E XECUTIVE S UMMARY

T HE PNC F INANCIAL S ERVICES G ROUP , I NC .

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

As further described in Note 2 Acquisitions and Divestitures in our 2008 Form 10-K, on December 31, 2008, PNC acquired National City Corporation (National City). Our consolidated financial statements for the first three months of 2009 reflect the impact of National City.

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, New Jersey, Washington, DC, Maryland, Virginia, Ohio, Kentucky, Delaware, Florida, Illinois, Indiana, Michigan, Missouri, and Wisconsin. PNC also provides certain investment servicing internationally and also conducts selected consumer and commercial lending businesses and other financial services on a nationwide basis.

We expect to incur total merger and integration costs of approximately $1.2 billion pretax in connection with the acquisition of National City. This total includes $575 million pretax recognized in the fourth quarter of 2008 and $51 million pretax recognized in the first quarter of 2009. The transaction is expected to result in the reduction of approximately $1.2 billion of combined company annualized noninterest expense through the elimination of operational and administrative redundancies.

We are in the process of integrating the business and operations of National City with those of PNC.

K EY S TRATEGIC G OALS

We manage our company for the long term and are focused on returning to a moderate risk profile while maintaining strong capital and liquidity positions, investing in our markets and

products, and embracing our corporate responsibility to the communities where we do business.

Our strategy to enhance shareholder value centers on driving pre-tax, pre-provision earnings that exceed 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 returning to 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. Our actions have created a well-positioned and strong balance sheet, ample 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 regarding certain restrictions on dividends and common share repurchases resulting from PNC’s participation on December 31, 2008 in the US Treasury’s Troubled Asset Relief Program (TARP) Capital Purchase Program and other regulatory restrictions on dividend capacity.

On April 2, 2009 the Board declared a quarterly common stock dividend of $.10 per share, a reduction from the prior quarterly dividend of $.66 per share. Our Board recognizes the

importance of the dividend to our shareholders. While our overall capital and liquidity positions are strong, extreme economic and market deterioration and the changing regulatory environment drove this difficult but prudent decision. This proactive measure will help us build capital by approximately $1 billion annually, further strengthen our balance sheet and continue to serve our customers.

S UPERVISORY C APITAL A SSESSMENT P ROGRAM (“S TRESS   TESTS ”)

On May 7, 2009, the Board of Governors of the Federal Reserve System announced the results of the stress tests conducted by banking regulators under the Supervisory Capital Assessment Program with respect to the 19 largest bank holding companies. As a result of this test, the Federal Reserve concluded that PNC is currently well capitalized but that, in order to provide a greater cushion against the risk that economic conditions over the next two years are worse than currently anticipated, PNC needed to augment the composition of its capital by increasing the common shareholders’ equity component of Tier 1 capital by $600 million by November 9, 2009. This amount represents one-quarter of 1% of our risk-weighted assets as of March 31, 2009. PNC intends to satisfy this requirement through a combination of growth in retained earnings and the pursuit of other capital raising alternatives.

R ECENT M ARKET AND I NDUSTRY D EVELOPMENTS

Since the middle of 2007 and with a heightened level of activity during the second half of 2008 and into 2009, there has been unprecedented turmoil, volatility and illiquidity in worldwide financial markets, accompanied by uncertain prospects for the overall national economy, which is currently in the midst of a severe recession. In addition, there have been dramatic changes in the competitive landscape of the financial services industry during this time.

Recent efforts by the Federal government, including 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 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 and TARP Capital Purchase Program, the FDIC’s Temporary Liquidity Guarantee Program (TLGP) and the Federal Reserve’s Commercial Paper Funding Facility (CPFF).

These programs, some of which are further described in Item 7 of our 2008 Form 10-K, include the following:

TARP Capital Purchase Program – On December 31, 2008, PNC issued to the US Treasury $7.6 billion of preferred stock together with a related warrant to purchase shares of common

stock of PNC, in accordance with the terms of the TARP Capital Purchase Program. Funds from this sale count as Tier 1 capital. Holders of this preferred stock are entitled to a cumulative cash dividend at the annual rate per share of 5% of the liquidation preference per year for the first five years after its issuance. After December 31, 2013, if these shares are still outstanding, the annual dividend rate will increase to 9% per year. We plan to redeem the US Treasury’s investment as soon as appropriate, subject to approval by our primary banking regulators. We do not contemplate exchanging any of the shares of preferred stock issued to the US Treasury under the TARP Capital Purchase Program for shares of mandatorily convertible preferred stock.

Further information on these securities is included in Note 19 Shareholders’ Equity included in our Notes to Consolidated Financial Statements within Item 8 of the 2008 Form 10-K.

FDIC Temporary Liquidity Guarantee Program (TLGP) – In December 2008, PNC Funding Corp issued fixed and floating rate senior notes totaling $2.9 billion under the FDIC’s TLGP-Debt Guarantee Program. In March 2009, PNC Funding Corp issued floating rate senior notes totaling $1.0 billion under this program. Each of these series of senior notes is guaranteed by the FDIC and is backed by the full faith and credit of the United States through June 30, 2012.

Since October 14, 2008, both PNC Bank, National Association (PNC Bank, N.A.) and National City Bank have participated in the TLGP-Transaction Account Guarantee Program. Under this program, through December 31, 2009, all non-interest bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Coverage under this program is in addition to, and separate from, the coverage available under the FDIC’s general deposit insurance rules.

Commercial Paper Funding Facility – Effective October 28, 2008, Market Street Funding LLC (Market Street) was approved to participate in the Federal Reserve’s CPFF. The CPFF commitment to purchase up to $5.4 billion of three-month Market Street commercial paper expires on October 30, 2009. Market Street had no borrowings under this facility at March 31, 2009.

Public-Private Investment Programs – On March 23, 2009, the US Treasury and the FDIC announced that they will establish the Legacy Loans Program (LLP) to remove troubled loans and other assets from banks. The FDIC will provide oversight for the formation, funding, and operation of new public-private investment funds (PPIFs) that will purchase loans and other assets from depository institutions. The LLP will attract private capital through an FDIC debt guarantee and Treasury equity co-investment. All FDIC-insured depository institutions will be eligible to participate in the program.

