Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018

or
☐


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)
(888) 762-2265
(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  ☒    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  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
☒
  
Accelerated filer
 
☐
Non-accelerated filer
 
☐
  
Smaller reporting company
 
☐
 
 
 
  
Emerging growth company
 
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
    Yes  ☐  No  ☒
As of April 20, 2018, there were 469,498,755 shares of the registrant’s common stock ($5 par value) outstanding.
 


THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to First Quarter 2018 Form 10-Q

 
 
 
Pages
PART I – FINANCIAL INFORMATION
 
Item 1.   Financial Statements (Unaudited).
 
 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
20-37, 64-73 and 76-81
Item 4. Controls and Procedures.
 


THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to First Quarter 2018 Form 10-Q (continued)

 
 
 
MD&A TABLE REFERENCE
 
Table
Description
Page
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE
 
 
Table
Description
Page
35
36
37
38
39
40
41
42
43
44
45
46
47


THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to First Quarter 2018 Form 10-Q (continued)

 
 
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE (Continued)
 
 
Table
Description
Page
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76



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 2017 Annual Report on Form 10-K (2017 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business, regulatory and legal risks, see the following: the Risk Management section of this Financial Review and of Item 7 in our 2017 Form 10-K; Item 1A Risk Factors included in our 2017 Form 10-K; and the Legal Proceedings and Commitments Notes of the Notes To Consolidated Financial Statements included in Item 1 of this Report and Item 8 of our 2017 Form 10-K. 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 2017 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 this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a generally accepted accounting principles (GAAP) basis. In this Report, “PNC”, “we” or “us” refers to The PNC Financial Services Group, Inc. and its subsidiaries on a consolidated basis (except when referring to PNC as a public company, its common stock or other securities issued by PNC, which just refer to The PNC Financial Services Group, Inc.). References to The PNC Financial Services Group, Inc. or to any of its subsidiaries are specifically made where applicable.
Table 1: Consolidated Financial Highlights
Dollars in millions, except per share data
Unaudited
Three months ended March 31
 
2018
2017
 
Financial Results (a)
 
 
 
Revenue
 
 
 
Net interest income
$
2,361

$
2,160

 
Noninterest income
1,750

1,724

 
Total revenue
4,111

3,884

 
Provision for credit losses
92

88

 
Noninterest expense
2,527

2,402

 
Income before income taxes and noncontrolling interests
$
1,492

$
1,394

 
Net income
$
1,239

$
1,074

 
Less:
 
 
 
Net income attributable to noncontrolling interests
10

17

 
Preferred stock dividends
63

63

 
Preferred stock discount accretion and redemptions
1

21

 
Net income attributable to common shareholders
1,165

973

 
Less:
 
 
 
Dividends and undistributed earnings allocated to nonvested restricted shares
5

6

 
Impact of BlackRock earnings per share dilution
2

4

 
Net income attributable to diluted common shares
$
1,158

$
963

 
Diluted earnings per common share
$
2.43

$
1.96

 
Cash dividends declared per common share
$
.75

$
.55

 
Effective tax rate (b)
17.0
%
23.0
%
 
Performance Ratios
 
 
 
Net interest margin (c)
2.91
%
2.77
%
 
Noninterest income to total revenue
43
%
44
%
 
Efficiency
61
%
62
%
 
Return on:
 
 
 
Average common shareholders’ equity
11.04
%
9.50
%
 
Average assets
1.34
%
1.19
%
 
(a)
The Executive Summary and Consolidated Income Statement Review portions of this Financial Review section 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. The first quarter 2018 results reflected the change in the statutory federal income tax rate from 35% to 21%, effective as of January 1, 2018, as a result of the new federal tax legislation.
(c)
Calculated as annualized taxable-equivalent net interest income divided by average earning assets. To provide more meaningful comparisons of net interest margins, 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 GAAP in the Consolidated Income Statement. For additional information, see Reconciliation of Taxable-Equivalent Net Interest Income in the Statistical Information (Unaudited) section in Item 1 of this Report.


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


Table 1: Consolidated Financial Highlights (Continued) (a)
Unaudited
March 31
2018

December 31
2017

March 31
2017

 
Balance Sheet Data (dollars in millions, except per share data)
 
 
 
 
Assets
$
379,161

$
380,768

$
370,944

 
Loans
$
221,614

$
220,458

$
212,826

 
Allowance for loan and lease losses
$
2,604

$
2,611

$
2,561

 
Interest-earning deposits with banks (b)
$
28,821

$
28,595

$
27,877

 
Investment securities
$
74,562

$
76,131

$
76,432

 
Loans held for sale
$
965

$
2,655

$
1,414

 
Equity investments (c)
$
12,008

$
11,392

$
10,900

 
Mortgage servicing rights
$
1,979

$
1,832

$
1,867

 
Goodwill
$
9,218

$
9,173

$
9,103

 
Other assets
$
27,949

$
27,894

$
28,083

 
Noninterest-bearing deposits
$
78,303

$
79,864

$
79,246

 
Interest-bearing deposits
$
186,401

$
185,189

$
181,464

 
Total deposits
$
264,704

$
265,053

$
260,710

 
Borrowed funds
$
58,039

$
59,088

$
55,062

 
Total shareholders’ equity
$
46,969

$
47,513

$
45,754

 
Common shareholders’ equity
$
42,983

$
43,530

$
41,774

 
Accumulated other comprehensive income (loss)
$
(699
)
$
(148
)
$
(279
)
 
Book value per common share
$
91.39

$
91.94

$
86.14

 
Period-end common shares outstanding (in millions)
470

473

485

 
Loans to deposits
84
%
83
%
82
%
 
Client Assets (in billions)
 
 
 
 
Discretionary client assets under management
$
148

$
151

$
141

 
Nondiscretionary client assets under administration
129

131

123

 
Total client assets under administration
277

282

264

 
Brokerage account client assets
49

49

46

 
Total client assets
$
326

$
331

$
310

 
Capital Ratios
 
 
 
 
Basel III (d) (e) (f)
 
 
 
