0000713676-18-000065.txt : 20180802 0000713676-18-000065.hdr.sgml : 20180802 20180802153043 ACCESSION NUMBER: 0000713676-18-000065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 114 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180802 DATE AS OF CHANGE: 20180802 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PNC FINANCIAL SERVICES GROUP, INC. CENTRAL INDEX KEY: 0000713676 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251435979 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09718 FILM NUMBER: 18988042 BUSINESS ADDRESS: STREET 1: THE TOWER AT PNC PLAZA STREET 2: 300 FIFTH AVENUE CITY: PITTSBURGH STATE: PA ZIP: 15222-2401 BUSINESS PHONE: 412-762-2000 MAIL ADDRESS: STREET 1: THE TOWER AT PNC PLAZA STREET 2: 300 FIFTH AVENUE CITY: PITTSBURGH STATE: PA ZIP: 15222-2401 FORMER COMPANY: FORMER CONFORMED NAME: PNC FINANCIAL SERVICES GROUP INC DATE OF NAME CHANGE: 20000327 FORMER COMPANY: FORMER CONFORMED NAME: PNC BANK CORP DATE OF NAME CHANGE: 19930505 FORMER COMPANY: FORMER CONFORMED NAME: PNC BANK CORP /PA/ DATE OF NAME CHANGE: 19930428 10-Q 1 pncq2201810-q.htm FORM 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018

or


TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to         
    
Commission file number 001-09718

The PNC Financial Services Group, Inc.
(Exact name of registrant as specified in its charter)
 
Pennsylvania
 
25-1435979
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
The Tower at PNC Plaza, 300 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2401
(Address of principal executive offices, including zip code)
(888) 762-2265
(Registrant’s telephone number including area code)

(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
  
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
    Yes    No  
As of July 20, 2018, there were 464,302,343 shares of the registrant’s common stock ($5 par value) outstanding.
 


THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to Second Quarter 2018 Form 10-Q


 
Pages
PART I – FINANCIAL INFORMATION
 
Item 1.   Financial Statements (Unaudited).
 
 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
21-38, 63-72 and 75-80
Item 4. Controls and Procedures.
 


THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to Second Quarter 2018 Form 10-Q (continued)

 
 
 
MD&A TABLE REFERENCE
 
Table
Description
Page
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34


THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to Second Quarter 2018 Form 10-Q (continued)

 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE
 
Table
Description
Page
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76





FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.

This Financial Review, including the Consolidated Financial Highlights, should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Quarterly Report on Form 10-Q (the Report or Form 10-Q) and with Items 6, 7, 8 and 9A of our 2017 Annual Report on Form 10-K (2017 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business, regulatory and legal risks, see the following: the Risk Management section of this Financial Review and of Item 7 in our 2017 Form 10-K; Item 1A Risk Factors included in our 2017 Form 10-K; and the Legal Proceedings and Commitments Notes of the Notes To Consolidated Financial Statements included in Item 1 of this Report and Item 8 of our 2017 Form 10-K. Also, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and the Critical Accounting Estimates And Judgments section in this Financial Review and in our 2017 Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this Report. See Note 14 Segment Reporting in the Notes To Consolidated Financial Statements included in this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a generally accepted accounting principles (GAAP) basis. In this Report, “PNC”, “we” or “us” refers to The PNC Financial Services Group, Inc. and its subsidiaries on a consolidated basis (except when referring to PNC as a public company, its common stock or other securities issued by PNC, which just refer to The PNC Financial Services Group, Inc.). References to The PNC Financial Services Group, Inc. or to any of its subsidiaries are specifically made where applicable.
Table 1: Consolidated Financial Highlights
Dollars in millions, except per share data
Unaudited
Three months ended June 30
Six months ended June 30
 
2018
2017
2018
2017
 
Financial Results (a)
 
 
 
 
 
Revenue
 
 
 
 
 
Net interest income
$
2,413

$
2,258

$
4,774

$
4,418

 
Noninterest income
1,911

1,802

3,661

3,526

 
Total revenue
4,324

4,060

8,435

7,944

 
Provision for credit losses
80

98

172

186

 
Noninterest expense
2,584

2,479

5,111

4,881

 
Income before income taxes and noncontrolling interests
$
1,660

$
1,483

$
3,152

$
2,877

 
Net income
$
1,356

$
1,097

$
2,595

$
2,171

 
Less:
 
 
 
 
 
Net income attributable to noncontrolling interests
10

10

20

27

 
Preferred stock dividends
55

55

118

118

 
Preferred stock discount accretion and redemptions
1

2

2

23

 
Net income attributable to common shareholders
1,290

1,030

$
2,455

$
2,003

 
Less:
 
 
 
 
 
Dividends and undistributed earnings allocated to nonvested restricted shares
5

4

10

10

 
Impact of BlackRock earnings per share dilution
3

1

5

5

 
Net income attributable to diluted common shares
$
1,282

$
1,025

$
2,440

$
1,988

 
Diluted earnings per common share
$
2.72

$
2.10

$
5.15

$
4.05

 
Cash dividends declared per common share
$
.75

$
.55

$
1.50

$
1.10

 
Effective tax rate (b)
18.3
%
26.0
%
17.7
%
24.5
%
 
Performance Ratios
 
 
 
 
 
Net interest margin (c)
2.96
%
2.84
%
2.94
%
2.81
%
 
Noninterest income to total revenue
44
%
44
%
43
%
44
%
 
Efficiency
60
%
61
%
61
%
61
%
 
Return on:
 
