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 investment servicing. 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 investment servicing internationally.

KEY STRATEGIC GOALS

We manage our company for the long term by focusing on maintaining a moderate risk profile and 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 positive operating leverage by achieving growth in revenue from our balance sheet and diverse business mix that exceeds growth in expenses controlled through 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 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 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 and permissible, 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. See the Funding and Capital Sources section of the Consolidated Balance Sheet Review section of this Financial Review regarding certain restrictions on dividends and common share repurchases resulting from PNC’s participation in the US Treasury’s Troubled Asset Relief Program (“TARP”) Capital Purchase Program.

RECENT MARKET AND INDUSTRY DEVELOPMENTS

Starting in the middle of 2007, and with a heightened level of activity during the third quarter of 2008 and through the present, there has been unprecedented turmoil, volatility and illiquidity in worldwide financial markets, accompanied by uncertain prospects for the overall national economy. 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 Treasury Department, the Federal Reserve, the FDIC, the Securities and Exchange Commission and others, 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 and other legislative, administrative and regulatory initiatives, including the US Treasury’s TARP and TARP Capital Purchase Program, the Federal Reserve’s Commercial Paper Funding Facility (“CPFF”), and the FDIC’s Temporary Liquidity Guarantee Program (“TLGP”).

The TARP Capital Purchase Program encourages US financial institutions to build capital through the sale to the US Treasury of senior preferred shares of stock to increase the flow of financing to US businesses and consumers and to support the US economy. The Federal Reserve established the CPFF to provide a liquidity backstop to US issuers of commercial paper and thereby improve liquidity in short-term funding markets and thus increase the availability of credit for businesses and households. The FDIC’s TLGP is designed to strengthen confidence and encourage liquidity in the banking

system by (1) guaranteeing newly issued senior unsecured debt of eligible institutions, including FDIC-insured banks and thrifts, as well as certain holding companies (the Debt Guarantee Program), and (2) providing full deposit insurance coverage for non-interest bearing deposit transaction accounts in FDIC-insured institutions, regardless of the dollar amount (the Transaction Account Guarantee Program). PNC has been approved to participate in the TARP Capital Purchase Program and will participate in the FDIC’s Transaction Account Guarantee Program. PNC is evaluating whether it will participate in the FDIC’s Debt Guarantee Program. Effective October 28, 2008, Market Street Funding LLC (“Market Street”) was approved to participate in the Federal Reserve’s CPFF.

It is also possible that the US Congress and federal banking agencies, as part of their efforts to enhance the liquidity and solvency of financial institutions and markets and otherwise enhance the regulation of financial institutions and markets, will announce additional legislation, regulations or programs. These additional actions may take the form of 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.

PLANNED ACQUISITION OF NATIONAL CITY

On October 24, 2008, we entered into a definitive agreement with National City Corporation (“National City”) for PNC to acquire National City for approximately $5.9 billion in cash and common stock. Consideration includes approximately $5.5 billion of PNC common stock (based on a five-day average share price including the announcement date), with a fixed exchange ratio of 0.0392 share of PNC common stock for each share of National City common stock, and $384 million of cash payable to certain warrant holders. The transaction is currently expected to close by December 31, 2008 and is subject to customary closing conditions, including the approval of regulators and the shareholders of both PNC and National City.

National City, headquartered in Cleveland, Ohio, is one of the nation’s largest commercial banking organizations based on assets. At September 30, 2008, National City had total assets of approximately $145 billion and total deposits of approximately $96 billion. National City operates through an extensive network in Ohio, Florida, Illinois, Indiana, Kentucky, Michigan, Missouri, Pennsylvania and Wisconsin and also conducts selected consumer lending businesses and other financial services on a nationwide basis. Its primary businesses include commercial and retail banking, mortgage financing and servicing, consumer finance and asset management.

