Edgar Filing: PNC FINANCIAL SERVICES GROUP, INC.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2015

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

For the transition period from to

Commission file number 001-09718

The PNC Financial Services Group, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania

25-1435979

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

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

(Address of principal executive offices, including zip code)

(412) 762-2000

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of July 24, 2015, there were 513,599,824 shares of the registrant’s common stock ($5 par value) outstanding.

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2015 Form 10-Q


	Pages
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).
Consolidated Income Statement		56
Consolidated Statement of Comprehensive Income		57
Consolidated Balance Sheet		58
Consolidated Statement Of Cash Flows		59

Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies		61
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities		65
Note 3 Asset Quality		69
Note 4 Purchased Loans		82
Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit		83
Note 6 Investment Securities		86
Note 7 Fair Value		90
Note 8 Goodwill and Intangible Assets		101
Note 9 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities		103
Note 10 Certain Employee Benefit And Stock Based Compensation Plans		103
Note 11 Financial Derivatives		106
Note 12 Earnings Per Share		113
Note 13 Total Equity And Other Comprehensive Income		114
Note 14 Income Taxes		119
Note 15 Legal Proceedings		119
Note 16 Commitments and Guarantees		122
Note 17 Segment Reporting		126
Note 18 Subsequent Events		129

Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis		130
Transitional Basel III and Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios – 2014 Periods		132

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Financial Review
Consolidated Financial Highlights		1
Executive Summary		3
Consolidated Income Statement Review		8
Consolidated Balance Sheet Review		11
Off-Balance Sheet Arrangements And Variable Interest Entities		21
Fair Value Measurements		22
Business Segments Review		22
Critical Accounting Estimates and Judgments		31
Status Of Qualified Defined Benefit Pension Plan		32
Recourse And Repurchase Obligations		33
Risk Management		34
Internal Controls And Disclosure Controls And Procedures		49
Glossary Of Terms		49
Cautionary Statement Regarding Forward-Looking Information		54

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		34-49, 90-100 and 106-113

Item 4. Controls and Procedures.		49

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.		133

Item 1A. RiskFactors.		133

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds.		133

Item 6. Exhibits.		133

Exhibit Index.		133

Corporate Information		134

Signature		135

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2015 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		8
4	Net Interest Income and Net Interest Margin		8
5	Noninterest Income		9
6	Summarized Balance Sheet Data		11
7	Details Of Loans		12
8	Accretion – Purchased Impaired Loans		13
9	Purchased Impaired Loans – Accretable Yield		13
10	Valuation of Purchased Impaired Loans		13
11	Weighted Average Life of the Purchased Impaired Portfolios		14
12	Accretable Difference Sensitivity – Total Purchased Impaired Loans		14
13	Commitments to Extend Credit		14
14	Investment Securities		15
15	Weighted-Average Expected Maturity of Mortgage and Other Asset-Backed Debt Securities		16
16	Loans Held For Sale		16
17	Details Of Funding Sources		17
18	Shareholders’ Equity		18
19	Basel III Capital		19
20	Fair Value Measurements – Summary		22
21	Retail Banking Table		23
22	Corporate & Institutional Banking Table		26
23	Asset Management Group Table		28
24	Residential Mortgage Banking Table		29
25	BlackRock Table		30
26	Non-Strategic Assets Portfolio Table		30
27	Pension Expense – Sensitivity Analysis		32
28	Nonperforming Assets By Type		35
29	Change in Nonperforming Assets		35
30	OREO and Foreclosed Assets		35
31	Accruing Loans Past Due		36
32	Home Equity Lines of Credit – Draw Period End Dates		37
33	Consumer Real Estate Related Loan Modifications		37
34	Summary of Troubled Debt Restructurings		38
35	Loan Charge-Offs And Recoveries		39
36	Allowance for Loan and Lease Losses		40
37	PNC Bank Bank Notes Issued During 2015		42
38	PNC Bank Senior and Subordinated Debt		42
39	FHLB Borrowings		42
40	Parent Company Senior and Subordinated Debt and Hybrid Capital Instruments		44
41	Credit Ratings as of June 30, 2015 for PNC and PNC Bank		44
42	Contractual Obligations		44
43	Other Commitments		45
44	Interest Sensitivity Analysis		46
45	Net Interest Income Sensitivity to Alternative Rate Scenarios (Second Quarter 2015)		46
46	Alternate Interest Rate Scenarios: One Year Forward		46
47	Enterprise-Wide Gains/Losses Versus Value-at-Risk		47
48	Equity Investments Summary		47
49	Financial Derivatives Summary		49

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2015 Form 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE


Table	Description	Page
50	Certain Financial Information and Cash Flows Associated with Loan Sale and Servicing Activities		66
51	Principal Balance, Delinquent Loans, and Net Charge-offs Related to Serviced Loans		67
52	Consolidated VIEs – Carrying Value		68
53	Non-Consolidated VIEs		69
54	Analysis of Loan Portfolio		70
55	Nonperforming Assets		71
56	Commercial Lending Asset Quality Indicators		73
57	Home Equity and Residential Real Estate Balances		74
58	Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans		74
59	Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans		76
60	Credit Card and Other Consumer Loan Classes Asset Quality Indicators		77
61	Summary of Troubled Debt Restructurings		78
62	Financial Impact and TDRs by Concession Type		78
63	TDRs that were Modified in the Past Twelve Months which have Subsequently Defaulted		80
64	Impaired Loans		81
65	Purchased Impaired Loans – Balances		82
66	Purchased Impaired Loans – Accretable Yield		83
67	Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data		84
68	Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit		85
69	Investment Securities Summary		86
70	Gross Unrealized Loss and Fair Value of Securities Available for Sale		87
71	Gains (Losses) on Sales of Securities Available for Sale		89
72	Contractual Maturity of Debt Securities		89
73	Fair Value of Securities Pledged and Accepted as Collateral		90
74	Fair Value Measurements – Recurring Basis Summary		91
75	Reconciliation of Level 3 Assets and Liabilities		92
76	Fair Value Measurements – Recurring Quantitative Information		96
77	Fair Value Measurements – Nonrecurring		98
78	Fair Value Measurements – Nonrecurring Quantitative Information		98
79	Fair Value Option – Changes in Fair Value		98
80	Fair Value Option – Fair Value and Principal Balances		99
81	Additional Fair Value Information Related to Other Financial Instruments		100
82	Goodwill by Business Segment		101
83	Mortgage Servicing Rights		101
84	Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions		102
85	Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions		102
86	Fees from Mortgage and Other Loan Servicing		102
87	Other Intangible Assets		102
88	Amortization Expense on Existing Intangible Assets		102
89	Net Periodic Pension and Postretirement Benefits Costs		104
90	Stock Option Rollforward		105
91	Nonvested Incentive/Performance Unit Share Awards and Restricted Stock/Share Unit Awards – Rollforward		105
92	Nonvested Cash-Payable Incentive/Performance Units and Restricted Share Units – Rollforward		105
93	Total Gross Derivatives		106
94	Derivatives Designated As Hedging Instruments under GAAP		107
95	Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges		107
96	Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges		108
97	Gains (Losses) on Derivatives – Net Investment Hedges		108
98	Derivatives Not Designated As Hedging Instruments under GAAP		109
99	Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP		110
100	Credit Default Swaps		110

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2015 Form 10-Q (continued)


Table	Description	Page
101	Credit Ratings of Credit Default Swaps		110
102	Referenced/Underlying Assets of Credit Default Swaps		110
103	Risk Participation Agreements Sold		111
104	Derivative Assets and Liabilities Offsetting		112
105	Basic and Diluted Earnings per Common Share		113
106	Rollforward of Total Equity		114
107	Other Comprehensive Income		115
108	Accumulated Other Comprehensive Income (Loss) Components		118
109	Net Operating Loss Carryforwards and Tax Credit Carryforwards		119
110	Commitments to Extend Credit and Other Commitments		122
111	Internal Credit Ratings Related to Net Outstanding Standby Letters of Credit		122
112	Reinsurance Agreements Exposure		122
113	Reinsurance Reserves – Rollforward		123
114	Analysis of Commercial Mortgage Recourse Obligations		124
115	Analysis of Indemnification and Repurchase Liability for Asserted Claims and Unasserted Claims		125
116	Resale and Repurchase Agreements Offsetting		126
117	Repurchase Agreements By Type of Collateral Pledged		126
118	Results Of Businesses		128

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 2014 Annual Report on Form 10-K (2014 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business, regulatory and legal risks, see the following sections as they appear in this Report and in our 2014 Form 10-K and our First Quarter 2015 Form 10-Q: 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 2014 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 2014 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 17 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 June 30						Six months ended June 30
Dollars in millions, except per share data Unaudited	2015			2014			2015			2014
Financial Results (a)
Revenue
Net interest income	$	2,052		$	2,129		$	4,124		$	4,324
Noninterest income		1,814			1,681			3,473			3,263
Total revenue		3,866			3,810			7,597			7,587
Noninterest expense		2,366			2,328			4,715			4,592
Pretax, pre-provision earnings (b)		1,500			1,482			2,882			2,995
Provision for credit losses		46			72			100			166
Income before income taxes and noncontrolling interests	$	1,454		$	1,410		$	2,782		$	2,829
Net income	$	1,044		$	1,052		$	2,048		$	2,112
Less:
Net income (loss) attributable to noncontrolling interests		4			3			5			1
Preferred stock dividends and discount accretion and redemptions		48			48			118			118
Net income attributable to common shareholders	$	992		$	1,001		$	1,925		$	1,993
Less:
Dividends and undistributed earnings allocated to nonvested restricted shares		–			3			2			6
Impact of BlackRock earnings per share dilution		5			3			10			9
Net income attributable to diluted common shares	$	987		$	995		$	1,913		$	1,978
Diluted earnings per common share	$	1.88		$	1.85		$	3.63		$	3.67
Cash dividends declared per common share	$	.51		$	.48		$	.99		$	.92
Performance Ratios
Net interest margin (c)		2.73	%		3.12	%		2.78	%		3.19	%
Noninterest income to total revenue		47			44			46			43
Efficiency		61			61			62			61
Return on:
Average common shareholders’ equity		9.75			10.12			9.54			10.24
Average assets		1.19			1.31			1.18			1.33

See page 49 for a glossary of certain terms used in this Report.

