August 4, 2020 - 10-Q: Quarterly report pursuant to Section 13 or 15(d) | The PNC Financial Services Group, Inc. (PNC)

Form: 10-Q

Documents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

______________________________________

FORM 10-Q

______________________________________



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

For the quarterly period ended June 30, 2020



☐	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.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of July 17, 2020, there were 424,502,851 shares of the registrant’s common stock ($5 par value) outstanding.

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2020 Form 10-Q



	Pages
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Income Statement	49
Consolidated Statement of Comprehensive Income	50
Consolidated Balance Sheet	51
Consolidated Statement of Cash Flows	52
Notes To Consolidated Financial Statements (Unaudited)
Note 1 Accounting Policies	54
Note 2 Discontinued Operations	66
Note 3 Investment Securities	66
Note 4 Loans and Related Allowance for Credit Losses	70
Note 5 Loan Sale and Servicing Activities and Variable Interest Entities	79
Note 6 Goodwill and Mortgage Servicing Rights	82
Note 7 Leases	83
Note 8 Borrowed Funds	84
Note 9 Commitments	85
Note 10 Total Equity and Other Comprehensive Income	86
Note 11 Earnings Per Share	89
Note 12 Fair Value	89
Note 13 Financial Derivatives	99
Note 14 Legal Proceedings	105
Note 15 Segment Reporting	106
Note 16 Fee-based Revenue from Contracts with Customers	108
Note 17 Subsequent Events	110
Statistical Information (Unaudited)
Average Consolidated Balance Sheet And Net Interest Analysis	111
Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP)	113
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Financial Review	1
Consolidated Financial Highlights	1
Executive Summary	3
Consolidated Income Statement Review	6
Consolidated Balance Sheet Review	10
Business Segments Review	14
Risk Management	22
Recent Regulatory Developments	43
Critical Accounting Estimates and Judgments	45
Off-Balance Sheet Arrangements and Variable Interest Entities	46
Internal Controls and Disclosure Controls and Procedures	46
Glossary of Terms	46
Cautionary Statement Regarding Forward-Looking Information	47
Item 3. Quantitative and Qualitative Disclosures about Market Risk.	22-43, 54-66 and 99-105
Item 4. Controls and Procedures.	46
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.	113
Item 1A. Risk Factors.	113
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	113
Item 6. Exhibits.	114
Exhibit Index	114
Corporate Information	114
Signature	116

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2020 Form 10-Q (continued)




MD&A TABLE REFERENCE
Table	Description	Page
1	Consolidated Financial Highlights	1
2	Summarized Average Balances and Net Interest Income	7
3	Noninterest Income	8
4	Noninterest Expense	9
5	Provision for Credit Losses	9
6	Discontinued Operations	10
7	Summarized Balance Sheet Data	10
8	Loans	11
9	Investment Securities	11
10	Weighted-Average Expected Maturities of Mortgage and Asset-Backed Debt Securities	12
11	Details of Funding Sources	13
12	Retail Banking Table	15
13	Corporate & Institutional Banking Table	18
14	Asset Management Group Table	21
15	Details of Loans	23
16	Commercial and Industrial Loans by Industry	23
17	Commercial Real Estate Loans by Geography and Property Type	24
18	Home Equity Loans by Geography and by Lien Type	26
19	Residential Real Estate Loans by Geography	26
20	Nonperforming Assets by Type	28
21	Change in Nonperforming Assets	28
22	Accruing Loans Past Due	29
23	Summary of Troubled Debt Restructurings	29
24	Unpaid Principal Balance of Commercial Loans with a COVID-19 Related Principal/Interest Deferral Modification	30
25	Unpaid Principal Balance of Consumer Loan Modifications Under Hardship Relief Programs	31
26	Allowance for Credit Losses by Loan Class	33
27	Loan Charge-Offs and Recoveries	34
28	Senior and Subordinated Debt	35
29	Credit Ratings for PNC and PNC Bank	37
30	Basel III Capital	38
31	Interest Sensitivity Analysis	40
32	Net Interest Income Sensitivity to Alternative Rate Scenarios	40
33	Alternate Interest Rate Scenarios: One Year Forward	41
34	Equity Investments Summary	42

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2020 Form 10-Q (continued)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE
Table	Description	Page
35	Impact of the CECL Standard Adoption	57
36	Consolidated Income Statement - Discontinued Operations	66
37	Consolidated Statement of Cash Flows - Discontinued Operations	66
38	Investment Securities Summary	67
39	Gross Unrealized Loss and Fair Value of Securities Available for Sale Without an Allowance for Credit Losses	68
40	Gross Unrealized Loss and Fair Value of Debt Securities	68
41	Gains (Losses) on Sales of Securities Available for Sale	68
42	Contractual Maturity of Debt Securities	69
43	Fair Value of Securities Pledged and Accepted as Collateral	69
44	Analysis of Loan Portfolio	71
45	Nonperforming Assets	72
46	Commercial Credit Quality Indicators	73
47	Home Equity and Residential Real Estate Credit Quality Indicators	74
48	Credit Quality Indicators for Automobile, Credit Card, Education and Other Consumer Loan Classes	76
49	Financial Impact and TDRs by Concession Type	77
50	Subsequently Defaulted TDRs	77
51	Rollforward of Allowance for Credit Losses	78
52	Analysis of Changes in the Allowance for Credit Losses	78
53	Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data	79
54	Cash Flows Associated with Loan Sale and Servicing Activities	80
55	Principal Balance, Delinquent Loans and Net Charge-offs Related to Serviced Loans For Others	81
56	Non-Consolidated VIEs	81
57	Mortgage Servicing Rights	82
58	Commercial Mortgage Servicing Rights – Key Valuation Assumptions	83
59	Residential Mortgage Servicing Rights – Key Valuation Assumptions	83
60	Lessor Income	83
61	Borrowed Funds	84
62	FHLB Borrowings, Senior Debt and Subordinated Debt	84
63	Commitments to Extend Credit and Other Commitments	85
64	Rollforward of Total Equity	86
65	Other Comprehensive Income (Loss)	87
66	Accumulated Other Comprehensive Income (Loss) Components	88
67	Dividends Per Share	88
68	Basic and Diluted Earnings Per Common Share	89
69	Fair Value Measurements – Recurring Basis Summary	90
70	Reconciliation of Level 3 Assets and Liabilities	91
71	Fair Value Measurements – Recurring Quantitative Information	95
72	Fair Value Measurements – Nonrecurring	96
73	Fair Value Option – Fair Value and Principal Balances	97
74	Fair Value Option – Changes in Fair Value	97
75	Additional Fair Value Information Related to Other Financial Instruments	98
76	Total Gross Derivatives	100
77	Gains (Losses) Recognized on Fair Value and Cash Flow Hedges in the Consolidated Income Statement	102
78	Hedged Items - Fair Value Hedges	102
79	Gains (Losses) on Derivatives Not Designated for Hedging	103
80	Derivative Assets and Liabilities Offsetting	104
81	Results of Businesses	107
82	Retail Banking Noninterest Income Disaggregation	109
83	Corporate & Institutional Banking Noninterest Income Disaggregation	109
84	Asset Management Group Noninterest Income Disaggregation	110

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). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business, regulatory and legal risks, see the following: the Risk Management section of this Financial Review and of Item 7 in our 2019 Form 10-K; Item 1A Risk Factors included in our first quarter 2020 Form 10-Q 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 15 Segment Reporting in the Notes To Consolidated Financial Statements included in this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a generally accepted accounting principles (GAAP) basis. In this Report, “PNC”, “we” or “us” refers to The PNC Financial Services Group, Inc. and its subsidiaries on a consolidated basis (except when referring to PNC as a public company, its common stock or other securities issued by PNC, which just refer to The PNC Financial Services Group, Inc.). References to The PNC Financial Services Group, Inc. or to any of its subsidiaries are specifically made where applicable.

Table 1: Consolidated Financial Highlights



Dollars in millions, except per share data Unaudited	Three months ended June 30						Six months ended June 30
Dollars in millions, except per share data Unaudited	2020			2019			2020			2019
Financial Results (a)
Revenue
Net interest income	$	2,527		$	2,498		$	5,038		$	4,973
Noninterest income	1,549			1,717			3,374			3,303
Total revenue	4,076			4,215			8,412			8,276
Provision for credit losses	2,463			180			3,377			369
Noninterest expense	2,515			2,611			5,058			5,189
Income (loss) from continuing operations before income taxes and noncontrolling interests	$	(902	)	$	1,424		$	(23	)	$	2,718
Income taxes (benefit) from continuing operations	(158		)	239			(38		)	451
Net income (loss) from continuing operations	$	(744	)	$	1,185		$	15		$	2,267
Income from discontinued operations before taxes	$	5,596		$	224		$	5,777		$	449
Income taxes from discontinued operations	1,197			35			1,222			71
Net income from discontinued operations	$	4,399		$	189		$	4,555		$	378
Net income	$	3,655		$	1,374		$	4,570		$	2,645
Less:
Net income attributable to noncontrolling interests	7			12			14			22
Preferred stock dividends (b)	55			55			118			118
Preferred stock discount accretion and redemptions	1			1			2			2
Net income attributable to common shareholders	$	3,592		$	1,306		$	4,436		$	2,503
Per Common Share
Basic earnings (loss) from continuing operations	$	(1.90	)	$	2.47		$	(.29	)	$	4.68
Basic earnings from discontinued operations	10.28			.42			10.60			.83
Total basic earnings	$	8.40		$	2.89		$	10.33		$	5.51
Diluted earnings (loss) from continuing operations	$	(1.90	)	$	2.47		$	(.29	)	$	4.67
Diluted earnings from discontinued operations	10.28			.41			10.59			.82
Total diluted earnings	$	8.40		$	2.88		$	10.32		$	5.49
Cash dividends declared per common share	$	1.15		$	.95		$	2.30		$	1.90
Effective tax rate from continuing operations (c)	17.5		%	16.8		%	165.2		%	16.6		%
Performance Ratios
Net interest margin (d)	2.52		%	2.91		%	2.67		%	2.94		%
Noninterest income to total revenue	38		%	41		%	40		%	40		%
Efficiency	62		%	62		%	60		%	63		%
Return on:
Average common shareholders’ equity	30.11		%	11.75		%	19.15		%	11.45		%
Average assets	3.21		%	1.39		%	2.11		%	1.36		%


(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)	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.


(c)	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.

(d)

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	June 30 2020			December 31 2019			June 30 2019
Balance Sheet Data (dollars in millions, except per share data)
Assets	$	458,978		$	410,295		$	405,761
Loans	$	258,236		$	239,843		$	237,215
Allowance for loan and lease losses (b)	$	5,928		$	2,742		$	2,721
Interest-earning deposits with banks (c)	$	50,233		$	23,413		$	18,362
Investment securities	$	98,493		$	86,824		$	88,303
Loans held for sale	$	1,443		$	1,083		$	1,144
Equity investments	$	4,943		$	5,176		$	4,817
Asset held for sale (d)				$	8,558		$	8,184
Mortgage servicing rights	$	1,067		$	1,644		$	1,627
Goodwill	$	9,233		$	9,233		$	9,221
Other assets	$	34,920		$	32,202		$	34,193
Noninterest-bearing deposits	$	99,458		$	72,779		$	69,867
Interest-bearing deposits	$	246,539		$	215,761		$	203,393
Total deposits	$	345,997		$	288,540		$	273,260
Borrowed funds	$	47,026		$	60,263		$	69,025
Allowance for unfunded lending related commitments (b)	$	662		$	318		$	291
Total shareholders’ equity	$	52,923		$	49,314		$	49,340
Common shareholders’ equity	$	48,928		$	45,321		$	45,349
Accumulated other comprehensive income	$	3,069		$	799		$	631
Book value per common share	$	115.26		$	104.59		$	101.53
Period-end common shares outstanding (in millions)	425			433			447
Loans to deposits	75		%	83		%	87		%
Common shareholders’ equity to total assets	10.7		%	11.0		%	11.2		%
Client Assets (in billions)
Discretionary client assets under management	$	151		$	154		$	162
Nondiscretionary client assets under administration	138			143			132
Total client assets under administration	289			297			294
Brokerage account client assets	53			54			52
Total client assets	$	342		$	351		$	346
Basel III Capital Ratios (e) (f)
Common equity Tier 1	11.3		%	9.5		%	9.7		%
Common equity Tier 1 fully implemented (g)	10.9		%	N/A			N/A
Tier 1 risk-based	12.4		%	10.7		%	10.9		%
Total capital risk-based (h)	14.9		%	12.7		%	12.8		%
Leverage	9.4		%	9.1		%	9.6		%
Supplementary leverage	9.3		%	7.6		%	8.0		%
Asset Quality
Nonperforming loans to total loans	.73		%	.68		%	.73		%
Nonperforming assets to total loans, OREO and foreclosed assets	.76		%	.73		%	.78		%
Nonperforming assets to total assets	.43		%	.43		%	.46		%
Net charge-offs to average loans (for the three months ended) (annualized)	.35		%	.35		%	.24		%
Allowance for loan and lease losses to total loans (i)	2.30		%	1.14		%	1.15		%
Allowance for credit losses to total loans (i) (j)	2.55		%	1.28		%	1.27		%
Allowance for loan and lease losses to nonperforming loans (i)	316		%	168		%	158		%
Accruing loans past due 90 days or more (in millions)	$	456		$	585		$	524


(a)	The Executive Summary and Consolidated Balance Sheet Review portions of this Financial Review provide information regarding items impacting the comparability of the periods presented.

(b)

Amounts at June 30, 2020 reflect 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. 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 $50.0 billion, $23.2 billion and $18.1 billion as of June 30, 2020, December 31, 2019 and June 30, 2019, respectively.

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

(d)

Represents our held for sale investment in BlackRock, Inc. In the second quarter of 2020, PNC divested its entire investment in BlackRock. Prior period BlackRock investment balances have been reclassified to the Asset held for sale line in accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations. Refer to Note 1 Accounting Policies and Note 2 Discontinued Operations for additional details.

(e)

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.


(f)	The June 30, 2020 ratios are calculated to reflect PNC's election to adopt the CECL optional five-year transition provision, unless noted differently.


(g)	The June 30, 2020 fully implemented CET1 ratio is calculated to reflect the full impact of CECL and excludes the benefits of the five-year transition provision.


(h)	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.


(i)	Ratios at June 30, 2020 reflect the changes in methodology due to the adoption of the CECL accounting standard on January 1, 2020, along with increases in reserves during 2020 due to the significantly adverse economic impact of the pandemic and its resulting effects on loan portfolio credit quality and loan growth.


(j)	Calculated as the Allowance for loan and lease losses plus the Allowance 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) pandemic and public health response to contain it led to a severe recession in the first and second quarters of 2020, after the US economy reached a peak in economic activity in February 2020. Most measures of economic activity contracted with enormous declines in consumer spending, employment, retail sales, business investment, industrial production and corporate profitability. The unemployment rate peaked at 14.7% in April before declining in June 2020 to a still extremely elevated level of 11.1%. While economic conditions have started to improve, including a rebound in consumer spending and job growth, economic activity remains far below its pre-recession level with real GDP not expected to return to its pre-recession level until 2022. There is still a great deal of uncertainty about the length and severity of the pandemic and the strength or reversal of the economic rebound.

The Federal Reserve has undertaken extraordinary efforts to combat the economic weakness, reducing the federal funds rate 1.5 percentage points in March to a range of 0.00% to 0.25%. The central bank put downward pressure on long-term rates by expanding its balance sheet and purchasing long-term Treasury and mortgage-backed securities (“quantitative easing”). The Federal Reserve has also implemented multiple programs to support the flow of credit to businesses, consumers, and state and local governments, including, for the first time, direct purchases of corporate bonds and of bank loans to small and medium-sized businesses. In addition, the federal government has authorized $2.4 trillion in federal spending to support household incomes and businesses, including the $1.8 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act.

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

PNC is committed to putting our resources to work to support our customers, communities and the broader financial system. PNC is participating in the Paycheck Protection Program (PPP) under the CARES Act and funded $13.7 billion of PPP loans during the second quarter of 2020. We granted short-term loan modifications for loan customers experiencing hardships through extensions, deferrals, partial payments and forbearance. In addition, we have temporarily halted the majority of consumer real estate related foreclosures, while we continue to monitor the situation. See the Troubled Debt Restructurings and Loan Modifications in the Credit Risk Management portion of the Risk Management section of this Financial Review for details on our commercial and consumer loan modifications.

Our retail branch operations remain temporarily modified and have begun a gradual return to business as usual as we continue to prioritize the safety and well-being of our customers and employees. A majority of our branch locations have remained open and offer full in-branch services by appointment only, as well as options for ATM and, in equipped branches, drive-up services. Additionally, digital and call center channels have experienced elevated customer activity.

See the Recent Regulatory Developments section of this Financial Review as well as the Recent Regulatory Developments section in our first quarter 2020 Form 10-Q for additional detail on the CARES Act and other governmental responses to the COVID-19 pandemic and its economic and financial impacts. See also Risk Factors in Part II, Item 1A of our first quarter 2020 Form 10-Q for a description of the associated risks.

