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 October 3, 2015, rules requiring mortgage lenders to issue new integrated disclosures under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) became effective. These rules, among other things, impose new timelines for the provision of disclosures to borrowers and provide additional limitations on increases to the fees and charges estimated and disclosed by lenders.

On October 22, 2015, the Office of the Comptroller of the Currency (OCC) approved final interagency rules (developed jointly with the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) Farm Credit Administration and Federal Housing Finance Agency) governing margin and capital requirements for uncleared swaps entered into by swap dealers who are supervised by a prudential regulator. PNC Bank is registered as a swap dealer and will be subject to these rules. The compliance date for requirements under the final rules is subject to a substantial phase-in period that begins on September 1, 2016, for the largest market participants and, for

 

PNC Bank, no earlier than March 1, 2017. While we continue to analyze fully the various requirements under the final rules, we expect that the rules will not have a material effect on PNC Bank.

Also on October 22, 2015, the FDIC requested comment on a proposed rule that would impose a surcharge, equal to 4.5 basis points of an institution’s deposit insurance assessment base, on the quarterly deposit insurance assessments of all insured depository institutions with total consolidated assets of $10 billion or more (including PNC Bank). Under the proposal, the surcharge would take effect for assessments billed after the Deposit Insurance Fund (DIF) reserve ratio reaches 1.15 percent (estimated by the FDIC to most likely occur in the first quarter of 2016) or such later date as the proposed rule is finalized, and would continue until the reserve ratio reached 1.35 percent (estimated by the FDIC to occur under the proposal before the end of 2018). Based on data as of September 30, 2015, we estimate that the net effect of the proposed surcharge, together with the scheduled reduction of regular assessments that will go into effect when the DIF reserve ratio reaches 1.15 percent, would increase PNC Bank’s quarterly assessment by approximately $20 million. The comment period on the proposed surcharge will run for 60 days after the proposal is published in the Federal Register.

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, Recent Market and Industry Developments in the Executive Summary section of our First Quarter 2015 Form 10-Q and Second Quarter 2015 Form 10-Q 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 increased $35 million, or 3%, in the third quarter of 2015 to $1.1 billion, or $1.90 per diluted common share, compared to $1.0 billion, or $1.79 per diluted common share for the third quarter of 2014. Third quarter net income benefitted from a lower effective tax rate and slightly lower noninterest expense, partially offset by declines in net interest income and noninterest income.

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Net interest income of $2.1 billion for the third quarter of 2015 decreased 2% compared with the third quarter of 2014, reflective of the ongoing low rate environment, primarily resulting in lower interest-earning asset yields, and lower 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 2.67% for the third quarter of 2015 compared to 2.98% for the third quarter of 2014 principally due to the impact of increasing the company’s liquidity position, lower benefit from purchase accounting accretion, and lower loan and securities yields.

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Noninterest income of $1.7 billion for the third quarter of 2015 decreased $24 million, or 1% compared to the third quarter of 2014, due to declines in asset management and residential mortgage, partially offset by strong fee income growth in consumer and corporate services.

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The provision for credit losses increased to $81 million for the third quarter of 2015 compared to $55 million for the third quarter of 2014.

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Noninterest expense of $2.4 billion for the third quarter of 2015 decreased $5 million compared to the third quarter of 2014 mainly driven by lower expense related to third party services and lower asset impairment charges related to historic tax credits, mostly offset by investments in technology and business infrastructure in support of PNC’s strategic priorities and higher personnel expense associated with higher business activity.

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The effective tax rate was 20.0% for the third quarter of 2015 compared to 27.4% for the third quarter of 2014 reflecting tax benefits and additions to reserves, the largest components of which were a benefit of

$75 million attributable to effectively settling acquired entity tax contingencies offset by additions to reserves of $10 million for various tax matters.

