Edgar Filing: PNC FINANCIAL SERVICES GROUP, INC.

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Form 10-Q

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 June 30, 2014

¨	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.)

One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707

(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 July 25, 2014, there were 540,566,475 shares of the registrant’s common stock ($5 par value) outstanding.

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2014 Form 10-Q


	Pages
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).
Consolidated Income Statement		63
Consolidated Statement of Comprehensive Income		64
Consolidated Balance Sheet		65
Consolidated Statement Of Cash Flows		66

Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies		68
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities		73
Note 3 Loans and Commitments to Extend Credit		78
Note 4 Asset Quality		79
Note 5 Purchased Loans		91
Note 6 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit		92
Note 7 Investment Securities		95
Note 8 Fair Value		100
Note 9 Goodwill and Other Intangible Assets		114
Note 10 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities		117
Note 11 Certain Employee Benefit And Stock Based Compensation Plans		118
Note 12 Financial Derivatives		120
Note 13 Earnings Per Share		129
Note 14 Total Equity And Other Comprehensive Income		130
Note 15 Income Taxes		135
Note 16 Legal Proceedings		135
Note 17 Commitments and Guarantees		138
Note 18 Segment Reporting		143
Note 19 Subsequent Events		145

Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis		146
Estimated Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratio – 2013 Periods		148
2013 Basel I Tier 1 Common Capital Ratio		148

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Financial Review
Consolidated Financial Highlights		1
Executive Summary		3
Consolidated Income Statement Review		8
Consolidated Balance Sheet Review		12
Off-Balance Sheet Arrangements And Variable Interest Entities		21
Fair Value Measurements		22
Business Segments Review		22
Critical Accounting Estimates and Judgments		31
Status Of Qualified Defined Benefit Pension Plan		33
Recourse And Repurchase Obligations		33
Risk Management		36
Internal Controls And Disclosure Controls And Procedures		56
Glossary Of Terms		56
Cautionary Statement Regarding Forward-Looking Information		60

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		36-55, 100-114 and 120-128

Item 4. Controls and Procedures.		56

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.		149

Item 1A. RiskFactors.		149

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds.		149

Item 6. Exhibits.		149
Exhibit Index.		149
Corporate Information		150
Signature		151

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2014 Form 10-Q (continued)

MD&A TABLE REFERENCE


Table	Description	Page
1	Consolidated Financial Highlights		1
2	Summarized Average Balance Sheet		7
3	Results Of Businesses – Summary		8
4	Net Interest Income and Net Interest Margin		8
5	Noninterest Income		9
6	Summarized Balance Sheet Data		12
7	Details Of Loans		13
8	Accretion – Purchased Impaired Loans		14
9	Purchased Impaired Loans – Accretable Yield		14
10	Valuation of Purchased Impaired Loans		15
11	Weighted Average Life of the Purchased Impaired Portfolios		15
12	Accretable Difference Sensitivity – Total Purchased Impaired Loans		15
13	Net Unfunded Loan Commitments		16
14	Investment Securities		16
15	Loans Held For Sale		18
16	Details Of Funding Sources		18
17	Shareholders’ Equity		19
18	Basel III Capital		20
19	Fair Value Measurements – Summary		22
20	Retail Banking Table		23
21	Corporate & Institutional Banking Table		25
22	Asset Management Group Table		27
23	Residential Mortgage Banking Table		28
24	BlackRock Table		29
25	Non-Strategic Assets Portfolio Table		30
26	Pension Expense – Sensitivity Analysis		33
27	Analysis of Quarterly Residential Mortgage Repurchase Claims by Vintage		34
28	Analysis of Residential Mortgage Unresolved Asserted Indemnification and Repurchase Claims		34
29	Analysis of Residential Mortgage Indemnification and Repurchase Claim Settlement Activity		35
30	Nonperforming Assets By Type		38
31	OREO and Foreclosed Assets		39
32	Change in Nonperforming Assets		39
33	Accruing Loans Past Due 30 To 59 Days		40
34	Accruing Loans Past Due 60 To 89 Days		40
35	Accruing Loans Past Due 90 Days Or More		40
36	Home Equity Lines of Credit – Draw Period End Dates		41
37	Consumer Real Estate Related Loan Modifications		42
38	Consumer Real Estate Related Loan Modifications Re-Default by Vintage		43
39	Summary of Troubled Debt Restructurings		44
40	Loan Charge-Offs And Recoveries		45
41	Allowance for Loan and Lease Losses		47
42	Credit Ratings as of June 30, 2014 for PNC and PNC Bank, N.A.		50
43	Contractual Obligations		51
44	Other Commitments		51
45	Interest Sensitivity Analysis		52
46	Net Interest Income Sensitivity to Alternative Rate Scenarios (Second Quarter 2014)		52
47	Alternate Interest Rate Scenarios: One Year Forward		52
48	Enterprise-Wide Gains/Losses Versus Value-at-Risk		53
49	Customer-Related Trading Revenue		53
50	Equity Investments Summary		54
51	Financial Derivatives Summary		55

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2014 Form 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE


Table	Description	Page
52	Certain Financial Information and Cash Flows Associated with Loan Sale and Servicing Activities		74
53	Principal Balance, Delinquent Loans (Loans 90 Days or More Past Due), and Net Charge-offs Related to Serviced Loans		75
54	Consolidated VIEs – Carrying Value		76
55	Non-Consolidated VIEs		76
56	Loans Summary		78
57	Net Unfunded Loan Commitments		78
58	Analysis of Loan Portfolio		79
59	Nonperforming Assets		80
60	Commercial Lending Asset Quality Indicators		81
61	Home Equity and Residential Real Estate Balances		82
62	Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans		83
63	Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans		84
64	Credit Card and Other Consumer Loan Classes Asset Quality Indicators		86
65	Summary of Troubled Debt Restructurings		87
66	Financial Impact and TDRs by Concession Type		87
67	TDRs that were Modified in the Past Twelve Months which have Subsequently Defaulted		89
68	Impaired Loans		90
69	Purchased Impaired Loans – Balances		91
70	Purchased Impaired Loans – Accretable Yield		92
71	Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data		93
72	Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit		94
73	Investment Securities Summary		95
74	Gross Unrealized Loss and Fair Value of Securities Available for Sale		96
75	Credit Impairment Assessment Assumptions – Non-Agency Residential Mortgage-Backed and Asset-Backed Securities		97
76	Rollforward of Cumulative OTTI Credit Losses Recognized in Earnings		98
77	Gains (Losses) on Sales of Securities Available for Sale		98
78	Contractual Maturity of Debt Securities		99
79	Weighted-Average Expected Maturity of Mortgage and Other Asset-Backed Debt Securities		100
80	Fair Value of Securities Pledged and Accepted as Collateral		100
81	Fair Value Measurements – Recurring Basis Summary		102
82	Reconciliation of Level 3 Assets and Liabilities		104
83	Fair Value Measurements – Recurring Quantitative Information		108
84	Fair Value Measurements – Nonrecurring		110
85	Fair Value Measurements – Nonrecurring Quantitative Information		110
86	Fair Value Option – Changes in Fair Value		111
87	Fair Value Option – Fair Value and Principal Balances		112
88	Additional Fair Value Information Related to Financial Instruments		113
89	Goodwill by Business Segment		114
90	Other Intangible Assets		114
91	Amortization Expense on Existing Intangible Assets		114
92	Summary of Changes in Customer-Related and Other Intangible Assets		115
93	Commercial Mortgage Servicing Rights Accounted for at Fair Value		115
94	Commercial Mortgage Servicing Rights Accounted for Under the Amortization Method		115
95	Residential Mortgage Servicing Rights		116
96	Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions		116
97	Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions		116
98	Fees from Mortgage Loan Servicing		117
99	Net Periodic Pension and Postretirement Benefits Costs		118
100	Option Pricing Assumptions		119
101	Stock Option Rollforward		119

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2014 Form 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE (Continued)


Table	Description	Page
102	Nonvested Incentive/Performance Unit Share Awards and Restricted Stock/Share Unit Awards – Rollforward		120
103	Nonvested Cash-Payable Incentive/Performance Units and Restricted Share Units – Rollforward		120
104	Total Gross Derivatives		120
105	Derivatives Designated As Hedging Instruments under GAAP		121
106	Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges		121
107	Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges		122
108	Gains (Losses) on Derivatives – Net Investment Hedges		122
109	Derivatives Not Designated As Hedging Instruments under GAAP		123
110	Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP		124
111	Credit Default Swaps		125
112	Credit Ratings of Credit Default Swaps		125
113	Referenced/Underlying Assets of Credit Default Swaps		125
114	Risk Participation Agreements Sold		126
115	Internal Credit Ratings of Risk Participation Agreements Sold		126
116	Derivative Assets and Liabilities Offsetting		127
117	Basic and Diluted Earnings per Common Share		129
118	Rollforward of Total Equity		130
119	Other Comprehensive Income		131
120	Accumulated Other Comprehensive Income (Loss) Components		134
121	Net Operating Loss Carryforwards and Tax Credit Carryforwards		135
122	Net Outstanding Standby Letters of Credit		138
123	Analysis of Commercial Mortgage Recourse Obligations		140
124	Analysis of Indemnification and Repurchase Liability for Asserted Claims and Unasserted Claims		140
125	Reinsurance Agreements Exposure		141
126	Reinsurance Reserves – Rollforward		141
127	Resale and Repurchase Agreements Offsetting		142
128	Results Of Businesses		144

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 2013 Annual Report on Form 10-K (2013 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. Prior period amounts have also been updated to reflect the first quarter 2014 adoption of Accounting Standards Update (ASU) 2014-01 related to investments in low income housing tax credits. See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report for more detail. For information regarding certain business, regulatory and legal risks, see the following sections as they appear in this Report and in our 2013 Form 10-K and our First Quarter 2014 Form 10-Q: the Risk Management and Recourse And Repurchase Obligations sections of the Financial Review portion of the respective report; Item 1A Risk Factors included in our 2013 Form 10-K; and the Legal Proceedings and Commitments and Guarantees Notes of the Notes To Consolidated Financial Statements included in the respective report. 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 2013 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 18 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

THE PNC FINANCIAL SERVICES GROUP, INC. (PNC)


Dollars in millions, except per share data	Three months ended June 30						Six months ended June 30
Unaudited	2014			2013			2014			2013
Financial Results (a)
Revenue
Net interest income	$	2,129		$	2,258		$	4,324		$	4,647
Noninterest income		1,681			1,806			3,263			3,372
Total revenue		3,810			4,064			7,587			8,019
Noninterest expense (b)		2,328			2,405			4,592			4,773
Pretax, pre-provision earnings (c)		1,482			1,659			2,995			3,246
Provision for credit losses		72			157			166			393
Income before income taxes and noncontrolling interests	$	1,410		$	1,502		$	2,829		$	2,853
Net income (b)	$	1,052		$	1,115		$	2,112		$	2,110
Less:
Net income (loss) attributable to noncontrolling interests (b)		3			4			1			(4	)
Preferred stock dividends and discount accretion and redemptions		48			53			118			128
Net income attributable to common shareholders	$	1,001		$	1,058		$	1,993		$	1,986
Less:
Dividends and undistributed earnings allocated to nonvested restricted shares		3			5			6			9
Impact of BlackRock earnings per share dilution		3			4			9			9
Net income attributable to diluted common shares	$	995		$	1,049		$	1,978		$	1,968
Diluted earnings per common share	$	1.85		$	1.98		$	3.67		$	3.72
Cash dividends declared per common share	$	.48		$	.44		$	.92		$	.84
Performance Ratios
Net interest margin (d)		3.12	%		3.58	%		3.19	%		3.69	%
Noninterest income to total revenue		44			44			43			42
Efficiency		61			59			61			60
Return on:
Average common shareholders’ equity		10.12			11.71			10.24			11.16
Average assets		1.31			1.48			1.33			1.41

See page 56 for a glossary of certain terms used in this Report.

Certain prior period amounts have been reclassified to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements.

(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)	Amounts for 2013 periods have been updated to reflect the first quarter 2014 adoption of Accounting Standards Update (ASU) 2014-01 related to investments in low income housing tax credits.

(c)	We believe that pretax, pre-provision earnings, a non-GAAP measure, is useful as a tool to help evaluate the ability to provide for credit costs through operations.

