The Quarterly
PNC Q2 2015 10-Q

PNC Financial Services Group Inc (PNC) SEC Quarterly Report (10-Q) for Q3 2015

PNC 2015 10-K
PNC Q2 2015 10-Q PNC 2015 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2015

or

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

For the transition period from              to             

Commission file number 001-09718

The PNC Financial Services Group, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania 25-1435979

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

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

(Address of principal executive offices, including zip code)

(412) 762-2000

(Registrant's telephone number, including area code)

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

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

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

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

Large accelerated filer x Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company ¨

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

As of October 23, 2015, there were 507,805,789 shares of the registrant's common stock ($5 par value) outstanding.

T HE PNC F INANCIAL S ERVICES G ROUP , I NC .

Cross-Reference Index to Third Quarter 2015 Form 10-Q

Pages

PART I – FINANCIAL INFORMATION

Item 1.      Financial Statements (Unaudited).

Consolidated Income Statement

56

Consolidated Statement of Comprehensive Income

57

Consolidated Balance Sheet

58

Consolidated Statement Of Cash Flows

59

Notes To Consolidated Financial Statements (Unaudited)

Note 1   Accounting Policies

61

Note 2   Loan Sale and Servicing Activities and Variable Interest Entities

65

Note 3   Asset Quality

69

Note 4   Purchased Loans

82

Note 5    Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit

83

Note 6   Investment Securities

86

Note 7   Fair Value

90

Note 8   Goodwill and Intangible Assets

102

Note 9   Capital Securities of a Subsidiary Trust and Perpetual Trust Securities

104

Note 10 Certain Employee Benefit And Stock Based Compensation Plans

104

Note 11 Financial Derivatives

107

Note 12 Earnings Per Share

113

Note 13 Total Equity And Other Comprehensive Income

114

Note 14 Income Taxes

119

Note 15 Legal Proceedings

119

Note 16 Commitments and Guarantees

122

Note 17 Segment Reporting

127

Note 18 Subsequent Events

131

Statistical Information (Unaudited)

Average Consolidated Balance Sheet And Net Interest Analysis

132

Transitional Basel III and Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios – 2014 Periods

134

Item 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

Financial Review

Consolidated Financial Highlights

1

Executive Summary

3

Consolidated Income Statement Review

8

Consolidated Balance Sheet Review

11

Off-Balance Sheet Arrangements And Variable Interest Entities

21

Fair Value Measurements

22

Business Segments Review

22

Critical Accounting Estimates and Judgments

30

Status Of Qualified Defined Benefit Pension Plan

31

Recourse And Repurchase Obligations

31

Risk Management

32

Internal Controls And Disclosure Controls And Procedures

48

Glossary Of Terms

49

Cautionary Statement Regarding Forward-Looking Information

54

Item 3.       Quantitative and Qualitative Disclosures About Market Risk.

32-48, 90-101 and 107-113

Item 4.      Controls and Procedures.

48

PART II – OTHER INFORMATION

Item 1.      Legal Proceedings.

135

Item 1A.   RiskFactors.

135

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

136

Item 6.      Exhibits.

136

Exhibit Index.

136

Corporate Information

137

Signature

139

T HE PNC F INANCIAL S ERVICES G ROUP , I NC .

Cross-Reference Index to Third Quarter 2015 Form 10-Q (continued)

MD&A TABLE REFERENCE

Table

Description

Page

1

Consolidated Financial Highlights

1

2

Summarized Average Balance Sheet

7

3

Results Of Businesses – Summary

8

4

Net Interest Income and Net Interest Margin

8

5

Noninterest Income

9

6

Summarized Balance Sheet Data

11

7

Details Of Loans

12

8

Accretion – Purchased Impaired Loans

13

9

Purchased Impaired Loans – Accretable Yield

13

10

Valuation of Purchased Impaired Loans

13

11

Weighted Average Life of the Purchased Impaired Portfolios

14

12

Estimated Derecognition Impact – Total ALLL to Total Loans

14

13

Accretable Difference Sensitivity – Total Purchased Impaired Loans

14

14

Commitments to Extend Credit

15

15

Investment Securities

15

16

Weighted-Average Expected Maturity of Mortgage and Other Asset-Backed Debt Securities

16

17

Loans Held For Sale

16

18

Details Of Funding Sources

17

19

Shareholders' Equity

18

20

Basel III Capital

19

21

Fair Value Measurements – Summary

22

22

Retail Banking Table

23

23

Corporate & Institutional Banking Table

25

24

Asset Management Group Table

27

25

Residential Mortgage Banking Table

28

26

BlackRock Table

29

27

Non-Strategic Assets Portfolio Table

29

28

Pension Expense – Sensitivity Analysis

31

29

Nonperforming Assets By Type

33

30

Change in Nonperforming Assets

34

31

OREO and Foreclosed Assets

34

32

Accruing Loans Past Due

35

33

Home Equity Lines of Credit – Draw Period End Dates

36

34

Consumer Real Estate Related Loan Modifications

36

35

Summary of Troubled Debt Restructurings

37

36

Loan Charge-Offs And Recoveries

38

37

Allowance for Loan and Lease Losses

39

38

PNC Bank Bank Notes Issued During 2015

41

39

PNC Bank Senior and Subordinated Debt

41

40

FHLB Borrowings

42

41

Parent Company Senior and Subordinated Debt and Hybrid Capital Instruments

43

42

Credit Ratings as of September 30, 2015 for PNC and PNC Bank

43

43

Contractual Obligations

44

44

Other Commitments

44

45

Interest Sensitivity Analysis

45

46

Net Interest Income Sensitivity to Alternative Rate Scenarios (Third Quarter 2015)

45

47

Alternate Interest Rate Scenarios: One Year Forward

46

48

Enterprise-Wide Gains/Losses Versus Value-at-Risk

46

49

Equity Investments Summary

47

50

Financial Derivatives Summary

48

T HE PNC F INANCIAL S ERVICES G ROUP , I NC .

Cross-Reference Index to Third Quarter 2015 Form 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE

Table

Description

Page

51

Cash Flows Associated with Loan Sale and Servicing Activities 66

52

Principal Balance, Delinquent Loans, and Net Charge-offs Related to Serviced Loans For Others 67

53

Consolidated VIEs – Carrying Value 68

54

Non-Consolidated VIEs 69

55

Analysis of Loan Portfolio 70

56

Nonperforming Assets 71

57

Commercial Lending Asset Quality Indicators 73

58

Home Equity and Residential Real Estate Balances 74

59

Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans 74

60

Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans 76

61

Credit Card and Other Consumer Loan Classes Asset Quality Indicators 77

62

Summary of Troubled Debt Restructurings 78

63

Financial Impact and TDRs by Concession Type 78

64

TDRs that were Modified in the Past Twelve Months which have Subsequently Defaulted 80

65

Impaired Loans 81

66

Purchased Impaired Loans – Balances 82

67

Purchased Impaired Loans – Accretable Yield 83

68

Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data 84

69

Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit 85

70

Investment Securities Summary 86

71

Gross Unrealized Loss and Fair Value of Securities Available for Sale 87

72

Gains (Losses) on Sales of Securities Available for Sale 89

73

Contractual Maturity of Debt Securities 89

74

Fair Value of Securities Pledged and Accepted as Collateral 90

75

Fair Value Measurements – Recurring Basis Summary 91

76

Reconciliation of Level 3 Assets and Liabilities 92

77

Fair Value Measurements – Recurring Quantitative Information 96

78

Fair Value Measurements – Nonrecurring 98

79

Fair Value Measurements – Nonrecurring Quantitative Information 98

80

Fair Value Option – Changes in Fair Value 99

81

Fair Value Option – Fair Value and Principal Balances 100

82

Additional Fair Value Information Related to Other Financial Instruments 101

83

Goodwill by Business Segment 102

84

Mortgage Servicing Rights 102

85

Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions 103

86

Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions 103

87

Fees from Mortgage Loan Servicing 103

88

Other Intangible Assets 103

89

Amortization Expense on Existing Intangible Assets 103

90

Net Periodic Pension and Postretirement Benefits Costs 105

91

Stock Option Rollforward 106

92

Nonvested Incentive/Performance Unit Share Awards and Restricted Stock/Share Unit Awards – Rollforward 106

93

Nonvested Cash-Payable Incentive/Performance Units and Restricted Share Units – Rollforward 106

94

Total Gross Derivatives 107

95

Derivatives Designated As Hedging Instruments under GAAP 108

96

Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges 108

97

Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges 109

98

Gains (Losses) on Derivatives – Net Investment Hedges 109

99

Derivatives Not Designated As Hedging Instruments under GAAP 110

100

Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP 111

101

Derivative Assets and Liabilities Offsetting 112

T HE PNC F INANCIAL S ERVICES G ROUP , I NC .

Cross-Reference Index to Third Quarter 2015 Form 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE (continued)

Table

Description

Page

102

Basic and Diluted Earnings per Common Share 113

103

Rollforward of Total Equity 114

104

Other Comprehensive Income 115

105

Accumulated Other Comprehensive Income (Loss) Components 118

106

Net Operating Loss Carryforwards and Tax Credit Carryforwards 119

107

Commitments to Extend Credit and Other Commitments 122

108

Internal Credit Ratings Related to Net Outstanding Standby Letters of Credit 122

109

Reinsurance Agreements Exposure 123

110

Reinsurance Reserves – Rollforward 123

111

Analysis of Commercial Mortgage Recourse Obligations 124

112

Analysis of Indemnification and Repurchase Liability for Asserted Claims and Unasserted Claims 125

113

Resale and Repurchase Agreements Offsetting 126

114

Repurchase Agreements By Type of Collateral Pledged 126

115

Results Of Businesses 129

FINANCIAL RE VIEW

T HE PNC F INANCIAL S ERVICES G ROUP , I NC .

This Financial Review, including the Consolidated Financial Highlights, should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report and with Items 6, 7, 8 and 9A of our 2014 Annual Report on Form 10-K (2014 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business, regulatory and legal risks, see the following sections as they appear in this Report and in our 2014 Form 10-K and our First and Second Quarter 2015 Form 10-Q: the Risk Management and Recourse And Repurchase Obligations sections of the Financial Review portion of the respective reports; Item 1A Risk Factors included in our 2014 Form 10-K; and the Legal Proceedings and Commitments and Guarantees Notes of the Notes To Consolidated Financial Statements included in the respective report. Also, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and the Critical Accounting Estimates And Judgments section in this Financial Review and in our 2014 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 17 Segment Reporting in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a GAAP basis.

Table 1: Consolidated Financial Highlights

T HE PNC F INANCIAL S ERVICES G ROUP , I NC . (PNC)

Dollars in millions, except per share data

Unaudited

Three months ended
September 30
Nine months ended
September 30
2015 2014 2015 2014

Financial Results (a)

Revenue

Net interest income

$ 2,062 $ 2,104 $ 6,186 $ 6,428

Noninterest income

1,713 1,737 5,186 5,000

Total revenue

3,775 3,841 11,372 11,428

Noninterest expense

2,352 2,357 7,067 6,949

Pretax, pre-provision earnings (b)

1,423 1,484 4,305 4,479

Provision for credit losses

81 55 181 221

Income before income taxes and noncontrolling interests

$ 1,342 $ 1,429 $ 4,124 $ 4,258

Net income

$ 1,073 $ 1,038 $ 3,121 $ 3,150

Less:

Net income (loss) attributable to noncontrolling interests

18 1 23 2

Preferred stock dividends and discount accretion and redemptions

64 71 182 189

Net income attributable to common shareholders

$ 991 $ 966 $ 2,916 $ 2,959

Less:

Dividends and undistributed earnings allocated to nonvested restricted shares

3 2 9

Impact of BlackRock earnings per share dilution

4 4 14 13

Net income attributable to diluted common shares

$ 987 $ 959 $ 2,900 $ 2,937

Diluted earnings per common share

$ 1.90 $ 1.79 $ 5.52 $ 5.45

Cash dividends declared per common share

$ .51 $ .48 $ 1.50 $ 1.40

Effective tax rate (c)

20.0 27.4 24.3 26.0

Performance Ratios

Net interest margin (d)

2.67 2.98 2.74 3.12

Noninterest income to total revenue

45 45 46 44

Efficiency

62 61 62 61

Return on:

Average common shareholders' equity

9.61 9.52 9.56 9.99

Average assets

1.19 1.25 1.18 1.30

See page 49 for a glossary of certain terms used in this Report.

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

(a) The Executive Summary and Consolidated Income Statement Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.
(b) We believe that pretax, pre-provision earnings, a non-GAAP measure, is useful as a tool to help evaluate the ability to provide for credit costs through operations.
(c) 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.
(d) Calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under generally accepted accounting principles (GAAP) in the Consolidated Income Statement. The taxable-equivalent adjustments to net interest income for the three months ended September 30, 2015 and September 30, 2014 were $50 million and $47 million, respectively. The taxable-equivalent adjustments to net interest income for the nine months ended September 30, 2015 and September 30, 2014 were $148 million and $140 million, respectively.

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

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

Unaudited September 30
2015
December 31
2014
September 30
2014

Balance Sheet Data (dollars in millions, except per share data)

Assets

$ 362,125 $ 345,072 $ 334,424

Loans

204,983 204,817 200,872

Allowance for loan and lease losses

3,237 3,331 3,406

Interest-earning deposits with banks (b)

34,224 31,779 26,247

Investment securities

68,066 55,823 55,039

Loans held for sale

2,060 2,262 2,143

Goodwill

9,103 9,103 9,074

Mortgage servicing rights

1,467 1,351 1,510

Equity investments (c)

10,497 10,728 10,763

Other assets

27,285 23,482 23,123

Noninterest-bearing deposits

78,239 73,479 72,963

Interest-bearing deposits

166,740 158,755 153,341

Total deposits

244,979 232,234 226,304

Transaction deposits

208,768 198,267 192,222

Borrowed funds

56,663 56,768 52,327

Total shareholders' equity

44,948 44,551 44,481

Common shareholders' equity

41,498 40,605 40,536

Accumulated other comprehensive income

615 503 727

Book value per common share

$ 81.42 $ 77.61 $ 76.71

Common shares outstanding (millions)

510 523 528

Loans to deposits

84 88 89

Client Investment Assets (billions)

Discretionary client assets under management

$ 132 $ 135 $ 132

Nondiscretionary client assets under administration

124 128 127

Total client assets under administration

256 263 259

Brokerage account client assets

42 43 43

Total

$ 298 $ 306 $ 302

Capital Ratios

Transitional Basel III (d) (e)

Common equity Tier 1

10.6 10.9 11.1

Tier 1 risk-based

12.0 12.6 12.8

Total capital risk-based

14.8 15.8 16.1

Leverage

10.2 10.8 11.1

Pro forma Fully Phased-In Basel III (e)

Common equity Tier 1

10.1 10.0 10.1

Common shareholders' equity to assets

11.5 11.8 12.1

Asset Quality

Nonperforming loans to total loans

1.06 1.23 1.30

Nonperforming assets to total loans, OREO and foreclosed assets

1.21 1.40 1.48

Nonperforming assets to total assets

.69 .83 .89

Net charge-offs to average loans (for the three months ended) (annualized)

.19 .23 .16

Allowance for loan and lease losses to total loans (f)

1.58 1.63 1.70

Allowance for loan and lease losses to nonperforming loans (g)

149 133 130

Accruing loans past due 90 days or more (in millions)

$ 890 $ 1,105 $ 1,178
(a) The Executive Summary and Consolidated Balance Sheet Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.
(b) Amounts include balances held with the Federal Reserve Bank of Cleveland (Federal Reserve Bank) of $33.8 billion, $31.4 billion, and $25.9 billion as of September 30, 2015, December 31, 2014 and September 30, 2014, respectively.
(c) Amounts include our equity interest in BlackRock.
(d) Calculated using the regulatory capital methodology applicable to PNC during each period presented.
(e) See Basel III Capital discussion in the Capital portion of the Consolidated Balance Sheet Review section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business in our 2014 Form 10-K. See also the Estimated Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratio – 2014 Periods table in the Statistical Information section of this Report for a reconciliation of the 2014 periods' ratios.
(f) The allowance for loan and lease losses includes impairment reserves attributable to purchased impaired loans. This ratio will be impacted by the expected change in our derecognition policy for purchased impaired loans that are pooled and accounted for as a single asset. For additional information on this policy change, see the Purchase Accounting Accretion and Valuation of Purchased Impaired Loans portion of the Consolidated Balance Sheet Review of this Financial Review.
(g) The allowance for loan and lease losses includes impairment reserves attributable to purchased impaired loans. Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. The allowance for loan and lease losses in this ratio will be impacted by the expected fourth quarter of 2015 change in our derecognition policy for purchased impaired loans that are pooled and accounted for as a single asset. For additional information on this policy change, see the Purchase Accounting Accretion and Valuation of Purchased Impaired Loans portion of the Consolidated Balance Sheet Review of this Financial Review.

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

E XECUTIVE S UMMARY

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

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

Key Strategic Goals

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

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

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

Our capital priorities are to support client growth and business investment, maintain appropriate capital in light of economic conditions and the Basel III framework and return excess capital to shareholders, in accordance with the capital plan included in our 2015 Comprehensive Capital Analysis and

Review (CCAR) submission to the Board of Governors of the Federal Reserve System (Federal Reserve). New regulatory short-term liquidity standards became effective for PNC and PNC Bank, National Association (PNC Bank) beginning January 1, 2015. For more detail, see the Balance Sheet, Liquidity and Capital Highlights portion of this Executive Summary, the Capital portion of the Consolidated Balance Sheet Review section and the Liquidity Risk Management portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2014 Form 10-K.

Recent Market and Industry Developments

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

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

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

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

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

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

For additional information concerning recent legislative and regulatory developments, as well as certain governmental, legislative and regulatory inquiries and investigations that may affect PNC, please see the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors, and Note 21 Legal Proceedings and Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements in our 2014 Form 10-K, Recent Market and Industry Developments in the Executive Summary section of our First Quarter 2015 Form 10-Q and Second Quarter 2015 Form 10-Q as well as Note 15 Legal Proceedings and Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

Key Factors Affecting Financial Performance

PNC faces a variety of risks that may impact various aspects of our risk profile from time to time. The extent of such impacts may vary depending on factors such as the current economic, political and regulatory environment, merger and acquisition activity and operational challenges. Many of these risks and our risk management strategies are described in more detail in our 2014 Form 10-K and elsewhere in this Report.

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

General economic conditions, including the continuity, speed and stamina of the current U.S.

economic expansion in general and on our customers in particular,

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

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

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

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

Customer demand for non-loan products and services,

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

The impact of the extensive reforms enacted in the Dodd-Frank legislation and other legislative, regulatory and administrative initiatives and actions, including those outlined elsewhere in this Report, in our 2014 Form 10-K and in subsequent filings with the SEC, and

The impact of market credit spreads on asset valuations.

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

Focused execution of strategic priorities for organic customer growth opportunities,

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

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

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

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

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

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

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

A sustained focus on expense management,

Managing our credit risk in our portfolio,

Managing the non-strategic assets portfolio and impaired assets,

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

Prudent risk, liquidity and capital management related to our efforts to manage risk to acceptable

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

levels and to meet evolving regulatory capital, capital planning, stress testing and liquidity standards,

Actions we take within the capital and other financial markets,

The impact of legal and regulatory-related contingencies, and

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

For additional information, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2014 Form 10-K.

Income Statement Highlights

Net income increased $35 million, or 3%, in the third quarter of 2015 to $1.1 billion, or $1.90 per diluted common share, compared to $1.0 billion, or $1.79 per diluted common share for the third quarter of 2014. Third quarter net income benefitted from a lower effective tax rate and slightly lower noninterest expense, partially offset by declines in net interest income and noninterest income.

Net interest income of $2.1 billion for the third quarter of 2015 decreased 2% compared with the third quarter of 2014, reflective of the ongoing low rate environment, primarily resulting in lower interest-earning asset yields, and lower purchase accounting accretion, partially offset by commercial and commercial real estate loan growth and higher securities balances.

Net interest margin decreased to 2.67% for the third quarter of 2015 compared to 2.98% for the third quarter of 2014 principally due to the impact of increasing the company's liquidity position, lower benefit from purchase accounting accretion, and lower loan and securities yields.

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

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

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

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

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

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

Credit Quality Highlights

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

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

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

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

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

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

Balance Sheet, Liquidity and Capital Highlights

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

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

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

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

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

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

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

PNC's balance sheet remained core funded with a loans to deposits ratio of 84% at September 30, 2015.

PNC maintained a strong liquidity position.

New regulatory short-term liquidity standards became effective for PNC and PNC Bank as advanced approaches banking organizations beginning January 1, 2015, with a minimum phased-in Liquidity Coverage Ratio requirement of 80% in 2015, calculated as of month end.

The Liquidity Coverage Ratio (LCR) at September 30, 2015 exceeded 100% for both PNC and PNC Bank.

PNC maintained a strong capital position.

The Transitional Basel III common equity Tier 1 capital ratio was 10.6% at September 30, 2015 and 10.9% at December 31, 2014, calculated using the regulatory capital methodologies applicable to PNC during 2015 and 2014, respectively. The decline in the capital ratio during the comparable period was mainly due to higher risk weighting percentages applied to certain commercial real estate, equity and securities assets under the Basel III standardized rule which became effective in 2015.

Pro forma fully phased-in Basel III common equity Tier 1 capital ratio was an estimated 10.1% at September 30, 2015 and 10.0% at December 31, 2014 based on the standardized approach rules. See the Capital discussion and Table 20 in the Consolidated Balance Sheet Review section of this Financial Review and the December 31, 2014 capital ratio tables in the Statistical Information (Unaudited) section of this Report for more detail.

PNC returned capital to shareholders during the first nine months of 2015.

In the first quarter of 2015, in accordance with the 2014 capital plan, PNC repurchased 4.4 million common shares for an aggregate repurchase price of $.4 billion. These first quarter 2015 repurchases completed PNC's common stock repurchase program for the four quarter period that began in second quarter 2014 with total repurchases of 17.3 million common shares for $1.5 billion.

In connection with the 2015 CCAR process, PNC submitted its 2015 capital plan, as approved by its Board of Directors, to the Federal Reserve in January 2015. As we announced on March 11, 2015, the Federal Reserve accepted the capital plan and did not object to our proposed capital actions, which

included the following that were completed during the second and third quarters of 2015:

PNC repurchased 6.2 million common shares for $.6 billion during the third quarter of 2015 and 5.9 million common shares for $.6 billion during the second quarter of 2015 under share repurchase programs of up to $2.875 billion for the five quarter period beginning in the second quarter of 2015. These programs include repurchases of up to $375 million related to stock issuances under employee benefit-related programs.

In April 2015, the Board of Directors raised the quarterly dividend on common stock to 51 cents per share, an increase of 3 cents per share, or 6%, effective with the May dividend. On October 1, 2015, the PNC Board of Directors declared a quarterly common stock cash dividend of 51 cents per share payable on November 5, 2015.

On May 4, 2015, we redeemed $500 million of PNC's Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series K, as well as all Depositary Shares representing interests therein. Each Depositary Share represented a 1/10 interest in a share of the Series K Preferred Stock. All 50,000 shares of Series K Preferred Stock, as well as all 500,000 Depositary Shares representing interests therein, were redeemed. The redemption price was $10,000 per share of Series K Preferred Stock equivalent to $1,000 per Depositary Share, plus declared and unpaid dividends up to but excluding the redemption date.

Our Consolidated Income Statement and Consolidated Balance Sheet Review sections of this Financial Review describe in greater detail the various items that impacted our results during the first nine months of 2015 and 2014 and balances at September 30, 2015 and December 31, 2014, respectively.

Our ability to take certain capital actions, including plans to pay or increase common stock dividends or to repurchase shares under current or future programs, is subject to the results of the supervisory assessment of capital adequacy undertaken by the Federal Reserve as part of the CCAR process. For additional information, see the Supervision and Regulation section in Item 1 Business of our 2014 Form 10-K.

See the Capital portion of the Consolidated Balance Sheet Review and the Liquidity Risk Management portion of the Risk Management section of this Financial Review for more detail on our 2015 capital and liquidity actions.

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

Average Consolidated Balance Sheet Highlights

Table 2: Summarized Average Balance Sheet

Nine months ended September 30 Change
Dollars in millions 2015 2014 $ %

Average assets

Interest-earning assets

Investment securities

$ 59,578 $ 56,357 $ 3,221 6

Loans

205,122 198,559 6,563 3

Interest-earning deposits with banks

33,380 16,341 17,039 104

Other

9,048 8,476 572 7

Total interest-earning assets

307,128 279,733 27,395 10

Noninterest-earning assets

46,005 44,145 1,860 4

Total average assets

$ 353,133 $ 323,878 $ 29,255 9

Average liabilities and equity

Interest-bearing liabilities

Interest-bearing deposits

$ 162,790 $ 151,757 $ 11,033 7

Borrowed funds

57,018 47,620 9,398 20

Total interest-bearing liabilities

219,808 199,377 20,431 10

Noninterest-bearing deposits

75,359 68,976 6,383 9

Other liabilities

12,091 10,389 1,702 16

Equity

45,875 45,136 739 2

Total average liabilities and equity

$ 353,133 $ 323,878 $ 29,255 9

Seasonal and other factors may impact our period-end balances, whereas average balances are generally more indicative of underlying business trends apart from the impact of acquisitions and divestitures. The Consolidated Balance Sheet Review section of this Financial Review provides information on changes in selected Consolidated Balance Sheet categories at September 30, 2015 compared with December 31, 2014. Total assets were $362.1 billion at September 30, 2015 compared with $345.1 billion at December 31, 2014.

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

Average total loans in the first nine months of 2015 increased compared with the first nine months of 2014 driven by growth in average commercial loans of $6.7 billion and average commercial real estate loans of $2.2 billion, principally in our Corporate & Institutional Banking segment. These increases were partially offset by a decrease in consumer loans of $2.2 billion primarily attributable to lower home equity and education loans. Runoff in the non-strategic portfolio of residential mortgage and brokered home equity loans contributed to the decrease in consumer loans.

Loans represented 67% of average interest-earning assets for the first nine months of 2015 and 71% of average interest-earning assets for the first nine months of 2014.

Average interest-earning deposits with banks, which are primarily maintained with the Federal Reserve Bank, increased in the comparison to the prior year period in part due to regulatory short-term liquidity standards phased in starting January 1, 2015 and also due to deposit growth.

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

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

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

The increase in average borrowed funds in the first nine months of 2015 compared with the first nine months of 2014 was primarily due to increases in average Federal Home Loan Bank (FHLB) borrowings and average bank notes and senior debt. These increases were partially offset by lower average commercial paper balances, in part due to actions to enhance PNC's funding structure in light of regulatory liquidity standards and a rating agency methodology change. The Liquidity Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding our sources and uses of borrowed funds.

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

Business Segment Highlights

Total business segment earnings were $3.0 billion for both the first nine months of 2015 and 2014. The Business Segments Review section of this Financial Review includes further analysis of our business segment results over the first nine months of 2015 and 2014, including presentation differences from Note 17 Segment Reporting in our Notes To Consolidated Financial Statements of this Report. Note 17 Segment Reporting presents results of businesses for the three and nine months ended September 30, 2015 and 2014.

We provide a reconciliation of total business segment earnings to PNC total consolidated net income as reported on a GAAP basis in Note 17 Segment Reporting in our Notes To Consolidated Financial Statements of this Report.

