10-K 1 pnc-12312017x10k.htm FORM 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2017
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)
Registrant’s telephone number, including area code - (888) 762-2265
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
 Name of Each Exchange
    on Which Registered    
Common Stock, par value $5.00
 
New York Stock Exchange
Depositary Shares Each Representing a 1/4,000 Interest in a Share of Fixed-to-
    Floating Rate Non-Cumulative Perpetual Preferred Stock, Series P
 
New York Stock Exchange
Depositary Shares Each Representing a 1/4,000 Interest in a Share of 5.375%
    Non-Cumulative Perpetual Preferred Stock, Series Q
 
New York Stock Exchange
Warrants (expiring December 31, 2018) to purchase Common Stock
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
$1.80 Cumulative Convertible Preferred Stock - Series B, par value $1.00
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No     
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes      No X
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No     
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No     
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X
 
 
 
 
 
Accelerated filer     
Non-accelerated filer     
 
 
 
 
 
Smaller reporting company     
 
 
 
 
 
 
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 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes      No X
The aggregate market value of the registrant’s outstanding voting common stock held by nonaffiliates on June 30, 2017, determined using the per share closing price on that date on the New York Stock Exchange of $124.87, was approximately $59.8 billion. There is no non-voting common equity of the registrant outstanding.
Number of shares of registrant’s common stock outstanding at February 9, 2018: 471,590,384
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of The PNC Financial Services Group, Inc. to be filed pursuant to Regulation 14A for the 2018 annual meeting of shareholders (Proxy Statement) are incorporated by reference into Part III of this Form 10-K.




THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to 2017 Form 10-K
TABLE OF CONTENTS
 
Page
 
 
PART I
 
 
 
 
Item 1
 
 
 
Item 1A
 
 
 
Item 1B
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
 
PART II
 
 
 
 
Item 5
 
 
 
 
 
 
 
Item 6
 
 
 
Item 7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 7A
 
 
 
Item 8
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to 2017 Form 10-K (continued)
TABLE OF CONTENTS (Continued)
 
 
Page
 
 
 
Item 8
Financial Statements and Supplementary Data. (continued)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 9
 
 
 
Item 9A
 
 
 
Item 9B
 
 
PART III
 
 
 
 
Item 10
 
 
 
Item 11
 
 
 
Item 12
 
 
 
Item 13
 
 
 
Item 14
 
 
PART IV
 
 
 
 
Item 15
 
 
 
Item 16
 
 




THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to 2017 Form 10-K (continued)
 
MD&A TABLE REFERENCE
 
Table
Description
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THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to 2017 Form 10-K (continued)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE
 
Table
Description
Page
 
 
 
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THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to 2017 Form 10-K (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE (Continued)
 
Table
Description
Page
 
 
 
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PART I
Forward-Looking Statements: From time to time, The PNC Financial Services Group, Inc. has made and may continue to make written or oral forward-looking 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 or the impact of legal, regulatory or supervisory matters on our business operations or performance. This Annual Report on Form 10-K (the Report or Form 10-K) also includes forward-looking statements. With respect to all such forward-looking statements, you should review our Risk Factors discussion in Item 1A, our Risk Management, Critical Accounting Estimates and Judgments, and Cautionary Statement Regarding Forward-Looking Information sections included in Item 7, and Note 19 Legal Proceedings in the Notes To Consolidated Financial Statements included in Item 8 of this Report. See page 73 for a glossary of certain terms used in this Report. In this Report, "PNC", "we", "us", "the Company" or "the Corporation" refers to The PNC Financial Services Group, Inc. and its subsidiaries on a consolidated basis (except when referring to PNC as a public company, its common stock or other securities issued by PNC, which just refer to The PNC Financial Services Group, Inc.). References to The PNC Financial Services Group, Inc. or to any of its subsidiaries are specifically made where applicable.

ITEM 1 – BUSINESS

Business Overview
Headquartered in Pittsburgh, Pennsylvania, we are one of the largest diversified financial services companies in the United States. 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 19 states in the Mid-Atlantic, Midwest and Southeast. We also provide certain products and services internationally. At December 31, 2017, our consolidated total assets, total deposits and total shareholders’ equity were $380.8 billion, $265.1 billion and $47.5 billion, respectively.

We were incorporated under the laws of the Commonwealth of Pennsylvania in 1983 with the consolidation of Pittsburgh National Corporation and Provident National Corporation. Since 1983, we have diversified our geographical presence, business mix and product capabilities through internal growth, strategic bank and non-bank acquisitions and equity investments, and the formation of various non-banking subsidiaries.

Review of Business Segments
In addition to the following information relating to our businesses, we incorporate the information under the caption Business Segments Review in Item 7 of this Report here by reference. Also, we include the financial and other information by business in Note 22 Segment Reporting in the Notes To Consolidated Financial Statements in Item 8 of this Report here by reference.

Effective for the first quarter of 2017, as a result of changes to how we manage our businesses, we realigned our segments and, accordingly, changed the basis of presentation of our segments, resulting in four reportable business segments:
Retail Banking
Corporate & Institutional Banking
Asset Management Group
BlackRock

See the Business Segments Review section in Item 7 for additional detail on our first quarter 2017 change.
 
Assets, revenue and earnings attributable to foreign activities were not material in the periods presented. We periodically refine our internal methodologies as management reporting practices are enhanced. To the extent significant and practicable, retrospective application of new methodologies is made to prior period reportable business segment results and disclosures to create comparability with the current period. See Note 22 Segment Reporting in the Notes To Consolidated Financial Statements in Item 8 of this Report for information on adjustments made in the first quarter of 2017 to our internal funds transfer pricing methodology.

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


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


Our core strategy is to acquire and retain customers who maintain their primary checking and transaction relationships with us. We also seek to deepen relationships by meeting the broad range of our customers’ financial needs with savings, liquidity, lending, investment and retirement solutions. A strategic priority for us is to reinvent the retail banking experience in response to changing customer preferences. A key element of this strategy is to expand the use of lower-cost alternative distribution channels, with an emphasis on digital capabilities, while continuing to optimize the traditional branch network. In addition, we have a disciplined process to continually improve the engagement of both our employees and customers, which is a strong indicator of customer growth, retention and relationship expansion.

Corporate & Institutional Banking provides lending, treasury management, and capital markets-related products and services to mid-sized and large corporations, and government and not-for-profit entities. Lending products include secured and unsecured loans, letters of credit and equipment leases. Treasury management services include cash and investment management, receivables management, disbursement services, funds transfer services, information reporting and global trade services. Capital markets-related products and services include foreign exchange, derivatives, securities underwriting, loan syndications, mergers and acquisitions advisory and equity capital markets advisory related services. We also provide commercial loan servicing and technology solutions for the commercial real estate finance industry. Products and services are provided nationally. We offer certain products and services internationally.

Corporate & Institutional Banking’s strategy is to be the leading relationship-based provider of traditional banking products and services to its customers through the economic cycles. We aim to grow our market share and drive higher returns by delivering value-added solutions that help our clients better run their organizations, all while maintaining prudent risk and expense management.

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

 
Asset Management Group is focused on being a premier bank-held individual and institutional asset managers in each of the markets it serves. The business seeks to deliver high quality banking, trust and investment management services to our high net worth, ultra high net worth and institutional client sectors through a broad array of products and services. Asset Management Group’s priorities are to serve our clients' financial objectives, grow and deepen customer relationships and deliver solid financial performance with prudent risk and expense management.

BlackRock, in which we hold an equity investment, is a leading publicly-traded investment management firm providing a broad range of investment, risk management and technology services to institutional and retail clients worldwide. Using a diverse platform of active and index investment strategies across asset classes, BlackRock develops investment outcomes and asset allocation solutions for clients. Product offerings include single- and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. BlackRock also offers an investment and risk management technology platform, risk analytics, advisory and technology services and solutions to a broad base of institutional and wealth management investors. Our equity investment in BlackRock provides us with an additional source of noninterest income and increases our overall revenue diversification. BlackRock is a publicly-traded company, and additional information regarding its business is available in its filings with the Securities and Exchange Commission (SEC).

Subsidiaries
Our corporate legal structure at December 31, 2017 consisted of one domestic subsidiary bank, including its subsidiaries, and approximately 50 active non-bank subsidiaries, in addition to various affordable housing investments. Our bank subsidiary is PNC Bank, National Association (PNC Bank), a national bank headquartered in Pittsburgh, Pennsylvania. For additional information on our subsidiaries, see Exhibit 21 to this Report.


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


Statistical Disclosure By Bank Holding Companies
The following statistical information is included on the indicated pages of this Report and is incorporated herein by reference: 
  
Form 10-K page
Average Consolidated Balance Sheet And Net
    Interest Analysis
158
Analysis Of Year-To-Year Changes
    In Net Interest Income
159
Book Values Of Securities
37 and 108-111
Maturities And Weighted-Average Yield Of
    Securities
37 and 110-111
Loan Types
36, 53, 98-99 and 160
Selected Loan Maturities And Interest Sensitivity
163
Nonaccrual, Past Due And Restructured Loans And
    Other Nonperforming Assets
53-59, 87-90, 97-105 and 161
Potential Problem Loans
53-59
Summary Of Loan Loss Experience
58-59, 106-107 and 162
Allocation Of Allowance For Loan And Lease
    Losses
58-59 and 162
Average Amount And Average Rate Paid On
    Deposits
158
Time Deposits Of $100,000 Or More
163
Selected Consolidated Financial Data
28-29
Short-term Borrowings – not included as average
    balances during 2017, 2016, and 2015 were less
    than 30% of total shareholders’ equity at the end
    of each period.
 

Supervision and Regulation
The PNC Financial Services Group, Inc. is a bank holding company (BHC) registered under the Bank Holding Company Act of 1956 (BHC Act) and a financial holding company under the Gramm-Leach-Bliley Act (GLB Act).

We are subject to numerous governmental regulations, some of which are highlighted below. See Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information regarding our regulatory matters. Applicable laws and regulations restrict our permissible activities and investments, impose conditions and requirements on the products and services we offer and the manner in which they are offered and sold, and require compliance with protections for loan, deposit, brokerage, fiduciary, investment management and other customers, among other things. They also restrict our ability to repurchase stock or pay dividends, or to receive dividends from our bank subsidiary, and impose capital adequacy and liquidity requirements. The consequences of noncompliance with these, or other applicable laws or regulations, can include substantial monetary and nonmonetary sanctions.

 
In addition, we are subject to comprehensive supervision and periodic examination by, among other regulatory bodies, the Board of Governors of the Federal Reserve System (Federal Reserve) and the Office of the Comptroller of the Currency (OCC). These examinations consider not only compliance with applicable laws, regulations and supervisory policies of the agency, but also capital levels, asset quality, risk management effectiveness, the ability and performance of management and the board of directors, the effectiveness of internal controls, earnings, liquidity and various other factors.

The results of examination activity by any of our federal bank regulators potentially can result in the imposition of significant limitations on our activities and growth. These regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity and take enforcement action, including the imposition of substantial monetary penalties and nonmonetary requirements, against a regulated entity where the relevant agency determines, among other things, that such operations fail to comply with applicable law or regulations or are conducted in an unsafe or unsound manner. This supervisory framework, including the examination reports and supervisory ratings (which are not publicly available) of the agencies, could materially impact the conduct, growth and profitability of our operations.

The Consumer Financial Protection Bureau (CFPB) is responsible for examining PNC Bank and its affiliates (including PNC) for compliance with most federal consumer financial protection laws, including the laws relating to fair lending and prohibiting unfair, deceptive or abusive acts or practices in connection with the offer, sale or provision of consumer financial products or services, and for enforcing such laws with respect to PNC Bank and its affiliates. The results of the CFPB’s examinations (which are not publicly available) also can result in restrictions or limitations on the operations of a regulated entity as well as enforcement actions against a regulated entity, including the imposition of substantial monetary penalties and nonmonetary requirements.

We also are subject to regulation by the SEC by virtue of our status as a public company and by the SEC and the Commodity Futures Trading Commission (CFTC) due to the nature of some of our businesses. Our businesses with operations outside the United States are also subject to regulation by appropriate authorities in the foreign jurisdictions in which they do business.

As a regulated financial services firm, our relationships and good standing with regulators are of fundamental importance to the operation and growth of our businesses. The Federal Reserve, OCC, CFPB, SEC, CFTC and other domestic and foreign regulators have broad enforcement powers, and certain of the regulators have the power to approve, deny, or refuse to act upon our applications or notices to conduct new activities, acquire or divest businesses, assets or deposits, or reconfigure existing operations.


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


Among the areas that have been receiving a high level of regulatory focus are compliance with the Bank Secrecy Act and anti-money laundering laws, capital and liquidity management, fair lending and other consumer protection issues, including retail sales practices, fee assessment and collection, cyber-security, capital planning and stress testing, the oversight of arrangements with third-party vendors and suppliers, the protection of confidential customer information, and the structure and effectiveness of enterprise risk management frameworks.

New legislation, changes in rules promulgated by federal financial regulators, other federal and state regulatory authorities and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the method of operation and profitability of our businesses. We anticipate new legislative and regulatory initiatives over the next several years, focused specifically on banking and other financial services in which we are engaged. Legislative and regulatory developments to date, as well as those that come in the future, have had and are likely to continue to have an impact on the conduct of our business. The more detailed description of the significant regulations to which we are subject included in this Report is based on current laws and regulations and is subject to potentially material change. See also the additional information included as Risk Factors in Item 1A of this Report discussing the impact of financial regulatory initiatives on the regulatory environment for us and the financial services industry, including ongoing implementation of Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) reforms.

The profitability of our businesses could also be affected by rules and regulations that impact the business and financial sectors in general, including changes to the laws governing taxation, antitrust regulation and electronic commerce.

In the fourth quarter of 2017, federal tax reform legislation, the Tax Cuts and Jobs Act, was enacted and, among other provisions, lowered the statutory tax rate for corporations to 21% from 35% effective January 1, 2018. PNC's consolidated financial statements for the fourth quarter and full year 2017 reflect reasonable estimates of the impact of the tax legislation as of December 31, 2017, and the amounts could be adjusted during the measurement period, which will end in December 2018. See the Critical Accounting Estimates and Judgments section in Item 7 of this Report for more detail.

There are numerous rules governing the regulation of financial services institutions and their holding companies. Accordingly, the following discussion is general in nature and does not purport to be complete or to describe all of the laws, regulations and supervisory policies that apply to us. To a substantial extent, the purpose of the regulation and supervision of financial services institutions and their holding companies is not to protect our shareholders and our non-customer creditors, but rather to protect our customers (including depositors) and the financial markets and financial system in general.

 
Banking Regulation and Supervision
Regulatory Capital Requirements, Stress Testing and Capital Planning. PNC and PNC Bank are subject to the regulatory capital requirements established by the Federal Reserve and the OCC, respectively. The foundation of the agencies’ regulatory capital rules is 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. The regulatory capital rules establish minimum requirements for the ratio of a banking organization’s regulatory capital to its risk-weighted assets, referred to as risk-based capital requirements, as well as for the ratio of its regulatory capital to measures of assets and other exposures, referred to as leverage capital requirements. The agencies’ regulatory capital rules have undergone significant change since 2013, when the agencies adopted final rules to implement changes to the Basel Committee's international regulatory capital framework, known as “Basel III”, as well as certain provisions of Dodd-Frank. Many provisions of these rules, referred to as the Basel III capital rules, are subject to multi-year phase-in periods, with the rules generally fully phased-in as of January 1, 2019. Certain provisions (described below) of these rules apply only to banking organizations that have $250 billion or more in total consolidated assets (such as PNC and PNC Bank) or that have $10 billion or more in on-balance sheet foreign exposure (referred to as advanced approaches banking organizations).

The regulatory capital rules generally divide regulatory capital into three components: common equity tier 1 (CET1) capital, additional Tier 1 capital (which, together with CET1 capital, comprises Tier 1 capital) and Tier 2 capital. CET1 capital is generally common stock, retained earnings, qualifying minority interest and, for PNC and PNC Bank as advanced approaches banking organizations, accumulated other comprehensive income related to both available for sale securities and pension and other post-retirement plans, less the deductions required to be made from CET1 capital. Additional Tier 1 capital generally includes, among other things, perpetual preferred stock and qualifying minority interests, less the deductions required to be made from additional Tier 1 capital. Tier 2 capital generally comprises qualifying subordinated debt, less any required deductions from Tier 2 capital. There are significant limits on the extent to which minority interests in consolidated subsidiaries (including minority interests in the form of REIT preferred securities) may be included in regulatory capital.

Total capital is the sum of Tier 1 capital and Tier 2 capital, less the deductions required from total capital. Significant common stock investments in unconsolidated financial institutions, as well as mortgage servicing rights and deferred tax assets, must be deducted from CET1 regulatory capital (subject to a phase-in schedule and net of associated deferred tax liabilities) to the extent such items individually exceed 10%, or in the aggregate exceed 15%, of our adjusted Basel III CET1 regulatory capital. Our common stock investment in BlackRock is treated

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


as a significant common stock investment in an unconsolidated financial institution for these purposes.

The regulatory capital rules include a standardized approach for determining a banking organization’s risk-weighted assets for purposes of calculating the risk-based capital ratios. To determine risk-weighted assets under the standardized approach, a banking organization must allocate its assets and specified off-balance sheet financial exposures and instruments into risk-weighted categories. The standardized approach for risk-weighted assets takes into account credit and market risk. To calculate risk-weighted assets under the standardized approach for credit risk, the nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are generally multiplied by risk weights set forth in the rules, which increase as the perceived credit risk of the relevant asset or exposure increases. For certain types of exposures, such as securitization exposures, the standardized approach establishes one or more methodologies that are to be used to calculate the risk-weighted asset amount for the exposure. High volatility commercial real estate, past due, securitization and equity exposures, as well as investments in unconsolidated financial institutions, mortgage servicing rights and deferred tax assets that are not deducted from capital are generally subject to higher risk weights than other types of exposures.

