Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

¨	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)

(412) 762-2000

(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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of October 21, 2016, there were 486,501,562 shares of the registrant’s common stock ($5 par value) outstanding.

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Third Quarter 2016 Form 10-Q


	Pages
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).
Consolidated Income Statement		46
Consolidated Statement of Comprehensive Income		47
Consolidated Balance Sheet		48
Consolidated Statement Of Cash Flows		49

Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies		51
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities		51
Note 3 Asset Quality		54
Note 4 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit		64
Note 5 Investment Securities		66
Note 6 Fair Value		70
Note 7 Goodwill and Intangible Assets		81
Note 8 Employee Benefit Plans		82
Note 9 Financial Derivatives		83
Note 10 Earnings Per Share		89
Note 11 Total Equity And Other Comprehensive Income		90
Note 12 Legal Proceedings		92
Note 13 Commitments and Guarantees		94
Note 14 Segment Reporting		96
Note 15 Subsequent Events		99

Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis		100
Non-GAAP to GAAP Reconciliation of Net Interest Income		102
Transitional Basel III and Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios (Non-GAAP) – 2015 Periods		102

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		6
Consolidated Balance Sheet Review		8
Off-Balance Sheet Arrangements And Variable Interest Entities		15
Fair Value Measurements		16
Business Segments Review		16
Critical Accounting Estimates and Judgments		28
Recourse And Repurchase Obligations		29
Risk Management		29
Internal Controls And Disclosure Controls And Procedures		43
Glossary Of Terms		43
Cautionary Statement Regarding Forward-Looking Information		44

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		29-43, 70-80 and 83-89

Item 4. Controls and Procedures.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.		103

Item 1A. Risk Factors.		103

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds.		103

Item 6. Exhibits.		104
Exhibit Index.		104
Corporate Information		105
Signature		107

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Third Quarter 2016 Form 10-Q (continued)

MD&A TABLE REFERENCE


Table	Description	Page
1	Consolidated Financial Highlights		1
2	Summarized Average Balance Sheet		5
3	Net Interest Income and Net Interest Margin		6
4	Noninterest Income		7
5	Summarized Balance Sheet Data		8
6	Details Of Loans		9
7	Purchased Impaired Loans – Balances		10
8	Purchased Impaired Loans – Accretable Yield		10
9	Weighted Average Life of the Purchased Impaired Portfolios		10
10	Investment Securities		11
11	Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities		12
12	Loans Held For Sale		12
13	Details Of Funding Sources		12
14	Shareholders’ Equity		13
15	Basel III Capital		14
16	Fair Value Measurements – Summary		16
17	Retail Banking Table		17
18	Corporate & Institutional Banking Table		20
19	Asset Management Group Table		23
20	Residential Mortgage Banking Table		25
21	BlackRock Table		26
22	Non-Strategic Assets Portfolio Table		27
23	Nonperforming Assets By Type		30
24	Change in Nonperforming Assets		31
25	OREO and Foreclosed Assets		31
26	Accruing Loans Past Due		32
27	Home Equity Lines of Credit – Draw Period End Dates		32
28	Consumer Real Estate Related Loan Modifications		34
29	Loan Charge-Offs And Recoveries		35
30	Allowance for Loan and Lease Losses		36
31	PNC Bank Notes Issued During 2016		38
32	PNC Bank Senior and Subordinated Debt		38
33	FHLB Borrowings		38
34	Parent Company Senior and Subordinated Debt and Hybrid Capital Instruments		39
35	Credit Ratings as of September 30, 2016 for PNC and PNC Bank		39
36	Interest Sensitivity Analysis		40
37	Net Interest Income Sensitivity to Alternative Rate Scenarios (Third Quarter 2016)		40
38	Alternate Interest Rate Scenarios: One Year Forward		41
39	Equity Investments Summary		42
40	Financial Derivatives Summary		43

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Third Quarter 2016 Form 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE


Table	Description	Page
41	Cash Flows Associated with Loan Sale and Servicing Activities		52
42	Principal Balance, Delinquent Loans, and Net Charge-offs Related to Serviced Loans For Others		53
43	Consolidated VIEs – Carrying Value		53
44	Non-Consolidated VIEs		54
45	Analysis of Loan Portfolio		55
46	Nonperforming Assets		56
47	Commercial Lending Asset Quality Indicators		57
48	Home Equity and Residential Real Estate Balances		58
49	Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans		59
50	Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans		60
51	Credit Card and Other Consumer Loan Classes Asset Quality Indicators		61
52	Summary of Troubled Debt Restructurings		61
53	Financial Impact and TDRs by Concession Type		62
54	Impaired Loans		63
55	Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data		64
56	Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit		65
57	Investment Securities Summary		66
58	Gross Unrealized Loss and Fair Value of Securities Available for Sale		68
59	Gains (Losses) on Sales of Securities Available for Sale		69
60	Contractual Maturity of Debt Securities		69
61	Fair Value of Securities Pledged and Accepted as Collateral		70
62	Fair Value Measurements – Recurring Basis Summary		71
63	Reconciliation of Level 3 Assets and Liabilities		72
64	Fair Value Measurements – Recurring Quantitative Information		76
65	Fair Value Measurements – Nonrecurring		78
66	Fair Value Measurements – Nonrecurring Quantitative Information		78
67	Fair Value Option – Changes in Fair Value		78
68	Fair Value Option – Fair Value and Principal Balances		79
69	Additional Fair Value Information Related to Other Financial Instruments		80
70	Mortgage Servicing Rights		81
71	Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions		82
72	Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions		82
73	Net Periodic Pension and Postretirement Benefit Costs		83
74	Total Gross Derivatives		83
75	Derivatives Designated As Hedging Instruments under GAAP		84
76	Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges		84
77	Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges		85
78	Derivatives Not Designated As Hedging Instruments under GAAP		86
79	Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP		87
80	Derivative Assets and Liabilities Offsetting		88
81	Basic and Diluted Earnings per Common Share		89
82	Rollforward of Total Equity		90
83	Other Comprehensive Income		91
84	Accumulated Other Comprehensive Income (Loss) Components		92
85	Commitments to Extend Credit and Other Commitments		94
86	Internal Credit Ratings Related to Net Outstanding Standby Letters of Credit		94
87	Resale and Repurchase Agreements Offsetting		96
88	Results Of Businesses		98

FINANCIAL REVIEW

THE PNC FINANCIAL SERVICES GROUP, INC.

This Financial Review, including the Consolidated Financial Highlights, should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report and with Items 6, 7, 8 and 9A of our 2015 Annual Report on Form 10-K (2015 Form 10-K). For information regarding certain business, regulatory and legal risks, see the following sections as they appear in this Report and in our 2015 Form 10-K: the Risk Management section of the Financial Review portion of this report and of Item 7 in our 2015 Form 10-K; Item 1A Risk Factors included in our 2015 Form 10-K; and the Legal Proceedings and Commitments and Guarantees Notes of the Notes To Consolidated Financial Statements included in our 2015 Form 10-K and our First and Second Quarter 2016 Form 10-Q. 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 2015 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 Part I, Item 1 of this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a GAAP basis.

Table 1: Consolidated Financial Highlights


Dollars in millions, except per share data Unaudited	Three months ended September 30						Nine months ended September 30
Dollars in millions, except per share data Unaudited	2016			2015			2016			2015
Financial Results (a)
Revenue
Net interest income	$	2,095		$	2,062		$	6,261		$	6,186
Noninterest income		1,734			1,713			5,027			5,186
Total revenue		3,829			3,775			11,288			11,372
Provision for credit losses		87			81			366			181
Noninterest expense		2,394			2,352			7,035			7,067
Income before income taxes and noncontrolling interests	$	1,348		$	1,342		$	3,887		$	4,124
Net income	$	1,006		$	1,073		$	2,938		$	3,121
Less:
Net income attributable to noncontrolling interests		18			18			60			23
Preferred stock dividends and discount accretion and redemptions		64			64			172			182
Net income attributable to common shareholders	$	924		$	991		$	2,706		$	2,916
Less:
Dividends and undistributed earnings allocated to nonvested restricted shares		7						19			2
Impact of BlackRock earnings per share dilution		4			4			10			14
Net income attributable to diluted common shares	$	913		$	987		$	2,677		$	2,900
Diluted earnings per common share	$	1.84		$	1.90		$	5.33		$	5.52
Cash dividends declared per common share	$	.55		$	.51		$	1.57		$	1.50
Effective tax rate (b)		25.4	%		20.0	%		24.4	%		24.3	%
Performance Ratios
Net interest margin (c)		2.68	%		2.67	%		2.71	%		2.74	%
Noninterest income to total revenue		45	%		45	%		45	%		46	%
Efficiency		63	%		62	%		62	%		62	%
Return on:
Average common shareholders’ equity		8.74	%		9.61	%		8.69	%		9.56	%
Average assets		1.10	%		1.19	%		1.09	%		1.18	%

(a)	The Executive Summary and Consolidated Income Statement Review portions of the Financial Review section of this Report 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.