Table 3: Results Of Businesses – Summary (a)

(Unaudited)

Net Income Revenue Average Assets (b)
Nine months ended September 30 – in millions 2015 2014 2015 2014 2015 2014

Retail Banking

$ 694 $ 556 $ 4,804 $ 4,529 $ 73,430 $ 75,264

Corporate & Institutional Banking

1,492 1,542 4,010 4,032 131,678 121,232

Asset Management Group

143 136 873 826 7,922 7,687

Residential Mortgage Banking

43 44 579 618 6,962 7,889

BlackRock

407 399 532 528 6,813 6,562

Non-Strategic Assets Portfolio

205 291 336 447 6,880 8,563

Total business segments

2,984 2,968 11,134 10,980 233,685 227,197

Other (c) (d) (e)

137 182 238 448 119,448 96,681

Total

$ 3,121 $ 3,150 $ 11,372 $ 11,428 $ 353,133 $ 323,878
(a) Our business information is presented based on our internal management reporting practices. We periodically refine our internal methodologies as management reporting practices are enhanced. Net interest income in business segment results reflects PNC's internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors. In the first quarter of 2015, enhancements were made to PNC's funds transfer pricing methodology primarily for costs related to the new regulatory short-term liquidity standards. The enhancements incorporate an additional charge assigned to assets, including for unfunded loan commitments. Conversely, a higher transfer pricing credit has been assigned to those deposits that are accorded higher value under LCR rules for liquidity purposes. These adjustments apply to business segment results, primarily favorably impacting Retail Banking and adversely impacting Corporate & Institutional Banking, prospectively beginning with the first quarter of 2015. Prior periods have not been adjusted due to the impracticability of estimating the impact of the change for prior periods.
(b) Period-end balances for BlackRock.
(c) "Other" average assets include investment securities associated with asset and liability management activities.
(d) "Other" includes differences between the total business segment financial results and our total consolidated net income. Additional detail is included in the Business Segments Review section of this Financial Review and in Note 17 Segment Reporting in the Notes To Consolidated Financial Statements in this Report.
(e) The decreases in net income and revenue in the first nine months of 2015 compared to the first nine months of 2014 for "Other" primarily reflected a decline in net interest income, partially offset by lower income tax expense, which reflected the $75 million tax benefit recorded in the third quarter of 2015.

C ONSOLIDATED I NCOME S TATEMENT R EVIEW

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

Net income for the third quarter of 2015 was $1.1 billion, an increase of 3% compared with $1.0 billion for third quarter of 2014. The increase was primarily driven by a lower effective income tax rate and slightly lower noninterest expense, partially offset by a 2% decrease in net interest income, higher provision for credit losses, and a 1% decrease in noninterest income.

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

Net Interest Income

Table 4: Net Interest Income and Net Interest Margin

Three months ended

September 30

Nine months ended
September 30
Dollars in millions 2015 2014 2015 2014

Net interest income

$ 2,062 $ 2,104 $ 6,186 $ 6,428

Net interest margin

2.67 2.98 2.74 3.12

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

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

Net interest income decreased by $42 million, or 2%, and $242 million, or 4%, for the third quarter and first nine months of 2015, respectively, compared to the same periods in 2014. The declines in both comparisons are reflective of the decreased purchase accounting accretion and the ongoing low rate environment, primarily resulting in lower interest-earning asset yields, partially offset by commercial and commercial real estate loan growth and higher securities balances. The year-to-date decline also reflected the impact from the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to noninterest income.

Lower net interest margins in both comparisons were driven by 28 basis point and 35 basis point declines in the yields on total interest-earning assets in the quarterly and year-to-date comparisons, respectively, which were principally due to the impact of increasing the company's liquidity position, lower loan and securities yields, and lower benefit from purchase accounting accretion. The year-to-date decline also included the impact of the second quarter 2014 correction to reclassify certain commercial facilities fees.

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

Noninterest Income

Table 5: Noninterest Income

Three months ended September 30 Nine months ended September 30
Change Change
Dollars in millions 2015 2014 $ % 2015 2014 $ %

Noninterest income

Asset management

$ 376 $ 411 $ (35 (9 )%  $ 1,168 $ 1,137 $ 31 3

Consumer services

341 320 21 7 986 933 53 6

Corporate services

384 374 10 3 1,097 1,018 79 8

Residential mortgage

125 140 (15 (11 )%  453 483 (30 (6 )% 

Service charges on deposits

172 179 (7 (4 )%  481 482 (1

Net gains (losses) on sales of securities

(9 (9 * 41 4 37 *

Other

324 313 11 4 960 943 17 2

Total noninterest income

$ 1,713 $ 1,737 $ (24 (1 )%  $ 5,186 $ 5,000 $ 186 4
* – Not meaningful

Noninterest income decreased in the third quarter of 2015 compared to the same period in 2014 mainly attributable to declines in asset management and residential mortgage, partially offset by strong fee income growth in consumer and corporate services.

Year-to-date noninterest income increased compared to the first nine months of 2014 primarily driven by strong fee income growth in consumer and corporate services and higher gains on sales of securities.

Noninterest income as a percentage of total revenue was 45% for both the third quarters of 2015 and 2014. The comparable amounts for the year-to-date periods of 2015 and 2014 were 46% and 44%, respectively.

Asset management revenue decreased in the third quarter of 2015 compared to the same period of 2014 primarily as a result of elevated third quarter 2014 revenue attributable to PNC's investment in BlackRock, partially offset by fee growth. On a year-to-date comparison, asset management revenue increased due to stronger average equity markets and

new business and reflected a benefit from a $30 million trust settlement during the second quarter of 2015. Discretionary client assets under management were $132 billion at both September 30, 2015 and September 30, 2014.

Consumer service fees increased in both the quarterly and year-to-date comparisons, primarily due to growth in customer-initiated transaction volumes.

Corporate services revenue increased in both comparisons due to increased treasury management fees, partially offset by lower mergers and acquisition advisory fees. The increase in the year-to-date comparison also reflected the impact of the correction to reclassify certain commercial facility fees from net interest income to noninterest income beginning in second quarter 2014.

Residential mortgage revenue decreased in both quarterly and year-to-date comparisons mainly driven by lower loan sales revenue, reflecting the impact from the second quarter 2014 sale of previously underperforming portfolio loans and lower servicing fee revenue. The year-to-date decrease was partially

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

offset by higher net hedging gains on residential mortgage servicing rights.

Other noninterest income for the third quarter of 2015 included gains of $43 million on the sale of 500,000 Visa Class B common shares compared with gains of $57 million on the sale of 1 million Visa Class B common shares in the third quarter of 2014. For the first nine months of 2015 and 2014, gains on sales of Visa Class B common shares were $122 million and $173 million on the sale of 1.5 million and 3 million shares, respectively. Gains on commercial mortgage loans held for sale increased on a year-to-date basis compared to the same period in 2014.

As of September 30, 2015, we held approximately 5.4 million Visa Class B common shares with a fair value of approximately $616 million and a recorded investment of approximately $43 million.

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

In the fourth quarter of 2015, we expect the fee categories of noninterest income (asset management, consumer services, corporate services, residential mortgage and service charges on deposits) to remain stable compared to third quarter of 2015.

Provision For Credit Losses

The provision for credit losses increased $26 million to $81 million in the third quarter of 2015 compared to the third quarter of 2014. The provision for credit losses decreased $40 million to $181 million for first nine months of 2015 compared to the same period in 2014 due to improved credit quality.

We expect our provision for credit losses in the fourth quarter of 2015 to be between $50 million and $100 million.

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

Noninterest Expense

Noninterest expense decreased $5 million to $2.4 billion for the third quarter of 2015 compared to the third quarter of 2014. For the first nine months of 2015, noninterest expense increased $118 million, or 2%, to $7.1 billion compared to the same period of 2014.

Both comparisons reflected increased noninterest expense related to investments in technology and business infrastructure in support of PNC's strategic priorities and higher personnel expense associated with higher business activity. These increases were partially offset by lower asset impairment charges related to historic tax credits recorded as reductions to the associated investment asset balance beginning in the second quarter of 2015. In prior periods, these credits were recorded as a reduction to income tax expense. This change in application of historic tax credits was not material to PNC's financial results. In the quarterly comparison, expense for third party services also declined.

During the second quarter of 2015, we increased the savings goal of our annual continuous improvement program, which focuses on reducing costs in part to fund investments in technology and infrastructure, to $500 million for 2015. Through the first nine months of 2015, PNC has completed actions to capture 75% of this goal and is on track to reach the full year target.

For the fourth quarter of 2015, we expect noninterest expense to remain stable compared to third quarter 2015. We expect our full year 2015 expenses to be approximately one percent lower than full year 2014 expenses.

Effective Income Tax Rate

The effective income tax rate was 20.0% in the third quarter of 2015, compared to 27.4% in the third quarter of 2014 and 24.3% in the first nine months of 2015 compared to 26.0% in the same period of 2014. The effective tax rate is generally lower than the statutory rate primarily due to tax credits PNC receives from our investments in low income housing and new markets investments, as well as earnings in other tax exempt investments.

The lower effective tax rate for both 2015 periods reflected tax benefits of $75 million attributable to effectively settling acquired entity tax contingencies offset by additions to reserves of $10 million for various tax matters. These decreases were partially offset by the impact beginning in second quarter 2015 of historic tax credits recorded as a reduction to the associated investment asset balances, while in prior periods these credits were recorded as a reduction of income tax expense.

We expect our fourth quarter of 2015 effective tax rate to be approximately 26%.

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

C ONSOLIDATED B ALANCE S HEET R EVIEW

Table 6: Summarized Balance Sheet Data

Dollars in millions

September 30

2015

December 31

2014

Change
$ %

Assets

Interest-earning deposits with banks

$ 34,224 $ 31,779 $ 2,445 8

Loans held for sale

2,060 2,262 (202 (9 )% 

Investment securities

68,066 55,823 12,243 22

Loans

204,983 204,817 166

Allowance for loan and lease losses

(3,237 (3,331 94 (3 )% 

Goodwill

9,103 9,103

Mortgage servicing rights

1,467 1,351 116 9

Other intangible assets

407 493 (86 (17 )% 

Other, net

45,052 42,775 2,277 5

Total assets

$ 362,125 $ 345,072 $ 17,053 5

Liabilities

Deposits

$ 244,979 $ 232,234 $ 12,745 5

Borrowed funds

56,663 56,768 (105

Other

14,205 9,996 4,209 42

Total liabilities

315,847 298,998 16,849 6

Equity

Total shareholders' equity

44,948 44,551 397 1

Noncontrolling interests

1,330 1,523 (193 (13 )% 

Total equity

46,278 46,074 204

Total liabilities and equity

$ 362,125 $ 345,072 $ 17,053 5

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

PNC's balance sheet reflected asset growth and strong liquidity and capital positions at September 30, 2015.

Total assets increased $17.1 billion, or 5%, mainly due to an increase of $12.2 billion in investment securities driven by deposit growth and a $2.4 billion increase in interest-earning deposits with banks reflecting the impact of regulatory short-term liquidity standards phased in starting January 1, 2015.

Total liabilities increased $16.8 billion, or 6%, mainly due to an increase in deposits.

Total equity increased $.2 billion mainly due to increased retained earnings driven by net income, partially offset by share repurchases and redemption of preferred stock.

An analysis of changes in selected balance sheet categories follows.

Loans

Outstanding loan balances of $205.0 billion at September 30, 2015 and $204.8 billion at December 31, 2014 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.5 billion at September 30, 2015 and $1.7 billion at December 31, 2014. The balances include purchased impaired loans but do not include future accretable net interest ( i.e. , the difference between the undiscounted expected cash flows and the carrying value of the loan) on those loans.

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

Table 7: Details Of Loans

Dollars in millions

September 30

2015

December 31

2014

Change
$ %

Commercial lending

Commercial

Retail/wholesale trade

$ 16,986 $ 16,972 $ 14

Manufacturing

19,649 18,744 905 5

Service providers

13,550 14,103 (553 (4 )% 

Real estate related (a)

11,492 10,812 680 6

Financial services

5,511 6,178 (667 (11 )% 

Health care

9,397 9,017 380 4

Other industries

20,842 21,594 (752 (3 )% 

Total commercial

97,427 97,420 7

Commercial real estate

Real estate projects (b)

15,333 14,577 756 5

Commercial mortgage

10,760 8,685 2,075 24

Total commercial real estate

26,093 23,262 2,831 12

Equipment lease financing

7,644 7,686 (42 (1 )% 

Total commercial lending (c)

131,164 128,368 2,796 2

Consumer lending

Home equity

Lines of credit

19,309 20,361 (1,052 (5 )% 

Installment

13,697 14,316 (619 (4 )% 

Total home equity

33,006 34,677 (1,671 (5 )% 

Residential real estate

Residential mortgage

14,038 13,885 153 1

Residential construction

454 522 (68 (13 )% 

Total residential real estate

14,492 14,407 85 1

Credit card

4,600 4,612 (12

Other consumer

Education

6,070 6,626 (556 (8 )% 

Automobile

11,039 11,616 (577 (5 )% 

Other

4,612 4,511 101 2

Total consumer lending

73,819 76,449 (2,630 (3 )% 

Total loans

$ 204,983 $ 204,817 $ 166
(a) Includes loans to customers in the real estate and construction industries.
(b) Includes both construction loans and intermediate financing for projects.
(c) Construction loans with interest reserves and A/B Note restructurings are not significant to PNC.

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

Loans represented 57% of total assets at September 30, 2015 and 59% at December 31, 2014. Commercial lending represented 64% of the loan portfolio at September 30, 2015 and 63% at December 31, 2014. Consumer lending represented 36% of the loan portfolio at September 30, 2015 and 37% at December 31, 2014.

Commercial real estate loans represented 13% of total loans at September 30, 2015 and 11% of total loans at December 31, 2014 and represented 7% of total assets at both September 30, 2015 and December 31, 2014. See the Credit Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our loan portfolio.

Total loans above include purchased impaired loans of $4.2 billion, or 2% of total loans, at September 30, 2015, and $4.9 billion, or 2% of total loans, at December 31, 2014.

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

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

Allowance for Loan and Lease Losses (ALLL)

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

Purchase Accounting Accretion and Valuation of Purchased Impaired Loans

Information related to purchase accounting accretion and accretable yield for the third quarter and first nine months of 2015 and 2014 follows. Additional information on our policies for ALLL for purchased impaired loans is provided in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements of this Report. A description of our purchased impaired loan accounting and loan data is included in Note 4 Purchased Loans in the Notes To Consolidated Financial Statements of this Report.

Table 8: Accretion – Purchased Impaired Loans

Three months ended

September 30

Nine months ended
September 30
In millions 2015 2014 2015 2014

Accretion on purchased impaired loans

Scheduled accretion

$ 88 $ 109 $ 279 $ 354

Reversal of contractual interest on impaired loans

(57 (57 (164 (195

Scheduled accretion net of contractual interest

31 52 115 159

Excess cash recoveries (a)

19 31 80 95

Total

$ 50 $ 83 $ 195 $ 254
(a) Relates to excess cash recoveries for purchased impaired commercial loans.

Table 9: Purchased Impaired Loans – Accretable Yield

In millions 2015 2014

January 1

$ 1,558 $ 2,055

Accretion (including excess cash recoveries)

(359 (449

Net reclassification to accretable from non-accretable and other activity (a)

218 237

Disposals

(66 (24

September 30 (b)

$ 1,351 $ 1,819
(a) Approximately 66% and 68% of the net reclassification for the first nine months of 2015 and 2014, respectively, were driven by the consumer portfolio and were due to improvements of cash expected to be collected on loans in future periods. The remaining net reclassifications were predominantly due to future cash flow changes in the commercial portfolio.
(b) As of September 30, 2015, we estimate that the reversal of contractual interest on purchased impaired loans will total approximately $0.7 billion in future periods. This will offset the total net accretable interest in future interest income of $1.4 billion on purchased impaired loans.

Information related to the valuation of purchased impaired loans at September 30, 2015 and December 31, 2014 follows.

Table 10: Valuation of Purchased Impaired Loans

September 30, 2015 December 31, 2014
Dollars in millions Balance Net Investment Balance Net Investment

Commercial and commercial real estate loans:

Outstanding balance (a)

$ 296 $ 466

Recorded investment

$ 204 $ 310

Allowance for loan losses

(67 (79

Net investment/Carrying value

$ 137 46 $ 231 50

Consumer and residential real estate loans:

Outstanding balance (a)

$ 3,854 $ 4,541

Recorded investment

$ 3,963 $ 4,548

Allowance for loan losses

(751 (793

Net investment/Carrying value

$ 3,212 83 $ 3,755 83

Total purchased impaired loans:

Outstanding balance (a)

$ 4,150 $ 5,007

Recorded investment

$ 4,167 $ 4,858

Allowance for loan losses

(818 (872

Net investment/Carrying value

$ 3,349 81 $ 3,986 80
(a) Outstanding balance represents the balance on the loan servicing system for active loans. It is possible for the outstanding balance to be lower than the recorded investment for certain loans due to the use of pool accounting. See Note 4 Purchased Loans for additional information on purchased impaired loans.

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

At September 30, 2015, our largest individual purchased impaired loan had a recorded investment of $9 million. We currently expect to collect total cash flows of $4.7 billion on purchased impaired loans, representing the $3.3 billion net investment at September 30, 2015 and the accretable net interest of $1.4 billion shown in Table 9.

Weighted Average Life of the Purchased Impaired Portfolios

The table below provides the weighted average life (WAL) for each of the purchased impaired portfolios as of September 30, 2015.

Table 11: Weighted Average Life of the Purchased Impaired Portfolios

As of September 30, 2015

Dollars in millions

Recorded Investment WAL (a)

Commercial

$ 43 2.1 years

Commercial real estate

161 1.4 years

Consumer (b)

1,753 4.0 years

Residential real estate

2,210 4.7 years

Total

$ 4,167 4.2 years
(a) Weighted average life represents the average number of years for which each dollar of unpaid principal remains outstanding.
(b) Portfolio primarily consists of nonrevolving home equity products.

Through the National City Corporation (National City) and RBC Bank (USA) acquisitions, we acquired purchased impaired loans with a recorded investment of $14.7 billion. As noted in Table 11 above, at September 30, 2015, those balances are now $4.2 billion, of which $4.0 billion in consumer and residential real estate loans is accounted for using pool accounting. In anticipation of the end of the life of our purchased impaired pooled consumer and residential real estate loans and pursuant to supervisory direction received regarding such loans, we will change our derecognition policy for these loans effective December 31, 2015. Pursuant to this change in policy, we will remove loans that have been paid off, sold, short sold, foreclosed upon, or that have nominal collateral value/expected cash flows from our loan pools. The result of this change will accelerate the derecognition of a pool's recorded investment and associated ALLL balance. As the loans that will be removed effective December 31, 2015 have been fully reserved for, this change will not impact the net carrying values of the pools, accretion accounting or result in additional provision for credit losses for purchased impaired loans that are pooled, as a pool's recorded investment and associated ALLL balance will be reduced in equal amounts. Upon implementation of this policy change in the fourth quarter of 2015, which is immaterial to our financial statements taken as a whole, we estimate that the recorded investment and associated ALLL balances for our purchased impaired pooled consumer and residential real estate loans will each be reduced by approximately $475 million. These amounts represent the net loss from loan dispositions or expected cash flow shortfalls that have been retained as part of the pools' recorded investment per our accounting for the pool

as a single asset. We expect the future impact of this policy change to the Consolidated Income Statement and Consolidated Balance Sheet to be immaterial on a quarterly basis. See Note 4 Purchased Loans and Note 5 Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit in the Notes To Consolidated Financial Statements in this Report for additional information.

The following table represents on a proforma basis as of September 30, 2015 the estimated impact of the change in our derecognition policy to total ALLL, total loans and ratio of total ALLL to total loans.

Table 12: Estimated Derecognition Impact – Total ALLL to Total Loans

September 30, 2015
(Dollars in millions) Actual Adjustment (a) Proforma

Total ALLL

$ 3,237 $ (475 $ 2,762

Total Loans

204,983 (475 204,508

Ratio of Total ALLL to Total Loans

1.58 1.35
(a) The estimated reduction of ALLL and corresponding reduction in the purchased impaired loans recorded investment as of September 30, 2015 would be approximately the same as the expected amounts as of December 31, 2015.

Purchased Impaired Loans – Accretable Difference Sensitivity Analysis

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

Table 13: Accretable Difference Sensitivity – Total Purchased Impaired Loans

In billions September 30,
2015
Declining
Scenario (a)
Improving
Scenario (b)

Expected cash flows

$ 4.7 $ (.1 $ .2

Accretable difference

1.4

Allowance for loan and lease losses

(.8 (.1 .2
(a) Declining Scenario – Reflects hypothetical changes that would decrease future cash flow expectations. For consumer loans, we assume home price forecast decreases by ten percent and unemployment rate forecast increases by two percentage points; for commercial loans, we assume that collateral values decrease by ten percent.
(b) Improving Scenario – Reflects hypothetical changes that would increase future cash flow expectations. For consumer loans, we assume home price forecast increases by ten percent, unemployment rate forecast decreases by two percentage points and interest rate forecast increases by two percentage points; for commercial loans, we assume that collateral values increase by ten percent.

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

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

Commitments to Extend Credit

Commitment to extend credit comprise the following:

Table 14: Commitments to Extend Credit (a)

In millions September 30
2015
December 31
2014

Total commercial lending

$ 100,323 $ 98,742

Home equity lines of credit

17,350 17,839

Credit card

19,622 17,833

Other

4,075 4,178

Total

$ 141,370 $ 138,592
(a) Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions.

In addition to the credit commitments set forth in the table above, our net outstanding standby letters of credit totaled $9.1 billion at September 30, 2015 and $10.0 billion at December 31, 2014. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

Information regarding our commitments to extend credit and our allowance for unfunded loan commitments and letters of credit is included in Note 1 Accounting Policies, Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit and Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part 1, Item 1 of this Report.

I NVESTMENT S ECURITIES

The following table presents the distribution of our investment securities portfolio by credit rating. We have included credit ratings information because we believe that the information is an indicator of the degree of credit risk to which we are exposed. Changes in credit ratings classifications could indicate increased or decreased credit risk and could be accompanied by a reduction or increase in the fair value of our investment securities portfolio. For those securities on our balance sheet at September 30, 2015, where during our quarterly security-level impairment assessments we determined losses represented other-than-temporary impairment (OTTI), we have recorded cumulative credit losses of $1.1 billion in earnings and accordingly have reduced the amortized cost of our securities. The majority of these cumulative impairment charges related to non-agency residential mortgage-backed and asset-backed securities rated BB or lower.

Table 15: Investment Securities

September 30, 2015 December 31, 2014

Ratings (a)

As of September 30, 2015

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

$ 8,368 $ 8,593 $ 5,485 $ 5,714 100

Agency residential mortgage-backed

33,185 33,685 23,382 23,935 100

Non-agency residential mortgage-backed

4,392 4,591 4,993 5,225 10 1 2 82 5

Agency commercial mortgage-backed

3,077 3,155 3,378 3,440 100

Non-agency commercial mortgage-backed (b)

5,477 5,544 5,095 5,191 77 12 2 3 6

Asset-backed (c)

5,921 5,950 5,900 5,940 89 3 7 1

State and municipal

3,972 4,140 3,995 4,191 88 6 6

Other debt

2,157 2,194 2,099 2,142 56 35 9

Corporate stock and other

576 576 442 441 100

Total investment securities (d)

$ 67,125 $ 68,428 $ 54,769 $ 56,219 88 3 1 6 2
(a) Ratings percentages allocated based on amortized cost.
(b) Collateralized primarily by retail properties, office buildings, lodging properties and multi-family housing.
(c) Collateralized primarily by government guaranteed student loans and other consumer credit products and corporate debt.
(d) Includes available for sale and held to maturity securities.

Investment securities represented 19% of total assets at September 30, 2015 and 16% at December 31, 2014.

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

We evaluate our investment securities portfolio in light of changing market conditions and other factors and, where appropriate, take steps to improve our overall positioning. We consider the portfolio to be well-diversified and of high quality. At September 30, 2015, 88% of the securities in the portfolio were rated AAA/AA, with U.S. Treasury and government agencies, agency residential mortgage-backed and agency commercial mortgage-backed securities collectively representing 66% of the portfolio.

The investment securities portfolio includes both available for sale and held to maturity securities. Securities classified as available for sale are carried at fair value with net unrealized gains and losses, representing the difference between amortized cost and fair value, included in Shareholders' equity as Accumulated other comprehensive income or loss, net of tax, on our Consolidated Balance Sheet. Securities classified as held to maturity are carried at amortized cost. As of September 30, 2015, the amortized cost and fair value of available for sale securities totaled $52.7 billion and $53.7 billion, respectively, compared to an amortized cost and fair value as of December 31, 2014 of $43.2 billion and $44.2 billion, respectively. The amortized cost and fair value of held to maturity securities were $14.4 billion and $14.8 billion, respectively, at September 30, 2015, compared to $11.6 billion and $12.0 billion, respectively, at December 31, 2014.

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally decreases when credit spreads widen and vice versa. Net unrealized gains in the total investment securities portfolio decreased to $1.3 billion at September 30, 2015 from $1.5 billion at December 31, 2014. The comparable amounts for the securities available for sale portfolio were $.9 billion at September 30, 2015 and $1.1 billion at December 31, 2014.

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

The duration of investment securities was 2.5 years at September 30, 2015. We estimate that, at September 30, 2015, the effective duration of investment securities was 2.7 years for an immediate 50 basis points parallel increase in interest rates and 2.4 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2014 for the effective duration of investment securities were 2.2 years and 2.1 years, respectively.

Based on current interest rates and expected prepayment speeds, the weighed-average expected maturity of the investment securities portfolio (excluding corporate stock and other) was 4.4 years at September 30, 2015 compared to 4.3 years at December 31, 2014. The weighted-average expected maturities of mortgage and other asset-backed debt securities were as follows as of September 30, 2015:

Table 16: Weighted-Average Expected Maturity of Mortgage and Other Asset-Backed Debt Securities

September 30, 2015 Years

Agency residential mortgage-backed securities

4.2

Non-agency residential mortgage-backed securities

5.4

Agency commercial mortgage-backed securities

3.2

Non-agency commercial mortgage-backed securities

3.1

Asset-backed securities

3.0

At least quarterly, we conduct a comprehensive security-level impairment assessment on all securities. If economic conditions, including home prices, were to deteriorate from current levels, and if market volatility and liquidity were to deteriorate from current levels, or if market interest rates were to increase or credit spreads were to widen appreciably, the valuation of our investment securities portfolio would likely be adversely affected and we could incur additional OTTI credit losses that would impact our Consolidated Income Statement.

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

Loans Held for Sale

T able 17: Loans Held For Sale

In millions September 30
2015
December 31
2014

Commercial mortgages at fair value

$ 802 $ 893

Commercial mortgages at lower of cost or fair value

58 29

Total commercial mortgages

860 922

Residential mortgages at fair value

1,086 1,261

Residential mortgages at lower of cost or fair value

42 18

Total residential mortgages

1,128 1,279

Other

72 61

Total

$ 2,060 $ 2,262

As of September 1, 2014, we have elected to apply the fair value option to commercial mortgage loans held for sale to agencies. This election applies to all new commercial

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

mortgage loans held for sale that have been originated for sale to the agencies effective on or after September 1, 2014. The election of fair value option aligns the accounting for the commercial mortgages with the related commitments to sell the loans.

We sold $3.0 billion of commercial mortgage loans to agencies during the first nine months of 2015 compared to $2.0 billion during the first nine months of 2014. Total gains of $64 million were recognized on the valuation and sale of commercial mortgage loans held for sale, net of hedges, during the first nine months of 2015, including $13 million in the third quarter. Comparable amounts for 2014 were $49 million and $20 million, respectively. These amounts are included in Other noninterest income on our Consolidated Income Statement.

Residential mortgage loan origination volume was $8.2 billion during the first nine months of 2015 compared to $7.1 billion during the first nine months of 2014. The majority of such loans were originated under agency or Federal Housing

Administration (FHA) standards. We sold $6.2 billion of loans and recognized loan sales revenue of $278 million during the first nine months of 2015, including $75 million in the third quarter. The comparable amounts for the first nine months of 2014 were $6.4 billion and $327 million, respectively, including $85 million in the third quarter. These loan sales revenue amounts are included in Residential mortgage noninterest income on our Consolidated Income Statement.

Interest income on loans held for sale was $68 million during the first nine months of 2015, including $22 million in the third quarter. Comparable amounts for 2014 were $73 million and $26 million, respectively. These amounts are included in Other interest income on our Consolidated Income Statement.

