Edgar Filing: PNC FINANCIAL SERVICES GROUP, INC.

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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 June 30, 2018



☐	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.

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 July 20, 2018, there were 464,302,343 shares of the registrant’s common stock ($5 par value) outstanding.

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2018 Form 10-Q



	Pages
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Income Statement	43
Consolidated Statement of Comprehensive Income	44
Consolidated Balance Sheet	45
Consolidated Statement of Cash Flows	46
Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies	48
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities	51
Note 3 Asset Quality	53
Note 4 Allowance for Loan and Lease Losses	59
Note 5 Investment Securities	60
Note 6 Fair Value	63
Note 7 Goodwill and Mortgage Servicing Rights	72
Note 8 Employee Benefit Plans	74
Note 9 Financial Derivatives	75
Note 10 Earnings Per Share	80
Note 11 Total Equity and Other Comprehensive Income	81
Note 12 Legal Proceedings	83
Note 13 Commitments	85
Note 14 Segment Reporting	86
Note 15 Fee-based Revenue from Contracts with Customers	89
Note 16 Subsequent Events	89
Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis	91
Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP)	93
Transitional Basel III and Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios (Non-GAAP) – June 30, 2017	93
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Financial Review	1
Consolidated Financial Highlights	1
Executive Summary	3
Consolidated Income Statement Review	5
Consolidated Balance Sheet Review	9
Business Segments Review	12
Risk Management	21
Recent Regulatory Developments	38
Critical Accounting Estimates and Judgments	39
Off-Balance Sheet Arrangements and Variable Interest Entities	41
Internal Controls and Disclosure Controls and Procedures	41
Glossary of Terms	41
Cautionary Statement Regarding Forward-Looking Information	41
Item 3. Quantitative and Qualitative Disclosures about Market Risk.	21-38, 63-72 and 75-80
Item 4. Controls and Procedures.	41
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.	93
Item 1A. Risk Factors.	93
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	94
Item 6. Exhibits.	94
Exhibit Index	94
Corporate Information	94
Signature	96

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2018 Form 10-Q (continued)




MD&A TABLE REFERENCE
Table	Description	Page
1	Consolidated Financial Highlights	1
2	Summarized Average Balances and Net Interest Income	5
3	Noninterest Income	7
4	Noninterest Expense	8
5	Summarized Balance Sheet Data	9
6	Loans	9
7	Investment Securities	10
8	Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities	11
9	Details of Funding Sources	11
10	Retail Banking Table	13
11	Corporate & Institutional Banking Table	16
12	Asset Management Group Table	19
13	BlackRock Table	20
14	Details of Loans	21
15	Commercial Loans by Industry	22
16	Commercial Real Estate Loans by Geography	22
17	Home Equity Loans by Geography and by Lien Priority	23
18	Residential Real Estate Loans by Geography	24
19	Nonperforming Assets by Type	25
20	Change in Nonperforming Assets	25
21	Accruing Loans Past Due	26
22	Consumer Real Estate Related Loan Modifications	26
23	Summary of Troubled Debt Restructurings	27
24	Allowance for Loan and Lease Losses	28
25	Loan Charge-Offs and Recoveries	29
26	Senior and Subordinated Debt	30
27	PNC Bank Notes Issued	30
28	Credit Ratings for PNC and PNC Bank	31
29	Basel III Capital	33
30	Interest Sensitivity Analysis	35
31	Net Interest Income Sensitivity to Alternative Rate Scenarios	35
32	Alternate Interest Rate Scenarios: One Year Forward	36
33	Equity Investments Summary	37
34	Fair Value Measurements – Summary	39

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2018 Form 10-Q (continued)




