EXECUTIVE SUMMARY

THE PNC FINANCIAL SERVICES GROUP, INC.

PNC is one of the largest diversified financial services companies in the United States based on assets, with businesses engaged in retail banking, corporate and institutional banking, asset management, and global fund processing services. We provide many of our products and services nationally and others in our primary geographic markets located in Pennsylvania, New Jersey, Washington, DC, Maryland, Virginia, Ohio, Kentucky and Delaware. We also provide certain fund processing services internationally.

KEY STRATEGIC GOALS

Our strategy to enhance shareholder value centers on driving positive operating leverage by achieving growth in revenue from our diverse business mix that exceeds growth in expenses as a result of disciplined cost management. In each of our business segments, 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 systems, providing a broad range of fee-based 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.

A volatile and significantly challenging financial market environment began in 2007 and has continued into 2008, and has been accompanied by uncertain prospects for the overall national economy. We are focused on our strategies for growth. We remain committed to maintaining 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, to changing interest rates and market conditions. We continue to be disciplined in investing capital in our businesses while returning a portion to shareholders through dividends and share repurchases when appropriate.

ACQUISITION AND DIVESTITURE ACTIVITY

On March 31, 2008, we sold J.J.B. Hilliard, W.L. Lyons, LLC (“Hilliard Lyons”), a Louisville, Kentucky-based wholly-owned subsidiary of PNC and a full-service brokerage and financial services provider, to Houchens Industries, Inc. We recognized an after-tax gain of $23 million in the first quarter of 2008 in connection with this divestiture.

On April 4, 2008, we acquired Lancaster, Pennsylvania-based Sterling Financial Corporation (“Sterling”) for approximately 4.6 million shares of PNC common stock and $224 million in cash. Sterling is a banking and financial services company with approximately $3.2 billion in assets, $2.7 billion in deposits, and 67 branches in south-central Pennsylvania, northern Maryland and northern Delaware.

KEY FACTORS AFFECTING FINANCIAL PERFORMANCE

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

Starting in the middle of 2007, and continuing at present, there has been significant turmoil and volatility in worldwide financial markets, accompanied by uncertain prospects for the overall national economy. Our performance for the remainder of 2008 will be impacted by developments in these areas. In addition, our success in 2008 will depend, among other things, upon:

SUMMARY FINANCIAL RESULTS

The decline in earnings for the first quarter of 2008 compared with the first quarter of 2007 reflected a higher provision for credit losses in 2008, partially offset by an increase in operating leverage as the increase in net interest income exceeded the decline in noninterest income and increase in noninterest expense. Our Consolidated Income Statement Review section of this Financial Review describes in greater detail the various items that impacted our results for the first quarter of 2008 and 2007.

Highlights of the first quarter of 2008 included the following:

BALANCE SHEET HIGHLIGHTS

Total assets were $140.0 billion at March 31, 2008 compared with $138.9 billion at December 31, 2007. Total average assets were $140.6 billion for the first three months of 2008 compared with $107.4 billion for the first three months of 2007. This increase reflected a $26.1 billion increase in average interest-earning assets and a $7.1 billion increase in average noninterest-earning assets. An increase of $15.3 billion in loans and a $6.6 billion increase in securities available for sale were the primary factors for the increase in average interest-earning assets.

The increase in average noninterest-earning assets for the first quarter of 2008 reflected an increase in average goodwill of $3.6 billion primarily related to the acquisition of Mercantile on March 2, 2007 and Yardville on October 26, 2007.

The impact of the Mercantile and Yardville acquisitions is also reflected in our year-over-year increases in average total loans, average securities available for sale and average total deposits described further below.

Average total loans were $69.3 billion for the first three months of 2008 and $54.1 billion in the first three months of 2007. The increase in average total loans included growth in commercial loans of $7.7 billion and growth in commercial real estate loans of $3.5 billion. Loans represented 62% of average interest-earning assets for the first three months of 2008 and 63% for the first three months of 2007.

Average securities available for sale totaled $30.0 billion for the first quarter of 2008 and $23.4 billion for the first quarter of 2007. Average residential and commercial mortgage-backed securities increased $5.5 billion on a combined basis in the comparison. Securities available for sale comprised 27% of average interest-earning assets for both the first three months of 2008 and 2007.

Average total deposits were $81.6 billion for the first three months of 2008, an increase of $11.9 billion over the first three months of 2007. Average deposits grew from the prior year period primarily as a result of increases in money market accounts, time deposits in foreign offices, other time deposits, and demand and other noninterest-bearing deposits.