 
Common equity Tier 1
9.6
%
N/A

N/A

 
Tier 1 risk-based
10.8
%
N/A

N/A

 
Total capital risk-based
12.8
%
N/A

N/A

 
Leverage
9.4
%
N/A

N/A

 
   Supplementary leverage
7.9
%
N/A

N/A

 
Fully Phased-In Basel III (Non-GAAP) (f) (g)
 
 
 
 
Common equity Tier 1
N/A

9.8
%
10.0
%
 
2017 Transitional Basel III (d) (f)
 
 
 
 
Common equity Tier 1
N/A

10.4
%
10.5
%
 
Tier 1 risk-based
N/A

11.6
%
11.8
%
 
Total capital risk-based
N/A

13.7
%
14.1
%
 
Leverage
N/A

9.9
%
9.9
%
 
Common shareholders’ equity to total assets
11.3
%
11.4
%
11.3
%
 
Asset Quality
 
 
 
 
Nonperforming loans to total loans
.83
%
.85
%
.94
%
 
Nonperforming assets to total loans, OREO, foreclosed and other assets
.90
%
.92
%
1.04
%
 
Nonperforming assets to total assets
.53
%
.53
%
.60
%
 
Net charge-offs to average loans (for the three months ended) (annualized)
.21
%
.22
%
.23
%
 
Allowance for loan and lease losses to total loans
1.18
%
1.18
%
1.20
%
 
Allowance for loan and lease losses to total nonperforming loans
141
%
140
%
128
%
 
Accruing loans past due 90 days or more (in millions)
$
628

$
737

$
699

 
(a)
The Executive Summary and Consolidated Balance Sheet Review portions of this Financial Review 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 $28.6 billion, $28.3 billion and $27.5 billion as of March 31, 2018, December 31, 2017 and March 31, 2017, respectively.
(c)
Amounts include our equity interest in BlackRock. The amount at March 31, 2018 includes $.6 billion of trading and available for sale securities that were reclassified to Equity investments on January 1, 2018 in accordance with the adoption of Accounting Standard Update 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in the Notes To Consolidated Financial Statements of this Report for additional detail on this adoption.
(d)
All ratios are calculated using the regulatory capital methodology applicable to PNC during each period presented and calculated based on the standardized approach.
(e)
The Basel III ratios for common equity Tier 1 capital, Tier 1 risk-based capital, Leverage and Supplementary leverage reflect the full phase-in of all Basel III adjustments to these metrics applicable to PNC. The Basel III total risk-based capital ratio includes $80 million of nonqualifying trust preferred capital securities that are subject to a phase-out period that runs through 2022.
(f)
See Basel III Capital discussion in the Capital Management portion of the Risk Management section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business and Item 1A Risk Factors in our 2017 Form 10-K. See also the Transitional Basel III and Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios (Non-GAAP) – March 31, 2017 table in the Statistical Information section of this Report for a reconciliation of the March 31, 2017 ratios.
(g)
2017 Fully Phased-in Basel III results are presented as Pro forma estimates.

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


EXECUTIVE SUMMARY
The PNC Financial Services Group, Inc. 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, including residential mortgage, corporate and institutional banking and asset management, providing many of our products and services nationally. Our primary geographic markets are located in the Mid-Atlantic, Midwest and Southeast. 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 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 commitments to our customers, shareholders, employees and the communities where we do business.

We strive to expand and deepen customer relationships by offering a broad range of deposit, credit and fee-based products and services. We are focused on delivering those products and services to our customers with the goal of addressing their financial objectives and putting customers’ needs first. Our business model is built on customer loyalty and engagement, understanding our customers’ financial goals and offering our diverse products and services to help them achieve financial well-being. Our approach is concentrated on organically growing and deepening client relationships across our businesses that meet our risk/return measures.

We are focused on our strategic priorities, which are designed to enhance value over the long term, and consist of:
•
Expanding our leading banking franchise to new markets and digital platforms;
•
Deepening customer relationships by delivering a superior banking experience and financial solutions; and
•
Leveraging technology to innovate and enhance products, services, security and 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). For more detail, see the Capital Highlights portion of this Executive Summary and the Liquidity and Capital Management portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2017 Form 10-K.

Income Statement Highlights
Net income for the first quarter of 2018 increased 15% to $1.2 billion, or $2.43 per diluted common share, compared to $1.1 billion, or $1.96 per diluted common share, for the first quarter of 2017.
•
Total revenue increased $227 million, or 6%, to $4.1 billion.
•
Net interest income increased $201 million, or 9%, to $2.4 billion.
•
Net interest margin increased to 2.91% compared to 2.77% for the first quarter of 2017.
•
Noninterest income increased $26 million, or 2%, to $1.8 billion.
•
Provision for credit losses was $92 million compared to $88 million for the first quarter of 2017.
•
Noninterest expense increased $125 million, or 5%, to $2.5 billion.
•
Income tax expense decreased to $253 million compared to $320 million for the first quarter of 2017.
•
Federal tax reform legislation, the Tax Cuts and Jobs Act, lowered the statutory federal income tax rate for corporations to 21% from 35% effective January 1, 2018.

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

Balance Sheet Highlights
Our balance sheet was strong and well positioned at March 31, 2018 and December 31, 2017. In comparison to December 31, 2017:
•
Total loans increased $1.2 billion, or 1%, to $221.6 billion.
•
Total commercial lending grew $1.5 billion, or 1%.
•
Total consumer lending decreased $.3 billion.
•
Total deposits decreased $.3 billion to $264.7 billion.
•
Investment securities decreased $1.6 billion, or 2%, to $74.6 billion.

For additional detail, see the Consolidated Balance Sheet Review section of this Financial Review.


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


Credit Quality Highlights
Overall credit quality remained stable.
•
At March 31, 2018 compared to December 31, 2017:
•
Nonperforming assets decreased $31 million, or 2%, to $2.0 billion.
•
Overall loan delinquencies decreased $131 million, or 9%.
•
Net charge-offs of $113 million in the first quarter of 2018 decreased 4% compared to net charge-offs of $118 million for the first quarter of 2017.

