Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2016

or

 

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

For the transition period from              to             

Commission file number 001-09718

The PNC Financial Services Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   25-1435979

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

The Tower at PNC Plaza, 300 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2401

(Address of principal executive offices, including zip code)

(412) 762-2000

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 22, 2016, there were 499,323,737 shares of the registrant’s common stock ($5 par value) outstanding.

 

 

 


Table of Contents

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to First Quarter 2016 Form 10-Q

 

     Pages  

PART I – FINANCIAL INFORMATION

  

Item 1.      Financial Statements (Unaudited).

  

Consolidated Income Statement

     48   

Consolidated Statement of Comprehensive Income

     49   

Consolidated Balance Sheet

     50   

Consolidated Statement Of Cash Flows

     51   

Notes To Consolidated Financial Statements (Unaudited)

  

Note 1   Accounting Policies

     53   

Note 2   Loan Sale and Servicing Activities and Variable Interest Entities

     58   

Note 3   Asset Quality

     60   

Note 4   Purchased Loans

     72   

Note 5    Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit

     73   

Note 6   Investment Securities

     75   

Note 7   Fair Value

     79   

Note 8   Goodwill and Intangible Assets

     88   

Note 9   Certain Employee Benefit And Stock Based Compensation Plans

     90   

Note 10 Financial Derivatives

     92   

Note 11 Earnings Per Share

     98   

Note 12 Total Equity And Other Comprehensive Income

     99   

Note 13 Income Taxes

     101   

Note 14 Legal Proceedings

     101   

Note 15 Commitments and Guarantees

     103   

Note 16 Segment Reporting

     105   

Note 17 Subsequent Events

     107   

Statistical Information (Unaudited)

  

Average Consolidated Balance Sheet And Net Interest Analysis

     108   

Transitional Basel III and Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios – 2015 Periods

     110   

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

  

Financial Review

  

Consolidated Financial Highlights

     1   

Executive Summary

     3   

Consolidated Income Statement Review

     8   

Consolidated Balance Sheet Review

     10   

Off-Balance Sheet Arrangements And Variable Interest Entities

     19   

Fair Value Measurements

     19   

Business Segments Review

     19   

Critical Accounting Estimates and Judgments

     27   

Status Of Qualified Defined Benefit Pension Plan

     28   

Recourse And Repurchase Obligations

     29   

Risk Management

     29   

Internal Controls And Disclosure Controls And Procedures

     42   

Glossary Of Terms

     42   

Cautionary Statement Regarding Forward-Looking Information

     46   

Item 3.      Quantitative and Qualitative Disclosures About Market Risk.

     29-41, 79-88 and  92-98   

Item 4.      Controls and Procedures.

     42   

PART II – OTHER INFORMATION

  

Item 1.      Legal Proceedings.

     111   

Item 1A.   RiskFactors.

     111   

Item 2.       Unregistered Sales Of Equity Securities And Use Of Proceeds.

     111   

Item 6.      Exhibits.

     111   

Exhibit Index.

     111   

Corporate  Information

     112   

Signature

     113   


Table of Contents

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to First Quarter 2016 Form 10-Q (continued)

 

MD&A TABLE REFERENCE

 

Table

  

Description

   Page  

1

  

Consolidated Financial Highlights

     1   

2

  

Summarized Average Balance Sheet

     6   

3

  

Results Of Businesses – Summary

     8   

4

  

Net Interest Income and Net Interest Margin

     8   

5

  

Noninterest Income

     9   

6

  

Summarized Balance Sheet Data

     10   

7

  

Details Of Loans

     11   

8

  

Weighted Average Life of the Purchased Impaired Portfolios

     12   

9

  

Commitments to Extend Credit

     12   

10

  

Investment Securities

     13   

11

  

Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities

     14   

12

  

Loans Held For Sale

     14   

13

  

Details Of Funding Sources

     15   

14

  

Shareholders’ Equity

     16   

15

  

Basel III Capital

     17   

16

  

Fair Value Measurements – Summary

     19   

17

  

Retail Banking Table

     20   

18

  

Corporate & Institutional Banking Table

     22   

19

  

Asset Management Group Table

     24   

20

  

Residential Mortgage Banking Table

     25   

21

  

BlackRock Table

     26   

22

  

Non-Strategic Assets Portfolio Table

     26   

23

  

Pension Expense – Sensitivity Analysis

     29   

24

  

Nonperforming Assets By Type

     30   

25

  

Change in Nonperforming Assets

     30   

26

  

OREO and Foreclosed Assets

     30   

27

  

Accruing Loans Past Due

     31   

28

  

Home Equity Lines of Credit – Draw Period End Dates

     31   

29

  

Consumer Real Estate Related Loan Modifications

     33   

30

  

Loan Charge-Offs And Recoveries

     34   

31

  

Allowance for Loan and Lease Losses

     35   

32

  

PNC Bank Notes Issued During 2016

     37   

33

  

PNC Bank Senior and Subordinated Debt

     37   

34

  

FHLB Borrowings

     37   

35

  

Parent Company Senior and Subordinated Debt and Hybrid Capital Instruments

     38   

36

  

Credit Ratings as of March 31, 2016 for PNC and PNC Bank

     38   

37

  

Interest Sensitivity Analysis

     39   

38

  

Net Interest Income Sensitivity to Alternative Rate Scenarios (First Quarter 2016)

     39   

39

  

Alternate Interest Rate Scenarios: One Year Forward

     39   

40

  

Equity Investments Summary

     40   

41

  

Financial Derivatives Summary

     41   


Table of Contents

THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to First Quarter 2016 Form 10-Q (continued)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE

 

Table

  

Description

   Page  

42

  

Cash Flows Associated with Loan Sale and Servicing Activities

     58   

43

  

Principal Balance, Delinquent Loans, and Net Charge-offs Related to Serviced Loans For Others

     59   

44

  

Consolidated VIEs – Carrying Value

     59   

45

  

Non-Consolidated VIEs

     60   

46

  

Analysis of Loan Portfolio

     61   

47

  

Nonperforming Assets

     62   

48

  

Commercial Lending Asset Quality Indicators

     64   

49

  

Home Equity and Residential Real Estate Balances

     65   

50

  

Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans

     65   

51

  

Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans

     67   

52

  

Credit Card and Other Consumer Loan Classes Asset Quality Indicators

     69   

53

  

Summary of Troubled Debt Restructurings

     70   

54

  

Financial Impact and TDRs by Concession Type

     70   

55

  

Impaired Loans

     71   

56

  

Purchased Impaired Loans – Balances

     72   

57

  

Purchased Impaired Loans – Accretable Yield

     73   

58

  

Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data

     74   

59

  

Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit

     75   

60

  

Investment Securities Summary

     75   

61

  

Gross Unrealized Loss and Fair Value of Securities Available for Sale

     77   

62

  

Gains (Losses) on Sales of Securities Available for Sale

     78   

63

  

Contractual Maturity of Debt Securities

     78   

64

  

Fair Value of Securities Pledged and Accepted as Collateral

     79   

65

  

Fair Value Measurements – Recurring Basis Summary

     80   

66

  

Reconciliation of Level 3 Assets and Liabilities

     81   

67

  

Fair Value Measurements – Recurring Quantitative Information

     83   

68

  

Fair Value Measurements – Nonrecurring

     85   

69

  

Fair Value Measurements – Nonrecurring Quantitative Information

     85   

70

  

Fair Value Option – Changes in Fair Value

     85   

71

  

Fair Value Option – Fair Value and Principal Balances

     86   

72

  

Additional Fair Value Information Related to Other Financial Instruments

     87   

73

  

Mortgage Servicing Rights

     88   

74

  

Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions

     89   

75

  

Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions

     89   

76

  

Fees from Mortgage Loan Servicing

     89   

77

  

Net Periodic Pension and Postretirement Benefit Costs

     90   

78

  

Stock Options – Rollforward

     91   

79

  

Nonvested Incentive/Performance Unit Awards and Restricted Share/Restricted Share Unit Awards – Rollforward

     91   

80

  

Nonvested Cash-Payable Incentive/Performance Units and Restricted Share Units – Rollforward

     91   

81

  

Total Gross Derivatives

     92   

82

  

Derivatives Designated As Hedging Instruments under GAAP

     93   

83

  

Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges

     93   

84

  

Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges

     94   

85

  

Derivatives Not Designated As Hedging Instruments under GAAP

     95   

86

  

Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP

     96   

87

  

Derivative Assets and Liabilities Offsetting

     97   

88

  

Basic and Diluted Earnings per Common Share

     98   

89

  

Rollforward of Total Equity

     99   

90

  

Other Comprehensive Income

     100   

91

  

Accumulated Other Comprehensive Income (Loss) Components

     101   

92

  

Net Operating Loss Carryforwards and Tax Credit Carryforwards

     101   

93

  

Commitments to Extend Credit and Other Commitments

     103   

94

  

Internal Credit Ratings Related to Net Outstanding Standby Letters of Credit

     104   

95

  

Resale and Repurchase Agreements Offsetting

     105   

96

  

Results Of Businesses

     107   


Table of Contents

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 Report and with Items 6, 7, 8 and 9A of our 2015 Annual Report on Form 10-K (2015 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business, regulatory and legal risks, see the following sections as they appear in this Report and in our 2015 Form 10-K: the Risk Management section of the Financial Review portion of this report and of Item 7 in our 2015 Form 10-K; Item 1A Risk Factors included in our 2015 Form 10-K; and Note 14 Legal Proceedings and Note 15 Commitments and Guarantees Notes of the Notes To Consolidated Financial Statements included in the respective report. 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 2015 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 16 Segment Reporting in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a GAAP basis.

Table 1: Consolidated Financial Highlights

 

Dollars in millions, except per share data

Unaudited

  Three months ended
March 31
 
  2016     2015  

Financial Results (a)

     

Revenue

     

Net interest income

  $ 2,098      $ 2,072   

Noninterest income

    1,567        1,659   

Total revenue

    3,665        3,731   

Noninterest expense

    2,281        2,349   

Pretax, pre-provision earnings (b)

    1,384        1,382   

Provision for credit losses

    152        54   

Income before income taxes and noncontrolling interests

  $ 1,232      $ 1,328   

Net income

  $ 943      $ 1,004   

Less:

     

Net income (loss) attributable to noncontrolling interests

    19        1   

Preferred stock dividends and discount accretion and redemptions

    65        70   

Net income attributable to common shareholders

  $ 859      $ 933   

Less:

     

Dividends and undistributed earnings allocated to nonvested restricted shares

    6        2   

Impact of BlackRock earnings per share dilution

    3        5   

Net income attributable to diluted common shares

  $ 850      $ 926   

Diluted earnings per common share

  $ 1.68      $ 1.75   

Cash dividends declared per common share

  $ .51      $ .48   

Performance Ratios

     

Net interest margin (c)

    2.75     2.82

Noninterest income to total revenue

    43        44   

Efficiency

    62        63   

Return on:

     

Average common shareholders’ equity

    8.44        9.32   

Average assets

    1.07        1.17   

See page 42 for a glossary of certain terms used in this Report.

(a) The Executive Summary and Consolidated Income Statement Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.
(b) We believe that pretax, pre-provision earnings, a non-GAAP financial measure, is useful as a tool to help evaluate the ability to provide for credit costs through operations.
(c) Calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under generally accepted accounting principles (GAAP) in the Consolidated Income Statement. The taxable-equivalent adjustments to net interest income for the three months ended March 31, 2016 and March 31, 2015 were $48 million and $49 million, respectively.

 

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


Table of Contents

Table 1: Consolidated Financial Highlights (Continued) (a)

 

Unaudited   March 31
2016
    December 31
2015
    March 31
2015
 

Balance Sheet Data (dollars in millions, except per share data)

       

Assets

  $ 360,985      $ 358,493      $ 350,960   

Loans

    207,485        206,696        204,722   

Allowance for loan and lease losses

    2,711        2,727        3,306   

Interest-earning deposits with banks (b)

    29,478        30,546        31,198   

Investment securities

    72,569        70,528        60,768   

Loans held for sale

    1,541        1,540        2,423   

Goodwill

    9,103        9,103        9,103   

Mortgage servicing rights

    1,323        1,589        1,333   

Equity investments (c)

    10,391        10,587        10,523   

Other assets

    24,585        23,092        25,538   

Noninterest-bearing deposits

    78,151        79,435        74,944   

Interest-bearing deposits

    172,208        169,567        161,559   

Total deposits

    250,359        249,002        236,503   

Borrowed funds

    54,178        54,532        56,829   

Total shareholders’ equity

    45,130        44,710        45,025   

Common shareholders’ equity

    41,677        41,258        41,077   

Accumulated other comprehensive income

    532        130        703   

Book value per common share

  $ 83.47      $ 81.84      $ 78.99   

Common shares outstanding (millions)

    499        504        520   

Loans to deposits

    83     83     87

Client Assets (in billions)

       

Discretionary client assets under management

  $ 135      $ 134      $ 136   

Nondiscretionary client assets under administration

    125        125        129   

Total client assets under administration (d)

    260        259        265   

Brokerage account client assets

    43        43        44   

Total client assets

  $ 303      $ 302      $ 309   

Capital Ratios

       

Transitional Basel III (e) (f)

       

Common equity Tier 1

    10.6     10.6     10.5

Tier 1 risk-based

    11.9        12.0        12.0   

Total capital risk-based

    14.4        14.6        15.0   

Leverage

    10.2        10.1        10.5   

Pro forma Fully Phased-In Basel III (f)

       

Common equity Tier 1

    10.1     10.0     10.0

Common shareholders’ equity to assets

    11.5     11.5     11.7

Asset Quality

       

Nonperforming loans to total loans

    1.10     1.03     1.17

Nonperforming assets to total loans, OREO and foreclosed assets

    1.23        1.17        1.34   

Nonperforming assets to total assets

    .71        .68        .78   

Net charge-offs to average loans (for the three months ended) (annualized)

    .29        .23        .20   

Allowance for loan and lease losses to total loans (g)

    1.31        1.32        1.61   

Allowance for loan and lease losses to total nonperforming loans (g) (h)

    119     128     137

Accruing loans past due 90 days or more (in millions)

  $ 782      $ 881      $ 988   
(a) The Executive Summary and Consolidated Balance Sheet Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.
(b) Amounts include balances held with the Federal Reserve Bank of Cleveland (Federal Reserve Bank) of $29.0 billion, $30.0 billion, and $30.8 billion as of March 31, 2016, December 31, 2015 and March 31, 2015, respectively.
(c) Amounts include our equity interest in BlackRock.
(d) As a result of certain investment advisory services performed by one of our registered investment advisors, certain assets are reported as both discretionary client assets under management and nondiscretionary client assets under administration. The amount of such assets was approximately $7 billion, $6 billion and $5 billion as of March 31, 2016, December 31, 2015 and March 31, 2015, respectively.
(e) Calculated using the regulatory capital methodology applicable to PNC during each period presented.
(f) See Basel III Capital discussion in the Capital portion of the Consolidated Balance Sheet Review section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business in our 2015 Form 10-K. See also the Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratio – 2015 Periods table in the Statistical Information section of this Report for a reconciliation of the 2015 periods’ ratios.
(g) See our 2015 Form 10-K for information on our change in derecognition policy effective December 31, 2015 for certain purchased impaired loans.
(h) The allowance for loan and lease losses includes impairment reserves attributable to purchased impaired loans. Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans.

 

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


Table of Contents

EXECUTIVE SUMMARY

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

We have businesses engaged in retail banking, corporate and institutional banking, asset management and residential mortgage banking, providing many of our products and services nationally, as well as other products and services in our primary geographic markets located in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, Florida, North Carolina, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Georgia, Missouri, Wisconsin and South Carolina. We also provide certain products and services internationally.

Key Strategic Goals

At PNC we manage our company for the long term. We are focused on the fundamentals of growing customers, loans, deposits and fee 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 corporate responsibility to the communities where we do business.

We strive to expand and deepen customer relationships by offering a broad range of deposit, fee-based and credit products and services. We are focused on delivering those products and services where, when and how our customers choose with the goal of offering insight that addresses their specific financial objectives. Our approach is concentrated on organically growing and deepening client relationships that meet our risk/return measures. Our strategies for growing fee income across our lines of business are focused on achieving deeper market penetration and cross selling our diverse product mix to meet the broad range of financial needs of our customers.

Our strategic priorities are designed to enhance value over the long term. A key priority is to build a leading banking franchise in our underpenetrated geographic markets. In addition, we are seeking to attract more of the investable assets of new and existing clients. PNC is focused on redefining the retail banking experience by transforming to a more customer-centric and sustainable model while lowering delivery costs as customer banking preferences evolve.

Additionally, we continue to focus on expense management while investing in technology to bolster critical business infrastructure and streamline core processes.

Our capital priorities are to support client growth and business investment, maintain appropriate capital in light of economic conditions and the Basel III framework and return excess capital to shareholders, in accordance with the currently effective capital plan included in our Comprehensive Capital Analysis and Review (CCAR) submission to the Board of Governors of the Federal Reserve System (Federal Reserve). New regulatory short-term liquidity standards became effective for PNC and PNC Bank, National Association (PNC Bank) beginning January 1, 2015. For more detail, see the Balance Sheet, Liquidity and Capital Highlights portion of this Executive Summary, the Capital portion of the Consolidated Balance Sheet Review section and the Liquidity Risk Management portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2015 Form 10-K.

Key Factors Affecting Financial Performance

PNC faces a variety of risks that may impact various aspects of our risk profile from time to time. The extent of such impacts may vary depending on factors such as the current economic, political and regulatory environment, merger and acquisition activity and operational challenges. Many of these risks and our risk management strategies are described in more detail in our 2015 Form 10-K and elsewhere in this Report.

Our financial performance is substantially affected by a number of external factors outside of our control, including the following:

   

Domestic and global economic conditions, including the continuity, speed and stamina of the current U.S. economic expansion in general and its impact on our customers in particular;

   

The monetary policy actions and statements of the Federal Reserve and the Federal Open Market Committee (FOMC);

   

The level of, and direction, timing and magnitude of movement in, interest rates and the shape of the interest rate yield curve;

   

The functioning and other performance of, and availability of liquidity in, the capital and other financial markets;

 

 

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


Table of Contents
   

Changes in the competitive and regulatory landscape and in counterparty creditworthiness and performance as the financial services industry restructures in the current environment;

   

The impact of the extensive reforms enacted by the Dodd-Frank legislation and other legislative, regulatory and administrative initiatives and actions, including those outlined elsewhere in this Report, in our 2015 Form 10-K and in subsequent filings with the SEC;

   

The impact of market credit spreads on asset valuations;

   

Asset quality and the ability of customers, counterparties and issuers to perform in accordance with contractual terms;

   

Loan demand, utilization of credit commitments and standby letters of credit; and

   

Customer demand for non-loan products and services.

In addition, our success will depend upon, among other things:

   

Focused execution of our strategic priorities and achieving targeted outcomes, including our ability to:

   

Build a leading banking franchise in our underpenetrated geographic markets;

   

Grow profitability through the acquisition and retention of customers and deepening relationships that meet our risk/return measures;

   

Increase revenue from fee income and provide innovative and valued products and services to our customers;

   

Bolster our critical infrastructure and streamline our core processes;

   

Utilize technology to develop and deliver products and services to our customers and protect PNC’s systems and customer information; and

   

Sustain our expense management.

   

Effectively managing capital and liquidity including:

   

Continuing to maintain and grow our deposit base as a low-cost stable funding source;

   

Prudent liquidity and capital management to meet evolving regulatory capital, capital planning, stress testing and liquidity standards; and

   

Actions we take within the capital and other financial markets.

   

Managing credit risk in our portfolio;

   

Our ability to manage and implement strategic business objectives within the changing regulatory environment;

   

The impact of legal and regulatory-related contingencies; and

   

The appropriateness of reserves needed for critical accounting estimates and related contingencies.

For additional information, see the Cautionary Statement Regarding Forward-Looking Information section in this

Financial Review and Item 1A Risk Factors in our 2015 Form 10-K.

Income Statement Highlights

Net income for the first quarter of 2016 was $943 million, or $1.68 per diluted common share, a decrease of 6%, compared to $1.0 billion, or $1.75 per diluted common share, for the first quarter of 2015. The decrease was driven by higher provision for credit losses and a decline in noninterest income, partially offset by lower noninterest expense and an increase in net interest income.

   

Net interest income of $2.1 billion for the first quarter of 2016 increased 1% compared with the first quarter of 2015, primarily due to higher loan yields and higher loan and securities balances, partially offset by lower purchase accounting accretion and higher borrowing costs related to higher short-term interest rates.

   

Net interest margin decreased to 2.75% for the first quarter of 2016 compared to 2.82% for the first quarter of 2015 principally as a result of lower benefit from purchase accounting accretion and higher securities balances, partially offset by lower balances on deposit with the Federal Reserve.

   

Noninterest income of $1.6 billion for the first quarter of 2016 decreased $92 million, or 6%, compared to the first quarter of 2015 mainly attributable to weaker equity markets and lower capital markets activity as well as lower residential mortgage revenue.

   

Noninterest expense of $2.3 billion for the first quarter of 2016 decreased $68 million compared to the first quarter of 2015 reflecting lower legal costs and lower variable compensation costs associated with lower business activity as well as a continued focus on expense management.

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

Credit Quality Highlights

Overall credit quality for the first quarter of 2016 remained relatively stable with the fourth quarter of 2015, except for certain energy related loans.

   

The provision for credit losses increased to $152 million for the first quarter of 2016 compared to $54 million for the first quarter of 2015. Provision for credit losses for the first quarter of 2016 included $80 million for energy related loans in the oil, gas and coal sectors.

   

Nonperforming assets increased $127 million, or 5%, to $2.6 billion at March 31, 2016 compared to December 31, 2015. Nonperforming assets to total assets were 0.71% at March 31, 2016, compared to 0.68% at December 31, 2015.

 

 

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


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Overall loan delinquencies of $1.5 billion at March 31, 2016 decreased $143 million, or 9%, compared with December 31, 2015.

   

The allowance for loan and lease losses was 1.31% of total loans and 119% of nonperforming loans at March 31, 2016, compared with 1.32% and 128% at December 31, 2015, respectively.

   

Net charge-offs of $149 million for the first quarter of 2016 increased by $46 million compared to net charge-offs for the first quarter of 2015. Annualized net charge-offs were 0.29% of average loans in the first quarter of 2016 and 0.20% of average loans in the first quarter of 2015.

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

Balance Sheet, Liquidity and Capital Highlights

PNC’s balance sheet was well-positioned at March 31, 2016 reflecting strong liquidity and capital positions.

   

Total loans increased by $.8 billion to $207.5 billion at March 31, 2016 compared to December 31, 2015.

   

Total commercial lending grew $1.6 billion, or 1%, primarily in PNC’s corporate banking and real estate businesses.

   

Total consumer lending decreased $.8 billion, or 1%, mainly due to declines in home equity and education loans as well as run-off in the non-strategic portfolio.

   

Total deposits increased $1.4 billion, or 1%, to $250.4 billion at March 31, 2016 compared with December 31, 2015, reflecting growth in consumer deposits, partially offset by lower commercial deposits.

   

Investment securities increased $2.0 billion, or 3%, to $72.6 billion at March 31, 2016 compared to December 31, 2015.

   

PNC maintained a strong liquidity position.

   

The Liquidity Coverage Ratio at March 31, 2016 exceeded 100% for both PNC and PNC Bank, above the minimum phased-in requirement of 90% in 2016.

   

PNC maintained a strong capital position.

   

The Transitional Basel III common equity Tier 1 capital ratio was 10.6% at both March 31, 2016 and December 31, 2015.

   

Pro forma fully phased-in Basel III common equity Tier 1 capital ratio was an estimated 10.1% at March 31, 2016 and 10.0% at December 31, 2015 based on the standardized approach rules. See the Capital discussion and Table 15 in the Consolidated Balance Sheet Review section of this Financial Review and the December 31, 2015 capital ratio tables in the Statistical Information (Unaudited) section of this Report for more detail.

   

PNC returned capital to shareholders during first quarter 2016 through share repurchases of 5.9 million common shares for $.5 billion and dividends on common shares of $.3 billion.

   

PNC has repurchased a total of 23.8 million common shares for $2.2 billion under current share repurchase programs of up to $2.875 billion for the five quarter period ending in the second quarter of 2016.

See the Capital portion of the Consolidated Balance Sheet Review and the Liquidity Risk Management portion of the Risk Management section of this Financial Review for more detail on our other 2016 capital and liquidity actions.

Our ability to take certain capital actions, including plans to pay or increase common stock dividends or to repurchase shares under current or future programs, is subject to the results of the supervisory assessment of capital adequacy undertaken by the Federal Reserve as part of the CCAR process. For additional information, see the Supervision and Regulation section in Item 1 Business of our 2015 Form 10-K.

Our Consolidated Income Statement and Consolidated Balance Sheet Review sections of this Financial Review describe in greater detail the various items that impacted our results during the first quarters of 2016 and 2015 and balances at March 31, 2016 and December 31, 2015, respectively.

 

 

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


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Average Consolidated Balance Sheet Highlights

Table 2: Summarized Average Balance Sheet

 

Three months ended March 31

Dollars in millions

                   Change  
   2016      2015      $     %  

Average assets

            

Interest-earning assets

            

Investment securities

   $ 70,269       $ 57,166       $ 13,103        23

Loans

     207,184         205,155         2,029        1

Interest-earning deposits with banks

     25,533         30,405         (4,872     (16 )% 

Other

     7,764         8,947         (1,183     (13 )% 

Total interest-earning assets

     310,750         301,673         9,077        3

Noninterest-earning assets

     45,163         46,384         (1,221     (3 )% 

Total average assets

   $ 355,913       $ 348,057       $ 7,856        2

Average liabilities and equity

            

Interest-bearing liabilities

            

Interest-bearing deposits

   $ 168,823       $ 159,911       $ 8,912        6

Borrowed funds

     53,626         56,352         (2,726     (5 )% 

Total interest-bearing liabilities

     222,449         216,263         6,186        3

Noninterest-bearing deposits

     77,306         73,178         4,128        6

Other liabilities

     10,255         12,586         (2,331     (19 )% 

Equity

     45,903         46,030         (127       

Total average liabilities and equity

   $ 355,913       $ 348,057       $ 7,856        2

 

Total assets were $361.0 billion at March 31, 2016 compared with $358.5 billion at December 31, 2015. Various seasonal and other factors impact our period-end balances, whereas average balances are generally more indicative of underlying business trends apart from the impact of acquisitions and divestitures. The Consolidated Balance Sheet Review section of this Financial Review provides information on changes in selected Consolidated Balance Sheet categories at March 31, 2016 compared with December 31, 2015.

Average investment securities increased in the first three months of 2016 compared with the first three months of 2015, mainly due to increases in average agency residential mortgage-backed securities and U.S. Treasury and government agency securities. Investment securities comprised 23% of average interest-earning assets for the first quarter of 2016 and 19% for the first quarter of 2015.

Average loans increased in the first quarter of 2016 compared to the prior year quarter due to increases in average commercial real estate loans of $4.0 billion and average commercial loans of $1.2 billion mainly attributable to growth in our Corporate & Institutional Banking segment. These increases were partially offset by a decrease in average consumer loans of $3.3 billion driven by lower home equity loans, including runoff in the nonstrategic portfolio, and lower education loans, partially offset by growth in automobile and credit card loans. Average loans represented 67% of average

interest-earning assets for the first quarter of 2016 and 68% of average interest-earning assets for the first quarter of 2015.

Average interest-earning deposits with banks, which are primarily maintained with the Federal Reserve Bank, decreased in the first quarter of 2016 compared to first quarter 2015, reflecting a shift towards higher yielding assets, such as investment securities and loans.

Average total deposits increased $13.0 billion in the first quarter of 2016 compared with the prior year quarter, primarily due to higher average savings deposits, which included a shift from money market deposits to new relationship-based savings products. Additionally, average noninterest-bearing deposits and average interest-bearing demand deposits increased reflecting overall strong deposit growth. Average total deposits represented 69% of average total assets for the first quarter of 2016 and 67% for the first quarter of 2015.

Average borrowed funds decreased in the current year first quarter compared with the prior year first quarter primarily due to declines in average commercial paper, average federal funds purchased and repurchase agreements and average Federal Home Loan Bank (FHLB) borrowings, partially offset by an increase in average bank notes and senior debt. The Liquidity Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding our sources and uses of borrowed funds.

 

 

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


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Recent Market and Industry Developments

In March 2016, the Federal Deposit Insurance Corporation (FDIC) adopted final rules to impose a surcharge on the quarterly deposit insurance assessments of insured depository institutions with total consolidated assets of $10 billion or more (including PNC Bank) in order to fund the Dodd-Frank Act mandated increase in the Designated Reserve Ratio from 1.15 percent to 1.35 percent. The final rules take effect July 1, 2016. The surcharge, which is equal to 4.5 basis points of the institution’s deposit insurance assessment base, will take effect for assessments billed after the Designated Reserve Ratio reaches 1.15 percent, and will continue until the reserve ratio reaches 1.35 percent (estimated by the FDIC to occur before the end of 2018). Based on data as of March 31, 2016, we estimate that the net effect of the proposed surcharge, together with the scheduled reduction of regular assessments that will go into effect when the Designated Reserve Ratio reaches 1.15 percent, will increase PNC Bank’s quarterly assessment by approximately $22 million beginning no earlier than the third quarter of 2016.

Also in March 2016, the Federal Reserve re-proposed rules, originally proposed in December 2011, to implement the single-counterparty credit limit (SCCL) under section 165(e) of the Dodd-Frank Act. Under the proposal, the net credit exposure of a bank holding company (BHC) with total consolidated assets of $50 billion or more (covered BHC), including its subsidiaries, to any single, unaffiliated counterparty would be subject to an aggregate limit. For covered BHCs with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposures (large covered BHCs), including PNC, the applicable limit would be 25 percent of tier 1 capital and would be calculated at the end of each business day. The proposed limit would cover credit exposure resulting from, among other transactions, extensions of credit, repurchase and reverse repurchase transactions, purchases or investments in securities, and derivative transactions. Compliance with the proposed rules would be required one year after the effective date. The comment period on the proposal is scheduled to close on June 3, 2016.

In April 2016, the Department of Labor (DOL) published a final rule expanding the definition of “investment advice” related to retirement accounts and certain other accounts that are subject to DOL interpretive authority. The rule will increase the scope of activities that give rise to fiduciary status under the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code. The rule, which will primarily apply to aspects of PNC’s retail and asset management business lines, will require new disclosures, development of policies and procedures, and contractual obligations for some account types, among other things. The rule is effective April 10, 2017 and there is a transition period between April 10, 2017 and January 1, 2018 during which time reduced requirements apply. Full compliance is required on January 1, 2018.

Also in April 2016, the FDIC and Office of the Comptroller of the Currency (OCC) requested comment on proposed rules that would implement the net stable funding ratio (NSFR). The Federal Reserve is expected to propose similar rules shortly. The proposed rules, which are based on standards developed by the Basel Committee on Banking Supervision, are designed to ensure the stability of a covered banking organization’s funding profile over a one-year time horizon. The NSFR is measured as the ratio of a banking organization’s available stable funding (ASF) amount to its required stable funding (RSF) amount, each as defined in the proposed rules, over a one-year horizon. The regulatory minimum ratio for all covered banking organizations is 100 percent. For BHCs with assets of $50 billion or more, but less than $250 billion, the RSF amount is scaled by a factor of 70 percent. The proposal also includes requirements for quarterly quantitative and qualitative NSFR disclosures. The requirements of the proposed rules would take effect January 1, 2018. The comment period on the proposed rules is scheduled to close on August 5, 2016. Although the impact on PNC will not be fully known until the rules are final, PNC has taken several actions to prepare for implementation of the NSFR and we expect to be in compliance with the NSFR requirements when they become effective.

In 2011, several federal regulators jointly proposed regulations required by Dodd-Frank regarding incentive-based compensation arrangements at large financial institutions. In April and May 2016, the OCC, Federal Reserve, FDIC, Federal Housing Finance Agency, and National Credit Union Administration re-proposed these regulations, and the SEC is expected to re-propose similar regulations shortly. The regulations would apply to, among other entities, bank holding companies, national banks, investment advisers and SEC-registered broker dealers with total assets of $1 billion or more (“covered financial institutions”). The new proposed rules would require covered financial institutions with total assets of $50 billion or more to defer the vesting of specified percentages of incentive-based compensation awarded to the institution’s “senior executive officers” and “significant risk-takers” for specific periods, and require that all unvested and vested incentive-based compensation to these individuals be subject to forfeiture and clawback, respectively, under circumstances specified by the rules. PNC is currently evaluating the proposal and the comment period on the proposed rules will end on July 22, 2016. The nature, scope and terms of any final regulations could negatively affect PNC’s ability to attract and retain officers and employees with appropriate skill and experience and compete with financial institutions that are either not subject to the proposed rules, or are not subject to the rules to the same extent as PNC.

 

 

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


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Business Segment Highlights

Total business segment earnings were $.9 billion for the first three months of 2016 and $1.0 billion for the first three months of 2015. The Business Segments Review section of this Financial Review includes further analysis of our business segment results for the first three months of 2016 and 2015, including presentation differences from Note 16 Segment Reporting in our Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

Table 3: Results Of Businesses – Summary (a)

(Unaudited)

 

     Net Income (Loss)      Revenue      Average Assets (b)  
Three months ended March 31 – in millions    2016     2015      2016      2015      2016      2015  

Retail Banking

   $ 268      $ 202       $ 1,650       $ 1,526       $ 72,216       $ 74,017   

Corporate & Institutional Banking

     431        482         1,304         1,284         135,521         131,178   

Asset Management Group

     49        37         280         281         7,887         7,943   

Residential Mortgage Banking

     (13     28         130         207         6,306         7,245   

BlackRock

     114        135         141         175         6,775         6,645   

Non-Strategic Assets Portfolio

     52        81         97         121         5,816         7,276   

Total business segments

     901        965         3,602         3,594         234,521         234,304   

Other (c) (d)

     42        39         63         137         121,392         113,753   

Total

   $ 943      $ 1,004       $ 3,665       $ 3,731       $ 355,913       $ 348,057   
(a) Our business information is presented based on our internal management reporting practices. We periodically refine our internal methodologies as management reporting practices are enhanced. Net interest income in business segment results reflects PNC’s 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.
(b) Period-end balances for BlackRock.
(c) “Other” average assets include investment securities associated with asset and liability management activities.
(d) “Other” includes differences between the total business segment financial results and our total consolidated net income. Additional detail is included in Note 16 Segment Reporting in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

 

CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for the first quarter of 2016 was $943 million, or $1.68 per diluted common share, a decrease of 6%, compared to $1.0 billion, or $1.75 per diluted common share, for the first quarter of 2015. The decrease was driven by higher provision for credit losses and a 2% decline in revenue, partially offset by a 3% decrease in noninterest expense. Lower revenue in the comparison reflected a 6% decline in noninterest income, partially offset by a 1% increase in net interest income.

Net Interest Income

Table 4: Net Interest Income and Net Interest Margin

 

     Three months ended
March 31
 
Dollars in millions    2016     2015  

Net interest income

   $ 2,098      $ 2,072   

Net interest margin

     2.75     2.82

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

Net interest income increased by $26 million, or 1%, in the first quarter of 2016 compared with the first quarter of 2015 due to higher loan and securities balances, partially offset by lower purchase accounting accretion and higher borrowing costs related to higher short-term interest rates.

Net interest margin of 2.75% for the first quarter of 2016 declined from 2.82% in the first quarter of 2015 due to lower benefit from purchase accounting accretion and higher securities balances, partially offset by lower balances on deposit with the Federal Reserve.

In the second quarter of 2016, we expect net interest income to increase modestly compared to the first quarter of 2016.

For full year 2016, we expect purchase accounting accretion to be down approximately $175 million compared to 2015.

 

 

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


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Noninterest Income

Table 5: Noninterest Income

 

Three months ended March 31

Dollars in millions

                   Change  
   2016      2015      $     %  

Noninterest income

            

Asset management

   $ 341       $ 376       $ (35     (9 )% 

Consumer services

     337         311         26        8

Corporate services

     325         344         (19     (6 )% 

Residential mortgage

     100         164         (64     (39 )% 

Service charges on deposits

     158         153         5        3

Net gains on sales of securities

     9         42         (33     (79 )% 

Other

     297         269         28        10

Total noninterest income

   $ 1,567       $ 1,659       $ (92     (6 )% 

Noninterest income decreased during the first quarter of 2016 compared to first quarter of 2015 primarily reflecting the impact of weaker equity markets and lower capital markets activity as well as lower residential mortgage revenue. Noninterest income as a percentage of total revenue was 43% in the first quarter of 2016 compared to 44% in the first quarter of 2015.

Lower asset management revenue in the first three months of 2016 was driven by decreased earnings from our BlackRock equity investment mainly attributable to the impact of lower equity markets. Discretionary client assets under management of $135 billion at March 31, 2016 were relatively stable compared to $136 billion at March 31, 2015.

Consumer service fees increased in the first quarter of 2016 compared to the prior year quarter primarily due to growth in payment-related products including debit card, credit card and merchant services, as well as increased brokerage fees.

Corporate services revenue decreased in the first quarter of 2016 compared to the first quarter of 2015, principally due to lower commercial mortgage servicing rights valuation, net of economic hedge, and lower capital markets activity.

Residential mortgage fee revenue decreased in the first three months of 2016 compared to the prior year quarter as a result of lower residential mortgage servicing rights valuation, net of economic hedge, and lower loan sales revenue, partially offset by higher servicing fee income.

Net gains on sales of securities decreased in the first quarter of 2016 compared to the first quarter of 2015 mainly due to a higher volume of securities sales in the prior year quarter.

Other noninterest income for the first quarter of 2016 included a gain of $44 million on the sale of 0.5 million Visa Class B common shares and lower gains on sales of other assets compared to first quarter 2015. There were no sales of Visa shares in first quarter 2015.

In the second quarter of 2016, we expect the fee income categories of noninterest income, consisting of asset management, consumer services, corporate services, residential mortgage and service charges on deposits, to be up approximately 10 to 12 percent, compared to the first quarter of 2016, reflecting higher anticipated business levels in the second quarter.

For full year 2016, we expect modest growth in revenue.

Provision For Credit Losses

The provision for credit losses totaled $152 million for the first quarter of 2016 compared with $54 million for the first quarter of 2015. The first quarter 2016 provision included $80 million for energy related loans in the oil, gas, and coal sectors.

We expect our provision for credit losses in the second quarter of 2016 to be between $125 million and $175 million.

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

Noninterest Expense

Noninterest expense decreased $68 million, or 3%, to $2.3 billion for the first quarter of 2016 compared with first quarter 2015 reflecting lower legal costs and lower variable compensation as well as a continued focus on expense management.

As of the end of the first quarter of 2016, we have completed actions to capture more than one-third of our 2016 continuous improvement savings goal of $400 million, and are on track to achieve the full-year goal. Through this program, we intend to help fund our continued investments in technology and business infrastructure throughout 2016.

In the second quarter of 2016, we expect noninterest expense to increase by mid-single digits, on a percentage basis, compared to the first quarter of 2016, primarily as a result of higher anticipated business activity and seasonality.

For full year 2016, we expect noninterest expense to remain stable compared to 2015.

Effective Income Tax Rate

The effective income tax rate was 23.5% in the first quarter of 2016 compared with 24.4% in the first quarter of 2015. The effective tax rate is generally lower than the statutory rate primarily due to tax credits PNC receives from our investments in low income housing and new markets investments, as well as earnings in other tax exempt investments.

We expect our full-year 2016 effective tax rate to be approximately 25%.

 

 

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


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CONSOLIDATED BALANCE SHEET REVIEW

Table 6: Summarized Balance Sheet Data

 

    

March 31

2016

   

December 31

2015

     Change  
Dollars in millions         $     %  

Assets

                                 

Interest-earning deposits with banks

   $ 29,478      $ 30,546       $ (1,068     (3 )% 

Loans held for sale

     1,541        1,540         1       

Investment securities

     72,569        70,528         2,041        3

Loans

     207,485        206,696         789       

Allowance for loan and lease losses

     (2,711     (2,727      16        (1 )% 

Goodwill

     9,103        9,103               

Mortgage servicing rights

     1,323        1,589         (266     (17 )% 

Other intangible assets

     353        379         (26     (7 )% 

Other, net

     41,844        40,839         1,005        2

Total assets

   $ 360,985      $ 358,493       $ 2,492        1

Liabilities

           

Deposits

   $ 250,359      $ 249,002       $ 1,357        1

Borrowed funds

     54,178        54,532         (354     (1 )% 

Other

     10,120        8,979         1,141        13

Total liabilities

     314,657        312,513         2,144        1

Equity

           

Total shareholders’ equity

     45,130        44,710         420        1

Noncontrolling interests

     1,198        1,270         (72     (6 )% 

Total equity

     46,328        45,980         348        1

Total liabilities and equity

   $ 360,985      $ 358,493       $ 2,492        1

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

PNC’s balance sheet reflected asset growth and strong liquidity and capital positions at March 31, 2016.

   

Total assets increased in the first quarter of 2016 compared to the prior year end primarily due to an increase in investment securities and loans, partially offset by lower interest-earning deposits with banks.

