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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________________________
FORM 10-Q
______________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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)
___________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
 Name of Each Exchange
    on Which Registered    
Common Stock, par value $5.00
PNC
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
PNC 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
PNC Q
New York Stock Exchange

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 every Interactive Data File required to be submitted 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 such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
  
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
    Yes    No  
As of April 16, 2020, there were 424,260,434 shares of the registrant’s common stock ($5 par value) outstanding.
 


THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to First Quarter 2020 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.
22-40, 53-64 and 94-99
Item 4. Controls and Procedures.
 


THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to First Quarter 2020 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


THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to First Quarter 2020 Form 10-Q (continued)

 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE
 
Table
Description
Page
33
34
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
77
78
79
80




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 2019 Annual Report on Form 10-K (2019 Form 10-K). 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 2019 Form 10-K; Item 1A Risk Factors included in this Report and our 2019 Form 10-K; and the Commitments and Legal Proceedings Notes of the Notes To Consolidated Financial Statements included in Item 1 of this Report and Item 8 of our 2019 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 2019 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
March 31
 
2020
2019
 
Financial Results (a)
 
 
 
Revenue
 
 
 
Net interest income
$
2,511

$
2,475

 
Noninterest income
2,006

1,811

 
Total revenue
4,517

4,286

 
Provision for credit losses
914

189

 
Noninterest expense
2,543

2,578

 
Income before income taxes and noncontrolling interests
$
1,060

$
1,519

 
Net income
$
915

$
1,271

 
Less:
 
 
 
Net income attributable to noncontrolling interests
7

10

 
Preferred stock dividends
63

63

 
Preferred stock discount accretion and redemptions
1

1

 
Net income attributable to common shareholders
844

1,197

 
Less:
 
 
 
Dividends and undistributed earnings allocated to participating securities
4

5

 
Impact of BlackRock earnings per share dilution
1

3

 
Net income attributable to diluted common shares
$
839

$
1,189

 
Diluted earnings per common share
$
1.95

$
2.61

 
Cash dividends declared per common share
$
1.15

$
.95

 
Effective tax rate (b)
13.7
%
16.3
%
 
Performance Ratios
 
 
 
Net interest margin (c)
2.84
%
2.98
%
 
Noninterest income to total revenue
44
%
42
%
 
Efficiency
56
%
60
%
 
Return on:
 
 
 
Average common shareholders’ equity
7.51
%
11.13
%
 
Average assets
.89
%
1.34
%
 
(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.
(c)
Net interest margin is the total yield on interest-earning assets minus the total rate on interest-bearing liabilities and includes the benefit from use of noninterest-bearing sources. To provide more meaningful comparisons of net interest margins, we use net interest income on a taxable-equivalent basis in calculating average yields used in the calculation of 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
March 31
2020

December 31
2019

March 31
2019

 
Balance Sheet Data (dollars in millions, except per share data)
 
 
 
 
Assets
$
445,493

$
410,295

$
392,837

 
Loans
$
264,643

$
239,843

$
232,293

 
Allowance for credit losses - loans and leases (b)



$
3,944

$
2,742

$
2,692

 
Interest-earning deposits with banks (c)
$
19,986

$
23,413

$
15,261

 
Investment securities (d)
$
90,546

$
86,824

$
83,869

 
Loans held for sale
$
1,693

$
1,083

$
686

 
Equity investments (e)
$
13,205

$
13,734

$
12,567

 
Mortgage servicing rights
$
1,082

$
1,644

$
1,812

 
Goodwill
$
9,233

$
9,233

$
9,218

 
Other assets (d)
$
41,556

$
32,202

$
34,761

 
Noninterest-bearing deposits
$
81,614

$
72,779

$
71,606

 
Interest-bearing deposits
$
223,590

$
215,761

$
199,615

 
Total deposits
$
305,204

$
288,540

$
271,221

 
Borrowed funds
$
73,399

$
60,263

$
59,860

 
Allowance for credit losses - unfunded lending related commitments (b)

$
450

$
318

$
279

 
Total shareholders’ equity
$
49,263

$
49,314

$
48,536

 
Common shareholders’ equity
$
45,269

$
45,321

$
44,546

 
Accumulated other comprehensive income (loss)
$
2,518

$
799

$
(5
)
 
Book value per common share
$
106.70

$
104.59

$
98.47

 
Period-end common shares outstanding (in millions)
424

433

452

 
Loans to deposits
87
%
83
%
86
%
 
Common shareholders’ equity to total assets
10.2
%
11.0
%
11.3
%
 
Client Assets (in billions)
 
 
 
 
Discretionary client assets under management
$
136

$
154

$
158

 
Nondiscretionary client assets under administration
128

143

130

 
Total client assets under administration
264

297

288

 
Brokerage account client assets
49

54

51

 
Total client assets
$
313

$
351

$
339

 
Basel III Capital Ratios (f) (g)
 
 
 
 
Common equity Tier 1
9.4
%
9.5
%
9.8
%
 
Common equity Tier 1 fully implemented (h)
9.2
%
N/A

N/A

 
Tier 1 risk-based
10.5
%
10.7
%
10.9
%
 
Total capital risk-based (i)
12.6
%
12.7
%
13.0
%
 
Leverage
9.5
%
9.1
%
9.6
%
 
Supplementary leverage
7.9
%
7.6
%
8.0
%
 
Asset Quality
 
 
 
 
Nonperforming loans to total loans
.62
%
.68
%
.71
%
 
Nonperforming assets to total loans, OREO and foreclosed assets
.66
%
.73
%
.77
%
 
Nonperforming assets to total assets
.39
%
.43
%
.45
%
 
Net charge-offs to average loans (for the three months ended) (annualized)
.35
%
.35
%
.24
%
 
Allowance for credit losses - loans and leases to total loans (j)

1.49
%
1.14
%
1.16
%
 
Allowance for credit losses to total loans (k)
1.66
%
1.28
%
1.28
%
 
Allowance for credit losses - loans and leases to nonperforming loans (j)


240
%
168
%
163
%
 
Accruing loans past due 90 days or more (in millions)
$
534

$
585

$
590

 
(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)
Amount at March 31, 2020 reflects the impact of adopting Accounting Standards Update 2016-13 - Financial Instruments - Credit Losses, which is commonly referred to as the Current Expected Credit Losses (CECL) standard and our transition from an incurred loss methodology for these reserves to an expected credit loss methodology. Prior period amounts represent Allowance for Loan and Lease Losses (ALLL) under the incurred loss methodology. See Note 1 Accounting Policies of this Report for additional information related to our adoption of this standard.
(c)
Amounts include balances held with the Federal Reserve Bank of Cleveland (Federal Reserve Bank) of $19.6 billion, $23.2 billion and $15.0 billion as of March 31, 2020, December 31, 2019 and March 31, 2019, respectively.
(d)
Amounts as of March 31, 2020 are net of the related Allowance for Credit Losses (ACL) recorded in accordance with the adoption of the CECL standard, which totaled $2 million and $19 million for Investment securities and Other assets, respectively. See Note 1 Accounting Policies of this Report for additional detail related to our adoption of this standard.

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




(e)
Amounts include our equity interest in BlackRock, Inc.
(f)
All ratios are calculated using the regulatory capital methodology applicable to PNC during each period presented and calculated based on the standardized approach. 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 2019 Form 10-K.
(g)
The March 31, 2020 ratios are calculated to reflect PNC's election to adopt the CECL optional five-year transition provision, unless noted differently.
(h)
The March 31, 2020 ratio is calculated to reflect the full impact of CECL and excludes the benefits of phase-ins under the optional transition provision.
(i)
The 2020 and 2019 Basel III Total risk-based capital ratios include nonqualifying trust preferred capital securities of $40 million and $60 million, respectively, that are subject to a phase-out period that runs through 2021.
(j)
Prior period ratios are calculated with ALLL as the numerator under the incurred loss methodology prior to the adoption of the CECL standard.
(k)
Calculated as the ACL for loans and leases and the ACL for unfunded lending related commitments divided by total loans.

EXECUTIVE SUMMARY
Headquartered in Pittsburgh, Pennsylvania, we are one of the largest diversified financial services companies in the United States (U.S.). 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 retail branch network is located primarily in markets across the Mid-Atlantic, Midwest and Southeast. We also have strategic international offices in four countries outside the U.S.

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 serve our customers and expand and deepen 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 customers and business investment, maintain appropriate capital in light of economic conditions, the Basel III framework, and other regulatory expectations, and return excess capital to shareholders. 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 2019 Form 10-K.

Economic Environment
The coronavirus (COVID-19) outbreak and public health response to contain it have resulted in recessionary economic and financial market conditions as of the end of the first quarter that did not exist at the beginning of the quarter. These conditions have worsened since the end of the first quarter. In response to these evolving conditions, the Federal Reserve reduced the federal funds rate 1.5 percentage points to 0.00% to 0.25% in March 2020. The recession that has started in the U.S. as a result of government-mandated closures and stay at home orders is significantly impacting the U.S. labor market, consumer spending, business investment and profitability. As a result, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act), the largest economic stimulus package in the nation’s history in an effort to lessen the impact of COVID-19 on consumers and businesses.

PNC is committed to putting our resources to work to support our customers and the broader financial system. We are working to provide relief and flexibility to our customers through a variety of solutions during these uncertain times, including fee waivers, loan modifications, payment deferrals, and Paycheck Protection Program (PPP) loans under the CARES Act. For commercial lending, we are offering emergency relief for small and medium-sized business loans, including those being provided for commercial mortgage clients pursuant to the federally enacted CARES Act. For example, we are granting short-term loan modifications to our commercial clients, primarily in the form of principal and/or interest deferrals. We are analyzing and making decisions on these modifications based on each individual borrower’s situation. In addition, in April and May, we registered more than 70,500 customer applications with the SBA under the PPP, totaling $14 billion, and we will continue to submit completed applications for as long as the SBA is accepting them from banks such as PNC.


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



We are also granting short-term loan modifications for our consumer loan customers through extensions, deferrals and forbearance and providing relief from deposit-related fees. Through April 30, 2020, we have completed more than 156,000 consumer requests on loans totaling $9.3 billion; granted more than $2.6 million in emergency personal loans; and waived more than $8.1 million in deposit fees. In addition, we have halted involuntary auto repossessions and mortgage foreclosures and while we will continue to monitor the situation, we plan to continue this practice for the foreseeable future.

Our branch operations have been temporarily modified as we prioritize the safety and well-being of our customers and employees.  A majority of our branch locations remain open, with equipped branches providing drive-up services only as well as other services through appointment only.  Furthermore, non-teller digital, and call center channels have experienced elevated customer activity.

See the Recent Regulatory Developments section of this Report for additional detail on the CARES Act and other governmental responses to the COVID-19 outbreak and its economic and financial impacts. See also Risk Factors in Part II, Item 1A of this Report for a description of the risks associated with the current situation.

Income Statement Highlights
Net income of $915 million, or $1.95 per diluted common share for the first quarter of 2020 decreased $356 million, or 28%, compared to $1.3 billion, or $2.61 per diluted common share, for the first quarter of 2019.
Total revenue increased $231 million, or 5%, to $4.5 billion.
Net interest income of $2.5 billion increased $36 million, or 1%.
Net interest margin decreased to 2.84% compared to 2.98% for the first quarter of 2019.
Noninterest income increased $195 million, or 11%, to $2.0 billion.
Provision for credit losses of $914 million, which was calculated under the Current Expected Credit Losses (CECL) accounting standard effective January 1, 2020, increased $725 million compared to the first quarter of 2019 reflecting the change in methodology together with the significant economic impact of COVID-19 and loan growth.
Noninterest expense decreased $35 million, or 1%, to $2.5 billion.
Earnings per diluted common share decreased primarily due to lower net income partially offset by lower average common shares outstanding due to share repurchases.

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

Balance Sheet Highlights
Our balance sheet was strong and well positioned at March 31, 2020 and December 31, 2019. In comparison to December 31, 2019:
Total assets increased $35.2 billion, or 9%, to $445.5 billion.
Total loans increased $24.8 billion, or 10%, to $264.6 billion.
Total commercial lending grew $24.1 billion, or 15%, to $184.7 billion, reflecting higher utilization of loan commitments near quarter end driven by the economic impact of COVID-19.
Total consumer lending increased $.7 billion, or 1%, to $79.9 billion.
Investment securities increased $3.7 billion, or 4%, to $90.5 billion.
Interest-earning deposits with banks, primarily with the Federal Reserve Bank, decreased $3.4 billion to $20.0 billion.
Total deposits increased $16.7 billion, or 6%, to $305.2 billion as higher commercial deposits near quarter end reflected liquidity maintained by customers due to the economic impact of COVID-19.
Borrowed funds increased $13.1 billion, or 22%, to $73.4 billion in part related to enhanced liquidity to meet customer needs caused by the economic impact of COVID-19.

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

Credit Quality Highlights
Credit quality metrics remained strong in the first quarter of 2020 entering a challenging environment.
At March 31, 2020 compared to December 31, 2019:
Nonperforming assets of $1.8 billion increased $3 million.
Overall loan delinquencies of $1.5 billion decreased $21 million, or 1%.
Net charge-offs were $212 million, or .35% of average loans on annualized basis, in the first quarter of 2020 compared to $136 million, or .24%, for the first quarter of 2019.
The allowance for credit losses of $4.4 billion to total loans was 1.66% at March 31, 2020, and reflects the January 1, 2020 transition adjustment of $.6 billion for the adoption of the CECL accounting standard.

For additional detail, including the adoption of the CECL accounting standard and the significant economic impact of COVID-19, see the Credit Risk Management portion of the Risk Management section of this Financial Review.

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




Capital Highlights
We maintained a strong capital position and continued to return capital to shareholders.
The Basel III common equity Tier 1 (CET1) capital ratio was 9.4% at March 31, 2020 and 9.5% at December 31, 2019.
The March 31, 2020 ratio reflects 2019 Tailoring Rules changes and our election of a five-year transition provision that delays CECL's estimated impact on CET1 capital, as defined by the rule. CECL's estimated impact on CET1 capital is the change in retained earnings at adoption plus or minus 25% of the change in CECL ACL at the balance sheet date compared to CECL ACL at transition. The estimated CECL impact is added to CET1 through December 31, 2021, then phased-out over the following three years.
Common shareholders' equity was $45.3 billion at both March 31, 2020 and December 31, 2019.
In the first quarter of 2020, we returned $1.9 billion of capital to shareholders through repurchases of 10.1 million common shares for $1.4 billion and dividends on common shares of $.5 billion.
We announced on March 16, 2020 a temporary suspension of our common stock share repurchase program through June 30, 2020 in conjunction with the Federal Reserve's effort to support the U.S. economy during the COVID-19 outbreak.
On April 2, 2020, the PNC board of directors declared a quarterly cash dividend on common stock of $1.15 per share effective with the May 5, 2020 dividend payment date.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for more detail on our 2020 liquidity and capital actions as well as our capital ratios.

PNC’s ability to take certain capital actions, including returning capital to shareholders, is subject to review by the Federal Reserve Board as part of PNC’s comprehensive capital plan for the applicable period in connection with the Federal Reserve Board’s Comprehensive Capital Analysis and Review (CCAR) process. During the third quarter of 2020, the Federal Reserve’s revised capital plan rule permits PNC to make capital distributions in an amount equal to the average quarterly amount that was approved by the Federal Reserve for the 2019 capital plan year (July 1, 2019 through June 30, 2020). Once the Federal Reserve's new stress capital buffer rules become effective on October 1, 2020, our ability to take certain capital actions, including returning capital to shareholders, will be subject to PNC meeting or exceeding a stress capital buffer established by the Federal Reserve Board as part of the annual CCAR process. For additional information, see the Recent Regulatory Developments section in this Report and the Supervision and Regulation section in Item 1 Business of our 2019 Form 10-K.

Business Outlook
Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory contingencies. These statements are based on our view that:
Our baseline economic forecast is for a severe but short recession in the first half of 2020. Restrictions on movement because of the COVID-19 pandemic have led to a substantial drop in consumer spending and a steep drop in output as many businesses are closed or operating at significantly reduced levels, and many workers are unable to get to their jobs. PNC expects a significant contraction in U.S. real GDP and steep job losses over the next few months and a large increase in the unemployment rate through mid-2020.
In the baseline forecast, economic growth resumes in the third quarter as businesses re-open and consumers start to spend again. Fiscal stimulus and extremely low interest rates support the recovery. Real GDP surpasses its pre-recession peak in the second half of 2021, and growth is well above its long-term trend through 2022.
The baseline forecast assumes that the Federal Open Market Committee keeps the federal funds rate in its current range of 0.00% to 0.25% into 2023.

Given the unprecedented circumstances and fluidity of the current environment, our forward-looking statements are subject to potentially substantial shifts in risk conditions, which accordingly, could alter our expected results materially. Past performance trends are not necessarily predictive of future performance in the current economic environment.

For the second quarter of 2020 compared to the first quarter of 2020, we expect:
Average loans to be up approximately 10% to 15%;
Net interest income to be stable;
Noninterest income to be down approximately 15% to 20%;
Noninterest expense to be stable to down; and
Net charge-offs to be between $250 million and $350 million.

Average commercial loans are expected to grow due to substantial PPP loans and the full quarter impact of ending loan balances at March 31, 2020, which resulted from higher utilization. Average consumer loans are expected to be stable with first quarter of 2020.

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



Noninterest income is expected to be down, reflecting the elevated residential mortgage servicing rights and security gains we generated in the first quarter in addition to some general softening in fee categories in the second quarter, reflective of the current economic environment. We expect to continue to waive certain consumer services fees during the second quarter, which will also contribute to the decline.
For the full year 2020, we expect total revenue and noninterest expense to each be down between 5% and 10%.

See the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in this Report and our 2019 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 first quarter of 2020 was $915 million, or $1.95 per diluted common share, a decrease of $356 million, or 28%, compared to $1.3 billion, or $2.61 per diluted common share, for the first quarter of 2019. The decrease was primarily driven by a $725 million increase in the provision for credit losses, which was calculated under the CECL accounting standard effective January 1, 2020 and reflects the change in methodology together with the significant economic impact of COVID-19 and loan growth, partially offset by an increase in revenue of $231 million, or 5% resulting from higher noninterest income and net interest income.
Net Interest Income
Table 2: Summarized Average Balances and Net Interest Income (a)
 
 
2020

2019
 
Three months ended March 31
Dollars in millions
 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
 
$
84,422

 
2.78
%
 
$
588

 
$
82,318

 
3.05
%
 
$
627

 
Loans
 
243,572

 
4.08
%
 
2,496

 
228,545

 
4.61
%
 
2,622

 
Interest-earning deposits with banks
 
17,569

 
1.27
%
 
56

 
15,017

 
2.43
%
 
91

 
Other
 
9,468

 
3.51
%
 
82

 
11,068

 
4.14
%
 
115

 
Total interest-earning assets/interest income
 
$
355,031

 
3.62
%
 
3,222

 
$
336,948

 
4.11
%
 
3,455

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
215,336

 
.70
%
 
375

 
$
195,816

 
.98
%
 
472

 
Borrowed funds
 
57,188

 
2.18
%
 
314

 
59,783

 
3.21
%
 
481

 
Total interest-bearing liabilities/interest expense
 
$
272,524

 
1.00
%
 
689

 
$
255,599

 
1.50
%
 
953

 
Net interest margin/income (Non-GAAP)
 
 
 
2.84
%
 
2,533

 
 
 
2.98
%
 
2,502

 
Taxable-equivalent adjustments
 
 
 
 
 
(22
)
 
 
 
 
 
(27
)
 
Net interest income (GAAP)
 
 
 
 
 
$
2,511

 
 
 
 
 
$
2,475

 
(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 in Item 1 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 $36 million, or 1%, for the first quarter of 2020 compared with the first quarter of 2019. The increase was driven by lower rates on borrowings and deposits, higher loan and securities balances and one additional day in the first quarter of 2020 substantially offset by lower asset yields due to the decrease in interest rates. Net interest margin decreased 14 basis points reflecting the impact of lower interest rates.

Average investment securities increased $2.1 billion, or 3%. The increase was due to net purchase activity of agency residential mortgage-backed securities of $5.0 billion and commercial mortgage-backed securities of $.8 billion, partially offset by decreases of

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




$2.3 billion of U.S. Treasury and government agency securities, $.9 billion of other securities, and $.5 billion of both nonagency residential mortgage-backed and asset-backed securities.

Average investment securities represented 24% of average interest-earning assets for both periods in the comparison.

Average loans grew $15.0 billion, or 7%, driven by an increase in both commercial and consumer lending. Average commercial lending increased by $9.3 billion, or 6%, to $164.0 billion reflecting loan growth and higher utilization of loan commitments at the end of the first quarter of 2020 driven by the economic impact of COVID-19 on customer liquidity needs.

Average consumer lending increased $5.7 billion, or 8%. Growth in residential mortgage, auto, credit card, and unsecured installment loans was partially offset by declines in home equity and education loans due to runoff of brokered home equity and government guaranteed education loans. Average loans represented 69% of average interest-earning assets for the first quarter of 2020 compared to 68% for the first quarter of 2019.

Average interest-earning deposits with banks increased $2.6 billion, reflecting higher average balances held with the Federal Reserve Bank.

Average interest-bearing deposits grew $19.5 billion, or 10%, reflecting overall deposit and customer growth. The increase includes a shift from money market deposits to relationship-based savings products as well as growth in both consumer and commercial deposits. In total, average interest-bearing deposits increased to 79% of average interest-bearing liabilities compared to 77% for the first quarter of 2019.

Average borrowed funds decreased by $2.6 billion, or 4%, primarily due to a decline in Federal Home Loan Bank (FHLB) borrowings of $8.0 billion, partially offset by an increase in bank notes and senior debt of $4.6 billion and an increase in other borrowed funds of $.8 billion driven by federal funds purchased and repurchase agreements.

Further details regarding average loans and deposits are included in the Business Segments Review section of this Financial Review.
Noninterest Income
Table 3: Noninterest Income
 
 
Three months ended March 31

 
 
 
 
 
 
Change
 
Dollars in millions
 
2020


2019

 
$
 
%
 
Noninterest income
 
 
 
 
 
 
 
 
 
Asset management
 
$
382

 
$
437

 
$
(55
)
 
(13
)%
 
Consumer services
 
377

 
371

 
6

 
2
 %
 
Corporate services
 
526

 
462

 
64

 
14
 %
 
Residential mortgage
 
210

 
65

 
145

 
223
 %
 
Service charges on deposits
 
168

 
168

 

 

 
Other
 
343

 
308

 
35

 
11
 %
 
Total noninterest income
 
$
2,006


$
1,811


$
195

 
11
 %
 
 
Noninterest income as a percentage of total revenue was 44% for the first quarter of 2020 compared to 42% for the same period in 2019.

Asset management revenue declined due to lower earnings from our equity investment in BlackRock, including the impact of BlackRock's charitable contribution in the first quarter of 2020, and the impact on fees of PNC's divestiture activity in 2019. PNC's discretionary client assets under management decreased to $136 billion at March 31, 2020 compared to $158 billion at March 31, 2019 as a result of declines in the equity markets and our fourth quarter 2019 sale of PNC's proprietary mutual funds.

Growth in consumer service revenue resulted from increases in debit card and brokerage fees, partially offset by increased credit card rewards.

Corporate services revenue increased primarily due to higher treasury management product revenue, a higher benefit from commercial mortgage servicing rights valuation, net of economic hedge, and higher merger and acquisition advisory fees.

Residential mortgage revenue increased due to higher results from residential mortgage servicing rights valuation, net of economic hedge, and higher loan sales revenue, partially offset by lower servicing fees.


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



The increase in other noninterest income was primarily attributable to higher net securities gains partially offset by negative private equity valuation adjustments related to the economic impact of COVID-19.

Provision For Credit Losses
The provision for credit losses increased $725 million to $914 million in the first quarter of 2020 compared to $189 million in the first quarter of 2019. The provision for the first quarter of 2020 was calculated under the CECL accounting standard effective January 1, 2020 and the increase compared to the first quarter 2019 was due to the change in methodology together with the significant economic impact of COVID-19 and loan growth.

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

Noninterest Expense

Table 4: Noninterest Expense
 
 
Three months ended March 31
 
 
 
 
 
 
 
Change
 
Dollars in millions
 
2020


2019

 
$
 
%
 
Noninterest expense
 
 
 
 
 
 
 
 
 
Personnel
 
$
1,369

 
$
1,414

 
$
(45
)
 
(3
)%
 
Occupancy
 
207

 
215

 
(8
)
 
(4
)%
 
Equipment
 
287

 
273

 
14

 
5
 %
 
Marketing
 
58

 
65

 
(7
)
 
(11
)%
 
Other
 
622

 
611

 
11

 
2
 %
 
Total noninterest expense
 
$
2,543


$
2,578


$
(35
)
 
(1
)%
 
 
Noninterest expense decreased primarily due to lower personnel expense reflecting lower incentive compensation partially offset by business growth.

Effective Income Tax Rate

The effective income tax rate decreased to 13.7% in the first quarter of 2020 compared to 16.3% in the first quarter of 2019 primarily due to the benefit from resolution of certain tax matters and the impact of lower pretax earnings in the first quarter 2020.

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




CONSOLIDATED BALANCE SHEET REVIEW
Table 5: Summarized Balance Sheet Data
 
March 31

 
December 31

 
Change
 
Dollars in millions
2020

 
2019

 
$
%
 
Assets
 
 
 
 
 
 
 
Interest-earning deposits with banks
$
19,986

 
$
23,413

 
$
(3,427
)
(15
)%
 
Loans held for sale
1,693

 
1,083

 
610

56
 %
 
Investment securities (a)
90,546

 
86,824

 
3,722

4
 %
 
Loans
264,643

 
239,843

 
24,800

10
 %
 
Allowance for credit losses - loans and leases (b)
(3,944
)
 
(2,742
)
 
(1,202
)
(44
)%
 
Mortgage servicing rights
1,082

 
1,644

 
(562
)
(34
)%
 
Goodwill
9,233

 
9,233

 


 
Other (a)
62,254

 
50,997

 
11,257

22
 %
 
Total assets
$
445,493

 
$
410,295

 
$
35,198

9
 %
 
Liabilities
 
 
 
 




 
Deposits
$
305,204

 
$
288,540

 
$
16,664

6
 %
 
Borrowed funds
73,399

 
60,263

 
13,136

22
 %
 
Allowance for credit losses - unfunded lending related commitments (b)
450

 
318

 
132

42
 %
 
Other
17,150

 
11,831

 
5,319

45
 %
 
Total liabilities
396,203

 
360,952

 
35,251

10
 %
 
Equity
 
 
 
 




 
Total shareholders’ equity
49,263

 
49,314

 
(51
)

 
Noncontrolling interests
27

 
29

 
(2
)
(7
)%
 
Total equity
49,290

 
49,343

 
(53
)

 
Total liabilities and equity
$
445,493

 
$
410,295

 
$
35,198

9
 %
 
(a)
Amount as of March 31, 2020 is net of the related Allowance for Credit Losses recorded in accordance with the adoption of the CECL accounting standard. Refer to Note 1 Accounting Policies in this Report for additional detail on the adoption of this standard.
(b)
Amounts as of March 31, 2020 reflect the impact of adopting the CECL accounting standard and our transition from an incurred loss methodology for these reserves to an expected credit loss methodology. Prior period amounts represent Allowance for Loan and Lease losses (ALLL) under the incurred loss methodology. Refer to Note 1 Accounting Policies in this Report for additional detail on the adoption of this standard.

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

Our balance sheet was strong and well positioned at both March 31, 2020 and December 31, 2019.
Total assets increased driven by loan growth, higher other assets due to timing of unsettled securities sales at quarter end and an increase in derivative values, and higher investment securities;
Total liabilities increased due to deposit growth and higher borrowed funds, and higher other liabilities due to timing of unsettled securities purchases at quarter end and higher derivative values;
Total equity decreased due to higher accumulated other comprehensive income (AOCI) and net income more than offset by share repurchases and dividends and the day-one effect of adopting the CECL accounting standard.

The allowance for credit losses totaled $4.4 billion at March 31, 2020, an increase of $1.3 billion since December 31, 2019. The increase was attributable to the $.6 billion day-one CECL transition adjustment and the $.9 billion provision for credit losses partially offset by net charge-offs of $.2 billion. The provision for credit losses reflects the change in methodology together with the significant economic impact of COVID-19 and loan growth.

The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and regulatory compliance is included in the Liquidity and Capital Management portion of the Risk Management section in this Financial Review and in Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements included in our 2019 Form 10-K.

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



Loans
Table 6: Loans
 
March 31

 
December 31

 
Change
 
Dollars in millions
2020

 
2019

 
$
%
 
Commercial lending
 
 
 
 
 
 
 
Commercial
$
149,131

 
$
125,337

 
$
23,794

19
 %
 
Commercial real estate
28,544

 
28,110

 
434

2
 %
 
Equipment lease financing
7,061

 
7,155

 
(94
)
(1
)%
 
Total commercial lending
184,736

 
160,602

 
24,134

15
 %
 
Consumer lending
 
 
 
 




 
Home equity
25,081

 
25,085

 
(4
)

 
Residential real estate
22,250

 
21,821

 
429

2
 %
 
Automobile
17,194

 
16,754

 
440

3
 %
 
Credit card
7,132

 
7,308

 
(176
)
(2
)%
 
Education
3,247

 
3,336

 
(89
)
(3
)%
 
Other consumer
5,003

 
4,937

 
66

1
 %
 
Total consumer lending
79,907

 
79,241

 
666

1
 %
 
Total loans
$
264,643

 
$
239,843

 
$
24,800

10
 %
 

Commercial lending increased reflecting broad-based growth across our Corporate & Institutional Banking segment, including higher utilization of loan commitments, primarily driven by the economic impact of COVID-19.

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

Consumer lending balances increased as growth in auto, residential real estate and unsecured installment loans was partially offset by lower credit card and education loans.

The growth in auto loans reflected higher indirect auto loans from continued new loan originations and expansion into franchised dealers in new markets. Residential real estate loans increased primarily from originations of nonconforming loans, which are loans that do not meet agency standards as a result of exceeding agency conforming loan limits.

Credit card balances declined due to lower consumer spending, both seasonally and due to the economic impact of COVID-19. Education loans declined primarily due to continued runoff of the government guaranteed education loan portfolio.

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

For additional information regarding our loan portfolio see Note 1 Accounting Policies and Note 3 Loans in the Notes To Consolidated Financial Statements included in this Report.

Investment Securities

Investment securities of $90.5 billion at March 31, 2020 increased $3.7 billion, or 4%, compared to December 31, 2019, driven primarily by an increase in the fair value of U.S. Treasury and agency residential mortgage-backed securities due to a decline in market interest rates and net purchases of agency residential mortgage-backed securities, non-agency commercial mortgage-backed securities, asset-backed securities, and other debt securities.

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. Effective January 1, 2020, upon the adoption of ASU 2019-04, $16.2 billion of debt securities were transferred from held to maturity to available for sale. See further discussion in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Item 1 of this Report.

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




Table 7: Investment Securities
 
March 31, 2020
 
December 31, 2019
 
Ratings (a) as of March 31, 2020
 
Dollars in millions
Amortized
Cost (b)

 
Fair
Value

 
Amortized
Cost

 
Fair
Value

 
AAA/
AA

 
A

 
BBB

 
BB and Lower

 
No
Rating

 
U.S. Treasury and government agencies
$
16,883

 
$
17,905

 
$
16,926

 
$
17,348

 
100
%
 

 

 

 

 
Agency residential mortgage-backed
50,828

 
52,628

 
50,266

 
50,984

 
100
%
 

 

 

 

 
Non-agency residential mortgage-backed
1,563

 
1,643

 
1,648

 
1,954

 
13
%
 
1
%
 
2
%
 
47
%
 
37
%
 
Agency commercial mortgage-backed
3,181

 
3,289

 
3,153

 
3,178

 
100
%
 

 

 

 

 
Non-agency commercial mortgage-backed (c)
4,249

 
4,082

 
3,782

 
3,806

 
81
%
 
1
%
 
4
%
 
2
%
 
12
%
 
Asset-backed (d)
5,389

 
5,327

 
5,096

 
5,166

 
91
%
 
2
%
 
 
 
6
%
 
1
%
 
Other (e)
5,600

 
5,824

 
4,580

 
4,771

 
68
%
 
22
%
 
8
%
 
 
 
2
%
 
Total investment securities (f)
$
87,693

 
$
90,698

 
$
85,451

 
$
87,207

 
95
%
 
2
%
 
1
%
 
1
%
 
1
%
 
(a)
Ratings percentages allocated based on amortized cost.
(b)
Amortized cost is presented net of applicable ACL of $2 million at March 31, 2020 in accordance with the adoption of the CECL accounting standard. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies for additional detail on the adoption of this ASU.
(c)
Collateralized primarily by retail properties, office buildings, lodging properties and multifamily housing.
(d)
Collateralized primarily by corporate debt, government guaranteed education loans and other consumer credit products.
(e)
Includes state and municipal securities.
(f)
Includes available for sale and held to maturity securities, which are recorded on our balance sheet at fair value and amortized cost, respectively.

Table 7 presents the distribution of our total investment securities portfolio by amortized cost and fair value, as well as by credit rating. We have included credit ratings information because we believe that the information is an indicator of the degree of credit risk to which we are exposed. Changes in credit ratings classifications could indicate increased or decreased credit risk and could be accompanied by a reduction or increase in the fair value of our investment securities portfolio. We continually monitor the credit risk in our portfolio and maintain an ACL at an appropriate level to absorb expected credit losses on our investment securities portfolio for the remaining contractual term of the securities adjusted for expected prepayments. See Note 1 Accounting Policies and Note 2 Investment Securities in the Notes To Consolidated Financial Statements for additional details regarding the methodology for determining the ACL and the amount of the ACL for investment securities.

The duration of investment securities was 2.2 years at March 31, 2020. We estimate that at March 31, 2020 the effective duration of investment securities was 2.3 years for an immediate 50 basis points parallel increase in interest rates and 2.1 years for an immediate 50 basis points parallel decrease in interest rates.

Based on expected prepayment speeds, the weighted-average expected maturity of the investment securities portfolio was 3.5 years at March 31, 2020 compared to 4.1 years at December 31, 2019.

Table 8: Weighted-Average Expected Maturities of Mortgage and Asset-Backed Debt Securities
March 31, 2020
Years

 
Agency residential mortgage-backed
3.0

 
Non-agency residential mortgage-backed
6.2

 
Agency commercial mortgage-backed
3.6

 
Non-agency commercial mortgage-backed
2.9

 
Asset-backed
1.9

 

Additional information regarding our investment securities is included in Note 2 Investment Securities and Note 11 Fair Value in the Notes To Consolidated Financial Statements included in this Report.


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



Funding Sources
Table 9: Details of Funding Sources
 
March 31

 
December 31

 
Change
 
Dollars in millions
2020

 
2019

 
$
%
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing
$
81,614

 
$
72,779

 
$
8,835

12
 %
 
Interest-bearing
 
 
 
 




 
Money market
54,039

 
54,115

 
(76
)

 
Demand
74,457

 
71,692

 
2,765

4
 %
 
Savings
72,654

 
68,291

 
4,363

6
 %
 
Time deposits
22,440

 
21,663

 
777

4
 %
 
Total interest-bearing deposits
223,590

 
215,761

 
7,829

4
 %
 
Total deposits
305,204

 
288,540

 
16,664

6
 %
 
Borrowed funds
 
 
 
 




 
FHLB borrowings
23,491

 
16,341

 
7,150

44
 %
 
Bank notes and senior debt
31,438

 
29,010

 
2,428

8
 %
 
Subordinated debt
6,475

 
6,134

 
341

6
 %
 
Other
11,995

 
8,778

 
3,217

37
 %
 
Total borrowed funds
73,399

 
60,263

 
13,136

22
 %
 
Total funding sources
$
378,603

 
$
348,803

 
$
29,800

9
 %
 

Total deposits increased with growth in both noninterest-bearing and interest-bearing. Commercial deposits increased near the end of the first quarter reflecting liquidity maintained by customers due to the economic impact of COVID-19.

Borrowed funds increased primarily due to higher FHLB borrowings, bank notes and senior debt, and repurchase agreements included in other borrowed funds, in part related to enhanced liquidity to meet customer needs caused by the economic impact of COVID-19. 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 our LCR requirements 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 2020 liquidity and capital activities. See Note 7 Borrowed Funds in the Notes to Consolidated Financial Statements in Item 1 of this Report for additional information related to our borrowings.
Shareholders’ Equity

Total shareholders’ equity of $49.3 billion at both March 31, 2020 and December 31, 2019 decreased $51 million. The slight decline resulted from common share repurchases of $1.4 billion, common and preferred dividends of $.6 billion, and a transition adjustment of $.7 billion for the adoption of the CECL accounting standard, substantially offset by higher AOCI of $1.7 billion and net income of $915 million.

Common shares outstanding declined to 424 million at March 31, 2020 from 433 million at December 31, 2019 as repurchases of 10.1 million shares during the period were partially offset by stock-based compensation activity. On March 16, 2020, PNC announced a temporary suspension of its common stock repurchase program through June 30, 2020 in conjunction with the Federal Reserve's effort to support the U.S. economy during the COVID-19 outbreak.
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 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.


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




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.
Total business segment financial results differ from total consolidated net income. The impact of these differences is reflected in the “Other” category as shown in Table 77 in Note 14 Segment Reporting in Item 1 of this Report. “Other” includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as asset and liability management activities including net securities gains or losses, ACL for investment securities, certain trading activities, certain runoff consumer loan portfolios, private equity investments, intercompany eliminations, certain corporate overhead, tax adjustments that are not allocated to business segments, gains or losses related to BlackRock transactions, exited businesses, and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests as the segments’ results exclude their portion of net income attributable to noncontrolling interests.

See the Executive Summary of this Financial Review for our discussion of the impact of COVID-19 related developments on our business and operations, including loan modifications and COVID-19 relief efforts for our customers.


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



Retail Banking

Retail Banking's core strategy is to acquire and retain customers who maintain their primary checking and transaction relationships with us. We 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 differentiate the customer experience and drive transformation and automation. A key element of our 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 driver of customer growth, retention and relationship expansion.

Table 10: Retail Banking Table
(Unaudited)
 
 
 
 
 
 
 
Three months ended March 31
  
 
  
 
Change
 
Dollars in millions, except as noted
2020
 
2019
 
$
%
 
Income Statement
 
 
 
 
 
 
 
Net interest income
$
1,456

 
$
1,349

 
$
107

8
 %
 
Noninterest income
788

 
595

 
193

32
 %
 
Total revenue
2,244

 
1,944

 
300

15
 %
 
Provision for credit losses
445

 
128

 
317

248
 %
 
Noninterest expense
1,536

 
1,468

 
68

5
 %
 
Pretax earnings
263

 
348

 
(85
)
(24
)%
 
Income taxes
62

 
84

 
(22
)
(26
)%
 
Earnings
$
201

 
$
264

 
$
(63
)
(24
)%
 
Average Balance Sheet
 
 
 
 
 
 
 
Loans held for sale
$
779

 
$
441

 
$
338

77
 %
 
Loans
 
 
 
 
 
 
 
Consumer lending
 
 
 
 
 
 
 
Home equity
$
22,736

 
$
22,990

 
$
(254
)
(1
)%
 
Residential real estate
17,964

 
15,034

 
2,930

19
 %
 
Automobile
17,096

 
14,608

 
2,488

17
 %
 
Credit cards
7,207

 
6,204

 
1,003

16
 %
 
Education
3,343

 
3,816

 
(473
)
(12
)%
 
Other
2,533

 
2,068

 
465

22
 %
 
Total consumer lending
70,879

 
64,720

 
6,159

10
 %
 
Commercial and commercial real estate
10,524

 
10,461

 
63

1
 %
 
Total loans
$
81,403

 
$
75,181

 
$
6,222

8
 %
 
Total assets
$
97,062

 
$
91,255

 
$
5,807

6
 %
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing demand
$
32,225

 
$
30,389

 
$
1,836

6
 %
 
Interest-bearing demand
42,865

 
42,477

 
388

1
 %
 
Money market
22,866

 
26,773

 
(3,907
)
(15
)%
 
Savings
62,781

 
53,100

 
9,681

18
 %
 
Certificates of deposit
12,233

 
12,381

 
(148
)
(1
)%
 
Total deposits
$
172,970

 
$
165,120

 
$
7,850

5
 %
 
Performance Ratios
 
 
 
 
 
 
 
Return on average assets
.84
%
 
1.17
%
 
 
 
 
Noninterest income to total revenue
35
%
 
31
%
 
 
 
 
Efficiency
68
%
 
76
%
 
 
 
 

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





Three months ended March 31
  
 
  
 
Change
 
Dollars in millions, except as noted
2020

 
2019

 
$
%
 
Supplemental Noninterest Income Information
 
 
 
 
 
 
 
Consumer services
$
372

 
$
366

 
$
6

2
 %
 
Residential mortgage
$
210

 
$
65

 
$
145

223
 %
 
Service charges on deposits
$
166

 
$
162

 
$
4

2
 %
 
Residential Mortgage Information
 
 
 
 
 
 
 
Residential mortgage servicing statistics (in billions, except as noted) (a)
 
 
 
 
 
 
 
Serviced portfolio balance (b)
$
118

 
$
123

 
$
(5
)
(4
)%
 
Serviced portfolio acquisitions
$
2

 
$
1

 
$
1

100
 %
 
MSR asset value (b)
$
0.6

 
$
1.1

 
$
(.5
)
(45
)%
 
MSR capitalization value (in basis points) (b)
51

 
92

 
(41
)
(45
)%
 
Servicing income: (in millions)
 
 
 
 
 
 
 
Servicing fees, net (c)
$
44

 
$
53

 
$
(9
)
(17
)%
 
Mortgage servicing rights valuation, net of economic hedge
$
101

 
$
(9
)
 
$
110

*

 
Residential mortgage loan statistics
 
 
 
 
 
 
 
Loan origination volume (in billions)
$
3.2

 
$
1.7

 
$
1.5

88
 %
 
Loan sale margin percentage
3.16
%
 
2.35
%
 
 
 
 
Percentage of originations represented by:
 
 
 
 
 
 
 
Purchase volume (d)
36
%
 
56
%
 
 
 
 
Refinance volume
64
%
 
44
%
 
 
 
 
Other Information (b)
 
 
 
 
 
 
 
Customer-related statistics (average)
 
 
 
 
 
 
 
Non-teller deposit transactions (e)
59
%
 
57
%
 
 
 
 
Digital consumer customers (f)
71
%
 
68
%
 
 
 
 
Credit-related statistics
 
 
 
 
 
 
 
Nonperforming assets (g)
$
1,011

 
$
1,109

 
$
(98
)
(9
)%
 
Net charge-offs - loans and leases
$
166

 
$
132

 
$
34

26
 %
 
Other statistics
 
 
 
 
 
 
 
ATMs
9,048

 
9,112

 
(64
)
(1
)%
 
Branches (h)
2,277

 
2,347

 
(70
)
(3
)%
 
Brokerage account client assets (in billions) (i)
$
49

 
$
51

 
$
(2
)
(4
)%
 
* - Not Meaningful
(a)
Represents mortgage loan servicing balances for third parties and the related income.
(b)
Presented as of March 31, except for customer-related statistics, which are averages for the three months ended, and net charge-offs, which are for the three months ended.
(c)
Servicing fees net of impact of decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan payments, prepayments, and loans that were paid down or paid off during the period.
(d)
Mortgages with borrowers as part of residential real estate purchase transactions.
(e)
Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application.
(f)
Represents consumer checking relationships that process the majority of their transactions through non-teller channels.
(g)
Primarily nonperforming loans of $1.0 billion for both March 31, 2020 and March 31, 2019.
(h)
Excludes stand-alone mortgage offices and satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services.
(i)
Includes cash and money market balances.