(c)

Calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. 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 generally accepted accounting principles (GAAP) in the Consolidated Income Statement. The taxable-equivalent adjustments to net interest income for the three months ended September 30, 2016 and September 30, 2015 were $49 million and $50 million, respectively. The taxable-equivalent adjustments to net interest income for the nine months ended September 30, 2016 and September 30, 2015 were $145 million and $148 million, respectively. For additional information, see 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 2016			December 31 2015			September 30 2015
Balance Sheet Data (dollars in millions, except per share data)
Assets	$	369,348		$	358,493		$	362,125
Loans	$	210,446		$	206,696		$	204,983
Allowance for loan and lease losses	$	2,619		$	2,727		$	3,237
Interest-earning deposits with banks (b)	$	27,058		$	30,546		$	34,224
Investment securities	$	78,514		$	70,528		$	68,066
Loans held for sale	$	2,053		$	1,540		$	2,060
Goodwill	$	9,103		$	9,103		$	9,103
Mortgage servicing rights	$	1,293		$	1,589		$	1,467
Equity investments (c)	$	10,605		$	10,587		$	10,497
Other assets	$	24,730		$	23,092		$	27,285

Noninterest-bearing deposits	$	82,159		$	79,435		$	78,239
Interest-bearing deposits	$	177,736		$	169,567		$	166,740
Total deposits	$	259,895		$	249,002		$	244,979
Borrowed funds	$	51,541		$	54,532		$	56,663
Total shareholders’ equity	$	45,707		$	44,710		$	44,948
Common shareholders’ equity	$	42,251		$	41,258		$	41,498
Accumulated other comprehensive income	$	646		$	130		$	615

Book value per common share	$	86.57		$	81.84		$	81.42
Common shares outstanding (millions)		488			504			510
Loans to deposits		81	%		83	%		84	%

Client Assets (in billions)
Discretionary client assets under management	$	138		$	134		$	132
Nondiscretionary client assets under administration		128			125			124
Total client assets under administration (d)		266			259			256
Brokerage account client assets		44			43			42
Total client assets	$	310		$	302		$	298

Capital Ratios
Transitional Basel III (e) (f)
Common equity Tier 1		10.6	%		10.6	%		10.6	%
Tier 1 risk-based		11.9	%		12.0	%		12.0	%
Total capital risk-based		14.2	%		14.6	%		14.8	%
Leverage		10.1	%		10.1	%		10.2	%
Pro forma Fully Phased-In Basel III (Non-GAAP) (f)
Common equity Tier 1		10.2	%		10.0	%		10.1	%
Common shareholders’ equity to assets		11.4	%		11.5	%		11.5	%

Asset Quality
Nonperforming loans to total loans		1.02	%		1.03	%		1.06	%
Nonperforming assets to total loans, OREO and foreclosed assets		1.13	%		1.17	%		1.21	%
Nonperforming assets to total assets		.64	%		.68	%		.69	%
Net charge-offs to average loans (for the three months ended) (annualized)		.29	%		.23	%		.19	%
Allowance for loan and lease losses to total loans (g)		1.24	%		1.32	%		1.58	%
Allowance for loan and lease losses to total nonperforming loans (g) (h)		122	%		128	%		149	%
Accruing loans past due 90 days or more (in millions)	$	766		$	881		$	890

(a)	The Executive Summary and Consolidated Balance Sheet Review portions of the Financial Review section of this Report 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 $26.6 billion, $30.0 billion, and $33.8 billion as of September 30, 2016, December 31, 2015 and September 30, 2015, respectively.

(c)	Amounts include our equity interest in BlackRock.

(d)

As a result of certain investment advisory services performed by one of our registered investment advisors, certain assets are reported as both discretionary client assets under management and nondiscretionary client assets under administration. The amount of such assets was approximately $9 billion, $6 billion and $6 billion as of September 30, 2016, December 31, 2015 and September 30, 2015, respectively.

(e)	Calculated using the regulatory capital methodology applicable to PNC during each period presented.

(f)

See Basel III Capital discussion in the Capital portion of the Consolidated Balance Sheet Review section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business in our 2015 Form 10-K. See also the Transitional Basel III and Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios (Non-GAAP) – 2015 Periods table in the Statistical Information section of this Report for a reconciliation of the 2015 periods’ ratios.

(g)	See our 2015 Form 10-K for information on our change in derecognition policy effective December 31, 2015 for certain purchased impaired loans.

(h)	The allowance for loan and lease losses includes impairment reserves attributable to purchased impaired loans. Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans.

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

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, Florida, North Carolina, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Georgia, Missouri, 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 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, fee-based and credit products and services. We are focused on delivering those products and services to our customers with the goal of addressing their financial objectives. Our strategies for growing fee income across our lines of business are focused on 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 wellbeing. Our approach is concentrated on organically growing and deepening client relationships that meet our risk/return measures.

Our strategic priorities are designed to enhance value over the long term. One of our priorities is to build a leading banking franchise in our underpenetrated geographic markets. In addition, we are seeking to attract more of the investable assets of new and existing clients. PNC is focused on redefining the retail banking experience by transforming the retail distribution network and the home lending process while lowering delivery costs as customer banking preferences evolve. Additionally, we continue to focus on expense management while investing in technology to bolster critical business infrastructure and streamline core processes.

Our capital priorities are to support client growth and business investment, maintain appropriate capital in light of economic conditions and the Basel III framework and return excess

capital to shareholders, in accordance with the currently effective capital plan included in our Comprehensive Capital Analysis and Review (CCAR) submission to the Board of Governors of the Federal Reserve System (Federal Reserve). For more detail, see the Capital Highlights portion of this Executive Summary, 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 2015 Form 10-K.

Income Statement Highlights

Net income for the third quarter of 2016 was $1.0 billion, or $1.84 per diluted common share, a decrease of 6%, compared to $1.1 billion, or $1.90 per diluted common share, for the third quarter of 2015.

•

Net interest income increased $33 million, or 2%, to $2.1 billion.

•

Net interest margin increased to 2.68% compared to 2.67% in third quarter 2015.

•

Noninterest income increased $21 million, or 1%, to $1.7 billion as growth in fee income was mostly offset by a decline in other noninterest income.

•

Noninterest expense increased $42 million to $2.4 billion, reflecting a new Federal Deposit Insurance Corporation (FDIC) deposit insurance surcharge and higher costs associated with business activities as PNC continued to focus on disciplined expense management.

•

The effective tax rate was 25.4% compared to 20.0% in the third quarter of 2015.

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

Credit Quality Highlights

Overall credit quality remained relatively stable at September 30, 2016.

•

Nonperforming assets decreased $50 million, or 2%, to $2.4 billion compared to December 31, 2015.

•

Overall loan delinquencies of $1.5 billion decreased $184 million, or 11% compared to December 31, 2015.

•

Provision for credit losses increased modestly to $87 million for the third quarter of 2016 compared to $81 million for the third quarter of 2015.

•

Net charge-offs of $154 million for the third quarter of 2016 increased $58 million compared to the third quarter of 2015.

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

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

Balance Sheet and Liquidity Highlights

PNC’s balance sheet continued to be well positioned at September 30, 2016 compared to December 31, 2015.

•

Total loans increased $3.8 billion to $210.4 billion.

•

Total commercial lending grew $4.6 billion, or 3%.

•

Total consumer lending decreased $.8 billion, or 1%.

•

Total deposits increased $10.9 billion to $259.9 billion.

•

Investment securities increased $8.0 billion, or 11%, to $78.5 billion.

•

The Liquidity Coverage Ratio (LCR) at September 30, 2016 for both PNC and PNC Bank exceeded the 2017 fully phased-in requirement of 100%.

Capital Highlights

PNC maintained a strong capital position and continued to return capital to shareholders.

•

The Transitional Basel III common equity Tier 1 capital ratio remained stable at 10.6% at September 30, 2016 compared to December 31, 2015.

•

Pro forma fully phased-in Basel III common equity Tier 1 capital ratio, a non-GAAP financial measure, increased to an estimated 10.2% at September 30, 2016 compared to 10.0% at December 31, 2015 based on the standardized approach rules.

•

In the third quarter of 2016, we returned $.8 billion of capital to common shareholders through repurchases of 5.9 million common shares for $.5 billion, made under new share repurchase programs, and dividends on common shares of $.3 billion.

•

On October 4, 2016, the PNC Board of Directors declared a quarterly cash dividend on common stock of 55 cents per share effective with the November 5, 2016 payment date.

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 2016 capital and liquidity actions as well as our capital ratios.

Our ability to take certain capital actions, including plans to pay or increase common stock dividends or to repurchase shares under current or future programs, is subject to the results of the supervisory assessment of capital adequacy undertaken by the Federal Reserve as part of the CCAR

process. For additional information, see the Supervision and Regulation section in Item 1 Business of our 2015 Form 10-K.

Our Consolidated Income Statement and Consolidated Balance Sheet Review sections of this Financial Review describe in greater detail our results during the first nine months of 2016 and 2015 and balances at September 30, 2016 and December 31, 2015, respectively.

Business Outlook

Statements regarding our business outlook are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous assumptions, risks and uncertainties, including our current view that the U.S. economy will grow moderately in the latter half of 2016, boosted by stable oil/energy prices, improving housing activity and moderate job gains, and that short-term interest rates and bond yields will hold fairly steady before gradually rising late this year and do not take into account the impact of potential legal and regulatory contingencies. Specifically, our business outlook reflects our expectation of a 25 basis point increase in short-term interest rates by the Federal Reserve in December 2016. See the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2015 From 10-K for other factors that could cause future events to differ, perhaps materially, from those anticipated in these forward-looking statements.

In the fourth quarter of 2016, we expect:

•

Modest loan growth compared to the third quarter of 2016;

•

Stable net interest income compared to the third quarter, and purchase accounting accretion to be approximately $50 million;

•

Stable fee income compared to the third quarter of 2016, with fee income consisting of asset management, consumer services, corporate services, residential mortgage and service charges on deposits;

•

Provision for credit losses to be between $75 million and $125 million; and

•

Noninterest expense to increase by low single digits, on a percentage basis, compared to the third quarter 2016.

We also expect full year 2016 noninterest expense to remain stable compared to full year 2015, and the full year 2016 effective tax rate to be approximately 25%.

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

Average Consolidated Balance Sheet Highlights

Table 2: Summarized Average Balance Sheet


Nine months ended September 30 Dollars in millions					Change
Nine months ended September 30 Dollars in millions	2016		2015		$			%
Average assets
Interest-earning assets
Investment securities	$	70,706	$	59,578	$	11,128			19	%
Loans		208,124		205,122		3,002			1	%
Interest-earning deposits with banks		26,691		33,380		(6,689	)		(20	)%
Other		7,797		9,048		(1,251	)		(14	)%
Total interest-earning assets		313,318		307,128		6,190			2	%
Noninterest-earning assets		46,289		46,005		284			1	%
Total average assets	$	359,607	$	353,133	$	6,474			2	%
Average liabilities and equity
Interest-bearing liabilities
Interest-bearing deposits	$	171,635	$	162,790	$	8,845			5	%
Borrowed funds		53,411		57,018		(3,607	)		(6	)%
Total interest-bearing liabilities		225,046		219,808		5,238			2	%
Noninterest-bearing deposits		77,133		75,359		1,774			2	%
Other liabilities		11,169		12,091		(922	)		(8	)%
Equity		46,259		45,875		384			1	%
Total average liabilities and equity	$	359,607	$	353,133	$	6,474			2	%

Average investment securities increased due to higher 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 increased from 19% to 23% of average interest-earning assets.

