Edgar Filing: PNC FINANCIAL SERVICES GROUP, INC.

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-09718

The PNC Financial Services Group, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania

25-1435979

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707

(Address of principal executive offices, including zip code)

(412) 762-2000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of April 30, 2013, there were 529,423,740 shares of the registrant’s common stock ($5 par value) outstanding.

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to First Quarter 2013 Form 10-Q


	Pages
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
Consolidated Income Statement		73
Consolidated Statement of Comprehensive Income		74
Consolidated Balance Sheet		75
Consolidated Statement Of Cash Flows		76

Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies		78
Note 2 Acquisition and Divestiture Activity		83
Note 3 Loan Sale and Servicing Activities and Variable Interest Entities		83
Note 4 Loans and Commitments to Extend Credit		88
Note 5 Asset Quality		89
Note 6 Purchased Loans		102
Note 7 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit		103
Note 8 Investment Securities		106
Note 9 Fair Value		111
Note 10 Goodwill and Other Intangible Assets		121
Note 11 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities		124
Note 12 Certain Employee Benefit And Stock Based Compensation Plans		125
Note 13 Financial Derivatives		127
Note 14 Earnings Per Share		136
Note 15 Total Equity And Other Comprehensive Income		137
Note 16 Income Taxes		140
Note 17 Legal Proceedings		140
Note 18 Commitments and Guarantees		141
Note 19 Segment Reporting		146
Note 20 Subsequent Events		149

Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis		150

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Review		1
Consolidated Financial Highlights		1
Executive Summary		3
Consolidated Income Statement Review		9
Consolidated Balance Sheet Review		11
Off-Balance Sheet Arrangements And Variable Interest Entities		24
Fair Value Measurements		24
European Exposure		25
Business Segments Review		27
Critical Accounting Estimates And Judgments		41
Status Of Qualified Defined Benefit Pension Plan		42
Recourse And Repurchase Obligations		43
Risk Management		47
Internal Controls And Disclosure Controls And Procedures		66
Glossary Of Terms		66
Cautionary Statement Regarding Forward-Looking Information		71

Item 3. Quantitative and Qualitative Disclosures About Market Risk		47-66, 111-121 and 127-135

Item 4. Controls and Procedures		66

PART II – OTHER INFORMATION		152

Item 1. Legal Proceedings		152

Item 1A. Risk Factors		152

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds		152

Item 6. Exhibits		153
Exhibit Index		153
Signature		154

Corporate Information		154

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to First Quarter 2013 Form 10-Q (continued)

MD&A TABLE REFERENCE


Table	Description	Page
1	Consolidated Financial Highlights		1
2	Summarized Average Balance Sheet		6
3	Results Of Businesses – Summary		8
4	Net Interest Income and Net Interest Margin		9
5	Noninterest Income		9
6	Summarized Balance Sheet Data		11
7	Details Of Loans		11
8	Accretion – Purchased Impaired Loans		12
9	Purchased Impaired Loans – Accretable Yield		12
10	Valuation of Purchased Impaired Loans		13
11	Weighted Average Life of the Purchased Impaired Portfolios		14
12	Accretable Difference Sensitivity – Total Purchased Impaired Loans		14
13	Net Unfunded Credit Commitments		14
14	Investment Securities		15
15	Vintage, Current Credit Rating and FICO Score for Asset-Backed Securities		16
16	Other-Than-Temporary Impairments		17
17	Net Unrealized Gains and Losses on Non-Agency Securities		18
18	Loans Held For Sale		20
19	Details Of Funding Sources		21
20	Shareholders’ Equity		21
21	Risk-Based Capital		22
22	Estimated Pro forma Basel III Tier 1 Common Capital		23
23	Fair Value Measurements – Summary		24
24	Summary of European Exposure		25
25	Retail Banking Table		28
26	Corporate & Institutional Banking Table		31
27	Asset Management Group Table		34
28	Residential Mortgage Banking Table		36
29	BlackRock Table		38
30	Non-Strategic Assets Portfolio Table		39
31	Pension Expense – Sensitivity Analysis		42
32	Analysis of Quarterly Residential Mortgage Repurchase Claims by Vintage		44
33	Analysis of Quarterly Residential Mortgage Unresolved Asserted Indemnification and Repurchase Claims		44
34	Analysis of Residential Mortgage Indemnification and Repurchase Claim Settlement Activity		45
35	Analysis of Home Equity Unresolved Asserted Indemnification and Repurchase Claims		46
36	Analysis of Home Equity Indemnification and Repurchase Claim Settlement Activity		46
37	Nonperforming Assets By Type		49
38	OREO and Foreclosed Assets		49
39	Change in Nonperforming Assets		50
40	Accruing Loans Past Due 30 To 59 Days		51
41	Accruing Loans Past Due 60 To 89 Days		51
42	Accruing Loans Past Due 90 Days Or More		52
43	Home Equity Lines of Credit – Draw Period End Dates		53
44	Consumer Real Estate Related Loan Modifications		54
45	Consumer Real Estate Related Loan Modifications Re-Default by Vintage		54
46	Summary of Troubled Debt Restructurings		56
47	Loan Charge-Offs And Recoveries		56
48	Allowance for Loan and Lease Losses		58
49	Credit Ratings as of March 31, 2013 for PNC and PNC Bank, N.A.		61
50	Contractual Obligations		61
51	Other Commitments		62
52	Interest Sensitivity Analysis		62
53	Net Interest Income Sensitivity to Alternative Rate Scenarios (First Quarter 2013)		62
54	Alternate Interest Rate Scenarios: One Year Forward		63
55	Enterprise-Wide Trading-Related Gains/Losses Versus Value at Risk		63
56	Trading Revenue		64
57	Equity Investments Summary		64
58	Financial Derivatives Summary		66

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to First Quarter 2013 Form 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE


Table	Description	Page
59	Certain Financial Information and Cash Flows Associated with Loan Sale and Servicing Activities		84
60	Consolidated VIEs – Carrying Value		85
61	Assets and Liabilities of Consolidated VIEs		86
62	Non-Consolidated VIEs		86
63	Loans Outstanding		88
64	Net Unfunded Credit Commitments		88
65	Age Analysis of Past Due Accruing Loans		89
66	Nonperforming Assets		90
67	Commercial Lending Asset Quality Indicators		92
68	Home Equity and Residential Real Estate Balances		93
69	Consumer Real Estate Secured Asset Quality Indicators – Excluding Purchased Impaired Loans		93
70	Consumer Real Estate Secured Asset Quality Indicators – Purchased Impaired Loans		95
71	Credit Card and Other Consumer Loan Classes Asset Quality Indicators		97
72	Summary of Troubled Debt Restructurings		98
73	Financial Impact and TDRs by Concession Type		99
74	TDRs which have Subsequently Defaulted		100
75	Impaired Loans		101
76	Purchased Impaired Loans – Balances		102
77	Purchased Impaired Loans – Accretable Yield		102
78	Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data		104
79	Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit		105
80	Investment Securities Summary		106
81	Gross Unrealized Loss and Fair Value of Securities Available for Sale		107
82	Credit Impairment Assessment Assumptions – Non-Agency Residential Mortgage-Backed and Asset-Backed Securities		108
83	Other-Than-Temporary Impairments		109
84	Rollforward of Cumulative OTTI Credit Losses Recognized in Earnings		109
85	Gains (Losses) on Sales of Securities Available for Sale		109
86	Contractual Maturity of Debt Securities		110
87	Weighted-Average Expected Maturity of Mortgage and Other Asset-Backed Debt Securities		110
88	Fair Value of Securities Pledged and Accepted as Collateral		110
89	Fair Value Measurements – Summary		112
90	Reconciliation of Level 3 Assets and Liabilities		113
91	Fair Value Measurement – Recurring Quantitative Information		115
92	Fair Value Measurements – Nonrecurring		117
93	Fair Value Measurements – Nonrecurring Quantitative Information		117
94	Fair Value Option – Changes in Fair Value		118
95	Fair Value Option – Fair Value and Principal Balances		119
96	Additional Fair Value Information Related to Financial Instruments		120
97	Changes in Goodwill by Business Segment		121
98	Other Intangible Assets		121
99	Amortization Expense on Existing Intangible Assets		122
100	Summary of Changes in Customer-Related Other Intangible Assets		122
101	Commercial Mortgage Servicing Rights		122
102	Residential Mortgage Servicing Rights		122
103	Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions		123
104	Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions		123
105	Fees from Mortgage and Other Loan Servicing		123
106	Net Periodic Pension and Postretirement Benefits Costs		125
107	Option Pricing Assumptions		125
108	Stock Option Rollforward		126
109	Nonvested Incentive/Performance Unit Share Awards and Restricted Stock/Share Unit Awards – Rollforward		127
110	Nonvested Cash-Payable Restricted Share Units – Rollforward		127
111	Derivatives Total Notional or Contractual Amounts and Fair Values		130
112	Derivative Assets and Liabilities Offsetting		131

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to First Quarter 2013 Form 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE (Continued)


Table	Description	Page
113	Derivatives Designated in GAAP Hedge Relationships – Fair Value Hedges		133
114	Derivatives Designated in GAAP Hedge Relationships – Cash Flow Hedges		133
115	Derivatives Designated in GAAP Hedge Relationships – Net Investment Hedges		133
116	Gains (Losses) on Derivatives Not Designated as Hedging Instruments under GAAP		134
117	Credit Default Swaps		134
118	Credit Ratings of Credit Default Swaps		135
119	Referenced/Underlying Assets of Credit Default Swaps		135
120	Risk Participation Agreements Sold		135
121	Internal Credit Ratings of Risk Participation Agreements Sold		135
122	Basic and Diluted Earnings per Common Share		136
123	Rollforward of Total Equity		137
124	Other Comprehensive Income		138
125	Accumulated Other Comprehensive Income (Loss) Components		139
126	Net Operating Loss Carryforwards and Tax Credit Carryforwards		140
127	Net Outstanding Standby Letters of Credit		141
128	Analysis of Commercial Mortgage Recourse Obligations		143
129	Analysis of Indemnification and Repurchase Liability for Asserted Claims and Unasserted Claims		144
130	Reinsurance Agreements Exposure		144
131	Reinsurance Reserves – Rollforward		145
132	Resale and Repurchase Agreements Offsetting		145
133	Results Of Businesses		148

FINANCIAL REVIEW

THE PNC FINANCIAL SERVICES GROUP, INC.

TABLE 1: CONSOLIDATED FINANCIAL HIGHLIGHTS


Dollars in millions, except per share data Unaudited	Three months ended March 31
Dollars in millions, except per share data Unaudited	2013			2012
Financial Results (a)
Revenue
Net interest income	$	2,389		$	2,291
Noninterest income		1,566			1,441
Total revenue		3,955			3,732
Noninterest expense		2,395			2,455
Pretax, pre-provision earnings (b)		1,560			1,277
Provision for credit losses		236			185
Income before income taxes and noncontrolling interests	$	1,324		$	1,092
Net income	$	1,004		$	811
Less:
Net income (loss) attributable to noncontrolling interests		(9	)		6
Preferred stock dividends and discount accretion		75			39
Net income attributable to common shareholders	$	938		$	766
Diluted earnings per common share	$	1.76		$	1.44
Cash dividends declared per common share	$	.40		$	.35
Performance Ratios
Net interest margin (c)		3.81	%		3.90	%
Noninterest income to total revenue		40			39
Efficiency		61			66
Return on:
Average common shareholders’ equity		10.68			9.41
Average assets		1.34			1.16

See page 66 for a glossary of certain terms used in this Report.

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

(a)	The Executive Summary and Consolidated Income Statement Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.

(b)	We believe that pretax, pre-provision earnings, a non-GAAP measure, is useful as a tool to help evaluate the ability to provide for credit costs through operations.

(c)

Calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under generally accepted accounting principles (GAAP) in the Consolidated Income Statement. The taxable-equivalent adjustments to net interest income for the three months ended March 31, 2013 and March 31, 2012 were $40 million and $31 million, respectively.

The PNC Financial Services Group, Inc. – Form 10-Q 1

TABLE 1: CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED) (a)


Unaudited	March 31 2013			December 31 2012			March 31 2012
Balance Sheet Data (dollars in millions, except per share data)
Assets	$	300,812		$	305,107		$	295,883
Loans (b) (c)		186,504			185,856			176,214
Allowance for loan and lease losses (b)		3,828			4,036			4,196
Interest-earning deposits with banks (b)		1,541			3,984			2,084
Investment securities (b)		59,361			61,406			64,554
Loans held for sale (c)		3,295			3,693			2,456
Goodwill and other intangible assets		10,996			10,869			11,188
Equity investments (b) (d)		11,008			10,877			10,352

Noninterest-bearing deposits		64,652			69,980			62,463
Interest-bearing deposits		146,968			143,162			143,664
Total deposits		211,620			213,142			206,127
Transaction deposits		175,407			176,705			164,575
Borrowed funds (b) (c)		37,647			40,907			42,539
Shareholders’ equity		39,663			39,003			35,045
Common shareholders’ equity		36,072			35,413			33,408
Accumulated other comprehensive income		767			834			281

Book value per common share		68.23			67.05			63.26
Common shares outstanding (millions)		529			528			528
Loans to deposits		88	%		87	%		85	%

Client Assets (billions)
Discretionary assets under management	$	118		$	112		$	112
Nondiscretionary assets under administration		118			112			107
Total assets under administration		236			224			219
Brokerage account assets		39			38			37
Total client assets	$	275		$	262		$	256

Capital Ratios
Basel I ratios
Tier 1 common		9.8	%		9.6	%		9.3	%
Tier 1 risk-based (e)		11.6			11.6			11.4
Total risk-based (e)		14.9			14.7			14.4
Leverage (e)		10.4			10.4			10.5

Common shareholders’ equity to assets		12.0			11.6			11.3

Pro forma Basel III Tier 1 common (f)		8.0	%		7.5	%		N/A	(g)

Asset Quality
Nonperforming loans to total loans		1.83	%		1.75	%		2.03	%
Nonperforming assets to total loans, OREO and foreclosed assets		2.10			2.04			2.46
Nonperforming assets to total assets		1.31			1.24			1.47
Net charge-offs to average loans (for the three months ended) (annualized) (h)		.99			.67			.81
Allowance for loan and lease losses to total loans		2.05			2.17			2.38
Allowance for loan and lease losses to nonperforming loans (i)		112			124			117
Accruing loans past due 90 days or more	$	1,906		$	2,351		$	2,585

(a)	The Executive Summary and Consolidated Balance Sheet Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.