   

Total liabilities increased in the first three months of 2016 compared to 2015 year end mainly due to deposit growth.

   

Total equity in the first quarter of 2016 remained relatively stable compared to the prior year end mainly due to increased retained earnings driven by net income, offset by share repurchases.

 

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


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Loans

Outstanding loan balances of $207.5 billion at March 31, 2016 and $206.7 billion at December 31, 2015 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.4 billion at both March 31, 2016 and December 31, 2015.

Table 7: Details Of Loans

 

Dollars in millions

  

March 31

2016

    

December 31

2015

     Change  
         $     %  

Commercial lending

                                  

Commercial

            

Manufacturing

   $ 20,104       $ 19,014       $ 1,090        6

Retail/wholesale trade

     16,736         16,661         75       

Service providers

     14,141         13,970         171        1

Real estate related (a)

     12,153         11,659         494        4

Health care

     9,106         9,210         (104     (1 )% 

Financial services

     6,084         7,234         (1,150     (16 )% 

Other industries

     20,992         20,860         132        1

Total commercial

     99,316         98,608         708        1

Commercial real estate

            

Real estate projects (b)

     16,199         15,697         502        3

Commercial mortgage

     12,031         11,771         260        2

Total commercial real estate

     28,230         27,468         762        3

Equipment lease financing

     7,584         7,468         116        2

Total commercial lending

     135,130         133,544         1,586        1

Consumer lending

            

Home equity

            

Lines of credit

     18,458         18,828         (370     (2 )% 

Installment

     13,000         13,305         (305     (2 )% 

Total home equity

     31,458         32,133         (675     (2 )% 

Residential real estate

            

Residential mortgage

     14,425         14,162         263        2

Residential construction

     247         249         (2     (1 )% 

Total residential real estate

     14,672         14,411         261        2

Credit card

     4,746         4,862         (116     (2 )% 

Other consumer

            

Automobile

     11,177         11,157         20       

Education

     5,701         5,881         (180     (3 )% 

Other

     4,601         4,708         (107     (2 )% 

Total consumer lending

     72,355         73,152         (797     (1 )% 

Total loans

   $ 207,485       $ 206,696       $ 789       
(a) Includes loans to customers in the real estate and construction industries.
(b) Includes both construction loans and intermediate financing for projects.

 

Loan growth was the result of an increase in total commercial lending driven by commercial real estate and commercial loans, partially offset by a decline in consumer lending due to lower home equity and education loans.

Loans represented 57% of total assets at March 31, 2016 and 58% at December 31, 2015. Commercial lending represented 65% of the loan portfolio at both March 31, 2016 and December 31, 2015. Consumer lending represented 35% of the loan portfolio at both March 31, 2016 and December 31,

2015. See the Credit Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our loan portfolio.

Total loans above include purchased impaired loans of $3.4 billion, or 2% of total loans, at March 31, 2016, and $3.5 billion, or 2% of total loans, at December 31, 2015.

For the second quarter of 2016, we expect total loans to be up modestly compared to the first quarter of 2016.

 

 

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


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Allowance for Loan and Lease Losses (ALLL)

Information regarding our higher risk loans and ALLL is included in the Credit Risk Management portion of the Risk Management section of this Financial Review and Note 1 Accounting Policies, Note 3 Asset Quality and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in our Notes To Consolidated Financial Statements included in Part 1, Item 1 of this Report.

Purchased Impaired Loans

A description of our purchased impaired loans is included in Note 4 Purchased Loans in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report. Information on our accounting policies related to purchased impaired loans is provided in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

We currently expect to collect total cash flows of $4.2 billion on purchased impaired loans, representing the $3.1 billion net investment at March 31, 2016 and accretable net interest of $1.1 billion.

The table below provides the weighted average life (WAL) for each of the purchased impaired portfolios as of March 31, 2016.

Table 8: Weighted Average Life of the Purchased Impaired Portfolios

 

As of March 31, 2016

Dollars in millions

   Recorded
Investment
     WAL (a)  

Commercial

   $ 29         2.2 years   

Commercial real estate

     120         1.5 years   

Consumer (b)

     1,338         3.6 years   

Residential real estate

     1,893         4.5 years   

Total

   $ 3,380         4.0 years   
(a) Weighted average life represents the average number of years for which each dollar of unpaid principal remains outstanding.
(b) Portfolio primarily consists of nonrevolving home equity products.

Commitments to Extend Credit

Commitments to extend credit comprise the following:

Table 9: Commitments to Extend Credit (a)

 

In millions    March 31
2016
     December 31
2015
 

Total commercial lending

   $ 101,434       $ 101,252   

Home equity lines of credit

     17,311         17,268   

Credit card

     20,814         19,937   

Other

     4,399         4,032   

Total

   $ 143,958       $ 142,489   
(a) Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions.

In addition to the credit commitments set forth in the table above, our net outstanding standby letters of credit totaled $9.0 billion at March 31, 2016 and $8.8 billion at December 31, 2015. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

Information regarding our commitments to extend credit and our allowance for unfunded loan commitments and letters of credit is included in Note 1 Accounting Policies, Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit and Note 15 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part 1, Item 1 of this Report.

 

 

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


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Investment Securities

The following table presents the distribution of our investment securities portfolio by credit rating. We have included credit ratings information because we believe that the information is an indicator of the degree of credit risk to which we are exposed. Changes in credit ratings classifications could indicate increased or decreased credit risk and could be accompanied by a reduction or increase in the fair value of our investment securities portfolio.

Table 10: Investment Securities

 

     March 31, 2016      December 31, 2015      Ratings (a)
As of March 31, 2016
 
Dollars in millions    Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
    

AAA/

AA

     A      BBB     

BB

and

Lower

    

No

Rating

 

U.S. Treasury and government agencies

   $ 10,497       $ 10,789       $ 10,022       $ 10,172         100              

Agency residential mortgage-backed

     35,350         35,981         34,250         34,408         100                 

Non-agency residential mortgage-backed

     4,063         4,189         4,225         4,392         11         1      3      80      5

Agency commercial mortgage-backed

     2,972         3,039         3,045         3,086         100                 

Non-agency commercial mortgage-backed (b)

     5,410         5,444         5,624         5,630         80         10         2         2         6   

Asset-backed (c)

     6,345         6,325         6,134         6,130         90         3            6         1   

State and municipal

     3,897         4,130         3,936         4,126         89         5               6   

Other debt

     2,662         2,713         2,211         2,229         53         32         15           

Corporate stock and other

     413         413         590         589                                             100   

Total investment securities (d)

   $ 71,609       $ 73,023       $ 70,037       $ 70,762         90      2      1      5      2
(a) Ratings percentages allocated based on amortized cost.
(b) Collateralized primarily by retail properties, office buildings, lodging properties and multi-family housing.
(c) Collateralized primarily by corporate debt, government guaranteed student loans and other consumer credit products.
(d) Includes available for sale and held to maturity securities.

 

Investment securities represented 20% of total assets at both March 31, 2016 and December 31, 2015.

We evaluate our investment securities portfolio in light of changing market conditions and other factors and, where appropriate, take steps to improve our overall positioning. We consider the portfolio to be well-diversified and of high quality. At March 31, 2016, 90% of the securities in the portfolio were rated AAA/AA, with U.S. Treasury and government agencies, agency residential mortgage-backed and agency commercial mortgage-backed securities collectively representing 68% of the portfolio.

The investment securities portfolio includes both available for sale and held to maturity securities. Securities classified as available for sale are carried at fair value with net unrealized gains and losses, representing the difference between amortized cost and fair value, included in Shareholders’ equity as Accumulated other comprehensive income or loss, net of tax, on our Consolidated Balance Sheet. Securities classified as held to maturity are carried at amortized cost. As of March 31, 2016, the amortized cost and fair value of available for sale securities totaled $56.5 billion and $57.4 billion, respectively, compared to an amortized cost and fair value as of December 31, 2015 of $55.3 billion and $55.8 billion, respectively. The amortized cost and fair value of held to maturity securities were $15.2 billion and $15.6 billion, respectively, at March 31, 2016, compared to $14.8 billion and $15.0 billion, respectively, at December 31, 2015.

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally decreases when credit spreads widen and vice versa. Net unrealized gains in the total investment securities portfolio increased to $1.4 billion at March 31, 2016 from $.7 billion at December 31, 2015. The comparable amounts for the securities available for sale portfolio were $1.0 billion at March 31, 2016 and $.5 billion at December 31, 2015.

Unrealized gains and losses on available for sale debt securities do not impact liquidity; however these gains and losses do affect capital under the regulatory capital rules. Also, a change in the securities’ credit ratings could impact the liquidity of the securities and may be indicative of a change in credit quality, which could affect our risk-weighted assets and, therefore, our risk-based regulatory capital ratios under the regulatory capital rules. In addition, the amount representing the credit-related portion of OTTI on securities would reduce our earnings and regulatory capital ratios.

The duration of investment securities was 2.3 years at March 31, 2016. We estimate that, at March 31, 2016, the effective duration of investment securities was 2.4 years for an immediate 50 basis points parallel increase in interest rates and 2.1 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2015 for

 

 

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the effective duration of investment securities were 2.8 years and 2.6 years, respectively.

Based on current interest rates and expected prepayment speeds, the weighed-average expected maturity of the investment securities portfolio (excluding corporate stock and other) was 4.3 years at March 31, 2016 compared to 4.8 years at December 31, 2015. The weighted-average expected maturities of mortgage and other asset-backed debt securities were as follows as of March 31, 2016:

Table 11: Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities

 

March 31, 2016    Years  

Agency residential mortgage-backed securities

     3.8   

Non-agency residential mortgage-backed securities

     5.3   

Agency commercial mortgage-backed securities

     3.1   

Non-agency commercial mortgage-backed securities

     3.5   

Asset-backed securities

     2.7   

At least quarterly, we conduct a comprehensive security-level impairment assessment on all securities. If economic conditions, including home prices, were to deteriorate from current levels, and if market volatility and liquidity were to deteriorate from current levels, or if market interest rates were to increase or credit spreads were to widen appreciably, the valuation of our investment securities portfolio would likely be adversely affected and we could incur additional OTTI credit losses that would impact our Consolidated Income Statement. For those securities on our balance sheet at March 31, 2016, where during our quarterly security-level impairment assessments we determined losses represented other-than-temporary impairment (OTTI), we have recorded cumulative credit losses of $1.1 billion in earnings and accordingly have reduced the amortized cost of our securities. The majority of these cumulative impairment charges related to non-agency residential mortgage-backed and asset-backed securities rated BB or lower.

Additional information regarding our investment securities is included in Note 6 Investment Securities and Note 7 Fair Value in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

Loans Held for Sale

Table 12: Loans Held For Sale

 

In millions    March 31
2016
     December 31
2015
 

Commercial mortgages

   $ 667       $ 668   

Residential mortgages

     833         850   

Other

     41         22   

Total

   $ 1,541       $ 1,540   

We sold $.6 billion of commercial mortgage loans to agencies during the first three months of 2016 compared to $1.0 billion during the first three months of 2015. Total revenue of $17 million was recognized on the valuation and sale of commercial mortgage loans held for sale, net of hedges, during the first three months of 2016 and $15 million during the first three months of 2015. These amounts are included in Other noninterest income on the Consolidated Income Statement.

Residential mortgage loan origination volume was $1.9 billion during the first three months of 2016 compared to $2.6 billion in the same period in 2015. The majority of such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $1.4 billion of loans and recognized loan sales revenue of $64 million during the first quarter of 2016. The comparable amounts for 2015 were $1.9 billion and $104 million, respectively. These loan sales revenue amounts are included in Residential mortgage noninterest income on the Consolidated Income Statement.

Interest income on loans held for sale was $16 million and $23 million during the first three months of 2016 and 2015, respectively. These amounts are included in Other interest income on the Consolidated Income Statement.

Additional information regarding our loan sale and servicing activities is included in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities and Note 7 Fair Value in our Notes To Consolidated Financial Statements included in Part 1, Item 1 of this Report.

 

 

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


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Funding Sources

Table 13: Details Of Funding Sources

 

    

March 31

2016

    

December 31

2015

     Change  
Dollars in millions          $     %  

Deposits

                                  

Money market

   $ 114,710       $ 118,079       $ (3,369     (3 )% 

Demand

     90,182         90,038         144       

Savings

     26,412         20,375         6,037        30

Retail certificates of deposit

     17,189         17,405         (216     (1 )% 

Time deposits in foreign offices and other time deposits

     1,866         3,105         (1,239     (40 )% 

Total deposits

     250,359         249,002         1,357        1

Borrowed funds

            

Federal funds purchased and repurchase agreements

     2,495         1,777         718        40

FHLB borrowings

     19,058         20,108         (1,050     (5 )% 

Bank notes and senior debt

     21,594         21,298         296        1

Subordinated debt

     8,707         8,556         151        2

Other

     2,324         2,793         (469     (17 )% 

Total borrowed funds

     54,178         54,532         (354     (1 )% 

Total funding sources

   $ 304,537       $ 303,534       $ 1,003       

 

See the Liquidity Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our 2016 capital and liquidity activities.

Total deposits increased in the comparison mainly due to growth in savings deposits reflecting in part a shift from money market deposits to new relationship-based savings products. Interest-bearing deposits represented 69% of total deposits at March 31, 2016 and 68% at December 31, 2015.

Total borrowed funds decreased in the comparison as maturities of FHLB borrowings were partially offset by higher federal funds purchased and repurchase agreements.

Capital

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

We repurchase shares of PNC common stock under common stock repurchase authorizations approved from time to time by PNC’s Board of Directors and consistent with capital plans submitted to, and accepted by, the Federal Reserve. The extent and timing of share repurchases under authorizations will depend on a number of factors including, among others, market and general economic conditions, economic and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, contractual and regulatory limitations, and the results of future supervisory

assessments of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process.

In connection with the 2016 CCAR process, we filed our capital plan and stress testing results in April 2016 using financial data as of December 31, 2015 with the Federal Reserve. We expect to receive the Federal Reserve’s response (either a non-objection or objection) to the capital plan submitted as part of the 2016 CCAR in June 2016.

In the first quarter of 2016, we repurchased 5.9 million common shares for $.5 billion. We have repurchased a total of 23.8 million common shares for $2.2 billion under current share repurchase programs of up to $2.875 billion for the five quarter period ending in the second quarter of 2016. These repurchases were included in the capital plan accepted by the Federal Reserve as part of our 2015 CCAR submission.

We paid dividends on common stock of $.3 billion, or 51 cents per common share, during the first quarter of 2016. On April 4, 2016, the PNC board of directors declared a quarterly common stock cash dividend of 51 cents per share payable on May 5, 2016.

See the Supervision and Regulation section of Item 1 Business of our 2015 Form 10-K for further information concerning the CCAR process and the factors the Federal Reserve takes into consideration in its evaluation of capital plans. See also the Capital section of the Consolidated Balance Sheet Review in our 2015 Form 10-K for additional information on our 2015 CCAR submission and current capital plan.

 

 

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Table 14: Shareholders’ Equity

 

    

March 31

2016

   

December 31

2015

     Change  
Dollars in millions         $     %  

Shareholders’ equity

                                 

Preferred stock (a)

           

Common stock

   $ 2,708      $ 2,708       $       

Capital surplus – preferred stock

     3,453        3,452         1       

Capital surplus – common stock and other

     12,586        12,745         (159     (1 )% 

Retained earnings

     29,642        29,043         599        2

Accumulated other comprehensive income

     532        130         402        309

Common stock held in treasury at cost

     (3,791     (3,368      (423     (13 )% 

Total shareholders’ equity

   $ 45,130      $ 44,710         $ 420        1
(a) Par value less than $.5 million at each date.

The increase in total shareholders’ equity compared to December 31, 2015 was mainly due to a $.6 billion increase in retained earnings and higher accumulated other comprehensive income primarily related to net securities gains, partially offset by common share repurchases of $.5 billion. The increase in retained earnings was driven by net income of $.9 billion, reduced by $.3 billion of common and preferred dividends declared. Common shares outstanding were 499 million and 504 million at March 31, 2016 and December 31, 2015, respectively.

 

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


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Table 15: Basel III Capital

 

      March 31, 2016  
Dollars in millions   

2016
Transitional

Basel III (a)

     Pro forma Fully
Phased-In Basel  III
(estimated) (b)(c)
 

Common equity Tier 1 capital

         

Common stock plus related surplus, net of treasury stock

   $ 11,503       $ 11,503   

Retained earnings

     29,642         29,642   

Accumulated other comprehensive income for securities currently and previously held as available for sale

     388         647   

Accumulated other comprehensive income for pension and other postretirement plans

     (328      (546

Goodwill, net of associated deferred tax liabilities

     (8,837      (8,837

Other disallowed intangibles, net of deferred tax liabilities

     (186      (311

Other adjustments/(deductions)

     (139      (148

Total common equity Tier 1 capital before threshold deductions

     32,043         31,950   

Total threshold deductions

     (678      (1,139

Common equity Tier 1 capital

     31,365         30,811   

Additional Tier 1 capital

         

Preferred stock plus related surplus

     3,453         3,453   

Trust preferred capital securities

         

Noncontrolling interests (d)

     418         44   

Other adjustments/(deductions)

     (86      (107

Tier 1 capital

     35,150         34,201   

Additional Tier 2 capital

         

Qualifying subordinated debt

     4,362         4,149   

Trust preferred capital securities

     119        

Allowance for loan and lease losses included in Tier 2 capital

     2,992         8   

Other (d)

     6         10   

Total Basel III capital

   $ 42,629       $ 38,368   

Risk-weighted assets

         

Basel III standardized approach risk-weighted assets (e)

   $ 295,555       $ 303,805   

Basel III advanced approaches risk-weighted assets (f)

     N/A         283,297   

Average quarterly adjusted total assets

     345,269         344,652   

Supplementary leverage exposure (g)

     408,695         408,078   

Basel III risk-based capital and leverage ratios

         

Common equity Tier 1

     10.6      10.1 % (h)(j) 

Tier 1

     11.9         11.3  (h)(k) 

Total

     14.4         13.5  (i)(l) 

Leverage (m)

     10.2         9.9   

Supplementary leverage ratio (n)

     8.6         8.4   
(a) Calculated using the regulatory capital methodology applicable to PNC during 2016.
(b) PNC utilizes the pro forma fully phased-in Basel III capital ratios to assess its capital position (without the benefit of phase-ins), including comparison to similar estimates made by other financial institutions. Pro forma fully phased-in capital amounts, ratios and risk-weighted and leverage-related assets are estimated.
(c) Basel III capital ratios and estimates may be impacted by additional regulatory guidance or analysis and, in the case of those ratios calculated using the advanced approaches, the ongoing evolution, validation and regulatory approval of PNC’s models integral to the calculation of advanced approaches risk-weighted assets.
(d) Primarily includes REIT preferred securities for 2016 Transitional Basel III and Pro forma fully phased-in Basel III capital ratios.
(e) Includes credit and market risk-weighted assets.
(f) Basel III advanced approaches risk-weighted assets are estimated based on the Basel III advanced approaches rules, and include credit, market, and operational risk-weighted assets. During the parallel run qualification phase PNC has refined the data, models, and internal processes used as part of the advanced approaches for determining risk-weighted assets. Refinements made in the fourth quarter of 2015 reduced Estimated Basel III advanced approaches risk-weighted assets and refinements made in the first quarter of 2016 increased Estimated Basel III advanced approaches risk-weighted assets. We anticipate additional refinements to this estimate through the parallel run qualification phase.
(g) Supplementary leverage exposure is the sum of Adjusted average assets and certain off-balance sheet exposures including undrawn credit commitments and derivative potential future exposures.
(h) Pro forma fully phased-in Basel III capital ratio based on Basel III standardized approach risk-weighted assets and rules.
(i) Pro forma fully phased-in Basel III capital ratio based on Basel III advanced approaches risk-weighted assets and rules.

(continued on following page)

 

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(continued from previous page)

 

(j) For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Common equity Tier 1 capital ratio estimate is 10.9%. This capital ratio is calculated using pro forma fully phased-in Common equity Tier 1 capital and dividing by Basel III advanced approaches risk-weighted assets.
(k) For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Tier 1 risk-based capital ratio estimate is 12.1%. This capital ratio is calculated using fully phased-in Tier 1 capital and dividing by Basel III advanced approaches risk-weighted assets.
(l) For comparative purposes only, the pro forma fully phased-in standardized approaches Basel III Total capital risk-based capital ratio estimate is 13.6%. This ratio is calculated using fully phased-in additional Tier 2 capital which, under the standardized approach, reflects allowance for loan and lease losses of up to 1.25% of credit risk related risk-weighted assets and dividing by estimated Basel III standardized approach risk-weighted assets.
(m) Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets.
(n) Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure. As advanced approaches banking organizations, PNC and PNC Bank will be subject to a 3% minimum supplementary leverage ratio effective January 1, 2018.

 

The Basel II framework, which was adopted by the Basel Committee on Banking Supervision in 2004, seeks to provide more risk-sensitive regulatory capital calculations and promote enhanced risk management practices among large, internationally active banking organizations. The U.S. banking agencies initially adopted rules to implement the Basel II capital framework in 2004. In July 2013, the U.S. banking agencies adopted final rules (referred to as the advanced approaches) that modified the Basel II framework effective January 1, 2014. See the Supervision and Regulation section in Item 1 Business and Item 1A Risk Factors of our 2015 Form 10-K for additional information. Prior to fully implementing the advanced approaches to calculate risk-weighted assets, PNC and PNC Bank must successfully complete a “parallel run” qualification phase. Both PNC and PNC Bank entered this parallel run phase on January 1, 2013. Although the minimum parallel run qualification period is four quarters, the parallel run period for PNC and PNC Bank, now in its fourth year, is consistent with the experience of other U.S. advanced approaches banks that have all had multi-year parallel run periods. After PNC exits parallel run, its regulatory risk-based capital ratio for each measure (e.g., Common equity Tier 1 capital ratio) will be the lower of the ratios as calculated under the standardized approach and the advanced approaches.

As a result of the staggered effective dates of the final U.S. Basel III regulatory capital rules (Basel III rules), as well as the fact that PNC remains in the parallel run qualification phase for the advanced approaches, PNC’s regulatory risk-based ratios in 2016 are calculated using the standardized approach for determining risk-weighted assets, and the definitions of, and deductions from, regulatory capital under the Basel III rules (as such definitions and deductions are phased-in for 2016). We refer to the capital ratios calculated using the phased-in Basel III provisions in effect for 2016 and, for the risk-based ratios, standardized approach risk-weighted assets, as the 2016 Transitional Basel III ratios. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, past due exposures, equity exposures and securitization exposures are generally subject to higher risk weights than other types of exposures.

Under the Basel III rules adopted by the U.S. banking agencies, significant common stock investments in unconsolidated financial institutions, mortgage servicing

rights and deferred tax assets must be deducted from capital (subject to a phase-in schedule and net of associated deferred tax liabilities) to the extent they individually exceed 10%, or in the aggregate exceed 15%, of the institution’s adjusted common equity Tier 1 capital. Also, Basel III regulatory capital includes (subject to a phase-in schedule) accumulated other comprehensive income related to securities currently and previously held as available for sale, as well as pension and other postretirement plans.

Federal banking regulators have stated that they expect the largest U.S. bank holding companies, including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largest U.S. bank holding companies, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers through estimated stress scenarios. We seek to manage our capital consistent with these regulatory principles, and believe that our March 31, 2016 capital levels were aligned with them.

At March 31, 2016, PNC and PNC Bank, our sole bank subsidiary, were both considered “well capitalized,” based on applicable U.S. regulatory capital ratio requirements. To qualify as “well capitalized”, PNC must have Transitional 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 Transitional 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%.

The access to and cost of funding for new business initiatives, the ability to undertake new business initiatives including acquisitions, the ability to engage in expanded business activities, the ability to pay dividends or repurchase shares or other capital instruments, the level of deposit insurance costs, and the level and nature of regulatory oversight depend, in large part, on a financial institution’s capital strength.

We provide additional information regarding regulatory capital requirements and some of their potential impacts on PNC in the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 19 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K.

 

 

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


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OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

We engage in a variety of activities that involve unconsolidated entities or that are otherwise not reflected in our Consolidated Balance Sheet that are generally referred to as “off-balance sheet arrangements.” Additional information on these types of activities is included in our 2015 Form 10-K and in the following sections of this Report:

   

Commitments, including contractual obligations and other commitments, included within the Risk Management section of this Financial Review,

   

Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements, and

   

Note 15 Commitments and Guarantees in the Notes To Consolidated Financial Statements.

PNC consolidates variable interest entities (VIEs) when we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that meets

both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.

A summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements, as of March 31, 2016 and December 31, 2015 is included in Note 2 of this Report.

Trust Preferred Securities and REIT Preferred Securities

See Note 11 Borrowed Funds and Note 16 Equity in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K for additional information on trust preferred securities issued by PNC Capital Trust C and REIT preferred securities issued by PNC Preferred Funding Trust I and PNC Preferred Funding Trust II including information on contractual limitations potentially imposed on payments (including dividends) with respect to PNC and PNC Bank’s equity capital securities.

 

 

FAIR VALUE MEASUREMENTS

In addition to the following, see Note 7 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for further information regarding fair value.

The following table summarizes the assets and liabilities measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015, respectively, and the portions of such assets and liabilities that are classified within Level 3 of the valuation hierarchy. Level 3 assets and liabilities are those where the fair value is estimated using significant unobservable inputs.

Table 16: Fair Value Measurements – Summary

 

     March 31, 2016      December 31, 2015  
Dollars in millions    Total Fair
Value
     Level 3      Total Fair
Value
     Level 3  

Total assets

   $ 72,182       $ 8,029       $ 68,804       $ 8,606   

Total assets at fair value as a percentage of consolidated assets

     20           19     

Level 3 assets as a percentage of total assets at fair value

        11         13

Level 3 assets as a percentage of consolidated assets

        2         2

Total liabilities

   $ 6,168       $ 355       $ 4,892       $ 495   

Total liabilities at fair value as a percentage of consolidated liabilities

     2           2     

Level 3 liabilities as a percentage of total liabilities at fair value

        6         10

Level 3 liabilities as a percentage of consolidated liabilities

              <1               <1

 

BUSINESS SEGMENTS REVIEW

We have six reportable business segments:

   

Retail Banking

   

Corporate & Institutional Banking

   

Asset Management Group

   

Residential Mortgage Banking

   

BlackRock

   

Non-Strategic Assets Portfolio

Business segment results, including the basis of presentation of inter-segment revenues, and a description of each business are included in Note 16 Segment Reporting included in the

Notes To Consolidated Financial Statements in Part I, Item 1 of this Report. Certain amounts included in this Business Segments Review and the Business Segments Highlights in the Executive Summary section of this Financial Review differ from those amounts shown in Note 16, primarily due to the presentation in this Financial Review of business net interest revenue on a taxable-equivalent basis.

Net interest income in business segment results reflects PNC’s 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.

 

 

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


Table of Contents

Retail Banking

(Unaudited)

Table 17: Retail Banking Table

 

Three months ended March 31

Dollars in millions, except as noted

   2016      2015  

Income Statement

       

Net interest income

   $ 1,113       $ 1,038   

Noninterest income

     537         488   

Total revenue

     1,650         1,526   

Provision for credit losses

     77         49   

Noninterest expense

     1,150         1,158   

Pretax earnings

     423         319   

Income taxes

     155         117   

Earnings

   $ 268       $ 202   

Average Balance Sheet

       

Loans

       

Consumer

       

Home equity

   $ 26,743       $ 28,152   

Automobile

     10,787         10,341   

Education

     5,865         6,626   

Credit cards

     4,722         4,444   

Other

     1,823         1,896   

Total consumer

     49,940         51,459   

Commercial and commercial real estate

     12,551         12,867   

Residential mortgage

     596         734   

Total loans

   $ 63,087       $ 65,060   

Total assets

   $ 72,216       $ 74,017   

Deposits

       

Noninterest-bearing demand

   $ 26,209       $ 22,591   

Interest-bearing demand

     37,860         35,650   

Money market

     50,405         53,105   

Savings

     21,780         12,888   

Certificates of deposit

     15,350         17,318   

Total deposits

   $ 151,604       $ 141,552   

Performance Ratios

       

Return on average assets

     1.51      1.11

Noninterest income to total revenue

     33      32

Efficiency

     70      76

Supplemental Noninterest Income Information

       

Service charges on deposits

   $ 151       $ 146   

Brokerage

   $ 75       $ 67   

Consumer services

   $ 254       $ 233   

Other Information (a)

       

Customer-related statistics (average):

       

Non-teller deposit transactions (b)

     47      40

Digital consumer customers (c)

     56      50

Credit-related statistics:

       

Nonperforming assets (d)

   $ 1,023       $ 1,174   

Net charge-offs

   $ 96       $ 99   

Annualized net charge-off ratio

     .61      .62

Other statistics:

       

ATMs

     8,940         8,754   

Branches (e)

     2,613         2,660   

Brokerage account client assets (billions) (f)

   $ 43       $ 44   
(a) Presented as of March 31, except for customer-related statistics, which are quarterly averages for the three months ended, and net charge-offs and annualized net charge-off ratio, which are for the three months ended.
(b) Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application.
(c) Represents consumer checking relationships that process the majority of their transactions through non-teller channels.
(d) Includes nonperforming loans of $1.0 billion at March 31, 2016 and $1.1 billion at March 31, 2015.
(e) Excludes satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services.
(f) Amounts include cash and money market balances.

Retail Banking earned $268 million in the first three months of 2016 compared with earnings of $202 million for the same period a year ago. The increase in earnings was driven by higher net interest income and noninterest income, partially offset by higher provision for credit losses. Retail Banking continues to enhance the customer experience with refinements to product offerings that drive product value for consumers and small businesses. We are focused on growing customer share of wallet through the sale of liquidity, banking, and investment products that meet the broad range of financial needs of our customers.

Retail Banking continued to focus on the strategic priority of transforming the customer experience through transaction migration, branch network transformation and multi-channel sales and service strategies.

   

In the first three months of 2016, approximately 56% of consumer customers used non-teller channels for the majority of their transactions compared with 50% for the same period in 2015.

   

Deposit transactions via ATM and mobile channels increased to 47% of total deposit transactions in the first quarter of 2016 compared with 40% for the same period in 2015.

   

Integral to PNC’s retail branch transformation strategy, approximately 14% of branches operate under the universal model designed to enhance sales opportunities for branch personnel, in part, by driving higher ATM and mobile deposits. PNC had a network of 2,613 branches and 8,940 ATMs at March 31, 2016.

   

Instant debit card issuance, which enables us to print a customer’s debit card in minutes, is now available in nearly 900 branches, over 34% of the branch network.

Total revenue for the first three months of 2016 increased $124 million compared to the same period in 2015, driven by increases in both net interest income and noninterest income. Net interest income increased $75 million in the comparison due to growth in deposit balances and interest rate spread on the value of deposits, partially offset by lower loan balances and interest rate spread compression on the value of loans.

Noninterest income increased $49 million in the first quarter of 2016 compared to the same period a year ago. Execution on our share of wallet strategy resulted in growth in consumer

 

 

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


Table of Contents

service fee income from payment-related products, specifically in debit card, credit card and merchant services, as well as increased brokerage fees. Increased noninterest income in the comparison also reflected a gain of $44 million on the sale of 0.5 million Visa Class B common shares in the first quarter of 2016.

Provision for credit losses increased $28 million and net charge-offs declined $3 million in the first three months of 2016, compared to the same period in 2015. The increase in provision for credit losses reflected slowing credit quality improvement.

The deposit strategy of Retail Banking is to remain disciplined on pricing, focused on growing and retaining relationship-based balances, executing on market specific deposit growth strategies, and providing a source of low-cost funding and liquidity to PNC.

In the first three months of 2016, average total deposits of $151.6 billion increased $10.0 billion, or 7%, compared to the same period a year ago, driven by organic growth in the following deposit categories:

   

Savings deposits increased $8.9 billion, or 69%, to $21.8 billion.

   

Demand deposits increased $5.8 billion, or 10%, to $64.1 billion.

The increase in savings deposits was partially offset by lower money market deposits, which declined $2.7 billion, or 5%, reflecting a shift to new relationship-based savings products. Certificates of deposit, declined $2.0 billion, or 11%, in the comparison, from the net runoff of maturing accounts.

Retail Banking continued to focus on a relationship-based lending strategy that targets specific products and markets for growth. In the first three months of 2016, average total loans

declined $2.0 billion, or 3%, compared to the same period in 2015, driven by a decline in home equity loans and runoff of non-strategic portions of the portfolios, as more fully described below.

   

Average home equity loans decreased $1.4 billion, or 5%, as pay-downs and payoffs on loans exceeded new booked volume, consistent with lower mortgage refinance demand. Retail Banking’s home equity loan portfolio is relationship based, with over 97% of the portfolio attributable to borrowers in our primary geographic footprint. The weighted-average updated FICO scores for this portfolio was 750 at March 31, 2016 compared to 752 at December 31, 2015.

   

Average commercial and commercial real estate loans declined $316 million, or 2%, as pay-downs and payoffs on loans exceeded new volume.

   

Average automobile loans, comprised of both direct and indirect auto loans, increased $446 million, or 4%, primarily due to portfolio growth in previously underpenetrated markets.

   

Average credit card balances increased $278 million, or 6%, as a result of efforts to increase credit card share of wallet through organic growth.

   

In the first three months of 2016, average loan balances for the remainder of the portfolio declined $972 million, or 11%, compared to the same period in 2015, driven by declines in the discontinued government guaranteed education, indirect other, and residential mortgage portfolios, which are primarily runoff portfolios.

Nonperforming assets declined $151 million, or 13%, at March 31, 2016 compared to March 31, 2015. The decrease was driven by declines in both consumer and commercial nonperforming loans.

 

 

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


Table of Contents

Corporate & Institutional Banking

(Unaudited)

Table 18: Corporate & Institutional Banking Table

 

Three months ended March 31
Dollars in millions, except as noted
  2016     2015  

Income Statement

     

Net interest income

  $ 870      $ 855   

Noninterest income

    434        429   

Total revenue

    1,304        1,284   

Provision for credit losses

    107        17   

Noninterest expense

    521        514   

Pretax earnings

    676        753   

Income taxes

    245        271   

Earnings

  $ 431      $ 482   

Average Balance Sheet

     

Loans held for sale

  $ 708      $ 1,106   

Loans

     

Commercial

  $ 86,645      $ 84,712   

Commercial real estate

    25,817        22,090   

Equipment lease financing

    6,783        6,914   

Total commercial lending

    119,245        113,716   

Consumer

    499        1,352   

Total loans

  $ 119,744      $ 115,068   

Total assets

  $ 135,521      $ 131,178   

Deposits

     

Noninterest-bearing demand

  $ 46,962      $ 46,976   

Money market

    21,229        22,286   

Other

    11,316        9,340   

Total deposits

  $ 79,507      $ 78,602   

Performance Ratios

     

Return on average assets

    1.29     1.49

Noninterest income to total revenue

    33     33

Efficiency

    40     40

Other Information

     

Commercial loan servicing portfolio (a) (b)

  $ 453      $ 390   

Consolidated revenue from: (c)

     

Treasury Management (d)

  $ 377      $ 319   

Capital Markets (d)

  $ 152      $ 180   

Commercial mortgage banking activities

     

Commercial mortgage loans held for
sale (e)

  $ 26      $ 26   

Commercial mortgage loan servicing income (f)

    66        56   

Commercial mortgage servicing rights valuation, net of economic hedge (g)

    1        16   

Total

  $ 93      $ 98   

Average Loans (by C&IB business)

     

Corporate Banking

  $ 56,166      $ 58,227   

Real Estate

    35,784        29,918   

Business Credit

    14,672        14,217   

Equipment Finance

    11,014        10,941   

Other

    2,108        1,765   

Total average loans

  $ 119,744      $ 115,068   

Net carrying amount of commercial mortgage servicing rights (a)

  $ 460      $ 494   

Credit-related statistics:

     

Nonperforming assets (a) (h)

  $ 701      $ 516   

Net charge-offs (recoveries)

  $ 41      $ (1
(a) As of March 31.
(b) Represents loans serviced for PNC and others.
(c) Represents consolidated PNC amounts. See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of the Corporate & Institutional Banking portion of this Business Segments Review section.
(d) Includes amounts reported in net interest income, corporate service fees and other noninterest income.
(e) Includes other noninterest 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.
(f) Includes net interest income and noninterest income (primarily in corporate services fees) from loan servicing net of reduction in commercial mortgage servicing rights due to time decay and payoffs. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.
(g) Amounts reported in corporate services fees.
(h) Includes nonperforming loans of $.6 billion at March 31, 2016 and $.4 billion at March 31, 2015.

Corporate & Institutional Banking earned $431 million in the first quarter of 2016, a decrease of $51 million, or 11%, compared with the first quarter of 2015. The decrease in earnings was primarily due to an increase in the provision for credit losses, partially offset by increased net interest income. We continue to focus on building client relationships where the risk-return profile is attractive, including the Southeast.

Net interest income increased $15 million, or 2%, in the first three months of 2016 compared to the first three months of 2015. The increase primarily reflects the impact of higher average loans and deposits as well as interest rate spread expansion on deposits, partially offset by continued interest rate spread compression on loans and lower purchase accounting accretion.

Noninterest income increased slightly in the first three months of 2016 compared to the first three months of 2015 reflecting an equity investment gain, lower commercial mortgage servicing rights valuation, net of economic hedge, and lower capital markets activity.

Overall credit quality for the first quarter of 2016 remained relatively stable, except for deterioration related to certain energy related loans, which was the primary driver for the increase in provision for credit losses of $90 million, net charge-offs of $42 million and nonperforming assets of $185 million in the year over year comparisons. Increased provision for credit losses also reflected the impact of continued loan growth.

Average loans increased $4.7 billion, or 4%, for the first quarter of 2016 compared to the prior year quarter, reflecting solid growth in Real Estate and Business Credit, partially offset by a decline in Corporate Banking:

   

PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. Average loans for this business increased $5.9 billion, or 20%, in the first quarter of 2016 compared with the first quarter of 2015, primarily due to growth in commercial lending driven by higher term, REIT and agency warehouse lending.

 

 

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


Table of Contents
   

PNC Business Credit provides asset-based lending. The loan portfolio is relatively high yielding, with acceptable risk as the loans are mainly secured by short-term assets. Average loans for this business increased $455 million, or 3%, in the first three months of 2016 compared to the first three months of 2015, due to new originations.

   

Corporate Banking provides lending, treasury management and capital markets-related products and services to midsized and large corporations, government and not-for-profit entities. Average loans for this business decreased $2.1 billion, or 4%, in the first quarter of 2016 compared with the first quarter of 2015, reflecting the impact of ongoing capital and liquidity management activities, partially offset by increased lending to large corporate clients.

   

PNC Equipment Finance provides equipment financing solutions for clients throughout the U.S. and Canada. Average loans and operating leases were $11.8 billion in the first quarter of 2016, unchanged compared with the first quarter of 2015.

Average deposits for the first quarter of 2016 increased $.9 billion, or 1%, compared with the first quarter of 2015, as a result of interest-bearing demand deposit growth, partially offset by a decrease in money market deposits.

The commercial loan servicing portfolio increased $63 billion, or 16%, at March 31, 2016 compared to March 31, 2015, as servicing additions from new and existing customers exceeded portfolio run-off.

Product Revenue

In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management, capital markets-related products and services, and commercial mortgage banking activities, for customers of all business segments. On a consolidated basis, the revenue from these other services is included in net interest income, corporate service fees and other noninterest income. From a segment perspective, the majority of the revenue and expense related to these services is reflected in the Corporate & Institutional Banking segment results and the remainder is reflected in the results of other businesses. The Other Information section in Table 18 in the Corporate & Institutional Banking portion of this Business Segments Review section includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.

Treasury management revenue, comprised of fees and net interest income from customer deposit balances, increased $58 million, or 18%, in the first quarter of 2016 compared with the first quarter of 2015, driven by liquidity-related revenue.

Capital markets-related products and services include foreign exchange, derivatives, securities, loan syndications, mergers and acquisitions advisory, equity capital markets advisory activities and related services. Revenue from capital markets-related products and services decreased $28 million, or 16%, in the first three months of 2016 compared with the first three months of 2015. The decrease in the comparison was primarily driven by lower merger and acquisition advisory fees, decreased corporate securities underwriting activity and lower loan syndication fees.

Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (including net interest income and noninterest income) and revenue derived from commercial mortgage loans held for sale and related hedges. Total revenue from commercial mortgage banking activities decreased $5 million, or 5%, in the first quarter of 2016 compared with the first quarter of 2015. The decrease in the comparison was mainly due to lower commercial mortgage servicing rights valuation, net of economic hedge, largely offset by higher mortgage servicing revenue.

