The Quarterly
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PNC Financial Services Group Inc (PNC) SEC Quarterly Report (10-Q) for Q1 2017

PNC Q2 2017 10-Q
PNC 2016 10-K PNC Q2 2017 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2017

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.)

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

(Address of principal executive offices, including zip code)

(888) 762-2265

(Registrant's telephone number, including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically 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  ☒    No  ☐

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

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company

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

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

As of April 21, 2017, there were 483,901,441 shares of the registrant's common stock ($5 par value) outstanding.

Table of Contents

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

Cross-Reference Index to First Quarter 2017 Form 10-Q

Pages

PART I – FINANCIAL INFORMATION

Item 1.      Financial Statements (Unaudited).

Consolidated Income Statement

37

Consolidated Statement of Comprehensive Income

38

Consolidated Balance Sheet

39

Consolidated Statement of Cash Flows

40

Notes To Consolidated Financial Statements (Unaudited)

42

Note 1   Accounting Policies

42

Note 2   Loan Sale and Servicing Activities and Variable Interest Entities

42

Note 3   Asset Quality

44

Note 4   Allowance for Loan and Lease Losses

51

Note 5   Investment Securities

52

Note 6   Fair Value

55

Note 7   Goodwill and Mortgage Servicing Rights

64

Note 8   Employee Benefit Plans

65

Note 9   Financial Derivatives

66

Note 10 Earnings Per Share

70

Note 11 Total Equity and Other Comprehensive Income

71

Note 12 Legal Proceedings

73

Note 13 Commitments

75

Note 14 Segment Reporting

75

Statistical Information (Unaudited)

78

Average Consolidated Balance Sheet And Net Interest Analysis

78

Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP)

80

Transitional Basel III and Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios (Non-GAAP) – 2016 Periods

80

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

Financial Review

1

Consolidated Financial Highlights

1

Executive Summary

3

Consolidated Income Statement Review

5

Consolidated Balance Sheet Review

7

Business Segments Review

10

Risk Management

18

Recent Regulatory Developments

Critical Accounting Estimates and Judgments


31

31


Off-Balance Sheet Arrangements and Variable Interest Entities

34

Internal Controls and Disclosure Controls and Procedures

34

Glossary of Terms

34

Cautionary Statement Regarding Forward-Looking Information

35

Item 3.      Quantitative and Qualitative Disclosures about Market Risk.

18-31, 55-63 and 66-70

Item 4.      Controls and Procedures.

34

PART II – OTHER INFORMATION

Item 1.      Legal Proceedings.

81

Item 1A.  Risk Factors.

81

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds.

81

Item 6.      Exhibits.

81

Exhibit Index.

81

Corporate Information

82

Signature

83
Table of Contents

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

Cross-Reference Index to First Quarter 2017 Form 10-Q (continued)

MD&A TABLE REFERENCE

Table

Description

Page

1

Consolidated Financial Highlights

1

2

Summarized Average Balances and Net Interest Income

5

3

Noninterest Income

6

4

Noninterest Expense

6

5

Summarized Balance Sheet Data

7

6

Details of Loans

8

7

Investment Securities

8

8

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

9

9

Details of Funding Sources

9

10

Retail Banking Table

11

11

Corporate & Institutional Banking Table

14

12

Asset Management Group Table

16

13

BlackRock Table

17

14

Nonperforming Assets by Type

18

15

Change in Nonperforming Assets

18

16

Accruing Loans Past Due

19

17

Home Equity Lines of Credit – Draw Period End Dates

20

18

Consumer Real Estate Related Loan Modifications

21

19

Summary of Troubled Debt Restructurings

21

20

Allowance for Loan and Lease Losses

23

21

Loan Charge-Offs and Recoveries

23

22

Senior and Subordinated Debt

24

23

PNC Bank Notes Issued During First Quarter 2017

24

24

Credit Ratings as of March 31, 2017 for PNC and PNC Bank

26

25

Basel III Capital

27

26

Interest Sensitivity Analysis

29

27

Net Interest Income Sensitivity to Alternative Rate Scenarios (First Quarter 2017)

29

28

Alternate Interest Rate Scenarios: One Year Forward

29

29

Equity Investments Summary

30

30

Fair Value Measurements – Summary

32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE

31

Cash Flows Associated with Loan Sale and Servicing Activities 43

32

Principal Balance, Delinquent Loans and Net Charge-offs Related to Serviced Loans For Others 43

33

Non-Consolidated VIEs 44

34

Analysis of Loan Portfolio 45

35

Nonperforming Assets 46

36

Commercial Lending Asset Quality Indicators 46

37

Asset Quality Indicators for Home Equity and Residential Real Estate Loans – Excluding Purchased Impaired and Government Insured or Guaranteed Loans 47

38

Credit Card and Other Consumer Loan Classes Asset Quality Indicators 48

39

Financial Impact and TDRs by Concession Type 49

40

Impaired Loans 50

41

Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data 51

42

Investment Securities Summary 52

43

Gross Unrealized Loss and Fair Value of Debt Securities 53

44

Gains (Losses) on Sales of Securities Available for Sale 54

45

Contractual Maturity of Debt Securities 54

46

Fair Value of Securities Pledged and Accepted as Collateral 55

47

Fair Value Measurements – Recurring Basis Summary 56

48

Reconciliation of Level 3 Assets and Liabilities 57
Table of Contents

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

Cross-Reference Index to First Quarter 2017 Form 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE (continued)

Table

Description

Page

49

Fair Value Measurements – Recurring Quantitative Information 59

50

Fair Value Measurements – Nonrecurring 61

51

Fair Value Measurements – Nonrecurring Quantitative Information 61

52

Fair Value Option – Fair Value and Principal Balances 62

53

Fair Value Option – Changes in Fair Value

62

54

Additional Fair Value Information Related to Other Financial Instruments

63

55

Mortgage Servicing Rights

64

56

Commercial Mortgage Loan Servicing Rights –  Key Valuation Assumptions

65

57

Residential Mortgage Loan Servicing Rights –  Key Valuation Assumptions

65

58

Components of Net Periodic Benefit Cost

65

59

Total Gross Derivatives

66

60

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

67

61

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

68

62

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

68

63

Derivative Assets and Liabilities Offsetting

69

64

Basic and Diluted Earnings Per Common Share

70

65

Rollforward of Total Equity

71

66

Other Comprehensive Income

72

67

Accumulated Other Comprehensive Income (Loss) Components

73

68

Commitments to Extend Credit and Other Commitments

75

69

Results of Businesses

77
Table of Contents

FINANCIAL REVIEW

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 2016 Annual Report on Form 10-K (2016 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business, regulatory and legal risks, see the following: the Risk Management section of this Financial Review and of Item 7 in our 2016 Form 10-K; Item 1A Risk Factors included in our 2016 Form 10-K; and the Legal Proceedings and Commitments Notes of the Notes To Consolidated Financial Statements included in Item 1 of this Report and Item 8 of our 2016 Form 10-K. Also, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and the Critical Accounting Estimates And Judgments section in this Financial Review and in our 2016 Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this Report. See Note 14 Segment Reporting in the Notes To Consolidated Financial Statements included in this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a generally accepted accounting principles (GAAP) basis. In this Report, "PNC", "we" or "us" refers to The PNC Financial Services Group, Inc. and its subsidiaries on a consolidated basis. References to The PNC Financial Services Group, Inc. or to any of its subsidiaries are specifically made where applicable.

Table 1: Consolidated Financial Highlights

Dollars in millions, except per share data

Unaudited

Three months ended
March 31
2017 2016

Financial Results (a)

Revenue

Net interest income

$ 2,160 $ 2,098

Noninterest income

1,724 1,567

Total revenue

3,884 3,665

Provision for credit losses

88 152

Noninterest expense

2,402 2,281

Income before income taxes and noncontrolling interests

$ 1,394 $ 1,232

Net income

$ 1,074 $ 943

Less:

Net income attributable to noncontrolling interests

17 19

Preferred stock dividends

63 63

Preferred stock discount accretion and redemptions

21 2

Net income attributable to common shareholders

$ 973 $ 859

Less:

Dividends and undistributed earnings allocated to nonvested restricted shares

6 6

Impact of BlackRock earnings per share dilution

4 3

Net income attributable to diluted common shares

$ 963 $ 850

Diluted earnings per common share

$ 1.96 $ 1.68

Cash dividends declared per common share

$ .55 $ .51

Effective tax rate (b)

23.0 23.5

Performance Ratios

Net interest margin (c)

2.77 2.75

Noninterest income to total revenue

44 43

Efficiency

62 62

Return on:

Average common shareholders' equity

9.50 8.44

Average assets

1.19 1.07
(a) The Executive Summary and Consolidated Income Statement Review portions of this Financial Review provide information regarding items impacting the comparability of the periods presented.
(b) The effective income tax rates are generally lower than the statutory rate due to the relationship of pretax income to tax credits and earnings that are not subject to tax.
(c) Calculated as annualized taxable-equivalent net interest income divided by average earning assets. To provide more meaningful comparisons of net interest margins, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP in the Consolidated Income Statement. The taxable-equivalent adjustments to net interest income for the three months ended March 31, 2017 and March 31, 2016 were $52 million and $48 million, respectively. For additional information, see the Statistical Information (Unaudited) section of this Report.

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

Table of Contents

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

Unaudited March 31
2017
December 31
2016
March 31
2016

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

Assets

$ 370,944 $ 366,380 $ 360,985

Loans

$ 212,826 $ 210,833 $ 207,485

Allowance for loan and lease losses

$ 2,561 $ 2,589 $ 2,711

Interest-earning deposits with banks (b)

$ 27,877 $ 25,711 $ 29,478

Investment securities

$ 76,432 $ 75,947 $ 72,569

Loans held for sale

$ 1,414 $ 2,504 $ 1,541

Equity investments (c)

$ 10,900 $ 10,728 $ 10,391

Mortgage servicing rights

$ 1,867 $ 1,758 $ 1,323

Goodwill

$ 9,103 $ 9,103 $ 9,103

Other assets

$ 28,083 $ 27,506 $ 27,945

Noninterest-bearing deposits

$ 79,246 $ 80,230 $ 78,151

Interest-bearing deposits

$ 181,464 $ 176,934 $ 172,208

Total deposits

$ 260,710 $ 257,164 $ 250,359

Borrowed funds

$ 55,062 $ 52,706 $ 54,178

Total shareholders' equity

$ 45,754 $ 45,699 $ 45,130

Common shareholders' equity

$ 41,774 $ 41,723 $ 41,677

Accumulated other comprehensive income (loss)

$ (279 $ (265 $ 532

Book value per common share

$ 86.14 $ 85.94 $ 83.47

Common shares outstanding (in millions)

485 485 499

Loans to deposits

82 82 83

Client Assets (in billions)

Discretionary client assets under management

$ 141 $ 137 $ 135

Nondiscretionary client assets under administration

123 120 118

Total client assets under administration (d)

264 257 253

Brokerage account client assets

46 44 43

Total client assets

$ 310 $ 301 $ 296

Capital Ratios

Transitional Basel III (e) (f)

Common equity Tier 1

10.5 10.6 10.6

Tier 1 risk-based

11.8 12.0 11.9

Total capital risk-based

14.1 14.3 14.4

Leverage

9.9 10.1 10.2

Pro forma Fully Phased-In Basel III (Non-GAAP) (f)

Common equity Tier 1

10.0 10.0 10.1

Common shareholders' equity to assets

11.3 11.4 11.5

Asset Quality

Nonperforming loans to total loans

.94 1.02 1.10

Nonperforming assets to total loans, OREO, foreclosed and other assets

1.04 1.12 1.23

Nonperforming assets to total assets

.60 .65 .71

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

.23 .20 .29

Allowance for loan and lease losses to total loans

1.20 1.23 1.31

Allowance for loan and lease losses to total nonperforming loans

128 121 119

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

$ 699 $ 782 $ 782
(a) The Executive Summary and Consolidated Balance Sheet Review portions of this Financial Review provide information regarding items impacting the comparability of the periods presented.
(b) Amounts include balances held with the Federal Reserve Bank of Cleveland (Federal Reserve Bank) of $27.5 billion, $25.1 billion and $29.0 billion as of March 31, 2017, December 31, 2016 and March 31, 2016, respectively.
(c) Amounts include our equity interest in BlackRock.
(d) As a result of certain investment advisory services performed by one of our registered investment advisors, certain assets were previously reported as both discretionary client assets under management and nondiscretionary client assets under administration. Effective for the first quarter of 2017, these amounts are only reported as discretionary assets under management. Prior periods were adjusted to remove amounts previously included in nondiscretionary assets under administration of approximately $9 billion and $7 billion as of December 31, 2016 and March 31, 2016, respectively.
(e) Calculated using the regulatory capital methodology applicable to PNC during each period presented.
(f) See Basel III Capital discussion in the Capital Management portion of the Risk Management section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business in our 2016 Form 10-K. See also the Transitional Basel III and Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios (Non-GAAP) – 2016 Periods table in the Statistical Information section of this Report for a reconciliation of the 2016 periods' ratios.

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

Table of Contents

E XECUTIVE S UMMARY

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

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

Key Strategic Goals

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

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

Our strategic priorities are designed to enhance value over the long term. One of our priorities is to build a leading banking franchise in our underpenetrated geographic markets. We are focused on reinventing the retail banking experience by transforming the retail distribution network and the home lending process for a better customer experience and improved efficiency, and growing our consumer loan portfolio. In addition, we are seeking to attract more of the investable assets of new and existing clients and we continue to focus on expense management while investing in technology to bolster critical business infrastructure and streamline core processes.

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

Analysis and Review (CCAR) submission to the Board of Governors of the Federal Reserve System (Federal Reserve). For more detail, see the Capital Highlights portion of this Executive Summary and the Liquidity and Capital Management portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2016 Form 10-K.

Income Statement Highlights

Net income for the first quarter of 2017 was $1.1 billion, or $1.96 per diluted common share, an increase of 14%, compared to $943 million, or $1.68 per diluted common share, for the first quarter of 2016.

Total revenue increased $219 million, or 6%, to $3.9 billion.
Net interest income increased $62 million, or 3%, to $2.2 billion.
Net interest margin increased to 2.77% compared to 2.75% for the first quarter of 2016.
Noninterest income increased $157 million, or 10%, to $1.7 billion primarily due to growth in fee income.
Provision for credit losses decreased to $88 million for the first quarter of 2017 compared to $152 million for the first quarter of 2016.
Noninterest expense increased $121 million to $2.4 billion, reflecting overall higher levels of business activity.

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

Balance Sheet Highlights

Our balance sheet was strong and well positioned at March 31, 2017 and December 31, 2016.

Total loans increased $2.0 billion, or 1%, to $212.8 billion.
Total commercial lending grew $2.7 billion, or 2%.
Total consumer lending decreased $.7 billion, or 1%.
Total deposits increased $3.5 billion, or 1%, to $260.7 billion.
Investment securities increased $.5 billion, or 1%, to $76.4 billion.

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

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

Table of Contents

Credit Quality Highlights

Overall credit quality remained stable with the fourth quarter of 2016.

Nonperforming assets decreased $162 million, or 7%, to $2.2 billion at March 31, 2017 compared with December 31, 2016.
Overall loan delinquencies decreased $192 million, or 12%, as of March 31, 2017 compared with December 31, 2016.
Net charge-offs of $118 million in the first quarter of 2017 decreased compared to net charge-offs of $149 million for the first quarter of 2016.

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

Capital Highlights

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

The Transitional Basel III common equity Tier 1 capital ratio was 10.5% at March 31, 2017 compared to 10.6% at December 31, 2016.
Pro forma fully phased-in Basel III common equity Tier 1 capital ratio, a non-GAAP financial measure, remained stable at an estimated 10.0% at March 31, 2017 and December 31, 2016 based on the standardized approach rules.
In the first quarter of 2017, we returned $.9 billion of capital to shareholders through repurchases of 5.0 million common shares for $.6 billion and dividends on common shares of $.3 billion.
On January 30, 2017, PNC announced a $300 million increase to its common stock share repurchase programs, which now provide for repurchases of up to $2.3 billion for the four-quarter period ending June 30, 2017.
On April 4, 2017, the PNC board of directors declared a quarterly cash dividend on common stock of 55 cents per share with a payment date of May 5, 2017.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for more detail on our 2017 capital and liquidity actions as well as our capital ratios.

Our ability to take certain capital actions, including plans to pay or increase common stock dividends or to repurchase shares under current or future programs, is subject to the results of the supervisory assessment of capital adequacy undertaken by the Federal Reserve as part of the CCAR process. For additional information, see the Supervision and Regulation section in Item 1 Business of our 2016 Form 10-K.

Business Outlook

Statements regarding our business outlook are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory contingencies. These statements are based on our current view that the U.S. economy and the labor market will grow moderately in 2017, boosted by stable oil/energy prices, improving consumer spending and housing activity, and expanded federal fiscal policy stimulus as a result of the 2016 elections. Short-term interest rates and bond yields are expected to continue rising gradually in 2017, along with inflation. Specifically, our business outlook reflects our expectation of continued steady growth in GDP and two 25 basis point increases in short-term interest rates by the Federal Reserve in June and December of 2017. We are also assuming that long-term rates rise at a slower pace than short-term rates. See the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2016 Form 10-K for other factors that could cause future events to differ, perhaps materially, from those anticipated in these forward-looking statements.

For the full year 2017 compared to full year 2016, we expect:

Loans to increase by mid-single digits, on a percentage basis;
Revenue growth in the upper end of the mid-single digit range, on a percentage basis;
Noninterest expense to increase by low single digits, on a percentage basis; and
The effective tax rate to be approximately 25%, absent any tax reform.

For the remaining quarters of 2017, we expect quarterly other noninterest income to be between $225 million and $275 million.

For the second quarter of 2017 compared to the first quarter of 2017, we expect:

Modest loan growth;
Net interest income to increase by low single digits, on a percentage basis;
Fee income to increase by mid-single digits, on a percentage basis. Fee income consists of asset management, consumer services, corporate services, residential mortgage and service charges on deposits;
Provision for credit losses to be between $75 million and $125 million, and could be at the higher end of this range as a result of an initial provision for acquired loans; and
Noninterest expense to increase by low single digits, on a percentage basis.

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

Table of Contents

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 first quarter of 2017 was $1.1 billion, or $1.96 per diluted common share, an increase of 14%, compared to $943 million, or $1.68 per diluted common share, for the first quarter of 2016. The increase was driven by a 6% increase in revenue and lower provision for credit losses, partially offset by a 5% increase in noninterest expense. Higher revenue in the comparison reflected a 10% increase in noninterest income and a 3% increase in net interest income.

Net Interest Income

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

2017 2016

Three months ended March 31

Dollars in millions

Average
Balances
Average
Yields/
Rates
Interest
Income/
Expense
Average
Balances
Average
Yields/
Rates
Interest
Income/
Expense

Assets

Interest-earning assets

Investment securities

$ 76,253 2.67 $ 508 $ 70,269 2.72 $ 478

Loans

212,253 3.67 1,941 207,184 3.60 1,875

Interest-earning deposits with banks

24,192 .81 49 25,533 .50 32

Other

8,395 3.54 74 7,764 3.62 70

Total interest-earning assets/interest income

$ 321,093 3.22 2,572 $ 310,750 3.15 2,455

Liabilities

Interest-bearing liabilities

Interest-bearing deposits

$ 176,871 .28 120 $ 168,823 .25 105

Borrowed funds

54,942 1.74 240 53,626 1.51 204

Total interest-bearing liabilities/interest expense

$ 231,813 .62 360 $ 222,449 .55 309

Net interest margin/income (Non-GAAP)

2.77 2,212 2.75 2,146

Taxable-equivalent adjustments

(52 (48

Net interest income (GAAP)

$ 2,160 $ 2,098
(a) Interest income calculated as taxable-equivalent interest income. To provide more meaningful comparisons of interest income and yields for all interest-earning assets, as well as net interest margins, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margins by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP on the Consolidated Income Statement.

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

Net interest income increased by $62 million, or 3%, in the first quarter of 2017 compared with the first quarter of 2016, and net interest margin increased to 2.77% compared with 2.75% in the prior year quarter. Both increases reflected higher loan yields, partially offset by an increase in borrowing and deposit costs. The increase in net interest income also was driven by growth in loans and securities balances.

Average investment securities increased $6.0 billion, or 9%, due to higher average U.S. Treasury and government agency securities and average agency residential mortgage-backed securities, partially offset by decreases in average commercial

mortgage-backed securities and non-agency residential mortgage-backed securities. Total investment securities increased to 24% of average interest-earning assets for the first quarter of 2017 compared to 23% for the first quarter of 2016.

