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 September 30, 2014

¨	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 October 24, 2014, there were 526,209,756 shares of the registrant’s common stock ($5 par value) outstanding.

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Third Quarter 2014 Form 10-Q


	Pages
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).
Consolidated Income Statement		66
Consolidated Statement of Comprehensive Income		67
Consolidated Balance Sheet		68
Consolidated Statement Of Cash Flows		69

Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies		71
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities		76
Note 3 Loans and Commitments to Extend Credit		81
Note 4 Asset Quality		82
Note 5 Purchased Loans		94
Note 6 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit		95
Note 7 Investment Securities		98
Note 8 Fair Value		103
Note 9 Goodwill and Other Intangible Assets		118
Note 10 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities		121
Note 11 Certain Employee Benefit And Stock Based Compensation Plans		122
Note 12 Financial Derivatives		124
Note 13 Earnings Per Share		132
Note 14 Total Equity And Other Comprehensive Income		133
Note 15 Income Taxes		138
Note 16 Legal Proceedings		138
Note 17 Commitments and Guarantees		141
Note 18 Segment Reporting		146
Note 19 Subsequent Events		149

Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis		150
Estimated Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratio – 2013 Periods		152
2013 Basel I Tier 1 Common Capital Ratio		152

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Financial Review		1
Consolidated Financial Highlights		1
Executive Summary		3
Consolidated Income Statement Review		10
Consolidated Balance Sheet Review		13
Off-Balance Sheet Arrangements And Variable Interest Entities		23
Fair Value Measurements		24
Business Segments Review		24
Critical Accounting Estimates and Judgments		33
Status Of Qualified Defined Benefit Pension Plan		35
Recourse And Repurchase Obligations		35
Risk Management		38
Internal Controls And Disclosure Controls And Procedures		59
Glossary Of Terms		59
Cautionary Statement Regarding Forward-Looking Information		64

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		38-59, 103-118 and 124-132

Item 4. Controls and Procedures.		59

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.		153

Item 1A. Risk Factors.		153

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds.		153

Item 6. Exhibits.		154
Exhibit Index.		154
Corporate Information		154

Signature		156

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Third Quarter 2014 Form 10-Q (continued)

MD&A TABLE REFERENCE


Table	Description	Page
1	Consolidated Financial Highlights		1
2	Summarized Average Balance Sheet		7
3	Results Of Businesses – Summary		9
4	Net Interest Income and Net Interest Margin		10
5	Noninterest Income		11
6	Summarized Balance Sheet Data		13
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		16
13	Net Unfunded Loan Commitments		17
14	Investment Securities		17
15	Loans Held For Sale		19
16	Details Of Funding Sources		19
17	Shareholders’ Equity		20
18	Basel III Capital		21
19	Fair Value Measurements – Summary		24
20	Retail Banking Table		25
21	Corporate & Institutional Banking Table		27
22	Asset Management Group Table		29
23	Residential Mortgage Banking Table		30
24	BlackRock Table		31
25	Non-Strategic Assets Portfolio Table		32
26	Pension Expense – Sensitivity Analysis		35
27	Analysis of Quarterly Residential Mortgage Repurchase Claims by Vintage		36
28	Analysis of Residential Mortgage Unresolved Asserted Indemnification and Repurchase Claims		36
29	Analysis of Residential Mortgage Indemnification and Repurchase Claim Settlement Activity		36
30	Nonperforming Assets By Type		40
31	OREO and Foreclosed Assets		41
32	Change in Nonperforming Assets		41
33	Accruing Loans Past Due 30 To 59 Days		42
34	Accruing Loans Past Due 60 To 89 Days		42
35	Accruing Loans Past Due 90 Days Or More		43
36	Home Equity Lines of Credit – Draw Period End Dates		44
37	Consumer Real Estate Related Loan Modifications		45
38	Consumer Real Estate Related Loan Modifications Re-Default by Vintage		45
39	Summary of Troubled Debt Restructurings		47
40	Loan Charge-Offs And Recoveries		48
41	Allowance for Loan and Lease Losses		49
42	Credit Ratings as of September 30, 2014 for PNC and PNC Bank, N.A.		54
43	Contractual Obligations		54
44	Other Commitments		54
45	Interest Sensitivity Analysis		55
46	Net Interest Income Sensitivity to Alternative Rate Scenarios (Third Quarter 2014)		55
47	Alternate Interest Rate Scenarios: One Year Forward		56
48	Enterprise-Wide Gains/Losses Versus Value-at-Risk		56
49	Customer-Related Trading Revenue		57
50	Equity Investments Summary		57
51	Financial Derivatives Summary		59

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Third Quarter 2014 Form 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE


Table	Description	Page
52	Certain Financial Information and Cash Flows Associated with Loan Sale and Servicing Activities		77
53	Principal Balance, Delinquent Loans (Loans 90 Days or More Past Due), and Net Charge-offs Related to Serviced Loans		78
54	Consolidated VIEs – Carrying Value		79
55	Non-Consolidated VIEs		79
56	Loans Summary		81
57	Net Unfunded Loan Commitments		81
58	Analysis of Loan Portfolio		82
59	Nonperforming Assets		83
60	Commercial Lending Asset Quality Indicators		84
61	Home Equity and Residential Real Estate Balances		85
62	Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans		86
63	Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans		87
64	Credit Card and Other Consumer Loan Classes Asset Quality Indicators		89
65	Summary of Troubled Debt Restructurings		90
66	Financial Impact and TDRs by Concession Type		90
67	TDRs that were Modified in the Past Twelve Months which have Subsequently Defaulted		92
68	Impaired Loans		93
69	Purchased Impaired Loans – Balances		94
70	Purchased Impaired Loans – Accretable Yield		95
71	Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data		96
72	Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit		97
73	Investment Securities Summary		98
74	Gross Unrealized Loss and Fair Value of Securities Available for Sale		100
75	Credit Impairment Assessment Assumptions – Non-Agency Residential Mortgage-Backed and Asset-Backed Securities		101
76	Rollforward of Cumulative OTTI Credit Losses Recognized in Earnings		101
77	Gains (Losses) on Sales of Securities Available for Sale		102
78	Contractual Maturity of Debt Securities		102
79	Weighted-Average Expected Maturity of Mortgage and Other Asset-Backed Debt Securities		103
80	Fair Value of Securities Pledged and Accepted as Collateral		103
81	Fair Value Measurements – Recurring Basis Summary		105
82	Reconciliation of Level 3 Assets and Liabilities		107
83	Fair Value Measurements – Recurring Quantitative Information		112
84	Fair Value Measurements – Nonrecurring		114
85	Fair Value Measurements – Nonrecurring Quantitative Information		114
86	Fair Value Option – Changes in Fair Value		115
87	Fair Value Option – Fair Value and Principal Balances		116
88	Additional Fair Value Information Related to Financial Instruments		117
89	Goodwill by Business Segment		118
90	Other Intangible Assets		118
91	Amortization Expense on Existing Intangible Assets		119
92	Summary of Changes in Customer-Related and Other Intangible Assets		119
93	Commercial Mortgage Servicing Rights Accounted for at Fair Value		119
94	Commercial Mortgage Servicing Rights Accounted for Under the Amortization Method		120
95	Residential Mortgage Servicing Rights		120
96	Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions		120
97	Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions		121
98	Fees from Mortgage Loan Servicing		121
99	Net Periodic Pension and Postretirement Benefits Costs		122
100	Option Pricing Assumptions		123
101	Stock Option Rollforward		123

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Third Quarter 2014 Form 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE (Continued)


Table	Description	Page
102	Nonvested Incentive/Performance Unit Share Awards and Restricted Stock/Share Unit Awards – Rollforward		124
103	Nonvested Cash-Payable Incentive/Performance Units and Restricted Share Units – Rollforward		124
104	Total Gross Derivatives		125
105	Derivatives Designated As Hedging Instruments under GAAP		125
106	Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges		126
107	Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges		127
108	Gains (Losses) on Derivatives – Net Investment Hedges		127
109	Derivatives Not Designated As Hedging Instruments under GAAP		128
110	Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP		129
111	Credit Default Swaps		129
112	Credit Ratings of Credit Default Swaps		130
113	Referenced/Underlying Assets of Credit Default Swaps		130
114	Risk Participation Agreements Sold		130
115	Internal Credit Ratings of Risk Participation Agreements Sold		130
116	Derivative Assets and Liabilities Offsetting		131
117	Basic and Diluted Earnings per Common Share		132
118	Rollforward of Total Equity		133
119	Other Comprehensive Income		134
120	Accumulated Other Comprehensive Income (Loss) Components		137
121	Net Operating Loss Carryforwards and Tax Credit Carryforwards		138
122	Net Outstanding Standby Letters of Credit		141
123	Analysis of Commercial Mortgage Recourse Obligations		142
124	Analysis of Indemnification and Repurchase Liability for Asserted Claims and Unasserted Claims		143
125	Reinsurance Agreements Exposure		144
126	Reinsurance Reserves – Rollforward		144
127	Resale and Repurchase Agreements Offsetting		145
128	Results Of Businesses		148

FINANCIAL REVIEW

THE PNC FINANCIAL SERVICES GROUP, INC.

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 2013 Annual Report on Form 10-K (2013 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. Prior period amounts have also been updated to reflect the first quarter 2014 adoption of Accounting Standards Update (ASU) 2014-01 related to investments in low income housing tax credits. See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report for more detail. For information regarding certain business, regulatory and legal risks, see the following sections as they appear in this Report and in our 2013 Form 10-K and our First and Second Quarter 2014 Form 10-Qs: the Risk Management and Recourse And Repurchase Obligations sections of the Financial Review portion of the respective report; Item 1A Risk Factors included in our 2013 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 2013 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 18 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.

Table 1: Consolidated Financial Highlights

THE PNC FINANCIAL SERVICES GROUP, INC. (PNC)


Dollars in millions, except per share data Unaudited	Three months ended September 30						Nine months ended September 30
Dollars in millions, except per share data Unaudited	2014			2013			2014			2013
Financial Results (a)
Revenue
Net interest income	$	2,104		$	2,234		$	6,428		$	6,881
Noninterest income		1,737			1,686			5,000			5,058
Total revenue		3,841			3,920			11,428			11,939
Noninterest expense (b)		2,357			2,394			6,949			7,167
Pretax, pre-provision earnings (c)		1,484			1,526			4,479			4,772
Provision for credit losses		55			137			221			530
Income before income taxes and noncontrolling interests	$	1,429		$	1,389		$	4,258		$	4,242
Net income (b)	$	1,038		$	1,028		$	3,150		$	3,138
Less:
Net income (loss) attributable to noncontrolling interests (b)		1			2			2			(2	)
Preferred stock dividends and discount accretion and redemptions		71			71			189			199
Net income attributable to common shareholders	$	966		$	955		$	2,959		$	2,941
Less:
Dividends and undistributed earnings allocated to nonvested restricted shares		3			4			9			13
Impact of BlackRock earnings per share dilution		4			4			13			13
Net income attributable to diluted common shares	$	959		$	947		$	2,937		$	2,915
Diluted earnings per common share	$	1.79		$	1.77		$	5.45		$	5.49
Cash dividends declared per common share	$	.48		$	.44		$	1.40		$	1.28
Performance Ratios
Net interest margin (d)		2.98	%		3.47	%		3.12	%		3.62	%
Noninterest income to total revenue		45			43			44			42
Efficiency (b)		61			61			61			60
Return on:
Average common shareholders’ equity (b)		9.52			10.40			9.99			10.90
Average assets (b)		1.25			1.34			1.30			1.39

See page 59 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)	Amounts for 2013 periods have been updated to reflect the first quarter 2014 adoption of Accounting Standards Update (ASU) 2014-01 related to investments in low income housing tax credits.

(c)	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.

(d)

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 September 30, 2014 and September 30, 2013 were $47 million and $43 million, respectively. The taxable-equivalent adjustments to net interest income for the nine months ended September 30, 2014 and September 30, 2013 were $140 million and $123 million, respectively.