Sale of Equity Investment in BlackRock, Inc.

During the second quarter, we divested our entire 22.4% investment in BlackRock. PNC completed the sale of 31.6 million shares of BlackRock common and preferred stock through a registered secondary offering on May 15, 2020, and BlackRock repurchased 2.65 million shares from PNC. Total proceeds from the sale were $14.2 billion in cash, net of $.2 billion in expenses. The after-tax gain on the sale of $4.3 billion, and donation expense and BlackRock's results for all periods presented, are reported as discontinued operations. After completion of the registered secondary offering and BlackRock's share repurchase, PNC retained 500,000 shares of BlackRock common stock. These shares were donated to the PNC Foundation on May 18, 2020. As a result of the sale and donation, PNC and its affiliates only hold shares of BlackRock stock in a fiduciary capacity for clients of PNC and its affiliates. See Note 2 Discontinued Operations for additional details on our results and cash flows for the three and six months ended June 30, 2020 and 2019.

Income Statement Highlights

Results from continuing operations was a net loss of $744 million, or $1.90 loss per diluted common share for the second quarter of 2020, a decrease of $1.9 billion, compared to net income from continuing operations of $1.2 billion, or $2.47 per diluted common share, for the second quarter of 2019, driven by a higher provision for credit losses.


•	Total revenue decreased $139 million, or 3%, to $4.1 billion.


•	Net interest income of $2.5 billion increased $29 million, or 1%.


•	Net interest margin decreased to 2.52% compared to 2.91% for the second quarter of 2019.


•	Noninterest income decreased $168 million, or 10%, to $1.6 billion.

•

Provision for credit losses of $2.5 billion, which was calculated under the Current Expected Credit Losses (CECL) accounting standard adopted January 1, 2020, increased $2.3 billion compared to the second quarter of 2019 reflecting the change in methodology together with the significantly adverse economic impact of the pandemic and its resulting effects on loan portfolio credit quality and loan growth.


•	Noninterest expense decreased $96 million, or 4%, to $2.5 billion.

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 June 30, 2020 and December 31, 2019. In comparison to December 31, 2019:


•	Total assets increased $48.7 billion, or 12%, to $459.0 billion.


•	Total loans increased $18.4 billion, or 8%, to $258.2 billion.


•	Total commercial loans grew $19.6 billion, or 12%, to $180.2 billion, reflecting PPP lending under the CARES Act and higher utilization of loan commitments driven by the economic impact of the pandemic on customer liquidity preferences.


•	Total consumer loans decreased $1.2 billion, or 2%, to $78.0 billion.


•	Investment securities increased $11.7 billion, or 13%, to $98.5 billion.


•	Interest-earning deposits with banks, primarily with the Federal Reserve Bank, increased $26.8 billion to $50.2 billion due to higher liquidity from deposit growth and proceeds from the sale of our equity investment in BlackRock.

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


•	Total deposits increased $57.5 billion, or 20%, to $346.0 billion due to growth in commercial deposits reflecting pandemic-related accumulation of liquidity by customers and higher consumer deposits driven by government stimulus payments and lower consumer spending.


•	Borrowed funds decreased $13.2 billion, or 22%, to $47.0 billion reflecting use of liquidity from deposit growth and proceeds from the sale of our equity investment in BlackRock.

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

Credit Quality Highlights

Credit quality metrics in the second quarter of 2020 reflected a challenging economic environment.


•	At June 30, 2020 compared to December 31, 2019:


•	Nonperforming assets of $2.0 billion increased $203 million, or 12%, driven by higher commercial nonperforming loans primarily related to industries economically impacted by the pandemic and the energy industry.


•	Overall loan delinquencies of $1.3 billion decreased $194 million, or 13%, reflecting CARES Act and other forbearance and extension treatments.


•	Net charge-offs were $236 million, or .35% of average loans on an annualized basis, in the second quarter of 2020 compared to $142 million, or .24%, for the second quarter of 2019. Commercial loan net charge-offs increased $75 million and consumer loan net charge-offs increased $19 million.

•

The allowance for credit losses increased to $6.6 billion, or 2.55% of total loans, at June 30, 2020, calculated under the CECL accounting standard adopted January 1, 2020, compared to $3.1 billion, or 1.28% of total loans, at December 31, 2019, due to the change in methodology together with the significantly adverse economic impact of the pandemic and its resulting effects on loan portfolio credit quality and loan growth.

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.

Capital Highlights

We further strengthened our already strong capital position.


•	The Basel III common equity Tier 1 (CET1) capital ratio increased to 11.3% at June 30, 2020 from 9.5% at December 31, 2019.

•

The June 30, 2020 ratio reflects a capital increase due to proceeds from the sale of our equity investment in BlackRock, changes under the Tailoring Rules, effective January 1, 2020 for PNC, 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 defined as the change in retained earnings at adoption plus or minus 25% of the change in CECL Allowance for credit losses (ACL) at the balance sheet date compared to CECL ACL at transition. The estimated CECL impact is added to CET1 capital through December 31, 2021, then phased-out over the following three years.


•	Common shareholders' equity increased 8% to $48.9 billion at June 30, 2020, compared to $45.3 billion at December 31, 2019.


•	The PNC board of directors declared a quarterly cash dividend on common stock payable on August 5, 2020 of $1.15 per share, consistent with the second quarter dividend paid on May 5, 2020.

•

We announced on March 16, 2020 a temporary suspension of our common stock repurchase program in conjunction with the Federal Reserve's effort to support the U.S. economy during the pandemic, and will continue the suspension through the third quarter of 2020, with the exception of share repurchases to offset the effects of employee benefit plan-related issuances as permitted by recent guidance from the Federal Reserve. The estimated amount of these repurchases in the third quarter of 2020 is $100 million, but the timing and amount of executed repurchases will be based on market conditions and other factors.

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 beginning in the fourth quarter of 2020, is subject to PNC meeting or exceeding a stress capital buffer established by the Federal Reserve Board in connection with the Federal Reserve Board's Comprehensive Capital Analysis and Review (CCAR) process. The Federal Reserve also has imposed limitations on capital distributions in the third quarter of 2020 by CCAR-participating bank holding companies and may extend these limitations, potentially in modified form. For additional information, see Capital Management in the Risk Management section in this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2019 Form 10-K.

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

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 views, as follow:

•

PNC’s baseline economic forecast is for an economic recovery in the second half of 2020 and into 2021, following a very severe but short recession in the first half of 2020. Consumers are increasing their spending and workers are returning to their job sites as states are gradually lifting restrictions on businesses and activities because of the COVID-19 pandemic; fiscal stimulus from the federal government is also supporting economic growth in mid-2020. After a significant contraction in real GDP, steep job losses, and a large increase in the unemployment rate earlier in the second quarter, economic growth has resumed and the labor market is improving.


•	In the baseline forecast, real GDP increases 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 2022, and growth is well above its long-term trend through 2023.


•	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 potential downside risks, including additional COVID-19 outbreaks, 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 businesses and activities are reimposed or expanded, the economy could fall back into recession. The potential expiration of fiscal stimulus is also a major downside risk. The longer the labor market recovery takes, the more it will damage consumer fundamentals and sentiment. This could make the recovery weaker. Similarly, weak near-term growth 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.

For the third quarter of 2020 compared to the second quarter of 2020, we expect:


•	Average loans to decline in the low-single digits percentage range;


•	Net interest income to be down approximately 1%;


•	Noninterest income to be down between 3% and 5%, including our expectation for lower other noninterest income;


•	Noninterest expense to be flat to down; and


•	Net loan charge-offs to be between $250 million and $350 million.

For the full year 2020, we expect total revenue and noninterest expense to each be down between 2% and 5% and we expect the 2020 effective tax rate to be in the low teens percentage range.

See the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our first quarter 2020 Form 10-Q and 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.

Results from continuing operations for the second quarter of 2020 was a net loss of $744 million, or $1.90 diluted loss per common share, a decrease of $1.9 billion compared to net income from continuing operations of $1.2 billion, or $2.47 per diluted common share, for the second quarter of 2019. For the first six months of 2020, net income from continuing operations was $15 million, or $0.29 diluted loss per common share, compared to $2.3 billion, or $4.67 per diluted common share, for the first six months of 2019.

The second quarter loss was driven by a $2.3 billion increase in the provision for credit losses, calculated under the CECL accounting standard adopted January 1, 2020 and reflecting the change in methodology together with the significantly adverse economic impact of the pandemic and its resulting effects on loan portfolio credit quality and loan growth.

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

Net Interest Income

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



	2020							2019
Three months ended June 30 Dollars in millions	Average Balances		Average Yields/ Rates		Interest Income/ Expense			Average Balances		Average Yields/ Rates		Interest Income/ Expense
Assets
Interest-earning assets
Investment securities	$	88,430	2.41	%	$	533		$	83,641	3.03	%	$	635
Loans	268,114		3.37	%	2,270			234,845		4.56	%	2,693
Interest-earning deposits with banks	34,600		0.10	%	9			13,469		2.38	%	80
Other	10,867		2.26	%	62			13,145		3.55	%	116
Total interest-earning assets/interest income	$	402,011	2.85	%	2,874			$	345,100	4.06	%	3,524
Liabilities
Interest-bearing liabilities
Interest-bearing deposits	$	241,445	.23	%	141			$	201,234	1.03	%	515
Borrowed funds	53,229		1.39	%	187			62,335		3.08	%	484
Total interest-bearing liabilities/interest expense	$	294,674	.44	%	328			$	263,569	1.51	%	999
Net interest margin/income (Non-GAAP)			2.52	%	2,546					2.91	%	2,525
Taxable-equivalent adjustments					(19		)					(27		)
Net interest income (GAAP)					$	2,527						$	2,498



	2020							2019
Six months ended June 30 Dollars in millions	Average Balances		Average Yields/ Rates		Interest Income/ Expense			Average Balances		Average Yields/ Rates		Interest Income/ Expense
Assets
Interest-earning assets
Investment securities	$	86,426	2.59	%	$	1,121		$	82,983	3.04	%	$	1,262
Loans	255,843		3.71	%	4,766			231,712		4.58	%	5,315
Interest-earning deposits with banks	26,085		0.50	%	65			14,238		2.41	%	171
Other	10,167		2.84	%	144			12,113		3.82	%	231
Total interest-earning assets/interest income	$	378,521	3.21	%	6,096			$	341,046	4.09	%	6,979
Liabilities
Interest-bearing liabilities
Interest-bearing deposits	$	228,390	.45	%	516			$	198,540	1.00	%	987
Borrowed funds	55,209		1.80	%	501			61,066		3.14	%	965
Total interest-bearing liabilities/interest expense	$	283,599	.71	%	1,017			$	259,606	1.50	%	1,952
Net interest margin/income (Non-GAAP)			2.67	%	5,079					2.94	%	5,027
Taxable-equivalent adjustments					(41		)					(54		)
Net interest income (GAAP)					$	5,038						$	4,973

(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 $29 million, or 1%, and $65 million, or 1%, for the second quarter and first six months of 2020, respectively, compared with the same periods in 2019. The increase in both comparisons was driven by lower rates on borrowings and deposits and higher average loans, balances held with the Federal Reserve Bank and securities, partially offset by lower yields on interest-earning assets. Net interest margin in the quarterly comparison decreased 39 basis points reflecting the full quarter impact of the 1.5% reduction in the federal funds rate by the Federal Reserve in March 2020 and related changes in other short-term rates.

Average investment securities increased $4.8 billion, or 6%, in the quarterly comparison and $3.4 billion, or 4% in the year-to-date comparison. The increase in both comparisons was primarily due to increases in agency residential mortgage-backed securities and commercial mortgage-backed securities, partially offset by a decrease in U.S. Treasury and government agency securities.

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

Average investment securities represented 22% of average interest-earning assets for the second quarter of 2020 and 23% for the first six months of 2020 compared to 24% for the same periods in 2019.

Average loans grew $33.3 billion, or 14%, and $24.1 billion, or 10%, in the quarterly and year-to-date comparisons, respectively. Loan growth was driven by an increase in both commercial and consumer loans. Average commercial loans increased by $29.2 billion and $19.2 billion in the respective comparisons, reflecting PPP lending under the CARES Act and higher utilization of loan commitments at the end of first quarter and extending through most of the second quarter 2020, driven by the economic impact of the pandemic on customer liquidity preferences.

Average consumer loans increased $4.1 billion and $4.9 billion in the quarterly and year-to-date comparisons, respectively. Growth in residential mortgage, auto, credit card, and unsecured installment loans was partially offset by declines in education loans due to runoff in the guaranteed government loan portfolio and home equity loan paydowns and payoffs that exceeded new origination volumes.

Average loans represented 67% and 68% of average interest-earning assets for the second quarter of 2020 and 2019, respectively, and 68% for the first six months of both 2020 and 2019.

Average interest-earning deposits with banks increased $21.1 billion and $11.8 billion in the respective quarterly and year-to-date comparisons, as average balances held with the Federal Reserve Bank increased due to higher liquidity from deposit growth and proceeds from the sale of our equity investment in BlackRock.

Average interest-bearing deposits grew $40.2 billion, or 20%, and $29.9 billion, or 15%, in the respective quarterly and year-to-date comparisons reflecting pandemic-related accumulation of customer liquidity as well as growth in commercial and consumer deposits and customers. In total, average interest-bearing deposits increased to 82% and 81% of average interest-bearing liabilities for the second quarter and first six months of 2020 compared to 76% for the same periods in 2019.

Average borrowed funds decreased $9.1 billion, or 15%, compared with the second quarter of 2019 and $5.9 billion, or 10%, compared with the first six months of 2019 primarily due to a decline in Federal Home Loan Bank (FHLB) borrowings and federal funds purchased reflecting use of liquidity from deposit growth and proceeds from the sale of our equity investment in BlackRock, partially offset by higher bank notes and senior and subordinated debt.

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 June 30									Six months ended June 30
					Change									Change
Dollars in millions	2020		2019		$			%		2020		2019		$			%
Noninterest income
Asset management	$	199	$	221	$	(22	)	(10	)%	$	400	$	433	$	(33	)	(8	)%
Consumer services	330		392		(62		)	(16	)%	707		763		(56		)	(7	)%
Corporate services	512		484		28			6	%	1,038		946		92			10	%
Residential mortgage	158		82		76			93	%	368		147		221			150	%
Service charges on deposits	79		171		(92		)	(54	)%	247		339		(92		)	(27	)%
Other	271		367		(96		)	(26	)%	614		675		(61		)	(9	)%
Total noninterest income	$	1,549	$	1,717	$	(168	)	(10	)%	$	3,374	$	3,303	$	71		2	%

Noninterest income as a percentage of total revenue was 38% and 41% for the second quarter of 2020 and 2019, respectively, and 40% for the first six months of both 2020 and 2019.

Asset management revenue declined due to the impact on fees of PNC's divestiture activity in 2019 of the recordkeeping retirement business and proprietary mutual funds. PNC's discretionary client assets under management decreased to $151 billion at June 30, 2020 from $162 billion at June 30, 2019, primarily as a result of our fourth quarter 2019 sale of PNC's proprietary mutual funds.

Consumer services revenue declined in the quarterly and year-to-date comparisons as a result of lower transaction volumes and activity reflecting lower consumer spending.

Service charges on deposits decreased in both comparisons due to lower transaction volumes and fees waived to assist customers as a result of the pandemic.

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

Corporate services revenue in the quarterly and year-to-date comparison increased due to higher revenue from commercial mortgage banking activities and asset-backed finance structuring fees and loan syndication fees, partially offset by lower merger and acquisition advisory fees.

Residential mortgage revenue increased in the quarterly comparison due to higher loan sales revenue from higher origination volumes. Revenue increases in the year-to-date comparison were attributable to higher residential mortgage servicing rights (RMSR) hedging gains and loan sales revenue.

The decrease in other noninterest income in the quarterly and year-to-date comparisons was primarily attributable to negative valuation adjustments of private equity investments and the second quarter 2019 gain on the sale of the retirement recordkeeping business, partially offset by higher capital markets-related revenue, and higher net securities gains in the year-to-date comparison.

Noninterest Expense

Table 4: Noninterest Expense



	Three months ended June 30									Six months ended June 30
					Change									Change
Dollars in millions	2020		2019		$			%		2020		2019		$			%
Noninterest expense
Personnel	$	1,373	$	1,365	$	8		1	%	$	2,742	$	2,779	$	(37	)	(1	)%
Occupancy	199		212		(13		)	(6	)%	406		427		(21		)	(5	)%
Equipment	301		298		3			1	%	588		571		17			3	%
Marketing	47		83		(36		)	(43	)%	105		148		(43		)	(29	)%
Other	595		653		(58		)	(9	)%	1,217		1,264		(47		)	(4	)%
Total noninterest expense	$	2,515	$	2,611	$	(96	)	(4	)%	$	5,058	$	5,189	$	(131	)	(3	)%

The decrease in noninterest expense in the quarterly and year-to-date comparisons reflected lower business activity related to the economic impact of the pandemic, including lower marketing expense and costs associated with business travel. In the year-to-date comparison, personnel expense declined due to variable costs associated with decreased business activity, partially offset by higher equipment expense related to technology investments.