Average loans grew $5.1 billion, or 2%, consisting of growth in average commercial loans of $4.0 billion and average commercial real estate loans of $1.2 billion, driven by our Corporate Banking and Real Estate businesses within our Corporate & Institutional Banking segment. Additionally, average residential real estate loans increased $1.1 billion. These increases were partially offset by a decline in consumer loans of $1.4 billion, which reflected decreases in the non-strategic runoff consumer loan portfolios of brokered home equity and government guaranteed education loans. Average loans represented 66% of average interest-earning assets for the first quarter of 2017 and 67% of average interest-earning assets for the first quarter of 2016.

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Average total deposits of $254.9 billion grew $8.8 billion, or 4%, in the first quarter of 2017 compared to the first quarter of 2016. Average interest-bearing deposits increased $8.0 billion primarily due to higher average savings deposits, which largely reflected a shift from money market deposits to relationship-based savings products, as well as higher average interest-bearing demand deposits. Average interest-bearing deposits represented 76% of average interest-bearing liabilities in both quarters in the comparison.

Noninterest Income

Table 3: Noninterest Income

Three months ended March 31

Dollars in millions

Change
2017 2016 $ %

Noninterest income

Asset management

$ 403 $ 341 $ 62 18

Consumer services

332 337 (5 (1 )% 

Corporate services

393 325 68 21

Residential mortgage

113 100 13 13

Service charges on deposits

161 158 3 2

Other

322 306 16 5

Total noninterest income

$ 1,724 $ 1,567 $ 157 10

Noninterest income as a percentage of total revenue was 44% in the first quarter of 2017 compared to 43% in the first quarter of 2016.

Asset management revenue growth in the comparison reflected higher earnings from BlackRock and the impact of higher average equity markets as well as net new business activity in our asset management business. Discretionary client assets under management increased $6 billion to $141 billion at March 31, 2017 compared to March 31, 2016.

Corporate services revenue increased due to higher merger and acquisition advisory fees and other capital markets revenue, higher commercial mortgage servicing rights valuation, net of economic hedge, and higher treasury management revenue.

Residential mortgage revenue was higher in the comparison as a result of an increased benefit from residential mortgage servicing rights valuation, net of economic hedge.

Other noninterest income for the first quarter of 2017 increased over the first quarter of 2016 largely attributable to higher revenue from private equity investments, including positive valuation adjustments of $47 million associated with

our receipt of a five-year extension of the prior July 2017 deadline to conform certain equity investments subject to the Volcker Rule provisions of the Dodd-Frank Act. The increase was partially offset by the impact of first quarter 2016 net gains on the sale of Visa Class B common shares.

Provision For Credit Losses

The provision for credit losses was $88 million for the first quarter of 2017 compared with $152 million for the first quarter of 2016, which included a higher provision for energy related loans in the oil, gas and coal sectors.

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

Table 4: Noninterest Expense

Three months ended March 31

Dollars in millions

Change
2017 2016 $ %

Noninterest expense

Personnel

$ 1,249 $ 1,145 $ 104 9

Occupancy

222 221 1

Equipment

251 234 17 7

Marketing

55 54 1 2

Other

625 627 (2

Total noninterest expense

$ 2,402 $ 2,281 $ 121 5

Higher noninterest expense in the comparison reflected the impact of overall higher levels of business activity on personnel and equipment expense. We remained focused on disciplined expense management while continuing to invest in technology and business infrastructure.

As of March 31, 2017, we were on track to achieve our full-year 2017 goal of $350 million in cost savings through our continuous improvement program, which we expect will substantially fund our 2017 business and technology investments.

Effective Income Tax Rate

The effective income tax rate was 23.0% in the first quarter of 2017 compared with 23.5% in the first quarter of 2016. Income taxes for first quarter 2017 included higher tax deductions for stock-based compensation related to vesting of restricted shares and options exercised at a higher common stock price.

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C ONSOLIDATED B ALANCE S HEET R EVIEW

Table 5: Summarized Balance Sheet Data

Change
Dollars in millions

March 31

2017

December 31

2016

$ %

Assets

Interest-earning deposits with banks

$ 27,877 $ 25,711 $ 2,166 8

Loans held for sale

1,414 2,504 (1,090 (44 )% 

Investment securities

76,432 75,947 485 1

Loans

212,826 210,833 1,993 1

Allowance for loan and lease losses

(2,561 (2,589 28 1

Mortgage servicing rights

1,867 1,758 109 6

Goodwill

9,103 9,103

Other, net

43,986 43,113 873 2

Total assets

$ 370,944 $ 366,380 $ 4,564 1

Liabilities

Deposits

$ 260,710 $ 257,164 $ 3,546 1

Borrowed funds

55,062 52,706 2,356 4

Other

9,269 9,656 (387 (4 )% 

Total liabilities

325,041 319,526 5,515 2

Equity

Total shareholders' equity

45,754 45,699 55

Noncontrolling interests

149 1,155 (1,006 (87 )% 

Total equity

45,903 46,854 (951 (2 )% 

Total liabilities and equity

$ 370,944 $ 366,380 $ 4,564 1

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

Our balance sheet was strong and well positioned at both March 31, 2017 and December 31, 2016.

Total assets increased primarily driven by loan growth and higher interest-earning deposits with banks;

Total liabilities increased due to deposit growth and higher borrowed funds;

Total equity decreased due to a decline in noncontrolling interests related to the redemption of Perpetual Trust Securities.

The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and regulatory compliance is included in the Liquidity and Capital Management portion of the Risk Management section of this Financial Review and in Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements included in our 2016 Form 10-K.

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Loans

Table 6: Details of Loans

Dollars in millions Change
March 31
2017
December 31
2016
$ %

Commercial lending

Commercial

Manufacturing

$ 20,054 $ 18,891 $ 1,163 6

Retail/wholesale trade

17,446 16,752 694 4

Service providers

14,185 14,707 (522 (4 )% 

Real estate related (a)

11,690 11,920 (230 (2 )% 

Health care

9,603 9,491 112 1

Financial services

7,710 7,241 469 6

Other industries

23,077 22,362 715 3

Total commercial

103,765 101,364 2,401 2

Commercial real estate

29,435 29,010 425 1

Equipment lease financing

7,462 7,581 (119 (2 )% 

Total commercial lending

140,662 137,955 2,707 2

Consumer lending

Home equity

29,577 29,949 (372 (1 )% 

Residential real estate

15,781 15,598 183 1

Credit card

5,112 5,282 (170 (3 )% 

Other consumer

Automobile

12,337 12,380 (43

Education

4,974 5,159 (185 (4 )% 

Other

4,383 4,510 (127 (3 )% 

Total consumer lending

72,164 72,878 (714 (1 )% 

Total loans

$ 212,826 $ 210,833 $ 1,993 1
(a) Includes loans to customers in the real estate and construction industries.

Growth in commercial lending was driven by increased utilization from manufacturing, retail/wholesale trade and financial services customers. Lower consumer lending was driven by declines in home equity loans, education loans and credit cards. The decreases in home equity and education reflected runoff in the non-strategic brokered home equity and government guaranteed education loan portfolios.

See 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 4 Allowances for Loan and Lease Losses in our Notes To Consolidated Financial Statements included in this Report for additional information regarding our loan portfolio.

Investment Securities

Table 7: Investment Securities

March 31, 2017 December 31, 2016

Ratings (a)

As of March 31, 2017

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

$ 13,318 $ 13,459 $ 13,627 $ 13,714 100

Agency residential mortgage-backed

38,673 38,427 37,319 37,109 100

Non-agency residential mortgage-backed

3,196 3,394 3,382 3,564 11 4 76 9

Agency commercial mortgage-backed

2,919 2,906 3,053 3,046 100

Non-agency commercial mortgage-backed (b)

4,407 4,434 4,590 4,602 85 4 1 1 9

Asset-backed (c)

6,486 6,532 6,496 6,524 85 5 3 7

Other debt (d)

6,610 6,782 6,679 6,810 73 15 8 1 3

Corporate stock and other

517 515 603 601 100

Total investment securities (e)

$ 76,126 $ 76,449 $ 75,749 $ 75,970 91 2 1 4 2

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(a) Ratings percentages allocated based on amortized cost.
(b) Collateralized primarily by retail properties, office buildings, lodging properties and multi-family housing.
(c) Collateralized primarily by corporate debt, government guaranteed education loans and other consumer credit products.
(d) Includes state and municipal securities.
(e) Includes available for sale and held to maturity securities.

Investment securities increased $.5 billion at March 31, 2017 compared to December 31, 2016. Growth in investment securities was driven by net purchases of agency residential mortgage-backed securities, partially offset by maturities and prepayments of U.S. Treasury and government agencies, non-agency commercial mortgage-backed and non-agency residential mortgage-backed securities.

Table 7 presents the distribution of our investment securities portfolio by credit rating. We have included credit ratings information because we believe that the information is an indicator of the degree of credit risk to which we are exposed, which could affect our risk-weighted assets and, therefore, our risk-based regulatory capital ratios under the regulatory capital rules. Changes in credit ratings classifications could indicate increased or decreased credit risk and could be accompanied by a reduction or increase in the fair value of our investment securities portfolio.

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

The duration of investment securities was 3.2 years at March 31, 2017. We estimate that at March 31, 2017 the effective duration of investment securities was 3.3 years for an immediate 50 basis points parallel increase in interest rates and 3.1 years for an immediate 50 basis points parallel decrease in interest rates.

Based on expected prepayment speeds, the weighted-average expected maturity of the investment securities portfolio (excluding corporate stock and other) was 5.1 years at March 31, 2017 compared to 5.0 years at December 31, 2016.

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

March 31, 2017 Years

Agency residential mortgage-backed

5.4

Non-agency residential mortgage-backed

5.8

Agency commercial mortgage-backed

3.5

Non-agency commercial mortgage-backed

3.7

Asset-backed

2.5

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

Funding Sources

Table 9: Details of Funding Sources

Dollars in millions

March 31

2017

December 31

2016

Change
$ %

Deposits

Money market

$ 105,230 $ 105,849 $ (619 (1 )% 

Demand

97,076 96,799 277

Savings

41,428 36,956 4,472 12

Time deposits

16,976 17,560 (584 (3 )% 

Total deposits

260,710 257,164 3,546 1

Borrowed funds

FHLB borrowings

19,549 17,549 2,000 11

Bank notes and senior debt

23,745 22,972 773 3

Subordinated debt

6,889 8,009 (1,120 (14 )% 

Other

4,879 4,176 703 17

Total borrowed funds

55,062 52,706 2,356 4

Total funding sources

$ 315,772 $ 309,870 $ 5,902 2

Growth in total deposits was driven by higher consumer savings and demand deposits, partially offset by seasonal declines in commercial deposits. The overall increase in savings deposits reflected in part a shift from money market deposits to relationship-based savings products. The decline in time deposits reflected the net runoff of maturing accounts.

The increase in total borrowed funds reflected net increases in FHLB borrowings and bank notes and senior debt, as new issuances outpaced maturities and calls. These increases were partially offset by subordinated debt maturities.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for additional information regarding our 2017 capital and liquidity activities.

Shareholders' Equity

Total shareholders' equity as of March 31, 2017 remained relatively stable compared to December 31, 2016. Increased retained earnings, driven by net income of $1.1 billion partially offset by $.3 billion of common and preferred dividends, was largely offset by common share repurchases of $.6 billion and lower capital surplus.

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Common shares outstanding were 485 million at both March 31, 2017, and December 31, 2016, as repurchases of 5.0 million shares during the first quarter of 2017 were largely offset by share issuances from treasury stock related to warrants exercised and stock based compensation activity.

B USINESS S EGMENTS R EVIEW

Effective for the first quarter of 2017, as a result of changes to how we manage our businesses, we realigned our segments and, accordingly, have changed the basis of presentation of our segments, resulting in four reportable business segments:

Retail Banking
Corporate & Institutional Banking
Asset Management Group
BlackRock

Our changes in business segment presentation resulting from the realignment included the following:

The Residential Mortgage Banking segment was combined into Retail Banking as a result of our strategic initiative to transform the home lending process by integrating mortgage and home equity lending to enhance product capability and speed of delivery for a better customer experience and to improve efficiency. In conjunction with this shift, residential mortgages previously reported within the "Other" category were also moved to Retail Banking.

The Non-Strategic Assets Portfolio segment was eliminated. The segment's remaining consumer assets were moved to the "Other" category as they are unrelated to the ongoing strategy of any segment, while its commercial assets were transferred to Corporate & Institutional Banking in order to continue the relationships we have with those customers.

A portion of business banking clients was moved from Retail Banking to Corporate & Institutional Banking to facilitate enhanced product offerings to meet the financial needs of our business banking clients.

Net interest income in business segment results reflects our internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors. Effective for the first quarter of 2017, we made certain adjustments to our internal funds transfer pricing methodology primarily relating to weighted average lives of certain non-maturity deposits based on our recent historical experience. These changes in methodology affected business segment results, primarily adversely impacting net interest income for Corporate & Institutional Banking and Retail Banking, offset by increased net interest income in the "Other" category.

The prior period presented was revised to conform to the new segment alignment and to our change in internal funds transfer pricing methodology.

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

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

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

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Retail Banking

(Unaudited)

Table 10: Retail Banking Table

Three months ended March 31

Dollars in millions, except as noted

Change
2017 2016 $ %

Income Statement

Net interest income

$ 1,121 $ 1,122 $ (1

Noninterest income

603 633 (30 (5 )% 

Total revenue

1,724 1,755 (31 (2 )% 

Provision for credit losses

71 72 (1 (1 )% 

Noninterest expense

1,315 1,299 16 1

Pretax earnings

338 384 (46 (12 )% 

Income taxes

125 141 (16 (11 )% 

Earnings

$ 213 $ 243 $ (30 (12 )% 

Average Balance Sheet

Loans held for sale

$ 843 $ 801 $ 42 5

Loans

Consumer

Home equity

$ 25,601 $ 26,743 $ (1,142 (4 )% 

Automobile

12,146 10,787 1,359 13

Education

5,131 5,865 (734 (13 )% 

Credit cards

5,121 4,722 399 8

Other

1,756 1,823 (67 (4 )% 

Total consumer

49,755 49,940 (185

Commercial and commercial real estate

11,006 11,801 (795 (7 )% 

Residential mortgage

11,688 10,268 1,420 14

Total loans

$ 72,449 $ 72,009 $ 440 1

Total assets

$ 87,109 $ 86,213 $ 896 1

Deposits

Noninterest-bearing demand

$ 29,010 $ 26,980 $ 2,030 8

Interest-bearing demand

40,649 37,815 2,834 7

Money market

39,321 49,336 (10,015 (20 )% 

Savings

35,326 21,780 13,546 62

Certificates of deposit

13,735 15,320 (1,585 (10 )% 

Total deposits

$ 158,041 $ 151,231 $ 6,810 5

Performance Ratios

Return on average assets

.99 1.14

Noninterest income to total revenue

35 36

Efficiency

76 74

(continued on following page)

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(continued from previous page)

Change
Dollars in millions, except as noted 2017 2016 $ %

Supplemental Noninterest Income Information

Consumer services

$ 250 $ 254 $ (4 (2 )% 

Brokerage

$ 76 $ 75 $ 1 1

Residential mortgage

$ 113 $ 100 $ 13 13

Service charges on deposits

$ 154 $ 151 $ 3 2

Residential Mortgage Information

Residential mortgage servicing statistics (in billions, except as noted) (a)

Serviced portfolio balance (b)

$ 130 $ 125 $ 5 4

Serviced portfolio acquisitions

$ 8 $ 5 $ 3 60

MSR asset value (b)

$ 1.3 $ .9 $ .4 44

MSR capitalization value (in basis points) (b)

97 69 28 41

Servicing income: (in millions)

Servicing fees, net (c)

$ 52 $ 55 $ (3 (5 )% 

Mortgage servicing rights valuation, net of economic hedge

$ 12 $ (8 $ 20 250

Residential mortgage loan statistics

Loan origination volume (in billions)

$ 1.9 $ 1.9

Loan sale margin percentage

2.96 3.21

Percentage of originations represented by:

Purchase volume (d)

43 40

Refinance volume

57 60

Other Information (b)

Customer-related statistics (average)

Non-teller deposit transactions (e)

52 47

Digital consumer customers (f)

61 56

Credit-related statistics

Nonperforming assets (g)

$ 1,209 $ 1,298 $ (89 (7 )% 

Net charge-offs

$ 100 $ 97 $ 3 3

Other statistics

ATMs

8,976 8,940 36

Branches (h)

2,508 2,613 (105 (4 )% 

Universal branches (i)

527 362 165 46

Brokerage account client assets (in billions) (j)

$ 46 $ 43 $ 3 7
(a) Represents mortgage loan servicing balances for third parties and the related income.
(b) Presented as of March 31, except for customer-related statistics, which are averages for the three months ended, and net charge-offs, which are for the three months ended.
(c) Servicing fees net of impact of decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan prepayments and loans that were paid down or paid off during the period.
(d) Mortgages with borrowers as part of residential real estate purchase transactions.
(e) Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application.
(f) Represents consumer checking relationships that process the majority of their transactions through non-teller channels.
(g) Includes nonperforming loans of $1.1 billion at March 31, 2017 and $1.2 billion at March 31, 2016.
(h) Excludes stand-alone mortgage offices and satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services.
(i) Included in total branches, represents branches operating under our universal model.
(j) Includes cash and money market balances.

Retail Banking earned $213 million in the first three months of 2017 compared with $243 million for the same period in 2016. The decrease in earnings was driven by lower noninterest income and increased expenses.

Noninterest income declined compared to the same period a year ago due to the impact of first quarter of 2016 net gains on the sale of Visa Class B common shares, partially offset by a higher benefit from residential mortgage servicing rights valuation, net of economic hedge.

The increase in noninterest expense in the comparison resulted primarily from investments in technology.

The deposit strategy of Retail Banking is to remain disciplined on pricing and focused on growing and retaining relationship-based balances, executing on market specific deposit growth strategies and providing a source of low-cost funding and liquidity to PNC. In the first three months of 2017, average total deposits increased compared to the same period a year ago, driven by growth in savings deposits reflecting in part a shift from money market deposits to relationship-based savings products. Additionally, demand deposits increased, partially offset by a decline in certificates of deposit due to the net runoff of maturing accounts.

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Retail Banking continued to focus on a relationship-based lending strategy. Total average loans increased in the comparison due to increases in residential mortgage and automobile loans partially offset by declines in home equity and commercial loans, as well as runoff of certain portfolios, as more fully described below.

Average home equity loans decreased as pay-downs and payoffs on loans exceeded new originated volume. Retail Banking's home equity loan portfolio is relationship based, with over 97% of the portfolio attributable to borrowers in our primary geographic footprint. The weighted-average updated FICO scores for this portfolio were 746 at both March 31, 2017 and December 31, 2016.
Average commercial and commercial real estate loans declined as pay-downs and payoffs on loans exceeded new volume.
Average residential mortgages increased as a result of new volumes exceeding portfolio liquidations.
Average automobile loans, which consisted of both direct and indirect auto loans, increased primarily due to portfolio growth in previously underpenetrated markets.
Average credit card balances increased as a result of organic growth as we continue to focus on delivering on our long-term objective of deepening penetration within our existing customer base.
In the first three months of 2017, average loan balances for the education and other loan portfolios decreased $801 million, or 10%, compared to same period in 2016, driven by declines in the government guaranteed education and indirect other portfolios, which are primarily runoff portfolios.

Nonperforming assets decreased compared to March 31, 2016 driven by declines in both consumer and commercial nonperforming loans.

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

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

In the first three months of 2017, approximately 61% of consumer customers used non-teller channels for the majority of their transactions compared with 56% for the same period a year ago.
Deposit transactions via ATM and mobile channels increased to 52% of total deposit transactions in the first three months of 2017 compared with 47% for the same period in 2016.
We had a network of 2,508 branches and 8,976 ATMs at March 31, 2017. Approximately 21% of the branch network operates under the universal model.
Instant debit card issuance, which enables us to print a customer's debit card in minutes, was available in 2,224 branches, or 89% of the branch network, as of March 31, 2017.
Mortgage loan originations for the first three months of 2017 were comparable to the same period in 2016. 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.

