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, 2016

¨	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.)

The Tower at PNC Plaza, 300 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2401

(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 22, 2016, there were 491,409,134 shares of the registrant’s common stock ($5 par value) outstanding.

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2016 Form 10-Q


	Pages
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).
Consolidated Income Statement		44
Consolidated Statement of Comprehensive Income		45
Consolidated Balance Sheet		46
Consolidated Statement Of Cash Flows		47

Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies		49
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities		49
Note 3 Asset Quality		52
Note 4 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit		62
Note 5 Investment Securities		64
Note 6 Fair Value		68
Note 7 Goodwill and Intangible Assets		79
Note 8 Employee Benefit Plans		80
Note 9 Financial Derivatives		81
Note 10 Earnings Per Share		87
Note 11 Total Equity And Other Comprehensive Income		88
Note 12 Legal Proceedings		90
Note 13 Commitments and Guarantees		92
Note 14 Segment Reporting		94
Note 15 Subsequent Events		97

Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis		98
Transitional Basel III and Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios – 2015 Periods		100

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Financial Review		1
Consolidated Financial Highlights		1
Executive Summary		3
Consolidated Balance Sheet Review		9
Off-Balance Sheet Arrangements And Variable Interest Entities		16
Fair Value Measurements		17
Business Segments Review		17
Critical Accounting Estimates and Judgments		27
Recourse And Repurchase Obligations		28
Risk Management		28
Internal Controls And Disclosure Controls And Procedures		41
Glossary Of Terms		41
Cautionary Statement Regarding Forward-Looking Information		42

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		28-41, 68-80 and 81-87

Item 4. Controls and Procedures.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.		101

Item 1A. Risk Factors.		101

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds.		101

Item 6. Exhibits.		101
Exhibit Index.		101
Corporate Information		102
Signature		103

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2016 Form 10-Q (continued)

MD&A TABLE REFERENCE


Table	Description	Page
1	Consolidated Financial Highlights		1
2	Summarized Average Balance Sheet		5
3	Results Of Businesses – Summary		7
4	Net Interest Income and Net Interest Margin		7
5	Noninterest Income		8
6	Summarized Balance Sheet Data		9
7	Details Of Loans		10
8	Purchased Impaired Loans – Balances		11
9	Purchased Impaired Loans – Accretable Yield		11
10	Weighted Average Life of the Purchased Impaired Portfolios		11
11	Investment Securities		12
12	Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities		13
13	Loans Held For Sale		13
14	Details Of Funding Sources		13
15	Shareholders’ Equity		14
16	Basel III Capital		15
17	Fair Value Measurements – Summary		17
18	Retail Banking Table		18
19	Corporate & Institutional Banking Table		20
20	Asset Management Group Table		22
21	Residential Mortgage Banking Table		24
22	BlackRock Table		25
23	Non-Strategic Assets Portfolio Table		26
24	Nonperforming Assets By Type		29
25	Change in Nonperforming Assets		29
26	OREO and Foreclosed Assets		30
27	Accruing Loans Past Due		30
28	Home Equity Lines of Credit – Draw Period End Dates		31
29	Consumer Real Estate Related Loan Modifications		32
30	Loan Charge-Offs And Recoveries		33
31	Allowance for Loan and Lease Losses		35
32	PNC Bank Notes Issued During 2016		36
33	PNC Bank Senior and Subordinated Debt		36
34	FHLB Borrowings		37
35	Parent Company Senior and Subordinated Debt and Hybrid Capital Instruments		38
36	Credit Ratings as of June 30, 2016 for PNC and PNC Bank		38
37	Interest Sensitivity Analysis		39
38	Net Interest Income Sensitivity to Alternative Rate Scenarios (Second Quarter 2016)		39
39	Alternate Interest Rate Scenarios: One Year Forward		39
40	Equity Investments Summary		40
41	Financial Derivatives Summary		41

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2016 Form 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE


Table	Description	Page
42	Cash Flows Associated with Loan Sale and Servicing Activities		50
43	Principal Balance, Delinquent Loans, and Net Charge-offs Related to Serviced Loans For Others		51
44	Consolidated VIEs – Carrying Value		51
45	Non-Consolidated VIEs		52
46	Analysis of Loan Portfolio		53
47	Nonperforming Assets		54
48	Commercial Lending Asset Quality Indicators		55
49	Home Equity and Residential Real Estate Balances		56
50	Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans		57
51	Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans		58
52	Credit Card and Other Consumer Loan Classes Asset Quality Indicators		59
53	Summary of Troubled Debt Restructurings		59
54	Financial Impact and TDRs by Concession Type		60
55	Impaired Loans		61
56	Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data		62
57	Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit		63
58	Investment Securities Summary		64
59	Gross Unrealized Loss and Fair Value of Securities Available for Sale		66
60	Gains (Losses) on Sales of Securities Available for Sale		67
61	Contractual Maturity of Debt Securities		67
62	Fair Value of Securities Pledged and Accepted as Collateral		68
63	Fair Value Measurements – Recurring Basis Summary		69
64	Reconciliation of Level 3 Assets and Liabilities		70
65	Fair Value Measurements – Recurring Quantitative Information		74
66	Fair Value Measurements – Nonrecurring		76
67	Fair Value Measurements – Nonrecurring Quantitative Information		76
68	Fair Value Option – Changes in Fair Value		76
69	Fair Value Option – Fair Value and Principal Balances		77
70	Additional Fair Value Information Related to Other Financial Instruments		78
71	Mortgage Servicing Rights		79
72	Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions		80
73	Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions		80
74	Net Periodic Pension and Postretirement Benefit Costs		81
75	Total Gross Derivatives		81
76	Derivatives Designated As Hedging Instruments under GAAP		82
77	Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges		82
78	Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges		83
79	Derivatives Not Designated As Hedging Instruments under GAAP		84
80	Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP		85
81	Derivative Assets and Liabilities Offsetting		86
82	Basic and Diluted Earnings per Common Share		87
83	Rollforward of Total Equity		88
84	Other Comprehensive Income		89
85	Accumulated Other Comprehensive Income (Loss) Components		90
86	Commitments to Extend Credit and Other Commitments		92
87	Internal Credit Ratings Related to Net Outstanding Standby Letters of Credit		93
88	Resale and Repurchase Agreements Offsetting		94
89	Results Of Businesses		96

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 2015 Annual Report on Form 10-K (2015 Form 10-K). For information regarding certain business, regulatory and legal risks, see the following sections as they appear in this Report and in our 2015 Form 10-K: the Risk Management section of the Financial Review portion of this report and of Item 7 in our 2015 Form 10-K; Item 1A Risk Factors included in our 2015 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 2015 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 14 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


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	2016			2015			2016			2015
Financial Results (a)
Revenue
Net interest income	$	2,068		$	2,052		$	4,166		$	4,124
Noninterest income		1,726			1,814			3,293			3,473
Total revenue		3,794			3,866			7,459			7,597
Provision for credit losses		127			46			279			100
Noninterest expense		2,360			2,366			4,641			4,715
Income before income taxes and noncontrolling interests	$	1,307		$	1,454		$	2,539		$	2,782
Net income	$	989		$	1,044		$	1,932		$	2,048
Less:
Net income (loss) attributable to noncontrolling interests		23			4			42			5
Preferred stock dividends and discount accretion and redemptions		43			48			108			118
Net income attributable to common shareholders	$	923		$	992		$	1,782		$	1,925
Less:
Dividends and undistributed earnings allocated to nonvested restricted shares		6						12			2
Impact of BlackRock earnings per share dilution		3			5			6			10
Net income attributable to diluted common shares	$	914		$	987		$	1,764		$	1,913
Diluted earnings per common share	$	1.82		$	1.88		$	3.49		$	3.63
Cash dividends declared per common share	$	.51		$	.51		$	1.02		$	.99
Effective tax rate (b)		24.3	%		28.2	%		23.9	%		26.4	%
Performance Ratios
Net interest margin (c)		2.70	%		2.73	%		2.73	%		2.78	%
Noninterest income to total revenue		45	%		47	%		44	%		46	%
Efficiency		62	%		61	%		62	%		62	%
Return on:
Average common shareholders’ equity		8.87	%		9.75	%		8.66	%		9.54	%
Average assets		1.11	%		1.19	%		1.09	%		1.18	%

(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)	The effective income tax rates are generally lower than the statutory rate due to the relationship of pretax income to tax credits and earnings that are not subject to tax.

(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, 2016 and June 30, 2015 were $48 million and $49 million, respectively. The taxable-equivalent adjustments to net interest income for the six months ended June 30, 2016 and June 30, 2015 were $96 million and $98 million, respectively.