(d)

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 for all earning assets, 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 June 30, 2014 and June 30, 2013 were $47 million and $40 million, respectively. The taxable-equivalent adjustments to net interest income for the six months ended June 30, 2014 and June 30, 2013 were $93 million and $80 million, respectively.

The PNC Financial Services Group, Inc. – Form 10-Q 1

TABLE 1: CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED) (a)


Unaudited	June 30 2014			December 31 2013			June 30 2013
Balance Sheet Data (dollars in millions, except per share data)
Assets (b)	$	327,064		$	320,192		$	304,306
Loans		200,984			195,613			189,775
Allowance for loan and lease losses		3,453			3,609			3,772
Interest-earning deposits with banks (c)		16,876			12,135			3,797
Investment securities		56,602			60,294			57,449
Loans held for sale		2,228			2,255			3,814
Goodwill and other intangible assets		11,071			11,290			11,228
Equity investments (b) (d)		10,583			10,560			9,945
Other assets		23,527			22,552			24,297
Noninterest-bearing deposits		71,001			70,306			66,708
Interest-bearing deposits		151,553			150,625			145,571
Total deposits		222,554			220,931			212,279
Transaction deposits		188,489			186,391			175,564
Borrowed funds		49,066			46,105			39,864
Total shareholders’ equity (b)		44,205			42,334			40,210
Common shareholders’ equity (b)		40,261			38,392			36,271
Accumulated other comprehensive income		881			436			45
Book value per common share	$	75.62		$	72.07		$	68.32
Common shares outstanding (millions)		532			533			531
Loans to deposits		90	%		89	%		89	%
Client Assets (billions)
Discretionary assets under management	$	131		$	127		$	117
Nondiscretionary assets under administration		126			120			116
Total assets under administration		257			247			233
Brokerage account assets		43			41			39
Total client assets	$	300		$	288		$	272

Capital Ratios
Transitional Basel III (e) (f)
Common equity Tier 1 (g)		11.0	%		N/A	(h)		N/A
Tier 1 risk-based		12.7			N/A			N/A
Total capital risk-based		16.0			N/A			N/A
Leverage		11.2			N/A			N/A

Pro forma Fully Phased-In Basel III (f) (i)
Common equity Tier 1 (g)		10.0	%		9.4	%		8.2	%
Common shareholders’ equity to assets		12.3	%		12.0	%		11.9	%

Asset Quality
Nonperforming loans to total loans		1.39	%		1.58	%		1.75	%
Nonperforming assets to total loans, OREO and foreclosed assets		1.57			1.76			1.99
Nonperforming assets to total assets		.97			1.08			1.24
Net charge-offs to average loans (for the three months ended) (annualized)		.29			.39			.44
Allowance for loan and lease losses to total loans		1.72			1.84			1.99
Allowance for loan and lease losses to nonperforming loans (j)		123	%		117	%		114	%
Accruing loans past due 90 days or more (in millions)	$	1,252		$	1,491		$	1,762

(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 for 2013 periods have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits.

(c)	Amounts include balances held with the Federal Reserve Bank of Cleveland of $16.5 billion, $11.7 billion and $3.3 billion as of June 30, 2014, December 31, 2013 and June 30, 2013, respectively.

(d)	Amounts include our equity interest in BlackRock.

(e)	Calculated using the regulatory capital methodology applicable to PNC during 2014.

(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 2013 Form 10-K. See also the Estimated Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratio – 2013 Periods table in the Statistical Information section of this Report for a reconciliation of the 2013 periods’ ratios.

(g)	Prior to 2014, the Basel III common equity Tier 1 capital ratio was referred to as the Basel III Tier 1 common capital ratio.

(h)

Our 2013 Form 10-K included a pro forma illustration of the Transitional Basel III common equity Tier 1 capital ratio using December 31, 2013 data and the Basel III phase-in schedule in effect for 2014 and information regarding our Basel I capital ratios, which applied to PNC in 2013. See also the 2013 Basel I Tier 1 Common Capital Ratio Table in the Statistical Information section of this Report for information regarding December 31, 2013 and June 30, 2013 ratios.

(i)	Ratios as of December 31, 2013 and June 30, 2013 have not been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits.

(j)	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

PNC is one of the largest diversified financial services companies in the United States and is headquartered in Pittsburgh, Pennsylvania.

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

KEY STRATEGIC GOALS

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

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

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

Our capital priorities are to support client growth and business investment, maintain appropriate capital in light of economic uncertainty and the Basel III framework and return excess capital to shareholders, in accordance with the capital plan included in our 2014 Comprehensive Capital Analysis and Review (CCAR) submission to the Board of Governors of the

Federal Reserve System (Federal Reserve). We continue to improve our capital levels and ratios through retention of earnings and expect to build capital through retention of future earnings net of dividend payments and share repurchases. PNC continues to maintain adequate liquidity positions at both PNC and PNC Bank, National Association (PNC Bank, N.A.). For more detail, see the Capital and Liquidity Actions portion of this Executive Summary, the Funding and Capital Sources 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 2013 Form 10-K.

PNC faces a variety of risks that may impact various aspects of our risk profile from time to time. The extent of such impacts may vary depending on factors such as the current economic, political and regulatory environment, merger and acquisition activity and operational challenges. Many of these risks and our risk management strategies are described in more detail in our 2013 Form 10-K and elsewhere in this Report.

RECENT MARKET AND INDUSTRY DEVELOPMENTS

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

On June 12, 2014, the Federal Reserve issued a proposed rule that would modify the schedule for the annual CCAR and Dodd-Frank stress test (DFAST) process. Under the proposal, beginning in 2016, bank holding companies with total consolidated assets of $50 billion or more, such as PNC, would be required to submit their annual capital plans and company-run stress test results to the Federal Reserve by

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

April 5^th of each year (rather than by January 5^th as currently required). Under the proposal, the Federal Reserve would also release its decisions on the capital plans submitted and release the results of its supervisory stress test results by June 30^th, approximately three months later than current practice. The proposal would also shift the schedule for the company-run mid-cycle DFAST stress tests, with the company submission date for these tests shifting to October 5^th (from July 5^th) and the release date for company results moving to October (from September). In addition, the proposal would require a covered bank holding company to limit the capital distributions made in a calendar quarter under its approved capital plan if the proceeds from the company’s net issuances of capital instruments in that quarter are less than the amount projected for that quarter in the company’s approved capital plan. Also on June 12, 2014, the Office of the Comptroller of the Currency (OCC) issued a related proposal that would shift the timing of the OCC’s required annual company-run stress tests to coincide with the Federal Reserve’s proposed modified annual capital plan and stress test cycle. Comments on the Federal Reserve’s proposal are due by August 11, 2014, and comments on the OCC’s proposal are due no later than August 30, 2014.

On July 31, 2013, the U.S. District Court for the District of Columbia granted summary judgment to the plaintiffs in NACS, et al. v. Board of Governors of the Federal Reserve System. The decision vacated the debit card interchange and network processing rules that went into effect in October 2011 and that were adopted by the Federal Reserve to implement provisions of Dodd-Frank. The court found among other things that the debit card interchange fees permitted under the rules allowed card issuers to recover costs that were not permitted by the statute. The court stayed its decision pending appeal, and the United States Court of Appeals for the District of Columbia Circuit granted an expedited appeal. In March 2014, the court of appeals reversed the district court. It upheld the Federal Reserve’s network processing rule and upheld its interchange fee rule except as to the issue of transaction monitoring costs, and remanded that issue back to the Federal Reserve for further explanation. In May and July 2014, the plaintiffs filed applications in the United States Supreme Court to extend the time for filing a petition for a writ of certiorari, which is a petition for further appellate review of the court of appeals’ decision, thereby indicating an intent to seek Supreme Court review.

The SEC adopted rules on July 23, 2014 intended to reform certain fundamental structural and operational aspects of money market funds. These changes include requiring a floating net asset value for prime institutional and tax-exempt money market funds, possible fees and suspension of redemption provisions for both retail and institutional funds under certain scenarios, and additional disclosure and stress testing requirements for all money market funds. The majority of these amendments, except for some disclosure enhancements, will not take effect for two years. The likely

impact of these changes on the money market fund industry or on the markets for money market instruments is currently unclear. Among other things, PNC could potentially be impacted as it is a sponsor of money market funds, holds money market funds in customer accounts, and is an issuer of money market instruments, many of which are currently sold to money market funds.

For additional information concerning recent legislative and regulatory developments, as well as certain governmental, legislative and regulatory inquiries and investigations that may affect PNC, please see the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors, Recent Market and Industry Developments in the Executive Summary section of Item 7, and Note 23 Legal Proceedings and Note 24 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Item 8 of our 2013 Form 10-K and Recent Market and Industry Developments in the Executive Summary section of our First Quarter 2014 Form 10-Q, as well as Note 16 Legal Proceedings and Note 17 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

KEY FACTORS AFFECTING FINANCIAL PERFORMANCE

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

•

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

•

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

•

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

•

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

•

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

•

Customer demand for non-loan products and services,

•

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

•

The impact of the extensive reforms enacted in the Dodd-Frank legislation and other legislative, regulatory and administrative initiatives and actions, including those outlined elsewhere in this Report, in our 2013 Form 10-K and in our other SEC filings, and

•

The impact of market credit spreads on asset valuations.

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

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

•

Focused execution of strategic priorities for organic customer growth opportunities,

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

A sustained focus on expense management,

•

Improving our overall asset quality,

•

Managing the non-strategic assets portfolio and impaired assets,

•

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

•

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

•

Actions we take within the capital and other financial markets,

•

The impact of legal and regulatory-related contingencies, and

•

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

For additional information, please see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2013 Form 10-K.

INCOME STATEMENT HIGHLIGHTS

•

Net income for the second quarter of 2014 was $1.1 billion, or $1.85 per diluted common share, compared with net income of $1.1 billion, or $1.98 per diluted common share for the second quarter of 2013. Net income decreased 6% in the comparison as a 3% reduction in noninterest expense and lower provision for credit losses were more than offset by a 6% decline in revenue. For additional detail, see the Consolidated Income Statement Review section in this Financial Review.

•

Net interest income of $2.1 billion for the second quarter of 2014 decreased 6% compared with the second quarter of 2013, primarily driven by lower

yields on loans and lower purchase accounting accretion, partially offset by the impact of loan growth.

•

Net interest margin decreased to 3.12% for the second quarter of 2014 compared to 3.58% for the second quarter of 2013. The decline reflected the impact of lower purchase accounting accretion, lower loan yields in the ongoing low rate environment, and the impact of higher interest-earning deposits with banks in light of proposed short-term liquidity regulatory standards partially offset by commercial loan growth.

•

Noninterest income of $1.7 billion for the second quarter of 2014 decreased 7% compared to the second quarter of 2013, as strong fee income growth and the positive impact from lower provision for residential mortgage repurchase obligations were more than offset by lower revenue related to asset valuations and sales.

•

The provision for credit losses decreased to $72 million for the second quarter of 2014 compared to $157 million for the second quarter of 2013 due to overall credit quality improvement.

•

Noninterest expense of $2.3 billion for the second quarter of 2014 decreased 3% compared with the second quarter of 2013 reflecting well managed expenses.

CREDIT QUALITY HIGHLIGHTS

•

Overall credit quality continued to improve during the first six months of 2014. For additional detail, see the Credit Risk Management portion of the Risk Management section of this Financial Review.

•

Nonperforming assets decreased $.3 billion, or 8%, to $3.2 billion at June 30, 2014 compared to December 31, 2013. Nonperforming assets to total assets were .97% at June 30, 2014, compared to 1.08% at December 31, 2013.

•

Overall loan delinquencies of $2.1 billion at June 30, 2014 decreased $.4 billion, or 16%, compared with December 31, 2013.

•

The allowance for loan and lease losses was 1.72% of total loans and 123% of nonperforming loans at June 30, 2014, compared with 1.84% and 117% at December 31, 2013, respectively.

