10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 2, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________________________
FORM 10-Q
______________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2023
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-09718
The PNC Financial Services Group, Inc.
(Exact name of registrant as specified in its charter)
___________________________________________________________
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(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
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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.
☒ | Accelerated filer | ☐ | ||||||||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of April 18, 2023, there were 399,108,019 shares of the registrant’s common stock ($5 par value) outstanding.
THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to First Quarter 2023 Form 10-Q
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PART I – FINANCIAL INFORMATION | |||||
Item 1. Financial Statements (Unaudited). | |||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). | |||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk. | 21-38, 49-50, 83-89 |
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Item 4. Controls and Procedures. | |||||
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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 2022 Annual Report on Form 10-K (our “2022 Form 10-K”). For information regarding certain business, regulatory and legal risks, see the following: the Risk Management section of this Financial Review and of Item 7 in our 2022 Form 10-K; Item 1A Risk Factors included in this Report and our 2022 Form 10-K; and the Commitments and Legal Proceedings Notes included in this Report and Item 8 of our 2022 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 2022 Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this Report. See Note 14 Segment Reporting for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a 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.
See page 103 for a glossary of certain terms and acronyms used in this Report.
EXECUTIVE SUMMARY
Headquartered in Pittsburgh, Pennsylvania, we are one of the largest diversified financial institutions in the 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 coast-to-coast. 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 needs. 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 create efficiencies that help us better serve customers.
Our capital and liquidity priorities are to support customers, fund business investments and return excess capital to shareholders, while maintaining appropriate capital in light of economic conditions, the Basel III framework and other regulatory expectations. For more detail, see the Capital Highlights portion of this Executive Summary, 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 2022 Form 10-K.
Presentation of Noninterest Income
In the fourth quarter of 2022, PNC updated the name of the noninterest income line item “Capital markets related” to “Capital markets and advisory.” This update did not impact the components of the category. All periods presented herein reflect these changes. For a description of each updated noninterest income revenue stream, see Note 1 Accounting Policies in our 2022 Form 10-K.
Selected Financial Data
The following tables include selected financial data, which should be reviewed in conjunction with the Consolidated Financial Statements and Notes included in Item 1 of this Report as well as the other disclosures in this Report concerning our historical financial performance, our future prospects and the risks associated with our business and financial performance.
The PNC Financial Services Group, Inc. – Form 10-Q 1
Table 1: Summary of Operations, Per Common Share Data and Performance Ratios
Dollars in millions, except per share data Unaudited |
Three months ended | ||||||||||
March 31 | December 31 | March 31 | |||||||||
2023 | 2022 | 2022 | |||||||||
Summary of Operations (a) | |||||||||||
Net interest income | $ | 3,585 | $ | 3,684 | $ | 2,804 | |||||
Noninterest income | 2,018 | 2,079 | 1,888 | ||||||||
Total revenue | 5,603 | 5,763 | 4,692 | ||||||||
Provision for (recapture of) credit losses | 235 | 408 | (208) | ||||||||
Noninterest expense | 3,321 | 3,474 | 3,172 | ||||||||
Income before income taxes and noncontrolling interests |
$ | 2,047 | $ | 1,881 | $ | 1,728 | |||||
Income taxes |
353 | 333 | 299 | ||||||||
Net income | $ | 1,694 | $ | 1,548 | $ | 1,429 | |||||
Net income attributable to common shareholders | $ | 1,607 | $ | 1,407 | $ | 1,361 | |||||
Per Common Share
|
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Basic | $ | 3.98 | $ | 3.47 | $ | 3.23 | |||||
Diluted | $ | 3.98 | $ | 3.47 | $ | 3.23 | |||||
Book value per common share | $ | 104.76 | $ | 99.93 | $ | 106.47 | |||||
Performance Ratios | |||||||||||
Net interest margin (b) | 2.84 | % | 2.92 | % | 2.28 | % | |||||
Noninterest income to total revenue | 36 | % | 36 | % | 40 | % | |||||
Efficiency | 59 | % | 60 | % | 68 | % | |||||
Return on: | |||||||||||
Average common shareholders’ equity | 16.11 | % | 14.19 | % | 11.64 | % | |||||
Average assets | 1.22 | % | 1.10 | % | 1.05 | % |
(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)See explanation and reconciliation of this non-GAAP measure in Average Consolidated Balance Sheet and Net Interest Analysis and Reconciliation of Taxable-Equivalent Net Interest Income (non-GAAP) in the Statistical Information (Unaudited) section in Item 1 of this Report.
Table 2: Balance Sheet Highlights and Other Selected Ratios
Dollars in millions, except as noted Unaudited |
March 31 2023 |
December 31 2022 |
March 31 2022 |
|||||||||||
Balance Sheet Highlights (a) | ||||||||||||||
Assets | $ | 561,777 | $ | 557,263 | $ | 541,246 | ||||||||
Loans | $ | 326,475 | $ | 326,025 | $ | 294,457 | ||||||||
Allowance for loan and lease losses |
$ | 4,741 | $ | 4,741 | $ | 4,558 | ||||||||
Interest-earning deposits with banks | $ | 33,865 | $ | 27,320 | $ | 48,776 | ||||||||
Investment securities | $ | 138,239 | $ | 139,334 | $ | 132,411 | ||||||||
Total deposits | $ | 436,833 | $ | 436,282 | $ | 450,197 | ||||||||
Borrowed funds | $ | 60,822 | $ | 58,713 | $ | 26,571 | ||||||||
Total shareholders’ equity | $ | 49,044 | $ | 45,774 | $ | 49,181 | ||||||||
Common shareholders’ equity | $ | 41,809 | $ | 40,028 | $ | 44,170 | ||||||||
Other Selected Ratios | ||||||||||||||
Common equity Tier 1 | 9.2 | % | 9.1 | % | 9.9 | % | ||||||||
Loans to deposits | 75 | % | 75 | % | 65 | % | ||||||||
Common shareholders’ equity to total assets | 7.4 | % | 7.2 | % | 8.2 | % | ||||||||
(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.
Income Statement Highlights
Net income of $1.7 billion, or $3.98 per diluted common share, for the first quarter of 2023 increased $146 million, or 9%, compared to $1.5 billion, or $3.47 per diluted common share, for the fourth quarter of 2022, primarily due to a lower provision for credit losses and a decline in expenses, partially offset by decreased net interest income and noninterest income.
•For the three months ended March 31, 2023 compared to the three months ended December 31, 2022:
•Total revenue decreased $160 million, or 3%, to $5.6 billion.
•Net interest income of $3.6 billion decreased $99 million, or 3%, driven by two fewer days in the quarter and higher funding costs, partially offset by higher yields on interest-earning assets.
2 The PNC Financial Services Group, Inc. – Form 10-Q
•Net interest margin decreased 8 basis points to 2.84% as higher yields on interest-earning assets were more than offset by increased funding costs.
•Noninterest income decreased $61 million, or 3%, and included lower merger and acquisition advisory activity as well as seasonally lower consumer transaction volumes.
•Provision for credit losses of $235 million in the first quarter of 2023 included the impact of updated economic assumptions and changes in portfolio composition and quality. The fourth quarter of 2022 included a provision for credit losses of $408 million.
•Noninterest expense decreased $153 million, or 4%, to $3.3 billion, reflecting strong expense control and lower personnel costs, primarily due to lower variable compensation related to decreased business activity as well as seasonally lower benefits expense.
•We generated positive operating leverage of 2%.
Net income of $1.7 billion, or $3.98 per diluted common share, for the first quarter of 2023 increased $265 million, or 19%, compared to $1.4 billion, or $3.23 per diluted common share, for the first quarter of 2022, as a result of higher net interest income and noninterest income, partially offset by a higher provision for credit losses and increased expenses.
•For the three months ended March 31, 2023 compared to the three months ended March 31, 2022:
•Total revenue increased $911 million, or 19%, to $5.6 billion.
•Net interest income increased $781 million, or 28%, as a result of higher interest-earning asset yields and balances, partially offset by higher funding costs.
•Net interest margin increased 56 basis points, reflecting the benefit of higher yields on interest-earning assets.
•Noninterest income increased $130 million, or 7%, as a result of business growth across the franchise as well as higher private equity revenue, partially offset by the impact of lower average equity markets.
•Noninterest expense increased $149 million, or 5%, due to higher personnel costs, an increased FDIC assessment rate and continued investments in technology and marketing to support business growth.
•We generated positive operating leverage of 15%.
For additional detail, see the Consolidated Income Statement Review section of this Financial Review.
Balance Sheet Highlights
Our balance sheet was strong and well positioned at March 31, 2023. In comparison to December 31, 2022:
•Total assets increased modestly, to $561.8 billion.
•Total loans remained largely stable at $326.5 billion.
•Total commercial loans increased modestly to $225.4 billion as new production and higher utilization of loan commitments were largely offset by payoffs and maturities.
•Total consumer loans were relatively stable at $101.1 billion as increases in home equity, residential mortgages and automobile loans were offset by declines in the remaining portfolios as paydowns outpaced new originations.
•Investment securities decreased $1.1 billion to $138.2 billion, due to prepayments and maturities outpacing purchases, partially offset by the favorable impact of interest rate changes on net unrealized losses for available for sale securities.
•Interest-earning deposits with banks, primarily with the Federal Reserve Bank, increased $6.5 billion, or 24%, to $33.9 billion, primarily due to higher borrowed funds and deposits. In the first quarter of 2023, Interest-earning deposits with banks also included a $1.0 billion uninsured deposit with First Republic Bank. The deposit was acquired out of First Republic Bank's receivership on May 1, 2023, and will be repaid to PNC.
•Total deposits increased $551 million to $436.8 billion as a result of higher consumer time deposits, partially offset by seasonally lower commercial deposits, and reflected a continued shift from noninterest-bearing to interest-bearing deposit products as interest rates have risen.
•Borrowed funds increased $2.1 billion, or 4%, to $60.8 billion as a result of parent company senior debt issuances in January 2023.
For additional detail, see the Consolidated Balance Sheet Review section of this Financial Review.
The PNC Financial Services Group, Inc. – Form 10-Q 3
Credit Quality Highlights
The first quarter of 2023 reflected solid credit quality performance.
•At March 31, 2023 compared to December 31, 2022:
•Nonperforming assets of $2.0 billion were stable.
•Overall loan delinquencies of $1.3 billion decreased $164 million, or 11%, driven by lower consumer and commercial loan delinquencies.
•The ACL related to loans, which consists of the ALLL and the allowance for unfunded lending related commitments, totaled $5.4 billion at both March 31, 2023 and December 31, 2022. During the three months ended March 31, 2023, reserves reflected our updated economic assumptions and changes in portfolio composition and quality. ACL to total loans was 1.66% and 1.67% at March 31, 2023 and December 31, 2022, respectively.
•Net charge-offs of $195 million, or 0.24% of average loans, in the first quarter of 2023 decreased $29 million, or 13%, compared to $224 million, or 0.28% of average loans, for the fourth quarter of 2022, due to lower consumer and commercial net charge-offs.
For additional detail see the Credit Risk Management portion of the Risk Management section of this Financial Review.
Capital and Liquidity Highlights
We maintained our strong capital and liquidity positions.
•Common shareholders’ equity of $41.8 billion at March 31, 2023, increased $1.8 billion, or 4%, compared to December 31, 2022, driven by the benefit of net income and an increase in AOCI, partially offset by common dividends paid and share repurchases during the first quarter of 2023.
•In the first quarter of 2023, PNC returned $1.0 billion of capital to shareholders, reflecting $0.6 billion of dividends on common shares and $0.4 billion of common share repurchases, representing 2.4 million shares.
•Consistent with the SCB framework, which allows for capital returns in amounts in excess of the SCB minimum levels, our Board of Directors has authorized a repurchase framework under the previously approved repurchase program of up to 100 million common shares, of which approximately 47% were still available for repurchase at March 31, 2023. Due to recent market volatility and increased economic uncertainty, share repurchase activity is expected to be reduced in the second quarter of 2023 compared to recent quarters. PNC continues to evaluate and may adjust share repurchase activity, as actual amounts and timing are dependent on market and economic conditions as well as other factors. PNC’s SCB for the four-quarter period that began October 1, 2022 is 2.9%.
•On April 3, 2023, the PNC Board of Directors declared a quarterly cash dividend on common stock of $1.50 per share payable on May 5, 2023.
•Our CET1 ratio increased to 9.2% at March 31, 2023 from 9.1% at December 31, 2022.
•PNC elected a five-year transition provision effective March 31, 2020 to delay until December 31, 2021 the full impact of the CECL standard on regulatory capital, followed by a three-year transition period. Effective for the first quarter of 2022, PNC is now in the three-year transition period, and the full impact of the CECL standard is being phased-in to regulatory capital through December 31, 2024. The fully implemented ratios reflect the full impact of CECL and exclude the benefits of this transition provision. The CET1 fully implemented ratio was 9.1% at March 31, 2023 compared to 8.9% at December 31, 2022.
•PNC’s average LCR for the three months ended March 31, 2023 was 108% and exceeded the regulatory minimum requirement throughout the quarter.
See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for more detail on our 2023 liquidity and capital actions as well as our capital ratios.
PNC’s ability to take certain capital actions, including returning capital to shareholders, is subject to PNC meeting or exceeding an SCB established by the Federal Reserve Board in connection with the Federal Reserve Board’s CCAR process. For additional information, see Capital Management in the Risk Management section in this Financial Review and the Supervision and Regulation section in our 2022 Form 10-K.
Business Outlook
Statements regarding our business outlook are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking 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 that:
•The economy continues to expand in the first half of 2023, but economic growth is slowing in response to the ongoing Federal Reserve monetary policy tightening to slow inflation. This has led to large increases in both short- and long-term interest rates. With much higher mortgage rates the housing market is already in contraction, with steep drops in existing
4 The PNC Financial Services Group, Inc. – Form 10-Q
home sales and single-family housing starts, and a modest decline in house prices. Other sectors where interest rates play an outsized role, such as business investment and consumer spending on durable goods, will contract over 2023.
•PNC’s baseline outlook is for a recession starting in the second half of 2023, with real GDP contracting less than 1% before recovery starts in the first half of 2024 as the Federal Reserve lowers interest rates in response to a deteriorating labor market and slower inflation. The unemployment rate will increase throughout 2023, peaking at above 5% in the second half of 2024. Inflation will slow with the recession and be back to the Federal Reserve’s 2% long-term objective by mid-2024.
•PNC expects the FOMC to raise the federal funds rate by 25 basis points in May. This would bring the federal funds rate to a range of 5.00% to 5.25% by early-May. PNC expects a federal funds rate cut of 25 basis points in early 2024 as inflation moves toward the FOMC’s 2% long-term objective.
For the second quarter of 2023, compared to the first quarter of 2023, we expect:
•Average loans to be stable,
•Net interest income to be down 2% to 4%,
•Fee income to be stable to down 1%,
•Other noninterest income, excluding net securities gains and Visa activity, to be $200 million to $250 million,
•Revenue to be down approximately 3%,
•Noninterest expense to be up 1% to 2%, and
•Net loan charge-offs to be $200 million to $250 million.
For the full year 2023, compared to the full year of 2022, we expect:
•Average loans to be up 5% to 7%,
•Period-end loans to be up 1% to 3%,
•Revenue to be up 4% to 5%,
•Noninterest expense to be up 2% to 3%, and
•The effective tax rate to be approximately 18%.
We cannot provide, without unreasonable effort, a meaningful or accurate reconciliation of forward-looking non-GAAP measures to their most directly comparable GAAP financial measures. This is due to the inherent difficulty of forecasting the timing and amounts necessary for the reconciliation when such amounts are subject to events that cannot be reasonably predicted, as noted in our Cautionary Statement. Accordingly, we cannot address the probable significance of unavailable information.
See the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors included in this Report and in our 2022 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 Item 1 of this Report.
Net income of $1.7 billion, or $3.98 per diluted common share, for the first quarter of 2023 increased $146 million, or 9%, compared to $1.5 billion, or $3.47 per diluted common share, for the fourth quarter of 2022, primarily due to a lower provision for credit losses and a decline in expenses, partially offset by decreased net interest income and noninterest income. Net income increased $265 million, or 19%, compared to $1.4 billion, or $3.23 per diluted common share for the first quarter of 2022, as a result of higher net interest income and noninterest income, partially offset by a higher provision for credit losses and increased expenses.
The PNC Financial Services Group, Inc. – Form 10-Q 5
Net Interest Income
Table 3: Summarized Average Balances and Net Interest Income (a)
March 31, 2023 | December 31, 2022 | March 31, 2022 | ||||||||||||||||||||||||||||||||||||
Three months ended Dollars in millions |
Average Balances |
Average Yields/ Rates |
Interest Income/ Expense |
Average Balances |
Average Yields/ Rates |
Interest Income/ Expense |
Average Balances |
Average Yields/ Rates |
Interest Income/ Expense |
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Assets | ||||||||||||||||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||||||||||||||||
Investment securities | $ | 143,391 | 2.49 | % | $ | 891 | $ | 142,890 | 2.36 | % | $ | 843 | $ | 133,897 | 1.64 | % | $ | 548 | ||||||||||||||||||||
Loans | 325,526 | 5.29 | % | 4,290 | 321,875 | 4.75 | % | 3,889 | 290,701 | 3.19 | % | 2,311 | ||||||||||||||||||||||||||
Interest-earning deposits with banks | 34,054 | 4.58 | % | 390 | 30,395 | 3.76 | % | 286 | 62,540 | 0.19 | % | 29 | ||||||||||||||||||||||||||
Other | 8,806 | 5.75 | % | 126 | 9,690 | 5.20 | % | 127 | 9,417 | 2.07 | % | 48 | ||||||||||||||||||||||||||
Total interest-earning assets/interest income | $ | 511,777 | 4.46 | % | 5,697 | $ | 504,850 | 4.02 | % | 5,145 | 496,555 | 2.37 | % | 2,936 | ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits | $ | 315,056 | 1.66 | % | 1,291 | $ | 301,447 | 1.07 | % | 812 | $ | 299,543 | 0.04 | % | 27 | |||||||||||||||||||||||
Borrowed funds | 62,968 | 4.98 | % | 783 | 59,231 | 4.07 | % | 613 | 30,312 | 1.10 | % | 83 | ||||||||||||||||||||||||||
Total interest-bearing liabilities/interest expense | $ | 378,024 | 2.20 | % | 2,074 | $ | 360,678 | 1.55 | % | 1,425 | $ | 329,855 | 0.13 | % | 110 | |||||||||||||||||||||||
Net interest margin/income (non-GAAP) | 2.84 | % | 3,623 | 2.92 | % | 3,720 | 2.28 | % | 2,826 | |||||||||||||||||||||||||||||
Taxable-equivalent adjustments | (38) | (36) | (22) | |||||||||||||||||||||||||||||||||||
Net interest income (GAAP) | $ | 3,585 | $ | 3,684 | $ | 2,804 |
(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.
Net interest income decreased $99 million, or 3%, for the first quarter of 2023 compared to the fourth quarter of 2022, driven by two fewer days in the quarter and higher funding costs, partially offset by higher yields on interest-earning assets. Net interest income increased $781 million, or 28%, for the first quarter of 2023 compared to the same period in 2022, as a result of higher interest-earning asset yields and balances, partially offset by higher funding costs. Net interest margin decreased 8 basis points compared to the fourth quarter of 2022 as higher yields on interest-earning assets were more than offset by increased funding costs. Compared to the first quarter of 2022, net interest margin increased 56 basis points, reflecting the benefit of higher yields on interest-earning assets.
Average investment securities of $143.4 billion were relatively stable for the first quarter of 2023 compared to the fourth quarter of 2022. Compared to the first quarter of 2022, average investment securities increased $9.5 billion, or 7%, reflecting net purchases, primarily of agency residential mortgage-backed securities. Average investment securities represented 28% of average interest-earning assets for the first quarter of 2023 and the fourth quarter of 2022, and 27% for the first quarter of 2022.
Average loans of $325.5 billion for the first quarter of 2023 increased $3.7 billion compared to the fourth quarter of 2022, primarily driven by growth in PNC’s corporate banking business during the fourth quarter of 2022. In comparison to the first quarter of 2022, average loans increased $34.8 billion, or 12%, reflecting growth in both commercial and consumer loans. Average loans represented 64% of average interest-earning assets for both the first quarter of 2023 and the fourth quarter of 2022, and 59% for the first quarter of 2022.
Average interest-earning deposits with banks of $34.1 billion for the first quarter of 2023, increased $3.7 billion, or 12% compared to the fourth quarter of 2022, primarily due to higher borrowed funds and deposits. Compared to the first quarter of 2022, average interest-earning deposits with banks decreased $28.5 billion, or 46%, primarily due to higher loans outstanding.
Average interest-bearing deposits of $315.1 billion for the first quarter of 2023 increased $13.6 billion, or 5%, and $15.5 billion, or 5%, compared to the fourth and first quarters of 2022, respectively. Both comparisons reflected a continued shift from noninterest-bearing to interest-bearing deposits, as interest rates have risen. In total, average interest-bearing deposits represented 83% of average interest-bearing liabilities for the first quarter of 2023, 84% for the fourth quarter of 2022 and 91% for the first quarter of 2022.
6 The PNC Financial Services Group, Inc. – Form 10-Q
Average borrowed funds of $63.0 billion for the first quarter of 2023 increased $3.7 billion, or 6%, compared to the fourth quarter of 2022, driven by parent company senior debt issuances in January 2023. Compared to the first quarter of 2022, average borrowed funds increased $32.7 billion, or 108% due to increased FHLB borrowings and senior debt issuances.
Further details regarding average loans and deposits are included in the Business Segments Review section of this Financial Review.
Noninterest Income
Table 4: Noninterest Income
Three months ended | Three months ended | ||||||||||||||||||||||||||||||||||||||||||||||
March 31 | December 31 | Change | March 31 | March 31 | Change | ||||||||||||||||||||||||||||||||||||||||||
Dollars in millions | 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||||||||||||||||
Noninterest income | |||||||||||||||||||||||||||||||||||||||||||||||
Asset management and brokerage | $ | 356 | $ | 345 | $ | 11 | 3 | % | $ | 356 | $ | 377 | $ | (21) | (6) | % | |||||||||||||||||||||||||||||||
Capital markets and advisory | 262 | 336 | (74) | (22) | % | 262 | 252 | 10 | 4 | % | |||||||||||||||||||||||||||||||||||||
Card and cash management | 659 | 671 | (12) | (2) | % | 659 | 620 | 39 | 6 | % | |||||||||||||||||||||||||||||||||||||
Lending and deposit services | 306 | 296 | 10 | 3 | % | 306 | 269 | 37 | 14 | % | |||||||||||||||||||||||||||||||||||||
Residential and commercial mortgage | 177 | 184 | (7) | (4) | % | 177 | 159 | 18 | 11 | % | |||||||||||||||||||||||||||||||||||||
Other | 258 | 247 | 11 | 4 | % | 258 | 211 | 47 | 22 | % | |||||||||||||||||||||||||||||||||||||
Total noninterest income |
$ | 2,018 | $ | 2,079 | $ | (61) | (3) | % | $ | 2,018 | $ | 1,888 | $ | 130 | 7 | % |
Noninterest income as a percentage of total revenue was 36% for both the first quarter of 2023 and the fourth quarter of 2022 compared to 40% for the first quarter of 2022.