Retail Banking earned $201 million in the first three months of 2020 compared with $264 million for the same period in 2019. The decrease in earnings was attributable to higher provision for credit losses and increased noninterest expense partially offset by higher noninterest income and net interest income.

Net interest income increased primarily due to growth in loan and deposit balances and wider interest rate spreads on the value of loans, partially offset by narrower interest rate spreads on the value of deposits.
  
Noninterest income increased largely due to growth in residential mortgage revenue attributable to higher results from residential mortgage servicing rights valuation, net of economic hedge, and increased loan sales revenue from higher origination volumes. Also contributing to the increase in noninterest income was the impact of slightly positive derivative fair value adjustments related to Visa Class B common shares for the first quarter of 2020 compared with the negative adjustments of $31 million for the same period in 2019.


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



Provision for credit losses increased in the first three months of 2020 compared to the same period of 2019 due to the adoption of the CECL accounting standard and the significant economic impact of COVID-19 and loan growth.

Higher noninterest expense primarily resulted from higher customer-related transaction costs, personnel, equipment, and ATM expense resulting from enhanced checking product benefits.

The deposit strategy of Retail Banking is to remain disciplined on pricing and focused on growing and retaining relationship-based balances, executing on market-specific deposit growth strategies and providing a source of low-cost funding and liquidity to PNC. In the first quarter of 2020, average total deposits increased compared to the same period in 2019 primarily driven by savings deposits which increased due, in part, to a shift from money market deposits to relationship-based savings products as well as growth in consumer deposits, including from our national expansion.

Retail Banking average total loans increased in the first three months of 2020 compared with the same period in 2019.
Average residential mortgages increased primarily as a result of growth in nonconforming residential mortgage loans.
Average auto loans increased primarily due to strong new indirect auto loan volumes, including in our Southeast and expansion markets, as well as growth in direct auto loans.
Average credit card balances increased as we continued to focus on our long-term objective of deepening penetration within our existing customer base as well as new client acquisition.
Average education loans decreased driven by a decline in the runoff portfolio of government guaranteed education loans.
Average unsecured installment loans increased primarily driven by growth in originations through digital channels.
Average home equity loans decreased as paydowns and payoffs on loans exceeded new originated volume.

In 2018, we launched our national expansion strategy designed to grow customers with digitally-led banking and an ultra-thin branch network in markets outside of our existing retail branch network and began offering our digital high yield savings deposit product and opened our first solution center. Solution centers are an emerging branch operating model with a distinctive layout, where routine transactions are supported through a combination of technology and skilled banker assistance to create personalized experiences. The primary focus of the solution center is to bring a community element to our digital banking capabilities. The solution center provides a collaborative environment that connects our customers with our digital solutions and banking services, beyond deposits and withdrawals. Deposit products are led by a digital high yield savings account. Following the first solution center opening in Kansas City in 2018, four additional solution centers opened in 2019 with a second in Kansas City and three in the Dallas/Fort Worth market. We also offer digital unsecured installment and small business loans in the expansion markets. In 2020, our plan is to continue to execute our national expansion strategy.

Retail Banking continues to enhance the customer experience with refinements to product and service offerings that drive value for consumers and small businesses. We are focused on meeting the financial needs of our customers by providing a broad range of liquidity, banking and investment products. Retail Banking continued to execute on its strategy of transforming the customer experience through transaction channel migration, branch network and home lending process transformations and multi-channel engagement and service strategies.
Approximately 71% of consumer customers used non-teller channels for the majority of their transactions in the first three months of 2020 compared with 68% for the same period in 2019.
Deposit transactions via ATM and mobile channels increased to 59% of total deposit transactions in the first three months of 2020 from 57% for the same period in 2019.

Retail Banking continues to make progress on its multi-year initiative to redesign the home lending process, including integrating mortgage and home equity lending into a common platform. Technology enhancements supported increased residential mortgage origination volume. In addition, we enhanced the home equity origination process to make it easier and to reach additional customers by offering the product in new states. The improvements and expansion are planned to continue throughout 2020.


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




Corporate & Institutional Banking
 
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. We continue to focus on building client relationships where the risk-return profile is attractive.

Table 11: Corporate & Institutional Banking Table
(Unaudited)
 
 
 
 
 
 
 
Three months ended March 31
  
 
  
 
Change
 
Dollars in millions
2020
 
2019
 
$
%
 
Income Statement
 
 
 
 
 
 
 
Net interest income
$
966

 
$
898

 
$
68

8
 %
 
Noninterest income
694

 
576

 
118

20
 %
 
Total revenue
1,660

 
1,474

 
186

13
 %
 
Provision for credit losses
458

 
71

 
387

545
 %
 
Noninterest expense
722

 
686

 
36

5
 %
 
Pretax earnings
480

 
717

 
(237
)
(33
)%
 
Income taxes
110

 
165

 
(55
)
(33
)%
 
Earnings
$
370

 
$
552

 
$
(182
)
(33
)%
 
Average Balance Sheet
 
 
 
 
 
 
 
Loans held for sale
$
395

 
$
347

 
$
48

14
 %
 
Loans
 
 
 
 
 
 
 
Commercial lending
 
 
 
 
 
 
 
Commercial
$
117,288

 
$
108,641

 
$
8,647

8
 %
 
Commercial real estate
26,589

 
25,971

 
618

2
 %
 
Equipment lease financing
7,066

 
7,264

 
(198
)
(3
)%
 
Total commercial lending
150,943

 
141,876

 
9,067

6
 %
 
Consumer
9

 
20

 
(11
)
(55
)%
 
Total loans
$
150,952

 
$
141,896

 
$
9,056

6
 %
 
Total assets
$
172,502

 
$
157,169

 
$
15,333

10
 %
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing demand
$
40,651

 
$
39,551

 
$
1,100

3
 %
 
Interest-bearing demand
21,101

 
17,827

 
$
3,274

18
 %
 
Money market
28,468

 
25,630

 
2,838

11
 %
 
Other
7,868

 
5,547

 
2,321

42
 %
 
Total deposits
$
98,088

 
$
88,555

 
$
9,533

11
 %
 
Performance Ratios
 
 
 
 
 
 
 
Return on average assets
.87
%
 
1.42
%
 
 
 
 
Noninterest income to total revenue
42
%
 
39
%
 
 
 
 
Efficiency
43
%
 
45
%
 
 
 
 
Other Information
 
 
 
 
 
 
 
Consolidated revenue from: (a)
 
 
 
 
 
 
 
Treasury Management (b)
$
491

 
$
445

 
$
46

10
 %
 
Capital Markets (b)
$
344

 
$
246

 
$
98

40
 %
 
Commercial mortgage banking activities:
 
 
 
 
 
 
 
Commercial mortgage loans held for sale (c)
$
29

 
$
15

 
$
14

93
 %
 
Commercial mortgage loan servicing income (d)
69

 
54

 
15

28
 %
 
Commercial mortgage servicing rights valuation, net of economic hedge (e)
20

 
5

 
15

300
 %
 
Total
$
118

 
$
74

 
$
44

59
 %
 
Commercial mortgage servicing rights asset value (f)
$
477

 
$
681

 
$
(204
)
(30
)%
 
Average Loans by C&IB business
 
 
 
 
 
 
 
Corporate Banking
$
78,057

 
$
71,089

 
$
6,968

10
 %
 
Real Estate
37,368

 
36,357

 
1,011

3
 %
 
Business Credit
23,251

 
21,728

 
1,523

7
 %
 
Commercial Banking
7,784

 
8,118

 
(334
)
(4
)%
 
Other
4,492

 
4,604

 
(112
)
(2
)%
 
Total average loans
$
150,952

 
$
141,896

 
$
9,056

6
 %
 
Credit-related statistics
 
 
 
 
 
 
 
Nonperforming assets (f) (g)
$
508

 
$
388

 
$
120

31
 %
 
Net charge-offs - loans and leases
$
50

 
$
5

 
$
45

900
 %
 
(a)
See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of this Corporate & Institutional Banking section.
(b)
Amounts are reported in net interest income and noninterest income.
(c)
Represents other noninterest income for valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, originations fees, gains on sale of loans held for sale and net interest income on loans held for sale.
(d)
Represents net interest income and noninterest income (primarily in corporate service fees) from loan servicing net of reduction in commercial mortgage servicing rights due to amortization expense and payoffs. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.
(e)
Amounts are reported in corporate service fees.
(f)
As of March 31.
(g)
Primarily nonperforming loans of $.5 billion and $.4 billion at March 31, 2020 and March 31, 2019, respectively.

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




Corporate & Institutional Banking earned $370 million in the first quarter of 2020 compared to $552 million for the same period in 2019. Higher provision for credit losses and higher noninterest expense were partially offset by higher revenue.

Net interest income increased in the comparison, primarily due to higher average loan and deposit balances, partially offset by narrower interest rate spreads on the value of loans and deposits.

Growth in noninterest income in the comparison reflected broad-based increases including higher capital markets-related revenue, commercial mortgage banking activities and treasury management product revenue.

Provision for credit losses in the first quarter of 2020 reflected the adoption of the CECL accounting standard, the significant economic impact of COVID-19 and portfolio growth, including new loans and increased utilization. First quarter 2020 experienced an increase in nonperforming assets and net loan and lease charge-offs compared to the same period in 2019.

Noninterest expense increased in the comparison largely due to investments in strategic initiatives and variable costs associated with increased business activity.

Average loans increased compared to the first quarter of 2019 driven by strong growth in Corporate Banking, Business Credit and PNC Real Estate due in part to increased utilization in March as the need for liquidity in the current economic environment increased:
Corporate 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. Average loans for this business grew reflecting strong new production and increased utilization in asset-backed financing, and increased lending to large and mid-sized corporate clients.
PNC Business Credit provides asset-based lending. The loan portfolio is relatively high yielding, with acceptable risk as the loans are mainly secured by short-term assets. Average loans for this business increased primarily due to new originations, partially offset by payoffs.
PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. Average loans for this business increased primarily driven by higher commercial mortgage balances, partially offset by loan payoffs.
Commercial Banking provides lending, treasury management and capital markets-related products and services to smaller corporations and businesses. Average loans for this business decreased as portfolio runoff outpaced new originations.

The deposit strategy of Corporate & Institutional Banking is to remain disciplined on pricing and focused on growing and retaining relationship-based balances over time, executing on customer and segment-specific deposit growth strategies and continuing to provide funding and liquidity to PNC. Average total deposits increased in the comparison driven by growth in interest-bearing deposits. Additionally, due to recent economic uncertainties and interest rate changes, first quarter 2020 experienced an increase in noninterest-bearing deposits compared to the same period in 2019. We continue to actively monitor the interest rate environment and make adjustments in response to evolving market conditions, bank funding needs and client relationship dynamics.

Corporate & Institutional Banking continues to expand its Corporate Banking business, focused on the middle market and larger sectors. We are continuing to execute on our expansion plans into the Seattle and Portland markets in 2020. This follows offices opened in Boston and Phoenix in 2019, Denver, Houston and Nashville in 2018, and Dallas, Kansas City and Minneapolis in 2017. These locations complement Corporate & Institutional Banking national businesses with a significant presence in these cities, and build on past successes in the markets where PNC’s retail banking presence was limited, such as in the Southeast. Our full suite of commercial products and services is offered in these locations.

Product Revenue
In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management, capital markets-related products and services, and commercial mortgage banking activities, for customers of all business segments. On a consolidated basis, the revenue from these other services is included in net interest income, corporate service fees and other noninterest income. From a business perspective, the majority of the revenue and expense related to these services is reflected in the Corporate & Institutional Banking segment results and the remainder is reflected in the results of other businesses. The Other Information section in Table 11 includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.
The Treasury Management business provides payables, receivables, deposit and account services, liquidity and investments, and online and mobile banking products and services to our clients. Treasury management revenue is reported in noninterest income and net interest income. Noninterest income includes treasury management product revenue less earnings credits provided to customers on compensating deposit balances used to pay for products and services. Net interest income primarily includes revenue from all treasury

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




management customer deposit balances. Compared with the first quarter of 2019, treasury management revenue increased primarily due to higher deposit balances and product revenue.

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. The increase in capital markets-related revenue in the comparison was broad-based across most products and services and included higher revenue from credit valuations and fees on customer-related derivatives activities and higher underwriting fees.

Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (both net interest income and noninterest income) and revenue derived from commercial mortgage loans held for sale and related hedges. Total revenue from commercial mortgage banking activities increased in the comparison due to higher revenue across all activities.


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



Asset Management Group

Asset Management Group is focused on being a premier bank-held individual and institutional asset manager 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.

Table 12: Asset Management Group Table
(Unaudited)
 
 
 
 
 
 
 
Three months ended March 31
  
 
  
 
Change
 
Dollars in millions, except as noted
2020
 
2019
 
$
%
 
Income Statement
 
 
 
 
 
 
 
Net interest income
$
88

 
$
70

 
$
18

26
 %
 
Noninterest income
204

 
217

 
(13
)
(6
)%
 
Total revenue
292

 
287

 
5

2
 %
 
Provision for credit losses
3

 
(1
)
 
4

*

 
Noninterest expense
219

 
230

 
(11
)
(5
)%
 
Pretax earnings
70

 
58

 
12

21
 %
 
Income taxes
16

 
13

 
3

23
 %
 
Earnings
$
54

 
$
45

 
$
9

20
 %
 
Average Balance Sheet
 
 
 
 
 
 
 
Loans
 
 
 
 
 
 
 
Consumer lending
 
 
 
 
 
 
 
Residential real estate
$
2,385

 
$
1,723

 
662

38
 %
 
Other
4,052

 
4,362

 
(310
)
(7
)%
 
Total consumer lending
6,437

 
6,085

 
352

6
 %
 
Commercial and commercial real estate
856

 
752

 
104

14
 %
 
Total loans
$
7,293

 
$
6,837

 
$
456

7
 %
 
Total assets
$
7,801

 
$
7,259

 
$
542

7
 %
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing demand
$
1,468

 
$
1,388

 
$
80

6
 %
 
Interest-bearing demand
6,850

 
3,076

 
3,774

123
 %
 
Money market
1,709

 
2,036

 
(327
)
(16
)%
 
Savings
7,197

 
5,723

 
1,474

26
 %
 
Other
847

 
697

 
150

22
 %
 
Total deposits
$
18,071

 
$
12,920

 
$
5,151

40
 %
 
Performance Ratios
 
 
 
 
 
 
 
Return on average assets
2.81
%
 
2.51
%
 
 
 
 
Noninterest income to total revenue
70
%
 
76
%
 
 
 
 
Efficiency
75
%
 
80
%
 
 
 
 
Supplemental Noninterest Income Information
 
 
 
 
 
 
 
Asset management fees
$
201

 
$
212

 
$
(11
)
(5
)%
 
Other Information
 
 
 
 
 
 
 
Nonperforming assets (a) (b)
$
34

 
$
48

 
$
(14
)
(29
)%
 
Net charge-offs - loans and leases
$
(1
)
 
$
1

 
$
(2
)
(200
)%
 
Client Assets Under Administration (in billions) (a) (c)
 
 
 
 
 
 
 
Discretionary client assets under management
$
136

 
$
158

 
$
(22
)
(14
)%
 
Nondiscretionary client assets under administration
128

 
130

 
(2
)
(2
)%
 
Total
$
264

 
$
288

 
$
(24
)
(8
)%
 
Discretionary client assets under management
 
 
 
 
 
 
 
Personal
$
84

 
$
95

 
$
(11
)
(12
)%
 
Institutional
52

 
63

 
(11
)
(17
)%
 
Total
$
136

 
$
158

 
$
(22
)
(14
)%
 
* - Not meaningful
(a)
As of March 31.
(b)
Primarily nonperforming loans of $34 million at March 31, 2020 and $47 million at March 31, 2019.
(c)
Excludes brokerage account client assets. 

Asset Management Group earned $54 million in the first three months of 2020 compared to $45 million for the same period in 2019. Earnings increased due to higher revenue and lower noninterest expense.


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




Growth in revenue was driven by higher net interest income due to higher average deposit balances. This increase was partially offset by lower asset management fees related to the 2019 sale of the retirement recordkeeping and the sale of components of the PNC Capital Advisors investment management business, including its PNC family of proprietary mutual funds businesses.

Noninterest expense decreased primarily attributable to the impact of the 2019 divestitures.

Asset Management Group’s discretionary client assets under management decreased primarily attributable to lower equity markets as of March 31, 2020 and the sale of components of the PNC Capital Advisors investment management business.

The Asset Management Group strives to be the leading relationship-based provider of investment, planning, banking and fiduciary services to wealthy individuals and institutions by proactively delivering value-added ideas, solutions and exceptional service.

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

Institutional Asset Management provides outsourced chief investment officer, custody, private real estate, cash and fixed income client solutions, and fiduciary retirement advisory services to institutional clients including corporations, healthcare systems, insurance companies, unions, municipalities, and non-profits.
BlackRock

We hold an equity investment in BlackRock, a leading publicly-traded investment management firm. Information related to our equity investment in BlackRock follows:

Table 13: BlackRock Table
(Unaudited)
 
 
 
Three months ended March 31
 
 
 
Dollars in millions
2020
2019
 
Business segment earnings (a)
$
157

$
197

 
PNC’s economic interest in BlackRock (b)
22
%
22
%
 
(a)
Represents our share of BlackRock’s reported GAAP earnings net of income taxes on those earnings incurred by us.
(b)
At March 31.
In billions
March 31, 2020

December 31, 2019

 
Carrying value of our investment in BlackRock (c)
$
8.7

$
8.7

 
Market value of our investment in BlackRock (d)
$
15.3

$
17.5

 
(c)
We account for our investment in BlackRock under the equity method of accounting, exclusive of a related deferred tax liability of $1.8 billion for both March 31, 2020 and December 31, 2019, respectively. Our voting interest in BlackRock common stock was approximately 22% at March 31, 2020.
(d)
Does not include liquidity discount.

Our 2019 Form 10-K includes additional information about our investment in BlackRock.


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



RISK MANAGEMENT

The Risk Management section included in Item 7 of our 2019 Form 10-K describes our enterprise risk management framework including risk culture, enterprise strategy, risk governance and framework, risk identification, risk assessment, risk controls and monitoring, and risk aggregation and reporting. Additionally, our 2019 Form 10-K provides an analysis of our key areas of risk, which include but are not limited to credit, liquidity and capital, market, operational, compliance and information security.

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

Loan Portfolio Characteristics and Analysis

Table 14: Details of Loans
In billions
chart-66fdea0bc66259c69cc.jpg
We use several asset quality indicators, as further detailed in Note 3 Loans in the Notes To Consolidated Financial Statements in this Report, to monitor and measure our exposure to credit risk within our loan portfolio. The following provides additional information about our significant loan classes.

Commercial Lending

Commercial
Commercial loans comprised 56% and 52% of our total loan portfolio at March 31, 2020 and December 31, 2019, respectively. The majority of our commercial loans are secured by collateral that provides a secondary source of repayment for the loan should the borrower experience cash generation difficulties. Examples of this collateral include short-term assets, such as accounts receivable, inventory and securities, and long-lived assets, such as equipment, real estate and other business assets.

We actively manage our commercial loans to assess any changes (both positive and negative) in the level of credit risk at both the borrower and portfolio level. To evaluate the level of credit risk, we assign internal risk ratings reflecting our estimates of the borrower’s probability of default (PD) and loss given default (LGD) for each related credit facility. This two-dimensional credit risk rating methodology provides granularity in the risk monitoring process and is updated on an ongoing basis through our credit risk management processes. In addition to monitoring the level of credit risk, we also monitor concentrations of credit risk pertaining to both specific industries and geography that may exist in our portfolio. Our portfolio is well-diversified as shown in the following table which provides a breakout of our commercial loans by industry classification (classified based on the North American Industry Classification System (NAICS)).


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




Table 15: Commercial Loans by Industry
 
March 31, 2020
 
 
December 31, 2019
 
Dollars in millions
Amount
 
% of Total
 
 
Amount
 
% of Total
 
Commercial
 
 
 
 
 
 
 
 
 
Manufacturing
$
27,225

 
18
%
 
 
$
21,540

 
17
%
 
Retail/wholesale trade
24,408

 
16

 
 
21,565

 
17

 
Service providers
19,411

 
13

 
 
16,112

 
13

 
Real estate related (a)
14,843

 
10

 
 
12,346

 
10

 
Financial services
13,473

 
9

 
 
11,318

 
9

 
Health care
9,238

 
6

 
 
8,035

 
6

 
Transportation and warehousing
8,160

 
5

 
 
7,474

 
6

 
Other industries
32,373

 
23

 
 
26,947

 
22

 
Total commercial loans
$
149,131

 
100
%
 
 
$
125,337

 
100
%
 
(a) Represents loans to customers in the real estate and construction industries.

Commercial loan increases at March 31, 2020 were driven by loan growth, including higher utilization of loan commitments near the end of the first quarter, primarily due to the economic impact of COVID-19. See the Commercial Lending High Impact Industries discussion within Credit Risk Management for additional discussion of the impact of COVID-19 on loans and how we are evaluating and monitoring the portfolio for elevated levels of credit risk.

Commercial Real Estate
Commercial real estate loans comprised $17.4 billion related to commercial mortgages, $5.8 billion of real estate project loans and $5.3 billion of intermediate term financing loans as of March 31, 2020. Comparable amounts were $17.0 billion, $5.6 billion and $5.5 billion, respectively, as of December 31, 2019.
We monitor credit risk associated with our commercial real estate loans similar to commercial loans by analyzing PD and LGD. Additionally, risks associated with these types of credit activities tend to be correlated to the loan structure, collateral location, project progress and business environment. These attributes are also monitored and utilized in assessing credit risk. The portfolio is geographically diverse due to the nature of our business involving clients throughout the U.S. The following table presents our commercial real estate loans by geography and property type.

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



Table 16: Commercial Real Estate Loans by Geography and Property Type
 
March 31, 2020
 
 
December 31, 2019
 
Dollars in millions
Amount
 
% of Total
 
 
Amount
 
% of Total
 
Geography
 
 
 
 
 
 
 
 
 
California
$
4,406

 
15
%
 
 
$
4,393

 
16
%
 
Florida
2,651

 
9

 
 
2,557

 
9

 
Texas
1,844

 
6

 
 
1,717

 
6

 
Maryland
1,743

 
6

 
 
1,889

 
7

 
Virginia
1,509

 
5

 
 
1,547

 
6

 
Pennsylvania
1,341

 
5

 
 
1,310

 
4

 
Ohio
1,265

 
4

 
 
1,307

 
4

 
New Jersey
1,159

 
4

 
 
1,106

 
4

 
Illinois
1,028

 
4

 
 
1,001

 
4

 
North Carolina
997

 
4

 
 
1,015

 
4

 
Other
10,601

 
38

 
 
10,268

 
36

 
Total commercial real estate loans
$
28,544

 
100
%
 
 
$
28,110

 
100
%
 
Property Type
 
 
 
 
 
 
 
 
 
Multifamily
$
9,123

 
32
%
 
 
$
9,003

 
32
%
 
Office
7,794

 
27

 
 
7,641

 
27

 
Retail
3,599

 
13

 
 
3,702

 
13

 
Industrial/Warehouse
2,169

 
8

 
 
2,003

 
7

 
Hotel/Motel
1,892

 
7

 
 
1,813

 
7

 
Senior Housing
1,238

 
4

 
 
1,123

 
4

 
Mixed Use
871

 
3

 
 
943

 
3

 
Other
1,858

 
6

 
 
1,882

 
7

 
Total commercial real estate loans
$
28,544

 
100
%
 
 
$
28,110

 
100
%
 

Commercial Lending High Impact Industries
In light of the current economic circumstances related to COVID-19, we are evaluating and monitoring our entire commercial lending portfolio for elevated levels of credit risk; however, we believe the industry sectors likely to be most impacted are:
Non-real estate related
Leisure recreation: restaurants, casinos, hotels, convention centers
Non-essential retail: retail excluding auto, gas, staples
Healthcare facilities: elective, private practices
Leisure travel: cruise, airlines, other travel/transportation
Consumer services: religious organizations, childcare
Other impacted areas: shipping, senior living, specialty education
Real estate related
Non-essential retail and restaurants: malls, lifestyle centers, outlets, restaurants
Hotel: full service, limited service, extended stay
Senior housing: assisted living, independent living

As of March 31, 2020, our outstanding loan balances in these industries totaled $19.3 billion, with additional exposures totaling $7.0 billion, and we are carefully monitoring and managing these loans and exposures.
At this time we are most closely monitoring our non-real estate related loans to non-essential retail, restaurants and certain parts of leisure travel. At March 31, 2020:
Non-essential retail loans outstanding totaled $2.5 billion, 60% of which were asset-based loans;
Restaurant loan outstanding balances were $1.5 billion; and
Cruise line and commercial airline loan outstanding balances were less than $600 million.

Within the commercial real estate related category, we have $8.7 billion in outstanding loans to borrowers that we assess as likely to be most impacted by COVID-19. This includes real estate projects of $5.1 billion, 40% of which are under construction and have a portfolio loan-to-value ratio (LTV) of 55%. The remaining $3.6 billion of loans outstanding are to real estate investment trusts (REITs), approximately two-thirds of which are investment grade.



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




Oil and Gas Loan Portfolio
We are also monitoring our oil and gas portfolio closely for elevated levels of credit risk given the continued pressures on the energy industry. As of March 31, 2020, our outstanding loans in the oil and gas sector totaled $4.6 billion or 2% of total loans, with additional exposures totaling $7.0 billion. This portfolio comprised approximately $2.2 billion in the midstream and downstream sectors, $1.2 billion of oil services companies and $1.2 billion related to exploration and production companies. Of the oil services category, approximately $.3 billion is not asset-based or investment grade. Nonperforming loans in the oil and gas sector as of March 31, 2020 totaled $106 million, or 6% of total nonperforming loans.

Consumer Lending
Given the uncertainty of the current economic environment, we recently tightened underwriting requirements across our consumer lending portfolio. See the discussion that follows for analysis of credit risk in our significant consumer loan classes as of March 31, 2020.

Home Equity
Home equity loans comprised $13.7 billion of primarily variable-rate home equity lines of credit and $11.4 billion of closed-end home equity installment loans at March 31, 2020. Comparable amounts were $13.9 billion and $11.2 billion, respectively, as of December 31, 2019.

We track borrower performance monthly, including obtaining original LTVs, updated FICO scores at least quarterly, updated LTVs at least semi-annually, and other credit metrics at least quarterly, including the historical performance of any related mortgage loans regardless of lien position that we do or do not hold. This information is used for internal reporting and risk management. For internal reporting and risk management we also segment the population into pools based on product type (e.g., home equity loans, brokered home equity loans, home equity lines of credit, brokered home equity lines of credit). As part of our overall risk analysis and monitoring, we also segment the portfolio based upon the loan delinquency, nonperforming status, modification and bankruptcy status, FICO scores, LTV, lien position and geographic concentration.

The credit quality of newly originated loans over the last twelve months was strong overall with a weighted-average LTV on originations of 68% and a weighted-average FICO score of 768.

The credit performance of the majority of the home equity portfolio where we hold the first lien position is superior to the portion of the portfolio where we hold the second lien position, but do not hold the first lien. Lien position information is generally determined at the time of origination and monitored on an ongoing basis for risk management purposes. We use an industry-leading third-party service provider to obtain updated loan information, including lien and collateral data that is aggregated from public and private sources.

The following table presents our home equity loans by geography and lien type.

Table 17: Home Equity Loans by Geography and by Lien Type
 
March 31, 2020
 
 
December 31, 2019
 
Dollars in millions
Amount
 
% of Total
 
 
Amount
 
% of Total
 
Geography
 
 
 
 
 
 
 
 
 
Pennsylvania
$
5,778

 
23
%
 
 
$
5,812

 
23
%
 
New Jersey
3,729

 
15

 
 
3,728

 
15

 
Ohio
2,893

 
12

 
 
2,899

 
12

 
Illinois
1,541

 
6

 
 
1,544

 
6

 
Florida
1,431

 
6

 
 
1,340

 
5

 
Maryland
1,429

 
6

 
 
1,420

 
6

 
Michigan
1,404

 
6

 
 
1,371

 
5

 
North Carolina
1,098

 
4

 
 
1,092

 
4

 
Kentucky
985

 
4

 
 
990

 
4

 
Virginia
835

 
3

 
 
810

 
3

 
Other
3,958

 
15

 
 
4,079

 
17

 
Total home equity loans
$
25,081

 
100
%
 
 
$
25,085

 
100
%
 
Lien type
 
 
 
 
 
 
 
 
 
1st lien
 
 
60
%
 
 
 
 
59
%
 
2nd lien
 
 
40

 
 
 
 
41

 
Total

 
100
%
 
 
 
 
100
%
 


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



Residential Real Estate
Residential real estate loans primarily consisted of residential mortgage loans at both March 31, 2020 and December 31, 2019.

We track borrower performance of this portfolio monthly similarly to home equity loans. This information is used for internal reporting and risk management. For internal reporting and risk management we also segment the mortgage portfolio into pools based on product type (e.g., nonconforming, conforming). As part of our overall risk analysis and monitoring, we also segment the portfolio based upon loan delinquency, nonperforming status, modification and bankruptcy status, FICO scores, LTV and geographic concentrations. Loan performance is evaluated by source originators and loan servicers.

The credit quality of newly originated loans that we retained on our balance sheet over the last twelve months was strong overall as evidenced by a weighted-average LTV on originations of 69% and a weighted-average FICO score of 770.

The following table presents our residential real estate loans by geography.

Table 18: Residential Real Estate Loans by Geography
 
March 31, 2020
 
 
December 31, 2019
 
Dollars in millions
Amount
 
% of Total
 
 
Amount
 
% of Total
 
Geography
 
 
 
 
 
 
 
 
 
California
$
7,343

 
33
%
 
 
$
6,800

 
31
%
 
New Jersey
1,786

 
8

 
 
1,779

 
8

 
Florida
1,550

 
7

 
 
1,580

 
7

 
Pennsylvania
1,110

 
5

 
 
1,113

 
5

 
Illinois
1,076

 
5

 
 
1,118

 
5

 
New York
993

 
4

 
 
1,008

 
5

 
Maryland
898

 
4

 
 
923

 
4

 
Virginia
887

 
4

 
 
868

 
4

 
North Carolina
863

 
4

 
 
877

 
4

 
Washington
782

 
4

 
 
646

 
3

 
Other
4,962

 
22

 
 
5,109

 
24

 
Total residential real estate loans
$
22,250

 
100
%
 
 
$
21,821

 
100
%
 

We originate residential mortgage loans nationwide through our national mortgage business as well as within our branch network. Residential mortgage loans underwritten to agency standards, including conforming loan amount limits, are typically sold with servicing retained by us. We also originate nonconforming residential mortgage loans that do not meet agency standards, which we retain on our balance sheet. The originated nonconforming residential mortgage portfolio had strong credit quality at March 31, 2020 with an average original LTV of 70% and an average original FICO score of 773. Our portfolio of originated nonconforming residential mortgage loans totaled $16.8 billion at March 31, 2020 with 39% located in California.

Automobile
Within auto loans, $15.5 billion resided in the indirect auto portfolio while $1.7 billion were in the direct auto portfolio as of March 31, 2020. Comparable amounts as of December 31, 2019 were $15.1 billion and $1.7 billion, respectively. The indirect auto portfolio pertains to loans originated through franchised dealers, including from expansion into new markets. This business is strategically aligned with our core retail banking business.

We continue to focus on borrowers with strong credit profiles as evidenced by a weighted-average loan origination FICO score over the last twelve months of 765 for indirect auto loans and 769 for direct auto loans. The weighted-average term of loan originations over the last twelve months was 73 months for indirect auto loans and 63 months for direct auto loans. We offer both new and used auto financing to customers through our various channels. At March 31, 2020, the portfolio was composed of 56% new vehicle loans and 44% used vehicle loans. Comparable amounts at December 31, 2019 were 55% and 45%, respectively.

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




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




Nonperforming Assets and Loan Delinquencies

Nonperforming Assets
Nonperforming assets include nonperforming loans and leases for which ultimate collectability of the full amount of contractual principal and interest is not probable and include nonperforming troubled debt restructurings (TDRs), other real estate owned (OREO) and foreclosed assets. Loans held for sale, certain government insured or guaranteed loans and loans accounted for under the fair value option are excluded from nonperforming loans. Amounts as of December 31, 2019 also excluded purchased impaired loans. In connection with the adoption of the CECL standard, nonperforming loans as of March 31, 2020 include purchased credit deteriorated loans which meet the criteria to be classified as nonperforming. See Note 1 Accounting Policies and Note 3 Loans in the Notes To Consolidated Financial Statements in this Report for additional information regarding our nonperforming loans and nonaccrual policies and further detail of nonperforming asset categories.

The following table presents a summary of nonperforming assets by major category, Table 20 provides details on the change in nonperforming assets during the three months ended March 31, 2020 and 2019.

Table 19: Nonperforming Assets by Type
 
March 31, 2020

December 31, 2019

 
Change
Dollars in millions
$
 
%
Nonperforming loans
 
 
 
 
 
 
Commercial lending
$
566

$
501

 
$
65

 
13
 %
Consumer lending (a)
1,078

1,134

 
(56
)
 
(5
)%
Total nonperforming loans
1,644

1,635

 
9

 
1
 %
OREO and foreclosed assets
111

117

 
(6
)
 
(5
)%
Total nonperforming assets
$
1,755

$
1,752

 
$
3

 

TDRs included in nonperforming loans
$
767

$
843

 
$
(76
)
 
(9
)%
Percentage of total nonperforming loans
47
%
52
%
 
 
 
 
Nonperforming loans to total loans
.62
%
.68
%
 
 
 
 
Nonperforming assets to total loans, OREO and foreclosed assets
.66
%
.73
%
 
 
 
 
Nonperforming assets to total assets
.39
%
.43
%
 
 
 
 
Allowance for credit losses - loans and leases to total nonperforming loans (b)
240
%
168
%
 
 
 
 
(a)
Excludes most unsecured consumer loans and lines of credit, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.
(b)
Ratio at March 31, 2020 reflects the transition impact on our allowance for loans and leases from the adoption of the CECL standard along with the increases in reserves during the first quarter of 2020 due to the significant economic impact of COVID-19 and loan growth.

Table 20: Change in Nonperforming Assets
In millions
 
2020

 
2019

 
January 1
 
$
1,752

 
$
1,808

 
New nonperforming assets
 
391

 
287

 
Charge-offs and valuation adjustments
 
(145
)
 
(164
)
 
Principal activity, including paydowns and payoffs
 
(158
)
 
(92
)
 
Asset sales and transfers to loans held for sale
 
(20
)
 
(13
)
 
Returned to performing status
 
(65
)
 
(41
)
 
March 31
 
$
1,755

 
$
1,785

 

As of March 31, 2020, approximately 83% of total nonperforming loans were secured by collateral which lessened reserve requirements and is expected to reduce credit losses. As of March 31, 2020, commercial lending nonperforming loans were carried at approximately 74% of their unpaid principal balance, due to charge-offs recorded to date, before consideration of the ACL.

Within consumer lending nonperforming loans, residential real estate TDRs comprised 76% and 79% of total residential real estate nonperforming loans at March 31, 2020 and December 31, 2019, respectively, while home equity TDRs comprised 46% and 49% of home equity nonperforming loans at March 31, 2020 and December 31, 2019, respectively. TDRs generally remain in nonperforming status until a borrower has made at least six consecutive months of both principal and interest payments under the modified terms or ultimate resolution occurs. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to us and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status. Loans that have been restructured for COVID-19

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



related hardships and meet certain criteria under the CARES Act are not identified as TDRs. See the Recent Regulatory Developments section of this Report for more information on the treatment of loan modifications under the CARES Act.

At March 31, 2020, our largest nonperforming asset was $41 million in the Mining, Quarrying, and Oil and Gas Extraction industry and the ten largest individual nonperforming assets represented 13% of total nonperforming assets.

Loan Delinquencies
We regularly monitor the level of loan delinquencies and believe these levels may be a key indicator of loan portfolio asset quality. Measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of payment are considered delinquent. Loan delinquencies include government insured or guaranteed loans, loans accounted for under the fair value option and at March 31, 2020 also include purchased credit deteriorated loans. Amounts exclude loans held for sale, while amounts as of December 31, 2019 also excluded purchased impaired loans.
Table 21: Accruing Loans Past Due (a)
 
 
Amount
 
  
 
Percentage of Total Loans Outstanding
 
 
 
March 31
2020

 
December 31
2019

 
Change
 
March 31
2020

 
December 31
2019

 
Dollars in millions
 
$
 
%
 
 
Early stage loan delinquencies
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing loans past due 30 to 59 days
 
$
688

 
$
661

 
$
27

 
4
 %
 
.26
%
 
.28
%
 
Accruing loans past due 60 to 89 days
 
261

 
258

 
3

 
1
 %
 
.10
%
 
.11
%
 
Total
 
949

 
919

 
30

 
3
 %
 
.36
%
 
.38
%
 
Late stage loan delinquencies
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing loans past due 90 days or more
 
534

 
585

 
(51
)
 
(9
)%
 
.20
%
 
.24
%
 
Total
 
$
1,483

 
$
1,504

 
$
(21
)
 
(1
)%
 
.56
%
 
.63
%
 
(a)
Past due loan amounts include government insured or guaranteed loans of $.5 billion at March 31, 2020 and $.6 billion at December 31, 2019. Additionally, in connection with the adoption of the CECL standard, past due loan amounts at March 31, 2020 include purchased credit deteriorated loans totaling $.1 billion.
 
Accruing loans past due 90 days or more continue to accrue interest because they are (i) well secured by collateral and are in the process of collection, (ii) managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines, or (iii) certain government insured or guaranteed loans. As such, they are excluded from nonperforming loans.

Troubled Debt Restructurings and Loan Modifications

Troubled Debt Restructurings
A TDR is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs result from our loss mitigation activities and include rate reductions, principal forgiveness, postponement/reduction of scheduled amortization and extensions, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Additionally, TDRs also result from court imposed concessions (e.g., a Chapter 7 bankruptcy where the debtor is discharged from personal liability to us and a court approved Chapter 13 bankruptcy repayment plan). Loans to borrowers experiencing COVID-19 related hardships and meet certain criteria under the CARES Act are not categorized as TDRs. See the Recent Regulatory Developments section of this Report for additional information on the updated agency guidance on TDRs under the CARES Act.
Table 22: Summary of Troubled Debt Restructurings (a)
 
 
March 31
2020

 
December 31
2019

 
Change
 
Dollars in millions
 
$
 
%
 
Total commercial lending
 
$
349

 
$
361

 
$
(12
)
 
(3
)%
 
Total consumer lending
 
1,191

 
1,303

 
(112
)
 
(9
)%
 
Total TDRs
 
$
1,540

 
$
1,664

 
$
(124
)
 
(7
)%
 
Nonperforming
 
$
767

 
$
843

 
$
(76
)
 
(9
)%
 
Accruing (b)
 
773

 
821

 
(48
)
 
(6
)%
 
Total TDRs
 
$
1,540

 
$
1,664

 
$
(124
)
 
(7
)%
 
(a)
Amounts in table do not include associated valuation allowances.
(b)
Accruing loans include consumer credit card loans and loans that have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans.

Excluded from TDRs are $.9 billion of consumer loans held for sale, loans accounted for under the fair value option, certain government insured or guaranteed loans, and purchased credit deteriorated loans that did not meet the criteria to be classified as TDRs at March 31, 2020. Excluded from TDRs at December 31, 2019 are $1.0 billion of consumer loans held for sale, loans accounted for

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




under the fair value option and pooled purchased impaired loans, as well as certain government insured or guaranteed loans. Nonperforming TDRs represented approximately 47% and 52% of total nonperforming loans at March 31, 2020 and December 31, 2019, respectively, and 50% and 51% of total TDRs at March 31, 2020 and December 31, 2019, respectively. The remaining portion of TDRs represents TDRs that have been returned to accrual status after performing under the restructured terms for at least six consecutive months.

See Note 3 Loans in the Notes to Consolidated Financial Statements in this Report for additional information on TDRs.

Loan Modifications
See the Executive Summary of this Financial Review for information on short-term loan modifications being made for both commercial and consumer customers in light of the current economic circumstances related to COVID-19. For additional information related to loan modifications, see the Credit Risk Management portion of the Risk Management section in our 2019 Form 10-K.

Allowances for Credit Losses

On January 1, 2020 we adopted the CECL standard which replaced the incurred loss methodology for our credit related reserves with an expected credit loss methodology for the remaining estimated contractual term of in-scope assets and off-balance sheet exposures. Our ACL is based on historical loss experience, borrower characteristics, current economic conditions, reasonable and supportable forecasts of future conditions and other relevant factors. We maintain the ACL at an appropriate level for expected losses on our existing investment securities, loans, finance leases, trade receivables and other financial assets and off-balance sheet credit exposures and determine this allowance based on quarterly assessments of the remaining estimated contractual term of the assets or exposures as of the balance sheet date.

Expected losses are estimated using a combination of (i) the expected losses over a reasonable and supportable forecast period (RSFP), (ii) a period of reversion to long run average expected losses (reversion period) where applicable, and (iii) long run average (LRA) expected losses for the remaining estimated contractual term.

We use forward-looking information in estimating expected credit losses for the RSFP. For this purpose, we have established a framework which includes a three year reasonable and supportable forecast period and the use of four economic scenarios and associated probability weights, which in combination create a forecast of expected economic outcomes over our RSFP of three years. Forward looking information, such as forecasted relevant macroeconomic variables, is incorporated into the expected credit loss estimates using quantitative techniques, as well as through analysis from PNC economists and management’s judgment in qualitatively assessing the ACL.

The reversion period is used to bridge RSFP and LRA expected credit losses. We may consider a number of factors in determining the duration of the reversion period, such as contractual maturity of the asset, observed historical patterns and the estimated credit loss rates at the end of RSFP relative to the beginning of the LRA period.

The LRA expected credit losses are derived from our available historical credit information. We use LRA expected loss for the portfolio for the estimated remaining contractual term beyond the RSFP and reversion period.