Average total deposits represented 58% of average total assets for the first three months of 2008 and 65% for the first three months of 2007. Average transaction deposits were $52.5 billion for the first quarter of 2008 compared with $47.0 billion for the first quarter of 2007.

Average borrowed funds were $32.1 billion for the first three months of 2008 and $16.8 billion for the first three months of 2007. Increases of $8.2 billion in Federal Home Loan Bank borrowings, $2.6 billion in bank notes and senior debt and $2.4 billion in other borrowed funds drove the increase compared with the first quarter of 2007.

Shareholders’ equity totaled $14.4 billion at March 31, 2008 compared with $14.9 billion at December 31, 2007. See the Consolidated Balance Sheet Review section of this Financial Review for additional information.

BUSINESS SEGMENT HIGHLIGHTS

Total business segment earnings decreased $103 million for the first quarter of 2008, to $313 million, compared with the first quarter of 2007. Highlights of results for the first three months of 2008 and 2007 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 16 Segment Reporting in the Notes To Consolidated Financial Statements in this Report.

Retail Banking

Retail Banking’s earnings were $221 million for the first quarter of 2008 compared with $201 million for the same period in 2007. The 10% increase in earnings over the first quarter in 2007 was driven by acquisitions and gains related to our ownership interest in Visa and the Hilliard Lyons sale, partially offset by an increase in the provision for credit losses.

Corporate & Institutional Banking

Corporate & Institutional Banking earned $2 million in the first quarter of 2008 compared with $132 million in the first quarter of 2007. First quarter 2008 earnings were impacted by pretax valuation losses of $177 million on commercial mortgage loans and commitments held for sale, net of hedges. The decrease compared with the first quarter of 2007 also resulted from higher provision for credit losses and noninterest expense somewhat offset by higher taxable-equivalent net interest income.

BlackRock

Our BlackRock business segment earned $60 million for the first quarter of 2008, a 15% increase compared with $52 million in the first quarter of 2007.

PFPC

PFPC earned $30 million for the first three months of 2008 compared with $31 million in the year-earlier period. While servicing revenue growth of 14% was realized through new business, organic growth, and the completion of two acquisitions in December 2007, increased costs related to this growth and the acquisitions offset the increase.

Other

“Other” earnings for the first quarter of 2008 totaled $64 million compared with earnings of $43 million for the first quarter of 2007. The higher earnings in the first quarter of 2008 reflected growth in net interest income related to asset and liability management activity, net securities gains and the partial reversal of the Visa indemnification liability, partially offset by net trading losses.

CONSOLIDATED INCOME STATEMENT REVIEW

Our Consolidated Income Statement is presented in Part I, Item 1 of this Report. Total revenue for the first quarter of 2008 increased 13% compared with the first quarter of 2007. We created positive operating leverage as total noninterest expense increased 10% in the comparison.

NET INTEREST INCOME AND NET INTEREST MARGIN

We provide a reconciliation of net interest income as reported under GAAP to net interest income presented on a taxable-equivalent basis in the Consolidated Financial Highlights section on page 1 of this Report.

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 37% increase in taxable-equivalent net interest income for the first three months of 2008 compared with the first three months of 2007 was consistent with the $26.1 billion, or 31%, increase in average interest-earning assets and wider net interest margin over this period. The reasons driving the higher interest-earning assets in the comparison are further discussed in the Balance Sheet Highlights portion of the Executive Summary section of this Financial Review.

We expect net interest income to be at least 20% higher for full year 2008 compared with 2007, assuming our current expectations for interest rates and economic conditions. Our forward-looking statements are based on our current expectations that interest rates will remain low through most of 2008 with continued wide market credit spreads and our view that national economic conditions currently point toward a mild recession.

The net interest margin was 3.09% for the first quarter of 2008 and 2.95% for the first quarter of 2007. The following factors impacted the comparison:

Comparing yields and rates paid to the broader market, during the first three months of 2008, the average federal funds rate was 3.17% compared with 5.26% for the first three months of 2007.

We believe that net interest margins for our industry will continue to be impacted by competition for high quality loans and deposits and customer migration from lower to higher rate deposit or other products. We expect our net interest margin to improve for full year 2008 compared with 2007, assuming our current expectations for interest rates and economic conditions.

PROVISION FOR CREDIT LOSSES

The provision for credit losses totaled $151 million for the first quarter of 2008 compared with $8 million for the first quarter of 2007. The higher provision in the comparison was driven by general credit quality migration, especially in our commercial real estate portfolio, including residential real estate development exposure, and growth in total credit exposure. Total residential real estate development outstandings were approximately $2.1 billion at March 31, 2008.