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

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

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

(c)

Calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under generally accepted accounting principles (GAAP) in the Consolidated Income Statement. The taxable-equivalent adjustments to net interest income for the three months ended June 30, 2015 and June 30, 2014 were $49 million and $47 million, respectively. The taxable-equivalent adjustments to net interest income for the six months ended June 30, 2015 and June 30, 2014 were $98 million and $93 million, respectively.

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

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


Unaudited	June 30 2015			December 31 2014			June 30 2014
Balance Sheet Data (dollars in millions, except per share data)
Assets	$	353,945		$	345,072		$	327,064
Loans		205,153			204,817			200,984
Allowance for loan and lease losses		3,272			3,331			3,453
Interest-earning deposits with banks (b)		33,969			31,779			16,876
Investment securities		61,362			55,823			56,602
Loans held for sale		2,357			2,262			2,228
Goodwill		9,103			9,103			9,074
Mortgage servicing rights		1,558			1,351			1,482
Equity investments (c)		10,531			10,728			10,583
Other assets		24,032			23,482			23,527

Noninterest-bearing deposits		77,369			73,479			71,001
Interest-bearing deposits		162,335			158,755			151,553
Total deposits		239,704			232,234			222,554
Transaction deposits		205,296			198,267			188,489
Borrowed funds		58,276			56,768			49,066
Total shareholders’ equity		44,515			44,551			44,205
Common shareholders’ equity		41,066			40,605			40,261
Accumulated other comprehensive income		379			503			881

Book value per common share	$	79.64		$	77.61		$	75.62
Common shares outstanding (millions)		516			523			532
Loans to deposits		86	%		88	%		90	%

Client Investment Assets (billions)
Discretionary client assets under management	$	134		$	135		$	131
Nondiscretionary client assets under administration		128			128			126
Total client assets under administration		262			263			257
Brokerage account client assets		44			43			43
Total	$	306		$	306		$	300

Capital Ratios
Transitional Basel III (d) (e)
Common equity Tier 1		10.6	%		10.9	%		11.0	%
Tier 1 risk-based		12.0			12.6			12.7
Total capital risk-based		14.9			15.8			16.0
Leverage		10.3			10.8			11.2

Pro forma Fully Phased-In Basel III (e)
Common equity Tier 1		10.0	%		10.0	%		10.0	%

Common shareholders’ equity to assets		11.6	%		11.8	%		12.3	%

Asset Quality
Nonperforming loans to total loans		1.10	%		1.23	%		1.39	%
Nonperforming assets to total loans, OREO and foreclosed assets		1.25			1.40			1.57
Nonperforming assets to total assets		.73			.83			.97
Net charge-offs to average loans (for the three months ended) (annualized)		.13			.23			.29
Allowance for loan and lease losses to total loans		1.59			1.63			1.72
Allowance for loan and lease losses to nonperforming loans (f)		145	%		133	%		123	%
Accruing loans past due 90 days or more (in millions)	$	914		$	1,105		$	1,252

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

(b)	Amounts include balances held with the Federal Reserve Bank of Cleveland (Federal Reserve Bank) of $33.6 billion, $31.4 billion, and $16.5 billion as of June 30, 2015, December 31, 2014 and June 30, 2014, respectively.

(c)	Amounts include our equity interest in BlackRock.

(d)	Calculated using the regulatory capital methodology applicable to PNC during each period presented.

(e)

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 2014 Form 10-K. See also the Estimated Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratio – 2014 Periods table in the Statistical Information section of this Report for a reconciliation of the 2014 periods’ ratios.

(f)	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

The PNC Financial Services Group, Inc. (PNC) is one of the largest diversified financial services companies in the United States and is headquartered in Pittsburgh, Pennsylvania.

We have businesses engaged in retail banking, corporate and institutional banking, asset management and residential mortgage banking, providing many of our products and services nationally, as well as other products and services in our primary geographic markets located in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, North Carolina, Florida, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Missouri, Georgia, Wisconsin and South Carolina. We also provide 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 addresses their specific financial 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 geographic 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 transforming 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 investing in technology and business infrastructure and streamlining our processes.

Our capital priorities are to support client growth and business investment, maintain appropriate capital in light of economic conditions and the Basel III framework and return excess capital to shareholders, in accordance with the capital plan included in our 2015 Comprehensive Capital Analysis and Review (CCAR) submission to the Board of Governors of the

Federal Reserve System (Federal Reserve). New regulatory short-term liquidity standards became effective for PNC and PNC Bank, National Association (PNC Bank) beginning January 1, 2015. For more detail, see the Balance Sheet, Liquidity and Capital Highlights portion of this Executive Summary, the Capital 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 2014 Form 10-K.

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 additional 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 the scrutiny from our supervisors in the examination process and the enforcement of laws and regulations on both the federal and state levels to remain at elevated 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 June 17, 2015, the OCC terminated the 2011 consent order and 2013 amended consent order against PNC Bank entered into following a publicly-disclosed interagency horizontal review of residential mortgage servicing operations at 14 federally regulated mortgage servicers. For more information, see Note 15 Legal Proceedings of this Report and Note 21 Legal Proceedings in our 2014 Form 10-K.

On July 20, 2015, the Federal Reserve issued final rules to implement an additional risk-based common equity Tier 1 capital surcharge on U.S. bank holding companies (BHCs) identified as global systemically important banks (GSIBs) using a scoring methodology that is based on five measures of global systemic importance (size, interconnectedness, substitutability, complexity, and cross-jurisdictional activity). Based on that methodology, PNC is not subject to the surcharge. The release accompanying the final rules indicates that there is a wide gap between the scores of U.S. BHCs identified as GSIBs and the

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

significantly lower scores of other advanced approaches BHCs (such as PNC) that are not identified as GSIBs.

On July 21, 2015, the Consumer Financial Protection Bureau issued final rules delaying to October 3, 2015 (from August 2015) the effective date of broad new regulations concerning the disclosures required to be provided to prospective residential mortgage customers. These regulations, among other things, require the provision of new disclosures near the time a prospective borrower submits an application and three days prior to closing of a mortgage loan.

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, and Note 21 Legal Proceedings and Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements in our 2014 Form 10-K, as well as Note 15 Legal Proceedings and Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

Key Factors Affecting Financial Performance

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 2014 Form 10-K and elsewhere in this Report.

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 2014 Form 10-K and in subsequent filings with the SEC, 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,

•

Managing our credit risk in our portfolio,

•

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, liquidity and capital management related to our efforts to manage risk to acceptable levels and to meet evolving regulatory capital, capital planning, stress testing 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, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2014 Form 10-K.

Income Statement Highlights

Net income decreased $8 million, or 1%, in the second quarter of 2015 to $1.0 billion, or $1.88 per diluted common share, compared to $1.1 billion, or $1.85 per diluted common share for the second quarter of 2014. Growth in noninterest income and a lower provision for credit losses were more than offset by lower net interest income and higher noninterest expense.

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

•

Net interest income of $2.1 billion for the second quarter of 2015 decreased 4% compared with the second quarter of 2014, reflective of the ongoing low rate environment, primarily resulting in lower loan yields, and decreased purchase accounting accretion, partially offset by commercial and commercial real estate loan growth and higher securities balances.

•

Net interest margin decreased to 2.73% for the second quarter of 2015 compared to 3.12% for the second quarter of 2014 principally due to the impact of increasing the company’s liquidity position, lower loan yields and lower benefit from purchase accounting accretion.

•

Noninterest income of $1.8 billion for the second quarter of 2015 increased $133 million, or 8%, compared to the second quarter of 2014, due to strong client fee income growth and higher gains on asset sales, including gains on sales of Visa Class B common shares.

•

The provision for credit losses decreased to $46 million for the second quarter of 2015 compared to $72 million for the second quarter of 2014 reflecting improved credit quality.

•

Noninterest expense of $2.4 billion for the second quarter of 2015 increased $38 million, or 2%, compared with the second quarter of 2014 due to investments in technology and business infrastructure in support of its strategic priorities and higher personnel expense associated with higher business activity, partially offset by lower asset impairment charges related to historic tax credits recorded as reductions to the associated investment asset balance. PNC maintains a continued focus on disciplined expense management.

For additional detail, see the Consolidated Income Statement Review section in this Financial Review.

Credit Quality Highlights

Overall credit quality improved during the first six months of 2015.

•

Nonperforming assets decreased $.3 billion, or 10%, to $2.6 billion at June 30, 2015 compared to December 31, 2014. Nonperforming assets to total assets were 0.73% at June 30, 2015, compared to 0.83% at December 31, 2014.

•

Overall loan delinquencies of $1.6 billion at June 30, 2015 decreased $.3 billion, or 16%, compared with December 31, 2014.

•

The allowance for loan and lease losses was 1.59% of total loans and 145% of nonperforming loans at June 30, 2015, compared with 1.63% and 133% at December 31, 2014, respectively.

•

Net charge-offs of $67 million for the second quarter of 2015 were down 54% compared to net charge-offs of $145 million for the second quarter of 2014.

Annualized net charge-offs were 0.13% of average loans in the second quarter of 2015 and 0.29% of average loans in the second quarter of 2014. For the first six months of 2015, net charge-offs were $170 million, and 0.17% of average loans on an annualized basis, compared with $331 million and 0.34% for the first six months of 2014.

For additional detail, see the Credit Risk Management portion of the Risk Management section of this Financial Review.

Balance Sheet, Liquidity and Capital Highlights

PNC’s balance sheet was well-positioned at June 30, 2015 reflecting strong liquidity and capital positions.

•

Total loans increased by $.3 billion to $205.2 billion at June 30, 2015 compared to December 31, 2014.

–

Total commercial lending increased $2.3 billion, or 2%, as a result of increases in commercial real estate and commercial loans.

–

Total consumer lending decreased $2.0 billion, or 3%, due to declines in home equity, automobile, education and credit card loans, including runoff in the nonstrategic portfolio.

•

Investment securities increased $5.5 billion, or 10%, to $61.4 billion at June 30, 2015 compared to December 31, 2014, primarily funded by deposit growth.

•

Total deposits increased $7.5 billion, or 3%, to $239.7 billion at June 30, 2015 compared with December 31, 2014, driven by higher retail deposits.

•

PNC’s balance sheet remained core funded with a loans to deposits ratio of 86% at June 30, 2015.