•

Net charge-offs of $145 million were down 30% compared to net charge-offs of $208 million for the second quarter of 2013. Annualized net charge-offs were 0.29% of average loans in the second quarter of 2014 and 0.44% of average loans in the second quarter of 2013. For the first six months of 2014, net charge-offs were $331 million, and 0.34% of average loans on an annualized basis, compared with $664 million and 0.71% for the first six months of 2013, respectively. The year-to-date comparisons were impacted by alignment with interagency guidance in the first quarter of 2013 on practices for loans and

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

lines of credit related to consumer lending. In the first quarter 2013, this alignment had the overall effect of (i) accelerating charge-offs, (ii) increasing nonperforming loans and (iii) in the case of loans accounted for under the fair value option, increasing nonaccrual loans. See the Credit Risk Management portion of the Risk Management section of this Financial Review for further detail.

BALANCE SHEET HIGHLIGHTS

•

Total loans increased by $5.4 billion to $201 billion at June 30, 2014 compared to December 31, 2013.

–

Total commercial lending increased by $6.9 billion, or 6%, as a result of growth in commercial and commercial real estate loans to new and existing customers.

–

Total consumer lending decreased $1.6 billion, or 2%, due to lower home equity, residential mortgage and education loans partially offset by growth in automobile loans.

•

Total deposits increased by $1.6 billion to $223 billion at June 30, 2014 compared with December 31, 2013, driven by growth in transaction deposits.

•

PNC further enhanced its liquidity position in preparation for implementation of proposed short-term liquidity regulatory standards as reflected in higher interest-earning deposits with banks, which are primarily maintained with the Federal Reserve Bank, and activity relating to borrowed funds.

•

PNC’s well-positioned balance sheet remained core funded with a loans to deposits ratio of 90% at June 30, 2014.

•

The Transitional Basel III common equity Tier 1 capital ratio, calculated using the regulatory capital methodology applicable to PNC during 2014, increased to 11.0% at June 30, 2014.

•

Pro forma fully phased-in Basel III common equity Tier 1 capital ratio based on the standardized approach rules increased to an estimated 10.0% at June 30, 2014 from 9.4% at December 31, 2013. See the Capital discussion and Table 18 in the Consolidated Balance Sheet Review section of this Financial Review and the December 31, 2013 capital ratio tables in the Statistical Information section of this Report for more detail.

Our Consolidated Income Statement and Consolidated Balance Sheet Review sections of this Financial Review describe in greater detail the various items that impacted our

results during the first six months of 2014 and 2013 and balances at June 30, 2014 and December 31, 2013, respectively.

CAPITAL AND LIQUIDITY ACTIONS

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 and our primary bank regulators as part of the CCAR process.

In connection with the 2014 CCAR, PNC submitted its 2014 capital plan, approved by its Board of Directors, to the Federal Reserve in January 2014. As we announced on March 26, 2014, the Federal Reserve accepted the capital plan and did not object to our proposed capital actions, which included a recommendation to increase the quarterly common stock dividend in the second quarter of 2014. The capital plan also included share repurchase programs of up to $1.5 billion for the four quarter period beginning in the second quarter of 2014 under PNC’s existing common stock repurchase authorization. These programs include repurchases of up to $200 million to mitigate the financial impact of employee benefit plan transactions. In the second quarter of 2014, in accordance with the 2014 capital plan, we repurchased 2.6 million shares of common stock on the open market, with an average price of $86.26 per share and an aggregate repurchase price of $223 million. For additional information concerning the CCAR process and the factors the Federal Reserve takes into consideration in evaluating capital plans, see the Supervision and Regulation section in Item 1 Business of our 2013 Form 10-K.

On April 3, 2014, consistent with our 2014 capital plan, our Board of Directors approved an increase to PNC’s quarterly common stock dividend from 44 cents per common share to 48 cents per common share effective with the May 5, 2014 dividend payment to shareholders of record at the close of business on April 15, 2014. On July 3, 2014, the Board of Directors declared a quarterly common stock cash dividend of 48 cents per share payable on August 5, 2014 to shareholders of record at the close of business on July 15, 2014.

See the Liquidity Risk Management portion of the Risk Management section of this Financial Review for more detail on our 2014 capital and liquidity actions.

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

AVERAGE CONSOLIDATED BALANCE SHEET HIGHLIGHTS

Table 2: Summarized Average Balance Sheet


Six months ended June 30					Change
Dollars in millions	2014		2013		$			%
Average assets
Interest-earning assets
Investment securities	$	57,342	$	57,683	$	(341	)		(1	)%
Loans		197,914		187,359		10,555			6	%
Interest-earning deposits with banks		13,410		2,236		11,174			500	%
Other		8,415		8,863		(448	)		(5	)%
Total interest-earning assets		277,081		256,141		20,940			8	%
Noninterest-earning assets		43,968		46,505		(2,537	)		(5	)%
Total average assets	$	321,049	$	302,646	$	18,403			6	%
Average liabilities and equity
Interest-bearing liabilities
Interest-bearing deposits	$	151,212	$	145,014	$	6,198			4	%
Borrowed funds		46,747		39,161		7,586			19	%
Total interest-bearing liabilities		197,959		184,175		13,784			7	%
Noninterest-bearing deposits		67,951		64,800		3,151			5	%
Other liabilities		10,313		11,614		(1,301	)		(11	)%
Equity		44,826		42,057		2,769			7	%
Total average liabilities and equity	$	321,049	$	302,646	$	18,403			6	%

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. The Consolidated Balance Sheet Review section of this Financial Review provides information on changes in selected Consolidated Balance Sheet categories at June 30, 2014 compared with December 31, 2013. Total assets were $327.1 billion at June 30, 2014 compared with $320.2 billion at December 31, 2013.

Average investment securities remained relatively stable in the comparison of the first six months of 2014 with the first six months of 2013, as a net decrease in average residential mortgage-backed securities from principal payments was mostly offset by an increase in average U.S. Treasury and government agency securities, which was largely driven by purchases to enhance our liquidity position in light of proposed short-term liquidity regulatory standards. Total investment securities comprised 21% of average interest-earning assets for the first six months of 2014 and 23% for the first six months of 2013.

The increase in average total loans in the first six months of 2014 compared with the first six months of 2013 was driven by increases in average commercial loans of $5.9 billion, average commercial real estate loans of $3.4 billion and average consumer loans of $1.3 billion. The overall increase in loans reflected organic loan growth, primarily in our Corporate & Institutional Banking segment.

Loans represented 71% of average interest-earning assets for the first six months of 2014 and 73% of average interest-earning assets for the first six months of 2013.

Average interest-earning deposits with banks, which are primarily maintained with the Federal Reserve Bank, increased significantly to $13.4 billion for the first six months of 2014 from $2.2 billion for the first six months of 2013, as we continued to enhance our liquidity position in light of proposed short-term liquidity regulatory standards.

The decrease in average noninterest-earning assets in the first six months of 2014 compared with the first six months of 2013 was primarily driven by decreased unsettled securities sales and securities valuations, both of which are included in noninterest-earning assets for average balance sheet purposes.

Average total deposits increased $9.3 billion to $219.2 billion in the first six months of 2014 compared with the first six months of 2013, primarily due to an increase of $11.4 billion in average transaction deposits, which grew to $185.1 billion for the first six months of 2014. Higher average money market deposits, average interest-bearing demand deposits and average noninterest-bearing deposits drove the increase in both commercial and consumer average transaction deposits. These increases were partially offset by a decrease of $2.8 billion in average retail certificates of deposit attributable to runoff of maturing accounts. Total deposits at June 30, 2014 were $222.6 billion compared with $220.9 billion at December 31, 2013 and are further discussed within the Consolidated Balance Sheet Review section of this Financial Review.

Average total deposits represented 68% of average total assets for the first six months of 2014 and 69% for the first six months of 2013.

The increase in average borrowed funds in the first six months of 2014 compared with the first six months of 2013 was

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

primarily due to increases in average Federal Home Loan Bank (FHLB) borrowings and average bank notes and senior debt, in part to enhance our liquidity position in light of proposed short-term liquidity regulatory standards. These increases were partially offset by a decline in average commercial paper. Total borrowed funds at June 30, 2014 were $49.1 billion compared with $46.1 billion at December 31, 2013 and are further discussed within the Consolidated Balance Sheet Review section of this Financial Review. The Liquidity Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding our sources and uses of borrowed funds.

BUSINESS SEGMENT HIGHLIGHTS

Total business segment earnings were $2.0 billion and $1.9 billion for the first six months of 2014 and 2013, respectively. The Business Segments Review section of this Financial Review includes further analysis of our business segment results over the first six months of 2014 and 2013, including presentation differences from Note 18 Segment Reporting in our Notes To Consolidated Financial Statements of this Report. Note 18 Segment Reporting presents results of businesses for the three months and six months ended June 30, 2014 and 2013.

We provide a reconciliation of total business segment earnings to PNC total consolidated net income as reported on a GAAP basis in Note 18 Segment Reporting in our Notes To Consolidated Financial Statements of this Report.

Table 3: Results Of Businesses – Summary

(Unaudited)


	Net Income				Revenue				Average Assets (a)
Six months ended June 30 – in millions	2014		2013		2014		2013		2014		2013
Retail Banking	$	383	$	278	$	3,008	$	3,037	$	75,559	$	74,317
Corporate & Institutional Banking		993		1,153		2,646		2,761		119,992		111,941
Asset Management Group		90		79		549		509		7,642		7,210
Residential Mortgage Banking		32		65		433		519		8,128		10,604
BlackRock		253		220		332		287		6,400		5,982
Non-Strategic Assets Portfolio		209		139		295		394		8,732		10,511
Total business segments		1,960		1,934		7,263		7,507		226,453		220,565
Other (b) (c) (d)		152		176		324		512		94,596		82,081
Total	$	2,112	$	2,110	$	7,587	$	8,019	$	321,049	$	302,646

(a)	Period-end balances for BlackRock.

(b)	“Other” average assets include investment securities associated with asset and liability management activities.

(c)

“Other” includes differences between the total business segment financial results and our total consolidated net income. Additional detail is included in the Business Segments Review section of this Financial Review and in Note 18 Segment Reporting in the Notes To Consolidated Financial Statements in this Report.

(d)

The decrease in revenue in the first six months of 2014 compared to the first six months of 2013 for “Other” reflected a decline in net interest income primarily due to decreased investment securities income and higher borrowed funds expense, while the decline in noninterest income was more than offset by a decrease in noninterest expense.

CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income was $2.1 billion for both the first six months of 2014 and 2013 as a 4% reduction in noninterest expense and lower provision for credit losses were offset by a 5% decline in total revenue. Second quarter 2014 net income decreased $63 million to $1.1 billion, compared with second quarter 2013, as a 3% reduction in noninterest expense and lower provision for credit losses were more than offset by a 6% decline in revenue. Lower revenue in both comparisons reflected single-digit declines, on a percentage basis, in both net interest income and noninterest income.

NET INTEREST INCOME

Table 4: Net Interest Income and Net Interest Margin


	Six months ended June 30						Three months ended June 30
Dollars in millions	2014			2013			2014			2013
Net interest income	$	4,324		$	4,647		$	2,129		$	2,258
Net interest margin		3.19	%		3.69	%		3.12	%		3.58	%

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

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

Net interest income decreased by $323 million, or 7%, in the first six months of 2014 compared with the prior year, including a decline of $129 million, or 6%, in the second quarter compared with the same prior year quarter. The declines in both comparisons were primarily due to lower purchase accounting accretion and lower yields on loans, partially offset by the impact of loan growth. The declines also reflected a second quarter 2014 correction to reclassify certain commercial facility fees of $31 million from net interest income to noninterest income. Lower investment securities yields in the year-to-date comparison and lower investment securities balances in the quarter-to-date comparison also contributed to the declines.

Lower net interest margins in both comparisons were driven by 52 basis point and 47 basis point declines in the yields on total interest-earning assets in both the year-to-date and quarter-to-date comparisons, respectively, which included the impact of lower purchase accounting accretion, continued spread compression, and repricing of commercial loans in a

lower rate environment. The rate paid on interest-bearing liabilities remained relatively stable in both comparisons.

These declines in total interesting-earning asset yields, in both comparisons, primarily reflected lower yields on new and repricing loans in the ongoing low rate environment, the impact of the second quarter 2014 correction to reclassify certain commercial facility fees and the impact of higher interest-earning deposits maintained with the Federal Reserve Bank in light of proposed short-term liquidity regulatory standards. The year-to-date comparison also reflected lower rates on the investment securities portfolio.

In the third quarter of 2014, we expect net interest income to be down modestly due to the continued decline in purchase accounting accretion and further interest rate spread compression related to loans and investment securities.

