PNC Financial Services (PNC)

determine fair value. In these cases, the securities are classified as Level 3.

The primary valuation technique for securities classified as Level 3 is to identify a proxy security, market transaction or index. The proxy selected generally has similar credit, tenor, duration, pricing and structuring attributes to the PNC position. The price, market spread, or yield on the proxy is then used to calculate an indicative market price for the security. Depending on the nature of the PNC position and its attributes relative to the proxy, management may make additional adjustments to account for market conditions, liquidity, and nonperformance risk, based on various inputs including recent trades of similar assets, single dealer quotes, and/or other observable and unobservable inputs.

Residential Mortgage-Backed Securities

At September 30, 2008, our residential mortgage-backed securities portfolio was comprised of $11.8 billion fair value of US government agency-backed securities (substantially all classified as available for sale) and $9.5 billion fair value of private-issuer securities (substantially all 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”).

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 57% are vintage 2005 and earlier, approximately 23% are vintage 2006 and approximately 20% are vintage 2007 and 2008. At September 30, 2008, $9.0 billion, or 95%, of the private-issuer securities were rated “AAA” equivalents by at least two nationally recognized rating agencies. There were six private-issuer securities totaling $212 million fair value where at least one national rating agency rated the security either “BBB” or lower equivalent.

For two securities, we recorded other-than-temporary impairment charges of $56 million for the first nine months of 2008, including $49 million in the third quarter. Since September 30, 2008, no significant deterioration in the credit quality assigned to the private-issuer securities has occurred.

Commercial Mortgage-Backed Securities

The commercial mortgage-backed securities portfolio was $6.0 billion fair value at September 30, 2008 ($5.5 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 49% are vintage 2005 and earlier, approximately 35% are vintage 2006 and approximately 16% are vintage 2007 and 2008. At September 30, 2008, $6.0 billion, or 99%, of the commercial mortgage-backed securities were rated “AAA” equivalents by at least two nationally recognized rating agencies. There were three commercial mortgage-backed securities totaling $3 million fair value where at least one national rating agency rated the security “BBB” equivalent.

We have recorded no other-than-temporary impairment charges on commercial mortgage-backed securities to date. Since September 30, 2008, no significant deterioration in the credit quality assigned to the commercial mortgage-backed securities has occurred.

Other Asset-Backed Securities

The asset-backed securities portfolio was $2.9 billion fair value at September 30, 2008 (all classified as available for sale), and consisted of fixed-rate and floating-rate, private-issuer securities collateralized primarily by various consumer credit products, including first-lien residential mortgage 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 total asset-backed securities portfolio, $1.2 billion were collateralized by fixed- and floating-rate first-lien residential mortgage loans. Of the $1.2 billion, approximately 38% are vintage 2005 and earlier, approximately 25% are vintage 2006 and approximately 37% are vintage 2007.

At September 30, 2008, $2.6 billion, or 87%, of the total asset-backed securities were rated “AAA” equivalents by at least two nationally recognized rating agencies. There were seven asset-backed securities totaling $68 million fair value where at least one national rating agency rated the security “BBB” or lower equivalent.

For two securities collateralized by first-lien residential mortgage loans, we recorded other-than-temporary impairment charges totaling approximately $9 million for the first nine months of 2008, including $7 million in the third quarter. Since September 30, 2008, no significant deterioration in the credit quality assigned to the other asset-backed securities has occurred.

services, dealer quotes or recent trades to determine the fair value of securities. The majority 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 June 30, 2008, our residential mortgage-backed securities portfolio was comprised of $9.8 billion fair value of US government agency-backed securities (substantially all classified as available for sale) and $11.0 billion fair value of private-issuer securities (substantially all 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 higher risk (i.e., FICO scores of equal to or less than 660) 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 55% are vintage 2005 and earlier, approximately 24% are vintage 2006 and approximately 21% are vintage 2007 and 2008. At June 30, 2008, $10.9 billion, or 99%, of the private-issuer securities were rated “AAA” equivalents by at least two nationally recognized rating agencies. There were 11 private-issuer securities totaling $69 million fair value where at least one national rating agency rated the security either “AA” or “A” equivalent.

For one security, we recorded an other-than-temporary impairment charge of $7 million in the second quarter of 2008. Since June 30, 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 $6.4 billion fair value at June 30, 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 49% are vintage 2005 and earlier, approximately 35% are vintage 2006 and approximately 16% are vintage 2007 and 2008. At June 30, 2008, $6.3 billion, or 99%, 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 $52 million fair value where at least one national rating agency rated the security “AA” equivalent and three commercial mortgage-backed securities totaling $4 million where at least one national rating agency rated the security “BBB” equivalent.

Since June 30, 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 $3.2 billion fair value at June 30, 2008 (substantially all 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 $1.3 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 higher risk credit quality. Of the total asset-backed securities collateralized by fixed- and floating-rate home equity loans, approximately 39% are vintage 2005 and earlier, approximately 25% are vintage 2006 and approximately 36% are vintage 2007. At June 30, 2008, $3.0 billion, or 94%, of the other asset-backed securities were rated “AAA” equivalents by at least two nationally recognized rating agencies. There were five asset-backed securities totaling $63 million fair value where at least one national rating agency rated the security “AA” equivalent, 11 asset-backed securities totaling $130 million fair value where the rating was between “AA” equivalent and “BBB” equivalent, and two asset-backed securities totaling $6 million fair value where the rating was lower than “BBB” equivalent.

For both of the securities rated lower than “BBB” equivalent, we recorded other-than-temporary impairment charges totaling approximately $2 million in the second quarter of 2008. Since June 30, 2008, no significant deterioration in the credit ratings assigned to the other asset-backed 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.

represented 23% of total assets as of both dates. The increase in total securities compared with December 31, 2005 was primarily due to higher balances of mortgage-backed and commercial mortgage-backed securities, which more than offset the decline in US Treasury and government agencies securities.

At December 31, 2006, the securities available for sale balance included a net unrealized loss of $142 million, which represented the difference between fair value and amortized cost. The comparable amount at December 31, 2005 was a net unrealized loss of $370 million. The impact on bond prices of increases in interest rates during 2005 was reflected in the net unrealized loss position at December 31, 2005. The expected weighted-average life of securities available for sale was 3 years and 8 months at December 31, 2006 compared with 4 years and 1 month at December 31, 2005.