PNC Financial Services - 10-Q quarterly report FY2018 Q3

PNC Financial Services - 10-Q quarterly report FY2018 Q3

What is the market capitalization of a company?

DISCLAIMER

Contact

Links

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2018



☐	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)

(888) 762-2265

(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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of October 19, 2018, there were 461,424,528 shares of the registrant’s common stock ($5 par value) outstanding.

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Third Quarter 2018 Form 10-Q



	Pages
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Income Statement	40
Consolidated Statement of Comprehensive Income	41
Consolidated Balance Sheet	42
Consolidated Statement of Cash Flows	43
Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies	45
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities	48
Note 3 Asset Quality	50
Note 4 Allowance for Loan and Lease Losses	55
Note 5 Investment Securities	56
Note 6 Fair Value	59
Note 7 Goodwill and Mortgage Servicing Rights	68
Note 8 Employee Benefit Plans	70
Note 9 Financial Derivatives	71
Note 10 Earnings Per Share	76
Note 11 Total Equity and Other Comprehensive Income	77
Note 12 Legal Proceedings	79
Note 13 Commitments	81
Note 14 Segment Reporting	82
Note 15 Fee-based Revenue from Contracts with Customers	85
Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis	87
Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP)	89
Transitional Basel III and Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios (Non-GAAP)	89
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Financial Review	1
Consolidated Financial Highlights	1
Executive Summary	3
Consolidated Income Statement Review	5
Consolidated Balance Sheet Review	8
Business Segments Review	12
Risk Management	19
Recent Regulatory Developments	35
Critical Accounting Estimates and Judgments	36
Off-Balance Sheet Arrangements and Variable Interest Entities	38
Internal Controls and Disclosure Controls and Procedures	38
Glossary of Terms	38
Cautionary Statement Regarding Forward-Looking Information	38
Item 3. Quantitative and Qualitative Disclosures about Market Risk.	19-35, 59-68 and 71-76
Item 4. Controls and Procedures.	38
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.	89
Item 1A. Risk Factors.	89
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	90
Item 6. Exhibits.	90
Exhibit Index	90
Corporate Information	90
Signature	92

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Third Quarter 2018 Form 10-Q (continued)




MD&A TABLE REFERENCE
Table	Description	Page
1	Consolidated Financial Highlights	1
2	Summarized Average Balances and Net Interest Income	5
3	Noninterest Income	7
4	Noninterest Expense	8
5	Summarized Balance Sheet Data	8
6	Loans	9
7	Investment Securities	10
8	Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities	11
9	Details of Funding Sources	11
10	Retail Banking Table	12
11	Corporate & Institutional Banking Table	15
12	Asset Management Group Table	18
13	BlackRock Table	19
14	Details of Loans	20
15	Commercial Loans by Industry	20
16	Commercial Real Estate Loans by Geography	21
17	Home Equity Loans by Geography and by Lien Priority	22
18	Residential Real Estate Loans by Geography	22
19	Nonperforming Assets by Type	23
20	Change in Nonperforming Assets	24
21	Accruing Loans Past Due	24
22	Consumer Real Estate Related Loan Modifications	25
23	Summary of Troubled Debt Restructurings	25
24	Allowance for Loan and Lease Losses	27
25	Loan Charge-Offs and Recoveries	27
26	Senior and Subordinated Debt	28
27	PNC Bank Notes Issued	29
28	Credit Ratings for PNC and PNC Bank	30
29	Basel III Capital	31
30	Interest Sensitivity Analysis	33
31	Net Interest Income Sensitivity to Alternative Rate Scenarios	33
32	Alternate Interest Rate Scenarios: One Year Forward	34
33	Equity Investments Summary	34
34	Fair Value Measurements – Summary	36

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Third Quarter 2018 Form 10-Q (continued)




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE
Table	Description	Page
35	Cash Flows Associated with Loan Sale and Servicing Activities	48
36	Principal Balance, Delinquent Loans and Net Charge-offs Related to Serviced Loans For Others	49
37	Non-Consolidated VIEs	49
38	Analysis of Loan Portfolio	50
39	Nonperforming Assets	51
40	Commercial Lending Asset Quality Indicators	52
41	Asset Quality Indicators for Home Equity and Residential Real Estate Loans – Excluding Purchased Impaired and Government Insured or Guaranteed Loans	52
42	Credit Card and Other Consumer Loan Classes Asset Quality Indicators	53
43	Financial Impact and TDRs by Concession Type	54
44	Impaired Loans	55
45	Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data	55
46	Investment Securities Summary	56
47	Gross Unrealized Loss and Fair Value of Debt Securities	57
48	Gains (Losses) on Sales of Securities Available for Sale	58
49	Contractual Maturity of Debt Securities	58
50	Fair Value of Securities Pledged and Accepted as Collateral	58
51	Fair Value Measurements – Recurring Basis Summary	59
52	Reconciliation of Level 3 Assets and Liabilities	60
53	Fair Value Measurements – Recurring Quantitative Information	64
54	Fair Value Measurements – Nonrecurring	65
55	Fair Value Measurements – Nonrecurring Quantitative Information	66
56	Fair Value Option – Fair Value and Principal Balances	66
57	Fair Value Option – Changes in Fair Value	67
58	Additional Fair Value Information Related to Other Financial Instruments	67
59	Mortgage Servicing Rights	69
60	Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions	69
61	Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions	70
62	Components of Net Periodic Benefit Cost	70
63	Total Gross Derivatives	71
64	Gains (Losses) Recognized on Fair Value and Cash Flow Hedges in the Consolidated Income Statement	73
65	Hedged Items - Fair Value Hedges	73
66	Gains (Losses) on Derivatives Not Designated for Hedging under GAAP	74
67	Derivative Assets and Liabilities Offsetting	75
68	Basic and Diluted Earnings Per Common Share	76
69	Rollforward of Total Equity	77
70	Other Comprehensive Income (Loss)	78
71	Accumulated Other Comprehensive Income (Loss) Components	79
72	Commitments to Extend Credit and Other Commitments	81
73	Results of Businesses	84
74	Retail Banking Noninterest Income Disaggregation	85
75	Corporate & Institutional Banking Noninterest Income Disaggregation	86
76	Asset Management Group Noninterest Income Disaggregation	86

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 Quarterly Report on Form 10-Q (the Report or Form 10-Q) and with Items 6, 7, 8 and 9A of our 2017 Annual Report on Form 10-K (2017 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: the Risk Management section of this Financial Review and of Item 7 in our 2017 Form 10-K; Item 1A Risk Factors included in our 2017 Form 10-K; and the Legal Proceedings and Commitments Notes of the Notes To Consolidated Financial Statements included in Item 1 of this Report and Item 8 of our 2017 Form 10-K. 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 2017 Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this Report. See Note 14 Segment Reporting in the Notes To Consolidated Financial Statements included in this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a generally accepted accounting principles (GAAP) basis. In this Report, “PNC”, “we” or “us” refers to The PNC Financial Services Group, Inc. and its subsidiaries on a consolidated basis (except when referring to PNC as a public company, its common stock or other securities issued by PNC, which just refer to The PNC Financial Services Group, Inc.). References to The PNC Financial Services Group, Inc. or to any of its subsidiaries are specifically made where applicable.

Table 1: Consolidated Financial Highlights



Dollars in millions, except per share data Unaudited	Three months ended September 30						Nine months ended September 30
	2018			2017			2018			2017
Financial Results (a)
Revenue
Net interest income	$	2,466		$	2,345		$	7,240		$	6,763
Noninterest income	1,891			1,780			5,552			5,306
Total revenue	4,357			4,125			12,792			12,069
Provision for credit losses	88			130			260			316
Noninterest expense	2,608			2,456			7,719			7,337
Income before income taxes and noncontrolling interests	$	1,661		$	1,539		$	4,813		$	4,416
Net income	$	1,400		$	1,126		$	3,995		$	3,297
Less:
Net income attributable to noncontrolling interests	11			12			31			39
Preferred stock dividends	63			63			181			181
Preferred stock discount accretion and redemptions	1			1			3			24
Net income attributable to common shareholders	1,325			1,050			3,780			3,053
Less:
Dividends and undistributed earnings allocated to participating securities	6			5			16			15
Impact of BlackRock earnings per share dilution	2			3			7			8
Net income attributable to diluted common shares	$	1,317		$	1,042		$	3,757		$	3,030
Diluted earnings per common share	$	2.82		$	2.16		$	7.96		$	6.21
Cash dividends declared per common share	$	.95		$	.75		$	2.45		$	1.85
Effective tax rate (b)	15.7		%	26.8		%	17.0		%	25.3		%
Performance Ratios
Net interest margin (c)	2.99		%	2.91		%	2.95		%	2.84		%
Noninterest income to total revenue	43		%	43		%	43		%	44		%
Efficiency	60		%	60		%	60		%	61		%
Return on:
Average common shareholders’ equity	12.32		%	9.89		%	11.83		%	9.76		%
Average assets	1.47		%	1.20		%	1.42		%	1.19		%


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


(b)	The effective income tax rates are generally lower than the statutory rate due to the relationship of pretax income to tax credits and earnings that are not subject to tax. Amounts for the 2018 periods reflected the change in the statutory federal income tax rate from 35% to 21%, effective as of January 1, 2018, as a result of the new federal tax legislation.

(c)

Calculated as annualized taxable-equivalent net interest income divided by average interest-earning assets. To provide more meaningful comparisons of net interest margins, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP in the Consolidated Income Statement. For additional information, see Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP) in the Statistical Information (Unaudited) section in Item 1 of this Report.

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

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



Unaudited	September 30 2018			December 31 2017			September 30 2017
Balance Sheet Data (dollars in millions, except per share data)
Assets	$	380,080		$	380,768		$	375,191
Loans	$	223,053		$	220,458		$	221,109
Allowance for loan and lease losses	$	2,584		$	2,611		$	2,605
Interest-earning deposits with banks (b)	$	19,800		$	28,595		$	24,713
Investment securities	$	80,804		$	76,131		$	74,994
Loans held for sale	$	1,108		$	2,655		$	1,764
Equity investments (c)	$	12,446		$	11,392		$	11,009
Mortgage servicing rights	$	2,136		$	1,832		$	1,854
Goodwill	$	9,218		$	9,173		$	9,163
Other assets	$	28,851		$	27,894		$	28,454
Noninterest-bearing deposits	$	74,736		$	79,864		$	79,967
Interest-bearing deposits	$	190,148		$	185,189		$	180,768
Total deposits	$	264,884		$	265,053		$	260,735
Borrowed funds	$	57,955		$	59,088		$	57,564
Total shareholders’ equity	$	47,058		$	47,513		$	46,388
Common shareholders’ equity	$	43,076		$	43,530		$	42,406
Accumulated other comprehensive income (loss)	$	(1,260	)	$	(148	)	$	(22	)
Book value per common share	$	93.22		$	91.94		$	89.05
Period-end common shares outstanding (in millions)	462			473			476
Loans to deposits	84		%	83		%	85		%
Client Assets (in billions)
Discretionary client assets under management	$	159		$	151		$	146
Nondiscretionary client assets under administration	134			131			129
Total client assets under administration	293			282			275
Brokerage account client assets	51			49			48
Total client assets	$	344		$	331		$	323
Capital Ratios
Basel III (d) (e) (f)
Common equity Tier 1	9.3		%	N/A			N/A
Tier 1 risk-based	10.5		%	N/A			N/A
Total risk-based capital	12.7		%	N/A			N/A
Leverage	9.2		%	N/A			N/A
Supplementary leverage	7.7		%	N/A			N/A
Fully Phased-In Basel III (Non-GAAP) (f) (g)
Common equity Tier 1	N/A			9.8		%	9.8		%
2017 Transitional Basel III (d) (f)
Common equity Tier 1	N/A			10.4		%	10.3		%
Tier 1 risk-based	N/A			11.6		%	11.6		%
Total risk-based capital	N/A			13.7		%	13.7		%
Leverage	N/A			9.9		%	9.9		%
Common shareholders’ equity to total assets	11.3		%	11.4		%	11.3		%
Asset Quality
Nonperforming loans to total loans	.76		%	.85		%	.85		%
Nonperforming assets to total loans, OREO, foreclosed and other assets	.82		%	.92		%	.93		%
Nonperforming assets to total assets	.48		%	.53		%	.55		%
Net charge-offs to average loans (for the three months ended) (annualized)	.16		%	.22		%	.19		%
Allowance for loan and lease losses to total loans	1.16		%	1.18		%	1.18		%
Allowance for loan and lease losses to total nonperforming loans	153		%	140		%	139		%
Accruing loans past due 90 days or more (in millions)	$	619		$	737		$	678


(a)	The Executive Summary and Consolidated Balance Sheet Review portions of this Financial Review 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 $19.6 billion, $28.3 billion and $24.3 billion as of September 30, 2018, December 31, 2017 and September 30, 2017, respectively.

(c)

Amounts include our equity interest in BlackRock. On January 1, 2018, $.6 billion of trading and available for sale securities, primarily money market funds, were reclassified to Equity investments in accordance with the adoption of Accounting Standards Update (ASU) 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in our first quarter 2018 Quarterly Report on Form 10-Q (First Quarter 2018 Form 10-Q) for additional detail on this adoption.


(d)	All ratios are calculated using the regulatory capital methodology applicable to PNC during each period presented and calculated based on the standardized approach.


(e)	The 2018 Basel III ratios for Common equity Tier 1 capital, Tier 1 risk-based capital, Leverage and Supplementary leverage reflect the full phase-in of all Basel III adjustments to these metrics applicable to PNC. The 2018 Basel III Total risk-based capital ratio includes $80 million of nonqualifying trust preferred capital securities that are subject to a phase-out period that runs through 2021.

(f)

See Basel III Capital discussion in the Capital Management portion of the Risk Management section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business and Item 1A Risk Factors in our 2017 Form 10-K. See also the Transitional Basel III and Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios (Non-GAAP) table in the Statistical Information (Unaudited) section in Item 1 of this Report for a reconciliation of the September 30, 2017 ratios.


(g)	2017 Fully Phased-in Basel III results are presented as pro forma estimates.

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

EXECUTIVE SUMMARY

The PNC Financial Services Group, Inc. 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, including residential mortgage, corporate and institutional banking and asset management, providing many of our products and services nationally. Our primary geographic markets are located in the Mid-Atlantic, Midwest and Southeast. 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 revenue and improving profitability, while investing for the future and managing risk, expenses and capital. We continue to invest in our products, markets and brand, and embrace our commitments to our customers, shareholders, employees and the communities where we do business.

We strive to expand and deepen customer relationships by offering a broad range of deposit, credit and fee-based products and services. We are focused on delivering those products and services to our customers with the goal of addressing their financial objectives and putting customers’ needs first. Our business model is built on customer loyalty and engagement, understanding our customers’ financial goals and offering our diverse products and services to help them achieve financial well-being. Our approach is concentrated on organically growing and deepening client relationships across our businesses that meet our risk/return measures.

We are focused on our strategic priorities, which are designed to enhance value over the long term, and consist of:


•	Expanding our leading banking franchise to new markets and digital platforms;


•	Deepening customer relationships by delivering a superior banking experience and financial solutions; and


•	Leveraging technology to innovate and enhance products, services, security and processes.

Our capital priorities are to support client growth and business investment, maintain appropriate capital in light of economic conditions, the Basel III framework, and other regulatory expectations, and return excess capital to shareholders. For more detail, see the Capital Highlights portion of this Executive Summary and the Liquidity and Capital Management portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2017 Form 10-K.

Income Statement Highlights

Net income for the third quarter of 2018 increased 24% to $1.4 billion, or $2.82 per diluted common share, compared to $1.1 billion, or $2.16 per diluted common share, for the third quarter of 2017.


•	Total revenue increased $232 million, or 6%, to $4.4 billion.


•	Net interest income increased $121 million, or 5%, to $2.5 billion.


•	Net interest margin increased to 2.99% compared to 2.91% for the third quarter of 2017.


•	Noninterest income increased $111 million, or 6%, to $1.9 billion.


•	Provision for credit losses was $88 million compared to $130 million for the third quarter of 2017.


•	Noninterest expense increased $152 million, or 6%, to $2.6 billion.


•	Income tax expense decreased to $261 million compared to $413 million for the third quarter of 2017, as the effective tax rate was 15.7% in the third quarter of 2018 compared with 26.8% in third quarter 2017.


•	Federal tax reform legislation, the Tax Cuts and Jobs Act, lowered the statutory federal income tax rate for corporations to 21% from 35% effective January 1, 2018.

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

Balance Sheet Highlights

Our balance sheet was strong and well positioned at September 30, 2018 and December 31, 2017. In comparison to December 31, 2017:


•	Total assets declined $.7 billion to $380.1 billion.


•	Total loans increased $2.6 billion, or 1%, to $223.1 billion.


•	Total commercial lending grew $2.0 billion, or 1%.


•	Total consumer lending increased $.6 billion, or 1%.


•	Investment securities increased $4.7 billion, or 6%, to $80.8 billion.


•	Interest-earning deposits with banks decreased $8.8 billion, or 31%, to $19.8 billion.


•	Total deposits declined $.2 billion to $264.9 billion.

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

For additional detail, see the Consolidated Balance Sheet Review section of this Financial Review.

Credit Quality Highlights

Overall credit quality remained strong.


•	At September 30, 2018 compared to December 31, 2017:


•	Nonperforming assets decreased $210 million, or 10%, to $1.8 billion.


•	Overall loan delinquencies decreased $92 million, or 6%, to $1.4 billion.


•	Net charge-offs were $91 million in the third quarter of 2018 compared to $106 million for the third quarter of 2017.

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

Capital Highlights

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


•	The Basel III common equity Tier 1 capital ratio, which includes the full phase-in of all Basel III adjustments and became effective for PNC as of January 1, 2018, was 9.3% at September 30, 2018, compared with 9.8% at December 31, 2017, calculated on the same basis.


•	In the third quarter of 2018, we returned $.9 billion of capital to shareholders through repurchases of 3.3 million common shares for $.5 billion and dividends on common shares of $.4 billion.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for more detail on our 2018 liquidity and capital actions as well as our capital ratios.

Our ability to take certain capital actions, including plans to pay or increase common stock dividends or to repurchase shares under current or future programs, is subject to the results of the supervisory assessment of capital adequacy undertaken by the Board of Governors of the Federal Reserve System (Federal Reserve) as part of the Comprehensive Capital Analysis and Review (CCAR) process. For additional information, see the Supervision and Regulation section in Item 1 Business of our 2017 Form 10-K.

Business Outlook

Our forward-looking financial statements are based on our view that U.S. economic growth has accelerated over the past two years and will remain above its long-run trend for the remainder of 2018 and into 2019, in light of stimulus from corporate and personal income tax cuts passed in late 2017 that are expected to support business investment and consumer spending, respectively. We expect an increase in federal government spending will also support economic growth for the remainder of 2018 and into 2019. Further gradual improvement in the labor market this year and next, including job gains and rising wages, is another positive for consumer spending. Trade restrictions are a growing downside risk to the forecast. Inflation has accelerated to close to the Federal Open Market Committee’s 2% objective. Short-term interest rates and bond yields are expected to rise throughout the remainder of 2018 and into 2019; after the Federal Open Market Committee raised the federal funds rate in September, our baseline forecast is for one additional rate hike in December 2018, pushing the rate to a range of 2.25% to 2.50% by the end of the year. PNC expects two 25 basis point increases in the fed funds rate in 2019 (in June and September); this would take the fed funds rate to a range of 2.75% to 3.00% by the end of next year.

For the fourth quarter of 2018 compared to the third quarter of 2018, we expect:


•	Loans to be up modestly;


•	Net interest income to increase by low single digits, on a percentage basis;


•	Fee income to increase by low single digits, on a percentage basis. Fee income consists of asset management, consumer services, corporate services, residential mortgage and service charges on deposits;


•	Provision for credit losses to be between $100 million and $150 million; and


•	Noninterest expense to increase by low single digits, on a percentage basis.

We expect the quarterly run rate for other noninterest income to be in the range of $225 million to $275 million, excluding net securities gains (losses) and Visa activity.

We expect our full year 2018 effective tax rate to be approximately 17%.

See the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2017 Form 10-K for other factors that could cause future events to differ, perhaps materially, from those anticipated in these forward-looking statements.

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

CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for the third quarter of 2018 was $1.4 billion, or $2.82 per diluted common share, an increase of 24% compared to $1.1 billion, or $2.16 per diluted common share, for the third quarter of 2017. For the first nine months of 2018, net income was $4.0 billion, or $7.96 per diluted common share, an increase of 21% compared to $3.3 billion, or $6.21 per diluted common share, for the first nine months of 2017.

Net income increased in both comparisons driven by an increase in revenue from higher net interest income and noninterest income and a lower effective tax rate, partially offset by an increase in noninterest expense.

Net Interest Income

Table 2: Summarized Average Balances and Net Interest Income (a)



	2018							2017
Three months ended September 30 Dollars in millions	Average Balances		Average Yields/ Rates		Interest Income/ Expense			Average Balances		Average Yields/ Rates		Interest Income/ Expense
Assets
Interest-earning assets
Investment securities	$	80,766	2.92	%	$	591		$	74,406	2.77	%	$	516
Loans	223,342		4.36	%	2,474			219,218		3.92	%	2,179
Interest-earning deposits with banks	19,151		1.97	%	95			23,859		1.26	%	75
Other	7,114		5.19	%	92			9,024		3.47	%	80
Total interest-earning assets/interest income	$	330,373	3.89	%	3,252			$	326,507	3.45	%	2,850
Liabilities
Interest-bearing liabilities
Interest-bearing deposits	$	186,320	.71	%	336			$	180,508	.37	%	170
Borrowed funds	59,838		2.76	%	421			57,016		1.93	%	280
Total interest-bearing liabilities/interest expense	$	246,158	1.21	%	757			$	237,524	.75	%	450
Net interest margin/income (Non-GAAP)			2.99	%	2,495					2.91	%	2,400
Taxable-equivalent adjustments					(29		)					(55		)
Net interest income (GAAP)					$	2,466						$	2,345



	2018							2017
Nine months ended September 30 Dollars in millions	Average Balances		Average Yields/ Rates		Interest Income/ Expense			Average Balances		Average Yields/ Rates		Interest Income/ Expense
Assets
Interest-earning assets
Investment securities	$	77,656	2.87	%	$	1,674		$	75,330	2.71	%	$	1,535
Loans	222,385		4.23	%	7,091			215,974		3.81	%	6,197
Interest-earning deposits with banks	21,921		1.74	%	286			23,530		1.03	%	182
Other	7,305		4.74	%	259			9,058		3.46	%	236
Total interest-earning assets/interest income	$	329,267	3.75	%	9,310			$	323,892	3.34	%	8,150
Liabilities
Interest-bearing liabilities
Interest-bearing deposits	$	184,716	.59	%	810			$	178,810	.32	%	433
Borrowed funds	59,481		2.60	%	1,173			56,502		1.86	%	793
Total interest-bearing liabilities/interest expense	$	244,197	1.08	%	1,983			$	235,312	.69	%	1,226
Net interest margin/income (Non-GAAP)			2.95	%	7,327					2.84	%	6,924
Taxable-equivalent adjustments					(87		)					(161		)
Net interest income (GAAP)					$	7,240						$	6,763

(a)

Interest income calculated as taxable-equivalent interest income. To provide more meaningful comparisons of interest income and yields for all interest-earning assets, as well as net interest margins, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margins 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 GAAP on the Consolidated Income Statement. For more information, see Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP) in the Statistical Information (Unaudited) section of this Report.

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

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

Information (Unaudited) – Average Consolidated Balance Sheet And Net Interest Analysis section of this Report for additional information.

Net interest income increased by $121 million, or 5%, and $477 million, or 7%, for the third quarter and first nine months of 2018, respectively, compared to the same periods in 2017. The increase in both comparisons was driven by higher loan and securities balances and yields partially offset by increases in deposit and borrowing costs. Net interest margin increased in both comparisons reflecting the impact of higher interest rates.

Average investment securities increased $6.4 billion, or 9%, in the quarterly comparison and $2.3 billion, or 3%, in the year-to-date comparison. Net purchase activity of agency residential mortgage-backed and U.S. Treasury and government agencies securities was partially offset by declines in commercial mortgage-backed and other securities.

These comparisons included the impact of the January 1, 2018 reclassification of $.6 billion of available for sale securities to equity investments in accordance with the adoption of ASU 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in our First Quarter 2018 Form 10-Q for additional detail on this adoption.

Average investment securities increased to 24% of average interest-earning assets for the third quarter and first nine months of 2018 compared to 23% for the respective 2017 periods.

Average loans grew $4.1 billion, or 2%, and $6.4 billion, or 3%, in the quarterly and year-to-date comparisons, respectively. Loan growth was driven by increases in average commercial lending of $3.1 billion and $5.7 billion in the respective comparisons reflecting broad-based growth in the Corporate Banking, Business Credit and Equipment Finance businesses in our Corporate & Institutional Banking segment.

Average consumer lending increased $1.0 billion and $.7 billion in the quarterly and year-to-date comparisons, respectively. Growth in residential real estate, automobile and credit card loans was partially offset by declines in home equity and education loans. Lower home equity loans reflected paydowns and payoffs exceeding new originated volume. In addition, run-off in the non-strategic consumer loan portfolios of brokered home equity and government guaranteed education loans contributed to the declines. Average loans represented 68% of average interest-earning assets for the third quarter and first nine months of 2018 compared to 67% for the same periods of 2017.

Average interest-bearing deposits grew $5.8 billion, or 3%, and $5.9 billion, or 3%, in the respective quarterly and year-to-date comparisons, reflecting overall deposit and customer growth. Additionally, the increases reflect a shift from noninterest-bearing deposits, which declined $2.8 billion to $76.2 billion and $1.5 billion to $76.7 billion in the respective comparisons, to interest-bearing deposits as deposit rates have risen.

Average savings deposits increased $9.1 billion in both comparisons due in part to a shift to relationship-based savings products from money market deposits, which decreased $6.8 billion and $6.1 billion in the quarterly and year-to-date comparisons, respectively. Additionally, average interest-bearing demand deposits grew $3.4 billion in the quarterly comparison and $3.0 billion in the year-to-date comparison. Average interest-bearing deposits remained stable at 76% of average interest-bearing liabilities in both the quarterly and year-to-date comparisons.

Further details regarding average loans and deposits are included in the Business Segments Review section of this Financial Review.

Average borrowed funds increased $2.8 billion, or 5%, and $3.0 billion, or 5%, in the quarterly and year-to-date comparisons, respectively, primarily due to higher bank notes and senior debt and Federal Home Loan Bank borrowings, partially offset by a decline in subordinated debt. See the Consolidated Balance Sheet Review portion of this Financial Review for additional detail on the level and composition of borrowed funds.

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

Noninterest Income

Table 3: Noninterest Income



	Three months ended September 30									Nine months ended September 30
					Change									Change
Dollars in millions	2018		2017		$			%		2018		2017		$			%
Noninterest income
Asset management	$	486	$	421	$	65		15	%	$	1,397	$	1,222	$	175		14	%
Consumer services	377		357		20			6	%	1,115		1,049		66			6	%
Corporate services	465		404		61			15	%	1,381		1,284		97			8	%
Residential mortgage	76		104		(28		)	(27	)%	257		321		(64		)	(20	)%
Service charges on deposits	186		181		5			3	%	522		512		10			2	%
Other	301		313		(12		)	(4	)%	880		918		(38		)	(4	)%
Total noninterest income	$	1,891	$	1,780	$	111		6	%	$	5,552	$	5,306	$	246		5	%

Noninterest income as a percentage of total revenue was 43% for both of the third quarters in 2018 and 2017. The comparable ratios for the year-to-date periods were 43% and 44%, respectively.

Growth in asset management revenue reflected higher earnings from our equity investment in BlackRock which benefited from the lower federal statutory income tax rate as well as stronger equity markets. PNC's discretionary client assets under management increased to $159 billion at September 30, 2018 compared with $146 billion at September 30, 2017.

Increases in consumer services revenue in the quarterly and year-to-date comparisons were primarily due to growth in debit and credit card fees totaling $12 million and $42 million, respectively, reflecting continued momentum in customer activity in both transaction trends and customer growth. Brokerage fees increased in both comparisons by $10 million and $30 million, respectively, as a result of growth in brokerage assets under management.

Higher corporate services revenue in both comparisons was primarily driven by growth in merger and acquisition advisory fees of $35 million and $50 million and treasury management fees of $20 million and $54 million, in the respective comparisons. Additionally, the year-to-date comparison included a $12 million increase in operating lease income related to the commercial and vendor finance business acquired in the second quarter of 2017 and a $15 million lower benefit from commercial mortgage servicing rights valuation, net of economic hedge.

Residential mortgage revenue decreased due to loan sales revenue declines of $18 million and $46 million in the quarterly and year-to-date comparisons, as well as lower servicing revenue and a lower benefit from mortgage servicing rights valuation, net of economic hedge. The declines in loan sales revenue reflected lower gain on sales margins as a result of increased competition in the marketplace and a shift in mix away from refinancing to purchases.

The decline in other noninterest income in the year-to-date comparison was largely attributable to a $35 million decline in revenue from equity investments, which included the impact of first quarter 2017 positive valuation adjustments related to the Volcker Rule provisions of the Dodd-Frank Act, and net securities losses in the 2018 period compared with gains in the 2017 period, partially offset by a net $25 million benefit in the comparison from derivative fair value adjustments related to Visa Class B common shares.

In the first quarter of 2018, and in connection with the commercial and vendor finance business we acquired in the second quarter of 2017, we reclassified operating lease income to corporate services noninterest income from other noninterest income on the Consolidated Income Statement, including operating lease income of $34 million and $86 million for the three and nine months ended September 30, 2017, respectively. Operating lease income was $32 million and $98 million for the three and nine months ended September 30, 2018, respectively.

Provision For Credit Losses

The provision for credit losses decreased $42 million to $88 million in the third quarter of 2018 compared to the third quarter of 2017 and decreased $56 million to $260 million for the first nine months of 2018 compared to the same period in 2017 reflecting a lower provision for commercial loans, partially offset by a higher provision for consumer loans.

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.

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

Noninterest Expense

Table 4: Noninterest Expense



	Three months ended September 30									Nine months ended September 30
					Change									Change
Dollars in millions	2018		2017		$			%		2018		2017		$			%
Noninterest expense
Personnel	$	1,413	$	1,286	$	127		10	%	$	4,123	$	3,819	$	304		8	%
Occupancy	195		204		(9		)	(4	)%	616		628		(12		)	(2	)%
Equipment	264		259		5			2	%	818		791		27			3	%
Marketing	71		62		9			15	%	201		184		17			9	%
Other	665		645		20			3	%	1,961		1,915		46			2	%
Total noninterest expense	$	2,608	$	2,456	$	152		6	%	$	7,719	$	7,337	$	382		5	%

Noninterest expense increased in both comparisons attributable to our ongoing business investments, including technology and staffing. The increases in personnel expense included higher variable compensation related to revenue growth, our announced increase in the minimum hourly pay rate for eligible employees and enhanced employee benefits. Marketing expense was higher in support of business growth. In addition, the year-to-date comparison reflects operating expense related to the second quarter 2017 acquisition of a commercial and vendor finance business.

PNC continued to focus on disciplined expense management. As of September 30, 2018, we were on track to achieve our full-year 2018 goal of $250 million in cost savings through our continuous improvement program, which we expect will continue to help fund a portion of our strategic investments.

Effective Income Tax Rate

The effective income tax rate was 15.7% in the third quarter of 2018 compared to 26.8% in the third quarter of 2017 and 17.0% in the first nine months of 2018 compared to 25.3% in the same period of 2017. Both comparisons reflected the change in the statutory federal income tax rate from 35% to 21%, effective as of January 1, 2018, as a result of the new federal tax legislation.

CONSOLIDATED BALANCE SHEET REVIEW

Table 5: Summarized Balance Sheet Data



	September 30			December 31			Change
Dollars in millions	2018			2017			$			%
Assets
Interest-earning deposits with banks	$	19,800		$	28,595		$	(8,795	)	(31	)%
Loans held for sale	1,108			2,655			(1,547		)	(58	)%
Investment securities	80,804			76,131			4,673			6	%
Loans	223,053			220,458			2,595			1	%
Allowance for loan and lease losses	(2,584		)	(2,611		)	27			1	%
Mortgage servicing rights	2,136			1,832			304			17	%
Goodwill	9,218			9,173			45			—
Other, net	46,545			44,535			2,010			5	%
Total assets	$	380,080		$	380,768		$	(688	)	—
Liabilities
Deposits	$	264,884		$	265,053		$	(169	)	—
Borrowed funds	57,955			59,088			(1,133		)	(2	)%
Other	10,139			9,042			1,097			12	%
Total liabilities	332,978			333,183			(205		)	—
Equity
Total shareholders’ equity	47,058			47,513			(455		)	(1	)%
Noncontrolling interests	44			72			(28		)	(39	)%
Total equity	47,102			47,585			(483		)	(1	)%
Total liabilities and equity	$	380,080		$	380,768		$	(688	)	—

The summarized balance sheet data in Table 5 is based upon our Consolidated Balance Sheet in Part 1, Item 1 of this Report.

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

Our balance sheet was strong and well positioned at both September 30, 2018 and December 31, 2017.


•	Total assets were relatively stable as higher investment securities and loan growth were funded by lower interest-earning deposits with banks;


•	Total liabilities were stable, as lower borrowed funds were mostly offset by an increase in other liabilities;


•	Total equity decreased slightly as higher retained earnings driven by net income was more than offset by share repurchases and lower accumulated other comprehensive income (AOCI) related to net unrealized securities losses.

The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and regulatory compliance is included in the Liquidity and Capital Management portion of the Risk Management section in this Financial Review and in Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements included in our 2017 Form 10-K.

Loans

Table 6: Loans



	September 30		December 31		Change
Dollars in millions	2018		2017		$			%
Commercial lending
Commercial	$	113,671	$	110,527	$	3,144		3	%
Commercial real estate	28,563		28,978		(415		)	(1	)%
Equipment lease financing	7,214		7,934		(720		)	(9	)%
Total commercial lending	149,448		147,439		2,009			1	%
Consumer lending
Home equity	26,628		28,364		(1,736		)	(6	)%
Residential real estate	18,203		17,212		991			6	%
Credit card	5,979		5,699		280			5	%
Other consumer
Automobile	14,309		12,880		1,429			11	%
Education	3,954		4,454		(500		)	(11	)%
Other	4,532		4,410		122			3	%
Total consumer lending	73,605		73,019		586			1	%
Total loans	$	223,053	$	220,458	$	2,595		1	%

Commercial loans increased primarily driven by growth from our Business Credit and Corporate Banking businesses within our Corporate & Institutional Banking segment. In Business Credit, higher utilization and new production resulted in an increase in commercial loans of $1.4 billion, or 8%. In Corporate Banking, commercial loans increased $.7 billion, or 1%, largely due to strong growth in asset-backed finance securitizations, partially offset by lower public finance lending. In the third quarter of 2018, commercial loan growth was moderated by payoffs and paydowns and lower line of credit utilization.

For commercial loans by industry and commercial real estate loans by geography, see Loan Portfolio Characteristics and Analysis in the Credit Risk Management portion of the Risk Management section in this Financial Review.

Consumer lending balances increased as growth in automobile and residential real estate loans were partially offset by lower home equity and education loans.

The growth in automobile loans was due in part to continued expansion in the Southeast and new markets. Residential real estate loans increased as a result of originations of loans that are nonconforming, both nationwide and within our branch network. Nonconforming residential mortgage loans are loans that do not meet government agency standards, such as a maximum loan amount, property type or credit requirements, among other factors.

