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 June 30, 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 July 31, 2013, there were 531,511,981 shares of the registrant’s common stock ($5 par value) outstanding.

THE PNC FINANCIAL SERVICES GROUP, INC.

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


	Pages
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).
Consolidated Income Statement		76
Consolidated Statement of Comprehensive Income		77
Consolidated Balance Sheet		78
Consolidated Statement Of Cash Flows		79

Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies		81
Note 2 Acquisition and Divestiture Activity		85
Note 3 Loan Sale and Servicing Activities and Variable Interest Entities		86
Note 4 Loans and Commitments to Extend Credit		92
Note 5 Asset Quality		92
Note 6 Purchased Loans		108
Note 7 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit		109
Note 8 Investment Securities		112
Note 9 Fair Value		118
Note 10 Goodwill and Other Intangible Assets		130
Note 11 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities		133
Note 12 Certain Employee Benefit And Stock Based Compensation Plans		134
Note 13 Financial Derivatives		136
Note 14 Earnings Per Share		145
Note 15 Total Equity And Other Comprehensive Income		146
Note 16 Income Taxes		151
Note 17 Legal Proceedings		151
Note 18 Commitments and Guarantees		154
Note 19 Segment Reporting		158
Note 20 Subsequent Events		161

Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis		162

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Financial Review
Consolidated Financial Highlights		1
Executive Summary		3
Consolidated Income Statement Review		11
Consolidated Balance Sheet Review		14
Off-Balance Sheet Arrangements And Variable Interest Entities		27
Fair Value Measurements		27
European Exposure		28
Business Segments Review		30
Critical Accounting Estimates And Judgments		42
Status Of Qualified Defined Benefit Pension Plan		44
Recourse And Repurchase Obligations		44
Risk Management		48
Internal Controls And Disclosure Controls And Procedures		69
Glossary Of Terms		70
Cautionary Statement Regarding Forward-Looking Information		74

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		48-69, 118-130 and 136-144

Item 4. Controls and Procedures.		69

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.		164

Item 1A. RiskFactors.		164

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds.		164

Item 6. Exhibits.		165
Exhibit Index.		165
Signature		165

Corporate Information		166

THE PNC FINANCIAL SERVICES GROUP, INC.

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

MD&A TABLE REFERENCE


Table	Description	Page
1	Consolidated Financial Highlights		1
2	Summarized Average Balance Sheet		8
3	Results Of Businesses – Summary		9
4	Net Interest Income and Net Interest Margin		11
5	Noninterest Income		12
6	Summarized Balance Sheet Data		14
7	Details Of Loans		14
8	Accretion – Purchased Impaired Loans		15
9	Purchased Impaired Loans – Accretable Yield		15
10	Valuation of Purchased Impaired Loans		16
11	Weighted Average Life of the Purchased Impaired Portfolios		16
12	Accretable Difference Sensitivity – Total Purchased Impaired Loans		17
13	Net Unfunded Credit Commitments		17
14	Investment Securities		18
15	Vintage, Current Credit Rating and FICO Score for Asset-Backed Securities		19
16	Other-Than-Temporary Impairments		20
17	Net Unrealized Gains and Losses on Non-Agency Securities		21
18	Loans Held For Sale		22
19	Details Of Funding Sources		23
20	Shareholders’ Equity		24
21	Basel I Risk-Based Capital		25
22	Estimated Pro forma Basel III Tier 1 Common Capital Ratio		26
23	Fair Value Measurements – Summary		27
24	Summary of European Exposure		28
25	Retail Banking Table		31
26	Corporate & Institutional Banking Table		33
27	Asset Management Group Table		36
28	Residential Mortgage Banking Table		38
29	BlackRock Table		40
30	Non-Strategic Assets Portfolio Table		40
31	Pension Expense – Sensitivity Analysis		44
32	Analysis of Quarterly Residential Mortgage Repurchase Claims by Vintage		45
33	Analysis of Quarterly Residential Mortgage Unresolved Asserted Indemnification and Repurchase Claims		46
34	Analysis of Residential Mortgage Indemnification and Repurchase Claim Settlement Activity		46
35	Analysis of Home Equity Unresolved Asserted Indemnification and Repurchase Claims		47
36	Analysis of Home Equity Indemnification and Repurchase Claim Settlement Activity		47
37	Nonperforming Assets By Type		50
38	OREO and Foreclosed Assets		51
39	Change in Nonperforming Assets		51
40	Accruing Loans Past Due 30 To 59 Days		52
41	Accruing Loans Past Due 60 To 89 Days		52
42	Accruing Loans Past Due 90 Days Or More		53
43	Home Equity Lines of Credit – Draw Period End Dates		54
44	Consumer Real Estate Related Loan Modifications		55
45	Consumer Real Estate Related Loan Modifications Re-Default by Vintage		56
46	Summary of Troubled Debt Restructurings		57
47	Loan Charge-Offs And Recoveries		58
48	Allowance for Loan and Lease Losses		59
49	Credit Ratings as of June 30, 2013 for PNC and PNC Bank, N.A.		63
50	Contractual Obligations		64
51	Other Commitments		64
52	Interest Sensitivity Analysis		65
53	Net Interest Income Sensitivity to Alternative Rate Scenarios (Second Quarter 2013)		65
54	Alternate Interest Rate Scenarios: One Year Forward		66
55	Enterprise-Wide Trading-Related Gains/Losses Versus Value-at-Risk		66
56	Trading Revenue		67
57	Equity Investments Summary		67
58	Financial Derivatives Summary		69

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second 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		87
60	Consolidated VIEs – Carrying Value		88
61	Assets and Liabilities of Consolidated VIEs		89
62	Non-Consolidated VIEs		89
63	Loans Outstanding		92
64	Net Unfunded Credit Commitments		92
65	Age Analysis of Past Due Accruing Loans		93
66	Nonperforming Assets		94
67	Commercial Lending Asset Quality Indicators		96
68	Home Equity and Residential Real Estate Balances		97
69	Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans		97
70	Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans		99
71	Credit Card and Other Consumer Loan Classes Asset Quality Indicators		101
72	Summary of Troubled Debt Restructurings		102
73	Financial Impact and TDRs by Concession Type		103
74	TDRs which have Subsequently Defaulted		105
75	Impaired Loans		107
76	Purchased Impaired Loans – Balances		108
77	Purchased Impaired Loans – Accretable Yield		108
78	Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data		110
79	Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit		111
80	Investment Securities Summary		112
81	Gross Unrealized Loss and Fair Value of Securities Available for Sale		113
82	Credit Impairment Assessment Assumptions – Non-Agency Residential Mortgage-Backed and Asset-Backed Securities		114
83	Other-Than-Temporary Impairments		115
84	Rollforward of Cumulative OTTI Credit Losses Recognized in Earnings		115
85	Gains (Losses) on Sales of Securities Available for Sale		116
86	Contractual Maturity of Debt Securities		116
87	Weighted-Average Expected Maturity of Mortgage and Other Asset-Backed Debt Securities		117
88	Fair Value of Securities Pledged and Accepted as Collateral		117
89	Fair Value Measurements – Summary		119
90	Reconciliation of Level 3 Assets and Liabilities		120
91	Fair Value Measurement – Recurring Quantitative Information		124
92	Fair Value Measurements – Nonrecurring		126
93	Fair Value Measurements – Nonrecurring Quantitative Information		126
94	Fair Value Option – Changes in Fair Value		127
95	Fair Value Option – Fair Value and Principal Balances		128
96	Additional Fair Value Information Related to Financial Instruments		129
97	Changes in Goodwill by Business Segment		130
98	Other Intangible Assets		130
99	Amortization Expense on Existing Intangible Assets		131
100	Summary of Changes in Customer-Related Other Intangible Assets		131
101	Commercial Mortgage Servicing Rights		131
102	Residential Mortgage Servicing Rights		131
103	Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions		132
104	Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions		132
105	Fees from Mortgage and Other Loan Servicing		132
106	Net Periodic Pension and Postretirement Benefits Costs		134
107	Option Pricing Assumptions		135
108	Stock Option Rollforward		135

THE PNC FINANCIAL SERVICES GROUP, INC.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE (continued)


Table	Description	Page
109	Nonvested Incentive/Performance Unit Share Awards and Restricted Stock/Share Unit Awards – Rollforward		136
110	Nonvested Cash-Payable Restricted Share Units – Rollforward		136
111	Derivatives Total Notional or Contractual Amounts and Fair Values		139
112	Derivative Assets and Liabilities Offsetting		140
113	Derivatives Designated in GAAP Hedge Relationships – Fair Value Hedges		142
114	Derivatives Designated in GAAP Hedge Relationships – Cash Flow Hedges		142
115	Derivatives Designated in GAAP Hedge Relationships – Net Investment Hedges		143
116	Gains (Losses) on Derivatives Not Designated as Hedging Instruments under GAAP		143
117	Credit Default Swaps		144
118	Credit Ratings of Credit Default Swaps		144
119	Referenced/Underlying Assets of Credit Default Swaps		144
120	Risk Participation Agreements Sold		144
121	Internal Credit Ratings of Risk Participation Agreements Sold		144
122	Basic and Diluted Earnings per Common Share		145
123	Rollforward of Total Equity		146
124	Other Comprehensive Income		147
125	Accumulated Other Comprehensive Income (Loss) Components		150
126	Net Operating Loss Carryforwards and Tax Credit Carryforwards		151
127	Net Outstanding Standby Letters of Credit		154
128	Analysis of Commercial Mortgage Recourse Obligations		155
129	Analysis of Indemnification and Repurchase Liability for Asserted Claims and Unasserted Claims		156
130	Reinsurance Agreements Exposure		157
131	Reinsurance Reserves – Rollforward		157
132	Resale and Repurchase Agreements Offsetting		158
133	Results Of Businesses		160

FINANCIAL REVIEW

THE PNC FINANCIAL SERVICES GROUP, INC.