We expect to incur merger and integration costs of approximately $2.3 billion in connection with the acquisition of National City. The transaction is expected to result in the reduction of approximately $1.2 billion of acquired company noninterest expense through the elimination of operational and administrative redundancies.

Our Current Reports on Form 8-K filed October 24, 2008 and October 30, 2008 contain additional information regarding our planned acquisition of National City.

TARP CAPITAL PURCHASE PROGRAM

Also on October 24, 2008, PNC announced it will participate in the TARP Capital Purchase Program. PNC plans to issue to the US Treasury $7.7 billion of preferred stock together with related warrants to purchase shares of common stock of PNC in accordance with the terms of the TARP Capital Purchase Program, subject to standard closing requirements. A portion of the $7.7 billion amount assumes the consummation of the acquisition of National City. Funds from this sale will count as Tier 1 capital and the warrants will qualify as tangible common equity. The US Treasury’s term sheet describing the TARP Capital Purchase Program and standard forms of agreements are available on the US Treasury’s website at http://www.ustreas.gov.

KEY FACTORS AFFECTING FINANCIAL PERFORMANCE

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 outlined above:

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

OTHER 2008 ACQUISITION AND DIVESTITURE ACTIVITY

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 was a banking and financial services company with approximately $3.2 billion in assets, $2.7 billion in deposits, and 65 branches in south-central Pennsylvania, northern Maryland and northern Delaware. The Sterling technology systems and bank charter conversions were completed during the third quarter of 2008 and we realized the anticipated cost savings related to these activities.

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. Business segment information for the periods presented in this report reflects the reclassification of results for Hilliard Lyons, including the gain on the sale of this business, from the Retail Banking business segment to “Other.”

SUMMARY FINANCIAL RESULTS

Highlights of the third quarter of 2008 included the following:

In addition, we created positive year-to-date operating leverage by growing revenue while controlling noninterest expense. Revenue growth of 9% in the first nine months of 2008 compared with the same period in 2007 exceeded noninterest expense growth of 7% for the same periods.

Our Consolidated Income Statement Review section of this Financial Review describes in greater detail the various items that impacted our results for the third quarter and first nine months of 2008 and 2007.

BALANCE SHEET HIGHLIGHTS

Total assets were $145.6 billion at September 30, 2008 compared with $138.9 billion at December 31, 2007. Total average assets were $141.7 billion for the first nine months of 2008 compared with $119.5 billion for the first nine months of 2007. This increase reflected an $18.5 billion increase in average interest-earning assets and a $3.6 billion increase in average noninterest-earning assets. An increase of $11.0 billion in loans and a $6.1 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 nine months of 2008 reflected an increase in average goodwill of $1.9 billion primarily related to the acquisition of Sterling on April 4, 2008, Yardville National Bancorp (“Yardville”) on October 26, 2007 and Mercantile Bankshares Corporation (“Mercantile”) on March 2, 2007.

The impact of the Sterling, Yardville and Mercantile 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 $71.8 billion for the first nine months of 2008 and $60.9 billion in the first nine months of 2007. The increase in average total loans included growth in commercial loans of $5.5 billion, consumer loans of $2.6 billion, commercial real estate loans of $2.0 billion and residential mortgage loans of $.9 billion. Loans represented 63% of average interest-earning assets for the first nine months of 2008 and 64% for the first nine months of 2007.

Average securities available for sale totaled $31.7 billion for the first nine months of 2008 and $25.6 billion for the first nine months of 2007. Average residential and commercial mortgage-backed securities increased $4.8 billion on a combined basis in the comparison. In addition, asset-backed securities increased $1.0 billion in the first nine months of 2008 compared with the prior year nine-month period. Securities available for sale comprised 28% of average interest-earning assets for the first nine months of 2008 and 27% for the first nine months of 2007.

Average total deposits were $83.5 billion for the first nine months of 2008, an increase of $8.0 billion over the first nine months of 2007. Average deposits grew from the prior year period primarily as a result of increases in money market balances, other time deposits, time deposits in foreign offices, and demand and other noninterest-bearing deposits.