 

 

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


Table of Contents

Asset Management Group

(Unaudited)

Table 19: Asset Management Group Table

 

Three months ended March 31

Dollars in millions, except as noted

   2016      2015  

Income Statement

       

Net interest income

   $ 77       $ 73   

Noninterest income

     203         208   

Total revenue

     280         281   

Provision for credit losses (benefit)

     (3      12   

Noninterest expense

     206         210   

Pretax earnings

     77         59   

Income taxes

     28         22   

Earnings

   $ 49       $ 37   

Average Balance Sheet

       

Loans

       

Consumer

   $ 5,630       $ 5,650   

Commercial and commercial real estate

     788         932   

Residential mortgage

     1,003         865   

Total loans

   $ 7,421       $ 7,447   

Total assets

   $ 7,887       $ 7,943   

Deposits

       

Noninterest-bearing demand

   $ 1,407       $ 1,345   

Interest-bearing demand

     4,280         4,241   

Money market

     4,758         4,621   

Savings

     1,563         165   

Other

     275         290   

Total deposits

   $ 12,283       $ 10,662   

Performance Ratios

       

Return on average assets

     2.52      1.89

Noninterest income to total revenue

     73      74

Efficiency

     74      75

Other Information

       

Total nonperforming assets (a) (b)

   $ 54       $ 63   

Total net charge-offs

   $ 4       $ 4   

Client Assets Under Administration (a) (c) (d) (in billions)

       

Discretionary client assets under management

   $ 135       $ 136   

Nondiscretionary client assets under administration

     125         129   

Total

   $ 260       $ 265   

Discretionary client assets under management

       

Personal

   $ 84       $ 88   

Institutional

     51         48   

Total

   $ 135       $ 136   

Equity

   $ 72       $ 75   

Fixed Income

     40         41   

Liquidity/Other

     23         20   

Total

   $ 135       $ 136   
(a) As of March 31.
(b) Includes nonperforming loans of $49 million at March 31, 2016 and $59 million at March 31, 2015.
(c) Excludes brokerage account client assets.
(d) As a result of certain investment advisory services performed by one of our registered investment advisors, certain assets are reported as both discretionary client assets under management and nondiscretionary client assets under administration. The amount of such assets was approximately $7 billion at March 31, 2016 and $5 billion at March 31, 2015.

Asset Management Group earned $49 million in the first quarter of 2016 and $37 million in the first quarter of 2015. Earnings increased compared with the prior year quarter as a reduction in the provision for credit losses and lower noninterest expense was partially offset by a decline in noninterest income.

Total revenue for the first quarter of 2016 decreased slightly compared to the first quarter of 2015, as a decline in noninterest income from lower average equity markets was largely offset by an increase in net interest income.

Noninterest expense decreased $4 million, or 2%, in the first quarter of 2016 compared to the first quarter of 2015. Asset Management Group remains focused on disciplined expense management as it invests in strategic growth opportunities.

The core growth strategies of the business include increasing sales sourced from other PNC lines of business, maximizing front line productivity and optimizing market presence in high opportunity markets. Wealth Management and Hawthorn have over 100 offices operating in 7 out of the 10 most affluent states in the U.S. with a majority co-located with retail banking branches. The businesses’ strategies primarily focus on growing client assets under management through expanding relationships directly and through cross-selling from PNC’s other lines of business.

Institutional Asset Management provides advisory, custody, and retirement administration services to institutional clients primarily within our banking footprint. The business also offers PNC proprietary mutual funds and investment strategies. Institutional Asset Management is strengthening its partnership with Corporate and Institutional Banking and other internal channels to drive growth and is focused on building retirement capabilities and expanding product solutions for all customers.

Assets under administration were $260 billion as of March 31, 2016 compared with $265 billion as of March 31, 2015 largely due to a decline in nondiscretionary client assets under administration. Discretionary client assets under management decreased $1 billion compared to March 31, 2015.

Average deposits for the first quarter of 2016 increased $1.6 billion, or 15%, from the prior year first quarter, primarily driven by an increase in savings products. Average loan balances of $7.4 billion remained stable compared to the prior year quarter.

 

 

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


Table of Contents

Residential Mortgage Banking

(Unaudited)

Table 20: Residential Mortgage Banking Table

 

Three months ended March 31

Dollars in millions, except as noted

   2016     2015   

Income Statement

      

Net interest income

   $ 25      $ 30   

Noninterest income

     105        177   

Total revenue

     130        207   

Provision for credit losses (benefit)

     (1     2   

Noninterest expense

     152        161   

Pretax earnings (loss)

     (21     44   

Income taxes (benefit)

     (8     16   

Earnings (loss)

   $ (13   $ 28   

Average Balance Sheet

      

Loans held for sale

   $ 800      $ 1,147   

Loans

   $ 1,028      $ 1,282   

Mortgage servicing rights (MSR)

   $ 995      $ 843   

Total assets

   $ 6,306      $ 7,245   

Total deposits

   $ 2,330      $ 2,215   

Performance Ratios

      

Return on average assets

     (.84 )%      1.57

Noninterest income to total revenue

     81     86

Efficiency

     117     78

Supplemental Noninterest Income Information

      

Loan servicing revenue

      

Servicing fees

   $ 62      $ 48   

Mortgage servicing rights valuation, net of economic hedge

   $ (21   $ 25   

Loan sales revenue

   $ 64      $ 104   

Residential Mortgage Servicing Portfolio (in billions) (a)

      

Serviced portfolio balance (b)

   $ 125      $ 113   

Portfolio acquisitions

   $ 5      $ 8   

MSR asset value (b)

   $ .9      $ .8   

MSR capitalization value (in basis
points) (b)

     69        74   

Other Information

      

Loan origination volume (in billions)

   $ 1.9      $ 2.6   

Loan sale margin percentage

     3.21     4.09

Percentage of originations represented by:

      

Purchase volume (c)

     40     31

Refinance volume

     60     69

Total nonperforming assets (b) (d)

   $ 75      $ 105   
(a) Represents loans serviced for third parties.
(b) As of March 31.
(c) Mortgages with borrowers as part of residential real estate purchase transactions.
(d) Includes nonperforming loans of $44 million at March 31, 2016 and $65 million at March 31, 2015.

Residential Mortgage Banking reported a loss of $13 million in the first three months of 2016 compared with earnings of $28 million in the first three months of 2015, primarily driven by a decline in noninterest income, partially offset by lower noninterest expense. The decline in noninterest income reflected lower residential mortgage servicing rights valuation, net of economic hedge, as well as lower loan sales revenue in the comparison, partially offset by increased servicing fee income.

The strategic focus of the business is the acquisition of new customers through a retail loan officer sales force with an emphasis on home purchase transactions. Our strategy involves competing on the basis of superior service to new and existing customers in serving their home purchase and refinancing needs. A key consideration in pursuing this approach is the cross-sell opportunity, especially in the bank footprint markets.

Residential Mortgage Banking overview:

   

Total loan originations decreased $.7 billion in first quarter 2016 compared to first quarter 2015. Loans continue to be originated primarily through direct channels under Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Federal Housing Administration (FHA)/Department of Veterans Affairs agency guidelines. Refinancings were 60% of originations in the first 3 months of 2016 and 69% in the first three months 2015.

   

Residential mortgage loans serviced for others increased by $12 billion at March 31, 2016 compared to March 31, 2015. During the first three months of 2016, $5 billion of residential mortgage servicing rights were acquired, compared with $8 billion in the comparable period of 2015.

   

Net interest income decreased $5 million in the first three months in 2016 compared with the 2015 period. This decline was primarily due to lower originations and lower balances of portfolio loans held for investment.

   

Noninterest income declined $72 million in the first three months of 2016 compared with the prior year period, as increased servicing fee income was more than offset by lower residential mortgage servicing rights valuation, net of economic hedge, as well as lower loan sales revenue.

   

Noninterest expense declined $9 million in the first three months of 2016 compared with the 2015 period, primarily as a result of lower mortgage servicing and compliance costs.

 

 

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


Table of Contents

BlackRock

(Unaudited)

Table 21: BlackRock Table

Information related to our equity investment in BlackRock follows:

 

Three months ended March 31

Dollars in millions

     2016      2015  

Business segment earnings (a)

     $ 114       $ 135   

PNC’s economic interest in BlackRock (b)

       22      22
(a) Includes PNC’s share of BlackRock’s reported GAAP earnings and additional income taxes on those earnings incurred by PNC.
(b) At March 31.

 

In billions    March 31
2016
     December 31
2015
 

Carrying value of PNC’s investment in
BlackRock (c)

   $ 6.7       $ 6.7   

Market value of PNC’s investment in
BlackRock (d)

     12.0         12.0   
(c) PNC accounts for its investment in BlackRock under the equity method of accounting, exclusive of a related deferred tax liability of $2.2 billion at both March 31, 2016 and December 31, 2015. Our voting interest in BlackRock common stock was approximately 21% at March 31, 2016.
(d) Does not include liquidity discount.

In addition to our investment in BlackRock reflected in Table 21, at March 31, 2016, we held approximately 0.8 million shares of BlackRock Series C Preferred Stock valued at $208 million, which are available to fund our obligation in connection with certain BlackRock long-term incentive plan (LTIP) programs. We account for the BlackRock Series C Preferred Stock at fair value, which offsets the impact of marking-to-market the obligation to deliver these shares to BlackRock. The fair value amount of the BlackRock Series C Preferred Stock is included on our Consolidated Balance Sheet in the caption Other assets. Additional information regarding the valuation of the BlackRock Series C Preferred Stock is included in Note 7 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report and in Note 7 Fair Value in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K.

On February 1, 2016, we transferred 0.5 million shares of BlackRock Series C Preferred Stock to BlackRock to satisfy a portion of our LTIP obligation. The transfer reduced Other assets and Other liabilities on our Consolidated Balance Sheet by $138 million.

Our 2015 Form 10-K includes additional information about our investment in BlackRock.

Non-Strategic Assets Portfolio

(Unaudited)

Table 22: Non-Strategic Assets Portfolio Table

 

Three months ended March 31

Dollars in millions

   2016     2015   

Income Statement

      

Net interest income

   $ 75      $ 112   

Noninterest income

     22        9   

Total revenue

     97        121   

Provision for credit losses (benefit)

     (7     (31

Noninterest expense

     21        24   

Pretax earnings

     83        128   

Income taxes

     31        47   

Earnings

   $ 52      $ 81   

Average Balance Sheet

      

Loans

      

Commercial Lending

   $ 708      $ 750   

Consumer Lending

      

Home equity

     2,144        3,021   

Residential real estate

     3,245        4,184   

Total consumer lending

     5,389        7,205   

Total loans

     6,097        7,955   

Other assets (a)

     (281     (679

Total assets

   $ 5,816      $ 7,276   

Performance Ratios

      

Return on average assets

     3.63     4.51

Noninterest income to total revenue

     23        7   

Efficiency

     22        20   

Other Information

      

Nonperforming assets (b) (c)

   $ 499      $ 669   

Purchased impaired loans (b) (d)

   $ 2,737      $ 3,808   

Net charge-offs

   $ 8      $   

Loans (b)

      

Commercial Lending

   $ 703      $ 746   

Consumer Lending

      

Home equity

     2,088        2,944   

Residential real estate

     3,190        4,139   

Total consumer lending

     5,278        7,083   

Total loans

   $ 5,981      $ 7,829   
(a) Other assets includes deferred taxes, ALLL and other real estate owned (OREO). Other assets were negative in both periods due to the ALLL.
(b) As of March 31.
(c) Includes nonperforming loans of $.4 billion at March 31, 2016 and $.5 billion at March 31, 2015.
(d) Recorded investment of purchased impaired loans related to acquisitions. This segment contained 81% of PNC’s purchased impaired loans at both March 31, 2016 and March 31, 2015.

 

 

 

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


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This business segment consists of non-strategic assets primarily obtained through acquisitions of other companies. The business activity of this segment is to manage the liquidation of the portfolios while maximizing the value and mitigating risk.

Non-Strategic Assets Portfolio had earnings of $52 million in the first three months of 2016 compared with $81 million in the first three months of 2015. Earnings decreased year-over-year primarily due to a declining loan portfolio and a reduced benefit from the provision for credit losses.

Non-Strategic Assets Portfolio overview:

   

Net interest income declined $37 million, or 33%, in the first three months of 2016 compared with the first three months of 2015, resulting from lower purchase accounting accretion and the impact of the declining average balance of the loan portfolio.

   

Noninterest income increased $13 million in the first three months of 2016 compared to the first three months of 2015 driven by a release of excess reserves for estimated losses on repurchase obligations in the first quarter of 2016 related to a settlement.

   

Provision for credit losses was a benefit in both the first three months of 2016 and the first three months of 2015, reflecting improved actual and expected purchased impaired loan losses.

   

Noninterest expense declined $3 million, or 13%, in the first three months of 2016 compared with the first three months of 2015, due to lower costs of managing and servicing the loan portfolios, as the portfolio continues to decline.

   

Average portfolio loans declined $1.9 billion, or 23%, in the first three months of 2016 compared to the first three months of 2015, due to customer payment activity and portfolio management activities to reduce under-performing assets. The decline also reflects the impact of our change in derecognition policy effective December 31, 2015 for certain purchased impaired loans.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Note 1 Accounting Policies in Item 8 of our 2015 Form 10-K and in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report describe the most significant accounting policies that we use to prepare our consolidated financial statements. 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.

We must use estimates, assumptions and judgments when assets and liabilities are required to be recorded at, or adjusted to reflect, fair value.

Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by independent third-party sources, including appraisers and valuation specialists, when available. When such third-party information is not available, we estimate fair value primarily by using discounted cash flow and other financial modeling techniques. Changes in underlying factors, assumptions or estimates in any of these areas could materially impact our future financial condition and results of operations.

The following critical accounting policies and judgments are described in more detail in Critical Accounting Estimates and Judgments in Item 7 of our 2015 Form 10-K:

   

Fair Value Measurements

   

Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit

   

Estimated Cash Flows on Purchased Impaired Loans

   

Goodwill

   

Lease Residuals

   

Revenue Recognition

   

Residential and Commercial Mortgage Servicing Rights

   

Income Taxes

   

Recently Issued Accounting Standards

We provide additional information about many of these items in the Notes To Consolidated Financial Statements included in Part I, Item l of this Report.

 

 

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Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP with one accounting model. The core principle of the guidance is that an entity should recognize revenue to depict the satisfaction of a performance obligation by transfer of promised goods or services to customers. The ASU also requires additional qualitative and quantitative disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has subsequently released several amendments to ASU 2014-09. In August 2015, the FASB issued guidance deferring the mandatory effective date of the ASU for one year, to annual reporting periods beginning after December 15, 2017. In March 2016, the FASB issued guidance clarifying how an entity should assess whether it is a principal or an agent with respect to the delivery of promised goods or services to customers, which impacts whether revenue should be recorded on a gross or net basis. Finally, in April 2016, the FASB issued additional guidance on identifying performance obligations and licensing. The requirements within ASU 2014-09 and its subsequent amendments should be applied retrospectively to each prior period presented (with several practical expedients for certain completed contracts) or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. We plan to adopt the ASU consistent with the deferred mandatory effective date. Based on our evaluation to date, we do not expect the adoption of this standard to have a significant impact on our consolidated results of operations or our consolidated financial position.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU changes the accounting for certain equity investments, financial liabilities under the fair value option and presentation and disclosure requirements for financial instruments. Equity investments not accounted for under the equity method of accounting will be measured at fair value with any changes in fair value recognized in net income. The ASU also simplifies the impairment assessment of equity investments for which fair value is not readily determinable. Additionally, the ASU changes the presentation of certain fair value changes for financial liabilities measured at fair value; and amends certain disclosure requirements relating to the fair value of financial instruments. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and should be applied using a modified retrospective approach through a cumulative-effect adjustment to the balance sheet, except for the amendment related to equity securities without readily determinable fair values, which should be applied prospectively. We plan to adopt all provisions consistent with

the effective date and are currently evaluating the impact of this ASU on our results of operations and financial position.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The primary change in the new guidance is the recognition of lease assets and lease liabilities by lessees for operating leases. The ASU requires lessees to recognize a right-of-use asset and related lease liability for all leases with lease terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 using a modified retrospective approach through a cumulative-effect adjustment. Early adoption is permitted. We are currently evaluating the impact of adopting this standard.

Recently Adopted Accounting Standards

See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements included in Part I, Item I of this Report regarding the impact of new accounting pronouncements adopted in 2016.

STATUS OF QUALIFIED DEFINED BENEFIT PENSION PLAN

We have a noncontributory, qualified defined benefit pension plan (plan or pension plan) covering eligible employees. Benefits are determined using a cash balance formula where earnings credits are applied as a percentage of eligible compensation. We calculate the expense associated with the pension plan and the assumptions and methods that we use include a policy of reflecting plan assets at their fair market value. Annually, we review the actuarial assumptions for the pension plan.

We currently estimate pretax pension expense of $43 million for 2016 compared with pretax expense of $9 million in 2015. This year-over-year expected increase in expense is mainly due to lower than expected asset returns during 2015, which reduced year-end pension asset balances and increased the amortization of actuarial losses in 2016.

 

 

 

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


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The table below reflects the estimated effects on pension expense of certain changes in annual assumptions, using 2016 estimated expense as a baseline.

Table 23: Pension Expense – Sensitivity Analysis

 

Change in Assumption (a)

(In millions)

   Estimated
Increase
to 2016
Pension
Expense
 

.5% decrease in discount rate

   $ 18   

.5% decrease in expected long-term return on assets

   $ 21   

.5% increase in compensation rate

   $ 2   
(a) The impact is the effect of changing the specified assumption while holding all other assumptions constant.

We provide additional information on our pension plan in Note 12 Employee Benefit Plans in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K.

RECOURSE AND REPURCHASE OBLIGATIONS

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in our 2015 Form 10-K, PNC has sold commercial mortgage, residential mortgage and home equity loans/lines of credit directly or indirectly through securitization and loan sale transactions in which we have continuing involvement. One form of continuing involvement includes certain recourse and loan repurchase obligations associated with the transferred assets. For additional discussion regarding our recourse and repurchase obligations, see the Recourse and Repurchase Obligations section in Item 7 of our 2015 Form 10-K.

RISK MANAGEMENT

The Risk Management section included in Item 7 of our 2015 Form 10-K describes our enterprise risk management framework including risk appetite and strategy, risk culture, risk organization and governance, risk identification and quantification, risk control and limits, and risk monitoring and reporting. Additionally, our 2015 Form 10-K provides an analysis of our key areas of risk, which include but are not limited to credit, operational, compliance, model, liquidity and market. Our use of financial derivatives as part of our overall asset and liability risk management process is also addressed within the Risk Management section.

The following information updates our 2015 Form 10-K risk management disclosures.

Credit Risk Management

See the Credit Risk Management portion of the Risk Management section in our 2015 Form 10-K for additional discussion regarding credit risk.

Asset Quality Overview

Asset quality trends remained relatively stable during the first three months of 2016, except for certain energy related loans.

   

Provision for credit losses for the first quarter of 2016 increased to $152 million compared to $54 million for the first quarter of 2015. The first quarter 2016 provision included $80 million for energy related loans in the oil, gas, and coal sectors.

   

Nonperforming assets at March 31, 2016 increased $127 million compared with December 31, 2015 due to higher nonperforming commercial loans driven by energy related loans, partially offset by declining commercial real estate and consumer lending nonperforming loans. Nonperforming assets were 0.71% of total assets at March 31, 2016 compared with 0.68% at December 31, 2015.

   

Overall loan delinquencies totaled $1.5 billion at March 31, 2016, a decrease of $143 million, or 9%, from year-end 2015. The reduction was due in large part to a reduction in accruing government insured consumer lending loans past due of $95 million.

   

Net charge-offs were $149 million in the first quarter of 2016, up 45%, or $46 million, from net charge-offs in the first quarter of 2015 due to higher commercial loan net charge-offs.

   

The level of ALLL remained at $2.7 billion at both March 31, 2016 and December 31, 2015.

Nonperforming Assets and Loan Delinquencies

Nonperforming Assets, including OREO and Foreclosed Assets

Nonperforming assets include nonperforming loans and leases for which ultimate collectability of the full amount of contractual principal and interest is not probable and include nonperforming troubled debt restructurings (TDRs), OREO and foreclosed assets. Loans held for sale, certain government insured or guaranteed loans, purchased impaired loans and loans accounted for under the fair value option are excluded from nonperforming loans. Additional information regarding our nonperforming loans and nonaccrual policies is included in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report. A summary of the major categories of nonperforming assets are presented in Table 24. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in this Report for further detail of nonperforming asset categories.

 

 

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


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Table 24: Nonperforming Assets By Type

 

Dollars in millions    March 31
2016
     December 31
2015
 

Nonperforming loans

       

Commercial lending

   $ 732       $ 545   

Consumer lending (a)

     1,549         1,581   

Total nonperforming loans (b)(c)

     2,281         2,126   

OREO and foreclosed assets

     271         299   

Total nonperforming assets

   $ 2,552       $ 2,425   

Amount of TDRs included in nonperforming loans

   $ 1,172       $ 1,119   

Percentage of total nonperforming loans

     51      53

Nonperforming loans to total loans

     1.10      1.03

Nonperforming assets to total loans, OREO and foreclosed assets

     1.23         1.17   

Nonperforming assets to total assets

     .71         .68   

Allowance for loan and lease losses to total nonperforming loans

     119         128   
(a) Excludes most consumer loans and lines of credit, not secured by residential real estate, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.
(b) Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans.
(c) The recorded investment of loans collateralized by residential real estate property that are in process of foreclosure was $.5 billion and $.6 billion at March 31, 2016 and December 31, 2015, respectively. Both periods included $.3 billion of loans that are government insured/guaranteed.

Table 25: Change in Nonperforming Assets

 

In millions    2016     2015  

January 1

   $ 2,425      $ 2,880   

New nonperforming assets

     542        336   

Charge-offs and valuation adjustments

     (161     (124

Principal activity, including paydowns and payoffs

     (98     (170

Asset sales and transfers to loans held for sale

     (90     (93

Returned to performing status

     (66     (75

March 31

   $ 2,552      $ 2,754   

Nonperforming assets increased $127 million at March 31, 2016 compared to December 31, 2015. Commercial lending nonperforming loans increased $187 million and consumer lending nonperforming loans decreased $32 million. As of March 31, 2016, approximately 83% of total nonperforming loans were secured by collateral which lessens reserve requirements and is expected to reduce credit losses in the event of default. As of March 31, 2016, commercial lending nonperforming loans were carried at approximately 67% of their unpaid principal balance, due to charge-offs recorded to date, before consideration of the ALLL. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information on these loans.

 

Within consumer nonperforming loans, residential real estate TDRs comprise 70% of total residential real estate nonperforming loans at March 31, 2016, up from 68% at December 31, 2015. Home equity TDRs comprise 53% of home equity nonperforming loans at March 31, 2016, up from 51% at December 31, 2015. TDRs generally remain in nonperforming status until a borrower has made at least six consecutive months of both principal and interest payments under the modified terms or ultimate resolution occurs. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

At March 31, 2016, our largest nonperforming asset was $55 million in the Mining, Quarrying, Oil and Gas Extraction Industry and our average nonperforming loan associated with commercial lending was less than $1 million. The ten largest outstanding nonperforming assets are from the commercial lending portfolio and represent 42% and 12% of total commercial lending nonperforming loans and total nonperforming assets, respectively, as of March 31, 2016.

Table 26: OREO and Foreclosed Assets

 

In millions    March 31
2016
     December 31
2015
 

Other real estate owned (OREO):

       

Residential properties

   $ 135       $ 146   

Residential development properties

     27         31   

Commercial properties

     97         102   

Total OREO

     259         279   

Foreclosed and other assets

     12         20   

Total OREO and foreclosed assets

   $ 271       $ 299   

Total OREO and foreclosed assets decreased $28 million during the first three months of 2016 and were 11% of total nonperforming assets at March 31, 2016. As of March 31, 2016 and December 31, 2015, 60% and 59%, respectively, of our OREO and foreclosed assets were comprised of residential related properties.

Loan Delinquencies

We regularly monitor the level of loan delinquencies and believe these levels may be a key indicator of loan portfolio asset quality. Measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of payment are considered delinquent. Loan delinquencies exclude loans held for sale and purchased impaired loans, but include government insured or guaranteed loans and loans accounted for under the fair value option.

 

 

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


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Table 27: Accruing Loans Past Due (a) (b)

 

    Amount     Percentage of Total
Outstandings
 
Dollars in millions   March 31
2016
    December 31
2015
    March 31
2016
    December 31
2015
 

Early stage loan delinquencies

         

Accruing loans past due 30 to 59 days

  $ 506      $ 511        .24     .25

Accruing loans past due 60 to 89 days

    209        248        .10     .12

Total

    715        759        .34     .37

Late stage loan delinquencies

         

Accruing loans past due 90 days or more

    782        881        .38     .43

Total

  $ 1,497      $ 1,640        .72     .80
(a) Amounts in table represent recorded investment.
(b) Past due loan amounts at March 31, 2016 include government insured or guaranteed loans of $178 million, $108 million, and $676 million for accruing loans past due 30 to 59 days, past due 60 to 89 days, and past due 90 days or more, respectively. The comparative amounts as of December 31, 2015 were $172 million, $120 million, and $765 million, respectively.

Total early stage loan delinquencies (accruing loans past due 30 to 89 days) decreased $44 million, or 6%, at March 31, 2016 compared to December 31, 2015, driven by reductions in consumer early stage delinquencies.

Accruing loans past due 90 days or more decreased $99 million, or 11 %, at March 31, 2016 compared to December 31, 2015 due to declines in government insured consumer lending loans of $89 million. Accruing loans past due 90 days or more are referred to as late stage loan delinquencies. These loans are not included in nonperforming loans and continue to accrue interest because they are well secured by collateral and are in the process of collection, or are managed in homogenous portfolios with specified charge-off timeframes adhering to regulatory guidelines, or are certain government insured or guaranteed loans.

On a regular basis our Special Asset Committee closely monitors loans, primarily commercial loans, that are not included in the nonperforming or accruing past due categories and for which we are uncertain about the borrower’s ability to comply with existing repayment terms. These loans totaled $.3 billion and $.1 billion at March 31, 2016 and December 31, 2015, respectively.

See Note 1 Accounting Policies and Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information regarding our nonperforming loan and nonaccrual policies and further information on loan delinquencies.

Home Equity Loan Portfolio

Our home equity loan portfolio totaled $31.5 billion as of March 31, 2016, or 15% of the total loan portfolio. Of that total, $18.5 billion, or 59%, was outstanding under primarily variable-rate home equity lines of credit and $13.0 billion, or 41%, consisted of closed-end home equity installment loans. Approximately 4% of the home equity portfolio was purchased impaired and 3% of the home equity portfolio was on nonperforming status as of March 31, 2016.

As of March 31, 2016, we are in an originated first lien position for approximately 54% of the total outstanding portfolio and, where originated as a second lien, we currently hold or service the first lien position for an additional 2% of the portfolio. The remaining 44% of the portfolio was secured by second liens where we do not hold the first lien position. The credit performance of the majority of the home equity portfolio where we are in, hold or service 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.

Generally, our variable-rate home equity lines of credit have either a seven or ten year draw period, followed by a 20-year amortization term. During the draw period, we have home equity lines of credit where borrowers pay either interest or principal and interest. We view home equity lines of credit where borrowers are paying principal and interest under the draw period as less risky than those where the borrowers are paying interest only, as these borrowers have a demonstrated ability to make some level of principal and interest payments. The risk associated with the borrower’s ability to satisfy the loan terms upon the draw period ending is considered in establishing our ALLL. Based upon outstanding balances at March 31, 2016, the following table presents the periods when home equity lines of credit draw periods are scheduled to end.

Table 28: Home Equity Lines of Credit – Draw Period End Dates

 

In millions    Interest Only
Product
     Principal and
Interest Product
 

Remainder of 2016

   $ 801       $ 270   

2017

     2,025         522   

2018

     898         711   

2019

     623         553   

2020

     494         494   

2021 and thereafter

     2,842         5,445   

Total (a) (b)

   $ 7,683       $ 7,995   
(a) Includes all home equity lines of credit that mature in the remainder 2016 or later, including those with borrowers where we have terminated borrowing privileges.
(b) Includes approximately $30 million, $46 million, $32 million, $25 million, $76 million and $447 million of home equity lines of credit with balloon payments, including those where we have terminated borrowing privileges, with draw periods scheduled to end in the remainder of 2016, 2017, 2018, 2019, 2020 and 2021 and thereafter, respectively.

 

 

 

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Based upon outstanding balances, and excluding purchased impaired loans, at March 31, 2016, for home equity lines of credit for which the borrower can no longer draw (e.g., draw period has ended or borrowing privileges have been terminated), approximately 3% were 30-89 days past due and approximately 5% were 90 days or more past due. Generally, when a borrower becomes 60 days past due, we terminate borrowing privileges and those privileges are not subsequently reinstated. At that point, we continue our collection/recovery processes, which may include loan modification resulting in a loan that is classified as a TDR.

See the Credit Risk Management portion of the Risk Management section in our 2015 Form 10-K for more information on our home equity loan portfolio. See also Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

Auto Loan Portfolio

The auto loan portfolio totaled $11.2 billion as of March 31, 2016, or 5% of our total loan portfolio. Of that total, $9.6 billion resides in the indirect auto portfolio, $1.1 billion in the direct auto portfolio, and $.5 billion in acquired or securitized portfolios, which has been declining as no pools have been recently acquired. The indirect auto portfolio is the largest segment and generates auto loan applications from franchised automobile dealers. This business is strategically aligned with our core retail business.

We have elected not to pursue non-prime auto lending as evidenced by an average new loan origination FICO score over the last twelve months of 759 for indirect auto loans and 773 for direct auto loans. As of March 31, 2016, 0.3% of the portfolio was nonperforming and 0.4% of our auto loan portfolio was accruing past due. We offer both new and used automobile financing to customers through our various channels. The portfolio comprised 59% new vehicle loans and 41% used vehicle loans at March 31, 2016.

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

Energy Related Loan Portfolio

Our portfolio of loans outstanding in the oil and gas industry totaled $2.7 billion as of March 31, 2016, or 1% of our total loan portfolio and 2% of our total commercial lending portfolio. This portfolio comprised approximately $1.0 billion in the midstream and downstream sectors, $.9 billion to oil services companies and $.8 billion to upstream sectors. Of the

oil services portfolio, approximately $.2 billion is not asset-based or investment grade. Nonperforming loans in the oil and gas sector as of March 31, 2016 totaled $161 million, or 6% of total nonperforming assets.

Our portfolio of loans outstanding in the coal industry totaled $.5 billion as of March 31, 2016, or less than 1% of both our total loan portfolio and our total commercial lending portfolio. Nonperforming loans in the coal industry as of March 31, 2016 totaled $140 million, or 5% of total nonperforming assets.

Our ALLL at March 31, 2016 reflects the incremental impact of the continued decline in energy prices. Higher reserves for oil, gas and coal exposure drove the overall increase in the provision for credit losses. For the first quarter of 2016, $80 million, or 53%, of the provision was related to these sectors. Net charge-offs related to energy loans totaled $25 million for the three months ended March 31, 2016, or 17% of total net-charge-offs.

Loan Modifications and Troubled Debt Restructurings

Consumer Loan Modifications

We modify loans under government and PNC-developed programs based upon our commitment to help eligible homeowners and borrowers avoid foreclosure, where appropriate. Initially, a borrower is evaluated for a modification under a government program. If a borrower does not qualify under a government program, the borrower is then evaluated under a PNC program. Our programs utilize both temporary and permanent modifications and typically reduce the interest rate, extend the term and/or defer principal. Loans that are either temporarily or permanently modified under programs involving a change to loan terms are generally classified as TDRs. Further, loans that have certain types of payment plans and trial payment arrangements which do not include a contractual change to loan terms may be classified as TDRs. Additional detail on TDRs is discussed below as well as in Note 3 Asset Quality in our 2015 Form 10-K.

A temporary modification, with a term between 3 and 24 months, involves a change in original loan terms for a period of time and reverts to a calculated exit rate for the remaining term of the loan as of a specific date. A permanent modification, with a term greater than 24 months, is a modification in which the terms of the original loan are changed. Permanent modification programs, including both government-created Home Affordable Modification Program (HAMP) and PNC-developed modification programs, generally result in principal forgiveness, interest rate reduction, term extension, capitalization of past due amounts, interest only period or deferral of principal.

 

 

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We also monitor the success rates and delinquency status of our loan modification programs to assess their effectiveness in serving our borrowers’ and servicing customers’ needs while

mitigating credit losses. Table 29 provides the number of accounts and unpaid principal balance of modified consumer real estate related loans at the end of each year presented.

 

 

Table 29: Consumer Real Estate Related Loan Modifications

 

     March 31, 2016      December 31, 2015  
Dollars in millions    Number of
Accounts
     Unpaid
Principal
Balance
     Number of
Accounts
     Unpaid
Principal
Balance
 

Temporary modifications (a)

     4,083       $ 309         4,469       $ 337   

Permanent modifications

             

Home equity

     15,339         1,099         15,268         1,088   

Residential real estate

     8,474         1,649         8,787         1,721   

Total permanent modifications

     23,813         2,748         24,055         2,809   

Total consumer real estate related loan modifications

     27,896       $ 3,057         28,524       $ 3,146   
(a) All temporary modifications are home equity loans.

 

In addition to temporary loan modifications, we may make a payment plan or a HAMP trial payment period available to a borrower. Under a payment plan or a HAMP trial payment period, there is no change to the loan’s contractual terms so the borrower remains legally responsible for payment of the loan under its original terms.

Payment plans may include extensions, re-ages and/or forbearance plans. All payment plans bring an account current once certain requirements are achieved and are primarily intended to demonstrate a borrower’s renewed willingness and ability to re-pay. Due to the short term nature of the payment plan, there is a minimal impact to the ALLL.

Under a HAMP trial payment period, we establish an alternate payment, generally at an amount less than the contractual payment amount, for the borrower during this short time period. This allows a borrower to demonstrate successful payment performance before permanently restructuring the loan into a HAMP modification. Subsequent to successful borrower performance under the trial payment period, we will capitalize the original contractual amount past due, to include accrued interest and fees receivable, and restructure the loan’s contractual terms, along with bringing the restructured account current. As the borrower is often already delinquent at the time of participation in the HAMP trial payment period, generally enrollment in the program does not significantly increase the ALLL. If the trial payment period is unsuccessful, the loan will be evaluated for further action based upon our existing policies. After December 31, 2016, the government-created HAMP program will expire. As such, no new modifications will be offered under the program after that date.

Commercial Loan Modifications and Payment Plans

Modifications of terms for commercial loans are based on individual facts and circumstances. Commercial loan modifications may involve reduction of the interest rate, extension of the loan term and/or forgiveness of principal.

Modified commercial loans are usually already nonperforming prior to modification. We evaluate these modifications for TDR classification based upon whether we granted a concession to a borrower experiencing financial difficulties. Additional detail on TDRs is discussed below as well as in Note 3 Asset Quality in our 2015 Form 10-K.

We have established certain commercial loan modification and payment programs for small business loans, Small Business Administration loans, and investment real estate loans. As of March 31, 2016 and December 31, 2015, $22 million and $23 million, respectively, in loan balances were covered under these modification and payment plan programs. Of these loan balances, $8 million and $9 million have been determined to be TDRs as of March 31, 2016 and December 31, 2015, respectively.

Troubled Debt Restructurings

A TDR is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs result from our loss mitigation activities and include rate reductions, principal forgiveness, postponement/reduction of scheduled amortization and extensions, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Additionally, TDRs also result from court imposed concessions (e.g. a Chapter 7 bankruptcy that is discharged from personal liability to PNC and a court approved Chapter 13 bankruptcy repayment plan).

TDRs totaled $2.4 billion at March 31, 2016, an increase of $40 million, or 2%, during the first three months of 2016. Excluded from TDRs are $1.2 billion of consumer loans held for sale, loans accounted for under the fair value option and pooled purchased impaired loans, as well as certain government insured or guaranteed loans at both March 31, 2016 and December 31, 2015. Nonperforming TDRs represent approximately 51% and 53% of total nonperforming loans, and 49% and 48% of total TDRs at March 31, 2016 and

 

 

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December 31, 2015, respectively. The remaining portion of TDRs represents TDRs that have been returned to accrual accounting after performing under the restructured terms for at least six consecutive months.

See Note 3 Asset Quality and Note 1 Accounting Policies in Part I, Item 1 of this report for additional information on loan modifications and TDRs.

Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit

Table 30: Loan Charge-Offs And Recoveries

 

Three months

ended March 31

Dollars in millions

  Gross
Charge-offs
    Recoveries    

Net

Charge-offs /
(Recoveries)

    Percent of Average
Loans (annualized)
 

2016

         

Commercial

  $ 78      $ 33      $ 45        .18

Commercial real estate

    10        12        (2     (.03

Equipment lease financing

    1        1         

Home equity

    48        21        27        .34   

Residential real estate

    8        3        5        .14   

Credit card

    42        4        38        3.23   

Other consumer

    49        13        36        .67   

Total

  $ 236      $ 87      $ 149        .29   

2015

         

Commercial

  $ 34      $ 32      $ 2        .01

Commercial real estate

    12        12         

Equipment lease financing

      1        (1     (.05

Home equity

    52        20        32        .38   

Residential real estate

      2        (2     (.06

Credit card

    43        5        38        3.46   

Other consumer

    48        14        34        .61   

Total

  $ 189      $ 86      $ 103        .20   

Net charge-offs increased by $46 million, or 45%, in the first quarter of 2016 compared to the first quarter of 2015 due to higher commercial loan net charge-offs. Total net charge-offs exclude write-offs and recoveries related to purchased impaired loans.

We maintain an ALLL to absorb losses from the loan and lease portfolio and determine this allowance based on quarterly assessments of the estimated probable credit losses incurred in the loan and lease portfolio. Our total ALLL of $2.7 billion at March 31, 2016 consisted of $1.6 billion and $1.1 billion established for the commercial lending and consumer lending categories, respectively. We maintain the

ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan and lease portfolio as of the balance sheet date. The reserve calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan and lease portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.

We establish specific allowances for loans considered impaired using methods prescribed by GAAP. All impaired loans are subject to individual analysis, except leases and large groups of smaller-balance homogeneous loans which may include, but are not limited to, credit card, residential real estate secured and consumer installment loans. Specific allowances for individual loans (including commercial and consumer TDRs) are determined based on an analysis of the present value of expected future cash flows from the loans discounted at their effective interest rate, observable market price or the fair value of the underlying collateral.

Reserves allocated to non-impaired commercial loan classes are based on PD and LGD credit risk ratings.

Our commercial pool reserve methodology is sensitive to changes in key risk parameters such as PD and LGD. The results of these parameters are then applied to the loan balance and unfunded loan commitments and letters of credit to determine the amount of the respective reserves. Our PDs and LGDs are primarily determined using internal commercial loan loss data. This internal data is supplemented with third-party data and management judgment, as deemed necessary. We continue to evaluate and enhance our use of internal commercial loss data and will periodically update our PDs and LGDs as well as consider third-party data, regulatory guidance and management judgment.

The majority of the commercial portfolio is secured by collateral, including loans to asset-based lending customers, which generally demonstrate lower LGD compared to loans not secured by collateral. Additionally, guarantees on loans greater than $1 million and owner guarantees for small business loans do not significantly impact our ALLL.

Allocations to non-impaired consumer loan classes are primarily based upon a roll-rate model which uses statistical relationships, calculated from historical data that estimate the movement of loan outstandings through the various stages of delinquency and ultimately charge-off.

A portion of the ALLL is related to qualitative and measurement factors. These factors may include, but are not limited to, the following:

   

Industry concentrations and conditions,

   

Recent credit quality trends,

   

Recent loss experience in particular portfolios,

 

 

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Recent macro-economic factors,

   

Model imprecision,

   

Changes in lending policies and procedures,

   

Timing of available information, including the performance of first lien positions, and

   

Limitations of available historical data.

Purchased impaired loans are initially recorded at fair value and applicable accounting guidance prohibits the carry over or creation of valuation allowances at acquisition. Because the initial fair values of these loans already reflect a credit component, additional reserves are established when performance is expected to be worse than our expectations as of the acquisition date. At March 31, 2016, we had reserves of $.3 billion for purchased impaired loans. In addition, loans (purchased impaired and non-impaired) acquired after January 1, 2009 were recorded at fair value. No allowance for loan losses was carried over and no allowance was created at the date of acquisition. See Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information.

In determining the appropriateness of the ALLL, we make specific allocations to impaired loans and allocations to portfolios of commercial and consumer loans. We also allocate reserves to provide coverage for probable losses incurred in the portfolio at the balance sheet date based upon current market conditions, which may not be reflected in historical loss data. Commercial lending is the largest category of credits and is sensitive to changes in assumptions and judgments underlying the determination of the ALLL. We have allocated approximately $1.6 billion, or 60%, of the ALLL at March 31, 2016 to the commercial lending category. Consumer lending allocations are made based on historical loss experience adjusted for recent activity. Approximately $1.1 billion, or 40%, of the ALLL at March 31, 2016 has been allocated to these consumer lending categories.

In addition to the ALLL, we maintain an allowance for unfunded loan commitments and letters of credit. We report this allowance as a liability on our Consolidated Balance Sheet. We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable losses on these unfunded credit facilities. We determine this amount using estimates of the probability of the ultimate funding and losses related to those credit exposures. Other than the estimation of the probability of funding, this methodology is very similar to the one we use for determining our ALLL.

We refer you to Note 1 Accounting Policies and Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for further information on certain key asset quality indicators that we use to evaluate our portfolios and establish the allowances.

