2009. Decreases of $13.1 billion in loans and $6.5 billion in other interest-earning assets, partially offset by a $5.3 billion increase in investment securities, drove the decrease in average interest-earning assets.

The decrease in average total loans reflected a decline in commercial loans of $8.6 billion, commercial real estate loans of $4.1 billion and residential mortgage loans of $3.3 billion, partially offset by an increase of $2.9 billion in consumer loans.

Loans represented 69% of average interest-earning assets for the first nine months of 2010 and 70% for the first nine months of 2009.

Average securities available for sale increased $2.0 billion, to $49.4 billion, in the first nine months of 2010 compared with the first nine months of 2009. Average US Treasury and government agencies securities increased $4.2 billion while average other debt securities increased $1.4 billion in the comparison. These increases were partially offset by a decline of $2.9 billion in average non-agency residential mortgage-backed securities and a decline of $.8 billion in commercial mortgage-backed securities.

Average securities held to maturity increased $3.3 billion, to $7.2 billion, in the first nine months of 2010 compared with the first nine months of 2009. The increase reflected purchases of asset-backed and non-agency commercial mortgage-backed securities, the transfer of securities from the available for sale portfolio, and the impact of the Market Street Funding LLC (Market Street) consolidation effective January 1, 2010.

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

Average noninterest-earning assets totaled $40.3 billion in the first nine months of 2010 compared with $37.6 billion in the prior year period.

Average total deposits were $182.0 billion for the first nine months of 2010 compared with $191.2 billion for the first nine months of 2009. Average deposits declined from the prior year period primarily as a result of decreases in retail certificates of deposit and other time deposits, which were partially offset by an increase in transaction deposits. Total deposits at September 30, 2010 were $179.2 billion compared with $186.9 billion at December 31, 2009 and are further discussed within the Consolidated Balance Sheet Review section of this Report.

Average total deposits represented 69% of average total assets for both the first nine months of 2010 and the first nine months of 2009.

Average transaction deposits were $127.2 billion for the first nine months of 2010 compared with $118.7 billion for the first nine months of 2009.

Average borrowed funds were $40.8 billion for the first nine months of 2010 compared with $45.7 billion for the first nine months of 2009. A $6.7 billion decline in Federal Home Loan Bank borrowings drove the decline in the comparison, partially offset by higher average commercial paper borrowings that reflected the consolidation of Market Street. Total borrowed funds at September 30, 2010 were $39.8 billion compared with $39.3 billion at December 31, 2009 and are further discussed within the Consolidated Balance Sheet Review section of this Report. In addition, the Liquidity Risk Management portion of the Risk Management section of this Report includes additional information regarding our sources and uses of borrowed funds.

LINE OF BUSINESS HIGHLIGHTS

We have six reportable business segments:

   

Retail Banking

   

Corporate & Institutional Banking

   

Asset Management Group

   

Residential Mortgage Banking

   

BlackRock

   

Distressed Assets Portfolio

Total business segment earnings were $2.0 billion for the first nine months of 2010 and $1.8 billion for the first nine months of 2009. Highlights of results for the first nine months and third quarter of 2010 and 2009 are included below. The Business Segments Review section of this Financial Review includes a Results of Business-Summary table and further analysis of our business segment results over the first nine months of 2010 and 2009 including presentation differences from Note 19 Segment Reporting.

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


 

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Retail Banking

Retail Banking earned $97 million for the first nine months of 2010 compared with earnings of $161 million for the same period a year ago. Earnings declined from the prior year due primarily due to lower revenues as a result of lower interest credits assigned to deposits and a decline in fees which were partially offset by well-managed expenses. Retail Banking continued to maintain its focus on growing customers and deposits, customer and employee satisfaction, investing in the business for future growth, as well as, disciplined expense management during this period of market and economic uncertainty.

Retail Banking had a loss of $7 million in the third quarter of 2010 compared with earnings of $50 million in the third quarter of 2009. Earnings decreased from the prior year quarter due to a decline in fees, a higher provision for credit losses and lower net interest income.

Corporate & Institutional Banking

Corporate & Institutional Banking earned $1.2 billion in the first nine months of 2010 compared with $775 million in the first nine months of 2009. Significantly higher earnings for the first nine months of 2010 reflected a lower provision for credit losses and lower noninterest expense which more than offset declines in net interest income and noninterest income compared with the 2009 period.

Corporate & Institutional Banking earned $427 million in the third quarter of 2010 compared with $309 million in the third quarter of 2009. The increase in earnings compared with third quarter 2009 was primarily due to a lower provision for credit losses driven by reduced exposure levels along with positive credit migration.

Asset Management Group

Asset Management Group earned $112 million for the first nine months of 2010 compared with $82 million for the same period in 2009. Assets under administration were $206 billion at September 30, 2010 and $217 billion at September 30, 2009. The first nine months of 2010 reflected a lower provision for credit losses, lower expenses from disciplined expense management and higher noninterest income. These improvements were partially offset by a decrease in net interest income from lower yields on loans.

Earnings for Asset Management Group totaled $44 million for the third quarter of 2010 compared with $35 million for the third quarter of 2009. The increase in earnings from the prior year quarter reflected a benefit from the provision for credit losses and lower expenses that more than offset a decline in revenue.

Residential Mortgage Banking

Residential Mortgage Banking earned $272 million for the first nine months of 2010 compared with $410 million in the first nine months of 2009. Earnings decreased from the first nine months of 2009 primarily due to reduced loan sales revenue and lower net hedging gains on mortgage servicing rights, partially offset by lower noninterest expense.

Residential Mortgage Banking earned $98 million in the third quarter of 2010 compared with $91 million for the third quarter of 2009. Higher net hedging gains on mortgage servicing rights and lower expenses in the 2010 quarter more than offset a decline in net interest income and a higher provision for credit losses.

BlackRock

Our BlackRock business segment earned $253 million in the first nine months of 2010 and $151 million in the first nine months of 2009. Third quarter 2010 business segment earnings from BlackRock were $99 million compared with $74 million in the third quarter of 2009. The benefits of BlackRock’s December 2009 acquisition of Barclays Global Investors (BGI) and improved capital markets conditions contributed to higher earnings at BlackRock.

Distressed Assets Portfolio

The Distressed Assets Portfolio earned $8 million for the first nine months of 2010 compared with $172 million for the first nine months of 2009. A $288 million increase in the provision for credit losses was the primary factor driving the decrease in earnings in the comparison.

For the third quarter of 2010, Distressed Assets Portfolio had earnings of $17 million compared with $14 million for the third quarter of 2009. Higher net interest income and lower expenses more than offset the impact of lower noninterest income and a higher provision for credit losses.

Other

“Other” reported earnings of $232 million for the first nine months of 2010 compared with a net loss of $496 million for the first nine months of 2009. The net loss for the 2009 period included higher other-than-temporary impairment (OTTI) charges compared with the 2010 period, alternative investment writedowns, a $133 million special FDIC assessment, and equity management losses.

“Other” reported earnings of $97 million for the third quarter of 2010 compared with a net loss of $33 million for the third quarter of 2009.


 

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CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for the first nine months of 2010 was $2.6 billion compared with $1.3 billion for the first nine months of 2009. Net income for the third quarter of 2010 was $1.1 billion compared with $.6 billion for the third quarter of 2009. Total revenue for the first nine months of both 2010 and 2009 was $11.3 billion. Total revenue for the third quarter of 2010 decreased 7% to $3.6 billion from $3.9 billion for the third quarter of 2009.

NET INTEREST INCOME AND NET INTEREST MARGIN

 

     Three months ended
September 30
    Nine months ended
September 30
 
Dollars in millions    2010     2009     2010     2009  

Net interest income

   $ 2,215      $ 2,224      $ 7,029      $ 6,737   

Net interest margin

     3.96     3.76     4.18     3.72

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

The increase in net interest income for the first nine months of 2010 compared with the first nine months of 2009 resulted primarily from the impact of lower deposit and borrowing costs somewhat offset by lower loan volume and lower revenue from our investment securities portfolio. Our deposit strategy included the retention and repricing at lower rates of relationship-based certificates of deposit and the planned run off of maturing non-relationship certificates of deposit and brokered deposits.

The net interest margin was 4.18% for the first nine months of 2010 and 3.72% for the first nine months of 2009. The following factors impacted the comparison:

   

A decrease in the rate accrued on interest-bearing liabilities of 57 basis points. The rate accrued on interest-bearing deposits, the largest component, decreased 52 basis points.

   

A decrease in the yield on interest-earning assets of 3 basis points. The yield on loans, the largest portion of our interest-earning assets, increased 8 basis points but was more than offset by the 111 basis point decline in yield on investment securities.

   

The benefit of noninterest-bearing sources of funding decreased 8 basis points primarily due to the decline in interest rates.

The net interest margin was 3.96% for the third quarter of 2010 and 3.76% for the third quarter of 2009. The following factors impacted the comparison:

   

A decrease in the rate accrued on interest-bearing liabilities of 29 basis points. The rate accrued on interest-bearing deposits, the largest component, decreased 36 basis points.

   

A 6 basis point decrease in the yield on interest-earning assets. This decrease was driven by a 105 basis point decline in the yield on investment securities, partially offset by higher yields on loans.

   

In addition, the benefit of noninterest-bearing sources of funding decreased 3 basis points primarily due to the decline in interest rates.

We expect net interest income and margin to trend down in the fourth quarter of 2010 but at a slower pace than we experienced from the second quarter of 2010 to the third quarter of 2010. We believe that lower purchase accounting accretion, continued soft loan demand and the low interest rate environment will contribute to lower net interest income and margin in the fourth quarter of 2010 compared with the third quarter of 2010.