Advanced approaches banking organizations (such as PNC and PNC Bank) are also required to calculate risk-weighted assets using a separate methodology, referred to as the advanced approaches, that is based on the Basel II capital framework. The Basel II framework, seeks to provide more risk-sensitive regulatory capital calculations and promote enhanced risk management practices among large, internationally active banking organizations. Advanced approaches risk-weighted assets take into account credit, market and operational risk and rely to a significant extent on internal models. Prior to fully implementing the advanced approaches to calculate risk-weighted assets, PNC and PNC Bank must successfully complete a “parallel run” qualification phase. PNC and PNC Bank entered this parallel run qualification phase on January 1, 2013. As discussed further in Item 1A Risk Factors of this Report, the Basel Committee in 2017 finalized additional, significant changes to the international capital framework for banking organizations.The extent to and manner in which these or similar changes would be implemented by the U.S. banking agencies, and the implications of any such developments on the U.S. regulatory capital framework (including the advanced approaches and the parallel run qualification period for PNC and PNC Bank) are not fully known at this time.

As a result of the phase-in period for provisions of the Basel III capital 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 were based on the definitions of, and deductions from, regulatory capital (as such definitions and deductions were phased-in for 2017) and the standardized approach for determining risk-weighted assets. Until we have exited parallel run, our regulatory risk-
 
based capital ratios will be calculated using the standardized approach for determining risk-weighted assets, and the definitions of, and deductions from, capital (as such definitions and deductions are phased-in). 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 as the Transitional Basel III ratios. The Transitional Basel III regulatory capital ratios of PNC and PNC Bank as of December 31, 2017 exceeded the applicable minimum levels. For additional information regarding the Transitional Basel III capital ratios of PNC and PNC Bank as of December 31, 2017, as well as the levels needed to be considered “well capitalized”, see the Liquidity and Capital Management portion of the Risk Management section of Item 7 of this Report.

The risk-based capital rules establish certain minimum standards for the capital ratios of banking organizations, including PNC and PNC Bank. Banking organizations must maintain a minimum CET1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0%, in each case in relation to risk-weighted assets, to be considered “adequately capitalized.” Banking organizations also must maintain a capital conservation buffer requirement above the minimum risk-based capital ratio requirements in order to avoid limitations on capital distributions (including dividends and repurchases of any Tier 1 capital instrument, such as common and qualifying preferred stock) and certain discretionary incentive compensation payments. The capital conservation buffer requirement is subject to a multi-year phase-in period. For 2018, banking organizations (including PNC and PNC Bank) are required to maintain a risk-based CET1 capital ratio of at least 6.375%, a Tier 1 capital ratio of at least 7.875%, and a total capital ratio of at least 9.875% to avoid limitations on capital distributions and certain discretionary incentive compensation payments. When fully phased-in on January 1, 2019, banking organizations must maintain a CET1 capital ratio of at least 7.0%, a Tier 1 capital ratio of at least 8.5%, and a total capital ratio of at least 10.5%, in each case in relation to risk-weighted assets, to avoid limitations on capital distributions and certain discretionary incentive compensation payments.

For advanced approaches banking organizations (such as PNC and PNC Bank), these higher capital conservation buffer levels above the regulatory minimums could be supplemented by a countercyclical capital buffer based on U.S. credit exposures of up to an additional 2.5% of risk-weighted assets (once fully phased-in). This buffer is currently set at zero in the U.S. A 2016 Federal Reserve policy statement establishes the framework and factors the Federal Reserve would use in setting and adjusting the amount of the U.S. countercyclical capital buffer. Covered banking organizations would generally have 12 months after the announcement of any increase in the countercyclical capital buffer to meet the increased buffer requirement, unless the Federal Reserve determines to establish an earlier effective date. Under the phase-in schedule for the countercyclical capital buffer, the maximum potential

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


countercyclical capital buffer amount is 1.875% in 2018 and 2.5% in 2019 and thereafter. When fully phased-in and if the full countercyclical buffer amount is implemented, PNC and PNC Bank could be required to maintain a risk-based CET1 capital ratio of at least 9.5%, a Tier 1 capital ratio of at least 11%, and a total capital ratio of at least 13% to avoid limitations on capital distributions and certain discretionary incentive compensation payments.

PNC and PNC Bank are not subject to the additional risk-based CET1 capital surcharge, minimum long-term debt requirement, or minimum total loss-absorbing capacity (TLAC) requirement that applies to U.S. firms identified as globally systemically important banks (GSIBs).

The regulatory capital rules also require that banking organizations maintain a minimum amount of Tier 1 capital to average consolidated assets, referred to as the leverage ratio. Banking organizations are required to maintain a minimum leverage ratio of Tier 1 capital to total assets of 4.0%. As of December 31, 2017, the leverage ratios of PNC and PNC Bank were above the required minimum level.

Advanced approaches banking organizations (such as PNC and PNC Bank) also are subject to a minimum 3.0% supplementary leverage ratio that took effect on January 1, 2018. The supplementary leverage ratio is calculated by dividing Tier 1 capital by total leverage exposure, which takes into account on-balance sheet assets as well as certain off-balance sheet items, including loan commitments and potential future exposure under derivative contracts. BHCs with total consolidated assets of more than $700 billion or assets under custody of more than $10 trillion, as well as the insured depository institution subsidiaries of these BHCs, are subject to a higher supplementary leverage ratio requirement. These higher supplementary leverage requirements do not apply to PNC or PNC Bank.

Failure to meet applicable capital requirements could subject a banking organization to a variety of enforcement remedies available to the federal banking agencies, including a limitation on the ability to pay dividends or repurchase shares, the issuance of a capital directive to increase capital and, in severe cases, the termination of deposit insurance by the Federal Deposit Insurance Corporation (FDIC), and the appointment of a conservator or receiver. In some cases, the extent of these powers depends upon whether the institution in question is considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Generally, the smaller an institution’s capital base in relation to its risk-weighted or total assets, the greater the scope and severity of the agencies’ powers. Business activities may also be affected by an institution’s capital classification. For example, as a financial holding company, PNC and PNC Bank must remain “well capitalized.” At December 31, 2017, PNC and PNC Bank exceeded the required ratios for classification as “well capitalized.” The thresholds at which an insured depository institution is considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
 
undercapitalized” or “critically undercapitalized” are based on (i) the institution’s CET1, Tier 1 and total risk-based capital ratios; (ii) the institution’s leverage ratio; and (iii) for the definitions of “adequately capitalized” and “undercapitalized”, the institution’s supplementary leverage ratio. For additional discussion of capital adequacy requirements, see the Liquidity and Capital Management portion of the Risk Management section of Item 7 of this Report and to Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report.

In addition to potential changes to the U.S. capital rules as a result of developments at the Basel Committee, the U.S. banking agencies also are undertaking a review of the regulatory capital rules. In September 2017, the banking agencies jointly requested public comment on a proposal that would implement certain changes to the Basel III regulatory capital rules. The proposal would reduce the risk weight (from 150 percent to 130 percent) for high-volatility commercial real estate exposures under the standardized approach, while also making certain changes to the definition of such exposures and relabeling such exposures as either high-volatility acquisition, development or construction exposures. For non-advanced approaches banking organizations, the proposal also would modify the threshold deductions from CET1 regulatory capital for significant common stock investments in unconsolidated financial institutions, mortgage servicing rights and certain deferred tax assets. The public comment period on the proposal closed on December 26, 2017.

In addition to regulatory capital requirements, we are subject to the Federal Reserve’s capital plan rule, annual capital stress testing requirements and Comprehensive Capital Analysis and Review (CCAR) process, as well as the annual and mid-year Dodd-Frank capital stress testing (DFAST) requirements of the Federal Reserve (annual and mid-cycle) and the OCC (annual). As part of the CCAR process, the Federal Reserve undertakes a supervisory assessment of the capital planning process of BHCs, including PNC, that have $50 billion or more in total consolidated assets. For us, this capital planning assessment is based on a review of a comprehensive capital plan submitted to the Federal Reserve that describes the company’s planned capital actions, such as plans to pay or increase common stock dividends, reinstate or increase common stock repurchase programs, or issue or redeem preferred stock or other regulatory capital instruments, during the nine quarter review period, as well as the results of stress tests conducted by both the company and the Federal Reserve under different hypothetical macro-economic scenarios, including a supervisory adverse scenario and severely adverse scenario provided by the Federal Reserve. The Federal Reserve can object to our capital plan for qualitative or quantitative reasons. If the Federal Reserve objects to a BHC’s capital plan, the BHC cannot make capital distributions without Federal Reserve approval.

In evaluating capital plans of advanced approaches BHCs (such as PNC) or BHCs with $75 million or more in nonbank assets, the Federal Reserve considers a number of qualitative factors, which have become increasingly important in the

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


CCAR process in recent years. The Federal Reserve’s supervisory expectations for the capital planning and stress testing processes at large and complex BHCs, including PNC, are heightened relative to smaller and less complex BHCs. In assessing a BHC’s capital planning and stress testing processes, the Federal Reserve considers whether the BHC has sound and effective governance to oversee these processes. The Federal Reserve’s evaluation focuses on whether a BHC’s capital planning and stress testing processes are supported by a strong risk management framework to identify, measure and assess material risks and that provides a strong foundation to capital planning. The Federal Reserve also considers the comprehensiveness of a BHC’s control framework and evaluates a BHC’s policy guidelines for capital planning and assessing capital adequacy. A BHC’s stress testing scenario design processes and approaches for estimating the impact of stress on its capital position, including stress testing models and non-model qualitative approaches, are comprehensively reviewed to ensure that projections reflect the impact of appropriately stressful conditions, as well as risks idiosyncratic to the BHC, on its capital position. Significant deficiencies in a BHC’s capital planning and stress testing processes may result in a qualitative objection by the Federal Reserve to its capital plan.

From a quantitative perspective, the Federal Reserve considers whether under different hypothetical macro-economic scenarios, including the supervisory severely adverse scenario, the BHC would be able to maintain, throughout each quarter of the nine quarter review period, projected regulatory risk-based and leverage capital ratios that exceed the applicable minimums. In making these estimates, the Federal Reserve assumes that the BHC would continue its base case capital actions in each supervisory scenario, including the severely adverse scenario. Failure to meet a minimum regulatory risk-based or leverage capital requirement on a projected stress basis is grounds for objection to a BHC’s capital plan.

In connection with the 2018 CCAR exercise, we must file our capital plan and stress testing results using financial data as of December 31, 2017 with the Federal Reserve by April 5, 2018. We expect to receive the Federal Reserve’s response (either a non-objection or objection) to the capital plan submitted as part of the 2018 CCAR in June 2018.

As part of the CCAR and annual DFAST processes, both we and the Federal Reserve release certain revenue, loss and capital results from stress testing exercises. For the 2018 exercises, the Federal Reserve has announced that it intends to publish its supervisory revenue, loss and capital projections for participating BHCs under the supervisory adverse and severely adverse macro-economic scenarios using the common assumptions concerning capital distributions established by the Federal Reserve in its DFAST regulations (DFAST capital action assumptions), as well as capital ratio information using the company’s proposed base case capital actions. Within 15 days of the Federal Reserve publishing its DFAST results, we also are required to publicly disclose our own estimates of certain capital, revenue and loss information under the same hypothetical supervisory severely adverse
 
macro-economic scenario and applying the DFAST capital action assumptions.

Federal Reserve regulations also require that we and other large BHCs conduct a separate, mid-cycle stress test using financial data as of June 30 and three company-derived macro-economic scenarios (base, adverse and severely adverse) and publish a summary of the results under the severely adverse scenario. For the 2018 mid-cycle stress test cycle, we must publish our results in the period between October 5 and November 4, 2018.

The Federal Reserve’s capital plan rule provides that a BHC must resubmit a new capital plan prior to the annual submission date if, among other things, there has been or will be a material change in the BHC’s risk profile, financial condition or corporate structure since its last capital plan submission. Under the “de minimis” safe harbor of the Federal Reserve’s capital plan rule, we may make limited repurchases of common stock or other capital distributions in amounts that exceed the amounts included in our most recently approved capital plan subject to certain conditions, including that the Federal Reserve does not object to the additional repurchases or distributions. Such additional distributions may not exceed, in the aggregate, 0.25% of Tier 1 capital during the relevant 12-month period.

Regulatory Liquidity Standards and Liquidity Risk Management Requirements. The Basel Committee's Basel III framework included short-term liquidity standards (Liquidity Coverage Ratio or LCR) and long-term funding standards (Net Stable Funding Ratio or NSFR).

The U.S. banking agencies' LCR rules are designed to ensure that covered banking organizations maintain an adequate level of cash and high quality, unencumbered liquid assets (HQLA) to meet estimated net liquidity needs in a short-term stress scenario using liquidity inflow and outflow assumptions prescribed in the rules (net cash outflow). A company’s LCR is the amount of its HQLA, as defined and calculated in accordance with the haircuts and limitations in the rule, divided by its net cash outflows, with the quotient expressed as a percentage. The regulatory minimum LCR that covered banking organizations are required to maintain is 100%. As of December 31, 2017, the LCR for PNC and PNC Bank exceeded the fully phased-in requirement of 100%.

Top-tier BHCs (like PNC) that are subject to the advanced approaches for regulatory capital purposes, as well as any subsidiary depository institution of such a company that has $10 billion or more in total consolidated assets (such as PNC Bank), are subject to the full LCR (rather than the less stringent modified LCR). PNC and PNC Bank are required to calculate the LCR on a daily basis. Under the full LCR, an institution required to calculate the LCR on a daily basis must promptly provide its regulator with a plan for achieving compliance with the minimum LCR requirement if its LCR is below the minimum requirement for three consecutive business days.


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


The Federal Reserve requires large BHCs, including PNC, to publicly disclose certain quantitative and qualitative measures of their LCR-related liquidity profile. These disclosures include major components used to calculate the LCR (e.g., HQLA, cash outflows and inflows for the consolidated parent company), and a qualitative discussion of the BHC’s LCR results, including, among other things, key drivers of the results, composition of HQLA and concentration of funding sources. We are required to make these disclosures starting with the second quarter of 2018.

The NSFR is designed to promote a stable maturity structure of assets and liabilities of banking organizations over a one-year time horizon. In 2016, the federal banking agencies requested comment on proposed rules that would implement the NSFR in the United States. The proposed rules would require a covered BHC to calculate its NSFR as the ratio of its available stable funding (ASF) to its required stable funding (RSF) amount, each as defined in the proposed rules, over a one-year horizon. The regulatory minimum ratio for all covered banking organizations is 100%. For BHCs with assets of $50 billion or more, but less than $250 billion, and on-balance sheet foreign exposure of less than $10 billion, the RSF amount is scaled by a factor of 70%. The proposal also includes requirements for quarterly quantitative and qualitative NSFR disclosures. Although the impact on us will not be fully known until the rules are finalized, we have taken several actions to prepare for implementation of the NSFR and we expect to be in compliance with the NSFR requirements if and when they become effective.

PNC is also subject to Federal Reserve rules that require BHCs with $50 billion or more in consolidated total assets to, among other things, conduct internal liquidity stress tests over a range of time horizons, maintain a buffer of highly liquid assets sufficient to meet projected net outflows under the BHC’s 30-day liquidity stress test, and maintain a contingency funding plan that meets detailed requirements.

For additional discussion of regulatory liquidity requirements, please refer to the Liquidity and Capital Management portion of the Risk Management section of Item 7 of this Report.

Source of Parent Company Liquidity and Dividends. The principal source of our liquidity at the parent company level is dividends from PNC Bank. PNC Bank is subject to various restrictions on its ability to pay dividends to PNC Bancorp, Inc., its direct parent, which is a wholly-owned direct subsidiary of The PNC Financial Services Group, Inc. PNC Bank is also subject to federal laws limiting extensions of credit to its parent holding company and non-bank affiliates as discussed in Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report. Further information on bank level liquidity and parent company liquidity is also available in the Liquidity and Capital Management portion of the Risk Management section of Item 7 of this Report

 
Federal Reserve rules provide that a BHC is expected to serve as a source of financial strength to its subsidiary banks and to commit resources to support such banks if necessary. Dodd-Frank requires that the Federal Reserve jointly adopt new rules with the OCC and the FDIC to implement this source of strength requirement. These joint rules have not yet been proposed. Consistent with this source of strength policy for subsidiary banks, the Federal Reserve has stated that, as a matter of prudent banking, a BHC generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the corporation’s capital needs, asset quality and overall financial condition. Further, in providing guidance to the large BHCs participating in the 2018 CCAR, discussed above, the Federal Reserve stated that it expects capital plans submitted in 2018 to reflect conservative dividend payout ratios, and that requests that imply common dividend payout ratios above 30% of projected after-tax net income available to common shareholders will receive particularly close scrutiny.

Enhanced Prudential Requirements. Under Federal Reserve rules, PNC (and other BHCs with total consolidated assets of $50 billion or more) are subject to enhanced prudential standards related to liquidity risk management and overall risk management. These rules, among other things, establish liquidity stress testing requirements (described further below) and certain oversight and governance responsibilities for the chief risk officer, the board of directors, and the risk committee of the board of directors of a covered company. These standards also require the Federal Reserve to impose a maximum 15-to-1 debt to equity ratio on a BHC, if the federal agencies that comprise the Financial Stability Oversight Council (FSOC), determine that the company poses a grave threat to the financial stability of the United States and that the imposition of such a debt-to-equity requirement would mitigate such risk.

The Federal Reserve is also required to establish single counterparty credit limits and early remediation requirements for BHCs with more than $50 billion in total assets. The Federal Reserve requested comment on proposed rules to implement a single counterparty credit limit in March 2016. Under those rules, the aggregate net credit exposure by PNC, to any single, unaffiliated counterparty, including its subsidiaries, would have to be calculated on a daily basis and could not exceed 25 percent of our Tier 1 capital. The proposed limit would cover credit exposure resulting from, among other transactions, extensions of credit, repurchase and reverse repurchase transactions, purchases or investments in securities, and derivative transactions, although certain exposures, including, among others, exposures to the U.S. government, would be excluded. Compliance with the proposed rules would be required one year after the effective date. The proposed rule, if finalized, would not have a material impact on our credit relationships with third parties.


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


The Federal Reserve is also required to establish early remediation requirements for BHCs with more than $50 billion in total assets and continues to work towards finalizing these requirements.