Table 31: Allowance for Loan and Lease Losses

 

Dollars in millions    2016     2015   

January 1

   $ 2,727      $ 3,331   

Total net charge-offs

     (149     (103

Provision for credit losses

     152        54   

Net change in allowance for unfunded loan commitments and letters of credit

     (21     25   

Net recoveries of purchased impaired loans

     1       

Other

     1        (1

March 31

   $ 2,711      $ 3,306   

Net charge-offs to average loans (for the three months ended) (annualized)

     .29     .20

Total allowance for loan and lease losses to total loans (a)

     1.31        1.61   

Commercial lending net charge-offs

   $ (43   $ (1

Consumer lending net charge-offs

     (106     (102

Total net charge-offs

   $ (149   $ (103

Net charge-offs to average loans (for the three months ended) (annualized)

      

Commercial lending

     .13     .00

Consumer lending

     .59        .55   
(a) See Note 1 Accounting Policies in our 2015 Form 10-K for information on our change in derecognition policy effective December 31, 2015 for certain purchased impaired loans.

The provision for credit losses increased to $152 million for the first three months of 2016 compared to $54 million for the first three months of 2015, primarily driven by reserves for energy related exposure. For the first three months of 2016, the provision for commercial lending credit losses increased by $86 million from the first three months of 2015. The provision for consumer lending credit losses increased $12 million, or 21%, from the first three months of 2015.

At March 31, 2016, total ALLL to total nonperforming loans was 119%. The comparable amount for December 31, 2015 was 128%. These ratios are 91% and 98%, respectively, when excluding the $.6 billion of ALLL at both March 31, 2016 and December 31, 2015 allocated to consumer loans and lines of credit not secured by residential real estate and purchased impaired loans. We have excluded consumer loans and lines of credit not secured by real estate as they are charged off after 120 to 180 days past due and not placed on nonperforming status. Additionally, we have excluded purchased impaired loans as they are considered performing regardless of their delinquency status as interest is accreted in accordance with ASC 310-30 based on the recorded investment balance. See Table 24 within this Credit Risk Management section for additional information.

The ALLL balance increases or decreases across periods in relation to fluctuating risk factors, including asset quality trends, net charge-offs and changes in aggregate portfolio balances. During the first three months of 2016, overall credit

 

 

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quality remained relatively stable offsetting impacts from certain energy related loans, which resulted in an essentially flat ALLL balance as of March 31, 2016 compared to December 31, 2015.

See Note 1 Accounting Policies and Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report regarding changes in the ALLL and in the allowance for unfunded loan commitments and letters of credit.

Liquidity Risk Management

Liquidity risk, including our liquidity monitoring measures and tools, is described in further detail in the Liquidity Risk Management section of our 2015 Form 10-K.

One of the ways PNC monitors its liquidity is by reference to the Liquidity Coverage Ratio (LCR), a regulatory minimum liquidity requirement designed to ensure that covered banking organizations maintain an adequate level of liquidity to meet net liquidity needs over the course of a 30-day stress scenario. The LCR is calculated by dividing the amount of an institution’s high quality, unencumbered liquid assets (HQLA), as defined and calculated in accordance with the LCR rules, by its estimated net cash outflow, with net cash outflows determined by applying the assumed outflow factors in the LCR rules. The resulting quotient is expressed as a percentage. For PNC and PNC Bank, the LCR became effective January 1, 2015. The minimum required LCR will be phased-in over a period of years. The minimum LCR that PNC and PNC Bank were required to maintain was 80% in 2015 and such minimum increased to 90% in 2016. Between January 1, 2016 and June 30, 2016, PNC and PNC Bank are required to calculate the LCR on a month-end basis. Effective July 1, 2016, PNC and PNC Bank must begin calculating their respective LCR ratios on a daily basis.

As of March 31, 2016, the LCR for PNC and PNC Bank exceeded 100 percent.

We provide additional information regarding regulatory liquidity requirements and their potential impact on PNC in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of our 2015 Form 10-K.

Bank Level Liquidity – Uses

At the bank level, primary contractual obligations include funding loan commitments, satisfying deposit withdrawal requests and maturities and debt service related to bank borrowings. As of March 31, 2016, there were approximately $9.8 billion of bank borrowings with contractual maturities of less than one year, including $2.3 billion in borrowings from an affiliate. We also maintain adequate bank liquidity to meet future potential loan demand and provide for other business needs, as necessary.

Bank Level Liquidity – Sources

Our largest source of bank liquidity on a consolidated basis is the deposit base generated by our retail and commercial banking businesses. Total deposits increased to $250.4 billion at March 31, 2016 from $249.0 billion at December 31, 2015, driven by growth in savings deposits, partially offset by a decline in money market deposits and time deposits in foreign offices and other time deposits. Assets determined by PNC to be liquid (liquid assets) and unused borrowing capacity from a number of sources are also available to maintain our liquidity position. Borrowed funds come from a diverse mix of short-term and long-term funding sources.

At March 31, 2016, our liquid assets consisted of short-term investments (Federal funds sold, resale agreements, trading securities and interest-earning deposits with banks) totaling $32.5 billion and securities available for sale totaling $57.4 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. Of our total liquid assets of $89.9 billion, we had $4.9 billion of securities available for sale and trading securities pledged as collateral to secure public and trust deposits, repurchase agreements and for other purposes. In addition to the liquid assets we pledged, $6.1 billion of securities held to maturity were also pledged as collateral for these purposes.

In addition to the customer deposit base, which has historically provided the single largest source of relatively stable and low-cost funding, the bank also obtains liquidity through the issuance of traditional forms of funding, including long-term debt (senior notes, subordinated debt and FHLB advances) and short-term borrowings (Federal funds purchased, securities sold under repurchase agreements, commercial paper and other short-term borrowings).

 

 

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Under PNC Bank’s 2014 bank note program, dated January 16, 2014 and amended May 22, 2015, PNC Bank may from time to time offer up to $30.0 billion aggregate principal amount at any one time outstanding 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. The $30.0 billion of notes includes notes issued by PNC Bank under the 2004 bank note program and those notes PNC Bank has assumed through the acquisition of other banks, in each case for so long as such notes remain outstanding. The terms of the 2014 bank note program, as amended, do not affect any of the bank notes issued prior to January 16, 2014. At March 31, 2016 , PNC Bank had $24.1 billion of notes outstanding under this program of which $17.9 billion was senior bank notes and $6.2 billion was subordinated bank notes. The following table details all issuances during 2016:

Table 32: PNC Bank Notes Issued During 2016

 

  Issuance Date    Amount    Description of Issuance

  March 4, 2016

   $1.0 billion    Senior notes with a maturity date of March 4, 2019. Interest is payable semi-annually at a fixed rate of 1.950% on March 4 and September 4 of each year, beginning September 4, 2016.

Total senior and subordinated debt of PNC Bank increased to $25.9 billion at March 31, 2016 from $25.5 billion at December 31, 2015 due to the following activity in the period.

Table 33: PNC Bank Senior and Subordinated Debt

 

In billions    2016   

January 1

   $ 25.5   

Issuances

     1.0   

Calls and maturities

     (1.0

Other

     .4   

March 31

   $ 25.9   

See Note 17 Subsequent Events in the Notes to Consolidated Financial Statements of this Report for information on the issuances of senior notes by PNC Bank on April 29, 2016.

PNC Bank is a member of the FHLB-Pittsburgh and, as such, has access to advances from FHLB-Pittsburgh secured generally by residential mortgage loans, other mortgage-related loans and commercial mortgage-backed securities. At March 31, 2016, our unused secured borrowing capacity was $22.7 billion with the FHLB-Pittsburgh. Total FHLB borrowings decreased to $19.1 billion at March 31, 2016 from $20.1 billion at December 31, 2015 due to the following activity in the period.

Table 34: FHLB Borrowings

 

In billions    2016   

January 1

   $ 20.1   

Issuances

     2.0   

Calls and maturities

     (3.0

March 31

   $ 19.1   

The FHLB-Pittsburgh also periodically provides standby letters of credit on behalf of PNC Bank to secure certain public deposits. PNC Bank began using standby letters of credit issued by the FHLB-Pittsburgh for these purposes in response to the regulatory liquidity standards finalized during 2014. If the FHLB-Pittsburgh is required to make payment for a beneficiary’s draw, the payment amount is converted into a collateralized advance to PNC Bank. At March 31, 2016, standby letters of credit issued on our behalf by the FHLB-Pittsburgh totaled $5.3 billion.

PNC Bank has the ability to offer up to $10.0 billion of its commercial paper to provide additional liquidity. As of March 31, 2016, there was approximately $1 million outstanding under this program.

PNC Bank can also borrow from the Federal Reserve Bank discount window to meet short-term liquidity requirements. The Federal Reserve Bank, however, is not viewed as the 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. These potential borrowings are secured by commercial loans. At March 31, 2016, our unused secured borrowing capacity was $15.8 billion with the Federal Reserve Bank.

Parent Company Liquidity

As of March 31, 2016, available parent company liquidity totaled $4.8 billion. Parent company liquidity is primarily held in intercompany short-term investments, the terms of which provide for the availability of cash in 31 days or less. Investments with longer durations may also be acquired, but if so, the related maturities are aligned with scheduled cash needs, such as the maturity of parent company debt obligations.

Parent Company Liquidity – Uses

The parent company’s contractual obligations consist primarily of debt service related to parent company borrowings and funding non-bank affiliates. As of March 31, 2016, there were approximately $1.9 billion of parent company borrowings with contractual maturities of less than one year. Additionally, the parent company maintains adequate liquidity to fund discretionary activities such as paying dividends to PNC shareholders, share repurchases, and acquisitions.

See the Capital portion of the Consolidated Balance Sheet Review in this Financial Review for more information on our

 

 

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share repurchase programs, including detail on our first quarter repurchase of 5.9 million common shares for $.5 billion.

See the Supervision and Regulation section in Item 1 Business of our 2015 Form 10-K for additional information regarding the Federal Reserve’s CCAR process and the factors the Federal Reserve takes into consideration in evaluating capital plans, qualitative and quantitative liquidity risk management standards proposed by the U.S. banking agencies, and final rules issued by the Federal Reserve that make certain modifications to the Federal Reserve’s capital planning and stress testing rules.

Parent Company Liquidity – Sources

The principal source of parent company liquidity is the dividends it receives from its subsidiary bank, which may be impacted by the following:

   

Bank-level capital needs,

   

Laws and regulations,

   

Corporate policies,

   

Contractual restrictions, and

   

Other factors.

There are statutory and regulatory limitations on the ability of a national bank to pay dividends or make other capital distributions or to extend credit to the parent company or its non-bank subsidiaries. The amount available for dividend payments by PNC Bank to the parent company without prior regulatory approval was approximately $1.1 billion at March 31, 2016. See Note 19 Regulatory Matters in our 2015 Form 10-K for a further discussion of these limitations. We provide additional information on certain contractual restrictions in Note 16 Equity in our 2015 Form 10-K.

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.

Total parent company senior and subordinated debt and hybrid capital instruments increased to $7.6 billion at March 31, 2016 from $7.5 billion at December 31, 2015 due to the following activity in the period.

Table 35: Parent Company Senior and Subordinated Debt and Hybrid Capital Instruments

 

In billions    2016   

January 1

   $ 7.5   

Other

     .1   

March 31

   $ 7.6   

The parent company has the ability to offer up to $5.0 billion of commercial paper to provide additional liquidity. As of March 31, 2016, there were no issuances outstanding under this program.

Status of Credit Ratings

The cost and availability of short-term and long-term funding, as well as collateral requirements for certain derivative instruments, is influenced by PNC’s credit ratings. See the Liquidity Risk Management portion of the Risk Management section in our 2015 Form 10-K for more information on credit ratings.

Table 36: Credit Ratings as of March 31, 2016 for PNC and PNC Bank

 

      Moody’s      Standard &
Poor’s
     Fitch  

PNC

          

Senior debt

     A3         A-         A+   

Subordinated debt

     A3         BBB+         A   

Preferred stock

     Baa2         BBB-         BBB-   
 

PNC Bank

          

Senior debt

     A2         A         A+   

Subordinated debt

     A3         A-         A   

Long-term deposits

     Aa2         A         AA-   

Short-term deposits

     P-1         A-1         F1+   

Short-term notes

     P-1         A-1         F1   

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 Risk Management portion of the Risk Management section in our 2015 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 15 Commitments and Guarantees in Part I, Item 1 of this Report.

Market Risk Management

Market risk is the risk of a loss in earnings or economic value due to adverse movements in market factors such as interest rates, credit spreads, foreign exchange rates, commodity prices and equity prices. We are exposed to market risk primarily by our involvement in the following activities, among others:

   

Traditional banking activities of gathering deposits and extending loans,

   

Equity and other investments and activities whose economic values are directly impacted by market factors, and

   

Fixed income securities, derivatives and foreign exchange activities, as a result of customer activities and securities underwriting.

 

 

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We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. Market Risk Management provides independent oversight by monitoring compliance with established guidelines, and reporting significant risks in the business to the Risk Committee of the Board.

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.

Asset and Liability Management 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.

Sensitivity results and market interest rate benchmarks for the first quarters of 2016 and 2015 follow:

Table 37: Interest Sensitivity Analysis

 

      First
Quarter
2016
    First
Quarter
2015
 

Net Interest Income Sensitivity Simulation (a)

      

Effect on net interest income in first year from gradual interest rate change over the following 12 months of:

      

100 basis point increase

     2.7     2.1

100 basis point decrease

     (2.9 )%      (1.2 )% 

Effect on net interest income in second year from gradual interest rate change over the preceding 12 months of:

      

100 basis point increase

     6.7     6.2

100 basis point decrease

     (7.8 )%      (6.0 )% 

Duration of Equity Model (a)

      

Base case duration of equity (in years)

     (7.1     (6.2

Key Period-End Interest Rates

      

One-month LIBOR

     .44     .18

Three-year swap

     .95     1.11
(a) Given the inherent limitations in certain of these measurement tools and techniques, results become less meaningful as interest rates approach zero.

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 38 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 1-month and ten-year rates superimposed on current base rates) scenario.

Table 38: Net Interest Income Sensitivity to Alternative Rate Scenarios (First Quarter 2016)

 

     PNC
Economist
    Market
Forward
    Slope
Flattening
 

First year sensitivity

    3.4     1.1     (2.0 )% 

Second year sensitivity

    9.6     2.3     (6.4 )% 

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.

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 37 and 38 above. These simulations assume that as assets and liabilities mature, they are replaced or repriced at then current market rates. We also consider forward projections of purchase accounting accretion when forecasting net interest income.

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

Table 39: Alternate Interest Rate Scenarios: One Year Forward

 

 

LOGO

The first quarter 2016 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.

 

 

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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 (CVA) related to our customer derivatives portfolio are marked-to-market daily and reported as customer-related trading activities. We do not engage in proprietary trading of these products.

We use value-at-risk (VaR) as the primary means to measure and monitor market risk in customer-related trading activities. VaR is used to estimate the probability of portfolio losses based on the statistical analysis of historical market risk factors. A diversified VaR reflects empirical correlations across different asset classes. We calculate a diversified VaR at a 95% confidence interval and the results for the first three months of 2016 and 2015 were within our acceptable limits.

See the Market Risk Management – Customer-Related Trading Risk section of our 2015 Form 10-K for more information on the models and backtesting.

Customer-related trading revenue decreased to $39 million for the first quarter of 2016 compared with $49 million for the first quarter of 2015. The decrease was primarily due to reduced client-related trading results, lower derivative client sales revenues and market interest rate changes impacting credit valuations for customer-related derivatives.

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, securities underwriting 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 and in debt and equity-oriented hedge funds. The economic and/or book value of these investments and other assets such as loan servicing rights are directly affected by changes in market factors.

The primary risk measurement for equity and other investments is economic capital. Economic capital is a common measure of risk for credit, market and operational risk. It is an estimate of the potential value depreciation over a one year horizon commensurate with solvency expectations of an institution rated single-A by the credit rating agencies. Given the illiquid nature of many of these types of investments, it can be a challenge to determine their fair values. See Note 7 Fair Value in the Notes To Consolidated Financial Statements in this Report and Note 7 Fair Value in our 2015 Form 10-K for additional information.

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 40: Equity Investments Summary

 

In millions    March 31
2016
     December 31
2015
 

BlackRock

   $ 6,567       $ 6,626   

Tax credit investments

     2,061         2,254   

Private equity

     1,500         1,441   

Visa

     19         31   

Other

     244         235   

Total

   $ 10,391       $ 10,587   

BlackRock

PNC owned approximately 35 million common stock equivalent shares of BlackRock equity at March 31, 2016, accounted for under the equity method. The primary risk measurement, similar to other equity investments, is economic capital. The Business Segments Review section of this Financial Review includes additional information about BlackRock.

Tax Credit Investments

Included in our equity investments are direct tax credit investments and equity investments held by consolidated partnerships which totaled $2.1 billion at March 31, 2016 and $2.3 billion at December 31, 2015. These equity investment balances include unfunded commitments totaling $655 million and $669 million at March 31, 2016 and December 31, 2015, respectively. These unfunded commitments are included in Other Liabilities on our Consolidated Balance Sheet.

Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K has further information on Tax Credit Investments.

Private Equity

The private equity portfolio is an illiquid portfolio comprised of mezzanine and equity investments that vary by industry, stage and type of investment. Private equity investments carried at estimated fair value totaled $1.5 billion at March 31, 2016 and $1.4 billion at December 31, 2015. As of March 31, 2016, $1.2 billion was invested directly in a variety of companies and $.3 billion was invested indirectly through various private equity funds. Included in direct investments are investment activities of two private equity funds that are consolidated for financial reporting purposes. The interests held in indirect private equity funds are not redeemable, but PNC may receive distributions over the life of the partnership from liquidation of the underlying investments. See Item 1

 

 

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Business – Supervision and Regulation and Item 1A Risk Factors included in our 2015 Form 10-K for discussion of the potential impacts of the Volcker Rule provisions of Dodd-Frank on our interests in and sponsorship of private funds covered by the Volcker Rule.

Our unfunded commitments related to private equity totaled $133 million at March 31, 2016 compared with $126 million at December 31, 2015.

Visa

Our 2015 Form 10-K includes information regarding the October 2007 Visa restructuring, our involvement with judgment and loss sharing agreements with Visa and certain other banks, the status of pending interchange litigation, the sales of portions of our Visa Class B common shares and the related swap agreements with the purchaser.

During the first three months of 2016, we sold .5 million Visa Class B common shares, in addition to the 18.5 million shares sold in previous years. We have entered into swap agreements with the purchasers of the shares as part of these sales. At March 31, 2016, our investment in Visa Class B common shares totaled approximately 4.4 million shares and had a carrying value of $19 million. Based on the March 31, 2016 closing price of $76.48 for the Visa Class A common shares, the fair value of our total investment was approximately $550 million at the current conversion rate. The 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 of stock, which cannot happen until the final resolution of all of the specified litigation.

Other Investments

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. The economic values could be driven by either the fixed-income market or the equity markets, or both. Given the nature of these investments, if market conditions affecting their valuation were to worsen, we could incur future losses. Net gains related to these investments were not significant for the first three months of 2016 and 2015.

Our unfunded commitments related to other investments at March 31, 2016 and December 31, 2015 were not significant.

Financial Derivatives

Information on our financial derivatives is presented in Note 1 Accounting Policies and Note 7 Fair Value in our Notes To Consolidated Financial Statements under Item 8 of our 2015 Form 10-K and in Note 7 Fair Value and Note 10 Financial Derivatives in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report, which is incorporated here by reference.

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.

 

 

The following table summarizes the notional or contractual amounts and net fair value of financial derivatives at March 31, 2016 and December  31, 2015.

Table 41: Financial Derivatives Summary

 

     March 31, 2016      December 31, 2015  
In millions    Notional/
Contractual
Amount
     Net Fair
Value (a)
     Notional/
Contractual
Amount
     Net Fair
Value (a)
 

Derivatives designated as hedging instruments under GAAP

                                   

Total derivatives designated as hedging instruments

   $ 51,508       $ 1,362       $ 52,074       $ 985   

Derivatives not designated as hedging instruments under GAAP

             

Total derivatives used for residential mortgage banking activities

   $ 88,207       $ 470       $ 73,891       $ 376   

Total derivatives used for commercial mortgage banking activities

     21,074         67         24,091         36   

Total derivatives used for customer-related activities

     202,157         185         192,621         151   

Total derivatives used for other risk management activities

     5,550         (389      5,299         (409

Total derivatives not designated as hedging instruments

   $ 316,988       $ 333       $ 295,902       $ 154   

Total Derivatives

   $ 368,496       $ 1,695       $ 347,976       $ 1,139   
(a) Represents the net fair value of assets and liabilities.

 

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INTERNAL CONTROLS AND DISCLOSURE CONTROLS AND PROCEDURES

As of March 31, 2016, 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 and Exchange Act of 1934) were effective as of March 31, 2016, and that there has been no change in PNC’s internal control over financial reporting that occurred during the first quarter of 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

GLOSSARY OF TERMS

Accretable net interest (Accretable yield) – The excess of cash flows expected to be collected on a purchased impaired loan over the carrying value of the loan. The accretable net interest is recognized into interest income over the remaining life of the loan using the constant effective yield method.

Adjusted average total assets – Primarily comprised of total average quarterly (or annual) assets plus (less) unrealized losses (gains) on investment securities, less goodwill and certain other intangible assets (net of eligible deferred taxes).

Annualized – Adjusted to reflect a full year of activity.

Basel III common equity Tier 1 capital – Common stock plus related surplus, net of treasury stock, plus retained earnings, plus accumulated other comprehensive income for securities currently and previously held as available for sale, plus accumulated other comprehensive income for pension and other postretirement benefit plans, less goodwill, net of associated deferred tax liabilities, less other disallowed intangibles, net of deferred tax liabilities and plus/less other adjustments.

Basel III common equity Tier 1 capital ratio – Common equity Tier 1 capital divided by period-end risk-weighted assets (as applicable).

Basel III Tier 1 capital – Common equity Tier 1 capital, plus preferred stock, plus certain trust preferred capital securities, plus certain noncontrolling interests that are held by others and plus/less other adjustments.

Basel III Tier 1 capital ratio – Tier 1 capital divided by period-end risk-weighted assets (as applicable).

Basel III Total capital – Tier 1 capital plus qualifying subordinated debt, plus certain trust preferred securities, plus, under the Basel III transitional rules and the standardized approach, the allowance for loan and lease losses included in Tier 2 capital and other.

Basel III Total capital ratio – Total capital divided by period-end risk-weighted assets (as applicable).

Basis point – One hundredth of a percentage point.

Carrying value of purchased impaired loans – The net value on the balance sheet which represents the recorded investment less any valuation allowance.

Cash recoveries – Cash recoveries used in the context of purchased impaired loans represent cash payments for a single purchased impaired loan not included within a pool of loans from customers that exceeded the recorded investment of that loan.

Charge-off – Process of removing a loan or portion of a loan from our balance sheet because it is considered uncollectible. We also record a charge-off when a loan is transferred from portfolio holdings to held for sale by reducing the loan carrying amount to the fair value of the loan, if fair value is less than carrying amount.

Combined loan-to-value ratio (CLTV) – This is the aggregate principal balance(s) of the mortgages on a property divided by its appraised value or purchase price.

Common shareholders’ equity to total assets – Common shareholders’ equity divided by total assets. Common shareholders’ equity equals total shareholders’ equity less the liquidation value of preferred stock.

Core net interest income – Core net interest income is total net interest income less purchase accounting accretion.

Credit derivatives – Contractual agreements, primarily credit default swaps, that provide protection against a credit event of one or more referenced credits. The nature of a credit event is established by the protection buyer and protection seller at the inception of a transaction, and such events include bankruptcy, insolvency and failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic fee in return for a payment by the protection seller upon the occurrence, if any, of a credit event.

Credit spread – The difference in yield between debt issues of similar maturity. The excess of yield attributable to credit

 

 

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spread is often used as a measure of relative creditworthiness, with a reduction in the credit spread reflecting an improvement in the borrower’s perceived creditworthiness.

Credit valuation adjustment (CVA) – Represents an adjustment to the fair value of our derivatives for our own and counterparties’ non-performance risk.

Criticized commercial loans – Loans with potential or identified weaknesses based upon internal risk ratings that comply with the regulatory classification definitions of “Special Mention,” “Substandard” or “Doubtful.”

Derivatives – Financial contracts whose value is derived from changes in publicly traded securities, interest rates, currency exchange rates or market indices. Derivatives cover a wide assortment of financial contracts, including but not limited to forward contracts, futures, options and swaps.

Discretionary client assets under management – Assets over which we have sole or shared investment authority for our customers/clients. We do not include these assets on our Consolidated Balance Sheet.

Duration of equity – An estimate of the rate sensitivity of our economic value of equity. A negative duration of equity is associated with asset sensitivity (i.e., positioned for rising interest rates), while a positive value implies liability sensitivity (i.e., positioned for declining interest rates). For example, if the duration of equity is -1.5 years, the economic value of equity increases by 1.5% for each 100 basis point increase in interest rates.

Earning assets – Assets that generate income, which include: federal funds sold; resale agreements; trading securities; interest-earning deposits with banks; loans held for sale; loans; investment securities; and certain other assets.

Effective duration – A measurement, expressed in years, that, when multiplied by a change in interest rates, would approximate the percentage change in value of on- and off- balance sheet positions.

Efficiency – Noninterest expense divided by total revenue.

Enterprise risk management framework – An enterprise process designed to identify potential risks that may affect PNC, manage risk to be within our risk appetite and provide reasonable assurance regarding achievement of our objectives.

Fair value – The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fee income – When referring to the components of Noninterest income, we use the term fee income to refer to the

following categories within Noninterest income: Asset management; Consumer services; Corporate services; Residential mortgage; and Service charges on deposits.

FICO score – A credit bureau-based industry standard score created by Fair Isaac Co. which predicts the likelihood of borrower default. We use FICO scores both in underwriting and assessing credit risk in our consumer lending portfolio. Lower FICO scores indicate likely higher risk of default, while higher FICO scores indicate likely lower risk of default. FICO scores are updated on a periodic basis.

Foreign exchange contracts – Contracts that provide for the future receipt and delivery of foreign currency at previously agreed-upon terms.

Funds transfer pricing – A management accounting methodology designed to recognize the net interest income effects of sources and uses of funds provided by the assets and liabilities of a business segment. 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.

Futures and forward contracts – Contracts in which the buyer agrees to purchase and the seller agrees to deliver a specific financial instrument at a predetermined price or yield. May be settled either in cash or by delivery of the underlying financial instrument.

GAAP – Accounting principles generally accepted in the United States of America.

Home price index (HPI) – A broad measure of the movement of single-family house prices in the U.S.

Impaired loans – Loans are determined to be impaired when, based on current information and events, it is probable that all contractually required payments will not be collected. Impaired loans include commercial nonperforming loans and consumer and commercial TDRs, regardless of nonperforming status. Excluded from impaired loans are nonperforming leases, loans held for sale, loans accounted for under the fair value option, smaller balance homogenous type loans and purchased impaired loans.

Interest rate floors and caps – Interest rate protection instruments that involve payment from the protection seller to the protection buyer of an interest differential, which represents the difference between a short-term rate (e.g., three-month LIBOR) and an agreed-upon rate (the strike rate) applied to a notional principal amount.

Interest rate swap contracts – Contracts that are entered into primarily as an asset/liability management strategy to reduce interest rate risk. Interest rate swap contracts are exchanges of interest rate payments, such as fixed-rate payments for floating-rate payments, based on notional principal amounts.

 

 

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Intrinsic value – The difference between the price, if any, required to be paid for stock issued pursuant to an equity compensation arrangement and the fair market value of the underlying stock.

Leverage ratio – Tier 1 capital divided by average quarterly adjusted total assets.

LIBOR – Acronym for London InterBank Offered Rate. LIBOR is the average interest rate charged when banks in the London wholesale money market (or interbank market) borrow unsecured funds from each other. LIBOR rates are used as a benchmark for interest rates on a global basis. PNC’s product set includes loans priced using LIBOR as a benchmark.

Loan-to-value ratio (LTV) – A calculation of a loan’s collateral coverage that is used both in underwriting and assessing credit risk in our lending portfolio. LTV is the sum total of loan obligations secured by collateral divided by the market value of that same collateral. Market values of the collateral are based on an independent valuation of the collateral. For example, a LTV of less than 90% is better secured and has less credit risk than a LTV of greater than or equal to 90%.

Loss given default (LGD)An estimate of loss, net of recovery based on collateral type, collateral value, loan exposure, and other factors. Each loan has its own LGD. The LGD risk rating measures the percentage of exposure of a specific credit obligation that we expect to lose if default occurs. LGD is net of recovery, through any means, including but not limited to the liquidation of collateral or deficiency judgments rendered from foreclosure or bankruptcy proceedings.

Net interest margin – Annualized taxable-equivalent net interest income divided by average earning assets.

Nonaccretable difference – Contractually required payments receivable on a purchased impaired loan in excess of the cash flows expected to be collected.

Nonaccrual loans – Loans for which we do not accrue interest income. Nonaccrual loans include nonperforming loans, in addition to loans accounted for under fair value option and loans accounted for as held for sale for which full collection of contractual principal and/or interest is not probable.

Nondiscretionary client assets under administration – Assets we hold for our customers/clients in a nondiscretionary, custodial capacity. We do not include these assets on our Consolidated Balance Sheet.

Nonperforming assets – Nonperforming assets include nonperforming loans and OREO and foreclosed assets, but exclude certain government insured or guaranteed loans for

which we expect to collect substantially all principal and interest, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. We do not accrue interest income on assets classified as nonperforming.

Nonperforming loans – Loans accounted for at amortized cost for which we do not accrue interest income. Nonperforming loans include loans to commercial, commercial real estate, equipment lease financing, home equity, residential real estate, credit card and other consumer customers as well as TDRs which have not returned to performing status. Nonperforming loans exclude certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. Nonperforming loans exclude purchased impaired loans as we are currently accreting interest income over the expected life of the loans.

Notional amount – A number of currency units, shares, or other units specified in a derivative contract.

Operating leverage – The period to period dollar or percentage change in total revenue (GAAP basis) less the dollar or percentage change in noninterest expense. A positive variance indicates that revenue growth exceeded expense growth (i.e., positive operating leverage) while a negative variance implies expense growth exceeded revenue growth (i.e., negative operating leverage).

Options – Contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to either purchase or sell the associated financial instrument at a set price during a specified period or at a specified date in the future.

Other real estate owned (OREO) and foreclosed assets – Assets taken in settlement of troubled loans primarily through deed-in-lieu of foreclosure or foreclosure. Foreclosed assets include real and personal property, equity interests in corporations, partnerships, and limited liability companies. Excludes certain assets that have a government-guarantee which are classified as other receivables.

Other-than-temporary impairment (OTTI) – When the fair value of a security is less than its amortized cost basis, an assessment is performed to determine whether the impairment is other-than-temporary. If we intend to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, an other-than-temporary impairment is considered to have occurred. In such cases, an other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Further, if we do not expect to recover the entire amortized cost of the security, an other-than-temporary impairment is considered to have

 

 

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occurred. However for debt securities, if we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before its recovery, the other-than-temporary loss is separated into (a) the amount representing the credit loss, and (b) the amount related to all other factors. The other-than-temporary impairment related to credit losses is recognized in earnings while the amount related to all other factors is recognized in other comprehensive income, net of tax.

Parent company liquidity coverage – Liquid assets divided by funding obligations within a two year period.

Pretax earnings – Income before income taxes and noncontrolling interests.

Pretax, pre-provision earnings – Total revenue less noninterest expense.

Probability of default (PD) – An internal risk rating that indicates the likelihood that a credit obligor will enter into default status.

Purchase accounting accretion – Accretion of the discounts and premiums on acquired assets and liabilities. The purchase accounting accretion is recognized in net interest income over the weighted-average life of the financial instruments using the constant effective yield method. Accretion for a single purchased impaired loan not included within a pool of loans includes any cash recoveries on that loan received in excess of the recorded investment.

Purchased impaired loans – Acquired loans (or pools of loans) determined to be credit impaired under FASB ASC 310-30 (AICPA SOP 03-3). Loans (or pools of loans) are determined to be impaired if there is evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected.

Recorded investment (purchased impaired loans) – The initial investment of a purchased impaired loan plus interest accretion and less any cash payments and writedowns to date. The recorded investment excludes any valuation allowance which is included in our allowance for loan and lease losses.

Recovery – Cash proceeds received on a loan that we had previously charged off. We credit the amount received to the allowance for loan and lease losses.

Residential development loans – Project-specific loans to commercial customers for the construction or development of residential real estate including land, single family homes, condominiums and other residential properties.

Return on average assets – Annualized net income divided by average assets.

Return on average capital – Annualized net income divided by average capital.

Return on average common shareholders’ equity – Annualized net income attributable to common shareholders divided by average common shareholders’ equity.

Risk – The potential that an event or series of events could occur that would threaten PNC’s ability to achieve its strategic objectives, thereby negatively affecting shareholder value or reputation.

Risk appetite – A dynamic, forward-looking view on the aggregate amount of risk PNC is willing and able to take in executing business strategy in light of the current business environment.

Risk limits – Quantitative measures based on forward looking assumptions that allocate the firm’s aggregate risk appetite (e.g. measure of loss or negative events) to business lines, legal entities, specific risk categories, concentrations and as appropriate, other levels.

Risk profile – The risk profile is a point-in-time assessment of risk. The profile represents overall risk position in relation to the desired risk appetite. The determination of the risk profile’s position is based on qualitative and quantitative analysis of reported risk limits, metrics, operating guidelines and qualitative assessments.

Risk-weighted assets – Computed by the assignment of specific risk-weights (as defined by the Board of Governors of the Federal Reserve System) to assets and off-balance sheet instruments.

Securitization – The process of legally transforming financial assets into securities.

Servicing rights – An intangible asset or liability created by an obligation to service assets for others. Typical servicing rights include the right to receive a fee for collecting and forwarding payments on loans and related taxes and insurance premiums held in escrow.

Swaptions – Contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to enter into an interest rate swap agreement during a specified period or at a specified date in the future.

Taxable-equivalent interest – The interest income earned on certain assets is completely or partially exempt from Federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of yields and margins for all interest-earning assets, 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 other taxable investments. This adjustment is not permitted under GAAP on the Consolidated Income Statement.

 

 

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Total equity – Total shareholders’ equity plus noncontrolling interests.

Total return swap – A non-traditional swap where one party agrees to pay the other the “total return” of a defined underlying asset (e.g., a loan), usually in return for receiving a stream of LIBOR-based cash flows. The total returns of the asset, including interest and any default shortfall, are passed through to the counterparty. The counterparty is, therefore, assuming the credit and economic risk of the underlying asset.

Transitional Basel III common equity – Common equity calculated under Basel III using phased in definitions and deductions applicable to PNC during the applicable presentation period.

Troubled debt restructuring (TDR) – A loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties.

Value-at-risk (VaR) – A statistically-based measure of risk that describes the amount of potential loss which may be incurred due to adverse market movements. The measure is of the maximum loss which should not be exceeded on 95 out of 100 days for a 95% VaR.

Watchlist – A list of criticized loans, credit exposure or other assets compiled for internal monitoring purposes. We define criticized exposure for this purpose as exposure with an internal risk rating of other assets especially mentioned, substandard, doubtful or loss.

Yield curve – A graph showing the relationship between the yields on financial instruments or market indices of the same credit quality with different maturities. For example, a “normal” or “positive” yield curve exists when long-term bonds have higher yields than short-term bonds. A “flat” yield curve exists when yields are the same for short-term and long-term bonds. A “steep” yield curve exists when yields on long-term bonds are significantly higher than on short-term bonds. An “inverted” or “negative” yield curve exists when short-term bonds have higher yields than long-term bonds.

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 earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting PNC and its future business and operations that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “look,” “intend,” “outlook,” “project,” “forecast,” “estimate,” “goal,” “will,” “should” and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time.

Forward-looking statements speak only as of the date made. We do not assume any duty and do not undertake to update forward-looking statements. Actual results or future events could differ, possibly materially, from those anticipated in forward-looking statements, as well as from historical performance.

Our forward-looking statements are subject to the following principal risks and uncertainties.

 

Our businesses, financial results and balance sheet values are affected by business and economic conditions, including the following:

    Changes in interest rates and valuations in debt, equity and other financial markets.
    Disruptions in the U.S. and global financial markets.
    The impact on financial markets and the economy of any changes in the credit ratings of U.S. Treasury obligations and other U.S. government-backed debt, as well as issues surrounding the levels of U.S. and European government debt and concerns regarding the creditworthiness of certain sovereign governments, supranationals and financial institutions in Europe.
    Actions by the Federal Reserve, U.S. Treasury and other government agencies, including those that impact money supply and market interest rates.
    Changes in customers’, suppliers’ and other counterparties’ performance and creditworthiness.
    Slowing or reversal of the current U.S. economic expansion.
    Continued residual effects of recessionary conditions and uneven spread of positive impacts of recovery on the economy and our counterparties, including adverse impacts on levels of unemployment, loan utilization rates, delinquencies, defaults and counterparty ability to meet credit and other obligations.
    Commodity price volatility.
    Changes in customer preferences and behavior, whether due to changing business and economic conditions, legislative and regulatory initiatives, or other factors.
 

Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than we are currently expecting. These statements are based on our current view that the U.S. economy will grow moderately again in 2016, boosted by lower oil/energy prices, improving housing activity and solid job gains, and that short-term interest rates and bond yields will rise very gradually during 2016. These forward-looking statements also do not, unless otherwise indicated, take into account the impact of potential legal and regulatory contingencies.

 

PNC’s ability to take certain capital actions, including paying dividends and any plans to increase common stock dividends, repurchase common stock under current or future programs, or issue or redeem preferred stock or

 

 

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other regulatory capital instruments, is subject to the review of such proposed actions by the Federal Reserve as part of PNC’s comprehensive capital plan for the applicable period in connection with the regulators’ CCAR process and to the acceptance of such capital plan and non-objection to such capital actions by the Federal Reserve.

 

PNC’s regulatory capital ratios in the future will depend on, among other things, the company’s financial performance, the scope and terms of final capital regulations then in effect (particularly those implementing the Basel Capital Accords), 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 approval of related models.

 

Legal and regulatory developments could have an impact on our ability to operate our businesses, financial condition, results of operations, competitive position, reputation, or pursuit of attractive acquisition opportunities. Reputational impacts could affect matters such as business generation and retention, liquidity, funding, and ability to attract and retain management. These developments could include:

    Changes resulting from legislative and regulatory reforms, including major reform of the regulatory oversight structure of the financial services industry and changes to laws and regulations involving tax, pension, bankruptcy, consumer protection, and other industry aspects, and changes in accounting policies and principles. We will be impacted by extensive reforms provided for in the Dodd-Frank Act and otherwise growing out of the most recent financial crisis, the precise nature, extent and timing of which, and their impact on us, remains uncertain.
    Changes to regulations governing bank capital and liquidity standards, including due to the Dodd-Frank Act and to Basel-related initiatives.
    Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries. In addition to matters relating to PNC’s current and historical business and activities, such matters may include proceedings, claims, investigations, or inquiries relating to pre-acquisition business and activities of acquired companies, such as National City. These matters may result in monetary judgments or settlements or other remedies, including fines, penalties, restitution or alterations in our business practices, and in additional expenses and collateral costs, and may cause reputational harm to PNC.
    Results of the regulatory examination and supervision process, including our failure to satisfy requirements of agreements with governmental agencies.
    Impact on business and operating results of any costs associated with obtaining rights in intellectual property claimed by others and of adequacy of our intellectual property protection in general.
 

Business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through effective use of third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards. In particular, our results currently depend on our ability to manage elevated levels of impaired assets.

 

Business and operating results also include impacts relating to our equity interest in BlackRock, Inc. and rely to a significant extent on information provided to us by BlackRock. Risks and uncertainties that could affect BlackRock are discussed in more detail by BlackRock in its SEC filings.

 

We grow our business in part by acquiring from time to time other financial services companies, financial services assets and related deposits and other liabilities. Acquisition risks and uncertainties include those presented by the nature of the business acquired, including in some cases those associated with our entry into new businesses or new geographic or other markets and risks resulting from our inexperience in those new areas, as well as risks and uncertainties related to the acquisition transactions themselves, regulatory issues, and the integration of the acquired businesses into PNC after closing.

 

Competition can have an impact on customer acquisition, growth and retention and on credit spreads and product pricing, which can affect market share, deposits and revenues. Industry restructuring in the current environment could also impact our business and financial performance through changes in counterparty creditworthiness and performance and in the competitive and regulatory landscape. Our ability to anticipate and respond to technological changes can also impact our ability to respond to customer needs and meet competitive demands.

 

Business and operating results can also be affected by widespread natural and other disasters, pandemics, dislocations, terrorist activities, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically.

We provide greater detail regarding these as well as other factors in our 2015 Form 10-K and elsewhere in this Report, including in the Risk Factors and Risk Management sections and the Legal Proceedings and Commitments and Guarantees Notes of the Notes To Consolidated Financial Statements in those 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.

 

 

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CONSOLIDATED INCOME STATEMENT

THE PNC FINANCIAL SERVICES GROUP, INC.