NONINTEREST INCOME

Summary

Noninterest income totaled $4.2 billion for the first nine months of 2010, a decline of $361 million or 8% compared with the first nine months of 2009. Decreases in residential mortgage loan sales revenue, the value of commercial mortgage servicing rights and net hedging gains on residential mortgage servicing rights, along with lower service charges on deposits, were the primary factors in the comparison. Partially offsetting these items were lower OTTI charges and higher asset management fees.

Noninterest income totaled $1.4 billion for the third quarter of 2010, a decline of $246 million or 15% compared with the third quarter of 2009. This decrease was mainly due to the decrease in overdraft charges, the reduction in value of commercial mortgage servicing rights and third quarter 2009 gains on sales of commercial loans.

Additional Analysis

Asset management revenue was $751 million in the first nine months of 2010 compared with $639 million in the first nine months of 2009. Asset management revenue was $249 million in the third quarter of 2010 compared with $242 million in the third quarter of 2009. These increases reflected higher equity earnings from our BlackRock investment, improved equity markets and client growth. Discretionary assets under management at September 30, 2010 totaled $105 billion compared with $104 billion at September 30, 2009.

For the first nine months of 2010, consumer services fees totaled $939 million compared with $975 million in the first nine months of 2009. Consumer services fees were $328


 

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million for the third quarter of 2010 compared with $330 million for the third quarter of 2009. Lower consumer service fees for 2010 in both comparisons reflected lower brokerage fees and the impact of the consolidation of the securitized credit card portfolio, partially offset by higher volume-related transaction fees. As further discussed in the Retail Banking section of the Business Segments Review portion of this Financial Review, we expect that the Credit CARD Act of 2009 will negatively impact full year 2010 revenues by approximately $75 million, a portion of which will be in the fourth quarter of 2010.

Corporate services revenue totaled $712 million in the first nine months of 2010 and $761 million in the first nine months of 2009. Corporate services revenue declined in the third quarter of 2010 to $183 million, compared with $252 million for the third quarter of 2009. The declines in both comparisons were largely the result of a reduction in the value of commercial mortgage servicing rights largely driven by lower interest rates, partially offset by higher merger and acquisition advisory and ancillary commercial mortgage servicing fees. Corporate services fees include the noninterest component of treasury management fees, which continued to be a strong contributor to revenue.

Residential mortgage revenue totaled $542 million in the first nine months of 2010 compared with $883 million in the first nine months of 2009. Third quarter 2010 residential mortgage revenue totaled $216 million compared with $207 million in the third quarter of 2009. The nine-month decline reflected reduced loan sales revenue given the strong loan origination refinance volume in 2009 and lower net hedging gains on mortgage servicing rights. Higher net hedging gains on mortgage servicing rights drove the third quarter 2010 increase.

Service charges on deposits totaled $573 million for the first nine months of 2010 and $714 million for the first nine months of 2009. Service charges on deposits totaled $164 million for the third quarter of 2010 compared with $248 million for the third quarter of 2009. The decrease in both instances was due to lower overdraft charges and required branch divestitures in the third quarter of 2009. As further discussed in the Retail Banking section of the Business Segments Review portion of this Financial Review, we expect that the new Regulation E rules related to overdraft charges will negatively impact our fourth quarter 2010 revenue by an estimated $100 million, or approximately $55 million more than its impact on the third quarter of 2010.

Net gains on sales of securities totaled $358 million for the first nine months of 2010 and $406 million for the first nine months of 2009. Third quarter net gains on sales of securities were $121 million in 2010 and $168 million in 2009.

The net credit component of OTTI of securities recognized in earnings was a loss of $281 million in the first nine months of

2010, including $71 million in the third quarter, compared with losses of $433 million and $129 million, respectively, for the same periods in 2009.

Other noninterest income totaled $650 million for the first nine months of 2010 compared with $660 million for the first nine months of 2009. Other noninterest income for the third quarter of 2010 totaled $193 million compared with $311 million for the third quarter of 2009. The third quarter of 2009 included $88 million of gains on sales of loans.

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

We believe that as the economy recovers, there will be greater opportunities for growth in client-related fee-based revenue.

PRODUCT REVENUE

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

Treasury management revenue, which includes fees as well as net interest income from customer deposit balances, totaled $919 million for the first nine months of 2010, an increase of $78 million or 9% compared with the first nine months of 2009. For the third quarter of 2010, treasury management revenue was $319 million, an increase of $38 million or 14% compared with the third quarter of 2009. These increases were primarily related to deposit growth and continued growth in legacy offerings such as purchasing cards and lockbox as well as services provided to the Federal government and healthcare customers.

Revenue from capital markets-related products and services totaled $411 million in the first nine months of 2010 compared with $346 million in the first nine months of 2009, an increase of $65 million or 19%. Higher underwriting, mergers and acquisition advisory fees, and syndications fees contributed to the improved results. Third quarter 2010 revenue was $119 million compared with $155 million for the third quarter of 2009, a decline of $36 million or 23%. The decline was driven by lower loan sale gains partially offset by increased mergers and acquisition advisory fees and syndications fees.


 

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

Commercial mortgage banking activities resulted in revenue of $146 million in the first nine months of 2010, a decrease of $206 million or 59% compared with the first nine months of 2009. For the third quarter of 2010, losses from commercial mortgage banking activities totaled $16 million compared with third quarter 2009 revenue of $119 million. These decreases were primarily due to valuations associated with commercial mortgage loans held for sale, net of hedges, higher impairment of mortgage servicing rights, and the sale during the second quarter 2010 of a duplicative agency servicing operation acquired as part of the National City transaction. These decreases were partially offset by higher ancillary commercial mortgage servicing fees.

PROVISION FOR CREDIT LOSSES

The provision for credit losses totaled $2.1 billion for the first nine months of 2010 compared with $2.9 billion for the first nine months of 2009. For the third quarter of 2010, the provision for credit losses totaled $486 million compared with $914 million for the third quarter of 2009. The lower provision in both comparisons reflected credit exposure reductions and overall improving credit migration during 2010.

We are optimistic about prospects for a stable-to-lower provision for credit losses in the fourth quarter of 2010 compared with the third quarter of 2010. Future provision levels will depend primarily on the level of nonperforming loans and the pace of economic recovery.

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 for the first nine months of 2010 was $6.3 billion compared with $6.9 billion for the first nine months of 2009, a decline of $591 million or 9%. The impact of higher cost savings related to the National City acquisition

and the reversal of certain accrued liabilities in the second quarter of 2010, including $73 million associated with a franchise tax settlement and $47 million associated with an indemnification for certain Visa litigation, were reflected in the lower nine-month expenses. Lower expenses in the first nine months of 2010 also reflected a special FDIC assessment, intended to build the FDIC’s Deposit Insurance Fund, of $133 million in the second quarter of 2009.

Noninterest expense totaled $2.2 billion in the third quarter of 2010, a decline of 3% compared with the third quarter of 2009. Noninterest expense declined compared with the year ago quarter primarily due to higher acquisition-related cost savings.

We expect noninterest expense to be lower in the fourth quarter of 2010 relative to the third quarter of 2010 primarily due to lower integration costs and an expected fourth quarter reduction in our Visa indemnification liability.

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

We achieved National City acquisition cost savings of $1.7 billion on an annualized basis in the third quarter of 2010, higher and earlier than our original goal of $1.2 billion, and are on track to meet our new goal of $1.8 billion by the end of 2010.

EFFECTIVE TAX RATE

The effective tax rate was 25.0% for the first nine months of 2010 compared with 21.4% for the first nine months of 2009. The tax rate was lower on a year-to-date basis in 2009 due to lower levels of pretax income in 2009 partially offset by the 2010 favorable IRS letter ruling noted below.

For the third quarter of 2010, our effective tax rate was 18.8% compared with 25.5% for the third quarter of 2009. The lower tax rate in the third quarter of 2010 was primarily the result of receiving a favorable IRS letter ruling in July 2010 that resolved a prior tax position and resulted in a tax benefit of $89 million.

We anticipate that the full year 2010 effective tax rate will be approximately 26%.


 

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CONSOLIDATED BALANCE SHEET REVIEW

SUMMARIZED BALANCE SHEET DATA

 

In millions    Sept. 30
2010
    

Dec. 31

2009

 

Assets

       

Loans

   $ 150,127       $ 157,543   

Investment securities

     63,461         56,027   

Cash and short-term investments

     7,188         13,290   

Loans held for sale

     3,275         2,539   

Goodwill and other intangible assets

     10,518         12,909   

Equity investments

     10,137         10,254   

Other

     15,427         17,301   

Total assets

   $ 260,133       $ 269,863   

Liabilities

       

Deposits

   $ 179,183       $ 186,922   

Borrowed funds

     39,763         39,261   

Other

     8,521         11,113   

Total liabilities

     227,467         237,296   

Total shareholders’ equity

     30,042         29,942   

Noncontrolling interests

     2,624         2,625   

Total equity

     32,666         32,567   

Total liabilities and equity

   $ 260,133       $ 269,863   

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

The decline in total assets at September 30, 2010 compared with December 31, 2009 was primarily due to decreases in loans and cash and short-term investments, partially offset by an increase in investment securities.

Total assets and liabilities at September 30, 2010 included $4.5 billion and $3.2 billion, respectively, related to Market Street and a credit card securitization trust as more fully described in the Off-Balance Sheet Arrangements And Variable Interest Entities section of this Financial Review and Note 3 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements of this Report.

An analysis of changes in selected balance sheet categories follows.

LOANS

A summary of the major categories of loans outstanding follows. Outstanding loan balances reflect unearned income, unamortized discount and premium, and purchase discounts and premiums totaling $2.8 billion at September 30, 2010 and $3.2 billion at December 31, 2009. The balances do not include future accretable net interest on the purchased impaired loans.