On March 23, 2009, the US Treasury also announced the establishment of the Legacy Securities PPIFs, which are designed to address issues raised by troubled assets. These Legacy Securities PPIFs are specifically focused on legacy securities and are part of a plan that directs both equity capital and debt financing into the market for legacy assets. This program is designed to draw in private capital to these markets by providing matching equity capital from the US Treasury and debt financing from the Federal Reserve via the TALF and the US Treasury.

PNC is in the process of determining to what extent, if any, it will participate in these programs.

****

It is also possible that the US Congress and federal banking agencies, as part of their efforts to provide economic stimulus and financial market stability, to enhance the liquidity and solvency of financial institutions and markets, and to enhance the regulation of financial institutions and markets, will announce additional legislation, regulations or programs. These additional actions may include changes in or additions to the statutes or regulations related to existing programs, including those described above. It is not possible at this time to predict the ultimate impact of these actions on PNC’s business plans and strategies.

K EY F ACTORS A FFECTING F INANCIAL P ERFORMANCE

Our financial performance is substantially affected by several external factors outside of our control including the following, some of which may be affected by legislative, regulatory and administrative initiatives of the Federal government such as those outlined above:

•

General economic conditions, including the length and severity of the current recession,

•

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 landscape and in counterparty creditworthiness and performance as the financial services industry restructures in the current environment, 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 integrating the National City acquisition,

•

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,

•

Maintaining solid overall asset quality,

•

Continuing to maintain our deposit base,

•

Prudent risk and capital management leading to a return to our desired moderate risk profile, and

•

Actions we take within the capital and other financial markets.

S UMMARY F INANCIAL R ESULTS

 

		Three months ended March 31
		2009				2008
Net income, in millions		$	530			$	384
Diluted earnings per common share		$	1.03			$	1.09
Return on
Average common			10.23	%			10.82	%
Average assets			.77	%			1.10	%

Highlights of the first quarter of 2009 included the following:

•

Net income for the first quarter of 2009 reflected the diversification of our businesses. Total revenue was $3.9 billion for the quarter. Net interest income was strong and noninterest income benefited from robust residential mortgage banking activity driven by refinancing volumes and income from servicing rights. Pretax, pre-provision earnings exceeded credit costs by over $650 million in the first quarter of 2009.

•

Our Tier 1 risk-based capital ratio increased by 30 basis points during the quarter to 10.0% and the Tier 1 common capital ratio increased to 4.9% at March 31, 2009. The reduction in our quarterly common stock dividend beginning in April 2009 is expected to add $1 billion annually to PNC’s common equity and cash positions, resulting in annual improvement in capital ratios of approximately 40 basis points.

•

We strengthened our liquidity position and we remain core funded with a loan to deposit ratio of 88% at March 31, 2009 compared with 91% at December 31, 2008. We continued to generate new deposits while allowing high rate acquired certificate of deposit balances to decline consistent with our focus on relationship-based deposits.

•

We are committed to responsible lending, essential to economic recovery. Loans and commitments of approximately $26 billion were originated and renewed during the first quarter of 2009 as we

continued to make credit available to qualified borrowers.

•

Credit quality deterioration continued during the first quarter of 2009 as expected, reflecting further economic weakening and resulting in net additions to loan loss reserves. Nonperforming assets increased during the quarter and were 2.02% of total loans and foreclosed assets at March 31, 2009 compared with 1.23% at December 31, 2008. The ratio of allowance for loan and lease losses to total loans increased to 2.51% at March 31, 2009 from 2.23% at December 31, 2008.

•

Investment securities were $46 billion at March 31, 2009, or 16% of total assets. Approximately 92% of the portfolio was comprised of agency or investment grade equivalent securities.

•

The acquisition of National City is currently exceeding our expectations.

•

The transaction was accretive to first quarter 2009 earnings and is expected to be accretive for full year 2009.

•

The combined company was focused on clients and business growth, implementing centralized loan and deposit pricing.

•

Cost savings of approximately $400 million annualized were realized in the first quarter of 2009, progressing toward the two-year goal of reducing combined company annualized noninterest expense by $1.2 billion.

•

Agreements were reached in April 2009 to divest 61 branches in the third quarter of 2009.

•

The first wave of client conversions is planned for the fourth quarter of 2009.

Our Consolidated Income Statement Review section of this Financial Review describes in greater detail the various items that impacted our results for the first quarters of 2009 and 2008.

A VERAGE C ONSOLIDATED B ALANCE S HEET H IGHLIGHTS

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 recent acquisitions.

Our Average Consolidated Balance Sheet for the first quarter of 2009 included the impact of National City, which was the primary driver of increases compared with the first quarter of 2008. The Consolidated Balance Sheet Review section of this Financial Review provides information on changes in selected Consolidated Balance Sheet categories at March 31, 2009 compared with December 31, 2008.

Total average assets were $280.9 billion for the first three months of 2009 compared with $140.6 billion for the first three months of 2008. Total average assets for the first three months of 2009 included $134.9 billion related to National City.

 

Average interest-earning assets were $244.2 billion for the first quarter of 2009, including $123.5 billion related to National City, compared with $111.3 billion in the first quarter of 2008. An increase of $104.5 billion in loans, including $98.2 billion related to National City, and a $16.2 billion increase in securities available for sale, including $13.1 billion related to National City, were reflected in the increase in average interest-earning assets. In addition, securities held to maturity, including those transferred by PNC in the fourth quarter of 2008 from the available for sale portfolio, averaged $3.4 billion in the first quarter of 2009.

Average noninterest-earning assets totaled $36.6 billion in the first quarter of 2009 compared with $29.2 billion in the prior year quarter.

The increase in average total loans, which includes the impact of National City as indicated above, reflected growth in commercial loans of $37.7 billion, consumer loans of $33.7 billion, commercial real estate loans of $16.6 billion and residential mortgage loans of $12.5 billion. Loans represented 71% of average interest-earning assets for the first three months of 2009 and 62% for the first three months of 2008.