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Corporate & Institutional Banking

(Unaudited)

Table 11: Corporate & Institutional Banking Table

Three months ended March 31     Change
Dollars in millions, except as noted 2017 2016 $ %

Income Statement

Net interest income

$ 839 $ 817 $ 22 3

Noninterest income

524 441 83 19

Total revenue

1,363 1,258 105 8

Provision for credit losses

25 102 (77 (75 )% 

Noninterest expense

584 533 51 10

Pretax earnings

754 623 131 21

Income taxes

270 225 45 20

Earnings

$ 484 $ 398 $ 86 22

Average Balance Sheet

Loans held for sale

$ 1,116 $ 708 $ 408 58

Loans

Commercial

$ 92,116 $ 87,324 $ 4,792 5

Commercial real estate

27,091 25,959 1,132 4

Equipment lease financing

7,497 7,420 77 1

Total commercial lending

126,704 120,703 6,001 5

Consumer

331 503 (172 (34 )% 

Total loans

$ 127,035 $ 121,206 $ 5,829 5

Total assets

$ 142,592 $ 137,270 $ 5,322 4

Deposits

Noninterest-bearing demand

$ 47,423 $ 48,715 $ (1,292 (3 )% 

Money market

21,086 22,298 (1,212 (5 )% 

Interest-bearing demand and other

15,391 11,391 4,000 35

Total deposits

$ 83,900 $ 82,404 $ 1,496 2

Performance Ratios

Return on average assets

1.38 1.18

Noninterest income to total revenue

38 35

Efficiency

43 42

Other Information

Commercial loan servicing portfolio (in billions) (a) (b)

$ 490 $ 453 $ 37 8

Consolidated revenue from: (c)

Treasury Management (d)

$ 359 $ 315 $ 44 14

Capital Markets (d)

$ 247 $ 152 $ 95 63

Commercial mortgage banking activities

Commercial mortgage loans held for sale (e)

$ 13 $ 26 $ (13 (50 )% 

Commercial mortgage loan servicing income (f)

58 62 (4 (6 )% 

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

16 1 15 *

Total

$ 87 $ 89 $ (2 (2 )% 

Net carrying amount of commercial mortgage servicing rights (a)

$ 606 $ 460 $ 146 32

Average Loans (by C&IB business)

Corporate Banking

$ 53,839 $ 49,533 $ 4,306 9

Real Estate

37,136 35,784 1,352 4

Business Credit

14,839 14,672 167 1

Equipment Finance

12,478 11,652 826 7

Commercial Banking

7,041 7,384 (343 (5 )% 

Other

1,702 2,181 (479 (22 )% 

Total average loans

$ 127,035 $ 121,206 $ 5,829 5

Credit-related statistics

Nonperforming assets (a) (h)

$ 546 $ 760 $ (214 (28 )% 

Net charge-offs

$ 21 $ 38 $ (17 (45 )% 

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

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* - Not meaningful.
(a) As of March 31.
(b) Represents loans serviced for PNC and others.
(c) Represents consolidated amounts. See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of the Corporate & Institutional Banking portion of this Business Segments Review section.
(d) Includes amounts reported in net interest income, corporate service fees and other noninterest income.
(e) Includes other noninterest income for valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, origination fees, gains on sale of loans held for sale and net interest income on loans held for sale.
(f) Includes net interest income and noninterest income (primarily in corporate services fees) from loan servicing net of reduction in commercial mortgage servicing rights due to time decay and payoffs. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.
(g) Amounts reported in corporate service fees.
(h) Includes nonperforming loans of $.4 billion at March 31, 2017 and $.6 billion at March 31, 2016.

Corporate & Institutional Banking earned $484 million in the first quarter of 2017 compared to $398 million for the same period in 2016. The increase of $86 million, or 22%, was primarily due to a decrease in the provision for credit losses and higher revenue, partially offset by higher noninterest expense. We continue to focus on building client relationships where the risk-return profile is attractive.

Net interest income increased compared with the first quarter of 2016, reflecting the impact of interest rate spread expansion on deposits as well as higher average loan balances.

Growth in noninterest income in the comparison was driven primarily by higher merger and acquisition advisory fees and other capital markets-related revenue, a higher benefit from commercial mortgage servicing rights valuation, net of economic hedge, and higher treasury management revenue.

The decrease in provision for credit losses reflected a lower provision for energy related loans in the oil, gas and coal sectors in the first quarter of 2017.

Noninterest expense increased in the comparison largely driven by higher variable compensation commensurate with increased business activity.

Average loans increased compared to the first quarter of 2016 due to strong growth in the Corporate Banking, Real Estate and Equipment Finance businesses:

Corporate Banking provides lending, treasury management and capital markets-related products and services to midsized and large corporations, government and not-for-profit entities. Average loans for this business grew in the comparison reflecting increased lending to large corporate clients and strong production in specialty lending verticals.

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

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 modestly in the comparison as new originations were offset by payoffs and decreased utilization.

PNC Equipment Finance provides equipment financing solutions for clients throughout the U.S.

and Canada. Average loans, including commercial loans and finance leases, and operating leases were $13.2 billion in the first quarter of 2017, an increase of $.8 billion in the year over year comparison due to strong new production.

Commercial Banking provides lending, treasury management and capital markets-related products and services to smaller corporations and businesses. Average loans for this business decreased in the comparison primarily due to the impact of capital management activities.

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

Product Revenue

In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, for customers of all business segments, including treasury management, capital markets-related products and services, and commercial mortgage banking activities. On a consolidated basis, the revenue from these other services is included in net interest income, corporate service fees and other noninterest income. From a segment perspective, the majority of the revenue and expense related to these services is reflected in the Corporate & Institutional Banking segment results and the remainder is reflected in the results of other businesses. The Other Information section in Table 11 includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.

Treasury management revenue, composed of fees and net interest income from customer deposit balances, increased compared with the first quarter of 2016 driven by liquidity-related revenue associated with customer deposit balances mostly due to interest rate spread expansion.

Capital markets-related products and services include foreign exchange, derivatives, securities, loan syndications, mergers and acquisitions advisory and equity capital markets advisory related services. Revenue from capital markets-related products and services increased in the comparison primarily due to higher merger and acquisition advisory fees, higher revenue from credit valuations on customer-related derivative activities and higher derivative sales to customers.

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Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (including net interest income and noninterest income) and revenue derived from commercial mortgage loans held for sale and related hedges. Total revenue from commercial mortgage banking

activities decreased slightly in the comparison as a decline in revenue from commercial mortgage loans held for sale and lower commercial mortgage loan servicing income was mostly offset by a higher benefit from commercial mortgage servicing rights valuation, net of economic hedge.

Asset Management Group

(Unaudited)

Table 12: Asset Management Group Table

Three months ended March 31 Change
Dollars in millions, except as noted 2017 2016 $ %

Income Statement

Net interest income

$ 71 $ 77 $ (6 (8 )% 

Noninterest income

218 203 15 7

Total revenue

289 280 9 3

Provision for credit losses (benefit)

(2 (3 1 33

Noninterest expense

217 206 11 5

Pretax earnings

74 77 (3 (4 )% 

Income taxes

27 28 (1 (4 )% 

Earnings

$ 47 $ 49 $ (2 (4 )% 

Average Balance Sheet

Loans

Consumer

$ 5,113 $ 5,630 $ (517 (9 )% 

Commercial and commercial real estate

728 788 (60 (8 )% 

Residential mortgage

1,190 1,003 187 19

Total loans

$ 7,031 $ 7,421 $ (390 (5 )% 

Total assets

$ 7,476 $ 7,887 $ (411 (5 )% 

Deposits

Noninterest-bearing demand

$ 1,433 $ 1,407 $ 26 2

Interest-bearing demand

3,829 4,280 (451 (11 )% 

Money market

3,500 4,758 (1,258 (26 )% 

Savings

3,768 1,563 2,205 141

Other

246 275 (29 (11 )% 

Total deposits

$ 12,776 $ 12,283 $ 493 4

Performance Ratios

Return on average assets

2.55 2.52

Noninterest income to total revenue

75 73

Efficiency

75 74

Other Information

Nonperforming assets (a) (b)

$ 51 $ 54 $ (3 (6 )% 

Net charge-offs

$ 1 $ 4 $ (3 (75 )% 

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

Discretionary client assets under management

$ 141 $ 135 $ 6 4

Nondiscretionary client assets under administration

123 118 5 4

Total

$ 264 $ 253 $ 11 4

Discretionary client assets under management

Personal

$ 87 $ 84 $ 3 4

Institutional

54 51 3 6

Total

$ 141 $ 135 $ 6 4

Equity

$ 71 $ 66 $ 5 8

Fixed Income

50 45 5 11

Liquidity/Other

20 24 (4 (17 )% 

Total

$ 141 $ 135 $ 6 4

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(a) As of March 31.
(b) Includes nonperforming loans of $45 million at March 31, 2017 and $49 million at March 31, 2016.
(c) Excludes brokerage account client assets.
(d) Effective for the first quarter of 2017, we have adjusted nondiscretionary client assets under administration for prior periods to remove assets which, as a result of certain investment advisory services performed by one of our registered investment advisors, were previously reported as both discretionary client assets under management and nondiscretionary client assets under administration. Effective for the first quarter of 2017, these amounts are only reported as discretionary assets under management. The prior period presented was adjusted to remove approximately $7 billion as of March 31, 2016 previously included in nondiscretionary assets under administration. In addition, effective for the first quarter of 2017, we have refined our methodologies for allocating discretionary client assets under management by asset type. As a result, we have updated the presentation of discretionary client assets under management by asset type for the prior period presented.

Asset Management Group earned $47 million in the first quarter of 2017 and $49 million in the first quarter of 2016. Earnings decreased slightly as an increase in noninterest expense was mostly offset by higher revenue.

Higher revenue in the comparison was driven by growth in noninterest income, reflecting stronger average equity markets. Net interest income decreased primarily due to lower average loan balances and interest rate spread compression within the loan portfolio.

Noninterest expense increased in the first quarter of 2017 compared to the prior year primarily attributable to higher variable compensation and technology expenses. Asset Management Group remains focused on disciplined expense management as it invests in strategic growth opportunities.

Asset Management Group's strategy is focused on growing investable assets by continually evolving the client experience and products and services. The business offers an open architecture platform with a full array of investment products and banking solutions.

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

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

Asset Management Group's discretionary client assets under management increased in the comparison to the prior year, primarily attributable to higher equity markets and net business growth.

BlackRock (Unaudited)

Information related to our equity investment in BlackRock follows:

Table 13: BlackRock Table

Three months ended March 31
Dollars in millions 2017 2016

Business segment earnings (a)

$ 145 $ 114

PNC's economic interest in BlackRock (b)

22 22
(a) Includes our share of BlackRock's reported GAAP earnings and additional income taxes on those earnings incurred by us.
(b) At March 31.

March 31 December 31
In billions 2017 2016

Carrying value of our investment in BlackRock (c)

$ 7.1 $ 7.0

Market value of our investment in BlackRock (d)

13.5 13.4
(c) We account for our investment in BlackRock under the equity method of accounting, exclusive of a related deferred tax liability of $2.3 billion at both March 31, 2017 and December 31, 2016. Our voting interest in BlackRock common stock was approximately 21% at March 31, 2017.
(d) Does not include liquidity discount.

In addition to our investment in BlackRock reflected in Table 13, at March 31, 2017, we held approximately 0.25 million shares of BlackRock Series C Preferred Stock valued at $76 million, which are available to fund our obligation in connection with certain BlackRock long-term incentive plan (LTIP) programs.

On February 1, 2017, we transferred 0.52 million shares of BlackRock Series C Preferred Stock to BlackRock to satisfy a portion of our LTIP obligation. The transfer reduced Other assets and Other liabilities on our Consolidated Balance Sheet by $155 million, representing the fair value of the shares transferred.

Our 2016 Form 10-K includes additional information about our investment in BlackRock.

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R ISK M ANAGEMENT

The Risk Management section included in Item 7 of our 2016 Form 10-K describes our enterprise risk management framework including risk culture, enterprise strategy, risk governance and oversight, risk identification, risk assessment, risk controls and monitoring, and risk aggregation and reporting. Additionally, our 2016 Form 10-K provides an analysis of our key areas of risk, which include but are not limited to credit, liquidity and capital, market, operational and compliance. Our use of financial derivatives as part of our overall asset and liability risk management process is also addressed within the Risk Management section.

The following information updates our 2016 Form 10-K risk management disclosures.

Credit Risk Management

See the Credit Risk Management portion of the Risk Management section in our 2016 Form 10-K for additional discussion regarding credit risk.

Nonperforming Assets and Loan Delinquencies

Nonperforming Assets

Nonperforming assets include nonperforming loans and leases for which ultimate collectability of the full amount of contractual principal and interest is not probable and include nonperforming troubled debt restructurings (TDRs), other real estate owned (OREO), foreclosed and other assets. Loans held for sale, certain government insured or guaranteed loans, purchased impaired loans and loans accounted for under the fair value option are excluded from nonperforming loans. Additional information regarding our nonperforming loans and nonaccrual policies is included in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in our 2016 Form 10-K. A summary of the major categories of nonperforming assets are presented in Table 14. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in this Report for further detail of nonperforming asset categories.

Table 14: Nonperforming Assets by Type

March 31

2017

December 31

2016

Change
Dollars in millions $ %

Nonperforming loans

Commercial lending

$ 549 $ 655 $ (106) (16 )% 

Consumer lending (a)

1,449 1,489 (40) (3 )% 

Total nonperforming loans (b)

1,998 2,144 (146) (7 )% 

OREO, foreclosed and other assets

214 230 (16) (7 )% 

Total nonperforming assets

$ 2,212 $ 2,374 $ (162) (7 )% 

Amount of TDRs included in nonperforming loans

$ 1,009 $ 1,112 $ (103) (9 )% 

Percentage of total nonperforming loans

51 52

Nonperforming loans to total loans

.94 1.02

Nonperforming assets to total loans, OREO, foreclosed and other assets

1.04 1.12

Nonperforming assets to total assets

.60 .65

Allowance for loan and lease losses to total nonperforming loans

128 121
(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 $.4 billion at both March 31, 2017 and December 31, 2016, which included $.2 billion of loans that are government insured/guaranteed.

Table 15: Change in Nonperforming Assets

In millions 2017 2016

January 1

$ 2,374 $ 2,425

New nonperforming assets

330 542

Charge-offs and valuation adjustments

(150 (161

Principal activity, including paydowns and payoffs

(228 (98

Asset sales and transfers to loans held for sale

(42 (90

Returned to performing status

(72 (66

March 31

$ 2,212 $ 2,552

As of March 31, 2017, approximately 85% of total nonperforming loans were secured by collateral which lessened reserve requirements and is expected to reduce credit losses in the event of default. As of March 31, 2017, commercial lending nonperforming loans were carried at approximately 54% of their unpaid principal balance, due to charge-offs recorded to date, before consideration of the ALLL.

Within consumer nonperforming loans, residential real estate TDRs comprise 73% of total residential real estate nonperforming loans at March 31, 2017, up from 70% at

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December 31, 2016. Home equity TDRs comprise 51% of home equity nonperforming loans at March 31, 2017 and 52% at December 31, 2016. TDRs generally remain in nonperforming status until a borrower has made at least six consecutive months of both principal and interest payments under the modified terms or ultimate resolution occurs. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to us and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

At March 31, 2017, our largest nonperforming asset was $51 million in the Wholesale Trade Industry and our average nonperforming loan associated with commercial lending was

less than $1 million. The ten largest individual nonperforming assets are from the commercial lending portfolio and represented 42% and 10% of total commercial lending nonperforming loans and total nonperforming assets, respectively, as of March 31, 2017.

Loan Delinquencies

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

Table 16: Accruing Loans Past Due (a)

Amount Percentage of Total Loans
Outstanding

March 31

2017

December 31

2016

Change

March 31

2017

December 31

2016

Dollars in millions $ %

Early stage loan delinquencies

Accruing loans past due 30 to 59 days

$ 458 $ 562 $ (104 (19 )%  .22 .27

Accruing loans past due 60 to 89 days

227 232 (5 (2 )%  .11 .11

Total

685 794 (109 (14 )%  .32 .38

Late stage loan delinquencies

Accruing loans past due 90 days or more

699 782 (83 (11 )%  .33 .37

Total

$ 1,384 $ 1,576 $ (192 (12 )%  .65 .75
(a) Past due loan amounts include government insured or guaranteed loans of $.9 billion at both March 31, 2017 and December 31, 2016.

Accruing loans past due 90 days or more decreased at March 31, 2017 compared to December 31, 2016 primarily driven by declines in government insured residential real estate and other consumer loans. Accruing loans past due 90 days or more are not included in nonperforming loans and continue to accrue interest because they are well secured by collateral and are in the process of collection, or are managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines, or are certain government insured or guaranteed loans.

Home Equity and Auto Loan Portfolios

Home Equity Loan Portfolio

Our home equity loan portfolio totaled $29.6 billion as of March 31, 2017, or 14% of the total loan portfolio. Of that total, $17.4 billion, or 59%, were outstanding under primarily variable-rate home equity lines of credit and $12.2 billion, or 41%, consisted of closed-end home equity installment loans. Approximately 4% of the home equity portfolio was purchased impaired and 3% of the home equity portfolio was on nonperforming status as of March 31, 2017.

As of March 31, 2017, we were in an originated first lien position for approximately 57% of the total outstanding portfolio and, where originated as a second lien, we held and serviced the first lien position for an additional 1% of the portfolio. The remaining 42% 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. Lien position information is generally based upon original LTV at the time of origination. We use an industry-leading third-party service provider to obtain updated loan, lien and collateral data that is aggregated from public and private sources.

We track borrower performance monthly, including obtaining original LTVs and updated FICO scores at least quarterly, updated LTVs semi-annually, and other credit metrics at least quarterly, including the historical performance of any mortgage loans regardless of lien position that we do or do not hold. This information is used for internal reporting and risk management. For internal reporting and risk management we also segment the population into pools based on product type

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( e.g. , home equity loans, brokered home equity loans, home equity lines of credit, brokered home equity lines of credit). As part of our overall risk analysis and monitoring, we segment the home equity portfolio based upon the loan delinquency, modification status and bankruptcy status, as well as the delinquency, modification status and bankruptcy status of any mortgage loan with the same borrower (regardless of whether it is a first lien senior to our second lien).

In establishing our ALLL for non-impaired loans, we utilize a delinquency roll-rate methodology for pools of loans. The roll-rate methodology estimates transition/roll of loan balances from one delinquency state to the next delinquency state and ultimately to charge-off. The roll through to charge-off is based on our actual loss experience for each type of pool. Each of our home equity pools contains both first and second liens. Our experience has been that the ratio of first to second lien loans has been consistent over time and the charge-off amounts for the pools, used to establish our allowance, include losses on both first and second lien loans.

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 only 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 March 31, 2017, the following table presents the periods when home equity lines of credit draw periods are scheduled to end.

Table 17: Home Equity Lines of Credit – Draw Period End Dates

In millions Interest Only
Product
Principal and
Interest Product

Remainder of 2017

$ 1,257 $ 308

2018

757 606

2019

518 460

2020

416 412

2021

436 638

2022 and thereafter

2,536 6,054

Total (a) (b)

$ 5,920 $ 8,478
(a) Includes all home equity lines of credit that mature in the remainder of 2017 or later, including those with borrowers where we have terminated borrowing privileges.
(b) Includes home equity lines of credit with balloon payments, including those where we have terminated borrowing privileges, of $25 million, $25 million, $18 million, $69 million, $62 million and $340 million with draw periods scheduled to end in the remainder of 2017, 2018, 2019, 2020, 2021 and 2022 and thereafter, respectively.

Based upon outstanding balances, and excluding purchased impaired loans, at March 31, 2017, 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, which are accounted for as nonperforming. 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.

Auto Loan Portfolio

The auto loan portfolio totaled $12.3 billion as of March 31, 2017, or 6% of our total loan portfolio. Of that total, $10.8 billion resides in the indirect auto portfolio, $1.3 billion in the direct auto portfolio and $.2 billion in acquired or securitized portfolios, which have been declining as no pools have been recently acquired. Indirect auto loan applications are generated from franchised automobile dealers. This business is strategically aligned with our core retail business.

We have elected not to pursue non-prime auto lending. Our average new loan origination FICO score over the last twelve months was 758 for indirect auto loans and 773 for direct auto loans. As of March 31, 2017, .5% of our auto loan portfolio was nonperforming and .4% of the portfolio was accruing past due. We offer both new and used automobile financing to customers through our various channels. The portfolio was composed of 56% new vehicle loans and 44% used vehicle loans at March 31, 2017.

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

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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.

A temporary modification, with a term between three 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 generally result in principal forgiveness, interest rate reduction, term extension, capitalization of past due amounts, interest-only period or deferral of principal.

We also monitor the success rates and delinquency status of our loan modification programs to assess their effectiveness in serving our borrowers' and servicing customers' needs while mitigating credit losses. Table 18 provides the number of accounts and unpaid principal balance of modified consumer real estate related loans at the end of each year presented.