Given our projections for loan growth and continued credit deterioration, and our view that national economic conditions currently point toward a mild recession, we expect that the provision for credit losses will be approximately $600 million for full year 2008, including the impact of the Sterling acquisition.

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

NONINTEREST INCOME

Summary

Noninterest income totaled $967 million for the first three months of 2008 compared with $991 million for the first three months of 2007.

Noninterest income for the first quarter of 2008 included the following items:

Noninterest income for the first quarter of 2007 included the following:

Apart from the impact of these items, noninterest income increased $49 million, or 6%, for the first three months of 2008 compared with the first three months of 2007.

Additional Analysis

Fund servicing fees increased $25 million, to $228 million, in the first three months of 2008 compared with the first three months of 2007. This increase primarily resulted from the growth in PFPC’s offshore operations and its acquisitions of Albridge Solutions Inc. and Coates Analytics, LP in December 2007.

PFPC provided fund accounting/administration services for $1 trillion of net fund investment assets and provided custody services for $476 billion of fund investment assets at March 31, 2008, compared with $822 billion and $435 billion, respectively, at March 31, 2007. PFPC continued to see both organic growth and growth from new business in each of its product areas.

Asset management fees totaled $212 million in the first quarter of 2008, an increase of $47 million compared with the first quarter of 2007. Higher equity earnings from our BlackRock investment and the full quarter impact in 2008 of Mercantile, which we acquired in March 2007, drove the increase compared with the first quarter of 2007. Assets managed at March 31, 2008 totaled $65 billion compared with $76 billion at March 31, 2007. The decline in assets under management was primarily due to the effects of the Hilliard Lyons sale and comparatively lower equity markets in the first quarter of 2008.

Consumer services fees grew $13 million, to $170 million, for the first quarter of 2008 compared with the first quarter of

2007. This increase reflected the impact of Mercantile and higher debit card revenues resulting from higher transaction volumes.

Corporate services revenue totaled $164 million in the first three months of 2008 compared with $159 million in the first three months of 2007. Higher revenue from treasury management and third party consumer loan servicing activities, along with the full quarter impact of Mercantile, were the primary factors in the increase.

Service charges on deposits grew $5 million, to $82 million, in the first three months of 2008 compared with the first three months of 2007. The increase reflected the full quarter impact in 2008 of Mercantile.

Net securities gains totaled $41 million for the first quarter of 2008 compared with net securities losses of $3 million in the first quarter of 2007.

Other noninterest income totaled $70 million for the first three months of 2008 compared with $233 million for the first three months of 2007.

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 their 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 valuation losses related to our commercial mortgage loans and commitments held for sale, net of hedges, of $177 million, and trading losses of $76 million.

The net gain related to our equity investment in BlackRock of $52 million and trading income of $52 million were included in other noninterest income for the first quarter of 2007.

Additional information regarding our transactions related to Visa is included in Note 15 Commitments And Guarantees in the Notes To Consolidated Financial Statements included in this Report. 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.

Other noninterest income typically fluctuates from period to period depending on the nature and magnitude of transactions completed.

We expect that total revenue will increase by a low teens percentage for full year 2008 compared with full year 2007, assuming our current expectations for interest rates and economic conditions. We also expect PNC to create positive operating leverage for full year 2008 with a percentage growth in total revenue relative to 2007 that will exceed the percentage growth in noninterest expense from 2007.

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 loan servicing that are marketed by several businesses across PNC.

Revenue from capital markets-related products and services totaled $76 million in the first quarter of 2008 compared with $67 million in the first quarter of 2007. This increase was primarily driven by strong customer derivative activity partially offset by a decline in merger and acquisition advisory fees.

Treasury management revenue, which includes fees as well as net interest income from customer deposit balances, increased 21% to $133 million in the first quarter of 2008 compared with $110 million for the first quarter of 2007. The higher revenue reflected the impact of Mercantile and strong growth in the commercial payment card services business and in investment products.

Commercial mortgage banking activities include revenue derived from loan originations, commercial mortgage servicing, direct loan sales, and mark-to-market valuation adjustments and related hedging activities for held for sale commercial mortgage loans intended for securitization. Commercial mortgage banking activities resulted in a net loss of $96 million in the first quarter of 2008, including valuation losses of $177 million on commercial mortgage loans and commitments held for sale, net of hedges, due to the impact of an illiquid market. Excluding these losses, commercial mortgage banking activities revenue was $81 million in the first quarter of 2008 compared with $73 million in the first quarter of 2007. This increase was largely due to higher net interest income from a larger portfolio of commercial mortgage loans held for sale.

As a component of our advisory services to clients, we provide a select set of insurance products to fulfill specific customer financial needs. Primary insurance offerings include annuities, life, credit life, health, and disability. Revenue from these products totaled $18 million for the first three months of both 2008 and 2007.

