Edgar Filing: PNC FINANCIAL SERVICES GROUP, INC.

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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 September 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 every Interactive Data File required to be submitted 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 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 October 19, 2018, there were 461,424,528 shares of the registrant’s common stock ($5 par value) outstanding.

THE PNC FINANCIAL SERVICES GROUP, INC.

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



	Pages
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Income Statement	40
Consolidated Statement of Comprehensive Income	41
Consolidated Balance Sheet	42
Consolidated Statement of Cash Flows	43
Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies	45
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities	48
Note 3 Asset Quality	50
Note 4 Allowance for Loan and Lease Losses	55
Note 5 Investment Securities	56
Note 6 Fair Value	59
Note 7 Goodwill and Mortgage Servicing Rights	68
Note 8 Employee Benefit Plans	70
Note 9 Financial Derivatives	71
Note 10 Earnings Per Share	76
Note 11 Total Equity and Other Comprehensive Income	77
Note 12 Legal Proceedings	79
Note 13 Commitments	81
Note 14 Segment Reporting	82
Note 15 Fee-based Revenue from Contracts with Customers	85
Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis	87
Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP)	89
Transitional Basel III and Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios (Non-GAAP)	89
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	8
Business Segments Review	12
Risk Management	19
Recent Regulatory Developments	35
Critical Accounting Estimates and Judgments	36
Off-Balance Sheet Arrangements and Variable Interest Entities	38
Internal Controls and Disclosure Controls and Procedures	38
Glossary of Terms	38
Cautionary Statement Regarding Forward-Looking Information	38
Item 3. Quantitative and Qualitative Disclosures about Market Risk.	19-35, 59-68 and 71-76
Item 4. Controls and Procedures.	38
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.	89
Item 1A. Risk Factors.	89
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	90
Item 6. Exhibits.	90
Exhibit Index	90
Corporate Information	90
Signature	92

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Third 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	8
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	12
11	Corporate & Institutional Banking Table	15
12	Asset Management Group Table	18
13	BlackRock Table	19
14	Details of Loans	20
15	Commercial Loans by Industry	20
16	Commercial Real Estate Loans by Geography	21
17	Home Equity Loans by Geography and by Lien Priority	22
18	Residential Real Estate Loans by Geography	22
19	Nonperforming Assets by Type	23
20	Change in Nonperforming Assets	24
21	Accruing Loans Past Due	24
22	Consumer Real Estate Related Loan Modifications	25
23	Summary of Troubled Debt Restructurings	25
24	Allowance for Loan and Lease Losses	27
25	Loan Charge-Offs and Recoveries	27
26	Senior and Subordinated Debt	28
27	PNC Bank Notes Issued	29
28	Credit Ratings for PNC and PNC Bank	30
29	Basel III Capital	31
30	Interest Sensitivity Analysis	33
31	Net Interest Income Sensitivity to Alternative Rate Scenarios	33
32	Alternate Interest Rate Scenarios: One Year Forward	34
33	Equity Investments Summary	34
34	Fair Value Measurements – Summary	36