Effective Income Tax Rate

The effective income tax rate from continuing operations was 17.5% in the second quarter of 2020 compared to 16.8% in the second quarter of 2019 and 165.2% in the first six months of 2019 compared to 16.6% in the same period in 2019.

Provision For Credit Losses

Table 5: Provision for Credit Losses



	Three months ended June 30				Six months ended June 30
Dollars in millions	2020		2019		2020		2019
Provision for credit losses
Loans and leases	$	2,220	$	180	$	3,172	$	369
Unfunded lending related commitments (a)	212				165
Investment securities	30				30
Other financial assets	1				10
Total provision for credit losses	$	2,463	$	180	$	3,377	$	369

(a) For the three and six months ended June 30, 2019, the provision for unfunded lending related commitments was included in the provision for loans and leases.

The provision for credit losses increased $2.3 billion and $3.0 billion for the second quarter and first six months of 2020, respectively, compared with the same periods in 2019. The provision in the 2020 periods was calculated under the CECL accounting standard adopted January 1, 2020 and the increase in both the quarterly and year-to-date comparison reflects the change in methodology together with the significantly adverse economic impact of the pandemic and its resulting effects on loan portfolio credit quality 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.

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

Net Income from Discontinued Operations

Table 6: Discontinued Operations

The following table summarizes net income from our investment in BlackRock, which is now reported as discontinued operations as a result of the divestiture.



	Three months ended June 30				Six months ended June 30

Dollars in millions	2020		2019		2020		2019
Net income from discontinued operations	$	4,399	$	189	$	4,555	$	378

For additional details on the divestiture of our equity investment in BlackRock, see the Executive Summary within this Financial Review and Note 2 Discontinued Operations in the Notes To Consolidated Financial Statements of this Report.

CONSOLIDATED BALANCE SHEET REVIEW

Table 7: Summarized Balance Sheet Data



	June 30			December 31			Change
Dollars in millions	2020			2019			$			%
Assets
Interest-earning deposits with banks	$	50,233		$	23,413		$	26,820		115	%
Loans held for sale	1,443			1,083			360			33	%
Asset held for sale (a)				8,558			(8,558		)	(100	)%
Investment securities	98,493			86,824			11,669			13	%
Loans	258,236			239,843			18,393			8	%
Allowance for loan and lease losses (b)	(5,928		)	(2,742		)	(3,186		)	(116	)%
Mortgage servicing rights	1,067			1,644			(577		)	(35	)%
Goodwill	9,233			9,233			—			—
Other	46,201			42,439			3,762			9	%
Total assets	$	458,978		$	410,295		$	48,683		12	%
Liabilities
Deposits	$	345,997		$	288,540		$	57,457		20	%
Borrowed funds	47,026			60,263			(13,237		)	(22	)%
Allowance for unfunded lending related commitments (b)	662			318			344			108	%
Other	12,345			11,831			514			4	%
Total liabilities	406,030			360,952			45,078			12	%
Equity
Total shareholders’ equity	52,923			49,314			3,609			7	%
Noncontrolling interests	25			29			(4		)	(14	)%
Total equity	52,948			49,343			3,605			7	%
Total liabilities and equity	$	458,978		$	410,295		$	48,683		12	%

(a)

Represents our held for sale investment in BlackRock. In the second quarter of 2020, PNC divested its entire investment in BlackRock. Prior period BlackRock investment balances have been reclassified to the Asset held for sale line in accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations. Refer to Note 1 Accounting Policies and Note 2 Discontinued Operations for additional details.


(b)	Amounts as of June 30, 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 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 7 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 June 30, 2020 and December 31, 2019.


•	Total assets increased as a result of higher interest-earning deposits with banks, primarily the Federal Reserve Bank, loan growth, and higher investment securities;


•	Total liabilities increased primarily due to deposit growth reflecting pandemic-related accumulation of liquidity by customers partially offset by lower FHLB borrowings and federal funds purchased;


•	Total equity increased as higher retained earnings driven by the gain on sale of our equity investment in BlackRock and higher accumulated other comprehensive income (AOCI) was partially offset by share repurchases, dividends on common and preferred stock, and the day-one effect of adopting the CECL accounting standard.

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

The ACL related to loans totaled $6.6 billion at June 30, 2020, an increase of $3.5 billion since December 31, 2019. The increase was attributable to the $.6 billion day-one CECL transition adjustment and a $3.3 billion provision for credit losses, partially offset by net charge-offs of $.4 billion. The provision reflects the significantly adverse economic impact of the pandemic and its resulting effects on loan portfolio credit quality and loan growth. See the following for additional information related to our ACL related to loans:


•	Allowance for Credit Losses in the Credit Risk Management section of this Financial Review, and


•	Note 1 Accounting Policies and Note 4 Loans and Related Allowance for Credit Losses in the Notes To Consolidated Financial Statements included in this Report.

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.

Loans

Table 8: Loans



	June 30		December 31		Change
Dollars in millions	2020		2019		$			%
Commercial
Commercial and industrial	$	144,335	$	125,337	$	18,998		15	%
Commercial real estate	28,763		28,110		653			2	%
Equipment lease financing	7,097		7,155		(58		)	(1	)%
Total commercial	180,195		160,602		19,593			12	%
Consumer
Home equity	24,879		25,085		(206		)	(1	)%
Residential real estate	22,469		21,821		648			3	%
Automobile	16,157		16,754		(597		)	(4	)%
Credit card	6,575		7,308		(733		)	(10	)%
Education	3,132		3,336		(204		)	(6	)%
Other consumer	4,829		4,937		(108		)	(2	)%
Total consumer	78,041		79,241		(1,200		)	(2	)%
Total loans	$	258,236	$	239,843	$	18,393		8	%

Commercial loan growth reflected the impact of PPP lending under the CARES Act and higher utilization of loan commitments driven by the economic impact of the pandemic on customer liquidity preferences. PNC funded $13.7 billion of PPP loans during the second quarter of 2020, which benefited over 73,000 of our customers. At June 30, 2020, we had $12.8 billion of PPP loans in our commercial loan balance.

For commercial and industrial 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 loans declined as new originations decreased due to the economic impact of the pandemic and lower customer spending. Residential mortgage loans increased as the low interest rate environment resulted in an increase in origination volumes primarily of nonconforming loans, which are loans that do not meet agency standards as a result of exceeding agency conforming loan limits.

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 4 Loans and Related Allowance for Credit Losses in the Notes To Consolidated Financial Statements included in this Report.

Investment Securities

Investment securities of $98.5 billion at June 30, 2020 increased $11.7 billion, or 13%, compared to December 31, 2019, due primarily to net purchases and an increase in the fair value of agency residential mortgage-backed and U.S. Treasury securities.

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

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. During the first half of 2020, $16.2 billion of debt securities were transferred from held to maturity to available for sale, including $49 million in the second quarter of 2020 pursuant to elections made under recently adopted accounting standards. See further discussion in Note 1 Accounting Policies.

Table 9: Investment Securities



	June 30, 2020				December 31, 2019				Ratings (a) as of June 30, 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	$	20,040	$	21,119	$	16,926	$	17,348	100	%
Agency residential mortgage-backed	55,630		57,480		50,266		50,984		100	%
Non-agency residential mortgage-backed	1,472		1,682		1,648		1,954		13	%	1	%	2	%	47	%	37	%
Agency commercial mortgage-backed	3,002		3,140		3,153		3,178		100	%
Non-agency commercial mortgage-backed (c)	4,134		4,039		3,782		3,806		85	%	1	%	5	%	1	%	8	%
Asset-backed (d)	5,312		5,368		5,096		5,166		91	%	2	%			6	%	1	%
Other (e)	5,512		5,839		4,580		4,771		67	%	23	%	8	%			2	%
Total investment securities (f)	$	95,102	$	98,667	$	85,451	$	87,207	96	%	1	%	1	%	1	%	1	%


(a)	Ratings percentages allocated based on amortized cost, net of allowance for securities.


(b)	Amortized cost is presented net of applicable allowance for securities of $32 million at June 30, 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 9 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 the allowance for securities 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 3 Investment Securities in the Notes To Consolidated Financial Statements for additional details regarding the methodology for determining the allowance and the amount of the allowance for investment securities, respectively.

The duration of investment securities was 2 years at June 30, 2020. We estimate that at June 30, 2020 the effective duration of investment securities was 2.5 years for an immediate 50 basis points parallel increase in interest rates and 1.5 years for an immediate 50 basis points parallel decrease in interest rates.

Based on expected prepayment speeds, the weighted-average expected maturity of the investment securities portfolio was 3.3 years at June 30, 2020 compared to 4.1 years at December 31, 2019.

Table 10: Weighted-Average Expected Maturities of Mortgage and Asset-Backed Debt Securities



June 30, 2020	Years
Agency residential mortgage-backed	3.0
Non-agency residential mortgage-backed	6.4
Agency commercial mortgage-backed	3.5
Non-agency commercial mortgage-backed	2.6
Asset-backed	2.1

Additional information regarding our investment securities is included in Note 3 Investment Securities and Note 12 Fair Value in the Notes To Consolidated Financial Statements included in this Report.

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

Funding Sources

Table 11: Details of Funding Sources



	June 30		December 31		Change
Dollars in millions	2020		2019		$			%
Deposits
Noninterest-bearing	$	99,458	$	72,779	$	26,679		37	%
Interest-bearing
Money market	62,688		54,115		8,573			16	%
Demand	85,379		71,692		13,687			19	%
Savings	77,252		68,291		8,961			13	%
Time deposits	21,220		21,663		(443		)	(2	)%
Total interest-bearing deposits	246,539		215,761		30,778			14	%
Total deposits	345,997		288,540		57,457			20	%
Borrowed funds
FHLB borrowings	8,500		16,341		(7,841		)	(48	)%
Bank notes and senior debt	27,704		29,010		(1,306		)	(5	)%
Subordinated debt	6,500		6,134		366			6	%
Other	4,322		8,778		(4,456		)	(51	)%
Total borrowed funds	47,026		60,263		(13,237		)	(22	)%
Total funding sources	$	393,023	$	348,803	$	44,220		13	%

Growth in both interest-bearing and noninterest-bearing deposits reflected pandemic-related accumulation of liquidity by commercial and consumer customers, including from government stimulus payments and lower consumer spending. In addition, there was a shift from interest-bearing to noninterest-bearing deposits in the first six months of 2020 that reflected the impact of the current interest rate environment.

Borrowed funds decreased due to lower FHLB borrowings, federal funds purchased included in other borrowed funds and bank notes and senior debt, reflecting the use of liquidity from deposit growth and proceeds from the sale of our equity investment in BlackRock.

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 8 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 was $52.9 billion at June 30, 2020, an increase of $3.6 billion compared to December 31, 2019. The increase resulted from net income of $4.6 billion driven by the gain on sale of our equity investment in BlackRock and higher AOCI of $2.3 billion, partially offset by common share repurchases of $1.3 billion, common and preferred stock dividends of $1.1 billion, and a day-one transition adjustment of $.7 billion for the adoption of the CECL accounting standard.

PNC announced on March 16, 2020 a temporary suspension of its common stock repurchase program in conjunction with the Federal Reserve's effort to support the U.S. economy during the pandemic, and will continue the suspension through the third quarter of 2020, with the exception of share repurchases to offset the effects of employee benefit plan-related issuances as permitted by recent guidance from the Federal Reserve. The estimated amount of these repurchases in the third quarter of 2020 is $100 million, but the timing and amount of executed repurchases will be based on market conditions and other factors.

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

BUSINESS SEGMENTS REVIEW

We have three reportable business segments:


•	Retail Banking


•	Corporate & Institutional Banking


•	Asset Management Group

Business segment results and a description of each business are included in Note 15 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 15, primarily due to the presentation in this Financial Review of business net interest income on a taxable-equivalent basis.

During the second quarter, we divested our entire 22.4% investment in BlackRock. See Note 2 Discontinued Operations in the Notes To Consolidated Financial Statements in this Report for additional information on the sale and details on our results and cash flows for the three and six months ended June 30, 2020 and 2019. Following the sale and donation, PNC and its affiliates only hold shares of BlackRock stock in a fiduciary capacity for clients of PNC and its affiliates.

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 81 in Note 15 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, 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 COVID-19 relief efforts for our customers. We have granted loan modifications through extensions, deferrals, and forbearance to assist our customers in need during the pandemic. See Loan Modifications in the Troubled Debt Restructurings and Loan Modifications section of Credit Risk Management for details on our commercial and consumer loan modifications.

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

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 12: Retail Banking Table



(Unaudited)
Six months ended June 30							Change
Dollars in millions, except as noted	2020			2019			$			%
Income Statement
Net interest income	$	2,846		$	2,725		$	121		4	%
Noninterest income	1,373			1,252			121			10	%
Total revenue	4,219			3,977			242			6	%
Provision for credit losses	1,206			209			997			477	%
Noninterest expense	3,036			2,995			41			1	%
Pretax earnings	(23		)	773			(796		)	(103	)%
Income taxes (benefit)	(1		)	184			(185		)	(101	)%
Earnings	$	(22	)	$	589		$	(611	)	(104	)%
Average Balance Sheet
Loans held for sale	$	804		$	498		$	306		61	%
Loans
Consumer
Home equity	$	22,763		$	22,804		$	(41	)	—	%
Residential real estate	18,104			15,388			2,716			18	%
Automobile	16,892			14,917			1,975			13	%
Credit card	6,948			6,291			657			10	%
Education	3,281			3,740			(459		)	(12	)%
Other consumer	2,494			2,123			371			17	%
Total consumer	70,482			65,263			5,219			8	%
Commercial	12,068			10,471			1,597			15	%
Total loans	$	82,550		$	75,734		$	6,816		9	%
Total assets	$	99,583		$	91,805		$	7,778		8	%
Deposits
Noninterest-bearing demand	$	35,680		$	30,956		$	4,724		15	%
Interest-bearing demand	45,102			42,607			2,495			6	%
Money market	22,903			26,283			(3,380		)	(13	)%
Savings	65,364			54,596			10,768			20	%
Certificates of deposit	11,947			12,543			(596		)	(5	)%
Total deposits	$	180,996		$	166,985		$	14,011		8	%
Performance Ratios
Return on average assets	(.04		)%	1.29		%
Noninterest income to total revenue	33		%	31		%
Efficiency	72		%	75		%

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



Six months ended June 30							Change
Dollars in millions, except as noted	2020			2019			$			%
Supplemental Noninterest Income Information
Consumer services	$	687		$	751		$	(64	)	(9	)%
Residential mortgage	$	368		$	147		$	221		150	%
Service charges on deposits	$	246		$	326		$	(80	)	(25	)%
Residential Mortgage Information
Residential mortgage servicing statistics (in billions, except as noted) (a)
Serviced portfolio balance (b)	$	122		$	124		$	(2	)	(2	)%
Serviced portfolio acquisitions	$	13		$	6		$	7		117	%
MSR asset value (b)	$	0.6		$	1.0		$	(.4	)	(40	)%
MSR capitalization value (in basis points) (b)	47			80			(33		)	(41	)%
Servicing income: (in millions)
Servicing fees, net (c)	$	80		$	95		$	(15	)	(16	)%
Mortgage servicing rights valuation, net of economic hedge	$	121		$	(2	)	$	123		*
Residential mortgage loan statistics
Loan origination volume (in billions)	$	7.4		$	4.6		$	2.8		61	%
Loan sale margin percentage	3.45		%	2.28		%
Percentage of originations represented by:
Purchase volume (d)	35		%	55		%
Refinance volume	65		%	45		%
Other Information (b)
Customer-related statistics (average)
Non-teller deposit transactions (e)	61		%	56		%
Digital consumer customers (f)	72		%	69		%
Credit-related statistics
Nonperforming assets (g)	$	1,037		$	1,074		$	(37	)	(3	)%
Net charge-offs - loans and leases	$	308		$	252		$	56		22	%
Other statistics
ATMs	9,058			9,072			(14		)	—	%
Branches (h)	2,256			2,321			(65		)	(3	)%
Brokerage account client assets (in billions) (i)	$	53		$	52		$	1		2	%

* - Not Meaningful


(a)	Represents mortgage loan servicing balances for third parties and the related income.


(b)	Presented as of June 30, except for customer-related statistics, which are averages for the six months ended, and net charge-offs, which are for the six 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 and $1.1 billion for June 30, 2020 and June 30, 2019, respectively.


(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 had a loss of $22 million in the first six months of 2020 compared with earnings of $589 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 partially offset by service charges on deposits and consumer services fees reflecting lower transaction volumes, fees waived to assist customers in the pandemic and lower consumer spending. The increase in noninterest income was also driven by lower negative derivative fair value adjustments related to Visa Class B common shares of $24 million for the first six months of 2020 compared with the negative adjustments of $47 million for the same period in 2019.

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

Provision for credit losses increased in the first six months of 2020 compared to the same period in 2019 reflecting changes in methodology due to the adoption of the CECL accounting standard, together with the significantly adverse economic impact of the pandemic.

Higher noninterest expense primarily resulted from higher personnel, equipment and branch-related expenses, partially offset by lower advertising and marketing.