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

Credit Quality Highlights

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

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Nonperforming assets decreased $.4 billion, or 14%, to $2.5 billion at September 30, 2015 compared to December 31, 2014. Nonperforming assets to total assets were 0.69% at September 30, 2015, compared to 0.83% at December 31, 2014.

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Overall loan delinquencies of $1.7 billion at September 30, 2015 decreased $.3 billion, or 15%, compared with December 31, 2014.

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The allowance for loan and lease losses was 1.58% of total loans and 149% of nonperforming loans at September 30, 2015, compared with 1.63% and 133% at December 31, 2014, respectively.

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Net charge-offs of $96 million for the third quarter of 2015 increased 17% compared to net charge-offs of $82 million for the third quarter of 2014. Annualized net charge-offs were 0.19% of average loans in the third quarter of 2015 and 0.16% of average loans in the third quarter of 2014. For the first nine months of 2015, net charge-offs were $266 million, and 0.17% of average loans on an annualized basis, compared with $413 million and 0.28% for the first nine months of 2014.

For additional detail, see the Credit Risk Management portion of the Risk Management section and the Purchase Accounting Accretion and Valuation of Purchased Impaired Loans portion of the Consolidated Balance Sheet Review of this Financial Review.

Balance Sheet, Liquidity and Capital Highlights

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

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Total loans increased by $.2 billion to $205.0 billion at September 30, 2015 compared to December 31, 2014.

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Total commercial lending increased $2.8 billion, or 2%, due to growth in PNC’s real estate business.

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Total consumer lending decreased $2.6 billion, or 3%, due to declines in home equity, automobile, and education, including runoff in the non-strategic consumer loan portfolio.

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Investment securities increased $12.2 billion, or 22%, to $68.1 billion at September 30, 2015 compared to December 31, 2014, primarily funded by deposit growth.

 

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Total deposits increased $12.7 billion, or 5%, to $245.0 billion at September 30, 2015 compared with December 31, 2014, driven by higher Retail Banking and Corporate & Institutional Banking deposits.

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PNC’s balance sheet remained core funded with a loans to deposits ratio of 84% at September 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 September 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 September 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 period was mainly due to higher risk weighting percentages applied to certain commercial real estate, equity and securities assets under the Basel III standardized rule which became effective in 2015.

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Pro forma fully phased-in Basel III common equity Tier 1 capital ratio was an estimated 10.1% at September 30, 2015 and 10.0% at December 31, 2014 based on the standardized approach rules. See the Capital discussion and Table 20 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 during the first nine months of 2015.

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In the first quarter of 2015, in accordance with the 2014 capital plan, PNC repurchased 4.4 million common shares for 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 following that were completed during the second and third quarters of 2015:

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PNC repurchased 6.2 million common shares for $.6 billion during the third quarter of 2015 and 5.9 million common shares for $.6 billion during the second quarter of 2015 under share repurchase programs of up to $2.875 billion for the five quarter period beginning in the second quarter of 2015. These programs include repurchases of up to $375 million related to stock issuances under employee benefit-related 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%, effective with the May dividend. On October 1, 2015, the PNC Board of Directors declared a quarterly common stock cash dividend of 51 cents per share payable on November 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 Financial Review describe in greater detail the various items that impacted our results during the first nine months of 2015 and 2014 and balances at September 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

 

Nine months ended September 30										Change
Dollars in millions		2015				2014				$				%
Average assets
Interest-earning assets
Investment securities		$	59,578			$	56,357			$	3,221				6	%
Loans			205,122				198,559				6,563				3	%
Interest-earning deposits with banks			33,380				16,341				17,039				104	%
Other			9,048				8,476				572				7	%
Total interest-earning assets			307,128				279,733				27,395				10	%
Noninterest-earning assets			46,005				44,145				1,860				4	%
Total average assets		$	353,133			$	323,878			$	29,255				9	%
Average liabilities and equity
Interest-bearing liabilities
Interest-bearing deposits		$	162,790			$	151,757			$	11,033				7	%
Borrowed funds			57,018				47,620				9,398				20	%
Total interest-bearing liabilities			219,808				199,377				20,431				10	%
Noninterest-bearing deposits			75,359				68,976				6,383				9	%
Other liabilities			12,091				10,389				1,702				16	%
Equity			45,875				45,136				739				2	%
Total average liabilities and equity		$	353,133			$	323,878			$	29,255				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 September 30, 2015 compared with December 31, 2014. Total assets were $362.1 billion at September 30, 2015 compared with $345.1 billion at December 31, 2014.