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Third 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	48
36	Principal Balance, Delinquent Loans and Net Charge-offs Related to Serviced Loans For Others	49
37	Non-Consolidated VIEs	49
38	Analysis of Loan Portfolio	50
39	Nonperforming Assets	51
40	Commercial Lending Asset Quality Indicators	52
41	Asset Quality Indicators for Home Equity and Residential Real Estate Loans – Excluding Purchased Impaired and Government Insured or Guaranteed Loans	52
42	Credit Card and Other Consumer Loan Classes Asset Quality Indicators	53
43	Financial Impact and TDRs by Concession Type	54
44	Impaired Loans	55
45	Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data	55
46	Investment Securities Summary	56
47	Gross Unrealized Loss and Fair Value of Debt Securities	57
48	Gains (Losses) on Sales of Securities Available for Sale	58
49	Contractual Maturity of Debt Securities	58
50	Fair Value of Securities Pledged and Accepted as Collateral	58
51	Fair Value Measurements – Recurring Basis Summary	59
52	Reconciliation of Level 3 Assets and Liabilities	60
53	Fair Value Measurements – Recurring Quantitative Information	64
54	Fair Value Measurements – Nonrecurring	65
55	Fair Value Measurements – Nonrecurring Quantitative Information	66
56	Fair Value Option – Fair Value and Principal Balances	66
57	Fair Value Option – Changes in Fair Value	67
58	Additional Fair Value Information Related to Other Financial Instruments	67
59	Mortgage Servicing Rights	69
60	Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions	69
61	Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions	70
62	Components of Net Periodic Benefit Cost	70
63	Total Gross Derivatives	71
64	Gains (Losses) Recognized on Fair Value and Cash Flow Hedges in the Consolidated Income Statement	73
65	Hedged Items - Fair Value Hedges	73
66	Gains (Losses) on Derivatives Not Designated for Hedging under GAAP	74
67	Derivative Assets and Liabilities Offsetting	75
68	Basic and Diluted Earnings Per Common Share	76
69	Rollforward of Total Equity	77
70	Other Comprehensive Income (Loss)	78
71	Accumulated Other Comprehensive Income (Loss) Components	79
72	Commitments to Extend Credit and Other Commitments	81
73	Results of Businesses	84
74	Retail Banking Noninterest Income Disaggregation	85
75	Corporate & Institutional Banking Noninterest Income Disaggregation	86
76	Asset Management Group Noninterest Income Disaggregation	86

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 September 30						Nine months ended September 30
	2018			2017			2018			2017
Financial Results (a)
Revenue
Net interest income	$	2,466		$	2,345		$	7,240		$	6,763
Noninterest income	1,891			1,780			5,552			5,306
Total revenue	4,357			4,125			12,792			12,069
Provision for credit losses	88			130			260			316
Noninterest expense	2,608			2,456			7,719			7,337
Income before income taxes and noncontrolling interests	$	1,661		$	1,539		$	4,813		$	4,416
Net income	$	1,400		$	1,126		$	3,995		$	3,297
Less:
Net income attributable to noncontrolling interests	11			12			31			39
Preferred stock dividends	63			63			181			181
Preferred stock discount accretion and redemptions	1			1			3			24
Net income attributable to common shareholders	1,325			1,050			3,780			3,053
Less:
Dividends and undistributed earnings allocated to participating securities	6			5			16			15
Impact of BlackRock earnings per share dilution	2			3			7			8
Net income attributable to diluted common shares	$	1,317		$	1,042		$	3,757		$	3,030
Diluted earnings per common share	$	2.82		$	2.16		$	7.96		$	6.21
Cash dividends declared per common share	$	.95		$	.75		$	2.45		$	1.85
Effective tax rate (b)	15.7		%	26.8		%	17.0		%	25.3		%
Performance Ratios
Net interest margin (c)	2.99		%	2.91		%	2.95		%	2.84		%
Noninterest income to total revenue	43		%	43		%	43		%	44		%
Efficiency	60		%	60		%	60		%	61		%
Return on:
Average common shareholders’ equity	12.32		%	9.89		%	11.83		%	9.76		%
Average assets	1.47		%	1.20		%	1.42		%	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 interest-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	September 30 2018			December 31 2017			September 30 2017
Balance Sheet Data (dollars in millions, except per share data)
Assets	$	380,080		$	380,768		$	375,191
Loans	$	223,053		$	220,458		$	221,109
Allowance for loan and lease losses	$	2,584		$	2,611		$	2,605
Interest-earning deposits with banks (b)	$	19,800		$	28,595		$	24,713
Investment securities	$	80,804		$	76,131		$	74,994
Loans held for sale	$	1,108		$	2,655		$	1,764
Equity investments (c)	$	12,446		$	11,392		$	11,009
Mortgage servicing rights	$	2,136		$	1,832		$	1,854
Goodwill	$	9,218		$	9,173		$	9,163
Other assets	$	28,851		$	27,894		$	28,454
Noninterest-bearing deposits	$	74,736		$	79,864		$	79,967
Interest-bearing deposits	$	190,148		$	185,189		$	180,768
Total deposits	$	264,884		$	265,053		$	260,735
Borrowed funds	$	57,955		$	59,088		$	57,564
Total shareholders’ equity	$	47,058		$	47,513		$	46,388
Common shareholders’ equity	$	43,076		$	43,530		$	42,406
Accumulated other comprehensive income (loss)	$	(1,260	)	$	(148	)	$	(22	)
Book value per common share	$	93.22		$	91.94		$	89.05
Period-end common shares outstanding (in millions)	462			473			476
Loans to deposits	84		%	83		%	85		%
Client Assets (in billions)
Discretionary client assets under management	$	159		$	151		$	146
Nondiscretionary client assets under administration	134			131			129
Total client assets under administration	293			282			275
Brokerage account client assets	51			49			48
Total client assets	$	344		$	331		$	323
Capital Ratios
Basel III (d) (e) (f)
Common equity Tier 1	9.3		%	N/A			N/A
Tier 1 risk-based	10.5		%	N/A			N/A
Total risk-based capital	12.7		%	N/A			N/A
Leverage	9.2		%	N/A			N/A
Supplementary leverage	7.7		%	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 risk-based capital	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	.76		%	.85		%	.85		%
Nonperforming assets to total loans, OREO, foreclosed and other assets	.82		%	.92		%	.93		%
Nonperforming assets to total assets	.48		%	.53		%	.55		%
Net charge-offs to average loans (for the three months ended) (annualized)	.16		%	.22		%	.19		%
Allowance for loan and lease losses to total loans	1.16		%	1.18		%	1.18		%
Allowance for loan and lease losses to total nonperforming loans	153		%	140		%	139		%
Accruing loans past due 90 days or more (in millions)	$	619		$	737		$	678