In addition, the Federal Reserve may continue to develop the set of enhanced prudential standards that apply to large BHCs in order to further promote the resiliency of such firms and the U.S. financial system. For additional information see Item 1A Risk Factors of this Report.

Additional Powers Under the GLB Act. The GLB Act permits a qualifying BHC to become a “financial holding company” and thereby engage in, or affiliate with financial companies engaging in, a broader range of activities than would otherwise be permitted for a BHC. Permitted affiliates include securities underwriters and dealers, insurance companies, insurance agents and companies engaged in other activities that are determined by the Federal Reserve, in consultation with the Secretary of the Treasury, to be “financial in nature or incidental thereto” or are determined by the Federal Reserve unilaterally to be “complementary” to financial activities. We became a financial holding company as of March 13, 2000. A BHC qualifies to become a financial holding company if the BHC and its subsidiary depository institutions are “well capitalized” and “well managed” and its subsidiary depository institutions have a rating under the Community Reinvestment Act (CRA) of Satisfactory or better. Among other activities, we currently rely on our status as a financial holding company to conduct merchant banking activities and securities underwriting and dealing activities. As subsidiaries of a financial holding company under the GLB Act, our non-bank subsidiaries are generally allowed to conduct new financial activities, and we are generally permitted to acquire non-bank financial companies that have less than $10 billion in assets, with after-the-fact notice to the Federal Reserve.

In addition, the GLB Act permits qualifying national banks to engage in expanded activities through a “financial subsidiary.” PNC Bank has filed a financial subsidiary certification with the OCC and currently engages in insurance agency activities through financial subsidiaries. PNC Bank may also generally engage through a financial subsidiary in any activity that is determined to be financial in nature or incidental to a financial activity by the Secretary of the Treasury, in consultation with the Federal Reserve (other than insurance underwriting activities, insurance company investment activities and merchant banking). In order to establish a financial subsidiary, a national bank and each of its depository institution affiliates must be “well capitalized” and “well managed” and the national bank and each of its depository institution affiliates must have a CRA rating of Satisfactory or better.

If a financial holding company or a national bank with a financial subsidiary fails to continue to meet the applicable “well capitalized” or “well managed” criteria, the financial holding company or national bank must enter into an agreement with the Federal Reserve or the OCC, respectively, that, among other things, identifies how the capital or management deficiencies will be corrected. Until such
 
deficiencies are corrected, the relevant agency may impose limits or conditions on the activities of the company or bank, and the company or bank may not engage in, or acquire a company engaged in, the types of expanded activities only permissible for a financial holding company or financial subsidiary without prior approval of the relevant agency.

In addition, a financial holding company generally may not engage in a new financial activity authorized by the GLB Act, or acquire a company engaged in such a new activity, if any of its insured depository institutions receives a CRA rating of less than Satisfactory rating. A national bank’s financial subsidiary generally may not engage in a new financial activity authorized by the GLB Act, or acquire a company engaged in such a new financial activity, if the national bank or any of its insured depository institution affiliates received a CRA rating of less than Satisfactory.

Volcker Rule. Banking entities of any size, including PNC, are prohibited under the Volcker Rule and its implementing regulations from engaging in short-term trading as principal and having certain ownership interests in and relationships with hedge funds, private equity funds, and certain other private funds (together, “covered funds”), unless an exemption or exception applies. For example, the exemptions under the Volcker Rule allow PNC to trade as principal for securities underwriting, market making and risk-mitigating hedging purposes, subject to a variety of conditions.

To date, the prohibitions under the final Volcker Rule regulations have not had, and we do not expect them to have in the future, a material effect on our businesses or revenue. However, the conditions for engaging in exempted trading activities and having permissible relationships with a private fund under the regulations could, depending on the agencies’ approach to interpreting them, cause us to forego engaging in hedging or other transactions that we would otherwise undertake in the ordinary course of business and, thus, to some extent, may limit our ability to most effectively hedge our risks, manage our balance sheet or provide products or services to our customers.

The final Volcker Rule regulations impose significant compliance and reporting obligations on banking entities. We are subject to the enhanced compliance program requirements and have adopted an enterprise Volcker compliance program. We have also divested prohibited investments in covered funds and received extensions allowing an extended conformance period for our remaining $.2 billion interests in illiquid covered funds (as defined by the applicable requirements).

Other Federal Reserve and OCC Regulation and Supervision. The federal banking agencies also possess broad powers to take corrective action as deemed appropriate for an insured depository institution and its holding company, and the Federal Reserve and the OCC have the ability to take enforcement action against PNC and PNC Bank, respectively, to prevent and remedy acts and practices that the agencies determine to be unfair or deceptive.


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


Moreover, less than satisfactory examination ratings, lower capital ratios than peer group institutions, or regulatory concerns regarding management, controls, assets, operations or other factors can all potentially result in practical limitations on the ability of a bank or BHC to engage in new activities, grow, acquire new businesses, repurchase its stock or pay dividends, or to continue to conduct existing activities. Furthermore, the OCC has established certain heightened risk management and governance standards for large banks, including PNC Bank, as enforceable guidelines under section 39 of the Federal Deposit Insurance Act (FDI Act). The guidelines, among other things, establish minimum standards for the design and implementation of a risk governance framework, describe the appropriate risk management roles and responsibilities of front line units, independent risk management, internal audit, and the board of directors, and provide that a covered bank should have a comprehensive written statement that articulates its risk appetite and serves as a basis for the framework (a risk appetite statement). If the OCC determines that a covered national bank is not in compliance with these or other guidelines established under section 39 of the FDI Act (including the guidelines relating to information security standards), the OCC may require the bank to submit a corrective action plan and may initiate enforcement action against the bank if an acceptable plan is not submitted or the bank fails to comply with an approved plan.

In August 2017, the Federal Reserve requested public comment on a proposal that would introduce a new supervisory rating system for BHCs with $50 billion or more in total consolidated assets, including PNC. Under the proposal, covered BHCs would receive separate ratings from the Federal Reserve for (i) capital planning and positions, (ii) liquidity risk management and positions and (iii) governance and controls. Each of these component areas would receive one of the following four ratings: (i) Satisfactory, (ii) Satisfactory Watch, (iii) Deficient-1 or (iv) Deficient-2. As proposed, a covered BHC would have to maintain a rating of Satisfactory Watch or better for each of the three components to be considered “well managed”. The public comment period for the proposal closed on February 15, 2018, with initial ratings under the new framework to be assigned during 2018.

Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve’s implementing regulation, Regulation W, place quantitative and qualitative restrictions on covered transactions between a bank and its affiliates (for example between PNC Bank, on the one hand, and The PNC Financial Services Group, Inc. and its nonbank subsidiaries, on the other hand). In general, section 23A and Regulation W limit the total amount of covered transactions between a bank and any single affiliate to 10 percent of the bank’s capital stock and surplus, limit the total amount of covered transactions between a bank and all its affiliates to 20 percent of the bank’s capital stock and surplus, prohibit a bank from purchasing low-quality assets from an affiliate, and require certain covered transactions to be secured with prescribed amounts of collateral. Section 23B generally requires that transactions between a bank and its affiliates be on terms that are at least as
 
favorable to the bank as the terms that would apply in comparable transactions between the bank and a third party. Dodd-Frank amended section 23A of the Federal Reserve Act to include as a covered transaction the credit exposure of a bank to an affiliate arising from a derivative transaction with the affiliate. The Federal Reserve has yet to propose rules to implement these revisions.

The Federal Reserve and the OCC have provided guidance regarding incentive and other elements of compensation provided to executives and other employees at financial services companies they regulate, both as general industry-wide guidance and guidance specific to select larger companies, including PNC. These guidelines are intended to ensure that the incentive compensation practices of covered banking organizations do not encourage excessive risk-taking. The Federal Reserve, the OCC, the FDIC, the SEC and two other regulatory agencies jointly proposed regulations in 2011 and again in 2016 to implement the incentive compensation requirements of Section 956 of Dodd-Frank. Regulation of compensation provided by us to our executives and other employees, whether through guidance or rules and regulations, could hamper our ability to attract and retain quality employees.

The Federal Reserve’s prior approval is required whenever we propose to acquire all or substantially all of the assets of any bank, to acquire direct or indirect ownership or control of more than 5% of any class of voting securities of any bank or BHC, or to merge or consolidate with any other BHC. The BHC Act and other federal law enumerates the factors the Federal Reserve must consider when reviewing the merger of BHCs, the acquisition of banks or the acquisition of voting securities of a bank or BHC. These factors include the competitive effects of the proposal in the relevant geographic markets; the financial and managerial resources and future prospects of the companies and banks involved in the transaction; the effect of the transaction on the financial stability of the United States; the organizations’ compliance with anti-money laundering laws and regulations; the convenience and needs of the communities to be served; and the records of performance under the CRA of the insured depository institutions involved in the transaction.

The Federal Reserve’s prior approval is also required, and similar factors are considered, to acquire direct or indirect ownership or control of more than 5% of any class of voting securities of a savings association or savings and loan holding company, or to merge or consolidate with a savings and loan holding company. In cases involving interstate bank acquisitions, the Federal Reserve also must consider the concentration of deposits nationwide and in certain individual states. Under Dodd-Frank, a BHC is generally prohibited from merging or consolidating with, or acquiring, another company if upon consummation the resulting company would control 10% or more of deposits in the U.S or a state, or if the resulting company’s liabilities would exceed 10% of the aggregate liabilities of the U.S. financial sector (including the U.S. liabilities of foreign financial companies). In extraordinary cases, the FSOC, in conjunction with the

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


Federal Reserve, could order the break-up of financial firms that are deemed to present a grave threat to the financial stability of the United States.

OCC prior approval is required for PNC Bank to acquire another insured bank or savings association by merger or to acquire deposits or substantially all of the assets of such institutions. In deciding whether to approve such a transaction, the OCC is required to consider factors similar to those that must be considered by the Federal Reserve in connection with the acquisition of a bank or BHC. Approval of the FDIC is required to merge a nonbank entity into PNC Bank. Our ability to grow through acquisitions or reorganize our operations could be limited by these approval requirements.

At December 31, 2017, PNC Bank had an Outstanding rating with respect to the CRA.

Based on the Federal Reserve’s interpretation of the BHC Act, the Federal Reserve has indicated that it considers BlackRock to be a subsidiary of The PNC Financial Services Group, Inc. for purposes of the BHC Act due to PNC’s current and historical ownership interest in, as well as other relationships with, BlackRock and, thus, subject to the supervision and regulation of the Federal Reserve.

FDIC Insurance and Related Matters. PNC Bank is insured by the FDIC and subject to deposit premium assessments. Regulatory matters could increase the cost of FDIC deposit insurance premiums to an insured bank as FDIC deposit insurance premiums are “risk based.” Therefore, higher fee percentages would be charged to banks that have lower capital ratios or higher risk profiles. These risk profiles take into account, among other things, weaknesses that are found by the primary federal banking regulator through its examination and supervision of the bank and the bank’s holdings of assets or liabilities classified as higher risk by the FDIC. A negative evaluation by the FDIC or a bank’s primary federal banking regulator could increase the costs to a bank and result in an aggregate cost of deposit funds higher than that of competing banks in a lower risk category.

Federal banking laws and regulations also apply a variety of requirements or restrictions on insured depository institutions with respect to brokered deposits. For instance, only a “well capitalized” insured depository institution may accept brokered deposits without prior regulatory approval. In addition, brokered deposits are generally subject to higher outflow assumptions than other types of deposits for purposes of the LCR.

The FDIC has imposed a deposit insurance assessment surcharge on insured depository institutions with total consolidated assets of $10 billion or more (including PNC Bank), which will continue in effect until the earlier of (i) the date on which the Designated Reserve Ratio (the balance in the Deposit Insurance Fund divided by estimated insured deposits) reaches 1.35% (estimated by the FDIC to occur before the end of 2018), or (ii) December 31, 2018. If the ratio does not reach 1.35% by December 31, 2018, the FDIC will
 
impose a one-time shortfall assessment on insured depository institutions with total consolidated assets of $10 billion or more (including PNC Bank).

Resolution and Recovery Planning. BHCs that have $50 billion or more in assets, such as PNC, are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that includes, among other things, an analysis of how the company could be resolved in a rapid and orderly fashion if the company were to fail or experience material financial distress. The Federal Reserve and the FDIC may jointly impose restrictions on a covered BHC, including additional capital requirements or limitations on growth, if the agencies jointly determine that the company’s plan is not credible or would not facilitate a rapid and orderly resolution of the company under the U.S. Bankruptcy Code (or other applicable resolution framework), and additionally could require the company to divest assets or take other actions if the company did not submit an acceptable resolution plan within two years after any such restrictions were imposed. The FDIC also requires large insured depository institutions, including PNC Bank, to periodically submit a resolution plan to the FDIC that includes, among other things, an analysis of how the institution could be resolved under the FDI Act in a manner that protects depositors and limits losses or costs to creditors of the bank in accordance with the FDI Act. PNC and PNC Bank are required to provide the Federal Reserve and FDIC a public summary of their resolution plans, which the agencies then make available to the public. Depending on how the agencies conduct their review of the resolution plans submitted by PNC and PNC Bank, these requirements could affect the ways in which PNC structures and conducts its business and result in higher compliance and operating costs.

PNC Bank also is subject to OCC guidelines under section 39 of the FDI Act that establish standards for recovery planning. These guidelines require a covered bank to develop and maintain a recovery plan that, among other things, identifies a range of options that could be undertaken by the covered bank to restore its financial strength and viability should identified triggering events occur. The recovery plan guidelines are enforceable in the same manner as the other guidelines the OCC has established under section 39 of the FDI Act.

CFPB Regulation and Supervision. The CFPB examines PNC and PNC Bank for compliance with a broad range of federal consumer financial laws and regulations, including the laws and regulations that relate to deposit products, credit card, mortgage, automobile, student and other consumer loans, and other consumer financial products and services that we offer. The CFPB also has authority to take enforcement actions to prevent and remedy acts and practices relating to consumer financial products and services that it deems to be unfair, deceptive or abusive, and to impose new disclosure requirements for any consumer financial product or service.

The CFPB may issue regulations that impact products and services offered by PNC Bank. The regulations could reduce the fees that we receive, alter the way we provide our products and services, or expose us to greater risk of private litigation

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


or regulatory enforcement action. The CFPB may engage in rulemakings affecting prepaid cards, data on small business lending, the Home Mortgage Disclosure Act, and payday, vehicle title, and certain high-cost installment loans.

Securities and Derivatives Regulation
Our registered broker-dealer and investment adviser subsidiaries are subject to the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940, respectively, and related rules and regulations promulgated by the SEC.

Our investment adviser subsidiary that serves as adviser to registered investment companies is also subject to the requirements of the Investment Company Act of 1940 and related regulations. The Financial Industry Regulatory Authority (FINRA) is the primary self-regulatory organization for our registered broker-dealer subsidiaries. Our broker-dealer and investment adviser subsidiaries also are subject to additional regulation by states or local jurisdictions.

The SEC and FINRA have active enforcement functions that oversee broker-dealers and investment advisers and can bring actions that result in fines, restitution, a limitation on permitted activities, disqualification to continue to conduct certain activities and an inability to rely on certain favorable exemptions. Certain types of infractions and violations also can affect our ability to expeditiously issue new securities into the capital markets. In addition, certain changes in the activities of a broker-dealer require approval from FINRA, and FINRA takes into account a variety of considerations in acting upon applications for such approval, including internal controls, capital levels, management experience and quality, prior enforcement and disciplinary history and supervisory concerns.

Dodd-Frank imposed comprehensive and significant regulations on the activities of financial institutions that are active in the U.S. over-the-counter derivatives and foreign exchange markets. These regulations were intended to (i) address systemic risk issues, (ii) bring greater transparency to the derivatives markets, (iii) provide enhanced disclosures and protections to customers and (iv) promote market integrity. Among other things, Dodd-Frank: (i) requires the registration of both “swap dealers” and “major swap participants” with one or both of the CFTC (in the case of non security-based swaps) and the SEC (in the case of security-based swaps); (ii) requires that most standardized swaps be centrally cleared through a regulated clearing house and traded on a centralized exchange or swap execution facility; (iii) subjects swap dealers and major swap participants to capital and margin requirements in excess of historical practice; (iv) subjects swap dealers and major swap participants to comprehensive new recordkeeping and real-time public reporting requirements; (v) subjects swap dealers and major swap participants to new business conduct requirements, including the provision of daily marks to counterparties and disclosing to counterparties (pre-execution) the material risks, material incentives, and any conflicts of interest associated with their swap; (vi) imposes special duties on swap dealers and major swap participants when transacting
 
a swap with a “special entity” (e.g., governmental agency (federal, state or local) or political subdivision thereof, pension plan or endowment); and (vii) imposes margin requirements on swaps that are not centrally cleared through a regulated clearing house.

As a registered swap dealer with the CFTC, PNC Bank's derivatives and foreign exchange businesses are subject to the regulations and requirements imposed on registered swap dealers, and the CFTC (and for certain delegated responsibilities, the National Futures Association) has a meaningful supervisory role with respect to PNC Bank’s derivatives and foreign exchange businesses. Because of the limited volume of our security-based swap activities, PNC Bank has not registered with the SEC as a security-based swap dealer. The regulations and requirements applicable to swap dealers have and will continue to impose compliance burdens on PNC Bank and introduces additional legal risks (including as a result of applicable anti-fraud and anti-manipulation provisions and private rights of action). In addition, failure to comply with the "pay-to-play" regulations that govern our swap and municipal securities businesses could result in limitations on PNC Bank's ability to conduct swap and municipal securities business with state or local governments and their authorities.

BlackRock has subsidiaries in securities and related businesses subject to SEC, other governmental agencies, state, local and FINRA regulation, and a federally chartered nondepository trust company subsidiary subject to supervision and regulation by the OCC. For additional information about the regulation of BlackRock by these agencies and otherwise, see the discussion under the “Regulation” section of Item 1 Business in BlackRock’s most recent Annual Report on Form 10-K, which may be obtained electronically at the SEC’s website at www.sec.gov.