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

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


Unaudited	June 30 2016			December 31 2015			June 30 2015
Balance Sheet Data (dollars in millions, except per share data)
Assets	$	361,335		$	358,493		$	353,945
Loans	$	209,056		$	206,696		$	205,153
Allowance for loan and lease losses	$	2,685		$	2,727		$	3,272
Interest-earning deposits with banks (b)	$	26,750		$	30,546		$	33,969
Investment securities	$	71,801		$	70,528		$	61,362
Loans held for sale	$	2,296		$	1,540		$	2,357
Goodwill	$	9,103		$	9,103		$	9,103
Mortgage servicing rights	$	1,222		$	1,589		$	1,558
Equity investments (c)	$	10,469		$	10,587		$	10,531
Other assets	$	25,316		$	23,092		$	24,032

Noninterest-bearing deposits	$	77,866		$	79,435		$	77,369
Interest-bearing deposits	$	171,912		$	169,567		$	162,335
Total deposits	$	249,778		$	249,002		$	239,704
Borrowed funds	$	54,571		$	54,532		$	58,276
Total shareholders’ equity	$	45,558		$	44,710		$	44,515
Common shareholders’ equity	$	42,103		$	41,258		$	41,066
Accumulated other comprehensive income	$	736		$	130		$	379

Book value per common share	$	85.33		$	81.84		$	79.64
Common shares outstanding (millions)		493			504			516
Loans to deposits		84	%		83	%		86	%

Client Assets (in billions)
Discretionary client assets under management	$	135		$	134		$	134
Nondiscretionary client assets under administration		126			125			128
Total client assets under administration (d)		261			259			262
Brokerage account client assets		44			43			44
Total client assets	$	305		$	302		$	306

Capital Ratios
Transitional Basel III (e) (f)
Common equity Tier 1		10.6	%		10.6	%		10.6	%
Tier 1 risk-based		11.9	%		12.0	%		12.0	%
Total capital risk-based		14.3	%		14.6	%		14.9	%
Leverage		10.2	%		10.1	%		10.3	%
Pro forma Fully Phased-In Basel III (f)
Common equity Tier 1		10.2	%		10.0	%		10.0	%
Common shareholders’ equity to assets		11.7	%		11.5	%		11.6	%

Asset Quality
Nonperforming loans to total loans		1.08	%		1.03	%		1.10	%
Nonperforming assets to total loans, OREO and foreclosed assets		1.20	%		1.17	%		1.25	%
Nonperforming assets to total assets		.70	%		.68	%		.73	%
Net charge-offs to average loans (for the three months ended) (annualized)		.26	%		.23	%		.13	%
Allowance for loan and lease losses to total loans (g)		1.28	%		1.32	%		1.59	%
Allowance for loan and lease losses to total nonperforming loans (g) (h)		119	%		128	%		145	%
Accruing loans past due 90 days or more (in millions)	$	754		$	881		$	914

(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 $26.3 billion, $30.0 billion, and $33.6 billion as of June 30, 2016, December 31, 2015 and June 30, 2015, respectively.

(c)	Amounts include our equity interest in BlackRock.

(d)

As a result of certain investment advisory services performed by one of our registered investment advisors, certain assets are reported as both discretionary client assets under management and nondiscretionary client assets under administration. The amount of such assets was approximately $9 billion, $6 billion and $5 billion as of June 30, 2016, December 31, 2015 and June 30, 2015, respectively.

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

(f)

See Basel III Capital discussion in the Capital portion of the Consolidated Balance Sheet Review section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business in our 2015 Form 10-K. See also the Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratio – 2015 Periods table in the Statistical Information section of this Report for a reconciliation of the 2015 periods’ ratios.

(g)	See our 2015 Form 10-K for information on our change in derecognition policy effective December 31, 2015 for certain purchased impaired loans.

(h)	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, Florida, North Carolina, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Georgia, Missouri, 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 objectives. 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 to meet the broad range of financial needs of our customers.

Our strategic priorities are designed to enhance value over the long term. A key priority is to build a leading banking franchise in our underpenetrated geographic markets. In addition, we are seeking to attract more of the investable assets of new and existing clients. PNC is focused on redefining the retail banking experience by transforming to a more customer-centric and sustainable model while lowering delivery costs as customer banking preferences evolve. Additionally, we continue to focus on expense management while investing in technology to bolster critical business infrastructure and streamline core 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 currently effective capital plan included in our 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 2015 Form 10-K.

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 2015 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:

•

Domestic and global economic conditions, including the continuity, speed and stamina of the current U.S. economic expansion in general and its impact 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;

•

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 by the Dodd-Frank legislation and other legislative, regulatory and administrative initiatives and actions, including those outlined elsewhere in this Report, in our 2015 Form 10-K and in subsequent filings with the SEC;

•

The impact of market credit spreads on asset valuations;

•

Asset quality and the ability of customers, counterparties and issuers to perform in accordance with contractual terms;

•

Loan demand, utilization of credit commitments and standby letters of credit; and

•

Customer demand for non-loan products and services.

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

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

•

Execution of our strategic priorities and achieving targeted outcomes, including our ability to:

–

Build a leading banking franchise in our underpenetrated geographic markets;

–

Grow profitability through the acquisition and retention of customers and deepening relationships that meet our risk/return measures;

–

Increase revenue from fee income and provide innovative and valued products and services to our customers;

–

Bolster our critical infrastructure and streamline our core processes;

–

Utilize technology to develop and deliver products and services to our customers and protect PNC’s systems and customer information; and

–

Sustain our expense management.

•

Effectively managing capital and liquidity including:

–

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

–

Prudent liquidity and capital management to meet evolving regulatory capital, capital planning, stress testing and liquidity standards; and

–

Actions we take within the capital and other financial markets.

•

Managing credit risk in our portfolio;

•

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

•

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 2015 Form 10-K.

Income Statement Highlights

Net income for the second quarter of 2016 was $989 million, or $1.82 per diluted common share, a decrease of 5%, compared to $1.044 billion, or $1.88 per diluted common share, for the second quarter of 2015.

•

Net interest income increased $16 million, or 1%, to $2.1 billion.

•

Net interest margin decreased to 2.70% compared to 2.73% in second quarter 2015.

•

Noninterest income decreased $88 million, or 5%, to $1.7 billion as higher fee income was more than offset by lower other income.

•

Noninterest expense decreased $6 million to $2.4 billion reflecting PNC’s effective expense management.

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

Credit Quality Highlights

Overall credit quality remained relatively stable at June 30, 2016 compared to December 31, 2015, except for certain energy related loans.

•

Nonperforming assets increased $90 million, or 4%, to $2.5 billion.

•

Overall loan delinquencies of $1.5 billion decreased $179 million, or 11%.

•

Provision for credit losses increased to $127 million for the second quarter of 2016 compared to $46 million for the second quarter of 2015. Second quarter 2016 provision included $48 million for energy related loans in the oil, gas and coal sectors.

•

Net charge-offs of $134 million for the second quarter of 2016 increased $67 million compared to the second quarter of 2015.

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

Balance Sheet, Liquidity and Capital Highlights

PNC’s balance sheet continued to be well-positioned at June 30, 2016 compared to December 31, 2015 reflecting strong liquidity and capital.

•

Total loans increased $2.4 billion to $209.1 billion.

–

Total commercial lending grew $3.5 billion, or 3%.

–

Total consumer lending decreased $1.1 billion, or 2%.

•

Total deposits increased $.8 billion to $249.8 billion.

•

Investment securities increased $1.3 billion, or 2%, to $71.8 billion.

•

PNC maintained a strong liquidity position.

–

The Liquidity Coverage Ratio (LCR) at June 30, 2016 exceeded 100% for both PNC and PNC Bank, above the minimum phased-in requirement of 90% in 2016.

•

PNC maintained a strong capital position.

–

The Transitional Basel III common equity Tier 1 capital ratio remained stable at 10.6%.

–

Pro forma fully phased-in Basel III common equity Tier 1 capital ratio increased to an estimated 10.2% compared to 10.0% based on the standardized approach rules.

•

PNC continued to return capital to shareholders.

–

We completed common stock repurchase programs for the five quarter period that ended in the second quarter of 2016.

–

We returned a total of $4.0 billion of capital to shareholders through repurchases of 29.9 million common shares for $2.7 billion and dividends on common shares of $1.3 billion over the five-quarter period.

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

–

Second quarter 2016 repurchases were 6.1 million common shares for $.5 billion and dividends on common shares were $.3 billion.

–

In June 2016, we announced share repurchase programs of up to $2.0 billion for the four-quarter period beginning in the third quarter of 2016.

–

PNC’s Board of Directors raised the quarterly dividend on common stock to 55 cents per share, an increase of 4 cents per share, or 8 percent, effective with the August 5, 2016 dividend.

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 2016 capital and liquidity actions as well as more detail on our capital ratios.

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 2015 Form 10-K.