TABLE 1: CONSOLIDATED FINANCIAL HIGHLIGHTS


Dollars in millions, except per share data Unaudited	Three months ended June 30						Six months ended June 30
Dollars in millions, except per share data Unaudited	2013			2012			2013			2012
Financial Results (a)
Revenue
Net interest income	$	2,258		$	2,526		$	4,647		$	4,817
Noninterest income		1,806			1,097			3,372			2,538
Total revenue		4,064			3,623			8,019			7,355
Noninterest expense		2,435			2,648			4,830			5,103
Pretax, pre-provision earnings (b)		1,629			975			3,189			2,252
Provision for credit losses		157			256			393			441
Income before income taxes and noncontrolling interests	$	1,472		$	719		$	2,796		$	1,811
Net income	$	1,123		$	546		$	2,127		$	1,357
Less:
Net income (loss) attributable to noncontrolling interests		1			(5	)		(8	)		1
Preferred stock dividends and discount accretion		53			25			128			64
Net income attributable to common shareholders	$	1,069		$	526		$	2,007		$	1,292
Diluted earnings per common share	$	1.99		$	.98		$	3.76		$	2.42
Cash dividends declared per common share	$	.44		$	.40		$	.84		$	.75
Performance Ratios
Net interest margin (c)		3.58	%		4.08	%		3.69	%		3.99	%
Noninterest income to total revenue		44			30			42			35
Efficiency		60			73			60			69
Return on:
Average common shareholders’ equity		11.81			6.23			11.25			7.80
Average assets		1.49			.74			1.42			.94

See page 70 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 June 30, 2013 and June 30, 2012 were $40 million and $35 million, respectively. The taxable-equivalent adjustments to net interest income for the six months ended June 30, 2013 and June 30, 2012 were $80 million and $66 million, respectively.

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

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


Unaudited	June 30 2013			December 31 2012			June 30 2012
Balance Sheet Data (dollars in millions, except per share data)
Assets	$	304,415		$	305,107		$	299,575
Loans (b) (c)		189,775			185,856			180,425
Allowance for loan and lease losses (b)		3,772			4,036			4,156
Interest-earning deposits with banks (b)		3,797			3,984			3,995
Investment securities (b)		57,449			61,406			61,937
Loans held for sale (c)		3,814			3,693			3,333
Goodwill and other intangible assets		11,228			10,869			10,962
Equity investments (b) (d)		10,054			10,877			10,617
Other assets (b) (c)		24,297			23,679			24,559

Noninterest-bearing deposits		66,708			69,980			64,476
Interest-bearing deposits		145,571			143,162			142,447
Total deposits		212,279			213,142			206,923
Transaction deposits		175,564			176,705			166,043
Borrowed funds (b) (c)		39,864			40,907			43,689
Shareholders’ equity		40,286			39,003			37,005
Common shareholders’ equity		36,347			35,413			33,884
Accumulated other comprehensive income		45			834			402

Book value per common share	$	68.46		$	67.05		$	64.00
Common shares outstanding (millions)		531			528			529
Loans to deposits		89	%		87	%		87	%

Client Assets (billions)
Discretionary assets under management	$	117		$	112		$	109
Nondiscretionary assets under administration		116			112			105
Total assets under administration		233			224			214
Brokerage account assets		39			38			36
Total client assets	$	272		$	262		$	250

Capital Ratios
Basel I capital ratios
Tier 1 common		10.1	%		9.6	%		9.3	%
Tier 1 risk-based (e)		12.0			11.6			11.4
Total risk-based (e)		15.2			14.7			14.2
Leverage (e)		10.9			10.4			10.1
Common shareholders’ equity to assets		11.9			11.6			11.3
Pro forma Basel III Tier 1 common (f)		8.2	%		7.5	%		N/A	(g)

Asset Quality
Nonperforming loans to total loans		1.75	%		1.75	%		1.92	%
Nonperforming assets to total loans, OREO and foreclosed assets		1.99			2.04			2.31
Nonperforming assets to total assets		1.24			1.24			1.39
Net charge-offs to average loans (for the three months ended) (annualized) (h)		.44			.67			.71
Allowance for loan and lease losses to total loans		1.99			2.17			2.30
Allowance for loan and lease losses to nonperforming loans (i)		114	%		124	%		120	%
Accruing loans past due 90 days or more	$	1,762		$	2,351		$	2,483

(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 understanding of the prior Basel III rule proposals issued by the U.S. banking agencies in June 2012. See Table 21: Basel I Risk-Based Capital and Table 22: Estimated Pro forma Basel III Tier 1 Common Capital Ratio and related information for further detail on how this pro forma ratio differs from the Basel I Tier 1 common capital ratio. The Basel III ratio will replace the current Basel I ratio for this regulatory metric when PNC exits the parallel run qualification phase.

(g)	Pro forma Basel III Tier 1 common capital ratio not disclosed in our second 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 were taken.

(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 and our First Quarter 2013 Form 10-Q: 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 are 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, in accordance with our capital plan included in our 2013 Comprehensive Capital Analysis and Review (CCAR) submission to the Board of Governors of the Federal Reserve System (Federal Reserve). We continue to improve our capital levels and ratios through retention of quarterly earnings and expect to build capital through retention of future earnings. During 2013, PNC does not expect to repurchase common stock through a share buyback program. PNC continues to maintain a strong bank and 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.

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 Federal Reserve and our primary bank regulators as part of the 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

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

we announced on March 14, 2013, the Federal Reserve accepted the capital plan 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 with a payment date of May 5, 2013, payable the next business day, to shareholders of record at the close of business on April 16, 2013. On July 3, 2013, our board of directors declared a quarterly common stock cash dividend of 44 cents per share with a payment date of August 5, 2013 to shareholders of record at the close of business on July 15, 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 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.

New and evolving capital and liquidity standards will have a significant effect on banks and bank holding companies, including PNC. In July 2013, the U.S. banking agencies issued final rules to implement the Basel III capital framework in the United States. In addition, the banking agencies issued final rules to revise the framework for the risk-weighting of assets under Basel I and Basel II (referred to as the standardized approach and the advanced approaches, respectively). For banking organizations subject to Basel II (such as PNC), the Basel III final rules become effective on January 1, 2014, although many provisions are phased-in over a period of years, with the rules generally fully phased-in as of January 1, 2019. The changes made to the Basel I risk-weighting framework by the standardized approach rules become effective on January 1, 2015, and the changes made to the Basel II risk-weighting framework by the advanced approaches rules become effective on January 1, 2014.

The Basel III final rules, among other things, narrow the definition of regulatory capital, require banking organizations with $15 billion or more in assets to phase-out trust preferred securities from Tier 1 regulatory capital, establish a new Tier 1 common capital requirement for banking organizations and revise the capital levels at which a bank would be subject to prompt corrective action. As of June 30, 2013, PNC had $216 million of trust preferred securities included in Tier 1 capital which, under these rules and Dodd-Frank, will no longer qualify as Tier 1 capital over time to the extent they remain outstanding. The final rules also would require that significant common stock investments in unconsolidated financial institutions (as defined in the final rules), as well as mortgage servicing rights and deferred tax assets, be deducted from regulatory capital to the extent such items individually exceed 10%, or in the aggregate exceed 15%, of the organization’s adjusted Tier 1 common capital. The Basel III final rules also significantly limit the extent to which minority interests in consolidated subsidiaries (including minority interests in the form of REIT preferred securities) may be included in regulatory capital. As of June 30, 2013, PNC had approximately $1 billion of REIT preferred securities outstanding that will be subject to these limitations over time to the extent they remain outstanding. In addition, for Basel II banking organizations, like PNC, the final rules remove the filter that currently excludes unrealized gains and losses (other than those resulting from other-than-temporary impairments) on available for sale debt securities from affecting regulatory capital, which could increase the volatility of regulatory capital of Basel II banking organizations in response to changes in interest rates.

When fully phased-in on January 1, 2019, the Basel III rules require that banking organizations maintain a minimum Tier 1 common ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0% and a leverage ratio of 4.0%. Moreover,

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

the final rules, when fully phased-in, will also require banking organizations to maintain a Tier 1 common ratio of at least 7.0%, a Tier 1 capital ratio of at least 8.5%, and a total capital ratio of at least 10.5% to avoid limitations on capital distributions (including common stock dividends and share repurchases) and certain discretionary incentive compensation payments. For Basel II banking organizations (such as PNC), these higher buffer levels above the regulatory minimums could be supplemented by a countercyclical capital buffer of up to an additional 2.5% during periods of excessive credit growth, although this buffer is initially set at zero in the United States. After a Basel II banking organization exits its “parallel run” qualification phase under the Basel II framework, its compliance with these minimum and buffer ratio levels will be determined using the lower of the organization’s capital ratios calculated under the standardized or the advanced approach. For additional information concerning PNC’s estimated fully phased-in pro forma Basel III Tier 1 common ratio as well as the Basel II “parallel run” process, please see Balance Sheet Highlights in this Executive Summary section, and Capital and Table 22: Estimated Pro Forma Basel III Tier 1 Common Capital in the Consolidated Balance Sheet Review section, of this Report.