Table 18: Consumer Real Estate Related Loan Modifications

March 31, 2017 December 31, 2016
Dollars in millions Number of
Accounts
Unpaid
Principal
Balance
Number of
Accounts
Unpaid
Principal
Balance

Temporary modifications

3,315 $ 242 3,484 $ 258

Permanent modifications

24,024 2,718 23,904 2,693

Total consumer real estate related loan modifications

27,339 $ 2,960 27,388 $ 2,951

Commercial Loan Modifications

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

Troubled Debt Restructurings

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

Table 19: Summary of Troubled Debt Restructurings (a)

March 31

2017

December 31

2016

Change
In millions $ %

Total commercial lending

$ 366 $ 428 $ (62 (14 )% 

Total consumer lending

1,764 1,793 (29 (2 )% 

Total TDRs

$ 2,130 $ 2,221 $ (91 (4 )% 

Nonperforming

$ 1,009 $ 1,112 $ (103 (9 )% 

Accruing (b)

1,121 1,109 12 1

Total TDRs

$ 2,130 $ 2,221 $ (91 (4 )% 
(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) Accruing loans include consumer credit card loans and loans that have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans.

Excluded from TDRs are $1.2 billion of consumer loans held for sale, loans accounted for under the fair value option and pooled purchased impaired loans, as well as certain government insured or guaranteed loans at both March 31, 2017 and December 31, 2016. Nonperforming TDRs represented approximately 51% and 52% of total nonperforming loans and 47% and 50% of total TDRs at March 31, 2017 and December 31, 2016, respectively. The remaining portion of TDRs represents TDRs that have been returned to accrual accounting after performing under the restructured terms for at least six consecutive months.

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

We maintain an ALLL to absorb losses from the loan and lease portfolio and determine this allowance based on quarterly assessments of the estimated probable credit losses incurred in the loan and lease portfolio. Our total ALLL of $2.6 billion at March 31, 2017 consisted of $1.5 billion and $1.1 billion established for the commercial lending and consumer lending categories, respectively. We maintain the ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan and lease portfolio as of the balance sheet date. The reserve calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan and lease portfolio performance experience, the financial strength of the borrower and economic conditions. Key reserve assumptions 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 are established for non-impaired commercial loan classes based on probability of default (PD) and loss given default (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. The majority of the commercial portfolio is secured by collateral, including loans to asset-based lending customers, which generally demonstrate lower LGD compared to loans not secured by collateral. Our PDs and LGDs are primarily determined using internal commercial loan loss data. This internal data is supplemented with third-party data and management judgment, as deemed necessary. We continue to evaluate and enhance our use of internal commercial loss data and will periodically update our PDs and LGDs as well as consider third-party data, regulatory guidance and management judgment.

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.

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.

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

See Note 1 Accounting Policies in our 2016 Form 10-K and Note 3 Asset Quality in the Notes To Consolidated Financial Statements in this Report for further information on certain key asset quality indicators that we use to evaluate our portfolios and establish the allowances.

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Table 20: Allowance for Loan and Lease Losses

Dollars in millions 2017 2016

January 1

$ 2,589 $ 2,727

Total net charge-offs

(118 (149

Provision for credit losses

88 152

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

(4 (21

Other

6 2

March 31

$ 2,561 $ 2,711

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

.23 .29

Total allowance for loan and lease losses to total loans

1.20 1.31

Commercial lending net charge-offs

$ (23 $ (43

Consumer lending net charge-offs

(95 (106

Total net charge-offs

$ (118 $ (149

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

Commercial lending

.07 .13

Consumer lending

.53 .59

At March 31, 2017, total ALLL to total nonperforming loans was 128%. The comparable amount for December 31, 2016 was 121%. These ratios are 94% and 89%, respectively, when excluding the $.7 billion of ALLL at both March 31, 2017 and December 31, 2016, allocated to consumer loans and lines of credit not secured by residential real estate and purchased impaired loans. We have excluded from these ratios purchased impaired loans, consumer loans and consumer lines of credit not secured by real estate that are excluded from nonperforming loans. See Table 14 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 three months of 2017, overall credit quality remained relatively stable, which resulted in an essentially flat ALLL balance as of March 31, 2017 compared to December 31, 2016.

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

Table 21: Loan Charge-Offs and Recoveries

Three months ended
March 31

Dollars in millions

Gross
Charge-offs
Recoveries

Net

Charge-offs /
(Recoveries)
Percent of Average
Loans (Annualized)

2017

Commercial

$ 53 $ 24 $ 29 .11

Commercial real estate

1 7 (6 (.08 )% 

Equipment lease financing

1 1

Home equity

34 20 14 .19

Residential real estate

4 4

Credit card

46 5 41 3.24

Other consumer

59 19 40 .74

Total

$ 198 $ 80 $ 118 .23

2016

Commercial

$ 78 $ 33 $ 45 .18

Commercial real estate

10 12 (2 (.03 )% 

Equipment lease financing

1 1

Home equity

48 21 27 .34

Residential real estate

8 3 5 .14

Credit card

42 4 38 3.23

Other consumer

49 13 36 .67

Total

$ 236 $ 87 $ 149 .29

See Note 1 Accounting Policies in our 2016 Form 10-K and Note 4 Allowance for Loan and Lease Losses in the Notes To Consolidated Financial Statements in this Report for additional information on the ALLL.

Residential Mortgage Repurchase Obligations

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in our 2016 Form 10-K, we have sold residential mortgage loans directly or indirectly through securitization and loan sale transactions in which we have continuing involvement. One form of continuing involvement includes certain loan repurchase obligations associated with the transferred assets. For additional information regarding our residential mortgage repurchase obligations, see the Credit Risk Management portion of the Risk Management section in our 2016 Form 10-K.

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Liquidity and Capital Management

Liquidity risk, including our liquidity monitoring measures and tools, is described in further detail in the Liquidity and Capital Management section of our 2016 Form 10-K.

One of the ways we monitor our liquidity is by reference to the Liquidity Coverage Ratio (LCR), a regulatory minimum liquidity requirement designed to ensure that covered banking organizations maintain an adequate level of liquidity to meet net liquidity needs over the course of a 30-day stress scenario. The LCR is calculated by dividing the amount of an institution's high quality, unencumbered liquid assets (HQLA), as defined and calculated in accordance with the LCR rules, by its estimated net cash outflows, with net cash outflows determined by applying the assumed outflow factors in the LCR rules. The resulting quotient is expressed as a percentage. The minimum LCR that PNC and PNC Bank were required to maintain was 90% in 2016 and the minimum increased to 100% in 2017. PNC and PNC Bank calculate the LCR on a daily basis and as of March 31, 2017, the LCR for PNC and PNC Bank exceeded the fully phased-in requirement of 100%.

We provide additional information regarding regulatory liquidity requirements and their potential impact on us in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of our 2016 Form 10-K.

Sources of Funding

Our largest source of liquidity on a consolidated basis is the customer deposit base generated by our banking businesses. These deposits provide relatively stable and low-cost funding. Total deposits increased to $260.7 billion at March 31, 2017 from $257.2 billion at December 31, 2016, driven by growth in consumer savings and demand deposits, partially offset by seasonal declines in commercial deposits. The overall increase in savings deposits reflected in part a shift from money market deposits to relationship-based savings products. Additionally, certain assets determined by us to be liquid and unused borrowing capacity from a number of sources are also available to maintain our liquidity position.

At March 31, 2017, our liquid assets consisted of short-term investments (Federal funds sold, resale agreements, trading securities and interest-earning deposits with banks) totaling $32.4 billion and securities available for sale totaling $59.3 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 $91.7 billion, we had $4.4 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, $4.5 billion of securities held to maturity were also pledged as collateral for these purposes.

We also obtain liquidity through the issuance of traditional forms of funding, including long-term debt (senior notes, subordinated debt and FHLB advances) and short-term borrowings (Federal funds purchased, securities sold under repurchase agreements, commercial paper and other short-term borrowings).

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

Table 22: Senior and Subordinated Debt

In billions 2017

January 1

$ 31.0

Issuances

1.8

Calls and maturities

(2.2

March 31

$ 30.6

Under PNC Bank's 2014 bank note program, as amended, PNC Bank may from time to time offer up to $40.0 billion aggregate principal amount outstanding at any one time of its unsecured senior and subordinated notes with maturity dates more than nine months (in the case of senior notes) and five years or more (in the case of subordinated notes) from their date of issue. At March 31, 2017, PNC Bank had $24.6 billion of notes outstanding under this program of which $19.4 billion were senior bank notes and $5.2 billion were subordinated bank notes. The following table details issuances for the three months ended March 31, 2017:

Table 23: PNC Bank Notes Issued During First Quarter 2017

Issuance Date Amount Description of Issuance

February 17, 2017

March 8, 2017 (re-opening)

$1.0 billion

$250 million

Senior notes with a maturity date of February 17, 2022. Interest is payable semi-annually at a fixed rate of 2.625% on February 17 and August 17 of each year, beginning August 17, 2017. Following the re-opening, the aggregate outstanding principal amount of this series of notes increased to $1.25 billion.

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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 March 31, 2017, our unused secured borrowing capacity was $25.6 billion with the FHLB-Pittsburgh. Total FHLB borrowings increased to $19.5 billion at March 31, 2017 compared with $17.5 billion at December 31, 2016 as draws outpaced maturities.

The FHLB-Pittsburgh also periodically provides standby letters of credit on behalf of PNC Bank to secure certain public deposits. 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 March 31, 2017, standby letters of credit issued on our behalf by the FHLB-Pittsburgh totaled $4.4 billion.

PNC Bank has the ability to offer up to $10.0 billion of its commercial paper to provide additional liquidity. As of March 31, 2017, there were no issuances 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 a primary means of funding our routine business activities, but rather as a potential source of liquidity in a stressed environment or during a market disruption. These potential borrowings are secured by commercial loans. At March 31, 2017, our unused secured borrowing capacity was $17.5 billion with the Federal Reserve Bank.

Borrowed funds come from a diverse mix of short-term and long-term funding sources. See Note 10 Borrowed Funds in our 2016 Form 10-K and the Funding Sources section of the Consolidated Balance Sheet Review for additional information related to our Borrowings.

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

As of March 31, 2017, available parent company liquidity totaled $4.5 billion. Parent company liquidity is primarily held in intercompany short-term investments, the terms of which provide for the availability of cash in 31 days or less. Investments with longer durations may also be acquired, but if so, the related maturities are aligned with scheduled cash needs, such as the maturity of parent company debt obligations.

The principal source of parent company liquidity is the dividends it receives from 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 payments by PNC Bank to the parent company without prior regulatory approval was approximately $1.1 billion at March 31, 2017. See Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements in our 2016 Form 10-K for a further discussion of these limitations.

In addition to dividends from PNC Bank, other sources of parent company liquidity include cash and investments, as well as dividends and loan repayments from other subsidiaries and dividends or distributions from equity investments. We can also generate liquidity for the parent company and PNC's non-bank subsidiaries through the issuance of debt and equity securities, including certain capital instruments, in public or private markets and commercial paper. The parent company has the ability to offer up to $5.0 billion of commercial paper to provide additional liquidity. As of March 31, 2017, there were no commercial paper issuances outstanding.

The parent company has an effective shelf registration statement pursuant to which it can issue additional debt, equity and other capital instruments. Under this shelf registration statement, on February 7, 2017, the parent company issued $575 million in Floating Rate Senior Notes with a maturity date of August 7, 2018. Interest is payable at the 3-month LIBOR rate reset quarterly, plus a spread of 0.25% per annum, on February 7, May 7, August 7 and November 7 of each year, commencing on May 7, 2017.

Total parent company borrowings outstanding totaled $6.2 billion at both March 31, 2017 and December 31, 2016. As of March 31, 2017, there were no parent company borrowings with contractual maturities of less than one year.

Contractual Obligations and Commitments

We have contractual obligations representing required future payments on borrowed funds, time deposits, leases, pension and postretirement benefits and purchase obligations. See the Liquidity and Capital Management portion of the Risk Management section in our 2016 Form 10-K for more information on these future cash outflows. Additionally, in the normal course of business we have various commitments outstanding, certain of which are not included on our Consolidated Balance Sheet. We provide information on our commitments in Note 13 Commitments in the Notes To Consolidated Financial Statements of this Report.

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Credit Ratings

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

In general, rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, level and quality of earnings, and the current legislative and regulatory environment, including implied government support. 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.

Table 24: Credit Ratings as of March 31, 2017 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

Capital Management

Detailed information on our capital management processes and activities, including additional information on our share repurchase programs and our previous CCAR submissions and capital plans, is included in the Capital Management portion of the Risk Management section in our 2016 Form 10-K.

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

In January 2017, we announced a $300 million increase to our share repurchase programs, which now provide for repurchases of up to $2.3 billion for the four quarter period ended June 30, 2017. In the first quarter of 2017, we repurchased 5.0 million common shares for $.6 billion. PNC has repurchased a total of 15.8 million shares for $1.6 billion under these repurchase programs as of March 31, 2017.

We paid dividends on common stock of $.3 billion, or 55 cents per common share, during the first quarter of 2017. On April 4, 2017, the PNC Board of Directors declared a quarterly common stock cash dividend of 55 cents per share payable on May 5, 2017.

See Note 11 Total Equity and Other Comprehensive Income in the Notes To Consolidated Financial Statements in this Report for additional information on the March 15, 2017 redemption of $1.0 billion of Fixed-to-Floating Rate Non-Cumulative Exchangeable Perpetual Trust Securities issued by PNC Preferred Funding Trusts I and II.

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Table 25: Basel III Capital

March 31, 2017
Dollars in millions

2017 Transitional

Basel III (a)

Pro forma Fully Phased-In Basel III
(Non-GAAP) (estimated) (b) (c)

Common equity Tier 1 capital

Common stock plus related surplus, net of treasury stock

$ 9,681 $ 9,681

Retained earnings

32,372 32,372

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

179 223

Accumulated other comprehensive income for pension and other postretirement plans

(474 (592

Goodwill, net of associated deferred tax liabilities

(8,824 (8,824

Other disallowed intangibles, net of deferred tax liabilities

(183 (228

Other adjustments/(deductions)

(183 (180

Total common equity Tier 1 capital before threshold deductions

32,568 32,452

Total threshold deductions

(1,064 (1,585

Common equity Tier 1 capital

31,504 30,867

Additional Tier 1 capital

Preferred stock plus related surplus

3,980 3,980

Other adjustments/(deductions)

(94 (104

Tier 1 capital

35,390 34,743

Additional Tier 2 capital

Qualifying subordinated debt

3,846 3,778

Trust preferred capital securities

100

Eligible credit reserves includable in Tier 2 capital

2,866 2,866

Total Basel III capital

$ 42,202 $ 41,387

Risk-weighted assets

Basel III standardized approach risk-weighted assets (d)

$ 300,233 $ 308,392

Basel III advanced approaches risk-weighted assets (e)

N/A $ 278,938

Average quarterly adjusted total assets

$ 356,237 $ 355,657

Supplementary leverage exposure (f)

$ 423,122 $ 422,542

Basel III risk-based capital and leverage ratios

Common equity Tier 1

10.5 10.0 % (g) (h) 

Tier 1

11.8 11.3 % (g) (i) 

Total

14.1 13.4 % (g) (j) 

Leverage (k)

9.9 9.8

Supplementary leverage ratio (l)

8.4 8.2
(a) Calculated using the regulatory capital methodology applicable to us during 2017.
(b) PNC utilizes the pro forma fully phased-in Basel III capital ratios to assess its capital position (without the benefit of phase-ins), as these ratios represent the regulatory capital standards that will ultimately be applicable to PNC under the final Basel III rules. Pro forma fully phased-in capital amounts, ratios and risk-weighted and leverage-related assets are estimates.
(c) Basel III capital ratios and estimates may be impacted by additional regulatory guidance or analysis and, in the case of those ratios calculated using the advanced approaches, may be subject to variability based on the ongoing evolution, validation and regulatory approval of PNC's models integral to the calculation of advanced approaches risk-weighted assets.
(d) Includes credit and market risk-weighted assets.
(e) Basel III advanced approaches risk-weighted assets are estimated based on the Basel III advanced approaches rules, and include credit, market and operational risk-weighted assets. During the parallel run qualification phase, PNC has refined the data, models and internal processes used as part of the advanced approaches for determining risk-weighted assets. We anticipate additional refinements to this estimate through the parallel run qualification phase.
(f) 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.
(g) Pro forma fully phased-in Basel III capital ratio based on Basel III standardized approach risk-weighted assets and rules.
(h) For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Common equity Tier 1 capital ratio estimate is 11.1%. 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.
(i) For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Tier 1 risk-based capital ratio estimate is 12.5%. This capital ratio is calculated using fully phased-in Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets.
(j) For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Total capital risk-based capital ratio estimate is 13.8%. This ratio is calculated using fully phased-in Total Basel III capital, which under the advanced approaches, Additional Tier 2 capital includes allowance for loan and lease losses in excess of Basel expected credit losses, if any, up to 0.6% of credit risk related risk-weighted assets, and dividing by estimated Basel III advanced approach risk-weighted assets.
(k) Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets.
(l) 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.

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As a result of the phase-in periods included in the final U.S. Basel III regulatory capital rules (Basel III rules), as well as the fact that we remain in the parallel run qualification phase for the advanced approaches, our regulatory risk-based capital ratios in 2017 are based on the definitions of, and deductions from, regulatory capital under the Basel III rules (as such definitions and deductions are phased-in for 2017) and the standardized approach for determining risk-weighted assets. Until we have exited parallel run, our regulatory risk-based Basel III ratios will be calculated using the standardized approach for determining risk-weighted assets, and the definitions of, and deductions from, capital under Basel III (as such definitions and deductions are phased-in through 2019). Once we exit parallel run, our regulatory risk-based capital ratios will be the lower of the ratios calculated under the standardized approach and the advanced approaches. We refer to the capital ratios calculated using the phased-in Basel III provisions in effect for 2017 and, for the risk-based ratios, standardized approach risk-weighted assets, as the 2017 Transitional Basel III ratios. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, past due exposures, equity exposures and securitization exposures are generally subject to higher risk weights than other types of exposures.

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

Federal banking regulators have stated that they expect the largest U.S. bank holding companies, including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largest U.S. bank holding companies, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers through estimated stress scenarios. We seek to manage our capital consistent with these regulatory principles and believe that our March 31, 2017 capital levels were aligned with them.

At March 31, 2017, PNC and PNC Bank, our sole bank subsidiary, were both considered "well capitalized," based on applicable U.S. regulatory capital ratio requirements. To qualify as "well capitalized", PNC must have Transitional Basel III capital ratios of at least 6% for Tier 1 risk-based

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

We provide additional information regarding regulatory capital requirements and some of their potential impacts on us in the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 18 Regulatory Matters in our 2016 Form 10-K. See the Statistical Information (Unaudited) section of this Report for details on our December 31, 2016 and March 31, 2016 Transitional Basel III and Pro forma fully phased-in Basel III common equity tier 1 capital ratios.

Market Risk Management

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

Traditional banking activities of gathering deposits and extending loans,
Equity and other investments and activities whose economic values are directly impacted by market factors, and
Fixed income securities, derivatives and foreign exchange activities, as a result of customer activities and securities underwriting.

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

Market Risk Management – Interest Rate Risk

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

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 of Directors.

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Sensitivity results and market interest rate benchmarks for the first quarters of 2017 and 2016 follow:

Table 26: Interest Sensitivity Analysis

First Quarter
2017
First Quarter
2016

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

2.5 2.7

100 basis point decrease

(4.5 )%  (2.9 )% 

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

100 basis point increase

4.0 6.7

100 basis point decrease

(8.8 )%  (7.8 )% 

Duration of Equity Model (a)

Base case duration of equity (in years)

(2.3 (7.1

Key Period-End Interest Rates

One-month LIBOR

.98 .44

Three-year swap

1.81 .95
(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 27 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 27: Net Interest Income Sensitivity to Alternative Rate Scenarios (First Quarter 2017)

PNC
Economist
Market
Forward
Slope
Flattening

First year sensitivity

1.8 2.0 (2.3 )% 

Second year sensitivity

4.8 2.6 (6.5 )% 

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 26 and 27 above. These simulations assume that as assets and liabilities mature, they are replaced or repriced at then current market rates.

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

Table 28: Alternate Interest Rate Scenarios: One Year Forward

The first quarter 2017 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.

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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. VaR is used to estimate the probability of portfolio losses based on the statistical analysis of historical market risk factors. A diversified VaR reflects empirical correlations across different asset classes. We calculate a diversified VaR at a 95% confidence interval and the results for the first three months of 2017 and 2016 were within our acceptable limits.

See the Market Risk Management – Customer-Related Trading Risk section of our 2016 Form 10-K for more information on our models used to calculate VaR and our backtesting process.

Customer-related trading revenue was $68 million for the first quarter of 2017 compared with $39 million for the first quarter of 2016. The increase was primarily due to market rate changes impacting valuations for customer-related derivatives and higher derivative sales.

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, securities 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. 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.