 

Unaudited    Three months ended
March 31
 
In millions, except per share data          2016      2015  

Interest Income

     

Loans

   $ 1,843       $ 1,802   

Investment securities

     462         406   

Other

     102         111   

Total interest income

     2,407         2,319   

Interest Expense

     

Deposits

     105         92   

Borrowed funds

     204         155   

Total interest expense

     309         247   

Net interest income

     2,098         2,072   

Noninterest Income

     

Asset management

     341         376   

Consumer services

     337         311   

Corporate services

     325         344   

Residential mortgage

     100         164   

Service charges on deposits

     158         153   

Net gains on sales of securities

     9         42   

Other

     297         269   

Total noninterest income

     1,567         1,659   

Total revenue

     3,665         3,731   

Provision For Credit Losses

     152         54   

Noninterest Expense

     

Personnel

     1,145         1,157   

Occupancy

     221         216   

Equipment

     234         222   

Marketing

     54         62   

Other

     627         692   

Total noninterest expense

     2,281         2,349   

Income before income taxes and noncontrolling interests

     1,232         1,328   

Income taxes

     289         324   

Net income

     943         1,004   

Less: Net income (loss) attributable to noncontrolling interests

     19         1   

 Preferred stock dividends and discount accretion and redemptions

     65         70   

Net income attributable to common shareholders

   $ 859       $ 933   

Earnings Per Common Share

     

Basic

   $ 1.70       $ 1.79   

Diluted

     1.68         1.75   

Average Common Shares Outstanding

     

Basic

     501         521   

Diluted

     507         529   

See accompanying Notes To Consolidated Financial Statements.

 

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


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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

THE PNC FINANCIAL SERVICES GROUP, INC.

 

Unaudited

In millions

   Three months ended
March 31
 
   2016      2015  

Net income

   $ 943       $ 1,004   

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

     

Net unrealized gains (losses) on non-OTTI securities

     504         74   

Net unrealized gains (losses) on OTTI securities

     (38      3   

Net unrealized gains (losses) on cash flow hedge derivatives

     200         239   

Pension and other postretirement benefit plan adjustments

     12         60   

Other

     (27      (27

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

     651         349   

Income tax benefit (expense) related to items of other comprehensive income

     (249      (149

Other comprehensive income (loss), after tax and net of reclassifications into Net income

     402         200   

Comprehensive income

     1,345         1,204   

Less: Comprehensive income (loss) attributable to noncontrolling interests

     19         1   

Comprehensive income attributable to PNC

   $ 1,326       $ 1,203   

See accompanying Notes To Consolidated Financial Statements.

 

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


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CONSOLIDATED BALANCE SHEET

THE PNC FINANCIAL SERVICES GROUP, INC.

 

Unaudited

In millions, except par value

  

March 31

2016

   

December 31

2015

 
    

Assets

                

Cash and due from banks (a)

   $ 3,861      $ 4,065   

Federal funds sold and resale agreements (b)

     1,123        1,369   

Trading securities

     1,884        1,726   

Interest-earning deposits with banks (a)

     29,478        30,546   

Loans held for sale (b)

     1,541        1,540   

Investment securities

     72,569        70,528   

Loans (b)

     207,485        206,696   

Allowance for loan and lease losses

     (2,711     (2,727

Net loans (a)

     204,774        203,969   

Goodwill

     9,103        9,103   

Mortgage servicing rights

     1,323        1,589   

Other intangible assets

     353        379   

Equity investments (a)

     10,391        10,587   

Other (a) (b)

     24,585        23,092   

Total assets

   $ 360,985      $ 358,493   

Liabilities

    

Deposits

    

Noninterest-bearing

   $ 78,151      $ 79,435   

Interest-bearing

     172,208        169,567   

Total deposits

     250,359        249,002   

Borrowed funds

    

Federal funds purchased and repurchase agreements

     2,495        1,777   

Federal Home Loan Bank borrowings

     19,058        20,108   

Bank notes and senior debt

     21,594        21,298   

Subordinated debt

     8,707        8,556   

Other (c) (d)

     2,324        2,793   

Total borrowed funds

     54,178        54,532   

Allowance for unfunded loan commitments and letters of credit

     282        261   

Accrued expenses (c)

     4,850        4,975   

Other (c)

     4,988        3,743   

Total liabilities

     314,657        312,513   

Equity

    

Preferred stock (e)

    

Common stock ($5 par value, authorized 800 shares, issued 542 and 542 shares)

     2,708        2,708   

Capital surplus – preferred stock

     3,453        3,452   

Capital surplus – common stock and other

     12,586        12,745   

Retained earnings

     29,642        29,043   

Accumulated other comprehensive income (loss)

     532        130   

Common stock held in treasury at cost: 43 and 38 shares

     (3,791     (3,368

Total shareholders’ equity

     45,130        44,710   

Noncontrolling interests

     1,198        1,270   

Total equity

     46,328        45,980   

Total liabilities and equity

   $ 360,985      $ 358,493   
(a) Our consolidated assets at March 31, 2016 included the following assets of certain variable interest entities (VIEs): Equity investments of $326 million and Other assets of $41 million. Our consolidated assets at December 31, 2015 included the following assets of certain VIEs: Cash and due from banks of $11 million, Interest-earning deposits with banks of $4 million, Net loans of $1.3 billion, Equity investments of $183 million, and Other assets of $402 million.
(b) Our consolidated assets at March 31, 2016 included the following for which we have elected the fair value option: Federal funds sold and resale agreements of $138 million, Loans held for sale of $1.4 billion, Loans of $.9 billion, and Other assets of $375 million. Our consolidated assets at December 31, 2015 included the following for which we have elected the fair value option: Federal funds sold and resale agreements of $137 million, Loans held for sale of $1.5 billion, Loans of $.9 billion, and Other assets of $521 million.
(c) Our consolidated liabilities at March 31, 2016 included liabilities of $9 million for certain VIEs. Our consolidated liabilities at December 31, 2015 included the following liabilities of certain VIEs: Other borrowed funds of $148 million, Accrued expenses of $44 million, and Other liabilities of $202 million.
(d) Our consolidated liabilities at March 31, 2016 and December 31, 2015 included Other borrowed funds of $63 million and $93 million, respectively, for which we have elected the fair value option.
(e) Par value less than $.5 million at each date.

See accompanying Notes To Consolidated Financial Statements.

 

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CONSOLIDATED STATEMENT OF CASH FLOWS

THE PNC FINANCIAL SERVICES GROUP, INC.

 

Unaudited

In millions

     Three months ended
March 31
 
     2016      2015  

Operating Activities

       

Net income

     $ 943       $ 1,004   

Adjustments to reconcile net income to net cash provided (used) by operating activities

       

Provision for credit losses

       152         54   

Depreciation and amortization

       270         252   

Deferred income taxes

       (49      40   

Net gains on sales of securities

       (9      (42

Changes in fair value of mortgage servicing rights

       341         143   

Gain on sales of Visa Class B common shares

       (44   

Undistributed earnings of BlackRock

       (61      (96

Net change in

       

Trading securities and other short-term investments

       (946      (229

Loans held for sale

       51         (268

Other assets

       (1,310      (1,449

Accrued expenses and other liabilities

       1,084         1,044   

Other

       (146      (193

Net cash provided (used) by operating activities

       276         260   

Investing Activities

       

Sales

       

Securities available for sale

       782         1,787   

Loans

       371         389   

Repayments/maturities

       

Securities available for sale

       2,005         1,762   

Securities held to maturity

       523         486   

Purchases

       

Securities available for sale

       (3,441      (6,170

Securities held to maturity

       (687      (2,000

Loans

       (363      (242

Net change in

       

Federal funds sold and resale agreements

       246         (41

Interest-earning deposits with banks

       1,067         581   

Loans

       (1,530      (173

Other

       119         (265

Net cash provided (used) by investing activities

       (908      (3,886

(continued on following page)

 

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CONSOLIDATED STATEMENT OF CASH FLOWS

THE PNC FINANCIAL SERVICES GROUP, INC.

(continued from previous page)

 

Unaudited

In millions

     Three months ended
March 31
 
     2016      2015  

Financing Activities

       

Net change in

       

Noninterest-bearing deposits

     $ (877    $ 1,488   

Interest-bearing deposits

       2,641         2,804   

Federal funds purchased and repurchase agreements

       718         (1,308

Commercial paper

          (109

Other borrowed funds

       128         1,104   

Sales/issuances

       

Federal Home Loan Bank borrowings

          1,250   

Bank notes and senior debt

       997         1,743   

Commercial paper

          1,322   

Other borrowed funds

       80         549   

Common and treasury stock

       18         60   

Repayments/maturities

       

Federal Home Loan Bank borrowings

       (1,050      (31

Bank notes and senior debt

       (997      (1,397

Subordinated debt

       18         14   

Commercial paper

       (13      (1,809

Other borrowed funds

       (360      (1,481

Acquisition of treasury stock

       (551      (463

Preferred stock cash dividends paid

       (64      (68

Common stock cash dividends paid

       (260      (251

Net cash provided (used) by financing activities

       428         3,417   

Net Increase (Decrease) In Cash And Due From Banks

       (204      (209

Cash and due from banks at beginning of period

       4,065         4,360   

Cash and due from banks at end of period

     $ 3,861       $ 4,151   

Supplemental Disclosures

       

Interest paid

     $ 345       $ 251   

Income taxes paid

       19         28   

Income taxes refunded

       33         1   

Non-cash Investing and Financing Items

       

Transfer from (to) loans to (from) loans held for sale, net

       191         (7

Transfer from loans to foreclosed assets

       81         103   

See accompanying Notes To Consolidated Financial Statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THE PNC FINANCIAL SERVICES GROUP, INC.

 

BUSINESS

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

We have businesses engaged in retail banking, corporate and institutional banking, asset management and residential mortgage banking, providing many of our products and services nationally, as well as other products and services in our primary geographic markets located in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, Florida, North Carolina, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Georgia, Missouri, Wisconsin and South Carolina. We also provide certain products and services internationally.

NOTE 1 ACCOUNTING POLICIES

Basis of Financial Statement Presentation

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

We prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). We have eliminated intercompany accounts and transactions. We have also reclassified certain prior year amounts to conform to the 2016 presentation, which did not have a material impact on our consolidated financial condition or results of operations. Additionally, we evaluate the materiality of identified errors in the financial statements using both an income statement and a balance sheet approach, based on relevant quantitative and qualitative factors. The consolidated financial statements include certain adjustments to correct immaterial errors related to previously reported periods.

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

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

When preparing these unaudited interim consolidated financial statements, we have assumed that you have read the audited consolidated financial statements included in our 2015 Annual Report on Form 10-K. Reference is made to Note 1 Accounting Policies in the 2015 Form 10-K for a detailed description of significant accounting policies. Included herein are policies that are required to be disclosed on an interim basis as well as policies where there has been a significant change within the first three months of 2016. These interim consolidated financial statements serve to update the 2015 Form 10-K and may not include all information and notes necessary to constitute a complete set of 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 our fair value measurements, allowances for loan and lease losses and unfunded loan commitments and letters of credit, and accretion on purchased impaired loans. Actual results may differ from the estimates and the differences may be material to the consolidated financial statements.

 

 

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Nonperforming Loans and Leases

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

 

 

Commercial loans

   
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  

•       Purchased impaired loans because interest income is accreted by nature of the accounting for these assets.

•       Loans that are well secured and in the process of collection.

 

 

Consumer loans

Loans Classified as Nonperforming and Accounted for as Nonaccrual  

•       Loans accounted for at amortized cost where full collection of contractual principal and interest is not deemed probable as demonstrated in the policies below:

–    The loan is 90 days past due for home equity and installment loans, and 180 days past due for well secured residential real estate loans;

–    The loan has been modified and classified as a troubled debt restructuring (TDR);

–    Notification of bankruptcy has been received and the loan is 30 days or more past due;

–    The bank holds a subordinate lien position in the loan and the first lien 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 repossessed 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  

•       Purchased impaired loans because interest income is accreted through the accounting model.

•       Certain government insured loans where substantially all principal and interest is insured.

•       Residential real estate loans that are well secured and in the process of collection.

•       Consumer loans and lines of credit, not secured by residential real estate, as permitted by regulatory guidance.

 

 

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


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See Note 3 Asset Quality in this Report for additional detail on nonperforming assets and asset quality indicators for commercial and consumer loans.

Commercial Loans

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

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

Consumer Loans

Home equity installment loans, home equity lines of credit, and residential real estate loans that are not well-secured and in the process of collection are charged-off at no later than 180 days past due. At that time, the basis in the loan is reduced to the fair value of the collateral less costs to sell. In addition to this policy, the bank recognizes a charge-off on a secured consumer loan when:

   

The bank holds a subordinate lien position in the loan and a foreclosure notice has been received on the first lien loan;

   

The bank holds a subordinate lien position in the loan which is 30 days or more past due with a combined loan to value ratio of greater than or equal to 110% and the first lien loan is seriously stressed (i.e., 90 days or more past due);

   

The loan is modified or otherwise restructured in a manner that results in the loan becoming collateral dependent;

   

Notification of bankruptcy has been received within the last 60 days and the loan is 60 days or more past due;

   

The borrower has been discharged from personal liability through Chapter 7 bankruptcy and has not formally reaffirmed his or her loan obligation to PNC; or

   

The collateral securing the loan has been repossessed and the value of the collateral is less than the recorded investment of the loan outstanding.

For loans that continue to meet any of the above policies, collateral values are updated annually and subsequent declines in collateral values are charged-off resulting in incremental provision for credit loss.

Most consumer loans and lines of credit, not secured by residential real estate, are charged off after 120-180 days past due.

Accounting for Nonperforming Assets and Leases and Other Nonaccrual Loans

For accrual loans, interest income is accrued on a monthly basis and certain fees and costs are deferred upon origination and recognized in income over the term of the loan utilizing an effective yield method. For nonaccrual loans, interest income accrual and deferred fee/cost recognition is discontinued. Additionally, the current year accrued and uncollected interest is reversed through Net interest income and prior year accrued and uncollected interest is charged-off. Nonaccrual loans may also 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 recorded investment; payments are then applied to recover any charged-off amounts related to the loan. Finally, if both recorded investment and any charge-offs have been recovered, then the payment will be recorded as fee and interest income.

For TDRs, payments are applied based upon their contractual terms unless the related loan is deemed non-performing. TDRs are generally included in nonperforming and nonaccrual loans. However, after a reasonable period of time in which the loan performs under restructured terms and meets other performance indicators, it is returned to performing/accruing status. This return to performing/accruing status demonstrates that the bank expects to collect all of the loan’s remaining contractual principal and interest. TDRs resulting from 1) borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and 2) borrowers that are not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

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

See Note 3 Asset Quality and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in this Report, as well as Note 3 Asset Quality in Item 8 of our 2015 Form 10-K, for additional TDR information.

 

 

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


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Allowance for Loan and Lease Losses

We maintain the ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan and lease portfolios as of the balance sheet date. Our determination of the allowance is based on periodic evaluations of these loan and lease portfolios and other relevant factors. This critical estimate includes significant use of PNC’s own historical data and complex methods to interpret this data. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change, and include, among others:

   

Probability of default (PD),

   

Loss given default (LGD),

   

Outstanding balance of the loan,

   

Movement through delinquency stages,

   

Amounts and timing of expected future cash flows,

   

Value of collateral, which may be obtained from third parties, and

   

Qualitative factors, such as changes in current economic conditions, that may not be reflected in modeled results.

For all loans, except purchased impaired loans, the ALLL is the sum of three components: (i) asset specific/individual impaired reserves, (ii) quantitative (formulaic or pooled) reserves and (iii) qualitative (judgmental) reserves.

The reserve calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.

Asset Specific/Individual Component

Nonperforming loans that are considered impaired under ASC 310 – Receivables, which include all commercial and consumer TDRs, are evaluated for a specific reserve. Specific reserve allocations are determined as follows:

   

For commercial nonperforming loans and commercial TDRs greater than or equal to a defined dollar threshold, specific reserves are based on an analysis of the present value of the loan’s expected future cash flows, the loan’s observable market price or the fair value of the collateral.

   

For commercial nonperforming loans and commercial TDRs below the defined dollar threshold, the individual loan’s loss given default (LGD) percentage is multiplied by the loan balance and the results are aggregated for purposes of measuring specific reserve impairment.

   

Consumer nonperforming loans are collectively reserved for unless classified as consumer TDRs. For consumer TDRs, specific reserves are determined through an analysis of the present value of the loan’s

   

expected future cash flows, except for those instances where loans have been deemed collateral dependent, including loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC. Once that determination has been made, those TDRs are charged down to the fair value of the collateral less costs to sell at each period end.

Commercial Lending Quantitative Component

The estimates of the quantitative component of ALLL for incurred losses within the commercial lending portfolio segment are determined through statistical loss modeling utilizing PD, LGD and outstanding balance of the loan. Based upon loan risk ratings, we assign PDs and LGDs. Each of these statistical parameters is determined based on internal historical data and market data. PD is influenced by such factors as liquidity, industry, obligor financial structure, access to capital and cash flow. LGD is influenced by collateral type, original and/or updated loan-to-value ratio (LTV), facility structure and other factors.

Consumer Lending Quantitative Component

Quantitative estimates within the consumer lending portfolio segment are calculated primarily using a roll-rate model based on statistical relationships, calculated from historical data that estimate the movement of loan outstandings through the various stages of delinquency and ultimately charge-off over our loss emergence period.

Qualitative Component

While our reserve methodologies strive to reflect all relevant 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 estimates and actual outcomes. We provide additional reserves that are designed to provide coverage for losses attributable to such risks. The ALLL also includes factors that may not be directly measured in the determination of specific or pooled reserves. Such qualitative factors may include:

   

Industry concentrations and conditions,

   

Recent credit quality trends,

   

Recent loss experience in particular portfolios,

   

Recent macro-economic factors,

   

Model imprecision,

   

Changes in lending policies and procedures,

   

Timing of available information, including the performance of first lien positions, and

   

Limitations of available historical data.

Allowance for Purchased Non-Impaired Loans

ALLL for purchased non-impaired loans is determined based upon a comparison between the methodologies described above and the remaining acquisition date fair value discount that has yet to be accreted into interest income. After making

 

 

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


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the comparison, an ALLL is recorded for the amount greater than the discount, or no ALLL is recorded if the discount is greater.

Allowance for Purchased Impaired Loans

ALLL for purchased impaired loans is determined in accordance with ASC 310-30 by comparing the net present value of the cash flows expected to be collected to the recorded investment for a given loan (or pool of loans). In cases where the net present value of expected cash flows is lower than the recorded investment, ALLL is established. Cash flows expected to be collected represent management’s best estimate of the cash flows expected over the life of a loan (or pool of loans). For large balance commercial loans, cash flows are separately estimated at the loan level. For smaller balance pooled loans, pool cash flows are estimated using cash flow models. Pools were defined at acquisition based on the risk characteristics of the loan. Our cash flow models use loan data including, but not limited to, contractual loan balance, delinquency status of the loan, updated borrower FICO credit scores, geographic information, historical loss experience, and updated LTVs, as well as best estimates for changes in unemployment rates, home prices and other economic factors, to determine estimated cash flows.

See Note 4 Purchased Loans and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional loan data and application of the policies disclosed herein.

Our credit risk management policies, procedures and practices are designed to promote sound lending standards and prudent credit risk management. We have policies, procedures and practices that address financial statement requirements, collateral review and appraisal requirements, advance rates based upon collateral types, appropriate levels of exposure, cross-border risk, lending to specialized industries or borrower type, guarantor requirements, and regulatory compliance.

Allowance for Unfunded Loan Commitments and Letters of Credit

We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable credit losses incurred on these unfunded credit facilities as of the balance sheet date. We determine the allowance based on periodic evaluations of the unfunded credit facilities, including an assessment of the probability of commitment usage, credit risk factors, and, solely for commercial lending, the terms and expiration dates of the unfunded credit facilities. Other than the estimation of the probability of funding, the reserve for unfunded loan commitments is estimated in a manner similar to the methodology used for determining reserves for funded exposures. The allowance for unfunded loan commitments and letters of credit is recorded as a liability on the Consolidated Balance Sheet. Net adjustments to the allowance for unfunded

loan commitments and letters of credit are included in the provision for credit losses.

See Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional loan data and application of the policies disclosed herein.

Earnings Per Common Share

Basic earnings per common share is calculated using the two-class method to determine income attributable to common shareholders. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities under the two-class method. Distributed dividends and dividend equivalents related to participating securities and an allocation of undistributed net income reduce the amount of income attributable to common shareholders. Income attributable to common shareholders is then divided by the weighted-average common shares outstanding for the period.

Diluted earnings per common share is calculated under the more dilutive of either the treasury method or the two-class method. For the diluted calculation, we increase the weighted-average number of shares of common stock outstanding by the assumed conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance, if later, and the number of shares of common stock that would be issued assuming the exercise of stock options and warrants and the issuance of incentive shares using the treasury stock method. These adjustments to the weighted-average number of shares of common stock outstanding are made only when such adjustments will dilute earnings per common share. See Note 11 Earnings Per Share for additional information.

Recently Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies the accounting for several aspects of share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The changes which impacted PNC included a requirement that all excess tax benefits and deficiencies that pertain to share-based payment arrangements be recognized within income tax expense line instead of Capital surplus – common stock and other. This change also removes the impact of the excess tax benefits and deficiencies from the calculation of diluted earnings per share. PNC is required to apply these changes on a prospective basis. Additionally, the ASU no longer requires a presentation of excess tax benefits and deficiencies related to the vesting and exercise of share-based compensation as both an operating outflow and financing inflow on the statement of cash flows. This change was applied on a retrospective basis.

 

 

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We elected to early adopt this standard as of January 1, 2016. Adoption of this ASU did not have a material impact on our results of operations or financial position.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. All legal entities are subject to evaluation under this ASU, including investment companies and certain other entities measured in a manner consistent with ASC 946 Financial Services – Investment Companies which were previously excluded. The ASU changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, the ASU modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities (VOEs); eliminates the presumption that a general partner should consolidate a limited partnership; potentially changes the consolidation conclusions of reporting entities that are involved with VIEs, in particular those that have fee arrangements and related party arrangements; and provides a scope exception for reporting entities with interests held in certain money market funds. We adopted this standard as of January 1, 2016 under a modified retrospective approach. The impact of adoption resulted in a decrease of $.4 billion in consolidated total assets at January 1, 2016. In addition the adoption impacted the classification of certain limited partnerships and legal entities as either VIEs or VOEs. See Note 2 Loan Sale and Servicing Activities and Variable Interest Entities for further disclosure on adoption of the standard.

NOTE 2 LOAN SALE AND SERVICING ACTIVITIES AND VARIABLE INTEREST ENTITIES

Loan Sale and Servicing Activities

As more fully described in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2015 Form 10-K, we have transferred residential and commercial mortgage loans in securitization or sales transactions in which we have continuing involvement. Our continuing involvement generally consists of servicing, repurchasing previously transferred loans under certain conditions and loss share arrangements, and, in limited circumstances, holding of mortgage-backed securities issued by the securitization 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 PNC retains the servicing, we recognize a servicing right at fair value. See Note 8 Goodwill and Intangible Assets for information on our servicing rights, including the carrying value of servicing assets.

The following table provides cash flows associated with PNC’s loan sale and servicing activities:

Table 42: Cash Flows Associated with Loan Sale and Servicing Activities

 

In millions   Residential
Mortgages
   

Commercial

Mortgages (a)

    Home Equity
Loans/Lines (b)
 

CASH FLOWS – Three months ended March 31, 2016

           

Sales of loans (c)

  $ 1,438      $ 650       

Repurchases of previously transferred loans (d)

    160           

Servicing fees (e)

    93        30      $ 3   

Servicing advances recovered/(funded), net

    28        31        24   

Cash flows on mortgage-backed securities held (f)

    352        105           

CASH FLOWS – Three months ended March 31, 2015

           

Sales of loans (c)

  $ 1,940      $ 1,020       

Repurchases of previously transferred loans (d)

    169          $ 2   

Servicing fees (e)

    83        32        4   

Servicing advances recovered/(funded), net

    (9     7        24   

Cash flows on mortgage-backed securities held (f)

    240        60           
(a) Represents cash flow information associated with both commercial mortgage loan transfer and servicing activities.
(b) These activities were part of an acquired brokered home equity lending business in which PNC is no longer engaged.
(c) Gains/losses recognized on sales of loans were insignificant for the periods presented.
(d) Includes residential mortgage government insured or guaranteed loans eligible for repurchase through the exercise of our Removal of Account Provision (ROAP) option, and loans repurchased due to alleged breaches of origination covenants or representations and warranties made to purchasers. Includes home equity lines of credit repurchased at the end of their draw periods due to contractual requirements.
(e) Includes contractually specified servicing fees, late charges and ancillary fees.
(f) Represents cash flows on securities we hold issued by a securitization SPE in which PNC transferred to and/or services loans. The carrying values of such securities held were $6.6 billion in residential mortgage-backed securities and $1.2 billion in commercial mortgage-backed securities at March 31, 2016 and $5.2 billion in residential mortgage-backed securities and $1.1 billion in commercial mortgage-backed securities at March 31, 2015. Additionally, at December 31, 2015, the carrying values of such securities held were $6.6 billion in residential mortgage-backed securities and $1.3 billion in commercial mortgage-backed securities.

 

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The table below 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 due to a breach in representations and warranties or a loss sharing arrangement associated with our continuing involvement with these loans. For more information regarding our recourse and repurchase obligations, including our reserve of estimated losses, see the Recourse and Repurchase Obligations section of Note 15 Commitments and Guarantees.

Table 43: Principal Balance, Delinquent Loans, and Net Charge-offs Related to Serviced Loans For Others

 

In millions   Residential
Mortgages
    Commercial
Mortgages (a)
    Home Equity
Loans/Lines (b)
 

March 31, 2016

           

Total principal balance

  $ 71,275      $ 51,369      $ 2,683   

Delinquent loans (c)

    1,693        1,051        896   

December 31, 2015

           

Total principal balance

  $ 72,898      $ 53,789      $ 2,806   

Delinquent loans (c)

    1,923        1,057        904   

Three months ended March 31, 2016

           

Net charge-offs (d)

  $ 26      $ 912      $ 7   

Three months ended March 31, 2015

           

Net charge-offs (d)

  $ 32      $ 107      $ 7   
(a) Represents information at the securitization level in which PNC has sold loans and is the servicer for the securitization.
(b) These activities were part of an acquired brokered home equity lending business in which PNC is no longer engaged.
(c) Serviced delinquent loans are 90 days or more past due or are in process of foreclosure.
(d) Net charge-offs for Residential mortgages and Home equity loans/lines represent credit losses less recoveries distributed and as reported to investors during the period. Net charge-offs for Commercial mortgages represent credit losses less recoveries distributed and as reported by the trustee for commercial mortgage backed securitizations. Realized losses for Agency securitizations are not reflected as we do not manage the underlying real estate upon foreclosure and, as such, do not have access to loss information.

Variable Interest Entities (VIEs)

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2015 Form 10-K, we are involved with various entities in the normal course of business that are deemed to be VIEs. The following provides a summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements as of March 31, 2016 and December 31, 2015, respectively. Amounts presented for March 31, 2016 are based on the assessments performed in accordance with ASC 810 as amended by ASU 2015-02. Specifically, the ASU modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or VOEs. We have not provided additional financial support to these entities which we are not contractually required to provide.

Table 44: Consolidated VIEs – Carrying Value (a)

 

March 31, 2016 (b)

In millions

  Total  

Assets

   

Equity investments

  $ 326   

Other assets

    41   

Total assets

  $ 367   

Total liabilities

  $ 9   

Noncontrolling interests

  $ 156   

 

December 31, 2015

In millions

  Total  

Assets

   

Cash and due from banks

  $ 11   

Interest-earning deposits with banks

    4   

Loans

    1,341   

Allowance for loan and lease losses

    (48

Equity investments

    183   

Other assets

    402   

Total assets

  $ 1,893   

Liabilities

   

Other borrowed funds

  $ 148   

Accrued expenses

    44   

Other liabilities

    202   

Total liabilities

  $ 394   

Noncontrolling interests

  $ 99   
(a) Amounts represent carrying value on PNC’s Consolidated Balance Sheet.
(b) Amounts for March 31, 2016 reflect the first quarter 2016 adoption of ASU 2015-02.

The following table provides a summary of non-consolidated VIEs with which we have significant continuing involvement but are not the primary beneficiary. We do not consider our continuing involvement to be significant when it relates to a VIE where we only invest in securities issued by the VIE and were not involved in the design of the VIE or where no transfers have occurred between PNC and the VIE. We have excluded certain transactions with non-consolidated VIEs from the balances presented in Table 45 where we have determined that our continuing involvement is not significant.

In addition, where PNC only has lending arrangements in the normal course of business with entities that could be VIEs, we have excluded these transactions with non-consolidated entities from the balances presented in Table 45. These loans are included as part of the asset quality disclosures that we make in Note 3 Asset Quality.

 

 

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Table 45: 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, 2016 (b)

           

Commercial Mortgage-Backed Securitizations (c)

  $ 1,420      $ 1,420 (d)     

Residential Mortgage-Backed Securitizations (c)

    6,579        6,579 (d)    $ 2 (f) 

Tax Credit Investments and Other

    3,004        2,918 (e)      743 (g) 

Total

  $ 11,003      $ 10,917      $ 745   

December 31, 2015

           

Commercial Mortgage-Backed Securitizations (c)

  $ 1,498      $ 1,498 (d)    $ 1 (f) 

Residential Mortgage-Backed Securitizations (c)

    6,680        6,680 (d)      1 (f) 

Tax Credit Investments and Other

    2,551        2,622 (e)      836 (g) 

Total

  $ 10,729      $ 10,800      $ 838   
(a) This represents loans, investments and other assets related to non-consolidated VIEs, net of collateral (if applicable).
(b) Amounts for March 31, 2016 reflect the first quarter 2016 adoption of ASU 2015-02.
(c) Amounts reflect involvement with securitization SPEs where PNC transferred to and/or services 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.
(d) Included in Trading securities, Investment securities, Other intangible assets and Other assets on our Consolidated Balance Sheet.
(e) Included in Loans, Equity investments and Other assets on our Consolidated Balance Sheet.
(f) Included in Other liabilities on our Consolidated Balance Sheet.
(g) Included in Deposits and Other liabilities on our Consolidated Balance Sheet.

Our involvement with VIEs is discussed further in detail in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2015 Form 10-K.

NOTE 3 ASSET QUALITY

We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency rates may be a key indicator, among other considerations, of credit risk within the loan portfolios. 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 exclude loans held for sale, purchased impaired loans, nonperforming loans and loans accounted for under the fair value option which are on nonaccrual status, but include government insured or guaranteed loans and accruing loans accounted for under the fair value option.

Nonperforming assets include nonperforming loans and leases, OREO and foreclosed assets, and nonperforming TDRs. 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 as these loans are accounted for at fair value. However, when nonaccrual criteria is met, interest income is not recognized on these loans. Additionally, certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest are not reported as nonperforming loans and continue to accrue interest. Purchased impaired loans are excluded from nonperforming loans as we are currently accreting interest income over the expected life of the loans. See Note 4 Purchased Loans for further information.

See Note 1 Accounting Policies for additional delinquency, nonperforming, and charge-off information.

 

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The following tables display the delinquency status of our loans and our nonperforming assets at March 31, 2016 and December 31, 2015, respectively.

Table 46: Analysis of Loan Portfolio (a)

 

    Accruing                          
Dollars in millions   Current or Less
Than 30 Days
Past Due
    30-59 Days
Past Due
    60-89 Days
Past Due
    90 Days
Or More
Past Due
    Total Past
Due (b)
    Nonperforming
Loans
    Fair Value Option
Nonaccrual
Loans (c)
    Purchased
Impaired
Loans
   

Total

Loans

(d) (e)

 

March 31, 2016

                             

Commercial Lending

                             

Commercial

  $ 98,593      $ 85      $ 18      $ 39      $ 142      $ 552          $ 29      $ 99,316   

Commercial real estate

    27,943        6        1            7        160            120        28,230   

Equipment lease financing

    7,543        21                        21        20                        7,584   

Total commercial lending

    134,079        112        19        39        170        732                149        135,130   

Consumer Lending

                             

Home equity

    29,079        57        27            84        957            1,338        31,458   

Residential real estate (f)

    11,322        139        61        506        706        536      $ 215        1,893        14,672   

Credit card

    4,668        25        17        32        74        4                4,746   

Other consumer (g)

    20,964        173        85        205        463        52                        21,479   

Total consumer lending

    66,033        394        190        743        1,327        1,549        215        3,231        72,355   

Total

  $ 200,112      $ 506      $ 209      $ 782      $ 1,497      $ 2,281      $ 215      $ 3,380      $ 207,485   

Percentage of total loans

    96.45     .24     .10     .38     .72     1.10     .10     1.63     100.00

December 31, 2015

                             

Commercial Lending

                             

Commercial

  $ 98,075      $ 69      $ 32      $ 45      $ 146      $ 351          $ 36      $ 98,608   

Commercial real estate

    27,134        10        4            14        187            133        27,468   

Equipment lease financing

    7,440        19        2                21        7                        7,468   

Total commercial lending

    132,649        98        38        45        181        545                169        133,544   

Consumer Lending

                             

Home equity

    29,656        63        30            93        977            1,407        32,133   

Residential real estate (f)

    10,918        142        65        566        773        549      $ 225        1,946        14,411   

Credit card

    4,779        28        19        33        80        3                4,862   

Other consumer (g)

    21,181        180        96        237        513        52                        21,746   

Total consumer lending

    66,534        413        210        836        1,459        1,581        225        3,353        73,152   

Total

  $ 199,183      $ 511      $ 248      $ 881      $ 1,640      $ 2,126      $ 225      $ 3,522      $ 206,696   

Percentage of total loans

    96.36     .25     .12     .43     .80     1.03     .11     1.70     100.00
(a) Amounts in table represent recorded investment and exclude loans held for sale. Recorded investment in a loan includes the unpaid principal balance plus accrued interest and net accounting adjustments, less any charge-offs. Recorded investment does not include any associated valuation allowance.
(b) Past due loan amounts exclude purchased impaired loans, even if contractually past due (or if we do not expect to receive payment in full based on the original contractual terms), as we are currently accreting interest income over the expected life of the loans.
(c) Consumer loans accounted for under the fair value option for which we do not expect to collect substantially all principal and interest are subject to nonaccrual accounting and classification upon meeting any of our nonaccrual policies. Given that these loans are not accounted for at amortized cost, these loans have been excluded from the nonperforming loan population.
(d) Net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.4 billion at both March 31, 2016 and December 31, 2015.
(e) Future accretable yield related to purchased impaired loans is not included in the analysis of loan portfolio.
(f) Past due loan amounts at March 31, 2016 include government insured or guaranteed Residential real estate mortgages totaling $62 million for 30 to 59 days past due, $44 million for 60 to 89 days past due and $483 million for 90 days or more past due. Past due loan amounts at December 31, 2015 include government insured or guaranteed Residential real estate mortgages totaling $56 million for 30 to 59 days past due, $45 million for 60 to 89 days past due and $545 million for 90 days or more past due.
(g) Past due loan amounts at March 31, 2016 include government insured or guaranteed Other consumer loans totaling $116 million for 30 to 59 days past due, $64 million for 60 to 89 days past due and $193 million for 90 days or more past due. Past due loan amounts at December 31, 2015 include government insured or guaranteed Other consumer loans totaling $116 million for 30 to 59 days past due, $75 million for 60 to 89 days past due and $220 million for 90 days or more past due.

 

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In the normal course of business, we originate or purchase loan products with contractual characteristics that, when concentrated, may increase our exposure as a holder of those loan products. Possible product features that may create a concentration of credit risk would include a high original or updated LTV ratio, terms that may expose the borrower to future increases in repayments above increases in market interest rates, and interest-only loans, among others. We also originate home equity and residential real estate loans that are concentrated in our primary geographic markets.

We originate interest-only loans to commercial borrowers. Such credit arrangements are usually designed to match borrower cash flow expectations (e.g., working capital lines, revolvers). These products are standard in the financial services industry and product features are considered during the underwriting process to mitigate the increased risk that the interest-only feature may result in borrowers not being able to make interest and principal payments when due. We do not believe that these product features create a concentration of credit risk.

At March 31, 2016, we pledged $21.3 billion of commercial loans to the Federal Reserve Bank (FRB) and $56.9 billion of residential real estate and other loans to the Federal Home Loan Bank (FHLB) as collateral for the contingent ability to borrow, if necessary. The comparable amounts at December 31, 2015 were $20.2 billion and $56.4 billion, respectively.

Table 47: Nonperforming Assets

 

Dollars in millions    March 31
2016
    December 31
2015
 

Nonperforming loans

      

Total commercial lending

   $ 732      $ 545   

Total consumer lending (a)

     1,549        1,581   

Total nonperforming loans (b)(c)

     2,281        2,126   

OREO and foreclosed assets

      

Other real estate owned (OREO)

     259        279   

Foreclosed and other assets

     12        20   

Total OREO and foreclosed assets

     271        299   

Total nonperforming assets

   $ 2,552      $ 2,425   

Nonperforming loans to total loans

     1.10     1.03

Nonperforming assets to total loans, OREO and foreclosed assets

     1.23        1.17   

Nonperforming assets to total assets

     .71        .68   
(a) Excludes most consumer loans and lines of credit, not secured by residential real estate, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.
(b) Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans.
(c) The recorded investment of loans collateralized by residential real estate property that are in process of foreclosure was $.5 billion and $.6 billion at March 31, 2016 and December 31, 2015, both included $.3 billion of loans that are government insured/guaranteed.

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

Total nonperforming loans in the nonperforming assets table above include TDRs of $1.2 billion at March 31, 2016 and $1.1 billion at December 31, 2015. TDRs that are performing, including consumer credit card TDR loans, totaled $1.2 billion at both March 31, 2016 and December 31, 2015, and are excluded from nonperforming loans. Nonperforming TDRs are returned to accrual and classified as performing after demonstrating a period of at least six months of consecutive performance under the restructured terms. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

Additional Asset Quality Indicators

We have two overall portfolio segments – Commercial Lending and Consumer Lending. Each of these two segments is comprised of multiple loan classes. Classes are characterized by similarities in initial measurement, risk attributes and the manner in which we monitor and assess credit risk. The Commercial Lending segment is comprised of the commercial, commercial real estate, equipment lease financing, and commercial purchased impaired loan classes. The Consumer Lending segment is comprised of the home equity, residential real estate, credit card, other consumer, and consumer purchased impaired loan classes.

 

 

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Commercial Lending Asset Classes

Commercial Loan Class

For commercial loans, we monitor the performance of the borrower in a disciplined and regular manner based upon the level of credit risk inherent in the loan. To evaluate the level of credit risk, we assign an internal risk rating reflecting the borrower’s PD and LGD. This two-dimensional credit risk rating methodology provides granularity in the risk monitoring process on an ongoing basis. These ratings are reviewed and updated, generally at least once per year. Additionally, no less frequently than on an annual basis, we review PD rates related to each rating grade based upon internal historical data. These rates are updated as needed and augmented by market data as deemed necessary. For small balance homogenous pools of commercial loans, mortgages and leases, we apply statistical modeling to assist in determining the probability of default within these pools. Further, on a periodic basis, we update our LGD estimates associated with each rating grade based upon historical data. The combination of the PD and LGD ratings assigned to a commercial loan, capturing both the combination of expectations of default and loss severity in event of default, reflects the relative estimated likelihood of loss for that loan at the reporting date. In general, loans with better PD and LGD tend to have a lower likelihood of loss compared to loans with worse PD and LGD. The loss amount also considers an estimate of exposure at date of default, which we also periodically update based upon historical data.

Based upon the amount of the lending arrangement and our risk rating assessment, we follow a formal schedule of written periodic review. Quarterly, we conduct formal reviews of a market’s or business unit’s entire loan portfolio, focusing on those loans which we perceive to be of higher risk, based upon PDs and LGDs, or loans for which credit quality is weakening. If circumstances warrant, it is our practice to review any customer obligation and its level of credit risk more frequently. We attempt to proactively manage our loans by using various procedures that are customized to the risk of a given loan, including ongoing outreach, contact, and assessment of obligor financial conditions, collateral inspection and appraisal.

Commercial Real Estate Loan Class

We manage credit risk associated with our commercial real estate projects and commercial mortgage activities similar to commercial loans by analyzing PD and LGD. Additionally, risks connected with commercial real estate projects and commercial mortgage activities tend to be correlated to the loan structure and collateral location, project progress and business environment. As a result, these attributes are also monitored and utilized in assessing credit risk.

As with the commercial class, a formal schedule of periodic review is also performed to assess market/geographic risk and business unit/industry risk. Often as a result of these overviews, more in-depth reviews and increased scrutiny are placed on areas of higher risk, including adverse changes in risk ratings, deteriorating operating trends, and/or areas that concern management. These reviews are designed to assess risk and take actions to mitigate our exposure to such risks.

Equipment Lease Financing Loan Class

We manage credit risk associated with our equipment lease financing loan class similar to commercial loans by analyzing PD and LGD.

