Note 7 Investment Securities

Investment Securities Summary

			Amortized		Unrealized						Fair
In millions			Cost		Gains			Losses			Value
September 30, 2011

Securities Available for Sale
Debt securities
	US Treasury and government agencies		$	3,397		$	354			$	3,751
	Residential mortgage-backed
		Agency		26,963			799	$	(79)		27,683
		Non-agency		6,949			187		(1,148)		5,988
	Commercial mortgage-backed
		Agency		956			35				991
		Non-agency		2,646			53		(53)		2,646
	Asset-backed			3,914			32		(195)		3,751
	State and municipal			1,714			65		(51)		1,728
	Other debt			2,741			96		(12)		2,825
		Total debt securities		49,280			1,621		(1,538)		49,363
Corporate stocks and other				352							352
	Total securities available for sale		$	49,632		$	1,621	$	(1,538)	$	49,715
Securities Held to Maturity
Debt securities
	US Treasury and government agencies		$	219		$	37			$	256
	Residential mortgage-backed (agency)			4,588			104				4,692
	Commercial mortgage-backed
		Agency		1,290			41				1,331
		Non-agency		3,770			106	$	(5)		3,871
	Asset-backed			1,489			22		(3)		1,508
	State and municipal			670			19				689
	Other debt			364			13				377
	Total securities held to maturity		$	12,390		$	342	$	(8)	$	12,724

December 31, 2010

Securities Available for Sale
Debt securities
	US Treasury and government agencies		$	5,575		$	157	$	(22)	$	5,710
	Residential mortgage-backed
		Agency		31,697			443		(420)		31,720
		Non-agency		8,193			230		(1,190)		7,233
	Commercial mortgage-backed
		Agency		1,763			40		(6)		1,797
		Non-agency		1,794			73		(11)		1,856
	Asset-backed			2,780			40		(238)		2,582
	State and municipal			1,999			30		(72)		1,957
	Other debt			3,992			102		(17)		4,077
		Total debt securities		57,793			1,115		(1,976)		56,932
Corporate stocks and other				378							378
	Total securities available for sale		$	58,171		$	1,115	$	(1,976)	$	57,310
Securities Held to Maturity
Debt securities
	Commercial mortgage-backed (non-agency)		$	4,316		$	178	$	(4)	$	4,490
	Asset-backed			2,626			51		(1)		2,676
	Other debt			10			1				11
	Total securities held to maturity		$	6,952		$	230	$	(5)	$	7,177

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the securities available for sale portfolio are included in shareholders' equity as accumulated other comprehensive income or loss, net of tax, unless credit-related.

The gross unrealized loss on debt securities held to maturity was $8 million at September 30, 2011 and $5 million at December 31, 2010, with $.6 billion and $.7 billion of positions in a continuous loss position for less than 12 months at September 30, 2011 and December 31, 2010, respectively. The gross unrealized loss and fair value on debt securities held to maturity that were in a continuous loss position for 12 months or more were not significant at both September 30, 2011 and December 31, 2010. The unrealized loss at September 30, 2011 relates primarily to non-agency commercial mortgage-backed securities.

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

In the second quarter of 2011, we transferred available for sale securities with a fair value of $3.4 billion to the held to maturity portfolio. The reclassification was made at fair value at the date of transfer and was a non-cash transaction. Net pretax unrealized gains in accumulated other comprehensive income totaled $40 million at the transfer date and will be accreted over the remaining life of the related securities as an adjustment of yield in a manner consistent with the amortization of the premium on the same transferred securities, resulting in no impact on net income.

The following table presents gross unrealized loss and fair value of securities available for sale at September 30, 2011 and December 31, 2010. The securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and twelve months or more based on the point in time the fair value declined below the amortized cost basis. The table includes debt securities where a portion of other-than-temporary impairment (OTTI) has been recognized in accumulated other comprehensive loss.

Gross Unrealized Loss and Fair Value of Securities Available for Sale

				Unrealized loss position less					Unrealized loss position 12
In millions				than 12 months					months or more				Total
				Unrealized			Fair		Unrealized		Fair		Unrealized		Fair
				Loss			Value		Loss		Value		Loss		Value
September 30, 2011
Debt securities
	US Treasury and government agencies
	Residential mortgage-backed
		Agency			$	(45)	$	3,223	$	(34)	$	828	$	(79)	$	4,051
		Non-agency				(21)		372		(1,127)		4,645		(1,148)		5,017
	Commercial mortgage-backed
		Agency
		Non-agency				(53)		1,134						(53)		1,134
	Asset-backed					(7)		1,372		(188)		757		(195)		2,129
	State and municipal					(5)		347		(46)		257		(51)		604
	Other debt					(9)		560		(3)		37		(12)		597
			Total		$	(140)	$	7,008	$	(1,398)	$	6,524	$	(1,538)	$	13,532