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

Table 1: Consolidated Financial Highlights (Continued) (a)


Unaudited	September 30 2014			December 31 2013			September 30 2013
Balance Sheet Data (dollars in millions, except per share data)
Assets (b)	$	334,424		$	320,192		$	308,472
Loans		200,872			195,613			192,856
Allowance for loan and lease losses		3,406			3,609			3,691
Interest-earning deposits with banks (c)		26,247			12,135			8,047
Investment securities		55,039			60,294			57,260
Loans held for sale		2,143			2,255			2,399
Goodwill and other intangible assets		11,068			11,290			11,268
Equity investments (b) (d)		10,763			10,560			10,178
Other assets		23,123			22,552			22,733

Noninterest-bearing deposits		72,963			70,306			68,747
Interest-bearing deposits		153,341			150,625			147,327
Total deposits		226,304			220,931			216,074
Transaction deposits		192,222			186,391			181,794
Borrowed funds		52,327			46,105			40,273
Total shareholders’ equity (b)		44,481			42,334			41,043
Common shareholders’ equity (b)		40,536			38,392			37,103
Accumulated other comprehensive income		727			436			47

Book value per common share (b)	$	76.71		$	72.07		$	69.75
Common shares outstanding (millions)		528			533			532
Loans to deposits		89	%		89	%		89	%

Client Investment Assets (billions)
Discretionary client assets under management	$	132		$	127		$	122
Nondiscretionary client assets under administration		127			120			115
Total client assets under administration		259			247			237
Brokerage account client assets		43			41			40
Total	$	302		$	288		$	277

Capital Ratios
Transitional Basel III (e) (f)
Common equity Tier 1 (g)		11.1	%		N/A	(h)		N/A
Tier 1 risk-based		12.8			N/A			N/A
Total capital risk-based		16.1			N/A			N/A
Leverage		11.1			N/A			N/A

Pro forma Fully Phased-In Basel III (f) (i)
Common equity Tier 1 (g)		10.1	%		9.4	%		8.7	%
Common shareholders’ equity to assets (b)		12.1	%		12.0	%		12.0	%

Asset Quality
Nonperforming loans to total loans		1.30	%		1.58	%		1.66	%
Nonperforming assets to total loans, OREO and foreclosed assets		1.48			1.76			1.87
Nonperforming assets to total assets		.89			1.08			1.17
Net charge-offs to average loans (for the three months ended) (annualized)		.16			.39			.47
Allowance for loan and lease losses to total loans		1.70			1.84			1.91
Allowance for loan and lease losses to nonperforming loans (j)		130	%		117	%		115	%
Accruing loans past due 90 days or more (in millions)	$	1,178		$	1,491		$	1,633

(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 for 2013 periods have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits.

(c)	Amounts include balances held with the Federal Reserve Bank of Cleveland of $25.9 billion, $11.7 billion and $7.6 billion as of September 30, 2014, December 31, 2013 and September 30, 2013, respectively.

(d)	Amounts include our equity interest in BlackRock.

(e)	Calculated using the regulatory capital methodology applicable to PNC during 2014.

(f)

See Basel III Capital discussion in the Capital portion of the Consolidated Balance Sheet Review section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business in our 2013 Form 10-K. See also the Estimated Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratio – 2013 Periods table in the Statistical Information section of this Report for a reconciliation of the 2013 periods’ ratios.

(g)	The Basel III common equity Tier 1 capital ratio was previously referred to as the Basel III Tier 1 common capital ratio.

(h)

Our 2013 Form 10-K included a pro forma illustration of the Transitional Basel III common equity Tier 1 capital ratio using December 31, 2013 data and the Basel III phase-in schedule in effect for 2014 and information regarding our Basel I capital ratios, which applied to PNC in 2013. See also the 2013 Basel I Tier 1 Common Capital Ratio Table in the Statistical Information section of this Report for information regarding December 31, 2013 and September 30, 2013 ratios.

(i)	Ratios as of December 31, 2013 and September 30, 2013 have not been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits.

(j)	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

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, Missouri, Georgia, 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, expenses 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 a broad range of deposit, fee-based and credit products and services. We are focused on delivering those products and services where, when and how our customers choose with the goal of offering insight that reflects their specific needs. Our approach is concentrated 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.

Our strategic priorities are designed to enhance value over the long term. A key priority is to drive growth in acquired and underpenetrated markets, including in the Southeast. In addition, we are seeking to attract more of the investable assets of new and existing clients. PNC is focused on redefining our retail banking business to a more customer-centric and sustainable model while lowering delivery costs as customer banking preferences evolve. We are also working to build a stronger residential mortgage banking business with the goal of becoming the provider of choice for our customers. Additionally, we continue to focus on expense management while bolstering critical infrastructure and streamlining our processes.

Our capital priorities 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, in accordance with the capital plan included in our 2014 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 earnings and expect to build capital through retention of future earnings net of dividend payments and share repurchases. PNC continues to maintain adequate liquidity positions at both PNC and PNC Bank, National Association (PNC Bank, N.A.). For more detail, see the 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 portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2013 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 2013 Form 10-K and elsewhere in this Report.

Recent Market and Industry Developments

There have been numerous legislative and regulatory developments and significant 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. 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. We expect to face further increased regulation of our industry as a result of Dodd-Frank as well as other current and future initiatives intended to enhance the regulation of financial services companies, the stability of the financial system, the protection of consumers and investors, and 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 laws and 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.

On September 2, 2014, the Office of the Comptroller of the Currency (OCC) finalized enforceable guidelines that establish minimum standards for the design and implementation of a risk governance framework at large insured national banks, including PNC Bank, N.A. The

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

guidelines describe the appropriate risk management roles and responsibilities of front line units, independent risk management, internal audit, and the board of directors, and provide that a bank should have a comprehensive written statement that articulates its risk appetite and serves as a basis for the framework (i.e., a risk appetite statement). In accordance with the guidelines’ phased-in compliance dates, PNC Bank, N.A. is required to be in compliance with the guidelines by May 10, 2015.

New and evolving capital and liquidity standards will have a significant effect on banks and bank holding companies, including PNC and PNC Bank, N.A. On September 3, 2014, the U.S. banking agencies released final rules to implement the Liquidity Coverage Ratio (LCR), which is a quantitative liquidity standard included in the international Basel III framework. The LCR rules are designed to ensure that covered banking organizations maintain an adequate level of cash and high quality, unencumbered liquid assets (HQLA) to meet estimated net liquidity needs in a short-term stress scenario using liquidity inflow and outflow assumptions provided in the rules (net cash outflow). An institution’s LCR is the amount of its HQLA, as defined and calculated in accordance with the haircuts and limitations in the rule, divided by its net cash outflow, with the quotient expressed as a percentage.

Top-tier bank holding companies (like PNC) that are subject to the advanced approaches for regulatory capital purposes, as well as any subsidiary depository institution of such a company that has $10 billion or more in total consolidated assets (such as PNC Bank, N.A.), are subject to the full LCR (rather than the less stringent modified LCR) under the final rules effective on January 1, 2015. However, the minimum required LCR and the requirement to calculate the LCR on a daily basis will be phased-in over a period of years. For example, the minimum LCR PNC and PNC Bank, N.A. will be required to maintain in 2015 is 80%, increases to 90% in 2016 and, when fully phased-in in 2017, will be 100%. PNC and PNC Bank, N.A. will be required to calculate the LCR on a monthly basis until June 30, 2016. Beginning on July 1, 2016, and thereafter, PNC and PNC Bank, N.A. will be required to calculate the LCR on a daily basis. PNC and PNC Bank, N.A. expect to exceed the initial LCR phase-in requirement when it becomes effective on January 1, 2015.

On October 17, 2014, the Federal Reserve issued final rules adopting amendments to its capital plan and stress testing rules. Under these amendments, the schedule for the annual CCAR and Dodd-Frank stress test (DFAST) process will be modified effective January 1, 2016. Beginning in 2016, bank holding companies with total consolidated assets of $50 billion or more, such as PNC, are required to submit their annual capital plans and company-run stress test results to the Federal Reserve by April 5th of each year (rather than by January 5th as currently required). In order to transition to this new schedule, the Federal Reserve has indicated that its non-

objection to a capital plan submitted in January 2015 would cover proposed capital actions for the five quarter period from the second quarter of 2015 through and including the second quarter of 2016. Under the new schedule, the Federal Reserve will release its decisions on the capital plans submitted and release the results of its supervisory stress test by June 30th, approximately three months later than current practice. The amendments also shift the schedule for the company-run mid-cycle DFAST stress tests, with PNC’s submission date for these tests shifting to October 5th (from July 5th) and the release date for company results moving to October (from September).

On July 31, 2013, the U.S. 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 Dodd-Frank. The district 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. In March 2014, the U.S. Court of Appeals for the District of Columbia Circuit reversed the district court. It upheld the Federal Reserve’s network processing rule and upheld its interchange fee rule except as to the issue of transaction monitoring costs, and remanded that issue back to the Federal Reserve for further explanation. In August 2014, the plaintiffs filed a petition for a writ of certiorari in the U.S. Supreme Court seeking review of the court of appeals’ decision.

In October 2014, six federal agencies (the Federal Reserve, OCC, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development) adopted final rules to implement the credit risk retention requirements of Section 941 of Dodd-Frank for asset-backed securitization transactions. The regulations specify when and how securitizers of different types of asset-backed securitizations, including transactions backed by residential mortgages, commercial mortgages, and commercial, credit card and auto loans, must comply with the Dodd-Frank requirement that they retain at least five percent of the credit risk of the assets being securitized. The final rules also implement the exemptions from these credit risk retention requirements for transactions that are backed by “qualified residential mortgages” or other high-quality commercial mortgage, commercial or automobile loans, each as defined in the final rules. The regulations will take effect one year after publication in the Federal Register (which is expected in November 2014) with respect to new securitization transactions backed by residential mortgages and two years after publication in the Federal Register with respect to new securitization transactions backed by other types of assets. The final rules are likely to have an impact on PNC both directly, due to its role in certain types of securitization transactions, as

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

well as indirectly, by impacting the markets for loans that PNC originates and securitizes, although the extent and magnitude of these impacts is not yet known and will, to some extent, depend on how the markets and market participants (including PNC) adjust to the new rules. For more information on the potential direct and indirect impact of the rules on PNC, see Item 1A Risk Factors in our 2013 Form 10-K.

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 the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors, Recent Market and Industry Developments in the Executive Summary section of Item 7, and Note 23 Legal Proceedings and Note 24 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Item 8 of our 2013 Form 10-K and Recent Market and Industry Developments in the Executive Summary section of our First Quarter 2014 Form 10-Q and Second Quarter 2014 Form 10-Q, as well as Note 17 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

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 current U.S. economic expansion in general and on our customers in particular,

•

The monetary policy actions and statements of the Federal Reserve and the Federal Open Market Committee (FOMC),

•

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 and actions, including those outlined elsewhere in this Report, in our 2013 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:

•

Focused execution of strategic priorities for organic customer growth opportunities,

•

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

•

Driving growth in acquired and underpenetrated geographic markets, including our Southeast markets,

•

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

•

Revenue growth from fee income 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 bolster our critical infrastructure and streamline our core processes,

•

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

•

A sustained focus on expense management,

•

Improving our overall asset quality,

•

Managing the non-strategic assets portfolio and impaired assets,

•

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 and liquidity 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 accounting 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 2013 Form 10-K.

Income Statement Highlights

•

Net income for the third quarter of 2014 was $1.0 billion, or $1.79 per diluted common share, compared to $1.0 billion, or $1.77 per diluted common share for the third quarter of 2013. Net income increased $10 million in the comparison, as a 2% reduction in noninterest expense and lower provision for credit losses were mostly offset by a 2% decline in total revenue. For additional detail, see the Consolidated Income Statement Review section in this Financial Review.

•

Net interest income of $2.1 billion for the third quarter of 2014 decreased 6% compared with the third quarter of 2013, primarily driven by lower

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

purchase accounting accretion and lower yields on loans and investment securities, partially offset by the impact of commercial and commercial real estate loan growth.

