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 March 31, 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 April 30, 2010, there were 526,050,424 shares of the registrant’s common stock ($5 par value) outstanding.

 

 

 


Table of Contents

The PNC Financial Services Group, Inc.

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

 

     Pages

PART I – FINANCIAL INFORMATION

  

Item 1.        Financial Statements (Unaudited).

  

Consolidated Income Statement

   58

Consolidated Balance Sheet

   59

Consolidated Statement Of Cash Flows

   60

Notes To Consolidated Financial Statements (Unaudited)

  

Note 1   Accounting Policies

   61

Note 2   Divestiture

   62

Note 3   Loan Sale and Servicing Activities and Variable Interest Entities

   62

Note 4   Loans and Commitments To Extend Credit

   68

Note 5   Asset Quality

   69

Note 6   Purchased Impaired Loans Related to National City

   70

Note 7   Investment Securities

   71

Note 8   Fair Value

   76

Note 9   Goodwill and Other Intangible Assets

   86

Note 10 Capital Securities of Subsidiary Trusts

   88

Note 11 Certain Employee Benefit And Stock-Based Compensation Plans

   88

Note 12 Financial Derivatives

   90

Note 13 Earnings Per Share

   96

Note 14 Total Equity And Other Comprehensive Income

   97

Note 15 Income Taxes

   98

Note 16 Summarized Financial Information of BlackRock

   99

Note 17 Legal Proceedings

   99

Note 18 Commitments and Guarantees

   100

Note 19 Segment Reporting

   102

Note 20 Subsequent Event

   104

Statistical Information (Unaudited)

  

Average Consolidated Balance Sheet And Net Interest Analysis

   105-106

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

  

Financial Review

  

Consolidated Financial Highlights

   1-2

Executive Summary

   3

Consolidated Income Statement Review

   8

Consolidated Balance Sheet Review

   11

Off-Balance Sheet Arrangements And Variable Interest Entities

   21

Fair Value Measurements

   26

Business Segments Review

   28

Critical Accounting Estimates And Judgments

   40

Status Of Qualified Defined Benefit Pension Plan

   41

Risk Management

   42

Internal Controls And Disclosure Controls And Procedures

   52

Glossary Of Terms

   52

Cautionary Statement Regarding Forward-Looking Information

   55

Item 3.         Quantitative and Qualitative Disclosures About Market Risk.

   42-51
and
90-95

Item 4.        Controls and Procedures.

   52

PART II – OTHER INFORMATION

  

Item 1.        Legal Proceedings.

   107

Item 1A.    Risk Factors.

   107

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

   107

Item 6.        Exhibits.

   107

Exhibit Index.

   107

Signature

   107

Corporate Information

   108


Table of Contents

FINANCIAL REVIEW

CONSOLIDATED FINANCIAL HIGHLIGHTS

THE PNC FINANCIAL SERVICES GROUP, INC.

 

Dollars in millions, except per share data    Three months ended March 31    
Unaudited        2010             2009      

FINANCIAL PERFORMANCE (a)

      

Revenue

      

Net interest income

   $ 2,379      $ 2,320   

Noninterest income

     1,384        1,366   

Total revenue

     3,763        3,686   

Noninterest expense

     2,113        2,158   

Pretax, pre-provision earnings (b)

   $ 1,650      $ 1,528   

Provision for credit losses

   $ 751      $ 880   

Income from continuing operations before noncontrolling interests

   $ 648      $ 520   

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

   $ 23      $ 10   

Net income

   $ 671      $ 530   
Net income attributable to common shareholders    $ 333      $ 460   

Diluted earnings per common share

      

Continuing operations

   $ .61      $ 1.01   

Discontinued operations (c)

     .05        .02   

Net income

   $ .66      $ 1.03   

Cash dividends declared per common share

   $ .10      $ .66   

Total preferred dividends declared

   $ 93      $ 51   

TARP Capital Purchase Program preferred dividends (d)

   $ 89      $ 47   

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

   $ .18      $ .11   

PERFORMANCE RATIOS

      

From continuing operations

      

Noninterest income to total revenue

     37     37

Efficiency (e)

     56        59   

From net income

      

Net interest margin (f)

     4.24     3.81

Return on:

      

Average common shareholders’ equity

     5.37        10.23   

Average assets

     1.02        .77   

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

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

(a) The Executive Summary and Consolidated Income Statement Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.
(b) PNC believes that pre-tax, pre-provision earnings, a non-GAAP measure, is useful as a tool to help evaluate its ability to provide for credit costs through operations.
(c) Includes results of operations for PNC Global Investment Servicing Inc. See Pending 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) PNC redeemed the Series N (TARP) Preferred Stock on February 10, 2010.
(e) Calculated as noninterest expense divided by total revenue.
(f) 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 March 31, 2010 and March 31, 2009 were $18 million and $15 million, respectively.

 

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CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED) (a)

 

Unaudited    March 31
2010
    December 31
2009
    March 31
2009
 

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

        

Assets

   $ 265,396      $ 269,863      $ 286,422   

Loans

     157,266        157,543        171,373   

Allowance for loan and lease losses

     5,319        5,072        4,299   

Interest-earning deposits with banks

     607        4,488        14,783   

Investment securities

     57,606        56,027        46,253   

Loans held for sale

     2,691        2,539        4,045   

Goodwill and other intangible assets

     12,714        12,909        12,178   

Equity investments

     10,256        10,254        8,215   

Noninterest-bearing deposits

     43,122        44,384        40,610   

Interest-bearing deposits

     139,401        142,538        154,025   

Total deposits

     182,523        186,922        194,635   

Transaction deposits

     126,420        126,244        118,869   

Borrowed funds

     42,461        39,261        48,459   

Shareholders’ equity

     26,818        29,942        26,477   

Common shareholders’ equity

     26,466        22,011        18,546   

Accumulated other comprehensive loss

     1,288        1,962        3,289   

Book value per common share

     50.32        47.68        41.67   

Common shares outstanding (millions)

     526        462        445   

Loans to deposits

     86     84     88
 

ASSETS UNDER ADMINISTRATION (billions)

        

Discretionary assets under management

   $ 105      $ 103      $ 96   

Nondiscretionary assets under administration

     104        102        120   

Total assets under administration

   $ 209      $ 205      $ 216   
 
CAPITAL RATIOS         

Tier 1 risk-based (b)

     10.3     11.4     10.0

Tier 1 common

     7.9        6.0        4.9   

Total risk-based (b)

     13.9        15.0        13.6   

Leverage (b)

     8.8        10.1        8.9   

Common shareholders’ equity to assets

     10.0        8.2        6.5   
 
ASSET QUALITY RATIOS         

Nonperforming loans to total loans

     3.66     3.60     1.73

Nonperforming assets to total loans and foreclosed and other assets

     4.14        3.99        2.05   

Nonperforming assets to total assets

     2.46        2.34        1.23   

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

     1.77        2.09        1.01   

Allowance for loan and lease losses to total loans

     3.38        3.22        2.51   

Allowance for loan and lease losses to nonperforming loans

     92        89        145   
(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) The regulatory minimums are 4.0% for Tier 1, 8.0% for Total, and 4.0% for Leverage ratios. The well-capitalized levels are 6.0% for Tier 1, 10.0% for Total, and 5.0% for Leverage ratios.

 

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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 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, residential mortgage banking and global investment servicing, 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.

REPURCHASE OF OUTSTANDING TARP PREFERRED STOCK

As further described in our 2009 Form 10-K, on December 31, 2008, we issued $7.6 billion of Fixed Rate Cumulative Perpetual Preferred Shares, Series N (Series N Preferred Stock), and a related warrant for common stock to the US Department of the Treasury (US Treasury) under the US Treasury’s Troubled Asset Relief Program (TARP) Capital Purchase Program.

As approved by the Federal Reserve Board, the US Treasury and our other banking regulators, on February 10, 2010, we redeemed all 75,792 shares of our Series N Preferred Stock held by the US Treasury for $7.6 billion in cash. We used the net proceeds from our February 2010 common stock and senior notes offerings, described further in the Liquidity Risk Management section of this Financial Review, and other available funds to redeem the Series N Preferred Stock.

Dividends of $89 million were paid on February 10, 2010 when the Series N Preferred Stock was redeemed. PNC paid total dividends of $421 million to the US Treasury while the Series N Preferred Stock was outstanding.

 

We did not exercise our right to seek to repurchase the related warrant at the time we redeemed the Series N Preferred Stock. See Note 20 Subsequent Event in the Notes To Consolidated Financial Statements of this Report regarding the May 2010 exchange of this warrant for 16,885,192 warrants, each to purchase one share of PNC common stock, and the sale of such warrants by the US Treasury in a secondary public offering.

PENDING SALE OF PNC GLOBAL INVESTMENT SERVICING

On February 2, 2010, we entered into a definitive agreement to sell 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. Upon completion of the sale, we expect to report an after-tax gain of approximately $455 million.

We currently anticipate closing the transaction in the third quarter of 2010. Completion of the transaction is subject to regulatory approvals and certain other closing conditions. If the sale of GIS is not completed by November 1, 2010, we will be required, on or before that date, to raise $700 million in additional Tier 1 common capital. We would do this either through the sale of assets approved by the Federal Reserve Board and/or through the issuance of additional common stock.

Results of operations of GIS are presented as income from discontinued operations, net of income taxes, on our Consolidated Income Statement for the periods presented in this Report. Further information regarding the pending sale of GIS is included in Note 2 Divestiture in our Notes To Consolidated Financial Statements in this Report and in Item 1A Risk Factors in our 2009 Form 10-K. As a result of its pending sale, GIS is no longer a reportable business segment.

NATIONAL CITY INTEGRATION COSTS

We expect to incur pretax merger and integration costs in 2010 of approximately $285 million in connection with our


 

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December 31, 2008 acquisition of National City Corporation (National City), including $113 million recognized in the first quarter of 2010. We recognized National City-related pretax merger and integration costs of $421 million in 2009, including $52 million in the first quarter, and $575 million pretax in the fourth quarter of 2008. The transaction is expected to result in the reduction of more than $1.5 billion of combined company annualized noninterest expense through the elimination of operational and administrative redundancies.

We continue to integrate the businesses and operations of National City with those of PNC.

KEY STRATEGIC GOALS

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

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

We are focused on our strategies for quality growth. We are committed to re-establishing a moderate risk profile characterized by disciplined credit management and limited exposure to earnings volatility resulting from interest rate fluctuations and the shape of the interest rate yield curve. We made substantial progress in transitioning our balance sheet throughout 2009 and in the first quarter of 2010, working to institute our moderate risk philosophy throughout our expanded franchise. Our actions have created a well-positioned balance sheet, strong bank level liquidity and investment flexibility to adjust, where appropriate and permissible, to changing interest rates and market conditions.

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

 

RECENT MARKET AND INDUSTRY DEVELOPMENTS

Since the middle of 2007 and with a heightened level of activity during 2008 and 2009, there has been unprecedented turmoil, volatility and illiquidity in worldwide financial markets, accompanied by uncertain prospects for sustaining the moderate economic recovery that began last year. In addition, there have been dramatic changes in the competitive landscape of the financial services industry during this time.