Asset management and brokerage fees increased compared to the fourth quarter of 2022, reflecting the impact of higher average equity markets and increased annuity sales. The decrease compared to the first quarter of 2022 reflected the impact of lower average equity markets. PNC’s discretionary client assets under management of $177 billion at March 31, 2023 increased from $173 billion at December 31, 2022, primarily as a result of higher spot equity markets. PNC’s discretionary client assets under management decreased from $182 billion at March 31, 2022, driven by lower spot equity markets.
Capital markets and advisory fees decreased compared to the fourth quarter of 2022 driven by lower merger and acquisition advisory fees. The increase compared to the first quarter of 2022 included higher asset backed financing, merger and acquisition advisory and underwriting fees.
Card and cash management revenue decreased compared to the fourth quarter of 2022, reflecting seasonally lower consumer transaction volumes. The increase in the first quarter of 2022 comparison was primarily due to increased treasury management product revenue and higher consumer spending.
Lending and deposit services increased compared to both the fourth and first quarters of 2022, primarily driven by increased client activity.
Residential and commercial mortgage decreased compared to the fourth quarter of 2022 due to lower results from residential mortgage servicing rights valuation, net of economic hedge. The increase compared to the first quarter of 2022 was driven by modestly higher commercial and residential banking activities.
Other noninterest income increased compared to both the fourth quarter and first quarter of 2022. The increase compared to the first quarter of 2022 included the impact of higher private equity revenue. The first quarter of 2023 included $45 million of negative Visa Class B fair value adjustments compared to $41 million of negative adjustments in the fourth quarter of 2022, and $4 million of positive adjustments for the first quarter of 2022.
The PNC Financial Services Group, Inc. – Form 10-Q 7
Noninterest Expense
Table 5: Noninterest Expense
Three months ended | Three months ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31 | December 31 | Change | March 31 | March 31 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||
Dollars in millions | 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||
Noninterest expense | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Personnel | $ | 1,826 | $ | 1,943 | $ | (117) | (6) | % | $ | 1,826 | $ | 1,717 | $ | 109 | 6 | % | |||||||||||||||||||||||||||||||||||||
Occupancy | 251 | 247 | 4 | 2 | % | 251 | 258 | (7) | (3) | % | |||||||||||||||||||||||||||||||||||||||||||
Equipment | 350 | 369 | (19) | (5) | % | 350 | 331 | 19 | 6 | % | |||||||||||||||||||||||||||||||||||||||||||
Marketing | 74 | 106 | (32) | (30) | % | 74 | 61 | 13 | 21 | % | |||||||||||||||||||||||||||||||||||||||||||
Other | 820 | 809 | 11 | 1 | % | 820 | 805 | 15 | 2 | % | |||||||||||||||||||||||||||||||||||||||||||
Total noninterest expense |
$ | 3,321 | $ | 3,474 | $ | (153) | (4) | % | $ | 3,321 | $ | 3,172 | $ | 149 | 5 | % |
Noninterest expense decreased compared to the fourth quarter of 2022, reflecting strong expense control and lower personnel costs, primarily due to lower variable compensation related to decreased business activity as well as seasonally lower benefits expense. The increase compared to the first quarter of 2022 was due to higher personnel costs, increased technology costs and marketing to support business growth. In both comparisons, the increase in other noninterest expense included the impact of a higher FDIC assessment rate, which resulted in an additional $25 million of expense in the first quarter of 2023.
Effective Income Tax Rate
The effective income tax rate was 17.2% in the first quarter of 2023, compared to 17.7% in the fourth quarter of 2022, and 17.3% for the same period in 2022.
Provision For (Recapture of) Credit Losses
Table 6: Provision for (Recapture of) Credit Losses
Three months ended | Three months ended | ||||||||||||||||||||||||||||||||||
March 31 | December 31 | Change | March 31 | March 31 | Change | ||||||||||||||||||||||||||||||
Dollars in millions | 2023 | 2022 | $ | 2023 | 2022 | $ | |||||||||||||||||||||||||||||
Provision for (recapture of) credit losses | |||||||||||||||||||||||||||||||||||
Loans and leases | $ | 229 | $ | 380 | $ | (151) | $ | 229 | $ | (172) | $ | 401 | |||||||||||||||||||||||
Unfunded lending related commitments | (22) | 12 | (34) | (22) | (23) | 1 | |||||||||||||||||||||||||||||
Investment securities | (1) | 10 | (11) | (1) | 1 | (2) | |||||||||||||||||||||||||||||
Other financial assets | 29 | 6 | 23 | 29 | (14) | 43 | |||||||||||||||||||||||||||||
Total provision for (recapture of) credit losses | $ | 235 | $ | 408 | $ | (173) | $ | 235 | $ | (208) | $ | 443 |
Provision for credit losses of $235 million in the first quarter of 2023 included the impact of updated economic assumptions and changes in portfolio composition and quality. The fourth quarter of 2022 included a provision for credit losses of $408 million. The first quarter of 2022 included a recapture of credit losses of $208 million.
8 The PNC Financial Services Group, Inc. – Form 10-Q
CONSOLIDATED BALANCE SHEET REVIEW
The summarized balance sheet data in Table 7 is based upon our Consolidated Balance Sheet in Item 1 of this Report.
Table 7: Summarized Balance Sheet Data
March 31 | December 31 | Change | |||||||||||||||||||||
Dollars in millions | 2023 | 2022 | $ | % | |||||||||||||||||||
Assets | |||||||||||||||||||||||
Interest-earning deposits with banks | $ | 33,865 | $ | 27,320 | $ | 6,545 | 24 | % | |||||||||||||||
Loans held for sale | 998 | 1,010 | (12) | (1) | % | ||||||||||||||||||
Investment securities | 138,239 | 139,334 | (1,095) | (1) | % | ||||||||||||||||||
Loans | 326,475 | 326,025 | 450 | — | |||||||||||||||||||
Allowance for loan and lease losses | (4,741) | (4,741) | — | ||||||||||||||||||||
Mortgage servicing rights | 3,293 | 3,423 | (130) | (4) | % | ||||||||||||||||||
Goodwill | 10,987 | 10,987 | — | ||||||||||||||||||||
Other | 52,661 | 53,905 | (1,244) | (2) | % | ||||||||||||||||||
Total assets | $ | 561,777 | $ | 557,263 | $ | 4,514 | 1 | % | |||||||||||||||
Liabilities | |||||||||||||||||||||||
Deposits | $ | 436,833 | $ | 436,282 | $ | 551 | — | ||||||||||||||||
Borrowed funds | 60,822 | 58,713 | 2,109 | 4 | % | ||||||||||||||||||
Allowance for unfunded lending related commitments | 672 | 694 | (22) | (3) | % | ||||||||||||||||||
Other | 14,376 | 15,762 | (1,386) | (9) | % | ||||||||||||||||||
Total liabilities | 512,703 | 511,451 | 1,252 | — | |||||||||||||||||||
Equity | |||||||||||||||||||||||
Total shareholders’ equity | 49,044 | 45,774 | 3,270 | 7 | % | ||||||||||||||||||
Noncontrolling interests | 30 | 38 | (8) | (21) | % | ||||||||||||||||||
Total equity | 49,074 | 45,812 | 3,262 | 7 | % | ||||||||||||||||||
Total liabilities and equity | $ | 561,777 | $ | 557,263 | $ | 4,514 | 1 | % |
Our balance sheet was strong and well positioned at March 31, 2023. In comparison to December 31, 2022:
•Total assets increased modestly, and included higher Federal Reserve Bank balances.
•Total liabilities were largely stable.
•Total equity increased due to the benefit of net income, a preferred stock issuance and an improvement in AOCI, partially offset by dividends paid and common share repurchases.
The ACL related to loans totaled $5.4 billion at both March 31, 2023 and December 31, 2022. During the three months ended March 31, 2023, reserves reflected our updated economic assumptions and changes in portfolio composition and quality. See the following for additional information regarding our ACL related to loans:
•Allowance for Credit Losses in the Credit Risk Management section of this Financial Review,
•Critical Accounting Estimates and Judgments section of this Financial Review, and
•Note 3 Loans and Related Allowance for Credit Losses.
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 20 Regulatory Matters in our 2022 Form 10-K.
The PNC Financial Services Group, Inc. – Form 10-Q 9
Loans
Table 8: Loans
March 31 | December 31 | Change | |||||||||||||||||||||
Dollars in millions | 2023 | 2022 | $ | % | |||||||||||||||||||
Commercial | |||||||||||||||||||||||
Commercial and industrial | $ | 182,997 | $ | 182,219 | $ | 778 | — | ||||||||||||||||
Commercial real estate | 35,991 | 36,316 | (325) | (1) | % | ||||||||||||||||||
Equipment lease financing | 6,424 | 6,514 | (90) | (1) | % | ||||||||||||||||||
Total commercial | 225,412 | 225,049 | 363 | — | |||||||||||||||||||
Consumer | |||||||||||||||||||||||
Residential real estate | 46,067 | 45,889 | 178 | — | |||||||||||||||||||
Home equity | 26,203 | 25,983 | 220 | 1 | % | ||||||||||||||||||
Automobile | 14,923 | 14,836 | 87 | 1 | % | ||||||||||||||||||
Credit card | 6,961 | 7,069 | (108) | (2) | % | ||||||||||||||||||
Education | 2,131 | 2,173 | (42) | (2) | % | ||||||||||||||||||
Other consumer | 4,778 | 5,026 | (248) | (5) | % | ||||||||||||||||||
Total consumer | 101,063 | 100,976 | 87 | — | |||||||||||||||||||
Total loans | $ | 326,475 | $ | 326,025 | $ | 450 | — |
Commercial loans increased modestly as an increase in commercial and industrial loans was offset by declines in both commercial real estate and equipment lease financing.
Consumer loans were relatively stable as increases in home equity, residential mortgages and automobile loans were offset by declines in the remaining portfolios as paydowns outpaced new originations.
For additional information regarding our loan portfolio see the Credit Risk Management portion of the Risk Management section in this Financial Review and Note 3 Loans and Related Allowance for Credit Losses.
10 The PNC Financial Services Group, Inc. – Form 10-Q
Investment Securities
Investment securities of $138.2 billion at March 31, 2023 decreased $1.1 billion, compared to December 31, 2022, due to prepayments and maturities outpacing purchases, partially offset by the favorable impact of interest rate changes on net unrealized losses for available for sale securities.
The level and composition of the investment securities portfolio fluctuates over time based on many factors, including market conditions, loan and deposit growth and balance sheet management activities. We manage our investment securities portfolio to optimize returns, while providing a reliable source of liquidity for our banking and other activities, considering the LCR, NSFR and other internal and external guidelines and constraints.
Table 9: Investment Securities (a)
March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
Dollars in millions | Amortized Cost (b) |
Fair Value |
Amortized Cost (b) |
Fair Value |
|||||||||||||||||||
U.S. Treasury and government agencies | $ | 45,291 | $ | 43,455 | $ | 45,767 | $ | 43,330 | |||||||||||||||
Agency residential mortgage-backed | 76,701 | 71,565 | 77,385 | 71,073 | |||||||||||||||||||
Non-agency residential mortgage-backed | 947 | 1,040 | 973 | 1,074 | |||||||||||||||||||
Agency commercial mortgage-backed | 2,674 | 2,518 | 2,693 | 2,501 | |||||||||||||||||||
Non-agency commercial mortgage-backed (c) | 2,624 | 2,529 | 2,992 | 2,883 | |||||||||||||||||||
Asset-backed (d) | 7,277 | 7,219 | 7,291 | 7,183 | |||||||||||||||||||
Other (e) | 6,482 | 6,319 | 6,642 | 6,394 | |||||||||||||||||||
Total investment securities (f) | $ | 141,996 | $ | 134,645 | $ | 143,743 | $ | 134,438 |
(a)Of our total securities portfolio, 97% were rated AAA/AA at both March 31, 2023 and December 31, 2022.
(b)Amortized cost is presented net of the allowance for investment securities, which totaled $148 million at March 31, 2023 and primarily related to non-agency commercial mortgage-backed securities. The comparable amount at December 31, 2022 was $149 million.
(c)Collateralized primarily by office buildings, multifamily housing, retail properties, lodging properties and industrial properties.
(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 our investment securities portfolio by amortized cost and fair value. The relationship of fair value to amortized cost at March 31, 2023 compared to December 31, 2022 primarily reflected the impact of lower interest rates on the valuation of fixed rate securities. We continually monitor the credit risk in our portfolio and maintain the allowance for investment 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 2 Investment Securities for additional details regarding the allowance for investment securities.
The duration of investment securities was 4.4 years and 4.5 years at March 31, 2023 and December 31, 2022, respectively. We estimate that at March 31, 2023 the effective duration of investment securities was 4.4 years for an immediate 50 basis points parallel increase in interest rates and 4.4 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2022 for the effective duration of investment securities were 4.4 years and 4.5 years, respectively.
Based on expected prepayment speeds, the weighted-average expected maturity of the investment securities portfolio was 5.8 years at March 31, 2023 compared to 6.0 years at December 31, 2022.
Table 10: Weighted-Average Expected Maturities of Mortgage and Asset-Backed Debt Securities
March 31, 2023 | Years | |||||||
Agency residential mortgage-backed | 7.5 | |||||||
Non-agency residential mortgage-backed | 10.1 | |||||||
Agency commercial mortgage-backed | 5.3 | |||||||
Non-agency commercial mortgage-backed | 1.4 | |||||||
Asset-backed | 2.4 |
Additional information regarding our investment securities portfolio is included in Note 2 Investment Securities and Note 11 Fair Value.
The PNC Financial Services Group, Inc. – Form 10-Q 11
Funding Sources
Table 11: Details of Funding Sources
March 31 | December 31 | Change | |||||||||||||||||||||
Dollars in millions | 2023 | 2022 | $ | % | |||||||||||||||||||
Deposits | |||||||||||||||||||||||
Noninterest-bearing | $ | 118,014 | $ | 124,486 | $ | (6,472) | (5) | % | |||||||||||||||
Interest-bearing | |||||||||||||||||||||||
Money market | 63,943 | 64,150 | (207) | — | |||||||||||||||||||
Demand | 128,404 | 126,143 | 2,261 | 2 | % | ||||||||||||||||||
Savings | 104,712 | 103,033 | 1,679 | 2 | % | ||||||||||||||||||
Time deposits | 21,760 | 18,470 | 3,290 | 18 | % | ||||||||||||||||||
Total interest-bearing deposits | 318,819 | 311,796 | 7,023 | 2 | % | ||||||||||||||||||
Total deposits | 436,833 | 436,282 | 551 | — | |||||||||||||||||||
Borrowed funds | |||||||||||||||||||||||
Federal Home Loan Bank borrowings | 32,020 | 32,075 | (55) | — | |||||||||||||||||||
Senior debt | 19,622 | 16,657 | 2,965 | 18 | % | ||||||||||||||||||
Subordinated debt | 5,630 | 6,307 | (677) | (11) | % | ||||||||||||||||||
Other | 3,550 | 3,674 | (124) | (3) | % | ||||||||||||||||||
Total borrowed funds | 60,822 | 58,713 | 2,109 | 4 | % | ||||||||||||||||||
Total funding sources | $ | 497,655 | $ | 494,995 | $ | 2,660 | 1 | % |
Total deposits increased modestly as a result of higher consumer time deposits, partially offset by seasonally lower commercial deposits. In addition, noninterest-bearing balances decreased due to the continued shift into interest-bearing deposit products as interest rates have risen.
Borrowed funds increased due to parent company senior debt issuances in January 2023.
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 and NSFR requirements and other internal and external guidelines and constraints. See the Liquidity and Capital Management portion of the Risk Management section in this Financial Review for additional information regarding our liquidity and capital activities. See Note 7 Borrowed Funds in this Report and Note 10 Borrowed Funds in our 2022 Form 10-K for additional information related to our borrowings.
Shareholders’ Equity
Total shareholders’ equity was $49.0 billion at March 31, 2023, an increase of $3.2 billion compared to December 31, 2022, as increases related to net income of $1.7 billion, a preferred stock issuance of $1.5 billion and an improvement in AOCI of $1.1 billion were partially offset by dividends paid of $0.7 billion and common share repurchases of $0.4 billion.
12 The PNC Financial Services Group, Inc. – Form 10-Q
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 14 Segment Reporting. Certain amounts included in this Business Segments Review differ from those amounts shown in Note 14, primarily due to the presentation in this Financial Review of business net interest income on a taxable-equivalent basis.
Net interest income in business segment results reflects our internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors.
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 78 in Note 14 Segment Reporting. “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).
The PNC Financial Services Group, Inc. – Form 10-Q 13
Retail Banking
Retail Banking’s core strategy is to build lifelong, primary relationships by creating a sense of financial well-being and ease for our clients. Over time, we seek to deepen those relationships by meeting the broad range of our clients’ financial needs across savings, liquidity, lending, payments, investment and retirement solutions. We work to deliver these solutions in the most seamless and efficient way possible, meeting our customers where they want to be met – whether in a branch, through digital channels, at an ATM or through our phone-based customer contact centers – while continuously optimizing the cost to sell and service. We believe that, over time, we can grow our customer base, enhance the breadth and depth of our client relationships and improve our efficiency through differentiated products and leading digital channels.
Table 12: Retail Banking Table
(Unaudited) | |||||||||||||||||||||||
Three months ended March 31 | Change | ||||||||||||||||||||||
Dollars in millions, except as noted | 2023 | 2022 | $ | % | |||||||||||||||||||
Income Statement | |||||||||||||||||||||||
Net interest income | $ | 2,281 | $ | 1,531 | $ | 750 | 49 | % | |||||||||||||||
Noninterest income | 743 | 745 | (2) | — | |||||||||||||||||||
Total revenue | 3,024 | 2,276 | 748 | 33 | % | ||||||||||||||||||
Provision for (recapture of) credit losses | 238 | (81) | 319 | * | |||||||||||||||||||
Noninterest expense | 1,927 | 1,892 | 35 | 2 | % | ||||||||||||||||||
Pretax earnings | 859 | 465 | 394 | 85 | % | ||||||||||||||||||
Income taxes | 202 | 109 | 93 | 85 | % | ||||||||||||||||||
Noncontrolling interests | 10 | 16 | (6) | (38) | % | ||||||||||||||||||
Earnings | $ | 647 | $ | 340 | $ | 307 | 90 | % | |||||||||||||||
Average Balance Sheet | |||||||||||||||||||||||
Loans held for sale | $ | 542 | $ | 1,183 | $ | (641) | (54) | % | |||||||||||||||
Loans | |||||||||||||||||||||||
Consumer | |||||||||||||||||||||||
Residential real estate | $ | 35,421 | $ | 31,528 | $ | 3,893 | 12 | % | |||||||||||||||
Home equity | 24,571 | 22,458 | 2,113 | 9 | % | ||||||||||||||||||
Automobile | 14,918 | 16,274 | (1,356) | (8) | % | ||||||||||||||||||
Credit card | 6,904 | 6,401 | 503 | 8 | % | ||||||||||||||||||
Education | 2,188 | 2,532 | (344) | (14) | % | ||||||||||||||||||
Other consumer | 1,990 | 2,348 | (358) | (15) | % | ||||||||||||||||||
Total consumer | 85,992 | 81,541 | 4,451 | 5 | % | ||||||||||||||||||
Commercial | 11,438 | 11,610 | (172) | (1) | % | ||||||||||||||||||
Total loans | $ | 97,430 | $ | 93,151 | $ | 4,279 | 5 | % | |||||||||||||||
Total assets | $ | 115,384 | $ | 111,754 | $ | 3,630 | 3 | % | |||||||||||||||
Deposits | |||||||||||||||||||||||
Noninterest-bearing | $ | 60,801 | $ | 64,058 | $ | (3,257) | (5) | % | |||||||||||||||
Interest-bearing | 201,720 | 201,021 | 699 | — | |||||||||||||||||||
Total deposits | $ | 262,521 | $ | 265,079 | $ | (2,558) | (1) | % | |||||||||||||||
Performance Ratios | |||||||||||||||||||||||
Return on average assets | 2.27 | % | 1.23 | % | |||||||||||||||||||
Noninterest income to total revenue | 25 | % | 33 | % | |||||||||||||||||||
Efficiency | 64 | % | 83 | % |
14 The PNC Financial Services Group, Inc. – Form 10-Q
At or for three months ended March 31 |
Change | ||||||||||||||||||||||
Dollars in millions, except as noted | 2023 | 2022 | $ | % | |||||||||||||||||||
Supplemental Noninterest Income Information | |||||||||||||||||||||||
Asset management and brokerage | $ | 131 | $ | 134 | $ | (3) | (2) | % | |||||||||||||||
Card and cash management | $ | 324 | $ | 308 | $ | 16 | 5 | % | |||||||||||||||
Lending and deposit services | $ | 181 | $ | 164 | $ | 17 | 10 | % | |||||||||||||||
Residential and commercial mortgage | $ | 104 | $ | 99 | $ | 5 | 5 | % | |||||||||||||||
Residential Mortgage Information | |||||||||||||||||||||||
Residential mortgage servicing statistics (in billions, except as noted) (a) | |||||||||||||||||||||||
Serviced portfolio balance (b) | $ | 188 | $ | 135 | $ | 53 | 39 | % | |||||||||||||||
Serviced portfolio acquisitions | $ | 2 | $ | 6 | $ | (4) | (67) | % | |||||||||||||||
MSR asset value (b) | $ | 2.2 | $ | 1.3 | $ | 0.9 | 69 | % | |||||||||||||||
MSR capitalization value (in basis points) (b) | 119 | 98 | 21 | 21 | % | ||||||||||||||||||
Servicing income: (in millions) | |||||||||||||||||||||||
Servicing fees, net (c) | $ | 78 | $ | 33 | $ | 45 | * | ||||||||||||||||
Mortgage servicing rights valuation, net of economic hedge | $ | 14 | $ | 2 | $ | 12 | * | ||||||||||||||||
Residential mortgage loan statistics | |||||||||||||||||||||||
Loan origination volume (in billions) | $ | 1.4 | $ | 5.1 | $ | (3.7) | (73) | % | |||||||||||||||
Loan sale margin percentage | 2.26 | % | 2.45 | % | |||||||||||||||||||
Percentage of originations represented by: | |||||||||||||||||||||||
Purchase volume (d) | 84 | % | 42 | % | |||||||||||||||||||
Refinance volume | 16 | % | 58 | % | |||||||||||||||||||
Other Information (b) | |||||||||||||||||||||||
Customer-related statistics (average) | |||||||||||||||||||||||
Non-teller deposit transactions (e) | 65 | % | 64 | % | |||||||||||||||||||
Digital consumer customers (f) | 75 | % | 78 | % | |||||||||||||||||||
Credit-related statistics | |||||||||||||||||||||||
Nonperforming assets | $ | 1,009 | $ | 1,168 | $ | (159) | (14) | % | |||||||||||||||
Net charge-offs - loans and leases | $ | 112 | $ | 141 | $ | (29) | (21) | % | |||||||||||||||
Other statistics | |||||||||||||||||||||||
ATMs | 8,697 | 9,502 | (805) | (8) | % | ||||||||||||||||||
Branches (g) | 2,450 | 2,591 | (141) | (5) | % | ||||||||||||||||||
Brokerage account client assets (in billions) (h) | $ | 73 | $ | 74 | $ | (1) | (1) | % |
*- Not Meaningful
(a) Represents mortgage loan servicing balances for third parties and the related income.
(b)Presented as of period end, except for average customer-related statistics and net charge-offs, which are both shown for the three months ended.