•

PNC maintained a strong liquidity position.

–

New regulatory short-term liquidity standards became effective for PNC and PNC Bank as advanced approaches banking organizations beginning January 1, 2015, with a minimum phased-in Liquidity Coverage Ratio requirement of 80% in 2015, calculated as of month end.

–

The Liquidity Coverage Ratio (LCR) at June 30, 2015 exceeded 100% for both PNC and PNC Bank.

•

PNC maintained a strong capital position.

–

The Transitional Basel III common equity Tier 1 capital ratio was 10.6% at June 30, 2015 and 10.9% at December 31, 2014, calculated using the regulatory capital methodologies applicable to PNC during 2015 and 2014, respectively. The decline in the capital ratio during the comparable periods was mainly due to higher risk-weighted assets.

–

Pro forma fully phased-in Basel III common equity Tier 1 capital ratio was an estimated 10.0% at June 30, 2015 and 10.0% at December 31, 2014 based on the standardized approach rules. See the Capital discussion and Table 19 in the Consolidated Balance Sheet

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

Review section of this Financial Review and the December 31, 2014 capital ratio tables in the Statistical Information (Unaudited) section of this Report for more detail.

•

PNC returned capital to shareholders.

–

In the first quarter of 2015, in accordance with the 2014 capital plan, PNC repurchased 4.4 million shares of common stock on the open market, with an average price of $89.48 per share and an aggregate repurchase price of $.4 billion. These first quarter 2015 repurchases completed PNC’s common stock repurchase program for the four quarter period that began in second quarter 2014 with total repurchases of 17.3 million common shares for $1.5 billion.

–

In connection with the 2015 CCAR process, PNC submitted its 2015 capital plan, as approved by its Board of Directors, to the Federal Reserve in January 2015. As we announced on March 11, 2015, the Federal Reserve accepted the capital plan and did not object to our proposed capital actions, which included the actions discussed below.

–

In the second quarter of 2015, we repurchased 5.9 million shares of common stock on the open market, with an average price of $93.93 per share and an aggregate repurchase price of $.6 billion. Purchases were made under share repurchase programs of up to $2.875 billion for the five quarter period beginning in the second quarter of 2015. See the Capital portion of the Consolidated Balance Sheet review of this Financial Review for more detail on these share repurchase programs.

–

In April 2015, the Board of Directors raised the quarterly dividend on common stock to 51 cents per share, an increase of 3 cents per share, or 6 percent, effective with the May dividend. On July 2, 2015, the PNC Board of Directors declared a quarterly common stock cash dividend of 51 cents per share payable on August 5, 2015.

–

On May 4, 2015, we redeemed $500 million of PNC’s Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series K, as well as all Depositary Shares representing interests therein. Each Depositary Share represented a 1/10 interest in a share of the Series K Preferred Stock. All 50,000 shares of Series K Preferred Stock, as well as all 500,000 Depositary Shares representing interests therein, were redeemed. The redemption price was $10,000 per share of Series K Preferred Stock equivalent to $1,000 per Depositary Share, plus declared and unpaid dividends up to but excluding the redemption date.

Our Consolidated Income Statement and Consolidated Balance Sheet Review sections of this Item 7 describe in greater detail the various items that impacted our results during the first six months of 2015 and 2014 and balances at June 30, 2015 and December 31, 2014, respectively.

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 as part of the CCAR process. For additional information, see the Supervision and Regulation section in Item 1 Business of our 2014 Form 10-K.

See the Capital portion of the Consolidated Balance Sheet Review and the Liquidity Risk Management portion of the Risk Management section of this Financial Review for more detail on our 2015 capital and liquidity actions.

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

Average Consolidated Balance Sheet Highlights

Table 2: Summarized Average Balance Sheet


Six months ended June 30					Change
Dollars in millions	2015		2014		$		%
Average assets
Interest-earning assets
Investment securities	$	58,310	$	57,342	$	968		2	%
Loans		205,272		197,914		7,358		4	%
Interest-earning deposits with banks		31,392		13,410		17,982		134	%
Other		9,236		8,415		821		10	%
Total interest-earning assets		304,210		277,081		27,129		10	%
Noninterest-earning assets		46,151		43,968		2,183		5	%
Total average assets	$	350,361	$	321,049	$	29,312		9	%
Average liabilities and equity
Interest-bearing liabilities
Interest-bearing deposits	$	161,236	$	151,212	$	10,024		7	%
Borrowed funds		56,757		46,747		10,010		21	%
Total interest-bearing liabilities		217,993		197,959		20,034		10	%
Noninterest-bearing deposits		74,245		67,951		6,294		9	%
Other liabilities		12,181		10,313		1,868		18	%
Equity		45,942		44,826		1,116		2	%
Total average liabilities and equity	$	350,361	$	321,049	$	29,312		9	%

Seasonal and other factors may impact our period-end balances, whereas average balances are generally more indicative of underlying business trends apart from the impact of acquisitions and divestitures. The Consolidated Balance Sheet Review section of this Financial Review provides information on changes in selected Consolidated Balance Sheet categories at June 30, 2015 compared with December 31, 2014. Total assets were $353.9 billion at June 30, 2015 compared with $345.1 billion at December 31, 2014.

Average investment securities increased in the first six months of 2015 compared with the first six months of 2014, due to increases in average residential mortgage-backed securities and U.S. Treasury and government agency securities, partially offset by a decrease in average asset-backed securities. Total investment securities comprised 19% of average interest-earning assets for the first six months of 2015 and 21% for the first six months of 2014.

The increase in average total loans in the first six months of 2015 compared with the first six months of 2014 was driven by growth in average commercial loans of $7.4 billion and average commercial real estate loans of $2.2 billion, principally in our Corporate & Institutional Banking segment. These increases were partially offset by a decrease in consumer loans of $1.9 billion primarily attributable to lower home equity and education loans. Runoff in the non-strategic portfolio of residential mortgage and brokered home equity loans contributed to the decrease in loans.

Loans represented 67% of average interest-earning assets for the first six months of 2015 and 71% of average interest-earning assets for the first six months of 2014.

Average interest-earning deposits with banks, which are primarily maintained with the Federal Reserve Bank, increased in the comparison to the prior year period in part due to regulatory short-term liquidity standards phased in starting January 1, 2015 and also due to deposit growth.

The increase in average noninterest-earning assets in the first six months of 2015 compared with the first six months of 2014 was primarily driven by higher accounts receivable from trade date securities sales, which are included in noninterest-earnings assets for average balance sheet purposes, and an increase in trading assets, primarily net customer related derivatives values.

Average total deposits increased $16.3 billion, or 7%, to $235.5 billion in the first six months of 2015 compared with the first six months of 2014, primarily due to an increase in average transaction deposits, which grew to $201.4 billion for the first six months of 2015. 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 $1.8 billion in average retail certificates of deposit attributable to runoff of maturing accounts. Total deposits at June 30, 2015 were

$239.7 billion compared with $232.2 billion at December 31, 2014 and are further discussed within the Consolidated Balance Sheet Review section of this Financial Review.

Average total deposits represented 67% of average total assets for the first six months of 2015 and 68% for the first six months of 2014.

The increase in average borrowed funds in the first six months of 2015 compared with the first six months of 2014 was primarily due to increases in average Federal Home Loan Bank (FHLB) borrowings and average bank notes and senior debt. 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.

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

Business Segment Highlights

Total business segment earnings were $2.0 billion for both the first six months of 2015 and 2014. The Business Segments Review section of this Financial Review includes further analysis of our business segment results over the first six months of 2015 and 2014, including presentation differences from Note 17 Segment Reporting in our Notes To Consolidated Financial Statements of this Report. Note 17 Segment Reporting presents results of businesses for the three and six months ended June 30, 2015 and 2014.

We provide a reconciliation of total business segment earnings to PNC total consolidated net income as reported on a GAAP basis in Note 17 Segment Reporting in our Notes To Consolidated Financial Statements of this Report.

Table 3: Results Of Businesses – Summary (a)

(Unaudited)


	Net Income				Revenue				Average Assets (b)
Six months ended June 30 – in millions	2015		2014		2015		2014		2015		2014
Retail Banking	$	443	$	383	$	3,161	$	3,008	$	73,691	$	75,559
Corporate & Institutional Banking		990		993		2,647		2,646		131,711		119,992
Asset Management Group		99		90		595		549		7,974		7,642
Residential Mortgage Banking		47		32		413		433		7,190		8,128
BlackRock		269		253		351		332		6,760		6,400
Non-Strategic Assets Portfolio		137		209		230		295		7,094		8,732
Total business segments		1,985		1,960		7,397		7,263		234,420		226,453
Other (c) (d) (e)		63		152		200		324		115,941		94,596
Total	$	2,048	$	2,112	$	7,597	$	7,587	$	350,361	$	321,049

(a)

Our business information is presented based on our internal management reporting practices. We periodically refine our internal methodologies as management reporting practices are enhanced. Net interest income in business segment results reflects PNC’s internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors. In the first quarter of 2015, enhancements were made to PNC’s funds transfer pricing methodology primarily for costs related to the new regulatory short-term liquidity standards. The enhancements incorporate an additional charge assigned to assets, including for unfunded loan commitments. Conversely, a higher transfer pricing credit has been assigned to those deposits that are accorded higher value under LCR rules for liquidity purposes. These adjustments apply to business segment results, primarily favorably impacting Retail Banking and adversely impacting Corporate & Institutional Banking, prospectively beginning with the first quarter of 2015. Prior periods have not been adjusted due to the impracticability of estimating the impact of the change for prior periods.

(b)	Period-end balances for BlackRock.

(c)	“Other” average assets include investment securities associated with asset and liability management activities.

(d)

“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 17 Segment Reporting in the Notes To Consolidated Financial Statements in this Report.

(e)	The decreases in net income and revenue in the first six months of 2015 compared to the first six months of 2014 for “Other” primarily reflected a decline in net interest income, partially offset by higher net securities gains.

CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for the first six months of 2015 was $2.0 billion, a decrease of 3% compared with $2.1 billion for the first six months of 2014. The decrease was driven by a 5% decline in net interest income and a 3% increase in noninterest expense, partially offset by a 6% increase in noninterest income and lower provision for credit losses.

Second quarter 2015 net income decreased $8 million to $1.0 billion, compared with second quarter 2014. Growth in noninterest income of 8% and lower provision for credit losses were more than offset by a 4% decline in net interest income and higher noninterest expense.