Our Consolidated Income Statement and Consolidated Balance Sheet Review sections of this Financial Review describe in greater detail our results during the first six months of 2016 and 2015 and balances at June 30, 2016 and December 31, 2015, respectively.

Average Consolidated Balance Sheet Highlights

Table 2: Summarized Average Balance Sheet


Six months ended June 30 Dollars in millions					Change
Six months ended June 30 Dollars in millions	2016		2015		$			%
Average assets
Interest-earning assets
Investment securities	$	70,232	$	58,310	$	11,922			20	%
Loans		207,757		205,272		2,485			1	%
Interest-earning deposits with banks		25,998		31,392		(5,394	)		(17	)%
Other		7,606		9,236		(1,630	)		(18	)%
Total interest-earning assets		311,593		304,210		7,383			2	%
Noninterest-earning assets		45,858		46,151		(293	)		(1	)%
Total average assets	$	357,451	$	350,361	$	7,090			2	%
Average liabilities and equity
Interest-bearing liabilities
Interest-bearing deposits	$	170,335	$	161,236	$	9,099			6	%
Borrowed funds		53,629		56,757		(3,128	)		(6	)%
Total interest-bearing liabilities		223,964		217,993		5,971			3	%
Noninterest-bearing deposits		76,541		74,245		2,296			3	%
Other liabilities		10,822		12,181		(1,359	)		(11	)%
Equity		46,124		45,942		182			-	%
Total average liabilities and equity	$	357,451	$	350,361	$	7,090			2	%

Average investment securities increased due to higher average agency residential mortgage-backed securities and U.S. Treasury and government agency securities, partially offset by a decrease in average non-agency residential mortgage-backed securities. Total investment securities increased from 19% to 23% of average interest-earning assets.

The increase in average loans was driven by growth in average commercial real estate loans of $3.9 billion and average

commercial loans of $1.4 billion, principally in our Corporate & Institutional Banking segment, partially offset by a decrease in consumer loans of $3.0 billion. The decline in consumer loans was primarily attributable to lower home equity and education loans, and included runoff in the non-strategic portfolio of residential mortgage and brokered home equity loans. Loans remained stable at 67% of average interest-earning assets in both periods.

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

Average interest-earning deposits with banks, which are primarily maintained with the Federal Reserve Bank, decreased in the comparison reflecting a shift to higher yielding investment securities and loans as well as lower borrowed funds, partially offset by an increase in deposits.

Average total deposits increased $11.4 billion, primarily due to higher average savings deposits, which reflected a shift from money market deposits to relationship-based savings products. Additionally, average interest-bearing demand

deposits and average noninterest-bearing deposits increased as overall deposits grew. Average total deposits increased from 67% to 69% of average assets in the comparison.

Average borrowed funds declined due to decreases in average commercial paper, Federal Home Loan Bank (FHLB) borrowings and federal funds purchased and repurchase agreements, partially offset by an increase in average bank notes and senior debt. The Liquidity Risk Management portion of this Financial Review includes additional information regarding our sources and uses of borrowed funds.

Various seasonal and other factors impact our period-end balances, whereas average balances are generally more indicative of underlying business trends apart from the impact of acquisitions and divestitures. Total assets were $361.3 billion at June 30, 2016 compared with $358.5 billion at December 31, 2015. The Consolidated Balance Sheet Review section of this Financial Review provides information on changes in selected Consolidated Balance Sheet categories at June 30, 2016 compared with December 31, 2015.

Recent Market and Industry Developments

On June 29, 2016, the Federal Reserve announced the results of the 2016 CCAR exercise. As we previously announced, the Federal Reserve accepted the capital plan that PNC submitted in April 2016 and did not object to the capital actions included in that plan. See the Capital portion of the Consolidated Balance Sheet Review section of this Financial Review.

On July 6, 2016, the Federal Reserve granted the final one-year extension of the general conformance period available under the Volcker Rule provisions of the Dodd-Frank Act to give all banking entities until July 21, 2017, to conform their investments in, and relationships with, covered funds (as defined in the Volcker Rule) that were in place prior to December 31, 2013 (legacy covered funds). As a result, PNC now has until at least July 21, 2017, to divest or conform its remaining investments in, and relationships with, legacy covered funds, including certain of PNC’s REIT preferred securities that, as currently structured, are considered legacy covered funds. In the second quarter of 2016, PNC recorded negative valuation adjustments of $51 million in noninterest income primarily associated with nonconforming investments under the Volcker Rule. For additional information regarding the Volcker Rule and related considerations, see the Supervision and Regulation section in Item 1 Business and Item 1A Risk Factors of our 2015 Form 10-K. The Federal Reserve has the ability to provide up to an additional 5-year extended conformance period for investments held in, and relationships with, covered funds that qualify as illiquid funds under the Volcker Rule and the Federal Reserve’s regulations.

In June 2016, following a period of public comments, the FDIC revised and updated its FAQs concerning brokered deposits that were originally released in 2015. Federal banking laws and regulations apply a variety of requirements or restrictions on insured depository institutions with respect to brokered deposits. For example, as explained in these FAQs, only a “well capitalized” insured depository institution may accept or retain brokered deposits without prior regulatory approval and brokered deposits are generally subject to higher outflow assumptions than other types of deposits for purposes of the LCR. We do not anticipate that these revised FAQs will have a material impact on PNC’s deposit-taking activities or LCR.

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

Business Segment Highlights

Table 3: Results Of Businesses – Summary (a)

(Unaudited)


	Net Income					Revenue				Average Assets (b)
Six months ended June 30 – in millions	2016			2015		2016		2015		2016		2015
Retail Banking	$	575		$	443	$	3,332	$	3,161	$	71,880	$	73,691
Corporate & Institutional Banking		921			990		2,691		2,647		136,913		131,711
Asset Management Group		97			99		569		595		7,822		7,974
Residential Mortgage Banking		33			47		340		413		6,037		7,190
BlackRock		246			269		311		351		6,919		6,760
Non-Strategic Assets Portfolio		81			137		175		230		5,677		7,094
Total business segments		1,953			1,985		7,418		7,397		235,248		234,420
Other (c) (d)		(21	)		63		41		200		122,203		115,941
Total	$	1,932		$	2,048	$	7,459	$	7,597	$	357,451	$	350,361

(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.

(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 Note 14 Segment Reporting in the Notes To Consolidated Financial Statements in Part I, Item 1 this Report.

CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for the second quarter of 2016 was $989 million, or $1.82 per diluted common share, a decrease of 5%, compared with $1.044 billion, or $1.88 per diluted common share, for the second quarter of 2015. For the first six months of 2016, net income was $1.9 billion, or $3.49 per diluted common share, a decrease of 6%, compared with $2.0 billion, or $3.63 per diluted common share, for the first six months of 2015.

Net income decreased in both comparisons driven by higher provision for credit losses and a 2% decline in revenue, partially offset by a 2% decrease in noninterest expense in the year-to-date comparison. Lower revenue in both comparisons reflected a 5% decline in noninterest income, partially offset by a 1% increase in net interest income.

Net Interest Income

Table 4: Net Interest Income and Net Interest Margin


	Three months ended June 30						Six months ended June 30
Dollars in millions	2016			2015			2016			2015
Net interest income	$	2,068		$	2,052		$	4,166		$	4,124
Net interest margin (a)		2.70	%		2.73	%		2.73	%		2.78	%

(a)	See footnote (c) in Table 1: Consolidated Financial Highlights on page 1.

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 for additional information.

Net interest income increased $16 million, or 1%, and $42 million, or 1%, for the second quarter and first six months of 2016, respectively, compared to the same periods in 2015. The increases in both comparisons were attributable to increases in loan and securities balances and higher loan yields, partially offset by lower purchase accounting accretion, higher borrowing costs and lower securities yields.

Net interest margins decreased in both comparisons mainly due to lower benefit from purchase accounting accretion, partially offset by the impact of lower balances on deposit with the Federal Reserve.

In the third quarter of 2016, we expect net interest income to be stable with the second quarter of 2016.

For full year 2016, we expect purchase accounting accretion to be down approximately $175 million compared to 2015.

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

Noninterest Income

Table 5: Noninterest Income


	Three months ended June 30										Six months ended June 30
	2016		2015		Change						2016		2015		Change
Dollars in millions	2016		2015		$			%			2016		2015		$			%
Noninterest income
Asset management	$	377	$	416	$	(39	)		(9	)%	$	718	$	792	$	(74	)		(9	)%
Consumer services		354		334		20			6	%		691		645		46			7	%
Corporate services		403		369		34			9	%		728		713		15			2	%
Residential mortgage		165		164		1			1	%		265		328		(63	)		(19	)%
Service charges on deposits		163		156		7			4	%		321		309		12			4	%
Net gains on sales of securities		4		8		(4	)		(50	)%		13		50		(37	)		(74	)%
Other		260		367		(107	)		(29	)%		557		636		(79	)		(12	)%
Total noninterest income	$	1,726	$	1,814	$	(88	)		(5	)%	$	3,293	$	3,473	$	(180	)		(5	)%

Noninterest income decreased in both the quarterly and year-to-date comparisons. Noninterest income as a percentage of total revenue was 45% for the second quarter of 2016 compared to 47% for the same period in 2015. The comparable amounts for the year-to-date periods of 2016 and 2015 were 44% and 46%, respectively.