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

Funding Sources

Table 18: Details Of Funding Sources

Dollars in millions

September 30

2015

December 31

2014

Change
$ %

Deposits

Money market

$ 125,135 $ 115,438 $ 9,697 8

Demand

83,632 82,829 803 1

Retail certificates of deposit

18,337 18,544 (207 (1 )% 

Savings

15,330 12,571 2,759 22

Time deposits in foreign offices and other time deposits

2,545 2,852 (307 (11 )% 

Total deposits

244,979 232,234 12,745 5

Borrowed funds

Federal funds purchased and repurchase agreements

2,077 3,510 (1,433 (41 )% 

FHLB borrowings

21,664 20,005 1,659 8

Bank notes and senior debt

19,749 15,750 3,999 25

Subordinated debt

9,242 9,151 91 1

Commercial paper

1,125 4,995 (3,870 (77 )% 

Other

2,806 3,357 (551 (16 )% 

Total borrowed funds

56,663 56,768 (105

Total funding sources

$ 301,642 $ 289,002 $ 12,640 4

See the Liquidity Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our 2015 capital and liquidity activities.

Total deposits increased $12.7 billion at September 30, 2015 compared with December 31, 2014 due to strong growth in money market, savings and demand deposits, partially offset by time deposits in foreign offices and other time deposits and retail certificates of deposit. Interest-bearing deposits represented 68% of total deposits at both September 30, 2015 and December 31, 2014.

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

Total borrowed funds decreased $.1 billion since December 31, 2014 as a decline in commercial paper, federal funds purchased and repurchase agreements, and other borrowed funds were partially offset by higher issuances of bank notes and senior debt and FHLB borrowings. The changes in the composition of funding sources are attributable to PNC's actions to enhance its funding structure in light of regulatory liquidity standards and a rating agency methodology change.

Capital

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

We repurchase shares of PNC common stock under common stock repurchase authorizations approved from time to time by PNC's Board of Directors and consistent with capital plans submitted to, and accepted by, the Federal Reserve. Through the first quarter of 2015, we repurchased stock under our 2007 common stock repurchase program authorization that permitted us to purchase up to 25 million shares of PNC common stock on the open market or in privately negotiated transactions. Effective as of March 31, 2015, PNC's Board of Directors approved the termination of the 2007 common stock repurchase program authorization, and replaced it with a new stock repurchase program authorization in the amount of 100 million shares of PNC common stock, effective April 1, 2015. The extent and timing of share repurchases under this authorization will depend on a number of factors including, among others, market and general economic conditions, economic and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, contractual and regulatory limitations, and the results of future supervisory assessments of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process.

In the first quarter of 2015, we completed our common stock repurchase programs for the four quarter period that began in second quarter 2014 with total repurchases over that period of 17.3 million common shares for $1.5 billion. These repurchases were included in our 2014 capital plan accepted by the Federal Reserve as part of our 2014 CCAR submission.

In connection with the 2015 CCAR process, we submitted our 2015 capital plan, as approved by PNC's Board of Directors, to the Federal Reserve in January 2015. The Federal Reserve accepted the capital plan and did not object to our proposed capital actions in March 2015. As provided for in the 2015 capital plan, we announced new share repurchase programs of up to $2.875 billion for the five quarter period beginning in the second quarter of 2015. These programs include repurchases of up to $375 million over the five quarter period related to stock issuances under employee benefit-related programs.

In the first quarter of 2015, PNC repurchased 4.4 million common shares for $.4 billion. In the second quarter of 2015, PNC repurchased 5.9 million common shares for $.6 billion. In the third quarter of 2015, PNC repurchased 6.2 million common shares for $.6 billion. All of these repurchases were under the authorizations and programs then in effect, as described above.

Under the Federal Reserve's capital plan rule, a bank holding company must resubmit a new capital plan prior to the annual submission date if, among other things, there has been or will be a material change in the bank holding company's risk profile, financial condition, or corporate structure since its last capital plan submission.

See the Supervision and Regulation section of Item 1 Business of our 2014 Form 10-K for further information concerning the CCAR process and the factors the Federal Reserve takes into consideration in its evaluation of capital plans and the Balance Sheet, Liquidity and Capital Highlights portion of the Executive Summary section of this Financial Review for the impact of the Federal Reserve's current supervisory assessment of the capital adequacy program.

Table 19: Shareholders' Equity

Dollars in millions

September 30

2015

December 31

2014

Change
$ %

Shareholders' equity

Preferred stock (a)

Common stock

$ 2,708 $ 2,705 $ 3

Capital surplus – preferred stock

3,450 3,946 (496 (13 )% 

Capital surplus – common stock and other

12,675 12,627 48

Retained earnings

28,337 26,200 2,137 8

Accumulated other comprehensive income

615 503 112 22

Common stock held in treasury at cost

(2,837 (1,430 (1,407 (98 )% 

Total shareholders' equity

$ 44,948 $ 44,551 $ 397 1
(a) Par value less than $.5 million at each date.

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

The increase in total shareholders' equity compared to December 31, 2014 was mainly due to a $2.1 billion increase in retained earnings, partially offset by common share repurchases of $1.6 billion and the redemption of $500 million of preferred stock. The increase in retained earnings was driven by net income of $3.1 billion, reduced by $957 million of common and preferred dividends declared and continued share repurchases. Common shares outstanding were 510 million at September 30, 2015 and 523 million at December 31, 2014.

Table 20: Basel III Capital

September 30, 2015
Dollars in millions

Transitional

Basel III (a)

Pro forma Fully

Phased-In Basel III

(b)(c)

Common equity Tier 1 capital

Common stock plus related surplus, net of treasury stock

$ 12,546 $ 12,546

Retained earnings

28,337 28,337

Accumulated other comprehensive income for securities currently and previously held as available for sale

257 642

Accumulated other comprehensive income for pension and other postretirement plans

(193 (483

Goodwill, net of associated deferred tax liabilities

(8,845 (8,845

Other disallowed intangibles, net of deferred tax liabilities

(141 (352

Other adjustments/(deductions)

(111 (148

Total common equity Tier 1 capital before threshold deductions

31,850 31,697

Total threshold deductions

(448 (1,135

Common equity Tier 1 capital

31,402 30,562

Additional Tier 1 capital

Preferred stock plus related surplus

3,450 3,450

Trust preferred capital securities

50

Noncontrolling interests (d)

604 45

Other adjustments/(deductions)

(91 (107

Tier 1 capital

35,415 33,950

Additional Tier 2 capital

Qualifying subordinated debt

4,709 4,298

Trust preferred capital securities

149

Allowance for loan and lease losses included in Tier 2 capital

3,502 356

Other

6 10

Total Basel III capital

$ 43,781 $ 38,614

Risk-weighted assets

Basel III standardized approach risk-weighted assets (e)

$ 295,384 $ 303,343

Estimated Basel III advanced approaches risk-weighted assets (f)

N/A 284,215

Average quarterly adjusted total assets

348,477 347,541

Supplementary leverage exposure (g)

411,182 410,369

Basel III risk-based capital and leverage ratios

Common equity Tier 1

10.6 10.1 %(h)(j) 

Tier 1

12.0 11.2 (h)(k) 

Total

14.8 13.6 (i)(l) 

Leverage (m)

10.2 9.8

Supplementary leverage ratio (n)

8.6 8.3
(a) Calculated using the regulatory capital methodology applicable to PNC during 2015.
(b) PNC utilizes the pro forma fully phased-in Basel III capital ratios to assess its capital position (without the benefit of phase-ins), including comparison to similar estimates made by other financial institutions. Pro forma fully phased-in capital amounts, ratios and risk-weighted and leverage-related assets are estimated.
(c) Basel III capital ratios and estimates may be impacted by additional regulatory guidance or analysis and, in the case of those ratios calculated using the advanced approaches, the ongoing evolution, validation and regulatory approval of PNC's models integral to the calculation of advanced approaches risk-weighted assets.
(d) Primarily includes REIT Preferred Securities.
(e) Includes credit and market risk-weighted assets.
(f) Includes credit, market and operational risk-weighted assets.
(g) Supplementary leverage exposure is the sum of Adjusted average assets and certain off-balance sheet exposures including undrawn credit commitments and derivative potential future exposures.
(h) Pro forma fully phased-in Basel III capital ratio based on estimated Basel III standardized approach risk-weighted assets and rules.
(i) Pro forma fully phased-in Basel III capital ratio based on estimated Basel III advanced approaches risk-weighted assets and rules.
(j) For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Common equity Tier 1 capital ratio estimate is 10.8%. This capital ratio is calculated using pro forma fully phased-in Common equity Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets.
(k) For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Tier 1 risk-based capital ratio estimate is 12.0%. This capital ratio is calculated using fully phased-in Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets.
(l) For comparative purposes only, the pro forma fully phased-in standardized approach Basel III Total capital risk-based capital ratio estimate is 13.8%. This ratio is calculated using fully phased-in additional Tier 2 capital which, under the standardized approach, reflects allowance for loan and lease losses of up to 1.25% of credit risk related risk-weighted assets and dividing by estimated Basel III standardized approach risk-weighted assets.
(m) Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets.
(n) Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure. As advanced approaches banking organizations, PNC and PNC Bank will be subject to a 3% minimum supplementary leverage ratio effective January 1, 2018.

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

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

As a result of the staggered effective dates of the final U.S. Basel III regulatory capital rules (Basel III rules), as well as the fact that PNC remains in the parallel run qualification phase for the advanced approaches, PNC's regulatory risk-based ratios in 2015 are calculated using the standardized approach, effective January 1, 2015, for determining risk-weighted assets, and the definitions of, and deductions from, regulatory capital under the Basel III rules (as such definitions and deductions are phased-in for 2015). We refer to the capital ratios calculated using the phased-in Basel III provisions in effect for 2015 and, for the risk-based ratios, standardized approach risk-weighted assets as the 2015 Transitional Basel III ratios. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, past due exposures, equity exposures and securitization exposures are generally subject to higher risk weights than other types of exposures.

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

Federal banking regulators have stated that they expect the largest U.S. bank holding companies, including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largest U.S. bank holding companies, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers through estimated stress scenarios. We seek to manage our capital consistent with these regulatory principles, and believe that our September 30, 2015 capital levels were aligned with them.

At September 30, 2015, 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" during 2015, PNC and PNC Bank must have Transitional Basel III capital ratios of at least 6.5% for Common equity Tier 1 capital, 8% for Tier 1 risk-based and 10% for Total risk-based, and PNC Bank is required to have a Transitional Basel III leverage ratio of at least 5%.

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

We provide additional information regarding regulatory capital requirements and some of their potential impacts on PNC in the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 20 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of our 2014 Form 10-K.

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

O FF -B ALANCE S HEET A RRANGEMENTS AND V ARIABLE I NTEREST E NTITIES

We engage in a variety of activities that involve unconsolidated entities or that are otherwise not reflected in our Consolidated Balance Sheet that are generally referred to as "off-balance sheet arrangements." Additional information on these types of activities is included in our 2014 Form 10-K and in the following sections of this Report:

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

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

Note 9 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities in the Notes To Consolidated Financial Statements, and

Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements.

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

A summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements, as of September 30, 2015 and December 31, 2014 is included in Note 2 of this Report.

Trust Preferred Securities

We are subject to certain restrictions, including restrictions on dividend payments, in connection with $206 million in principal amount of an outstanding junior subordinated debenture associated with $200 million of trust preferred securities that were issued by PNC Capital Trust C, a subsidiary statutory trust (both amounts as of September 30, 2015). Generally, if there is (i) an event of default under the debenture, (ii) PNC elects to defer interest on the debenture, (iii) PNC exercises its right to defer payments on the related trust preferred security issued by the statutory trust or (iv) there is a default under PNC's guarantee of such payment obligations, as specified in the applicable governing documents, then PNC would be subject during the period of such default or deferral to restrictions on dividends and other provisions protecting the status of the debenture holders similar to or in some ways more restrictive than those potentially imposed under the Exchange Agreement with PNC Preferred Funding Trust II. See Note 12 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in the Notes To Consolidated Financial Statements in Item 8 of our 2014 Form 10-K for information on contractual limitations on dividend payments resulting from securities issued by PNC Preferred Funding Trust I and PNC Preferred Funding Trust II.

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

F AIR V ALUE M EASUREMENTS

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

The following table summarizes the assets and liabilities measured at fair value on a recurring basis at September 30, 2015 and December 31, 2014, 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 21: Fair Value Measurements – Summary

September 30, 2015 December 31, 2014
Dollars in millions Total Fair Value Level 3 Total Fair Value Level 3

Total assets

$ 68,612 $ 9,384 $ 58,973 $ 10,257

Total assets at fair value as a percentage of consolidated assets

19 17

Level 3 assets as a percentage of total assets at fair value

14 17

Level 3 assets as a percentage of consolidated assets

3 3

Total liabilities

$ 5,783 $ 515 $ 5,799 $ 716

Total liabilities at fair value as a percentage of consolidated liabilities

2 2

Level 3 liabilities as a percentage of total liabilities at fair value

9 12

Level 3 liabilities as a percentage of consolidated liabilities

<1 <1

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

An instrument's categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification (transfer) of assets or liabilities between hierarchy levels. PNC's policy is to recognize transfers in and transfers out as of the end of the reporting period. For additional information regarding the transfers of assets or liabilities between hierarchy levels, see Note 7 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

B USINESS S EGMENTS R EVIEW

We have six reportable business segments:

Retail Banking

Corporate & Institutional Banking

Asset Management Group

Residential Mortgage Banking

BlackRock

Non-Strategic Assets Portfolio

Business segment results, including inter-segment revenues, and a description of each business are included in Note 17 Segment Reporting included in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report. Certain amounts included in this Financial Review differ from those amounts shown in Note 17 primarily due to the presentation in this Financial Review of business net interest revenue on a taxable-equivalent basis. Note 17 presents results of businesses for the first nine months and third quarter of 2015 and 2014.

Net interest income in business segment results reflects PNC's internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors. In the first quarter of 2015, enhancements were made to PNC's funds transfer pricing methodology primarily for costs related to the new regulatory short-term liquidity standards. The enhancements incorporate an additional charge assigned to assets, including for unfunded loan commitments. Conversely, a higher transfer pricing credit has been assigned to those deposits that are accorded higher value under LCR rules for liquidity purposes. Please see the Supervision and Regulation section in Item 1 and the Liquidity Risk Management section in Item 7 of our 2014 Form 10-K for more information about the LCR. These adjustments apply to business segment results, primarily favorably impacting Retail Banking and adversely impacting Corporate & Institutional Banking, prospectively beginning with the first quarter of 2015. Prior periods have not been adjusted due to the impracticability of estimating the impact of the change for prior periods.

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

Retail Banking

(Unaudited)

Table 22: Retail Banking Table

Nine months ended September 30

Dollars in millions, except as noted

2015 2014

Income Statement

Net interest income

$ 3,152 $ 2,938

Noninterest income

Service charges on deposits

459 461

Brokerage

212 176

Consumer services

747 714

Other

234 240

Total noninterest income

1,652 1,591

Total revenue

4,804 4,529

Provision for credit losses

151 223

Noninterest expense

3,558 3,430

Pretax earnings

1,095 876

Income taxes

401 320

Earnings

$ 694 $ 556

Average Balance Sheet

Loans

Consumer

Home equity

$ 27,810 $ 28,985

Indirect auto

9,318 9,093

Indirect other

559 726

Education

6,402 7,314

Credit cards

4,476 4,327

Other

2,383 2,200

Total consumer

50,948 52,645

Commercial and commercial real estate

10,580 10,924

Floor plan

2,164 2,227

Residential mortgage

704 618

Total loans

64,396 66,414

Goodwill and other intangible assets

5,975 6,043

Other assets

3,059 2,807

Total assets

$ 73,430 $ 75,264

Deposits

Noninterest-bearing demand

$ 23,353 $ 21,890

Interest-bearing demand

36,009 33,889

Money market

54,775 49,945

Total transaction deposits

114,137 105,724

Savings

13,471 11,713

Certificates of deposit

16,763 19,314

Total deposits

144,371 136,751

Other liabilities

612 440

Total liabilities

$ 144,983 $ 137,191

Performance Ratios

Return on average assets

1.26 .99

Noninterest income to total revenue

34 35

Efficiency

74 76

Other Information (a)

Credit-related statistics :

Commercial nonperforming assets

$ 116 $ 146

Consumer nonperforming assets

976 1,037

Total nonperforming assets (b)

$ 1,092 $ 1,183

Purchased impaired loans (c)

$ 516 $ 600

Commercial lending net (recoveries) charge-offs

$ (5 $ 33

Credit card lending net charge-offs

104 109

Consumer lending (excluding credit card) net charge-offs

152 212

Total net charge-offs

$ 251 $ 354

Commercial lending annualized net (recovery) charge-off ratio

(.06 )%  .34

Credit card lending annualized net charge-off ratio

3.11 3.37

Consumer lending (excluding credit card) annualized net charge-off ratio

.43 .58

Total annualized net charge-off ratio

.52 .71
At September 30 2015 2014

Other Information (Continued) (a)

Home equity portfolio credit statistics : (d)

% of first lien positions at origination (e)

56 53

Weighted-average loan-to-value ratios (LTVs) (e) (f)

74 78

Weighted-average updated FICO scores (g)

751 747

Annualized net charge-off ratio

.31 .55

Delinquency data – % of total loans: (h)

Loans 30 – 59 days past due

.20 .19

Loans 60 – 89 days past due

.09 .07

Accruing loans past due

.29 .26

Nonperforming loans

3.09 3.04

Other statistics :

ATMs

8,996 8,178

Branches (i)

2,645 2,691

Brokerage account client assets (in billions) (j)

$ 42 $ 43

Customer-related statistics (average) :

Non-teller deposit transactions (k)

43 34

Digital consumer customers (l)

52 45
(a) Presented as of September 30, except for net charge-offs, net charge-off ratios, which are for the nine months ended and customer-related statistics which are averages for the nine months ended.
(b) Includes nonperforming loans of $1.0 billion at September 30, 2015 and $1.1 billion at September 30, 2014.
(c) Recorded investment of purchased impaired loans related to acquisitions.
(d) Lien position, LTV and FICO statistics are based upon customer balances.
(e) Lien position and LTV calculations reflect management assumptions where data limitations exist.
(f) LTV statistics are based upon current information.
(g) Represents FICO scores that are updated at least quarterly.
(h) Data based upon recorded investment. Past due amounts exclude purchased impaired loans, even if contractually past due, as we are currently accreting interest income over the expected life of the loans.
(i) Excludes satellite offices ( e.g. , drive-ups, electronic branches and retirement centers) that provide limited products and/or services.
(j) Amounts include cash and money market balances.
(k) Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application.
(l) Represents consumer checking relationships that process the majority of their transactions through non-teller channels.

Retail Banking earned $694 million in the first nine months of 2015 compared with earnings of $556 million for the same period a year ago. The increase in earnings was driven by increased net interest income and noninterest income and lower provision for credit losses partially offset by higher noninterest expense. Noninterest income included lower gains on sales of Visa Class B common shares.

Retail Banking continues to enhance the customer experience with refinements to product offerings that drive product value for consumers and small businesses. We are focused on growing customer share of wallet through the sale of liquidity, banking, and investment products.

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

In the first nine months of 2015, approximately 52% of consumer customers used non-teller channels for the majority of their transactions compared with 45% for the same period in 2014.

Deposit transactions via ATM and mobile channels increased to 43% of total deposit transactions in the first nine months of 2015 compared with 34% for the same period a year ago.

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

Integral to PNC's retail branch transformation strategy, more than 300 branches operate under the universal model designed to enhance sales opportunities for branch personnel, in part, by driving higher ATM and mobile deposits. During the first nine months of 2015, the total branch network was reduced by 52 branches and the ATM network was increased by 391 ATMs. PNC had a network of 2,645 branches and 8,996 ATMs at September 30, 2015.

Instant debit card issuance, which enables us to print a customer's debit card in a matter of minutes, is now available in more than 500 branches, approximately 20% of the branch network.

At the end of third quarter, Apple iPad™ technology was available in the majority of our branches to demonstrate product capabilities to customers and prospects. The remainder of the branch network will have this technology by year-end.

Total revenue for the first nine months of 2015 increased $275 million compared to the same period a year ago, which included a $214 million increase in net interest income primarily from the enhancements to internal funds transfer pricing methodology in the first quarter of 2015.

Noninterest income increased $61 million compared to the first nine months of 2014. Noninterest income included gains on sales of Visa Class B common shares of $122 million on 1.5 million shares and $173 million on three million shares, in the first nine months of 2015 and 2014, respectively. Excluding these gains, noninterest income increased $112 million, or 8%, in the comparison. Execution on our share of wallet strategy resulted in increased fee income from payment-related products, specifically in debit, credit and merchant services, as well as increased brokerage fees.

Provision for credit losses and net charge-offs in the first nine months of 2015 declined by $72 million and $103 million, respectively, in the comparison to the same period a year ago due to improved credit quality.

Noninterest expense increased $128 million in the first nine months of 2015 compared to the same period in 2014. Increases in technology investments, sales-related and other compensation, marketing, and customer transaction-related costs were offset by reduced third party service expense and lower branch network expenses as a result of transaction migration to lower cost digital and ATM channels.

Growing core checking deposits is key to Retail Banking's growth and to providing a source of low-cost funding and liquidity to PNC. The deposit product strategy of Retail Banking is to remain disciplined on pricing, target specific products and markets for growth, and focus on the retention and growth of customer balances. In the first nine months of 2015, average total deposits increased $7.6 billion, or 6%, compared with the same period in 2014.

Organic deposit growth drove the increases in average transaction deposits and savings deposits,

which increased $8.4 billion and $1.8 billion, or 8% and 15%, respectively, in the comparison. Transaction deposits include demand and money market deposits, which increased $3.6 billion and $4.8 billion, respectively.

The expected run-off of maturing certificates of deposit partially offset these increases, reflecting a decline of $2.6 billion, or 13%, in the comparison.

Retail Banking continued to focus on a relationship-based lending strategy that targets specific products and markets for growth. In the first nine months of 2015, average total loans declined $2.0 billion, or 3%, compared to the same period a year ago, driven by a decline in home equity loans and declines from run-off of non-strategic portions of the portfolios, as more fully described below.

Average home equity loans decreased $1.2 billion, or 4%, compared to the first nine months of 2014. The overall portfolio decline resulted from pay-downs and payoffs on loans exceeding new booked volume, consistent with lower mortgage demand. Retail Banking's home equity loan portfolio is relationship based, with 97% of the portfolio attributable to borrowers in our primary geographic footprint.

Average commercial & commercial real estate loans declined $344 million, or 3%, as pay-downs and payoffs on loans exceeded new volume.

Average auto dealer floor plan loans declined $63 million, or 3%, in the first nine months of 2015 compared to the same period in 2014, primarily resulting from lower dealer line utilization.

Average indirect auto loans increased $225 million, or 2%, compared to the first nine months of 2014. The increase was primarily due to portfolio growth in previously underpenetrated markets.

Average credit card balances increased $149 million, or 3%, over the same period in 2014 as a result of efforts to increase credit card share of wallet through organic growth.

Average residential mortgage balances increased $86 million, or 14%, compared to the first nine months of 2014. The increase was due to the transfer of $198 million in Community Reinvestment Act (CRA) mortgage loans from the Residential Mortgage Banking business segment in January 2015.

In the first nine months of 2015, average loan balances for the remainder of the portfolio declined a net $896 million, compared to the same period a year ago, driven by declines in the education and indirect other portfolios of $912 million and $167 million, respectively, as the discontinued government guaranteed education loan and indirect other balances are primarily run-off portfolios.

Nonperforming assets declined $91 million, or 8%, at September 30, 2015 compared to September 30, 2014. The decrease was driven by declines in both consumer and commercial non-performing loans.

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

Corporate & Institutional Banking

(Unaudited)

Table 23: Corporate & Institutional Banking Table

Nine months ended September 30

Dollars in millions, except as noted

2015 2014

Income Statement

Net interest income

$ 2,613 $ 2,777

Noninterest income

Corporate service fees

1,007 926

Other

390 329

Noninterest income

1,397 1,255

Total revenue

4,010 4,032

Provision for credit losses

83 86

Noninterest expense

1,594 1,520

Pretax earnings

2,333 2,426

Income taxes

841 884

Earnings

$ 1,492 $ 1,542

Average Balance Sheet

Loans

Commercial

$ 85,304 $ 77,550

Commercial real estate

22,536 20,927

Equipment lease financing

6,965 6,863

Total commercial lending

114,805 105,340

Consumer

971 1,116

Total loans

115,776 106,456

Goodwill and other intangible assets

3,850 3,812

Loans held for sale

973 973

Other assets

11,079 9,991

Total assets

$ 131,678 $ 121,232

Deposits

Noninterest-bearing demand

$ 48,168 $ 43,348

Money market

22,319 20,930

Other

9,776 7,646

Total deposits

80,263 71,924

Other liabilities

7,893 7,454

Total liabilities

$ 88,156 $ 79,378

Performance Ratios

Return on average assets

1.51 1.70

Noninterest income to total revenue

35 31

Efficiency

40 38

Commercial Loan Servicing Portfolio – Serviced For PNC and Others (in billions)

Beginning of period

$ 377 $ 347

Acquisitions/additions

125 64

Repayments/transfers

(61 (48

End of period

$ 441 $ 363

Other Information

Consolidated revenue from: (a)

Treasury Management (b)

$ 999 $ 950

Capital Markets (b)

$ 592 $ 547

Commercial mortgage banking activities

Commercial mortgage loans held for sale (c)

$ 94 $ 84

Commercial mortgage loan servicing income (d)

191 164

Commercial mortgage servicing rights valuation, net of economic hedge (e)

25 33

Total

$ 310 $ 281

Average Loans (by C&IB business)

Corporate Banking

$ 58,108 $ 53,530

Real Estate

30,621 27,260

Business Credit

14,503 13,074

Equipment Finance

10,956 10,362

Other

1,588 2,230

Total average loans

$ 115,776 $ 106,456

Total loans (f)

$ 116,238 $ 109,792

Net carrying amount of commercial mortgage servicing rights (f)

$ 505 $ 532

Credit-related statistics:

Nonperforming assets (f) (g)

$ 484 $ 616

Purchased impaired loans (f) (h)

$ 153 $ 316

Net charge-offs (recoveries)

$ 6 $ 10
(a) Represents consolidated PNC amounts. See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of the Corporate & Institutional Banking portion of this Business Segments Review section.
(b) Includes amounts reported in net interest income, corporate service fees and other noninterest income.
(c) Includes other noninterest income for valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, origination fees, gains on sale of loans held for sale and net interest income on loans held for sale.
(d) Includes net interest income and noninterest income, primarily in corporate services fees, from loan servicing and ancillary services, net of changes in fair value on commercial mortgage servicing rights due to time and payoffs. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.
(e) Includes amounts reported in corporate services fees.
(f) As of September 30.
(g) Includes nonperforming loans of $.4 billion at September 30, 2015 and $.5 billion at September 30, 2014.
(h) Recorded investment of purchased impaired loans related to acquisitions.

Corporate & Institutional Banking earned $1.5 billion in the first nine months of 2015, a decrease of $50 million compared to the same period a year ago. The slight decrease in earnings was due to lower net interest income and an increase in noninterest expense, largely offset by higher noninterest income. We continue to focus on building client relationships where the risk-return profile is attractive, including the Southeast.

Net interest income decreased $164 million in the first nine months of 2015 compared to the first nine months of 2014. The decline was due to the impact of first quarter 2015 enhancements to internal funds transfer pricing methodology, continued spread compression on loans and deposits, and lower purchase accounting accretion, partially offset by the impact of higher average loans and deposits. Decreased net interest income in the comparison also reflected the impact from the second quarter 2014 correction to reclassify certain commercial facility usage fees from net interest income to corporate service fees.

Corporate service fees increased $81 million in the first nine months of 2015 compared to the first nine months of 2014. This increase was primarily due to the impact of the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to corporate service fees and increases in treasury management and equity capital markets advisory fees, partially offset by lower merger and acquisition advisory fees.

Other noninterest income increased $61 million in the first nine months of 2015 compared to the first nine months of 2014. This increase was driven by higher revenue associated with credit valuations for customer-related derivatives activities and related derivatives sales, higher multifamily loans originated for sale to agencies and higher corporate securities underwriting activity.

Noninterest expense increased $74 million in the first nine months of 2015 compared to the prior year period, primarily driven by investments in technology and treasury management operations, higher asset writedowns, and expenses related to equity capital markets advisory fees.

