EXECUTIVE SUMMARY

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

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

Key Strategic Goals

At PNC we manage our company for the long term. We are focused on the fundamentals of growing customers, loans, deposits and fee revenue and improving profitability, while investing for the future and managing risk, expenses and capital. We continue to invest in our products, markets and brand, and embrace our corporate responsibility to the communities where we do business.

We strive to expand and deepen customer relationships by offering a broad range of deposit, fee-based and credit products and services. We are focused on delivering those products and services where, when and how our customers choose with the goal of offering insight that addresses their specific financial needs. Our approach is concentrated on organically growing and deepening client relationships that meet our risk/return measures. Our strategies for growing fee income across our lines of business are focused on achieving deeper market penetration and cross selling our diverse product mix.

Our strategic priorities are designed to enhance value over the long term. A key priority is to drive growth in acquired and underpenetrated geographic markets, including in the Southeast. In addition, we are seeking to attract more of the investable assets of new and existing clients. PNC is focused on transforming our retail banking business to a more customer-centric and sustainable model while lowering delivery costs as customer banking preferences evolve. We are also working to build a stronger residential mortgage banking business with the goal of becoming the provider of choice for our customers. Additionally, we continue to focus on expense management while investing in technology and business infrastructure and streamlining our processes.

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

Federal Reserve System (Federal Reserve). New regulatory short-term liquidity standards became effective for PNC and PNC Bank, National Association (PNC Bank) beginning January 1, 2015. For more detail, see the Balance Sheet, Liquidity and Capital Highlights portion of this Executive Summary, the Capital portion of the Consolidated Balance Sheet Review section and the Liquidity Risk Management portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2014 Form 10-K.

Recent Market and Industry Developments

There have been numerous legislative and regulatory developments and significant changes in the competitive landscape of our industry over the last several years. The United States and other governments have undertaken major reform of the regulation of the financial services industry, including engaging in new efforts to impose requirements designed to strengthen the stability of the financial system and protect consumers and investors. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), enacted in July 2010, mandates the most wide-ranging overhaul of financial industry regulation in decades. Many parts of the law are now in effect, and others are now in the implementation stage, which is likely to continue for several years. We expect to face additional regulation of our industry as a result of Dodd-Frank as well as other current and future initiatives intended to enhance the regulation of financial services companies, the stability of the financial system, the protection of consumers and investors, and the liquidity and solvency of financial institutions and markets. We also expect the scrutiny from our supervisors in the examination process and the enforcement of laws and regulations on both the federal and state levels to remain at elevated levels. Compliance with new regulations will increase our costs and reduce our revenue. Some new regulations may limit our ability to pursue certain desirable business opportunities.

On June 17, 2015, the OCC terminated the 2011 consent order and 2013 amended consent order against PNC Bank entered into following a publicly-disclosed interagency horizontal review of residential mortgage servicing operations at 14 federally regulated mortgage servicers. For more information, see Note 15 Legal Proceedings of this Report and Note 21 Legal Proceedings in our 2014 Form 10-K.

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

 

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

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

For additional information concerning recent legislative and regulatory developments, as well as certain governmental, legislative and regulatory inquiries and investigations that may affect PNC, please see the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors, and Note 21 Legal Proceedings and Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements in our 2014 Form 10-K, as well as Note 15 Legal Proceedings and Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

Key Factors Affecting Financial Performance

PNC faces a variety of risks that may impact various aspects of our risk profile from time to time. The extent of such impacts may vary depending on factors such as the current economic, political and regulatory environment, merger and acquisition activity and operational challenges. Many of these risks and our risk management strategies are described in more detail in our 2014 Form 10-K and elsewhere in this Report.

Our financial performance is substantially affected by a number of external factors outside of our control, including the following:

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General economic conditions, including the continuity, speed and stamina of the current U.S. economic expansion in general and on our customers in particular,

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The monetary policy actions and statements of the Federal Reserve and the Federal Open Market Committee (FOMC),

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The level of, and direction, timing and magnitude of movement in, interest rates and the shape of the interest rate yield curve,

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The functioning and other performance of, and availability of liquidity in, the capital and other financial markets,

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Loan demand, utilization of credit commitments and standby letters of credit, and asset quality,

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Customer demand for non-loan products and services,

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Changes in the competitive and regulatory landscape and in counterparty creditworthiness and performance as the financial services industry restructures in the current environment,

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The impact of the extensive reforms enacted in the Dodd-Frank legislation and other legislative,

regulatory and administrative initiatives and actions, including those outlined elsewhere in this Report, in our 2014 Form 10-K and in subsequent filings with the SEC, and

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The impact of market credit spreads on asset valuations.