Home equity loans declined as paydowns and payoffs exceeded new originated volume. In addition, the declines in both home equity and education loans included the continued runoff in our non-strategic brokered home equity and government guaranteed education loan portfolios.

For information on home equity and residential real estate loans, including by geography, and automobile loans, see Loan Portfolio Characteristics and Analysis in the Credit Risk Management portion of the Risk Management section in this Financial Review.

See the Credit Risk Management portion of the Risk Management section of this Financial Review, Note 3 Asset Quality and Note 4 Allowance for Loan and Lease Losses in our Notes To Consolidated Financial Statements included in this Report, and Note 1 Accounting Policies in our 2017 Form 10-K for additional information regarding our loan portfolio.

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

Investment Securities

Table 7: Investment Securities



	September 30, 2018				December 31, 2017				Ratings (a) as of September 30, 2018
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	$	17,808	$	17,586	$	15,173	$	15,286	100	%
Agency residential mortgage-backed	44,656		43,297		40,037		39,847		100	%
Non-agency residential mortgage-backed	2,189		2,507		2,610		2,932		12	%			3	%	65	%	20	%
Agency commercial mortgage-backed	2,214		2,128		2,367		2,315		100	%
Non-agency commercial mortgage-backed (b)	3,063		3,040		3,141		3,161		86	%	6	%					8	%
Asset-backed (c)	5,732		5,779		5,531		5,598		86	%	3	%	4	%	7	%
Other debt (d)	5,838		5,895		6,279		6,459		74	%	16	%	7	%			3	%
Other (e)					587		585
Total investment securities (f)	$	81,500	$	80,232	$	75,725	$	76,183	94	%	2	%	1	%	2	%	1	%


(a)	Ratings percentages allocated based on amortized cost.


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


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


(d)	Includes state and municipal securities.


(e)	On January 1, 2018, $.6 billion of available for sale securities, primarily money market funds, were reclassified to equity investments in accordance with the adoption of ASU 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our First Quarter 2018 Form 10-Q for additional detail on this adoption.


(f)	Includes available for sale and held to maturity securities, which are recorded on our balance sheet at fair value and amortized cost, respectively.

Investment securities increased $4.7 billion to $80.8 billion at September 30, 2018 compared to December 31, 2017, driven by net purchase activity of agency residential mortgage-backed securities of $4.0 billion and U.S. Treasury and government agencies securities of $2.3 billion. These increases were partially offset by the reclassification of $.6 billion of available for sale securities, primarily money market funds, to equity investments as part of the adoption of ASU 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our First Quarter 2018 Form 10-Q for additional detail on the adoption of this ASU.

The level and composition of the investment securities portfolio fluctuates over time based on many factors including market conditions, loan and deposit growth, and balance sheet management activities. We manage our investment securities portfolio to optimize returns, while providing a reliable source of liquidity for our banking and other activities, considering the Liquidity Coverage Ratio (LCR) and other internal and external guidelines and constraints.

Table 7 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, which could affect our risk-weighted assets and, therefore, our risk-based regulatory capital ratios under the regulatory capital rules. 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.

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 other than temporary impairment (OTTI) credit losses that would impact our Consolidated Income Statement.

The duration of investment securities was 3.6 years at September 30, 2018. We estimate that at September 30, 2018 the effective duration of investment securities was 3.7 years for an immediate 50 basis points parallel increase in interest rates and 3.5 years for an immediate 50 basis points parallel decrease in interest rates.

Based on expected prepayment speeds, the weighted-average expected maturity of the investment securities portfolio (excluding other) was 5.6 years at September 30, 2018 compared to 5.2 years at December 31, 2017.

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

Table 8: Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities



September 30, 2018	Years
Agency residential mortgage-backed	6.8
Non-agency residential mortgage-backed	6.5
Agency commercial mortgage-backed	3.7
Non-agency commercial mortgage-backed	2.7
Asset-backed	2.3

Additional information regarding our investment securities is included in Note 5 Investment Securities and Note 6 Fair Value in the Notes To Consolidated Financial Statements included in this Report.

Funding Sources

Table 9: Details of Funding Sources



	September 30		December 31		Change
Dollars in millions	2018		2017		$			%
Deposits
Noninterest-bearing	$	74,736	$	79,864	$	(5,128	)	(6	)%
Interest-bearing
Money market	55,662		59,735		(4,073		)	(7	)%
Demand	62,354		61,213		1,141			2	%
Savings	53,678		46,980		6,698			14	%
Time deposits	18,454		17,261		1,193			7	%
Total interest-bearing deposits	190,148		185,189		4,959			3	%
Total deposits	264,884		265,053		(169		)	—
Borrowed funds
Federal Home Loan Bank (FHLB) borrowings	20,036		21,037		(1,001		)	(5	)%
Bank notes and senior debt	26,676		28,062		(1,386		)	(5	)%
Subordinated debt	5,764		5,200		564			11	%
Other	5,479		4,789		690			14	%
Total borrowed funds	57,955		59,088		(1,133		)	(2	)%
Total funding sources	$	322,839	$	324,141	$	(1,302	)	—

Total deposits declined slightly in the comparison as growth in interest-bearing deposits was more than offset by a decrease in noninterest-bearing deposits. Noninterest-bearing deposits decreased mainly due to the impact of rising interest rates, reflecting a shift of primarily commercial noninterest-bearing deposits to interest-bearing. The increase in interest-bearing deposits also was driven by growth in savings deposits reflecting, in part, a shift from consumer money market to relationship-based savings products.

Borrowed funds decreased in the comparison as declines in bank notes and senior debt and FHLB borrowings were partially offset by increases in repurchase agreements and subordinated debt. The level and composition of borrowed funds fluctuates over time based on many factors including market conditions, loan, investment securities and deposit growth, and capital considerations. We manage our borrowed funds to provide a reliable source of liquidity for our banking and other activities, considering our LCR and other internal and external guidelines and constraints.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for additional information regarding our 2018 liquidity and capital activities.

Shareholders’ Equity

Total shareholders’ equity was $47.1 billion at September 30, 2018, a decrease of $.5 billion compared to December 31, 2017. The decrease resulted from common share repurchases of $2.0 billion, common and preferred dividends of $1.3 billion and lower AOCI related to net unrealized securities losses of $1.1 billion, partially offset by net income of $4.0 billion.

Common shares outstanding were 462 million and 473 million at September 30, 2018 and December 31, 2017, respectively, as repurchases of 13.8 million shares during the period were partially offset by stock-based compensation activity and share issuances from treasury stock related to warrants exercised.

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

BUSINESS SEGMENTS REVIEW

We have four reportable business segments:


•	Retail Banking


•	Corporate & Institutional Banking


•	Asset Management Group


•	BlackRock

Business segment results and a description of each business are included in Note 14 Segment Reporting included in the Notes To Consolidated Financial Statements in this Report. Certain amounts included in this Business Segments Review differ from those amounts shown in Note 14, primarily due to the presentation in this Financial Review of business net interest income on a taxable-equivalent basis.

Net interest income in business segment results reflects our 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.

Retail Banking

(Unaudited)

Table 10: Retail Banking Table



Nine months ended September 30							Change
Dollars in millions, except as noted	2018			2017			$			%
Income Statement
Net interest income	$	3,800		$	3,436		$	364		11	%
Noninterest income	1,935			1,891			44			2	%
Total revenue	5,735			5,327			408			8	%
Provision for credit losses	254			198			56			28	%
Noninterest expense	4,287			4,060			227			6	%
Pretax earnings	1,194			1,069			125			12	%
Income taxes	285			394			(109		)	(28	)%
Earnings	$	909		$	675		$	234		35	%
Average Balance Sheet
Loans held for sale	$	662		$	791		$	(129	)	(16	)%
Loans
Consumer
Home equity	$	24,188		$	25,394		$	(1,206	)	(5	)%
Automobile	13,643			12,285			1,358			11	%
Education	4,208			4,921			(713		)	(14	)%
Credit cards	5,746			5,180			566			11	%
Other	1,794			1,767			27			2	%
Total consumer	49,579			49,547			32			—
Commercial and commercial real estate	10,397			10,852			(455		)	(4	)%
Residential mortgage	13,767			11,999			1,768			15	%
Total loans	$	73,743		$	72,398		$	1,345		2	%
Total assets	$	89,259		$	88,589		$	670		1	%
Deposits
Noninterest-bearing demand	$	30,555		$	29,600		$	955		3	%
Interest-bearing demand	42,172			40,959			1,213			3	%
Money market	30,656			37,492			(6,836		)	(18	)%
Savings	46,091			37,881			8,210			22	%
Certificates of deposit	11,957			13,331			(1,374		)	(10	)%
Total deposits	$	161,431		$	159,263		$	2,168		1	%
Performance Ratios
Return on average assets	1.36		%	1.02		%
Noninterest income to total revenue	34		%	35		%
Efficiency	75		%	76		%

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



Nine months ended September 30							Change
Dollars in millions, except as noted	2018			2017			$			%
Supplemental Noninterest Income Information
Consumer services	$	837		$	800		$	37		5	%
Brokerage	$	260		$	231		$	29		13	%
Residential mortgage	$	257		$	321		$	(64	)	(20	)%
Service charges on deposits	$	503		$	491		$	12		2	%
Residential Mortgage Information
Residential mortgage servicing statistics (in billions, except as noted) (a)
Serviced portfolio balance (b)	$	127		$	129		$	(2	)	(2	)%
Serviced portfolio acquisitions	$	10		$	18		$	(8	)	(44	)%
MSR asset value (b)	$	1.4		$	1.2		$	.2		17	%
MSR capitalization value (in basis points) (b)	108			95			13			14	%
Servicing income: (in millions)
Servicing fees, net (c)	$	132		$	142		$	(10	)	(7	)%
Mortgage servicing rights valuation, net of economic hedge	$	22		$	30		$	(8	)	(27	)%
Residential mortgage loan statistics
Loan origination volume (in billions)	$	5.8		$	6.6		$	(.8	)	(12	)%
Loan sale margin percentage	2.39		%	2.83		%
Percentage of originations represented by:
Purchase volume (d)	67		%	54		%
Refinance volume	33		%	46		%
Other Information (b)
Customer-related statistics (average)
Non-teller deposit transactions (e)	54		%	53		%
Digital consumer customers (f)	65		%	61		%
Credit-related statistics
Nonperforming assets (g)	$	1,145		$	1,126		$	19		2	%
Net charge-offs	$	308		$	272		$	36		13	%
Other statistics
ATMs	9,093			8,987			106			1	%
Branches (h)	2,388			2,474			(86		)	(3	)%
Brokerage account client assets (in billions) (i)	$	51		$	48		$	3		6	%


(a)	Represents mortgage loan servicing balances for third parties and the related income.


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


(c)	Servicing fees net of impact of decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan prepayments and loans that were paid down or paid off during the period.


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


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


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


(g)	Includes nonperforming loans of $1.1 billion at both September 30, 2018 and September 30, 2017.


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


(i)	Includes cash and money market balances.

Retail Banking earned $909 million in the first nine months of 2018 compared with $675 million for the same period in 2017. The increase in earnings was driven by higher net interest income and noninterest income, partially offset by increases in noninterest expense and provision for credit losses. Earnings in 2018 also benefited from the lower statutory federal income tax rate.

Net interest income increased primarily due to wider interest rate spreads on the value of deposits.

The increase in noninterest income was driven by growth in consumer service fees, including higher debit and credit card fees, as well as higher brokerage fees and service charges on deposits. In addition, the increase reflected a net $25 million benefit in the comparison from derivative fair value adjustments related to Visa Class B common shares. These increases were partially offset by lower residential mortgage noninterest income, reflecting a decline in loan sales revenue, as well as lower servicing revenue and a lower benefit from mortgage servicing rights valuation, net of economic hedge. The decline in loan sales revenue reflected lower gain on sales margins, as a result of increased competition in the marketplace and a shift in mix away from refinancing to purchases.

Provision for credit losses increased in the comparison primarily due to credit card loan portfolio growth.

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

Higher noninterest expense primarily resulted from an increase in personnel expense, continued investments in technology, risk and compliance expense, and marketing activity.

Retail Banking continues to enhance the customer experience with refinements to product and service offerings that drive value for consumers and small businesses. We are focused on meeting the financial needs of our customers by providing a broad range of liquidity, banking and investment products.

The deposit strategy of Retail Banking is to remain disciplined on pricing and focused on growing and retaining relationship-based balances, executing on market-specific deposit growth strategies and providing a source of low-cost funding and liquidity to PNC. During the first nine months of 2018, average total deposits increased compared to the same period a year ago, as both interest-bearing and noninterest-bearing demand deposits increased. Savings deposits grew, reflecting, in part, a shift from money market deposits to relationship-based savings products. Certificates of deposit declined due to the net runoff of maturing accounts.

Retail Banking average total loans increased in the first nine months of 2018 compared with the same period in 2017.


•	Average residential mortgages increased as a result of growth in nonconforming residential mortgage loans, both nationwide and within our branch network.


•	Average automobile loans, which consisted of both direct and indirect auto loans, increased primarily due to strong new loan volumes, including in our Southeast and new markets.


•	Average credit card balances increased as we continued to focus on our long-term objective of deepening penetration within our existing customer base.


•	Average home equity loans decreased as paydowns and payoffs on loans exceeded new originated volume.


•	Average education loans decreased driven by a decline in the runoff portfolio of government guaranteed education loans.


•	Average commercial and commercial real estate loans declined as paydowns and payoffs on loans exceeded new volume.

Retail Banking continued to focus on its strategy of transforming the customer experience through transaction migration, branch network and home lending transformations and multi-channel engagement and service strategies.


•	Approximately 65% of consumer customers used non-teller channels for the majority of their transactions in the first nine months of 2018 compared with 61% in the first nine months of 2017.


•	Deposit transactions via ATM and mobile channels increased to 54% of total deposit transactions versus 53% in the comparison.


•	Instant debit card issuance, which enables us to print a customer’s debit card in minutes, was available in 92% of our branch network as of September 30, 2018.

Retail Banking continued to make progress on its multi-year initiative to redesign the home lending process by integrating mortgage and home equity lending into a common platform to enhance product capability and improve speed of delivery and convenience. We implemented a new mortgage origination system in 2017 and converted home equity loans to the new servicing platform in the first quarter of 2018. Both residential mortgage and home equity loans are now serviced on a single platform.

In the third quarter of 2018, Retail Banking launched its national retail digital strategy in select markets where it does not have existing branches, leading with a high yield savings offer to be supported by an ultra-thin retail network. With an initial focus on certain markets where PNC's Corporate & Institutional Banking has expanded its middle market banking business, PNC opened a retail location in Kansas City in October 2018.

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

Corporate & Institutional Banking

(Unaudited)

Table 11: Corporate & Institutional Banking Table



Nine months ended September 30							Change
Dollars in millions	2018			2017			$			%
Income Statement
Net interest income	$	2,707		$	2,653		$	54		2	%
Noninterest income	1,774			1,667			107			6	%
Total revenue	4,481			4,320			161			4	%
Provision for credit losses	43			174			(131		)	(75	)%
Noninterest expense	1,934			1,785			149			8	%
Pretax earnings	2,504			2,361			143			6	%
Income taxes	580			834			(254		)	(30	)%
Earnings	$	1,924		$	1,527		$	397		26	%
Average Balance Sheet
Loans held for sale	$	763		$	916		$	(153	)	(17	)%
Loans
Commercial	$	102,342		$	95,660		$	6,682		7	%
Commercial real estate	26,699			27,410			(711		)	(3	)%
Equipment lease financing	7,512			7,602			(90		)	(1	)%
Total commercial lending	136,553			130,672			5,881			5	%
Consumer	49			276			(227		)	(82	)%
Total loans	$	136,602		$	130,948		$	5,654		4	%
Total assets	$	153,149		$	147,299		$	5,850		4	%
Deposits
Noninterest-bearing demand	$	44,577		$	46,976		$	(2,399	)	(5	)%
Money market	23,511			21,949			1,562			7	%
Other	19,182			16,100			3,082			19	%
Total deposits	$	87,270		$	85,025		$	2,245		3	%
Performance Ratios
Return on average assets	1.68		%	1.39		%
Noninterest income to total revenue	40		%	39		%
Efficiency	43		%	41		%
Other Information
Consolidated revenue from: (a)
Treasury Management (b)	$	1,318		$	1,115		$	203		18	%
Capital Markets (b)	$	816		$	746		$	70		9	%
Commercial mortgage banking activities
Commercial mortgage loans held for sale (c)	$	78		$	73		$	5		7	%
Commercial mortgage loan servicing income (d)	179			169			10			6	%
Commercial mortgage servicing rights valuation, net of economic hedge (e)	26			41			(15		)	(37	)%
Total	$	283		$	283		$	—		—
MSR asset value (f)	$	766		$	628		$	138		22	%
Average Loans by C&IB business
Corporate Banking	$	58,322		$	55,242		$	3,080		6	%
Real Estate	37,379			37,995			(616		)	(2	)%
Business Credit	17,234			15,531			1,703			11	%
Equipment Finance	14,414			13,239			1,175			9	%
Commercial Banking	7,032			7,052			(20		)	—
Other	2,221			1,889			332			18	%
Total average loans	$	136,602		$	130,948		$	5,654		4	%
Credit-related statistics
Nonperforming assets (f) (g)	$	355		$	549		$	(194	)	(35	)%
Net charge-offs	$	8		$	64		$	(56	)	(88	)%

(continued on following page)

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

(continued from previous page)


(a)	Represents consolidated 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 this Corporate & Institutional Banking section.


(b)	Includes amounts reported in net interest income and noninterest income.


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


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


(e)	Amounts are reported in corporate service fees.


(f)	As of September 30.


(g)	Includes nonperforming loans of $.3 billion at September 30, 2018 and $.4 billion at September 30, 2017.

Corporate & Institutional Banking earned $1.9 billion in the first nine months of 2018 compared to $1.5 billion for the same period in 2017. The increase was primarily due to the impact of the lower statutory federal income tax rate, higher revenue and a decrease in the provision for credit losses, partially offset by higher noninterest expense. We continue to focus on building client relationships where the risk-return profile is attractive.

Net interest income increased in the comparison, reflecting higher average loan and deposit balances, as well as wider interest rate spreads on the value of deposits, partially offset by narrower interest rate spreads on the value of loans.

Growth in noninterest income in the comparison was primarily driven by higher capital markets-related revenue, including higher merger and acquisition advisory fees and revenue from customer-related derivative and foreign exchange services, as well as higher treasury management fees, partially offset by a lower benefit from commercial mortgage servicing rights valuation, net of economic hedge. In addition, operating lease income increased, mainly due to the commercial and vendor finance business acquired in the second quarter of 2017.

Overall, credit quality remained strong, as nonperforming assets and net charge-offs declined in the comparison. The decrease in provision for credit losses in the comparison reflected improved credit quality. Additionally, the prior year period included an initial provision for the loan and lease portfolio obtained through the business acquired in the second quarter of 2017.

Noninterest expense increased in the comparison largely due to investments in strategic initiatives and variable costs associated with increased business activity.

Average loans increased in the comparison mostly due to strong growth in the Corporate Banking, Business Credit and Equipment Finance businesses:

•

Corporate Banking provides lending, treasury management and capital markets-related products and services to mid-sized and large corporations, and government and not-for-profit entities. Average loans for this business grew in the comparison reflecting increased lending to large and mid-sized corporate clients as well as strong production in asset-backed financing, partially offset by lower public finance lending.


•	PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. Average loans for this business decreased primarily driven by project loan payoffs and lower utilization.


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


•	PNC Equipment Finance provides equipment financing solutions for clients throughout the U.S. and Canada. Average loans, including commercial loans and finance leases, and operating leases were $15.4 billion in the first nine months of 2018, an increase of $1.3 billion in the year over year comparison due to strong new production and the impact of the acquired business.


•	Commercial Banking provides lending, treasury management and capital markets-related products and services to smaller corporations and businesses. Average loans for this business were relatively unchanged.

The deposit strategy of Corporate & Institutional Banking is to remain disciplined on pricing and focused on growing and retaining relationship-based balances over time, executing on customer and segment-specific deposit growth strategies and continuing to provide funding and liquidity to PNC. Average total deposits increased in the comparison driven by growth in interest-bearing deposits reflecting, in part, a shift from noninterest-bearing deposits in the rising rate environment. We continue to monitor and balance the relationship between increases to rates paid and the overall profitability of our deposit balances.

Corporate & Institutional Banking is expanding its Corporate Banking business, focused on the middle market and larger sectors, into the Denver, Houston and Nashville markets in 2018, and the Boston and Phoenix markets in 2019. This follows offices opened in 2017 in Dallas, Kansas City and Minneapolis. These locations complement Corporate & Institutional Banking national businesses with a significant presence in these cities, and build on past successes in the markets where PNC’s retail banking presence was limited, such as in the Southeast. We plan to offer our full suite of products and services.

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

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 11 includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.

Treasury management revenue comprises fees from products and services and net interest income from customer deposit balances. Compared with the first nine months of 2017, treasury management revenue increased due to liquidity-related revenue associated with customer deposit balances, including interest rate spread expansion, and higher fee income.

Capital markets-related products and services include foreign exchange, derivatives, securities underwriting, loan syndications, mergers and acquisitions advisory and equity capital markets advisory related services. The increase in revenue in the comparison was broad based across most products and services and included higher merger and acquisition advisory, foreign exchange, derivative and equity capital markets advisory related services, partially offset by lower revenue from credit valuations on customer-related derivative activities.

Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (including net interest income and noninterest income) and revenue derived from commercial mortgage loans held for sale and related hedges. Total revenue from commercial mortgage banking activities was stable in the comparison as higher revenue from commercial mortgage loan servicing and commercial mortgage loans held for sale was offset by a lower benefit from commercial mortgage servicing rights valuation, net of economic hedge.

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

Asset Management Group

(Unaudited)

Table 12: Asset Management Group Table



Nine months ended September 30							Change
Dollars in millions, except as noted	2018			2017			$			%
Income Statement
Net interest income	$	217		$	216		$	1		—
Noninterest income	676			655			21			3	%
Total revenue	893			871			22			3	%
Provision for credit losses (benefit)	2			(6		)	8			*
Noninterest expense	658			646			12			2	%
Pretax earnings	233			231			2			1	%
Income taxes	55			85			(30		)	(35	)%
Earnings	$	178		$	146		$	32		22	%
Average Balance Sheet
Loans
Consumer	$	4,702		$	5,059		$	(357	)	(7	)%
Commercial and commercial real estate	734			705			29			4	%
Residential mortgage	1,561			1,257			304			24	%
Total loans	$	6,997		$	7,021		$	(24	)	—
Total assets	$	7,455		$	7,499		$	(44	)	(1	)%
Deposits
Noninterest-bearing demand	$	1,455		$	1,501		$	(46	)	(3	)%
Interest-bearing demand	3,413			3,666			(253		)	(7	)%
Money market	2,339			3,257			(918		)	(28	)%
Savings	4,754			3,834			920			24	%
Other	408			237			171			72	%
Total deposits	$	12,369		$	12,495		$	(126	)	(1	)%
Performance Ratios
Return on average assets	3.19		%	2.60		%
Noninterest income to total revenue	76		%	75		%
Efficiency	74		%	74		%
Supplemental Noninterest Income Information
Asset management fees	$	669		$	644		$	25		4	%
Other Information
Nonperforming assets (a) (b)	$	51		$	45		$	6		13	%
Net charge-offs	$	8		$	5		$	3		60	%
Client Assets Under Administration (in billions) (a) (c)
Discretionary client assets under management	$	159		$	146		$	13		9	%
Nondiscretionary client assets under administration	134			129			5			4	%
Total	$	293		$	275		$	18		7	%
Discretionary client assets under management
Personal	$	97		$	90		$	7		8	%
Institutional	62			56			6			11	%
Total	$	159		$	146		$	13		9	%

* - Not meaningful


(a)	As of September 30.


(b)	Includes nonperforming loans of $48 million at September 30, 2018 and $41 million at September 30, 2017.


(c)	Excludes brokerage account client assets.

Asset Management Group earned $178 million in the first nine months of 2018 compared to $146 million for the same period in 2017. Higher earnings reflected the lower statutory federal income tax rate and higher revenue, partially offset by an increase in noninterest expense and the impact of a benefit from the provision for credit losses in the prior year period.

Higher revenue in the comparison was driven by growth in asset management fees, reflecting stronger average equity markets.

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

Noninterest expense increased in the comparison and was primarily attributable to higher legal reserves, continued investments in technology and higher compensation.

Asset Management Group’s discretionary client assets under management increased in the comparison to the prior year, primarily attributable to higher equity markets as of September 30, 2018.

The Asset Management Group strives to be the leading relationship-based provider of investment, planning, banking and fiduciary services to wealthy individuals and institutions by proactively delivering value-added ideas and solutions and exceptional service.

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

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

BlackRock

(Unaudited)

We hold an equity investment in BlackRock, a leading publicly-traded investment management firm. Information related to our equity investment in BlackRock follows:

Table 13: BlackRock Table



Nine months ended September 30
Dollars in millions	2018			2017
Business segment earnings (a)	$	608		$	446
PNC’s economic interest in BlackRock (b)	22		%	22		%


(a)	Includes our share of BlackRock’s reported GAAP earnings net of income taxes on those earnings incurred by us.


(b)	At September 30.



In billions	September 30 2018		December 31 2017
Carrying value of our investment in BlackRock (c)	$	8.0	$	7.7
Market value of our investment in BlackRock (d)	$	16.4	$	17.9


(c)	We account for our investment in BlackRock under the equity method of accounting, exclusive of a related deferred tax liability of $1.7 billion at September 30, 2018 and $1.6 billion at December 31, 2017. Our voting interest in BlackRock common stock was approximately 21% at September 30, 2018.


(d)	Does not include liquidity discount.

Earnings for our BlackRock segment increased compared with the first nine months of 2017, and included the impact of the lower statutory federal income tax rate.

In addition to our investment in BlackRock reflected in Table 13, at September 30, 2018, we held 143,458 shares of BlackRock Series C Preferred Stock valued at $54 million, which are available to fund our obligation in connection with certain BlackRock long-term incentive plan (LTIP) programs.

Our 2017 Form 10-K and our First Quarter 2018 Form 10-Q included additional information about our investment in BlackRock.

RISK MANAGEMENT

The Risk Management section included in Item 7 of our 2017 Form 10-K describes our enterprise risk management framework including risk culture, enterprise strategy, risk governance and framework, risk identification, risk assessment, risk controls and monitoring, and risk aggregation and reporting. Additionally, our 2017 Form 10-K provides an analysis of our key areas of risk, which include but are not limited to credit, liquidity and capital, market, operational and compliance. 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 2017 Form 10-K risk management disclosures.

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

Credit Risk Management

See the Credit Risk Management portion of the Risk Management section in our 2017 Form 10-K for additional discussion regarding credit risk.

Loan Portfolio Characteristics and Analysis

Table 14: Details of Loans

In billions

We use several asset quality indicators, as further detailed in Note 3 Asset Quality, to monitor and measure our exposure to credit risk within our loan portfolio. The following provides additional information about our significant loan classes.

Commercial

Commercial loans comprised 51% and 50% of our total loan portfolio at September 30, 2018 and December 31, 2017, respectively. Most of our commercial loans are secured by collateral that provides a secondary source of repayment for the loan should the borrower experience cash generation difficulties. Examples of this collateral include short-term assets, such as accounts receivable, inventory and securities, and long-lived assets, such as equipment, real estate and other business assets.

We actively manage our commercial loans to assess any changes (both positive and negative) in the level of credit risk at both the borrower and portfolio level. To evaluate the level of credit risk, we assign an internal risk rating reflecting the borrower’s probability of default (PD) and loss given default (LGD). This two-dimensional credit risk rating methodology provides granularity in the risk monitoring process and is updated on an ongoing basis through our credit risk management processes. In addition to continual monitoring of the level of credit risk, we also monitor concentrations of credit risk pertaining to both specific industries and geography that may exist in our portfolio. Our portfolio remains stable and well-diversified as shown in the following table which provides a breakout of our commercial loans by industry classification (classified based on the North American Industry Classification System (NAICS)).

Table 15: Commercial Loans by Industry



	September 30, 2018				December 31, 2017
Dollars in millions	Amount		% of Total		Amount		% of Total
Commercial
Manufacturing	$	21,272	19	%	$	20,578	19	%
Retail/wholesale trade	19,689		17		17,846		16
Service providers	14,386		13		15,100		14
Real estate related (a)	12,539		11		12,496		11
Health care	9,217		8		9,739		9
Financial services	9,441		8		8,532		8
Transportation and warehousing	5,715		5		5,609		5
Other industries	21,412		19		20,627		18
Total commercial loans	$	113,671	100	%	$	110,527	100	%

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

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

Commercial Real Estate

Commercial real estate loans comprised $14.5 billion of real estate project loans and $14.1 billion related to commercial mortgages as of September 30, 2018. Comparable amounts were $15.3 billion and $13.7 billion, respectively, as of December 31, 2017. Commercial real estate loan growth remains challenged as market pricing and structure is, at times, outside of our risk tolerance, and payoffs and maturities continue at a steady pace.

We monitor credit risk associated with our commercial real estate projects and commercial mortgages similar to commercial loans by analyzing PD and LGD. Additionally, risks associated with types of credit activities tend to be correlated to the loan structure, collateral location, project progress and business environment. These attributes are also monitored and utilized in assessing credit risk. The portfolio is geographically diverse due to the nature of our business involving clients throughout the U.S. The following table presents our commercial real estate loans by geographic market.

Table 16: Commercial Real Estate Loans by Geography



	September 30, 2018				December 31, 2017
Dollars in millions	Amount		% of Total		Amount		% of Total
Geography
California	$	4,237	15	%	$	4,192	14	%
Florida	2,262		8		2,221		8
Maryland	2,069		7		2,104		7
Virginia	1,687		6		1,609		5
Texas	1,634		6		1,639		6
Illinois	1,269		4		1,325		5
Pennsylvania	1,221		4		1,394		5
New York	1,136		4		1,163		4
Ohio	1,021		4		1,134		4
North Carolina	955		3		943		3
New Jersey	915		3		964		3
All other states	10,157		36		10,290		36
Total commercial real estate loans	$	28,563	100	%	$	28,978	100	%

Home Equity

Home equity loans comprised $15.8 billion of primarily variable-rate home equity lines of credit and $10.8 billion of closed-end home equity installment loans at September 30, 2018. Comparable amounts were $16.8 billion and $11.6 billion, respectively, as of December 31, 2017.

We track borrower performance monthly, including obtaining original loan-to-value ratios (LTV), updated FICO scores at least quarterly, updated LTVs at least semi-annually, and other credit metrics at least quarterly, including the historical performance of any related mortgage loans regardless of lien position that we do or do not hold. This information is used for internal reporting and risk management. For internal reporting and risk management, we also segment the population into pools based on product type (e.g., home equity loans, brokered home equity loans, home equity lines of credit, brokered home equity lines of credit). As part of our overall risk analysis and monitoring, we also segment the portfolio based upon the loan delinquency, nonperforming status, modification and bankruptcy status, FICO scores, LTV, lien position and geographic concentration.

The portfolio is primarily originated within our primary geographic markets, with only 5% of the portfolio in states outside of those markets at both September 30, 2018 and December 31, 2017. The credit quality of newly originated loans over the last twelve months was strong overall as evidenced by a weighted-average LTV on originations of 67% and a weighted-average FICO score of 774.

The credit performance of the majority of the home equity portfolio where we hold 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. Lien position information is generally based upon original LTV at the time of origination. We use a third-party service provider to obtain updated loan, lien and collateral data that is aggregated from public and private sources.

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

The following table presents our home equity loans by geographic market and lien type.

Table 17: Home Equity Loans by Geography and by Lien Priority



	September 30, 2018				December 31, 2017
Dollars in millions	Amount		% of Total		Amount		% of Total
Geography
Pennsylvania	$	6,303	24	%	$	6,792	24	%
New Jersey	4,017		15		4,252		15
Ohio	3,161		12		3,413		12
Illinois	1,678		6		1,801		6
Maryland	1,498		6		1,572		6
Michigan	1,372		5		1,442		5
Florida	1,223		5		1,255		4
North Carolina	1,184		4		1,266		5
Kentucky	1,063		4		1,138		4
Indiana	860		3		924		3
All other states	4,269		16		4,509		16
Total home equity loans	$	26,628	100	%	$	28,364	100	%
Lien type
1st lien			58	%			58	%
2nd lien			42				42
Total			100	%			100	%

Residential Real Estate

Residential real estate loans primarily consisted of residential mortgage loans at both September 30, 2018 and December 31, 2017.

We track borrower performance of this portfolio monthly similar to home equity loans. This information is used for internal reporting and risk management. For internal reporting and risk management, we also segment the mortgage portfolio into pools based on product type (e.g., nonconforming, conforming, etc.). As part of our overall risk analysis and monitoring, we also segment the portfolio based upon loan delinquency, nonperforming status, modification and bankruptcy status, FICO scores, LTV and geographic concentrations. Loan performance is evaluated by source originators and loan servicers.

The credit quality of newly originated loans that we retained on our balance sheet over the last twelve months was strong overall as evidenced by a weighted-average LTV on originations of 71% and a weighted-average FICO score of 769.

The following table presents our residential real estate loans by geographic market.

Table 18: Residential Real Estate Loans by Geography



	September 30, 2018				December 31, 2017
Dollars in millions	Amount		% of Total		Amount		% of Total
Geography
California	$	4,393	24	%	$	3,676	21	%
New Jersey	1,607		9		1,503		9
Florida	1,534		8		1,529		9
Illinois	1,167		6		1,230		7
Pennsylvania	1,011		5		962		5
New York	923		5		847		5
Maryland	901		5		902		5
North Carolina	841		5		821		5
Virginia	824		5		824		5
Ohio	676		4		684		4
All other states	4,326		24		4,234		25
Total residential real estate loans	$	18,203	100	%	$	17,212	100	%

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

We originate residential mortgage loans nationwide through our national mortgage business as well as within our branch network. Residential mortgage loans underwritten to government agency standards, including conforming loan amount limits, are typically sold with servicing retained by us. We also originate nonconforming residential mortgage loans that do not meet government agency standards, which we retain on our balance sheet. Growth in residential mortgage loans in the first nine months of 2018 was primarily due to nonconforming loans that exceeded agency conforming loan limits. The nonconforming residential mortgage portfolio had strong credit quality at September 30, 2018 with an average original LTV of 70% and an average original FICO score of 772. Our portfolio of nonconforming residential mortgage loans totaled $12.2 billion at September 30, 2018, with 29% located in California.

Automobile

Within auto loans, $12.8 billion resided in the indirect auto portfolio while $1.5 billion were in the direct auto portfolio as of September 30, 2018. Comparable amounts as of December 31, 2017 were $11.4 billion and $1.4 billion, respectively, and also included $.1 billion of securitized loans. The indirect auto portfolio relates to loan applications generated from franchised automobile dealers. This business is strategically aligned with our core retail business.

We continue to focus on borrowers with strong credit profiles as evidenced by a weighted-average loan origination FICO score over the last twelve months of 739 for indirect auto loans and 762 for direct auto loans. The weighted-average term of loan originations over the last twelve months was 74 months for indirect auto loans and 62 months for direct auto loans. We offer both new and used automobile financing to customers through our various channels. At September 30, 2018, the portfolio was composed of 53% new vehicle loans and 47% used vehicle loans. Comparable amounts at December 31, 2017 were 54% and 46%, respectively.