Net Interest Income

Table 4: Net Interest Income and Net Interest Margin


	Six months ended June 30						Three months ended June 30
Dollars in millions	2015			2014			2015			2014
Net interest income	$	4,124		$	4,324		$	2,052		$	2,129
Net interest margin		2.78	%		3.19	%		2.73	%		3.12	%

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.

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

Net interest income decreased by $200 million, or 5%, in the first six months of 2015 compared with the prior year period, including a decline of $77 million, or 4%, in the second quarter compared with the same prior year quarter. The declines in both comparisons are reflective of the ongoing low rate environment, primarily resulting in lower loan yields, and decreased purchase accounting accretion, partially offset by commercial and commercial real estate loan growth and higher securities balances. The year-to-date 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 net interest margins in both comparisons were driven by 41 basis point and 39 basis point declines in the yields on total interest-earning assets in the year-to-date and quarterly

comparisons, respectively, which were principally due to the impact of increasing the company’s liquidity position, lower loan yields, and lower benefit from purchase accounting accretion. The year-to-date decline also included the impact of the second quarter 2014 correction to reclassify certain commercial facilities fees.

In the third quarter of 2015, we expect net interest income to remain stable compared with the second quarter of 2015.

For full year 2015, we expect purchase accounting accretion to be down compared to 2014 by approximately $200 million, rather than $225 million as previously disclosed, as cash recoveries on purchased impaired loans in the first six months of 2015 were higher than expected.

Noninterest Income

Table 5: Noninterest Income


	Six months ended June 30										Three months ended June 30
					Change											Change
Dollars in millions	2015		2014		$			%			2015		2014			$			%
Noninterest income
Asset management	$	792	$	726	$	66			9	%	$	416	$	362		$	54			15	%
Consumer services		645		613		32			5	%		334		323			11			3	%
Corporate services		713		644		69			11	%		369		343			26			8	%
Residential mortgage		328		343		(15	)		(4)	%		164		182			(18	)		(10)	%
Service charges on deposits		309		303		6			2	%		156		156			–			–	%
Net gains on sales of securities		50		4		46			*			8		(6	)		14			*
Other		636		630		6			1	%		367		321			46			14	%
Total noninterest income	$	3,473	$	3,263	$	210			6	%	$	1,814	$	1,681		$	133			8	%

*	Not meaningful

Noninterest income increased in both quarterly and year-to-date comparisons primarily due to strong fee income growth and higher gains on asset sales. Noninterest income as a percentage of total revenue was 46% for the first six months of 2015, up from 43% for the first six months of 2014. The comparable amounts for the second quarters of 2015 and 2014 were 47% and 44%, respectively.

Asset management revenue increased in both comparisons due to increased earnings from our BlackRock investment, stronger average equity markets, and new business. The increases also included the impact from a $30 million trust settlement during the second quarter of 2015. Discretionary client assets under management increased to $134 billion at June 30, 2015 compared with $131 billion at June 30, 2014 driven by higher equity markets, new sales and positive net flows, after adjustments for cyclical client activities.

Consumer service fees increased in both the year-to-date and quarterly comparisons, primarily due to growth in customer-initiated transaction volumes.

Corporate services revenue increased in both comparisons due to increased treasury management and equity capital markets advisory fees, partially offset by lower mergers and acquisition advisory fees. The year-to-date results also reflect the impact of the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to noninterest income.

Residential mortgage revenue decreased in both quarterly and year-to-date comparisons mainly driven by lower loan sales revenue, reflecting the impact from the second quarter 2014 sale of previously underperforming portfolio loans and lower servicing fee revenue, partially offset by higher net hedging gains on residential mortgage servicing rights.

Service charges on deposits for the first six months of 2015 increased slightly compared to the first six months of 2014, due to changes in product offerings and higher customer-related activity. Service charges on deposits for the second quarter of 2015 were stable with the prior year quarter.

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

Other noninterest income for the second quarter of 2015 included gains of $79 million on the sale of 1 million Visa Class B common shares compared with gains of $54 million on the sale of 1 million Visa Class B common shares in the second quarter of 2014. For the first six months of 2015 and 2014, gains on sales of Visa Class B common shares were $79 million and $116 million on the sale of 1 million and 2 million shares, respectively. In both comparisons, gains on loans held for sale increased.

As of June 30, 2015, we held approximately 6 million Visa Class B common shares with a fair value of approximately $649 million and a recorded investment of approximately $54 million.

Other noninterest income typically fluctuates from period to period depending on the nature and magnitude of transactions completed. 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. 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 third quarter of 2015, we expect the fee categories of noninterest income (asset management, consumer services, corporate services, residential mortgage and service charges on deposits) to remain stable compared to second quarter of 2015. We anticipate that continued growth in business activity in the third quarter will offset the impact to asset management revenue from the second quarter 2015 trust settlement.

Provision For Credit Losses

The provision for credit losses totaled $100 million for the first six months of 2015 compared with $166 million for the first six months of 2014, and was $46 million for the second quarter of 2015 compared with $72 million for the second quarter of 2014. The decreases in provision in both comparisons reflected improved credit quality.

We expect our provision for credit losses in the third quarter of 2015 to be between $50 million and $100 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 increased $123 million, or 3%, to $4.7 billion for the first six months of 2015 compared to the first six months of 2014, and increased $38 million, or 2%, to $2.4 billion for the second quarter of 2015 compared to the prior year quarter. These increases were primarily related to PNC’s investments in technology and business infrastructure in support of its strategic priorities and higher personnel expense associated with higher business activity, partially offset by lower asset impairment charges related to historic tax credits recorded as reductions to the associated investment asset balance. In prior periods, these credits were recorded as a reduction to income tax expense. This change in application of historic tax credits was not material to PNC’s financial results.

In the second quarter of 2015, we have identified initiatives that support increasing our 2015 continuous improvement savings goal by an additional $100 million to $500 million.

For the third quarter of 2015, we expect noninterest expense to remain stable compared to second quarter 2015. We expect our full year 2015 expenses to be approximately one percent lower than full year 2014 expenses.

Effective Income Tax Rate

The effective income tax rate was 26.4% in the first six months of 2015 compared to 25.3% in the first six months of 2014. For the second quarter of 2015, our effective income tax rate was 28.2% compared with 25.4% for the second quarter of 2014. 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 increases to the effective tax rate in both comparisons were primarily related to the second quarter 2015 impact of historic tax credits recorded as a reduction to the associated investment asset balances, while in prior periods these credits were recorded as a reduction of income tax expense.

We expect our 2015 effective tax rate to be approximately 26%.

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

CONSOLIDATED BALANCE SHEET REVIEW

Table 6: Summarized Balance Sheet Data


	June 30			December 31			Change
Dollars in millions	2015			2014			$			%
Assets
Interest-earning deposits with banks	$	33,969		$	31,779		$	2,190			7	%
Loans held for sale		2,357			2,262			95			4	%
Investment securities		61,362			55,823			5,539			10	%
Loans		205,153			204,817			336			–	%
Allowance for loan and lease losses		(3,272	)		(3,331	)		59			(2	)%
Goodwill		9,103			9,103			–			–	%
Mortgage servicing rights		1,558			1,351			207			15	%
Other intangible assets		435			493			(58	)		(12	)%
Other, net		43,280			42,775			505			1	%
Total assets	$	353,945		$	345,072		$	8,873			3	%
Liabilities
Deposits	$	239,704		$	232,234		$	7,470			3	%
Borrowed funds		58,276			56,768			1,508			3	%
Other		10,053			9,996			57			1	%
Total liabilities		308,033			298,998			9,035			3	%
Equity
Total shareholders’ equity		44,515			44,551			(36	)		–	%
Noncontrolling interests		1,397			1,523			(126	)		(8	)%
Total equity		45,912			46,074			(162	)		–	%
Total liabilities and equity	$	353,945		$	345,072		$	8,873			3	%

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

The increase in total assets was primarily due to higher investment securities balances and higher deposit balances maintained with the Federal Reserve. Interest-earning deposits with banks increased due to regulatory short-term liquidity standards phased in starting January 1, 2015. The increase in investment securities was primarily funded by deposit growth. The increase in liabilities was largely due to growth in deposits and higher FHLB borrowings and issuances of bank notes and senior debt, partially offset by a decline in federal funds purchased and repurchase agreements along with commercial paper. An analysis of changes in selected balance sheet categories follows.

Loans

Outstanding loan balances of $205.2 billion at June 30, 2015 and $204.8 billion at December 31, 2014 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.6 billion at June 30, 2015 and $1.7 billion at December 31, 2014, 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 11

Table 7: Details Of Loans


	June 30		December 31		Change
Dollars in millions	2015		2014		$			%
Commercial lending
Commercial
Retail/wholesale trade	$	17,162	$	16,972	$	190			1	%
Manufacturing		19,775		18,744		1,031			6	%
Service providers		14,054		14,103		(49	)		–	%
Real estate related (a)		10,931		10,812		119			1	%
Financial services		5,966		6,178		(212	)		(3	)%
Health care		9,396		9,017		379			4	%
Other industries		20,849		21,594		(745	)		(3	)%
Total commercial		98,133		97,420		713			1	%
Commercial real estate
Real estate projects (b)		15,142		14,577		565			4	%
Commercial mortgage		9,664		8,685		979			11	%
Total commercial real estate		24,806		23,262		1,544			7	%
Equipment lease financing		7,783		7,686		97			1	%
Total commercial lending (c)		130,722		128,368		2,354			2	%
Consumer lending
Home equity
Lines of credit		19,589		20,361		(772	)		(4	)%
Installment		13,946		14,316		(370	)		(3	)%
Total home equity		33,535		34,677		(1,142	)		(3	)%
Residential real estate
Residential mortgage		14,041		13,885		156			1	%
Residential construction		491		522		(31	)		(6	)%
Total residential real estate		14,532		14,407		125			1	%
Credit card		4,520		4,612		(92	)		(2	)%
Other consumer
Education		6,212		6,626		(414	)		(6	)%
Automobile		11,057		11,616		(559	)		(5	)%
Other		4,575		4,511		64			1	%
Total consumer lending		74,431		76,449		(2,018	)		(3	)%
Total loans	$	205,153	$	204,817	$	336			–	%

(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 slight increase in loans was driven by an increase in total commercial lending driven by commercial real estate and commercial loans, offset by a decline in consumer lending due to lower home equity, auto and education loans.