For full year 2014, we expect total purchase accounting accretion to be down approximately $300 million compared with 2013. In 2015, we expect purchase accounting accretion to be down approximately $225 million compared to 2014.

NONINTEREST INCOME

Table 5: Noninterest Income


	Six months ended June 30												Three months ended June 30
							Change												Change
Dollars in millions	2014			2013			$			%			2014			2013			$			%
Noninterest income
Asset management	$	726		$	648		$	78			12	%	$	362		$	340		$	22			6	%
Consumer services		613			610			3			—			323			314			9			3
Corporate services		644			603			41			7			343			326			17			5
Residential mortgage		343			401			(58	)		(14	)		182			167			15			9
Service charges on deposits		303			283			20			7			156			147			9			6
Net gains on sales of securities		4			75			(71	)		(95	)		(6	)		61			(67	)		(110	)
Net other-than-temporary impairments		(3	)		(14	)		11			79			(1	)		(4	)		3			75
Other		633			766			(133	)		(17	)		322			455			(133	)		(29	)
Total noninterest income	$	3,263		$	3,372		$	(109	)		(3	)%	$	1,681		$	1,806		$	(125	)		(7	)%

Noninterest income decreased in both prior year comparisons as strong fee income growth and the impact from lower provision for residential mortgage repurchase obligations were more than offset by a decline in residential mortgage loan sales revenue, reductions in asset valuations and lower gains on asset sales.

Noninterest income as a percentage of total revenue was 43% for the first six months of 2014, up from 42% for the first six months of 2013, and was 44% in both the second quarter of 2014 and 2013.

Asset management revenue increased in both comparisons to the prior year periods, reflecting increases in the equity markets and sales production. The increase in the first six months of 2014 also reflected increased earnings from our BlackRock investment. Discretionary assets under management increased to $131 billion at June 30, 2014 compared with $117 billion at June 30, 2013 driven by higher

equity markets and year-to-date positive net flows, primarily from the institutional business, after adjustments to total net flows for cyclical client activities, due to strong sales performance.

Consumer service fees increased slightly in both the year-to-date and second quarter comparisons, primarily due to growth in customer-initiated transaction volumes that was mostly offset by several individually insignificant items.

Corporate services revenue increased to $644 million for the first six months of 2014, including $343 million in the second quarter of 2014, compared to $603 million for the first six months of 2013, which included $326 million for the second quarter of 2013. The comparisons reflected higher merger and acquisition advisory fees and a second quarter 2014 correction to reclassify certain commercial facility fees of $31 million from net interest income to noninterest income. These increases were partially offset by lower net commercial mortgage servicing rights valuation gains, which were $25

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

million for the first six months of 2014 compared to $55 million for the first six months of 2013. The respective gain amounts for the second quarters of 2014 and 2013 were $14 million and $44 million.

Residential mortgage revenue decreased to $343 million in the first six months of 2014 compared with $401 million in the first six months of 2013. In the second quarter 2014 comparison, residential mortgage revenue increased to $182 million compared with $167 million in the second quarter of 2013. Both comparisons included lower loan sales revenue from a reduction in origination volume and lower net hedging gains on residential mortgage servicing rights. The decline in loan sales revenue was partially mitigated by the impact of second quarter 2014 gains on sales of previously underperforming portfolio loans.

The overall decline in residential mortgage revenue for the first six months of 2014 was partially offset by the impact of improvement in the provision for residential mortgage repurchase obligations, which was a benefit of $17 million for the first six months of 2014 compared to a provision of $77 million in the prior year period.

For the second quarter of 2014, residential mortgage revenue increased compared to the prior year quarter, as the decreases in loan sales revenue and net hedging gains on residential mortgage servicing rights were more than offset by the improvement in the provision for residential mortgage repurchase obligations, which was an insignificant amount in the current year quarter, compared to $73 million for the second quarter of 2013.

Service charges on deposits increased in both comparisons to the prior year periods due to growth in customer activity and changes in product offerings.

Other noninterest income decreased to $633 million for the first six months of 2014 compared with $766 million for the first six months of 2013. Second quarter 2014 other noninterest income declined to $322 million compared to $455 million for the second quarter of 2013. Decreases in both of the comparisons were driven by lower revenue from credit valuations for customer-related derivatives activities as higher market interest rates impacted the fair value of PNC’s credit exposure on these activities. The impacts of these valuations to other noninterest income was a loss of $18 million for the first six months of 2014 compared to income of $41 million for the first six months of 2013, while in the quarterly comparison the second quarter 2014 loss was insignificant and the second quarter of 2013 included income of $39 million. In addition to these declines, other noninterest income decreased due to lower revenue from private equity investments and a decline in the market value of investments related to deferred compensation obligations. The six month comparison also

reflected lower revenue associated with commercial mortgage banking activity in the 2014 period.

Other noninterest income in the first six months of 2014 included a gain of $116 million on the sale of 2 million shares Visa Class B common shares, with a gain in the second quarter of 2014 of $54 million on the sale of 1 million shares, compared to an $83 million gain on the sale of 2 million shares in the second quarter of 2013. At June 30, 2014, we held approximately 8 million Visa Class B common shares with a fair value of approximately $741 million at a recorded investment of approximately $112 million.

Other noninterest income typically fluctuates from period to period depending on the nature and magnitude of transactions completed. Further details regarding our customer-related trading activities are included in the Market Risk Management – Customer-Related Trading Risk portion of the Risk Management section of this Financial Review. Further details regarding private and other equity investments are included in the Market Risk Management – Equity And Other Investment Risk section, and further details regarding gains or losses related to our equity investment in BlackRock are included in the Business Segments Review section.

In the third quarter of 2014, we expect fee-based noninterest income to remain stable as we anticipate growth in our other fee-based businesses to offset an expected decline in the third quarter related to second quarter 2014 gains on sales of residential mortgage banking portfolio loans.

Assuming a continuation of the current economic environment, we continue to expect that full year 2014 revenue will be under pressure, and as a result, could likely be down compared to full year 2013 revenue due to expected purchase accounting accretion declines and lower residential mortgage revenues.

PROVISION FOR CREDIT LOSSES

The provision for credit losses totaled $166 million for the first six months of 2014 compared with $393 million for the first six months of 2013. The provision for credit losses was $72 million for the second quarter of 2014 compared with $157 million for the second quarter of 2013. The declines in both comparisons reflected overall credit quality improvement with the increasing value of residential real estate a contributing factor that improved expected cash flows on our purchased impaired loans.

Assuming a continuation of second quarter 2014 credit trends, we expect our provision for credit losses in the third quarter of 2014 to be between $75 million and $125 million.

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.

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

NONINTEREST EXPENSE

Noninterest expense decreased $181 million, or 4%, to $4.6 billion for the first six months of 2014, reflecting overall disciplined expense management. The decline was driven by a decrease in personnel expense related to lower headcount and benefits costs and a reduction in other noninterest expense, which reflected the impacts of a first quarter 2013 contribution to the PNC Foundation and second quarter 2013 noncash charges for unamortized discounts of $30 million related to redemption of trust preferred securities.

For the second quarter of 2014, noninterest expense was $2.3 billion in the second quarter of 2014, a decline of $77 million, or 3%, compared with the prior year quarter. The decrease reflected lower benefits costs, reductions in other real estate owned expense and noncredit losses, and the impact of the second quarter 2013 noncash charges related to redemption of trust preferred securities. These declines were partially offset by investments in technology and infrastructure.

In the first six months of 2014 we have completed actions relating to capturing more than two-thirds of our 2014 continuous improvement savings goal of $500 million, and we expect to achieve the full-year goal. We expect these cost savings to fund investments in our infrastructure, including those related to cybersecurity, and investments in our diversified businesses, including our Retail Banking transformation, consistent with our strategic priorities.

In the first quarter of 2014, we adopted new accounting guidance which changes how investments in low income housing tax credits are recognized. As a result, losses on certain tax credit investments which were previously recorded in noninterest expense are recorded to income taxes. See the discussion under Effective Income Tax Rate below.

For the third quarter of 2014, we expect noninterest expense to increase by low single digits, on a percentage basis, compared to second quarter 2014 related to employee benefit seasonality

and costs related to the automating of our regulatory submissions.

We plan to remain focused on overall disciplined expense management and we continue to expect noninterest expense for full year 2014 to be down compared with full year 2013.

EFFECTIVE INCOME TAX RATE

The effective income tax rate was 25.3% in the first six months of 2014 compared with 26.0% in the first six months of 2013. For the second quarter of 2014, our effective income tax rate was 25.4% compared with 25.8% for the second quarter of 2013. 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.

The lower effective income tax rate in both the first six months of 2014 and the second quarter of 2014 compared to the prior year periods was primarily attributable to the impact of higher tax-exempt income and tax credits.

The effective tax rate for both the 2014 and 2013 periods reflects the adoption of Accounting Standards Update (ASU) 2014-01, which relates to amortization of investments in low income housing tax credits. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in the Notes to Consolidated Financial Statements in Part I, Item 1 of this Report for further detail. The retrospective application of this guidance resulted in increased income tax expenses in both periods due to the reclassification of noninterest expense associated with these investments.

As a result of the adoption of this accounting guidance, we now expect our 2014 effective tax rate to be approximately 26%.

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

CONSOLIDATED BALANCE SHEET REVIEW

Table 6: Summarized Balance Sheet Data


							Change
Dollars in millions	June 30 2014			December 31 2013			$			%
Assets
Interest-earning deposits with banks	$	16,876		$	12,135		$	4,741			39	%
Loans held for sale		2,228			2,255			(27	)		(1	)%
Investment securities		56,602			60,294			(3,692	)		(6	)%
Loans		200,984			195,613			5,371			3	%
Allowance for loan and lease losses		(3,453	)		(3,609	)		156			4	%
Goodwill		9,074			9,074			–		–		%
Other intangible assets		1,997			2,216			(219	)		(10	)%
Other, net		42,756			42,214			542			1	%
Total assets	$	327,064		$	320,192		$	6,872			2	%
Liabilities
Deposits	$	222,554		$	220,931		$	1,623			1	%
Borrowed funds		49,066			46,105			2,961			6	%
Other		9,651			9,119			532			6	%
Total liabilities		281,271			276,155			5,116			2	%
Equity
Total shareholders’ equity		44,205			42,334			1,871			4	%
Noncontrolling interests		1,588			1,703			(115	)		(7	)%
Total equity		45,793			44,037			1,756			4	%
Total liabilities and equity	$	327,064		$	320,192		$	6,872			2	%

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

The increase in total assets was primarily due to higher interest-earning deposits with banks and loan growth, partially offset by lower investment securities. The increase in interest-earning deposits with banks resulted from the continuation of PNC’s efforts to enhance its liquidity position in light of proposed short-term liquidity regulatory standards. Interest-earning deposits with banks included balances held with the Federal Reserve Bank of Cleveland of $16.5 billion and $11.7 billion at June 30, 2014 and December 31, 2013, respectively. The increase in liabilities was largely due to growth in deposits and higher Federal Home Loan Bank borrowings and issuances of bank notes and senior debt and subordinated debt,

partially offset by a decline in federal funds purchased and repurchase agreements. An analysis of changes in selected balance sheet categories follows.

LOANS

Outstanding loan balances of $201.0 billion at June 30, 2014 and $195.6 billion at December 31, 2013 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.9 billion at June 30, 2014 and $2.1 billion at December 31, 2013, respectively. The balances include purchased impaired loans but do not include future accretable net interest (i.e., the difference between the undiscounted expected cash flows and the carrying value of the loan) on those loans.