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

Average loans increased $9.3 billion, or 9%, for the first nine months of 2015 compared to the first nine months of 2014, reflecting solid growth in Corporate Banking, Real Estate, Business Credit and Equipment Finance:

Corporate Banking business provides lending, treasury management and capital markets-related products and services to midsized and large corporations, government and not-for-profit entities. Average loans for this business increased $4.6 billion, or 9%, in the first nine months of 2015 compared with the first nine months of 2014, primarily due to an increase in loan commitments from specialty lending businesses and large corporate clients.

PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. Average loans for this business increased $3.4 billion, or 12%, in first nine months of 2015 compared with the first nine months of 2014 due to increased originations and higher 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 $1.4 billion, or 11%, in first nine months of 2015 compared with the first nine months of 2014 due to new originations, increasing deal sizes and higher utilization.

PNC Equipment Finance provides equipment financing solutions for clients throughout the U.S. and Canada. Average equipment finance loans and operating leases were $11.8 billion in the first nine months of 2015, an increase of $.7 billion, or 6% compared with the first nine months of 2014.

Period-end loan balances increased 6%, or $6.4 billion at September 30, 2015 compared to September 30, 2014, primarily due to growth in our Corporate Banking, Real Estate and Business Credit businesses.

Average deposits for the first nine months of 2015 increased $8.3 billion, or 12%, compared with the first nine months of 2014 as a result of business growth and inflows into demand, money market and certificates of deposit products.

The commercial loan servicing portfolio increased $78 billion, or 21% at September 30, 2015, compared to September 30, 2014, as servicing additions from new and existing customers exceeded portfolio run-off.

Nonperforming assets declined 21% at September 30, 2015 compared to September 30, 2014 reflecting improved credit quality.

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

Treasury management revenue, comprised of fees and net interest income from customer deposit balances, increased $49 million in the comparison of the first nine months of 2015 to the first nine months of 2014, driven by growth in our commercial card, wholesale lockbox, PINACLE ® and liquidity-related revenue.

Capital markets revenue includes merger and acquisition advisory fees, loan syndications, derivatives, foreign exchange, asset-backed finance revenue and fixed income and equity capital markets advisory activities. Revenue from capital markets-related products and services increased $45 million in the first nine months of 2015 compared with the first nine months of 2014. The increase in the comparison was primarily driven by higher revenue associated with credit valuations for customer-related derivatives activities and related derivatives sales, higher equity capital markets advisory fees and increased corporate securities underwriting activity, partially offset by lower merger and acquisition advisory fees.

Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (including net interest income and noninterest income) and revenue derived from commercial mortgage loans held for sale and related hedges. Revenue from total commercial mortgage banking activities increased $29 million in the first nine months of 2015 compared with the first nine months of 2014. The increase in the comparison was mainly due to higher mortgage servicing revenue and higher multifamily loans originated for sale to agencies.

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

Asset Management Group

(Unaudited)

Table 24: Asset Management Group Table

Nine months ended September 30

Dollars in millions, except as noted

2015 2014

Income Statement

Net interest income

$ 215 $ 215

Noninterest income

658 611

Total revenue

873 826

Provision for credit losses

11 2

Noninterest expense

636 610

Pretax earnings

226 214

Income taxes

83 78

Earnings

$ 143 $ 136

Average Balance Sheet

Loans

Consumer

$ 5,656 $ 5,407

Commercial and commercial real estate

901 997

Residential mortgage

899 794

Total loans

7,456 7,198

Goodwill and other intangible assets

230 264

Other assets

236 225

Total assets

$ 7,922 $ 7,687

Deposits

Noninterest-bearing demand

$ 1,207 $ 1,342

Interest-bearing demand

4,126 3,887

Money market

5,072 3,918

Total transaction deposits

10,405 9,147

CDs/IRAs/savings deposits

472 448

Total deposits

10,877 9,595

Other liabilities

43 51

Total liabilities

$ 10,920 $ 9,646

Performance Ratios

Return on average assets

2.41 2.37

Noninterest income to total revenue

75 74

Efficiency

73 74

Other Information

Total nonperforming assets (a) (b)

$ 52 $ 73

Purchased impaired loans (a) (c)

$ 75 $ 89

Total net charge-offs

$ 14 $ 3

Client Assets Under Administration (a) (d)
(in billions)

Personal

$ 110 $ 113

Institutional

146 146

Total

$ 256 $ 259

Asset Type

Equity

$ 142 $ 147

Fixed Income

73 72

Liquidity/Other

41 40

Total

$ 256 $ 259

Discretionary client assets under management

Personal

$ 84 $ 85

Institutional

48 47

Total

$ 132 $ 132

Asset Type

Equity

$ 70 $ 72

Fixed Income

40 40

Liquidity/Other

22 20

Total

$ 132 $ 132

Nondiscretionary client assets under administration

Personal

$ 26 $ 28

Institutional

98 99

Total

$ 124 $ 127

Asset Type

Equity

$ 72 $ 75

Fixed Income

33 32

Liquidity/Other

19 20

Total

$ 124 $ 127
(a) As of September 30.
(b) Includes nonperforming loans of $48 million at September 30, 2015 and $67 million at September 30, 2014.
(c) Recorded investment of purchased impaired loans related to acquisitions.
(d) Excludes brokerage account client assets.

Asset Management Group earned $143 million through the first nine months of 2015 compared with $136 million in the same period of 2014, driven by higher noninterest income, including a $30 million trust settlement in the second quarter of 2015, partially offset by higher noninterest expense. Assets under administration were $256 billion as of September 30, 2015 compared to $259 billion as of September 30, 2014, as nondiscretionary client assets under administration declined slightly and discretionary client assets under administration remained flat in the comparison.

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

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

Discretionary client assets under management remained flat at September 30, 2015 compared to September 30, 2014, as lower equity markets were offset by new sales and positive net flows after adjustments for cyclical client activities.

Total revenue increased $47 million, or 6%, in the first nine months of 2015 compared with the same period in 2014, primarily relating to higher noninterest income due to the trust settlement in the second quarter of 2015, net new business, and strong average equity markets.

Noninterest expense increased $26 million, or 4% in the first nine months of 2015 compared to the prior year period, primarily attributable to higher compensation and technology expenses. Asset Management Group remains focused on disciplined expense management as it invests in strategic growth opportunities.

Average loan balances for the first nine months of 2015 increased $.3 billion, or 4%, compared to the prior year period. Asset Management Group's clients' preference for liquidity in the form of a new line of credit product has driven significant growth in the loan portfolio. The line of credit product is primarily secured by the market value of the client's underlying investment management account assets.

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

Average transaction deposits for the first nine months of 2015 increased $1.3 billion, or 14%, over the prior year period, driven by an increase in interest bearing demand deposit accounts and money market products.

Residential Mortgage Banking

(Unaudited)

Table 25: Residential Mortgage Banking Table

Nine months ended September 30

Dollars in millions, except as noted

2015 2014

Income Statement

Net interest income

$ 91 $ 115

Noninterest income

Loan servicing revenue

Servicing fees

143 170

Mortgage servicing rights valuation, net of economic hedge

70 11

Loan sales revenue

278 327

Other

(3 (5

Total noninterest income

488 503

Total revenue

579 618

Provision for credit losses (benefit)

2 (1

Noninterest expense

510 550

Pretax earnings

67 69

Income taxes

24 25

Earnings

$ 43 $ 44

Average Balance Sheet

Portfolio loans

$ 1,175 $ 1,759

Loans held for sale

1,160 1,130

Mortgage servicing rights (MSR)

967 1,036

Other assets

3,660 3,964

Total assets

$ 6,962 $ 7,889

Deposits

$ 2,415 $ 2,279

Borrowings and other liabilities

2,241 2,819

Total liabilities

$ 4,656 $ 5,098

Performance Ratios

Return on average assets

.83 .75

Noninterest income to total revenue

84 81

Efficiency

88 89

Residential Mortgage Servicing Portfolio – Serviced for Third Parties (in billions)

Beginning of period

$ 108 $ 114

Acquisitions

24 4

Additions

6 7

Repayments/transfers

(16 (14

End of period

$ 122 $ 111

Servicing portfolio – third-party statistics: (a)

Fixed rate

94 94

Adjustable rate/balloon

6 6

Weighted-average interest rate

4.29 4.49

MSR asset value (in billions)

$ 1.0 $ 1.0

MSR capitalization value (in basis points)

79 88

Weighted-average servicing fee (in basis points)

27 27

Residential Mortgage Repurchase Reserve

Beginning of period

$ 107 $ 131

(Benefit)/ Provision

4 (4

Losses – loan repurchases

(16 (19

End of Period

$ 95 $ 108

Other Information

Loan origination volume (in billions)

$ 8.2 $ 7.1

Loan sale margin percentage

3.43 4.57

Percentage of originations represented by:

Purchase volume (b)

46 47

Refinance volume

54 53

Total nonperforming assets (a) (c)

$ 88 $ 135
(a) As of September 30.
(b) Mortgages with borrowers as part of residential real estate purchase transactions.
(c) Includes nonperforming loans of $53 million at September 30, 2015 and $93 million at September 30, 2014.

Residential Mortgage Banking earned $43 million in the first nine months of 2015 compared to $44 million in the first nine months of 2014. Earnings decreased slightly from the prior year as higher net hedging gains on residential mortgage servicing rights and lower noninterest expense were more than offset by lower loan sales and servicing revenue and decreased net interest income.

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

Residential Mortgage Banking overview:

Total loan originations increased $1.1 billion in the first nine months of 2015 compared to the same 2014 period. Loans continue to be originated primarily through direct channels under Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Federal Housing Administration (FHA)/Department of Veterans Affairs agency guidelines. Refinancings were 54% of originations for the first nine months of 2015 and 53% in the first nine months of 2014. During the first nine months of 2015, 13% of loan originations were under the original or revised Home Affordable Refinance Program (HARP or HARP 2).

Residential mortgage loans serviced for others increased $11 billion at September 30, 2015 compared to September 30, 2014. During the first nine months of 2015, $24 billion of residential mortgage servicing rights were acquired, compared with $4 billion in the comparable period of 2014.

Noninterest income declined $15 million in the first nine months of 2015 compared with the prior year period, as increased net hedging gains on residential mortgage servicing rights were more than offset by decreased loan sales revenue and servicing revenue.

Net interest income decreased $24 million in the first nine months of 2015 compared with the first nine months of 2014. This decline was primarily due to lower balances of portfolio loans held for investment.

Noninterest expense declined $40 million in the first nine months of 2015 compared with the same 2014 period, primarily as a result of lower legal accruals.

Investors having purchased mortgage loans may request PNC to indemnify them against losses on certain loans or to repurchase loans that they believe do not comply with applicable contractual loan

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

origination covenants and representations and warranties we have made. At September 30, 2015, the liability for estimated losses on repurchase and indemnification claims for the Residential Mortgage Banking business segment was $95 million, compared with $108 million at September 30, 2014. See the Recourse and Repurchase Obligations section of this Financial Review and Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements of this Report for additional information.

BlackRock

(Unaudited)

Table 26: BlackRock Table

Information related to our equity investment in BlackRock follows:

Nine months ended September 30

Dollars in millions

2015 2014

Business segment earnings (a)

$ 407 $ 399

PNC's economic interest in BlackRock (b)

22 22
(a) Includes PNC's share of BlackRock's reported GAAP earnings and additional income taxes on those earnings incurred by PNC.
(b) At September 30.

In billions September 30
2015
December 31
2014

Carrying value of PNC's investment in BlackRock (c)

$ 6.6 $ 6.3

Market value of PNC's investment in BlackRock (d)

10.5 12.6
(c) PNC accounts for its investment in BlackRock under the equity method of accounting, exclusive of a related deferred tax liability of $2.1 billion at both September 30, 2015 and December 31, 2014. Our voting interest in BlackRock common stock was approximately 21% at September 30, 2015.
(d) Does not include liquidity discount.

In addition to our investment in BlackRock reflected in Table 26, at September 30, 2015, we held approximately 1.3 million shares of BlackRock Series C Preferred Stock valued at $312 million, which are available to fund our obligation in connection with certain BlackRock long-term incentive plan (LTIP) programs. We account for the BlackRock Series C Preferred Stock at fair value, which offsets the impact of marking-to-market the obligation to deliver these shares to BlackRock. The fair value amount of the BlackRock Series C Preferred Stock is included on our Consolidated Balance Sheet in the caption Other assets. Additional information regarding the valuation of the BlackRock Series C Preferred Stock is included in Note 7 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report and in Note 7 Fair Value in the Notes To Consolidated Financial Statements in Item 8 of our 2014 Form 10-K.

Our 2014 Form 10-K includes additional information about our investment in BlackRock.

Non-Strategic Assets Portfolio

(Unaudited)

Table 27: Non-Strategic Assets Portfolio Table

Nine months ended September 30

Dollars in millions

2015 2014

Income Statement

Net interest income

$ 302 $ 425

Noninterest income

34 22

Total revenue

336 447

Provision for credit losses (benefit)

(61 (99

Noninterest expense

73 86

Pretax earnings

324 460

Income taxes

119 169

Earnings

$ 205 $ 291

Average Balance Sheet

Commercial Lending:

Commercial/Commercial real estate

$ 114 $ 190

Lease financing

628 686

Total commercial lending

742 876

Consumer Lending:

Home equity

2,859 3,477

Residential real estate

3,981 4,952

Total consumer lending

6,840 8,429

Total portfolio loans

7,582 9,305

Other assets (a)

(702 (742

Total assets

$ 6,880 $ 8,563

Deposits and other liabilities

$ 221 $ 227

Total liabilities

$ 221 $ 227

Performance Ratios

Return on average assets

3.98 4.54

Noninterest income to total revenue

10 5

Efficiency

22 19

Other Information

Nonperforming assets (b) (c)

$ 571 $ 731

Purchased impaired loans (b) (d)

$ 3,411 $ 4,147

Net (recoveries) charge-offs

$ (8 $ 35

Annualized net (recovery) charge-off ratio

(.14 )%  .50

Loans (b)

Commercial Lending

Commercial/Commercial real estate

$ 98 $ 162

Lease financing

633 691

Total commercial lending

731 853

Consumer Lending

Home equity

2,586 3,242

Residential real estate

3,625 4,665

Total consumer lending

6,211 7,907

Total loans

$ 6,942 $ 8,760
(a) Other assets includes deferred taxes, ALLL and other real estate owned (OREO). Other assets were negative in both periods due to the ALLL.
(b) As of September 30.
(c) Includes nonperforming loans of $.5 billion at September 30, 2015 and $.6 billion at September 30, 2014.
(d) Recorded investment of purchased impaired loans related to acquisitions. This segment contained 82% of PNC's purchased impaired loans at September 30, 2015 and 80% at September 30, 2014.

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

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

Non-Strategic Assets Portfolio had earnings of $205 million in the first nine months of 2015 compared with $291 million in the first nine months of 2014. Earnings decreased year-over-year due to lower net interest income and a reduced benefit from the provision for credit losses.

Non-Strategic Assets Portfolio overview:

Net interest income declined $123 million, or 29% in the first nine months of 2015 compared with the first nine months of 2014, resulting from lower purchase accounting accretion and the impact of the declining average balance of the loan portfolio.

Noninterest income increased $12 million, or 55% in the first nine months of 2015 compared to the first nine months of the 2014 driven by valuation gains, lower provision for estimated losses on repurchase obligations and loan sale gains.

Provision for credit losses was a benefit in both the first nine months of 2015 and 2014, reflecting continued improvements in credit quality.

Noninterest expense declined $13 million, or 15% in the first nine months of 2015 compared with in the first nine months of 2014, due to lower costs of managing and servicing the loan portfolios.

Average portfolio loans declined $1.7 billion, or 19% in the first nine months of 2015 compared to the first nine months of 2014, due to customer payment activity and portfolio management activities to reduce under-performing assets.

C RITICAL A CCOUNTING E STIMATES AND J UDGMENTS

Note 1 Accounting Policies in Item 8 of our 2014 Form 10-K and in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report describe the most significant accounting policies that we use to prepare our consolidated financial statements. Certain of these policies require us to make estimates or economic assumptions that may prove inaccurate or be subject to variations that may significantly affect our reported results and financial position for the period or in future periods.

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

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

We discuss the following critical accounting policies and judgments under this same heading in Item 7 of our 2014 Form 10-K:

Fair Value Measurements

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

Estimated Cash Flows on Purchased Impaired Loans

Goodwill

Lease Residuals

Revenue Recognition

Residential and Commercial Mortgage Servicing Rights

Income Taxes

Recently Issued Accounting Standards

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

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standard Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP with one accounting model. The core principle of the guidance is that an entity should recognize revenue to depict the satisfaction of a performance obligation by transfer of promised goods or services to customers. The ASU also requires additional qualitative and quantitative disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued guidance deferring the mandatory effective date of the ASU for one year, to annual reporting periods beginning after December 15, 2017. The requirements within ASU 2014-09 should be applied retrospectively to each prior period presented (with several practical expedients for certain completed contracts) or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. We plan to adopt the ASU consistent with the deferred mandatory effective date and continue to evaluate the impact of this ASU on our results of operations and financial position.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis . All legal entities are subject to re-evaluation under this ASU, including investment companies and certain other entities measured in a manner consistent with ASC 946 Financial Services – Investment Companies which were previously excluded. The ASU will change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, the ASU modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; eliminates the presumption that a

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

general partner should consolidate a limited partnership; potentially changes the consolidation conclusions of reporting entities that are involved with VIEs, in particular those that have fee arrangements and related party arrangements, and provides a scope exception for reporting entities with interests held in certain money market funds. The ASU is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2015 and may be applied through a retrospective or modified retrospective approach. We do not expect this ASU to have a material effect on our results of operations and financial position.

Recently Adopted Accounting Standards

See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements included in Part I, Item I of this Report regarding the impact of new accounting pronouncements adopted in 2015.

S TATUS OF Q UALIFIED D EFINED B ENEFIT P ENSION P LAN

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

We currently estimate pretax pension expense of $9 million in 2015 compared with pretax income of $7 million in 2014. This year-over-year expected increase in expense reflects the effects of the lower expected return on asset assumption, improved mortality, and the lower discount rate required to be used in 2015. These factors are partially offset by the favorable impact of the increase in plan assets at December 31, 2014 and the assumed return on a $200 million voluntary contribution to the plan made in February 2015.

The table below reflects the estimated effects on pension expense of certain changes in annual assumptions, using 2015 estimated expense as a baseline.

Table 28: Pension Expense – Sensitivity Analysis

Change in Assumption (a)

Estimated
Increase/(Decrease)
to 2015

Pension

Expense

(In millions)

.5% decrease in discount rate

$ 18

.5% decrease in expected long-term return on assets

$ 22

.5% increase in compensation rate

$ 2
(a) The impact is the effect of changing the specified assumption while holding all other assumptions constant.

We provide additional information on our pension plan in Note 13 Employee Benefit Plans in the Notes To Consolidated Financial Statements in Item 8 of our 2014 Form 10-K.

R ECOURSE AND R EPURCHASE O BLIGATIONS

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in our 2014 Form 10-K, PNC has sold commercial mortgage, residential mortgage and home equity loans/lines of credit directly or indirectly through securitization and loan sale transactions in which we have continuing involvement. One form of continuing involvement includes certain recourse and loan repurchase obligations associated with the transferred assets.

Commercial Mortgage Loan Recourse Obligations

We originate and service certain multi-family commercial mortgage loans which are sold to FNMA under FNMA's Delegated Underwriting and Servicing (DUS) program. We participated in a similar program with the FHLMC. Our exposure and activity associated with these recourse obligations are reported in the Corporate & Institutional Banking segment. For more information regarding our Commercial Mortgage Loan Recourse Obligations, see the Recourse and Repurchase Obligations section of Note 16 Commitments and Guarantees included in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

Residential Mortgage Repurchase Obligations

While residential mortgage loans are sold on a non-recourse basis, we assume certain loan repurchase obligations associated with mortgage loans we have sold to investors. These loan repurchase obligations primarily relate to situations where PNC is alleged to have breached certain origination covenants and representations and warranties made to purchasers of the loans in the respective purchase and sale agreements. Residential mortgage loans covered by these loan repurchase obligations include first and second-lien mortgage loans we have sold through Agency securitizations, Non-Agency securitizations, and loan sale transactions. As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2014 Form 10-K, Agency securitizations consist of mortgage loan sale transactions with FNMA, FHLMC and the Government National Mortgage Association (GNMA), while Non-Agency securitizations consist of mortgage loan sale transactions with private investors. Mortgage loan sale transactions that are not part of a securitization may involve FNMA, FHLMC or private investors. Our historical exposure and activity associated with Agency securitization repurchase obligations has primarily been related to transactions with FNMA and FHLMC, as indemnification and repurchase losses associated with FHA

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

and VA-insured and uninsured loans pooled in GNMA securitizations historically have been minimal. In addition to indemnification and repurchase risk, we face other risks of loss with respect to our participation in these programs, some of which are described in Note 21 Legal Proceedings in the Notes To Consolidated Financial Statements in our 2014 Form 10-K with respect to governmental inquiries related to FHA-insured loans. Repurchase obligation activity associated with residential mortgages is reported in the Residential Mortgage Banking segment.

Origination and sale of residential mortgages is an ongoing business activity and, accordingly, management continually assesses the need to recognize indemnification and repurchase liabilities pursuant to the associated investor sale agreements. We establish indemnification and repurchase liabilities for estimated losses on sold first and second-lien mortgages for which indemnification is expected to be provided or for loans that are expected to be repurchased. For the first and second-lien mortgage sold portfolio, we have established an indemnification and repurchase liability pursuant to investor sale agreements based on claims made and our estimate of future claims on a loan by loan basis. To estimate the mortgage repurchase liability arising from breaches of representations and warranties, we consider the following factors: (i) borrower performance in our historically sold portfolio (both actual and estimated future defaults); (ii) the level of outstanding unresolved repurchase claims; (iii) estimated probable future repurchase claims, considering information about expected investor behaviors, delinquent and liquidated loans, resolved and unresolved mortgage insurance rescission notices and our historical experience with claim rescissions; (iv) the potential ability to cure the defects identified in the repurchase claims ("rescission rate"); (v) the availability of legal defenses; and (vi) the estimated severity of loss upon repurchase of the loan or collateral, make-whole settlement or indemnification.

We previously reached agreements with both FNMA and FHLMC to resolve their repurchase claims with respect to loans sold between 2000 and 2008. Thus, our repurchase obligations involve Agency securitizations and other loan sales with FNMA and FHLMC subsequent to 2008 only, as well as Agency securitizations with GNMA and Non-Agency securitizations and other loan sales with private investors. The unpaid principal balance of loans associated with our exposure to repurchase obligations totaled $66.0 billion at September 30, 2015, of which $1.2 billion was 90 days or more delinquent. The comparative amounts were $68.3 billion and $1.5 billion, respectively, at December 31, 2014.

We believe our indemnification and repurchase liability appropriately reflects the estimated probable losses on indemnification and repurchase claims for all residential mortgage loans sold and outstanding as of September 30, 2015 and December 31, 2014. In making these estimates we consider the losses that we expect to incur over the life of the

sold loans. See Note 16 Commitments and Guarantees in this Report for additional information on residential mortgage repurchase obligations.

Home Equity Repurchase Obligations

PNC's repurchase obligations include obligations with respect to certain brokered home equity loans/lines of credit that were sold to a limited number of private investors in the financial services industry by National City prior to our acquisition of National City. PNC is no longer engaged in the brokered home equity lending business, and our exposure under these loan repurchase obligations is limited to repurchases of the loans sold in these transactions. Repurchase activity associated with brokered home equity loans/lines of credit is reported in the Non-Strategic Assets Portfolio segment.

For more information regarding our Home Equity Repurchase Obligations, see the Recourse and Repurchase Obligations section under Item 7 of our 2014 Form 10-K and Note 16 Commitments and Guarantees included in this Report.

R ISK M ANAGEMENT

PNC encounters risk as part of the normal course of operating our business. Accordingly, we design risk management processes to help manage these risks.

The Risk Management section included in Item 7 of our 2014 Form 10-K describes our enterprise risk management framework including risk appetite and strategy, risk culture, risk organization and governance, risk identification and quantification, risk control and limits, and risk monitoring and reporting. Additionally, our 2014 Form 10-K provides an analysis of our key areas of risk, which include but are not limited to credit, operational, compliance, model, liquidity and market. Our use of financial derivatives as part of our overall asset and liability risk management process is also addressed within the Risk Management section.

The following information updates our 2014 Form 10-K risk management disclosures.

Credit Risk Management

As more fully discussed in the Credit Risk Management portion of the Risk Management section in our 2014 Form 10-K, credit risk represents the possibility that a customer, counterparty or issuer may not perform in accordance with contractual terms. Credit risk is inherent in the financial services business and results from extending credit to customers, purchasing securities, and entering into financial derivative transactions and certain guarantee contracts. Credit risk is one of our most significant risks. Our processes for managing credit risk are embedded in PNC's risk culture and in our decision-making processes using a systematic approach whereby credit risks and related exposures are identified and assessed, managed through specific policies and processes, measured and evaluated against our risk appetite and credit concentration limits, and reported, along with specific mitigation activities, to management and the Board through our governance structure.

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

Asset Quality Overview

Asset quality trends improved overall during the first nine months of 2015.

Nonperforming assets at September 30, 2015 decreased $390 million compared with December 31, 2014 as a result of improvements in both consumer lending and commercial lending nonperforming loans. Consumer lending nonperforming loans decreased $227 million and commercial lending nonperforming loans decreased another $106 million. Nonperforming assets were 0.69% of total assets at September 30, 2015 compared with 0.83% at December 31, 2014.

Overall loan delinquencies totaled $1.7 billion at September 30, 2015, a decrease of $283 million, or 15%, from year-end 2014 levels. The reduction was due in large part to a reduction in accruing government insured residential real estate loans past due 90 days or more of $161 million, the majority of which we took possession of and conveyed the real estate, or are in the process of conveyance and claim resolution.

Net charge-offs were $96 million in the third quarter of 2015, up 17%, or $14 million, from net charge-offs in the same quarter of 2014, as higher commercial loan and residential real estate loan net charge-offs were somewhat offset by lower home equity loan net charge-offs. For the nine months ended September 30, 2015, net charge-offs were $266 million, down from $413 million for the nine months ended September 30, 2014.

Provision for credit losses in the third quarter of 2015 increased to $81 million compared with $55 million in the third quarter of 2014. Provision for credit losses for the nine months ending September 30, 2015 declined to $181 million compared to $221 million for the nine months ending September 30, 2014.

The level of ALLL decreased to $3.2 billion at September 30, 2015 as compared to $3.3 billion at December 31, 2014.

Nonperforming Assets and Loan Delinquencies

Nonperforming Assets, including OREO and Foreclosed Assets

Nonperforming assets include nonperforming loans and leases for which ultimate collectability of the full amount of contractual principal and interest is not probable and include nonperforming troubled debt restructurings (TDRs), OREO and foreclosed assets. Loans held for sale, certain government insured or guaranteed loans, purchased impaired loans and loans accounted for under the fair value option are excluded from nonperforming loans. Additional information regarding our nonperforming loans and nonaccrual policies is included in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report. A summary of the major categories of nonperforming assets are presented in Table 29. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements of this Report for further detail of nonperforming asset categories.

Table 29: Nonperforming Assets By Type

Dollars in millions September 30
2015
December 31
2014

Nonperforming loans

Commercial lending

$ 520 $ 626

Consumer lending (a) (b)

1,657 1,884

Total nonperforming loans (c)

2,177 2,510

OREO and foreclosed assets

313 370

Total nonperforming assets

$ 2,490 $ 2,880

Amount of TDRs included in nonperforming loans

$ 1,171 $ 1,370

Percentage of total nonperforming loans

54 55

Nonperforming loans to total loans

1.06 1.23

Nonperforming assets to total loans, OREO and foreclosed assets

1.21 1.40

Nonperforming assets to total assets

.69 .83

Allowance for loan and lease losses to total nonperforming loans (d)

149 133
(a) Excludes most consumer loans and lines of credit, not secured by residential real estate, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.
(b) The recorded investment of loans collateralized by residential real estate property that are in process of foreclosure was $.6 billion and $.8 billion at September 30, 2015 and December 31, 2014, which included $.3 billion and $.5 billion, respectively, of loans that are government insured/guaranteed.
(c) Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans.
(d) The allowance for loan and lease losses in this ratio includes impairment reserves attributable to purchased impaired loans. See Note 1 Accounting Policies and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information. The allowance for loan and lease losses will be impacted by the expected fourth quarter 2015 change in our derecognition policy for purchased impaired loans that are pooled and accounted for as a single asset. For additional information on this policy change, see the Purchase Accounting Accretion and Valuation of Purchased Impaired Loans portion of the Consolidated Balance Sheet Review of this Financial Review.