Average residential mortgage-backed securities increased $15.7 billion compared with the first quarter of 2008. Average US Treasury and government agencies securities increased $1.1 billion and average state and municipal securities increased $.9 billion in the comparison. These increases were largely as a result of the National City acquisition and were partially offset by declines of $1.3 billion in average commercial mortgage-backed securities and $.8 billion in average asset-backed securities compared with the prior year quarter. Investment securities comprised 20% of average interest-earning assets for the first three months of 2009 and 27% for the first three months of 2008.

Average total deposits were $192.2 billion for the first three months of 2009, including $104.0 billion related to National City, compared with $81.6 billion for the first three months of 2008. Average deposits grew from the prior year period primarily as a result of increases in money market balances, retail certificates of deposit, and demand and other noninterest-bearing deposits. Average total deposits represented 68% of average total assets for the first three months of 2009 and 58% for the first three months of 2008.

Average transaction deposits were $113.5 billion for the first three months of 2009, including $49.6 billion related to National City, compared with $52.5 billion for the first three months of 2008.

Average borrowed funds were $47.9 billion for the first quarter of 2009, including $21.1 billion related to National City, compared with $32.1 billion for the first quarter of 2008.

B USINESS S EGMENT H IGHLIGHTS

In the first quarter of 2009, we made changes to our business organization structure and management reporting in conjunction with the acquisition of National City. As a result, we now have seven reportable business segments which include:

•

Retail Banking

•

Corporate & Institutional Banking

•

Asset Management Group

•

Residential Mortgage Banking

•

BlackRock

•

Global Investment Servicing

•

Distressed Assets Portfolio

Business segment results for the first quarter of 2008 have been reclassified to present prior periods on the same basis.

Total business segment earnings were $750 million for the first three months of 2009 and $289 million for the first three months of 2008. Highlights of results for the first quarters of 2009 and 2008 are included below. The Business Segments Review section of this Financial Review includes further analysis of our business segment results over these periods.

We provide a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a GAAP basis in Note 19 Segment Reporting.

Retail Banking

Retail Banking earned $56 million for the first quarter of 2009. Results for the quarter were challenged in this environment by ongoing credit deterioration, a lower value assigned to deposits in a declining rate environment, reduced consumer spending and increased FDIC insurance costs. Retail Banking continues to maintain its focus on customer growth, employee and customer 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 $374 million in the first quarter of 2009. Total revenue of $1.3 billion was strong given the current environment, driven primarily by net interest income. Noninterest expense was tightly managed, and earnings were impacted by the provision for credit losses, indicative of deteriorating credit quality occurring throughout the economy.

Asset Management Group

Earnings from the Asset Management Group totaled $38 million in the first quarter of 2009 compared with $37 million in the prior year first quarter. The current period earnings reflects new business obtained from National City offset by lower noninterest income and higher provision for credit losses stemming from the depressed equity markets and continued economic challenges. This business segment was formed in the first quarter of 2009.

 

Residential Mortgage Banking

Residential Mortgage Banking earned $226 million for the first quarter of 2009 driven by strong loan origination activity and income from servicing rights. This business segment was formed in the first quarter of 2009 and consists primarily of activities acquired with National City.

BlackRock

Our BlackRock business segment earned $23 million for the first quarter of 2009 compared with $60 million for the first quarter of 2008. Lower equity markets in the first quarter of 2009 impacted BlackRock’s results.

Global Investment Servicing

Global Investment Servicing earned $10 million for the first quarter of 2009 compared with $30 million for the same period of 2008. Results for 2009 were negatively impacted by continued declines in asset values and fund redemptions as a result of the deterioration of the financial markets that began in the fourth quarter of 2008 and the establishment of a legal contingency reserve.

Distressed Assets Portfolio

This business segment was formed in the first quarter of 2009 and consists primarily of assets acquired with National City. The Distressed Assets Portfolio had earnings of $23 million for the first quarter of 2009. Earnings were mainly driven by net interest income of $364 million. Further deterioration of credit quality occurred on the loans in this segment during the quarter.

Other

“Other” reported a net loss of $220 million for the first quarter of 2009 compared with earnings of $95 million for the first quarter of 2008. The loss for the first quarter of 2009 included the after-tax impact of other-than-temporary impairment charges and alternative investment writedowns, equity management losses and integration costs. These items were somewhat offset by a gain related to PNC’s BlackRock LTIP shares obligation and net gains on sales of securities. Earnings for the first quarter of 2008 reflected net securities gains and the partial reversal of the Visa indemnification liability, partially offset by trading losses.

C ONSOLIDATED I NCOME S TATEMENT R EVIEW

Our Consolidated Income Statement is presented in Part I, Item 1 of this Report. Net income for the first three months of 2009 was $530 million and for the first three months of 2008 was $384 million. Our Consolidated Income Statement for the first quarter of 2009 includes operating results of National City. As a result, the substantial increase in all income statement comparisons to the first quarter of 2008, except as noted, are primarily due to the operating results of National City.

N ET I NTEREST I NCOME AND N ET I NTEREST M ARGIN

 

		Three months ended March 31
Dollars in millions		2009				2008
Net interest income		$	2,305			$	854
Net interest margin			3.81	%			3.09	%

In addition to the first quarter 2009 impact of National City, changes in net interest income and margin result from the interaction of the volume and composition of interest-earning assets and related yields, interest-bearing liabilities and related rates paid, and noninterest-bearing sources of funding. See the Statistical Information – Average Consolidated Balance Sheet And Net Interest Analysis section of this Report for additional information.

The increase in net interest income for the first three months of 2009 compared with the first three months of 2008 reflected the increase in average interest-earning assets due to National City and the improvement in the net interest margin described below.

We expect net interest income and net interest margin for the remainder of 2009 to be flat to down compared with the first quarter of 2009 as the maturity of higher-yielding assets will be partially offset by interest-bearing deposit re-pricing, assuming 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 3.81% for the first three months of 2009 and 3.09% for the first three months of 2008. The following factors impacted the comparison:

•

A decrease in the rate paid on interest-bearing liabilities of 126 basis points. The rate paid on interest-bearing deposits, the largest component, decreased 138 basis points.

•

These factors were partially offset by a 45 basis point decrease in the yield on interest-earning assets. The yield on loans, which represented a larger portion of our earning assets in the first quarter of 2009, decreased 46 basis points.

•

In addition, the impact of noninterest-bearing sources of funding decreased 9 basis points due to lower interest rates and a lower proportion of noninterest-bearing sources of funding to interest-earning assets.