Average total deposits represented 59% of average total assets for the first nine months of 2008 and 63% for the first nine

months of 2007. Average transaction deposits were $54.8 billion for the first nine months of 2008 compared with $50.0 billion for the first nine months of 2007.

Average borrowed funds were $31.8 billion for the first nine months of 2008 and $21.1 billion for the first nine months of 2007. Increases of $8.4 billion in Federal Home Loan Bank borrowings and $1.3 billion in other borrowed funds drove the increase compared with the first nine months of 2007.

Shareholders’ equity totaled $14.2 billion at September 30, 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 were $904 million for the first nine months of 2008 and $1.278 billion for the first nine months of 2007. Third quarter 2008 business segment earnings of $241 million decreased $191 million compared with the third quarter of 2007. Results for 2008 were impacted by a lower assigned revenue value for deposits in the current interest rate environment, the impact of valuation adjustments on certain illiquid assets, and a higher provision for credit losses. Notwithstanding these factors, our business segments made significant progress in growing loans and deposits, adding customers and investing in products and services.

Highlights of results for the third quarter and first nine 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 $414 million for the first nine months of 2008 compared with $665 million for the same period in 2007. The 38% decline in earnings over the prior year was primarily driven by increases in the provision for credit losses and expenses.

Retail Banking’s earnings were $79 million for the third quarter of 2008 compared with $246 million for the same period in 2007. The decline from the prior year third quarter was driven by an increase in the provision for credit losses and higher noninterest expense.

Corporate & Institutional Banking

Corporate & Institutional Banking earned $208 million in the first nine months of 2008 compared with $341 million in the first nine months of 2007. Earnings in 2008 were impacted by pretax valuation losses of $238 million on commercial mortgage loans held for sale. Increases in the provision for credit losses and noninterest expenses were offset by higher net interest income.

For the third quarter of 2008, earnings from Corporate & Institutional Banking totaled $72 million compared with $87 million for the third quarter of 2007. Lower earnings in the third quarter of 2008 reflected a decline in revenue largely driven by valuation losses on commercial mortgage loans held for sale. Higher noninterest expense in the comparison was substantially offset by lower provision for credit losses.

BlackRock

Our BlackRock business segment earned $185 million for the first nine months of 2008, a 5% increase compared with $176 million for the first nine months of 2007. Earnings from our BlackRock business segment totaled $56 million for the third quarter of 2008 compared with $66 million for the third quarter of 2007. BlackRock’s operating income decreased in the third quarter of 2008 largely as a result of market declines and massive disruption in the US money markets.

Global Investment Servicing

Global Investment Servicing, formerly PFPC, earned $97 million for the first nine months of 2008 and $96 million for the first nine months of 2007. Earnings from Global Investment Servicing totaled $34 million in the third quarter of 2008 compared with $33 million in the third quarter of 2007. While servicing revenue growth 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 largely offset the increases in both comparisons.

Other

“Other” earnings for the first nine months of 2008 totaled $226 million compared with earnings of $11 million for the first nine months of 2007.

The following factors contributed to the higher earnings for “Other” for the first nine months of 2008:

The benefits of these items were partially offset by lower trading results and by equity management losses in the year-to-date comparison.

For the third quarter of 2008, “Other” earnings totaled $7 million compared with a net loss of $25 million in the third quarter of 2007. Growth in net interest income related to asset and liability management activities and the third quarter 2008 reversal of a legal contingency reserve referred to above, partially offset by lower trading results, higher net securities losses and equity management losses, drove the increase in this comparison.

CONSOLIDATED INCOME STATEMENT REVIEW

Our Consolidated Income Statement is presented in Part I, Item 1 of this Report. Net income for the first nine months of 2008 was $1.130 billion and for the first nine months of 2007 was $1.289 billion. Net income for the third quarter of 2008 was $248 million compared with net income of $407 million for the third quarter of 2007. Total revenue for the first nine months of 2008 increased 9% compared with the first nine months of 2007. We created positive operating leverage in the year-to-date comparison as total noninterest expense increased 7% in the comparison.