Items 1 and 7 of our 2009 Form 10-K include information regarding efforts over the past 18 months by the Federal government, including the US Congress, the US Department of the Treasury, the Federal Reserve, the FDIC, and the Securities and Exchange Commission, to stabilize and restore confidence in the financial services industry that have impacted and will likely continue to impact PNC and our stakeholders. These efforts, which will continue to evolve, include the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009, and other legislative, administrative and regulatory initiatives, including the US Treasury’s TARP Capital Purchase Program, the FDIC’s Temporary Liquidity Guarantee Program (TLGP) and the Federal Reserve’s Commercial Paper Funding Facility (CPFF).

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

TARP Capital Purchase Program

See Repurchase of Outstanding TARP Preferred Stock above and 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 quarter 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.


 

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Federal Reserve Commercial Paper Funding Facility (CPFF)

The CPFF commitment to purchase up to $5.4 billion of Market Street Funding LLC (Market Street) three-month commercial paper expired on February 1, 2010. Market Street had no borrowings under this facility in January 2010.

Public-Private Investment Fund Programs (PPIFs)

PNC did not participate in these programs during the first quarter of 2010 and is determining to what extent, if any, it will participate in these programs in the future.

Home Affordable Modification Program (HAMP)

As previously reported, PNC began participating in HAMP for GSE mortgages in May 2009 and for non-GSE mortgages in July 2009, and is evaluating participation in the Second Lien Program. This program is scheduled to terminate as of December 31, 2012.

Home Affordable Refinance Program (HARP)

As previously reported, PNC began participating in HARP in May 2009. The program is scheduled to terminate as of June 10, 2010.

In June 2009 the US Treasury issued a report entitled “Financial Regulatory Reform: A New Foundation” which outlined five key objectives:

   

Promote robust supervision and regulation of financial firms,

   

Establish comprehensive supervision of financial markets,

   

Protect consumers and investors from financial abuse,

   

Provide the US government with the tools it needs to manage financial crises, and

   

Raise international regulatory standards and improve international cooperation.

To implement the proposals set forth in the US Treasury report, as well as to provide economic stimulus and financial market stability and to enhance the liquidity and solvency of financial institutions and markets, the US Congress and federal banking agencies have announced, and are continuing to develop, additional legislation, regulations and programs. These proposals include changes in or additions to the statutes or regulations related to existing programs, including those described above.

The current regulatory environment remains uncertain and we expect greater reforms and additional regulatory changes. 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,

   

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 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,

   

Progress toward completion of the integration of the National City acquisition,

   

The timely closing of our planned 2010 sale of GIS,

   

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

   

Revenue growth,

   

A sustained focus on expense management, including achieving our cost savings targets associated with our National City integration, and creating positive 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 leading to re-establishing our desired moderate risk profile, and

   

Actions we take within the capital and other financial markets.

SUMMARY FINANCIAL RESULTS

 

     Three months ended
March 31
 
      2010     2009  

Net income, in millions

   $ 671      $ 530   

Diluted earnings per common share

      

Continuing operations

   $ .61      $ 1.01   

Discontinued operations

     .05        .02   

Net income

   $ .66      $ 1.03   

Return from net income on:

      

Average common shareholders’ equity

     5.37     10.23

Average assets

     1.02     .77

 

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Highlights of the first quarter of 2010 included the following:

   

We remain committed to responsible lending to support economic growth. Loans and commitments originated and renewed totaled approximately $32 billion in the first quarter. Since its inception, we have funded approximately 3,200 refinances totaling $.6 billion through HARP, and we have sent approximately 80,700 solicitations to eligible borrowers under HAMP through March 31, 2010. Trial Modification Plan offers under HAMP have been extended to approximately 21,700 eligible borrowers.

   

Loans totaled $157 billion at March 31, 2010 and decreased a nominal $.3 billion since year end. An increase in loans of $3.5 billion from consolidating Market Street, a variable interest entity, and the securitized credit card portfolio was offset by soft customer loan demand combined with loan repayments and payoffs in the distressed assets portfolio.

   

Deposits declined by $4.4 billion or 2% since year end as we continued to reduce nonrelationship certificates of deposit and other time deposits and effectively managed deposit pricing, reducing the rate paid on deposits to .81% in the first quarter of 2010 from .93% in the fourth quarter of 2009.

   

We remained core funded with a loan to deposit ratio of 86% at March 31, 2010, providing a strong bank liquidity position to support growth and stability.

   

Pretax pre-provision earnings of $1.7 billion were more than double the provision for credit losses of $.8 billion in the first quarter of 2010 driven by well-diversified revenue performance, exceptional expense management and reduced credit costs.

   

Total revenue was $3.8 billion for the quarter and reflected strong net interest income of $2.4 billion due to the benefit of deposit repricing. The net interest margin increased 19 basis points to 4.24% compared with the fourth quarter of 2009 due to the impact of deposit repricing and a reduction in low-rate interest-earning deposits with banks.

   

Expenses of $2.1 billion in the first quarter declined 4% compared with the linked quarter reflecting further progress in integrating the National City acquisition.

   

We expect to exceed our overall annualized cost savings goal related to the National City acquisition of $1.5 billion by the fourth quarter of 2010. This is $300 million higher and six months earlier than originally anticipated. As of mid-April 2010, we had successfully completed the conversion of more than 4 million customers at over 1,000 National City branches to the PNC platform. Remaining branch conversions are scheduled to be completed in June 2010.

   

The pace of credit quality deterioration during the first quarter continued to ease. Nonperforming assets

   

increased $.2 billion from year end 2009 to $6.5 billion as of March 31, 2010, a lower increase compared with $.7 billion in the fourth quarter. Loan loss reserves increased by 5% primarily due to the consolidation of the securitized credit card portfolio. The allowance for loan and lease losses was increased to $5.3 billion, or 3.38% of total loans, as of March 31, 2010.

   

Common capital was strengthened during the first quarter with a $3.4 billion common equity offering. The Tier 1 common equity ratio increased by 190 basis points to 7.9% at March 31, 2010 from 6.0% at December 31, 2009. On a pro forma basis at March 31, 2010, our Tier 1 common capital ratio would have been an estimated 8.6% based on completion of the sale of GIS.

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

AVERAGE CONSOLIDATED BALANCE SHEET HIGHLIGHTS

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

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

Total average assets were $267.1 billion for the first three months of 2010 compared with $280.9 billion for the first three months of 2009.

Average interest-earning assets were $227.0 billion for the first quarter of 2010, compared with $244.2 billion in the first quarter of 2009. A decrease of $15.0 billion in loans was reflected in the decrease in average interest-earning assets.

Average noninterest-earning assets totaled $40.2 billion in the first three months of 2010 compared with $36.6 billion in the prior year period.

The decrease in average total loans reflected a decline in commercial loans of $11.8 billion and commercial real estate loans of $3.2 billion. Loans represented 70% of average interest-earning assets for the first three months of 2010 and 71% for the first three months of 2009.

Average securities available for sale increased $4.5 billion, to $50.7 billion, in the first quarter of 2010 compared with the first quarter of 2009. Average US Treasury and government agencies securities increased $6.3 billion compared with the


 

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first three months of 2009. Average commercial mortgage-backed securities increased $1.1 billion and average other debt securities increased $1.2 billion in the comparison. These increases were partially offset by a decline of $4.1 billion in average residential mortgage-backed securities compared with the prior year period.

Average securities held to maturity increased $2.5 billion, to $5.9 billion, in the first three months of 2010 compared with the first three months of 2009.

Total investment securities comprised 25% of average interest-earning assets for the first three months of 2010 and 20% for the first three months of 2009.

Average total deposits were $183.1 billion for the first quarter of 2010 compared with $192.2 billion for the first quarter of 2009. Average deposits declined from the prior year period primarily as a result of decreases in retail certificates of deposit and other time deposits, which were partially offset by increases in money market balances, demand and other noninterest-bearing deposits. Average total deposits represented 69% of average total assets for the first three months of 2010 and 68% for the first three months of 2009.

Average transaction deposits were $125.2 billion for the first three months of 2010 compared with $113.5 billion for the first three months of 2009.

Average borrowed funds were $42.3 billion for the first quarter of 2010 compared with $47.9 billion for the first quarter of 2009.

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 $654 million for the first three months of 2010 and $701 million for the first three months of 2009. Highlights of results for the first three months 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 these periods including presentation differences from Note 19 Segment Reporting.

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

Retail Banking

Retail Banking earned $24 million for the quarter compared with earnings of $50 million for the year-ago quarter. Earnings declined from the prior year quarter as a result of

increased credit costs, 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.

Corporate & Institutional Banking

Corporate & Institutional Banking earned $360 million in the first quarter of 2010 compared with $359 million in the first quarter of 2009. Earnings were flat as a decrease in net interest income was offset by higher noninterest income and a lower provision for credit losses.

Asset Management Group

Asset Management Group earned $39 million for the first quarters of 2010 and 2009. Assets under administration were $209 billion at March 31, 2010. The quarter reflected higher noninterest income, lower provision for credit losses, and lower expenses from disciplined expense management. These improvements offset a decrease in net interest income from lower yields on loans in the first quarter of 2010.

Residential Mortgage Banking

Residential Mortgage Banking earned $82 million for the first quarter of 2010 compared with $227 million in the first quarter of 2009. Earnings decreased from the first quarter of 2009 primarily due to lower net hedging gains on mortgage servicing rights and reduced loan sales revenue.

BlackRock

Our BlackRock business segment earned $77 million in the first three months of 2010 and $23 million in the first three months of 2009. Improved capital market conditions and the impact of BlackRock’s December 2009 acquisition of Barclays Global Investors (BGI) contributed to higher earnings at BlackRock.

Distressed Assets Portfolio

The Distressed Assets Portfolio had earnings of $72 million for the first three months of 2010, compared to $3 million for the first three months of 2009. Earnings improved primarily due to lower provision for credit losses and lower noninterest expense.

Other

“Other” reported a net loss of $6 million for the first three months of 2010 compared with a net loss of $181 million for the first three months of 2009. The higher loss for the 2009 period reflected the after-tax impact in 2009 of higher other-than-temporary impairment charges compared with 2010 and alternative investment writedowns and equity management losses, which more than offset the impact of higher National City-related integration costs in the first quarter of 2010. Higher net gains on sales of securities in the first quarter of 2010 compared with the prior year first quarter also contributed to the smaller loss in the 2010 period.


 

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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 three months of 2010 was $671 million compared with $530 million for the first three months of 2009. Total revenue for the first three months of 2010 was $3.8 billion compared with $3.7 billion for the first three months of 2009. We expect total revenue for full year 2010 to be relatively stable with the level for full year 2009 apart from the impact of the $1.1 billion gain we recognized in the fourth quarter of 2009 in connection with BlackRock’s acquisition of BGI.

NET INTEREST INCOME AND NET INTEREST MARGIN

 

     Three months ended
March 31
 
Dollars in millions    2010     2009  

Net interest income

   $ 2,379      $ 2,320   

Net interest margin

     4.24     3.81

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 and net interest margin for the first quarter of 2010 compared with the first quarter of 2009 reflected our successful deposit pricing strategy as well as the benefit to the margin of a reduction in low-rate interest-earning deposits with banks. Our deposit strategy included the retention and repricing at lower rates of relationship-based certificates of deposit and the planned run off of maturing non-relationship certificates of deposit.