The increase in average loans was driven by growth in average commercial real estate loans of $3.9 billion and average commercial loans of $1.7 billion, partially offset by a decrease in consumer loans of $2.8 billion. The decline in consumer loans was primarily attributable to declines in the nonstrategic consumer and the government guaranteed education loan portfolios. Loans represented 66% of average interest-earning assets for the first nine months of 2016 and 67% in the same period of 2015.

Average interest-earning deposits with banks, which are primarily maintained with the Federal Reserve Bank, decreased in the comparison reflecting higher investment securities, loan growth and lower borrowed funds, partially offset by an increase in deposits.

Average total deposits increased $10.6 billion, primarily due to higher average savings deposits, which reflected a shift from money market deposits to relationship-based savings products. Additionally, average interest-bearing demand deposits and average noninterest-bearing deposits increased as

overall deposits grew. Average total deposits increased from 67% to 69% of average assets in the comparison.

Average borrowed funds declined due to decreases in average commercial paper and Federal Home Loan Bank (FHLB) borrowings, partially offset by an increase in average bank notes and senior debt. The Liquidity Risk Management portion of this Financial Review includes additional information regarding our sources and uses of borrowed funds.

Various seasonal and other factors impact our period-end balances, whereas average balances are generally more indicative of underlying business trends apart from the impact of acquisitions and divestitures. Total assets were $369.3 billion at September 30, 2016 compared with $358.5 billion at December 31, 2015. The Consolidated Balance Sheet Review section of this Financial Review provides information on changes in selected Consolidated Balance Sheet categories at September 30, 2016 compared with December 31, 2015.

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

Recent Market and Industry Developments

As previously disclosed in our First Quarter 2016 Form 10-Q, the final rules adopted by the FDIC imposing a deposit insurance assessment surcharge (Surcharge) on insured depository institutions with total consolidated assets of $10 billion or more (including PNC Bank) became effective on July 1, 2016. The Surcharge took effect beginning with the third quarter 2016 assessment period. Based on data as of September 30, 2016, PNC Bank’s quarterly assessment increased by approximately $25 million compared to the second quarter of 2016, reflecting the impact of the Surcharge and the reduction of regular assessments that went into effect at the same time.

In September 2016, the Office of the Comptroller of the Currency (OCC) issued final enforceable guidelines under section 39 of the Federal Deposit Insurance Act that establish standards for recovery planning for insured national banks with average total consolidated assets of $50 billion or more, including PNC Bank. The guidelines require a covered bank to develop and maintain a recovery plan that, among other things, identifies a range of options that could be undertaken by the covered bank to restore its financial strength and viability should identified triggering events occur. For PNC Bank the compliance date for these guidelines is January 1, 2018.

Also in September 2016, the Federal Reserve proposed amendments to its capital plan rule that would, among other things, reduce, from 1% to 0.25% of Tier 1 capital, the amount of capital distributions that a bank holding company may make above the amounts included in its most recently approved capital plan without seeking the Federal Reserve’s prior approval and prohibit bank holding companies from seeking to use this “de minimis” capital distribution authority during the second calendar quarter of each year. The comment period on the proposal closes on November 25, 2016. Governor Daniel Tarullo of the Federal Reserve also outlined additional changes that the Federal Reserve is considering to its capital plan rule and CCAR process, including the establishment of a new “stress capital buffer,” in a speech delivered on September 26, 2016. Governor Tarullo indicated that such potential changes would be issued for public comment at a later date and, accordingly, the precise nature of these additional potential changes is not known at this time.

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 2016 was $1.0 billion, or $1.84 per diluted common share, a decrease of 6% compared with $1.1 billion, or $1.90 per diluted common share, for the third quarter of 2015. For the first nine months of 2016, net income was $2.9 billion, or $5.33 per diluted common share, a decrease of 6% compared with $3.1 billion, or $5.52 per diluted common share, for the first nine months of 2015.

Net income decreased in the quarterly comparison as revenue growth, driven by a 2% increase in net interest income and a 1% increase in noninterest income, was more than offset by a higher effective tax rate and a 2% increase in noninterest expense. Net income decreased in the year-to-date comparison driven by higher provision for credit losses and a 3% decline in noninterest income, partially offset by a 1% increase in net interest income and lower noninterest expense.

Net Interest Income

Table 3: Net Interest Income and Net Interest Margin


	Three months ended September 30						Nine months ended September 30
Dollars in millions	2016			2015			2016			2015
Net interest income	$	2,095		$	2,062		$	6,261		$	6,186
Net interest margin (a)		2.68	%		2.67	%		2.71	%		2.74	%

(a)	See footnote (c) in Table 1: Consolidated Financial Highlights on page 1.

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

Net interest income increased by $33 million, or 2%, and $75 million, or 1%, for the third quarter and first nine months of 2016, respectively, compared to the same periods in 2015. The increases in both comparisons were attributable to increases in loan and securities balances and higher loan yields, partially offset by lower purchase accounting accretion, lower securities yields and an increase in borrowing costs.

Net interest margin increased in the quarterly comparison largely reflecting the impact of the December 2015 increase in the federal funds rate and decreased in the year-to-date comparison as the impact of the rate increase was more than offset by a lower benefit from purchase accounting accretion.

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

Noninterest Income

Table 4: Noninterest Income


	Three months ended September 30											Nine months ended September 30
	2016		2015			Change						2016		2015		Change
Dollars in millions	2016		2015			$			%			2016		2015		$			%
Noninterest income
Asset management	$	404	$	376		$	28			7	%	$	1,122	$	1,168	$	(46	)		(4	)%
Consumer services		348		341			7			2	%		1,039		986		53			5	%
Corporate services		389		384			5			1	%		1,117		1,097		20			2	%
Residential mortgage		160		125			35			28	%		425		453		(28	)		(6	)%
Service charges on deposits		174		172			2			1	%		495		481		14			3	%
Net gains on sales of securities		7		(9	)		16			(178	)%		20		41		(21	)		(51	)%
Other		252		324			(72	)		(22	)%		809		960		(151	)		(16	)%
Total noninterest income	$	1,734	$	1,713		$	21			1	%	$	5,027	$	5,186	$	(159	)		(3	)%

Noninterest income increased in the third quarter of 2016 compared to the third quarter of 2015 and decreased in the first nine months compared to the same period in 2015. Noninterest income as a percentage of total revenue was 45% in both the third quarters of 2016 and 2015 and 45% and 46% on a year-to-date basis, respectively.

Asset management revenue increased in the quarterly comparison primarily due to the impact of higher average equity markets on both BlackRock and our asset management business segment. The year-to-date comparison decreased mainly due to lower earnings from BlackRock and the impact from a $30 million trust settlement during the second quarter of 2015 in our asset management business segment. Discretionary client assets under management were $138 billion at September 30, 2016 compared with $132 billion at September 30, 2015.

Consumer services fees increased in the year-to-date comparison primarily due to growth in payment-related products including debit card, credit card and merchant services, as well as higher brokerage fees.

Corporate services revenue increased in the year-to-date comparison primarily reflecting higher capital markets-related revenue and higher treasury management fees.

Residential mortgage revenue increased in the quarterly comparison as a result of higher loan sales revenue from higher origination volumes and increased benefit from residential mortgage servicing rights valuation, net of economic hedge. The year-to-date comparison decreased mainly due to lower loan sales revenue and a lower benefit from residential mortgage servicing rights valuation, net of economic hedge.

Other noninterest income decreased in both comparisons primarily attributable to the impact of third quarter 2015 net gains of $43 million on sales of 0.5 million Visa Class B

common shares and lower revenue from private equity investments. There were no sales of Visa shares in the third quarter of 2016. Net gains on the sale of Visa shares for the first nine months of 2016 were $52 million on sales of 1.35 million shares compared with net gains of $124 million on sales of 1.5 million shares in the first nine months of 2015. Net gains on Visa sales include derivative fair value adjustments related to swap agreements with purchasers of Visa shares in connection with all sales to date.

Provision For Credit Losses

The provision for credit losses increased modestly to $87 million in the third quarter of 2016 compared to $81 million in the third quarter of 2015 and increased $185 million to $366 million for the first nine months of 2016 compared to the same period in 2015. The increase in the year-to-date comparison was attributable to a higher provision for energy related loans in the oil, gas, and coal sectors of $130 million in the first nine months of 2016 compared to $86 million for the first nine months of 2015, as well as slowing credit quality improvement in our commercial and consumer lending portfolios and the impact of continued loan growth.

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

Noninterest Expense

Noninterest expense for the third quarter of 2016 increased $42 million to $2.4 billion compared to the third quarter of 2015, while noninterest expense for the first nine months of 2016 compared to the same period in 2015 decreased $32 million to $7.0 billion. Both comparisons reflected increases to noninterest expense resulting from a new FDIC deposit insurance surcharge, higher variable compensation costs associated with increased business activity and investments in technology and business infrastructure as PNC continued to

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

focus on disciplined expense management. These were offset by net lower contingency accruals and the impact from our effective expense management.

As of September 30, 2016, we have completed actions to capture more than 75% of our 2016 continuous improvement savings goal of $400 million, and are on track to achieve the full-year goal. Through this program, we are helping to fund our continued investments in technology and business infrastructure.

Effective Income Tax Rate

The effective income tax rate was 25.4% in the third quarter of 2016 compared to 20.0% in the third quarter of 2015 and 24.4% in the first nine months of 2016 compared to 24.3% in the same period of 2015. The lower effective tax rate for the third quarter of 2015 reflected tax benefits attributable to effectively settling acquired entity tax contingencies.

The effective tax rate is generally lower than the statutory rate primarily due to tax credits PNC receives from our investments in low income housing and new markets investments, as well as earnings in other tax exempt investments.