Basel II banking organizations also are subject to a new minimum 3% supplementary leverage ratio that becomes effective on January 1, 2018, with public reporting of the ratio beginning in 2015. Unlike the existing leverage ratio, the denominator of the supplementary leverage ratio takes into account certain off-balance sheet items, including loan commitments and potential future exposure under derivative contracts. We estimate that our supplementary leverage ratio currently exceeds the new minimum ratio requirement applicable to PNC that goes into effect in 2018. In July 2013, the U.S. banking agencies separately requested comment on a proposed rule that would raise the supplemental leverage ratio for U.S. bank holding companies that have $700 billion or more in total consolidated assets or $10 trillion or more in assets under custody and for the insured depository institution subsidiaries of these bank holding companies. Based on the asset and custody thresholds included in the proposed rule, PNC and PNC Bank, National Association would not be subject to this higher proposed supplemental leverage ratio.

As noted above, the final rules adopted by the U.S. banking agencies in July 2013 revise both the Basel I and Basel II risk-weighting framework. Both the standardized approach rules (which will replace the Basel I risk-weighting framework as of January 1, 2015) and the advanced approaches modifications to the Basel II risk-weighting framework replace the use of credit ratings with alternative methodologies for assessing creditworthiness and establish a new framework (referred to as the Simplified Supervisory Framework Approach) for risk-weighting securitization exposures (such as privately issued mortgage-backed securities and asset-backed securities). The standardized approach also would, among other things, increase the risk weight applicable to high volatility commercial real estate exposures and past due exposures,

establish a new framework for cleared derivatives and securities financing transactions, and require that equity exposures (other than those that are deducted from capital) be risk-weighted in a manner similar to the existing Basel II rules for equity exposures. In addition, Basel II banks that have not exited the parallel run qualification phase by the first quarter of 2015 are required to make certain public disclosures after that date under the standardized approach until the bank exits parallel run (after which it would make the public disclosures required by the advanced approaches rule). The advanced approaches rule would, among other things, significantly alter the methodology for determining counterparty credit risk weights, including the establishment of a credit valuation adjustment for counterparty risk in over-the-counter (OTC) derivative transactions, under Basel II.

The need to maintain more and higher quality capital could limit PNC’s business activities, including lending, and its ability to expand, either organically or through acquisitions. It could also result in PNC taking steps to increase its capital that may be dilutive to shareholders or being limited in its ability to pay dividends or otherwise return capital to shareholders, or selling or refraining from acquiring assets, the capital requirements for which are inconsistent with the assets’ underlying risks. Moreover, although these new requirements are being phased in over time, U.S. federal banking agencies have been taking into account expectations regarding the ability of banks to meet these new requirements, including under stressed conditions, in approving actions that represent uses of capital, such as dividend increases, share repurchases and acquisitions.

On July 31, 2013, the United States District Court for the District of Columbia granted summary judgment to the plaintiffs in NACS, et al. v. Board of Governors of the Federal Reserve System. The decision vacated the debit card interchange and network processing rules that went into effect in October 2011 and that were adopted by the Federal Reserve to implement provisions of the Dodd-Frank Act. The court found among other things that the debit card interchange fees permitted under the rules allowed card issuers to recover costs that were not permitted by the statute. The court has temporarily stayed its decision. We do not now know the ultimate impact of this ruling, nor the timing of any such impact, but if the ruling were to take effect it could have a materially adverse impact on our debit card interchange revenues. Debit card interchange revenue for the year ended December 31, 2012 was approximately $305 million.

For additional information concerning recent legislative and regulatory developments, 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.

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

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 U.S. 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, in our 2012 Form 10-K and in our other 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,

•

Our ability to effectively manage PNC’s balance sheet and generate net interest income,

•

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 and protect PNC’s systems and customer information,

•

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 to acceptable levels 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 second quarter of 2013 of $1.1 billion increased $.6 billion compared to the second quarter of 2012, driven by revenue growth of 12%, a decline in noninterest expense of 8% and a decrease in provision for credit losses. For additional detail, please see the Consolidated Income Statement Review section in this Financial Review.

•

Net interest income of $2.3 billion for the second quarter of 2013 decreased 11% compared with the second quarter of 2012, reflecting the impact of lower purchase accounting accretion and lower yields on loans and securities, partially offset by lower rates paid on borrowed funds.

•

Net interest margin decreased to 3.58% for the second quarter of 2013 compared to 4.08% for the second quarter of 2012. Consistent with the decline in net interest income, the decrease in net interest margin reflected lower purchase accounting accretion and lower yields on loans and securities, partially offset by lower rates paid on borrowed funds.

•

Noninterest income of $1.8 billion for the second quarter of 2013 increased by $.7 billion compared to the second quarter of 2012. The increase was attributable to lower provision for residential mortgage repurchase obligations, strong customer fee income and higher gains on asset sales and valuations.

•

The provision for credit losses decreased to $157 million for the second quarter of 2013 compared to $256 million for the second quarter of 2012 driven by overall credit quality improvement.

•

Noninterest expense of $2.4 billion for the second quarter of 2013 decreased 8% compared with the second quarter of 2012, primarily due to lower noncash charges related to redemption of trust preferred securities, the impact of second quarter 2012 integration costs, and lower residential mortgage foreclosure-related expenses.

CREDIT QUALITY HIGHLIGHTS

•

Overall credit quality improved during the second quarter of 2013. The following comparisons to December 31, 2012 were impacted by alignment with interagency guidance in the first quarter of 2013 on

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

practices for loans and lines of credit related to consumer lending. This had the overall effect of (i) accelerating charge-offs, (ii) increasing nonperforming loans and (iii), in the case of loans accounted for under the fair value option, increasing nonaccrual loans. In addition, commercial real estate delinquencies declined due to improved performance. See the Credit Risk Management section of this Financial Review for further detail.

•

Nonperforming assets of $3.8 billion at June 30, 2013 remained relatively flat compared to December 31, 2012. The comparison includes the addition of $426 million of consumer loans to nonperforming pursuant to alignment with interagency guidance for loans and lines of credit that occurred in the first quarter of 2013, substantially offset by a reduction in total commercial nonperforming loans due to credit quality improvement and lower consumer nonperforming loans largely due to principal activity. Nonperforming assets to total assets were 1.24% at both June 30, 2013 and December 31, 2012 compared with 1.39% at June 30, 2012.

•

Overall delinquencies of $2.8 billion decreased $.9 billion as of June 30, 2013 compared with December 31, 2012. The reduction was partially due to a decline in total consumer loan delinquencies of $395 million pursuant to alignment with interagency guidance in which loans were moved from various delinquency categories to either nonperforming or, in the case of loans accounted for under the fair value option, nonaccruing. In addition, during the first six months of 2013, government insured residential real estate accruing loans past due 90 days or more declined $324 million, the majority of which were transferred to OREO. Finally, commercial real estate delinquencies decreased $84 million due to improved performance.

•

Net charge-offs of $208 million decreased $107 million compared to the second quarter of 2012, reflecting a decrease in home equity, commercial and commercial real estate net charge-offs of $97 million. On an annualized basis, net charge-offs were 0.44% of average loans for the second quarter of 2013 and 0.71% of average loans for the second quarter of 2012. Net charge-offs for the first six months were $664 million, up slightly compared to $648 million of net charge-offs for the first six months of 2012, due to the impact of alignment with interagency guidance in first quarter 2013, partially offset by improving credit quality in the second quarter of 2013. On an annualized basis, net charge-offs for the first half of 2013 were 0.71% of average loans and 0.76% of average loans for the first half of 2012.

•

The allowance for loan and lease losses was 1.99% of total loans and 114% of nonperforming loans at June 30, 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 $3.9 billion to $190 billion at June 30, 2013 compared to December 31, 2012.

•

Total commercial lending increased by $4.3 billion, or 4%, from December 31, 2012, as a result of growth in commercial loans to new and existing customers.

•

Total consumer lending decreased $.4 billion from December 31, 2012 primarily from pay downs of residential real estate, education and credit card loans, partially offset by increases in home equity and automobile loans.

•

Total deposits decreased by $0.9 billion to $212 billion at June 30, 2013 compared with December 31, 2012.

•

PNC’s well-positioned balance sheet remained core funded with a loans to deposits ratio of 89% at June 30, 2013.

•

PNC had a strong capital position at June 30, 2013.

•

The Basel I Tier 1 common capital ratio increased to 10.1% compared with 9.6% at December 31, 2012.

•

The pro forma Basel III Tier 1 common capital ratio was an estimated 8.2% at June 30, 2013 compared with 7.5% at December 31, 2012 without benefit of phase-ins.

–

PNC continues to evaluate the Basel III final rules adopted in July 2013. Pending completion of that evaluation this estimate is based on our understanding of the prior U.S. Basel III rule proposals issued in 2012. We do not believe the changes in the final rules from the proposals will negatively impact our common capital ratio.

–

See the Capital discussion and Table 22: Estimated Pro forma Basel III Tier 1 Common Capital Ratio 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 six months of 2013 and 2012 and balances at June 30, 2013 and December 31, 2012, respectively.