•

Net interest margin decreased to 2.98% for the third quarter of 2014 compared to 3.47% for the third quarter of 2013. The decline reflected the impact of lower purchase accounting accretion, lower loan and securities yields in the ongoing low rate environment, and the impact of higher interest-earning deposits with the Federal Reserve Bank.

•

Noninterest income of $1.7 billion for the third quarter of 2014 increased 3% compared to the third quarter of 2013, as strong fee income growth was partially offset by declines in residential mortgage loan sales revenue, reductions in asset valuations and lower gains on asset sales.

•

The provision for credit losses decreased to $55 million for the third quarter of 2014 compared to $137 million for the third quarter of 2013 due to overall credit quality improvement.

•

Noninterest expense of $2.4 billion for the third quarter of 2014 decreased 2% compared with the third quarter of 2013 reflecting well managed expenses and the impact of the third quarter 2013 noncash charge related to redemption of trust preferred securities.

Credit Quality Highlights

•

Overall credit quality continued to improve during the first nine months of 2014. For additional detail, see the Credit Risk Management portion of the Risk Management section of this Financial Review.

•

Nonperforming assets decreased $.5 billion, or 14%, to $3.0 billion at September 30, 2014 compared to December 31, 2013. Nonperforming assets to total assets were 0.89% at September 30, 2014, compared to 1.08% at December 31, 2013.

•

Overall loan delinquencies of $2.0 billion at September 30, 2014 decreased $.5 billion, or 19%, compared with December 31, 2013.

•

The allowance for loan and lease losses was 1.70% of total loans and 130% of nonperforming loans at September 30, 2014, compared with 1.84% and 117% at December 31, 2013, respectively.

•

Net charge-offs of $82 million were down 63% compared to net charge-offs of $224 million for the third quarter of 2013. Annualized net charge-offs were 0.16% of average loans in the third quarter of 2014 and 0.47% of average loans in the third quarter of 2013. For the first nine months of 2014, net charge-offs were $413 million, and 0.28% of average loans on an annualized basis, compared with $888 million and 0.63% for the first nine months of 2013, respectively. The year-to-date comparisons were impacted by alignment with interagency guidance in

the first quarter of 2013 on practices for loans and lines of credit related to consumer lending. In the first quarter 2013, this alignment 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. See the Credit Risk Management portion of the Risk Management section of this Financial Review for further detail.

Balance Sheet Highlights

•

Total loans increased by $5.3 billion to $201 billion at September 30, 2014 compared to December 31, 2013.

•

Total commercial lending increased by $6.9 billion, or 6%, as a result of growth in commercial and commercial real estate loans to new and existing customers.

•

Total consumer lending decreased $1.7 billion, or 2%, due to lower home equity, residential mortgage and education loans partially offset by growth in automobile loans.

•

Total deposits increased by $5.4 billion to $226 billion at September 30, 2014 compared with December 31, 2013, driven by growth in transaction deposits.

•

PNC further increased its liquidity position as reflected in higher deposit balances maintained with the Federal Reserve Bank and expects to exceed the phase-in requirement of the short-term liquidity coverage ratio when it becomes effective for PNC as an advanced approaches bank beginning January 1, 2015.

•

PNC’s well-positioned balance sheet remained core funded with a loans to deposits ratio of 89% at September 30, 2014.

•

The Transitional Basel III common equity Tier 1 capital ratio, calculated using the regulatory capital methodology applicable to PNC during 2014, increased to 11.1% at September 30, 2014.

•

Pro forma fully phased-in Basel III common equity Tier 1 capital ratio increased to an estimated 10.1% at September 30, 2014 from 9.4% at December 31, 2013 based on the standardized approach rules. See the Capital discussion and Table 18 in the Consolidated Balance Sheet Review section of this Financial Review and the December 31, 2013 capital ratio tables in the Statistical Information section of this Report for more detail.

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 during the first nine months of 2014 and 2013 and balances at September 30, 2014 and December 31, 2013, respectively.

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

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.

In connection with the 2014 CCAR, PNC submitted its 2014 capital plan, approved by its Board of Directors, to the Federal Reserve in January 2014. As we announced on March 26, 2014, 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 2014. The capital plan also included share repurchase programs of up to $1.5 billion for the four quarter period beginning in the second quarter of 2014 under PNC’s existing common stock repurchase authorization. These programs include repurchases of up to

$200 million to mitigate the financial impact of employee benefit plan transactions. In the second and third quarters of 2014, in accordance with the 2014 capital plan, we repurchased 6.8 million shares of common stock on the open market, with an average price of $85.55 per share and an aggregate repurchase price of $583 million. For additional information concerning the CCAR process and the factors the Federal Reserve takes into consideration in evaluating capital plans, see the Supervision and Regulation section in Item 1 Business of our 2013 Form 10-K.

On April 3, 2014, consistent with our 2014 capital plan, our Board of Directors approved an increase to PNC’s quarterly common stock dividend from 44 cents per common share to 48 cents per common share beginning with the May 5, 2014 dividend payment.

See the Liquidity Risk Management portion of the Risk Management section of this Financial Review for more detail on our 2014 capital and liquidity actions.

Average Consolidated Balance Sheet Highlights

Table 2: Summarized Average Balance Sheet


Nine months ended September 30 Dollars in millions					Change
Nine months ended September 30 Dollars in millions	2014		2013		$			%
Average assets
Interest-earning assets
Investment securities	$	56,357	$	57,304	$	(947	)		(2	)%
Loans		198,559		188,419		10,140			5	%
Interest-earning deposits with banks		16,341		3,041		13,300			437	%
Other		8,476		8,565		(89	)		(1	)%
Total interest-earning assets		279,733		257,329		22,404			9	%
Noninterest-earning assets		44,145		45,503		(1,358	)		(3	)%
Total average assets	$	323,878	$	302,832	$	21,046			7	%
Average liabilities and equity
Interest-bearing liabilities
Interest-bearing deposits	$	151,757	$	145,041	$	6,716			5	%
Borrowed funds		47,620		38,994		8,626			22	%
Total interest-bearing liabilities		199,377		184,035		15,342			8	%
Noninterest-bearing deposits		68,976		65,485		3,491			5	%
Other liabilities		10,389		11,261		(872	)		(8	)%
Equity		45,136		42,051		3,085			7	%
Total average liabilities and equity	$	323,878	$	302,832	$	21,046			7	%

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 September 30, 2014 compared with December 31, 2013. Total assets were $334.4 billion at September 30, 2014 compared with $320.2 billion at December 31, 2013.

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

Average investment securities declined in the comparison of the first nine months of 2014 with the first nine months of 2013, as a net decrease in average residential and commercial mortgage-backed securities from principal payments was partially offset by an increase in average U.S. Treasury and government agencies securities, which was largely driven by purchases to enhance our liquidity position. Total investment securities comprised 20% of average interest-earning assets for the first nine months of 2014 and 22% for the first nine months of 2013.

The increase in average total loans in the first nine months of 2014 compared with the first nine months of 2013 was driven by increases in average commercial loans of $6.0 billion, average commercial real estate loans of $3.4 billion and average consumer loans of $.9 billion. The overall increase in loans reflected organic loan growth, primarily in our Corporate & Institutional Banking segment.

Loans represented 71% of average interest-earning assets for the first nine months of 2014 and 73% of average interest-earning assets for the first nine months of 2013.

Average interest-earning deposits with banks, which are primarily maintained with the Federal Reserve Bank, increased significantly in the comparison to the prior year period as we continued to enhance our liquidity position.

The decrease in average noninterest-earning assets in the first nine months of 2014 compared with the first nine months of 2013 was primarily driven by decreased unsettled securities sales and securities valuations, both of which are included in noninterest-earning assets for average balance sheet purposes.

Average total deposits increased $10.2 billion to $220.7 billion in the first nine months of 2014 compared with the first nine months of 2013, primarily due to an increase of $11.9 billion in average transaction deposits, which grew to $186.8 billion for the first nine months of 2014. Higher average money market deposits, average noninterest-bearing deposits and average interest-bearing demand deposits drove the increase in both commercial and consumer average transaction deposits. These increases were partially offset by a decrease of $2.7 billion in average retail certificates of deposit attributable to runoff of maturing accounts. Total deposits at September 30, 2014 were $226.3 billion compared with $220.9 billion at December 31, 2013 and are further discussed within the Consolidated Balance Sheet Review section of this Financial Review.

Average total deposits represented 68% of average total assets for the first nine months of 2014 and 70% for the first nine months of 2013.

The increase in average borrowed funds in the first nine months of 2014 compared with the first nine months of 2013 was primarily due to increases in average Federal Home Loan Bank (FHLB) borrowings and average bank notes and senior debt, in part to enhance our liquidity position. These increases were partially offset by a decline in average commercial paper. Total borrowed funds at September 30, 2014 were $52.3 billion compared with $46.1 billion at December 31, 2013 and are further discussed within the Consolidated Balance Sheet Review section of this Financial Review. The Liquidity Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding our sources and uses of borrowed funds.

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

Business Segment Highlights

Total business segment earnings were $3.0 billion for the first nine months of 2014 and 2013. The Business Segments Review section of this Financial Review includes further analysis of our business segment results over the first nine months of 2014 and 2013, including presentation differences from Note 18 Segment Reporting in our Notes To Consolidated Financial Statements of this Report. Note 18 Segment Reporting presents results of businesses for the three months and nine months ended September 30, 2014 and 2013.

We provide a reconciliation of total business segment earnings to PNC total consolidated net income as reported on a GAAP basis in Note 18 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)
Nine months ended September 30 – in millions	2014		2013		2014		2013		2014		2013
Retail Banking	$	556	$	443	$	4,529	$	4,600	$	75,264	$	74,620
Corporate & Institutional Banking		1,542		1,695		4,032		4,117		121,232		112,152
Asset Management Group		136		126		826		771		7,687		7,289
Residential Mortgage Banking		44		93		618		773		7,889		10,170
BlackRock		399		338		528		442		6,562		6,102
Non-Strategic Assets Portfolio		291		260		447		575		8,563		10,238
Total business segments		2,968		2,955		10,980		11,278		227,197		220,571
Other (b) (c) (d)		182		183		448		661		96,681		82,261
Total	$	3,150	$	3,138	$	11,428	$	11,939	$	323,878	$	302,832

(a)	Period-end balances for BlackRock.

(b)	“Other” average assets include investment securities 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 18 Segment Reporting in the Notes To Consolidated Financial Statements in this Report.

(d)

The decrease in revenue in the first nine months of 2014 compared to the first nine months of 2013 for “Other” reflected a decline in net interest income primarily due to decreased investment securities income and higher borrowed funds expense, while the decline in noninterest income was more than offset by a decrease in noninterest expense.

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

CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income was $3.2 billion for the first nine months of 2014, an increase of $12 million compared to the first nine months of 2013, as a 3% reduction in noninterest expense and significantly lower provision for credit losses were mostly offset by a 4% decline in total revenue, driven by lower net interest income and slightly lower noninterest income.

Third quarter 2014 net income increased $10 million to $1.0 billion, compared with third quarter 2013. A 2% decrease in noninterest expense and lower provision for credit losses were largely offset by a 2% decline in total revenue. The decrease in revenue resulted from lower net interest income, which was partially offset by a 3% increase in noninterest income.

Net Interest Income

Table 4: Net Interest Income and Net Interest Margin


	Nine months ended September 30						Three months ended September 30
Dollars in millions	2014			2013			2014			2013
Net interest income	$	6,428		$	6,881		$	2,104		$	2,234
Net interest margin		3.12	%		3.62	%		2.98	%		3.47	%

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 on purchased impaired loans in the Consolidated Balance Sheet Review section of this Financial Review for additional information.

Net interest income decreased by $453 million, or 7%, in the first nine months of 2014 compared with the prior year period, including a decline of $130 million, or 6%, in the third quarter comparison. The decreases in both comparisons were primarily due to lower purchase accounting accretion and lower yields on loans and investment securities, partially offset by the impact of commercial and commercial real estate loan growth. The declines also reflected the impact from the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to noninterest income. Lower investment securities balances in both comparisons also contributed to the decline.