 
 
 
 
Average common shareholders’ equity
12.13
%
9.88
%
11.59
%
9.69
%
 
Average assets
1.45
%
1.19
%
1.39
%
1.19
%
 
(a)
The Executive Summary and Consolidated Income Statement Review portions of this Financial Review section provide information regarding items impacting the comparability of the periods presented.
(b)
The effective income tax rates are generally lower than the statutory rate due to the relationship of pretax income to tax credits and earnings that are not subject to tax. Amounts for the 2018 periods reflected the change in the statutory federal income tax rate from 35% to 21%, effective as of January 1, 2018, as a result of the new federal tax legislation.
(c)
Calculated as annualized taxable-equivalent net interest income divided by average earning assets. To provide more meaningful comparisons of net interest margins, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP in the Consolidated Income Statement. For additional information, see Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP) in the Statistical Information (Unaudited) section in Item 1 of this Report.

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



Table 1: Consolidated Financial Highlights (Continued) (a)
Unaudited
June 30
2018

December 31
2017

June 30
2017

 
Balance Sheet Data (dollars in millions, except per share data)
 
 
 
 
Assets
$
380,711

$
380,768

$
372,190

 
Loans
$
222,855

$
220,458

$
218,034

 
Allowance for loan and lease losses
$
2,581

$
2,611

$
2,561

 
Interest-earning deposits with banks (b)
$
21,972

$
28,595

$
22,482

 
Investment securities
$
80,125

$
76,131

$
76,431

 
Loans held for sale
$
1,325

$
2,655

$
2,030

 
Equity investments (c)
$
12,430

$
11,392

$
10,819

 
Mortgage servicing rights
$
2,045

$
1,832

$
1,867

 
Goodwill
$
9,218

$
9,173

$
9,163

 
Other assets
$
27,897

$
27,894

$
28,886

 
Noninterest-bearing deposits
$
79,047

$
79,864

$
79,550

 
Interest-bearing deposits
$
185,838

$
185,189

$
179,626

 
Total deposits
$
264,885

$
265,053

$
259,176

 
Borrowed funds
$
59,222

$
59,088

$
56,406

 
Total shareholders’ equity
$
46,904

$
47,513

$
46,084

 
Common shareholders’ equity
$
42,917

$
43,530

$
42,103

 
Accumulated other comprehensive income (loss)
$
(940
)
$
(148
)
$
(98
)
 
Book value per common share
$
92.26

$
91.94

$
87.78

 
Period-end common shares outstanding (in millions)
465

473

480

 
Loans to deposits
84
%
83
%
84
%
 
Client Assets (in billions)
 
 
 
 
Discretionary client assets under management
$
149

$
151

$
141

 
Nondiscretionary client assets under administration
130

131

125

 
Total client assets under administration
279

282

266

 
Brokerage account client assets
49

49

46

 
Total client assets
$
328

$
331

$
312

 
Capital Ratios
 
 
 
 
Basel III (d) (e) (f)
 
 
 
 
Common equity Tier 1
9.5
%
N/A

N/A

 
Tier 1 risk-based
10.7
%
N/A

N/A

 
Total capital risk-based
12.6
%
N/A

N/A

 
Leverage
9.4
%
N/A

N/A

 
   Supplementary leverage
7.8
%
N/A

N/A

 
Fully Phased-In Basel III (Non-GAAP) (f) (g)

 
 
 
 
Common equity Tier 1
N/A

9.8
%
9.8
%
 
2017 Transitional Basel III (d) (f)
 
 
 
 
Common equity Tier 1
N/A

10.4
%
10.3
%
 
Tier 1 risk-based
N/A

11.6
%
11.6
%
 
Total capital risk-based
N/A

13.7
%
13.7
%
 
Leverage
N/A

9.9
%
9.9
%
 
Common shareholders’ equity to total assets
11.3
%
11.4
%
11.3
%
 
Asset Quality
 
 
 
 
Nonperforming loans to total loans
.77
%
.85
%
.90
%
 
Nonperforming assets to total loans, OREO, foreclosed and other assets
.83
%
.92
%
.99
%
 
Nonperforming assets to total assets
.49
%
.53
%
.58
%
 
Net charge-offs to average loans (for the three months ended) (annualized)
.20
%
.22
%
.20
%
 
Allowance for loan and lease losses to total loans
1.16
%
1.18
%
1.17
%
 
Allowance for loan and lease losses to total nonperforming loans
150
%
140
%
131
%
 