Asset management revenue decreased in both comparisons driven by lower earnings from our BlackRock equity investment and the impact of lower equity markets on both BlackRock and our asset management business segment. The decreases also included the impact from a $30 million trust settlement during the second quarter of 2015 in our asset management business segment. Discretionary client assets under management were $135 billion at June 30, 2016 compared with $134 billion at June 30, 2015.

Consumer services fees increased in both the quarterly and year-to-date comparisons, primarily due to growth in payment-related products including debit card, credit card and merchant services, as well as increased brokerage fees.

Corporate services revenue increased in both comparisons primarily as a result of higher merger and acquisition advisory fees and higher loan syndication fees.

Residential mortgage revenue decreased in the year-to-date comparison as a result of lower residential mortgage servicing rights valuation, net of economic hedge, and lower loan sales revenue, partially offset by higher servicing fee revenue.

Other noninterest income decreased in both comparisons mainly attributable to second quarter valuation adjustments of $51 million primarily associated with nonconforming investments under the Volcker Rule as well as lower net gains on sales of Visa Class B common shares. Net gains on the sale of Visa Class B common shares were $63 million on sales of 1.35 million shares for the first six months of 2016, including $31 million on the sale of 0.85 million shares in the second

quarter of 2016, compared to $79 million on the sale of 1.0 million shares in the second quarter of 2015. Net gains consist of gains on Visa sales reduced by derivative fair value adjustments related to swap agreements with purchasers of Visa Class B common shares in connection with all prior sales.

In the third quarter of 2016, we expect fee income to remain stable with the second quarter of 2016. Fee income, a non-GAAP financial measure, refers to noninterest income categories of asset management, consumer services, corporate services, residential mortgage and service charges on deposits.

For full year 2016, we expect total revenue to be stable compared to 2015.

Provision For Credit Losses

The provision for credit losses increased $81 million to $127 million in the second quarter of 2016 compared to the second quarter of 2015 and increased $179 million to $279 million for the first six months of 2016 compared to the same period in 2015. The increase in both comparisons was primarily due to provision for energy related loans in the oil, gas, and coal sectors, which was $128 million for the first six months of 2016, including $48 million in the second quarter of 2016. The energy related loan portfolio weakened slightly in the second quarter of 2016 compared to the first quarter of 2016, but at a slower pace.

We expect our provision for credit losses in the third quarter of 2016 to be between $100 million and $150 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.

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

Noninterest Expense

Noninterest expense for the second quarter of 2016 remained stable at $2.4 billion compared to the second quarter of 2015. Noninterest expense decreased $74 million, or 2%, to $4.6 billion for the first six months of 2016 compared to the same period in 2015, primarily due to the release of $24 million in residential mortgage foreclosure-related reserves and lower legal accruals, and reflected our effective expense management.

As of June 30, 2016, we have completed actions to capture more than two-thirds of our 2016 continuous improvement savings goal of $400 million, and are on track to achieve the full-year goal. Through this program, we intend to help fund our continued investments in technology and business infrastructure throughout 2016.

We expect noninterest expense in the third quarter of 2016 to remain stable compared to the second quarter 2016, and full year 2016 noninterest expense to remain stable compared to full year 2015.

Effective Income Tax Rate

The effective income tax rate was 24.3% in the second quarter of 2016 compared to 28.2% in the second quarter of 2015 and 23.9% in the first six months of 2016 compared to 26.4% in the same period of 2015. Both declines were primarily attributable to increased tax credit investments and a change in 2015 to record the impact of historic tax credits as a reduction to the associated investment asset balance.

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.

We expect our full-year 2016 effective tax rate to be approximately 25%.

CONSOLIDATED BALANCE SHEET REVIEW

Table 6: Summarized Balance Sheet Data


	June 30 2016			December 31 2015			Change
Dollars in millions	June 30 2016			December 31 2015			$			%
Assets
Interest-earning deposits with banks	$	26,750		$	30,546		$	(3,796	)		(12	)%
Loans held for sale		2,296			1,540			756			49	%
Investment securities		71,801			70,528			1,273			2	%
Loans		209,056			206,696			2,360			1	%
Allowance for loan and lease losses		(2,685	)		(2,727	)		42			2	%
Goodwill		9,103			9,103			—			—
Mortgage servicing rights		1,222			1,589			(367	)		(23	)%
Other intangible assets		329			379			(50	)		(13	)%
Other, net		43,463			40,839			2,624			6	%
Total assets	$	361,335		$	358,493		$	2,842			1	%
Liabilities
Deposits	$	249,778		$	249,002		$	776			—
Borrowed funds		54,571			54,532			39			—
Other		10,287			8,979			1,308			15	%
Total liabilities		314,636			312,513			2,123			1	%
Equity
Total shareholders’ equity		45,558			44,710			848			2	%
Noncontrolling interests		1,141			1,270			(129	)		(10	)%
Total equity		46,699			45,980			719			2	%
Total liabilities and equity	$	361,335		$	358,493		$	2,842			1	%

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

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

PNC’s balance sheet reflected asset growth and strong liquidity and capital positions at June 30, 2016 as compared to December 31, 2015.

•

Total assets increased in the comparison primarily due to increases in loans, investment securities, and other assets driven by accounts receivable for trade date securities sales, partially offset by lower interest-earning deposits with banks.

•

Total liabilities increased mainly due to deposit growth and higher other liabilities driven by accounts payable for trade date securities purchases.

•

Total equity increased mainly due to increased retained earnings driven by net income, offset by share repurchases.

Loans

Outstanding loan balances of $209.1 billion at June 30, 2016 and $206.7 billion at December 31, 2015 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.4 billion at both June 30, 2016 and December 31, 2015.

Table 7: Details Of Loans


	June 30 2016		December 31 2015		Change
Dollars in millions	June 30 2016		December 31 2015		$			%
Commercial lending
Commercial
Manufacturing	$	19,665	$	19,014	$	651			3	%
Retail/wholesale trade		16,786		16,661		125			1	%
Service providers		14,258		13,970		288			2	%
Real estate related (a)		11,965		11,659		306			3	%
Health care		9,092		9,210		(118	)		(1	)%
Financial services		7,400		7,234		166			2	%
Other industries		21,396		20,860		536			3	%
Total commercial		100,562		98,608		1,954			2	%
Commercial real estate
Real estate projects (b)		16,468		15,697		771			5	%
Commercial mortgage		12,372		11,771		601			5	%
Total commercial real estate		28,840		27,468		1,372			5	%
Equipment lease financing		7,620		7,468		152			2	%
Total commercial lending		137,022		133,544		3,478			3	%
Consumer lending
Home equity
Lines of credit		18,203		18,828		(625	)		(3	)%
Installment		12,680		13,305		(625	)		(5	)%
Total home equity		30,883		32,133		(1,250	)		(4	)%
Residential real estate
Residential mortgage		14,562		14,162		400			3	%
Residential construction		237		249		(12	)		(5	)%
Total residential real estate		14,799		14,411		388			3	%
Credit card		4,896		4,862		34			1	%
Other consumer
Automobile		11,449		11,157		292			3	%
Education		5,482		5,881		(399	)		(7	)%
Other		4,525		4,708		(183	)		(4	)%
Total consumer lending		72,034		73,152		(1,118	)		(2	)%
Total loans	$	209,056	$	206,696	$	2,360			1	%

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

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

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

Loan growth was the result of an increase in total commercial lending driven by commercial and commercial real estate loans, partially offset by a decline in consumer lending due to lower home equity and education loans.

Loans represented 58% of total assets at both June 30, 2016 and December 31, 2015. Commercial lending represented 66% of the loan portfolio at June 30, 2016 and 65% at December 31, 2015. Consumer lending represented 34% of the loan portfolio at June 30, 2016 and 35% at December 31, 2015. 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 $3.2 billion, or 2% of total loans, at June 30, 2016, and $3.5 billion, or 2% of total loans, at December 31, 2015.

For the third quarter of 2016, we expect total loans to be up modestly compared to the second quarter of 2016.

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, Note 1 Accounting Policies in our 2015 Form 10-K and Note 3 Asset Quality and Note 4 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.