Lower net interest margins in both comparisons were driven by 52 basis point and 49 basis point declines in the yields on total interest-earning assets in both the year-to-date and quarterly comparisons, respectively, which included the impact of lower purchase accounting accretion, continued spread compression, and repricing of new and existing loans and securities in a lower rate environment. The rate paid on interest-bearing liabilities remained relatively stable in both comparisons.

The declines in total interest-earning asset yields, in both comparisons, primarily reflected lower yields on new and repricing loans in the ongoing low rate environment, the impact of the second quarter 2014 correction to reclassify certain commercial facility fees and the impact of higher interest-earning deposits maintained with the Federal Reserve Bank. Both comparisons also reflected lower yields on the investment securities portfolio.

In the fourth quarter of 2014, we expect net interest income to be down modestly due to the continued decline in purchase accounting accretion and further interest rate spread compression related to loans and investment securities.

For full year 2014, we expect total purchase accounting accretion to be down approximately $275 million compared with 2013. In 2015, we expect purchase accounting accretion to be down approximately $225 million compared to 2014.

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

Noninterest Income

Table 5: Noninterest Income


	Nine months ended September 30												Three months ended September 30
							Change												Change
Dollars in millions	2014			2013			$			%			2014			2013			$			%
Noninterest income
Asset management	$	1,137		$	978		$	159			16	%	$	411		$	330		$	81			25	%
Consumer services		933			926			7			1	%		320			316			4			1	%
Corporate services		1,018			909			109			12	%		374			306			68			22	%
Residential mortgage		483			600			(117	)		(20	)%		140			199			(59	)		(30	)%
Service charges on deposits		482			439			43			10	%		179			156			23			15	%
Net gains on sales of securities		4			96			(92	)		(96	)%		–			21			(21	)		(100	)%
Net other-than-temporary impairments		(4	)		(16	)		12			75	%		(1	)		(2	)		1			50	%
Other		947			1,126			(179	)		(16	)%		314			360			(46	)		(13	)%
Total noninterest income	$	5,000		$	5,058		$	(58	)		(1	)%	$	1,737		$	1,686		$	51			3	%

Noninterest income decreased in the comparison to the first nine months of 2013 as strong fee income growth was more than offset by declines in residential mortgage loan sales revenue, reductions in asset valuations and lower gains on asset sales. In the quarterly comparison, noninterest income increased in the current quarter, as the strong growth in fee income was only partially offset by the declines in residential mortgage loan sales revenue, asset valuations and gains on asset sales.

Noninterest income as a percentage of total revenue was 44% for the first nine months of 2014, up from 42% for the first nine months of 2013. The comparable amounts for the third quarters of 2014 and 2013 were 45% and 43%, respectively.

Asset management revenue increased in both comparisons due to increased earnings from our BlackRock investment, stronger average equity markets in the respective periods and positive net flows, after adjustments for cyclical client activities. Discretionary client assets under management increased to $132 billion at September 30, 2014 compared with $122 billion at September 30, 2013 driven by higher equity markets, new sales and positive net flows.

Consumer service fees increased slightly in both the year-to-date and third quarter comparisons, primarily due to growth in customer-initiated transaction volumes that was mostly offset by several individually insignificant items.

Corporate services revenue increased to $1.0 billion for the first nine months of 2014, including $374 million in the third quarter of 2014, compared to $.9 billion for the first nine months of 2013, which included $306 million for the third quarter of 2013. The comparisons reflected higher merger and acquisition advisory fees and the impact of the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to noninterest income. These increases were partially offset by lower net commercial mortgage servicing rights valuation gains, which were $33

million for the first nine months of 2014 compared to $73 million for the first nine months of 2013. The respective gain amount for the third quarter of 2013 was $18 million, while the amount for the third quarter of 2014 was not significant.

Residential mortgage revenue decreased to $483 million in the first nine months of 2014 compared with $600 million in the first nine months of 2013. In the third quarter 2014 comparison, residential mortgage revenue declined to $140 million compared with $199 million in the third quarter of 2013. Both comparisons included lower loan sales revenue from a reduction in origination volume and lower net hedging gains on residential mortgage servicing rights, partially offset by higher loan servicing fee revenue. The decline in loan sales revenue in the year-to-date comparison was partially offset by the impact of second quarter 2014 gains on sales of previously underperforming portfolio loans.

In addition, the overall decline in residential mortgage revenue for the first nine months of 2014 was partially offset by the impact of improvement in the provision for residential mortgage repurchase obligations, which was a small benefit for the first nine months of 2014 compared to a provision of $71 million in the prior year period. The respective amounts in the third quarters of 2014 and 2013 were not significant.

Service charges on deposits increased in both comparisons to the prior year periods due to growth in customer-initiated transactions and changes in product offerings.

Other noninterest income decreased to $.9 billion for the first nine months of 2014 compared with $1.1 billion for the first nine months of 2013. Third quarter 2014 other noninterest income declined to $314 million compared to $360 million for the third quarter of 2013. Both declines were driven by lower asset valuations and reduced overall gains on sale of other assets, partially offset by higher revenue associated with private equity investments. The year-to-date comparison also reflected lower revenue from a decline in the market value of investments related to deferred compensation obligations.

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

The declines in asset valuations in the nine months period comparison included lower revenue from credit valuations for customer-related derivatives activities due to lower market interest rates impacting the fair value of PNC’s credit exposure on these activities, which resulted in a loss of $15 million for the first nine months of 2014 compared to income of $40 million for the first nine months of 2013. The impacts to both the third quarters of 2014 and 2013 were not significant.

Other noninterest income in the first nine months of 2014 included gains of $173 million on sales of 3 million shares of Visa Class B common shares, compared to $168 million of gains on sales of 4 million shares in the first nine months of 2013. The comparable amounts for the third quarters of 2014 and 2013 were gains of $57 million and $85 million on sales of 1 million and 2 million shares, respectively. At September 30, we held approximately 7 million Visa Class B common shares with a fair value of approximately $648 million and a recorded investment of approximately $89 million.

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

In the fourth quarter of 2014, we expect fee-based noninterest income to remain stable as we anticipate seasonal growth and higher fee-based business activity to offset an expected fourth quarter decline in anticipated merger and acquisition advisory fees compared to the third quarter.

Provision For Credit Losses

The provision for credit losses totaled $221 million for the first nine months of 2014 compared with $530 million for the first nine months of 2013 and was $55 million for the third quarter of 2014 compared with $137 million for the third quarter of 2013. The decreases in provision reflected improved overall credit quality, including lower consumer loan delinquencies. A contributing economic factor in the nine month comparison was the increasing value of residential real estate, which improved expected cash flows from our purchased impaired loans.

Assuming a continuation of current credit trends, we expect our provision for credit losses in the fourth quarter of 2014 to be between $25 million and $75 million.

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

Noninterest Expense

Noninterest expense decreased $218 million, or 3%, to $6.9 billion for the first nine months of 2014 compared to the prior year period, reflecting overall disciplined expense management. The decline was driven by a decrease in personnel expense related to lower headcount and benefits costs and the impacts of a first quarter 2013 contribution to the PNC Foundation and noncash charges for unamortized discounts of $57 million related to redemption of trust preferred securities in the first nine months of 2013.

Noninterest expense was $2.4 billion in the third quarter of 2014, a decline of $37 million, or 2%, compared with third quarter 2013. The decrease reflected well-controlled expenses and the impact of the third quarter 2013 noncash charge related to redemption of trust preferred securities of $27 million. These declines were partially offset by investments in technology and infrastructure.

In the first nine months of 2014, we have completed actions to achieve our full year 2014 continuous improvement savings goal of $500 million. These cost savings are funding investments in our infrastructure, including those related to cybersecurity, and investments in our diversified businesses, including our Retail Banking transformation, consistent with our strategic priorities.

For the fourth quarter of 2014, we expect noninterest expense to increase by low single digits, on a percentage basis, compared to third quarter 2014 related to expected seasonally higher fourth quarter expenses and as we continue to invest in our businesses and infrastructure. We expect to partially offset these increases with expected cost savings from our continuous improvement savings program.

Effective Income Tax Rate

The effective income tax rate was 26.0% in both the first nine months of 2014 and 2013. For the third quarter of 2014, our effective income tax rate was 27.4% compared with 26.0% for the third quarter of 2013. 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 earnings in other tax exempt investments.

The higher effective income tax rate in the third quarter of 2014 compared to the third quarter of 2013 was primarily attributable to the 2013 tax benefit recognized by asserting that earnings of the Luxembourg-UK lending business were indefinitely reinvested.

The effective tax rate for both the 2014 and 2013 periods reflects the adoption of Accounting Standards Update (ASU) 2014-01, which relates to amortization of investments in low income housing tax credits. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for further detail. The retrospective application of this guidance resulted in increased income tax expenses in both periods due to the reclassification of noninterest expense associated with these investments.

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

CONSOLIDATED BALANCE SHEET REVIEW

Table 6: Summarized Balance Sheet Data


	September 30 2014			December 31 2013			Change
Dollars in millions	September 30 2014			December 31 2013			$			%
Assets
Interest-earning deposits with banks	$	26,247		$	12,135		$	14,112			116	%
Loans held for sale		2,143			2,255			(112	)		(5	)%
Investment securities		55,039			60,294			(5,255	)		(9	)%
Loans		200,872			195,613			5,259			3	%
Allowance for loan and lease losses		(3,406	)		(3,609	)		203			6	%
Goodwill		9,074			9,074			–			–	%
Other intangible assets		1,994			2,216			(222	)		(10	)%
Other, net		42,461			42,214			247			1	%
Total assets	$	334,424		$	320,192		$	14,232			4	%
Liabilities
Deposits	$	226,304		$	220,931		$	5,373			2	%
Borrowed funds		52,327			46,105			6,222			13	%
Other		9,798			9,119			679			7	%
Total liabilities		288,429			276,155			12,274			4	%
Equity
Total shareholders’ equity		44,481			42,334			2,147			5	%
Noncontrolling interests		1,514			1,703			(189	)		(11	)%
Total equity		45,995			44,037			1,958			4	%
Total liabilities and equity	$	334,424		$	320,192		$	14,232			4	%

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

The increase in total assets was primarily due to higher interest-earning deposits with banks and loan growth, partially offset by lower investment securities. The increase in interest-earning deposits with banks was driven by higher deposit balances maintained with the Federal Reserve Bank in part due to regulatory short-term liquidity standards that begin to be phased in starting January 1, 2015. Interest-earning deposits with banks included balances held with the Federal Reserve Bank of Cleveland of $25.9 billion and $11.7 billion at September 30, 2014 and December 31, 2013, respectively. The increase in liabilities was largely due to growth in deposits and higher Federal Home Loan Bank borrowings and issuances of bank notes and senior debt and subordinated debt, partially offset by a decline in federal funds purchased and repurchase agreements. An analysis of changes in selected balance sheet categories follows.

Loans

Outstanding loan balances of $200.9 billion at September 30, 2014 and $195.6 billion at December 31, 2013 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.8 billion at September 30, 2014 and $2.1 billion at December 31, 2013, 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.