(c)Servicing fees net of impact of decrease in MSR value due to passage of time, including the impact from regularly scheduled loan principal payments, prepayments and loans 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)Reflects all branches and solution centers excluding standalone mortgage offices and satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services.
(h)Includes cash and money market balances.
Retail Banking earnings for the first three months of 2023 increased $307 million compared to the same period in 2022 primarily due to increased net interest income, partially offset by an increased provision for credit losses, and higher noninterest expense.
Net interest income increased in the comparison primarily due to wider interest rate spreads on the value of deposits, partially offset by narrower interest rate spreads on the value of loans.
Noninterest income was relatively stable in the comparison.
Provision for credit losses included the impact of updated economic assumptions and changes in portfolio composition and quality.
Noninterest expense increased in the comparison, and included increased technology costs and higher marketing spend.
Retail Banking average total loans increased in the first three months of 2023 compared to the same period in 2022. Average consumer loans increased 5% driven by higher residential real estate and home equity loans as a result of new volume and draws on existing accounts outpacing liquidations, as well as growth in credit card loans due to new account production and purchase volume increases. The increase was partially offset by a decline in automobile, education and other consumer loans as paydowns outpaced new
The PNC Financial Services Group, Inc. – Form 10-Q 15
originations. Average commercial loans decreased primarily due to forgiveness of PPP loans, largely offset by growth in dealer segment balances.
Our focus on growing primary customer relationships is at the core of our deposit strategy in Retail, which is based on attracting and retaining stable, low-cost deposits as a key funding source for PNC. We have taken a disciplined approach to pricing, focused on retaining relationship-based balances and executing on targeted deposit growth and retention strategies aimed at more rate sensitive customers. Our goal with regard to deposits is to optimize balances, economics and long-term customer growth. In the first three months of 2023, average total deposits decreased compared to the same period in 2022, reflecting the impact of inflationary pressures and competitive pricing dynamics.
As part of our strategic focus on growing customers and meeting their financial needs, we have established a coast-to-coast network of retail branches, solution centers and ATMs that operate alongside PNC’s suite of digital capabilities. Over time, we plan to continue to convert a portion of branches into solution centers, which have a distinctive layout and the capability to support transactions, sales and advice using a combination of technology and personalized banker assistance.
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 customers by providing a broad range of liquidity, banking, payments and investment products.
16 The PNC Financial Services Group, Inc. – Form 10-Q
Corporate & Institutional Banking
Corporate & Institutional Banking’s strategy is to be the leading relationship-based provider of traditional banking products and services to its customers through the economic cycles. We aim to grow our market share and drive higher returns by delivering value-added solutions that help our clients better run their organizations, all while maintaining prudent risk and expense management. We continue to focus on building client relationships where the risk-return profile is attractive.
Table 13: Corporate & Institutional Banking Table
(Unaudited) | |||||||||||||||||||||||
Three months ended March 31 | Change | ||||||||||||||||||||||
Dollars in millions, except as noted | 2023 | 2022 | $ | % | |||||||||||||||||||
Income Statement | |||||||||||||||||||||||
Net interest income | $ | 1,414 | $ | 1,160 | $ | 254 | 22 | % | |||||||||||||||
Noninterest income | 886 | 804 | 82 | 10 | % | ||||||||||||||||||
Total revenue | 2,300 | 1,964 | 336 | 17 | % | ||||||||||||||||||
Provision for (recapture of) credit losses | (28) | (118) | 90 | 76 | % | ||||||||||||||||||
Noninterest expense | 939 | 837 | 102 | 12 | % | ||||||||||||||||||
Pretax earnings | 1,389 | 1,245 | 144 | 12 | % | ||||||||||||||||||
Income taxes | 325 | 285 | 40 | 14 | % | ||||||||||||||||||
Noncontrolling interests | 5 | 4 | 1 | 25 | % | ||||||||||||||||||
Earnings | $ | 1,059 | $ | 956 | $ | 103 | 11 | % | |||||||||||||||
Average Balance Sheet | |||||||||||||||||||||||
Loans held for sale | $ | 456 | $ | 628 | $ | (172) | (27) | % | |||||||||||||||
Loans | |||||||||||||||||||||||
Commercial | |||||||||||||||||||||||
Commercial and industrial | $ | 168,874 | $ | 141,622 | $ | 27,252 | 19 | % | |||||||||||||||
Commercial real estate | 34,605 | 32,433 | 2,172 | 7 | % | ||||||||||||||||||
Equipment lease financing | 6,451 | 6,099 | 352 | 6 | % | ||||||||||||||||||
Total commercial | 209,930 | 180,154 | 29,776 | 17 | % | ||||||||||||||||||
Consumer | 7 | 8 | (1) | (13) | % | ||||||||||||||||||
Total loans | $ | 209,937 | $ | 180,162 | $ | 29,775 | 17 | % | |||||||||||||||
Total assets | $ | 234,536 | $ | 200,724 | $ | 33,812 | 17 | % | |||||||||||||||
Deposits | |||||||||||||||||||||||
Noninterest-bearing | $ | 58,529 | $ | 86,178 | $ | (27,649) | (32) | % | |||||||||||||||
Interest-bearing | 86,832 | 68,429 | 18,403 | 27 | % | ||||||||||||||||||
Total deposits | $ | 145,361 | $ | 154,607 | $ | (9,246) | (6) | % | |||||||||||||||
Performance Ratios | |||||||||||||||||||||||
Return on average assets | 1.83 | % | 1.93 | % | |||||||||||||||||||
Noninterest income to total revenue | 39 | % | 41 | % | |||||||||||||||||||
Efficiency | 41 | % | 43 | % | |||||||||||||||||||
Other Information | |||||||||||||||||||||||
Consolidated revenue from: (a) | |||||||||||||||||||||||
Treasury Management (b) | $ | 785 | $ | 546 | $ | 239 | 44 | % | |||||||||||||||
Commercial mortgage banking activities: | |||||||||||||||||||||||
Commercial mortgage loans held for sale (c) | $ | 27 | $ | 16 | $ | 11 | 69 | % | |||||||||||||||
Commercial mortgage loan servicing income (d) | 39 | 68 | (29) | (43) | % | ||||||||||||||||||
Commercial mortgage servicing rights valuation, net of economic hedge | 41 | 13 | 28 | 215 | % | ||||||||||||||||||
Total | $ | 107 | $ | 97 | $ | 10 | 10 | % | |||||||||||||||
Commercial mortgage servicing statistics | |||||||||||||||||||||||
Serviced portfolio balance (in billions) (e) | $ | 281 | $ | 278 | $ | 3 | 1 | % | |||||||||||||||
MSR asset value (e) | $ | 1,061 | $ | 886 | $ | 175 | 20 | % | |||||||||||||||
Average loans by C&IB business | |||||||||||||||||||||||
Corporate Banking | $ | 118,229 | $ | 92,503 | $ | 25,726 | 28 | % | |||||||||||||||
Real Estate | 47,297 | 43,213 | 4,084 | 9 | % | ||||||||||||||||||
Business Credit | 30,180 | 26,535 | 3,645 | 14 | % | ||||||||||||||||||
Commercial Banking | 8,430 | 10,045 | (1,615) | (16) | % | ||||||||||||||||||
Other | 5,801 | 7,866 | (2,065) | (26) | % | ||||||||||||||||||
Total average loans | $ | 209,937 | $ | 180,162 | $ | 29,775 | 17 | % | |||||||||||||||
Credit-related statistics | |||||||||||||||||||||||
Nonperforming assets (e) | $ | 801 | $ | 866 | $ | (65) | (8) | % | |||||||||||||||
Net charge-offs (recoveries) - loans and leases | $ | 85 | $ | (1) | $ | 86 | * |
*- Not Meaningful
(a)See the additional revenue discussion regarding treasury management and commercial mortgage banking activities in the Product Revenue section of this Corporate & Institutional Banking section.
The PNC Financial Services Group, Inc. – Form 10-Q 17
(b)Amounts are reported in net interest income and noninterest income.
(c)Represents commercial mortgage banking income for valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, origination 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 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)As of March 31.
Corporate & Institutional Banking earnings in the first three months of 2023 increased $103 million compared to the same period in 2022 driven by higher net interest income and noninterest income, partially offset by increased noninterest expense and a lower provision recapture.
Net interest income increased in the comparison primarily due to wider interest rate spreads on the value of deposits and higher average loan balances, partially offset by narrower interest rate spreads on the value of loans and lower average deposit balances.
Noninterest income increased in the comparison and included higher capital markets and advisory fees and growth in treasury management product revenue.
Noninterest expense increased in the comparison due to continued investments to support business growth.
Average loans increased compared to the three months ended March 31, 2022 due to increases in Corporate Banking, Real Estate and Business Credit, partially offset by a decrease in Commercial Banking:
•Corporate Banking provides lending, equipment finance, treasury management and capital markets products and services to mid-sized and large corporations, and government and not-for-profit entities. Average loans for this business increased driven by strong new production throughout 2022 and higher average utilization of loan commitments.
•Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. Average loans for this business increased largely due to new production throughout 2022, partially offset by a lower average utilization of loan commitments.
•Business Credit provides asset-based lending and equipment financing solutions. The loan and lease portfolio is relatively high yielding, with acceptable risk as the loans are mainly secured by business assets. Average loans for this business increased primarily driven by new production and higher utilization of loan commitments.
•Commercial Banking provides lending, treasury management and capital markets related products and services to smaller corporations and businesses. Average loans for this business declined primarily driven by PPP loan forgiveness and lower average utilization of loan commitments.
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 decreased compared to the three months ended March 31, 2022, reflecting the impact of competitive pricing dynamics. We continue to actively monitor the interest rate environment and make adjustments to our deposit strategy in response to evolving market conditions, bank funding needs and client relationship dynamics.
Following the BBVA acquisition in 2021 and our de novo expansion efforts, we are now a coast-to-coast franchise and have a presence in the largest 30 U.S. metropolitan statistical areas. These expanded locations complement Corporate & Institutional Banking’s existing national businesses with a significant presence in these cities, and our full suite of commercial products and services are offered nationally.
Product Revenue
In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management, capital markets and advisory 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 and noninterest income, as appropriate. 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 where the customer relationship exists. The Other Information section in Table 13 includes the consolidated revenue to PNC for treasury management and commercial mortgage banking services. A discussion of the consolidated revenue from these services follows.
The Treasury Management business provides corporations with cash and investment management services, receivables and disbursement management services, funds transfer services, international payment services and access to online/mobile information management and reporting services. 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 includes funding credit from all treasury management customer deposit balances. Compared to the first three months of 2022, treasury management revenue increased due to wider interest rate spreads on the value of deposits and higher noninterest income.
18 The PNC Financial Services Group, Inc. – Form 10-Q
Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (both net interest income and noninterest income), revenue derived from commercial mortgage loans held for sale and hedges related to those activities. Total revenue from commercial mortgage banking activities increased in the comparison primarily due to a higher benefit from commercial mortgage servicing rights valuation, net of economic hedge and higher revenue from commercial mortgage loans held for sale, partially offset by lower commercial mortgage servicing income.
Capital markets and advisory includes services and activities primarily related to merger and acquisition advisory, equity capital markets advisory, asset-backed financing, loan syndication, securities underwriting and customer-related trading. The increase in capital markets and advisory fees in the comparison was mostly driven by higher fees and credit valuation on customer-related derivative activities as well as asset-backed financing and underwriting fees.
The PNC Financial Services Group, Inc. – Form 10-Q 19
Asset Management Group
The Asset Management Group strives to be the leading relationship-based provider of investment, planning, credit and cash management solutions and fiduciary services to affluent individuals and institutions by endeavoring to proactively deliver value-added ideas, solutions and exceptional service. 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) | |||||||||||||||||||||||
Three months ended March 31 | Change | ||||||||||||||||||||||
Dollars in millions, except as noted | 2023 | 2022 | $ | % | |||||||||||||||||||
Income Statement | |||||||||||||||||||||||
Net interest income | $ | 127 | $ | 138 | $ | (11) | (8) | % | |||||||||||||||
Noninterest income | 230 | 248 | (18) | (7) | % | ||||||||||||||||||
Total revenue | 357 | 386 | (29) | (8) | % | ||||||||||||||||||
Provision for credit losses | 9 | 2 | 7 | 350 | % | ||||||||||||||||||
Noninterest expense | 280 | 251 | 29 | 12 | % | ||||||||||||||||||
Pretax earnings | 68 | 133 | (65) | (49) | % | ||||||||||||||||||
Income taxes | 16 | 31 | (15) | (48) | % | ||||||||||||||||||
Earnings | $ | 52 | $ | 102 | $ | (50) | (49) | % | |||||||||||||||
Average Balance Sheet | |||||||||||||||||||||||
Loans | |||||||||||||||||||||||
Consumer | |||||||||||||||||||||||
Residential real estate | $ | 9,174 | $ | 6,989 | $ | 2,185 | 31 | % | |||||||||||||||
Other consumer | 4,156 | 4,541 | (385) | (8) | % | ||||||||||||||||||
Total consumer | 13,330 | 11,530 | 1,800 | 16 | % | ||||||||||||||||||
Commercial | 1,246 | 1,848 | (602) | (33) | % | ||||||||||||||||||
Total loans | $ | 14,576 | $ | 13,378 | $ | 1,198 | 9 | % | |||||||||||||||
Total assets | $ | 14,997 | $ | 13,801 | $ | 1,196 | 9 | % | |||||||||||||||
Deposits | |||||||||||||||||||||||
Noninterest-bearing | $ | 1,846 | $ | 3,458 | $ | (1,612) | (47) | % | |||||||||||||||
Interest-bearing | 26,337 | 29,830 | (3,493) | (12) | % | ||||||||||||||||||
Total deposits | $ | 28,183 | $ | 33,288 | $ | (5,105) | (15) | % | |||||||||||||||
Performance Ratios | |||||||||||||||||||||||
Return on average assets | 1.41 | % | 3.00 | % | |||||||||||||||||||
Noninterest income to total revenue | 64 | % | 64 | % | |||||||||||||||||||
Efficiency | 78 | % | 65 | % | |||||||||||||||||||
Supplemental Noninterest Income Information | |||||||||||||||||||||||
Asset management fees | $ | 224 | $ | 241 | $ | (17) | (7) | % | |||||||||||||||
Brokerage fees | 2 | 2 | — | ||||||||||||||||||||
Total | $ | 226 | $ | 243 | $ | (17) | (7) | % | |||||||||||||||
Other Information | |||||||||||||||||||||||
Nonperforming assets (a) | $ | 42 | $ | 72 | $ | (30) | (42) | % | |||||||||||||||
Net charge-offs - loans and leases | $ | 2 | $ | (2) | (100) | % | |||||||||||||||||
Brokerage account client assets (in billions) (a) | $ | 4 | $ | 5 | $ | (1) | (20) | % | |||||||||||||||
Client Assets Under Administration (in billions) (a) (b)
|
|||||||||||||||||||||||
Discretionary client assets under management | $ | 177 | $ | 182 | $ | (5) | (3) | % | |||||||||||||||
Nondiscretionary client assets under administration | 156 | 165 | (9) | (5) | % | ||||||||||||||||||
Total | $ | 333 | $ | 347 | $ | (14) | (4) | % | |||||||||||||||
Discretionary client assets under management | |||||||||||||||||||||||
PNC Private Bank | $ | 108 | $ | 115 | $ | (7) | (6) | % | |||||||||||||||
Institutional Asset Management | 69 | 67 | 2 | 3 | % | ||||||||||||||||||
Total | $ | 177 | $ | 182 | $ | (5) | (3) | % |
(a)As of March 31.
(b)Excludes brokerage account client assets.
The Asset Management Group consists of two primary businesses: PNC Private Bank and Institutional Asset Management.
The PNC Private Bank is focused on being a premier private bank in each of the markets it serves. This business seeks to deliver high quality banking, trust, and investment management services to our emerging affluent, high net worth and ultra high net worth clients through a broad array of products and services.
20 The PNC Financial Services Group, Inc. – Form 10-Q
Institutional Asset Management provides outsourced chief investment officer, custody, private real estate, cash and fixed income client solutions, and retirement plan fiduciary investment services to institutional clients including corporations, healthcare systems, insurance companies, unions, municipalities and non-profits.
Asset Management Group earnings in the first three months of 2023 decreased $50 million compared to the same period in 2022 primarily driven by higher noninterest expense, lower noninterest income and a decrease in net interest income.
Net interest income decreased in the comparison due to a decline in average deposits as well as narrower interest rate spreads on the value of loans.
Noninterest income decreased in the comparison primarily attributable to the asset management fee impact from lower average equity markets.
Noninterest expense increased in the comparison reflecting continued investments to support business growth.
Discretionary client assets under management decreased in comparison to the prior year, primarily due to lower equity markets as of March 31, 2023.
RISK MANAGEMENT
The Risk Management section included in Item 7 of our 2022 Form 10-K describes our enterprise risk management framework including risk culture, enterprise strategy, risk governance and oversight framework, risk identification, risk assessments, risk controls and monitoring, and risk aggregation and reporting. Additionally, our 2022 Form 10-K provides an analysis of the firm’s Capital Management and our key areas of risk, which include, but are not limited to, Credit, Market, Liquidity and Operational (including Compliance and Information Security).
Credit Risk Management
Credit risk, including our credit risk management processes, is described in further detail in the Credit Risk Management section of our 2022 Form 10-K. The following provides additional information around our loan portfolio, which is our most significant concentration of credit risk.
Loan Portfolio Characteristics and Analysis
Table 15: Details of Loans
In billions

We use several credit quality indicators, as further detailed in Note 3 Loans and Related Allowance for Credit Losses, to monitor and measure our exposure to credit risk within our loan portfolio. The following provides additional information about the significant loan classes that comprise our Commercial and Consumer portfolio segments.
The PNC Financial Services Group, Inc. – Form 10-Q 21
Commercial
Commercial and Industrial
Commercial and industrial loans comprised 56% of our total loan portfolio at both March 31, 2023 and December 31, 2022. 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, owner-occupied 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 PD and 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 geographies that may exist in our portfolio. Our commercial and industrial portfolio is well-diversified across industries as shown in the following table which provides a breakout by industry classification (classified based on the North American Industry Classification System).
Table 16: Commercial and Industrial Loans by Industry
March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||
Dollars in millions | Amount | % of Total | Amount | % of Total | |||||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||
Manufacturing | $ | 32,132 | 18 | % | $ | 30,845 | 17 | % | |||||||||||||||||||||
Retail/wholesale trade | 29,172 | 16 | 29,176 | 16 | |||||||||||||||||||||||||
Service providers | 23,186 | 13 | 23,548 | 13 | |||||||||||||||||||||||||
Financial services | 22,534 | 12 | 21,320 | 12 | |||||||||||||||||||||||||
Real estate related (a) | 17,548 | 10 | 17,780 | 10 | |||||||||||||||||||||||||
Technology, media & telecommunications | 11,338 | 6 | 11,845 | 7 | |||||||||||||||||||||||||
Health care | 10,537 | 6 | 10,649 | 6 | |||||||||||||||||||||||||
Transportation and warehousing | 7,824 | 4 | 7,858 | 4 | |||||||||||||||||||||||||
Other industries | 28,726 | 15 | 29,198 | 15 | |||||||||||||||||||||||||
Total commercial and industrial loans | $ | 182,997 | 100 | % | $ | 182,219 | 100 | % |
(a) Represents loans to customers in the real estate and construction industries.
Commercial Real Estate
Commercial real estate loans comprised $22.2 billion related to commercial mortgages on income-producing properties, $6.7 billion of real estate construction project loans and $7.1 billion of intermediate-term financing loans as of March 31, 2023. Comparable amounts as of December 31, 2022 were $22.3 billion, $6.4 billion and $7.6 billion, respectively.
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 and quality, 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.
22 The PNC Financial Services Group, Inc. – Form 10-Q
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
March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||
Dollars in millions | Amount | % of Total | Amount | % of Total | |||||||||||||||||||||||||
Geography (a) | |||||||||||||||||||||||||||||
California | $ | 6,073 | 17 | % | $ | 6,224 | 17 | % | |||||||||||||||||||||
Texas | 3,787 | 11 | 3,871 | 11 | |||||||||||||||||||||||||
Florida | 3,420 | 10 | 3,275 | 9 | |||||||||||||||||||||||||
Pennsylvania | 1,648 | 5 | 1,638 | 5 | |||||||||||||||||||||||||
Virginia | 1,611 | 4 | 1,638 | 5 | |||||||||||||||||||||||||
Maryland | 1,446 | 4 | 1,496 | 4 | |||||||||||||||||||||||||
Colorado | 1,366 | 4 | 1,336 | 4 | |||||||||||||||||||||||||
Illinois | 1,284 | 4 | 1,321 | 4 | |||||||||||||||||||||||||
Ohio | 1,183 | 3 | 1,236 | 3 | |||||||||||||||||||||||||
North Carolina | 1,147 | 3 | 1,150 | 3 | |||||||||||||||||||||||||
Other | 13,026 | 35 | 13,131 | 35 | |||||||||||||||||||||||||
Total commercial real estate loans | $ | 35,991 | 100 | % | $ | 36,316 | 100 | % | |||||||||||||||||||||
Property Type (a) | |||||||||||||||||||||||||||||
Multifamily | $ | 14,278 | 40 | % | $ | 13,738 | 38 | % | |||||||||||||||||||||
Office | 8,880 | 25 | 9,123 | 25 | |||||||||||||||||||||||||
Industrial/warehouse | 3,882 | 11 | 4,035 | 11 | |||||||||||||||||||||||||
Retail | 2,798 | 8 | 2,855 | 8 | |||||||||||||||||||||||||
Seniors housing | 1,960 | 5 | 2,228 | 6 | |||||||||||||||||||||||||
Hotel/motel | 1,830 | 5 | 1,896 | 5 | |||||||||||||||||||||||||
Mixed use | 648 | 2 | 701 | 2 | |||||||||||||||||||||||||
Other | 1,715 | 4 | 1,740 | 5 | |||||||||||||||||||||||||
Total commercial real estate loans | $ | 35,991 | 100 | % | $ | 36,316 | 100 | % |
(a) Presented in descending order based on loan balances at March 31, 2023.
As remote work continues to be a feasible alternative and notable portions of leased space remain unoccupied, real estate related to the office sector is an area of continuing uncertainty. We continue to closely monitor and manage our office portfolio for elevated levels of credit risk given the ongoing shift in office demand.
At March 31, 2023, our outstanding loan balances in the office portfolio totaled $8.9 billion, or 2.7% of total loans, while additional unfunded loan commitments totaled $0.4 billion. Nonperforming loans totaled 3.5% of total office loans outstanding at March 31, 2023, while criticized loans totaled 20.0% of this portfolio. At March 31, 2023, 0.2% of total office loans outstanding were 30 or more days delinquent. We have established reserves against these loans that we believe appropriately reflect the expected credit losses in the portfolio as of March 31, 2023.
Our office portfolio is well diversified geographically across our coast-to-coast franchise. From a tenancy category perspective, 58% of this portfolio represents multi-tenant properties at March 31, 2023, which is an area where we have noted increased stress. The remaining 42% of the portfolio is comprised of single-tenant, government tenant, and medical office tenant.
Consumer
Residential Real Estate
Residential real estate loans primarily consisted of residential mortgage loans at both March 31, 2023 and December 31, 2022.