CONSOLIDATED BALANCE SHEET REVIEW

Table 5: Summarized Balance Sheet Data


	September 30 2016			December 31 2015			Change
Dollars in millions	September 30 2016			December 31 2015			$			%
Assets
Interest-earning deposits with banks	$	27,058		$	30,546		$	(3,488	)		(11	)%
Loans held for sale		2,053			1,540			513			33	%
Investment securities		78,514			70,528			7,986			11	%
Loans		210,446			206,696			3,750			2	%
Allowance for loan and lease losses		(2,619	)		(2,727	)		108			4	%
Goodwill		9,103			9,103			–			–
Mortgage servicing rights		1,293			1,589			(296	)		(19	)%
Other intangible assets		304			379			(75	)		(20	)%
Other, net		43,196			40,839			2,357			6	%
Total assets	$	369,348		$	358,493		$	10,855			3	%
Liabilities
Deposits	$	259,895		$	249,002		$	10,893			4	%
Borrowed funds		51,541			54,532			(2,991	)		(5	)%
Other		11,067			8,979			2,088			23	%
Total liabilities		322,503			312,513			9,990			3	%
Equity
Total shareholders’ equity		45,707			44,710			997			2	%
Noncontrolling interests		1,138			1,270			(132	)		(10	)%
Total equity		46,845			45,980			865			2	%
Total liabilities and equity	$	369,348		$	358,493		$	10,855			3	%

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

PNC’s balance sheet reflected asset growth compared to December 31, 2015 and strong liquidity and capital positions at September 30, 2016.

•

Total assets increased primarily due to higher investment securities and loan balances, partially offset by lower interest-earning deposits with banks.

•

Higher total liabilities were driven by deposit growth.

•

The increase to total equity reflected increased retained earnings driven by net income, partially offset by share repurchases.

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

Loans

Outstanding loan balances of $210.4 billion at September 30, 2016 and $206.7 billion at December 31, 2015 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.3 billion at September 30, 2016 and $1.4 billion at December 31, 2015.

Table 6: Details Of Loans


	September 30 2016		December 31 2015		Change
Dollars in millions	September 30 2016		December 31 2015		$			%
Commercial lending
Commercial
Manufacturing	$	19,813	$	19,014	$	799			4	%
Retail/wholesale trade		17,211		16,661		550			3	%
Service providers		14,159		13,970		189			1	%
Real estate related (a)		12,045		11,659		386			3	%
Health care		9,148		9,210		(62	)		(1	)%
Financial services		7,203		7,234		(31	)		–
Other industries		21,933		20,860		1,073			5	%
Total commercial		101,512		98,608		2,904			3	%
Commercial real estate
Real estate projects (b)		16,851		15,697		1,154			7	%
Commercial mortgage		12,422		11,771		651			6	%
Total commercial real estate		29,273		27,468		1,805			7	%
Equipment lease financing		7,378		7,468		(90	)		(1	)%
Total commercial lending		138,163		133,544		4,619			3	%
Consumer lending
Home equity
Lines of credit		18,014		18,828		(814	)		(4	)%
Installment		12,418		13,305		(887	)		(7	)%
Total home equity		30,432		32,133		(1,701	)		(5	)%
Residential real estate
Residential mortgage		14,915		14,162		753			5	%
Residential construction		226		249		(23	)		(9	)%
Total residential real estate		15,141		14,411		730			5	%
Credit card		5,029		4,862		167			3	%
Other consumer
Automobile		11,898		11,157		741			7	%
Education		5,337		5,881		(544	)		(9	)%
Other		4,446		4,708		(262	)		(6	)%
Total consumer lending		72,283		73,152		(869	)		(1	)%
Total loans	$	210,446	$	206,696	$	3,750			2	%

(a)	Includes loans to customers in the real estate and construction industries.

(b)	Includes both construction loans and intermediate financing for projects.

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

Loan growth was the result of an increase in total commercial lending driven by higher commercial and commercial real estate loans, while consumer lending declined due to lower home equity and education loans, partially offset by higher automobile and residential mortgage loans.

Loans represented 57% of total assets at September 30, 2016 and 58% at December 31, 2015. Commercial lending represented 66% of the loan portfolio at September 30, 2016 and 65% at December 31, 2015. Consumer lending represented 34% of the loan portfolio at September 30, 2016 and 35% at December 31, 2015. See the Credit Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our loan portfolio.

Total loans above include purchased impaired loans of $3.1 billion, or 1% of total loans, at September 30, 2016, and $3.5 billion, or 2% of total loans, at December 31, 2015.

Allowance for Loan and Lease Losses (ALLL)

Information regarding our higher risk loans and ALLL is included in the Credit Risk Management portion of the Risk Management section of this Financial Review, Note 1 Accounting Policies in our 2015 Form 10-K and Note 3 Asset Quality and Note 4 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in our Notes To Consolidated Financial Statements included in this Report.

Purchased Impaired Loans

The following table provides further detail on purchased impaired loans at September 30, 2016 and December 31, 2015:

Table 7: Purchased Impaired Loans – Balances


	September 30, 2016						December 31, 2015
In millions	Outstanding Balance		Recorded Investment		Carrying Value		Outstanding Balance		Recorded Investment		Carrying Value
Total commercial lending	$	156	$	122	$	80	$	249	$	169	$	120
Total consumer lending		3,211		2,958		2,677		3,684		3,353		3,092
Total	$	3,367	$	3,080	$	2,757	$	3,933	$	3,522	$	3,212

The excess of undiscounted cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the loan using the constant effective yield method. Activity for the accretable yield during the first nine months of 2016 and 2015 follows:

Table 8: Purchased Impaired Loans – Accretable Yield


In millions	2016			2015
January 1	$	1,250		$	1,558
Accretion (including excess cash recoveries)		(292	)		(359	)
Net reclassifications to accretable from non-accretable		155			218
Disposals		(5	)		(66	)
September 30	$	1,108		$	1,351

We currently expect to collect total cash flows of $3.9 billion on purchased impaired loans, representing the $2.8 billion carrying value at September 30, 2016 and accretable net interest of $1.1 billion.

The table below provides the weighted average life (WAL) for each of the purchased impaired portfolios as of September 30, 2016.

Table 9: Weighted Average Life of the Purchased Impaired Portfolios


As of September 30, 2016 Dollars in millions	Recorded Investment		WAL (a)
Commercial	$	21		2.2 years
Commercial real estate		101		1.7 years
Consumer (b)		1,188		3.9 years
Residential real estate		1,770		4.6 years
Total	$	3,080		4.2 years

(a)	Weighted average life represents the average number of years for which each dollar of unpaid principal remains outstanding.

(b)	Portfolio primarily consists of nonrevolving home equity products.

For more information on purchased impaired loans and the accretable yield, see Note 1 Accounting Policies in our 2015 Form 10-K.

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

Investment Securities

The following table 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. 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.

Table 10: Investment Securities


	September 30, 2016				December 31, 2015				Ratings (a) As of September 30, 2016
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	$	12,327	$	12,680	$	10,022	$	10,172		100	%
Agency residential mortgage-backed		39,066		39,868		34,250		34,408		100
Non-agency residential mortgage-backed		3,576		3,754		4,225		4,392		11						4	%		80	%		5	%
Agency commercial mortgage-backed		3,352		3,408		3,045		3,086		100
Non-agency commercial mortgage-backed (b)		4,762		4,837		5,624		5,630		80			7	%		3			1			9
Asset-backed (c)		6,922		6,958		6,134		6,130		90			3						7
State and municipal		3,883		4,146		3,936		4,126		89			6									5
Other debt		2,830		2,878		2,211		2,229		51			32			16			1
Corporate stock and other		525		525		590		589														100
Total investment securities (d)	$	77,243	$	79,054	$	70,037	$	70,762		91	%		2	%		1	%		4	%		2	%

(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 available for sale and held to maturity securities.

Investment securities represented 21% of total assets at September 30, 2016 and 20% at December 31, 2015.

We evaluate our investment securities portfolio in light of changing market conditions and other factors and, where appropriate, take steps to improve our overall positioning. We consider the portfolio to be well-diversified and of high quality. At September 30, 2016, 91% of the securities in the portfolio were rated AAA/AA, with U.S. Treasury and government agencies, agency residential mortgage-backed and agency commercial mortgage-backed securities collectively representing 71% of the portfolio.

The investment securities portfolio includes both available for sale and held to maturity securities. Securities classified as available for sale are carried at fair value with net unrealized gains and losses, representing the difference between amortized cost and fair value, included in Shareholders’ equity as Accumulated other comprehensive income or loss, net of tax, on our Consolidated Balance Sheet. Securities classified as held to maturity are carried at amortized cost.

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally decreases when credit spreads widen and

vice versa. Net unrealized gains in the total investment securities portfolio increased to $1.8 billion at September 30, 2016 from $.7 billion at December 31, 2015. The comparable amounts for the securities available for sale portfolio were $1.3 billion at September 30, 2016 and $.5 billion at December 31, 2015.

Unrealized gains and losses on available for sale debt securities do not impact liquidity; however, these gains and losses do affect capital under the regulatory capital rules. Also, a change in the securities’ credit ratings could impact the liquidity of the securities and may be indicative of a change in credit quality, which could affect our risk-weighted assets and, therefore, our risk-based regulatory capital ratios under the regulatory capital rules. In addition, the amount representing the credit-related portion of other-than-temporary impairment (OTTI) on securities would reduce our earnings and regulatory capital ratios.

The duration of investment securities was 1.8 years at September 30, 2016. We estimate that at September 30, 2016 the effective duration of investment securities was 2.0 years for an immediate 50 basis points parallel increase in interest rates and 1.6 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2015 for the effective duration of investment securities were 2.8 years and 2.6 years, respectively.

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

Based on current interest rates and expected prepayment speeds, the weighed-average expected maturity of the investment securities portfolio (excluding corporate stock and other) was 4.0 years at September 30, 2016 compared to 4.8 years at December 31, 2015. The weighted-average expected maturities of mortgage and other asset-backed debt securities were as follows as of September 30, 2016:

Table 11: Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities


September 30, 2016	Years
Agency residential mortgage-backed securities		3.4
Non-agency residential mortgage-backed securities		5.3
Agency commercial mortgage-backed securities		3.5
Non-agency commercial mortgage-backed securities		3.5
Asset-backed securities		2.5

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 OTTI credit losses that would impact our Consolidated Income Statement. For those securities on our balance sheet at September 30, 2016, where during our quarterly security-level impairment assessments we determined losses represented OTTI, we have recorded cumulative credit losses of $1.1 billion in earnings and accordingly have reduced the amortized cost of our securities. The majority of these cumulative impairment charges related to non-agency residential mortgage-backed and asset-backed securities rated BB or lower.

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.