Accruing loans past due 90 days or more (in millions)
$
586

$
737

$
674

 
(a)
The Executive Summary and Consolidated Balance Sheet Review portions of this Financial Review provide information regarding items impacting the comparability of the periods presented.
(b)
Amounts include balances held with the Federal Reserve Bank of Cleveland (Federal Reserve Bank) of $21.6 billion, $28.3 billion and $22.1 billion as of June 30, 2018, December 31, 2017 and June 30, 2017, respectively.
(c)
Amounts include our equity interest in BlackRock. On January 1, 2018, $.6 billion of trading and available for sale securities, primarily money market funds, were reclassified to Equity investments in accordance with the adoption of Accounting Standards Update (ASU) 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in our first quarter 2018 Quarterly Report on Form 10-Q (First Quarter 2018 Form 10-Q) for additional detail on this adoption.
(d)
All ratios are calculated using the regulatory capital methodology applicable to PNC during each period presented and calculated based on the standardized approach.
(e)
The 2018 Basel III ratios for Common equity Tier 1 capital, Tier 1 risk-based capital, Leverage and Supplementary leverage reflect the full phase-in of all Basel III adjustments to these metrics applicable to PNC. The 2018 Basel III Total risk-based capital ratio includes $80 million of nonqualifying trust preferred capital securities that are subject to a phase-out period that runs through 2021.
(f)
See Basel III Capital discussion in the Capital Management portion of the Risk Management section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business and Item 1A Risk Factors in our 2017 Form 10-K. See also the Transitional Basel III and Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios (Non-GAAP) – June 30, 2017 table in the Statistical Information (Unaudited) section of this Report for a reconciliation of the June 30, 2017 ratios.
(g)
2017 Fully Phased-in Basel III results are presented as Pro forma estimates.


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



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

We have businesses engaged in retail banking, including residential mortgage, corporate and institutional banking and asset management, providing many of our products and services nationally. Our primary geographic markets are located in the Mid-Atlantic, Midwest and Southeast. We also provide certain products and services internationally.

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

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

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

Our capital priorities are to support client growth and business investment, maintain appropriate capital in light of economic conditions and the Basel III framework and return excess capital to shareholders, in accordance with the currently effective capital plan included in our Comprehensive Capital Analysis and Review (CCAR) submission to the Board of Governors of the Federal Reserve System (Federal Reserve). For more detail, see the Capital Highlights portion of this Executive Summary and the Liquidity and Capital Management portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2017 Form 10-K.

Income Statement Highlights
Net income for the second quarter of 2018 increased 24% to $1.4 billion, or $2.72 per diluted common share, compared to $1.1 billion, or $2.10 per diluted common share, for the second quarter of 2017.
Total revenue increased $264 million, or 7%, to $4.3 billion.
Net interest income increased $155 million, or 7%, to $2.4 billion.
Net interest margin increased to 2.96% compared to 2.84% for the second quarter of 2017.
Noninterest income increased $109 million, or 6%, to $1.9 billion.
Provision for credit losses was $80 million compared to $98 million for the second quarter of 2017.
Noninterest expense increased $105 million, or 4%, to $2.6 billion.
Income tax expense decreased to $304 million compared to $386 million for the second quarter of 2017.
Federal tax reform legislation, the Tax Cuts and Jobs Act, lowered the statutory federal income tax rate for corporations to 21% from 35% effective January 1, 2018.

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

Balance Sheet Highlights
Our balance sheet was strong and well positioned at June 30, 2018 and December 31, 2017. In comparison to December 31, 2017:
Total loans increased $2.4 billion, or 1%, to $222.9 billion.
Total commercial lending grew $2.2 billion, or 1%.
Total consumer lending increased $.2 billion.
Total deposits declined $.2 billion to $264.9 billion.
Investment securities increased $4.0 billion, or 5%, to $80.1 billion.
Interest-earning deposits with banks decreased $6.6 billion, or 23%, to $22.0 billion.

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

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



Credit Quality Highlights
Overall credit quality remained strong.
At June 30, 2018 compared to December 31, 2017:
Nonperforming assets decreased $181 million, or 9%, to $1.9 billion.
Overall loan delinquencies decreased $159 million, or 10%.
Net charge-offs were $109 million in the second quarter of 2018 compared to $110 million for the second quarter of 2017.

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

Capital Highlights
We maintained a strong capital position and continued to return capital to shareholders.
The Basel III common equity Tier 1 capital ratio, which includes the full phase-in of all Basel III adjustments and became effective for PNC as of January 1, 2018, was 9.5% at June 30, 2018, compared with 9.8% at December 31, 2017, calculated on the same basis.
In the second quarter of 2018, we returned $1.2 billion of capital to shareholders through repurchases of 5.7 million common shares for $.8 billion and dividends on common shares of $.4 billion.
In June 2018, we announced share repurchase programs of up to $2.0 billion for the four-quarter period beginning in the third quarter of 2018, including repurchases of up to $.3 billion related to stock issuances under employee benefit plans.
In July 2018, our board of directors raised the quarterly cash dividend on common stock to 95 cents per share, an increase of 20 cents per share, or 27%, effective with the August dividend.

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

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

Business Outlook
Our forward-looking financial statements are based on our current view that U.S. economic growth will accelerate somewhat in 2018, in light of stimulus from corporate and personal income tax cuts passed in late 2017 that are expected to support business investment and consumer spending, respectively. We expect an increase in federal government spending will also support economic growth in 2018. 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 trade restrictions are a growing downside risk to the forecast. 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; after the Federal Open Market Committee raised the federal funds rate in June, our baseline forecast is for one additional rate hike in September 2018, pushing the federal funds rate to a range of 2.00% to 2.25% 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. Long-term rates will rise more slowly than short-term rates, so we anticipate that the yield curve will flatten but not invert.

For the third quarter of 2018 compared to the second quarter of 2018, we expect:
Modest loan growth;
Net interest income to increase by low single digits, on a percentage basis;
Fee income to increase by low single digits, on a percentage basis. Fee income consists of asset management, consumer services, corporate services, residential mortgage and service charges on deposits;
Provision for credit losses to be between $100 million and $150 million; and
Noninterest expense to be stable.