We obtain loan attributes at origination, including FICO scores and LTVs, and we update these and other credit metrics at least quarterly. We track borrower performance monthly. We also segment the mortgage portfolio into pools based on product type (e.g., nonconforming or conforming). This information is used for internal reporting and risk management. 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 PNC Financial Services Group, Inc. – Form 10-Q 23
The following table presents certain key statistics related to our residential real estate portfolio:
Table 18: Residential Real Estate Loan Statistics
March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||
Dollars in millions | Amount | % of Total | Amount | % of Total | |||||||||||||||||||||||||
Geography (a) | |||||||||||||||||||||||||||||
California | $ | 18,802 | 41 | % | $ | 18,609 | 41 | % | |||||||||||||||||||||
Texas | 4,139 | 9 | 4,194 | 9 | |||||||||||||||||||||||||
Florida | 3,356 | 7 | 3,360 | 7 | |||||||||||||||||||||||||
Washington | 3,063 | 7 | 3,009 | 7 | |||||||||||||||||||||||||
New Jersey | 1,914 | 4 | 1,925 | 4 | |||||||||||||||||||||||||
New York | 1,556 | 3 | 1,558 | 3 | |||||||||||||||||||||||||
Arizona | 1,446 | 3 | 1,436 | 3 | |||||||||||||||||||||||||
Colorado | 1,193 | 3 | 1,192 | 3 | |||||||||||||||||||||||||
Pennsylvania | 1,192 | 3 | 1,188 | 3 | |||||||||||||||||||||||||
North Carolina | 972 | 2 | 965 | 2 | |||||||||||||||||||||||||
Other | 8,434 | 18 | 8,453 | 18 | |||||||||||||||||||||||||
Total residential real estate loans |
$ | 46,067 | 100 | % | $ | 45,889 | 100 | % | |||||||||||||||||||||
March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||
Weighted-average loan origination statistics (b) | |||||||||||||||||||||||||||||
Loan origination FICO score | 770 | 770 | |||||||||||||||||||||||||||
LTV of loan originations | 73 | % | 71 | % |
(a)Presented in descending order based on loan balances at March 31, 2023.
(b)Weighted-averages calculated for the twelve months ended March 31, 2023 and December 31, 2022, respectively.
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. Our portfolio of originated nonconforming residential mortgage loans totaled $40.9 billion at March 31, 2023 with 44% located in California. Comparable amounts at December 31, 2022 were $40.6 billion and 44%, respectively.
Home Equity
Home equity loans comprised $19.9 billion of home equity lines of credit and $6.3 billion of closed-end home equity installment loans at March 31, 2023. Comparable amounts were $19.5 billion and $6.5 billion as of December 31, 2022, respectively. Home equity lines of credit are a variable interest rate product with fixed rate conversion options available to certain borrowers.
Similar to residential real estate loans, we track borrower performance of this portfolio on a monthly basis. 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, or brokered home equity lines of credit) and track the historical performance of any related mortgage loans regardless of whether we hold such liens. This information is used for internal reporting and risk management. 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, lien position and geographic concentration.
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 a third-party service provider to obtain updated loan information, including lien and collateral data that is aggregated from public and private sources.
24 The PNC Financial Services Group, Inc. – Form 10-Q
The following table presents certain key statistics related to our home equity portfolio:
Table 19: Home Equity Loan Statistics
March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||
Dollars in millions | Amount | % of Total | Amount | % of Total | |||||||||||||||||||||||||
Geography (a) | |||||||||||||||||||||||||||||
Pennsylvania | $ | 4,959 | 19 | % | $ | 5,051 | 19 | % | |||||||||||||||||||||
New Jersey | 3,258 | 12 | 3,266 | 13 | |||||||||||||||||||||||||
Ohio | 2,326 | 9 | 2,352 | 9 | |||||||||||||||||||||||||
Florida | 2,136 | 8 | 2,082 | 8 | |||||||||||||||||||||||||
California | 1,389 | 5 | 1,247 | 5 | |||||||||||||||||||||||||
Michigan | 1,248 | 5 | 1,263 | 5 | |||||||||||||||||||||||||
Maryland | 1,245 | 5 | 1,254 | 5 | |||||||||||||||||||||||||
Texas | 1,186 | 5 | 1,144 | 4 | |||||||||||||||||||||||||
Illinois | 1,111 | 4 | 1,126 | 4 | |||||||||||||||||||||||||
North Carolina | 1,005 | 4 | 995 | 4 | |||||||||||||||||||||||||
Other | 6,340 | 24 | 6,203 | 24 | |||||||||||||||||||||||||
Total home equity loans | $ | 26,203 | 100 | % | $ | 25,983 | 100 | % | |||||||||||||||||||||
Lien type | |||||||||||||||||||||||||||||
1st lien | 56 | % | 58 | % | |||||||||||||||||||||||||
2nd lien | 44 | 42 | |||||||||||||||||||||||||||
Total | 100 | % | 100 | % | |||||||||||||||||||||||||
Weighted-average loan origination statistics (b) | March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||
Loan origination FICO score | 773 | 774 | |||||||||||||||||||||||||||
LTV of loan originations | 67 | % | 67 | % |
(a)Presented in descending order based on loan balances at March 31, 2023.
(b)Weighted-averages calculated for the twelve months ended March 31, 2023 and December 31, 2022, respectively.
Automobile
Auto loans comprised $13.8 billion in the indirect auto portfolio and $1.1 billion in the direct auto portfolio as of March 31, 2023. Comparable amounts as of December 31, 2022 were $13.7 billion and $1.1 billion, respectively. The indirect auto portfolio consists of loans originated primarily through franchised dealers, including from expansion into new markets. This business is strategically aligned with our core retail banking business.
The following table presents certain key statistics related to our indirect and direct auto portfolios:
Table 20: Auto Loan Statistics
March 31, 2023 | December 31, 2022 | |||||||
Weighted-average loan origination FICO score (a) (b) | ||||||||
Indirect auto | 785 | 784 | ||||||
Direct auto | 778 | 776 | ||||||
Weighted-average term of loan originations - in months (a) | ||||||||
Indirect auto | 73 | 73 | ||||||
Direct auto | 63 | 63 |
(a)Weighted-averages calculated for the twelve months ended March 31, 2023 and December 31, 2022, respectively.
(b)Calculated using the auto enhanced FICO scale.
We continue to focus on borrowers with strong credit profiles as evidenced by the weighted-average loan origination FICO scores noted in Table 20. We offer both new and used auto financing to customers through our various channels. At March 31, 2023, the portfolio balance was composed of 48% new vehicle loans and 52% used vehicle loans. Comparable amounts at December 31, 2022 were 50% and 50%, 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 geography, channel, collateral attributes and credit metrics which include FICO score, LTV and term.
The PNC Financial Services Group, Inc. – Form 10-Q 25
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 loans whose terms were modified as a result of a borrower’s financial difficulty and PCD loans, 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. See Note 1 Accounting Policies of this Report for details on our nonaccrual policies.
The following table presents a summary of nonperforming assets by major category:
Table 21: Nonperforming Assets by Type
March 31, 2023 | December 31, 2022 | Change | ||||||||||||||||||
Dollars in millions | $ | % | ||||||||||||||||||
Nonperforming loans (a) | ||||||||||||||||||||
Commercial | $ | 891 | $ | 858 | $ | 33 | 4 | % | ||||||||||||
Consumer (b) | 1,119 | 1,127 | (8) | (1) | % | |||||||||||||||
Total nonperforming loans | 2,010 | 1,985 | 25 | 1 | % | |||||||||||||||
OREO and foreclosed assets | 38 | 34 | 4 | 12 | % | |||||||||||||||
Total nonperforming assets | $ | 2,048 | $ | 2,019 | $ | 29 | 1 | % | ||||||||||||
Nonperforming loans to total loans | 0.62 | % | 0.61 | % | ||||||||||||||||
Nonperforming assets to total loans, OREO and foreclosed assets | 0.63 | % | 0.62 | % | ||||||||||||||||
Nonperforming assets to total assets | 0.36 | % | 0.36 | % | ||||||||||||||||
Allowance for loan and lease losses to nonperforming loans | 236 | % | 239 | % | ||||||||||||||||
Allowance for credit losses to nonperforming loans (c) | 269 | % | 274 | % |
(a)In connection with the adoption of ASU 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, nonperforming loans as of March 31, 2023 include certain loans where terms were modified as a result of a borrower’s financial difficulty. Prior period amounts included nonperforming TDRs, for which accounting guidance was eliminated effective January 1, 2023. See Note 1 Accounting Policies and the Loan Modifications to Borrowers Experiencing Financial Difficulty section of Note 3 Loans and Related Allowance for more information on our adoption of this ASU.
(b)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.
(c)Calculated excluding allowances for investment securities and other financial assets.
The following table provides details on the change in nonperforming assets for the three months ended March 31, 2023 and 2022:
Table 22: Change in Nonperforming Assets
In millions | 2023 | 2022 | |||||||||||||||
January 1 | $ | 2,019 | $ | 2,506 | |||||||||||||
New nonperforming assets | 452 | 346 | |||||||||||||||
Charge-offs and valuation adjustments | (122) | (62) | |||||||||||||||
Principal activity, including paydowns and payoffs | (172) | (274) | |||||||||||||||
Asset sales and transfers to loans held for sale | (46) | (21) | |||||||||||||||
Returned to performing status | (83) | (171) | |||||||||||||||
March 31 | $ | 2,048 | $ | 2,324 |
As of March 31, 2023, approximately 98% of total nonperforming loans were secured by collateral, which lessened reserve requirements and is expected to reduce credit losses.
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 PCD loans. Amounts exclude loans held for sale.
We manage credit risk based on the risk profile of the borrower, repayment sources, underlying collateral, and other support given current events, economic conditions and expectations. We refine our practices to meet the changing environment resulting from rising inflation levels, labor-related supply chain pressures, higher interest rates and structural and secular changes fostered by the pandemic. To mitigate losses and enhance customer support, we offer loan modifications and collection programs to assist our customers. Under
26 The PNC Financial Services Group, Inc. – Form 10-Q
the CARES Act credit reporting rules, certain loans modified due to COVID-19 related hardships are not being reported as past due as of March 31, 2023 and December 31, 2022 based on the contractual terms of the loan, even where borrowers may not be making payments on their loans during the modification period.
The following table presents a summary of accruing loans past due by delinquency status:
Table 23: Accruing Loans Past Due (a)
Amount | % of Total Loans Outstanding | ||||||||||||||||||||||||||||||||||||||||
March 31 2023 |
December 31 2022 |
Change | March 31 2023 |
December 31 2022 |
|||||||||||||||||||||||||||||||||||||
Dollars in millions | $ | % | |||||||||||||||||||||||||||||||||||||||
Early stage loan delinquencies | |||||||||||||||||||||||||||||||||||||||||
Accruing loans past due 30 to 59 days | $ | 645 | $ | 747 | $ | (102) | (14) | % | 0.20 | % | 0.23 | % | |||||||||||||||||||||||||||||
Accruing loans past due 60 to 89 days | 225 | 261 | (36) | (14) | % | 0.07 | % | 0.08 | % | ||||||||||||||||||||||||||||||||
Total early stage loan delinquencies | 870 | 1,008 | (138) | (14) | % | 0.27 | % | 0.31 | % | ||||||||||||||||||||||||||||||||
Late stage loan delinquencies | |||||||||||||||||||||||||||||||||||||||||
Accruing loans past due 90 days or more | 456 | 482 | (26) | (5) | % | 0.14 | % | 0.15 | % | ||||||||||||||||||||||||||||||||
Total accruing loans past due | $ | 1,326 | $ | 1,490 | $ | (164) | (11) | % | 0.41 | % | 0.46 | % |
(a)Past due loan amounts include government insured or guaranteed loans of $0.4 billion at both March 31, 2023 and December 31, 2022.
The decrease in accruing loans past due from December 31, 2022 was the result of lower delinquencies in both the consumer and commercial portfolios.
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.
Loan Modifications
We provide relief to our customers experiencing financial hardships through a variety of solutions. Commercial loan and lease modifications are based on each individual borrower’s situation, while consumer loan modifications are evaluated under our hardship relief programs.
On January 1, 2023, we adopted ASU 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for TDRs and enhances the disclosure requirements for certain loan modifications when a borrower is experiencing financial difficulty. Refer to Note 1 Accounting Policies and Note 3 Loans and Related Allowance for Credit Losses for additional information on our adoption of this ASU.
Allowance for Credit Losses
Our determination of the ACL is based on historical loss and performance experience, current economic conditions, reasonable and supportable forecasts of future conditions and other relevant factors, including current borrower and/or transaction characteristics. We maintain the ACL at an appropriate level for expected losses on our existing investment securities, loans, equipment finance leases, trade receivables and other financial assets and off-balance sheet credit exposures and determine this allowance based on assessments of the remaining estimated contractual term as of the balance sheet date.
See Note 1 Accounting Policies for additional discussion of our ACL, including details of our methodologies. Also see the Critical Accounting Estimates and Judgments section of this Report for further discussion of the assumptions used in the determination of the ACL as of March 31, 2023.
The PNC Financial Services Group, Inc. – Form 10-Q 27
The following table summarizes our ACL related to loans:
Table 24: Allowance for Credit Losses by Loan Class (a)
March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||
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 | $ | 1,771 | $ | 182,997 | 0.97 | % | $ | 1,957 | $ | 182,219 | 1.07 | % | |||||||||||||||||
Commercial real estate | 1,171 | 35,991 | 3.25 | % | 1,047 | 36,316 | 2.88 | % | |||||||||||||||||||||
Equipment lease financing | 104 | 6,424 | 1.62 | % | 110 | 6,514 | 1.69 | % | |||||||||||||||||||||
Total commercial | 3,046 | 225,412 | 1.35 | % | 3,114 | 225,049 | 1.38 | % | |||||||||||||||||||||
Consumer | |||||||||||||||||||||||||||||
Residential real estate | 95 | 46,067 | 0.21 | % | 92 | 45,889 | 0.20 | % | |||||||||||||||||||||
Home equity | 316 | 26,203 | 1.21 | % | 274 | 25,983 | 1.05 | % | |||||||||||||||||||||
Automobile | 199 | 14,923 | 1.33 | % | 226 | 14,836 | 1.52 | % | |||||||||||||||||||||
Credit card | 782 | 6,961 | 11.23 | % | 748 | 7,069 | 10.58 | % | |||||||||||||||||||||
Education | 64 | 2,131 | 3.00 | % | 63 | 2,173 | 2.90 | % | |||||||||||||||||||||
Other consumer | 239 | 4,778 | 5.00 | % | 224 | 5,026 | 4.46 | % | |||||||||||||||||||||
Total consumer | 1,695 | 101,063 | 1.68 | % | 1,627 | 100,976 | 1.61 | % | |||||||||||||||||||||
Total | 4,741 | $ | 326,475 | 1.45 | % | 4,741 | $ | 326,025 | 1.45 | % | |||||||||||||||||||
Allowance for unfunded lending related commitments |
672 | 694 | |||||||||||||||||||||||||||
Allowance for credit losses |
$ | 5,413 | $ | 5,435 | |||||||||||||||||||||||||
Allowance for credit losses to total loans | 1.66 | % | 1.67 | % | |||||||||||||||||||||||||
Commercial | 1.60 | % | 1.66 | % | |||||||||||||||||||||||||
Consumer | 1.79 | % | 1.69 | % |
(a) Excludes allowances for investment securities and other financial assets, which together totaled $205 million and $176 million at March 31, 2023 and December 31, 2022, respectively.
28 The PNC Financial Services Group, Inc. – Form 10-Q
The following table summarizes our loan charge-offs and recoveries:
Table 25: Loan Charge-Offs and Recoveries
Three months ended March 31 | Gross Charge-offs |
Recoveries | Net Charge-offs / (Recoveries) |
% of Average Loans (Annualized) |
|||||||||||||||||||||||||
Dollars in millions | |||||||||||||||||||||||||||||
2023 | |||||||||||||||||||||||||||||
Commercial | |||||||||||||||||||||||||||||
Commercial and industrial | $ | 104 | $ | 20 | $ | 84 | 0.19 | % | |||||||||||||||||||||
Commercial real estate | 12 | 2 | 10 | 0.11 | % | ||||||||||||||||||||||||
Equipment lease financing | 4 | 3 | 1 | 0.06 | % | ||||||||||||||||||||||||
Total commercial | 120 | 25 | 95 | 0.17 | % | ||||||||||||||||||||||||
Consumer | |||||||||||||||||||||||||||||
Residential real estate | 3 | 3 | |||||||||||||||||||||||||||
Home equity | 6 | 11 | (5) | (0.08) | % | ||||||||||||||||||||||||
Automobile | 33 | 24 | 9 | 0.24 | % | ||||||||||||||||||||||||
Credit card | 74 | 11 | 63 | 3.70 | % | ||||||||||||||||||||||||
Education | 4 | 2 | 2 | 0.37 | % | ||||||||||||||||||||||||
Other consumer | 42 | 11 | 31 | 2.57 | % | ||||||||||||||||||||||||
Total consumer | 162 | 62 | 100 | 0.40 | % | ||||||||||||||||||||||||
Total | $ | 282 | $ | 87 | $ | 195 | 0.24 | % | |||||||||||||||||||||
2022 | |||||||||||||||||||||||||||||
Commercial | |||||||||||||||||||||||||||||
Commercial and industrial | $ | 41 | $ | 30 | $ | 11 | 0.03 | % | |||||||||||||||||||||
Commercial real estate | 10 | 1 | 9 | 0.11 | % | ||||||||||||||||||||||||
Equipment lease financing | 1 | 3 | (2) | (0.13) | % | ||||||||||||||||||||||||
Total commercial | 52 | 34 | 18 | 0.04 | % | ||||||||||||||||||||||||
Consumer | |||||||||||||||||||||||||||||
Residential real estate | 7 | 5 | 2 | 0.02 | % | ||||||||||||||||||||||||
Home equity | 4 | 21 | (17) | (0.29) | % | ||||||||||||||||||||||||
Automobile | 52 | 31 | 21 | 0.52 | % | ||||||||||||||||||||||||
Credit card | 68 | 12 | 56 | 3.54 | % | ||||||||||||||||||||||||
Education | 4 | 1 | 3 | 0.48 | % | ||||||||||||||||||||||||
Other consumer | 64 | 10 | 54 | 3.88 | % | ||||||||||||||||||||||||
Total consumer | 199 | 80 | 119 | 0.51 | % | ||||||||||||||||||||||||
Total | $ | 251 | $ | 114 | $ | 137 | 0.19 | % |
Total net charge-offs increased $58 million, or 42%, for the first quarter of 2023 compared to the same period in 2022. The increase in the comparison was attributable to higher net charge-offs in our commercial portfolio, most notably within the commercial and industrial loan class, partially offset by lower consumer net charge-offs.
See Note 1 Accounting Policies in our 2022 Form 10-K and Note 3 Loans and Related Allowance for Credit Losses of 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 2022 Form 10-K.
One of the ways we monitor our liquidity is by reference to the 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. PNC and PNC Bank calculate the LCR daily and are required to maintain a regulatory minimum of 100%. The LCR for each of PNC and PNC Bank exceeded the regulatory minimum requirement throughout the first quarter of 2023. Fluctuations in our average LCR result from changes to the components of the calculation, including high-quality liquid assets and net cash outflows, as a result of ongoing business activity.
The NSFR is designed to measure the stability of the maturity structure of assets and liabilities of banking organizations over a one-year time horizon. PNC and PNC Bank calculate the NSFR on an ongoing basis and are required to maintain a regulatory minimum of 100%. The NSFR for each of PNC and PNC Bank exceeded the regulatory minimum requirement throughout the first quarter of 2023.
The PNC Financial Services Group, Inc. – Form 10-Q 29
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 2022 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 $436.8 billion at March 31, 2023 from $436.3 billion at December 31, 2022, and included a continued shift from noninterest-bearing to interest-bearing deposit products, as interest rates have risen. As of March 31, 2023, uninsured deposits represented approximately 43% of our total deposit base. The majority of our uninsured deposits are related to commercial operating and relationship accounts, which we define as commercial deposit customers who utilize two or more PNC products. See the Funding Sources portion of the Consolidated Balance Sheet Review and Business Segments Review sections of this Financial Review for additional information on our deposits and related strategies. Additionally, certain liquid assets as well as unused borrowing capacity from a number of sources are also available to manage our liquidity position.
At March 31, 2023, 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 $43.5 billion and securities available for sale totaling $43.2 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. PNC pledges securities as collateral to secure public and trust deposits, repurchase agreements and for other purposes. Pledged securities included $28.1 billion of securities held to maturity and an immaterial amount of available for sale and trading securities.
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 the Funding Sources section of the Consolidated Balance Sheet Review in this Financial Review, Note 7 Borrowed Funds included in this Report and Note 10 Borrowed Funds in the Notes To Consolidated Financial Statements included in Item 8 of our 2022 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 26: Senior and Subordinated Debt
In billions | 2023 | |||||||
January 1 | $ | 23.0 | ||||||
Issuances | 2.7 | |||||||
Calls and maturities | (0.8) | |||||||
Other | 0.4 | |||||||
March 31 | $ | 25.3 |
Bank Liquidity
Under PNC Bank’s 2014 bank note program, as amended, PNC Bank may from time to time offer up to $40.0 billion aggregate
principal amount outstanding at any one time of its unsecured senior and subordinated notes with maturity dates more than nine months (in the case of senior notes) and five years or more (in the case of subordinated notes) from their date of issue. At March 31, 2023, PNC Bank had $7.9 billion of notes outstanding under this program of which $4.8 billion were senior notes and $3.1 billion were subordinated 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 March 31, 2023, our unused secured borrowing capacity at the FHLB-Pittsburgh and the Federal Reserve Bank totaled $72.3 billion.
In March 2023, following the failures of Silicon Valley Bank and Signature Bank, the Federal Reserve created a new Bank Term Funding Program as an additional source of liquidity against high-quality securities. The program offers loans of up to one year in length to eligible depository institutions, including PNC Bank, pledging certain qualifying assets as collateral, provided that such collateral was owned by the borrower as of March 12, 2023. See the Recent Regulatory Developments section in this Financial Review and Item 1A Risk Factors for further detail on the risks related to the recent turmoil in the financial services industry and responsive measures to manage it.
PNC Bank has the ability to offer up to $10.0 billion of its commercial paper to provide additional liquidity. At March 31, 2023, there were no issuances outstanding under this program.
30 The PNC Financial Services Group, Inc. – Form 10-Q
Additionally, PNC Bank may also access funding from the parent company through deposits placed at the bank, or through issuing its senior unsecured notes.
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 liquidity to fund discretionary activities such as paying dividends to our shareholders, share repurchases and acquisitions.
At March 31, 2023, available parent company liquidity totaled $13.9 billion. Parent company liquidity is held in intercompany cash and investments. For investments with longer durations, 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 or other capital distributions it receives from PNC Bank, which may be impacted by the following:
•Bank-level capital needs,
•Laws, regulations and the results of supervisory activities,
•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 $3.6 billion at March 31, 2023. See Note 20 Regulatory Matters in the Notes To Consolidated Financial Statements included in Item 8 of our 2022 Form 10-K for 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. Authorized by the Board of Directors, the parent company has the ability to offer up to $5.0 billion of commercial paper to provide additional liquidity. At March 31, 2023, there were no commercial paper issuances outstanding.