Loans Held for Sale

Table 12: Loans Held For Sale


	September 30 2016		December 31 2015	Change
In millions	September 30 2016		December 31 2015	$		%
Commercial mortgages	$	876	$668	$	208		31	%
Residential mortgages		1,129	850		279		33	%
Other		48	22		26		118	%
Total	$	2,053	$1,540	$	513		33	%

Loans held for sale increased in the comparison as origination volumes exceeded loan sales during the first nine months of 2016 in both commercial and residential mortgages.

We sold $2.8 billion of commercial mortgage loans to agencies during the first nine months of 2016 compared to $3.0 billion during the first nine months of 2015. Total revenue of $51 million was recognized on the valuation and sale of commercial mortgage loans held for sale, net of hedges, during the first nine months of 2016, including $18 million in the third quarter. Comparable amounts for 2015 were $64 million and $13 million, respectively. These amounts are included in Other noninterest income on the Consolidated Income Statement.

Residential mortgage loan origination volume was $7.6 billion during the first nine months of 2016 compared to $8.2 billion in the same period in 2015. The majority of such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $4.8 billion of loans and recognized loan sales revenue of $262 million during the first nine months of 2016, of which $103 million occurred in the third quarter. The comparable amounts for 2015 were $6.2 billion and $278 million, respectively, including $75 million in the third quarter. These loan sales revenue amounts are included in Residential mortgage noninterest income on the Consolidated Income Statement.

Interest income on loans held for sale was $55 million during the first nine months of 2016, including $21 million in the third quarter. Comparable amounts for 2015 were $68 million and $22 million, respectively. These amounts are included in Other interest income on the Consolidated Income Statement.

Additional information regarding our loan sale and servicing activities is included in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities and Note 6 Fair Value in our Notes To Consolidated Financial Statements included in Part 1, Item 1 of this Report.

Funding Sources

Table 13: Details Of Funding Sources


	September 30 2016		December 31 2015		Change
Dollars in millions	September 30 2016		December 31 2015		$			%
Deposits
Money market	$	115,324	$	118,079	$	(2,755	)		(2	)%
Demand		92,282		90,038		2,244			2	%
Savings		33,540		20,375		13,165			65	%
Retail certificates of deposit		16,979		17,405		(426	)		(2	)%
Time deposits in foreign offices and other time deposits		1,770		3,105		(1,335	)		(43	)%
Total deposits		259,895		249,002		10,893			4	%
Borrowed funds
Federal funds purchased and repurchase agreements		1,235		1,777		(542	)		(31	)%
FHLB borrowings		17,050		20,108		(3,058	)		(15	)%
Bank notes and senior debt		22,431		21,298		1,133			5	%
Subordinated debt		8,708		8,556		152			2	%
Other		2,117		2,793		(676	)		(24	)%
Total borrowed funds		51,541		54,532		(2,991	)		(5	)%
Total funding sources	$	311,436	$	303,534	$	7,902			3	%

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

See the Liquidity Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our 2016 capital and liquidity activities.

Total deposits increased in the comparison mainly due to growth in savings deposits reflecting in part a shift from money market deposits to relationship-based savings products. Interest-bearing deposits represented 68% of total deposits at both September 30, 2016 and December 31, 2015.

Total borrowed funds decreased in the comparison due to maturities of FHLB borrowings, partially offset by higher bank notes and senior debt.

Capital

We manage our funding and capital positions by making adjustments to our balance sheet size and composition, issuing or redeeming debt, issuing equity or other capital instruments, executing treasury stock transactions and capital redemptions, managing dividend policies and retaining earnings.

We repurchase shares of PNC common stock under common stock repurchase authorizations approved by PNC’s Board of Directors and consistent with capital plans submitted to, and accepted by, the Federal Reserve. The extent and timing of share repurchases under authorizations will depend on a number of factors including, among others, market and general economic conditions, economic and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, contractual and regulatory limitations, and the results of future supervisory assessments of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process.

In the second quarter of 2016, we completed our common stock repurchase programs for the five quarter period that ended in June 2016 with total repurchases of 29.9 million common shares for $2.7 billion. These repurchases were included in our capital plan accepted by the Federal Reserve as part of our 2015 CCAR submission. Additionally, we paid $1.3 billion in common stock dividends for a total of $4.0 billion of capital returned to shareholders during this five quarter period.

In connection with the 2016 CCAR process, we submitted our capital plan as approved by PNC’s Board of Directors, to the Federal Reserve in April 2016. The Federal Reserve accepted the capital plan and did not object to our proposed capital actions. As provided for in the 2016 capital plan, PNC announced new share repurchase programs of up to $2.0 billion for the four-quarter period beginning in the third quarter of 2016, including repurchases of up to $200 million related to employee benefit plans. In the third quarter of 2016, we repurchased 5.9 million common shares for $.5 billion.

We paid dividends on common stock of $.3 billion, or 55 cents per common share, during the third quarter of 2016. On October 4, 2016, the PNC Board of Directors declared a quarterly common stock cash dividend of 55 cents per share payable on November 5, 2016. In July 2016, the Board of Directors raised the quarterly dividend on common stock to 55 cents per share, an increase of 4 cents per share, or 8%, effective with the August dividend.

See the Supervision and Regulation section of Item 1 Business of our 2015 Form 10-K for further information concerning the CCAR process and the factors the Federal Reserve takes into consideration in its evaluation of capital plans. See also the Capital section of the Consolidated Balance Sheet Review in our 2015 Form 10-K for additional information on our 2015 CCAR submission and current capital plan.

Table 14: Shareholders’ Equity


	September 30 2016			December 31 2015			Change
Dollars in millions	September 30 2016			December 31 2015			$			%
Shareholders’ equity
Preferred stock (a)
Common stock	$	2,709		$	2,708		$	1			–
Capital surplus – preferred stock		3,456			3,452			4			–
Capital surplus – common stock and other		12,703			12,745			(42	)		–
Retained earnings		30,958			29,043			1,915			7	%
Accumulated other comprehensive income		646			130			516			397	%
Common stock held in treasury at cost		(4,765	)		(3,368	)		(1,397	)		(41	)%
Total shareholders’ equity	$	45,707		$	44,710		$	997			2	%

(a)	Par value less than $.5 million at each date.

The growth in total shareholders’ equity as of September 30, 2016 compared to December 31, 2015 was mainly due to an increase in retained earnings and higher accumulated other comprehensive income primarily related to net securities gains, partially offset by common share repurchases of $1.5 billion. The growth in retained earnings resulted from net income of $2.9 billion during the period, reduced by $1.0 billion of common and preferred dividends declared. Common shares outstanding were 488 million and 504 million at September 30, 2016, and December 31, 2015, respectively, reflecting repurchases of 17.9 million shares during the period.

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

Table 15: Basel III Capital


	September 30, 2016
Dollars in millions	2016 Transitional Basel III (a)			Pro forma Fully Phased-In Basel III (Non-GAAP) (estimated) (b)(c)
Common equity Tier 1 capital
Common stock plus related surplus, net of treasury stock	$	10,646		$	10,646
Retained earnings		30,958			30,958
Accumulated other comprehensive income for securities currently and previously held as available for sale		504			840
Accumulated other comprehensive income for pension and other postretirement plans		(323	)		(538	)
Goodwill, net of associated deferred tax liabilities		(8,830	)		(8,830	)
Other disallowed intangibles, net of deferred tax liabilities		(163	)		(272	)
Other adjustments/(deductions)		(177	)		(180	)
Total common equity Tier 1 capital before threshold deductions		32,615			32,624
Total threshold deductions		(731	)		(1,218	)
Common equity Tier 1 capital		31,884			31,406
Additional Tier 1 capital
Preferred stock plus related surplus		3,456			3,456
Noncontrolling interests (d)		418			45
Other adjustments/(deductions)		(86	)		(111	)
Tier 1 capital		35,672			34,796
Additional Tier 2 capital
Qualifying subordinated debt		3,929			3,755
Trust preferred capital securities		119			–
Allowance for loan and lease losses included in Tier 2 capital		2,929			2,929
Other (d)		6			11
Total Basel III capital	$	42,655		$	41,491
Risk-weighted assets
Basel III standardized approach risk-weighted assets (e)	$	300,308		$	308,665
Basel III advanced approaches risk-weighted assets (f)		N/A		$	280,150
Average quarterly adjusted total assets	$	352,860		$	352,231
Supplementary leverage exposure (g)	$	417,565		$	416,937
Basel III risk-based capital and leverage ratios
Common equity Tier 1		10.6	%		10.2	%(h)(i)
Tier 1		11.9	%		11.3	%(h)(j)
Total		14.2	%		13.4	%(h)(k)
Leverage (l)		10.1	%		9.9	%
Supplementary leverage ratio (m)		8.5	%		8.3	%

(a)	Calculated using the regulatory capital methodology applicable to PNC during 2016.

(b)

PNC utilizes the pro forma fully phased-in Basel III capital ratios to assess its capital position (without the benefit of phase-ins), as these ratios represent the regulatory capital standards that will ultimately be applicable to PNC under the final Basel III rules. Pro forma fully phased-in capital amounts, ratios and risk-weighted and leverage-related assets are estimates.

(c)

Basel III capital ratios and estimates may be impacted by additional regulatory guidance or analysis and, in the case of those ratios calculated using the advanced approaches, may be subject to variability based on the ongoing evolution, validation and regulatory approval of PNC’s models integral to the calculation of advanced approaches risk-weighted assets.

(d)	Primarily includes REIT Preferred Securities for transitional and pro forma fully phased-in.

(e)	Includes credit and market risk-weighted assets.

(f)

Basel III advanced approaches risk-weighted assets are estimated based on the Basel III advanced approaches rules, and include credit, market, and operational risk-weighted assets. During the parallel run qualification phase PNC has refined the data, models, and internal processes used as part of the advanced approaches for determining risk-weighted assets. We anticipate additional refinements to this estimate through the parallel run qualification phase.

(g)	Supplementary leverage exposure is the sum of Adjusted average assets and certain off-balance sheet exposures including undrawn credit commitments and derivative potential future exposures.

(h)	Pro forma fully phased-in Basel III capital ratio based on Basel III standardized approach risk-weighted assets and rules.

(i)

For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Common equity Tier 1 capital ratio estimate is 11.2%. This capital ratio is calculated using pro forma fully phased-in Common equity Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets.