(b)	Amounts include consolidated variable interest entities. See Consolidated Balance Sheet in Part I, Item 1 of this Report for additional information.

(c)	Amounts include assets and liabilities for which we have elected the fair value option. See Consolidated Balance Sheet in Part I, Item 1 of this Report for additional information.

(d)	Amounts include our equity interest in BlackRock.

(e)	The minimum U.S. regulatory capital ratios under Basel I are 4.0% for Tier 1 risk-based, 8.0% for Total risk-based, and 4.0% for Leverage. The comparable well-capitalized levels are 6.0% for Tier 1 risk-based, 10.0% for Total risk-based, and 5.0% for Leverage.

(f)

PNC’s pro forma Basel III Tier 1 common capital ratio was estimated without the benefit of phase-ins and is based on our current understanding of the Basel III proposed rules. See Table 22: Estimated Pro forma Basel III Tier 1 Common Capital for further detail on how this pro forma ratio differs from the Basel I Tier 1 common capital ratio. We expect the Basel III ratio to replace the current Basel I ratio for this regulatory metric when the applicable rules are finalized and fully implemented and PNC exits parallel run.

(g)	Pro forma Basel III Tier 1 common capital ratio not disclosed in our first quarter 2012 Form 10-Q.

(h)

Pursuant to alignment with interagency guidance on practices for loans and lines of credit related to consumer lending in the first quarter of 2013, additional charge-offs of $134 million have been taken. Excluding the impact of these additional charge-offs, annualized net charge-offs to average loans for the first quarter 2013 was 0.70%.

(i)	The allowance for loan and lease losses includes impairment reserves attributable to purchased impaired loans. Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans.

2 The PNC Financial Services Group, Inc. – Form 10-Q

This Financial Review, including the Consolidated Financial Highlights, should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report and with Items 6, 7, 8 and 9A of our 2012 Annual Report on Form 10-K (2012 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business, regulatory and legal risks, see the following sections as they appear in this Report and in our 2012 Form 10-K: the Risk Management And Recourse and Repurchase Obligation sections of the Financial Review portion of the respective report; Item 1A Risk Factors included in our 2012 Form 10-K; and the Legal Proceedings and Commitments and Guarantees Notes of the Notes To Consolidated Financial Statements included in the respective report. Also, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and the Critical Accounting Estimates And Judgments section in this Financial Review and in our 2012 Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this Report. See Note 19 Segment Reporting in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a GAAP basis.

EXECUTIVE SUMMARY

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

PNC has businesses engaged in retail banking, corporate and institutional banking, asset management and residential mortgage banking, providing many of its products and services nationally, as well as other products and services in PNC’s primary geographic markets located in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, North Carolina, Florida, Kentucky, Washington, D.C., Delaware, Alabama, Virginia, Georgia, Missouri, Wisconsin and South Carolina. PNC also provides certain products and services internationally.

KEY STRATEGIC GOALS

At PNC we manage our company for the long term. We are focused on the fundamentals of growing customers, loans, deposits and fee revenue and improving profitability, while investing for the future and managing risk and capital. We continue to invest in our products, markets and brand, and embrace our corporate responsibility to the communities where we do business.

We strive to expand and deepen customer relationships by offering convenient banking options and innovative technology solutions, providing a broad range of fee-based and credit products and services, focusing on customer service and enhancing our brand. Our approach is focused on organically growing and deepening client relationships that meet our risk/return measures. Our strategies for growing fee income across our lines of business will be focused on achieving deeper market penetration and cross selling our diverse product mix. A key priority is to drive growth in newly acquired and underpenetrated markets, including in the Southeast. We may also grow revenue through appropriate and targeted acquisitions and, in certain businesses, by expanding into new geographical markets.

Our capital priorities for 2013 are to support client growth and business investment, maintain appropriate capital in light of economic uncertainty and the Basel III framework and return excess capital to shareholders through dividends, subject to regulatory approval. We continue to improve our capital levels and ratios and expect to build capital through retained earnings. During 2013, PNC does not expect to repurchase common stock through a share buyback program. PNC continues to maintain a strong bank holding company liquidity position. For more detail, see the 2013 Capital and Liquidity Actions portion of this Executive Summary, the Funding and Capital Sources portion of the Consolidated Balance Sheet Review section and the Liquidity Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2012 Form 10-K.

PNC faces a variety of risks that may impact various aspects of our risk profile from time to time. The extent of such impacts may vary depending on factors such as the current economic, political and regulatory environment, merger and acquisition activity and operational challenges. Many of these risks and our risk management strategies are described in more detail in our 2012 Form 10-K and elsewhere in this Report.

RBC BANK (USA) ACQUISITION

On March 2, 2012, we acquired 100% of the issued and outstanding common stock of RBC Bank (USA), the U.S. retail banking subsidiary of Royal Bank of Canada. As part of the acquisition, PNC also purchased a credit card portfolio from RBC Bank (Georgia), National Association. PNC paid $3.6 billion in cash as the consideration for the acquisition of both RBC Bank (USA) and the credit card portfolio. The transaction added approximately $18.1 billion in deposits, $14.5 billion of loans, $1.0 billion of goodwill and $.2 billion of other intangible assets to PNC’s Consolidated Balance Sheet. Our Consolidated Income Statement includes the impact of business activity associated with the RBC Bank (USA) acquisition subsequent to March 2, 2012. See Note 2 Acquisition and Divestiture Activity in the Notes To Consolidated Financial Statements in this Report for additional information regarding this acquisition.

The PNC Financial Services Group, Inc. – Form 10-Q 3

SALE OF SMARTSTREET

Effective October 26, 2012, PNC divested certain deposits and assets of the Smartstreet business unit, which was acquired by PNC as part of the RBC Bank (USA) acquisition, to Union Bank, N.A. Smartstreet is a nationwide business focused on homeowner or community association managers and had approximately $1 billion of assets and deposits as of September 30, 2012. The gain on sale was immaterial and resulted in a reduction of goodwill and core deposit intangibles of $46 million and $13 million, respectively.

2013 CAPITAL AND LIQUIDITY ACTIONS

Our ability to take certain capital actions, including plans to pay or increase common stock dividends or to repurchase shares under current or future programs, is subject to the results of the supervisory assessment of capital adequacy undertaken by the Board of Governors of the Federal Reserve System (Federal Reserve) and our primary bank regulators as part of the Comprehensive Capital Analysis and Review (CCAR) process. This capital adequacy assessment is based on a review of a comprehensive capital plan submitted to the Federal Reserve.

In connection with the 2013 CCAR, PNC submitted its capital plan, approved by its board of directors, to the Federal Reserve and our primary bank regulators in January 2013. As we announced on March 14, 2013, the Federal Reserve accepted the capital plan that we submitted for their review and did not object to our proposed capital actions, which included a recommendation to increase the quarterly common stock dividend in the second quarter of 2013. A share repurchase program for 2013 was not included in the capital plan primarily as a result of PNC’s 2012 acquisition of RBC Bank (USA) and expansion into Southeastern markets. For additional information concerning the CCAR process and the factors the Federal Reserve takes into consideration in evaluating capital plans, see Item 1 Business – Supervision and Regulation included in our 2012 Form 10-K. See the Liquidity Risk Management portion of the Risk Management section of this Financial Review, as well as Note 20 Subsequent Events in the Notes To Consolidated Financial Statements in this Report, for more detail on our 2013 capital and liquidity actions.

On April 4, 2013, consistent with our capital plan submitted to the Federal Reserve in 2013, our board of directors approved an increase to PNC’s quarterly common stock dividend from 40 cents per common share to 44 cents per common share. For the second quarter of 2013, the increased dividend was payable to shareholders of record at the close of business on April 16, 2013 and was paid on the next business day after the payment date of May 5, 2013.

RECENT MARKET AND INDUSTRY DEVELOPMENTS

There have been numerous legislative and regulatory developments and dramatic changes in the competitive landscape of our industry over the last several years.

The United States and other governments have undertaken major reform of the regulation of the financial services industry, including engaging in new efforts to impose requirements designed to strengthen the stability of the financial system and protect consumers and investors. We expect to face further increased regulation of our industry as a result of current and future initiatives intended to provide economic stimulus, financial market stability and enhanced regulation of financial services companies and to enhance the liquidity and solvency of financial institutions and markets. We also expect in many cases more intense scrutiny from our bank supervisors in the examination process and more aggressive enforcement of regulations on both the federal and state levels. Compliance with new regulations will increase our costs and reduce our revenue. Some new regulations may limit our ability to pursue certain desirable business opportunities.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), enacted in July 2010, mandates the most wide-ranging overhaul of financial industry regulation in decades. Many parts of the law are now in effect, and others are now in the implementation stage, which is likely to continue for several years.

PNC will be providing its first market-risk related disclosures under the final market risk capital rules adopted by the Federal banking agencies in June 2012 (commonly referred to as “Basel II.5”) with respect to the quarter ended March 31, 2013. PNC is able to satisfy the requirement to make this disclosure through postings on its website, and PNC expects to do so without also providing disclosure of this information through filings with the SEC.

In April 2013, the Federal Reserve requested comment on a proposed rule that would require bank holding companies with $50 billion or more in total assets, including PNC, and systemically designated nonbank financial companies to pay, beginning in 2013, an annual assessment to reimburse the Federal Reserve for the costs of supervising and regulating such companies. While the assessment formula remains subject to change until a final rule is adopted, PNC’s annual assessment would not be material based on the formula contained in the proposal.

For additional information concerning recent legislative and regulatory developments, including developments related to the implementation of the Basel III capital framework, as well as certain governmental, legislative and regulatory inquiries and investigations that may affect PNC, please see Item 1 Business – Supervision and Regulation, Item 1A Risk Factors and Note 23 Legal Proceedings in Item 8 of our 2012 Form 10-K and Note 17 Legal Proceedings and Note 18 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

4 The PNC Financial Services Group, Inc. – Form 10-Q

KEY FACTORS AFFECTING FINANCIAL PERFORMANCE

Our financial performance is substantially affected by a number of external factors outside of our control, including the following:

•

General economic conditions, including the continuity, speed and stamina of the moderate economic recovery in general and on our customers in particular,

•

The level of, and direction, timing and magnitude of movement in, interest rates and the shape of the interest rate yield curve,

•

The functioning and other performance of, and availability of liquidity in, the capital and other financial markets,

•

Loan demand, utilization of credit commitments and standby letters of credit, and asset quality,

•

Customer demand for non-loan products and services,

•

Changes in the competitive and regulatory landscape and in counterparty creditworthiness and performance as the financial services industry restructures in the current environment,

•

The impact of the extensive reforms enacted in the Dodd-Frank legislation and other legislative, regulatory and administrative initiatives, including those outlined elsewhere in this Report and in our SEC filings, and

•

The impact of market credit spreads on asset valuations.

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

•

Further success in growing profitability through the acquisition and retention of customers,

•

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

•

Revenue growth and our ability to provide innovative and valued products to our customers,

•

Our ability to utilize technology to develop and deliver products and services to our customers,

•

Our ability to manage and implement strategic business objectives within the changing regulatory environment,

•

A sustained focus on expense management,

•

Managing the non-strategic assets portfolio and impaired assets,

•

Improving our overall asset quality,

•

Continuing to maintain and grow our deposit base as a low-cost funding source,

•

Prudent risk and capital management related to our efforts to manage risk in keeping with a moderate risk philosophy, and to meet evolving regulatory capital standards,

•

Actions we take within the capital and other financial markets,

•

The impact of legal and regulatory-related contingencies, and

•

The appropriateness of reserves needed for critical estimates and related contingencies.

For additional information, please see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2012 Form 10-K.

INCOME STATEMENT HIGHLIGHTS

•

Net income for the first quarter of 2013 of $1.0 billion increased 24% compared to the first quarter of 2012, driven by revenue growth of 6% and a decline in noninterest expense of 2%, partially offset by an increase in the provision for credit losses. For additional detail, please see the Consolidated Income Statement Review section in this Financial Review.

•

Net interest income of $2.4 billion for the first quarter of 2013 increased 4% compared with the first quarter of 2012 driven by organic loan growth and the full quarter impact of the RBC Bank (USA) acquisition.

•

Net interest margin decreased to 3.81% for the first quarter of 2013 compared to 3.90% for the first quarter of 2012 due to lower purchase accounting accretion.

•

Noninterest income of $1.6 billion for the first quarter of 2013 increased 9% compared to the first quarter of 2012. The increase reflected higher fee income from corporate services, consumer services and asset management.