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 29: Equity Investments Summary

March 31 December 31 Change
In millions 2017 2016 $ %

BlackRock

$ 6,907 $6,886 $ 21

Tax credit investments

2,204 2,090 114 5

Private equity and other

1,789 1,752 37 2

Total

$ 10,900 $10,728 $ 172 2

BlackRock

We owned approximately 35 million common stock equivalent shares of BlackRock equity at March 31, 2017, 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 entities. These tax credit investment balances included unfunded commitments totaling $.8 billion and $.7 billion at March 31, 2017 and December 31, 2016, respectively. These unfunded commitments are included in Other Liabilities on our Consolidated Balance Sheet.

Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in our 2016 Form 10-K has further information on Tax Credit Investments.

Private Equity and Other

The majority of our other equity investments consists of our private equity portfolio. The private equity portfolio is an illiquid portfolio consisted of mezzanine and equity investments that vary by industry, stage and type of investment. Private equity investments carried at estimated fair value totaled $1.4 billion at both March 31, 2017 and December 31, 2016. As of March 31, 2017, $1.1 billion was invested directly in a variety of companies and $.3 billion was invested indirectly through various private equity funds. See Item 1 Business – Supervision and Regulation and Item 1A Risk Factors in our 2016 Form 10-K for discussion of the potential impacts of the Volcker Rule provisions of Dodd-Frank on our interests in and of private funds covered by the Volcker Rule, including the five-year extension we received in February 2017 to conform certain equity investments subject to the Volcker Rule.

Included in our other equity investments are Visa Class B common shares, which are recorded at cost. At March 31, 2017, the fair value of our investment in Visa Class B common shares was approximately $515 million and our cost basis was not significant. Visa Class B common shares that we own are transferable only under limited circumstances until they can be converted into shares of the publicly traded class of stock, which cannot happen until the settlement of the pending interchange litigation. Please see Note 6 Fair Value and Note 12 Legal Proceedings in the Notes To Consolidated Financial Statements in our 2016 Form 10-K for additional information regarding our Visa agreements.

We also have certain other equity investments, the majority of which represent investments in affiliated and non-affiliated funds with both traditional and alternative investment strategies. Net gains related to these investments were not significant at March 31, 2017 and December 31, 2016.

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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 future contracts. Premiums are also exchanged for options contracts. Therefore, cash requirements and exposure to credit risk are significantly less than the notional amount on these instruments.

Further information on our financial derivatives is presented in Note 1 Accounting Policies and Note 6 Fair Value in our Notes To Consolidated Financial Statements in our 2016 Form 10-K and in Note 6 Fair Value and Note 9 Financial Derivatives in the Notes To Consolidated Financial Statements in this Report.

Not all elements of market and credit risk are addressed through the use of financial derivatives, and such instruments

may be ineffective for their intended purposes due to unanticipated market changes, among other reasons.

R ECENT R EGULATORY D EVELOPMENTS

The Department of Labor (DOL) has issued final rules expanding the definition of "investment advice" related to retirement accounts and certain other accounts that are subject to DOL interpretive authority. The rules were scheduled to take effect on April 10, 2017 with a transition period between April 10, 2017 and January 1, 2018, during which time reduced requirements were to apply. A presidential memorandum issued on February 3, 2017 directed the DOL to review the rules to determine whether, among other things, the rules harm investors or increase the cost of retirement services. In light of the presidential memorandum, on April 5, 2017, the DOL delayed the applicability date of the rule until June 9, 2017 and further reduced the requirements during the transition period. Full compliance is still required on January 1, 2018, although the DOL continues to conduct a review of the rules and has left open the possibility of additional extension of the full compliance date or modification to the rules.

C RITICAL A CCOUNTING E STIMATES AND J UDGMENTS

Note 1 Accounting Policies of our 2016 Form 10-K describes the most significant accounting policies that we use to prepare our consolidated financial statements. Certain of these policies

require us to make estimates or economic assumptions that may vary under different assumptions or conditions and such variations may significantly affect our reported results and financial position for the period or in future periods.

The following critical accounting policies and judgments are described in more detail in Critical Accounting Estimates and Judgments in Item 7 of our 2016 Form 10-K:

Fair Value Measurements
Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit
Goodwill
Residential and Commercial Mortgage Servicing Rights
Income Taxes

Goodwill

Goodwill arising from business acquisitions represents the value attributable to unidentifiable intangible elements in the business acquired. Most of our goodwill relates to value inherent in the Retail Banking and Corporate & Institutional Banking businesses.

The value of goodwill is supported by earnings, which is driven by our invested assets and transaction volume and, for certain businesses, the market value of assets under administration or for which processing services are provided. Lower earnings and realized profitability resulting from a lack of growth or our inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill, which could result in a current period charge to earnings. At least annually, in the fourth quarter, or more frequently if events occur or circumstances have changed significantly from the annual test date, management reviews the current operating environment and strategic direction of each reporting unit taking into consideration any events or changes in circumstances that may have an effect on the unit. For this review, inputs are generated and used in calculating the fair value of the reporting unit, which is compared to its carrying amount ("Step 1" of the goodwill impairment test) as further discussed below. The fair values of our reporting units are determined using a discounted cash flow valuation model with assumptions based upon market comparables. Additionally, we may also evaluate certain financial metrics that are indicative of fair value, including market quotes, price to earnings ratios and recent acquisitions involving other financial institutions.

Given our segment realignment, as described in the Business Segments Review section of this Financial Review, we performed an interim impairment test as of March 31, 2017. The results indicated that the estimated fair value of our reporting units exceeded their carrying values by at least 10% and are not considered to be at risk of not passing Step 1.

See the Critical Accounting Estimates and Judgments section in Item 7 of our 2016 Form 10-K for additional information on our annual impairment test processes.

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Fair Value Measurements

The following table summarizes the assets and liabilities measured at fair value on a recurring basis at March 31, 2017 and December 31, 2016, 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 30: Fair Value Measurements – Summary

March 31, 2017 December 31, 2016
Dollars in millions Total Fair
Value
Level 3 Total Fair
Value
Level 3

Total assets

$ 71,352 $ 7,526 $ 74,608 $ 8,830

Total assets at fair value as a percentage of consolidated assets

19 20

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

11 12

Level 3 assets as a percentage of consolidated assets

2 2

Total liabilities

$ 4,315 $ 292 $ 4,818 $ 433

Total liabilities at fair value as a percentage of consolidated liabilities

1 2

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

7 9

Level 3 liabilities as a percentage of consolidated liabilities

<1 <1

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

Recently Issued Accounting Standards

Revenue Recognition

In May 2014, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP with one accounting model. The core principle of the guidance is that an entity should recognize revenue to depict the satisfaction of a performance obligation by transfer of promised goods or services to customers. The ASU also requires additional qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

In August 2015, the FASB issued guidance deferring the mandatory effective date of ASU 2014-09 for one year, to annual reporting periods beginning after December 15, 2017. During 2016, the FASB also issued four separate ASUs which amend the original standard to clarify guidance regarding principal versus agent considerations, identifying performance obligations and licensing, certain narrow-scope amendments which address the presentation of sales tax, noncash consideration, contract modifications at transition and assessing collectability and other minor technical corrections and improvements.

The requirements within ASU 2014-09 and its subsequent amendments should be applied retrospectively to each prior period presented (with several practical expedients for certain completed contracts) or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application (i.e., modified retrospective application). We plan to adopt the ASU consistent with the deferred mandatory effective date using the modified retrospective approach. Based on our evaluation to date, we do not expect the adoption of this standard to have a significant impact on our consolidated results of operations or our consolidated financial position. We expect that the most significant impact related to the standard's expanded disclosure requirements will be the disaggregation of revenue.

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Financial Instruments

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

Leases

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

Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The ASU requires the use of an expected credit loss methodology; specifically, expected credit losses for the remaining life of the asset will be recognized at the time of origination or acquisition. The expected credit loss methodology will apply to loans, debt securities and other financial assets accounted for at amortized cost and net investment in leases not accounted for at fair value through net income. It will also apply to off-balance

sheet credit exposures except for unconditionally cancellable commitments. Assets in the scope of the ASU, except for purchased credit deteriorated assets, will be presented at the net amount expected to be collected after deducting the allowance for credit losses from the amortized cost basis of the assets.

Enhanced credit quality disclosures will be required including disaggregation of credit quality indicators by vintage. The development of an expected credit loss methodology and new disclosures will require significant data collection, building or enhancing loss models, and process re-development prior to adoption. The ASU is effective for us for the first quarter of 2020 using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. We have established a company-wide, cross-functional governance structure. We are in the process of determining the required changes to our credit loss estimation methodologies, data and systems to be able to comply with the standard. We continue to assess the impact of the standard; however, we expect the guidance will result in an increase in the allowance for loan losses to cover credit losses over the estimated life of the financial assets. The magnitude of the increase in our allowance for loan losses at the adoption date will be dependent upon the nature of the characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that date.

Statement of Cash Flows

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU provides guidance on eight specific issues related to classification within the statement of cash flows with the objective of reducing existing diversity in practice. The specific issues cover cash payments for debt prepayment or debt extinguishment costs; cash outflows for settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant; contingent consideration payments that are not made soon after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests received in securitization transactions; and clarifies that when no specific GAAP guidance exists and the source of the cash flows are not separately identifiable, then the predominant source of cash flows should be used to determine the classification for the item. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. Based on our evaluation to date, we do not expect the adoption of this standard to have a significant impact on our consolidated statement of cash flows.

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Goodwill

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test to simplify the subsequent measurement of goodwill. Under Step 2, an entity had to calculate the implied fair value of goodwill at the impairment testing date of its assets and liabilities as if those assets and liabilities had been acquired in a business combination. Under the ASU, the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the carrying amount of goodwill. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of this standard to impact our consolidated results of operations or our consolidated financial position.

Recently Adopted Accounting Standards

See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in this Report regarding the impact of new accounting pronouncements adopted in 2017.

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

We engage in a variety of activities that involve entities that are not consolidated or otherwise reflected in our Consolidated Balance Sheet that are generally referred to as off-balance sheet arrangements. Additional information on these types of activities is included in our 2016 Form 10-K and in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities and Note 13 Commitments in the Notes To Consolidated Financial Statements included in this Report.

A summary of variable interest entities (VIEs), including those in which we hold variable interests but have not consolidated into our financial statements, is included in Note 2 in our 2016 Form 10-K.

Trust Preferred Securities and REIT Preferred Securities

See Note 10 Borrowed Funds and Note 15 Equity in the Notes To Consolidated Financial Statements in our 2016 Form 10-K and Note 11 Total Equity and Other Comprehensive Income in the Notes To Consolidated Financial Statements in this Report for additional information on trust preferred securities issued by PNC Capital Trust C and Fixed-to-Floating Rate Non-Cumulative Exchangeable Perpetual Trust Securities (Perpetual Trust Securities) issued by PNC Preferred Funding Trust I and PNC Preferred Funding Trust II, including information on our March 15, 2017 redemption of the Perpetual Trust Securities and the related termination of the replacement capital covenants which had benefitted PNC Capital Trust C, as well as information on contractual limitations potentially imposed by PNC Capital Trust C on payments (including dividends) with respect to PNC's securities.

I NTERNAL C ONTROLS A ND D ISCLOSURE C ONTROLS A ND P ROCEDURES

As of March 31, 2017, 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 March 31, 2017, and that there has been no change in PNC's internal control over financial reporting that occurred during the first quarter of 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

G LOSSARY O F T ERMS

For a glossary of terms commonly used in our filings, please see the glossary of terms included in our 2016 Form 10-K.

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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 us and our future business and operations that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as "believe," "plan," "expect," "anticipate," "see," "look," "intend," "outlook," "project," "forecast," "estimate," "goal," "will," "should" and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time.

Forward-looking statements speak only as of the date made. We do not assume any duty 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.
Actions by the Federal Reserve Board, U.S. Treasury and other government agencies, including those that impact money supply and market interest rates.
Changes in law and policy accompanying the new presidential administration and uncertainty or speculation pending the enactment of such changes.
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.
Commodity price volatility.
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 those we are currently

expecting. These statements are based on our current view that the U.S. economy and the labor market will grow moderately in 2017, boosted by stable oil/energy prices, improving consumer spending and housing activity, and expanded federal fiscal policy stimulus as a result of the 2016 elections. Short-term interest rates and bond yields are expected to continue rising gradually in 2017, along with inflation. These forward-looking statements also do not, unless otherwise indicated, take into account the impact of potential legal and regulatory contingencies.

Our 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 Board as part of our comprehensive capital plan for the applicable period in connection with the Federal Reserve Board's 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 Board.
Our regulatory capital ratios in the future will depend on, among other things, the company's financial performance, the scope and terms of final capital regulations then in effect (particularly those implementing the international regulatory capital framework developed by the Basel Committee on Banking Supervision (Basel Committee), the international body responsible for developing global regulatory standards for banking organizations for consideration and adoption by national jurisdictions), and management actions affecting the composition of our balance sheet. In addition, our ability to determine, evaluate and forecast regulatory capital ratios, and to take actions (such as capital distributions) based on actual or forecasted capital ratios, will be dependent at least in part on the development, validation and regulatory approval of related models.
Legal and regulatory developments could have an impact on our ability to operate our businesses, financial condition, results of operations, competitive position, reputation, or pursuit of attractive acquisition opportunities. Reputational impacts could affect matters such as business generation and retention, liquidity, funding and ability to attract and retain management. These developments could include:
Changes resulting from legislative and regulatory reforms, including changes affecting oversight of the financial services industry, consumer protection, bank capital and liquidity standards, tax, pension, bankruptcy and other industry aspects, and changes in accounting policies and principles.

Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries. These matters may

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

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result in monetary judgments or settlements or other remedies, including fines, penalties, restitution or alterations in our business practices, and in additional expenses and collateral costs, and may cause reputational harm to us.

Results of the regulatory examination and supervision process, including our failure to satisfy requirements of agreements with governmental agencies.
Impact on business and operating results of any costs associated with obtaining rights in intellectual property claimed by others and of adequacy of our intellectual property protection in general.
Business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through effective use of systems and controls, third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards.

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

We grow our business in part 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. Our ability to anticipate and respond to technological changes can also impact our ability to respond to customer needs and meet competitive demands.

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

We provide greater detail regarding these as well as other factors in our 2016 Form 10-K, and elsewhere in this Report, including in the Risk Factors and Risk Management sections and the Legal Proceedings and Commitments Notes of the Notes To Consolidated Financial Statements in that Report. 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.

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CONSOLIDATED INCOME STATEMENT

THE PNC FINANCIAL SERVICES GROUP, INC.

Unaudited

In millions, except per share data

Three months ended

March 31

     2017 2016

Interest Income

Loans

$ 1,904 $ 1,843

Investment securities

493 462

Other

123 102

Total interest income

2,520 2,407

Interest Expense

Deposits

120 105

Borrowed funds

240 204

Total interest expense

360 309

Net interest income

2,160 2,098

Noninterest Income

Asset management

403 341

Consumer services

332 337

Corporate services

393 325

Residential mortgage

113 100

Service charges on deposits

161 158

Other

322 306

Total noninterest income

1,724 1,567

Total revenue

3,884 3,665

Provision For Credit Losses

88 152

Noninterest Expense

Personnel

1,249 1,145

Occupancy

222 221

Equipment

251 234

Marketing

55 54

Other

625 627

Total noninterest expense

2,402 2,281

Income before income taxes and noncontrolling interests

1,394 1,232

Income taxes

320 289

Net income

1,074 943

Less: Net income attributable to noncontrolling interests

17 19

Preferred stock dividends

63 63

Preferred stock discount accretion and redemptions

21 2

Net income attributable to common shareholders

$ 973 $ 859

Earnings Per Common Share

Basic

$ 1.99 $ 1.70

Diluted

1.96 1.68

Average Common Shares Outstanding

Basic

487 501

Diluted

492 507

See accompanying Notes To Consolidated Financial Statements.

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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

THE PNC FINANCIAL SERVICES GROUP, INC.

Unaudited

In millions

Three months ended

March 31

2017 2016

Net income

$ 1,074 $ 943

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

Net unrealized gains (losses) on non-OTTI securities

69 504

Net unrealized gains (losses) on OTTI securities

35 (38

Net unrealized gains (losses) on cash flow hedge derivatives

(77 200

Pension and other postretirement benefit plan adjustments

(62 12

Other

4 (27

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

(31 651

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

17 (249

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

(14 402

Comprehensive income

1,060 1,345

Less: Comprehensive income (loss) attributable to noncontrolling interests

17 19

Comprehensive income attributable to PNC

$ 1,043 $ 1,326

See accompanying Notes To Consolidated Financial Statements.

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CONSOLIDATED BALANCE SHEET

THE PNC FINANCIAL SERVICES GROUP, INC.

Unaudited

In millions, except par value

March 31
2017
December 31
2016

Assets

Cash and due from banks

$ 5,003 $ 4,879

Interest-earning deposits with banks

27,877 25,711

Loans held for sale (a)

1,414 2,504

Investment securities – available for sale

59,339 60,104

Investment securities – held to maturity

17,093 15,843

Loans (a)

212,826 210,833

Allowance for loan and lease losses

(2,561 (2,589

Net loans

210,265 208,244

Equity investments

10,900 10,728

Mortgage servicing rights

1,867 1,758

Goodwill

9,103 9,103

Other (a)

28,083 27,506

Total assets

$ 370,944 $ 366,380

Liabilities

Deposits

Noninterest-bearing

$ 79,246 $ 80,230

Interest-bearing

181,464 176,934

Total deposits

260,710 257,164

Borrowed funds

Federal Home Loan Bank borrowings

19,549 17,549

Bank notes and senior debt

23,745 22,972

Subordinated debt

6,889 8,009

Other (b)

4,879 4,176

Total borrowed funds

55,062 52,706

Allowance for unfunded loan commitments and letters of credit

305 301

Accrued expenses and other liabilities

8,964 9,355

Total liabilities

325,041 319,526

Equity

Preferred stock (c)

Common stock ($5 par value, Authorized 800 shares, issued 542 shares)

2,709 2,709

Capital surplus

16,275 16,651

Retained earnings

32,372 31,670

Accumulated other comprehensive income (loss)

(279 (265

Common stock held in treasury at cost: 57 shares

(5,323 (5,066

Total shareholders' equity

45,754 45,699

Noncontrolling interests

149 1,155

Total equity

45,903 46,854

Total liabilities and equity

$ 370,944 $ 366,380
(a) Our consolidated assets included the following for which we have elected the fair value option: Loans held for sale of $1.3 billion, Loans of $.9 billion and Other assets of $.3 billion at March 31, 2017 and Loans held for sale of $2.4 billion, Loans of $.9 billion and Other assets of $.5 billion at December 31, 2016.
(b) Our consolidated liabilities included Other borrowed funds of $.1 billion at both March 31, 2017 and December 31, 2016, 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.

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CONSOLIDATED STATEMENT OF CASH FLOWS

THE PNC FINANCIAL SERVICES GROUP, INC.

Unaudited

In millions

Three months ended
March 31
2017 2016

Operating Activities

Net income

$ 1,074 $ 943

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

Provision for credit losses

88 152

Depreciation and amortization

279 270

Deferred income taxes

21 (49

Changes in fair value of mortgage servicing rights

33 341

Gain on sales of Visa Class B common shares

(44

Undistributed earnings of BlackRock

(100 (61

Net change in

Trading securities and other short-term investments

(405 (946

Loans held for sale

1,065 51

Other assets

554 (1,310

Accrued expenses and other liabilities

(884 1,084

Other

(116 (155

Net cash provided (used) by operating activities

1,609 276

Investing Activities

Sales

Securities available for sale

3,202 782

Loans

338 371

Repayments/maturities

Securities available for sale

2,790 2,005

Securities held to maturity

504 523

Purchases

Securities available for sale

(5,142 (3,441

Securities held to maturity

(1,778 (687

Loans

(177 (363

Net change in

Federal funds sold and resale agreements

(674 246

Interest-earning deposits with banks

(2,166 1,067

Loans

(2,359 (1,530

Other

(177 119

Net cash provided (used) by investing activities

(5,639 (908

(continued on following page)

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

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Unaudited

In millions

Three months ended
March 31
2017 2016

Financing Activities

Net change in

Noninterest-bearing deposits

$ (944 $ (877

Interest-bearing deposits

4,530 2,641

Federal funds purchased and repurchase agreements

8 718

Other borrowed funds

795 128

Sales/issuances

Federal Home Loan Bank borrowings

4,500

Bank notes and senior debt

1,820 997

Other borrowed funds

26 80

Common and treasury stock

60 18

Repayments/maturities

Federal Home Loan Bank borrowings

(2,500 (1,050

Bank notes and senior debt

(1,000 (997

Subordinated debt

(1,100 18

Other borrowed funds

(19 (373

Redemption of noncontrolling interests

(1,000

Acquisition of treasury stock

(688 (551

Preferred stock cash dividends paid

(63 (64

Common stock cash dividends paid

(271 (260

Net cash provided (used) by financing activities

4,154 428

Net Increase (Decrease) In Cash And Due From Banks

124 (204

Cash and due from banks at beginning of period

4,879 4,065

Cash and due from banks at end of period

$ 5,003 $ 3,861

Supplemental Disclosures

Interest paid

$ 347 $ 345

Income taxes paid

$ 8 $ 19

Income taxes refunded

$ 9 $ 33

Non-cash Investing and Financing Items

Transfer from loans to loans held for sale, net

$ 107 $ 191

Transfer from loans to foreclosed assets

$ 57 $ 81

See accompanying Notes To Consolidated Financial Statements.