For comparing to the broader market, during the first three months of 2009 the average federal funds rate was .19% compared with 3.17% for the first three months of 2008.

N ONINTEREST I NCOME

Summary

Noninterest income totaled $1.566 billion for the first three months of 2009 compared with $967 million for the first three months of 2008. Noninterest income for the first quarter of 2009 included $945 million of noninterest income related to National City.

First quarter 2009 noninterest income included the following:

•

Gains on hedges of residential mortgage servicing rights of $202 million,

•

Gains of $103 million related to our BlackRock LTIP shares adjustment,

•

Net credit-related other-than-temporary impairments on debt and equity securities of $149 million,

•

Net losses on private equity and alternative investments of $122 million, and

•

Net gains on sales of securities of $56 million.

Noninterest income for the first three months of 2008 included the impact of the following:

•

Losses related to our commercial mortgage loans held for sale, net of hedges, of $166 million,

•

Income from Hilliard Lyons totaling $164 million, including the gain of $114 million from the sale of this business,

•

A gain of $95 million related to the redemption of a portion of our Visa Class B common shares related to Visa’s March 2008 initial public offering,

•

Trading losses of $76 million,

•

Net gains on sales of securities of $41 million, and

•

Gains of $40 million related to our BlackRock LTIP shares adjustment.

Additional Analysis

Fund servicing fees totaled $199 million in the first three months of 2009 compared with $228 million in the first three months of 2008. Asset management revenue was $189 million in the first three months of 2009 compared with $212 million in the first three months of 2008. Fund servicing fees and asset management revenue were negatively impacted by declines in asset values associated with the lower equity markets during the first three months of 2009. We believe that the equity markets may rebound in 2009 in advance of an economic recovery resulting in improvement to these components of our fee-based income.

Assets managed at March 31, 2009 totaled $96 billion, including National City assets under management, compared with $66 billion at March 31, 2008.

Global Investment Servicing provided fund accounting/ administration services for $712 billion of net fund investment assets and provided custody services for $361 billion of fund investment assets at March 31, 2009, compared with $1.0 trillion and $476 billion, respectively, at March 31, 2008. The decrease in assets serviced in the comparison was due to declines in asset values and fund outflows resulting from market conditions.

For the first quarter of 2009, consumer services fees totaled $316 million, including $180 million related to National City, compared with $170 million in the first quarter of 2008. Consumer service fees in the 2009 period reflected higher card-related revenue more than offset by reduced consumer transaction volumes related to the economy.

Corporate services revenue totaled $245 million in the first three months of 2009, including $73 million related to

National City, and $164 million in the first quarter of 2008. Corporate services fees include treasury management fees, which continued to be a strong contributor to revenue.

Residential mortgage revenue totaled $431 million in the first quarter of 2009. Substantially all of this revenue is associated with National City’s business. Strong mortgage refinancing volumes and $202 million of net hedging gains of mortgage servicing rights occurred in the first quarter of 2009. It is unlikely that we will repeat this strong performance in future periods, particularly the servicing rights hedging gains.

Service charges on deposits totaled $224 million for the first three months of 2009, including $137 million related to National City, and $82 million for the first three months of 2008. Service charges on deposits increased despite declining customer transaction amounts and volumes.

Net gains on sales of securities totaled $56 million for the first quarter of 2009 and $41 million for the first quarter of 2008.

The net credit component of other-than-temporary impairments of securities recognized in earnings was a loss of $149 million in the first three months of 2009. The non-credit component of the fair value mark on these securities of $537 million, which related to market factors, was included in accumulated other comprehensive loss in shareholders’ equity at March 31, 2009. There were no other-than-temporary impairments recognized in the first three months of 2008.

Other noninterest income totaled $55 million for the first quarter of 2009 compared with $70 million for the first quarter of 2008. Other noninterest income for 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 as referred to above.

Other noninterest income for 2008 included the $114 million gain from the sale of Hilliard Lyons, the $95 million gain from the redemption of a portion of our investment in Visa related to its March 2008 initial public offering, and gains of $40 million related to our equity investment in BlackRock as described above. The impact of these items was more than offset by losses related to our commercial mortgage loans held for sale, net of hedges, of $166 million, and trading losses of $76 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.

 

P RODUCT R EVENUE

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 across PNC.

Treasury management revenue, which includes fees as well as net interest income from customer deposit balances, doubled in the first quarter of 2009, to $275 million, compared with $137 million in the first quarter of 2008. In addition to the impact of National City, these increases were primarily related to deposit growth and continued growth in legacy offerings such as lockbox, purchasing cards and services provided to the federal government.

Revenue from capital markets-related products and services totaled $43 million in the first three months of 2009 compared with $76 million in the first three months of 2008. The revenue decline was driven by reduced merger and acquisition revenues reflecting the difficult financing environment along with lower customer trading revenues impacted by reduced derivative activity levels and the impact of counterparty credit on valuations of customer positions. These revenue declines were partially offset by National City-related revenues in 2009.

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 $94 million in the first quarter of 2009 compared with a $94 million loss for the first quarter of 2008. The loss for the first three months of 2008 reflected losses of $166 million on commercial mortgage loans held for sale, net of hedges, due to the impact of an illiquid market in 2008.

P ROVISION F OR C REDIT L OSSES

The provision for credit losses totaled $880 million for the first three months of 2009 compared with $151 million for the first three months of 2008. The provision for credit losses for the first quarter of 2009 was in excess of net charge-offs of $431 million for the period due to a required increase to our allowance for loan and lease losses reflecting continued deterioration in the credit markets and the resulting increase in nonperforming loans.

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.

N ONINTEREST E XPENSE

Noninterest expense for the first quarter of 2009 was $2.3 billion compared with $1.0 billion in the prior year first quarter, with the increase substantially related to National City. Acquisition cost savings of approximately $400 million annualized were realized in the first quarter of 2009, on plan to reach our goal of annualized cost savings of $1.2 billion at the end of two years.

Integration costs totaled $52 million in the first quarter of 2009 compared with $14 million in the first quarter of 2008.

We expect that the FDIC will enact a special deposit insurance assessment in 2009 that will significantly increase our FDIC deposit insurance costs for the year.