Loans decreased $7.4 billion, or 5%, as of September 30, 2010 compared with December 31, 2009. An increase in loans of $3.5 billion from the initial consolidation of Market Street and

the securitized credit card portfolio was more than offset by the impact of soft customer loan demand combined with loan repayments and payoffs in the distressed assets portfolio.

Loans represented 58% of total assets at both September 30, 2010 and at December 31, 2009. Commercial lending represented 52% of the loan portfolio and consumer lending represented 48% at September 30, 2010.

Commercial real estate loans represented 7% of total assets at September 30, 2010 and 9% of total assets at December 31, 2009.

Details Of Loans

 

In millions   

Sept. 30

2010

    

Dec. 31

2009

 

Commercial

       

Retail/wholesale

   $ 9,752       $ 9,515   

Manufacturing

     9,519         9,880   

Service providers

     8,747         8,256   

Real estate related (a)

     7,398         7,403   

Financial services

     3,773         3,874   

Health care

     3,169         2,970   

Other

     10,830         12,920   

Total commercial

     53,188         54,818   

Commercial real estate

       

Real estate projects

     13,021         15,582   

Commercial mortgage

     6,070         7,549   

Total commercial real estate

     19,091         23,131   

Equipment lease financing

     6,408         6,202   

TOTAL COMMERCIAL LENDING (b)

     78,687         84,151   

Consumer

       

Home equity

       

Lines of credit

     23,770         24,236   

Installment

     10,815         11,711   

Education

     8,819         7,468   

Automobile

     2,863         2,013   

Credit card and other unsecured lines of credit

     4,843         3,536   

Other

     3,846         4,618   

Total consumer

     54,956         53,582   

Residential real estate

       

Residential mortgage

     15,708         18,190   

Residential construction

     776         1,620   

Total residential real estate

     16,484         19,810   

TOTAL CONSUMER LENDING

     71,440         73,392   

Total loans

   $ 150,127       $ 157,543   
(a) Includes loans to customers in the real estate and construction industries.
(b) Construction loans with interest reserves, and A Note/B Note restructurings are not significant to PNC.

Total loans above include purchased impaired loans related to National City amounting to $8.1 billion, or 5% of total loans, at September 30, 2010, and $10.3 billion, or 7% of total loans, at December 31, 2009.

We are committed to providing credit and liquidity to qualified borrowers. Total loan originations and new


 

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commitments and renewals totaled $112 billion for the first nine months of 2010, including $39 billion in the third quarter.

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

Commercial lending is the largest category and is the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan and lease losses. 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. We established specific and pooled reserves on the total commercial lending category of $2.9 billion at September 30, 2010. This commercial lending reserve provided adequate and appropriate loss coverage on the higher risk commercial loans in the total commercial portfolio. The commercial lending reserve represented 56% of the total allowance for loan and lease losses of $5.2 billion at that date. The remaining 44% of the allowance for loan and lease losses pertained to the total consumer lending category. This category of loans is more homogenous in nature and has certain characteristics that can be assessed at a total portfolio level in terms of loans representing higher risk. We do not consider government insured/government guaranteed loans to be higher risk as we do not believe these loans will result in a significant loss because of their structure. Such loans are excluded from the following assessment of higher risk loans.

Our home equity lines of credit and installment loans outstanding totaled $34.6 billion at September 30, 2010. In this portfolio, we consider the higher risk loans to be those with a recent FICO credit score of less than or equal to 660 and an original loan-to-value ratio greater than 90%. Such loans totaled $1.2 billion or approximately 4% of the total home equity line of credit and installment loans at September 30, 2010. These higher risk loans were concentrated in our geographic footprint with 28% in

Pennsylvania, 13% in Ohio, 11% in New Jersey, 7% in Illinois, 6% in Michigan, and 5% in Kentucky, with the remaining loans dispersed across several other states. Option ARM loans and negative amortization loans in this portfolio were not significant. Within the higher risk home equity portfolio, approximately 12% are in some stage of delinquency and 6% are in late stage (90+ days) delinquency status.

In our $15.7 billion residential mortgage portfolio, loans with a recent FICO credit score of less than or equal to 660 and a recent loan-to-value ratio greater than 90% totaled $.7 billion and comprised approximately 4% of this portfolio at September 30, 2010. Twenty-three percent of the higher risk loans are located in California, 12% in Florida, 11% in Illinois, 8% in Maryland, 5% in Pennsylvania, and 5% in New Jersey, with the remaining loans dispersed across several other states. Option ARM loans and negative amortization loans in this portfolio were not significant. Within the higher risk residential mortgage portfolio of $.7 billion, approximately 47% are in some stage of delinquency and 36% are in 90+ days late stage delinquency status.

Within our broader home equity lines of credit, installment loans and residential mortgage portfolios, approximately 5% of the aggregate $50.3 billion loan outstandings have loan-to-value ratios in excess of 100%. The impact of housing price depreciation is reflected in the allowance for loans and lease losses as a result of the consumer reserve methodology process. The consumer reserve process is sensitive to collateral values which in turn affect loan loss severity. While our consumer reserve methodology strives to reflect all significant risk factors, there is an element of uncertainty associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information such as housing price depreciation. We provide additional reserves where appropriate to provide coverage for losses attributable to such risks.

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

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


 

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Valuation of Purchased Impaired Loans

 

     December 31, 2008      December 31, 2009      September 30, 2010  
Dollars in billions    Balance      Net
Investment
     Balance      Net
Investment
     Balance     Net
Investment
 

Commercial and commercial real estate loans:

                  

Unpaid principal balance

   $ 6.3          $ 3.5          $ 2.2       

Purchased impaired mark

     (3.4         (1.3         (.7    

Recorded investment

     2.9            2.2            1.5       

Allowance for loan losses

                 (.2         (.3    

Net investment

     2.9         46      2.0         57      1.2        55

Consumer and residential mortgage loans:

                  

Unpaid principal balance

     15.6            11.7            8.4       

Purchased impaired mark

     (5.8         (3.6         (1.8    

Recorded investment

     9.8            8.1            6.6       

Allowance for loan losses

                 (.3         (.6    

Net investment

     9.8         63      7.8         67      6.0        71

Total purchased impaired loans:

                  

Unpaid principal balance

     21.9            15.2            10.6       

Purchased impaired mark (a)

     (9.2         (4.9         (2.5    

Recorded investment

     12.7            10.3            8.1       

Allowance for loan losses

                 (.5         (.9 )(b)     

Net investment

   $ 12.7         58    $ 9.8         64    $ 7.2        68
(a) Comprised of $5.5 billion of nonaccretable principal cash flows and $3.7 billion of accretable total cash flows at December 31, 2008, $1.4 billion of nonaccretable principal cash flows and $3.5 billion of accretable total cash flows at December 31, 2009, and $.2 billion of nonaccretable principal cash flows and $2.3 billion of accretable total cash flows at September 30, 2010.
(b) Impairment reserves of $.9 billion at September 30, 2010 reflect impaired loans with further credit quality deterioration since acquisition. This deterioration was more than offset by the cash received to date in excess of recorded investment of $.6 billion and the net reclassification to accretable, to be recognized over time, of $.9 billion.

 

The unpaid principal balance of purchased impaired loans declined from $21.9 billion at December 31, 2008 to $10.6 billion at September 30, 2010 due to amounts determined to be uncollectible, payoffs and disposals. The remaining purchased impaired mark at September 30, 2010 was $2.5 billion which was a decline from $9.2 billion at December 31, 2008. The net investment of $12.7 billion at December 31, 2008 declined 43% to $7.2 billion at September 30, 2010 primarily due to payoffs, disposals and further impairment partially offset by accretion during 2009 and the first nine months of 2010. At September 30, 2010, our largest individual purchased impaired loan had a recorded investment of $21 million.

We currently expect to collect total cash flows of $9.5 billion on purchased impaired loans, representing the $7.2 billion net investment at September 30, 2010 and the accretable net interest of $2.3 billion shown in the Accretable Net Interest table that follows.

 

Purchase Accounting Accretion

 

     Three months ended
Sept. 30
    Nine months ended
Sept. 30
 
In millions    2010     2009     2010     2009  

Non-impaired loans

   $ 70      $ 172      $ 293      $ 662   

Impaired loans

     187        193        710        670   

Reversal of contractual interest on impaired loans

     (138     (167     (408     (584

Net impaired loans

     49        26        302        86   

Securities

     15        25        39        97   

Deposits

     122        231        433        807   

Borrowings

     (42     (58     (112     (195

Total

   $ 214      $ 396      $ 955      $ 1,457   

Cash received in excess of recorded investment from sales or payoffs of impaired commercial loans (cash recoveries) totaled $350 million for the first nine months of 2010, including $111 million in the third quarter. We do not expect this level of cash recoveries to be sustainable on a quarterly basis.


 

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Remaining Purchase Accounting Accretion

 

In billions    Dec. 31
2008
    Dec. 31
2009
    Sept. 30
2010
 

Non-impaired loans

   $ 2.4      $ 1.6      $ 1.3   

Impaired loans (a)

     3.7        3.5        2.3   

Total loans (gross)

     6.1        5.1        3.6   

Securities

     .2        .1        .1   

Deposits

     2.1        1.0        .6   

Borrowings

     (1.5     (1.2     (1.1

Total

   $ 6.9      $ 5.0      $ 3.2   
(a) Adjustments include purchase accounting accretion, reclassifications from non-accretable to accretable net interest as a result of increases in estimated cash flows, and reductions in the accretable amount as a result of the identification of additional purchased impaired loans as of the National City acquisition close date of December 31, 2008.