•

The provision for credit losses increased to $236 million for the first quarter of 2013 compared to $185 million for the first quarter of 2012. The increase in the comparison primarily reflected a larger loan portfolio.

•

Noninterest expense of $2.4 billion for the first quarter of 2013 decreased 2% compared with the first quarter of 2012 primarily driven by lower integration costs, partially offset by the impact in the first quarter 2013 of a full quarter of operating expense for the RBC Bank (USA) acquisition. The decline also reflected our continued commitment to disciplined expense management.

CREDIT QUALITY HIGHLIGHTS

•

Overall credit quality improved during the first quarter of 2013. While credit quality metrics for the first quarter of 2013 were impacted by alignment with interagency guidance, underlying credit quality continued to improve. Alignment with interagency guidance on practices for loans and lines of credit related to consumer lending in the first quarter of 2013 had the overall effect of accelerating charge-offs and nonaccrual classification while reducing delinquencies.

The PNC Financial Services Group, Inc. – Form 10-Q 5

•

Nonperforming assets of $3.9 billion at March 31, 2013 increased by $.1 billion, or 4%, compared to December 31, 2012. The increase was mainly due to the alignment with interagency guidance for loans and lines of credit related to consumer loans of $426 million. Commercial lending nonperforming loans decreased $115 million, or 8%, as a result of improving credit quality. Nonperforming assets to total assets were 1.31% at March 31, 2013 compared with 1.24% at December 31, 2012 and 1.47% at March 31, 2012.

•

Overall delinquencies of $3.2 billion decreased $.6 billion as of March 31, 2013 compared with December 31, 2012. The decline was due in part to $395 million for alignment with interagency guidance. A substantial portion of this decrease was reflected in accruing loans past due 90 days or more.

•

Net charge-offs of $456 million increased $123 million compared to the first quarter of 2012. First quarter 2013 included charge-offs of $134 million primarily related to home equity and residential real estate loans to align with interagency guidance. On an annualized basis, net charge-offs were 0.99% of average loans for the first quarter of 2013 and 0.81% of average loans for the first quarter of 2012. Excluding the impact of these $134 million additional charge-offs, annualized net charge-offs to average loans for the first quarter 2013 was 0.70%.

•

The allowance for loan and lease losses was 2.05% of total loans and 112% of nonperforming loans at March 31, 2013, compared with 2.17% and 124% at December 31, 2012, respectively. The decrease in the allowance compared with year end resulted from improved overall credit quality and the impact of alignment with interagency guidance.

BALANCE SHEET HIGHLIGHTS

•

Total loans increased by $.6 billion to $187 billion at March 31, 2013 compared to December 31, 2012.

•

Total commercial lending increased by $1.3 billion, or 1%, from December 31, 2012, as a result of growth in commercial loans primarily from new relationships.

•

Total consumer lending decreased $.7 billion from December 31, 2012 primarily from pay downs of residential real estate, credit card and education loans.

•

Total deposits decreased by $1.5 billion to $212 billion at March 31, 2013 compared with December 31, 2012.

•

Runoff of year-end seasonally higher transaction deposits resulted in a decrease of $1.3 billion to $175 billion at March 31, 2013 compared with December 31, 2012.

•

Average transaction deposits grew $3.1 billion to $173.2 billion in the first quarter of 2013 compared with average transaction deposits in the fourth quarter of 2012.

•

PNC’s balance sheet remained core funded with a loans to deposits ratio of 88% at March 31, 2013.

•

PNC had a strong capital position at March 31, 2013.

•

The Tier 1 common capital ratio increased to 9.8% compared with 9.6% at December 31, 2012.

•

The estimated pro forma Basel III Tier 1 common capital ratio was 8.0% at March 31, 2013, without benefit of phase-ins. See Table 22: Estimated Pro forma Basel III Tier 1 Common Capital in the Consolidated Balance Sheet Review section of this Financial Review for more detail.

•

In April 2013, the PNC board of directors raised the quarterly cash dividend on common stock to 44 cents per share, an increase of 4 cents per share, or 10 %, effective with the May dividend.

Our Consolidated Income Statement and Consolidated Balance Sheet Review sections of this Financial Review describe in greater detail the various items that impacted our results for the first three months of 2013 and 2012 and balances at March 31, 2013 and December 31, 2012, respectively.

AVERAGE CONSOLIDATED BALANCE SHEET HIGHLIGHTS

Table 2: Summarized Average Balance Sheet


Three months ended March 31 Dollars in millions	2013		2012
Average assets
Interest-earning assets
Investment securities	$	58,531	$	61,583
Loans		186,099		164,556
Other		11,550		11,595
Total interest-earning assets		256,180		237,734
Other		47,265		43,808
Total average assets	$	303,445	$	281,542
Average liabilities and equity
Interest-bearing liabilities
Interest-bearing deposits	$	144,801	$	134,193
Borrowed funds		39,727		40,212
Total interest-bearing liabilities		184,528		174,405
Noninterest-bearing deposits		64,850		57,900
Other liabilities		12,140		11,426
Equity		41,927		37,811
Total average liabilities and equity	$	303,445	$	281,542

Various seasonal and other factors impact our period-end balances, whereas average balances are generally more indicative of underlying business trends apart from the impact of acquisitions and divestitures. The Consolidated Balance Sheet Review section of this Financial Review provides

6 The PNC Financial Services Group, Inc. – Form 10-Q

information on changes in selected Consolidated Balance Sheet categories at March 31, 2013 compared with December 31, 2012.

Total average assets increased to $303.4 billion for the first quarter of 2013 compared with $281.5 billion for the first quarter of 2012, primarily due to an increase of $18.4 billion in average interest-earning assets driven by an increase in average total loans, including the full quarter impact of loans added in the RBC Bank (USA) acquisition, which closed March 2, 2012. Total assets were $300.8 billion at March 31, 2013 compared with $305.1 billion at December 31, 2012.

Average total loans increased by $21.5 billion to $186.1 billion for the first quarter of 2013 compared with the first quarter of 2012, including increases in average commercial loans of $14.2 billion and average consumer loans of $4.3 billion. The overall increase in loans reflected organic loan growth, primarily in corporate banking and real estate, as well as the full quarter impact of loans added in the RBC Bank (USA) acquisition.

Loans represented 73% of average interest-earning assets for the first quarter of 2013 and 69% of average interest-earning assets for the first quarter of 2012.

Average investment securities decreased $3.1 billion to $58.5 billion in the first quarter of 2013 compared with the first quarter of 2012, primarily as a result of principal payments. Total investment securities comprised 23% of average interest-earning assets for the first quarter of 2013 and 26% for the first quarter of 2012.

Average noninterest-earning assets increased $3.5 billion to $47.3 billion in the first quarter of 2013 compared with the first quarter of 2012. The increase included the impact of higher adjustments for net unrealized gains on securities, which are included in noninterest-earnings assets for average balance sheet purposes, the impact of the RBC Bank (USA) acquisition, including goodwill, and an increase in equity investments.

Average total deposits were $209.7 billion for the first quarter of 2013 compared with $192.1 billion for the first quarter of 2012. The increase of $17.6 billion primarily resulted from an increase in average transaction deposits of $22.6 billion partially offset by a decrease of $5.5 billion in average retail

certificates of deposit attributable to runoff of maturing accounts. Growth in average money market deposits, average interest-bearing demand deposits and average noninterest-bearing deposits drove the increase in average transaction deposits, which resulted from deposits added in the RBC Bank (USA) acquisition and organic growth. Average transaction deposits were $173.2 billion for the first quarter of 2013 compared with $150.7 billion for the first quarter of 2012. Total deposits at March 31, 2013 were $211.6 billion compared with $213.1 billion at December 31, 2012 and are further discussed within the Consolidated Balance Sheet Review section of this Financial Review.

Average total deposits represented 69% of average total assets for the first quarter of 2013 and 68% for the first quarter of 2012.

Average borrowed funds remained relatively flat with a balance of $39.7 billion for the first quarter of 2013 compared with $40.2 billion for the first quarter of 2012. Lower average Federal Home Loan Bank (FHLB) borrowings and net redemptions and maturities of subordinated debt and bank notes and senior debt, were mostly offset by an increase in average commercial paper. Total borrowed funds at March 31, 2013 were $37.6 billion compared with $40.9 billion at December 31, 2012 and are further discussed within the Consolidated Balance Sheet Review section of this Financial Review. The Liquidity Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding our sources and uses of borrowed funds.

BUSINESS SEGMENT HIGHLIGHTS

Total business segment earnings were $936 million for the first three months of 2013 and $900 million for the first three months of 2012. Highlights of results for the first quarters of 2013 and 2012 are included below. The Business Segments Review section of this Financial Review includes further analysis of our business segment results over the first three months of 2013 and 2012 including presentation differences from Note 19 Segment Reporting in our Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

We provide a reconciliation of total business segment earnings to PNC total consolidated net income as reported on a GAAP basis in Note 19 Segment Reporting in our Notes To Consolidated Financial Statements of this Report.

The PNC Financial Services Group, Inc. – Form 10-Q 7

Table 3: Results Of Businesses – Summary

(Unaudited)


	Net Income					Revenue				Average Assets (a)
Three months ended March 31 – in millions	2013		2012			2013		2012		2013		2012
Retail Banking	$	120	$	147		$	1,483	$	1,436	$	74,116	$	69,709
Corporate & Institutional Banking		541		495			1,341		1,266		111,671		92,896
Asset Management Group		43		36			255		243		7,131		6,566
Residential Mortgage Banking		45		61			291		293		10,803		11,989
BlackRock		108		90			138		116		5,859		5,565
Non-Strategic Assets Portfolio		79		71			219		198		10,735		12,124
Total business segments		936		900			3,727		3,552		220,315		198,849
Other (b) (c)		68		(89	)		228		180		83,130		82,693
Total	$	1,004	$	811		$	3,955	$	3,732	$	303,445	$	281,542

(a)	Period-end balances for BlackRock.

(b)	“Other” average assets include securities available for sale associated with asset and liability management activities.

(c)

“Other” includes differences between the total business segment financial results and our total consolidated net income. Additional detail is included in the Business Segments Review section of this Financial Review and in Note 19 Segment Reporting in the Notes to Consolidated Financial Statements in this Report.

Retail Banking

Retail Banking earned $120 million in the first three months of 2013 compared with $147 million for the same period a year ago. The decrease in earnings resulted from higher noninterest expense and provision for credit losses, both attributable to the full quarter impact of the RBC Bank (USA) acquisition. Noninterest income was also higher compared with the first quarter of 2012 primarily due to increased debit and credit card transactions, brokerage activity and the RBC Bank (USA) acquisition.

Corporate & Institutional Banking

In the first quarter of 2013, Corporate & Institutional Banking earned $541 million compared with $495 million in the first quarter of 2012. Earnings increased for the first quarter of 2013 primarily due to the full quarter impact of the RBC Bank (USA) acquisition and organic growth. The increase in revenue in the comparison reflected higher net interest income from higher average loans and deposits, as well as growth in corporate service fees primarily due to higher commercial mortgage servicing revenue. The increase in noninterest expense reflected a full quarter impact of the RBC Bank (USA) acquisition.

Asset Management Group

Asset Management Group earned $43 million in the first three months of 2013 compared with $36 million in the first three months of 2012. Assets under administration reached a record high for Asset Management Group of $236 billion as of March 31, 2013 and were $219 billion as of March 31, 2012. Revenue increased $12 million, or 5%, in the year over year comparison due to stronger average equity markets and increased sales volume. The revenue increase was partially offset by higher noninterest expense from strategic business investments.

Residential Mortgage Banking

Residential Mortgage Banking reported net income of $45 million in the first three months of 2013 compared with $61 million in the first three months of 2012. Earnings declined from the prior year period primarily as a result of higher provision for credit losses. Noninterest income was stable in the comparison, as decreases in net hedging gains on mortgage servicing rights and servicing fees were offset by increased loan sales revenue and lower provision for residential mortgage repurchase obligations. The increase to noninterest expense from higher loan origination volume was more than offset by lower residential mortgage foreclosure-related expense and legal expense.

BlackRock

Our BlackRock business segment earned $108 million in the first three months of 2013 and $90 million in the first three months of 2012. The higher business segment earnings from BlackRock for the first quarter of 2013 compared to the first quarter of 2012 was primarily due to PNC’s higher equity earnings from BlackRock.

Non-Strategic Assets Portfolio

In the first quarter of 2013, Non-Strategic Assets Portfolio had earnings of $79 million compared with $71 million for the first quarter of 2012, primarily attributable to higher noninterest income, partially offset by higher provision for credit losses. The increase in noninterest income reflected a lower provision for estimated losses on home equity repurchase obligations. The increase in provision for credit losses in the comparison was driven by reductions in expected cash flows on purchased impaired home equity loans.

Other

“Other” reported earnings of $68 million for the three months of 2013 compared with a loss of $89 million for the first three months of 2012. Increased earnings for the 2013 period was primarily due to lower integration costs.

8 The PNC Financial Services Group, Inc. – Form 10-Q

CONSOLIDATED INCOME STATEMENT REVIEW

Our Consolidated Income Statement is presented in Part I, Item 1 of this Report.