E FFECTIVE T AX R ATE

Our effective tax rate was 20.1% for the first three months of 2009 and 39.5% for the first three months of 2008. A favorable agreement to settle with taxing authorities in the first quarter of 2009 contributed to the lower effective tax rate in that period and higher taxes related to the gain on sale of Hilliard Lyons in the first quarter of 2008 contributed to the higher effective tax rate in that period.

C ONSOLIDATED B ALANCE S HEET R EVIEW

S UMMARIZED B ALANCE S HEET D ATA

 

In millions		March 31 2009			Dec. 31 2008
Assets
Loans		$	171,373		$	175,489
Investment securities			46,253			43,473
Cash and short-term investments			21,807			23,936
Loans held for sale			4,045			4,366
Equity investments			8,215			8,554
Goodwill			8,855			8,868
Other intangible assets			3,323			2,820
Other			22,551			23,575
Total assets		$	286,422		$	291,081
Liabilities
Deposits			194,635		$	192,865
Borrowed funds			48,459			52,240
Other			14,672			18,328
Total liabilities			257,766			263,433
Total shareholders’ equity			26,477			25,422
Noncontrolling interests			2,179			2,226
Total equity			28,656			27,648
Total liabilities and equity		$	286,422		$	291,081

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

An analysis of changes in selected balance sheet categories follows.

 

L OANS

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 $3.5 billion at March 31, 2009 and $4.1 billion at December 31, 2008, respectively.

Loans decreased $4.1 billion, or 2%, as of March 31, 2009 compared with December 31, 2008. Total loans represented 60% of total assets at both March 31, 2009 and December 31, 2008.

Commercial lending represented 57% of the loan portfolio and consumer lending represented 43% at March 31, 2009. Commercial lending declined 4% at March 31, 2009 compared with December 31, 2008. Commercial loans, which comprised 67% of total commercial lending, declined due to lower utilization levels and paydowns. Consumer lending increased slightly at March 31, 2009 from December 31, 2008. Increases in education and residential mortgage loans were somewhat offset by a decline in home equity installment loans.

Details Of Loans

 

In millions		March 31 2009			Dec. 31 2008
Commercial
Retail/wholesale		$	11,226		$	11,482
Manufacturing			12,796			13,263
Other service providers			8,674			9,038
Real estate related (a)			8,926			9,107
Financial services			5,050			5,194
Health care			3,079			3,201
Other			15,446			17,935
Total commercial			65,197			69,220
Commercial real estate
Real estate projects			16,830			17,176
Commercial mortgage			8,590			8,560
Total commercial real estate			25,420			25,736
Equipment lease financing			6,300			6,461
TOTAL COMMERCIAL LENDING			96,917			101,417
Consumer
Home equity
Lines of credit			24,112			24,024
Installment			12,934			14,252
Education			5,127			4,211
Automobile			1,737			1,667
Credit card and other unsecured lines of credit			3,148			3,163
Other			4,910			5,172
Total consumer			51,968			52,489
Residential real estate
Residential mortgage			19,661			18,783
Residential construction			2,827			2,800
Total residential real estate			22,488			21,583
TOTAL CONSUMER LENDING			74,456			74,072
Total loans		$	171,373		$	175,489

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

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.

Our home equity lines and loans outstanding totaled $37.0 billion at March 31, 2009 and $38.3 billion at December 31, 2008. 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 or equal to 90%. We had $1.2 billion or approximately 3% of the total portfolio in this grouping at March 31, 2009 and December 31, 2008.

In our $19.7 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 $3.3 billion and comprised approximately 17% of this portfolio at March 31, 2009. The comparable amounts related to the $18.8 billion residential mortgage portfolio as of December 31, 2008 were $2.5 billion and 14%, respectively.

Commercial lending outstandings are the largest category and are the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan and lease losses. We have allocated $2.8 billion, or 65%, of the total allowance for loan and lease losses at March 31, 2009 to these loans. We allocated $1.5 billion, or 35%, of the remaining allowance at that date to consumer lending outstandings. 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.

Net unfunded credit commitments are comprised of the following:

Net Unfunded Credit Commitments

 

In millions		March 31 2009			Dec 31 2008
Commercial and commercial real estate		$	58,771		$	60,020
Home equity lines of credit			22,416			23,195
Consumer credit card lines			19,291			19,028
Other			2,343			2,645
Total		$	102,821		$	104,888

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 $8.7 billion at March 31, 2009 and $8.6 billion at December 31, 2008.

Unfunded liquidity facility commitments and standby bond purchase agreements totaled $6.7 billion at March 31, 2009 and $7.0 billion at December 31, 2008 and are included in the preceding table primarily within the “Commercial and commercial real estate” category.

In addition to credit commitments, our net outstanding standby letters of credit totaled $10.3 billion at March 31, 2009 and December 31, 2008. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

INVESTMENT SECURITIES

Details Of Investment Securities

 

In millions		Amortized Cost			Fair Value
March 31, 2009
S ECURITIES A VAILABLE FOR S ALE
Debt securities
US Treasury and government agencies		$	2,597		$	2,624
Residential mortgage-backed
Agency			22,860			23,427
Nonagency			12,900			9,281
Commercial mortgage-backed			4,248			3,428
Asset-backed			2,005			1,489
State and municipal			1,382			1,337
Other debt			786			774
Corporate stocks and other			281			280
Total securities available for sale		$	47,059		$	42,640
S ECURITIES H ELD TO M ATURITY
Debt securities
Commercial mortgage-backed		$	2,002		$	1,969
Asset-backed			1,602			1,623
Other debt			9			10
Total securities held to maturity		$	3,613		$	3,602
December 31, 2008
S ECURITIES A VAILABLE FOR S ALE
Debt securities
US Treasury and government agencies		$	738		$	739
Residential mortgage-backed
Agency			22,744			23,106
Nonagency			13,205			8,831
Commercial mortgage-backed			4,305			3,446
Asset-backed			2,069			1,627
State and municipal			1,326			1,263
Other debt			563			559
Corporate stocks and other			575			571
Total securities available for sale		$	45,525		$	40,142
S ECURITIES H ELD TO M ATURITY
Debt securities
Commercial mortgage-backed		$	1,945		$	1,896
Asset-backed			1,376			1,358
Other debt			10			10
Total securities held to maturity		$	3,331		$	3,264

Investment securities totaled $46.3 billion at March 31, 2009 and $43.5 billion at December 31, 2008. The increase in securities of $2.8 billion since year-end reflected the purchase of US Treasury and government agency securities, somewhat offset by maturities and prepayments. Securities represented 16% of total assets at March 31, 2009 and 15% of total assets at December 31, 2008.