The auto loan portfolio's performance is measured monthly, including updated collateral values that are obtained monthly and updated FICO scores that are obtained at least quarterly. For internal reporting and risk management, we analyze the portfolio by product channel and product type and regularly evaluate default and delinquency experience. As part of our overall risk analysis and monitoring, we segment the portfolio by loan structure, collateral attributes and credit metrics which include FICO score, LTV and term.

Nonperforming Assets and Loan Delinquencies

Nonperforming 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), other real estate owned (OREO), foreclosed and other 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 our 2017 Form 10-K. A summary of the major categories of nonperforming assets are presented in Table 19. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in this Report for further detail of nonperforming asset categories.

Table 19: Nonperforming Assets by Type



	September 30, 2018			December 31, 2017			Change
Dollars in millions	September 30, 2018			December 31, 2017			$			%
Nonperforming loans
Commercial lending	$	393		$	554		$	(161	)	(29	)%
Consumer lending (a)	1,301			1,311			(10		)	(1	)%
Total nonperforming loans	1,694			1,865			(171		)	(9	)%
OREO, foreclosed and other assets	131			170			(39		)	(23	)%
Total nonperforming assets	$	1,825		$	2,035		$	(210	)	(10	)%
Amount of TDRs included in nonperforming loans	$	878		$	964		$	(86	)	(9	)%
Percentage of total nonperforming loans	52		%	52		%
Nonperforming loans to total loans	.76		%	.85		%
Nonperforming assets to total loans, OREO, foreclosed and other assets	.82		%	.92		%
Nonperforming assets to total assets	.48		%	.53		%
Allowance for loan and lease losses to total nonperforming loans	153		%	140		%


(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.

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

Table 20: Change in Nonperforming Assets



In millions	2018			2017
January 1	$	2,035		$	2,374
New nonperforming assets	785			1,069
Charge-offs and valuation adjustments	(408		)	(444		)
Principal activity, including paydowns and payoffs	(379		)	(551		)
Asset sales and transfers to loans held for sale	(101		)	(138		)
Returned to performing status	(107		)	(243		)
September 30	$	1,825		$	2,067

As of September 30, 2018, approximately 89% of total nonperforming loans were secured by collateral which lessened reserve requirements and is expected to reduce credit losses in the event of default. As of September 30, 2018, commercial lending nonperforming loans were carried at approximately 66% of their unpaid principal balance, due to charge-offs recorded to date, before consideration of the Allowance for loan and lease losses (ALLL).

Within consumer nonperforming loans, residential real estate TDRs comprised 77% and 75% of total residential real estate nonperforming loans at September 30, 2018 and December 31, 2017, respectively. Home equity TDRs comprised 48% of home equity nonperforming loans at September 30, 2018, down from 50% at December 31, 2017. 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 us 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 September 30, 2018, our largest nonperforming asset was $37 million in the Information industry and the ten largest individual nonperforming assets represented 10% of total nonperforming assets.

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.

Table 21: Accruing Loans Past Due (a)



	Amount									Percentage of Total Loans Outstanding
	September 30 2018		December 31 2017		Change					September 30 2018		December 31 2017
Dollars in millions	September 30 2018		December 31 2017		$			%		September 30 2018		December 31 2017
Early stage loan delinquencies
Accruing loans past due 30 to 59 days	$	551	$	545	$	6		1	%	.25	%	.25	%
Accruing loans past due 60 to 89 days	258		238		20			8	%	.12	%	.11	%
Total	809		783		26			3	%	.36	%	.36	%
Late stage loan delinquencies
Accruing loans past due 90 days or more	619		737		(118		)	(16	)%	.28	%	.33	%
Total	$	1,428	$	1,520	$	(92	)	(6	)%	.64	%	.69	%


(a)	Past due loan amounts include government insured or guaranteed loans of $.7 billion at September 30, 2018 and $.9 billion at December 31, 2017.

Accruing loans past due 90 days or more 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 homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines, or are certain government insured or guaranteed loans.

Loan Modifications and Troubled Debt Restructurings

Consumer Loan Modifications

We modify loans under government and PNC-developed programs based upon our commitment to help eligible homeowners and borrowers avoid foreclosure, where appropriate. Initially, a borrower is evaluated for a modification under a government program. If a borrower does not qualify under a government program, the borrower is then evaluated under a PNC program. Our programs utilize both temporary and permanent modifications and typically reduce the interest rate, extend the term and/or defer principal. Loans that

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

are either temporarily or permanently modified under programs involving a change to loan terms are generally classified as TDRs. Further, loans that have certain types of payment plans and trial payment arrangements which do not include a contractual change to loan terms may be classified as TDRs.

A temporary modification, with a term up to 24 months, involves a change in original loan terms for a period of time and reverts to a calculated exit rate for the remaining term of the loan as of a specific date. A permanent modification, with a term greater than 24 months, is a modification in which the terms of the original loan are changed. Permanent modification programs generally result in principal forgiveness, interest rate reduction, term extension, capitalization of past due amounts, interest-only period or deferral of principal.

We also monitor the success rates and delinquency status of our loan modification programs to assess their effectiveness in serving our borrowers’ and servicing customers’ needs while mitigating credit losses. Table 22 provides the number of accounts and unpaid principal balance of modified consumer real estate related loans as of each date presented.

Table 22: Consumer Real Estate Related Loan Modifications



	September 30, 2018			December 31, 2017
Dollars in millions	Number of Accounts	Unpaid Principal Balance		Number of Accounts	Unpaid Principal Balance
Temporary modifications	2,629	$	178	3,033	$	217
Permanent modifications	21,567	2,382		23,270	2,581
Total consumer real estate related loan modifications	24,196	$	2,560	26,303	$	2,798

Commercial Loan Modifications

Modifications of terms for commercial loans are based on individual facts and circumstances. Commercial loan modifications may involve reduction of the interest rate, extension of the loan term and/or forgiveness of principal. Modified commercial loans are usually already nonperforming prior to modification. We evaluate these modifications for TDR classification based upon whether we granted a concession to a borrower experiencing financial difficulties.

Troubled Debt Restructurings

A TDR is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs result from our loss mitigation activities and include rate reductions, principal forgiveness, postponement/reduction of scheduled amortization and extensions, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Additionally, TDRs also result from court imposed concessions (e.g., a Chapter 7 bankruptcy where the debtor is discharged from personal liability to us and a court approved Chapter 13 bankruptcy repayment plan).

Table 23: Summary of Troubled Debt Restructurings (a)



	September 30 2018		December 31 2017		Change
Dollars in millions	September 30 2018		December 31 2017		$			%
Total commercial lending	$	389	$	409	$	(20	)	(5	)%
Total consumer lending	1,497		1,652		(155		)	(9	)%
Total TDRs	$	1,886	$	2,061	$	(175	)	(8	)%
Nonperforming	$	878	$	964	$	(86	)	(9	)%
Accruing (b)	1,008		1,097		(89		)	(8	)%
Total TDRs	$	1,886	$	2,061	$	(175	)	(8	)%


(a)	Amounts in table represent recorded investment, which includes the unpaid principal balance plus net accounting adjustments, less any charge-offs. Recorded investment does not include any associated valuation allowance.


(b)	Accruing loans include consumer credit card loans and loans that have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans.

Excluded from TDRs are $1.1 billion and $1.2 billion of consumer loans held for sale, loans accounted for under the fair value option and pooled purchased impaired loans, as well as certain government insured or guaranteed loans at September 30, 2018 and December 31, 2017, respectively. Nonperforming TDRs represented approximately 52% of total nonperforming loans and 47% of total TDRs at both September 30, 2018 and December 31, 2017. The remaining portion of TDRs represents TDRs that have been returned to accrual accounting after performing under the restructured terms for at least six consecutive months.

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

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

We maintain an ALLL to absorb losses from the loan and lease portfolio and determine this allowance based on quarterly assessments of the estimated probable credit losses incurred in the loan and lease portfolio. Our total ALLL of $2.6 billion at September 30, 2018 consisted of $1.6 billion and $1.0 billion established for the commercial lending and consumer lending categories, respectively. We maintain the ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan and lease portfolio as of the balance sheet date. The reserve calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan and lease portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions and estimation processes are periodically updated.

Allowances are established for non-impaired commercial loan classes based primarily on PD and LGD.

Our commercial pool reserve methodology is sensitive to changes in key risk parameters such as PD and LGD. The results of these parameters are then applied to the loan balance and unfunded loan commitments and letters of credit to determine the amount of the respective reserves. The majority of the commercial portfolio is secured by collateral, including loans to asset-based lending customers, which generally demonstrate lower LGD compared to loans not secured by collateral. Our PDs and LGDs are primarily determined using internal commercial loan loss data. This internal data is supplemented with third-party data and management judgment, as deemed necessary. We continue to evaluate and enhance our use of internal commercial loss data and will periodically update our PDs and LGDs as well as consider third-party data, regulatory guidance and management judgment.

Allowances for non-impaired consumer loan classes are primarily based upon transition matrices, including using a roll-rate model. The roll-rate model uses statistical relationships, calculated from historical data that estimate the movement of loan outstandings through the various stages of delinquency and ultimately charge-off.

We establish specific allowances for loans considered impaired using methods prescribed by GAAP. All impaired loans are subject to individual analysis, except leases and large groups of smaller-balance homogeneous loans which may include, but are not limited to, credit card, residential real estate secured and consumer installment loans. Specific allowances for individual loans (including commercial and consumer TDRs) are determined based on an analysis of the present value of expected future cash flows from the loans discounted at their effective interest rate, observable market price or the fair value of the underlying collateral.

A portion of the ALLL is related to qualitative measurement factors. These factors may include, but are not limited to, the following:


•	Industry concentrations and conditions,


•	Recent credit quality trends,


•	Recent loss experience in particular portfolios,


•	Recent macro-economic factors,


•	Model imprecision,


•	Changes in lending policies and procedures,


•	Timing of available information, including the performance of first lien positions, and


•	Limitations of available historical data.

Purchased impaired loans are initially recorded at fair value and applicable accounting guidance prohibits the carryover or creation of valuation allowances at acquisition. Because the initial fair values of these loans already reflect a credit component, additional reserves are established when performance is expected to be worse than our expectations as of the acquisition date. At September 30, 2018, we had established reserves of $.3 billion for purchased impaired loans. In addition, loans (purchased impaired and non-impaired) acquired after January 1, 2009 were recorded at fair value. No allowance for loan losses was carried over and no allowance was created at the date of acquisition.

In addition to the ALLL, we maintain an allowance for unfunded loan commitments and letters of credit. We report this allowance as a liability on our Consolidated Balance Sheet. We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable losses on these unfunded credit facilities. We determine this amount using estimates of the probability of the ultimate funding and losses related to those credit exposures. Other than the estimation of the probability of funding, this methodology is very similar to the one we use for determining our ALLL.

See Note 1 Accounting Policies in our 2017 Form 10-K and Note 3 Asset Quality in the Notes To Consolidated Financial Statements in this Report for further information on certain key asset quality indicators that we use to evaluate our portfolios and establish the allowances.

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

Table 24: Allowance for Loan and Lease Losses



Dollars in millions	2018			2017
January 1	$	2,611		$	2,589
Total net charge-offs	(313		)	(334		)
Provision for credit losses	260			316
Net decrease / (increase) in allowance for unfunded loan commitments and letters of credit	9			8
Other	17			26
September 30	$	2,584		$	2,605
Net charge-offs to average loans (for the nine months ended) (annualized)	.19		%	.21		%
Total allowance for loan and lease losses to total loans	1.16		%	1.18		%
Commercial lending net charge-offs	$	(18	)	$	(69	)
Consumer lending net charge-offs	(295		)	(265		)
Total net charge-offs	$	(313	)	$	(334	)
Net charge-offs to average loans (for the nine months ended) (annualized)
Commercial lending	.02		%	.06		%
Consumer lending	.54		%	.49		%

At September 30, 2018, total ALLL to total nonperforming loans was 153%. The comparable amount for December 31, 2017 was 140%. These ratios are 110% and 102% when excluding the $.7 billion of ALLL at both September 30, 2018 and December 31, 2017 allocated to consumer loans and lines of credit not secured by residential real estate and purchased impaired loans. We have excluded these amounts from ALLL in these ratios as these asset classes are not included in nonperforming loans. See Table 19 within this Credit Risk Management section for additional information.

The ALLL balance increases or decreases across periods in relation to fluctuating risk factors, including asset quality trends, net charge-offs and changes in aggregate portfolio balances. During the first nine months of 2018, overall credit quality remained strong, which resulted in an essentially flat ALLL balance as of September 30, 2018 compared to December 31, 2017.

The following table summarizes our loan charge-offs and recoveries.

Table 25: Loan Charge-Offs and Recoveries



Nine months ended September 30	Gross Charge-offs		Recoveries		Net Charge-offs / (Recoveries)			Percent of Average Loans (Annualized)
Dollars in millions	Gross Charge-offs		Recoveries		Net Charge-offs / (Recoveries)			Percent of Average Loans (Annualized)
2018
Commercial	$	78	$	50	$	28		.03	%
Commercial real estate	8		18		(10		)	(.05	)%
Equipment lease financing	6		6
Home equity	85		67		18			.09	%
Residential real estate	9		18		(9		)	(.07	)%
Credit card	161		18		143			3.32	%
Other consumer
Automobile	117		56		61			.60	%
Education	24		6		18			.57	%
Other	76		12		64			1.94	%
Total	$	564	$	251	$	313		.19	%
2017
Commercial	$	140	$	61	$	79		.10	%
Commercial real estate	9		21		(12		)	(.05	)%
Equipment lease financing	6		4		2			.04	%
Home equity	98		67		31			.14	%
Residential real estate	8		12		(4		)	(.03	)%
Credit card	136		16		120			3.09	%
Other consumer
Automobile	89		43		46			.49	%
Education	23		6		17			.46	%
Other	68		13		55			1.65	%
Total	$	577	$	243	$	334		.21	%

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

See Note 1 Accounting Policies in our 2017 Form 10-K and Note 4 Allowance for Loan and Lease Losses in the Notes To Consolidated Financial Statements in this Report for additional information on the ALLL.

Liquidity and Capital Management

Liquidity risk, including our liquidity monitoring measures and tools, is described in further detail in the Liquidity and Capital Management section of our 2017 Form 10-K.

One of the ways we monitor our liquidity is by reference to the Liquidity Coverage Ratio (LCR), a regulatory minimum liquidity requirement designed to ensure that covered banking organizations maintain an adequate level of liquidity to meet net liquidity needs over the course of a hypothetical 30-day stress scenario. The LCR is calculated by dividing the amount of an institution’s high quality, unencumbered liquid assets (HQLA), as defined and calculated in accordance with the LCR rules, by its estimated net cash outflows, with net cash outflows determined by applying the assumed outflow factors in the LCR rules. The resulting quotient is expressed as a percentage. The minimum LCR that PNC and PNC Bank are required to maintain is 100% in 2018. PNC and PNC Bank calculate the LCR daily, and as of September 30, 2018, the LCR for PNC and PNC Bank exceeded the requirement of 100%.

We provide additional information regarding regulatory liquidity requirements and their potential impact on us in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of our 2017 Form 10-K.

Sources of Liquidity

Our largest source of liquidity on a consolidated basis is the customer deposit base generated by our banking businesses. These deposits provide relatively stable and low-cost funding. Total deposits declined slightly to $264.9 billion at September 30, 2018 from $265.1 billion at December 31, 2017 as growth in interest-bearing deposits was more than offset by a decrease in noninterest-bearing deposits. See the Funding Sources portion of the Consolidated Balance Sheet Review section of this Financial Review for additional information related to our deposits. Additionally, certain assets determined by us to be liquid as well as unused borrowing capacity from a number of sources are also available to manage our liquidity position.

At September 30, 2018, our liquid assets consisted of short-term investments (Federal funds sold, resale agreements, trading securities and interest-earning deposits with banks) totaling $24.5 billion and securities available for sale totaling $61.2 billion. The level of liquid assets fluctuates over time based on many factors, including market conditions, loan and deposit growth and balance sheet management activities. Our liquid assets included $3.1 billion of securities available for sale and trading securities pledged as collateral to secure public and trust deposits, repurchase agreements and for other purposes. In addition, $6.0 billion of securities held to maturity were also pledged as collateral for these purposes.

We also obtain liquidity through various forms of funding, including long-term debt (senior notes, subordinated debt and FHLB borrowings) and short-term borrowings (securities sold under repurchase agreements, commercial paper and other short-term borrowings). See Note 10 Borrowed Funds in our 2017 Form 10-K and the Funding Sources section of the Consolidated Balance Sheet Review for additional information related to our borrowings.

Total senior and subordinated debt, on a consolidated basis, decreased due to the following activity:

Table 26: Senior and Subordinated Debt



In billions	2018
January 1	$	33.3
Issuances	4.5
Calls and maturities	(4.8		)
Other	(.6		)
September 30	$	32.4

Bank Liquidity

Under PNC Bank’s 2014 bank note program, as amended, PNC Bank may from time to time offer up to $40.0 billion aggregate principal amount outstanding at any one time of its unsecured senior and subordinated notes with maturity dates more than nine months (in the case of senior notes) and five years or more (in the case of subordinated notes) from their date of issue. At September 30, 2018, PNC Bank had $26.5 billion of notes outstanding under this program of which $22.2 billion were senior bank notes and $4.3 billion were subordinated bank notes.

The following table details issuances for the three months ended September 30, 2018.

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

Table 27: PNC Bank Notes Issued



Issuance Date	Amount	Description of Issuance
July 26, 2018 September 14, 2018 (re-opening)	$750 million $500 million	Subordinated notes with a maturity date of July 26, 2028. Interest is payable semi-annually at a fixed rate of 4.05% on January 26 and July 26 of each year, beginning January 26, 2019. Following the re-opening, the aggregate outstanding principal amount of this series of notes increased to $1.25 billion.

PNC Bank maintains additional secured borrowing capacity with the FHLB-Pittsburgh and through the Federal Reserve Bank discount window. The Federal Reserve Bank, however, is not viewed as a primary means of funding our routine business activities, but rather as a potential source of liquidity in a stressed environment or during a market disruption. At September 30, 2018, our unused secured borrowing capacity at the FHLB-Pittsburgh and the Federal Reserve Bank totaled $42.1 billion.

PNC Bank has the ability to offer up to $10.0 billion of its commercial paper to provide additional liquidity. As of September 30, 2018, there were no issuances outstanding under this program.

Parent Company Liquidity

In addition to managing liquidity risk at the bank level, we monitor the parent company’s liquidity. The parent company’s contractual obligations consist primarily of debt service related to parent company borrowings and funding non-bank affiliates. Additionally, the parent company maintains adequate liquidity to fund discretionary activities such as paying dividends to our shareholders, share repurchases and acquisitions.

As of September 30, 2018, available parent company liquidity totaled $4.7 billion. Parent company liquidity is primarily held in intercompany short-term investments, the terms of which provide for the availability of cash in 31 days or less. Investments with longer durations may also be acquired, but if so, the related maturities are aligned with scheduled cash needs, such as the maturity of parent company debt obligations.

The principal source of parent company liquidity is the dividends it receives from PNC Bank, which may be impacted by the following:


•	Bank-level capital needs,


•	Laws and regulations,


•	Corporate policies,


•	Contractual restrictions, and


•	Other factors.

There are statutory and regulatory limitations on the ability of a national bank to pay dividends or make other capital distributions or to extend credit to the parent company or its non-bank subsidiaries. The amount available for dividend payments by PNC Bank to the parent company without prior regulatory approval was approximately $3.0 billion at September 30, 2018. See Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements in our 2017 Form 10-K for a further discussion of these limitations.

In addition to dividends from PNC Bank, other sources of parent company liquidity include cash and investments, as well as dividends and loan repayments from other subsidiaries and dividends or distributions from equity investments. We can also generate liquidity for the parent company and PNC’s non-bank subsidiaries through the issuance of debt and equity securities, including certain capital instruments, in public or private markets and commercial paper. The parent company has the ability to offer up to $5.0 billion of commercial paper to provide additional liquidity. As of September 30, 2018, there were no commercial paper issuances outstanding.

The parent company has an effective shelf registration statement pursuant to which we can issue additional debt, equity and other capital instruments. Under this shelf registration statement, on September 5, 2018, the parent company issued $500 million in Senior Notes with a maturity date of September 3, 2021. Interest is payable semi-annually at a fixed rate of 3.25% per annum on March 3 and September 3 of each year, beginning March 3, 2019.

Parent company senior and subordinated debt outstanding totaled $6.6 billion and $6.8 billion at September 30, 2018 and December 31, 2017, respectively.

Contractual Obligations and Commitments

We have contractual obligations representing required future payments on borrowed funds, time deposits, leases, pension and postretirement benefits and purchase obligations. See the Liquidity and Capital Management portion of the Risk Management section in our 2017 Form 10-K for more information on these future cash outflows. Additionally, in the normal course of business we have various commitments outstanding, certain of which are not included on our Consolidated Balance Sheet. We provide information on our commitments in Note 13 Commitments in the Notes To Consolidated Financial Statements of this Report.

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

Credit Ratings

PNC’s credit ratings affect the cost and availability of short and long-term funding, collateral requirements for certain derivative instruments and the ability to offer certain products.

In general, rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, level and quality of earnings, and the current legislative and regulatory environment, including implied government support. A decrease, or potential decrease, in credit ratings could impact access to the capital markets and/or increase the cost of debt, and thereby adversely affect liquidity and financial condition.

Table 28: Credit Ratings for PNC and PNC Bank



	September 30, 2018
	Moody’s	Standard & Poor’s	Fitch
PNC
Senior debt	A3	A-	A+
Subordinated debt	A3	BBB+	A
Preferred stock	Baa2	BBB-	BBB-
PNC Bank
Senior debt	A2	A	A+
Subordinated debt	A3	A-	A
Long-term deposits	Aa2	A	AA-
Short-term deposits	P-1	A-1	F1+
Short-term notes	P-1	A-1	F1

Capital Management

Detailed information on our capital management processes and activities, including additional information on our previous CCAR submissions and capital plans, is included in the Capital Management portion of the Risk Management section in our 2017 Form 10-K.

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

In connection with the 2018 CCAR process, we submitted our capital plan, as approved by PNC's Board of Directors, to the Federal Reserve in April 2018. In June 2018, the Federal Reserve accepted the capital plan and did not object to our proposed capital actions. As provided in the 2018 capital plan, we announced new share repurchase programs of up to $2.0 billion for the four quarter period beginning in the third quarter of 2018, including repurchases of up to $.3 billion related to employee benefit plans. In the third quarter of 2018, we repurchased 3.3 million common shares for $.5 billion.

We paid dividends on common stock of $.4 billion, or $.95 per common share, during the third quarter of 2018. On October 4, 2018, the PNC Board of Directors declared a quarterly common stock cash dividend of $.95 per share with a payment date of November 5, 2018.

We completed our common stock repurchase programs for the four quarter period that ended June 30, 2018 with total repurchases of 18.4 million common shares for $2.6 billion. These repurchases were included in our capital plan accepted by the Federal Reserve as part of our 2017 CCAR submission. Additionally, we paid $1.5 billion in common stock dividends for a total of $4.1 billion of capital returned to shareholders during this four quarter period.

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

Table 29: Basel III Capital



Dollars in millions	Basel III September 30, 2018 (a) (b)			Fully Phased-In Basel III (Non-GAAP) December 31, 2017 (c)				2017 Transitional Basel III December 31, 2017 (a)
Common equity Tier 1 capital
Common stock plus related surplus, net of treasury stock	$	6,256		$	8,195			$	8,195
Retained earnings	38,080			35,481				35,481
Accumulated other comprehensive income (loss) for securities currently, and those transferred from, available for sale	(519		)	337				270
Accumulated other comprehensive income (loss) for pension and other postretirement plans	(488		)	(544		)		(436		)
Goodwill, net of associated deferred tax liabilities	(9,024		)	(8,988		)		(8,988		)
Other disallowed intangibles, net of deferred tax liabilities	(273		)	(319		)		(255		)
Other adjustments/(deductions)	(322		)	(141		)		(138		)
Total common equity Tier 1 capital before threshold deductions	33,710			34,021				34,129
Total threshold deductions (d)	(3,932		)	(2,928		)		(1,983		)
Common equity Tier 1 capital	29,778			31,093				32,146
Additional Tier 1 capital
Preferred stock plus related surplus	3,982			3,985				3,985
Other adjustments/(deductions)	(154		)	(146		)		(124		)
Tier 1 capital	33,606			34,932				36,007
Additional Tier 2 capital
Qualifying subordinated debt	4,067			3,433				3,482
Trust preferred capital securities	80							100
Eligible credit reserves includable in Tier 2 capital	2,873			2,907				2,907
Total Basel III capital	40,626			$	41,272			$	42,496
Risk-weighted assets
Basel III standardized approach risk-weighted assets (e)	$	318,889		$	316,120			$	309,460
Basel III advanced approaches risk-weighted assets (f)	$	274,742		$	285,226			N/A
Average quarterly adjusted total assets	$	364,909		$	363,967			$	364,999
Supplementary leverage exposure (g)	$	437,406		$	434,698			$	435,731
Basel III risk-based capital and leverage ratios
Common equity Tier 1 (i)	9.3		%	9.8		%	(h)	10.4		%
Tier 1 (j)	10.5		%	11.1		%	(h)	11.6		%
Total (k) (l) (m)	12.7		%	13.1		%	(h)	13.7		%
Leverage (n)	9.2		%	9.6		%		9.9		%
Supplementary leverage ratio (o)	7.7		%	8.0		%		8.3		%


(a)	All ratios are calculated using the regulatory capital methodology applicable to PNC during each period presented and calculated based on the standardized approach.


(b)	The Basel III Common equity Tier 1 capital, Tier 1 risk-based capital, Leverage and Supplementary ratios as of September 30, 2018 reflect the full phase-in of all Basel III adjustments to these metrics applicable to PNC.


(c)	2017 Fully Phased-In Basel III results are presented as pro forma estimates.

(d)

Under the Basel III rules, certain items such as significant common stock investments in unconsolidated financial institutions (primarily BlackRock), mortgage servicing rights and deferred tax assets must be deducted from capital (subject to a phase-in schedule that ended December 31, 2017 and net of associated deferred tax liabilities) to the extent they individually exceed 10%, or in the aggregate exceed 15%, of PNC's adjusted common equity Tier 1 capital.


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

(f)

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


(i)	For comparative purposes only, the advanced approaches Basel III Common equity Tier 1 capital ratio for September 30, 2018 is 10.8% and for December 31, 2017 is 10.9% (estimated). This capital ratio is calculated using Common equity Tier 1 capital and dividing by Basel III advanced approaches risk-weighted assets.


(j)	For comparative purposes only, the advanced approaches Basel III Tier 1 risk-based capital ratio for both September 30, 2018 and December 31, 2017 (estimated) is 12.2%. This capital ratio is calculated using Tier 1 capital and dividing by Basel III advanced approaches risk-weighted assets.

(k)

For comparative purposes only, the advanced approaches Basel III Total risk-based capital ratio for September 30, 2018 is 13.8% and for December 31, 2017 is 13.5% (estimated). This ratio is calculated using Total Basel III capital, which under the advanced approaches, Additional Tier 2 capital includes allowance for loan and lease losses in excess of Basel expected credit losses, if any, up to 0.6% of credit risk-weighted assets, and dividing by Basel III advanced approaches risk-weighted assets.


(l)	The Basel III Total risk-based capital ratio includes $80 million of nonqualifying trust preferred capital securities that are subject to a phase-out period that runs through 2021.


(m)	For comparative purposes only, as of September 30, 2018 the ratio would be 12.7%, assuming nonqualifying trust preferred capital securities are phased out.


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


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

The decline in our Basel III Common equity Tier 1 capital ratio at September 30, 2018 compared to December 31, 2017 reflected continued capital return to shareholders in the form of common share repurchases and dividends and a decline in AOCI largely related to the impact of higher interest rates on the valuation of our available for sale securities portfolio.

The PNC Financial Services Group, Inc. – Form 10-Q 31

Because PNC remains in the parallel run qualification phase for the advanced approaches, our regulatory risk-based capital ratios in 2018 and 2017 are calculated using the standardized approach for determining risk-weighted assets. 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 and equity exposures are generally subject to higher risk weights than other types of exposures. Once we exit parallel run, our regulatory risk-based capital ratios will be the lower of the ratios calculated under the standardized approach and the advanced approaches.

Under the Basel III rules applicable to PNC, significant common stock investments in unconsolidated financial institutions (for PNC, primarily BlackRock), mortgage servicing rights and deferred tax assets must be deducted from capital (subject to a phase-in schedule that ended December 31, 2017 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 that ended December 31, 2017) AOCI related to securities currently, and those transferred from, available for sale, as well as pension and other postretirement plans. With the exception of certain nonqualifiying trust preferred capital securities included in PNC’s Total risk-based capital ratio, the transitions and multi-year phase-in of the definition of capital under the Basel III rules were complete as of January 1, 2018. Accordingly, we refer to the capital ratios calculated using the definition of capital in effect as of January 1, 2018 and, for the risk-based ratios, standardized approach risk-weighted assets, as the Basel III ratios. The Basel III Total risk-based capital ratio includes trust preferred capital securities in the amount of $80 million that are subject to a phase-out that runs through 2021. We refer to the capital ratios calculated using the phased-in Basel III provisions in effect for 2017 and, for the risk-based ratios, standardized approach risk-weighted assets, as the 2017 Transitional Basel III ratios. All current period capital ratios are calculated using the regulatory capital methodology applicable to us during 2018.

Federal banking regulators have stated that they expect the largest U.S. bank holding companies (BHCs), including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largest U.S. BHCs, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers through estimated stress scenarios. We seek to manage our capital consistent with these regulatory principles, and believe that our September 30, 2018 capital levels were aligned with them.

At September 30, 2018, 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 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 Basel III capital ratios of at least 6.5% for Common equity Tier 1 risk-based capital, 8% for Tier 1 risk-based capital, 10% for Total risk-based capital and a Leverage ratio of at least 5%.

We provide additional information regarding regulatory capital requirements and some of their potential impacts on us in the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 18 Regulatory Matters in our 2017 Form 10-K. See the Statistical Information (Unaudited) section of this Report for details on our September 30, 2017 Transitional Basel III and Fully Phased-In Basel III Common equity Tier 1 capital ratios.

Market Risk Management

Market risk is the risk of a loss in earnings or economic value due to adverse movements in market factors such as interest rates, credit spreads, foreign exchange rates, commodity prices and equity prices. We are exposed to market risk primarily by our involvement in the following activities, among others:


•	Traditional banking activities of gathering deposits and extending loans,


•	Equity and other investments and activities whose economic values are directly impacted by market factors, and


•	Fixed income securities, derivatives and foreign exchange activities, as a result of customer activities and securities underwriting.

We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. Market Risk Management provides independent oversight by monitoring compliance with established guidelines and reporting significant risks in the business to the Risk Committee of the Board of Directors.

Market Risk Management – Interest Rate Risk

Interest rate risk results primarily from our traditional banking activities of gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest that we earn on assets and the interest that we pay on liabilities and the level of our noninterest-bearing funding sources. Due to the repricing term mismatches and embedded options inherent in certain of these products, changes in market interest rates not only affect expected near-term earnings, but also the economic values of these assets and liabilities.

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

The interest rates that we pay on customer deposits have risen in recent quarters as a result of higher short-term market interest rates. The rates paid on commercial deposits have had a higher correlation to increases in short-term interest rates, as compared to the rates paid on consumer deposits. During the remainder of 2018, we anticipate that the rates paid on our consumer deposits will have a higher correlation to changes in short-term interest rates. The rates paid on customer deposits are also impacted by factors including the level of interest rates, competition for deposits, new product offerings, and changes in business strategies.

Our Asset and Liability Management group centrally manages interest rate risk as prescribed in our risk management policies, which are approved by management’s Asset and Liability Committee and the Risk Committee of the Board of Directors.

Sensitivity results and market interest rate benchmarks for the third quarters of 2018 and 2017 follow:

Table 30: Interest Sensitivity Analysis



	Third Quarter 2018		Third Quarter 2017
Net Interest Income Sensitivity Simulation (a)
Effect on net interest income in first year from gradual interest rate change over the following 12 months of:
100 basis point increase	1.8	%	2.9	%
100 basis point decrease	(2.3	)%	(3.6	)%
Effect on net interest income in second year from gradual interest rate change over the preceding 12 months of:
100 basis point increase	3.6	%	5.9	%
100 basis point decrease	(5.9	)%	(8.8	)%
Duration of Equity Model (a)
Base case duration of equity (in years)	.2		(2.6	)
Key Period-End Interest Rates
One-month LIBOR	2.26	%	1.23	%
Three-month LIBOR	2.40	%	1.33	%
Three-year swap	3.05	%	1.86	%


(a)	Given the inherent limitations in certain of these measurement tools and techniques, results become less meaningful as interest rates approach zero.

In addition to measuring the effect on net interest income assuming parallel changes in current interest rates, we routinely simulate the effects of a number of nonparallel interest rate environments. Table 31 reflects the percentage change in net interest income over the next two 12-month periods assuming (i) the PNC Economist’s most likely rate forecast, (ii) implied market forward rates and (iii) yield curve slope flattening (a 100 basis point yield curve slope flattening between one-month and ten-year rates superimposed on current base rates) scenario.

All changes in forecasted net interest income are relative to results in a base rate scenario where current market rates are assumed to remain unchanged over the forecast horizon.

Table 31: Net Interest Income Sensitivity to Alternative Rate Scenarios



	September 30, 2018
	PNC Economist		Market Forward		Slope Flattening
First year sensitivity	.5	%	.5	%	(.6	)%
Second year sensitivity	.3	%	(1.0	)%	(3.0	)%

When forecasting net interest income, we make assumptions about interest rates and the shape of the yield curve, the volume and characteristics of new business and the behavior of existing on- and off-balance sheet positions. These assumptions determine the future level of simulated net interest income in the base interest rate scenario and the other interest rate scenarios presented in Tables 30 and 31. These simulations assume that as assets and liabilities mature, they are replaced or repriced at then current market rates.

The following graph presents the LIBOR/Swap yield curves for the base rate scenario and each of the alternate scenarios one year forward.

The PNC Financial Services Group, Inc. – Form 10-Q 33

Table 32: Alternate Interest Rate Scenarios: One Year Forward

The third quarter 2018 interest sensitivity analyses indicate that our Consolidated Balance Sheet is positioned to benefit from an increase in interest rates and an upward sloping interest rate yield curve. We believe that we have the deposit funding base and balance sheet flexibility to adjust, where appropriate and permissible, to changing interest rates and market conditions.

Market Risk Management – Customer-Related Trading Risk

We engage in fixed income securities, derivatives and foreign exchange transactions to support our customers’ investing and hedging activities. These transactions, related hedges and the credit valuation adjustment related to our customer derivatives portfolio are marked-to-market daily and reported as customer-related trading activities. We do not engage in proprietary trading of these products.

We use value-at-risk (VaR) as the primary means to measure and monitor market risk in customer-related trading activities. VaR is used to estimate the probability of portfolio losses based on the statistical analysis of historical market risk factors. A diversified VaR reflects empirical correlations across different asset classes. We calculate a diversified VaR at a 95% confidence interval and the results for the first nine months of 2018 and 2017 were within our acceptable limits.

See the Market Risk Management – Customer-Related Trading Risk section of our 2017 Form 10-K for more information on our models used to calculate VaR and our backtesting process.