Net income for the first three months of 2013 was $1.0 billion, an increase of 24% compared with $.8 billion for the first three months of 2012. The increase was driven by revenue growth of 6% and a decline in noninterest expense of 2%, partially offset by an increase in the provision for credit losses. Revenue growth in the comparison was driven by higher net interest income, higher corporate and consumer services fees and higher asset management revenue. The decline in noninterest expense in the comparison reflected lower integration costs and continued commitment to disciplined expense management, partially offset by the impact of a full quarter of operating expense for the RBC Bank (USA) acquisition.

NET INTEREST INCOME

Table 4: Net Interest Income and Net Interest Margin


	Three months ended March 31
Dollars in millions	2013			2012
Net interest income	$	2,389		$	2,291
Net interest margin		3.81	%		3.90	%

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 (Unaudited) – Average Consolidated Balance Sheet And Net Interest Analysis section of this Report and the discussion of purchase accounting accretion of purchased impaired loans in the Consolidated Balance Sheet review of this Report for additional information.

Net interest income increased by $98 million, or 4%, in the first quarter of 2013 compared with the first quarter of 2012, driven by organic loan growth and the full quarter impact of the RBC Bank (USA) acquisition.

The decline in the net interest margin for the first quarter of 2013 compared with the first quarter of 2012 was due to lower purchase accounting accretion.

Net interest margin for the first quarter of 2013 also reflected a 26 basis point decrease in the yield on total interest-earning assets, partially offset by a decrease in the weighted-average rate accrued on total interest-bearing liabilities of 22 basis points. The decrease in the yield on interest-earning assets was

primarily due to lower rates on new loans and purchased securities in the ongoing low rate environment. The decrease in the rate accrued on interest-bearing liabilities was primarily due to net redemptions and maturities of bank notes and senior debt and subordinated debt, including the redemption of trust preferred and hybrid capital securities, and the runoff of maturing retail certificates of deposit during 2012.

With respect to the second quarter of 2013, we expect net interest income to decline by two to three percent compared to first quarter 2013 net interest income.

For the full year 2013, we expect net interest income to decrease compared with 2012, assuming an expected decline in the purchase accounting accretion component of net interest income of approximately $350 million.

NONINTEREST INCOME

Table 5: Noninterest Income


Three months ended March 31 Dollars in millions	2013			2012
Noninterest income
Asset management	$	308		$	284
Consumer services		296			264
Corporate services		277			232
Residential mortgage		234			230
Service charges on deposits		136			127
Net gains on sales of securities		14			57
Net other-than-temporary impairments		(10	)		(38	)
Other		311			285
Total noninterest income	$	1,566		$	1,441

Noninterest income increased by $125 million, or 9%, during the first three months of 2013 compared to first three months of 2012. The overall increase reflected higher fee income from corporate services, consumer services and asset management.

Asset management revenue, including BlackRock, increased $24 million in the first three months of 2013 to $308 million compared with $284 million in the first three months of 2012. The increase was due to stronger equity markets, growth in customers and higher earnings from our BlackRock investment. Discretionary assets under management increased to $118 billion at March 31, 2013 compared with $112 billion at March 31, 2012 driven by higher equity markets, strong sales performance and successful client retention.

Consumer service fees were $296 million for the first three months of 2013, which reflected an increase of $32 million, or 12%, compared with $264 million in the first three months of 2012, due to growth in customers and transaction volume.

The PNC Financial Services Group, Inc. – Form 10-Q 9

Corporate services revenue increased by $45 million, or 19%, in the first quarter of 2013 to $277 million compared to $232 million in the first quarter of 2012, primarily as a result of higher commercial mortgage servicing revenue.

Residential mortgage revenue increased to $234 million in the first three months of 2013 from $230 million in the first three months of 2012, which includes the impact of the decline in provision for residential mortgage repurchase obligations to $4 million in the first three months of 2013, compared to $32 million in the first three months of 2012. Excluding this provision impact, residential mortgage revenue decreased by $24 million due to the impact of lower net hedging gains on mortgage servicing rights, which was partially offset by higher loan sales revenue.

Service charges on deposits grew to $136 million for the first quarter of 2013 from $127 million for the first quarter of 2012. The increase reflected customer growth, including the RBC Bank (USA) acquisition.

Other noninterest income increased by $26 million, or 9%, to $311 million for the first three months of 2013 compared with $285 million for the first three months of 2012, which was primarily attributable to higher revenue associated with commercial mortgage banking activity.

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

For 2013, we continue to expect both full year 2013 noninterest income and total revenue to increase compared with 2012.

PROVISION FOR CREDIT LOSSES

The provision for credit losses totaled $236 million for the first three months of 2013 compared with $185 million for the first three months of 2012. The increase in the comparison primarily reflected a larger loan portfolio.

We currently expect our provision for credit losses in the second quarter of 2013 to be between $200 million and $300 million.

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

Noninterest expense was $2.4 billion for the first three months of 2013 and $2.5 billion for the first three months of 2012. The decline in the comparison reflected residential mortgage foreclosure-related expenses of $15 million for the first three months of 2013, while noninterest expense for the first three months of 2012 included integration costs of $145 million and residential mortgage foreclosure-related expenses of $38 million. These declines were partially offset by the impact in the first quarter 2013 of a full quarter of operating expense for the RBC Bank (USA) acquisition.

The decline in noninterest expense in the comparison also reflected our continued commitment to disciplined expense management, and we currently expect to achieve our $700 million continuous improvement savings goal for 2013. Through the end of the first quarter, we have captured approximately $500 million of annualized savings. Cost savings are expected to offset investments we are making in our businesses and infrastructure.

For the second quarter of 2013, we currently expect noninterest expenses to be two to three percent higher than the first quarter of 2013.

We continue to expect noninterest expense for 2013 to decline by mid-single digits on a percentage basis compared with 2012. We expect noninterest expense, excluding integration costs and trust preferred securities redemption related charges, to be flat to down in 2013 versus 2012.

EFFECTIVE INCOME TAX RATE

The effective income tax rate was 24.2% in the first three months of 2013 compared with 25.7% in the first three months of 2012. The effective tax rate is generally lower than the statutory rate primarily due to increased tax credits PNC receives from our investments in low income housing and new markets investments, as well increased earnings in other tax exempt investments. The lower effective income tax rate in the first quarter 2013 compared to the prior year quarter was primarily attributable to the impact of higher tax-exempt income and tax credits, partially offset by higher levels of pretax income.

10 The PNC Financial Services Group, Inc. – Form 10-Q

CONSOLIDATED BALANCE SHEET REVIEW

Table 6: Summarized Balance Sheet Data


In millions	March 31 2013			December 31 2012
Assets
Loans held for sale	$	3,295		$	3,693
Investment securities		59,361			61,406
Loans		186,504			185,856
Allowance for loan and lease losses		(3,828	)		(4,036	)
Goodwill		9,075			9,072
Other intangible assets		1,921			1,797
Other, net		44,484			47,319
Total assets	$	300,812		$	305,107
Liabilities
Deposits	$	211,620		$	213,142
Borrowed funds		37,647			40,907
Other		9,467			9,293
Total liabilities		258,734			263,342
Equity
Total shareholders’ equity		39,663			39,003
Noncontrolling interests		2,415			2,762
Total equity		42,078			41,765
Total liabilities and equity	$	300,812		$	305,107

The summarized balance sheet data above is based upon our Consolidated Balance Sheet in this Report.

The decrease in total assets of $4.3 billion at March 31, 2013 compared with December 31, 2012 was primarily due to lower interest-earning deposits with banks (which is included in Other, net in the preceding table) and investment securities. The decline in investment securities was primarily due to principal payments. The decline in interest-earning deposits with banks was primarily driven by the impact of decreased borrowed funds and decreased deposits, partially offset by the impact of decreased investment securities. Total liabilities decreased $4.6 billion at March 31, 2013 compared with December 31, 2012 primarily due to the runoff of year end seasonally higher deposits and lower FHLB borrowings.

An analysis of changes in selected balance sheet categories follows.

LOANS

A summary of the major categories of loans outstanding follows. Outstanding loan balances of $186.5 billion at March 31, 2013 and $185.9 billion at December 31, 2012 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums of $2.5 billion at March 31, 2013 and $2.7 billion at December 31, 2012, respectively. The balances

include purchased impaired loans but do not include future accretable net interest (i.e., the difference between the undiscounted expected cash flows and the carrying value of the loan) on those loans.

Table 7: Details Of Loans


In millions	March 31 2013		December 31 2012
Commercial Lending
Commercial
Retail/wholesale trade	$	14,109	$	13,801
Manufacturing		14,139		13,856
Service providers		12,568		12,095
Real estate related (a)		10,274		10,616
Financial services (b)		9,679		9,026
Health care		7,392		7,267
Other industries		16,124		16,379
Total commercial		84,285		83,040
Commercial real estate
Real estate projects (c)		12,596		12,347
Commercial mortgage		6,183		6,308
Total commercial real estate		18,779		18,655
Equipment lease financing		7,240		7,247
Total Commercial Lending (d)		110,304		108,942
Consumer Lending
Home equity
Lines of credit		23,029		23,576
Installment		13,001		12,344
Total home equity		36,030		35,920
Residential real estate
Residential mortgage		14,217		14,430
Residential construction		768		810
Total residential real estate		14,985		15,240
Credit card		4,081		4,303
Other consumer
Education		8,048		8,238
Automobile		8,716		8,708
Other		4,340		4,505
Total Consumer Lending		76,200		76,914
Total loans	$	186,504	$	185,856

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

(b)	Includes loans issued to a Financing Special Purpose Entity which holds receivables from the other industries within Commercial Lending.

(c)	Includes both construction loans and intermediate financing for projects.

(d)	Construction loans with interest reserves, and A/B Note restructurings are not significant to PNC.

The increase in loans of $.6 billion from December 31, 2012 included an increase in commercial lending of $1.3 billion and a decrease in consumer lending of $.7 billion. The increase in commercial lending was the result of growth in commercial loans primarily from new relationships. The decline in consumer lending resulted primarily from pay downs of residential real estate, credit card and education loans.

The PNC Financial Services Group, Inc. – Form 10-Q 11

Loans represented 62% of total assets at March 31, 2013 and 61% of total assets at December 31, 2012. Commercial lending represented 59% of the loan portfolio at both March 31, 2013 and December 31, 2012. Consumer lending represented 41% of the loan portfolio at both March 31, 2013 and December 31, 2012.

Commercial real estate loans represented 10% of total loans and 6% of total assets at both March 31, 2013 and December 31, 2012. See the Credit Risk Management portion of the Risk Management section of this Financial Review for additional details of loans.

Total loans above include purchased impaired loans of $7.1 billion, or 4% of total loans, at March 31, 2013, and $7.4 billion, or 4% of total loans, at December 31, 2012.

Our loan portfolio continued to be diversified among numerous industries, types of businesses and consumers across our principal geographic markets.

The Allowance for Loan and Lease Losses (ALLL) and the Allowance for Unfunded Loan Commitments and Letters of Credit are sensitive to changes in assumptions and judgments and are inherently subjective as they require material estimates, all of which may be susceptible to significant change, including, among others:

•

Probability of default,

•

Loss given default,

•

Exposure at date of default,

•

Movement through delinquency stages,

•

Amounts and timing of expected cash flows,

•

Value of collateral, and

•

Qualitative factors, such as changes in current economic conditions, that may not be reflected in historical results.

HIGHER RISK LOANS

Our total ALLL of $3.8 billion at March 31, 2013 consisted of $1.7 billion and $2.1 billion established for the commercial lending and consumer lending categories, respectively. The ALLL included what we believe to be appropriate loss coverage on higher risk loans in the commercial and consumer portfolios. We do not consider government insured or guaranteed loans to be higher risk as defaults have historically been materially mitigated by payments of insurance or guarantee amounts for approved claims. Additional information regarding our higher risk loans is included in the

Credit Risk Management portion of the Risk Management section of this Financial Review and in Note 5 Asset Quality and Note 7 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in our Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

PURCHASE ACCOUNTING ACCRETION AND VALUATION OF PURCHASED IMPAIRED LOANS

Information related to purchase accounting accretion and accretable yield for the first three months of 2013 and 2012 follows. Additional information is provided in Note 6 Purchased Loans in the Notes To Consolidated Financial Statements in this Report.

Table 8: Accretion – Purchased Impaired Loans


	Three months ended March 31
In millions	2013			2012
Accretion on purchased impaired loans
Scheduled accretion	$	157		$	158
Reversal of contractual interest on impaired loans		(85	)		(97	)
Scheduled accretion net of contractual interest		72			61
Excess cash recoveries		50			40
Total	$	122		$	101

Table 9: Purchased Impaired Loans – Accretable Yield


In millions	2013			2012
January 1	$	2,166		$	2,109
Addition of accretable yield due to RBC Bank (USA) acquisition on March 2, 2012					587
Scheduled accretion		(157	)		(158	)
Excess cash recoveries		(50	)		(40	)
Net reclassifications to accretable from non-accretable and other activity (a)		213			(29	)
March 31 (b)	$	2,172		$	2,469

(a)

Over 48% of the net reclassifications were driven by the commercial portfolio. Approximately half of the commercial portfolio impact related to excess cash recoveries recognized during the period, with the remaining due to improvements of cash expected to be collected on both RBC Bank (USA) and National City loans in future periods. The remaining net reclassifications were due to future cash flow changes in the consumer portfolio.

(b)	As of March 31, 2013, we estimate that the reversal of contractual interest on purchased impaired loans will total approximately $1.2 billion in future periods. This will offset the total net accretable interest in future interest income of $2.2 billion on purchased impaired loans.