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 six months 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 demand deposits. Savings and demand deposits also benefited from the impact of government stimulus payments and lower consumer spending due to the pandemic.

Retail Banking average total loans increased in the first six 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 and a robust refinance market driven by historically low interest rates.


•	Average auto loans increased primarily due to strong new indirect auto loan volumes, including in our Southeast and expansion markets.


•	Average commercial loans increased primarily due to PPP 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 unsecured installment loans increased primarily driven by growth in originations through digital channels.


•	Average education loans decreased driven by a decline in the runoff portfolio of government guaranteed education loans.


•	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 a digital high yield savings deposit product and opened our first solution center in Kansas City. 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 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. We continue to execute our national expansion strategy in 2020 including physical expansion into three new markets, Boston, Houston, and Nashville. The first solution centers in Houston and Nashville were opened successfully in July. The first solution center in Boston is on track to open later in the year.

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 also 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. We are also continually assessing our current branch network for optimization opportunities as usage of alternative channels has increased.


•	Approximately 72% of consumer customers used non-teller channels for the majority of their transactions in the first six months of 2020 compared with 69% for the same period in 2019.


•	Deposit transactions via ATM and mobile channels increased to 61% of total deposit transactions in the first six months of 2020 from 56% 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.

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

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 13: Corporate & Institutional Banking Table



(Unaudited)
Six months ended June 30							Change
Dollars in millions	2020			2019			$			%
Income Statement
Net interest income	$	2,030		$	1,815		$	215		12	%
Noninterest income	1,420			1,237			183			15	%
Total revenue	3,450			3,052			398			13	%
Provision for credit losses	2,043			171			1,872			1,095	%
Noninterest expense	1,395			1,384			11			1	%
Pretax earnings	12			1,497			(1,485		)	(99	)%
Income taxes	—			343			(343		)	(100	)%
Earnings	$	12		$	1,154		$	(1,142	)	(99	)%
Average Balance Sheet
Loans held for sale	$	550		$	338		$	212		63	%
Loans
Commercial
Commercial and industrial	$	128,139		$	111,186		$	16,953		15	%
Commercial real estate	26,848			26,098			750			3	%
Equipment lease financing	7,051			7,274			(223		)	(3	)%
Total commercial	162,038			144,558			17,480			12	%
Consumer	9			18			(9		)	(50	)%
Total loans	$	162,047		$	144,576		$	17,471		12	%
Total assets	$	185,878		$	160,551		$	25,327		16	%
Deposits
Noninterest-bearing demand	$	46,904		$	39,156		$	7,748		20	%
Interest-bearing demand	24,388			18,267			$	6,121		34	%
Money market	32,532			26,292			6,240			24	%
Other	8,706			5,830			2,876			49	%
Total deposits	$	112,530		$	89,545		$	22,985		26	%
Performance Ratios
Return on average assets	.01		%	1.45		%
Noninterest income to total revenue	41		%	41		%
Efficiency	40		%	45		%
Other Information
Consolidated revenue from: (a)
Treasury Management (b)	$	960		$	912		$	48		5	%
Capital Markets (b)	$	732		$	559		$	173		31	%
Commercial mortgage banking activities:
Commercial mortgage loans held for sale (c)	$	71		$	35		$	36		103	%
Commercial mortgage loan servicing income (d)	136			119			17			14	%
Commercial mortgage servicing rights valuation, net of economic hedge (e)	42			16			26			163	%
Total	$	249		$	170		$	79		46	%
Commercial mortgage servicing rights asset value (f)	$	490		$	630		$	(140	)	(22	)%
Average Loans by C&IB business
Corporate Banking	$	84,846		$	72,736		$	12,110		17	%
Real Estate	39,746			36,752			2,994			8	%
Business Credit	23,597			22,306			1,291			6	%
Commercial Banking	9,246			8,099			1,147			14	%
Other	4,612			4,683			(71		)	(2	)%
Total average loans	$	162,047		$	144,576		$	17,471		12	%
Credit-related statistics
Nonperforming assets (f) (g)	$	674		$	497		$	177		36	%
Net charge-offs - loans and leases	$	149		$	28		$	121		432	%


(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 June 30.


(g)	Primarily nonperforming loans of $.7 billion and $.5 billion at June 30, 2020 and June 30, 2019, respectively.

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

Corporate & Institutional Banking earned $12 million in the first six months of 2020 compared to $1.2 billion for the same period in 2019. Higher provision for credit losses was 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 deposits.

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

The first six months of 2020 experienced an increase in nonperforming assets and net loan and lease charge-offs compared to the same period in 2019 primarily related to industries economically impacted by the pandemic and the energy industry.

Noninterest expense increased in the comparison largely due to investments in strategic initiatives, mostly offset by lower variable costs associated with decreased business activity related to the pandemic.

Average loans increased in the comparison across all businesses primarily due to increased utilization of loan commitments driven by the economic impact of the pandemic on customer liquidity preferences and the impact of PPP loan originations:


•	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 increased utilization and new production, including PPP loan originations.


•	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 and multifamily agency warehouse lending, partially offset by project loan payoffs.


•	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 lower utilization.


•	Commercial Banking provides lending, treasury management and capital markets-related products and services to smaller corporations and businesses. Average loans for this business increased primarily driven by PPP loan 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 reflecting customers maintaining liquidity due to the economic impact of the pandemic. 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 13 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

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

management customer deposit balances. Compared with the first six months of 2019, treasury management revenue increased primarily due to higher deposit balances, partially offset by narrower interest rate spreads on the value of deposits.

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 underwriting fees and fees on customer-related derivatives activities.

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.

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

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 14: Asset Management Group Table



(Unaudited)
Six months ended June 30							Change
Dollars in millions, except as noted	2020			2019			$			%
Income Statement
Net interest income	$	177		$	138		$	39		28	%
Noninterest income	408			503			(95		)	(19	)%
Total revenue	585			641			(56		)	(9	)%
Provision for credit losses	42			(1		)	43			*
Noninterest expense	436			479			(43		)	(9	)%
Pretax earnings	107			163			(56		)	(34	)%
Income taxes	25			38			(13		)	(34	)%
Earnings	$	82		$	125		$	(43	)	(34	)%
Average Balance Sheet
Loans
Consumer
Residential real estate	$	2,511		$	1,758		$	753		43	%
Other consumer	4,013			4,289			(276		)	(6	)%
Total consumer	6,524			6,047			477			8	%
Commercial	869			741			128			17	%
Total loans	$	7,393		$	6,788		$	605		9	%
Total assets	$	7,880		$	7,204		$	676		9	%
Deposits
Noninterest-bearing demand	$	1,445		$	1,368		$	77		6	%
Interest-bearing demand	7,296			2,983			4,313			145	%
Money market	1,653			1,910			(257		)	(13	)%
Savings	7,297			5,799			1,498			26	%
Other	785			747			38			5	%
Total deposits	$	18,476		$	12,807		$	5,669		44	%
Performance Ratios
Return on average assets	2.10		%	3.50		%
Noninterest income to total revenue	70		%	78		%
Efficiency	75		%	75		%
Supplemental Noninterest Income Information
Asset management fees	$	400		$	433		$	(33	)	(8	)%
Other Information
Nonperforming assets (a) (b)	$	38		$	45		$	(7	)	(16	)%
Net charge-offs (recoveries) - loans and leases	$	(1	)	$	1		$	(2	)	(200	)%
Client Assets Under Administration (in billions) (a) (c)
Discretionary client assets under management	$	151		$	162		$	(11	)	(7	)%
Nondiscretionary client assets under administration	138			132			6			5	%
Total	$	289		$	294		$	(5	)	(2	)%
Discretionary client assets under management
Personal	$	94		$	99		$	(5	)	(5	)%
Institutional	57			63			(6		)	(10	)%
Total	$	151		$	162		$	(11	)	(7	)%

* - Not meaningful


(a)	As of June 30.


(b)	Primarily nonperforming loans of $38 million at June 30, 2020 and $45 million at June 30, 2019.


(c)	Excludes brokerage account client assets.

Asset Management Group earned $82 million in the first six months of 2020 compared with earnings of $125 million for the same period in 2019. Earnings decreased due to lower revenue and higher provision for credit losses, partially offset by lower noninterest expense.

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

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

Noninterest income decreased due to lower asset management fees resulting from the impact of 2019 divestiture activities and the 2019 gain on the sale of the retirement recordkeeping business.

Noninterest expense decreased in the comparison and was primarily attributable to the impact of the 2019 divestitures.

Provision for credit losses increased reflecting changes in methodology due to the adoption of the CECL accounting standard, together with the significantly adverse economic impact of the pandemic.

Asset Management Group’s discretionary client assets under management decreased in comparison to the prior year primarily attributable to 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 businesses provide 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.

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.

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

Loan Portfolio Characteristics and Analysis

Table 15: Details of Loans

In billions

We use several credit quality indicators, as further detailed in Note 4 Loans and Related Allowance for Credit Losses 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

Commercial and Industrial

Commercial and industrial loans comprised 56% and 52% of our total loan portfolio at June 30, 2020 and December 31, 2019, respectively. The majority of our commercial and industrial 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 and industrial 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 commercial and industrial portfolio is well-diversified as shown in the following table which provides a breakout by industry classification (classified based on the North American Industry Classification System (NAICS)).

Table 16: Commercial and Industrial Loans by Industry



	June 30, 2020				December 31, 2019
Dollars in millions	Amount		% of Total		Amount		% of Total
Commercial and industrial
Manufacturing	$	25,590	18	%	$	21,540	17	%
Retail/wholesale trade	21,747		15		21,565		17
Service providers	21,347		15		16,112		13
Real estate related (a)	14,634		10		12,346		10
Financial services	13,596		9		11,318		9
Health care	10,109		7		8,035		6
Transportation and warehousing	7,771		5		7,474		6
Other industries	29,541		21		26,947		22
Total commercial and industrial loans	$	144,335	100	%	$	125,337	100	%

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

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

Commercial and industrial loan increases at June 30, 2020 were driven by loan growth, including the impact of PPP lending under the CARES Act and higher utilization of loan commitments driven by the economic impact of the pandemic on customer liquidity preferences. See the Commercial High Impact Industries discussion within this Credit Risk Management for additional discussion of the impact of COVID-19 on our commercial portfolio and how we are evaluating and monitoring the portfolio for elevated levels of credit risk.

Commercial Real Estate

Commercial real estate loans comprised $17.5 billion related to commercial mortgages, $6.4 billion of real estate project loans and $4.9 billion of intermediate term financing loans as of June 30, 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 and industrial 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.

Table 17: Commercial Real Estate Loans by Geography and Property Type



	June 30, 2020				December 31, 2019
Dollars in millions	Amount		% of Total		Amount		% of Total
Geography (a)
California	$	4,524	16	%	$	4,393	16	%
Florida	2,863		10		2,557		9
Texas	1,847		6		1,717		6
Maryland	1,771		6		1,889		7
Virginia	1,577		5		1,547		6
Pennsylvania	1,351		5		1,310		4
Ohio	1,280		4		1,307		4
New Jersey	1,209		4		1,106		4
Illinois	999		4		1,001		4
North Carolina	961		3		1,015		4
Other	10,381		37		10,268		36
Total commercial real estate loans	$	28,763	100	%	$	28,110	100	%
Property Type
Multifamily	$	9,326	32	%	$	9,003	32	%
Office	7,785		27		7,641		27
Retail	3,615		13		3,702		13
Industrial/Warehouse	2,069		7		2,003		7
Hotel/Motel	1,923		7		1,813		7
Senior Housing	1,309		5		1,123		4
Mixed Use	905		3		943		3
Other	1,831		6		1,882		7
Total commercial real estate loans	$	28,763	100	%	$	28,110	100	%


(a)	Presented in descending order based on loan balances at June 30, 2020.

Commercial High Impact Industries

In light of the current economic circumstances related to COVID-19, we are evaluating and monitoring our entire commercial portfolio for elevated levels of credit risk; however, we believe the industry sectors most likely to be impacted by the effects of the pandemic 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


•	Consumer services: religious organizations, childcare


•	Leisure travel: cruise, airlines, other travel/transportation


•	Other impacted areas: shipping, senior living, specialty education

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


•	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 June 30, 2020, our outstanding loan balances in these industries totaled $19.6 billion, or approximately 8% of our total loan portfolio, while additional unfunded loan commitments totaled $9.2 billion. We continue to carefully monitor and manage these loans, and while we have not yet experienced material charge-offs in these industries, we expect to see charge-offs increase over time if the current economic trends continue.

In our non-real estate related category we have $11.5 billion in loans outstanding, $2.0 billion of which are funded through the PPP and guaranteed by the Small Business Administration (SBA) under the CARES Act. Nonperforming loans in these industries totaled $.1 billion, or .9% of total loans outstanding in the non-real estate related category, while criticized assets totaled $1.0 billion at June 30, 2020 with the greatest stress seen in the leisure recreation and leisure travel sectors.

Within the commercial real estate related category, we have $8.1 billion in loans outstanding which includes real estate projects of $4.8 billion. Nonperforming loans in this category totaled $.1 billion at June 30, 2020, or 1.2% of total loans outstanding in the commercial real estate related category, driven primarily by one real estate investment trust related loan. In this category, we continue to see substantial stress in the non-essential retail and hotel segments.

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 June 30, 2020, our outstanding loans in the oil and gas sector totaled $4.1 billion or 1.6% of total loans, which includes $.1 billion funded through the PPP and guaranteed by the SBA under the CARES Act. This portfolio comprised approximately $1.9 billion in the midstream and downstream sectors, $1.1 billion of oil services companies and $1.1 billion related to exploration and production companies. Of the oil services category, approximately $.2 billion is not asset-based or investment grade. Nonperforming loans in the oil and gas sector as of June 30, 2020 totaled $.2 billion, or 4.9% of total loans outstanding in this sector. Additional unfunded loan commitments in the oil and gas portfolio totaled $6.9 billion at June 30, 2020.

Consumer

Home Equity

Home equity loans comprised $13.3 billion of primarily variable-rate home equity lines of credit and $11.6 billion of closed-end home equity installment loans at June 30, 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 770.

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

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

Table 18: Home Equity Loans by Geography and by Lien Type



	June 30, 2020				December 31, 2019
Dollars in millions	Amount		% of Total		Amount		% of Total
Geography (a)
Pennsylvania	$	5,750	23	%	$	5,812	23	%
New Jersey	3,648		15		3,728		15
Ohio	2,845		11		2,899		12
Illinois	1,497		6		1,544		6
Florida	1,497		6		1,340		5
Michigan	1,408		6		1,371		5
Maryland	1,399		6		1,420		6
North Carolina	1,083		4		1,092		4
Kentucky	970		4		990		4
Virginia	827		3		810		3
Other	3,955		16		4,079		17
Total home equity loans	$	24,879	100	%	$	25,085	100	%
Lien type
1st lien			61	%			59	%
2nd lien			39				41
Total			100	%			100	%


(a)	Presented in descending order based on loan balances at June 30, 2020.

Residential Real Estate

Residential real estate loans primarily consisted of residential mortgage loans at both June 30, 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 771.

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

Table 19: Residential Real Estate Loans by Geography



	June 30, 2020				December 31, 2019
Dollars in millions	Amount		% of Total		Amount		% of Total
Geography (a)
California	$	7,618	34	%	$	6,800	31	%
New Jersey	1,786		8		1,779		8
Florida	1,567		7		1,580		7
Pennsylvania	1,096		5		1,113		5
Illinois	1,068		5		1,118		5
New York	990		4		1,008		5
Washington	923		4		646		3
Virginia	908		4		868		4
Maryland	895		4		923		4
North Carolina	848		4		877		4
Other	4,770		21		5,109		24
Total residential real estate loans	$	22,469	100	%	$	21,821	100	%


(a)	Presented in descending order based on loan balances at June 30, 2020.

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

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 June 30, 2020 with an average original LTV of 69% and an average original FICO score of 773. Our portfolio of originated nonconforming residential mortgage loans totaled $17.4 billion at June 30, 2020 with 40% located in California.

Automobile

Within auto loans, $14.5 billion resided in the indirect auto portfolio while $1.7 billion were in the direct auto portfolio as of June 30, 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 June 30, 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.

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 as we were accreting interest income over the expected life of the loans. In connection with the adoption of the CECL standard, nonperforming loans as of June 30, 2020 include purchased credit deteriorated (PCD) loans which meet the criteria to be classified as nonperforming. See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in this Report for details on our nonaccrual policies and additional information related to the adoption of the CECL standard, including the discontinuation of purchased impaired loan accounting.

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

The following table presents a summary of nonperforming assets by major category.

Table 20: Nonperforming Assets by Type



	June 30, 2020			December 31, 2019			Change
Dollars in millions	June 30, 2020			December 31, 2019			$			%
Nonperforming loans
Commercial	$	758		$	501		$	257		51	%
Consumer (a)	1,118			1,134			(16		)	(1	)%
Total nonperforming loans	1,876			1,635			241			15	%
OREO and foreclosed assets	79			117			(38		)	(32	)%
Total nonperforming assets	$	1,955		$	1,752		$	203		12	%
TDRs included in nonperforming loans	$	860		$	843		$	17		2	%
Percentage of total nonperforming loans	46		%	52		%
Nonperforming loans to total loans	.73		%	.68		%
Nonperforming assets to total loans, OREO and foreclosed assets	.76		%	.73		%
Nonperforming assets to total assets	.43		%	.43		%
Allowance for loan and lease losses to nonperforming loans (b)	316		%	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 June 30, 2020 reflects the changes in ALLL methodology due to the adoption of the CECL accounting standard on January 1, 2020, along with increases in reserves during 2020 due to the significantly adverse economic impact of the pandemic, and its resulting effects on loan portfolio credit quality and loan growth.