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

Table 7: Details Of Loans


					Change
Dollars in millions	June 30 2014		December 31 2013		$			%
Commercial lending
Commercial
Retail/wholesale trade	$	16,146	$	15,530	$	616			4	%
Manufacturing		18,683		16,208		2,475			15	%
Service providers		13,734		13,052		682			5	%
Real estate related (a)		10,908		10,729		179			2	%
Financial services		4,846		4,927		(81	)		(2	)%
Health care		8,939		8,690		249			3	%
Other industries		20,280		19,242		1,038			5	%
Total commercial		93,536		88,378		5,158			6	%
Commercial real estate
Real estate projects (b)		14,535		13,613		922			7	%
Commercial mortgage		8,384		7,578		806			11	%
Total commercial real estate		22,919		21,191		1,728			8	%
Equipment lease financing		7,628		7,576		52			1	%
Total commercial lending (c)		124,083		117,145		6,938			6	%
Consumer lending
Home equity
Lines of credit		20,959		21,696		(737	)		(3	)%
Installment		14,507		14,751		(244	)		(2	)%
Total home equity		35,466		36,447		(981	)		(3	)%
Residential real estate
Residential mortgage		13,965		14,418		(453	)		(3	)%
Residential construction		595		647		(52	)		(8	)%
Total residential real estate		14,560		15,065		(505	)		(3	)%
Credit card		4,435		4,425		10			–	%
Other consumer
Education		7,118		7,534		(416	)		(6	)%
Automobile		11,005		10,827		178			2	%
Other		4,317		4,170		147			4	%
Total consumer lending		76,901		78,468		(1,567	)		(2	)%
Total loans	$	200,984	$	195,613	$	5,371			3	%

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

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

(c)	Construction loans with interest reserves and A/B Note restructurings are not significant to PNC.

The increase in loans was driven by the increase in commercial lending as a result of growth in commercial and commercial real estate loans, primarily from new customers and organic growth. The decline in consumer lending resulted from lower home equity, residential mortgage and education loans, partially offset by growth in credit card and automobile loans.

Loans represented 61% of total assets at both June 30, 2014 and December 31, 2013. Commercial lending represented 62% of the loan portfolio at June 30, 2014 and 60% at December 31, 2013. Consumer lending represented 38% of

the loan portfolio at June 30, 2014 and 40% at December 31, 2013.

Commercial real estate loans represented 11% of total loans at both June 30, 2014 and December 31, 2013 and represented 7% of total assets at both June 30, 2014 and December 31, 2013. 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 $5.6 billion, or 3% of total loans, at June 30, 2014, and $6.1 billion, or 3% of total loans, at December 31, 2013.

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

Our loan portfolio continued to be diversified among numerous industries, types of businesses and consumers across our principal geographic markets.

ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)

Our total ALLL of $3.5 billion at June 30, 2014 consisted of $1.6 billion and $1.9 billion established for the commercial lending and consumer lending categories, respectively. The ALLL included what we believe to be appropriate loss coverage on all loans, including higher risk loans, in the commercial and consumer portfolios. We do not consider government insured or guaranteed loans to be higher risk as defaults have historically been materially mitigated by payments of insurance or guarantee amounts for approved claims. Additional information regarding our higher risk loans is included in the Credit Risk Management portion of the Risk Management section of this Financial Review and Note 1 Accounting Policies, Note 4 Asset Quality and Note 6 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in our Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

PURCHASE ACCOUNTING ACCRETION AND VALUATION OF PURCHASED IMPAIRED LOANS

Information related to purchase accounting accretion and accretable yield for the first six months of 2014 and 2013 follows. Additional information is provided in Note 5 Purchased Loans in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

Table 8: Accretion – Purchased Impaired Loans


	Three months ended June 30						Six months ended June 30
In millions	2014			2013			2014			2013
Accretion on purchased impaired loans
Scheduled accretion	$	120		$	150		$	245		$	307
Reversal of contractual interest on impaired loans		(70	)		(83	)		(138	)		(168	)
Scheduled accretion net of contractual interest		50			67			107			139
Excess cash recoveries		35			11			64			61
Total	$	85		$	78		$	171		$	200

Table 9: Purchased Impaired Loans – Accretable Yield


In millions	2014			2013
January 1	$	2,055		$	2,166
Scheduled accretion		(245	)		(307	)
Excess cash recoveries		(64	)		(61	)
Net reclassifications to accretable from non-accretable and other activity (a)		190			366
June 30 (b)	$	1,936		$	2,164

(a)

Approximately 78% and 58% of the net reclassifications for the first six months ended June 30, 2014 and 2013, respectively, were driven by the consumer portfolio and were due to improvements of cash expected to be collected on both RBC Bank (USA) and National City loans in future periods. The remaining net reclassifications were predominantly due to future cash flow changes in the commercial portfolio.

(b)	As of June 30, 2014, we estimate that $1.9 billion of accretable interest on purchased credit impaired loans will be recognized in future interest income, $1.1 billion of which is expected to be contractual interest.

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

Information related to the valuation of purchased impaired loans at June 30, 2014 and December 31, 2013 follows.

Table 10: Valuation of Purchased Impaired Loans


	June 30, 2014						December 31, 2013
Dollars in millions	Balance			Net Investment			Balance			Net Investment
Commercial and commercial real estate loans:
Outstanding balance	$	676					$	937
Purchased impaired mark		(197	)					(264	)
Recorded investment		479						673
Allowance for loan losses		(108	)					(133	)
Net investment		371			55	%		540			58	%
Consumer and residential mortgage loans:
Outstanding balance		5,120						5,548
Purchased impaired mark		(42	)					(115	)
Recorded investment		5,078						5,433
Allowance for loan losses		(778	)					(871	)
Net investment		4,300			84	%		4,562			82	%
Total purchased impaired loans:
Outstanding balance		5,796						6,485
Purchased impaired mark		(239	)					(379	)
Recorded investment		5,557						6,106
Allowance for loan losses		(886	)					(1,004	)
Net investment	$	4,671			81	%	$	5,102			79	%

At June 30, 2014, our largest individual purchased impaired loan had a recorded investment of $12 million. We currently expect to collect total cash flows of $6.6 billion on purchased impaired loans, representing the $4.7 billion net investment at June 30, 2014 and the accretable net interest of $1.9 billion shown in Table 9.

WEIGHTED AVERAGE LIFE OF THE PURCHASED IMPAIRED PORTFOLIOS

The table below provides the weighted average life (WAL) for each of the purchased impaired portfolios as of June 30, 2014.

Table 11: Weighted Average Life of the Purchased Impaired Portfolios


As of June 30, 2014 Dollars in millions	Recorded Investment		WAL (a)
Commercial	$	109		1.8 years
Commercial real estate		370		1.3 years
Consumer (b) (c)		2,150		4.4 years
Residential real estate (c)		2,928		5.2 years
Total	$	5,557		4.5 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.

(c)	In 2014, the weighted average life of the purchased impaired portfolio increased, primarily driven by residential real estate and home equity loans. Increasing a portfolio’s weighted average life will result in more interest income being recognized on purchased impaired loans in future periods.

PURCHASED IMPAIRED LOANS – ACCRETABLE DIFFERENCE SENSITIVITY ANALYSIS

The following table provides a sensitivity analysis on the Total Purchased Impaired Loans portfolio. The analysis reflects hypothetical changes in key drivers for expected cash flows over the life of the loans under declining and improving conditions at a point in time. Any unusual significant economic events or changes, as well as other variables not considered below (e.g., natural or widespread disasters), could result in impacts outside of the ranges represented below. Additionally, commercial and commercial real estate loan settlements or sales proceeds can vary widely from appraised values due to a number of factors including, but not limited to, special use considerations, liquidity premiums and improvements/deterioration in other income sources.

Table 12: Accretable Difference Sensitivity – Total Purchased Impaired Loans


In billions	June 30, 2014			Declining Scenario (a)			Improving Scenario (b)
Expected Cash Flows	$	6.6		$	(.2	)	$	.3
Accretable Difference		1.9			–			.1
Allowance for Loan and Lease Losses		(.9	)		(.1	)		.2

(a)

Declining Scenario – Reflects hypothetical changes that would decrease future cash flow expectations. For consumer loans, we assume home price forecast decreases by ten percent and unemployment rate forecast increases by two percentage points; for commercial loans, we assume that collateral values decrease by ten percent.

(b)

Improving Scenario – Reflects hypothetical changes that would increase future cash flow expectations. For consumer loans, we assume home price forecast increases by ten percent, unemployment rate forecast decreases by two percentage points and interest rate forecast increases by two percentage points; for commercial loans, we assume that collateral values increase by ten percent.

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

The present value impact of declining cash flows is primarily reflected as immediate impairment charge to the provision for credit losses, resulting in an increase to the allowance for loan and lease losses. The present value impact of increased cash flows is first recognized as a reversal of the allowance with any additional cash flow increases reflected as an increase in accretable yield over the life of the loan.

NET UNFUNDED CREDIT COMMITMENTS

Net unfunded credit commitments are comprised of the following:

Table 13: Net Unfunded Loan Commitments


In millions	June 30 2014		December 31 2013
Total commercial lending (a)	$	91,209	$	90,104
Home equity lines of credit		18,323		18,754
Credit card		17,343		16,746
Other		4,571		4,266
Total	$	131,446	$	129,870

(a)	Less than 5% of net unfunded loan commitments relate to commercial real estate at each date.

Commitments to extend credit represent arrangements to lend funds or provide liquidity subject to specified contractual conditions.

Standby bond purchase agreements totaled $980 million at June 30, 2014 and $1.3 billion at December 31, 2013 and are included in the preceding table, primarily within the Total commercial lending category.

In addition to the credit commitments set forth in the table above, our net outstanding standby letters of credit totaled $10.5 billion at both June 30, 2014 and December 31, 2013. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

Information regarding our Allowance for unfunded loan commitments and letters of credit is included in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

INVESTMENT SECURITIES

The following table presents the distribution of our investment securities portfolio. We have included credit ratings information because 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. For those securities, where during our quarterly security-level impairment assessments we determined losses represented other-than-temporary impairment (OTTI), we have recorded cumulative credit losses of $1.2 billion in earnings and accordingly have reduced the amortized cost of our securities. See Table 76 in Note 7 Investment Securities in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for more detail. The majority of these cumulative impairment charges related to non-agency residential mortgage-backed and asset-backed securities rated BB or lower.

Table 14: Investment Securities


	June 30, 2014				December 31, 2013				Ratings (a) As of June 30, 2014
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	$	5,453	$	5,638	$	4,229	$	4,361		100	%
Agency residential mortgage-backed		25,402		25,930		28,483		28,652		100
Non-agency residential mortgage-backed		5,385		5,629		5,750		5,894		11			1	%		3	%		82	%		3	%
Agency commercial mortgage-backed		1,795		1,871		1,883		1,946		100
Non-agency commercial mortgage-backed (b)		4,710		4,855		5,624		5,744		69			11			11			4			5
Asset-backed (c)		6,361		6,414		6,763		6,773		90			1						8			1
State and municipal		3,925		4,057		3,664		3,678		83			12									5
Other debt		2,122		2,179		2,845		2,891		67			24			8						1
Corporate stock and other		355		362		434		433														100
Total investment securities (d)	$	55,508	$	56,935	$	59,675	$	60,372		84	%		3	%		2	%		9	%		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 government guaranteed student loans and other consumer credit products and corporate debt.

(d)	Includes available for sale and held to maturity securities.

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

Investment securities represented 17% of total assets at June 30, 2014 and 19% at December 31, 2013.

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 June 30, 2014, 84% 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 58% 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. As of June 30, 2014, the amortized cost and fair value of available for sale securities totaled $43.4 billion and $44.5 billion, respectively, compared to an amortized cost and fair value as of December 31, 2013 of $48.0 billion and $48.6 billion, respectively. The amortized cost and fair value of held to maturity securities were $12.1 billion and $12.4 billion, respectively, at June 30, 2014, compared to $11.7 billion and $11.8 billion, respectively, at December 31, 2013.

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 $1.4 billion at June 30, 2014 from $.7 billion at December 31, 2013 primarily due to the impact of market interest rates and credit spreads. The comparable amounts for the securities available for sale portfolio were $1.1 billion and $.6 billion, respectively.

Unrealized gains and losses on available for sale debt securities do not impact liquidity. However these gains and losses do affect risk-based capital under the regulatory capital rules in effect beginning in 2014 for PNC. 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 regulatory capital ratios under the regulatory capital rules in effect for 2014. In addition, the amount representing the

credit-related portion of OTTI on available for sale securities would reduce our earnings and regulatory capital ratios.

During the second quarter of 2014, we transferred securities with a fair value of $1.4 billion from available for sale to held to maturity. We changed our intent and committed to hold these high-quality securities to maturity in order to reduce the impact of price volatility on Accumulated other comprehensive income and certain capital measures, after taking into consideration market conditions and regulatory capital requirements under Basel III capital standards. See additional discussion of this transfer in Note 7 Investment Securities in our Notes To Consolidated Financial Statements included in Part I, Item I of this Report.