NET INTEREST INCOME AND NET INTEREST MARGIN

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 33% increase in net interest income for the first nine months of 2008 compared with the first nine months of 2007 was favorably impacted by the $18.5 billion, or 20%, increase in average interest-earning assets and a decrease in funding costs. Similarly, the 31% increase in net interest income for the third quarter of 2008 compared with the third quarter of 2007 reflected the $14.4 billion, or 14%, increase in average interest-earning assets over this period and a decrease in funding costs. Wider net interest margins also benefited the 2008 periods in both the third quarter and first nine months comparisons. The reasons driving the higher interest-earning assets in these comparisons are further discussed in the Balance Sheet Highlights portion of the Executive Summary section of this Financial Review.

We expect net interest income growth will be approximately 30% for full year 2008 compared with 2007, 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 3.34% for the first nine months of 2008 and 3.00% for the first nine months of 2007. The following factors impacted the comparison:

The net interest margin was 3.46% for the third quarter of 2008 and 3.00% for the third quarter of 2007. The following factors impacted the comparison:

For comparing to the broader market, during the first nine months of 2008 the average federal funds rate was 2.40% compared with 5.20% for the first nine months of 2007. The average federal funds rate was 1.96% for the third quarter of 2008 compared with 5.09% for the third quarter 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.

NONINTEREST INCOME

Summary – First Nine Months

Noninterest income totaled $2.683 billion for the first nine months of 2008 compared with $2.956 billion for the first nine months of 2007.

Noninterest income for the first nine months of 2008 included the following:

Noninterest income for the first nine months of 2007 included the following:

Apart from the impact of these items, noninterest income increased $134 million, or 5%, for the first nine months of 2008 compared with the first nine months of 2007.

Summary – Third Quarter

Noninterest income totaled $654 million for the third quarter of 2008 compared with $990 million for the third quarter of 2007.

Noninterest income for the third quarter of 2008 included the following:

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

Apart from the impact of these items, noninterest income increased $31 million, or 3%, in this comparison.

Additional Analysis

Fund servicing fees increased $75 million, to $695 million, in the first nine months of 2008 compared with the first nine months of 2007. Fund servicing fees totaled $233 million in the third quarter of 2008 compared with $208 million in the third quarter of 2007. The increases in both comparisons primarily resulted from the December 2007 acquisition of Albridge Solutions Inc. and growth in Global Investment Servicing’s offshore operations.

Global Investment Servicing provided fund accounting/ administration services for $907 billion of net fund investment assets and provided custody services for $415 billion of fund investment assets at September 30, 2008, compared with $922 billion and $497 billion, respectively, at September 30, 2007. The decrease in assets serviced was due to declines in asset values and fund outflows resulting primarily from market conditions in the third quarter of 2008.

Asset management fees totaled $589 million in the first nine months of 2008, an increase of $30 million compared with the first nine months of 2007. Higher equity earnings from our BlackRock investment in 2008 and our March 2007 acquisition of Mercantile impacted the nine-month comparison. For the third quarter of 2008, asset management fees totaled $180 million compared with $204 million in the third quarter of 2007. The effect on fees of a $14 billion decrease in assets managed related to wealth management and the Hilliard Lyons divestiture and lower equity earnings from BlackRock were reflected in the decline during the third quarter of 2008 compared with the prior year third quarter. Assets managed at September 30, 2008 totaled $63 billion compared with $77 billion at September 30, 2007. The Hilliard Lyons sale and the impact of comparatively lower equity markets in the first nine months of 2008 drove the decline in assets managed.