The increase in nonperforming assets at June 30, 2020 was primarily attributable to higher nonperforming commercial loans in industries economically impacted by the pandemic and the energy industry, partially offset by the decline in OREO and foreclosed assets due to asset sales and the suspension of pandemic-related foreclosures. See the discussions of Commercial High Impact Industries and the Oil and Gas Loan Portfolio within this Credit Risk Management section for further detail on these industries.

The following table provides details on the change in nonperforming assets for the six months ended June 30, 2020 and 2019.

Table 21: Change in Nonperforming Assets



In millions	2020			2019
January 1	$	1,752		$	1,808
New nonperforming assets	849			695
Charge-offs and valuation adjustments	(249		)	(334		)
Principal activity, including paydowns and payoffs	(243		)	(193		)
Asset sales and transfers to loans held for sale	(48		)	(40		)
Returned to performing status	(106		)	(86		)
June 30	$	1,955		$	1,850

As of June 30, 2020, approximately 81% of total nonperforming loans were secured by collateral which lessened reserve requirements and is expected to reduce credit losses. As of June 30, 2020, commercial nonperforming loans were carried at approximately 78% of their unpaid principal balance, due to charge-offs recorded to date, before consideration of the ALLL.

Within consumer nonperforming loans, residential real estate TDRs comprised 77% and 79% of total residential real estate nonperforming loans at June 30, 2020 and December 31, 2019, respectively, while home equity TDRs comprised 45% and 49% of home equity nonperforming loans at June 30, 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 related hardships and meet certain criteria under the CARES Act are not identified as TDRs. Refer to the Troubled Debt Restructurings and Loan Modifications discussion in this Credit Risk Management section for more information on the treatment of loan modifications under the CARES Act.

At June 30, 2020, our largest nonperforming asset was $99 million in the Real Estate and Rental and Leasing industry and the ten largest individual nonperforming assets represented 18% of total nonperforming assets.

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

Loan Delinquencies

We regularly monitor the level of loan delinquencies and believe these levels may be a key indicator of credit quality in our loan portfolio. 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 June 30, 2020 also include PCD loans. Amounts exclude loans held for sale, while amounts as of December 31, 2019 also excluded purchased impaired loans.

Pursuant to the interagency guidance issued in April 2020 and in connection with the credit reporting rules from the CARES Act, the delinquency status of loans modified due to COVID-19 related hardships are being reported as of June 30, 2020 in alignment with the rules set forth for banks to report delinquency status to the credit agencies. These rules require that COVID-19 related loan modifications be reported as follows: (i) if current at the time of modification, the loan remains current throughout the modification period, (ii) if delinquent at the time of modification and the borrower was not made current as part of the modification, the loan maintains its reported as delinquent status during the modification period, or (iii) if delinquent at the time of modification and the borrower was made current as part of the modification or became current during the modification period, the loan is reported as current. As a result, certain loans modified due to COVID-19 related hardships are not being reported as past due as of June 30, 2020 based on the contractual terms of the loan, even where borrowers may not be making payments on their loans during the modification period. See Recent Regulatory Developments in Item 2 of our first quarter 2020 Form 10-Q for more information on the CARES Act and the related interagency guidance.

Table 22: Accruing Loans Past Due (a)



	Amount									% of Total Loans Outstanding
	June 30 2020		December 31 2019		Change					June 30 2020		December 31 2019
Dollars in millions	June 30 2020		December 31 2019		$			%		June 30 2020		December 31 2019
Early stage loan delinquencies
Accruing loans past due 30 to 59 days	$	590	$	661	$	(71	)	(11	)%	.23	%	.28	%
Accruing loans past due 60 to 89 days	264		258		6			2	%	.10	%	.11	%
Total early stage loan delinquencies	854		919		(65		)	(7	)%	.33	%	.38	%
Late stage loan delinquencies
Accruing loans past due 90 days or more	456		585		(129		)	(22	)%	.18	%	.24	%
Total accruing loans past due	$	1,310	$	1,504	$	(194	)	(13	)%	.51	%	.63	%


(a)	Past due loan amounts include government insured or guaranteed loans of $.5 billion at June 30, 2020 and $.6 billion at December 31, 2019.

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 that meet certain criteria under the CARES Act are not categorized as TDRs.

Table 23: Summary of Troubled Debt Restructurings (a)



	June 30 2020		December 31 2019		Change
Dollars in millions	June 30 2020		December 31 2019		$			%
Commercial	$	404	$	361	$	43		12	%
Consumer	1,181		1,303		(122		)	(9	)%
Total TDRs	$	1,585	$	1,664	$	(79	)	(5	)%
Nonperforming	$	860	$	843	$	17		2	%
Accruing (b)	725		821		(96		)	(12	)%
Total TDRs	$	1,585	$	1,664	$	(79	)	(5	)%


(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.

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

Nonperforming TDRs represented approximately 46% and 52% of total nonperforming loans at June 30, 2020 and December 31, 2019, respectively, and 54% and 51% of total TDRs at June 30, 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 1 Accounting Policies and 4 Loans and Related Allowance for Credit Losses in the Notes to Consolidated Financial Statements in this Report for additional information on TDRs. For additional information on the CARES Act, see the Recent Regulatory Developments section in Item 2 of our first quarter 2020 Form 10-Q.

Loan Modifications

PNC is working to provide relief and flexibility to our customers, many of whom are suffering hardships as a result of COVID-19 and the resulting economic downturn, through a variety of solutions, including granting loan and lease modifications. We continue to monitor the success rates and delinquency status of our loan and lease modification programs to assess their effectiveness in serving our borrowers’ and servicing customers’ needs while mitigating credit losses.

Due to the passage of the CARES Act, loan modifications meeting certain criteria qualify the loan for relief from TDR treatment. These criteria include (i) the loan modification results from a COVID-19 related hardship, (ii) the borrower is no more than 30 days past due as of December 31, 2019, and (iii) the loan modification does not result in a permanent reduction of interest or principal. Loans that do not meet the criteria for TDR relief under the CARES Act may be evaluated under interagency guidance, which allows banks to not designate certain short-term modifications as TDRs for borrowers with COVID-19 hardships who were current on their payments prior to the modification. Loans that are permanently modified or receive longer term modifications under programs involving a change to loan terms due to customer financial difficulty and PNC concessions are evaluated for TDR accounting.

Refer to the Loan Delinquencies discussion in this Credit Risk Management section for information on how these hardship related loan modification are reported from a delinquency perspective as of June 30, 2020. For additional information on the CARES Act and interagency guidance, see the Recent Regulatory Developments section in Item 2 of our first quarter 2020 Form 10-Q.

The impact of modifications made through one of the hardship programs was considered within the modified loans’ quarterly reserve determination. See the Allowance for Credit Losses discussion within this Credit Risk Management for additional information.

Commercial Loan and Lease Modifications Under COVID-19 Hardship Relief Programs

PNC is granting temporary loan and lease modifications to our commercial clients in the form of principal and/or interest deferrals, covenant waivers and other types of modifications including term extensions. Initial principal and/or interest deferrals are being offered with terms typically up to 90 days, and we are analyzing and making decisions on these modifications based on each individual borrower’s situation. Modifications made in the form of covenant waivers include modifying financial covenants, waiving covenants currently in default, amending reporting requirements and waiving the receipt of required reporting.

The following table presents a summary as of June 30, 2020 of the principal and/or interest deferral modifications PNC has granted due to COVID-19 related hardships in the commercial portfolio. As of June 30, 2020, the unpaid principal balance on these modifications represented approximately 4% of the total commercial loan portfolio. In some cases, individual loans have been modified more than once. Regardless of the number of modifications granted on a loan, each loan is counted only once in Table 24.

Table 24: Unpaid Principal Balance of Commercial Loans with a COVID-19 Related Principal/Interest Deferral Modification (a)



	Number of Accounts	Unpaid Principal Balance
As of June 30, 2020 - Dollars in millions	Number of Accounts	Unpaid Principal Balance
Commercial
Commercial and industrial	12,534	$	4,939
Commercial real estate	407	1,544
Equipment lease financing	2,774	285
Total commercial	15,715	$	6,768

(a) Amounts include loan modifications that qualify for TDR accounting totaling $40 million.

Consumer Loan Modifications Under Hardship Relief Programs

We are also granting temporary loan and line modifications for our consumer loan customers through extensions, deferrals, partial payments and forbearance. The consumer loan modifications are inclusive of all hardship related modifications granted in 2020. In addition, we have temporarily halted the majority of consumer real estate related foreclosures, while we continue to monitor the situation.

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

Our consumer loan modification programs are in response to current customer hardships and the primary offerings by loan class in the reported period are described in the following matrix.



Modification Type	Home Equity	Residential Real Estate	Automobile	Credit Card	Education	Other Consumer
Extensions - Defers current payments and moves them to the end of the loan by extending the loan's maturity or the extension re-amortizes the remaining principal balance.	a		a		a	a
Forbearance - Payment is deferred and moved to the end of the forbearance period. Balance is due at the end of the forbearance period, but payment options may be available to repay the forborne amount, including for many borrowers an option to delay payment until the payoff or maturity of the loan.		a
Minimum payment suspension - Reduces required minimum payment to $0 for a period of time.				a
New loan terms - Sets loan terms to a new monthly payment of principal and interest based on customer's financial situation.	a	a
Reduced payments - Allows the customer to make a lower payment for a period of time, with any deferred balance being moved to the end of the loan term or extending the loan's maturity.	a		a			a
Repayment plan - Allows reduced payment and interest rate for a period of time.				a

Interest continues to accrue during the forbearance, extension or deferral period of the loan modification unless it was designated as a nonperforming TDR or on nonaccrual at the date of modification. The method of collection of the accrued interest is dependent on the product type and modification offered.

The following table presents a summary as of June 30, 2020 of the hardship related loan modifications PNC has granted in our consumer loan portfolio during 2020. As of June 30, 2020, the unpaid principal balance on these modifications represented approximately 8% of the total consumer loan portfolio. In some cases, there have been multiple modifications of individual loans. Regardless of the number of modifications granted on a loan, each loan is counted only once in Table 25.

Table 25: Unpaid Principal Balance of Consumer Loan Modifications Under Hardship Relief Programs (a)



As of June 30, 2020 - Dollars in millions	Number of Accounts	Unpaid Principal Balance
Consumer
Home equity	14,245	$	1,403
Residential real estate (b)	5,619	1,620
Automobile	83,933	2,044
Credit card	39,235	266
Education (b)	84,615	579
Other consumer	14,671	204
Total consumer loan modifications	242,318	$	6,116

(a) Amounts include loan modifications that qualify for TDR accounting totaling $348 million.

(b) Includes government insured or guaranteed loans totaling $208 million and $433 million in the Residential real estate and Education loan classes, respectively.

The initial consumer loan modifications granted in response to the COVID-19 outbreak and the surrounding economic circumstances were short-term and temporary in nature and generally meet the qualifications for relief from TDR treatment under the CARES Act. However, in response to customers' hardships that have extended beyond the initial relief period, PNC continues to offer options to customers which include both temporary and permanent modifications that may reduce the payment, the interest rate or extend the term and/or defer principal and interest payments. Permanent modifications would not meet the qualifications for relief from TDR treatment under the CARES Act.

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

Allowance 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's 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 Loan and Lease Losses

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. We also consider the impact of prepayments and amortization on contractual maturity in our expected loss estimates. We use historical data, current borrower characteristics and forecasted economic variables in quantitative 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 contractual cash flows adjusted for prepayments and market interest rates. We then determine the net present value of expected cash flows and ALLL 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 ALLL related to recovery of amounts previously charged-off are evaluated through an analysis of the fair value of the collateral less costs to sell.

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

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 allowance 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, including the impact of COVID-19 hardship related loan modifications,


•	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 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.

Table 26: Allowance for Credit Losses by Loan Class (a)



	June 30, 2020						December 31, 2019
Dollars in millions	Allowance Amount		Total Loans		% of Total Loans		Allowance Amount		Total Loans		% of Total Loans
Allowance for loans and lease losses
Commercial
Commercial and industrial	$	2,834	$	144,335	1.96	%	$	1,489	$	125,337	1.19	%
Commercial real estate	382		28,763		1.33	%	278		28,110		.99	%
Equipment lease financing	164		7,097		2.31	%	45		7,155		.63	%
Total commercial	3,380		180,195		1.88	%	1,812		160,602		1.13	%
Consumer
Home equity	382		24,879		1.54	%	87		25,085		.35	%
Residential real estate	50		22,469		.22	%	258		21,821		1.18	%
Automobile	450		16,157		2.79	%	160		16,754		.95	%
Credit card	1,010		6,575		15.36	%	288		7,308		3.94	%
Education	151		3,132		4.82	%	17		3,336		.51	%
Other consumer	505		4,829		10.46	%	120		4,937		2.43	%
Total consumer	2,548		78,041		3.26	%	930		79,241		1.17	%
Total	5,928		$	258,236	2.30	%	2,742		$	239,843	1.14	%
Allowance for unfunded lending related commitments	662						318
Allowance for credit losses	$	6,590					$	3,060
Allowance for credit losses to total loans					2.55	%					1.28	%
Commercial					2.18	%					1.33	%
Consumer					3.41	%					1.18	%


(a)	Excludes allowances for investment securities and other financial assets.

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

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

Table 27: Loan Charge-Offs and Recoveries



Six months ended June 30	Gross Charge-offs		Recoveries		Net Charge-offs / (Recoveries)			% of Average Loans (Annualized)
Dollars in millions	Gross Charge-offs		Recoveries		Net Charge-offs / (Recoveries)			% of Average Loans (Annualized)
2020
Commercial
Commercial and industrial	$	190	$	31	$	159		.23	%
Commercial real estate	—		4		(4		)	(.03	)%
Equipment lease financing	15		4		11			.31	%
Total commercial	205		39		166			.19	%
Consumer
Home equity	19		29		(10		)	(.08	)%
Residential real estate	2		8		(6		)	(.05	)%
Automobile	153		64		89			1.06	%
Credit card	154		17		137			3.96	%
Education	10		4		6			.37	%
Other consumer	75		9		66			2.69	%
Total consumer	413		131		282			.72	%
Total	$	618	$	170	$	448		.35	%
2019
Commercial
Commercial and industrial	$	75	$	31	$	44		.07	%
Commercial real estate	5		5		—			—
Equipment lease financing	4		4		—			—
Total commercial	84		40		44			.06	%
Consumer
Home equity	41		36		5			.04	%
Residential real estate	4		7		(3		)	(.03	)%
Automobile	112		55		57			.77	%
Credit card	132		14		118			3.78	%
Education	13		4		9			.49	%
Other consumer	56		8		48			2.10	%
Total consumer	358		124		234			.64	%
Total	$	442	$	164	$	278		.24	%

Total net charge-offs increased $170 million, or 61%, for the first six 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 4 Loans and Related Allowance for Credit Losses 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

34 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 June 30, 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 $346.0 billion at June 30, 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 June 30, 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 $61.6 billion and securities available for sale totaling $97.1 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 $23.4 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 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 8 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 28: Senior and Subordinated Debt



In billions	2020
January 1	$	35.1
Issuances	3.5
Calls and maturities	(5.9		)
Other	1.5
June 30	$	34.2

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 June 30, 2020, PNC Bank had $21.6 billion of notes outstanding under this program of which $16.6 billion were senior bank notes and $5.0 billion were subordinated bank notes.

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 June 30, 2020, our unused secured borrowing capacity at the FHLB-Pittsburgh and the Federal Reserve Bank totaled $80.8 billion. 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 the pandemic. For additional information on these special liquidity facilities see the Recent Regulatory Developments section of the first quarter 2020 Form 10-Q.

PNC Bank has the ability to offer up to $10.0 billion of its commercial paper to provide additional liquidity. As of June 30, 2020, there were no issuances outstanding under this program.

From time to time, the parent company may make capital contributions to PNC Bank. In the second quarter of 2020, a capital contribution to PNC Bank of $2.5 billion was made by the parent company.

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

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 June 30, 2020, available parent company liquidity totaled $17.7 billion which includes proceeds from our second quarter 2020 sale of our equity investment in BlackRock. See Note 2 Discontinued Operations in the Notes To Consolidated Financial Statements of this Report for additional information.

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 $1.8 billion at June 30, 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 June 30, 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.

Parent company senior and subordinated debt outstanding totaled $11.5 billion and $9.8 billion at June 30, 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 9 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.