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

Our outlook for certain financial information for full year 2018 is compared to full year 2017 results as adjusted for the following fourth quarter 2017 tax legislation and significant items: $26 million in lower net interest income from the impact of tax legislation on leveraged leases; a total of $54 million of higher noninterest income, consisting of the flow through impact of tax legislation on our equity investment in BlackRock, Visa Class B derivative fair value adjustments, and the appreciation of BlackRock stock contributed to the PNC Foundation, partially offset by negative adjustments for residential mortgage servicing rights fair value assumption

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



updates; a total of $502 million of higher noninterest expense, consisting of a contribution to the PNC Foundation, charges for real estate dispositions and exits, and employee cash payments and pension account credits; and a $1.2 billion tax benefit recognized as a result of the federal tax legislation, primarily attributable to revaluation of net deferred tax liabilities and $230 million from the tax effect of the aforementioned significant items. For additional information on these fourth quarter 2017 items, see the Income Statement Highlights portion of the Executive Summary section in Item 7 of our 2017 Form 10-K.

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 on the upper end of mid-single digits, on a percentage basis;
Noninterest expense to increase on the lower end of mid-single digits, on a percentage basis; and
The effective tax rate to be approximately 17%.

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

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

Net income for the second quarter of 2018 was $1.4 billion, or $2.72 per diluted common share, an increase of 24% compared to $1.1 billion, or $2.10 per diluted common share, for the second quarter of 2017. For the first six months of 2018, net income was $2.6 billion, or $5.15 per diluted common share, an increase of 20% compared to $2.2 billion, or $4.05 per diluted common share, for the first six months of 2017.

Net income increased in both comparisons driven by an increase in revenue from higher net interest income and noninterest income and a lower effective tax rate, partially offset by an increase in noninterest expense.
Net Interest Income
Table 2: Summarized Average Balances and Net Interest Income (a)
 
 
2018

2017
 
Three months ended June 30
Dollars in millions
 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
 
$
77,479

 
2.91
%
 
$
564

 
$
75,352

 
2.71
%
 
$
511

 
Loans
 
222,684

 
4.23
%
 
2,367

 
216,373

 
3.82
%
 
2,077

 
Interest-earning deposits with banks
 
21,017

 
1.78
%
 
93

 
22,543

 
1.04
%
 
58

 
Other
 
6,905

 
4.98
%
 
87

 
9,748

 
3.38
%
 
82

 
Total interest-earning assets/interest income
 
$
328,085

 
3.78
%
 
3,111

 
$
324,016

 
3.35
%
 
2,728

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
184,357

 
.57
%
 
261

 
$
179,012

 
.32
%
 
143

 
Borrowed funds
 
58,966

 
2.74
%
 
408

 
57,524

 
1.89
%
 
273

 
Total interest-bearing liabilities/interest expense
 
$
243,323

 
1.10
%
 
669

 
$
236,536

 
.70
%
 
416

 
Net interest margin/income (Non-GAAP)
 
 
 
2.96
%
 
2,442

 
 
 
2.84
%
 
2,312

 
Taxable-equivalent adjustments
 
 
 
 
 
(29
)
 
 
 
 
 
(54
)
 
Net interest income (GAAP)
 
 
 
 
 
$
2,413

 
 
 
 
 
$
2,258

 
(continued on following page)

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



(continued from previous page)
 
 
2018
 
2017
 
Six months ended June 30
Dollars in millions
 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
 
$
76,075

 
2.85
%
 
$
1,083

 
$
75,800

 
2.69
%
 
$
1,019

 
Loans
 
221,899

 
4.16
%
 
4,617

 
214,324

 
3.75
%
 
4,018

 
Interest-earning deposits with banks
 
23,329

 
1.64
%
 
191

 
23,363

 
.92
%
 
107

 
Other
 
7,402

 
4.52
%
 
167

 
9,076

 
3.46
%
 
156

 
Total interest-earning assets/interest income
 
$
328,705

 
3.68
%
 
6,058

 
$
322,563

 
3.29
%
 
5,300

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
183,900

 
.52
%
 
474

 
$
177,947

 
.30
%
 
263

 
Borrowed funds
 
59,300

 
2.52
%
 
752

 
56,241

 
1.82
%
 
513

 
Total interest-bearing liabilities/interest expense
 
$
243,200

 
1.01
%
 
1,226

 
$
234,188

 
.66
%
 
776

 
Net interest margin/income (Non-GAAP)
 
 
 
2.94
%
 
4,832

 
 
 
2.81
%
 
4,524

 
Taxable-equivalent adjustments
 
 
 
 
 
(58
)
 
 
 
 
 
(106
)
 
Net interest income (GAAP)
 
 
 
 
 
$
4,774

 
 
 
 
 
$
4,418

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

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

Net interest income increased by $155 million, or 7%, and $356 million, or 8%, for the second quarter and first six months of 2018, respectively, compared to the same periods in 2017. The increase in both comparisons was driven by higher loans and securities yields, as well as loan growth, partially offset by increases in borrowing and deposit costs. Net interest margin increased in both comparisons reflecting the impact of higher interest rates.

Average investment securities increased $2.1 billion, or 3%, in the quarterly comparison and $.3 billion in the year-to-date comparison. Net purchase activity of U.S. Treasury and government agencies and agency residential mortgage-backed securities was offset by declines in commercial mortgage-backed, asset-backed and other securities.
These comparisons included the impact of the January 1, 2018 reclassification of $.6 billion of available for sale securities to equity investments in accordance with the adoption of ASU 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in our First Quarter 2018 Form 10-Q for additional detail on this adoption.