December 31, 2010
Debt securities
	US Treasury and government agencies				$	(22)	$	398					$	(22)	$	398
	Residential mortgage-backed
		Agency				(406)		17,040	$	(14)	$	186		(420)		17,226
		Non-agency				(17)		345		(1,173)		5,707		(1,190)		6,052
	Commercial mortgage-backed
		Agency				(6)		344						(6)		344
		Non-agency				(8)		184		(3)		84		(11)		268
	Asset-backed					(5)		441		(233)		776		(238)		1,217
	State and municipal					(22)		931		(50)		247		(72)		1,178
	Other debt					(14)		701		(3)		13		(17)		714
			Total		$	(500)	$	20,384	$	(1,476)	$	7,013	$	(1,976)	$	27,397

For the securities in the preceding table, as of September 30, 2011 we do not intend to sell and believe we will not be required to sell the securities prior to recovery of the amortized cost basis.

On at least a quarterly basis, we conduct a comprehensive security-level assessment on all securities in an unrealized loss position to determine if OTTI exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. An OTTI loss must be recognized for a debt security in an unrealized loss position if we intend to sell the security or it is more likely than not we will be required to sell the security prior to recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between the fair value and the amortized cost basis of the security. Even if we do not expect to sell the security, we must evaluate the expected cash flows to be received to determine if we believe a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in accumulated other comprehensive loss.

Equity securities are also evaluated to determine whether the unrealized loss is expected to be recoverable based on whether evidence exists to support a realizable value equal to or greater than the cost basis. If it is probable that we will not recover the amortized cost basis, taking into consideration the estimated recovery period and our ability to hold the equity security until recovery, OTTI is recognized in earnings equal to the difference between the fair value and the amortized cost basis of the security.

The security-level assessment is performed on each security, regardless of the classification of the security as available for sale or held to maturity. Our assessment considers the security structure, recent security collateral performance metrics if applicable, 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 the security has been impaired in our assessment. Results of the periodic assessment are reviewed by a cross-functional senior management team representing Asset & Liability Management, Finance, and Market Risk Management. The senior management team considers the results of the assessments, as well as other factors, in determining whether the impairment is other-than-temporary.

For debt securities, a critical component of the evaluation for OTTI is the identification of credit-impaired securities, where management does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. The paragraphs below describe our process for identifying credit impairment for our most significant categories of securities not backed by the US government or its agencies.

Non-Agency Residential Mortgage-Backed Securities and Asset-Backed Securities Collateralized by First-Lien and Second-Lien Residential Mortgage Loans

Potential credit losses on these securities are evaluated on a security by security basis. Collateral performance assumptions are developed for each security after reviewing collateral composition and collateral performance statistics. This includes analyzing recent delinquency roll rates, loss severities, voluntary prepayments, and various other collateral and performance metrics. This information is then combined with general expectations on the housing market and other economic factors to develop estimates of future performance.

Security level assumptions for prepayments, loan defaults, and loss given default are applied to every security using a third-party cash flow model. The third-party cash flow model then generates projected cash flows according to the structure of each security. Based on the results of the cash flow analysis, we determine whether we will recover the amortized cost basis of our security.

Credit Impairment Assessment Assumptions – Non-Agency Residential Mortgage-Backed and Asset-Backed Securities (a)

								Weighted-
September 30, 2011			Range					average (b)
Long-term prepayment rate (annual CPR)
	Prime			7	-	20	%	14	%
	Alt-A			3	-	12		5
Remaining collateral expected to default
	Prime			0	-	56	%	20	%
	Alt-A			0	-	83		43
Loss severity
	Prime			20	-	65	%	47	%
	Alt-A			30	-	85		61
(a)		Collateralized by first and second-lien non-agency residential mortgage loans.
(b)		Calculated by weighting the relevant assumption for each individual security by the current outstanding cost basis of the security.

Credit losses on these securities are measured using property-level cash flow projections and forward-looking property valuations. Cash flows are projected using a detailed analysis of net operating income (NOI) by property type which, in turn, is based on the analysis of NOI performance over the past several business cycles combined with PNC's economic outlook for the current cycle. Loss severities are based on property price projections, which are calculated using capitalization rate projections. The capitalization rate projections are based on a combination of historical capitalization rates and expected capitalization rates implied by current market activity, our outlook and relevant independent industry research, analysis and forecasts. Securities exhibiting weaker performance within the model are subject to further analysis. This analysis is performed at the loan level, and includes assessing local market conditions, reserves, occupancy, rent rolls and master/special servicer details.