Customer related trading revenue was $196 million for the nine months ended September 30, 2018 compared to $186 million for the same period in 2017. The increase was primarily due to higher foreign exchange client sales revenues. For the quarterly period, customer related trading revenue was $53 million for the third quarter of 2018 compared to $57 million in 2017. The decrease was primarily due to the impact of changes in credit valuations for customer-related derivatives, which was partially offset by higher client related trading and foreign exchange client revenues.

Market Risk Management – Equity And Other Investment Risk

Equity investment risk is the risk of potential losses associated with investing in both private and public equity markets. In addition to extending credit, taking deposits, underwriting securities and trading financial instruments, we make and manage direct investments in a variety of transactions, including management buyouts, recapitalizations and growth financings in a variety of industries. We also have investments in affiliated and non-affiliated funds that make similar investments in private equity. The economic and/or book value of these investments and other assets are directly affected by changes in market factors.

Various PNC business units manage our equity and other investment activities. Our businesses are responsible for making investment decisions within the approved policy limits and associated guidelines.

A summary of our equity investments follows:

Table 33: Equity Investments Summary



	September 30 2018		December 31 2017		Change
Dollars in millions	September 30 2018		December 31 2017		$		%
BlackRock	$	7,909	$	7,576	$	333	4	%
Tax credit investments	2,233		2,148		85		4	%
Private equity and other	2,304		1,668		636		38	%
Total	$	12,446	$	11,392	$	1,054	9	%

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

BlackRock

We owned approximately 35 million common stock equivalent shares of BlackRock equity at September 30, 2018, accounted for under the equity method. The Business Segments Review section of this Financial Review includes additional information about BlackRock.

Tax Credit Investments

Included in our equity investments are direct tax credit investments and equity investments held by consolidated entities. These tax credit investment balances included unfunded commitments totaling $.7 billion and $.8 billion at September 30, 2018 and December 31, 2017, respectively. These unfunded commitments are included in Other liabilities on our Consolidated Balance Sheet.

Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in our 2017 Form 10-K has further information on Tax Credit Investments.

Private Equity and Other

The majority of our other equity investments consists of our private equity portfolio. The private equity portfolio is an illiquid portfolio consisting of mezzanine and equity investments that vary by industry, stage and type of investment. Private equity investments carried at estimated fair value totaled $1.3 billion at both September 30, 2018 and December 31, 2017. As of September 30, 2018, $1.1 billion was invested directly in a variety of companies and $.2 billion was invested indirectly through various private equity funds. See Item 1 Business - Supervision and Regulation in our 2017 Form 10-K for discussion of the potential impacts of the Volcker Rule provisions of Dodd-Frank on our interests in and of private funds covered by the Volcker Rule.

Effective January 1, 2018, $.6 billion of available for sale securities were reclassified to equity investments as part of the adoption of ASU 2016-01. These securities were primarily money market funds.

Included in our other equity investments are Visa Class B common shares, which are recorded at cost. At September 30, 2018, the estimated value of our investment in Visa Class B common shares was approximately $860 million while our cost basis was not significant. Visa Class B common shares that we own are transferable only under limited circumstances until they can be converted into shares of the publicly-traded class of stock, which cannot happen until the resolution of the pending interchange litigation.

We also have certain other equity investments, the majority of which represent investments in affiliated and non-affiliated funds with both traditional and alternative investment strategies. Net gains related to these investments were not significant at September 30, 2018 and September 30, 2017.

Financial Derivatives

We use a variety of financial derivatives as part of the overall asset and liability risk management process to help manage exposure to market and credit risk inherent in our business activities. Substantially all such instruments are used to manage risk related to changes in interest rates. Interest rate swaps, interest rate caps and floors, swaptions, options, forwards and futures contracts are the primary instruments we use for risk management. We also enter into derivatives with customers to facilitate their risk management activities.

Financial derivatives involve, to varying degrees, market and credit risk. Periodic cash payments are exchanged for interest rate swaps, options and futures contracts. Premiums are also exchanged for options contracts. Therefore, cash requirements and exposure to credit risk are significantly less than the notional amount on these instruments.

Further information on our financial derivatives is presented in Note 1 Accounting Policies and Note 6 Fair Value in our Notes To Consolidated Financial Statements in our 2017 Form 10-K and in Note 6 Fair Value and Note 9 Financial Derivatives in the Notes To Consolidated Financial Statements in this Report.

Not all elements of market and credit risk are addressed through the use of financial derivatives, and such instruments may be ineffective for their intended purposes due to unanticipated market changes, among other reasons.

RECENT REGULATORY DEVELOPMENTS

Consistent with Section 403 of the Economic Growth, Regulatory Relief and Consumer Protection Act (Relief Act), on August 22, 2018, the Federal Reserve, Office of Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) jointly issued an interim final rule to amend the LCR rules to expand the definition of high quality liquid assets under those rules to include certain high quality municipal securities. The interim final rule took effect on August 31, 2018.

On September 5, 2018, the OCC issued an advance notice of proposed rulemaking soliciting public input on a framework for modernizing its regulations implementing the Community Reinvestment Act of 1977. The public comment period closes on November 19, 2018.

The PNC Financial Services Group, Inc. – Form 10-Q 35

On September 18, 2018, the Federal Reserve, OCC and FDIC jointly requested public comments on a proposal, consistent with Section 214 of the Relief Act, to implement changes under the U.S. Standardized Approach regulatory capital rules to limit the scope of commercial real estate exposures that receive a heightened (150 percent) risk weight. The public comment period on the proposal closes on November 27, 2018.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Note 1 Accounting Policies of our 2017 Form 10-K describes 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.

The following critical accounting policies and judgments are described in more detail in Critical Accounting Estimates and Judgments in Item 7 of our 2017 Form 10-K:


•	Fair Value Measurements


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


•	Goodwill


•	Residential and Commercial Mortgage Servicing Rights


•	Income Taxes


•	Legal Contingencies

Fair Value Measurements

The following table summarizes the assets and liabilities measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017, 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 34: Fair Value Measurements – Summary



	September 30, 2018						December 31, 2017
Dollars in millions	Total Fair Value			Level 3			Total Fair Value			Level 3
Total assets	$	72,958		$	6,269		$	69,673		$	6,475
Total assets at fair value as a percentage of consolidated assets	19		%				18		%
Level 3 assets as a percentage of total assets at fair value				9		%				9		%
Level 3 assets as a percentage of consolidated assets				2		%				2		%
Total liabilities	$	3,884		$	406		$	4,233		$	531
Total liabilities at fair value as a percentage of consolidated liabilities	1		%				1		%
Level 3 liabilities as a percentage of total liabilities at fair value				10		%				13		%
Level 3 liabilities as a percentage of consolidated liabilities				<1		%				<1		%

The majority of assets recorded at fair value are included in the securities available for sale portfolio. The majority of Level 3 assets represent non-agency residential mortgage-backed securities in the available for sale portfolio, mortgage servicing rights and equity investments. For further information on fair value, see Note 6 Fair Value in the Notes To Consolidated Financial Statements in this Report.

Income Taxes

See the Critical Accounting Estimates and Judgments section in Item 7 of our 2017 Form 10-K for information on our accounting of certain income tax effects of the Tax Cuts and Jobs Act enacted on December 22, 2017. Where certain income tax effects could be reasonably estimated, these were included as provisional amounts as of December 31, 2017. During the measurement period, which will end in December 2018, these estimates may be adjusted upon obtaining or analyzing additional information about facts and circumstances or clarifications of uncertain aspects of the newly enacted tax law, which if known would have affected the initially reported provisional amounts. No changes were made to these provisional amounts during the first nine months of 2018.

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

Recently Issued Accounting Standards



Accounting Standards Update (ASU)	Description	Financial Statement Impact
Leases - ASU 2016-02 Issued February 2016	• Required effective date of January 1, 2019.^(a) • Requires lessees to recognize a right-of-use asset and related lease liability for all leases with lease terms of more than 12 months. • 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. • Targeted changes have been made to the lessor accounting model to align the guidance with the new lessee model and revenue recognition guidance. • May be adopted using a modified retrospective approach through a cumulative-effect adjustment. • Financial Accounting Standards Board issued an ASU which permits the option to adopt the new standard prospectively as of the effective date, without adjusting comparative periods presented. Under this new transition method, an entity initially applies the new leases standard at the effective date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.	• We plan to adopt the guidance in the first quarter of 2019, utilizing the new transition relief option. • Implementation efforts are ongoing, including the recent deployment of our lessee accounting software solution. • We continue to evaluate the impact of planned accounting policy elections and the new disclosure requirements. Our evaluation of the incremental borrowing rate to discount our future minimum lease payments in calculating the lease liabilities and corresponding right-of-use assets is substantially complete. • Our evaluation of our initial lease population is substantially complete. We will continue to review service contracts through the effective date and may identify additional leases embedded within those arrangements that are within the scope of the ASU. • We expect, at a minimum, to recognize lease liabilities and corresponding right-of-use assets commensurate with the present value of the future minimum payments. Future minimum lease payments under operating leases totaled $2.6 billion as of December 31, 2017 as disclosed in Note 8 Premises, Equipment and Leasehold Improvements in our 2017 Form 10-K. • We do not expect a material change to the timing of our expense recognition. • We have evaluated the changes to the lessor accounting model and do not expect these changes to have a material impact on our financial statements.
Credit Losses - ASU 2016-13 Issued June 2016	• Required effective date of January 1, 2020.^(a) • Requires the use of an expected credit loss methodology; specifically, current expected credit losses (CECL) for the remaining life of the asset will be recognized at the time of origination or acquisition. • Methodology will apply to loans, debt securities, and other financial assets and net investment in leases not accounted for at fair value through net income. It will also apply to off-balance sheet credit exposures except for unconditionally cancellable commitments. • In-scope assets will be presented at the net amount expected to be collected after deducting the allowance for credit losses from the amortized cost basis of the assets. • Requires enhanced credit quality disclosures including disaggregation of credit quality indicators by vintage. • Requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.	• We do not plan to adopt the standard at its early adoption date in the first quarter of 2019. • We established a company-wide, cross-functional governance structure in the third quarter of 2016, which oversees overall strategy for implementation of Topic 326. • We continue to make progress towards design and development of CECL estimation methodologies, technological solutions, data requirements, revised disclosures, committee reporting and future state processes. • We plan to review and validate loss model outputs, test end to end processes, and assess controls and future state governance structure during 2019. We continue to meet with industry groups, regulatory bodies and our external auditors regularly to discuss implementation related topics. • We continue to believe that the adoption of the standard will result in an overall increase in the allowance for loan losses to cover credit losses over the estimated life of the financial assets. However, the magnitude of the increase in our allowance for loan losses at the adoption date will depend upon the nature and characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that date.
Goodwill - ASU 2017-04 Issued January 2017	• Required effective date of January 1, 2020.^(a) • Eliminates Step 2 from the goodwill impairment test to simplify the subsequent measurement of goodwill under which a loss was recognized only if the estimated implied fair value of the goodwill is below its carrying value. • Requires impairment to be recognized if the carrying amount exceeds the reporting unit’s fair value.	• We plan to adopt the standard on its effective date and we do not expect the adoption of this standard to impact our consolidated results of operations or our consolidated financial position.

(a) Early adoption is permitted.

Recently Adopted Accounting Standards

See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in this Report regarding the impact of new accounting pronouncements.

The PNC Financial Services Group, Inc. – Form 10-Q 37

OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

We engage in a variety of activities that involve entities that are not consolidated or otherwise 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 2017 Form 10-K and in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities and Note 13 Commitments in the Notes To Consolidated Financial Statements included in this Report.

A summary of variable interest entities (VIEs), including those in which we hold variable interests but have not consolidated into our financial statements, is included in Note 2 in our 2017 Form 10-K.

Trust Preferred Securities and REIT Preferred Securities

See Note 10 Borrowed Funds and Note 15 Equity in the Notes To Consolidated Financial Statements in our 2017 Form 10-K for additional information on trust preferred securities issued by PNC Capital Trust C including information on contractual limitations potentially imposed on payments (including dividends) with respect to PNC's equity securities and for additional information on the 2017 redemption of the REIT preferred securities issued by PNC Preferred Funding Trust I and PNC Preferred Funding Trust II.

INTERNAL CONTROLS AND DISCLOSURE CONTROLS AND PROCEDURES

As of September 30, 2018, we performed an evaluation under the supervision of and with the participation of our management, including the Chairman, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures and of changes in our internal control over financial reporting.

Based on that evaluation, our Chairman, President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were effective as of September 30, 2018, and that there has been no change in PNC’s internal control over financial reporting that occurred during the third quarter of 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

GLOSSARY OF TERMS

For a glossary of terms commonly used in our filings, please see the glossary of terms included in our 2017 Form 10-K.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

We make statements in this Report, and we may from time to time make other statements, regarding our outlook for earnings, revenues, expenses, tax rates, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting us and our future business and operations that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “look,” “intend,” “outlook,” “project,” “forecast,” “estimate,” “goal,” “will,” “should” and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time.

Forward-looking statements speak only as of the date made. We do not assume any duty to update forward-looking statements. Actual results or future events could differ, possibly materially, from those anticipated in forward-looking statements, as well as from historical performance.

Our forward-looking statements are subject to the following principal risks and uncertainties.


•	Our businesses, financial results and balance sheet values are affected by business and economic conditions, including the following:


–	Changes in interest rates and valuations in debt, equity and other financial markets.


–	Disruptions in the U.S. and global financial markets.


–	Actions by the Federal Reserve Board, U.S. Treasury and other government agencies, including those that impact money supply and market interest rates.


–	Changes in customer behavior due to recently enacted tax legislation, changing business and economic conditions or legislative or regulatory initiatives.


–	Changes in customers’, suppliers’ and other counterparties’ performance and creditworthiness.


–	Impact of tariffs and other trade policies of the U.S. and its global trading partners.


–	Slowing or reversal of the current U.S. economic expansion.


–	Commodity price volatility.


•	Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory

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

contingencies. These statements are based on our view that U.S. economic growth has accelerated over the past two years and will remain above its long-run trend for the remainder of 2018 and into 2019, in light of stimulus from corporate and personal income tax cuts passed in late 2017 that are expected to support business investment and consumer spending, respectively. We expect an increase in federal government spending will also support economic growth for the remainder of 2018 and into 2019. Further gradual improvement in the labor market this year and next, including job gains and rising wages, is another positive for consumer spending. Trade restrictions are a growing downside risk to the forecast. Inflation has accelerated to close to the Federal Open Market Committee's two percent objective. Short-term interest rates and bond yields are expected to rise throughout the remainder of 2018 and into 2019; after the Federal Open Market Committee raised the federal funds rate in September, our baseline forecast is for one additional rate hike in December 2018, pushing the rate to a range of 2.25% to 2.50% by the end of the year. We expect two 25 basis point increases in the fed funds rate in 2019 (in June and September); this would take the fed funds rate to a range of 2.75% to 3.00% by the end of next year.


•	Our ability to take certain capital actions, including returning capital to shareholders, is subject to review by the Federal Reserve Board as part of our comprehensive capital plan for the applicable period in connection with the Federal Reserve Board’s CCAR process and to the acceptance of such capital plan and non-objection to such capital actions by the Federal Reserve Board.

•

Our regulatory capital ratios in the future will depend on, among other things, the company’s financial performance, the scope and terms of final capital regulations then in effect (particularly those implementing the international regulatory capital framework developed by the Basel Committee on Banking Supervision (Basel Committee)), and management actions affecting the composition of our balance sheet. In addition, our ability to determine, evaluate and forecast regulatory capital ratios, and to take actions (such as capital distributions) based on actual or forecasted capital ratios, will be dependent at least in part on the development, validation and regulatory approval of related models.

•

Legal and regulatory developments could have an impact on our ability to operate our businesses, financial condition, results of operations, competitive position, reputation, or pursuit of attractive acquisition opportunities. Reputational impacts could affect matters such as business generation and retention, liquidity, funding, and ability to attract and retain management. These developments could include:


–	Changes resulting from legislative and regulatory reforms, including changes affecting oversight of the financial services industry, consumer protection, pension, bankruptcy and other industry aspects, and changes in accounting policies and principles.


–	Changes to regulations governing bank capital and liquidity standards.


–	Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries. These matters may result in monetary judgments or settlements or other remedies, including fines, penalties, restitution or alterations in our business practices, and in additional expenses and collateral costs, and may cause reputational harm to us.


–	Results of the regulatory examination and supervision process, including our failure to satisfy requirements of agreements with governmental agencies.


–	Impact on business and operating results of any costs associated with obtaining rights in intellectual property claimed by others and of adequacy of our intellectual property protection in general.


•	Business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through effective use of systems and controls, third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards.


•	Business and operating results also include impacts relating to our equity interest in BlackRock, Inc. and rely to a significant extent on information provided to us by BlackRock. Risks and uncertainties that could affect BlackRock are discussed in more detail by BlackRock in its SEC filings.

•

We grow our business in part through acquisitions. Acquisition risks and uncertainties include those presented by the nature of the business acquired, including in some cases those associated with our entry into new businesses or new geographic or other markets and risks resulting from our inexperience in those new areas, as well as risks and uncertainties related to the acquisition transactions themselves, regulatory issues, and the integration of the acquired businesses into PNC after closing.


•	Competition can have an impact on customer acquisition, growth and retention and on credit spreads and product pricing, which can affect market share, deposits and revenues. Our ability to anticipate and respond to technological changes can also impact our ability to respond to customer needs and meet competitive demands.


•	Business and operating results can also be affected by widespread natural and other disasters, pandemics, dislocations, terrorist activities, system failures, security breaches, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically.

We provide greater detail regarding these as well as other factors in our 2017 Form 10-K, our 2018 Form 10-Qs, and elsewhere in this Report, including in the Risk Factors and Risk Management sections and the Legal Proceedings and Commitments Notes of the Notes To Consolidated Financial Statements in those reports. Our forward-looking statements may also be subject to other risks and uncertainties, including those discussed elsewhere in this Report or in our other filings with the SEC.

The PNC Financial Services Group, Inc. – Form 10-Q 39

CONSOLIDATED INCOME STATEMENT

THE PNC FINANCIAL SERVICES GROUP, INC.



Unaudited	Three months ended September 30				Nine months ended September 30
In millions, except per share data	2018		2017		2018		2017
Interest Income
Loans	$	2,452	$	2,140	$	7,025	$	6,084
Investment securities	584		501		1,653		1,489
Other	187		154		545		416
Total interest income	3,223		2,795		9,223		7,989
Interest Expense
Deposits	336		170		810		433
Borrowed funds	421		280		1,173		793
Total interest expense	757		450		1,983		1,226
Net interest income	2,466		2,345		7,240		6,763
Noninterest Income
Asset management	486		421		1,397		1,222
Consumer services	377		357		1,115		1,049
Corporate services	465		404		1,381		1,284
Residential mortgage	76		104		257		321
Service charges on deposits	186		181		522		512
Other	301		313		880		918
Total noninterest income	1,891		1,780		5,552		5,306
Total revenue	4,357		4,125		12,792		12,069
Provision For Credit Losses	88		130		260		316
Noninterest Expense
Personnel	1,413		1,286		4,123		3,819
Occupancy	195		204		616		628
Equipment	264		259		818		791
Marketing	71		62		201		184
Other	665		645		1,961		1,915
Total noninterest expense	2,608		2,456		7,719		7,337
Income before income taxes and noncontrolling interests	1,661		1,539		4,813		4,416
Income taxes	261		413		818		1,119
Net income	1,400		1,126		3,995		3,297
Less: Net income attributable to noncontrolling interests	11		12		31		39
Preferred stock dividends	63		63		181		181
Preferred stock discount accretion and redemptions	1		1		3		24
Net income attributable to common shareholders	$	1,325	$	1,050	$	3,780	$	3,053
Earnings Per Common Share
Basic	$	2.84	$	2.18	$	8.03	$	6.29
Diluted	$	2.82	$	2.16	$	7.96	$	6.21
Average Common Shares Outstanding
Basic	465		479		469		483
Diluted	467		483		472		488

See accompanying Notes To Consolidated Financial Statements.

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

THE PNC FINANCIAL SERVICES GROUP, INC.



Unaudited In millions	Three months ended September 30						Nine months ended September 30
Unaudited In millions	2018			2017			2018			2017
Net income	$	1,400		$	1,126		$	3,995		$	3,297
Other comprehensive income (loss), before tax and net of reclassifications into Net income:
Net unrealized gains (losses) on non-OTTI securities	(324		)	61			(1,125		)	281
Net unrealized gains (losses) on OTTI securities	(1		)	66			16			164
Net unrealized gains (losses) on cash flow hedge derivatives	(71		)	(47		)	(377		)	(134		)
Pension and other postretirement benefit plan adjustments	1			11			70			(6		)
Other	(17		)	6			(25		)	32
Other comprehensive income (loss), before tax and net of reclassifications into Net income	(412		)	97			(1,441		)	337
Income tax benefit (expense) related to items of other comprehensive income	92			(21		)	323			(94		)
Other comprehensive income (loss), after tax and net of reclassifications into Net income	(320		)	76			(1,118		)	243
Comprehensive income	1,080			1,202			2,877			3,540
Less: Comprehensive income (loss) attributable to noncontrolling interests	11			12			31			39
Comprehensive income attributable to PNC	$	1,069		$	1,190		$	2,846		$	3,501

See accompanying Notes To Consolidated Financial Statements.

The PNC Financial Services Group, Inc. – Form 10-Q 41

CONSOLIDATED BALANCE SHEET

THE PNC FINANCIAL SERVICES GROUP, INC.



Unaudited	September 30 2018			December 31 2017
In millions, except par value
Assets
Cash and due from banks	$	5,248		$	5,249
Interest-earning deposits with banks	19,800			28,595
Loans held for sale (a)	1,108			2,655
Investment securities – available for sale	61,211			57,618
Investment securities – held to maturity	19,593			18,513
Loans (a)	223,053			220,458
Allowance for loan and lease losses	(2,584		)	(2,611		)
Net loans	220,469			217,847
Equity investments (b)	12,446			11,392
Mortgage servicing rights	2,136			1,832
Goodwill	9,218			9,173
Other (a)	28,851			27,894
Total assets	$	380,080		$	380,768
Liabilities
Deposits
Noninterest-bearing	$	74,736		$	79,864
Interest-bearing	190,148			185,189
Total deposits	264,884			265,053
Borrowed funds
Federal Home Loan Bank borrowings	20,036			21,037
Bank notes and senior debt	26,676			28,062
Subordinated debt	5,764			5,200
Other (c)	5,479			4,789
Total borrowed funds	57,955			59,088
Allowance for unfunded loan commitments and letters of credit	288			297
Accrued expenses and other liabilities	9,851			8,745
Total liabilities	332,978			333,183
Equity
Preferred stock (d)
Common stock ($5 par value, Authorized 800 shares, issued 542 shares)	2,710			2,710
Capital surplus	16,299			16,374
Retained earnings	38,080			35,481
Accumulated other comprehensive income (loss)	(1,260		)	(148		)
Common stock held in treasury at cost: 80 and 69 shares	(8,771		)	(6,904		)
Total shareholders’ equity	47,058			47,513
Noncontrolling interests	44			72
Total equity	47,102			47,585
Total liabilities and equity	$	380,080		$	380,768


(a)	Our consolidated assets included the following for which we have elected the fair value option: Loans held for sale of $1.0 billion, Loans of $.8 billion and Other assets of

$.2 billion at September 30, 2018 and Loans held for sale of $1.7 billion, Loans of $.9 billion and Other assets of $.3 billion at December 31, 2017.

(b)

Amounts include our equity interest in BlackRock. Effective for the first quarter of 2018, $.6 billion of trading and available for sale securities, primarily money market funds, were reclassified to Equity investments on January 1, 2018 in accordance with the adoption of Accounting Standards Update 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.


(c)	Our consolidated liabilities at both September 30, 2018 and December 31, 2017 included Other borrowed funds of $.1 billion for which we have elected the fair value option.


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

See accompanying Notes To Consolidated Financial Statements.

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

CONSOLIDATED STATEMENT OF CASH FLOWS

THE PNC FINANCIAL SERVICES GROUP, INC.



Unaudited In millions	Nine months ended September 30
Unaudited In millions	2018			2017
Operating Activities
Net income	$	3,995		$	3,297
Adjustments to reconcile net income to net cash provided (used) by operating activities
Provision for credit losses	260			316
Depreciation and amortization	839			859
Deferred income taxes	(116		)	147
Changes in fair value of mortgage servicing rights	(57		)	231
Undistributed earnings of BlackRock	(421		)	(315		)
Net change in
Trading securities and other short-term investments	293			252
Loans held for sale	910			37
Other assets	(2,194		)	38
Accrued expenses and other liabilities	2,195			5
Other	(1		)	(152		)
Net cash provided (used) by operating activities	$	5,703		$	4,715
Investing Activities
Sales
Securities available for sale	$	5,422		$	4,192
Loans	1,180			1,493
Repayments/maturities
Securities available for sale	6,941			8,195
Securities held to maturity	1,917			2,196
Purchases
Securities available for sale	(17,635		)	(8,676		)
Securities held to maturity	(3,072		)	(4,098		)
Loans	(430		)	(690		)
Net change in
Federal funds sold and resale agreements	313			(397		)
Interest-earning deposits with banks	8,795			998
Loans	(4,120		)	(10,606		)
Net cash paid for acquisition				(1,323		)
Other	(965		)	(788		)
Net cash provided (used) by investing activities	$	(1,654	)	$	(9,504	)

(continued on following page)

The PNC Financial Services Group, Inc. – Form 10-Q 43

CONSOLIDATED STATEMENT OF CASH FLOWS

THE PNC FINANCIAL SERVICES GROUP, INC.

(continued from previous page)



Unaudited In millions	Nine Months Ended September 30
Unaudited In millions	2018			2017
Financing Activities
Net change in
Noninterest-bearing deposits	$	(5,114	)	$	(165	)
Interest-bearing deposits	4,959			3,834
Federal funds purchased and repurchase agreements	1,037			(33		)
Federal Home Loan Bank borrowings				3,000
Commercial paper	(100		)
Other borrowed funds	(109		)	829
Sales/issuances
Federal Home Loan Bank borrowings	6,500			6,000
Bank notes and senior debt	3,238			5,309
Subordinated debt	1,243
Other borrowed funds	400			277
Common and treasury stock	61			94
Repayments/maturities
Federal Home Loan Bank borrowings	(7,501		)	(6,011		)
Bank notes and senior debt	(4,175		)	(1,800		)
Subordinated debt	(575		)	(2,408		)
Other borrowed funds	(429		)	(268		)
Redemption of noncontrolling interests				(1,000		)
Acquisition of treasury stock	(2,145		)	(1,927		)
Preferred stock cash dividends paid	(181		)	(181		)
Common stock cash dividends paid	(1,159		)	(904		)
Net cash provided (used) by financing activities	$	(4,050	)	$	4,646
Net Increase (Decrease) In Cash And Due From Banks	(1		)	(143		)
Cash and due from banks at beginning of period	5,249			4,879
Cash and due from banks at end of period	$	5,248		$	4,736
Supplemental Disclosures
Interest paid	$	1,881		$	1,201
Income taxes paid	$	324		$	53
Income taxes refunded	$	463		$	11
Non-cash Investing and Financing Items
Transfer from loans to loans held for sale, net	$	359		$	295
Transfer from loans to foreclosed assets	$	145		$	164
Transfer from trading securities to investment securities				$	192

See accompanying Notes To Consolidated Financial Statements.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THE PNC FINANCIAL SERVICES GROUP, INC.

Unaudited

BUSINESS

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.

NOTE 1 ACCOUNTING POLICIES

Basis of Financial Statement Presentation

Our consolidated financial statements include the accounts of the parent company and its subsidiaries, most of which are wholly-owned, certain partnership interests and variable interest entities.

We prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). We have eliminated intercompany accounts and transactions. We have also reclassified certain prior year amounts to conform to the current period presentation, which did not have a material impact on our consolidated financial condition or results of operations.

In our opinion, the unaudited interim consolidated financial statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

We have also considered the impact of subsequent events on these consolidated financial statements.

When preparing these unaudited interim consolidated financial statements, we have assumed that you have read the audited consolidated financial statements included in our 2017 Form 10-K. Reference is made to Note 1 Accounting Policies in our 2017 Form 10-K for a detailed description of significant accounting policies. There have been no significant changes to our accounting policies as disclosed in our 2017 Form 10-K, except for those accounting policies included in this Note 1 as a result of the adoption of new accounting standards that were effective in the first quarter of 2018. See our first quarter 2018 Quarterly Report on Form 10-Q (First Quarter 2018 Form 10-Q) for more detail on these new accounting standards. These interim consolidated financial statements serve to update our 2017 Form 10-K and may not include all information and Notes necessary to constitute a complete set of financial statements.

Use of Estimates

We prepared these consolidated financial statements using financial information available at the time of preparation, which requires us to make estimates and assumptions that affect the amounts reported. Our most significant estimates pertain to our fair value measurements and allowances for loan and lease losses and unfunded loan commitments and letters of credit. Actual results may differ from the estimates and the differences may be material to the consolidated financial statements.

Revenue Recognition

We earn interest and noninterest income from various sources, including:


•	Lending,


•	Securities portfolio,


•	Asset management,


•	Customer deposits,


•	Loan sales, loan securitizations, and servicing,


•	Brokerage services,


•	Sale of securities,


•	Certain private equity activities, and


•	Securities, derivatives and foreign exchange activities.

The PNC Financial Services Group, Inc. – Form 10-Q 45

In addition, we earn fees and commissions from:


•	Issuing loan commitments, standby letters of credit and financial guarantees,


•	Deposit account services,


•	Merchant services,


•	Selling various insurance products,


•	Providing treasury management services,


•	Providing merger and acquisition advisory and related services


•	Debit and credit card transactions, and


•	Participating in certain capital markets transactions.

Our Asset management noninterest income also includes our share of the earnings of BlackRock recognized under the equity method of accounting.

We record private equity income or loss based on changes in the valuation of the underlying investments or when we dispose of our interest.

We recognize gain/(loss) on changes in the fair value of certain financial instruments where we have elected the fair value option. These financial instruments include certain commercial and residential mortgage loans originated for sale, certain residential mortgage portfolio loans, resale agreements and our investment in BlackRock Series C preferred stock. We also recognize gain/(loss) on changes in the fair value of residential and commercial mortgage servicing rights (MSRs).

We recognize revenue from servicing residential mortgages, commercial mortgages and other consumer loans as earned based on the specific contractual terms. These revenues are reported on the Consolidated Income Statement in the line items Residential mortgage, Corporate services and Consumer services. We recognize revenue from securities, derivatives and foreign exchange customer-related trading, as well as securities underwriting activities, as these transactions occur or as services are provided. We generally recognize gains from the sale of loans upon receipt of cash. Mortgage revenue recognized is reported net of mortgage repurchase reserves.

For the fee-based revenue within the scope of ASC Topic 606 - Revenue from Contracts with Customers (Topic 606), revenue is recognized when or as those services are transferred to the customer. See Note 15 Fee-based Revenue from Contracts with Customers for additional information related to revenue within the scope of Topic 606.

Equity Securities and Partnership Interests

We account for equity securities and equity investments other than BlackRock and private equity investments under one of the following methods:


•	Equity securities that have a readily determinable fair value are included in Equity investments on our Consolidated Balance Sheet. Both realized and unrealized gains and losses are included in Noninterest income. Dividend income on these equity securities is included in Other interest income on our consolidated income statement.

•

For investments in limited partnerships, limited liability companies and other investments that are not required to be consolidated, we use either the equity method of accounting or the practicability exception to fair value. We use the equity method for general and limited partner ownership interests and limited liability companies in which we are considered to have significant influence over the operations of the investee. Under the equity method, we record our equity ownership share of net income or loss of the investee in Noninterest income and any dividends received on equity method investments are recorded as a reduction to the investment balance. When an equity investment experiences an other-than-temporary decline in value, we may be required to record a loss on the investment.

•

We generally use the practicability exception to fair value for all other investments. When we elect this alternative measurement method, the carrying value is adjusted for impairment, if any, plus or minus changes in value resulting from observable price changes in orderly transactions for identical or similar instruments of the same issuer. These investments are written down to fair value if a qualitative assessment indicates impairment and the fair value is less than the carrying value. The amount of the write-down is accounted for as a loss included in Noninterest income. Distributions received on these investments are included in Noninterest income.

Investments described above are included in Equity investments on our Consolidated Balance Sheet.

See Note 1 Accounting Policies of our 2017 Form 10-K for a discussion on our accounting for our investment in BlackRock and private equity investments.

Derivative Instruments and Hedging Activities

We use a variety of financial derivatives as part of our overall asset and liability risk management process to help manage exposure to interest rate, market and credit risk inherent in our business activities. Interest rate and total return swaps, swaptions, interest rate caps

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

and floors, options, forwards, and futures contracts are the primary instruments we use for risk management. Financial derivatives involve, to varying degrees, interest rate, market and credit risk. We manage these risks as part of our asset and liability management process and through credit policies and procedures.

We recognize all derivative instruments at fair value as either Other assets or Other liabilities on the Consolidated Balance Sheet and the related cash flows in the Operating Activities section of the Consolidated Statement of Cash Flows. Adjustments for counterparty credit risk are included in the determination of fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a cash flow or net investment hedging relationship. For all other derivatives, changes in fair value are recognized in earnings.

We utilize a net presentation for derivative instruments on the Consolidated Balance Sheet taking into consideration the effects of legally enforceable master netting agreements. Cash collateral exchanged with counterparties is also netted against the applicable derivative exposures by offsetting obligations to return, or general rights to reclaim, cash collateral against the fair values of the net derivatives being collateralized.

For those derivative instruments that are designated and qualify as accounting hedges, we designate the hedging instrument, based on the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of the net investment in a foreign operation.

We formally document the relationship between the hedging instruments and hedged items, as well as the risk management objective and strategy, before undertaking an accounting hedge. To qualify for hedge accounting, the derivatives and related hedged items must be designated as a hedge at inception of the hedge relationship. In addition, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. For accounting hedge relationships, we formally assess, both at the inception of the hedge and on an ongoing basis, if the derivatives are highly effective in offsetting designated changes in the fair value or cash flows of the hedged item. If it is determined that the derivative instrument is not highly effective, hedge accounting is discontinued. We assess effectiveness using statistical regression analysis. Where the critical terms of the derivative and hedged item match, effectiveness may be assessed qualitatively.

For derivatives that are designated as fair value hedges (i.e., hedging the exposure to changes in the fair value of an asset or a liability attributable to a particular risk, such as changes in LIBOR), changes in the fair value of the hedging instrument are recognized in earnings and offset by also recognizing in earnings the changes in the fair value of the hedged item attributable to the hedged risk. To the extent the change in fair value of the derivative does not offset the change in fair value of the hedged item, the difference is reflected in the Consolidated Income Statement in the same income statement line as the hedged item.

For derivatives designated as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows), the gain or loss on derivatives is reported as a component of Accumulated other comprehensive income (AOCI) and subsequently reclassified to income in the same period or periods during which the hedged cash flows affect earnings and recorded in the same income statement line item as the hedged cash flows. For derivatives designated as a hedge of net investment in a foreign operation, the gain or loss on the derivatives are reported as a component of AOCI.

We discontinue hedge accounting when it is determined that the derivative no longer qualifies as an effective hedge; the derivative expires or is sold, terminated or exercised; or the derivative is de-designated as a fair value or cash flow hedge or, for a cash flow hedge, it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period.

