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 March 31, 2016

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

For the transition period from to

Commission file number 001-09718

The PNC Financial Services Group, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania

25-1435979

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

The Tower at PNC Plaza, 300 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2401

(Address of principal executive offices, including zip code)

(412) 762-2000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

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

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

As of April 22, 2016, there were 499,323,737 shares of the registrant’s common stock ($5 par value) outstanding.

THE PNC FINANCIAL SERVICES GROUP, INC.

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


	Pages
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).
Consolidated Income Statement		48
Consolidated Statement of Comprehensive Income		49
Consolidated Balance Sheet		50
Consolidated Statement Of Cash Flows		51

Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies		53
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities		58
Note 3 Asset Quality		60
Note 4 Purchased Loans		72
Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit		73
Note 6 Investment Securities		75
Note 7 Fair Value		79
Note 8 Goodwill and Intangible Assets		88
Note 9 Certain Employee Benefit And Stock Based Compensation Plans		90
Note 10 Financial Derivatives		92
Note 11 Earnings Per Share		98
Note 12 Total Equity And Other Comprehensive Income		99
Note 13 Income Taxes		101
Note 14 Legal Proceedings		101
Note 15 Commitments and Guarantees		103
Note 16 Segment Reporting		105
Note 17 Subsequent Events		107

Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis		108
Transitional Basel III and Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios – 2015 Periods		110

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		10
Off-Balance Sheet Arrangements And Variable Interest Entities		19
Fair Value Measurements		19
Business Segments Review		19
Critical Accounting Estimates and Judgments		27
Status Of Qualified Defined Benefit Pension Plan		28
Recourse And Repurchase Obligations		29
Risk Management		29
Internal Controls And Disclosure Controls And Procedures		42
Glossary Of Terms		42
Cautionary Statement Regarding Forward-Looking Information		46

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		29-41, 79-88 and 92-98

Item 4. Controls and Procedures.		42

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.		111

Item 1A. RiskFactors.		111

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds.		111

Item 6. Exhibits.		111
Exhibit Index.		111

Corporate Information		112
Signature		113

THE PNC FINANCIAL SERVICES GROUP, INC.

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

MD&A TABLE REFERENCE


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

THE PNC FINANCIAL SERVICES GROUP, INC.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE


Table	Description	Page
42	Cash Flows Associated with Loan Sale and Servicing Activities		58
43	Principal Balance, Delinquent Loans, and Net Charge-offs Related to Serviced Loans For Others		59
44	Consolidated VIEs – Carrying Value		59
45	Non-Consolidated VIEs		60
46	Analysis of Loan Portfolio		61
47	Nonperforming Assets		62
48	Commercial Lending Asset Quality Indicators		64
49	Home Equity and Residential Real Estate Balances		65
50	Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans		65
51	Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans		67
52	Credit Card and Other Consumer Loan Classes Asset Quality Indicators		69
53	Summary of Troubled Debt Restructurings		70
54	Financial Impact and TDRs by Concession Type		70
55	Impaired Loans		71
56	Purchased Impaired Loans – Balances		72
57	Purchased Impaired Loans – Accretable Yield		73
58	Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data		74
59	Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit		75
60	Investment Securities Summary		75
61	Gross Unrealized Loss and Fair Value of Securities Available for Sale		77
62	Gains (Losses) on Sales of Securities Available for Sale		78
63	Contractual Maturity of Debt Securities		78
64	Fair Value of Securities Pledged and Accepted as Collateral		79
65	Fair Value Measurements – Recurring Basis Summary		80
66	Reconciliation of Level 3 Assets and Liabilities		81
67	Fair Value Measurements – Recurring Quantitative Information		83
68	Fair Value Measurements – Nonrecurring		85
69	Fair Value Measurements – Nonrecurring Quantitative Information		85
70	Fair Value Option – Changes in Fair Value		85
71	Fair Value Option – Fair Value and Principal Balances		86
72	Additional Fair Value Information Related to Other Financial Instruments		87
73	Mortgage Servicing Rights		88
74	Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions		89
75	Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions		89
76	Fees from Mortgage Loan Servicing		89
77	Net Periodic Pension and Postretirement Benefit Costs		90
78	Stock Options – Rollforward		91
79	Nonvested Incentive/Performance Unit Awards and Restricted Share/Restricted Share Unit Awards – Rollforward		91
80	Nonvested Cash-Payable Incentive/Performance Units and Restricted Share Units – Rollforward		91
81	Total Gross Derivatives		92
82	Derivatives Designated As Hedging Instruments under GAAP		93
83	Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges		93
84	Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges		94
85	Derivatives Not Designated As Hedging Instruments under GAAP		95
86	Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP		96
87	Derivative Assets and Liabilities Offsetting		97
88	Basic and Diluted Earnings per Common Share		98
89	Rollforward of Total Equity		99
90	Other Comprehensive Income		100
91	Accumulated Other Comprehensive Income (Loss) Components		101
92	Net Operating Loss Carryforwards and Tax Credit Carryforwards		101
93	Commitments to Extend Credit and Other Commitments		103
94	Internal Credit Ratings Related to Net Outstanding Standby Letters of Credit		104
95	Resale and Repurchase Agreements Offsetting		105
96	Results Of Businesses		107

FINANCIAL REVIEW

THE PNC FINANCIAL SERVICES GROUP, INC.

This Financial Review, including the Consolidated Financial Highlights, should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report and with Items 6, 7, 8 and 9A of our 2015 Annual Report on Form 10-K (2015 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business, regulatory and legal risks, see the following sections as they appear in this Report and in our 2015 Form 10-K: the Risk Management section of the Financial Review portion of this report and of Item 7 in our 2015 Form 10-K; Item 1A Risk Factors included in our 2015 Form 10-K; and Note 14 Legal Proceedings and Note 15 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 2015 Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this Report. See Note 16 Segment Reporting in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a GAAP basis.

Table 1: Consolidated Financial Highlights


Dollars in millions, except per share data Unaudited	Three months ended March 31
Dollars in millions, except per share data Unaudited	2016			2015
Financial Results (a)
Revenue
Net interest income	$	2,098		$	2,072
Noninterest income		1,567			1,659
Total revenue		3,665			3,731
Noninterest expense		2,281			2,349
Pretax, pre-provision earnings (b)		1,384			1,382
Provision for credit losses		152			54
Income before income taxes and noncontrolling interests	$	1,232		$	1,328
Net income	$	943		$	1,004
Less:
Net income (loss) attributable to noncontrolling interests		19			1
Preferred stock dividends and discount accretion and redemptions		65			70
Net income attributable to common shareholders	$	859		$	933
Less:
Dividends and undistributed earnings allocated to nonvested restricted shares		6			2
Impact of BlackRock earnings per share dilution		3			5
Net income attributable to diluted common shares	$	850		$	926
Diluted earnings per common share	$	1.68		$	1.75
Cash dividends declared per common share	$	.51		$	.48
Performance Ratios
Net interest margin (c)		2.75	%		2.82	%
Noninterest income to total revenue		43			44
Efficiency		62			63
Return on:
Average common shareholders’ equity		8.44			9.32
Average assets		1.07			1.17

See page 42 for a glossary of certain terms used in this Report.

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

(c)

Calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins 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 March 31, 2016 and March 31, 2015 were $48 million and $49 million, respectively.

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

Table 1: Consolidated Financial Highlights (Continued) (a)


Unaudited	March 31 2016			December 31 2015			March 31 2015
Balance Sheet Data (dollars in millions, except per share data)
Assets	$	360,985		$	358,493		$	350,960
Loans		207,485			206,696			204,722
Allowance for loan and lease losses		2,711			2,727			3,306
Interest-earning deposits with banks (b)		29,478			30,546			31,198
Investment securities		72,569			70,528			60,768
Loans held for sale		1,541			1,540			2,423
Goodwill		9,103			9,103			9,103
Mortgage servicing rights		1,323			1,589			1,333
Equity investments (c)		10,391			10,587			10,523
Other assets		24,585			23,092			25,538
Noninterest-bearing deposits		78,151			79,435			74,944
Interest-bearing deposits		172,208			169,567			161,559
Total deposits		250,359			249,002			236,503
Borrowed funds		54,178			54,532			56,829
Total shareholders’ equity		45,130			44,710			45,025
Common shareholders’ equity		41,677			41,258			41,077
Accumulated other comprehensive income		532			130			703
Book value per common share	$	83.47		$	81.84		$	78.99
Common shares outstanding (millions)		499			504			520
Loans to deposits		83	%		83	%		87	%
Client Assets (in billions)
Discretionary client assets under management	$	135		$	134		$	136
Nondiscretionary client assets under administration		125			125			129
Total client assets under administration (d)		260			259			265
Brokerage account client assets		43			43			44
Total client assets	$	303		$	302		$	309
Capital Ratios
Transitional Basel III (e) (f)
Common equity Tier 1		10.6	%		10.6	%		10.5	%
Tier 1 risk-based		11.9			12.0			12.0
Total capital risk-based		14.4			14.6			15.0
Leverage		10.2			10.1			10.5
Pro forma Fully Phased-In Basel III (f)
Common equity Tier 1		10.1	%		10.0	%		10.0	%
Common shareholders’ equity to assets		11.5	%		11.5	%		11.7	%
Asset Quality
Nonperforming loans to total loans		1.10	%		1.03	%		1.17	%
Nonperforming assets to total loans, OREO and foreclosed assets		1.23			1.17			1.34
Nonperforming assets to total assets		.71			.68			.78
Net charge-offs to average loans (for the three months ended) (annualized)		.29			.23			.20
Allowance for loan and lease losses to total loans (g)		1.31			1.32			1.61
Allowance for loan and lease losses to total nonperforming loans (g) (h)		119	%		128	%		137	%
Accruing loans past due 90 days or more (in millions)	$	782		$	881		$	988

(a)	The Executive Summary and Consolidated Balance Sheet Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.

(b)	Amounts include balances held with the Federal Reserve Bank of Cleveland (Federal Reserve Bank) of $29.0 billion, $30.0 billion, and $30.8 billion as of March 31, 2016, December 31, 2015 and March 31, 2015, respectively.

(c)	Amounts include our equity interest in BlackRock.

(d)

As a result of certain investment advisory services performed by one of our registered investment advisors, certain assets are reported as both discretionary client assets under management and nondiscretionary client assets under administration. The amount of such assets was approximately $7 billion, $6 billion and $5 billion as of March 31, 2016, December 31, 2015 and March 31, 2015, respectively.

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

(f)

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

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

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

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

EXECUTIVE SUMMARY

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

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

Key Strategic Goals

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

We strive to expand and deepen customer relationships by offering a broad range of deposit, fee-based and credit products and services. We are focused on delivering those products and services where, when and how our customers choose with the goal of offering insight that addresses their specific financial objectives. 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 to meet the broad range of financial needs of our customers.

Our strategic priorities are designed to enhance value over the long term. A key priority is to build a leading banking franchise in our underpenetrated geographic markets. In addition, we are seeking to attract more of the investable assets of new and existing clients. PNC is focused on redefining the retail banking experience by transforming to a more customer-centric and sustainable model while lowering delivery costs as customer banking preferences evolve.

Additionally, we continue to focus on expense management while investing in technology to bolster critical business infrastructure and streamline core processes.

Our capital priorities are to support client growth and business investment, maintain appropriate capital in light of economic conditions and the Basel III framework and return excess capital to shareholders, in accordance with the currently effective capital plan included in our Comprehensive Capital Analysis and Review (CCAR) submission to the Board of Governors of the Federal Reserve System (Federal Reserve). New regulatory short-term liquidity standards became effective for PNC and PNC Bank, National Association (PNC Bank) beginning January 1, 2015. For more detail, see the Balance Sheet, Liquidity and Capital Highlights portion of this Executive Summary, the Capital portion of the Consolidated Balance Sheet Review section and the Liquidity Risk Management portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2015 Form 10-K.