Based upon the dollar amount of the lease and of the level of credit risk, we follow a formal schedule of periodic review. Generally, this occurs quarterly, although we have established practices to review such credit risk more frequently if circumstances warrant. Our review process entails analysis of the following factors: equipment value/residual value, exposure levels, jurisdiction risk, industry risk, guarantor requirements, and regulatory compliance.

Commercial Purchased Impaired Loan Class

Estimates of the expected cash flows primarily determine the valuation of commercial purchased impaired loans. Commercial cash flow estimates are influenced by a number of credit related items, which include but are not limited to: estimated collateral value, receipt of additional collateral, secondary trading prices, circumstances of possible and/or ongoing liquidation, capital availability, business operations and payment patterns.

We attempt to proactively manage these factors by using various procedures that are customized to the risk of a given loan. These procedures include a review by our Special Asset Committee (SAC), ongoing outreach, contact, and assessment of obligor financial conditions, collateral inspection and appraisal.

See Note 4 Purchased Loans for additional information.

 

 

 

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Table 48: Commercial Lending Asset Quality Indicators (a)(b)

 

            Criticized Commercial Loans         
In millions    Pass Rated      Special
Mention (c)
     Substandard (d)      Doubtful (e)      Total Loans  

March 31, 2016

                

Commercial

   $ 93,617       $ 1,837       $ 3,680       $ 153       $ 99,287   

Commercial real estate

     27,571         91         441         7         28,110   

Equipment lease financing

     7,245         100         231         8         7,584   

Purchased impaired loans

     23         2         100         24         149   

Total commercial lending

   $ 128,456       $ 2,030       $ 4,452       $ 192       $ 135,130   

December 31, 2015

                

Commercial

   $ 93,364       $ 2,029       $ 3,089       $ 90       $ 98,572   

Commercial real estate

     26,729         120         481         5         27,335   

Equipment lease financing

     7,230         87         150         1         7,468   

Purchased impaired loans

              6         157         6         169   

Total commercial lending

   $ 127,323       $ 2,242       $ 3,877       $ 102       $ 133,544   
(a) Based upon PDs and LGDs. We apply a split rating classification to certain loans meeting threshold criteria. By assigning a split classification, a loan’s exposure amount may be split into more than one classification category in the above table.
(b) Loans are included above based on the Regulatory Classification definitions of “Pass”, “Special Mention”, “Substandard” and “Doubtful”.
(c) Special Mention rated loans have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects at some future date. These loans do not expose us to sufficient risk to warrant a more adverse classification at this time.
(d) Substandard rated loans have a well-defined weakness or weaknesses that jeopardize the collection or liquidation of debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.
(e) Doubtful rated loans possess all the inherent weaknesses of a Substandard loan with the additional characteristics that the weakness makes collection or liquidation in full improbable due to existing facts, conditions, and values.

 

Consumer Lending Asset Classes

Home Equity and Residential Real Estate Loan Classes

We use several credit quality indicators, including delinquency information, nonperforming loan information, updated credit scores, originated and updated LTV ratios, and geography, to monitor and manage credit risk within the home equity and residential real estate loan classes. We evaluate mortgage loan performance by source originators and loan servicers. A summary of asset quality indicators follows:

Delinquency/Delinquency Rates: We monitor trending of delinquency/delinquency rates for home equity and residential real estate loans. See the Asset Quality section of this Note 3 for additional information.

Nonperforming Loans: We monitor trending of nonperforming loans for home equity and residential real estate loans. See the Asset Quality section of this Note 3 for additional information.

Credit Scores: We use a national third-party provider to update FICO credit scores for home equity loans and lines of credit and residential real estate loans at least quarterly. The updated scores are incorporated into a series of credit management reports, which are utilized to monitor the risk in the loan classes.

LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions): At least annually, we update the property values of real estate collateral and calculate an

updated LTV ratio. For open-end credit lines secured by real estate in regions experiencing significant declines in property values, more frequent valuations may occur. We examine LTV migration and stratify LTV into categories to monitor the risk in the loan classes.

Historically, we used, and we continue to use, a combination of original LTV and updated LTV for internal risk management and reporting purposes (e.g., line management, loss mitigation strategies). In addition to the fact that estimated property values by their nature are estimates, given certain data limitations it is important to note that updated LTVs may be based upon management’s assumptions (e.g., if an updated LTV is not provided by the third-party service provider, home price index (HPI) changes will be incorporated in arriving at management’s estimate of updated LTV).

Geography: Geographic concentrations are monitored to evaluate and manage exposures. Loan purchase programs are sensitive to, and focused within, certain regions to manage geographic exposures and associated risks.

A combination of updated FICO scores, originated and updated LTV ratios and geographic location assigned to home equity loans and lines of credit and residential real estate loans is used to monitor the risk in the loan classes. Loans with higher FICO scores and lower LTVs tend to have a lower level of risk. Conversely, loans with lower FICO scores, higher LTVs, and in certain geographic locations tend to have a higher level of risk.

 

 

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


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Consumer Purchased Impaired Loan Class

Estimates of the expected cash flows primarily determine the valuation of consumer purchased impaired loans. Consumer cash flow estimates are influenced by a number of credit related items, which include, but are not limited to: estimated real estate values, payment patterns, updated FICO scores, the current economic environment, updated LTV ratios and the date of origination. These key factors are monitored to help ensure that concentrations of risk are managed and cash flows are maximized.

See Note 4 Purchased Loans for additional information.

Table 49: Home Equity and Residential Real Estate Balances

 

In millions    March 31
2016
    December 31
2015
 

Home equity and residential real estate loans – excluding purchased impaired loans (a)

   $ 42,007      $ 42,268   

Home equity and residential real estate loans – purchased impaired loans (b)

     3,537        3,684   

Government insured or guaranteed residential real estate mortgages (a)

     892        923   

Difference between outstanding balance and recorded investment in purchased impaired loans

     (306     (331

Total home equity and residential real estate loans (a)

   $ 46,130      $ 46,544   
(a) Represents recorded investment.
(b) Represents outstanding balance.

Table 50: Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans (a) (b)

 

     Home Equity      Residential Real Estate          
March 31, 2016 – in millions    1st Liens      2nd Liens              Total  

Current estimated LTV ratios (c)

                 

Greater than or equal to 125% and updated FICO scores:

                 

Greater than 660

   $ 238       $ 917       $ 275       $ 1,430   

Less than or equal to 660 (d) (e)

     41         173         62         276   

Missing FICO

     1         6         3         10   

Greater than or equal to 100% to less than 125% and updated FICO scores:

                 

Greater than 660

     626         1,668         554         2,848   

Less than or equal to 660 (d) (e)

     87         286         98         471   

Missing FICO

     3         4         6         13   

Greater than or equal to 90% to less than 100% and updated FICO scores:

                 

Greater than 660

     682         1,449         596         2,727   

Less than or equal to 660

     94         217         81         392   

Missing FICO

     1         3         9         13   

Less than 90% and updated FICO scores:

                 

Greater than 660

     13,762         7,638         9,515         30,915   

Less than or equal to 660

     1,288         888         584         2,760   

Missing FICO

     33         16         103         152   

Total home equity and residential real estate loans

   $ 16,856       $ 13,265       $ 11,886       $ 42,007   

(continued on following page)

 

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(continued from previous page)

 

     Home Equity      Residential Real Estate          
December 31, 2015 – in millions    1st Liens      2nd Liens              Total  

Current estimated LTV ratios (c)

                 

Greater than or equal to 125% and updated FICO scores:

                 

Greater than 660

   $ 283       $ 960       $ 284       $ 1,527   

Less than or equal to 660 (d) (e)

     40         189         68         297   

Missing FICO

     1         8         5         14   

Greater than or equal to 100% to less than 125% and updated FICO scores:

                 

Greater than 660

     646         1,733         564         2,943   

Less than or equal to 660 (d) (e)

     92         302         102         496   

Missing FICO

     3         4         8         15   

Greater than or equal to 90% to less than 100% and updated FICO scores:

                 

Greater than 660

     698         1,492         615         2,805   

Less than or equal to 660

     88         226         94         408   

Missing FICO

     1         3         10         14   

Less than 90% and updated FICO scores:

                 

Greater than 660

     13,895         7,808         9,117         30,820   

Less than or equal to 660

     1,282         923         570         2,775   

Missing FICO

     31         18         105         154   

Total home equity and residential real estate loans

   $ 17,060       $ 13,666       $ 11,542       $ 42,268   
(a) Excludes purchased impaired loans of approximately $3.2 billion and $3.4 billion in recorded investment, certain government insured or guaranteed residential real estate mortgages of approximately $.9 billion and $.9 billion, and loans held for sale at March 31, 2016 and December 31, 2015, respectively. See the Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans table below for additional information on purchased impaired loans.
(b) Amounts shown represent recorded investment.
(c) Based upon updated LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions). Updated LTV is estimated using modeled property values. These ratios are updated at least semi-annually. The related estimates and inputs are based upon an approach that uses a combination of third-party automated valuation models (AVMs), broker price opinions (BPOs), HPI indices, property location, internal and external balance information, origination data and management assumptions. We generally utilize origination lien balances provided by a third-party, where applicable, which do not include an amortization assumption when calculating updated LTV. Accordingly, the results of these calculations do not represent actual appraised loan level collateral or updated LTV based upon lien balances held by others, and as such, are necessarily imprecise and subject to change as we enhance our methodology.
(d) Higher risk loans are defined as loans with both an updated FICO score of less than or equal to 660 and an updated LTV greater than or equal to 100%.
(e) The following states had the highest percentage of higher risk loans at March 31, 2016: New Jersey 15%, Pennsylvania 13%, Illinois 12%, Ohio 11%, Florida 7%, Maryland 6% and Michigan 5%. The remainder of the states had lower than 4% of the higher risk loans individually, and collectively they represent approximately 31% of the higher risk loans. The following states had the highest percentage of higher risk loans at December 31, 2015: New Jersey 14%, Pennsylvania 12%, Illinois 11%, Ohio 11%, Florida 7%, Maryland 7% and Michigan 5%. The remainder of the states had lower than 4% of the high risk loans individually, and collectively they represent approximately 33% of the higher risk loans.

 

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Table 51: Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans (a)

 

     Home Equity (b) (c)      Residential Real Estate (b) (c)          
March 31, 2016 – in millions    1st Liens      2nd Liens              Total  

Current estimated LTV ratios (d)

               

Greater than or equal to 125% and updated FICO scores:

               

Greater than 660

   $ 6       $ 157       $ 179       $ 342   

Less than or equal to 660

     5         71         73         149   

Missing FICO

        6         4         10   

Greater than or equal to 100% to less than 125% and updated FICO scores:

               

Greater than 660

     9         311         167         487   

Less than or equal to 660

     10         132         115         257   

Missing FICO

        8         7         15   

Greater than or equal to 90% to less than 100% and updated FICO scores:

               

Greater than 660

     9         161         120         290   

Less than or equal to 660

     6         72         70         148   

Missing FICO

        4         3         7   

Less than 90% and updated FICO scores:

               

Greater than 660

     115         335         617         1,067   

Less than or equal to 660

     87         176         443         706   

Missing FICO

     1         12         30         43   

Missing LTV and updated FICO scores:

               

Greater than 660

     1            11         12   

Less than or equal to 660

                       4         4   

Total home equity and residential real estate loans

   $ 249       $ 1,445       $ 1,843       $ 3,537   

(continued on following page)

 

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(continued from previous page)

 

     Home Equity (b) (c)      Residential Real Estate (b) (c)          
December 31, 2015 – in millions    1st Liens      2nd Liens              Total  

Current estimated LTV ratios (d)

               

Greater than or equal to 125% and updated FICO scores:

               

Greater than 660

   $ 6       $ 164       $ 147       $ 317   

Less than or equal to 660

     6         79         76         161   

Missing FICO

        7         5         12   

Greater than or equal to 100% to less than 125% and updated FICO scores:

               

Greater than 660

     12         331         186         529   

Less than or equal to 660

     9         145         118         272   

Missing FICO

        8         7         15   

Greater than or equal to 90% to less than 100% and updated FICO scores:

               

Greater than 660

     10         167         133         310   

Less than or equal to 660

     6         75         68         149   

Missing FICO

        4         3         7   

Less than 90% and updated FICO scores:

               

Greater than 660

     106         345         665         1,116   

Less than or equal to 660

     91         182         455         728   

Missing FICO

     1         13         31         45   

Missing LTV and updated FICO scores:

               

Greater than 660

     1            14         15   

Less than or equal to 660

     1            6         7   

Missing FICO

                       1         1   

Total home equity and residential real estate loans

   $ 249       $ 1,520       $ 1,915       $ 3,684   
(a) Amounts shown represent outstanding balance. See Note 4 Purchased Loans for additional information.
(b) For the estimate of cash flows utilized in our purchased impaired loan accounting, other assumptions and estimates are made, including amortization of first lien balances, pre-payment rates, etc., which are not reflected in this table.
(c) The following states had the highest percentage of purchased impaired loans at March 31, 2016: California 16%, Florida 14%, Illinois 11%, Ohio 9%, North Carolina 7%, and Michigan 5%. The remainder of the states had lower than a 4% concentration of purchased impaired loans individually, and collectively they represent approximately 38% of the purchased impaired portfolio. The following states had the highest percentage of purchased impaired loans at December 31, 2015: California 16%, Florida 14%, Illinois 11%, Ohio 9%, North Carolina 7% and Michigan 5%. The remainder of the states had lower than a 4% concentration of purchased impaired loans individually, and collectively they represent approximately 38% of the purchased impaired portfolio.
(d) Based upon updated LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions). Updated LTV is estimated using modeled property values. These ratios are updated at least semi-annually. The related estimates and inputs are based upon an approach that uses a combination of third-party automated valuation models (AVMs), broker price opinions (BPOs), HPI indices, property location, internal and external balance information, origination data and management assumptions. We generally utilize origination lien balances provided by a third-party, where applicable, which do not include an amortization assumption when calculating updated LTV. Accordingly, the results of these calculations do not represent actual appraised loan level collateral or updated LTV based upon lien balances held by others, and as such, are necessarily imprecise and subject to change as we enhance our methodology.

 

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Credit Card and Other Consumer Loan Classes

We monitor a variety of asset quality information in the management of the credit card and other consumer loan classes. Other consumer loan classes include education, automobile, and other secured and unsecured lines and loans. Along with the trending of delinquencies and losses for each class, FICO credit score updates are generally obtained monthly, as well as a variety of credit bureau attributes. Loans with high FICO scores tend to have a lower likelihood of loss. Conversely, loans with low FICO scores tend to have a higher likelihood of loss.

Table 52: Credit Card and Other Consumer Loan Classes Asset Quality Indicators

 

     Credit Card (a)      Other Consumer (b)  
Dollars in millions    Amount      % of Total Loans
Using FICO
Credit Metric
     Amount      % of Total Loans
Using FICO
Credit Metric
 

March 31, 2016

               

FICO score greater than 719

   $ 2,845         60    $ 9,424         65

650 to 719

     1,333         28         3,584         25   

620 to 649

     199         4         537         4   

Less than 620

     219         5         625         4   

No FICO score available or required (c)

     150         3         388         2   

Total loans using FICO credit metric

     4,746         100      14,558         100

Consumer loans using other internal credit metrics (b)

                       6,921            

Total loan balance

   $ 4,746                $ 21,479            

Weighted-average updated FICO score (d)

              734                  744   

December 31, 2015

               

FICO score greater than 719

   $ 2,936         60    $ 9,371         65

650 to 719

     1,346         28         3,534         24   

620 to 649

     202         4         523         4   

Less than 620

     227         5         604         4   

No FICO score available or required (c)

     151         3         501         3   

Total loans using FICO credit metric

     4,862         100      14,533         100

Consumer loans using other internal credit metrics (b)

                       7,213            

Total loan balance

   $ 4,862                $ 21,746            

Weighted-average updated FICO score (d)

              734                  744   
(a) At March 31, 2016, we had $33 million of credit card loans that are higher risk (i.e., loans with both updated FICO scores less than 660 and in late stage (90+ days) delinquency status). The majority of the March 31, 2016 balance related to higher risk credit card loans was geographically distributed throughout the following areas: Ohio 16%, Pennsylvania 16%, New Jersey 8%, Michigan 7%, Florida 7%, Illinois 6%, Indiana 5%, Maryland 5%, North Carolina 4%, and Kentucky 4%. All other states had less than 3% individually and make up the remainder of the balance. At December 31, 2015, we had $34 million of credit card loans that are higher risk. The majority of the December 31, 2015 balance related to higher risk credit card loans was geographically distributed throughout the following areas: Ohio 17%, Pennsylvania 15%, Michigan 8%, New Jersey 8%, Florida 7%, Illinois 6%, Indiana 6%, Maryland 4% and North Carolina 4%. All other states had less than 4% individually and make up the remainder of the balance.
(b) Other consumer loans for which updated FICO scores are used as an asset quality indicator include non-government guaranteed or insured education loans, automobile loans and other secured and unsecured lines and loans. Other consumer loans for which other internal credit metrics are used as an asset quality indicator include primarily government guaranteed or insured education loans, as well as consumer loans to high net worth individuals. Other internal credit metrics may include delinquency status, geography or other factors.
(c) Credit card loans and other consumer 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 portfolio and, when necessary, takes actions to mitigate the credit risk.
(d) Weighted-average updated FICO score excludes accounts with no FICO score available or required.

 

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


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Troubled Debt Restructurings (TDRs)

Table 53: Summary of Troubled Debt Restructurings

 

In millions    March 31
2016
     December 31
2015
 

Total commercial lending

   $ 500       $ 434   

Total consumer lending

     1,891         1,917   

Total TDRs

   $ 2,391       $ 2,351   

Nonperforming

   $ 1,172       $ 1,119   

Accruing (a)

     1,219         1,232   

Total TDRs

   $ 2,391       $ 2,351   
(a) Accruing loans include consumer credit card loans and loans that have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

We held specific reserves in the ALLL of $.3 billion at both March 31, 2016 and December 31, 2015, respectively, for the total TDR portfolio.

Table 54 quantifies the number of loans that were classified as TDRs as well as the change in the loans’ recorded investment as a result of becoming a TDR during the three months ended March 31, 2016 and March 31, 2015, respectively. Additionally, the table provides information about the types of TDR concessions. See Note 3 Asset Quality in our 2015 Form 10-K for additional discussion of TDR concessions.

 

 

Table 54: Financial Impact and TDRs by Concession Type (a)

 

During the three months ended March 31, 2016

Dollars in millions

  

Number
of Loans

    

Pre-TDR

Recorded
Investment (b)

     Post-TDR Recorded Investment (c)  
         Principal
Forgiveness (d)
     Rate
Reduction (e)
     Other (f)      Total  

Total commercial lending

     42       $ 168                $ 10       $ 142       $ 152   

Total consumer lending

     2,965         68                  44         20         64   

Total TDRs

     3,007       $ 236                $ 54       $ 162       $ 216   
       

During the three months ended March 31, 2015

Dollars in millions

                                               

Total commercial lending

     38       $ 63       $ 1       $ 2       $ 50       $ 53   

Total consumer lending

     2,738         71                  42         25         67   

Total TDRs

     2,776       $ 134       $ 1       $ 44       $ 75       $ 120   
(a) Impact of partial charge-offs at TDR date are included in this table.
(b) Represents the recorded investment of the loans as of the quarter end prior to TDR designation, and excludes immaterial amounts of accrued interest receivable.
(c) Represents the recorded investment of the TDRs as of the end of the quarter in which the TDR occurs, and excludes immaterial amounts of accrued interest receivable.
(d) Includes principal forgiveness and accrued interest forgiveness. These types of TDRs result in a write down of the recorded investment and a charge-off if such action has not already taken place.
(e) Includes reduced interest rate and interest deferral. The TDRs within this category result in reductions to future interest income.
(f) Primarily includes consumer borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC, as well as postponement/reduction of scheduled amortization and contractual extensions for both consumer and commercial borrowers.

After a loan is determined to be a TDR, we continue to track its performance under its most recent restructured terms. We consider a TDR to have subsequently defaulted when it becomes 60 days past due after the most recent date the loan was restructured. The recorded investment of loans that were both (i) classified as TDRs or were subsequently modified during each 12-month period preceding January 1, 2016 and January 1, 2015, respectively, and (ii) subsequently defaulted during the three months ended March 31, 2016 and March 31, 2015 totaled $27 million and $23 million, respectively.

See Note 3 Asset Quality in our 2015 Form 10-K for additional discussion on TDRs.

 

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


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Impaired Loans

Impaired loans include commercial nonperforming loans and consumer and commercial TDRs, regardless of nonperforming status. TDRs that were previously recorded at amortized cost and are now classified and accounted for as held for sale are also included. Excluded from impaired loans are nonperforming leases, loans accounted for as held for sale other than the TDRs described in the preceding sentence, loans accounted for under the fair value option, smaller balance homogeneous type loans and purchased impaired loans. See Note 4 Purchased Loans for additional information. Nonperforming equipment lease financing loans of $20 million and $7 million at March 31, 2016 and December 31, 2015, respectively, are excluded from impaired loans pursuant to authoritative lease accounting guidance. We did not recognize any interest income on impaired loans that have not returned to performing status, while they were impaired during the three months ended March 31, 2016 and March 31, 2015. The following table provides further detail on impaired loans individually evaluated for impairment and the associated ALLL. Certain commercial and consumer impaired loans do not have a related ALLL as the valuation of these impaired loans exceeded the recorded investment.

Table 55: Impaired Loans

 

In millions    Unpaid
Principal
Balance
     Recorded
Investment
     Associated
Allowance (a)
     Average
Recorded
Investment (b)
 

March 31, 2016

             

Impaired loans with an associated allowance

             

Commercial

   $ 468       $ 359       $ 134       $ 348   

Commercial real estate

     218         105         30         117   

Home equity

     1,036         929         205         920   

Residential real estate

     274         264         32         264   

Credit card

     107         106         23         107   

Other consumer

     31         24         1         25   

Total impaired loans with an associated allowance

   $ 2,134       $ 1,787       $ 425       $ 1,781   

Impaired loans without an associated allowance

             

Commercial

   $ 416       $ 316          $ 217   

Commercial real estate

     210         156            157   

Home equity

     409         179            192   

Residential real estate

     495         381            389   

Other consumer

     24         8                  8   

Total impaired loans without an associated allowance

   $ 1,554       $ 1,040                $ 963   

Total impaired loans

   $ 3,688       $ 2,827       $ 425       $ 2,744   

December 31, 2015

             

Impaired loans with an associated allowance

             

Commercial

   $ 442       $ 337       $ 84       $ 306   

Commercial real estate

     254         130         35         197   

Home equity

     978         909         216         965   

Residential real estate

     272         264         35         359   

Credit card

     108         108         24         118   

Other consumer

     31         26         1         32   

Total impaired loans with an associated allowance

   $ 2,085       $ 1,774       $ 395       $ 1,977   

Impaired loans without an associated allowance

             

Commercial

   $ 201       $ 118          $ 87   

Commercial real estate

     206         158            168   

Home equity

     464         206            158   

Residential real estate

     512         396            346   

Other consumer

     24         8                  8   

Total impaired loans without an associated allowance

   $ 1,407       $ 886                $ 767   

Total impaired loans

   $ 3,492       $ 2,660       $ 395       $ 2,744   
(a) Associated allowance amounts include $.3 billion for TDRs at both March 31, 2016 and December 31, 2015.
(b) Average recorded investment is for the three months ended March 31, 2016 and the year ended December 31, 2015, respectively.

 

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


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NOTE 4 PURCHASED LOANS

Purchased Impaired Loans

Purchased impaired loan accounting addresses differences between contractual cash flows and cash flows expected to be collected from the initial investment in loans if those differences are attributable, at least in part, to credit quality. Several factors were considered when evaluating whether a loan was considered a purchased impaired loan, including the delinquency status of the loan, updated borrower credit status, geographic information, and updated LTV. GAAP allows purchasers to account for loans individually or to aggregate purchased impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Purchased impaired homogeneous consumer, residential real estate and smaller balance

commercial loans with common risk characteristics are aggregated into pools where appropriate, whereas commercial loans with a total commitment greater than a defined threshold are accounted for individually. For pooled loans, proceeds of individual loans are not applied individually to each loan within a pool, but to the pool’s recorded investment since it is accounted for as a single asset.

Upon final disposition of a loan within a pool and for loans that have nominal collateral value/expected cash flows, the loan’s recorded investment is written-off and the associated ALLL is derecognized, thus removing it from the carrying value of the pool. Gains and losses on such loans are recognized as either an adjustment to the pool’s associated ALLL, or yield, as appropriate. For more information regarding our derecognition policy, see Note 1 Accounting Policies in our 2015 Form 10-K.

 

 

The following table provides balances of purchased impaired loans at March 31, 2016 and December 31, 2015:

Table 56: Purchased Impaired Loans – Balances

 

     March 31, 2016      December 31, 2015  
In millions   

Outstanding

Balance (a)

     Recorded
Investment
     Carrying
Value
    

Outstanding

Balance (a)

     Recorded
Investment
     Carrying
Value
 

Commercial lending

                   

Commercial

   $ 78       $ 29       $ 18       $ 94       $ 36       $ 24   

Commercial real estate

     128         120         81         155         133         96   

Total commercial lending

     206         149         99         249         169         120   

Consumer lending

                   

Consumer

     1,694         1,338         1,313         1,769         1,407         1,392   

Residential real estate

     1,843         1,893         1,656         1,915         1,946         1,700   

Total consumer lending

     3,537         3,231         2,969         3,684         3,353         3,092   

Total

   $ 3,743       $ 3,380       $ 3,068       $ 3,933       $ 3,522       $ 3,212   
(a) Outstanding balance represents the balance on the loan servicing system. Recorded investment may be greater than the outstanding balance due to expected recoveries of collateral.

 

The excess of undiscounted cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the loan using the constant effective yield method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and is not recognized in income. Subsequent changes in the expected cash flows of individual or pooled purchased impaired loans will either impact the accretable yield or result in an impairment charge to provision for credit losses in the period in which the changes become probable. Decreases to the net present value of expected cash flows will generally result in an impairment charge recorded as a provision for credit losses, resulting in an increase to the ALLL, and a reclassification from accretable yield to non-accretable difference.

At March 31, 2016 and December 31, 2015, the ALLL on total purchased impaired loans was $.3 billion. For purchased impaired loan pools where an allowance has been recognized, subsequent increases in the net present value of cash flows will result in a provision recapture of any previously recorded ALLL to the extent applicable, and/or a reclassification from non-accretable difference to accretable yield, which will be recognized prospectively. Individual loan transactions where final dispositions have occurred (as noted above) result in removal of the loans from their applicable pools for cash flow estimation purposes. The cash flow re-estimation process is completed quarterly to evaluate the appropriateness of the ALLL associated with the purchased impaired loans.

 

 

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Activity for the accretable yield during the first three months of 2016 and 2015 follows:

Table 57: Purchased Impaired Loans – Accretable Yield

 

In millions    2016      2015  

January 1

   $ 1,250       $ 1,558   

Accretion (including excess cash recoveries)

     (107      (132

Net reclassifications to accretable from non-accretable

     17         64   

Disposals

     (4      (6

March 31

   $ 1,156       $ 1,484   

NOTE 5 ALLOWANCES FOR LOAN AND LEASE LOSSES AND UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT

Allowance for Loan and Lease Losses

We maintain the ALLL at levels that we believe to be appropriate to absorb estimated probable credit losses incurred in the portfolios as of the balance sheet date. We use the two main portfolio segments – Commercial Lending and Consumer Lending – and develop and document the ALLL under separate methodologies for each of these segments as discussed in Note 1 Accounting Policies. A rollforward of the ALLL and associated loan data follows.

 

 

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Table 58: Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data

 

In millions    Commercial
Lending
     Consumer
Lending
     Total  

March 31, 2016

          

Allowance for Loan and Lease Losses

          

January 1

   $ 1,605       $ 1,122       $ 2,727   

Charge-offs

     (89      (147      (236

Recoveries

     46         41         87   

Net (charge-offs) / recoveries

     (43      (106      (149

Provision for credit losses

     84         68         152   

Net change in allowance for unfunded loan commitments and letters of credit

     (19      (2      (21

Net recoveries of purchased impaired loans

        1         1   

Other

     1                  1   

March 31

   $ 1,628       $ 1,083       $ 2,711   

TDRs individually evaluated for impairment

   $ 49       $ 261       $ 310   

Other loans individually evaluated for impairment

     115            115   

Loans collectively evaluated for impairment

     1,414         560         1,974   

Purchased impaired loans

     50         262         312   

March 31

   $ 1,628       $ 1,083       $ 2,711   

Loan Portfolio

          

TDRs individually evaluated for impairment (a)

   $ 500       $ 1,891       $ 2,391   

Other loans individually evaluated for impairment

     436            436   

Loans collectively evaluated for impairment (b)

     134,045         66,338         200,383   

Fair value option loans (c)

        895         895   

Purchased impaired loans

     149         3,231         3,380   

March 31

   $ 135,130       $ 72,355       $ 207,485   

Portfolio segment ALLL as a percentage of total ALLL

     60      40      100

Ratio of the allowance for loan and lease losses to total loans (d)

     1.20      1.50      1.31

March 31, 2015

          

Allowance for Loan and Lease Losses

          

January 1

   $ 1,571       $ 1,760       $ 3,331   

Charge-offs

     (46      (143      (189

Recoveries

     45         41         86   

Net charge-offs

     (1      (102      (103

Provision for credit losses

     (2      56         54   

Net change in allowance for unfunded loan commitments and letters of credit

     25            25   

Other

     (1               (1

March 31

   $ 1,592       $ 1,714       $ 3,306   

TDRs individually evaluated for impairment

   $ 47       $ 295       $ 342   

Other loans individually evaluated for impairment

     70            70   

Loans collectively evaluated for impairment

     1,395         638         2,033   

Purchased impaired loans

     80         781         861   

March 31

   $ 1,592       $ 1,714       $ 3,306   

Loan Portfolio

          

TDRs individually evaluated for impairment (a)

   $ 510       $ 2,020       $ 2,530   

Other loans individually evaluated for impairment

     278            278   

Loans collectively evaluated for impairment (b)

     128,611         67,627         196,238   

Fair value option loans (c)

        1,001         1,001   

Purchased impaired loans

     276         4,399         4,675   

March 31

   $ 129,675       $ 75,047       $ 204,722   

Portfolio segment ALLL as a percentage of total ALLL

     48      52      100

Ratio of the allowance for loan and lease losses to total loans

     1.23      2.28      1.61

 

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(a) TDRs individually evaluated for impairment exclude TDRs that were subsequently accounted for as held for sale loans, but continue to be disclosed as TDRs.
(b) Includes $143 million of loans collectively evaluated for impairment based upon collateral values and written down to the respective collateral value less costs to sell at March 31, 2016 Accordingly, there is no allowance recorded for these loans. The comparative amount as of March 31, 2015 was $183 million.
(c) Loans accounted for under the fair value option are not evaluated for impairment as these loans are accounted for at fair value. Accordingly, there is no allowance recorded on these loans.
(d) See Note 1 Accounting Policies in our 2015 Form 10-K for information on our change in derecognition policy effective December 31, 2015 for certain purchased impaired loans.

Allowance for Unfunded Loan Commitments and Letters of Credit

We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable credit losses incurred on these unfunded credit facilities as of the balance sheet date as discussed in Note 1 Accounting Policies. A rollforward of the allowance is presented below.

Table 59: Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit

 

In millions    2016      2015  

January 1

   $ 261       $ 259   

Net change in allowance for unfunded loan commitments and letters of credit

     21         (25

March 31

   $ 282       $ 234   

NOTE 6 INVESTMENT SECURITIES

Table 60: Investment Securities Summary

 

    

Amortized

Cost

     Unrealized     

Fair

Value

 
In millions       Gains      Losses     

March 31, 2016

             

Securities Available for Sale

             

Debt securities

             

U.S. Treasury and government agencies

   $ 10,237       $ 263       $ (28    $ 10,472   

Residential mortgage-backed

             

Agency

     25,241         466         (22      25,685   

Non-agency

     3,836         216         (101      3,951   

Commercial mortgage-backed

             

Agency

     1,851         22         (3      1,870   

Non-agency

     4,727         51         (35      4,743   

Asset-backed

     5,634         45         (54      5,625   

State and municipal

     1,954         91         (3      2,042   

Other debt

     2,562         57         (5      2,614   

Total debt securities

     56,042         1,211         (251      57,002   

Corporate stocks and other

     413                           413   

Total securities available for sale

   $ 56,455       $ 1,211       $ (251    $ 57,415   

Securities Held to Maturity (a)

             

Debt securities

             

U.S. Treasury and government agencies

   $ 260       $ 57          $ 317   

Residential mortgage-backed

             

Agency

     10,109         194       $ (7      10,296   

Non-agency

     227         11            238   

Commercial mortgage-backed

             

Agency

     1,121         48            1,169   

Non-agency

     683         18            701   

Asset-backed

     711            (11      700   

State and municipal

     1,943         145            2,088   

Other debt

     100                  (1      99   

Total securities held to maturity

   $ 15,154       $ 473       $ (19    $ 15,608   

(continued on following page)

 

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(continued from previous page)

 

    

Amortized

Cost

     Unrealized     

Fair

Value

 
In millions       Gains      Losses     

December 31, 2015

             

Securities Available for Sale

             

Debt securities

             

U.S. Treasury and government agencies

   $ 9,764       $ 152       $ (42    $ 9,874   

Residential mortgage-backed

             

Agency

     24,698         250         (128      24,820   

Non-agency

     3,992         247         (88      4,151   

Commercial mortgage-backed

             

Agency

     1,917         11         (10      1,918   

Non-agency

     4,902         30         (29      4,903   

Asset-backed

     5,417         54         (48      5,423   

State and municipal

     1,982         79         (5      2,056   

Other debt

     2,007         31         (12      2,026   

Total debt securities

     54,679         854         (362      55,171   

Corporate stocks and other

     590                  (1      589   

Total securities available for sale

   $ 55,269       $ 854       $ (363    $ 55,760   

Securities Held to Maturity (a)

             

Debt securities

             

U.S. Treasury and government agencies

   $ 258       $ 40          $ 298   

Residential mortgage-backed

             

Agency

     9,552         101       $ (65      9,588   

Non-agency

     233         8            241   

Commercial mortgage-backed

             

Agency

     1,128         40            1,168   

Non-agency

     722         6         (1      727   

Asset-backed

     717            (10      707   

State and municipal

     1,954         116            2,070   

Other debt

     204                  (1      203   

Total securities held to maturity

   $ 14,768       $ 311       $ (77    $ 15,002   
(a) Held to maturity securities transferred from available for sale are recorded in held to maturity at fair value at the time of transfer. The amortized cost of held to maturity securities included net unrealized gains of $90 million and $97 million at March 31, 2016 and December 31, 2015, respectively, related to securities transferred, which are offset in Accumulated Other Comprehensive Income, net of tax.

 

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the securities available for sale portfolio are included in Shareholders’ equity as Accumulated other comprehensive income or loss, net of tax, unless credit-related. Securities held to maturity are carried at amortized cost. At March 31, 2016, Accumulated other comprehensive income included pretax gains of $100 million from derivatives that hedged the purchase of investment securities classified as held to maturity. The gains will be accreted into interest income as an adjustment of yield on the securities.

Table 61 presents gross unrealized losses on securities available for sale at March 31, 2016 and December 31, 2015. The securities are segregated between investments that have 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. The table includes debt securities where a portion of other-than-temporary impairment (OTTI) has been recognized in Accumulated other comprehensive income (loss). The decrease in total unrealized losses at March 31, 2016 when compared to December 31, 2015 was due to a decline in market interest rates.

 

 

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Table 61: Gross Unrealized Loss and Fair Value of Securities Available for Sale

 

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

March 31, 2016

                   

Debt securities

                   

U.S. Treasury and government agencies

   $ (21    $ 3,195       $ (7    $ 637       $ (28    $ 3,832   

Residential mortgage-backed

                   

Agency

     (6      1,451         (16      1,153         (22      2,604   

Non-agency

     (8      392         (93      1,516         (101      1,908   

Commercial mortgage-backed

                   

Agency

     (a      71         (3      241         (3      312   

Non-agency

     (20      1,839         (15      693         (35      2,532   

Asset-backed

     (36      3,341         (18      477         (54      3,818   

State and municipal

     (2      219         (1      64         (3      283   

Other debt

     (3      160         (2      144         (5      304   

Total debt securities

     (96      10,668         (155      4,925         (251      15,593   

Corporate stocks and other

                       (a      15         (a      15   

Total

   $ (96    $ 10,668       $ (155    $ 4,940       $ (251    $ 15,608   

December 31, 2015

                   

Debt securities

                   

U.S. Treasury and government agencies

   $ (40    $ 5,885       $ (2    $ 120       $ (42    $ 6,005   

Residential mortgage-backed

                   

Agency

     (103      11,799         (25      1,094         (128      12,893   

Non-agency

     (3      368         (85      1,527         (88      1,895   

Commercial mortgage-backed

                   

Agency

     (7      745         (3      120         (10      865   

Non-agency

     (22      2,310         (7      807         (29      3,117   

Asset-backed

     (30      3,477         (18      494         (48      3,971   

State and municipal

     (3      326         (2      60         (5      386   

Other debt

     (8      759         (4      188         (12      947   

Total debt securities

     (216      25,669         (146      4,410         (362      30,079   

Corporate stocks and other

     (a      46         (1      15         (1      61   

Total

   $ (216    $ 25,715       $ (147    $ 4,425       $ (363    $ 30,140   
(a) The unrealized loss on these securities was less than $.5 million.

 

The gross unrealized loss on debt securities held to maturity was $19 million at March 31, 2016, with $6 million of the loss related to securities with a fair value of $.6 billion that had been in a continuous loss position less than 12 months and $13 million of the loss related to securities with a fair value of $1.7 billion that had been in a continuous loss position for more than 12 months. The gross unrealized loss on debt securities held to maturity was $82 million at December 31, 2015, with $59 million of the loss related to securities with a fair value of $5.5 billion that had been in a continuous loss position less than 12 months and $23 million of the loss related to securities with a fair value of $953 million that had been in a continuous loss position for more than 12 months. For securities transferred to held to maturity from available for sale, the unrealized loss for purposes of this analysis is determined by comparing the security’s original amortized cost to its current estimated fair value.

Evaluating Investment Securities for Other-than-Temporary Impairments

For the securities in the preceding Table 61, as of March 31, 2016 we do not intend to sell and believe we will not be required to sell the securities prior to recovery of the amortized cost basis.

As more fully described in Note 6 Investment Securities in our 2015 Form 10-K, at least quarterly, we conduct a comprehensive security-level assessment on all securities. For those securities in an unrealized loss position we determine if OTTI exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. An OTTI loss must be recognized for a debt security in an unrealized loss position if we intend to sell the security or it is more likely than not we will be required to sell the security

 

 

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prior to recovery of its amortized cost basis. Even if we do not expect to sell the security, we must evaluate the expected cash flows to be received to determine if we believe a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in accumulated other comprehensive income (loss). See Note 6 Investment Securities in our 2015 Form 10-K for additional details on this quarterly assessment.

For those securities on our balance sheet where we determined losses represented OTTI, we have recorded cumulative credit losses of $1.1 billion at March 31, 2016. During 2016 and 2015, the OTTI credit losses recognized in noninterest income and the OTTI noncredit losses recognized in accumulated other comprehensive income (loss), net of tax, on securities were not significant.

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

Table 62: Gains (Losses) on Sales of Securities Available for Sale

 

In millions    Proceeds      Gross
Gains
     Gross
Losses
     Net
Gains
     Tax
Expense
 

Three months ended March 31

                

2016

   $ 788       $ 9       $       $ 9       $ 3   

2015

   $ 1,804       $ 43       $ (1    $ 42       $ 15   

The following table presents, by remaining contractual maturity, the amortized cost, fair value and weighted-average yield of debt securities at March 31, 2016.

Table 63: Contractual Maturity of Debt Securities

 

March 31, 2016

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

   $ 953      $ 4,466      $ 3,756      $ 1,062      $ 10,237   

Residential mortgage-backed

            

Agency

       128        919        24,194        25,241   

Non-agency

       3          3,833        3,836   

Commercial mortgage-backed

            

Agency

     21        124        252        1,454        1,851   

Non-agency

     50        28        8        4,641        4,727   

Asset-backed

     18        1,622        1,814        2,180        5,634   

State and municipal

     2        127        348        1,477        1,954   

Other debt

     206        1,916        298        142        2,562   

Total debt securities available for sale

   $ 1,250      $ 8,414      $ 7,395      $ 38,983      $ 56,042   

Fair value

   $ 1,256      $ 8,529      $ 7,510      $ 39,707      $ 57,002   

Weighted-average yield, GAAP basis

     2.79     2.19     2.32     2.90     2.71 % 

Securities Held to Maturity

            

U.S. Treasury and government agencies

         $ 260      $ 260   

Residential mortgage-backed

            

Agency

     $ 7      $ 376        9,726        10,109   

Non-agency

           227        227   

Commercial mortgage-backed

            

Agency

   $ 118        824        122        57        1,121   

Non-agency

           683        683   

Asset-backed

       2        589        120        711   

State and municipal

       62        948        933        1,943   

Other debt

             100                        100   

Total debt securities held to maturity

   $ 118      $ 995      $ 2,035      $ 12,006      $ 15,154   

Fair value

   $ 118      $ 1,030      $ 2,128      $ 12,332      $ 15,608   

Weighted-average yield, GAAP basis

     3.02     3.48     3.26     3.44     3.42 % 

 

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Weighted-average yields are based on historical cost with effective yields weighted for the contractual maturity of each security. At March 31, 2016, there were no securities of a single issuer, other than FHLMC and FNMA, that exceeded 10% of Total shareholders’ equity. The FHLMC investments had a total amortized cost of $4.8 billion and fair value of $4.9 billion. The FNMA investments had a total amortized cost of $22.8 billion and fair value of $23.2 billion.