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

Table 7: Details Of Loans


	September 30 2014		December 31 2013		Change
Dollars in millions	September 30 2014		December 31 2013		$			%
Commercial lending
Commercial
Retail/wholesale trade	$	16,162	$	15,530	$	632			4	%
Manufacturing		18,649		16,208		2,441			15	%
Service providers		13,603		13,052		551			4	%
Real estate related (a)		10,722		10,729		(7	)		–	%
Financial services		5,218		4,927		291			6	%
Health care		9,095		8,690		405			5	%
Other industries		20,051		19,242		809			4	%
Total commercial		93,500		88,378		5,122			6	%
Commercial real estate
Real estate projects (b)		14,564		13,613		951			7	%
Commercial mortgage		8,378		7,578		800			11	%
Total commercial real estate		22,942		21,191		1,751			8	%
Equipment lease financing		7,621		7,576		45			1	%
Total commercial lending (c)		124,063		117,145		6,918			6	%
Consumer lending
Home equity
Lines of credit		20,667		21,696		(1,029	)		(5	)%
Installment		14,388		14,751		(363	)		(2	)%
Total home equity		35,055		36,447		(1,392	)		(4	)%
Residential real estate
Residential mortgage		13,805		14,418		(613	)		(4	)%
Residential construction		546		647		(101	)		(16	)%
Total residential real estate		14,351		15,065		(714	)		(5	)%
Credit card		4,449		4,425		24			1	%
Other consumer
Education		6,978		7,534		(556	)		(7	)%
Automobile		11,548		10,827		721			7	%
Other		4,428		4,170		258			6	%
Total consumer lending		76,809		78,468		(1,659	)		(2	)%
Total loans	$	200,872	$	195,613	$	5,259			3	%

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

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

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

The increase in loans was driven by the increase in commercial lending as a result of growth in commercial and commercial real estate loans, primarily from new customers and organic growth. The decline in consumer lending resulted from lower home equity, residential mortgage and education loans, partially offset by growth in automobile loans.

Loans represented 60% of total assets at September 30, 2014 and 61% at December 31, 2013. Commercial lending represented 62% of the loan portfolio at September 30, 2014 and 60% at December 31, 2013. Consumer lending represented 38% of the loan portfolio at September 30, 2014 and 40% at December 31, 2013.

Commercial real estate loans represented 11% of total loans at both September 30, 2014 and December 31, 2013 and represented 7% of total assets at both September 30, 2014 and December 31, 2013. See the Credit Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our loan portfolio.

Total loans above include purchased impaired loans of $5.2 billion, or 3% of total loans, at September 30, 2014, and $6.1 billion, or 3% of total loans, at December 31, 2013.

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

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

Allowance for Loan and Lease Losses (ALLL)

Our total ALLL of $3.4 billion at September 30, 2014 consisted of $1.6 billion and $1.8 billion established for the commercial lending and consumer lending categories, respectively. The ALLL included what we believe to be appropriate loss coverage on all loans, including 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 Note 1 Accounting Policies, Note 4 Asset Quality and Note 6 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in our Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

Purchase Accounting Accretion and Valuation of Purchased Impaired Loans

Information related to purchase accounting accretion and accretable yield for the first nine months of 2014 and 2013 follows. Additional information is provided in Note 5 Purchased Loans in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

Table 8: Accretion – Purchased Impaired Loans


	Three months ended September 30						Nine months ended September 30
In millions	2014			2013			2014			2013
Accretion on purchased impaired loans
Scheduled accretion	$	109		$	145		$	354		$	452
Reversal of contractual interest on impaired loans		(57	)		(82	)		(195	)		(250	)
Scheduled accretion net of contractual interest		52			63			159			202
Excess cash recoveries		31			26			95			87
Total	$	83		$	89		$	254		$	289

Table 9: Purchased Impaired Loans – Accretable Yield


In millions	2014			2013
January 1	$	2,055		$	2,166
Scheduled accretion		(354	)		(452	)
Excess cash recoveries		(95	)		(87	)
Net reclassifications to accretable from non-accretable and other activity (a)		213			557
September 30 (b)	$	1,819		$	2,184

(a)

Approximately 68% and 60% of the net reclassifications for the first nine months ended September 30, 2014 and 2013, respectively, 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 with the remainder predominantly due to future cash flow changes in the commercial portfolio.

(b)	As of September 30, 2014, we estimate that $1.8 billion of accretable interest on purchased credit impaired loans will be recognized in future interest income, $1.0 billion of which is expected to be contractual interest.

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

Information related to the valuation of purchased impaired loans at September 30, 2014 and December 31, 2013 follows.

Table 10: Valuation of Purchased Impaired Loans


	September 30, 2014				December 30, 2013
Dollars in millions	Balance			Net Investment	Balance			Net Investment
Commercial and commercial real estate loans:
Outstanding balance	$	573			$	937
Purchased impaired mark		(168	)			(264	)
Recorded investment		405				673
Allowance for loan losses		(96	)			(133	)
Net investment		309		54%		540		58%
Consumer and residential mortgage loans:
Outstanding balance		4,795				5,548
Purchased impaired mark		(33	)			(115	)
Recorded investment		4,762				5,433
Allowance for loan losses		(795	)			(871	)
Net investment		3,967		83%		4,562		82%
Total purchased impaired loans:
Outstanding balance		5,368				6,485
Purchased impaired mark		(201	)			(379	)
Recorded investment		5,167				6,106
Allowance for loan losses		(891	)			(1,004	)
Net investment	$	4,276		80%	$	5,102		79%

At September 30, 2014, our largest individual purchased impaired loan had a recorded investment of $11 million. We currently expect to collect total cash flows of $6.1 billion on purchased impaired loans, representing the $4.3 billion net investment at September 30, 2014 and the accretable net interest of $1.8 billion shown in Table 9.

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 September 30, 2014.

Table 11: Weighted Average Life of the Purchased Impaired Portfolios


As of September 30, 2014 Dollars in millions	Recorded Investment		WAL (a)
Commercial	$	82		1.9 years
Commercial real estate		323		1.5 years
Consumer (b)		2,065		4.3 years
Residential real estate (c)		2,697		5.3 years
Total	$	5,167		4.6 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.

(c)	In 2014, the weighted average life of the purchased impaired portfolio increased, primarily driven by residential real estate. Increasing a portfolio’s weighted average life may result in more interest income being recognized on purchased impaired loans in future periods.

Purchased Impaired Loans – Accretable Difference Sensitivity Analysis

The following table provides a sensitivity analysis on the Total 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	September 30, 2014			Declining Scenario (a)			Improving Scenario (b)
Expected cash flows	$	6.1			$(.1	)	$	.3
Accretable difference		1.8			–			.1
Allowance for loan and lease losses		(.9	)		(.1	)		.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.

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

(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 present value impact of declining cash flows is primarily reflected as an immediate impairment charge to the provision for credit losses, resulting in an increase to the allowance for loan and lease losses. The present value 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 Loan Commitments


In millions	September 30 2014		December 31 2013
Total commercial lending (a)	$	96,815	$	90,104
Home equity lines of credit		18,029		18,754
Credit card		17,659		16,746
Other		4,292		4,266
Total	$	136,795	$	129,870

(a)	Less than 5% of net unfunded loan 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.

Standby bond purchase agreements totaled $1.1 billion at September 30, 2014 and $1.3 billion at December 31, 2013 and are included in the preceding table, primarily within the Total commercial lending category.

In addition to the credit commitments set forth in the table above, our net outstanding standby letters of credit totaled $10.2 billion at September 30, 2014 and $10.5 billion at December 31, 2013. 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 1 Accounting Policies in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

Investment Securities

The following table presents the distribution of our investment securities portfolio. We have included credit ratings information because the information is an indicator of the degree of credit risk to which we are exposed. Changes in credit ratings classifications could indicate increased or decreased credit risk and could be accompanied by a reduction or increase in the fair value of our investment securities portfolio. For those securities, where during our quarterly security-level impairment assessments we determined losses represented other-than-temporary impairment (OTTI), we have recorded cumulative credit losses of $1.2 billion in earnings and accordingly have reduced the amortized cost of our securities. See Table 76 in Note 7 Investment Securities in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for more detail. The majority of these cumulative impairment charges related to non-agency residential mortgage-backed and asset-backed securities rated BB or lower.

Table 14: Investment Securities


	September 30, 2014				December 31, 2013				Ratings (a) As of September 30, 2014
Dollars in millions	Amortized Cost		Fair Value		Amortized Cost		Fair Value		AAA/ AA			A			BBB			BB and Lower			No Rating
U.S. Treasury and government agencies	$	5,422	$	5,619	$	4,229	$	4,361		100	%
Agency residential mortgage-backed (b)		23,271		23,688		27,370		27,535		100
Non-agency residential mortgage-backed		5,180		5,423		5,750		5,894		11			1	%		2	%		81	%		5	%
Agency commercial mortgage-backed (b)		3,039		3,094		2,996		3,063		100
Non-agency commercial mortgage-backed (c)		4,771		4,869		5,624		5,744		73			10			8			4			5
Asset-backed (d)		5,836		5,890		6,763		6,773		89			2						8			1
State and municipal		4,031		4,192		3,664		3,678		82			12									6
Other debt		2,117		2,159		2,845		2,891		66			23			10						1
Corporate stock and other		391		397		434		433														100
Total investment securities (e)	$	54,058	$	55,331	$	59,675	$	60,372		85	%		3	%		1	%		9	%		2	%

(a)	Ratings percentages allocated based on amortized cost.

(b)

These line items were corrected for the prior period due to a misclassification of Government National Mortgage Association (GNMA) securities collateralized by project loans. $1.1 billion was previously reported as residential mortgage-backed agency securities and was reclassified to commercial mortgage-backed agency securities.

(c)	Collateralized primarily by retail properties, office buildings, lodging properties and multi-family housing.

(d)	Collateralized primarily by government guaranteed student loans and other consumer credit products and corporate debt.

(e)	Includes available for sale and held to maturity securities.

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

Investment securities represented 16% of total assets at September 30, 2014 and 19% at December 31, 2013.

We evaluate our investment securities portfolio 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. At September 30, 2014, 85% of the securities in the portfolio were rated AAA/AA, with U.S. Treasury and government agencies, agency residential mortgage-backed and agency commercial mortgage-backed securities collectively representing 59% of the portfolio.

The investment securities portfolio includes both available for sale and held to maturity securities. Securities classified as available for sale are carried at fair value with net unrealized gains and losses, representing the difference between amortized cost and fair value, included in Shareholders’ equity as Accumulated other comprehensive income or loss, net of tax, on our Consolidated Balance Sheet. Securities classified as held to maturity are carried at amortized cost. As of September 30, 2014, the amortized cost and fair value of available for sale securities totaled $42.6 billion and $43.6 billion, respectively, compared to an amortized cost and fair value as of December 31, 2013 of $48.0 billion and $48.6 billion, respectively. The amortized cost and fair value of held to maturity securities were $11.4 billion and $11.7 billion, respectively, at September 30, 2014, compared to $11.7 billion and $11.8 billion, respectively, at December 31, 2013.

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 in the total investment securities portfolio increased to $1.3 billion at September 30, 2014 from $.7 billion at December 31, 2013 primarily due to the impact of market interest rates and credit spreads. The comparable amounts for the securities available for sale portfolio were $1.0 billion and $.6 billion, respectively.

Unrealized gains and losses on available for sale debt securities do not impact liquidity. However these gains and losses do affect risk-based capital under the regulatory capital rules in effect beginning in 2014 for PNC. Also, a change in the securities’ credit ratings could impact the liquidity of the securities and may be indicative of a change in credit quality, which could affect our risk-weighted assets and, therefore, our regulatory capital ratios under the regulatory capital rules in effect for 2014. In addition, the amount representing the credit-related portion of OTTI on available for sale securities would reduce our earnings and regulatory capital ratios.

During the second quarter of 2014, we transferred securities with a fair value of $1.4 billion from available for sale to held to maturity. We changed our intent and committed to hold these high-quality securities to maturity in order to reduce the impact of price volatility on Accumulated other comprehensive income and certain capital measures, after taking into consideration market conditions and regulatory capital requirements under Basel III capital standards. See additional discussion of this transfer in Note 7 Investment Securities in our Notes To Consolidated Financial Statements included in Part I, Item I of this Report.

The duration of investment securities was 2.4 years at September 30, 2014. We estimate that, at September 30, 2014, the effective duration of investment securities was 2.5 years for an immediate 50 basis points parallel increase in interest rates and 2.3 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2013 were 3.0 years and 2.8 years, respectively.