(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 $19.6 billion, $28.3 billion and $24.3 billion as of September 30, 2018, December 31, 2017 and September 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) table in the Statistical Information (Unaudited) section in Item 1 of this Report for a reconciliation of the September 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, the Basel III framework, and other regulatory expectations, and return excess capital to shareholders. 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 third quarter of 2018 increased 24% to $1.4 billion, or $2.82 per diluted common share, compared to $1.1 billion, or $2.16 per diluted common share, for the third quarter of 2017.


•	Total revenue increased $232 million, or 6%, to $4.4 billion.


•	Net interest income increased $121 million, or 5%, to $2.5 billion.


•	Net interest margin increased to 2.99% compared to 2.91% for the third quarter of 2017.


•	Noninterest income increased $111 million, or 6%, to $1.9 billion.


•	Provision for credit losses was $88 million compared to $130 million for the third quarter of 2017.


•	Noninterest expense increased $152 million, or 6%, to $2.6 billion.


•	Income tax expense decreased to $261 million compared to $413 million for the third quarter of 2017, as the effective tax rate was 15.7% in the third quarter of 2018 compared with 26.8% in third quarter 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 September 30, 2018 and December 31, 2017. In comparison to December 31, 2017:


•	Total assets declined $.7 billion to $380.1 billion.


•	Total loans increased $2.6 billion, or 1%, to $223.1 billion.


•	Total commercial lending grew $2.0 billion, or 1%.


•	Total consumer lending increased $.6 billion, or 1%.


•	Investment securities increased $4.7 billion, or 6%, to $80.8 billion.


•	Interest-earning deposits with banks decreased $8.8 billion, or 31%, to $19.8 billion.


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

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

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

Credit Quality Highlights

Overall credit quality remained strong.


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


•	Nonperforming assets decreased $210 million, or 10%, to $1.8 billion.


•	Overall loan delinquencies decreased $92 million, or 6%, to $1.4 billion.