Accretable Net Interest – Purchased Impaired Loans

 

In billions        

January 1, 2010

   $ 3.5   

Accretion (including cash recoveries)

     (1.1

Net reclassifications to accretable from non-accretable

     .1   

Disposals

     (.2

September 30, 2010

   $ 2.3   

 

In billions        

January 1, 2009

   $ 3.7   

Accretion (including cash recoveries)

     (2.2

Adjustments resulting from changes in purchase price allocation

     .3   

Net reclassifications to accretable from non-accretable

     .9   

Disposals

     (.4

September 30, 2010

   $ 2.3   

Net unfunded credit commitments are comprised of the following:

Net Unfunded Credit Commitments

 

In millions    Sept. 30
2010
     Dec. 31
2009
 

Commercial / commercial real estate (a)

   $ 59,834       $ 60,143   

Home equity lines of credit

     19,500         20,367   

Consumer credit card and other unsecured lines

     16,478         18,800   

Other

     1,335         1,485   

Total

   $ 97,147       $ 100,795   
(a) Less than 4% of these amounts at each date relate to commercial real estate.

Unfunded commitments are concentrated in our primary geographic markets. Commitments to extend credit represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. Commercial commitments are reported net of participations, assignments and syndications, primarily to financial institutions, totaling $15.3 billion at September 30, 2010 and $13.2 billion at December 31, 2009.

Unfunded credit commitments related to the consolidation of Market Street totaled $3.4 billion at September 30, 2010 and are now a component of PNC’s total unfunded credit commitments. These amounts are included in the preceding table within the “Commercial / commercial real estate” category.

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

Unfunded liquidity facility commitments and standby bond purchase agreements totaled $509 million at September 30, 2010 and $6.2 billion at December 31, 2009 and are included in the preceding table primarily within the “Commercial / commercial real estate” category. Due to the consolidation of Market Street, $5.5 billion of unfunded liquidity facility commitments were no longer included in the amounts in the preceding table as of September 30, 2010.


 

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INVESTMENT SECURITIES

Details of Investment Securities

 

In millions    Amortized
Cost
     Fair
Value
 

September 30, 2010

       

SECURITIES AVAILABLE FOR SALE

       

Debt securities

       

US Treasury and government agencies

   $ 7,546       $ 7,883   

Residential mortgage-backed

       

Agency

     28,470         29,093   

Non-agency

     8,663         7,581   

Commercial mortgage-backed

       

Agency

     1,560         1,641   

Non-agency

     1,795         1,853   

Asset-backed

     2,897         2,702   

State and municipal

     1,578         1,601   

Other debt

     3,157         3,297   

Corporate stocks and other

     399         399   

Total securities available for sale

   $ 56,065       $ 56,050   

SECURITIES HELD TO MATURITY

       

Debt securities

       

Commercial mortgage-backed (non-agency)

   $ 4,378       $ 4,618   

Asset-backed

     3,024         3,104   

Other debt

     9         11   

Total securities held to maturity

   $ 7,411       $ 7,733   

December 31, 2009

       

SECURITIES AVAILABLE FOR SALE

       

Debt securities

       

US Treasury and government agencies

   $ 7,548       $ 7,520   

Residential mortgage-backed

       

Agency

     24,076         24,438   

Non-agency

     10,419         8,302   

Commercial mortgage-backed

       

Agency

     1,299         1,297   

Non-agency

     4,028         3,848   

Asset-backed

     2,019         1,668   

State and municipal

     1,346         1,350   

Other debt

     1,984         2,015   

Corporate stocks and other

     360         360   

Total securities available for sale

   $ 53,079       $ 50,798   

SECURITIES HELD TO MATURITY

       

Debt securities

       

Commercial mortgage-backed (non-agency)

   $ 2,030       $ 2,225   

Asset-backed

     3,040         3,136   

Other debt

     159         160   

Total securities held to maturity

   $ 5,229       $ 5,521   

The carrying amount of investment securities totaled $63.5 billion at September 30, 2010 and $56.0 billion at December 31, 2009. The increase in investment securities reflected a $5.3 billion increase in securities available for sale and a $2.2 billion increase in securities held to maturity as excess liquidity was invested in short duration, high quality securities. Investment securities represented 24% of total assets at September 30, 2010 and 21% at December 31, 2009.

We evaluate our portfolio of investment securities in light of changing market conditions and other factors and, where

appropriate, take steps intended to improve our overall positioning. 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 61% of the investment securities portfolio at September 30, 2010.

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

At September 30, 2010, the securities available for sale portfolio included a net unrealized loss of $15 million, which represented the difference between fair value and amortized cost. The comparable amount at December 31, 2009 was a net unrealized loss of $2.3 billion. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally decreases when credit spreads widen and vice versa.

The significant decline in the net unrealized loss from December 31, 2009 was primarily the result of lower market interest rates and improving liquidity and credit spreads on non-agency residential mortgage-backed and non-agency commercial mortgage-backed securities. Net unrealized gains and losses in the securities available for sale portfolio are included in shareholders’ equity as accumulated other comprehensive income or loss from continuing operations, net of tax.

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

The expected weighted-average life of investment securities (excluding corporate stocks and other) was 4.0 years at September 30, 2010 and 4.1 years at December 31, 2009.

We estimate that, at September 30, 2010, the effective duration of investment securities was 2.4 years for an immediate 50 basis points parallel increase in interest rates and 2.4 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2009 were 2.9 years and 2.5 years, respectively.


 

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

 

     September 30, 2010  
     Agency     Non-agency         
Dollars in millions    Residential
Mortgage-Backed
Securities
    Commercial
Mortgage-Backed
Securities
    Residential
Mortgage-Backed
Securities
    Commercial
Mortgage-Backed
Securities
    Asset-Backed
Securities
 

Fair Value – Available for Sale

   $ 29,093      $ 1,641      $ 7,581      $ 1,853      $ 2,702   

Fair Value – Held to Maturity

                             4,618        3,104   

Total Fair Value

   $ 29,093      $ 1,641      $ 7,581      $ 6,471      $ 5,806   

% of Fair Value:

                

By Vintage

                

2010

     23     29           6

2009

     22     39       3     15

2008

     9     6           17

2007

     14     3     17     10     12

2006

     7     6     23     30     13

2005 and earlier

     25     17     60     57     15

Not Available

                                     22

Total

     100     100     100     100     100

By Credit Rating

                

Agency

     100     100          

AAA

           8     87     72

AA

           4     5     6

A

           5     4     4

BBB

           4     3    

BB

           11     1     1

B

           19         4

Lower than B

           49         11

No rating

                                     2

Total

     100     100     100     100     100

By FICO Score

                

>720

           60         4

<720 and >660

           31         8

<660

                 3

No FICO score

     N/A        N/A        9     N/A        85

Total

                     100             100

 

We conduct a comprehensive security-level impairment assessment quarterly on all securities in an unrealized loss position to determine whether the loss represents OTTI. Our assessment considers the security structure, recent security collateral performance metrics, external credit ratings, failure of the issuer to make scheduled interest or principal payments, our judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts.

We also consider the severity of the impairment and the length of time that the security has been impaired in our assessment. Results of the periodic assessment are reviewed by a cross-

functional senior management team representing Asset & Liability Management, Finance, and Balance Sheet Risk Management. The senior management team considers the results of the assessments, as well as other factors, in determining whether the impairment is other-than-temporary.

We recognize the credit portion of OTTI charges in current earnings for those debt securities where there is no intent to sell and it is not more likely than not that we would be required to sell the security prior to expected recovery. The remaining portion of OTTI charges is included in accumulated other comprehensive loss.


 

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We recognized OTTI for the first nine months and third quarter of 2010 and 2009 as follows:

Other-Than-Temporary Impairments

 

    Three months ended
September 30
    Nine months ended
September 30
 
In millions   2010     2009     2010     2009  

Credit portion of OTTI losses (a)

  $ (71   $ (129   $ (281   $ (433

Noncredit portion of OTTI losses (b)

    (46     (272     (194     (1,107

Total OTTI losses

  $ (117   $ (401   $ (475   $ (1,540
(a) Reduction of noninterest income in our Consolidated Income Statement.
(b) Included in Accumulated other comprehensive loss on our Consolidated Balance Sheet.

 

Included below is detail on the net unrealized losses and OTTI credit losses recorded on non-agency residential and commercial mortgage-backed and other asset-backed securities, which represent 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 third quarter and first nine months of 2010 by investment type is included in Note 7 Investment Securities in the Notes To Consolidated Financial Statements of this Report.


 

     September 30, 2010  
In millions    Residential Mortgage-
Backed Securities
    Commercial Mortgage-
Backed Securities
   

Asset-Backed

Securities (a)

 

AVAILABLE FOR SALE SECURITIES (NON-AGENCY)

                     
     Fair
Value
     Net Unrealized
Gain (Loss)
    Fair
Value
     Net Unrealized
Gain (Loss)
    Fair
Value
     Net Unrealized
Gain (Loss)
 

Credit Rating Analysis

                     

AAA

   $ 580       $ (24   $ 1,131       $ 50      $ 1,527       $ 4   

Other Investment Grade (AA, A, BBB)

     1,027         (49     667         13        277         (6

Total Investment Grade

     1,607         (73     1,798         63        1,804         (2

BB

     798         (121     49         (7     2        

B

     1,436         (221     6         2        222         (39

Lower than B

     3,740         (667            641         (129

No Rating

                                       29         (25

Total Sub-Investment Grade

     5,974         (1,009     55         (5     894         (193

Total

   $ 7,581       $ (1,082   $ 1,853       $ 58      $ 2,698       $ (195

OTTI Analysis

                     

Investment Grade:

                     

OTTI has been recognized

   $ 62       $ (12              

No OTTI recognized to date

     1,545         (61   $ 1,798       $ 63      $ 1,804       $ (2

Total Investment Grade

     1,607         (73     1,798         63        1,804         (2

Sub-Investment Grade:

                     

OTTI has been recognized

     3,610         (838     18         (1     639         (160

No OTTI recognized to date

     2,364         (171     37         (4     255         (33

Total Sub-Investment Grade

     5,974         (1,009     55         (5     894         (193

Total

   $ 7,581       $ (1,082   $ 1,853       $ 58      $ 2,698       $ (195

SECURITIES HELD TO MATURITY (NON-AGENCY)

                     

Credit Rating Analysis

                     

AAA

          $ 4,510       $ 239      $ 2,676       $ 67   

Other Investment Grade (AA, A, BBB)

                      108         1        290         7   

Total Investment Grade

                      4,618         240        2,966         74   

BB

                   16        

B

                   2        

Lower than B

                   10        

No Rating

                                       98         6   

Total Sub-Investment Grade

                                       126         6   

Total

                    $ 4,618       $ 240      $ 3,092       $ 80   
(a) Table excludes $4 million and $12 million of available for sale and held to maturity agency asset-backed securities, respectively.