At least quarterly, we conduct a comprehensive security-level impairment assessment on all securities. For securities in an unrealized loss position, we determine whether the loss represents OTTI. For debt securities that we neither intend to sell nor believe we will be required to sell prior to expected recovery, we recognize the credit portion of OTTI charges in current earnings and include the noncredit portion of OTTI in Net unrealized gains (losses) on OTTI securities on our Consolidated Statement of Comprehensive Income and net of tax in Accumulated other comprehensive income (loss) on our Consolidated Balance Sheet. During the first nine months of 2014 and 2013 we recognized OTTI credit losses of $4 million and $16 million, respectively. The credit losses related to residential mortgage-backed and asset-backed securities collateralized by non-agency residential loans.

If 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.

Additional information regarding our investment securities is included in Note 7 Investment Securities and Note 8 Fair Value in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

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

Loans Held for Sale

Table 15: Loans Held For Sale


In millions	September 30 2014		December 31 2013
Commercial mortgages at fair value	$	867	$	586
Commercial mortgages at lower of cost or fair value		24		281
Total commercial mortgages		891		867
Residential mortgages at fair value		1,187		1,315
Residential mortgages at lower of cost or fair value		24		41
Total residential mortgages		1,211		1,356
Other		41		32
Total	$	2,143	$	2,255

We account for certain commercial mortgage loans classified as held for sale at fair value. As of September 1, 2014, we have elected to apply the fair value option to certain commercial mortgage loans held for sale to agencies. This election applies to all new commercial mortgage loans held for sale originated for sale to the agencies effective on or after September 1, 2014. The election of fair value option aligns the accounting for the commercial mortgages with the related commitments to sell the loans.

We sold $2.0 billion of commercial mortgage loans to agencies during the first nine months of 2014 compared to $2.1 billion during the first nine months of 2013. Total gains of $49 million were recognized on the valuation and sale of commercial mortgage loans held for sale, net of hedges, during the first nine months of 2014, including $20 million in the third quarter. Comparable amounts for 2013 were $57 million and $14 million, respectively.

Residential mortgage loan origination volume was $7.1 billion during the first nine months of 2014 compared to $12.6 billion for the first nine months of 2013. The majority of such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $6.4 billion of loans and recognized related gains of $323 million during the first nine months of 2014, of which $98 million occurred in the third quarter. The comparable amounts for the first nine months of 2013 were $12.1 billion and $470 million, respectively, including $108 million in the third quarter.

Interest income on loans held for sale was $73 million in the first nine months of 2014, including $26 million in the third quarter. Comparable amounts for 2013 were $126 million and $41 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 2 Loan Sale and Servicing Activities and Variable Interest Entities and Note 8 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 $11.1 billion at September 30, 2014 and $11.3 billion at December 31, 2013. The decrease of $.2 billion was primarily due to fair value changes of residential mortgage servicing rights, partially offset by new additions and purchases of mortgage servicing rights. See additional information regarding our goodwill and intangible assets in Note 9 Goodwill and Other Intangible Assets included in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

Funding Sources

Table 16: Details Of Funding Sources


	September 30 2014		December 31 2013		Change
Dollars in millions	September 30 2014		December 31 2013		$			%
Deposits
Money market	$	113,727	$	108,631	$	5,096			5	%
Demand		78,495		77,756		739			1	%
Retail certificates of deposit		18,963		20,795		(1,832	)		(9	)%
Savings		12,226		11,078		1,148			10	%
Time deposits in foreign offices and other time deposits		2,893		2,671		222			8	%
Total deposits		226,304		220,931		5,373			2	%
Borrowed funds
Federal funds purchased and repurchase agreements		3,499		4,289		(790	)		(18	)%
Federal Home Loan Bank borrowings		16,471		12,912		3,559			28	%
Bank notes and senior debt		15,327		12,603		2,724			22	%
Subordinated debt		9,046		8,244		802			10	%
Commercial paper		4,809		4,997		(188	)		(4	)%
Other		3,175		3,060		115			4	%
Total borrowed funds		52,327		46,105		6,222			13	%
Total funding sources	$	278,631	$	267,036	$	11,595			4	%

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

See the Liquidity Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our 2014 capital and liquidity activities.

The increase in deposits during the first nine months of 2014 was primarily driven by increases in money market and savings deposits, partially offset by lower retail certificates of

deposit. Interest-bearing deposits represented 68% of total deposits at both September 30, 2014 and December 31, 2013. Total borrowed funds increased $6.2 billion since December 31, 2013 as higher Federal Home Loan Bank borrowings and issuances of bank notes and senior debt and subordinated debt were partially offset by a decline in federal funds purchased and repurchase agreements.

Capital

Table 17: Shareholders’ Equity


	September 30 2014			December 31 2013			Change
Dollars in millions	September 30 2014			December 31 2013			$			%
Shareholders’ equity
Preferred stock (a)
Common stock	$	2,703		$	2,698		$	5			–	%
Capital surplus – preferred stock		3,945			3,941			4			–	%
Capital surplus – common stock and other		12,573			12,416			157			1	%
Retained earnings		25,464			23,251			2,213			10	%
Accumulated other comprehensive income		727			436			291			67	%
Common stock held in treasury at cost		(931	)		(408	)		(523	)		(128	)%
Total shareholders’ equity	$	44,481		$	42,334		$	2,147			5	%

(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 $2.1 billion compared with December 31, 2013, primarily reflecting an increase in retained earnings of $2.2 billion (driven by net income of $3.2 billion and the impact of $933 million of common and preferred dividends declared) and an increase of $291 million in accumulated other comprehensive income partially offset by share repurchases of $633 million under PNC’s existing common stock repurchase authorization. The increase in accumulated other comprehensive income was primarily due to the impact of market interest rates and credit spreads on securities available for sale and derivatives that are part of cash flow hedging strategies, along with the impact of pension and other postretirement benefit plan adjustments. Common shares outstanding were 528 million at September 30, 2014 and 533 million at December 31, 2013.

Our current common stock repurchase program authorization 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, the potential impact on our credit ratings, contractual and regulatory limitations, and the results of the supervisory

assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve and our primary bank regulators as part of the CCAR process. The Federal Reserve accepted our 2014 capital plan and did not object to our proposed capital actions. The capital plan included share repurchase programs of up to $1.5 billion for the four quarter period beginning in the second quarter of 2014 under PNC’s existing common stock repurchase authorization. These programs include repurchases of up to $200 million to mitigate the financial impact of employee benefit plan transactions. Under the capital plan authorization, PNC repurchased 2.6 million common shares for $223 million in the second quarter of 2014 and 4.2 million common shares for $360 million in the third quarter of 2014. Under the “de minimis” safe harbor of the Federal Reserve’s capital plan rule, PNC may make limited repurchases of common stock or other capital distributions in amounts that exceed the amounts included in its most recently approved capital plan, provided that, among other things, such distributions do not exceed, in the aggregate, 1% of PNC’s Tier 1 capital and the Federal Reserve does not object to the additional repurchases or distributions. Under this “de minimis” safe harbor, PNC repurchased $50 million of common shares to mitigate the financial impact of employee benefit plan transactions in the first quarter of 2014. See the Supervision and Regulation section of Item 1 Business of our 2013 Form 10-K for further information concerning the CCAR process and the factors the Federal Reserve takes into consideration in its evaluation of capital plans and the Capital and Liquidity Actions portion of the Executive Summary section of our Financial Review for the impact of the Federal Reserve’s current supervisory assessment of the capital adequacy program.

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

Table 18: Basel III Capital


	September 30, 2014
Dollars in millions	Transitional Basel III (a) (c)			Pro forma Fully Phased-In Basel III (b) (c)
Common equity Tier 1 capital
Common stock plus related surplus, net of treasury stock	$	14,344		$	14,344
Retained earnings		25,464			25,464
Accumulated other comprehensive income for securities currently and previously held as available for sale		136			681
Accumulated other comprehensive income for pension and other postretirement plans		(36	)		(180	)
Goodwill, net of associated deferred tax liabilities		(8,834	)		(8,834	)
Other disallowed intangibles, net of deferred tax liabilities		(80	)		(400	)
Other adjustments/(deductions)		(28	)		(93	)
Total common equity Tier 1 capital before threshold deductions		30,966			30,982
Total threshold deductions		(214	)		(1,067	)
Common equity Tier 1 capital		30,752			29,915
Additional Tier 1 capital
Preferred stock		3,945			3,945
Trust preferred capital securities		99
Noncontrolling interests (d)		790			43
Other adjustments/(deductions)		(82	)		(96	)
Tier 1 capital		35,504			33,807
Additional Tier 2 capital
Qualifying subordinated debt		5,674			4,872
Trust preferred capital securities		99
Allowance for loan and lease losses included in Tier 2 capital		3,443			226
Other		2			10
Total Basel III capital	$	44,722		$	38,915
Risk-Weighted Assets (e)
Basel I risk-weighted assets calculated in accordance with transition rules for 2014 (f)	$	277,348			N/A
Estimated Basel III standardized approach risk-weighted assets (g)		N/A		$	295,665
Estimated Basel III advanced approaches risk-weighted assets (h)		N/A			289,405
Average quarterly adjusted total assets		319,696			318,471
Basel III capital ratios
Common equity Tier 1		11.1	%		10.1	% (i) (k)
Tier 1 risk-based		12.8			11.4	(i) (l)
Total capital risk-based		16.1			13.5	(j) (m)
Leverage (n)		11.1			10.6

(a)	Calculated using the regulatory capital methodology applicable to PNC during 2014.

(b)	PNC utilizes the pro forma fully phased-in Basel III capital ratios to assess its capital position (without the benefit of phase-ins), including comparison to similar estimates made by other financial institutions.

(c)

Basel III capital ratios and estimates may be impacted by additional regulatory guidance or analysis and, in the case of those ratios calculated using the advanced approaches, the ongoing evolution, validation and regulatory approval of PNC’s models integral to the calculation of advanced approaches risk-weighted assets.

(d)	Includes primarily REIT Preferred Securities.

(e)	Calculated as of period end.

(f)	Includes credit and market risk-weighted assets.

(g)	Estimated based on Basel III standardized approach rules and includes credit and market risk-weighted assets.

(h)	Estimated based on Basel III advanced approaches rules and includes credit, market and operational risk-weighted assets.

(i)	Pro forma fully phased-in Basel III capital ratio based on estimated Basel III standardized approach risk-weighted assets and rules.

(j)	Pro forma fully phased-in Basel III capital ratio based on estimated Basel III advanced approaches risk-weighted assets and rules.

(k)	For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Common equity Tier 1 capital ratio is 10.4%. This capital ratio is calculated using Common equity Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets.

(l)	For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Tier 1 risk-based capital ratio is 11.7%. This capital ratio is calculated using Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets.

(m)

For comparative purposes only, the pro forma fully phased-in standardized approach Basel III Total capital risk-based capital ratio is 14.3%. This ratio is calculated using additional Tier 2 capital which, under the standardized approach, reflects allowance for loan and lease losses of up to 1.25% of credit risk related risk-weighted assets and dividing by estimated Basel III standardized approach risk-weighted assets.

(n)	Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets.

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

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 modified the Basel II framework effective January 1, 2014. See the Supervision and Regulation section in Item 1 Business and Item 1A Risk Factors of our 2013 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. Both PNC and PNC Bank, N.A. entered this parallel run phase on January 1, 2013. 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. After PNC exits parallel run, its regulatory risk-based capital ratio for each measure (e.g., Common equity Tier 1 ratio) will be the lower of the ratios as calculated under the standardized approach and the advanced approaches.

As a result of the staggered effective dates of the final U.S. capital rules issued in July 2013, as well as the fact that PNC remains in the parallel run qualification phase for the advanced approaches, PNC’s regulatory risk-based capital ratios in 2014 are based on the definitions of, and deductions from, capital under Basel III (as such definitions and deductions are phased-in for 2014) and Basel I risk-weighted assets (subject to certain adjustments as defined by the Basel III rules). We refer to the capital ratios calculated using these Basel III phased-in provisions and adjusted Basel I risk-weighted assets as the Transitional Basel III ratios.

Federal banking regulators have stated that they expect the largest U.S. bank holding companies, including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and 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. We seek to manage our capital consistent with these regulatory principles, and believe that our September 30, 2014 capital levels were aligned with them.