12 The PNC Financial Services Group, Inc. – Form 10-Q

Information related to the valuation of purchased impaired loans at March 31, 2013 and December 31, 2012 follows.

Table 10: Valuation of Purchased Impaired Loans


	March 31, 2013						December 31, 2012
Dollars in millions	Balance			Net Investment			Balance			Net Investment
Commercial and commercial real estate loans:
Unpaid principal balance	$	1,465					$	1,680
Purchased impaired mark		(386	)					(431	)
Recorded investment		1,079						1,249
Allowance for loan losses		(198	)					(239	)
Net investment		881			60	%		1,010			60	%
Consumer and residential mortgage loans:
Unpaid principal balance		6,359						6,639
Purchased impaired mark		(365	)					(482	)
Recorded investment		5,994						6,157
Allowance for loan losses		(911	)					(858	)
Net investment		5,083			80	%		5,299			80	%
Total purchased impaired loans:
Unpaid principal balance		7,824						8,319
Purchased impaired mark		(751	)					(913	)
Recorded investment		7,073						7,406
Allowance for loan losses		(1,109	)					(1,097	)
Net investment	$	5,964			76	%	$	6,309			76	%

The unpaid principal balance of purchased impaired loans decreased to $7.8 billion at March 31, 2013 from $8.3 billion at December 31, 2012 due to payments, disposals and charge-offs of amounts determined to be uncollectible. The remaining purchased impaired mark at March 31, 2013 was $751 million, which was a decrease from $913 million at December 31, 2012. The associated allowance for loan losses remained relatively flat at $1.1 billion. The net investment of $6.0 billion at March 31, 2013 decreased 5% from $6.3 billion at December 31, 2012. At March 31, 2013, our largest individual purchased impaired loan had a recorded investment of $19 million.

We currently expect to collect total cash flows of $8.2 billion on purchased impaired loans, representing the $6.0 billion net investment at March 31, 2013 and the accretable net interest of $2.2 billion shown in Table 9: Purchased Impaired Loans – Accretable Yield.

The PNC Financial Services Group, Inc. – Form 10-Q 13

WEIGHTED AVERAGE LIFE OF THE PURCHASED IMPAIRED PORTFOLIOS

The table below provides the weighted average life (WAL) for each of the purchased impaired portfolios as of the first quarter of 2013.

Table 11: Weighted Average Life of the Purchased Impaired Portfolios


As of March 31, 2013
In millions	Recorded Investment		WAL (a)
Commercial	$	270		2.1 years
Commercial real estate		809		2.0 years
Consumer (b)		2,557		4.5 years
Residential real estate		3,437		4.6 years
Total	$	7,073		4.1 years

(a)	Weighted average life represents the average number of years for which each dollar of unpaid principal remains outstanding.

(b)	Portfolio primarily consists of nonrevolving home equity products.

PURCHASED IMPAIRED LOANS – ACCRETABLE DIFFERENCE SENSITIVITY ANALYSIS

The following table provides a sensitivity analysis on the Purchased Impaired Loans portfolio. The analysis reflects hypothetical changes in key drivers for expected cash flows over the life of the loans under declining and improving conditions at a point in time. Any unusual significant economic events or changes, as well as other variables not considered below (e.g., natural or widespread disasters), could result in impacts outside of the ranges represented below. Additionally, commercial and commercial real estate loan settlements or sales proceeds can vary widely from appraised values due to a number of factors including, but not limited to, special use considerations, liquidity premiums and improvements/deterioration in other income sources.

Table 12: Accretable Difference Sensitivity – Total Purchased Impaired Loans


In billions	March 31, 2013			Declining Scenario (a)			Improving Scenario (b)
Expected Cash Flows	$	8.2		$	(.4	)	$	.4
Accretable Difference		2.2			(.1	)		.2
Allowance for Loan and Lease Losses		(1.1	)		(.4	)		.2

(a)

Declining Scenario – Reflects hypothetical changes that would decrease future cash flow expectations. For consumer loans we assume home price forecast decreases by ten percent and unemployment rate forecast increases by two percentage points; for commercial loans, we assume that collateral values decrease by ten percent.

(b)

Improving Scenario – Reflects hypothetical changes that would increase future cash flow expectations. For consumer loans, we assume home price forecast increases by ten percent, unemployment rate forecast decreases by two percentage points and interest rate forecast increases by two percentage points; for commercial loans, we assume that collateral values increase by ten percent.

The impact of declining cash flows is primarily reflected as immediate impairment (allowance for loan losses). The impact of increased cash flows is first recognized as a reversal of the allowance with any additional cash flow increases reflected as an increase in accretable yield over the life of the loan.

NET UNFUNDED CREDIT COMMITMENTS

Net unfunded credit commitments are comprised of the following:

Table 13: Net Unfunded Credit Commitments


In millions	March 31 2013		December 31 2012
Commercial / commercial real estate (a)	$	79,953	$	78,703
Home equity lines of credit		19,696		19,814
Credit card		17,356		17,381
Other		4,807		4,694
Total	$	121,812	$	120,592

(a)	Less than 5% of these amounts at each date relate to commercial real estate.

Commitments to extend credit represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. Commercial commitments reported above exclude syndications, assignments and participations, primarily to financial institutions, totaling $22.9 billion at March 31, 2013 and $22.5 billion at December 31, 2012.

Unfunded liquidity facility commitments and standby bond purchase agreements totaled $713 million at March 31, 2013 and $732 million at December 31, 2012 and are included in the preceding table primarily within the Commercial / commercial real estate category.

In addition to the credit commitments set forth in the table above, our net outstanding standby letters of credit totaled $11.5 billion at both March 31, 2013 and December 31, 2012. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

Information regarding our Allowance for unfunded loan commitments and letters of credit is included in Note 7 Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

14 The PNC Financial Services Group, Inc. – Form 10-Q

INVESTMENT SECURITIES

Table 14: Investment Securities


	March 31, 2013				December 31, 2012
In millions	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Total securities available for sale (a)	$	47,950	$	49,536	$	49,447	$	51,052
Total securities held to maturity		9,825		10,272		10,354		10,860
Total securities	$	57,775	$	59,808	$	59,801	$	61,912

(a)

Includes $288 million of both amortized cost and fair value of securities classified as corporate stocks and other at March 31, 2013. Comparably, at December 31, 2012, amortized cost and fair value of these corporate stocks and other was $367 million. The remainder of securities available for sale are debt securities.

The carrying amount of investment securities totaled $59.4 billion at March 31, 2013, which was made up of $49.6 billion of securities available for sale carried at fair value and $9.8 billion of securities held to maturity carried at amortized cost. Comparably, at December 31, 2012, the carrying value of investment securities totaled $61.4 billion of which $51.0 billion represented securities available for sale carried at fair value and $10.4 billion of securities held to maturity carried at amortized cost.

The decrease in the carrying amount of investment securities of $2.0 billion since December 31, 2012 resulted primarily from a decline in agency residential mortgage-backed securities due to principal payments. Investment securities represented 20% of total assets at both March 31, 2013 and December 31, 2012.

We evaluate our portfolio of investment securities in light of changing market conditions and other factors and, where appropriate, take steps to improve our overall positioning. We consider the portfolio to be well-diversified and of high quality. U.S. Treasury and government agencies, agency residential mortgage-backed and agency commercial mortgage-backed securities collectively represented 57% of the investment securities portfolio at March 31, 2013.

At both March 31, 2013 and December 31, 2012, the securities available for sale portfolio included a net unrealized gain of $1.6 billion, which represented the difference between fair value and amortized cost. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally

decreases when credit spreads widen and vice versa. 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, on our Consolidated Balance Sheet.

Additional information regarding our investment securities is included in Note 8 Investment Securities and Note 9 Fair Value in our Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

Unrealized gains and losses on available for sale securities do not impact liquidity or risk-based capital under currently effective capital rules. However, reductions in the credit ratings of these securities could have an impact on the liquidity of the securities or the determination of risk-weighted assets, which could reduce our regulatory capital ratios under currently effective capital rules. In addition, the amount representing the credit-related portion of other-than- temporary impairment (OTTI) on available for sale securities would reduce our earnings and regulatory capital ratios.

The weighted-average expected life of investment securities (excluding corporate stocks and other) was 4.2 years at March 31, 2013 and 4.0 years at December 31, 2012.

The duration of investment securities was 2.4 years at March 31, 2013. We estimate that, at March 31, 2013, the effective duration of investment securities was 2.6 years for an immediate 50 basis points parallel increase in interest rates and 2.2 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2012 were 2.3 years and 2.2 years, respectively.

The PNC Financial Services Group, Inc. – Form 10-Q 15

The following table provides details regarding the vintage, current credit rating and FICO score of the underlying collateral at origination, where available, for residential mortgage-backed, commercial mortgage-backed and other asset-backed securities held in the available for sale and held to maturity portfolios:

Table 15: Vintage, Current Credit Rating and FICO Score for Asset-Backed Securities


	Agency						Non-agency
As of March 31, 2013 Dollars in millions	Residential Mortgage- Backed Securities			Commercial Mortgage- Backed Securities			Residential Mortgage- Backed Securities			Commercial Mortgage- Backed Securities			Asset- Backed Securities (a)
Fair Value – Available for Sale	$	25,272		$	615		$	6,038		$	3,477		$	6,015
Fair Value – Held to Maturity		4,178			1,357						2,400			997
Total Fair Value	$	29,450		$	1,972		$	6,038		$	5,877		$	7,012
% of Fair Value:
By Vintage
2013		1	%
2012		20	%		1	%					12	%
2011		26	%		49	%					6	%
2010		24	%		11	%		1	%		4	%		3	%
2009		9	%		19	%					2	%		1	%
2008		2	%		3	%								1	%
2007		3	%		2	%		25	%		11	%		2	%
2006		1	%		3	%		21	%		20	%		6	%
2005 and earlier		6	%		12	%		52	%		44	%		6	%
Not Available		8	%					1	%		1	%		81	%
Total		100	%		100	%		100	%		100	%		100	%
By Credit Rating (at March 31, 2013)
Agency		100	%		100	%
AAA											71	%		65	%
AA								1	%		8	%		25	%
A								1	%		12	%		1	%
BBB								4	%		4	%
BB								12	%		2	%
B								7	%		1	%		1	%
Lower than B								73	%					8	%
No rating								2	%		2	%
Total		100	%		100	%		100	%		100	%		100	%
By FICO Score (at origination)
>720								56	%					2	%
<720 and >660								31	%					5	%
<660														2	%
No FICO score								13	%					91	%
Total								100	%					100	%

(a)	Available for sale asset-backed securities include $2 million of available for sale agency asset-backed securities.

16 The PNC Financial Services Group, Inc. – Form 10-Q

We conduct a comprehensive security-level impairment assessment quarterly on all securities in an unrealized loss position to determine whether the loss represents OTTI. Our assessment considers the security structure, recent security collateral performance metrics, external credit ratings, failure of the issuer to make scheduled interest or principal payments, our judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts.

We also consider the severity of the impairment and the length of time that the security has been impaired in our assessment. Results of the periodic assessment are reviewed by a cross-functional senior management team representing Asset & Liability Management, Finance and Market Risk Management. The senior management team considers the results of the assessments, as well as other factors, in determining whether the impairment is other-than-temporary.

For those debt securities where we do not intend to sell and believe we will not be required to sell the securities prior to expected recovery, we recognize the credit portion of OTTI charges in current earnings and the noncredit portion of OTTI is included in Net unrealized gains (losses) on OTTI securities on our Consolidated Statement of Comprehensive Income and in Accumulated other comprehensive income (loss), net of tax, on our Consolidated Balance Sheet.

We recognized OTTI for the first three months of 2013 and 2012 as follows:

Table 16: Other-Than-Temporary Impairments


	Three months ended March 31
In millions	2013			2012
Credit portion of OTTI losses (a)
Non-agency residential mortgage-backed	$	7		$	32
Asset-backed		3			5
Other debt					1
Total credit portion of OTTI losses		10			38
Noncredit portion of OTTI (recoveries) (b)		(9	)		(22	)
Total OTTI losses	$	1		$	16

(a)	Reduction of Noninterest income on our Consolidated Income Statement.

(b)	Included in Accumulated other comprehensive income (loss), net of tax, on our Consolidated Balance Sheet and in Net unrealized gains (losses) on OTTI securities on our Consolidated Statement of Comprehensive Income.