Key Factors Affecting Financial Performance

PNC faces a variety of risks that may impact various aspects of our risk profile from time to time. The extent of such impacts may vary depending on factors such as the current economic, political and regulatory environment, merger and acquisition activity and operational challenges. Many of these risks and our risk management strategies are described in more detail in our 2015 Form 10-K and elsewhere in this Report.

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

•

Domestic and global economic conditions, including the continuity, speed and stamina of the current U.S. economic expansion in general and its impact 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;

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

•

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 by the Dodd-Frank legislation and other legislative, regulatory and administrative initiatives and actions, including those outlined elsewhere in this Report, in our 2015 Form 10-K and in subsequent filings with the SEC;

•

The impact of market credit spreads on asset valuations;

•

Asset quality and the ability of customers, counterparties and issuers to perform in accordance with contractual terms;

•

Loan demand, utilization of credit commitments and standby letters of credit; and

•

Customer demand for non-loan products and services.

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

•

Focused execution of our strategic priorities and achieving targeted outcomes, including our ability to:

–

Build a leading banking franchise in our underpenetrated geographic markets;

–

Grow profitability through the acquisition and retention of customers and deepening relationships that meet our risk/return measures;

–

Increase revenue from fee income and provide innovative and valued products and services to our customers;

–

Bolster our critical infrastructure and streamline our core processes;

–

Utilize technology to develop and deliver products and services to our customers and protect PNC’s systems and customer information; and

–

Sustain our expense management.

•

Effectively managing capital and liquidity including:

–

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

–

Prudent liquidity and capital management to meet evolving regulatory capital, capital planning, stress testing and liquidity standards; and

–

Actions we take within the capital and other financial markets.

•

Managing credit risk in our portfolio;

•

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

•

The impact of legal and regulatory-related contingencies; and

•

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

For additional information, see the Cautionary Statement Regarding Forward-Looking Information section in this

Financial Review and Item 1A Risk Factors in our 2015 Form 10-K.

Income Statement Highlights

Net income for the first quarter of 2016 was $943 million, or $1.68 per diluted common share, a decrease of 6%, compared to $1.0 billion, or $1.75 per diluted common share, for the first quarter of 2015. The decrease was driven by higher provision for credit losses and a decline in noninterest income, partially offset by lower noninterest expense and an increase in net interest income.

•

Net interest income of $2.1 billion for the first quarter of 2016 increased 1% compared with the first quarter of 2015, primarily due to higher loan yields and higher loan and securities balances, partially offset by lower purchase accounting accretion and higher borrowing costs related to higher short-term interest rates.

•

Net interest margin decreased to 2.75% for the first quarter of 2016 compared to 2.82% for the first quarter of 2015 principally as a result of lower benefit from purchase accounting accretion and higher securities balances, partially offset by lower balances on deposit with the Federal Reserve.

•

Noninterest income of $1.6 billion for the first quarter of 2016 decreased $92 million, or 6%, compared to the first quarter of 2015 mainly attributable to weaker equity markets and lower capital markets activity as well as lower residential mortgage revenue.

•

Noninterest expense of $2.3 billion for the first quarter of 2016 decreased $68 million compared to the first quarter of 2015 reflecting lower legal costs and lower variable compensation costs associated with lower business activity as well as a continued focus on expense management.

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

Credit Quality Highlights

Overall credit quality for the first quarter of 2016 remained relatively stable with the fourth quarter of 2015, except for certain energy related loans.

•

The provision for credit losses increased to $152 million for the first quarter of 2016 compared to $54 million for the first quarter of 2015. Provision for credit losses for the first quarter of 2016 included $80 million for energy related loans in the oil, gas and coal sectors.

•

Nonperforming assets increased $127 million, or 5%, to $2.6 billion at March 31, 2016 compared to December 31, 2015. Nonperforming assets to total assets were 0.71% at March 31, 2016, compared to 0.68% at December 31, 2015.

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

•

Overall loan delinquencies of $1.5 billion at March 31, 2016 decreased $143 million, or 9%, compared with December 31, 2015.

•

The allowance for loan and lease losses was 1.31% of total loans and 119% of nonperforming loans at March 31, 2016, compared with 1.32% and 128% at December 31, 2015, respectively.

•

Net charge-offs of $149 million for the first quarter of 2016 increased by $46 million compared to net charge-offs for the first quarter of 2015. Annualized net charge-offs were 0.29% of average loans in the first quarter of 2016 and 0.20% of average loans in the first quarter of 2015.

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

Balance Sheet, Liquidity and Capital Highlights

PNC’s balance sheet was well-positioned at March 31, 2016 reflecting strong liquidity and capital positions.

•

Total loans increased by $.8 billion to $207.5 billion at March 31, 2016 compared to December 31, 2015.

–

Total commercial lending grew $1.6 billion, or 1%, primarily in PNC’s corporate banking and real estate businesses.

–

Total consumer lending decreased $.8 billion, or 1%, mainly due to declines in home equity and education loans as well as run-off in the non-strategic portfolio.

•

Total deposits increased $1.4 billion, or 1%, to $250.4 billion at March 31, 2016 compared with December 31, 2015, reflecting growth in consumer deposits, partially offset by lower commercial deposits.

•

Investment securities increased $2.0 billion, or 3%, to $72.6 billion at March 31, 2016 compared to December 31, 2015.

•

PNC maintained a strong liquidity position.

–

The Liquidity Coverage Ratio at March 31, 2016 exceeded 100% for both PNC and PNC Bank, above the minimum phased-in requirement of 90% in 2016.

•

PNC maintained a strong capital position.

–

The Transitional Basel III common equity Tier 1 capital ratio was 10.6% at both March 31, 2016 and December 31, 2015.

–

Pro forma fully phased-in Basel III common equity Tier 1 capital ratio was an estimated 10.1% at March 31, 2016 and 10.0% at December 31, 2015 based on the standardized approach rules. See the Capital discussion and Table 15 in the Consolidated Balance Sheet Review section of this Financial Review and the December 31, 2015 capital ratio tables in the Statistical Information (Unaudited) section of this Report for more detail.

•

PNC returned capital to shareholders during first quarter 2016 through share repurchases of 5.9 million common shares for $.5 billion and dividends on common shares of $.3 billion.

–

PNC has repurchased a total of 23.8 million common shares for $2.2 billion under current share repurchase programs of up to $2.875 billion for the five quarter period ending in the second quarter of 2016.

See the Capital portion of the Consolidated Balance Sheet Review and the Liquidity Risk Management portion of the Risk Management section of this Financial Review for more detail on our other 2016 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 as part of the CCAR process. For additional information, see the Supervision and Regulation section in Item 1 Business of our 2015 Form 10-K.

Our Consolidated Income Statement and Consolidated Balance Sheet Review sections of this Financial Review describe in greater detail the various items that impacted our results during the first quarters of 2016 and 2015 and balances at March 31, 2016 and December 31, 2015, respectively.

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

Average Consolidated Balance Sheet Highlights

Table 2: Summarized Average Balance Sheet


Three months ended March 31 Dollars in millions					Change
Three months ended March 31 Dollars in millions	2016		2015		$			%
Average assets
Interest-earning assets
Investment securities	$	70,269	$	57,166	$	13,103			23	%
Loans		207,184		205,155		2,029			1	%
Interest-earning deposits with banks		25,533		30,405		(4,872	)		(16	)%
Other		7,764		8,947		(1,183	)		(13	)%
Total interest-earning assets		310,750		301,673		9,077			3	%
Noninterest-earning assets		45,163		46,384		(1,221	)		(3	)%
Total average assets	$	355,913	$	348,057	$	7,856			2	%
Average liabilities and equity
Interest-bearing liabilities
Interest-bearing deposits	$	168,823	$	159,911	$	8,912			6	%
Borrowed funds		53,626		56,352		(2,726	)		(5	)%
Total interest-bearing liabilities		222,449		216,263		6,186			3	%
Noninterest-bearing deposits		77,306		73,178		4,128			6	%
Other liabilities		10,255		12,586		(2,331	)		(19	)%
Equity		45,903		46,030		(127	)		–
Total average liabilities and equity	$	355,913	$	348,057	$	7,856			2	%

Total assets were $361.0 billion at March 31, 2016 compared with $358.5 billion at December 31, 2015. 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 March 31, 2016 compared with December 31, 2015.

Average investment securities increased in the first three months of 2016 compared with the first three months of 2015, mainly due to increases in average agency residential mortgage-backed securities and U.S. Treasury and government agency securities. Investment securities comprised 23% of average interest-earning assets for the first quarter of 2016 and 19% for the first quarter of 2015.

Average loans increased in the first quarter of 2016 compared to the prior year quarter due to increases in average commercial real estate loans of $4.0 billion and average commercial loans of $1.2 billion mainly attributable to growth in our Corporate & Institutional Banking segment. These increases were partially offset by a decrease in average consumer loans of $3.3 billion driven by lower home equity loans, including runoff in the nonstrategic portfolio, and lower education loans, partially offset by growth in automobile and credit card loans. Average loans represented 67% of average

interest-earning assets for the first quarter of 2016 and 68% of average interest-earning assets for the first quarter of 2015.

Average interest-earning deposits with banks, which are primarily maintained with the Federal Reserve Bank, decreased in the first quarter of 2016 compared to first quarter 2015, reflecting a shift towards higher yielding assets, such as investment securities and loans.

Average total deposits increased $13.0 billion in the first quarter of 2016 compared with the prior year quarter, primarily due to higher average savings deposits, which included a shift from money market deposits to new relationship-based savings products. Additionally, average noninterest-bearing deposits and average interest-bearing demand deposits increased reflecting overall strong deposit growth. Average total deposits represented 69% of average total assets for the first quarter of 2016 and 67% for the first quarter of 2015.

Average borrowed funds decreased in the current year first quarter compared with the prior year first quarter primarily due to declines in average commercial paper, average federal funds purchased and repurchase agreements and average Federal Home Loan Bank (FHLB) borrowings, partially offset by an increase in average bank notes and senior debt. The Liquidity Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding our sources and uses of borrowed funds.

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

Recent Market and Industry Developments

In March 2016, the Federal Deposit Insurance Corporation (FDIC) adopted final rules to impose a surcharge on the quarterly deposit insurance assessments of insured depository institutions with total consolidated assets of $10 billion or more (including PNC Bank) in order to fund the Dodd-Frank Act mandated increase in the Designated Reserve Ratio from 1.15 percent to 1.35 percent. The final rules take effect July 1, 2016. The surcharge, which is equal to 4.5 basis points of the institution’s deposit insurance assessment base, will take effect for assessments billed after the Designated Reserve Ratio reaches 1.15 percent, and will continue until the reserve ratio reaches 1.35 percent (estimated by the FDIC to occur before the end of 2018). Based on data as of March 31, 2016, we estimate that the net effect of the proposed surcharge, together with the scheduled reduction of regular assessments that will go into effect when the Designated Reserve Ratio reaches 1.15 percent, will increase PNC Bank’s quarterly assessment by approximately $22 million beginning no earlier than the third quarter of 2016.

Also in March 2016, the Federal Reserve re-proposed rules, originally proposed in December 2011, to implement the single-counterparty credit limit (SCCL) under section 165(e) of the Dodd-Frank Act. Under the proposal, the net credit exposure of a bank holding company (BHC) with total consolidated assets of $50 billion or more (covered BHC), including its subsidiaries, to any single, unaffiliated counterparty would be subject to an aggregate limit. For covered BHCs with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposures (large covered BHCs), including PNC, the applicable limit would be 25 percent of tier 1 capital and would be calculated at the end of each business day. The proposed limit would cover credit exposure resulting from, among other transactions, extensions of credit, repurchase and reverse repurchase transactions, purchases or investments in securities, and derivative transactions. Compliance with the proposed rules would be required one year after the effective date. The comment period on the proposal is scheduled to close on June 3, 2016.