Loans represented 58% of total assets at June 30, 2015 and 59% at December 31, 2014. Commercial lending represented 64% of the loan portfolio at June 30, 2015 and 63% at December 31, 2014. Consumer lending represented 36% of the loan portfolio at June 30, 2015 and 37% at December 31, 2014.

Commercial real estate loans represented 12% of total loans at June 30, 2015 and 11% of total loans at December 31, 2014 and represented 7% of total assets at both June 30, 2015 and December 31, 2014. 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 $4.5 billion, or 2% of total loans, at June 30, 2015, and $4.9 billion, or 2% of total loans, at December 31, 2014.

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

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

Allowance for Loan and Lease Losses (ALLL)

Information regarding our higher risk loans and ALLL is included in the Credit Risk Management portion of the Risk Management section of this Financial Review and Note 1 Accounting Policies, Note 3 Asset Quality and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in our Notes To Consolidated Financial Statements included in Part 1, Item 1 of this Report.

Purchase Accounting Accretion and Valuation of Purchased Impaired Loans

Information related to purchase accounting accretion and accretable yield for the second quarter and first six months of 2015 and 2014 follows. Additional information on our policies for ALLL for purchased impaired loans is provided in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements of this Report. A description of our purchased impaired loan accounting and loan data is included in Note 4 Purchased Loans in the Notes To Consolidated Financial Statements of this Report.

Table 8: Accretion – Purchased Impaired Loans


	Three months ended June 30						Six months ended June 30
In millions	2015			2014			2015			2014
Accretion on purchased impaired loans
Scheduled accretion	$	92		$	120		$	191		$	245
Reversal of contractual interest on impaired loans		(52	)		(70	)		(107	)		(138	)
Scheduled accretion net of contractual interest		40			50			84			107
Excess cash recoveries (a)		28			35			61			64
Total	$	68		$	85		$	145		$	171

(a)	Relates to excess cash recoveries for purchased impaired commercial loans.

Table 9: Purchased Impaired Loans – Accretable Yield


In millions	2015			2014
January 1	$	1,558		$	2,055
Scheduled accretion		(191	)		(245	)
Excess cash recoveries		(61	)		(64	)
Net reclassification to accretable from non-accretable and other activity (a)		137			190
June 30 (b)	$	1,443		$	1,936

(a)

Approximately 70% and 78% of the net reclassification for the first six months ended June 30, 2015 and 2014, respectively, were driven by the consumer portfolio and were due to improvements of cash expected to be collected on loans in future periods. The remaining net reclassifications were predominantly due to future cash flow changes in the commercial portfolio.

(b)	As of June 30, 2015, we estimate that the reversal of contractual interest on purchased impaired loans will total approximately $.8 billion in future periods. This will offset the total net accretable interest in future interest income of $1.4 billion on purchased impaired loans.

Information related to the valuation of purchased impaired loans at June 30, 2015 and December 31, 2014 follows.

Table 10: Valuation of Purchased Impaired Loans


	June 30, 2015						December 31, 2014
Dollars in millions	Balance			Net Investment			Balance			Net Investment
Commercial and commercial real estate loans:
Outstanding balance (a)	$	346					$	466
Recorded investment	$	235					$	310
Allowance for loan losses		(67	)					(79	)
Net investment/Carrying value	$	168			49	%	$	231			50	%
Consumer and residential mortgage loans:
Outstanding balance (a)	$	4,136					$	4,541
Recorded investment	$	4,230					$	4,548
Allowance for loan losses		(788	)					(793	)
Net investment/Carrying value	$	3,442			83	%	$	3,755			83	%
Total purchased impaired loans:
Outstanding balance (a)	$	4,482					$	5,007
Recorded investment	$	4,465					$	4,858
Allowance for loan losses		(855	)					(872	)
Net investment/Carrying value	$	3,610			81	%	$	3,986			80	%

(a)

Outstanding balance represents the balance on the loan servicing system for active loans. It is possible for the outstanding balance to be lower than the recorded investment for certain loans due to the use of pool accounting. See Note 4 Purchased Loans for additional information on purchased impaired loans.

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

At June 30, 2015, our largest individual purchased impaired loan had a recorded investment of $9 million. We currently expect to collect total cash flows of $5.0 billion on purchased impaired loans, representing the $3.6 billion net investment at June 30, 2015 and the accretable net interest of $1.4 billion shown in Table 9.

At June 30, 2015, and as noted in Table 10 above, our ALLL and our recorded investment balance for purchased impaired loans is $855 million and $4.5 billion, respectively. The ratio of total ALLL less purchased impaired loan ALLL to total loans less purchased impaired loans is 1.20%. The comparable amounts at June 30, 2014 were $886 million, $5.6 billion, and 1.31%, respectively. See Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in the Notes To Consolidated Financial Statements in this Report for additional information.

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 June 30, 2015.

Table 11: Weighted Average Life of the Purchased Impaired Portfolios


As of June 30, 2015 Dollars in millions
As of June 30, 2015 Dollars in millions	Recorded Investment		WAL (a)
Commercial	$	50		2.2 years
Commercial real estate		185		1.4 years
Consumer (b)		1,833		3.9 years
Residential real estate		2,397		4.8 years
Total	$	4,465		4.2 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.

Through the National City Corporation (National City) and RBC Bank (USA) acquisitions, we acquired purchased impaired loans with a recorded investment of $14.7 billion. As noted in Table 11 above, at June 30, 2015, those balances are now $4.5 billion, of which $4.2 billion is accounted for using pool accounting. In anticipation of the end of our purchased impaired loan balances and in light of supervisory guidance on industry practices for purchased impaired loans that are pooled and accounted for as single asset, management is re-evaluating its derecognition policies for purchased impaired loans that are pooled and accounted for as a single asset. Any resulting change in these policies would likely result in an acceleration of when a pool’s recorded investment and associated ALLL balances are reduced. At implementation, we do not expect this potential change to impact the net carrying values of the pools or result in additional provision for credit losses for purchased impaired loans that are pooled, as a pool’s recorded investment and associated ALLL balances are to be reduced in equal amounts. See Note 4

Purchased Loans in the Notes To Consolidated Financial Statements in this Report for additional information.

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	June 30, 2015			Declining Scenario (a)			Improving Scenario (b)
Expected cash flows	$	5.0		$	(.1	)	$	.2
Accretable difference		1.4			–			–
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.

(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.

Commitments to Extend Credit

Commitment to extend credit are comprised of the following:

Table 13: Commitments to Extend Credit (a)


In millions	June 30 2015		December 31 2014
Total commercial lending	$	97,334	$	98,742
Home equity lines of credit		17,570		17,839
Credit card		18,999		17,833
Other		4,339		4,178
Total	$	138,242	$	138,592

(a)	Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions.

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

In addition to the credit commitments set forth in the table above, our net outstanding standby letters of credit totaled $9.5 billion at June 30, 2015 and $10.0 billion at December 31, 2014. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

Information regarding our commitments to extend credit and our allowance for unfunded loan commitments and letters of credit is included in Note 1 Accounting Policies, Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit and Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part 1, Item 1 of this Report.

INVESTMENT SECURITIES

The following table presents the distribution of our investment securities portfolio by credit rating. We have included credit ratings information because we believe that 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 on our balance sheet at June 30, 2015, 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. 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


									Ratings (a)
	June 30, 2015				December 31, 2014				As of June 30, 2015
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	$	6,184	$	6,385	$	5,485	$	5,714		100	%
Agency residential mortgage-backed		28,828		29,100		23,382		23,935		100
Non-agency residential mortgage-backed		4,609		4,811		4,993		5,225		10			1	%		2	%		82	%		5	%
Agency commercial mortgage-backed		3,122		3,184		3,378		3,440		100
Non-agency commercial mortgage-backed (b)		5,180		5,247		5,095		5,191		76			8			7			3			6
Asset-backed (c)		6,113		6,168		5,900		5,940		89			3						7			1
State and municipal		3,992		4,118		3,995		4,191		88			6									6
Other debt		2,129		2,167		2,099		2,142		61			30			8						1
Corporate stock and other		428		427		442		441														100
Total investment securities (d)	$	60,585	$	61,607	$	54,769	$	56,219		87	%		3	%		1	%		7	%		2	%

(a)	Ratings percentages allocated based on amortized cost.

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

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

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

Investment securities represented 17% of total assets at June 30, 2015 and 16% at December 31, 2014.

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 June 30, 2015, 87% 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 63% 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 June 30, 2015, the amortized cost and fair value of available for sale securities totaled $46.9 billion and $47.7 billion, respectively, compared to an amortized cost and fair value as of December 31, 2014 of $43.2 billion and $44.2 billion, respectively. The amortized cost and fair value of held to maturity securities were $13.7 billion and $13.9 billion, respectively, at June 30, 2015, compared to $11.6 billion and $12.0 billion, respectively, at December 31, 2014.

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

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 decreased to $1.0 billion at June 30, 2015 from $1.5 billion at December 31, 2014 primarily due to the impact of market interest rates. The comparable amounts for the securities available for sale portfolio were $.8 billion at June 30, 2015 and $1.1 billion at December 31, 2014.

Unrealized gains and losses on available for sale debt securities do not impact liquidity. However these gains and losses do affect capital under the regulatory capital rules. 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 risk-based regulatory capital ratios under the regulatory capital rules. In addition, the amount representing the credit-related portion of OTTI on securities would reduce our earnings and regulatory capital ratios.

The duration of investment securities was 2.7 years at June 30, 2015. We estimate that, at June 30, 2015, the effective duration of investment securities was 2.8 years for an immediate 50 basis points parallel increase in interest rates and 2.6 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2014 for the effective duration of investment securities were 2.2 years and 2.1 years, respectively.