The following table details Parent Company note issuances in the first quarter of 2023:
Table 27: Parent Company Notes Issued
Issuance Date | Amount | Description of Issuance | ||||||
January 19, 2023 | $1.25 billion | $1.25 billion of senior fixed-to-floating green bond notes with a maturity date of January 26, 2027. Interest is payable semi-annually in arrears at a fixed rate of 4.758% per annum, on January 26 and July 26 of each year, beginning on July 26, 2023. Beginning on January 26, 2026, interest is payable quarterly in arrears at a floating rate per annum equal to Compounded SOFR (determined with respect to each quarterly interest period using the SOFR Index as described in the Prospectus Supplement), plus 1.085%, on April 26, 2026, July 26, 2026, October 26, 2026, and at the maturity date. | ||||||
January 19, 2023 | $1.5 billion | $1.5 billion of senior fixed-to-floating notes with a maturity date of January 24, 2034. Interest is payable semi-annually in arrears at a fixed rate of 5.068% per annum, on January 24 and July 24 of each year, beginning on July 24, 2023. Beginning on January 24, 2033, interest is payable quarterly in arrears at a floating rate per annum equal to Compounded SOFR (determined with respect to each quarterly interest period using the SOFR Index, plus 1.933% on April 24, 2033, July 24, 2033, October 24, 2033 and at the maturity date. |
Parent company senior and subordinated debt outstanding totaled $16.0 billion and $13.1 billion at March 31, 2023 and December 31, 2022, 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 of our 2022 Form 10-K for more information on these future cash outflows. Additionally, in the normal course of business we have various commitments outstanding, certain of which are not included on our Consolidated Balance Sheet. We provide information on our commitments in Note 8 Commitments.
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.
The PNC Financial Services Group, Inc. – Form 10-Q 31
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.
The following table presents credit ratings for PNC and PNC Bank as of March 31, 2023:
Table 28: Credit Ratings for PNC and PNC Bank
March 31, 2023 | |||||||||||
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 | Aa3 | A | AA- | ||||||||
Short-term deposits | P-1 | A-1 | F1+ | ||||||||
Short-term notes | P-1 | A-1 | F1 | ||||||||
Capital Management
Detailed information on our capital management processes and activities is included in the Supervision and Regulation section of Item 1 of our 2022 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.
On February 7, 2023, PNC issued 1,500,000 depositary shares each representing 1/100th ownership in a share of 6.250% fixed-rate
reset non-cumulative perpetual preferred stock, Series W, with a par value of $1 per share.
In the first quarter of 2023, PNC returned $1.0 billion of capital to shareholders, reflecting $0.6 billion of dividends on common shares and $0.4 billion of common share repurchases, representing 2.4 million shares. Consistent with the SCB framework, which allows for capital return of amounts in excess of the SCB minimum levels, our Board of Directors has authorized a repurchase framework under the previously approved repurchase program of up to 100 million common shares, of which approximately 47% were still available for repurchase at March 31, 2023. Due to recent market volatility and increased economic uncertainty, share repurchase activity is expected to be reduced in the second quarter of 2023 compared to recent quarters. PNC continues to evaluate and may adjust share repurchase activity, as actual amounts and timing are dependent on market and economic conditions as well as other factors. PNC's SCB for the four-quarter period that began October 1, 2022 is 2.9%.
On April 3, 2023, the PNC Board of Directors declared a quarterly cash dividend on common stock of $1.50 per share payable on May 5, 2023.
On April 5, 2023, PNC submitted its 2023 Capital Plan to the Federal Reserve under the Federal Reserve’s CCAR process. We anticipate that the Federal Reserve will provide the updated SCB requirement on a preliminary basis to PNC by June 30, 2023. The updated SCB will become effective October 1, 2023. Refer to the Supervision and Regulation section in our 2022 Form 10-K for additional information on CCAR and the SCB framework.
32 The PNC Financial Services Group, Inc. – Form 10-Q
Table 29: Basel III Capital
March 31, 2023 | ||||||||
Dollars in millions | Basel III (a) | Fully Implemented (estimated) (b) |
||||||
Common equity Tier 1 capital | ||||||||
Common stock plus related surplus, net of treasury stock | $ | (3,681) | $ | (3,681) | ||||
Retained earnings | 55,081 | 54,598 | ||||||
Goodwill, net of associated deferred tax liabilities | (10,756) | (10,756) | ||||||
Other disallowed intangibles, net of deferred tax liabilities | (363) | (363) | ||||||
Other adjustments/(deductions) | (92) | (93) | ||||||
Common equity Tier 1 capital (c) | $ | 40,189 | $ | 39,705 | ||||
Additional Tier 1 capital | ||||||||
Preferred stock plus related surplus | 7,235 | 7,235 | ||||||
Tier 1 capital | $ | 47,424 | $ | 46,940 | ||||
Additional Tier 2 capital | ||||||||
Qualifying subordinated debt | 3,541 | 3,541 | ||||||
Eligible credit reserves includable in Tier 2 capital | 4,765 | 5,242 | ||||||
Total Basel III capital | $ | 55,730 | $ | 55,723 | ||||
Risk-weighted assets | ||||||||
Basel III standardized approach risk-weighted assets (d) | $ | 435,827 | $ | 436,022 | ||||
Average quarterly adjusted total assets | $ | 556,297 | $ | 555,812 | ||||
Supplementary leverage exposure (e) | $ | 659,292 | $ | 659,291 | ||||
Basel III risk-based capital and leverage ratios (f) | ||||||||
Common equity Tier 1 | 9.2 | % | 9.1 | % | ||||
Tier 1 | 10.9 | % | 10.8 | % | ||||
Total | 12.8 | % | 12.8 | % | ||||
Leverage (g) | 8.5 | % | 8.4 | % | ||||
Supplementary leverage ratio (e) | 7.2 | % | 7.1 | % |
(a)The ratios are calculated to reflect PNC’s election to adopt the CECL five-year transition provisions. Effective for the first quarter 2022, PNC is now in the three-year transition period and the full impact of the CECL standard is being phased-in to regulatory capital through December 31, 2024.
(b)The ratios are calculated to reflect the full impact of CECL and excludes the benefits of the optional five-year transition.
(c)As permitted, PNC and PNC Bank have elected to exclude AOCI related to both available for sale securities and pension and other post-retirement plans from CET1 capital.
(d)Basel III standardized approach risk-weighted assets are based on the Basel III standardized approach rules and include credit and market risk-weighted assets.
(e)The Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure, which takes into account the quarterly average of both on balance sheet assets as well as certain off-balance sheet items, including loan commitments and potential future exposure under derivative contracts.
(f)All ratios are calculated using the regulatory capital methodology applicable to PNC and calculated based on the standardized approach.
(g)Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets.
PNC’s regulatory risk-based capital ratios are calculated using the standardized approach for determining risk-weighted assets. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, nonaccruals, financial difficulty modifications, past due exposures and equity exposures are generally subject to higher risk weights than other types of exposures.
The regulatory agencies have adopted a rule permitting certain banks, including PNC, 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, excluding the allowance for PCD loans, compared to CECL ACL at adoption. Effective for the first quarter of 2022, PNC is now in the three-year transition period, and the full impact of the CECL standard is being phased-in to regulatory capital through December 31, 2024. See additional discussion of this rule in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of our 2022 Form 10-K.
At March 31, 2023, PNC and PNC Bank were 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%.
Federal banking regulators have stated that they expect the largest U.S. 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
The PNC Financial Services Group, Inc. – Form 10-Q 33
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 we believe that our March 31, 2023 capital levels were aligned with them.
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 20 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of our 2022 Form 10-K.
Market Risk Management
See the Market Risk Management portion of the Risk Management Section in our 2022 Form 10-K for additional discussion regarding market risk.
Market Risk Management – Interest Rate Risk
Interest rate risk results primarily from our traditional banking activities of gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest that we earn on assets and the interest that we pay on liabilities and the level of our noninterest-bearing funding sources. Due to the repricing term mismatches and embedded options inherent in certain of these products, changes in market interest rates not only affect expected near-term earnings, but also the economic values of these assets and liabilities.
Our Asset and Liability Management group centrally manages interest rate risk as prescribed in our risk management policies, which are approved by management’s Asset and Liability Committee and the Risk Committee of the Board of Directors.
Sensitivity results and market interest rate benchmarks for the first quarters of 2023 and 2022 follow:
Table 30: Interest Sensitivity Analysis
First Quarter 2023 | First Quarter 2022 | |||||||||||||
Net Interest Income Sensitivity Simulation | ||||||||||||||
Effect on net interest income in first year from gradual interest rate change over the following 12 months of: |
||||||||||||||
100 basis point increase | 0.5 | % | 4.6 | % | ||||||||||
100 basis point decrease (a) | (0.6) | % | N/A | |||||||||||
Effect on net interest income in second year from gradual interest rate change over the preceding 12 months of: |
||||||||||||||
100 basis point increase | 1.3 | % | 7.3 | % | ||||||||||
100 basis point decrease (a) | (1.8) | % | N/A | |||||||||||
(a)Due to the prevailing low interest rate environment post pandemic, the reporting of Net interest income sensitivities for the 100 basis point decrease scenario was suspended from the first quarter of 2020 to the first quarter of 2022.
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 31 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 100 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 31: Net Interest Income Sensitivity to Alternative Rate Scenarios
March 31, 2023 | ||||||||||||||
PNC Economist |
Market Forward |
Slope Flattening |
||||||||||||
First year sensitivity | (0.2) | % | 1.9 | % | (0.6) | % | ||||||||
Second year sensitivity | 1.3 | % | 2.1 | % | (2.8) | % |
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 30 and 31. These simulations assume that as assets and liabilities mature, they are replaced or repriced at then-current market rates.
34 The PNC Financial Services Group, Inc. – Form 10-Q
The following graph presents the SOFR curves for the base rate scenario and each of the alternate scenarios one year forward:
Table 32: Alternate Interest Rate Scenarios: One Year Forward

The first quarter 2023 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.
LIBOR Transition
The scheduled cessation of the requirement that banks submit rates for the calculation of LIBOR after June 30, 2023 presents risks to the financial instruments originated, held or serviced by PNC that use LIBOR as a reference rate. For more discussion regarding the transition from LIBOR, see Item 1 Risk Factors and the Risk Management section in Item 7 of our 2022 Form 10-K.
As of December 31, 2021, PNC Bank ceased entering into new contracts with a LIBOR reference rate, except on a limited basis, as permissible. PNC is offering conforming adjustable-rate mortgages using SOFR instead of USD LIBOR, in line with Fannie Mae and Freddie Mac requirements, nonconforming adjustable-rate residential mortgages using SOFR and private education loans using Prime. Alternative rates, primarily SOFR and BSBY, are currently offered to our corporate and commercial customers. The focus for all lines of business is planning for the cessation event in June 2023 and client communication and outreach.
The Federal Reserve adopted a final rule effective February 27, 2023 that implements the Adjustable Interest Rate LIBOR Act (the “LIBOR Act”) by identifying benchmark rates based on SOFR that will replace LIBOR in certain financial contracts after June 30, 2023. The final rule identifies replacement benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month, and 12-month LIBOR contracts subject to the LIBOR Act. These contracts include U.S. contracts that do not mature before publication of LIBOR ends June 30, 2023, and that lack adequate fallback provisions that would replace LIBOR with a practicable replacement benchmark rate.
In addition to the previously announced transition of PNC’s Series O, Series R and Series S preferred stock to three-month CME Term SOFR plus a tenor spread adjustment of 0.26161% per annum (“Adjusted 3-Month CME Term SOFR”), PNC will also rely on the LIBOR Act and its implementing regulations to transition the calculation of interest on the junior subordinated debentures issued by The PNC Financial Services Group, Inc. and owned by PNC Capital Trust C, a wholly-owned finance subsidiary of The PNC Financial Services Group, Inc., as well as the calculation of distributions on the trust preferred securities issued by PNC Capital Trust C. Adjusted 3-Month CME Term SOFR will be the replacement reference rate and will be used with respect to interest or distribution periods, as applicable, with determination dates occurring after June 30, 2023. Further, two series of debt securities issued by a predecessor banking subsidiary, National City Bank, will also rely on the LIBOR Act to transition the calculation of interest. The National City Bank Notes due April 1, 2043 will use Adjusted 3-Month CME Term SOFR as the replacement reference rate for interest periods with determination dates occurring after June 30, 2023. The National City Bank Notes due April 1, 2037 will use one-month CME Term SOFR plus a tenor spread adjustment of 0.11448% per annum as the replacement reference rate with respect to interest periods with determination dates occurring after June 30, 2023.
The PNC Financial Services Group, Inc. – Form 10-Q 35
PNC is actively working to address other contracts without sufficient fallbacks in advance of LIBOR cessation; however, PNC does expect to leverage the LIBOR Act for its intended purpose to address difficult exposures when necessary. We anticipate these exposures to be a small subset of our overall portfolio.
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 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. VaR is calculated for each of the portfolios that comprise our customer-related trading activities of which the majority are covered positions as defined by the Market Risk Rule. VaR is computed with positions and market risk factors updated daily to ensure each portfolio is operating within its acceptable limits.
See the Market Risk Management – Customer-Related Trading Risk section of our 2022 Form 10-K for more information on our models used to calculate VaR and our backtesting process. Customer-related trading revenue was $84 million for the three months ended March 31, 2023, compared to $88 million for the three months ended March 31, 2022. The decrease was mainly due to lower derivative client sales revenue, offset by increases in client related trading results.
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, consistent with regulatory limitations. 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 33: Equity Investments Summary
March 31 2023 |
December 31 2022 |
Change | ||||||||||||||||||||||||
Dollars in millions | $ | % | ||||||||||||||||||||||||
Tax credit investments | $ | 4,056 | $ | 4,308 | $ | (252) | (6) | % | ||||||||||||||||||
Private equity and other | 4,267 | 4,129 | 138 | 3 | % | |||||||||||||||||||||
Total | $ | 8,323 | $ | 8,437 | $ | (114) | (1) | % |
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 $2.4 billion and $2.5 billion at March 31, 2023 and December 31, 2022, respectively. These unfunded commitments are included in Other liabilities on our Consolidated Balance Sheet.
Note 5 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in Item 8 of our 2022 Form 10-K has further information on tax credit investments.
Private Equity and Other
The largest component of our other equity investments is 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 $2.0 billion and $1.8 billion at March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023, $1.8 billion was invested directly in a variety of companies and $0.2 billion was invested indirectly through various private equity funds.
Included in our other equity investments are Visa Class B common shares, which are recorded at cost. Visa Class B common shares that we own are transferable only under limited circumstances until they can be converted into shares of the publicly-traded Class A common shares, which cannot happen until the resolution of the pending interchange litigation. Based upon the March 31, 2023 per share closing price of $225.46 for a Visa Class A common share, the estimated value of our total investment in the Class B common shares was approximately $1.3 billion at the current conversion rate of Visa B shares to Visa A shares, while our cost basis was insignificant. See Note 15 Fair Value and Note 21 Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8 of our 2022 Form 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 shares’ limited transferability and the lack of observable transactions in the marketplace.
36 The PNC Financial Services Group, Inc. – Form 10-Q
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 $21 million for the three months ended March 31, 2023 and $20 million for the three months ended March 31, 2022.
Financial Derivatives
We use a variety of financial derivatives as part of the overall asset and liability risk management process to help manage exposure to market (primarily interest rate) and credit risk inherent in our business activities. We also enter into derivatives with customers to facilitate their risk management activities.
Financial derivatives involve, to varying degrees, market and credit risk. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional and an underlying as specified in the contract. Therefore, cash requirements and exposure to credit risk are significantly less than the notional amount on these instruments.
Further information on our financial derivatives is presented in Note 1 Accounting Policies, Note 15 Fair Value and Note 16 Financial Derivatives in our Notes To Consolidated Financial Statements in Item 8 of our 2022 Form 10-K and in Note 11 Fair Value and Note 12 Financial Derivatives.
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
Bank Failures and Resolutions
Following the bank failures in March 2023 of Silicon Valley Bank, Santa Clara, California, and Signature Bank, New York, New York, and after recommendations by the boards of the FDIC and Federal Reserve and a determination by the Secretary of the Treasury in consultation with the President, the FDIC invoked the systemic risk exception to certain resolution-related and Deposit Insurance Fund restrictions in order to fully protect all depositors of both institutions, including uninsured deposits. By law, any losses to the Deposit Insurance Fund to support uninsured depositors under the systemic risk exception must be recovered by one or more special assessments on insured depository institutions or depository institution holding companies, or both. The FDIC has not yet announced the amount or timeline of any special assessments.
The Federal Reserve also created a new Bank Term Funding Program as an additional source of liquidity against high-quality securities in order to make additional funding available to eligible depository institutions. This program offers loans of up to one year in length to eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral, provided that such collateral was owned by the borrower as of March 12, 2023. These pledged assets will be valued at par under the Program. Eligible institutions can request advances under the Program at least through March 11, 2024.
Other Developments
In February 2023, the CFPB issued a notice of proposed rulemaking to amend the rules under the Truth in Lending Act governing credit card late fees that could reduce credit card fee income for credit card issuers, including PNC Bank. Among other things, the proposed rule would lower the safe harbor dollar amount for credit card late fees that issuers can charge to $8 regardless of whether the late payment is the initial or a subsequent late payment from $30 for an initial late payment and $41 for subsequent late payments. The proposal also would eliminate the inflation adjustment to the safe harbor and cap late fees at 25% of the consumer’s required minimum payment. The proposal also seeks comment on, among other things, whether to eliminate the safe harbor or to require a grace period of 15 calendar days before a card issuer can impose a late fee.
In February 2023, the SEC proposed changes to the rules under the Investment Advisers Act of 1940 governing the custody of client assets that would increase the obligations of registered investment advisers, such as PNC Investments, PNC Capital Advisors, LLC, and PNC TC, LLC and impact PNC Bank in its role as custodian for the clients of registered investment advisers. Among other things, the proposal would expand the current custody rule to apply to additional advisory activities and all client assets held in advisory accounts. Investment advisers with custody of client assets would be required to maintain them with a qualified custodian and enter into a written agreement and receive certain assurances from the qualified custodian regarding custodial protections. Qualified custodians would be required to hold client cash off-balance sheet, potentially reducing the liquidity available for bank lending and other activities. The SEC also has proposed rules and rule changes that would impose new obligations on registered broker-dealers and registered investment advisers with respect to cybersecurity and safeguarding of customer information, as well as mandatory swing pricing of mutual fund shares and a hard close for transacting in fund shares that would fundamentally change current industry practices.
In March 2023, the CFPB finalized its rule to implement small business data collection under Section 1071 of the Dodd-Frank Act. The final rule introduces substantial data collection and reporting requirements for small business lenders, including PNC Bank, in connection with credit applications by small businesses, which impose significant compliance and operational risks and costs. Under
The PNC Financial Services Group, Inc. – Form 10-Q 37
the final rule, PNC Bank must begin collecting certain prescribed information from small business credit applicants by no later than October 1, 2024, and begin reporting such data to the CFPB by June 1, 2025.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Our consolidated financial statements are prepared by applying certain accounting policies. Note 1 Accounting Policies in our 2022 Form 10-K describes the most significant accounting policies that we use. Certain of these 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 policies and judgments related to residential and commercial MSRs and Level 3 fair value measurements are described in Critical Accounting Estimates and Judgments in our 2022 Form 10-K. The following details the critical estimates and judgments around the ACL.
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, equipment finance leases, other financial assets and unfunded lending related commitments, for the remaining contractual term of the assets or exposures, taking into consideration expected prepayments and estimated recoveries. Our determination of the ACL is based on historical loss and performance experience, as well as current borrower and transaction characteristics including collateral type and quality, 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 and to estimate expected credit losses. We evaluate and, when appropriate, enhance the quality of our data and models and other methods used to estimate the ACL on an ongoing basis. We incorporate qualitative factors in the ACL that reflect our best estimate of expected losses that may not be adequately represented in our quantitative methods or economic assumptions. The major drivers of ACL estimates include, but are not limited to:
•Current economic conditions: Our forecast of expected losses depends on economic conditions as of the estimation date. As current economic conditions evolve, forecasted losses could be materially affected.
•Scenario weights and design: Our loss estimates are sensitive to the shape, direction and rate of change 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.
•Current borrower quality: Our forecast of expected losses depends on current borrower and transaction characteristics, including credit metrics and collateral type/quality. As borrower quality evolves, forecasted losses could be materially affected.
•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 and derecognized upon paydown, maturity or sale.
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.
Reasonable and Supportable Economic Forecast
Under the CECL standard, we are required to consider reasonable and supportable forecasts in estimating expected credit losses. For this purpose, we have established a framework that includes a three-year forecast period and the use of four economic scenarios with associated probability weights, which in combination create a forecast of expected economic outcomes. Credit losses estimated in our reasonable and supportable forecast period 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 reasonable and supportable forecast period. Each scenario is then given an associated probability (weight) in order to represent our current expectation within that distribution over the forecast period. This process is informed by current economic conditions, expected business cycle evolution and the expert judgment of PNC’s 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 to RAC for approval, and the committee determines and approves CECL scenarios’ weights for use for the current reporting period.
The scenarios used for the period ended March 31, 2023 reflect an increase in downside risk compared to December 31, 2022. The current outlook considers ongoing inflationary pressures, along with the projected impacts of the recent stress on the banking industry. Our most-likely expectation at March 31, 2023 is that the U.S. economy will be impacted by a mild recession in the second half of the year.
38 The PNC Financial Services Group, Inc. – Form 10-Q
We used a number of economic variables in our scenarios, with two of the most significant drivers being real GDP and the U.S. unemployment rate. The following table presents a comparison of these two economic variables based on the weighted-average scenario forecasts used in determining our ACL at March 31, 2023 and December 31, 2022.
Table 34: Key Macroeconomic Variables in CECL Weighted-Average Scenarios
Assumptions as of March 31, 2023 | |||||||||||
2023 | 2024 | 2025 | |||||||||
U.S. real GDP (a) | 0.4% | 0.3% | 1.9% | ||||||||
U.S. unemployment rate (b) | 4.1% | 5.0% | 4.4% | ||||||||
Assumptions as of December 31, 2022 | |||||||||||
2023 | 2024 | 2025 | |||||||||
U.S. real GDP (a) | (0.4)% | 1.4% | 1.9% | ||||||||
U.S. unemployment rate (b) | 4.9% | 4.9% | 4.4% |
(a)Represents year-over-year growth (loss) rates.
(b)Represents quarterly average rate at December 31, 2023, 2024 and 2025, respectively.
Real GDP growth is expected to end 2023 at 0.4% on a weighted average basis, up from the (0.4%) assumed at December 31, 2022 due primarily to stronger economic activity at the start of 2023. Growth then drops narrowly to 0.3% in 2024, before jumping to 1.9% in 2025. In line with stronger-than-anticipated job growth at the start of 2023, the weighted-average projection of the unemployment rate is expected to end 2023 at 4.1%, down from the 4.9% assumed at December 31, 2022. In line with the slowing in overall economic activity, the weighted average unemployment rate is expected to increase throughout 2023 and 2024, peaking at 5.0% by year-end 2024, and gradually improving to 4.4% by the fourth quarter of 2025.
The current state of the economy reflects an environment with receding COVID-19 related risks, but heightened uncertainty remains due to structural and secular changes fostered by the pandemic for certain sectors of the economy combined with inflation, rising interest rates and ongoing labor-related supply chain pressures. As such, for both our commercial and consumer loan portfolios, PNC identified and performed significant analysis around segments impacted by such uncertainties to ensure our reserves are adequate, given our current macroeconomic expectations.