We purchase or originate financial instruments that contain an embedded derivative. For financial instruments not measured at fair value with changes in fair value reported in earnings, we assess, at inception of the transaction, if the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the host contract and whether a separate instrument with the same terms as the embedded derivative would be a derivative. If the embedded derivative is not clearly and closely related to the host contract and meets the definition of a derivative, the embedded derivative is recorded separately from the host contract with changes in fair value recorded in earnings, unless we elect to account for the hybrid instrument at fair value.

We have elected, on an instrument-by-instrument basis, fair value measurement for certain financial instruments with embedded derivatives.

We enter into commitments to originate residential and commercial mortgage loans for sale. We also enter into commitments to purchase or sell commercial and residential real estate loans. These commitments are accounted for as free-standing derivatives which are recorded at fair value in Other assets or Other liabilities on the Consolidated Balance Sheet. Any gain or loss from the change in fair value after the inception of the commitment is recognized in Noninterest income.

Recently Adopted Accounting Standards

We did not adopt any new accounting standards that had a significant impact during the third quarter of 2018.

The PNC Financial Services Group, Inc. – Form 10-Q 47

NOTE 2 LOAN SALE AND SERVICING ACTIVITIES AND VARIABLE INTEREST ENTITIES

Loan Sale and Servicing Activities

As more fully described in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2017 Form 10-K, we have transferred residential and commercial mortgage loans in securitization or sales transactions in which we have continuing involvement. Our continuing involvement generally consists of servicing, repurchasing previously transferred loans under certain conditions and loss share arrangements, and, in limited circumstances, holding of mortgage-backed securities issued by the securitization special purpose entities (SPEs).

We earn servicing and other ancillary fees for our role as servicer and, depending on the contractual terms of the servicing arrangement, we can be terminated as servicer with or without cause. At the consummation date of each type of loan transfer where we retain the servicing, we recognize a servicing right at fair value. See Note 7 Goodwill and Mortgage Servicing Rights for information on our servicing rights, including the carrying value of servicing assets.

The following table provides cash flows associated with our loan sale and servicing activities.

Table 35: Cash Flows Associated with Loan Sale and Servicing Activities



In millions	Residential Mortgages			Commercial Mortgages (a)
Cash Flows - Three months ended September 30, 2018
Sales of loans (b)	$	1,242			$	953
Repurchases of previously transferred loans (c)	$	90
Servicing fees (d)	$	88			$	34
Servicing advances recovered/(funded), net	$	2			$	19
Cash flows on mortgage-backed securities held (e)	$	574			$	51
Cash Flows - Three months ended September 30, 2017
Sales of loans (b)	$	1,468			$	1,280
Repurchases of previously transferred loans (c)	$	103
Servicing fees (d)	$	95			$	32
Servicing advances recovered/(funded), net	$	(4	)		$	(1	)
Cash flows on mortgage-backed securities held (e)	$	372			$	13
Cash Flows - Nine months ended September 30, 2018
Sales of loans (b)	$	3,486			$	2,613
Repurchases of previously transferred loans (c)	$	286
Servicing fees (d)	$	269			$	100
Servicing advances recovered/(funded), net	$	45			$	24
Cash flows on mortgage-backed securities held (e)	$	1,445			$	100
Cash Flows - Nine months ended September 30, 2017
Sales of loans (b)	$	4,385			$	3,639
Repurchases of previously transferred loans (c)	$	331
Servicing fees (d)	$	281			$	95
Servicing advances recovered/(funded), net	$	80			$	25
Cash flows on mortgage-backed securities held (e)	$	1,066			$	196


(a)	Represents cash flow information associated with both commercial mortgage loan transfers and servicing activities.


(b)	Gains/losses recognized on sales of loans were insignificant for the periods presented.


(c)	Includes residential mortgage government insured or guaranteed loans eligible for repurchase through the exercise of our removal of account provision option and loans repurchased due to alleged breaches of origination covenants or representations and warranties made to purchasers.


(d)	Includes contractually specified servicing fees, late charges and ancillary fees.

(e)

Represents cash flows on securities where we transferred to and/or service loans for a securitization SPE and we hold securities issued by that SPE. The carrying values of such securities held were $13.0 billion, $8.8 billion, and $7.6 billion in residential mortgage-backed securities and $.6 billion, $.6 billion, and $.7 billion in commercial mortgage-backed securities at September 30, 2018, December 31, 2017, and September 30, 2017, respectively.

Table 36 presents information about the principal balances of transferred loans that we service and are not recorded on our Consolidated Balance Sheet. We would only experience a loss on these transferred loans if we were required to repurchase a loan, where the repurchase price exceeded the loan's fair value, due to a breach in representations and warranties or a loss sharing arrangement associated with our continuing involvement with these loans. The estimate of losses related to breaches in representations and warranties was insignificant at September 30, 2018.

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

Table 36: Principal Balance, Delinquent Loans and Net Charge-offs Related to Serviced Loans For Others



In millions	Residential Mortgages		Commercial Mortgages (a)
September 30, 2018
Total principal balance	$	55,085	$	49,706
Delinquent loans (b)	$	662	$	240
December 31, 2017
Total principal balance	$	58,320	$	49,116
Delinquent loans (b)	$	899	$	355
Three months ended September 30, 2018
Net charge-offs (c)	$	9	$	117
Three months ended September 30, 2017
Net charge-offs (c)	$	13	$	228
Nine months ended September 30, 2018
Net charge-offs (c)	$	34	$	169
Nine months ended September 30, 2017
Net charge-offs (c)	$	62	$	639


(a)	Represents information at the securitization level in which we have sold loans and we are the servicer for the securitization.


(b)	Serviced delinquent loans are 90 days or more past due or are in process of foreclosure.

(c)

Net charge-offs for Residential mortgages represent credit losses less recoveries distributed and as reported to investors during the period. Net charge-offs for Commercial mortgages represent credit losses less recoveries distributed and as reported by the trustee for commercial mortgage backed securitizations. Realized losses for Agency securitizations are not reflected as we do not manage the underlying real estate upon foreclosure and, as such, do not have access to loss information.

Variable Interest Entities (VIEs)

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2017 Form 10-K, we are involved with various entities in the normal course of business that are deemed to be VIEs.

The following table provides a summary of non-consolidated VIEs with which we have significant continuing involvement but are not the primary beneficiary. We have excluded certain transactions with non-consolidated VIEs from the balances presented in Table 37 where we have determined that our continuing involvement is not significant. We do not consider our continuing involvement to be significant when it relates to a VIE where we only invest in securities issued by the VIE and were not involved in the design of the VIE or where no transfers have occurred between us and the VIE. In addition, where we only have lending arrangements in the normal course of business with entities that could be VIEs, we have excluded these transactions with non-consolidated entities from the balances presented in Table 37. These loans are included as part of the asset quality disclosures that we make in Note 3 Asset Quality.

Table 37: Non-Consolidated VIEs



In millions	PNC Risk of Loss (a)		Carrying Value of Assets Owned by PNC			Carrying Value of Liabilities Owned by PNC
September 30, 2018
Mortgage-Backed Securitizations (b)	$	13,892	$	13,892	(c)
Tax Credit Investments and Other	3,015		3,003		(d)	$	790	(e)
Total	$	16,907	$	16,895		$	790
December 31, 2017
Mortgage-Backed Securitizations (b)	$	9,738	$	9,738	(c)
Tax Credit Investments and Other	3,069		3,001		(d)	$	858	(e)
Total	$	12,807	$	12,739		$	858


(a)	This represents loans, investments and other assets related to non-consolidated VIEs, net of collateral (if applicable). The risk of loss excludes any potential tax recapture associated with tax credit investments.


(b)	Amounts reflect involvement with securitization SPEs where we transferred to and/or service loans for an SPE and we hold securities issued by that SPE. Values disclosed in the PNC Risk of Loss column represent our maximum exposure to loss for those securities’ holdings.


(c)	Included in Investment securities, Mortgage servicing rights and Other assets on our Consolidated Balance Sheet.


(d)	Included in Investment securities, Loans, Equity investments and Other assets on our Consolidated Balance Sheet.


(e)	Included in Total deposits and Other liabilities on our Consolidated Balance Sheet.

We make certain equity investments in various tax credit limited partnerships or limited liability companies (LLCs). The purpose of these investments is to achieve a satisfactory return on capital and to assist us in achieving goals associated with the Community Reinvestment Act. During the nine months ended September 30, 2018, we recognized $168 million of amortization, $179 million of tax credits, and $39 million of other tax benefits associated with qualified investments in low income housing tax credits within Income taxes. The amounts for the third quarter of 2018 were $56 million, $60 million and $13 million, respectively.

The PNC Financial Services Group, Inc. – Form 10-Q 49

NOTE 3 ASSET QUALITY

We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency rates may be a key indicator, among other considerations, of credit risk within the loan portfolios. The 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.

Nonperforming assets include nonperforming loans and leases, OREO, foreclosed and other assets. Nonperforming loans are those loans accounted for at amortized cost whose credit quality has deteriorated to the extent that full collection of contractual principal and interest is not probable. Interest income is not recognized on these loans. Loans accounted for under the fair value option are reported as performing loans as these loans are accounted for at fair value. However, when nonaccrual criteria is met, interest income is not recognized on these loans. Additionally, certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest are not reported as nonperforming loans and continue to accrue interest. Purchased impaired loans are excluded from nonperforming loans as we are currently accreting interest income over the expected life of the loans.

See Note 1 Accounting Policies in our 2017 Form 10-K for additional information on our loan related policies.

The following tables display the delinquency status of our loans and our nonperforming assets at September 30, 2018 and December 31, 2017, respectively.

Table 38: Analysis of Loan Portfolio (a)



	Accruing
Dollars in millions	Current or Less Than 30 Days Past Due			30-59 Days Past Due			60-89 Days Past Due			90 Days Or More Past Due			Total Past Due				Nonperforming Loans			Fair Value Option Nonaccrual Loans (c)			Purchased Impaired Loans			Total Loans (d)
September 30, 2018
Commercial Lending
Commercial	$	113,189		$	60		$	35		$	67		$	162			$	320								$	113,671
Commercial real estate	28,484			8			3						11				68									28,563
Equipment lease financing	7,164			29			16						45				5									7,214
Total commercial lending	148,837			97			54			67			218				393									149,448
Consumer Lending
Home equity	24,967			77			30						107				828						$	726		26,628
Residential real estate	15,733			130			67			357			554			(b)	363			$	177		1,376			18,203
Credit card	5,852			45			28			48			121				6									5,979
Other consumer
Automobile	14,077			104			25			8			137				95									14,309
Education and other	8,186			98			54			139			291			(b)	9									8,486
Total consumer lending	68,815			454			204			552			1,210				1,301			177			2,102			73,605
Total	$	217,652		$	551		$	258		$	619		$	1,428			$	1,694		$	177		$	2,102		$	223,053
Percentage of total loans	97.58		%	.25		%	.12		%	.28		%	.64		%		.76		%	.08		%	.94		%	100.00		%
December 31, 2017
Commercial Lending
Commercial	$	109,989		$	45		$	25		$	39		$	109			$	429								$	110,527
Commercial real estate	28,826			27			2						29				123									28,978
Equipment lease financing	7,914			17			1						18				2									7,934
Total commercial lending	146,729			89			28			39			156				554									147,439
Consumer Lending
Home equity	26,561			78			26						104				818						$	881		28,364
Residential real estate	14,389			151			74			486			711			(b)	400			$	197		1,515			17,212
Credit card	5,579			43			26			45			114				6									5,699
Other consumer
Automobile	12,697			79			20			8			107				76									12,880
Education and other	8,525			105			64			159			328			(b)	11									8,864
Total consumer lending	67,751			456			210			698			1,364				1,311			197			2,396			73,019
Total	$	214,480		$	545		$	238		$	737		$	1,520			$	1,865		$	197		$	2,396		$	220,458
Percentage of total loans	97.29		%	.25		%	.11		%	.33		%	.69		%		.85		%	.09		%	1.08		%	100.00		%

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


(a)	Amounts in table represent recorded investment and exclude loans held for sale. Recorded investment in a loan includes the unpaid principal balance plus net accounting adjustments, less any charge-offs. Recorded investment does not include any associated valuation allowance.

(b)

Past due loan amounts exclude purchased impaired loans, even if contractually past due (or if we do not expect to receive payment in full based on the original contractual terms), as we are currently accreting interest income over the expected life of the loans. Past due loan amounts include government insured or guaranteed Residential real estate mortgages totaling $.5 billion and $.6 billion at September 30, 2018 and December 31, 2017, respectively, and Education and other consumer loans totaling $.2 billion and $.3 billion at September 30, 2018 and December 31, 2017, respectively.


(c)	Consumer loans accounted for under the fair value option for which we do not expect to collect substantially all principal and interest are subject to nonaccrual accounting and classification upon meeting any of our nonaccrual policies. Given that these loans are not accounted for at amortized cost, these loans have been excluded from the nonperforming loan population.


(d)	Net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.2 billion at both September 30, 2018 and December 31, 2017.

At September 30, 2018, we pledged $17.0 billion of commercial loans to the Federal Reserve Bank and $63.7 billion of residential real estate and other loans to the Federal Home Loan Bank as collateral for the ability to borrow, if necessary. The comparable amounts at December 31, 2017 were $18.7 billion and $62.8 billion, respectively.

Table 39: Nonperforming Assets



Dollars in millions	September 30 2018			December 31 2017
Nonperforming loans
Total commercial lending	$	393		$	554
Total consumer lending (a)	1,301			1,311
Total nonperforming loans	1,694			1,865
OREO, foreclosed and other assets	131			170
Total nonperforming assets	$	1,825		$	2,035
Nonperforming loans to total loans	.76		%	.85		%
Nonperforming assets to total loans, OREO, foreclosed and other assets	.82		%	.92		%
Nonperforming assets to total assets	.48		%	.53		%


(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.

Nonperforming loans also include certain loans whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. In accordance with applicable accounting guidance, these loans are considered troubled debt restructurings (TDRs). See Note 1 Accounting Policies in our 2017 Form 10-K and the TDR section of this Note 3.

Total nonperforming loans in Table 39 include TDRs of $.9 billion at September 30, 2018 and $1.0 billion at December 31, 2017. TDRs that are performing, including consumer credit card TDR loans, totaled $1.0 billion at September 30, 2018 and $1.1 billion at December 31, 2017, and are excluded from nonperforming loans. Nonperforming TDRs are returned to accrual status and classified as performing after demonstrating a period of at least six months of consecutive performance under the restructured terms. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to us and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status. See the TDRs section of this Note 3 for more information on TDRs.

Additional Asset Quality Indicators

We have two overall portfolio segments – Commercial Lending and Consumer Lending. Each of these two segments comprises multiple loan classes. Classes are characterized by similarities in initial measurement, risk attributes and the manner in which we monitor and assess credit risk. The Commercial Lending segment is composed of the commercial, commercial real estate and equipment lease financing loan classes. The Consumer Lending segment is composed of the home equity, residential real estate, credit card and other consumer loan classes.

Commercial Lending Loan Classes

The following table presents asset quality indicators for the Commercial Lending loan classes. See Note 3 Asset Quality in our 2017 Form 10-K for additional information related to our Commercial Lending loan classes, including discussion around the asset quality indicators that we use to monitor and manage the credit risk associated with each loan class.

The PNC Financial Services Group, Inc. – Form 10-Q 51

Table 40: Commercial Lending Asset Quality Indicators (a)



			Criticized Commercial Loans
In millions	Pass Rated		Special Mention (b)		Substandard (c)		Doubtful (d)		Total Loans
September 30, 2018
Commercial	$	107,854	$	2,046	$	3,722	$	49	$	113,671
Commercial real estate	28,194		127		241		1		28,563
Equipment lease financing	7,063		84		64		3		7,214
Total commercial lending	$	143,111	$	2,257	$	4,027	$	53	$	149,448
December 31, 2017
Commercial	$	105,280	$	1,858	$	3,331	$	58	$	110,527
Commercial real estate	28,380		148		435		15		28,978
Equipment lease financing	7,754		77		102		1		7,934
Total commercial lending	$	141,414	$	2,083	$	3,868	$	74	$	147,439


(a)	Loans are classified as “Pass”, “Special Mention”, “Substandard” and “Doubtful” based on the Regulatory Classification definitions. We use probability of default and loss given default to rate commercial loans.


(b)	Special Mention rated loans have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects at some future date. These loans do not expose us to sufficient risk to warrant a more adverse classification at the reporting date.


(c)	Substandard rated loans have a well-defined weakness or weaknesses that jeopardize the collection or liquidation of debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.


(d)	Doubtful rated loans possess all the inherent weaknesses of a Substandard rated loan with the additional characteristics that the weakness makes collection or liquidation in full improbable due to existing facts, conditions and values.

Consumer Lending Loan Classes

See Note 3 Asset Quality in our 2017 Form 10-K for additional information related to our Consumer Lending loan classes, including discussion around the asset quality indicators that we use to monitor and manage the credit risk associated with each loan class.

Home Equity and Residential Real Estate Loan Classes

The following table presents asset quality indicators for the home equity and residential real estate loan classes, excluding consumer purchased impaired loans of $2.1 billion and $2.4 billion at September 30, 2018 and December 31, 2017, respectively, and government insured or guaranteed residential real estate mortgages of $.7 billion and $.8 billion at September 30, 2018 and December 31, 2017, respectively.

Table 41: Asset Quality Indicators for Home Equity and Residential Real Estate Loans – Excluding Purchased Impaired and Government Insured or Guaranteed Loans (a)



	Home Equity				Residential Real Estate		Total
September 30, 2018 - in millions	1st Liens		2nd Liens		Residential Real Estate		Total
Current estimated LTV ratios
Greater than or equal to 125% and updated FICO scores:
Greater than 660	$	163	$	348	$	134	$	645
Less than or equal to 660 (b)	27		47		15		89
Missing FICO	1		4		1		6
Greater than or equal to 100% to less than 125% and updated FICO scores:
Greater than 660	280		720		269		1,269
Less than or equal to 660 (b)	38		89		30		157
Missing FICO	1		5		3		9
Greater than or equal to 90% to less than 100% and updated FICO scores:
Greater than 660	299		814		315		1,428
Less than or equal to 660	41		93		24		158
Missing FICO	2		5		4		11
Less than 90% and updated FICO scores:
Greater than 660	13,075		7,721		14,724		35,520
Less than or equal to 660	1,157		775		555		2,487
Missing FICO	35		48		92		175
Total home equity and residential real estate loans	$	15,119	$	10,669	$	16,166	$	41,954

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



December 31, 2017 - in millions	Home Equity				Residential Real Estate		Total
December 31, 2017 - in millions	1st Liens		2nd Liens		Residential Real Estate		Total
Current estimated LTV ratios
Greater than or equal to 125% and updated FICO scores:
Greater than 660	$	108	$	385	$	126	$	619
Less than or equal to 660 (b)	21		64		23		108
Missing FICO	1		5		1		7
Greater than or equal to 100% to less than 125% and updated FICO scores:
Greater than 660	300		842		253		1,395
Less than or equal to 660 (b)	46		143		45		234
Missing FICO	2		9		5		16
Greater than or equal to 90% to less than 100% and updated FICO scores:
Greater than 660	331		890		324		1,545
Less than or equal to 660	55		134		55		244
Missing FICO	2		9		4		15
Less than 90% and updated FICO scores:
Greater than 660	13,954		8,066		13,445		35,465
Less than or equal to 660	1,214		774		507		2,495
Missing FICO	42		57		95		194
Total home equity and residential real estate loans	$	16,076	$	11,378	$	14,883	$	42,337


(a)	Amounts shown represent recorded investment.

(b)

Higher risk loans are defined as loans with both an updated FICO score of less than or equal to 660 and an updated LTV greater than or equal to 100%. The following states had the highest percentage of higher risk loans at September 30, 2018: New Jersey 17%, Pennsylvania 17%, Illinois 12%, Ohio 9%, Maryland 7%, Florida 5%, North Carolina 5% and Michigan 4%. The remainder of the states had lower than 4% of the higher risk loans individually, and collectively they represent approximately 24% of the higher risk loans. The following states had the highest percentage of higher risk loans at December 31, 2017: New Jersey 17%, Pennsylvania 13%, Illinois 13%, Ohio 9%, Maryland 8%, Florida 6%, North Carolina 5% and Michigan 4%. The remainder of the states had lower than 4% of the higher risk loans individually, and collectively they represent approximately 25% of the higher risk loans.

Credit Card and Other Consumer Loan Classes

The following table presents asset quality indicators for the credit card and other consumer loan classes.

Table 42: Credit Card and Other Consumer Loan Classes Asset Quality Indicators



	Credit Card				Other Consumer (a)
Dollars in millions	Amount		% of Total Loans Using FICO Credit Metric		Amount		% of Total Loans Using FICO Credit Metric
September 30, 2018
FICO score greater than 719	$	3,588	60	%	$	10,385	58	%
650 to 719	1,672		28	%	5,087		28	%
620 to 649	268		5	%	1,048		6	%
Less than 620	326		5	%	1,034		6	%
No FICO score available or required (b)	125		2	%	395		2	%
Total loans using FICO credit metric	5,979		100	%	17,949		100	%
Consumer loans using other internal credit metrics (a)					4,846
Total loan balance	$	5,979			$	22,795
Weighted-average updated FICO score (b)			732				733
December 31, 2017
FICO score greater than 719	$	3,457	61	%	$	10,366	63	%
650 to 719	1,596		28	%	4,352		27	%
620 to 649	250		4	%	659		4	%
Less than 620	272		5	%	715		4	%
No FICO score available or required (b)	124		2	%	314		2	%
Total loans using FICO credit metric	5,699		100	%	16,406		100	%
Consumer loans using other internal credit metrics (a)					5,338
Total loan balance	$	5,699			$	21,744
Weighted-average updated FICO score (b)			735				741

(a)

We use updated FICO scores as an asset quality indicator for non-government guaranteed or insured education loans, automobile loans and other secured and unsecured lines and loans. We use internal credit metrics, such as delinquency status, geography or other factors, as an asset quality indicator for government guaranteed or insured education loans and consumer loans to high net worth individuals, as internal credit metrics are more relevant than FICO scores for these types of loans.

(b)

Credit card loans and other consumer loans with no FICO score available or required generally refers to new accounts issued to borrowers with limited credit history, accounts for which we cannot obtain an updated FICO score (e.g., recent profile changes), cards issued with a business name and/or cards secured by collateral. Management proactively assesses the risk and size of this loan portfolio and, when necessary, takes actions to mitigate the credit risk. Weighted-average updated FICO score excludes accounts with no FICO score available or required.

The PNC Financial Services Group, Inc. – Form 10-Q 53

Troubled Debt Restructurings (TDRs)

Table 43 quantifies the number of loans that were classified as TDRs, as well as the change in the loans’ recorded investment as a result of becoming a TDR during the three and nine months ended September 30, 2018 and September 30, 2017. Additionally, the table provides information about the types of TDR concessions. See Note 3 Asset Quality in our 2017 Form 10-K for additional discussion of TDRs.

Table 43: Financial Impact and TDRs by Concession Type (a)



			Pre-TDR Recorded Investment (b)		Post-TDR Recorded Investment (c)
During the three months ended September 30, 2018 Dollars in millions	Number of Loans		Pre-TDR Recorded Investment (b)		Principal Forgiveness		Rate Reduction		Other		Total
Total commercial lending		18	$	115	$	2	$	24	$	81	$	107
Total consumer lending		3,147	45				19		23		42
Total TDRs		3,165	$	160	$	2	$	43	$	104	$	149
During the three months ended September 30, 2017 Dollars in millions
Total commercial lending		25	$	44	$	14			$	30	$	44
Total consumer lending		2,965	52				$	36	15		51
Total TDRs		2,990	$	96	$	14	$	36	$	45	$	95



			Pre-TDR Recorded Investment (b)		Post-TDR Recorded Investment (c)
During the nine months ended September 30, 2018 Dollars in millions	Number of Loans		Pre-TDR Recorded Investment (b)		Principal Forgiveness		Rate Reduction		Other		Total
Total commercial lending		65	$	145	$	2	$	26	$	105	$	133
Total consumer lending		9,015	129		1		66		52		119
Total TDRs		9,080	$	274	$	3	$	92	$	157	$	252
During the nine months ended September 30, 2017 Dollars in millions
Total commercial lending		107	$	256	$	18	$	6	$	191	$	215
Total consumer lending		8,839	179				116		62		178
Total TDRs		8,946	$	435	$	18	$	122	$	253	$	393


(a)	Impact of partial charge-offs at TDR date are included in this table.


(b)	Represents the recorded investment of the loans as of the quarter end prior to TDR designation, and excludes immaterial amounts of accrued interest receivable.


(c)	Represents the recorded investment of the TDRs as of the end of the quarter in which the TDR occurs, and excludes immaterial amounts of accrued interest receivable.

After a loan is determined to be a TDR, we continue to track its performance under its most recent restructured terms. We consider a TDR to have subsequently defaulted when it becomes 60 days past due after the most recent date the loan was restructured. The recorded investment of loans that were both (i) classified as TDRs or were subsequently modified during each 12-month period preceding January 1, 2018 and January 1, 2017, respectively, and (ii) subsequently defaulted during the three and nine months ended September 30, 2018 totaled $19 million and $44 million, respectively. The comparable amounts for the three and nine months ended September 30, 2017 totaled $49 million and $107 million, respectively.

Impaired Loans

Impaired loans include commercial and consumer nonperforming loans and TDRs, regardless of nonperforming status. TDRs that were previously recorded at amortized cost and are now classified and accounted for as held for sale are also included. Excluded from impaired loans are nonperforming leases, loans accounted for as held for sale other than the TDRs described in the preceding sentence, loans accounted for under the fair value option, smaller balance homogeneous type loans and purchased impaired loans. We did not recognize any interest income on impaired loans that have not returned to performing status, while they were impaired during the nine months ended September 30, 2018 and September 30, 2017. Table 44 provides further detail on impaired loans individually evaluated for impairment and the associated allowance for loan and lease losses (ALLL). Certain commercial and consumer impaired loans do not have a related ALLL as the valuation of these impaired loans exceeded the recorded investment.

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

Table 44: Impaired Loans



In millions	Unpaid Principal Balance		Recorded Investment		Associated Allowance		Average Recorded Investment (a)
September 30, 2018
Impaired loans with an associated allowance
Total commercial lending	$	494	$	333	$	65	$	357
Total consumer lending	933		879		145		925
Total impaired loans with an associated allowance	1,427		1,212		210		1,282
Impaired loans without an associated allowance
Total commercial lending	326		262				287
Total consumer lending	1,039		618				650
Total impaired loans without an associated allowance	1,365		880				937
Total impaired loans	$	2,792	$	2,092	$	210	$	2,219
December 31, 2017
Impaired loans with an associated allowance
Total commercial lending	$	580	$	353	$	76	$	419
Total consumer lending	1,061		1,014		195		1,072
Total impaired loans with an associated allowance	1,641		1,367		271		1,491
Impaired loans without an associated allowance
Total commercial lending	494		366				330
Total consumer lending	1,019		638				648
Total impaired loans without an associated allowance	1,513		1,004				978
Total impaired loans	$	3,154	$	2,371	$	271	$	2,469


(a)	Average recorded investment is for the nine months ended September 30, 2018 and the year ended December 31, 2017, respectively.

NOTE 4 ALLOWANCE FOR LOAN AND LEASE LOSSES

We maintain the ALLL at levels that we believe to be appropriate to absorb estimated probable credit losses incurred in the portfolios as of the balance sheet date. We use the two main portfolio segments – Commercial Lending and Consumer Lending, and develop and document the ALLL under separate methodologies for each of these portfolio segments. See Note 1 Accounting Policies in our 2017 Form 10-K for a description of the accounting policies for ALLL.

A rollforward of the ALLL and associated loan data follows:

Table 45: Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data



	2018									2017
At or for the nine months ended September 30 Dollars in millions	Commercial Lending			Consumer Lending			Total			Commercial Lending			Consumer Lending			Total
Allowance for Loan and Lease Losses
January 1	$	1,582		$	1,029		$	2,611		$	1,534		$	1,055		$	2,589
Charge-offs	(92		)	(472		)	(564		)	(155		)	(422		)	(577		)
Recoveries	74			177			251			86			157			243
Net (charge-offs)	(18		)	(295		)	(313		)	(69		)	(265		)	(334		)
Provision for credit losses	48			212			260			153			163			316
Net decrease / (increase) in allowance for unfunded loan commitments and letters of credit	7			2			9			9			(1		)	8
Other	(1		)	18			17			1			25			26
September 30	$	1,618		$	966		$	2,584		$	1,628		$	977		$	2,605
TDRs individually evaluated for impairment	$	28		$	145		$	173		$	49		$	194		$	243
Other loans individually evaluated for impairment	37						37			44						44
Loans collectively evaluated for impairment	1,553			547			2,100			1,515			499			2,014
Purchased impaired loans				274			274			20			284			304
September 30	$	1,618		$	966		$	2,584		$	1,628		$	977		$	2,605
Loan Portfolio
TDRs individually evaluated for impairment	$	389		$	1,497		$	1,886		$	429		$	1,673		$	2,102
Other loans individually evaluated for impairment	206						206			289						289
Loans collectively evaluated for impairment	148,853			69,253			218,106			147,751			67,603			215,354
Fair value option loans (a)				753			753						807			807
Purchased impaired loans				2,102			2,102			58			2,499			2,557
September 30	$	149,448		$	73,605		$	223,053		$	148,527		$	72,582		$	221,109
Portfolio segment ALLL as a percentage of total ALLL	63		%	37		%	100		%	62		%	38		%	100		%
Ratio of ALLL to total loans	1.08		%	1.31		%	1.16		%	1.10		%	1.35		%	1.18		%


(a)	Loans accounted for under the fair value option are not evaluated for impairment as these loans are accounted for at fair value. Accordingly, there is no allowance recorded on these loans.

The PNC Financial Services Group, Inc. – Form 10-Q 55

NOTE 5 INVESTMENT SECURITIES

Table 46: Investment Securities Summary



	September 30, 2018									December 31, 2017
In millions	Amortized Cost		Unrealized					Fair Value		Amortized Cost		Unrealized					Fair Value
In millions	Amortized Cost		Gains		Losses			Fair Value		Amortized Cost		Gains		Losses			Fair Value
Securities Available for Sale
Debt securities
U.S. Treasury and government agencies	$	17,054	$	91	$	(294	)	$	16,851	$	14,432	$	173	$	(84	)	$	14,521
Residential mortgage-backed
Agency	28,694		46		(838		)	27,902		25,534		121		(249		)	25,406
Non-agency	2,034		331		(13		)	2,352		2,443		336		(21		)	2,758
Commercial mortgage-backed
Agency	2,050				(85		)	1,965		1,960		2		(58		)	1,904
Non-agency	2,561		7		(29		)	2,539		2,603		19		(9		)	2,613
Asset-backed	5,545		64		(17		)	5,592		5,331		74		(8		)	5,397
Other debt	3,969		92		(51		)	4,010		4,322		129		(17		)	4,434
Total debt securities	61,907		631		(1,327		)	61,211		56,625		854		(446		)	57,033
Other (a)										587				(2		)	585
Total securities available for sale	$	61,907	$	631	$	(1,327	)	$	61,211	$	57,212	$	854	$	(448	)	$	57,618
Securities Held to Maturity
Debt securities
U.S. Treasury and government agencies	$	754	$	19	$	(38	)	$	735	$	741	$	37	$	(13	)	$	765
Residential mortgage-backed
Agency	15,962		6		(573		)	15,395		14,503		77		(139		)	14,441
Non-agency	155							155		167		7					174
Commercial mortgage-backed
Agency	164		1		(2		)	163		407		4					411
Non-agency	502				(1		)	501		538		10					548
Asset-backed	187							187		200		1					201
Other debt	1,869		44		(28		)	1,885		1,957		88		(20		)	2,025
Total securities held to maturity	$	19,593	$	70	$	(642	)	$	19,021	$	18,513	$	224	$	(172	)	$	18,565


(a)	On January 1, 2018, $.6 billion of available for sale securities, primarily money market funds, were reclassified to equity investments in accordance with the adoption of Accounting Standards Update (ASU) 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our First Quarter 2018 Form 10-Q for additional detail on this adoption.

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the securities available for sale portfolio are included in Shareholders’ equity as AOCI, unless credit-related. Securities held to maturity are carried at amortized cost. At September 30, 2018, AOCI included pretax gains of $27 million from derivatives that hedged the purchase of investment securities classified as held to maturity. The gains will be accreted into interest income as an adjustment of yield on the securities.

Table 47 presents gross unrealized losses and fair value of debt securities at September 30, 2018 and December 31, 2017. The securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and twelve months or more based on the point in time that the fair value declined below the amortized cost basis. The table includes debt securities where a portion of other than temporary impairment (OTTI) has been recognized in AOCI.

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

Table 47: Gross Unrealized Loss and Fair Value of Debt Securities



	Unrealized loss position less than 12 months					Unrealized loss position 12 months or more					Total
In millions	Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value
September 30, 2018
Securities Available for Sale
Debt securities
U.S. Treasury and government agencies	$	(177	)	$	8,745	$	(117	)	$	2,253	$	(294	)	$	10,998
Residential mortgage-backed
Agency	(331		)	15,278		(507		)	9,409		(838		)	24,687
Non-agency	(1		)	105		(12		)	308		(13		)	413
Commercial mortgage-backed
Agency	(8		)	412		(77		)	1,473		(85		)	1,885
Non-agency	(19		)	1,128		(10		)	196		(29		)	1,324
Asset-backed	(14		)	3,095		(3		)	372		(17		)	3,467
Other debt	(24		)	1,564		(27		)	838		(51		)	2,402
Total debt securities available for sale	$	(574	)	$	30,327	$	(753	)	$	14,849	$	(1,327	)	$	45,176
Securities Held to Maturity
Debt securities
U.S. Treasury and government agencies						$	(38	)	$	429	$	(38	)	$	429
Residential mortgage-backed - Agency	$	(232	)	$	8,631	(341		)	5,797		(573		)	14,428
Commercial mortgage-backed
Agency	(2		)	64							(2		)	64
Non-agency	(1		)	344							(1		)	344
Other debt	(7		)	144		(21		)	102		(28		)	246
Total debt securities held to maturity	$	(242	)	$	9,183	$	(400	)	$	6,328	$	(642	)	$	15,511
December 31, 2017
Securities Available for Sale
Debt securities
U.S. Treasury and government agencies	$	(42	)	$	6,099	$	(42	)	$	1,465	$	(84	)	$	7,564
Residential mortgage-backed
Agency	(47		)	8,151		(202		)	9,954		(249		)	18,105
Non-agency						(21		)	383		(21		)	383
Commercial mortgage-backed
Agency	(11		)	524		(47		)	1,302		(58		)	1,826
Non-agency	(3		)	400		(6		)	333		(9		)	733
Asset-backed	(4		)	1,697		(4		)	462		(8		)	2,159
Other debt	(3		)	966		(14		)	798		(17		)	1,764
Total debt securities available for sale	$	(110	)	$	17,837	$	(336	)	$	14,697	$	(446	)	$	32,534
Securities Held to Maturity
Debt securities
U.S. Treasury and government agencies	$	(3	)	$	195	$	(10	)	$	255	$	(13	)	$	450
Residential mortgage-backed - Agency	(10		)	3,167		(129		)	6,168		(139		)	9,335
Other debt	(12		)	83		(8		)	67		(20		)	150
Total debt securities held to maturity	$	(25	)	$	3,445	$	(147	)	$	6,490	$	(172	)	$	9,935

Evaluating Investment Securities for OTTI

For the securities in Table 47, as of September 30, 2018 we do not intend to sell and believe we will not be required to sell the securities prior to recovery of the amortized cost basis.