Based on current interest rates and expected prepayment speeds, the weighed-average expected maturity of the investment securities portfolio (excluding corporate stock and other) was 4.6 years at June 30, 2015 compared to 4.3 years at December 31, 2014. The weighted-average expected maturities of mortgage and other asset-backed debt securities were as follows as of June 30, 2015:

Table 15: Weighted-Average Expected Maturity of Mortgage and Other Asset-Backed Debt Securities


June 30, 2015	Years
Agency residential mortgage-backed securities		4.4
Non-agency residential mortgage-backed securities		5.3
Agency commercial mortgage-backed securities		3.4
Non-agency commercial mortgage-backed securities		2.9
Asset-backed securities		3.0

At least quarterly, we conduct a comprehensive security-level impairment assessment on all securities. If economic conditions, including home prices, were to deteriorate from current levels, and if market volatility and liquidity 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 would likely 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 6 Investment Securities and Note 7 Fair Value in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

Loans Held for Sale

Table 16: Loans Held For Sale


In millions	June 30 2015		December 31 2014
Commercial mortgages at fair value	$	757	$	893
Commercial mortgages at lower of cost or fair value		27		29
Total commercial mortgages		784		922
Residential mortgages at fair value		1,364		1,261
Residential mortgages at lower of cost or fair value		5		18
Total residential mortgages		1,369		1,279
Other		204		61
Total	$	2,357	$	2,262

As of September 1, 2014, we have elected to apply the fair value option to 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 $2.2 billion of commercial mortgage loans to agencies during the first six months of 2015 compared to $935 million during the first six months of 2014. Total gains of $51 million were recognized on the valuation and sale of commercial mortgage loans held for sale, net of hedges, during the first six months of 2015, including $36 million in the second quarter. Comparable amounts for 2014 were $29 million and $22 million, respectively. These amounts are included in Other noninterest income on our Consolidated Income Statement.

Residential mortgage loan origination volume was $5.5 billion during the first six months of 2015 compared to $4.5 billion during the first six months of 2014. The majority of such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $4.0 billion of loans and recognized loan sales revenue of $203 million during the first six months of 2015, of which $99 million occurred in the second quarter. The comparable amounts for the first six months of 2014 were $4.3 billion and $242 million, respectively, including $135 million in the second quarter.

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

Interest income on loans held for sale was $46 million during the first six months of 2015, including $23 million in the second quarter. Comparable amounts for 2014 were $47 million and $24 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 7 Fair Value in our Notes To Consolidated Financial Statements included in Part 1, Item 1 of this Report.

Goodwill and Intangible Assets

Goodwill and intangible assets of $11.1 billion remained relatively flat at June 30, 2015. See additional information regarding our goodwill and intangible assets in Note 8 Goodwill and Intangible Assets included in the Notes To Consolidated Financial Statements in Part 1, Item 1 of this Report.

Funding Sources

Table 17: Details Of Funding Sources


Dollars in millions	June 30 2015		December 31 2014		Change
Dollars in millions	June 30 2015		December 31 2014		$			%
Deposits
Money market	$	122,643	$	115,438	$	7,205			6	%
Demand		82,653		82,829		(176	)		–	%
Retail certificates of deposit		18,265		18,544		(279	)		(2	)%
Savings		13,818		12,571		1,247			10	%
Time deposits in foreign offices and other time deposits		2,325		2,852		(527	)		(18	)%
Total deposits		239,704		232,234		7,470			3	%
Borrowed funds
Federal funds purchased and repurchase agreements		2,190		3,510		(1,320	)		(38	)%
FHLB borrowings		22,193		20,005		2,188			11	%
Bank notes and senior debt		18,529		15,750		2,779			18	%
Subordinated debt		9,121		9,151		(30	)		–	%
Commercial paper		2,956		4,995		(2,039	)		(41	)%
Other		3,287		3,357		(70	)		(2	)%
Total borrowed funds		58,276		56,768		1,508			3	%
Total funding sources	$	297,980	$	289,002	$	8,978			3	%

See the Liquidity Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our 2015 capital and liquidity activities.

Total deposits increased $7.5 billion at June 30, 2015 compared with December 31, 2014 due to strong growth in money market and savings, partially offset by lower other time deposits. Interest-bearing deposits represented 68% of total deposits at both June 30, 2015 and December 31, 2014. Total borrowed funds increased $1.5 billion since December 31, 2014 as higher issuances of bank notes and senior debt and FHLB borrowings were partially offset by a decline in commercial paper and federal funds purchased and repurchase agreements.

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

Capital

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.

We repurchase shares of PNC common stock under common stock repurchase authorizations approved from time to time by PNC’s Board of Directors and consistent with capital plans submitted to, and accepted by, the Federal Reserve. Through the first quarter of 2015, we repurchased stock under our 2007 common stock repurchase program authorization that permitted us to purchase up to 25 million shares of PNC common stock on the open market or in privately negotiated transactions. Effective as of March 31, 2015, PNC’s Board of Directors approved the termination of the 2007 common stock repurchase program authorization, and replaced it with a new stock repurchase program authorization in the amount of 100 million shares of PNC common stock, effective April 1, 2015. The extent and timing of share repurchases under this authorization 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 future supervisory assessments of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process.

In the first quarter of 2015, we completed our common stock repurchase programs for the four quarter period that began in second quarter 2014 with total repurchases of 17.3 million common shares for $1.5 billion. These repurchases were included in our 2014 capital plan accepted by the Federal Reserve as part of our 2014 CCAR submission.

In connection with 2015 CCAR, we submitted our 2015 capital plan, as approved by PNC’s Board of Directors, to the Federal Reserve in January 2015. The Federal Reserve accepted the capital plan and did not object to our proposed capital actions in March 2015. As provided for in the 2015 capital plan, we announced new share repurchase programs of up to $2.875 billion for the five quarter period beginning in the second quarter of 2015. These programs include repurchases of up to $375 million over the five quarter period related to stock issuances under employee benefit-related programs.

Under the Federal Reserve’s capital plan rule, a bank holding company must resubmit a new capital plan prior to the annual submission date if, among other things, there has been or will be a material change in the bank holding company’s risk profile, financial condition, or corporate structure since its last capital plan submission.

See the Supervision and Regulation section of Item 1 Business of our 2014 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 Balance Sheet, Liquidity and Capital Highlights portion of the Executive Summary section of this Financial Review for the impact of the Federal Reserve’s current supervisory assessment of the capital adequacy program.

Table 18: Shareholders’ Equity


Dollars in millions	June 30 2015			December 31 2014			Change
Dollars in millions	June 30 2015			December 31 2014			$			%
Shareholders’ equity
Preferred stock (a)
Common stock	$	2,708		$	2,705		$	3			–	%
Capital surplus – preferred stock		3,449			3,946			(497	)		(13	)%
Capital surplus – common stock and other		12,632			12,627			5			–	%
Retained earnings		27,609			26,200			1,409			5	%
Accumulated other comprehensive income		379			503			(124	)		(25	)%
Common stock held in treasury at cost		(2,262	)		(1,430	)		(832	)		(58	)%
Total shareholders’ equity	$	44,515		$	44,551		$	(36	)		–	%

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

The slight decline in total shareholders’ equity compared to December 31, 2014 reflected common share repurchases of $1.0 billion and the redemption of $500 million of preferred stock, partially offset by an increase in retained earnings. The increase in retained earnings was driven by net income of $2.0 billion, reduced by $631 million of common and preferred dividends declared. Common shares outstanding were 516 million at June 30, 2015 and 523 million at December 31, 2014.

In the first quarter of 2015, PNC repurchased 4.4 million common shares for $.4 billion. In the second quarter of 2015, PNC repurchased 5.9 million common shares for $.6 billion. All of these repurchases were under the authorizations and programs then in effect, as described above.

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

Table 19: Basel III Capital


	June 30, 2015
Dollars in millions	Transitional Basel III (a)			Pro forma Fully Phased-In Basel III (b)(c)
Common equity Tier 1 capital
Common stock plus related surplus, net of treasury stock	$	13,079		$	13,079
Retained earnings		27,609			27,609
Accumulated other comprehensive income for securities currently and previously held as available for sale		217			541
Accumulated other comprehensive income for pension and other postretirement plans		(195	)		(488	)
Goodwill, net of associated deferred tax liabilities		(8,849	)		(8,849	)
Other disallowed intangibles, net of deferred tax liabilities		(150	)		(374	)
Other adjustments/(deductions)		(101	)		(148	)
Total common equity Tier 1 capital before threshold deductions		31,610			31,370
Total threshold deductions		(430	)		(1,159	)
Common equity Tier 1 capital		31,180			30,211
Additional Tier 1 capital
Preferred stock plus related surplus		3,449			3,449
Trust preferred capital securities		50
Noncontrolling interests (d)		604			44
Other adjustments/(deductions)		(90	)		(105	)
Tier 1 capital		35,193			33,599
Additional Tier 2 capital
Qualifying subordinated debt		4,841			4,415
Trust preferred capital securities		149
Allowance for loan and lease losses included in Tier 2 capital		3,518			223
Other		5			10
Total Basel III capital	$	43,706		$	38,247
Risk-weighted assets
Basel III standardized approach risk-weighted assets (e)	$	293,862		$	301,688
Estimated Basel III advanced approaches risk-weighted assets (f)		N/A			286,277
Average quarterly adjusted total assets		342,680			341,687
Supplementary leverage exposure (g)		405,726			404,792
Basel III risk-based capital and leverage ratios
Common equity Tier 1		10.6	%		10.0	% (h)(j)
Tier 1		12.0			11.1	(h)(k)
Total		14.9			13.4	(i)(l)
Leverage (m)		10.3			9.8
Supplementary leverage ratio (n)		8.7			8.3

(a)	Calculated using the regulatory capital methodology applicable to PNC during 2015.

(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. Pro forma fully phased-in capital amounts, ratios and risk-weighted and leverage-related assets are estimated.

(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)	Primarily includes REIT Preferred Securities.

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

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

(g)	Supplementary leverage exposure is the sum of Adjusted average assets and certain off-balance sheet exposures including undrawn credit commitments and derivative potential future exposures.

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

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

(j)

For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Common equity Tier 1 capital ratio estimate is 10.6%. This capital ratio is calculated using pro forma fully phased-in Common equity Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets.

(k)	For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Tier 1 risk-based capital ratio estimate is 11.7%. This capital ratio is calculated using fully phased-in 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 standardized approach Basel III Total capital risk-based capital ratio estimate is 13.8%. This ratio is calculated using fully phased-in 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.

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

(n)	Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure. As advanced approaches banking organizations, PNC and PNC Bank will be subject to a 3% minimum supplementary leverage ratio effective January 1, 2018.