Consumer services fees declined $41 million, to $472 million, for the first nine months of 2008 compared with the first nine months of 2007. For the third quarter of 2008, consumer services fees totaled $153 million compared with $177 million in the third quarter of 2007. In both comparisons, the sale of Hilliard Lyons more than offset the benefits of increased volume-related fees, including debit card, credit card, brokerage and merchant revenues.

Corporate services revenue totaled $547 million in the first nine months of 2008 compared with $533 million in the first nine months of 2007. Corporate services revenue totaled $198 million in both the third quarter of 2008 and 2007. Higher revenue from treasury management and other fees, partially offset by lower merger and acquisition advisory fees and mortgage servicing fees, net of amortization, were the primary factors in the year-to-date increase.

Service charges on deposits grew $13 million, to $271 million, in the first nine months of 2008 compared with the first nine months of 2007. Service charges on deposits totaled $97 million for the third quarter of 2008 and $89 million for the third quarter of 2007. The impact of our expansion into new markets contributed to the increase in both comparisons.

Net securities losses totaled $34 million for the first nine months of 2008 compared with net securities losses of $4 million in the first nine months of 2007. Net securities losses were $74 million for the third quarter of 2008 and $2 million for the third quarter of 2007. Losses for the third quarter of 2008 included other-than-temporary impairment charges of

$74 million on our investment in preferred stock of FHLMC and FNMA in addition to other-than-temporary impairments on other securities that were offset by securities gains.

Other noninterest income totaled $143 million for the first nine months of 2008 compared with $477 million for the first nine months of 2007.

Other noninterest income for the first nine months of 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, gains of $69 million related to our BlackRock LTIP shares adjustment and the $61 million reversal of a legal contingency reserve referred to above. The impact of these items was partially offset by valuation losses related to our commercial mortgage loans held for sale of $238 million, and trading losses of $77 million.

Trading income of $114 million and equity management gains of $81 million were included in other noninterest income for the first nine months of 2007.

For the third quarter of 2008, other noninterest income was a negative $133 million compared with $116 million for the third quarter of 2007.

Other noninterest income for the third quarter of 2008 included valuation losses related to our commercial mortgage loans held for sale of $82 million, trading losses of $54 million and equity management losses of $24 million. The impact of these items was partially offset by the $61 million reversal of a legal contingency reserve. Other noninterest income for the third quarter of 2007 included equity management gains of $47 million and trading income of $33 million.

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 and further details regarding equity management are included in the Market Risk Management – Equity and Other Investment Risk section.

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

We expect that total revenue growth will exceed 10% for full year 2008 compared with full year 2007, assuming our current expectations for interest rates and economic conditions. We also expect 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, excluding any potential impact on expenses of our planned acquisition of National City.

PRODUCT REVENUE

In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management and capital markets-related products and services and commercial mortgage loan servicing, 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, increased 17% to $403 million in the first nine months of 2008 compared with $345 million for the first nine months of 2007. For the third quarter of 2008, treasury management revenue increased 13% to $137 million compared with $121 million in the third quarter of 2007. These increases were primarily related to the impact of our expansion into new markets and strong growth in commercial payment card services and in cash and liquidity management products.

Revenue from capital markets-related products and services totaled $260 million in the first nine month of 2008 compared with $216 million in the first nine months of 2007. Revenue totaled $80 million for the third quarter of 2008 compared with $73 million for the third quarter of 2007. These increases were primarily driven by strong customer interest rate derivative and foreign exchange activity partially offset by a decline in merger and acquisition advisory fees.

Commercial mortgage banking activities include revenue derived from loan originations, commercial mortgage servicing (including net interest income and noninterest income from loan servicing and ancillary services), gains, valuation adjustments, net interest income on loans held for sale, and related commitments and hedges.