At September 30, 2014, PNC and PNC Bank, N.A., our domestic bank subsidiary, were both considered “well capitalized,” based on applicable U.S. regulatory capital ratio requirements. To qualify as “well capitalized,” PNC and PNC Bank, N.A. must have, during 2014, Transitional Basel III capital ratios of at least 6% for Tier 1 risk-based and 10% for Total capital risk-based, and PNC Bank, N.A. must have a Transitional Basel III leverage ratio of at least 5%.

Common equity Tier 1 capital as defined under the Basel III rules adopted by the U.S. banking agencies 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 Common equity Tier 1 capital. Also, Basel I regulatory capital excludes accumulated other comprehensive income related to securities currently and previously held as available for sale, as well as pension and other postretirement plans, whereas under Basel III these items are a component of PNC’s capital. The Basel III final rules also eliminate the Tier 1 treatment of trust preferred securities for bank holding companies with $15 billion or more in assets. In the third quarter of 2013, we concluded our redemptions of the discounted trust preferred securities previously assumed through acquisitions.

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

We provide additional information regarding regulatory capital requirements and some of their potential impacts on PNC in the Banking Regulation and Supervision section of Item 1 Business, Item 1A Risk Factors and Note 22 Regulatory Matters in the Notes To Consolidated Financial Statements under Item 8 of our 2013 Form 10-K.

PNC’s Basel I ratios as of December 31, 2013, which were PNC’s effective regulatory capital ratios as of that date, were 10.5% for Tier 1 common capital ratio, 12.4% for Tier 1 risk-based capital ratio, 15.8% for Total risk-based capital ratio and 11.1% for leverage ratio. Our 2013 Form 10-K included additional information regarding our Basel I capital ratios.

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

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 2013 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 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements,

•

Note 10 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities in the Notes To Consolidated Financial Statements, and

•

Note 17 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 September 30, 2014 and December 31, 2013 is included in Note 2 of this Report.

Trust Preferred Securities

We are subject to certain restrictions, including restrictions on dividend payments, in connection with $206 million in principal amount of an outstanding junior subordinated debenture associated with $200 million of trust preferred securities that were issued by PNC Capital Trust C, a subsidiary statutory trust (both amounts as of September 30, 2014). Generally, if there is (i) an event of default under the debenture, (ii) PNC elects to defer interest on the debenture, (iii) PNC exercises its right to defer payments on the related trust preferred security issued by the statutory trust 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. See Note 14 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in the Notes To Consolidated Financial Statements in Item 8 of our 2013 Form 10-K for information on contractual limitations on dividend payments resulting from securities issued by PNC Preferred Funding Trust I and PNC Preferred Funding Trust II.

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

FAIR VALUE MEASUREMENTS

In addition to the following, see Note 8 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for further information regarding fair value.

The following table summarizes the assets and liabilities measured at fair value at September 30, 2014 and December 31, 2013, respectively, and the portions of such assets and liabilities that are classified within Level 3 of the valuation hierarchy.

Table 19: Fair Value Measurements – Summary


	September 30, 2014						December 31, 2013
Dollars in millions	Total Fair Value			Level 3			Total Fair Value			Level 3
Total assets	$	57,978		$	10,848		$	63,221		$	10,650
Total assets at fair value as a percentage of consolidated assets		17	%					20	%
Level 3 assets as a percentage of total assets at fair value					19	%					17	%
Level 3 assets as a percentage of consolidated assets					3	%					3	%
Total liabilities	$	5,187		$	679		$	5,585		$	638
Total liabilities at fair value as a percentage of consolidated liabilities		2	%					2	%
Level 3 liabilities as a percentage of total liabilities at fair value					13	%					11	%
Level 3 liabilities as a percentage of consolidated liabilities					<1	%					<1	%

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

An instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. 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. For additional information regarding the transfers of assets or liabilities between hierarchy levels, see Note 8 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

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 18 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 18 primarily due to the presentation in this Financial Review of business net interest revenue on a taxable-equivalent basis. Note 18 presents results of businesses for the first nine months and third quarter of 2014 and 2013.

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

Retail Banking

(Unaudited)

Table 20: Retail Banking Table


Nine months ended September 30 Dollars in millions, except as noted	2014			2013
Income Statement
Net interest income	$	2,938		$	3,067
Noninterest income
Service charges on deposits		461			419
Brokerage		176			167
Consumer services		714			679
Other		240			268
Total noninterest income		1,591			1,533
Total revenue		4,529			4,600
Provision for credit losses		223			462
Noninterest expense		3,430			3,438
Pretax earnings		876			700
Income taxes		320			257
Earnings	$	556		$	443
Average Balance Sheet
Loans
Consumer
Home equity	$	28,985		$	29,203
Indirect auto		9,093			7,434
Indirect other		726			938
Education		7,314			8,005
Credit cards		4,327			4,106
Other		2,200			2,145
Total consumer		52,645			51,831
Commercial and commercial real estate		10,924			11,311
Floor plan		2,227			1,997
Residential mortgage		618			764
Total loans		66,414			65,903
Goodwill and other intangible assets		6,043			6,127
Other assets		2,807			2,590
Total assets	$	75,264		$	74,620
Deposits
Noninterest-bearing demand	$	21,890		$	21,096
Interest-bearing demand		33,889			31,647
Money market		49,945			48,628
Total transaction deposits		105,724			101,371
Savings		11,713			10,812
Certificates of deposit		19,314			21,846
Total deposits		136,751			134,029
Other liabilities		440			327
Total liabilities	$	137,191		$	134,356
Performance Ratios
Return on average assets		.99	%		.79	%
Noninterest income to total revenue		35			33
Efficiency		76			75
Other Information (a)
Credit-related statistics:
Commercial nonperforming assets	$	146		$	212
Consumer nonperforming assets		1,037			1,074
Total nonperforming assets (b)	$	1,183		$	1,286
Purchased impaired loans (c)	$	600		$	718
Commercial lending net charge-offs	$	33		$	76
Credit card lending net charge-offs		109			119
Consumer lending (excluding credit card) net charge-offs		212			350
Total net charge-offs	$	354		$	545
Commercial lending annualized net charge-off ratio		.34	%		.76	%
Credit card lending annualized net charge-off ratio		3.37	%		3.87	%
Consumer lending (excluding credit card) annualized net charge-off ratio (d)		.58	%		.97	%
Total annualized net charge-off ratio (d)		.71	%		1.11	%


At September 30	2014			2013
Other Information (Continued) (a)
Home equity portfolio credit statistics: (e)
% of first lien positions at origination (f)		53	%		52	%
Weighted-average loan-to-value ratios (LTVs) (f) (g)		78	%		83	%
Weighted-average updated FICO scores (h)		747			745
Annualized net charge-off ratio (d)		.55	%		1.17	%
Delinquency data – % of total loans: (i)
Loans 30 – 59 days past due		.19	%		.22	%
Loans 60 – 89 days past due		.07	%		.09	%
Accruing loans past due		.26	%		.32	%
Nonperforming loans		3.04	%		3.13	%
Other statistics:
ATMs		8,178			7,441
Branches (j)		2,691			2,724
Brokerage account client assets (in billions)	$	43		$	40
Customer-related statistics (average):
Non-teller deposit transactions (k)		34	%		23	%
Digital consumer customers (l)		45	%		37	%

(a)	Presented as of September 30, except for net charge-offs, net charge-off ratios and customer-related statistics, which are for the nine months ended.

(b)	Includes nonperforming loans of $1.1 billion at September 30, 2014 and $1.2 billion at September 30, 2013.

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

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

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

(f)	Lien position and LTV calculations reflect management assumptions where data limitations exist.

(g)	LTV statistics are based upon current information.

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

(i)	Data based upon recorded investment. Past due amounts exclude purchased impaired loans, even if contractually past due, as we are currently accreting interest income over the expected life of the loans.

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

(k)	Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application.

(l)	Represents consumer checking relationships that process the majority of their transactions through non-teller channels.

Retail Banking earned $556 million in the first nine months of 2014 compared with earnings of $443 million for the same period a year ago. The increase in earnings was driven by a lower provision for credit losses, increased noninterest income due to strong fee income growth, and lower noninterest expense resulting from disciplined expense management and the impact of branch consolidations in 2013. These increases in earnings were partially offset by lower net interest income driven by interest rate spread compression on the value of deposits, lower yields on loans, and lower purchase accounting accretion.

Retail Banking continues to augment and refine its core checking account products to enhance the customer experience and grow value. In the first nine months of 2014, we completed the conversion of consumer and business banking customers from free checking and we focused on product value for consumers and small businesses and growing customer share of wallet through the sale of liquidity, banking and investment products.

•

Completed the market rollout of PNC Total Insight ^SM, an integrated online banking and investing experience for our customers.

•

Enhanced business banking Cash Flow Insight ^SM features and customer experience.

•

Introduced relationship pricing for business banking customers.

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

Retail Banking also continued to focus on serving more customers through cost effective channels that meet their evolving preferences for convenience.

•

In the first nine months of 2014, approximately 45% of consumer customers used non-teller channels for the majority of their transactions compared with 37% for the same period in 2013.

•

Deposit transactions via ATM and mobile channels increased to 34% of total deposit transactions in the first nine months of 2014 compared with 23% for the same period a year ago.

•

As part of PNC’s retail branch transformation strategy we continue to evolve our network. We converted 45 branches to universal branches as of September 30, 2014 in a pilot program; additional branches will be converted in the fourth quarter of 2014 and throughout 2015. In the first nine months of 2014, 43 branches were closed or consolidated.

•

Retail Banking’s primary geographic footprint extends across 17 states and Washington, D.C. Our retail branch network covers nearly half the U.S. population, with 2,691 branches and 8,178 ATMs.

Total revenue for the first nine months of 2014 was $4.5 billion, $71 million lower than the same period of 2013. Net interest income of $2.9 billion decreased $129 million compared with the same period a year ago. The decrease resulted primarily from interest rate spread compression on the value of deposits due to the continued low rate environment, lower yields on loans and lower purchase accounting accretion on loans and deposits.

Noninterest income increased $58 million compared to the first nine months of 2013. Noninterest income included strong customer-related fee income growth primarily resulting from changes in product offerings and increases in customer-initiated transactions. Noninterest income included gains on sales of Visa Class B common shares of $173 million in the first nine months of 2014 compared to $168 million for the same period a year ago; three million shares were sold in the first nine months of 2014 compared to four million shares in the same period a year ago.

The provision for credit losses was $223 million and net charge-offs were $354 million in the first nine months of 2014 compared with $462 million and $545 million, respectively, for the same period in 2013. The provision for credit losses decrease was due to credit quality improvement. The decrease in the net charge-offs was attributable to the impact of alignment with interagency guidance in the first quarter of 2013 and improved credit quality.

Noninterest expense for the first nine months of 2014 was $8 million lower than the same period in 2013. The decrease was due to disciplined expense management and the impact of branch consolidations in 2013.

Growing core checking deposits is key to Retail Banking’s growth and to providing a source of low-cost funding and liquidity to PNC. The deposit product strategy of Retail Banking is to remain disciplined on pricing, target specific

products and markets for growth, and focus on the retention and growth of customer balances. In the first nine months of 2014, average total deposits of $136.8 billion increased $2.7 billion, or 2%, compared with the same period in 2013.

•

Average transaction deposits grew $4.4 billion, or 4%, and average savings deposit balances grew $901 million, or 8%, year-over-year as a result of organic deposit growth. In the first nine months of 2014, compared with the same period a year ago, average demand deposits increased $3.0 billion, or 6%, to $55.8 billion and average money market deposits increased $1.3 billion, or 3%, to $50.0 billion.

•

Total average certificates of deposit decreased $2.5 billion, or 12%, compared to the same period of 2013. The decline in average certificates of deposit was due to the expected run-off of maturing accounts.

Retail Banking continued to focus on a relationship-based lending strategy that targets specific products and markets for growth, small businesses, and auto dealerships. In the first nine months of 2014, average total loans were $66.4 billion, an increase of $511 million, or 1%, over the same period of 2013.