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

(j)	For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Tier 1 risk-based capital ratio estimate is 12.4%. This capital ratio is calculated using fully phased-in Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets.

(k)

For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Total capital risk-based capital ratio estimate is 13.8%. This ratio is calculated using fully phased-in Total Basel III capital, which under the advanced approaches, Additional Tier 2 capital includes allowance for loan and lease losses in excess of Basel expected credit losses, if any, up to 0.6% of credit risk related risk-weighted assets, and dividing by estimated Basel III advanced approach risk-weighted assets.

(l)	Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets.

(m)	Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure. As advanced approaches banking organizations, PNC and PNC Bank will be subject to a 3% minimum supplementary leverage ratio effective January 1, 2018.

As a result of the staggered effective dates of the final U.S. Basel III regulatory capital rules (Basel III rules), as well as the fact that PNC remains in the parallel run qualification phase for the advanced approaches, PNC’s regulatory risk-based ratios in 2016 are calculated using the standardized approach for determining risk-weighted assets, and the definitions of, and deductions from, regulatory capital under the Basel III rules (as such definitions and deductions are phased-in for 2016). We refer to the capital ratios calculated using the phased-in Basel III provisions in effect for 2016 and, for the risk-based ratios, standardized approach risk-weighted assets, as the 2016 Transitional Basel III ratios. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, past due exposures, equity exposures and securitization exposures are generally subject to higher risk weights than other types of exposures.

Under the Basel III rules adopted by the U.S. banking agencies, significant common stock investments in unconsolidated financial institutions, mortgage servicing rights and deferred tax assets must be deducted from capital (subject to a phase-in schedule and net of associated deferred tax liabilities) to the extent they individually exceed 10%, or in the aggregate exceed 15%, of the institution’s adjusted common equity Tier 1 capital. Also, Basel III regulatory capital includes (subject to a phase-in schedule) accumulated other comprehensive income related to securities currently and previously held as available for sale, as well as pension and other postretirement plans.

Federal banking regulators have stated that they expect the largest U.S. bank holding companies, including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largest U.S. bank holding companies, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers through estimated stress scenarios. We seek to manage our capital consistent with these regulatory principles, and believe that our September 30, 2016 capital levels were aligned with them.

At September 30, 2016, PNC and PNC Bank, our sole bank subsidiary, were both considered “well capitalized,” based on applicable U.S. regulatory capital ratio requirements. To qualify as “well capitalized”, PNC must have Transitional Basel III capital ratios of at least 6% for Tier 1 risk-based

capital and 10% for Total risk-based capital, and PNC Bank must have Transitional Basel III capital ratios of at least 6.5% for Common equity Tier 1 risk-based capital, 8% for Tier 1 risk-based capital, 10% for Total risk-based capital, and a Leverage ratio of at least 5%.

We provide additional information regarding regulatory capital requirements and some of their potential impacts on PNC in the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 19 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K. See the Statistical Information (Unaudited) section of this Report for details on PNC’s December 31, 2015 and September 30, 2015 Transitional Basel III and Pro forma fully phased-in Basel III common equity tier 1 capital ratios.

OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

We engage in a variety of activities that involve unconsolidated entities or that are otherwise not reflected in our Consolidated Balance Sheet that are generally referred to as “off-balance sheet arrangements.” Additional information on these types of activities is included in our 2015 Form 10-K and in the following sections of this Report:

•

Commitments, including contractual obligations and other commitments, included within the Risk Management section of this Financial Review,

•

Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements, and

•

Note 13 Commitments and Guarantees in the Notes To Consolidated Financial Statements.

PNC consolidates variable interest entities (VIEs) when we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.

A summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements, as of September 30, 2016 and December 31, 2015, is included in Note 2 of this Report.

The PNC Financial Services Group, Inc. – Form 10-Q 15

Trust Preferred Securities and REIT Preferred Securities

See Note 11 Borrowed Funds and Note 16 Equity in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K for additional information on trust preferred securities issued by PNC Capital Trust C and REIT preferred securities issued by PNC Preferred Funding Trust I and PNC Preferred Funding Trust II including information on contractual limitations potentially imposed on payments (including dividends) with respect to PNC and PNC Bank’s equity capital securities.

FAIR VALUE MEASUREMENTS

In addition to the following, see Note 6 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for further information regarding fair value.

The following table summarizes the assets and liabilities measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015, respectively, and the portions of such assets and liabilities that are classified within Level 3 of the valuation hierarchy. Level 3 assets and liabilities are those where the fair value is estimated using significant unobservable inputs.

Table 16: Fair Value Measurements – Summary


	September 30, 2016						December 31, 2015
Dollars in millions	Total Fair Value			Level 3			Total Fair Value			Level 3
Total assets	$	78,010		$	7,929		$	68,804		$	8,606
Total assets at fair value as a percentage of consolidated assets		21	%					19	%
Level 3 assets as a percentage of total assets at fair value					10	%					13	%
Level 3 assets as a percentage of consolidated assets					2	%					2	%
Total liabilities	$	6,040		$	424		$	4,892		$	495
Total liabilities at fair value as a percentage of consolidated liabilities		2	%					2	%
Level 3 liabilities as a percentage of total liabilities at fair value					7	%					10	%
Level 3 liabilities as a percentage of consolidated liabilities					<1	%					<1	%

BUSINESS SEGMENTS REVIEW

We have six reportable business segments:

•

Retail Banking

•

Corporate & Institutional Banking

•

Asset Management Group

•

Residential Mortgage Banking

•

BlackRock

•

Non-Strategic Assets Portfolio

Business segment results, including the basis of presentation of inter-segment revenues, and a description of each business are included in Note 14 Segment Reporting included in the Notes To Consolidated Financial Statements in Part I, Item 1 of 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 revenue on a taxable-equivalent basis.

Net interest income in business segment results reflects PNC’s 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.

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

Retail Banking

(Unaudited)

Table 17: Retail Banking Table


Nine months ended September 30 Dollars in millions, except as noted							Change
	2016			2015			$			%
Income Statement
Net interest income	$	3,351		$	3,152		$	199			6	%
Noninterest income		1,628			1,652			(24	)		(1	)%
Total revenue		4,979			4,804			175			4	%
Provision for credit losses		210			151			59			39	%
Noninterest expense		3,509			3,558			(49	)		(1	)%
Pretax earnings		1,260			1,095			165			15	%
Income taxes		462			401			61			15	%
Earnings	$	798		$	694		$	104			15	%
Average Balance Sheet
Loans
Consumer
Home equity	$	26,351		$	27,810		$	(1,459	)		(5	)%
Automobile		11,040			10,374			666			6	%
Education		5,653			6,402			(749	)		(12	)%
Credit cards		4,818			4,476			342			8	%
Other		1,800			1,886			(86	)		(5	)%
Total consumer		49,662			50,948			(1,286	)		(3	)%
Commercial and commercial real estate		12,268			12,744			(476	)		(4	)%
Residential mortgage		546			704			(158	)		(22	)%
Total loans	$	62,476		$	64,396		$	(1,920	)		(3	)%
Total assets	$	71,658		$	73,430		$	(1,772	)		(2	)%
Deposits
Noninterest-bearing demand	$	26,895		$	23,353		$	3,542			15	%
Interest-bearing demand		38,432			36,009			2,423			7	%
Money market		47,230			54,775			(7,545	)		(14	)%
Savings		25,738			13,471			12,267			91	%
Certificates of deposit		15,008			16,763			(1,755	)		(10	)%
Total deposits	$	153,303		$	144,371		$	8,932			6	%
Performance Ratios
Return on average assets		1.49	%		1.26	%
Noninterest income to total revenue		33	%		34	%
Efficiency		70	%		74	%
Supplemental Noninterest Income Information
Service charges on deposits	$	474		$	459		$	15			3	%
Brokerage	$	222		$	212		$	10			5	%
Consumer services	$	792		$	747		$	45			6	%
Other Information (a)
Customer-related statistics (average):
Non-teller deposit transactions (b)		49	%		43	%
Digital consumer customers (c)		57	%		52	%
Credit-related statistics:
Nonperforming assets (d)	$	970		$	1,092		$	(122	)		(11	)%
Net charge-offs	$	260		$	251		$	9			4	%
Other statistics:
ATMs		9,045			8,996			49			1	%
Branches (e)		2,600			2,645			(45	)		(2	)%
Universal branches (f)		475			355			120			34	%
Brokerage account client assets (billions) (g)	$	44		$	42		$	2			5	%

(continued on following page)

The PNC Financial Services Group, Inc. – Form 10-Q 17

(continued from previous page)

(a)	Presented as of September 30, except for customer-related statistics, which are averages for the nine months ended, and net charge-offs, which are for the nine months ended.

(b)	Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application.

(c)	Represents consumer checking relationships that process the majority of their transactions through non-teller channels.

(d)	Includes nonperforming loans of $.9 billion at September 30, 2016 and $1.0 billion at September 30, 2015.

(e)	Excludes satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services.

(f)	Included in total branches, represents branches operating under our Universal model.

(g)	Amounts include cash and money market balances.

Retail Banking earned $798 million in the first nine months of 2016 compared with $694 million for the first nine months of 2015. The increase in earnings was driven by higher net interest income and a decrease in noninterest expense, partially offset by increased provision for credit losses. Retail Banking continues to enhance the customer experience with refinements to product offerings that drive product value for consumers and small businesses. We are focused on meeting the financial needs of our customers by providing a broad range of liquidity, banking and investment products.

Retail Banking continued to focus on the strategic priority of transforming the customer experience through transaction migration, branch network transformation and multi-channel engagement and service strategies.

•

In the first nine months of 2016, approximately 57% of consumer customers used non-teller channels for the majority of their transactions compared with 52% for the same period in 2015.

•

Deposit transactions via ATM and mobile channels increased to 49% of total deposit transactions in the first nine months of 2016 compared with 43% for the same period in 2015.

•

PNC had a network of 2,600 branches and 9,045 ATMs at September 30, 2016. Approximately 18% of the branch network operates under the universal model.

•

Instant debit card issuance, which enables us to print a customer’s debit card in minutes, was available in 1,812 branches, or 70% of the branch network, as of September 30, 2016.

Net interest income increased in the comparison due to growth in deposit balances partially offset by lower loan balances and interest rate spread compression on the value of loans.