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CONSOLIDATED STATEMENT OF CASH FLOWS

THE PNC FINANCIAL SERVICES GROUP, INC.

(continued from previous page)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Unaudited

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, including residential mortgage, corporate and institutional banking and asset management, providing many of our products and services nationally. Our primary geographic markets are located in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, Florida, North Carolina, Kentucky, Washington, D.C., Delaware, Virginia, Georgia, Alabama, Missouri, 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, 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 2017 presentation, which did not have a material impact on our consolidated financial condition or results of operations.

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

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

When preparing these unaudited interim consolidated financial statements, we have assumed that you have read the audited consolidated financial statements included in our 2016 Annual Report on Form 10-K. Reference is made to Note 1 Accounting Policies in the 2016 Form 10-K for a detailed

description of significant accounting policies. There have been no significant changes to our accounting policies as disclosed in the 2016 Annual Report on Form 10-K. These interim consolidated financial statements serve to update the 2016 Form 10-K and may not include all information and notes necessary to constitute a complete set of financial statements.

Use of Estimates

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

Recently Adopted Accounting Standards

We did not adopt any new accounting standards that had a significant impact during the first quarter of 2017.

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 2016 Form 10-K, we have transferred residential and commercial mortgage loans in securitization or sales transactions in which we have continuing involvement. Our continuing involvement generally consists of servicing, repurchasing previously transferred loans under certain conditions and loss share arrangements, and, in limited circumstances, holding of mortgage-backed securities issued by the securitization special purpose entities (SPEs).

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

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

Table 31: Cash Flows Associated with Loan Sale and Servicing Activities

In millions Residential
Mortgages
Commercial
Mortgages (a)

CASH FLOWS – Three months ended March 31, 2017

Sales of loans (b)

$ 1,594 $ 1,617

Repurchases of previously transferred loans (c)

$ 131

Servicing fees (d)

$ 94 $ 33

Servicing advances recovered/(funded), net

$ 42 $ 31

Cash flows on mortgage-backed securities held (e)

$ 349 $ 129

CASH FLOWS – Three months ended March 31, 2016

Sales of loans (b)

$ 1,438 $ 650

Repurchases of previously transferred loans (c)

$ 160

Servicing fees (d)

$ 93 $ 30

Servicing advances recovered/(funded), net

$ 28 $ 31

Cash flows on mortgage-backed securities held (e)

$ 352 $ 105
(a) Represents cash flow information associated with both commercial mortgage loan transfer and servicing activities.
(b) Gains/losses recognized on sales of loans were insignificant.
(c) Includes residential mortgage government insured or guaranteed loans eligible for repurchase through the exercise of our removal of account provision option, and loans repurchased due to alleged breaches of origination covenants or representations and warranties made to purchasers.
(d) Includes contractually specified servicing fees, late charges and ancillary fees.
(e) Represents cash flows on securities we hold issued by a securitization SPE in which we transferred to and/or services loans. The carrying values of such securities held were $6.9 billion in residential mortgage-backed securities and $.7 billion in commercial mortgage-backed securities at March 31, 2017 and $6.6 billion in residential mortgage-backed securities and $1.2 billion in commercial mortgage-backed securities at March 31, 2016. Additionally, at December 31, 2016, the carrying values of such securities held were $6.9 billion in residential mortgage-backed securities and $.9 billion in commercial mortgage-backed securities.

Table 32 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 with these loans.

Table 32: Principal Balance, Delinquent Loans and Net Charge-offs Related to Serviced Loans For Others

In millions Residential
Mortgages
Commercial
Mortgages (a)

March 31, 2017

Total principal balance

$ 64,825 $ 45,043

Delinquent loans (b)

$ 1,248 $ 1,148

December 31, 2016

Total principal balance

$ 66,081 $ 45,855

Delinquent loans (b)

$ 1,422 $ 941

Three months ended March 31, 2017

Net charge-offs (c)

$ 25 $ 355

Three months ended March 31, 2016

Net charge-offs (c)

$ 26 $ 912
(a) Represents information at the securitization level in which we have sold loans and we are the servicer for the securitization.
(b) Serviced delinquent loans are 90 days or more past due or are in process of foreclosure.
(c) Net charge-offs for Residential mortgages represent credit losses less recoveries distributed and as reported to investors during the period. Net charge-offs for Commercial mortgages represent credit losses less recoveries distributed and as reported by the trustee for commercial mortgage backed securitizations. Realized losses for Agency securitizations are not reflected as we do not manage the underlying real estate upon foreclosure and, as such, do not have access to loss information.

Variable Interest Entities (VIEs)

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2016 Form 10-K, we are involved with various entities in the normal course of business that are deemed to be VIEs.

The following table provides a summary of non-consolidated VIEs with which we have significant continuing involvement but are not the primary beneficiary. We do not consider our continuing involvement to be significant when it relates to a VIE where we only invest in securities issued by the VIE and were not involved in the design of the VIE or where no transfers have occurred between us and the VIE. We have excluded certain transactions with non-consolidated VIEs from the balances presented in Table 33 where we have determined that our continuing involvement is not significant. In addition, where we only have lending arrangements in the normal course of business with entities that could be VIEs, we have excluded these transactions with non-consolidated entities from the balances presented in Table 33. These loans are included as part of the asset quality disclosures that we make in Note 3 Asset Quality.

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Table 33: Non-Consolidated VIEs

In millions PNC Risk
of Loss (a)
Carrying
Value of
Assets
Owned by PNC
Carrying
Value of
Liabilities
Owned by PNC

March 31, 2017

Mortgage-Backed Securitizations (b)

$ 7,771 $ 7,771  (c) 

Tax Credit Investments and Other

3,194 3,173  (d)  $ 865  (e) 

Total

$ 10,965 $ 10,944 $ 865

December 31, 2016

Mortgage-Backed Securitizations (b)

$ 8,003 $ 8,003  (c) 

Tax Credit Investments and Other

3,083 3,043  (d)  $ 823  (e) 

Total

$ 11,086 $ 11,046 $ 823
(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 we 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.
(c) Included in Investment securities and Other assets on our Consolidated Balance Sheet.
(d) Included in Investment securities, Loans, Equity investments and Other assets on our Consolidated Balance Sheet.
(e) Included in Deposits and Other liabilities on our Consolidated Balance Sheet.

We make certain equity investments in various tax credit limited partnerships or limited liability companies (LLCs). The purpose of these investments is to achieve a satisfactory return on capital and to assist us in achieving goals associated with the Community Reinvestment Act. During the three months ended March 31, 2017, we recognized $.1 billion of amortization, $.1 billion of tax credits and $21 million of other tax benefits associated with qualified investments in low income housing tax credits within Income taxes.

N OTE 3 A SSET Q UALITY

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

See Note 1 Accounting Policies in our 2016 Form 10-K for additional information on our loan related policies.

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The following tables display the delinquency status of our loans and our nonperforming assets at March 31, 2017 and December 31, 2016, respectively.

Table 34: 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)

March 31, 2017

Commercial Lending

Commercial

$ 103,217 $ 62 $ 29 $ 40 $ 131 $ 400 $ 17 $ 103,765

Commercial real estate

29,212 15 6 21 137 65 29,435

Equipment lease financing

7,431 19 19 12 7,462

Total commercial lending

139,860 96 35 40 171 549 82 140,662

Consumer Lending

Home equity

27,541 57 23 80 900 1,056 29,577

Residential real estate

12,787 122 77 432 631  (b)  473 $ 217 1,673 15,781

Credit card

5,018 32 21 37 90 4 5,112

Other consumer

Automobile

12,226 35 10 5 50 61 12,337

Education and other

8,984 116 61 185 362  (b)  11 9,357

Total consumer lending

66,556 362 192 659 1,213 1,449 217 2,729 72,164

Total

$ 206,416 $ 458 $ 227 $ 699 $ 1,384 $ 1,998 $ 217 $ 2,811 $ 212,826

Percentage of total loans

96.99 .22 .11 .33 .65 .94 .10 1.32 100.00

December 31, 2016

Commercial Lending

Commercial

$ 100,710 $ 81 $ 20 $ 39 $ 140 $ 496 $ 18 $ 101,364

Commercial real estate

28,769 5 2 7 143 91 29,010

Equipment lease financing

7,535 29 1 30 16 7,581

Total commercial lending

137,014 115 23 39 177 655 109 137,955

Consumer Lending

Home equity

27,820 64 30 94 914 1,121 29,949

Residential real estate

12,425 159 68 500 727  (b)  501 $ 219 1,726 15,598

Credit card

5,187 33 21 37 91 4 5,282

Other consumer

Automobile

12,257 51 12 5 68 55 12,380

Education and other

9,235 140 78 201 419  (b)  15 9,669

Total consumer lending

66,924 447 209 743 1,399 1,489 219 2,847 72,878

Total

$ 203,938 $ 562 $ 232 $ 782 $ 1,576 $ 2,144 $ 219 $ 2,956 $ 210,833

Percentage of total loans

96.73 .27 .11 .37 .75 1.02 .10 1.40 100.00
(a) Amounts in table represent recorded investment and exclude loans held for sale. Recorded investment in a loan 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) Past due loan amounts exclude purchased impaired loans, even if contractually past due (or if we do not expect to receive payment in full based on the original contractual terms), as we are currently accreting interest income over the expected life of the loans. Past due loan amounts include government insured or guaranteed Residential real estate mortgages totaling $.6 billion and $.6 billion and Education and other consumer loans totaling $.3 billion and $.4 billion at March 31, 2017 and December 31, 2016, respectively.
(c) Consumer loans accounted for under the fair value option for which we do not expect to collect substantially all principal and interest are subject to nonaccrual accounting and classification upon meeting any of our nonaccrual policies. Given that these loans are not accounted for at amortized cost, these loans have been excluded from the nonperforming loan population.
(d) Net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.2 billion and $1.3 billion at March 31, 2017 and December 31, 2016, respectively.

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At March 31, 2017, we pledged $21.6 billion of commercial loans to the Federal Reserve Bank (FRB) and $61.1 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, 2016 were $22.0 billion and $60.8 billion, respectively.

Table 35: Nonperforming Assets

Dollars in millions March 31
2017
December 31
2016

Nonperforming loans

Total commercial lending

$ 549 $ 655

Total consumer lending (a)

1,449 1,489

Total nonperforming loans (b)

1,998 2,144

OREO, foreclosed and other assets

214 230

Total nonperforming assets

$ 2,212 $ 2,374

Nonperforming loans to total loans

.94 1.02

Nonperforming assets to total loans, OREO, foreclosed and other assets

1.04 1.12

Nonperforming assets to total assets

.60 .65
(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 $.4 billion at both March 31, 2017 and December 31, 2016, which included $.2 billion of loans that are government insured/guaranteed.

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 in our 2016 Form 10-K and the TDR section of this Note 3.

Total nonperforming loans in Table 35 include TDRs of $1.0 billion and $1.1 billion at March 31, 2017 and December 31, 2016, respectively. TDRs that are performing, including consumer credit card TDR loans, totaled $1.1 billion at both March 31, 2017 and December 31, 2016 and are excluded from nonperforming loans. Nonperforming TDRs are returned to accrual status and classified as performing after demonstrating a period of at least six months of consecutive performance under the restructured terms. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to us and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status. See the TDRs section of this Note 3 for more information on TDRs.

Additional Asset Quality Indicators

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

Commercial Lending Asset Classes

The following table presents asset quality indicators for the Commercial Lending asset classes. See Note 3 Asset Quality in our 2016 Form 10-K for additional information related to our Commercial Lending asset classes, including discussion around the asset quality indicators that we use to monitor and manage the credit risk associated with each loan class.

Table 36: Commercial Lending Asset Quality Indicators (a)

Criticized Commercial Loans
In millions Pass Rated Special
Mention (b)
Substandard (c) Doubtful (d) Total Loans

March 31, 2017

Commercial

$ 98,379 $ 1,894 $ 3,367 $ 125 $ 103,765

Commercial real estate

28,983 122 309 21 29,435

Equipment lease financing

7,294 70 92 6 7,462

Total commercial lending

$ 134,656 $ 2,086 $ 3,768 $ 152 $ 140,662

December 31, 2016

Commercial

$ 96,231 $ 1,612 $ 3,449 $ 72 $ 101,364

Commercial real estate

28,561 98 327 24 29,010

Equipment lease financing

7,395 89 91 6 7,581

Total commercial lending

$ 132,187 $ 1,799 $ 3,867 $ 102 $ 137,955

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(a) Loans are classified as "Pass", "Special Mention", "Substandard" and "Doubtful" based on the Regulatory Classification definitions. We use PDs and LGDs to rate commercial loans and 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 this table.
(b) Special Mention rated loans have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects at some future date. These loans do not expose us to sufficient risk to warrant a more adverse classification at the reporting date.
(c) Substandard rated loans have a well-defined weakness or weaknesses that jeopardize the collection or liquidation of debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.
(d) Doubtful rated loans possess all the inherent weaknesses of a Substandard 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

See Note 3 Asset Quality in our 2016 Form 10-K for additional information related to our Consumer Lending asset classes, including discussion around the asset quality indicators that we use to monitor and manage the credit risk associated with each loan class.

Home Equity and Residential Real Estate Loan Classes

The following table presents asset quality indicators for home equity and residential real estate balances, excluding consumer purchased impaired loans of $2.7 billion and $2.8 billion at March 31, 2017 and December 31, 2016, respectively, and government insured or guaranteed residential real estate mortgages of $.8 billion at both March 31, 2017 and December 31, 2016.

Table 37: Asset Quality Indicators for Home Equity and Residential Real Estate Loans – Excluding Purchased Impaired and Government Insured or Guaranteed Loans (a)

Home Equity Residential
Real Estate
March 31, 2017 – in millions 1st Liens 2nd Liens Total

Current estimated LTV ratios

Greater than or equal to 125% and updated FICO scores:

Greater than 660

$ 149 $ 576 $ 146 $ 871

Less than or equal to 660 (b)

25 101 33 159

Missing FICO

1 9 3 13

Greater than or equal to 100% to less than 125% and updated FICO scores:

Greater than 660

360 1,112 320 1,792

Less than or equal to 660 (b)

67 200 81 348

Missing FICO

3 10 5 18

Greater than or equal to 90% to less than 100% and updated FICO scores:

Greater than 660

430 1,047 431 1,908

Less than or equal to 660

69 161 75 305

Missing FICO

2 8 6 16

Less than 90% and updated FICO scores:

Greater than 660

14,150 7,815 11,499 33,464

Less than or equal to 660

1,323 808 597 2,728

Missing FICO

42 54 90 186

Total home equity and residential real estate loans

$ 16,621 $ 11,901 $ 13,286 $ 41,808

(continued on following page)

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(continued from previous page)

Home Equity Residential
Real Estate
December 31, 2016 – in millions 1st Liens 2nd Liens Total

Current estimated LTV ratios

Greater than or equal to 125% and updated FICO scores:

Greater than 660

$ 161 $ 629 $ 174 $ 964

Less than or equal to 660 (b)

32 110 35 177

Missing FICO

1 9 2 12

Greater than or equal to 100% to less than 125% and updated FICO scores:

Greater than 660

394 1,190 345 1,929

Less than or equal to 660 (b)

66 211 76 353

Missing FICO

3 10 7 20

Greater than or equal to 90% to less than 100% and updated FICO scores:

Greater than 660

453 1,100 463 2,016

Less than or equal to 660

77 171 78 326

Missing FICO

1 8 6 15

Less than 90% and updated FICO scores:

Greater than 660

14,047 7,913 11,153 33,113

Less than or equal to 660

1,323 822 586 2,731

Missing FICO

42 55 102 199

Missing LTV and updated FICO scores:

Greater than 660

1 1

Total home equity and residential real estate loans

$ 16,600 $ 12,228 $ 13,028 $ 41,856
(a) Amounts shown represent recorded investment.
(b) Higher risk loans are defined as loans with both an updated FICO score of less than or equal to 660 and an updated LTV greater than or equal to 100%. The following states had the highest percentage of higher risk loans at March 31, 2017: New Jersey 16%, Pennsylvania 13%, Illinois 12%, Ohio 9%, Maryland 8%, Florida 6%, Michigan 5% and North Carolina 5%. The remainder of the states had lower than 4% of the higher risk loans individually, and collectively they represent approximately 26% of the higher risk loans. The following states had the highest percentage of higher risk loans at December 31, 2016: New Jersey 16%, Pennsylvania 14%, Illinois 12%, Ohio 10%, Florida 7%, Maryland 6%, Michigan 4% and North Carolina 4%. The remainder of the states had lower than 4% of the high risk loans individually, and collectively they represent approximately 27% of the higher risk loans.

Credit Card and Other Consumer Loan Classes

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

Table 38: Credit Card and Other Consumer Loan Classes Asset Quality Indicators

Credit Card Other Consumer (a)
Dollars in millions Amount % of Total Loans
Using FICO
Credit Metric
Amount % of Total Loans
Using FICO
Credit Metric

March 31, 2017

FICO score greater than 719

$ 3,071 60 $ 10,062 64

650 to 719

1,448 28 4,025 26

620 to 649

219 4 596 4

Less than 620

239 5 674 4

No FICO score available or required (b)

135 3 390 2

Total loans using FICO credit metric

5,112 100 15,747 100

Consumer loans using other internal credit metrics (a)

5,947

Total loan balance

$ 5,112 $ 21,694

Weighted-average updated FICO score (b)

734 742

December 31, 2016

FICO score greater than 719

$ 3,244 61 $ 10,247 65

650 to 719

1,466 28 3,873 25

620 to 649

215 4 552 3

Less than 620

229 4 632 4

No FICO score available or required (b)

128 3 489 3

Total loans using FICO credit metric

5,282 100 15,793 100

Consumer loans using other internal credit metrics (a)

6,256

Total loan balance

$ 5,282 $ 22,049

Weighted-average updated FICO score (b)

736 744

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(a) We use updated FICO scores as an asset quality indicator for non-government guaranteed or insured education loans, automobile loans and other secured and unsecured lines and loans. We use internal credit metrics, such as delinquency status, geography or other factors, as an asset quality indicator for government guaranteed or insured education loans and consumer loans to high net worth individuals, as internal credit metrics are more relevant than FICO scores for these types of loans.
(b) Credit card loans and other consumer loans with no FICO score available or required generally refers to new accounts issued to borrowers with limited credit history, accounts for which we cannot obtain an updated FICO score (e.g., recent profile changes), cards issued with a business name and/or cards secured by collateral. Management proactively assesses the risk and size of this loan portfolio and, when necessary, takes actions to mitigate the credit risk. Weighted-average updated FICO score excludes accounts with no FICO score available or required.

Troubled Debt Restructurings (TDRs)

Table 39 quantifies the number of loans that were classified as TDRs as well as the change in the loans' recorded investment as a result of becoming a TDR during the three months ended March 31, 2017 and March 31, 2016. Additionally, the table provides information about the types of TDR concessions. See Note 3 Asset Quality in our 2016 Form 10-K for additional discussion of TDRs.

Table 39: Financial Impact and TDRs by Concession Type (a)

Number
of Loans

Pre-TDR

Recorded
Investment (b)
Post-TDR Recorded Investment (c)

During the three months ended March 31, 2017

Dollars in millions

Principal
Forgiveness
Rate
Reduction
Other Total

Total commercial lending

49 $ 35 $ 4 $ 6 $ 5 $ 15

Total consumer lending

2,899 73 37 31 68

Total TDRs

2,948 $ 108 $ 4 $ 43 $ 36 $ 83

During the three months ended March 31, 2016

Dollars in millions

Total commercial lending

42 $ 168 $ 10 $ 142 $ 152

Total consumer lending

2,965 68 44 20 64

Total TDRs

3,007 $ 236 $ 54 $ 162 $ 216
(a) Impact of partial charge-offs at TDR date are included in this table.
(b) Represents the recorded investment of the loans as of the quarter end prior to TDR designation, and excludes immaterial amounts of accrued interest receivable.
(c) Represents the recorded investment of the TDRs as of the end of the quarter in which the TDR occurs, and excludes immaterial amounts of accrued interest receivable.

After a loan is determined to be a TDR, we continue to track its performance under its most recent restructured terms. We consider a TDR to have subsequently defaulted when it becomes 60 days past due after the most recent date the loan was restructured. The recorded investment of loans that were both (i) classified as TDRs or were subsequently modified during each 12-month period preceding January 1, 2017 and January 1, 2016, respectively, and (ii) subsequently defaulted during the three months ended March 31, 2017 and March 31, 2016 totaled $32 million and $27 million, respectively.