The PNC Financial Services Group, Inc. – Form 10-Q 17

The following table summarizes net unrealized gains and losses recorded on non-agency residential and commercial mortgage-backed securities and other asset-backed securities, which represent our most significant categories of securities not backed by the U.S. government or its agencies. A summary of all OTTI credit losses recognized for the first three months of 2013 by investment type is included in Note 8 Investment Securities in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

Table 17: Net Unrealized Gains and Losses on Non-Agency Securities


As of March 31, 2013 In millions	Residential Mortgage- Backed Securities					Commercial Mortgage- Backed Securities				Asset-Backed Securities (a)
	Fair Value		Net Unrealized Gain (Loss)			Fair Value		Net Unrealized Gain		Fair Value		Net Unrealized Gain (Loss)
Available for Sale Securities (Non-Agency)
Credit Rating Analysis
AAA	$	20				$	2,015	$	81	$	3,814	$	32
Other Investment Grade (AA, A, BBB)		369	$	31			1,179		91		1,567		19
Total Investment Grade		389		31			3,194		172		5,381		51
BB		702		(50	)		113		8		5
B		427		(8	)		58		4		31
Lower than B		4,395		160							570		(20	)
Total Sub-Investment Grade		5,524		102			171		12		606		(20	)
Total No Rating		125		10			112		7		26		(11	)
Total	$	6,038	$	143		$	3,477	$	191	$	6,013	$	20
OTTI Analysis
Investment Grade:
OTTI has been recognized
No OTTI recognized to date	$	389	$	31		$	3,194	$	172	$	5,381	$	51
Total Investment Grade		389		31			3,194		172		5,381		51
Sub-Investment Grade:
OTTI has been recognized		3,679		(35	)						573		(18	)
No OTTI recognized to date		1,845		137			171		12		33		(2	)
Total Sub-Investment Grade		5,524		102			171		12		606		(20	)
No Rating:
OTTI has been recognized		80		3							26		(11	)
No OTTI recognized to date		45		7			112		7
Total No Rating		125		10			112		7		26		(11	)
Total	$	6,038	$	143		$	3,477	$	191	$	6,013	$	20
Securities Held to Maturity (Non-Agency)
Credit Rating Analysis
AAA						$	2,179	$	53	$	746	$	4
Other Investment Grade (AA, A, BBB)							221		12		241		3
Total Investment Grade							2,400		65		987		7
BB											10		1
B
Lower than B
Total Sub-Investment Grade											10		1
Total No Rating
Total						$	2,400	$	65	$	997	$	8

(a)	Excludes $2 million of available for sale agency asset-backed securities.

18 The PNC Financial Services Group, Inc. – Form 10-Q

Residential Mortgage-Backed Securities

At March 31, 2013, our residential mortgage-backed securities portfolio was comprised of $29.5 billion fair value of U.S. government agency-backed securities and $6.0 billion fair value of non-agency (private issuer) securities. The agency securities are generally collateralized by 1-4 family, conforming, fixed-rate residential mortgages. The non-agency securities are also generally collateralized by 1-4 family residential mortgages. The mortgage loans underlying the non-agency securities are generally non-conforming (i.e., original balances in excess of the amount qualifying for agency securities) and predominately have interest rates that are fixed for a period of time, after which the rate adjusts to a floating rate based upon a contractual spread that is indexed to a market rate (i.e., a “hybrid ARM”), or interest rates that are fixed for the term of the loan.

Substantially all of the non-agency securities are senior tranches in the securitization structure and at origination had credit protection in the form of credit enhancement, over-collateralization and/or excess spread accounts.

During the first three months of 2013, we recorded OTTI credit losses of $7 million on non-agency residential mortgage-backed securities. All of the losses were associated with securities rated below investment grade. As of March 31, 2013, the net unrealized loss recorded in Accumulated other comprehensive income for non-agency residential mortgage-backed securities for which we have recorded an OTTI credit loss totaled $32 million and the related securities had a fair value of $3.8 billion.

The fair value of sub-investment grade investment securities for which we have not recorded an OTTI credit loss as of March 31, 2013 totaled $1.8 billion, with unrealized net gains of $137 million.

Commercial Mortgage-Backed Securities

The fair value of the non-agency commercial mortgage-backed securities portfolio was $5.9 billion at March 31, 2013 and consisted of fixed-rate, private-issuer securities collateralized by non-residential properties, primarily retail properties, office buildings and multi-family housing. The agency commercial mortgage-backed securities portfolio had a fair value of $2.0 billion at March 31, 2013 consisting of multi-family housing. Substantially all of the securities are the most senior tranches in the subordination structure.

There were no OTTI credit losses on commercial mortgage-backed securities during the first three months of 2013.

Asset-Backed Securities

The fair value of the asset-backed securities portfolio was $7.0 billion at March 31, 2013. The portfolio consisted of fixed-rate and floating-rate securities collateralized by various consumer credit products, primarily student loans and residential mortgage loans, as well as securities backed by corporate debt. Substantially all of the securities are senior tranches in the securitization structure and have credit protection in the form of credit enhancement, over-collateralization and/or excess spread accounts. Substantially all of the student loans in the securitizations are guaranteed by an agency of the U.S. government.

We recorded OTTI credit losses of $3 million on asset-backed securities during the first three months of 2013. All of the securities are collateralized by first and second lien residential mortgage loans and are rated below investment grade. As of March 31, 2013, the net unrealized loss recorded in Accumulated other comprehensive income for asset-backed securities for which we have recorded an OTTI credit loss totaled $29 million and the related securities had a fair value of $599 million.

For the sub-investment grade investment securities (available for sale and held to maturity) for which we have not recorded an OTTI loss through March 31, 2013, the fair value was $43 million, with unrealized net losses of $1 million. The results of our security-level assessments indicate that we will recover the cost basis of these securities.

Note 8 Investment Securities in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report provides additional information on OTTI losses and further detail regarding our process for assessing OTTI.

If current housing and economic conditions were to worsen, and if market volatility and illiquidity were to worsen, or if market interest rates were to increase or credit spreads were to widen appreciably, the valuation of our investment securities portfolio could be adversely affected and we could incur additional OTTI credit losses that would impact our Consolidated Income Statement.

The PNC Financial Services Group, Inc. – Form 10-Q 19

LOANS HELD FOR SALE

Table 18: Loans Held For Sale


In millions	March 31 2013		December 31 2012
Commercial mortgages at fair value	$	769	$	772
Commercial mortgages at lower of cost or market		126		620
Total commercial mortgages		895		1,392
Residential mortgages at fair value		2,204		2,096
Residential mortgages at lower of cost or market		127		124
Total residential mortgages		2,331		2,220
Other		69		81
Total	$	3,295	$	3,693

We stopped originating certain commercial mortgage loans held for sale designated at fair value and continue pursuing opportunities to reduce these positions at appropriate prices. At March 31, 2013, the balance relating to these loans was $769 million, compared to $772 million at December 31, 2012.

We sold $926 million of commercial mortgages held for sale carried at lower of cost or market during the first three months of 2013 compared to $481 million during the first three months of 2012, due to an increase in loan sales to government agencies. Gains on sale, net of hedges, were immaterial.

Residential mortgage loan origination volume was $4.2 billion in the first three months of 2013 compared to $3.4 billion for the first three months of 2012. Substantially all such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $3.8 billion of loans and recognized related gains of $172 million during the first three months of 2013. The comparable amounts for the first three months of 2012 were $3.5 billion and $141 million, respectively.

Interest income on loans held for sale was $53 million in the first three months of 2013 and $50 million in the first three months of 2012. These amounts are included in Other interest income on our Consolidated Income Statement.

Additional information regarding our loan sale and servicing activities is included in Note 3 Loan Sales and Servicing Activities and Variable Interest Entities and Note 9 Fair Value in our Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets totaled $11.0 billion at March 31, 2013 and $10.9 billion at December 31, 2012. See additional information regarding our goodwill and intangible assets in Note 10 Goodwill and Other Intangible Assets included in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

20 The PNC Financial Services Group, Inc. – Form 10-Q

FUNDING AND CAPITAL SOURCES

Table 19: Details Of Funding Sources


In millions	March 31 2013		December 31 2012
Deposits
Money market	$	103,429	$	102,706
Demand		71,975		73,995
Retail certificates of deposit		23,097		23,837
Savings		11,137		10,350
Time deposits in foreign offices and other time		1,982		2,254
Total deposits		211,620		213,142
Borrowed funds
Federal funds purchased and repurchase agreements		4,000		3,327
Federal Home Loan Bank borrowings		5,483		9,437
Bank notes and senior debt		10,918		10,429
Subordinated debt		7,996		7,299
Commercial paper		6,953		8,453
Other		2,297		1,962
Total borrowed funds		37,647		40,907
Total funding sources	$	249,267	$	254,049

Total funding sources decreased $4.8 billion at March 31, 2013 compared with December 31, 2012.

Total deposits decreased $1.5 billion at March 31, 2013 compared with December 31, 2012 primarily due to a decrease in demand deposits. Interest-bearing deposits represented 69% of total deposits at March 31, 2013 compared to 67% at December 31, 2012. Total borrowed funds decreased $3.3 billion since December 31, 2012. The change from December 31, 2012 was largely due to redemptions and maturities of FHLB borrowings.

CAPITAL

Table 20: Shareholders’ Equity


In millions	March 31 2013			December 31 2012
Shareholders’ equity
Preferred stock
Common stock	$	2,690		$	2,690
Capital surplus – preferred stock		3,591			3,590
Capital surplus – common stock and other		12,174			12,193
Retained earnings		20,993			20,265
Accumulated other comprehensive income (loss)		767			834
Common stock held in treasury at cost		(552	)		(569	)
Total shareholders’ equity	$	39,663		$	39,003

We manage our funding and capital positions by making adjustments to our balance sheet size and composition, issuing debt, equity or other capital instruments, executing treasury stock transactions and capital redemptions, managing dividend policies and retaining earnings.

Total shareholders’ equity increased $.7 billion, to $39.7 billion at March 31, 2013, compared with December 31, 2012 primarily reflecting an increase in retained earnings of $.7 billion. Accumulated other comprehensive income remained relatively flat at $.8 billion. Common shares outstanding were 529 million at March 31, 2013 and 528 million at December 31, 2012.

See the Liquidity Risk Management portion of the Risk Management section of this Financial Review and Note 20 Subsequent Events in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information regarding our March 2013 announcement of our April 2013 redemption of our Series L Preferred Stock and our May 2013 issuance of our Series R Preferred Stock.

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 and the potential impact on our credit ratings. We do not expect to repurchase any shares under this program in 2013. We did not include any such share repurchases in our 2013 capital plan submitted to the Federal Reserve, primarily as a result of PNC’s 2012 acquisition of RBC Bank (USA) and expansion into Southeastern markets.

The PNC Financial Services Group, Inc. – Form 10-Q 21

Table 21: Risk-Based Capital


Dollars in millions	March 31 2013			December 31 2012
Capital components
Shareholders’ equity
Common	$	36,072		$	35,413
Preferred		3,591			3,590
Trust preferred capital securities		317			331
Noncontrolling interests		983			1,354
Goodwill and other intangible assets		(9,763	)		(9,798	)
Eligible deferred income taxes on goodwill and other intangible assets		351			354
Pension and other postretirement benefit plan adjustments		748			777
Net unrealized securities (gains)/losses, after-tax		(1,037	)		(1,052	)
Net unrealized gains on cash flow hedge derivatives, after-tax		(510	)		(578	)
Other		(331	)		(165	)
Tier 1 risk-based capital		30,421			30,226
Subordinated debt		5,276			4,735
Eligible allowance for credit losses		3,278			3,276
Total risk-based capital	$	38,975		$	38,237
Tier 1 common capital
Tier 1 risk-based capital	$	30,421		$	30,226
Preferred equity		(3,441	)		(3,590	)
Trust preferred capital securities		(317	)		(331	)
Noncontrolling interests		(983	)		(1,354	)
Tier 1 common capital	$	25,680		$	24,951
Assets
Risk-weighted assets, including off-balance sheet instruments and market risk equivalent assets	$	261,491		$	260,847
Adjusted average total assets		292,911			291,426
Basel I capital ratios
Tier 1 common		9.8	%		9.6	%
Tier 1 risk-based		11.6			11.6
Total risk-based		14.9			14.7
Leverage		10.4			10.4

Federal banking regulators have stated that they expect all bank holding companies to have a level and composition of Tier 1 capital well in excess of the 4% Basel I regulatory minimum, and they have required the largest U.S. bank holding companies, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet credit needs of their customers through estimated stress scenarios. They have also stated their view that common equity should be the dominant form of Tier 1 capital. As a result, regulators are now emphasizing the Tier 1 common capital ratio in their evaluation of bank holding company capital levels. We seek to manage our capital consistent with these regulatory principles, and believe that our March 31, 2013 capital levels were aligned with them.

Dodd-Frank requires the Federal Reserve Board to establish capital requirements that would, among other things, eliminate the Tier 1 treatment of trust preferred securities following a phase-in period expected to begin later this year. Accordingly, PNC has redeemed trust preferred securities and will consider redeeming others on or after their first call date, based on such considerations as dividend rates, future capital requirements, capital market conditions and other factors. See Note 14 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in Item 8 of our 2012 Form 10-K and Note 11 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities and Note 20 Subsequent Events in the Notes To Consolidated Financial Statements in this Report for additional discussion of our trust preferred securities and completed or upcoming redemptions.

22 The PNC Financial Services Group, Inc. – Form 10-Q

Our Tier 1 common capital ratio was 9.8% at March 31, 2013, compared with 9.6% at December 31, 2012. Our Tier 1 risk-based capital ratio remained consistent at 11.6% for both March 31, 2013 and December 31, 2012. Our total risk-based capital ratio increased 20 basis points to 14.9% at March 31, 2013 from 14.7% at December 31, 2012. These ratios were positively impacted by a net increase in retained earnings. The positive impacts on the Tier 1 risk-based capital and total risk-based capital ratios were partially offset by the redemption of trust preferred securities and announced call of the Series L preferred stock. Basel I risk-weighted assets increased $.7 billion from $260.8 billion at December 31, 2012 to $261.5 billion at March 31, 2013.

At March 31, 2013, PNC and PNC Bank, National Association (PNC Bank, N.A.), our domestic bank subsidiary, were both considered “well capitalized” based on US regulatory capital ratio requirements under Basel I. To qualify as “well-capitalized”, regulators currently require bank holding companies and banks to maintain capital ratios of at least 6% for Tier 1 risk-based, 10% for total risk-based, and 5% for leverage. We believe PNC and PNC Bank, N.A. will continue to meet these requirements during the remainder of 2013.