•	Net charge-offs were $91 million in the third quarter of 2018 compared to $106 million for the third 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 9.3% at September 30, 2018, compared with 9.8% at December 31, 2017, calculated on the same basis.


•	In the third quarter of 2018, we returned $.9 billion of capital to shareholders through repurchases of 3.3 million common shares for $.5 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 Board of Governors of the Federal Reserve System (Federal Reserve) as part of the Comprehensive Capital Analysis and Review (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 view that U.S. economic growth has accelerated over the past two years and will remain above its long-run trend for the remainder of 2018 and into 2019, 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 for the remainder of 2018 and into 2019. Further gradual improvement in the labor market this year and next, including job gains and rising wages, is another positive for consumer spending. Trade restrictions are a growing downside risk to the forecast. Inflation has accelerated to close to the Federal Open Market Committee’s 2% objective. Short-term interest rates and bond yields are expected to rise throughout the remainder of 2018 and into 2019; after the Federal Open Market Committee raised the federal funds rate in September, our baseline forecast is for one additional rate hike in December 2018, pushing the rate to a range of 2.25% to 2.50% by the end of the year. PNC expects two 25 basis point increases in the fed funds rate in 2019 (in June and September); this would take the fed funds rate to a range of 2.75% to 3.00% by the end of next year.

For the fourth quarter of 2018 compared to the third quarter of 2018, we expect:


•	Loans to be up modestly;


•	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 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.

We expect our full year 2018 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.

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

CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for the third quarter of 2018 was $1.4 billion, or $2.82 per diluted common share, an increase of 24% compared to $1.1 billion, or $2.16 per diluted common share, for the third quarter of 2017. For the first nine months of 2018, net income was $4.0 billion, or $7.96 per diluted common share, an increase of 21% compared to $3.3 billion, or $6.21 per diluted common share, for the first nine 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 September 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	$	80,766	2.92	%	$	591		$	74,406	2.77	%	$	516
Loans	223,342		4.36	%	2,474			219,218		3.92	%	2,179
Interest-earning deposits with banks	19,151		1.97	%	95			23,859		1.26	%	75
Other	7,114		5.19	%	92			9,024		3.47	%	80
Total interest-earning assets/interest income	$	330,373	3.89	%	3,252			$	326,507	3.45	%	2,850
Liabilities
Interest-bearing liabilities
Interest-bearing deposits	$	186,320	.71	%	336			$	180,508	.37	%	170
Borrowed funds	59,838		2.76	%	421			57,016		1.93	%	280
Total interest-bearing liabilities/interest expense	$	246,158	1.21	%	757			$	237,524	.75	%	450
Net interest margin/income (Non-GAAP)			2.99	%	2,495					2.91	%	2,400
Taxable-equivalent adjustments					(29		)					(55		)
Net interest income (GAAP)					$	2,466						$	2,345



	2018							2017
Nine months ended September 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	$	77,656	2.87	%	$	1,674		$	75,330	2.71	%	$	1,535
Loans	222,385		4.23	%	7,091			215,974		3.81	%	6,197
Interest-earning deposits with banks	21,921		1.74	%	286			23,530		1.03	%	182
Other	7,305		4.74	%	259			9,058		3.46	%	236
Total interest-earning assets/interest income	$	329,267	3.75	%	9,310			$	323,892	3.34	%	8,150
Liabilities
Interest-bearing liabilities
Interest-bearing deposits	$	184,716	.59	%	810			$	178,810	.32	%	433
Borrowed funds	59,481		2.60	%	1,173			56,502		1.86	%	793
Total interest-bearing liabilities/interest expense	$	244,197	1.08	%	1,983			$	235,312	.69	%	1,226
Net interest margin/income (Non-GAAP)			2.95	%	7,327					2.84	%	6,924
Taxable-equivalent adjustments					(87		)					(161		)
Net interest income (GAAP)					$	7,240						$	6,763

(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

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

Information (Unaudited) – Average Consolidated Balance Sheet And Net Interest Analysis section of this Report for additional information.

