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PNC Financial Services: Pnc Reports Third Quarter Net Income Of $1.1 Billion AND $1.90 DILUTED EPS

The following excerpt is from the company's SEC filing.

Expenses well controlled, deposits grew, capital levels strong

PITTSBURGH, Oct. 14, 2015 The PNC Financial Services Group, Inc. (NYSE: PNC) today reported net income of $1.1 billion, or $1.90 per diluted common share, for the third quarter of 2015 compared with net income of $1.0 billion, or $1.88 per diluted common share, for the second quarter of 2015 and net income of $1.0 billion, or $1.79 per diluted common share, for the third quarter of 2014.

PNC had a solid third quarter, our tenth consecutive quarter of $1 billion or more in net income, reflecting consistency without the benefit of highe r interest rates, said William S. Demchak, chairman, president and chief executive officer. Expenses were down, deposits were up, and we continued to execute on our strategic priorities designed to deepen customer relationships and grow our diverse fee businesses.

Income Statement Highlights

Third quarter earnings reflected a strong contribution of noninterest income to total revenue of 45 percent and well-controlled expenses.

Net interest income of $2.1 billion for the third quarter was relatively stable with the second quarter, increasing $10 million as higher core net interest income largely driven by an additional day in the quarter was offset by lower purchase accounting accretion.

Noninterest income of $1.7 billion for the third quarter decreased $101 million, or 6 percent, compared with the second quarter primarily due to higher second quarter gains on asset sales.

Fee income declined as higher service charges on deposits, corporate service fees and consumer service fees were more than offset by lower asset management revenue reflecting a second quarter trust settlement and equity market declines, and lower residential mortgage revenue.

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PNC Reports Third Quarter Net Income of $1.1 Billion and $1.90 Diluted EPS Page 2

Noninterest expense of $2.4 billion decreased $14 million, or 1 percent, compared with the second quarter as PNC continued to focus on disciplined expense management.

Provision for credit losses was $81 million for the third quarter and $46 million in the second quarter. Overall credit quality remained relatively stable.

The effective tax rate was 20.0 percent for the third quarter reflecting tax benefits and additions to reserves, the largest components of which were a benefit of $75 million attributable to effectively settling acquired entity tax contingencies offset by additions to reserves of $10 million for various tax matters.

Balance Sheet Highlights

Loans declined $.2 billion to $205.0 billion at September 30, 2015 compared with June 30, 2015.

Total commercial lending increased $.4 billion as growth primarily in PNCs real estate business was offset by the impact of ongoing capital and liquidity management activities.

Total consumer lending decreased $.6 billion, including runoff in the non-strategic consumer loan portfolio of $.5 billion.

Overall credit quality in the third quarter remained relatively stable with the second quarter.

Nonperforming assets of $2.5 billion at September 30, 2015 decreased $.1 billion, or 3 percent, compared with June 30, 2015.

Net charge-offs were $96 million for the third quarter compared with $67 million in the second quarter, which included elevated recoveries on commercial and commercial real estate loans.

Investment securities increased $6.7 billion, or 11 percent, in the third quarter to $68.1 billion at September 30, 2015, largely funded by deposit growth.

Deposits grew $5.3 billion, or 2 percent, compared with the second quarter due to higher demand, savings and money market deposits primarily driven by commercial deposit growth.

PNCs well-positioned balance sheet remained core funded with a loans to deposits ratio of 84 percent at September 30, 2015.

PNC maintained a strong liquidity position.

The estimated Liquidity Coverage Ratio at September 30, 2015 exceeded 100 percent for both PNC and PNC Bank, N.A., above the minimum phased-in requirement of 80 percent in 2015, calculated as of month end.

PNC returned capital to shareholders through repurchases of 6.2 million common shares for $.6 billion during the third quarter and 5.9 million common shares for $.6 billion during the second quarter.

PNC maintained a strong capital position.

Transitional Basel III common equity Tier 1 capital ratio was an estimated 10.6 percent at both September 30, 2015 and June 30, 2015, calculated using the regulatory capital methodology applicable to PNC during 2015.

Pro forma fully phased-in Basel III common equity Tier 1 capital ratio was an estimated 10.1 percent at September 30, 2015 and 10.0 percent at June 30, 2015 based on the standardized approach rules.

PNC Reports Third Quarter Net Income of $1.1 Billion and $1.90 Diluted EPS Page 3

Earnings Summary

In millions, except per share data

Net income

Net income attributable to diluted common shares

Diluted earnings per common share

Average diluted common shares outstanding

Return on average assets

Return on average common equity

Book value per common share

Period end

Tangible book value per common share (non-GAAP)

Cash dividends declared per common share

The Consolidated Financial Highlights accompanying this news release include additional information regarding reconciliations of non-GAAP financial measures to reported amounts, including reconciliations of tangible book value to book value per common share and business segment income to net income. Reference to core net interest income is to total net interest income less purchase accounting accretion, which consists of scheduled accretion and excess cash recoveries, as detailed in the Consolidated Financial Highlights. Fee income refers to noninterest income in the following categories: asset management, consumer services, corporate services, residential mortgage, and service charges on deposits. Information in this news release including the financial tables is unaudited. See the notes and other information in the Consolidated Financial Highlights.