The following discussion provides additional information related to our reserves under CECL for loans and leases as well as unfunded lending related commitments. See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in this Report for further discussion on our ACL, including details of our methodologies and discussion of the allowances for investment securities and other financial assets. See also the Critical Accounting Estimates and Judgments section of this Financial Review for further discussion of the assumptions used in the determination of the ACL and the predicted impacts on the ACL of deteriorating economic conditions as a result of COVID-19.

Allowance for Credit Losses - Loans and Leases
Our pooled expected loss methodology is based upon the quantification of PD, LGD, exposure at default (EAD) and the remaining estimated contractual term for a loan or loan segment. The impact of prepayments is considered in our expected loss estimates by adjusting the aforementioned risk parameters. We use historical data, current borrower characteristics and forecasted economic variables in complex methods, including statistical models, to estimate these risk parameters by credit risk characteristics. PDs represent a quantification of risk that a borrower may not be able to pay their contractual obligation over a defined period of time. LGD describes the estimate of potential loss if a borrower were to default, and EAD (or utilization rates for revolving loans) is the estimated balance outstanding at the time of default and loss. These parameters are calculated for each forecasted scenario, and are combined to generate expected loss estimates by scenario in proportion to the scenario weights.

We use a discounted cash flow methodology for our consumer real estate related loan classes and for certain commercial and consumer TDR loans. For non-TDR residential real estate loans and lines, we determine effective interest rates considering

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



contractual cash flows adjusted for prepayments and market interest rates. We then determine the net present value of expected cash flows and ACL by discounting contractual cash flows adjusted for both prepayments and expected credit losses using the effective interest rates.

We establish individually assessed reserves for loans and leases that do not share similar risk characteristics with a pool of loans using methods prescribed by GAAP. Reserves for individual commercial nonperforming loans and commercial TDRs exceeding a defined dollar threshold are based on an analysis of the present value of the loan’s expected future cash flows or the fair value of the collateral, if appropriate under our policy for collateral dependent loans. Commercial loans that are below the defined threshold and accruing TDRs are collectively reserved for, as we believe these loans continue to share similar risk characteristics. For consumer nonperforming loans classified as collateral dependent, charge-off and ACL related to recovery of amounts previously charged-off are evaluated through an analysis of the fair value of the collateral less costs to sell.

While our reserve methodologies strive to reflect all relevant credit risk factors, there continues to be uncertainty associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal variations between expected and actual outcomes. We may hold additional reserves that are designed to provide coverage for losses attributable to such risks. A portion of the ACL is related to qualitative measurement factors. These factors may include, but are not limited to, the following:
Industry concentrations and conditions,
Changes in market conditions, including regulatory and legal requirements,
Changes in the nature and volume of our portfolio,
Recent credit quality trends,
Recent loss experience in particular portfolios, including specific and unique events,
Recent macro-economic factors that may not be reflected in the forecast information,
Limitations of available data, including historical loss information and recent data such as collateral values,
Model imprecision,
Changes in lending policies and procedures, including changes in loss recognition and mitigation policies and procedures,
Timing of available information, including the performance of first lien positions, and
Other relevant factors.

Allowance for Credit Losses - Unfunded Lending Related Commitments
We maintain the allowance for unfunded lending related commitments on off-balance sheet credit exposures that are not unconditionally cancelable, (e.g., unfunded loan commitments, letters of credit and certain financial guarantees) at a level we believe is appropriate as of the balance sheet date to absorb expected credit losses on these exposures. Other than the estimation of the probability of funding, this reserve is estimated in a manner similar to the methodology used for determining reserves for loans and leases. The allowance for unfunded lending related commitments is recorded as a liability on the Consolidated Balance Sheet. Net adjustments to this reserve are included in the provision for credit losses.


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




Table 23: Allowance for Credit Losses by Loan Class (a)
 
 
March 31, 2020
 
December 31, 2019
 

Dollars in millions
 
Allowance Amount
Total Loans
% of Total Loans
 
Allowance Amount (b)
Total Loans
% of Total Loans
 
Allowance for credit losses - loans and leases
 
 
 
 
 
 
 
 
 
Commercial Lending
 
 
 
 
 
 
 
 
 
Commercial
 
$
1,596

$
149,131

1.07
%
 
$
1,489

$
125,337

1.19
%
 
Commercial real estate
 
269

28,544

.94
%
 
278

28,110

.99
%
 
Equipment lease financing
 
114

7,061

1.61
%
 
45

7,155

.63
%
 
Total commercial lending
 
1,979

184,736

1.07
%
 
1,812

160,602

1.13
%
 
Consumer Lending
 
 
 


 
 
 


 
Home equity
 
332

25,081

1.32
%
 
87

25,085

.35
%
 
Residential real estate
 
18

22,250

.08
%
 
258

21,821

1.18
%
 
Automobile
 
377

17,194

2.19
%
 
160

16,754

.95
%
 
Credit card
 
746

7,132

10.46
%
 
288

7,308

3.94
%
 
Education
 
123

3,247

3.79
%
 
17

3,336

.51
%
 
Other consumer
 
369

5,003

7.38
%
 
120

4,937

2.43
%
 
Total consumer lending
 
1,965

79,907

2.46
%
 
930

79,241

1.17
%
 
Total
 
3,944

$
264,643

1.49
%
 
2,742

$
239,843

1.14
%
 
Allowance for credit losses - unfunded lending related commitments
 
450

 
 
 
318

 
 
 
Allowance for credit losses
 
$
4,394

 
 
 
$
3,060

 
 
 
Allowance for credit losses to total loans (c)
 
1.66
%
 
 
 
1.28
%
 
 
 
Commercial lending
 
1.26
%
 
 
 
1.33
%
 
 
 
Consumer lending
 
2.59
%
 
 
 
1.18
%
 
 
 
(a) Excludes allowances for investment securities and other financial assets.
(b) Prior period reserve amounts represent the ALLL and allowance for unfunded loan commitments and letters of credit, respectively.
(c) Calculated as the ACL for loans and leases and the ACL for unfunded lending related commitments divided by total loans.


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



The following table summarizes our loan charge-offs and recoveries.
Table 24: Loan Charge-Offs and Recoveries
Three months ended March 31
 
Gross
Charge-offs

 
Recoveries

 
Net Charge-offs /
(Recoveries)

 
Percent of Average
Loans (Annualized)

 
Dollars in millions
2020
 
 
 
 
 
 
 
 
 
Commercial Lending
 
 
 
 
 
 
 
 
 
Commercial
 
$
78

 
$
18

 
$
60

 
.19
 %
 
Commercial real estate
 

 
4

 
(4
)
 
(.06
)%
 
Equipment lease financing
 
5

 
2

 
3

 
.17
 %
 
Total commercial lending
 
83


24


59

 
.14
 %
 
Consumer Lending
 
 
 
 
 
 
 
 
 
Home equity
 
11

 
14

 
(3
)
 
(.05
)%
 
Residential real estate
 
2

 
4

 
(2
)
 
(.04
)%
 
Automobile
 
84

 
35

 
49

 
1.15
 %
 
Credit card
 
78

 
8

 
70

 
3.90
 %
 
Education
 
6

 
2

 
4

 
.48
 %
 
Other consumer
 
40

 
5

 
35

 
2.83
 %
 
Total consumer lending
 
221


68


153

 
.77
 %
 
  Total
 
$
304


$
92


$
212

 
.35
 %
 
2019
 
 
 
 
 
 
 
 
 
Commercial Lending
 
 
 
 
 
 
 
 
 
Commercial
 
$
25

 
$
14

 
$
11

 
.04
 %
 
Commercial real estate
 
3

 
3

 

 

 
Equipment lease financing
 
3

 
2

 
1

 
.06
 %
 
Total commercial lending
 
31


19


12

 
.03
 %
 
Consumer Lending
 
 
 
 
 
 
 
 
 
Home equity
 
23

 
18

 
5

 
.08
 %
 
Residential real estate
 
2

 
3

 
(1
)
 
(.02
)%
 
Automobile
 
58

 
26

 
32

 
.89
 %
 
Credit card
 
67

 
7

 
60

 
3.91
 %
 
Education
 
6

 
2

 
4

 
.43
 %
 
Other consumer
 
28

 
4

 
24

 
2.13
 %
 
Total consumer lending
 
184


60


124

 
.68
 %
 
  Total
 
$
215


$
79


$
136

 
.24
 %
 

Total net charge-offs increased $76 million, or 56%, for the first three months of 2020 compared to the same period in 2019. The increase in commercial net charge-offs reflected the impact of certain individual credits, while the increases in automobile, credit card and other consumer loan net charge-offs were due in part to loan portfolio growth.

See Note 1 Accounting Policies and Note 3 Loans in the Notes To Consolidated Financial Statements in this report for additional information.
Liquidity and Capital Management
Liquidity risk, including our liquidity monitoring measures and tools, is described in further detail in the Liquidity and Capital Management section of our 2019 Form 10-K.

One of the ways we monitor our liquidity is by reference to the Liquidity Coverage Ratio (LCR), a regulatory minimum liquidity requirement designed to ensure that covered banking organizations maintain an adequate level of liquidity to meet net liquidity needs over the course of a hypothetical 30-day stress scenario. The LCR is calculated by dividing the amount of an institution’s high quality, unencumbered liquid assets (HQLA), as defined and calculated in accordance with the LCR rules, by its estimated, weighted net cash outflows, with net cash outflows determined by applying the assumed outflow factors in the LCR rules. The resulting quotient is expressed as a percentage. Effective January 1, 2020, PNC and PNC Bank, as Category III institutions under the Tailoring Rules, were subject to a reduced LCR requirement, with each company's net outflows reduced by 15%, thereby reducing the amount of HQLA each institution must hold to meet the LCR minimum requirement. The minimum LCR that PNC and PNC Bank are required to

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




maintain continues to be 100%. PNC and PNC Bank calculate the LCR daily, and as of March 31, 2020, the LCR for PNC and PNC Bank exceeded the requirement of 100%.

We provide additional information regarding regulatory liquidity requirements and their potential impact on us in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of our 2019 Form 10-K.

Sources of Liquidity
Our largest source of liquidity on a consolidated basis is the customer deposit base generated by our banking businesses. These deposits provide relatively stable and low-cost funding. Total deposits increased to $305.2 billion at March 31, 2020 from $288.5 billion at December 31, 2019 driven by growth in both interest-bearing and noninterest-bearing deposits. See the Funding Sources portion of the Consolidated Balance Sheet Review section of this Financial Review for additional information related to our deposits. Additionally, certain assets determined by us to be liquid as well as unused borrowing capacity from a number of sources are also available to manage our liquidity position.
At March 31, 2020, our liquid assets consisted of cash and due from banks and short-term investments (federal funds sold, resale agreements, trading securities and interest-earning deposits with banks) totaling $33.0 billion and securities available for sale totaling $89.1 billion. The level of liquid assets fluctuates over time based on many factors, including market conditions, loan and deposit growth and balance sheet management activities. Our liquid assets included $24.4 billion of securities available for sale and trading securities pledged as collateral to secure public and trust deposits, repurchase agreements and for other purposes. In addition, $1.3 billion of securities held to maturity were also pledged as collateral for these purposes.

We also obtain liquidity through various forms of funding, including long-term debt (senior notes, subordinated debt and FHLB borrowings) and short-term borrowings (securities sold under repurchase agreements, commercial paper and other short-term borrowings). See Note 7 Borrowed Funds in the Notes To Consolidated Financial Statements and the Funding Sources section of the Consolidated Balance Sheet Review in this Report, and Note 10 Borrowed Funds in Item 8 of our 2019 Form 10-K for additional information related to our borrowings.
Total senior and subordinated debt, on a consolidated basis, increased due to the following activity:
Table 25: Senior and Subordinated Debt
In billions
2020

 
January 1
$
35.1

 
Issuances
3.5

 
Calls and maturities
(2.1
)
 
Other
1.4

 
March 31
$
37.9

 
Bank Liquidity
Under PNC Bank’s 2014 bank note program, as amended, PNC Bank may from time to time offer up to $40.0 billion aggregate principal amount outstanding at any one time of its unsecured senior and subordinated notes with maturity dates more than nine months (in the case of senior notes) and five years or more (in the case of subordinated notes) from their date of issue. At March 31, 2020, PNC Bank had $25.4 billion of notes outstanding under this program of which $20.4 billion were senior bank notes and $5.0 billion were subordinated bank notes. The following table details issuances for the three months ended March 31, 2020.
Table 26: PNC Bank Notes Issued
Issuance Date
Amount
Description of Issuance
February 25, 2020
$1.0 billion
$1.0 billion of senior floating rate notes with a maturity date of February 24, 2023. Interest is payable quarterly at the 3-month LIBOR rate, reset quarterly, plus 32.5 basis points, on February 24, May 24, August 24, and November 24, commencing on May 24, 2020.

February 25, 2020
$500 million
$500 million of senior fixed-to-floating rate notes with a maturity date of February 24, 2023. Interest is payable semi-annually at a fixed rate of 1.743% per annum, on February 24 and August 24 of each year, beginning on August 24, 2020. Beginning on February 24, 2022, interest is payable quarterly at the floating rate equal to the 3-month LIBOR rate, reset quarterly, plus 32.3 basis points, on February 24, May 24, August 24, and November 24, commencing on May 24, 2022.


PNC Bank maintains additional secured borrowing capacity with the FHLB-Pittsburgh and through the Federal Reserve Bank discount window. The Federal Reserve Bank, however, is not viewed as a primary means of funding our routine business activities, but rather as a potential source of liquidity in a stressed environment or during a market disruption. At March 31, 2020, our unused secured borrowing capacity at the FHLB-Pittsburgh and the Federal Reserve Bank totaled $51.4 billion, including $20.2 billion through the

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



Federal Reserve Bank discount window. The Federal Reserve also has established certain special liquidity facilities under its emergency lending authority in Section 13(3) of the Federal Reserve Act in response to the economic impact of COVID-19. For additional information on these special liquidity facilities see the Recent Regulatory Developments section of this Report.

PNC Bank has the ability to offer up to $10.0 billion of its commercial paper to provide additional liquidity. As of March 31, 2020, there were no issuances outstanding under this program.

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

As of March 31, 2020, available parent company liquidity totaled $6.5 billion. Parent company liquidity is primarily held in intercompany short-term investments, the terms of which provide for the availability of cash in 31 days or less. Investments with longer durations may also be acquired, but if so, the related maturities are aligned with scheduled cash needs, such as the maturity of parent company debt obligations.

The principal source of parent company liquidity is the dividends it receives from PNC Bank, which may be impacted by the following:
Bank-level capital needs,
Laws and regulations,
Corporate policies,
Contractual restrictions, and
Other factors.

There are statutory and regulatory limitations on the ability of a national bank to pay dividends or make other capital distributions or to extend credit to the parent company or its non-bank subsidiaries. The amount available for dividend payments by PNC Bank to the parent company without prior regulatory approval was approximately $2.5 billion at March 31, 2020. See Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements in our 2019 Form 10-K for a further discussion of these limitations.

In addition to dividends from PNC Bank, other sources of parent company liquidity include cash and investments, as well as dividends and loan repayments from other subsidiaries and dividends or distributions from equity investments. We can also generate liquidity for the parent company and PNC’s non-bank subsidiaries through the issuance of debt and equity securities, including certain capital instruments, in public or private markets and commercial paper. The parent company has the ability to offer up to $5.0 billion of commercial paper to provide additional liquidity. As of March 31, 2020, there were no commercial paper issuances outstanding.

The parent company has an effective shelf registration statement pursuant to which we can issue additional debt, equity and other capital instruments. On January 22, 2020, the parent company issued $2.0 billion of senior notes with a maturity date of January 22, 2030, redeemable, in whole or in part, on or after October 24, 2029. Interest is payable semi-annually at a fixed rate of 2.550% per annum, on January 22 and July 22 of each year, commencing on July 22, 2020.

Parent company senior and subordinated debt outstanding totaled $11.5 billion and $9.8 billion at March 31, 2020 and December 31, 2019, respectively.

Contractual Obligations and Commitments
We have contractual obligations representing required future payments on borrowed funds, time deposits, leases, pension and postretirement benefits and purchase obligations. See the Liquidity and Capital Management portion of the Risk Management section in our 2019 Form 10-K for more information on these future cash outflows. Additionally, in the normal course of business we have various commitments outstanding, certain of which are not included on our Consolidated Balance Sheet. We provide information on our commitments in Note 8 Commitments in the Notes To Consolidated Financial Statements of this Report.

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

In general, rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, level and quality of earnings, and the current legislative and regulatory environment, including implied government support. A decrease, or potential decrease, in credit ratings could impact access to the capital markets and/or increase the cost of debt, and thereby adversely affect liquidity and financial condition.

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




Table 27: Credit Ratings for PNC and PNC Bank
 
March 31, 2020
  
Moody’s
Standard & Poor’s
Fitch
PNC
 
 
 
Senior debt
A3
A-
A+
Subordinated debt
A3
BBB+
A
Preferred stock
Baa2
BBB-
BBB-
PNC Bank
 
 
 
Senior debt
A2
A
A+
Subordinated debt
A3
A-
A
Long-term deposits
Aa2
A
AA-
Short-term deposits
P-1
A-1
F1+
Short-term notes
P-1
A-1
F1

Capital Management
Detailed information on our capital management processes and activities, including additional information on our previous CCAR submissions and capital plans, is included in the Capital Management portion of the Risk Management section in our 2019 Form 10-K.

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

In connection with the capital plan accepted by the Federal Reserve as part of our 2019 CCAR submission, we repurchased 10.1 million common shares for $1.4 billion in the first quarter of 2020. As of March 31, 2020, PNC has repurchased a total of 24.0 million shares for $3.4 billion under current share repurchase programs that will end June 30, 2020.

PNC announced on March 16, 2020, a temporary suspension of our common stock repurchase program through June 30, 2020, in conjunction with the Federal Reserve's effort to support the U.S. economy during the COVID-19 outbreak.

We paid dividends on common stock of $.5 billion, or $1.15 per common share, during the first quarter of 2020. On April 2, 2020, the PNC Board of Directors declared a quarterly common stock cash dividend of $1.15 per share, with a payment date of May 5, 2020. On April 6, 2020, PNC submitted its capital plan and stress test results to the Federal Reserve and OCC as part of the 2020 annual Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress testing (DFAST) process.


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



Table 28: Basel III Capital
Dollars in millions
Basel III
March 31, 2020 (a)
 
March 31, 2020 (Fully Implemented)
(estimated) (b)
 
Common equity Tier 1 capital
 
 
 
 
Common stock plus related surplus, net of treasury stock
$
866

 
$
866

 
Retained earnings
42,730

 
41,885

 
Goodwill, net of associated deferred tax liabilities
(9,027
)
 
(9,027
)
 
Other disallowed intangibles, net of deferred tax liabilities
(210
)
 
(210
)
 
Other adjustments/(deductions)
(220
)
 
(224
)
 
Total common equity Tier 1 capital before threshold deductions
34,139

 
33,290

 
Total threshold deductions (c)

 

 
Common equity Tier 1 capital
$
34,139

 
$
33,290

 
Additional Tier 1 capital
 
 
 
 
Preferred stock plus related surplus
3,994

 
3,994

 
Other adjustments/(deductions)

 

 
Tier 1 capital
$
38,133

 
$
37,284

 
Additional Tier 2 capital
 
 
 
 
Qualifying subordinated debt
4,249

 
4,249

 
Trust preferred capital securities
40

 
 
 
Eligible credit reserves includable in Tier 2 capital
3,511

 
4,346

 
Total Basel III capital
$
45,933

 
$
45,879

 
Risk-weighted assets
 
 
 
 
Basel III standardized approach risk-weighted assets (d)
$
363,631

 
$
363,651

 
Average quarterly adjusted total assets
$
402,018

 
$
401,169

 
Supplementary leverage exposure
$
481,144

 
$
481,140

 
Basel III risk-based capital and leverage ratios (a)(e)
 
 
 
 
Common equity Tier 1
9.4
%
 
9.2
%
 
Tier 1
10.5
%
 
10.3
%
 
Total (f)
12.6
%
 
12.6
%
 
Leverage (g)
9.5
%
 
9.3
%
 
Supplementary leverage ratio (h)
7.9
%
 
7.7
%
 
(a)
The ratios are calculated to reflect PNC's election to adopt the CECL optional five-year transition provision.
(b)
The ratios are calculated to reflect the full impact of CECL and excludes the benefits of phase-ins under the optional transition provision.
(c)
Based on the Tailoring Rules, effective January 1, 2020 for PNC, the quantitative threshold limits increased, resulting in no deduction as of March 31, 2020.
(d)
Basel III standardized approach weighted-assets are based on the Basel III standardized approach rules and include credit and market risk-weighted assets.
(e)
All ratios are calculated using the regulatory capital methodology applicable to PNC and calculated based on the standardized approach.
(f)
The Basel III Total risk-based capital ratios include nonqualifying trust preferred capital securities of $40 million that are subject to a phase-out period that runs through 2021.
(g)
Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets.
(h)
Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure. PNC and PNC Bank are subject to a 3% minimum supplementary leverage ratio.

As of January 1, 2020, the 2019 Tailoring Rules became effective for PNC. The most significant changes involve the election to exclude specific AOCI items from common equity Tier 1 (CET1) capital and higher thresholds used to calculate CET1 capital deductions. Effective January 1, 2020, PNC must deduct from CET1 capital (net of associated deferred tax liabilities) investments in unconsolidated financial institutions (for PNC, primarily BlackRock), mortgage servicing rights and deferred tax assets to the extent such items individually exceed 25% of the institution’s adjusted CET1 capital.
PNC’s regulatory risk-based capital ratios in 2020 are calculated using the standardized approach for determining risk-weighted assets. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, past due exposures and equity exposures are generally subject to higher risk weights than other types of exposures.
On March 27, 2020, the regulatory agencies issued an interim final rule delaying the estimated impact on regulatory capital stemming from implementing CECL. CECL’s estimated impact on CET1 capital, as defined by the rule, is the change in retained earnings at adoption plus or minus 25% of the change in CECL ACL at the balance sheet date compared to the CECL ACL at transition.  The

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




estimated CECL impact is added to CET1 through December 31, 2021, then phased-out over the following three years.  PNC elected to adopt this optional transition provision effective March 31, 2020. See additional discussion of this interim final rule in Recent Regulatory Developments in this Financial Review.
Federal banking regulators have stated that they expect the largest U.S. bank holding companies (BHCs), including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largest U.S. BHCs, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers through estimated stress scenarios. We seek to manage our capital consistent with these regulatory principles, and believe that our March 31, 2020 capital levels were aligned with them.

At March 31, 2020, PNC and PNC Bank, our sole bank subsidiary, were both considered “well capitalized,” based on applicable U.S. regulatory capital ratio requirements. To qualify as “well capitalized”, PNC must have Basel III capital ratios of at least 6% for Tier 1 risk-based capital and 10% for Total risk-based capital, and PNC Bank must have Basel III capital ratios of at least 6.5% for Common equity Tier 1 risk-based capital, 8% for Tier 1 risk-based capital, 10% for Total risk-based capital and a Leverage ratio of at least 5%.

See the Recent Regulatory Developments section of this Report for recent developments that could have a potential impact on our Basel III capital ratios. We provide additional information regarding regulatory capital requirements and some of their potential impacts on us in the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 18 Regulatory Matters in our 2019 Form 10-K.

Market Risk Management
See the Market Risk Management portion of the Risk Management Section in our 2019 Form 10-K for additional discussion regarding market risk.

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

Our Asset and Liability Management group centrally manages interest rate risk as prescribed in our risk management policies, which are approved by management’s Asset and Liability Committee and the Risk Committee of the Board of Directors.
Sensitivity results and market interest rate benchmarks for the first quarters of 2020 and 2019 follow.

Table 29: Interest Sensitivity Analysis
 
First Quarter 2020

 
First Quarter 2019

 
Net Interest Income Sensitivity Simulation (a)
 
 
 
 
Effect on net interest income in first year from gradual interest rate change over the
   following 12 months of:
 
 
 
 
100 basis point increase
1.4
%
 
1.5
%
 
Effect on net interest income in second year from gradual interest rate change over the
    preceding 12 months of:
 
 
 
 
100 basis point increase
6.1
%
 
4.0
%
 
Duration of Equity Model (a)
 
 
 
 
Base case duration of equity (in years)
(7.3
)
 
(3.7
)
 
Key Period-End Interest Rates
 
 
 
 
One-month LIBOR
.99
%
 
2.49
%
 
Three-month LIBOR
1.45
%
 
2.60
%
 
Three-year swap
.46
%
 
2.31
%
 
(a)
Given the inherent limitations in certain of these measurement tools and techniques, results become less meaningful as interest rates approach zero. Senior management recently approved the suspension of the 100bps decrease in rate shock sensitivities considering the current low rate environment.
In addition to measuring the effect on net interest income assuming parallel changes in current interest rates, we routinely simulate the effects of a number of nonparallel interest rate environments. Table 30 reflects the percentage change in net interest income over the next two 12-month periods assuming (i) the PNC Economist’s most likely rate forecast, (ii) implied market forward rates and (iii) yield curve slope flattening (a 50 basis point yield curve slope flattening between one-month and ten-year rates superimposed on current base rates) scenario.

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



All changes in forecasted net interest income are relative to results in a base rate scenario where current market rates are assumed to remain unchanged over the forecast horizon.
Table 30: Net Interest Income Sensitivity to Alternative Rate Scenarios
 
March 31, 2020
 
 
PNC
Economist

Market
Forward

Slope
Flattening

 
First year sensitivity
(5.3
)%
(3.6
)%
(.6
)%
 
Second year sensitivity
(7.4
)%
(7.0
)%
(2.6
)%
 

When forecasting net interest income, we make assumptions about interest rates and the shape of the yield curve, the volume and characteristics of new business and the behavior of existing on- and off-balance sheet positions. These assumptions determine the future level of simulated net interest income in the base interest rate scenario and the other interest rate scenarios presented in Tables 29 and 30. These simulations assume that as assets and liabilities mature, they are replaced or repriced at then current market rates.

The following graph presents the LIBOR/Swap yield curves for the base rate scenario and each of the alternate scenarios one year forward.
Table 31: Alternate Interest Rate Scenarios: One Year Forward
q12020irfinala02.jpg

The first quarter 2020 interest sensitivity analyses indicate that our Consolidated Balance Sheet is positioned to benefit from an increase in interest rates and an upward sloping interest rate yield curve. We believe that we have the deposit funding base and balance sheet flexibility to adjust, where appropriate and permissible, to changing interest rates and market conditions.

The planned discontinuance of the requirement that banks submit rates for the calculation of LIBOR after 2021 presents risks to the financial instruments originated, held, or serviced by PNC that use LIBOR as a reference rate. PNC holds instruments and services its instruments and instruments owned by others that may be impacted by the likely discontinuance of LIBOR, including loans, investments, hedging products, floating-rate obligations, and other financial instruments that use LIBOR as a reference rate. The transition from LIBOR as an interest rate benchmark will subject PNC to financial, legal, operational, and reputational risks.

PNC has established a cross functional governance structure to oversee the overall strategy for the transition from LIBOR and mitigate risks associated with the transition. An initial LIBOR impact and risk assessment has been performed, which identified the associated risks across products, systems, models and processes. PNC is actively monitoring its overall firm-wide exposure to LIBOR and using these results to plan transitional strategies and track progress versus these goals.

We also continue to focus our transition efforts on:
enhancing fallback language in new contracts and reviewing existing legal contracts/agreements to assess fallback language impacts;
making preparations for internal operational readiness;
making necessary enhancements to our infrastructure including systems, models, valuation tools, and processes;
developing and delivering on internal and external LIBOR cessation communication plans;
engaging with our clients, industry working groups, and regulators; and
monitoring developments associated with LIBOR alternatives and industry practices related to LIBOR-indexed instruments.

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




See the Risk Factors section in Item IA and Risk Management Market Rate Management - Interest Rate Risk section in Item 7 disclosed in our 2019 Form 10-K for additional information regarding the planned discontinuance of LIBOR as a reference rate.
Market Risk Management – Customer-Related Trading Risk
We engage in fixed income securities, derivatives and foreign exchange transactions to support our customers’ investing and hedging activities. These transactions, related hedges and the credit valuation adjustment related to our customer derivatives portfolio are marked-to-market daily and reported as customer-related trading activities. We do not engage in proprietary trading of these products.
We use value-at-risk (VaR) as the primary means to measure and monitor market risk in customer-related trading activities. VaR is used to estimate the probability of portfolio losses based on the statistical analysis of historical market risk factors. A diversified VaR reflects empirical correlations across different asset classes. We calculate a diversified VaR at a 95% confidence interval and the results for the first three months of 2020 and 2019 were within our acceptable limits.
See the Market Risk Management – Customer-Related Trading Risk section of our 2019 Form 10-K for more information on our models used to calculate VaR and our backtesting process.
Customer related trading revenue was $71 million for the three months ended March 31, 2020 compared to $48 million for the same period in 2019. The increase was primarily due to higher derivative clients sales revenue partially offset by client-related trading losses due to market volatility resulting from COVID-19.
Market Risk Management – Equity And Other Investment Risk
Equity investment risk is the risk of potential losses associated with investing in both private and public equity markets. In addition to extending credit, taking deposits, underwriting securities and trading financial instruments, we make and manage direct investments in a variety of transactions, including management buyouts, recapitalizations and growth financings in a variety of industries. We also have investments in affiliated and non-affiliated funds that make similar investments in private equity. The economic and/or book value of these investments and other assets are directly affected by changes in market factors.
Various PNC business units manage our equity and other investment activities. Our businesses are responsible for making investment decisions within the approved policy limits and associated guidelines.
A summary of our equity investments follows:
Table 32: Equity Investments Summary
 
March 31
2020

 
December 31
2019

 
Change
 
Dollars in millions
 
$

 
%

 
BlackRock
$
8,511

 
$
8,558

 
$
(47
)
 
(1
)%
 
Tax credit investments
2,134

 
2,218

 
(84
)
 
(4
)%
 
Private equity and other
2,560

 
2,958

 
(398
)
 
(13
)%
 
Total
$
13,205

 
$
13,734

 
$
(529
)
 
(4
)%
 

BlackRock
We owned approximately 35 million common stock equivalent shares of BlackRock equity at March 31, 2020, accounted for under the equity method. The Business Segments Review section of this Financial Review includes additional information about BlackRock.
Tax Credit Investments
Included in our equity investments are direct tax credit investments and equity investments held by consolidated entities. These tax credit investment balances included unfunded commitments totaling $.9 billion and $1.0 billion at March 31, 2020 and December 31, 2019, respectively. These unfunded commitments are included in Other liabilities on our Consolidated Balance Sheet.

Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in our 2019 Form 10-K has further information on Tax Credit Investments.

Private Equity and Other
The majority of our other equity investments consists of our private equity portfolio. The private equity portfolio is an illiquid portfolio consisting of mezzanine and equity investments that vary by industry, stage and type of investment. Private equity investments carried at estimated fair value totaled $1.4 billion and $1.5 billion at March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020, $1.2 billion was invested directly in a variety of companies and $.2 billion was invested indirectly through various private equity funds. See the Supervision and Regulation section in Item 1 of our 2019 Form 10-K for discussion of the potential impacts of the Volcker Rule provisions of Dodd-Frank on our interests in and other relationships with private funds covered by the Volcker Rule.


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



Included in our other equity investments are Visa Class B common shares, which are recorded at cost. Visa Class B common shares that we own are transferable only under limited circumstances until they can be converted into shares of the publicly-traded Class A common shares, which cannot happen until the resolution of the pending interchange litigation. Based upon the March 31, 2020 per share closing price of $161.12 for a Visa Class A common share, the estimated value of our total investment in the Class B common shares was approximately $919 million at the current conversion rate of Visa B shares to Visa A shares, while our cost basis was not significant. See Note 6 Fair Value and Note 19 Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8 of our 2019 10-K for additional information regarding our Visa agreements. The estimated value does not represent fair value of the Visa B common shares given the share’s limited transferability and the lack of observable transactions in the marketplace.

We also have certain other equity investments, the majority of which represent investments in affiliated and non-affiliated funds with both traditional and alternative investment strategies. Net gains related to these investments were not significant at March 31, 2020 and March 31, 2019.

Financial Derivatives
We use a variety of financial derivatives as part of the overall asset and liability risk management process to help manage exposure to market (primarily interest rate) and credit risk inherent in our business activities. We also enter into derivatives with customers to facilitate their risk management activities.

Financial derivatives involve, to varying degrees, market and credit risk. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional and an underlying as specified in the contract. Therefore, cash requirements and exposure to credit risk are significantly less than the notional amount on these instruments.

Further information on our financial derivatives is presented in Note 1 Accounting Policies and Note 6 Fair Value in our Notes To Consolidated Financial Statements in our 2019 Form 10-K and in Note 11 Fair Value and Note 12 Financial Derivatives in the Notes To Consolidated Financial Statements in this Report.

Not all elements of market and credit risk are addressed through the use of financial derivatives, and such instruments may be ineffective for their intended purposes due to unanticipated market changes, among other reasons.

RECENT REGULATORY DEVELOPMENTS

The outbreak of COVID–19 resulted in legislative, regulatory and supervisory actions. See Part II, Item 1A Risk Factors for a description of the risks presented by COVID–19.

Coronavirus Aid, Relief and Economic Security Act
In March 2020, the U.S. Congress passed, and President Trump signed into law, the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which includes a variety of provisions designed to aid business and consumers financially impacted by the COVID-19 pandemic and associated public health directives. The provisions of the CARES Act applicable to individuals and businesses generally include, among other things:
Refundable tax credits for eligible taxpayers of $1,200 ($2,400 for married taxpayers filing jointly), plus $500 per child,
subject to income limitations;
Funding for an additional 13 weeks of unemployment benefits, an additional $600 a week (for up to four months) of unemployment payments, and payments during the first week of an individual’s unemployment on a temporary basis;
Delays in the payment of the employer portion of Social Security taxes otherwise payable through January 1, 2021, with 50% of delayed amounts due by each of December 31, 2021 and December 31, 2022;
An expansion of the ability of corporate taxpayers to take advantage of net operating losses; and
Refundable tax credits for eligible employers against their portion of Social Security taxes equal to 50% of eligible wages paid between March 13, 2020 and December 31, 2020 (up to a maximum of $10,000 per employee) if the employer’s operations were fully or partially suspended by governmental authorities due to the COVID-19 crisis or the employer experienced a significant decline in gross receipts (as measured in the manner specified in the CARES Act).

The CARES Act, as subsequently amended by the Paycheck Protection Program and Health Care Enhancement Act, also authorizes the Small Business Administration (SBA) and the Treasury Department to expend up to $659 billion to support the issuance by SBA approved lenders of loans of up to $10 million to small and medium-sized businesses that meet certain size and other eligibility requirements under a new Paycheck Protection Program (PPP). Of the authorized amount, the SBA is required to reserve at least $60 billion in funding for PPP loans made by lenders with $50 billion or less in total assets. Borrowers may use the proceeds of a PPP loan only for specified purposes (such as meeting payroll) and borrowers can have the loan partially or fully forgiven (and repaid by the SBA) to the extent the borrower expends funds during the eight weeks following receipt of the loan proceeds for payroll costs or other specified expenses. Borrowers and lenders are required to provide certain certifications and documentation, and conduct certain

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




reviews, in connection with PPP loan applications as specified in the PPP rules and associated guidance, which are subject to change upon further clarification by the SBA and Treasury. PNC Bank is participating in the PPP. However, in light of the exceptionally strong demand for PPP loans, both among customers of PNC Bank and small businesses generally, it is possible that not all eligible applicants for PPP loans will be processed and receive SBA approval before the currently available funding runs out.

The CARES Act also permits residential and multifamily mortgage borrowers with federally backed mortgages to request payment forbearance for up to six months or 30 days, respectively, under a streamlined process if the borrower is experiencing a financial hardship due to the COVID-19 national emergency. The borrower may request an extension of these forbearance periods, for up to an additional six months for residential borrowers and 60 days for multifamily borrowers. Residential mortgage borrowers with federally backed mortgages, and tenants of multifamily borrowers that receive forbearance under these provisions, also benefit from certain foreclosure and eviction protections. For these purposes, federally backed mortgages include those guaranteed by the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), the Federal Housing Administration or the Veterans Administration. Under revised Federal Housing Finance Agency policies, servicers of FNMA and FHLMC-guaranteed residential mortgages, such as PNC Bank, will no longer have an obligation to advance scheduled payments on a mortgage loan that is in a mortgage-backed security once the servicer has advanced four months of missed payments on the loan. Various states and municipalities also have imposed new foreclosure and eviction limitations of varying scope and degree in response to the COVID-19 pandemic. The CARES Act also provides consumers certain temporary protections against the reporting of negative credit information to a credit reporting agency as a result of loan accommodations provided during the COVID-19 national emergency.

The CARES Act permits financial institutions to temporarily suspend the requirements under GAAP to categorize loan modifications related to the COVID-19 pandemic as a TDR, and the determination of such a loan modification as being a TDR. The federal banking agencies, along with the Consumer Financial Protection Bureau (CFPB) and the National Credit Union Administration, in April 2020, released an interagency statement that, among other things, clarifies the agencies’ views on TDRs, including the interaction between agency guidance on TDRs and the CARES Act. We are following the provisions within the CARES Act and interagency statement when evaluating our COVID-19 related loan modification requests.

Federal Reserve Liquidity Facilities
To help promote the flow of credit and the orderly functioning of financial markets, the Federal Reserve has announced the establishment of a number of new lending or liquidity facilities using its emergency lending authority under section 13(3) of the Federal Reserve Act. Many of these facilities are supported by funding provided by the Treasury Department, either from the Emergency Stabilization Fund or under the CARES Act. These emergency facilities include:
Main Street Lending Facility, which will purchase up to $600 billion of participations in eligible loans made by U.S. banking organizations to eligible small- and medium-sized U.S. businesses;
Commercial Paper Funding Facility, which will purchase highly rated unsecured and asset-backed commercial paper issued by eligible U.S. issuers;
Primary Market Corporate Credit Facility, which will purchase up to $750 billion (in combination with the Secondary Market Corporate Facility) in corporate bonds and loans issued by eligible, investment grade U.S. issuers;
Secondary Market Corporate Credit Facility, which will purchase up to $750 billion (in combination with the Primary Market Corporate Facility) in investment grade corporate debt issued by eligible U.S issuers or shares of exchange traded funds that primarily invest in investment grade debt of U.S. issuers;
Municipal Liquidity Facility, which will purchase up to $500 billion of certain types of debt obligations issued by states and eligible cities and counties;
Term Asset-Backed Securities Loan Facility, which will purchase up to $100 billion in highly rated asset-backed securities that are backed by specified types of consumer, small business or commercial loans;
Paycheck Protection Program Lending Facility, which will provide lenders funding secured by SBA-guaranteed loans made under the PPP described above;
Primary Dealer Credit Facility, which will provide secured funding to broker-dealers that are registered as primary dealers with the Federal Reserve in exchange for a broad range of collateral; and
Money Market Mutual Fund Liquidity Facility, which is intended to provide liquidity to money market mutual funds by lending to U.S. banking entities in exchange for highly-rated collateral acquired from money market mutual funds.

These facilities generally will stop making loans or asset purchases no later than September 30, 2020, unless the Federal Reserve and the Secretary of the Treasury approve an extension.

In addition, in March 2020, the Federal Reserve announced changes to its discount window lending for insured depository institutions, such as PNC Bank. These changes permit insured depository institutions to borrow from the discount window, on a fully collateralized basis, for periods of up to 90 days, with such loans being prepayable and renewable by the borrowing institution on a daily basis. These changes, which will remain in effect until the Federal Reserve announces otherwise, provide insured depository institutions additional tools for managing their liquidity profile, including for purposes of the Liquidity Coverage Ratio (for institutions, like PNC and PNC Bank, subject to that regulatory metric).

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



The Federal Reserve must publicly disclose the details (including the name of the borrower or counterparty) of discount window transactions and transactions conducted by facilities established by the Federal Reserve under section 13(3) of the Federal Reserve Act on a delayed basis.

Capital, Capital Planning and Liquidity
In March 2020, the Federal banking agencies adopted an interim final rule that permits banking organizations that are subject to the Accounting Standards Board Accounting Standard Update No. 2016-13 (Measurement of Credit Losses on Financial Instruments) (commonly referred to as the Current Expected Credit Loss standard or “CECL”) during 2020 to delay CECL's estimated impact on CET1 capital, as defined by the rule. CECL's estimated impact on CET1 capital is the change in retained earnings at adoption plus or minus 25% of the change in CECL ACL at the balance sheet date compared to CECL ACL at transition. The estimated CECL impact is added to CET1 through December 31, 2021, then phased-out over the following three years. PNC and PNC Bank have elected the five-year transition period effective March 31, 2020 impacting regulatory capital ratios disclosed in this Report. Comments on the interim final rule are due by May 15, 2020. Separately, PNC and PNC Bank have not elected, and do not expect to elect in the future, to defer implementation of the CECL standard for financial reporting purposes, as otherwise permitted by the CARES Act.

In March 2020, the Federal Reserve issued a final rule to integrate its capital plan rule and stress testing process with its Basel III regulatory capital rules. Among other things, the rules introduce a new common equity tier 1 (CET1) stress capital buffer (SCB) that will replace the Basel III capital conservation buffer for covered bank holding companies (BHCs). The SCB is calculated based on the start-to-trough change (as projected by the Federal Reserve) in the organization’s CET1 ratio in the Supervisory Severely Adverse scenario during the Comprehensive Capital Analysis and Review (CCAR) process, plus four quarters of the organization’s planned common stock dividends (expressed as a percentage of risk-weighted assets), subject to a floor of 2.5%. Under the rules, once the SCB rules become effective, PNC would be subject to automatic restrictions on capital distributions and certain discretionary incentive compensation payments if its CET1 ratio fell below (i) 4.5%, plus (ii) its applicable stress capital buffer, plus (iii) any countercyclical capital buffer (which is currently set at zero in the United States). Similar SCB-based buffers apply to Tier 1 and Total Risk-Based capital. The SCB becomes effective on October 1, 2020, and the Federal Reserve has indicated that it will provide covered BHCs their preliminary and final SCB amounts by June 30 and August 31, respectively, each year. Once the SCB becomes effective, covered BHCs, such as PNC, may increase their capital distributions without seeking prior Federal Reserve approval, provided the BHC otherwise complies with its SCB and any other applicable buffer requirement. In connection with these changes, the Federal Reserve announced that covered BHCs (including PNC) would no longer be subject to a capital plan objection from the Federal Reserve during the CCAR process for quantitative reasons.

In March 2020, the Federal Reserve, OCC and FDIC also adopted an interim final rule that revises the definition of “eligible retained income” for purposes of the SCB and other Basel III capital buffers. This revision is designed to phase in the potential application of these buffers more gradually, especially in periods when banking organizations are distributing all or a substantial majority of their net income. Under the interim final rule, eligible retained income is the greater of (i) the banking organization’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (ii) the average of the banking organization’s net income over the preceding four quarters. Comments on the interim final rule are due by May 4, 2020.