The duration of investment securities was 2.4 years at June 30, 2014. We estimate that, at June 30, 2014, the effective duration of investment securities was 2.5 years for an immediate 50 basis points parallel increase in interest rates and 2.3 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2013 were 3.0 years and 2.8 years, respectively.

At least quarterly, we conduct a comprehensive security-level impairment assessment on all securities. For securities in an unrealized loss position, we determine whether the loss represents OTTI. For debt securities that we neither intend to sell nor believe we will be required to sell prior to expected recovery, we recognize the credit portion of OTTI charges in current earnings and include the noncredit portion of OTTI in Net unrealized gains (losses) on OTTI securities on our Consolidated Statement of Comprehensive Income and net of tax in Accumulated other comprehensive income (loss) on our Consolidated Balance Sheet. During the first six months of 2014 and 2013 we recognized OTTI credit losses of $3 million and $14 million, respectively. The credit losses related to residential mortgage-backed and asset-backed securities collateralized by non-agency residential loans.

If housing and economic conditions were to deteriorate from current levels, and if market volatility and illiquidity 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 could be adversely affected and we could incur additional OTTI credit losses that would impact our Consolidated Income Statement.

Additional information regarding our investment securities is included in Note 7 Investment Securities and Note 8 Fair Value in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

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

LOANS HELD FOR SALE

Table 15: Loans Held For Sale


In millions	June 30 2014		December 31 2013
Commercial mortgages at fair value	$	521	$	586
Commercial mortgages at lower of cost or fair value		379		281
Total commercial mortgages		900		867
Residential mortgages at fair value		1,259		1,315
Residential mortgages at lower of cost or fair value		12		41
Total residential mortgages		1,271		1,356
Other		57		32
Total	$	2,228	$	2,255

For commercial mortgages held for sale at fair value, we stopped originating these and continue to pursue opportunities to reduce these positions.

For commercial mortgages held for sale carried at lower of cost or fair value, we sold $935 million during the first six months of 2014 compared to $1.4 billion during the first six months of 2013. All of these loan sales were to government agencies. Total gains of $29 million were recognized on the valuation and sale of commercial mortgage loans held for sale, net of hedges, during the first six months of 2014, including $22 million in the second quarter. Comparable amounts for 2013 were $43 million and $20 million, respectively.

Residential mortgage loan origination volume was $4.5 billion during the first six months of 2014 compared to $8.9 billion for the first six months of 2013. The majority of such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $4.3 billion of loans and recognized related gains of $225 million during the first six months of 2014, of which $137 million occurred in the second quarter. The comparable amounts for the six months of 2013 were $8.0 billion and $362 million, respectively, including $190 million in the second quarter.

Interest income on loans held for sale was $47 million in the first six months of 2014, including $24 million in the second quarter. Comparable amounts for 2013 were $85 million and $32 million, respectively. These amounts are included in Other interest income on our 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 8 Fair Value in our Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets totaled $11.1 billion at June 30, 2014 and $11.3 billion at December 31, 2013. The decrease of $.2 billion was primarily due to fair value changes of residential mortgage servicing rights, partially offset by new additions and purchases of mortgage servicing rights. See additional information regarding our goodwill and intangible assets in Note 9 Goodwill and Other Intangible Assets included in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

FUNDING AND CAPITAL SOURCES

Table 16: Details Of Funding Sources


					Change
Dollars in millions	June 30 2014		December 31 2013		$			%
Deposits
Money market	$	110,404	$	108,631	$	1,773			2	%
Demand		78,083		77,756		327			–	%
Retail certificates of deposit		19,713		20,795		(1,082	)		(5	)%
Savings		12,037		11,078		959			9	%
Time deposits in foreign offices and other time deposits		2,317		2,671		(354	)		(13	)%
Total deposits		222,554		220,931		1,623			1	%
Borrowed funds
Federal funds purchased and repurchase agreements		3,132		4,289		(1,157	)		(27	)%
Federal Home Loan Bank borrowings		15,023		12,912		2,111			16	%
Bank notes and senior debt		14,102		12,603		1,499			12	%
Subordinated debt		9,099		8,244		855			10	%
Commercial paper		4,999		4,997		2			–	%
Other		2,711		3,060		(349	)		(11	)%
Total borrowed funds		49,066		46,105		2,961			6	%
Total funding sources	$	271,620	$	267,036	$	4,584			2	%

18 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 2014 capital and liquidity activities.

The increase in deposits during the first six months of 2014 was primarily driven by increases in money market and savings deposits, partially offset by lower retail certificates of

deposit. Interest-bearing deposits represented 68% of total deposits at both June 30, 2014 and December 31, 2013. Total borrowed funds increased $3.0 billion since December 31, 2013 as higher Federal Home Loan Bank borrowings and issuances of bank notes and senior debt and subordinated debt were partially offset by a decline in federal funds purchased and repurchase agreements.

CAPITAL

Table 17: Shareholders’ Equity


							Change
Dollars in millions	June 30 2014			December 31 2013			$			%
Shareholders’ equity
Preferred stock (a)
Common stock	$	2,703		$	2,698		$	5			–	%
Capital surplus – preferred stock		3,944			3,941			3			–	%
Capital surplus – common stock and other		12,506			12,416			90			1	%
Retained earnings		24,755			23,251			1,504			6	%
Accumulated other comprehensive income		881			436			445			102	%
Common stock held in treasury at cost		(584	)		(408	)		(176	)		(43	)%
Total shareholders’ equity	$	44,205		$	42,334		$	1,871			4	%

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

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

Total shareholders’ equity increased $1.9 billion compared with December 31, 2013, primarily reflecting an increase in retained earnings of $1.5 billion (driven by net income of $2.1 billion and the impact of $606 million of common and preferred dividends declared) and an increase of $445 million in accumulated other comprehensive income. This increase was primarily due to the impact of market interest rates and credit spreads on securities available for sale and derivatives that are part of cash flow hedging strategies, along with the impact of pension and other postretirement benefit plan adjustments. Common shares outstanding were 532 million at June 30, 2014 and 533 million at December 31, 2013.

Our current common stock repurchase program authorization permits us to purchase up to 25 million shares of PNC common stock on the open market or in privately negotiated transactions. This program will remain in effect until fully utilized or until modified, superseded or terminated. The extent and timing of share repurchases under this program 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 the supervisory assessment of capital adequacy and capital planning processes

undertaken by the Federal Reserve and our primary bank regulators as part of the CCAR process. The Federal Reserve accepted our 2014 capital plan and did not object to our proposed capital actions. The capital plan included share repurchase programs of up to $1.5 billion for the four quarter period beginning in the second quarter of 2014 under PNC’s existing common stock repurchase authorization. These programs include repurchases of up to $200 million to mitigate the financial impact of employee benefit plan transactions. In the second quarter of 2014, PNC repurchased 2.6 million common shares for $223 million under the capital plan authorization. Under the “de minimis” safe harbor of the Federal Reserve’s capital plan rule, PNC may make limited repurchases of common stock or other capital distributions in amounts that exceed the amounts included in its most recently approved capital plan, provided that, among other things, such distributions do not exceed, in the aggregate, 1% of PNC’s Tier 1 capital and the Federal Reserve does not object to the additional repurchases or distributions. Under this “de minimis” safe harbor, PNC repurchased $50 million of common shares to mitigate the financial impact of employee benefit plan transactions in the first quarter of 2014. See the Supervision and Regulation section of Item 1 Business of our 2013 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 and the Capital and Liquidity Actions portion of the Executive Summary section of our Financial Review for the impact of the Federal Reserve’s current supervisory assessment of the capital adequacy program.

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

Table 18: Basel III Capital


	June 30, 2014
Dollars in millions	Transitional Basel III (a) (c)			Pro forma Fully Phased-In Basel III (b) (c)
Common equity Tier 1 capital
Common stock plus related surplus, net of treasury stock	$	14,625		$	14,625
Retained earnings		24,755			24,755
Accumulated other comprehensive income for securities currently and previously held as available for sale		151			756
Accumulated other comprehensive income for pension and other postretirement plans		(36	)		(180	)
Goodwill, net of associated deferred tax liabilities		(8,838	)		(8,838	)
Other disallowed intangibles, net of deferred tax liabilities		(85	)		(424	)
Other adjustments/(deductions)		(5	)		(74	)
Total common equity Tier 1 capital before threshold deductions		30,567			30,620
Total threshold deductions		(216	)		(1,075	)
Common equity Tier 1 capital		30,351			29,545
Additional Tier 1 capital
Preferred stock		3,944			3,944
Trust preferred capital securities		99
Noncontrolling interests (d)		790			42
Other adjustments/(deductions)		(86	)		(95	)
Tier 1 capital		35,098			33,436
Additional Tier 2 capital
Qualifying subordinated debt		5,804			4,961
Trust preferred capital securities		99
Allowance for loan and lease losses included in Tier 2 capital		3,443			194
Other		2			10
Total Basel III capital	$	44,446		$	38,601
Risk-Weighted Assets (e)
Basel I risk-weighted assets calculated in accordance with transition rules for 2014 (f)	$	277,126			N/A
Estimated Basel III standardized approach risk-weighted assets (g)		N/A		$	295,217
Estimated Basel III advanced approaches risk-weighted assets (h)		N/A			290,063
Average quarterly adjusted total assets		312,747			311,503
Basel III capital ratios
Common equity Tier 1		11.0	%		10.0	%(i)(k)
Tier 1 risk-based		12.7			11.3	(i)(l)
Total capital risk-based		16.0			13.3	(j)(m)
Leverage (n)		11.2			10.7

(a)	Calculated using the regulatory capital methodology applicable to PNC during 2014.

(b)	PNC utilizes the pro forma fully phased-in Basel III capital ratios to assess its capital position (without the benefit of phase-ins), including comparison to similar estimates made by other financial institutions.

(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, the ongoing evolution, validation and regulatory approval of PNC’s models integral to the calculation of advanced approaches risk-weighted assets.

(d)	Includes primarily REIT Preferred Securities.

(e)	Calculated as of period end.

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

(g)	Estimated based on Basel III standardized approach rules and includes credit and market risk-weighted assets.

(h)	Estimated based on Basel III advanced approaches rules and includes credit, market and operational risk-weighted assets.

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

(j)	Pro forma fully phased-in Basel III capital ratio based on estimated Basel III advanced approaches risk-weighted assets.

(k)	For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Common equity Tier 1 capital ratio is 10.2%. This capital ratio is calculated using Common equity Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets.

(l)	For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Tier 1 risk-based capital ratio is 11.5%. This capital ratio is calculated using Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets.

(m)

For comparative purposes only, the pro forma fully phased-in standardized approach Basel III Total capital risk-based capital ratio is 14.3%. This ratio is calculated using additional Tier 2 capital which, under the standardized approach, reflects allowance for loan and lease losses of up to 1.25% of credit risk related risk-weighted assets and dividing by estimated Basel III standardized approach risk-weighted assets.

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

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

The Basel II framework, which was adopted by the Basel Committee on Banking Supervision in 2004, seeks to provide more risk-sensitive regulatory capital calculations and promote enhanced risk management practices among large, internationally active banking organizations. The U.S. banking agencies initially adopted rules to implement the Basel II capital framework in 2004. In July 2013, the U.S. banking agencies adopted final rules (referred to as the advanced approaches) that modified the Basel II framework effective January 1, 2014. See the Supervision and Regulation section in Item 1 Business and Item 1A Risk Factors of our 2013 Form 10-K. Prior to fully implementing the advanced approaches established by these rules to calculate risk-weighted assets, PNC and PNC Bank, N.A. must successfully complete a “parallel run” qualification phase. Both PNC and PNC Bank, N.A. entered this parallel run phase on January 1, 2013. This phase must last at least four consecutive quarters, although, consistent with the experience of other U.S. banks, we currently anticipate a multi-year parallel run period. After PNC exits parallel run, its regulatory risk-based capital ratio for each measure (e.g., Common equity Tier 1 ratio) will be the lower of the ratios as calculated under the standardized approach and the advanced approaches.