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

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 2014 Form 10-K for additional information. Prior to fully implementing the advanced approaches to calculate risk-weighted assets, PNC and PNC Bank must successfully complete a “parallel run” qualification phase. Both PNC and PNC Bank entered this parallel run phase on January 1, 2013. Although the minimum parallel run qualification period is four quarters, the parallel run period for PNC and PNC Bank, now in its third year, is consistent with the experience of other U.S. advanced approaches banks that have all had multi-year parallel run periods. After PNC exits parallel run, its regulatory risk-based capital ratio for each measure (e.g., Common equity Tier 1 capital 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. Basel III regulatory capital rules (Basel III rules), as well as the fact that PNC remains in the parallel run qualification phase for the advanced approaches, PNC’s regulatory risk-based ratios in 2015 will be calculated using the standardized approach, effective January 1, 2015, for determining risk-weighted assets, and the definitions of, and deductions from, regulatory capital under the Basel III rules (as such definitions and deductions are phased-in for 2015). We refer to the capital ratios calculated using the phased-in Basel III provisions in effect for 2015 and, for the risk-based ratios, standardized approach risk-weighted assets as the 2015 Transitional Basel III ratios. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, past due exposures, equity exposures and securitization exposures are generally subject to higher risk weights than other types of exposures.

Under the Basel III rules adopted by the U.S. banking agencies, significant common stock investments in unconsolidated financial institutions, mortgage servicing rights and deferred tax assets must be deducted from capital (subject to a phase-in schedule) 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 III regulatory capital includes (subject to a phase-in schedule) accumulated other comprehensive income related to securities currently and previously held as available for sale, as well as pension and other postretirement plans.

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 June 30, 2015 capital levels were aligned with them.

At June 30, 2015, PNC and PNC Bank, our sole bank subsidiary, were both considered “well capitalized,” based on applicable U.S. regulatory capital ratio requirements. To qualify as “well capitalized” during 2015, PNC and PNC Bank must have Transitional Basel III capital ratios of at least 6.5% for Common equity Tier 1 capital, 8% for Tier 1 risk-based and 10% for Total risk-based, and PNC Bank is required to have a Transitional Basel III leverage ratio of at least 5%.

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 Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 20 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of our 2014 Form 10-K.

20 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 2014 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 9 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities in the Notes To Consolidated Financial Statements, and

•

Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements.

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

A summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements, as of June 30, 2015 and December 31, 2014 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 June 30, 2015). 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 12 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in the Notes To Consolidated Financial Statements in Item 8 of our 2014 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 21

FAIR VALUE MEASUREMENTS

In addition to the following, see Note 7 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 June 30, 2015 and December 31, 2014, respectively, and the portions of such assets and liabilities that are classified within Level 3 of the valuation hierarchy. Level 3 assets and liabilities are those where the fair value is estimated using significant unobservable inputs.

Table 20: Fair Value Measurements – Summary


	June 30, 2015						December 31, 2014
Dollars in millions	Total Fair Value			Level 3			Total Fair Value			Level 3
Total assets	$	62,102		$	9,719		$	58,973		$	10,257
Total assets at fair value as a percentage of consolidated assets		18	%					17	%
Level 3 assets as a percentage of total assets at fair value					16	%					17	%
Level 3 assets as a percentage of consolidated assets					3	%					3	%
Total liabilities	$	5,493		$	673		$	5,799		$	716
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					12	%					12	%
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, 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 7 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 17 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 17 primarily due to the presentation in this Financial Review of business net interest revenue on a taxable-equivalent basis. Note 17 presents results of businesses for the first six months and second quarter of 2015 and 2014.

Net interest income in business segment results reflects PNC’s internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors. In the first quarter of 2015, enhancements were made to PNC’s funds transfer pricing methodology primarily for costs related to the new regulatory short-term liquidity standards. The enhancements incorporate an additional charge assigned to assets, including for unfunded loan commitments. Conversely, a higher transfer pricing credit has been assigned to those deposits that are accorded higher value under LCR rules for liquidity purposes. Please see the Supervision and Regulation section in Item 1 and the Liquidity Risk Management section in Item 7 of our 2014 Form 10-K for more information about the LCR. These adjustments apply to business segment results, primarily favorably impacting Retail Banking and adversely impacting Corporate & Institutional Banking, prospectively beginning with the first quarter of 2015. Prior periods have not been adjusted due to the impracticability of estimating the impact of the change for prior periods.

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

Retail Banking

(Unaudited)

Table 21: Retail Banking Table


Six months ended June 30 Dollars in millions, except as noted	2015			2014
Income Statement
Net interest income	$	2,083		$	1,953
Noninterest income
Service charges on deposits		294			288
Brokerage		138			116
Consumer services		487			466
Other		159			185
Total noninterest income		1,078			1,055
Total revenue		3,161			3,008
Provision for credit losses		94			149
Noninterest expense		2,368			2,255
Pretax earnings		699			604
Income taxes		256			221
Earnings	$	443		$	383
Average Balance Sheet
Loans
Consumer
Home equity	$	27,964		$	29,137
Indirect auto		9,287			9,043
Indirect other		580			751
Education		6,506			7,422
Credit cards		4,446			4,289
Other		2,360			2,164
Total consumer		51,143			52,806
Commercial and commercial real estate		10,612			10,986
Floor plan		2,200			2,332
Residential mortgage		731			635
Total loans		64,686			66,759
Goodwill and other intangible assets		5,983			6,052
Other assets		3,022			2,748
Total assets	$	73,691		$	75,559
Deposits
Noninterest-bearing demand	$	23,015		$	21,634
Interest-bearing demand		36,054			33,883
Money market		54,071			49,815
Total transaction deposits		113,140			105,332
Savings		13,245			11,568
Certificates of deposit		17,032			19,617
Total deposits		143,417			136,517
Other liabilities		603			405
Total liabilities	$	144,020		$	136,922
Performance Ratios
Return on average assets		1.21	%		1.02	%
Noninterest income to total revenue		34			35
Efficiency		75			75
Other Information (a)
Credit-related statistics:
Commercial nonperforming assets	$	126		$	158
Consumer nonperforming assets		1,001			1,037
Total nonperforming assets (b)	$	1,127		$	1,195
Purchased impaired loans (c)	$	531		$	631
Commercial lending net charge-offs	$	2		$	31
Credit card lending net charge-offs		73			74
Consumer lending (excluding credit card) net charge-offs		110			156
Total net charge-offs	$	185		$	261
Commercial lending annualized net charge-off ratio		.03	%		.47	%
Credit card lending annualized net charge-off ratio		3.29	%		3.48	%
Consumer lending (excluding credit card) annualized net charge-off ratio		.47	%		.64	%
Total annualized net charge-off ratio		.58	%		.79	%


At June 30	2015			2014
Other Information (Continued) (a)
Home equity portfolio credit statistics: (d)
% of first lien positions at origination (e)		55	%		53	%
Weighted-average loan-to-value ratios (LTVs) (e) (f)		76	%		79	%
Weighted-average updated FICO scores (g)		751			748
Annualized net charge-off ratio		.38	%		.65	%
Delinquency data – % of total loans: (h)
Loans 30 – 59 days past due		.20	%		.19	%
Loans 60 – 89 days past due		.08	%		.07	%
Accruing loans past due		.28	%		.26	%
Nonperforming loans		3.13	%		3.08	%
Other statistics:
ATMs		8,880			7,977
Branches (i)		2,644			2,695
Brokerage account client assets (in billions) (j)	$	44		$	43
Customer-related statistics (average):
Non-teller deposit transactions (k)		41	%		32	%
Digital consumer customers (l)		51	%		44	%

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

(b)	Includes nonperforming loans of $1.1 billion at both June 30, 2015 and June 30, 2014.

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

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

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

(f)	LTV statistics are based upon current information.

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

(h)	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.

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

(j)	Amounts include cash and money market balances.

(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.

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

Retail Banking earned $443 million in the first six months of 2015 compared with earnings of $383 million for the same period a year ago. The increase in earnings was driven by increased net interest income and noninterest income and lower provision for credit losses partially offset by higher noninterest expense. Noninterest income included lower gains on sales of Visa Class B common shares.

Retail Banking continues to enhance the customer experience with refinements to product offerings that drive product value for consumers and small businesses. We are focused on growing customer share of wallet through the sale of liquidity, banking, and investment products.

Retail Banking continued to focus on the strategic priority of transforming the customer experience through transaction migration, branch network transformation and multi-channel sales strategies.

•

In the first six months of 2015, approximately 51% of consumer customers used non-teller channels for the majority of their transactions compared with 44% for the same period in 2014.

•

Deposit transactions via ATM and mobile channels increased to 41% of total deposit transactions in the first half of 2015 compared with 32% for the same period a year ago.

•

Integral to PNC’s retail branch transformation strategy, more than 300 branches operate under the universal model designed to drive higher ATM and mobile deposits and enhance sales opportunities for branch personnel. During the first half of 2015, the total branch network was reduced by 53 branches and the ATM network was increased by 275 ATMs. PNC had a network of 2,644 branches and 8,880 ATMs at June 30, 2015.

•

As part of Retail Banking’s transformation and multi-channel sales strategy, PNC’s proactive customer appointment setting model was rolled out to all markets.

•

Instant debit card issuance is now available in more than 500 branches, approximately 20% of the branch network.

•

By the end of third quarter, all branches will have Apple iPad™ technology to demonstrate product capabilities to customers and prospects.

Total revenue for the first six months of 2015 increased $153 million compared to the same period a year ago, which included a $130 million increase in net interest income. In addition to the benefit from the enhancements to internal funds transfer pricing methodology in the first quarter of 2015, net interest income increased slightly, as growth in deposit balances was partially offset by lower loan balances and yields and lower purchase accounting accretion on loans and deposits.

Noninterest income increased $23 million, or 2%, compared to the first six months of 2014. Noninterest income included gains on sales of Visa Class B common shares of $79 million on one million shares and $116 million on two million shares, in the first six months of 2015 and 2014, respectively. Excluding these gains, noninterest income increased $60 million, or 6%, as a result of increases in customer-initiated transactions, brokerage fees, changes in product offerings, and increased merchant processing revenue.

Provision for credit losses and net charge-offs in the first six months of 2015 declined by $55 million and $76 million, respectively, in the comparison to the same period a year ago. Provision for credit losses decreased due to improved credit metrics. Lower net charge-offs were driven by improved credit quality in both the consumer and commercial portfolios.