PNC, through its subsidiary company Alpine Indemnity Limited, participates as a direct writer for its general liability, automobile liability, workers’ compensation, property and terrorism insurance programs. In the normal course of business, Alpine Indemnity Limited maintains insurance reserves for reported claims and for claims incurred but not reported based on actuarial assessments. We believe these reserves were adequate at March 31, 2008.

NONINTEREST EXPENSE

Total noninterest expense was $1.042 billion for the first quarter of 2008 and $944 million for the first quarter of 2007. Noninterest expense for 2008 included the reversal of $43 million of the Visa indemnification liability that we established in the fourth quarter of 2007.

Apart from the impact of this item, noninterest expense increased $141 million, or 15%, in the first three months of 2008 compared with the first three months of 2007. The higher noninterest expense in 2008 resulted from Mercantile and Yardville operating and Yardville integration costs, and investments in growth initiatives while maintaining disciplined expense management. Additional information regarding our transactions related to Visa is included in Note 15 Commitments and Guarantees in the Notes To Consolidated Financial Statements included in this Report.

We expect noninterest expense to grow at a mid-single digit percentage for full year 2008 compared with 2007.

PERIOD-END EMPLOYEES

Statistics at March 31, 2008 exclude 994 Hilliard Lyons employees as we sold Hilliard Lyons on that date.

EFFECTIVE TAX RATE

Our effective tax rate was 40.0% for the first quarter of 2008 and 30.7% for the first quarter of 2007. The higher effective tax rate for the first quarter of 2008 was due to taxes associated with the gain on the sale of Hilliard Lyons. We expect our effective tax rate to be approximately 31% for the remainder of 2008.

CONSOLIDATED BALANCE SHEET REVIEW

SUMMARIZED BALANCE SHEET DATA

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

Various seasonal and other factors impact our period-end balances whereas average balances (discussed under the Balance Sheet Highlights section of this Financial Review above and included in the Statistical Information section of this Report) are more indicative of underlying business trends.

An analysis of changes in certain balance sheet categories follows.

LOANS, NET OF UNEARNED INCOME

Loans increased $2.5 billion, to $70.8 billion, at March 31, 2008 compared with the balance at December 31, 2007. In February 2008, we transferred the education loans in our held for sale portfolio to the loan portfolio as further described in the Loans Held For Sale section of this Consolidated Balance Sheet Review.

Details Of Loans

Total loans represented 51% of total assets at March 31, 2008 and 49% of total assets at December 31, 2007.

Our total 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.

Approximately $2.1 billion of the $6.5 billion of real estate projects loans at March 31, 2008 were in residential real estate development. These represented approximately 3% of total loans and 2% of total assets at March 31, 2008.

Our home equity loan outstandings totaled $14.3 billion at March 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 $569 million or approximately 4% of the total portfolio in this grouping at March 31, 2008. Consistent with the entire home equity portfolio, approximately 93% of these higher-risk loans are located in our geographic footprint. In our $9.3 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 or equal to 90% totaled $105 million and comprised approximately 1% of the total at March 31, 2008.

Commercial lending outstandings in the table above 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 approximately $777 million, or 90%, of the total allowance for loan and lease losses at March 31, 2008 to these loans. We allocated $77 million, or 9%, of the remaining allowance at that date to consumer loans and $11 million, or 1%, to all other loans. This allocation also considers other relevant factors such as:

Net Unfunded Credit Commitments

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 $7.9 billion at March 31, 2008 and $8.9 billion at December 31, 2007.

Unfunded liquidity facility commitments and standby bond purchase agreements totaled $9.4 billion at both March 31, 2008 and December 31, 2007 and are included in the preceding table primarily within the “Commercial” and “Consumer” categories.

In addition to credit commitments, our net outstanding standby letters of credit totaled $5.2 billion at March 31, 2008 and $4.8 billion at December 31, 2007. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

SECURITIES AVAILABLE FOR SALE

Securities available for sale represented 20% of total assets at March 31, 2008 and 22% of total assets at December 31, 2007.

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

At March 31, 2008, securities available for sale included a net pretax unrealized loss of $1.6 billion, which represented the difference between fair value and amortized cost. The comparable amount at December 31, 2007 was a net unrealized loss of $265 million. We believe that the majority of the decline in value of these securities is attributable to changes in market spreads and not from deterioration in the credit quality of individual securities or underlying collateral where applicable. See Note 4 Securities in the Notes To Consolidated Financial Statements included in this Report for further information.

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 debt securities available for sale generally increases when market interest rates decrease and vice versa. Market values are also impacted by volatility and illiquidity.