The decline in noninterest income compared to the prior year period reflected the impact of higher net gains on sales of Visa Class B common shares in the 2015 period, as the first nine months of 2016 reflected net gains of $52 million on sales of 1.35 million Visa shares compared with net gains of $124 million on the sale of 1.5 million shares for the same period in 2015. Net gains on Visa sales include derivative fair value adjustments related to swap agreements with purchasers of Visa shares in connection with all sales to date.

Excluding the impact of these Visa sales, noninterest income grew in the comparison, reflecting execution on our strategy to provide diverse product and service offerings, which contributed to higher consumer service fee income from payment-related products, specifically in debit card, credit card and merchant services, as well as increased brokerage fees.

The decline in noninterest expense in the comparison was due to a decrease in compensation expense, lower marketing expense and reduced branch network expenses as a result of network transformation and transaction migration to lower cost digital and ATM channels.

Provision for credit losses increased compared to the same period a year ago, reflecting slowing credit quality improvement.

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

The deposit strategy of Retail Banking is to remain disciplined on pricing and focused on growing and retaining relationship-based balances, executing on market specific deposit growth strategies, and providing a source of low-cost funding and liquidity to PNC.

In the first nine months of 2016, average total deposits increased compared to the same period a year ago, driven by growth in savings deposits reflecting in part a shift from money market deposits to relationship-based savings products. Additionally, demand deposit categories increased, partially offset by a decline in certificates of deposit due to the net runoff of maturing accounts.

Retail Banking continued to focus on a relationship-based lending strategy. The decrease in average total loans in the comparison was due to a decline in home equity and commercial loans, as well as runoff of certain portions of the portfolios, as more fully described below.

•

Average home equity loans decreased as pay-downs and payoffs on loans exceeded new originated volume. Retail Banking’s home equity loan portfolio is relationship based, with over 97% of the portfolio attributable to borrowers in our primary geographic footprint. The weighted-average updated FICO scores for this portfolio were 748 at September 30, 2016 and 752 at December 31, 2015.

•

Average commercial and commercial real estate loans declined as pay-downs and payoffs on loans exceeded new volume.

•

Average automobile loans, comprised of both direct and indirect auto loans, increased primarily due to portfolio growth in previously underpenetrated markets.

•

Average credit card balances increased as a result of efforts to increase credit card share of wallet through organic growth.

•

In the first nine months of 2016, average loan balances for the remainder of the portfolio declined $993 million, or 11%, compared to the same period in 2015, driven by declines in the discontinued government guaranteed education, indirect other, and residential mortgage portfolios, which are primarily runoff portfolios.

Nonperforming assets decreased compared to September 30, 2015 driven by declines in both consumer and commercial nonperforming loans.

The PNC Financial Services Group, Inc. – Form 10-Q 19

Corporate & Institutional Banking

(Unaudited)

Table 18: Corporate & Institutional Banking Table


Nine months ended September 30 Dollars in millions, except as noted							Change
	2016			2015			$			%
Income Statement
Net interest income	$	2,597		$	2,613		$	(16	)		(1	)%
Noninterest income		1,484			1,397			87			6	%
Total revenue		4,081			4,010			71			2	%
Provision for credit losses		188			83			105			127	%
Noninterest expense		1,625			1,594			31			2	%
Pretax earnings		2,268			2,333			(65	)		(3	)%
Income taxes		810			841			(31	)		(4	)%
Earnings	$	1,458		$	1,492		$	(34	)		(2	)%
Average Balance Sheet
Loans held for sale	$	835		$	973		$	(138	)		(14	)%
Loans
Commercial	$	87,625		$	85,304		$	2,321			3	%
Commercial real estate		26,395			22,536			3,859			17	%
Equipment lease financing		6,843			6,965			(122	)		(2	)%
Total commercial lending		120,863			114,805			6,058			5	%
Consumer		445			971			(526	)		(54	)%
Total loans	$	121,308		$	115,776		$	5,532			5	%
Total assets	$	137,884		$	131,678		$	6,206			5	%
Deposits
Noninterest-bearing demand	$	45,712		$	48,168		$	(2,456	)		(5	)%
Money market		21,452			22,319			(867	)		(4	)%
Other		13,111			9,776			3,335			34	%
Total deposits	$	80,275		$	80,263		$	12			–
Performance Ratios
Return on average assets		1.41	%		1.51	%
Noninterest income to total revenue		36	%		35	%
Efficiency		40	%		40	%
Other Information
Commercial loan servicing portfolio (in billions) (a) (b)	$	461		$	441		$	20			5	%
Consolidated revenue from: (c)
Treasury Management (d)	$	1,162		$	999		$	163			16	%
Capital Markets (d)	$	600		$	592		$	8			1	%
Commercial mortgage banking activities
Commercial mortgage loans held for sale (e)	$	77		$	94		$	(17	)		(18	)%
Commercial mortgage loan servicing income (f)		198			191			7			4	%
Commercial mortgage servicing rights valuation, net of economic hedge (g)		22			25			(3	)		(12	)%
Total	$	297		$	310		$	(13	)		(4	)%
Net carrying amount of commercial mortgage servicing rights (a)	$	473		$	505		$	(32	)		(6	)%
Average Loans (by C&IB business)
Corporate Banking	$	57,372		$	58,108		$	(736	)		(1	)%
Real Estate		36,235			30,621			5,614			18	%
Business Credit		14,770			14,503			267			2	%
Equipment Finance		11,094			10,956			138			1	%
Other		1,837			1,588			249			16	%
Total average loans	$	121,308		$	115,776		$	5,532			5	%
Credit-related statistics:
Nonperforming assets (a) (h)	$	671		$	484		$	187			39	%
Net charge-offs	$	169		$	6		$	163			*

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

* – Not meaningful.

(a)	As of September 30.

(b)	Represents loans serviced for PNC and others.

(c)

Represents consolidated PNC amounts. See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of the Corporate & Institutional Banking portion of this Business Segments Review section.

(d)	Includes amounts reported in net interest income, corporate service fees and other noninterest income.

(e)	Includes other noninterest income for valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, origination fees, gains on sale of loans held for sale and net interest income on loans held for sale.

(f)	Includes net interest income and noninterest income (primarily in corporate services fees) from loan servicing net of reduction in commercial mortgage servicing rights due to time decay and payoffs. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.

(g)	Amounts reported in corporate services revenue.

(h)	Includes nonperforming loans of $.6 billion at September 30, 2016 and $.4 billion at September 30, 2015.

Corporate & Institutional Banking earned $1.5 billion in the first nine months of both 2016 and 2015. Earnings decreased by $34 million primarily due to an increase in the provision for credit losses, partially offset by higher noninterest income. We continue to focus on building client relationships where the risk-return profile is attractive, including in the Southeast.

Net interest income decreased in the comparison, driven by continued interest rate spread compression on loans and lower purchase accounting accretion, which were mostly offset by the impact of higher average loans as well as interest rate spread expansion on deposits.

Higher noninterest income in the comparison was primarily due to an equity investment gain, an increase in gains on asset sales, higher capital markets-related revenue and higher treasury management fees. These increases were partially offset by lower noninterest income from commercial mortgage loan servicing and commercial mortgage loans held for sale activities.

Overall credit quality for the first nine months of 2016 remained relatively stable, except for deterioration of certain energy related loans, which was the primary driver for the increase in provision for credit losses, net charge-offs and nonperforming assets in the year over year comparisons. Increased provision for credit losses also reflected the impact of continued loan growth.

Noninterest expense increased in the comparison due to higher variable compensation and other costs associated with increased business activity and investments in technology and infrastructure, partially offset by our continued expense management.

Average loans increased in the comparison due to strong growth in Real Estate, partially offset by a decline in Corporate Banking:

•

PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. Higher average loans for this business were primarily due to growth in commercial lending driven by higher term and REIT lending.

•

Corporate Banking provides lending, treasury management and capital markets-related products and services to midsized and large corporations, government and not-for-profit entities. Average loans for this business declined in the comparison, reflecting the impact of capital and liquidity management activities, partially offset by increased lending to large corporate clients.

•

PNC Business Credit provides asset-based lending. The loan portfolio is relatively high yielding, with acceptable risk as the loans are mainly secured by short-term assets. Average loans for this business increased in the comparison due to new originations.

•

PNC Equipment Finance provides equipment financing solutions for clients throughout the U.S. and Canada. Average loans, including commercial loans and finance leases, and operating leases were $11.8 billion in the first nine months of 2016, stable with the first nine months of 2015.

Average deposits increased nominally compared to the prior year period, as interest-bearing demand deposit growth was essentially offset by decreases in noninterest-bearing demand deposits and money market deposits.

Growth in the commercial loan servicing portfolio was driven by servicing additions from new and existing customers exceeding portfolio runoff.

The PNC Financial Services Group, Inc. – Form 10-Q 21

Product Revenue

In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management, capital markets-related products and services, and commercial mortgage banking activities, for customers of all business segments. On a consolidated basis, the revenue from these other services is included in net interest income, corporate service fees and other noninterest income. From a segment perspective, the majority of the revenue and expense related to these services is reflected in the Corporate & Institutional Banking segment results and the remainder is reflected in the results of other businesses. The Other Information section in Table 18 includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.

Treasury management revenue, comprised of fees and net interest income from customer deposit balances, increased in the comparison to the prior year period, driven by liquidity-related revenue.

Capital markets-related products and services include foreign exchange, derivatives, securities, loan syndications, mergers and acquisitions advisory and equity capital markets advisory related services. Revenue from capital markets-related products and services increased slightly in the comparison as higher merger and acquisition advisory fees and structuring fees on asset securitizations were mostly offset by lower revenue associated with credit valuations for customer-related derivative activities.

Revenue from commercial mortgage banking activities (including net interest income and noninterest income) includes those derived from commercial mortgage servicing and from commercial mortgage loans held for sale and related hedges. Total revenue from commercial mortgage banking activities decreased in the comparison due to lower revenue from commercial mortgage loans held for sale, partially offset by higher commercial mortgage loan servicing income.