Purchased Impaired Loans

The following table provides further detail on purchased impaired loans at June 30, 2016 and December 31, 2015:

Table 8: Purchased Impaired Loans – Balances


	June 30, 2016						December 31, 2015
In millions	Outstanding Balance (a)		Recorded Investment		Carrying Value		Outstanding Balance (a)		Recorded Investment		Carrying Value
Total commercial lending	$	185	$	138	$	94	$	249	$	169	$	120
Total consumer lending		3,379		3,098		2,817		3,684		3,353		3,092
Total	$	3,564	$	3,236	$	2,911	$	3,933	$	3,522	$	3,212

(a)	Outstanding balance represents the balance on the loan servicing system. Recorded investment may be greater than the outstanding balance due to expected recoveries of collateral.

The excess of undiscounted cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the loan using the constant effective yield method. Activity for the accretable yield during the first six months of 2016 and 2015 follows:

Table 9: Purchased Impaired Loans – Accretable Yield


In millions	2016			2015
January 1	$	1,250		$	1,558
Accretion (including excess cash recoveries)		(199	)		(252	)
Net reclassifications to accretable from non-accretable		110			146
Disposals		(4	)		(9	)
June 30	$	1,157		$	1,443

We currently expect to collect total cash flows of $4.1 billion on purchased impaired loans, representing the $2.9 billion carrying value at June 30, 2016 and accretable net interest of $1.2 billion.

The table below provides the weighted average life (WAL) for each of the purchased impaired portfolios as of June 30, 2016.

Table 10: Weighted Average Life of the Purchased Impaired Portfolios


As of June 30, 2016 Dollars in millions	Recorded Investment		WAL (a)
Commercial	$	26		2.2 years
Commercial real estate		112		1.5 years
Consumer (b)		1,263		3.9 years
Residential real estate		1,835		4.6 years
Total	$	3,236		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.

For more information on purchased impaired loans and the accretable yield, see Note 1 Accounting Policies in our 2015 Form 10-K.

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

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.

Table 11: Investment Securities


	June 30, 2016				December 31, 2015				Ratings (a) As of June 30, 2016
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	$	10,057	$	10,429	$	10,022	$	10,172		100	%
Agency residential mortgage-backed		35,274		36,068		34,250		34,408		100
Non-agency residential mortgage-backed		3,772		3,920		4,225		4,392		11						4	%		80	%		5	%
Agency commercial mortgage-backed		2,849		2,918		3,045		3,086		100
Non-agency commercial mortgage-backed (b)		5,171		5,242		5,624		5,630		79			9	%		2			2			8
Asset-backed (c)		6,387		6,394		6,134		6,130		90			3						6			1
State and municipal		3,915		4,206		3,936		4,126		89			6									5
Other debt		2,638		2,703		2,211		2,229		50			34			15						1
Corporate stock and other		483		484		590		589														100
Total investment securities (d)	$	70,546	$	72,364	$	70,037	$	70,762		90	%		3	%		1	%		5	%		1	%

(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 corporate debt, government guaranteed student loans and other consumer credit products.

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

Investment securities represented 20% of total assets at both June 30, 2016 and December 31, 2015.

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, 2016, 90% 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 68% 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, 2016, the amortized cost and fair value of available for sale securities totaled $55.6 billion and $56.9 billion, respectively, compared to an amortized cost and fair value as of December 31, 2015 of $55.3 billion and $55.8 billion, respectively. The amortized cost and fair value of held to maturity securities were $14.9 billion and $15.5 billion, respectively, at June 30, 2016, compared to $14.8 billion and $15.0 billion, respectively, at December 31, 2015.

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair

value generally decreases when credit spreads widen and vice versa. Net unrealized gains in the total investment securities portfolio increased to $1.8 billion at June 30, 2016 from $0.7 billion at December 31, 2015. The comparable amounts for the securities available for sale portfolio were $1.3 billion at June 30, 2016 and $0.5 billion at December 31, 2015.

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 other-than-temporary impairment (OTTI) on securities would reduce our earnings and regulatory capital ratios.

The duration of investment securities was 2.0 years at June 30, 2016. We estimate that at June 30, 2016 the effective duration of investment securities was 2.1 years for an immediate 50 basis points parallel increase in interest rates and 1.8 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2015 for the effective duration of investment securities were 2.8 years and 2.6 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 4.0 years at June 30, 2016 compared to 4.8 years at December 31, 2015. The weighted-average expected maturities of mortgage and other asset-backed debt securities were as follows as of June 30, 2016:

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

Table 12: Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities


June 30, 2016	Years
Agency residential mortgage-backed securities		3.4
Non-agency residential mortgage-backed securities		5.3
Agency commercial mortgage-backed securities		2.9
Non-agency commercial mortgage-backed securities		3.6
Asset-backed securities		2.6

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. For those securities on our balance sheet at June 30, 2016, where during our quarterly security-level impairment assessments we determined losses represented OTTI, we have recorded cumulative credit losses of $1.1 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.

Additional information regarding our investment securities is included in Note 5 Investment Securities and Note 6 Fair Value in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

Loans Held for Sale

Table 13: Loans Held For Sale


	June 30 2016		December 31 2015	Change
In millions	June 30 2016		December 31 2015	$		%
Commercial mortgages	$	1,000	$668	$	332		50	%
Residential mortgages		1,137	850		287		34	%
Other		159	22		137		623	%
Total	$	2,296	$1,540	$	756		49	%

Loans held for sale increased in the comparison reflecting higher origination volumes in both commercial and residential mortgages.

We sold $1.5 billion of commercial mortgage loans to agencies during the first six months of 2016 compared to $2.2 billion during the first six months of 2015. Total revenue of $33 million was recognized on the valuation and sale of commercial mortgage loans held for sale, net of hedges, during the first six months of 2016, including $16 million in the second quarter. Comparable amounts for 2015 were $51

million and $36 million, respectively. These amounts are included in Other noninterest income on the Consolidated Income Statement.

Residential mortgage loan origination volume was $4.5 billion during the first six months of 2016 compared to $5.5 billion in the same period in 2015. The majority of such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $2.8 billion of loans and recognized loan sales revenue of $159 million during the first six months of 2016, of which $95 million occurred in the second quarter. The comparable amounts for 2015 were $4.0 billion and $203 million, respectively, including $99 million in the second quarter. These loan sales revenue amounts are included in Residential mortgage noninterest income on the Consolidated Income Statement.

Interest income on loans held for sale was $34 million during the first six months of 2016, including $18 million in the second quarter. Comparable amounts for 2015 were $46 million and $23 million, respectively. These amounts are included in Other interest income on the 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 6 Fair Value in our Notes To Consolidated Financial Statements included in Part 1, Item 1 of this Report.

Funding Sources

Table 14: Details Of Funding Sources


	June 30 2016		December 31 2015		Change
Dollars in millions	June 30 2016		December 31 2015		$			%
Deposits
Money market	$	110,435	$	118,079	$	(7,644	)		(6	)%
Demand		90,356		90,038		318			–
Savings		29,936		20,375		9,561			47	%
Retail certificates of deposit		17,359		17,405		(46	)		–
Time deposits in foreign offices and other time deposits		1,692		3,105		(1,413	)		(46	)%
Total deposits		249,778		249,002		776			–
Borrowed funds
Federal funds purchased and repurchase agreements		1,620		1,777		(157	)		(9	)%
FHLB borrowings		18,055		20,108		(2,053	)		(10	)%
Bank notes and senior debt		23,588		21,298		2,290			11	%
Subordinated debt		8,764		8,556		208			2	%
Other		2,544		2,793		(249	)		(9	)%
Total borrowed funds		54,571		54,532		39			–
Total funding sources	$	304,349	$	303,534	$	815			–

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

See the Liquidity Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our 2016 capital and liquidity activities.

Total deposits increased in the comparison mainly due to growth in savings deposits reflecting in part a shift from money market deposits to relationship-based savings products. Interest-bearing deposits represented 69% of total deposits at June 30, 2016 and 68% at December 31, 2015.

Total borrowed funds increased slightly in the comparison as higher bank notes and senior debt were substantially offset by maturities of FHLB borrowings.

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 by PNC’s Board of Directors and consistent with capital plans submitted to, and accepted by, the Federal Reserve. The extent and timing of share repurchases under authorizations 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 second quarter of 2016, we repurchased 6.1 million common shares for $.5 billion, completing our common stock repurchase programs for the five quarter period that ended in June 2016. We returned a total of $4.0 billion of capital to shareholders through repurchases of 29.9 million common shares for $2.7 billion and dividends on common shares of $1.3 billion over the five quarter period, consistent with the capital plan accepted by the Federal Reserve as part of our 2015 CCAR submission.