On at least a quarterly basis, we review all debt securities that are in an unrealized loss position for OTTI, as discussed in Note 1 Accounting Policies of our 2017 Form 10-K. For those securities on our Consolidated Balance Sheet at September 30, 2018, where during our quarterly security-level impairment assessments we determined losses represented OTTI, we have recorded cumulative credit losses of $1.1 billion in earnings and accordingly have reduced the amortized cost of our securities.

The majority of these cumulative impairment charges related to non-agency residential mortgage-backed and asset-backed securities rated BB or lower. During the first nine months of 2018 and 2017, the OTTI credit losses recognized in noninterest income and the OTTI noncredit losses recognized in AOCI on securities were not significant.

The PNC Financial Services Group, Inc. – Form 10-Q 57

Information relating to gross realized securities gains and losses from the sales of securities is set forth in the following table:

Table 48: Gains (Losses) on Sales of Securities Available for Sale



Nine months ended September 30 In millions	Proceeds		Gross Gains		Gross Losses			Net Gains (Losses)			Tax Expense (Benefit)
2018	$	5,464	$	43	$	(48	)	(5		)	$	(1	)
2017	$	4,221	$	31	$	(21	)	$	10		$	3

The following table presents, by remaining contractual maturity, the amortized cost, fair value and weighted-average yield of debt securities at September 30, 2018.

Table 49: Contractual Maturity of Debt Securities



September 30, 2018 Dollars in millions	1 Year or Less			After 1 Year through 5 Years			After 5 Years through 10 Years			After 10 Years			Total
Securities Available for Sale
U.S. Treasury and government agencies	$	265		$	12,052		$	4,434		$	303		$	17,054
Residential mortgage-backed
Agency	2			67			611			28,014			28,694
Non-agency										2,034			2,034
Commercial mortgage-backed
Agency	4			457			412			1,177			2,050
Non-agency							445			2,116			2,561
Asset-backed	18			2,129			2,110			1,288			5,545
Other debt	604			1,694			692			979			3,969
Total debt securities available for sale	$	893		$	16,399		$	8,704		$	35,911		$	61,907
Fair value	$	892		$	16,160		$	8,666		$	35,493		$	61,211
Weighted-average yield, GAAP basis	2.63		%	2.17		%	2.93		%	3.16		%	2.85		%
Securities Held to Maturity
U.S. Treasury and government agencies							$	484		$	270		$	754
Residential mortgage-backed
Agency				$	69		507			15,386			15,962
Non-agency										155			155
Commercial mortgage-backed
Agency	$	62		47			4			51			164
Non-agency										502			502
Asset-backed				12			100			75			187
Other debt	34			532			803			500			1,869
Total debt securities held to maturity	$	96		$	660		$	1,898		$	16,939		$	19,593
Fair value	$	96		$	668		$	1,912		$	16,345		$	19,021
Weighted-average yield, GAAP basis	4.67		%	3.82		%	3.45		%	3.26		%	3.30		%

Weighted-average yields are based on amortized cost with effective yields weighted for the contractual maturity of each security. At September 30, 2018, there were no securities of a single issuer, other than the Federal National Mortgage Association (FNMA), that exceeded 10% of Total shareholders’ equity. The FNMA investments had a total amortized cost of $36.5 billion and fair value of $35.3 billion.

The following table presents the fair value of securities that have been either pledged to or accepted from others to collateralize outstanding borrowings.

Table 50: Fair Value of Securities Pledged and Accepted as Collateral



In millions	September 30 2018		December 31 2017
Pledged to others	$	9,166	$	8,175
Accepted from others:
Permitted by contract or custom to sell or repledge	$	790	$	1,152
Permitted amount repledged to others	$	790	$	1,097

The securities pledged to others include positions held in our portfolio of investment securities, trading securities and securities accepted as collateral from others that we are permitted by contract or custom to sell or repledge, and were used to secure public and trust deposits, repurchase agreements and for other purposes.

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

NOTE 6 FAIR VALUE

Fair Value Measurement

We measure certain financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date, determined using an exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair value hierarchy established by GAAP requires us to maximize the use of observable inputs when measuring fair value. For more information regarding the fair value hierarchy, see Note 6 Fair Value in our 2017 Form 10-K.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

For more information on the valuation methodologies used to measure assets and liabilities at fair value on a recurring basis, see Note 6 Fair Value in our 2017 Form 10-K. The following table summarizes our assets and liabilities measured at fair value on a recurring basis, including instruments for which we have elected the fair value option.

Table 51: Fair Value Measurements – Recurring Basis Summary



	September 30, 2018								December 31, 2017
In millions	Level 1		Level 2		Level 3		Total Fair Value		Level 1		Level 2		Level 3		Total Fair Value
Assets
Residential mortgage loans held for sale			$	628	$	3	$	631			$	829	$	3	$	832
Commercial mortgage loans held for sale			329		89		418				723		107		830
Securities available for sale
U.S. Treasury and government agencies	$	16,422	429				16,851		$	14,088	433				14,521
Residential mortgage-backed
Agency			27,902				27,902				25,406				25,406
Non-agency			84		2,268		2,352				97		2,661		2,758
Commercial mortgage-backed
Agency			1,965				1,965				1,904				1,904
Non-agency			2,539				2,539				2,613				2,613
Asset-backed			5,299		293		5,592				5,065		332		5,397
Other debt			3,921		89		4,010				4,347		87		4,434
Total debt securities	16,422		42,139		2,650		61,211		14,088		39,865		3,080		57,033
Other (a)									524		61				585
Total securities available for sale	16,422		42,139		2,650		61,211		14,612		39,926		3,080		57,618
Loans			472		281		753				571		298		869
Equity investments (b)	591		59		1,042		1,904						1,036		1,265
Residential mortgage servicing rights					1,370		1,370						1,164		1,164
Commercial mortgage servicing rights					766		766						668		668
Trading securities (c)	1,678		1,883		2		3,563		1,243		1,670		2		2,915
Financial derivatives (c) (d)			1,781		8		1,789				2,864		10		2,874
Other assets	309		186		58		553		278		253		107		638
Total assets	$	19,000	$	47,477	$	6,269	$	72,958	$	16,133	$	46,836	$	6,475	$	69,673
Liabilities
Other borrowed funds	$	517	$	361	$	9	$	887	$	1,079	$	254	$	11	$	1,344
Financial derivatives (d) (e)			2,600		342		2,942				2,369		487		2,856
Other liabilities					55		55						33		33
Total liabilities	$	517	$	2,961	$	406	$	3,884	$	1,079	$	2,623	$	531	$	4,233


(a)	Prior period amounts included $.6 billion of available for sale securities, primarily money market funds, that were reclassified to equity investments on January 1, 2018 as the result of the adoption of ASU 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our First Quarter 2018 Form 10-Q for additional details on this adoption.


(b)	Certain investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the Consolidated Balance Sheet.


(c)	Included in Other assets on the Consolidated Balance Sheet.


(d)	Amounts at September 30, 2018 and December 31, 2017 are presented gross and are not reduced by the impact of legally enforceable master netting agreements that allow us to net positive and negative positions and cash collateral held or placed with the same counterparty. See Note 9 Financial Derivatives for additional information related to derivative offsetting.


(e)	Included in Other liabilities on the Consolidated Balance Sheet.

The PNC Financial Services Group, Inc. – Form 10-Q 59

Reconciliations of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the three and nine months ended September 30, 2018 and 2017 follow:

Table 52: Reconciliation of Level 3 Assets and Liabilities

Three Months Ended September 30, 2018



			Total realized / unrealized gains or losses for the period (a)																								Unrealized gains / losses on assets and liabilities held on Consolidated Balance Sheet at September 30, 2018 (a) (b)
Level 3 Instruments Only In millions	Fair Value June 30, 2018		Included in Earnings			Included in Other comprehensive income				Purchases		Sales			Issuances		Settlements			Transfers into Level 3		Transfers out of Level 3			Fair Value Sept. 30, 2018
Assets
Residential mortgage loans held for sale	$	4								$	2	$	(1	)						$	5	$	(7	)	$	3
Commercial mortgage loans held for sale	91		$	1													$	(3	)						89
Securities available for sale
Residential mortgage- backed non-agency	2,405		18				$	(1	)								(154		)						2,268
Asset-backed	308		2				(3		)								(14		)						293
Other debt	91						1			2												(5		)	89
Total securities available for sale	2,804		20				(3		)	2							(168		)			(5		)	2,650
Loans	282		4							25		(18		)			(1		)	8		(19		)	281
Equity investments	1,167		81							52		(258		)											1,042		$	18
Residential mortgage servicing rights	1,297		41							66					$	12	(46		)						1,370		41
Commercial mortgage servicing rights	748		23							16					16		(37		)						766		23
Trading securities	2																								2
Financial derivatives	16		9														(17		)						8		11
Other assets	63		(3		)												(2		)						58		(3		)
Total assets	$	6,474	$	176			$	(3	)	$	163	$	(277	)	$	28	$	(274	)	$	13	$	(31	)	$	6,269	$	90
Liabilities
Other borrowed funds	$	7													$	18	$	(16	)						$	9
Financial derivatives	384		$	26								$	5				(73		)						342		$	32
Other liabilities	47		4												58		(54		)						55
Total liabilities	$	438	$	30								$	5		$	76	$	(143	)						$	406	$	32
Net gains (losses)			$	146		(c)																					$	58		(d)

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

Three Months Ended September 30, 2017



			Total realized / unrealized gains or losses for the period (a)																							Unrealized gains / losses on assets and liabilities held on Consolidated Balance Sheet at September 30, 2017 (a) (b)
Level 3 Instruments Only In millions	Fair Value June 30, 2017		Included in Earnings			Included in Other comprehensive income			Purchases		Sales			Issuances		Settlements			Transfers into Level 3		Transfers out of Level 3			Fair Value Sept. 30, 2017
Assets
Residential mortgage loans held for sale	$	5							$	2									$	1	$	(6	)	$	2
Commercial mortgage loans held for sale	982		$	14							$	(1,280	)	$	1,066	$	(24	)						758		$	(2	)
Securities available for sale
Residential mortgage- backed non-agency	2,964		19				$	61								(199		)						2,845
Asset-backed	361		3				4				(1		)			(19		)						348
Other debt	78						3		9		(7		)											83
Total securities available for sale	3,403		22				68		9		(8		)			(218		)						3,276
Loans	290		2						20		(3		)			(14		)	5		(9		)	291
Equity investments	987		54						103		(83		)											1,061		38
Residential mortgage servicing rights	1,249		(10		)				18					14		(45		)						1,226		(9		)
Commercial mortgage servicing rights	618		6						14					19		(29		)						628		6
Trading securities	2																							2
Financial derivatives	22		16						1							(17		)						22		22
Other assets	89		5																					94		5
Total assets	$	7,647	$	109			$	68	$	167	$	(1,374	)	$	1,099	$	(347	)	$	6	$	(15	)	$	7,360	$	60
Liabilities
Other borrowed funds	$	8												$	16	$	(15	)						$	9
Financial derivatives	248		$	16							$	1				(17		)						248		$	13
Other liabilities	33		3											16		(18		)						34		4
Total liabilities	$	289	$	19							$	1		$	32	$	(50	)						$	291	$	17
Net gains (losses)			$	90		(c)																				$	43		(d)

(continued on following page)

The PNC Financial Services Group, Inc. – Form 10-Q 61

(continued from previous page)

Nine Months Ended September 30, 2018



			Total realized / unrealized gains or losses for the period (a)																							Unrealized gains / losses on assets and liabilities held on Consolidated Balance Sheet at September 30, 2018 (a) (b)
Level 3 Instruments Only In millions	Fair Value Dec. 31, 2017		Included in Earnings			Included in Other comprehensive income			Purchases		Sales			Issuances		Settlements			Transfers into Level 3		Transfers out of Level 3			Fair Value Sept. 30, 2018
Assets
Residential mortgage loans held for sale	$	3							$	4	$	(2	)						$	10	$	(12	)	$	3
Commercial mortgage loans held for sale	107															$	(18	)						89
Securities available for sale
Residential mortgage- backed non-agency	2,661		$	38			$	7								(438		)						2,268
Asset-backed	332		2				1									(42		)						293
Other debt	87		5				8		6							(12		)			(5		)	89
Total securities available for sale	3,080		45				16		6							(492		)			(5		)	2,650
Loans	298		9						80		(27		)			(44		)	8		(43		)	281		$	1
Equity investments	1,036		169						213		(376		)											1,042		77
Residential mortgage servicing rights	1,164		188						113					$	35	(130		)						1,370		180
Commercial mortgage servicing rights	668		104						60					39		(105		)						766		104
Trading securities	2																							2
Financial derivatives	10		33						2							(37		)						8		37
Other assets	107		(5		)											(44		)						58		(5		)
Total assets	$	6,475	$	543			$	16	$	478	$	(405	)	$	74	$	(870	)	$	18	$	(60	)	$	6,269	$	394
Liabilities
Other borrowed funds	$	11												$	50	$	(52	)						$	9
Financial derivatives	487		$	3							$	10				(158		)						342		$	5
Other liabilities	33		9						$	12				92		(91		)						55		8
Total liabilities	$	531	$	12					$	12	$	10		$	142	$	(301	)						$	406	$	13
Net gains (losses)			$	531		(c)																				$	381		(d)

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

Nine Months Ended September 30, 2017



			Total realized / unrealized gains or losses for the period (a)																								Unrealized gains / losses on assets and liabilities held on Consolidated Balance Sheet at September 30, 2017 (a) (b)
Level 3 Instruments Only In millions	Fair Value Dec. 31, 2016		Included in Earnings			Included in Other comprehensive income			Purchases		Sales			Issuances		Settlements			Transfers into Level 3		Transfers out of Level 3				Fair Value Sept. 30, 2017
Assets
Residential mortgage loans held for sale	$	2							$	8	$	(1	)						$	6	$	(13	)		$	2
Commercial mortgage loans held for sale	1,400		$	51							(3,640		)	$	3,011	$	(64	)							758		$	(13	)
Securities available for sale
Residential mortgage- backed non-agency	3,254		69				$	130								(608		)							2,845		(1		)
Commercial mortgage- backed non-agency			12								(12		)
Asset-backed	403		11				19				(26		)			(59		)							348
Other debt	66						15		11		(8		)			(1		)							83
Total securities available for sale	3,723		92				164		11		(46		)			(668		)							3,276		(1		)
Loans	335		(3		)				60		(22		)			(51		)	11		(39		)		291		(8		)
Equity investments	1,331		211						184		(482		)								(183		)	(e)	1,061		127
Residential mortgage servicing rights	1,182		(40		)				172					42		(130		)							1,226		(37		)
Commercial mortgage servicing rights	576		20						48					65		(81		)							628		19
Trading securities	2																								2
Financial derivatives	40		33						3							(54		)							22		58
Other assets	239		10													(155		)							94		10
Total assets	$	8,830	$	374			$	164	$	486	$	(4,191	)	$	3,118	$	(1,203	)	$	17	$	(235	)		$	7,360	$	155
Liabilities
Other borrowed funds	$	10												$	51	$	(52	)							$	9
Financial derivatives	414		$	34							$	3				(203		)							248		$	36
Other liabilities	9		22											165		(162		)							34		24
Total liabilities	$	433	$	56							$	3		$	216	$	(417	)							$	291	$	60
Net gains (losses)			$	318		(c)																					$	95		(d)


(a)	Losses for assets are bracketed while losses for liabilities are not.


(b)	The amount of the total gains or losses for the period included in earnings that is attributable to the change in unrealized gains or losses related to those assets and liabilities held at the end of the reporting period.


(c)	Net gains (losses) realized and unrealized included in earnings related to Level 3 assets and liabilities included amortization and accretion. The amortization and accretion amounts were included in Interest income on the Consolidated Income Statement and the remaining net gains (losses) realized and unrealized were included in Noninterest income on the Consolidated Income Statement.


(d)	Net unrealized gains (losses) related to assets and liabilities held at the end of the reporting period were included in Noninterest income on the Consolidated Income Statement.


(e)	Reflects transfer out of Level 3 associated with change in valuation methodology for certain equity investments subject to the Volcker Rule provisions of the Dodd-Frank Act.

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

The PNC Financial Services Group, Inc. – Form 10-Q 63

Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities follows:

Table 53: Fair Value Measurements – Recurring Quantitative Information

September 30, 2018



Level 3 Instruments Only Dollars in millions	Fair Value			Valuation Techniques	Unobservable Inputs	Range (Weighted-Average)
Commercial mortgage loans held for sale	$	89		Discounted cash flow	Spread over the benchmark curve (a)	520bps - 1,730bps (1,139bps)
Residential mortgage-backed non-agency securities	2,268			Priced by a third-party vendor using a discounted cash flow pricing model	Constant prepayment rate	1.0% - 33.0% (10.7%)
					Constant default rate	0.0% - 17.8% (5.4%)
					Loss Severity	10.0% - 100.0% (49.5%)
					Spread over the benchmark curve (a)	163bps weighted-average
Asset-backed securities	293			Priced by a third-party vendor using a discounted cash flow pricing model	Constant prepayment rate	1.0% - 19.0% (8.5%)
					Constant default rate	1.0% - 9.3% (4.0%)
					Loss Severity	15.0% - 100.0% (63.1%)
					Spread over the benchmark curve (a)	123bps weighted-average
Loans	140			Consensus pricing (b)	Cumulative default rate	11.0% - 100.0% (81.5%)
					Loss severity	0.0% - 100.0% (17.7%)
					Discount rate	5.5% - 8.3% (5.8%)
	86			Discounted cash flow	Loss severity	8.0% weighted-average
	86			Discounted cash flow	Discount rate	5.8% weighted-average
	55			Consensus pricing (b)	Credit & Liquidity Discount	0.0% - 99.0% (61.0%)
Equity investments	1,042			Multiple of adjusted earnings	Multiple of earnings	5.0x - 29.7x (8.6x)
Residential mortgage servicing rights	1,370			Discounted cash flow	Constant prepayment rate	0.0% - 46.9% (8.1%)
Residential mortgage servicing rights	1,370			Discounted cash flow	Spread over the benchmark curve (a)	365bps - 1,783bps (820bps)
Commercial mortgage servicing rights	766			Discounted cash flow	Constant prepayment rate	5.4% - 13.8% (6.4%)
Commercial mortgage servicing rights	766			Discounted cash flow	Discount rate	5.9% - 8.9% (8.6%)
Financial derivatives - Swaps related to sales of certain Visa Class B common shares	(272		)	Discounted cash flow	Conversion factor of Class B shares into Class A shares	163.0% weighted-average
					Estimated growth rate of Visa Class a share price	16.0%
					Estimated length of litigation resolution date	Q4 2020
Insignificant Level 3 assets, net of liabilities (c)	26
Total Level 3 assets, net of liabilities (d)	$	5,863

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

December 31, 2017



Level 3 Instruments Only Dollars in millions	Fair Value			Valuation Techniques	Unobservable Inputs	Range (Weighted-Average)
Commercial mortgage loans held for sale	$	107		Discounted cash flow	Spread over the benchmark curve (a)	525bps - 1,470bps (1,020bps)
Residential mortgage-backed non-agency securities	2,661			Priced by a third-party vendor using a discounted cash flow pricing model	Constant prepayment rate	1.0% - 31.6% (10.8%)
					Constant default rate	0.1% - 18.8% (5.4%)
					Loss severity	15.0% - 100.0% (51.5%)
					Spread over the benchmark curve (a)	190bps weighted-average
Asset-backed securities	332			Priced by a third-party vendor using a discounted cash flow pricing model	Constant prepayment rate	1.0% - 19.0% (7.9%)
					Constant default rate	2.0% - 11.8% (5.4%)
					Loss severity	15.0% - 100.0% (68.5%)
					Spread over the benchmark curve (a)	179bps weighted-average
Loans	133			Consensus pricing (b)	Cumulative default rate	11.0% - 100.0% (85.7%)
					Loss severity	0.0% - 100.0% (20.6%)
					Discount rate	5.5% - 8.0% (5.7%)
	104			Discounted cash flow	Loss severity	8.0% weighted-average
	104			Discounted cash flow	Discount rate	4.9% weighted-average
	61			Consensus pricing (b)	Credit and Liquidity discount	0.0% - 99.0% (61.1%)
Equity investments	1,036			Multiple of adjusted earnings	Multiple of earnings	4.5x - 29.7x (8.3x)
Residential mortgage servicing rights	1,164			Discounted cash flow	Constant prepayment rate	0.0% - 36.7% (10.0%)
Residential mortgage servicing rights	1,164			Discounted cash flow	Spread over the benchmark curve (a)	390bps - 1,839bps (830bps)
Commercial mortgage servicing rights	668			Discounted cash flow	Constant prepayment rate	7.7% - 14.2% (8.5%)
Commercial mortgage servicing rights	668			Discounted cash flow	Discount rate	6.4% - 7.9% (7.8%)
Financial derivatives - Swaps related to sales of certain Visa Class B common shares	(380		)	Discounted cash flow	Estimated conversion factor of Visa Class B shares into Class A shares	163.8% weighted-average
					Estimated growth rate of Visa Class A share price	16.0%
					Estimated length of litigation resolution date	Q2 2021
Insignificant Level 3 assets, net of liabilities (c)	58
Total Level 3 assets, net of liabilities (d)	$	5,944


(a)	The assumed yield spread over the benchmark curve for each instrument is generally intended to incorporate non-interest rate risks, such as credit and liquidity risks.


(b)	Consensus pricing refers to fair value estimates that are generally internally developed using information such as dealer quotes or other third-party provided valuations or comparable asset prices.


(c)	Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes certain financial derivative assets and liabilities, trading securities, other debt securities, residential mortgage loans held for sale, other assets, other borrowed funds and other liabilities.


(d)	Consisted of total Level 3 assets of $6.3 billion and total Level 3 liabilities of $.4 billion as of September 30, 2018 and $6.4 billion and $.5 billion as of December 31, 2017, respectively.

Financial Assets Accounted for at Fair Value on a Nonrecurring Basis

We may be required to measure certain financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment and are included in Table 54 and Table 55. For more information regarding the valuation methodologies of our financial assets measured at fair value on a nonrecurring basis, see Note 6 Fair Value in our 2017 Form 10-K.

Table 54: Fair Value Measurements – Nonrecurring



	Fair Value (a)				Gains (Losses) Three months ended						Gains (Losses) Nine months ended
In millions	September 30 2018		December 31 2017		September 30 2018			September 30 2017			September 30 2018			September 30 2017
Assets
Nonaccrual loans	$	97	$	100	$	(11	)	$	(1	)	$	(14	)	$	(11	)
OREO and foreclosed assets	53		70		(2		)	(5		)	(2		)	(10		)
Long-lived assets	3		80		(1		)	(3		)	(1		)	(11		)
Total assets	$	153	$	250	$	(14	)	$	(9	)	$	(17	)	$	(32	)


(a)	All Level 3 as of September 30, 2018 and December 31, 2017.

The PNC Financial Services Group, Inc. – Form 10-Q 65

Quantitative information about the significant unobservable inputs within Level 3 nonrecurring assets follows:

Table 55: Fair Value Measurements – Nonrecurring Quantitative Information



Level 3 Instruments Only In millions	Fair Value		Valuation Techniques	Unobservable Inputs
September 30, 2018
Assets
Nonaccrual loans	$	97	Fair value of property or collateral	Appraised value/sales price
OREO and foreclosed assets	53		Fair value of property or collateral	Appraised value/sales price
Long-lived assets	3		Fair value of property or collateral	Appraised value/sales price
Total assets	$	153
December 31, 2017
Assets
Nonaccrual loans	$	100	Fair value of property or collateral	Appraised value/sales price
OREO and foreclosed assets	70		Fair value of property or collateral	Appraised value/sales price
Long-lived assets	47		Fair value of property or collateral	Appraised value/sales price
	20		Fair value of property or collateral	Broker opinion
	13		Fair value of property or collateral	Projected income/required improvement costs
Total assets	$	250

Financial Instruments Accounted for under Fair Value Option

We elect the fair value option to account for certain financial instruments. For more information on these financial instruments for which the fair value option election has been made, see Note 6 Fair Value in our 2017 Form 10-K.

Fair values and aggregate unpaid principal balances of certain items for which we elected the fair value option follow:

Table 56: Fair Value Option – Fair Value and Principal Balances



	September 30, 2018							December 31, 2017
In millions	Fair Value		Aggregate Unpaid Principal Balance		Difference			Fair Value		Aggregate Unpaid Principal Balance		Difference
Assets
Residential mortgage loans held for sale
Performing loans	$	623	$	609	$	14		$	822	$	796	$	26
Accruing loans 90 days or more past due	2		2					3		3
Nonaccrual loans	6		7		(1		)	7		8		(1		)
Total	$	631	$	618	$	13		$	832	$	807	$	25
Commercial mortgage loans held for sale (a)
Performing loans	$	417	$	438	$	(21	)	$	828	$	842	$	(14	)
Nonaccrual loans	1		2		(1		)	2		3		(1		)
Total	$	418	$	440	$	(22	)	$	830	$	845	$	(15	)
Residential mortgage loans
Performing loans	$	263	$	284	$	(21	)	$	251	$	280	$	(29	)
Accruing loans 90 days or more past due	313		325		(12		)	421		431		(10		)
Nonaccrual loans	177		288		(111		)	197		317		(120		)
Total	$	753	$	897	$	(144	)	$	869	$	1,028	$	(159	)
Other assets	$	167	$	175	$	(8	)	$	216	$	212	$	4
Liabilities
Other borrowed funds	$	62	$	64	$	(2	)	$	84	$	85	$	(1	)


(a)	There were no accruing loans 90 days or more past due within this category at September 30, 2018 or December 31, 2017.

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

The changes in fair value for items for which we elected the fair value option are as follows:

Table 57: Fair Value Option – Changes in Fair Value (a)



	Gains (Losses)						Gains (Losses)
	Three months ended						Nine months ended
	September 30			September 30			September 30			September 30
In millions	2018			2017			2018			2017
Assets
Residential mortgage loans held for sale	$	13		$	39		$	25		$	101
Commercial mortgage loans held for sale	$	16		$	15		$	41		$	58
Residential mortgage loans	$	7		$	7		$	17		$	18
Other assets	$	(1	)	$	16		$	(11	)	$	36
Liabilities
Other liabilities	$	(3	)	$	(5	)	$	(8	)	$	(24	)


(a)	The impact on earnings of offsetting hedged items or hedging instruments is not reflected in these amounts.

Additional Fair Value Information Related to Financial Instruments Not Recorded at Fair Value

The following table presents the carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of all other financial instruments that are not recorded on our Consolidated Balance Sheet at fair value as of September 30, 2018 and December 31, 2017.

Table 58: Additional Fair Value Information Related to Other Financial Instruments



	Carrying		Fair Value
In millions	Amount		Total		Level 1		Level 2		Level 3
September 30, 2018
Assets
Cash and due from banks	$	5,248	$	5,248	$	5,248
Interest-earning deposits with banks	19,800		19,800				$	19,800
Securities held to maturity	19,593		19,021		735		18,137		$	149
Net loans (excludes leases)	212,502		212,151						212,151
Other assets	4,865		4,865				4,858		7
Total assets	$	262,008	$	261,085	$	5,983	$	42,795	$	212,307
Liabilities
Time deposits (a)	$	18,454	$	18,115			$	18,115
Borrowed funds	57,068		57,707				55,873		$	1,834
Unfunded loan commitments and letters of credit	288		288						288
Other liabilities	432		432				432
Total liabilities	$	76,242	$	76,542			$	74,420	$	2,122
December 31, 2017
Assets
Cash and due from banks	$	5,249	$	5,249	$	5,249
Interest-earning deposits with banks	28,595		28,595				$	28,595
Securities held to maturity	18,513		18,565		765		17,658		$	142
Net loans (excludes leases)	209,044		211,175						211,175
Other assets	6,078		6,736				5,949		787
Total assets	$	267,479	$	270,320	$	6,014	$	52,202	$	212,104
Liabilities
Deposits	$	265,053	$	264,854			$	264,854
Borrowed funds	57,744		58,503				56,853		$	1,650
Unfunded loan commitments and letters of credit	297		297						297
Other liabilities	399		399				399
Total liabilities	$	323,493	$	324,053			$	322,106	$	1,947


(a)	The amount at September 30, 2018 excludes deposit liabilities with no defined or contractual maturities in accordance with the adoption of ASU 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our First Quarter 2018 Form 10-Q for additional details on this adoption.

The PNC Financial Services Group, Inc. – Form 10-Q 67

The aggregate fair values in Table 58 represent only a portion of the total market value of our assets and liabilities as, in accordance with the guidance related to fair values about financial instruments, we exclude the following:


•	financial instruments recorded at fair value on a recurring basis (as they are disclosed in Table 51),


•	investments accounted for under the equity method,


•	equity securities without a readily determinable fair value that apply for the alternative measurement approach to fair value under ASU 2016-01,


•	real and personal property,


•	lease financing,


•	loan customer relationships,


•	deposit customer intangibles,


•	mortgage servicing rights,


•	retail branch networks,


•	fee-based businesses, such as asset management and brokerage,


•	trademarks and brand names,


•	trade receivables and payables due in one year or less, and


•	deposit liabilities with no defined or contractual maturities.

The balance of equity securities without a readily determinable fair value that apply the alternative measurement approach to fair value was $.1 billion at both September 30, 2018 and December 31, 2017. Impairment taken on those equity securities was immaterial during the first nine months of 2018.

For more information regarding the methods and assumptions used to estimate the fair values of financial instruments included in Table 58, see Note 6 Fair Value in our 2017 Form 10-K.

NOTE 7 GOODWILL AND MORTGAGE SERVICING RIGHTS

Goodwill

See Note 7 Goodwill and Mortgage Servicing Rights in our 2017 Form 10-K for more information regarding our goodwill.

Mortgage Servicing Rights

We recognize the right to service mortgage loans for others when we recognize it as an intangible asset and the servicing income we receive is more than adequate compensation. MSRs totaled $2.1 billion and $1.8 billion at September 30, 2018 and December 31, 2017, respectively, and consisted of loan servicing contracts for commercial and residential mortgages measured at fair value.

MSRs are subject to declines in value from actual or expected prepayment of the underlying loans and defaults as well as market driven changes in interest rates. We manage this risk by economically hedging the fair value of MSRs with securities and derivative instruments which are expected to increase (or decrease) in value when the value of MSRs decreases (or increases).

See the Sensitivity Analysis section of this Note 7, as well as Note 6 Fair Value in our 2017 Form 10-K for more detail on our fair value measurement of MSRs. Refer to Note 7 Goodwill and Mortgage Servicing Rights in our 2017 Form 10-K for more information on our accounting and measurement of MSRs.

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

Changes in the commercial and residential MSRs follow:

Table 59: Mortgage Servicing Rights



	Commercial MSRs						Residential MSRs
In millions	2018			2017			2018			2017
January 1	$	668		$	576		$	1,164		$	1,182
Additions:
From loans sold with servicing retained	39			65			35			42
Purchases	60			48			113			172
Changes in fair value due to:
Time and payoffs (a)	(105		)	(81		)	(130		)	(130		)
Other (b)	104			20			188			(40		)
September 30	$	766		$	628		$	1,370		$	1,226
Related unpaid principal balance at September 30	$	174,664		$	153,059		$	127,099		$	129,210
Servicing advances at September 30	$	193		$	240		$	156		$	222


(a)	Represents decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period.


(b)	Represents MSR value changes resulting primarily from market-driven changes in interest rates.

Sensitivity Analysis

The fair value of commercial and residential MSRs and significant inputs to the valuation models as of September 30, 2018 are shown in Tables 60 and 61. The expected and actual rates of mortgage loan prepayments are significant factors driving the fair value. Management uses both internal proprietary models and a third-party model to estimate future commercial mortgage loan prepayments and a third-party model to estimate future residential mortgage loan prepayments. These models have been refined based on current market conditions and management judgment. Future interest rates are another important factor in the valuation of MSRs. Management utilizes market implied forward interest rates to estimate the future direction of mortgage and discount rates. The forward rates utilized are derived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. Changes in the shape and slope of the forward curve in future periods may result in volatility in the fair value estimate.

A sensitivity analysis of the hypothetical effect on the fair value of MSRs to adverse changes in key assumptions is presented in Tables 60 and 61. These sensitivities do not include the impact of the related hedging activities. Changes in fair value generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the interest rate spread), which could either magnify or counteract the sensitivities.

The following tables set forth the fair value of commercial and residential MSRs and the sensitivity analysis of the hypothetical effect on the fair value of MSRs to immediate adverse changes of 10% and 20% in those assumptions.

Table 60: Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions



Dollars in millions	September 30 2018			December 31 2017
Fair value	$	766		$	668
Weighted-average life (years)	4.2			4.4
Weighted-average constant prepayment rate	6.36		%	8.51		%
Decline in fair value from 10% adverse change	$	10		$	12
Decline in fair value from 20% adverse change	$	20		$	23
Effective discount rate	8.61		%	7.81		%
Decline in fair value from 10% adverse change	$	21		$	18
Decline in fair value from 20% adverse change	$	42		$	36

The PNC Financial Services Group, Inc. – Form 10-Q 69

Table 61: Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions



Dollars in millions	September 30 2018				December 31 2017
Fair value	$	1,370			$	1,164
Weighted-average life (years)	7.2				6.4
Weighted-average constant prepayment rate	8.13		%		10.04		%
Decline in fair value from 10% adverse change	$	39			$	44
Decline in fair value from 20% adverse change	$	75			$	85
Weighted-average option adjusted spread	820			bps	830			bps
Decline in fair value from 10% adverse change	$	41			$	35
Decline in fair value from 20% adverse change	$	80			$	67

Fees from mortgage loan servicing, which includes contractually specified servicing fees, late fees and ancillary fees were $.2 billion for both the three months ended September 30, 2018 and 2017 and $.4 billion for both the nine months ended September 30, 2018 and 2017. We also generate servicing fees from fee-based activities provided to others for which we do not have an associated servicing asset. Fees from commercial and residential MSRs are reported within Noninterest income on our Consolidated Income Statement in the line items Corporate services and Residential mortgage, respectively.

NOTE 8 EMPLOYEE BENEFIT PLANS

Pension and Postretirement Plans

As described in Note 11 Employee Benefit Plans in our 2017 Form 10-K, we have a noncontributory, qualified defined benefit pension plan covering eligible employees. Benefits are determined using a cash balance formula where earnings credits are a percentage of eligible compensation. Beginning in 2018, these earnings credits are subject to a minimum annual amount. Any pension contributions to the plan are based on an actuarially determined amount necessary to fund total benefits payable to plan participants. We made a voluntary contribution of $.2 billion in September 2018 to the qualified pension plan.

We also maintain nonqualified supplemental retirement plans for certain employees and provide certain health care and life insurance benefits for qualifying retired employees (postretirement benefits) through various plans. We reserve the right to terminate or make changes to these plans at any time.