We have approximately $19 billion of certificates of deposit with an average rate of 2.4% that are scheduled to mature during the remainder of 2010. Assuming interest rates stay low, we believe that we will continue to reprice these deposits and lower our funding costs even further. We expect to retain approximately 80% of our relationship-based CDs in 2010, which is comparable with our first quarter 2010 results. This assumes our current expectations for interest rates and economic conditions – we include our current economic assumptions underlying our forward-looking statements in the Cautionary Statement Regarding Forward-Looking Information section of this Financial Review.

 

The net interest margin was 4.24% for the first three months of 2010 and 3.81% for the first three months of 2009. The following factors impacted the comparison:

   

A decrease in the rate accrued on interest-bearing liabilities of 75 basis points. The rate accrued on interest-bearing deposits, the largest component, decreased 63 basis points.

   

These factors were partially offset by a 21 basis point decrease in the yield on interest-earning assets. The yield on loans, which represented the largest portion of our earning assets in the first three months of 2010, decreased 22 basis points.

   

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

For comparing to the broader market, the average Federal funds rate was .14% for the first quarter of 2010 compared with ..19% for the first quarter of 2009. We expect that net interest income and margin will remain relatively flat at least through the first half of 2010.

NONINTEREST INCOME

Summary

Noninterest income totaled $1.384 billion for the first three months of 2010, compared with $1.366 billion for the first three months of 2009.

Noninterest income was essentially flat compared with the prior year first quarter as higher asset management and corporate service fees and an increase in the net effect of net securities gains and other-than-temporary impairment (OTTI) losses on securities were substantially offset by declines in revenue related to residential mortgage servicing activities, consumer service fees and service charges on deposits.

Additional Analysis

Asset management revenue increased $70 million to $259 million in the first three months of 2010 compared with the first three months of 2009. This increase reflected improving equity markets and client growth. Assets managed at March 31, 2010 totaled $105 billion compared with $96 billion at March 31, 2009. Higher equity earnings from our BlackRock investment also contributed to the improved first quarter results.

For the first quarter of 2010, consumer services fees totaled $296 million compared with $316 million in the first quarter of 2009. Lower consumer service fees in the 2010 quarter resulted from lower brokerage fees and the impact of the consolidation of the securitized credit card portfolio partially offset by higher volume-related transaction fees.

Corporate services revenue totaled $268 million in the first three months of 2010 and $245 million in the first three months of 2009. The increase in the comparison was primarily


 

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due to higher commercial mortgage special servicing ancillary income. Corporate services fees include the noninterest component of treasury management fees, which continued to be a strong contributor to revenue.

Residential mortgage revenue totaled $147 million in the first quarter of 2010 and $431 million in the first quarter of 2009. The decline compared with the first quarter of 2009 was due to lower net hedging gains on mortgage servicing rights and reduced loan sales revenue related to strong loan origination refinance volume in the first quarter of 2009.

Service charges on deposits totaled $200 million for the first three months of 2010 and $224 million for the first three months of 2009. The decrease in the comparison was due to required branch divestitures and lower overdraft charges.

Net gains on sales of securities totaled $90 million for the first quarter of 2010 and $56 million for the first quarter of 2009. The net credit component of OTTI of securities recognized in earnings was a loss of $116 million in the first quarter of 2010, compared with a loss of $149 million in the first quarter of 2009.

Other noninterest income totaled $240 million for the first three months of 2010 compared with $54 million for the first three months of 2009. The first quarter of 2010 included trading income of $58 million and net gains on private equity and alternative investments of $57 million.

Other noninterest income for the first three months of 2009 included gains of $103 million related to our equity investment in BlackRock and net losses on private equity and alternative investments of $122 million.

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

We believe that as the economy recovers, there are greater opportunities for growth in client-related fee-based income. We also expect that the conversions of National City branches to the PNC platform this quarter, and those completed in April 2010 and the remaining branch conversions scheduled for June 2010, will create more product cross-selling opportunities.

 

PRODUCT REVENUE

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

Treasury management revenue, which includes fees as well as net interest income from customer deposit balances, totaled $298 million for the first three months of 2010 and $276 million for the first three months of 2009. This increase was primarily related to deposit growth and continued growth in legacy offerings such as purchasing cards and services provided to the Federal government and healthcare customers.

Revenue from capital markets-related products and services totaled $164 million in the first quarter of 2010 compared with $43 million in the first quarter of 2009. The increase was primarily due to a benefit from reduced impact of counterparty credit risk on valuations of customer derivative positions, higher underwriting revenue and an increase in merger and acquisition advisory fees.

Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (including net interest income and noninterest income from loan servicing and ancillary services), 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 $115 million in the first three months of 2010 compared with $94 million in the first three months of 2009. The increase in the comparison was due to a reduction in reserves for the DUS lending program and higher special servicing ancillary income which more than offset decreases in net valuation gains and net interest income on the held for sale portfolio.


 

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PROVISION FOR CREDIT LOSSES

The provision for credit losses totaled $751 million for the first three months of 2010 compared with $880 million for the first three months of 2009. The lower provision in the 2010 period reflected economic factors that are beginning to stabilize.

The Credit Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding factors impacting the provision for credit losses.

We believe that our provision for credit losses may have peaked in the fourth quarter of 2009 and that our provision for full year 2010 will be below the provision for 2009. Future provision levels will depend primarily on the level of nonperforming loans, our related coverage ratios, the pace of economic recovery and the nature of regulatory reforms.

 

NONINTEREST EXPENSE

Noninterest expense for the first three months of 2010 was $2.113 billion compared with $2.158 billion in the first three months of 2009, a decline of 2%. Lower noninterest expense in the first three months of 2010 was primarily due to the impact of higher cost savings related to the National City acquisition.

Integration costs included in noninterest expense totaled $102 million in the first quarter of 2010 compared with $52 million in the first quarter of 2009.

Annualized National City acquisition cost savings of approximately $1.4 billion were realized by the first quarter of 2010. We expect to exceed our overall annualized cost savings goal related to the National City acquisition of $1.5 billion by the fourth quarter of 2010. This is $300 million higher and six months earlier than originally anticipated.

EFFECTIVE TAX RATE

The effective tax rate was 27.9% in the first quarter of 2010 compared with 19.8% in the first quarter of 2009. The effective tax rate was lower in the first quarter of 2009 primarily as a result of relatively equal levels of favorable permanent differences (tax exempt income, tax credits and dividend received deductions) on lower pretax income in 2009. We anticipate that the effective tax rate will be approximately 27% for the remainder of 2010, excluding the impact of the anticipated gain on the pending sale of GIS.


 

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CONSOLIDATED BALANCE SHEET REVIEW

SUMMARIZED BALANCE SHEET DATA

 

In millions    March 31
2010
  

Dec. 31

2009

Assets

       

Loans

   $ 157,266    $ 157,543

Investment securities

     57,606      56,027

Cash and short-term investments

     7,132      13,290

Loans held for sale

     2,691      2,539

Goodwill and other intangible assets

     12,714      12,909

Equity investments

     10,256      10,254

Other

     17,731      17,301

Total assets

   $ 265,396    $ 269,863

Liabilities

       

Deposits

   $ 182,523    $ 186,922

Borrowed funds

     42,461      39,261

Other

     10,978      11,113

Total liabilities

     235,962      237,296

Total shareholders’ equity

     26,818      29,942

Noncontrolling interests

     2,616      2,625

Total equity

     29,434      32,567

Total liabilities and equity

   $ 265,396    $ 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 March 31, 2010 compared with December 31, 2009 was primarily due to lower interest-earning deposits with banks. Total assets at March 31, 2010 included $5.2 billion of assets 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 $3.0 billion at March 31, 2010 and $3.2 billion at December 31, 2009, respectively. The balances do not include accretable net interest on the purchased impaired loans.

Loans decreased $.3 billion, or less than 1%, as of March 31, 2010 compared with December 31, 2009. An increase in loans of $3.5 billion from consolidating Market Street and the securitized credit card portfolio was offset by soft customer loan demand combined with loan repayments and payoffs in the distressed assets portfolio.

 

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

Details Of Loans

 

In millions    March 31
2010
  

Dec. 31

2009

Commercial

       

Retail/wholesale

   $ 9,557    $ 9,515

Manufacturing

     9,863      9,880

Other service providers

     8,528      8,256

Real estate related (a)

     7,379      7,403

Financial services

     4,654      3,874

Health care

     2,998      2,970

Other

     11,724      12,920

Total commercial

     54,703      54,818

Commercial real estate

       

Real estate projects

     14,535      15,582

Commercial mortgage

     7,415      7,549

Total commercial real estate

     21,950      23,131

Equipment lease financing

     6,111      6,202

TOTAL COMMERCIAL LENDING

     82,764      84,151

Consumer

       

Home equity

       

Lines of credit

     24,040      24,236

Installment

     11,390      11,711

Education

     8,320      7,468

Automobile

     2,206      2,013

Credit card and other unsecured lines of credit

     4,962      3,536

Other

     4,316      4,618

Total consumer

     55,234      53,582

Residential real estate

       

Residential mortgage

     17,599      18,190

Residential construction

     1,669      1,620

Total residential real estate

     19,268      19,810

TOTAL CONSUMER LENDING

     74,502      73,392

Total loans

   $ 157,266    $ 157,543
(a) Includes loans to customers in the real estate and construction industries.

Total loans in the table above include purchased impaired loans related to National City, adjusted to reflect additional loan impairments effective December 31, 2008, amounting to $9.7 billion, or 6% of total loans, at March 31, 2010, and $10.3 billion, or 7% of total loans, at December 31, 2009.

We are committed to providing credit and liquidity to qualified borrowers. Total loan originations and new commitments and renewals totaled $32 billion for the first quarter of 2010, including originations for first mortgages of $2 billion.

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.


 

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Commercial lending is the largest category and is the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan and lease losses. We have allocated $3.3 billion, or 62%, of the total allowance for loan and lease losses at March 31, 2010 to these loans. We allocated $2.0 billion, or 38%, of the total allowance at that date to consumer lending. This allocation also considers other relevant factors such as:

   

Actual versus estimated losses,

   

Regional and national economic conditions,

   

Business segment and portfolio concentrations,

   

Industry conditions,

   

The impact of government regulations, and

   

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

Higher Risk Loans

Our loan portfolio contains higher risk loans that are more likely to result in credit losses. We established specific and pooled reserves on the total commercial lending category, including higher risk loans, of $3.3 billion at March 31, 2010. This represented 62% of the total allowance for loan and lease losses of $5.3 billion at that date. The remaining 38% of the allowance for loan and lease losses pertained to the total consumer lending category. This category of loans is more homogenous in nature and has certain characteristics that can be assessed at a total portfolio level in terms of loans representing higher risk. We do not consider government insured/government guaranteed loans to be higher risk as we do not believe these loans will result in a significant loss because of their structure. These loans are excluded from the following assessment of higher risk loans.