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE
Table	Description	Page
35	Cash Flows Associated with Loan Sale and Servicing Activities	51
36	Principal Balance, Delinquent Loans and Net Charge-offs Related to Serviced Loans For Others	52
37	Non-Consolidated VIEs	52
38	Analysis of Loan Portfolio	54
39	Nonperforming Assets	55
40	Commercial Lending Asset Quality Indicators	55
41	Asset Quality Indicators for Home Equity and Residential Real Estate Loans – Excluding Purchased Impaired and Government Insured or Guaranteed Loans	56
42	Credit Card and Other Consumer Loan Classes Asset Quality Indicators	57
43	Financial Impact and TDRs by Concession Type	57
44	Impaired Loans	58
45	Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data	59
46	Investment Securities Summary	60
47	Gross Unrealized Loss and Fair Value of Debt Securities	61
48	Gains (Losses) on Sales of Securities Available for Sale	62
49	Contractual Maturity of Debt Securities	62
50	Fair Value of Securities Pledged and Accepted as Collateral	62
51	Fair Value Measurements – Recurring Basis Summary	63
52	Reconciliation of Level 3 Assets and Liabilities	66
53	Fair Value Measurements – Recurring Quantitative Information	68
54	Fair Value Measurements – Nonrecurring	69
55	Fair Value Measurements – Nonrecurring Quantitative Information	70
56	Fair Value Option – Fair Value and Principal Balances	70
57	Fair Value Option – Changes in Fair Value	71
58	Additional Fair Value Information Related to Other Financial Instruments	71
59	Mortgage Servicing Rights	73
60	Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions	73
61	Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions	74
62	Components of Net Periodic Benefit Cost	74
63	Total Gross Derivatives	75
64	Gains(Losses) Recognized on Fair Value and Cash Flow Hedges in the Consolidated Income Statement	77
65	Hedged Items - Fair Value Hedges	77
66	Gains (Losses) on Derivatives Not Designated for Hedging under GAAP	78
67	Derivative Assets and Liabilities Offsetting	79
68	Basic and Diluted Earnings Per Common Share	80
69	Rollforward of Total Equity	81
70	Other Comprehensive Income	82
71	Accumulated Other Comprehensive Income (Loss) Components	83
72	Commitments to Extend Credit and Other Commitments	85
73	Results of Businesses	88
74	Retail Banking Noninterest Income Disaggregation	89
75	Corporate & Institutional Banking Noninterest Income Disaggregation	90
76	Asset Management Group Noninterest Income Disaggregation	90