We believe the economic scenarios effectively reflect the distribution of potential economic outcomes. Additionally, through in-depth and granular analysis we have addressed reserve requirements for the specific populations most affected in the current environment. Through this approach, we believe the reserve levels appropriately reflect the expected credit losses in the portfolio as of the balance sheet date.
See the following for additional details on the components of our ACL:
•Allowance For Credit Losses in the Credit Risk Management section of this Financial Review, and
•Note 2 Investment Securities and Note 3 Loans and Related Allowance for Credit Losses in this Report.
The PNC Financial Services Group, Inc. – Form 10-Q 39
Recently Issued Accounting Standards
Accounting Standards Update |
Description |
Financial Statement Impact |
||||||
Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method – ASU 2023-02
Issued March 2023
|
• Required effective date of January 1, 2024; early adoption is permitted.
• The amendments in this Update must be applied on either a modified retrospective or a retrospective basis.
• The amendments in this Update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met.
• A reporting entity makes an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments.
|
• We are currently evaluating when to adopt the amendments in ASU 2023-02 and the impact of the ASU on our consolidated results of operations and our consolidated financial position.
|
Recently Adopted Accounting Pronouncements
See Note 1 Accounting Policies regarding the impact of new accounting pronouncements that we have adopted.
INTERNAL CONTROLS AND DISCLOSURE CONTROLS AND PROCEDURES
As of March 31, 2023, we performed an evaluation under the supervision of and with the participation of our management, including the Chairman, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures and of changes in our internal control over financial reporting.
Based on that evaluation, our Chairman, President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were effective as of March 31, 2023, and that there has been no change in PNC’s internal control over financial reporting that occurred during the first quarter of 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
We make statements in this Report, and we may from time to time make other statements, regarding our outlook for financial performance, such as 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, including our sustainability strategy, 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 any obligation 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:
40 The PNC Financial Services Group, Inc. – Form 10-Q
–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, market interest rates and inflation,
–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 sanctions, tariffs and other trade policies of the U.S. and its global trading partners,
–A continuation of recent turmoil in the banking industry, responsive measures to mitigate and manage it and related supervisory and regulatory actions and costs,
–Impacts of changes in federal, state and local governmental policy, including on the regulatory landscape, capital markets, taxes, infrastructure spending and social programs,
–PNC’s ability to attract, recruit and retain skilled employees, and
–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 views that:
–The economy continues to expand in the first half of 2023, but economic growth is slowing in response to the ongoing Federal Reserve monetary policy tightening to slow inflation. This has led to large increases in both short- and long-term interest rates. With much higher mortgage rates the housing market is already in contraction, with steep drops in existing home sales and single-family housing starts, and a modest decline in house prices. Other sectors where interest rates play an outsized role, such as business investment and consumer spending on durable goods, will contract over 2023.
–PNC’s baseline outlook is for a recession starting in the second half of 2023, with real GDP contracting less than 1% before recovery starts in the first half of 2024 as the Federal Reserve lowers interest rates in response to a deteriorating labor market and slower inflation. The unemployment rate will increase throughout 2023, peaking at above 5% in the second half of 2024. Inflation will slow with the recession and be back to the Federal Reserve’s 2% long-term objective by mid-2024.
–PNC expects the FOMC to raise the federal funds rate by 25 basis points in May. This would bring the federal funds rate to a range of 5.00% to 5.25% by early-May. PNC expects a federal funds rate cut of 25 basis points in early 2024 as inflation moves toward the FOMC’s 2% long-term objective.
•PNC’s ability to take certain capital actions, including returning capital to shareholders, is subject to PNC meeting or exceeding an SCB established by the Federal Reserve Board in connection with the Federal Reserve Board’s CCAR process.
•PNC’s regulatory capital ratios in the future will depend on, among other things, our financial performance, the scope and terms of final capital regulations then in effect and management actions affecting the composition of PNC’s balance sheet. In addition, PNC’s ability to determine, evaluate and forecast regulatory capital ratios, and to take actions (such as capital distributions) based on actual or forecasted capital ratios, will be dependent at least in part on the development, validation and regulatory review of related models and the reliability of and risks resulting from extensive use of such 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 employees. These developments could include:
–Changes to laws and regulations, including changes affecting oversight of the financial services industry, changes in the enforcement and interpretation of such laws and regulations, and changes in accounting and reporting standards.
–Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries resulting in monetary losses, costs, or alterations in our business practices, and potentially causing reputational harm to PNC.
–Results of the regulatory examination and supervision process, including our failure to satisfy requirements of agreements with governmental agencies.
–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.
•Our reputation and business and operating results may be affected by our ability to appropriately meet or address environmental, social or governance targets, goals, commitments or concerns that may arise.
•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
The PNC Financial Services Group, Inc. – Form 10-Q 41
well as risks and uncertainties related to the acquisition transactions themselves, regulatory issues, the integration of the acquired businesses into PNC after closing or any failure to execute strategic or operational plans.
•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 manmade, natural and other disasters (including severe weather events), health emergencies, dislocations, geopolitical instabilities or events, terrorist activities, system failures or disruptions, security breaches, cyberattacks, international hostilities, or other extraordinary events beyond PNC’s control through impacts on the economy and financial markets generally or on us or our counterparties, customers or third-party vendors and service providers specifically.
We provide greater detail regarding these as well as other factors in our 2022 Form 10-K and subsequent Form 10-Qs 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. Our forward-looking statements may also be subject to other risks and uncertainties, including those discussed elsewhere in this Report or in our other filings with the SEC.
42 The PNC Financial Services Group, Inc. – Form 10-Q
CONSOLIDATED INCOME STATEMENT
THE PNC FINANCIAL SERVICES GROUP, INC.
Unaudited | Three months ended March 31 |
||||||||||
In millions, except per share data | 2023 | 2022 | |||||||||
Interest Income | |||||||||||
Loans | $ | $ | |||||||||
Investment securities | |||||||||||
Other | |||||||||||
Total interest income | |||||||||||
Interest Expense | |||||||||||
Deposits | |||||||||||
Borrowed funds | |||||||||||
Total interest expense | |||||||||||
Net interest income | |||||||||||
Noninterest Income | |||||||||||
Asset management and brokerage | |||||||||||
Capital markets and advisory | |||||||||||
Card and cash management | |||||||||||
Lending and deposit services | |||||||||||
Residential and commercial mortgage | |||||||||||
Other | |||||||||||
Total noninterest income | |||||||||||
Total revenue | |||||||||||
Provision For (Recapture of) Credit Losses | ( |
||||||||||
Noninterest Expense | |||||||||||
Personnel | |||||||||||
Occupancy | |||||||||||
Equipment | |||||||||||
Marketing | |||||||||||
Other | |||||||||||
Total noninterest expense | |||||||||||
Income before income taxes and noncontrolling interests | |||||||||||
Income taxes | |||||||||||
Net income | |||||||||||
Less: Net income attributable to noncontrolling interests | |||||||||||
Preferred stock dividends | |||||||||||
Preferred stock discount accretion and redemptions | |||||||||||
Net income attributable to common shareholders | $ | $ | |||||||||
Earnings Per Common Share | |||||||||||
Basic | $ | $ | |||||||||
Diluted | $ | $ | |||||||||
Average Common Shares Outstanding | |||||||||||
Basic | |||||||||||
Diluted |
See accompanying Notes To Consolidated Financial Statements.
The PNC Financial Services Group, Inc. – Form 10-Q 43
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
THE PNC FINANCIAL SERVICES GROUP, INC.
Unaudited In millions |
Three months ended March 31 |
||||||||||
2023 | 2022 | ||||||||||
Net income | $ | $ | |||||||||
Other comprehensive income (loss), before tax and net of reclassifications into Net income | |||||||||||
Net change in debt securities | ( |
||||||||||
Net change in cash flow hedge derivatives | ( |
||||||||||
Pension and other postretirement benefit plan adjustments | ( |
||||||||||
Net change in Other | ( |
||||||||||
Other comprehensive income (loss), before tax and net of reclassifications into Net income | ( |
||||||||||
Income tax benefit (expense) related to items of other comprehensive income | ( |
||||||||||
Other comprehensive income (loss), after tax and net of reclassifications into Net income | ( |
||||||||||
Comprehensive income (loss) | ( |
||||||||||
Less: Comprehensive income attributable to noncontrolling interests | |||||||||||
Comprehensive income (loss) attributable to PNC | $ | $ | ( |
See accompanying Notes To Consolidated Financial Statements.
44 The PNC Financial Services Group, Inc. – Form 10-Q
CONSOLIDATED BALANCE SHEET
THE PNC FINANCIAL SERVICES GROUP, INC.
Unaudited | March 31 2023 |
December 31 2022 |
|||||||||
In millions, except par value | |||||||||||
Assets | |||||||||||
Cash and due from banks | $ | $ | |||||||||
Interest-earning deposits with banks | |||||||||||
Loans held for sale (a) | |||||||||||
Investment securities – available for sale | |||||||||||
Investment securities – held to maturity | |||||||||||
Loans (a) | |||||||||||
Allowance for loan and lease losses | ( |
( |
|||||||||
Net loans | |||||||||||
Equity investments | |||||||||||
Mortgage servicing rights | |||||||||||
Goodwill | |||||||||||
Other (a) | |||||||||||
Total assets | $ | $ | |||||||||
Liabilities | |||||||||||
Deposits | |||||||||||
Noninterest-bearing | $ | $ | |||||||||
Interest-bearing | |||||||||||
Total deposits | |||||||||||
Borrowed funds | |||||||||||
Federal Home Loan Bank borrowings | |||||||||||
Senior debt | |||||||||||
Subordinated debt | |||||||||||
Other (b) | |||||||||||
Total borrowed funds | |||||||||||
Allowance for unfunded lending related commitments | |||||||||||
Accrued expenses and other liabilities | |||||||||||
Total liabilities | |||||||||||
Equity | |||||||||||
Preferred stock (c) | |||||||||||
Common stock ($ |
|||||||||||
Capital surplus | |||||||||||
Retained earnings | |||||||||||
Accumulated other comprehensive income (loss) | ( |
( |
|||||||||
Common stock held in treasury at cost: |
( |
( |
|||||||||
Total shareholders’ equity | |||||||||||
Noncontrolling interests | |||||||||||
Total equity | |||||||||||
Total liabilities and equity | $ | $ |
(a)Our consolidated assets included the following for which we have elected the fair value option: Loans held for sale of $0.9 billion, Loans held for investment of $1.3 billion and Other assets of $0.1 billion at both March 31, 2023 and December 31, 2022.
(b)Our consolidated liabilities included the following for which we have elected the fair value option: Other borrowed funds of less than $0.1 billion and Other liabilities of $0.1 billion at March 31, 2023. Comparable amounts at December 31, 2022 were less than $0.1 billion and $0.2 billion.
(c)Par value less than $0.5 million at each date.
See accompanying Notes To Consolidated Financial Statements.
The PNC Financial Services Group, Inc. – Form 10-Q 45
CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
Unaudited In millions |
Three months ended March 31 | ||||||||||||||||
2023 | 2022 | ||||||||||||||||
Operating Activities | |||||||||||||||||
Net income | $ | $ | |||||||||||||||
Adjustments to reconcile net income to net cash provided (used) by operating activities | |||||||||||||||||
Provision for (recapture of) credit losses | ( |
||||||||||||||||
Depreciation, amortization and accretion | |||||||||||||||||
Deferred income taxes (benefit) | ( |
||||||||||||||||
Changes in fair value of mortgage servicing rights | ( |
||||||||||||||||
Net change in | |||||||||||||||||
Trading securities and other short-term investments | ( |
( |
|||||||||||||||
Loans held for sale and related securitization activity | ( |
||||||||||||||||
Other assets | ( |
||||||||||||||||
Accrued expenses and other liabilities | ( |
||||||||||||||||
Other | |||||||||||||||||
Net cash provided (used) by operating activities | $ | $ | ( |
||||||||||||||
Investing Activities | |||||||||||||||||
Sales | |||||||||||||||||
Securities available for sale | $ | ( |
$ | ||||||||||||||
Loans | |||||||||||||||||
Repayments/maturities | |||||||||||||||||
Securities available for sale | |||||||||||||||||
Securities held to maturity | |||||||||||||||||
Purchases | |||||||||||||||||
Securities available for sale | ( |
( |
|||||||||||||||
Securities held to maturity | ( |
( |
|||||||||||||||
Loans | ( |
( |
|||||||||||||||
Net change in | |||||||||||||||||
Federal funds sold and resale agreements | ( |
||||||||||||||||
Interest-earning deposits with banks | ( |
||||||||||||||||
Loans | ( |
( |
|||||||||||||||
Other | ( |
||||||||||||||||
Net cash provided (used) by investing activities | $ | ( |
$ |
46 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 |
Three months ended March 31 | ||||||||||||||||
2023 | 2022 | ||||||||||||||||
Financing Activities | |||||||||||||||||
Net change in | |||||||||||||||||
Noninterest-bearing deposits | $ | ( |
$ | ( |
|||||||||||||
Interest-bearing deposits | ( |
||||||||||||||||
Federal funds purchased and repurchase agreements | ( |
||||||||||||||||
Short-term Federal Home Loan Bank borrowings | ( |
||||||||||||||||
Other borrowed funds | ( |
||||||||||||||||
Sales/issuances | |||||||||||||||||
Senior debt | |||||||||||||||||
Other borrowed funds | |||||||||||||||||
Preferred stock | |||||||||||||||||
Common and treasury stock | |||||||||||||||||
Repayments/maturities | |||||||||||||||||
Federal Home Loan Bank borrowings | ( |
||||||||||||||||
Senior debt | ( |
||||||||||||||||
Subordinated debt | ( |
||||||||||||||||
Other borrowed funds | ( |
( |
|||||||||||||||
Acquisition of treasury stock | ( |
( |
|||||||||||||||
Preferred stock cash dividends paid | ( |
( |
|||||||||||||||
Common stock cash dividends paid | ( |
( |
|||||||||||||||
Net cash provided (used) by financing activities | $ | $ | ( |
||||||||||||||
Net Increase (Decrease) In Cash And Due From Banks And Restricted Cash | $ | ( |
$ | ( |
|||||||||||||
Cash and due from banks and restricted cash at beginning of period | |||||||||||||||||
Cash and due from banks and restricted cash at end of period | $ | $ | |||||||||||||||
Cash And Due From Banks And Restricted Cash | |||||||||||||||||
Cash and due from banks at end of period (unrestricted cash) | $ | $ | |||||||||||||||
Restricted cash | |||||||||||||||||
Cash and due from banks and restricted cash at end of period | $ | $ | |||||||||||||||
Supplemental Disclosures | |||||||||||||||||
Interest paid | $ | $ | |||||||||||||||
Income taxes paid | $ | $ | |||||||||||||||
Income taxes refunded | $ | $ | |||||||||||||||
Leased assets obtained in exchange for new operating lease liabilities | $ | $ | |||||||||||||||
Non-cash Investing And Financing Items | |||||||||||||||||
Transfer from securities available for sale to securities held to maturity | $ | ||||||||||||||||
Transfer from loans to loans held for sale, net | $ | $ | |||||||||||||||
Transfer from loans to foreclosed assets | $ | $ | |||||||||||||||
See accompanying Notes To Consolidated Financial Statements.
The PNC Financial Services Group, Inc. – Form 10-Q 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PNC FINANCIAL SERVICES GROUP, INC.
Unaudited
See page 103 for a glossary of certain terms and acronyms used in this Report.
BUSINESS
PNC is one of the largest diversified financial services companies in the U.S. and is headquartered in Pittsburgh, Pennsylvania.
NOTE 1 A CCOUNTING 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 VIEs.
We prepared these consolidated financial statements in accordance with GAAP. We have eliminated intercompany accounts and transactions.
In our opinion, the unaudited interim consolidated financial statements reflect all normal, recurring adjustments needed to state 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.
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 the ACL and our fair value measurements. Actual results may differ from the estimates and the differences may be material to the consolidated financial statements.
48 The PNC Financial Services Group, Inc. – Form 10-Q
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 3 Loans and Related Allowance for Credit Losses for additional information on how COVID-19 hardship related loan modification delinquencies are reported as of March 31, 2023 and December 31, 2022.
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 and costs on originated loans, 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 over the contractual life. Loan origination fees, direct loan origination costs, and loan premiums and discounts are deferred and accreted or amortized into Net interest income using the constant effective yield method, over the contractual life of the loan. The processing fee received for loans originated through PPP lending under the CARES Act 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 the 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-insignificant 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. PNC considers a variety of factors in connection with the identification of more-than-insignificant deterioration in credit quality, including but not limited to nonperforming status, delinquency, risk ratings and other qualitative factors that indicate deterioration in credit quality since origination. 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, or when 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.
On January 1, 2023, we adopted ASU 2022-02, which eliminates the accounting guidance for TDRs. See Note 1 Accounting Policies in our 2022 Form 10-K for a description of our accounting policies for TDRs that were in effect prior to adoption.
Modifications to borrowers experiencing financial difficulty result from our loss mitigation activities and include principal forgiveness, interest rate reductions, payment delays, term extensions, or combinations thereof. Modified loans to borrowers experiencing financial difficulty continue to be subject to our existing nonaccrual policies. Expected losses or recoveries on loans where modifications have been granted to borrowers experiencing financial difficulty have been factored into the ALLL estimates for each loan class under the methodologies described in this Note. Refer to Note 3 Loans and Related Allowance for Credit Losses for more information on modifications granted to borrowers experiencing financial difficulty.
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,
•Note 3 Loans and Related Allowance for Credit Losses in this Report, and
•Note 4 Loans and Related Allowance for Credit Losses in our 2022 Form 10-K.
The PNC Financial Services Group, Inc. – Form 10-Q 49
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 or guaranteed loans where substantially all principal and interest is insured.
• Commercial purchasing card assets that 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 due to a borrower experiencing financial difficulty and is not government
insured or guaranteed,
– The loan has been modified to defer prior payments in forbearance to the end of the loan term,
– 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 or guaranteed 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. For commercial loans and leases less than a defined dollar threshold, balances are generally charged-off in full after 180 days for loans and 120 days for leases.
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 or lien position), 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 automobiles or 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
50 The PNC Financial Services Group, Inc. – Form 10-Q
adjustment to the ALLL to reflect the expectation of recoveries in an amount greater than previously expected, limited to amounts previously charged-off.
Accounting for Nonperforming Assets and Leases and Other Nonaccrual Loans
For nonaccrual loans, interest income accrual and deferred fee/cost recognition is discontinued. Additionally, depending on whether the accrued interest has been incorporated into the ACL estimates, as discussed in the Accrued Interest section of this Note 1, the accrued and uncollected interest is either reversed through Net interest income (if a CECL reserve is not maintained for accrued interest) or charged-off against the allowance (if a CECL reserve is maintained for accrued interest), 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 loans modified due to a borrower experiencing financial difficulty, payments are applied based upon their contractual terms unless the related loan is deemed nonperforming. Loans modified due to a borrower experiencing financial difficulty are generally included in nonperforming and nonaccrual loans if they are not government insured or guaranteed. However, after a reasonable period of time, generally six months, in which the loan performs under modified 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. Loan modifications granted to borrowers experiencing financial difficulty 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 modified 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. OREO comprises principally residential and commercial 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 3 Loans and Related Allowance for Credit Losses for additional information on loan modifications granted to borrowers experiencing financial difficulty, nonperforming assets and credit quality indicators related to our loan portfolio.
The PNC Financial Services Group, Inc. – Form 10-Q 51
Allowance for Credit Losses
Our ACL is based on historical loss experience, current 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, equipment finance leases, other financial assets and unfunded lending related commitments, for the estimated contractual term of the assets or exposures as of the balance sheet date. The remaining contractual term of assets in scope of CECL is estimated considering contractual maturity dates, prepayment expectations, utilization or draw expectations and any contractually 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 paydown 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, (ii) a period of reversion to long-run average expected losses, where applicable and (iii) the long run average 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 our reasonable and supportable forecast period. For this purpose, we use 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 quantitative macroeconomic models, analysis from PNC economists and management judgment.
The reversion period is used to bridge our three year reasonable and supportable forecast period and the long run average expected credit losses. We 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 the forecast period relative to the beginning of the long run average period. The reversion period is typically one to three years, if not immediate.
The long-run average 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 loans and unfunded lending related commitments for details about specific methodologies.
52 The PNC Financial Services Group, Inc. – Form 10-Q
Allowance for Loan and Lease Losses
Our pooled expected loss methodology is based upon the quantification of risk parameters, such as PD, LGD and EAD for a loan, loan segment or lease. 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 reasonable and supportable forecast period, coupled with analytical methods, to estimate these risk parameters by loan, loan segment or lease. PD, LGD and EAD parameters are calculated for each forecasted scenario and the long run average 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.
Loan Class | Probability of Default | Loss Given Default | Exposure at Default | ||||||||
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
•For retail small balance obligors, product type and credit scores
|
•Outstanding balances, commitment, contractual maturities and historical prepayment experience for loans
•Current utilization and historical pre-default draw experience for lines
|
||||||||
Commercial real estate (CRE) |
•Property performance metrics, property type, market and risk pool for the forecast period
•For the long run average period, internal risk ratings based on borrower characteristics
|
•Property values and anticipated liquidation costs
|
•Outstanding balances, commitment, contractual maturities and historical prepayment experience for loans
|
||||||||
Consumer | |||||||||||
Home equity / Residential real estate |
•Borrower credit scores, delinquency status, origination vintage, LTV 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, delinquency status, 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 are used to estimate expected losses in lieu of discrete risk parameters
|
The PNC Financial Services Group, Inc. – Form 10-Q 53
The following matrix describes the key economic variables that are consumed during our forecast period by loan class, as well as other assumptions that are used for our reversion and long run average approaches.
Loan Class | Forecast Period - Key Economic Variables | Reversion Method | Long Run Average | ||||||||
Commercial | |||||||||||
Commercial and industrial / Equipment lease financing |
•GDP and Gross Domestic Investment measures, employment related variables and personal income and consumption measures
|
•Immediate reversion
|
•Average parameters determined based on internal and external historical data
•Modeled parameters using long run economic conditions for retail small balance obligors
|
||||||||
Commercial real estate (CRE) | • CRE Price Index, unemployment rates, 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 and Manheim used car index
|
•Straight-line over 1 year
|
•Average parameters determined based on internal and external historical data
|
||||||||
Credit card |
•Unemployment rates, 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 are used to estimate expected losses in lieu of discrete risk parameters
|
After the forecast period, we revert to the long run average over the reversion period noted above, which is the period between the end of the forecast period and when losses are estimated to have completely reverted to the long run average.
Once we have developed a combined estimate of credit losses (i.e., for the forecast period, reversion period and long run average) 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 discussions that follow in this Note 1 for additional information about those adjustments.
Discounted Cash Flow
Prior to January 1, 2023, we used a discounted cash flow methodology for our home equity and residential real estate loan classes. Effective January 1, 2023, we discontinued our use of a discounted cash flow methodology, and we now use a pooled expected loss methodology based upon the quantification of risk parameters, such as PD, LGD and EAD for a loan or loan segment. See Note 1 Accounting Policies in our 2022 Form 10-K for a description of our use of a discounted cash flow methodology prior to January 1, 2023.
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 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
54 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,
•Recent loss experience in particular portfolios, including specific and unique events,
•Recent macroeconomic factors that may not be reflected in the forecast information,
•Limitations of available input data, including historical loss information and recent data such as collateral values,
•Model imprecision and limitations,
•Changes in lending policies and procedures, including changes in loss recognition and mitigation policies and procedures, and
•Timing of available information.