 

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Table of Contents

 

Residential Mortgage-Backed Securities

At September 30, 2010, our residential mortgage-backed securities portfolio was comprised of $29.1 billion fair value of US government agency-backed securities and $7.6 billion fair value of non-agency (private issuer) securities. The agency securities are generally collateralized by 1-4 family, conforming, fixed-rate residential mortgages. The non-agency securities are also generally collateralized by 1-4 family residential mortgages. The mortgage loans underlying the non-agency securities are generally non-conforming (i.e., original balances in excess of the amount qualifying for agency securities) and predominately have interest rates that are fixed for a period of time, after which the rate adjusts to a floating rate based upon a contractual spread that is indexed to a market rate (i.e., a “hybrid ARM”), or interest rates that are fixed for the term of the loan.

Substantially all of the securities are senior tranches in the securitization structure and have credit protection in the form of credit enhancement, over-collateralization and/or excess spread accounts.

During the first nine months of 2010, we recorded OTTI credit losses of $211 million on non-agency residential mortgage-backed securities, including $57 million in the third quarter. As of September 30, 2010, $207 million of the year-to-date credit losses related to securities rated below investment grade. As of September 30, 2010, the noncredit portion of OTTI losses recorded in accumulated other comprehensive loss for non-agency residential mortgage-backed securities totaled $850 million and the related securities had a fair value of $3.7 billion.

The fair value of sub-investment grade investment securities for which we have not recorded an OTTI credit loss as of September 30, 2010 totaled $2.4 billion, with unrealized net losses of $171 million. The results of our security-level assessments indicate that we will recover the entire cost basis of these securities. Note 7 Investment Securities in the Notes To Consolidated Financial Statements of this Report provides further detail regarding our process for assessing OTTI for these securities.

Commercial Mortgage-Backed Securities

The fair value of the non-agency commercial mortgage-backed securities portfolio was $6.5 billion at September 30, 2010 and consisted of fixed-rate, private-issuer securities collateralized by non-residential properties, primarily retail properties, office buildings, and multi-family housing. The agency commercial mortgage-backed securities portfolio was $1.6 billion fair value at September 30, 2010 consisting of multi-family housing. Substantially all of the securities are the most senior tranches in the subordination structure.

OTTI credit losses on commercial mortgage-backed securities for the first nine months of 2010 were not significant. In addition, the noncredit portion of OTTI losses recorded in

accumulated other comprehensive loss for commercial mortgage-backed securities and the fair value of the related securities at September 30, 2010 were not significant. The remaining fair value for which OTTI was previously recorded approximates zero.

Asset-Backed Securities

The fair value of the asset-backed securities portfolio was $5.8 billion at September 30, 2010 and consisted of fixed-rate and floating-rate, private-issuer securities collateralized primarily by various consumer credit products, including residential mortgage loans, credit cards, and automobile loans. Substantially all of the securities are senior tranches in the securitization structure and have credit protection in the form of credit enhancement, over-collateralization and/or excess spread accounts.

During the first nine months of 2010, we recorded OTTI credit losses of $67 million on asset-backed securities, including $14 million in the third quarter. All of the securities were collateralized by first and second lien residential mortgage loans and were rated below investment grade. As of September 30, 2010, the noncredit portion of OTTI losses recorded in accumulated other comprehensive loss for asset-backed securities totaled $160 million and the related securities had a fair value of $639 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, 2010, the remaining fair value was $381 million, with unrealized net losses of $27 million. The results of our security-level assessments indicate that we will recover the entire cost basis of these securities. Note 7 Investment Securities in the Notes To Consolidated Financial Statements of this Report provides further detail regarding our process for assessing OTTI for these securities.

If current housing and economic conditions were to continue for the foreseeable future or worsen, if market volatility and illiquidity were to continue or worsen, or if market interest rates were to increase appreciably, the valuation of our investment securities portfolio could continue to be adversely affected and we could incur additional OTTI credit losses that would impact our Consolidated Income Statement.

LOANS HELD FOR SALE

 

In millions  

Sept. 30

2010

    

Dec. 31

2009

 

Commercial mortgages at fair value

  $ 1,028       $ 1,050   

Commercial mortgages at lower of cost or market

    353         251   

Total commercial mortgages

    1,381         1,301   

Residential mortgages at fair value

    1,777         1,012   

Residential mortgages at lower of cost or market

    9            

Total residential mortgages

    1,786         1,012   

Other

    108         226   

Total

  $ 3,275       $ 2,539   

 

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Table of Contents

 

We stopped originating certain commercial mortgage loans designated as held for sale during the first quarter of 2008 and continue pursuing opportunities to reduce these positions at appropriate prices. We sold $82 million of commercial mortgage loans held for sale carried at fair value in the first nine months of 2010 and sold $234 million in the first nine months of 2009.

We recognized net losses of $6 million in the first nine months of 2010 on the valuation and sale of commercial mortgage loans held for sale, net of hedges, including net gains of $7 million in the third quarter. Net gains of $62 million on the valuation and sale of commercial mortgages loans held for sale, net of hedges, were recognized in the first nine months of 2009, including $28 million in the third quarter.

Residential mortgage loan origination volume was $7.0 billion in the first nine months of 2010. Substantially all such loans were originated to agency or FHA standards. We sold $6.6 billion of loans and recognized related gains of $165 million during the first nine months of 2010, of which $77 million occurred in the third quarter. The comparable amounts for the first nine months of 2009 were $17.0 billion and $409 million, respectively, including $83 million in the third quarter.

Interest income on loans held for sale was $208 million for the first nine months of 2010, including $55 million in the third quarter. Comparable amounts in 2009 were $195 million and $68 million, respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets totaled $10.5 billion at September 30, 2010 compared with $12.9 billion at December, 31, 2009. Goodwill declined $1.3 billion, to $8.2 billion, at September 30, 2010 compared with the year-end balance primarily due to the sale of GIS which reduced goodwill by $1.2 billion. The $1.1 billion decline in other intangible assets from December 31, 2009 included a $.5 billion decline in residential mortgage servicing rights and a $.3 billion decline in commercial mortgage servicing rights. Note 9 Goodwill and Other Intangible Assets included in the Notes To Consolidated Financial Statements of this Report provides further information on these items.

FUNDING AND CAPITAL SOURCES

Details Of Funding Sources

 

In millions    Sept. 30
2010
     Dec. 31
2009
 

Deposits

       

Money market

   $ 82,386       $ 85,838   

Demand

     45,811         40,406   

Retail certificates of deposit

     40,716         48,622   

Savings

     7,099         6,401   

Other time

     686         1,088   

Time deposits in foreign offices

     2,485         4,567   

Total deposits

     179,183         186,922   

Borrowed funds

       

Federal funds purchased and repurchase agreements

     4,661         3,998   

Federal Home Loan Bank borrowings

     7,106         10,761   

Bank notes and senior debt

     13,508         12,362   

Subordinated debt

     10,023         9,907   

Other

     4,465         2,233   

Total borrowed funds

     39,763         39,261   

Total

   $ 218,946       $ 226,183   

Total funding sources decreased $7.2 billion, or 3%, at September 30, 2010 compared with December 31, 2009.

Total deposits decreased $7.7 billion at September 30, 2010 compared with December 31, 2009. Deposits decreased in the comparison primarily due to declines in retail certificates of deposit and money market deposits partially offset by an increase in demand deposits.

Interest-bearing deposits represented 74% of total deposits at September 30, 2010 compared with 76% at December 31, 2009.

Total borrowed funds increased $.5 billion since December 31, 2009. Other borrowed funds increased $2.2 billion in the comparison primarily due to an increase in commercial paper borrowings of $2.3 billion with the consolidation of Market Street. Bank notes and senior debt increased $1.1 billion since year-end. These increases were partially offset by a decline of $3.7 billion in Federal Home Loan Bank borrowings since December 31, 2009.

Capital

PNC increased common equity during the first nine months of 2010 as outlined below. We manage our capital position by making adjustments to our balance sheet size and composition, issuing debt, equity or hybrid instruments, executing treasury stock transactions, managing dividend policies and retaining earnings.


 

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Total shareholders’ equity increased $.1 billion, to $30.0 billion, at September 30, 2010 compared with December 31, 2009 and included the impact of the following:

   

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

   

An increase of $2.0 billion to retained earnings, and

   

A positive swing of $2.1 billion in accumulated other comprehensive income (loss) largely due to decreases in net unrealized securities losses as more fully described in the Investment Securities portion of this Consolidated Balance Sheet Review.

The factors above were mostly offset by a decline of $7.3 billion in capital surplus preferred stock in connection with our February 2010 redemption of the Series N (TARP) Preferred Stock as explained further in Note 14 Total Equity And Other Comprehensive Income in the Notes To Consolidated Financial Statements in this Report.