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

Noninterest expense increased $113 million in the first six months of 2015 compared to the same period in 2014. Increases in technology investments, sales incentive compensation, marketing, and customer transaction-related costs were offset by reduced branch network expenses as a result of transaction migration to lower cost digital and ATM channels.

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 half of 2015, average total deposits increased $6.9 billion, or 5%, compared with the same period in 2014.

•

Average transaction deposits grew $7.8 billion, or 7%, and average savings deposit balances grew $1.7 billion, or 14%, compared to the first six months of 2014 as a result of organic deposit growth. Compared to the same period a year ago, average demand deposits increased $3.6 billion, or 6%, to $59.1 billion and average money market deposits increased $4.3 billion, or 9%.

•

Total average certificates of deposit decreased $2.6 billion in the first six months of 2015, or 13%, compared to the same period in 2014. 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, including small businesses and auto dealerships. In the first six months of 2015, average total loans declined $2.1 billion, compared to the same period a year ago, driven by a decline in home equity loans and declines from run-off of non-strategic portions of the portfolios.

•

Average home equity loans decreased $1.2 billion, or 4%, compared to the first six months of 2014. The overall portfolio decline resulted from pay-downs and payoffs on loans exceeding new booked volume. Retail Banking’s home equity loan portfolio is relationship based, with 97% of the portfolio attributable to borrowers in our primary geographic footprint.

•

Average auto dealer floor plan loans declined $132 million, or 6%, in the first half of 2015, compared to the same period in 2014, primarily resulting from lower dealer line utilization.

•

Average indirect auto loans increased $244 million, or 3%, compared to the first six months 2014. The increase was primarily due to growth in newer footprint indirect auto markets.

•

Average credit card balances increased $157 million, or 4%, over the same period in 2014 as a result of efforts to increase credit card share of wallet through organic growth.

•

Average residential mortgage balances increased $96 million, or 15%, compared to the first six months of 2014. The increase was due to the transfer of $198 million in Community Reinvestment Act (CRA) mortgage loans from the Residential Mortgage Banking business segment in January 2015.

•

In the first half of 2015, average loan balances for the remainder of the portfolio declined a net $1.3 billion, compared to the same period a year ago, driven by declines in the education portfolio of $916 million and commercial & commercial real estate of $374 million. The discontinued government guaranteed education loan and indirect other portfolios are primarily run-off portfolios.

Nonperforming assets declined $68 million, or 6%, at June 30, 2015 compared to June 30, 2014. The decrease was driven by declines in both commercial and consumer non-performing loans.

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

Corporate & Institutional Banking

(Unaudited)

Table 22: Corporate & Institutional Banking Table


Six months ended June 30 Dollars in millions, except as noted	2015			2014
Income Statement
Net interest income	$	1,726		$	1,855
Noninterest income
Corporate service fees		651			580
Other		270			211
Noninterest income		921			791
Total revenue		2,647			2,646
Provision for credit losses		37			90
Noninterest expense		1,061			992
Pretax earnings		1,549			1,564
Income taxes		559			571
Earnings	$	990		$	993
Average Balance Sheet
Loans
Commercial	$	85,228		$	76,771
Commercial real estate		22,319			20,640
Equipment lease financing		6,920			6,834
Total commercial lending		114,467			104,245
Consumer		1,113			1,070
Total loans		115,580			105,315
Goodwill and other intangible assets		3,840			3,815
Loans held for sale		1,048			913
Other assets		11,243			9,949
Total assets	$	131,711		$	119,992
Deposits
Noninterest-bearing demand	$	47,449		$	42,646
Money market		22,002			20,476
Other		9,368			7,548
Total deposits		78,819			70,670
Other liabilities		8,083			7,477
Total liabilities	$	86,902		$	78,147
Performance Ratios
Return on average assets		1.52	%		1.67	%
Noninterest income to total revenue		35			30
Efficiency		40			37
Commercial Loan Servicing Portfolio – Serviced For PNC and Others (in billions)
Beginning of period	$	377		$	347
Acquisitions/additions		96			39
Repayments/transfers		(37	)		(33	)
End of period	$	436		$	353
Other Information
Consolidated revenue from: (a)
Treasury Management (b)	$	653		$	624
Capital Markets (b)	$	385		$	335
Commercial mortgage banking activities
Commercial mortgage loans held for sale (c)	$	73		$	52
Commercial mortgage loan servicing income (d)		121			108
Commercial mortgage servicing rights valuation, net of economic hedge (e)		24			25
Total	$	218		$	185
Average Loans (by C&IB business)
Corporate Banking	$	58,323		$	52,947
Real Estate		30,248			26,827
Business Credit		14,415			12,868
Equipment Finance		10,938			10,250
Other		1,656			2,423
Total average loans	$	115,580		$	105,315
Total loans (f)	$	115,708		$	108,990
Net carrying amount of commercial mortgage servicing rights (f)	$	543		$	515
Credit-related statistics:
Nonperforming assets (f) (g)	$	463		$	715
Purchased impaired loans (f) (h)	$	181		$	370
Net charge-offs (recoveries)	$	(20	)	$	17

(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, corporate service fees and other noninterest income.

(c)	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.

(d)

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. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.

(e)	Includes amounts reported in corporate services fees.

(f)	As of June 30.

(g)	Includes nonperforming loans of $.4 billion at June 30, 2015 and $.6 billion at June 30, 2014.

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

Corporate & Institutional Banking earned $990 million in the first six months of 2015 compared with earnings of $993 million for the same period a year ago. The slight decrease in earnings was due to lower net interest income and an increase in noninterest expense, mostly offset by higher noninterest income and a decrease in the provision for credit losses. We continue to focus on building client relationships where the risk-return profile is attractive, including the Southeast.

Net interest income decreased $129 million in the first six months of 2015 compared to the first six months of 2014. The decline was due to the impact of first quarter 2015 enhancements to internal funds transfer pricing methodology, continued spread compression on loans, and lower purchase accounting accretion, partially offset by the impact of higher average loans and deposits. Decreased net interest income in the comparison also reflected the impact from the second quarter 2014 correction to reclassify certain commercial facility usage fees from net interest income to corporate service fees.

Corporate service fees increased $71 million in the first six months of 2015 compared to the first six months of 2014. This increase was primarily due to the impact of the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to corporate service fees and increases in treasury management and equity capital markets advisory fees.

Other noninterest income increased $59 million in the first six months of 2015 compared to the first six months of 2014. This increase was driven by higher multifamily loans originated for sale to agencies, higher revenue associated with credit valuations for customer-related derivatives activities and related derivatives sales and higher corporate securities underwriting activity.

The provision for credit losses declined $53 million in the first six months of 2015 compared with the first six months of 2014 reflecting improved credit quality.

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

Noninterest expense increased $69 million in the first six months of 2015 compared to the prior year period, primarily driven by investments in technology and infrastructure, higher asset writedowns, and expenses related to equity capital markets advisory fees.

Average loans increased $10.3 billion, or 10%, for the first six months of 2015 compared to the first six months of 2014, reflecting solid growth in Corporate Banking, Real Estate, Business Credit and Equipment Finance:

•

Corporate Banking business provides lending, treasury management and capital markets-related products and services to midsized and large corporations, government and not-for-profit entities. Average loans for this business increased $5.4 billion, or 10%, in the first six months of 2015 compared with the first six months of 2014, primarily due to an increase in loan commitments from specialty lending businesses and large corporate clients.

•

PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. Average loans for this business increased $3.4 billion, or 13%, in first six months of 2015 compared with the first six months of 2014 due to increased originations and higher utilization.

•

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 for this business increased $1.5 billion, or 12%, in first six months of 2015 compared with the first six months of 2014 due to new originations, increasing deal sizes and higher utilization.

•

PNC Equipment Finance provides equipment financing solutions for clients throughout the U.S. and Canada. Average equipment finance loans and operating leases were $11.8 billion in the first six months of 2015, an increase of $.8 billion, or 7%, compared with the first six months of 2014.

Period-end loan balances increased by 6%, or $6.7 billion, at June 30, 2015 compared to June 30, 2014 primarily due to growth in our Corporate Banking, Real Estate and Business Credit businesses.

Loan commitments increased 5%, or $10.1 billion, to $213.1 billion at June 30, 2015 compared to June 30, 2014, primarily due to growth in our Corporate Banking, Real Estate and Business Credit businesses.

Average deposits for the first six months of 2015 increased $8.1 billion, or 12%, compared with the first six months of 2014 as a result of business growth and inflows into demand and money market deposits.

The commercial loan servicing portfolio increased $83 billion, or 24% at June 30, 2015, compared to June 30, 2014, as servicing additions exceeded portfolio run-off.

Nonperforming assets declined 35% at June 30, 2015 compared to June 30, 2014 reflecting improved credit quality.

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 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 22 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, increased $29 million in the comparison of the first six months of 2015 to the first six months of 2014, driven by growth in our commercial card, wholesale lockbox and PINACLE^® products.

Capital markets revenue includes merger and acquisition advisory fees, loan syndications, derivatives, foreign exchange, asset-backed finance revenue and fixed income and equity capital markets advisory activities. Revenue from capital markets-related products and services increased $50 million in the first six months of 2015 compared with the first six months of 2014. The increase in the comparison was primarily driven by higher revenue associated with credit valuations for customer-related derivatives activities and related derivatives sales, higher equity capital markets advisory fees and increased corporate securities underwriting activity.

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. Revenue from total commercial mortgage banking activities increased $33 million in the first six months of 2015 compared with the first six months of 2014. The increase in the comparison was mainly due to higher multifamily loans originated for sale to agencies and higher mortgage servicing revenue.

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

Asset Management Group

(Unaudited)

Table 23: Asset Management Group Table


Six months ended June 30 Dollars in millions, except as noted	2015		2014
Income Statement
Net interest income	$	144	$	143
Noninterest income		451		406
Total revenue		595		549
Provision for credit losses		13		6
Noninterest expense		425		401
Pretax earnings		157		142
Income taxes		58		52
Earnings	$	99	$	90
Average Balance Sheet
Loans
Consumer	$	5,669	$	5,361
Commercial and commercial real estate		938		1,011
Residential mortgage		878		780
Total loans		7,485		7,152
Goodwill and other intangible assets	</