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

Capital Highlights
We maintained a strong capital position and continued to return capital to shareholders.
•
The Basel III common equity Tier 1 capital ratio, which includes the full phase-in of all Basel III adjustments and became effective for PNC as of January 1, 2018, was 9.6% at March 31, 2018, compared with 9.8% at December 31, 2017, calculated on the same basis.
•
In the first quarter of 2018, we returned $1.1 billion of capital to shareholders through repurchases of 4.8 million common shares for $.7 billion and dividends on common shares of $.4 billion.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for more detail on our 2018 liquidity and capital actions as well as 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 2017 Form 10-K.

Business Outlook
Our forward-looking financial statements are based on our current view that U.S. economic growth will accelerate somewhat in 2018, in light of stimulus from corporate and personal income tax cuts passed in late 2017 that are expected to support business investment and consumer spending, respectively. We expect an increase in federal government spending will also support economic growth in 2018. Further gradual improvement in the labor market this year, including job gains and rising wages, is another positive for consumer spending. Other sources of growth for the U.S. economy in 2018 will be the global economic expansion and the housing market, although trade restrictions are a downside risk to the forecast. Although inflation slowed in 2017, it should pick up as the labor market continues to tighten. Short-term interest rates and bond yields are expected to rise throughout 2018; after the Federal Open Market Committee raised the federal funds rate in March, our baseline forecast is for two additional rate hikes in June and December 2018, pushing the federal funds rate to a range of 2.00 to 2.25% by the end of the year. Longer-term rates are also expected to increase as the Federal Reserve slowly reduces the size of its balance sheet and the federal government borrows more. Long-term rates will rise more slowly than short-term rates, so we anticipate that the yield curve will flatten but not invert.

For the second quarter of 2018 compared to the first quarter of 2018, we expect:
•
Modest loan growth;
•
Net interest income to increase by low single digits, on a percentage basis;
•
Fee income to increase by mid-single digits, on a percentage basis. Fee income consists of asset management, consumer services, corporate services, residential mortgage and service charges on deposits;
•
Provision for credit losses to be between $100 million and $150 million; and
•
Noninterest expense to increase by low single digits, on a percentage basis.

We expect the quarterly run rate for other noninterest income to be in the range of $225 million to $275 million, excluding net securities gains (losses) and Visa activity.

Our outlook for certain financial information for full year 2018 is compared to full year 2017 results as adjusted for the following fourth quarter 2017 tax legislation and significant items: $26 million in lower net interest income from the impact of tax legislation on leveraged leases; a total of $54 million of higher noninterest income, consisting of the flow through impact of tax legislation on our equity investment in BlackRock, Visa Class B derivative fair value adjustments, and the appreciation of BlackRock stock contributed to the PNC Foundation, partially offset by negative adjustments for residential mortgage servicing rights fair value assumption updates; a total of $502 million of higher noninterest expense, consisting of a contribution to the PNC Foundation, charges for real estate dispositions and exits, and employee cash payments and pension account credits; and a $1.2 billion tax benefit recognized as a result of the federal tax legislation, primarily attributable to revaluation of net deferred tax liabilities and $230 million from the tax

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


effect of the aforementioned significant items. For additional information on these fourth quarter 2017 items, see the Income Statement Highlights portion of the Executive Summary section in Item 7 of our 2017 Form 10-K.

For full year 2018 compared to full year 2017 on an adjusted basis, we expect:
•
Loan growth to be up mid-single digits, on a percentage basis;
•
Revenue to increase mid-single digits, on a percentage basis;
•
Noninterest expense to increase by low single digits, on a percentage basis; and
•
The effective tax rate to be approximately 17%.

See the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2017 Form 10-K for other factors that could cause future events to differ, perhaps materially, from those anticipated in these forward-looking statements.
CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for the first quarter of 2018 was $1.2 billion, or $2.43 per diluted common share, an increase of 15% compared to $1.1 billion, or $1.96 per diluted common share, for the first quarter of 2017. The increase was driven by a 6% increase in revenue and a lower effective tax rate, partially offset by a 5% increase in noninterest expense. Higher revenue in the comparison reflected a 9% increase in net interest income and a 2% increase in noninterest income.
Net Interest Income
Table 2: Summarized Average Balances and Net Interest Income (a)
 
 
2018

2017
 
Three months ended March 31
Dollars in millions
 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
 
$
74,656

 
2.78
%
 
$
519

 
$
76,253

 
2.67
%
 
$
508

 
Loans
 
221,104

 
4.09
%
 
2,250

 
212,253

 
3.67
%
 
1,941

 
Interest-earning deposits with banks
 
25,667

 
1.52
%
 
98

 
24,192

 
.81
%
 
49

 
Other
 
7,904

 
4.11
%
 
80

 
8,395

 
3.54
%
 
74

 
Total interest-earning assets/interest income
 
$
329,331

 
3.59
%
 
2,947

 
$
321,093

 
3.22
%
 
2,572

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
183,438

 
.47
%
 
213

 
$
176,871

 
.28
%
 
120

 
Borrowed funds
 
59,638

 
2.31
%
 
344

 
54,942

 
1.74
%
 
240

 
Total interest-bearing liabilities/interest expense
 
$
243,076

 
.91
%
 
557

 
$
231,813

 
.62
%
 
360

 
Net interest margin/income (Non-GAAP)
 
 
 
2.91
%
 
2,390

 
 
 
2.77
%
 
2,212

 
Taxable-equivalent adjustments
 
 
 
 
 
(29
)
 
 
 
 
 
(52
)
 
Net interest income (GAAP)
 
 
 
 
 
$
2,361

 
 
 
 
 
$
2,160

 
(a)
Interest income calculated as taxable-equivalent interest income. To provide more meaningful comparisons of interest income and yields for all interest-earning assets, as well as net interest margins, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margins 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 GAAP on the Consolidated Income Statement. For more information, see Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP) in the Statistical Information (Unaudited) section of this Report.

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 by $201 million, or 9%, in the first quarter of 2018 compared with the first quarter of 2017, and net interest margin increased 14 basis points. These increases reflected higher loans and securities yields from higher interest rates, partially offset by increased balances and rates paid on borrowed funds and deposits. Net interest income also benefited from higher loan balances in the comparison.

Higher average rates on borrowed funds reflected the impact of an increase in three-month LIBOR. Interest rates on our borrowed funds portfolio are largely indexed to three-month LIBOR, either issued at this floating rate or through interest rate swaps.