As a result of the staggered effective dates of the final U.S. capital rules issued in July 2013, as well as the fact that PNC remains in the parallel run qualification phase for the advanced approaches, PNC’s regulatory risk-based capital ratios in 2014 are based on the definitions of, and deductions from, capital under Basel III (as such definitions and deductions are phased-in for 2014) and Basel I risk-weighted assets (subject to certain adjustments as defined by the Basel III rules). We refer to the capital ratios calculated using these Basel III phased-in provisions and adjusted Basel I risk-weighted assets as the Transitional Basel III ratios.

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 June 30, 2014 capital levels were aligned with them.

At June 30, 2014, PNC and PNC Bank, N.A., our domestic bank subsidiary, were both considered “well capitalized,” based on applicable U.S. regulatory capital ratio requirements. To qualify as “well capitalized”, PNC and PNC Bank, N.A. must have, during 2014, Transitional Basel III capital ratios of at least 6% for Tier 1 risk-based and 10% for Total capital risk-based, and PNC Bank, N.A. must have a Transitional Basel III leverage ratio of at least 5%.

Common equity Tier 1 capital as defined under the Basel III rules adopted by the U.S. banking agencies differs materially

from Basel I. For example, under Basel III, significant common stock investments in unconsolidated financial institutions, mortgage servicing rights and deferred tax assets must be deducted from capital 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 I regulatory capital excludes accumulated other comprehensive income related to securities currently and previously held as available for sale, as well as pension and other postretirement plans, whereas under Basel III these items are a component of PNC’s capital. The Basel III final rules also eliminate the Tier 1 treatment of trust preferred securities for bank holding companies with $15 billion or more in assets. In the third quarter of 2013, we concluded our redemptions of the discounted trust preferred securities previously assumed through acquisitions.

The access to and cost of funding for new business initiatives, the ability to undertake new business initiatives including acquisitions, the ability to engage in expanded business activities, the ability to pay dividends or repurchase shares or other capital instruments, the level of deposit insurance costs, and the level and nature of regulatory oversight depend, in large part, on a financial institution’s capital strength.

We provide additional information regarding regulatory capital requirements and some of their potential impacts on PNC in the Banking Regulation and Supervision section of Item 1 Business, Item 1A Risk Factors and Note 22 Regulatory Matters in the Notes To Consolidated Financial Statements under Item 8 of our 2013 Form 10-K.

PNC’s Basel I ratios, which were PNC’s effective regulatory capital ratios as of December 31, 2013 were 10.5% for Tier 1 common capital ratio, 12.4% for Tier 1 risk-based capital ratio, 15.8% for Total risk-based capital ratio and 11.1% for leverage ratio. Our 2013 Form 10-K included additional information regarding our Basel I 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 2013 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,

•

Note 10 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities in the Notes To Consolidated Financial Statements, and

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

•

Note 17 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 June 30, 2014 and December 31, 2013 is included in Note 2 of this Report.

TRUST PREFERRED SECURITIES

We are subject to certain restrictions, including restrictions on dividend payments, in connection with $206 million in principal amount of an outstanding junior subordinated

debenture associated with $200 million of trust preferred securities that were issued by PNC Capital Trust C, a subsidiary statutory trust (both amounts as of June 30, 2014). Generally, if there is (i) an event of default under the debenture, (ii) PNC elects to defer interest on the debenture, (iii) PNC exercises its right to defer payments on the related trust preferred security issued by the statutory trust or (iv) there is a default under PNC’s guarantee of such payment obligations, as specified in the applicable governing documents, then PNC would be subject during the period of such default or deferral to restrictions on dividends and other provisions protecting the status of the debenture holders similar to or in some ways more restrictive than those potentially imposed under the Exchange Agreement with PNC Preferred Funding Trust II. See Note 14 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in the Notes To Consolidated Financial Statements in Item 8 of our 2013 Form 10-K for information on contractual limitations on dividend payments resulting from securities issued by PNC Preferred Funding Trust I and PNC Preferred Funding Trust II.

FAIR VALUE MEASUREMENTS

In addition to the following, see Note 8 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 at June 30, 2014 and December 31, 2013, respectively, and the portions of such assets and liabilities that are classified within Level 3 of the valuation hierarchy.

Table 19: Fair Value Measurements – Summary


	June 30, 2014						December 31, 2013
Dollars in millions	Total Fair Value			Level 3			Total Fair Value			Level 3
Total assets	$	58,446		$	10,679		$	63,096		$	10,635
Total assets at fair value as a percentage of consolidated assets		18	%					20	%
Level 3 assets as a percentage of total assets at fair value					18	%					17	%
Level 3 assets as a percentage of consolidated assets					3	%					3	%
Total liabilities	$	4,879		$	624		$	5,460		$	623
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					13	%					11	%
Level 3 liabilities as a percentage of consolidated liabilities					<1	%					<1	%

The majority of assets recorded at fair value are included in the securities available for sale portfolio. The majority of Level 3 assets represent non-agency residential mortgage-backed securities in the securities available for sale portfolio for which there was limited market activity, equity investments and mortgage servicing rights.

An instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification (transfer) of assets or liabilities between hierarchy levels. PNC’s policy is to recognize transfers in and transfers out as of the end of the reporting

period. For additional information regarding the transfers of assets or liabilities between hierarchy levels, see Note 8 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

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

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

Business segment results, including inter-segment revenues, and a description of each business are included in Note 18 Segment Reporting included in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report. Certain amounts included in this Financial Review differ from those amounts shown in Note 18 primarily due to the presentation in this Financial Review of business net interest revenue on a taxable-equivalent basis. Note 18 presents results of businesses for the first six months and second quarter of 2014 and 2013.

RETAIL BANKING

(Unaudited)

Table 20: Retail Banking Table


Six months ended June 30 Dollars in millions, except as noted	2014			2013
Income Statement
Net interest income	$	1,953		$	2,061
Noninterest income
Service charges on deposits		288			270
Brokerage		116			110
Consumer services		466			445
Other		185			151
Total noninterest income		1,055			976
Total revenue		3,008			3,037
Provision for credit losses		149			310
Noninterest expense		2,255			2,287
Pretax earnings		604			440
Income taxes		221			162
Earnings	$	383		$	278
Average Balance Sheet
Loans
Consumer
Home equity	$	29,137		$	29,063
Indirect auto		9,043			7,161
Indirect other		751			969
Education		7,422			8,101
Credit cards		4,289			4,085
Other		2,164			2,141
Total consumer		52,806			51,520
Commercial and commercial real estate		10,986			11,318
Floor plan		2,332			2,031
Residential mortgage		635			788
Total loans		66,759			65,657
Goodwill and other intangible assets		6,052			6,138
Other assets		2,748			2,522
Total assets	$	75,559		$	74,317
Deposits
Noninterest-bearing demand	$	21,634		$	20,967
Interest-bearing demand		33,883			31,595
Money market		49,815			48,469
Total transaction deposits		105,332			101,031
Savings		11,568			10,768
Certificates of deposit		19,617			22,251
Total deposits		136,517			134,050
Other liabilities		405			308
Total liabilities	$	136,922		$	134,358
Performance Ratios
Return on average assets		1.02	%		.75	%
Noninterest income to total revenue		35			32
Efficiency		75			75
Other Information (a)
Credit-related statistics:
Commercial nonperforming assets	$	158		$	222
Consumer nonperforming assets		1,037			1,068
Total nonperforming assets (b)	$	1,195		$	1,290
Purchased impaired loans (c)	$	631		$	750
Commercial lending net charge-offs	$	31		$	59
Credit card lending net charge-offs		74			84
Consumer lending (excluding credit card) net charge-offs		156			259
Total net charge-offs	$	261		$	402
Commercial lending annualized net charge-off ratio		.47	%		.89	%
Credit card lending annualized net charge-off ratio		3.48	%		4.15	%
Consumer lending (excluding credit card) annualized net charge-off ratio (d)		.64	%		1.08	%
Total annualized net charge-off ratio (d)		.79	%		1.23	%


At June 30	2014			2013
Other Information (Continued) (a)
Home equity portfolio credit statistics: (e)
% of first lien positions at origination (f)		53	%		50	%
Weighted-average loan-to-value ratios (LTVs) (f) (g)		79	%		85	%
Weighted-average updated FICO scores (h)		748			745
Annualized net charge-off ratio (d)		.65	%		1.39	%
Delinquency data – % of total loans: (i)
Loans 30 – 59 days past due		.19	%		.20	%
Loans 60 – 89 days past due		.07	%		.08	%
Accruing loans past due		.26	%		.28	%
Nonperforming loans		3.08	%		3.12	%
Other statistics:
ATMs		7,977			7,335
Branches (j)		2,695			2,780
Brokerage account assets (in billions)	$	43		$	39
Customer-related statistics (average):
Non-teller deposit transactions (k)		32	%		21	%
Digital consumer customers (l)		44	%		37	%

(a)	Presented as of June 30, except for net charge-offs, net charge-off ratios and customer-related statistics, which are for the six months ended.

(b)	Includes nonperforming loans of $1.1 billion at June 30, 2014 and $1.2 billion at June 30, 2013.

(c)	Recorded investment of purchased impaired loans related to acquisitions.

(d)	Ratios for the first six months of 2013 include additional consumer charge-offs taken as a result of alignment with interagency guidance on practices for loans and lines of credit we implemented in the first quarter of 2013.

(e)	Lien position, LTV and FICO statistics are based upon customer balances.

(f)	Lien position and LTV calculations reflect the use of revised assumptions where data is missing.

(g)	LTV statistics are based upon current information.

(h)	Represents FICO scores that are updated at least quarterly.

(i)	Data based upon recorded investment. Past due amounts exclude purchased impaired loans, even if contractually past due, as we are currently accreting interest income over the expected life of the loans.

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

(k)	Percentage of total deposit transactions processed at an ATM or through our mobile banking application.

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

Retail Banking earned $383 million in the first six months of 2014 compared with earnings of $278 million for the same period a year ago. The increase in earnings was driven by a lower provision for credit losses, increased noninterest income due to strong fee income growth and higher gains on sales of Visa Class B common shares, and lower noninterest expense resulting from disciplined expense management and the impact of branch consolidations in 2013. These increases were partially offset by lower net interest income driven by interest rate spread compression on the value of deposits, lower purchase accounting accretion and lower yield on loans.

Retail Banking continues to augment and refine its core checking account products to enhance the customer experience and grow value. In the first half of 2014, we continued to focus on growing consumer share of wallet through the sale of liquidity, banking and investment products and improved product value for customers. PNC Total Insight^SM, an integrated banking and investing experience for our customers, completed the pilot phase and was introduced across all markets. We also improved the Cash Flow Insight^SM features and customer experience, and launched the implementation to discontinue the sale of free checking to our business banking customers.

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

Retail Banking also continued to focus on serving more customers through cost effective channels that meet their evolving preferences for convenience.

•

In the first six months of 2014, approximately 44% of consumer customers used non-teller channels for the majority of their transactions compared with 37% for the same period in 2013.

•

Deposit transactions via ATM and mobile channels increased to 32% of total deposit transactions in the first half of 2014 compared with 21% for the same period a year ago.

•

As part of PNC’s retail branch transformation strategy, 45 branches were converted to universal branches as of June 30, 2014 in a pilot program, and 36 branches were closed or consolidated in the first six months of 2014. Retail Banking’s primary geographic footprint extends across 17 states and Washington, D.C. Our retail branch network covers nearly half the U.S. population, with 2,695 branches and 7,977 ATMs.

Total revenue for the first six months of 2014 was $3.0 billion, $29 million lower than the same period of 2013. Net interest income of $2.0 billion decreased $108 million compared with the same period a year ago. The decrease resulted primarily from interest rate spread compression on the value of deposits due to the continued low rate environment and lower purchase accounting accretion and lower yields on loans. Noninterest income increased $79 million compared to the first six months of 2013. Noninterest income included gains on sales of Visa Class B common shares of $116 million in the first half of 2014 compared to $83 million in the first half of 2013; two million shares were sold in each of the periods. Noninterest income, excluding the gains on sales of Visa Class B common shares, increased $46 million over the first six months of 2013, primarily as a result of changes in product offerings, strategic initiatives, including investing and retirement, and an increase in customer-initiated transactions.