Our home equity lines of credit and installment loans outstanding totaled $35.4 billion at March 31, 2010. In this portfolio, we consider the higher risk loans to be those with a recent FICO credit score of less than or equal to 660 and a loan-to-value ratio greater than 90%. Such loans totaled $1.2 billion or approximately 3% of the total home equity line and installment loans at March 31, 2010. These higher risk loans were concentrated in our geographic footprint with 28% in Pennsylvania, 14% in Ohio, 11% in New Jersey, 7% in Illinois, and 6% in Michigan, 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 11% are in some stage of delinquency and 6% are in late stage (90+ days) delinquency status.

In our $17.6 billion residential mortgage portfolio, loans with a recent FICO credit score of less than or equal to 660 and a loan-to-value ratio greater than 90% totaled $.8 billion and comprised approximately 5% of this portfolio at March 31, 2010. Twenty-one percent of the higher risk loans are located in California, 14% 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 $.8 billion, approximately 48% are in some stage of delinquency and 37% are in 90+ days late stage delinquency status.

Within our home equity lines of credit, installment loans and residential mortgage portfolios, approximately 5% of the aggregate $53.0 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 quarter of 2010 in connection with our acquisition of National City follows.


 

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Valuation of FASB ASC 310-30 Purchased Impaired Loans

 

     December 31, 2008      December 31, 2009      March 31, 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          $ 2.9       

Purchase impaired mark

     (3.4         (1.3         (1.0    

Recorded investment

     2.9            2.2            1.9       

Allowance for loan losses

                 (.2         (.3    

Net investment

     2.9       46      2.0       57      1.6      55

Consumer and residential mortgage loans:

                  

Unpaid principal balance

     15.6            11.7            10.6       

Purchase impaired mark

     (5.8         (3.6         (2.8    

Recorded investment

     9.8            8.1            7.8       

Allowance for loan losses

                 (.3         (.3    

Net investment

     9.8       63      7.8       67      7.5      71

Total FASB ASC 310-30 purchased impaired loans:

                  

Unpaid principal balance

     21.9            15.2            13.5       

Purchase impaired mark (a)

     (9.2         (4.9         (3.8    

Recorded investment

     12.7            10.3            9.7       

Allowance for loan losses

                 (.5         (.6 )(b)     

Net investment

   $ 12.7       58    $ 9.8       64    $ 9.1      67
(a) Comprised of $5.5 billion of nonaccretable and $3.7 billion of accretable at December 31, 2008, $1.4 billion of nonaccretable and $3.5 billion of accretable at December 31, 2009, and $.2 billion of nonaccretable and $3.6 billion of accretable at March 31, 2010.
(b) While additional impairment reserves of $.6 billion have been provided for further deterioration, incremental accretable interest of $1.4 billion has been reclassified since acquisition date on those purchased impaired loans with improving estimated cash flows.

 

The unpaid principal balance of purchased impaired loans declined from $21.9 billion at December 31, 2008 to $13.5 billion at March 31, 2010 due to amounts determined to be uncollectible, payoffs and disposals. The remaining purchased impaired mark at March 31, 2010 was $3.8 billion and declined from $9.2 billion at December 31, 2008 primarily due to amounts determined to be uncollectible. The net investment of $12.7 billion at December 31, 2008 declined to $9.1 billion at March 31, 2010 primarily due to payoffs, disposals and further impairment partially offset by accretion during 2009 and the first three months of 2010. At March 31, 2010, our largest purchased impaired loan was $32 million.

We currently expect to collect total cash flows of $13.3 billion on purchased impaired loans, representing the $9.7 billion recorded investment at March 31, 2010 and the accretable net interest of $3.6 billion shown in the Accretable Net Interest table that follows.

Purchase Accounting Net Interest Accretion

 

In millions    Three months
ended
March 31 2010
    Three months
ended
March 31 2009
 

Non-impaired loans

   $ 112      $ 322   

Impaired loans

     265        257   

Reversal of contractual interest on impaired loans

     (134     (223

Net impaired loans

     131        34   

Securities

     11        31   

Deposits

     167        312   

Borrowings

     (56     (85

Total

   $ 365      $ 614   

 

Cash received in excess of recorded investment from sales or payoffs of impaired commercial loans (cash recoveries) totaled $75 million for the first quarter of 2010.

Accretable Net Interest

 

In billions    Dec. 31
2008
    Dec. 31
2009
    March 31
2010
 

Non-impaired loans

   $ 2.4      $ 1.6      $ 1.5   

Impaired loans (a)

     3.7        3.5        3.6   

Total loans (gross)

     6.1        5.1        5.1   

Securities

     .2        .1        .1   

Deposits

     2.1        1.0        .9   

Borrowings

     (1.5     (1.2     (1.2

Total

   $ 6.9      $ 5.0      $ 4.9   
(a) Adjustments to accretable net interest include purchase accounting accretion, reclassifications from non-accretable to accretable 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)

     (.3

Net reclassifications from non-accretable to accretable

     .5   

Disposals

     (.1

March 31, 2010

   $ 3.6   

 

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In billions        

January 1, 2009

   $ 3.7   

Accretion (including cash recoveries)

     (1.5

Adjustments resulting from changes in purchase price allocation

     .3   

Net reclassifications from non-accretable to accretable

     1.4   

Disposals

     (.3

March 31, 2010

   $ 3.6   

Net unfunded credit commitments are comprised of the following:

Net Unfunded Credit Commitments

 

In millions    March 31
2010
   Dec. 31
2009

Commercial / commercial real estate (a)

   $ 56,850    $ 60,143

Home equity lines of credit

     20,229      20,367

Consumer credit card and other

unsecured lines

     18,248      18,800

Other

     1,036      1,485

Total

   $ 96,363    $ 100,795
(a) Less than 3% of these amounts relate to commercial real estate.

Unfunded commitments are concentrated in our primary geographic markets. Commitments to extend credit represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. Commercial commitments are reported net of participations, assignments and syndications, primarily to financial institutions, totaling $12.5 billion at March 31, 2010 and $13.2 billion at December 31, 2009.

Unfunded credit commitments related to purchased customer receivables totaled $2.8 billion at March 31, 2010. These receivables are included due to the consolidation of Market Street and are now a component of PNC’s total unfunded credit commitments. These amounts are included in the preceding table within the “Commercial / commercial real estate” category.

In addition to credit commitments, our net outstanding standby letters of credit totaled $10.1 billion at March 31, 2010 and $10.0 billion at December 31, 2009. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

Unfunded liquidity facility commitments and standby bond purchase agreements totaled $545 million at March 31, 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, $5.4 billion of unfunded liquidity facility commitments were no longer included in the amounts in the preceding table as of March 31, 2010.

 

INVESTMENT SECURITIES

Details of Investment Securities

 

In millions    Amortized
Cost
  

Fair

Value

March 31, 2010

       

SECURITIES AVAILABLE FOR SALE

       

Debt securities

       

US Treasury and government agencies

   $ 10,520    $ 10,539

Residential mortgage-backed

       

Agency

     22,259      22,704

Non-agency

     9,498      7,710

Commercial mortgage-backed

       

Agency

     1,179      1,202

Non-agency

     1,908      1,856

Asset-backed

     1,842      1,531

State and municipal

     1,374      1,376

Other debt

     2,180      2,224

Corporate stocks and other

     399      399

Total securities available for sale

   $ 51,159    $ 49,541

SECURITIES HELD TO MATURITY

       

Debt securities

       

Commercial mortgage-backed (non-agency)

   $ 4,295    $ 4,506

Asset-backed

     3,761      3,850

Other debt

     9      10

Total securities held to maturity

   $ 8,065    $ 8,366

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 $57.6 billion at March 31, 2010 and $56.0 billion at December 31, 2009. The Market Street consolidation was the largest component of the 3% increase in investment securities since December 31, 2009. Investment securities represented 22% of total assets at March 31, 2010 and 21% of total assets at December 31, 2009.

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


 

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appropriate, take steps intended to improve our overall positioning. Overall, we consider the portfolio to be well-diversified and high quality. US Treasury and government agencies, agency residential mortgage-backed securities and agency commercial mortgage-backed securities collectively represented 60% of the investment securities portfolio at March 31, 2010.

During the first quarter of 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 March 31, 2010, the securities available for sale portfolio included a net unrealized loss of $1.6 billion, which represented the difference between fair value and amortized cost. The comparable amount at December 31, 2009 was a net unrealized loss of $2.3 billion. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally decreases when credit spreads widen and vice versa. The decline in the net unrealized loss from December 31, 2009

was primarily the result of improving fair values in 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 March 31, 2010 and 4.1 years at December 31, 2009.

We estimate that at March 31, 2010 the effective duration of investment securities was 2.8 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:

 

     March 31, 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

   $ 22,704      $ 1,202      $ 7,710      $ 1,856      $ 1,531   

Fair Value – Held to Maturity

                             4,506        3,850   

Total Fair Value

   $ 22,704      $ 1,202      $ 7,710      $ 6,362      $ 5,381   

% of Fair Value:

                

By Vintage

                

2010

     11     8           4

2009

     33     56       3     27

2008

     14     2           16

2007

     9     4     18     16     18

2006

     10     10     22     33     18

2005 and earlier

     23     20     60     48     17

Total

     100     100     100     100     100

By Credit Rating

                

Agency

     100     100          

AAA

           10     88     62

AA

           6     3     9

A

           7     4     8

BBB

           9     4    

BB

           12     1     3

B

           19         2

Lower than B

           37         11

No rating

                                     5

Total

     100     100     100     100     100

By FICO Score

                

>720

           58         4

<720 and >660

           32         10

<660

                 9

No FICO score

     N/A        N/A        10     N/A        77

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

We recognized OTTI for the first three months of 2010 and 2009 as follows:

Other-Than-Temporary Impairments

 

     Three months ended
March 31
 
In millions    2010     2009  

Credit portion of OTTI losses (a)

   $ (116   $ (149

Noncredit portion of OTTI losses (b)

     (124     (537

Total OTTI losses

   $ (240   $ (686
(a) Reduction of noninterest income in our Consolidated Income Statement.
(b) Included in accumulated other comprehensive loss on the Consolidated Balance Sheet.

 

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Included below is detail on the net unrealized losses and OTTI credit losses recorded on non-agency residential and commercial mortgage-backed and other asset-backed securities, which represent the portfolios that have generated the majority of the OTTI losses. A summary of all OTTI credit losses recognized for the first quarter of 2010 by investment type is included in Note 7 Investment Securities in the Notes To Consolidated Financial Statements of this Report.