The expected weighted-average life of securities available for sale (excluding corporate stocks and other) was 3 years and 6 months at both March 31, 2008 and December 31, 2007.

We estimate that at March 31, 2008 the effective duration of securities available for sale was 3.5 years for an immediate 50 basis points parallel increase in interest rates and 3.3 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2007 were 2.8 years and 2.5 years, respectively.

LOANS HELD FOR SALE

Commercial mortgage loans held for sale included loans intended for securitization of $2.1 billion at March 31, 2008 and $2.0 billion at December 31, 2007 that were recorded at fair value. During the first quarter of 2008, we recorded a negative valuation adjustment for loans and commitments of $177 million, net of hedges. This loss was reflected in the other noninterest income line item in our Consolidated Income Statement and in the results of the Corporate & Institutional Banking business segment. We value our commercial mortgage loans held for sale based on securitization prices. In early 2008, spreads widened and there was limited activity in the commercial real estate loan securitization market. Therefore, if these conditions continue, additional valuation losses may be incurred. If spreads narrow, we may realize valuation gains. However, we do not expect the impact to be significant to our capital position. Currently, these valuation losses are unrealized. We are not currently originating commercial mortgages for distribution through commercial real estate loan securitizations. We intend to pursue opportunities to reduce our loans held for sale position when we can receive prices we feel are appropriate.

Historically, we classified substantially all of our education loans as loans held for sale. In the past, we have sold education loans to issuers of asset-backed paper when the loans are placed into repayment status. Recently, the secondary markets for education loans have been impacted by liquidity issues similar to those for other asset classes. In February 2008, given this outlook and the economic and

customer relationship value inherent in this product, we transferred these loans at lower of cost or market value from held for sale to the loan portfolio. We do not anticipate sales of education loans in the foreseeable future.

FUNDING AND CAPITAL SOURCES

Details Of Funding Sources

Total funding sources were relatively unchanged at March 31, 2008 compared with the balance at December 31, 2007. Total deposits declined $2.3 billion, or 3%, as increases in money market and other time deposits were more than offset with declines in other categories, primarily time deposits in foreign offices. Total borrowed funds increased $1.8 billion, or 6%, primarily due to the increase of $2.6 billion in Federal Home Loan Bank borrowings at March 31, 2008 compared with December 31, 2007. The increase in this category reduced our overnight borrowings. The Liquidity Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding our first quarter 2008 borrowed funds activities.

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, maintaining dividend policies and retaining earnings.

Total shareholders’ equity decreased $.4 billion, to $14.4 billion, at March 31, 2008 compared with December 31, 2007. This decline was primarily due to a $.6 billion decrease in accumulated other comprehensive income (loss) which more than offset the net impact of earnings and dividends in the first

quarter of 2008. The decrease in accumulated other comprehensive income (loss) was primarily due to higher net unrealized securities losses.

Common shares outstanding totaled 341 million at both March 31, 2008 and December 31, 2007. PNC issued 4.6 million common shares in April 2008 in connection with the closing of the Sterling acquisition.

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 limitations resulting from merger activity, and the potential impact on our credit ratings.

We did not purchase any shares during the first quarter of 2008 under this program. We do not expect to actively engage in share repurchase activity for the foreseeable future as we look to enhance our capital position.

Risk-Based Capital

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, 2008, each of our domestic banking subsidiaries was considered “well-capitalized” based on US regulatory capital ratio requirements, as indicated in the Capital Ratios section of Consolidated Financial Highlights on page 2 of this Report. We believe our current bank subsidiaries will continue to meet these requirements during the remainder of 2008.

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

The following provides a summary of variable interest entities (“VIEs”), including those in which we hold a significant variable interest but have not consolidated and those that we have consolidated into our financial statements as of March 31, 2008 and December 31, 2007. Additional information on our partnership interests in low income housing projects is included in our 2007 Form 10-K under this same heading in Part I, Item 7 and in Note 3 Variable Interest Entities in the Notes To Consolidated Financial Statements included in Part II, Item 8 of that report.

Non-Consolidated VIEs - Significant Variable Interests

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 2007 and the first three months of 2008, Market Street met all of its funding needs through the issuance of commercial paper.

Market Street commercial paper outstanding was $5.1 billion at both March 31, 2008 and December 31, 2007. The weighted average maturity of the commercial paper was 31 days at March 31, 2008 compared with 32 days at December 31, 2007.