Common shares outstanding were 526 million at September 30, 2010 and 462 million at December 31, 2009. Our first quarter 2010 common stock offering referred to above drove this increase.

Since our acquisition of National City on December 31, 2008, we have increased total common shareholders’ equity by $11.9 billion, or 68%. We expect to continue to increase our common equity as a proportion of total capital through growth in retained earnings and will consider other capital opportunities as appropriate.

Our current common stock repurchase program permits us to purchase up to 25 million shares of PNC common stock on the open market or in privately negotiated transactions. This program will remain in effect until fully utilized or until modified, superseded or terminated. The extent and timing of share repurchases under this program will depend on a number of factors including, among others, market and general economic conditions, economic and regulatory capital considerations, alternative uses of capital, regulatory and contractual limitations, and the potential impact on our credit ratings. We did not purchase any shares during the first nine months of 2010 under this program and, as described in our 2009 Form 10-K, were restricted from doing so under the TARP Capital Purchase Program prior to our February 2010 redemption of the Series N Preferred Stock.

Risk-Based Capital

 

Dollars in millions    Sept. 30
2010
    Dec. 31
2009
 

Capital components

      

Shareholders’ equity

      

Common

   $ 29,394      $ 21,967   

Preferred

     648        7,975   

Trust preferred capital securities

     2,941        2,996   

Noncontrolling interests

     1,350        1,611   

Goodwill and other intangible assets

     (9,111     (10,652

Eligible deferred income taxes on goodwill and other intangible assets

     528        738   

Pension, other postretirement benefit plan adjustments

     402        542   

Net unrealized securities losses, after-tax

     86        1,575   

Net unrealized losses (gains) on cash flow hedge derivatives, after-tax

     (655     (166

Other

     (207     (63

Tier 1 risk-based capital

     25,376        26,523   

Subordinated debt

     5,143        5,356   

Eligible allowance for credit losses

     2,704        2,934   

Total risk-based capital

   $ 33,223      $ 34,813   

Tier 1 common capital

      

Tier 1 risk-based capital

   $ 25,376      $ 26,523   

Preferred equity

     (648     (7,975

Trust preferred capital securities

     (2,941     (2,996

Noncontrolling interests

     (1,350     (1,611

Tier 1 common capital

   $ 20,437      $ 13,941   

Assets

      

Risk-weighted assets, including off- balance sheet instruments and market risk equivalent assets

   $ 213,655      $ 232,257   

Adjusted average total assets

     255,800        263,103   

Capital ratios

      

Tier 1 risk-based

     11.9     11.4

Tier 1 common

     9.6        6.0   

Total risk-based

     15.6        15.0   

Leverage

     9.9        10.1   

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


 

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

Our Tier 1 risk-based capital ratio increased 50 basis points to 11.9% at September 30, 2010 from 11.4% at December 31, 2009. Our Tier 1 common capital ratio was 9.6% at September 30, 2010, an increase of 360 basis points compared with 6.0% at December 31, 2009. Increases in both ratios were attributable to retention of earnings in 2010, the first quarter 2010 equity offering, the third quarter 2010 sale of GIS, and lower risk-weighted assets. The increases in the Tier 1 risk-based capital ratio noted above were offset by the impact of the $7.6 billion first quarter 2010 redemption of the Series N (TARP) Preferred Stock. See Note 14 Total Equity And Other Comprehensive Income in the Notes To Consolidated Financial Statements in this Report for additional information regarding the Series N Preferred Stock redemption.

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

The access to, and cost of, funding 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.

 

OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

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

   

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

   

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

   

Note 18 Commitments and Guarantees and

   

Both Note 3 and Note 18 are in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

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


 

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

Consolidated VIEs – Carrying Value (a)

 

September 30, 2010

In millions

   Market
Street
     Credit Card
Securitization
Trust
   

Tax Credit

Investments (b)

    

Credit Risk

Transfer
Transaction

    Total  

Assets

                      

Cash and due from banks

            $ 2           $ 2   

Interest-earning deposits with banks

              5             5   

Investment securities

   $ 202                      202   

Loans

     2,094       $ 2,103           $ 447        4,644   

Allowance for loan and lease losses

          (213          (6     (219

Equity investments

              1,177             1,177   

Other assets

     339         3        435         10        787   

Total assets

   $ 2,635       $ 1,893      $ 1,619       $ 451      $ 6,598   

Liabilities

                      

Other borrowed funds

   $ 2,298       $ 523      $ 116           $ 2,937   

Accrued expenses

              79             79   

Other liabilities

     336                 187                 523   

Total liabilities

   $ 2,634       $ 523      $ 382               $ 3,539   
(a) Amounts represent carrying value on PNC’s Consolidated Balance Sheet.
(b) Amounts reported primarily represent LIHTC investments.

Consolidated VIEs

 

In millions   

Aggregate

Assets

    

Aggregate

Liabilities

 

September 30, 2010

       

Market Street

   $ 3,220       $ 3,226   

Credit Card Securitization Trust

     2,231         995   

Tax Credit Investments (a)

     1,631         417   

Credit Risk Transfer Transaction

     766         766   
 

December 31, 2009

       

Tax Credit Investments (a)

   $ 1,933       $ 808   

Credit Risk Transfer Transaction

     860         860   
(a) Amounts reported primarily represent LIHTC investments.

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

Non-Consolidated VIEs

 

In millions    Aggregate
Assets
     Aggregate
Liabilities
    

PNC Risk

of Loss

   

Carrying

Value of

Assets

   

Carrying

Value of
Liabilities

 

September 30, 2010

                  

Tax Credit Investments (a)

   $ 3,818       $ 2,028       $ 850      $ 850 (c)    $ 347 (d) 

Commercial Mortgage-Backed Securitizations (b)

     73,206         73,206         1,727        1,727 (e)     

Residential Mortgage-Backed Securitizations (b)

     47,585         47,585         1,936        1,930 (e)      6 (d) 

Collateralized Debt Obligations

     18                  2        2 (c)         

Total

   $ 124,627       $ 122,819       $ 4,515      $ 4,509      $ 353   
            
In millions    Aggregate
Assets
     Aggregate
Liabilities
     PNC Risk
of Loss
             

December 31, 2009

                

Market Street

   $ 3,698       $ 3,718       $ 6,155 (f)     

Tax Credit Investments (a)

     1,786         1,156         743       

Collateralized Debt Obligations

     23              2       

Total

   $ 5,507       $ 4,874       $ 6,900       
(a) Amounts reported primarily represent LIHTC investments. Aggregate assets and aggregate liabilities represent estimated balances due to limited availability of financial information associated with certain acquired partnerships.

 

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(b) Amounts reported reflect involvement with securitization SPEs where PNC transferred to and/or services loans for a SPE and we hold securities issued by that SPE. We also invest in other mortgage and asset-backed securities issued by third-party VIEs with which we have no continuing involvement. Further information on these securities is included in Note 7 Investment Securities and values disclosed represent our maximum exposure to loss for those securities’ holdings.
(c) Included in Equity investments on our Consolidated Balance Sheet.
(d) Included in Other liabilities on our Consolidated Balance Sheet.
(e) Included in Trading securities, Investment securities, Other intangible assets, and Other assets on our Consolidated Balance Sheet.
(f) PNC’s risk of loss consisted of off-balance sheet liquidity commitments to Market Street of $5.6 billion and other credit enhancements of $.6 billion at December 31, 2009.

 

Market Street

Market Street is a multi-seller asset-backed commercial paper conduit that is owned by an independent third party. Market Street’s activities primarily involve purchasing assets or making loans secured by interests in pools of receivables from US corporations that desire access to the commercial paper market. Market Street funds the purchases of assets or loans by issuing commercial paper and is supported by pool-specific credit enhancements, liquidity facilities and program-level credit enhancement. Generally, Market Street mitigates its potential interest rate risk by entering into agreements with its borrowers that reflect interest rates based upon its weighted average commercial paper cost of funds. During 2009 and the first nine months of 2010, Market Street met all of its funding needs through the issuance of commercial paper.

Market Street commercial paper outstanding was $2.3 billion at September 30, 2010 and $3.1 billion at December 31, 2009. The weighted average maturity of the commercial paper was 39 days at September 30, 2010 and 36 days at December 31, 2009.

During 2009, PNC Capital Markets, acting as a placement agent for Market Street, held a maximum daily position in Market Street commercial paper of $135 million with an average balance of $19 million. This compares with a maximum daily position and an average balance of zero for the first nine months of 2010. PNC Capital Markets owned no Market Street commercial paper at September 30, 2010 and December 31, 2009. PNC Bank, N.A. made no purchases of Market Street commercial paper during the first nine months of 2010.

Assets of Market Street (a)

 

In millions    Outstanding      Commitments      Weighted
Average
Remaining
Maturity
In Years
 

December 31, 2009

          

Trade receivables

   $ 1,551       $ 4,105         2.01   

Automobile financing

     480         480         4.20   

Auto fleet leasing

     412         543         .85   

Collateralized loan obligations

     126         150         .36   

Residential mortgage

     13         13         26.01   

Other

     534         567         1.65   

Cash and miscellaneous receivables

     582                     

Total

   $ 3,698       $ 5,858         2.06   
(a) Market Street did not recognize an asset impairment charge or experience any material rating downgrades during 2009.

 

Market Street Commitments by Credit Rating (a)

 

     

September 30,

2010

   

December 31,

2009

 

AAA/Aaa

     26     14

AA/Aa

     61        50   

A/A

     12        34   

BBB/Baa

     1        2   

Total

     100     100
(a) The majority of our facilities are not explicitly rated by the rating agencies. All facilities are structured to meet rating agency standards for applicable rating levels.