The components of our net periodic benefit cost for the three and nine months ended September 30, 2018 and 2017, respectively, were as follows:

Table 62: Components of Net Periodic Benefit Cost (a)



	Qualified Pension Plan						Nonqualified Pension Plan				Postretirement Benefits
Three months ended September 30 In millions	2018			2017			2018		2017		2018			2017
Net periodic cost consists of:
Service cost	$	29		$	26		$	1	$	1	$	1		$	2
Interest cost	43			45			2		2		3			3
Expected return on plan assets	(76		)	(71		)					(1		)	(2		)
Amortization of prior service credit				(1		)
Amortization of actuarial losses				11			1		1
Net periodic cost/(benefit)	$	(4	)	$	10		$	4	$	4	$	3		$	3



	Qualified Pension Plan						Nonqualified Pension Plan				Postretirement Benefits
Nine months ended September 30 In millions	2018			2017			2018		2017		2018			2017
Net periodic cost consists of:
Service cost	$	87		$	77		$	2	$	2	$	3		$	4
Interest cost	128			134			7		8		9			10
Expected return on plan assets	(229		)	(213		)					(4		)	(4		)
Amortization of prior service credit	1			(3		)								(1		)
Amortization of actuarial losses				33			3		3
Net periodic cost/(benefit)	$	(13	)	$	28		$	12	$	13	$	8		$	9


(a)	The service cost component is included in Personnel expense on the Consolidated Income Statement. All other components are included in Other noninterest expense on the Consolidated Income Statement.

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

NOTE 9 FINANCIAL DERIVATIVES

We use derivative financial instruments primarily to help manage exposure to interest rate, market and credit risk and reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities and cash flows. We also enter into derivatives with customers to facilitate their risk management activities. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract.

For more information regarding derivatives see Note 1 Accounting Policies and Note 13 Financial Derivatives in our 2017 Form 10-K.

The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by us.

Table 63: Total Gross Derivatives



	September 30, 2018						December 31, 2017
In millions	Notional / Contract Amount		Asset Fair Value (a)		Liability Fair Value (b)		Notional / Contract Amount		Asset Fair Value (a)		Liability Fair Value (b)
Derivatives used for hedging under GAAP
Interest rate contracts (c):
Fair value hedges	$	33,232	$	14			$	34,059	$	114	$	94
Cash flow hedges	17,394						23,875		60		6
Foreign exchange contracts:
Net investment hedges	1,042		36				1,060				11
Total derivatives designated for hedging under GAAP	$	51,668	$	50			$	58,994	$	174	$	111
Derivatives not used for hedging under GAAP
Derivatives used for mortgage banking activities (d):
Interest rate contracts:
Swaps	$	71,254			$	3	$	48,335	$	162	$	42
Futures (e)	44,063						47,494
Mortgage-backed commitments	6,595		$	21	16		8,999		19		9
Other	4,610		5		2		2,530		11		2
Subtotal	126,522		26		21		107,358		192		53
Derivatives used for customer-related activities:
Interest rate contracts:
Swaps	216,998		1,039		1,946		194,042		2,079		1,772
Futures (e)	3,550						3,453
Mortgage-backed commitments	3,280		9		2		2,228		2		2
Other	21,581		66		71		17,775		75		36
Subtotal	245,409		1,114		2,019		217,498		2,156		1,810
Foreign exchange contracts and other	28,494		581		552		27,330		349		332
Subtotal	273,903		1,695		2,571		244,828		2,505		2,142
Derivatives used for other risk management activities:
Foreign exchange contracts and other (f)	8,780		18		350		7,445		3		550
Total derivatives not designated for hedging under GAAP	$	409,205	$	1,739	$	2,942	$	359,631	$	2,700	$	2,745
Total gross derivatives	$	460,873	$	1,789	$	2,942	$	418,625	$	2,874	$	2,856
Less: Impact of legally enforceable master netting agreements			710		710				1,054		1,054
Less: Cash collateral received/paid			80		728				636		763
Total derivatives			$	999	$	1,504			$	1,184	$	1,039


(a)	Included in Other assets on our Consolidated Balance Sheet.


(b)	Included in Other liabilities on our Consolidated Balance Sheet.


(c)	Represents primarily swaps.


(d)	Includes both residential and commercial mortgage banking activities.


(e)	Futures contracts settle in cash daily and, therefore, no derivative asset or derivative liability is recognized on our Consolidated Balance Sheet.


(f)	Includes our obligation to fund a portion of certain BlackRock LTIP programs and the swaps entered into in connection with sales of a portion of Visa Class B common shares.

The PNC Financial Services Group, Inc. – Form 10-Q 71

All derivatives are carried on our Consolidated Balance Sheet at fair value. Derivative balances are presented on the Consolidated Balance Sheet on a net basis taking into consideration the effects of legally enforceable master netting agreements and, when appropriate, any related cash collateral exchanged with counterparties. Further discussion regarding the offsetting rights associated with these legally enforceable master netting agreements is included in the Offsetting, Counterparty Credit Risk and Contingent Features section of this Note 9. Any nonperformance risk, including credit risk, is included in the determination of the estimated net fair value of the derivatives. Exchange-traded and over-the-counter cleared derivative instruments are typically settled in cash each day based on the prior day value. In the first quarter of 2018, we changed our presentation for variation margin related to derivative instruments cleared through a central clearinghouse as a result of changes made by that clearinghouse to its rules governing such instruments with its counterparties. This variation margin is now recorded as a settlement payment instead of collateral. The impact at September 30, 2018 was a reduction of gross derivative assets and gross derivative liabilities of $1.8 billion and $.6 billion, respectively. The accounting change had no impact on the net fair value of the derivative assets and liabilities that otherwise would have been reported on our Consolidated Balance Sheet. See Table 67 for more information.

Derivatives Designated As Hedging Instruments under GAAP

Certain derivatives used to manage interest rate and foreign exchange risk as part of our asset and liability risk management activities are designated as accounting hedges under GAAP. Derivatives hedging the risks associated with changes in the fair value of assets or liabilities are considered fair value hedges, derivatives hedging the variability of expected future cash flows are considered cash flow hedges, and derivatives hedging a net investment in a foreign subsidiary are considered net investment hedges. Designating derivatives as accounting hedges allows for gains and losses on those derivatives to be recognized in the same period and in the same income statement line item as the earnings impact of the hedged items.

Fair Value Hedges

We enter into receive-fixed, pay-variable interest rate swaps to hedge changes in the fair value of outstanding fixed-rate debt caused by fluctuations in market interest rates. We also enter into pay-fixed, receive-variable interest rate swaps and zero-coupon swaps to hedge changes in the fair value of fixed rate and zero-coupon investment securities caused by fluctuations in market interest rates. Gains and losses on the interest rate swaps designated in these hedge relationships, along with the offsetting gains and losses on the hedged items attributable to the hedged risk, are recognized in current earnings within the same income statement line item.

Cash Flow Hedges

We enter into receive-fixed, pay-variable interest rate swaps to modify the interest rate characteristics of designated commercial loans from variable to fixed in order to reduce the impact of changes in future cash flows due to market interest rate changes. We also periodically enter into forward purchase and sale contracts to hedge the variability of the consideration that will be paid or received related to the purchase or sale of investment securities. The forecasted purchase or sale is consummated upon gross settlement of the forward contract itself. For these cash flow hedges, gains and losses on the interest rate swaps and forward contracts are recorded in AOCI and are then reclassified into earnings in the same period the hedged cash flows affect earnings and within the same income statement line as the hedged cash flows.

In the 12 months that follow September 30, 2018, we expect to reclassify net derivative losses of $39 million pretax, or $31 million after-tax, from AOCI to interest income for both cash flow hedge strategies. This reclassified amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to September 30, 2018. As of September 30, 2018, the maximum length of time over which forecasted transactions are hedged is ten years.

The amount of cash flow hedge ineffectiveness recognized in income was not significant for the 2017 period presented.

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

Detail regarding the net gains (losses) related to our fair value and cash flow hedge derivatives is presented in the following table.

Table 64: Gains (Losses) Recognized on Fair Value and Cash Flow Hedges in the Consolidated Income Statement (a) (b)



	Location and Amount of Gains (Losses) Recognized in Income
	Interest Income					Interest Expense			Noninterest Income
In millions	Loans		Investment Securities			Borrowed Funds			Other
For the three months ended September 30, 2018
Total amounts on the Consolidated Income Statement	$	2,452	$	584		$	421		$	301
Gains (losses) on fair value hedges recognized on:
Hedged items (c)			$	(31	)	$	107
Derivatives			$	30		$	(137	)
Amounts related to interest settlements on derivatives			$	2		$	24
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from accumulated OCI	$	6	$	2					$	1
For the three months ended September 30, 2017
Total amounts on the Consolidated Income Statement	$	2,140	$	501		$	280		$	313
Gains (losses) on fair value hedges recognized on:
Hedged items			$	(8	)	$	50
Derivatives			$	9		$	(56	)
Amounts related to interest settlements on derivatives			$	(9	)	$	53
Gains (losses) on cash flow hedges - interest rate contracts (d):
Amount of derivative gains (losses) reclassified from accumulated OCI	$	38	$	5					$	2
For the nine months ended September 30, 2018
Total amounts on the Consolidated Income Statement	$	7,025	$	1,653		$	1,173		$	880
Gains (losses) on fair value hedges recognized on:
Hedged items (c)			$	(145	)	$	577
Derivatives			$	149		$	(632	)
Amounts related to interest settlements on derivatives						$	57
Gains (losses) on cash flow hedges (d):
Amount of derivative gains (losses) reclassified from accumulated OCI	$	43	$	9					$	8
For the nine months ended September 30, 2017
Total amounts on the Consolidated Income Statement	$	6,084	$	1,489		$	793		$	918
Gains (losses) on fair value hedges recognized on:
Hedged items			$	4		$	61
Derivatives			$	(3	)	$	(84	)
Amounts related to interest settlements on derivatives			$	(34	)	$	190
Gains (losses) on cash flow hedges - interest rate contracts (d):
Amount of derivative gains (losses) reclassified from accumulated OCI	$	128	$	16					$	5


(a)	For all periods presented, there were no components of derivative gains or losses excluded from the assessment of hedge effectiveness for any of the fair value or cash flow hedge strategies.


(b)	All cash flow and fair value hedge derivatives were interest rate contracts for the periods presented.


(c)	Includes an insignificant amount of fair value hedge adjustments related to discontinued hedge relationships.


(d)	For all periods presented, there were no gains or losses from cash flow hedge derivatives reclassified to income because it became probable that the original forecasted transaction would not occur.

Detail regarding the impact of fair value hedge accounting on the carrying value of the hedged items is presented in the following table.

Table 65: Hedged Items - Fair Value Hedges



	September 30, 2018
In millions	Carrying Value of the Hedged Items		Cumulative Fair Value Hedge Adjustment included in the Carrying Value of Hedged Items (a)
Investment securities - Available for Sale (b)	$	7,056	$	(230	)
Borrowed funds	$	28,284	$	(686	)


(a)	Includes $.6 billion of fair value hedge adjustments primarily related to discontinued borrowed funds hedge relationships.


(b)	Carrying value shown represents amortized cost.

The PNC Financial Services Group, Inc. – Form 10-Q 73

Net Investment Hedges

We enter into foreign currency forward contracts to hedge non-U.S. dollar net investments in foreign subsidiaries against adverse changes in foreign exchange rates. We assess whether the hedging relationship is highly effective in achieving offsetting changes in the value of the hedge and hedged item by qualitatively verifying that the critical terms of the hedge and hedged item match at the inception of the hedging relationship and on an ongoing basis. Net investment hedge derivatives are classified as foreign exchange contracts. There were no components of derivative gains or losses excluded from the assessment of the hedge effectiveness for all periods presented. During the first three and nine months of 2017 there was no net investment hedge ineffectiveness. Gains (losses) on net investment hedge derivatives recognized in OCI were net gains of $17 million and $47 million for the three and nine months ended September 30, 2018, respectively, compared with net losses of $26 million and $76 million for the three and nine months ended September 30, 2017, respectively.

Derivatives Not Designated As Hedging Instruments under GAAP

We also enter into derivatives that are not designated as accounting hedges under GAAP. For additional information on derivatives not designated as hedging instruments under GAAP, see Note 13 Financial Derivatives in our 2017 Form 10-K.

Further detail regarding the gains (losses) on derivatives not designated in hedging relationships is presented in the following table.

Table 66: Gains (Losses) on Derivatives Not Designated for Hedging under GAAP



	Three months ended September 30						Nine months ended September 30
In millions	2018			2017			2018			2017
Derivatives used for mortgage banking activities:
Interest rate contracts (a)	$	(34	)	$	19		$	(166	)	$	92
Derivatives used for customer-related activities:
Interest rate contracts	15			10			96			63
Foreign exchange contracts and other	22			38			79			110
Gains (losses) from customer-related activities (b)	37			48			175			173
Derivatives used for other risk management activities:
Foreign exchange contracts and other (b) (c)	(19		)	(101		)	111			(257		)
Total gains (losses) from derivatives not designated as hedging instruments	$	(16	)	$	(34	)	$	120		$	8


(a)	Included in Residential mortgage, Corporate services and Other noninterest income on our Consolidated Income Statement.


(b)	Included in Other noninterest income on our Consolidated Income Statement.


(c)	Includes BlackRock LTIP funding obligation and the swaps entered into in connection with sales of a portion of Visa Class B common shares.

Offsetting, Counterparty Credit Risk and Contingent Features

We generally utilize a net presentation on the Consolidated Balance Sheet for those derivative financial instruments entered into with counterparties under legally enforceable master netting agreements. The master netting agreements reduce credit risk by permitting the closeout netting of all outstanding derivative instruments under the master netting agreement with the same counterparty upon the occurrence of an event of default. The master netting agreement also may require the exchange of cash or marketable securities to collateralize either party’s net position. For additional information on derivative offsetting, counterparty credit risk and contingent features, see Note 13 Financial Derivatives in our 2017 Form 10-K.

Table 67 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities as of September 30, 2018 and December 31, 2017. The table includes cash collateral held or pledged under legally enforceable master netting agreements. The table also includes the fair value of any securities collateral held or pledged under legally enforceable master netting agreements. Cash and securities collateral amounts are included in the table only to the extent of the related net derivative fair values.

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

Table 67: Derivative Assets and Liabilities Offsetting



In millions			Amounts Offset on the Consolidated Balance Sheet							Securities Collateral Held / (Pledged) Under Master Netting Agreements
In millions	Gross Fair Value		Fair Value Offset Amount		Cash Collateral		Net Fair Value					Net Amounts
September 30, 2018
Derivative assets
Interest rate contracts:
Over-the-counter cleared (a)	$	16					$	16				$	16
Over-the-counter	1,138		$	432	$	75	631			$	19	612
Foreign exchange and other contracts	635		278		5		352					352
Total derivative assets	$	1,789	$	710	$	80	$	999	(b)	$	19	$	980
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared (a)	$	11					$	11				$	11
Over-the-counter	2,029		$	563	$	435	1,031					1,031
Foreign exchange and other contracts	902		147		293		462					462
Total derivative liabilities	$	2,942	$	710	$	728	$	1,504	(c)			$	1,504
December 31, 2017
Derivative assets
Interest rate contracts:
Over-the-counter cleared	$	827	$	251	$	567	$	9				$	9
Over-the-counter	1,695		668		67		960			$	32	928
Foreign exchange and other contracts	352		135		2		215					215
Total derivative assets	$	2,874	$	1,054	$	636	$	1,184	(b)	$	32	$	1,152
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared	$	260	$	251			$	9				$	9
Over-the-counter	1,703		662		$	669	372					372
Foreign exchange and other contracts	893		141		94		658					658
Total derivative liabilities	$	2,856	$	1,054	$	763	$	1,039	(c)			$	1,039


(a)	Reflects our first quarter 2018 change in accounting presentation for variation margin for certain derivative instruments cleared through a central clearing house. The accounting change reduced the asset and liability gross fair values with corresponding reductions to the fair value and cash collateral offsets, resulting in no changes to the net fair value amounts.


(b)	Represents the net amount of derivative assets included in Other assets on our Consolidated Balance Sheet.


(c)	Represents the net amount of derivative liabilities included in Other liabilities on our Consolidated Balance Sheet.

Table 67 includes over-the-counter (OTC) derivatives, OTC cleared derivatives and exchange-traded derivatives. OTC derivatives represent contracts executed bilaterally with counterparties that are not settled through an organized exchange or cleared through a central clearing house. The majority of OTC derivatives are governed by the International Swaps and Derivatives Association (ISDA) documentation or other legally enforceable master netting agreements. OTC cleared derivatives represent contracts executed bilaterally with counterparties in the OTC market that are novated to a central clearing house who then becomes our counterparty. Exchange-traded derivatives represent standardized futures and options contracts executed directly on an organized exchange.

In addition to using master netting agreements and other collateral agreements to reduce credit risk associated with derivative instruments, we also seek to manage credit risk by evaluating credit ratings of counterparties and by using internal credit analysis, limits and monitoring procedures.

At September 30, 2018, we held cash, U.S. government securities and mortgage-backed securities totaling $.2 billion under master netting agreements and other collateral agreements to collateralize net derivative assets due from counterparties, and we pledged cash totaling $1.4 billion under these agreements to collateralize net derivative liabilities owed to counterparties and to meet initial margin requirements. These totals may differ from the amounts presented in the preceding offsetting table because these totals may include collateral exchanged under an agreement that does not qualify as a master netting agreement or because the total amount of collateral held or pledged exceeds the net derivative fair values with the counterparty as of the balance sheet date due to timing or other factors, such as initial margin. To the extent not netted against the derivative fair values under a master netting agreement, the receivable for cash pledged is included in Other assets and the obligation for cash held is included in Other liabilities on our Consolidated Balance

The PNC Financial Services Group, Inc. – Form 10-Q 75

Sheet. Securities held from counterparties are not recognized on our balance sheet. Likewise securities we have pledged to counterparties remain on our balance sheet.

Certain derivative agreements contain various credit-risk related contingent provisions, such as those that require our debt to maintain a specified credit rating from one or more of the major credit rating agencies. If our debt ratings were to fall below such specified ratings, the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on September 30, 2018 was $2.2 billion for which we had posted collateral of $.8 billion in the normal course of business. The maximum additional amount of collateral we would have been required to post if the credit-risk-related contingent features underlying these agreements had been triggered on September 30, 2018 would be $1.4 billion.

NOTE 10 EARNINGS PER SHARE

Table 68: Basic and Diluted Earnings Per Common Share



	Three months ended September 30				Nine months ended September 30
In millions, except per share data	2018		2017		2018		2017
Basic
Net income	$	1,400	$	1,126	$	3,995	$	3,297
Less:
Net income attributable to noncontrolling interests	11		12		31		39
Preferred stock dividends	63		63		181		181
Preferred stock discount accretion and redemptions	1		1		3		24
Net income attributable to common shares	1,325		1,050		3,780		3,053
Less: Dividends and undistributed earnings allocated to participating securities	6		5		16		15
Net income attributable to basic common shares	$	1,319	$	1,045	$	3,764	$	3,038
Basic weighted-average common shares outstanding	465		479		469		483
Basic earnings per common share (a)	$	2.84	$	2.18	$	8.03	$	6.29
Diluted
Net income attributable to basic common shares	$	1,319	$	1,045	$	3,764	$	3,038
Less: Impact of BlackRock earnings per share dilution	2		3		7		8
Net income attributable to diluted common shares	$	1,317	$	1,042	$	3,757	$	3,030
Basic weighted-average common shares outstanding	465		479		469		483
Dilutive potential common shares	2		4		3		5
Diluted weighted-average common shares outstanding	467		483		472		488
Diluted earnings per common share (a)	$	2.82	$	2.16	$	7.96	$	6.21


(a)	Basic and diluted earnings per share under the two-class method are determined on net income reported on the income statement less earnings allocated to nonvested restricted shares and restricted share units with nonforfeitable dividends and dividend rights (participating securities).

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

NOTE 11 TOTAL EQUITY AND OTHER COMPREHENSIVE INCOME

Activity in total equity for the nine months ended September 30, 2018 and 2017 follows:

Table 69: Rollforward of Total Equity



			Shareholders’ Equity
In millions	Shares Outstanding Common Stock		Common Stock		Capital Surplus - Preferred Stock			Capital Surplus - Common Stock and Other			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Non- controlling Interests			Total Equity
Balance at January 1, 2017	485		$	2,709	$	3,977		$	12,674		$	31,670		$	(265	)	$	(5,066	)	$	1,155		$	46,854
Net income											3,258									39			3,297
Other comprehensive income (loss), net of tax														243									243
Cash dividends declared
Common ($1.85 per share)											(904		)										(904		)
Preferred											(181		)										(181		)
Preferred stock discount accretion					5						(5		)
Redemption of noncontrolling interests (a)											(19		)							(981		)	(1,000		)
Common stock activity (b)			1					9															10
Treasury stock activity	(9	)						(274		)							(1,396		)				(1,670		)
Other								(48		)										(149		)	(197		)
Balance at September 30, 2017 (c)	476		$	2,710	$	3,982		$	12,361		$	33,819		$	(22	)	$	(6,462	)	$	64		$	46,452
Balance at December 31, 2017	473		$	2,710	$	3,985		$	12,389		$	35,481		$	(148	)	$	(6,904	)	$	72		$	47,585
Cumulative effect of ASU adoptions (d)											(22		)	6									(16		)
Balance at January 1, 2018	473		$	2,710	$	3,985		$	12,389		$	35,459		$	(142	)	$	(6,904	)	$	72		$	47,569
Net income											3,964									31			3,995
Other comprehensive income (loss), net of tax														(1,118		)							(1,118		)
Cash dividends declared
Common ($2.45 per share)											(1,159		)										(1,159		)
Preferred											(181		)										(181		)
Preferred stock discount accretion					3						(3		)
Common stock activity (b)								10															10
Treasury stock activity	(11	)						(31		)							(1,867		)				(1,898		)
Other					(6		)	(51		)										(59		)	(116		)
Balance at September 30, 2018 (c)	462		$	2,710	$	3,982		$	12,317		$	38,080		$	(1,260	)	$	(8,771	)	$	44		$	47,102


(a)	See Note 15 Equity in our 2017 Form 10-K for additional information on the redemption of Perpetual Trust Securities.


(b)	Common stock activity totaled less than .5 million shares issued.


(c)	The par value of our preferred stock outstanding was less than $.5 million at each date and, therefore, is excluded from this presentation.


(d)	Represents the cumulative effect of adopting ASU 2014-09, ASU 2016-01, ASU 2017-12 and ASU 2018-02. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our First Quarter 2018 Form 10-Q for additional detail on the adoption of these ASUs.

Warrants

We had 2.0 million and 3.5 million warrants outstanding at September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018, each warrant entitles the holder to purchase one share of PNC common stock at an exercise price of $67.016 per share. In accordance with the terms of the warrants, the warrants are exercised on a non-cash net basis with the warrant holder receiving PNC common shares determined based on the excess of the market price of PNC common stock on the exercise date over the exercise price of the warrant. The outstanding warrants will expire as of December 31, 2018 and are considered in the calculation of diluted earnings per common share in Note 10 Earnings Per Share in this Report.

On October 4, 2018, PNC declared a quarterly common stock dividend of $.95 per share to shareholders of record as of October 17, 2018. In accordance with the terms of the warrants, the declaration of a dividend in excess of $.66 per share may result in an adjustment to the warrant exercise price and to the warrant share number. As a result of this dividend, the warrant exercise price was reduced from $67.016 to $66.861 per share on October 17, 2018 and the warrant share number remained 1.00.

The PNC Financial Services Group, Inc. – Form 10-Q 77

Other Comprehensive Income

Details of other comprehensive income (loss) are as follows:

Table 70: Other Comprehensive Income (Loss)



	Three months ended September 30						Nine months ended September 30
In millions	2018			2017			2018			2017
Net unrealized gains (losses) on non-OTTI securities
Increase in net unrealized gains (losses) on non-OTTI securities	$	(323	)	$	68		$	(1,129	)	$	304
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest income	3			10			9			20
Less: Net gains (losses) realized on sales of securities reclassified to noninterest income	(2		)	(3		)	(13		)	3
Net increase (decrease), pre-tax	(324		)	61			(1,125		)	281
Effect of income taxes	73			(20		)	259			(103		)
Net increase (decrease), after-tax	(251		)	41			(866		)	178
Net unrealized gains (losses) on OTTI securities
Increase in net unrealized gains (losses) on OTTI securities	(1		)	66			16			165
Less: OTTI losses realized on securities reclassified to noninterest income										(1		)
Less: Net gains (losses) realized on sales of securities reclassified to noninterest income										2
Net increase (decrease), pre-tax	(1		)	66			16			164
Effect of income taxes	1			(22		)	(4		)	(60		)
Net increase (decrease), after-tax	—			44			12			104
Net unrealized gains (losses) on cash flow hedge derivatives
Increase in net unrealized gains (losses) on cash flow hedge derivatives	(62		)	(2		)	(317		)	15
Less: Net gains (losses) realized as a yield adjustment reclassified to loan interest income	6			38			43			128
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest income	2			5			9			16
Less: Net gains (losses) realized on sales of securities reclassified to noninterest income	1			2			8			5
Net increase (decrease), pre-tax	(71		)	(47		)	(377		)	(134		)
Effect of income taxes	17			17			87			49
Net increase (decrease), after-tax	(54		)	(30		)	(290		)	(85		)
Pension and other postretirement benefit plan adjustments
Net pension and other postretirement benefit activity							66			(38		)
Amortization of actuarial loss (gain) reclassified to other noninterest expense	1			12			3			36
Amortization of prior service cost (credit) reclassified to other noninterest expense				(1		)	1			(4		)
Net increase (decrease), pre-tax	1			11			70			(6		)
Effect of income taxes				(4		)	(16		)	2
Net increase (decrease), after-tax	1			7			54			(4		)
Other
PNC’s portion of BlackRock’s OCI	(22		)	4			(37		)	26
Net investment hedge derivatives	17			(26		)	47			(76		)
Foreign currency translation adjustments and other	(12		)	28			(35		)	82
Net increase (decrease), pre-tax	(17		)	6			(25		)	32
Effect of income taxes	1			8			(3		)	18
Net increase (decrease), after-tax	(16		)	14			(28		)	50
Total other comprehensive income (loss), pre-tax	(412		)	97			(1,441		)	337
Total other comprehensive income (loss), tax effect	92			(21		)	323			(94		)
Total other comprehensive income (loss), after-tax	$	(320	)	$	76		$	(1,118	)	$	243

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

Table 71: Accumulated Other Comprehensive Income (Loss) Components



In millions, after-tax	Net unrealized gains (losses) on non-OTTI securities			Net unrealized gains (losses) on OTTI securities		Net unrealized gains (losses) on cash flow hedge derivatives			Pension and other postretirement benefit plan adjustments			Other			Total
Balance at June 30, 2017	$	189		$	166	$	278		$	(564	)	$	(167	)	$	(98	)
Net activity	41			44		(30		)	7			14			76
Balance at September 30, 2017	$	230		$	210	$	248		$	(557	)	$	(153	)	$	(22	)
Balance at June 30, 2018	$	(494	)	$	227	$	(52	)	$	(489	)	$	(132	)	$	(940	)
Net activity	(251		)			(54		)	1			(16		)	(320		)
Balance at September 30, 2018	$	(745	)	$	227	$	(106	)	$	(488	)	$	(148	)	$	(1,260	)
Balance at December 31, 2016	$	52		$	106	$	333		$	(553	)	$	(203	)	$	(265	)
Net activity	178			104		(85		)	(4		)	50			243
Balance at September 30, 2017	$	230		$	210	$	248		$	(557	)	$	(153	)	$	(22	)
Balance at December 31, 2017	$	62		$	215	$	151		$	(446	)	$	(130	)	$	(148	)
Cumulative effect of adopting ASU 2018-02 (a)	59					33			(96		)	10			6
Balance at January 1, 2018	121			215		184			(542		)	(120		)	(142		)
Net activity	(866		)	12		(290		)	54			(28		)	(1,118		)
Balance at September 30, 2018	$	(745	)	$	227	$	(106	)	$	(488	)	$	(148	)	$	(1,260	)


(a)	Represents the cumulative impact of adopting ASU 2018-02 which permits the reclassification to retained earnings of the income tax effects stranded within AOCI. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our First Quarter 2018 Form 10-Q for additional detail on this adoption.

NOTE 12 LEGAL PROCEEDINGS

We establish accruals for legal proceedings, including litigation and regulatory and governmental investigations and inquiries, when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changed circumstances. When we are able to do so, we also determine estimates of possible losses or ranges of possible losses, whether in excess of any related accrued liability or where there is no accrued liability, for disclosed legal proceedings (“Disclosed Matters,” which are those matters disclosed in this Note 12 as well as those matters disclosed in Note 19 Legal Proceedings in Part II, Item 8 of our 2017 Form 10-K and in Note 12 Legal Proceedings in Part I, Item 1 of our first and second quarter 2018 Form 10-Qs (such prior disclosure collectively referred to as “Prior Disclosure”)). For Disclosed Matters where we are able to estimate such possible losses or ranges of possible losses, as of September 30, 2018, we estimate that it is reasonably possible that we could incur losses in excess of related accrued liabilities, if any, in an aggregate amount of up to approximately $125 million. The estimates included in this amount are based on our analysis of currently available information and are subject to significant judgment and a variety of assumptions and uncertainties. As new information is obtained we may change our estimates. Due to the inherent subjectivity of the assessments and unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to us from the legal proceedings in question. Thus, our exposure and ultimate losses may be higher, and possibly significantly so, than the amounts accrued or this aggregate amount.

As a result of the types of factors described in Note 19 in our 2017 Form 10-K, we are unable, at this time, to estimate the losses that are reasonably possible to be incurred or ranges of such losses with respect to some of the matters disclosed, and the aggregate estimated amount provided above does not include an estimate for every Disclosed Matter. Therefore, as the estimated aggregate amount disclosed above does not include all of the Disclosed Matters, the amount disclosed above does not represent our maximum reasonably possible loss exposure for all of the Disclosed Matters. The estimated aggregate amount also does not reflect any of our exposure to matters not so disclosed, as discussed below under “Other.”

We include in some of the descriptions of individual Disclosed Matters certain quantitative information related to the plaintiff’s claim against us as alleged in the plaintiff’s pleadings or other public filings or otherwise publicly available information. While information of this type may provide insight into the potential magnitude of a matter, it does not necessarily represent our estimate of reasonably possible loss or our judgment as to any currently appropriate accrual.

Some of our exposure in Disclosed Matters may be offset by applicable insurance coverage. We do not consider the possible availability of insurance coverage in determining the amounts of any accruals (although we record the amount of related insurance recoveries that are deemed probable up to the amount of the accrual) or in determining any estimates of possible losses or ranges of possible losses.

The PNC Financial Services Group, Inc. – Form 10-Q 79

Interchange Litigation

In September 2018, in the antitrust lawsuits that have been consolidated for pre-trial proceedings in the U.S. District Court for the Eastern District of New York under the caption In re Payment Card Interchange Fee and Merchant-Discount Antitrust Litigation (Master File No. 1:05-md-1720-MKB-JO), the relevant parties entered into an amended definitive agreement to resolve the claims of the class seeking damages. In this amended settlement agreement, the parties agreed, among other things, to the following terms:


•	An additional settlement payment from all defendants of $900 million, with Visa’s share of the additional settlement payment being $600 million. The additional settlement payment will be added to the approximately $5.3 billion previously paid by the defendants pursuant to the original 2012 settlement agreement.

•

Up to $700 million may be returned to the defendants (with up to $467 million to Visa) if more than 15% of class members (by payment volume) opt out of the class. The amount that may be returned to defendants is calculated using a formula based on the payment volume attributable to class members that opt out of the class. If more than 25% of class members (by payment volume) opt out of the class, the defendants may terminate the Amended Settlement Agreement.

This amended settlement agreement is subject to court approval.

In addition, in August 2018, the district court judge overruled the ruling of magistrate judge that had held that the two-sided market allegations do not relate back to the time of the original complaint and are not subject to tolling. Instead, the district court judge found that the two-sided market allegations do relate back.

Pre-need Funeral Arrangements

In the lawsuit pending in the U.S. District Court for the Eastern District of Missouri under the caption Jo Ann Howard and Associates, P.C., et al. v. Cassity, et al. (No. 4:09-CV-1252-ERW) a new trial in accordance with the court of appeal’s decision is scheduled to start in November 2018.

Other Regulatory and Governmental Inquiries

We are the subject of investigations, audits, examinations and other forms of regulatory and governmental inquiry covering a broad range of issues in our consumer, mortgage, brokerage, securities and other financial services businesses, as well as other aspects of our operations. In some cases, these inquiries are part of reviews of specified activities at multiple industry participants; in others, they are directed at PNC individually. From time to time, these inquiries, including those described below and in Prior Disclosure, involve or lead to regulatory enforcement actions and other administrative proceedings, and may lead to civil or criminal judicial proceedings. Some of these inquiries result in remedies including fines, penalties, restitution, or alterations in our business practices, and in additional expenses and collateral costs and other consequences. Such remedies and other consequences are not typically material to us from a financial standpoint, but may be and, even if not, may result in significant reputational harm or other adverse consequences.

As has been publicly reported, the United States Attorney’s Office for the Southern District of Florida is conducting an inquiry relating to the federal Low Income Housing Tax Credit (LIHTC) program directed at program participants. In connection with that inquiry, the U.S. Attorney’s Office has requested information from PNC Bank. We are cooperating with the inquiry.

Our practice is to cooperate fully with regulatory and governmental investigations, audits and other inquiries, including those described in this Note 12 and in Prior Disclosure.

Other

In addition to the proceedings or other matters described above, PNC and persons to whom we may have indemnification obligations, in the normal course of business, are subject to various other pending and threatened legal proceedings in which claims for monetary damages and other relief are asserted. We do not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of such other legal proceedings will have a material adverse effect on our financial position. However, we cannot now determine whether or not any claims asserted against us or others to whom we may have indemnification obligations, whether in the proceedings or other matters described above or otherwise, will have a material adverse effect on our results of operations in any future reporting period, which will depend on, among other things, the amount of the loss resulting from the claim and the amount of income otherwise reported for the reporting period.

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

NOTE 13 COMMITMENTS

In the normal course of business, we have various commitments outstanding, certain of which are not included on our Consolidated Balance Sheet. The following table presents our outstanding commitments to extend credit along with significant other commitments as of September 30, 2018 and December 31, 2017, respectively.

Table 72: Commitments to Extend Credit and Other Commitments



In millions	September 30 2018		December 31 2017
Commitments to extend credit
Total commercial lending	$	118,491	$	112,125
Home equity lines of credit	16,703		17,852
Credit card	26,548		24,911
Other	5,174		4,753
Total commitments to extend credit	166,916		159,641
Net outstanding standby letters of credit (a)	8,828		8,651
Reinsurance agreements (b)	1,557		1,654
Standby bond purchase agreements (c)	1,018		843
Other commitments (d)	1,060		1,732
Total commitments to extend credit and other commitments	$	179,379	$	172,521


(a)	Net outstanding standby letters of credit include $3.7 billion and $3.5 billion at September 30, 2018 and December 31, 2017, respectively, which support remarketing programs.

(b)

Represents aggregate maximum exposure up to the specified limits of the reinsurance contracts provided by our wholly-owned captive insurance subsidiary. These amounts reflect estimates based on availability of financial information from insurance carriers. As of September 30, 2018, the aggregate maximum exposure amount comprised $1.4 billion for accidental death & dismemberment contracts and $.2 billion for credit life, accident and health contracts. Comparable amounts at December 31, 2017 were $1.5 billion and $.2 billion, respectively.


(c)	We enter into standby bond purchase agreements to support municipal bond obligations.


(d)	Includes $.5 billion related to investments in qualified affordable housing projects at both September 30, 2018 and December 31, 2017, respectively.

Commitments to Extend Credit

Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. These commitments generally have fixed expiration dates, may require payment of a fee, and contain termination clauses in the event the customer’s credit quality deteriorates.