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

Asset Management Group

(Unaudited)

Table 19: Asset Management Group Table


Nine months ended September 30 Dollars in millions, except as noted							Change
	2016			2015			$			%
Income Statement
Net interest income	$	227		$	215		$	12			6	%
Noninterest income		636			658			(22	)		(3	)%
Total revenue		863			873			(10	)		(1	)%
Provision for credit losses		–			11			(11	)		(100	)%
Noninterest expense		618			636			(18	)		(3	)%
Pretax earnings		245			226			19			8	%
Income taxes		90			83			7			8	%
Earnings	$	155		$	143		$	12			8	%
Average Balance Sheet
Loans
Consumer	$	5,493		$	5,656		$	(163	)		(3	)%
Commercial and commercial real estate		759			901			(142	)		(16	)%
Residential mortgage		1,032			899			133			15	%
Total loans	$	7,284		$	7,456		$	(172	)		(2	)%
Total assets	$	7,743		$	7,922		$	(179	)		(2	)%
Deposits
Noninterest-bearing demand	$	1,409		$	1,207		$	202			17	%
Interest-bearing demand		4,069			4,126			(57	)		(1	)%
Money market		4,278			5,072			(794	)		(16	)%
Savings		2,032			193			1,839			953	%
Other		275			279			(4	)		(1	)%
Total deposits	$	12,063		$	10,877		$	1,186			11	%
Performance Ratios
Return on average assets		2.68	%		2.41	%
Noninterest income to total revenue		74	%		75	%
Efficiency		72	%		73	%
Other Information
Nonperforming assets (a) (b)	$	51		$	52		$	(1	)		(2	)%
Net charge-offs	$	7		$	14		$	(7	)		(50	)%
Client Assets Under Administration (in billions) (a) (c) (d)
Discretionary client assets under management	$	138		$	132		$	6			5	%
Nondiscretionary client assets under administration		128			124			4			3	%
Total	$	266		$	256		$	10			4	%
Discretionary client assets under management
Personal	$	85		$	84		$	1			1	%
Institutional		53			48		$	5			10	%
Total	$	138		$	132
Equity	$	73		$	70		$	3			4	%
Fixed Income		40			40			–			–
Liquidity/Other		25			22		$	3			14	%
Total	$	138		$	132

(a)	As of September 30.

(b)	Includes nonperforming loans of $45 million at September 30, 2016 and $48 million at September 30, 2015.

(c)	Excludes brokerage account client assets.

(d)

As a result of certain investment advisory services performed by one of our registered investment advisors, certain assets are reported as both discretionary client assets under management and nondiscretionary client assets under administration. The amount of such assets was approximately $9 billion at September 30, 2016 and $6 billion at September 30, 2015.

The PNC Financial Services Group, Inc. – Form 10-Q 23

Asset Management Group earned $155 million through the first nine months of 2016 compared with $143 million in the same period of 2015. Earnings for the first nine months of 2016 increased due to lower noninterest expense and a decline in the provision for credit losses, partially offset by decreased revenue.

The decrease in total revenue in the comparison was driven by lower noninterest income, partially offset by an increase in net interest income. The decline in noninterest income reflected the impact of a $30 million trust settlement in the second quarter of 2015, which was partially offset by net business growth.

Noninterest expense decreased in the first nine months of 2016 compared to the prior year period, primarily attributable to lower personnel expense. Asset Management Group remains focused on disciplined expense management as it makes strategic investments.

Asset Management Group’s growth strategy is focused on capturing more investable assets by delivering an enhanced client experience, and involves new client acquisition and expanding products and services based on our clients’ needs and investment objectives while leveraging our open architecture platform with a full array of investment products and banking solutions for all clients. Key considerations are maximizing front line productivity, a relationship-based focus with other line of business partners, and optimizing market presence in high opportunity markets.

Wealth Management and Hawthorn have nearly 100 offices operating in seven out of the ten most affluent states in the U.S. with a majority co-located with retail banking branches. The businesses provide customized investments, wealth planning, trust and estate administration and private banking solutions to affluent individuals and ultra-affluent families.

Institutional Asset Management provides advisory, custody, and retirement administration services to institutional clients such as corporations, unions, municipalities, non-profits, foundations, and endowments. The business also offers PNC proprietary mutual funds and investment strategies. Institutional Asset Management is strengthening its partnership with Corporate & Institutional Banking to drive growth and is focused on building retirement capabilities and expanding product solutions for all customers.

Asset Management Group’s discretionary client assets under management increased in the comparison to the prior year, primarily attributable to higher equity markets as of September 30, 2016 and net business growth.

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

Residential Mortgage Banking

(Unaudited)

Table 20: Residential Mortgage Banking Table


Nine months ended September 30							Change
Dollars in millions, except as noted	2016			2015			$			%
Income Statement
Net interest income	$	81		$	91		$	(10	)		(11	)%
Noninterest income		450			488			(38	)		(8	)%
Total revenue		531			579			(48	)		(8	)%
Provision for credit losses		–			2			(2	)		(100	)%
Noninterest expense		458			510			(52	)		(10	)%
Pretax earnings		73			67			6			9	%
Income taxes		27			24			3			13	%
Earnings	$	46		$	43		$	3			7	%
Average Balance Sheet
Loans held for sale	$	897		$	1,160		$	(263	)		(23	)%
Loans	$	979		$	1,175		$	(196	)		(17	)%
Mortgage servicing rights (MSR)	$	913		$	967		$	(54	)		(6	)%
Total assets	$	6,078		$	6,962		$	(884	)		(13	)%
Total deposits	$	2,685		$	2,415		$	270			11	%
Performance Ratios
Return on average assets		1.01	%		.83	%
Noninterest income to total revenue		85	%		84	%
Efficiency		86	%		88	%
Supplemental Noninterest Income Information
Loan servicing revenue
Servicing fees	$	171		$	143		$	28			20	%
Mortgage servicing rights valuation, net of economic hedge (a)	$	16		$	70		$	(54	)		(77	)%
Loan sales revenue	$	262		$	278		$	(16	)		(6	)%
Residential Mortgage Servicing Portfolio (in billions) (b)
Serviced portfolio balance (c)	$	126		$	122		$	4			3	%
Portfolio acquisitions	$	16		$	24		$	(8	)		(33	)%
MSR asset value (c)	$	.8		$	1.0		$	(.2	)		(20	)%
MSR capitalization value (in basis points) (c)		65			79			(14	)		(18	)%
Other Information
Loan origination volume (in billions)	$	7.6		$	8.2		$	(.6	)		(7	)%
Loan sale margin percentage		3.33	%		3.43	%
Percentage of originations represented by:
Purchase volume (d)		43	%		46	%
Refinance volume		57	%		54	%
Nonperforming assets (c) (e)	$	57		$	88		$	(31	)		(35	)%

(a)	Consolidated PNC amounts, which include asset and liability management activities reported in the “Other” business segment, were $57 million and $83 million for the nine months ended September 30, 2016 and 2015, respectively.

(b)	Represents loans serviced for third parties.

(c)	As of September 30.

(d)	Mortgages with borrowers as part of residential real estate purchase transactions.

(e)	Includes nonperforming loans of $33 million at September 30, 2016 and $53 million at September 30, 2015.

The PNC Financial Services Group, Inc. – Form 10-Q 25

Residential Mortgage Banking earned $46 million in the first nine months of 2016 compared with earnings of $43 million in the first nine months of 2015, primarily driven by a decline in noninterest expense, which was mostly offset by lower noninterest income and net interest income.

The strategic focus of the business is the acquisition of new customers through a retail loan officer sales force with an emphasis on home purchase transactions, competing on the basis of superior service, and leveraging the bank footprint markets.

Residential Mortgage Banking overview:

•

Total loan originations declined 7% compared to the same period in 2015. Loans continue to be originated primarily through direct channels under Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Federal Housing Administration (FHA)/Department of Veterans Affairs agency guidelines. Refinancings were 57% of originations in the first nine months of 2016 and 54% in the first nine months of 2015.

•

The decline in net interest income was driven by the decrease in loan originations and lower balances of portfolio loans held for investment.

•

Noninterest income declined in the comparison, as increased servicing fee income was more than offset by lower benefit from residential mortgage servicing rights valuation, net of economic hedge, and decreased loan sales revenue.

•

Noninterest expense declined primarily as a result of lower residential mortgage foreclosure-related expenses, including reserve releases of $24 million, as well as lower servicing costs.

BlackRock

(Unaudited)

Table 21: BlackRock Table

Information related to our equity investment in BlackRock follows:


Nine months ended September 30 Dollars in millions	2016			2015
Business segment earnings (a)	$	390		$	407
PNC’s economic interest in BlackRock (b)		22	%		22	%

(a)	Includes PNC’s share of BlackRock’s reported GAAP earnings and additional income taxes on those earnings incurred by PNC.

(b)	At September 30.


In billions	September 30 2016		December 31 2015
Carrying value of PNC’s investment in BlackRock (c)	$	6.9	$	6.7
Market value of PNC’s investment in BlackRock (d)		12.8		12.0

(c)	PNC accounts for its investment in BlackRock under the equity method of accounting, exclusive of a related deferred tax liability of $2.2 billion at both September 30, 2016 and December 31, 2015. Our voting interest in BlackRock common stock was approximately 21% at September 30, 2016.

(d)	Does not include liquidity discount.

In addition to our investment in BlackRock reflected in Table 21, at September 30, 2016, we held approximately 0.8 million shares of BlackRock Series C Preferred Stock valued at $221 million, which are available to fund our obligation in connection with certain BlackRock long-term incentive plan (LTIP) programs. We account for the BlackRock Series C Preferred Stock at fair value, which offsets the impact of marking-to-market the obligation to deliver these shares to BlackRock. The fair value amount of the BlackRock Series C Preferred Stock is included on our Consolidated Balance Sheet in the caption Other assets. Additional information regarding the valuation of the BlackRock Series C Preferred Stock is included in Note 6 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report and in Note 7 Fair Value in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K.

Our 2015 Form 10-K includes additional information about our investment in BlackRock.

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

Non-Strategic Assets Portfolio

(Unaudited)

Table 22: Non-Strategic Assets Portfolio Table


Nine months ended September 30							Change
Dollars in millions	2016			2015			$			%
Income Statement
Net interest income	$	220		$	302		$	(82	)		(27	)%
Noninterest income		35			34			1			3	%
Total revenue		255			336			(81	)		(24	)%
Provision for credit losses (benefit)		(16	)		(61	)		45			74	%
Noninterest expense		57			73			(16	)		(22	)%
Pretax earnings		214			324			(110	)		(34	)%
Income taxes