Average investment securities increased to 24% of average interest-earning assets for the second quarter of 2018 compared to 23% for the second quarter of 2017 and both year-to-date periods.

Average loans grew $6.3 billion, or 3%, and $7.6 billion, or 4%, in the quarterly and year-to-date comparisons, respectively. Loan growth was driven by increases in average commercial lending of $5.5 billion and $7.0 billion in the respective comparisons reflecting broad-based growth in the Corporate Banking, Business Credit and Equipment Finance businesses in our Corporate & Institutional Banking segment.

Average consumer lending increased $.8 billion and $.6 billion in the quarterly and year-to-date comparisons, respectively. Growth in residential real estate, automobile and credit card loans was mostly offset by declines in home equity and education loans. Lower home equity loans reflected paydowns and payoffs exceeding new originated volume. In addition, run-off in the non-strategic consumer loan portfolios of brokered home equity and government guaranteed education loans contributed to the declines. Average loans represented 68% of average interest-earning assets for the second quarter and first six months of 2018 compared to 67% and 66% for the same periods of 2017, respectively.

Average interest-bearing deposits grew $5.3 billion, or 3%, and $6.0 billion, or 3%, in the respective quarterly and year-to-date comparisons, reflecting overall deposit and customer growth. Average savings deposits increased $9.0 billion and $9.2 billion,

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



respectively, due in part to a shift to relationship-based savings products from money market deposits, which decreased $6.0 billion and $5.7 billion in the respective comparisons. Additionally, average interest-bearing demand deposits grew $2.9 billion in both comparisons. Average interest-bearing deposits remained stable at 76% of average interest-bearing liabilities in both the quarterly and year-to-date comparisons.

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

Average borrowed funds increased $1.4 billion, or 3%, and $3.1 billion, or 5%, in the quarterly and year-to-date comparisons, respectively, primarily due to higher bank notes and senior debt, partially offset by a decline in subordinated debt. See the Consolidated Balance Sheet Review portion of this Financial Review for additional detail on the level and composition of borrowed funds.
Noninterest Income
Table 3: Noninterest Income
 
 
Three months ended June 30

Six months ended June 30
 
 
 
 
 
 
 
Change
 
 
 
 
 
Change
 
Dollars in millions
 
2018


2017

 
$
 
%
 
2018

 
2017

 
$

 
%

 
Noninterest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset management
 
$
456

 
$
398

 
$
58

 
15
 %
 
$
911

 
$
801

 
$
110

 
14
 %
 
Consumer services
 
381

 
360

 
21

 
6
 %
 
738

 
692

 
46

 
7
 %
 
Corporate services
 
487

 
466

 
21

 
5
 %
 
916

 
880

 
36

 
4
 %
 
Residential mortgage
 
84

 
104

 
(20
)
 
(19
)%
 
181

 
217

 
(36
)
 
(17
)%
 
Service charges on deposits
 
169

 
170

 
(1
)
 
(1
)%
 
336

 
331

 
5

 
2
 %
 
Other
 
334

 
304

 
30

 
10
 %
 
579

 
605

 
(26
)
 
(4
)%
 
Total noninterest income
 
$
1,911


$
1,802


$
109

 
6
 %
 
$
3,661


$
3,526


$
135

 
4
 %
 
 
Noninterest income as a percentage of total revenue was 44% for both the second quarters of 2018 and 2017. The comparable ratios for the year-to-date periods were 43% and 44%, respectively.

Growth in asset management revenue reflected higher earnings on our equity investment in BlackRock and stronger equity markets. PNC's discretionary client assets under management increased to $149 billion at June 30, 2018 compared with $141 billion at June 30, 2017.

Increases in consumer services revenue in the quarterly and year-to-date comparisons were primarily due to growth in debit and credit card fees totaling $12 million and $29 million, respectively, reflecting continued momentum in customer activity in both transaction trends and customer growth. Brokerage fees increased in both comparisons by $10 million and $20 million, respectively, as a result of growth in brokerage assets under management.

Higher corporate services revenue in both comparisons was primarily driven by growth in treasury management fees of $19 million and $34 million and merger and acquisition advisory fees of $11 million and $15 million, respectively. Additionally, the year-to-date comparison included a $12 million increase in operating lease income related to the commercial and vendor finance business acquired in the second quarter of 2017 and an $11 million lower benefit from commercial mortgage servicing rights valuation, net of economic hedge.

Residential mortgage revenue decreased due to loan sales revenue declines of $16 million and $28 million in the quarterly and year-to-date comparisons, as well as lower servicing revenue. The declines in loan sales revenue reflected increased competition in the marketplace and a shift in mix away from refinancing to purchases, which drove lower gain on sales margins.

Other noninterest income increased in the quarterly comparison reflecting a benefit from positive derivative fair value adjustments related to swap agreements with purchasers of Visa Class B common shares of $27 million in the second quarter of 2018, primarily due to developments relevant to the litigation, partially offset by a $16 million decline in net securities gains.

Other noninterest income decreased in the year-to-date comparison largely attributable to an $81 million decline in revenue from equity investments, which included the impact of first quarter 2017 positive valuation adjustments related to the Volcker Rule provisions of the Dodd-Frank Act. This decline was partially offset by a net $45 million benefit from derivative fair value adjustments related to Visa Class B common shares.