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

Table 29: Credit Ratings for PNC and PNC Bank



	June 30, 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

On July 10, 2020, Fitch downgraded PNC's senior debt rating from A+ to A in conjunction with the finalization of ratings methodology changes for Category II and III banking organizations. The ratings downgrade was solely a function of criteria changes and does not reflect a change in Fitch’s current or expected view of PNC’s credit fundamentals. No impact to PNC or its businesses is expected as a result of this downgrade. Additionally, PNC Bank’s senior unsecured and subordinated debt ratings were affirmed at A+ and A, respectively.

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.

PNC announced on March 16, 2020 a temporary suspension of our common stock repurchase program in conjunction with the Federal Reserve's effort to support the U.S. economy during the pandemic, and will continue the suspension through the third quarter of 2020, with the exception of share repurchases to offset the effects of employee benefit plan-related issuances as permitted by recent guidance from the Federal Reserve. The estimated amount of these repurchases in the third quarter of 2020 is $100 million, but the timing and amount of executed repurchases will be based on market conditions and other factors.

We paid dividends on common stock of $.5 billion, or $1.15 per common share, during the second quarter of 2020. The PNC Board of Directors declared a quarterly cash dividend on common stock payable on August 5, 2020 of $1.15 per share, consistent with the second quarter dividend paid on May 5, 2020. In April 2020, PNC submitted its capital plan 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.

On June 25, 2020, the Federal Reserve released the results of its supervisory stress tests conducted as part of the 2020 CCAR/DFAST process, as well as the results of additional sensitivity analysis it conducted to account for the uncertainty presented by the COVID-19 pandemic. Based on the results of the Federal Reserve's supervisory stress tests, PNC's Stress Capital Buffer (SCB), which is scheduled to go into effect on October 1, 2020, was set at 2.5%, the minimum level permitted under applicable rules. For additional information on the SCB and its potential impact on PNC's capital distributions, see the Recent Regulatory Developments section of the Financial Review of our first quarter 2020 Form 10-Q.

Following completion of the 2020 CCAR/DFAST process, the Federal Reserve announced certain limitations on the capital distributions of any CCAR-participating bank holding company (including PNC) during the third quarter of 2020. Under these limitations, PNC and other CCAR-participating firms, absent Federal Reserve approval, are permitted to make only the following capital distributions during the third quarter of 2020:


•	Pay common dividends at the same per share level as paid during the second quarter of 2020, provided that the amount does not exceed the average of the firm's net income for the four preceding calendar quarters;


•	Purchase common shares in an amount that equals the amount of share issuances related to expensed employee compensation; and


•	Make scheduled payments on additional Tier 1 and Tier 2 capital instruments.

The Federal Reserve has indicated that it reserves the right to extend these limitations to additional quarters, potentially in modified form.

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

In June 2020, the Federal Reserve also announced that all 2020 CCAR-participating firms (including PNC) would be required to conduct an additional round of company and supervisory stress tests in the fourth quarter of 2020 using updated baseline and stressed scenarios that better incorporate the current, expected and potential effects of the COVID-19 pandemic. The Federal Reserve has indicated it will provide updated supervisory scenarios to firms by September 30, 2020, and stress test projections and updated capital plans will be due within 45 days of distribution of the supervisory scenarios. It is unclear at this time how the Federal Reserve expects to utilize the results of this additional 2020 stress test or what, if any, impact this additional round of stress testing may have on the SCB or authorized capital distributions of participating firms.

Table 30: Basel III Capital



Dollars in millions	Basel III June 30, 2020 (a)			June 30, 2020 (Fully Implemented) (estimated) (b)
Common equity Tier 1 capital
Common stock plus related surplus, net of treasury stock	$	873		$	873
Retained earnings	46,381			44,986
Goodwill, net of associated deferred tax liabilities	(9,025		)	(9,025		)
Other disallowed intangibles, net of deferred tax liabilities	(197		)	(197		)
Other adjustments/(deductions)	(75		)	(78		)
Common equity Tier 1 capital	$	37,957		$	36,559
Additional Tier 1 capital
Preferred stock plus related surplus	3,995			3,995
Other adjustments/(deductions)	—			—
Tier 1 capital	$	41,952		$	40,554
Additional Tier 2 capital
Qualifying subordinated debt	4,100			4,100
Trust preferred capital securities	40			—
Eligible credit reserves includable in Tier 2 capital	4,192			4,192
Total Basel III capital	$	50,284		$	48,846
Risk-weighted assets
Basel III standardized approach risk-weighted assets (c)	$	336,990		$	335,615
Average quarterly adjusted total assets	$	446,741		$	445,343
Supplementary leverage exposure (d)	$	452,000		$	522,843
Basel III risk-based capital and leverage ratios (a)(e)
Common equity Tier 1	11.3		%	10.9		%
Tier 1	12.4		%	12.1		%
Total (f)	14.9		%	14.6		%
Leverage (g)	9.4		%	9.1		%
Supplementary leverage ratio (d)(h)	9.3		%	7.8		%


(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 the optional five-year transition provision.


(c)	Basel III standardized approach weighted-assets are based on the Basel III standardized approach rules and include credit and market risk-weighted assets.


(d)	As of June 30, 2020 the Supplementary leverage exposure and Supplementary leverage ratio reflects the temporary exclusions of U.S. Treasury securities and deposits at Federal Reserve Banks.


(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)	The Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure, which takes into account both on balance sheet assets as well as certain off-balance sheet items, including loan commitments and potential future exposure under derivative contracts.

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, 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

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

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 permitting banks to delay 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 estimated CECL impact is added to CET1 capital 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 the Recent Regulatory Developments section and Item 2 Risk Management of our first quarter 2020 Form 10-Q.

In April 2020, in response to the economic conditions caused by COVID-19, the Federal Reserve issued an interim final rule that revises, on a temporary basis, the calculation of supplementary leverage exposure (the denominator of the supplementary leverage ratio) by bank holding companies to exclude the on-balance sheet amounts of U.S. Treasury securities and deposits at Federal Reserve Banks. The rule was effective as of April 14, 2020 and will remain in effect through March 31, 2021. See additional discussion of this interim final rule in the Recent Regulatory Developments section of our first quarter 2020 Form 10-Q.

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 June 30, 2020 capital levels were aligned with them.

At June 30, 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 our first quarter 2020 Form 10-Q 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.

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

Sensitivity results and market interest rate benchmarks for the second quarter of 2020 and 2019 follow.

Table 31: Interest Sensitivity Analysis



	Second Quarter 2020		Second 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	3.2	%	1.9	%
Effect on net interest income in second year from gradual interest rate change over the preceding 12 months of:
100 basis point increase	11.2	%	4.8	%
Duration of Equity Model (a)
Base case duration of equity (in years)	(8.1	)	(4.7	)
Key Period-End Interest Rates
One-month LIBOR	.16	%	2.40	%
Three-month LIBOR	.30	%	2.32	%
Three-year swap	.23	%	1.74	%


(a)	Given the inherent limitations in certain of these measurement tools and techniques, results become less meaningful as interest rates approach zero. Senior management approved the suspension of the 100bps decrease in rate change 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 32 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.

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 32: Net Interest Income Sensitivity to Alternative Rate Scenarios



	June 30, 2020
	PNC Economist		Market Forward		Slope Flattening
First year sensitivity	(.5	)%	1.0	%	(1.0	)%
Second year sensitivity	.4	%	1.4	%	(3.1	)%

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 31 and 32. These simulations assume that as assets and liabilities mature, they are replaced or repriced at then current market rates.

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

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

Table 33: Alternate Interest Rate Scenarios: One Year Forward

The second 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.

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 six 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.

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

Customer related trading revenue was $185 million for the six months ended June 30, 2020 compared to $135 million for the same period in 2019. For the quarterly period, customer related trading revenue was $114 million for the second quarter of 2020 compared to $87 million in 2019. The increase was primarily due to higher derivative sales to clients mainly due to interest rate and oil price volatility.

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 34: Equity Investments Summary



	June 30 2020		December 31 2019		Change
Dollars in millions	June 30 2020		December 31 2019		$			%
Tax credit investments	$	2,141	$	2,218	$	(77	)	(3	)%
Private equity and other	2,802		2,958		(156		)	(5	)%
Total	$	4,943	$	5,176	$	(233	)	(5	)%

Tax Credit Investments

Included in our equity investments are direct tax credit investments and equity investments held by consolidated entities. These tax credit investment balances included unfunded commitments totaling $.8 billion and $1.0 billion at June 30, 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 June 30, 2020 and December 31, 2019, respectively. As of June 30, 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.

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 June 30, 2020 per share closing price of $193.17 for a Visa Class A common share, the estimated value of our total investment in the Class B common shares was approximately $1.1 billion 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 June 30, 2020 and June 30, 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.

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

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, Note 6 Fair Value and Note 13 Financial Derivatives in our Notes To Consolidated Financial Statements in our 2019 Form 10-K and in Note 12 Fair Value and Note 13 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

Since the outbreak of COVID-19, the U.S. Government has taken a wide variety of actions in order to aid businesses and consumers financially impacted by COVID-19, facilitate the orderly functioning of financial markets and assist banking organizations in being able to meet the credit and other banking needs of their customers and communities. The following provides an overview of the most significant recent COVID-related actions affecting U.S. banking organizations, such as PNC. See Item 2 Recent Regulatory Developments and Item 1A Risk Factors in our first quarter 2020 Form 10-Q for a description of the risks presented by COVID-19.

CARES Act Related Developments

In July 2020, President Trump signed an extension of the PPP, which provides forgivable loans to small and medium-sized businesses affected by the pandemic. The extension authorizes the SBA to continue to accept PPP loan applications until August 8, 2020. PNC Bank continues to participate in the PPP with our focus shifting to the loan forgiveness process.

Capital, Capital Planning and Liquidity

In June 2020, the Federal Reserve announced the results of its stress tests for 2020 and additional sensitivity analyses that the agency conducted in light of COVID-19. See the Liquidity and Capital Management portion of the Risk Management section in this Item 2 for a discussion of PNC’s results and capital actions. Concurrently, the Federal Reserve announced that it will, among other actions, require banks like PNC to suspend share repurchases (except those to offset the effects of employee benefit plan-related issuances), resubmit their capital plans, and conduct additional stress analyses later this year as economic conditions evolve. These capital distribution limitations will apply for the third quarter of 2020, and may be extended by the Federal Reserve.

In May 2020, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued an interim final rule that modifies the agencies’ LCR rule to support banking organizations’ participation in the Federal Reserve’s Money Market Mutual Fund Liquidity Facility (MMLF) and the PPP Liquidity Facility (PPPLF). The interim final rule neutralizes the LCR impact associated with the non-recourse funding provided by these facilities. Separately, in June 2020, the FDIC issued a final rule to mitigate the deposit insurance assessment effects of participating in the PPP, the PPPLF, and the MMLF. Among other changes, the final rule removes the effect of participation in the PPP and borrowings under the PPPLF on various risk measures used to calculate the assessment rate of an insured depository institution like PNC Bank, and provides an offset to an insured depository institution’s assessment for the increase to its assessment base attributable to participation in the PPP and MMLF. The final rule will be applied to assessments starting in the second quarter of 2020. Similarly, in June 2020, the OCC issued an interim final rule that will reduce assessments due to be paid to the OCC on September 30, 2020. Under the interim final rule, assessments due will be calculated using the lower of the bank’s assets on December 31, 2019 or June 30, 2020.

In May 2020, the Federal Reserve, FDIC, and OCC issued an interim final rule that permits depository institutions like PNC Bank to elect to exclude, until March 31, 2021, U.S. Treasury securities and deposits at Federal Reserve Banks from its supplementary leverage exposure for purposes of calculating the institution’s supplementary leverage ratio (SLR). If a depository institution elects to exclude these items from its SLR calculation, it must obtain the approval of its primary federal banking regulator before making capital distributions as long as the exclusion is in effect. In light of PNC Bank’s strong SLR, PNC Bank has not elected to take advantage of this interim final rule.

In May 2020, the Federal Reserve and FDIC extended, until September 29, 2021, the submission date for the next resolution plans for Category II and Category III organizations, such as PNC, under section 165(d) of the Dodd-Frank Act.

In April 2020, the Federal Reserve announced temporary actions aimed at increasing the availability of intraday credit extended by Federal Reserve Banks on both a collateralized and uncollateralized basis. Among other actions, the Federal Reserve suspended uncollateralized intraday credit limits (net debit caps), waived overdraft fees for institutions that are eligible for the primary credit program, and suspended two collections of information that are used to calculate net debit caps. These temporary actions are currently scheduled to remain in effect until September 30, 2020.

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

In April 2020, the Federal Reserve also amended Regulation D (reserve requirements for depository institutions) to eliminate the regulatory six-per-month limit on certain types of transfers from the savings deposits, which may result in certain changes to how depository institutions (such as PNC Bank) classify and report deposit balances.

Other Developments

The regulatory agencies also recently finalized a number of non-COVID-19-related rules. For example, in July 2020, the CFPB issued a final rule rescinding the mandatory underwriting provisions of its 2017 payday lending rule that required lenders to make certain underwriting determinations prior to issuing payday and other covered loans, but leaving intact the payments provisions of the 2017 rule. In connection with issuing this final rule, the CFPB also issued a statement indicating that it did not intend to take supervisory or enforcement action to enforce the application of the final rule to loans with an original principal balance that exceeds $58,300.

In June 2020, the Federal Reserve, FDIC, OCC, SEC, and the Commodity Futures Trading Commission (CFTC) finalized a rule modifying the Volcker rule’s prohibition on banking entities investing in or sponsoring hedge funds or private equity funds (referred to under the rule as covered funds). The final rule streamlines several aspects of the covered funds portion of the rule; allows banking organizations to offer and sponsor venture capital funds and a wider array of loan-related funds; and permits banking entities to offer financial services to, and engage in other activities with, covered funds that do not raise concerns that the Volcker rule was intended to address. The final rule will be effective October 1, 2020.

In June 2020, the Federal Reserve, FDIC, OCC, Farm Credit Administration, and the Federal Housing Finance Agency finalized amendments to the swap margin rule. Under the final rule, entities that are part of the same banking organization-like PNC Bank and its affiliates-generally will no longer be required to hold a specific amount of initial margin for uncleared swaps with each other (known as inter-affiliate swaps), unless the aggregate initial margin calculation amount for such swaps exceeds 15 percent of the covered swap entity’s tier 1 capital. Additionally, among other changes, the final rule allows swap entities to amend legacy swaps to replace references to the London Inter-bank Offered Rate (LIBOR) or other reference rates that are expected to be discontinued without triggering margin exchange requirements. Separately, the agencies issued an interim final rule that extends the compliance date under the swap margin rule for entities like PNC to September 1, 2021.

In June 2020, the OCC released a notice of proposed rulemaking (NPR) to update its rules for national bank and federal savings association activities and operations. Among other significant changes, the NPR would incorporate and streamline interpretations addressing permissible derivatives activities and codify interpretations that permit national banks to engage in certain tax equity finance transactions and participate in payment systems. Separately, the OCC also released an advance notice of proposed rulemaking (ANPR) seeking public comment on how the OCC’s rules could be modified to better facilitate the provision of banking products and services through digital means. Comments for the NPR and ANPR are due on August 3, 2020.

With respect to consumer financial protection matters, in June 2020, the Consumer Financial Protection Bureau (CFPB) issued an

interim final rule amending its Regulation X to facilitate the offering of COVID-19 related loss mitigation options to mortgage

borrowers. The amendments temporarily permit mortgage servicers like PNC Bank to offer certain loss mitigation options without

obtaining a complete loss mitigation application. Mortgage servicers may offer such loss mitigation options to borrowers participating

in COVID-related payment forbearance programs or experiencing financial hardships due to COVID-19.

In June 2020, the U.S. Supreme Court held that the Dodd-Frank Act provision that allows the President to remove the CFPB’s single director only for inefficiency, neglect, or malfeasance violates the separation of powers in the U.S. Constitution, but otherwise left the structure and powers of the CFPB intact. In response, the CFPB in July 2020 issued a ratification through its now removable-at-will director of the large majority of its existing regulations and certain other regulatory actions taken from January 4, 2012 through June 30, 2020.

In May 2020, the CFPB issued a final rule covering remittance transfers, which allows certain banks and credit unions to continue to

provide estimates of the exchange rate and certain remittance fees under certain conditions.

In May 2020, the OCC finalized amendments to its regulations implementing the Community Reinvestment Act (CRA), which requires the agencies to assess a bank’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods. The final rule significantly revamps for national banks like PNC Bank how the OCC defines what qualifies for CRA credit, where such activity must be conducted to receive credit, how CRA performance is measured, and how CRA performance is documented and reported. The final rule is effective October 1, 2020, with a compliance date of January 1, 2023, for PNC Bank. The OCC has indicated it will conduct a future rulemaking to set the quantitative levels of CRA activity that a national bank would have to achieve to receive a Satisfactory or Outstanding CRA rating, either within a particular assessment area or overall.

In May 2020, the OCC finalized a rule to address the legal uncertainty regarding the effect of a transfer on a loan’s permissible interest rate caused by the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC. The rule clarifies that when a national bank like PNC Bank sells, assigns, or otherwise transfers a loan, interest permissible before the transfer continues to be permissible after the transfer. In June 2020, the FDIC issued a final regulation for state banks that mirrors the OCC’s rule.