Net interest income increased by $121 million, or 5%, and $477 million, or 7%, for the third quarter and first nine months of 2018, respectively, compared to the same periods in 2017. The increase in both comparisons was driven by higher loan and securities balances and yields partially offset by increases in deposit and borrowing costs. Net interest margin increased in both comparisons reflecting the impact of higher interest rates.

Average investment securities increased $6.4 billion, or 9%, in the quarterly comparison and $2.3 billion, or 3%, in the year-to-date comparison. Net purchase activity of agency residential mortgage-backed and U.S. Treasury and government agencies securities was partially offset by declines in commercial mortgage-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 third quarter and first nine months of 2018 compared to 23% for the respective 2017 periods.

Average loans grew $4.1 billion, or 2%, and $6.4 billion, or 3%, in the quarterly and year-to-date comparisons, respectively. Loan growth was driven by increases in average commercial lending of $3.1 billion and $5.7 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 $1.0 billion and $.7 billion in the quarterly and year-to-date comparisons, respectively. Growth in residential real estate, automobile and credit card loans was partially 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 third quarter and first nine months of 2018 compared to 67% for the same periods of 2017.

Average interest-bearing deposits grew $5.8 billion, or 3%, and $5.9 billion, or 3%, in the respective quarterly and year-to-date comparisons, reflecting overall deposit and customer growth. Additionally, the increases reflect a shift from noninterest-bearing deposits, which declined $2.8 billion to $76.2 billion and $1.5 billion to $76.7 billion in the respective comparisons, to interest-bearing deposits as deposit rates have risen.

Average savings deposits increased $9.1 billion in both comparisons due in part to a shift to relationship-based savings products from money market deposits, which decreased $6.8 billion and $6.1 billion in the quarterly and year-to-date comparisons, respectively. Additionally, average interest-bearing demand deposits grew $3.4 billion in the quarterly comparison and $3.0 billion in the year-to-date comparison. 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 $2.8 billion, or 5%, and $3.0 billion, or 5%, in the quarterly and year-to-date comparisons, respectively, primarily due to higher bank notes and senior debt and Federal Home Loan Bank borrowings, 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.

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

Noninterest Income

Table 3: Noninterest Income



	Three months ended September 30									Nine months ended September 30
					Change									Change
Dollars in millions	2018		2017		$			%		2018		2017		$			%
Noninterest income
Asset management	$	486	$	421	$	65		15	%	$	1,397	$	1,222	$	175		14	%
Consumer services	377		357		20			6	%	1,115		1,049		66			6	%
Corporate services	465		404		61			15	%	1,381		1,284		97			8	%
Residential mortgage	76		104		(28		)	(27	)%	257		321		(64		)	(20	)%
Service charges on deposits	186		181		5			3	%	522		512		10			2	%
Other	301		313		(12		)	(4	)%	880		918		(38		)	(4	)%
Total noninterest income	$	1,891	$	1,780	$	111		6	%	$	5,552	$	5,306	$	246		5	%

Noninterest income as a percentage of total revenue was 43% for both of the third quarters in 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 from our equity investment in BlackRock which benefited from the lower federal statutory income tax rate as well as stronger equity markets. PNC's discretionary client assets under management increased to $159 billion at September 30, 2018 compared with $146 billion at September 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 $42 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 $30 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 merger and acquisition advisory fees of $35 million and $50 million and treasury management fees of $20 million and $54 million, in the respective comparisons. 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 a $15 million lower benefit from commercial mortgage servicing rights valuation, net of economic hedge.

Residential mortgage revenue decreased due to loan sales revenue declines of $18 million and $46 million in the quarterly and year-to-date comparisons, as well as lower servicing revenue and a lower benefit from mortgage servicing rights valuation, net of economic hedge. The declines in loan sales revenue reflected lower gain on sales margins as a result of increased competition in the marketplace and a shift in mix away from refinancing to purchases.