The following table presents the fair value of securities that have been either pledged to or accepted from others to collateralize outstanding borrowings.

Table 64: Fair Value of Securities Pledged and Accepted as Collateral

 

In millions    March 31
2016
     December 31
2015
 

Pledged to others

   $ 11,047       $ 9,674   

Accepted from others:

       

Permitted by contract or custom to sell or repledge

     1,003         1,100   

Permitted amount repledged to others

     843         943   

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

NOTE 7 FAIR VALUE

Fair Value Measurement

PNC measures certain financial assets and liabilities at fair value in accordance with GAAP. Fair value is defined in GAAP as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date. GAAP focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also establishes a fair value hierarchy to maximize the use of observable inputs when measuring fair value. For more information regarding the fair value hierarchy see Note 7 Fair Value in our 2015 Form 10-K.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

For more information on the valuation methodologies used to measure assets and liabilities at fair value on a recurring basis, see Note 7 Fair Value in our 2015 Form 10-K. The following table summarizes our assets and liabilities measured at fair value on a recurring basis, including instruments for which PNC has elected the fair value option.

 

 

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Table 65: Fair Value Measurements – Recurring Basis Summary

 

    March 31, 2016     December 31, 2015  
In millions   Level 1     Level 2     Level 3     Total Fair
Value
    Level 1     Level 2     Level 3     Total Fair
Value
 

Assets

                   

Securities available for sale

                   

U.S. Treasury and government agencies

  $ 9,859      $ 613        $ 10,472      $ 9,267      $ 607        $ 9,874   

Residential mortgage-backed

                   

Agency

      25,685          25,685          24,820          24,820   

Non-agency

      141      $ 3,810        3,951          143      $ 4,008        4,151   

Commercial mortgage-backed

                   

Agency

      1,870          1,870          1,918          1,918   

Non-agency

      4,743          4,743          4,903          4,903   

Asset-backed

      5,174        451        5,625          4,941        482        5,423   

State and municipal

      2,028        14        2,042          2,041        15        2,056   

Other debt

            2,584        30        2,614                1,996        30        2,026   

Total debt securities

    9,859        42,838        4,305        57,002        9,267        41,369        4,535        55,171   

Corporate stocks and other

    350        63                413        527        62                589   

Total securities available for sale

    10,209        42,901        4,305        57,415        9,794        41,431        4,535        55,760   

Financial derivatives (a) (b)

                   

Interest rate contracts

    2        6,634        38        6,674          4,626        29        4,655   

Other contracts

            253        3        256                284        2        286   

Total financial derivatives

    2        6,887        41        6,930                4,910        31        4,941   

Residential mortgage loans held for sale (c)

      776        4        780          838        5        843   

Trading securities (d)

                   

Debt

    762        1,108        2        1,872        987        727        3        1,717   

Equity

    12                        12        9                        9   

Total trading securities

    774        1,108        2        1,884        996        727        3        1,726   

Residential mortgage servicing rights

        863        863            1,063        1,063   

Commercial mortgage servicing rights

        460        460            526        526   

Commercial mortgage loans held for sale (c)

        655        655            641        641   

Equity investments – direct investments

        1,156        1,156            1,098        1,098   

Equity investments – indirect investments (e) (f)

          347              347   

Customer resale agreements (g)

      138          138          137          137   

Loans (h)

      566        329        895          565        340        905   

Other assets

                   

BlackRock Series C Preferred Stock (i)

        208        208            357        357   

Other

    250        195        6        451        254        199        7        460   

Total other assets

    250        195        214        659        254        199        364        817   

Total assets

  $ 11,235      $ 52,571      $ 8,029      $ 72,182      $ 11,044      $ 48,807      $ 8,606      $ 68,804   

Liabilities

                   

Financial derivatives (b) (j)

                   

Interest rate contracts

  $ 3      $ 4,654      $ 10      $ 4,667      $ 1      $ 3,124      $ 7      $ 3,132   

BlackRock LTIP

        208        208            357        357   

Other contracts

            245        115        360                204        109        313   

Total financial derivatives

    3        4,899        333        5,235        1        3,328        473        3,802   

Trading securities sold short (k)

                   

Debt

    847        9                856        960        27                987   

Total trading securities sold short

    847        9                856        960        27                987   

Other borrowed funds

      55        8        63          81        12        93   

Other liabilities

                    14        14                        10        10   

Total liabilities

  $ 850      $ 4,963      $ 355      $ 6,168      $ 961      $ 3,436      $ 495      $ 4,892   

 

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


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(a) Included in Other assets on the Consolidated Balance Sheet.
(b) Amounts at March 31, 2016 and December 31, 2015, are presented gross and are not reduced by the impact of legally enforceable master netting agreements that allow PNC to net positive and negative positions and cash collateral held or placed with the same counterparty. At March 31, 2016 and December 31, 2015, the net asset amounts were $2.5 billion and $1.8 billion, respectively, and the net liability amounts were $.5 billion and $.6 billion, respectively.
(c) Included in Loans held for sale on the Consolidated Balance Sheet. PNC has elected the fair value option for certain residential and commercial mortgage loans held for sale.
(d) Fair value includes net unrealized gains of $49 million at March 31, 2016 compared with net unrealized gains of $23 million at December 31, 2015.
(e) In accordance with ASC 820-10, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the Consolidated Balance Sheet.
(f) The indirect equity funds are not redeemable, but PNC receives distributions over the life of the partnership from liquidation of the underlying investments by the investee, which we expect to occur over the next twelve years. The amount of unfunded contractual commitments as of March 31, 2016 related to indirect equity investments was $111 million and related to direct equity investments was $22 million, respectively. Comparable amounts at December 31, 2015 were $103 million and $23 million, respectively.
(g) Included in Federal funds sold and resale agreements on the Consolidated Balance Sheet. PNC has elected the fair value option for these items.
(h) Included in Loans on the Consolidated Balance Sheet.
(i) PNC has elected the fair value option for these shares.
(j) Included in Other liabilities on the Consolidated Balance Sheet.
(k) Included in Other borrowed funds on the Consolidated Balance Sheet.

Reconciliations of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the three months ended March 31, 2016 and 2015 follow:

Table 66: Reconciliation of Level 3 Assets and Liabilities

Three Months Ended March 31, 2016

 

          

Total realized / unrealized

gains or losses for the period (a)

                                                    

Unrealized

gains /losses

on assets and

liabilities held

on Consolidated

Balance Sheet at

Mar. 31, 2016

(a) (b)

 

Level 3 Instruments Only

In millions

  Fair Value
Dec. 31,
2015
    Included in
Earnings
    Included in Other
comprehensive
income
    Purchases     Sales     Issuances     Settlements     Transfers
into
Level 3
    Transfers
out of
Level 3
    Fair
Value
Mar. 31,
2016
   

Assets

                         

Securities available for sale

                         

Residential mortgage-backed non-agency

  $ 4,008      $ 22      $ (45         $ (175       $ 3,810      $ (1

Asset-backed

    482        3        (12           (22         451       

State and municipal

    15          (1                 14       

Other debt

    30                      $ 2      $ (2                                     30           

Total securities available for sale

    4,535        25        (58     2        (2             (197                     4,305        (1

Financial derivatives

    31        34                (24         41        28   

Residential mortgage loans held for sale

    5            3        (1       $ 2      $ (5     4       

Trading securities – Debt

    3                  (1         2       

Residential mortgage servicing rights

    1,063        (226       52        $ 11        (37         863        (225

Commercial mortgage servicing rights

    526        (55       3          9        (23         460        (55

Commercial mortgage loans held for sale

    641        16            (649     647              655        12   

Equity investments – direct investments

    1,098        51          23        (16             1,156        50   

Loans

    340        2          33        (8       (25       (13     329        1   

Other assets

                         

BlackRock Series C

                         

Preferred Stock

    357        (11             (138         208        (11

Other

    7        2        (2             (1                                     6           

Total other assets

    364        (9     (2             (1             (138                     214        (11

Total assets

  $ 8,606      $ (162 ) (c)    $ (60   $ 116      $ (677   $ 667      $ (445   $ 2      $ (18   $ 8,029      $ (201 ) (d) 

Liabilities

                         

Financial derivatives (e)

  $ 473      $ 7          $ 2        $ (149       $ 333      $ 8   

Other borrowed funds

    12              $ 23        (27         8       

Other liabilities

    10                                        38        (34                     14           

Total liabilities

  $ 495      $ (c)                    $ 2      $ 61      $ (210                   $ 355      $ (d) 

(continued on following page)

 

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Table of Contents

Three Months Ended March 31, 2015

 

Level 3 Instruments Only

In millions

 

Fair Value
Dec. 31,
2014

          

Purchases

   

Sales

   

Issuances

   

Settlements

   

Transfers
into
Level 3

   

Transfers
out of
Level 3

   

Fair
Value
Mar. 31,
2015

   

Unrealized
gains / losses

on assets and
liabilities held
on Consolidated
Balance Sheet at
Mar. 31, 2015

(a)(b)

 
    Total realized / unrealized gains
or losses for the period (a)
                 
    Included in
Earnings
    Included in Other
comprehensive
income
                 

Assets

                                                                                       

Securities available for sale

                       

Residential mortgage-backed non-agency

  $ 4,798      $ 25      $ (14         $ (185       $ 4,624      $ (1

Commercial mortgage-backed non-agency

      7                (7          

Asset-backed

    563        6        4              (25         548       

State and municipal

    134          (1                 133       

Other debt

    30        1              $ 3                        (1                     33           

Total securities available for sale

    5,525        39        (11     3                        (218                     5,338        (1

Financial derivatives

    42        71          1            (60         54        59   

Residential mortgage loans held for sale

    6            6            $ 1      $ (6     7       

Trading securities – Debt

    32                  (29         3       

Residential mortgage servicing rights

    845        (67       83        $ 17        (39         839        (65

Commercial mortgage servicing rights

    506        (16       11          14        (21         494        (16

Commercial mortgage loans held for sale

    893        21          $ (1,020     1,083        (2         975        15   

Equity investments – direct investments

    1,152        29          43        (75             1,149        18   

Loans

    397        10          32        (4       (37     5        (20     383        8   

Other assets

                       

BlackRock Series C Preferred Stock

    375        9                      384        9   

Other

    15                                (5                                     10           

Total other assets

    390        9                        (5                                     394        9   

Total assets

  $ 9,788      $ 96  (c)    $ (11   $ 179      $ (1,104   $ 1,114      $ (406   $ 6      $ (26   $ 9,636      $ 27  (d) 

Liabilities

                       

Financial derivatives (e)

  $ 526      $ 41              $ (38       $ 529      $ (6

Other borrowed funds

    181              $ 25        (35         171       

Other liabilities

    9        1                                                                10           

Total liabilities

  $ 716      $ 42  (c)                            $ 25      $ (73                   $ 710      $ (6 ) (d) 
(a) Losses for assets are bracketed while losses for liabilities are not.
(b) The amount of the total gains or losses for the period included in earnings that is attributable to the change in unrealized gains or losses related to those assets and liabilities held at the end of the reporting period.
(c) Net losses (realized and unrealized) included in earnings relating to Level 3 assets and liabilities were $169 million for the first three months of 2016 compared with net gains (realized and unrealized) of $54 million for the first three months of 2015. These amounts also included amortization and accretion. The amortization and accretion amounts were included in Interest income on the Consolidated Income Statement, and the remaining net gains/(losses) (realized and unrealized) were included in Noninterest income on the Consolidated Income Statement.
(d) Net unrealized losses relating to those assets and liabilities held at the end of the reporting period were $209 million for the first three months of 2016, compared with net unrealized gains of $33 million for the first three months of 2015. These amounts were included in Noninterest income on the Consolidated Income Statement.
(e) Includes swaps entered into in connection with sales of certain Visa Class B common shares.

An instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification (transfer) of assets or liabilities between hierarchy levels. PNC’s policy is to recognize transfers in and transfers out as of the end of the reporting period. There were no significant transfers into or out of Level 3 assets and liabilities during the first three months of 2016 and 2015.

 

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


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Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities follows.

Table 67: Fair Value Measurements – Recurring Quantitative Information

March 31, 2016

 

Level 3 Instruments Only                                
Dollars in millions    Fair Value      Valuation Techniques    Unobservable Inputs    Range (Weighted Average)      

Residential mortgage-backed non-agency securities

   $ 3,810      

Priced by a third-party vendor using a discounted cash flow

pricing model (a)

  

Constant prepayment rate (CPR)

Constant default rate (CDR)

Loss severity

Spread over the benchmark curve (b)

  

1.0%-24.2%(7.0%)

0.0%-16.7%(5.4%)

10.0%-98.5%(53.3%)

283bps weighted average

  

(a)

(a)

(a)

(a)

 

Asset-backed securities

     451      

Priced by a third-party vendor using a discounted cash flow

pricing model (a)

  

Constant prepayment rate (CPR)

Constant default rate (CDR)

Loss severity

Spread over the benchmark curve (b)

  

1.0%-14.0%(6.3%)

1.7%-13.9%(6.7%)

24.2%-100%(77.8%)

397bps weighted average

  

(a)

(a)

(a)

(a)

 

Residential mortgage servicing rights

     863       Discounted cash flow   

Constant prepayment rate (CPR)

Spread over the benchmark curve (b)

  

0.3%-36.6%(15.7%)

171bps-1,856bps (882bps)

    
 

Commercial mortgage servicing rights

     460       Discounted cash flow    Constant prepayment rate (CPR) Discount rate   

5.4%-42.0%(7.3%)

5.1%-7.5%(7.4%)

    
 

Commercial mortgage loans held for sale

     655       Discounted cash flow   

Spread over the benchmark curve (b)

Estimated servicing cash flows

   64bps-5,540bps (561bps) 0.0%-6.5%(3.0%)     
 

Equity investments  – Direct investments

     1,156       Multiple of adjusted earnings    Multiple of earnings    4.5x-13.8x (8.0x)     
 

Loans – Residential real estate

     126       Consensus pricing (c)   

Cumulative default rate

Loss severity Discount rate

  

2.0%-100%(81.5%)

0.0%-100%(25.5%)

4.9%-7.0%(5.2%)

    
 
     110       Discounted cash flow   

Loss severity

 

Discount rate

  

8.0% weighted average

 

3.8% weighted average

    
 

Loans – Home equity

     93       Consensus pricing (c)    Credit and Liquidity discount    26.0%-99.0%(55.0%)     
 

BlackRock Series C Preferred Stock

     208       Consensus pricing (c)    Liquidity discount    20.0%     
 

BlackRock LTIP

     (208    Consensus pricing (c)    Liquidity discount    20.0%     
 

Swaps related to sales of certain Visa Class B common shares

     (109    Discounted cash flow   

Estimated conversion factor of

Class B shares into Class A shares

Estimated growth rate of Visa Class A share price

  

164.3%

18.0%

    
 

Insignificant Level 3 assets, net of liabilities (d)

     59                 
 

Total Level 3 assets, net of liabilities (e)

   $ 7,674                       

(continued on following page)

 

 

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


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(continued from previous page)

December 31, 2015

 

Level 3 Instruments Only

Dollars in millions

                               
   Fair Value      Valuation Techniques    Unobservable Inputs    Range (Weighted Average)      

Residential mortgage-backed non-agency securities

   $ 4,008       Priced by a third-party vendor using a discounted cash flow pricing model (a)   

Constant prepayment rate (CPR)

Constant default rate (CDR)

Loss severity

Spread over the benchmark curve (b)

  

1.0%-24.2%(7.0%)

0.0%-16.7%(5.4%)

10.0%-98.5%(53.3%)

241bps weighted average

  

(a)

(a)

(a)

(a)

 

Asset-backed securities

     482       Priced by a third-party vendor using a discounted cash flow pricing model (a)   

Constant prepayment rate (CPR)

Constant default rate (CDR)

Loss severity

Spread over the benchmark curve (b)

  

1.0%-14.0%(6.3%)

1.7%-13.9%(6.8%)

24.2%-100.0%(77.5%)

324bps weighted average

  

(a)

(a)

(a)

(a)

 

Residential mortgage servicing rights

     1,063       Discounted cash flow    Constant prepayment rate (CPR)    0.3%-46.5%(10.6%)     
         Spread over the benchmark curve (b)    559bps-1,883bps (893bps)     
 

Commercial mortgage servicing rights

     526       Discounted cash flow    Constant prepayment rate (CPR)    3.9%-26.5%(5.7%)     
         Discount rate    2.6%-7.7%(7.5%)     
 

Commercial mortgage loans held for sale

     641       Discounted cash flow    Spread over the benchmark curve (b)    85bps-4,270bps (547bps)     
         Estimated servicing cash flows    0.0%-7.0%(0.9%)     
 

Equity investments – Direct investments

     1,098       Multiple of adjusted earnings    Multiple of earnings    4.2x-14.1x (7.6x)     
 

Loans – Residential real estate

     123       Consensus pricing (c)    Cumulative default rate    2.0%-100.0%(85.1%)     
         Loss severity    0.0%-100.0%(27.3%)     
         Discount rate    4.9%-7.0%(5.2%)     
     116       Discounted cash flow    Loss severity    8.0% weighted average     
         Discount rate    3.9% weighted average     
 

Loans – Home equity

     101       Consensus pricing (c)    Credit and Liquidity discount    26.0%-99.0%(54.0%)     
 

BlackRock Series C Preferred Stock

     357       Consensus pricing (c)    Liquidity discount    20.0%     
 

BlackRock LTIP

     (357    Consensus pricing (c)    Liquidity discount    20.0%     
 

Swaps related to sales of certain Visa Class B common shares

     (104    Discounted cash flow    Estimated conversion factor of
Class B shares into Class A shares
   164.3%     
         Estimated growth rate of Visa
Class A share price
   16.3%     
 

Insignificant Level 3 assets, net of
liabilities (d)

     57                 
 

Total Level 3 assets, net of liabilities (e)

   $ 8,111                       

 

(a) Level 3 residential mortgage-backed non-agency and asset-backed securities with fair values as of March 31, 2016 totaling $3,197 million and $419 million, respectively, were priced by a third-party vendor using a discounted cash flow pricing model that incorporates consensus pricing, where available. The comparable amounts as of December 31, 2015 were $3,379 million and $448 million, respectively. The significant unobservable inputs for these securities were provided by the third-party vendor and are disclosed in the table. Our procedures to validate the prices provided by the third-party vendor related to these securities are discussed further in the Assets and Liabilities Measured at Fair Value on a Recurring Basis section of Note 7 Fair Value in our 2015 Form 10-K. Certain Level 3 residential mortgage-backed non-agency and asset-backed securities with fair values as of March 31, 2016 of $613 million and $32 million, respectively, were valued using a pricing source, such as a dealer quote or comparable security price, for which the significant unobservable inputs used to determine the price were not reasonably available. The comparable amounts as of December 31, 2015 were $629 million and $34 million, respectively.
(b) The assumed yield spread over the benchmark curve for each instrument is generally intended to incorporate non-interest-rate risks, such as credit and liquidity risks.
(c) Consensus pricing refers to fair value estimates that are generally internally developed using information such as dealer quotes or other third-party provided valuations or comparable asset prices.
(d) Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes certain financial derivative assets and liabilities, trading securities, state and municipal securities, other debt securities, residential mortgage loans held for sale, other assets, other borrowed funds (ROAPs) and other liabilities. For additional information, please see the Assets and Liabilities Measured at Fair Value on a Recurring Basis discussion included in Note 7 Fair Value in our 2015 Form 10-K.
(e) Consisted of total Level 3 assets of $8,029 million and total Level 3 liabilities of $355 million as of March 31, 2016 and $8,606 million and $495 million as of December 31, 2015, respectively.

 

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


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Financial Assets Accounted for at Fair Value on a Nonrecurring Basis

We may be required to measure certain financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment and are included in Table 68 and Table 69. For more information regarding the valuation methodologies of our financial assets measured at fair value on a nonrecurring basis, see Note 7 Fair Value in our 2015 Form 10-K.

Table 68: Fair Value Measurements – Nonrecurring

 

    Fair Value (a)    

Gains (Losses)

Three months ended

 
In millions   March 31
2016
    December 31
2015
    March 31
2016
    March 31
2015
 

Assets

         

Nonaccrual loans

  $ 87      $ 30      $ (47   $ 3   

Equity investments

    1        5        (4     (1

OREO and foreclosed assets

    70        137        (8     (10

Long-lived assets held for sale

    6        23        (3     (8

Total assets

  $ 164      $ 195      $ (62   $ (16
(a) All Level 3 as of March 31, 2016 and December 31, 2015.

Quantitative information about the significant unobservable inputs within Level 3 nonrecurring assets follows.

Table 69: Fair Value Measurements – Nonrecurring Quantitative Information

 

Level 3 Instruments Only

Dollars in millions

  Fair Value      Valuation Techniques    Unobservable Inputs    Range (Weighted  Average)

March 31, 2016

            

Assets

            

Nonaccrual loans (a)

  $ 62       LGD percentage (b)    Loss severity    6.7%-62.7%(33.8%)

Equity investments

    1       Discounted cash flow    Market rate of return    5.0%

Other (c)

    101       Fair value of property or collateral    Appraised value/sales price    Not meaningful
 

 

 

            

Total assets

  $ 164                  

December 31, 2015

            

Assets

            

Nonaccrual loans (a)

  $ 20       LGD percentage (b)    Loss severity    8.1%-73.3%(58.6%)

Equity investments

    5       Discounted cash flow    Market rate of return    5.0%

Other (c)

    170       Fair value of property or collateral    Appraised value/sales price    Not meaningful
 

 

 

            

Total assets

  $ 195                  
(a) The fair value of nonaccrual loans included in this line item is determined based on internal loss rates. The fair value of nonaccrual loans where the fair value is determined based on the appraised value or sales price is included within Other, below.
(b) LGD percentage represents the amount that PNC expects to lose in the event a borrower defaults on an obligation.
(c) Other included Nonaccrual loans of $25 million, OREO and foreclosed assets of $70 million and Long-lived assets held for sale of $6 million as of March 31, 2016. Comparably, as of December 31, 2015, Other included Nonaccrual loans of $10 million, OREO and foreclosed assets of $137 million and Long-lived assets held for sale of $23 million. The fair value of these assets is determined based on appraised value or sales price, the range of which is not meaningful to disclose.

 

Financial Instruments Accounted For Under Fair Value Option

We elect the fair value option to account for certain financial instruments. For more information on these financial instruments for which the fair value option election has been made, please refer to Note 7 Fair Value in our 2015 Form 10-K.

The changes in fair value for items for which we elected the fair value option are included in Noninterest income and Noninterest expense on the Consolidated Income Statement and are as follows:

Table 70: Fair Value Option – Changes in Fair Value (a)

 

     Gains (Losses) Three
months ended
 
In millions    March 31
2016
    March 31
2015
 

Assets

      

Commercial mortgage loans held for sale

   $ 27      $ 25   

Residential mortgage loans held for sale

     47        46   

Residential mortgage loans – portfolio

     6        16   

BlackRock Series C Preferred Stock

     (11     9   

Other assets

     (16     1   
(a) The impact on earnings of offsetting hedged items or hedging instruments is not reflected in these amounts.
 

 

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Fair values and aggregate unpaid principal balances of items for which we elected the fair value option follow.

Table 71: Fair Value Option – Fair Value and Principal Balances

 

In millions    Fair Value      Aggregate Unpaid
Principal Balance
     Difference  

March 31, 2016

          

Assets

          

Customer resale agreements

   $ 138       $ 134       $ 4   

Residential mortgage loans held for sale

          

Performing loans

     767         731         36   

Accruing loans 90 days or more past due

     4         4        

Nonaccrual loans

     9         9            

Total

     780         744         36   

Commercial mortgage loans held for sale (a)

          

Performing loans

     652         657         (5

Nonaccrual loans

     3         5         (2

Total

     655         662         (7

Residential mortgage loans – portfolio

          

Performing loans

     270         313         (43

Accruing loans 90 days or more past due

     410         410        

Nonaccrual loans

     215         361         (146

Total

     895         1,084         (189

Other assets

     167         172         (5

Liabilities

          

Other borrowed funds

   $ 63       $ 64       $ (1

December 31, 2015

          

Assets

          

Customer resale agreements

   $ 137       $ 133       $ 4   

Residential mortgage loans held for sale

          

Performing loans

     832         804         28   

Accruing loans 90 days or more past due

     4         4        

Nonaccrual loans

     7         8         (1

Total

     843         816         27   

Commercial mortgage loans held for sale (a)

          

Performing loans

     639         659         (20

Nonaccrual loans

     2         3         (1

Total

     641         662         (21

Residential mortgage loans – portfolio

          

Performing loans

     204         260         (56

Accruing loans 90 days or more past due

     475         478         (3

Nonaccrual loans

     226         361         (135

Total

     905         1,099         (194

Other assets

     164         159         5   

Liabilities

          

Other borrowed funds

   $ 93       $ 95       $ (2
(a) There were no accruing loans 90 days or more past due within this category at March 31, 2016 or December 31, 2015.

 

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Additional Fair Value Information Related to Other Financial Instruments

The following table presents the carrying amounts and estimated fair values, including the level within the fair value hierarchy, of all other financial instruments that are not measured on the consolidated financial statements at fair value as of March 31, 2016 and December 31, 2015.

Table 72: Additional Fair Value Information Related to Other Financial Instruments

 

             Fair Value  
In millions   

Carrying

Amount

     Total      Level 1      Level 2      Level 3  

March 31, 2016

                

Assets

                

Cash and due from banks

   $ 3,861       $ 3,861       $ 3,861           

Short-term assets

     31,787         31,787          $ 31,787        

Securities held to maturity

     15,154         15,608         317         15,285       $ 6   

Loans held for sale

     106         109            94         15   

Net loans (excludes leases)

     196,280         199,002               199,002   

Other assets

     1,767         2,298                  1,748         550 (a) 

Total assets

   $ 248,955       $ 252,665       $ 4,178       $ 48,914       $ 199,573   

Liabilities

                

Demand, savings and money market deposits

   $ 231,304       $ 231,304          $ 231,304        

Time deposits

     19,055         19,132            19,132        

Borrowed funds

     53,545         54,109            52,775       $ 1,334   

Unfunded loan commitments and letters of credit

     263         263               263   

Other liabilities

     53         53                  53            

Total liabilities

   $ 304,220       $ 304,861                $ 303,264       $ 1,597   

December 31, 2015

                

Assets

                

Cash and due from banks

   $ 4,065       $ 4,065       $ 4,065           

Short-term assets

     32,959         32,959          $ 32,959        

Securities held to maturity

     14,768         15,002         298         14,698       $ 6   

Loans held for sale

     56         56            22         34   

Net loans (excludes leases)

     195,579         197,611               197,611   

Other assets

     1,817         2,408                  1,786         622 (a) 

Total assets

   $ 249,244       $ 252,101       $ 4,363       $ 49,465       $ 198,273   

Liabilities

                

Demand, savings and money market deposits

   $ 228,492       $ 228,492          $ 228,492        

Time deposits

     20,510         20,471            20,471        

Borrowed funds

     53,761         54,002            52,578       $ 1,424   

Unfunded loan commitments and letters of credit

     245         245                           245   

Total liabilities

   $ 303,008       $ 303,210                $ 301,541       $ 1,669   
(a) Represents estimated fair value of Visa Class B common shares, which was estimated solely based upon the March 31, 2016 and December 31, 2015 closing price for the Visa Class A common shares, respectively, and the Visa Class B common share conversion rate, which reflects adjustments in respect of all litigation funding by Visa as of that date. The transfer restrictions on the Visa Class B common shares could impact the aforementioned estimate, until they can be converted to Class A common shares. See Note 21 Commitments and Guarantees in our 2015 Form 10-K for additional information.

 

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The aggregate fair values in the preceding table represent only a portion of the total market value of PNC’s assets and liabilities as, in accordance with the guidance related to fair values of financial instruments, Table 72 excludes the following:

   

financial instruments recorded at fair value on a recurring basis,

   

real and personal property,

   

lease financing,

   

loan customer relationships,

   

deposit customer intangibles,

   

mortgage servicing rights,

   

retail branch networks,

   

fee-based businesses, such as asset management and brokerage, and

   

trademarks and brand names.

For more information regarding the methods and assumptions used to estimate the fair values of financial instruments included in Table 72, see Note 7 Fair Value in our 2015 Form 10-K.

NOTE 8 GOODWILL AND INTANGIBLE ASSETS

Goodwill

See Note 8 Goodwill and Intangible Assets of our 2015 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. MSRs are purchased or originated when loans are sold with servicing retained. MSRs totaled $1.3 billion and $1.6 billion at March 31, 2016 and December 31, 2015, respectively, and consisted of loan servicing contracts for commercial and residential mortgages measured at fair value.

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

See the Sensitivity Analysis section of this Note 8, as well as Note 7 Fair Value for more detail on our fair value measurement of MSRs. Refer to Note 8 Goodwill and Intangible Assets in our 2015 Form 10-K for more information on our accounting and measurement of MSRs.

Changes in the commercial and residential MSRs follow:

 

 

Table 73: Mortgage Servicing Rights

 

    Commercial MSRs     Residential MSRs  
In millions   2016     2015     2016     2015  

January 1

  $ 526      $ 506      $ 1,063      $ 845   

Additions:

         

From loans sold with servicing retained

    9        14        11        17   

Purchases

    3        11        52        83   

Changes in fair value due to:

         

Time and payoffs (a)

    (23     (21     (37     (39

Other (b)

    (55     (16     (226     (67

March 31

  $ 460      $ 494      $ 863      $ 839   

Related unpaid principal balance at March 31

  $ 143,922      $ 143,724      $ 124,839      $ 112,932   

Servicing advances at March 31

  $ 220      $ 292      $ 383      $ 510   
(a) Represents decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period.
(b) Represents MSR value changes resulting primarily from market-driven changes in interest rates.

Sensitivity Analysis

The fair value of commercial and residential MSRs and significant inputs to the valuation models as of March 31, 2016 are shown in the tables below. 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.

 

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A sensitivity analysis of the hypothetical effect on the fair value of MSRs to adverse changes in key assumptions is presented below. 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 (for example, changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the interest rate spread), which could either magnify or counteract the sensitivities.

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

Table 74: Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions

 

Dollars in millions   March 31     December 31  
  2016     2015  

Fair value

  $ 460      $   526   

Weighted-average life (years)

    4.6        4.7   

Weighted-average constant prepayment rate

    7.30     5.71

Decline in fair value from 10% adverse change

  $ 10      $ 10   

Decline in fair value from 20% adverse change

  $ 19      $ 19   

Effective discount rate

    7.38     7.49

Decline in fair value from 10% adverse change

  $ 13      $ 14   

Decline in fair value from 20% adverse change

  $ 26      $ 29   

Table 75: Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions

 

    March 31     December 31  
Dollars in millions   2016     2015  

Fair value

  $ 863      $ 1,063   

Weighted-average life (years)

    4.8        6.3   

Weighted-average constant prepayment rate

    15.71     10.61

Decline in fair value from 10% adverse change

  $ 48      $ 44   

Decline in fair value from 20% adverse change

  $ 92      $ 85   

Weighted-average option adjusted spread

    8.82     8.93

Decline in fair value from 10% adverse change

  $ 26      $ 34   

Decline in fair value from 20% adverse change

  $ 51      $ 67   

Fees from mortgage loan servicing, which includes contractually specified servicing fees, late fees and ancillary fees, follows:

Table 76: Fees from Mortgage Loan Servicing

 

In millions    2016      2015  

Three months ended March 31

   $ 129       $ 121   

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 on our Consolidated Income Statement in the line items Corporate services and Residential mortgage, respectively.

Other Intangible Assets

Other intangible assets consist primarily of core deposit intangibles, customer lists and non-compete agreements. See Note 8 Goodwill and Intangible Assets of our 2015 Form 10-K for more information regarding our other intangible assets.

 

 

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NOTE 9 CERTAIN EMPLOYEE BENEFIT AND STOCK BASED COMPENSATION PLANS

Pension And Postretirement Plans

As described in Note 12 Employee Benefit Plans in our 2015 Form 10-K, we have a noncontributory, qualified defined benefit pension plan covering eligible employees. Benefits are determined using a cash balance formula where earnings credits are a percentage of eligible compensation. Any pension contributions to the plan are based on an actuarially determined amount necessary to fund total benefits payable to plan participants.

We also maintain nonqualified supplemental retirement plans for certain employees and provide certain health care and life insurance benefits for qualifying retired employees (postretirement benefits) through various plans. PNC reserves the right to terminate or make changes to these plans at any time. The nonqualified pension is unfunded.

The components of our net periodic pension and postretirement benefit cost for the first three months of 2016 and 2015, respectively, were as follows:

Table 77: Net Periodic Pension and Postretirement Benefit Costs

 

    Qualified
Pension Plan
    Nonqualified
Retirement
Plans
    Postretirement
Benefit
 
Three months ended March 31                                    
In millions   2016     2015     2016     2015     2016     2015  

Net periodic cost consists of:

             

Service cost

  $ 26      $ 27          $ 1      $ 1   

Interest cost

    46        44      $ 3      $ 3        4        4   

Expected return on plan assets

    (70     (74         (1    

Amortization of prior service credit

    (2     (2          

Amortization of actuarial losses

    11        7        1        2                   

Net periodic cost/(benefit)

  $ 11      $ 2      $ 4      $ 5      $ 4      $ 5   

Stock Based Compensation Plans

As more fully described in Note 13 Stock Based Compensation Plans in our 2015 Form 10-K, we have long-term incentive award plans (Incentive Plans) that provide for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, incentive shares/performance units, restricted shares, restricted share units, other share-based awards and dollar-denominated awards to executives and, other than incentive stock options, to non-employee directors. Certain Incentive Plan awards may be paid in stock, cash or a combination of stock and cash. We typically grant a substantial portion of our stock-based compensation awards during the first quarter of the year. As of March 31, 2016, no stock appreciation rights were outstanding.

Total compensation expense recognized related to all share-based payment arrangements during the first three months of 2016 and 2015 was $13 million and $40 million, respectively. At March 31, 2016, there was $314 million of unamortized share-based compensation expense related to nonvested equity compensation arrangements granted under the Incentive Plans. This unamortized cost is expected to be recognized as expense over a period of no longer than five years.

Nonqualified Stock Options

Additional information regarding PNC stock options is more fully described in Note 13 Stock Based Compensation Plans in our 2015 Form 10-K.

 

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The following table represents the stock option activity for the first three months of 2016.

Table 78: Stock Options – Rollforward

 

    PNC     PNC Options Converted
From National City Options
    Total  
In thousands, except weighted-average data   Shares     Weighted-Average
Exercise Price
    Shares     Weighted-Average
Exercise Price
    Shares     Weighted-Average
Exercise Price
 

Outstanding at December 31, 2015

    4,931      $ 55.50        243      $ 522.54        5,174      $ 77.47   

Granted (a)

               

Exercised

    (49     63.82              (49     63.82   

Cancelled

                    (3     372.30        (3     372.30   

Outstanding and Exercisable at March 31, 2016

    4,882      $ 55.42        240      $ 524.27        5,122      $ 77.44   
(a) PNC did not grant any stock options in the first three months of 2016.

Incentive/Performance Unit Awards and Restricted Share/Restricted Share Unit Awards

Information on incentive/performance unit share awards and restricted share/restricted share unit awards is more fully described in Note 13 Stock Based Compensation Plans in our 2015 Form 10-K.

Table 79: Nonvested Incentive/Performance Unit Awards and Restricted Share/Restricted Share Unit Awards – Rollforward

 

Shares in thousands    Nonvested
Incentive/
Performance
Unit Shares
     Weighted-
Average
Grant
Date Fair
Value
     Nonvested
Restricted
Share/
Restricted
Share
Units
     Weighted-
Average
Grant
Date Fair
Value
 

December 31, 2015

     1,830       $ 79.27         3,333       $ 79.26   

Granted (a)

     776         77.71         1,264         78.22   

Vested/Released (a)

     (691      71.55         (897      64.00   

Forfeited

                       (30      79.65   

March 31, 2016

     1,915       $ 81.42         3,670       $ 82.63   
(a) Includes adjustments for achieving specific performance goals for Incentive/Performance Unit Share awards granted in prior periods.

 

In the preceding table, the units and related weighted-average grant date fair value of the incentive/performance unit share awards exclude the effect of dividends on the underlying shares, as those dividends will be paid in cash if and when the underlying shares are issued to the participants.

Liability Awards

A summary of all nonvested, cash-payable incentive/performance units and restricted share unit activity follows:

Table 80: Nonvested Cash-Payable Incentive/Performance Units and Restricted Share Units – Rollforward

 

In thousands    Cash-Payable
Incentive/
Performance
Units
     Cash-Payable
Restricted
Share Units
     Total  

Outstanding at December 31, 2015

     117         664         781   

Granted (a)

     85         395         480   

Vested and Released (a)

     (94      (327      (421

Forfeited

              (4      (4

Outstanding at March 31, 2016

     108         728         836   
(a) Includes adjustments for achieving specific performance goals for Cash-Payable Incentive/Performance Units granted in prior periods.

Included in the preceding table are cash-payable restricted share units granted to certain executives. These grants were made primarily as part of an annual bonus incentive deferral plan. While there are time-based and other vesting criteria, there are generally no market or performance criteria associated with these awards. Prior to the 2015 grant, compensation expense recognized related to these awards was recorded in prior periods as part of the annual cash bonus process. Due to certain requisite service period changes in the award agreements starting with the 2015 grant (for the 2014 performance year), compensation expense is recognized ratably over a four-year period commensurate with the performance year plus the three years of service-based vesting requirements. As of March 31, 2016, the aggregate intrinsic value of all outstanding nonvested cash-payable incentive/performance units and restricted share units was approximately $71 million.

 

 

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NOTE 10 FINANCIAL DERIVATIVES

We use derivative financial instruments (derivatives) primarily to help manage exposure to interest rate, market and credit risk and reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. We also enter into derivatives with customers to facilitate their risk management activities. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract.

For more information regarding derivatives see Note 1 Accounting Policies and Note 14 Financial Derivatives in our Notes To Consolidated Financial Statements under Item 8 of our 2015 Form 10-K.

The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by PNC:

Table 81: Total Gross Derivatives

 

    March 31, 2016     December 31, 2015  
In millions   Notional/
Contract
Amount
    Asset
Fair
Value (a)
    Liability
Fair
Value (b)
    Notional/
Contract
Amount
    Asset
Fair
Value (a)
    Liability
Fair
Value (b)
 

Derivatives designated as hedging instruments under GAAP

  $ 51,508      $ 1,663      $ 301      $ 52,074      $ 1,159      $ 174   

Derivatives not designated as hedging instruments under GAAP

    316,988        5,267        4,934        295,902        3,782        3,628   

Total gross derivatives

  $ 368,496      $ 6,930      $ 5,235      $ 347,976      $ 4,941      $ 3,802   
(a) Included in Other assets on our Consolidated Balance Sheet.
(b) Included in Other liabilities on our Consolidated Balance Sheet.

 

All derivatives are carried on our Consolidated Balance Sheet at fair value. Derivative balances are presented on the Consolidated Balance Sheet on a net basis taking into consideration the effects of legally enforceable master netting agreements and, when appropriate, any related cash collateral exchanged with counterparties. Further discussion regarding the offsetting rights associated with these legally enforceable master netting agreements is included in the Offsetting, Counterparty Credit Risk, and Contingent Features section below. Any nonperformance risk, including credit risk, is included in the determination of the estimated net fair value of the derivatives.

Derivatives Designated As Hedging Instruments under GAAP

Certain derivatives used to manage interest rate and foreign exchange risk as part of our asset and liability risk management activities are designated as accounting hedges under GAAP. Derivatives hedging the risks associated with changes in the fair value of assets or liabilities are considered fair value hedges, derivatives hedging the variability of expected future cash flows are considered cash flow hedges, and derivatives hedging a net investment in a foreign subsidiary are considered net investment hedges. Designating derivatives as accounting hedges allows for gains and losses on those derivatives, to the extent effective, to be recognized in the income statement in the same period the hedged items affect earnings.