In April 2020, the Federal Reserve adopted an interim final rule that permits BHCs that are subject to the supplementary leverage ratio requirement, including PNC, to exclude, through March 31, 2021, treasury securities and balances held at Federal Reserve Banks from the organization’s total leverage exposure for purposes of calculating its supplementary leverage ratio. This rule became effective on April 14, 2020, and comments on the rule are due by May 29, 2020.

During March and April 2020, the Federal banking agencies released two interim final rules to encourage banking organizations to use the Money Market Mutual Fund Liquidity Facility and Paycheck Protection Program Liquidity Facility. Under the interim final rules, banking organizations may exclude from leverage and risk-based capital requirements any eligible assets sold or pledged to the Federal Reserve on a non-recourse basis as part of these programs. The banking agencies also clarified that, consistent with the CARES Act, covered loans originated by a banking organization under the PPP will receive a zero percent risk weight for regulatory capital purposes, even if not pledged to the Federal Reserve. Comments on these interim final rules are due by May 7 and May 13, 2020, respectively.

Other COVID-19 Related Financial Agency Developments
The Federal banking agencies, SEC, and Commodity Futures Trading Commission (CFTC) have issued other rules, guidance, statements, orders or other actions to, among other things, facilitate the continued provision of financial services, encourage financial institutions to work with customers affected by the pandemic, and reduce operational or regulatory challenges resulting from the pandemic and the private-sector and governmental actions designed to mitigate its effects, including directives for personnel to work from home to the fullest extent possible. These actions and statements, among others, have outlined temporary changes to supervisory and enforcement practices, clarified when appraisals or evaluations are required for real estate-secured transactions and allowed required appraisals and evaluations to be deferred in certain circumstances, encouraged banking organizations to use their capital and

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




liquidity buffers to continue to provide credit to customers and support the smooth functioning of markets, and encouraged financial institutions to make available small-dollar loans to consumers and small businesses affected by COVID-19.

In March 2020, the CFTC extended the schedule for registered swap dealers to post and collect initial margin with certain swap dealer counterparties, including PNC Bank, that have small uncleared swap portfolios. Under the extension, swap dealers will not have to collect initial margin on trades with PNC Bank until September 1, 2021, an extension of one year from the prior schedule.

Also in March 2020, the Federal Reserve delayed, until September 30, 2020, the effective date of its new framework for determining when a company is presumed to “control” another company for purposes of the Bank Holding Company Act. The FDIC extended, until June 9, 2020, the public comment period on its proposed rules which define when a deposit is considered “brokered” for purposes of the Federal Deposit Insurance Act. PNC Bank also received approval from the OCC, with the concurrence of the Federal Reserve, permitting it, for a limited period of time and subject to certain conditions, to purchase municipal variable-rate demand notes (VRDNs) from PNC Capital Markets LLC, a nonbank affiliate, in order to promote liquidity in the market for VRDNs without such transactions counting towards the quantitative limits on affiliate transactions in section 23A of the Federal Reserve Act and the Federal Reserve’s Regulation W. As of March 31, 2020, PNC Bank had not acquired any VRDNs from PNC Capital Markets LLC in reliance on this approval.

Finally, in March 2020, the OCC requested public comment on proposed amendments to its licensing policies and procedures that govern when and how national banks, such as PNC Bank, may engage in a host of corporate transactions or activities such as business combinations, branching, operating subsidiaries, and dividend payments. The proposed rules would, among other things, permit national banks to elect to follow state procedures for certain business combinations, expand the scope of operating subsidiary activities that qualify for an after-the-fact notice procedure (rather than an application), modify the standards for when a national bank is considered “well managed” for certain procedures and requirements, and relax the restrictions applicable to permissible non-controlling investments. Comments on the proposed rules are due by May 4, 2020.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Note 1 Accounting Policies of our 2019 Form 10-K describes the most significant accounting policies that we use to prepare our consolidated financial statements, including discussion of our policies for the Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit prior to the adoption of the CECL standard. See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in this Report regarding the impact of new accounting pronouncements, including CECL, that were adopted in the first quarter of 2020.

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

The following critical accounting policies and judgments are described in more detail in Critical Accounting Estimates and Judgments in Item 7 of our 2019 Form 10-K:
Fair Value Measurements
Residential and Commercial Mortgage Servicing Rights

Allowance for Credit Losses

We maintain the ACL at levels that we believe to be appropriate as of the balance sheet date to absorb expected credit losses on our existing investment securities, loans, finance leases (including residual values), trade receivables and other financial assets and unfunded lending related commitments, for the remaining contractual term of the assets taking into consideration expected prepayments. Our determination of the ACL is based on historical loss experience, borrower characteristics, current economic conditions, reasonable and supportable forecasts of future conditions and other relevant factors. We use methods sensitive to changes in economic conditions, to interpret these factors to estimate expected credit losses. We evaluate and, when appropriate, enhance the quality of our data and models and other methods used to estimate ACL on an ongoing basis. We apply qualitative factors to reflect in the ACL our best estimate of amounts that we do not expect to collect because of, among other things, idiosyncratic risk factors, changes in economic conditions that may not be reflected in forecasted results, or other potential methodology weaknesses. The ACL estimates are therefore susceptible to various factors, including, but not limited to, the following major factors:
Current economic conditions and borrower quality: Our forecast of expected losses depends on conditions and portfolio
quality as of the estimation date. As current conditions evolve, forecasted losses could be materially affected.
Scenario weights and design: Our loss estimates are sensitive to the shape and severity of macroeconomic forecasts and thus
vary significantly between upside and downside scenarios. Change to probability weights assigned to these scenarios and
timing of peak business cycles reflected by the scenarios could materially affect our loss estimates.
Portfolio volume and mix: Changes to portfolio volume and mix could materially affect our estimates, as CECL reserves
would be recognized at origination or acquisition.

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



For all assets and unfunded lending related commitments within the scope of the CECL standard, the applicable ACL is composed of one or a combination of the following components: (i) collectively assessed or pooled reserves, (ii) individually assessed reserves, and
(iii) qualitative (judgmental) reserves. Our methodologies and key assumptions for each of the components are discussed in Note 1
Accounting Policies in the Notes To Consolidated Financial Statements of this Report.

Reasonable and Supportable Economic Forecast
Under CECL, we are required to consider reasonable and supportable forecasts in estimating expected credit losses. For this purpose,
we have established a framework which includes a three year reasonable and supportable economic forecast period and the use of four
economic scenarios with associated probability weights, which in combination create a forecast of expected economic outcomes over
our reasonable and supportable forecast period (RSFP).

To generate the four economic forecast scenarios we use a combination of quantitative macroeconomic models, other measures of economic activity and forward-looking expert judgment to forecast the distribution of economic outcomes over the RSFP. Each scenario is then given an associated probability (weight) in order to represent our current expectation within that distribution over the RSFP. This process is informed by current economic conditions, expected business cycle evolution and the expert judgment of PNC’s CECL Reserve Adequacy Committee (CECL RAC). This approach seeks to provide a reasonable representation of the forecast of expected economic outcomes and is used to estimate expected credit losses across a variety of loans and securities. Each quarter the scenarios are presented for approval to PNC’s CECL RAC and the committee determines and approves CECL scenarios weights for use for the current reporting period.

The scenarios used for the period ended March 31, 2020 were designed to address the emerging COVID-19 crisis, based on our best estimate as of March 31, 2020. We used a number of economic variables, a large driver being GDP. Using a weighted average of our four economic forecast scenarios, we estimated at March 31, 2020 that annualized GDP contracts 11.2% in the second quarter of 2020 and ends 2020 down 2.3%, with recovery to the pre-recession peak levels occurring by the fourth quarter of 2021. Since March 31, 2020, the macro-economic backdrop has worsened, suggesting additional deterioration in GDP, unemployment and other economic factors than what our forecasted scenarios contemplated. Should this macro-economic environment persist, we will adjust our scenarios accordingly, which would likely result in a material build to our allowance for credit losses during the second quarter of 2020.

Our RSFP credit loss estimates are sensitive to the shape and severity of the scenarios used and weights assigned to them. For example, as of March 31, 2020, our most severe forecasted scenario assumed a 30% annualized contraction in GDP in the second quarter of 2020 followed by another 20% annualized contraction in GDP in the third quarter of 2020, leading to a peak-to-trough decline of 14%. For our stress informational purposes, we considered our most severe forecast scenario in isolation to determine a hypothetical impact. A 100% weighting of this severe forecast scenario at March 31, 2020 would have resulted in full year 2020 provision for credit losses of approximately $9.4 billion. This scenario was not our expectation at March 31, 2020 and does not reflect our current expectation, nor does it capture all the potential unknown variables that would likely arise over 2020, but it provides an approximation of losses under our worst case scenario as of March 31, 2020. The CECL methodology inherently requires a high degree of judgment. As a result, it is possible that we may, at another point in time, reach different conclusions regarding our credit loss estimates.
See the following for additional details on the components of our ACL, as well as the methodologies and related assumptions:
Allowance For Credit Losses in the Credit Risk Management section of this Financial Review, and
Note 1 Accounting Policies, Note 2 Investment Securities and Note 3 Loans in the Notes To Consolidated Financial Statements included in this Report.

OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

We engage in a variety of activities that involve entities that are not consolidated or otherwise reflected in our Consolidated Balance Sheet that are generally referred to as off-balance sheet arrangements. Additional information on these types of activities is included in our 2019 Form 10-K and in Note 4 Loan Sale and Servicing Activities and Variable Interest Entities and Note 8 Commitments in the Notes To Consolidated Financial Statements included in this Report.

A summary and further description of variable interest entities (VIEs) is included in Note 1 Accounting Policies and Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2019 Form 10-K.

Trust Preferred Securities
See Note 10 Borrowed Funds in the Notes To Consolidated Financial Statements in our 2019 Form 10-K for additional information on trust preferred securities issued by PNC Capital Trust C including information on contractual limitations potentially imposed on payments (including dividends) with respect to PNC's equity securities.

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




INTERNAL CONTROLS AND DISCLOSURE CONTROLS AND PROCEDURES

As of March 31, 2020, we performed an evaluation under the supervision of and with the participation of our management, including the Chairman, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures and of changes in our internal control over financial reporting.

Based on that evaluation, our Chairman, President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were effective as of March 31, 2020, and that there has been no change in PNC’s internal control over financial reporting that occurred during the first quarter of 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
GLOSSARY OF TERMS
For a glossary of terms commonly used in our filings, please see the glossary of terms included in our 2019 Form 10-K. Below are terms that have been added or updated based upon our adoption of CECL and the 2019 Tailoring Rules on January 1, 2020.

Allowance for credit losses (ACL) – A valuation account that is deducted from or added to the amortized cost basis of the related financial assets to present the net carrying value at the amount expected to be collected on the financial asset.

Amortized cost basis – Amount at which a financial asset is originated or acquired, adjusted for applicable accretion or amortization of premiums, discounts and net deferred fees or costs, collection of cash, charge-offs, foreign exchange and fair value hedge accounting adjustments.

Basel III common equity Tier 1 capital (Tailoring Rules) - Common stock plus related surplus, net of treasury stock, plus retained earnings, less goodwill, net of associated deferred tax liabilities, less other disallowed intangibles, net of deferred tax liabilities and plus/less other adjustments. Investments in unconsolidated financial institutions, as well as mortgage servicing rights and deferred tax assets, must then be deducted to the extent such items individually exceed 25% of our adjusted Basel III common equity Tier 1 capital.

Collateral dependent loans – Loans expected to be repaid substantially through the operation or sale of the collateral when a borrower is experiencing financial difficulty, and for which the related ACL is determined by the loan collateral's fair value (less cost to sell, where appropriate).

Current Expected Credit Loss (CECL) – Methodology for estimating the allowance for credit losses on in-scope financial assets held at amortized cost and unfunded lending related commitments, which uses a combination of expected losses over a reasonable and supportable forecast period, a reversion period and long run average credit losses for their estimated contractual term.

Estimated contractual term - In the context of CECL, contractual term of the financial asset or credit exposure, adjusted for estimated draws and prepayments, certain embedded extension options and extensions granted under troubled debt restructurings.

Exposure at default (EAD) – The credit exposure estimated to be outstanding in the event of default of a credit obligor.

Long run average (LRA) – In the context of CECL, expected credit losses or credit risk parameters for the remaining estimated contractual maturity beyond the reasonable and supportable forecast and reversion periods. The long run average is generally derived from historical loss information and current portfolio characteristics, without considering current or forecasted conditions.

Loss given default (LGD) - Assuming a credit obligor enters default status, an estimate of loss, based on collateral type, collateral value, loan exposure and other factors. LGD is net of recovery, through any means, including but not limited to the liquidation of collateral or deficiency judgments rendered from foreclosure or bankruptcy proceedings.

Probability of default (PD) - An estimate of the likelihood that a credit obligor will enter default status.

Purchased credit deteriorated assets – Acquired loans or debt securities that, at acquisition, are determined to have experienced a more-than-insignificant deterioration in credit quality since origination or issuance.

Reasonable and supportable forecast period (RSFP) – In the context of CECL, the period for which forecasts and projections of macroeconomic variables have been determined to be reasonable and supportable, and are used as inputs for ACL measurement.


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



Reversion period – In the context of CECL, the period between the end of the reasonable and supportable forecast period and the point at which losses are expected to have reverted to their long run average, in order to reflect an overall reasonable estimate of expected credit losses.

Unfunded lending related commitments – Standby letters of credit, financial guarantees, commitments to extend credit and similar unfunded obligations that are not unilaterally, unconditionally, cancelable at PNC’s option.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

We also make statements in this Report, and we may from time to time make other statements, regarding our outlook for earnings, revenues, expenses, tax rates, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting us and our future business and operations that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “look,” “intend,” “outlook,” “project,” “forecast,” “estimate,” “goal,” “will,” “should” and other similar words and expressions.
Forward-looking statements are necessarily subject to numerous assumptions, risks and uncertainties, which change over time. Future events or circumstances may change our outlook and may also affect the nature of the assumptions, risks and uncertainties to which our forward-looking statements are subject. Forward-looking statements speak only as of the date made. We do not assume any duty and do not undertake to update forward-looking statements. Actual results or future events could differ, possibly materially, from those anticipated in forward-looking statements, as well as from historical performance. As a result, we caution against placing undue reliance on any forward-looking statements.
Our forward-looking statements are subject to the following principal risks and uncertainties. 
Our businesses, financial results and balance sheet values are affected by business and economic conditions, including the following:
Changes in interest rates and valuations in debt, equity and other financial markets.
Disruptions in the U.S. and global financial markets.
Actions by the Federal Reserve Board, U.S. Treasury and other government agencies, including those that impact money supply and market interest rates.
Changes in customer behavior due to changing business and economic conditions or legislative or regulatory initiatives.
Changes in customers’, suppliers’ and other counterparties’ performance and creditworthiness.
Impacts of tariffs and other trade policies of the U.S. and its global trading partners.
The length and extent of economic contraction as a result of the coronavirus (COVID-19) pandemic.
Commodity price volatility.
Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory contingencies. These statements are based on our view that:
Our baseline economic forecast is for a severe but short recession in the first half of 2020. Restrictions on movement because of the COVID-19 pandemic have led to a huge drop in consumer spending and a steep drop in output as many workers are unable to get to their jobs. We expect a significant contraction in U.S. real GDP and steep job losses over the next few months and a large increase in the unemployment rate in through mid-2020.
In the baseline forecast, economic growth resumes in the third quarter as consumers start to spend again. Fiscal stimulus and extremely low interest rates support the recovery. Real GDP surpasses its pre-recession peak in the second half of 2021, and growth is well above its long-term trend through 2022.
The baseline forecast assumes that the Federal Open Market Committee keeps the federal funds rate in its current range of 0.00% to 0.25% into 2023.
Given the many unknowns and risks being heavily weighted to the downside, our forward-looking statements are subject to the risk that conditions will be substantially different than we are currently expecting. If efforts to contain COVID-19 are unsuccessful and restrictions on movement last into the third quarter or beyond, the recession would be much longer and much more severe. Ineffective fiscal stimulus, or an extended delay in implementing it, are also major downside risks. The deeper the recession is, and the longer it lasts, the more it will damage consumer fundamentals and sentiment. This could both prolong the recession, and/or make any recovery weaker. Similarly, the recession could damage business fundamentals. And an extended global recession due to COVID-19 would weaken the U.S. recovery. As a result, the outbreak and its consequences, including responsive measures to manage it, have had and are likely to continue to have an adverse effect, possibly materially, on our business and financial performance by adversely affecting, possibly materially, the demand and profitability of our products and services, the valuation of assets and our ability to meet the needs of our customers.
PNC’s ability to take certain capital actions, including returning capital to shareholders, is subject to review by the Federal Reserve Board as part of PNC’s comprehensive capital plan for the applicable period in connection with the Federal Reserve

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




Board’s Comprehensive Capital Analysis and Review (CCAR) process. During the third quarter of 2020, the Federal Reserve’s revised capital plan rule permits PNC to make capital distributions in an amount equal to the average quarterly amount that was approved by the Federal Reserve for the 2019 capital plan year (July 1, 2019 through June 30, 2020). Once the Federal Reserve's new stress capital buffer rules become effective on October 1, 2020, our ability to take certain capital actions, including returning capital to shareholders, will be subject to PNC meeting or exceeding a stress capital buffer established by the Federal Reserve Board as part of the annual CCAR process.
PNC’s regulatory capital ratios in the future will depend on, among other things, the company’s financial performance, the scope and terms of final capital regulations then in effect and management actions affecting the composition of PNC’s balance sheet. In addition, PNC’s ability to determine, evaluate and forecast regulatory capital ratios, and to take actions (such as capital distributions) based on actual or forecasted capital ratios, will be dependent at least in part on the development, validation and regulatory review of related models.
Legal and regulatory developments could have an impact on our ability to operate our businesses, financial condition, results of operations, competitive position, reputation, or pursuit of attractive acquisition opportunities. Reputational impacts could affect matters such as business generation and retention, liquidity, funding, and ability to attract and retain management. These developments could include:
Changes to laws and regulations, including changes affecting oversight of the financial services industry, consumer protection, bank capital and liquidity standards, pension, bankruptcy and other industry aspects, and changes in accounting policies and principles.
Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries. These matters may result in monetary judgments or settlements or other remedies, including fines, penalties, restitution or alterations in our business practices, and in additional expenses and collateral costs, and may cause reputational harm to PNC.
Results of the regulatory examination and supervision process, including our failure to satisfy requirements of agreements with governmental agencies.
Impact on business and operating results of any costs associated with obtaining rights in intellectual property claimed by others and of adequacy of our intellectual property protection in general.
Business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through effective use of systems and controls, third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards.
Business and operating results also include impacts relating to our equity interest in BlackRock, Inc. and rely to a significant extent on information provided to us by BlackRock. Risks and uncertainties that could affect BlackRock are discussed in more detail by BlackRock in its SEC filings.
We grow our business in part through acquisitions and new strategic initiatives. Risks and uncertainties include those presented by the nature of the business acquired and strategic initiative, including in some cases those associated with our entry into new businesses or new geographic or other markets and risks resulting from our inexperience in those new areas, as well as risks and uncertainties related to the acquisition transactions themselves, regulatory issues, and the integration of the acquired businesses into PNC after closing.
Competition can have an impact on customer acquisition, growth and retention and on credit spreads and product pricing, which can affect market share, deposits and revenues. Our ability to anticipate and respond to technological changes can also impact our ability to respond to customer needs and meet competitive demands.
Business and operating results can also be affected by widespread natural and other disasters, pandemics, dislocations, terrorist activities, system failures, security breaches, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically.
We provide greater detail regarding these as well as other factors in our 2019 Form 10-K and elsewhere in this Report, including in the Risk Factors and Risk Management sections and the Commitments and Legal Proceedings Notes of the Notes To Consolidated Financial Statements in these reports. Our forward-looking statements may also be subject to other risks and uncertainties, including those we may discuss elsewhere in this Report or in our other filings with the SEC.


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



CONSOLIDATED INCOME STATEMENT
THE PNC FINANCIAL SERVICES GROUP, INC.
 
Unaudited
Three months ended
March 31
In millions, except per share data
2020

 
2019

Interest Income
 
 
 
Loans
$
2,480

 
$
2,602

Investment securities
582

 
620

Other
138

 
206

Total interest income
3,200

 
3,428

Interest Expense
 
 
 
Deposits
375

 
472

Borrowed funds
314

 
481

Total interest expense
689

 
953

Net interest income
2,511

 
2,475

Noninterest Income
 
 
 
Asset management
382

 
437

Consumer services
377

 
371

Corporate services
526

 
462

Residential mortgage
210

 
65

Service charges on deposits
168

 
168

Other
343

 
308

Total noninterest income
2,006

 
1,811

Total revenue
4,517

 
4,286

Provision For Credit Losses
914

 
189

Noninterest Expense
 
 
 
Personnel
1,369

 
1,414

Occupancy
207

 
215

Equipment
287

 
273

Marketing
58

 
65

Other
622

 
611

Total noninterest expense
2,543

 
2,578

Income before income taxes and noncontrolling interests
1,060

 
1,519

Income taxes
145

 
248

Net income
915

 
1,271

Less: Net income attributable to noncontrolling interests
7

 
10

Preferred stock dividends
63

 
63

Preferred stock discount accretion and redemptions
1

 
1

Net income attributable to common shareholders
$
844

 
$
1,197

Earnings Per Common Share
 
 
 
Basic
$
1.96

 
$
2.62

Diluted
$
1.95

 
$
2.61

Average Common Shares Outstanding
 
 
 
Basic
429

 
455

Diluted
430

 
456

See accompanying Notes To Consolidated Financial Statements.

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




CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
THE PNC FINANCIAL SERVICES GROUP, INC.
 
Unaudited
In millions
 
Three months ended
March 31
2020

 
2019

Net income
 
$
915

 
$
1,271

Other comprehensive income (loss), before tax and net of reclassifications into Net income:
 
 
 
 
Net unrealized gains (losses) on securities without an allowance for credit losses
 
1,487

 
 
Net unrealized gains (losses) on securities with an allowance for credit losses
 
(7
)
 
 
Net unrealized gains (losses) on non-OTTI securities
 
 
 
639

Net unrealized gains (losses) on OTTI securities
 
 
 
9

Net unrealized gains (losses) on cash flow hedge derivatives
 
785

 
100

Pension and other postretirement benefit plan adjustments
 
12

 
145

Other
 
(26
)
 
34

Other comprehensive income (loss), before tax and net of reclassifications into Net income
 
2,251


927

Income tax benefit (expense) related to items of other comprehensive income
 
(532
)
 
(207
)
Other comprehensive income (loss), after tax and net of reclassifications into Net income
 
1,719


720

Comprehensive income
 
2,634

 
1,991

Less: Comprehensive income attributable to noncontrolling interests
 
7

 
10

Comprehensive income attributable to PNC
 
$
2,627


$
1,981

See accompanying Notes To Consolidated Financial Statements.

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



CONSOLIDATED BALANCE SHEET
THE PNC FINANCIAL SERVICES GROUP, INC.
Unaudited
March 31
2020

 
December 31
2019

In millions, except par value
Assets
 
 
 
Cash and due from banks
$
7,493

 
$
5,061

Interest-earning deposits with banks
19,986

 
23,413

Loans held for sale (a)
1,693

 
1,083

Investment securities – available for sale
89,077

 
69,163

Investment securities – held to maturity (b)
1,469

 
17,661

Loans (a)
264,643

 
239,843

Allowance for credit losses – loan and lease losses (c)
(3,944
)
 
(2,742
)
Net loans
260,699

 
237,101

Equity investments (d)
13,205

 
13,734

Mortgage servicing rights
1,082

 
1,644

Goodwill
9,233

 
9,233

Other (a) (b)
41,556

 
32,202

Total assets
$
445,493

 
$
410,295

Liabilities
 
 
 
Deposits
 
 
 
Noninterest-bearing
$
81,614

 
$
72,779

Interest-bearing
223,590

 
215,761

Total deposits
305,204

 
288,540

Borrowed funds
 
 
 
Federal Home Loan Bank borrowings
23,491

 
16,341

Bank notes and senior debt
31,438

 
29,010

Subordinated debt
6,475

 
6,134

Other (e)
11,995

 
8,778

Total borrowed funds
73,399

 
60,263

Allowance for credit losses – unfunded lending related commitments (c)
450

 
318

Accrued expenses and other liabilities
17,150

 
11,831

Total liabilities
396,203

 
360,952

Equity
 
 
 
Preferred stock (f)

 
 
Common stock ($5 par value, Authorized 800 shares, issued 542 shares)
2,712

 
2,712

Capital surplus
16,288

 
16,369

Retained earnings
41,885

 
42,215

Accumulated other comprehensive income
2,518

 
799

Common stock held in treasury at cost: 118 and 109 shares
(14,140
)
 
(12,781
)
Total shareholders’ equity
49,263

 
49,314

Noncontrolling interests
27

 
29

Total equity
49,290

 
49,343

Total liabilities and equity
$
445,493

 
$
410,295

(a)
Our consolidated assets included the following for which we have elected the fair value option: Loans held for sale of $1.5 billion, Loans of $1.1 billion and Other assets of $.1 billion at March 31, 2020 and Loans held for sale of $1.1 billion, Loans of $.7 billion and Other assets of $.1 billion at December 31, 2019.
(b)
Amounts as of March 31, 2020 are net of the related Allowances for Credit Losses recorded in accordance with the adoption of Accounting Standards Update 2016-13, Financial Instruments - Credit Losses, which totaled $2 million and $19 million for Investment securities and Other assets, respectively. See Recently Adopted Accounting Standards portion of Note 1 Accounting Policies for additional detail on the adoption of this ASU.
(c)
Amounts as of March 31, 2020 reflect the impact of adopting the CECL accounting standard and our transition from an incurred loss methodology for these reserves to an expected credit loss methodology. Prior period amounts represent Allowance for Loans and Leases (ALLL) under the incurred loss methodology. Refer to Note 1 Accounting Policies in this Report for additional detail on the adoption of this standard.
(d)
Amounts include our equity investment in BlackRock.
(e)
Our consolidated liabilities at both March 31, 2020 and December 31, 2019 included Other borrowed funds of $.1 billion for which we have elected the fair value option.
(f)
Par value less than $.5 million at each date.

See accompanying Notes To Consolidated Financial Statements.

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




CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
 
Unaudited
In millions
 
Three months ended
March 31
 
2020

 
2019

 
Operating Activities
 
 
 
 
 
Net income
 
$
915

 
$
1,271

 
Adjustments to reconcile net income to net cash provided (used) by operating activities
 
 
 
 
 
Provision for credit losses
 
914

 
189

 
Depreciation and amortization
 
328

 
272

 
Deferred income taxes
 
(226
)
 
111

 
Changes in fair value of mortgage servicing rights
 
620

 
210

 
Undistributed earnings of BlackRock
 
(56
)
 
(111
)
 
Net change in
 
 
 
 
 
Trading securities and other short-term investments
 
(1,014
)
 
358

 
Loans held for sale
 
(452
)
 
320

 
Other assets
 
(6,912
)
 
(2,931
)
 
Accrued expenses and other liabilities
 
5,376

 
1,796

 
Other
 
(189
)
 
(84
)
 
Net cash provided (used) by operating activities
 
$
(696
)
 
$
1,401

 
Investing Activities
 
 
 
 
 
Sales
 
 
 
 
 
Securities available for sale
 
$
5,447

 
$
840

 
Loans
 
314

 
306

 
Repayments/maturities
 
 
 
 
 
Securities available for sale
 
4,332

 
2,103

 
Securities held to maturity
 
12

 
510

 
Purchases
 
 
 
 
 
Securities available for sale
 
(11,889
)
 
(3,861
)
 
Securities held to maturity
 
(4
)
 
(23
)
 
Loans
 
(100
)
 
(468
)
 
Net change in
 
 
 
 
 
Federal funds sold and resale agreements
 
965

 
4,810

 
Interest-earning deposits with banks
 
3,427

 
(4,368
)
 
Loans
 
(25,758
)
 
(6,085
)
 
Other
 
(125
)
 
213

 
Net cash provided (used) by investing activities
 
$
(23,379
)
 
$
(6,023
)
 
(continued on following page)

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



CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
(continued from previous page)
 
Unaudited
In millions
 
Three Months Ended
March 31
 
2020

 
2019

 
Financing Activities
 
 
 
 
 
Net change in
 
 
 
 
 
Noninterest-bearing deposits
 
$
8,857

 
$
(2,337
)
 
Interest-bearing deposits
 
7,829

 
5,736

 
Federal funds purchased and repurchase agreements
 
2,306

 
2,232

 
Federal Home Loan Bank borrowings
 
(400
)
 


 
Other borrowed funds
 
1,044

 
250

 
Sales/issuances
 
 
 
 
 
Federal Home Loan Bank borrowings
 
9,060

 
5,000

 
Bank notes and senior debt
 
3,486

 
2,147

 
Other borrowed funds
 
172

 
397

 
Common and treasury stock
 
23

 
22

 
Repayments/maturities
 
 
 
 
 
Federal Home Loan Bank borrowings
 
(1,510
)
 
(6,000
)
 
Bank notes and senior debt
 
(2,100
)
 
(1,750
)
 
Other borrowed funds
 
(172
)
 
(296
)
 
Acquisition of treasury stock
 
(1,522
)
 
(826
)
 
Preferred stock cash dividends paid
 
(63
)
 
(63
)
 
Common stock cash dividends paid
 
(503
)
 
(436
)
 
Net cash provided (used) by financing activities
 
$
26,507

 
$
4,076

 
Net Increase (Decrease) In Cash And Due From Banks And Restricted Cash
 
2,432

 
(546
)
 
Cash and due from banks and restricted cash at beginning of period
 
5,061

 
5,608

 
Cash and due from banks and restricted cash at end of period
 
$
7,493

 
$
5,062

 
Cash and due from banks and restricted cash
 
 
 
 
 
Cash and due from banks at end of period (unrestricted cash)
 
$
7,161

 
$
5,062

 
Restricted cash
 
332

 
 
 
Cash and due from banks and restricted cash at end of period
 
$
7,493

 
$
5,062

 
Supplemental Disclosures
 
 
 
 
 
Interest paid
 
$
638

 
$
907

 
Income taxes paid
 
$
36

 
$
30

 
Income taxes refunded
 
$
5

 
$
2

 
Leased assets obtained in exchange for new operating lease liabilities
 
$
57

 
$
155

 
Right-of-use assets recognized at adoption of ASU 2016-02
 
 
 
$
2,004

 
Non-cash Investing and Financing Items
 
 
 
 
 
Transfer from loans to loans held for sale, net
 
$
313

 
$
139

 
Transfer from loans to foreclosed assets
 
$
37

 
$
48

 
See accompanying Notes To Consolidated Financial Statements.

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




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PNC FINANCIAL SERVICES GROUP, INC.
Unaudited

BUSINESS

The PNC Financial Services Group, Inc. (PNC) is one of the largest diversified financial services companies in the United States (U.S.) 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 retail branch network is located primarily in markets across the Mid-Atlantic, Midwest and Southeast. We also have strategic international offices in four countries outside the U.S.
NOTE 1 ACCOUNTING POLICIES

Basis of Financial Statement Presentation

Our consolidated financial statements include the accounts of the parent company and its subsidiaries, most of which are wholly-owned, certain partnership interests and variable interest entities.

We prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). We have eliminated intercompany accounts and transactions.

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

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

When preparing these unaudited interim consolidated financial statements, we have assumed that you have read the audited consolidated financial statements included in our 2019 Form 10-K. These interim consolidated financial statements serve to update our 2019 Form 10-K and may not include all information and Notes necessary to constitute a complete set of financial statements. There have been significant changes to our accounting policies as disclosed in our 2019 Form 10-K due to the adoption of the current expected credit losses standard. The updated policies impacted by this adoption are included in this Note 1 in the first quarter of 2020. Reference is made to Note 1 Accounting Policies in our 2019 Form 10-K for a detailed description of all other significant accounting policies.

Use of Estimates

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



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



Recently Adopted Accounting Standards

Accounting Standards Update (ASU)
Description
Financial Statement Impact
Credit Losses- ASU 2016-13

Issued June 2016

Codification Improvements - ASU 2019-04

Various improvements related to Credit Losses (Topics 1, 2 and 5)

Issued April 2019

Targeted Transition Relief - Credit Losses - ASU 2019-05

Issued May 2019

Codification Improvements - ASU 2019-11

Issued November 2019


• Commonly referred to as the Current Expected Credit Losses (CECL) standard.

•Replaces measurement, recognition and disclosure guidance for credit related reserves (i.e., the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit) and Other than Temporary Impairment (OTTI) for debt securities.

•Requires the use of an expected credit loss methodology; specifically, current expected credit losses for the remaining life of the asset will be recognized starting from the time of origination or acquisition.

•Methodology applies to loans, net investment in leases, debt securities and certain financial assets not accounted for at fair value through net income. It also applies to unfunded lending related commitments except for unconditionally cancellable commitments.

•In-scope assets are presented at the net amount expected to be collected after the deduction or addition of the ACL from the amortized cost basis of the assets.

• Requires inclusion of expected recoveries of previously charged-off amounts for in-scope assets.

• Requires enhanced credit quality disclosures including disaggregation of credit quality indicators by vintage.

• Requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings at adoption.


• Adopted January 1, 2020 under the modified retrospective approach. The cumulative-effect adjustment to retained earnings totaled $671 million at adoption.

• Amended presentation and disclosures are required prospectively. Refer to the disclosures in this Note 1, Note 2 Investment Securities, Note 3 Loans and Note 9 Total Equity and Other Comprehensive Income for additional information.

• With the adoption of CECL, we discontinued the accounting for purchased impaired loans and elected the one-time fair value option election for some of these loans and certain residential real estate collateral dependent loans. Loans that were previously accounted for as purchased impaired where the fair value option election was not made are now accounted for as purchased credit deteriorated loans.

• There was no impact to the recorded investment of our investment securities or loans, except for our purchased credit deteriorated loan portfolio. Accounting for these loans as purchased credit deteriorated required an adjustment to the remaining accretable discount and recorded investment in addition to the impact on ACL due to the adoption of CECL methodology.

• Refer to Table 33 for a summary of the impact of the CECL standard adoption.




Accounting Standards Update (ASU)
Description
Financial Statement Impact
Codification Improvements - ASU 2019-04

Topic 3: Codification Improvements to ASU 2017-12 and Other Hedging Items

Issued April 2019
• Targeted improvements related to:
     - Partial-term fair value hedges of interest rate risk
     - Amortization of fair value hedge basis adjustments
     - Disclosure of fair value hedge basis adjustments
     - Consideration of the hedged contractually specified interest rate under the hypothetical derivative method
     - Application of a first-payments-received cash flow hedging technique to overall cash flows on a group of variable interest payments
     - Update to transition guidance for ASU 2017-12
• This ASU permits a one-time transfer out of held to maturity securities to provide entities the opportunity to hedge fixed rate, prepayable securities under a last of layer hedging strategy (although an entity is not required to hedge such securities subsequent to transfer).


• Adopted January 1, 2020.
• As permitted by the eligibility requirements in this guidance, at adoption we elected to transfer debt securities with an amortized cost of $16.2 billion (fair value of $16.5 billion) from held to maturity to the available for sale portfolio. The transfer resulted in a pretax increase to AOCI of $306 million. There were no other impacts to PNC's consolidated financial statements from the adoption of this guidance.



Accounting Standards Update (ASU)
Description
Financial Statement Impact
Goodwill -
ASU 2017-04

Issued January 2017
• Eliminates Step 2 from the goodwill impairment test to simplify the subsequent measurement of goodwill under which a loss was recognized only if the estimated implied fair value of the goodwill is below its carrying value.
• Requires impairment to be recognized if the reporting unit's carrying value exceeds the fair value.
• Adopted January 1, 2020.
• The adoption of this standard did not impact our consolidated results of operations or our consolidated financial position.



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




Accounting Standards Update (ASU)
Description
Financial Statement Impact
Reference Rate Reform - ASU 2020-04

Issued March 2020
• Provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.
• Includes optional expedients related to contract modifications that allow an entity to account for modifications (if certain criteria are met) as if the modifications were only minor (assets within the scope of ASC 310, Receivables), were not substantial (assets within the scope of ASC 470, Debt), and/or did not result in remeasurements or reclassifications (assets within the scope of ASC 842, Leases, and other Topics) of the existing contract.
• Includes optional expedients related to hedging relationships within the scope of ASC 815, Derivatives & Hedging, whereby changes to the critical terms of a hedging relationship do not require dedesignation if certain criteria are met. In addition, potential sources of ineffectiveness as a result of reference rate reform may be disregarded when performing some effectiveness assessments.
• Allows for a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020.
• Guidance in this ASU is effective as of March 12, 2020 through December 31, 2022.




• Adopted March 12, 2020, will apply prospectively.
• As of March 31, 2020, we have not yet elected any optional expedients outlined in this ASU. However, we plan to elect these optional expedients in the future.




The following table presents the impact of adopting the CECL standard on January 1, 2020 on our allowance and retained earnings.

Table 33: Impact of the CECL Standard Adoption
 
 
ALLL (a)
 
ACL (a)
In millions
 
December 31, 2019
Transition Adjustment
January 1, 2020
Allowance (a)
 
 
 
 
Loans and leases
 
 
 
 
Commercial lending
 
$
1,812

$
(304
)
$
1,508

Consumer lending
 
930

767

1,697

Total loans and leases allowance
 
2,742

463

3,205

Unfunded lending related commitments (b)
 
318

179

497

Other
 

19

19

Total allowance
 
$
3,060

$
661

$
3,721

 
 
 
 
 
In millions
 
December 31, 2019

Transition Adjustment

January 1, 2020

Impact to retained earnings (c)
 
$
42,215

$
(671
)
$
41,544

(a) Amounts at December 31, 2019 represent the ALLL and the allowance for unfunded loan commitments and letters of credit. The amounts at January 1, 2020 represent the ACL.
(b) Unfunded lending related commitments are primarily unfunded loan commitments and letters of credit. See Note 3 Loans for additional information.
(c) Transition adjustment includes the increase in the total allowance of $.7 billion and the impact of the fair value option election of $.2 billion, offset by the tax impact of $.2 billion.

Cash, Cash Equivalents and Restricted Cash

Cash and due from banks are considered cash and cash equivalents for financial reporting purposes because they represent a primary source of liquidity. Certain cash balances within Cash and due from banks on our Consolidated Balance Sheet are restricted as to withdrawal or usage by legally binding contractual agreements or regulatory requirements.







The PNC Financial Services Group, Inc. – Form 10-Q 55  



Investments

We hold interests in various types of investments. The accounting for these investments is dependent on a number of factors including,
but not limited to, items such as:
• Ownership interest,
• Our plans for the investment, and
• The nature of the investment.

Debt Securities
Debt securities are recorded on a trade-date basis. We classify debt securities as either trading, held to maturity, or available for sale. Debt securities that we purchase for certain risk management activities or customer-related trading activities are classified as trading securities, are reported in the Other assets line item on our Consolidated Balance Sheet, and are carried at fair value. Realized and unrealized gains and losses on trading securities are included in Other noninterest income. We classify debt securities as held to maturity when we have the positive intent and ability to hold the securities to maturity, and carry them at amortized cost, less any ACL. Debt securities not classified as held to maturity or trading are classified as securities available for sale, and are carried at fair value. Unrealized gains and losses on available for sale securities are included in Accumulated other comprehensive income (AOCI) net of income taxes.

We include all interest on debt securities, including amortization of premiums and accretion of discounts on investment securities, in
net interest income using the constant effective yield method generally calculated over the contractual lives of the securities. Effective
yields reflect either the effective interest rate implicit in the security at the date of acquisition or, for debt securities where an other-than-temporary impairment was recorded, the effective interest rate determined based on improved cash flows subsequent to an
impairment. We compute gains and losses realized on the sale of available for sale debt securities on a specific security basis. These
securities gains/(losses) are included in Other noninterest income on the Consolidated Income Statement.

As discussed in the Recently Adopted Accounting Standards section of this Note 1, we adopted the CECL standard as of January 1,
2020, which requires expected credit losses on both held to maturity and available for sale securities to be recognized through a
valuation allowance, ACL, instead of as a direct write-down to the amortized cost basis of the security. An available for sale security is considered impaired if the fair value is less than amortized cost basis. If any portion of the decline in fair value is related to credit, the amount of ACL is determined as the portion related to credit, limited to the difference between the amortized cost basis and the fair value of the security. If we have the intent to sell or believe it is more likely than not we will be required to sell an impaired available for sale security before recovery of the amortized cost basis, the credit loss is recorded as a direct write-down of the amortized cost basis. Credit losses on investment securities are recognized through the Provision for credit losses on our Consolidated Income Statement. Declines in the fair value of available for sale securities that are not considered credit related are recognized in AOCI on our Consolidated Balance Sheet. The CECL standard is applied prospectively to debt securities and, as a result, the amortized cost basis of investment securities for which OTTI had previously been recorded did not change upon adoption. For information on the policies previously applied to determine OTTI, see the Debt Securities section of Note 1 Accounting Policies in our 2019 Form 10-K.

We consider a security to be past due in terms of payment based on its contractual terms. A security may be placed on nonaccrual, with
interest no longer recognized until received, when collectability of principal or interest is doubtful. As of March 31, 2020, nonaccrual or past due held-to-maturity securities were immaterial.

A security may be partially or fully charged off against the ACL if it is determined to be uncollectible, including, for an available for
sale security, if we have the intent to sell or believe it is more likely than not we will be required to sell the security before recovery of
the amortized cost basis. Recoveries of previously charged-off available for sale securities are recognized when received, while
recoveries on held to maturity securities are recognized when expected.

See the Allowance for Credit Loss section of this Note 1 for further discussion regarding the methodologies used to determine the
ACL on investment securities. See Note 2 Investment Securities for additional information about the investment securities portfolio
and the related ACL.

Loans

Loans are classified as held for investment when management has both the intent and ability to hold the loan for the foreseeable
future, or until maturity or payoff. Management’s intent and view of the foreseeable future may change based on changes in business
strategies, the economic environment, market conditions and the availability of government programs.

Measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of
payment are considered delinquent.


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




Loans held for investment, excluding purchased credit deteriorated loans, are recorded at amortized cost basis unless we elect to measure these under the fair value option. Amortized cost basis represents principal amounts outstanding, net of unearned income, unamortized deferred fees, costs on originated loans, and premiums or discounts on purchased loans, and charge-offs. Amortized cost basis does not include accrued interest, as we include accrued interest in Other Assets on our Consolidated Balance Sheet. Interest on performing loans is accrued based on the principal amount outstanding and recorded in Interest income as earned using the constant effective yield method. Loan origination fees, direct loan origination costs, and loan premiums and discounts are deferred and accreted or amortized into Net interest income using the constant effective yield method, over the contractual life of the loan. Loans under the fair value option are reported at their fair value, with any changes to fair value reported as Noninterest income on the Consolidated Income Statement, and are excluded from measurement of ACL.