We evaluate our portfolio of investment securities in light of changing market conditions and other factors and, where appropriate, take steps intended to improve our overall positioning.

At March 31, 2009, the investment securities balance included a net unrealized loss of $4.4 billion, which represented the difference between fair value and amortized cost. The comparable amount at December 31, 2008 was a net unrealized loss of $5.4 billion. The fair value of investment securities is impacted by interest rates, credit spreads, and market volatility and illiquidity. The improvement in the unrealized pretax loss from year-end was the result of improving fair values in both agency and nonagency securities. The net unrealized losses at March 31, 2009 did not reflect credit quality concerns of any significance with the underlying assets, which represented an overall well-diversified, high quality portfolio. US government agency residential mortgage-backed securities and US Treasury and government agencies securities collectively represented 56% of the investment securities portfolio at March 31, 2009.

FSP FAS 115-2 and FAS 124-2, “ Recognition and Presentation of Other-Than-Temporary Impairments,” was issued in April 2009 and amended other-than-temporary impairment (OTTI) guidance for debt securities regarding recognition and disclosure. The major change in the guidance was the requirement to recognize only the credit portion of OTTI charges in current earnings for those debt securities where there is no intent to sell or it is more likely than not the entity would not be required to sell the security prior to expected recovery. The remaining portion of OTTI charges is included in accumulated other comprehensive loss.

As permitted, PNC adopted this guidance effective January 1, 2009. As a result, we recognized total OTTI in the first quarter of 2009 of $686 million, comprised of $537 million in accumulated other comprehensive loss on the Consolidated Balance Sheet at March 31, 2009, and $149 million recognized as a reduction of noninterest income in our Consolidated Income Statement. Note 7 Investment Securities in the Notes To Consolidated Financial Statements of this Report provides further information regarding the credit portion of OTTI recognized in the first quarter of 2009.

As required under the new FASB guidance, we also recorded a cumulative effect adjustment of $110 million to retained earnings at January 1, 2009 to reclassify the noncredit component of OTTI recognized in 2008 from retained earnings to accumulated other comprehensive loss.

 

We also early adopted FSP FAS 157-4, “ Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” during the first quarter of 2009. The Fair Value Measurements and Fair Value Option section of this Financial Review has additional information related to FSP FAS 157-4.

At least quarterly we conduct a comprehensive security-level impairment assessment. Our process and methods have evolved as market conditions have deteriorated and as more research and other analyses have become available. We expect that our process and methods will continue to evolve. Our assessment considers the security structure, recent security collateral performance metrics, our judgment and expectations of future performance, and relevant industry research and analysis. We also consider the magnitude of the impairment and the amount 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. The Fair Value Measurements And Fair Value Option section of this Financial Review provides further detail on the composition of our securities portfolio, including vintage, credit rating, and FICO score, where applicable. Note 7 Investment Securities in the Notes To Consolidated Financial Statements of this Report includes a further discussion of our process for assessing OTTI and the results of the most recent assessment.

If the current issues affecting the US housing market 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 available for sale securities portfolio could continue to be adversely affected and we could incur additional OTTI charges that would impact our Consolidated Income Statement.

Net unrealized gains and losses in the securities available for sale portfolio are included in shareholders’ equity as accumulated other comprehensive income or loss, net of tax. 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 expected weighted-average life of investment securities (excluding corporate stocks and other) was 3 years and 5 months at March 31, 2009 and 3 years and 1 month at December 31, 2008.

We estimate that at March 31, 2009 the effective duration of investment securities was 2.3 years for an immediate 50 basis points parallel increase in interest rates and 1.9 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2008 were 3.7 years and 3.1 years, respectively.

L OANS H ELD F OR S ALE

 

In millions		March 31 2009			Dec. 31 2008
Commercial mortgages at fair value (a)		$	1,245		$	1,401
Commercial mortgages at lower of cost or market			403			747
Total commercial mortgages			1,648			2,148
Residential mortgages at fair value (a)			2,226			1,824
Residential mortgages at lower of cost or market			18			138
Total residential mortgages			2,244			1,962
Other			153			256
Total		$	4,045		$	4,366

(a)	Balance at December 31, 2008 includes loans held for sale which were acquired from National City and recorded at fair value at the date of acquisition.

Under SFAS 159, we account for certain commercial and residential mortgage loans held for sale at fair value.

We stopped originating certain commercial mortgage loans held for sale at fair value during the first quarter of 2008 and intend to continue pursuing opportunities to reduce these positions at appropriate prices. We sold $.1 billion of commercial mortgage loans held for sale carried at fair value in the first quarter of 2009 and recognized losses of $1 million on these loans, net of hedges. Losses of $166 million on commercial mortgage loans held for sale carried at fair value, net of hedges, were recognized in the first quarter of 2008.

Strong origination volumes partially offset sales to government agencies of $1.6 billion of commercial mortgages held for sale at lower of cost or market during the first quarter of 2009.

Residential mortgage loans held for sale increased during the first quarter of 2009 due to strong refinancing volumes. Loan origination volume was $6.9 billion. Substantially all such loans were originated to agency standards. We sold $6.3 billion of this production, recognizing revenue of $175 million, during the first quarter of 2009. Net interest income on residential mortgage loans held for sale was $87 million for the first quarter of 2009.

 

F UNDING AND C APITAL S OURCES

Details Of Funding Sources

 

In millions		March 31 2009			Dec. 31 2008
Deposits
Money market		$	74,389		$	67,678
Demand			44,473			43,212
Retail certificates of deposit			57,785			58,315
Savings			6,570			6,056
Other time			7,619			13,620
Time deposits in foreign offices			3,799			3,984
Total deposits			194,635			192,865
Borrowed funds
Federal funds purchased and repurchase agreements			4,789			5,153
Federal Home Loan Bank borrowings			16,985			18,126
Bank notes and senior debt			13,828			13,664
Subordinated debt			10,694			11,208
Other			2,163			4,089
Total borrowed funds			48,459			52,240
Total		$	243,094		$	245,105

Total funding sources decreased $2.0 billion at March 31, 2009 compared with the balance at December 31, 2008 as an increase in total deposits was more than offset by a decline in total borrowed funds.