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

Table 30: Change in Nonperforming Assets

In millions 2015 2014

January 1

$ 2,880 $ 3,457

New nonperforming assets

1,089 1,657

Charge-offs and valuation adjustments

(367 (427

Principal activity, including paydowns and payoffs

(544 (818

Asset sales and transfers to loans held for sale

(296 (440

Returned to performing status

(272 (454

September 30

$ 2,490 $ 2,975

Nonperforming assets decreased $390 million at September 30, 2015 compared to December 31, 2014. Consumer lending nonperforming loans decreased $227 million and commercial lending nonperforming loans decreased another $106 million. As of September 30, 2015, approximately 89% of total nonperforming loans were secured by collateral which lessens reserve requirements and is expected to reduce credit losses in the event of default. As of September 30, 2015, commercial lending nonperforming loans were carried at approximately 60% of their unpaid principal balance, due to charge-offs recorded to date, before consideration of the ALLL. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information on these loans.

Within consumer nonperforming loans, residential real estate TDRs comprise 69% of total residential real estate nonperforming loans at September 30, 2015, up from 60% at December 31, 2014. Home equity TDRs comprise 52% of home equity nonperforming loans at September 30, 2015, down from 54% at December 31, 2014. TDRs generally remain in nonperforming status until a borrower has made at least six consecutive months of both principal and interest payments under the modified terms or ultimate resolution occurs. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

At September 30, 2015, our largest nonperforming asset was $34 million in the Real Estate, Rental and Leasing Industry and our average nonperforming loan associated with commercial lending was less than $1 million. The ten largest outstanding nonperforming assets are from the commercial lending portfolio and represent 18% and 4% of total commercial lending nonperforming loans and total nonperforming assets, respectively, as of September 30, 2015.

Purchased impaired loans are considered performing, even if contractually past due (or if we do not expect to receive payment in full based on the original contractual terms), as we accrete interest income over the expected life of the loans. Total nonperforming loans and assets in the tables above are significantly lower than they would have been due to this accounting treatment for purchased impaired loans. This treatment also results in a lower ratio of nonperforming loans to total loans and a higher ratio of ALLL to nonperforming loans. See Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report, as well as the Credit Risk Management portion of the Risk Management section in our 2014 Form 10-K for additional information, including the accounting treatment, on these loans.

Table 31: OREO and Foreclosed Assets

In millions September 30
2015
December 31
2014

Other real estate owned (OREO):

Residential properties

$ 147 $ 183

Residential development properties

38 48

Commercial properties

108 120

Total OREO

293 351

Foreclosed and other assets

20 19

Total OREO and foreclosed assets

$ 313 $ 370

Total OREO and foreclosed assets decreased $57 million during the first nine months of 2015 and is 13% of total nonperforming assets at September 30, 2015. As of September 30, 2015 and December 31, 2014, 59% and 62%, respectively, of our OREO and foreclosed assets were comprised of residential related properties.

Loan Delinquencies

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

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

Table 32: Accruing Loans Past Due (a) (b)

Amount Percentage of Total
Outstandings
Dollars in millions September 30
2015
December 31
2014
September 30
2015
December 31
2014

Early stage loan delinquencies

Accruing loans past due 30 to 59 days

$ 508 $ 582 .25 .28

Accruing loans past due 60 to 89 days

265 259 .13 .13

Total

773 841 .38 .41

Late stage loan delinquencies

Accruing loans past due 90 days or more

890 1,105 .43 .54

Total

$ 1,663 $ 1,946 .81 .95
(a) Amounts in table represent recorded investment.
(b) Past due loan amounts at September 30, 2015 include government insured or guaranteed loans of $181 million, $120 million, and $782 million for accruing loans past due 30 to 59 days, past due 60 to 89 days, and past due 90 days or more, respectively. The comparative amounts as of December 31, 2014 were $220 million, $136 million, and $996 million, respectively.

Total early stage loan delinquencies (accruing loans past due 30 to 89 days) decreased $68 million, or 8%, at September 30, 2015 compared to December 31, 2014, driven by reductions in consumer early stage delinquencies, which more than offset an increase in commercial real estate lending early stage delinquencies.

Accruing loans past due 90 days or more decreased $215 million, or 19%, at September 30, 2015 compared to December 31, 2014 due to declines in government insured residential real estate loans of $161 million, the majority of which we took possession of and conveyed the real estate, or are in the process of conveyance and claim resolution and other consumer government insured of $53 million. Accruing loans past due 90 days or more are referred to as late stage loan delinquencies. These loans are not included in nonperforming loans and continue to accrue interest because they are well secured by collateral and are in the process of collection, or are managed in homogenous portfolios with specified charge-off timeframes adhering to regulatory guidelines, or are certain government insured or guaranteed loans.

On a regular basis our Special Asset Committee closely monitors loans, primarily commercial loans, that are not included in the nonperforming or accruing past due categories and for which we are uncertain about the borrower's ability to comply with existing repayment terms. These loans totaled $.2 billion at both September 30, 2015 and December 31, 2014.

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

Home Equity Loan Portfolio

Our home equity loan portfolio totaled $33 billion as of September 30, 2015, or 16% of the total loan portfolio. Of that total, $19.3 billion, or 59%, was outstanding under primarily variable-rate home equity lines of credit and $13.7 billion, or 41%, consisted of closed-end home equity installment loans. Approximately 5% of the home equity portfolio was purchased credit impaired and 3% of the home equity portfolio was on nonperforming status as of September 30, 2015.

As of September 30, 2015, we are in an originated first lien position for approximately 53% of the total outstanding portfolio and, where originated as a second lien, we currently hold or service the first lien position for an additional 2% of the portfolio. The remaining 45% of the portfolio was secured by second liens where we do not hold the first lien position. The credit performance of the majority of the home equity portfolio where we are in, hold or service the first lien position, is superior to the portion of the portfolio where we hold the second lien position but do not hold the first lien.

Generally, our variable-rate home equity lines of credit have either a seven or ten year draw period, followed by a 20-year amortization term. During the draw period, we have home equity lines of credit where borrowers pay either interest or principal and interest. We view home equity lines of credit where borrowers are paying principal and interest under the draw period as less risky than those where the borrowers are paying interest only, as these borrowers have a demonstrated ability to make some level of principal and interest payments. The risk associated with the borrower's ability to satisfy the loan terms upon the draw period ending is considered in establishing our ALLL. Based upon outstanding balances at September 30, 2015, the following table presents the periods when home equity lines of credit draw periods are scheduled to end.

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

Table 33: Home Equity Lines of Credit – Draw Period End Dates

In millions Interest Only
Product
Principal and
Interest Product

Remainder of 2015

$ 224 $ 89

2016

1,209 398

2017

2,180 554

2018

961 753

2019

672 591

2020 and thereafter

3,390 5,652

Total (a) (b)

$ 8,636 $ 8,037
(a) Includes all home equity lines of credit that mature in the remainder of 2015 or later, including those with borrowers where we have terminated borrowing privileges.
(b) Includes approximately $5 million, $43 million, $48 million, $35 million, $25 million and $539 million of home equity lines of credit with balloon payments, including those where we have terminated borrowing privileges, with draw periods scheduled to end in the remainder of 2015, 2016, 2017, 2018, 2019 and 2020 and thereafter, respectively.

Based upon outstanding balances, and excluding purchased impaired loans, at September 30, 2015, for home equity lines of credit for which the borrower can no longer draw ( e.g. , draw period has ended or borrowing privileges have been terminated), approximately 3% were 30-89 days past due and approximately 5% were 90 days or more past due. Generally, when a borrower becomes 60 days past due, we terminate borrowing privileges and those privileges are not subsequently reinstated. At that point, we continue our collection/recovery processes, which may include loan modification resulting in a loan that is classified as a TDR.

See the Credit Risk Management portion of the Risk Management section in our 2014 Form 10-K for more information on our home equity loan portfolio.

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 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. Additional detail on TDRs is discussed below as well as in Note 3 Asset Quality in our 2014 Form 10-K.

A temporary modification, with a term between 3 and 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 include the government-created Home Affordable Modification Program (HAMP) and PNC-developed HAMP-like modification programs. These programs first require a reduction of the interest rate followed by an extension of term and, if appropriate, deferral of principal payments.

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 34 provides the number of bank-owned accounts and unpaid principal balance of modified consumer real estate related loans at the end of each year presented.

Table 34: Consumer Real Estate Related Loan Modifications

September 30, 2015 December 31, 2014
Dollars in millions Number of
Accounts
Unpaid
Principal
Balance
Number of
Accounts
Unpaid
Principal
Balance

Temporary modifications (a)

4,604 $ 345 5,346 $ 417

Permanent modifications

Home equity

14,309 1,019 13,128 968

Residential real estate

9,628 1,795 12,526 2,350

Total permanent modifications

23,937 2,814 25,654 3,318

Total consumer real estate related loan modifications

28,541 $ 3,159 31,000 $ 3,735
(a) All temporary modifications are home equity loans.

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

In addition to temporary loan modifications, we may make available to a borrower a payment plan or a HAMP trial payment period. Under a payment plan or a HAMP trial payment period, there is no change to the loan's contractual terms so the borrower remains legally responsible for payment of the loan under its original terms.

Payment plans may include extensions, re-ages and/or forbearance plans. All payment plans bring an account current once certain requirements are achieved and are primarily intended to demonstrate a borrower's renewed willingness and ability to re-pay. Due to the short term nature of the payment plan, there is a minimal impact to the ALLL.

Under a HAMP trial payment period, we establish an alternate payment, generally at an amount less than the contractual payment amount, for the borrower during this short time period. This allows a borrower to demonstrate successful payment performance before permanently restructuring the loan into a HAMP modification. Subsequent to successful borrower performance under the trial payment period, we will capitalize the original contractual amount past due, to include accrued interest and fees receivable, and restructure the loan's contractual terms, along with bringing the restructured account current. As the borrower is often already delinquent at the time of participation in the HAMP trial payment period, generally enrollment in the program does not significantly increase the ALLL. If the trial payment period is unsuccessful, the loan will be evaluated for further action based upon our existing policies.

Commercial Loan Modifications and Payment Plans

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. Additional detail on TDRs is discussed below as well as in Note 3 Asset Quality in our 2014 Form 10-K.

We have established certain commercial loan modification and payment programs for small business loans, Small Business Administration loans, and investment real estate loans. As of September 30, 2015 and December 31, 2014, $26 million and $34 million, respectively, in loan balances were covered under these modification and payment plan programs. Of these loan balances, $10 million and $12 million have been determined to be TDRs as of September 30, 2015 and December 31, 2014, respectively.

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 borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC.

Table 35: Summary of Troubled Debt Restructurings (a)

In millions September 30
2015
December 31
2014

Consumer lending:

Real estate-related

$ 1,801 $ 1,864

Credit card

112 130

Other consumer

35 47

Total consumer lending (b)

1,948 2,041

Total commercial lending

420 542

Total TDRs

$ 2,368 $ 2,583

Nonperforming

$ 1,171 $ 1,370

Accruing

1,085 1,083

Credit card

112 130

Total TDRs

$ 2,368 $ 2,583
(a) Amounts in table represent recorded investment, which includes the unpaid principal balance plus accrued interest and net accounting adjustments, less any charge-offs. Recorded investment does not include any associated valuation allowance.
(b) Excludes $1.2 billion and $.9 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, 2015 and December 31, 2014, respectively.

Total TDRs decreased $215 million, or 8%, during the first nine months of 2015. Nonperforming TDRs were approximately 54% of total nonperforming loans, and 49% of total TDRs.

TDRs that are performing, including credit card loans, are excluded from nonperforming loans. These TDRs remained generally flat during the first nine months of 2015 at $1.2 billion. Generally, the accruing category is comprised of loans where borrowers have been performing under the restructured terms for at least six consecutive months. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

See Note 3 Asset Quality and the Credit Risk Management portion of the Risk Management section in our 2014 Form 10-K for additional information on loan modifications and TDRs.

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

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

Table 36: Loan Charge-Offs And Recoveries

Nine months ended September 30

Dollars in millions

Gross
Charge-offs
Recoveries

Net

Charge-offs /
(Recoveries)

Percent of
Average Loans
(annualized)

2015

Commercial

$ 145 $ 139 $ 6 .01

Commercial real estate

29 46 (17 (.09

Equipment lease financing

2 3 (1 (.02

Home equity

139 69 70 .28

Residential real estate

17 10 7 .07

Credit card

121 16 105 3.13

Other consumer

136 40 96 .58

Total

$ 589 $ 323 $ 266 .17

2014

Commercial

$ 231 $ 156 $ 75 .11

Commercial real estate

46 64 (18 (.11

Equipment lease financing

9 10 (1 (.02

Home equity

213 58 155 .58

Residential real estate

26 23 3 .03

Credit card

125 16 109 3.36

Other consumer

136 46 90 .53

Total

$ 786 $ 373 $ 413 .28

Total net charge-offs are lower than they would have been otherwise due to the accounting treatment for purchased impaired loans. This treatment also results in a lower ratio of net charge-offs to average loans. See Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information on net charge-offs related to these loans.

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 $3.2 billion at September 30, 2015 consisted of $1.6 billion established for each of the commercial lending and consumer lending categories. 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 are periodically updated.

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.

Reserves allocated to non-impaired commercial loan classes are based on PD and LGD credit risk ratings.

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. 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.

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. Additionally, guarantees on loans greater than $1 million and owner guarantees for small business loans do not significantly impact our ALLL.

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

Allocations to non-impaired consumer loan classes are primarily based upon a roll-rate model which uses statistical relationships, calculated from historical data that estimate the movement of loan outstandings through the various stages of delinquency and ultimately charge-off.

A portion of the ALLL is related to qualitative and 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 carry over 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, 2015, we had established reserves of $.8 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. See Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information.

In determining the appropriateness of the ALLL, we make specific allocations to impaired loans and allocations to portfolios of commercial and consumer loans. We also allocate reserves to provide coverage for probable losses incurred in the portfolio at the balance sheet date based upon current market conditions, which may not be reflected in historical loss data. Commercial lending is the largest category of credits and is sensitive to changes in assumptions and judgments underlying the determination of the ALLL. We have allocated approximately $1.6 billion, or 50%, of the ALLL at September 30, 2015 to the commercial lending category. Consumer lending allocations are made based on historical loss experience adjusted for recent activity. Approximately $1.6 billion, or 50%, of the ALLL at September 30, 2015 has been allocated to these consumer lending categories.

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.

We refer you to Note 1 Accounting Policies and Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report and in our 2014 Form 10-K for further information on certain key asset quality indicators that we use to evaluate our portfolios and establish the allowances.

Table 37: Allowance for Loan and Lease Losses

Dollars in millions 2015 2014

January 1

$ 3,331 $ 3,609

Total net charge-offs

(266 (413

Provision for credit losses

181 221

Net change in allowance for unfunded loan commitments and letters of credit

(7 (9

Other

(2 (2

September 30

$ 3,237 $ 3,406

Net charge-offs to average loans (for the nine months ended) (annualized)

.17 .28

Total allowance for loan and lease losses to total loans (a)

1.58 1.70

Commercial lending net (charge-offs) / recoveries

$ 12 $ (56

Consumer lending net charge-offs

(278 (357

Total net charge-offs

$ (266 $ (413

Net charge-offs (recoveries) to average loans (for the nine months ended) (annualized)

Commercial lending

(.01 )%  .06

Consumer lending

.50 .62
(a) This ratio will be impacted by the expected change in our derecognition policy for purchased impaired loans that are pooled and accounted for as a single asset. For additional information on this policy change, see the Purchase Accounting Accretion and Valuation of Purchased Impaired Loans portion of the Consolidated Balance Sheet Review of this Financial Review.

The provision for credit losses totaled $181 million for the first nine months of 2015 compared to $221 million for the first nine months of 2014. For the first nine months of 2015, the provision for commercial lending credit losses decreased by $41 million, or 46%, from the first nine months of 2014. The provision for consumer lending credit losses increased $1 million, or 1%, from the first nine months of 2014.

At September 30, 2015, total ALLL to total nonperforming loans was 149%. The comparable amount for December 31, 2014 was 133%. These ratios are 98% and 85%, respectively, when excluding the $1.1 billion and $1.2 billion of ALLL at September 30, 2015 and December 31, 2014, respectively, allocated to consumer loans and lines of credit not secured by

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

residential real estate and purchased impaired loans. We have excluded consumer loans and lines of credit not secured by real estate as they are charged off after 120 to 180 days past due and not placed on nonperforming status. Additionally, we have excluded purchased impaired loans as they are considered performing regardless of their delinquency status as interest is accreted in accordance with ASC 310-30 based on the recorded investment balance. See Table 29 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 2015, improved asset quality trends, including, but not limited to, delinquency status and improving economic conditions, as well as reduced net charge-offs combined to result in the ALLL balance decline of $.1 billion, or 3% to $3.2 billion as of September 30, 2015 compared to December 31, 2014.

See Note 1 Accounting Policies and Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report regarding changes in the ALLL and in the allowance for unfunded loan commitments and letters of credit. See also the Purchase Accounting Accretion and Valuation of Purchased Impaired Loans portion of the Consolidated Balance Sheet Review section of this Financial Review for additional information on our ALLL related to purchased impaired loans.

Liquidity Risk Management

Liquidity risk, including our liquidity monitoring measures and tools, is described in further detail in the Liquidity Risk Management section of our 2014 Form 10-K.

PNC also monitors its liquidity by reference to the 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 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 outflow, with net cash outflows determined by applying the assumed outflow factors in the LCR rules. The resulting quotient is expressed as a percentage. For PNC and PNC Bank, the LCR became effective January 1, 2015. The minimum required LCR will be phased-in over a period of years. For 2015, PNC and PNC Bank are required to calculate the LCR on a month-end basis and the minimum LCR that PNC and PNC Bank are required to maintain is 80 percent. Effective July 1, 2016, PNC and PNC Bank must begin calculating their respective LCR ratios on a daily basis.

As of September 30, 2015, the LCR for PNC and PNC Bank exceeded 100 percent. The September 30, 2015 LCR calculation and the underlying components are based on PNC's current interpretation and understanding of the final LCR rules and are subject to, among other things, further regulatory guidance.

We provide additional information regarding regulatory liquidity requirements and their potential impact on PNC in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of our 2014 Form 10-K.

Bank Level Liquidity – Uses

At the bank level, primary contractual obligations include funding loan commitments, satisfying deposit withdrawal requests and maturities and debt service related to bank borrowings. As of September 30, 2015, there were approximately $6.7 billion of bank borrowings with contractual maturities of less than one year. We also maintain adequate bank liquidity to meet future potential loan demand and provide for other business needs, as necessary.

Bank Level Liquidity – Sources

Our largest source of bank liquidity on a consolidated basis is the deposit base generated by our retail and commercial banking businesses. Total deposits increased to $245.0 billion at September 30, 2015 from $232.2 billion at December 31, 2014, driven primarily by growth in money market and savings deposits. Assets determined by PNC to be liquid (liquid assets) and unused borrowing capacity from a number of sources are also available to maintain our liquidity position. Borrowed funds come from a diverse mix of short-term and long-term funding sources.

At September 30, 2015, our liquid assets consisted of short-term investments (Federal funds sold, resale agreements, trading securities and interest-earning deposits with banks) totaling $37.7 billion and securities available for sale totaling $53.7 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. Of our total liquid assets of $91.4 billion, we had $3.7 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 to the liquid assets we pledged, $6.5 billion of securities held to maturity were also pledged as collateral for these purposes.

In addition to the customer deposit base, which has historically provided the single largest source of relatively stable and low-cost funding, the bank also obtains liquidity through the issuance of traditional forms of funding, including long-term debt (senior notes and subordinated debt and FHLB advances) and short-term borrowings (Federal funds purchased, securities sold under repurchase agreements, commercial paper and other short-term borrowings).

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

Under the 2014 bank note program, PNC Bank may from time to time offer 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). On May 22, 2015, PNC Bank increased the capacity of this program by $5.0 billion to a maximum aggregate principal amount at any one time outstanding of $30.0 billion. The $30.0 billion of notes authorized to be issued and outstanding at any one time includes notes issued by PNC Bank under the 2004 bank note program and those notes PNC Bank has assumed through the acquisition of other banks, in each case for so long as such notes remain outstanding. The terms of the 2014 bank note program do not affect any of the bank notes issued prior to January 16, 2014. At September 30, 2015, PNC Bank had $22.3 billion of notes outstanding under this program. The following table details all issuances through September 30, 2015:

Table 38: PNC Bank Bank Notes Issued During 2015

Issuance Date Amount Description of Issuance

February 6, 2015

$600 million Floating rate senior notes issued to an affiliate with a maturity date of January 26, 2017. Interest is payable at the 3-month LIBOR rate, reset quarterly, plus a spread of .30%, on January 26, April 26, July 26 and October 26 of each year, beginning on April 26, 2015.

February 23, 2015

$750 million Senior notes with a maturity date of February 23, 2025. Interest is payable semi-annually at a fixed rate of 2.950% on February 23 and August 23 of each year, beginning on August 23, 2015.

February 23, 2015

$1.0 billion Senior notes with a maturity date of February 23, 2018. Interest is payable semi-annually at a fixed rate of 1.500% on February 23 and August 23 of each year, beginning on August 23, 2015.

May 27, 2015

$200 million Floating rate senior notes with a maturity date of May 27, 2021. Interest is payable at the 3-month LIBOR rate, reset quarterly, plus a spread of .65%, on February 27, May 27, August 27 and November 27 of each year, beginning on August 27, 2015.

June 1, 2015

$550 million Floating rate senior notes with a maturity date of June 1, 2018. Interest is payable at the 3-month LIBOR rate, reset quarterly, plus a spread of .42%, on March 1, June 1, September 1 and December 1 of each year, beginning on September 1, 2015.

June 1, 2015

$1.3 billion Senior notes with a maturity date of June 1, 2018. Interest is payable semi-annually at a fixed rate of 1.600% on June 1 and December 1 of each year, beginning on December 1, 2015.

June 1, 2015

$750 million Senior notes with a maturity date of June 1, 2020. Interest is payable semi-annually at a fixed rate of 2.300% on June 1 and December 1 of each year, beginning on December 1, 2015.

June 1, 2015

$400 million Senior notes with a maturity date of June 1, 2025. Interest is payable semi-annually at a fixed rate of 3.250% on June 1 and December 1 of each year, beginning on December 1, 2015.

July 21, 2015

$750 million Senior notes with a maturity date of July 20, 2018. Interest is payable semi-annually at a fixed rate of 1.850% on January 20 and July 20 of each year, beginning on January 20, 2016.

July 21, 2015

$750 million Senior notes with a maturity date of July 21, 2020. Interest is payable semi-annually at a fixed rate of 2.600% on January 21 and July 21 of each year, beginning on January 21, 2016.

Total senior and subordinated debt of PNC Bank increased to $24.0 billion at September 30, 2015 from $17.5 billion at December 31, 2014 due to the following activity in the period.

Table 39: PNC Bank Senior and Subordinated Debt

In billions 2015

January 1

$ 17.5

Issuances

7.0

Calls and maturities

(.7

Other

.2

September 30

$ 24.0

See Note 18 Subsequent Events in the Notes to Consolidated Financial Statements in Part I, Item 1 of this Report for information on two issuances of senior notes totaling $1.75 billion on November 3, 2015.

PNC Bank is a member of the FHLB-Pittsburgh and, as such, has access to advances from FHLB-Pittsburgh secured generally by residential mortgage loans, other mortgage-related loans and commercial mortgage-backed securities. At September 30, 2015, our unused secured borrowing capacity was $16.0 billion with the FHLB-Pittsburgh. Total FHLB borrowings increased to $21.7 billion at September 30, 2015 from $20.0 billion at December 31, 2014 due to the following activity in the period.

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

Table 40: FHLB Borrowings

In billions 2015

January 1

$ 20.0

Issuances

2.3

Calls and maturities

(.6

September 30

$ 21.7

The FHLB-Pittsburgh also periodically provides standby letters of credit on behalf of PNC Bank to secure certain public deposits. PNC Bank began using standby letters of credit issued by the FHLB-Pittsburgh for these purposes in response to the regulatory liquidity standards finalized during 2014. If the FHLB-Pittsburgh is required to make payment for a beneficiary's draw, the payment amount is converted into a collateralized advance to PNC Bank. At September 30, 2015, standby letters of credit issued on our behalf by the FHLB-Pittsburgh totaled $6.0 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, 2015, there was $1.1 billion outstanding under this program.

PNC Bank can also borrow from the Federal Reserve Bank discount window to meet short-term liquidity requirements. The Federal Reserve Bank, however, is not viewed as the 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. These potential borrowings are secured by commercial loans. At September 30, 2015, our unused secured borrowing capacity was $13.7 billion with the Federal Reserve Bank.

Parent Company Liquidity

As of September 30, 2015, available parent company liquidity totaled $5.0 billion. Parent company liquidity is primarily held in 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.

Parent Company Liquidity – Uses

The parent company's contractual obligations consist primarily of debt service related to parent company borrowings and funding non-bank affiliates. As of September 30, 2015, there were approximately $1.9 billion of parent company borrowings with contractual maturities of less than one year. Additionally, the parent company maintains adequate liquidity to fund discretionary activities such as paying dividends to PNC shareholders, share repurchases, and acquisitions.

See Balance Sheet, Liquidity and Capital Highlights in the Executive Summary section of this Financial Review for information on our 2015 capital plan that was accepted by the

Federal Reserve. Our capital plan included a recommendation to increase the quarterly common stock dividend in the second quarter of 2015 and the ability to redeem the Series K Preferred Stock, as further described below, and also included share repurchase programs of up to $2.875 billion for the five quarter period beginning in the second quarter of 2015. See the Capital portion of the Consolidated Balance Sheet Review in this Financial Review for more information on our share repurchase programs, including detail on our first quarter repurchase of 4.4 million common shares for $.4 billion, our second quarter repurchase of 5.9 million common shares for $.6 billion and our third quarter repurchase of 6.2 million common shares for $.6 billion.

On April 2, 2015, consistent with our 2015 capital plan, our Board of Directors approved an increase to PNC's quarterly common stock dividend from 48 cents per common share to 51 cents per common share beginning with the May 5, 2015 dividend payment.

On May 4, 2015, we redeemed $500 million of PNC's Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series K, as well as all Depositary Shares representing interests therein. Each Depositary Share represented a 1/10 interest in a share of the Series K Preferred Stock. All 50,000 shares of Series K Preferred Stock, as well as all 500,000 Depositary Shares representing interests therein, were redeemed. The redemption price was $10,000 per share of Series K Preferred Stock equivalent to $1,000 per Depositary Share, plus declared and unpaid dividends up to but excluding the redemption date.

See the Supervision and Regulation section of Item 1 Business in our 2014 Form 10-K for additional information regarding the Federal Reserve's CCAR process and the factors the Federal Reserve takes into consideration in evaluating capital plans, qualitative and quantitative liquidity risk management standards proposed by the U.S. banking agencies, and final rules issued by the Federal Reserve that make certain modifications to the Federal Reserve's capital planning and stress testing rules.

See Table 38 for information on an affiliate purchase of notes issued by PNC Bank during 2015.

Parent Company Liquidity – Sources

The principal source of parent company liquidity is the dividends it receives from its subsidiary 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

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

payments by PNC Bank to the parent company without prior regulatory approval was approximately $1.6 billion at September 30, 2015. See Note 20 Regulatory Matters in our 2014 Form 10-K for a further discussion of these limitations. We provide additional information on certain contractual restrictions in Note 12 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities in our 2014 Form 10-K.

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. We have an effective shelf registration statement pursuant to which we can issue additional debt, equity and other capital instruments.