In addition to originating loans, we also acquire loans through the secondary loan market, portfolio purchases or acquisitions of other
financial services companies. Certain acquired loans that have experienced a deterioration of credit quality since origination (i.e.,
purchased credit deteriorated) are recognized at fair value. ACL for purchased credit deteriorated loans is measured at the acquisition date and added to the acquisition date fair value to determine the amortized cost basis for these loans. Subsequent decreases in expected cash flows that are attributable, at least in part, to credit quality are recognized through a charge to the provision for credit losses resulting in an increase in the ACL. Subsequent increases in expected cash flows are recognized as a provision recapture of previously recorded ACL.

We consider a loan to be collateral dependent when we determine that substantially all of the expected cash flows will be generated
from the operation or sale of the collateral underlying the loan, the borrower is experiencing financial difficulty and we have elected to
measure the loan at the estimated fair value of collateral (less costs to sell if sale or foreclosure of the property is expected).
Additionally, we consider a loan to be collateral dependent when foreclosure or liquidation of the underlying collateral is probable.

See the Allowance for Credit Losses section of this Note 1 for further discussion regarding the methodologies and significant inputs
used to determine the ACL on loans. See Note 3 Loans for additional information about our loan portfolio and the related ACL.

Loans Held for Sale

We designate loans as held for sale when we have the intent to sell them. At the time of designation to held for sale, any ACL is
reversed, and a valuation allowance for shortfall between the amortized cost basis and the net realizable value is recognized, excluding
the amounts already charged off. Similarly, when loans are no longer considered held for sale, the valuation allowance (net of writedowns) is reversed, and an allowance for credit losses is established, excluding the amounts already charged-off. Write-downs on these loans (if required) are recorded as charge-offs through the valuation allowance. Adjustments to the valuation allowance on held for sale loans are recognized in Other noninterest income.

We have elected to account for certain commercial and residential mortgage loans held for sale at fair value. The changes in the fair
value of the commercial mortgage loans are measured and recorded in Other noninterest income while such changes for the residential
mortgage loans are measured and recorded in Residential mortgage noninterest income each period. See Note 11 Fair Value for
additional information.

Interest income with respect to loans held for sale is accrued based on the principal amount outstanding and the loan’s contractual
interest rate.

In certain circumstances, loans designated as held for sale may be transferred to held for investment based on a change in strategy. We
transfer these loans at the lower of cost or estimated fair value; however, any loans originated or purchased as held for sale for which the fair value option has been elected remain at fair value for the life of the loan.

Nonperforming Loans and Leases

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

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



Commercial lending
Loans Classified as Nonperforming and Accounted for as Nonaccrual
  
•     Loans accounted for at amortized cost where:
–      The loan is 90 days or more past due.
–      The loan is rated substandard or worse due to the determination that full collection of
        principal and interest is not probable as demonstrated by the following conditions:
•     The collection of principal or interest is 90 days or more past due;
•     Reasonable doubt exists as to the certainty of the borrower’s future debt service
       ability, according to the terms of the credit arrangement, regardless of whether 90
       days have passed or not;
•     The borrower has filed or will likely file for bankruptcy;
•     The bank advances additional funds to cover principal or interest;
•     We are in the process of liquidating a commercial borrower; or
•     We are pursuing remedies under a guarantee.
Loans Excluded from Nonperforming Classification but Accounted for as Nonaccrual
  
•       Loans accounted for under the fair value option and full collection of principal and interest
        is not probable.
•       Loans accounted for at the lower of cost or market less costs to sell (held for sale) and full
        collection of principal and interest is not probable.
 
Loans Excluded from Nonperforming Classification and Nonaccrual Accounting
 
  
•       Loans that are well secured and in the process of collection.

Consumer lending
Loans Classified as Nonperforming and Accounted for as Nonaccrual
  
•       Loans accounted for at amortized cost where full collection of contractual principal and
         interest is not deemed probable as demonstrated in the policies below:
–      The loan is 90 days past due for home equity and installment loans, and 180 days past
        due for well secured residential real estate loans;
–      The loan has been modified and classified as a troubled debt restructuring (TDR);
–      Notification of bankruptcy has been received;
–      The bank holds a subordinate lien position in the loan and the first lien mortgage loan is
        seriously stressed (i.e., 90 days or more past due);
–      Other loans within the same borrower relationship have been placed on nonaccrual or
        charge-offs have been taken on them;
–      The bank has ordered the repossession of non-real estate collateral securing the loan; or
–      The bank has charged-off the loan to the value of the collateral.
Loans Excluded from Nonperforming Classification but Accounted for as Nonaccrual
  
•       Loans accounted for under the fair value option and full collection of principal and interest
        is not probable.
•       Loans accounted for at the lower of cost or market less costs to sell (held for sale) and full
        collection of principal and interest is not probable.
Loans Excluded from Nonperforming Classification and Nonaccrual Accounting
  
• Certain government insured loans where substantially all principal and interest is insured.
•       Residential real estate loans that are well secured and in the process of collection.
•       Consumer loans and lines of credit, not secured by residential real estate or automobiles, as
         permitted by regulatory guidance.
 

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

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

Consumer Lending
We generally charge off secured consumer (Home equity, Residential Real Estate and Automobile) nonperforming loans to the fair
value of collateral less costs to sell, if lower than the amortized cost basis of the loan outstanding, when delinquency of the loan, combined with other risk factors (e.g., bankruptcy, lien position, or troubled debt restructuring), indicates that the loan, or some portion thereof, is uncollectible as per our historical experience, or the collateral has been repossessed. We charge-off secured
consumer loans no later than 180 days past due. Most consumer loans and lines of credit, not secured by residential real estate, are

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




charged off once they have reached 120-180 days past due.

For secured collateral dependent loans, collateral values are updated at least annually and subsequent declines in collateral values are charged-off resulting in incremental provision for credit loss. Subsequent increases in collateral values may be reflected as an adjustment to ACL to reflect the expectation of recoveries in an amount greater than previously expected.

Accounting for Nonperforming Assets and Leases and Other Nonaccrual Loans
For nonaccrual loans, interest income accrual and deferred fee/cost recognition is discontinued. Additionally, the current year accrued and uncollected interest is reversed through Net interest income and prior year accrued and uncollected interest is charged-off, except for credit cards, where we reverse any accrued interest through Net interest income at the time of charge-off, as per industry standard practice. Nonaccrual loans that are also collateral dependent may be charged-off to reduce the basis to the fair value of collateral less costs to sell.

If payment is received on a nonaccrual loan, generally the payment is first applied to the remaining principal balance; payments are then applied to recover any charged-off amounts related to the loan. Finally, if both principal balance and any charge-offs have been recovered, then the payment will be recorded as fee and interest income. For certain consumer loans, the receipt of interest payments is recognized as interest income on a cash basis. Cash basis income recognition is applied if a loan’s amortized cost basis is deemed fully collectible and the loan has performed for at least six months.

For TDRs, payments are applied based upon their contractual terms unless the related loan is deemed non-performing. TDRs are
generally included in nonperforming and nonaccrual loans. However, after a reasonable period of time, generally six months, in which the loan performs under restructured terms and meets other performance indicators, it is returned to performing/accruing status. This return to performing/accruing status demonstrates that the bank expects to collect all of the loan’s remaining contractual principal and interest. TDRs resulting from (i) borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to us, and (ii) borrowers that are not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

Other nonaccrual loans are generally not returned to accrual status until the borrower has performed in accordance with the
contractual terms and other performance indicators for at least six months, the period of time which was determined to demonstrate
the expected collection of the loan’s remaining contractual principal and interest. Nonaccrual loans with partially charged-off principal are not returned to accrual. When a nonperforming loan is returned to accrual status, it is then considered a performing loan.

Foreclosed assets consist of any asset seized or property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu
of foreclosure. Other real estate owned (OREO) comprises principally commercial and residential real estate properties obtained in
partial or total satisfaction of loan obligations. After obtaining a foreclosure judgment, or in some jurisdictions the initiation of
proceedings under a power of sale in the loan instruments, the property will be sold. When we are awarded title or completion of
deed-in-lieu of foreclosure, we transfer the loan to foreclosed assets included in Other assets on our Consolidated Balance Sheet.
Property obtained in satisfaction of a loan is initially recorded at estimated fair value less cost to sell. Based upon the estimated fair
value less cost to sell, the amortized cost basis of the loan is adjusted and a charge-off/recovery is recognized to the ACL. We
estimate fair values primarily based on appraisals, or sales agreements with third parties. Subsequently, foreclosed assets are
valued at the lower of the amount recorded at acquisition date or estimated fair value less cost to sell. Valuation adjustments on
these assets and gains or losses realized from disposition of such property are reflected in Other noninterest expense.

For certain mortgage loans that have a government guarantee, we establish a separate other receivable upon foreclosure. The
receivable is measured based on the loan balance (inclusive of principal and interest) that is expected to be recovered from the
guarantor.

See Note 3 Loans in this Report for additional information on nonperforming assets, TDRs and credit quality indicators related to our loan portfolio.

Allowance for Credit Losses

Our ACL, in accordance with the CECL standard, is based on historical loss experience, borrower characteristics, current economic
conditions, reasonable and supportable forecasts of future conditions and other relevant factors. We maintain the ACL at an
appropriate level for expected losses on our existing investment securities, loans, finance leases (including residual values), trade
receivables and other financial assets and unfunded lending related commitments, for the estimated contractual term of the assets or
exposures as of the balance sheet date. We estimate the estimated contractual term of assets in scope of CECL considering
contractual maturity dates, prepayment expectations, utilization or draw expectations and any embedded extension options that do
not allow us to unilaterally cancel the extension options. For products without a fixed contractual maturity date (e.g., credit cards),
we rely on historical payment behavior to determine the length of the pay down or default time period.

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




We estimate expected losses on a pooled basis using a combination of (i) the expected losses over a reasonable and supportable
forecast period (RSFP), (ii) a period of reversion to long run average expected losses (reversion period) where applicable, and (iii)
long run average (LRA) expected losses for the remaining estimated contractual term. For all assets and unfunded lending related commitments in the scope of CECL, the ACL also includes individually assessed reserves and qualitative reserves, as
applicable.

We use forward-looking information in estimating expected credit losses for the RSFP. For this purpose, we use the forecasted
scenarios produced by PNC's Economics Team, which are designed to reflect business cycles and their related estimated probabilities. The forecast length that we have determined to be reasonable and supportable is three years. As noted in the methodology discussions that follow, forward looking information, such as forecasted relevant macroeconomic variables, is incorporated into the expected credit loss estimates using quantitative techniques, as well as through analysis from PNC economists and management judgment.

The reversion period is used to bridge RSFP and LRA expected credit losses. We may consider a number of factors in determining the duration of the reversion period, such as contractual maturity of the asset, observed historical patterns and the estimated credit loss rates at the end of RSFP relative to the beginning of the LRA period.

The LRA expected credit losses are derived from long run historical credit loss information adjusted for the credit quality of the current portfolio, and therefore do not consider current and forecasted economic conditions.

See the following sections related to investment securities, loans, trade receivables, other financial assets and unfunded lending related commitments for details about specific methodologies.

Allowance for Credit Losses - Investment Securities
A significant portion of our investment securities are issued or guaranteed by either the U.S. government (U.S. Treasury or Government National Mortgage Association (GNMA)) or a government-sponsored agency (Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC)). Taking into consideration historical information and current and forecasted conditions, we do not expect to incur any credit losses on these securities.

Investment securities that are not issued or guaranteed by the U.S. government or a government-sponsored agency consist of both securitized products, such as non-agency mortgage and asset-backed securities, as well as non-securitized products, such as corporate and municipal debt securities. A discounted cash flow approach is primarily used to determine the amount of the ACL required. The estimates of expected cash flows are determined using macroeconomic sensitive models taking into consideration the RSFP and scenarios discussed above. The cash flows expected to be collected, after considering expected prepayments, are discounted at the effective interest rate. For an available-for-sale security, the amount of the ACL is limited to the difference between the amortized cost basis of the security and its estimated fair value.

See Note 2 Investment Securities in this Report for additional information about the investment securities portfolio.

Allowance for Credit Losses - Loans and Leases
Our pooled expected loss methodology is based upon the quantification of risk parameters, such as probability of default (PD), loss
given default (LGD) and exposure at default (EAD) for a loan or loan segment. We also consider the impact of prepayments and
amortization on contractual maturity in our expected loss estimates. We use historical credit loss information, current borrower
characteristics and forecasted economic variables for the RSFP, coupled with analytical methods, to estimate these risk parameters
by loan or loan segments. PD, LGD and EAD parameters are calculated for each forecasted scenario and the LRA period, and
combined to generate expected loss estimates by scenario. The following matrix provides key credit risk characteristics that we use to
estimate these risk parameters.


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




Loan Class
 
Probability of Default (PD)
Loss Given Default (LGD)
Exposure at Default (EAD)
Commercial Lending
Commercial and Equipment Lease Financing
 
• For wholesale obligors: internal risk ratings based on borrower characteristics and industry

•  For retail small balance obligors: credit scores, exposure characteristics and industry




•  Collateral type, collateral value, industry, size and outstanding exposure for secured loans

•  Capital structure, industry and size for unsecured loans

•  Product type and credit scores






•  Outstanding balances, contractual maturities and historical prepayment experience

•  Product type and historical prepayment experience



Commercial Real Estate
 
•  Property performance metrics and capitalization rates for RSFP

• Internal risk ratings based on borrower characteristics for LRA

•  Property values and anticipated liquidation costs
•  Outstanding balances, contractual maturities, historical prepayment experience and contractual extension options
Consumer Lending
Home Equity and Residential Real Estate
 
•  Borrower credit scores, delinquency rates, origination vintage, loan-to-value (LTV) ratios and contractual maturity
•  Collateral characteristics, LTV and costs to sell
•  Outstanding balances, contractual maturities and historical prepayment experience
Automobile
 
•  Borrower credit scores, borrower income, LTV and contractual maturity
•  New vs. used, LTV and borrower credit scores
•  Outstanding balances, contractual maturities and historical prepayment experience
Credit Card
 
•  Borrower credit scores, customer type (individual vs. joint) and months on book
• Borrower credit scores
•  Pay-down curves estimated using borrower behavior segments, payment ratios and borrower credit scores
•  Payment ratios are developed using a pro-rata method
Education and Other Consumer
 
• Net charge-off rates by vintage are used to estimate expected losses in lieu of discrete risk parameters

The following matrix describes the key economic variables that are consumed during the RSFP by loan class, as well as other
assumptions that are used for our reversion and LRA approaches.


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



Loan Class
 
RSFP - Key Economic Variables
Reversion Method
LRA Approach
Commercial Lending

Commercial and Equipment Lease Financing
 
•  Gross Domestic Product and Gross Domestic Income measures, imports, unemployment rates, House Price Index (HPI), credit spreads, personal income and consumption measures and stock market indices

•  Immediate reversion

•  Average parameters determined based on internal and external historical data

•  Modeled parameters using long run economic conditions for retail small business obligors

Commercial Real Estate
 
•  Unemployment rates, Commercial Property Price Index, stock market indices /volatility measures, and interest rates
•  Immediate reversion
•  Average parameters determined based on internal and external historical data
Consumer Lending
Home Equity and Residential Real Estate
 
•  Unemployment rates, HPI and interest rates
•  Straight-line over 1-3 years based on economic scenario
•  Modeled parameters using long run economic conditions
Automobile
 
•  Unemployment rates, HPI, personal consumption, interest rates, Manheim used car index and domestic oil prices

•  Straight-line over 1 year

•  Average parameters determined based on internal and external historical data

Credit Card
 
•  Unemployment rates, delinquency rates, personal consumption, HPI and housing data

•  Straight-line over 2 years

•  Modeled parameters using long run economic conditions

Education and Other Consumer
 
•  Net charge-off rates by vintage are used to estimate expected losses in lieu of discrete risk parameters

After the RSFP, we revert to the LRA over the reversion period noted above, which is the period between the end of the RSFP and
when losses are estimated to have completely reverted to the LRA.

Once we have developed a combined estimate of credit losses (i.e., of the RSFP, reversion period and LRA) under each of the forecasted scenarios, we produce a probability-weighted credit loss estimate by loan class. We then add or deduct any qualitative components and other adjustments, such as individually assessed loans, to produce the ACL. See the Individually Assessed Component and Qualitative Component sections of this Note 1 for additional information about those adjustments.

Discounted Cash Flow
In addition to TDRs, we also use a discounted cash flow methodology for our Home Equity and Residential Real Estate loan classes. We determine effective interest rates considering contractual cash flows adjusted for estimated prepayments. Changes in the ACL due to the impact of the passage of time under the discounted cash flow estimate are recognized through the provision for credit losses.

Individually Assessed Component
Loans and leases that do not share similar risk characteristics with a pool of loans are individually assessed as follows:
For commercial nonperforming loans greater than or equal to a defined dollar threshold, reserves are based on an analysis of the present value of the loan’s expected future cash flows or the fair value of the collateral, if appropriate under our policy for collateral dependent loans. Nonperforming commercial loans below the defined threshold and accruing TDRs are reserved for under a pooled basis.
For consumer nonperforming loans classified as collateral dependent, charge-off and ACL related to recovery of amounts previously charged-off are evaluated through an analysis of the fair value of the collateral less costs to sell.

Qualitative Component
While our reserve methodologies strive to reflect all relevant credit risk factors, there continues to be uncertainty associated with,
but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal
variations between expected and actual outcomes. We may hold additional reserves that are designed to provide coverage for losses
attributable to such risks. The ACL also takes into account factors that may not be directly measured in the determination of
individually assessed or pooled reserves. Such qualitative factors may include, but are not limited to:

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




Industry concentrations and conditions,
Changes in market conditions, including regulatory and legal requirements,
Changes in the nature and volume of our portfolio,
Recent credit quality trends,
Recent loss experience in particular portfolios, including specific and unique events,
Recent macro-economic factors that may not be reflected in the forecast information,
Limitations of available data, including historical loss information and recent data such as collateral values,
Model imprecision,
Changes in lending policies and procedures, including changes in loss recognition and mitigation policies and procedures,
Timing of available information, including the performance of first lien positions, and
Other relevant factors

See Note 3 Loans for additional information about our loan portfolio and the related allowance.

Accrued Interest
When accrued interest is reversed or charged-off in a timely manner the CECL standard provides a practical expedient to exclude
accrued interest from ACL measurement. We consider our nonaccrual and charge-off policies to be timely for all of our investment
securities, loans and leases, with the exception of consumer credit cards, education loans and certain unsecured consumer lines of credit. We consider the length of time before nonaccrual/charge-off and the use of appropriate other triggering events for nonaccrual and charge-offs in making this determination. Pursuant to these policy elections, we calculate reserves for accrued interest on credit cards, education loans and certain consumer lines of credit, which are then included within the ACL for loans and leases. See the Debt Securities and Nonperforming Loans and Leases sections of this Note 1 for additional information on our nonaccrual and charge-off policies.

Additionally, pursuant to our use of a discounted cash flow methodology in estimating credit losses for our home equity and residential real estate loan classes, applicable reserves for accrued interest are also included within the ACL for loans and leases for these loan classes.

Purchased Credit Deteriorated Loans or Securities
The ACL for purchased credit deteriorated loans or securities is determined at the time of acquisition, as the estimated expected credit loss of the outstanding balance or par value, based on the methodologies described previously for loans and securities. In accordance with CECL, the ACL recognized at acquisition is added to the acquisition date purchase price to determine the asset’s amortized cost basis.

Allowance for Credit Losses - Unfunded Lending Related Commitments
We maintain the ACL for unfunded lending related commitments on off-balance sheet credit exposures that are not unconditionally cancelable (e.g., unfunded loan commitments, letters of credit and certain financial guarantees), at a level we believe is appropriate as of the balance sheet date to absorb expected credit losses on these exposures. Other than the estimation of the probability of funding, this reserve is estimated in a manner similar to the methodology used for determining reserves for loans and leases. The ACL for unfunded lending related commitments is recorded as a liability on the Consolidated Balance Sheet. Net adjustments to this reserve are included in the provision for credit losses.

See Note 3 Loans for additional information about this allowance.

Allowance for Credit Losses - Other Financial Assets
We determine the allowance for other financial assets (e.g., trade receivables, servicing advances, balances with banks) considering historical loss information and other available indicators. In certain cases where there are no historical, current or forecast indicators of an expected credit loss, we may estimate the reserve to be close to zero. As of March 31, 2020, the ACL for other financial assets was immaterial.

Goodwill

Goodwill arising from business acquisitions represents the value attributable to unidentifiable intangible elements in the business acquired. At least annually, in the fourth quarter, or more frequently if events occur or circumstances have changed significantly from the annual test date, management performs our goodwill impairment test at a reporting unit level.

PNC has the ability to first perform a qualitative analysis to evaluate whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, PNC determines it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative impairment test is not necessary. If PNC elects to bypass the qualitative analysis, or concludes via qualitative analysis that it is more-likely-than-

The PNC Financial Services Group, Inc. – Form 10-Q 63  



not that the fair value of a reporting unit is less than its carrying amount, a quantitative goodwill impairment test is performed. Inputs are generated and used in calculating the fair value of the reporting unit, which is compared to its carrying amount. The fair value of our reporting units is determined by using discounted cash flows and/or market comparability methodologies. If the fair value is greater than the carrying amount, then the reporting unit's goodwill is deemed not to be impaired. If the fair value is less than the carrying amount, an entity should recognize an impairment charge for the amount by which the carrying amount of goodwill exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

NOTE 2 INVESTMENT SECURITIES

With the adoption of the CECL standard on January 1, 2020, credit losses on investment securities are required to be recognized through the ACL, instead of as a direct write-down to the amortized cost basis of the security. The amortized cost basis of investment securities for which impairment had previously been recorded did not change upon adoption.

We maintain the ACL for investment securities at levels that we believe to be appropriate as of the balance sheet date to absorb expected credit losses on our portfolio. As of March 31, 2020, the ACL for investment securities totaled $2 million and primarily related to other debt securities in the held to maturity portfolio.

Additionally, upon adoption of ASU 2019-04 and as permitted by the eligibility requirements in this guidance, we elected to transfer debt securities with an amortized cost of $16.2 billion and a fair value of $16.5 billion from held to maturity to the available for sale portfolio.

See Note 1 Accounting Policies for additional information related to the adoption of the CECL standard, including the methodologies used to determine the ACL for investment securities, and the adoption of ASU 2019-04.

The following table summarizes our available for sale and held to maturity portfolios by major security type.
Table 34: Investment Securities Summary
 
 
March 31, 2020 (a)
 
 
December 31, 2019
In millions
 
Amortized
Cost (b)

 
Unrealized
 
Fair
Value

 
 
Amortized
Cost

 
Unrealized
 
Fair
Value

Gains

 
Losses

 
 
 
Gains

 
Losses

 
Securities Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
16,102

 
$
879

 
 
 
$
16,981

 
 
$
16,150

 
$
382

 
$
(16
)
 
$
16,516

Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
50,828

 
1,810

 
$
(10
)
 
52,628

 
 
35,847

 
517

 
(43
)
 
36,321

Non-agency
 
1,563

 
142

 
(62
)
 
1,643

 
 
1,515

 
302

 
(3
)
 
1,814

Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
3,181

 
114

 
(6
)
 
3,289

 
 
3,094

 
42

 
(18
)
 
3,118

Non-agency
 
4,249

 
27

 
(194
)
 
4,082

 
 
3,352

 
29

 
(9
)
 
3,372

Asset-backed
 
5,339

 
43

 
(104
)
 
5,278

 
 
5,044

 
78

 
(8
)
 
5,114

Other
 
4,962

 
218

 
(4
)
 
5,176

 
 
2,788

 
121

 
(1
)
 
2,908

Total securities available for sale
 
$
86,224

 
$
3,233

 
$
(380
)
 
$
89,077

 
 
$
67,790

 
$
1,471

 
$
(98
)
 
$
69,163

Securities Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
781

 
$
143

 
 
 
$
924

 
 
$
776

 
$
56

 
 
 
$
832

Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
 
 


 
 
 
 
 
 
14,419

 
270

 
$
(26
)
 
14,663

Non-agency
 
 
 


 
 
 
 
 
 
133

 
7

 
 
 
140

Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
 
 


 
 
 
 
 
 
59

 
1

 
 
 
60

Non-agency
 
 
 


 
 
 
 
 
 
430

 
4

 
 
 
434

Asset-backed
 
50

 


 
$
(1
)
 
49

 
 
52

 


 
 
 
52

Other
 
638

 
33

 
(23
)
 
648

 
 
1,792

 
85

 
(14
)
 
1,863

Total securities held to maturity, net of ACL (c)
 
$
1,469

 
$
176

 
$
(24
)
 
$
1,621

 
 
$
17,661

 
$
423

 
$
(40
)
 
$
18,044


(a) The accrued interest associated with our available for sale and held to maturity portfolios totaled $266 million and $2.7 million at March 31, 2020, respectively. These amounts are included in Other assets on the Consolidated Balance Sheet.
(b) Amortized cost is presented net of applicable ACL of $2 million at March 31, 2020 in accordance with the adoption of the CECL accounting standard. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies for additional detail on the adoption of this ASU.
(c) Credit ratings represent a primary credit quality indicator used to monitor and manage credit risk. As of March 31, 2020, 87% of our securities held to maturity were rated AAA/AA.


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




The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Securities available for sale are carried at fair value with net unrealized gains and losses included in Shareholders’ equity as AOCI, unless credit related. Net unrealized gains and losses are determined by taking the difference between the fair value of a security and its amortized cost, net of any ACL. Securities held to maturity are carried at amortized cost less any ACL. Investment securities at March 31, 2020 included $388 million of net unsettled purchases which represent non-cash investing activity, and accordingly, are not reflected on the Consolidated Statement of Cash Flows. The comparable amount for March 31, 2019 was $623 million.

Table 35 presents the gross unrealized losses and fair value of securities available for sale that do not have an associated ACL as of March 31, 2020. These securities are segregated between investments that had been in a continuous unrealized loss position for less than twelve months and twelve months or more based on the point in time that the fair value declined below the amortized cost basis. As of March 31, 2020, we do not intend to sell and believe we will not be required to sell these securities prior to recovery of the amortized cost basis.

Table 35: Gross Unrealized Loss and Fair Value of Securities Available for Sale Without an Allowance for Credit Losses

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

 
Fair
Value

 
Unrealized
Loss

 
Fair
Value

 
Unrealized
Loss

 
Fair
Value

March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
 
 
 
 
 
 
 
 


 


Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
$
(3
)
 
$
409

 
$
(7
)
 
$
380

 
$
(10
)
 
$
789

Non-agency
 
(43
)
 
537

 
(17
)
 
77

 
(60
)
 
614

Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
(1
)
 
187

 
(5
)
 
436

 
(6
)
 
623

Non-agency
 
(172
)
 
2,719

 
(22
)
 
147

 
(194
)
 
2,866

Asset-backed
 
(75
)
 
2,815

 
(25
)
 
538

 
(100
)
 
3,353

Other
 
(3
)
 
320

 
 
 
 
 
(3
)
 
320

Total securities available for sale
 
$
(297
)
 
$
6,987

 
$
(76
)
 
$
1,578

 
$
(373
)
 
$
8,565



Table 36 presents the gross unrealized losses and fair value of debt securities at December 31, 2019, prior to the adoption of the CECL standard. These securities are segregated between investments that had been in a continuous unrealized loss position for less than twelve months and twelve months or more based on the point in time that the fair value declined below the amortized cost basis.

Table 36: Gross Unrealized Loss and Fair Value of Debt Securities
 
 
Unrealized loss position less than 12 months
 
Unrealized loss position 12 months or more
 
Total
 
In millions
 
Unrealized
Loss

 
Fair
Value

 
Unrealized
Loss

 
Fair
Value

 
Unrealized
Loss

 
Fair
Value

 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
(14
)
 
$
2,451

 
$
(2
)
 
$
607

 
$
(16
)
 
$
3,058

 
Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
(6
)
 
2,832

 
(37
)
 
4,659

 
(43
)
 
7,491

 
Non-agency
 

 

 
(3
)
 
102

 
(3
)
 
102

 
Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
(6
)
 
852

 
(12
)
 
953

 
(18
)
 
1,805

 
Non-agency
 
(4
)
 
1,106

 
(5
)
 
230

 
(9
)
 
1,336

 
Asset-backed
 
(3
)
 
660

 
(5
)
 
561

 
(8
)
 
1,221

 
Other
 

 

 
(1
)
 
403

 
(1
)
 
403

 
Total securities available for sale
 
$
(33
)
 
$
7,901

 
$
(65
)
 
$
7,515

 
$
(98
)
 
$
15,416

 
Securities Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed - Agency
 

 

 
$
(26
)
 
$
2,960

 
$
(26
)
 
$
2,960

 
Other
 
$
(1
)
 
$
22

 
(13
)
 
105

 
(14
)
 
127

 
Total securities held to maturity
 
$
(1
)
 
$
22

 
$
(39
)
 
$
3,065

 
$
(40
)
 
$
3,087

 



The PNC Financial Services Group, Inc. – Form 10-Q 65  



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

Table 37: Gains (Losses) on Sales of Securities Available for Sale
Three months ended March 31
In millions
Gross Gains

Gross Losses

Net Gains (Losses)

Tax Expense (Benefit)

 
2020
$
184

$
(2
)
$
182

$
38

 
2019
$
27

$
(14
)
$
13

$
3

 

The following table presents, by remaining contractual maturity, the amortized cost, fair value and weighted-average yield of debt securities at March 31, 2020.
Table 38: Contractual Maturity of Debt Securities
March 31, 2020
Dollars in millions
 
1 Year or Less

 
After 1 Year
through 5 Years

 
After 5 Years
through 10 Years

 
After 10
Years

 
Total

 
Securities Available for Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
249

 
$
10,949

 
$
3,839

 
$
1,065

 
$
16,102

 
Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
Agency
 
3

 
117

 
2,092

 
48,616

 
50,828

 
Non-agency
 
 
 
 
 
 
 
1,563

 
1,563

 
Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
Agency
 
7

 
466

 
828

 
1,880

 
3,181

 
Non-agency
 
 
 
75

 
351

 
3,823

 
4,249

 
Asset-backed
 
15

 
2,721

 
1,169

 
1,434

 
5,339

 
Other
 
505

 
1,958

 
1,355

 
1,144

 
4,962

 
Total securities available for sale at amortized cost
 
$
779

 
$
16,286

 
$
9,634

 
$
59,525

 
$
86,224

 
Fair value
 
$
785

 
$
16,788

 
$
10,017

 
$
61,487

 
$
89,077

 
Weighted-average yield, GAAP basis (a)
 
3.10
%
 
2.16
%
 
2.58
%
 
3.14
%
 
2.89
%
 
Securities Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
 
 
$
198

 
$
303

 
$
280

 
$
781

 
Asset-backed
 
 
 
6

 
18

 
26

 
50

 
Other
 
$
32

 
379

 
113

 
114

 
638

 
Total securities held to maturity at amortized cost
 
$
32

 
$
583

 
$
434

 
$
420

 
$
1,469

 
Fair value
 
$
32

 
$
613

 
$
516

 
$
460

 
$
1,621

 
Weighted-average yield, GAAP basis (a)
 
3.32
%
 
3.23
%
 
3.87
%
 
2.63
%
 
3.26
%
 

(a) Weighted-average yields are based on amortized cost with effective yields weighted for the contractual maturity of each security.
At March 31, 2020, there were no securities of a single issuer, other than FNMA and FHLMC, that exceeded 10% of Total shareholders’ equity. The FNMA and FHLMC investments had a total amortized cost of $38.6 billion and $7.1 billion and fair value of $40.0 billion and $7.3 billion, respectively.
The following table presents the fair value of securities that have been either pledged to or accepted from others to collateralize outstanding borrowings.
Table 39: Fair Value of Securities Pledged and Accepted as Collateral
In millions
March 31
2020

December 31
2019

Pledged to others
$
25,722

$
14,609

Accepted from others:
 
 
Permitted by contract or custom to sell or repledge (a)
$
1,439

$
2,349

Permitted amount repledged to others
$
1,439

$
360

(a)
Balances at December 31, 2019 include $2.0 billion in fair value of securities accepted from others to collateralize short-term investments in resale agreements that were not repledged.

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


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




NOTE 3 Loans

Loan Portfolio

Our loan portfolio consists of two portfolio segments – Commercial Lending and Consumer Lending. Each of these segments comprises multiple loan classes. Classes are characterized by similarities in risk attributes and the manner in which we monitor and assess credit risk.
Commercial Lending
 
Consumer Lending
 
• Commercial
 
• Home equity
• Commercial real estate
 
• Residential real estate
• Equipment lease financing
 
• Automobile
 
 
• Credit card
 
 
• Education
 
 
• Other consumer
 
 
 
See Note 1 Accounting Policies for additional information on our loan related policies.

Credit Quality

We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk within the loan portfolio based on our defined loan classes. In doing so, we use several credit quality indicators, including trends in delinquency rates, nonperforming status, analysis of PD and LGD ratings, updated credit scores, and originated and updated LTV ratios.

The measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of payment are considered delinquent. With the adoption of the CECL standard, accruing loans past due as of March 31, 2020 include purchased credit deteriorated loans, while amounts as of December 31, 2019 excluded purchased impaired loans. See Note 1 Accounting Policies for additional information related to the adoption of this standard, including the discontinuation of purchased impaired loan accounting.

The following table presents the composition and delinquency status of our loan portfolio at March 31, 2020 and December 31, 2019.

Table 40: Analysis of Loan Portfolio
 
Accruing
 
 
 
 
 
 
Dollars in millions
Current or Less
Than 30 Days
Past Due

30-59
Days
Past Due

60-89
Days
Past Due

90 Days
Or More
Past Due

Total
Past
Due (b)

 
Nonperforming
Loans

Fair Value
Option
Nonaccrual
Loans (c)

Total
Loans
(d)(e)

 
Accrued
Interest
Receivable (f)

March 31, 2020 (a)
 
 
 
 
 
 
 
 
 
 
 
Commercial Lending
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
148,467

$
97

$
22

$
51

$
170

  
$
494

 
$
149,131

 
$
268

Commercial real estate
28,495

6

1

 
7

  
42

 
28,544

 
68

Equipment lease financing
6,987

42

2

 
44

  
30

 
7,061

 
 

Total commercial lending
183,949

145

25

51

221

  
566

 
184,736

 
336

Consumer Lending
 
 
 
 
 
 
 
 
 
 
 
Home equity
24,311

65

28

 
93

  
617

$
60

25,081

 
118

Residential real estate
20,934

173

82

300

555

(b) 
292

469

22,250

 
59

Automobile
16,795

177

49

19

245

  
154

 
17,194

 
64

Credit card
6,956

59

37

70

166

  
10

 
7,132

 
 

Education
3,081

52

30

84

166

(b)
 
 
3,247

 
134

Other consumer
4,961

17

10

10

37

 
5

 
5,003

 
14

Total consumer lending
77,038

543

236

483

1,262

  
1,078

529

79,907

 
389

Total
$
260,987

$
688

$
261

$
534

$
1,483

  
$
1,644

$
529

$
264,643

 
$
725

Percentage of total loans
98.62
%
.26
%
.10
%
.20
%
.56
%
 
.62
%
.20
%
100.00
%
 
 
(a)
Amounts in table represent loans held for investment and do not include any associated valuation allowance.
(b)
Past due loan amounts include purchased credit deteriorated loans totaling $.1 billion and government insured or guaranteed Residential real estate loans and Education loans totaling $.4 billion and $.2 billion, respectively, at March 31, 2020.
(c)
Consumer loans accounted for under the fair value option for which we do not expect to collect substantially all principal and interest are subject to nonaccrual accounting and classification upon meeting any of our nonaccrual policies. Given that these loans are not accounted for at amortized cost, these loans have been excluded from the nonperforming loan population.
(d)
Net of unearned income, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans totaling $1.3 billion at March 31, 2020.

The PNC Financial Services Group, Inc. – Form 10-Q 67  



(e)
Collateral dependent loans totaled $1.1 billion at March 31, 2020. The majority of these loans are within the Home equity and Residential real estate loan classes and are secured by consumer real estate.
(f)
The accrued interest associated with our loan portfolio is included in Other assets on the Consolidated Balance Sheet.

 
Accruing
 
  
  
  
  
 
Dollars in millions
Current or Less
Than 30 Days
Past Due

30-59 Days
Past Due

60-89 Days
Past Due

90 Days
Or More
Past Due

Total Past
Due (h)

 
Nonperforming
Loans

Fair Value
Option
Nonaccrual
Loans (i)

Purchased
Impaired
Loans

Total
Loans (j)

 
December 31, 2019 (g)
 
 
 
 
 
 
 
 
 
 
 
Commercial Lending
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
124,695

$
102

$
30

$
85

$
217

 
$
425

 
 
$
125,337

 
Commercial real estate
28,061

4

1

 
5

 
44

 
 
28,110

 
Equipment lease financing
7,069

49

5

 
54

 
32

 
 
7,155

 
Total commercial lending
159,825

155

36

85

276

 
501

 
 
160,602

 
Consumer Lending
 
 
 
 
 
 
 
 
 
 
 
Home equity
23,791

58

24

 
82

 
669

 
$
543

25,085

 
Residential real estate
19,640

140

69

315

524

(h) 
315

$
166

1,176

21,821

 
Automobile
16,376

178

47

18

243

 
135

 
 
16,754

 
Credit card
7,133

60

37

67

164

 
11

 
 
7,308

 
Education
3,156

55

34

91

180

(h) 
 
 
 
3,336

 
Other consumer
4,898

15

11

9

35

 
4

 
 
4,937

 
Total consumer lending
74,994

506

222

500

1,228

 
1,134

166

1,719

79,241

 
Total
$
234,819

$
661

$
258

$
585

$
1,504

 
$
1,635

$
166

$
1,719

$
239,843

 
Percentage of total loans
97.90
%
.28
%
.11
%
.24
%
.63
%
 
.68
%
.07
%
.72
%
100.00
%
 
(g)
Amounts in table represent recorded investment and exclude loans held for sale. Recorded investment does not include any associated valuation allowance.
(h)
Past due loan amounts exclude purchased impaired loans, even if contractually past due (or if we do not expect to receive payment in full based on the original contractual terms), as we accreted interest income over the expected life of the loans. Past due loan amounts include government insured or guaranteed Residential real estate loans totaling $.4 billion and Education loans totaling $.2 billion at December 31, 2019.
(i)
Consumer loans accounted for under the fair value option for which we do not expect to collect substantially all principal and interest are subject to nonaccrual accounting and classification upon meeting any of our nonaccrual policies. Given that these loans are not accounted for at amortized cost, these loans have been excluded from the nonperforming loan population.
(j)
Net of unearned income, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans totaling $1.1 billion at December 31, 2019.

At March 31, 2020, we pledged $16.6 billion of commercial loans to the Federal Reserve Bank and $69.3 billion of residential real estate and other loans to the Federal Home Loan Bank as collateral for the ability to borrow, if necessary. The comparable amounts at December 31, 2019 were $16.9 billion and $68.0 billion, respectively. Amounts pledged reflect the unpaid principal balances.

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

With the adoption of the CECL standard, nonperforming loans as of March 31, 2020 include purchased credit deteriorated loans. Amounts as of December 31, 2019 excluded purchased impaired loans as we were accreting interest income over the expected life of the loans. See Note 1 Accounting Policies for additional information related to the adoption of this standard and our nonperforming loan and lease policies.

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




The following table presents our nonperforming assets as of March 31, 2020 and December 31, 2019, respectively.
Table 41: Nonperforming Assets
Dollars in millions
 
March 31
2020

 
December 31
2019

 
Nonperforming loans
 
 
 
 
 
Total commercial lending
 
$
566

 
$
501

 
Total consumer lending (a)
 
1,078

 
1,134

 
Total nonperforming loans (b)
 
1,644

 
1,635

 
OREO and foreclosed assets
 
111

 
117

 
Total nonperforming assets
 
$
1,755

 
$
1,752

 
Nonperforming loans to total loans
 
.62
%
 
.68
%
 
Nonperforming assets to total loans, OREO and foreclosed assets
 
.66
%
 
.73
%
 
Nonperforming assets to total assets
 
.39
%
 
.43
%
 
(a)
Excludes most unsecured consumer loans and lines of credit, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.
(b)
Nonperforming loans for which there is no related ACL totaled $.3 billion at March 31, 2020.

Nonperforming loans also include certain loans whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. In accordance with applicable accounting guidance, these loans are considered TDRs. See Note 1 Accounting Policies and the TDR section of this Note 3 for additional information on TDRs.

Total nonperforming loans in Table 41 include TDRs of $.7 billion and $.9 billion at March 31, 2020 and December 31, 2019, respectively. TDRs that are performing, including consumer credit card TDR loans, totaled $.8 billion at both March 31, 2020 and December 31, 2019 and are excluded from nonperforming loans.
Additional Credit Quality Indicators by Loan Class
Commercial Loan Class
For commercial loans, we monitor the performance of the borrower in a disciplined and regular manner based upon the level of credit risk inherent in the loan. To evaluate the level of credit risk, we assign an internal risk rating reflecting the borrower’s PD and LGD. This two-dimensional credit risk rating methodology provides granularity in the risk monitoring process. These ratings are reviewed and updated, generally at least once per year. For small balance homogeneous pools of commercial loans, mortgages and leases, we apply scoring techniques to assist in determining the PD. Further, on a periodic basis, we update our LGD estimates associated with each rating grade based upon historical data. The combination of the PD and LGD ratings assigned to commercial loans, capturing both the combination of expectations of default and loss severity in event of default, reflects the relative estimated likelihood of loss at the reporting date. In general, loans with lower PD and LGD tend to have less likelihood of loss compared to loans with higher PD and LGD. The loss amount also considers an estimate of exposure at date of default, which we also periodically update based upon historical data.
Based upon the amount of the lending arrangement and our risk rating assessment, we follow a formal schedule of written periodic review. Quarterly, we conduct formal reviews of a market’s or business unit’s loan portfolio, focusing on those loans which we perceive to be of higher risk, based upon PDs and LGDs, or loans for which credit quality is weakening. If circumstances warrant, it is our practice to review any customer obligation and its level of credit risk more frequently. We attempt to proactively manage our loans by using various procedures that are customized to the risk of a given loan, including ongoing outreach, contact, and assessment of obligor financial conditions, collateral inspection and appraisal.
Commercial Real Estate Loan Class
We manage credit risk associated with our commercial real estate projects and commercial mortgages similar to commercial loans by analyzing PD and LGD. Additionally, risks associated with commercial real estate projects and commercial mortgage activities tend to be correlated to the loan structure and collateral location, project progress and business environment. As a result, these attributes are also monitored and utilized in assessing credit risk.
As with the commercial class, a formal schedule of periodic review is also performed to assess market/geographic risk and business unit/industry risk. Often as a result of these overviews, more in-depth reviews and increased scrutiny are placed on areas of higher risk, including adverse changes in risk ratings, deteriorating operating trends, and/or areas that concern management. These reviews are designed to assess risk and take actions to mitigate our exposure to such risks.
Equipment Lease Financing Loan Class
We manage credit risk associated with our equipment lease financing loan class similar to commercial loans by analyzing PD and LGD.