Total deposits increased $1.8 billion at March 31, 2009 compared with December 31, 2008 as growth in money market deposits was partially offset by the decline of higher rate non-relationship certificates of deposit. Interest-bearing deposits represented 79% of total deposits at March 31, 2009 compared with 81% of total deposits at December 31, 2008.

Borrowed funds totaled $48.5 billion at March 31, 2009 compared with $52.2 billion at December 31, 2008. The $3.7 billion decline primarily resulted from repayments of Federal Home Loan Bank and other borrowings. PNC issued $1.0 billion of senior notes guaranteed by the FDIC under the Temporary Liquidity Guarantee Program in the first quarter of 2009. The Liquidity Risk Management section of this Financial Review contains further details regarding actions we have taken which impacted our borrowed funds balances in 2009.

Capital

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. The reduction in our quarterly common stock dividend beginning in April 2009 is expected to add $1 billion annually to PNC’s common equity and cash positions, resulting in annual improvement in capital ratios of approximately 40 basis points.

Total shareholders’ equity increased $1.1 billion, to $26.5 billion, at March 31, 2009 compared with December 31, 2008 primarily due to a $.7 billion decline in accumulated other comprehensive loss and an increase of $.3 billion in retained earnings. The Investment Securities section has further information regarding the accumulated other comprehensive loss.

Common shares outstanding were 445 million at March 31, 2009 and 443 million at December 31, 2008.

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

Under the TARP Capital Purchase Program, there are restrictions on dividends and common share repurchases associated with the preferred stock that we issued to the US Treasury in accordance with that program. As is typical with cumulative preferred stock, dividend payments for this preferred stock must be current before dividends can be paid on junior shares, including our common stock, or junior shares can be repurchased or redeemed. Also, under the TARP Capital Purchase Program agreements, the US Treasury’s consent will be required for any increase in common dividends per share above $.66 per share quarterly until the third anniversary of the preferred stock issuance as long as the US Treasury continues to hold any of the preferred stock. Further, during that same period, the US Treasury’s consent will be required, unless the preferred stock is no longer held by the US Treasury, for any share repurchases with limited exceptions, most significantly purchases of common shares in connection with any benefit plan in the ordinary course of business consistent with past practice. Any increase in our dividends while we remain subject to these restrictions would depend on the status of our efforts to put ourselves into position to redeem the US Treasury’s investment in PNC.

 

Risk-Based Capital

 

Dollars in millions		March 31 2009				Dec. 31 2008
Capital components
Shareholders’ equity
Common		$	18,546			$	17,490
Preferred			7,932				7,932
Trust preferred capital securities			2,981				2,898
Noncontrolling interest			1,512				1,506
Goodwill and other intangible assets			(10,239	)			(9,800	)
Eligible deferred income taxes on goodwill and other intangible assets			791				594
Pension, other postretirement benefit plan adjustments			631				666
Net unrealized securities losses, after-tax			2,994				3,618
Net unrealized losses (gains) on cash flow hedge derivatives, after-tax			(378	)			(374	)
Other			(248	)			(243	)
Tier 1 risk-based capital			24,522				24,287
Subordinated debt			5,596				5,676
Eligible allowance for credit losses			3,078				3,153
Total risk-based capital		$	33,196			$	33,116
Tier 1 common capital
Tier 1 risk-based capital		$	24,522			$	24,287
Preferred equity			(7,932	)			(7,932	)
Trust preferred capital securities			(2,981	)			(2,898	)
Noncontrolling interest			(1,512	)			(1,506	)
Tier 1 common capital		$	12,097			$	11,951
Assets
Risk-weighted assets, including off- balance sheet instruments and market risk equivalent assets		$	244,746			$	251,106
Adjusted average total assets			276,422				138,689
Capital ratios
Tier 1 risk-based			10.0	%			9.7	%
Tier 1 common			4.9				4.8
Total risk-based			13.6				13.2
Leverage			8.9				17.5

Capital levels were strengthened during the first quarter of 2009. Higher capital levels were net of dividend payments, including $47 million paid to the US Department of the Treasury during the first quarter of 2009 on $7.6 billion of preferred stock. We plan to redeem the Treasury Department’s investment as soon as appropriate, subject to approval by our primary banking regulators.

As described in the Executive Summary section of this Financial Review, as a result of the Supervisory Capital Assessment Program, we will be required to increase our Tier 1 common capital by $600 million by November 9, 2009. We intend to do so through a combination of growth in retained earnings and other capital raising alternatives. We do not contemplate exchanging any of the shares of preferred stock issued to the US Treasury under the TARP Capital Purchase Program for shares of mandatorily convertible preferred stock.

PNC’s Tier 1 risk-based capital ratio increased by 30 basis points to 10.0% at March 31, 2009 from 9.7% at December 31, 2008. The increase in the ratio was due to higher risk-based capital primarily from retained earnings coupled with a decline in risk-weighted assets. Our Tier 1 common capital ratio was 4.9% at March 31, 2009.

The leverage ratio at December 31, 2008 reflected the favorable impact on Tier 1 risk-based capital from the issuance of securities under TARP and the issuance of PNC common stock in connection with the National City acquisition, both of which occurred on December 31, 2008. In addition, the ratio as of that date did not reflect any impact of National City on PNC’s adjusted average total assets.

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. At March 31, 2009 and December 31, 2008, each of our domestic bank subsidiaries was considered “well capitalized” based on US regulatory capital ratio requirements, which are indicated on page 2 of this Report. We believe our bank subsidiaries will continue to meet these requirements during the remainder of 2009.