CONSOLIDATED REVENUE REVIEW

Revenue

Change

3Q15 vs

Total revenue

Total revenue for the third quarter of 2015 decreased $91 million compared with the second quarter driven by lower noninterest income reflecting the impact of higher second quarter gains on asset sales and lower asset management revenue related to a second quarter trust settlement and equity market declines. The decrease in noninterest income was partially offset by higher net interest income. Total revenue declined $66 million compared with third quarter 2014 due to lower net interest income and noninterest income.

Net interest income for the third quarter of 2015 increased $10 million compared with the second quarter and decreased $42 million compared with the third quarter of 2014. The increase over second quarter was attributable to higher core net interest income largely driven by an additional day in the quarter partially offset by lower purchase accounting accretion. In the comparison with third quarter 2014, growth in core net interest income was more than offset by lower purchase accounting

PNC Reports Third Quarter Net Income of $1.1 Billion and $1.90 Diluted EPS Page 4

accretion. The increase in core net interest income reflected higher securities balances and loan growth partially offset by lower securities and loan yields.

The net interest margin was 2.67 percent for the third quarter of 2015 compared with 2.73 percent for the second quarter of 2015 and 2.98 percent for the third quarter of 2014. The decrease in the margin compared with the second quarter was primarily due to lower benefit from purchase accounting accretion. In the third quarter 2014 comparison, the margin declined as a result of increasing the companys liquidity position, lower benefit from purchase accounting accretion, and lower loan and securities yields.

Noninterest Income

Asset management

Consumer services

Corporate services

Residential mortgage

Service charges on deposits

Other, including net securities gains

Noninterest income for the third quarter of 2015 decreased $101 million compared with the second quarter. Asset management revenue declined $40 million attributable to a second quarter trust settlement and to equity market declines. Consumer service fees grew $7 million, including higher brokerage fees. Corporate service fees increased $15 million reflecting strong merger and acquisition advisory fees. Residential mortgage banking noninterest income decreased $39 million as a result of lower loan sales revenue and lower net hedging gains on mortgage servicing rights. Service charges on deposits grew $16 million in part from seasonally higher customer activity. Other noninterest income declined $60 million primarily due to lower gains on the sale of Visa Class B common shares of $43 million for the third quarter compared with $79 million in the second quarter as well as lower commercial mortgage loans held for sale revenue and net losses on sales of securities.

Noninterest income for the third quarter of 2015 decreased $24 million compared with the third quarter of 2014. Asset management revenue declined $35 million as a result of elevated third quarter 2014 revenue attributable to PNCs investment in BlackRock partially offset by fee growth. Strong fee income growth from higher customer activity was reflected in higher consumer and corporate service fees. Residential mortgage banking noninterest income decreased primarily due to lower loan sales revenue. Other noninterest income for third quarter 2014 included gains on sales of Visa Class B common shares of $57 million.

PNC Reports Third Quarter Net Income of $1.1 Billion and $1.90 Diluted EPS Page 5

CONSOLIDATED EXPENSE REVIEW

Noninterest Expense

Personnel

Occupancy

Equipment

Marketing

Noninterest expense decreased in both comparisons as PNC continued to focus on disciplined expense management. The decline of $14 million compared with the second quarter was driven by a decrease in other expense reflecting lower expense related to third party services. Higher personnel expense included an increase in the cost of medical benefits.

Noninterest expense for the third quarter of 2015 declined $5 million compared with the third quarter of 2014 reflecting lower expense related to third party services and the impact of a change in application of historic tax credits in second quarter 2015 previously recorded as a reduction to income tax expense. Decreases were somewhat offset by investments in technology and business infrastructure and higher compensation costs associated with higher business activity.

The effective tax rate was 20.0 percent for the third quarter of 2015, 28.2 percent for the second quarter of 2015 and 27.4 percent for the third quarter of 2014. Income tax expense for third quarter 2015 reflected tax benefits and additions to reserves, the largest components of which were a benefit of $75 million attributable to effectively settling acquired entity tax contingencies offset by additions to reserves of $10 million for various tax matters. The higher second quarter effective tax rate largely resulted from historic tax credits recorded as reductions to the associated investment asset balances, while in prior periods these credits were recorded as a reduction of income tax expense.

CONSOLIDATED BALANCE SHEET REVIEW

Total assets were $362.1 billion at September 30, 2015 compared with $353.9 billion at June 30, 2015 and $334.4 billion at September 30, 2014. Balance sheet growth of 2 percent compared with second quarter end was primarily reflected in higher investment securities balances and deposit growth. Assets grew 8 percent compared with September 30, 2014 as a result of higher investment securities, higher deposit balances maintained with the Federal Reserve Bank, and loan growth.