Average investment securities increased in the first nine months of 2015 compared with the first nine months of 2014, due to increases in average agency residential mortgage-backed securities and U.S. Treasury and government agency securities, partially offset by a decrease in average non-agency residential mortgage-backed securities. Total investment securities comprised 19% of average interest-earning assets for the first nine months of 2015 and 20% for the first nine months of 2014.

Average total loans in the first nine months of 2015 increased compared with the first nine months of 2014 driven by growth in average commercial loans of $6.7 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 $2.2 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 consumer loans.

Loans represented 67% of average interest-earning assets for the first nine months of 2015 and 71% of average interest-earning assets for the first nine 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 nine months of 2015 compared with the first nine months of 2014 was primarily driven by higher accounts receivable from trade date securities sales, which are included in noninterest-earning assets for average balance sheet purposes, and an increase in trading assets, primarily net customer-related derivatives values.

Average total deposits increased $17.4 billion, or 8%, to $238.1 billion in the first nine months of 2015 compared with the first nine months of 2014, primarily due to an increase in average transaction deposits, which grew to $203.8 billion for the first nine months of 2015. Higher average money market deposits, average noninterest-bearing deposits and average interest-bearing demand deposits were driven by both commercial and consumer deposit growth. These increases were partially offset by a decrease of $1.5 billion in average retail certificates of deposit attributable to runoff of maturing accounts.

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

The increase in average borrowed funds in the first nine months of 2015 compared with the first nine months of 2014 was primarily due to increases in average Federal Home Loan Bank (FHLB) borrowings and average bank notes and senior debt. These increases were partially offset by lower average commercial paper balances, in part due to actions to enhance PNC’s funding structure in light of regulatory liquidity standards and a rating agency methodology change. 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 third quarter of 2015 was $1.1 billion, an increase of 3% compared with $1.0 billion for third quarter of 2014. The increase was primarily driven by a lower effective income tax rate and slightly lower noninterest expense, partially offset by a 2% decrease in net interest income, higher provision for credit losses, and a 1% decrease in noninterest income.

For the first nine months of 2015, net income was $3.1 billion, a decrease of 1% compared with $3.2 billion for the first nine months of 2014. The decrease resulted from a 4% decline in net interest income and a 2% increase in noninterest expense, partially offset by a 4% increase in noninterest income, a lower effective income tax rate and lower provision for credit losses.

Net Interest Income

Table 4: Net Interest Income and Net Interest Margin

 

		Three months ended September 30								Nine months ended September 30
Dollars in millions		2015				2014				2015				2014
Net interest income		$	2,062			$	2,104			$	6,186			$	6,428
Net interest margin			2.67	%			2.98	%			2.74	%			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 $42 million, or 2%, and $242 million, or 4%, for the third quarter and first nine months of 2015, respectively, compared to the same periods in 2014. The declines in both comparisons are reflective of the decreased purchase accounting accretion and the ongoing low rate environment, primarily resulting in lower interest-earning asset yields, partially offset by commercial and commercial real estate loan growth and higher securities balances. The year-to-date decline 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 28 basis point and 35 basis point declines in the yields on total interest-earning assets in the quarterly and year-to-date comparisons, respectively, which were principally due to the impact of increasing the company’s liquidity position, lower loan and securities 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.

For full year 2015, we expect purchase accounting accretion to be down compared to 2014 by approximately $180 million to $200 million.