 

     March 31, 2010  
In millions    Residential Mortgage-
Backed Securities
    Commercial Mortgage-
Backed Securities
   

Asset-Backed

Securities (a)

 

AVAILABLE FOR SALE SECURITIES NON-AGENCY

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

By Credit Rating

                     

AAA

   $ 786    $ (85   $ 1,083    $ 21      $ 335    $ (2

Other Investment Grade (AA, A, BBB)

     1,653      (210     728      (57     317      (22

Total Investment Grade

     2,439      (295     1,811      (36     652      (24

BB

     921      (223     41      (18     118      (24

B

     1,458      (393     4      2        121      (29

Lower than B

     2,892      (877            602      (213

No Rating

                                   34      (21

Total Sub-Investment Grade

     5,271      (1,493     45      (16     875      (287

Total

   $ 7,710    $ (1,788   $ 1,856    $ (52   $ 1,527    $ (311

Investment Grade:

                     

OTTI has been recognized

   $ 166    $ (52              

No OTTI recognized to date

     2,273      (243   $ 1,811    $ (36   $ 652    $ (24

Total Investment Grade

   $ 2,439    $ (295   $ 1,811    $ (36   $ 652    $ (24

Sub-Investment Grade:

                     

OTTI has been recognized

   $ 2,862    $ (1,018          $ 559    $ (203

No OTTI recognized to date

     2,409      (475   $ 45    $ (16     316      (84

Total Sub-Investment Grade

   $ 5,271    $ (1,493   $ 45    $ (16   $ 875    $ (287

SECURITIES HELD TO MATURITY NON-AGENCY

                     

By Credit Rating

                     

AAA

          $ 4,506    $ 211      $ 2,975    $ 89   

Other Investment Grade (AA, A, BBB)

                                   579      5   

Total Investment Grade

                    4,506      211      $ 3,554      94   

BB

                   25      1   

B

                   3     

Lower than B

                     

No Rating

                                   254      (5

Total Sub-Investment Grade

                                   282      (4

Total

                  $ 4,506    $ 211      $ 3,836    $ 90   
(a) Table excludes $4 million and $14 million of available for sale and held to maturity agency asset-backed securities, respectively.

 

Residential Mortgage-Backed Securities

At March 31, 2010, our residential mortgage-backed securities portfolio was comprised of $22.7 billion fair value of US government agency-backed securities and $7.7 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 quarter of 2010, we recorded OTTI credit losses of $73 million on non-agency residential mortgage-backed securities. As of March 31, 2010, $69 million of the year-to-date credit losses related to securities rated below investment grade. As of March 31, 2010, the noncredit portion of OTTI losses recorded in accumulated other comprehensive loss for non-agency residential mortgage-backed securities totaled $1.1 billion and the related securities had a fair value of $3.0 billion.

The fair value of sub-investment grade investment securities for which we have not recorded an OTTI credit loss as of


 

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March 31, 2010 totaled $2.4 billion, with unrealized net losses of $475 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 $6.4 billion at March 31, 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 $1.2 billion fair value at March 31, 2010 consisting of multi-family housing. Substantially all of the securities are the most senior tranches in the subordination structure.

There were no OTTI credit losses on commercial mortgage-backed securities recorded during the first quarter. The remaining fair value of the securities for which OTTI was previously recorded approximates zero. All of the previously impaired securities were rated below investment grade.

Asset-Backed Securities

The fair value of the asset-backed securities portfolio was $5.4 billion at March 31, 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 three months of 2010, we recorded OTTI credit losses of $43 million on asset-backed securities. All of the securities were collateralized by first and second lien residential mortgage loans and were rated below investment grade. As of March 31, 2010, the noncredit portion of OTTI losses recorded in accumulated other comprehensive loss for asset-backed securities totaled $203 million and the related securities had a fair value of $559 million.

For the sub-investment grade investment securities for which we have not recorded an OTTI loss through March 31, 2010, the remaining fair value was $598 million, with unrealized net losses of $88 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   

March 31

2010

  

Dec. 31

2009

Commercial mortgages at fair value

   $ 1,041    $ 1,050

Commercial mortgages at lower of cost or market

     275      251

Total commercial mortgages

     1,316      1,301

Residential mortgages at fair value

     1,158      1,012

Other

     217      226

Total

   $ 2,691    $ 2,539

We stopped originating certain commercial mortgage loans designated as held for sale during the first quarter of 2008 and intend to continue pursuing opportunities to reduce these positions at appropriate prices. We sold $24 million of commercial mortgage loans held for sale carried at fair value in the first three months of 2010 and sold $115 million in the first three months of 2009.

We recognized net gains of $9 million in the first three months of 2010 on the valuation and sale of commercial mortgage loans held for sale, net of hedges compared with losses of $1 million in the comparable 2009 period.

Residential mortgage loan origination volume was $2.0 billion in the first quarter of 2010. Substantially all such loans were originated to agency or FHA standards. We sold $1.9 billion of loans and recognized related gains of $39 million during the first three months of 2010 compared with $6.3 billion and $175 million, respectively, for the first three months of 2009.

Net interest income on residential mortgage loans held for sale was $80 million for the first quarter of 2010 and $91 million for the first quarter of 2009.


 

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FUNDING AND CAPITAL SOURCES

Details Of Funding Sources

 

In millions    March 31
2010
  

Dec. 31

2009

Deposits

       

Money market

   $ 86,427    $ 85,838

Demand

     39,993      40,406

Retail certificates of deposit

     45,394      48,622

Savings

     6,963      6,401

Other time

     956      1,088

Time deposits in foreign offices

     2,790      4,567

Total deposits

     182,523      186,922

Borrowed funds

       

Federal funds purchased and repurchase agreements

     5,511      3,998

Federal Home Loan Bank borrowings

     8,700      10,761

Bank notes and senior debt

     12,638      12,362

Subordinated debt

     10,001      9,907

Other

     5,611      2,233

Total borrowed funds

     42,461      39,261

Total

   $ 224,984    $ 226,183

Total funding sources decreased $1.2 billion, or 1%, at March 31, 2010 compared with December 31, 2009.

Total deposits decreased $4.4 billion at March 31, 2010 compared with December 31, 2009. Deposits decreased in the comparison due to the withdrawal of corporate client balances in noninterest-bearing demand deposits, the continued reduction of non-relationship certificates of deposit and lower time deposits in foreign offices, partially offset by increased balances of interest-bearing transaction accounts.

Interest-bearing deposits represented 76% of total deposits at both March 31, 2010 and December 31, 2009.

Total borrowed funds increased $3.2 billion since December 31, 2009. In February 2010, PNC Funding Corp issued $2.0 billion of senior notes as described further in the Liquidity Risk Management section of this Financial Review. In addition, other borrowed funds at March 31, 2010 included an increase in commercial paper borrowings of $3.1 billion primarily due to the consolidation of Market Street.

 

Capital

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

Total shareholders’ equity decreased $3.1 billion, to $26.8 billion, at March 31, 2010 compared with December 31, 2009 primarily due to the following:

   

A decline of $7.3 billion in capital surplus preferred stock in connection with our February 2010 redemption of the Series N Preferred Stock as explained further in the Executive Summary section of this Financial Review,

   

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

   

A decline of $.7 billion in accumulated other comprehensive loss primarily as a result of decreases in net unrealized securities losses as more fully described in the Investment Securities portion of this Consolidated Balance Sheet Review.

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

We expect to continue to increase our common equity as a proportion of total capital through growth in retained earnings and will consider other capital opportunities as appropriate.

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 first quarter 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.


 

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Table of Contents

Risk-Based Capital

 

Dollars in millions    March 31
2010
    Dec. 31
2009
 

Capital components

      

Shareholders’ equity

      

Common

   $ 26,172      $ 21,967   

Preferred

     646        7,975   

Trust preferred capital securities

     3,000        2,996   

Noncontrolling interests

     1,698        1,611   

Goodwill and other intangible assets

     (10,518     (10,652

Eligible deferred income taxes on goodwill and other intangible assets

     705        738   

Pension, other postretirement benefit plan adjustments

     421        542   

Net unrealized securities losses, after-tax

     1,089        1,575   

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

     (244     (166

Other

     (63     (63

Tier 1 risk-based capital

     22,906        26,523   

Subordinated debt

     5,277        5,356   

Eligible allowance for credit losses

     2,827        2,934   

Total risk-based capital

   $ 33,010      $ 34,813   

Tier 1 common capital

      

Tier 1 risk-based capital

   $ 22,906      $ 26,523   

Preferred equity

     (646     (7,975

Trust preferred capital securities

     (3,000     (2,996

Noncontrolling interests

     (1,698     (1,611

Tier 1 common capital

   $ 17,562      $ 13,941   

Assets

      

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

   $ 223,426      $ 232,257   

Adjusted average total assets

     259,078        263,103   

Capital ratios

      

Tier 1 risk-based

     10.3     11.4

Tier 1 common

     7.9        6.0   

Total risk-based

     13.9        15.0   

Leverage

     8.8        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 March 31, 2010 capital levels were aligned with them.

PNC’s Tier 1 risk-based capital ratio decreased by 110 basis points to 10.3% at March 31, 2010 from 11.4% at

December 31, 2009 due to our redemption of the Series N Preferred Stock. See Repurchase of Outstanding TARP Preferred Stock in the Executive Summary section of this Financial Review.

Our Tier 1 common capital ratio was 7.9% at March 31, 2010, an increase of 190 basis points compared with 6.0% at December 31, 2009. Our first quarter earnings and common stock offering were reflected in the higher Tier 1 common capital ratio.

Our Tier 1 risk-based capital ratio and our Tier 1 common capital ratio would have been 11.0% and 8.6%, respectively, at March 31, 2010 had they included the estimated net impact of the pending sale of GIS. A reconciliation of these ratios reflecting the impact of the pending sale of GIS to the ratios set forth in the Risk-Based Capital table above follows:

 

Dollars in billions   Tier 1
risk-based
    Tier 1
common
 

Ratios – as reported

    10.3     7.9

Capital – as reported

  $ 22.9      $ 17.6   

Adjustment:

     

Net impact of pending 2010 sale of GIS (a)

    1.6        1.6   

Capital – pro forma

  $ 24.5      $ 19.2   

Ratios – pro forma

    11.0     8.6
(a) The estimated net impact of this pending sale is as follows:

 

Dollars in billions        

Sales price

   $ 2.3   

Less:

    

Book equity / intercompany debt

     (1.5

Pretax gain

     .8   

Income taxes

     (.3

After-tax gain

     .5   

Elimination of net intangible assets:

    

Goodwill and other intangible assets

     1.3   

Eligible deferred income taxes on goodwill and other intangible assets

     (.2

Net intangible assets

     1.1   

Estimated net impact of pending sale of GIS

   $ 1.6   

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

If the sale of GIS is not completed by November 1, 2010, we will be required, on or before that date, to raise $700 million in additional Tier 1 common capital. We would do this either through the sale of assets approved by the Federal Reserve Board and/or through the issuance of additional common stock.


 

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Table of Contents

At March 31, 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 2010.

The access to, and cost of, funding new business initiatives including acquisitions, the ability to engage in expanded business activities, the ability to pay dividends, the level of deposit insurance costs, and the level and nature of regulatory oversight depend, in part, on a financial institution’s capital strength.

OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

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

   

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

   

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

On January 1, 2010, we adopted ASU 2009-17 – Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This guidance removes the scope exception for qualifying special-purpose entities, contains new criteria for determining the primary beneficiary of a variable interest entity (VIE) and increases the frequency of required reassessments to determine whether an entity is the primary beneficiary of a VIE. VIEs are assessed for consolidation under Topic 810 when we hold variable interests in these entities. PNC consolidates VIEs when we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Effective January 1, 2010, we consolidated Market Street, a credit card securitization trust, and certain Low Income Housing Tax Credit (LIHTC) investments. We recorded consolidated assets and liabilities of $4.1 billion and $4.2 billion, respectively, and an after-tax cumulative effect adjustment to retained earnings of $92 million upon adoption.