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



Average investment securities decreased $1.6 billion, or 2%, reflecting portfolio runoff and lower reinvestments, including declines in average commercial mortgage-backed securities of $1.9 billion and asset-backed securities of $1.2 billion, partially offset by net purchases of U.S. Treasury and government agency securities of $1.4 billion and residential mortgage-backed securities of $1.3 billion.

The decline in average investment securities also reflected the January 1, 2018 reclassification of $.6 billion of available for sale securities to equity investments in accordance with the adoption of Accounting Standards Update (ASU) 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in the Notes To Consolidated Financial Statements of this Report for additional detail on this adoption.

Total investment securities were 23% of average interest-earning assets for the first quarter of 2018 compared to 24% for the first quarter of 2017.

Average loans grew $8.9 billion, or 4%, reflecting an increase in average commercial lending of $8.5 billion driven by broad-based growth in our Corporate Banking, Equipment Finance and Business Credit businesses in our Corporate & Institutional Banking segment. Growth in Equipment Finance included the impact of the acquisition of a commercial and vendor finance business with $1.0 billion of loans and leases in the second quarter of 2017. Average consumer lending increased $.4 billion in the comparison, as growth in residential real estate, automobile and credit card loans was largely offset by declines in home equity and education loans. Lower home equity loans reflected paydowns and payoffs exceeding new originated volume. In addition, run-off in the non-strategic consumer loan portfolios of brokered home equity and government guaranteed education loans contributed to the declines. Average loans represented 67% of average interest-earning assets for the first quarter of 2018 compared to 66% for the first quarter of 2017.

Average total deposits increased $5.7 billion, or 2%. Average interest-bearing deposits grew $6.6 billion, or 4%, reflecting the higher interest rate environment and customer growth. Average savings deposits increased $9.4 billion due in part to a shift to relationship-based savings products from money market deposits, which decreased $5.4 billion. Additionally, average interest-bearing demand deposits grew $2.8 billion. Average interest-bearing deposits represented 75% of average interest-bearing liabilities for the first quarter of 2018 compared to 76% for the same period in 2017. Average noninterest-bearing deposits declined $.9 billion to $77.2 billion.

Further details regarding average loans and deposits are included in the Business Segments Review section of this Financial Review.

Average borrowed funds increased $4.7 billion, or 9%, largely reflecting higher average bank notes and senior debt, partially offset by a decline in average subordinated debt. See the Consolidated Balance Sheet Review portion of this Financial Review for additional detail on the level and composition of borrowed funds.
Noninterest Income
Table 3: Noninterest Income
 
 
Three months ended March 31

 
 
 
 
 
 
Change
 
Dollars in millions
 
2018


2017

 
$
 
%
 
Noninterest income
 
 
 
 
 
 
 
 
 
Asset management
 
$
455

 
$
403

 
$
52

 
13
 %
 
Consumer services
 
357

 
332

 
25

 
8
 %
 
Corporate services
 
429

 
414

 
15

 
4
 %
 
Residential mortgage
 
97

 
113

 
(16
)
 
(14
)%
 
Service charges on deposits
 
167

 
161

 
6

 
4
 %
 
Other
 
245

 
301

 
(56
)
 
(19
)%
 
Total noninterest income
 
$
1,750


$
1,724


$
26

 
2
 %
 
 
Noninterest income as a percentage of total revenue was 43% for the first quarter of 2018 compared to 44% for the same period in 2017.

Asset management revenue increased reflecting higher earnings from our equity investment in BlackRock and stronger equity markets. PNC's discretionary client assets under management increased to $148 billion at March 31, 2018 compared with $141 billion at March 31, 2017.


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


Growth in consumer service fees included a $13 million increase in credit card fees, net of rewards, and debit card fees, which reflected continued momentum in customer activity in both transaction trends and customer growth. In addition, brokerage fees increased $10 million, driven by higher brokerage assets under management.

Corporate services revenue reflected growth in treasury management fees of $15 million and a $13 million increase in operating lease income related to the commercial and vendor finance business acquired in the second quarter of 2017. These increases were partially offset by a $12 million lower benefit from commercial mortgage servicing rights valuation, net of economic hedge.

Lower residential mortgage revenue was driven by a $12 million decline in loan sales revenue, which reflected compressed pricing margins and lower refinancing origination volume.

The decrease in other noninterest income was driven by an $88 million decline in revenue from equity investments, which included the impact of first quarter 2017 positive valuation adjustments related to the Volcker Rule provisions of the Dodd-Frank Act. This decrease was partially offset by a $14 million decline in negative derivative fair value adjustments related to Visa Class B common shares in the comparison.

In the first quarter of 2018, and as a result of the commercial and vendor finance business we acquired in the second quarter of 2017, we have reclassified operating lease income to corporate services noninterest income from other noninterest income on the Consolidated Income Statement. Operating lease income was $34 million for the first quarter of 2018. First quarter 2017 operating lease income was $21 million and was reclassified to reflect this change.

Provision For Credit Losses
The provision for credit losses was $92 million for the first quarter of 2018 compared with $88 million in the first quarter of 2017.

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

Noninterest Expense

Table 4: Noninterest Expense
 
 
Three months ended March 31
 
 
 
 
 
 
 
Change
 
Dollars in millions
 
2018


2017

 
$
 
%
 
Noninterest expense
 
 
 
 
 
 
 
 
 
Personnel
 
$
1,354

 
$
1,257

 
$
97

 
8
 %
 
Occupancy
 
218

 
222

 
(4
)
 
(2
)%
 
Equipment
 
273

 
251

 
22

 
9
 %
 
Marketing
 
55

 
55

 
—

 
—

 
Other
 
627

 
617

 
10

 
2
 %
 
Total noninterest expense
 
$
2,527


$
2,402


$
125

 
5
 %
 
 
The increase in noninterest expense was due to our ongoing investments in technology and in our businesses and employees, and was reflected primarily in personnel and equipment expense. These increases included operating expense related to the second quarter 2017 acquisition of a commercial and vendor finance business, as well as the investments we have made in new markets and our announced increase in hourly wages for eligible employees and in enhanced employee benefits.