•

Average indirect auto loans increased $1.7 billion, or 22%, compared to the first nine months of 2013. The increase was primarily due to increases in auto sales as well as the expansion of our indirect sales force and product introduction to the Southeast markets.

•

Average auto dealer floor plan loans grew $230 million, or 12%, in the first nine months of 2014, compared to the same period a year ago, primarily resulting from sales growth and additional dealer relationships.

•

Average credit card balances increased $221 million, or 5%, over the first nine months of 2013 as a result of efforts to increase credit card share of wallet through organic growth.

•

Average home equity loans decreased $218 million compared to the first nine months of 2013. The portfolio declined as decreases in lines of credit were partially offset by increases in term loans. Retail Banking’s home equity loan portfolio is relationship based, with 97% of the portfolio attributable to borrowers in our primary geographic footprint.

•

For the first nine months of 2014, compared to the same period a year ago, average loan balances for the remainder of the portfolio declined a net $1.4 billion, driven by declines in the education portfolio of $691 million and commercial & commercial real estate of $387 million. The discontinued government guaranteed education loan, indirect other and residential mortgage portfolios are primarily run-off portfolios.

Nonperforming assets totaled $1.2 billion at September 30, 2014, a decrease of $103 million, or 8%, over the same period of 2013, driven by declines in both commercial and consumer non-performing loans.

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

Corporate & Institutional Banking

(Unaudited)

Table 21: Corporate & Institutional Banking Table


Nine months ended September 30 Dollars in millions, except as noted	2014			2013
Income Statement
Net interest income	$	2,777		$	2,844
Noninterest income
Corporate service fees		926			820
Other		329			453
Noninterest income		1,255			1,273
Total revenue		4,032			4,117
Provision for credit losses		86			4
Noninterest expense		1,520			1,474
Pretax earnings		2,426			2,639
Income taxes		884			944
Earnings	$	1,542		$	1,695
Average Balance Sheet
Loans
Commercial	$	77,550		$	71,601
Commercial real estate		20,927			17,240
Equipment lease financing		6,863			6,606
Total commercial lending		105,340			95,447
Consumer		1,116			919
Total loans		106,456			96,366
Goodwill and other intangible assets		3,812			3,792
Loans held for sale		973			1,058
Other assets		9,991			10,936
Total assets	$	121,232		$	112,152
Deposits
Noninterest-bearing demand	$	43,348		$	40,850
Money market		20,930			17,355
Other		7,646			6,962
Total deposits		71,924			65,167
Other liabilities		7,454			16,572
Total liabilities	$	79,378		$	81,739
Performance Ratios
Return on average assets		1.70	%		2.02	%
Noninterest income to total revenue		31			31
Efficiency		38			36
Commercial Mortgage Servicing Portfolio – Serviced For PNC and Others (in billions)
Beginning of period	$	308		$	282
Acquisitions/additions		62			57
Repayments/transfers		(48	)		(41	)
End of period	$	322		$	298
Other Information
Consolidated revenue from: (a)
Treasury Management (b)	$	950		$	951
Capital Markets (c)	$	547		$	502
Commercial mortgage loans held for sale (d)	$	84		$	96
Commercial mortgage loan servicing income (e)		164			166
Commercial mortgage servicing rights valuation, net of economic hedge (f)		33			73
Total commercial mortgage banking activities	$	281		$	335
Average Loans (by C&IB business)
Corporate Banking	$	53,530		$	50,260
Real Estate		27,260			21,597
Business Credit		13,074			11,508
Equipment Finance		10,362			9,961
Other		2,230			3,040
Total average loans	$	106,456		$	96,366
Total loans (g)	$	109,792		$	99,337
Net carrying amount of commercial mortgage servicing rights (g)	$	532		$	541
Credit-related statistics:
Nonperforming assets (g) (h)	$	616		$	949
Purchased impaired loans (g) (i)	$	316		$	600
Net charge-offs	$	10		$	95

(a)

Represents consolidated PNC amounts. See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of the Corporate & Institutional Banking portion of this Business Segments Review section.

(b)	Includes amounts reported in net interest income and corporate service fees.

(c)	Includes amounts reported in net interest income, corporate service fees and other noninterest income.

(d)	Includes other noninterest income for valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, origination fees, gains on sale of loans held for sale and net interest income on loans held for sale.

(e)

Includes net interest income and noninterest income, primarily in corporate services fees, from loan servicing and ancillary services, net of changes in fair value on commercial mortgage servicing rights due to time and payoffs for the first nine months of 2014 and net of commercial mortgage servicing rights amortization for the first nine months of 2013. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.

(f)	Includes amounts reported in corporate services fees.

(g)	As of September 30.

(h)	Includes nonperforming loans of $.5 billion at September 30, 2014 and $.8 billion at September 30, 2013.

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

Corporate & Institutional Banking earned $1.5 billion in the first nine months of 2014, a decrease of $153 million compared with the first nine months of 2013. The decrease in earnings was due to narrower spreads on loans and deposits, lower purchase accounting accretion, an increase in the provision for credit losses, and decreases in asset valuations, partially offset by the impact of higher average loans and deposits. We continue to focus on building client relationships in our legacy and new Southeast markets where the risk-return profile is attractive.

Net interest income was $2.8 billion in the first nine months of 2014, a decrease of $67 million from the first nine months of 2013 primarily due to continued spread compression on loans and deposits, lower purchase accounting and the impact from the second quarter 2014 correction to reclassify certain commercial facility usage fees from net interest income to Corporate Service fees, partially offset by the impact of higher average loans and deposits.

Corporate service fees were $926 million in the first nine months of 2014, increasing $106 million compared to the first nine months of 2013. This increase was primarily due to higher merger and acquisition advisory fees and the impact of the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to corporate service fees, partially offset by a lower commercial mortgage servicing rights valuation, net of economic hedge.

Other noninterest income was $329 million in the first nine months of 2014 compared with $453 million in the first nine months of 2013. The decrease of $124 million was driven by lower revenue associated with credit valuations for customer-related derivatives activities, lower gains on asset sales and lower multifamily loans originated for sale to agencies.

The provision for credit losses was $86 million for the first nine months of 2014 compared with $4 million in the first nine months of 2013 reflecting our continual qualitative assessments of the portfolio given the growth trends over the

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

recent quarters. Net charge-offs were $10 million in the first nine months of 2014, which represents a decrease of $85 million compared with the first nine months of 2013 primarily attributable to a decrease in commercial and commercial real estate charge-offs.

Nonperforming assets were $616 million, a 35% decrease from September 30, 2013 resulting from continued improving credit quality.

Noninterest expense was $1.5 billion in the first nine months of 2014, an increase of $46 million primarily driven by higher incentive compensation costs associated with business activity.

Average loans were $106.5 billion in the first nine months of 2014 compared with $96.4 billion in the first nine months of 2013, an increase of 10% reflecting strong growth in Real Estate, Corporate Banking, and Business Credit:

•

Corporate Banking business provides lending, treasury management and capital markets-related products and services to mid-sized and large corporations, government and not-for-profit entities. Average loans for this business increased $3.3 billion, or 7%, in the first nine months of 2014 compared with the first nine months of 2013, primarily due to an increase in loan commitments from specialty lending businesses.

•

PNC Real Estate provides commercial real estate and real estate-related lending through both conventional and affordable multifamily financing. Average loans for this business increased $5.7 billion, or 26%, in the first nine months of 2014 compared with the first nine months of 2013 due to increased originations.

•

PNC Business Credit provides asset-based lending. The loan portfolio is relatively high yielding, with acceptable risk as the loans are mainly secured by short-term assets. Average loans increased $1.6 billion, or 14%, in the first nine months of 2014 compared with the first nine months of 2013 due to increasing deal sizes and higher utilization.

•

PNC Equipment Finance provides equipment financing solutions with over $11.5 billion in equipment finance assets as of September 30, 2014. Average equipment finance assets in the first nine months of 2014 were $11.1 billion, an increase of $.5 billion or 5% compared with the first nine months of 2013.

Loan commitments increased 4%, or $8.1 billion, to $204.2 billion at September 30, 2014 compared to $196.1 billion at December 31, 2013, and 8%, or $14.4 billion, compared to $189.8 billion at September 30, 2013, primarily due to growth in our Real Estate, Corporate Banking and Business Credit businesses.

Period-end loan balances increased by 8%, or $8.0 billion, to $109.8 billion at September 30, 2014 compared with $101.8 billion at December 31, 2013 and 11%, or $10.5 billion, compared with $99.3 billion at September 30, 2013.

Average deposits were $71.9 billion in the first nine months of 2014, an increase of $6.8 billion, or 10%, compared with the first nine months of 2013 as a result of business growth and inflows into money market and noninterest-bearing deposits.

The commercial mortgage servicing portfolio was $322 billion at September 30, 2014, an increase of 5% compared with December 31, 2013 and an increase of 8% compared to September 30, 2013 as servicing additions exceeded portfolio run-off.

Product Revenue

In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management, capital markets-related products and services, and commercial mortgage banking activities, for customers of all our business segments. On a consolidated basis, the revenue from these other services is included in net interest income, corporate service fees and other noninterest income. From a segment perspective, the majority of the revenue and expense related to these services is reflected in the Corporate & Institutional Banking segment results and the remainder is reflected in the results of other businesses. The Other Information section in Table 21 in the Corporate & Institutional Banking portion of this Business Segments Review section includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.

Treasury management revenue, comprised of fees and net interest income from customer deposit balances, totaled $950 million for the first nine months of 2014 compared with $951 million for the first nine months of 2013. Lower spreads on deposits in the first nine months of 2014 compared with the first nine months of 2013 were offset by an increase in average deposit balances.

Capital markets revenue includes merger and acquisition advisory fees, loan syndications, derivatives, foreign exchange, asset-backed finance revenue and fixed income activities. Revenue from capital markets-related products and services totaled $547 million in the first nine months of 2014 compared with $502 million in the first nine months of 2013. The increase in the comparison was driven by higher merger and acquisition advisory fees and to a lesser extent higher loan syndications and foreign exchange revenue, which was partially offset by lower revenue associated with credit valuations for customer-related derivatives activities and related derivatives sales.

Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (including net interest income and noninterest income) and revenue derived from commercial mortgage loans held for sale and related hedges. Total commercial mortgage banking activities resulted in revenue of $281 million in the first nine months of 2014 compared with $335 million in the first nine months of 2013. The decrease in the comparison was mainly due to lower net commercial mortgage servicing rights valuations.

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

Asset Management Group

(Unaudited)

Table 22: Asset Management Group Table


Nine months ended September 30 Dollars in millions, except as noted	2014			2013
Income Statement
Net interest income	$	215		$	217
Noninterest income		611			554
Total revenue		826			771
Provision for credit losses		2			2
Noninterest expense		610			570
Pretax earnings		214			199
Income taxes		78			73
Earnings	$	136		$	126
Average Balance Sheet
Loans
Consumer	$	5,407		$	4,950
Commercial and commercial real estate		997			1,043
Residential mortgage		794			776
Total loans		7,198			6,769
Goodwill and other intangible assets		264			297
Other assets		225			223
Total assets	$	7,687		$	7,289
Deposits
Noninterest-bearing demand	$	1,342		$	1,266
Interest-bearing demand		3,887			3,472
Money market		3,918			3,752
Total transaction deposits		9,147			8,490
CDs/IRAs/savings deposits		448			442
Total deposits		9,595			8,932
Other liabilities		51			60
Total liabilities	$	9,646		$	8,992
Performance Ratios
Return on average assets		2.37	%		2.31	%
Noninterest income to total revenue		74			72
Efficiency		74			74
Other Information
Total nonperforming assets (a) (b)	$	73		$	68
Purchased impaired loans (a) (c)	$	89		$	100
Total net charge-offs	$	3		$	(2	)
Client Assets Under Administration (in billions) (a) (d)
Personal	$	113		$	106
Institutional		146			131
Total	$	259		$	237

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