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 Quarterly Report on Form 10-Q (the Report or Form 10-Q) 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 June 30						Six months ended June 30
	2018			2017			2018			2017
Financial Results (a)
Revenue
Net interest income	$	2,413		$	2,258		$	4,774		$	4,418
Noninterest income	1,911			1,802			3,661			3,526
Total revenue	4,324			4,060			8,435			7,944
Provision for credit losses	80			98			172			186
Noninterest expense	2,584			2,479			5,111			4,881
Income before income taxes and noncontrolling interests	$	1,660		$	1,483		$	3,152		$	2,877
Net income	$	1,356		$	1,097		$	2,595		$	2,171
Less:
Net income attributable to noncontrolling interests	10			10			20			27
Preferred stock dividends	55			55			118			118
Preferred stock discount accretion and redemptions	1			2			2			23
Net income attributable to common shareholders	1,290			1,030			$	2,455		$	2,003
Less:
Dividends and undistributed earnings allocated to nonvested restricted shares	5			4			10			10
Impact of BlackRock earnings per share dilution	3			1			5			5
Net income attributable to diluted common shares	$	1,282		$	1,025		$	2,440		$	1,988
Diluted earnings per common share	$	2.72		$	2.10		$	5.15		$	4.05
Cash dividends declared per common share	$	.75		$	.55		$	1.50		$	1.10
Effective tax rate (b)	18.3		%	26.0		%	17.7		%	24.5		%
Performance Ratios
Net interest margin (c)	2.96		%	2.84		%	2.94		%	2.81		%
Noninterest income to total revenue	44		%	44		%	43		%	44		%
Efficiency	60		%	61		%	61		%	61		%
Return on:
Average common shareholders’ equity	12.13		%	9.88		%	11.59		%	9.69		%
Average assets	1.45		%	1.19		%	1.39		%	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. Amounts for the 2018 periods 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 (Non-GAAP) 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	June 30 2018			December 31 2017			June 30 2017
Balance Sheet Data (dollars in millions, except per share data)
Assets	$	380,711		$	380,768		$	372,190
Loans	$	222,855		$	220,458		$	218,034
Allowance for loan and lease losses	$	2,581		$	2,611		$	2,561
Interest-earning deposits with banks (b)	$	21,972		$	28,595		$	22,482
Investment securities	$	80,125		$	76,131		$	76,431
Loans held for sale	$	1,325		$	2,655		$	2,030
Equity investments (c)	$	12,430		$	11,392		$	10,819
Mortgage servicing rights	$	2,045		$	1,832		$	1,867
Goodwill	$	9,218		$	9,173		$	9,163
Other assets	$	27,897		$	27,894		$	28,886
Noninterest-bearing deposits	$	79,047		$	79,864		$	79,550
Interest-bearing deposits	$	185,838		$	185,189		$	179,626
Total deposits	$	264,885		$	265,053		$	259,176
Borrowed funds	$	59,222		$	59,088		$	56,406
Total shareholders’ equity	$	46,904		$	47,513		$	46,084
Common shareholders’ equity	$	42,917		$	43,530		$	42,103
Accumulated other comprehensive income (loss)	$	(940	)	$	(148	)	$	(98	)
Book value per common share	$	92.26		$	91.94		$	87.78
Period-end common shares outstanding (in millions)	465			473			480
Loans to deposits	84		%	83		%	84		%
Client Assets (in billions)
Discretionary client assets under management	$	149		$	151		$	141
Nondiscretionary client assets under administration	130			131			125
Total client assets under administration	279			282			266
Brokerage account client assets	49			49			46
Total client assets	$	328		$	331		$	312
Capital Ratios
Basel III (d) (e) (f)
Common equity Tier 1	9.5		%	N/A			N/A
Tier 1 risk-based	10.7		%	N/A			N/A
Total capital risk-based	12.6		%	N/A			N/A
Leverage	9.4		%	N/A			N/A
Supplementary leverage	7.8		%	N/A			N/A
Fully Phased-In Basel III (Non-GAAP) (f) (g)
Common equity Tier 1	N/A			9.8		%	9.8		%
2017 Transitional Basel III (d) (f)
Common equity Tier 1	N/A			10.4		%	10.3		%
Tier 1 risk-based	N/A			11.6		%	11.6		%
Total capital risk-based	N/A			13.7		%	13.7		%
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	.77		%	.85		%	.90		%
Nonperforming assets to total loans, OREO, foreclosed and other assets	.83		%	.92		%	.99		%
Nonperforming assets to total assets	.49		%	.53		%	.58		%
Net charge-offs to average loans (for the three months ended) (annualized)	.20		%	.22		%	.20		%
Allowance for loan and lease losses to total loans	1.16		%	1.18		%	1.17		%
Allowance for loan and lease losses to total nonperforming loans	150		%	140		%	131		%
Accruing loans past due 90 days or more (in millions)	$	586		$	737		$	674


(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 $21.6 billion, $28.3 billion and $22.1 billion as of June 30, 2018, December 31, 2017 and June 30, 2017, respectively.

(c)

Amounts include our equity interest in BlackRock. On January 1, 2018, $.6 billion of trading and available for sale securities, primarily money market funds, were reclassified 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 in our first quarter 2018 Quarterly Report on Form 10-Q (First Quarter 2018 Form 10-Q) 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 2018 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 2018 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 2021.

(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) – June 30, 2017 table in the Statistical Information (Unaudited) section of this Report for a reconciliation of the June 30, 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 second quarter of 2018 increased 24% to $1.4 billion, or $2.72 per diluted common share, compared to $1.1 billion, or $2.10 per diluted common share, for the second quarter of 2017.


•	Total revenue increased $264 million, or 7%, to $4.3 billion.


•	Net interest income increased $155 million, or 7%, to $2.4 billion.


•	Net interest margin increased to 2.96% compared to 2.84% for the second quarter of 2017.


•	Noninterest income increased $109 million, or 6%, to $1.9 billion.


•	Provision for credit losses was $80 million compared to $98 million for the second quarter of 2017.


•	Noninterest expense increased $105 million, or 4%, to $2.6 billion.


•	Income tax expense decreased to $304 million compared to $386 million for the second 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 June 30, 2018 and December 31, 2017. In comparison to December 31, 2017:


•	Total loans increased $2.4 billion, or 1%, to $222.9 billion.


•	Total commercial lending grew $2.2 billion, or 1%.


•	Total consumer lending increased $.2 billion.


•	Total deposits declined $.2 billion to $264.9 billion.