In the first quarter of 2018, and in connection with the commercial and vendor finance business we acquired in the second quarter of 2017, we reclassified operating lease income to corporate services noninterest income from other noninterest income on the

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



Consolidated Income Statement, including operating lease income of $31 million and $53 million for the three and six months ended June 30, 2017, respectively. Operating lease income was $31 million and $65 million for the three and six months ended June 30, 2018, respectively.

Provision For Credit Losses
The provision for credit losses decreased $18 million to $80 million in the second quarter of 2018 compared to the second quarter of 2017 and decreased $14 million to $172 million for the first six months of 2018 compared to the same period in 2017 reflecting a lower provision for commercial loans, partially offset by a higher provision for consumer loans.

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

Noninterest Expense

Table 4: Noninterest Expense
 
 
Three months ended June 30
 
Six months ended June 30
 
 
 
 
 
 
 
Change
 
 
 
 
 
Change
 
Dollars in millions
 
2018


2017

 
$
 
%
 
2018

 
2017

 
$

 
%

 
Noninterest expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel
 
$
1,356

 
$
1,276

 
$
80

 
6
%
 
$
2,710

 
$
2,533

 
$
177

 
7
 %
 
Occupancy
 
203

 
202

 
1

 

 
421

 
424

 
(3
)
 
(1
)%
 
Equipment
 
281

 
281

 

 

 
554

 
532

 
22

 
4
 %
 
Marketing
 
75

 
67

 
8

 
12
%
 
130

 
122

 
8

 
7
 %
 
Other
 
669

 
653

 
16

 
2
%
 
1,296

 
1,270

 
26

 
2
 %
 
Total noninterest expense
 
$
2,584


$
2,479


$
105

 
4
%
 
$
5,111

 
$
4,881

 
$
230

 
5
 %
 
 
Noninterest expense increased in both comparisons attributable to our ongoing business investments, including technology and staffing. The increases were primarily in higher personnel expense and were related to new initiatives, our announced increase in the minimum hourly pay rate for eligible employees and enhanced employee benefits. In addition, the year-to-date comparison reflects operating expense related to the second quarter 2017 acquisition of a commercial and vendor finance business.

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

Effective Income Tax Rate

The effective income tax rate was 18.3% in the second quarter of 2018 compared to 26.0% in the second quarter of 2017 and 17.7% in the first six months of 2018 compared to 24.5% in the same period of 2017. Both comparisons reflected the change in the statutory federal income tax rate from 35% to 21%, effective as of January 1, 2018, as a result of the new federal tax legislation.

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



CONSOLIDATED BALANCE SHEET REVIEW
Table 5: Summarized Balance Sheet Data
 
June 30

 
December 31

 
Change
 
Dollars in millions
2018

 
2017

 
$
%
 
Assets
 
 
 
 
 
 
 
Interest-earning deposits with banks
$
21,972

 
$
28,595

 
$
(6,623
)
(23
)%
 
Loans held for sale
1,325

 
2,655

 
(1,330
)
(50
)%
 
Investment securities
80,125

 
76,131

 
3,994

5
 %
 
Loans
222,855

 
220,458

 
2,397

1
 %
 
Allowance for loan and lease losses
(2,581
)
 
(2,611
)
 
30

1
 %
 
Mortgage servicing rights
2,045

 
1,832

 
213

12
 %
 
Goodwill
9,218

 
9,173

 
45


 
Other, net
45,752

 
44,535

 
1,217

3
 %
 
Total assets
$
380,711

 
$
380,768

 
$
(57
)

 
Liabilities
 
 
 
 




 
Deposits
$
264,885

 
$
265,053

 
$
(168
)

 
Borrowed funds
59,222

 
59,088

 
134


 
Other
9,629

 
9,042

 
587

6
 %
 
Total liabilities
333,736

 
333,183

 
553


 
Equity
 
 
 
 




 
Total shareholders’ equity
46,904

 
47,513

 
(609
)
(1
)%
 
Noncontrolling interests
71

 
72

 
(1
)
(1
)%
 
Total equity
46,975

 
47,585

 
(610
)
(1
)%
 
Total liabilities and equity
$
380,711

 
$
380,768

 
$
(57
)

 

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

Our balance sheet was strong and well positioned at both June 30, 2018 and December 31, 2017.
Total assets were stable as higher investment securities and loan growth were funded by lower interest-earning deposits with banks;
Total liabilities increased slightly;
Total equity decreased slightly as share repurchases and lower accumulated other comprehensive income (AOCI) related to net unrealized securities losses were mostly offset by higher retained earnings driven by net income.

The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and regulatory compliance is included in the Liquidity and Capital Management portion of Risk Management in this Financial Review and in Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements included in our 2017 Form 10-K.
Loans
Table 6: Loans
 
June 30

 
December 31

 
Change
 
Dollars in millions
2018

 
2017

 
$
%
 
Commercial lending
 
 
 
 
 
 
 
Commercial
$
113,367

 
$
110,527

 
$
2,840

3
 %
 
Commercial real estate
28,946

 
28,978

 
(32
)

 
Equipment lease financing
7,323

 
7,934

 
(611
)
(8
)%
 
Total commercial lending
149,636

 
147,439

 
2,197

1
 %
 
Consumer lending
 
 
 
 




 
Home equity
27,219

 
28,364

 
(1,145
)
(4
)%
 
Residential real estate
17,805

 
17,212

 
593

3
 %
 
Credit card
5,830

 
5,699

 
131

2
 %
 
Other consumer
 
 
 
 




 
Automobile
13,892

 
12,880

 
1,012

8
 %
 
Education
4,057

 
4,454

 
(397
)
(9
)%
 
Other
4,416

 
4,410

 
6


 
Total consumer lending
73,219

 
73,019

 
200


 
Total loans
$
222,855

 
$
220,458

 
$
2,397

1
 %
 

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



Loan growth was driven by commercial lending as well as an increase in consumer lending balances.