PNC continued to focus on disciplined expense management. As of March 31, 2018, we were on track to achieve our full-year 2018 goal of $250 million in cost savings through our continuous improvement program, which we expect will partially fund our ongoing business and technology investments.

Effective Income Tax Rate

The effective income tax rate was 17.0% in the first quarter of 2018 compared to 23.0% in the same period of 2017. First quarter 2018 reflected the change in the statutory federal income tax rate from 35% to 21%, effective as of January 1, 2018, as a result of the new federal tax legislation.

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


CONSOLIDATED BALANCE SHEET REVIEW
Table 5: Summarized Balance Sheet Data
 
March 31

 
December 31

 
Change
 
Dollars in millions
2018

 
2017

 
$
%
 
Assets
 
 
 
 
 
 
 
Interest-earning deposits with banks
$
28,821

 
$
28,595

 
$
226

1
 %
 
Loans held for sale
965

 
2,655

 
(1,690
)
(64
)%
 
Investment securities
74,562

 
76,131

 
(1,569
)
(2
)%
 
Loans
221,614

 
220,458

 
1,156

1
 %
 
Allowance for loan and lease losses
(2,604
)
 
(2,611
)
 
7

—

 
Mortgage servicing rights
1,979

 
1,832

 
147

8
 %
 
Goodwill
9,218

 
9,173

 
45

—

 
Other, net
44,606

 
44,535

 
71

—

 
Total assets
$
379,161

 
$
380,768

 
$
(1,607
)
—

 
Liabilities
 
 
 
 




 
Deposits
$
264,704

 
$
265,053

 
$
(349
)
—

 
Borrowed funds
58,039

 
59,088

 
(1,049
)
(2
)%
 
Other
9,383

 
9,042

 
341

4
 %
 
Total liabilities
332,126

 
333,183

 
(1,057
)
—

 
Equity
 
 
 
 




 
Total shareholders’ equity
46,969

 
47,513

 
(544
)
(1
)%
 
Noncontrolling interests
66

 
72

 
(6
)
(8
)%
 
Total equity
47,035

 
47,585

 
(550
)
(1
)%
 
Total liabilities and equity
$
379,161

 
$
380,768

 
$
(1,607
)
—

 

The summarized balance sheet data in Table 5 is based upon our Consolidated Balance Sheet in Part 1, Item 1 of this Report.

Our balance sheet was strong and well positioned at both March 31, 2018 and December 31, 2017.
•
Total assets decreased due to lower loans held for sale and investment securities, partially offset by higher loans;
•
Total liabilities decreased due to lower borrowed funds;
•
Total equity decreased due to share repurchases and lower accumulated other comprehensive income (loss) related to net unrealized securities losses, partially offset by higher retained earnings driven by net income.

The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and regulatory compliance is included in the Liquidity and Capital Management portion of Risk Management in this Financial Review and in Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements included in our 2017 Form 10-K.
Loans
Table 6: Loans
 
March 31

 
December 31

 
Change
 
Dollars in millions
2018

 
2017

 
$
%
 
Commercial lending
 
 
 
 
 
 
 
Commercial
$
112,308

 
$
110,527

 
$
1,781

2
 %
 
Commercial real estate
28,835

 
28,978

 
(143
)
—

 
Equipment lease financing
7,802

 
7,934

 
(132
)
(2
)%
 
Total commercial lending
148,945

 
147,439

 
1,506

1
 %
 
Consumer lending
 
 
 
 




 
Home equity
27,699

 
28,364

 
(665
)
(2
)%
 
Residential real estate
17,456

 
17,212

 
244

1
 %
 
Credit card
5,657

 
5,699

 
(42
)
(1
)%
 
Other consumer
 
 
 
 




 
Automobile
13,295

 
12,880

 
415

3
 %
 
Education
4,228

 
4,454

 
(226
)
(5
)%
 
Other
4,334

 
4,410

 
(76
)
(2
)
 
Total consumer lending
72,669

 
73,019

 
(350
)
—

 
Total loans
$
221,614

 
$
220,458

 
$
1,156

1
 %
 


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


Loan growth was driven by commercial lending partially offset by a decline in consumer lending balances.

Commercial loans increased reflecting broad-based growth across our Corporate Banking, Real Estate and Business Credit businesses within our Corporate & Institutional Banking segment. In Corporate Banking, commercial loans increased $.8 billion, or 1%, largely due to strong growth in asset-backed finance securitizations as well as middle market and large corporate lending. Commercial loans in our Real Estate business increased $.6 billion, or 5%, primarily driven by higher multifamily agency warehouse lending. In Business Credit, higher utilization resulted in an increase in commercial loans of $.4 billion, or 3%.

For commercial loans by industry and commercial real estate loans by geography, see Loan Portfolio Characteristics and Analysis in the Credit Risk Management portion of the Risk Management section in this Financial Review.

Consumer lending balances declined as growth in automobile and residential real estate loans were more than offset by lower home equity and education loans.

Home equity loans declined as paydowns and payoffs exceeded new originated volume. In addition, the declines in both home equity and education loans included the continued runoff in our non-strategic brokered home equity and government guaranteed education loan portfolios.

Residential real estate loans increased as a result of growth in originations of nonconforming residential mortgage loans, both nationwide and within our branch network. Nonconforming residential mortgage loans are loans that do not meet government agency standards, such as a maximum loan amount, property type or credit requirements, among other factors. The growth in residential real estate loans was primarily due to nonconforming loans that exceeded agency conforming loan limits. Automobile loans grew in part due to continued expansion in our Southeast markets.

For information on home equity and residential real estate loans, including by geography, and automobile loans, see Loan Portfolio Characteristics and Analysis in the Credit Risk Management portion of the Risk Management section in this Financial Review.