In April 2016, the Department of Labor (DOL) published a final rule expanding the definition of “investment advice” related to retirement accounts and certain other accounts that are subject to DOL interpretive authority. The rule will increase the scope of activities that give rise to fiduciary status under the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code. The rule, which will primarily apply to aspects of PNC’s retail and asset management business lines, will require new disclosures, development of policies and procedures, and contractual obligations for some account types, among other things. The rule is effective April 10, 2017 and there is a transition period between April 10, 2017 and January 1, 2018 during which time reduced requirements apply. Full compliance is required on January 1, 2018.

Also in April 2016, the FDIC and Office of the Comptroller of the Currency (OCC) requested comment on proposed rules that would implement the net stable funding ratio (NSFR). The Federal Reserve is expected to propose similar rules shortly. The proposed rules, which are based on standards developed by the Basel Committee on Banking Supervision, are designed to ensure the stability of a covered banking organization’s funding profile over a one-year time horizon. The NSFR is measured as the ratio of a banking organization’s available stable funding (ASF) amount to its required stable funding (RSF) amount, each as defined in the proposed rules, over a one-year horizon. The regulatory minimum ratio for all covered banking organizations is 100 percent. For BHCs with assets of $50 billion or more, but less than $250 billion, the RSF amount is scaled by a factor of 70 percent. The proposal also includes requirements for quarterly quantitative and qualitative NSFR disclosures. The requirements of the proposed rules would take effect January 1, 2018. The comment period on the proposed rules is scheduled to close on August 5, 2016. Although the impact on PNC will not be fully known until the rules are final, PNC has taken several actions to prepare for implementation of the NSFR and we expect to be in compliance with the NSFR requirements when they become effective.

In 2011, several federal regulators jointly proposed regulations required by Dodd-Frank regarding incentive-based compensation arrangements at large financial institutions. In April and May 2016, the OCC, Federal Reserve, FDIC, Federal Housing Finance Agency, and National Credit Union Administration re-proposed these regulations, and the SEC is expected to re-propose similar regulations shortly. The regulations would apply to, among other entities, bank holding companies, national banks, investment advisers and SEC-registered broker dealers with total assets of $1 billion or more (“covered financial institutions”). The new proposed rules would require covered financial institutions with total assets of $50 billion or more to defer the vesting of specified percentages of incentive-based compensation awarded to the institution’s “senior executive officers” and “significant risk-takers” for specific periods, and require that all unvested and vested incentive-based compensation to these individuals be subject to forfeiture and clawback, respectively, under circumstances specified by the rules. PNC is currently evaluating the proposal and the comment period on the proposed rules will end on July 22, 2016. The nature, scope and terms of any final regulations could negatively affect PNC’s ability to attract and retain officers and employees with appropriate skill and experience and compete with financial institutions that are either not subject to the proposed rules, or are not subject to the rules to the same extent as PNC.

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

Business Segment Highlights

Total business segment earnings were $.9 billion for the first three months of 2016 and $1.0 billion for the first three months of 2015. The Business Segments Review section of this Financial Review includes further analysis of our business segment results for the first three months of 2016 and 2015, including presentation differences from Note 16 Segment Reporting in our Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

Table 3: Results Of Businesses – Summary (a)

(Unaudited)


	Net Income (Loss)					Revenue				Average Assets (b)
Three months ended March 31 – in millions	2016			2015		2016		2015		2016		2015
Retail Banking	$	268		$	202	$	1,650	$	1,526	$	72,216	$	74,017
Corporate & Institutional Banking		431			482		1,304		1,284		135,521		131,178
Asset Management Group		49			37		280		281		7,887		7,943
Residential Mortgage Banking		(13	)		28		130		207		6,306		7,245
BlackRock		114			135		141		175		6,775		6,645
Non-Strategic Assets Portfolio		52			81		97		121		5,816		7,276
Total business segments		901			965		3,602		3,594		234,521		234,304
Other (c) (d)		42			39		63		137		121,392		113,753
Total	$	943		$	1,004	$	3,665	$	3,731	$	355,913	$	348,057

(a)

Our business information is presented based on our internal management reporting practices. We periodically refine our internal methodologies as management reporting practices are enhanced. Net interest income in business segment results reflects PNC’s internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors.

(b)	Period-end balances for BlackRock.

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

(d)	“Other” includes differences between the total business segment financial results and our total consolidated net income. Additional detail is included in Note 16 Segment Reporting in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for the first quarter of 2016 was $943 million, or $1.68 per diluted common share, a decrease of 6%, compared to $1.0 billion, or $1.75 per diluted common share, for the first quarter of 2015. The decrease was driven by higher provision for credit losses and a 2% decline in revenue, partially offset by a 3% decrease in noninterest expense. Lower revenue in the comparison reflected a 6% decline in noninterest income, partially offset by a 1% increase in net interest income.

Net Interest Income

Table 4: Net Interest Income and Net Interest Margin


	Three months ended March 31
Dollars in millions	2016			2015
Net interest income	$	2,098		$	2,072
Net interest margin		2.75	%		2.82	%

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

Net interest income increased by $26 million, or 1%, in the first quarter of 2016 compared with the first quarter of 2015 due to higher loan and securities balances, partially offset by lower purchase accounting accretion and higher borrowing costs related to higher short-term interest rates.

Net interest margin of 2.75% for the first quarter of 2016 declined from 2.82% in the first quarter of 2015 due to lower benefit from purchase accounting accretion and higher securities balances, partially offset by lower balances on deposit with the Federal Reserve.

In the second quarter of 2016, we expect net interest income to increase modestly compared to the first quarter of 2016.

For full year 2016, we expect purchase accounting accretion to be down approximately $175 million compared to 2015.

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

Noninterest Income

Table 5: Noninterest Income


Three months ended March 31 Dollars in millions					Change
Three months ended March 31 Dollars in millions	2016		2015		$			%
Noninterest income
Asset management	$	341	$	376	$	(35	)		(9	)%
Consumer services		337		311		26			8	%
Corporate services		325		344		(19	)		(6	)%
Residential mortgage		100		164		(64	)		(39	)%
Service charges on deposits		158		153		5			3	%
Net gains on sales of securities		9		42		(33	)		(79	)%
Other		297		269		28			10	%
Total noninterest income	$	1,567	$	1,659	$	(92	)		(6	)%

Noninterest income decreased during the first quarter of 2016 compared to first quarter of 2015 primarily reflecting the impact of weaker equity markets and lower capital markets activity as well as lower residential mortgage revenue. Noninterest income as a percentage of total revenue was 43% in the first quarter of 2016 compared to 44% in the first quarter of 2015.

Lower asset management revenue in the first three months of 2016 was driven by decreased earnings from our BlackRock equity investment mainly attributable to the impact of lower equity markets. Discretionary client assets under management of $135 billion at March 31, 2016 were relatively stable compared to $136 billion at March 31, 2015.

Consumer service fees increased in the first quarter of 2016 compared to the prior year quarter primarily due to growth in payment-related products including debit card, credit card and merchant services, as well as increased brokerage fees.

Corporate services revenue decreased in the first quarter of 2016 compared to the first quarter of 2015, principally due to lower commercial mortgage servicing rights valuation, net of economic hedge, and lower capital markets activity.

Residential mortgage fee revenue decreased in the first three months of 2016 compared to the prior year quarter as a result of lower residential mortgage servicing rights valuation, net of economic hedge, and lower loan sales revenue, partially offset by higher servicing fee income.

Net gains on sales of securities decreased in the first quarter of 2016 compared to the first quarter of 2015 mainly due to a higher volume of securities sales in the prior year quarter.

Other noninterest income for the first quarter of 2016 included a gain of $44 million on the sale of 0.5 million Visa Class B common shares and lower gains on sales of other assets compared to first quarter 2015. There were no sales of Visa shares in first quarter 2015.

In the second quarter of 2016, we expect the fee income categories of noninterest income, consisting of asset management, consumer services, corporate services, residential mortgage and service charges on deposits, to be up approximately 10 to 12 percent, compared to the first quarter of 2016, reflecting higher anticipated business levels in the second quarter.

For full year 2016, we expect modest growth in revenue.

Provision For Credit Losses

The provision for credit losses totaled $152 million for the first quarter of 2016 compared with $54 million for the first quarter of 2015. The first quarter 2016 provision included $80 million for energy related loans in the oil, gas, and coal sectors.

We expect our provision for credit losses in the second quarter of 2016 to be between $125 million and $175 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.

Noninterest Expense

Noninterest expense decreased $68 million, or 3%, to $2.3 billion for the first quarter of 2016 compared with first quarter 2015 reflecting lower legal costs and lower variable compensation as well as a continued focus on expense management.

As of the end of the first quarter of 2016, we have completed actions to capture more than one-third of our 2016 continuous improvement savings goal of $400 million, and are on track to achieve the full-year goal. Through this program, we intend to help fund our continued investments in technology and business infrastructure throughout 2016.

In the second quarter of 2016, we expect noninterest expense to increase by mid-single digits, on a percentage basis, compared to the first quarter of 2016, primarily as a result of higher anticipated business activity and seasonality.

For full year 2016, we expect noninterest expense to remain stable compared to 2015.

Effective Income Tax Rate

The effective income tax rate was 23.5% in the first quarter of 2016 compared with 24.4% in the first quarter of 2015. 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.

We expect our full-year 2016 effective tax rate to be approximately 25%.

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

CONSOLIDATED BALANCE SHEET REVIEW

Table 6: Summarized Balance Sheet Data


	March 31 2016			December 31 2015			Change
Dollars in millions	March 31 2016			December 31 2015			$			%
Assets
Interest-earning deposits with banks	$	29,478		$	30,546		$	(1,068	)		(3	)%
Loans held for sale		1,541			1,540			1			–	%
Investment securities		72,569			70,528			2,041			3	%
Loans		207,485			206,696			789			–	%
Allowance for loan and lease losses		(2,711	)		(2,727	)		16			(1	)%
Goodwill		9,103			9,103			–			–	%
Mortgage servicing rights		1,323			1,589			(266	)		(17	)%
Other intangible assets		353			379			(26	)		(7	)%
Other, net		41,844			40,839			1,005			2	%
Total assets	$	360,985		$	358,493		$	2,492			1	%
Liabilities
Deposits	$	250,359		$	249,002		$	1,357			1	%
Borrowed funds		54,178			54,532			(354	)		(1	)%
Other		10,120			8,979			1,141			13	%
Total liabilities		314,657			312,513			2,144			1	%
Equity
Total shareholders’ equity		45,130			44,710			420			1	%
Noncontrolling interests		1,198			1,270			(72	)		(6	)%
Total equity		46,328			45,980			348			1	%
Total liabilities and equity	$	360,985		$	358,493		$	2,492			1	%

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

PNC’s balance sheet reflected asset growth and strong liquidity and capital positions at March 31, 2016.

•

Total assets increased in the first quarter of 2016 compared to the prior year end primarily due to an increase in investment securities and loans, partially offset by lower interest-earning deposits with banks.

•

Total liabilities increased in the first three months of 2016 compared to 2015 year end mainly due to deposit growth.

•

Total equity in the first quarter of 2016 remained relatively stable compared to the prior year end mainly due to increased retained earnings driven by net income, offset by share repurchases.

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

Loans

Outstanding loan balances of $207.5 billion at March 31, 2016 and $206.7 billion at December 31, 2015 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.4 billion at both March 31, 2016 and December 31, 2015.