See Note 3 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 unsecured consumer lines of credit, which are then included within the ALLL. See the Debt Securities section of Note 1 Accounting Policies in our 2022 Form 10-K and the Nonperforming Loans and Leases section of this Note 1 for additional information on our nonaccrual and charge-off policies.
See Note 1 Accounting Policies in our 2022 Form 10-K for a description of the accounting policies related to the applicable reserves on accrued interest for our home equity and residential real estate loan classes prior to January 1, 2023.
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. See the Allowance for Loan and Lease Losses section of this Note 1 for the key credit risk characteristics for unfunded lending related commitments. 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 3 Loans and Related Allowance for Credit Losses for additional information about this allowance.
The PNC Financial Services Group, Inc. – Form 10-Q 55
Recently Adopted Accounting Standards
Accounting Standards Update | Description | Financial Statement Impact | ||||||
Reference Rate Reform - ASU 2020-04
Issued March 2020
Reference Rate Reform Scope - ASU 2021-01
Issued January 2021
Reference Rate Reform Deferral of Sunset Date – ASU 2022-06
Issued December 2022
|
• 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 (codified in ASC 848).
• 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.
• Includes optional expedients and exceptions for contract modifications and hedge accounting that apply to derivative instruments impacted by the market-wide discounting transition.
• Guidance in these ASUs is effective as of March 12, 2020 through December 31, 2024.
|
• ASU 2020-04 was adopted March 12, 2020. ASU 2021-01 was retrospectively adopted October 1, 2020. ASU 2022-06 was adopted upon issuance.
• Refer to Note 1 Accounting Policies in our 2022 Form 10-K for more information on elections of optional expedients that occurred in 2020, 2021 and 2022.
• We did not make any additional elections for the first quarter of 2023. We expect to continue to elect various optional expedients for contract modifications and hedge relationships affected by reference rate reform through the effective date of this guidance.
|
||||||
Troubled Debt Restructurings and Vintage Disclosures - ASU 2022-02
Issued March 2022
|
• Eliminates the accounting guidance for TDRs and requires an entity to apply the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan.
• Eliminates the requirement to use a discounted cash flow approach to measure the allowance for credit losses for TDRs.
• Enhances disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.
• Requires disclosure of current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of CECL.
• Requires a prospective transition approach to all amendments except those related to the recognition and measurement of TDRs (which allow the option to apply a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings in the period of adoption).
|
• Adopted January 1, 2023 using a modified retrospective transition approach for the amendments related to the recognition and measurement of TDRs.
• The impact of adoption resulted in a decrease to the beginning period ALLL of $35 million, resulting in an increase to Retained Earnings of $26 million, net of tax, as of January 1, 2023.
• The presentation of our loan modification disclosures have been updated to reflect information on loan modifications given to borrowers experiencing financial difficulty and can be found within Note 3 Loans and Related Allowance for Credit Losses. TDR disclosures are presented for comparative periods only and are not required to be updated in current periods. Additionally, our vintage disclosure has been updated to reflect gross charge-offs by year of origination.
|
56 The PNC Financial Services Group, Inc. – Form 10-Q
NOTE 2 I NVESTMENT SECURITIES
Table 35: Investment Securities Summary (a)(b)
March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
In millions | Amortized Cost (c) |
Unrealized | Fair Value |
Amortized Cost (c) |
Unrealized | Fair Value |
|||||||||||||||||||||||||||||||||||||||||||||||
Gains | Losses | Gains | Losses | ||||||||||||||||||||||||||||||||||||||||||||||||||
Securities Available for Sale | |||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | $ | $ | ( |
$ | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Agency | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Non-agency | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Agency | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Non-agency | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Other | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Total securities available for sale | $ | $ | $ | ( |
$ | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||||||||||||||||||
Securities Held to Maturity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | $ | $ | ( |
$ | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Agency | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Non-agency | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Agency | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Non-agency | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Other | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Total securities held to maturity (d) | $ | $ | $ | ( |
$ | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||||||||||||||||||
(a) At March 31, 2023, the accrued interest associated with our held to maturity and available for sale portfolios totaled $257 million and $135 million, respectively. The comparable amounts at December 31, 2022 were $282 million and $144 million, respectively. These amounts are included in Other assets on the Consolidated Balance Sheet.
(b) Credit ratings represent a primary credit quality indicator used to monitor and manage credit risk. Of our total securities portfolio, 97 % were rated AAA/AA at both March 31, 2023 and December 31, 2022.
(c) Amortized cost is presented net of allowance of $142 million for securities available for sale, primarily related to non-agency commercial mortgage-backed securities and $6 million for securities held to maturity at March 31, 2023. The comparable amounts at December 31, 2022 were $142 million and $7 million, respectively.
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 Total 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, net of any allowance. Investment securities at March 31, 2023 included $30 million of net unsettled sales that represent non-cash investing activity, and accordingly, are not reflected on the Consolidated Statement of Cash Flows. The comparable amount for March 31, 2022 was $0.8 billion of net unsettled purchases.
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. At March 31, 2023, the allowance for investment securities was $148 million and primarily related to non-agency commercial mortgage-backed securities in the available for sale portfolio. The comparable amount at December 31, 2022 was $149 million. See Note 1 Accounting Policies in our 2022 Form 10-K for a discussion of the methodologies used to determine the allowance for investment securities.
At March 31, 2023, AOCI included pretax losses of $305 million from derivatives that hedged the purchase of investment securities classified as held to maturity. The losses will be accreted to interest income as an adjustment of yield on the securities.
Table 36 presents the gross unrealized losses and fair value of securities available for sale that do not have an associated allowance for investment securities at March 31, 2023 and December 31, 2022. 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
The PNC Financial Services Group, Inc. – Form 10-Q 57
Table 36: Gross Unrealized Loss and Fair Value of Securities Available for Sale Without an Allowance for Credit Losses
Unrealized loss position less than 12 months |
Unrealized loss position 12 months or more |
Total | ||||||||||||||||||||||||||||||||||||
In millions | Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
||||||||||||||||||||||||||||||||
March 31, 2023 | ||||||||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | ( |
$ | $ | ( |
$ | $ | ( |
$ | |||||||||||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||||||||
Agency | ( |
( |
( |
|||||||||||||||||||||||||||||||||||
Non-agency | ( |
( |
( |
|||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||||||||
Agency | ( |
( |
( |
|||||||||||||||||||||||||||||||||||
Non-agency | ( |
( |
( |
|||||||||||||||||||||||||||||||||||
Asset-backed | ( |
( |
( |
|||||||||||||||||||||||||||||||||||
Other | ( |
( |
( |
|||||||||||||||||||||||||||||||||||
Total securities available for sale | $ | ( |
$ | $ | ( |
$ | $ | ( |
$ | |||||||||||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | ( |
$ | $ | ( |
$ | $ | ( |
$ | |||||||||||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||||||||
Agency | ( |
( |
( |
|||||||||||||||||||||||||||||||||||
Non-agency | ( |
( |
( |
|||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||||||||
Agency | ( |
( |
( |
|||||||||||||||||||||||||||||||||||
Non-agency | ( |
( |
( |
|||||||||||||||||||||||||||||||||||
Asset-backed | ( |
( |
||||||||||||||||||||||||||||||||||||
Other | ( |
( |
( |
|||||||||||||||||||||||||||||||||||
Total securities available for sale | $ | ( |
$ | $ | ( |
$ | $ | ( |
$ |
Information related to gross realized securities gains and losses from the sales of securities is set forth in the following table:
Table 37: Gains (Losses) on Sales of Securities Available for Sale (a)
Three months ended March 31 In millions |
Gross Gains | Gross Losses | Net Gains (Losses) | Tax Expense (Benefit) | |||||||||||||
2022 | $ | $ | ( |
$ | ( |
$ | ( |
58 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 March 31, 2023:
Table 38: Contractual Maturity of Debt Securities
March 31, 2023 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 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Residential mortgage-backed | |||||||||||||||||||||||||||||||||||
Agency | |||||||||||||||||||||||||||||||||||
Non-agency | |||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | |||||||||||||||||||||||||||||||||||
Agency | |||||||||||||||||||||||||||||||||||
Non-agency | |||||||||||||||||||||||||||||||||||
Asset-backed | |||||||||||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||||||||||
Total securities available for sale at amortized cost | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Fair value | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Weighted-average yield, GAAP basis (a) | % | % | % | % | % | ||||||||||||||||||||||||||||||
Securities Held to Maturity | |||||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Residential mortgage-backed | |||||||||||||||||||||||||||||||||||
Agency | |||||||||||||||||||||||||||||||||||
Non-agency | |||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | |||||||||||||||||||||||||||||||||||
Agency | |||||||||||||||||||||||||||||||||||
Non-agency | |||||||||||||||||||||||||||||||||||
Asset-backed | |||||||||||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||||||||||
Total securities held to maturity at amortized cost | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Fair value | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Weighted-average yield, GAAP basis (a) | % | % | % | % | % |
(a)Weighted-average yields are based on amortized cost with effective yields weighted for the contractual maturity of each security. Actual maturities and yields may differ as certain securities may be prepaid.
At March 31, 2023, 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 $39.2 billion and $33.0 billion and fair value of $36.6 billion and $31.0 billion, respectively.
The following table presents the fair value of securities that have been either pledged to or accepted from others to collateralize outstanding borrowings:
Table 39: Fair Value of Securities Pledged and Accepted as Collateral
In millions | March 31, 2023 | December 31, 2022 | ||||||
Pledged to others | $ | $ | ||||||
Accepted from others: | ||||||||
Permitted by contract or custom to sell or repledge | $ | $ | ||||||
Permitted amount repledged to others | $ | $ |
The PNC Financial Services Group, Inc. – Form 10-Q 59
NOTE 3 L OANS 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 and industrial
|
• Residential real estate | |||||||
• Commercial real estate
|
• Home equity | |||||||
• 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. Loan delinquencies include government insured or guaranteed loans and loans accounted for under the fair value option.
Table 40 presents the composition and delinquency status of our loan portfolio at March 31, 2023 and December 31, 2022. We manage credit risk based on the risk profile of the borrower, repayment sources, underlying collateral and other support given current events, economic conditions and expectations. We refine our practices to meet the changing environment resulting from rising inflation levels, labor-related supply chain pressures, higher interest rates, and structural and secular changes fostered by the pandemic. To mitigate losses and enhance customer support, we offer loan modifications and collection programs to assist our customers. Under the CARES Act credit reporting rules, certain loans modified due to COVID-19 related hardships are not being reported as past due as of March 31, 2023 and December 31, 2022 based on the contractual terms of the loan, even where borrowers may not be making payments on their loans during the modification period.
60 The PNC Financial Services Group, Inc. – Form 10-Q
Table 40: Analysis of Loan Portfolio (a) (b)
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) |
||||||||||||||||||||||||
March 31, 2023 | ||||||||||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||
Commercial and industrial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||||||||||
Equipment lease financing | ||||||||||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||
Residential real estate | (c) | $ | ||||||||||||||||||||||||||||||
Home equity | ||||||||||||||||||||||||||||||||
Automobile |
||||||||||||||||||||||||||||||||
Credit card | ||||||||||||||||||||||||||||||||
Education |
(c) | |||||||||||||||||||||||||||||||
Other consumer |
||||||||||||||||||||||||||||||||
Total consumer | ||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Percentage of total loans | % | % | % | % | % | % | % | % | ||||||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||
Commercial and industrial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||||||||||
Equipment lease financing | ||||||||||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||
Residential real estate | (c) | $ | ||||||||||||||||||||||||||||||
Home equity | ||||||||||||||||||||||||||||||||
Automobile |
||||||||||||||||||||||||||||||||
Credit card | ||||||||||||||||||||||||||||||||
Education |
(c) | |||||||||||||||||||||||||||||||
Other consumer |
||||||||||||||||||||||||||||||||
Total consumer | ||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Percentage of total loans | % | % | % | % | % | % | % | % |
(a)Amounts in table represent loans held for investment and do not include any associated ALLL.
(b)The accrued interest associated with our loan portfolio totaled $1.3 billion and $1.2 billion at March 31, 2023 and December 31, 2022, respectively. These amounts are 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 $0.3 billion and $0.1 billion at both March 31, 2023 and December 31, 2022, respectively.
(d)Consumer loans accounted for under the fair value option for which we do not expect to collect substantially all principal and interest are subject to nonaccrual accounting and classification upon meeting any of our nonaccrual policy criteria. Given that these loans are not accounted for at amortized cost, these loans have been excluded from the nonperforming loan population.
(e)Includes unearned income, unamortized deferred fees and costs on originated loans and premiums or discounts on purchased loans totaling $0.8 billion and $0.9 billion at March 31, 2023 and December 31, 2022, respectively.
(f)Collateral dependent loans totaled $1.2 billion and $1.3 billion at March 31, 2023 and December 31, 2022, respectively.
At March 31, 2023, we pledged $27.8 billion of commercial and other loans to the Federal Reserve Bank and $94.0 billion of residential real estate and other loans to the FHLB as collateral for the ability to borrow, if necessary. The comparable amounts at December 31, 2022 were $28.1 billion and $90.4 billion, respectively. Amounts pledged reflect the unpaid principal balances.
Nonperforming Assets
Nonperforming assets include nonperforming loans and leases, OREO and foreclosed assets. Nonperforming loans are those loans accounted for at amortized cost whose credit quality has deteriorated to the extent that full collection of contractual principal and interest is not probable. Interest income is not recognized on these loans. Loans accounted for under the fair value option are reported as performing loans; however, when nonaccrual criteria is met, interest income is not recognized on these loans. Additionally, certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest are not reported as
The PNC Financial Services Group, Inc. – Form 10-Q 61
The following table presents our nonperforming assets as of March 31, 2023 and December 31, 2022, respectively:
Table 41: Nonperforming Assets
Dollars in millions | March 31, 2023 | December 31, 2022 | |||||||||||||||
Nonperforming loans (a) | |||||||||||||||||
Commercial | $ | $ | |||||||||||||||
Consumer (b) | |||||||||||||||||
Total nonperforming loans (c) | |||||||||||||||||
OREO and foreclosed assets | |||||||||||||||||
Total nonperforming assets | $ | $ | |||||||||||||||
Nonperforming loans to total loans | % | % | |||||||||||||||
Nonperforming assets to total loans, OREO and foreclosed assets | % | % | |||||||||||||||
Nonperforming assets to total assets | % | % |
(a)In connection with the adoption of ASU 2022-02, nonperforming loans as of March 31, 2023 include certain loans where terms were modified as a result of a borrower’s financial difficulty. Prior period amounts included nonperforming TDRs, for which accounting guidance was eliminated effective January 1, 2023. See Note 1 Accounting Policies and the Loan Modifications to Borrowers Experiencing Financial Difficulty section of this Note 3 for more information on our adoption of this ASU.
(b)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.
(c)Nonperforming loans for which there is no related ALLL totaled $0.6 billion at March 31, 2023 and primarily include loans with a fair value of collateral that exceeds the amortized cost basis. The comparable amount at December 31, 2022 was $0.7 billion.
Additional Credit Quality Indicators by Loan Class
Commercial Loan Classes
See Note 4 Loans and Related Allowance for Credit Losses in our 2022 Form 10-K for additional information related to these loan classes, including discussion around the credit quality indicators that we use to monitor and manage the credit risk associated with each loan class.
62 The PNC Financial Services Group, Inc. – Form 10-Q
The following table presents credit quality indicators for our commercial loan classes:
Table 42: Commercial Credit Quality Indicators (a) (b)
Term Loans by Origination Year | |||||||||||||||||||||||||||||
March 31, 2023
In millions
|
2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | Revolving Loans Converted to Term | Total | ||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||
Pass Rated | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Criticized | |||||||||||||||||||||||||||||
Total commercial and industrial loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Gross charge-offs (c) | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Commercial real estate | |||||||||||||||||||||||||||||
Pass Rated | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Criticized | |||||||||||||||||||||||||||||
Total commercial real estate loans | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Gross charge-offs | $ | $ | |||||||||||||||||||||||||||
Equipment lease financing | |||||||||||||||||||||||||||||
Pass Rated | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Criticized | |||||||||||||||||||||||||||||
Total equipment lease financing loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Gross charge-offs | $ | $ | $ | ||||||||||||||||||||||||||
Total commercial loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Total commercial gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ |
Term Loans by Origination Year | |||||||||||||||||||||||||||||
December 31, 2022
In millions
|
2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans | Revolving Loans Converted to Term | Total Loans |
||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||
Pass Rated | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Criticized | |||||||||||||||||||||||||||||
Total commercial and industrial | |||||||||||||||||||||||||||||
Commercial real estate | |||||||||||||||||||||||||||||
Pass Rated | |||||||||||||||||||||||||||||
Criticized | |||||||||||||||||||||||||||||
Total commercial real estate | |||||||||||||||||||||||||||||
Equipment lease financing | |||||||||||||||||||||||||||||
Pass Rated | |||||||||||||||||||||||||||||
Criticized | |||||||||||||||||||||||||||||
Total equipment lease financing | |||||||||||||||||||||||||||||
Total commercial | $ | $ | $ | $ | $ | $ | $ | $ | $ |
(a)Loans in our commercial portfolio are classified as Pass Rated or Criticized based on the regulatory definitions, which are driven by the PD and LGD ratings that we assign. The Criticized classification includes loans that were rated special mention, substandard or doubtful as of March 31, 2023 and December 31, 2022.
(b)Gross charge-offs are presented on a year-to-date basis, as of the reporting date.
(c)Gross charge-offs for the 2023 origination year include deposit overdrafts.
Consumer Loan Classes
See Note 4 Loans and Related Allowance for Credit Losses in our 2022 Form 10-K for additional information related to these loan classes, including discussion around the credit quality indicators that we use to monitor and manage the credit risk
associated with each loan class.
The PNC Financial Services Group, Inc. – Form 10-Q 63
Residential Real Estate and Home Equity
The following table presents credit quality indicators for our residential real estate and home equity loan classes:
Table 43: Credit Quality Indicators for Residential Real Estate and Home Equity Loan Classes (a)
Term Loans by Origination Year | |||||||||||||||||||||||||||||
March 31, 2023
In millions
|
2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | Revolving Loans Converted to Term | Total | ||||||||||||||||||||
Residential real estate | |||||||||||||||||||||||||||||
Current estimated LTV ratios | |||||||||||||||||||||||||||||
Greater than 100% | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Greater than or equal to 80% to 100% | |||||||||||||||||||||||||||||
Less than 80% | |||||||||||||||||||||||||||||
No LTV available | |||||||||||||||||||||||||||||
Government insured or guaranteed loans | |||||||||||||||||||||||||||||
Total residential real estate loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Updated FICO scores | |||||||||||||||||||||||||||||
Greater than or equal to 780 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
720 to 779 | |||||||||||||||||||||||||||||
660 to 719 | |||||||||||||||||||||||||||||
Less than 660 | |||||||||||||||||||||||||||||
No FICO score available | |||||||||||||||||||||||||||||
Government insured or guaranteed loans | |||||||||||||||||||||||||||||
Total residential real estate loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Gross charge-offs | $ | $ | $ | ||||||||||||||||||||||||||
Home equity | |||||||||||||||||||||||||||||
Current estimated LTV ratios | |||||||||||||||||||||||||||||
Greater than 100% | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Greater than or equal to 80% to 100% | |||||||||||||||||||||||||||||
Less than 80% | |||||||||||||||||||||||||||||
Total home equity loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Updated FICO scores | |||||||||||||||||||||||||||||
Greater than or equal to 780 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
720 to 779 | |||||||||||||||||||||||||||||
660 to 719 | |||||||||||||||||||||||||||||
Less than 660 | |||||||||||||||||||||||||||||
No FICO score available | |||||||||||||||||||||||||||||
Total home equity loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Gross charge-offs | $ | $ | $ |
64 The PNC Financial Services Group, Inc. – Form 10-Q
(Continued from previous page) | Term Loans by Origination Year | ||||||||||||||||||||||||||||
December 31, 2022
In millions
|
2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans | Revolving Loans Converted to Term | Total Loans | ||||||||||||||||||||
Residential real estate | |||||||||||||||||||||||||||||
Current estimated LTV ratios | |||||||||||||||||||||||||||||
Greater than 100% | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Greater than or equal to 80% to 100% | |||||||||||||||||||||||||||||
Less than 80% | |||||||||||||||||||||||||||||
No LTV available | |||||||||||||||||||||||||||||
Government insured or guaranteed loans | |||||||||||||||||||||||||||||
Total residential real estate | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Updated FICO scores | |||||||||||||||||||||||||||||
Greater than or equal to 780 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
720 to 779 | |||||||||||||||||||||||||||||
660 to 719 | |||||||||||||||||||||||||||||
Less than 660 | |||||||||||||||||||||||||||||
No FICO score available | |||||||||||||||||||||||||||||
Government insured or guaranteed loans | |||||||||||||||||||||||||||||
Total residential real estate | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Home equity | |||||||||||||||||||||||||||||
Current estimated LTV ratios | |||||||||||||||||||||||||||||
Greater than 100% | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Greater than or equal to 80% to 100% | |||||||||||||||||||||||||||||
Less than 80% | |||||||||||||||||||||||||||||
Total home equity | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Updated FICO scores | |||||||||||||||||||||||||||||
Greater than or equal to 780 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
720 to 779 | |||||||||||||||||||||||||||||
660 to 719 | |||||||||||||||||||||||||||||
Less than 660 | |||||||||||||||||||||||||||||
No FICO score available | |||||||||||||||||||||||||||||
Total home equity | $ | $ | $ | $ | $ | $ | $ | $ |
(a)Gross charge-offs are presented on a year-to-date basis, as of the reporting date.