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

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 and second quarters 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), 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 upon origination or acquisition.

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 these 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). Our RSFP credit loss estimates are sensitive to the shape and severity of the scenarios used and weights assigned to them.

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 June 30, 2020 were designed to address the impact of the continuing COVID-19 crisis on the macroeconomic environment, based on our best estimate as of June 30, 2020. We used a number of economic variables, with the largest drivers being GDP and the unemployment rate measures. Using a weighted average of our four economic forecast scenarios, we estimated at June 30, 2020 that annualized GDP contracts 6.2% in the third quarter of 2020, finishing the year down 4.9% from

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

fourth quarter 2019 levels and recovering to pre-recession peak levels by the first quarter of 2022. Additionally, the quarterly unemployment rate falls to 9.5% in the fourth quarter of 2020, from a peak of 13.6% in the second quarter, with the labor market continuing to recover in 2021 and 2022. We believe that the economic assumptions used in the scenarios for the second quarter of 2020 sufficiently reflect the life of loan losses in the current portfolio, and based on these assumptions we do not anticipate any substantial reserve builds related to our current portfolio during the remainder of 2020.

For internal analytical purposes, we considered what our capital ratios would be if we had an ACL at December 31, 2020 equal to the Federal Reserve's estimated nine quarter credit losses for PNC under the 2020 CCAR supervisory severely adverse scenario of $12.1 billion, essentially adding $5.5 billion in reserves over the next two quarters. This analysis resulted in a CET1 ratio of approximately 10.0% at December 31, 2020, a level well above 7.0%, which is our regulatory minimum of 4.5% plus our Stress Capital Buffer of 2.5%. This scenario was not our expectation at June 30, 2020 and does not reflect our current expectation, nor does it capture all the potential unknown variables that would likely arise through the remainder of 2020, but it provides an approximation of a possible outcome under hypothetical severe conditions. 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 3 Investment Securities and Note 4 Loans and Related Allowance for Credit Losses 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 5 Loan Sale and Servicing Activities and Variable Interest Entities and Note 9 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.

INTERNAL CONTROLS AND DISCLOSURE CONTROLS AND PROCEDURES

As of June 30, 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 June 30, 2020, and that there has been no change in PNC’s internal control over financial reporting that occurred during the second 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 updated in our first quarter 2020 Form 10-Q and our 2019 Form 10-K.

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

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 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:

–


–	In the baseline forecast, real GDP increases 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 2022, and growth is well above its long-term trend through 2023.


–	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 potential downside risks, including additional COVID-19 outbreaks, 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 businesses and activities are reimposed or expanded, the economy could fall back into recession. The potential expiration of fiscal stimulus is also a major downside risk. The longer the labor market recovery takes, the more it will damage consumer fundamentals and sentiment. This could make the recovery weaker. Similarly, weak near-term growth 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 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

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

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.

•

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 first quarter 2020 Form 10-Q and elsewhere in this Report, including in the Risk Factors and Risk Management sections and the Legal Proceedings and Commitments Notes of the Notes To Consolidated Financial Statements in these reports. In particular, our forward-looking statements are subject to risks and uncertainties related to the COVID-19 pandemic and the resulting governmental and societal responses. 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.

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

CONSOLIDATED INCOME STATEMENT

THE PNC FINANCIAL SERVICES GROUP, INC.



Unaudited	Three months ended June 30					Six months ended June 30
In millions, except per share data	2020			2019		2020			2019
Interest Income
Loans	$	2,257		$	2,672	$	4,737		$	5,274
Investment securities	527			629		1,109			1,249
Other	71			196		209			402
Total interest income	2,855			3,497		6,055			6,925
Interest Expense
Deposits	141			515		516			987
Borrowed funds	187			484		501			965
Total interest expense	328			999		1,017			1,952
Net interest income	2,527			2,498		5,038			4,973
Noninterest Income
Asset management	199			221		400			433
Consumer services	330			392		707			763
Corporate services	512			484		1,038			946
Residential mortgage	158			82		368			147
Service charges on deposits	79			171		247			339
Other	271			367		614			675
Total noninterest income	1,549			1,717		3,374			3,303
Total revenue	4,076			4,215		8,412			8,276
Provision For Credit Losses	2,463			180		3,377			369
Noninterest Expense
Personnel	1,373			1,365		2,742			2,779
Occupancy	199			212		406			427
Equipment	301			298		588			571
Marketing	47			83		105			148
Other	595			653		1,217			1,264
Total noninterest expense	2,515			2,611		5,058			5,189
Income (loss) from continuing operations before income taxes and noncontrolling interests	(902		)	1,424		(23		)	2,718
Income taxes (benefit) from continuing operations	(158		)	239		(38		)	451
Net income (loss) from continuing operations	(744		)	1,185		15			2,267
Income from discontinued operations before taxes	5,596			224		5,777			449
Income taxes from discontinued operations	1,197			35		1,222			71
Net income from discontinued operations	4,399			189		4,555			378
Net income	3,655			1,374		4,570			2,645
Less: Net income attributable to noncontrolling interests	7			12		14			22
Preferred stock dividends	55			55		118			118
Preferred stock discount accretion and redemptions	1			1		2			2
Net income attributable to common shareholders	$	3,592		$	1,306	$	4,436		$	2,503
Earnings Per Common Share
Basic earnings (loss) from continuing operations	$	(1.90	)	$	2.47	$	(0.29	)	$	4.68
Basic earnings from discontinued operations	10.28			.42		10.60			.83
Total basic earnings	$	8.40		$	2.89	$	10.33		$	5.51
Diluted earnings (loss) from continuing operations	$	(1.90	)	$	2.47	$	(0.29	)	$	4.67
Diluted earnings from discontinued operations	10.28			.41		10.59			.82
Total diluted earnings	$	8.40		$	2.88	$	10.32		$	5.49
Average Common Shares Outstanding
Basic	426			451		428			453
Diluted	426			452		428			454

See accompanying Notes To Consolidated Financial Statements.

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

THE PNC FINANCIAL SERVICES GROUP, INC.



Unaudited In millions	Three months ended June 30						Six months ended June 30
Unaudited In millions	2020			2019			2020			2019
Net income (loss) from continuing operations	$	(744	)	$	1,185		$	15		$	2,267
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	620						2,107
Net unrealized gains (losses) on securities with an allowance for credit losses	(82		)				(89		)
Net unrealized gains (losses) on non-OTTI securities				694						1,333
Net unrealized gains (losses) on OTTI securities										9
Net unrealized gains (losses) on cash flow hedge derivatives	12			254			797			354
Pension and other postretirement benefit plan adjustments	(17		)	(84		)	(5		)	61
Other	2			5			10			10
Other comprehensive income (loss) from continuing operations, before tax and net of reclassifications into Net income	535			869			2,820			1,767
Income tax benefit (expense) from continuing operations related to items of other comprehensive income	(125		)	(205		)	(665		)	(407		)
Other comprehensive income (loss) from continuing operations, after tax and net of reclassifications into Net income	410			664			2,155			1,360
Net income from discontinued operations	4,399			189			4,555			378
Other comprehensive income (loss) from discontinued operations, before tax and net of reclassifications into Net income	182			(35		)	148			(6		)
Income tax benefit (expense) from discontinued operations related to items of other comprehensive income	(41		)	7			(33		)	2
Other comprehensive income (loss) from discontinued operations, after tax and net of reclassifications into Net income	141			(28		)	115			(4		)
Other comprehensive income (loss), after tax and net of reclassifications into Net income	551			636			2,270			1,356
Comprehensive income	4,206			2,010			6,840			4,001
Less: Comprehensive income attributable to noncontrolling interests	7			12			14			22
Comprehensive income attributable to PNC	$	4,199		$	1,998		$	6,826		$	3,979

See accompanying Notes To Consolidated Financial Statements.

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

CONSOLIDATED BALANCE SHEET

THE PNC FINANCIAL SERVICES GROUP, INC.



Unaudited	June 30 2020			December 31 2019
In millions, except par value
Assets
Cash and due from banks	$	6,338		$	5,061
Interest-earning deposits with banks	50,233			23,413
Loans held for sale (a)	1,443			1,083
Asset held for sale (b)				8,558
Investment securities – available for sale	97,052			69,163
Investment securities – held to maturity	1,441			17,661
Loans (a)	258,236			239,843
Allowance for loan and lease losses (c)	(5,928		)	(2,742		)
Net loans	252,308			237,101
Equity investments	4,943			5,176
Mortgage servicing rights	1,067			1,644
Goodwill	9,233			9,233
Other (a)	34,920			32,202
Total assets	$	458,978		$	410,295
Liabilities
Deposits
Noninterest-bearing	$	99,458		$	72,779
Interest-bearing	246,539			215,761
Total deposits	345,997			288,540
Borrowed funds
Federal Home Loan Bank borrowings	8,500			16,341
Bank notes and senior debt	27,704			29,010
Subordinated debt	6,500			6,134
Other (d)	4,322			8,778
Total borrowed funds	47,026			60,263
Allowance for unfunded lending related commitments (c)	662			318
Accrued expenses and other liabilities	12,345			11,831
Total liabilities	406,030			360,952
Equity
Preferred stock (e)
Common stock ($5 par value, Authorized 800 shares, issued 542 shares)	2,712			2,712
Capital surplus	16,284			16,369
Retained earnings	44,986			42,215
Accumulated other comprehensive income	3,069			799
Common stock held in treasury at cost: 117 and 109 shares	(14,128		)	(12,781		)
Total shareholders’ equity	52,923			49,314
Noncontrolling interests	25			29
Total equity	52,948			49,343
Total liabilities and equity	$	458,978		$	410,295


(a)	Our consolidated assets included the following for which we have elected the fair value option: Loans held for sale of $1.2 billion, Loans of $1.0 billion and Other assets of $.1 billion at June 30, 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)

Represents our held for sale investment in BlackRock. In the second quarter of 2020, PNC divested its entire investment in BlackRock. See Note 2 Discontinued Operations for additional information. Prior period BlackRock investment balances have been reclassified to the Asset held for sale line in accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations. Refer to Note 1 Accounting Policies and Note 2 Discontinued Operations for additional details.

(c)

Amount as of June 30, 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. Refer to Note 1 Accounting Policies in this Report for additional detail on the adoption of this standard.


(d)	Our consolidated liabilities at June 30, 2020 and December 31, 2019 included Other borrowed funds of less than $.1 billion and $.1 billion, respectively, for which we have elected the fair value option.


(e)	Par value less than $.5 million at each date.

See accompanying Notes To Consolidated Financial Statements.

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

CONSOLIDATED STATEMENT OF CASH FLOWS

THE PNC FINANCIAL SERVICES GROUP, INC.



Unaudited In millions	Six months ended June 30
Unaudited In millions	2020			2019
Operating Activities
Net income	$	4,570		$	2,645
Adjustments to reconcile net income to net cash provided (used) by operating activities
Provision for credit losses	3,377			369
Depreciation and amortization	712			579
Deferred income taxes	(2,501		)	106
Net gains on sales of securities	(222		)	(32		)
Changes in fair value of mortgage servicing rights	728			502
Gain on sale of BlackRock	(5,740		)
Undistributed earnings of BlackRock	(174		)	(220		)
Net change in
Trading securities and other short-term investments	(266		)	1,465
Loans held for sale	(170		)	(116		)
Other assets	(1,675		)	(2,286		)
Accrued expenses and other liabilities	3,161			812
Other	531			(180		)
Net cash provided (used) by operating activities	$	2,331		$	3,644
Investing Activities
Sales
Securities available for sale	$	12,055		$	2,817
Net proceeds from sale of BlackRock	14,225
Loans	597			520
Repayments/maturities
Securities available for sale	10,110			4,795
Securities held to maturity	38			1,155
Purchases
Securities available for sale	(31,593		)	(11,141		)
Securities held to maturity	(44		)	(292		)
Loans	(173		)	(735		)
Net change in
Federal funds sold and resale agreements	460			4,538
Interest-earning deposits with banks	(26,820		)	(7,469		)
Loans	(19,886		)	(11,169		)
Other	(206		)	(502		)
Net cash provided (used) by investing activities	$	(41,237	)	$	(17,483	)

(continued on following page)

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

CONSOLIDATED STATEMENT OF CASH FLOWS

THE PNC FINANCIAL SERVICES GROUP, INC.

(continued from previous page)



Unaudited In millions	Six Months Ended June 30
Unaudited In millions	2020			2019
Financing Activities
Net change in
Noninterest-bearing deposits	$	26,673		$	(3,992	)
Interest-bearing deposits	30,778			9,514
Federal funds purchased and repurchase agreements	(5,888		)	1,546
Federal Home Loan Bank borrowings	(6,300		)	6,875
Other borrowed funds	1,486			(119		)
Sales/issuances
Federal Home Loan Bank borrowings	9,060			12,000
Bank notes and senior debt	3,487			4,438
Other borrowed funds	304			771
Common and treasury stock	34			40
Repayments/maturities
Federal Home Loan Bank borrowings	(10,601		)	(11,000		)
Bank notes and senior debt	(5,897		)	(2,350		)
Subordinated debt				(700		)
Other borrowed funds	(318		)	(777		)
Acquisition of treasury stock	(1,523		)	(1,613		)
Preferred stock cash dividends paid	(118		)	(118		)
Common stock cash dividends paid	(994		)	(868		)
Net cash provided (used) by financing activities	$	40,183		$	13,647
Net Increase (Decrease) In Cash And Due From Banks And Restricted Cash	1,277			(192		)
Net cash provided by discontinued operations	14,299			159
Net cash provided (used) by continuing operations	(13,022		)	(351		)
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	$	6,338		$	5,416
Cash and due from banks and restricted cash
Cash and due from banks at end of period (unrestricted cash)	$	5,977		$	5,416
Restricted cash	361
Cash and due from banks and restricted cash at end of period	$	6,338		$	5,416
Supplemental Disclosures
Interest paid	$	913		$	1,905
Income taxes paid	$	528		$	217
Income taxes refunded	$	9		$	7
Leased assets obtained in exchange for new operating lease liabilities	$	59		$	236
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	$	542		$	256
Transfer from trading securities to investment securities	$	289
Transfer from loans to foreclosed assets	$	43		$	90

See accompanying Notes To Consolidated Financial Statements.

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

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 (CECL) standard and our discontinued operation as a result of the disposal of our equity investment in BlackRock. As a result of this disposal, BlackRock’s historical results of operations are reported as discontinued operations in our consolidated financial statements for all periods presented. The updated policies impacted by these changes are included in this Note 1. 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.

Discontinued Operations

A disposal of an asset or business that meets the criteria for held for sale classification is reported as discontinued operations when the disposal represents a strategic shift that has had, or will have, a major effect on our operating results. We report an asset as held for sale when management has approved or received approval to sell the asset and is committed to a formal plan, the asset is available for immediate sale, the asset is being actively marketed, the sale is anticipated to occur during the ensuing year and certain other specified criteria are met. An asset classified as held for sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the asset exceeds its estimated fair value, the asset is written down to its fair value upon the held for sale designation. Our BlackRock held for sale asset is recorded at its carrying amount as we accounted for this investment under the equity method of accounting and the fair value of the asset exceeded the carrying value at each balance sheet date.

When presenting discontinued operations, assets classified as held for sale are segregated in the Consolidated Balance Sheet commencing in the period in which the asset meets all of the held for sale criteria described above and prior periods are recast. The results of discontinued operations are reported in Discontinued Operations in the Consolidated Statement of Income for current and

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

prior periods commencing in the period in which the asset or business is either disposed of or is classified as held for sale, including any gain or loss recognized on sale or adjustment of the carrying amount to fair value less cost to sell.

Earnings Per Common Share

Basic earnings per common share is calculated using the two-class method to determine income attributable to common shareholders. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities under the two-class method. Distributed dividends and dividend equivalents related to participating securities and an allocation of undistributed net income to participating securities reduce the amount of income attributable to common shareholders. In a period with a loss, no allocation will be made to the participating securities, as they do not have a contractual obligation to absorb losses. Income attributable to common shareholders is then divided by the weighted-average common shares outstanding for the period.

Diluted earnings per common share is calculated under the more dilutive of either the treasury method or the two-class method. For the diluted calculation, we increase the weighted-average number of shares of common stock outstanding by the assumed conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance, if later, and the number of shares of common stock that would be issued assuming the exercise of stock options and warrants and the issuance of incentive shares using the treasury stock method. These adjustments to the weighted-average number of shares of common stock outstanding are made only when such adjustments will dilute earnings per common share. For periods in which there is a loss from continuing operations, any potential dilutive shares will be anti-dilutive. In this scenario, no potential dilutive shares will be included in the continuing operations, discontinued operations or total earnings per common share calculations, even if overall net income is reported. See Note 11 Earnings Per Share for additional information.

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

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 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 3 Investment Securities, Note 4 Loans and Related Allowance for Credit Losses and Note 10 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 (PCD) loans. • There was no impact to the recorded investment of our investment securities or loans, except for our PCD loan portfolio. Accounting for these loans as PCD 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 35 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.