Table 7: Details Of Loans


Dollars in millions	March 31 2016		December 31 2015		Change
Dollars in millions	March 31 2016		December 31 2015		$			%
Commercial lending
Commercial
Manufacturing	$	20,104	$	19,014	$	1,090			6	%
Retail/wholesale trade		16,736		16,661		75		–		%
Service providers		14,141		13,970		171			1	%
Real estate related (a)		12,153		11,659		494			4	%
Health care		9,106		9,210		(104	)		(1	)%
Financial services		6,084		7,234		(1,150	)		(16	)%
Other industries		20,992		20,860		132			1	%
Total commercial		99,316		98,608		708			1	%
Commercial real estate
Real estate projects (b)		16,199		15,697		502			3	%
Commercial mortgage		12,031		11,771		260			2	%
Total commercial real estate		28,230		27,468		762			3	%
Equipment lease financing		7,584		7,468		116			2	%
Total commercial lending		135,130		133,544		1,586			1	%
Consumer lending
Home equity
Lines of credit		18,458		18,828		(370	)		(2	)%
Installment		13,000		13,305		(305	)		(2	)%
Total home equity		31,458		32,133		(675	)		(2	)%
Residential real estate
Residential mortgage		14,425		14,162		263			2	%
Residential construction		247		249		(2	)		(1	)%
Total residential real estate		14,672		14,411		261			2	%
Credit card		4,746		4,862		(116	)		(2	)%
Other consumer
Automobile		11,177		11,157		20			–	%
Education		5,701		5,881		(180	)		(3	)%
Other		4,601		4,708		(107	)		(2	)%
Total consumer lending		72,355		73,152		(797	)		(1	)%
Total loans	$	207,485	$	206,696	$	789			–	%

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

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

Loan growth was the result of an increase in total commercial lending driven by commercial real estate and commercial loans, partially offset by a decline in consumer lending due to lower home equity and education loans.

Loans represented 57% of total assets at March 31, 2016 and 58% at December 31, 2015. Commercial lending represented 65% of the loan portfolio at both March 31, 2016 and December 31, 2015. Consumer lending represented 35% of the loan portfolio at both March 31, 2016 and December 31,

2015. See the Credit Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our loan portfolio.

Total loans above include purchased impaired loans of $3.4 billion, or 2% of total loans, at March 31, 2016, and $3.5 billion, or 2% of total loans, at December 31, 2015.

For the second quarter of 2016, we expect total loans to be up modestly compared to the first quarter of 2016.

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

Allowance for Loan and Lease Losses (ALLL)

Information regarding our higher risk loans and ALLL is included in the Credit Risk Management portion of the Risk Management section of this Financial Review and Note 1 Accounting Policies, Note 3 Asset Quality and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in our Notes To Consolidated Financial Statements included in Part 1, Item 1 of this Report.

Purchased Impaired Loans

A description of our purchased impaired loans is included in Note 4 Purchased Loans in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report. Information on our accounting policies related to purchased impaired loans is provided in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

We currently expect to collect total cash flows of $4.2 billion on purchased impaired loans, representing the $3.1 billion net investment at March 31, 2016 and accretable net interest of $1.1 billion.

The table below provides the weighted average life (WAL) for each of the purchased impaired portfolios as of March 31, 2016.

Table 8: Weighted Average Life of the Purchased Impaired Portfolios


As of March 31, 2016 Dollars in millions	Recorded Investment		WAL (a)
Commercial	$	29		2.2 years
Commercial real estate		120		1.5 years
Consumer (b)		1,338		3.6 years
Residential real estate		1,893		4.5 years
Total	$	3,380		4.0 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.

Commitments to Extend Credit

Commitments to extend credit comprise the following:

Table 9: Commitments to Extend Credit (a)


In millions	March 31 2016		December 31 2015
Total commercial lending	$	101,434	$	101,252
Home equity lines of credit		17,311		17,268
Credit card		20,814		19,937
Other		4,399		4,032
Total	$	143,958	$	142,489

(a)	Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions.

In addition to the credit commitments set forth in the table above, our net outstanding standby letters of credit totaled $9.0 billion at March 31, 2016 and $8.8 billion at December 31, 2015. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

Information regarding our commitments to extend credit and our allowance for unfunded loan commitments and letters of credit is included in Note 1 Accounting Policies, Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit and Note 15 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part 1, Item 1 of this Report.

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

Investment Securities

The following table presents the distribution of our investment securities portfolio by credit rating. We have included credit ratings information because we believe that the information is an indicator of the degree of credit risk to which we are exposed. Changes in credit ratings classifications could indicate increased or decreased credit risk and could be accompanied by a reduction or increase in the fair value of our investment securities portfolio.

Table 10: Investment Securities


	March 31, 2016				December 31, 2015				Ratings (a) As of March 31, 2016
Dollars in millions	Amortized Cost		Fair Value		Amortized Cost		Fair Value		AAA/ AA			A			BBB			BB and Lower			No Rating
U.S. Treasury and government agencies	$	10,497	$	10,789	$	10,022	$	10,172		100	%
Agency residential mortgage-backed		35,350		35,981		34,250		34,408		100
Non-agency residential mortgage-backed		4,063		4,189		4,225		4,392		11			1	%		3	%		80	%		5	%
Agency commercial mortgage-backed		2,972		3,039		3,045		3,086		100
Non-agency commercial mortgage-backed (b)		5,410		5,444		5,624		5,630		80			10			2			2			6
Asset-backed (c)		6,345		6,325		6,134		6,130		90			3						6			1
State and municipal		3,897		4,130		3,936		4,126		89			5									6
Other debt		2,662		2,713		2,211		2,229		53			32			15
Corporate stock and other		413		413		590		589														100
Total investment securities (d)	$	71,609	$	73,023	$	70,037	$	70,762		90	%		2	%		1	%		5	%		2	%

(a)	Ratings percentages allocated based on amortized cost.

(b)	Collateralized primarily by retail properties, office buildings, lodging properties and multi-family housing.

(c)	Collateralized primarily by corporate debt, government guaranteed student loans and other consumer credit products.

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

Investment securities represented 20% of total assets at both March 31, 2016 and December 31, 2015.

We evaluate our investment securities portfolio in light of changing market conditions and other factors and, where appropriate, take steps to improve our overall positioning. We consider the portfolio to be well-diversified and of high quality. At March 31, 2016, 90% 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 68% 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 March 31, 2016, the amortized cost and fair value of available for sale securities totaled $56.5 billion and $57.4 billion, respectively, compared to an amortized cost and fair value as of December 31, 2015 of $55.3 billion and $55.8 billion, respectively. The amortized cost and fair value of held to maturity securities were $15.2 billion and $15.6 billion, respectively, at March 31, 2016, compared to $14.8 billion and $15.0 billion, respectively, at December 31, 2015.

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 March 31, 2016 from $.7 billion at December 31, 2015. The comparable amounts for the securities available for sale portfolio were $1.0 billion at March 31, 2016 and $.5 billion at December 31, 2015.

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

The duration of investment securities was 2.3 years at March 31, 2016. We estimate that, at March 31, 2016, the effective duration of investment securities was 2.4 years for an immediate 50 basis points parallel increase in interest rates and 2.1 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2015 for

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

the effective duration of investment securities were 2.8 years and 2.6 years, respectively.

Based on current interest rates and expected prepayment speeds, the weighed-average expected maturity of the investment securities portfolio (excluding corporate stock and other) was 4.3 years at March 31, 2016 compared to 4.8 years at December 31, 2015. The weighted-average expected maturities of mortgage and other asset-backed debt securities were as follows as of March 31, 2016:

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


March 31, 2016	Years
Agency residential mortgage-backed securities		3.8
Non-agency residential mortgage-backed securities		5.3
Agency commercial mortgage-backed securities		3.1
Non-agency commercial mortgage-backed securities		3.5
Asset-backed securities		2.7

At least quarterly, we conduct a comprehensive security-level impairment assessment on all securities. If economic conditions, including home prices, were to deteriorate from current levels, and if market volatility and liquidity were to deteriorate from current levels, or if market interest rates were to increase or credit spreads were to widen appreciably, the valuation of our investment securities portfolio would likely be adversely affected and we could incur additional OTTI credit losses that would impact our Consolidated Income Statement. For those securities on our balance sheet at March 31, 2016, where during our quarterly security-level impairment assessments we determined losses represented other-than-temporary impairment (OTTI), we have recorded cumulative credit losses of $1.1 billion in earnings and accordingly have reduced the amortized cost of our securities. The majority of these cumulative impairment charges related to non-agency residential mortgage-backed and asset-backed securities rated BB or lower.

Additional information regarding our investment securities is included in Note 6 Investment Securities and Note 7 Fair Value in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

Loans Held for Sale

Table 12: Loans Held For Sale


In millions	March 31 2016		December 31 2015
Commercial mortgages	$	667	$	668
Residential mortgages		833		850
Other		41		22
Total	$	1,541	$	1,540

We sold $.6 billion of commercial mortgage loans to agencies during the first three months of 2016 compared to $1.0 billion during the first three months of 2015. Total revenue of $17 million was recognized on the valuation and sale of commercial mortgage loans held for sale, net of hedges, during the first three months of 2016 and $15 million during the first three months of 2015. These amounts are included in Other noninterest income on the Consolidated Income Statement.

Residential mortgage loan origination volume was $1.9 billion during the first three months of 2016 compared to $2.6 billion in the same period in 2015. The majority of such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $1.4 billion of loans and recognized loan sales revenue of $64 million during the first quarter of 2016. The comparable amounts for 2015 were $1.9 billion and $104 million, respectively. These loan sales revenue amounts are included in Residential mortgage noninterest income on the Consolidated Income Statement.

Interest income on loans held for sale was $16 million and $23 million during the first three months of 2016 and 2015, respectively. These amounts are included in Other interest income on the Consolidated Income Statement.

Additional information regarding our loan sale and servicing activities is included in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities and Note 7 Fair Value in our Notes To Consolidated Financial Statements included in Part 1, Item 1 of this Report.

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

Funding Sources

Table 13: Details Of Funding Sources


	March 31 2016		December 31 2015		Change
Dollars in millions	March 31 2016		December 31 2015		$			%
Deposits
Money market	$	114,710	$	118,079	$	(3,369	)		(3	)%
Demand		90,182		90,038		144			–	%
Savings		26,412		20,375		6,037			30	%
Retail certificates of deposit		17,189		17,405		(216	)		(1	)%
Time deposits in foreign offices and other time deposits		1,866		3,105		(1,239	)		(40	)%
Total deposits		250,359		249,002		1,357			1	%
Borrowed funds
Federal funds purchased and repurchase agreements		2,495		1,777		718			40	%
FHLB borrowings		19,058		20,108		(1,050	)		(5	)%
Bank notes and senior debt		21,594		21,298		296			1	%
Subordinated debt		8,707		8,556		151			2	%
Other		2,324		2,793		(469	)		(17	)%
Total borrowed funds		54,178		54,532		(354	)		(1	)%
Total funding sources	$	304,537	$	303,534	$	1,003			–	%

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

Total deposits increased in the comparison mainly due to growth in savings deposits reflecting in part a shift from money market deposits to new relationship-based savings products. Interest-bearing deposits represented 69% of total deposits at March 31, 2016 and 68% at December 31, 2015.

Total borrowed funds decreased in the comparison as maturities of FHLB borrowings were partially offset by higher federal funds purchased and repurchase agreements.

Capital

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.

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

assessments of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process.

In connection with the 2016 CCAR process, we filed our capital plan and stress testing results in April 2016 using financial data as of December 31, 2015 with the Federal Reserve. We expect to receive the Federal Reserve’s response (either a non-objection or objection) to the capital plan submitted as part of the 2016 CCAR in June 2016.

In the first quarter of 2016, we repurchased 5.9 million common shares for $.5 billion. We have repurchased a total of 23.8 million common shares for $2.2 billion under current share repurchase programs of up to $2.875 billion for the five quarter period ending in the second quarter of 2016. These repurchases were included in the capital plan accepted by the Federal Reserve as part of our 2015 CCAR submission.

We paid dividends on common stock of $.3 billion, or 51 cents per common share, during the first quarter of 2016. On April 4, 2016, the PNC board of directors declared a quarterly common stock cash dividend of 51 cents per share payable on May 5, 2016.