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

2012 ACQUISITION AND DIVESTITURE ACTIVITY

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.

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.

See Note 2 Acquisition and Divestiture Activity in the Notes To Consolidated Financial Statements in this Report for additional information regarding this 2012 acquisition and divestiture activity.

AVERAGE CONSOLIDATED BALANCE SHEET HIGHLIGHTS

Table 2: Summarized Average Balance Sheet


Six months ended June 30 Dollars in millions	2013		2012
Average assets
Interest-earning assets
Investment securities	$	57,683	$	61,469
Loans		187,359		171,239
Other		11,099		11,225
Total interest-earning assets		256,141		243,933
Other		46,591		44,914
Total average assets	$	302,732	$	288,847
Average liabilities and equity
Interest-bearing liabilities
Interest-bearing deposits	$	145,014	$	138,220
Borrowed funds		39,161		41,668
Total interest-bearing liabilities		184,175		179,888
Noninterest-bearing deposits		64,800		59,189
Other liabilities		11,650		11,023
Equity		42,107		38,747
Total average liabilities and equity	$	302,732	$	288,847

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 information on changes in selected Consolidated Balance Sheet categories at June 30, 2013 compared with December 31, 2012.

Total average assets increased to $302.7 billion for the first six months of 2013 compared with $288.8 billion for the first six months of 2012, primarily due to an increase of $12.2 billion in average interest-earning assets driven by an increase in average total loans, including the impact of loans added in the RBC Bank (USA) acquisition, which closed March 2, 2012.

Total assets were $304.4 billion at June 30, 2013 compared with $305.1 billion at December 31, 2012.

Average total loans increased by $16.1 billion to $187.4 billion for the first six months of 2013 compared with the six months of 2012, including increases in average commercial loans of $11.5 billion and average consumer loans of $3.0 billion. The overall increase in loans reflected organic loan growth, primarily in our Corporate & Institutional Banking segment, as well as the impact of loans added in the RBC Bank (USA) acquisition.

Loans represented 73% of average interest-earning assets for the first six months of 2013 and 70% of average interest-earning assets for the first six months of 2012.

Average investment securities decreased $3.8 billion to $57.7 billion in the first six months of 2013 compared with the first six months of 2012, primarily as a result of principal payments, including prepayments and maturities, partially offset by net purchase activity. During the second quarter of 2013, we entered into certain transactions to purchase securities that will be delivered in the third and fourth quarters of 2013. Total investment securities comprised 23% of average interest-earning assets for the first six months of 2013 and 25% for the first six months of 2012.

Average noninterest-earning assets increased $1.7 billion to $46.6 billion in the six months of 2013 compared with the six months of 2012. The increase included the impact of higher adjustments for net unrealized gains on securities, which are included in noninterest-earning assets for average balance sheet purposes, the six month impact of the RBC Bank (USA) acquisition, including goodwill, and an increase in equity investments. These increases were partially offset by decreased unsettled securities sales, which are included in noninterest-earning assets for average balance sheet purposes.

Average total deposits were $209.8 billion for the first six months of 2013 compared with $197.4 billion for the first six months of 2012. The increase of $12.4 billion primarily resulted from an increase of $17.4 billion in average transaction deposits which grew to $173.6 billion for the first six months of 2013 compared with $156.2 billion for the first six months of 2012. Growth in average interest-bearing demand deposits, average noninterest-bearing deposits and average money market deposits drove the increase in average transaction deposits, which resulted from the six month impact of the RBC Bank (USA) acquired deposits and organic growth. These increases were partially offset by a decrease of $5.1 billion in average retail certificates of deposit attributable to runoff of maturing accounts. Total deposits at June 30, 2013 were $212.3 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 six months of 2013 and 68% for the first six months of 2012.

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

Average borrowed funds decreased by $2.5 billion to $39.2 billion for the first six months of 2013 compared with the first six months of 2012. Lower average Federal Home Loan Bank (FHLB) borrowings were partially offset by an increase in average commercial paper. Total borrowed funds at June 30, 2013 were $39.9 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 borrowed funds.

BUSINESS SEGMENT HIGHLIGHTS

Total business segment earnings were $1.9 billion for the first six months of 2013 and $1.6 billion for the first six months of 2012. Highlights of results for the first six months and the second quarter 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 six months of 2013 and 2012, including presentation differences from Note 19 Segment Reporting in our Notes To Consolidated Financial Statements 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.

Table 3: Results Of Businesses – Summary

(Unaudited)


	Net Income					Revenue				Average Assets (a)
Six months ended June 30-in millions	2013		2012			2013		2012		2013		2012
Retail Banking	$	278	$	283		$	3,037	$	2,987	$	74,317	$	71,420
Corporate & Institutional Banking		1,153		1,072			2,761		2,705		111,941		97,866
Asset Management Group		79		74			509		483		7,210		6,613
Residential Mortgage Banking		65		(152	)		519		184		10,604		11,745
BlackRock		220		178			287		227		5,982		5,597
Non-Strategic Assets Portfolio		139		138			394		421		10,511		12,407
Total business segments		1,934		1,593			7,507		7,007		220,565		205,648
Other (b) (c)		193		(236	)		512		348		82,167		83,199
Total	$	2,127	$	1,357		$	8,019	$	7,355	$	302,732	$	288,847

(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 $278 million in the first six months of 2013 compared with $283 million for the same period a year ago. Earnings were essentially flat compared to a year ago as higher noninterest income was offset by lower net interest income and higher noninterest expense. Retail Banking’s core strategy is to efficiently grow customers by providing an experience that builds customer loyalty and expands loan, investment product, and money management share of wallet. Net checking relationships grew 114,000 in the first six 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.

In the second quarter of 2013, Retail Banking earned $158 million compared with earnings of $136 million for the second quarter of 2012. The increase in earnings was primarily due to the gain on sale of 2 million Visa Class B common shares, higher fee income, lower provision for credit losses and lower additions to legal reserves. These increases were partially offset by a decline in net interest income.

Corporate & Institutional Banking

Corporate & Institutional Banking earned $1.2 billion in the first six months of 2013 as compared with $1.1 billion in the first six months of 2012. The increase in earnings was primarily due to an increase in noninterest income and improved credit quality, partially offset by lower net interest income. We continued to focus on building client relationships, including increasing cross sales and adding new clients where the risk-return profile was attractive.

In the second quarter of 2013, Corporate & Institutional Banking earned $612 million compared with earnings of $577 million in the second quarter of 2012. The increase reflected higher noninterest income and a benefit on the provision for credit losses, which were partially offset by a decrease in net interest income.

Asset Management Group

Asset Management Group earned $79 million through the first six months of 2013 compared with $74 million in the same period of 2012. The increase in earnings was due to higher

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

revenue of $26 million partially offset by higher noninterest expense. Assets under administration were $233 billion as of June 30, 2013 compared to $214 billion as of June 30, 2012. The core growth strategies for the business continue to include: investing in higher growth geographies, increasing internal referral sales and adding new front line sales staff.

In the second quarter of 2013, Asset Management Group earned $36 million compared with $38 million in the second quarter of 2012. The decrease is primarily due to an increase in noninterest expense from strategic business investments and an increase in the provision for credit losses.

Residential Mortgage Banking

Residential Mortgage Banking reported earnings of $65 million in the first six months of 2013 compared with losses of $152 million in the first six months of 2012. Earnings increased from the prior year six month period primarily as a result of decreased provision for residential mortgage repurchase obligations.

In the second quarter of 2013, Residential Mortgage Banking reported earnings of $20 million compared with a loss of $213 million in the second quarter of 2012 due to a decrease in provision for residential mortgage repurchase obligations and a decrease in the noninterest expense.

BlackRock

Our BlackRock business segment earned $220 million in the first six months of 2013 and $178 million in the first six months of 2012. In the second quarter of 2013, business segment earnings from BlackRock were $112 million compared with $88 million in the second quarter of 2012.

Non-Strategic Assets Portfolio

This business segment consists primarily of acquired non-strategic assets. Non-Strategic Assets Portfolio had earnings of $139 million for the first six months of 2013 compared with $138 million in the first six months of 2012. Earnings were relatively flat year-over-year as higher noninterest income and lower noninterest expense were offset by lower net interest income and a higher provision for credit losses.

In the second quarter of 2013, Non-Strategic Assets Portfolio had earnings of $60 million compared with $67 million for the second quarter of 2012. The decrease was due to a decrease in net interest income driven by lower purchase accounting accretion and lower loan balances.

Other

“Other” reported earnings of $193 million for the six months of 2013 compared with a loss of $236 million for the first six months of 2012. In the second quarter of 2013, “Other” reported earnings of $125 million compared with a loss of $147 million in the second quarter of 2012.

10 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 six months of 2013 was $2.1 billion, compared with net income of $1.4 billion for the first six months of 2012. The increase in year-over-year net income was driven by revenue growth of 9%, a decline in noninterest expense of 5% and a decrease in provision for credit losses. Higher revenue for the first six months of 2013 reflected lower provision for residential mortgage repurchase obligations, strong customer fee income and higher gains on asset sales and valuations and was partially offset by lower net interest income.