See the Credit Risk Management portion of the Risk Management section of this Financial Review and Note 1 Accounting Policies, Note 3 Asset Quality and Note 4 Allowance for Loan and Lease Losses in our Notes To Consolidated Financial Statements included in this Report for additional information regarding our loan portfolio.
Investment Securities
Table 7: Investment Securities
 
March 31, 2018
 
December 31, 2017
 
Ratings (a) as of March 31, 2018
 
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
$
14,390

 
$
14,335

 
$
15,173

 
$
15,286

 
100
%
 

 

 

 

 
Agency residential mortgage-backed
41,175

 
40,301

 
40,037

 
39,847

 
100
%
 

 

 

 

 
Non-agency residential mortgage-backed
2,483

 
2,802

 
2,610

 
2,932

 
11
%
 

 
3
%
 
66
%
 
20
%
 
Agency commercial mortgage-backed
2,222

 
2,146

 
2,367

 
2,315

 
100
%
 

 

 

 

 
Non-agency commercial mortgage-backed (b)
3,109

 
3,098

 
3,141

 
3,161

 
84
%
 
6
%
 


 


 
10
%
 
Asset-backed (c)
5,325

 
5,380

 
5,531

 
5,598

 
84
%
 
3
%
 
6
%
 
7
%
 

 
Other debt (d)
6,081

 
6,179

 
6,279

 
6,459

 
74
%
 
15
%
 
7
%
 
1
%
 
3
%
 
Other (e)
 
 
 
 
587

 
585

 
 
 
 
 
 
 
 
 
 
 
Total investment securities (f)
$
74,785

 
$
74,241

 
$
75,725

 
$
76,183

 
93
%
 
2
%
 
1
%
 
3
%
 
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 education loans and other consumer credit products.
(d)
Includes state and municipal securities.
(e)
On January 1, 2018, $.6 billion of available for sale securities, primarily money market funds, were reclassified to equity investments in accordance with the adoption of ASU 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in the Notes To Consolidated Financial Statements of this Report for additional detail on this adoption.
(f)
Includes available for sale and held to maturity securities, which are recorded on our balance sheet at fair value and amortized cost, respectively.


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


Investment securities decreased $1.6 billion at March 31, 2018 compared to December 31, 2017, driven by declines in U.S. Treasury and government agencies securities of $.9 billion, other debt securities of $.3 billion, commercial mortgage-backed securities of $.2 billion and asset-backed securities of $.2 billion. These declines were partially offset by net purchases of agency residential mortgage-backed securities of $.8 billion. The overall decrease includes a $.6 billion decline in the valuation of our available for sale securities portfolio reflecting the impact of higher interest rates, primarily for U.S. Treasury and government agencies and agency residential mortgage-backed securities.

The decline in total investment securities at March 31, 2018 compared to December 31, 2017 also reflected the reclassification of $.6 billion of available for sale securities, primarily money market funds, to equity investments as part of the adoption of ASU 2016-01. See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements for additional detail on our adoption of this ASU.

The level and composition of the investment securities portfolio fluctuates over time based on many factors including market conditions, loan and deposit growth, and balance sheet management activities. We manage our investment securities portfolio to optimize returns, while providing a reliable source of liquidity for our banking and other activities, considering LCR and other internal and external guidelines and constraints.

Table 7 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, which could affect our risk-weighted assets and, therefore, our risk-based regulatory capital ratios under the regulatory capital rules. 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.

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 other than temporary impairment (OTTI) credit losses that would impact our Consolidated Income Statement.

The duration of investment securities was 3.7 years at March 31, 2018. We estimate that at March 31, 2018 the effective duration of investment securities was 3.8 years for an immediate 50 basis points parallel increase in interest rates and 3.5 years for an immediate 50 basis points parallel decrease in interest rates.

Based on expected prepayment speeds, the weighted-average expected maturity of the investment securities portfolio (excluding other) was 5.7 years at March 31, 2018 compared to 5.2 years at December 31, 2017.
Table 8: Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities
March 31, 2018
Years

 
Agency residential mortgage-backed
6.6

 
Non-agency residential mortgage-backed
6.3

 
Agency commercial mortgage-backed
3.5

 
Non-agency commercial mortgage-backed
3.1

 
Asset-backed
2.5

 

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 this Report.


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


Funding Sources
Table 9: Details of Funding Sources
 
March 31

 
December 31

 
Change
 
Dollars in millions
2018

 
2017

 
$
%
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing
$
78,303

 
$
79,864

 
$
(1,561
)
(2
)%
 
Interest-bearing
 
 
 
 




 
Money market
57,260

 
59,735

 
(2,475
)
(4
)%
 
Demand
62,289

 
61,213

 
1,076

2
 %
 
Savings
50,582

 
46,980

 
3,602

8
 %
 
Time deposits
16,270

 
17,261

 
(991
)
(6
)%
 
Total interest-bearing deposits
186,401

 
185,189

 
1,212

1
 %
 
Total deposits
264,704

 
265,053

 
(349
)
—

 
Borrowed funds
 
 
 
 




 
Federal Home Loan Bank (FHLB) borrowings
19,537

 
21,037

 
(1,500
)
(7
)%
 
Bank notes and senior debt
28,773

 
28,062

 
711

3
 %
 
Subordinated debt
5,121

 
5,200

 
(79
)
(2
)%
 
Other
4,608

 
4,789

 
(181
)
(4
)%
 
Total borrowed funds
58,039

 
59,088

 
(1,049
)
(2
)%
 
Total funding sources
$
322,743

 
$
324,141

 
$
(1,398
)
—

 

Total deposits declined slightly in the comparison as growth in interest-bearing deposits was more than offset by decreases in noninterest-bearing deposits.

Noninterest-bearing deposits decreased due to seasonal declines in commercial deposits. Within interest-bearing deposits, savings deposits grew reflecting, in part, a shift from consumer money market to relationship-based savings products, as well as growth in consumer demand deposit balances. The decline in time deposits largely reflected lower certificates of deposit due to the net runoff of maturing accounts.

The decline in borrowed funds in the comparison was primarily due to lower FHLB borrowings, partially offset by growth in bank notes and senior debt, including $2.0 billion issued in January 2018. The level and composition of borrowed funds fluctuates over time based on many factors including market conditions, loan, investment securities and deposit growth, and capital considerations. We manage our borrowed funds to provide a reliable source of liquidity for our banking and other activities, considering LCR and other internal and external guidelines and constraints.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for additional information regarding our 2018 liquidity and capital activities.