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

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

Table 14: Shareholders’ Equity


	March 31 2016			December 31 2015			Change
Dollars in millions	March 31 2016			December 31 2015			$			%
Shareholders’ equity
Preferred stock (a)
Common stock	$	2,708		$	2,708		$	–			–	%
Capital surplus – preferred stock		3,453			3,452			1			–	%
Capital surplus – common stock and other		12,586			12,745			(159	)		(1	)%
Retained earnings		29,642			29,043			599			2	%
Accumulated other comprehensive income		532			130			402			309	%
Common stock held in treasury at cost		(3,791	)		(3,368	)		(423	)		(13	)%
Total shareholders’ equity	$	45,130		$	44,710			$ 420			1	%

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

The increase in total shareholders’ equity compared to December 31, 2015 was mainly due to a $.6 billion increase in retained earnings and higher accumulated other comprehensive income primarily related to net securities gains, partially offset by common share repurchases of $.5 billion. The increase in retained earnings was driven by net income of $.9 billion, reduced by $.3 billion of common and preferred dividends declared. Common shares outstanding were 499 million and 504 million at March 31, 2016 and December 31, 2015, respectively.

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

Table 15: Basel III Capital


	March 31, 2016
Dollars in millions	2016 Transitional Basel III (a)			Pro forma Fully Phased-In Basel III (estimated) (b)(c)
Common equity Tier 1 capital
Common stock plus related surplus, net of treasury stock	$	11,503		$	11,503
Retained earnings		29,642			29,642
Accumulated other comprehensive income for securities currently and previously held as available for sale		388			647
Accumulated other comprehensive income for pension and other postretirement plans		(328	)		(546	)
Goodwill, net of associated deferred tax liabilities		(8,837	)		(8,837	)
Other disallowed intangibles, net of deferred tax liabilities		(186	)		(311	)
Other adjustments/(deductions)		(139	)		(148	)
Total common equity Tier 1 capital before threshold deductions		32,043			31,950
Total threshold deductions		(678	)		(1,139	)
Common equity Tier 1 capital		31,365			30,811
Additional Tier 1 capital
Preferred stock plus related surplus		3,453			3,453
Trust preferred capital securities
Noncontrolling interests (d)		418			44
Other adjustments/(deductions)		(86	)		(107	)
Tier 1 capital		35,150			34,201
Additional Tier 2 capital
Qualifying subordinated debt		4,362			4,149
Trust preferred capital securities		119
Allowance for loan and lease losses included in Tier 2 capital		2,992			8
Other (d)		6			10
Total Basel III capital	$	42,629		$	38,368
Risk-weighted assets
Basel III standardized approach risk-weighted assets (e)	$	295,555		$	303,805
Basel III advanced approaches risk-weighted assets (f)		N/A			283,297
Average quarterly adjusted total assets		345,269			344,652
Supplementary leverage exposure (g)		408,695			408,078
Basel III risk-based capital and leverage ratios
Common equity Tier 1		10.6	%		10.1	% (h)(j)
Tier 1		11.9			11.3	(h)(k)
Total		14.4			13.5	(i)(l)
Leverage (m)		10.2			9.9
Supplementary leverage ratio (n)		8.6			8.4

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

(b)

PNC utilizes the pro forma fully phased-in Basel III capital ratios to assess its capital position (without the benefit of phase-ins), including comparison to similar estimates made by other financial institutions. Pro forma fully phased-in capital amounts, ratios and risk-weighted and leverage-related assets are estimated.

(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)	Primarily includes REIT preferred securities for 2016 Transitional Basel III and Pro forma fully phased-in Basel III capital ratios.

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

(f)

Basel III advanced approaches risk-weighted assets are estimated based on the Basel III advanced approaches rules, and include credit, market, and operational risk-weighted assets. During the parallel run qualification phase PNC has refined the data, models, and internal processes used as part of the advanced approaches for determining risk-weighted assets. Refinements made in the fourth quarter of 2015 reduced Estimated Basel III advanced approaches risk-weighted assets and refinements made in the first quarter of 2016 increased Estimated Basel III advanced approaches risk-weighted assets. We anticipate additional refinements to this estimate through the parallel run qualification phase.

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

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

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

(continued on following page)

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

(continued from previous page)

(j)

For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Common equity Tier 1 capital ratio estimate is 10.9%. This capital ratio is calculated using pro forma fully phased-in Common equity Tier 1 capital and dividing by Basel III advanced approaches risk-weighted assets.

(k)	For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Tier 1 risk-based capital ratio estimate is 12.1%. This capital ratio is calculated using fully phased-in Tier 1 capital and dividing by Basel III advanced approaches risk-weighted assets.

(l)

For comparative purposes only, the pro forma fully phased-in standardized approaches Basel III Total capital risk-based capital ratio estimate is 13.6%. This ratio is calculated using fully phased-in 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.

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

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

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 2015 Form 10-K for additional information. Prior to fully implementing the advanced approaches to calculate risk-weighted assets, PNC and PNC Bank must successfully complete a “parallel run” qualification phase. Both PNC and PNC Bank entered this parallel run phase on January 1, 2013. Although the minimum parallel run qualification period is four quarters, the parallel run period for PNC and PNC Bank, now in its fourth year, is consistent with the experience of other U.S. advanced approaches banks that have all had multi-year parallel run periods. After PNC exits parallel run, its regulatory risk-based capital ratio for each measure (e.g., Common equity Tier 1 capital 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. Basel III regulatory capital rules (Basel III rules), as well as the fact that PNC remains in the parallel run qualification phase for the advanced approaches, PNC’s regulatory risk-based ratios in 2016 are calculated using the standardized approach for determining risk-weighted assets, and the definitions of, and deductions from, regulatory capital under the Basel III rules (as such definitions and deductions are phased-in for 2016). We refer to the capital ratios calculated using the phased-in Basel III provisions in effect for 2016 and, for the risk-based ratios, standardized approach risk-weighted assets, as the 2016 Transitional Basel III ratios. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, past due exposures, equity exposures and securitization exposures are generally subject to higher risk weights than other types of exposures.

Under the Basel III rules adopted by the U.S. banking agencies, significant common stock investments in unconsolidated financial institutions, mortgage servicing

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

Federal banking regulators have stated that they expect the largest U.S. bank holding companies, including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largest U.S. bank holding companies, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers through estimated stress scenarios. We seek to manage our capital consistent with these regulatory principles, and believe that our March 31, 2016 capital levels were aligned with them.

At March 31, 2016, PNC and PNC Bank, our sole bank subsidiary, were both considered “well capitalized,” based on applicable U.S. regulatory capital ratio requirements. To qualify as “well capitalized”, PNC must have Transitional Basel III capital ratios of at least 6% for Tier 1 risk-based capital and 10% for Total risk-based capital, and PNC Bank must have Transitional Basel III capital ratios of at least 6.5% for Common equity Tier 1 risk-based capital, 8% for Tier 1 risk-based capital, 10% for Total risk-based capital, and a Leverage ratio of at least 5%.

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 Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 19 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K.

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

OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

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

•

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

•

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

•

Note 15 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 March 31, 2016 and December 31, 2015 is included in Note 2 of this Report.

Trust Preferred Securities and REIT Preferred Securities

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

FAIR VALUE MEASUREMENTS

In addition to the following, see Note 7 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for further information regarding fair value.

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

Table 16: Fair Value Measurements – Summary


	March 31, 2016						December 31, 2015
Dollars in millions	Total Fair Value			Level 3			Total Fair Value			Level 3
Total assets	$	72,182		$	8,029		$	68,804		$	8,606
Total assets at fair value as a percentage of consolidated assets		20	%					19	%
Level 3 assets as a percentage of total assets at fair value					11	%					13	%
Level 3 assets as a percentage of consolidated assets					2	%					2	%
Total liabilities	$	6,168		$	355		$	4,892		$	495
Total liabilities at fair value as a percentage of consolidated liabilities		2	%					2	%
Level 3 liabilities as a percentage of total liabilities at fair value					6	%					10	%
Level 3 liabilities as a percentage of consolidated liabilities					<1	%					<1	%

BUSINESS SEGMENTS REVIEW

We have six reportable business segments:

•

Retail Banking

•

Corporate & Institutional Banking

•

Asset Management Group

•

Residential Mortgage Banking

•

BlackRock

•

Non-Strategic Assets Portfolio

Business segment results, including the basis of presentation of inter-segment revenues, and a description of each business are included in Note 16 Segment Reporting included in the

Notes To Consolidated Financial Statements in Part I, Item 1 of this Report. Certain amounts included in this Business Segments Review and the Business Segments Highlights in the Executive Summary section of this Financial Review differ from those amounts shown in Note 16, primarily due to the presentation in this Financial Review of business net interest revenue on a taxable-equivalent basis.

Net interest income in business segment results reflects PNC’s internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors.

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

Retail Banking

(Unaudited)

Table 17: Retail Banking Table


Three months ended March 31 Dollars in millions, except as noted	2016			2015
Income Statement
Net interest income	$	1,113		$	1,038
Noninterest income		537			488
Total revenue		1,650			1,526
Provision for credit losses		77			49
Noninterest expense		1,150			1,158
Pretax earnings		423			319
Income taxes		155			117
Earnings	$	268		$	202
Average Balance Sheet
Loans
Consumer
Home equity	$	26,743		$	28,152
Automobile		10,787			10,341
Education		5,865			6,626
Credit cards		4,722			4,444
Other		1,823			1,896
Total consumer		49,940			51,459
Commercial and commercial real estate		12,551			12,867
Residential mortgage		596			734
Total loans	$	63,087		$	65,060
Total assets	$	72,216		$	74,017
Deposits
Noninterest-bearing demand	$	26,209		$	22,591
Interest-bearing demand		37,860			35,650
Money market		50,405			53,105
Savings		21,780			12,888
Certificates of deposit		15,350			17,318
Total deposits	$	151,604		$	141,552
Performance Ratios
Return on average assets		1.51	%		1.11	%
Noninterest income to total revenue		33	%		32	%
Efficiency		70	%		76	%
Supplemental Noninterest Income Information
Service charges on deposits	$	151		$	146
Brokerage	$	75		$	67
Consumer services	$	254		$	233
Other Information (a)
Customer-related statistics (average):
Non-teller deposit transactions (b)		47	%		40	%
Digital consumer customers (c)		56	%		50	%
Credit-related statistics:
Nonperforming assets (d)	$	1,023		$	1,174
Net charge-offs	$	96		$	99
Annualized net charge-off ratio		.61	%		.62	%
Other statistics:
ATMs		8,940			8,754
Branches (e)		2,613			2,660
Brokerage account client assets (billions) (f)	$	43		$	44

(a)	Presented as of March 31, except for customer-related statistics, which are quarterly averages for the three months ended, and net charge-offs and annualized net charge-off ratio, which are for the three months ended.

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

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

(d)	Includes nonperforming loans of $1.0 billion at March 31, 2016 and $1.1 billion at March 31, 2015.

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

(f)	Amounts include cash and money market balances.

Retail Banking earned $268 million in the first three months of 2016 compared with earnings of $202 million for the same period a year ago. The increase in earnings was driven by higher net interest income and noninterest income, partially offset by higher provision for credit losses. Retail Banking continues to enhance the customer experience with refinements to product offerings that drive product value for consumers and small businesses. We are focused on growing customer share of wallet through the sale of liquidity, banking, and investment products that meet the broad range of financial needs of our customers.

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

•

In the first three months of 2016, approximately 56% of consumer customers used non-teller channels for the majority of their transactions compared with 50% for the same period in 2015.

•

Deposit transactions via ATM and mobile channels increased to 47% of total deposit transactions in the first quarter of 2016 compared with 40% for the same period in 2015.

•

Integral to PNC’s retail branch transformation strategy, approximately 14% of branches operate under the universal model designed to enhance sales opportunities for branch personnel, in part, by driving higher ATM and mobile deposits. PNC had a network of 2,613 branches and 8,940 ATMs at March 31, 2016.