Net income for the second quarter of 2013 was $1.1 billion compared with $.5 billion for the second quarter of 2012. The increase in net income was due to revenue growth of 12%, a decline in noninterest expense of 8% and a decrease in provision for credit losses. Higher revenue for the second quarter of 2013 reflected lower provision for residential mortgage repurchase obligations, strong customer fee income and higher gains on asset sales and valuations, partially offset by lower net interest income.

NET INTEREST INCOME

Table 4: Net Interest Income and Net Interest Margin


	Six months ended June 30						Three months ended June 30
Dollars in millions	2013			2012			2013			2012
Net interest income	$	4,647		$	4,817		$	2,258		$	2,526
Net interest margin		3.69	%		3.99	%		3.58	%		4.08	%

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 decreased by $170 million, or 4%, in the first half of 2013 compared with the first half of 2012. Net interest income decreased by $268 million, or 11%, in the

second quarter of 2013 compared with the second quarter of 2012. The decline in both comparisons reflected lower purchase accounting accretion, the impact of lower yields on loans and securities, as well as the impact of lower securities balances during the quarter as a result of portfolio management activities. The impact of the decline in earning asset yields and lower security balances was partially offset by increases in loan balances, reflecting commercial and consumer loan growth over the period, and lower rates paid on borrowed funds. The six months period comparison was also impacted by the March 2012 RBC Bank (USA) acquisition.

During the second quarter of 2013, we entered into transactions to purchase securities that will be delivered in the third and fourth quarters of 2013. As a result, we expect interest income from securities to improve in the third quarter versus second quarter.

The declines in net interest margin for both the first six months and second quarter of 2013 compared with the 2012 periods reflected lower purchase accounting accretion and lower yields on earning assets.

The decrease for the first six months of 2013 included a 43 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 17 basis points. In the second quarter comparison, the yield on total interest-earning assets decreased 60 basis points, partially offset by a decrease in the weighted-average rate accrued on total interest-bearing liabilities of 12 basis points.

The decreases in the yield on interest-earning assets were primarily due to lower rates on new loans and purchased securities in the ongoing low rate environment. The decreases in the rate accrued on interest-bearing liabilities were 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.

With respect to the third quarter of 2013, we expect net interest income to be modestly lower as we expect the continuing impact of lower loan and security yields and a decline in purchase accounting accretion to be partially offset by loan growth and the impact of our securities portfolio management activities.

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.

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

NONINTEREST INCOME

Table 5: Noninterest Income


	Six months ended June 30						Three months ended June 30
Dollars in millions	2013			2012			2013			2012
Noninterest income
Asset management	$	648		$	562		$	340		$	278
Consumer services		610			554			314			290
Corporate services		603			522			326			290
Residential mortgage		401			57			167			(173	)
Service charges on deposits		283			271			147			144
Net gains on sales of securities		75			119			61			62
Net other-than-temporary impairments		(14	)		(72	)		(4	)		(34	)
Other		766			525			455			240
Total noninterest income	$	3,372		$	2,538		$	1,806		$	1,097

Noninterest income increased by $834 million, or 33%, during the first half of 2013 compared to the first half of 2012. Noninterest income for the second quarter increased by $709 million, or 65%, compared to the second quarter of 2012. Both increases were driven by lower provision for residential mortgage repurchase obligations in the 2013 periods, strong customer fee income and higher gains on asset sales and valuations.

Asset management revenue, including BlackRock, increased $86 million, or 15% in the first six months of 2013 compared to the first six months of 2012. The comparison included an increase of $62 million, or 22%, in the second quarter compared to the prior year quarter. Both increases were due to higher earnings from our BlackRock investment, stronger equity markets and growth in customers. Discretionary assets under management increased to $117 billion at June 30, 2013 compared with $109 billion at June 30, 2012 driven by stronger average equity markets and positive net flows.

Consumer service fees increased $56 million in the first six months of 2013 compared to the first six months of 2012 and increased $24 million in the second quarter of 2013 compared to the second quarter of 2012. Both increases reflected growth in debit card, brokerage, credit card and merchant services revenue. The six month comparison was also impacted by the March 2012 RBC Bank (USA) acquisition.

Corporate services revenue increased to $603 million in the first six months of 2013 compared with $522 million in the first six months of 2012, including $326 million in the second quarter of 2013 compared with $290 million in the second quarter of 2012. Corporate services revenue for the first six months of 2013 included $55 million related to valuation gains from the impact of rising interest rates on commercial

mortgage servicing rights valuations, including $44 million in the second quarter. These amounts contributed to increases in commercial mortgage servicing revenue, as the comparable amounts for the 2012 periods were not significant. In addition, the increase in the six months comparison also reflected higher treasury management fees. The increases in both comparisons were partially offset by lower merger and acquisition advisory fees.

Residential mortgage revenue increased to $401 million in the first six months of 2013 compared with $57 million in the first six months of 2012. The second quarter comparables were revenue of $167 million in the second quarter of 2013 and a loss of $173 million for the second quarter of 2012. Residential mortgage revenue for the first six months of 2013 included provision for residential mortgage repurchase obligations of $77 million compared to $470 million for the first six months of 2012. The comparable amounts for the second quarters of 2013 and 2012 were $73 million and $438 million, respectively. See the Recourse and Repurchase Obligations section of this Financial Review for further detail. These increases to both 2013 periods in residential mortgage revenue were partially offset by lower net hedging gains on mortgage servicing rights.

Other noninterest income totaled $766 million for the first six months of 2013 compared with $525 million for the first six months of 2012. Other noninterest income totaled $455 million for the second quarter of 2013 and $240 million for the second quarter of 2012. The increases in both 2013 periods included the $83 million gain on the sale of 2 million Visa Class B common shares during the second quarter of 2013. Other noninterest income for the first six months of 2013 also included $41 million of revenue from credit valuations related to customer-initiated hedging activities as higher market interest rates reduced the fair value of PNC’s credit exposure on these activities. The comparable amount for the first six months of 2012 was a loss of $28 million. The impacts to the second quarters of 2013 and 2012 were revenue of $39 million and a loss of $35 million, respectively. In addition, the increase in other noninterest income in the year-to-date comparison also reflected higher revenue associated with commercial mortgage banking activity.

We continue to hold approximately 12 million Visa Class B common shares with an estimated fair value of approximately $950 million and recorded investment of approximately $204 million as of June 30, 2013.

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

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

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 $393 million for the first half of 2013 compared with $441 million for the first half of 2012. The provision for credit losses was $157 million for the second quarter of 2013 compared with $256 million for the second quarter of 2012. The declines in the comparisons were driven primarily by overall commercial credit quality improvement.

We expect our provision for credit losses for the third quarter of 2013 to be between $170 million and $250 million as we expect the pace of commercial credit improvement to ease and net credit exposure to increase.

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 $4.8 billion for the first half of 2013, a decrease of $.3 billion, or 5%, from $5.1 billion for the first half of 2012. Noninterest expense for the first six months of 2013 included $30 million of noncash charges related to redemption of trust preferred securities and $18 million of residential mortgage foreclosure-related expenses. The first half of 2012 included $197 million of integration costs, noncash charges of $130 million related to redemption of trust preferred securities and $81 million of residential mortgage foreclosure-related expenses. These decreases to noninterest expense were partially offset by the impact of higher operating expense for the RBC Bank (USA) acquisition during the first half of 2013 compared to the first six months of 2012.

Noninterest expense decreased $.2 billion, or 8%, to $2.4 billion for the second quarter of 2013 compared with $2.6 billion for the second quarter of 2012. The second quarter of 2013 included $30 million of noncash charges related to redemption of trust preferred securities, while the second quarter of 2012 included $130 million of noncash charges related to redemption of trust preferred securities, $52 million of integration costs and $43 million of residential mortgage foreclosure-related expenses. The impact of residential mortgage foreclosure-related expenses in second quarter 2013 was not significant.

The decline in noninterest expense in the comparison also reflected our continued commitment to disciplined expense management, and we currently expect to exceed our $700 million continuous improvement savings goal for 2013. Through the first half of the year, we have captured approximately $600 million of annualized savings. Cost savings are expected to offset investments we are making in our businesses and infrastructure.

For the third quarter of 2013, we currently expect noninterest expenses to be modestly up compared to the second quarter of 2013.

We expect noninterest expense for 2013 to decline by at least five percent compared with 2012.

EFFECTIVE INCOME TAX RATE

The effective income tax rate was 23.9% in the first six months of 2013 compared with 25.1% in the first six months of 2012. For the second quarter of 2013, our effective income tax rate was 23.7% compared with 24.1% for the second quarter of 2012. The effective tax rate is generally lower than the statutory rate primarily due to tax credits PNC receives from our investments in low income housing and new markets investments, as well as increased earnings in other tax exempt investments.

The decrease in the effective tax rate for the second quarter and the first six months of 2013 compared to the 2012 periods resulted from increased tax exempt investments and tax benefits from tax audit settlements, partially offset by higher levels of pretax income.