O FF -B ALANCE S HEET A RRANGEMENTS A ND V ARIABLE I NTEREST E NTITIES

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.” The following sections of this Report provide further information on these types of activities:

•

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

•

Note 10 Loan Sales and Securitizations and Note 18 Commitments and Guarantees in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

•

At March 31, 2009, $2.3 billion of loans were securitized by PNC. The comparable amount was $2.4 billion at December 31, 2008. These securitized loans are not included on our Consolidated Balance Sheet.

The following provides a summary of variable interest entities (VIEs), including those that we have consolidated and those in which we hold a significant variable interest but have not consolidated into our financial statements as of March 31, 2009 and December 31, 2008.

 

Consolidated VIEs – PNC Is Primary Beneficiary

 

In millions		Aggregate Assets			Aggregate Liabilities
Partnership interests in low income housing projects
March 31, 2009		$	1,452		$	803
December 31, 2008		$	1,499		$	863	(a)
Credit Risk Transfer Transaction
March 31, 2009		$	1,012		$	1,012
December 31, 2008		$	1,070		$	1,070

(a)	We have revised this amount due to PNC’s adoption of SFAS 160 as noncontrolling interests are no longer classified as aggregate liabilities.

Non-Consolidated VIEs – Significant Variable Interests

 

In millions		Aggregate Assets			Aggregate Liabilities			PNC Risk of Loss
March 31, 2009
Market Street		$	4,618		$	4,744		$	6,653	(a)
Partnership interests in tax credit investments (b) (c)			1,117			649			860
Collateralized debt obligations			17						2
Total		$	5,752		$	5,393		$	7,515
December 31, 2008
Market Street		$	4,916		$	5,010		$	6,965	(a)
Partnership interests in tax credit investments (b) (c)			1,095			652			920
Collateralized debt obligations			20						2
Total		$	6,031		$	5,662		$	7,887

(a)

PNC’s risk of loss consists of off-balance sheet liquidity commitments to Market Street of $6.1 billion and other credit enhancements of $.6 billion at March 31, 2009. The comparable amounts were $6.4 billion and $.6 billion at December 31, 2008. These liquidity commitments are included in the Net Unfunded Credit Commitments table in the Consolidated Balance Sheet Review section of this Report.

(b)	Amounts reported primarily represent low income housing projects.

(c)	Aggregate assets and aggregate liabilities represent approximate balances due to limited availability of financial information associated with the acquired National City partnerships that we did not sponsor.

Market Street

Market Street Funding LLC (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 by Standard & Poor’s and Moody’s, 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 2008 and the first quarter of 2009, Market Street met all of its funding needs through the issuance of commercial paper.

Market Street commercial paper outstanding was $4.1 billion at March 31, 2009 and $4.4 billion at December 31, 2008. The

weighted average maturity of the commercial paper was 27 days at March 31, 2009 compared with 24 days at December 31, 2008.

Effective October 28, 2008, Market Street was approved to participate in the Federal Reserve’s CPFF authorized under Section 13(3) of the Federal Reserve Act. The CPFF commitment to purchase up to $5.4 billion of three-month Market Street commercial paper expires on October 30, 2009. As of March 31, 2009, Market Street did not have any outstandings in the CPFF.

During the first quarter of 2009, PNC Capital Markets, acting as a placement agent for Market Street, held a maximum daily position in Market Street commercial paper of $8 million with an average of $5 million. This compares with a maximum daily position of $75 million with an average of $12 million for the year ended December 31, 2008. PNC Capital Markets owned $8 million of Market Street commercial paper at March 31, 2009 and none at December 31, 2008. PNC Bank, N.A. made no purchases of Market Street commercial paper during the first quarter of 2009.

PNC Bank, N.A. provides certain administrative services, the program-level credit enhancement and 99% of liquidity facilities to Market Street in exchange for fees negotiated based on market rates. Program administrator fees and commitment fees related to PNC’s portion of the liquidity facilities for the first quarters of 2009 and 2008 were insignificant.

The commercial paper obligations at March 31, 2009 and December 31, 2008 were effectively collateralized by Market Street’s assets. While PNC may be obligated to fund under the $6.1 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 or another third party in the form of deal-specific credit enhancement, such as by the over collateralization of the assets. 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 $1.0 billion of the liquidity facilities if the underlying assets are in default. See Note 18 Commitments And Guarantees included in the Notes To Consolidated Financial Statements of this Report for additional information.

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.

 

Market Street has entered into a Subordinated Note Purchase Agreement (Note) with an unrelated third party. The Note provides first loss coverage whereby the investor absorbs losses up to the amount of the Note, which was $8.0 million as of March 31, 2009. Proceeds from the issuance of the Note are held by Market Street in a first loss reserve account that will be used to reimburse any losses incurred by Market Street, PNC Bank, N.A. or other providers under the liquidity facilities and the credit enhancement arrangements.

Assets of Market Street Funding LLC (a)

 

In millions		Outstanding			Commitments			Weighted Average Remaining Maturity In Years
March 31, 2009
Trade receivables		$	1,491		$	3,389		2.21
Automobile financing			904			937		3.58
Collateralized loan obligations			280			305		1.22
Credit cards			300			300		.44
Residential mortgage			14			14		26.75
Other			1,151			1,315		1.87
Cash and miscellaneous receivables			478
Total		$	4,618		$	6,260		2.27
December 31, 2008
Trade receivables		$	1,516		$	3,370		2.34
Automobile financing			992			992		3.94
Collateralized loan obligations			306			405		1.58
Credit cards			400			400		.19
Residential mortgage			14			14		27.00
Other			1,168			1,325		1.76
Cash and miscellaneous receivables			520
Total		$	4,916		$	6,506		2.34

(a)	Market Street did not recognize an asset impairment charge or experience any material rating downgrades during 2008 or the first quarter of 2009.

Market Street Commitments by Credit Rating (a)

 

		March 31, 2009			December 31, 2008
AAA/Aaa		22	%		19	%
AA/Aa		10			6
A/A		62			72
BBB/Baa		6			3
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.

We evaluated the design of Market Street, its capital structure, the Note, and relationships among the variable interest holders under the provisions of FASB Interpretation No. 46, (Revised 2003) “Consolidation of Variable Interest Entities” (FIN 46R). Based on this analysis, we are not the primary beneficiary as defined by FIN 46R and therefore the assets and liabilities of Market Street are not reflected in our Consolidated Balance Sheet.