In connection with the 2016 CCAR process, we submitted our capital plan as approved by PNC’s Board of Directors, to the Federal Reserve in April 2016. The Federal Reserve accepted the capital plan and did not object to our proposed capital actions. As provided for in the 2016 capital plan, PNC announced new share repurchase programs of up to $2.0 billion for the four-quarter period beginning in the third quarter of 2016, including repurchases of up to $200 million related to employee benefit plans.

We paid dividends on common stock of $.3 billion, or 51 cents per common share, during the second quarter of 2016. On July 7, 2016, the PNC Board of Directors raised the quarterly common stock cash dividend to 55 cents per share, an increase of 4 cents, or 8%, payable on August 5, 2016.

See the Supervision and Regulation section of Item 1 Business of our 2015 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. See also the Capital section of the Consolidated Balance Sheet Review in our 2015 Form 10-K for additional information on our 2015 CCAR submission and current capital plan.

Table 15: Shareholders’ Equity


	June 30 2016			December 31 2015			Change
Dollars in millions	June 30 2016			December 31 2015			$			%
Shareholders’ equity
Preferred stock (a)
Common stock	$	2,709		$	2,708		$	1			–
Capital surplus – preferred stock		3,455			3,452			3			–
Capital surplus – common stock and other		12,653			12,745			(92	)		(1	)%
Retained earnings		30,309			29,043			1,266			4	%
Accumulated other comprehensive income		736			130			606			466	%
Common stock held in treasury at cost		(4,304	)		(3,368	)		(936	)		(28	)%
Total shareholders’ equity	$	45,558		$	44,710		$	848			2	%

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

The increase in total shareholders’ equity compared to December 31, 2015 was mainly due to a $1.3 billion increase in retained earnings and higher accumulated other comprehensive income primarily related to net securities gains, partially offset by common share repurchases of $1.0 billion. The increase in retained earnings was driven by net income of $1.9 billion, reduced by $.6 billion of common and preferred dividends declared. Common shares outstanding were 493 million and 504 million at June 30, 2016, and December 31, 2015, respectively.

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

Table 16: Basel III Capital


	June 30, 2016
Dollars in millions	2016 Transitional Basel III (a)			Pro forma Fully Phased-In Basel III (estimated) (b)(c)
Common equity Tier 1 capital
Common stock plus related surplus, net of treasury stock	$	11,058		$	11,058
Retained earnings		30,309			30,309
Accumulated other comprehensive income for securities currently and previously held as available for sale		499			831
Accumulated other comprehensive income for pension and other postretirement plans		(327	)		(545	)
Goodwill, net of associated deferred tax liabilities		(8,833	)		(8,833	)
Other disallowed intangibles, net of deferred tax liabilities		(175	)		(291	)
Other adjustments/(deductions)		(158	)		(165	)
Total common equity Tier 1 capital before threshold deductions		32,373			32,364
Total threshold deductions		(710	)		(1,185	)
Common equity Tier 1 capital		31,663			31,179
Additional Tier 1 capital
Preferred stock plus related surplus		3,455			3,455
Trust preferred capital securities		–			–
Noncontrolling interests (d)		418			45
Other adjustments/(deductions)		(86	)		(109	)
Tier 1 capital		35,450			34,570
Additional Tier 2 capital
Qualifying subordinated debt		4,041			3,845
Trust preferred capital securities		119			–
Allowance for loan and lease losses included in Tier 2 capital		2,989			2,989
Other (d)		6			11
Total Basel III capital	$	42,605		$	41,415
Risk-weighted assets
Basel III standardized approach risk-weighted assets (e)	$	297,724		$	305,918
Basel III advanced approaches risk-weighted assets (f)		N/A		$	278,863
Average quarterly adjusted total assets	$	348,195		$	347,572
Supplementary leverage exposure (g)	$	411,912		$	411,289
Basel III risk-based capital and leverage ratios
Common equity Tier 1		10.6	%		10.2	%(h)(i)
Tier 1		11.9	%		11.3	%(h)(j)
Total		14.3	%		13.5	%(h)(k)
Leverage (l)		10.2	%		9.9	%
Supplementary leverage ratio (m)		8.6	%		8.4	%

(a)	Calculated using the regulatory capital methodology applicable to PNC during 2016.

(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 for transitional and pro forma fully phased-in.

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

(f)

Basel III advanced approaches risk-weighted assets are estimated based on the Basel III advanced approaches rules, and include credit, market, and operational risk-weighted assets. During the parallel run qualification phase PNC has refined the data, models, and internal processes used as part of the advanced approaches for determining risk-weighted assets. We anticipate additional refinements to this estimate through the parallel run qualification phase.

(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 Basel III standardized approach risk-weighted assets and rules.

(continued on following page)

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

(continued from previous page)

(i)

For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Common equity Tier 1 capital ratio estimate is 11.2%. 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.

(j)	For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Tier 1 risk-based capital ratio estimate is 12.4%. This capital ratio is calculated using fully phased-in 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 Total capital risk-based capital ratio estimate is 13.8%. This ratio is calculated using fully phased-in Total Basel III capital, which under the advanced approaches, Additional Tier 2 capital includes allowance for loan and lease losses in excess of Basel expected credit losses, if any, up to 0.6% of credit risk related risk-weighted assets and dividing by estimated Basel III advanced approach risk-weighted assets.

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

(m)	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.

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 2016 are calculated using the standardized approach 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 2016). We refer to the capital ratios calculated using the phased-in Basel III provisions in effect for 2016 and, for the risk-based ratios, standardized approach risk-weighted assets, as the 2016 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 and net of associated deferred tax liabilities) 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, 2016 capital levels were aligned with them.

At June 30, 2016, 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”, PNC must have Transitional Basel III capital ratios of at least 6% for Tier 1 risk-based

capital and 10% for Total risk-based capital, and PNC Bank must have Transitional Basel III capital ratios of at least 6.5% for Common equity Tier 1 risk-based capital, 8% for Tier 1 risk-based capital, 10% for Total risk-based capital, and a Leverage ratio of at least 5%.

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 19 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K. See the Statistical Information (Unaudited) section of this Report for details on PNC’s December 31, 2015 and June 30, 2015 Transitional Basel III and Pro forma fully phased-in Basel III common equity tier 1 capital ratios.

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 2015 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, and

•

Note 13 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, 2016 and December 31, 2015, is included in Note 2 of this Report.

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

Trust Preferred Securities and REIT Preferred Securities

See Note 11 Borrowed Funds and Note 16 Equity in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K for additional information on trust preferred securities issued by PNC Capital Trust C and REIT preferred securities issued by PNC Preferred Funding Trust I and PNC Preferred Funding Trust II including information on contractual limitations potentially imposed on payments (including dividends) with respect to PNC and PNC Bank’s equity capital securities.

FAIR VALUE MEASUREMENTS

In addition to the following, see Note 6 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 on a recurring basis at June 30, 2016 and December 31, 2015, 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 17: Fair Value Measurements – Summary


	June 30, 2016						December 31, 2015
Dollars in millions	Total Fair Value			Level 3			Total Fair Value			Level 3
Total assets	$	73,459		$	8,188		$	68,804		$	8,606
Total assets at fair value as a percentage of consolidated assets		20	%					19	%
Level 3 assets as a percentage of total assets at fair value					11	%					13	%
Level 3 assets as a percentage of consolidated assets					2	%					2	%
Total liabilities	$	7,197		$	406		$	4,892		$	495
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					6	%					10	%
Level 3 liabilities as a percentage of consolidated liabilities					<1	%					<1	%

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 the basis of presentation of inter-segment revenues, and a description of each business are included in Note 14 Segment Reporting included in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report. Certain amounts included in this Business Segments Review and the Business Segments Highlights in the Executive Summary section of this Financial Review differ from those amounts shown in Note 14, primarily due to the presentation in this Financial Review of business net interest revenue on a taxable-equivalent basis.

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.