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

CONSOLIDATED BALANCE SHEET REVIEW

Table 6: Summarized Balance Sheet Data


In millions	June 30 2013			December 31 2012
Assets
Loans held for sale	$	3,814		$	3,693
Investment securities		57,449			61,406
Loans		189,775			185,856
Allowance for loan and lease losses		(3,772	)		(4,036	)
Goodwill		9,075			9,072
Other intangible assets		2,153			1,797
Other, net		45,921			47,319
Total assets	$	304,415		$	305,107
Liabilities
Deposits	$	212,279		$	213,142
Borrowed funds		39,864			40,907
Other		10,331			9,293
Total liabilities		262,474			263,342
Equity
Total shareholders’ equity		40,286			39,003
Noncontrolling interests		1,655			2,762
Total equity		41,941			41,765
Total liabilities and equity	$	304,415		$	305,107

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

Total assets decreased $692 million, or less than 1%, at June 30, 2013 compared with December 31, 2012. Total liabilities declined $868 million, or less than 1%, in the same comparison. 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 $189.8 billion at June 30, 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 $2.3 billion at June 30, 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	June 30 2013		December 31 2012
Commercial lending
Commercial
Retail/wholesale trade	$	14,466	$	13,801
Manufacturing		14,270		13,856
Service providers		12,758		12,095
Real estate related (a)		10,248		10,616
Financial services (b)		10,834		9,026
Health care		7,618		7,267
Other industries		16,736		16,379
Total commercial		86,930		83,040
Commercial real estate
Real estate projects (c)		12,636		12,347
Commercial mortgage		6,355		6,308
Total commercial real estate		18,991		18,655
Equipment lease financing		7,349		7,247
Total commercial lending (d)		113,270		108,942
Consumer lending
Home equity
Lines of credit		22,559		23,576
Installment		13,857		12,344
Total home equity		36,416		35,920
Residential real estate
Residential mortgage		14,051		14,430
Residential construction		726		810
Total residential real estate		14,777		15,240
Credit card		4,135		4,303
Other consumer
Education		7,814		8,238
Automobile		9,066		8,708
Other		4,297		4,505
Total consumer lending		76,505		76,914
Total loans	$	189,775	$	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 $3.9 billion from December 31, 2012 included an increase in commercial lending of $4.3 billion and a decrease in consumer lending of $.4 billion. The increase in commercial lending was the result of growth in commercial

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

loans, primarily from an increase in loan commitments to new and existing customers. The decline in consumer lending resulted from pay downs of residential real estate, education, credit card and other loans, along with the movement of residential real estate loans to OREO and charge-offs taken in the first quarter of 2013 related to the alignment with interagency supervisory guidance, partially offset by net growth in home equity and increases in indirect auto loans.

Loans represented 62% of total assets at June 30, 2013 and 61% of total assets at December 31, 2012. Commercial lending represented 60% of the loan portfolio at June 30, 2013 and 59% at December 31, 2012. Consumer lending represented 40% of the loan portfolio at June 30, 2013 and 41% at December 31, 2012.

Commercial real estate loans represented 10% of total loans and 6% of total assets at both June 30, 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 $6.8 billion, or 4% of total loans, at June 30, 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, which may be obtained from third parties, 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 June 30, 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 second quarter and first six 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 June 30						Six months ended June 30
In millions	2013			2012			2013			2012
Accretion on purchased impaired loans
Scheduled accretion	$	150		$	178		$	307		$	336
Reversal of contractual interest on impaired loans		(83	)		(111	)		(168	)		(208	)
Scheduled accretion net of contractual interest		67			67			139			128
Excess cash recoveries		11			51			61			91
Total	$	78		$	118		$	200		$	219

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		(307	)		(336	)
Excess cash recoveries		(61	)		(91	)
Net reclassifications to accretable from non-accretable and other activity (a)		366			134
June 30 (b)	$	2,164		$	2,403

(a)

Approximately 58% of the net reclassifications for the first six months of 2013 were driven by the consumer portfolio and were 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 predominantly due to future cash flow changes in the commercial portfolio.

(b)	As of June 30, 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.

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

Information related to the valuation of purchased impaired loans at June 30, 2013 and December 31, 2012 follows.

Table 10: Valuation of Purchased Impaired Loans


	June 30, 2013						December 31, 2012
Dollars in millions	Balance			Net Investment			Balance			Net Investment
Commercial and commercial real estate loans:
Unpaid principal balance	$	1,299					$	1,680
Purchased impaired mark		(331	)					(431	)
Recorded investment		968						1,249
Allowance for loan losses		(183	)					(239	)
Net investment		785			60	%		1,010			60	%
Consumer and residential mortgage loans:
Unpaid principal balance		6,095						6,639
Purchased impaired mark		(285	)					(482	)
Recorded investment		5,810						6,157
Allowance for loan losses		(934	)					(858	)
Net investment		4,876			80	%		5,299			80	%
Total purchased impaired loans:
Unpaid principal balance		7,394						8,319
Purchased impaired mark		(616	)					(913	)
Recorded investment		6,778						7,406
Allowance for loan losses		(1,117	)					(1,097	)
Net investment	$	5,661			77	%	$	6,309			76	%

The unpaid principal balance of purchased impaired loans decreased to $7.4 billion at June 30, 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 June 30, 2013 was $616 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 $5.7 billion at June 30, 2013 decreased 10% from $6.3 billion at December 31, 2012. At June 30, 2013, our largest individual purchased impaired loan had a recorded investment of $19 million.

We currently expect to collect total cash flows of $7.9 billion on purchased impaired loans, representing the $5.7 billion net investment at June 30, 2013 and the accretable net interest of $2.2 billion shown in Table 9: Purchased Impaired Loans – Accretable Yield.

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 second quarter of 2013.

Table 11: Weighted Average Life of the Purchased Impaired Portfolios


As of June 30, 2013 In millions	Recorded Investment		WAL (a)
Commercial	$	231		2.0 years
Commercial real estate		737		1.8 years
Consumer (b)		2,474		4.7 years
Residential real estate		3,336		4.8 years
Total	$	6,778		4.3 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.

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

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	June 30, 2013			Declining Scenario (a)			Improving Scenario (b)
Expected Cash Flows	$	7.9		$	(.3	)	$	.4
Accretable Difference		2.2			(.1	)		.2
Allowance for Loan and Lease Losses		(1.1	)		(.3	)		.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	June 30 2013		December 31 2012
Commercial and commercial real estate (a)	$	82,790	$	78,703
Home equity lines of credit		19,325		19,814
Credit card		17,101		17,381
Other		4,926		4,694
Total	$	124,142	$	120,592

(a)	Less than 5% of total net unfunded credit commitments relate to commercial real estate at each date.

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 $23.5 billion at June 30, 2013 and $22.5 billion at December 31, 2012.

Unfunded liquidity facility commitments and standby bond purchase agreements totaled $701 million at June 30, 2013 and $732 million at December 31, 2012 and are included in the preceding table primarily within the Commercial and commercial real estate category.

In addition to the credit commitments set forth in the table above, our net outstanding standby letters of credit totaled $10.9 billion at June 30, 2013 and $11.5 billion at 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.

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

INVESTMENT SECURITIES

Table 14: Investment Securities


	June 30, 2013				December 31, 2012
In millions	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Total securities available for sale (a)	$	47,176	$	47,899	$	49,447	$	51,052
Total securities held to maturity		9,550		9,749		10,354		10,860
Total securities	$	56,726	$	57,648	$	59,801	$	61,912

(a)

Includes $297 million of both amortized cost and fair value of securities classified as corporate stocks and other at June 30, 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 $57.4 billion at June 30, 2013, which was made up of $47.9 billion of securities available for sale carried at fair value and $9.5 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 $4.0 billion since December 31, 2012 resulted primarily from a decline in agency residential mortgage-backed securities due to principal payments partially offset by net purchase activity. Investment securities represented 19% of total assets at June 30, 2013 and 20% at 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 56% of the investment securities portfolio at June 30, 2013.

At June 30, 2013, the securities available for sale portfolio included a net unrealized gain of $.7 billion, which

represented the difference between fair value and amortized cost. The comparable balance at December 31, 2012 was $1.6 billion. The decrease in the net unrealized gain since December 31, 2012 resulted from an increase in market interest rates and widening asset spreads. 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 4.5 years at June 30, 2013 and 4.0 years at December 31, 2012.

The duration of investment securities was 2.8 years at June 30, 2013. We estimate that, at June 30, 2013, the effective duration of investment securities was 2.9 years for an immediate 50 basis points parallel increase in interest rates and 2.6 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.

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

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 June 30, 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	$	24,248		$	595		$	5,852		$	3,679		$	6,034
Fair Value – Held to Maturity		3,825			1,319						2,231			1,100
Total Fair Value	$	28,073		$	1,914		$	5,852		$	5,910		$	7,134
% of Fair Value:
By Vintage
2013		4	%					1	%		4	%
2012		18	%		1	%		1	%		12	%
2011		25	%		49	%					6	%
2010		24	%		11	%		1	%		5	%		2	%
2009		9	%		19	%					2	%		1	%
2008		2	%		3	%								1	%
2007		5	%		2	%		25	%		11	%		2	%
2006		1	%		4	%		20	%		19	%		6	%
2005 and earlier		6	%		11	%		51	%		41	%		5	%
Not Available		6	%					1	%					83	%
Total		100	%		100	%		100	%		100	%		100	%
By Credit Rating (at June 30, 2013)
Agency		100	%		100	%
AAA								3	%		69	%		66	%
AA								1	%		9	%		25	%
A								1	%		10	%		1	%
BBB								4	%		4	%
BB								11	%		2	%
B								7	%		1	%		1	%
Lower than B								71	%					7	%
No rating								2	%		5	%
Total		100	%		100	%		100	%		100	%		100	%
By FICO Score (at origination)
>720								51	%
<720 and >660								36	%					7	%
<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.