Regulations of Other Agencies
In addition to regulations issued by the federal banking, securities and derivatives regulators, we also are subject to regulations issued by other federal agencies with respect to certain financial products and services we offer. For example, certain of our fiduciary, brokerage and investment management activities are subject to regulations issued by the Department of Labor (DOL) under the Employee Retirement Income Security Act of 1974 (ERISA), as amended, and related provisions of the Internal Revenue Code and certain of our student lending and servicing activities are subject to regulation by the Department of Education. Certain provisions of final rules issued by the DOL expanding the definition of “investment advice” for retirement accounts and certain other accounts took effect in June 2017. The rules increased the scope of activities that give rise to fiduciary status under ERISA and the Internal Revenue Code and primarily apply to aspects of our Retail Banking and Asset Management Group segments. Certain requirements of the amended rules that had been scheduled to take effect on January 1, 2018 have been delayed until July 1, 2019 and the DOL is expected to propose amendments to the rules during the delay.


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


Competition
We are subject to intense competition from other regulated banking organizations, as well as various other types of financial institutions and non-bank entities that can offer a number of similar products and services without being subject to bank regulatory supervision and restrictions.

PNC Bank competes for deposits and/or loans with:
Other commercial banks,
Savings banks,
Credit unions,
Consumer finance companies,
Leasing companies,
Other non-bank lenders,
Financial technology companies,
Treasury management service companies,
Insurance companies, and
Issuers of commercial paper and other securities, including mutual funds.

In providing asset management services, our businesses compete with:
Investment management firms,
Large banks and other financial institutions,
Brokerage firms,
Financial technology companies,
Mutual fund complexes, and
Insurance companies.

Our various non-bank businesses engaged in investment banking and alternative investment activities compete with:
Commercial banks,
Investment banking firms,
Collateralized loan obligation (CLO) managers,
Hedge funds,
Mutual fund complexes,
Merchant banks,
Insurance companies,
Private equity firms, and
Other investment vehicles.

Loan pricing, structure and credit standards are extremely important in the current environment as we seek to achieve appropriate risk-adjusted returns. Traditional deposit-taking activities are also subject to pricing pressures and to customer migration as a result of intense competition for deposits and investments. Competitors may seek to compete with us through traditional channels such as physical locations or through digital channels such as internet or mobile. We include here by reference the additional information regarding competition and factors affecting our competitive position included in the Item 1A Risk Factors of this Report.

Employees
Employees totaled 52,906 at December 31, 2017. This total included 50,358 full-time and 2,548 part-time employees, of which 29,604 full-time and 2,368 part-time employees were employed by our Retail Banking business.

 
SEC Reports and Corporate Governance Information
We are subject to the informational requirements of the Securities Exchange Act of 1934 (Exchange Act) and, in accordance with the Exchange Act, we file annual, quarterly and current reports, proxy statements, and other information with the SEC. Our SEC File Number is 001-09718. You may read and copy this information at the SEC’s Public Reference Room located at 100 F Street NE, Room 1580, Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 800-SEC-0330. You can obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street NE, Washington, D.C. 20549, at prescribed rates.

The SEC maintains an internet website at www.sec.gov that contains reports, including exhibits, proxy and information statements, and other information about issuers, like us, who file electronically with the SEC. You can also inspect reports, proxy statements and other information about us at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.

We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge on our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our corporate internet address is www.pnc.com and you can find this information at www.pnc.com/secfilings. Shareholders and bondholders may obtain copies of these filings without charge by contacting Shareholder Services at 800-982-7652 or via the online contact form at www.computershare.com/contactus for copies without exhibits, and by contacting Shareholder Relations at 800-843-2206 or via e-mail at investor.relations@pnc.com for copies of exhibits, including financial statement and schedule exhibits where applicable. The interactive data file (XBRL) exhibit is only available electronically.

Information about our Board of Directors and its committees and corporate governance, including our PNC Code of Business Conduct and Ethics, is available on our corporate website at www.pnc.com/corporategovernance. In addition, any future amendments to, or waivers from, a provision of the PNC Code of Business Conduct and Ethics that applies to our directors or executive officers (including our principal executive officer, principal financial officer, and principal accounting officer or controller) will be posted at this internet address.

Shareholders who would like to request printed copies of the PNC Code of Business Conduct and Ethics or our Corporate Governance Guidelines or the charters of our Board of Directors’s Audit, Nominating and Governance, Personnel and Compensation, or Risk Committees (all of which are posted on our corporate website at www.pnc.com/corporategovernance) may do so by sending their requests to PNC’s Corporate Secretary at corporate headquarters at The

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


Tower at PNC Plaza, 300 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2401. Copies will be provided without charge to shareholders.

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol “PNC.”

Internet Information
The PNC Financial Services Group, Inc.’s financial reports and information about its products and services are available on the internet at www.pnc.com. We provide information for investors on our corporate website under “About Us – Investor Relations.” We use our Twitter account, @pncnews, as an additional way of disseminating to the public information that may be relevant to investors.

We generally post the following under “About Us – Investor Relations” shortly before or promptly following its first use or release: financially-related press releases, including earnings releases, and supplemental financial information, various SEC filings, including annual, quarterly and current reports and proxy statements, presentation materials associated with earnings and other investor conference calls or events, and access to live and recorded audio from earnings and other investor conference calls or events. In some cases, we may post the presentation materials for other investor conference calls or events several days prior to the call or event. When warranted, we will also use our website to expedite public access to time-critical information regarding PNC in advance of distribution of a press release or a filing with the SEC disclosing the same information. For earnings and other conference calls or events, we generally include in our posted materials a cautionary statement regarding forward-looking and non-GAAP financial information, and we provide GAAP reconciliations when we include non-GAAP financial information. Where applicable, we provide such GAAP reconciliations in materials for that event or in materials for prior investor presentations or in our annual, quarterly or current reports.

We are required to provide additional public disclosure regarding estimated income, losses and pro forma regulatory capital ratios under supervisory and PNC-developed hypothetical severely adverse economic scenarios, as well as information concerning our capital stress testing processes, pursuant to the stress testing regulations adopted by the Federal Reserve and the OCC. We are also required to make certain additional regulatory capital-related public disclosures about our capital structure, risk exposures, risk assessment processes, risk-weighted assets and overall capital adequacy, including market risk-related disclosures, under the regulatory capital rules adopted by the Federal banking agencies. Under these regulations, we may satisfy these requirements through postings on our website, and we have done so and expect to continue to do so without also providing disclosure of this information through filings with the SEC.

 
Other information posted on our corporate website that may not be available in our filings with the SEC includes information relating to our corporate governance and annual communications from our chairman to shareholders.

Where we have included internet addresses in this Report, such as our internet address and the internet address of the SEC, we have included those internet addresses as inactive textual references only. Except as specifically incorporated by reference into this Report, information on those websites is not part hereof.

ITEM 1A – RISK FACTORS
We are subject to a number of risks potentially impacting our business, financial condition, results of operations and cash flows. As a financial services organization, certain elements of risk are inherent in what we do and the business decisions we make. Thus, we encounter risk as part of the normal course of our business, and we design risk management processes to help manage these risks.

Our success is dependent on our ability to identify, understand and manage the risks presented by our business activities so that we can appropriately balance revenue generation and profitability. We categorize the risks we face as credit risk, liquidity risk, capital management, market risk, operational risk and compliance risk. We discuss our principal risk management processes and, in appropriate places, related historical performance and other metrics in the Risk Management section included in Item 7 of this Report.

The following are the key risk factors that affect us. Any one or more of these risk factors could have a material adverse impact on our business, financial condition, results of operations or cash flows, in addition to presenting other possible adverse consequences, including those described below. These risk factors and other risks we face are also discussed further in other sections of this Report.

Our business and financial performance are vulnerable to the impact of adverse economic conditions.

As a financial services company, our business and overall financial performance are affected to a significant extent by economic conditions. Adverse economic conditions generally result in reduced business activity, which may decrease the demand for our products and services, can impair the ability of borrowers to repay loans, and may lead to turmoil and volatility in financial markets. Such effects would likely have an adverse impact on financial institutions such as PNC, with the significance of the impact generally depending on the severity of the adverse economic conditions, increasing typically under recessionary conditions.

Even when economic conditions are relatively good or stable, specific economic factors can negatively affect the performance of financial institutions, especially as these factors relate to particular industries or geographical regions. For example, shifting consumer behavior with respect to retail

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


purchases over the internet rather than in physical stores has negatively impacted performance by some retailers, potentially decreasing demand for financial services in that sector and impairing the creditworthiness of some shopping malls and retail companies.

Given the geographic scope of our business and operations, we are most exposed to issues within the United States economy and financial markets and, within the United States, most exposed to issues within our primary geographic footprint concentrated in the Mid-Atlantic, Midwest and Southeast.

International economic conditions, however, can impact our business and financial performance both directly to the extent of our international business activities and, possibly more significantly, indirectly due to the possibility that poor economic conditions impacting other major economies around the world will have an impact on the United States. For example, the prospect of the United Kingdom’s impending exit from the European Union has led to uncertainty regarding the impact on the United Kingdom’s economy and capital markets as well as that of the remaining countries in the European Union. It is also possible that other countries might seek to exit the European Union in the future. The extent to which these uncertainties will affect the United States economy and capital markets is unclear.

The recently enacted Tax Cuts and Jobs Act will impact PNC’s business and financial results, including likely resultant changes in customer behavior.

In December 2017, Congress passed and the President signed the Tax Cuts and Jobs Act, representing the most significant change in U.S. federal tax law in decades. Although the direct impact of this legislation on PNC is likely to be positive, primarily as a result of a reduction in the corporate tax rate from 35% to 21%, there are specific aspects that will have a negative impact, including the disallowance of deductions for FDIC deposit insurance premiums and for a portion of our executive incentive compensation.

In addition, we anticipate that business and retail customers will modify behavior going forward in response to changes in the tax law, some of which are likely to be favorable to PNC over time, but some changes in customer behavior could be detrimental to our business. For example, in addition to various potential positive impacts, new or modified limitations on the ability of individuals to deduct mortgage and home equity interest expense could adversely affect demand for our home lending products. As another example, there could be reduced demand for commercial borrowing, due to factors such as improved cash flow resulting from lower tax rates or funds repatriated from outside the U.S. or utilization of other financing options.

It is not possible at present to determine the likely overall impact of the new tax law on PNC as a result of changes in economic activity and customer behavior, either in terms of magnitude or timing.
 
The monetary policies of governmental agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance.

Governmental monetary policies, including those of the Federal Reserve, have a significant impact on interest rates and overall financial market performance. These governmental policies can thus affect the activities and results of operations of banking companies such as PNC. An important function of the Federal Reserve is to regulate the national supply of bank credit and certain interest rates. The actions of the Federal Reserve influence the rates of interest that we charge on loans and that we pay on borrowings and interest-bearing deposits and can also affect the value of our on-balance sheet and off-balance sheet financial instruments. Both due to the impact on rates and by controlling access to direct funding from the Federal Reserve Banks, the Federal Reserve’s policies also significantly influence our cost of funding.

We cannot predict the nature or timing of future changes in monetary policies or the precise effects that they may have on our activities and financial results. The very low interest rate environment that has prevailed since the financial crisis has had a negative impact on our ability to increase our net interest income. Although the Federal Reserve started increasing its benchmark interest rate in December 2015, ending approximately seven years of near zero rates, and has continued to do so through 2017, with expectations that it will continue to do so in 2018, there is no assurance that it will do so or that it will do so in a manner that will be consistent with market expectations. Should the Federal Reserve not continue raising rates, it could affect consumer and business behavior in ways that are adverse to us in addition to continuing to affect our net interest income. Even if the Federal Reserve continues to increase the interest rates it directly influences, there may be a prolonged period before interest rates return to more historically typical levels. Recent and pending changes in the membership of the Federal Reserve Board, including its Chair, may create additional uncertainty regarding the direction of policy by the Federal Reserve.

After an extended period during which the Federal Reserve increased its balance sheet substantially above historical levels through the purchase of debt securities, the Federal Reserve has indicated an intention to start reducing its balance sheet from these elevated levels. It is unclear what impact this will have on the economy or on the markets for and values of financial assets, including assets of the types that we hold, purchase and sell.

In addition, monetary policy actions by governmental authorities in the European Union or other countries could have an impact on global interest rates, which could affect rates in the United States as well as rates on instruments denominated in currencies other than the U.S. dollar, any of which could have one or more of the potential effects on us described above. While we have not experienced negative interest rates in the United States, and in recent periods the Federal Reserve has been gradually increasing rates, some central banks in Europe and Asia have cut interest rates below

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


zero. If U.S. interest rates were to fall below zero, it could significantly affect our businesses and results of operation in ways that cannot easily be predicted.

Other government legislation, regulation and policy potentially impacting the economy can have an adverse effect on our business and financial performance.

Changes in law or governmental policy affecting the economy, business activity, or personal spending, investing or saving activities may cause consumers and businesses to alter behavior in ways that impact demand for our products and services. PNC may also adjust the types of transactions we seek to pursue under those circumstances. Uncertainty regarding future law or policy may have similar impacts. Concern regarding the ability of Congress and the President collectively to reach agreement on federal budgetary matters (including the debt ceiling), or prolonged stalemates leading to total or partial governmental shutdowns, also can have adverse economic consequences and create the risk of economic instability or market volatility with potential adverse consequences to our business and financial performance.

As a regulated financial services firm, we are subject to numerous governmental regulations, and the financial services industry as a whole continues to be subject to significant regulatory reform initiatives in the United States and elsewhere.

The PNC Financial Services Group, Inc. is a bank holding company (BHC) and a financial holding company and is subject to numerous governmental regulations involving both its business and organization.

Our businesses are subject to regulation by multiple banking, consumer protection, securities and derivatives regulatory bodies. In recent years, we, together with the rest of the financial services industry, have faced intense regulation, with many new regulatory initiatives and vigorous oversight and enforcement on the part of numerous regulatory bodies. Legislatures and regulators have pursued a broad array of initiatives intended to promote the safety and soundness of financial institutions, financial market stability, the transparency and liquidity of financial markets, and consumer and investor protection. As a result, we have experienced significantly increased compliance costs and have needed to adjust our business practices to accommodate new requirements and limitations, impacting some of our revenue opportunities.

Applicable laws and regulations restrict our ability to repurchase stock or to receive dividends from subsidiaries that operate in the banking and securities businesses and impose capital adequacy requirements. PNC’s ability to service its obligations and pay dividends to shareholders is largely dependent on the receipt of dividends and advances from its subsidiaries, primarily PNC Bank. The Federal Reserve requires a BHC to act as a source of financial and managerial strength for its subsidiary banks. The Federal Reserve could require PNC to commit resources to PNC Bank when doing so
 
is not otherwise in the interests of PNC or its shareholders or creditors.

Applicable laws and regulations also restrict permissible activities and investments and require compliance with provisions designed to protect loan, deposit, brokerage, fiduciary, mutual fund and other customers, and for the protection of customer information, among other things. We are also subject to laws and regulations designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities.

The current presidential administration has indicated an intent to pursue the regulation of the financial services industry differently than under the previous administration. There is, however, significant uncertainty regarding the direction this administration will take and its ability to implement its policies and objectives. In addition, the ultimate impact on potential new regulatory initiatives and the enforcement of existing laws and regulations is not known. Even to the extent that the current administration takes a different approach to regulation of the financial services industry than had previously been the case, and even if that is overall favorable to us, we would still expect compliance with regulations to be a meaningful burden presenting significant risk. In addition, there could be an increase in state regulation of aspects of our business and in foreign regulation that impacts our operations. Different approaches to regulation by different jurisdictions could increase our compliance costs.

There are currently pending numerous additional regulatory proposals, and other new initiatives are likely to be pursued in the future. The implementation of new regulatory requirements and limitations could further increase our compliance costs and the risks associated with non-compliance and could affect our ability to pursue or take full advantage of some desirable business opportunities.

A failure to comply, or to have adequate policies and procedures designed to comply, with regulatory requirements and expectations could expose us to damages, fines and regulatory penalties and other regulatory actions or consequences, such as limitations on activities otherwise permissible for us or additional requirements for engaging in new activities, and could also injure our reputation with customers and others with whom we do business.

See Supervision and Regulation in Item 1 of this Report for more information concerning the regulation of PNC and recent initiatives to reform financial institution regulation, including some of the matters discussed in this Risk Factor. Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report also discusses some of the regulation applicable to us.


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


Current and likely future capital and liquidity standards will result in banks and bank holding companies needing to maintain more and higher quality capital and greater liquidity than has historically been the case.

We are subject to regulatory capital and liquidity requirements established by the Federal Reserve and the OCC, and discuss these requirements and standards in the Supervision and Regulation section included in Item 1 of this Report and the Liquidity and Capital Management portion of the Risk Management section of Item 7 of this Report.

The regulatory capital requirements applicable to banks and BHCs have undergone significant changes. For example, the final rules adopted by the U.S. banking agencies in July 2013 to implement the new international guidelines for determining regulatory capital established by the Basel Committee known as “Basel III,” as well as to implement certain provisions of Dodd-Frank, fundamentally altered the U.S. regulatory capital requirements for U.S. BHCs and banks. Significant parts of these rules are now effective for us, although as a result of the staggered effective dates of the rules, many provisions are being phased-in over a period of years, with the rules generally to be fully phased-in as of January 1, 2019. The Basel Committee recently finalized additional, significant changes to the international capital framework for banking organizations, including modifications that would: (i) significantly alter the international frameworks governing the market risk capital requirements for trading positions and the standardized risk weighting approach for credit risk, (ii) introduce a new standardized measure of operational risk to replace the current methodology under the advanced approaches, and (iii) establish a standardized approach floor for capital ratios calculated by banking organizations that use the advanced approaches for the risk weighting of assets. Moreover, the Basel Committee continues to consider other changes to the international regulatory capital framework to enhance the transparency and consistency of capital requirements among banks and jurisdictions, including, among others, the treatment of securitization positions. It is unclear how these or other initiatives by the Basel Committee may be implemented in the U.S. and, thus, we are unable to estimate what potential impact such initiatives may have on us.