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Impaired Loans

Impaired loans include commercial and consumer nonperforming loans and TDRs, regardless of nonperforming status. TDRs that were previously recorded at amortized cost and are now classified and accounted for as held for sale are also included. Excluded from impaired loans are nonperforming leases, loans accounted for as held for sale other than the TDRs described in the preceding sentence, loans accounted for under the fair value option, smaller balance homogeneous type loans and purchased impaired loans. We did not recognize any interest income on impaired loans that have not returned to performing status, while they were impaired during the three months ended March 31, 2017 and March 31, 2016. The following table provides further detail on impaired loans individually evaluated for impairment and the associated ALLL. Certain commercial and consumer impaired loans do not have a related ALLL as the valuation of these impaired loans exceeded the recorded investment.

Table 40: Impaired Loans

In millions Unpaid
Principal
Balance
Recorded
Investment
Associated
Allowance
Average
Recorded
Investment (a)

March 31, 2017

Impaired loans with an associated allowance

Total commercial lending

$ 613 $ 372 $ 90 $ 425

Total consumer lending

1,236 1,178 215 1,181

Total impaired loans with an associated allowance

$ 1,849 $ 1,550 $ 305 $ 1,606

Impaired loans without an associated allowance

Total commercial lending

$ 617 $ 345 $ 333

Total consumer lending

957 586 598

Total impaired loans without an associated allowance

$ 1,574 $ 931 $ 931

Total impaired loans

$ 3,423 $ 2,481 $ 305 $ 2,537

December 31, 2016

Impaired loans with an associated allowance

Total commercial lending

$ 742 $ 477 $ 105 $ 497

Total consumer lending

1,237 1,185 226 1,255

Total impaired loans with an associated allowance

$ 1,979 $ 1,662 $ 331 $ 1,752

Impaired loans without an associated allowance

Total commercial lending

$ 447 $ 322 $ 365

Total consumer lending

982 608 604

Total impaired loans without an associated allowance

$ 1,429 $ 930 $ 969

Total impaired loans

$ 3,408 $ 2,592 $ 331 $ 2,721
(a) Average recorded investment is for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively.

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

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N OTE 4 A LLOWANCE FOR L OAN AND L EASE L OSSES

We maintain the ALLL at levels that we believe to be appropriate to absorb estimated probable credit losses incurred in the portfolios as of the balance sheet date. We use the two main portfolio segments – Commercial Lending and Consumer Lending, and develop and document the ALLL under separate methodologies for each of these portfolio segments. See Note 1 Accounting Policies in our 2016 Form 10-K for a description of the accounting policies for ALLL. A rollforward of the ALLL and associated loan data follows.

Table 41: Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data

In millions Commercial
Lending
Consumer
Lending
Total

March 31, 2017

Allowance for Loan and Lease Losses

January 1

$ 1,534 $ 1,055 $ 2,589

Charge-offs

(55 (143 (198

Recoveries

32 48 80

Net charge-offs

(23 (95 (118

Provision for credit losses

23 65 88

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

(5 1 (4

Other

1 5 6

March 31

$ 1,530 $ 1,031 $ 2,561

TDRs individually evaluated for impairment

$ 37 $ 215 $ 252

Other loans individually evaluated for impairment

53 53

Loans collectively evaluated for impairment

1,412 526 1,938

Purchased impaired loans

28 290 318

March 31

$ 1,530 $ 1,031 $ 2,561

Loan Portfolio

TDRs individually evaluated for impairment

$ 366 $ 1,764 $ 2,130

Other loans individually evaluated for impairment

351 351

Loans collectively evaluated for impairment

139,863 66,797 206,660

Fair value option loans (a)

874 874

Purchased impaired loans

82 2,729 2,811

March 31

$ 140,662 $ 72,164 $ 212,826

Portfolio segment ALLL as a percentage of total ALLL

60 40 100

Ratio of the allowance for loan and lease losses to total loans

1.09 1.43 1.20

March 31, 2016

Allowance for Loan and Lease Losses

January 1

$ 1,605 $ 1,122 $ 2,727

Charge-offs

(89 (147 (236

Recoveries

46 41 87

Net charge-offs

(43 (106 (149

Provision for credit losses

84 68 152

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

(19 (2 (21

Other

1 1 2

March 31

$ 1,628 $ 1,083 $ 2,711

TDRs individually evaluated for impairment

$ 49 $ 261 $ 310

Other loans individually evaluated for impairment

115 115

Loans collectively evaluated for impairment

1,414 560 1,974

Purchased impaired loans

50 262 312

March 31

$ 1,628 $ 1,083 $ 2,711

Loan Portfolio

TDRs individually evaluated for impairment

$ 500 $ 1,891 $ 2,391

Other loans individually evaluated for impairment

436 436

Loans collectively evaluated for impairment

134,045 66,338 200,383

Fair value option loans (a)

895 895

Purchased impaired loans

149 3,231 3,380

March 31

$ 135,130 $ 72,355 $ 207,485

Portfolio segment ALLL as a percentage of total ALLL

60 40 100

Ratio of the allowance for loan and lease losses to total loans

1.20 1.50 1.31
(a) Loans accounted for under the fair value option are not evaluated for impairment as these loans are accounted for at fair value. Accordingly, there is no allowance recorded on these loans.

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N OTE 5 I NVESTMENT S ECURITIES

Table 42: Investment Securities Summary

In millions

Amortized

Cost

Unrealized

Fair

Value

Gains Losses

March 31, 2017

Securities Available for Sale

Debt securities

U.S. Treasury and government agencies

$ 12,787 $ 185 $ (62 $ 12,910

Residential mortgage-backed

Agency

26,329 153 (293 26,189

Non-agency

3,011 236 (44 3,203

Commercial mortgage-backed

Agency

2,037 4 (35 2,006

Non-agency

3,846 28 (11 3,863

Asset-backed

5,934 59 (13 5,980

Other debt

4,572 124 (23 4,673

Total debt securities

58,516 789 (481 58,824

Corporate stocks and other

517 (2 515

Total securities available for sale

$ 59,033 $ 789 $ (483 $ 59,339

Securities Held to Maturity

Debt securities

U.S. Treasury and government agencies

$ 531 $ 36 $ (18 $ 549

Residential mortgage-backed

Agency

12,344 66 (172 12,238

Non-agency

185 6 191

Commercial mortgage-backed

Agency

882 18 900

Non-agency

561 10 571

Asset-backed

552 1 (1 552

Other debt

2,038 92 (21 2,109

Total securities held to maturity

$ 17,093 $ 229 $ (212 $ 17,110

December 31, 2016

Securities Available for Sale

Debt securities

U.S. Treasury and government agencies

$ 13,100 $ 151 $ (77 $ 13,174

Residential mortgage-backed

Agency

26,245 170 (287 26,128

Non-agency

3,191 227 (52 3,366

Commercial mortgage-backed

Agency

2,150 3 (34 2,119

Non-agency

4,023 29 (27 4,025

Asset-backed

5,938 52 (22 5,968

Other debt

4,656 104 (37 4,723

Total debt securities

59,303 736 (536 59,503

Corporate stocks and other

603 (2 601

Total securities available for sale

$ 59,906 $ 736 $ (538 $ 60,104

Securities Held to Maturity

Debt securities

U.S. Treasury and government agencies

$ 527 $ 35 $ (22 $ 540

Residential mortgage-backed

Agency

11,074 68 (161 10,981

Non-agency

191 7 198

Commercial mortgage-backed

Agency

903 24 927

Non-agency

567 10 577

Asset-backed

558 (2 556

Other debt

2,023 76 (12 2,087

Total securities held to maturity

$ 15,843 $ 220 $ (197 $ 15,866

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The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the securities available for sale portfolio are included in Shareholders' equity as Accumulated other comprehensive income or loss, net of tax, unless credit-related. Securities held to maturity are carried at amortized cost. At March 31, 2017, Accumulated other comprehensive income included pretax gains of $52 million from derivatives that hedged the purchase of investment securities classified as held to maturity. The gains will be accreted into interest income as an adjustment of yield on the securities.

Table 43 presents gross unrealized losses and fair value of debt securities at March 31, 2017 and December 31, 2016. The securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and twelve months or more based on the point in time that the fair value declined below the amortized cost basis. The table includes debt securities where a portion of OTTI has been recognized in Accumulated other comprehensive income (loss).

Table 43: Gross Unrealized Loss and Fair Value of Debt Securities

Unrealized loss position
less than 12 months
Unrealized loss position
12 months or more
Total
In millions Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value

March 31, 2017

Securities Available for Sale

Debt securities

U.S. Treasury and government agencies

$ (50 $ 2,756 $(12) $ 869 $ (62 $ 3,625

Residential mortgage-backed

Agency

(274 16,931 (19) 870 (293 17,801

Non-agency

(2 152 (42) 838 (44 990

Commercial mortgage-backed

Agency

(34 1,582 (1) 39 (35 1,621

Non-agency

(10 755 (1) 377 (11 1,132

Asset-backed

(3 1,065 (10) 606 (13 1,671

Other debt

(20 1,200 (3) 292 (23 1,492

Total debt securities available for sale

$ (393 $ 24,441 $(88) $ 3,891 $ (481 $ 28,332

Securities Held to Maturity

Debt securities

U.S. Treasury and government agencies

$ (18 $ 242 $ (18 $ 242

Residential mortgage-backed

Agency

(164 7,961 $(8) $ 152 (172 8,113

Commercial mortgage-backed

Agency

68 1 69

Non-agency

3 3

Asset-backed

25 (1) 251 (1 276

Other debt

(21 141 (a) 1 (21 142

Total debt securities held to maturity

$ (203 $ 8,437 $(9) $ 408 $ (212 $ 8,845

December 31, 2016

Securities Available for Sale

Debt securities

U.S. Treasury and government agencies

$ (57 $ 3,108 $(20) $ 2,028 $ (77 $ 5,136

Residential mortgage-backed

Agency

(267 16,942 (20) 922 (287 17,864

Non-agency

(1 109 (51) 1,119 (52 1,228

Commercial mortgage-backed

Agency

(33 1,577 (1) 86 (34 1,663

Non-agency

(14 880 (13) 987 (27 1,867

Asset-backed

(5 1,317 (17) 902 (22 2,219

Other debt

(33 1,827 (4) 243 (37 2,070

Total debt securities available for sale

$ (410 $ 25,760 $(126) $ 6,287 $ (536 $ 32,047

Securities Held to Maturity

Debt securities

U.S. Treasury and government agencies

$ (22 $ 238 $ (22 $ 238

Residential mortgage-backed

Agency

(153 8,041 $(8) $ 161 (161 8,202

Asset-backed

(2) 451 (2 451

Other debt

(12 146 (a) 1 (12 147

Total debt securities held to maturity

$ (187 $ 8,425 $(10) $ 613 $ (197 $ 9,038
(a) The unrealized loss on these securities was less than $.5 million.

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Evaluating Investment Securities for Other-than-Temporary Impairments

For the securities in Table 43, as of March 31, 2017 we do not intend to sell and believe we will not be required to sell the securities prior to recovery of the amortized cost basis.

On at least a quarterly basis, we review all debt securities that are in an unrealized loss position for OTTI, as discussed in Note 1 Accounting Policies of the 2016 Form 10-K. For those securities on our balance sheet at March 31, 2017, where during our quarterly security-level impairment assessments we determined losses represented OTTI, we have recorded cumulative credit losses of $1.1 billion in earnings and accordingly have reduced the amortized cost of our securities. The majority of these cumulative impairment charges related to non-agency residential mortgage-backed and asset-backed securities rated BB or lower. During 2017 and 2016, the OTTI credit losses recognized in noninterest income and the OTTI

noncredit losses recognized in accumulated other comprehensive income (loss), net of tax, on securities were not significant.

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

Table 44: Gains (Losses) on Sales of Securities Available for Sale

Three months ended March 31

In millions

Proceeds Gross
Gains
Gross
Losses
Net
(Losses)
Gains
Tax
(Benefit)
Expense

2017

$ 3,222 $ 14 $ (16 $ (2 $ (1

2016

$ 788 $ 9 $ 9 $ 3

The following table presents, by remaining contractual maturity, the amortized cost, fair value and weighted-average yield of debt securities at March 31, 2017.

Table 45: Contractual Maturity of Debt Securities

March 31, 2017

Dollars in millions

1 Year or Less After 1 Year
through 5 Years
After 5 Years
through 10 Years
After 10
Years
Total

Securities Available for Sale

U.S. Treasury and government agencies

$ 157 $ 5,714 $ 5,745 $ 1,171 $ 12,787

Residential mortgage-backed

Agency

1 81 558 25,689 26,329

Non-agency

1 3,010 3,011

Commercial mortgage-backed

Agency

74 155 758 1,050 2,037

Non-agency

108 108 3,630 3,846

Asset-backed

28 2,255 1,764 1,887 5,934

Other debt

310 2,311 569 1,382 4,572

Total debt securities available for sale

$ 570 $ 10,625 $ 9,502 $ 37,819 $ 58,516

Fair value

$ 573 $ 10,683 $ 9,536 $ 38,032 $ 58,824

Weighted-average yield, GAAP basis

2.99 2.14 2.15 2.91 2.65

Securities Held to Maturity

U.S. Treasury and government agencies

$ 109 $ 422 $ 531

Residential mortgage-backed

Agency

$ 51 413 11,880 12,344

Non-agency

185 185

Commercial mortgage-backed

Agency

$ 84 739 5 54 882

Non-agency

561 561

Asset-backed

1 451 100 552

Other debt

12 219 967 840 2,038

Total debt securities held to maturity

$ 96 $ 1,010 $ 1,945 $ 14,042 $ 17,093

Fair value

$ 96 $ 1,035 $ 2,004 $ 13,975 $ 17,110

Weighted-average yield, GAAP basis

3.67 3.62 3.33 3.20 3.24

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

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Weighted-average yields are based on historical cost with effective yields weighted for the contractual maturity of each security. At March 31, 2017, there were no securities of a single issuer, other than FNMA, that exceeded 10% of Total shareholders' equity. The FNMA investments had a total amortized cost of $29.1 billion and fair value of $28.8 billion.

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

Table 46: Fair Value of Securities Pledged and Accepted as Collateral

In millions March 31
2017
December 31
2016

Pledged to others

$ 8,889 $9,493

Accepted from others:

Permitted by contract or custom to sell or repledge

$ 1,693 $912

Permitted amount repledged to others

$ 1,599 $799

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

N OTE 6 F AIR V ALUE

Fair Value Measurement

We measure certain financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date, determined using an exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair value hierarchy established by GAAP requires us to maximize the use of observable inputs when measuring fair value. For more information regarding the fair value hierarchy see Note 6 Fair Value in our 2016 Form 10-K.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

For more information on the valuation methodologies used to measure assets and liabilities at fair value on a recurring basis, see Note 6 Fair Value in our 2016 Form 10-K. The following table summarizes our assets and liabilities measured at fair value on a recurring basis, including instruments for which we have elected the fair value option.

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Table 47: Fair Value Measurements – Recurring Basis Summary

March 31, 2017 December 31, 2016
In millions Level 1 Level 2 Level 3

Total

Fair Value

Level 1 Level 2 Level 3

Total

Fair Value

Assets

Residential mortgage loans held for sale

$ 719 $ 4 $ 723 $ 1,008 $ 2 $ 1,010

Commercial mortgage loans held for sale

581 581 1,400 1,400

Securities available for sale

U.S. Treasury and government agencies

$ 12,312 598 12,910 $ 12,572 602 13,174

Residential mortgage-backed

Agency

26,189 26,189 26,128 26,128

Non-agency

107 3,096 3,203 112 3,254 3,366

Commercial mortgage-backed

Agency

2,006 2,006 2,119 2,119

Non-agency

3,863 3,863 4,025 4,025

Asset-backed

5,614 366 5,980 5,565 403 5,968

Other debt

4,598 75 4,673 4,657 66 4,723

Total debt securities

12,312 42,975 3,537 58,824 12,572 43,208 3,723 59,503

Corporate stocks and other

454 61 515 541 60 601

Total securities available for sale

12,766 43,036 3,537 59,339 13,113 43,268 3,723 60,104

Loans

551 323 874 558 335 893

Equity investments (a)

1,106 1,390 1,331 1,381

Residential mortgage servicing rights

1,261 1,261 1,182 1,182

Commercial mortgage servicing rights

606 606 576 576

Trading securities (b)

1,312 1,313 2 2,627 1,458 1,169 2 2,629

Financial derivatives (b) (c)

13 3,265 24 3,302 10 4,566 40 4,616

Other

276 291 82 649 266 312 239 817

Total assets

$ 14,367 $ 49,175 $ 7,526 $ 71,352 $ 14,847 $ 50,881 $ 8,830 $ 74,608

Liabilities

Other borrowed funds

$ 1,497 $ 158 $ 7 $ 1,662 $ 799 $ 161 $ 10 $ 970

Financial derivatives (c) (d)

2 2,366 254 2,622 1 3,424 414 3,839

Other liabilities

31 31 9 9

Total liabilities

$ 1,499 $ 2,524 $ 292 $ 4,315 $ 800 $ 3,585 $ 433 $ 4,818
(a) Certain investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the Consolidated Balance Sheet.
(b) Included in Other assets on the Consolidated Balance Sheet.
(c) Amounts at March 31, 2017 and December 31, 2016, are presented gross and are not reduced by the impact of legally enforceable master netting agreements that allow us to net positive and negative positions and cash collateral held or placed with the same counterparty. See Note 9 Financial Derivatives for additional information related to derivative offsetting.
(d) Included in Other liabilities on the Consolidated Balance Sheet.

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

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Reconciliations of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the three months ended March 31, 2017 and 2016 follow:

Table 48: Reconciliation of Level 3 Assets and Liabilities

Three Months Ended March 31, 2017

Total realized / unrealized
gains or losses for the period (a)
Unrealized
gains / losses
on assets and
liabilities held on
Consolidated
Balance Sheet
at Mar. 31, 2017
(a) (b)

Level 3 Instruments Only

In millions

Fair Value
Dec. 31,
2016
Included in
Earnings
Included
in Other
comprehensive
income
Purchases Sales Issuances Settlements Transfers
into
Level 3
Transfers
out of
Level 3
Fair Value
Mar. 31,
2017

Assets

Residential mortgage loans held for sale

$ 2 $ 2 $2 $ (2 $ 4

Commercial mortgage loans held for sale

1,400 $ 9 $ (1,617 $ 801 $ (12 581 $ (5

Securities available for sale

Residential mortgage- backed non-agency

3,254 26 $18 (202 3,096

Asset-backed

403 4 4 (25 (20 366

Other debt

66 9 1 (1 75

Total securities available for sale

3,723 30 31 1 (26 (222 3,537

Loans

335 1 22 (4 (19 2 (14 323

Equity investments

1,331 96 37 (175 (183 (c) 1,106 67

Residential mortgage servicing rights

1,182 18 83 17 (39 1,261 17

Commercial mortgage servicing rights

576 13 13 29 (25 606 13

Trading securities

2 2

Financial derivatives

40 (1 (15 24 22

Other assets

239 (2 (155 82 (2

Total assets

$ 8,830 $ 164 $31 $ 158 $ (1,822 $ 847 $ (487 $4 $ (199 $ 7,526 $ 112

Liabilities

Other borrowed funds

$ 10 $ 19 $ (22 $ 7

Financial derivatives

414 $ 9 $ 2 (171 254 $ 7

Other liabilities

9 16 77 (71 31 16

Total liabilities

$ 433 $ 25 $ 2 $ 96 $ (264 $ 292 $ 23

Net gains (losses)

$ 139  (d)  $ 89  (e) 

(continued on following page)

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Three Months Ended March 31, 2016

Total realized / unrealized

gains or losses for the
period (a)

Unrealized

gains / losses

on assets and
liabilities held on
Consolidated
Balance Sheet at
Mar. 31,

2016 (a) (b)

Level 3 Instruments Only

In millions

Fair Value
Dec. 31,
2015
Included
in
Earnings
Included in
Other
comprehensive
income
Purchases Sales Issuances Settlements Transfers
into
Level 3
Transfers
out of
Level 3
Fair Value
Mar. 31,
2016

Assets

Residential mortgage loans held for sale

$ 5 $ 3 $ (1 $2 $(5) $ 4

Commercial mortgage loans held for sale

641 $ 16 (649 $ 647 655 $ 12

Securities available for sale

Residential mortgage- backed non-agency

4,008 22 $ (45 $ (175 3,810 (1

Asset-backed

482 3 (12 (22 451

Other debt

45 (1 2 (2 44

Total securities available for sale

4,535 25 (58 2 (2 (197 4,305 (1

Loans

340 2 33 (8 (25 (13) 329 1

Equity investments

1,098 51 23 (16 1,156 50

Residential mortgage servicing rights

1,063 (226 52 11 (37 863 (225

Commercial mortgage servicing rights

526 (55 3 9 (23 460 (55

Trading securities

3 (1 2

Financial derivatives

31 34 (24 41 28

Other

364 (9 (2 (1 (138 214 (11

Total assets

$ 8,606 $ (162 $ (60 $ 116 $ (677 $ 667 $ (445 $2 $(18) $ 8,029 $ (201

Liabilities

Other borrowed funds

$ 12 $ 23 $ (27 $ 8

Financial derivatives

473 $ 7 $ 2 (149 333 $ 8

Other liabilities

10 38 (34 14

Total liabilities

$ 495 $ 7 $ 2 $ 61 $ (210 $ 355 $ 8

Net gains (losses)

$ (169 ) (d)  $ (209 ) (e) 
(a) Losses for assets are bracketed while losses for liabilities are not.
(b) The amount of the total gains or losses for the period included in earnings that is attributable to the change in unrealized gains or losses related to those assets and liabilities held at the end of the reporting period.
(c) Reflects transfers out of Level 3 associated with a change in valuation methodology for certain equity investments subject to the Volcker Rule provisions of the Dodd-Frank Act. These investments are measured at fair value using the NAV per share (or its equivalent) practical expedient as of March 31, 2017.
(d) Net gains (losses) realized and unrealized included in earnings related to Level 3 assets and liabilities included amortization and accretion. The amortization and accretion amounts were included in Interest income on the Consolidated Income Statement and the remaining net gains (losses) realized and unrealized were included in Noninterest income on the Consolidated Income Statement.
(e) Net unrealized gains (losses) related to assets and liabilities held at the end of the reporting period were included in Noninterest income on the Consolidated Income Statement.