In the ordinary course of business during the first quarter of 2008, PNC Capital Markets, acting as a placement agent for Market Street, held a maximum daily position in Market Street commercial paper of $75 million with an average of $35 million and a quarter-end position of $35 million. This compares with a maximum daily position of $113 million with an average of $27 million during the year ended December 31, 2007. PNC Capital Markets owned less than $1 million of any Market Street commercial paper at December 31, 2007. PNC made no other purchases of Market Street commercial paper during 2007 or the first three months of 2008.

PNC Bank, National Association (“PNC Bank, N.A.”) provides certain administrative services, a portion of the program-level credit enhancement and 99% of liquidity facilities to Market Street in exchange for fees negotiated based on market rates. PNC recognized program administrator fees and commitments fees related to PNC’s portion of the liquidity facilities of $4 million and $1 million, respectively, for the three months ended March 31, 2008.

PNC views its credit exposure for the Market Street transactions as limited. Neither creditors nor investors in Market Street have any recourse to our general credit. The commercial paper obligations at March 31, 2008 and December 31, 2007 were effectively collateralized by Market Street’s assets. While PNC may be obligated to fund under 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 – for example, 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. Of the $8.8 billion of liquidity facilities provided by PNC at March 31, 2008, only $2.8 billion required PNC to fund if the assets are in default.

Program-level credit enhancement in the amount of 10% of commitments, excluding explicitly rated AAA/Aaa facilities, is provided by PNC and Ambac, a monoline insurer. PNC provides 25% of the enhancement in the form of a cash collateral account funded by a loan facility. This facility expires in March 2013. See Note 15 Commitments And Guarantees included in the Notes To Consolidated Financial Statements of this Report for additional information. The monoline insurer provides the remaining 75% of the enhancement in the form of a surety bond. The cash collateral account is subordinate to the surety bond.

Market Street is a limited liability company that 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 $8.7 million as of March 31, 2008. 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

Market Street Commitments by Credit Rating (a)

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 Market Street is not reflected in our Consolidated Balance Sheet.

PNC would consider changes to the variable interest holders (such as new expected loss note investors and changes to program-level credit enhancement providers), terms of expected loss notes, and new types of risks (such as foreign currency or interest rate) in Market Street as reconsideration events. PNC reviews the activities of Market Street on at least a quarterly basis to determine if a reconsideration event has occurred. As indicated earlier, 75% of the program-level credit enhancement is provided by Ambac in the form of a surety bond. PNC Bank, N.A., in the role of program administrator, is closely following market developments relative to the rating agency outlooks of monoline insurers. Ambac is rated AAA by two of the three major rating agencies and was lowered to AA by the other agency in January 2008. This rating change has not impacted the Market Street commercial paper ratings of A1/P1. Various alternatives to the program-level enhancement are under consideration if future rating changes impact either the ratings of Market Street commercial paper or its financial results.

Based on current accounting guidance and market conditions, we are not required to consolidate Market Street into our consolidated financial statements. However, if PNC would be determined to be the primary beneficiary under FIN 46R, we would consolidate the conduit at that time. To the extent that the par value of the assets in Market Street exceeded the fair value of the assets upon consolidation, the difference would be recognized by PNC as a loss in our Consolidated Income Statement in that period. Based on the fair value of the assets held by Market Street at March 31, 2008, this reduction in earnings would not have had a material impact on our risk-based capital ratios, credit ratings or debt covenants.

The aggregate assets and liabilities of VIEs that we have consolidated in our financial statements are as follows:

Consolidated VIEs – PNC Is Primary Beneficiary

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, and each Trust I Security is automatically exchangeable into a share of Series F Non-Cumulative Perpetual Preferred Stock of PNC Bank, N.A., 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.

PNC has contractually committed to each of 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 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. We have agreed to redeem the JSNs on March 15, 2038, but only out of net proceeds from the sale of certain replacement capital securities described in the JSN indenture. The Trust E Securities will be redeemed at the time of the JSN redemption. If we defer interest on the JSNs and either pay current interest

or the fifth anniversary of the deferral passes, we are obligated to issue certain qualifying securities defined in the JSN indenture to raise proceeds to fund the payment of accrued and unpaid interest.

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.

Acquired Entity Trust Preferred Securities

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, $85 million of which related to the April 2008 Sterling acquisition. 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.

FAIR VALUE MEASUREMENTS AND FAIR VALUE OPTION

We adopted SFAS 157, “Fair Value Measurements” (“SFAS 157”), and SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”), on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Under SFAS 159, we elected to fair value certain commercial mortgage loans classified as held for sale and certain customer resale agreements and bank notes to align the accounting for the changes in the fair value of these financial instruments with the changes in the value of their related hedges. See Note 6 Fair Value in the Notes To Consolidated Financial Statements included in this Report for further information.