We conduct a comprehensive security-level impairment assessment quarterly on all securities. For those securities in an unrealized loss position, we 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

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

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 six months of 2013 and 2012 as follows:

Table 16: Other-Than-Temporary Impairments


	Three months ended June 30					Six months ended June 30
In millions	2013		2012			2013			2012
Credit portion of OTTI losses (a)
Non-agency residential mortgage-backed	$	3	$	31		$	10		$	63
Asset-backed		1		3			4			8
Other debt										1
Total credit portion of OTTI losses		4		34			14			72
Noncredit portion of OTTI losses (recoveries) (b)		6		(2	)		(3	)		(24	)
Total OTTI losses	$	10	$	32		$	11		$	48

(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.

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

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 six 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


	Residential Mortgage- Backed Securities					Commercial Mortgage- Backed Securities				Asset-Backed Securities (a)
As of June 30, 2013 In millions	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	$	159	$	(8	)	$	2,031	$	43	$	3,814	$	12
Other Investment Grade (AA, A, BBB)		334		25			1,170		64		1,609		13
Total Investment Grade		493		17			3,201		107		5,423		25
BB		671		(66	)		139		5		4
B		393		(13	)		57		3		46
Lower than B		4,181		92							534		(15	)
Total Sub-Investment Grade		5,245		13			196		8		584		(15	)
Total No Rating		114		6			282		4		25		(12	)
Total	$	5,852	$	36		$	3,679	$	119	$	6,032	$	(2	)
OTTI Analysis
Investment Grade:
OTTI has been recognized
No OTTI recognized to date	$	493	$	17		$	3,201	$	107	$	5,423	$	25
Total Investment Grade		493		17			3,201		107		5,423		25
Sub-Investment Grade:
OTTI has been recognized		3,490		(82	)						551		(15	)
No OTTI recognized to date		1,755		95			196		8		33
Total Sub-Investment Grade		5,245		13			196		8		584		(15	)
No Rating:
OTTI has been recognized		74		2							25		(12	)
No OTTI recognized to date		40		4			282		4
Total No Rating		114		6			282		4		25		(12	)
Total	$	5,852	$	36		$	3,679	$	119	$	6,032	$	(2	)
Securities Held to Maturity (Non-Agency)
Credit Rating Analysis
AAA						$	2,015	$	30	$	857	$	(1	)
Other Investment Grade (AA, A, BBB)							216		8		233		1
Total Investment Grade							2,231		38		1,090
BB											10
B
Lower than B
Total Sub-Investment Grade											10
Total No Rating
Total						$	2,231	$	38	$	1,100	$	–

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

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

Residential Mortgage-Backed Securities

At June 30, 2013, our residential mortgage-backed securities portfolio was comprised of $28.1 billion fair value of U.S. government agency-backed securities and $5.9 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 six months of 2013, we recorded OTTI credit losses of $10 million on non-agency residential mortgage-backed securities. All of the losses were associated with securities rated below investment grade. As of June 30, 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 $80 million and the related securities had a fair value of $3.6 billion.

The fair value of sub-investment grade investment securities for which we have not recorded an OTTI credit loss as of June 30, 2013 totaled $1.8 billion, with unrealized net gains of $95 million. Based on the results of our security-level assessments, we anticipate recovering the cost basis of these securities.

Commercial Mortgage-Backed Securities

The fair value of the non-agency commercial mortgage-backed securities portfolio was $5.9 billion at June 30, 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 $1.9 billion at June 30, 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 six months of 2013.

Asset-Backed Securities

The fair value of the asset-backed securities portfolio was $7.1 billion at June 30, 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 $4 million on asset-backed securities during the first six 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 June 30, 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 $27 million and the related securities had a fair value of $576 million.

For the sub-investment grade investment securities for which we have not recorded an OTTI loss through June 30, 2013, the fair value was $43 million, with no unrealized net losses recorded. Based on the results of our security-level assessments, we anticipate recovering 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 deteriorate from current levels, and if market volatility and illiquidity were to deteriorate from current levels, 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.

LOANS HELD FOR SALE

Table 18: Loans Held For Sale


In millions	June 30 2013		December 31 2012
Commercial mortgages at fair value	$	635	$	772
Commercial mortgages at lower of cost or market		437		620
Total commercial mortgages		1,072		1,392
Residential mortgages at fair value		2,246		2,096
Residential mortgages at lower of cost or market		107		124
Total residential mortgages		2,353		2,220
Other		389		81
Total	$	3,814	$	3,693

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

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 June 30, 2013, the balance relating to these loans was $635 million, compared to $772 million at December 31, 2012.

We sold $1.4 billion of commercial mortgages held for sale carried at lower of cost or market during the first six months of 2013 compared to $.9 billion during the first six months of 2012. All of these loan sales were to government agencies. Gains on sale, net of hedges, were $43 million during the first six months of 2013, including $20 million in the second quarter. Comparable amounts for 2012 were $15 million and $18 million, respectively.

Residential mortgage loan origination volume was $8.9 billion in the first six months of 2013 compared to $7.0 billion for the first six months of 2012. Substantially all such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $8.0 billion of loans and recognized related gains of $362 million during the first six months of 2013, of which $190 million occurred in the second quarter. The comparable amounts for the first six months of 2012 were $6.4 billion and $318 million, respectively, including $177 million in the second quarter.

Interest income on loans held for sale was $85 million in the first six months of 2013, including $32 million in the second quarter. Comparable amounts for 2012 were $95 million and $45 million, respectively. 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 $11.2 billion at June 30, 2013 and $10.9 billion at December 31, 2012. The increase of $.3 billion was primarily due to mortgage and other loan servicing rights. 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.

FUNDING AND CAPITAL SOURCES

Table 19: Details Of Funding Sources


In millions	June 30 2013		December 31 2012
Deposits
Money market	$	103,480	$	102,706
Demand		72,080		73,995
Retail certificates of deposit		22,265		23,837
Savings		11,085		10,350
Time deposits in foreign offices and other time		3,369		2,254
Total deposits		212,279		213,142
Borrowed funds
Federal funds purchased and repurchase agreements		4,303		3,327
Federal Home Loan Bank borrowings		8,481		9,437
Bank notes and senior debt		11,177		10,429
Subordinated debt		7,113		7,299
Commercial paper		6,400		8,453
Other		2,390		1,962
Total borrowed funds		39,864		40,907
Total funding sources	$	252,143	$	254,049

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 of this Report for additional information regarding our 2013 capital and liquidity activities.

Total funding sources decreased $1.9 billion at June 30, 2013 compared with December 31, 2012.

Total deposits decreased $.9 billion at June 30, 2013 compared with December 31, 2012 due to decreases in demand deposits and retail certificates of deposit, partially offset by increases in time deposits in foreign offices and other time, money market and savings deposits. Interest-bearing deposits represented 69% of total deposits at June 30, 2013 compared to 67% at December 31, 2012. Total borrowed funds decreased $1.0 billion since December 31, 2012 as a result of declines in commercial paper and FHLB borrowings, partially offset by higher federal funds purchased and repurchase agreements and bank notes and senior debt.

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

CAPITAL

Table 20: Shareholders’ Equity


In millions	June 30 2013			December 31 2012
Shareholders’ equity
Preferred stock (a)
Common stock	$	2,693		$	2,690
Capital surplus – preferred stock		3,939			3,590
Capital surplus – common stock and other		12,234			12,193
Retained earnings		21,828			20,265
Accumulated other comprehensive income (loss)		45			834
Common stock held in treasury at cost		(453	)		(569	)
Total shareholders’ equity	$	40,286		$	39,003

(a)	Par value less than $.5 million at each date.

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 $1.3 billion, to $40.3 billion at June 30, 2013, compared with December 31, 2012 primarily reflecting an increase in retained earnings of $1.6 billion (driven by net income of $2.1 billion and the impact of $.6 billion of dividends declared) and an increase of $.3

billion in capital surplus-preferred stock due to the net issuances of preferred stock. These increases were partially offset by the decline of accumulated other comprehensive income of $.8 billion primarily due to the impact of an increase in market interest rates and widening asset spreads on securities available for sale and derivatives that are part of cash flow hedging strategies. Common shares outstanding were 531 million at June 30, 2013 and 528 million at December 31, 2012.

See the Liquidity Risk Management portion of the Risk Management section of this Financial Review for additional information regarding 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.

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

Table 21: Basel I Risk-Based Capital


Dollars in millions	June 30 2013			December 31 2012
Capital components
Shareholders’ equity
Common	$	36,347		$	35,413
Preferred		3,939			3,590
Trust preferred capital securities		216			331
Noncontrolling interests		985			1,354
Goodwill and other intangible assets		(9,727	)		(9,798	)
Eligible deferred income taxes on goodwill and other intangible assets		346			354
Pension and other postretirement benefit plan adjustments		743			777
Net unrealized securities (gains)/losses, after-tax		(502	)		(1,052	)
Net unrealized (gains)/losses on cash flow hedge derivatives, after-tax		(332	)		(578	)
Other		(207	)		(165	)
Tier 1 risk-based capital		31,808			30,226
Subordinated debt		5,081			4,735
Eligible allowance for credit losses		3,318			3,276
Total risk-based capital	$	40,207		$	38,237
Tier 1 common capital
Tier 1 risk-based capital	$	31,808		$	30,226
Preferred equity		(3,939	)		(3,590	)
Trust preferred capital securities		(216	)		(331	)
Noncontrolling interests		(985	)		(1,354	)
Tier 1 common capital	$	26,668		$	24,951
Assets
Risk-weighted assets, including off-balance sheet instruments and market risk equivalent assets	$	264,750		$	260,847
Adjusted average total assets		291,605			291,426
Basel I capital ratios
Tier 1 common		10.1	%		9.6	%
Tier 1 risk-based		12.0			11.6
Total risk-based		15.2			14.7
Leverage		10.9			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 the 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 June 30, 2013 capital levels were aligned with them.