The decline in other noninterest income in the year-to-date comparison was largely attributable to a $35 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, and net securities losses in the 2018 period compared with gains in the 2017 period, partially offset by a net $25 million benefit in the comparison 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 Consolidated Income Statement, including operating lease income of $34 million and $86 million for the three and nine months ended September 30, 2017, respectively. Operating lease income was $32 million and $98 million for the three and nine months ended September 30, 2018, respectively.

Provision For Credit Losses

The provision for credit losses decreased $42 million to $88 million in the third quarter of 2018 compared to the third quarter of 2017 and decreased $56 million to $260 million for the first nine 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.

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

Noninterest Expense

Table 4: Noninterest Expense



	Three months ended September 30									Nine months ended September 30
					Change									Change
Dollars in millions	2018		2017		$			%		2018		2017		$			%
Noninterest expense
Personnel	$	1,413	$	1,286	$	127		10	%	$	4,123	$	3,819	$	304		8	%
Occupancy	195		204		(9		)	(4	)%	616		628		(12		)	(2	)%
Equipment	264		259		5			2	%	818		791		27			3	%
Marketing	71		62		9			15	%	201		184		17			9	%
Other	665		645		20			3	%	1,961		1,915		46			2	%
Total noninterest expense	$	2,608	$	2,456	$	152		6	%	$	7,719	$	7,337	$	382		5	%

Noninterest expense increased in both comparisons attributable to our ongoing business investments, including technology and staffing. The increases in personnel expense included higher variable compensation related to revenue growth, our announced increase in the minimum hourly pay rate for eligible employees and enhanced employee benefits. Marketing expense was higher in support of business growth. 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 September 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 continue to help fund a portion of our strategic investments.

Effective Income Tax Rate

The effective income tax rate was 15.7% in the third quarter of 2018 compared to 26.8% in the third quarter of 2017 and 17.0% in the first nine months of 2018 compared to 25.3% 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.

CONSOLIDATED BALANCE SHEET REVIEW

Table 5: Summarized Balance Sheet Data



	September 30			December 31			Change
Dollars in millions	2018			2017			$			%
Assets
Interest-earning deposits with banks	$	19,800		$	28,595		$	(8,795	)	(31	)%
Loans held for sale	1,108			2,655			(1,547		)	(58	)%
Investment securities	80,804			76,131			4,673			6	%
Loans	223,053			220,458			2,595			1	%
Allowance for loan and lease losses	(2,584		)	(2,611		)	27			1	%
Mortgage servicing rights	2,136			1,832			304			17	%
Goodwill	9,218			9,173			45			—
Other, net	46,545			44,535			2,010			5	%
Total assets	$	380,080		$	380,768		$	(688	)	—
Liabilities
Deposits	$	264,884		$	265,053		$	(169	)	—
Borrowed funds	57,955			59,088			(1,133		)	(2	)%
Other	10,139			9,042			1,097			12	%
Total liabilities	332,978			333,183			(205		)	—
Equity
Total shareholders’ equity	47,058			47,513			(455		)	(1	)%
Noncontrolling interests	44			72			(28		)	(39	)%
Total equity	47,102			47,585			(483		)	(1	)%
Total liabilities and equity	$	380,080		$	380,768		$	(688	)	—

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

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

Our balance sheet was strong and well positioned at both September 30, 2018 and December 31, 2017.


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


•	Total liabilities were stable, as lower borrowed funds were mostly offset by an increase in other liabilities;


•	Total equity decreased slightly as higher retained earnings driven by net income was more than offset by share repurchases and lower accumulated other comprehensive income (AOCI) related to net unrealized securities losses.