During the third quarter and first nine months of 2011 and 2010, the OTTI credit losses recognized in noninterest income related to estimated credit losses on securities that we do not expect to sell were as follows:

Summary of OTTI Credit Losses Recognized in Earnings

		Three months ended September 30					Nine months ended September 30
In millions		2011			2010			2011		2010
Available for sale securities:
	Non-agency residential mortgage-backed		$	(30)	$	(57)		$	(93)	$	(211)
	Non-agency commercial mortgage-backed										(3)
	Asset-backed			(5)		(14)			(14)		(67)
	Other debt								(1)
Total			$	(35)	$	(71)		$	(108)	$	(281)

The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings for all debt securities for which a portion of an OTTI loss was recognized in accumulated other comprehensive loss:

Rollforward of Cumulative OTTI Credit Losses Recognized in Earnings

		Non-agency			Non-agency
		residential			commercial
In millions		mortgage-backed			mortgage-backed			Asset-backed			Other debt			Total
For the three months ended September 30, 2011
June 30, 2011			$	(761)		$	(6)		$	(232)		$	(13)	$	(1,012)
Loss where impairment was not previously recognized				(2)											(2)
Additional loss where credit impairment was
	previously recognized			(28)						(5)					(33)
September 30, 2011			$	(791)		$	(6)		$	(237)		$	(13)	$	(1,047)

		Non-agency			Non-agency
		residential			commercial
In millions		mortgage-backed			mortgage-backed			Asset-backed			Other debt			Total
For the three months ended September 30, 2010
June 30, 2010			$	(621)		$	(9)		$	(198)		$	(12)	$	(840)
Loss where impairment was not previously recognized				(15)											(15)
Additional loss where credit impairment was
	previously recognized			(42)						(14)					(56)
September 30, 2010			$	(678)		$	(9)		$	(212)		$	(12)	$	(911)

	Non-agency			Non-agency
	residential			commercial
In millions	mortgage-backed			mortgage-backed			Asset-backed			Other debt			Total
For the nine months ended September 30, 2011
December 31, 2010		$	(709)		$	(11)		$	(223)		$	(12)	$	(955)
Loss where impairment was not previously recognized			(5)						(3)			(1)		(9)
Additional loss where credit impairment was previously recognized			(88)						(11)					(99)
Reduction due to credit impaired securities sold			11			5								16
September 30, 2011		$	(791)		$	(6)		$	(237)		$	(13)	$	(1,047)

	Non-agency			Non-agency
	residential			commercial
In millions	mortgage-backed			mortgage-backed			Asset-backed			Other debt			Total
For the nine months ended September 30, 2010
December 31, 2009		$	(479)		$	(6)		$	(145)		$	(12)	$	(642)
Loss where impairment was not previously recognized			(41)			(3)			(11)					(55)
Additional loss where credit impairment was previously recognized			(170)						(56)					(226)
Reduction due to credit impaired securities sold			12											12
September 30, 2010		$	(678)		$	(9)		$	(212)		$	(12)	$	(911)

Information relating to gross realized securities gains and losses from the sales of securities is set forth in the following table.

The following table presents, by remaining contractual maturity, the amortized cost, fair value and weighted-average yield of debt securities at September 30, 2011.

Contractual Maturity of Debt Securities

September 30, 2011					After 1 Year			After 5 Years			After 10
Dollars in millions		1 Year or Less			through 5 Years			through 10 Years			Years			Total
Securities Available for Sale
US Treasury and government agencies					$	2,054		$	910		$	433		$	3,397
Residential mortgage-backed
	Agency					6			947			26,010			26,963
	Non-agency								28			6,921			6,949
Commercial mortgage-backed
	Agency					764			192						956
	Non-agency	$	28			185			49			2,384			2,646
Asset-backed			68			887			451			2,508			3,914
State and municipal			20			72			278			1,344			1,714
Other debt			134			1,507			606			494			2,741
	Total debt securities available for sale	$	250		$	5,475		$	3,461		$	40,094		$	49,280
Fair value		$	252		$	5,634		$	3,683		$	39,794		$	49,363
Weighted-average yield, GAAP basis			2.99	%		2.77	%		3.48	%		3.71	%		3.58	%
Securities Held to Maturity
US Treasury and government agencies											$	219		$	219
Residential mortgage-backed (agency)												4,588			4,588
Commercial mortgage-backed
	Agency				$	16		$	1,269			5			1,290
	Non-agency	$	129			39			58			3,544			3,770
Asset-backed			8			1,011			105			365			1,489
State and municipal						54			71			545			670
Other debt						1			363						364
Total debt securities held to maturity		$	137		$	1,121		$	1,866		$	9,266		$	12,390
Fair value		$	137		$	1,142		$	1,923		$	9,522		$	12,724
Weighted-average yield, GAAP basis			5.25	%		2.05	%		3.35	%		4.45	%		4.08	%

Based on current interest rates and expected prepayment speeds, the weighted-average expected maturity of mortgage and other asset-backed debt securities were as follows as of September 30, 2011:

Weighted-average yields are based on historical cost with effective yields weighted for the contractual maturity of each security.

The following table presents the fair value of securities that have been either pledged to or accepted from others to collateralize outstanding borrowings.

The securities pledged to others include positions held in our portfolio of investment securities, trading securities, and securities accepted as collateral from others that we are permitted by contract or custom to sell or repledge, and were used to secure public and trust deposits, repurchase agreements, and for other purposes. The securities accepted from others that we are permitted by contract or custom to sell or repledge are a component of Federal funds sold and resale agreements on our Consolidated Balance Sheet.