Dodd-Frank requires the Federal Reserve to establish capital requirements that would, among other things, eliminate the Tier 1 treatment of trust preferred securities for bank holding companies with $15 billion or more in assets following a phase-in period that begins in 2014. 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.

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

Our Basel I Tier 1 common capital ratio was 10.1% at June 30, 2013, compared with 9.6% at December 31, 2012. Our Basel I Tier 1 risk-based capital ratio increased 40 basis points to 12.0% at June 30, 2013 from 11.6% at December 31, 2012. Our Basel I total risk-based capital ratio increased 50 basis points to 15.2% at June 30, 2013 from 14.7% at December 31, 2012. Basel I capital ratios increased in all comparisons primarily due to growth in retained earnings. The net issuance of preferred stock during the six months ended June 30, 2013 partially offset by the redemption of trust preferred securities favorably impacted the June 30, 2013 Basel I Tier 1 risk-based and Basel I total risk-based capital ratios. Basel I risk-weighted assets increased $3.9 billion to $264.8 billion at June 30, 2013.

At June 30, 2013, PNC and PNC Bank, National Association (PNC Bank, N.A.), our domestic bank subsidiary, were both considered “well capitalized” based on U.S. regulatory capital ratio requirements under Basel I. To qualify as “well-capitalized”, regulators currently require bank holding companies and banks to maintain Basel I 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 initially adopted rules to implement the Basel II capital framework in 2004. In July 2013, the U.S. banking agencies adopted final rules (referred to as the advanced approaches) that modify the Basel II risk-weighting framework. See Recent Market and Industry Developments in the Executive Summary section of this Financial Review and Item 1 Business – Supervision and Regulation and Item 1A Risk Factors in our 2012 Form 10-K. Prior to fully implementing the advanced approaches established by these rules 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 using PNC’s estimated Basel III advanced approaches risk-weighted assets and how it differs from the Basel I Tier 1 common capital ratio. The Basel III ratio will replace the current Basel I ratio for this regulatory metric when PNC exits the parallel run qualification phase.

The Federal Reserve announced final rules implementing Basel III on July 2, 2013. PNC continues its evaluation of these rules. Pending completion of that evaluation, we have estimated our Basel III capital information set forth below based on our understanding of the prior U.S. Basel III rule proposals issued in 2012.

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


Dollars in millions	June 30 2013			December 31 2012
Basel I Tier 1 common capital	$	26,668		$	24,951
Less regulatory capital adjustments:
Basel III quantitative limits		(2,224	)		(2,330	)
Accumulated other comprehensive income (a)		(241	)		276
All other adjustments		(283	)		(396	)
Estimated Basel III Tier 1 common capital	$	23,920		$	22,501
Estimated Basel III risk-weighted assets		290,838			301,006
Pro forma Basel III Tier 1 common capital ratio		8.2	%		7.5	%

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

Tier 1 common capital as defined under the Basel III rules differs materially from Basel I. For example, under Basel III, significant common stock investments in unconsolidated 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 PNC’s capital. Basel III risk-weighted assets were estimated under the advanced approaches included in the Basel III rules and application of Basel II.5, and reflect credit, market and operational risk.

PNC utilizes this capital ratio estimate to assess its Basel III capital position (without the benefit of phase-ins), including comparison to similar estimates made by other financial institutions. This Basel III capital estimate is likely to be impacted by PNC’s ongoing analysis of the recently issued Basel III final rules and the ongoing evolution, validation and regulatory approval of PNC’s models integral to the calculation of advanced approaches 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.

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

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.

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 June 30, 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 $265 million in principal amount of outstanding junior subordinated debentures associated with $257 million of trust preferred securities that were issued by various subsidiary statutory trusts (both amounts as of June 30, 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 June 30, 2013 and December 31, 2012, respectively, and the portions of such assets and liabilities that are classified within Level 3 of the valuation hierarchy.

Table 23: Fair Value Measurements – Summary


	June 30, 2013						December 31, 2012
In millions	Total Fair Value			Level 3			Total Fair Value			Level 3
Total assets	$	64,026		$	10,812		$	68,352		$	10,988
Total assets at fair value as a percentage of consolidated assets		21	%					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	$	6,457		$	578		$	7,356		$	376
Total liabilities at fair value as a percentage of consolidated liabilities		2	%					3	%
Level 3 liabilities as a percentage of total liabilities at fair value					9	%					5	%
Level 3 liabilities as a percentage of consolidated liabilities					<1	%					<1	%

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

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.

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 six months of 2013, there were transfers of residential mortgage loans held for sale and loans from Level 2 to Level 3 of $6 million and $11 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 $7 million and $16 million, respectively, primarily due to the transfer of residential mortgage loans held for sale and loans to OREO. In addition, there was approximately $46 million of Level 3 residential mortgage loans held for sale reclassified to Level 3 loans during the first six 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

June 30, 2013


	Direct Exposure														Total Exposure
	Funded								Unfunded
In millions	Loans		Leases		Securities		Total		Other (a)		Total Direct Exposure		Total Indirect Exposure
Greece, Ireland, Italy, Portugal and Spain (GIIPS)	$	84	$	124			$	208	$	3	$	211	$	36	$	247
Belgium and France				72				72		35		107		919		1,026
United Kingdom		747		71				818		332		1,150		612		1,762
Europe – Other (b)		107		532	$	324		963		49		1,012		703		1,715
Total Europe (c)	$	938	$	799	$	324	$	2,061	$	419	$	2,480	$	2,270	$	4,750

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. For the period ended June 30, 2013, Europe – Other also included Norway.

(c)

Included within Europe – Other is funded direct exposure of $68 million and $168 million consisting of AAA-rated sovereign debt securities at June 30, 2013 and December 31, 2012, respectively. There was no other direct or indirect exposure to European sovereigns as of June 30, 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 European 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, loans with moderate risk as they are predominantly well secured by short-term assets or, in limited situations, the borrower’s appraised value of certain fixed assets. 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.

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

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 June, 30, 2013, the $2.1 billion of funded direct exposure (.68% of PNC’s total assets) primarily represented $655 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, $598 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 $419 million of unfunded direct exposure as of June 30, 2013 was largely comprised of $332 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 June 30, 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 $247 million as of June 30, 2013, of which $124 million was direct exposure for cross-border leases within Portugal, $67 million represented direct exposure for loans outstanding within Ireland and $36 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 $1.0 billion as of June 30, 2013. Direct exposure of $107 million primarily consisted of $70 million for cross-border leases within Belgium and $35 million for unfunded contractual commitments in France. Indirect exposure was $919 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.

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

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.

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

RETAIL BANKING

(Unaudited)

Table 25: Retail Banking Table


Six months ended June 30 Dollars in millions, except as noted	2013			2012
Income Statement
Net interest income	$	2,061		$	2,159
Noninterest income
Service charges on deposits		270			258
Brokerage		110			94
Consumer services		445			404
Other		151			72
Total noninterest income		976			828
Total revenue		3,037			2,987
Provision for credit losses		310			300
Noninterest expense		2,287			2,240
Pretax earnings		440			447
Income taxes		162			164
Earnings	$	278		$	283
Average Balance Sheet
Loans
Consumer
Home equity	$	29,063		$	27,499
Indirect auto		7,161			4,735
Indirect other		969			1,242
Education		8,101			9,270
Credit cards		4,085			4,001
Other		2,141			2,222
Total consumer		51,520			48,969
Commercial and commercial real estate		11,318			11,083
Floor plan		2,031			1,733
Residential mortgage		788			1,002
Total loans		65,657			62,787
Goodwill and other intangible assets		6,138			6,058
Other assets		2,522			2,575
Total assets	$	74,317		$	71,420
Deposits
Noninterest-bearing demand	$	20,967		$	19,572
Interest-bearing demand		31,595			26,986
Money market		48,469			45,436
Total transaction deposits		101,031			91,994
Savings		10,768			9,489
Certificates of deposit		22,251			27,309
Total deposits		134,050			128,792
Other liabilities		308			410
Capital		8,967			8,391
Total liabilities and equity	$	143,325		$	137,593
Performance Ratios
Return on average capital		6	%		7	%
Return on average assets		.75			.80
Noninterest income to total revenue		32			28
Efficiency		75			75
Other Information (a)
Credit-related statistics:
Commercial nonperforming assets	$	222		$	275
Consumer nonperforming assets		1,068			685
Total nonperforming assets (b)	$	1,290		$	960
Purchased impaired loans (c)	$	750		$	886
Commercial lending net charge-offs	$	59		$	66
Credit card lending net charge-offs		84			99
Consumer lending (excluding credit card) net charge-offs		259			213
Total net charge-offs	$	402		$	378

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company