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

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Focused execution of strategic priorities for organic customer growth opportunities,

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Further success in growing profitability through the acquisition and retention of customers and deepening relationships,

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Driving growth in acquired and underpenetrated geographic markets, including our Southeast markets,

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Our ability to effectively manage PNC’s balance sheet and generate net interest income,

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Revenue growth from fee income and our ability to provide innovative and valued products to our customers,

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Our ability to utilize technology to develop and deliver products and services to our customers and protect PNC’s systems and customer information,

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Our ability to bolster our critical infrastructure and streamline our core processes,

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

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A sustained focus on expense management,

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Managing our credit risk in our portfolio,

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Managing the non-strategic assets portfolio and impaired assets,

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

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Prudent risk, liquidity and capital management related to our efforts to manage risk to acceptable levels and to meet evolving regulatory capital, capital planning, stress testing and liquidity standards,

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Actions we take within the capital and other financial markets,

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The impact of legal and regulatory-related contingencies, and

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The appropriateness of reserves needed for critical accounting estimates and related contingencies.

For additional information, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2014 Form 10-K.

Income Statement Highlights

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

 

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

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

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

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

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

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

Credit Quality Highlights

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

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

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

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

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

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

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

Balance Sheet, Liquidity and Capital Highlights

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

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

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

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

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

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

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

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PNC maintained a strong liquidity position.

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

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

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PNC maintained a strong capital position.

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

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

 

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

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PNC returned capital to shareholders.

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

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

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

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

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

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

Our ability to take certain capital actions, including plans to pay or increase common stock dividends or to repurchase shares under current or future programs, is subject to the results of the supervisory assessment of capital adequacy undertaken by the Federal Reserve as part of the CCAR process. For additional information, see the Supervision and Regulation section in Item 1 Business of our 2014 Form 10-K.

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

 

Average Consolidated Balance Sheet Highlights

Table 2: Summarized Average Balance Sheet

 

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

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

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

 

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

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

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

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

Average total deposits increased $16.3 billion, or 7%, to $235.5 billion in the first six months of 2015 compared with the first six months of 2014, primarily due to an increase in average transaction deposits, which grew to $201.4 billion for the first six months of 2015. Higher average money market deposits, average noninterest-bearing deposits and average interest-bearing demand deposits drove the increase in both commercial and consumer average transaction deposits. These increases were partially offset by a decrease of $1.8 billion in average retail certificates of deposit attributable to runoff of maturing accounts. Total deposits at June 30, 2015 were

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

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

The increase in average borrowed funds in the first six months of 2015 compared with the first six months of 2014 was primarily due to increases in average Federal Home Loan Bank (FHLB) borrowings and average bank notes and senior debt. The Liquidity Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding our sources and uses of borrowed funds.

 

CONSOLIDATED INCOME STATEMENT REVIEW

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

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

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

Net Interest Income

Table 4: Net Interest Income and Net Interest Margin

 

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

Changes in net interest income and margin result from the interaction of the volume and composition of interest-earning assets and related yields, interest-bearing liabilities and related rates paid, and noninterest-bearing sources of funding. See the Statistical Information (Unaudited) – Average Consolidated Balance Sheet And Net Interest Analysis section of this Report and the discussion of purchase accounting accretion on purchased impaired loans in the Consolidated Balance Sheet Review section of this Financial Review for additional information.

 

Net interest income decreased by $200 million, or 5%, in the first six months of 2015 compared with the prior year period, including a decline of $77 million, or 4%, in the second quarter compared with the same prior year quarter. The declines in both comparisons are reflective of the ongoing low rate environment, primarily resulting in lower loan yields, and decreased purchase accounting accretion, partially offset by commercial and commercial real estate loan growth and higher securities balances. The year-to-date declines also reflected the impact from the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to noninterest income.

Lower net interest margins in both comparisons were driven by 41 basis point and 39 basis point declines in the yields on total interest-earning assets in the year-to-date and quarterly

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

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

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