Shareholders’ Equity
Total shareholders’ equity was $47.0 billion at March 31, 2018, a decrease of $.5 billion compared to December 31, 2017. The decrease resulted from common share repurchases of $.7 billion, lower accumulated other comprehensive income (loss) related to net unrealized securities losses of $.6 billion and common and preferred dividends of $.4 billion, partially offset by net income of $1.2 billion.

Common shares outstanding were 470 million and 473 million at March 31, 2018 and December 31, 2017, respectively, as repurchases of 4.8 million shares during the period were partially offset by share issuances from treasury stock related to warrants exercised and stock-based compensation activity.


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


BUSINESS SEGMENTS REVIEW

We have four reportable business segments:
•
Retail Banking
•
Corporate & Institutional Banking
•
Asset Management Group
•
BlackRock

Business segment results and a description of each business are included in Note 14 Segment Reporting included in the Notes To Consolidated Financial Statements in this Report. Certain amounts included in this Business Segments Review differ from those amounts shown in Note 14, primarily due to the presentation in this Financial Review of business net interest income on a taxable-equivalent basis.

Net interest income in business segment results reflects our 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.

Retail Banking
(Unaudited)

Table 10: Retail Banking Table
Three months ended March 31
  
 
  
 
Change
 
Dollars in millions, except as noted
2018
 
2017
 
$
%
 
Income Statement
 
 
 
 
 
 
 
Net interest income
$
1,218

 
$
1,121

 
$
97

9
 %
 
Noninterest income
635

 
603

 
32

5
 %
 
Total revenue
1,853

 
1,724

 
129

7
 %
 
Provision for credit losses
69

 
71

 
(2
)
(3
)%
 
Noninterest expense
1,395

 
1,315

 
80

6
 %
 
Pretax earnings
389

 
338

 
51

15
 %
 
Income taxes
93

 
125

 
(32
)
(26
)%
 
Earnings
$
296

 
$
213

 
$
83

39
 %
 
Average Balance Sheet
 
 
 
 
 
 
 
Loans held for sale
$
652

 
$
843

 
$
(191
)
(23
)%
 
Loans
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
Home equity
$
24,608

 
$
25,601

 
$
(993
)
(4
)%
 
Automobile
13,105

 
12,146

 
959

8
 %
 
Education
4,409

 
5,131

 
(722
)
(14
)%
 
Credit cards
5,619

 
5,121

 
498

10
 %
 
Other
1,765

 
1,756

 
9

1
 %
 
Total consumer
49,506

 
49,755

 
(249
)
(1
)%
 
Commercial and commercial real estate
10,527

 
11,006

 
(479
)
(4
)%
 
Residential mortgage
13,420

 
11,688

 
1,732

15
 %
 
Total loans
$
73,453

 
$
72,449

 
$
1,004

1
 %
 
Total assets
$
88,734

 
$
87,109

 
$
1,625

2
 %
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing demand
$
29,779

 
$
29,010

 
$
769

3
 %
 
Interest-bearing demand
41,939

 
40,649

 
1,290

3
 %
 
Money market
32,330

 
39,321

 
(6,991
)
(18
)%
 
Savings
43,838

 
35,326

 
8,512

24
 %
 
Certificates of deposit
12,082

 
13,735

 
(1,653
)
(12
)%
 
Total deposits
$
159,968

 
$
158,041

 
$
1,927

1
 %
 
Performance Ratios
 
 
 
 
 
 
 
Return on average assets
1.35
%
 
.99
%
 
 
 
 
Noninterest income to total revenue
34
%
 
35
%
 
 
 
 
Efficiency
75
%
 
76
%
 
 
 
 



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



Three months ended March 31
  
 
  
 
Change
 
Dollars in millions, except as noted
2018

 
2017

 
$
%
 
Supplemental Noninterest Income Information
 
 
 
 
 
 
 
Consumer services
$
266

 
$
250

 
$
16

6
 %
 
Brokerage
$
86

 
$
76

 
$
10

13
 %
 
Residential mortgage
$
97

 
$
113

 
$
(16
)
(14
)%
 
Service charges on deposits
$
160

 
$
154

 
$
6

4
 %
 
Residential Mortgage Information
 
 
 
 
 
 
 
Residential mortgage servicing statistics (in billions, except as noted) (a)
 
 
 
 
 
 
 
Serviced portfolio balance (b)
$
125

 
$
130

 
$
(5
)
(4
)%
 
Serviced portfolio acquisitions
$
1

 
$
8

 
$
(7
)
(88
)%
 
MSR asset value (b)
$
1.3

 
$
1.3

 
—

—

 
MSR capitalization value (in basis points) (b)
101

 
97

 
4

4
 %
 
Servicing income: (in millions)
 
 
 
 
 
 
 
Servicing fees, net (c)
$
51

 
$
52

 
$
(1
)
(2
)%
 
Mortgage servicing rights valuation, net of economic hedge
$
9

 
$
12

 
$
(3
)
(25
)%
 
Residential mortgage loan statistics
 
 
 
 
 
 
 
Loan origination volume (in billions)
$
1.7

 
$
1.9

 
$
(.2
)
(11
)%
 
Loan sale margin percentage
2.83
%
 
2.96
%
 
 
 
 
Percentage of originations represented by:
 
 
 
 
 
 
 
Purchase volume (d)
56
%
 
43
%
 
 
 
 
Refinance volume
44
%
 
57
%
 
 
 
 
Other Information (b)
 
 
 
 
 
 
 
Customer-related statistics (average)
 
 
 
 
 
 
 
Non-teller deposit transactions (e)
54
%
 
52
%
 
 
 
 
Digital consumer customers (f)
64
%
 
61
%
 
 
 
 
Credit-related statistics
 
 
 
 
 
 
 
Nonperforming assets (g)
$
1,131

 
$
1,209

 
$
(78
)
(6
)%
 
Net charge-offs
$
100

 
$
100

 
—

—

 
Other statistics
 
 
 
 
 
 
 
ATMs
9,047

 
8,976

 
71

1
 %
 
Branches (h)
2,442

 
2,508

 
(66
)
(3
)%
 
Brokerage account client assets (in billions) (i)
$
49

 
$
46

 
$
3

7
 %
 
(a)
Represents mortgage loan servicing balances for third parties and the related income.
(b)
Presented as of March 31, except for customer-related statistics, which are quarterly averages, and net charge-offs, which are for the three months ended.
(c)
Servicing fees net of impact of decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan prepayments and loans that were paid down or paid off during the period.
(d)
Mortgages with borrowers as part of residential real estate purchase transactions.
(e)
Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application.
(f)
Represents consumer checking relationships that process the majority of their transactions through non-teller channels.
(g)
Includes nonperforming loans of $1.1 billion at both March 31, 2018 and March 31, 2017.
(h)
Excludes stand-alone mortgage offices and satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services.
(i)
Includes cash and money market balances.