The liquidity standards applicable to large U.S. banking organizations also are expected to be supplemented in the coming years. For example, the Basel Committee, in October 2014, released the final framework for the NSFR standard, which is designed to ensure that banking organizations maintain a stable, long-term funding profile in relation to their asset composition and off-balance sheet activities. In May 2016, the U.S. banking agencies proposed rules to implement the NSFR but these rules have not yet been finalized. Thus, the potential impact of the NSFR on us remains unclear.

The need to maintain more and higher quality capital, as well as greater liquidity, going forward than historically has been required could limit our business activities, including lending, and our ability to expand, either organically or through acquisitions. It could also result in us taking steps to increase
 
our capital that may be dilutive to shareholders, being limited in our ability to pay dividends or otherwise return capital to shareholders, or selling or refraining from acquiring assets, for which the capital requirements appear inconsistent with the assets’ underlying risks. In addition, the new liquidity standards require us to maintain holdings of highly liquid short-term investments, thereby reducing our ability to invest in longer-term or less liquid assets, even if more desirable from a balance sheet or interest rate risk management perspective. In addition, PNC, as a BHC that is subject to the advanced approaches for regulatory capital purposes, is subject to a higher LCR requirement than other BHCs that have more than $50 billion in total assets but are not subject to the advanced approaches. Until the scope and terms of pending or future rulemakings relating to capital, liquidity or liability composition are known, the extent to which such rules may apply to us and the potential impact of such rules on us will remain uncertain.

The planned discontinuance of the requirement that banks submit rates for the calculation of LIBOR presents risks to the financial instruments originated or held by PNC that use LIBOR as a reference rate.

LIBOR is the reference rate for many transactions in which we lend and borrow money, issue, purchase and sell securities and enter into derivatives to manage our or our customers’ risk of these transactions. LIBOR has been the subject of recent national and international regulatory guidance and proposals for reform. The United Kingdom Financial Conduct Authority, which regulates the process for establishing LIBOR, announced in July 2017 that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. It is not possible to predict the effect of this announcement, including whether LIBOR will continue in place, and if so what changes will be made to it, what rates may replace LIBOR in use going forward, and how LIBOR will be determined for purposes of loans, securities and derivative instruments currently referencing it if it ceases to exist at some point. Any change in the availability or calculation of LIBOR may adversely affect the yield on loans or securities held by us, amounts paid on securities we have issued, or amounts received and paid on derivative instruments we have entered into, the value of such loans, securities, or derivative instruments, the trading market for LIBOR-based securities, the terms of new loans being made using different or modified reference rates, or our ability to effectively use derivative instruments to manage risk.

Any of the reform proposals or the general increased regulatory scrutiny of LIBOR could increase the costs and risks of administering or otherwise participating in the setting of LIBOR and complying with any such regulations or requirements. Such factors may have the effect of discouraging market participants from continuing to administer or contribute to LIBOR or lead to the ultimate discontinuance or unavailability of quotes of LIBOR. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR.

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


Our business and financial results are subject to risks associated with the creditworthiness of our customers and counterparties.

Credit risk is inherent in the financial services business and results from, among other things, extending credit to customers, purchasing securities, and entering into financial derivative transactions and certain guarantee contracts. Credit risk is one of our most significant risks, particularly given the high percentage of our assets represented directly or indirectly by loans and securities and the importance of lending activity to our overall business. We manage credit risk by assessing and monitoring the creditworthiness of our customers and counterparties, by diversifying our loan portfolio and by investing primarily in high quality securities.

A borrower’s ability to repay a loan can be adversely affected by several factors. Individual borrowers can be affected by, among other things, declines in income, job losses, health issues or family issues. Commercial borrowers can be affected by, among other things, poor business performance or catastrophe losses. A weak or deteriorating economy and changes in the domestic or global markets would typically adversely impact the ability of our borrowers to repay outstanding loans. We may also be exposed to credit risk if we fail to evaluate properly at origination the likely ability of a borrower to repay a loan or fail to identify declining creditworthiness of a borrower at a time when remedial actions may reduce our exposure. Any decrease in our borrowers’ ability to repay loans would result in higher levels of nonperforming loans, net charge-offs, provision for credit losses and valuation adjustments on loans held for sale.

Financial services institutions are interrelated as a result of trading, clearing, lending, counterparty and other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of default of our counterparty or client.

Despite maintaining a diversified loan and securities portfolio, in the ordinary course of business, we may have concentrated credit exposure to a particular person or entity, industry, region or financial market. Loans secured by commercial and residential real estate represent a significant percentage of our overall credit portfolio, as well as of the assets underlying our investment securities. Events adversely affecting specific customers or counterparties, industries, regions or financial markets, including a decline in their creditworthiness or a worsening overall risk profile, could adversely affect us.

Our credit risk may be exacerbated when collateral held by us to secure obligations to us cannot be realized upon or is liquidated at prices that are not sufficient to recover the full amount of the loan or derivative exposure due us.

 
We reserve for credit losses on our loan and lease portfolio, as well as for unfunded loan commitments and letters of credit, through our Allowances for loan and lease losses and unfunded loan commitments and letters of credit, with changes in the allowances reflected in Net income through Provision for credit losses. An increase in credit risk would likely lead to an increase in Provision for credit losses with a resulting reduction in our Net income and would increase our allowances.

Our business and financial performance is impacted significantly by market interest rates and movements in those rates.

As a result of the high percentage of our assets and liabilities that are in the form of interest-bearing or interest-related instruments, changes in interest rates, in the shape of the yield curve, or in spreads between different market interest rates can have a material effect on our business, our profitability and the value of our financial assets and liabilities. For example:
Changes in interest rates or interest rate spreads can affect the difference between the interest that we earn on assets and the interest that we pay on liabilities, which impacts our overall net interest income and margin as well as our profitability.
Such changes can affect the ability of borrowers to meet obligations under variable or adjustable rate loans and other debt instruments, and can, in turn, affect our loss rates on those assets.
Such changes may decrease the demand for interest rate-based products and services, including loans and deposit accounts.
Such changes can also affect our ability to hedge various forms of market and interest rate risk and may decrease the effectiveness of those hedges in helping to manage such risks.
Movements in interest rates also affect mortgage prepayment speeds and could result in impairments of mortgage servicing assets or otherwise affect the profitability of such assets.
Increases in interest rates can lower the price we would receive on fixed-rate customer obligations if we were to sell them.

We discuss the impact of governmental monetary policy on interest rates in “The monetary policies of governmental agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance” Risk Factor in this Item 1A.

Our business and financial performance are vulnerable to the impact of changes in the values of financial assets.

As a financial institution, a substantial majority of our assets and liabilities are financial in nature (items such as loans, securities, servicing rights, deposits and borrowings). Such assets and liabilities will fluctuate in value, often significantly, due to movements in the financial markets or market volatility as well as developments specific to the asset or liability in question. Credit-based assets and liabilities will fluctuate in

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


value due to changes in the perceived creditworthiness of borrowers or other counterparties and also due to changes in market interest rates.

In addition, changes in loan prepayment speeds, usually based on fluctuations in market interest rates, could adversely impact the value of our mortgage servicing rights. Additionally, the underlying value of assets under lease or securing an obligation may decrease due to supply and demand for the asset or the condition of the asset. This could cause the ability to collect fully on, or the value of, the secured obligation to decline.

In many cases, we mark our assets and liabilities to market on our financial statements, either through our Net income and Retained earnings or through adjustments to Accumulated other comprehensive income on our balance sheet. We may need to record losses in the value of financial assets even where our expectation of realizing the face value of the underlying instrument has not changed.

In addition, asset management revenue is primarily based on a percentage of the value of the assets being managed and thus is impacted by general changes in market valuations. Thus, although we are not directly impacted by changes in the value of such assets, decreases in the value of those assets would affect related noninterest income.

Our asset and liability valuations and the determination of the amount of loss allowances and impairments taken on our assets are highly subjective. Inaccurate estimates could materially impact our results of operations or financial position.

We must use estimates, assumptions and judgments when assets and liabilities are measured and reported at fair value. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Changes in underlying factors or assumptions in any of the areas underlying our estimates could materially impact our future financial condition and results of operations. During periods of market disruption, it may be more difficult to value certain assets if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were historically traded in active markets with significant observable data that rapidly become illiquid due to market volatility, a loss in market confidence or other factors. In addition, we have certain assets and liabilities carried at fair value that are estimated using unobservable inputs that are significant to the fair value of the assets or liabilities. Further, rapidly changing and unprecedented market conditions in any particular market could materially impact the valuation of assets as reported within our consolidated financial statements.

The determination of the amount of loss allowances and asset impairments varies by asset type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations
 
are revised. Although we have policies and procedures in place to determine loss allowance and asset impairments, due to the subjective nature of this area, there can be no assurance that our management has accurately assessed the level of impairments taken and allowances reflected in our financial statements. Furthermore, additional impairments may need to be taken or allowances provided for in the future. Historical trends may not be indicative of future impairments or allowances.

Our success depends on our ability to attract and retain customers for our products and services, which may be negatively impacted by a lack of consumer and business economic confidence as well as our actions, including our ability to anticipate and satisfy customer demands for products and services.

As a financial institution, our performance is subject to risks associated with declines in customer demand for our products and services, including as a result of a loss of economic confidence or customer trust in us.

Economic and market developments may affect consumer and business confidence levels. If customers lose confidence due to a weak or deteriorating economy or uncertainty surrounding the future of the economy, the demand for our products and services could suffer. We may also fail to attract or retain customers if we are unable to develop and market products and services that meet evolving customer needs or demands or if we are unable to deliver them effectively and securely to our customers, particularly to the extent that our competitors are better able to do so.

News or other publicity that impairs our reputation, or the reputation of our industry generally, also could cause a loss of customers. Financial companies are highly vulnerable to reputational damage when they are found to have harmed customers, particularly retail customers, through conduct that is illegal or viewed as unfair, deceptive, manipulative or otherwise wrongful. The negative impact of such reputational damage on our business may be disproportionate to the actual harm caused customers. In addition, we could suffer reputational harm and a loss of customer trust as a result of conduct of others in which we have not engaged.

If we fail to attract and retain customers, demand for our loans and other financial products and services could decrease and we could experience adverse changes in payment patterns. We could lose interest income from a decline in credit usage and noninterest income from a decline in product sales, investments and other transactions. Our customers could remove money from checking, savings or other types of deposit accounts in favor of other banks or other types of investment products. Deposits are a low cost source of funds for us. Therefore, losing deposits could increase our funding costs and reduce our net interest income.


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


The United States is just starting to emerge from an extended period of very low interest rates. Very low interest rates decrease the attractiveness of alternatives to bank checking and savings accounts, which may lack deposit insurance and some of the convenience associated with more traditional banking products. As interest rates rise, and the spread between the rates we offer and those offered by alternatives to bank accounts widens, customers may be less willing to maintain balances in noninterest bearing or low interest bank accounts, which could result in a relatively higher cost of funds to us and negatively affect net interest income. This could also result in a loss of noninterest income.

In our asset management business, investment performance is an important factor influencing the level of assets that we manage. Poor investment performance could impair revenue and growth as existing clients might withdraw funds in favor of better performing products. Additionally, the ability to attract funds from existing and new clients might diminish. Overall economic conditions may limit the amount that customers are able or willing to invest as well as the value of the assets they do invest. The failure or negative performance of products of other financial institutions could lead to a loss of confidence in similar products offered by us without regard to the performance of our products. Such a negative contagion could lead to withdrawals, redemptions and liquidity issues in such products and have a material adverse impact on our assets under management and asset management revenues and earnings.

We operate in a highly competitive environment, in terms of the products and services we offer and the geographic markets in which we conduct business, as well as in our labor markets where we compete for talented employees. Competition could adversely impact our customer acquisition, growth and retention, as well as our credit spreads and product pricing, causing us to lose market share and deposits and revenues.

We are subject to intense competition from various financial institutions as well as from non-bank entities that engage in many similar activities without being subject to bank regulatory supervision and restrictions. This competition is described in Item 1 of this Report under “Competition.”

In all, the principal bases for competition are pricing (including the interest rates charged on loans or paid on interest-bearing deposits), product structure, the range of products and services offered and the quality of customer service (including convenience and responsiveness to customer needs and concerns). The ability to access and use technology is an increasingly important competitive factor in the financial services industry. Having the right technology is a critically important component to customer satisfaction as it affects our ability to deliver the products and services that customers desire and in a manner that they find convenient and attractive. Banks generally are facing the risk of increased competition from products and services offered by non-bank financial technology companies, particularly related to payment services and lending.
 
Consolidation in our industry, including among smaller banks combining to form more competitive larger ones and between banks and non-bank entities offering financial products and services, could result in PNC facing more intense competition, particularly in impacted regions or with respect to particular products.

Another increasingly competitive factor in the financial services industry is the competition to attract and retain talented employees across many of our business and support areas. This factor presents greater risk when we are expanding into new markets, developing new product lines, or need to significantly enhance staffing in certain areas. This competition leads to increased expenses in many business areas and can also cause us to not pursue certain business opportunities. Limitations on the manner in which regulated financial institutions can compensate their officers and employees, including those contained in pending rule proposals implementing requirements of the Dodd-Frank Act, may make it more difficult for regulated financial institutions, including PNC, to compete with unregulated financial institutions for talent.

A failure to adequately address the competitive pressures we face could make it harder for us to attract and retain customers across our businesses. On the other hand, meeting these competitive pressures could require us to incur significant additional expense or to accept risk beyond what we would otherwise view as desirable under the circumstances. In addition, in our interest rate sensitive businesses, pressures to increase rates on deposits or decrease rates on loans could reduce our net interest margin with a resulting negative impact on our net interest income.

We continually encounter technological change and need to keep pace with this change in order to maintain or enhance the competitiveness of our businesses.

The financial services industry is undergoing rapid technological change with frequent introductions of new technology-driven products and services. Examples at the present time include expanded use of cloud computing, artificial intelligence and machine learning, virtual and augmented reality, biometric authentication, voice and natural language, and data protection enhancements, as well as increased on-line and mobile device interaction with customers. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. We have been investing in technology and connectivity in order to automate functions previously performed manually, to facilitate the ability of customers to engage in financial transactions, and otherwise to enhance the customer experience with respect to our products and services. On the retail side, this has included developments such as more sophisticated ATMs (including the ability to cash checks using exact change), cashless bank branches, and expanded access to banking transactions (including mobile deposits, instant availability of funds, and real time payment processing) through the internet, smart phones, tablets and other mobile devices. These efforts have

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


all been in response to actual and anticipated customer behavior and expectations. Our continued success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that satisfy customer demands, including demands for faster and more secure payment services, and create efficiencies in our operations. A failure to maintain or enhance our competitive position with respect to technology, whether because we fail to anticipate customer expectations or because our technological developments fail to perform as desired or are not rolled out in a timely manner, may cause us to lose market share or incur additional expense.

We depend on the effectiveness and integrity of our employees, systems and controls to manage operational risks.

We are a large organization that offers a wide variety of products and services to a broad and diverse group of customers. We are dependent on our employees, systems and controls to assure that we properly enter into, record and manage processes, transactions and other relationships with customers, suppliers and other parties with whom we do business, as well as to assure that we identify and mitigate the risks that are inherent in these relationships.

We necessarily rely on our employees or, in some cases, employees of third parties to perform these tasks and manage the resulting risks. As a result, we are vulnerable to human error, misconduct or malfeasance, leading potentially to operational breakdowns or other errors. In addition, when we change processes or procedures or introduce new products or services, we may fail to adequately identify or manage operational risks resulting from such changes. We have taken measures to manage and mitigate this risk, but our controls may not be adequate to prevent problems resulting from human involvement in our business, including risks associated with the design, operation and monitoring of automated systems.

Errors by our employees or those of third parties, whether accidental, intentional or fraudulent, or other failures of our systems and controls, including systems and controls that are automated, could result in customer remediation costs, regulatory fines or penalties, litigation or enforcement actions, or limitations on our business activities. They also could result in damage to our reputation and to our ability to attract and retain customers, with the reputational impact likely greater to the extent that the mistakes or failures are pervasive, long-standing or affect a significant number of customers, particularly retail consumers. It is possible that the damage to our reputation may be disproportionate to the actual harm suffered by our customers or may be severe even if we fully remediate any harm suffered by our customers.

It is not possible to prevent all errors of these types, and over the last several years, financial services organizations have been reported to have failed to adequately prevent, identify or respond to a broad range of operational risk matters with resulting consequences to the other organizations of the types
 
described above. Recent examples include unauthorized account openings, assessment of inappropriate fees, and failure to report information timely to the government.

We depend on technology, both internally and through third-parties, to conduct our business and could suffer a material adverse impact from interruptions in the effective operation of, or security breaches affecting, those systems.

As a large financial company, we handle a substantial volume of customer and other financial transactions on a continuous basis. As a result, we rely heavily on information systems to conduct our business and to process, record and monitor our transactions and those of our customers. Over time, we have increased substantially in size, scope and complexity. We have also seen more customer usage of technological solutions for financial needs as well as higher expectations of customers and regulators regarding effective and safe systems operation. We expect these trends to continue for the foreseeable future. The need to ensure proper functioning and resiliency of these systems has become more challenging, and the costs involved in that effort are greater than ever.

The risks to these systems result from a variety of factors, both internal and external. In some cases, these factors relate to the potential for bad acts on the part of hackers, criminals, foreign governments or their agents, employees and others, and to some extent will be beyond our ability to prevent. In other cases, our systems could fail to operate as needed, including failures to prevent access in an unauthorized manner, due to factors such as design or performance issues, human error, unexpected transaction volumes or inadequate measures to protect against unauthorized access or transmissions. We are also at risk for the impact of natural or other disasters, terrorism, international hostilities and the like on our systems or for the effect of outages or other failures involving power, communications, or payment, clearing and settlement systems operated by others. In addition, we face a variety of types of cyber attacks, some of which are discussed in more detail below. Cyber attacks often include efforts to disrupt our ability to provide services or to gain access to, or destroy, confidential or proprietary company and customer information.

We rely on other companies for the provision of a broad range of products and services. Many of these products and services rely on information systems maintained by third parties or involve the use of such systems in connection with providing our products or services. In some cases, these other companies provide the infrastructure that supports communications, payment, clearing and settlement systems, or information processing and storage. These other companies are generally subject to many of the same risks we face with respect to our systems. To the extent we rely on these other companies, we could be adversely affected if they are impacted by system failures, cyber attacks or employee misconduct.