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

Retail Banking

(Unaudited)

Table 18: Retail Banking Table


Six months ended June 30 Dollars in millions, except as noted							Change
	2016			2015			$			%
Income Statement
Net interest income	$	2,231		$	2,083		$	148			7	%
Noninterest income		1,101			1,078			23			2	%
Total revenue		3,332			3,161			171			5	%
Provision for credit losses		106			94			12			13	%
Noninterest expense		2,318			2,368			(50	)		(2	)%
Pretax earnings		908			699			209			30	%
Income taxes		333			256			77			30	%
Earnings	$	575		$	443		$	132			30	%
Average Balance Sheet
Loans
Consumer
Home equity	$	26,526		$	27,964		$	(1,438	)		(5	)%
Automobile		10,882			10,340			542			5	%
Education		5,754			6,506			(752	)		(12	)%
Credit cards		4,755			4,446			309			7	%
Other		1,807			1,887			(80	)		(4	)%
Total consumer		49,724			51,143			(1,419	)		(3	)%
Commercial and commercial real estate		12,435			12,812			(377	)		(3	)%
Residential mortgage		567			731			(164	)		(22	)%
Total loans	$	62,726		$	64,686		$	(1,960	)		(3	)%
Total assets	$	71,880		$	73,691		$	(1,811	)		(2	)%
Deposits
Noninterest-bearing demand	$	26,577		$	23,015		$	3,562			15	%
Interest-bearing demand		38,378			36,054			2,324			6	%
Money market		48,739			54,071			(5,332	)		(10	)%
Savings		23,954			13,245			10,709			81	%
Certificates of deposit		15,199			17,032			(1,833	)		(11	)%
Total deposits	$	152,847		$	143,417		$	9,430			7	%
Performance Ratios
Return on average assets		1.61	%		1.21	%
Noninterest income to total revenue		33	%		34	%
Efficiency		70	%		75	%
Supplemental Noninterest Income Information
Service charges on deposits	$	306		$	294		$	12			4	%
Brokerage	$	149		$	138		$	11			8	%
Consumer services	$	525		$	487		$	38			8	%
Other Information (a)
Customer-related statistics (average):
Non-teller deposit transactions (b)		48	%		41	%
Digital consumer customers (c)		57	%		51	%
Credit-related statistics:
Nonperforming assets (d)	$	995		$	1,127		$	(132	)		(12	)%
Net charge-offs	$	171		$	185		$	(14	)		(8	)%
Annualized net charge-off ratio		.55	%		.58	%
Other statistics:
ATMs		8,993			8,880			113			1	%
Branches (e)		2,601			2,644			(43	)		(2	)%
Universal branches (f)		467			347			120			35	%
Brokerage account client assets (billions) (g)	$	44		$	44			–			–

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

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

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

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

(d)	Includes nonperforming loans of $.9 billion at June 30, 2016 and $1.1 billion at June 30, 2015.

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

(f)	Included in total branches, represents branches operating under our Universal model.

(g)	Amounts include cash and money market balances.

Retail Banking earned $575 million in the first six months of 2016 compared with earnings of $443 million for the first six months of 2015. The increase in earnings was driven by higher revenue, including both net interest income and noninterest income, as well as a decrease in noninterest expense. 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 that meet the broad range of financial needs of our customers.

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

•

In the first six months of 2016, approximately 57% of consumer customers used non-teller channels for the majority of their transactions compared with 51% for the same period in 2015.

•

Deposit transactions via ATM and mobile channels increased to 48% of total deposit transactions in the first six months of 2016 compared with 41% for the same period in 2015.

•

Integral to PNC’s retail branch transformation strategy, 467 branches, or 18% of the branch network, operate under the universal model designed to enhance sales opportunities for branch personnel, in part, by driving higher ATM and mobile deposits. PNC had a network of 2,601 branches and 8,993 ATMs at June 30, 2016.

•

Instant debit card issuance, which enables us to print a customer’s debit card in minutes, was available in 1,776 branches, or 68% of the branch network, as of June 30, 2016.

Net interest income increased in the comparison due to growth in deposit balances and interest rate spread on the value of deposits, partially offset by lower loan balances and interest rate spread compression on the value of loans.

Growth in noninterest income primarily resulted from execution on our share of wallet strategy, which drove increased consumer service fee income from payment-related products, specifically in debit card, credit card and merchant services, as well as increased brokerage fees. Noninterest income in the first six months of 2016 also reflected net gains of $63 million on sales of 1.35 million Visa Class B common shares compared with a net gain of $79 million on the sale of 1.0 million shares in the second quarter of 2015. Net gains on Visa sales include derivative fair value adjustments related to swap agreements with purchasers of Visa Class B common shares in connection with all prior sales.

The decline in noninterest expense in the comparison was due to lower marketing expense and reduced branch network

expenses as a result of network transformation and transaction migration to lower cost digital and ATM channels.

Provision for credit losses increased compared to the same period a year ago, reflecting slowing credit quality improvement.

The deposit strategy of Retail Banking is to remain disciplined on pricing, focused on growing and retaining relationship-based balances, executing on market specific deposit growth strategies, and providing a source of low-cost funding and liquidity to PNC.

In the first six months of 2016, average total deposits of $152.8 billion increased compared to the same period a year ago, driven by growth in savings deposits reflecting in part a shift from money market deposits to relationship-based savings products. Additionally, demand deposit categories increased, partially offset by a decline in certificates of deposit, due to the net runoff of maturing accounts.

Retail Banking continued to focus on a relationship-based lending strategy that targets specific products and markets for growth. The decline in average total loans in the comparison was due to a decline in home equity and commercial loans and runoff of non-strategic portions of the portfolios, as more fully described below.

•

Average home equity loans decreased as pay-downs and payoffs on loans exceeded new originated volume, consistent with lower mortgage refinance demand. Retail Banking’s home equity loan portfolio is relationship based, with over 97% of the portfolio attributable to borrowers in our primary geographic footprint. The weighted-average updated FICO scores for this portfolio was 752 at both June 30, 2016 and December 31, 2015.

•

Average commercial and commercial real estate loans declined as pay-downs and payoffs on loans exceeded new volume.

•

Average automobile loans, comprised of both direct and indirect auto loans, increased primarily due to portfolio growth in previously underpenetrated markets.

•

Average credit card balances increased as a result of efforts to increase credit card share of wallet through organic growth.

•

In the first six months of 2016, average loan balances for the remainder of the portfolio declined $996 million, or 11%, compared to the same period in 2015, driven by declines in the discontinued government guaranteed education, indirect other, and residential mortgage portfolios, which are primarily runoff portfolios.

Nonperforming assets decreased compared to June 30, 2015 driven by declines in both consumer and commercial nonperforming loans.

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

Corporate & Institutional Banking

(Unaudited)

Table 19: Corporate & Institutional Banking Table


Six months ended June 30 Dollars in millions, except as noted							Change
	2016			2015			$			%
Income Statement
Net interest income	$	1,724		$	1,726		$	(2	)		–
Noninterest income		967			921			46			5	%
Total revenue		2,691			2,647			44			2	%
Provision for credit losses		176			37			139			376	%
Noninterest expense		1,070			1,061			9			1	%
Pretax earnings		1,445			1,549			(104	)		(7	)%
Income taxes		524			559			(35	)		(6	)%
Earnings	$	921		$	990		$	(69	)		(7	)%
Average Balance Sheet
Loans held for sale	$	754		$	1,048		$	(294	)		(28	)%
Loans
Commercial	$	87,193		$	85,228		$	1,965			2	%
Commercial real estate		26,157			22,319			3,838			17	%
Equipment lease financing		6,856			6,920			(64	)		(1	)%
Total commercial lending		120,206			114,467			5,739			5	%
Consumer		470			1,113			(643	)		(58	)%
Total loans	$	120,676		$	115,580		$	5,096			4	%
Total assets	$	136,913		$	131,711		$	5,202			4	%
Deposits
Noninterest-bearing demand	$	45,588		$	47,449		$	(1,861	)		(4	)%
Money market		21,185			22,002			(817	)		(4	)%
Other		12,137			9,368			2,769			30	%
Total deposits	$	78,910		$	78,819		$	91			–
Performance Ratios
Return on average assets		1.36	%		1.52	%
Noninterest income to total revenue		36	%		35	%
Efficiency		40	%		40	%
Other Information
Commercial loan servicing portfolio (a) (b)	$	459		$	436		$	23			5	%
Consolidated revenue from: (c)
Treasury Management (d)	$	762		$	653		$	109			17	%
Capital Markets (d)	$	387		$	385		$	2			1	%
Commercial mortgage banking activities
Commercial mortgage loans held for sale (e)	$	50		$	73		$	(23	)		(32	)%
Commercial mortgage loan servicing income (f)		132			121			11			9	%
Commercial mortgage servicing rights valuation, net of economic hedge (g)		21			24			(3	)		(13	)%
Total	$	203		$	218		$	(15	)		(7	)%
Average Loans (by C&IB business)
Corporate Banking	$	56,933		$	58,323		$	(1,390	)		(2	)%
Real Estate		35,989			30,248			5,741			19	%
Business Credit		14,769			14,415			354			2	%
Equipment Finance		11,079			10,938			141			1	%
Other		1,906			1,656			250			15	%
Total average loans	$	120,676		$	115,580		$	5,096			4	%
Net carrying amount of commercial mortgage servicing rights (a)	$	448		$	543		$	(95	)		(17	)%
Credit-related statistics:
Nonperforming assets (a) (h)	$	752		$	463		$	289			62	%
Net charge-offs / (recoveries)	$	100		$	(20	)	$	120			600	%

(a)	As of June 30.

(b)	Represents loans serviced for PNC and others.

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

(c)

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.

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

(e)	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.