•	Investment securities increased $4.0 billion, or 5%, to $80.1 billion.


•	Interest-earning deposits with banks decreased $6.6 billion, or 23%, to $22.0 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 strong.


•	At June 30, 2018 compared to December 31, 2017:


•	Nonperforming assets decreased $181 million, or 9%, to $1.9 billion.


•	Overall loan delinquencies decreased $159 million, or 10%.


•	Net charge-offs were $109 million in the second quarter of 2018 compared to $110 million for the second 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 9.5% at June 30, 2018, compared with 9.8% at December 31, 2017, calculated on the same basis.


•	In the second quarter of 2018, we returned $1.2 billion of capital to shareholders through repurchases of 5.7 million common shares for $.8 billion and dividends on common shares of $.4 billion.


•	In June 2018, we announced share repurchase programs of up to $2.0 billion for the four-quarter period beginning in the third quarter of 2018, including repurchases of up to $.3 billion related to stock issuances under employee benefit plans.


•	In July 2018, our board of directors raised the quarterly cash dividend on common stock to 95 cents per share, an increase of 20 cents per share, or 27%, effective with the August dividend.

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 growing 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 June, our baseline forecast is for one additional rate hike in September 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 third quarter of 2018 compared to the second 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 low 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 be stable.

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

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

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 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 on the upper end of mid-single digits, on a percentage basis;


•	Noninterest expense to increase on the lower end of mid-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 second quarter of 2018 was $1.4 billion, or $2.72 per diluted common share, an increase of 24% compared to $1.1 billion, or $2.10 per diluted common share, for the second quarter of 2017. For the first six months of 2018, net income was $2.6 billion, or $5.15 per diluted common share, an increase of 20% compared to $2.2 billion, or $4.05 per diluted common share, for the first six months of 2017.

Net income increased in both comparisons driven by an increase in revenue from higher net interest income and noninterest income and a lower effective tax rate, partially offset by an increase in noninterest expense.

Net Interest Income

Table 2: Summarized Average Balances and Net Interest Income (a)



	2018							2017
Three months ended June 30 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	$	77,479	2.91	%	$	564		$	75,352	2.71	%	$	511
Loans	222,684		4.23	%	2,367			216,373		3.82	%	2,077
Interest-earning deposits with banks	21,017		1.78	%	93			22,543		1.04	%	58
Other	6,905		4.98	%	87			9,748		3.38	%	82
Total interest-earning assets/interest income	$	328,085	3.78	%	3,111			$	324,016	3.35	%	2,728
Liabilities
Interest-bearing liabilities
Interest-bearing deposits	$	184,357	.57	%	261			$	179,012	.32	%	143
Borrowed funds	58,966		2.74	%	408			57,524		1.89	%	273
Total interest-bearing liabilities/interest expense	$	243,323	1.10	%	669			$	236,536	.70	%	416
Net interest margin/income (Non-GAAP)			2.96	%	2,442					2.84	%	2,312
Taxable-equivalent adjustments					(29		)					(54		)
Net interest income (GAAP)					$	2,413						$	2,258

(continued on following page)

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

(continued from previous page)



	2018							2017
Six months ended June 30 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	$	76,075	2.85	%	$	1,083		$	75,800	2.69	%	$	1,019
Loans	221,899		4.16	%	4,617			214,324		3.75	%	4,018
Interest-earning deposits with banks	23,329		1.64	%	191			23,363		.92	%	107
Other	7,402		4.52	%	167			9,076		3.46	%	156
Total interest-earning assets/interest income	$	328,705	3.68	%	6,058			$	322,563	3.29	%	5,300
Liabilities
Interest-bearing liabilities
Interest-bearing deposits	$	183,900	.52	%	474			$	177,947	.30	%	263
Borrowed funds	59,300		2.52	%	752			56,241		1.82	%	513
Total interest-bearing liabilities/interest expense	$	243,200	1.01	%	1,226			$	234,188	.66	%	776
Net interest margin/income (Non-GAAP)			2.94	%	4,832					2.81	%	4,524
Taxable-equivalent adjustments					(58		)					(106		)
Net interest income (GAAP)					$	4,774						$	4,418

(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 $155 million, or 7%, and $356 million, or 8%, for the second quarter and first six months of 2018, respectively, compared to the same periods in 2017. The increase in both comparisons was driven by higher loans and securities yields, as well as loan growth, partially offset by increases in borrowing and deposit costs. Net interest margin increased in both comparisons reflecting the impact of higher interest rates.