All of these types of events, whether resulting from cyber attacks or other internal or external sources, expose customer and other confidential information to security risks. They also

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


could disrupt our ability to use our accounting, deposit, loan and other systems and could cause errors in transactions or system functionality with customers, vendors or other parties.

In addition, our customers often use their own devices, such as computers, smartphones and tablets, to do business with us and may provide their PNC customer information (including passwords) to a third party in connection with obtaining services from the third party. Although we take steps to provide safety and security for our customers’ transactions with us and their customer information to the extent they are utilizing their own devices or providing third parties access to their accounts, our ability to assure such safety and security is necessarily limited.

We are faced with ongoing efforts by others to breach data security at financial institutions or with respect to financial transactions. Some of these involve efforts to enter our systems directly by going through or around our security protections. Others involve the use of schemes such as “phishing” to gain access to identifying customer information, often from customers themselves. Most corporate and commercial transactions are now handled electronically, and our retail customers increasingly use online access and mobile devices to bank with us. The ability to conduct business with us in this manner depends on the transmission of confidential information, which increases the risk of data security breaches.

As our customers regularly use PNC-issued credit and debit cards to pay for transactions with retailers and other businesses, there is the risk of data security breaches at those other businesses covering PNC account information. When our customers use PNC-issued cards to make purchases from those businesses, card account information may be provided to the business. If the business’s systems that process or store card account information are subject to a data security breach, holders of our cards who have made purchases from that business may experience fraud on their card accounts. We may suffer losses associated with reimbursing our customers for such fraudulent transactions on customers’ card accounts, as well as for other costs related to data security compromise events, such as replacing cards associated with compromised card accounts. In addition, we provide card transaction processing services to some merchant customers under agreements we have with payment networks such as Visa and MasterCard. Under these agreements, we may be responsible for certain losses and penalties if one of our merchant customers suffers a data security breach.

Over the last few years, several large companies disclosed that they had suffered substantial data security breaches compromising millions of user accounts and credentials. To date, our losses and costs related to these breaches have not been material, but other similar events in the future could be more significant to us.

There have been other recent publicly announced cyber attacks that were not focused on gaining access to credit card or user credential information but instead sought access to a
 
range of other types of confidential information including internal emails and other forms of customer financial information. Ransomware attacks have sought to deny access to data and possibly shut down systems and devices maintained by target companies. In a ransomware attack, system data is encrypted or access is otherwise denied, accompanied by a demand for ransom to restore access to the data.

Other types of attacks in recent years have included distributed denial of service (DDoS) attacks, in which individuals or organizations flood commercial websites with extraordinarily high volumes of traffic with the goal of disrupting the ability of commercial enterprises to process transactions and possibly making their websites unavailable to customers for extended periods of time. We (as well as other financial services companies) have been subject to such attacks.

To date, these types of attacks have not had a material financial impact on us, but attacks on others demonstrate the risks posed by new and evolving types of cyber attacks. We could suffer material financial and reputational losses in the future from any of these or other types of attacks.

Methods used by others to attack information systems change frequently (with generally increasing sophistication), often are not recognized until launched against a target, may be supported by foreign governments or other well-financed entities, and may originate from less regulated and remote areas around the world. As a result, we may be unable to address these methods in advance of attacks, including our inability to implement adequate preventive measures.

In addition to threats from people external to us, insider threats represent a significant risk to us. Insiders, having legitimate access to our systems and the information contained in them, have the easiest opportunity to make inappropriate use of the systems and information. Addressing that risk requires understanding not only how to protect us from unauthorized use and disclosure of data, but also how to engage behaviorial analytics to identify potential internal threats before any damage is done.

We have policies, procedures and systems (including business continuity programs) designed to prevent or limit the effect of possible failures, interruptions or breaches in security of information systems. We design our business continuity and other information and technology risk management programs to manage our capabilities to provide services in the case of an event resulting in material disruptions of business activities affecting our employees, facilities, technology or suppliers. We regularly seek to test the effectiveness of and enhance these policies, procedures and systems. Nonetheless, we cannot guarantee the effectiveness of our policies, procedures and systems to protect us in any particular future situation.

Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our business continuity planning, our ability to understand threats to us from a holistic perspective, and our ability to anticipate the

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


timing and nature of any such event that occurs. The adverse impact of natural and other disasters, terrorist activities, international hostilities and the like could be increased to the extent that there is a lack of preparedness on the part of national or regional governments, including emergency responders, or on the part of other organizations and businesses with which we deal, particularly those on which we depend, many of which we have little or no control over.

In recent years, we have incurred significant expense towards improving the reliability of our systems and their security against external and internal threats. Even with our proactive and defensive measures in place, there remains the risk that one or more adverse events might occur. If one does occur, we might not be able to remediate the event or its consequences timely or adequately, particularly to the extent that it represents a novel or unusual threat. To the extent that the risk relates to products or services provided by others, we seek to engage in due diligence and monitoring to limit the risk, but here, as well, we cannot eliminate it. Should an adverse event affecting another company’s systems occur, we may not have indemnification or other protection from the other company sufficient to compensate us or otherwise protect us from the consequences.

The occurrence of any failure, interruption or security breach of any of our information or communications systems, or the systems of other companies on which we rely, could result in a wide variety of adverse consequences to us. This risk is greater if the issue is widespread or results in financial losses to our customers. Possible adverse consequences include damage to our reputation or a loss of customer business. We also could face litigation or additional regulatory scrutiny, which in turn could lead to liability or other sanctions, including fines and penalties or reimbursement of customers adversely affected by a systems problem or security breach. Even if we do not suffer any material adverse consequences as a result of events affecting us directly, successful attacks or systems failures at other financial institutions could lead to a general loss of customer confidence in financial institutions, including us. Also, systems problems, including those resulting from third party attacks, whether at PNC or at our competitors, would likely broadly increase regulatory and customer concerns regarding the functioning, safety and security of such systems. In that case, we would expect to incur even higher levels of costs with respect to prevention and mitigation of these risks.

There are risks resulting from the extensive use of models in our business.

We rely on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting or estimating losses, assessing capital adequacy, and calculating economic and regulatory capital levels, as well as to estimate the value of financial instruments and balance sheet items. Poorly designed or implemented models present the risk that our business
 
decisions based on information incorporating model output will be adversely affected due to the inadequacy of that information. Also, information we provide to the public or to our regulators based on poorly designed or implemented models could be inaccurate or misleading. Some of the decisions that our regulators make, including those related to capital distributions to our shareholders, could be affected adversely due to their perception that the quality of the models used to generate the relevant information is insufficient.

Our business and financial results could be impacted materially by adverse results in legal proceedings.

Many aspects of our business involve substantial risk of legal liability. We have been named or threatened to be named as defendants in various lawsuits arising from our business activities (and in some cases from the activities of companies we have acquired). In addition, we are regularly the subject of governmental investigations and other forms of regulatory inquiry. We also are at risk when we have agreed to indemnify others for losses related to legal proceedings they face, including litigation and governmental investigations and inquiries, such as in connection with the sale of a business or assets by us. The results of these legal proceedings could lead to significant monetary damages or penalties, restrictions on the way in which we conduct our business, or reputational harm.

Although we establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have accruals for all legal proceedings where we face a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss to us from the legal proceedings in question. Thus, our ultimate losses may be higher, and possibly significantly so, than the amounts accrued for legal loss contingencies. We discuss further the unpredictability of legal proceedings and describe certain of our pending legal proceedings in Note 19 Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8 of this Report.

We grow our business in part by acquiring other financial services companies or assets from time to time, and these acquisitions present a number of risks and uncertainties related both to the acquisition transactions themselves and to the integration of the acquired businesses into PNC after closing.

Acquisitions of other financial services companies, financial assets and related deposits and other liabilities present risks and uncertainties to us in addition to those presented by the nature of the business acquired.

In general, acquisitions may be substantially more expensive or take longer to complete than anticipated (including unanticipated costs incurred in connection with the integration of the acquired company). Anticipated benefits (including

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


anticipated cost savings and strategic gains, for example resulting from being able to offer product sets to a broader potential customer base) may be significantly harder or take longer to achieve than expected or may not be achieved in their entirety as a result of unexpected factors or events.

Our ability to achieve anticipated results from acquisitions is often dependent also on the extent of credit losses in acquired loan portfolios and the extent of deposit attrition, which are, in part, related to the state of economic and financial markets.

Also, litigation and governmental investigations that may be pending at the time of the acquisition or be filed or commenced thereafter, as a result of an acquisition or otherwise, could impact the timing or realization of anticipated benefits to us.

Integration of an acquired company’s business and operations into PNC, including conversion of the acquired company’s different systems and procedures, may take longer or be more costly than originally anticipated or have unanticipated adverse results relating to the acquired company’s or our existing businesses. In some cases, acquisitions involve our entry into new businesses or new geographic or other markets, and these situations also present risks and uncertainties in instances where we may be inexperienced in these new areas.

Our ability to analyze the risks presented by prospective acquisitions, as well as our ability to prepare in advance of closing for integration, depends, in part, on the information we can gather with respect to the target, which is more limited than the information we have regarding companies we already own. As a regulated financial institution, our ability to pursue or complete attractive acquisition opportunities could be negatively impacted by regulatory delays or other regulatory issues. In addition, our ability to make large acquisitions in the future may be negatively impacted by regulatory rules or future regulatory initiatives designed to limit systemic risk and the potential for a financial institution to become “too big to fail.”

Our business and financial performance could be adversely affected, directly or indirectly, by disasters, natural or otherwise, by terrorist activities or by international hostilities.

Neither the occurrence nor the potential impact of disasters (such as earthquakes, hurricanes, tornadoes, floods and other severe weather conditions, pandemics, dislocations, fires, explosions, and other catastrophic accidents or events), terrorist activities and international hostilities can be predicted. However, these occurrences could impact us directly (for example, by causing significant damage to our facilities or preventing us from conducting our business in the ordinary course), or indirectly as a result of their impact on our borrowers, depositors, other customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in any particular region. These types of impacts
 
could lead, for example, to an increase in delinquencies, bankruptcies or defaults that could result in our experiencing higher levels of nonperforming assets, net charge-offs and provisions for credit losses.

Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning, and our ability, if any, to anticipate the nature of any such event that occurs. The adverse impact of disasters or terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses that we deal with, particularly those that we depend upon but have no control over.

ITEM 1B – UNRESOLVED STAFF COMMENTS
There are no SEC staff comments regarding PNC’s periodic or current reports under the Exchange Act that are pending resolution.

ITEM 2 – PROPERTIES
Our executive and primary administrative offices are currently located at The Tower at PNC Plaza, Pittsburgh, Pennsylvania. The 33-story structure is owned by PNC Bank, National Association.

We own or lease numerous other premises for use in conducting business activities, including operations centers, offices, and branches and other facilities. We consider the facilities owned or occupied under lease by our subsidiaries to be adequate for the purposes of our business operations. We include here by reference the additional information regarding our properties in Note 8 Premises, Equipment and Leasehold Improvements in the Notes To Consolidated Financial Statements in Item 8 of this Report.

ITEM 3 – LEGAL PROCEEDINGS
See the information set forth in Note 19 Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8 of this Report, which is incorporated here by reference.

ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable


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


EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding each of our executive officers as of February 22, 2018 is set forth below. Executive officers do not have a stated term of office. Each executive officer has held the position or positions indicated or another executive position with the same entity or one of its affiliates for the past five years unless otherwise indicated below.
Name
Age

Position with PNC
Year
Employed (a)
William S. Demchak
55

Chairman, President and
    Chief Executive
    Officer (b)
2002
Orlando C. Esposito
59

Executive Vice
    President
1988
Michael J. Hannon
61

Executive Vice
    President and Chief
    Credit Officer
1982
Vicki C. Henn
49

Executive Vice
    President and Chief
    Human Resources
    Officer
1994
Gregory B. Jordan
58

Executive Vice
    President, General
    Counsel and Chief
    Administrative
    Officer
2013
Stacy M. Juchno
42

Executive Vice
    President and General
    Auditor
2009
Karen L. Larrimer
55

Executive Vice
    President, Chief
    Customer Officer and
    Head of Retail
    Banking
1995
Michael P. Lyons
47

Executive Vice
    President, Head of
    Corporate &
    Institutional Banking
    and Head of Asset
    Management Group
2011
E William Parsley, III
52

Executive Vice
    President and Chief
    Operating Officer
2003
Robert Q. Reilly
53

Executive Vice
    President and Chief
    Financial Officer
1987
Joseph E. Rockey
53

Executive Vice
    President and Chief
    Risk Officer
1999
Steven Van Wyk
59

Executive Vice
    President and Head of
    Technology and
    Innovation
2013
Gregory H. Kozich
54

Senior Vice President
    and Controller
2010
(a)
Where applicable, refers to year employed by predecessor company.
(b)
Mr. Demchak also serves as a director. Biographical information for Mr. Demchak is included in “Election of Directors (Item 1)” in our proxy statement for the 2018 annual meeting of shareholders. See Item 10 of this Report.

Orlando C. Esposito was appointed Executive Vice President in April 2013 and was head of PNC’s Asset Management Group from April 2013 until December 2017. He held numerous leadership positions within Corporate Banking from November 2006 to April 2013. Mr. Esposito has announced that he will retire in the spring of 2018.

 
Michael J. Hannon has served as Executive Vice President since February 2009. He has served as Chief Credit Officer since November 2001.

Vicki C. Henn has served as Executive Vice President and Chief Human Resources Officer of PNC since July 2014. Ms. Henn joined PNC in 1994 and has held numerous management positions. Prior to being named to her current position, Ms. Henn was responsible for Human Resources for Retail Banking.

Gregory B. Jordan joined PNC as Executive Vice President, General Counsel and Head of Regulatory and Government Affairs in October 2013. In February 2016, Mr. Jordan was also appointed Chief Administrative Officer. Prior to joining PNC, he served as the Global Managing Partner for the last 13 years of his 29 year tenure at Reed Smith LLP.

Stacy M. Juchno has served as Executive Vice President and General Auditor of PNC since April 2014. Ms. Juchno joined PNC in 2009 and previously served as Finance Governance and Oversight Director.

Karen L. Larrimer was appointed Executive Vice President in May 2013. Ms. Larrimer became head of PNC’s Retail Banking in 2016. She has also served as Chief Customer Officer since April 2014, prior to which she served as Chief Marketing Officer.

Michael P. Lyons has been an Executive Vice President since November 2011 and is head of PNC’s Corporate & Institutional Banking. Mr. Lyons assumed responsibility for PNC's Asset Management Group in January 2018.

E William Parsley, III has served as Executive Vice President since February 2009. In February 2018, Mr. Parsley was appointed Chief Operating Officer. Previously, he served as Treasurer and Chief Investment Officer since January 2004 and the head of Consumer Lending since the spring of 2016.

Robert Q. Reilly was appointed Chief Financial Officer in August 2013. He served as the head of PNC’s Asset Management Group from 2005 until April 2013. He was appointed Executive Vice President in February 2009.

Joseph E. Rockey was appointed Executive Vice President and Chief Risk Officer in January 2015. Prior to his appointment, Mr. Rockey led enterprise risk management and the Basel office within PNC’s risk management organization.

Steven Van Wyk joined PNC as Head of Technology and Operations in January 2013 and was appointed Head of Technology and Innovation in April 2017. From 2007 until joining PNC, Mr. Van Wyk served as Global Chief Operating Officer for ING. He was appointed Executive Vice President of PNC in February 2013.

Gregory H. Kozich has served as Controller of PNC since 2011. He was appointed as Senior Vice President in November 2010.

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


DIRECTORS OF THE REGISTRANT
The name, age and principal occupation of each of our directors as of February 22, 2018 and the year he or she first became a director is set forth below:
Charles E. Bunch, 68, Retired Executive Chairman of PPG Industries, Inc. (coatings, sealants and glass products) (2007)
Debra A. Cafaro, 60, Chairman of the Board and Chief Executive Officer of Ventas, Inc. (real estate investment trust) (2017)
Marjorie Rodgers Cheshire, 49, President and Chief Operating Officer of A&R Development Corp. (real estate development company) (2014)
William S. Demchak, 55, Chairman, President and Chief Executive Officer of PNC (2013)
Andrew T. Feldstein, 53, Chief Executive Officer and Chief Investment Officer of BlueMountain Capital Management, LLC (asset management firm) (2013)
Daniel R. Hesse, 64, Retired President and Chief Executive Officer of Sprint Corporation (telecommunications) (2016)
Richard B. Kelson, 71, Chairman, President and Chief Executive Officer of ServCo LLC (strategic sourcing, supply chain management) (2002)
Linda R. Medler, 61, Retired Brigadier General, United States Air Force and President and Chief Executive Officer of L A Medler & Associates, LLC (cyber strategy consulting services) (2018)
Jane G. Pepper, 72, Retired President of the Pennsylvania Horticultural Society (non-profit) (1997)
Martin Pfinsgraff, 63, Former Senior Deputy Comptroller of the Office of the Comptroller of the Currency (federal agency) (2018)
Donald J. Shepard, 71, Retired Chairman of the Executive Board and Chief Executive Officer of AEGON N.V. (insurance) (2007)
Lorene K. Steffes, 72, Independent Business Advisor (executive, business management and technical expertise) (2000)
Dennis F. Strigl, 71, Retired President and Chief Operating Officer of Verizon Communications Inc. (telecommunications) (2001)
Michael J. Ward, 67, Retired Chairman and Chief Executive Officer of CSX Corporation (railroads, transportation) (2016)
Gregory D. Wasson, 59, Retired President and Chief Executive Officer of Walgreens Boots Alliance (pharmacy, health and wellbeing enterprise) (2015)


 
PART II
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) (1) Our common stock is listed on the New York Stock Exchange and is traded under the symbol “PNC.” At the close of business on February 16, 2018, there were 57,157 common shareholders of record.