•

Instant debit card issuance, which enables us to print a customer’s debit card in minutes, is now available in nearly 900 branches, over 34% of the branch network.

Total revenue for the first three months of 2016 increased $124 million compared to the same period in 2015, driven by increases in both net interest income and noninterest income. Net interest income increased $75 million in the comparison due to growth in deposit balances and interest rate spread on the value of deposits, partially offset by lower loan balances and interest rate spread compression on the value of loans.

Noninterest income increased $49 million in the first quarter of 2016 compared to the same period a year ago. Execution on our share of wallet strategy resulted in growth in consumer

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

service fee income from payment-related products, specifically in debit card, credit card and merchant services, as well as increased brokerage fees. Increased noninterest income in the comparison also reflected a gain of $44 million on the sale of 0.5 million Visa Class B common shares in the first quarter of 2016.

Provision for credit losses increased $28 million and net charge-offs declined $3 million in the first three months of 2016, compared to the same period in 2015. The increase in provision for credit losses reflected slowing credit quality improvement.

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

In the first three months of 2016, average total deposits of $151.6 billion increased $10.0 billion, or 7%, compared to the same period a year ago, driven by organic growth in the following deposit categories:

•

Savings deposits increased $8.9 billion, or 69%, to $21.8 billion.

•

Demand deposits increased $5.8 billion, or 10%, to $64.1 billion.

The increase in savings deposits was partially offset by lower money market deposits, which declined $2.7 billion, or 5%, reflecting a shift to new relationship-based savings products. Certificates of deposit, declined $2.0 billion, or 11%, in the comparison, from the net runoff of maturing accounts.

Retail Banking continued to focus on a relationship-based lending strategy that targets specific products and markets for growth. In the first three months of 2016, average total loans

declined $2.0 billion, or 3%, compared to the same period in 2015, driven by a decline in home equity loans and runoff of non-strategic portions of the portfolios, as more fully described below.

•

Average home equity loans decreased $1.4 billion, or 5%, as pay-downs and payoffs on loans exceeded new booked volume, consistent with lower mortgage refinance demand. Retail Banking’s home equity loan portfolio is relationship based, with over 97% of the portfolio attributable to borrowers in our primary geographic footprint. The weighted-average updated FICO scores for this portfolio was 750 at March 31, 2016 compared to 752 at December 31, 2015.

•

Average commercial and commercial real estate loans declined $316 million, or 2%, as pay-downs and payoffs on loans exceeded new volume.

•

Average automobile loans, comprised of both direct and indirect auto loans, increased $446 million, or 4%, primarily due to portfolio growth in previously underpenetrated markets.

•

Average credit card balances increased $278 million, or 6%, as a result of efforts to increase credit card share of wallet through organic growth.

•

In the first three months of 2016, average loan balances for the remainder of the portfolio declined $972 million, or 11%, compared to the same period in 2015, driven by declines in the discontinued government guaranteed education, indirect other, and residential mortgage portfolios, which are primarily runoff portfolios.

Nonperforming assets declined $151 million, or 13%, at March 31, 2016 compared to March 31, 2015. The decrease was driven by declines in both consumer and commercial nonperforming loans.

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

Corporate & Institutional Banking

(Unaudited)

Table 18: Corporate & Institutional Banking Table


Three months ended March 31 Dollars in millions, except as noted	2016			2015
Income Statement
Net interest income	$	870		$	855
Noninterest income		434			429
Total revenue		1,304			1,284
Provision for credit losses		107			17
Noninterest expense		521			514
Pretax earnings		676			753
Income taxes		245			271
Earnings	$	431		$	482
Average Balance Sheet
Loans held for sale	$	708		$	1,106
Loans
Commercial	$	86,645		$	84,712
Commercial real estate		25,817			22,090
Equipment lease financing		6,783			6,914
Total commercial lending		119,245			113,716
Consumer		499			1,352
Total loans	$	119,744		$	115,068
Total assets	$	135,521		$	131,178
Deposits
Noninterest-bearing demand	$	46,962		$	46,976
Money market		21,229			22,286
Other		11,316			9,340
Total deposits	$	79,507		$	78,602
Performance Ratios
Return on average assets		1.29	%		1.49	%
Noninterest income to total revenue		33	%		33	%
Efficiency		40	%		40	%
Other Information
Commercial loan servicing portfolio (a) (b)	$	453		$	390
Consolidated revenue from: (c)
Treasury Management (d)	$	377		$	319
Capital Markets (d)	$	152		$	180
Commercial mortgage banking activities
Commercial mortgage loans held for sale (e)	$	26		$	26
Commercial mortgage loan servicing income (f)		66			56
Commercial mortgage servicing rights valuation, net of economic hedge (g)		1			16
Total	$	93		$	98
Average Loans (by C&IB business)
Corporate Banking	$	56,166		$	58,227
Real Estate		35,784			29,918
Business Credit		14,672			14,217
Equipment Finance		11,014			10,941
Other		2,108			1,765
Total average loans	$	119,744		$	115,068
Net carrying amount of commercial mortgage servicing rights (a)	$	460		$	494
Credit-related statistics:
Nonperforming assets (a) (h)	$	701		$	516
Net charge-offs (recoveries)	$	41		$	(1	)

(a)	As of March 31.

(b)	Represents loans serviced for PNC and others.

(c)

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

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

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

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

(g)	Amounts reported in corporate services fees.

(h)	Includes nonperforming loans of $.6 billion at March 31, 2016 and $.4 billion at March 31, 2015.

Corporate & Institutional Banking earned $431 million in the first quarter of 2016, a decrease of $51 million, or 11%, compared with the first quarter of 2015. The decrease in earnings was primarily due to an increase in the provision for credit losses, partially offset by increased net interest income. We continue to focus on building client relationships where the risk-return profile is attractive, including the Southeast.

Net interest income increased $15 million, or 2%, in the first three months of 2016 compared to the first three months of 2015. The increase primarily reflects the impact of higher average loans and deposits as well as interest rate spread expansion on deposits, partially offset by continued interest rate spread compression on loans and lower purchase accounting accretion.

Noninterest income increased slightly in the first three months of 2016 compared to the first three months of 2015 reflecting an equity investment gain, lower commercial mortgage servicing rights valuation, net of economic hedge, and lower capital markets activity.

Overall credit quality for the first quarter of 2016 remained relatively stable, except for deterioration related to certain energy related loans, which was the primary driver for the increase in provision for credit losses of $90 million, net charge-offs of $42 million and nonperforming assets of $185 million in the year over year comparisons. Increased provision for credit losses also reflected the impact of continued loan growth.

Average loans increased $4.7 billion, or 4%, for the first quarter of 2016 compared to the prior year quarter, reflecting solid growth in Real Estate and Business Credit, partially offset by a decline in Corporate Banking:

•

PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. Average loans for this business increased $5.9 billion, or 20%, in the first quarter of 2016 compared with the first quarter of 2015, primarily due to growth in commercial lending driven by higher term, REIT and agency warehouse lending.

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

•

PNC Business Credit provides asset-based lending. The loan portfolio is relatively high yielding, with acceptable risk as the loans are mainly secured by short-term assets. Average loans for this business increased $455 million, or 3%, in the first three months of 2016 compared to the first three months of 2015, due to new originations.

•

Corporate Banking provides lending, treasury management and capital markets-related products and services to midsized and large corporations, government and not-for-profit entities. Average loans for this business decreased $2.1 billion, or 4%, in the first quarter of 2016 compared with the first quarter of 2015, reflecting the impact of ongoing capital and liquidity management activities, partially offset by increased lending to large corporate clients.

•

PNC Equipment Finance provides equipment financing solutions for clients throughout the U.S. and Canada. Average loans and operating leases were $11.8 billion in the first quarter of 2016, unchanged compared with the first quarter of 2015.

Average deposits for the first quarter of 2016 increased $.9 billion, or 1%, compared with the first quarter of 2015, as a result of interest-bearing demand deposit growth, partially offset by a decrease in money market deposits.

The commercial loan servicing portfolio increased $63 billion, or 16%, at March 31, 2016 compared to March 31, 2015, as servicing additions from new and existing customers 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 business segments. On a consolidated basis, the revenue from these other services is included in net interest income, corporate service fees and other noninterest income. From a segment perspective, the majority of the revenue and expense related to these services is reflected in the Corporate & Institutional Banking segment results and the remainder is reflected in the results of other businesses. The Other Information section in Table 18 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.

Treasury management revenue, comprised of fees and net interest income from customer deposit balances, increased $58 million, or 18%, in the first quarter of 2016 compared with the first quarter of 2015, driven by liquidity-related revenue.

Capital markets-related products and services include foreign exchange, derivatives, securities, loan syndications, mergers and acquisitions advisory, equity capital markets advisory activities and related services. Revenue from capital markets-related products and services decreased $28 million, or 16%, in the first three months of 2016 compared with the first three months of 2015. The decrease in the comparison was primarily driven by lower merger and acquisition advisory fees, decreased corporate securities underwriting activity and lower loan syndication fees.

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 revenue from commercial mortgage banking activities decreased $5 million, or 5%, in the first quarter of 2016 compared with the first quarter of 2015. The decrease in the comparison was mainly due to lower commercial mortgage servicing rights valuation, net of economic hedge, largely offset by higher mortgage servicing revenue.

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

Asset Management Group

(Unaudited)

Table 19: Asset Management Group Table


Three months ended March 31 Dollars in millions, except as noted	2016			2015
Income Statement
Net interest income	$	77		$	73
Noninterest income		203			208
Total revenue		280			281
Provision for credit losses (benefit)		(3	)		12
Noninterest expense		206			210
Pretax earnings		77			59
Income taxes		28			22
Earnings	$	49		$	37
Average Balance Sheet
Loans
Consumer	$	5,630		$	5,650
Commercial and commercial real estate		788			932
Residential mortgage		1,003			865
Total loans	$	7,421		$	7,447
Total assets	$	7,887		$	7,943
Deposits
Noninterest-bearing demand	$	1,407		$	1,345
Interest-bearing demand		4,280			4,241
Money market		4,758			4,621
Savings		1,563			165
Other		275			290
Total deposits	$	12,283		$	10,662
Performance Ratios
Return on average assets		2.52	%		1.89	%
Noninterest income to total revenue		73	%		74	%
Efficiency		74	%		75	%
Other Information
Total nonperforming assets (a) (b)	$	54		$	63
Total net charge-offs	$	4		$	4
Client Assets Under Administration (a) (c) (d) (in billions)
Discretionary client assets under management	$	135		$	136
Nondiscretionary client assets under administration		125			129
Total	$	260		$	265
Discretionary client assets under management
Personal	$	84		$	88
Institutional		51			48
Total	$	135		$	136
Equity	$	72		$	75
Fixed Income		40			41
Liquidity/Other		23			20
Total	$	135		$	136

(a)	As of March 31.

(b)	Includes nonperforming loans of $49 million at March 31, 2016 and $59 million at March 31, 2015.

(c)	Excludes brokerage account client assets.

(d)

As a result of certain investment advisory services performed by one of our registered investment advisors, certain assets are reported as both discretionary client assets under management and nondiscretionary client assets under administration. The amount of such assets was approximately $7 billion at March 31, 2016 and $5 billion at March 31, 2015.

Asset Management Group earned $49 million in the first quarter of 2016 and $37 million in the first quarter of 2015. Earnings increased compared with the prior year quarter as a reduction in the provision for credit losses and lower noninterest expense was partially offset by a decline in noninterest income.

Total revenue for the first quarter of 2016 decreased slightly compared to the first quarter of 2015, as a decline in noninterest income from lower average equity markets was largely offset by an increase in net interest income.

Noninterest expense decreased $4 million, or 2%, in the first quarter of 2016 compared to the first quarter of 2015. Asset Management Group remains focused on disciplined expense management as it invests in strategic growth opportunities.