Commercial mortgage banking activities resulted in revenue of $8 million in the first nine months of 2008 compared with $206 million in the first nine months of 2007. The first nine months of 2008 included valuation losses of $238 million on commercial mortgage loans held for sale due to the impact of an illiquid market during most of the first nine months of 2008. The 2007 period reflected significant securitization activity. In addition, commercial mortgage servicing revenue declined $14 million while net interest income from commercial mortgage loans held for sale increased $51 million in the nine-month comparison due to higher loans held for sale balances.

For the third quarter of 2008, revenue from commercial mortgage banking activities totaled negative $1 million compared with $66 million in the third quarter of 2007. The decrease reflected an $82 million negative valuation adjustment in the third quarter of 2008. In addition,

commercial mortgage servicing revenue declined $10 million while net interest income from commercial mortgage loans held for sale increased $15 million in the quarter comparison due to higher loans held for sale balances.

PROVISION FOR CREDIT LOSSES

The provision for credit losses totaled $527 million for the first nine months of 2008 compared with $127 million for the first nine months of 2007. The provision for credit losses for the third quarter of 2008 totaled $190 million compared with $65 million for the third quarter of 2007. The higher provision in both comparisons was driven by general credit quality migration, especially in the residential real estate development portion of our commercial real estate portfolio and related sectors, and in home equity loans. Total residential real estate development outstandings were approximately $1.8 billion at September 30, 2008 compared with $2.1 billion at December 31, 2007. Growth in our total credit exposure also contributed to the higher provision amounts in both comparisons.

Our planned acquisition of National City may result in an additional provision for credit losses, which would be recorded at closing, to conform the National City loan reserving methodology with ours. Given this transaction and continued credit deterioration, management is no longer in a position to provide guidance for the provision for credit losses for full year 2008.

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

NONINTEREST EXPENSE

Total noninterest expense was $3.299 billion for the first nine months of 2008 and $3.083 billion for the first nine months of 2007. Noninterest expense totaled $1.142 billion for the third quarter of 2008 compared with $1.099 billion for the third quarter of 2007.

Higher noninterest expense in both the third quarter and first nine month comparisons with 2007 primarily resulted from investments in growth initiatives, including acquisitions, partially offset by the impact of the sale of Hilliard Lyons and disciplined expense management.

Integration costs included in noninterest expense totaled $41 million for the first nine months of 2008 and $67 million for the first nine months of 2007. Integration costs in the third quarter of 2008 totaled $14 million compared with $41 million in the third quarter of 2007.

Noninterest expense for the first nine months of 2008 included the benefit of the first quarter 2008 reversal of $43 million of

the $82 million Visa indemnification liability that we established in the fourth 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.

We expect noninterest expense to grow at a low-to-mid single digit percentage for full year 2008 compared with 2007, excluding any potential impact of our planned acquisition of National City.

PERIOD-END EMPLOYEES

EFFECTIVE TAX RATE

Our effective tax rate was 33.1% for the first nine months of 2008 and 31.0% for the first nine months of 2007. The higher effective tax rate for the first nine months of 2008 was due to taxes associated with the gain on the sale of Hilliard Lyons.

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 $6.9 billion, to $75.2 billion, at September 30, 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 52% of total assets at September 30, 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 $1.8 billion of the $6.6 billion of real estate projects loans at September 30, 2008 were in residential real

estate development. These represented approximately 2% of total loans and less than 2% of total assets at September 30, 2008. Approximately $2.1 billion of the $6.1 billion of real estate projects loans at December 31, 2007 were in residential real estate development.

Our home equity loan outstandings totaled $14.9 billion at September 30, 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 $581 million or approximately 4% of the total portfolio in this grouping at September 30, 2008. Consistent with the entire home equity portfolio, approximately 93% of these higher-risk loans are located in our geographic footprint. In our $8.8 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 $156 million and comprised approximately 2% of this portfolio at September 30, 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 $928 million, or 88%, of the total allowance for loan and lease losses at September 30, 2008 to these loans. We allocated $109 million, or 10%, of the remaining allowance at that date to consumer loans and $16 million, or 2%, 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 reported net of participations, assignments and syndications totaled $7.6 billion at September 30, 2008 and $8.9 billion at December 31, 2007.