(f)	Includes net interest income and noninterest income (primarily in corporate services fees) from loan servicing net of reduction in commercial mortgage servicing rights due to time decay and payoffs. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.

(g)	Amounts reported in corporate services revenue.

(h)	Includes nonperforming loans of $.7 billion at June 30, 2016 and $.4 billion at June 30, 2015.

Corporate & Institutional Banking earned $921 million in the first six months of 2016 compared with earnings of $990 million for the first six months of 2015. The decrease in earnings was primarily due to an increase in the provision for credit losses, partially offset by higher noninterest income. We continue to focus on building client relationships where the risk-return profile is attractive, including in the Southeast.

Net interest income decreased slightly in the comparison, as continued interest rate spread compression on loans and lower purchase accounting accretion were essentially offset by the impact of higher average loans and deposits as well as interest rate spread expansion on deposits.

Higher noninterest income in the comparison was primarily due to an equity investment gain and higher merger and acquisition advisory fees, structuring fees on asset securitizations and loan syndication fees. These increases were partially offset by lower multifamily loans originated for sale to agencies and lower revenue associated with credit valuations for customer-related derivative activities.

Overall credit quality for the first six months of 2016 remained relatively stable, except for deterioration related to certain energy related loans, which was the primary driver for the increases in provision for credit losses, net charge-offs and nonperforming assets in the year over year comparisons. Increased provision for credit losses also reflected the impact of continued loan growth.

Noninterest expense increased nominally in the comparison reflecting disciplined expense management.

Average loans increased in the comparison due to strong growth in Real Estate, partially offset by a decline in Corporate Banking:

•

PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. Higher average loans for this business was primarily due to growth in commercial lending driven by higher term and REIT lending.

•

Corporate Banking 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 declined in the comparison, reflecting the impact of ongoing capital and liquidity management activities, partially offset by increased lending to large corporate clients.

•

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 in the comparison due to new originations.

•

PNC Equipment Finance provides equipment financing solutions for clients throughout the U.S.

and Canada. Average loans, including commercial loans and finance leases, and operating leases were $11.8 billion in the first six months of 2016, stable with the first six months of 2015.

Average deposits increased slightly compared to the prior year period, as a result of interest-bearing demand deposit growth, mostly offset by decreases in noninterest-bearing demand deposits and money market deposits.

Growth in the commercial loan servicing portfolio was driven by servicing additions from new and existing customers exceeding portfolio run-off.

Product Revenue

In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management, capital markets-related products and services, and commercial mortgage banking activities, for customers of all 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 19 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 in the comparison to the prior year period, driven by liquidity-related revenue.

Capital markets-related products and services include foreign exchange, derivatives, securities, loan syndications, mergers and acquisitions advisory and equity capital markets advisory related services. Revenue from capital markets-related products and services increased slightly in the comparison, as higher merger and acquisition advisory fees, structuring fees on asset securitizations and loan syndication fees were mostly offset by lower revenue associated with credit valuations for customer-related derivative activities and lower equity capital markets advisory fees.

Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (including net interest income and noninterest income) and revenue derived from commercial mortgage loans held for sale and related hedges. Total commercial mortgage banking activities decreased in the comparison due to lower multifamily loans originated for sale to agencies, partially offset by higher mortgage servicing revenue.

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

Asset Management Group

(Unaudited)

Table 20: Asset Management Group Table


Six months ended June 30 Dollars in millions, except as noted							Change
	2016			2015			$			%
Income Statement
Net interest income	$	153		$	144		$	9			6	%
Noninterest income		416			451			(35	)		(8	)%
Total revenue		569			595			(26	)		(4	)%
Provision for credit losses		3			13			(10	)		(77	)%
Noninterest expense		412			425			(13	)		(3	)%
Pretax earnings		154			157			(3	)		(2	)%
Income taxes		57			58			(1	)		(2	)%
Earnings	$	97		$	99		$	(2	)		(2	)%
Average Balance Sheet
Loans
Consumer	$	5,565		$	5,669		$	(104	)		(2	)%
Commercial and commercial real estate		778			938			(160	)		(17	)%
Residential mortgage		1,014			878			136			15	%
Total loans	$	7,357		$	7,485		$	(128	)		(2	)%
Total assets	$	7,822		$	7,974		$	(152	)		(2	)%
Deposits
Noninterest-bearing demand	$	1,400		$	1,344		$	56			4	%
Interest-bearing demand		4,183			4,127			56			1	%
Money market		4,494			4,873			(379	)		(8	)%
Savings		1,783			171			1,612			943	%
Other		276			285			(9	)		(3	)%
Total deposits	$	12,136		$	10,800		$	1,336			12	%
Performance Ratios
Return on average assets		2.50	%		2.50	%
Noninterest income to total revenue		73	%		76	%
Efficiency		72	%		71	%
Other Information
Total nonperforming assets (a) (b)	$	48		$	56		$	(8	)		(14	)%
Total net charge-offs	$	6		$	11		$	(5	)		(45	)%
Client Assets Under Administration (in billions) (a) (c) (d)
Discretionary client assets under management	$	135		$	134		$	1			1	%
Nondiscretionary client assets under administration		126			128			(2	)		(2	)%
Total	$	261		$	262		$	(1	)		–
Discretionary client assets under management
Personal	$	84		$	86		$	(2	)		(2	)%
Institutional		51			48		$	3			6	%
Total	$	135		$	134
Equity	$	72		$	75		$	(3	)		(4	)%
Fixed Income		40			41		$	(1	)		(2	)%
Liquidity/Other		23			18		$	5			28	%
Total	$	135		$	134

(a)	As of June 30.

(b)	Includes nonperforming loans of $44 million at June 30, 2016 and $53 million at June 30, 2015.

(c)	Excludes brokerage account client assets.

(d)

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

Asset Management Group earned $97 million through the first six months of 2016 compared with earnings of $99 million for the first six months of 2015. Earnings for the first six months of 2016 decreased compared with the first six months of 2015 due to lower revenue, partially offset by lower noninterest expense and provision for credit losses.

Total revenue declined in the comparison due to lower noninterest income reflecting a $30 million trust settlement in the second quarter of 2015 and lower average equity markets, partially offset by higher net interest income.

Noninterest expense declined primarily attributable to lower personnel expense. Asset Management Group remains focused on disciplined expense management as it invests in strategic growth opportunities.

The core growth strategies of the business include increasing sales sourced from other PNC lines of business, maximizing front line productivity and optimizing market presence in high opportunity markets. Wealth Management and Hawthorn have nearly 100 offices operating in 7 of the 10 most affluent states in the U.S. with a majority co-located with retail banking branches. The strategies primarily focus on growing client assets under management through expanding relationships directly and through cross-selling from PNC’s other lines of business.

Institutional Asset Management provides advisory, custody, and retirement administration services to institutional clients primarily within our banking footprint. The business also offers PNC proprietary mutual funds. Institutional Asset Management is strengthening its partnership with Corporate & Institutional Banking to drive growth and is focused on building retirement capabilities and expanding product solutions for all customers.

Discretionary client assets under management increased in the comparison to the prior year, primarily attributable to equity market increases as of June 30, 2016 compared to the prior year and new business activities.

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

Residential Mortgage Banking

(Unaudited)

Table 21: Residential Mortgage Banking Table


Six months ended June 30							Change
Dollars in millions, except as noted	2016			2015			$			%
Income Statement
Net interest income	$	53		$	60		$	(7	)		(12	)%
Noninterest income		287			353			(66	)		(19	)%
Total revenue		340			413			(73	)		(18	)%
Provision for credit losses		–			–			–			–
Noninterest expense		288			339			(51	)		(15	)%
Pretax earnings		52			74			(22	)		(30	)%
Income taxes		19			27			(8	)		(30	)%
Earnings	$	33		$	47		$	(14	)		(30	)%
Average Balance Sheet
Loans held for sale	$	821		$	1,127		$	(306	)		(27	)%
Loans	$	995		$	1,223		$	(228	)		(19	)%
Mortgage servicing rights (MSR)	$	949		$	896		$	53			6	%
Total assets	$	6,037		$	7,190		$	(1,153	)		(16	)%
Total deposits	$	2,553		$	2,357		$	196			8	%
Performance Ratios
Return on average assets		1.10	%		1.32	%
Noninterest income to total revenue		84	%		85	%
Efficiency		85	%		82	%
Supplemental Noninterest Income Information
Loan servicing revenue
Servicing fees	$	118		$	94		$	24			26	%
Mortgage servicing rights valuation, net of economic hedge (a)	$	9		$	58		$	(49	)		(84	)%
Loan sales revenue	$	159		$	203		$	(44	)		(22	)%
Residential Mortgage Servicing Portfolio (in billions) (b)
Serviced portfolio balance (c)	$	126		$	115		$	11			10	%
Portfolio acquisitions	$	11		$	14