The core growth strategies of the business include increasing sales sourced from other PNC lines of business, maximizing front line productivity and optimizing market presence in high opportunity markets. Wealth Management and Hawthorn have over 100 offices operating in 7 out of the 10 most affluent states in the U.S. with a majority co-located with retail banking branches. The businesses’ strategies primarily focus on growing client assets under management through expanding relationships directly and through cross-selling from PNC’s other lines of business.

Institutional Asset Management provides advisory, custody, and retirement administration services to institutional clients primarily within our banking footprint. The business also offers PNC proprietary mutual funds and investment strategies. Institutional Asset Management is strengthening its partnership with Corporate and Institutional Banking and other internal channels to drive growth and is focused on building retirement capabilities and expanding product solutions for all customers.

Assets under administration were $260 billion as of March 31, 2016 compared with $265 billion as of March 31, 2015 largely due to a decline in nondiscretionary client assets under administration. Discretionary client assets under management decreased $1 billion compared to March 31, 2015.

Average deposits for the first quarter of 2016 increased $1.6 billion, or 15%, from the prior year first quarter, primarily driven by an increase in savings products. Average loan balances of $7.4 billion remained stable compared to the prior year quarter.

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

Residential Mortgage Banking

(Unaudited)

Table 20: Residential Mortgage Banking Table


Three months ended March 31 Dollars in millions, except as noted	2016			2015
Income Statement
Net interest income	$	25		$	30
Noninterest income		105			177
Total revenue		130			207
Provision for credit losses (benefit)		(1	)		2
Noninterest expense		152			161
Pretax earnings (loss)		(21	)		44
Income taxes (benefit)		(8	)		16
Earnings (loss)	$	(13	)	$	28
Average Balance Sheet
Loans held for sale	$	800		$	1,147
Loans	$	1,028		$	1,282
Mortgage servicing rights (MSR)	$	995		$	843
Total assets	$	6,306		$	7,245
Total deposits	$	2,330		$	2,215
Performance Ratios
Return on average assets		(.84	)%		1.57	%
Noninterest income to total revenue		81	%		86	%
Efficiency		117	%		78	%
Supplemental Noninterest Income Information
Loan servicing revenue
Servicing fees	$	62		$	48
Mortgage servicing rights valuation, net of economic hedge	$	(21	)	$	25
Loan sales revenue	$	64		$	104
Residential Mortgage Servicing Portfolio (in billions) (a)
Serviced portfolio balance (b)	$	125		$	113
Portfolio acquisitions	$	5		$	8
MSR asset value (b)	$	.9		$	.8
MSR capitalization value (in basis points) (b)		69			74
Other Information
Loan origination volume (in billions)	$	1.9		$	2.6
Loan sale margin percentage		3.21	%		4.09	%
Percentage of originations represented by:
Purchase volume (c)		40	%		31	%
Refinance volume		60	%		69	%
Total nonperforming assets (b) (d)	$	75		$	105

(a)	Represents loans serviced for third parties.

(b)	As of March 31.

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

(d)	Includes nonperforming loans of $44 million at March 31, 2016 and $65 million at March 31, 2015.

Residential Mortgage Banking reported a loss of $13 million in the first three months of 2016 compared with earnings of $28 million in the first three months of 2015, primarily driven by a decline in noninterest income, partially offset by lower noninterest expense. The decline in noninterest income reflected lower residential mortgage servicing rights valuation, net of economic hedge, as well as lower loan sales revenue in the comparison, partially offset by increased servicing fee income.

The strategic focus of the business is the acquisition of new customers through a retail loan officer sales force with an emphasis on home purchase transactions. Our strategy involves competing on the basis of superior service to new and existing customers in serving their home purchase and refinancing needs. A key consideration in pursuing this approach is the cross-sell opportunity, especially in the bank footprint markets.

Residential Mortgage Banking overview:

•

Total loan originations decreased $.7 billion in first quarter 2016 compared to first quarter 2015. Loans continue to be originated primarily through direct channels under Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Federal Housing Administration (FHA)/Department of Veterans Affairs agency guidelines. Refinancings were 60% of originations in the first 3 months of 2016 and 69% in the first three months 2015.

•

Residential mortgage loans serviced for others increased by $12 billion at March 31, 2016 compared to March 31, 2015. During the first three months of 2016, $5 billion of residential mortgage servicing rights were acquired, compared with $8 billion in the comparable period of 2015.

•

Net interest income decreased $5 million in the first three months in 2016 compared with the 2015 period. This decline was primarily due to lower originations and lower balances of portfolio loans held for investment.

•

Noninterest income declined $72 million in the first three months of 2016 compared with the prior year period, as increased servicing fee income was more than offset by lower residential mortgage servicing rights valuation, net of economic hedge, as well as lower loan sales revenue.

•

Noninterest expense declined $9 million in the first three months of 2016 compared with the 2015 period, primarily as a result of lower mortgage servicing and compliance costs.

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

BlackRock

(Unaudited)

Table 21: BlackRock Table

Information related to our equity investment in BlackRock follows:


Three months ended March 31 Dollars in millions	2016			2015
Business segment earnings (a)	$	114		$	135
PNC’s economic interest in BlackRock (b)		22	%		22	%

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

(b)	At March 31.


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

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

(d)	Does not include liquidity discount.

In addition to our investment in BlackRock reflected in Table 21, at March 31, 2016, we held approximately 0.8 million shares of BlackRock Series C Preferred Stock valued at $208 million, which are available to fund our obligation in connection with certain BlackRock long-term incentive plan (LTIP) programs. We account for the BlackRock Series C Preferred Stock at fair value, which offsets the impact of marking-to-market the obligation to deliver these shares to BlackRock. The fair value amount of the BlackRock Series C Preferred Stock is included on our Consolidated Balance Sheet in the caption Other assets. Additional information regarding the valuation of the BlackRock Series C Preferred Stock is included in Note 7 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report and in Note 7 Fair Value in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K.

On February 1, 2016, we transferred 0.5 million shares of BlackRock Series C Preferred Stock to BlackRock to satisfy a portion of our LTIP obligation. The transfer reduced Other assets and Other liabilities on our Consolidated Balance Sheet by $138 million.

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

Non-Strategic Assets Portfolio

(Unaudited)

Table 22: Non-Strategic Assets Portfolio Table


Three months ended March 31 Dollars in millions	2016			2015
Income Statement
Net interest income	$	75		$	112
Noninterest income		22			9
Total revenue		97			121
Provision for credit losses (benefit)		(7	)		(31	)
Noninterest expense		21			24
Pretax earnings		83			128
Income taxes		31			47
Earnings	$	52		$	81
Average Balance Sheet
Loans
Commercial Lending	$	708		$	750
Consumer Lending
Home equity		2,144			3,021
Residential real estate		3,245			4,184
Total consumer lending		5,389			7,205
Total loans		6,097			7,955
Other assets (a)		(281	)		(679	)
Total assets	$	5,816		$	7,276
Performance Ratios
Return on average assets		3.63	%		4.51	%
Noninterest income to total revenue		23			7
Efficiency		22			20
Other Information
Nonperforming assets (b) (c)	$	499		$	669
Purchased impaired loans (b) (d)	$	2,737		$	3,808
Net charge-offs	$	8		$	–
Loans (b)
Commercial Lending	$	703		$	746
Consumer Lending
Home equity		2,088			2,944
Residential real estate		3,190			4,139
Total consumer lending		5,278			7,083
Total loans	$	5,981		$	7,829

(a)	Other assets includes deferred taxes, ALLL and other real estate owned (OREO). Other assets were negative in both periods due to the ALLL.

(b)	As of March 31.

(c)	Includes nonperforming loans of $.4 billion at March 31, 2016 and $.5 billion at March 31, 2015.

(d)	Recorded investment of purchased impaired loans related to acquisitions. This segment contained 81% of PNC’s purchased impaired loans at both March 31, 2016 and March 31, 2015.

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

This business segment consists of non-strategic assets primarily obtained through acquisitions of other companies. The business activity of this segment is to manage the liquidation of the portfolios while maximizing the value and mitigating risk.

Non-Strategic Assets Portfolio had earnings of $52 million in the first three months of 2016 compared with $81 million in the first three months of 2015. Earnings decreased year-over-year primarily due to a declining loan portfolio and a reduced benefit from the provision for credit losses.

Non-Strategic Assets Portfolio overview:

•

Net interest income declined $37 million, or 33%, in the first three months of 2016 compared with the first three months of 2015, resulting from lower purchase accounting accretion and the impact of the declining average balance of the loan portfolio.

•

Noninterest income increased $13 million in the first three months of 2016 compared to the first three months of 2015 driven by a release of excess reserves for estimated losses on repurchase obligations in the first quarter of 2016 related to a settlement.

•

Provision for credit losses was a benefit in both the first three months of 2016 and the first three months of 2015, reflecting improved actual and expected purchased impaired loan losses.

•

Noninterest expense declined $3 million, or 13%, in the first three months of 2016 compared with the first three months of 2015, due to lower costs of managing and servicing the loan portfolios, as the portfolio continues to decline.

•

Average portfolio loans declined $1.9 billion, or 23%, in the first three months of 2016 compared to the first three months of 2015, due to customer payment activity and portfolio management activities to reduce under-performing assets. The decline also reflects the impact of our change in derecognition policy effective December 31, 2015 for certain purchased impaired loans.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Note 1 Accounting Policies in Item 8 of our 2015 Form 10-K and in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report describe the most significant accounting policies that we use to prepare our consolidated financial statements. Certain of these policies require us to make estimates or economic assumptions that may vary under different assumptions or conditions and such variations may significantly affect our reported results and financial position for the period or in future periods.

We must use estimates, assumptions and judgments when assets and liabilities are required to be recorded at, or adjusted to reflect, fair value.

Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by independent third-party sources, including appraisers and valuation specialists, when available. When such third-party information is not available, we estimate fair value primarily by using discounted cash flow and other financial modeling techniques. Changes in underlying factors, assumptions or estimates in any of these areas could materially impact our future financial condition and results of operations.

The following critical accounting policies and judgments are described in more detail in Critical Accounting Estimates and Judgments in Item 7 of our 2015 Form 10-K:

•

Fair Value Measurements

•

Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit

•

Estimated Cash Flows on Purchased Impaired Loans

•

Goodwill

•

Lease Residuals

•

Revenue Recognition

•

Residential and Commercial Mortgage Servicing Rights

•

Income Taxes

•

Recently Issued Accounting Standards

We provide additional information about many of these items in the Notes To Consolidated Financial Statements included in Part I, Item l of this Report.

The PNC Financial Services Group, Inc. – Form 10-Q 27

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP with one accounting model. The core principle of the guidance is that an entity should recognize revenue to depict the satisfaction of a performance obligation by transfer of promised goods or services to customers. The ASU also requires additional qualitative and quantitative disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has subsequently released several amendments to ASU 2014-09. In August 2015, the FASB issued guidance deferring the mandatory effective date of the ASU for one year, to annual reporting periods beginning after December 15, 2017. In March 2016, the FASB issued guidance clarifying how an entity should assess whether it is a principal or an agent with respect to the delivery of promised goods or services to customers, which impacts whether revenue should be recorded on a gross or net basis. Finally, in April 2016, the FASB issued additional guidance on identifying performance obligations and licensing. The requirements within ASU 2014-09 and its subsequent amendments should be applied retrospectively to each prior period presented (with several practical expedients for certain completed contracts) or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. We plan to adopt the ASU consistent with the deferred mandatory effective date. Based on our evaluation to date, we do not expect the adoption of this standard to have a significant impact on our consolidated results of operations or our consolidated financial position.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU changes the accounting for certain equity investments, financial liabilities under the fair value option and presentation and disclosure requirements for financial instruments. Equity investments not accounted for under the equity method of accounting will be measured at fair value with any changes in fair value recognized in net income. The ASU also simplifies the impairment assessment of equity investments for which fair value is not readily determinable. Additionally, the ASU changes the presentation of certain fair value changes for financial liabilities measured at fair value; and amends certain disclosure requirements relating to the fair value of financial instruments. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and should be applied using a modified retrospective approach through a cumulative-effect adjustment to the balance sheet, except for the amendment related to equity securities without readily determinable fair values, which should be applied prospectively. We plan to adopt all provisions consistent with

the effective date and are currently evaluating the impact of this ASU on our results of operations and financial position.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The primary change in the new guidance is the recognition of lease assets and lease liabilities by lessees for operating leases. The ASU requires lessees to recognize a right-of-use asset and related lease liability for all leases with lease terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 using a modified retrospective approach through a cumulative-effect adjustment. Early adoption is permitted. We are currently evaluating the impact of adopting this standard.