 

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

Consolidated VIEs – Carrying Value (a)

 

March 31, 2010

In millions

   Market
Street
  Credit Card
Securitization
Trust
   

Tax Credit

Investments (b)

 

Credit Risk

Transfer
Transaction

    Total  

Assets

                    

Cash and due from banks

           $ 17       $ 17   

Interest-earning deposits with banks

             4         4   

Investment securities

   $ 650                 650   

Loans

     2,149   $ 2,216          $ 482        4,847   

Allowance for loan and lease losses

         (198         (11     (209

Equity investments

             1,767         1,767   

Other assets

     419             345     11        775   

Total assets

   $ 3,218   $ 2,018      $ 2,133   $ 482      $ 7,851   

Liabilities

                    

Other borrowed funds

   $ 2,811   $ 1,512      $ 131       $ 4,454   

Accrued expenses

         21        97         118   

Other liabilities

     410             562             972   

Total liabilities

   $ 3,221   $ 1,533      $ 790           $ 5,544   
(a) Amounts represent carrying value on PNC’s Consolidated Balance Sheet.
(b) Amounts reported primarily represent investments in low income housing projects.

 

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Consolidated VIEs

 

In millions   

Aggregate

Assets (a)

 

Aggregate

Liabilities (a)

              

March 31, 2010

                 

Market Street

   $ 3,779   $ 3,790         

Credit Card Securitization Trust

     2,208     1,643         

Tax Credit Investments (b)

     2,156     877         

Credit Risk Transfer Transaction

     829     829         
   

December 31, 2009

                 

Tax Credit Investments (b)

   $ 1,933   $ 808         

Credit Risk Transfer Transaction

     860     860         
(a) Aggregate assets and aggregate liabilities differ from the consolidated carrying value of assets and liabilities due to elimination of intercompany assets and liabilities held by the consolidated VIE.
(b) Amounts reported primarily represent investments in low income housing projects.

Non-Consolidated VIEs

 

In millions    Aggregate
Assets
   Aggregate
Liabilities
  

PNC Risk

of Loss

   

Carrying

Value of

Assets

   

Carrying

Value of
Liabilities

 

March 31, 2010

                      

Tax Credit Investments (a)

   $ 3,243    $ 1,794    $ 664      $ 664 (c)    $ 300 (d) 

Commercial Mortgage-Backed Securitizations (b)

     90,648      90,648      2,149        2,149 (e)     

Residential Mortgage-Backed Securitizations (b)

     55,013      55,013      1,314        1,311 (e)      3 (d) 

Collateralized Debt Obligations

     24             2        2 (c)         

Total

   $ 148,928    $ 147,455    $ 4,129      $ 4,126      $ 303   
            
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 investments in low income housing projects. Aggregate assets and aggregate liabilities represent estimated balances due to limited availability of financial information associated with certain acquired National City partnerships.
(b) Amounts reported reflect involvement with securitization SPEs where PNC transferred to and/or services loans for a SPE and we hold securities issued by that SPE. For information regarding where we only hold securities refer to Note 7 Investment Securities.
(c) Included in the table above as we do not have the power to direct the activities that most significantly impact the economic performance of the entity. Included in Equity investments on our Consolidated Balance Sheet.
(d) Included in Other liabilities on our Consolidated Balance Sheet.
(e) Included in 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 which has been rated A1/P1/F1 by Standard & Poor’s, Moody’s, and Fitch, respectively, 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 quarter of 2010, Market Street met all of its funding needs through the issuance of commercial paper.

Market Street commercial paper outstanding was $2.8 billion at March 31, 2010 and $3.1 billion at December 31, 2009. The weighted average maturity of the commercial paper was 36 days at both March 31, 2010 and 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


 

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

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

The commercial paper obligations at March 31, 2010 and December 31, 2009 were effectively collateralized by Market Street’s assets. While PNC may be obligated to fund under the $5.4 billion of liquidity facilities for events such as commercial paper market disruptions, borrower bankruptcies, collateral deficiencies or covenant violations, our credit risk under the liquidity facilities is secondary to the risk of first loss provided by the borrower such as by the over- collateralization of the assets or by another third party in the form of deal-specific credit enhancement. Deal-specific credit enhancement that supports the commercial paper issued by Market Street is generally structured to cover a multiple of expected losses for the pool of assets and is sized to generally meet rating agency standards for comparably structured transactions. In addition, PNC would be required to fund $441 million of the liquidity facilities if the underlying assets are in default. Market Street creditors have no direct recourse to PNC.

PNC provides program-level credit enhancement to cover net losses in the amount of 10% of commitments, excluding explicitly rated AAA/Aaa facilities. PNC provides 100% of the enhancement in the form of a cash collateral account funded by a loan facility. This facility expires in March 2013. At March 31, 2010, approximately $567 million was outstanding on this facility. This amount was eliminated in PNC’s Consolidated Balance Sheet as of March 31, 2010 due to the consolidation of Market Street. We are not required to nor have we provided additional financial support to the SPE.

 

Assets of Market Street (a)

 

In millions   Outstanding   Commitments   Weighted
Average
Remaining
Maturity
In Years

December 31, 2009

       

Trade receivables

  $ 1,551   $ 4,105   2.01

Automobile financing

    480     480   4.20

Auto fleet leasing

    412     543   .85

Collateralized loan obligations

    126     150   .36

Residential mortgage

    13     13   26.01

Other

    534     567   1.65

Cash and miscellaneous receivables

    582          

Total

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

Market Street Commitments by Credit Rating (a)

 

     

March 31,

2010

   

December 31,

2009

 

AAA/Aaa

   16   14

AA/Aa

   62      50   

A/A

   20      34   

BBB/Baa

   2      2   

Total

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

Credit Card Securitization Trust

We are the sponsor of several credit card securitizations facilitated through an SPE trust. This bankruptcy-remote SPE or VIE was established to purchase credit card receivables from the sponsor and to issue and sell asset-backed securities created by it to independent third-parties. The SPE was financed primarily through the sale of these asset-backed securities. These transactions were originally structured as a form of liquidity and to afford favorable capital treatment. At March 31, 2010, Series 2005-1, 2006-1, 2007-1, and 2008-3 issued by the SPE were outstanding.

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


 

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gives us the obligation to absorb or receive expected losses or residual returns that are significant to the SPE. Accordingly, all retained interests held in the credit card SPE are eliminated in consolidation. We are not required to nor have we provided additional financial support to the SPE. Additionally, creditors of the SPE have no direct recourse to PNC.

Tax Credit Investments

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

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

Typically, the general partner or managing member will be the party that has the right to make decisions that will most significantly impact the economic performance of the entity. The primary sources of losses and benefits in LIHTC investments are the tax credits, tax benefits due to passive losses on the investments, and development and operating cash flows. We have consolidated LIHTC investments in which we are the general partner or managing member and have a limited partnership interest or non-managing member interest that could potentially absorb losses or receive benefits that are significant. The assets are primarily included in Equity investments and Other assets on our Consolidated Balance Sheet with the liabilities classified in Other liabilities and third party investors’ interests included in the Equity section as Noncontrolling interests. Neither creditors nor equity investors in the LIHTC investments have any recourse to our general credit. There are no terms or conditions that

have required or could require us, as the primary beneficiary, to provide financial support. Also, we have not provided nor do we intend to provide financial or other support to the limited partnership or LLC that we are not contractually obligated to provide. The consolidated aggregate assets and liabilities of these LIHTC investments are provided in the Consolidated VIEs table and reflected in the “Other” business segment.

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

Credit Risk Transfer Transaction

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

The credit risk transfer agreement associated with this transaction is no longer outstanding as a result of certain actions taken by us and the independent third-party in 2009. Refer to our 2009 Form 10-K for further details of these actions. We continue to hold all asset-backed securities issued by the SPE and are also the depositor in this transaction. As a result, we are deemed the primary beneficiary of the SPE. Our rights as depositor give us the power to direct the activities of the SPE that most significantly affect its economic performance and our holding of all asset-backed securities gives us the obligation to absorb or receive expected losses or residual returns that are significant to the SPE. Accordingly, this SPE is consolidated and all of the entity’s assets, liabilities, and equity associated with the securities held by us are intercompany balances and are eliminated in consolidation. We are not required to nor have we provided additional financial support to the SPE.


 

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Residential and Commercial Mortgage-Backed Securitizations

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

Our first step in our assessment is to determine whether we hold a variable interest in the securitization SPE. We hold a variable interest in an Agency and Non-Agency securitization SPE through our holding of mortgage-backed securities issued by the SPE and/or our recourse obligations. Each SPE in which we hold a variable interest is evaluated to determine whether we are the primary beneficiary of the entity. For Agency securitization transactions, our contractual role as servicer does not give us the power to direct the activities that most significantly affect the economic performance of the SPEs. Thus, we are not the primary beneficiary of these entities. For Non-Agency securitization transactions, we would be the primary beneficiary to the extent our servicing activities give us the power to direct the activities that most significantly affect the economic performance of the SPE and we hold a more than insignificant variable interest in the entity. At March 31, 2010, our level of continuing involvement in Non-Agency securitization SPEs did not result in PNC as the primary beneficiary of any of these entities. Details about the Agency and Non-Agency securitization SPEs where we hold a variable interest and are not the primary beneficiary are included in the table above. Our maximum exposure to loss as a result of our involvement with these SPEs is the carrying value of the mortgage-backed securities, servicing assets, servicing advances, and our liabilities associated with our recourse obligations. Creditors of the securitization SPEs have no recourse to PNC’s assets or general credit.

Perpetual Trust Securities

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

In February 2008, PNC Preferred Funding LLC (the LLC), one of our indirect subsidiaries, sold $375 million of 8.700% Fixed-to-Floating Rate Non-Cumulative Exchangeable Perpetual Trust Securities of PNC Preferred Funding Trust III (Trust III) to third parties in a private placement. In connection with the private placement, Trust III acquired $375 million of Fixed-to-Floating Rate Non-Cumulative Perpetual

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

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

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

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

PNC Bank, N.A. has contractually committed to Trust I that if full dividends are not paid in a dividend period on the Trust I


 

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

PNC Capital Trust E Trust Preferred Securities

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

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

closing of the Trust E Securities sale, we entered into a replacement capital covenant as described more fully in our 2009 Form 10-K.

Acquired Entity Trust Preferred Securities

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

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

FAIR VALUE MEASUREMENTS

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

At both March 31, 2010 and December 31, 2009, assets recorded at fair value represented 23% of total assets and liabilities recorded at fair value represented 2% of total liabilities.


 

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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.