PNC and PNC Bank, N.A. entered the “parallel run” qualification phase under the Basel II capital framework on January 1, 2013. The Basel II framework, which was adopted by the Basel Committee on Banking Supervision in 2004, seeks to provide more risk-sensitive regulatory capital calculations and promote enhanced risk management practices among large, internationally active banking organizations. The U.S. banking agencies adopted final rules to implement the Basel II capital framework in December 2007 and in June 2012 requested comment on proposed modifications to these rules (collectively referred to as the “advanced approaches”). See Item 1 Business – Supervision and Regulation and Item 1A Risk Factors in our 2012 Form 10-K. Prior to fully implementing the advanced approaches to calculate risk-weighted assets, PNC and PNC Bank, N.A. must successfully complete a “parallel run” qualification phase. This phase must last at least four consecutive quarters, although, consistent with the experience of other U.S. banks, we currently anticipate a multi-year parallel run period.

We provide information below regarding PNC’s pro forma fully phased-in Basel III Tier 1 common capital ratio and how it differs from the Basel I Tier 1 common capital ratio as we expect the Basel III ratio to replace the current Basel I ratio for this regulatory metric when the applicable rules are finalized and fully implemented and PNC exits parallel run.

Table 22: Estimated Pro forma Basel III Tier 1 Common Capital


Dollars in millions	March 31 2013			December 31 2012
Basel I Tier 1 common capital	$	25,680		$	24,951
Less regulatory capital adjustments:
Basel III quantitative limits		(2,076	)		(2,330	)
Accumulated other comprehensive income (a)		289			276
All other adjustments		(367	)		(396	)
Estimated Basel III Tier 1 common capital	$	23,526		$	22,501
Estimated Basel III risk-weighted assets		293,810			301,006
Pro forma Basel III Tier 1 common capital ratio		8.0	%		7.5	%

(a)	Represents net adjustments related to accumulated other comprehensive income for available for sale securities and pension and other postretirement benefit plans.

PNC’s pro forma Basel III Tier 1 common capital ratio was estimated without the benefit of phase-ins and is based on our current understanding of Basel III proposed rules. PNC utilizes this estimate to assess its Basel III capital position, including comparison to similar estimates made by other financial institutions. Tier 1 common capital as defined under the proposed Basel III rules differs materially from Basel I. Under Basel III, unconsolidated investments in financial institutions, mortgage servicing rights and deferred tax assets must be deducted from capital to the extent they individually exceed 10%, or in the aggregate exceed 15%, of the institution’s adjusted Tier 1 common capital. Also, Basel I regulatory capital excludes certain other comprehensive income related to both available for sale securities and pension and other postretirement plans, whereas under Basel III these items are a component of capital. Basel III risk-weighted assets were estimated under Basel II (including the modifications to the advanced approaches proposed under Basel III) and application of Basel II.5, and reflect credit, market and operational risk. This Basel III capital estimate is likely to be impacted by the finalization of the Basel III rules, further regulatory clarity relating to the capital rules, and the ongoing evolution, validation and regulatory approval of PNC’s models integral to the calculation of Basel II risk-weighted assets.

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

We provide additional information regarding enhanced capital requirements and some of their potential impacts on PNC in Item 1A Risk Factors included in our 2012 Form 10-K.

The PNC Financial Services Group, Inc. – Form 10-Q 23

OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

We engage in a variety of activities that involve unconsolidated entities or that are otherwise not reflected in our Consolidated Balance Sheet that are generally referred to as “off-balance sheet arrangements.” Additional information on these types of activities is included in our 2012 Form 10-K and in the following sections of this Report:

•

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

•

Note 3 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements,

•

Note 11 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in the Notes To Consolidated Financial Statements, and

•

Note 18 Commitments and Guarantees in the Notes To Consolidated Financial Statements.

PNC consolidates variable interest entities (VIEs) when we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.

A summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements, as of March 31, 2013 and December 31, 2012 is included in Note 3 of this Report.

TRUST PREFERRED SECURITIES AND REIT PREFERRED SECURITIES

We are subject to certain restrictions, including restrictions on dividend payments, in connection with $402 million in principal amount of outstanding junior subordinated debentures associated with $390 million of trust preferred securities that were issued by various subsidiary statutory trusts (both amounts as of March 31, 2013). Generally, if there is (i) an event of default under the debentures, (ii) PNC elects to defer interest on the debentures, (iii) PNC exercises its right to defer payments on the related trust preferred securities issued by the statutory trusts or (iv) there is a default under PNC’s guarantee of such payment obligations, as specified in the applicable governing documents, then 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 Agreement with PNC Preferred Funding Trust II, as described in Note 14 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in our 2012 Form 10-K. See the Liquidity Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our first quarter 2013 redemption of the REIT Preferred Securities issued by PNC Preferred Funding Trust III and additional discussion of redemptions of trust preferred securities.

FAIR VALUE MEASUREMENTS

In addition to the following, see Note 9 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report and in our 2012 Form 10-K for further information regarding fair value.

The following table summarizes the assets and liabilities measured at fair value at March 31, 2013 and December 31, 2012, respectively, and the portion of such assets and liabilities that are classified within Level 3 of the valuation hierarchy.

Table 23: Fair Value Measurements – Summary


	March 31, 2013						December 31, 2012
In millions	Total Fair Value			Level 3			Total Fair Value			Level 3
Total assets	$	66,769		$	11,206		$	68,352		$	10,988
Total assets at fair value as a percentage of consolidated assets		22	%					22	%
Level 3 assets as a percentage of total assets at fair value					17	%					16	%
Level 3 assets as a percentage of consolidated assets					4	%					4	%
Total liabilities	$	6,966		$	530		$	7,356		$	376
Total liabilities at fair value as a percentage of consolidated liabilities		3	%					3	%
Level 3 liabilities as a percentage of total liabilities at fair value					8	%					5	%
Level 3 liabilities as a percentage of consolidated liabilities					<1	%					<1	%

The majority of assets recorded at fair value are included in the securities available for sale portfolio. The majority of Level 3 assets represent non-agency residential mortgage-backed and asset-backed securities in the securities available for sale portfolio for which there was limited market activity.

24 The PNC Financial Services Group, Inc. – Form 10-Q

An instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. PNC reviews and updates fair value hierarchy classifications quarterly. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification (transfer) of assets or liabilities between hierarchy levels. PNC’s policy is to recognize transfers in and transfers out as of the end of the reporting period. During the first three months of 2013, there were transfers of residential mortgage loans held for sale and loans from Level 2 to Level 3 of $3 million and $1 million, respectively, as a result of reduced market activity in the nonperforming residential mortgage sales market which reduced the observability of valuation inputs. Also during 2013, there were transfers out of Level 3 residential mortgage

loans held for sale and loans of $4 million and $4 million, respectively, primarily due to the transfer of residential mortgage loans held for sale and loans to OREO. In addition, there was approximately $11 million of Level 3 residential mortgage loans held for sale reclassified to Level 3 loans during the first three months of 2013 due to the loans being reclassified from held for sale loans to held in portfolio loans. This amount was included in Transfers out of Level 3 residential mortgage loans held for sale and Transfers into Level 3 loans within Table 90: Reconciliation of Level 3 Assets and Liabilities. In the comparable period of 2012, there were transfers of assets and liabilities from Level 2 to Level 3 of $460 million consisting of mortgage-backed available for sale securities transferred as a result of a ratings downgrade which reduced the observability of valuation inputs.

EUROPEAN EXPOSURE

Table 24: Summary of European Exposure


*March 31, 2013*	Direct Exposure
	Funded								Unfunded
In millions	Loans		Leases		Securities		Total		Other (a)		Total Direct Exposure		Total Indirect Exposure		Total Exposure
Greece, Ireland, Italy, Portugal and Spain (GIIPS)	$	85	$	123			$	208	$	3	$	211	$	37	$	248
Belgium and France				72	$	30		102		35		137		927		1,064
United Kingdom		680		32				712		360		1,072		587		1,659
Europe – Other (b)		237		531		244		1,012		93		1,105		713		1,818
Total Europe (c)	$	1,002	$	758	$	274	$	2,034	$	491	$	2,525	$	2,264	$	4,789

*December 31, 2012*	Direct Exposure
	Funded								Unfunded
In millions	Loans		Leases		Securities		Total		Other (a)		Total Direct Exposure		Total Indirect Exposure		Total Exposure
Greece, Ireland, Italy, Portugal and Spain (GIIPS)	$	85	$	122			$	207	$	3	$	210	$	31	$	241
Belgium and France				73	$	30		103		35		138		1,083		1,221
United Kingdom		698		32				730		449		1,179		525		1,704
Europe – Other (b)		113		529		168		810		63		873		838		1,711
Total Europe (c)	$	896	$	756	$	198	$	1,850	$	550	$	2,400	$	2,477	$	4,877

(a)	Includes unfunded commitments, guarantees, standby letters of credit and sold protection credit derivatives.

(b)	Europe – Other primarily consists of Denmark, Germany, Netherlands, Sweden and Switzerland.

(c)	Included within Europe – Other is funded direct exposure of $68 million and $168 million consisting of sovereign debt securities at March 31, 2013 and December 31, 2012, respectively. There was no other direct or indirect exposure to European sovereigns as of March 31, 2013 and December 31, 2012.

European entities are defined as supranational, sovereign, financial institutions and non-financial entities within the countries that comprise the European Union, European Union candidate countries and other European countries. Foreign exposure underwriting and approvals are centralized. PNC currently underwrites new foreign activities if the credit is generally associated with activities of its United States commercial customers, and, in the case of PNC Business Credit’s United Kingdom operations, transactions that are predominantly well collateralized by self liquidating assets such as receivables, inventories or, in limited situations, the borrower’s appraised value of certain fixed assets, such that

PNC is at minimal risk of loss. Formerly, PNC had underwritten foreign infrastructure leases supported by highly rated bank letters of credit and other collateral, U.S. Treasury securities and the underlying assets of the lease. Country exposures are monitored and reported on a regular basis. We actively monitor sovereign risk, banking system health, and market conditions and adjust limits as appropriate. We rely on information from internal and external sources, including international financial institutions, economists and analysts, industry trade organizations, rating agencies, econometric data analytical service providers and geopolitical news analysis services.

The PNC Financial Services Group, Inc. – Form 10-Q 25

Among the regions and nations that PNC monitors, we have identified seven countries for which we are more closely monitoring their economic and financial situation. The basis for the increased monitoring includes, but is not limited to, sovereign debt burden, near term financing risk, political instability, GDP trends, balance of payments, market confidence, banking system distress and/or holdings of stressed sovereign debt. The countries identified are: Greece, Ireland, Italy, Portugal, Spain (collectively “GIIPS”), Belgium and France.

Direct exposure primarily consists of loans, leases, securities, derivatives, letters of credit and unfunded contractual commitments with European entities. As of March 31, 2013, the $2.0 billion of funded direct exposure (.67% of PNC’s total assets) primarily represented $650 million for cross-border leases in support of national infrastructure, which were supported by letters of credit and other collateral having trigger mechanisms that require replacement or collateral in the form of cash or United States Treasury or government securities, $586 million for United Kingdom foreign office loans and $68 million of securities issued by AAA-rated sovereigns. The comparable level of direct exposure outstanding at December 31, 2012 was $1.9 billion (.61% of PNC’s total assets), which primarily included $645 million for cross-border leases in support of national infrastructure, $600 million for United Kingdom foreign office loans and $168 million of securities issued by AAA-rated sovereigns.

The $491 million of unfunded direct exposure as of March 31, 2013 was largely comprised of $360 million for unfunded contractual commitments primarily for United Kingdom local office commitments to PNC Business Credit corporate customers on a secured basis or activities supporting our domestic customers export activities through the confirmation of trade letters of credit. Comparably, the $550 million of unfunded direct exposure as of December 31, 2012 was largely comprised of $449 million for unfunded contractual commitments primarily for United Kingdom local office commitments to PNC Business Credit corporate customers on a secured basis or activities supporting our domestic customers export activities through the confirmation of trade letters of credit.

We also track European financial exposures where our clients, primarily U.S. entities, appoint PNC as a letter of credit issuing bank and we elect to assume the joint probability of default risk. As of March 31, 2013 and December 31, 2012, PNC had $2.3 billion and $2.5 billion, respectively, of indirect exposure. For PNC to incur a loss in these indirect exposures, both the obligor and the financial counterparty participating bank would need to default. PNC assesses both the corporate customers and the participating banks for counterparty risk and where PNC has found that a participating bank exposes PNC to unacceptable risk, PNC will reject the participating bank as an acceptable counterparty and will ask the corporate customer to find an acceptable participating bank.

Direct and indirect exposure to entities in the GIIPS countries totaled $248 million as of March 31, 2013, of which $123 million was direct exposure for cross-border leases within Portugal, $67 million represented direct exposure for loans outstanding within Ireland and $37 million represented indirect exposure for letters of credit with strong underlying obligors, primarily U.S. entities, with participating banks in Ireland, Italy and Spain. The comparable amounts as of December 31, 2012 were total direct and indirect exposure of $241 million, consisting of $122 million of direct exposure for cross-border leases within Portugal, $67 million represented direct exposure for loans outstanding within Ireland and $31 million represented indirect exposure for letters of credit with strong underlying obligors, primarily U.S. entities, with participating banks in Ireland, Italy and Spain.