Perpetual Trust Securities

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

In February 2008, PNC Preferred Funding LLC (the LLC), one of our indirect subsidiaries, sold $375 million of 8.700% Fixed-to-Floating Rate Non-Cumulative Exchangeable Perpetual Trust Securities of PNC Preferred Funding Trust III (Trust III) to third parties in a private placement. In connection with the private placement, Trust III acquired $375 million of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Securities of the LLC (the LLC Preferred Securities). The sale was similar to the March 2007 private placement by the LLC of $500 million of 6.113% Fixed-to-Floating Rate Non-Cumulative Exchangeable Trust Securities (the Trust II Securities) of PNC Preferred Funding Trust II (Trust II) in which Trust II acquired $500 million of LLC Preferred Securities and to the December 2006 private placement by PNC REIT Corp. of $500 million of 6.517% Fixed-to-Floating Rate Non-Cumulative Exchangeable Perpetual Trust Securities (the Trust I Securities) of PNC Preferred Funding Trust I (Trust I) in which Trust I acquired $500 million of LLC Preferred Securities.

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

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


 

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

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

PNC Capital Trust E Trust Preferred Securities

In February 2008, PNC Capital Trust E issued $450 million of 7.75% Trust Preferred Securities due March 15, 2068 (the Trust E Securities). PNC Capital Trust E’s only assets are $450 million of 7.75% Junior Subordinated Notes due

March 15, 2068 and issued by PNC (the JSNs). The Trust E Securities are fully and unconditionally guaranteed by PNC. We may, at our option, redeem the JSNs at 100% of their principal amount on or after March 15, 2013.

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

Acquired Entity Trust Preferred Securities

As a result of the National City acquisition, we assumed obligations with respect to $2.4 billion in principal amount of junior subordinated debentures issued by the acquired entity. As a result of the Mercantile, Yardville and Sterling acquisitions, we assumed obligations with respect to $158 million in principal amount of junior subordinated debentures issued by the acquired entities. As described in Note 10 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in our Notes To Consolidated Financial Statements in this Report, in September 2010 we redeemed $71 million in principal amounts related to the junior subordinated debentures issued by the acquired entities. Under the terms of the outstanding debentures, if there is an event of default under the debentures or PNC exercises its right to defer payments on the related trust preferred securities issued by the statutory trusts or there is a default under PNC’s guarantee of such payment obligations, PNC would be subject during the period of such default or deferral to restrictions on dividends and other provisions protecting the status of the debenture holders similar to or in some ways more restrictive than those potentially imposed under the Exchange Agreements with Trust II and Trust III, as described above.

As more fully described in our 2009 Form 10-K, we are subject to replacement capital covenants with respect to four tranches of junior subordinated debentures inherited from National City as well as a replacement capital covenant with respect to our Series L Preferred Stock. As a result of a successful consent solicitation of the holders of our 6.875% Subordinated Notes due May 15, 2019, we terminated the replacement capital covenants with respect to these four tranches of junior subordinated debentures and our Series L Preferred Stock on November 5, 2010.


 

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FAIR VALUE MEASUREMENTS

In addition to the following, see Note 8 Fair Value in the Notes To Consolidated Financial Statements under Part 1, Item 1 of this Report for further information regarding fair value.

Assets recorded at fair value represented 28% and 23% of total assets at September 30, 2010 and December 31, 2009, respectively. The increase in the percentage of total assets recorded at fair value at September 30, 2010 compared with the prior year end was primarily due to increases in securities available for sale and financial derivatives. Liabilities recorded at fair value represented 3% and 2% of total liabilities at September 30, 2010 and December 31, 2009, respectively.

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

 

     Sept. 30, 2010     Dec. 31, 2009  
In millions    Total Fair
Value
    Level 3     Total Fair
Value
    Level 3  

Assets

            

Securities available for sale

   $ 56,050      $ 9,024      $ 50,798      $ 9,933   

Financial derivatives

     7,856        120        3,916        50   

Residential mortgage loans held for sale

     1,777            1,012       

Trading securities

     955        71        2,124        89   

Residential mortgage servicing rights

     788        788        1,332        1,332   

Commercial mortgage loans held for sale

     1,028        1,028        1,050        1,050   

Equity investments

     1,375        1,375        1,188        1,188   

Customer resale agreements

     921            990       

Loans

     90            107       

Other assets

     780        361        716        509   

Total assets

   $ 71,620      $ 12,767      $ 63,233      $ 14,151   

Level 3 assets as a percentage of total assets at fair value

       18       22

Level 3 assets as a percentage of consolidated assets

             5             5

Liabilities

            

Financial derivatives

   $ 6,233      $ 403      $ 3,839      $ 506   

Trading securities sold short

     872            1,344       

Other liabilities

     8                6           

Total liabilities

   $ 7,113      $ 403      $ 5,189      $ 506   

Level 3 liabilities as a percentage of total liabilities at fair value

       6       10

Level 3 liabilities as a percentage of consolidated liabilities

             <1             <1

 

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

 

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


 

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BUSINESS SEGMENTS REVIEW

We have six reportable business segments:

   

Retail Banking

   

Corporate & Institutional Banking

   

Asset Management Group

   

Residential Mortgage Banking

   

BlackRock

   

Distressed Assets Portfolio

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

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

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

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

Total business segment financial results differ from total consolidated results from continuing operations before noncontrolling interests, which itself excludes the earnings and revenue attributable to GIS, including the related after-tax third quarter 2010 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 LTIP share distributions and obligations, integration costs, asset and liability management activities including net securities gains or losses and certain trading activities, exited businesses, equity management activities, alternative investments, intercompany eliminations, most corporate overhead, and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests.

Period-end Employees

 

     

Sept. 30

2010

    

Dec. 31

2009

    

Sept. 30

2009

 

Full-time employees

          

Retail Banking

     21,203         21,416         21,644   

Corporate & Institutional Banking

     3,660         3,746         3,861   

Asset Management Group

     2,971         2,969         3,076   

Residential Mortgage Banking

     3,339         3,267         3,606   

Distressed Assets Portfolio

     170         175         157   

Other

          

Operations & Technology

     8,689         9,249         9,373   

Staff Services and other (a)

     4,588         8,939         8,812   

Total Other

     13,277         18,188         18,185   

Total full-time employees

     44,620         49,761         50,529   

Retail Banking part-time employees

     4,799         4,737         4,859   

Other part-time employees

     974         1,322         1,520   

Total part-time employees

     5,773         6,059         6,379   

Total

     50,393         55,820         56,908   
(a) Includes employees of GIS 4,450 at December 31, 2009 and 4,561 at September 30, 2009. We sold GIS effective July 1, 2010.

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


 

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Results Of Businesses – Summary

(Unaudited)

 

     Income (Loss)     Revenue      Average Assets (a)  
Nine months ended September 30 – in millions    2010      2009     2010      2009      2010      2009  

Retail Banking (b)

   $ 97       $ 161      $ 4,101       $ 4,342       $ 67,380       $ 65,281   

Corporate & Institutional Banking

     1,230         775        3,537         3,889         77,764         86,391   

Asset Management Group

     112         82        665         701         7,043         7,367   

Residential Mortgage Banking

     272         410        774         1,152         8,903         8,289   

BlackRock

     253         151        326         191         6,275         4,599   

Distressed Assets Portfolio

     8         172        927         932         18,246         23,627   

Total business segments

     1,972         1,751        10,330         11,207         185,611         195,554   

Other (b) (c) (d)

     232         (496     943         135         79,744         83,006   

Income from continuing operations before noncontrolling interests (e)

   $ 2,204       $ 1,255      $ 11,273       $ 11,342       $ 265,355       $ 278,560   
(a) Period-end balances for BlackRock.
(b) Amounts for 2009 include the results of the 61 branches divested by early September 2009.
(c) For our segment reporting presentation in this Financial Review, “Other” for the first nine months of 2010 and 2009 included $309 million and $266 million, respectively, of pretax integration costs related to National City.
(d) “Other” average assets include securities available for sale associated with asset and liability management activities.
(e) Amounts are presented on a continuing operations basis and therefore exclude the earnings, revenue, and assets of GIS, including the third quarter 2010 gain on sale of GIS.

 

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RETAIL BANKING

(Unaudited)

 

Nine months ended September 30

Dollars in millions

  2010 (a)     2009 (b)  

INCOME STATEMENT

     

Net interest income

  $ 2,608      $ 2,689   

Noninterest income

     

Service charges on deposits

    556        701   

Brokerage

    161        186   

Consumer services

    673        662   

Other

    103        104   

Total noninterest income

    1,493        1,653   

Total revenue

    4,101        4,342   

Provision for credit losses

    946        921   

Noninterest expense

    3,007        3,158   

Pretax earnings

    148        263   

Income taxes

    51        102   

Earnings

  $ 97      $ 161   

AVERAGE BALANCE SHEET

     

Loans

     

Consumer

     

Home equity

  $ 26,538      $ 27,502   

Indirect

    3,960        4,049   

Education

    8,409        5,278   

Credit cards

    3,975        2,150   

Other consumer

    1,792        1,791   

Total consumer

    44,674        40,770   

Commercial and commercial real estate

    11,302        12,488   

Floor plan

    1,287        1,307   

Residential mortgage

    1,669        2,120   

Total loans

    58,932        56,685   

Goodwill and other intangible assets

    5,881        5,828   

Other assets

    2,567        2,768   

Total assets

  $ 67,380      $ 65,281   

Deposits

     

Noninterest-bearing demand

  $ 17,054      $ 16,238   

Interest-bearing demand

    19,654        18,327   

Money market

    40,045        39,401   

Total transaction deposits

    76,753        73,966   

Savings

    6,865        6,621   

Certificates of deposit

    42,749        54,765   

Total deposits

    126,367        135,352   

Other liabilities

    1,602        58   

Capital

    8,187        8,564   

Total liabilities and equity

  $ 136,156      $ 143,974   

PERFORMANCE RATIOS

     