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 the Risk Management section 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



	September 30		December 31		Change
Dollars in millions	2018		2017		$			%
Commercial lending
Commercial	$	113,671	$	110,527	$	3,144		3	%
Commercial real estate	28,563		28,978		(415		)	(1	)%
Equipment lease financing	7,214		7,934		(720		)	(9	)%
Total commercial lending	149,448		147,439		2,009			1	%
Consumer lending
Home equity	26,628		28,364		(1,736		)	(6	)%
Residential real estate	18,203		17,212		991			6	%
Credit card	5,979		5,699		280			5	%
Other consumer
Automobile	14,309		12,880		1,429			11	%
Education	3,954		4,454		(500		)	(11	)%
Other	4,532		4,410		122			3	%
Total consumer lending	73,605		73,019		586			1	%
Total loans	$	223,053	$	220,458	$	2,595		1	%

Commercial loans increased primarily driven by growth from our Business Credit and Corporate Banking businesses within our Corporate & Institutional Banking segment. In Business Credit, higher utilization and new production resulted in an increase in commercial loans of $1.4 billion, or 8%. In Corporate Banking, commercial loans increased $.7 billion, or 1%, largely due to strong growth in asset-backed finance securitizations, partially offset by lower public finance lending. In the third quarter of 2018, commercial loan growth was moderated by payoffs and paydowns and lower line of credit utilization.

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

The growth in automobile loans was due in part to continued expansion in the Southeast and new markets. Residential real estate loans increased as a result of originations of loans that are nonconforming, 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.

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.

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

Investment Securities

Table 7: Investment Securities



	September 30, 2018				December 31, 2017				Ratings (a) as of September 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	$	17,808	$	17,586	$	15,173	$	15,286	100	%
Agency residential mortgage-backed	44,656		43,297		40,037		39,847		100	%
Non-agency residential mortgage-backed	2,189		2,507		2,610		2,932		12	%			3	%	65	%	20	%
Agency commercial mortgage-backed	2,214		2,128		2,367		2,315		100	%
Non-agency commercial mortgage-backed (b)	3,063		3,040		3,141		3,161		86	%	6	%					8	%
Asset-backed (c)	5,732		5,779		5,531		5,598		86	%	3	%	4	%	7	%
Other debt (d)	5,838		5,895		6,279		6,459		74	%	16	%	7	%			3	%
Other (e)					587		585
Total investment securities (f)	$	81,500	$	80,232	$	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 $4.7 billion to $80.8 billion at September 30, 2018 compared to December 31, 2017, driven by net purchase activity of agency residential mortgage-backed securities of $4.0 billion and U.S. Treasury and government agencies securities of $2.3 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.

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 September 30, 2018. We estimate that at September 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 5.6 years at September 30, 2018 compared to 5.2 years at December 31, 2017.

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

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



September 30, 2018	Years
Agency residential mortgage-backed	6.8
Non-agency residential mortgage-backed	6.5
Agency commercial mortgage-backed	3.7
Non-agency commercial mortgage-backed	2.7
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



	September 30		December 31		Change
Dollars in millions	2018		2017		$			%
Deposits
Noninterest-bearing	$	74,736	$	79,864	$	(5,128	)	(6	)%
Interest-bearing
Money market	55,662		59,735		(4,073		)	(7	)%
Demand	62,354		61,213		1,141			2	%
Savings	53,678		46,980		6,698			14	%
Time deposits	18,454		17,261		1,193			7	%
Total interest-bearing deposits	190,148		185,189		4,959			3	%
Total deposits	264,884		265,053		(169		)	—
Borrowed funds
Federal Home Loan Bank (FHLB) borrowings	20,036		21,037		(1,001		)	(5	)%
Bank notes and senior debt	26,676		28,062		(1,386		)	(5	)%
Subordinated debt	5,764		5,200		564			11	%
Other	5,479		4,789		690			14	%
Total borrowed funds	57,955		59,088		(1,133		)	(2	)%
Total funding sources	$	322,839	$	324,141	$	(1,302	)	—

Total deposits declined slightly in the comparison as growth in interest-bearing deposits was more than offset by a decrease in noninterest-bearing deposits. Noninterest-bearing deposits decreased mainly due to the impact of rising interest rates, reflecting a shift of primarily commercial noninterest-bearing deposits to interest-bearing. The increase in interest-bearing deposits also was driven by growth in savings deposits reflecting, in part, a shift from consumer money market to relationship-based savings products.