The PNC Financial Services Group, Inc. – Form 10-Q 69  



Based upon the dollar amount of the lease and the level of credit risk, we follow a formal schedule of periodic review. Generally, this occurs quarterly, although we have established practices to review such credit risk more frequently if circumstances warrant. Our review process entails analysis of the following factors: equipment value/residual value, exposure levels, jurisdiction risk, industry risk, guarantor requirements, and regulatory compliance as applicable.
Table 42: Commercial Lending Credit Quality Indicators (a)
 
Amortized Cost Basis by Origination Year
 
 
 
March 31, 2020 - Dollars in millions
Three Months Ended March 31, 2020

2019

2018

2017

2016

Prior

Revolving Loans

Revolving Loans Converted to Term

Total
Loans

Commercial
 
 
 
 
 
 
 
 
 
Pass Rated
$
7,250

$
18,695

$
11,957

$
7,943

$
5,399

$
11,807

$
78,664

$
61

$
141,776

Criticized
16

373

580

435

307

530

5,098

16

7,355

Total commercial
7,266

19,068

12,537

8,378

5,706

12,337

83,762

77

149,131

% of total commercial
4.8
%
12.8
%
8.4
%
5.6
%
3.8
%
8.3
%
56.2
%
.1
%
100.0
%
Commercial real estate
 
 
 
 
 
 
 
 
 
Pass Rated
898

6,812

4,221

3,766

2,973

8,908

203

 
27,781

Criticized
6

63

27

49

173

359

86

 
763

Total commercial real estate
904

6,875

4,248

3,815

3,146

9,267

289

 
28,544

% of total commercial real estate
3.2
%
24.0
%
14.9
%
13.4
%
11.0
%
32.5
%
1.0
%
 
100.0
%
Equipment lease financing
 
 
 
 
 
 
 
 
 
Pass Rated
334

1,438

1,252

1,038

680

2,059

 
 
6,801

Criticized
4

74

88

44

27

23

 
 
260

Total equipment lease financing
338

1,512

1,340

1,082

707

2,082

 
 
7,061

% of total equipment lease financing
4.8
%
21.4
%
19.0
%
15.3
%
10.0
%
29.5
%
 
 
100.0
%
Total commercial lending
$
8,508

$
27,455

$
18,125

$
13,275

$
9,559

$
23,686

$
84,051

$
77

$
184,736

% of total commercial lending

4.6
%
14.9
%
9.8
%
7.2
%
5.2
%
12.8
%
45.5
%

100.0
%
December 31, 2019 - Dollars in millions
 
Pass Rated

 
Criticized

 
Total Loans

 
Commercial
 
$
119,761

 
$
5,576

 
$
125,337

 
Commercial real estate
 
27,424

 
686

 
28,110

 
Equipment lease financing
 
6,891

 
264

 
7,155

 
Total commercial lending
 
$
154,076

 
$
6,526

 
$
160,602

 
(a)
Loans in our commercial lending portfolio are classified as Pass Rated or Criticized based on the regulatory definitions, which are driven by the PD and LGD ratings that we assign. The Criticized classification includes loans that were rated special mention, substandard or doubtful as of March 31, 2020 and December 31, 2019.

Home Equity and Residential Real Estate Loan Classes
We use several credit quality indicators, including delinquency information, nonperforming loan information, updated credit scores, originated and updated LTV ratios to monitor and manage credit risk within the home equity and residential real estate loan classes. A summary of credit quality indicators follows:
Delinquency/Delinquency Rates: We monitor trending of delinquency/delinquency rates for home equity and residential real estate loans. See Table 40 for additional information.
Nonperforming Loans: We monitor trending of nonperforming loans for home equity and residential real estate loans. See Table 40 for additional information.
Credit Scores: We use a national third-party provider to update FICO credit scores for home equity and residential real estate loans at least quarterly. The updated scores are incorporated into a series of credit management reports, which are utilized to monitor the risk in the loan classes.
LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions): At least annually, we update the property values of real estate collateral and calculate an updated LTV ratio. For open-end credit lines secured by real estate in regions experiencing significant declines in property values, more frequent valuations may occur. We examine LTV migration and stratify LTV into categories to monitor the risk in the loan classes.
We use a combination of original LTV and updated LTV for internal risk management and reporting purposes (e.g., line management, loss mitigation strategies). In addition to the fact that estimated property values by their nature are estimates, given certain data

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




limitations it is important to note that updated LTVs may be based upon management’s assumptions (i.e., if an updated LTV is not provided by the third-party service provider, HPI changes will be incorporated in arriving at management’s estimate of updated LTV).
Updated LTV is estimated using modeled property values. The related estimates and inputs are based upon an approach that uses a combination of third-party automated valuation models, broker price opinions, HPI indices, property location, internal and external balance information, origination data and management assumptions. We generally utilize origination lien balances provided by a third-party, where applicable, which do not include an amortization assumption when calculating updated LTV. Accordingly, the results of the calculations do not represent actual appraised loan level collateral or updated LTV based upon lien balances held by others, and as such, are necessarily imprecise and subject to change as we refine our methodology.

The following table presents credit quality indicators for the home equity and residential real estate loan classes.
Table 43: Home Equity and Residential Real Estate Loans Credit Quality Indicators
 
Amortized Cost Basis by Origination Year
 
 
 
March 31, 2020 – Dollars in millions
Three months ended March 31, 2020

2019

2018

2017

2016

Prior

Revolving Loans

Revolving Loans Converted to Term

Total Loans

Home Equity
 
 
 
 
 
 
 
 
 
Current estimated LTV ratios
 
 
 
 
 
 
 
 
.
Greater than or equal to 100%
 
$
18

$
27

$
30

$
18

$
144

$
722

$
389

$
1,348

Greater than or equal to 90% to less than 100%
 
45

37

20

15

87

684

263

1,151

Less than 90%
$
785

2,584

761

1,041

875

4,880

8,502

3,154

22,582

Total home equity
$
785

$
2,647

$
825

$
1,091

$
908

$
5,111

$
9,908

$
3,806

$
25,081

Updated FICO scores
 
 
 
 
 
 
 
 
 
Greater than 660
$
773

$
2,521

$
761

$
1,026

$
856

$
4,609

$
9,339

$
2,871

$
22,756

Less than or equal to 660
12

126

64

64

51

493

555

842

2,207

No FICO score available
 
 
 
1

1

9

14

93

118

Total home equity
$
785

$
2,647

$
825

$
1,091

$
908

$
5,111

$
9,908

$
3,806

$
25,081

% of total home equity
3.1
%
10.6
%
3.3
%
4.3
%
3.6
%
20.4
%
39.5
%
15.2
%
100.0
%
Residential Real Estate
 
 
 
 
 
 
 
 
 
Current estimated LTV ratios
 
 
 
 
 
 
 
 
 
Greater than or equal to 100%
 
$
3

$
58

$
74

$
68

$
241

 
 
$
444

Greater than or equal to 90% to less than 100%
$
4

27

61

64

50

155

 
 
361

Less than 90%
1,757

6,236

1,867

2,752

2,697

5,556

 
 
20,865

Government insured or guaranteed loans
 
9

13

17

25

516

 
 
580

Total residential real estate
$
1,761

$
6,275

$
1,999

$
2,907

$
2,840

$
6,468

 
 
$
22,250

Updated FICO scores
 
 
 
 
 
 
 
 
 
Greater than 660
$
1,757

$
6,198

$
1,945

$
2,844

$
2,732

$
5,166

 
 
$
20,642

Less than or equal to 660
2

65

41

41

79

693

 
 
921

No FICO score available
2

3

 
5

4

93

 
 
107

Government insured or guaranteed loans
 
9

13

17

25

516

 
 
580

Total residential real estate
$
1,761

$
6,275

$
1,999

$
2,907

$
2,840

$
6,468

 
 
$
22,250

% of total residential real estate
7.9
%
28.1
%
9.0
%
13.1
%
12.8
%
29.1
%
 
 
100.0
%


The PNC Financial Services Group, Inc. – Form 10-Q 71  



 
Home equity
Residential real estate

December 31, 2019 - Dollars in millions
Current estimated LTV ratios
 
 
Greater than or equal to 125%
$
366

$
112

Greater than or equal to 100% to less than 125%
877

221

Greater than or equal to 90% to less than 100%
1,047

340

Less than 90%
22,068

19,305

No LTV ratio available
184

83

Government insured or guaranteed loans
 
584

Purchased impaired loans
543

1,176

Total loans
$
25,085

$
21,821

Updated FICO Scores
 
 
Greater than 660
$
22,245

$
19,341

Less than or equal to 660
2,019

569

No FICO score available
278

151

Government insured or guaranteed loans
 
584

Purchased impaired loans
543

1,176

Total loans
$
25,085

$
21,821



Automobile, Credit Card, Education and Other Consumer Loan Classes
We monitor a variety of credit quality information in the management of these consumer loan classes. For all loan types, we generally use a combination of internal loan parameters as well as an updated FICO score. We use FICO scores as a primary credit quality indicator for automobile and credit card loans, as well as non-government guaranteed or non-insured education loans and other secured and unsecured lines and loans. Internal credit metrics, such as delinquency status, are heavily relied upon as credit quality indicators for government guaranteed or insured education loans and consumer loans to high net worth individuals, as internal credit metrics are more relevant than FICO scores for these types of loans.

Along with the monitoring of delinquency trends and losses for each class, FICO credit score updates are obtained at least quarterly along with a variety of credit bureau attributes. Loans with high FICO scores tend to have a lower likelihood of loss. Conversely, loans with low FICO scores tend to have a higher likelihood of loss.


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




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

Table 44: Credit Quality Indicators for Automobile, Credit Card, Education and Other Consumer Loan Classes
 
Amortized Cost Basis by Origination Year
 
 
 
March 31, 2020 – Dollars in millions
Three months ended March 31, 2020

2019

2018

2017

2016

Prior

Revolving Loans

Revolving Loans Converted to Term

Total Loans

Automobile
 
 
 
 
 
 
 
 
 
FICO score greater than 719
$
1,586

$
4,090

$
1,955

$
1,164

$
725

$
275

 
 
$
9,795

650 to 719
320

2,112

1,225

571

256

105

 
 
4,589

620 to 649
14

525

306

122

47

21

 
 
1,035

Less than 620
8

673

633

283

119

59

 
 
1,775

Total automobile
$
1,928

$
7,400

$
4,119

$
2,140

$
1,147

$
460

 
 
$
17,194

% of total automobile
11.2
%
43.0
%
24.0
%
12.4
%
6.7
%
2.7
%
 
 
100.0
%
Credit card
 
 
 
 
 
 
 
 
 
FICO score greater than 719
 
 
 
 
 
 
$
3,564

$
10

$
3,574

650 to 719
 
 
 
 
 
 
2,370

27

2,397

620 to 649
 
 
 
 
 
 
442

12

454

Less than 620
 
 
 
 
 
 
547

49

596

No FICO score available or required (a)
 
 
 
 
 
 
108

3

111

Total credit card
 
 
 
 
 
 
$
7,031

$
101

$
7,132

% total credit card
 
 
 
 
 
 
98.6
%
1.4
%
100.0
%
Education
 
 
 
 
 
 
 
 
 
FICO score greater than 719
$
7

$
89

$
121

$
94

$
78

$
703

 
 
$
1,092

650 to 719
2

14

19

12

9

124

 
 
180

620 to 649
 
1

2

1

1

20

 
 
25

Less than 620
 
1

1

1

1

24

 
 
28

No FICO score available or required (a)
3

11

7

6

1

1

 
 
29

Total loans using FICO credit metric
12

116

150

114

90

872

 
 
1,354

Other internal credit metrics
11

59

 
 
 
1,823

 
 
1,893

Total education
$
23

$
175

$
150

$
114

$
90

$
2,695

 
 
$
3,247

% total education
.7
%
5.4
%
4.6
%
3.5
%
2.8
%
83.0
%
 
 
100.0
%
Other consumer
 
 
 
 
 
 
 
 
 
FICO score greater than 719
$
218

$
623

$
219

$
71

$
25

$
90

$
230

$
1

$
1,477

650 to 719
126

349

158

40

13

26

162

1

875

620 to 649
17

56

29

6

2

4

26

 
140

Less than 620
5

45

37

12

4

9

44

1

157

No FICO score available or required (a)
1

 
 
 
 
2

6

 
9

Total loans using FICO credit metric
367

1,073

443

129

44

131

468

3

2,658

Other internal credit metrics
14

74

49

34

65

88

2,018

3

2,345

Total other consumer
$
381

$
1,147

$
492

$
163

$
109

$
219

$
2,486

$
6

$
5,003

% total other consumer
7.6
%
22.9
%
9.8
%
3.3
%
2.2
%
4.4
%
49.7
%
.1
%
100.0
%
 
 
 
 
Dollars in millions
 
Automobile
Credit Card
Education
Other Consumer
December 31, 2019
 
 
 
 
 
FICO score greater than 719
 
$
9,232

$
3,867

$
1,139

$
1,421

650 to 719
 
4,577

2,326

197

843

620 to 649
 
1,001

419

25

132

Less than 620
 
1,603

544

27

143

No FICO score available or required (a)
 
341

152

15

27

Total loans using FICO credit metric
 
16,754

7,308

1,403

2,566

Consumer loans using other internal credit metrics
 
 
 
1,933

2,371

Total loans
 
$
16,754

$
7,308

$
3,336

$
4,937

Weighted-average updated FICO score (b)
 
726

724

773

727

(a)
Loans with no FICO score available or required generally refers to new accounts issued to borrowers with limited credit history, accounts for which we cannot obtain an updated FICO score (e.g., recent profile changes), cards issued with a business name and/or cards secured by collateral. Management proactively assesses the risk and size of this loan category and, when necessary, takes actions to mitigate the credit risk.
(b)
Weighted-average updated FICO score excludes accounts with no FICO score available or required.


The PNC Financial Services Group, Inc. – Form 10-Q 73  



Troubled Debt Restructurings (TDRs)

A TDR is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulty. Loans that have been restructured for COVID-19 related hardships and meet certain criteria under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) are not categorized as TDRs. TDRs result from our loss mitigation activities, and include rate reductions, principal forgiveness, postponement/reduction of scheduled amortization, and extensions, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Additionally, TDRs also result from borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to us. In those situations where principal is forgiven, the amount of such principal forgiveness is immediately charged off.

Potential incremental losses or recoveries on TDRs have been factored into the ACL estimates for each loan class under the methodologies described in Note 1 Accounting Policies. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, the collateral is foreclosed upon, or it is fully charged off.

Table 45 quantifies the number of loans that were classified as TDRs as well as the change in the loans’ amortized cost basis as a result of becoming a TDR during the three months ended March 31, 2020. Amounts for the three months ended March 31, 2019 represent recorded investment. Additionally, the table provides information about the types of TDR concessions. See Note 3 Asset Quality in our 2019 Form 10-K for additional discussion of TDRs.
Table 45: Financial Impact and TDRs by Concession Type
 
 
 
Pre-TDR
Amortized Cost Basis (b)

 
Post-TDR Amortized Cost Basis (c)
 
During the three months ended March 31, 2020
Dollars in millions (a)
Number
of Loans
 
 
Principal
Forgiveness

 
Rate
Reduction

 
Other

 
Total

 
Total commercial lending
 
13

 
$
62

 
$
6

 
 
 
$
37

 
$
43

 
Total consumer lending
 
3,567

 
36

 
 
 
$
22

 
10

 
32

 
Total TDRs
 
3,580

 
$
98

 
$
6

 
$
22

 
$
47

 
$
75

 

(a) Impact of partial charge-offs at TDR date are included in this table.
(b) Represents the amortized cost basis of the loans as of the quarter end prior to TDR designation.
(c) Represents the amortized cost basis of the TDRs as of the end of the quarter in which the TDR occurs.
 
 
 
Pre-TDR
Recorded
Investment (e)

 
Post-TDR Recorded Investment (f)
 
During the three months ended March 31, 2019
Dollars in millions (d)
Number
of Loans
 
 
Principal
Forgiveness
 
Rate
Reduction

 
Other

 
Total

 
Total commercial lending

22

 
$
105

 
 
 
 
 
$
109

 
$
109

 
Total consumer lending
 
3,814

 
42

 
 
 
$
24

 
16

 
40

 
Total TDRs
 
3,836

 
$
147

 

 
$
24

 
$
125

 
$
149

 
(d) Impact of partial charge-offs at TDR date are included in this table.
(e) Represents the recorded investment of the loans as of the quarter end prior to TDR designation, and excludes immaterial amounts of accrued interest receivable.
(f) Represents the recorded investment of the TDRs as of the end of the quarter in which the TDR occurs, and excludes immaterial amounts of accrued interest receivable.

After a loan is determined to be a TDR, we continue to track its performance under its most recent restructured terms. We consider a TDR to have subsequently defaulted when it becomes 60 days past due after the most recent date the loan was restructured. The amortized cost basis of loans that were both (i) classified as TDRs or were subsequently modified during each 12-month period preceding January 1, 2020 and January 1, 2019, respectively, and (ii) subsequently defaulted during the three months ended March 31, 2020 and March 31, 2019 totaled $29 million and $18 million respectively. The comparable amount reflects recorded investment.

















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




Allowance for Credit Losses

Allowance for Credit Losses - Loans and Leases
We maintain the ACL for loans and leases at levels that we believe to be appropriate to absorb expected credit losses incurred in the portfolios as of the balance sheet date. See Note 1 Accounting Policies for a discussion of the methodologies used to determine this allowance. A rollforward of the ACL for loans and leases follows.
Table 46: Rollforward of Allowance for Credit Losses - Loans and Leases
At or for the three months ended March 31, 2020
Dollars in millions
Commercial Lending

Consumer Lending

Total

ACL - loans and leases
 
 
 
December 31, 2019 (a)
$
1,812

$
930

$
2,742

Adoption of ASU 2016-13 (b)
(304
)
767

463

January 1, 2020
$
1,508

$
1,697

$
3,205

Charge-offs
(83
)
(221
)
(304
)
Recoveries
24

68

92

Net (charge-offs)
(59
)
(153
)
(212
)
Provision for credit losses (c)
531

421

952

Other
(1
)
 
(1
)
March 31, 2020
$
1,979

$
1,965

$
3,944

Portfolio segment ACL as a percentage of total ACL for loans and leases
50
%
50
%
100
%
Ratio of ACL for loans and leases to total loans
1.07
%
2.46
%
1.49
%
(a) Amounts as of December 31, 2019 represent the ALLL.
(b) Represents the impact of adopting ASU 2016-13, Financial Instruments - Credit Losses on January 1, 2020 and our transition from an incurred loss methodology for our reserves to an expected credit loss methodology.
(c) The Provision for credit losses on the Consolidated Income Statement includes $952 million related to loans and leases, $9 million related to other financial assets and a recapture of credit losses for unfunded lending related commitments totaling $47 million for the three months ended March 31, 2020. See Table 47 for additional information related to our unfunded lending related commitments.

Allowance for Credit Losses - Unfunded Lending Related Commitments
We maintain the ACL for unfunded lending related commitments at a level we believe is appropriate as of the balance sheet date to absorb expected credit losses on these exposures. See Note 1 Accounting Policies for additional information. A rollforward of this allowance follows.

Table 47: Rollforward of Allowance for Credit Losses - Unfunded Lending Related Commitments
At or for the three months ended March 31, 2020
Dollars in millions
Commercial Lending

Consumer Lending

Total

 
ACL - unfunded lending related commitments
 
 
 
 
December 31, 2019 (a)
$
316

$
2

$
318

 
Adoption of ASU 2016-13 (b)
53

126

179

 
January 1, 2020
369

128

497

 
Provision for (recapture of ) credit losses
(25
)
(22
)
(47
)
 
March 31, 2020
$
344

$
106

$
450

 
Portfolio segment ACL as a percentage of total ACL for unfunded lending related commitments
76
%
24
%
100
%
 
(a) Amounts at December 31, 2019 represent the allowance for unfunded loan commitments and letters of credit.
(b) Represents the impact of adopting ASU 2016-13, Financial Instruments - Credit Losses on January 1, 2020 and our transition from an incurred loss methodology for our reserves to an expected credit loss methodology.

See Note 8 Commitments for additional information about the underlying commitments related to this allowance.


The PNC Financial Services Group, Inc. – Form 10-Q 75  



The following graph presents an analysis of changes impacting our ACL for the three months ended March 31, 2020.

Table 48: Analysis of Changes in the Allowance for Credit Losses (a)
In millions
chart-cb030eef0982e1929ff.jpg(a) Excludes allowances for investment securities and other financial assets.
(b) Portfolio changes represent the impact of increases/decreases in loan balances, age and mix due to new originations/purchases, as well as credit quality and net charge-off activity.
(c) Economics represent our evaluation and determination of an economic forecast applied to our loan portfolio.

The increase in the ACL as of March 31, 2020 was primarily attributable to the significant economic impact of COVID-19 along with loan growth in the commercial lending portfolio, reflecting higher utilization.

Allowance for Loan and Lease Losses
Prior to January 1, 2020, we maintained our ALLL at levels we believed to be appropriate to absorb estimated probable credit losses incurred in the portfolios as of the balance sheet date. We used the two main portfolio segments - Commercial Lending and Consumer Lending, and developed and documented the ALLL under separate methodologies for each of these portfolio segments. See Note 1 Accounting Policies in our 2019 Form 10-K for a description of the accounting policies for ALLL.


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





A rollforward of the ALLL and associated loan data follows:

Table 49: Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data
At or for the three months ended March 31, 2019
Dollars in millions
Commercial Lending

Consumer Lending

Total

Allowance for loan and lease losses
 
 
 
January 1, 2019
$
1,663

$
966

$
2,629

Charge-offs
(31
)
(184
)
(215
)
Recoveries
19

60

79

Net (charge-offs)
(12
)
(124
)
(136
)
Provision for credit losses
80

109

189

Net decrease in allowance for unfunded loan commitments and letters
    of credit
5

1

6

Other
 
4

4

March 31, 2019
$
1,736

$
956

$
2,692

TDRs individually evaluated for impairment
$
27

$
130

$
157

Other loans individually evaluated for impairment
60

 
60

Loans collectively evaluated for impairment
1,649

551

2,200

Purchased impaired loans
 
275

275

March 31, 2019
$
1,736

$
956

$
2,692

Loan portfolio
 
 
 
TDRs individually evaluated for impairment
$
456

$
1,412

$
1,868

Other loans individually evaluated for impairment
190

 
190

Loans collectively evaluated for impairment
157,796

69,732

227,528

Fair value option loans (a)
 
758

758

Purchased impaired loans
 
1,949

1,949

March 31, 2019
$
158,442

$
73,851

$
232,293

Portfolio segment ALLL as a percentage of total ALLL
64
%
36
%
100
%
Ratio of ALLL to total loans
1.10
%
1.29
%
1.16
%
(a) Loans accounted for under the fair value option were not evaluated for impairment as these loans are accounted for at fair value. Accordingly, there was no allowance recorded on those loans.

NOTE 4 LOAN SALE AND SERVICING ACTIVITIES AND VARIABLE INTEREST ENTITIES

Loan Sale and Servicing Activities

As more fully described in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2019 Form 10-K, we have transferred residential and commercial mortgage loans in securitization or sales transactions in which we have continuing involvement. Our continuing involvement generally consists of servicing, repurchasing previously transferred loans under certain conditions and loss share arrangements, and, in limited circumstances, holding of mortgage-backed securities issued by the securitization special purpose entities (SPEs).

We earn servicing and other ancillary fees for our role as servicer and, depending on the contractual terms of the servicing arrangement, we can be terminated as servicer with or without cause. At the consummation date of each type of loan transfer where we retain the servicing, we recognize a servicing right at fair value. See Note 8 Commitments and Note 11 Fair Value for information on our servicing rights, including the carrying value of servicing assets.


The PNC Financial Services Group, Inc. – Form 10-Q 77  



The following table provides cash flows associated with our loan sale and servicing activities:
Table 50: Cash Flows Associated with Loan Sale and Servicing Activities
In millions
Residential
Mortgages

 
Commercial
Mortgages (a)
 
 
Cash Flows - Three months ended March 31, 2020
 
 
 
 
 
Sales of loans (b)
$
1,334

 
 
$
493

 
Repurchases of previously transferred loans (c)
$
95

 
 
$
15

 
Servicing fees (d)
$
85

 
 
$
33

 
Servicing advances recovered/(funded), net
$
12

 
 
$
12

 
Cash flows on mortgage-backed securities held (e)
$
1,361

 
 
$
37

 
Cash Flows - Three months ended March 31, 2019
 
 
 
 
 
Sales of loans (b)
$
715

 
 
$
644

 
Repurchases of previously transferred loans (c)
$
93

 
 
 
 
Servicing fees (d)
$
87

 
 
$
30

 
Servicing advances recovered/(funded), net
$
18

 
 
$
(23
)
 
Cash flows on mortgage-backed securities held (e)
$
507

 
 
$
14

 
(a)
Represents cash flow information associated with both commercial mortgage loan transfers and servicing activities.
(b)
Gains/losses recognized on sales of loans were insignificant for the periods presented.
(c)
Includes both residential and commercial mortgage government insured or guaranteed loans eligible for repurchase through the exercise of our removal of account provision option, as well as residential mortgage loans repurchased due to alleged breaches of origination covenants or representations and warranties made to purchasers.
(d)
Includes contractually specified servicing fees, late charges and ancillary fees.
(e)
Represents cash flows on securities where we transferred to and/or service loans for a securitization SPE and we hold securities issued by that SPE. The carrying values of such securities held were $17.1 billion, $17.8 billion, and $14.6 billion in residential mortgage-backed securities and $.8 billion, $.6 billion, and $.6 billion in commercial mortgage-backed securities at March 31, 2020, December 31, 2019, and March 31, 2019, respectively.
Table 51 presents information about the principal balances of transferred loans that we service and are not recorded on our Consolidated Balance Sheet. We would only experience a loss on these transferred loans if we were required to repurchase a loan, where the repurchase price exceeded the loan's fair value, due to a breach in representations and warranties or a loss sharing arrangement associated with our continuing involvement with these loans. The estimate of losses related to breaches in representations and warranties was insignificant at March 31, 2020.
Table 51: Principal Balance, Delinquent Loans and Net Charge-offs Related to Serviced Loans For Others
In millions
Residential Mortgages

 
 
Commercial Mortgages (a)

 
March 31, 2020
 
 
 
 
 
Total principal balance
$
48,468

 
 
$
41,514

 
Delinquent loans (b)
$
446

 
 
$
10

 
December 31, 2019
 
 
 
 
 
Total principal balance
$
49,323

 
 
$
42,414

 
Delinquent loans (b)
$
492

 
 
$
64

 
Three months ended March 31, 2020
 
 
 
 
 
Net charge-offs (c)
$
8

 
 
$
99

 
Three months ended March 31, 2019
 
 
 
 
 
Net charge-offs (c)
$
11

 
 
$
119

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

Variable Interest Entities (VIEs)

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2019 Form 10-K, we are involved with various entities in the normal course of business that are deemed to be VIEs.

The following table provides a summary of non-consolidated VIEs with which we have significant continuing involvement but are not the primary beneficiary. We have excluded certain transactions with non-consolidated VIEs from the balances presented in Table 52 where we have determined that our continuing involvement is not significant. We do not consider our continuing involvement to be significant when it relates to a VIE where we only invest in securities issued by the VIE and were not involved in the design of the VIE or where no transfers have occurred between us and the VIE. In addition, where we only have lending arrangements in the normal

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




course of business with entities that could be VIEs, we have excluded these transactions with non-consolidated entities from the balances presented in Table 52. These loans are included as part of the asset quality disclosures that we make in Note 3 Loans.
Table 52: Non-Consolidated VIEs
In millions
PNC Risk of Loss (a)

 
 
Carrying Value of Assets
Owned by PNC

 
 
 
Carrying Value of Liabilities
Owned by PNC

 
March 31, 2020
 
 
 
 
 
 
 
 
 
Mortgage-backed securitizations (b)
$
19,067

 
 
$
19,067

(c) 
 
 
 
 
Tax credit investments and other
3,023

 
 
2,948

(d) 
 
 
$
992

(e) 
Total
$
22,090

 
 
$
22,015

 
 
 
$
992

 
December 31, 2019
 
 
 
 
 
 
 
 
 
Mortgage-backed securitizations (b)
$
19,287

 
 
$
19,287

(c) 
 
 
 
 
Tax credit investments and other
3,131

 
 
3,028

(d) 
 
 
$
1,101

(e) 
Total
$
22,418

 
 
$
22,315

 
 
 
$
1,101

 
(a)
Represents loans, investments and other assets related to non-consolidated VIEs, net of collateral (if applicable). The risk of loss excludes any potential tax recapture associated with tax credits investments.
(b)
Amounts reflect involvement with securitization SPEs where we transferred to and/or service loans for an SPE and we hold securities issued by that SPE. Values disclosed in the PNC Risk of Loss column represent our maximum exposure to loss for those securities’ holdings.
(c)
Included in Investment securities, Mortgage servicing rights and Other assets on our Consolidated Balance Sheet.
(d)
Included in Investment securities, Loans, Equity investments and Other assets on our Consolidated Balance Sheet.
(e)
Included in Deposits and Other liabilities on our Consolidated Balance Sheet.

We make certain equity investments in various tax credit limited partnerships or limited liability companies (LLCs). The purpose of these investments is to achieve a satisfactory return on capital and to assist us in achieving goals associated with the Community Reinvestment Act. Within Income taxes, during the three months ended March 31, 2020, we recognized $49 million of amortization, $50 million of tax credits and $12 million of other tax benefits associated with qualified investments in low income housing tax credits.

NOTE 5 GOODWILL AND MORTGAGE SERVICING RIGHTS

Goodwill

See Note 1 Accounting Policies in this Report and Note 7 Goodwill and Mortgage Servicing Rights in our 2019 Form 10-K for more information regarding our goodwill.

Mortgage Servicing Rights
We recognize the right to service mortgage loans for others as an intangible asset when the servicing income we receive is more than adequate compensation. MSRs totaled $1.1 billion and $1.6 billion at March 31, 2020 and December 31, 2019, respectively, and consisted of loan servicing contracts for commercial and residential mortgages measured at fair value.

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

See the Sensitivity Analysis section of this Note 5, as well as Note 6 Fair Value in our 2019 Form 10-K for more detail on our fair value measurement of MSRs. Refer to Note 7 Goodwill and Mortgage Servicing Rights in our 2019 Form 10-K for more information on our accounting and measurement of MSRs.


The PNC Financial Services Group, Inc. – Form 10-Q 79  



Changes in the commercial and residential MSRs follow:

Table 53: Mortgage Servicing Rights
 
Commercial MSRs
 
Residential MSRs
 
In millions
2020

2019

 
2020

2019

 
January 1
$
649

$
726

 
$
995

$
1,257

 
Additions:
 
 
 
 
 
 
From loans sold with servicing retained
11

7

 
10

7

 
Purchases
19

19

 
18

6

 
Changes in fair value due to:
 
 
 
 
 
 
Time and payoffs (a)
(35
)
(38
)
 
(39
)
(33
)
 
Other (b)
(167
)
(33
)
 
(379
)
(106
)
 
March 31
$
477

$
681

 
$
605

$
1,131

 
Related unpaid principal balance at March 31
$
225,769

$
186,946

 
$
118,104

$
123,079

 
Servicing advances at March 31
$
145

$
243

 
$
99

$
138

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

Sensitivity Analysis
The fair value of commercial and residential MSRs and significant inputs to the valuation models as of March 31, 2020 are shown in Tables 54 and 55. The expected and actual rates of mortgage loan prepayments are significant factors driving the fair value. Management uses both internal proprietary models and a third-party model to estimate future commercial mortgage loan prepayments and a third-party model to estimate future residential mortgage loan prepayments. These models have been refined based on current market conditions and management judgment. Future interest rates are another important factor in the valuation of MSRs. Management utilizes market implied forward interest rates to estimate the future direction of mortgage and discount rates. The forward rates utilized are derived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. Changes in the shape and slope of the forward curve in future periods may result in volatility in the fair value estimate.

A sensitivity analysis of the hypothetical effect on the fair value of MSRs to adverse changes in key assumptions is presented in Tables 54 and 55. These sensitivities do not include the impact of the related hedging activities. Changes in fair value generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the interest rate spread), which could either magnify or counteract the sensitivities.

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

Table 54: Commercial Mortgage Servicing Rights – Key Valuation Assumptions
Dollars in millions
March 31
2020

 
December 31
2019

 
Fair value
$
477

 
$
649

 
Weighted-average life (years)
4.1

 
4.1

 
Weighted-average constant prepayment rate
4.51
%
 
4.56
%
 
Decline in fair value from 10% adverse change
$
8

 
$
9

 
Decline in fair value from 20% adverse change
$
16

 
$
17

 
Effective discount rate
7.57
%
 
7.91
%
 
Decline in fair value from 10% adverse change
$
12

 
$
17

 
Decline in fair value from 20% adverse change
$
24

 
$
34

 


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




Table 55: Residential Mortgage Servicing Rights – Key Valuation Assumptions
Dollars in millions
March 31
2020

 
December 31
2019

 
Fair value
$
605

 
$
995

 
Weighted-average life (years)
2.9

 
5.2

 
Weighted-average constant prepayment rate
27.14
%
 
13.51
%
 
Decline in fair value from 10% adverse change
$
43

 
$
46

 
Decline in fair value from 20% adverse change
$
81

 
$
89

 
Weighted-average option adjusted spread
770

bps
769

bps
Decline in fair value from 10% adverse change
$
13

 
$
27

 
Decline in fair value from 20% adverse change
$
26

 
$
52

 


Fees from mortgage loan servicing, which includes contractually specified servicing fees, late fees and ancillary fees were $.1 billion for the three months ended March 31, 2020 and 2019. We also generate servicing fees from fee-based activities provided to others for which we do not have an associated servicing asset. Fees from commercial and residential MSRs are reported within Noninterest income on our Consolidated Income Statement in Corporate services and Residential mortgage, respectively.

NOTE 6 LEASES
PNC's lessor arrangements primarily consist of operating, sales-type and direct financing leases for equipment. Lease agreements may include options to renew and for the lessee to purchase the leased equipment at the end of the lease term. Lease income from sales-type and direct financing leases is included in Loan interest income and operating lease income is included in Corporate services on our Consolidated Income Statement. For more information on lease accounting see Note 1 Accounting Policies and Note 24 Leases in our 2019 Form 10-K.

Table 56: Lessor Income
 
Three months ended
March 31
 
In millions
2020

2019

 
Product
 
 
 
 Sales-type leases and direct financing leases
$
71

$
74

 
 Operating leases
27

31

 
Lessor Income
$
98

$
105

 

NOTE 7 BORROWED FUNDS
The following shows the carrying value of total borrowed funds of $73.4 billion at March 31, 2020 (including adjustments related to purchase accounting, accounting hedges and unamortized original issuance discounts) by remaining contractual maturity:
Table 57: Borrowed Funds
In billions
 
Less than 1 year
$
38.8

 
1 to 2 years
$
7.4

 
2 to 3 years
$
8.1

 
3 to 4 years
$
2.7

 
4 to 5 years
$
2.9

 
Over 5 years
$
13.5

 












The PNC Financial Services Group, Inc. – Form 10-Q 81  



The following table presents the contractual rates and maturity dates of our FHLB borrowings, senior debt and subordinated debt as of March 31, 2020 and the carrying values as of March 31, 2020 and December 31, 2019.

Table 58: FHLB Borrowings, Senior Debt and Subordinated Debt
 
Stated Rate
 
Maturity
 
Carrying Value
 
Dollars in millions
2020
 
2020
 
2020
 
2019
 
Parent Company
 
 
 
 
 
 
 
 
Senior debt
2.20%-4.38%

 
2020-2030
 
$
10,442

 
$
8,843

 
Subordinated debt
3.90
%
 
2024
 
814

 
777

 
Junior subordinated debt
2.15
%
 
2028
 
205

 
205

 
Subtotal
 
 
 
 
11,461

 
9,825

 
Bank
 
 
 
 
 
 
 
 
FHLB (a)
0.32%-1.89%

 
2020-2021
 
23,491

 
16,341

 
Senior debt
1.13%-3.50%

 
2020-2043
 
20,996

 
20,167

 
Subordinated debt
2.70%-4.20%

 
2022-2029
 
5,456

 
5,152

 
Subtotal
 
 
 
 
49,943

 
41,660

 
Total
 
 
 
 
$
61,404

 
$
51,485

 
(a)
FHLB borrowings are generally collateralized by residential mortgage loans, other mortgage-related loans and investment securities.
In Table 58, the carrying values for Parent Company senior and subordinated debt include basis adjustments of $778 million and $65 million, respectively, whereas Bank senior and subordinated debt include basis adjustments of $592 million and $473 million, respectively, related to fair value accounting hedges as of March 31, 2020.
Certain borrowings are reported at fair value, refer to Note 11 Fair Value for more information on those borrowings.
For further information regarding junior subordinated debentures refer to Note 10 Borrowed Funds in our 2019 Form 10-K.

NOTE 8 COMMITMENTS
In the normal course of business, we have various commitments outstanding, certain of which are not included on our Consolidated Balance Sheet. The following table presents our outstanding commitments to extend credit along with significant other commitments as of March 31, 2020 and December 31, 2019, respectively.
Table 59: Commitments to Extend Credit and Other Commitments
In millions
March 31
2020

 
December 31
2019

 
Commitments to extend credit
 
 
 
 
Total commercial lending
$
115,996

 
$
131,762

 
Home equity lines of credit
16,843

 
16,803

 
Credit card
32,065

 
30,862

 
Other
7,100

 
6,162

 
Total commitments to extend credit
172,004

 
185,589

 
Net outstanding standby letters of credit (a)
9,428

 
9,843

 
Reinsurance agreements (b)
110

 
1,393

 
Standby bond purchase agreements (c)
1,464

 
1,295

 
Other commitments (d)
1,530

 
1,498

 
Total commitments to extend credit and other commitments
$
184,536

 
$
199,618

 
(a)
Net outstanding standby letters of credit include $4.0 billion and $4.1 billion at March 31, 2020 and December 31, 2019, respectively, which support remarketing programs.
(b)
Represents aggregate maximum exposure up to the specified limits of the reinsurance contracts provided by our wholly-owned captive insurance subsidiary. These amounts reflect estimates based on availability of financial information from insurance carriers. As of March 31, 2020, the aggregate maximum exposure amount was zero for accidental death and dismemberment contracts, and $.1 billion for credit life, accident and health contracts. Comparable amounts at December 31, 2019 were $1.3 billion and $.1 billion, respectively.
(c)
We enter into standby bond purchase agreements to support municipal bond obligations.
(d)
Includes $.6 billion related to investments in qualified affordable housing projects at both March 31, 2020 and December 31, 2019.






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




Commitments to Extend Credit

Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. These commitments generally have fixed expiration dates, may require payment of a fee, and generally contain termination clauses in the event the customer’s credit quality deteriorates.

Net Outstanding Standby Letters of Credit

We issue standby letters of credit and share in the risk of standby letters of credit issued by other financial institutions, in each case to support obligations of our customers to third parties, such as insurance requirements and the facilitation of transactions involving capital markets product execution. Approximately 97% of our net outstanding standby letters of credit were rated as Pass as of March 31, 2020, with the remainder rated as Criticized. An internal credit rating of Pass indicates the expected risk of loss is currently low, while a rating of Criticized indicates a higher degree of risk.

If the customer fails to meet its financial or performance obligation to the third party under the terms of the contract or there is a need to support a remarketing program, then upon a draw by a beneficiary, subject to the terms of the letter of credit, we would be obligated to make payment to them. The standby letters of credit outstanding on March 31, 2020 had terms ranging from less than one year to six years.

As of March 31, 2020, assets of $1.1 billion secured certain specifically identified standby letters of credit. In addition, a portion of the remaining standby letters of credit issued on behalf of specific customers is also secured by collateral or guarantees that secure the customers’ other obligations to us. The carrying amount of the liability for our obligations related to standby letters of credit and participations in standby letters of credit was $.2 billion at March 31, 2020 and is included in Other liabilities on our Consolidated Balance Sheet.

NOTE 9 TOTAL EQUITY AND OTHER COMPREHENSIVE INCOME

Activity in total equity for the three months ended March 31, 2020 and 2019 follows.
Table 60: Rollforward of Total Equity
 
 
 
Shareholders’ Equity
 
  
  
 
In millions
Shares
Outstanding
Common
Stock

 
Common
Stock

Capital
Surplus -
Preferred
Stock

Capital
Surplus -
Common
Stock and
Other

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

 
Non-
controlling
Interests

Total Equity

 
Three months ended
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018 (a)
457

 
$
2,711

$
3,986

$
12,291

$
38,919

$
(725
)
$
(9,454
)
 
$
42

$
47,770

 
Cumulative effect of ASU 2016-02 adoption (b)
 
 
 
 
 
62

 
 
 
 
62

 
Balance at January 1, 2019 (a)
457

 
$
2,711

$
3,986

$
12,291

$
38,981

$
(725
)
$
(9,454
)
 
$
42

$
47,832

 
Net income
 
 
 
 
 
1,261

 
 
 
10

1,271

 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
720

 
 
 
720

 
Cash dividends declared - Common
 
 
 
 
 
(436
)
 
 
 
 
(436
)
 
Cash dividends declared - Preferred
 
 
 
 
 
(63
)
 
 
 
 
(63
)
 
Preferred stock discount accretion
 
 
 
1

 
(1
)
 
 
 
 


 
Common stock activity
 
 
 
 


 
 
 
 
 


 
Treasury stock activity
(5
)
 
 
 
10

 
 
(631
)
 
 
(621
)
 
Other
 
 
 
3

(118
)
 
 
 
 
(13
)
(128
)
 
Balance at March 31, 2019 (a)
452

 
$
2,711

$
3,990

$
12,183

$
39,742

$
(5
)
$
(10,085
)
 
$
39

$
48,575

 
Balance at December 31, 2019 (a)
433

 
$
2,712

$
3,993

$
12,376

$
42,215

$
799

$
(12,781
)
 
$
29

$
49,343

 
Cumulative effect of ASU 2016-13 adoption (c)
 
 
 
 
 
(671
)

 
 
 
(671
)
 
Balance at January 1, 2020 (a)
433

 
$
2,712

$
3,993

$
12,376

$
41,544

$
799

$
(12,781
)
 
$
29

$
48,672

 
Net income
 
 
 
 
 
908

 
 
 
7

915

 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
1,719

 
 
 
1,719

 
Cash dividends declared - Common
 
 
 
 
 
(503
)
 
 
 
 
(503
)
 
Cash dividends declared - Preferred
 
 
 
 
 
(63
)
 
 
 
 
(63
)
 
Preferred stock discount accretion
 
 
 
1

 
(1
)
 
 
 
 


 
Common stock activity
 
 
 
 


 
 
 
 
 


 
Treasury stock activity
(9
)
 
 
 
49

 
 
(1,359
)
 
 
(1,310
)
 
Other
 
 
 


(131
)
 
 
 
 
(9
)
(140
)
 
Balance at March 31, 2020 (a)
424

 
$
2,712

$
3,994

$
12,294

$
41,885

$
2,518

$
(14,140
)
 
$
27

$
49,290

 
(a)
The par value of our preferred stock outstanding was less than $.5 million at each date and, therefore, is excluded from this presentation.
(b)
Represents the cumulative effect of adopting ASU 2016-02 - Leases related primarily to deferred gains on previous sale-leaseback transactions. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our 2019 Form 10-K for additional detail.
(c)
Represents the cumulative effect of adopting ASU 2016-13 - Financial Instruments - Credit Losses. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in this Report for additional detail on this adoption.