Recently Adopted Accounting Standards

See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements included in Part I, Item I of this Report regarding the impact of new accounting pronouncements adopted in 2016.

STATUS OF QUALIFIED DEFINED BENEFIT PENSION PLAN

We have a noncontributory, qualified defined benefit pension plan (plan or pension plan) covering eligible employees. Benefits are determined using a cash balance formula where earnings credits are applied as a percentage of eligible compensation. We calculate the expense associated with the pension plan and the assumptions and methods that we use include a policy of reflecting plan assets at their fair market value. Annually, we review the actuarial assumptions for the pension plan.

We currently estimate pretax pension expense of $43 million for 2016 compared with pretax expense of $9 million in 2015. This year-over-year expected increase in expense is mainly due to lower than expected asset returns during 2015, which reduced year-end pension asset balances and increased the amortization of actuarial losses in 2016.

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

The table below reflects the estimated effects on pension expense of certain changes in annual assumptions, using 2016 estimated expense as a baseline.

Table 23: Pension Expense – Sensitivity Analysis


Change in Assumption (a) (In millions)	Estimated Increase to 2016 Pension Expense
.5% decrease in discount rate	$	18
.5% decrease in expected long-term return on assets	$	21
.5% increase in compensation rate	$	2

(a)	The impact is the effect of changing the specified assumption while holding all other assumptions constant.

We provide additional information on our pension plan in Note 12 Employee Benefit Plans in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K.

RECOURSE AND REPURCHASE OBLIGATIONS

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in our 2015 Form 10-K, PNC has sold commercial mortgage, residential mortgage and home equity loans/lines of credit directly or indirectly through securitization and loan sale transactions in which we have continuing involvement. One form of continuing involvement includes certain recourse and loan repurchase obligations associated with the transferred assets. For additional discussion regarding our recourse and repurchase obligations, see the Recourse and Repurchase Obligations section in Item 7 of our 2015 Form 10-K.

RISK MANAGEMENT

The Risk Management section included in Item 7 of our 2015 Form 10-K describes our enterprise risk management framework including risk appetite and strategy, risk culture, risk organization and governance, risk identification and quantification, risk control and limits, and risk monitoring and reporting. Additionally, our 2015 Form 10-K provides an analysis of our key areas of risk, which include but are not limited to credit, operational, compliance, model, liquidity and market. Our use of financial derivatives as part of our overall asset and liability risk management process is also addressed within the Risk Management section.

The following information updates our 2015 Form 10-K risk management disclosures.

Credit Risk Management

See the Credit Risk Management portion of the Risk Management section in our 2015 Form 10-K for additional discussion regarding credit risk.

Asset Quality Overview

Asset quality trends remained relatively stable during the first three months of 2016, except for certain energy related loans.

•

Provision for credit losses for the first quarter of 2016 increased to $152 million compared to $54 million for the first quarter of 2015. The first quarter 2016 provision included $80 million for energy related loans in the oil, gas, and coal sectors.

•

Nonperforming assets at March 31, 2016 increased $127 million compared with December 31, 2015 due to higher nonperforming commercial loans driven by energy related loans, partially offset by declining commercial real estate and consumer lending nonperforming loans. Nonperforming assets were 0.71% of total assets at March 31, 2016 compared with 0.68% at December 31, 2015.

•

Overall loan delinquencies totaled $1.5 billion at March 31, 2016, a decrease of $143 million, or 9%, from year-end 2015. The reduction was due in large part to a reduction in accruing government insured consumer lending loans past due of $95 million.

•

Net charge-offs were $149 million in the first quarter of 2016, up 45%, or $46 million, from net charge-offs in the first quarter of 2015 due to higher commercial loan net charge-offs.

•

The level of ALLL remained at $2.7 billion at both March 31, 2016 and December 31, 2015.

Nonperforming Assets and Loan Delinquencies

Nonperforming Assets, including OREO and Foreclosed Assets

Nonperforming assets include nonperforming loans and leases for which ultimate collectability of the full amount of contractual principal and interest is not probable and include nonperforming troubled debt restructurings (TDRs), OREO and foreclosed assets. Loans held for sale, certain government insured or guaranteed loans, purchased impaired loans and loans accounted for under the fair value option are excluded from nonperforming loans. Additional information regarding our nonperforming loans and nonaccrual policies is included in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report. A summary of the major categories of nonperforming assets are presented in Table 24. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in this Report for further detail of nonperforming asset categories.

The PNC Financial Services Group, Inc. – Form 10-Q 29

Table 24: Nonperforming Assets By Type


Dollars in millions	March 31 2016			December 31 2015
Nonperforming loans
Commercial lending	$	732		$	545
Consumer lending (a)		1,549			1,581
Total nonperforming loans (b)(c)		2,281			2,126
OREO and foreclosed assets		271			299
Total nonperforming assets	$	2,552		$	2,425
Amount of TDRs included in nonperforming loans	$	1,172		$	1,119
Percentage of total nonperforming loans		51	%		53	%
Nonperforming loans to total loans		1.10	%		1.03	%
Nonperforming assets to total loans, OREO and foreclosed assets		1.23			1.17
Nonperforming assets to total assets		.71			.68
Allowance for loan and lease losses to total nonperforming loans		119			128

(a)	Excludes most consumer loans and lines of credit, not secured by residential real estate, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.

(b)	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.

(c)	The recorded investment of loans collateralized by residential real estate property that are in process of foreclosure was $.5 billion and $.6 billion at March 31, 2016 and December 31, 2015, respectively. Both periods included $.3 billion of loans that are government insured/guaranteed.

Table 25: Change in Nonperforming Assets


In millions	2016			2015
January 1	$	2,425		$	2,880
New nonperforming assets		542			336
Charge-offs and valuation adjustments		(161	)		(124	)
Principal activity, including paydowns and payoffs		(98	)		(170	)
Asset sales and transfers to loans held for sale		(90	)		(93	)
Returned to performing status		(66	)		(75	)
March 31	$	2,552		$	2,754

Nonperforming assets increased $127 million at March 31, 2016 compared to December 31, 2015. Commercial lending nonperforming loans increased $187 million and consumer lending nonperforming loans decreased $32 million. As of March 31, 2016, approximately 83% of total nonperforming loans were secured by collateral which lessens reserve requirements and is expected to reduce credit losses in the event of default. As of March 31, 2016, commercial lending nonperforming loans were carried at approximately 67% of their unpaid principal balance, due to charge-offs recorded to date, before consideration of the ALLL. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information on these loans.

Within consumer nonperforming loans, residential real estate TDRs comprise 70% of total residential real estate nonperforming loans at March 31, 2016, up from 68% at December 31, 2015. Home equity TDRs comprise 53% of home equity nonperforming loans at March 31, 2016, up from 51% at December 31, 2015. TDRs generally remain in nonperforming status until a borrower has made at least six consecutive months of both principal and interest payments under the modified terms or ultimate resolution occurs. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

At March 31, 2016, our largest nonperforming asset was $55 million in the Mining, Quarrying, Oil and Gas Extraction Industry and our average nonperforming loan associated with commercial lending was less than $1 million. The ten largest outstanding nonperforming assets are from the commercial lending portfolio and represent 42% and 12% of total commercial lending nonperforming loans and total nonperforming assets, respectively, as of March 31, 2016.

Table 26: OREO and Foreclosed Assets


In millions	March 31 2016		December 31 2015
Other real estate owned (OREO):
Residential properties	$	135	$	146
Residential development properties		27		31
Commercial properties		97		102
Total OREO		259		279
Foreclosed and other assets		12		20
Total OREO and foreclosed assets	$	271	$	299

Total OREO and foreclosed assets decreased $28 million during the first three months of 2016 and were 11% of total nonperforming assets at March 31, 2016. As of March 31, 2016 and December 31, 2015, 60% and 59%, respectively, of our OREO and foreclosed assets were comprised of residential related properties.

Loan Delinquencies

We regularly monitor the level of loan delinquencies and believe these levels may be a key indicator of loan portfolio asset quality. Measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of payment are considered delinquent. Loan delinquencies exclude loans held for sale and purchased impaired loans, but include government insured or guaranteed loans and loans accounted for under the fair value option.

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

Table 27: Accruing Loans Past Due (a) (b)


	Amount				Percentage of Total Outstandings
Dollars in millions	March 31 2016		December 31 2015		March 31 2016			December 31 2015
Early stage loan delinquencies
Accruing loans past due 30 to 59 days	$	506	$	511		.24	%		.25	%
Accruing loans past due 60 to 89 days		209		248		.10	%		.12	%
Total		715		759		.34	%		.37	%
Late stage loan delinquencies
Accruing loans past due 90 days or more		782		881		.38	%		.43	%
Total	$	1,497	$	1,640		.72	%		.80	%

(a)	Amounts in table represent recorded investment.

(b)

Past due loan amounts at March 31, 2016 include government insured or guaranteed loans of $178 million, $108 million, and $676 million for accruing loans past due 30 to 59 days, past due 60 to 89 days, and past due 90 days or more, respectively. The comparative amounts as of December 31, 2015 were $172 million, $120 million, and $765 million, respectively.

Total early stage loan delinquencies (accruing loans past due 30 to 89 days) decreased $44 million, or 6%, at March 31, 2016 compared to December 31, 2015, driven by reductions in consumer early stage delinquencies.

Accruing loans past due 90 days or more decreased $99 million, or 11 %, at March 31, 2016 compared to December 31, 2015 due to declines in government insured consumer lending loans of $89 million. Accruing loans past due 90 days or more are referred to as late stage loan delinquencies. These loans are not included in nonperforming loans and continue to accrue interest because they are well secured by collateral and are in the process of collection, or are managed in homogenous portfolios with specified charge-off timeframes adhering to regulatory guidelines, or are certain government insured or guaranteed loans.

On a regular basis our Special Asset Committee closely monitors loans, primarily commercial loans, that are not included in the nonperforming or accruing past due categories and for which we are uncertain about the borrower’s ability to comply with existing repayment terms. These loans totaled $.3 billion and $.1 billion at March 31, 2016 and December 31, 2015, respectively.

See Note 1 Accounting Policies and Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information regarding our nonperforming loan and nonaccrual policies and further information on loan delinquencies.

Home Equity Loan Portfolio

Our home equity loan portfolio totaled $31.5 billion as of March 31, 2016, or 15% of the total loan portfolio. Of that total, $18.5 billion, or 59%, was outstanding under primarily variable-rate home equity lines of credit and $13.0 billion, or 41%, consisted of closed-end home equity installment loans. Approximately 4% of the home equity portfolio was purchased impaired and 3% of the home equity portfolio was on nonperforming status as of March 31, 2016.

As of March 31, 2016, we are in an originated first lien position for approximately 54% of the total outstanding portfolio and, where originated as a second lien, we currently hold or service the first lien position for an additional 2% of the portfolio. The remaining 44% of the portfolio was secured by second liens where we do not hold the first lien position. The credit performance of the majority of the home equity portfolio where we are in, hold or service the first lien position, is superior to the portion of the portfolio where we hold the second lien position but do not hold the first lien.

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