Retail Banking earned $296 million in the first three months of 2018 compared with $213 million for the same period in 2017. The increase in earnings was driven by higher net interest and noninterest income, partially offset by an increase in noninterest expense. First quarter 2018 earnings also benefited from the lower statutory federal income tax rate.

Net interest income increased due to wider interest rate spreads on the value of deposits.

The increase in noninterest income reflected growth in credit card, brokerage, and debit card fees, higher service charges on deposits and lower negative derivative fair value adjustments related to swap agreements with purchasers of Visa Class B common shares in connection with all prior sales to date. These increases were partially offset by lower residential mortgage loan sales revenue, which reflected compressed pricing margins and lower refinancing origination volume.

Higher noninterest expense primarily resulted from an increase in personnel expense, investments in technology and compliance expense.


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


Retail Banking continues to enhance the customer experience with refinements to product and service offerings that drive value for consumers and small businesses. We are focused on meeting the financial needs of our customers by providing a broad range of liquidity, banking and investment products.

The deposit strategy of Retail Banking is to remain disciplined on pricing and 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 quarter of 2018, average total deposits increased compared to the same period a year ago, as both interest-bearing and noninterest-bearing deposits increased. Savings deposits grew, reflecting, in part, a shift from money market deposits to relationship-based savings products. Additionally, interest-bearing demand deposits increased, while certificates of deposit declined due to the net runoff of maturing accounts.

Retail Banking average total loans increased in the first quarter of 2018 compared with the first quarter of 2017.     
•
Average residential mortgages increased as a result of growth in originations of nonconforming residential mortgage loans, both nationwide and within our branch network.
•
Average automobile loans, which consisted of both direct and indirect auto loans, increased primarily due to portfolio growth, including in our Southeast markets.
•
Average credit card balances increased as we continued to focus on our long-term objective of deepening penetration within our existing customer base.
•
Average home equity loans decreased as paydowns and payoffs on loans exceeded new originated volume.
•
Average commercial and commercial real estate loans declined as paydowns and payoffs on loans exceeded new volume.     
•
Average education loans decreased driven by a decline in the runoff portfolio of government guaranteed education loans.

Nonperforming assets decreased compared to March 31, 2017 due to declines in both consumer and commercial nonperforming loans.

Retail Banking continued to focus on its strategy of transforming the customer experience through transaction migration, branch network and home lending transformations and multi-channel engagement and service strategies.
•
Approximately 64% of consumer customers used non-teller channels for the majority of their transactions in the first quarter of 2018 compared with 61% in the first quarter of 2017.
•
Deposit transactions via ATM and mobile channels increased to 54% of total deposit transactions versus 52% in the comparison.
•
Instant debit card issuance, which enables us to print a customer’s debit card in minutes, was available in 91% of our branch network as of March 31, 2018.

Retail Banking continued to make progress on its multi-year initiative to redesign the home lending process by integrating mortgage and home equity lending into a common platform to enhance product capability and improve speed of delivery and convenience.
•
We converted home equity loans to the new servicing platform in the first quarter of 2018. Both residential mortgage and home equity loans are now serviced on a single platform.
•
We implemented a new mortgage origination system in 2017.


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


Corporate & Institutional Banking
(Unaudited)

Table 11: Corporate & Institutional Banking Table
Three months ended March 31
  
 
  
 
Change
 
Dollars in millions
2018
 
2017
 
$
%
 
Income Statement
 
 
 
 
 
 
 
Net interest income
$
882

 
$
839

 
$
43

5
 %
 
Noninterest income
547

 
524

 
23

4
 %
 
Total revenue
1,429

 
1,363

 
66

5
 %
 
Provision for credit losses
41

 
25

 
16

64
 %
 
Noninterest expense
626

 
584

 
42

7
 %
 
Pretax earnings
762

 
754

 
8

1
 %
 
Income taxes
178

 
270

 
(92
)
(34
)%
 
Earnings
$
584

 
$
484

 
$
100

21
 %
 
Average Balance Sheet
 
 
 
 
 
 
 
Loans held for sale
$
1,189

 
$
1,116

 
$
73

7
 %
 
Loans
 
 
 
 
 
 
 
Commercial
$
100,802

 
$
92,116

 
$
8,686

9
 %
 
Commercial real estate
26,732

 
27,091

 
(359
)
(1
)%
 
Equipment lease financing
7,845

 
7,497

 
348

5
 %
 
Total commercial lending
135,379

 
126,704

 
8,675

7
 %
 
Consumer
77

 
331

 
(254
)
(77
)%
 
Total loans
$
135,456

 
$
127,035

 
$
8,421

7
 %
 
Total assets
$
151,909

 
$
142,592

 
$
9,317

7
 %
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing demand
$
45,896

 
$
47,423

 
$
(1,527
)
(3
)%
 
Money market
23,406

 
21,086

 
2,320

11
 %
 
Other
18,592

 
15,391

 
3,201

21
 %
 
Total deposits
$
87,894

 
$
83,900

 
$
3,994

5
 %
 
Performance Ratios
 
 
 
 
 
 
 
Return on average assets
1.56
%
 
1.38
%
 
 
 
 
Noninterest income to total revenue
38
%
 
38
%
 
 
 
 
Efficiency
44
%
 
43
%
 
 
 
 
Other Information
 
 
 
 
 
 
 
Consolidated revenue from: (a)
 
 
 
 
 
 
 
Treasury Management (b)
$
419

 
$
359

 
$
60

17
 %
 
Capital Markets (b)
$
258

 
$
247

 
$
11

4
 %
 
Commercial mortgage banking activities