Total parent company senior and subordinated debt and hybrid capital instruments decreased to $8.2 billion at September 30, 2015 from $10.1 billion at December 31, 2014 due to the following activity in the period.

Table 41: Parent Company Senior and Subordinated Debt and Hybrid Capital Instruments

In billions 2015

January 1

$ 10.1

Maturities

(1.9

September 30

$ 8.2

The parent company has the ability to offer up to $5.0 billion of commercial paper to provide additional liquidity. As of September 30, 2015, there were no issuances outstanding under this program.

Status of Credit Ratings

The cost and availability of short-term and long-term funding, as well as collateral requirements for certain derivative instruments, is influenced by PNC's credit ratings.

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. In addition, rating agencies themselves have been subject to scrutiny arising from the most recent financial crisis and could make or be required to make substantial changes to their ratings policies and practices, particularly in response to legislative and regulatory changes. Potential changes in the legislative and regulatory environment and the timing of those changes could impact our ratings, which as noted above, could impact our liquidity and financial condition. 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.

In March 2015, Moody's Investors Service (Moody's) published a new bank ratings methodology which has been implemented on a global basis and includes assessment of expected loss ratings on instruments ranging from bank deposits to preferred stock. In the second quarter of 2015, Moody's concluded its review for PNC and PNC Bank under this new methodology. As a result, Moody's upgraded PNC Bank's long-term deposit rating three notches to Aa2, confirmed PNC Bank's senior debt and issuer ratings at A2, and confirmed PNC Bank's Prime-1 short-term notes rating. The Moody's rating outlook for PNC and PNC Bank is stable.

Table 42: Credit Ratings as of September 30, 2015 for PNC and PNC Bank

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

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

Commitments

The following tables set forth contractual obligations and various other commitments as of September 30, 2015 representing required and potential cash outflows.

Table 43: Contractual Obligations

Payment Due By Period
September 30, 2015 – in millions Total Less than one
year
One to three
years
Four to five
years
After five
years

Remaining contractual maturities of time deposits (a)

$ 20,882 $ 15,457 $ 1,608 $ 1,079 $ 2,738

Borrowed funds (a) (b)

56,663 12,039 21,912 13,938 8,774

Minimum annual rentals on noncancellable leases

2,713 380 656 488 1,189

Nonqualified pension and postretirement benefits

519 56 109 108 246

Purchase obligations (c)

879 449 252 143 35

Total contractual cash obligations

$ 81,656 $ 28,381 $ 24,537 $ 15,756 $ 12,982
(a) Includes purchase accounting adjustments.
(b) Includes basis adjustment relating to accounting hedges.
(c) Includes purchase obligations for goods and services covered by noncancellable contracts and contracts including cancellation fees.

At September 30, 2015, we had unrecognized tax benefits of $30 million, which represents a reserve for tax positions that we have taken in our tax returns which ultimately may not be sustained upon examination by taxing authorities. Since the ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty, this estimate has been excluded from the contractual obligations table. See Note 14 Income Taxes in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information.

Our contractual obligations totaled $82.0 billion at December 31, 2014. The slight decrease in the comparison is primarily attributable to a decrease in time deposits. See Funding Sources in the Consolidated Balance Sheet Review section of this Financial Review for additional information regarding our funding sources.

Table 44: Other Commitments (a)

Amount Of Commitment Expiration By Period
September 30, 2015 – in millions Total
Amounts
Committed
Less
than one
year
One to three
years
Four to five
years
After five
years

Commitments to extend credit (b)

$ 141,370 $ 54,016 $ 47,888 $ 38,908 $ 558

Net outstanding standby letters of credit (c)

9,112 4,433 3,728 925 26

Reinsurance agreements (d)

2,054 9 19 27 1,999

Standby bond purchase agreements

968 255 638 75

Other commitments (e)

990 735 224 31

Total commitments

$ 154,494 $ 59,448 $ 52,497 $ 39,966 $ 2,583
(a) Other commitments are funding commitments that could potentially require performance in the event of demands by third parties or contingent events. Loan commitments are reported net of syndications, assignments and participations.
(b) Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions.
(c) Includes $4.9 billion of standby letters of credit that support remarketing programs for customers' variable rate demand notes.
(d) Reinsurance agreements are with third-party insurers related to insurance sold to or placed on behalf of our customers. Balances represent estimates based on availability of financial information.
(e) Includes other commitments of $290 million that were not on our Consolidated Balance Sheet. The remaining $700 million of other commitments were included in Other liabilities on our Consolidated Balance Sheet.

Our total commitments were $154.9 billion at December 31, 2014. See Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information related to our commitments.

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

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 these limits and guidelines, and reporting significant risks in the business to the Risk Committee of the Board.

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.

Asset and Liability Management 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.

Sensitivity results and market interest rate benchmarks for the third quarters of 2015 and 2014 follow:

Table 45: Interest Sensitivity Analysis

Third
Quarter
2015
Third
Quarter
2014

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

2.7 2.8

100 basis point decrease

(.7 )%  (.6 )% 

Effect on net interest income in second year from gradual interest rate change over the preceding 12 months of:

100 basis point increase

6.4 7.0

100 basis point decrease

(5.3 )%  (3.2 )% 

Duration of Equity Model (a)

Base case duration of equity (in years)

(5.2 (3.3

Key Period-End Interest Rates

One-month LIBOR

.19 .16

Three-year swap

.98 1.30
(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 46 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 1-month and ten-year rates superimposed on current base rates) scenario.

Table 46: Net Interest Income Sensitivity to Alternative Rate Scenarios (Third Quarter 2015)

PNC

Economist

Market
Forward
Slope
Flattening

First year sensitivity

4.8 1.8 (1.0 )% 

Second year sensitivity

10.3 4.4 (4.9 )% 

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.

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 45 and 46 above. These simulations assume that as assets and liabilities mature, they are replaced or repriced at then current market rates. We also consider forward projections of purchase accounting accretion when forecasting net interest income.

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

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

Table 47: Alternate Interest Rate Scenarios: One Year Forward

The third quarter 2015 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 (CVA) 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. We calculate a diversified VaR at a 95% confidence interval. 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.

During the first nine months of 2015, our 95% VaR ranged between $1.4 million and $3.6 million, averaging $2.3 million. During the first nine months of 2014, our 95% VaR ranged between $.9 million and $3.9 million, averaging $2.5 million.

To help ensure the integrity of the models used to calculate VaR for each portfolio and enterprise-wide, we use a process known as backtesting. The backtesting process consists of comparing actual observations of gains or losses against the VaR levels that were calculated at the close of the prior day. This assumes that market exposures remain constant throughout the day and that recent historical market variability

is a good predictor of future variability. Our customer-related trading activity includes customer revenue and intraday hedging which helps to reduce losses, and may reduce the number of instances of actual losses exceeding the prior day VaR measure. There were six such instances during the first nine months of 2015 where actual losses exceeded the prior day VaR measure under our diversified VaR measure. In comparison, there were no such instances during the first nine months of 2014. We use a 500 day look back period for backtesting and include customer-related revenue.

The following graph shows a comparison of enterprise-wide gains and losses against prior day diversified VaR for the period indicated.

Table 48: Enterprise-Wide Gains/Losses Versus Value-at-Risk

Customer-related trading revenue increased to $155 million for the first nine months of 2015 compared with $130 million for the first nine months of 2014. This increase was primarily due to market interest rate changes impacting credit valuations for customer-related derivatives activities and improved derivatives client sales revenues.

Customer-related trading revenue increased to $53 million for the third quarter of 2015 compared with $46 million for the third quarter of 2014. This increase was primarily due to improved derivative client sales 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, and underwriting 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 and in debt and equity-oriented hedge funds. The economic and/or book value of these investments and other assets such as loan servicing rights are directly affected by changes in market factors.

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

The primary risk measurement for equity and other investments is economic capital. Economic capital is a common measure of risk for credit, market and operational risk. It is an estimate of the potential value depreciation over a one year horizon commensurate with solvency expectations of an institution rated single-A by the credit rating agencies. Given the illiquid nature of many of these types of investments, it can be a challenge to determine their fair values. See Note 7 Fair Value in the Notes To Consolidated Financial Statements in this Report and Note 7 Fair Value in our 2014 Form 10-K for additional information.

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 49: Equity Investments Summary

In millions September 30
2015
December 31
2014

BlackRock

$ 6,501 $ 6,265

Tax credit investments

2,171 2,616

Private equity

1,616 1,615

Visa

43 77

Other

166 155

Total

$ 10,497 $ 10,728

BlackRock

PNC owned approximately 35 million common stock equivalent shares of BlackRock equity at September 30, 2015, accounted for under the equity method. The primary risk measurement, similar to other equity investments, is economic capital. 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 partnerships which totaled $2.2 billion at September 30, 2015 and $2.6 billion at December 31, 2014. These equity investment balances include unfunded commitments totaling $616 million and $717 million at September 30, 2015 and December 31, 2014, 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 Part I, Item 1 of this Report has further information on Tax Credit Investments.

Private Equity

The private equity portfolio is an illiquid portfolio comprised of mezzanine and equity investments that vary by industry, stage and type of investment.

Private equity investments carried at estimated fair value totaled $1.6 billion at both September 30, 2015 and December 31, 2014. As of September 30, 2015, $1.2 billion was invested directly in a variety of companies and $.4 billion was invested indirectly through various private equity funds. Included in direct investments are investment activities of two private equity funds that are consolidated for financial reporting purposes. The noncontrolling interests of these funds totaled $157 million as of September 30, 2015. The interests held in indirect private equity funds are not redeemable, but PNC may receive distributions over the life of the partnership from liquidation of the underlying investments. See Item 1 Business – Supervision and Regulation and Item 1A Risk Factors included in our 2014 Form 10-K for discussion of the potential impacts of the Volcker Rule provisions of Dodd-Frank on our interests in and sponsorship of private funds covered by the Volcker Rule.

Our unfunded commitments related to private equity totaled $139 million at September 30, 2015 compared with $140 million at December 31, 2014.

Visa

Our 2014 Form 10-K includes information regarding the October 2007 Visa restructuring, our involvement with judgment and loss sharing agreements with Visa and certain other banks, the status of pending interchange litigation, the sales of portions of our Visa Class B common shares and the related swap agreements with the purchaser.

During the first nine months of 2015, we sold 1.5 million Visa Class B common shares, in addition to the 16.5 million shares sold in previous years. We have entered into swap agreements with the purchasers of the shares as part of these sales. At September 30, 2015, our investment in Visa Class B common shares totaled approximately 5.4 million shares and had a carrying value of $43 million. Based on the September 30, 2015 closing price of $69.66 for the Visa Class A common shares, the fair value of our total investment was approximately $616 million at the current conversion rate. The 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 settlement of all of the specified litigation.

Other Investments

We also make investments in affiliated and non-affiliated funds with both traditional and alternative investment strategies. The economic values could be driven by either the fixed-income market or the equity markets, or both. At September 30, 2015 other investments totaled $166 million compared with $155 million at December 31, 2014. Net gains related to these investments were not significant for the first nine months of 2015 and 2014.

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

Given the nature of these investments, if market conditions affecting their valuation were to worsen, we could incur future losses.

Our unfunded commitments related to other investments at September 30, 2015 and December 31, 2014 were not significant.

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 interest rate 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 7 Fair Value in our Notes To Consolidated Financial Statements under Item 8 of our 2014 Form 10-K and in Note 7 Fair Value and Note 11 Financial Derivatives in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report, which is incorporated here by reference.

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.

The following table summarizes the notional or contractual amounts and net fair value of financial derivatives at September 30, 2015 and December  31, 2014.

Table 50: Financial Derivatives Summary

September 30, 2015 December 31, 2014
In millions Notional/
Contractual
Amount
Net Fair
Value (a)
Notional/
Contractual
Amount
Net Fair
Value (a)

Derivatives designated as hedging instruments under GAAP

Total derivatives designated as hedging instruments

$ 52,710 $ 1,387 $ 49,061 $ 1,075

Derivatives not designated as hedging instruments under GAAP

Total derivatives used for residential mortgage banking activities

$ 91,020 $ 420 $ 76,102 $ 409

Total derivatives used for commercial mortgage banking activities

27,338 43 26,290 26

Total derivatives used for customer-related activities

190,090 149 183,474 122

Total derivatives used for other risk management activities

5,535 (357 5,390 (425

Total derivatives not designated as hedging instruments

$ 313,983 $ 255 $ 291,256 $ 132

Total Derivatives

$ 366,693 $ 1,642 $ 340,317 $ 1,207
(a) Represents the net fair value of assets and liabilities.

I NTERNAL C ONTROLS AND D ISCLOSURE C ONTROLS AND P ROCEDURES

As of September 30, 2015, 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 and Exchange Act of 1934) were effective as of September 30, 2015, and that there has been no change in PNC's internal control over financial reporting that occurred during the third quarter of 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

G LOSSARY OF T ERMS

Accretable net interest (Accretable yield) – The excess of cash flows expected to be collected on a purchased impaired loan over the carrying value of the loan. The accretable net interest is recognized into interest income over the remaining life of the loan using the constant effective yield method.

Adjusted average total assets – Primarily comprised of total average quarterly (or annual) assets plus (less) unrealized losses (gains) on investment securities, less goodwill and certain other intangible assets (net of eligible deferred taxes).

Annualized – Adjusted to reflect a full year of activity.

Basel III common equity Tier 1 capital – Common stock plus related surplus, net of treasury stock, plus retained earnings, plus accumulated other comprehensive income for securities currently and previously held as available for sale, plus accumulated other comprehensive income for pension and other postretirement benefit plans, less goodwill, net of associated deferred tax liabilities, less other disallowed intangibles, net of deferred tax liabilities and plus/less other adjustments.

Basel III common equity Tier 1 capital ratio – Common equity Tier 1 capital divided by period-end risk-weighted assets (as applicable).

Basel III Tier 1 capital – Common equity Tier 1 capital, plus preferred stock, plus certain trust preferred capital securities, plus certain noncontrolling interests that are held by others and plus/ less other adjustments.

Basel III Tier 1 capital ratio – Tier 1 capital divided by period-end risk-weighted assets (as applicable).

Basel III Total capital – Tier 1 capital plus qualifying subordinated debt, plus certain trust preferred securities, plus, under the Basel III transitional rules and the standardized approach, the allowance for loan and lease losses included in Tier 2 capital and other.

Basel III Total capital ratio – Total capital divided by period-end risk-weighted assets (as applicable).

Basis point – One hundredth of a percentage point.

Carrying value of purchased impaired loans – The net value on the balance sheet which represents the recorded investment less any valuation allowance.

Cash recoveries – Cash recoveries used in the context of purchased impaired loans represent cash payments for a single purchased impaired loan not included within a pool of loans from customers that exceeded the recorded investment of that loan.

Charge-off – Process of removing a loan or portion of a loan from our balance sheet because it is considered uncollectible. We also record a charge-off when a loan is transferred from portfolio holdings to held for sale by reducing the loan carrying amount to the fair value of the loan, if fair value is less than carrying amount.

Combined loan-to-value ratio (CLTV) – This is the aggregate principal balance(s) of the mortgages on a property divided by its appraised value or purchase price.

Common shareholders' equity to total assets – Common shareholders' equity divided by total assets. Common shareholders' equity equals total shareholders' equity less the liquidation value of preferred stock.

Core net interest income – Core net interest income is total net interest income less purchase accounting accretion.

Credit derivatives – Contractual agreements, primarily credit default swaps, that provide protection against a credit event of one or more referenced credits. The nature of a credit event is established by the protection buyer and protection seller at the inception of a transaction, and such events include bankruptcy, insolvency and failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic fee in return for a payment by the protection seller upon the occurrence, if any, of a credit event.

Credit spread – The difference in yield between debt issues of similar maturity. The excess of yield attributable to credit spread is often used as a measure of relative creditworthiness, with a reduction in the credit spread reflecting an improvement in the borrower's perceived creditworthiness.

Credit valuation adjustment (CVA) – Represents an adjustment to the fair value of our derivatives for our own and counterparties' non-performance risk.

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

Derivatives – Financial contracts whose value is derived from changes in publicly traded securities, interest rates, currency exchange rates or market indices. Derivatives cover a wide assortment of financial contracts, including but not limited to forward contracts, futures, options and swaps.

Discretionary client assets under management – Assets over which we have sole or shared investment authority for our customers/clients. We do not include these assets on our Consolidated Balance Sheet.

Duration of equity – An estimate of the rate sensitivity of our economic value of equity. A negative duration of equity is associated with asset sensitivity ( i.e. , positioned for rising interest rates), while a positive value implies liability sensitivity ( i.e. , positioned for declining interest rates). For example, if the duration of equity is -1.5 years, the economic value of equity increases by 1.5% for each 100 basis point increase in interest rates.

Earning assets – Assets that generate income, which include: federal funds sold; resale agreements; trading securities; interest-earning deposits with banks; loans held for sale; loans; investment securities; and certain other assets.

Effective duration – A measurement, expressed in years, that, when multiplied by a change in interest rates, would approximate the percentage change in value of on- and off- balance sheet positions.

Efficiency – Noninterest expense divided by total revenue.

Enterprise risk management framework – An enterprise process designed to identify potential risks that may affect PNC, manage risk to be within our risk appetite and provide reasonable assurance regarding achievement of our objectives.

Fair value – The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fee income – When referring to the components of Noninterest income, we use the term fee income to refer to the following categories within Noninterest income: Asset management; Consumer services; Corporate services; Residential mortgage; and Service charges on deposits.

FICO score – A credit bureau-based industry standard score created by Fair Isaac Co. which predicts the likelihood of borrower default. We use FICO scores both in underwriting and assessing credit risk in our consumer lending portfolio. Lower FICO scores indicate likely higher risk of default, while higher FICO scores indicate likely lower risk of default. FICO scores are updated on a periodic basis.

Foreign exchange contracts – Contracts that provide for the future receipt and delivery of foreign currency at previously agreed-upon terms.

Funds transfer pricing – A management accounting methodology designed to recognize the net interest income effects of sources and uses of funds provided by the assets and liabilities of a business segment. 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.

Futures and forward contracts – Contracts in which the buyer agrees to purchase and the seller agrees to deliver a specific financial instrument at a predetermined price or yield. May be settled either in cash or by delivery of the underlying financial instrument.

GAAP – Accounting principles generally accepted in the United States of America.

Home price index (HPI) – A broad measure of the movement of single-family house prices in the U.S.

Impaired loans – Loans are determined to be impaired when, based on current information and events, it is probable that all contractually required payments will not be collected. Impaired loans include commercial nonperforming loans and consumer and commercial TDRs, regardless of nonperforming status. Excluded from impaired loans are nonperforming leases, loans held for sale, loans accounted for under the fair value option, smaller balance homogenous type loans and purchased impaired loans.

Interest rate floors and caps – Interest rate protection instruments that involve payment from the protection seller to the protection buyer of an interest differential, which represents the difference between a short-term rate ( e.g. , three-month LIBOR) and an agreed-upon rate (the strike rate) applied to a notional principal amount.

Interest rate swap contracts – Contracts that are entered into primarily as an asset/liability management strategy to reduce interest rate risk. Interest rate swap contracts are exchanges of interest rate payments, such as fixed-rate payments for floating-rate payments, based on notional principal amounts.

Intrinsic value – The difference between the price, if any, required to be paid for stock issued pursuant to an equity compensation arrangement and the fair market value of the underlying stock.

Leverage ratio – Tier 1 capital divided by average quarterly adjusted total assets.

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

LIBOR – Acronym for London InterBank Offered Rate. LIBOR is the average interest rate charged when banks in the London wholesale money market (or interbank market) borrow unsecured funds from each other. LIBOR rates are used as a benchmark for interest rates on a global basis. PNC's product set includes loans priced using LIBOR as a benchmark.

Loan-to-value ratio (LTV) – A calculation of a loan's collateral coverage that is used both in underwriting and assessing credit risk in our lending portfolio. LTV is the sum total of loan obligations secured by collateral divided by the market value of that same collateral. Market values of the collateral are based on an independent valuation of the collateral. For example, a LTV of less than 90% is better secured and has less credit risk than a LTV of greater than or equal to 90%.

Loss given default (LGD) An estimate of loss, net of recovery based on collateral type, collateral value, loan exposure, and other factors. Each loan has its own LGD. The LGD risk rating measures the percentage of exposure of a specific credit obligation that we expect to lose if default occurs. LGD is net of recovery, through any means, including

but not limited to the liquidation of collateral or deficiency judgments rendered from foreclosure or bankruptcy proceedings.

Net interest margin – Annualized taxable-equivalent net interest income divided by average earning assets.

Nonaccretable difference – Contractually required payments receivable on a purchased impaired loan in excess of the cash flows expected to be collected.

Nonaccrual loans – Loans for which we do not accrue interest income. Nonaccrual loans include nonperforming loans, in addition to loans accounted for under fair value option and loans accounted for as held for sale for which full collection of contractual principal and/or interest is not probable.

Nondiscretionary client assets under administration – Assets we hold for our customers/clients in a nondiscretionary, custodial capacity. We do not include these assets on our Consolidated Balance Sheet.

Nonperforming assets – Nonperforming assets include nonperforming loans and OREO and foreclosed assets, but exclude certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. We do not accrue interest income on assets classified as nonperforming.

Nonperforming loans – Loans accounted for at amortized cost for which we do not accrue interest income. Nonperforming loans include loans to commercial, commercial real estate,

equipment lease financing, home equity, residential real estate, credit card and other consumer customers as well as TDRs which have not returned to performing status. Nonperforming loans exclude certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. Nonperforming loans exclude purchased impaired loans as we are currently accreting interest income over the expected life of the loans.

Notional amount – A number of currency units, shares, or other units specified in a derivative contract.

Operating leverage – The period to period dollar or percentage change in total revenue (GAAP basis) less the dollar or percentage change in noninterest expense. A positive variance indicates that revenue growth exceeded expense growth ( i.e. , positive operating leverage) while a negative variance implies expense growth exceeded revenue growth ( i.e. , negative operating leverage).

Options – Contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to either purchase or sell the associated financial instrument at a set price during a specified period or at a specified date in the future.

Other real estate owned (OREO) and foreclosed assets – Assets taken in settlement of troubled loans primarily through deed-in-lieu of foreclosure or foreclosure. Foreclosed assets include real and personal property, equity interests in corporations, partnerships, and limited liability companies. Excludes certain assets that have a government-guarantee which are classified as other receivables.

Other-than-temporary impairment (OTTI) – When the fair value of a security is less than its amortized cost basis, an assessment is performed to determine whether the impairment is other-than-temporary. If we intend to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, an other-than-temporary impairment is considered to have occurred. In such cases, an other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. Further, if we do not expect to recover the entire amortized cost of the security, an other-than-temporary impairment is considered to have occurred. However for debt securities, if we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before its recovery, the other-than-temporary loss is separated into (a) the amount representing the credit loss, and (b) the amount related to all other factors. The other-than-temporary impairment related to credit losses is recognized in earnings while the amount related to all other factors is recognized in other comprehensive income, net of tax.

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

Parent company liquidity coverage – Liquid assets divided by funding obligations within a two year period.

Pretax earnings – Income before income taxes and noncontrolling interests.

Pretax, pre-provision earnings – Total revenue less noninterest expense.

Primary client relationship – A corporate banking client relationship with annual revenue generation of $10,000 to $50,000 or more, and for Asset Management Group, a client relationship with annual revenue generation of $10,000 or more.

Probability of default (PD) – An internal risk rating that indicates the likelihood that a credit obligor will enter into default status.

Purchase accounting accretion – Accretion of the discounts and premiums on acquired assets and liabilities. The purchase accounting accretion is recognized in net interest income over

the weighted-average life of the financial instruments using the constant effective yield method. Accretion for a single purchased impaired loan not included within a pool of loans includes any cash recoveries on that loan received in excess of the recorded investment.

Purchased impaired loans – Acquired loans (or pools of loans) determined to be credit impaired under FASB ASC 310-30 (AICPA SOP 03-3). Loans (or pools of loans) are determined to be impaired if there is evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected.

Recorded investment (purchased impaired loans) – The initial investment of a purchased impaired loan plus interest accretion and less any cash payments and writedowns to date. The recorded investment excludes any valuation allowance which is included in our allowance for loan and lease losses.

Recovery – Cash proceeds received on a loan that we had previously charged off. We credit the amount received to the allowance for loan and lease losses.

Residential development loans – Project-specific loans to commercial customers for the construction or development of residential real estate including land, single family homes, condominiums and other residential properties.

Return on average assets – Annualized net income divided by average assets.

Return on average capital – Annualized net income divided by average capital.

Return on average common shareholders' equity – Annualized net income attributable to common shareholders divided by average common shareholders' equity.

Risk – The potential that an event or series of events could occur that would threaten PNC's ability to achieve its strategic objectives, thereby negatively affecting shareholder value or reputation.

Risk appetite – A dynamic, forward-looking view on the aggregate amount of risk PNC is willing and able to take in executing business strategy in light of the current business environment.

Risk limits – Quantitative measures based on forward looking assumptions that allocate the firm's aggregate risk appetite ( e.g. measure of loss or negative events) to business lines, legal entities, specific risk categories, concentrations and as appropriate, other levels.

Risk profile – The risk profile is a point-in-time assessment of risk. The profile represents overall risk position in relation to the desired risk appetite. The determination of the risk profile's position is based on qualitative and quantitative analysis of reported risk limits, metrics, operating guidelines and qualitative assessments.

Risk-weighted assets – Computed by the assignment of specific risk-weights (as defined by the Board of Governors of the Federal Reserve System) to assets and off-balance sheet instruments.

Securitization – The process of legally transforming financial assets into securities.

Servicing rights – An intangible asset or liability created by an obligation to service assets for others. Typical servicing rights include the right to receive a fee for collecting and forwarding payments on loans and related taxes and insurance premiums held in escrow.

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

Swaptions – Contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to enter into an interest rate swap agreement during a specified period or at a specified date in the future.

Taxable-equivalent interest – The interest income earned on certain 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 yields and margins for all interest-earning assets, 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 other taxable investments. This adjustment is not permitted under GAAP on the Consolidated Income Statement.

Total equity – Total shareholders' equity plus noncontrolling interests.

Total return swap – A non-traditional swap where one party agrees to pay the other the "total return" of a defined underlying asset ( e.g., a loan), usually in return for receiving a stream of LIBOR-based cash flows. The total returns of the asset, including interest and any default shortfall, are passed through to the counterparty. The counterparty is, therefore, assuming the credit and economic risk of the underlying asset.

Transaction deposits – The sum of interest-bearing money market deposits, interest-bearing demand deposits, and noninterest-bearing deposits.

Transitional Basel III common equity – Common equity calculated under Basel III using phased in definitions and deductions applicable to PNC during the applicable presentation period.

Troubled debt restructuring (TDR) – A loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties.

Value-at-risk (VaR) – A statistically-based measure of risk that describes the amount of potential loss which may be incurred due to adverse market movements. The measure is of the maximum loss which should not be exceeded on 95 out of 100 days for a 95% VaR.

Watchlist – A list of criticized loans, credit exposure or other assets compiled for internal monitoring purposes. We define criticized exposure for this purpose as exposure with an internal risk rating of other assets especially mentioned, substandard, doubtful or loss.

Yield curve – A graph showing the relationship between the yields on financial instruments or market indices of the same credit quality with different maturities. For example, a "normal" or "positive" yield curve exists when long-term bonds have higher yields than short-term bonds. A "flat" yield curve exists when yields are the same for short-term and long-term bonds. A "steep" yield curve exists when yields on long-term bonds are significantly higher than on short-term bonds. An "inverted" or "negative" yield curve exists when short-term bonds have higher yields than long-term bonds.

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

C AUTIONARY S TATEMENT R EGARDING F ORWARD -L OOKING I NFORMATION

We make statements in this Report, and we may from time to time make other statements, regarding our outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting PNC and its 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 and do not undertake 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.

The impact on financial markets and the economy of any changes in the credit ratings of U.S. Treasury obligations and other U.S. government-backed debt, as well as issues surrounding the levels of U.S. and European government debt and concerns regarding the creditworthiness of certain sovereign governments, supranationals and financial institutions in Europe.

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

Changes in customers', suppliers' and other counterparties' performance and creditworthiness.