The PNC Financial Services Group, Inc. – Form 10-Q 83  



Other Comprehensive Income

Details of other comprehensive income (loss) are as follows:

Table 61: Other Comprehensive Income (Loss)
 
Three months ended
March 31
 
In millions
2020

2019

 
Net unrealized gains (losses) on securities without an allowance for credit losses
 
 
 
Increase in net unrealized gains (losses) on securities
$
1,669

 
 
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest income
1

 
 
Less: Net gains (losses) realized on sales of securities reclassified to noninterest income
181

 
 
Net increase (decrease), pre-tax
1,487

 
 
Effect of income taxes
(341
)
 
 
Net increase (decrease), after-tax
1,146

 
 
Net unrealized gains (losses) on securities with an allowance for credit losses
 
 
 
Increase in net unrealized gains (losses) on securities
(7
)
 
 
Less: Net gains (losses) realized on sales of securities reclassified to noninterest income
 
 
 
Net increase (decrease), pre-tax
(7
)
 
 
Effect of income taxes
2

 
 
Net increase (decrease), after-tax
(5
)
 
 
Net unrealized gains (losses) on non-OTTI securities
 
 
 
Increase in net unrealized gains (losses) on non-OTTI securities
 
$
640

 
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest income
 
3

 
Less: Net gains (losses) realized on sales of securities reclassified to noninterest income
 
(2
)
 
Net increase (decrease), pre-tax
 
639

 
Effect of income taxes
 
(147
)
 
Net increase (decrease), after-tax
 
492

 
Net unrealized gains (losses) on OTTI securities
 
 
 
Increase in net unrealized gains (losses) on OTTI securities
 
9

 
Net increase (decrease), pre-tax
 
9

 
Effect of income taxes
 
(2
)
 
Net increase (decrease), after-tax


7

 
Net unrealized gains (losses) on cash flow hedge derivatives
 
 
 
Increase in net unrealized gains (losses) on cash flow hedge derivatives
830

108

 
Less: Net gains (losses) realized as a yield adjustment reclassified to loan interest income
42

(8
)
 
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest income
2

1

 
Less: Net gains (losses) realized on sales of securities reclassified to noninterest income
1

15

 
Net increase (decrease), pre-tax
785

100

 
Effect of income taxes
(180
)
(23
)
 
Net increase (decrease), after-tax
605

77

 
Pension and other postretirement benefit plan adjustments
 
 
 
Net pension and other postretirement benefit activity
10

143

 
Amortization of actuarial loss (gain) reclassified to other noninterest expense
1

1

 
Amortization of prior service cost (credit) reclassified to other noninterest expense
1

1

 
Net increase (decrease), pre-tax
12

145

 
Effect of income taxes
(3
)
(33
)
 
Net increase (decrease), after-tax
9

112

 
Other
 
 
 
PNC’s portion of BlackRock’s OCI
(34
)
29

 
Net investment hedge derivatives
75

(18
)
 
Foreign currency translation adjustments and other
(67
)
23

 
Net increase (decrease), pre-tax
(26
)
34

 
Effect of income taxes
(10
)
(2
)
 
Net increase (decrease), after-tax
(36
)
32

 
Total other comprehensive income (loss), pre-tax
2,251

927

 
Total other comprehensive income (loss), tax effect
(532
)
(207
)
 
Total other comprehensive income (loss), after-tax
$
1,719

$
720

 


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




Table 62: Accumulated Other Comprehensive Income (Loss) Components
In millions, after-tax
Net unrealized gains (losses) on non-OTTI securities

 
Net unrealized gains (losses) on OTTI securities

 
Net unrealized gains (losses) on cash flow hedge derivatives

 
Pension and other postretirement benefit plan adjustments

 
Other

 
Total

 
Balance at December 31, 2018
$
(284
)
 
$
204

 
$
47

 
$
(530
)
 
$
(162
)
 
$
(725
)
 
Net activity
492

 
7

 
77

 
112

 
32

 
720

 
Balance at March 31, 2019
$
208

 
$
211

 
$
124

 
$
(418
)
 
$
(130
)
 
$
(5
)
 


In millions, after-tax
Net unrealized gains (losses) on non-OTTI securities / securities without an ACL

 
Net unrealized gains (losses) on OTTI securities / securities with an ACL

 
Net unrealized gains (losses) on cash flow hedge derivatives

 
Pension and other postretirement benefit plan adjustments

 
Other

 
Total

 
Balance at December 31, 2019
$
844

 
$
223

 
$
276

 
$
(408
)
 
$
(136
)
 
$
799

 
Cumulative effect of ASU 2016-13 adoption (a)
223

 
(223
)
 
 
 
 
 
 
 

 
Balance at January 1, 2020
1,067

 

 
276

 
(408
)
 
(136
)
 
799

 
Net activity
1,146

 
(5
)
 
605

 
9

 
(36
)
 
1,719

 
March 31, 2020
2,213

 
(5
)
 
881

 
(399
)
 
(172
)
 
2,518

 
(a)
Represents the cumulative effect of adopting ASU 2016-13 - Credit Losses reflecting the change from OTTI to ACL for debt securities. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in this Report for additional detail on this adoption.
The following table provides the dividends per share for PNC's common and preferred stock.

Table 63: Dividends Per Share (a)
 
Three months ended March 31
 
2020
2019
Common Stock
$
1.15

$
.95

Preferred Stock
 
 
   Series B
$
.45

$
.45

   Series O
$
3,375

$
3,375

   Series P
$
1,531

$
1,531

   Series Q
$
1,344

$
1,344

   Series R
 
 
   Series S
 
 
(a) Dividends are payable quarterly other than Series O, Series R, and Series S preferred stock, which are payable semiannually, with the Series O payable in different quarters
than the Series R and Series S preferred stock

On April 2, 2020, we declared a quarterly common stock cash dividend of $1.15 per share payable on May 5, 2020.


The PNC Financial Services Group, Inc. – Form 10-Q 85  



NOTE 10 EARNINGS PER SHARE

Table 64: Basic and Diluted Earnings Per Common Share
 
 
Three months ended
March 31
In millions, except per share data
 
2020

 
2019

Basic
 
 
 
 
Net income
 
$
915

 
$
1,271

Less:
 
 
 
 
Net income attributable to noncontrolling interests
 
7

 
10

Preferred stock dividends
 
63

 
63

Preferred stock discount accretion and redemptions
 
1

 
1

Net income attributable to common shareholders
 
844


1,197

Less: Dividends and undistributed earnings allocated to participating securities
 
4

 
5

Net income attributable to basic common shareholders
 
$
840


$
1,192

Basic weighted-average common shares outstanding
 
429

 
455

Basic earnings per common share (a)
 
$
1.96

 
$
2.62

Diluted
 
 
 
 
Net income attributable to basic common shareholders
 
$
840

 
$
1,192

Less: Impact of BlackRock earnings per share dilution
 
1

 
3

Net income attributable to diluted common shareholders
 
$
839


$
1,189

Basic weighted-average common shares outstanding
 
429

 
455

Dilutive potential common shares
 
1

 
1

Diluted weighted-average common shares outstanding
 
430

 
456

Diluted earnings per common share (a)
 
$
1.95

 
$
2.61

(a)
Basic and diluted earnings per share under the two-class method are determined on net income reported on the income statement less earnings allocated to nonvested restricted shares and restricted share units with nonforfeitable dividends and dividend rights (participating securities).

NOTE 11 FAIR VALUE

Fair Value Measurement

We measure certain financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date, and is determined using an exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair value hierarchy established by GAAP requires us to maximize the use of observable inputs when measuring fair value. For more information regarding the fair value hierarchy, see Note 6 Fair Value in our 2019 Form 10-K.


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




Assets and Liabilities Measured at Fair Value on a Recurring Basis

For more information on the valuation methodologies used to measure assets and liabilities at fair value on a recurring basis, see Note 6 Fair Value in our 2019 Form 10-K. The following table summarizes our assets and liabilities measured at fair value on a recurring basis, including instruments for which we have elected the fair value option.

Table 65: Fair Value Measurements – Recurring Basis Summary
 
March 31, 2020
 
 
December 31, 2019
 
In millions
Level 1

 
Level 2

 
Level 3

 
Total
Fair Value

 
 
Level 1

 
Level 2

 
Level 3

 
Total
Fair Value

 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
 
 
$
923

 
$
4

 
$
927

 
 
 
 
$
817

 
$
2

 
$
819

 
Commercial mortgage loans held for sale
 
 
478

 
60

 
538

 
 
 
 
182

 
64

 
246

 
Securities available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
U.S. Treasury and government agencies
$
16,699

 
282

 
 
 
16,981

 
 
$
16,236

 
280

 
 
 
16,516

 
Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
Agency
 
 
52,628

 
 
 
52,628

 
 
 
 
36,321

 
 
 
36,321

 
Non-agency
 
 
201

 
1,442

 
1,643

 
 
 
 
73

 
1,741

 
1,814

 
Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
Agency
 
 
3,289

 
 
 
3,289

 
 
 
 
3,118

 
 
 
3,118

 
Non-agency
 
 
4,082

 
 
 
4,082

 
 
 
 
3,372

 
 
 
3,372

 
Asset-backed
 
 
5,076

 
202

 
5,278

 
 
 
 
4,874

 
240

 
5,114

 
Other
 
 
5,103

 
73

 
5,176

 
 
 
 
2,834

 
74

 
2,908

 
Total securities available for sale
16,699

 
70,661

 
1,717

 
89,077

 
 
16,236

 
50,872

 
2,055

 
69,163

 
Loans
 
 
425

 
655

 
1,080

 
 
 
 
442

 
300

 
742

 
Equity investments (a)
500

 
 
 
1,220

 
2,014

 
 
855

 
 
 
1,276

 
2,421

 
Residential mortgage servicing rights
 
 
 
 
605

 
605

 
 
 
 
 
 
995

 
995

 
Commercial mortgage servicing rights
 
 
 
 
477

 
477

 
 
 
 
 
 
649

 
649

 
Trading securities (b)
1,976

 
2,041

 
 
 
4,017

 
 
433

 
2,787

 
 
 
3,220

 
Financial derivatives (b) (c)
3

 
8,635

 
135

 
8,773

 
 
 
 
3,448

 
54

 
3,502

 
Other assets
286

 
85

 
 
 
371

 
 
339

 
131

 
 
 
470

 
Total assets (d)
$
19,464

 
$
83,248

 
$
4,873

 
$
107,879

 
 
$
17,863


$
58,679


$
5,395


$
82,227

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
Other borrowed funds
$
1,363

 
$
56

 
$
5

 
$
1,424

 
 
$
385

 
$
126

 
$
7

 
$
518

 
Financial derivatives (c) (e)
3

 
3,740

 
185

 
3,928

 
 
 
 
1,819

 
200

 
2,019

 
Other liabilities
 
 
 
 
72

 
72

 
 
 
 
 
 
137

 
137

 
Total liabilities (f)
$
1,366

 
$
3,796

 
$
262

 
$
5,424

 
 
$
385

 
$
1,945

 
$
344

 
$
2,674

 
(a)
Certain investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)
Included in Other assets on the Consolidated Balance Sheet.
(c)
Amounts at March 31, 2020 and December 31, 2019 are presented gross and are not reduced by the impact of legally enforceable master netting agreements that allow us to net positive and negative positions and cash collateral held or placed with the same counterparty. See Note 12 Financial Derivatives for additional information related to derivative offsetting.
(d)
Total assets at fair value as a percentage of total consolidated assets was 24% and 20% as of March 31, 2020 and December 31, 2019, respectively. Level 3 assets as a percentage of total assets at fair value was 5% and 7% as of March 31, 2020 and December 31, 2019, respectively. Level 3 assets as a percentage of total consolidated assets was 1% at both March 31, 2020 and December 31, 2019.
(e)
Included in Other liabilities on the Consolidated Balance Sheet.
(f)
Total liabilities at fair value as a percentage of total consolidated liabilities was 1% at both March 31, 2020 and December 31, 2019. Level 3 liabilities as a percentage of total liabilities at fair value was 5% and 13% as of March 31, 2020 and December 31, 2019, respectively. Level 3 liabilities as a percentage of total consolidated liabilities was less than 1% at both March 31, 2020 and December 31, 2019.


The PNC Financial Services Group, Inc. – Form 10-Q 87  



Reconciliations of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the three months ended March 31, 2020 and 2019 follow:

Table 66: Reconciliation of Level 3 Assets and Liabilities
Three Months Ended March 31, 2020
 
  
Total realized / unrealized
gains or losses for the 
period (a)
  
  
  
  
 
  
  
 
  
Unrealized
gains / losses
on assets and
liabilities held on
Consolidated
Balance Sheet at
Mar. 31, 2020
(a) (c)
Level 3 Instruments Only
In millions
Fair Value Dec. 31, 2019

Included in
Earnings

Included
in Other
comprehensive
income (b)
 
Purchases

Sales

Issuances

Settlements

 
Transfers
into
Level 3

Transfers
out of
Level 3

 
Fair
Value Mar. 31, 2020

Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
held for sale
$
2

 
 
 
$
2

$
(1
)
 
 
 
$
4

$
(3
)
(e)
$
4

 
 
Commercial mortgage
loans held for sale
64

$
(1
)
 
 
 
 
 
$
(3
)
 
 
 
 
60

$
(1
)
 
Securities available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-
backed non-agency
1,741

16

 
$
(222
)
 
 
 
(93
)
 
 
 
 
1,442

 
 
Asset-backed
240

2

 
(29
)
 
 
 
(11
)
 
 
 
 
202

 
 
Other
74

 
 
(5
)
4

 
 
 
 
 
 
 
73

 
 
Total securities
available for sale
2,055

18


(256
)
4





(104
)
 




 
1,717

 
 
Loans
300

11

 
 
16

(26
)
 
362

(d)
 
(8
)
(e)
655

11

 
Equity investments
1,276

(69
)
 
 
71

(58
)
 
 
 
 
 
 
1,220

(64
)
 
Residential mortgage
servicing rights
995

(379
)
 
 
18

 
$
10

(39
)
 
 
 
 
605

(379
)
 
Commercial mortgage
servicing rights
649

(167
)
 
 
19

 
11

(35
)
 
 
 
 
477

(166
)
 
Trading securities
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Financial derivatives
54

101

 
 
2

 
 
(22
)
 
 
 
 
135

75

 
Other assets
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Total assets
$
5,395

$
(486
)
 
$
(256
)
$
132

$
(85
)
$
21

$
159

 
$
4

$
(11
)
 
$
4,873

$
(524
)
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other borrowed funds
$
7

 
 
 
 
 
$
12

$
(14
)
 
 
 
 
$
5

 
 
Financial derivatives
200

$
8

 
 
 
$
1

 
(24
)
 
 
 
 
185

$
10

 
Other liabilities
137

2

 
 
 
 
11

(78
)
 
$
2

$
(2
)
 
72

(6
)
 
Total liabilities
$
344

$
10

 
 


$
1

$
23

$
(116
)
 
$
2

$
(2
)
 
$
262

$
4

 
Net gains (losses)
 
$
(496
)
(f)
 
 
 
 
 
 
 
 
 
 
$
(528
)
(g) 



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




Three Months Ended March 31, 2019
 
  
Total realized / unrealized
gains or losses for the 
period (a)
  
  
  
  
  
  
 
  
Unrealized gains/losses on assets and liabilities held on Consolidated Balance Sheet at Mar. 31, 2019
(a) (c)
Level 3 Instruments Only
In millions
Fair Value Dec. 31, 2018

Included in Earnings

Included in Other comprehensive income (b)
 
Purchases

Sales

Issuances

Settlements

Transfers into Level 3

Transfers out of Level 3

 
Fair Value Mar. 31, 2019

Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
held for sale
$
2

 
 
 
$
1

$
(1
)
 
 
$
3

$
(3
)
(e)
$
2

 
 
Commercial mortgage
loans held for sale
87

$
1

 
 
 


$
(15
)
 
 
 
73

$
1

 
Securities available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-
backed non-agency
2,128

18

 
$
2

 
 
 
(106
)
 
 
 
2,042

 
 
Asset-backed
274


 
2

 

 
(10
)
 
 
 
266

 
 
Other
84


 

1


 

 

 
85

 
 
Total securities
available for sale
2,486

18

 
4

1


 
(116
)
 

 
2,393

 
 
Loans
272

3

 
 
20

(3
)
 
(14
)
2

(8
)
(e)
272

1

 
Equity investments
1,255

52

 
 
45

(135
)
 
 
 
 
 
1,217


 
Residential mortgage
servicing rights
1,257

(106
)
 
 
6

 
$
7

(33
)
 
 
 
1,131

(106
)
 
Commercial mortgage
servicing rights
726

(33
)
 
 
19

 
7

(38
)
 
 
 
681

(33
)
 
Trading securities
2

 
 
 
 
 
 
 
 
 
 
2

 
 
Financial derivatives
25

39

 
 
2

 
 
(10
)
 
 
 
56

41

 
Other assets
45


 
 
 
 
 
(45
)
 
 
 
 

 
Total assets
$
6,157

$
(26
)
 
$
4

$
94

$
(139
)
$
14

$
(271
)
$
5

$
(11
)
 
$
5,827

$
(96
)
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other borrowed funds
$
7

 
 
 
 
 
$
14

$
(15
)
 
 
 
$
6

 
 
Financial derivatives
268

$
30

 
 
 
$
2

 
(70
)
 
 
 
230

$
34

 
Other liabilities
58

9

 
 

 
2

(7
)
 
 
 
62

9

 
Total liabilities
$
333

$
39

 
 

$
2

$
16

$
(92
)
 
 
 
$
298

$
43

 
Net gains (losses)
 
$
(65
)
(f)
 
 
 
 
 
 
 
 
 
$
(139
)
(g)

(a)
Losses for assets are bracketed while losses for liabilities are not.
(b)
The difference in unrealized gains and losses for the period included in Other comprehensive income and changes in unrealized gains and losses for the period included in Other comprehensive income for securities available for sale held at the end of the reporting period were not significant.
(c)
The amount of the total gains or losses for the period included in earnings that is attributable to the change in unrealized gains or losses related to those assets and liabilities held at the end of the reporting period.
(d)
Upon adoption of ASU 2016-13 - Credit Losses, we discontinued the accounting for purchased impaired loans and elected the one-time fair value option election for some of these loans and certain nonperforming loans.
(e)
Residential mortgage loan transfers out of Level 3 are primarily driven by residential mortgage loans transferring to OREO as well as reclassification of mortgage loans held for sale to held for investment.
(f)
Net gains (losses) realized and unrealized included in earnings related to Level 3 assets and liabilities included amortization and accretion. The amortization and accretion amounts were included in Interest income on the Consolidated Income Statement and the remaining net gains (losses) realized and unrealized were included in Noninterest income on the Consolidated Income Statement.
(g)
Net unrealized gains (losses) related to assets and liabilities held at the end of the reporting period were included in Noninterest income on the Consolidated Income Statement.
An instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification (transfer) of assets or liabilities between hierarchy levels.



The PNC Financial Services Group, Inc. – Form 10-Q 89  



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

Table 67: Fair Value Measurements – Recurring Quantitative Information

March 31, 2020
Level 3 Instruments Only
Dollars in millions
Fair Value

Valuation Techniques
Unobservable Inputs
Range (Weighted-Average) (a)
Commercial mortgage loans held for sale
$
60

Discounted cash flow
Spread over the benchmark curve (b)
600bps - 3,715bps (2,357bps)
Residential mortgage-backed
non-agency securities
1,442

Priced by a third-party vendor using a discounted cash flow pricing model
Constant prepayment rate
1.0% - 36.2% (9.9%)
Constant default rate
0.0% - 14.1% (4.3%)
Loss severity
20.0% - 95.7% (51.9%)
Spread over the benchmark curve (b)
493bps weighted-average
Asset-backed securities
202

Priced by a third-party vendor using a discounted cash flow pricing model
Constant prepayment rate
1.0% - 35.0% (7.7%)
Constant default rate
1.0% - 7.2% (3.3%)
Loss severity
30.0% - 100.0% (57.9%)
Spread over the benchmark curve (b)
643bps weighted-average
Loans - Residential real estate
483

Consensus pricing (c)
Cumulative default rate
3.6% - 100.0% (72.6%)
Loss severity
0.0% - 100.0% (12.4%)
Discount rate
4.5% - 6.5% (4.9%)
 
75

Discounted cash flow
Loss severity
8.0% weighted-average
Discount rate
3.8% weighted-average
Loans - Home equity
23

Consensus pricing (c)
Cumulative default rate
6.0% - 100.0% (93.6%)
Loss severity
0.0% - 99.4% (38.3%)
Discount rate
4.5% - 6.5% (6.2%)
 
74

Consensus pricing (c)
Credit and liquidity discount
12.1% - 97.0% (58.1%)
Equity investments
1,220

Multiple of adjusted earnings
Multiple of earnings
5.0x - 16.5x (8.4x)
Residential mortgage servicing rights
605

Discounted cash flow
Constant prepayment rate
0.0% - 58.6% (27.1%)
Spread over the benchmark curve (b)
379bps - 1,481bps (770bps)
Commercial mortgage servicing rights
477

Discounted cash flow
Constant prepayment rate
3.4% - 25.3% (4.5%)
Discount rate
4.1% - 8.1% (7.6%)
Financial derivatives - Swaps related to
sales of certain Visa Class B
common shares
(153
)
Discounted cash flow
Estimated conversion factor of Visa Class B shares into Class A shares
162.3% weighted-average
Estimated annual growth rate of Visa Class A share price
16.0%
Estimated length of litigation resolution date
Q2 2021
Insignificant Level 3 assets, net of
liabilities (d)
103

 
 
 
Total Level 3 assets, net of liabilities (e)
$
4,611

 
 
 

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




December 31, 2019
Level 3 Instruments Only
Dollars in millions
Fair Value

Valuation Techniques
Unobservable Inputs
Range (Weighted-Average) (a)
Commercial mortgage loans held for sale
$
64

Discounted cash flow
Spread over the benchmark curve (b)
530bps - 2,935bps (1,889bps)
Residential mortgage-backed
non-agency securities
1,741

Priced by a third-party vendor using a discounted cash flow pricing model
Constant prepayment rate
1.0% - 36.2% (9.9%)
Constant default rate
0.0% - 14.1% (4.3%)
Loss severity
26.6% - 95.7% (51.9%)
Spread over the benchmark curve (b)
188bps weighted-average
Asset-backed securities
240

Priced by a third-party vendor using a discounted cash flow pricing model
Constant prepayment rate
1.0% - 22.0% (7.5%)
Constant default rate
1.0% - 7.2% (3.4%)
Loss severity
30.0% - 100.0% (57.6%)
Spread over the benchmark curve (b)
215bps weighted-average
Loans
184

Consensus pricing (c)
Cumulative default rate
3.6% - 100.0% (76.7%)
Loss severity
0.0% - 100.0% (14.5%)
Discount rate
5.0% - 8.0% (5.2%)
 
72

Discounted cash flow
Loss severity
8.0% weighted-average
Discount rate
4.8% weighted-average
 
44

Consensus pricing (c)
Credit and Liquidity discount
0.0% - 99.0% (63.4%)
Equity investments
1,276

Multiple of adjusted earnings
Multiple of earnings
5.0x - 16.5x (8.5x)
Residential mortgage servicing rights
995

Discounted cash flow
Constant prepayment rate
0.0% - 53.8% (13.5%)
Spread over the benchmark curve (b)
320bps - 1,435bps (769bps)
Commercial mortgage servicing rights
649

Discounted cash flow
Constant prepayment rate
3.5% - 18.1% (4.6%)
Discount rate
5.6% - 8.1% (7.9%)
Financial derivatives - Swaps related to
sales of certain Visa Class B
common shares
(176
)
Discounted cash flow
Estimated conversion factor of Visa Class B shares into Class A shares
162.3% weighted-average
Estimated annual growth rate of Visa Class A share price
16.0%
Estimated length of litigation
resolution date
Q1 2021
Insignificant Level 3 assets, net of
liabilities (d)
(38
)
 
 
 
Total Level 3 assets, net of liabilities (e)
$
5,051

 
 
 
(a)
Unobservable inputs were weighted by the relative fair value of the instruments.
(b)
The assumed yield spread over the benchmark curve for each instrument is generally intended to incorporate non-interest rate risks, such as credit and liquidity risks.
(c)
Consensus pricing refers to fair value estimates that are generally internally developed using information such as dealer quotes or other third-party provided valuations or comparable asset prices.
(d)
Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes certain financial derivative assets and liabilities, trading securities, other securities, residential mortgage loans held for sale, other assets, other borrowed funds and other liabilities.
(e)
Consisted of total Level 3 assets of $4.9 billion and total Level 3 liabilities of $.3 billion as of March 31, 2020 and $5.4 billion and $.3 billion as of December 31, 2019, respectively.

Financial Assets Accounted for at Fair Value on a Nonrecurring Basis

We may be required to measure certain financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment and are included in Table 68. For more information regarding the valuation methodologies of our financial assets measured at fair value on a nonrecurring basis, see Note 6 Fair Value in our 2019 Form 10-K.

Table 68: Fair Value Measurements – Nonrecurring (a) (b) (c)
 
Fair Value
 
Gains (Losses)
Three months ended
In millions
March 31
2020

 
December 31
2019

 
March 31
2020

 
March 31
2019

Assets
 
 
 
 
 
 
 
Nonaccrual loans
$
140

 
$
136

 
$
(28
)
 
$
(18
)
Loans held for sale
150

 


 
 
 


OREO and foreclosed assets
25

 
57

 
(1
)
 
(2
)
Long-lived assets
5

 
5

 
(1
)
 
(4
)
Total assets
$
320

 
$
198

 
$
(30
)
 
$
(24
)
(a)
All Level 3 for the periods presented.
(b)
Valuation techniques applied were fair value of property or collateral.
(c)
Unobservable inputs used were appraised value/sales price, broker opinions or projected income/required improvement costs. Additional quantitative information was not meaningful for the periods presented.

The PNC Financial Services Group, Inc. – Form 10-Q 91  



Financial Instruments Accounted for under Fair Value Option

We elect the fair value option to account for certain financial instruments. For more information on these financial instruments for which the fair value option election has been made, see Note 6 Fair Value in our 2019 Form 10-K.

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

Table 69: Fair Value Option – Fair Value and Principal Balances
 
March 31, 2020
 
December 31, 2019
 
In millions
Fair Value

 
Aggregate Unpaid
Principal Balance

 
Difference

 
Fair Value

 
Aggregate Unpaid
Principal Balance

 
Difference

 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
 
 
 
 
 
 
 
 
 
 
 
 
Performing loans
$
915

 
$
872

 
$
43

 
$
813

 
$
792

 
$
21

 
Accruing loans 90 days or more past due
3

 
3

 


 
2

 
2

 


 
Nonaccrual loans
9

 
9

 


 
4

 
4

 

 
Total
$
927

 
$
884

 
$
43

 
$
819

 
$
798

 
$
21

 
Commercial mortgage loans held for sale (a)
 
 
 
 
 
 
 
 
 
 
 
 
Performing loans
$
537

 
$
521

 
$
16

 
$
245

 
$
263

 
$
(18
)
 
Nonaccrual loans
1

 
1

 


 
1

 
2

 
(1
)
 
Total
$
538

 
$
522

 
$
16

 
$
246

 
$
265

 
$
(19
)
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
Performing loans
$
289

 
$
303

 
$
(14
)
 
$
291

 
$
304

 
$
(13
)
 
Accruing loans 90 days or more past due
262

 
275

 
(13
)
 
285

 
296

 
(11
)
 
Nonaccrual loans
529

 
801

 
(272
)
 
166

 
265

 
(99
)
 
Total
$
1,080

 
$
1,379

 
$
(299
)
 
$
742

 
$
865

 
$
(123
)
 
Other assets
$
85

 
$
118

 
$
(33
)
 
$
132

 
$
125

 
$
7

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other borrowed funds
$
48

 
$
49

 
$
(1
)
 
$
63

 
$
64

 
$
(1
)
 
(a)
There were no accruing loans 90 days or more past due within this category at March 31, 2020 or December 31, 2019.

The changes in fair value for items for which we elected the fair value option are as follows:

Table 70: Fair Value Option – Changes in Fair Value (a)
 
Gains (Losses)
 
Three months ended
 
March 31

 
March 31

In millions
2020

 
2019

Assets
 
 
 
Residential mortgage loans held for sale
$
46

 
$
14

Commercial mortgage loans held for sale
$
48

 
$
5

Loans
$
18

 
$
4

Other assets
$
(36
)
 
$
9

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

Additional Fair Value Information Related to Financial Instruments Not Recorded at Fair Value
The following table presents the carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of all other financial instruments that are not recorded on our Consolidated Balance Sheet at fair value as of March 31, 2020 and December 31, 2019. For more information regarding the methods and assumptions used to estimate the fair values of financial instruments included in Table 71, see Note 6 Fair Value in our 2019 Form 10-K.


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




Table 71: Additional Fair Value Information Related to Other Financial Instruments
 
Carrying

 
Fair Value
 
In millions
Amount

 
Total

 
Level 1

 
Level 2

 
Level 3

 
March 31, 2020
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
7,493

 
$
7,493

 
$
7,493

 
 
 
 
 
Interest-earning deposits with banks
19,986

 
19,986

 
 
 
$
19,986

 
 
 
Securities held to maturity
1,469

 
1,621

 
924

 
542

 
$
155

 
Net loans (excludes leases)
252,557

 
259,894

 
 
 
 
 
259,894

 
Other assets
5,493

 
5,493

 
 
 
5,493

 
 
 
Total assets
$
286,998

 
$
294,487

 
$
8,417

 
$
26,021

 
$
260,049

 
Liabilities
 
 
 
 
 
 
 
 
 
 
Time deposits
$
22,440

 
$
22,399

 
 
 
$
22,399

 
 
 
Borrowed funds
71,975

 
70,660

 
 
 
68,909

 
$
1,751

 
Unfunded loan commitments and letters of credit
450

 
450

 
 
 
 
 
450

 
Other liabilities
456

 
456

 
 
 
456

 
 
 
Total liabilities
$
95,321

 
$
93,965

 
 
 
$
91,764

 
$
2,201

 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
5,061

 
$
5,061

 
$
5,061

 
 
 
 
 
Interest-earning deposits with banks
23,413

 
23,413

 
 
 
$
23,413

 
 
 
Securities held to maturity
17,661

 
18,044

 
832

 
17,039

 
$
173

 
Net loans (excludes leases)
229,205

 
232,670

 
 
 
 
 
232,670

 
Other assets
5,700

 
5,700

 
 
 
5,692

 
8

 
Total assets
$
281,040

 
$
284,888

 
$
5,893

 
$
46,144

 
$
232,851

 
Liabilities
 
 
 
 
 
 
 
 
 
 
Time deposits
$
21,663

 
$
21,425

 
 
 
$
21,425

 
 
 
Borrowed funds
59,745

 
60,399

 
 
 
58,622

 
$
1,777

 
Unfunded loan commitments and letters of credit
318

 
318

 
 
 
 
 
318

 
Other liabilities
506

 
506

 
 
 
506

 
 
 
Total liabilities
$
82,232

 
$
82,648

 

 
$
80,553

 
$
2,095

 


The aggregate fair values in Table 71 represent only a portion of the total market value of our assets and liabilities as, in accordance with the guidance related to fair values about financial instruments, we exclude the following:
financial instruments recorded at fair value on a recurring basis (as they are disclosed in Table 65);
investments accounted for under the equity method;
equity securities without a readily determinable fair value that apply for the alternative measurement approach to fair value under ASU 2016-01;
real and personal property;
lease financing;
loan customer relationships;
deposit customer intangibles;
mortgage servicing rights (MSRs);
retail branch networks;
fee-based businesses, such as asset management and brokerage;
trademarks and brand names;
trade receivables and payables due in one year or less; and
deposit liabilities with no defined or contractual maturities under ASU 2016-01.


The PNC Financial Services Group, Inc. – Form 10-Q 93  



NOTE 12 FINANCIAL DERIVATIVES

We use a variety of financial derivatives to both mitigate exposure to market (primarily interest rate) and credit risk inherent in our business activities, as well as, to facilitate customer risk management activities. We manage these risks as part of our overall asset and liability management process and through our credit policies and procedures. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract.

Derivative transactions are often measured in terms of notional amount, but this amount is generally not exchanged and it is not recorded on the balance sheet. The notional amount is the basis to which the underlying is applied to determine required payments under the derivative contract. The underlying is a referenced interest rate (commonly LIBOR), security price, credit spread or other index. Residential and commercial real estate loan commitments associated with loans to be sold also qualify as derivative instruments.

For more information regarding derivatives see Note 1 Accounting Policies and Note 13 Financial Derivatives in our 2019 Form 10-K.

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




The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by us.
Table 72: Total Gross Derivatives (a)
 
March 31, 2020
December 31, 2019
In millions
Notional /
Contract Amount

Asset Fair
Value (b)

Liability Fair
Value (c)

Notional /
Contract Amount

Asset Fair
Value (b)

Liability Fair
Value (c)

Derivatives used for hedging
 
 
 
 
 
 
Interest rate contracts (d):
 
 
 
 
 
 
Fair value hedges
$
31,764

 
 
$
30,663

 
 
Cash flow hedges
24,889

$
133

 
23,642

$
6

 
Foreign exchange contracts:
 
 
 
 
 
 
Net investment hedges
1,182

70

 
1,102



$
6

Total derivatives designated for hedging
$
57,835

$
203



$
55,407

$
6

$
6

Derivatives not used for hedging
 
 
 
 
 
 
Derivatives used for mortgage banking activities (e):
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
Swaps
$
54,029

 
 
$
52,007

$
1

 
Futures (f)
2,901

 
 
3,487

 
 
Mortgage-backed commitments
19,022

$
248

$
206

7,738

60

$
44

Other
7,168

35

49

3,134

32

23

Total interest rate contracts
83,120

283

255

66,366

93

67

Derivatives used for customer-related activities:
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
Swaps
268,654

6,346

1,834

249,075

2,769

1,187

Futures (f)
1,491

 
 
703

 
 
Mortgage-backed commitments
7,182

44

71

3,721

2

6

Other
23,439

299

106

21,379

113

33

Total interest rate contracts
300,766

6,689

2,011

274,878

2,884

1,226

Commodity contracts:
 
 
 
 
 
 
Swaps
5,152

792

783

5,204

234

229

Other
4,033

252

252

4,203

72

72

Total commodity contracts
9,185

1,044

1,035

9,407

306

301

Foreign exchange contracts and other
27,099

413

436

27,120

204

162

Total foreign exchange contracts and other
337,050

8,146

3,482

311,405

3,394

1,689

Derivatives used for other risk management activities:
 
 
 
 
 
 
Foreign exchange contracts and other
10,487

141

191

10,201

9

257

Total derivatives not designated for hedging
$
430,657

$
8,570

$
3,928

$
387,972

$
3,496

$
2,013

Total gross derivatives
$
488,492

$
8,773

$
3,928

$
443,379

$
3,502

$
2,019

Less: Impact of legally enforceable master netting agreements
 
1,341

1,341


690

690

Less: Cash collateral received/paid
 
2,110

1,109

 
616

790

Total derivatives
 
$
5,322

$
1,478



$
2,196

$
539

(a)
Centrally cleared derivatives are settled in cash daily and result in no derivative asset or derivative liability being recognized on our Consolidated Balance Sheet.
(b)
Included in Other assets on our Consolidated Balance Sheet.
(c)
Included in Other liabilities on our Consolidated Balance Sheet.
(d)
Represents primarily swaps.
(e)
Includes both residential and commercial mortgage banking activities.
(f)
Futures contracts settle in cash daily and, therefore, no derivative asset or derivative liability is recognized on our Consolidated Balance Sheet.

All derivatives are carried on our Consolidated Balance Sheet at fair value. Derivative balances are presented on the Consolidated Balance Sheet on a net basis taking into consideration the effects of legally enforceable master netting agreements and, when appropriate, any related cash collateral exchanged with counterparties. Further discussion regarding the offsetting rights associated with these legally enforceable master netting agreements is included in the Offsetting, Counterparty Credit Risk and Contingent Features section of this Note 12. Any nonperformance risk, including credit risk, is included in the determination of the estimated net fair value of the derivatives.





The PNC Financial Services Group, Inc. – Form 10-Q 95  



Derivatives Designated As Hedging Instruments

Certain derivatives used to manage interest rate and foreign exchange risk as part of our asset and liability risk management activities are designated as accounting hedges. Derivatives hedging the risks associated with changes in the fair value of assets or liabilities are considered fair value hedges, derivatives hedging the variability of expected future cash flows are considered cash flow hedges, and derivatives hedging a net investment in a foreign subsidiary are considered net investment hedges. Designating derivatives as accounting hedges allows for gains and losses on those derivatives to be recognized in the same period and in the same income statement line item as the earnings impact of the hedged items.

Fair Value Hedges
We enter into receive-fixed, pay-variable interest rate swaps to hedge changes in the fair value of outstanding fixed-rate debt caused by fluctuations in market interest rates. We also enter into pay-fixed, receive-variable interest rate swaps and zero-coupon swaps to hedge changes in the fair value of fixed rate and zero-coupon investment securities caused by fluctuations in market interest rates. Gains and losses on the interest rate swaps designated in these hedge relationships, along with the offsetting gains and losses on the hedged items attributable to the hedged risk, are recognized in current earnings within the same income statement line item.

Cash Flow Hedges
We enter into receive-fixed, pay-variable interest rate swaps to modify the interest rate characteristics of designated commercial loans from variable to fixed in order to reduce the impact of changes in future cash flows due to market interest rate changes. We also periodically enter into forward purchase and sale contracts to hedge the variability of the consideration that will be paid or received related to the purchase or sale of investment securities. The forecasted purchase or sale is consummated upon gross settlement of the forward contract itself. For these cash flow hedges, gains and losses on the interest rate swaps and forward contracts are recorded in AOCI and are then reclassified into earnings in the same period the hedged cash flows affect earnings and within the same income statement line as the hedged cash flows.

In the 12 months that follow March 31, 2020, we expect to reclassify net derivative gains of $491 million pretax, or $388 million after-tax, from AOCI to interest income for both cash flow hedge strategies. This reclassified amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to March 31, 2020. As of March 31, 2020, the maximum length of time over which forecasted transactions are hedged is ten years.

Further detail regarding gains (losses) related to our fair value and cash flow hedge derivatives is presented in the following table.
Table 73: Gains (Losses) Recognized on Fair Value and Cash Flow Hedges in the Consolidated Income Statement (a) (b)
 
Location and Amount of Gains (Losses) Recognized in Income
 
Interest Income
Interest Expense
Noninterest Income
In millions
Loans
Investment Securities
Borrowed Funds
Other
For the three months ended March 31, 2020
 
 
 
 
Total amounts on the Consolidated Income Statement
$
2,480

$
582

$
314

$
343

Gains (losses) on fair value hedges recognized on:
 
 
 
 
Hedged items (c)
 
$
234

$
(1,361
)
 
Derivatives
 
$
(231
)
$
1,339

 
Amounts related to interest settlements on derivatives
 
$
(2
)
$
59

 
Gains (losses) on cash flow hedges (d):
 
 
 
 
Amount of derivative gains (losses) reclassified from AOCI
$
42

$
2



$
1

For the three months ended March 31, 2019
 
 
 
 
Total amounts on the Consolidated Income Statement
$
2,602

$
620

$
481

$
308

Gains (losses) on fair value hedges recognized on:
 
 
 
 
Hedged items (c)
 
$
58

$
(274
)
 
Derivatives
 
$
(55
)
$
228

 
Amounts related to interest settlements on derivatives
 
$
5

$
11

 
Gains (losses) on cash flow hedges (d):
 
 
 
 
Amount of derivative gains (losses) reclassified from AOCI
$
(8
)
$
1

 
$
15

(a)
For all periods presented, there were no components of derivative gains or losses excluded from the assessment of hedge effectiveness for any of the fair value or cash flow hedge strategies.
(b)
All cash flow and fair value hedge derivatives were interest rate contracts for the periods presented.
(c)
Includes an insignificant amount of fair value hedge adjustments related to discontinued hedge relationships.
(d)
For all periods presented, there were no gains or losses from cash flow hedge derivatives reclassified to income because it became probable that the original forecasted transaction would not occur.

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




Detail regarding the impact of fair value hedge accounting on the carrying value of the hedged items is presented in the following table.

Table 74: Hedged Items - Fair Value Hedges
 
 
March 31, 2020
 
December 31, 2019
In millions
Carrying Value of the Hedged Items

 
Cumulative Fair Value Hedge Adjustment included in the Carrying Value of Hedged Items (a)

 
Carrying Value of the Hedged Items

 
Cumulative Fair Value Hedge Adjustment included in the Carrying Value of Hedged Items (a)

 
Investment securities - available for sale (b)
$
5,020

 
$
222

 
$
5,666

 
$
59

 
Borrowed funds
$
31,463

 
$
1,909

 
$
28,616

 
$
548

 
(a)
Includes $(.2) billion and $(.3) billion of fair value hedge adjustments primarily related to discontinued borrowed funds hedge relationships for March 31, 2020 and December 31, 2019, respectively.
(b)
Carrying value shown represents amortized cost.
Net Investment Hedges
We enter into foreign currency forward contracts to hedge non-U.S. dollar net investments in foreign subsidiaries against adverse changes in foreign exchange rates. We assess whether the hedging relationship is highly effective in achieving offsetting changes in the value of the hedge and hedged item by qualitatively verifying that the critical terms of the hedge and hedged item match at the inception of the hedging relationship and on an ongoing basis. Net investment hedge derivatives are classified as foreign exchange contracts. There were no components of derivative gains or losses excluded from the assessment of the hedge effectiveness for all periods presented. Gains (losses) on net investment hedge derivatives recognized in OCI were $75 million and $(18) million for the three months ended March 31, 2020 and 2019, respectively.