Return on average capital

    2     3

Return on average assets

    .19        .33   

Noninterest income to total revenue

    36        38   

Efficiency

    73        73   

OTHER INFORMATION (c)

     

Credit-related statistics:

     

Commercial nonperforming assets

  $ 262      $ 311   

Consumer nonperforming assets

    400        191   

Total nonperforming assets (d)

  $ 662      $ 502   

Impaired loans (e)

  $ 939      $ 1,161   

Commercial lending net charge-offs

  $ 281      $ 242   

Credit card lending net charge-offs (on balance sheet)

    248        152   

Consumer lending (excluding credit card) net charge-offs

    316        293   

Total net charge-offs

  $ 845      $ 687   

Commercial lending annualized net charge-off ratio

    2.98     2.35

Credit card annualized net charge-off ratio (on balance sheet)

    8.34     9.45

Consumer lending (excluding credit card) annualized net charge-off ratio

    1.00     .96

Total annualized net charge-off ratio

    1.92     1.62

Other statistics:

     

ATMs

    6,626        6,463   

Branches (f)

    2,461        2,554   

At September 30

Dollars in millions, except as noted

  2010 (a)     2009 (b)  

OTHER INFORMATION (CONTINUED) (C)

               

Home equity portfolio credit statistics:

     

% of first lien positions (g)

    35     35

Weighted average loan-to-value ratios (g)

    73     74

Weighted average FICO scores (h)

    725        727   

Annualized net charge-off ratio

    .87     .70

Loans 30 – 89 days past due

    .79     .75

Loans 90 days past due

    .94     .73

Customer-related statistics:

     

Retail Banking checking relationships (i)

    5,461,000        5,392,000   

Retail online banking active customers

    2,968,000        2,682,000   

Retail online bill payment active customers

    942,000        753,000   

Brokerage statistics:

     

Financial consultants (j)

    713        655   

Full service brokerage offices

    40        42   

Brokerage account assets (billions)

  $ 31      $ 30   
(a) Information for 2010 reflects the impact of the consolidation in our financial statements for the securitized credit card portfolio of approximately $1.6 billion of credit card loans as of January 1, 2010.
(b) PNC completed the required divestiture of 61 branches in early September 2009. Amounts for periods prior to the divestiture included the impact of those branches.
(c) Presented as of September 30 except for net charge-offs and annualized net charge-off ratios, which are for the nine months ended.
(d) Includes nonperforming loans of $638 million at September 30, 2010 and $490 million at September 30, 2009.
(e) Recorded investment of purchased impaired loans related to National City, adjusted to reflect additional loan impairments effective December 31, 2008.
(f) Excludes certain satellite branches that provide limited products and/or services.
(g) Includes loans from acquired portfolios for which lien position and loan-to-value information is not available.
(h) Represents the most recent FICO scores we have on file.
(i) Retail checking relationships for the prior period presented have been refined subsequent to completion of application system conversion activities related to the National City acquisition.
(j) Financial consultants provide services in full service brokerage offices and PNC traditional branches.

Retail Banking earned $97 million for the first nine months of 2010 compared with earnings of $161 million for the same period a year ago. Earnings declined from the prior year primarily due to lower revenues as a result of lower interest credits assigned to deposits and a decline in fees which were partially offset by well-managed expenses. Retail Banking continued to maintain its focus on growing customers and deposits, customer and employee satisfaction, investing in the business for future growth, as well as disciplined expense management during this period of market and economic uncertainty.

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

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

   

PNC successfully completed the conversion of customers at over 1,300 branches across nine states from National City Bank to PNC, providing further growth opportunities throughout our expanded footprint.


 

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Success in implementing Retail Banking’s deposit strategy resulted in growth in average demand deposits of $2.1 billion, or 6%, over the prior year. Excluding approximately $0.9 billion of average demand deposits from year-to-date 2009 balances related to the 61 required branch divestitures completed in early September 2009, average demand deposits increased $3.0 billion, or 9%, over the prior year.

   

Growth in demand deposits reflected the continued focus of Retail Banking on expanding and deepening customer relationships. Checking relationships grew by 67,000 from the beginning of 2010, better than expected in consideration of the impact of branch conversion activities in many markets. Markets not impacted by conversion activities had strong checking relationship results, and we have seen improved sales momentum in the acquired markets post-conversion, as a result of implementing our business model.

   

Our investment in online banking capabilities continues to pay off. Active online bill payment and active online banking customers grew by 21% and 8%, respectively, during the first nine months of 2010. In a year-over-year comparison, active online bill pay and active online banking customers have increased 25% and 11%, respectively.

   

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

   

PNC’s expansive branch footprint covers nearly one-third of the U.S. population with a network of 2,461 branches and 6,626 ATM machines at September 30, 2010. We continue to invest in the branch network. In the first nine months of 2010, we opened 17 traditional and 18 in-store branches, and consolidated 87 branches. The decrease in branches was primarily driven by acquisition-related branch consolidations.

Total revenue for the first nine months of 2010 was $4.1 billion compared with $4.3 billion for the same period in 2009. Net interest income of $2.6 billion declined $81 million compared with the first nine months of 2009. Net interest income was negatively impacted by lower interest credits assigned to deposits, reflective of the rate environment, and benefited from the consolidation of the securitized credit card portfolio, higher demand deposits, and increased education loans.

Noninterest income declined $160 million over the first nine months of 2009. The decrease was due to a decrease in service charges on deposits related to lower overdraft charges, the negative impact of the consolidation of the securitized credit card portfolio, lower brokerage fees, and the impact of the

required branch divestitures partially offset by, higher transaction volume-related fees within consumer services.

In 2010, Retail Banking revenues are negatively impacted by the implementation of new federal regulations. These regulations include: 1) the new rules set forth in Regulation E related to overdraft charges, 2) the Credit CARD Act of 2009, and 3) the education lending portions of the Health Care and Education Reconciliation Act of 2010 (HCERA).

The negative impact of Regulation E on revenue for the fourth quarter of 2010 is expected to be approximately $100 million, or approximately $55 million more than its impact on the third quarter of 2010. Additionally, the full year 2010 negative impact of the Credit CARD Act on revenues will be approximately $75 million. A portion of this impact will be in the fourth quarter of 2010. These estimates do not include additional impacts to revenue for other changes that may be made in 2010 responding to market conditions, or other/additional regulatory requirements, or any offsetting impact of changes to products and/or pricing.

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

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

The provision for credit losses was $946 million through September 30, 2010 compared with $921 million over the same period in 2009. Net charge-offs were $845 million for the first nine months of 2010 compared with $687 million in the same period last year. The year-over-year increase in provision and net charge-offs is due to the deteriorating economy that occurred throughout 2009, as well as an increase of $1.8 billion in average credit card loans primarily due to the consolidation of the $1.6 billion of credit card loans as of January 1, 2010, as previously mentioned. Credit quality has shown signs of stabilization during the first nine months of 2010 with a declining net charge-off trend in each of the first three quarters.

Noninterest expense for the first nine months of the year declined $151 million from the same period last year. Expenses were well-managed as continued investments in distribution channels were more than offset by acquisition cost savings and the required branch divestitures.


 

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

In the first nine months of 2010, average total deposits decreased $9.0 billion, or 7%, compared with 2009.

   

Average demand deposits increased $2.1 billion, or 6%, over the first nine months of 2009. The increase was primarily driven by customer growth and customer preferences for liquidity.

   

Average money market deposits increased $644 million, or 2%, from the first nine months of 2009. The increase was primarily due to core money market growth as customers generally prefer more liquid deposits in a low rate environment.

   

In the first nine months of 2010, average certificates of deposit decreased $12.0 billion from the same period last year. A continued decline in certificates of deposit is expected in the fourth quarter of 2010 due to the planned run off of higher rate certificates of deposit that were primarily obtained through the National City acquisition.

Currently, we plan to maintain our focus on a relationship-based lending strategy that targets specific customer sectors (mass consumers, homeowners, students, small businesses and auto dealerships) and our moderate risk lending approach. In the first nine months of 2010, average total loans were $58.9 billion, an increase of $2.2 billion, or 4%, over the same period last year.

   

Average education loans grew $3.1 billion compared with the first nine months of 2009 primarily due to increases in federal loan volumes as a result of non-bank competitors exiting from the business, portfolio purchases, and the impact of our current strategy of holding education loans on the balance sheet. As previously noted, the federally guaranteed portion of this business was essentially eliminated going forward beginning July 1, 2010 due to HCERA.

   

Average credit card balances increased $1.8 billion over the first nine months of 2009. The increase was primarily the result of the consolidation of the securitized credit card portfolio effective January 1, 2010.

   

Average home equity loans declined $964 million over the same period of 2009. Consumer loan demand has slowed as a result of the current economic environment. The decline is driven by loan demand being outpaced by paydowns, refinancings, and charge-offs. Retail Banking’s home equity loan portfolio is relationship based, with 96% of the portfolio attributable to borrowers in our primary geographic footprint. The nonperforming assets and charge-offs that we have experienced are within our expectations given current market conditions.

   

Average commercial and commercial real estate loans declined $1.2 billion compared with the first nine months of 2009. The decline was primarily due to loan demand being outpaced by refinancings, paydowns, charge-offs and the required branch divestitures (approximately $0.3 billion of the decline on average).


 

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CORPORATE & INSTITUTIONAL BANKING

(Unaudited)

 

Nine months ended September 30

Dollars in millions except as noted

   2010 (a)      2009  

INCOME STATEMENT

       

Net interest income

   $ 2,633       $ 2,824   

Noninterest income

       

Corporate service fees