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

Continued residual effects of recessionary conditions and uneven spread of positive impacts of recovery on the economy and our counterparties, including adverse impacts on levels of unemployment, loan utilization rates, delinquencies, defaults and counterparty ability to meet credit and other obligations.

Changes in customer preferences and behavior, whether due to changing business and economic

conditions, legislative and regulatory initiatives, or other factors.

Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than we are currently expecting. These statements are based on our current view that the U.S. economic expansion will speed up to an above trend growth rate near 2.5 percent in the fourth quarter of 2015, boosted by lower oil/energy prices and solid job gains, and that short-term interest rates and bond yields will rise slowly during the remainder of 2015. These forward-looking statements also do not, unless otherwise indicated, take into account the impact of potential legal and regulatory contingencies.

PNC's ability to take certain capital actions, including paying dividends and any plans to increase common stock dividends, repurchase common stock under current or future programs, or issue or redeem preferred stock or other regulatory capital instruments, is subject to the review of such proposed actions by the Federal Reserve as part of PNC's comprehensive capital plan for the applicable period in connection with the regulators' Comprehensive Capital Analysis and Review (CCAR) process and to the acceptance of such capital plan and non-objection to such capital actions by the Federal Reserve.

PNC's 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 Basel Capital Accords), and management actions affecting the composition of PNC's balance sheet. In addition, PNC's 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 major reform of the regulatory oversight structure of the financial services industry and changes to laws and regulations involving tax, pension, bankruptcy, consumer protection, and other industry aspects, and changes in accounting policies and principles. We will be impacted by extensive reforms provided for in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and otherwise growing out of the most recent financial crisis, the precise nature, extent and

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

timing of which, and their impact on us, remains uncertain.

Changes to regulations governing bank capital and liquidity standards, including due to the Dodd-Frank Act and to Basel-related initiatives.

Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries. In addition to matters relating to PNC's current and historical business and activities, such matters may include proceedings, claims, investigations, or inquiries relating to pre-acquisition business and activities of acquired companies, such as National City. 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 PNC.

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 third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards. In particular, our results currently depend on our ability to manage elevated levels of impaired assets.

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 by acquiring from time to time other financial services companies, financial services assets and related deposits and other liabilities. 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. Industry restructuring in the current environment could also impact our business and financial performance through changes in counterparty creditworthiness and performance and in the competitive and regulatory landscape. 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, 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 2014 10-K, in our first and second quarter 2015 Form 10-Qs, and elsewhere in this Report, including in the Risk Factors and Risk Management sections and the Legal Proceedings and Commitments and Guarantees Notes of the Notes To Consolidated Financial Statements in such 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 55

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 2015 2014 2015 2014

Interest Income

Loans

$ 1,804 $ 1,848 $ 5,397 $ 5,592

Investment securities

423 387 1,236 1,226

Other

114 93 332 276

Total interest income

2,341 2,328 6,965 7,094

Interest Expense

Deposits

107 81 297 239

Borrowed funds

172 143 482 427

Total interest expense

279 224 779 666

Net interest income

2,062 2,104 6,186 6,428

Noninterest Income

Asset management

376 411 1,168 1,137

Consumer services

341 320 986 933

Corporate services

384 374 1,097 1,018

Residential mortgage

125 140 453 483

Service charges on deposits

172 179 481 482

Net gains (losses) on sales of securities

(9 41 4

Other

324 313 960 943

Total noninterest income

1,713 1,737 5,186 5,000

Total revenue

3,775 3,841 11,372 11,428

Provision For Credit Losses

81 55 181 221

Noninterest Expense

Personnel

1,222 1,189 3,579 3,441

Occupancy

209 200 634 617

Equipment

227 220 680 625

Marketing

64 66 193 186

Other

630 682 1,981 2,080

Total noninterest expense

2,352 2,357 7,067 6,949

Income before income taxes and noncontrolling interests

1,342 1,429 4,124 4,258

Income taxes

269 391 1,003 1,108

Net income

1,073 1,038 3,121 3,150

Less: Net income (loss) attributable to noncontrolling interests

18 1 23 2

Preferred stock dividends and discount accretion and redemptions

64 71 182 189

Net income attributable to common shareholders

$ 991 $ 966 $ 2,916 $ 2,959

Earnings Per Common Share

Basic

$ 1.93 $ 1.82 $ 5.64 $ 5.55

Diluted

1.90 1.79 5.52 5.45

Average Common Shares Outstanding

Basic

512 529 516 531

Diluted

520 537 525 539

See accompanying Notes To Consolidated Financial Statements.

56     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
2015 2014 2015 2014

Net income

$ 1,073 $ 1,038 $ 3,121 $ 3,150

Other comprehensive income (loss), before tax and net of reclassifications into Net income:

Net unrealized gains (losses) on non-OTTI securities

154 (132 (137 269

Net unrealized gains (losses) on OTTI securities

4 15 11 122

Net unrealized gains (losses) on cash flow hedge derivatives

234 (81 303 (5

Pension and other postretirement benefit plan adjustments

7 (2 57 89

Other

(1 (12 (37 (5

Other comprehensive income (loss), before tax and net of reclassifications into Net income

398 (212 197 470

Income tax benefit (expense) related to items of other comprehensive income

(162 58 (85 (179

Other comprehensive income (loss), after tax and net of reclassifications into Net income

236 (154 112 291

Comprehensive income

1,309 884 3,233 3,441

Less: Comprehensive income (loss) attributable to noncontrolling interests

18 1 23 2

Comprehensive income attributable to PNC

$ 1,291 $ 883 $ 3,210 $ 3,439

See accompanying Notes To Consolidated Financial Statements.

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

CONSOLIDATED BALANCE SHEET

THE PNC FINANCIAL SERVICES GROUP, INC.

Unaudited

In millions, except par value

September 30
2015
December 31
2014

Assets

Cash and due from banks (includes $5 and $6 for VIEs) (a)

$ 3,835 $ 4,360

Federal funds sold and resale agreements (includes $139 and $155 measured at fair value) (b)

1,534 1,852

Trading securities

1,901 2,353

Interest-earning deposits with banks (includes $5 and $6 for VIEs) (a)

34,224 31,779

Loans held for sale (includes $1,888 and $2,154 measured at fair value) (b)

2,060 2,262

Investment securities

68,066 55,823

Loans (includes $1,354 and $1,606 for VIEs) (a) (includes $915 and $1,034 measured at fair value) (b)

204,983 204,817

Allowance for loan and lease losses (includes $(43) and $(50) for VIEs) (a)

(3,237 (3,331

Net loans

201,746 201,486

Goodwill

9,103 9,103

Mortgage servicing rights

1,467 1,351

Other intangible assets

407 493

Equity investments (includes $114 and $492 for VIEs) (a)

10,497 10,728

Other (includes $468 and $483 for VIEs) (a) (includes $349 and $412 measured at fair value) (b)

27,285 23,482

Total assets

$ 362,125 $ 345,072

Liabilities

Deposits

Noninterest-bearing

$ 78,239 $ 73,479

Interest-bearing

166,740 158,755

Total deposits

244,979 232,234

Borrowed funds

Federal funds purchased and repurchase agreements

2,077 3,510

Federal Home Loan Bank borrowings

21,664 20,005

Bank notes and senior debt

19,749 15,750

Subordinated debt

9,242 9,151

Commercial paper

1,125 4,995

Other (includes $207 and $347 for VIEs) (a) (includes $136 and $273 measured at fair value) (b)

2,806 3,357

Total borrowed funds

56,663 56,768

Allowance for unfunded loan commitments and letters of credit

266 259

Accrued expenses (includes $55 and $70 for VIEs) (a)

5,185 5,187

Other (includes $95 and $206 for VIEs) (a)

8,754 4,550

Total liabilities

315,847 298,998

Equity

Preferred stock (c)

Common stock ($5 par value, authorized 800 shares, issued 542 and 541 shares)

2,708 2,705

Capital surplus – preferred stock

3,450 3,946

Capital surplus – common stock and other

12,675 12,627

Retained earnings

28,337 26,200

Accumulated other comprehensive income (loss)

615 503

Common stock held in treasury at cost: 32 and 18 shares

(2,837 (1,430

Total shareholders' equity

44,948 44,551

Noncontrolling interests

1,330 1,523

Total equity

46,278 46,074

Total liabilities and equity

$ 362,125 $ 345,072
(a) Amounts represent the assets or liabilities of consolidated variable interest entities (VIEs).
(b) Amounts represent items for which we have elected the fair value option.
(c) Par value less than $.5 million at each date.

See accompanying Notes To Consolidated Financial Statements.

58     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
2015 2014

Operating Activities

Net income

$ 3,121 $     3,150

Adjustments to reconcile net income to net cash provided (used) by operating activities

Provision for credit losses

181 221

Depreciation and amortization

802 724

Deferred income taxes

128 50

Net gains on sales of securities

(41 (4

Changes in fair value of mortgage servicing rights

297 308

Gain on sales of Visa Class B common shares

(122 (173

Undistributed earnings of BlackRock

(292 (334

Excess tax benefits from share-based payment arrangements

(33 (23

Net change in

Trading securities and other short-term investments

165 628

Loans held for sale

(86 (220

Other assets

(2,415 170

Accrued expenses and other liabilities

2,280 332

Other

(385 (249

Net cash provided (used) by operating activities

3,600 4,580

Investing Activities

Sales

Securities available for sale

3,341 3,564

Loans

1,613 1,866

Repayments/maturities

Securities available for sale

6,013 5,349

Securities held to maturity

1,541 1,648

Purchases

Securities available for sale

(17,546 (5,057

Securities held to maturity

(3,735

Loans

(564 (544

Net change in

Federal funds sold and resale agreements

317 222

Interest-earning deposits with banks

(2,445 (14,112

Loans

(1,502 (7,206

Other

(567 (277

Net cash provided (used) by investing activities

(13,534 (14,547

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

(continued on following page)

CONSOLIDATED STATEMENT OF CASH FLOWS

THE PNC FINANCIAL SERVICES GROUP, INC.

(continued from previous page)

Unaudited

In millions

Nine months ended
September 30
2015 2014

Financing Activities

Net change in

Noninterest-bearing deposits

$   4,772 $   2,672

Interest-bearing deposits

7,985 2,716

Federal funds purchased and repurchase agreements

(1,433 (789

Commercial paper

(2 (268

Other borrowed funds

276 (156

Sales/issuances

Federal Home Loan Bank borrowings

2,250 10,150

Bank notes and senior debt

6,428 4,933

Subordinated debt

745

Commercial paper

1,394 6,737

Other borrowed funds

613 470

Common and treasury stock

130 203

Repayments/maturities

Federal Home Loan Bank borrowings

(591 (6,591

Bank notes and senior debt

(2,629 (2,194

Subordinated debt

57 34

Commercial paper

(5,262 (6,657

Other borrowed funds

(1,557 (374

Preferred stock redemption

(500

Excess tax benefits from share-based payment arrangements

33 23

Acquisition of treasury stock

(1,598 (633

Preferred stock cash dividends paid

(178 (185

Common stock cash dividends paid

(779 (748

Net cash provided (used) by financing activities

9,409 10,088

Net Increase (Decrease) In Cash And Due From Banks

(525 121

Cash and due from banks at beginning of period

4,360 4,043

Cash and due from banks at end of period

$ 3,835 $   4,164

Supplemental Disclosures

Interest paid

$ 764 $      627

Income taxes paid

527 689

Income taxes refunded

2 9

Non-cash Investing and Financing Items

Transfer from (to) loans to (from) loans held for sale, net

153 485

Transfer from loans to foreclosed assets

340 465

See accompanying Notes To Consolidated Financial Statements.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

T HE PNC F INANCIAL S ERVICES G ROUP , I NC .

B USINESS

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

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

N OTE 1 A CCOUNTING P OLICIES

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, and 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 2015 presentation, which did not have a material impact on our consolidated financial condition or results of operations. Additionally, we evaluate the materiality of identified errors in the financial statements using both an income statement and a balance sheet approach, based on relevant quantitative and qualitative factors. The consolidated financial statements include certain adjustments to correct immaterial errors related to previously reported periods.

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.

When preparing these unaudited interim consolidated financial statements, we have assumed that you have read the audited consolidated financial statements included in our 2014 Annual Report on Form 10-K. Reference is made to Note 1 Accounting Policies in the 2014 Form 10-K for a detailed description of significant accounting policies. Included herein are policies that are required to be disclosed on an interim basis as well as policies where there has been a significant change within the first nine months of 2015. These interim consolidated financial statements serve to update the 2014 Form 10-K and may not include all information and notes necessary to constitute a complete set of financial statements.

We have also considered the impact of subsequent events on these consolidated 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, allowances for loan and lease losses and unfunded loan commitments and letters of credit, and accretion on purchased impaired loans. Actual results may differ from the estimates and the differences may be material to the consolidated financial statements.

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

Nonperforming Loans and Leases

The matrix below summarizes PNC's policies for classifying certain loans as nonperforming loans and/or discontinuing the accrual of loan interest income.

Commercial loans
Loans Classified as Nonperforming and Accounted for as Nonaccrual

•      Loans accounted for at amortized cost where:

–          The loan is 90 days or more past due.

–          The loan is rated substandard or worse due to the determination that full collection of principal and interest is not probable as demonstrated by the following conditions:

•          The collection of principal or interest is 90 days or more past due;

•          Reasonable doubt exists as to the certainty of the borrower's future debt service ability, according to the terms of the credit arrangement, regardless of whether 90 days have passed or not;

•          The borrower has filed or will likely file for bankruptcy;

•          The bank advances additional funds to cover principal or interest;

•          We are in the process of liquidating a commercial borrower; or

•          We are pursuing remedies under a guarantee.

Loans Excluded from Nonperforming Classification but Accounted for as Nonaccrual

•          Loans accounted for under the fair value option and full collection of principal and interest is not probable.

•          Loans accounted for at the lower of cost or market less costs to sell (Held for Sale) and full collection of principal and interest is not probable.

Loans Excluded from Nonperforming Classification and Nonaccrual Accounting

•          Purchased impaired loans because interest income is accreted by nature of the accounting for these assets.

•          Loans that are well secured and in the process of collection.

Consumer loans
Loans Classified as Nonperforming and Accounted for as Nonaccrual

•          Loans accounted for at amortized cost where full collection of contractual principal and interest is not deemed probable as demonstrated in the policies below:

–          The loan is 90 days past due for home equity and installment loans, and 180 days past due for well secured residential real estate loans;

–          The loan has been modified and classified as a troubled debt restructuring (TDR);

–          Notification of bankruptcy has been received and the loan is 30 days or more past due;

–          The bank holds a subordinate lien position in the loan and the first lien loan is seriously stressed (i.e., 90 days or more past due);

–          Other loans within the same borrower relationship have been placed on nonaccrual or charge-offs have been taken on them;

–          The bank has repossessed non-real estate collateral securing the loan; or

–          The bank has charged-off the loan to the value of the collateral.

Loans Excluded from Nonperforming Classification but Accounted for as Nonaccrual

•          Loans accounted for under the fair value option and full collection of principal and interest is not probable.

•          Loans accounted for at the lower of cost or market less costs to sell (Held for Sale) and full collection of principal and interest is not probable.

Loans Excluded from Nonperforming Classification and Nonaccrual Accounting

•          Purchased impaired loans because interest income is accreted through the accounting model.

•          Certain government insured loans where substantially all principal and interest is insured.

•          Residential real estate loans that are well secured and in the process of collection.

•          Consumer loans and lines of credit, not secured by residential real estate, as permitted by regulatory guidance.

See Note 3 Asset Quality in this Report for additional detail on nonperforming assets and asset quality indicators for commercial and consumer loans.

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

Commercial Loans

We generally charge off Commercial Lending (Commercial, Commercial Real Estate, and Equipment Lease Financing) nonperforming loans when we determine that a specific loan, or portion thereof, is uncollectible. This determination is based on the specific facts and circumstances of the individual loans. In making this determination, we consider the viability of the business or project as a going concern, the past due status when the asset is not well-secured, the expected cash flows to repay the loan, the value of the collateral, and the ability and willingness of any guarantors to perform.

Additionally, in general, for smaller dollar commercial loans of $1 million or less, a partial or full charge-off occurs at 120 days past due for term loans and 180 days past due for revolvers. Certain small business credit card balances that are placed on nonaccrual status when they become 90 days or more past due are charged-off at 180 days past due.

Consumer Loans

Home equity installment loans, home equity lines of credit, and residential real estate loans that are not well-secured and in the process of collection are charged-off at no later than 180 days past due. At that time, the basis in the loan is reduced to the fair value of the collateral less costs to sell. In addition to this policy, the bank recognizes a charge-off on a secured consumer loan when:

The bank holds a subordinate lien position in the loan and a foreclosure notice has been received on the first lien loan;

The bank holds a subordinate lien position in the loan which is 30 days or more past due with a combined loan to value ratio of greater than or equal to 110% and the first lien loan is seriously stressed ( i.e ., 90 days or more past due);

The loan is modified or otherwise restructured in a manner that results in the loan becoming collateral dependent;

Notification of bankruptcy has been received within the last 60 days and the loan is 60 days or more past due;

The borrower has been discharged from personal liability through Chapter 7 bankruptcy and has not formally reaffirmed his or her loan obligation to PNC; or

The collateral securing the loan has been repossessed and the value of the collateral is less than the recorded investment of the loan outstanding.

For loans that continue to meet any of the above policies, collateral values are updated annually and subsequent declines in collateral values are charged-off resulting in incremental provision for credit loss.

Most consumer loans and lines of credit, not secured by residential real estate, are charged off after 120-180 days past due.

Accounting for Nonperforming Loans and Leases and Other Nonaccrual Loans

For accrual loans, interest income is accrued on a monthly basis and certain fees and costs are deferred upon origination and recognized in income over the term of the loan utilizing an effective yield method. For nonaccrual loans, interest income accrual and deferred fee/cost amortization is discontinued. Additionally, the current year accrued and uncollected interest is reversed through Net interest income and prior year accrued and uncollected interest is charged-off. Nonaccrual loans may also be charged-off to reduce the basis to the fair value of collateral less costs to sell.

If payment is received on a nonaccrual loan, generally the payment is first applied to the recorded investment; payments are then applied to recover any charged-off amounts related to the loan. Finally, if both recorded investment and any charge-offs have been recovered, then the payment will be recorded as fee and interest income.

For TDRs, payments are applied based upon their contractual terms unless the related loan is deemed non-performing. TDRs are generally included in nonperforming and nonaccrual loans until returned to performing/accruing status through performance under restructured terms and other performance indicators for a reasonable period of time demonstrating that the bank expects to collect all of the loan's remaining contractual principal and interest. TDRs resulting from 1) borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and 2) borrowers that are not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

Other nonaccrual loans are generally not returned to accrual status until the borrower has performed in accordance with the contractual terms and other performance indicators for at least six months, the period of time which was determined to demonstrate the expected collection of the loan's remaining contractual principal and interest. When a nonperforming loan is returned to accrual status, it is then considered a performing loan.

See Note 3 Asset Quality and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in this Report and in our 2014 Form 10-K for additional TDR information.

Allowance f or Loan and Lease Losses

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 portfolios as of the balance sheet date. Our determination of the allowance is based on periodic evaluations of these loan and lease portfolios and other relevant factors. This critical estimate includes significant use

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

of PNC's own historical data and complex methods to interpret this data. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change, and include, among others:

Probability of default (PD),

Loss given default (LGD),

Outstanding balance of the loan,

Movement through delinquency stages,

Amounts and timing of expected future cash flows,

Value of collateral, which may be obtained from third parties, and

Qualitative factors, such as changes in current economic conditions, that may not be reflected in modeled results.

For all loans, except purchased impaired loans, the ALLL is the sum of three components: (i) asset specific/individual impaired reserves, (ii) quantitative (formulaic or pooled) reserves and (iii) qualitative (judgmental) reserves.

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 portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.

Asset Specific/Individual Component

Nonperforming loans that are considered impaired under ASC 310 – Receivables, which include all commercial and consumer TDRs, are evaluated for a specific reserve. Specific reserve allocations are determined as follows:

For commercial nonperforming loans and commercial TDRs greater than or equal to a defined dollar threshold, specific reserves are based on an analysis of the present value of the loan's expected future cash flows, the loan's observable market price or the fair value of the collateral.

For commercial nonperforming loans and commercial TDRs below the defined dollar threshold, the individual loan's loss given default (LGD) percentage is multiplied by the loan balance and the results are aggregated for purposes of measuring specific reserve impairment.

Consumer nonperforming loans are collectively reserved for unless classified as consumer TDRs. For consumer TDRs, specific reserves are determined through an analysis of the present value of the loan's expected future cash flows, except for those instances where loans have been deemed collateral dependent, including loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC. Once that determination has been made, those TDRs are charged down to the fair value of the collateral less costs to sell at each period end.

Commercial Lending Quantitative Component

The estimates of the quantitative component of ALLL for incurred losses within the commercial lending portfolio segment are determined through statistical loss modeling utilizing PD, LGD and outstanding balance of the loan. Based upon loan risk ratings, we assign PDs and LGDs. Each of these statistical parameters is determined based on internal historical data and market data. PD is influenced by such factors as liquidity, industry, obligor financial structure, access to capital and cash flow. LGD is influenced by collateral type, original and/or updated loan-to-value ratio (LTV), facility structure and other factors.

Consumer Lending Quantitative Component

Quantitative estimates within the consumer lending portfolio segment are calculated primarily using a roll-rate model based on statistical relationships, calculated from historical data that estimate the movement of loan outstandings through the various stages of delinquency and ultimately charge-off over our loss emergence period.

Qualitative Component

While our reserve methodologies strive to reflect all relevant risk factors, there continues to be uncertainty associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal variations between estimates and actual outcomes. We provide additional reserves that are designed to provide coverage for losses attributable to such risks. The ALLL also includes factors that may not be directly measured in the determination of specific or pooled reserves. Such qualitative factors may include:

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.

Allowance for Purchased Non-Impaired Loans

ALLL for purchased non-impaired loans is determined based upon a comparison between the methodologies described above and the remaining acquisition date fair value discount that has yet to be accreted into interest income. After making the comparison, an ALLL is recorded for the amount greater than the discount, or no ALLL is recorded if the discount is greater.

Allowance for Purchased Impaired Loans

ALLL for purchased impaired loans is determined in accordance with ASC 310-30 by comparing the net present value of the cash flows expected to be collected to the recorded investment for a given loan (or pool of loans). In cases where the net present value of expected cash flows is

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

lower than the recorded investment, ALLL is established. Cash flows expected to be collected represent management's best estimate of the cash flows expected over the life of a loan (or pool of loans). For large balance commercial loans, cash flows are separately estimated at the loan level. For smaller balance pooled loans, pool cash flows are estimated using cash flow models. Pools were defined at acquisition based on the risk characteristics of the loan. Our cash flow models use loan data including, but not limited to, contractual loan balance, delinquency status of the loan, updated borrower FICO credit scores, geographic information, historical loss experience, and updated LTVs, as well as best estimates for changes in unemployment rates, home prices and other economic factors, to determine estimated cash flows.

See Note 4 Purchased Loans and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional loan data and application of the policies disclosed herein.

Our credit risk management policies, procedures and practices are designed to promote sound lending standards and prudent credit risk management. We have policies, procedures and practices that address financial statement requirements, collateral review and appraisal requirements, advance rates based upon collateral types, appropriate levels of exposure, cross-border risk, lending to specialized industries or borrower type, guarantor requirements, and regulatory compliance.

Allowance for Unfunded Loan Commitments and Letters of Credit

We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable credit losses incurred on these unfunded credit facilities as of the balance sheet date. We determine the allowance based on periodic evaluations of the unfunded credit facilities, including an assessment of the probability of commitment usage, credit risk factors, and, solely for commercial lending, the terms and expiration dates of the unfunded credit facilities. Other than the estimation of the probability of funding, the reserve for unfunded loan commitments is estimated in a manner similar to the methodology used for determining reserves for funded exposures. The allowance for unfunded loan commitments and letters of credit is recorded as a liability on the Consolidated Balance Sheet. Net adjustments to the allowance for unfunded loan commitments and letters of credit are included in the provision for credit losses.

See Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional loan data and application of the policies disclosed herein.

Earnings Per Common Share

Basic earnings per common share is calculated using the two-class method to determine income attributable to common shareholders. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities under the two-class method. Income attributable to common shareholders is then divided by the weighted-average common shares outstanding for the period.

Diluted earnings per common share is calculated under the more dilutive of either the treasury method or the two-class method. For the diluted calculation, we increase the weighted-average number of shares of common stock outstanding by the assumed conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance, if later, and the number of shares of common stock that would be issued assuming the exercise of stock options and warrants and the issuance of incentive shares using the treasury stock method. These adjustments to the weighted-average number of shares of common stock outstanding are made only when such adjustments will dilute earnings per common share. See Note 12 Earnings Per Share for additional information.

Recently Adopted Accounting Standards

We did not adopt any new accounting standards during the third quarter of 2015.

N OTE 2 L OAN S ALE AND S ERVICING A CTIVITIES AND V ARIABLE I NTEREST E NTITIES

Loan Sale and Servicing Activities

As more fully described in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2014 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 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 PNC retains the servicing, we recognize a servicing right at fair value. See Note 8 Goodwill and Other Intangible Assets for information on our servicing rights, including the carrying value of servicing assets.

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

The following table provides cash flows associated with PNC's loan sale and servicing activities:

Table 51: Cash Flows Associated with Loan Sale and Servicing Activities

In millions Residential
Mortgages
Commercial
Mortgages (a)
Home Equity
Loans/Lines (b)

CASH FLOWS – Three months ended September 30, 2015

Sales of loans (c)

$ 2,329 $ 846

Repurchases of previously transferred loans (d)

129 $ 90

Servicing fees (e)

84 35 4

Servicing advances recovered/(funded), net

32 (6 3

Cash flows on mortgage-backed securities held (f)

424 41

CASH FLOWS – Three months ended September 30, 2014

Sales of loans (c)

$ 2,153 $ 1,091

Repurchases of previously transferred loans (d)

188 $ 4

Servicing fees (e)

86 34 4

Servicing advances recovered/(funded), net

15 38

Cash flows on mortgage-backed securities held (f)

238 51

CASH FLOWS – Nine months ended September 30, 2015

Sales of loans (c)

$ 6,284 $ 3,025

Repurchases of previously transferred loans (d)

432 $ 92

Servicing fees (e)

249 103 12

Servicing advances recovered/(funded), net

70 22 28

Cash flows on mortgage-backed securities held (f)

1,093 155

CASH FLOWS – Nine months ended September 30, 2014

Sales of loans (c)

$ 6,437 $ 2,026

Repurchases of previously transferred loans (d)

556 $ 13

Servicing fees (e)

260 101 14

Servicing advances recovered/(funded), net

84 93 6

Cash flows on mortgage-backed securities held (f)

724 242
(a) Represents cash flow information associated with both commercial mortgage loan transfer and servicing activities.
(b) These activities were part of an acquired brokered home equity lending business in which PNC is no longer engaged.
(c) Gains/losses recognized on sales of loans were insignificant for the periods presented.
(d) Includes government insured or guaranteed loans eligible for repurchase through the exercise of our ROAP option and loans repurchased due to breaches of origination covenants or representations and warranties made to purchasers.
(e) Includes contractually specified servicing fees, late charges and ancillary fees.
(f) Represents cash flows on securities we hold issued by a securitization SPE in which PNC transferred to and/or services loans. The carrying value of such securities held were $5.8 billion in residential mortgage-backed securities and $1.1 billion in commercial mortgage-backed securities at September 30, 2015 and $3.5 billion in residential mortgage-backed securities and $1.2 billion in commercial mortgage-backed securities at September 30, 2014. Additionally, at December 31, 2014, the carrying value of such securities held were $3.4 billion in residential mortgage-backed securities and $1.3 billion in commercial mortgage-backed securities.

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

The table below 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 due to a breach in representations and warranties or a loss sharing arrangement associated with our continuing involvement of these loans. For more information regarding our recourse and repurchase obligations, including our reserve of estimated losses, see the Recourse and Repurchase Obligations section of Note 16 Commitments and Guarantees.