Derivatives Not Designated As Hedging Instruments

For additional information on derivatives not designated as hedging instruments under GAAP, see Note 13 Financial Derivatives in our 2019 Form 10-K.

Further detail regarding the gains (losses) on derivatives not designated in hedging relationships is presented in the following table.
Table 75: Gains (Losses) on Derivatives Not Designated for Hedging
   
 
Three months ended
March 31
In millions
2020

2019

Derivatives used for mortgage banking activities:
 
 
Interest rate contracts (a)
$
654

$
128

Derivatives used for customer-related activities:
 
 
Interest rate contracts
2

(2
)
Foreign exchange contracts and other (b)
11

23

Gains (losses) from customer-related activities (c)
13

21

Derivatives used for other risk management activities:
 
 
Foreign exchange contracts and other (c)
207

(54
)
Total gains (losses) from derivatives not designated as hedging instruments
$
874

$
95

(a)
Included in Residential mortgage, Corporate services and Other noninterest income on our Consolidated Income Statement.
(b)
Includes an insignificant amount of gains (losses) on commodity contracts for all periods presented.
(c)
Included in Other noninterest income on our Consolidated Income Statement.

Offsetting, Counterparty Credit Risk and Contingent Features

We generally utilize a net presentation on the Consolidated Balance Sheet for those derivative financial instruments entered into with counterparties under legally enforceable master netting agreements. The master netting agreements reduce credit risk by permitting the closeout netting of all outstanding derivative instruments under the master netting agreement with the same counterparty upon the occurrence of an event of default. The master netting agreement also may require the exchange of cash or marketable securities to collateralize either party’s net position. For additional information on derivative offsetting, counterparty credit risk and contingent features, see Note 13 Financial Derivatives in our 2019 Form 10-K.

Table 76 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities as of March 31, 2020 and December 31, 2019. The table includes cash collateral held or pledged under legally enforceable master netting

The PNC Financial Services Group, Inc. – Form 10-Q 97  



agreements. The table also includes the fair value of any securities collateral held or pledged under legally enforceable master netting agreements. Cash and securities collateral amounts are included in the table only to the extent of the related net derivative fair values.

Table 76 includes over-the-counter (OTC) derivatives and OTC derivatives cleared through a central clearing house. OTC derivatives represent contracts executed bilaterally with counterparties that are not settled through an organized exchange or directly cleared through a central clearing house. The majority of OTC derivatives are governed by the International Swaps and Derivatives Association (ISDA) documentation or other legally enforceable master netting agreements. OTC cleared derivatives represent contracts executed bilaterally with counterparties in the OTC market that are novated to a central clearing house who then becomes our counterparty. OTC cleared derivative instruments are typically settled in cash each day based on the prior day value.

Table 76: Derivative Assets and Liabilities Offsetting
In millions
 
  
 
Amounts Offset on the
Consolidated Balance Sheet
 
  
 
 
 
Securities Collateral Held/Pledged Under Master Netting Agreements

 
  
 
Gross
Fair Value

 
Fair Value
Offset Amount

 
Cash
Collateral

 
Net
Fair Value

 
 
 
Net Amounts

 
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over-the-counter cleared
 
$
296

 
 
 
 
 
$
296

 
 
 
 
 
$
296

 
Over-the-counter
 
6,809

 
$
499

 
$
1,701

 
4,609

 
 
 
$
634

 
3,975

 
Commodity contracts
 
1,044

 
484

 
382

 
178

 
 
 
 
 
178

 
Foreign exchange and other contracts
 
624

 
358

 
27

 
239

 
 
 
1

 
238

 
Total derivative assets
 
$
8,773


$
1,341


$
2,110


$
5,322

 
(a) 
 
$
635

 
$
4,687

 
Derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over-the-counter cleared
 
$
194

 
 
 
 
 
$
194

 
 
 
 
 
$
194

 
Over-the-counter
 
2,072

 
$
901

 
$
970

 
201

 
 
 
 
 
201

 
Commodity contracts
 
1,035

 
268

 
22

 
745

 
 
 
 
 
745

 
Foreign exchange and other contracts
 
627

 
172

 
117

 
338

 
 
 
 
 
338

 
Total derivative liabilities
 
$
3,928

 
$
1,341

 
$
1,109

 
$
1,478

 
(b)
 


 
$
1,478

 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over-the-counter cleared
 
$
14

 
 
 
 
 
$
14

 
 
 
 
 
$
14

 
Over-the-counter
 
2,969

 
$
365

 
$
593

 
2,011

 
 
 
$
215

 
1,796

 
Commodity contracts
 
306

 
198

 
18

 
90

 
 
 
 
 
90

 
Foreign exchange and other contracts
 
213

 
127

 
5

 
81

 
 
 
 
 
81

 
Total derivative assets
 
$
3,502


$
690


$
616


$
2,196

 
(a)
 
$
215

 
$
1,981

 
Derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over-the-counter cleared
 
$
14

 
 
 
 
 
$
14

 
 
 
 
 
$
14

 
Over-the-counter
 
1,279

 
$
475

 
$
692

 
112

 
 
 
 
 
112

 
Commodity contracts
 
301

 
152

 
17

 
132

 
 
 
 
 
132

 
Foreign exchange and other contracts
 
425

 
63

 
81

 
281

 
 
 
 
 
281

 
Total derivative liabilities
 
$
2,019

 
$
690

 
$
790

 
$
539

 
(b)
 


 
$
539

 
(a)
Represents the net amount of derivative assets included in Other assets on our Consolidated Balance Sheet.
(b)
Represents the net amount of derivative liabilities included in Other liabilities on our Consolidated Balance Sheet.

In addition to using master netting agreements and other collateral agreements to reduce credit risk associated with derivative instruments, we also seek to manage credit risk by evaluating credit ratings of counterparties and by using internal credit analysis, limits and monitoring procedures.

At March 31, 2020, we held cash, U.S. government securities and mortgage-backed securities totaling $3.0 billion under master netting agreements and other collateral agreements to collateralize net derivative assets due from counterparties, and we pledged cash totaling $2.0 billion under these agreements to collateralize net derivative liabilities owed to counterparties and to meet initial margin

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




requirements. These totals may differ from the amounts presented in the preceding offsetting table because these totals may include collateral exchanged under an agreement that does not qualify as a master netting agreement or because the total amount of collateral held or pledged exceeds the net derivative fair values with the counterparty as of the balance sheet date due to timing or other factors, such as initial margin. To the extent not netted against the derivative fair values under a master netting agreement, the receivable for cash pledged is included in Other assets and the obligation for cash held is included in Other liabilities on our Consolidated Balance Sheet. Securities held from counterparties are not recognized on our balance sheet. Likewise securities we have pledged to counterparties remain on our balance sheet.
 
Certain derivative agreements contain various credit-risk related contingent provisions, such as those that require our debt to maintain a specified credit rating from one or more of the major credit rating agencies. If our debt ratings were to fall below such specified ratings, the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on March 31, 2020 was $3.5 billion for which we had posted collateral of $2.4 billion in the normal course of business. The maximum additional amount of collateral we would have been required to post if the credit-risk-related contingent features underlying these agreements had been triggered on March 31, 2020 would be $1.1 billion.
NOTE 13 LEGAL PROCEEDINGS
 
We establish accruals for legal proceedings, including litigation and regulatory and governmental investigations and inquiries, 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. Any such accruals are adjusted thereafter as appropriate to reflect changed circumstances. When we are able to do so, we also determine estimates of possible losses or ranges of possible losses, whether in excess of any related accrued liability or where there is no accrued liability, for disclosed legal proceedings (“Disclosed Matters,” which are those matters disclosed in this Note 13 as well as those matters disclosed in Note 19 Legal Proceedings in Part II, Item 8 of our 2019 Form 10-K (such prior disclosure referred to as “Prior Disclosure”)). For Disclosed Matters where we are able to estimate such possible losses or ranges of possible losses, as of March 31, 2020, we estimate that it is reasonably possible that we could incur losses in excess of related accrued liabilities, if any, in an aggregate amount less than $100 million. The estimates included in this amount are based on our analysis of currently available information and are subject to significant judgment and a variety of assumptions and uncertainties. As new information is obtained we may change our estimates. Due to the inherent subjectivity of the assessments and unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to us from the legal proceedings in question. Thus, our exposure and ultimate losses may be higher, and possibly significantly so, than the amounts accrued or this aggregate amount.

As a result of the types of factors described in Note 19 in our 2019 Form 10-K, we are unable, at this time, to estimate the losses that are reasonably possible to be incurred or ranges of such losses with respect to some of the matters disclosed, and the aggregate estimated amount provided above does not include an estimate for every Disclosed Matter. Therefore, as the estimated aggregate amount disclosed above does not include all of the Disclosed Matters, the amount disclosed above does not represent our maximum reasonably possible loss exposure for all of the Disclosed Matters. The estimated aggregate amount also does not reflect any of our exposure to matters not so disclosed, as discussed below under “Other.”

We include in some of the descriptions of individual Disclosed Matters certain quantitative information related to the plaintiff’s claim against us as alleged in the plaintiff’s pleadings or other public filings or otherwise publicly available information. While information of this type may provide insight into the potential magnitude of a matter, it does not necessarily represent our estimate of reasonably possible loss or our judgment as to any currently appropriate accrual.

Some of our exposure in Disclosed Matters may be offset by applicable insurance coverage. We do not consider the possible availability of insurance coverage in determining the amounts of any accruals (although we record the amount of related insurance recoveries that are deemed probable up to the amount of the accrual) or in determining any estimates of possible losses or ranges of possible losses.

Pre-need Funeral Arrangements

In March 2020, in the lawsuit pending in the U.S. District Court for the Eastern District of Missouri under the caption Jo Ann Howard and Associates, P.C., et al. v. Cassity, et al. (No. 4:09-CV-1252-ERW), on the plaintiffs’ motion, the court dismissed the plaintiffs’ cross appeal of our appeal of the July 2019 district court award to the plaintiffs. We have also appealed the February 2020 district court award of $7 million in fees and costs to the plaintiffs.


The PNC Financial Services Group, Inc. – Form 10-Q 99  



Other Regulatory and Governmental Inquiries

We are the subject of investigations, audits, examinations and other forms of regulatory and governmental inquiry covering a broad range of issues in our consumer, mortgage, brokerage, securities and other financial services businesses, as well as other aspects of our operations. In some cases, these inquiries are part of reviews of specified activities at multiple industry participants; in others, they are directed at PNC individually. From time to time, these inquiries, including those described in Prior Disclosure, may involve or lead to regulatory enforcement actions and other administrative proceedings, and may lead to civil or criminal judicial proceedings. Some of these inquiries result in remedies including fines, penalties, restitution, or alterations in our business practices, and in additional expenses and collateral costs and other consequences. Such remedies and other consequences typically have not been material to us from a financial standpoint, but could be in the future. Even if not financially material, they may result in significant reputational harm or other adverse consequences.

Our practice is to cooperate fully with regulatory and governmental investigations, audits and other inquiries, including that described in Prior Disclosure.

Other

In addition to the proceedings or other matters described in Prior Disclosure, PNC and persons to whom we may have indemnification obligations, in the normal course of business, are subject to various other pending and threatened legal proceedings in which claims for monetary damages and other relief are asserted. We do not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of such other legal proceedings will have a material adverse effect on our financial position. However, we cannot now determine whether or not any claims asserted against us or others to whom we may have indemnification obligations, whether in the proceedings or other matters described above or otherwise, will have a material adverse effect on our results of operations in any future reporting period, which will depend on, among other things, the amount of the loss resulting from the claim and the amount of income otherwise reported for the reporting period.
NOTE 14 SEGMENT REPORTING

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

Results of individual businesses are presented based on our internal management reporting practices. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of our individual businesses are not necessarily comparable with similar information for any other company. 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.

Total business segment financial results differ from total consolidated net income. These differences are reflected in the “Other” category in the business segment tables. “Other” includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities, certain trading activities, certain runoff consumer loan portfolios, private equity investments, intercompany eliminations, certain corporate overhead, tax adjustments that are not allocated to business segments, gains or losses related to BlackRock transactions, exited businesses and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests as the segments’ results exclude their portion of net income attributable to noncontrolling interests. Assets, revenue and earnings attributable to foreign activities were not material in the period presented for comparison.

Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. Additionally, we have aggregated the results for corporate support functions within “Other” for financial reporting purposes.

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.

We have allocated the ACL and allowances for loan and lease losses and unfunded commitments and letters of credit based on the loan exposures within each business segment’s portfolio. Key reserve assumptions and estimation processes react to and are influenced by

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




observed changes in loan portfolio performance experience, the financial strength of the borrower and economic conditions. Key reserve assumptions are periodically updated.

Business Segment Results

Table 77: Results of Businesses
Three months ended March 31
In millions
 
Retail Banking

 
Corporate &
Institutional
Banking

 
Asset
Management
Group

 
BlackRock

 
Other

 
Consolidated (a) 

2020
 
 
 
 
 
 
 
 
 
 
 
 
Income Statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
1,456

 
$
950

 
$
88

 
 
 
$
17

 
$
2,511

Noninterest income
 
788

 
694

 
204

 
$
180

 
140

 
2,006

Total revenue
 
2,244

 
1,644

 
292

 
180

 
157

 
4,517

Provision for credit losses
 
445

 
458

 
3

 
 
 
8

 
914

Depreciation and amortization
 
57

 
48

 
11

 
 
 
124

 
240

Other noninterest expense
 
1,479

 
674

 
208

 
 
 
(58
)
 
2,303

Income before income taxes and noncontrolling interests
 
263

 
464

 
70

 
180

 
83

 
1,060

Income taxes (benefit)
 
62

 
94

 
16

 
23

 
(50
)
 
145

Net income
 
$
201

 
$
370

 
$
54

 
$
157

 
$
133

 
$
915

Average Assets (b)
 
$
97,062

 
$
172,502

 
$
7,801

 
$
8,511

 
$
126,560

 
$
412,436

2019
 
 
 
 
 
 
 
 
 
 
 
 
Income Statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
1,349

 
$
877

 
$
70

 
 
 
$
179

 
$
2,475

Noninterest income
 
595

 
576

 
217

 
$
233

 
190

 
1,811

Total revenue
 
1,944

 
1,453

 
287

 
233

 
369

 
4,286

Provision for credit losses (benefit)
 
128

 
71

 
(1
)
 
 
 
(9
)
 
189

Depreciation and amortization
 
51

 
50

 
12

 
 
 
121

 
234

Other noninterest expense
 
1,417

 
636

 
218

 
 
 
73

 
2,344

Income before income taxes and noncontrolling interests
 
348

 
696

 
58

 
233

 
184

 
1,519

Income taxes (benefit)
 
84

 
144

 
13

 
36

 
(29
)
 
248

Net income
 
$
264

 
$
552

 
$
45

 
$
197

 
$
213

 
$
1,271

Average Assets (b)
 
$
91,255

 
$
157,169

 
$
7,259

 
$
8,080

 
$
122,135

 
$
385,898

(a)
There were no material intersegment revenues for the three months ended March 31, 2020 and 2019.
(b)
Period-end balances for BlackRock.
Business Segment Products and Services
   
Retail Banking provides deposit, lending, brokerage, insurance services, investment management and cash management products and services to consumer and small business customers. Our customers are serviced through our branch network, ATMs, call centers, online banking and mobile channels. The branch network is located primarily in markets across the Mid-Atlantic, Midwest and Southeast. In 2018, Retail Banking launched its national expansion strategy designed to grow customers with digitally-led banking and an ultra-thin branch network in markets outside of our existing retail branch network. 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 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.

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. The Treasury Management business provides payables, receivables, deposit and account services, liquidity and investments, and online and mobile banking products and services to our clients. 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.

Asset Management Group provides personal wealth management for high net worth and ultra high net worth clients and institutional asset management. The Asset Management group is composed of three distinct operating units:

The PNC Financial Services Group, Inc. – Form 10-Q 101  



Wealth Management provides products and services to individuals and their families including investment and retirement planning, customized investment management, private banking, 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 clients.
Institutional asset management provides outsourced chief investment officer, custody, private real estate, cash and fixed income client solutions, and fiduciary retirement advisory services to institutional clients including corporations, healthcare systems, insurance companies, unions, municipalities and non-profits.

BlackRock, in which we hold an equity investment, is a leading publicly-traded investment management firm providing a broad range of investment and technology services to institutional and retail clients worldwide. Using a diverse platform of alpha-seeking active, index and cash management investment strategies across asset classes, BlackRock tailors 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 technology services, including an investment and risk management technology platform, as well as advisory services and solutions to a broad base of institutional and wealth management clients.

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). At March 31, 2020, our economic interest in BlackRock was 22%. We received cash dividends from BlackRock of $126 million and $115 million during the first three months of 2020 and 2019, respectively.

NOTE 15 FEE-BASED REVENUE FROM CONTRACTS WITH CUSTOMERS
As more fully described in Note 23 Fee-based Revenue from Contracts with Customers in our 2019 Form 10-K, a subset of our noninterest income relates to certain fee-based revenue within the scope of ASC Topic 606 - Revenue from Contracts with Customers (Topic 606).
Fee-based revenue within the scope of Topic 606 is recognized within three of our reportable business segments, Retail Banking, Corporate & Institutional Banking and Asset Management Group. Income recognized from our investment in BlackRock, also a reportable segment, is outside of the scope of the standard. Topic 606 also excludes interest income, income from lease contracts, fair value gains from financial instruments (including derivatives), income from mortgage servicing rights and guarantee products, letter of credit fees, non-refundable fees associated with acquiring or originating a loan and gains from the sale of financial assets.
The following tables present noninterest income within the scope of Topic 606 disaggregated by segment. A description of the fee-based revenue and how it is recognized for each segment’s principal services and products is included in our 2019 Form 10-K.

Retail Banking

Table 78: Retail Banking Noninterest Income Disaggregation
 
Three months ended
March 31
In millions
2020

2019

Product
 
 
 Deposit account fees
$
158

$
148

 Debit card fees
129

124

 Brokerage fees
93

89

 Merchant services
49

48

 Net credit card fees (a)
41

48

 Other
56

66

Total in-scope noninterest income by product
$
526

$
523

Reconciliation to total Retail Banking noninterest income
 
 
Total in-scope noninterest income
$
526

$
523

Total out-of-scope noninterest income (b)
262

72

Total Retail Banking noninterest income
$
788

$
595

(a)
Net credit card fees consists of interchange fees of $118 million and $112 million and credit card reward costs of $77 million and $64 million for the three months ended March 31, 2020 and 2019, respectively.
(b)
Out-of-scope noninterest income includes revenue streams that fall under the scope of other accounting and disclosure requirements outside of Topic 606.



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




Corporate & Institutional Banking

Table 79: Corporate & Institutional Banking Noninterest Income Disaggregation
 
Three months ended
March 31
In millions
2020

2019

Product
 
 
 Treasury management fees
$
216

$
199

 Capital markets fees
175

127

 Commercial mortgage banking activities
26

25

 Other
20

17

Total in-scope noninterest income by product
$
437

$
368

Reconciliation to total Corporate & Institutional Banking noninterest income
 
 
Total in-scope noninterest income
$
437

$
368

Total out-of-scope noninterest income (a)
257

208

Total Corporate & Institutional Banking noninterest income
$
694

$
576

(a)
Out-of-scope noninterest income includes revenue streams that fall under the scope of other accounting and disclosure requirements outside of Topic 606.

Asset Management Group

Table 80: Asset Management Group Noninterest Income Disaggregation

Three months ended
March 31
In millions
2020

2019

Customer Type
 
 
 Personal
$
150

$
147

 Institutional
51

65

Total in-scope noninterest income by customer type
$
201

$
212

Reconciliation to Asset Management Group noninterest income
 
 
Total in-scope noninterest income
$
201

$
212

Total out-of-scope noninterest income (a)
3

5

Total Asset Management Group noninterest income
$
204

$
217

(a)
Out-of-scope noninterest income includes revenue streams that fall under the scope of other accounting and disclosure requirements outside of Topic 606.


The PNC Financial Services Group, Inc. – Form 10-Q 103  



STATISTICAL INFORMATION (UNAUDITED)
THE PNC FINANCIAL SERVICES GROUP, INC.
Average Consolidated Balance Sheet And Net Interest Analysis (a) (b) (c)
  
Three months ended March 31
 
 
2020
 
2019
 
Taxable-equivalent basis
Dollars in millions
Average
Balances

 
Interest Income/Expense

 
Average Yields/Rates

 
Average
Balances

 
Interest Income/
Expense

 
Average Yields/
Rates

 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
Agency
$
49,636

 
$
326

 
2.63
%
 
$
29,002

 
$
213

 
2.94
%
 
Non-agency
1,617

 
32

 
7.87
%
 
1,890

 
35

 
7.31
%
 
Commercial mortgage-backed
6,734

 
50

 
2.95
%
 
5,368

 
42

 
3.13
%
 
Asset-backed
5,003

 
38

 
3.05
%
 
5,136

 
43

 
3.35
%
 
U.S. Treasury and government agencies
15,938

 
92

 
2.29
%
 
18,240

 
114

 
2.49
%
 
Other
4,024

 
37

 
3.69
%
 
3,671

 
30

 
3.34
%
 
Total securities available for sale
82,952

 
575

 
2.77
%
 
63,307

 
477

 
3.01
%
 
Securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed

 

 

 
15,627

 
118

 
3.01
%
 
Commercial mortgage-backed

 

 

 
600

 
5

 
3.53
%
 
Asset-backed
51

 

 
2.77
%
 
177

 
2

 
3.83
%
 
U.S. Treasury and government agencies
779

 
6

 
2.84
%
 
760

 
5

 
2.81
%
 
Other
640

 
7

 
4.48
%
 
1,847

 
20

 
4.40
%
 
Total securities held to maturity
1,470

 
13

 
3.56
%
 
19,011

 
150

 
3.16
%
 
Total investment securities
84,422

 
588

 
2.78
%
 
82,318

 
627

 
3.05
%
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
128,723

 
1,180

 
3.62
%
 
119,345

 
1,291

 
4.33
%
 
Commercial real estate
28,275

 
260

 
3.64
%
 
28,147

 
307

 
4.37
%
 
Equipment lease financing
7,066

 
69

 
3.93
%
 
7,263

 
71

 
3.93
%
 
Consumer
57,680

 
771

 
5.38
%
 
54,996

 
751

 
5.54
%
 
Residential real estate
21,828

 
216

 
3.96
%
 
18,794

 
202

 
4.29
%
 
Total loans
243,572

 
2,496

 
4.08
%
 
228,545

 
2,622

 
4.61
%
 
Interest-earning deposits with banks
17,569

 
56

 
1.27
%
 
15,017

 
91

 
2.43
%
 
Other interest-earning assets
9,468

 
82

 
3.51
%
 
11,068

 
115

 
4.14
%
 
Total interest-earning assets/interest income
355,031

 
3,222

 
3.62
%
 
336,948

 
3,455

 
4.11
%
 
Noninterest-earning assets
57,405

 
 
 
 
 
48,950

 
 
 
 
 
Total assets
$
412,436

 
 
 
 
 
$
385,898

 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
 
 
 
 
 
 
 
 
 
 
 
Money market
$
53,287

 
$
95

 
.72
%
 
$
54,702

 
$
155

 
1.15
%
 
Demand
70,931

 
72

 
.41
%
 
63,480

 
81

 
.52
%
 
Savings
69,977

 
138

 
.79
%
 
58,821

 
164

 
1.13
%
 
Time deposits
21,141

 
70

 
1.34
%
 
18,813

 
72

 
1.55
%
 
Total interest-bearing deposits
215,336

 
375

 
.70
%
 
195,816

 
472

 
.98
%
 
Borrowed funds
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank borrowings
13,440

 
58

 
1.69
%
 
21,491

 
149

 
2.77
%
 
Bank notes and senior debt
29,988

 
183

 
2.41
%
 
25,418

 
223

 
3.50
%
 
Subordinated debt
5,934

 
40

 
2.73
%
 
5,883

 
66

 
4.50
%
 
Other
7,826

 
33

 
1.69
%
 
6,991

 
43

 
2.44
%
 
Total borrowed funds
57,188

 
314

 
2.18
%
 
59,783

 
481

 
3.21
%
 
Total interest-bearing liabilities/interest expense
272,524

 
689

 
1.00
%
 
255,599

 
953

 
1.50
%
 
Noninterest-bearing liabilities and equity:
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
74,396

 
 
 
 
 
71,402

 
 
 
 
 
Accrued expenses and other liabilities
16,437

 
 
 
 
 
11,242

 
 
 
 
 
Equity
49,079

 
 
 
 
 
47,655

 
 
 
 
 
Total liabilities and equity
$
412,436

 
 
 
 
 
$
385,898

 
 
 
 
 
Interest rate spread
 
 
 
 
2.62
%
 
 
 
 
 
2.61
%
 
Impact of noninterest-bearing sources
 
 
 
 
.22

 
 
 
 
 
.37

 
Net interest income/margin
 
 
$
2,533

 
2.84
%
 
 
 
$
2,502

 
2.98
%
 
(continued on following page)


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




Average Consolidated Balance Sheet And Net Interest Analysis (a) (b) (c) (Continued)
  
Three months ended December 31
 
2019
Taxable-equivalent basis
Dollars in millions
Average
Balances

 
Interest Income/Expense

 
Average Yields/Rates

Assets
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
Investment securities
 
 
 
 
 
Securities available for sale
 
 
 
 
 
Residential mortgage-backed
 
 
 
 
 
Agency
$
33,937

 
$
210

 
2.48
%
Non-agency
1,582

 
32

 
8.09
%
Commercial mortgage-backed
6,054

 
35

 
2.30
%
Asset-backed
5,059

 
41

 
3.26
%
U.S. Treasury and government agencies
15,966

 
94

 
2.31
%
Other
2,849

 
24

 
3.36
%
Total securities available for sale
65,447

 
436

 
2.65
%
Securities held to maturity
 
 
 
 
 
Residential mortgage-backed
14,943

 
98

 
2.63
%
Commercial mortgage-backed
498

 
6

 
4.44
%
Asset-backed
54

 
1

 
3.02
%
U.S. Treasury and government agencies
774

 
6

 
2.86
%
Other
1,794

 
19

 
4.47
%
Total securities held to maturity
18,063

 
130

 
2.87
%
Total investment securities
83,510

 
566

 
2.70
%
Loans
 
 
 
 
 
Commercial
124,876

 
1,238

 
3.88
%
Commercial real estate
28,670

 
285

 
3.89
%
Equipment lease financing
7,199

 
70

 
3.87
%
Consumer
56,765

 
779

 
5.45
%
Residential real estate
21,341

 
219

 
4.10
%
Total loans
238,851

 
2,591

 
4.27
%
Interest-earning deposits with banks
23,316

 
97

 
1.66
%
Other interest-earning assets
11,371

 
104

 
3.65
%
Total interest-earning assets/interest income
357,048

 
3,358

 
3.71
%
Noninterest-earning assets
54,371

 
 
 
 
Total assets
$
411,419

 
 
 
 
Liabilities and Equity
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Interest-bearing deposits
 
 
 
 
 
Money market
$
56,209

 
132

 
.93
%
Demand
69,496

 
89

 
.51
%
Savings
66,827

 
164

 
.97
%
Time deposits
21,600

 
83

 
1.52
%
Total interest-bearing deposits
214,132

 
468

 
.87
%
Borrowed funds
 
 
 
 
 
Federal Home Loan Bank borrowings
18,944

 
102

 
2.11
%
Bank notes and senior debt
27,403

 
194

 
2.77
%
Subordinated debt
5,760

 
45

 
3.06
%
Other
7,926

 
37

 
1.89
%
Total borrowed funds
60,033

 
378

 
2.47
%
Total interest-bearing liabilities/interest expense
274,165

 
846

 
1.21
%
Noninterest-bearing liabilities and equity:
 
 
 
 
 
Noninterest-bearing deposits
73,626

 
 
 
 
Accrued expenses and other liabilities
14,541

 
 
 
 
Equity
49,087

 
 
 
 
Total liabilities and equity
$
411,419

 
 
 
 
Interest rate spread
 
 
 
 
2.50
%
Impact of noninterest-bearing sources
 
 
 
 
.28

Net interest income/margin
 
 
$
2,511

 
2.78
%
(a)
Nonaccrual loans are included in loans, net of unearned income. The impact of financial derivatives used in interest rate risk management is included in the interest income/expense and average yields/rates of the related assets and liabilities. Basis adjustments related to hedged items are included in noninterest-earning assets and noninterest-bearing liabilities. Average balances of securities are based on amortized historical cost (excluding adjustments to fair value, which are included in other assets). Average balances for certain loans and borrowed funds accounted for at fair value are included in noninterest-earning assets and noninterest-bearing liabilities, with changes in fair value recorded in Noninterest income.
(b)
Loan fees for the three months ended March 31, 2020, December 31, 2019 and March 31, 2019 were $44 million, $43 million and $28 million, respectively.
(c)
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 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. See Reconciliation of Taxable-Equivalent Net Interest Income in this Statistical Information section for more information.

The PNC Financial Services Group, Inc. – Form 10-Q 105  



RECONCILIATION OF TAXABLE-EQUIVALENT NET INTEREST INCOME (NON-GAAP) (a)
 
 
 
Three months ended
In millions
 
March 31, 2020

 
December 31, 2019

 
March 31, 2019

Net interest income (GAAP)
 
$
2,511

 
$
2,488

 
$
2,475

Taxable-equivalent adjustments
 
22

 
23

 
27

Net interest income (Non-GAAP)
 
$
2,533

 
$
2,511

 
$
2,502

(a)
The interest income earned on certain interest-earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest income, we use interest income on a taxable-equivalent basis by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the information set forth in Note 13 Legal Proceedings in the Notes To Consolidated Financial Statements under Part I, Item 1 of this Report, which is incorporated by reference in response to this item.
ITEM 1A. RISK FACTORS

There are no material changes from any of the risk factors previously disclosed in PNC's 2019 Form 10-K in response to Part I, Item 1A other than the addition of the following risk factor:

The recent outbreak of the novel strain of coronavirus (COVID-19) had and is likely to continue to have an adverse effect, possibly materially, on our overall business and financial performance.

In December 2019, an outbreak of COVID-19 occurred in China which has subsequently spread throughout many regions of the world, including the U.S. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended worldwide containment and mitigation measures. On March 13th, President Trump announced a National Emergency relating to the virus. Federal, state and local governments and their respective agencies have enacted and are expected to continue to enact and implement a variety of measures to manage the public health effects, including restricting travel, ordering the closure of non-essential businesses and prohibiting individual interactions through required social distancing measures and mandatory stay at home orders. Collectively, these measures, together with voluntary changes in behavior, have led to a substantial decrease in economic activity and a dramatic increase in unemployment. Sectors such as retail, hospitality, travel, shipping, consumer services, elective healthcare and oil and gas have been particularly hard hit. Governmental bodies have also enacted and are expected to continue to enact and implement laws designed to stabilize the economy and provide relief to businesses and individuals to mitigate the consequences of COVID-19 and the policies restricting the operation of businesses and the movement of individuals. The effectiveness of these efforts is uncertain, and we cannot predict future developments, including how long the outbreak and related restrictions will last, which geographical regions may be particularly affected, or what other government responses may occur.

The outbreak and its consequences, including responsive measures to manage it, had and are likely to continue to have an adverse effect, possibly materially, on our overall business and financial performance. The longer the public health crisis lasts and the greater its severity, the greater the likely adverse impact on the economy, our customers and our business and financial performance. The following are examples of the most likely impacts on PNC:

The deterioration of national and global economic conditions, substantial increases in unemployment, and associated turmoil and volatility in the financial markets has negatively affected and is likely to continue to negatively affect, possibly materially, our financial performance and capital and liquidity. The following are the key factors contributing to this risk:
There is a greater likelihood that more of our commercial and consumer customers or counterparties will become delinquent on their loans or other obligations to us, which, in turn, will result in a higher level of non-performing loans and net charge-offs. It will result in a higher and more volatile provision for credit losses for financial instruments held by us that are subject to CECL. Even if a loan returns to full performing status, it may be on modified terms that result in, for example, a term extension, interest rate reduction or principal deferral or forgiveness. Increases in loan delinquencies or modifications will also result in increased administrative costs.
There has been and there is likely to continue to be a decrease in the demand for certain of our products and services.
These rapidly changing and unprecedented market conditions have impacted and are likely to continue to impact the valuation of assets as reported within our consolidated financial statements, as well as causing substantial reductions in the value of our assets under management, all with the possible effects described in Item 1A of our 2019 Form 10-

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




K in the Risk Factor headed “Our business and financial performance are vulnerable to the impact of changes in the values of financial assets.”
Although PNC’s capital and liquidity continue to be strong, these conditions also have and are likely to continue to negatively affect our capital and liquidity positions, possibly materially, which are critical to our ability to operate and grow our business. In addition, continued or accelerated disruption and volatility in the financial markets or long-lasting or deeper recessionary conditions may diminish our access to the capital markets. We have suspended our discretionary common share repurchase program and may take further actions that would limit a return of capital to shareholders, including potentially a reduction or suspension of the dividend payable to common shareholders, as a result of these conditions and their effect on our financial performance and position or as a result of regulatory guidance.

Some of the legislation responsive to the outbreak, including the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), provides for certain commercial and consumer protections which are likely to alter the profitability of the transactions in which we engage, such as by allowing borrowers to delay payments on loans or other obligations to us and imposing other costs on us. These laws are also likely to delay or restrict our ability to realize the value of collateral by, for example, providing temporary foreclosure protection and eviction protection even when a customer is in breach of its obligations to us. We may also be limited in our ability to realize the value of collateral as a result of court closures and related delays. Moreover, collateral may be liquidated at prices insufficient to recover the full amount of exposure to us as a result of deteriorating economic conditions and volatile markets. See Recent Regulatory Developments in this Report for more information on PNC’s implementation of these programs.

Other laws related to employee benefits and the treatment of employees could also negatively impact us by increasing administrative, compensation and benefits costs by, for example, mandating coverage of certain COVID-19 related testing and treatment or mandating additional paid or unpaid leave. Further governmental action that is taken to mitigate the economic effects of the pandemic, as well as additional compensation or benefit actions taken by PNC, could adversely affect our financial condition and results of operations, possibly materially, in other ways that are not known now.

In response to the outbreak and its economic consequences, the Federal Reserve lowered its target for the federal funds rate to a range of 0% to 0.25%. As a result of the high percentage of our assets and liabilities that are in the form of interest-bearing or interest-related instruments, this change in interest rates will have a negative impact on our net interest income and net interest margin, which could be material and which could materially adversely affect our profitability. The possible effects of a low interest rate environment are further described in Item 1A of our 2019 Form 10-K in the Risk Factor headed “Our business and financial performance are impacted significantly by market interest rates and movements in those rates.” Moreover, such low rates increase the risk in the U.S. of a negative interest rate environment in which interest rates drop below zero, either broadly or for some types of instruments. For example, yields on one-month and three-month Treasuries briefly dropped below zero in March 2020. Such an occurrence would likely further reduce the interest we earn on loans and other earning assets, while also likely requiring us to pay to maintain our deposits with the Federal Reserve Bank. Our systems may not be able to handle adequately a negative interest rate environment and not all variable rate instruments are designed for such a circumstance. We cannot predict the nature or timing of future changes in monetary policies in response to the outbreak or the precise effects that they may have on our activities and financial results.

To protect our employees, customers and the communities in which we operate, we have modified the operations of many of our retail branches, including temporarily closing some branches, and have otherwise implemented work-from-home policies for a significant portion of our workforce. We believe we are capable of meeting the needs of our customers despite these modifications. However, these efforts may result in the loss of customers, impede our ability to perform certain transactions, and impair our ability to effectively identify, manage and control risk. For example, customers may be unwilling or unable to conduct transactions with us via online channels or through a local branch that is operating only in a drive-through mode. Another example is the infrastructure needed to provide products and services via online channels or to work effectively in a work-from-home environment, such as internet, telecommunications and internal information technology systems, may fail to perform as anticipated, resulting in our inability to deliver products or services or effectively manage the risks arising from our businesses. In addition, we rely on our employees, third party vendors and service providers and other counterparties, both domestically and abroad, to support many aspects of our business. Reduced workforces which may be caused by, but not limited to, illness, quarantine, stay at home or other government mandates, or difficulties transitioning back to an in office environment, could result in an adverse impact to our operations and financial performance. Redeployment of employees from current positions and of technology from current uses to support products and services responsive to the outbreak may further adversely impact our operations. Further, third party vendors, service providers and other counterparties, both domestically and abroad, face access, connectivity or other challenges operating within a work-from-home virtual environment.


The PNC Financial Services Group, Inc. – Form 10-Q 107  



In support of our employees, customers and communities, we may take steps beyond or in addition to those required by governmental or regulatory minimums which may further adversely impact our profitability. For example, we have and may continue to provide additional relief or forbearance to customers, health and wellness benefits to employees or financial support for community initiatives to assist those in need as a result of the outbreak. The actual or perceived failure to provide sufficient services, support or relief to those businesses or individuals in need or properly implement legislation responsive to the outbreak or our voluntary commitments to regulators could negatively impact our reputation with adverse consequences to our business. In addition, such actual or perceived failure, or operational and other issues that arise in connection with the implementation of government-mandated or other financial assistance or relief programs present elevated levels of legal and reputational risk, including the potential for governmental and regulatory inquiries, investigations and enforcement actions, as well as private lawsuits. Participation by PNC in governmental programs designed to provide liquidity to the financial system or impacted businesses, such as borrowing through the Federal Reserve discount window or borrowing from, or selling financial assets to, facilities established by the Federal Reserve or participation in programs under the CARES Act, also could expose us to governmental or public scrutiny and criticism, either at the time we participate in the program or subsequently.

You should also review our Risk Factors discussion in Item 1A of our 2019 Form 10-K for information regarding other factors that have and are likely to continue to affect our business and financial performance as a result of the pandemic.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities
None.

Equity Security Repurchases
Details of our repurchases of PNC common stock during the first quarter of 2020 are included in the following table.
2020 period
In thousands, except per share data
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)

January 1 - 31
4,056

$
153.22

4,052

82,040

February 1 - 29
4,423

$
147.96

3,982

78,058

March 1 - 31
2,030

$
107.57

2,030

76,028

Total
10,509

$
142.19

 
 
(a)
Includes PNC common stock purchased in connection with our various employee benefit plans generally related to 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 of our 2019 Annual Report on Form 10-K include additional information regarding our employee benefit and equity compensation plans that use PNC common stock.
(b)
On April 4, 2019, our Board of Directors approved the establishment of a new stock repurchase program authorization in the amount of 100 million shares of PNC common stock, effective July 1, 2019.  The previous 2015 authorization was terminated as of end of day on June 30, 2019. Under this authorization, repurchases may be made in the open market or privately negotiated transactions, with the timing and exact amount of common stock repurchases depending 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 2019, we announced share repurchase programs of up to $4.3 billion for the four quarter period beginning with the third quarter of 2019, in accordance with PNC's 2019 capital plan. In January 2020, we announced an increase to these programs to repurchase up to an additional $1.0 billion in common shares through the end of the second quarter of 2020. In the first quarter of 2020, we repurchased 10.1 million shares of common stock on the open market, with an average price of $141.67 per share and an aggregate repurchase price of $1.4 billion. On March 16, 2020, PNC announced a temporary suspension of its common stock repurchase program through June 30, 2020 in conjunction with the Federal Reserve's effort to support the U.S. economy during the COVID-19 outbreak.

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




ITEM 6. EXHIBITS
The following exhibit index lists Exhibits filed, or in the case of Exhibits 32.1 and 32.2 furnished, with this Quarterly Report on Form 10-Q:
EXHIBIT INDEX
31.1
  
 
 
31.2
  
 
 
32.1
  
 
 
32.2
  
 
 
 
101.INS
  
Inline XBRL Instance Document
 
 
 
101.SCH
 
Inline XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
104
 
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
 
 
 
You can obtain copies of these Exhibits electronically at the SEC’s website at www.sec.gov. The Exhibits are also available as part of this Form 10-Q on PNC’s corporate website at www.pnc.com/secfilings. Shareholders and bondholders may also obtain copies of Exhibits, without charge, by contacting Shareholder Relations at 800-843-2206 or via e-mail at investor.relations@pnc.com. The interactive data file (XBRL) exhibit is only available electronically.
CORPORATE INFORMATION
The PNC Financial Services Group, Inc.
Corporate Headquarters
The PNC Financial Services Group, Inc.
The Tower at PNC Plaza
300 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2401
888-762-2265
Internet Information

The PNC Financial Services Group, Inc.'s financial reports and information about 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. 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. Such GAAP reconciliations may be in materials for the applicable presentation, in materials for prior presentations or in our annual, quarterly or current reports.
When warranted, we will also use our website to expedite public access to time-critical information regarding PNC instead of using a press release or a filing with the SEC for first disclosure of the information. In some circumstances, the information may be relevant to investors but directed at customers, in which case it may be accessed directly through the home page rather than “About Us – Investor Relations.”
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

The PNC Financial Services Group, Inc. – Form 10-Q 109  



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 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.
Financial 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 can obtain copies of these and other filings, including exhibits, electronically at the SEC’s internet website at www.sec.gov or on our corporate internet website at www.pnc.com/secfilings. Shareholders and bond holders may also 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, or via email to 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.
Corporate Governance at PNC
Information about our Board of Directors and its committees and corporate governance, including our PNC Code of Business Conduct and Ethics (as amended from time to time), 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 covering any 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’s Audit, Nominating and Governance, Personnel and Compensation, or Risk Committees (all of which are posted on the PNC corporate website) may do so by sending their requests to our Corporate Secretary at corporate headquarters at the above address. Copies will be provided without charge to shareholders.
Inquiries
For financial services call 888-762-2265.
Registered shareholders should contact Shareholder Services at 800-982-7652.
Analysts and institutional investors should contact Bryan Gill, Executive Vice President, Director of Investor Relations, at 412-768-4143 or via email at investor.relations@pnc.com.
News media representatives should contact PNC Media Relations at 412-762-4550 or via email at media.relations@pnc.com.
Dividend Policy
Holders of PNC common stock are entitled to receive dividends when declared by the 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 have been paid or declared and set apart for payment. The Board 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 as part of the CCAR process as described in the Capital Management portion of the Risk Management section of the Financial Review of this Report and in the Supervision and Regulation section in Item 1 of our 2019 Form 10-K.



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




Dividend Reinvestment and Stock Purchase Plan
The PNC Financial Services Group, Inc. Dividend Reinvestment and Stock Purchase Plan enables holders of our common stock to conveniently purchase additional shares of common stock. You can obtain a prospectus and enrollment form by contacting Shareholder Services at 800-982-7652. Registered shareholders may also contact this phone number regarding dividends and other shareholder services.
Stock Transfer Agent and Registrar
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
800-982-7652
www.computershare.com/pnc
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on May 5, 2020 on its behalf by the undersigned thereunto duly authorized.
/s/ Robert Q. Reilly
Robert Q. Reilly
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

The PNC Financial Services Group, Inc. – Form 10-Q 111