Holders of PNC common stock are entitled to receive dividends when declared by our Board of Directors out of funds legally available for this purpose. Our Board of Directors may not pay or set apart dividends on the common stock until dividends for all past dividend periods on any series of outstanding preferred stock and certain outstanding capital securities issued by the parent company have been paid or declared and set apart for payment. The Board of Directors presently intends to continue the policy of paying quarterly cash dividends. The amount of any future dividends will depend on economic and market conditions, our financial condition and operating results, and other factors, including contractual restrictions and applicable government regulations and policies (such as those relating to the ability of bank and non-bank subsidiaries to pay dividends to the parent company and regulatory capital limitations). The amount of our dividend is also currently subject to the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve and our primary bank regulators as part of the Comprehensive Capital Analysis and Review (CCAR) process as described in the Supervision and Regulation section in Item 1 of this Report.

The Federal Reserve has the power to prohibit us from paying dividends without its approval. For further information concerning dividend restrictions and other factors that could limit our ability to pay dividends, as well as restrictions on loans, dividends or advances from bank subsidiaries to the parent company, see the Supervision and Regulation section in Item 1, Item 1A Risk Factors, the Capital and Liquidity Management portion of the Risk Management section in Item 7, and Note 10 Borrowed Funds, Note 15 Equity and Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report, which we include here by reference.

We include here by reference additional information relating to PNC common stock under the Common Stock Prices/Dividends Declared section in the Statistical Information (Unaudited) section of Item 8 of this Report.

We include here by reference the information regarding our compensation plans under which PNC equity securities are authorized for issuance as of December 31, 2017 in the table (with introductory paragraph and notes) in Item 12 of this Report.

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


Our stock transfer agent and registrar is:
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
800-982-7652
www.computershare.com/pnc
Registered shareholders may contact Computershare regarding dividends and other shareholder services.
We include here by reference the information that appears under the Common Stock Performance Graph caption at the end of this Item 5.
(a)(2)    None.
(b)
Not applicable.
(c)
Details of our repurchases of PNC common stock during the fourth quarter of 2017 are included in the following table:
In thousands, except per share data
2017 period
Total shares
purchased (a)

Average
price
paid per
share

Total shares
purchased as
part of
publicly
announced
programs (b)

Maximum
number of
shares that
may yet be
purchased
under the
programs (b)

October 1 – 31
1,092

$
135.97

1,065

43,308

November 1 – 30
1,159

$
134.65

1,159

42,149

December 1 – 31
1,512

$
144.56

1,512

40,637

Total
3,763

$
139.01

 
 
(a)
Includes PNC common stock purchased in connection with our various employee benefit plans generally related to forfeitures of unvested restricted stock awards and shares used to cover employee payroll tax withholding requirements. Note 11 Employee Benefit Plans and Note 12 Stock Based Compensation Plans in the Notes To Consolidated Financial Statements in Item 8 of this Report include additional information regarding our employee benefit and equity compensation plans that use PNC common stock.
(b)
On March 11 2015, we announced that our Board of Directors approved the establishment of a stock repurchase program authorization in the amount of 100 million shares of PNC common stock, effective April 1, 2015. Repurchases are made in open market or privately negotiated transactions and the timing and exact amount of common stock repurchases will depend on a number of factors including, among others, market and general economic conditions, regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations, including the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process. In June 2017, we announced share repurchase programs of up to $2.7 billion for the four quarter period beginning with the third quarter of 2017, including repurchases of up to $300 million related to employee benefit plans, in accordance with PNC's 2017 capital plan. In the fourth quarter of 2017,we repurchased 3.7 million shares of common stock on the open market, with an average price of $139.05 per share and an aggregate repurchase price of $.5 billion. See the Liquidity and Capital Management portion of the Risk Management section in Item 7 of this Report for more information on the share repurchase programs for the period July 1, 2017 through June 30, 2018 included in the 2017 capital plan accepted by the Federal Reserve.
 
Common Stock Performance Graph
This graph shows the cumulative total shareholder return (i.e., price change plus reinvestment of dividends) on our common stock during the five-year period ended December 31, 2017, as compared with: (1) a selected peer group as set forth below and referred to as the “Peer Group;” (2) an overall stock market index, the S&P 500 Index; and (3) a published industry index, the S&P 500 Banks. The yearly points marked on the horizontal axis of the graph correspond to December 31 of each year. The stock performance graph assumes that $100 was invested on January 1, 2013 for the five-year period and that any dividends were reinvested. The table below the graph shows the resultant compound annual growth rate for the performance period.
commonstockgraph2a14.gif
 
Base
Period

Assumes $100 investment at Close of
Market on December 31, 2012
Total Return = Price change plus
reinvestment of dividends
 
5-Year
Compound
Growth
Rate

  
Dec. 2012

Dec. 2013

Dec. 2014

Dec. 2015

Dec. 2016

Dec. 2017

  
PNC
$
100

$
136.45

$
164.18

$
175.35

$
220.56

$
277.82

22.67
%
S&P 500 Index
$
100

$
132.37

$
150.48

$
152.55

$
170.78

$
208.05

15.78
%
S&P 500 Banks
$
100

$
135.72

$
156.78

$
158.10

$
196.54

$
240.87

19.22
%
Peer Group
$
100

$
135.48

$
151.18

$
145.75

$
197.16

$
238.65

19.00
%

The Peer Group for the preceding chart and table consists of the following companies: Bank of America Corporation; BB&T Corporation; Capital One Financial Corporation; Fifth Third Bancorp; JPMorgan Chase & Co.; KeyCorp; M&T Bank Corporation; Regions Financial Corporation; SunTrust Banks, Inc.; The PNC Financial Services Group, Inc.; U.S. Bancorp; and Wells Fargo & Company. This Peer Group was approved for 2017 by the Board of Directors’s Personnel and Compensation Committee. Such Committee has approved a peer group of thirteen for 2018, consisting of all the companies in the 2017 Peer Group and Citizens Financial Group, Inc.

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


Each yearly point for the Peer Group is determined by calculating the cumulative total shareholder return for each company in the Peer Group from December 31, 2012 to December 31 of that year (End of Month Dividend Reinvestment Assumed) and then using the median of these returns as the yearly plot point.
 
In accordance with the rules of the SEC, this section, captioned “Common Stock Performance Graph,” is not incorporated by reference into any of our future filings made under the Securities Exchange Act of 1934 or the Securities Act of 1933. The Common Stock Performance Graph, including its accompanying table and footnotes, is not deemed to be soliciting material or to be filed under the Exchange Act or the Securities Act.

ITEM 6 – SELECTED FINANCIAL DATA
 
 
Year ended December 31
 
Dollars in millions, except per share data
2017

 
2016

 
2015

 
2014

 
2013

 
Summary of Operations
 
 
 
 
 
 
 
 
 
 
Interest income
$
10,814

 
$
9,652

 
$
9,323

 
$
9,431

 
$
10,007

 
Interest expense
1,706

 
1,261

 
1,045

 
906

 
860

 
Net interest income
9,108

 
8,391

 
8,278

 
8,525

 
9,147

 
Noninterest income
7,221

 
6,771

 
6,947

 
6,850

 
6,865

 
Total revenue
16,329

 
15,162

 
15,225

 
15,375

 
16,012

 
Provision for credit losses
441

 
433

 
255

 
273

 
643

 
Noninterest expense
10,398

 
9,476

 
9,463

 
9,488

 
9,681

 
Income before income taxes and noncontrolling interests
5,490

 
5,253

 
5,507

 
5,614

 
5,688

 
Income taxes
102

 
1,268

 
1,364

 
1,407

 
1,476

 
Net income
5,388

 
3,985

 
4,143

 
4,207

 
4,212

 
Less: Net income attributable to noncontrolling interests
50

 
82

 
37

 
23

 
11

 
  Preferred stock dividends
236

 
209

 
220

 
232

 
237

 
  Preferred stock discount accretion and redemptions
26

 
6

 
5

 
5

 
12

 
Net income attributable to common shareholders
$
5,076

 
$
3,688

 
$
3,881

 
$
3,947

 
$
3,952

 
Per Common Share
 
 
 
 
 
 
 
 
 
 
Basic earnings
$
10.49

 
$
7.42

 
$
7.52

 
$
7.44

 
$
7.45

 
Diluted earnings
$
10.36

 
$
7.30

 
$
7.39

 
$
7.30

 
$
7.36

 
Book value
$
91.94

 
$
85.94

 
$
81.84

 
$
77.61

 
$
72.07

 
Cash dividends declared
$
2.60

 
$
2.12

 
$
2.01

 
$
1.88

 
$
1.72

 
Effective tax rate (a)
1.9
%
 
24.1
%
 
24.8
%
 
25.1
%
 
25.9
%
 
(a)
The effective 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. The full year 2017 results benefited from the new federal tax legislation. Certain tax legislation amounts are considered reasonable estimates as of December 31, 2017. See the Critical Accounting Estimates and Judgments section in Item 7 of this Report for additional details.
Certain prior period amounts have been reclassified to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements.
This Selected Financial Data should be reviewed in conjunction with the Consolidated Financial Statements and Notes included in Item 8 of this Report as well as the other disclosures in this Report concerning our historical financial performance, our future prospects and the risks associated with our business and financial performance.
 

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


 
At or for the year ended December 31
 
Dollars in millions, except as noted
2017
 
2016
 
2015
 
2014
 
2013
 
Balance Sheet Highlights
 
 
 
 
 
 
 
 
 
 
Assets
$
380,768

 
$
366,380

 
$
358,493

 
$
345,072

 
$
320,192

 
Loans (a)
$
220,458

 
$
210,833

 
$
206,696

 
$
204,817

 
$
195,613

 
Allowance for loan and lease losses
$
2,611

 
$
2,589

 
$
2,727

 
$
3,331

 
$
3,609

 
Interest-earning deposits with banks (b)
$
28,595

 
$
25,711

 
$
30,546

 
$
31,779

 
$
12,135

 
Investment securities
$
76,131

 
$
75,947

 
$
70,528

 
$
55,823

 
$
60,294

 
Loans held for sale (a)
$
2,655

 
$
2,504

 
$
1,540

 
$
2,262

 
$
2,255

 
Equity investments (c)
$
11,392

 
$
10,728

 
$
10,587

 
$
10,728

 
$
10,560

 
Mortgage servicing rights
$
1,832

 
$
1,758

 
$
1,589

 
$
1,351

 
$
1,636

 
Goodwill
$
9,173

 
$
9,103

 
$
9,103

 
$
9,103

 
$
9,074

 
Other assets (a)
$
27,894

 
$
27,506

 
$
26,566

 
$
28,180

 
$
28,191

 
Noninterest-bearing deposits
$
79,864

 
$
80,230

 
$
79,435

 
$
73,479

 
$
70,306

 
Interest-bearing deposits
$
185,189

 
$
176,934

 
$
169,567

 
$
158,755

 
$
150,625

 
Total deposits
$
265,053

 
$
257,164

 
$
249,002

 
$
232,234

 
$
220,931

 
Borrowed funds (a) (d)
$
59,088

 
$
52,706

 
$
54,532

 
$
56,768

 
$
46,105

 
Total shareholders’ equity
$
47,513

 
$
45,699

 
$
44,710

 
$
44,551

 
$
42,334

 
Common shareholders’ equity
$
43,530

 
$
41,723

 
$
41,258

 
$
40,605

 
$
38,392

 
Accumulated other comprehensive income (loss)
$
(148
)
 
$
(265
)
 
$
130

 
$
503

 
$
436

 
Period-end common shares outstanding (millions)
473

 
485

 
504

 
523

 
533

 
Client Investment Assets (billions)
 
 
 
 
 
 
 
 
 
 
Discretionary client assets under management
$
151

 
$
137

 
$
134

 
$
135

 
$
127

 
Nondiscretionary client assets under administration
131

 
120

 
119

 
123

 
116

 
Total client assets under administration (e)
282

 
257

 
253

 
258

 
243

 
Brokerage account client assets
49

 
44

 
43

 
43

 
41

 
Total
$
331

 
$
301

 
$
296

 
$
301

 
$
284

 
Selected Ratios
 
 
 
 
 
 
 
 
 
 
Net interest margin (f)
2.87
%
 
2.73
%
 
2.74
%
 
3.08
%
 
3.57
%
 
Noninterest income to total revenue
44
%
 
45
%
 
46
%
 
45
%
 
43
%
 
Efficiency
64
%
 
62
%
 
62
%
 
62
%
 
60
%
 
Return on
 
 
 
 
 
 
 
 
 
 
Average common shareholders’ equity (g)
12.09
%
 
8.85
%
 
9.50
%
 
9.91
%
 
10.85
%
 
Average assets (g)
1.45
%
 
1.10
%
 
1.17
%
 
1.28
%
 
1.38
%
 
Loans to deposits
83
%
 
82
%
 
83
%
 
88
%
 
89
%
 
Dividend payout
24.7
%
 
29.0
%
 
27.0
%
 
25.3
%
 
23.1
%
 
Transitional Basel III common equity Tier 1 capital ratio (h) (i) (j)
10.4
%
 
10.6
%
 
10.6
%
 
10.9
%
 
N/A

 
Transitional Basel III Tier 1 risk-based capital ratio (h) (i) (j)
11.6
%
 
12.0
%
 
12.0
%
 
12.6
%
 
N/A

 
Pro forma fully phased-in Basel III common equity Tier 1 capital ratio
    (Non-GAAP) (i) (j) (k)
9.8
%
 
10.0
%
 
10.0
%
 
10.0
%
 
9.4
%
 
Basel I Tier 1 common capital ratio (j)
N/A

 
N/A

 
N/A

 
N/A

 
10.5
%
 
Basel I Tier 1 risk-based capital ratio (j)
N/A

 
N/A

 
N/A

 
N/A

 
12.4
%
 
Common shareholders’ equity to total assets
11.4
%
 
11.4
%
 
11.5
%
 
11.8
%
 
12.0
%
 
Average common shareholders’ equity to average assets
11.3
%
 
11.5
%
 
11.5
%
 
12.1
%
 
11.9
%
 
Selected Statistics
 
 
 
 
 
 
 
 
 
 
Employees
52,906

 
52,006

 
52,513

 
53,587

 
54,433

 
Retail Banking branches
2,459

 
2,520

 
2,616

 
2,697

 
2,714

 
ATMs
9,051

 
9,024

 
8,956

 
8,605

 
7,445

 
(a)
Includes assets and liabilities for which we have elected the fair value option. See the Consolidated Balance Sheet and Note 6 Fair Value in Item 8 of this Report for additional information.
(b)
Includes balances held with the Federal Reserve Bank of Cleveland of $28.3 billion, $25.1 billion, $30.0 billion, $31.4 billion and $11.7 billion as of December 31, 2017, 2016, 2015, 2014 and 2013, respectively.
(c)
Includes our equity interest in BlackRock.
(d)
Includes long-term borrowings of $43.1 billion, $38.3 billion, $43.6 billion, $41.5 billion and $27.6 billion for 2017, 2016, 2015, 2014 and 2013, respectively. Borrowings which mature more than one year after December 31, 2017 are considered to be long-term.
(e)
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, $6 billion, $5 billion and $4 billion at December 31, 2016, 2015, 2014 and 2013, respectively.
(f)
Calculated as 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. For additional information, see Reconciliation of Taxable-Equivalent Net Interest Income Statistical Information (Unaudited) in Item 8 of this Report.
(g)
The full year 2017 results benefited from the new federal tax legislation. Certain tax legislation amounts are considered reasonable estimates as of December 31, 2017. See the Critical Accounting Estimates and Judgments section in Item 7 of this Report for additional details.
(h)
Calculated using the regulatory capital methodology applicable to us during each period presented.
(i)
See capital ratios discussion in the Supervision and Regulation section of Item 1 and in the Liquidity and Capital Management portion of the Risk Management section in Item 7 of this Report for additional discussion on these capital ratios.
(j)
See additional information on the pro forma ratios, Transitional Basel III ratios and the Basel I ratios in the Statistical Information (Unaudited) section in Item 8 of this Report.
(k)
The pro forma ratios for all periods presented were calculated under the standardized approach. The 2013 ratio has not been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits.

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


ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
EXECUTIVE SUMMARY

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 and services, and markets and brand, and embrace our commitments to our customers, shareholders, employees and the communities where we do business.

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

We are focused on our strategic priorities, which are designed to enhance value over the long term, and consist of:
Expanding our leading banking franchise to new markets and digital platforms;
Deepening customer relationships by delivering a superior banking experience and financial solutions; and
Leveraging technology to innovate and enhance products, services, security and processes.

Our capital priorities are to support client growth and business investment, maintain appropriate capital in light of economic conditions 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 Item 7 and the Supervision and Regulation section in Item 1 Business of this Report.

Key Factors Affecting Financial Performance
We face a variety of risks that may impact various aspects of our risk profile from time to time. The extent of such impacts may vary depending on factors such as the current economic, political and regulatory environment, merger and acquisition activity and operational challenges. Many of these risks and our risk management strategies are described in more detail elsewhere in this Report.
 
Our financial performance is substantially affected by a number of external factors outside of our control, including the following:
Global and domestic economic conditions, including the continuity, speed and stamina of the current U.S. economic expansion;
The monetary policy actions and statements of the Federal Reserve and the Federal Open Market Committee (FOMC);
The level of, and direction, timing and magnitude of movement in, interest rates and the shape of the interest rate yield curve;
The functioning and other performance of, and availability of liquidity in, the capital and other financial markets;
Changes in the competitive and regulatory landscape;
The impact of legislative, regulatory and administrative initiatives and actions;
The impact of market credit spreads on asset valuations;
The ability of customers, counterparties and issuers to perform in accordance with contractual terms, and the resulting impact on our asset quality;
Loan demand, utilization of credit commitments and standby letters of credit; and
The impact on customers and changes in customer behavior due to changing business and economic conditions or regulatory or legislative initiatives, including newly enacted federal tax legislation.

In addition, our success will depend upon, among other things:
Effectively managing capital and liquidity including:
Continuing to maintain and grow our deposit base as a low-cost stable funding source;
Prudent liquidity and capital management to meet evolving regulatory capital, capital planning, stress testing and liquidity standards; and
Actions we take within the capital and other financial markets.
Management of credit risk in our portfolio;
Execution of our strategic priorities;
Our ability to manage and implement strategic business objectives within the changing regulatory environment;
The impact of legal and regulatory-related contingencies; and
The appropriateness of reserves needed for critical accounting estimates and related contingencies.