Direct and indirect exposure to entities in Belgium and France totaled $1.1 billion as of March 31, 2013. Direct exposure of $137 million primarily consisted of $69 million for cross-border leases within Belgium, $35 million for unfunded contractual commitments in France and $30 million of covered bonds issued by a financial institution in France. Indirect exposure was $927 million for letters of credit with strong underlying obligors, primarily U.S. entities, with creditworthy participant banks in France and Belgium. The comparable amounts as of December 31, 2012 were total direct and indirect exposure of $1.2 billion of which there was $138 million of direct exposure primarily consisting of $69 million for cross-border leases within Belgium, $35 million for unfunded contractual commitments in France and $30 million of covered bonds issued by a financial institution in France. Indirect exposure at December 31, 2012 was $1.1 billion for letters of credit with strong underlying obligors and creditworthy participant banks in France and Belgium.

26 The PNC Financial Services Group, Inc. – Form 10-Q

BUSINESS SEGMENTS REVIEW

We have six reportable business segments:

•

Retail Banking

•

Corporate & Institutional Banking

•

Asset Management Group

•

Residential Mortgage Banking

•

BlackRock

•

Non-Strategic Assets Portfolio

Business segment results, including inter-segment revenues, and a description of each business are included in Note 19 Segment Reporting included in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report. Certain amounts included in this Financial Review differ from those amounts shown in Note 19 primarily due to the presentation in this Financial Review of business net interest revenue on a taxable-equivalent basis.

Results of individual businesses are presented based on our internal management reporting practices. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of our individual businesses are not necessarily comparable with similar information for any other company. We periodically refine our internal methodologies as management reporting practices are enhanced. To the extent practicable, retrospective application of new methodologies is made to prior period reportable business segment results and disclosures to create comparability to the current period presentation to reflect any such refinements.

Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. Additionally, we have aggregated the results for corporate support functions within “Other” 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. A portion of capital is intended to cover unexpected losses and is assigned to our business segments using our risk-based economic capital model, including consideration of the goodwill and other intangible assets at those business segments, as well as the diversification of risk among the business segments.

We have allocated the allowances for loan and lease losses and for unfunded loan commitments and letters of credit based on our assessment of risk in each business segment’s loan portfolio. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated. Our allocation of the costs incurred by operations and other shared support areas not directly aligned with the businesses is primarily based on the use of services.

Total business segment financial results differ from total consolidated net income. 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 section of this Financial Review 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, integration costs, asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities and certain trading activities, exited businesses, private equity investments, intercompany eliminations, most corporate overhead, tax adjustments that are not allocated to business segments and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests as the segments’ results exclude their portion of net income attributable to noncontrolling interests.

The PNC Financial Services Group, Inc. – Form 10-Q 27

RETAIL BANKING

(Unaudited)

Table 25: Retail Banking Table


Three months ended March 31 Dollars in millions, except as noted	2013			2012
Income Statement
Net interest income	$	1,049		$	1,045
Noninterest income
Service charges on deposits		129			121
Brokerage		52			45
Consumer services		216			191
Other		37			34
Total noninterest income		434			391
Total revenue		1,483			1,436
Provision for credit losses		162			135
Noninterest expense		1,131			1,069
Pretax earnings		190			232
Income taxes		70			85
Earnings	$	120		$	147
Average Balance Sheet
Loans
Consumer
Home equity	$	28,913		$	26,759
Indirect auto		7,006			4,439
Indirect other		1,000			1,292
Education		8,220			9,440
Credit cards		4,108			3,928
Other		2,141			1,888
Total consumer		51,388			47,746
Commercial and commercial real estate		11,290			10,682
Floor plan		2,014			1,663
Residential mortgage		811			1,031
Total loans		65,503			61,122
Goodwill and other intangible assets		6,148			5,888
Other assets		2,465			2,699
Total assets	$	74,116		$	69,709
Deposits
Noninterest-bearing demand	$	20,744		$	18,764
Interest-bearing demand		31,183			25,707
Money market		48,291			43,601
Total transaction deposits		100,218			88,072
Savings		10,537			9,077
Certificates of deposit		22,683			28,150
Total deposits		133,438			125,299
Other liabilities		273			629
Capital		9,058			8,328
Total liabilities and equity	$	142,769		$	134,256
Performance Ratios
Return on average capital		5	%		7	%
Return on average assets		.66			.85
Noninterest income to total revenue		29			27
Efficiency		76			74


Three months ended March 31 Dollars in millions, except as noted	2013			2012
Other Information (a)
Credit-related statistics:
Commercial nonperforming assets	$	230		$	315
Consumer nonperforming assets		1,050			650
Total nonperforming assets (b)	$	1,280		$	965
Purchased impaired loans (c)	$	788		$	903
Commercial lending net charge-offs	$	37		$	28
Credit card lending net charge-offs		45			50
Consumer lending (excluding credit card) net charge-offs		168			113
Total net charge-offs	$	250		$	191
Commercial lending annualized net charge-off ratio		1.13	%		.91	%
Credit card lending annualized net charge-off ratio		4.44	%		5.12	%
Consumer lending (excluding credit card) annualized net charge-off ratio		1.42	%		1.01	%
Total annualized net charge-off ratio		1.55	%		1.26	%
Home equity portfolio credit statistics: (d)
% of first lien positions at origination (e)		48	%		37	%
Weighted-average loan-to-value ratios (LTVs) (e) (f)		85	%		81	%
Weighted-average updated FICO scores (g)		743			739
Annualized net charge-off ratio (h)		1.97	%		1.11	%
Delinquency data: (i)
Loans 30 – 59 days past due		.44	%		.56	%
Loans 60 – 89 days past due		.24	%		.35	%
Loans 90 days past due		.99	%		1.24	%
Other statistics:
ATMs		7,303			7,220
Branches (j)		2,856			2,900
Full service brokerage offices		39			38
Brokerage account assets (billions)	$	39		$	37
Customer-related statistics: (in thousands)
Retail Banking checking relationships		6,534			6,278
Retail online banking active customers		4,234			3,823
Retail online bill payment active customers		1,260			1,161

(a)	Presented as of March 31, except for net charge-offs and annualized net charge-off ratios, which are for the three months ended.

(b)	Includes nonperforming loans of $1.2 billion at March 31, 2013 and $.9 billion at March 31, 2012.

(c)	Recorded investment of purchased impaired loans related to acquisitions.

(d)	Lien position, LTV and FICO statistics are based upon customer balances.

(e)	Lien position and LTV calculation at March 31, 2013 reflect the use of revised assumptions where data is missing.

(f)	LTV statistics are based upon current information.

(g)	Represents FICO scores that are updated at least quarterly.

(h)	Ratio for the three months ended March 31, 2013 includes additional consumer charge-offs taken as a result of alignment with interagency guidance on practices for loans and lines of credit we implemented in the first quarter of 2013.

(i)	Delinquency data includes nonaccrual loans. Amounts as of March 31, 2013 are based upon recorded investment; previous quarters’ amounts are based upon unpaid principal balances.

(j)	Excludes satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services.

28 The PNC Financial Services Group, Inc. – Form 10-Q

Retail Banking earned $120 million in the first quarter of 2013 compared with earnings of $147 million for the same period a year ago. The decrease in earnings resulted from higher noninterest expense and provision for credit losses, both attributable to the full quarter impact of the RBC Bank (USA) acquisition. Noninterest income was also higher compared with the first quarter of 2012 primarily due to increased debit and credit card transactions, brokerage activity and the RBC Bank (USA) acquisition.

Retail Banking’s core strategy is to efficiently grow consumer and small business checking households by providing an experience that builds customer loyalty and creates opportunities to sell our savings, loans, investment products and money management services. Net checking relationships grew 59,000 in the first three months of 2013. The growth reflects strong results and gains in all of our markets, as well as strong customer retention in the overall network. As customer preferences for convenience evolve, we continue to provide more cost effective alternate servicing channels. Non-branch deposits via ATM and mobile channels increased from 14% a year ago to 20% of the total deposits in the first quarter of 2013. Active online banking customers and active online bill payment customers increased by 11% and 9%, respectively, from a year ago.

Retail Banking’s footprint extends across 17 states and Washington, D.C., covering nearly half the U.S. population and serving 5,784,000 consumers and 750,000 small businesses with 2,856 branches and 7,303 ATMs. PNC consolidated 30 branches in the first quarter and has plans to close a total of approximately 200 branches in 2013. We will continue to invest selectively in new branches. This quarter five branches were opened.

Total revenue for the first three months of 2013 was $1.5 billion compared with $1.4 billion for the same period of 2012. Net interest income increased $4 million compared with the first three months of 2012. The increase resulted from higher organic loan and transaction deposit balances, lower rates paid on deposits, and the impact of the RBC Bank (USA) acquisition.

Noninterest income increased $43 million compared to the first three months of 2012. The increase was driven by higher volumes of customer debit card and credit card transactions, brokerage activity and the RBC Bank (USA) acquisition.

The provision for credit losses was $162 million in the first quarter of 2013 and net charge-offs were $250 million compared with $135 million and $191 million, respectively, for the same period in 2012. The increase in the provision for credit losses year over year is attributable to the impact of the RBC Bank (USA) acquisition. The increase in net charge-offs was due to the alignment with interagency guidance.

Noninterest expense increased $62 million in the first three months of 2013 compared to the same period of 2012. The increase was primarily attributable to the first three months of 2013 including a full quarter of operating expenses associated with RBC Bank (USA) acquisition.

Growing core checking deposits is key to Retail Banking’s growth and to providing a source of low-cost funding to PNC. The deposit product strategy of Retail Banking is to remain disciplined on pricing, target specific products and markets for growth, and focus on the retention and growth of balances for relationship customers. In the first three months of 2013, average total deposits of $133.4 billion increased $8.1 billion, or 6%, compared with the same period in 2012.

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Average transaction deposits grew $12.1 billion, or 14%, and average savings deposit balances grew $1.5 billion, or 16%, compared with the first three months of 2012 as a result of organic deposit growth, continued customer preference for liquidity and the RBC Bank (USA) acquisition. In the first three months of 2013, compared with the same period a year ago, average demand deposits increased $7.5 billion, or 17%, to $51.9 billion, and average money market deposits increased $4.7 billion, or 11%, to $48.3 billion.

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Total average certificates of deposit decreased $5.5 billion, or 19%, compared to the same period in 2012. The decline in average certificates of deposit was due to the run-off of maturing accounts partially offset by the impact of the RBC Bank (USA) acquisition.

The PNC Financial Services Group, Inc. – Form 10-Q 29

Retail Banking continues to focus on a relationship-based lending strategy that targets specific products and markets for growth, small businesses and auto dealerships. In the first three months of 2013, average total loans were $65.5 billion, an increase of $4.4 billion, or 7%, over the same period in 2012.

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Average indirect auto loans increased $2.6 billion, or 58%, over the first three months of 2012. The increase was primarily due to the expansion of our indirect sales force and product introduction to acquired markets, as well as overall increases in auto sales.

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Average home equity loans increased $2.2 billion, or 8%, compared with the same period in 2012. The increase was due to the RBC Bank (USA) acquisition. The remainder of the portfolio was relatively flat as increases in term loans were offset by declines in lines of credit. Retail Banking’s home equity loan portfolio is relationship based, with 97% of the portfolio attributable to borrowers in our primary geographic footprint.

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Average commercial and commercial real estate loans increased $608 million, or 6%, compared with the same period in 2012. The increase was due to the acquisition of RBC Bank (USA). The remainder of the portfolio showed a decline as loan demand was outpaced by paydowns, refinancings and charge-offs.

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Average auto dealer floor plan loans grew $351 million, or 21%, compared with the first three months of 2012, primarily resulting from dealer line utilization and additional dealer relationships.

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Average credit card balances increased $180 million, or 5%, compared with the same period of 2012 as a result of the portfolio purchase from RBC Bank (Georgia), National Association in March 2012.

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Average education loans for the first three months of 2013 declined $1.2 billion, or 13%, compared with the same period in 2012. The decline was a result of run-off of the discontinued government guaranteed portfolio.

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Average indirect other and residential mortgages in this segment are primarily run-off portfolios and declined $292 million and $220 million, respectively, compared with the same period in 2012. The indirect other portfolio is comprised of marine, RV and other indirect loan products.

Nonperforming assets totaled $1.3 billion in the first quarter of 2013, a 33% increase from a year ago. The increase was in consumer assets due to the alignment with interagency guidance.

30 The PNC Financial Services Group, Inc. – Form 10-Q

CORPORATE & INSTITUTIONAL BANKING

(Unaudited)

Table 26: Corporate & Institutional Banking Table


Three months ended March 31 Dollars in millions, except as noted	2013		2012
Income Statement
Net interest income	$	956	$	938
Noninterest income
Corporate service fees		246		200
Other		139		128
Noninterest income		385		328
Total revenue		1,341		1,266
Provision for credit losses		14		19
Noninterest expense		480		463
Pretax earnings		847		784
Income taxes		306		289
Earnings	$	541	$	495
Average Balance Sheet
Loans
Commercial	$	52,893	$	42,919
Commercial real estate		16,876		14,388
Commercial – real estate related		6,826		4,971
Asset-based lending		11,181		9,266
Equipment lease financing		6,552		5,706
Total loans		94,328		77,250
Goodwill and other intangible assets		3,752		3,442
Loans held for sale		1,236		1,244
Other assets		12,355		10,960
Total assets	$	111,671	$	92,896
Deposits
Noninterest-bearing demand	$	40,572	$	37,225
Money market		17,023		13,872
Other		6,979		5,372

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company