PNC Reports Third Quarter Net Income of $1.1 Billion and $1.90 Diluted EPS Page 6

9/30/15 vs

In billions

6/30/2015

9/30/2014

6/30/15

9/30/14

Commercial lending

Consumer lending

Total loans

For the quarter ended:

Average loans

Total loans decreased $.2 billion as of September 30, 2015 compared with June 30, 2015. Commercial lending balances increased $.4 billion during the third quarter as growth primarily in PNCs real estate business was offset by the impact of ongoing capital and liquidity management activities. Consumer lending declined $.6 billion reflecting runoff of $.5 billion in the non-strategic portfolio of residential mortgage and brokered home equity loans. Additionally, lower education loans were partially offset by growth in credit card loans. Average loans declined $.6 billion in the third quarter of 2015 compared with the second quarter driven by lower average consumer loans of $.7 billion partially offset by an increase in average commercial lending balances of $.1 billion. Third quarter 2015 period end and average loans increased $4.1 billion and $5.0 billion, respectively, compared with third quarter 2014 due to commercial and commercial real estate loan growth partially offset by lower consumer loans.

Investment Securities

At quarter end

Average for the quarter ended

Investment securities balances at September 30, 2015 increased $6.7 billion compared with June 30, 2015 and average balances for the third quarter increased $2.6 billion compared with the second quarter. Portfolio purchases were substantially funded by deposit growth and were primarily agency residential mortgage-backed securities and U.S. Treasury securities. Third quarter 2015 period end and average investment securities increased $13.1 billion and $7.7 billion, respectively, compared with third quarter 2014. The available for sale investment securities balance included a net unrealized pretax gain of $.9 billion at September 30, 2015 compared with $.8 billion at June 30, 2015 and $1.0 billion at September 30, 2014, representing the difference between fair value and amortized cost.

Interest-earning deposits with banks of $34.2 billion at September 30, 2015 increased $.3 billion compared with June 30, 2015. Balances averaged $37.3 billion during the third quarter of 2015, an increase of $4.9 billion over second quarter 2015. Third quarter 2015 period end and average interest-earning deposits with banks increased $8.0 billion and $15.2 billion, respectively, compared with third quarter 2014. Increases reflected higher balances maintained on deposit with the Federal

PNC Reports Third Quarter Net Income of $1.1 Billion and $1.90 Diluted EPS Page 7

Reserve Bank in part due to regulatory short-term liquidity standards phased in starting January 1, 2015 and to deposit growth.

Other assets of $27.3 billion at September 30, 2015 increased $3.3 billion, or 14 percent, over June 30, 2015 due in part to an increase in trade date securities sales. An increase in trade date securities purchases contributed to a higher balance of other liabilities, which increased $4.0 billion at September 30, 2015 compared with June 30, 2015.

Transaction deposits

Other deposits

Total deposits

Average deposits

Total deposits at September 30, 2015 grew $5.3 billion compared with June 30, 2015 due to higher demand, savings and money market deposits primarily driven by commercial deposit growth. Average deposits increased $5.6 billion in the third quarter of 2015 compared with the second quarter due to higher money market and demand deposits. Third quarter 2015 period end and average deposits increased $18.7 billion and $19.6 billion, respectively, compared with third quarter 2014 from overall strong growth in demand and money market deposits.

Borrowed Funds

Borrowed funds at September 30, 2015 decreased $1.6 billion compared with June 30, 2015 primarily from lower commercial paper balances partially offset by the issuance of senior bank notes in the third quarter, in part due to actions to enhance PNCs funding structure in light of regulatory liquidity standards and a rating agency methodology change. Average borrowed funds increased $.3 billion in third quarter 2015 compared with the second quarter largely attributable to the full quarter impact of senior bank notes issued in the second quarter partially offset by lower commercial paper. Third quarter 2015 period end and average borrowed funds increased $4.4 billion and $8.2 billion, respectively, compared with third quarter 2014 due to higher bank borrowings and bank notes and senior debt partially offset by lower commercial paper.

PNC Reports Third Quarter Net Income of $1.1 Billion and $1.90 Diluted EPS Page 8

Capital

Common shareholders equity

Ratios estimated

PNC maintained a strong capital position. Common shareholders equity increased compared with second quarter end primarily due to growth in retained earnings partially offset by share repurchases. The transitional Basel III common equity Tier 1 capital ratios were calculated using the regulatory capital methodologies, including related phase-ins, applicable to PNC during 2015 and 2014. The Basel III standardized approach took effect on January 1, 2015. For 2014 PNC followed the methodology that became effective on January 1, 2014 for advanced approaches banks. The pro forma ratios were calculated based on the standardized approach. See Capital Ratios in the Consolidated Financial Highlights.

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

On October 1, 2015, the PNC board of directors declared a quarterly common stock cash dividend of 51 cents per share payable on November 5, 2015.

CREDIT QUALITY REVIEW

Credit Quality

At or for the quarter...


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