Commercial loans increased primarily driven by growth from our Corporate Banking and Business Credit businesses within our Corporate & Institutional Banking segment. In Corporate Banking, commercial loans increased $1.7 billion, or 3%, largely due to strong growth in asset-backed finance securitizations as well as middle market and large corporate lending. In Business Credit, higher utilization and new production resulted in an increase in commercial loans of $1.0 billion, or 6%.

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

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

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

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

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

See the Credit Risk Management portion of the Risk Management section of this Financial Review, Note 3 Asset Quality and Note 4 Allowance for Loan and Lease Losses in our Notes To Consolidated Financial Statements included in this Report, and Note 1 Accounting Policies in our 2017 Form 10-K for additional information regarding our loan portfolio.
Investment Securities
Table 7: Investment Securities
 
June 30, 2018
 
December 31, 2017
 
Ratings (a) as of June 30, 2018
 
Dollars in millions
Amortized
Cost

 
Fair
Value

 
Amortized
Cost

 
Fair
Value

 
AAA/
AA

 
A

 
BBB

 
BB
and
Lower

 
No
Rating

 
U.S. Treasury and government agencies
$
17,056

 
$
16,944

 
$
15,173

 
$
15,286

 
100
%
 

 

 

 

 
Agency residential mortgage-backed
44,337

 
43,321

 
40,037

 
39,847

 
100
%
 

 

 

 

 
Non-agency residential mortgage-backed
2,333

 
2,655

 
2,610

 
2,932

 
11
%
 

 
4
%
 
66
%
 
19
%
 
Agency commercial mortgage-backed
2,131

 
2,049

 
2,367

 
2,315

 
100
%
 

 

 

 

 
Non-agency commercial mortgage-backed (b)
3,101

 
3,080

 
3,141

 
3,161

 
84
%
 
6
%
 


 


 
10
%
 
Asset-backed (c)
5,601

 
5,653

 
5,531

 
5,598

 
85
%
 
3
%
 
6
%
 
6
%
 

 
Other debt (d)
5,939

 
6,026

 
6,279

 
6,459

 
74
%
 
16
%
 
7
%
 
 
 
3
%
 
Other (e)
 
 
 
 
587

 
585

 
 
 
 
 
 
 
 
 
 
 
Total investment securities (f)
$
80,498

 
$
79,728

 
$
75,725

 
$
76,183

 
94
%
 
2
%
 
1
%
 
2
%
 
1
%
 
(a)
Ratings percentages allocated based on amortized cost.
(b)
Collateralized primarily by retail properties, office buildings, lodging properties and multi-family housing.
(c)
Collateralized primarily by corporate debt, government guaranteed education loans and other consumer credit products.
(d)
Includes state and municipal securities.
(e)
On January 1, 2018, $.6 billion of available for sale securities, primarily money market funds, were reclassified to equity investments in accordance with the adoption of ASU 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our First Quarter 2018 Form 10-Q for additional detail on this adoption.
(f)
Includes available for sale and held to maturity securities, which are recorded on our balance sheet at fair value and amortized cost, respectively.

Investment securities increased $4.0 billion to $80.1 billion at June 30, 2018 compared to December 31, 2017, driven by net purchase activity of agency residential mortgage-backed securities of $3.8 billion and U.S. Treasury and government agencies securities of $1.7 billion. These increases were partially offset by the reclassification of $.6 billion of available for sale securities, primarily money market funds, to equity investments as part of the adoption of ASU 2016-01. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our First Quarter 2018 Form 10-Q for additional detail on the adoption of this ASU.

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



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

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

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

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

Based on expected prepayment speeds, the weighted-average expected maturity of the investment securities portfolio (excluding other) was 5.7 years at June 30, 2018 compared to 5.2 years at December 31, 2017.
Table 8: Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities
June 30, 2018
Years

 
Agency residential mortgage-backed
6.7

 
Non-agency residential mortgage-backed
6.4

 
Agency commercial mortgage-backed
3.6

 
Non-agency commercial mortgage-backed
3.1

 
Asset-backed
2.3

 

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

Funding Sources
Table 9: Details of Funding Sources
 
June 30

 
December 31

 
Change
 
Dollars in millions
2018

 
2017

 
$
%
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing
$
79,047

 
$
79,864

 
$
(817
)
(1
)%
 
Interest-bearing
 
 
 
 




 
Money market
54,771

 
59,735

 
(4,964
)
(8
)%
 
Demand
61,853

 
61,213

 
640

1
 %
 
Savings
51,974

 
46,980

 
4,994

11
 %
 
Time deposits
17,240

 
17,261

 
(21
)

 
Total interest-bearing deposits
185,838

 
185,189

 
649


 
Total deposits
264,885

 
265,053

 
(168
)

 
Borrowed funds
 
 
 
 




 
Federal Home Loan Bank (FHLB) borrowings
22,036

 
21,037

 
999

5
 %
 
Bank notes and senior debt
27,596

 
28,062

 
(466
)
(2
)%
 
Subordinated debt
4,781

 
5,200

 
(419
)
(8
)%
 
Other
4,809

 
4,789

 
20


 
Total borrowed funds
59,222

 
59,088

 
134


 
Total funding sources
$
324,107

 
$
324,141

 
$
(34
)

 

Total deposits declined slightly in the comparison as growth in interest-bearing deposits was more than offset by a decrease in noninterest-bearing deposits.