Table 52: Principal Balance, Delinquent Loans, and Net Charge-offs Related to Serviced Loans For Others

In millions Residential
Mortgages
Commercial
Mortgages (a)
Home Equity
Loans/Lines (b)

September 30, 2015

Total principal balance

$ 74,338 $ 53,466 $ 3,009

Delinquent loans (c)

2,014 792 933

December 31, 2014

Total principal balance

$ 79,108 $ 60,873 $ 3,833

Delinquent loans (c)

2,657 707 1,303

Three months ended September 30, 2015

Net charge-offs (d)

$ 23 $ 236 $ 6

Three months ended September 30, 2014

Net charge-offs (d)

$ 33 $ 439 $ 15

Nine months ended September 30, 2015

Net charge-offs (d)

$ 92 $ 491 $ 21

Nine months ended September 30, 2014

Net charge-offs (d)

$ 108 $ 1,139 $ 47
(a) Represents information at the securitization level in which PNC has sold loans and is the servicer for the securitization.
(b) These activities were part of an acquired brokered home equity lending business in which PNC is no longer engaged.
(c) Serviced delinquent loans are 90 days or more past due or are in process of foreclosure.
(d) Net charge-offs for Residential mortgages and Home equity loans/lines 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 CMBS 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.

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

Variable Interest Entities (VIEs)

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2014 Form 10-K, we are involved with various entities in the normal course of business that are deemed to be VIEs. The following provides a summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements as of September 30, 2015 and December 31, 2014, respectively. We have not provided additional financial support to these entities which we are not contractually required to provide.

Table 53: Consolidated VIEs – Carrying Value (a) (b)

September 30, 2015

In millions

Credit Card and Other
Securitization Trusts
Tax Credit
Investments
Total

Assets

Cash and due from banks

$ 5 $ 5

Interest-earning deposits with banks

5 5

Loans

$ 1,348 6 1,354

Allowance for loan and lease losses

(43 (43

Equity investments

114 114

Other assets

19 449 468

Total assets

$ 1,324 $ 579 $ 1,903

Liabilities

Other borrowed funds

$ 51 $ 156 $ 207

Accrued expenses

55 55

Other liabilities

95 95

Total liabilities

$ 51 $ 306 $ 357

December 31, 2014

In millions

Credit Card and Other
Securitization Trusts
Tax Credit
Investments
Total

Assets

Cash and due from banks

$ 6 $ 6

Interest-earning deposits with banks

6 6

Loans

$ 1,606 1,606

Allowance for loan and lease losses

(50 (50

Equity investments

492 492

Other assets

31 452 483

Total assets

$ 1,587 $ 956 $ 2,543

Liabilities

Other borrowed funds

$ 166 $ 181 $ 347

Accrued expenses

70 70

Other liabilities

206 206

Total liabilities

$ 166 $ 457 $ 623
(a) Amounts represent carrying value on PNC's Consolidated Balance Sheet.
(b) Difference between total assets and total liabilities represents the equity portion of the VIE or intercompany assets and liabilities which are eliminated in consolidation.

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

Table 54: 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, 2015

Commercial Mortgage-Backed Securitizations (b)

$ 1,314 $ 1,314  (c) 

Residential Mortgage-Backed Securitizations (b)

5,783 5,783  (c)  $ (e) 

Tax Credit Investments and Other

2,388 2,447  (d)  719  (f) 

Total

$ 9,485 $ 9,544 $ 720

In millions PNC Risk of Loss (a) Carrying Value of Assets
Owned by PNC
Carrying Value of Liabilities
Owned by PNC

December 31, 2014

Commercial Mortgage-Backed Securitizations (b)

$ 1,550 $ 1,550  (c)  $ (e) 

Residential Mortgage-Backed Securitizations (b)

3,385 3,385  (c)  (e) 

Tax Credit Investments and Other

2,270 2,304  (d)  777  (f) 

Total

$ 7,205 $ 7,239 $ 782
(a) This represents loans, investments and other assets related to non-consolidated VIEs, net of collateral (if applicable).
(b) Amounts reflect involvement with securitization SPEs where PNC transferred to and/or services 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. Additionally, we also invest in other mortgage and asset-backed securities issued by third-party VIEs with which we have no continuing involvement. Further information on these securities is included in Note 6 Investment Securities.
(c) Included in Trading securities, Investment securities, Other intangible assets and Other assets on our Consolidated Balance Sheet.
(d) Included in Loans, Equity investments and Other assets on our Consolidated Balance Sheet.
(e) Included in Other liabilities on our Consolidated Balance Sheet.
(f) Included in Deposits and Other liabilities on our Consolidated Balance Sheet.

Our involvement with VIEs is discussed in further detail in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2014 Form 10-K.

N OTE 3 A SSET Q UALITY

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. Loan delinquencies exclude loans held for sale, purchased impaired loans, nonperforming loans and loans accounted for under the fair value option which are on nonaccrual status, but include government insured or guaranteed loans and accruing loans accounted for under the fair value option.

Nonperforming assets include nonperforming loans and leases, OREO and foreclosed assets, and nonperforming TDRs. 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 4 Purchased Loans for further information.

See Note 1 Accounting Policies for additional delinquency, nonperforming, and charge-off information.

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

The following tables display the delinquency status of our loans and our nonperforming assets at September 30, 2015 and December 31, 2014, respectively.

Table 55: 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 (b)
Nonperforming
Loans
Fair Value Option
Nonaccrual
Loans (c)
Purchased
Impaired
Loans

Total

Loans
(d) (e)

September 30, 2015

Commercial Lending

Commercial

$ 96,952 $ 56 $ 39 $ 36 $ 131 $ 301 $ 43 $ 97,427

Commercial real estate

25,671 32 17 49 212 161 26,093

Equipment lease financing

7,635 2 2 7 7,644

Total commercial lending

130,258 90 56 36 182 520 204 131,164

Consumer Lending

Home equity

30,124 69 31 100 1,029 1,753 33,006

Residential real estate (f)

10,691 146 58 585 789 571 $ 231 2,210 14,492

Credit card

4,523 26 18 30 74 3 4,600

Other consumer (g)

21,149 177 102 239 518 54 21,721

Total consumer lending

66,487 418 209 854 1,481 1,657 231 3,963 73,819

Total

$ 196,745 $ 508 $ 265 $ 890 $ 1,663 $ 2,177 $ 231 $ 4,167 $ 204,983

Percentage of total loans

95.99 .25 .13 .43 .81 1.06 .11 2.03 100.00

December 31, 2014

Commercial Lending

Commercial

$ 96,922 $ 73 $ 24 $ 37 $ 134 $ 290 $ 74 $ 97,420

Commercial real estate

22,667 23 2 25 334 236 23,262

Equipment lease financing

7,672 11 1 12 2 7,686

Total commercial lending

127,261 107 27 37 171 626 310 128,368

Consumer Lending

Home equity

31,474 70 32 102 1,112 1,989 34,677

Residential real estate (f)

9,900 163 68 742 973 706 $ 269 2,559 14,407

Credit card

4,528 28 20 33 81 3 4,612

Other consumer (g)

22,071 214 112 293 619 63 22,753

Total consumer lending

67,973 475 232 1,068 1,775 1,884 269 4,548 76,449

Total

$ 195,234 $ 582 $ 259 $ 1,105 $ 1,946 $ 2,510 $ 269 $ 4,858 $ 204,817

Percentage of total loans

95.32 .28 .13 .54 .95 1.23 .13 2.37 100.00
(a) Amounts in table represent recorded investment and exclude loans held for sale.
(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.
(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 $1.5 billion and $1.7 billion at September 30, 2015 and December 31, 2014, respectively.
(e) Future accretable yield related to purchased impaired loans is not included in the analysis of loan portfolio.
(f) Past due loan amounts at September 30, 2015 include government insured or guaranteed Residential real estate mortgages totaling $62 million for 30 to 59 days past due, $40 million for 60 to 89 days past due and $558 million for 90 days or more past due. Past due loan amounts at December 31, 2014 include government insured or guaranteed Residential real estate mortgages totaling $68 million for 30 to 59 days past due, $43 million for 60 to 89 days past due and $719 million for 90 days or more past due.
(g) Past due loan amounts at September 30, 2015 include government insured or guaranteed Other consumer loans totaling $119 million for 30 to 59 days past due, $80 million for 60 to 89 days past due and $224 million for 90 days or more past due. Past due loan amounts at December 31, 2014 include government insured or guaranteed Other consumer loans totaling $152 million for 30 to 59 days past due, $93 million for 60 to 89 days past due and $277 million for 90 days or more past due.

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

At September 30, 2015, we pledged $18.9 billion of commercial loans to the Federal Reserve Bank (FRB) and $54.2 billion of residential real estate and other loans to the Federal Home Loan Bank (FHLB) as collateral for the contingent ability to borrow, if necessary. The comparable amounts at December 31, 2014 were $19.2 billion and $52.8 billion, respectively.

In the normal course of business, we originate or purchase loan products with contractual characteristics that, when concentrated, may increase our exposure as a holder of those loan products. Possible product features that may create a concentration of credit risk would include a high original or updated LTV ratio, terms that may expose the borrower to future increases in repayments above increases in market interest rates, and interest-only loans, among others.

We originate interest-only loans to commercial borrowers. Such credit arrangements are usually designed to match borrower cash flow expectations (e.g., working capital lines, revolvers). These products are standard in the financial services industry and product features are considered during the underwriting process to mitigate the increased risk that the interest-only feature may result in borrowers not being able to make interest and principal payments when due. We do not believe that these product features create a concentration of credit risk.

Table 56: Nonperforming Assets

Dollars in millions September 30
2015
December 31
2014

Nonperforming loans

Total commercial lending

$ 520 $ 626

Total consumer lending (a)(b)

1,657 1,884

Total nonperforming loans (c)

2,177 2,510

OREO and foreclosed assets

Other real estate owned (OREO)

293 351

Foreclosed and other assets

20 19

Total OREO and foreclosed assets

313 370

Total nonperforming assets

$ 2,490 $ 2,880

Nonperforming loans to total loans

1.06 1.23

Nonperforming assets to total loans, OREO and foreclosed assets

1.21 1.40

Nonperforming assets to total assets

.69 .83
(a) Excludes most consumer loans and lines of credit, not secured by residential real estate, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.
(b) The recorded investment of loans collateralized by residential real estate property that are in process of foreclosure was $.6 billion and $.8 billion at September 30, 2015 and December 31, 2014, which included $.3 billion and $.5 billion, respectively, of loans that are government insured/guaranteed.
(c) Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans.

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 TDRs. See Note 1 Accounting Policies and the TDR section of Note 3 in our 2014 Form 10-K for additional information.

Total nonperforming loans in the nonperforming assets table above include TDRs of $1.2 billion at September 30, 2015 and $1.4 billion at December 31, 2014. TDRs that are performing, including credit card TDR loans, totaled $1.2 billion at September 30, 2015 and December 31, 2014 and are excluded from nonperforming loans. These include TDRs that are not placed on nonaccrual status as permitted by regulatory guidance. Nonperforming TDRs are returned to accrual 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 PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

Additional Asset Quality Indicators

We have two overall portfolio segments – Commercial Lending and Consumer Lending. Each of these two segments is comprised of 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 comprised of the commercial, commercial real estate, equipment lease financing, and commercial purchased impaired loan classes. The Consumer Lending segment is comprised of the home equity, residential real estate, credit card, other consumer, and consumer purchased impaired loan classes.

Commercial Lending Asset Classes

Commercial Loan Class

For commercial loans, we monitor the performance of the borrower in a disciplined and regular manner based upon the level of credit risk inherent in the loan. To evaluate the level of credit risk, we assign an internal risk rating reflecting the borrower's PD and LGD. This two-dimensional credit risk rating methodology provides granularity in the risk monitoring process on an ongoing basis. These ratings are reviewed and updated, generally at least once per year. Additionally, no less frequently than on an annual basis, we review PD rates related to each rating grade based upon internal historical data. These rates are updated as needed and augmented by market data as deemed necessary. For small balance homogenous pools of commercial loans, mortgages and leases, we apply statistical modeling to assist in determining the probability of default within these pools. Further, on a periodic basis, we update our

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

LGD estimates associated with each rating grade based upon historical data. The combination of the PD and LGD ratings assigned to a commercial loan, capturing both the combination of expectations of default and loss severity in event of default, reflects the relative estimated likelihood of loss for that loan at the reporting date. In general, loans with better PD and LGD tend to have a lower likelihood of loss compared to loans with worse PD and LGD. The loss amount also considers an estimate of exposure at date of default, which we also periodically update based upon historical data.

Based upon the amount of the lending arrangement and our risk rating assessment, we follow a formal schedule of written periodic review. Quarterly, we conduct formal reviews of a market's or business unit's entire loan portfolio, focusing on those loans which we perceive to be of higher risk, based upon PDs and LGDs, or loans for which credit quality is weakening. If circumstances warrant, it is our practice to review any customer obligation and its level of credit risk more frequently. We attempt to proactively manage our loans by using various procedures that are customized to the risk of a given loan, including ongoing outreach, contact, and assessment of obligor financial conditions, collateral inspection and appraisal.

Commercial Real Estate Loan Class

We manage credit risk associated with our commercial real estate projects and commercial mortgage activities similar to commercial loans by analyzing PD and LGD. Additionally, risks connected with commercial real estate projects and commercial mortgage activities tend to be correlated to the loan structure and collateral location, project progress and business environment. As a result, these attributes are also monitored and utilized in assessing credit risk.

As with the commercial class, a formal schedule of periodic review is also performed to assess market/geographic risk and business unit/industry risk. Often as a result of these overviews, more in-depth reviews and increased scrutiny are placed on areas of higher risk, including adverse changes in risk ratings, deteriorating operating trends, and/or areas that concern management. These reviews are designed to assess risk and take actions to mitigate our exposure to such risks.

Equipment Lease Financing Loan Class

We manage credit risk associated with our equipment lease financing loan class similar to commercial loans by analyzing PD and LGD.

Based upon the dollar amount of the lease and of the level of credit risk, we follow a formal schedule of periodic review. Generally, this occurs quarterly, although we have established practices to review such credit risk more frequently if circumstances warrant. Our review process entails analysis of the following factors: equipment value/residual value, exposure levels, jurisdiction risk, industry risk, guarantor requirements, and regulatory compliance.

Commercial Purchased Impaired Loan Class

Estimates of the expected cash flows primarily determine the valuation of commercial purchased impaired loans. Commercial cash flow estimates are influenced by a number of credit related items, which include but are not limited to: estimated collateral value, receipt of additional collateral, secondary trading prices, circumstances of possible and/or ongoing liquidation, capital availability, business operations and payment patterns.

We attempt to proactively manage these factors by using various procedures that are customized to the risk of a given loan. These procedures include a review by our Special Asset Committee (SAC), ongoing outreach, contact, and assessment of obligor financial conditions, collateral inspection and appraisal.

See Note 4 Purchased Loans for additional information.

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

Table 57: Commercial Lending Asset Quality Indicators (a)(b)

Criticized Commercial Loans
In millions Pass Rated Special
Mention (c)
Substandard (d) Doubtful (e) Total Loans

September 30, 2015

Commercial

$ 92,334 $ 1,971 $ 2,962 $ 117 $ 97,384

Commercial real estate

25,224 203 478 27 25,932

Equipment lease financing

7,375 75 189 5 7,644

Purchased impaired loans

7 164 33 204

Total commercial lending

$ 124,933 $ 2,256 $ 3,793 $ 182 $ 131,164

December 31, 2014

Commercial

$ 92,884 $ 1,984 $ 2,424 $ 55 $ 97,347

Commercial real estate

22,066 285 639 35 23,025

Equipment lease financing

7,518 73 93 2 7,686

Purchased impaired loans

4 280 26 310

Total commercial lending

$ 122,468 $ 2,346 $ 3,436 $ 118 $ 128,368
(a) Based upon PDs and LGDs. We apply a split rating classification to certain loans meeting threshold criteria. By assigning a split classification, a loan's exposure amount may be split into more than one classification category in the above table.
(b) Loans are included above based on the Regulatory Classification definitions of "Pass", "Special Mention", "Substandard" and "Doubtful".
(c) 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 this time.
(d) 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.
(e) Doubtful rated loans possess all the inherent weaknesses of a Substandard loan with the additional characteristics that the weakness makes collection or liquidation in full improbable due to existing facts, conditions, and values.

Consumer Lending Asset Classes

Home Equity and Residential Real Estate Loan Classes

We use several credit quality indicators, including delinquency information, nonperforming loan information, updated credit scores, originated and updated LTV ratios, and geography, to monitor and manage credit risk within the home equity and residential real estate loan classes. We evaluate mortgage loan performance by source originators and loan servicers. A summary of asset quality indicators follows:

Delinquency/Delinquency Rates : We monitor trending of delinquency/delinquency rates for home equity and residential real estate loans. See the Asset Quality section of this Note 3 for additional information.

Nonperforming Loans : We monitor trending of nonperforming loans for home equity and residential real estate loans. See the Asset Quality section of this Note 3 for additional information.

Credit Scores : We use a national third-party provider to update FICO credit scores for home equity loans and lines of credit and residential real estate loans at least quarterly. The updated scores are incorporated into a series of credit management reports, which are utilized to monitor the risk in the loan classes.

LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions) : At least annually, we update the property values of real estate collateral and calculate an

updated LTV ratio. For open-end credit lines secured by real estate in regions experiencing significant declines in property values, more frequent valuations may occur. We examine LTV migration and stratify LTV into categories to monitor the risk in the loan classes.

Historically, we used, and we continue to use, a combination of original LTV and updated LTV for internal risk management and reporting purposes ( e.g. , line management, loss mitigation strategies). In addition to the fact that estimated property values by their nature are estimates, given certain data limitations it is important to note that updated LTVs may be based upon management's assumptions ( e.g. , if an updated LTV is not provided by the third-party service provider, home price index (HPI) changes will be incorporated in arriving at management's estimate of updated LTV).

Geography : Geographic concentrations are monitored to evaluate and manage exposures. Loan purchase programs are sensitive to, and focused within, certain regions to manage geographic exposures and associated risks.

A combination of updated FICO scores, originated and updated LTV ratios and geographic location assigned to home equity loans and lines of credit and residential real estate loans is used to monitor the risk in the loan classes. Loans with higher FICO scores and lower LTVs tend to have a lower level of risk. Conversely, loans with lower FICO scores, higher LTVs, and in certain geographic locations tend to have a higher level of risk.

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

Consumer Purchased Impaired Loan Class

Estimates of the expected cash flows primarily determine the valuation of consumer purchased impaired loans. Consumer cash flow estimates are influenced by a number of credit related items, which include, but are not limited to: estimated real estate values, payment patterns, updated FICO scores, the current economic environment, updated LTV ratios and the date of origination. These key factors are monitored to help ensure that concentrations of risk are managed and cash flows are maximized.

See Note 4 Purchased Loans for additional information.

Table 58: Home Equity and Residential Real Estate Balances

In millions September 30
2015
December 31
2014

Home equity and residential real estate loans – excluding purchased impaired loans (a)

$ 42,582 $ 43,348

Home equity and residential real estate loans – purchased impaired loans (b)

3,853 4,541

Government insured or guaranteed residential real estate mortgages (a)

953 1,188

Difference between outstanding balance and recorded investment in purchased impaired loans (c)

110 7

Total home equity and residential real estate loans (a)

$ 47,498 $ 49,084
(a) Represents recorded investment.
(b) Represents outstanding balance.
(c) Outstanding balance represents the balance on the loan servicing system for active loans. It is possible for the outstanding balance to be lower than the recorded investment for certain loans due to the use of pool accounting.

Table 59: Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans (a) (b)

Home Equity Residential Real Estate
September 30, 2015 – in millions 1st Liens 2nd Liens Total

Current estimated LTV ratios (c)

Greater than or equal to 125% and updated FICO scores:

Greater than 660

$ 300 $ 1,050 $ 315 $ 1,665

Less than or equal to 660 (d) (e)

44 208 72 324

Missing FICO

1 7 5 13

Greater than or equal to 100% to less than 125% and updated FICO scores:

Greater than 660

703 1,892 607 3,202

Less than or equal to 660 (d) (e)

98 317 113 528

Missing FICO

2 6 6 14

Greater than or equal to 90% to less than 100% and updated FICO scores:

Greater than 660

780 1,569 660 3,009

Less than or equal to 660

101 228 96 425

Missing FICO

1 3 8 12

Less than 90% and updated FICO scores:

Greater than 660

14,069 7,650 8,770 30,489

Less than or equal to 660

1,276 899 576 2,751

Missing FICO

32 17 101 150

Total home equity and residential real estate loans

$ 17,407 $ 13,846 $ 11,329 $ 42,582

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

Home Equity Residential Real Estate
December 31, 2014 – in millions 1st Liens 2nd Liens Total

Current estimated LTV ratios (c)

Greater than or equal to 125% and updated FICO scores:

Greater than 660

$ 333 $ 1,399 $ 360 $ 2,092

Less than or equal to 660 (d) (e)

57 273 92 422

Missing FICO

1 9 8 18

Greater than or equal to 100% to less than 125% and updated FICO scores:

Greater than 660

839 2,190 772 3,801

Less than or equal to 660 (d) (e)

118 383 153 654

Missing FICO

1 5 12 18

Greater than or equal to 90% to less than 100% and updated FICO scores:

Greater than 660

891 1,703 755 3,349

Less than or equal to 660

103 271 118 492

Missing FICO

2 3 5 10

Less than 90% and updated FICO scores:

Greater than 660

13,878 7,874 7,703 29,455

Less than or equal to 660

1,319 995 573 2,887

Missing FICO

27 14 109 150

Total home equity and residential real estate loans

$ 17,569 $ 15,119 $ 10,660 $ 43,348
(a) Excludes purchased impaired loans of approximately $4.0 billion and $4.5 billion in recorded investment, certain government insured or guaranteed residential real estate mortgages of approximately $1.0 billion and $1.2 billion, and loans held for sale at September 30, 2015 and December 31, 2014, respectively. See the Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans table below for additional information on purchased impaired loans.
(b) Amounts shown represent recorded investment.
(c) Based upon updated LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions). Updated LTV is estimated using modeled property values. These ratios are updated at least semi-annually. The related estimates and inputs are based upon an approach that uses a combination of third-party automated valuation models (AVMs), broker price opinions (BPOs), HPI indices, property location, internal and external balance information, origination data and management assumptions. We generally utilize origination lien balances provided by a third-party, where applicable, which do not include an amortization assumption when calculating updated LTV. Accordingly, the results of these calculations do not represent actual appraised loan level collateral or updated LTV based upon lien balances held by others, and as such, are necessarily imprecise and subject to change as we enhance our methodology.
(d) 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%.
(e) The following states had the highest percentage of higher risk loans at September 30, 2015: New Jersey 15%, Pennsylvania 13%, Ohio 11%, Illinois 11%, Florida 7%, Maryland 7% and Michigan 5%. The remainder of the states had lower than 4% of the higher risk loans individually, and collectively they represent approximately 31% of the higher risk loans. The following states had the highest percentage of higher risk loans at December 31, 2014: New Jersey 14%, Illinois 12%, Pennsylvania 12%, Ohio 12%, Florida 8%, Maryland 6%, Michigan 5%, and North Carolina 4%. The remainder of the states had lower than 4% of the high risk loans individually, and collectively they represent approximately 28% of the higher risk loans.

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

Table 60: Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans (a)

Home Equity (b) (c) Residential Real Estate (b) (c)
September 30, 2015 – in millions 1st Liens 2nd Liens Total

Current estimated LTV ratios (d)

Greater than or equal to 125% and updated FICO scores:

Greater than 660

$ 8 $ 195 $ 182 $ 385

Less than or equal to 660

8 92 89 189

Missing FICO

7 6 13

Greater than or equal to 100% to less than 125% and updated FICO scores:

Greater than 660

12 355 201 568

Less than or equal to 660

10 158 131 299

Missing FICO

9 7 16

Greater than or equal to 90% to less than 100% and updated FICO scores:

Greater than 660

9 170 137 316

Less than or equal to 660

7 82 81 170

Missing FICO

4 3 7

Less than 90% and updated FICO scores:

Greater than 660

110 337 649 1,096

Less than or equal to 660

94 179 461 734

Missing FICO

1 12 28 41

Missing LTV and updated FICO scores:

Greater than 660

1 10 11

Less than or equal to 660

3 5 8

Total home equity and residential real estate loans

$ 263 $ 1,600 $ 1,990 $ 3,853

Home Equity (b) (c) Residential Real Estate (b) (c)
December 31, 2014 – in millions 1st Liens 2nd Liens Total

Current estimated LTV ratios (d)

Greater than or equal to 125% and updated FICO scores:

Greater than 660

$ 8 $ 243 $ 276 $ 527

Less than or equal to 660

9 125 144 278

Missing FICO

8 6 14

Greater than or equal to 100% to less than 125% and updated FICO scores:

Greater than 660

15 426 272 713

Less than or equal to 660

12 194 200 406

Missing FICO

11 5 16

Greater than or equal to 90% to less than 100% and updated FICO scores:

Greater than 660

12 207 186 405

Less than or equal to 660

9 93 123 225

Missing FICO

5 3 8

Less than 90% and updated FICO scores:

Greater than 660

102 339 626 1,067

Less than or equal to 660

109 200 515 824

Missing FICO

1 12 15 28

Missing LTV and updated FICO scores:

Greater than 660

1 14 15

Less than or equal to 660

4 10 14

Missing FICO

1 1

Total home equity and residential real estate loans

$ 282 $ 1,863 $ 2,396 $ 4,541

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

(a) Amounts shown represent outstanding balance. See Note 4 Purchased Loans for additional information.
(b) For the estimate of cash flows utilized in our purchased impaired loan accounting, other assumptions and estimates are made, including amortization of first lien balances, pre-payment rates, etc., which are not reflected in this table.
(c) The following states had the highest percentage of purchased impaired loans at September 30, 2015: California 16%, Florida 14%, Illinois 11%, Ohio 9%, North Carolina 7%, and Michigan 5%. The remainder of the states had lower than a 4% concentration of purchased impaired loans individually, and collectively they represent approximately 38% of the purchased impaired portfolio. The following states had the highest percentage of purchased impaired loans at December 31, 2014: California 17%, Florida 15%, Illinois 11%, Ohio 8%, North Carolina 7% and Michigan 5%. The remainder of the states had lower than a 4% concentration of purchased impaired loans individually, and collectively they represent approximately 37% of the purchased impaired portfolio.
(d) Based upon updated LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions). Updated LTV is estimated using modeled property values. These ratios are updated at least semi-annually. The related estimates and inputs are based upon an approach that uses a combination of third-party automated valuation models (AVMs), broker price opinions (BPOs), HPI indices, property location, internal and external balance information, origination data and management assumptions. We generally utilize origination lien balances provided by a third-party, where applicable, which do not include an amortization assumption when calculating updated LTV. Accordingly, the results of these calculations do not represent actual appraised loan level collateral or updated LTV based upon lien balances held by others, and as such, are necessarily imprecise and subject to change as we enhance our methodology.

Credit Card and Other Consumer Loan Classes

Table 61: Credit Card and Other Consumer Loan Classes Asset Quality Indicators

Credit Card (a) Other Consumer (b)
Dollars in millions Amount % of Total Loans
Using FICO
Credit Metric
Amount % of Total Loans
Using FICO
Credit Metric

September 30, 2015

FICO score greater than 719

$ 2,729 59 $ 9,396 65

650 to 719

1,295 28 3,501 24

620 to 649

197 4 509 4

Less than 620

211 5 580 4

No FICO score available or required (c)

168 4 423 3

Total loans using FICO credit metric

4,600 100 14,409 100

Consumer loans using other internal credit metrics (b)

7,312

Total loan balance

$ 4,600 $ 21,721

Weighted-average updated FICO score (d)

733 745

December 31, 2014

FICO score greater than 719

$ 2,717 59 $ 9,156 64

650 to 719

1,288 28 3,459 24

620 to 649

203 4 528 4

Less than 620

239 5 619 4

No FICO score available or required (c)

165 4 557 4

Total loans using FICO credit metric

4,612 100 14,319 100

Consumer loans using other internal credit metrics (b)

8,434

Total loan balance

$ 4,612