Net Outstanding Standby Letters of Credit

We issue standby letters of credit and share in the risk of standby letters of credit issued by other financial institutions, in each case to support obligations of our customers to third-parties, such as insurance requirements and the facilitation of transactions involving capital markets product execution. Approximately 92% and 91% of our net outstanding standby letters of credit were rated as Pass as of September 30, 2018 and December 31, 2017, respectively, with the remainder rated as Criticized. An internal credit rating of Pass indicates the expected risk of loss is currently low, while a rating of Criticized indicates a higher degree of risk.

If the customer fails to meet its financial or performance obligation to the third-party under the terms of the contract or there is a need to support a remarketing program, then upon a draw by a beneficiary, subject to the terms of the letter of credit, we would be obligated to make payment to them. The standby letters of credit outstanding on September 30, 2018 had terms ranging from less than one year to six years.

As of September 30, 2018, assets of $1.1 billion secured certain specifically identified standby letters of credit. In addition, a portion of the remaining standby letters of credit issued on behalf of specific customers is also secured by collateral or guarantees that secure the customers’ other obligations to us. The carrying amount of the liability for our obligations related to standby letters of credit and participations in standby letters of credit was $.2 billion at September 30, 2018 and is included in Other liabilities on our Consolidated Balance Sheet.

The PNC Financial Services Group, Inc. – Form 10-Q 81

NOTE 14 SEGMENT REPORTING

We have four reportable business segments:


•	Retail Banking


•	Corporate & Institutional Banking


•	Asset Management Group


•	BlackRock

Results of individual businesses are presented based on our internal management reporting practices. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of our individual businesses are not necessarily comparable with similar information for any other company. We periodically refine our internal methodologies as management reporting practices are enhanced. To the extent significant and practicable, retrospective application of new methodologies is made to prior period reportable business segment results and disclosures to create comparability with the current period.

Total business segment financial results differ from total consolidated net income. The impact of these differences is reflected in the “Other” category in the business segment tables. “Other” includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities, certain trading activities, certain non-strategic runoff consumer loan portfolios, private equity investments, intercompany eliminations, most corporate overhead, tax adjustments that are not allocated to business segments, gains or losses related to BlackRock transactions, integration costs, exited businesses and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests as the segments’ results exclude their portion of net income attributable to noncontrolling interests. Assets, revenue and earnings attributable to foreign activities were not material in the periods presented for comparative purposes.

Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. Additionally, we have aggregated the results for corporate support functions within “Other” for financial reporting purposes.

Our allocation of the costs incurred by shared support areas not directly aligned with the businesses is primarily based on the use of services.

A portion of capital is intended to cover unexpected losses and is assigned to our business segments using our risk-based economic capital model, including consideration of the goodwill at those business segments, as well as the diversification of risk among the business segments, ultimately reflecting our portfolio risk adjusted capital allocation.

We have allocated the allowances for loan and lease losses and for unfunded loan commitments and letters of credit based on the loan exposures within each business segment’s portfolio. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower and economic conditions. Key reserve assumptions are periodically updated.

Business Segment Products and Services

Retail Banking provides deposit, lending, brokerage, insurance services, investment management and cash management products and services to consumer and small business customers. Our customers are serviced through our branch network, ATMs, call centers, online banking and mobile channels. The branch network is located primarily in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, Florida, North Carolina, Kentucky, Washington, D.C., Delaware, Virginia, Georgia, Alabama, Missouri, Wisconsin and South Carolina. Deposit products include checking, savings and money market accounts and certificates of deposit. Lending products include residential mortgages, home equity loans and lines of credit, auto loans, credit cards, education loans and personal and small business loans and lines of credit. The residential mortgage loans are directly originated within our branch network and nationwide, and are typically underwritten to government agency and/or third-party standards, and either sold, servicing retained, or held on our balance sheet. Brokerage, investment management and cash management products and services include managed, education, retirement and trust accounts.

Corporate & Institutional Banking provides lending, treasury management and capital markets-related products and services to mid-sized and large corporations, and government and not-for-profit entities. Lending products include secured and unsecured loans, letters of credit and equipment leases. Treasury management services include cash and investment management, receivables

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

management, disbursement services, funds transfer services, information reporting and global trade services. Capital markets-related products and services include foreign exchange, derivatives, securities underwriting, loan syndications, mergers and acquisitions advisory and equity capital markets advisory related services. We also provide commercial loan servicing and technology solutions for the commercial real estate finance industry. Products and services are provided nationally. We offer certain products and services internationally.

Asset Management Group provides personal wealth management for high net worth and ultra high net worth clients and institutional asset management. Wealth management products and services include investment and retirement planning, customized investment management, private banking, tailored credit solutions and trust management and administration for individuals and their families. Our Hawthorn unit provides multi-generational family planning including estate, financial, tax planning, fiduciary, investment management and consulting, private banking, personal administrative services, asset custody and customized performance reporting to ultra high net worth families. Institutional asset management provides advisory, custody and retirement administration services. The business also offers PNC proprietary mutual funds. Institutional clients include corporations, unions, municipalities, non-profits, foundations and endowments, largely within our primary geographic markets.

BlackRock, in which we hold an equity investment, is a leading publicly-traded investment management firm providing a broad range of investment, risk management and technology services to institutional and retail clients worldwide. Using a diverse platform of active and index investment strategies across asset classes, BlackRock develops investment outcomes and asset allocation solutions for clients. Product offerings include single- and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. BlackRock also offers an investment and risk management technology platform, risk analytics, advisory and technology services and solutions to a broad base of institutional and wealth management investors.

Our equity investment in BlackRock provides us with an additional source of noninterest income and increases our overall revenue diversification. BlackRock is a publicly-traded company, and additional information regarding its business is available in its filings with the Securities and Exchange Commission (SEC). At September 30, 2018, our economic interest in BlackRock was 22%. We received cash dividends from BlackRock of $310 million and $266 million during the first nine months of 2018 and 2017, respectively.

The PNC Financial Services Group, Inc. – Form 10-Q 83

Table 73: Results of Businesses



Three months ended September 30 In millions	Retail Banking		Corporate & Institutional Banking			Asset Management Group			BlackRock		Other			Consolidated (a)
2018
Income Statement
Net interest income	$	1,305	$	903		$	71				$	187		$	2,466
Noninterest income	622		592			228			$	265	184			1,891
Total revenue	1,927		1,495			299			265		371			4,357
Provision for credit losses (benefit)	113		(13		)	2					(14		)	88
Depreciation and amortization	52		47			13					112			224
Other noninterest expense	1,390		622			204					168			2,384
Income before income taxes and noncontrolling interests	372		839			80			265		105			1,661
Income taxes (benefit)	89		174			19			49		(70		)	261
Net income	$	283	$	665		$	61		$	216	$	175		$	1,400
Average Assets (b)	$	89,963	$	153,897		$	7,397		$	7,964	$	118,656		$	377,877
2017
Income Statement
Net interest income	$	1,177	$	883		$	72				$	213		$	2,345
Noninterest income	643		555			220			$	206	156			1,780
Total revenue	1,820		1,438			292			206		369			4,125
Provision for credit losses (benefit)	77		62			3					(12		)	130
Depreciation and amortization	43		47			13					126			229
Other noninterest expense	1,332		552			201					142			2,227
Income before income taxes and noncontrolling interests	368		777			75			206		113			1,539
Income taxes (benefit)	136		252			28			49		(52		)	413
Net income	$	232	$	525		$	47		$	157	$	165		$	1,126
Average Assets (b)	$	88,642	$	150,948		$	7,464		$	7,282	$	119,061		$	373,397

Nine months ended September 30 In millions	Retail Banking		Corporate & Institutional Banking			Asset Management Group			BlackRock		Other			Consolidated (a)
2018
Income Statement
Net interest income	$	3,800	$	2,641		$	217				$	582		$	7,240
Noninterest income	1,935		1,774			676			$	732	435			5,552
Total revenue	5,735		4,415			893			732		1,017			12,792
Provision for credit losses (benefit)	254		43			2					(39		)	260
Depreciation and amortization	144		140			38					372			694
Other noninterest expense	4,143		1,794			620					468			7,025
Income before income taxes and noncontrolling interests	1,194		2,438			233			732		216			4,813
Income taxes (benefit)	285		514			55			124		(160		)	818
Net income	$	909	$	1,924		$	178		$	608	$	376		$	3,995
Average Assets (b)	$	89,259	$	153,149		$	7,455		$	7,964	$	118,772		$	376,599
2017
Income Statement
Net interest income	$	3,436	$	2,538		$	216				$	573		$	6,763
Noninterest income	1,891		1,667			655			$	578	515			5,306
Total revenue	5,327		4,205			871			578		1,088			12,069
Provision for credit losses (benefit)	198		174			(6		)			(50		)	316
Depreciation and amortization	132		137			38					379			686
Other noninterest expense	3,928		1,648			608					467			6,651
Income before income taxes and noncontrolling interests	1,069		2,246			231			578		292			4,416
Income taxes (benefit)	394		719			85			132		(211		)	1,119
Net income	$	675	$	1,527		$	146		$	446	$	503		$	3,297
Average Assets (b)	$	88,589	$	147,299		$	7,499		$	7,282	$	119,395		$	370,064


(a)	There were no material intersegment revenues for the three and nine months ended September 30, 2018 and 2017.


(b)	Period-end balances for BlackRock.

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

NOTE 15 FEE-BASED REVENUE FROM CONTRACTS WITH CUSTOMERS

A subset of our noninterest income relates to certain fee-based revenue within the scope of ASC Topic 606 - Revenue from Contracts with Customers (Topic 606). The objective of the standard is to clarify the principles for recognizing revenue from contracts with customers across all industries and to develop a common revenue standard under GAAP. The standard requires the application of a five-step recognition model to contracts, allocating the amount of consideration we expect to be entitled to across distinct promises in the contract, called performance obligations, and recognizing revenue when or as those services are transferred to the customer.

Fee-based revenue within the scope of Topic 606 is recognized within three of our reportable business segments, Retail Banking, Corporate & Institutional Banking (C&IB) and Asset Management Group. Income recognized from our investment in BlackRock, also a reportable segment, is outside of the scope of the standard. Topic 606 also excludes interest income, income from lease contracts, fair value gains from financial instruments (including derivatives), income from mortgage servicing rights and guarantee products, letter of credit fees, non-refundable fees associated with acquiring or originating a loan and gains from the sale of financial assets.

The following tables present noninterest income within the scope of Topic 606 disaggregated by segment. A description of the fee-based revenue and how it is recognized for each segment’s principal services and products follows each table.

Table 74: Retail Banking Noninterest Income Disaggregation



In millions	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Product
Deposit account fees	$	162	$	451
Debit card fees	130		374
Brokerage fees	86		260
Merchant services	54		156
Net credit card fees (a)	45		139
Other	71		214
Total in-scope noninterest income by product	$	548	$	1,594
Reconciliation to total Retail Banking noninterest income
Total in-scope noninterest income	$	548	$	1,594
Total out-of-scope noninterest income (b)	74		341
Total Retail Banking noninterest income	$	622	$	1,935


(a)	Net credit card fees consists of interchange fees of $115 million and $332 million and credit card reward costs of $70 million and $193 million for the three and nine months ended September 30, 2018, respectively.


(b)	Out-of-scope noninterest income includes revenue streams that fall under the scope of other accounting and disclosure requirements outside of Topic 606.

Deposit Account Fees

Retail Banking provides demand deposit, money market and savings account products for consumer and small business customers. Services include online and branch banking, overdraft and wire transfer services, imaging services and cash alternative services such as money orders and cashier's checks. We recognize fee income at the time these services are performed for the customer.

Debit Card and Net Credit Card Fees

As an issuing bank, Retail Banking earns interchange fee revenue from debit and credit card transactions. By offering card products, we maintain and administer card-related services such as credit card reward programs, account data and statement information, card activation, renewals, and card suspension and blockage. Interchange fees are earned when cardholders make purchases and are presented net of credit card reward costs.

Brokerage Fees

Retail Banking earns fee revenue by providing its customers a wide range of investment options through its brokerage services including mutual funds, annuities, stocks, bonds, long-term care and insurance products, and managed accounts. We earn fee revenue for transaction-based brokerage services, such as the execution of market trades, once the transaction has been completed as of the trade date. In other cases, such as investment management services, we earn fee revenue over the term of the customer contract.

Merchant Services

Retail Banking earns fee revenue for debit and credit card processing services. We provide these services to merchant businesses including point-of-sale payment acceptance capabilities and customized payment processing built around the merchant’s specific requirements. We earn fee revenue as the merchant's customers make purchases.

The PNC Financial Services Group, Inc. – Form 10-Q 85

Other

Other noninterest income primarily includes ATM fees earned from our customers and non-PNC customers. These fees are recognized as transactions occur.

Table 75: Corporate & Institutional Banking Noninterest Income Disaggregation



In millions	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Product
Treasury management fees	$	196	$	578
Capital markets fees	147		397
Commercial mortgage banking activities	23		65
Other	16		51
Total in-scope noninterest income by product	$	382	$	1,091
Reconciliation to total Corporate & Institutional Banking noninterest income
Total in-scope noninterest income	$	382	$	1,091
Total out-of-scope noninterest income (a)	210		683
Total Corporate & Institutional Banking noninterest income	$	592	$	1,774


(a)	Out-of-scope noninterest income includes revenue streams that fall under the scope of other accounting and disclosure requirements outside of Topic 606.

Treasury Management Fees

C&IB provides corporations with cash and investment management services, receivables and disbursement management services, funds transfer services and access to online/mobile information management and reporting services. Treasury management fees are recognized over time as we perform these services.

Capital Markets Fees

Capital markets fees include securities underwriting fees, merger and acquisition advisory fees and other advisory related fees. We recognize these fees when the related transaction closes.

Commercial Mortgage Banking Activities

Commercial mortgage banking activities include servicing responsibilities where we do not own the servicing rights. Servicing responsibilities typically consist of collecting and remitting monthly borrower principal and interest payments, maintaining escrow deposits, performing loss mitigation and foreclosure activities, and, in certain instances, funding of servicing advances. We recognize servicing fees over time as we perform these activities.

Other

Other noninterest income within C&IB primarily comprised fees from collateral management and asset management services. We earn these fees over time as we perform these services.

Table 76: Asset Management Group Noninterest Income Disaggregation



In millions	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Customer Type
Personal	$	156	$	462
Institutional	70		206
Total in-scope noninterest income by customer type	$	226	$	668
Reconciliation to Asset Management Group noninterest income
Total in-scope noninterest income	$	226	$	668
Total out-of-scope noninterest income (a)	2		8
Total Asset Management Group noninterest income	$	228	$	676


(a)	Out-of-scope noninterest income includes revenue streams that fall under the scope of other accounting and disclosure requirements outside of Topic 606.

Asset Management Services

Asset Management Group provides both personal wealth and institutional asset management services including investment management, custody services, retirement planning, family planning, trust management and retirement administration services. We recognize fee revenue over the term of the customer contract based on the value of assets under management at a point in time.

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

STATISTICAL INFORMATION (UNAUDITED)

THE PNC FINANCIAL SERVICES GROUP, INC.

Average Consolidated Balance Sheet And Net Interest Analysis (a) (b) (c)



	Nine months ended September 30
	2018						2017
Taxable-equivalent basis Dollars in millions	Average Balances		Interest Income/ Expense		Average Yields/ Rates		Average Balances		Interest Income/ Expense		Average Yields/ Rates
Assets
Interest-earning assets:
Investment securities
Securities available for sale
Residential mortgage-backed
Agency	$	26,746	$	537	2.68	%	$	25,910	$	498	2.57	%
Non-agency	2,265		111		6.54	%	2,943		126		5.69	%
Commercial mortgage-backed	4,449		92		2.75	%	5,413		103		2.53	%
Asset-backed	5,260		123		3.12	%	5,799		109		2.51	%
U.S. Treasury and government agencies	15,603		260		2.20	%	13,021		173		1.76	%
Other	4,113		109		3.50	%	5,131		116		3.03	%
Total securities available for sale	58,436		1,232		2.80	%	58,217		1,125		2.57	%
Securities held to maturity
Residential mortgage-backed	15,578		337		2.88	%	12,736		268		2.80	%
Commercial mortgage-backed	807		23		3.73	%	1,353		41		4.05	%
Asset-backed	194		5		3.34	%	468		8		2.34	%
U.S. Treasury and government agencies	747		16		2.83	%	541		13		3.08	%
Other	1,894		61		4.42	%	2,015		80		5.31	%
Total securities held to maturity	19,220		442		3.07	%	17,113		410		3.19	%
Total investment securities	77,656		1,674		2.87	%	75,330		1,535		2.71	%
Loans
Commercial	112,907		3,363		3.93	%	106,534		2,758		3.41	%
Commercial real estate	28,883		873		3.98	%	29,505		777		3.47	%
Equipment lease financing	7,512		199		3.54	%	7,602		203		3.56	%
Consumer	55,474		2,075		5.00	%	56,413		1,920		4.55	%
Residential real estate	17,609		581		4.40	%	15,920		539		4.52	%
Total loans	222,385		7,091		4.23	%	215,974		6,197		3.81	%
Interest-earning deposits with banks	21,921		286		1.74	%	23,530		182		1.03	%
Other interest-earning assets	7,305		259		4.74	%	9,058		236		3.46	%
Total interest-earning assets/interest income	329,267		9,310		3.75	%	323,892		8,150		3.34	%
Noninterest-earning assets	47,332						46,172
Total assets	$	376,599					$	370,064
Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing deposits
Money market	$	56,732	279		.66	%	$	62,795	148		.32	%
Demand	60,058		117		.26	%	57,017		51		.12	%
Savings	50,845		284		.75	%	41,715		138		.44	%
Time deposits	17,081		130		1.02	%	17,283		96		.74	%
Total interest-bearing deposits	184,716		810		.59	%	178,810		433		.32	%
Borrowed funds
Federal Home Loan Bank borrowings	21,067		342		2.14	%	19,999		186		1.23	%
Bank notes and senior debt	28,352		594		2.76	%	24,817		372		1.98	%
Subordinated debt	5,096		159		4.16	%	6,556		174		3.54	%
Other	4,966		78		2.04	%	5,130		61		1.56	%
Total borrowed funds	59,481		1,173		2.60	%	56,502		793		1.86	%
Total interest-bearing liabilities/interest expense	244,197		1,983		1.08	%	235,312		1,226		.69	%
Noninterest-bearing liabilities and equity:
Noninterest-bearing deposits	76,666						78,122
Accrued expenses and other liabilities	8,971						10,423
Equity	46,765						46,207
Total liabilities and equity	$	376,599					$	370,064
Interest rate spread					2.67	%					2.65	%
Impact of noninterest-bearing sources					.28						.19
Net interest income/margin			$	7,327	2.95	%			$	6,924	2.84	%

(continued on following page)

The PNC Financial Services Group, Inc. – Form 10-Q 87

Average Consolidated Balance Sheet And Net Interest Analysis (a) (b) (c) (Continued)



	Three months ended September 30
	2018						2017
Taxable-equivalent basis Dollars in millions	Average Balances		Interest Income/ Expense		Average Yields/ Rates		Average Balances		Interest Income/ Expense		Average Yields/ Rates
Assets
Interest-earning assets:
Investment securities
Securities available for sale
Residential mortgage-backed
Agency	$	28,241	$	194	2.76	%	$	25,493	$	166	2.61	%
Non-agency	2,128		38		7.18	%	2,758		41		5.91	%
Commercial mortgage-backed	4,366		30		2.72	%	4,838		33		2.71	%
Asset-backed	5,459		46		3.37	%	5,546		35		2.53	%
U.S. Treasury and government agencies	16,757		96		2.25	%	13,081		61		1.83	%
Other	3,996		34		3.28	%	5,011		38		3.08	%
Total securities available for sale	60,947		438		2.86	%	56,727		374		2.63	%
Securities held to maturity
Residential mortgage-backed	16,292		119		2.92	%	13,549		95		2.81	%
Commercial mortgage-backed	715		7		3.71	%	1,211		14		4.42	%
Asset-backed	189		2		3.65	%	358		2		2.53	%
U.S. Treasury and government agencies	752		6		2.85	%	561		5		3.07	%
Other	1,871		19		4.42	%	2,000		26		5.30	%
Total securities held to maturity	19,819		153		3.10	%	17,679		142		3.20	%
Total investment securities	80,766		591		2.92	%	74,406		516		2.77	%
Loans
Commercial	113,883		1,183		4.06	%	109,503		991		3.54	%
Commercial real estate	28,860		302		4.10	%	29,676		277		3.65	%
Equipment lease financing	7,202		68		3.78	%	7,704		71		3.71	%
Consumer	55,449		722		5.17	%	56,062		659		4.67	%
Residential real estate	17,948		199		4.45	%	16,273		181		4.45	%
Total loans	223,342		2,474		4.36	%	219,218		2,179		3.92	%
Interest-earning deposits with banks	19,151		95		1.97	%	23,859		75		1.26	%
Other interest-earning assets	7,114		92		5.19	%	9,024		80		3.47	%
Total interest-earning assets/interest income	330,373		3,252		3.89	%	326,507		2,850		3.45	%
Noninterest-earning assets	47,504						46,890
Total assets	$	377,877					$	373,397
Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing deposits
Money market	$	55,507	112		.80	%	$	62,325	65		.41	%
Demand	60,138		49		.32	%	56,743		20		.14	%
Savings	52,919		122		.92	%	43,869		50		.45	%
Time deposits	17,756		53		1.18	%	17,571		35		.79	%
Total interest-bearing deposits	186,320		336		.71	%	180,508		170		.37	%
Borrowed funds
Federal Home Loan Bank borrowings	21,516		133		2.42	%	19,190		67		1.37	%
Bank notes and senior debt	27,301		204		2.92	%	26,602		140		2.05	%
Subordinated debt	5,253		54		4.10	%	5,970		51		3.48	%
Other	5,768		30		2.11	%	5,254		22		1.60	%
Total borrowed funds	59,838		421		2.76	%	57,016		280		1.93	%
Total interest-bearing liabilities/interest expense	246,158		757		1.21	%	237,524		450		.75	%
Noninterest-bearing liabilities and equity:
Noninterest-bearing deposits	76,155						78,931
Accrued expenses and other liabilities	8,853						10,749
Equity	46,711						46,193
Total liabilities and equity	$	377,877					$	373,397
Interest rate spread					2.68	%					2.70	%
Impact of noninterest-bearing sources					.31						.21
Net interest income/margin			$	2,495	2.99	%			$	2,400	2.91	%

(a)

Nonaccrual loans are included in loans, net of unearned income. The impact of financial derivatives used in interest rate risk management is included in the interest income/expense and average yields/rates of the related assets and liabilities. Basis adjustments related to hedged items are included in noninterest-earning assets and noninterest-bearing liabilities. Average balances of securities are based on amortized historical cost (excluding adjustments to fair value, which are included in other assets). Average balances for certain loans and borrowed funds accounted for at fair value are included in noninterest-earning assets and noninterest-bearing liabilities, with changes in fair value recorded in Noninterest income.


(b)	Loan fees for the three months ended September 30, 2018 and September 30, 2017 were $34 million and $35 million, respectively. Loan fees for the nine months ended September 30, 2018 and September 30, 2017 were $99 million and $89 million, respectfully.

(c)

Interest income calculated as taxable-equivalent interest income. To provide more meaningful comparisons of interest income and yields for all interest-earning assets, as well as net interest margins, we use interest income on a taxable-equivalent basis in calculating average yields and 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 GAAP. See Reconciliation of Taxable-Equivalent Net Interest Income in this Statistical Information section for more information.

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

RECONCILIATION OF TAXABLE-EQUIVALENT NET INTEREST INCOME (NON-GAAP) (a)



	Nine months ended				Three months ended
In millions	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Net interest income (GAAP)	$	7,240	$	6,763	$	2,466	$	2,345
Taxable-equivalent adjustments	87		161		29		55
Net interest income (Non-GAAP)	$	7,327	$	6,924	$	2,495	$	2,400

(a)

The interest income earned on certain interest-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 income, we use interest income on a taxable-equivalent basis 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 GAAP. As a result of the Tax Cuts and Jobs Act, which was enacted into law during the fourth quarter of 2017, the statutory tax rate for corporations was lowered to 21% from 35%, effective January 1, 2018. Amounts for the 2017 periods were calculated using the previously applicable statutory federal income tax rate of 35%.

TRANSITIONAL BASEL III AND FULLY PHASED-IN BASEL III COMMON EQUITY TIER 1 CAPITAL RATIOS (NON-GAAP)



	2017 Transitional Basel III (a)			Fully Phased-In Basel III (Non-GAAP) (b)
Dollars in millions	September 30 2017			September 30 2017
Common stock, related surplus and retained earnings, net of treasury stock	$	42,426		$	42,426
Less regulatory capital adjustments:
Goodwill and disallowed intangibles, net of deferred tax liabilities	(9,137		)	(9,202		)
Basel III total threshold deductions	(1,166		)	(1,731		)
Accumulated other comprehensive income (loss) (c)	(94		)	(117		)
All other adjustments	(161		)	(163		)
Basel III Common equity Tier 1 capital	$	31,868		$	31,213
Basel III standardized approach risk-weighted assets (d)	$	309,292		$	317,393
Basel III advanced approaches risk-weighted assets (e)	N/A			$	285,517
Basel III Common equity Tier 1 capital ratio	10.3		%	9.8		%
Risk weight and associated rules utilized	Standardized (with 2017 transition adjustments)			Standardized


(a)	Calculated using the regulatory capital methodology applicable to PNC during 2017 and calculated based on the standardized approach.


(b)	2017 Fully Phased-In Basel III results are presented as Pro forma estimates.


(c)	Represents net adjustments related to accumulated other comprehensive income (loss) for securities currently, and those transferred from, available for sale, as well as pension and other postretirement plans.


(d)	Basel III standardized approach risk-weighted assets are based on the Basel III standardized approach rules and include credit and market risk-weighted assets.

(e)

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See the information set forth in Note 12 Legal Proceedings in the Notes To Consolidated Financial Statements under Part I, Item 1 of this Report, which is incorporated by reference in response to this item.

ITEM 1A. RISK FACTORS

There are no material changes in our risk factors from those previously disclosed in PNC’s 2017 Form 10-K in response to Part I, Item 1A.

The PNC Financial Services Group, Inc. – Form 10-Q 89

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Details of our repurchases of PNC common stock during the third quarter of 2018 are included in the following table:



2018 period In thousands, except per share data	Total shares purchased (a)	Average price paid per share		Total shares purchased as part of publicly announced programs (b)	Maximum number of shares that may yet be purchased under the programs (b)
July 1 - 31	1,262	$	139.46	1,255	28,897
August 1 – 31	1,662	$	144.50	1,661	27,236
September 1 – 30	384	$	141.42	384	26,852
Total	3,308	$	142.22

(a)

Includes PNC common stock purchased in connection with our various employee benefit plans generally related to shares used to cover employee payroll tax withholding requirements. Note 11 Employee Benefit Plans and Note 12 Stock Based Compensation Plans in the Notes To Consolidated Financial Statements of our 2017 Annual Report on Form 10-K include additional information regarding our employee benefit and equity compensation plans that use PNC common stock.

(b)

On March 11, 2015, we announced that our Board of Directors approved the establishment of a stock repurchase program authorization in the amount of 100 million shares of PNC common stock, effective April 1, 2015. Repurchases are made in open market or privately negotiated transactions and the timing and exact amount of common stock repurchases will depend on a number of factors including, among others, market and general economic conditions, regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations, including the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process. In June 2018, we announced share repurchase programs of up to $2.0 billion for the four quarter period beginning with the third quarter of 2018, including repurchases of up to $300 million related to employee benefit plans, in accordance with PNC's 2018 capital plan. In the third quarter of 2018, we repurchased 3.3 million shares of common stock on the open market, with an average price of $142.22 per share and an aggregate repurchase price of $.5 billion.

ITEM 6. EXHIBITS

The following exhibit index lists Exhibits filed, or in the case of Exhibits 32.1 and 32.2 furnished, with this Quarterly Report on Form 10-Q:



EXHIBIT INDEX
10.53		The Corporation’s Employee Stock Purchase Plan, as amended and restated as of January 1, 2019

12.1		Computation of Ratio of Earnings to Fixed Charges

12.2		Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350

32.2		Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350

101		Interactive Data File (XBRL)

You can obtain copies of these Exhibits electronically at the SEC’s website at www.sec.gov or by mail from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, DC 20549 at prescribed rates. The Exhibits are also available as part of this Form 10-Q on PNC’s corporate website at www.pnc.com/secfilings. Shareholders and bondholders may also obtain copies of Exhibits, without charge, by contacting Shareholder Relations at 800-843-2206 or via e-mail at investor.relations@pnc.com. The interactive data file (XBRL) exhibit is only available electronically.

CORPORATE INFORMATION

The PNC Financial Services Group, Inc.

Corporate Headquarters

The PNC Financial Services Group, Inc.

The Tower at PNC Plaza

300 Fifth Avenue

Pittsburgh, Pennsylvania 15222-2401

888-762-2265

Stock Listing

The common stock of The PNC Financial Services Group, Inc. is listed on the New York Stock Exchange under the symbol “PNC”.

Internet Information

Our financial reports and information about our products and services are available on the internet at www.pnc.com. We provide information for investors on our corporate website under “About Us – Investor Relations.” We use our Twitter account, @pncnews, as an additional way of disseminating to the public information that may be relevant to investors.

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

We generally post the following under “About Us – Investor Relations” shortly before or promptly following its first use or release: financially-related press releases, including earnings releases and supplemental financial information, various SEC filings, including annual, quarterly and current reports and proxy statements, presentation materials associated with earnings and other investor conference calls or events, and access to live and recorded audio from earnings and other investor conference calls or events. In some cases, we may post the presentation materials for other investor conference calls or events several days prior to the call or event. For earnings and other conference calls or events, we generally include in our posted materials a cautionary statement regarding forward-looking and adjusted information and we provide GAAP reconciliations when we refer to adjusted information and results. Where applicable, we provide GAAP reconciliations for such additional information in materials for that event or in materials for other prior investor presentations or in our annual, quarterly or current reports.

We may on occasion use our corporate website to expedite public access to time-critical information regarding PNC instead of using a press release or a filing with the SEC for first disclosure of the information. In some circumstances, the information may be relevant to investors but directed at customers, in which case it may be accessed directly through the home page rather than "About Us--Investor Relations."

We are required periodically to provide additional public disclosure regarding estimated income, losses and pro forma regulatory capital ratios under supervisory and PNC-developed hypothetical severely adverse economic scenarios, as well as information concerning our capital stress testing processes, pursuant to the stress testing regulations adopted by the Federal Reserve and the OCC. We are also required to make certain additional regulatory capital-related public disclosures about our capital structure, risk exposures, risk assessment processes, risk-weighted assets and overall capital adequacy, including market risk-related disclosures and certain public disclosures regarding our liquidity position and liquidity risk management, under rules adopted by the Federal banking agencies. Under these regulations, we may satisfy these requirements through postings on our website, and we have done so and expect to continue to do so without also providing disclosure of this information through filings with the SEC.

Other information posted on our corporate website that may not be available in our filings with the SEC includes information relating to our corporate governance and communications from our chairman to shareholders, as well as our corporate social responsibility activities under “About Us – Corporate Responsibility.”

Where we have included web addresses in this Report, such as our web address and the web address of the SEC, we have included those web addresses as inactive textual references only. Except as specifically incorporated by reference into this Report, information on those websites is not part hereof.

Financial Information

We are subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance with the Exchange Act, we file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC File Number is 001-09718. You can obtain copies of these and other filings, including exhibits, electronically at the SEC’s internet website at www.sec.gov or on our corporate internet website at www.pnc.com/secfilings. Shareholders and bond holders may also obtain copies of these filings without charge by contacting Shareholder Services at 800-982-7652 or via the online contact form at www.computershare.com/contactus for copies without exhibits, and by contacting Shareholder Relations at 800-843-2206 or via email at investor.relations@pnc.com for copies of exhibits, including financial statement and schedule exhibits where applicable. The interactive data file (XBRL) exhibit is only available electronically.

Corporate Governance at PNC

Information about our Board of Directors and its committees and corporate governance at PNC is available on our corporate website at www.pnc.com/corporategovernance including our PNC Code of Business Conduct and Ethics. In addition, any future amendments to, or waivers from, a provision of the PNC Code of Business Conduct and Ethics that applies to our directors or executive officers (including our principal executive officer, principal financial officer and principal accounting officer or controller) will be posted at this internet address.

Shareholders who would like to request printed copies of the PNC Code of Business Conduct and Ethics or our Corporate Governance Guidelines or the charters of our Board’s Audit, Nominating and Governance, Personnel and Compensation, or Risk Committees (all of which are posted on the PNC corporate website) may do so by sending their requests to our Corporate Secretary at corporate headquarters at the above address. Copies will be provided without charge to shareholders.

Inquiries

For financial services call 888-762-2265.

Registered shareholders should contact Shareholder Services at 800-982-7652.

The PNC Financial Services Group, Inc. – Form 10-Q 91

Analysts and institutional investors should contact Bryan Gill, Executive Vice President, Director of Investor Relations, at 412-768-4143 or via email at investor.relations@pnc.com.

News media representatives should contact PNC Media Relations at 412-762-4550 or via email at media.relations@pnc.com.

Common Stock Prices/Dividends Declared

The following table sets forth by quarter the range of high and low sale and quarter-end closing prices for our common stock and the cash dividends declared per common share.



	High		Low		Close		Cash Dividends Declared (a)
2018 Quarter
First	$	163.59	$	143.94	$	151.24	$	.75
Second	$	154.58	$	134.59	$	135.10	.75
Third	$	147.23	$	133.50	$	136.19	.95
Total							$	2.45
2017 Quarter
First	$	131.83	$	113.66	$	120.24	$	.55
Second	$	128.25	$	115.45	$	124.87	.55
Third	$	135.73	$	119.77	$	134.77	.75
Fourth	$	147.28	$	130.46	$	144.29	.75
Total							$	2.60


(a)	Our Board approved a fourth quarter 2018 cash dividend of $.95 per common share, with a payment date of November 5, 2018.

Dividend Policy

Holders of PNC common stock are entitled to receive dividends when declared by the Board of Directors out of funds legally available for this purpose. Our Board of Directors may not pay or set apart dividends on the common stock until dividends for all past dividend periods on any series of outstanding preferred stock have been paid or declared and set apart for payment. The Board presently intends to continue the policy of paying quarterly cash dividends. The amount of any future dividends will depend on economic and market conditions, our financial condition and operating results, and other factors, including contractual restrictions and applicable government regulations and policies (such as those relating to the ability of bank and non-bank subsidiaries to pay dividends to the parent company and regulatory capital limitations). The amount of our dividend is also currently subject to the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process as described in the Capital Management portion of the Risk Management section of the Financial Review of this Report and in the Supervision and Regulation section in Item 1 of our 2017 Form 10-K.

Dividend Reinvestment and Stock Purchase Plan

The PNC Financial Services Group, Inc. Dividend Reinvestment and Stock Purchase Plan enables holders of our common stock to conveniently purchase additional shares of common stock. You can obtain a prospectus and enrollment form by contacting Shareholder Services at 800-982-7652. Registered shareholders may also contact this phone number regarding dividends and other shareholder services.

Stock Transfer Agent and Registrar

Computershare Trust Company, N.A.

250 Royall Street

Canton, MA 02021

800-982-7652

www.computershare.com/pnc

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on November 1, 2018 on its behalf by the undersigned thereunto duly authorized.

/s/ Robert Q. Reilly

Robert Q. Reilly

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company