At March 31, 2008, approximately 28% of our total assets were measured at fair value, consisting primarily of securities and other financial assets. Approximately 4% of our total liabilities were measured at fair value at that date.

Assets and liabilities measured at fair value on a recurring basis, including instruments for which PNC has elected the fair value option, are summarized below:

Valuation Hierarchy

The following is an outline of the valuation methodologies used for measuring fair value under SFAS 157 for the major items above. The fair value hierarchy (i.e., Level 1, Level 2, and Level 3) is described in detail in Note 6 Fair Value in the Notes To Consolidated Financial Statements included in this Report. Any models used to determine fair values based on the descriptions below are subject to review and independent testing as part of PNC’s model validation and internal control testing processes. Significant models are tested by our Model Validation Committee on at least an annual basis. In addition, we have teams independent of the traders verify marks and assumptions used for valuations at each period end.

Securities

Securities include both the available for sale and trading portfolios. We use market prices, sourced from pricing services, dealer quotes or recent trades to determine the fair value of securities. Almost all of our securities are classified as Level 1 or Level 2 in the fair value hierarchy. In circumstances where market prices are limited or unavailable, valuations may require significant management judgments or adjustments to determine fair value. In these cases, the securities are classified as Level 3.

Residential Mortgage-Backed Securities

At March 31, 2008, our residential mortgage-backed securities portfolio was comprised of $8.3 billion fair value of US government agency securities (substantially all classified as available for sale) and $11.4 billion fair value of private-issuer securities ($11.0 billion fair value classified as available for sale). The agency securities are generally collateralized by 1-4 family, conforming, fixed-rate residential mortgages. The private-issuer securities are also generally collateralized by 1-4 family residential mortgages. The mortgage loans underlying the private-issuer 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”). Of the total private-issuer securities, we consider that, based on the underlying credit score of the borrower, less than 1% were sub-prime credit quality. Substantially all of the securities are senior tranches in the subordination structure and have credit protection in the form of credit enhancement, over-collateralization and / or excess spread accounts. Of the total private-issuer securities, approximately 56% are vintage 2005 and earlier, approximately 25% are vintage 2006 and approximately 19% are vintage 2007 and 2008. At March 31, 2008, $11.3 billion of the private-issuer securities were rated “AAA” equivalents by at least two nationally recognized rating agencies. There were eleven private-issuer securities totaling $88 million fair value where at least one national rating agency rated the security “AA” equivalent. Since March 31, 2008, no significant deterioration in the credit ratings assigned to the private-issuer securities has occurred.

Commercial Mortgage-Backed Securities

The commercial mortgage-backed securities portfolio was $6.6 billion fair value at March 31, 2008 ($5.8 billion fair value classified as available for sale), and consisted of fixed-rate, private-issuer securities collateralized by non-residential properties, primarily retail properties, office buildings, and multi-family housing. Substantially all of the securities are the most senior tranches in the subordination structure. Of the total commercial mortgage-backed securities, approximately 47% are vintage 2005 and earlier, approximately 35% are vintage 2006 and approximately 18% are vintage 2007. At March 31, 2008, $6.5 billion of the commercial mortgage-backed securities were rated “AAA” equivalents by at least two nationally recognized rating agencies. There were four commercial mortgage-backed securities totaling $53 million fair value where at least one national rating agency rated the security “AA” equivalent. Since March 31, 2008, no significant deterioration in the credit ratings assigned to the commercial mortgage-backed securities has occurred.

Other Asset-Backed Securities

The asset-backed securities portfolio was $2.6 billion fair value at March 31, 2008 ($2.5 billion fair value classified as available for sale), and consisted of fixed-rate and floating-rate, private-issuer securities collateralized primarily by various consumer credit products, including home equity loans, credit cards, and automobile loans. Substantially all of the securities are senior tranches in the subordination structure and have credit protection in the form of credit enhancement, over-collateralization and / or excess spread accounts. Of the $1.4 billion fair value of asset-backed securities collateralized by fixed- and floating-rate home equity loans (all classified as available for sale), we consider that, based on the underlying credit score of the borrower, approximately 23% were sub-prime credit quality. Of the total asset-backed securities collateralized by fixed- and floating-rate home equity loans, approximately 37% are vintage 2005 and earlier, approximately 29% are vintage 2006 and approximately 34% are vintage 2007. At March 31, 2008, $2.4 billion of the other asset-backed securities were rated “AAA” equivalents by at least two nationally recognized rating agencies. There were two asset-backed securities totaling $23 million fair value where at least one national rating agency rated the security “AA” equivalent, six asset-backed securities totaling $118 million fair value where the rating was between “AA” equivalent and “BBB” equivalent, and two asset-backed securities totaling $8 million fair value where the rating was lower than “BBB” equivalent. For both of the securities rated lower than “BBB” equivalent, we had taken an other-than temporary impairment charge in the fourth quarter of 2007 totaling approximately $6 million. There were also three asset-backed securities (all classified as trading) totaling $18 million fair value that were not rated. Since March 31, 2008, no significant deterioration in the credit ratings assigned to the other asset-backed securities has occurred.