Average investment securities increased $2.1 billion, or 3%, in the quarterly comparison and $.3 billion in the year-to-date comparison. Net purchase activity of U.S. Treasury and government agencies and agency residential mortgage-backed securities was offset by declines in commercial mortgage-backed, asset-backed and other securities.

These comparisons included the impact of the January 1, 2018 reclassification of $.6 billion of available for sale securities 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 in our First Quarter 2018 Form 10-Q for additional detail on this adoption.

Average investment securities increased to 24% of average interest-earning assets for the second quarter of 2018 compared to 23% for the second quarter of 2017 and both year-to-date periods.

Average loans grew $6.3 billion, or 3%, and $7.6 billion, or 4%, in the quarterly and year-to-date comparisons, respectively. Loan growth was driven by increases in average commercial lending of $5.5 billion and $7.0 billion in the respective comparisons reflecting broad-based growth in the Corporate Banking, Business Credit and Equipment Finance businesses in our Corporate & Institutional Banking segment.

Average consumer lending increased $.8 billion and $.6 billion in the quarterly and year-to-date comparisons, respectively. Growth in residential real estate, automobile and credit card loans was mostly 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 68% of average interest-earning assets for the second quarter and first six months of 2018 compared to 67% and 66% for the same periods of 2017, respectively.

Average interest-bearing deposits grew $5.3 billion, or 3%, and $6.0 billion, or 3%, in the respective quarterly and year-to-date comparisons, reflecting overall deposit and customer growth. Average savings deposits increased $9.0 billion and $9.2 billion,

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

respectively, due in part to a shift to relationship-based savings products from money market deposits, which decreased $6.0 billion and $5.7 billion in the respective comparisons. Additionally, average interest-bearing demand deposits grew $2.9 billion in both comparisons. Average interest-bearing deposits remained stable at 76% of average interest-bearing liabilities in both the quarterly and year-to-date comparisons.

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

Average borrowed funds increased $1.4 billion, or 3%, and $3.1 billion, or 5%, in the quarterly and year-to-date comparisons, respectively, primarily due to higher bank notes and senior debt, partially offset by a decline in 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 June 30									Six months ended June 30
					Change									Change
Dollars in millions	2018		2017		$			%		2018		2017		$			%
Noninterest income
Asset management	$	456	$	398	$	58		15	%	$	911	$	801	$	110		14	%
Consumer services	381		360		21			6	%	738		692		46			7	%
Corporate services	487		466		21			5	%	916		880		36			4	%
Residential mortgage	84		104		(20		)	(19	)%	181		217		(36		)	(17	)%
Service charges on deposits	169		170		(1		)	(1	)%	336		331		5			2	%
Other	334		304		30			10	%	579		605		(26		)	(4	)%
Total noninterest income	$	1,911	$	1,802	$	109		6	%	$	3,661	$	3,526	$	135		4	%

Noninterest income as a percentage of total revenue was 44% for both the second quarters of 2018 and 2017. The comparable ratios for the year-to-date periods were 43% and 44%, respectively.

Growth in asset management revenue reflected higher earnings on our equity investment in BlackRock and stronger equity markets. PNC's discretionary client assets under management increased to $149 billion at June 30, 2018 compared with $141 billion at June 30, 2017.

Increases in consumer services revenue in the quarterly and year-to-date comparisons were primarily due to growth in debit and credit card fees totaling $12 million and $29 million, respectively, reflecting continued momentum in customer activity in both transaction trends and customer growth. Brokerage fees increased in both comparisons by $10 million and $20 million, respectively, as a result of growth in brokerage assets under management.

Higher corporate services revenue in both comparisons was primarily driven by growth in treasury management fees of $19 million and $34 million and merger and acquisition advisory fees of $11 million and $15 million, respectively. Additionally, the year-to-date comparison included a $12 million increase in operating lease income related to the commercial and vendor finance business acquired in the second quarter of 2017 and an $11 million lower benefit from commercial mortgage servicing rights valuation, net of economic hedge.