Unfunded liquidity facility commitments and standby bond purchase agreements totaled $7.8 billion at September 30,

2008 and $9.4 billion at December 31, 2007 and are included in the preceding table primarily within the “Commercial” and “Consumer” categories. The decrease from December 31, 2007 was primarily due to a decline in Market Street commitments.

In addition to credit commitments, our net outstanding standby letters of credit totaled $5.8 billion at September 30, 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 21% of total assets at September 30, 2008 and 22% of total assets at December 31, 2007.

At September 30, 2008, securities available for sale included a net pretax unrealized loss of $3.6 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. The fair value of securities available for sale is impacted by interest rates, credit spreads, and market volatility and illiquidity. We believe that substantially all of the decline in value of these securities is attributable to changes in market credit spreads and market illiquidity and not from deterioration in the credit quality of individual securities or underlying collateral, where applicable. If the current issues affecting the US housing market were to continue for the foreseeable future or worsen, or 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. 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 expected weighted-average life of securities available for sale (excluding corporate stocks and other) was 4 years and 8 months at September 30, 2008 and 3 years and 6 months at December 31, 2007.

We estimate that at September 30, 2008 the effective duration of securities available for sale was 3.2 years for an immediate 50 basis points parallel increase in interest rates and 3.1 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

Actions related to our commercial mortgage loans held for sale intended for securitization during the first nine months of 2008 included the following:

Loans intended for securitization are recorded at fair value. The valuation adjustments were reflected in the other noninterest income line item in our Consolidated Income Statement and in the results of the Corporate & Institutional Banking business segment. If conditions similar to the third

quarter of 2008 persist, additional valuation losses may be incurred. If conditions improve, we may realize valuation gains. However, we do not expect the impact to be significant to our capital position. We are not currently originating commercial mortgages for distribution through commercial real estate loan securitizations. We intend to pursue opportunities to further reduce our commercial mortgage loans held for sale position during the remainder of 2008 at appropriate prices.

We previously classified substantially all of our education loans as loans held for sale as we sold education loans to issuers of asset-backed paper when the loans were placed into repayment status. During 2008, 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 did not sell education loans during the second or third quarters of 2008 and do not anticipate sales of these transferred loans in the foreseeable future.

FUNDING AND CAPITAL SOURCES

Details Of Funding Sources

Total funding sources increased $3.5 billion, or 3%, at September 30, 2008 compared with December 31, 2007.

Total deposits increased $2.3 billion, or 3%, as higher money market balances and other time deposits more than offset declines in demand and time deposits in foreign offices. Total borrowed funds increased $1.2 billion, or 4%, at September 30, 2008 compared with the prior year end

primarily due to the increase of $3.4 billion in Federal Home Loan Bank (“FHLB”) borrowings, partially offset by reductions in federal funds purchased, bank notes and senior debt, and repurchase agreements. The Liquidity Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding our 2008 borrowed funds activities.

Capital

We manage our capital position by making adjustments to our balance sheet size and composition, issuing subordinated debt, equity or hybrid instruments, executing treasury stock transactions, maintaining dividend policies and retaining earnings.

Total shareholders’ equity decreased $.6 billion, to $14.2 billion, at September 30, 2008 compared with December 31, 2007. A $2.1 billion increase in accumulated other comprehensive loss in the first nine months of 2008, along with the impact of dividends, more than offset increases in shareholders’ equity resulting from net income, the May 2008 Series K preferred stock issuance and new common shares issued in connection with the Sterling acquisition.

The increase from December 31, 2007 in accumulated other comprehensive loss was primarily due to higher net unrealized losses on available for sale securities. These net unrealized losses were primarily driven by market liquidity factors and were not representative of credit quality concerns of the underlying assets.