Financial Derivatives

Exchange-traded derivatives are valued using quoted market prices and are classified as Level 1. However, the majority of derivatives that we enter into are executed over-the-counter and are valued using internal techniques. Readily observable market inputs to these models can be validated to external sources, including industry pricing services, or corroborated through recent trades, dealer quotes, yield curves, implied volatility or other market related data. Certain derivatives, such as total rate of return swaps, are corroborated to the CMBX index. These derivatives are classified as Level 2. Derivatives priced using significant management judgment or assumptions are classified as Level 3. The fair values of our derivatives are adjusted for nonperformance risk as appropriate.

Commercial Mortgage Loans and Commitments Held for Sale

This portfolio of loans is held for securitization. As such, a synthetic securitization methodology is used to value the loans and the related unfunded commitments on an aggregate basis based upon current commercial mortgage-backed securities (CMBS) market structures and conditions. Observable inputs include the pricing of CMBS with similar collateral and using tranche interest rates from end of period yield curves. Management assumptions include subordination levels, CMBS bond spreads, and the value of the mortgage servicing rights. Adjustments are made to the valuations to account for securitization uncertainties, including the composition of the portfolio, market conditions, and liquidity. Based on the significance of unobservable inputs, we classify this portfolio as Level 3.

Equity Investments

The valuation of direct and partnership private equity investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such investments. The carrying values of direct investments and affiliated partnership interests reflect the expected exit price and are based on various techniques including multiples of adjusted earnings of the entity, independent appraisals, anticipated financing and sale transactions with third parties or the pricing used to value the entity in a recent financing transaction. The limited partnership investments are generally valued based on the financial statements received from the general partner with the underlying investments being valued utilizing techniques similar to those noted above. These investments are classified as Level 3.

Level 3 Assets and Liabilities

Under SFAS 157, financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

Our Level 3 assets and liabilities represented 2% of our total assets and less than 1% of our total liabilities at March 31, 2008.

Assets and liabilities measured using Level 3 inputs represented $2.9 billion or 7% of total assets measured at fair value and $239 million or 5% of total liabilities measured at fair value at March 31, 2008.

As we adopted SFAS 157 as of January 1, 2008, there were no material increases or decreases in Level 3 items for the first quarter of 2008 resulting from transfers in or out of Level 3 during this period.

As indicated in the table on page 16, our largest category of Level 3 assets consists of certain commercial mortgage loans and commitments held for sale.

Approximately $143 million of the first quarter 2008 pretax valuation losses of $177 million on commercial mortgage loans and commitments held for sale was included in our Level 3 rollforward schedule. The remaining net losses pertained to derivative positions classified as Level 2.

We originated the loans held in the commercial real estate portfolio that are classified as held for sale and accounted for at fair value. The values of these loans are based on exit prices that were unusually low at March 31, 2008 primarily due to an illiquid securitization market for these loans. The loans that we originated are of high quality and we believe that current market prices do not reflect the appropriate level of risk inherent in our portfolio.

Total securities measured at fair value at March 31, 2008 included securities available for sale and trading securities consisting primarily of residential and commercial mortgage-backed securities and other asset-backed securities. 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.

BUSINESS SEGMENTS REVIEW

We have four major businesses engaged in providing banking, asset management and global fund processing products and services. Business segment results, including inter-segment revenues, and a description of each business are included in Note 16 Segment Reporting included in the Notes To Consolidated Financial Statements under Part I, Item 1 of this Report. Certain revenue and expense amounts included in this Financial Review differ from the amounts shown in Note 16 primarily due to the presentation in this Financial Review of business revenue on a taxable-equivalent basis and income statement classification differences related to PFPC.

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 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. Financial results are presented, to the extent practicable, as if each business, with the exception of our BlackRock segment, operated on a stand-alone basis. As permitted under GAAP, we have aggregated the business results for certain 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 processing

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. The capital assigned for PFPC reflects its legal entity shareholders’ equity.

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 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. 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, equity management activities, differences between business segment performance reporting and financial statement reporting (GAAP), intercompany eliminations, and most corporate overhead.

Employee data as reported by each business segment in the tables that follow reflect staff directly employed by the respective businesses and excludes corporate and shared services employees.