Residential mortgage revenue decreased due to loan sales revenue declines of $16 million and $28 million in the quarterly and year-to-date comparisons, as well as lower servicing revenue. The declines in loan sales revenue reflected increased competition in the marketplace and a shift in mix away from refinancing to purchases, which drove lower gain on sales margins.

Other noninterest income increased in the quarterly comparison reflecting a benefit from positive derivative fair value adjustments related to swap agreements with purchasers of Visa Class B common shares of $27 million in the second quarter of 2018, primarily due to developments relevant to the litigation, partially offset by a $16 million decline in net securities gains.

Other noninterest income decreased in the year-to-date comparison largely attributable to an $81 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 decline was partially offset by a net $45 million benefit from derivative fair value adjustments related to Visa Class B common shares.

In the first quarter of 2018, and in connection with the commercial and vendor finance business we acquired in the second quarter of 2017, we reclassified operating lease income to corporate services noninterest income from other noninterest income on the

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

Consolidated Income Statement, including operating lease income of $31 million and $53 million for the three and six months ended June 30, 2017, respectively. Operating lease income was $31 million and $65 million for the three and six months ended June 30, 2018, respectively.

Provision For Credit Losses

The provision for credit losses decreased $18 million to $80 million in the second quarter of 2018 compared to the second quarter of 2017 and decreased $14 million to $172 million for the first six months of 2018 compared to the same period in 2017 reflecting a lower provision for commercial loans, partially offset by a higher provision for consumer loans.

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 June 30								Six months ended June 30
					Change								Change
Dollars in millions	2018		2017		$		%		2018		2017		$			%
Noninterest expense
Personnel	$	1,356	$	1,276	$	80	6	%	$	2,710	$	2,533	$	177		7	%
Occupancy	203		202		1		—		421		424		(3		)	(1	)%
Equipment	281		281		—		—		554		532		22			4	%
Marketing	75		67		8		12	%	130		122		8			7	%
Other	669		653		16		2	%	1,296		1,270		26			2	%
Total noninterest expense	$	2,584	$	2,479	$	105	4	%	$	5,111	$	4,881	$	230		5	%

Noninterest expense increased in both comparisons attributable to our ongoing business investments, including technology and staffing. The increases were primarily in higher personnel expense and were related to new initiatives, our announced increase in the minimum hourly pay rate for eligible employees and enhanced employee benefits. In addition, the year-to-date comparison reflects operating expense related to the second quarter 2017 acquisition of a commercial and vendor finance business.

PNC continued to focus on disciplined expense management. As of June 30, 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 fund a portion of our strategic investments.

Effective Income Tax Rate

The effective income tax rate was 18.3% in the second quarter of 2018 compared to 26.0% in the second quarter of 2017 and 17.7% in the first six months of 2018 compared to 24.5% in the same period of 2017. Both comparisons 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.

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

CONSOLIDATED BALANCE SHEET REVIEW

Table 5: Summarized Balance Sheet Data



	June 30			December 31			Change
Dollars in millions	2018			2017			$			%
Assets
Interest-earning deposits with banks	$	21,972		$	28,595		$	(6,623	)	(23	)%
Loans held for sale	1,325			2,655			(1,330		)	(50	)%
Investment securities	80,125			76,131			3,994			5	%
Loans	222,855			220,458			2,397			1	%
Allowance for loan and lease losses	(2,581		)	(2,611		)	30			1	%
Mortgage servicing rights	2,045			1,832			213			12	%
Goodwill	9,218			9,173			45			—
Other, net	45,752			44,535			1,217			3	%
Total assets	$	380,711		$	380,768		$	(57	)	—
Liabilities
Deposits	$	264,885		$	265,053		$	(168	)	—
Borrowed funds	59,222			59,088			134			—
Other	9,629			9,042			587			6	%
Total liabilities	333,736			333,183			553			—
Equity
Total shareholders’ equity	46,904			47,513			(609		)	(1	)%
Noncontrolling interests	71			72			(1		)	(1	)%
Total equity	46,975			47,585			(610		)	(1	)%
Total liabilities and equity	$	380,711		$	380,768		$	(57	)	—

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 June 30, 2018 and December 31, 2017.