 

     March 31, 2010     December 31, 2009  
In millions    Total Fair
Value
   Level 3     Total
Fair
Value
   Level 3  

Assets

            

Securities available for sale

   $ 49,541    $ 9,302      $ 50,798    $ 9,933   

Financial derivatives

     4,226      86        3,916      50   

Residential mortgage loans held for sale

     1,158        1,012     

Trading securities

     1,595      77        2,124      89   

Residential mortgage servicing rights

     1,271      1,271        1,332      1,332   

Commercial mortgage loans held for sale

     1,041      1,041        1,050      1,050   

Equity investments

     1,208      1,208        1,188      1,188   

Customer resale agreements

     963        990     

Loans

     111        107     

Other assets

     880      461        716      509   

Total assets

   $ 61,994    $ 13,446      $ 63,233    $ 14,151   

Level 3 assets as a percentage of Total Assets at Fair Value

        22        22

Level 3 assets as a percentage of Consolidated Assets

            5            5

Liabilities

            

Financial derivatives

   $ 3,748    $ 494      $ 3,839    $ 506   

Trading securities sold short

     255        1,344     

Other liabilities

                    6         

Total liabilities

   $ 4,003    $ 494      $ 5,189    $ 506   

Level 3 liabilities as a percentage of Total Liabilities at Fair Value

        12        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 and trading security portfolios for which there was a lack of observable trading activity. Other Level 3 assets include commercial mortgage loans held for sale, certain equity securities, auction rate securities, corporate debt

securities, private equity investments, residential mortgage servicing rights and other assets.

During the first three 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 pending sale, GIS is no longer a reportable business segment. Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. We have aggregated the business results for certain similar operating segments for financial reporting purposes.

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

We have allocated the allowances for loan and lease losses and unfunded loan commitments and letters of credit based on our assessment of risk inherent in the business segment loan

portfolios. Our allocation of the costs incurred by operations and other shared support areas not directly aligned with the businesses is primarily based on the use of services.

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

Period-end Employees

 

    

March 31

2010

 

Dec. 31

2009

 

March 31

2009

Full-time employees

       

Retail Banking

  21,522   21,416   22,468

Corporate & Institutional Banking

  3,760   3,746   4,169

Asset Management Group

  2,986   2,960   3,210

Residential Mortgage Banking

  3,340   3,267   3,596

Distressed Assets Portfolio

  178   175   110

Other

       

Operations & Technology

  9,284   9,275   9,406

Staff Services and other (a)

  9,043   8,922   8,899

Total Other

  18,327   18,197   18,305

Total full-time employees

  50,113   49,761   51,858

Retail Banking part-time employees

  4,798   4,737   5,375

Other part-time employees

  1,187   1,322   1,562

Total part-time employees

  5,985   6,059   6,937

Total

  56,098   55,820   58,795
(a) Includes employees of GIS.

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.


 

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Results Of Businesses – Summary

(Unaudited)

 

     Earnings (Loss)     Revenue     Average Assets (a)
Three months ended March 31 – in millions    2010     2009     2010    2009     2010    2009

Retail Banking (b)

   $ 24      $ 50      $ 1,360    $ 1,441      $ 67,966    $ 65,620

Corporate & Institutional Banking

     360        359        1,248      1,290        79,516      91,130

Asset Management Group

     39        39        228      250        7,117      7,457

Residential Mortgage Banking

     82        227        237      528        8,855      7,219

BlackRock

     77        23        99      26        6,225      4,295

Distressed Assets Portfolio

     72        3        337      344        19,507      24,816

Total business segments

     654        701        3,509      3,879        189,186      200,537

Other (b) (c) (d)

     (6     (181     254      (193     77,962      80,315

Results from continuing operations before noncontrolling interests

   $ 648      $ 520      $ 3,763    $ 3,686      $ 267,148    $ 280,852
(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 three months of 2010 and 2009 included $113 million and $52 million, respectively, of pretax integration costs primarily related to National City.
(d) “Other” average assets include securities available for sale associated with asset and liability management activities.

 

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RETAIL BANKING

(Unaudited)

 

Three months ended March 31

Dollars in millions

  2010 (a)     2009  

INCOME STATEMENT

     

Net interest income

  $ 871      $ 921   

Noninterest income

     

Service charges on deposits

    195        220   

Brokerage

    53        61   

Consumer services

    209        208   

Other

    32        31   

Total noninterest income

    489        520   

Total revenue

    1,360        1,441   

Provision for credit losses

    340        304   

Noninterest expense

    975        1,053   

Pretax earnings

    45        84   

Income taxes

    21        34   

Earnings

  $ 24      $ 50   

AVERAGE BALANCE SHEET

     

Loans

     

Consumer

     

Home equity

  $ 26,824      $ 27,638   

Indirect

    3,973        4,120   

Education

    8,060        4,882   

Credit cards

    4,079        2,112   

Other consumer

    1,790        1,860   

Total consumer

    44,726        40,612   

Commercial and commercial real estate

    11,487        12,755   

Floor plan

    1,296        1,495   

Residential mortgage

    1,800        2,252   

Total loans

    59,309        57,114   

Goodwill and other intangible assets

    5,935        5,807   

Other assets

    2,722        2,699   

Total assets

  $ 67,966      $ 65,620   

Deposits

     

Noninterest-bearing demand

  $ 16,776      $ 15,819   

Interest-bearing demand

    19,212        17,900   

Money market

    39,699        38,831   

Total transaction deposits

    75,687        72,550   

Savings

    6,552        6,360   

Certificates of deposit

    45,614        56,355   

Total deposits

    127,853        135,265   

Other liabilities

    1,671        82   

Capital

    8,195        8,376   

Total liabilities and equity

  $ 137,719      $ 143,723   

PERFORMANCE RATIOS

     

Return on average capital

    1     2

Noninterest income to total revenue

    36        36   

Efficiency

    72        73   

OTHER INFORMATION (b)

     

Credit-related statistics:

     

Commercial nonperforming assets

  $ 324      $ 194   

Consumer nonperforming assets

    276        87   

Total nonperforming assets (c)

  $ 600      $ 281   

Impaired loans (d)

  $ 1,013      $ 1,269   

Commercial lending net charge-offs

  $ 96      $ 83   

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

    96        49   

Consumer lending (excluding credit card) net charge-offs

    108        75   

Total net charge-offs

  $ 300      $ 207   

Commercial lending annualized net charge-off ratio

    3.05     2.36

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

    9.54     9.41

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

    1.03     .75

Total annualized net charge-off ratio

    2.05     1.47

Other statistics:

     

ATMs

    6,467        6,402   

Branches (e)

    2,461        2,586   

 

At March 31

Dollars in millions, except as noted

   2010 (a)     2009  

OTHER INFORMATION (CONTINUED) (b)

      

Home equity portfolio credit statistics:

      

% of first lien positions (f)

     34     35

Weighted average loan-to-value ratios (f)

     73     74

Weighted average FICO scores (g)

     725        727   

Annualized net charge-off ratio

     .70     .34

Loans 30 – 89 days past due

     .74     .73

Loans 90 days past due

     .85     .67

Customer-related statistics (h):

      

Retail Banking checking relationships

     5,037,000        5,134,000   

Retail online banking active customers

     2,782,000        2,636,000   

Retail online bill payment active customers

     826,000        726,000   

Brokerage statistics:

      

Financial consultants (i)

     722        658   

Full service brokerage offices

     41        43   

Brokerage account assets (billions)

   $ 33      $ 26   
(a) Information as of March 31, 2010 reflects the impact of the consolidation in our financial statements for the securitized portfolio of approximately $1.6 billion of credit card loans as of January 1, 2010.
(b) Presented as of March 31 except for net charge-offs and annualized net charge-off ratios, which are for the three months ended.
(c) Includes nonperforming loans of $579 million at March 31, 2010 and $264 million at March 31, 2009.
(d) Recorded investment of purchased impaired loans related to National City.
(e) Excludes certain satellite branches that provide limited products and/or services.
(f) Includes loans from acquired portfolios for which lien position and loan-to-value information was limited.
(g) Represents the most recent FICO scores we have on file.
(h) Amounts as of March 31, 2010 and March 31, 2009 include the impact of National City prior to completion of all application system conversions. These amounts may be refined subsequent to system conversions.
(i) Financial consultants provide services in full service brokerage offices and traditional bank branches.

Retail Banking earned $24 million for the quarter compared with earnings of $50 million for the year-ago quarter. Earnings declined from the prior year quarter as a result of increased credit costs, 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.

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

 

Information as of March 31, 2010 reflects the impact of the consolidation in our financial statements for the securitized credit card portfolio of approximately $1.6 billion of credit card loans as of January 1, 2010. This consolidation impacted nearly all major categories of our income statement and primarily the loan and borrowings categories on the balance sheet.

 

As of mid-April 2010, we successfully completed the third of four major conversions of National City customers to the PNC platform. To date, we have successfully converted customer relationships at over 1,000 National City branches to PNC’s network and platform. The remaining branch conversions are scheduled to be completed in June 2010.


 

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Success in implementing Retail Banking’s deposit strategy resulted in growth in average demand deposits of $2.3 billion, or 7%, over the prior year first quarter. Excluding approximately $.9 billion of average demand deposits from the first quarter 2009 balances related to the 61 required branch divestitures completed by early September 2009, average demand deposits increased $3.2 billion, or 10%, over the prior year first quarter.

 

Growth in demand deposits reflected the continued focus of Retail Banking on expanding and deepening customer relationships. Checking relationships declined by 5,000 during the first quarter of 2010 reflecting the impact of branch conversion activities in many markets. Customer retention was stronger than expected and helped offset lower acquisition of new relationships in branch conversion markets. Markets not impacted by conversion activities had strong first quarter checking relationship results. Excluding the impact of the required branch divestitures, net new customer and business checking relationships grew 54,000 over the prior year quarter.

 

Our investment in online banking capabilities continues to pay off. Active online bill payment and online banking customers grew by 6% and 1%, respectively, during the first quarter. Excluding the impact of the required branch divestitures, active online bill pay and active online banking customers have increased 16% and 8%, respectively since March 31, 2009.

 

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

 

At March 31, 2010, Retail Banking had 2,461 branches and an ATM network of 6,467 machines giving PNC one of the largest distribution networks among US banks. We continue to invest in the branch network, albeit at a slower pace than in prior years given the current economic conditions. In the first quarter of 2010, we opened 3 traditional branches, consolidated 55 branches and had a net reduction of 6 ATMs. The reduction in branches and ATMs mainly resulted from branch consolidations following the second major National City customer conversion in February 2010.

Total revenue for the first quarter of 2010 was $1.360 billion compared with $1.441 billion for the same quarter in 2009. Net interest income of $871 million declined $50 million compared with the first quarter 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 $31 million over the first quarter of 2009. The decrease can be attributed to the negative impact of the consolidation of the securitized credit card portfolio, a decrease in service charges on deposits related to lower

overdraft charges, lower brokerage fees, and the impact of the required branch divestitures, but benefited as a result of higher transaction volume-related fees within consumer services.

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

Current estimates are that 2010 earnings will be impacted by approximately $115 million related to Regulation E and by approximately $40 million attributable to the Credit CARD Act. These estimates do not include any additional impact to revenue for other changes that may be made in 2010 responding to market conditions or other/additional regulatory requirements, or any offsetting impact of changes to products and/or pricing.

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

The provision for credit losses was $340 million for the first quarter of 2010 compared with $304 million in the first quarter of 2009. Net charge-offs were $300 million for the first quarter of 2010 compared with $207 million in the prior year first quarter. The year over year increase in provision and net charge-offs is due to the deteriorating economy that occurred throughout 2009 as well as the larger credit card portfolio that is now on the balance sheet.