56 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 June 30, 2020, we have not yet elected any optional expedients related to contract modifications or hedging relationships as outlined in this ASU. However, we plan to elect these optional expedients in the future. • During the second quarter of 2020, we elected to transfer all debt securities classified as held to maturity that are indexed to LIBOR to the available for sale portfolio. All securities were classified as held to maturity prior to January 1, 2020. These securities had an amortized cost and fair value of $49 million and $48 million, respectively, as of the transfer date. See Note 3 Investment Securities for more information.

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

Table 35: Impact of the CECL Standard Adoption



In millions	December 31, 2019		Transition Adjustment			January 1, 2020
Allowance for credit losses
Allowance for loan and lease losses
Commercial	$	1,812	$	(304	)	$	1,508
Consumer	930		767			1,697
Total allowance for loan and lease losses	2,742		463			3,205
Unfunded lending related commitments	318		179			497
Other	—		19			19
Total allowance for credit losses	$	3,060	$	661		$	3,721

In millions	December 31, 2019		Transition Adjustment			January 1, 2020
Impact to retained earnings (a)	$	42,215	$	(671	)	$	41,544

(a) Transition adjustment includes the increase in the total ACL 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.

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.

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

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 allowance. 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 allowance 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 June 30, 2020, nonaccrual or past due held-to-maturity securities were immaterial.

A security may be partially or fully charged off against the allowance 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

allowance for investment securities. See Note 3 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. See Note 4 Loans and Related Allowance for Credit Losses for additional information on how COVID-19 hardship related loan modifications are reported from a delinquency perspective as of June 30, 2020.

Loans held for investment, excluding PCD 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

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

interest income using the constant effective yield method, over the contractual life of the loan. The processing fee received for loans originated under the Paycheck Protection Program (PPP) is deferred and accreted into Net interest income using the 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 ALLL.

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 more than significant deterioration of credit quality since origination (i.e., PCD) are recognized at an amortized cost basis equal to their purchase price plus an ALLL measured at the acquisition date. 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 ALLL. Subsequent increases in expected cash flows are recognized as a provision recapture of previously recorded ALLL.

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.

A troubled debt restructuring (TDR) is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulty. A concession has been granted when we do not expect to collect all amounts due, including original interest accrued at the original contract rate, as a result of the restructuring, or there is a delay in payment that is more than insignificant. 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 ALLL estimates for each loan class under the methodologies described in this Note. 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.

PNC excludes consumer loans held for sale, loans accounted for under the fair value option and certain government insured or guaranteed loans from our TDR population. PCD loans that do not meet the criteria to be classified as TDRs are also excluded. In addition, PNC has elected not to apply a TDR designation to loans that have been restructured due to a COVID-19 hardship pursuant to specific criteria under the CARES Act. Since loans restructured due to a COVID-19 related hardship were not identified as TDRs, they are not placed on nonaccrual at the time of modification. However, these loans will be subject to our existing nonaccrual policy subsequent to the modification.

See the following for additional information related to loans, including further discussion regarding our policies, the methodologies and significant inputs used to determine the ALLL, and additional details on the composition of our loan portfolio:


•	Nonperforming Loans and Leases section of this Note 1,


•	Allowance for Credit Losses section of this Note 1, and


•	Note 4 Loans and Related Allowance for Credit Losses.

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 allowance is

reversed, and a valuation allowance for the 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 12 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.

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

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



Commercial
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. • Certain government insured loans where substantially all principal and interest is insured. • Commercial purchasing card assets which do not accrue interest.



Consumer
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

We generally charge off commercial (commercial and industrial, 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

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

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

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

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 the ALLL 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 ALLL. 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 4 Loans and Related Allowance for Credit Losses in this Report for additional information on nonperforming assets, TDRs and credit quality indicators related to our loan portfolio.

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

Allowance for Credit Losses

Our ACL, in accordance with the CECL standard, is based on historical loss experience, borrower risk 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), 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.

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 (LRA) expected losses (reversion period) where applicable, and (iii) the 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 is incorporated into the expected credit loss estimates. Such forward looking information includes forecasted relevant macroeconomic variables, which are estimated using qualitative techniques, analysis from PNC economists and management judgment.

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 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 allowance required. The estimates of expected cash flows are determined using macroeconomic sensitive models taking into consideration the RSFP and scenarios discussed above. Additional factors unique to a specific security may also be taken into consideration when estimating expected cash flows. 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 allowance is limited to the difference between the amortized cost basis of the security and its estimated fair value.

See Note 3 Investment Securities in this Report for additional information about the investment securities portfolio.

Allowance for Loan and Lease Losses

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 risk

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.

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



Loan Class	Probability of Default (PD)	Loss Given Default (LGD)	Exposure at Default (EAD)
Commercial
Commercial and industrial / Equipment lease financing	• For wholesale obligors: internal risk ratings based on borrower characteristics and industry • For retail small balance obligors: credit score, delinquency status, and product type	• 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 for loans • Current utilization and historical pre-default draw experience for lines
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	• Commitment and historical prepayment experience
Consumer
Home equity / 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 for loans • Current utilization and historical pre-default draw experience for lines
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, delinquency status, utilization, payment behavior and months on book	• Borrower credit scores and credit line amount	• Pay-down curves are developed using a pro-rata method and estimated using borrower behavior segments, payment ratios and borrower credit scores
Education / Other consumer	• Net charge-off and pay-down rates by vintage are used to estimate expected losses in lieu of discrete risk parameters

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

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.



Loan Class	RSFP - Key Economic Variables	Reversion Method	LRA Approach
Commercial
Commercial and industrial / Equipment lease financing	• Gross Domestic Product and Gross Domestic Income measures, imports, employment related variables, 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, GDP, corporate bond yield and interest rates	• Immediate reversion	• Average parameters determined based on internal and external historical data
Consumer
Home equity / Residential real estate	• Unemployment rates, HPI and interest rates	• Straight-line over 3 years	• Modeled parameters using long run economic conditions
Automobile	• Unemployment rates, HPI, personal consumption expenditure, 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 rate, personal consumption expenditure, and HPI	• Straight-line over 2 years	• Modeled parameters using long run economic conditions
Education / Other consumer	• Net charge-off and pay-down 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., for 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 ALLL. 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 ALLL 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 ALLL 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

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

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:


•	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, including the impact of COVID-19 hardship related loan modifications,


•	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 4 Loans and Related Allowance for Credit Losses 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 ALLL. 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 ALLL for these loan classes.

Purchased Credit Deteriorated Loans or Securities

The allowance for PCD 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 allowance recognized at acquisition is added to the acquisition date purchase price to determine the asset’s amortized cost basis.

Allowance for 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.

See Note 4 Loans and Related Allowance for Credit Losses for additional information about this allowance.

Allowance for Other Financial Assets

We determine the allowance for other financial assets (e.g., trade receivables, servicing advances on PNC-owned loans, 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 June 30, 2020, the allowance 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 65

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 DISCONTINUED OPERATIONS

On May 15, 2020, PNC completed the sale of its 31.6 million shares of BlackRock, Inc., common and preferred stock through a registered secondary offering at a price of $420 per share. In addition, BlackRock repurchased 2.65 million shares from PNC at a price of $414.96 per share. The total proceeds from the sale were $14.2 billion in cash, net of $.2 billion in expenses, and resulted in a gain on sale of $4.3 billion. Additionally, PNC contributed 500,000 BlackRock shares to the PNC Foundation on May 18, 2020.

Following the sale and donation, PNC has divested its entire investment in BlackRock. PNC and its affiliates only hold shares of BlackRock stock in a fiduciary capacity for clients of PNC and its affiliates.

The following table summarizes the results from the discontinued operations of BlackRock included in the Consolidated Income Statement:

Table 36: Consolidated Income Statement - Discontinued Operations



	Three months ended June 30				Six months ended June 30
In millions	2020		2019		2020		2019
Noninterest income	$	5,596	$	224	$	5,777	$	449
Total revenue	5,596		224		5,777		449
Income from discontinued operations before income taxes and noncontrolling interests	5,596		224		5,777		449
Income taxes	1,197		35		1,222		71
Net income from discontinued operations	$	4,399	$	189	$	4,555	$	378

The following table summarizes the cash flows of discontinued operations of BlackRock included in the Consolidated Statement of Cash Flows:

Table 37: Consolidated Statement of Cash Flows - Discontinued Operations



	Six months ended June 30
In millions	2020		2019
Cash flows from discontinued operations
Net cash provided (used) by operating activities of discontinued operations	$	74	$	159
Net cash provided by investing activities of discontinued operations	$	14,225

NOTE 3 INVESTMENT SECURITIES

With the adoption of the CECL standard on January 1, 2020, credit losses on investment securities are required to be recognized through an allowance, 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 allowance 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 June 30, 2020, the allowance for investment securities was $32 million and related to non-agency commercial mortgage-backed securities and other debt securities. The provision for credit losses on investment securities totaled $30 million for both the three and six months ended June 30, 2020.

In the first quarter of 2020, upon the adoption of ASU 2019-04, 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. During the second quarter of 2020, pursuant to the guidance in ASU 2020-04, we elected to transfer debt securities with an amortized cost of $49 million and a fair value of $48 million from the held to maturity to the available for sale portfolio.

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

See Note 1 Accounting Policies for additional information related to the adoption of the CECL standard, including the methodologies used to determine the allowance for investment securities, and the adoption of ASU 2019-04 and ASU 2020-04.

The following table summarizes our available for sale and held to maturity portfolios by major security type.

Table 38: Investment Securities Summary



	June 30, 2020 (a)									December 31, 2019
In millions	Amortized Cost (b)		Unrealized					Fair Value		Amortized Cost		Unrealized					Fair Value
In millions	Amortized Cost (b)		Gains		Losses			Fair Value		Amortized Cost		Gains		Losses			Fair Value
Securities Available for Sale
U.S. Treasury and government agencies	$	19,255	$	933				$	20,188	$	16,150	$	382	$	(16	)	$	16,516
Residential mortgage-backed
Agency	55,630		1,860		$	(10	)	57,480		35,847		517		(43		)	36,321
Non-agency	1,472		225		(15		)	1,682		1,515		302		(3		)	1,814
Commercial mortgage-backed
Agency	3,002		141		(3		)	3,140		3,094		42		(18		)	3,118
Non-agency	4,134		57		(152		)	4,039		3,352		29		(9		)	3,372
Asset-backed	5,312		96		(40		)	5,368		5,044		78		(8		)	5,114
Other	4,856		301		(2		)	5,155		2,788		121		(1		)	2,908
Total securities available for sale (b)	$	93,661	$	3,613	$	(222	)	$	97,052	$	67,790	$	1,471	$	(98	)	$	69,163
Securities Held to Maturity
U.S. Treasury and government agencies	$	785	$	146				$	931	$	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										52							52
Other	656		42		$	(14	)	684		1,792		85		(14		)	1,863
Total securities held to maturity (b) (c)	$	1,441	$	188	$	(14	)	$	1,615	$	17,661	$	423	$	(40	)	$	18,044

(a) The accrued interest associated with our available for sale and held to maturity portfolios totaled $270 million and $5 million at June 30, 2020, respectively. These amounts are included in Other assets on the Consolidated Balance Sheet.

(b) Amortized cost is presented net of allowance of $30 million for securities available for sale and $2 million for securities held to maturity at June 30, 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 June 30, 2020, 84% of our securities held to maturity were rated AAA/AA.

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 allowance. Securities held to maturity are carried at amortized cost less any allowance. Investment securities at June 30, 2020 included $347 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 June 30, 2019 was $2.0 billion.

Table 39 presents the gross unrealized losses and fair value of securities available for sale that do not have an associated allowance for investment securities as of June 30, 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. All securities included in the table have been evaluated to determine if a credit loss exists. As part of that assessment, as of June 30, 2020, we concluded that 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.

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

Table 39: 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
June 30, 2020
Residential mortgage-backed
Agency	$	(7	)	$	2,124	$	(3	)	$	249	$	(10	)	$	2,373
Non-agency	(8		)	213		(6		)	81		(14		)	294
Commercial mortgage-backed
Agency						(3		)	136		(3		)	136
Non-agency	(61		)	2,107		(2		)	71		(63		)	2,178
Asset-backed	(18		)	969		(22		)	616		(40		)	1,585
Other	(1		)	100		(1		)	35		(2		)	135
Total securities available for sale	$	(95	)	$	5,513	$	(37	)	$	1,188	$	(132	)	$	6,701

Table 40 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 40: 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

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

Table 41: Gains (Losses) on Sales of Securities Available for Sale



Six months ended June 30 In millions	Gross Gains		Gross Losses			Net Gains (Losses)		Tax Expense (Benefit)
2020	$	224	$	(2	)	$	222	$	47
2019	$	47	$	(15	)	$	32	$	7

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

The following table presents, by remaining contractual maturity, the amortized cost, fair value and weighted-average yield of debt securities at June 30, 2020.

Table 42: Contractual Maturity of Debt Securities



June 30, 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	$	5,647		$	9,172		$	3,516		$	920		$	19,255
Residential mortgage-backed
Agency	2			112			1,220			54,296			55,630
Non-agency										1,472			1,472
Commercial mortgage-backed
Agency				459			265			2,278			3,002
Non-agency				75			301			3,758			4,134
Asset-backed	66			2,603			1,039			1,604			5,312
Other	607			1,794			1,108			1,347			4,856
Total securities available for sale at amortized cost	$	6,322		$	14,215		$	7,449		$	65,675		$	93,661
Fair value	$	6,341		$	14,801		$	7,823		$	68,087		$	97,052
Weighted-average yield, GAAP basis (a)	0.75		%	2.08		%	2.12		%	2.97		%	2.62		%
Securities Held to Maturity
U.S. Treasury and government agencies				$	198		$	306		$	281		$	785
Other	$	18		403			120			115			656
Total securities held to maturity at amortized cost	$	18		$	601		$	426		$	396		$	1,441
Fair value	$	18		$	638		$	515		$	444		$	1,615
Weighted-average yield, GAAP basis (a)	2.94		%	3.23		%	3.93		%	2.66		%	3.30		%

(a) Weighted-average yields are based on amortized cost with effective yields weighted for the contractual maturity of each security.

At June 30, 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 $39.6 billion and $10.6 billion and fair value of $41.1 billion and $10.9 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 43: Fair Value of Securities Pledged and Accepted as Collateral



In millions	June 30 2020		December 31 2019
Pledged to others	$	23,528	$	14,609
Accepted from others:
Permitted by contract or custom to sell or repledge (a)	$	1,944	$	2,349
Permitted amount repledged to others	$	1,944	$	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.

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

NOTE 4 Loans and Related Allowance for Credit Losses

Loan Portfolio

Our loan portfolio consists of two portfolio segments – Commercial and Consumer. 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		Consumer
Commercial		Consumer
• Commercial and industrial		• 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 June 30, 2020 include PCD 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 June 30, 2020 and December 31, 2019. Pursuant to the interagency guidance issued in April 2020 and in connection with the credit reporting rules from the CARES Act, the delinquency status of loans modified due to COVID-19 related hardships are being reported as of June 30, 2020 in alignment with the rules set forth for banks to report delinquency status to the credit agencies. These rules require that COVID-19 related loan modifications be reported as follows: (i) if current at the time of modification, the loan remains current throughout the modification period, (ii) if delinquent at the time of modification and the borrower was not made current as part of the modification, the loan maintains its reported as delinquent status during the modification period, or (iii) if delinquent at the time of modification and the borrower was made current as part of the modification or became current during the modification period, the loan is reported as current. As a result, certain loans modified due to COVID-19 related hardships are not being reported as past due as of June 30, 2020 based on the contractual terms of the loan, even where borrowers may not be making payments on their loans during the modification period.

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

Table 44: 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 (c)				Nonperforming Loans			Fair Value Option Nonaccrual Loans (d)			Total Loans (e)(f)
June 30, 2020 (a) (b)
Commercial
Commercial and industrial	$	143,531		$	49		$	28		$	34		$	111			$	693					$	144,335
Commercial real estate	28,665			51			4						55				43						28,763
Equipment lease financing	7,058			8			9						17				22						7,097
Total commercial	179,254			108			41			34			183				758						180,195
Consumer
Home equity	24,089			70			27						97				636			$	57		24,879
Residential real estate	21,141			198			93			264			555			(c)	305			468			22,469
Automobile	15,843			105			34			19			158				156						16,157
Credit card	6,408			53			38			61			152				15						6,575
Education	3,004			39			23			66			128			(c)							3,132
Other consumer	4,786			17			8			12			37				6						4,829
Total consumer	75,271			482			223			422			1,127				1,118			525			78,041
Total	$	254,525		$	590		$	264		$	456		$	1,310			$	1,876		$	525		$	258,236
Percentage of total loans	98.56		%	.23		%	.10		%	.18		%	.51		%		.73		%	.20		%	100.00		%


(a)	Amounts in table represent loans held for investment and do not include any associated valuation allowance.


(b)	The accrued interest associated with our loan portfolio at June 30, 2020 totaled $.7 billion and is included in Other assets on the Consolidated Balance Sheet.


(c)	Past due loan amounts include government insured or guaranteed Residential real estate loans and Education loans totaling $.4 billion and $.1 billion, respectively, at June 30, 2020

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company