The PNC Financial Services Group, Inc. – Form 10-Q 65
Automobile, Credit Card, Education and Other Consumer
The following table presents credit quality indicators for our automobile, credit card, education and other consumer loan classes:
Table 44: Credit Quality Indicators for Automobile, Credit Card, Education and Other Consumer Loan Classes (a)
Term Loans by Origination Year | |||||||||||||||||||||||||||||
March 31, 2023
In millions
|
2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | Revolving Loans Converted to Term | Total | ||||||||||||||||||||
Automobile | |||||||||||||||||||||||||||||
Updated FICO scores | |||||||||||||||||||||||||||||
Greater than or equal to 780 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
720 to 779 | |||||||||||||||||||||||||||||
660 to 719 | |||||||||||||||||||||||||||||
Less than 660 | |||||||||||||||||||||||||||||
Total automobile loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Gross charge-offs | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Credit card | |||||||||||||||||||||||||||||
Updated FICO scores | |||||||||||||||||||||||||||||
Greater than or equal to 780 | $ | $ | $ | ||||||||||||||||||||||||||
720 to 779 | |||||||||||||||||||||||||||||
660 to 719 | |||||||||||||||||||||||||||||
Less than 660 | |||||||||||||||||||||||||||||
No FICO score available or required (b) | |||||||||||||||||||||||||||||
Total credit card loans | $ | $ | $ | ||||||||||||||||||||||||||
Gross charge-offs | $ | $ | $ | ||||||||||||||||||||||||||
Education | |||||||||||||||||||||||||||||
Updated FICO scores | |||||||||||||||||||||||||||||
Greater than or equal to 780 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
720 to 779 | |||||||||||||||||||||||||||||
660 to 719 | |||||||||||||||||||||||||||||
Less than 660 | |||||||||||||||||||||||||||||
No FICO score available or required (b) | |||||||||||||||||||||||||||||
Total loans using FICO credit metric | |||||||||||||||||||||||||||||
Other internal credit metrics | |||||||||||||||||||||||||||||
Total education loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Gross charge-offs | $ | $ | $ | ||||||||||||||||||||||||||
Other consumer | |||||||||||||||||||||||||||||
Updated FICO scores | |||||||||||||||||||||||||||||
Greater than or equal to 780 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
720 to 779 | |||||||||||||||||||||||||||||
660 to 719 | |||||||||||||||||||||||||||||
Less than 660 | |||||||||||||||||||||||||||||
Total loans using FICO credit metric | |||||||||||||||||||||||||||||
Other internal credit metrics | |||||||||||||||||||||||||||||
Total other consumer loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Gross charge-offs (c) | $ | $ | $ | $ | $ | $ | $ | $ |
66 The PNC Financial Services Group, Inc. – Form 10-Q
(Continued from previous page) | Term Loans by Origination Year | ||||||||||||||||||||||||||||
December 31, 2022
In millions
|
2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans | Revolving Loans Converted to Term | Total Loans | ||||||||||||||||||||
Updated FICO Scores | |||||||||||||||||||||||||||||
Automobile | |||||||||||||||||||||||||||||
Greater than or equal to 780 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
720 to 779 | |||||||||||||||||||||||||||||
660 to 719 | |||||||||||||||||||||||||||||
Less than 660 | |||||||||||||||||||||||||||||
Total automobile | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Credit card | |||||||||||||||||||||||||||||
Greater than or equal to 780 | $ | $ | $ | ||||||||||||||||||||||||||
720 to 779 | |||||||||||||||||||||||||||||
660 to 719 | |||||||||||||||||||||||||||||
Less than 660 | |||||||||||||||||||||||||||||
No FICO score available or required (b) | |||||||||||||||||||||||||||||
Total credit card | $ | $ | $ | ||||||||||||||||||||||||||
Education | |||||||||||||||||||||||||||||
Greater than or equal to 780 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
720 to 779 | |||||||||||||||||||||||||||||
660 to 719 | |||||||||||||||||||||||||||||
Less than 660 | |||||||||||||||||||||||||||||
No FICO score available or required (b) | |||||||||||||||||||||||||||||
Education loans using FICO credit metric | |||||||||||||||||||||||||||||
Other internal credit metrics | |||||||||||||||||||||||||||||
Total education | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Other consumer | |||||||||||||||||||||||||||||
Greater than or equal to 780 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
720 to 779 | |||||||||||||||||||||||||||||
660 to 719 | |||||||||||||||||||||||||||||
Less than 660 | |||||||||||||||||||||||||||||
Other consumer loans using FICO credit metric | |||||||||||||||||||||||||||||
Other internal credit metrics | |||||||||||||||||||||||||||||
Total other consumer | $ | $ | $ | $ | $ | $ | $ | $ | $ |
(a)Gross charge-offs are presented on a year-to-date basis, as of the reporting date.
(b)Loans with no FICO score available or required generally refers to new accounts issued to borrowers with limited credit history, accounts for which we cannot obtain an updated FICO score (e.g., recent profile changes), cards issued with a business name and/or cards secured by collateral. Management proactively assesses the risk and size of this loan category and, when necessary, takes actions to mitigate the credit risk.
The PNC Financial Services Group, Inc. – Form 10-Q 67
Loan Modifications to Borrowers Experiencing Financial Difficulty
On January 1, 2023, we adopted ASU 2022-02, which eliminates the accounting guidance for TDRs and enhances the disclosure requirements for certain loan modifications when a borrower is experiencing financial difficulty.
We modify loans to borrowers experiencing financial difficulty as a result of our loss mitigation activities. A variety of solutions are offered to borrowers, including loan modifications that may result in principal forgiveness, interest rate reductions, term extensions, payment delays, or combinations thereof.
•Principal forgiveness includes principal and accrued interest forgiveness.
•Interest rate reductions include modifications where the interest rate is reduced and interest is deferred.
•Term extensions extend the original contractual maturity date of the loan.
•Payment delays consist of modifications where we expect to collect contractual amounts due, but that result in a delay in the receipt of payments specified under the original loan terms. We generally consider payment delays to be insignificant when the delay is three months or less.
•We also offer repayment plans for some of our credit card and unsecured line of credit products, which provide for a reduced payment and interest rate for a specific period of time.
•Additionally, modifications to borrowers experiencing financial difficulty also result from borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their obligations to us, and those that enter into trial modifications.
Loan modifications granted to borrowers experiencing financial difficulty exclude loans held for sale and loans accounted for under the fair value option. Government insured or guaranteed loans, commercial loans with an appraised value of collateral that exceeds the loan value, and loans with guarantor support are evaluated for inclusion in our disclosed population of loan modifications granted to borrowers experiencing financial difficulty, if the loan has been modified in the current period. Refer to Note 1 Accounting Policies for additional information around our adoption of ASU 2022-02.
The following table presents the amortized cost basis, as of March 31, 2023, of loans modified to borrowers experiencing financial difficulty during the three months ended March 31, 2023:
Table 45: Loan Modifications Granted to Borrowers Experiencing Financial Difficulty (a)
Three months ended March 31, 2023 Dollars in millions |
Principal Forgiveness | Term Extension | Payment Delay | Repayment Plan | Interest Rate Reduction and Term Extension | Other (b) | Total | % of Loan Class | |||||||||||||||||||||
Commercial | |||||||||||||||||||||||||||||
Commercial and industrial | $ | $ | $ | $ | $ | % | |||||||||||||||||||||||
Commercial real estate | % | ||||||||||||||||||||||||||||
Total commercial | % | ||||||||||||||||||||||||||||
Consumer | |||||||||||||||||||||||||||||
Residential real estate | $ | % | |||||||||||||||||||||||||||
Home equity | % | ||||||||||||||||||||||||||||
Credit card | $ | % | |||||||||||||||||||||||||||
Education | % | ||||||||||||||||||||||||||||
Other consumer | % | ||||||||||||||||||||||||||||
Total consumer | % | ||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | % |
(a)At March 31, 2023, there were $0.1 billion of unfunded lending related commitments associated with loan modifications to borrowers experiencing financial difficulty.
(b)Includes loans where we have received notification that a borrower has filed for Chapter 7 bankruptcy relief, but specific instructions as to the terms of the relief have not been formally ruled upon by the court. Amounts also include trial modifications.
68 The PNC Financial Services Group, Inc. – Form 10-Q
Table 46 presents the financial effect of the loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2023:
Table 46: Financial Effect of Modifications to Borrowers Experiencing Financial Difficulty (a)
Three months ended March 31, 2023 Dollars in millions |
Total Principal Forgiveness | Weighted-Average Interest Rate Reduction | Weighted-Average Term Extension (in Months) |
Weighted-Average Payment Delay (in Months) |
|||||||||||||
Commercial | |||||||||||||||||
Commercial and industrial | $ | ||||||||||||||||
Commercial real estate | |||||||||||||||||
Consumer | |||||||||||||||||
Residential real estate | % | ||||||||||||||||
Home equity | % | ||||||||||||||||
Education | |||||||||||||||||
(a)Excludes the financial effects of modifications for loans that were paid off, charged-off or otherwise liquidated as of period end.
Repayment plans are excluded from Table 46. The terms of these programs, which are offered for certain credit card and unsecured line of credit products, are as follows:
•Short-term programs are granted for periods of 6 and 12 months. These programs are structurally similar such that the interest rate is reduced to a standard rate of 4.99 % and the minimum payment percentage is adjusted to 1.90 % of the outstanding balance. At the end of the 6 or 12 months, the borrower is returned to the original contractual interest rate and minimum payment amount specified in the original lending agreement.
•Fully-amortized repayment plans are also granted, the most common of which being a 60-month program. In this program, we convert the borrower’s drawn and unpaid balances into a fully-amortized repayment plan consisting of an interest rate of 4.99 % and a minimum payment amount of 1.90 %. This fully-amortized program is designed in a manner that allows the drawn and unpaid amounts to be recaptured at the end of the 60 months.
Table 47: Delinquency Status of Loans Modified to Borrowers Experiencing Financial Difficulty (a) (b)
Three months ended March 31, 2023 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 | ||||||||||||
Commercial | |||||||||||||||||
Commercial and industrial | $ | $ | $ | $ | $ | ||||||||||||
Commercial real estate | |||||||||||||||||
Total commercial | |||||||||||||||||
Consumer | |||||||||||||||||
Residential real estate | |||||||||||||||||
Home equity | |||||||||||||||||
Credit card | |||||||||||||||||
Education | |||||||||||||||||
Other consumer | |||||||||||||||||
Total consumer | |||||||||||||||||
Total | $ | $ | $ | $ | $ |
(a)Represents amortized cost basis.
We generally consider loan modifications to borrowers experiencing financial difficulty to have subsequently defaulted when they become 60 days past due after the most recent date the loan was modified. Loans that were both (i) modified due to a financial difficulty during the period, and (ii) subsequently defaulted during the three months ended March 31, 2023 were not material.
The PNC Financial Services Group, Inc. – Form 10-Q 69
Troubled Debt Restructuring Disclosures Prior to the Adoption of ASU 2022-02
Table 48: Financial Impact and TDRs by Concession Type (a)
Pre-TDR Amortized Cost Basis (b) |
Post-TDR Amortized Cost Basis (c) | ||||||||||||||||||||||||||||||||||||||||
Three months ended March 31 Dollars in millions |
Number of Loans |
Principal Forgiveness |
Rate Reduction |
Other | Total | ||||||||||||||||||||||||||||||||||||
2022 | |||||||||||||||||||||||||||||||||||||||||
Commercial | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
Consumer | $ | ||||||||||||||||||||||||||||||||||||||||
Total TDRs | $ | $ | $ | $ |
(a) Impact of partial charge-offs at TDR date is included in this table.
(b) Represents the amortized cost basis of the loans as of the quarter end prior to TDR designation.
(c) Represents the amortized cost basis of the TDRs as of the end of the quarter in which the TDR occurred.
After a loan was determined to be a TDR, we continued to track its performance under its most recent restructured terms. We considered a TDR to have subsequently defaulted when it became 60 days past due after the most recent date the loan was restructured. Loans that were both (i) classified as TDRs within the last twelve months from the balance sheet date, and (ii) subsequently defaulted during the three months ended March 31, 2022 totaled $9 million.
Allowance for Credit Losses
We maintain the ACL related to loans at levels that we believe to be appropriate to absorb expected credit losses in the portfolios as of the balance sheet date. See Note 1 Accounting Policies for a discussion of the methodologies used to determine this allowance. A rollforward of the ACL related to loans follows:
Table 49: Rollforward of Allowance for Credit Losses
Three months ended March 31 | |||||||||||||||||||||||||||||
2023 | 2022 | ||||||||||||||||||||||||||||
In millions | Commercial | Consumer | Total | Commercial | Consumer | Total | |||||||||||||||||||||||
Allowance for loan and lease losses | |||||||||||||||||||||||||||||
Beginning balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Adoption of ASU 2022-02 (a) | ( |
( |
|||||||||||||||||||||||||||
Beginning balance, adjusted | |||||||||||||||||||||||||||||
Charge-offs | ( |
( |
( |
( |
( |
( |
|||||||||||||||||||||||
Recoveries | |||||||||||||||||||||||||||||
Net (charge-offs) | ( |
( |
( |
( |
( |
( |
|||||||||||||||||||||||
Provision for (recapture of) credit losses | ( |
( |
( |
||||||||||||||||||||||||||
Other | ( |
( |
( |
||||||||||||||||||||||||||
Ending balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Allowance for unfunded lending related commitments (b) | |||||||||||||||||||||||||||||
Beginning balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Provision for (recapture of) credit losses | ( |
( |
( |
( |
|||||||||||||||||||||||||
Ending balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Allowance for credit losses at March 31 (c) |
$ | $ | $ | $ | $ | $ |
(a)Represents the impact of adopting ASU 2022-02 on January 1, 2023. As a result of adoption, we eliminated the accounting guidance for TDRs, including the use of a discounted cash flow approach to measure the allowance for TDRs.
(b)See Note 8 Commitments for additional information about the underlying commitments related to this allowance.
(c)Represents the ALLL plus allowance for unfunded lending related commitments and excludes allowances for investment securities and other financial assets, which together totaled $205 million and $158 million at March 31, 2023 and 2022, respectively.
The ACL related to loans totaled $5.4 billion at both March 31, 2023 and December 31, 2022. During the three months ended March 31, 2023, reserves reflected our updated economic assumptions and changes in portfolio composition and quality.
70 The PNC Financial Services Group, Inc. – Form 10-Q
NOTE 4 LOAN SALE AND SERVICING ACTIVITIES AND VARIABLE INTEREST ENTITIES
Loan Sale and Servicing Activities
As more fully described in Note 5 Loan Sale and Servicing Activities and Variable Interest Entities in our 2022 Form 10-K, we have transferred residential and commercial mortgage loans in securitization or sales transactions in which we have continuing involvement. Our continuing involvement in the FNMA, FHLMC and GNMA securitizations, Non-agency securitizations and loan sale transactions generally consists of servicing, repurchasing previously transferred loans under certain conditions and loss share arrangements, and, in limited circumstances, holding of mortgage-backed securities issued by the securitization SPEs.
We earn servicing and other ancillary fees for our role as servicer and, depending on the contractual terms of the servicing arrangement, we can be terminated as servicer with or without cause. At the consummation date of each type of loan transfer where we retain the servicing, we recognize a servicing right at fair value. See Note 8 Commitments and Note 11 Fair Value for information on our servicing rights, including the carrying value of servicing assets.
The following table provides our loan sale and servicing activities:
Table 50: Loan Sale and Servicing Activities
In millions | Residential Mortgages | Commercial Mortgages (a) | ||||||||||||
Cash Flows - Three months ended March 31, 2023 | ||||||||||||||
Sales of loans and related securitization activity (b) | $ | $ | ||||||||||||
Repurchases of previously transferred loans (c) | $ | $ | ||||||||||||
Servicing fees (d) | $ | $ | ||||||||||||
Servicing advances recovered/(funded), net | $ | $ | ( |
|||||||||||
Cash flows on mortgage-backed securities held (e) | $ | $ | ||||||||||||
Cash Flows - Three months ended March 31, 2022 | ||||||||||||||
Sales of loans and related securitization activity (b) | $ | $ | ||||||||||||
Repurchases of previously transferred loans (c) | $ | $ | ||||||||||||
Servicing fees (d) | $ | $ | ||||||||||||
Servicing advances recovered/(funded), net | $ | $ | ||||||||||||
Cash flows on mortgage-backed securities held (e) | $ | $ | ||||||||||||
(a)Represents both commercial mortgage loan transfer and servicing activities.
(b)Gains/losses recognized on sales of loans were insignificant for the periods presented.
(c)Includes both residential and commercial mortgage government insured or guaranteed loans eligible for repurchase through the exercise of our ROAP option, as well as residential mortgage loans repurchased due to alleged breaches of origination covenants or representations and warranties made to purchasers.
(d)Includes contractually specified servicing fees, late charges and ancillary fees.
Table 51 presents information about the principal balances of transferred loans that we service and are not recorded on our Consolidated Balance Sheet. We would only experience a loss on these transferred loans if we were required to repurchase a loan, where the repurchase price exceeded the loan’s fair value, due to a breach in representations and warranties or a loss sharing arrangement associated with our continuing involvement with these loans. The estimate of losses related to breaches in representations and warranties was insignificant at March 31, 2023.
Table 51: Principal Balance, Delinquent Loans and Net Charge-offs Related to Serviced Loans For Others
In millions | Residential Mortgages | Commercial Mortgages (a) | |||||||||||||||
March 31, 2023 | |||||||||||||||||
Total principal balance | $ | $ | |||||||||||||||
Delinquent loans (b) | $ | ||||||||||||||||
December 31, 2022 | |||||||||||||||||
Total principal balance | $ | $ | |||||||||||||||
Delinquent loans (b) | $ | ||||||||||||||||
Three months ended March 31, 2023 | |||||||||||||||||
Net charge-offs (c) | $ | $ | |||||||||||||||
Three months ended March 31, 2022 | |||||||||||||||||
Net charge-offs (c) | $ | ||||||||||||||||
(a)Represents information at the securitization level in which we have sold loans and we are the servicer for the securitization.
(b)Serviced delinquent loans are 90 days or more past due or are in process of foreclosure.
The PNC Financial Services Group, Inc. – Form 10-Q 71
Variable Interest Entities (VIEs)
As discussed in Note 5 Loan Sale and Servicing Activities and Variable Interest Entities included in our 2022 Form 10-K, we are involved with various entities in the normal course of business that are deemed to be VIEs.
Table 52: Non-Consolidated VIEs
In millions | PNC Risk of Loss (a) | Carrying Value of Assets Owned by PNC |
Carrying Value of Liabilities Owned by PNC |
||||||||||||||||||||||||||
March 31, 2023 | |||||||||||||||||||||||||||||
Mortgage-backed securitizations (b) | $ | $ | (c) | $ | |||||||||||||||||||||||||
Tax credit investments and other | (d) | (e) | |||||||||||||||||||||||||||
Total | $ | $ | $ | ||||||||||||||||||||||||||
December 31, 2022 | |||||||||||||||||||||||||||||
Mortgage-backed securitizations (b) | $ | $ | (c) | $ | |||||||||||||||||||||||||
Tax credit investments and other | (d) | (e) | |||||||||||||||||||||||||||
Total | $ | $ | $ |
(a)Represents loans, investments and other assets related to non-consolidated VIEs, net of collateral (if applicable). The risk of loss excludes any potential tax recapture associated with tax credit investments.
(b)Amounts reflect involvement with securitization SPEs where we transferred to and/or service loans for an SPE and we hold securities issued by that SPE. Values disclosed in the PNC Risk of Loss column represent our maximum exposure to loss for those securities’ holdings.
(c)Included in Investment securities, Mortgage servicing rights and Other assets on our Consolidated Balance Sheet.
(d)Included in Investment securities, Loans, Equity investments and Other assets on our Consolidated Balance Sheet.
(e)Included in Deposits and Other liabilities on our Consolidated Balance Sheet.
NOTE 5 G OODWILL AND MORTGAGE SERVICING RIGHTS
Goodwill
See Note 6 Goodwill and Mortgage Servicing Rights in our 2022 Form 10-K for more information regarding our goodwill.
Mortgage Servicing Rights
We recognize the right to service mortgage loans for others as an intangible asset when the benefits of servicing are expected to be more than adequate compensation to a servicer for performing the servicing. MSRs are recognized either when purchased or when originated loans are sold with servicing retained. MSRs totaled $3.3 billion at March 31, 2023 and $3.4 billion at December 31, 2022, and consisted of loan servicing contracts for commercial and residential mortgages which are measured at fair value.
We recognize gains (losses) on changes in the fair value of MSRs. MSRs are subject to changes in value from actual or expected prepayment of the underlying loans and defaults, as well as market driven changes in interest rates. We manage this risk by economically hedging the fair value of MSRs with securities, derivative instruments and resale agreements, which are expected to increase (or decrease) in value when the value of MSRs decreases (or increases).
72 The PNC Financial Services Group, Inc. – Form 10-Q
See the Sensitivity Analysis section of this Note 5 for more detail on our fair value measurement of MSRs. See Note 6 Goodwill and Mortgage Servicing Rights and Note 15 Fair Value in our 2022 Form 10-K for more detail on our fair value measurement and our accounting of MSRs.
Changes in the commercial and residential MSRs follow:
Table 53: Mortgage Servicing Rights
Commercial MSRs | Residential MSRs | |||||||||||||||||||
In millions | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
January 1 | $ | $ | $ | $ | ||||||||||||||||
Additions: | ||||||||||||||||||||
From loans sold with servicing retained | ||||||||||||||||||||
Purchases | ||||||||||||||||||||
Changes in fair value due to: | ||||||||||||||||||||
Time and payoffs (a) | ( |
( |
( |
( |
||||||||||||||||
Other (b) | ( |
|||||||||||||||||||
March 31 | $ | $ | $ | $ | ||||||||||||||||
Related unpaid principal balance of loans serviced at March 31 | $ | $ | $ | $ | ||||||||||||||||
Servicing advances at March 31 | $ | $ | $ | $ |
(a)Represents decrease in MSR value due to passage of time, including the impact from regularly scheduled loan principal payments, prepayments and loans that were paid off during the period.
(b)Represents MSR value changes resulting primarily from market-driven changes in interest rates.
Sensitivity Analysis
The fair value of commercial and residential MSRs and significant inputs to the valuation models as of March 31, 2023 and December 31, 2022 are shown in Tables 54 and 55. The expected and actual rates of mortgage loan prepayments are significant factors driving the fair value. Management uses both internal proprietary models and a third-party model to estimate future commercial mortgage loan prepayments and a third-party model to estimate future residential mortgage loan prepayments. These models have been refined based on current market conditions and management judgment. Future interest rates are another important factor in the valuation of MSRs. Management utilizes market implied forward interest rates to estimate the future direction of mortgage and discount rates. The forward rates utilized are derived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. Changes in the shape and slope of the forward curve in future periods may result in volatility in the fair value estimate.
A sensitivity analysis of the hypothetical effect on the fair value of MSRs to adverse changes in key assumptions is presented in Tables 54 and 55. These sensitivities do not include the impact of the related hedging activities. Changes in fair value generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the interest rate spread), which could either magnify or counteract the sensitivities.
Table 54: Commercial Mortgage Servicing Rights – Key Valuation Assumptions
Dollars in millions | March 31, 2023 | December 31, 2022 | ||||||||||||
Fair value | $ | $ | ||||||||||||
Weighted-average life (years) | ||||||||||||||
Weighted-average constant prepayment rate | % | % | ||||||||||||
Decline in fair value from 10% adverse change | $ | $ | ||||||||||||
Decline in fair value from 20% adverse change | $ | $ | ||||||||||||
Effective discount rate | % | % | ||||||||||||
Decline in fair value from 10% adverse change | $ | $ | ||||||||||||
Decline in fair value from 20% adverse change | $ | $ |
The PNC Financial Services Group, Inc. – Form 10-Q 73
Table 55: Residential Mortgage Servicing Rights – Key Valuation Assumptions
Dollars in millions |
March 31, 2023 | December 31, 2022 | ||||||||||||
Fair value | $ | $ | ||||||||||||
Weighted-average life (years) | ||||||||||||||
Weighted-average constant prepayment rate | % | % | ||||||||||||
Decline in fair value from 10% adverse change | $ | $ | ||||||||||||
Decline in fair value from 20% adverse change | $ | $ | ||||||||||||
Weighted-average option adjusted spread | bps | bps | ||||||||||||
Decline in fair value from 10% adverse change | $ | $ | ||||||||||||
Decline in fair value from 20% adverse change | $ | $ |
Fees from mortgage loan servicing, which include contractually specified servicing fees, late fees and ancillary fees were $0.2 billion and $0.1 billion for the three months ended March 31, 2023 and 2022, respectively. We also generate servicing fees from fee-based activities provided to others for which we do not have an associated servicing asset. Fees from commercial and residential MSRs are reported within Noninterest income on our Consolidated Income Statement in Residential and commercial mortgage.
NOTE 6 L EASES
Table 56: Lessor Income
Three months ended March 31 |
||||||||
In millions | 2023 | 2022 | ||||||
Sales-type and direct financing leases (a) | $ | $ |