For additional information, see the Cautionary Statement Regarding Forward-Looking Information section in this Item 7 and Item 1A Risk Factors in this Report.


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


Income Statement Highlights
Net income for 2017 was $5.4 billion, or $10.36 per diluted common share, an increase of 35% compared to $4.0 billion, or $7.30 per diluted common share, for 2016.
Total revenue increased $1.2 billion, or 8%, to $16.3 billion.
Net interest income increased $717 million, or 9%, to $9.1 billion.
Net interest margin increased to 2.87% for 2017 compared to 2.73% for 2016.
Noninterest income increased $450 million, or 7%, to $7.2 billion.
Provision for credit losses was $441 million in 2017 compared to $433 million for 2016.
Noninterest expense increased $922 million, or 10%, to $10.4 billion.
Income tax expense decreased to $102 million in 2017 compared to $1.3 billion in 2016.

PNC’s full year and fourth quarter 2017 reported net income and earnings per share benefited from the new federal tax legislation, the Tax Cuts and Jobs Act, and were also impacted by other significant items, described in more detail below:
Total revenue - increase of $28 million.
Net interest income - decrease of $26 million due to the impact of tax legislation on leveraged leases.
Noninterest income - increase of $54 million consisting of :
$254 million increase in asset management noninterest income as a result of the flow through impact of tax legislation from our equity investment in BlackRock.
$119 million increase in other noninterest income for appreciation of BlackRock common stock contributed to the PNC Foundation.
Negative fair value adjustments in the fourth quarter of 2017 of $248 million in other noninterest income related to Visa Class B derivatives and $71 million in residential mortgage noninterest income for servicing rights assumption updates.
Noninterest expense - increase of $502 million consisting of:
$200 million contribution of BlackRock common stock to the PNC Foundation.
$197 million of charges for real estate dispositions and exits.
$105 million for employee cash payments and pension account credits.
Income tax expense - benefit of $1.2 billion from tax legislation primarily attributable to revaluation of net deferred tax liabilities and $230 million from the tax effect of the aforementioned other significant items.

For additional detail, please see the Consolidated Income Statement Review section of this Item 7.

 
Balance Sheet Highlights
Our balance sheet was strong and well positioned at December 31, 2017. Compared to December 31, 2016:
Total loans increased $9.6 billion, or 5%, to $220.5 billion.
Total commercial lending grew $9.5 billion, or 7%.
Total consumer lending increased $.1 billion.
Total deposits increased $7.9 billion, or 3%, to $265.1 billion.
Investment securities increased $.2 billion to $76.1 billion.
Interest earning deposits with banks, primarily with the Federal Reserve Bank, increased $2.9 billion, or 11%, to $28.6 billion.

For additional detail, see the Consolidated Balance Sheet Review section of this Item 7.

Credit Quality Highlights
Overall credit quality remained stable in 2017 compared to 2016.
Nonperforming assets decreased $339 million, or 14%, to $2.0 billion at December 31, 2017 compared to December 31, 2016.
Overall loan delinquencies of $1.5 billion at December 31, 2017 decreased $56 million, or 4%, compared to December 31, 2016.
Net charge-offs of $457 million in 2017 decreased compared to net charge-offs of $543 million for 2016.
The allowance for loan and lease losses to total loans was 1.18% at December 31, 2017 compared to 1.23% at December 31, 2016.

For additional detail, see the Credit Risk Management portion of the Risk Management section of this Item 7.

Capital Highlights
We maintained a strong capital position during 2017 and continued to return capital to shareholders.
The Transitional Basel III common equity Tier 1 capital ratio was 10.4% at December 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, was an estimated 9.8% at December 31, 2017 compared to 10.0% at December 31, 2016 based on the standardized approach rules.
For the full year 2017, we returned $3.6 billion of capital to shareholders through repurchases of 18.6 million common shares for $2.3 billion and dividends on common shares of $1.3 billion.
Common shareholders’ equity increased to $43.5 billion at December 31, 2017 compared to $41.7 billion at December 31, 2016.


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


See the Liquidity and Capital Management portion of the Risk Management section of this Item 7 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 this Report.
 
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 U.S. economic growth will accelerate somewhat in 2018, in light of the recently passed corporate and personal income tax cuts that are expected to support business investment and consumer spending, respectively. Further gradual improvement in the labor market this year, including job gains and rising wages, is another positive for consumer spending. Other sources of growth for the U.S. economy in 2018 will be the global economic expansion and the housing market. Although inflation slowed in 2017, it should pick up as the labor market continues to tighten. Short-term interest rates and bond yields are expected to rise throughout 2018; PNC’s baseline forecast is for three increases in the federal funds rate in 2018, pushing the rate to a range of 2.00 to 2.25 percent by the end of the year. Longer-term rates are also expected to increase as the Federal Reserve slowly reduces the size of its balance sheet and the federal government borrows more, but at a slower pace than short-term rates, so we anticipate the yield curve will flatten but not invert. See the Cautionary Statement Regarding Forward-Looking Information section in this Item 7 and Item 1A Risk Factors in this Report for other factors that could cause future events to differ, perhaps materially, from those anticipated in these forward-looking statements.

 
Our outlook for certain financial information for full year and first quarter 2018 is compared to full year and fourth quarter 2017 results as adjusted for the tax legislation and significant items described in the Income Statement Highlights section of this Executive Summary. For additional information on financial results for the fourth quarter of 2017, see the Selected Quarterly Financial Data section in the Statistical Information (Unaudited) section of Item 8 of this Report.

For full year 2018 compared to full year 2017 on an adjusted basis, we expect:
Loan growth to be up mid-single digits, on a percentage basis;
Revenue to increase mid-single digits, on a percentage basis;
Noninterest expense to increase by low-single digits, on a percentage basis; and
The effective tax rate to be approximately 17%.

For the first quarter of 2018 compared to the fourth quarter of 2017 on an adjusted basis, we expect:
Modest loan growth;
Stable net interest income;
Fee income to decrease by low mid-single digits, on a percentage basis, mainly attributable to lower first quarter client activity and elevated fourth quarter fees. Fee income consists of asset management, consumer services, corporate services, residential mortgage and service charges on deposits;
Other noninterest income to be between $250 million and $300 million;
Provision for credit losses to be between $100 million and $150 million; and
Noninterest expense to decrease by low-single digits, on a percentage basis.


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


CONSOLIDATED INCOME STATEMENT REVIEW
Our Consolidated Income Statement is presented in Item 8 of this Report.

Net income for 2017 was $5.4 billion, or $10.36 per diluted common share, an increase of 35% compared with $4.0 billion, or $7.30 per diluted common share, for 2016. Higher net income was driven by an 8% increase in total revenue and a tax benefit from the new federal tax legislation, partially offset by a 10% increase in noninterest expense. Revenue growth resulted from a 9% increase in net interest income and a 7% increase in noninterest income.

Net Interest Income
Table 1: Summarized Average Balances and Net Interest Income (a)
 
2017
 
2016
Year Ended December 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
$
75,057

2.74
%
$
2,059

 
$
72,046

2.62
%
$
1,889

Loans
217,271

3.86
%
8,390

 
208,817

3.61
%
7,543

Interest-earning deposits with banks
24,043

1.11
%
267

 
26,328

.52
%
136

Other
8,983

3.48
%
313

 
7,843

3.56
%
279

Total interest-earning assets/interest income
$
325,354

3.39
%
11,029

 
$
315,034

3.13
%
9,847

Liabilities
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
Interest-bearing deposits
$
179,447

.35
%
623

 
$
172,764

.25
%
430

Borrowed funds
56,889

1.90
%
1,083

 
52,939

1.57
%
831

Total interest-bearing liabilities/interest expense
$
236,336

.72
%
1,706

 
$
225,703

.56
%
1,261

Net interest income/margin (Non-GAAP)
 
2.87
%
9,323

 
 
2.73
%
8,586

Taxable-equivalent adjustments
 
 
(215
)
 
 
 
(195
)
Net interest income (GAAP)
 
 
$
9,108

 
 
 
$
8,391

(a)
Interest income calculated as taxable-equivalent interest income. To provide more meaningful comparisons of interest income and yields for all interest-earning assets, as well as net interest margins, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margins by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP on the Consolidated Income Statement. For more information, see Reconciliation of Taxable-Equivalent Net Interest Income in the Statistical Information (Unaudited) section in Item 8 of this Report.

Changes in net interest income and margin result from the interaction of the volume and composition of interest-earning assets and related yields, interest-bearing liabilities and related rates paid, and noninterest-bearing sources of funding. See the Statistical Information (Unaudited) – Average Consolidated Balance Sheet And Net Interest Analysis and Analysis Of Year-To-Year Changes In Net Interest Income in Item 8 of this Report.

Net interest income increased $717 million, or 9%, in 2017 compared with 2016 due to increases in loan and securities balances and yields, partially offset by an increase in borrowing and deposit costs. Net interest margin increased largely reflecting the benefit to loans and securities yields from higher interest rates in 2017.

Average investment securities increased $3.0 billion, or 4%, reflecting net purchases of U.S. Treasury and government agency securities of $2.9 billion and agency residential mortgage-backed securities of $2.8 billion, partially offset by declines in average commercial mortgage-backed securities of $1.6 billion and non-agency residential mortgage-backed securities of $.8 billion. Total investment securities were 23% of average interest-earning assets in both 2017 and 2016.
 
Average loans grew by $8.5 billion, or 4%, reflecting an increase in average commercial lending of $8.4 billion driven by broad-based growth in our Corporate Banking, Real Estate, Equipment Finance and Business Credit businesses in our Commercial & Institutional Banking segment. Growth in Equipment Finance included the impact of the acquisition of a commercial and vendor finance business with $1.0 billion of loans and leases in the second quarter of 2017. Average consumer lending increased $.1 billion in the comparison, as growth in average residential real estate, automobile and credit card loans was substantially offset by declines in average home equity and education loans. These declines reflected run-off in the non-strategic consumer loan portfolios of brokered home equity and government guaranteed education loans. Average loans represented 67% of average interest-earning assets in 2017 compared to 66% in 2016.

Average total deposits increased $7.2 billion, or 3%, primarily due to growth in average interest-bearing deposits of $6.7 billion, or 4%, driven by higher average savings deposits of $13.1 billion. This increase reflected a shift, in part, to relationship-based savings products from money market deposits, which decreased $9.2 billion. Additionally, average interest-bearing demand deposits grew $4.3 billion, mainly

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


attributable to the higher interest rate environment and customer growth. Average interest-bearing deposits represented 76% of average interest-bearing liabilities in 2017 compared to 77% in 2016.

Further details regarding average loans and deposits are included in the Business Segments Review section of this Item 7.

Noninterest Income
Table 2: Noninterest Income
Year ended December 31
  
  
Change
Dollars in millions
2017

2016

$

%
Noninterest income
 
 
 
 
Asset management
$
1,942

$
1,521

$
421

28
 %
Consumer services
1,415

1,388

27

2
 %
Corporate services
1,621

1,504

117

8
 %
Residential mortgage
350

567

(217
)
(38
)%
Service charges on deposits
695

667

28

4
 %
Other
1,198

1,124

74

7
 %
Total noninterest income
$
7,221

$
6,771

$
450

7
 %

Noninterest income as a percentage of total revenue was 44% for 2017 and 45% for 2016.

Asset management revenue increased reflecting higher earnings from our equity investment in BlackRock, including a $254 million flow through impact of the new federal tax legislation on our equity investment. Additionally, the impact of stronger equity markets contributed to the increase. Discretionary client assets under management in our Asset Management Group segment increased to $151 billion at December 31, 2017 compared with $137 billion at December 31, 2016, primarily attributable to higher equity markets.

Growth in consumer service fees was primarily due to a $25 million increase in credit card fees, net of rewards, and debit card fees, which reflected continued momentum in customer activity in both transaction trends and customer growth. In addition, brokerage fees increased $17 million, driven by higher brokerage assets under management. These increases were partially offset by individually insignificant items.

Corporate services revenue reflected broad based growth, including higher merger and acquisition (M&A) advisory fees of $65 million and an increase in loan syndication and agency fees of $28 million, both of which reflected continued momentum in the M&A market. Higher treasury management revenue also contributed to the increase in corporate services revenue.

Lower residential mortgage revenue reflected a decline of $122 million in residential mortgage servicing rights valuation, net of economic hedge, which included a $71 million negative adjustment for mortgage servicing rights fair value assumption updates in the fourth quarter of 2017. In addition, the decrease reflected lower loan sales revenue of
 
$85 million, which was driven by lower origination volume and compressed pricing margins.

Higher service charges on deposits reflected net growth of $30 million related to fee income on personal deposit accounts, reflecting higher levels of customer activity.

The increase in other noninterest income included higher revenue from private equity investments of $172 million and $119 million for the appreciation of BlackRock common stock used to fund PNC's fourth quarter 2017 contribution to the PNC Foundation. The increase in revenue from private equity investments reflected positive impacts from valuation adjustments on equity investments subject to the Volcker Rule provision of Dodd-Frank. Additionally, operating lease income increased related to the commercial and vendor finance business acquired in the second quarter of 2017.

These increases were largely offset by the impact of negative derivative fair value adjustments related to Visa Class B common shares of $280 million in 2017, including $248 million in the fourth quarter primarily related to the extension of anticipated timing of litigation resolution. Derivative fair value adjustments relate to swap agreements with purchasers of Visa shares in connection with all prior sales to date. In 2016, gains on sales of Visa Class B common shares, net of derivative fair value adjustments, were $32 million.

Other noninterest income typically fluctuates from period to period depending on the nature and magnitude of transactions completed. Further details regarding our customer-related trading activities are included in the Market Risk Management – Customer-Related Trading Risk portion of the Risk Management section of this Item 7. Further details regarding private and other equity investments are included in the Market Risk Management – Equity and Other Investment Risk section, and further details regarding gains or losses related to our equity investment in BlackRock are included in the Business Segments Review section of this Item 7.

Effective for the first quarter of 2018, and as a result of the commercial and vendor finance business we acquired in the second quarter of 2017, we intend to classify operating lease income as corporate services noninterest income on the Consolidated Income Statement. In 2017 and prior years, this revenue was classified as other noninterest income, and these periods will be reclassified to reflect this change.

Provision for Credit Losses
Overall credit quality remained stable in 2017. The provision for credit losses was $441 million compared to $433 million in 2016. The provision for 2017 reflected loan growth, including an initial provision for the loan and lease portfolio obtained through the business acquired in the second quarter of 2017, mostly offset by lower provisions in the oil, gas and coal sectors.


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


The Credit Risk Management portion of the Risk Management section of this Item 7 includes additional information regarding factors impacting the provision for credit losses.

Noninterest Expense
Table 3: Noninterest Expense
Year ended December 31
  
  
Change
Dollars in millions
2017

2016

$

%
Noninterest expense
 
 
 
 
Personnel
$
5,224

$
4,841

$
383

8
 %
Occupancy
868

861

7

1
 %
Equipment
1,065

974

91

9
 %
Marketing
244

247

(3
)
(1
)%
Other
2,997

2,553

444

17
 %
Total noninterest expense
$
10,398

$
9,476

$
922

10
 %

Noninterest expense increased reflecting higher levels of business activity and ongoing investments in technology and business infrastructure. The increase in personnel expense also included the fourth quarter 2017 announcement of employee cash payments and pension account credits totaling $105 million. In addition, charges for real estate dispositions and exits, including data centers, totaled $197 million in the fourth quarter of 2017, primarily within other noninterest expense.

Other noninterest expense for 2017 included the fourth quarter $200 million contribution of BlackRock common stock to the PNC Foundation. Contributions to the PNC Foundation in 2016 were $75 million.

 
During 2017, we completed actions and achieved our 2017 continuous improvement program savings goal of $350 million, which funded a significant portion of our business and technology investments, including our Retail branch strategy, enhanced digital capabilities and our home lending transformation. In 2018, we have a goal of $250 million in cost savings through our continuous improvement program, which we expect will partially fund our ongoing business and technology investments.

Effective Income Tax Rate
An income tax benefit of $1.2 billion was recorded in the fourth quarter of 2017 related to the new tax legislation and was primarily attributable to the revaluation of net deferred tax liabilities at the lower statutory tax rate of 21%. As a result, the effective income tax rate for 2017 was 1.9% compared with 24.1% for 2016. Certain tax legislation amounts are considered reasonable estimates as of December 31, 2017. See the Critical Accounting Estimates and Judgments section in this Item 7 for additional details.

The effective tax rate is generally lower than the statutory rate primarily due to tax credits we receive from our investments in low income housing and new markets investments, as well as earnings in other tax exempt investments.

Additional information regarding our effective tax rate is included in the Reconciliation of Statutory and Effective Tax Rates table in Note 17 Income Taxes in the Notes To Consolidated Financial Statements included in this Report.
CONSOLIDATED BALANCE SHEET REVIEW
Table 4: Summarized Balance Sheet Data
 
December 31

 
December 31

 
Change
 
Dollars in millions
2017

 
2016

 
$
%
 
Assets
 
 
 
 
 
 
 
Interest-earning deposits with banks
$
28,595

 
$
25,711

 
$
2,884

11
 %
 
Loans held for sale
2,655

 
2,504

 
151

6
 %
 
Investment securities
76,131

 
75,947

 
184


 
Loans
220,458

 
210,833

 
9,625

5
 %
 
Allowance for loan and lease losses
(2,611
)
 
(2,589
)
 
(22
)
(1
)%
 
Mortgage servicing rights
1,832

 
1,758

 
74

4
 %
 
Goodwill
9,173

 
9,103

 
70

1
 %
 
Other, net
44,535

 
43,113

 
1,422

3
 %
 
Total assets
$
380,768

 
$
366,380

 
$
14,388

4
 %
 
Liabilities
 
 
 
 
 
 
 
Deposits
$
265,053

 
$
257,164

 
$
7,889

3
 %
 
Borrowed funds
59,088

 
52,706

 
6,382

12
 %
 
Other
9,042

 
9,656