The provision for credit losses was $149 million and net charge-offs were $261 million in the first six months of 2014 compared with $310 million and $402 million, respectively, for the same period in 2013. The provision for credit losses decrease was due to credit quality improvement. The decrease in the net charge-offs was attributable to the impact of alignment with interagency guidance in the first quarter of 2013 and improved credit quality.

Noninterest expense for the first six months of 2014 was $32 million lower than the same period in 2013. The decrease was due to disciplined expense management and the impact of branch consolidations in 2013.

Growing core checking deposits is key to Retail Banking’s growth and to providing a source of low-cost funding and liquidity to PNC. The deposit product strategy of Retail Banking is to remain disciplined on pricing, target specific

products and markets for growth, and focus on the retention and growth of customer balances. In the first six months of 2014, average total deposits of $136.5 billion increased $2.5 billion, or 2%, compared with the same period in 2013.

•

Average transaction deposits grew $4.3 billion, or 4%, and average savings deposit balances grew $800 million, or 7%, year-over-year as a result of organic deposit growth and continued customer preference for liquidity. In the first six months of 2014, compared with the same period a year ago, average demand deposits increased $3.0 billion, or 6%, to $55.5 billion and average money market deposits increased $1.3 billion, or 3%, to $49.8 billion.

•

Total average certificates of deposit decreased $2.6 billion, or 12%, compared to the same period of 2013. The decline in average certificates of deposit was due to the expected run-off of maturing accounts.

Retail Banking continued to focus on a relationship-based lending strategy that targets specific products and markets for growth, small businesses, and auto dealerships. In the first six months of 2014, average total loans were $66.8 billion, an increase of $1.1 billion, or 2%, over the same period of 2013.

•

Average indirect auto loans increased $1.9 billion, or 26%, compared to the first six months of 2013. The increase was primarily due to the expansion of our indirect sales force and product introduction to acquired markets, as well as overall increases in auto sales.

•

Average auto dealer floor plan loans grew $301 million, or 15%, in the first six months of 2014, compared to the same period a year ago, primarily resulting from dealer line utilization and additional dealer relationships.

•

Average credit card balances increased $204 million, or 5%, over the first six months of 2013 as a result of organic growth.

•

Average home equity loans increased $74 million compared to the first six months of 2013. The portfolio grew modestly as increases in term loans were partially offset by declines in lines of credit. Retail Banking’s home equity loan portfolio is relationship based, with 97% of the portfolio attributable to borrowers in our primary geographic footprint.

•

For the first six months of 2014, compared to the same period a year ago, average loan balances for the remainder of the portfolio declined a net $1.4 billion, driven by declines in the education portfolio of $679 million and commercial & commercial real estate of $332 million. The discontinued government guaranteed education loan, indirect other and residential mortgage portfolios are primarily run-off portfolios.

Nonperforming assets totaled $1.2 billion at June 30, 2014, a decrease of $95 million, or 7%, over the same period of 2013, driven by declines in both commercial and consumer non-performing loans.

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

CORPORATE & INSTITUTIONAL BANKING

(Unaudited)

Table 21: Corporate & Institutional Banking Table


Six months ended June 30 Dollars in millions, except as noted	2014			2013
Income Statement
Net interest income	$	1,855		$	1,899
Noninterest income
Corporate service fees		580			543
Other		211			319
Noninterest income		791			862
Total revenue		2,646			2,761
Provision for credit losses (benefit)		90			(26	)
Noninterest expense		992			979
Pretax earnings		1,564			1,808
Income taxes		571			655
Earnings	$	993		$	1,153
Average Balance Sheet
Loans
Commercial	$	76,771		$	71,016
Commercial real estate		20,640			16,939
Equipment lease financing		6,834			6,604
Total commercial lending		104,245			94,559
Consumer		1,070			979
Total loans		105,315			95,538
Goodwill and other intangible assets		3,815			3,763
Loans held for sale		913			1,101
Other assets		9,949			11,539
Total assets	$	119,992		$	111,941
Deposits
Noninterest-bearing demand	$	42,646		$	40,239
Money market		20,476			16,977
Other		7,548			6,947
Total deposits		70,670			64,163
Other liabilities		7,477			17,914
Total liabilities	$	78,147		$	82,077
Performance Ratios
Return on average assets		1.67	%		2.08	%
Noninterest income to total revenue		30			31
Efficiency		37			35
Commercial Mortgage Servicing Portfolio –Serviced For PNC and Others (in billions)
Beginning of period	$	308		$	282
Acquisitions/additions		41			39
Repayments/transfers		(33	)		(27	)
End of period	$	316		$	294
Other Information
Consolidated revenue from: (a)
Treasury Management (b)	$	624		$	642
Capital Markets (c)	$	335		$	327
Commercial mortgage loans held for sale (d)	$	52		$	69
Commercial mortgage loan servicing income (e)		108			106
Commercial mortgage servicing rights valuation, net of economic hedge (f)		25			55
Total commercial mortgage banking activities	$	185		$	230


Six months ended June 30 Dollars in millions, except as noted	2014		2013
Average Loans (by C&IB business)
Corporate Banking	$	52,947	$	49,964
Real Estate		26,827		21,077
Business Credit		12,868		11,397
Equipment Finance		10,250		9,923
Other		2,423		3,177
Total average loans	$	105,315	$	95,538
Total loans (g)	$	108,990	$	97,708
Net carrying amount of commercial mortgage servicing rights (g)	$	515	$	525
Credit-related statistics:
Nonperforming assets (g) (h)	$	715	$	999
Purchased impaired loans (g) (i)	$	370	$	708
Net charge-offs	$	17	$	39

(a)

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.

(b)	Includes amounts reported in net interest income and corporate service fees.

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

(d)	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.

(e)

Includes net interest income and noninterest income, primarily in corporate services fees, from loan servicing and ancillary services, net of changes in fair value on commercial mortgage servicing rights due to time and payoffs for the first six months of 2014 and net of commercial mortgage servicing rights amortization for the first six months of 2013. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.

(f)	Includes amounts reported in corporate services fees.

(g)	As of June 30.

(h)	Includes nonperforming loans of $.6 billion at June 30, 2014 and $.9 billion at June 30, 2013.

(i)	Recorded investment of purchased impaired loans related to acquisitions.

Corporate & Institutional Banking earned $993 million in the first six months of 2014, a decrease of $160 million compared with the first six months of 2013. The decrease in earnings was due to an increase in the provision for credit losses and a decrease in revenue, primarily driven by lower purchase accounting accretion and lower asset valuations, partially offset by higher corporate service fees. We continue to focus on building client relationships in our legacy and new Southeast markets where the risk-return profile is attractive.

Net interest income was $1.9 billion in the first six months of 2014, a decrease of $44 million from the first six months of 2013, reflecting lower purchase accounting accretion and continued spread compression on loans and deposits, partially offset by higher average loans and deposits. Additionally, a second quarter 2014 correction to reclassify certain commercial facility fees of $31 million to corporate service fees impacted the comparison.

Corporate service fees were $580 million in the first six months of 2014, increasing $37 million compared to the first six months of 2013. This increase was primarily due to higher merger and acquisition advisory fees and the second quarter 2014 correction to reclassify certain commercial facility fees

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

from net interest income to corporate service fees, partially offset by lower net commercial mortgage servicing rights valuations. Corporate service fees include the noninterest portion of treasury management revenue, corporate finance fees, including revenue from certain capital markets-related products and services, the noninterest portion of commercial mortgage loan servicing income, and commercial mortgage servicing rights valuation, net of economic hedge.

Other noninterest income was $211 million in the first six months of 2014 compared with $319 million in the first six months of 2013. The decrease of $108 million was driven by lower revenue associated with credit valuations for customer-related derivatives activities and lower gains on asset sales.

The provision for credit losses was $90 million for the first six months of 2014 compared with a benefit of $26 million in the first six months of 2013 reflecting our continual qualitative assessments of the portfolio given the growth trends over the recent quarters. Net charge-offs were $17 million in the first six months of 2014, which represents a decrease of $22 million compared with the first six months of 2013 primarily attributable to a decrease in commercial real estate charge-offs, partially offset by a decrease in commercial recoveries.

Nonperforming assets were $715 million, a 28% decrease from June 30, 2013 resulting from continued improving credit quality.

Noninterest expense was $992 million in the first six months of 2014, an increase of $13 million from the first six months of 2013, primarily driven by higher technology-related costs and incentive compensation costs associated with business activity.

Average loans were $105.3 billion in the first six months of 2014 compared with $95.5 billion in the first six months of 2013, an increase of 10% reflecting strong growth in Real Estate, Corporate Banking and Business Credit.

•

Corporate Banking business provides lending, treasury management and capital markets-related products and services to mid-sized and large corporations, government and not-for-profit entities. Average loans for this business increased $3.0 billion, or 6%, in the first six months of 2014 compared with the first six months of 2013, primarily due to an increase in loan commitments from specialty lending businesses.

•

PNC Real Estate provides commercial real estate and real estate-related lending through both conventional and affordable multifamily financing. Average loans for this business increased $5.8 billion, or 27%, in the first six months of 2014 compared with the first six months of 2013 due to increased originations.

•

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 increased $1.5 billion, or 13%, in the first six months of 2014 compared with the first six months of 2013 due to increasing deal sizes and higher utilization.

•

PNC Equipment Finance provides equipment financing solutions with over $11.0 billion in equipment finance assets as of June 30, 2014. Average equipment finance assets in the first six months of 2014 were $11.0 billion, an increase of $.4 billion or 4% compared with the first six months of 2013.

Loan commitments increased 4%, or $6.8 billion, to $202.9 billion at June 30, 2014 compared to $196.1 billion at December 31, 2013 and 9%, or $17.0 billion, compared to $185.9 billion at June 30, 2013 primarily due to growth in our Real Estate, Corporate Banking and Business Credit businesses.

Period-end loan balances increased by 7%, or $7.2 billion, to $109.0 billion at June 30, 2014 compared with $101.8 billion at December 31, 2013 and 12%, or $11.3 billion, compared with $97.7 billion at June 30, 2013.

Average deposits were $70.7 billion in the first six months of 2014, an increase of $6.5 billion, or 10%, compared with the first six months of 2013 as a result of business growth and inflows into money market and noninterest-bearing deposits.

The commercial mortgage servicing portfolio was $316 billion at June 30, 2014, an increase of 3% compared with December 31, 2013 and an increase of 7% compared to June 30, 2013 as servicing additions exceeded portfolio run-off.

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 our 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 21 in the Corporate & Institutional Banking portion of this Business Segments Review section includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.

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

Treasury management revenue, comprised of fees and net interest income from customer deposit balances, totaled $624 million for the first six months of 2014 compared with $642 million for the first six months of 2013. Lower spreads on deposits drove the decline in revenue in the first six months of 2014 compared with the first six months of 2013. Growth in deposit balances and healthcare customer-related revenues was strong.

Capital markets revenue includes merger and acquisition advisory fees, loan syndications, derivatives, foreign exchange, asset-backed finance revenue and fixed income activities. Revenue from capital markets-related products and services totaled $335 million in the first six months of 2014 compared with $327 million in the first six months of 2013. The increase in the comparison was driven by higher merger and acquisition advisory fees and to a lesser extent higher foreign exchange and fixed income revenue, which was mostly offset by lower revenue associated with credit valuations for customer-related derivatives activities.

Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (including net interest income and noninterest income) and revenue derived from commercial mortgage loans held for sale and related hedges. Total commercial mortgage banking activities resulted in revenue of $185 million in the first six months of 2014 compared with $230 million in the first six months of 2013. The decrease in the comparison was mainly due to lower net commercial mortgage servicing rights valuations and lower commercial mortgage loans held for sale activity.

ASSET MANAGEMENT GROUP

(Unaudited)

Table 22: As set Management Group Table


Six months ended June 30 Dollars in millions, except as noted	2014		2013
Income Statement
Net interest income	$	143	$	143
Noninterest income		406		366
Total revenue		549		509
Provision for credit losses		6		6
Noninterest expense		401		378
Pretax earnings		142		125
Income taxes		52		46
Earnings	$	90	$	79


Six months ended June 30 Dollars in millions, except as noted	2014		2013
Average Balance Sheet
Loans
Consumer	$	5,361	$	4,870
Commercial and commercial real estate		1,011		1,040
Residential mortgage		780		772
Total loans		7,152		6,682
Goodwill and other intangible assets		268		302
Other assets		222		226

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company