•	Total assets were stable as higher investment securities and loan growth were funded by lower interest-earning deposits with banks;


•	Total liabilities increased slightly;


•	Total equity decreased slightly as share repurchases and lower accumulated other comprehensive income (AOCI) related to net unrealized securities losses were mostly 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



	June 30		December 31		Change
Dollars in millions	2018		2017		$			%
Commercial lending
Commercial	$	113,367	$	110,527	$	2,840		3	%
Commercial real estate	28,946		28,978		(32		)	—
Equipment lease financing	7,323		7,934		(611		)	(8	)%
Total commercial lending	149,636		147,439		2,197			1	%
Consumer lending
Home equity	27,219		28,364		(1,145		)	(4	)%
Residential real estate	17,805		17,212		593			3	%
Credit card	5,830		5,699		131			2	%
Other consumer
Automobile	13,892		12,880		1,012			8	%
Education	4,057		4,454		(397		)	(9	)%
Other	4,416		4,410		6			—
Total consumer lending	73,219		73,019		200			—
Total loans	$	222,855	$	220,458	$	2,397		1	%

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

Loan growth was driven by commercial lending as well as an increase in consumer lending balances.

Commercial loans increased primarily driven by growth from our Corporate Banking and Business Credit businesses within our Corporate & Institutional Banking segment. In Corporate Banking, commercial loans increased $1.7 billion, or 3%, largely due to strong growth in asset-backed finance securitizations as well as middle market and large corporate lending. In Business Credit, higher utilization and new production resulted in an increase in commercial loans of $1.0 billion, or 6%.

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 increased slightly as growth in automobile and residential real estate loans were mostly offset by lower home equity and education loans.

The growth in automobile loans was due in part to continued expansion in our Southeast markets. Residential real estate loans increased as a result of 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 amount limits.

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.

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, Note 3 Asset Quality and Note 4 Allowance for Loan and Lease Losses in our Notes To Consolidated Financial Statements included in this Report, and Note 1 Accounting Policies in our 2017 Form 10-K for additional information regarding our loan portfolio.

Investment Securities

Table 7: Investment Securities



	June 30, 2018				December 31, 2017				Ratings (a) as of June 30, 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	$	17,056	$	16,944	$	15,173	$	15,286	100	%
Agency residential mortgage-backed	44,337		43,321		40,037		39,847		100	%
Non-agency residential mortgage-backed	2,333		2,655		2,610		2,932		11	%			4	%	66	%	19	%
Agency commercial mortgage-backed	2,131		2,049		2,367		2,315		100	%
Non-agency commercial mortgage-backed (b)	3,101		3,080		3,141		3,161		84	%	6	%					10	%
Asset-backed (c)	5,601		5,653		5,531		5,598		85	%	3	%	6	%	6	%
Other debt (d)	5,939		6,026		6,279		6,459		74	%	16	%	7	%			3	%
Other (e)					587		585
Total investment securities (f)	$	80,498	$	79,728	$	75,725	$	76,183	94	%	2	%	1	%	2	%	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 our First Quarter 2018 Form 10-Q 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.

Investment securities increased $4.0 billion to $80.1 billion at June 30, 2018 compared to December 31, 2017, driven by net purchase activity of agency residential mortgage-backed securities of $3.8 billion and U.S. Treasury and government agencies securities of $1.7 billion. These increases were partially offset by 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 the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our First Quarter 2018 Form 10-Q for additional detail on the adoption of this ASU.

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

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 the Liquidity Coverage Ratio (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 3.6 years at June 30, 2018. We estimate that at June 30, 2018 the effective duration of investment securities was 3.7 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 June 30, 2018 compared to 5.2 years at December 31, 2017.

Table 8: Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities



June 30, 2018	Years
Agency residential mortgage-backed	6.7
Non-agency residential mortgage-backed	6.4
Agency commercial mortgage-backed	3.6
Non-agency commercial mortgage-backed	3.1
Asset-backed	2.3

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.