Common shares outstanding totaled 348 million at September 30, 2008 and 341 million at December 31, 2007. PNC issued approximately 4.6 million common shares in April 2008 in connection with the closing of the Sterling acquisition. In addition to the common stock issuance related to our planned acquisition of National City, we may consider a common stock issuance in the foreseeable future, depending on market conditions.

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, and the potential impact on our credit ratings. We did not purchase any shares during the first nine months of 2008 under this program.

On October 24, 2008, PNC announced that it will participate in the US Treasury’s TARP Capital Purchase Program. See TARP Capital Purchase Program within the Executive Summary section of this Financial Review for additional information regarding PNC’s planned issuance of preferred

stock and related common stock warrants to the US Treasury under this program.

Under the TARP Capital Purchase Program, there will be restrictions on dividends and common share repurchases associated with the preferred stock that we plan to issue 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, the US Treasury’s consent will be required for any increase in common dividends per share 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.

Risk-Based And Tangible Capital

The tangible common equity information provided in the table above does not reflect the full value of our equity investment in BlackRock. As of September 30, 2008, the market value of our investment exceeded the book value by $4.1 billion. This unrecognized gain would have resulted in a $2.7 billion after-tax increase to our tangible common equity, to $7.6 billion. See additional information regarding our investment in BlackRock on page 28.

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 September 30, 2008, each of our domestic banking subsidiaries was considered “well-capitalized” based on US regulatory capital ratio requirements, which are indicated 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.”

Commitments, including contractual obligations and other commitments, are included within the Risk Management section of this Financial Review and in Note 15 Commitments And Guarantees in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

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 September 30, 2008 and December 31, 2007. During the third quarter of 2008, we reassessed the structure of certain partnership interests in low income housing projects and determined that they should be classified as VIEs. As such we have revised the December 31, 2007 disclosures to reflect these changes.

Consolidated VIEs – PNC Is Primary Beneficiary

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 nine months of 2008, Market Street met all of its funding needs through the issuance of commercial paper.

Market Street commercial paper outstanding was $4.6 billion at September 30, 2008 and $5.1 billion at December 31, 2007. The weighted average maturity of the commercial paper was 42 days at September 30, 2008 compared with 32 days at December 31, 2007.

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 April 30, 2009.

In the ordinary course of business during the first nine months 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 $16 million. This compares with a maximum daily position of $113 million with an average of $27 million for the year ended December 31, 2007. PNC Capital Markets owned no Market Street commercial paper at September 30, 2008 and owned less than $1 million of such commercial paper at December 31, 2007. PNC Bank, National Association (“PNC Bank, N.A.”) purchased overnight maturities of Market Street commercial paper on two days during September 2008 in the amounts of $197 million and $531 million due to illiquidity in the commercial paper market. We considered these transactions as part of our evaluation of Market Street described below to determine that we are not the primary beneficiary. PNC made no other purchases of Market Street commercial paper during 2007 or the first nine months of 2008.

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. PNC recognized program administrator fees and commitment fees related to PNC’s portion of the liquidity facilities of $14 million and $3 million, respectively, for the nine months ended September 30, 2008. The comparable amounts were $9 million and $3 million for the nine months ended September 30, 2007.

The commercial paper obligations at September 30, 2008 and December 31, 2007 were effectively collateralized by Market Street’s assets. While PNC may be obligated to fund under the $7.3 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 – 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. In addition, PNC would be required to fund $1.7 billion of the liquidity facilities if the underlying assets are in default. See Note 15 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 25% of the enhancement in the form of a cash collateral account funded by a loan facility. This facility expires in March 2013. PNC provides a liquidity facility for the remaining 75% of program-level enhancement. Ambac, a monoline insurer,

provides a surety bond equal to 75% of the program level enhancement which will repay PNC in the event of a liquidity facility draw. The cash collateral account is subordinate to the liquidity facility and surety bond.

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 $7.0 million as of September 30, 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)