Borrowed funds decreased in the comparison as declines in bank notes and senior debt and FHLB borrowings were partially offset by increases in repurchase agreements 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 our 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 $47.1 billion at September 30, 2018, a decrease of $.5 billion compared to December 31, 2017. The decrease resulted from common share repurchases of $2.0 billion, common and preferred dividends of $1.3 billion and lower AOCI related to net unrealized securities losses of $1.1 billion, partially offset by net income of $4.0 billion.

Common shares outstanding were 462 million and 473 million at September 30, 2018 and December 31, 2017, respectively, as repurchases of 13.8 million shares during the period were partially offset by stock-based compensation activity and share issuances from treasury stock related to warrants exercised.

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



Nine months ended September 30							Change
Dollars in millions, except as noted	2018			2017			$			%
Income Statement
Net interest income	$	3,800		$	3,436		$	364		11	%
Noninterest income	1,935			1,891			44			2	%
Total revenue	5,735			5,327			408			8	%
Provision for credit losses	254			198			56			28	%
Noninterest expense	4,287			4,060			227			6	%
Pretax earnings	1,194			1,069			125			12	%
Income taxes	285			394			(109		)	(28	)%
Earnings	$	909		$	675		$	234		35	%
Average Balance Sheet
Loans held for sale	$	662		$	791		$	(129	)	(16	)%
Loans
Consumer
Home equity	$	24,188		$	25,394		$	(1,206	)	(5	)%
Automobile	13,643			12,285			1,358			11	%
Education	4,208			4,921			(713		)	(14	)%
Credit cards	5,746			5,180			566			11	%
Other	1,794			1,767			27			2	%
Total consumer	49,579			49,547			32			—
Commercial and commercial real estate	10,397			10,852			(455		)	(4	)%
Residential mortgage	13,767			11,999			1,768			15	%
Total loans	$	73,743		$	72,398		$	1,345		2	%
Total assets	$	89,259		$	88,589		$	670		1	%
Deposits
Noninterest-bearing demand	$	30,555		$	29,600		$	955		3	%
Interest-bearing demand	42,172			40,959			1,213			3	%
Money market	30,656			37,492			(6,836		)	(18	)%
Savings	46,091			37,881			8,210			22	%
Certificates of deposit	11,957			13,331			(1,374		)	(10	)%
Total deposits	$	161,431		$	159,263		$	2,168		1	%
Performance Ratios
Return on average assets	1.36		%	1.02		%
Noninterest income to total revenue	34		%	35		%
Efficiency	75		%	76		%

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



Nine months ended September 30					Change
Dollars in millions, except as noted	2018		2017		$			%
Supplemental Noninterest Income Information
Consumer services	$	837	$	800	$	37		5	%
Brokerage	$	260	$	231	$	29		13	%
Residential mortgage	$	257	$	321	$	(64	)	(20	)%
Service charges on deposits	$	503	$	491	$	12		2	%
Residential Mortgage Information
Residential mortgage servicing statistics (in billions, except as noted) (a)
Serviced portfolio balance (b)	$	127	$	129	$	(2	)	(2	)%
Serviced portfolio acquisitions	$	10	$	18	$	(8	)	(44	)%
MSR asset value (b)	$	1.4	$	1.2	$	.2		17	%
MSR capitalization value (in basis points) (b)	108		95		13			14	%
Servicing income: (in millions)
Servicing fees, net (c)	$	132	$	142	$	(10	)	(7	)%
Mortgage servicing rights valuation, net of economic hedge	$	22	$	30	$	(8	)	(27	)%
Residential mortgage loan statistics