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

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

Table 49: Fair Value Measurements – Recurring Quantitative Information

March 31, 2017

Level 3 Instruments Only

Dollars in millions

Fair Value Valuation Techniques Unobservable Inputs Range (Weighted Average)

Commercial mortgage loans held for sale

$ 581 Discounted cash flow

Spread over the benchmark curve (a)

Estimated servicing cash flows

40bps-13,520bps (1,046bps)

0.0%-5.4% (2.0%)

Residential mortgage-backed non-agency securities

3,096 Priced by a third-party vendor Constant prepayment rate (CPR) 1.0%-24.2% (7.4%)
using a discounted cash flow Constant default rate (CDR) 0.0%-16.7% (5.2%)
pricing model

Loss severity

Spread over the benchmark curve (a)

10.0%-98.5% (53.4%)

225bps weighted average

Asset-backed securities

366 Priced by a third-party vendor Constant prepayment rate (CPR) 1.0%-16.0% (6.5%)
using a discounted cash flow Constant default rate (CDR) 2.0%-13.9% (6.5%)
pricing model Loss severity 24.2%-100.0% (75.5%)
Spread over the benchmark curve (a) 256bps weighted average

Loans

136 Consensus pricing (b) Cumulative default rate 11.0%-100.0% (85.4%)
Loss severity 0.0%-100.0% (21.4%)
Discount rate 4.7%-7.5% (5.1%)
113 Discounted cash flow Loss severity 8.0% weighted average
Discount rate 4.4% weighted average
74 Consensus pricing (b) Credit and Liquidity discount 0.0%-99.0% (58.6%)

Equity investments

1,106 Multiple of adjusted earnings Multiple of earnings 4.5x-13.4x (8.0x)

Residential mortgage servicing rights

1,261 Discounted cash flow Constant prepayment rate (CPR) 0.1%-38.1% (9.3%)
Spread over the benchmark curve (a) 224bps-1,900bps (850bps)

Commercial mortgage servicing rights

606 Discounted cash flow Constant prepayment rate (CPR) 7.1%-37.8% (8.1%)
Discount rate 5.0%-7.7% (7.6%)

Financial derivatives - Swaps related to sales of certain Visa Class B common shares

(165 Discounted cash flow Estimated conversion factor of     Class B shares into Class A shares 164.4% weighted average
Estimated growth rate of Visa     Class A share price 14.0%
Estimated length of litigation     resolution date Q2 2019

Insignificant Level 3 assets, net of liabilities (c)

60

Total Level 3 assets, net of liabilities (d)

$ 7,234

(continued on following page)

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(continued from previous page)

December 31, 2016

Level 3 Instruments Only

Dollars in millions

Fair Value Valuation Techniques Unobservable Inputs Range (Weighted Average)

Commercial mortgage loans held for sale

$ 1,400 Discounted cash flow Spread over the benchmark curve (a) 42bps - 1,725bps (362bps)
Estimated servicing cash flows 0.0% - 7.3% (1.5%)

Residential mortgage-backed non-agency securities

3,254 Priced by a third-party vendor Constant prepayment rate (CPR) 1.0% - 24.2% (7.2%)
using a discounted cash flow Constant default rate (CDR) 0.0% - 16.7% (5.3%)
pricing model Loss severity 10.0% - 98.5% (53.5%)
Spread over the benchmark curve (a) 236bps weighted average

Asset-backed securities

403 Priced by a third-party vendor Constant prepayment rate (CPR) 1.0% - 16.0% (6.4%)
using a discounted cash flow Constant default rate (CDR) 2.0% - 13.9% (6.6%)
pricing model Loss severity 24.2% - 100.0% (77.3%)
Spread over the benchmark curve (a) 278bps weighted average

Loans

141 Consensus pricing (b) Cumulative default rate 11.0% - 100.0% (86.9%)
Loss severity 0.0% - 100.0% (22.9%)
Discount rate 4.7% - 6.7% (5.1%)
116 Discounted cash flow Loss severity 8.0% weighted average
Discount rate 4.2% weighted average
78 Consensus pricing (b) Credit and Liquidity discount 0.0% - 99.0% (57.9%)

Equity investments

1,331 Multiple of adjusted earnings Multiple of earnings 4.5x - 12.0x (7.8x)
Consensus pricing (b) Liquidity discount 0.0% - 40.0%

Residential mortgage servicing rights

1,182 Discounted cash flow Constant prepayment rate (CPR) 0.0% - 36.0% (9.4%)
Spread over the benchmark curve (a) 341bps - 1,913bps (850bps)

Commercial mortgage servicing rights

576 Discounted cash flow Constant prepayment rate (CPR) 7.5% - 43.4% (8.6%)
Discount rate 3.5% - 7.6% (7.5%)

Other assets - BlackRock Series C Preferred Stock

232 Consensus pricing (b) Liquidity discount 15.0% - 25.0% (20.0%)

Financial derivatives - BlackRock LTIP

(232 Consensus pricing (b) Liquidity discount 15.0% - 25.0% (20.0%)

Financial derivatives - Swaps related to sales of certain Visa Class B common shares

(164 Discounted cash flow

Estimated conversion factor of

    Class B shares into Class A shares

164.4% weighted average

Estimated growth rate of Visa

    Class A share price

14.0%

Estimated length of litigation

    resolution date

Q2 2019

Insignificant Level 3 assets, net of liabilities (c)

80

Total Level 3 assets, net of liabilities (d)

$ 8,397
(a) The assumed yield spread over the benchmark curve for each instrument is generally intended to incorporate non-interest-rate risks, such as credit and liquidity risks.
(b) Consensus pricing refers to fair value estimates that are generally internally developed using information such as dealer quotes or other third-party provided valuations or comparable asset prices.
(c) Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes certain financial derivative assets and liabilities, trading securities, state and municipal and other debt securities, residential mortgage loans held for sale, other assets, other borrowed funds and other liabilities.
(d) Consisted of total Level 3 assets of $7.5 billion and total Level 3 liabilities of $.3 billion as of March 31, 2017 and $8.8 billion and $.4 billion as of December 31, 2016, respectively.

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Financial Assets Accounted for at Fair Value on a Nonrecurring Basis

We may be required to measure certain financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment and are included in Table 50 and Table 51. For more information regarding the valuation methodologies of our financial assets measured at fair value on a nonrecurring basis, see Note 6 Fair Value in our 2016 Form  10-K.

Table 50: Fair Value Measurements – Nonrecurring

Fair Value (a)

Gains (Losses)

Three months ended

In millions March 31
2017
December 31
2016
March 31
2017
March 31
2016

Assets

Nonaccrual loans

$ 146 $ 187 $ (6 $ (47

OREO and foreclosed assets

56 107 (4 (8

Insignificant assets

9 19 3 (7

Total assets

$ 211 $ 313 $ (7 $ (62
(a) All Level 3 as of March 31, 2017 and December 31, 2016.

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

Table 51: Fair Value Measurements – Nonrecurring Quantitative Information

Level 3 Instruments Only

Dollars in millions

Fair Value Valuation Techniques Unobservable Inputs Range (Weighted Average)

March 31, 2017

Assets

Nonaccrual loans

$ 70 LGD percentage Loss severity 6.4% - 86.8% (23.3%)
76 Fair value of property or collateral Appraised value/sales price Not meaningful

OREO and foreclosed assets

56 Fair value of property or collateral Appraised value/sales price Not meaningful

Insignificant assets

9

Total assets

$ 211

December 31, 2016

Assets

Nonaccrual loans

$ 112 LGD percentage Loss severity 6.0% - 77.1% (31.3%)
75 Fair value of property or collateral Appraised value/sales price Not meaningful

OREO and foreclosed assets

107 Fair value of property or collateral Appraised value/sales price Not meaningful

Insignificant assets

19

Total assets

$ 313

Financial Instruments Accounted for under Fair Value Option

We elect the fair value option to account for certain financial instruments. For more information on these financial instruments for which the fair value option election has been made, please refer to Note 6 Fair Value in our 2016 Form 10-K.

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

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Table 52: Fair Value Option – Fair Value and Principal Balances

In millions Fair Value Aggregate Unpaid
Principal Balance
Difference

March 31, 2017

Assets

Residential mortgage loans held for sale

Performing loans

$ 711 $ 684 $ 27

Accruing loans 90 days or more past due

3 3

Nonaccrual loans

9 10 (1

Total

723 697 26

Commercial mortgage loans held for sale (a)

Performing loans

578 610 (32

Nonaccrual loans

3 5 (2

Total

581 615 (34

Residential mortgage loans

Performing loans

279 320 (41

Accruing loans 90 days or more past due

378 378

Nonaccrual loans

217 339 (122

Total

874 1,037 (163

Other assets

272 278 (6

Liabilities

Other borrowed funds

$ 57 $ 58 $ (1

December 31, 2016

Assets

Residential mortgage loans held for sale

Performing loans

$ 1,000 $ 988 $ 12

Accruing loans 90 days or more past due

4 4

Nonaccrual loans

6 6

Total

1,010 998 12

Commercial mortgage loans held for sale (a)

Performing loans

1,395 1,412 (17

Nonaccrual loans

5 9 (4

Total

1,400 1,421 (21

Residential mortgage loans

Performing loans

247 289 (42

Accruing loans 90 days or more past due

427 428 (1

Nonaccrual loans

219 346 (127

Total

893 1,063 (170

Other assets

293 288 5

Liabilities

Other borrowed funds

$ 81 $ 82 $ (1
(a) There were no accruing loans 90 days or more past due within this category at March 31, 2017 or December 31, 2016.

The changes in fair value for items for which we elected the fair value option and are included in Noninterest income and Noninterest expense on the Consolidated Income Statement are as follows.

Table 53: Fair Value Option – Changes in Fair Value (a)

Gains (Losses)

Three months ended

In millions March 31
2017
March 31
2016

Assets

Residential mortgage loans held for sale

$ 30 $ 47

Commercial mortgage loans held for sale

$ 18 $ 27

Residential mortgage loans

$ 4 $ 6

Other assets

$ 7 $ (27

Liabilities

Other liabilities

$ (16
(a) The impact on earnings of offsetting hedged items or hedging instruments is not reflected in these amounts.

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

The following table presents the carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of all other financial instruments that are not recorded on the consolidated balance sheet at fair value as of March 31, 2017 and December  31, 2016.

Table 54: Additional Fair Value Information Related to Other Financial Instruments

Carrying

Amount

Fair Value
In millions Total Level 1 Level 2 Level 3

March 31, 2017

Assets

Cash and due from banks

$ 5,003 $ 5,003 $ 5,003

Interest-earning deposits with banks

27,877 27,877 $ 27,877

Securities held to maturity

17,093 17,110 549 16,428 $ 133

Net loans (excludes leases)

201,921 203,319 203,319

Other assets

5,512 6,025 5,387 638

Total assets

$ 257,406 $ 259,334 $ 5,552 $ 49,692 $ 204,090

Liabilities

Deposits

$ 260,710 $ 260,552 $ 260,552

Borrowed funds

53,400 54,134 52,743 $ 1,391

Unfunded loan commitments and letters of credit

305 305 305

Other liabilities

388 388 388

Total liabilities

$ 314,803 $ 315,379 $ 313,683 $ 1,696

December 31, 2016

Assets

Cash and due from banks

$ 4,879 $ 4,879 $ 4,879

Interest-earning deposits with banks

25,711 25,711 $ 25,711

Securities held to maturity

15,843 15,866 540 15,208 $ 118

Net loans (excludes leases)

199,766 201,863 201,863

Other assets

4,793 5,243 4,666 577

Total assets

$ 250,992 $ 253,562 $ 5,419 $ 45,585 $ 202,558

Liabilities

Deposits

$ 257,164 $ 257,038 $ 257,038

Borrowed funds

51,736 52,322 50,941 $ 1,381

Unfunded loan commitments and letters of credit

301 301 301

Other liabilities

417 417 417

Total liabilities

$ 309,618 $ 310,078 $ 308,396 $ 1,682

The aggregate fair values in Table 54 represent only a portion of the total market value of our assets and liabilities as, in accordance with the guidance related to fair values about financial instruments, we exclude the following:

financial instruments recorded at fair value on a recurring basis (as they are disclosed in Table 47),

investments accounted for under the equity method,

real and personal property,

lease financing,

loan customer relationships,

deposit customer intangibles,
mortgage servicing rights,

retail branch networks,
fee-based businesses, such as asset management and brokerage, and

trademarks and brand names.

For more information regarding the methods and assumptions used to estimate the fair values of financial instruments included in Table 54, see Note 6 Fair Value in our 2016 Form 10-K.

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N OTE 7 G OODWILL AND M ORTGAGE S ERVICING R IGHTS

Goodwill

See Note 7 Goodwill and Mortgage Servicing Rights in our 2016 Form 10-K for more information regarding our goodwill.

Mortgage Servicing Rights

We recognize the right to service mortgage loans for others when we recognize it as an intangible asset and the servicing income we receive is more than adequate compensation. MSRs totaled $1.9 billion and $1.8 billion at March 31, 2017 and December 31, 2016, respectively, and consisted of loan servicing contracts for commercial and residential mortgages measured at fair value.

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

See the Sensitivity Analysis section of this Note 7, as well as Note 6 Fair Value in our 2016 Form 10-K for more detail on our fair value measurement of MSRs. Refer to Note 7 Goodwill and Mortgage Servicing Rights in our 2016 Form 10-K for more information on our accounting and measurement of MSRs.

Changes in the commercial and residential MSRs follow:

Table 55: Mortgage Servicing Rights

Commercial MSRs Residential MSRs
In millions 2017 2016 2017 2016

January 1

$ 576 $ 526 $ 1,182 $ 1,063

Additions:

From loans sold with servicing retained

29 9 17 11

Purchases

13 3 83 52

Changes in fair value due to:

Time and payoffs (a)

(25 (23 (39 (37

Other (b)

13 (55 18 (226

March 31

$ 606 $ 460 $ 1,261 $ 863

Related unpaid principal balance at March 31

$ 143,908 $ 143,922 $ 130,382 $ 124,839

Servicing advances at March 31

$ 234 $ 220 $ 260 $ 383
(a) Represents decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period.
(b) Represents MSR value changes resulting primarily from market-driven changes in interest rates.

Sensitivity Analysis

The fair value of commercial and residential MSRs and significant inputs to the valuation models as of March 31, 2017 are shown in Tables 56 and 57. The expected and actual rates of mortgage loan prepayments are significant factors driving the fair value. Management uses both internal proprietary models and a third-party model to estimate future commercial mortgage loan prepayments and a third-party model to estimate future residential mortgage loan prepayments. These models have been refined based on current market conditions and management judgment. Future interest rates are another important factor in the valuation of MSRs. Management utilizes market implied forward interest rates to estimate the future direction of mortgage and discount rates. The forward rates utilized are derived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. Changes in the shape and slope of the forward curve in future periods may result in volatility in the fair value estimate.

A sensitivity analysis of the hypothetical effect on the fair value of MSRs to adverse changes in key assumptions is presented in Tables 56 and 57. These sensitivities do not include the impact of the related hedging activities. Changes in fair value generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the interest rate spread), which could either magnify or counteract the sensitivities.

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

Table 56: Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions

Dollars in millions March 31
2017
December 31
2016

Fair value

$ 606 $ 576

Weighted-average life (years)

4.5 4.6

Weighted-average constant prepayment rate

8.14 8.61

Decline in fair value from 10% adverse change

$ 11 $ 11

Decline in fair value from 20% adverse change

$ 21 $ 21

Effective discount rate

7.58 7.52

Decline in fair value from 10% adverse change

$ 17 $ 16

Decline in fair value from 20% adverse change

$ 33 $ 31

Table 57: Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions

Dollars in millions March 31
2017
December 31
2016

Fair value

$ 1,261 $ 1,182

Weighted-average life (years)

6.9 6.8

Weighted-average constant prepayment rate

9.34 9.41

Decline in fair value from 10% adverse change

$ 47 $ 45

Decline in fair value from 20% adverse change

$ 90 $ 86

Weighted-average option adjusted spread

850  bps  850  bps 

Decline in fair value from 10% adverse change

$ 39 $ 37

Decline in fair value from 20% adverse change

$ 76 $ 72

Fees from mortgage loan servicing, which includes contractually specified servicing fees, late fees and ancillary fees were $.1 billion for both the three months ended March 31, 2017 and 2016. We also generate servicing fees from fee-based activities provided to others for which we do not have an associated servicing asset. Fees from commercial and residential MSRs are reported on our Consolidated Income Statement in the line items Corporate services and Residential mortgage, respectively.

N OTE 8 E MPLOYEE B ENEFIT P LANS

Pension and Postretirement Plans

As described in Note 11 Employee Benefit Plans in our 2016 Form 10-K, we have a noncontributory, qualified defined benefit pension plan covering eligible employees. Benefits are determined using a cash balance formula where earnings credits are a percentage of eligible compensation. Any pension contributions to the plan are based on an actuarially determined amount necessary to fund total benefits payable to plan participants.

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

The components of our net periodic benefit cost for the three months ended March 31, 2017 and 2016, respectively, were as follows:

Table 58: Components of Net Periodic Benefit Cost

Qualified Pension Plan Nonqualified Retirement Plans Postretirement Benefit

Three months ended March 31

In millions

    2017         2016           2017             2016       2017 2016

Net periodic cost consists of:

Service cost

$ 26 $ 26 $ 1 $ 1 $ 1

Interest cost

45 46 3 $ 3 4 4

Expected return on plan assets

(71 (70 (1 (1

Amortization of prior service credit

(1 (2

Amortization of actuarial losses

12 11 1 1

Net periodic cost/(benefit)

$ 11 $ 11 $ 5 $ 4 $ 4 $ 4

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N OTE 9 F INANCIAL D ERIVATIVES

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

For more information regarding derivatives see Note 1 Accounting Policies and Note 13 Financial Derivatives in our Notes To Consolidated Financial Statements in our 2016 Form 10-K.

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

Table 59: Total Gross Derivatives

March 31, 2017 December 31, 2016
In millions Notional /
Contract
Amount
Asset Fair
Value (a)
Liability Fair
Value (b)
Notional /
Contract
Amount
Asset Fair
Value (a)
Liability Fair
Value (b)

Derivatives used for hedging under GAAP

Interest rate contracts (c):

Fair value hedges (d)

$ 31,380 $ 216 $ 71 $ 34,010 $ 551 $ 214

Cash flow hedges (d)

18,577 109 1 20,831 313 71

Foreign exchange contracts:

Net investment hedges

962 11 945 25

Total derivatives designated for hedging

$ 50,919 $ 336 $ 72 $ 55,786 $ 889 $ 285

Derivatives not used for hedging under GAAP

Derivatives used for mortgage banking activities (e):

Interest rate contracts:

Swaps (d)

$ 49,790 $ 344 $ 145 $ 49,071 $ 783 $ 505

Futures (f)

33,779 36,264

Mortgage-backed commitments

9,074 41 19 13,317 96 56

Other

47,181 27 8 31,907 <