Funding Sources

Table 9: Details of Funding Sources



	June 30		December 31		Change
Dollars in millions	2018		2017		$			%
Deposits
Noninterest-bearing	$	79,047	$	79,864	$	(817	)	(1	)%
Interest-bearing
Money market	54,771		59,735		(4,964		)	(8	)%
Demand	61,853		61,213		640			1	%
Savings	51,974		46,980		4,994			11	%
Time deposits	17,240		17,261		(21		)	—
Total interest-bearing deposits	185,838		185,189		649			—
Total deposits	264,885		265,053		(168		)	—
Borrowed funds
Federal Home Loan Bank (FHLB) borrowings	22,036		21,037		999			5	%
Bank notes and senior debt	27,596		28,062		(466		)	(2	)%
Subordinated debt	4,781		5,200		(419		)	(8	)%
Other	4,809		4,789		20			—
Total borrowed funds	59,222		59,088		134			—
Total funding sources	$	324,107	$	324,141	$	(34	)	—

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

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

Noninterest-bearing deposits decreased primarily 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 commercial demand deposit balances.

Borrowed funds increased slightly in the comparison as issuances of FHLB borrowings were mostly offset by declines in bank notes and senior debt and subordinated debt. 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 $46.9 billion at June 30, 2018, a decrease of $.6 billion compared to December 31, 2017. The decrease resulted from common share repurchases of $1.5 billion, lower AOCI related to net unrealized securities losses of $.8 billion and common and preferred dividends of $.8 billion, partially offset by net income of $2.6 billion.

Common shares outstanding were 465 million and 473 million at June 30, 2018 and December 31, 2017, respectively, as repurchases of 10.5 million shares during the period were partially offset by share issuances from treasury stock related to warrants exercised and stock-based compensation activity.

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.

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

Retail Banking

(Unaudited)

Table 10: Retail Banking Table



Six months ended June 30							Change
Dollars in millions, except as noted	2018			2017			$			%
Income Statement
Net interest income	$	2,495		$	2,260		$	235		10	%
Noninterest income	1,313			1,248			65			5	%
Total revenue	3,808			3,508			300			9	%
Provision for credit losses	141			121			20			17	%
Noninterest expense	2,845			2,685			160			6	%
Pretax earnings	822			702			120			17	%
Income taxes	196			259			(63		)	(24	)%
Earnings	$	626		$	443		$	183		41	%
Average Balance Sheet
Loans held for sale	$	640		$	786		$	(146	)	(19	)%
Loans
Consumer
Home equity	$	24,391		$	25,506		$	(1,115	)	(4	)%
Automobile	13,375			12,185			1,190			10	%
Education	4,294			5,021			(727		)	(14	)%
Credit cards	5,674			5,129			545			11	%
Other	1,768			1,757			11			1	%
Total consumer	49,502			49,598			(96		)	—
Commercial and commercial real estate	10,493			10,965			(472		)	(4	)%
Residential mortgage	13,570			11,804			1,766			15	%
Total loans	$	73,565		$	72,367		$	1,198		2	%
Total assets	$	88,879		$	88,559		$	320		—
Deposits
Noninterest-bearing demand	$	30,248		$	29,285		$	963		3	%
Interest-bearing demand	42,373			41,059			1,314			3	%
Money market	31,560			38,416			(6,856		)	(18	)%
Savings	45,139			36,851			8,288			22	%
Certificates of deposit	11,948			13,518			(1,570		)	(12	)%
Total deposits	$	161,268		$	159,129		$	2,139		1	%
Performance Ratios
Return on average assets	1.42		%	1.01		%
Noninterest income to total revenue	34		%	36		%
Efficiency	75		%	77		%

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

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Six months ended June 30					Change
Dollars in millions, except as noted	2018		2017		$			%
Supplemental Noninterest Income Information
Consumer services	$	553	$	527	$	26		5	%
Brokerage	$	174	$	154	$	20		13	%
Residential mortgage	$	181	$	217	$	(36	)	(17	)%
Service charges on deposits	$	324	$	317	$	7		2	%
Residential Mortgage Information
Residential mortgage servicing statistics (in billions, except as noted) (a)
Serviced portfolio balance (b)	$	124	$	131	$	(7	)	(5	)%
Serviced portfolio acquisitions	$	4	$	16	$	(12	)	(75	)%
MSR asset value (b)	$	1.3	$	1.2	$	.1		8	%
MSR capitalization value (in basis points) (b)	104		95		9			9	%
Servicing income: (in millions)
Servicing fees, net (c)	$	90	$	96	$	(6	)	(6	)%
Mortgage servicing rights valuation, net of economic hedge