Noninterest expense for the first quarter declined $78 million from the prior year first quarter. Expenses were well managed as continued investments in distribution channels were more than offset by reductions in expenses from acquisitions and the required branch divestitures.

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

In the first quarter of 2010, average total deposits decreased $7.4 billion compared with 2009.

 

Average demand deposits increased $2.3 billion, or 7%, over the same quarter of 2009. The increase was primarily driven by organic growth.


 

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Average money market deposits increased $868 million from the first quarter 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 quarter of 2010, average certificates of deposit decreased $10.7 billion from the same quarter last year. A continued decline in certificates of deposit is expected in 2010 due to the planned run off of higher rate certificates of deposits 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 quarter of 2010, average total loans were $59.3 billion, an increase of $2.2 billion over the same quarter last year.

 

Average commercial and commercial real estate loans declined $1.3 billion compared with the first quarter of 2009. The decline was primarily due to the required branch divestitures and loan demand being outpaced by

   

refinancings, paydowns, and charge-offs. Average home equity loans declined $814 million over the same quarter of 2009. Consumer loan demand has slowed as a result of the current economic environment. Our 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 credit card balances increased $2.0 billion over the first quarter of 2009. The increase was primarily the result of the consolidation of the securitized credit card portfolio effective January 1, 2010.

 

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


 

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CORPORATE & INSTITUTIONAL BANKING

(Unaudited)

 

Three months ended March 31

Dollars in millions except as noted

   2010 (a)    2009

INCOME STATEMENT

       

Net interest income

   $ 877    $ 1,023

Noninterest income

       

Corporate service fees

     242      218

Other

     129      49

Noninterest income

     371      267

Total revenue

     1,248      1,290

Provision for credit losses

     236      287

Noninterest expense

     445      430

Pretax earnings

     567      573

Income taxes

     207      214

Earnings

   $ 360    $ 359

AVERAGE BALANCE SHEET

       

Loans

       

Commercial

   $ 34,024    $ 41,709

Commercial real estate

     17,961      19,460

Commercial – real estate related

     3,128      4,267

Asset-based lending

     5,940      7,021

Equipment lease financing

     5,318      5,554

Total loans

     66,371      78,011

Goodwill and other intangible assets

     3,795      3,376

Loans held for sale

     1,410      1,714

Other assets

     7,940      8,029

Total assets

   $ 79,516    $ 91,130

Deposits

       

Noninterest-bearing demand

   $ 22,271    $ 17,108

Money market

     12,253      7,949

Other

     7,610      7,391

Total deposits

     42,134      32,448

Other liabilities

     10,870      10,024

Capital

     7,633      7,690

Total liabilities and equity

   $ 60,637    $ 50,162

 

Three months ended March 31

Dollars in millions except as noted

   2010 (a)     2009  

PERFORMANCE RATIOS

      

Return on average capital

     19     19

Noninterest income to total revenue

     30        21   

Efficiency

     36        33   

COMMERCIAL MORTGAGE SERVICING PORTFOLIO (in billions)

      

Beginning of period

   $ 287      $ 270   

Acquisitions/additions

     8        5   

Repayments/transfers

     (13     (6

End of period

   $ 282      $ 269   

OTHER INFORMATION

      

Consolidated revenue from: (b)

      

Treasury Management

   $ 298      $ 276   

Capital Markets

   $ 164      $ 43   

Commercial mortgage loans held for sale (c)

   $ 27      $ 22   

Commercial mortgage loan servicing (d)

     88        72   

Total commercial mortgage banking activities

   $ 115      $ 94   

Total loans (e)

   $ 65,076      $ 75,886   

Credit-related statistics:

      

Nonperforming assets (e) (f)

   $ 3,343      $ 1,862   

Impaired loans (e) (g)

   $ 1,033      $ 1,757   

Net charge-offs

   $ 271      $ 167   

Net carrying amount of commercial mortgage servicing rights (e)

   $ 921      $ 874   
(a) Information as of March 31, 2010 reflects the impact of the consolidation in our financial statements of Market Street Funding LLC effective January 1, 2010. Also, includes $1.6 billion of loans, net of eliminations, and $2.8 billion of commercial paper borrowings included in other liabilities.
(b) Represents consolidated PNC amounts.
(c) Includes valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, origination fees, gains on sale of loans held for sale and net interest income on loans held for sale.
(d) Includes net interest income and noninterest income from loan servicing and ancillary services.
(e) At March 31.
(f) Includes nonperforming loans of $3.2 billion at March 31, 2010 and $1.8 billion at March 31, 2009.
(g) Recorded investment of purchased impaired loans related to National City.

Corporate & Institutional Banking earned $360 million in the first three months of 2010 compared with $359 million in the first quarter of 2009. Earnings were relatively flat as a decrease in net interest income was offset by higher noninterest income and a lower provision for credit losses.

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

   

Net interest income for the first three months of 2010 was $877 million, a decrease of $146 million from 2009 impacted by a decrease in average loans and lower interest credits assigned to deposits.

   

Corporate service fees were $242 million for the first quarter of 2010, an increase of $24 million over the same period a year ago primarily due to increases in commercial mortgage special servicing ancillary income and merger and acquisition advisory fees. The major components of corporate service fees are


 

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treasury management, corporate finance fees and commercial mortgage servicing revenue.

   

Our Treasury Management business, which is ranked in the top ten nationally, continues to invest in the healthcare initiative which is designed to help provide our customers opportunities to reduce operating costs. Healthcare-related revenues in the first quarter of 2010 increased 32% from the first quarter of 2009.

   

Harris Williams is one of the nation’s largest and most successful mergers and acquisitions advisory teams focused exclusively on the middle markets. Although this business continues to be affected by the difficult economic environment that has impacted acquisition activity, fees increased slightly in the first quarter of 2010 compared with the first quarter of 2009. Harris Williams recently established its first overseas operation in London.

   

Midland Loan Services is one of the leading third-party providers of loan servicing, asset management and technology solutions for the commercial real estate finance industry. Midland is the only company in the industry with the highest U.S. servicer and special servicer ratings from Fitch Ratings and Standard & Poor’s and has achieved these highest ratings for 10 consecutive years.

   

The commercial mortgage servicing portfolio was $282 billion at March 31, 2010 compared with $269 billion at March 31, 2009. The increase from a year ago reflected the continued growth in the agency and conventional servicing portfolios that was somewhat offset by a decline in the commercial mortgage-backed securities servicing portfolio.

 

Other noninterest income was $129 million for the first three months of 2010, an increase of $80 million from the same period in 2009 primarily due to a reduction in reserves for the DUS lending program, a reduced impact of counterparty credit risk on valuations of customer derivative positions and higher underwriting revenue, partially offset by a decline in net valuation gains on the commercial mortgage and multi-family held for sale loan portfolios carried at fair value.

 

Provision for credit losses was $236 million in the first three months of 2010, a decrease of $51 million from 2009. The 2010 provision reflected continued deterioration in commercial real estate loans. The decline compared with the prior year first quarter was driven primarily by lower loan balances. Net charge-offs for the

   

first quarter of 2010 were $271 million compared with $167 million for the first quarter of 2009. Net charge-offs showed signs of slowing in the middle market and asset-based lending portfolios.

 

Noninterest expense was $445 million for the first three months of 2010, an increase of $15 million from the same period in 2009. The increase was primarily due to higher compensation expense related to increased sales activity, FDIC costs associated with higher deposit balances and credit-related expenses.

 

Average loans were $66.4 billion for the first three months of 2010 compared with $78.0 billion in the first quarter of 2009. The first quarter of 2010 included an increase in loans from the consolidation of Market Street. Excluding the impact of the Market Street consolidation, average loans decreased $13.2 billion or 17% compared with the prior year first quarter. The decrease was due to reductions in non-strategic areas, paydowns and charge-offs as well as declines in utilization levels among middle-market and large corporate clients.

   

PNC Real Estate is one of the industry’s top providers of conventional and affordable multifamily financing. It specializes in providing access to federal agency loan programs and is a top Fannie Mae DUS, FHA/Ginnie Mae and Freddie MAC Program Plus lender. Commercial real estate loans declined due to reduced demand, paydowns and charge-offs.

   

PNC Business Credit is one of the top asset-based lenders in the country. Average loans in this customer set have been relatively stable since the third quarter of 2009.

   

PNC Equipment Finance is the 5th largest bank-affiliated leasing company with approximately $9 billion in equipment finance assets, although average loans and leases have declined approximately 5% due to runoff of non-strategic portfolios.

   

Average deposits were $42.1 billion for the first three months of 2010, an increase of $9.7 billion, or 30%, compared with the first quarter of 2009 as customers continued to move balances from off-balance sheet sweep products to noninterest-bearing demand deposits and from the impact of the return of deposits from National City customers who had previously moved funds to other institutions.

See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities on page 9.


 

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ASSET MANAGEMENT GROUP

(Unaudited)

 

Three months ended March 31

Dollars in millions except as noted

   2010     2009  

INCOME STATEMENT

      

Net interest income

   $ 64      $ 96   

Noninterest income

     164        154   

Total revenue

     228        250   

Provision for credit losses

     9        17   

Noninterest expense

     157        170   

Pretax earnings

     62        63   

Income taxes

     23        24   

Earnings

   $ 39      $ 39   

AVERAGE BALANCE SHEET

      

Loans

      

Consumer

   $ 3,994      $ 3,851   

Commercial and commercial real estate

     1,504        1,761   

Residential mortgage

     963        1,153   

Total loans

     6,461        6,765   

Goodwill and other intangible assets

     415        404   

Other assets

     241        288   

Total assets

   $ 7,117      $ 7,457   

Deposits

      

Noninterest-bearing demand

   $ 1,228      $ 1,260   

Interest-bearing demand

     1,699        1,544   

Money market

     3,217        3,330   

Total transaction deposits

     6,144        6,134   

Certificates of deposit and other

     818        1,289   

Total deposits

     6,962        7,423   

Other liabilities

     119        117   

Capital

     553        576   

Total liabilities and equity

   $ 7,634      $ 8,116   

PERFORMANCE RATIOS

      

Return on average capital

     29     27

Noninterest income to total revenue

     72        62   

Efficiency

     69        68   

OTHER INFORMATION

      

Total nonperforming assets (a) (b)

   $ 139      $ 68   

Impaired loans (a) (c)

   $ 191      $ 223   

Total net charge-offs

   $ 4      $ 11   
 

ASSETS UNDER ADMINISTRATION
(in billions) (a) (d)

      

Personal

   $ 96      $ 85   

Institutional

     113        131   

Total

   $ 209      $ 216   

Asset Type

      

Equity

   $ 104      $ 79   

Fixed Income

     59        57   

Liquidity/Other

     46        80   

Total

   $ 209      $ 216   

Discretionary assets under management

      

Personal

   $ 69      $ 59   

Institutional

     36        37   

Total

   $ 105      $ 96   

Asset Type

      

Equity

   $ 51      $ 38   

Fixed Income

     35        32   

Liquidity/Other

     19        26   

Total

   $ 105      $ 96   

Nondiscretionary assets under administration

     <