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



Noninterest-bearing deposits decreased primarily due to seasonal declines in commercial deposits. Within interest-bearing deposits, savings deposits grew reflecting, in part, a shift from consumer money market to relationship-based savings products, as well as growth in commercial demand deposit balances.

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

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

Shareholders’ Equity
Total shareholders’ equity was $46.9 billion at June 30, 2018, a decrease of $.6 billion compared to December 31, 2017. The decrease resulted from common share repurchases of $1.5 billion, lower AOCI related to net unrealized securities losses of $.8 billion and common and preferred dividends of $.8 billion, partially offset by net income of $2.6 billion.

Common shares outstanding were 465 million and 473 million at June 30, 2018 and December 31, 2017, respectively, as repurchases of 10.5 million shares during the period were partially offset by share issuances from treasury stock related to warrants exercised and stock-based compensation activity.
BUSINESS SEGMENTS REVIEW

We have four reportable business segments:
Retail Banking
Corporate & Institutional Banking
Asset Management Group
BlackRock

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

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


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



Retail Banking
(Unaudited)

Table 10: Retail Banking Table
Six months ended June 30
  
 
  
 
Change
 
Dollars in millions, except as noted
2018
 
2017
 
$
%
 
Income Statement
 
 
 
 
 
 
 
Net interest income
$
2,495

 
$
2,260

 
$
235

10
 %
 
Noninterest income
1,313

 
1,248

 
65

5
 %
 
Total revenue
3,808

 
3,508

 
300

9
 %
 
Provision for credit losses
141

 
121

 
20

17
 %
 
Noninterest expense
2,845

 
2,685

 
160

6
 %
 
Pretax earnings
822

 
702

 
120

17
 %
 
Income taxes
196

 
259

 
(63
)
(24
)%
 
Earnings
$
626

 
$
443

 
$
183

41
 %
 
Average Balance Sheet
 
 
 
 
 
 
 
Loans held for sale
$
640

 
$
786

 
$
(146
)
(19
)%
 
Loans
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
Home equity
$
24,391

 
$
25,506

 
$
(1,115
)
(4
)%
 
Automobile
13,375

 
12,185

 
1,190

10
 %
 
Education
4,294

 
5,021

 
(727
)
(14
)%
 
Credit cards
5,674

 
5,129

 
545

11
 %
 
Other
1,768

 
1,757

 
11

1
 %
 
Total consumer
49,502

 
49,598

 
(96
)

 
Commercial and commercial real estate
10,493

 
10,965

 
(472
)
(4
)%
 
Residential mortgage
13,570

 
11,804

 
1,766

15
 %
 
Total loans
$
73,565

 
$
72,367

 
$
1,198

2
 %
 
Total assets
$
88,879

 
$
88,559

 
$
320


 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing demand
$
30,248

 
$
29,285

 
$
963

3
 %
 
Interest-bearing demand
42,373

 
41,059

 
1,314

3
 %
 
Money market
31,560

 
38,416

 
(6,856
)
(18
)%
 
Savings
45,139

 
36,851

 
8,288

22
 %
 
Certificates of deposit
11,948

 
13,518

 
(1,570
)
(12
)%
 
Total deposits
$
161,268

 
$
159,129

 
$
2,139

1
 %
 
Performance Ratios
 
 
 
 
 
 
 
Return on average assets
1.42
%
 
1.01
%
 
 
 
 
Noninterest income to total revenue
34
%
 
36
%
 
 
 
 
Efficiency
75
%
 
77
%
 
 
 
 
(continued on following page)


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



(continued from previous page)
Six months ended June 30
  
 
  
 
Change
 
Dollars in millions, except as noted
2018

 
2017

 
$
%
 
Supplemental Noninterest Income
Information
 
 
 
 
 
 
 
Consumer services
$
553

 
$
527

 
$
26

5
 %
 
Brokerage
$
174

 
$
154

 
$
20

13
 %
 
Residential mortgage
$
181

 
$
217

 
$
(36
)
(17
)%
 
Service charges on deposits
$
324

 
$
317

 
$
7

2
 %
 
Residential Mortgage Information
 
 
 
 
 
 
 
Residential mortgage servicing statistics (in billions, except as noted) (a)
 
 
 
 
 
 
 
Serviced portfolio balance (b)
$
124

 
$
131

 
$
(7
)
(5
)%
 
Serviced portfolio acquisitions
$
4

 
$
16

 
$
(12
)
(75
)%
 
MSR asset value (b)
$
1.3

 
$
1.2

 
$
.1

8
 %
 
MSR capitalization value (in basis points) (b)
104

 
95

 
9

9
 %
 
Servicing income: (in millions)
 
 
 
 
 
 
 
Servicing fees, net (c)
$
90

 
$
96

 
$
(6
)
(6
)%
 
Mortgage servicing rights valuation, net of economic hedge
$
22