 

 

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Further detail regarding the notional amounts and fair values related to derivatives designated in hedge relationships is presented in the following table:

Table 82: Derivatives Designated As Hedging Instruments under GAAP

 

    March 31, 2016     December 31, 2015  
In millions   Notional/
Contract
Amount
    Asset
Fair
Value (a)
    Liability
Fair
Value (b)
    Notional/
Contract
Amount
    Asset
Fair
Value (a)
    Liability
Fair
Value (b)
 

Interest rate contracts:

             

Fair value hedges:

             

Receive-fixed swaps

  $ 25,928      $ 1,064        $ 25,756      $ 699      $ 18   

Pay-fixed swaps (c)

    5,934              $ 301        5,934        13        153   

Subtotal

    31,862        1,064        301        31,690        712        171   

Cash flow hedges:

             

Receive-fixed swaps

    17,413        534          17,879        412        2   

Forward purchase commitments

    1,150        6                1,400        4        1   

Subtotal

    18,563        540          19,279        416        3   

Foreign exchange contracts:

             

Net investment hedges

    1,083        59                1,105        31           

Total derivatives designated as hedging instruments

  $ 51,508      $ 1,663      $ 301      $ 52,074      $ 1,159      $ 174   
(a) Included in Other assets on our Consolidated Balance Sheet.
(b) Included in Other liabilities on our Consolidated Balance Sheet.
(c) Includes zero-coupon swaps.

Fair Value Hedges

We enter into receive-fixed, pay-variable interest rate swaps to hedge changes in the fair value of outstanding fixed-rate debt caused by fluctuations in market interest rates. We also enter into pay-fixed, receive-variable interest rate swaps and zero-coupon swaps to hedge changes in the fair value of fixed rate and zero-coupon investment securities caused by fluctuations in market interest rates. For these hedge relationships, we use statistical regression analysis to assess hedge effectiveness at both the inception of the hedge relationship and on an ongoing basis. There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness.

Further detail regarding gains (losses) on fair value hedge derivatives and related hedged items is presented in the following table:

Table 83: Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges

 

            Three months ended  
            March 31, 2016     March 31, 2015  
In millions   Hedged Items   Location   Gain
(Loss) on
Derivatives
Recognized
in Income
    Gain
(Loss) on
Related
Hedged
Items
Recognized
in Income
    Gain
(Loss) on
Derivatives
Recognized
in Income
    Gain
(Loss) on
Related
Hedged
Items
Recognized
in Income
 

Interest rate contracts

 

U.S. Treasury and Government

Agencies Securities

and Other Debt

Securities

  Investment securities (interest income)   $ (154   $ 158      $ (52   $ 54   

Interest rate contracts

  Subordinated debt and Bank notes and senior debt  

Borrowed funds

(interest expense)

    407        (432     157        (172

Total (a)

          $ 253      $ (274   $ 105      $ (118
(a) The ineffective portion of the change in value of our fair value hedge derivatives resulted in net losses of $21 million for the first three months of 2016 compared with net losses of $13 million for the first three months of 2015.

 

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Cash Flow Hedges

We enter into receive-fixed, pay-variable interest rate swaps to modify the interest rate characteristics of designated commercial loans from variable to fixed in order to reduce the impact of changes in future cash flows due to market interest rate changes. For these cash flow hedges, any changes in the fair value of the derivatives that are effective in offsetting changes in the forecasted interest cash flows are recorded in Accumulated other comprehensive income and are reclassified to interest income in conjunction with the recognition of interest received on the loans. In the 12 months that follow March 31, 2016, we expect to reclassify from the amount currently reported in Accumulated other comprehensive income, net derivative gains of $198 million pretax, or $129 million after-tax, in association with interest received on the hedged loans. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to March 31, 2016. The maximum length of time over which forecasted loan cash flows are hedged is 6 years. We use statistical regression analysis to assess the effectiveness of these hedge relationships at both the inception of the hedge relationship and on an ongoing basis.

We also periodically enter into forward purchase and sale contracts to hedge the variability of the consideration that will be paid or received related to the purchase or sale of investment securities. The forecasted purchase or sale is consummated upon gross settlement of the forward contract itself. As a result, hedge ineffectiveness, if any, is typically minimal. Gains and losses on these forward contracts are recorded in Accumulated other comprehensive income and are recognized in earnings when the hedged cash flows affect earnings. In the 12 months that follow March 31, 2016, we expect to reclassify from the amount currently reported in Accumulated other comprehensive income, net derivative gains of $45 million pretax, or $29 million after-tax, as adjustments of yield on investment securities. As of March 31, 2016, the maximum length of time over which forecasted purchase contracts are hedged is 2 months.

There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to either cash flow hedge strategy.

During the first three months of 2016 and 2015, there were no gains or losses from cash flow hedge derivatives reclassified to earnings because it became probable that the original forecasted transaction would not occur.

 

 

Further detail regarding gains (losses) on derivatives and related cash flows is presented in the following table:

Table 84: Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges (a) (b)

 

     Three months ended
March 31
 
In millions    2016      2015  

Gains (losses) on derivatives recognized in OCI – (effective portion)

   $ 265       $ 298   

Less: Gains (losses) reclassified from accumulated OCI into income – (effective portion)

       

Interest income

     65         68   

Noninterest income

              (9

Total gains (losses) reclassified from accumulated OCI into income – (effective portion)

   $ 65       $ 59   

Net unrealized gains (losses) on cash flow hedge derivatives

   $ 200       $ 239   
(a) All cash flow hedge derivatives are interest rate contracts as of March 31, 2016 and March 31, 2015.
(b) The amount of cash flow hedge ineffectiveness recognized in income was not material for the periods presented.

 

Net Investment Hedges

We enter into foreign currency forward contracts to hedge non-U.S. Dollar (USD) net investments in foreign subsidiaries against adverse changes in foreign exchange rates. We assess whether the hedging relationship is highly effective in achieving offsetting changes in the value of the hedge and hedged item by qualitatively verifying that the critical terms of the hedge and hedged item match at the inception of the hedging relationship and on an ongoing basis. Net investment hedge derivatives are classified as foreign exchange contracts. There were no components of derivative gains or losses excluded from the assessment of the hedge effectiveness. During the first three months of 2016 and 2015, there was no

net investment hedge ineffectiveness. Gains (losses) on net investment hedge derivatives recognized in OCI was net gains of $29 million for the three months ended March 31, 2016 compared with net gains of $54 million at March 31, 2015.

Derivatives Not Designated As Hedging Instruments under GAAP

We also enter into derivatives that are not designated as accounting hedges under GAAP.

For additional information on derivatives not designated as hedging instruments under GAAP see Note 14 Financial Derivatives in our 2015 Form 10-K.

 

 

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


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Further detail regarding the notional amounts and fair values related to derivatives not designated in hedge relationships is presented in the following table:

Table 85: Derivatives Not Designated As Hedging Instruments under GAAP

 

    March 31, 2016     December 31, 2015  
In millions   Notional/
Contract
Amount
    Asset
Fair
Value (a)
    Liability
Fair
Value (b)
    Notional/
Contract
Amount
    Asset
Fair
Value (a)
    Liability
Fair
Value (b)
 

Derivatives used for residential mortgage banking activities:

             

Residential mortgage servicing

             

Interest rate contracts:

             

Swaps

  $ 36,925      $ 1,225      $ 793      $ 37,505      $ 758      $ 416   

Swaptions

    1,103        39        23        650        27        14   

Futures (c)

    20,626            17,653         

Futures options

    18,000        2        3        6,000          1   

Mortgage-backed securities commitments

    4,280        12        5        3,920        4        8   

Subtotal

    80,934        1,278        824        65,728        789        439   

Loan sales

             

Interest rate contracts:

             

Futures (c)

    10            20         

Bond options

    200            200        2       

Mortgage-backed securities commitments

    5,113        8        14        6,363        16        8   

Residential mortgage loan commitments

    1,950        22                1,580        16           

Subtotal

    7,273        30        14        8,163        34        8   

Subtotal

  $ 88,207      $ 1,308      $ 838      $ 73,891      $ 823      $ 447   

Derivatives used for commercial mortgage banking activities:

             

Interest rate contracts:

             

Swaps

  $ 4,186      $ 129      $ 68      $ 3,945      $ 77      $ 46   

Swaptions

          439         

Futures (c)

    15,450            18,454         

Commercial mortgage loan commitments

    1,380        14        8        1,176        11        6   

Subtotal

    21,016        143        76        24,014        88        52   

Credit contracts

    58                        77                   

Subtotal

  $ 21,074      $ 143      $ 76      $ 24,091      $ 88      $ 52   

Derivatives used for customer-related activities:

             

Interest rate contracts:

             

Swaps

  $ 163,175      $ 3,445      $ 3,424      $ 157,041      $ 2,507      $ 2,433   

Caps/floors – Sold

    5,277          7        5,337          11   

Caps/floors – Purchased

    6,617        19          6,383        18       

Swaptions

    4,963        144        11        4,363        86        13   

Futures (c)

    1,632            1,673         

Mortgage-backed securities commitments

    3,457        11        10        1,910        5        2   

Subtotal

    185,121        3,619        3,452        176,707        2,616        2,459   

Foreign exchange contracts

    11,261        178        157        10,888        194        198   

Credit contracts

    5,775        3        6        5,026        2        4   

Subtotal

  $ 202,157      $ 3,800      $ 3,615      $ 192,621      $ 2,812      $ 2,661   

Derivatives used for other risk management activities:

             

Foreign exchange contracts

  $ 2,995      $ 16      $ 88      $ 2,742      $ 59      $ 6   

Other contracts (d)

    2,555                317        2,557                462   

Subtotal

  $ 5,550      $ 16      $ 405      $ 5,299      $ 59      $ 468   

Total derivatives not designated as hedging instruments

  $ 316,988      $ 5,267      $ 4,934      $ 295,902      $ 3,782      $ 3,628   

(continued on following page)

 

The PNC Financial Services Group, Inc. – Form 10-Q    95


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(continued from previous page)

 

(a) Included in Other assets on our Consolidated Balance Sheet.
(b) Included in Other liabilities on our Consolidated Balance Sheet.
(c) Futures contracts settle in cash daily and, therefore, no derivative asset or derivative liability is recognized on our Consolidated Balance Sheet.
(d) Includes PNC’s obligation to fund a portion of certain BlackRock LTIP programs and the swaps entered into in connection with sales of a portion of Visa Class B common shares.

Further detail regarding the gains (losses) on derivatives not designated in hedging relationships is presented in the following table:

Table 86: Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP

 

     Three months ended
March 31
 
In millions    2016     2015  

Derivatives used for residential mortgage banking activities:

      

Residential mortgage servicing

      

Interest rate contracts

   $ 195      $ 98   

Loan sales

      

Interest rate contracts

     (7     21   

Gains (losses) included in residential mortgage banking activities (a)

   $ 188      $ 119   

Derivatives used for commercial mortgage banking activities:

      

Interest rate contracts (b) (c)

   $ 53      $ 30   

Credit contracts (c)

             (1

Gains (losses) from commercial mortgage banking activities

   $ 53      $ 29   

Derivatives used for customer-related activities:

      

Interest rate contracts

   $ (4   $ 4   

Foreign exchange contracts

     29        1   

Gains (losses) from customer-related activities (c)

   $ 25      $ 5   

Derivatives used for other risk management activities:

      

Interest rate contracts

      

Foreign exchange contracts

   $ (95   $ 183   

Other contracts (d)

     (4     (7

Gains (losses) from other risk management activities (c)

   $ (99   $ 176   

Total gains (losses) from derivatives not designated as hedging instruments

   $ 167      $ 329   
(a) Included in Residential mortgage noninterest income.
(b) Included in Corporate services noninterest income.
(c) Included in Other noninterest income.
(d) Includes BlackRock LTIP funding obligation and the swaps entered into in connection with sales of a portion of Visa Class B common shares.

 

Credit Derivatives – Risk Participation Agreements

We have entered into risk participation agreements to share some of the credit exposure with other counterparties related to interest rate derivative contracts or to take on credit exposure to generate revenue. The notional amount of risk participation agreements sold was $3.2 billion at March 31, 2016 and $2.5 billion at December 31, 2015. Assuming all underlying third party customers referenced in the swap contracts defaulted at March 31, 2016, the exposure from these agreements would be $166 million based on the fair value of the underlying swaps, compared with $122 million at December 31, 2015.

Offsetting, Counterparty Credit Risk, and Contingent Features

We, generally, utilize a net presentation on the Consolidated Balance Sheet for those derivative financial instruments entered into with counterparties under legally enforceable master netting agreements. The master netting agreements reduce credit risk by permitting the closeout netting of all outstanding derivative instruments under the master netting

agreement with the same counterparty upon the occurrence of an event of default. The master netting agreement also may require the exchange of cash or marketable securities to collateralize either party’s net position.

For additional information on derivative offsetting, counterparty credit risk, and contingent features see Note 14 Financial Derivatives in our 2015 Form 10-K. Refer to Note 15 Commitments and Guarantees in this Report for additional information related to resale and repurchase agreements offsetting.

The following derivative Table 87 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities as of March 31, 2016 and December 31, 2015. The table includes cash collateral held or pledged under legally enforceable master netting agreements. The table also includes the fair value of any securities collateral held or pledged under legally enforceable master netting agreements. Cash and securities collateral amounts are included in the table only to the extent of the related net derivative fair values.

 

 

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


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Table 87: Derivative Assets and Liabilities Offsetting

 

March 31, 2016

In millions

          

Amounts

Offset on the

Consolidated Balance Sheet

   

Securities
Collateral
Held/(Pledged)
Under Master

Netting
Agreements

    

Net
Amounts

 
   Gross
Fair Value
     Fair Value
Offset Amount
     Cash
Collateral
     Net Fair
Value
      

Derivative assets

                  

Interest rate contracts:

                  

Cleared

   $ 1,844       $ 1,651       $ 152       $ 41         $ 41   

Exchange-traded

     2               2           2   

Over-the-counter

     4,828         2,010         481         2,337      $ 296         2,041   

Foreign exchange contracts

     253         112         12         129        1         128   

Credit contracts

     3         1         1         1                 1   

Total derivative assets

   $ 6,930       $ 3,774       $ 646       $ 2,510 (a)    $ 297       $ 2,213   

Derivative liabilities

                  

Interest rate contracts:

                  

Cleared

   $ 1,923       $ 1,651       $ 243       $ 29         $ 29   

Exchange-traded

     3               3           3   

Over-the-counter

     2,741         1,996         663         82           82   

Foreign exchange contracts

     245         123         35         87           87   

Credit contracts

     6         4         2             

Other contracts

     317                           317                 317   

Total derivative liabilities

   $ 5,235       $ 3,774       $ 943       $ 518 (b)             $ 518   
 

December 31, 2015

In millions

                                              

Derivative assets

                  

Interest rate contracts:

                  

Cleared

   $ 1,003       $ 779       $ 195       $ 29         $ 29   

Over-the-counter

     3,652         1,645         342         1,665      $ 178         1,487   

Foreign exchange contracts

     284         129         13         142        2         140   

Credit contracts

     2         1         1                             

Total derivative assets

   $ 4,941       $ 2,554       $ 551       $ 1,836 (a)    $ 180       $ 1,656   

Derivative liabilities

                  

Interest rate contracts:

                  

Cleared

   $ 855       $ 779       $ 57       $ 19         $ 19   

Exchange-traded

     1               1           1   

Over-the-counter

     2,276         1,687         530         59           59   

Foreign exchange contracts

     204         85         20         99           99   

Credit contracts

     4         3         1             

Other contracts

     462                           462                 462   

Total derivative liabilities

   $ 3,802       $ 2,554       $ 608       $ 640 (b)             $ 640   
(a) Represents the net amount of derivative assets included in Other assets on our Consolidated Balance Sheet.
(b) Represents the net amount of derivative liabilities included in Other liabilities on our Consolidated Balance Sheet.

 

The table above includes over-the-counter (OTC) derivatives, cleared derivatives, and exchange-traded derivatives. OTC derivatives represent contracts executed bilaterally with counterparties that are not settled through an organized exchange or cleared through a central clearing house. The majority of OTC derivatives are governed by ISDA documentation or other legally enforceable industry standard master netting agreements. Cleared derivatives represent contracts executed bilaterally with counterparties in the OTC

market that are novated to a central clearing house who then becomes our counterparty. Exchange-traded derivatives represent standardized futures and options contracts executed directly on an organized exchange.

In addition to using master netting agreements and other collateral agreements to reduce credit risk associated with derivative instruments, we also seek to manage credit risk by evaluating credit ratings of counterparties and by using internal credit analysis, limits, and monitoring procedures.

 

 

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At March 31, 2016, we held cash, U.S. government securities and mortgage-backed securities totaling $.9 billion under master netting agreements and other collateral agreements to collateralize net derivative assets due from counterparties, and we pledged cash totaling $1.3 billion under these agreements to collateralize net derivative liabilities owed to counterparties and to meet initial margin requirements. These totals may differ from the amounts presented in the preceding offsetting table because these totals may include collateral exchanged under an agreement that does not qualify as a master netting agreement or because the total amount of collateral held or pledged exceeds the net derivative fair values with the counterparty as of the balance sheet date due to timing or other factors, such as initial margin. To the extent not netted against the derivative fair values under a master netting agreement, the receivable for cash pledged is included in Other assets and the obligation for cash held is included in Other liabilities on our Consolidated Balance Sheet. Securities held from counterparties are not recognized on our balance

sheet. Likewise securities we have pledged to counterparties remain on our balance sheet.

Certain derivative agreements contain various credit-risk related contingent provisions, such as those that require PNC’s debt to maintain a specified credit rating from one or more of the major credit rating agencies. If PNC’s debt ratings were to fall below such specified ratings, the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on March 31, 2016 was $1.2 billion for which PNC had posted collateral of $1.0 billion in the normal course of business. The maximum additional amount of collateral PNC would have been required to post if the credit-risk-related contingent features underlying these agreements had been triggered on March 31, 2016 would be $.2 billion.

 

 

NOTE 11 EARNINGS PER SHARE

Table 88: Basic and Diluted Earnings per Common Share

 

     Three months ended March 31  
In millions, except per share data            2016                  2015          

Basic

       

Net income

   $ 943       $ 1,004   

Less:

       

Net income (loss) attributable to noncontrolling interests

     19         1   

Preferred stock dividends and discount accretion and redemptions

     65         70   

Net income attributable to common shares

     859         933   

Less:

       

Dividends and undistributed earnings allocated to participating securities

     6         2   

Net income attributable to basic common shares

   $ 853       $ 931   

Basic weighted-average common shares outstanding

     501         521   

Basic earnings per common share (a)

   $ 1.70       $ 1.79   

Diluted

       

Net income attributable to basic common shares

   $ 853       $ 931   

Less: Impact of BlackRock earnings per share dilution

     3         5   

Net income attributable to diluted common shares

   $ 850       $ 926   

Basic weighted-average common shares outstanding

     501         521   

Dilutive potential common shares

     6         8   

Diluted weighted-average common shares outstanding

     507         529   

Diluted earnings per common share (a)

   $ 1.68       $ 1.75   
(a) Basic and diluted earnings per share under the two-class method are determined on net income reported on the income statement less earnings allocated to nonvested restricted shares and restricted share units with nonforfeitable dividends and dividend rights (participating securities).

 

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NOTE 12 TOTAL EQUITY AND OTHER COMPREHENSIVE INCOME

Activity in total equity for the first three months of 2015 and 2016 follows:

Table 89: Rollforward of Total Equity

 

          Shareholders’ Equity                
In millions  

Shares
Outstanding
Common

Stock

    Common
Stock
    Capital
Surplus -
Preferred
Stock
    Capital
Surplus -
Common
Stock
and
Other
    Retained
Earnings
   

Accumulated
Other
Comprehensive
Income

(Loss)

    Treasury
Stock
    Non-
controlling
Interests
    Total
Equity
 

Balance at January 1, 2015

    523      $ 2,705      $ 3,946      $ 12,627      $ 26,200      $ 503      $ (1,430   $ 1,523      $ 46,074   

Net income

              1,003              1        1,004   

Other comprehensive income (loss), net of tax

                200              200   

Cash dividends declared

                       

Common ($.48 per share)

              (251             (251

Preferred

              (68             (68

Preferred stock discount accretion

          2          (2            

Common stock activity (b)

        1          8                  9   

Treasury stock activity

    (3         (18         (345       (363

Other

                            (56                             (111     (167

Balance at March 31, 2015 (a)

    520      $ 2,706      $ 3,948      $ 12,561      $ 26,882      $ 703      $ (1,775   $ 1,413      $ 46,438   

Balance at January 1, 2016

    504      $ 2,708      $ 3,452      $ 12,745      $ 29,043      $ 130      $ (3,368   $ 1,270      $ 45,980   

Net income

              924              19        943   

Other comprehensive income (loss), net of tax

                402              402   

Cash dividends declared

                       

Common ($.51 per share)

              (260             (260

Preferred

              (64             (64

Preferred stock discount accretion

          1          (1            

Common stock activity (b)

            2                  2   

Treasury stock activity

    (5         (11         (423       (434

Other

                            (150                             (91     (241

Balance at March 31, 2016 (a)

    499      $ 2,708      $ 3,453      $ 12,586      $ 29,642      $ 532      $ (3,791   $ 1,198      $ 46,328   
(a) The par value of our preferred stock outstanding was less than $.5 million at each date and, therefore, is excluded from this presentation.
(b) Common stock activity totaled less than .5 million shares issued.

Warrants

We had 13.4 million warrants outstanding at both March 31, 2016 and December 31, 2015. Each warrant entitles the holder to purchase one share of PNC common stock at an exercise price of $67.33 per share. In accordance with the terms of the warrants, the warrants are exercised on a non-cash net basis with the warrant holder receiving PNC common shares determined based on the excess of the market price of PNC common stock on the exercise date over the exercise price of the warrant. The outstanding warrants will expire as of December 31, 2018, and are considered in the calculation of diluted earnings per common share in Note 11 Earnings Per Share in this Report.

 

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

Table 90: Other Comprehensive Income

 

     Three months ended
March 31
 
In millions    2016     2015  

Net unrealized gains (losses) on non-OTTI securities

      

Increase in net unrealized gains (losses) on non-OTTI securities

   $ 519      $ 132   

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

     6        7   

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

     9        51   

Net increase (decrease), pre-tax

     504        74   

Effect of income taxes

     (185     (27

Net increase (decrease), after-tax

     319        47   

Net unrealized gains (losses) on OTTI securities

      

Increase in net unrealized gains (losses) on OTTI securities

     (39     2   

Less: OTTI losses realized on securities reclassified to noninterest income

     (1     (1

Net increase (decrease), pre-tax

     (38     3   

Effect of income taxes

     14        (1

Net increase (decrease), after-tax

     (24     2   

Net unrealized gains (losses) on cash flow hedge derivatives

      

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

     265        298   

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

     60        64   

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

     5        4   

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

             (9

Net increase (decrease), pre-tax

     200        239   

Effect of income taxes

     (73     (88

Net increase (decrease), after-tax

     127        151   

Pension and other postretirement benefit plan adjustments

      

Net pension and other postretirement benefit activity

     2        53   

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

     12        9   

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

     (2     (2

Net increase (decrease), pre-tax

     12        60   

Effect of income taxes

     (4     (22

Net increase (decrease), after-tax

     8        38   

Other

      

PNC’s portion of BlackRock’s OCI

     (25     (25

Net investment hedge derivatives

     29        54   

Foreign currency translation adjustments (a)

     (29     (56

SBA I/O Strip sold

     (2        

Net increase (decrease), pre-tax

     (27     (27

Effect of income taxes (a)

     (1     (11

Net increase (decrease), after-tax

     (28     (38

Total other comprehensive income, pre-tax

     651        349   

Total other comprehensive income, tax effect

     (249     (149

Total other comprehensive income, after-tax

   $ 402      $ 200   
(a) The earnings of PNC’s Luxembourg-UK lending business have been indefinitely reinvested: therefore, no U.S. deferred income tax has been recorded on the foreign currency translation of the investment.

 

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Table 91: Accumulated Other Comprehensive Income (Loss) Components

 

In millions, after-tax    Net unrealized gains
(losses)  on non-OTTI
securities
     Net unrealized gains
(losses) on OTTI
securities
     Net unrealized gains
(losses) on cash flow
hedge derivatives
     Pension and other
postretirement benefit
plan adjustments
     Other      Total  

Balance at December 31, 2014

   $ 647       $ 74       $ 350       $ (520    $ (48    $ 503   

Net activity

     47         2         151         38         (38      200   

Balance at March 31, 2015

     694         76         501         (482      (86      703   

Balance at December 31, 2015

     286         66         430         (554      (98      130   

Net activity

     319         (24      127         8         (28      402   

Balance at March 31, 2016

   $ 605       $ 42       $ 557       $ (546    $ (126    $ 532   

 

NOTE 13 INCOME TAXES

Table 92: Net Operating Loss Carryforwards and Tax Credit Carryforwards

 

In millions    March 31
2016
     December 31
2015
 

Net Operating Loss Carryforwards:

       

Federal

   $ 858       $ 878   

State

   $ 2,249       $ 2,272   

Tax Credit Carryforwards:

       

Federal

   $ 59       $ 64   

State

   $ 3       $ 3   

The federal net operating loss carryforwards expire in 2032. The state net operating loss carryforwards will expire from 2016 to 2036. The majority of the tax credit carryforwards expire in 2032. All federal and most state net operating loss and credit carryforwards are from acquired entities and utilization is subject to various statutory limitations. It is anticipated that the company will be able to fully utilize its carryforwards for federal tax purposes, but a valuation allowance of $61 million has been recorded against certain state tax carryforwards as of March 31, 2016. If select uncertain tax positions were successfully challenged by a state, the state net operating losses listed above could be reduced by $60 million.

PNC is subject to U.S. federal income tax as well as income tax in most states and some foreign jurisdictions. Examinations were completed for PNC’s consolidated federal income tax returns for 2007 through 2010 and National City’s consolidated federal income tax returns through 2008 and were settled with the Internal Revenue Service (IRS). The IRS is currently examining PNC’s consolidated federal income tax returns for 2011 through 2013. In addition, we are under continuous examinations by various state taxing authorities. With few exceptions, we are no longer subject to state and local and foreign income tax examinations by taxing authorities for periods before 2010. For all open audits, any potential adjustments have been considered in establishing our unrecognized tax benefits as of March 31, 2016.

PNC had unrecognized tax benefits of $20 million at March 31, 2016 and $26 million at December 31, 2015. At March 31, 2016, these unrecognized tax benefits, if recognized, would favorably impact the effective income tax rate.

While it is reasonably possible that the balance of unrecognized tax benefits could increase or decrease in the next twelve months due to completion of tax authorities’ exams or the expiration of statutes of limitations, management believes it is unlikely that its unrecognized tax benefits will change by a significant amount during the next twelve months.

During the three months ended March 31, 2016, we recognized $52 million of amortization, $56 million of tax credits, and $19 million of other tax benefits associated with qualified investments in low income housing tax credits within Income taxes.

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    101


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NOTE 14 LEGAL PROCEEDINGS

We establish accruals for legal proceedings, including litigation and regulatory and governmental investigations and inquiries, when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changed circumstances. When we are able to do so, we also determine estimates of possible losses or ranges of possible losses, whether in excess of any related accrued liability or where there is no accrued liability, for disclosed legal proceedings (“Disclosed Matters,” which are those matters disclosed in this Note 14 as well as those matters disclosed in Note 20 Legal Proceedings in Part II, Item 8 of our 2015 Form 10-K (such prior disclosure referred to as “Prior Disclosure”)). For Disclosed Matters where we are able to estimate such possible losses or ranges of possible losses, as of March 31, 2016, we estimate that it is reasonably possible that we could incur losses in excess of related accrued liabilities, if any, in an aggregate amount of up to approximately $550 million. The estimates included in this amount are based on our analysis of currently available information and are subject to significant judgment and a variety of assumptions and uncertainties. As new information is obtained we may change our estimates. Due to the inherent subjectivity of the assessments and unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to us from the legal proceedings in question. Thus, our exposure and ultimate losses may be higher, and possibly significantly so, than the amounts accrued or this aggregate amount.

In our experience, legal proceedings are inherently unpredictable. One or more of the following factors frequently contribute to this inherent unpredictability: the proceeding is in its early stages; the damages sought are unspecified, unsupported or uncertain; it is unclear whether a case brought as a class action will be allowed to proceed on that basis or, if permitted to proceed as a class action, how the class will be defined; the other party is seeking relief other than or in addition to compensatory damages (including, in the case of regulatory and governmental investigations and inquiries, the possibility of fines and penalties); the matter presents meaningful legal uncertainties, including novel issues of law; we have not engaged in meaningful settlement discussions; discovery has not started or is not complete; there are significant facts in dispute; the possible outcomes may not be amenable to the use of statistical or quantitative analytical tools; predicting possible outcomes depends on making assumptions about future decisions of courts or regulatory bodies or the behavior of other parties; and there are a large number of parties named as defendants (including where it is uncertain how damages or liability, if any, will be shared among multiple defendants). Generally, the less progress that has been made in the proceedings or the broader the range of

potential results, the harder it is for us to estimate losses or ranges of losses that it is reasonably possible we could incur.

As a result of these types of factors, we are unable, at this time, to estimate the losses that are reasonably possible to be incurred or ranges of such losses with respect to some of the matters disclosed, and the aggregate estimated amount provided above does not include an estimate for every Disclosed Matter. Therefore, as the estimated aggregate amount disclosed above does not include all of the Disclosed Matters, the amount disclosed above does not represent our maximum reasonably possible loss exposure for all of the Disclosed Matters. The estimated aggregate amount also does not reflect any of our exposure to matters not so disclosed, as discussed below under “Other.”

We include in some of the descriptions of individual Disclosed Matters certain quantitative information related to the plaintiff’s claim against us as alleged in the plaintiff’s pleadings or other public filings or otherwise publicly available information. While information of this type may provide insight into the potential magnitude of a matter, it does not necessarily represent our estimate of reasonably possible loss or our judgment as to any currently appropriate accrual.

Some of our exposure in Disclosed Matters may be offset by applicable insurance coverage. We do not consider the possible availability of insurance coverage in determining the amounts of any accruals (although we record the amount of related insurance recoveries that are deemed probable up to the amount of the accrual) or in determining any estimates of possible losses or ranges of possible losses.

CBNV Mortgage Litigation

Our petition for a writ of certiorari filed with the U.S. Supreme Court seeking review of the decision of the U.S. Court of Appeals for the Third Circuit in the matter currently pending in the U.S. District Court for the Western District of Pennsylvania under the caption In re: Community Bank of Northern Virginia Lending Practices Litigation (No. 03-0425 (W.D. Pa.), MDL No. 1674) was denied in February 2016. We filed motions for decertification and summary judgment with the district court in April 2016.

Lender Placed Insurance Litigation

The U.S. District Court for the Southern District of Florida granted final approval of the settlement in Montoya, et al. v. PNC Bank, N.A., et al. (Case No. 1:14-cv-20474-JEM) in April 2016.

Pre-need Funeral Arrangements

In the lawsuit filed in the U.S. District Court for the Eastern District of Missouri under the caption Jo Ann Howard, P.C., et al. v. Cassity, et al. (No. 4:09-CV-1252-ERW), the plaintiffs have cross-appealed to the U.S. Court of Appeals for the Eighth Circuit from the trial court’s orders reducing the judgment by amounts paid in settlement by other defendants, denying plaintiffs’ motion for pre-judgment interest, and dismissing the plaintiffs’ aiding and abetting claims.

 

 

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


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Other Regulatory and Governmental Inquiries

PNC is the subject of investigations, audits and other forms of regulatory and governmental inquiry covering a broad range of issues in our banking, securities and other financial services businesses, in some cases as part of reviews of specified activities at multiple industry participants. Over the last few years, we have experienced an increase in regulatory and governmental investigations, audits and other inquiries. Areas of current regulatory or governmental inquiry with respect to PNC include consumer protection, fair lending, mortgage origination and servicing, mortgage and non mortgage-related insurance and reinsurance, municipal finance activities, conduct by broker-dealers, automobile lending practices, employment practices, and participation in government insurance or guarantee programs, some of which are described in Prior Disclosure. These inquiries, including those described in Prior Disclosure, may lead to administrative, civil or criminal proceedings, and possibly result in remedies including fines, penalties, restitution, or alterations in our business practices, and in additional expenses and collateral costs.

Our practice is to cooperate fully with regulatory and governmental investigations, audits and other inquiries, including those described in Prior Disclosure.

Other

In addition to the proceedings or other matters described above and in Prior Disclosure, PNC and persons to whom we may have indemnification obligations, in the normal course of business, are subject to various other pending and threatened legal proceedings in which claims for monetary damages and other relief are asserted. We do not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of such other legal proceedings will have a material adverse effect on our financial position. However, we cannot now determine whether or not any claims asserted against us or others to whom we may have indemnification obligations, whether in the proceedings or other matters described above or otherwise, will have a material adverse effect on our results of operations in any future reporting period, which will depend on, among other things, the amount of the loss resulting from the claim and the amount of income otherwise reported for the reporting period.

NOTE 15 COMMITMENTS AND GUARANTEES

Commitments

In the normal course of business, we have various commitments outstanding, certain of which are not included on our Consolidated Balance Sheet. The following table presents our outstanding commitments to extend credit along with significant other commitments as of March 31, 2016 and December 31, 2015, respectively.

Table 93: Commitments to Extend Credit and Other Commitments

 

In millions    March 31
2016
     December 31
2015
 

Commitments to extend credit

       

Total commercial lending

   $ 101,434       $ 101,252   

Home equity lines of credit

     17,311         17,268   

Credit card

     20,814         19,937   

Other

     4,399         4,032   

Total commitments to extend credit

     143,958         142,489   

Net outstanding standby letters of credit (a)

     8,969         8,765   

Reinsurance agreements (b)

     1,968         2,010   

Standby bond purchase agreements (c)

     891         911   

Other commitments (d)

     969         966   

Total commitments to extend credit and other commitments

   $ 156,755       $ 155,141   
(a) Net outstanding standby letters of credit include $4.6 billion and $4.7 billion which support remarketing programs at March 31, 2016 and December 31, 2015, respectively.
(b) Represents aggregate maximum exposure up to the specified limits of the reinsurance contracts, and reflects estimates based on availability of financial information from insurance carriers. As of both March 31, 2016 and December 31, 2015, the aggregate maximum exposure amount comprised $1.6 billion for accidental death & dismemberment contracts and $.4 billion for credit life, accident & health contracts.
(c) We enter into standby bond purchase agreements to support municipal bond obligations.
(d) Includes $.5 billion related to investments in qualified affordable housing projects at both March 31, 2016 and December 31, 2015.

Commitments to Extend Credit

Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. These commitments generally have fixed expiration dates, may require payment of a fee, and contain termination clauses in the event the customer’s credit quality deteriorates. Based on our historical experience, some commitments expire unfunded, and therefore cash requirements are substantially less than the total commitment.

 

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Net Outstanding Standby Letters of Credit

We issue standby letters of credit and share in the risk of standby letters of credit issued by other financial institutions, in each case to support obligations of our customers to third parties, such as insurance requirements and the facilitation of transactions involving capital markets product execution. Internal credit ratings related to our net outstanding standby letters of credit were as follows:

Table 94: Internal Credit Ratings Related to Net Outstanding Standby Letters of Credit

 

      March 31
2016
     December 31
2015
 

Internal credit ratings (as a percentage of portfolio):

       

Pass (a)

     92      93

Below pass (b)

     8      7
(a) Indicates that expected risk of loss is currently low.
(b) Indicates a higher degree of risk of default.

If the customer fails to meet its financial or performance obligation to the third party under the terms of the contract or there is a need to support a remarketing program, then upon a draw by a beneficiary, subject to the terms of the letter of credit, we would be obligated to make payment to them. The standby letters of credit outstanding on March 31, 2016 had terms ranging from less than 1 year to 9 years.

As of March 31, 2016, assets of $1.1 billion secured certain specifically identified standby letters of credit. In addition, a portion of the remaining standby letters of credit issued on behalf of specific customers is also secured by collateral or guarantees that secure the customers’ other obligations to us. The carrying amount of the liability for our obligations related to standby letters of credit and participations in standby letters of credit was $.2 billion at March 31, 2016 and is included in Other liabilities on our Consolidated Balance Sheet.

Reinsurance Agreements

We have a wholly-owned captive insurance subsidiary which provides reinsurance for accidental death & dismemberment, credit life, and accident & health, all of which are in run-off. This subsidiary previously entered into these various types of reinsurance agreements with third-party insurers where the subsidiary assumed the risk of loss through quota share agreements up to 100% reinsurance. In quota share agreements, the subsidiary and the third-party insurers share the responsibility for payment of all claims.

Recourse and Repurchase Obligations

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities, PNC has sold commercial

mortgage, residential mortgage and home equity loans/lines of credit directly or indirectly through securitization and loan sale transactions in which we have continuing involvement. One form of continuing involvement includes certain recourse and loan repurchase obligations associated with the transferred assets. See Note 21 Commitments and Guarantees in our 2015 Form 10-K for details related to our Recourse and Repurchase Obligations.

Resale and Repurchase Agreements

We enter into repurchase and resale agreements where we transfer investment securities to/from a third party with the agreement to repurchase/resell those investment securities at a future date for a specified price. These agreements are entered into primarily to provide short-term financing for securities inventory positions, acquire securities to cover short positions and accommodate customers’ investing and financing needs. Repurchase and resale agreements are treated as collateralized financing transactions for accounting purposes and are generally carried at the amounts at which the securities will be subsequently reacquired or resold, including accrued interest. Our policy is to take possession of securities purchased under agreements to resell. We monitor the market value of securities to be repurchased and resold and additional collateral may be obtained where considered appropriate to protect against credit exposure.

Repurchase and resale agreements are typically entered into with counterparties under industry standard master netting agreements which provide for the right to offset amounts owed to one another with respect to multiple repurchase and resale agreements under such master netting agreement (referred to as netting arrangements) and liquidate the purchased or borrowed securities in the event of counterparty default. In order for an arrangement to be eligible for netting under GAAP, we must obtain the requisite assurance that the offsetting rights included in the master netting agreement would be legally enforceable in the event of bankruptcy, insolvency, or a similar proceeding of such third party. Enforceability is evidenced by obtaining a legal opinion that supports, with sufficient confidence, the enforceability of the master netting agreement in bankruptcy.

Table 95 shows the amounts owed under resale and repurchase agreements and the securities collateral associated with those agreements where a legal opinion supporting the enforceability of the offsetting rights has been obtained. We do not present resale and repurchase agreements entered into with the same counterparty under a legally enforceable master netting agreement on a net basis on our Consolidated Balance Sheet or within Table 95.

 

 

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


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Refer to Note 10 Financial Derivatives for additional information related to offsetting of financial derivatives.

Table 95: Resale and Repurchase Agreements Offsetting

 

In millions   

Gross

Resale
Agreements

    

Amounts

Offset

on the
Consolidated
Balance Sheet

  

Net

Resale
Agreements (a)

    

Securities
Collateral

Held Under
Master Netting
Agreements (b)

     Net
Amounts (c)
 

Resale Agreements

                

March 31, 2016

   $ 978          $ 978       $ 904       $ 74   

December 31, 2015

   $ 1,082            $ 1,082       $ 1,008       $ 74   

 

In millions    Gross
Repurchase
Agreements
    

Amounts
Offset

on the
Consolidated
Balance Sheet

   Net
Repurchase
Agreements (a)
     Securities
Collateral
Pledged Under
Master Netting
Agreements (b)
     Net
Amounts (d)
 

Repurchase Agreements (e)

                

March 31, 2016

   $ 2,492          $ 2,492       $ 1,760       $ 732   

December 31, 2015

   $ 1,767            $ 1,767       $ 1,014       $ 753   
(a) Resale agreements are included on the Consolidated Balance Sheet in Federal funds sold and resale agreements. Repurchase agreements are included on the Consolidated Balance Sheet in Federal funds purchased and repurchase agreements.
(b) Represents the fair value of securities collateral purchased or sold, up to the amount owed under the agreement, for agreements supported by a legally enforceable master netting agreement.
(c) Represents certain long term resale agreements which are fully collateralized but do not have the benefits of a netting opinion and, therefore, might be subject to a stay in insolvency proceedings and therefore are not eligible under ASC 210-20 for netting.
(d) Represents overnight repurchase agreements entered into with municipalities, pension plans, and certain trusts and insurance companies which are fully collateralized but do not have the benefits of a netting opinion and, therefore, might be subject to a stay in insolvency proceedings and therefore are not eligible under ASC 210-20 for netting. There were no long term repurchase agreements as of March 31, 2016 and December 31, 2015.
(e) Repurchase agreements have remaining contractual maturities that are classified as overnight or continuous. As of March 31, 2016 and December 31, 2015, the collateral pledged under these agreements consisted primarily of residential mortgage-backed agency securities.

 

NOTE 16 SEGMENT REPORTING

We have six reportable business segments:

   

Retail Banking

   

Corporate & Institutional Banking

   

Asset Management Group

   

Residential Mortgage Banking

   

BlackRock

   

Non-Strategic Assets Portfolio

Results of individual businesses are presented based on our internal management reporting practices. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of our individual businesses are not necessarily comparable with similar information for any other company. We periodically refine our internal methodologies as management reporting practices are enhanced. To the extent significant and practicable, retrospective application of new methodologies is made to prior period reportable business segment results and disclosures to create comparability with the current period.

Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. Additionally, we have aggregated the results for corporate support functions within “Other” for financial reporting purposes.

Net interest income in business segment results reflects PNC’s 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.

A portion of capital is intended to cover unexpected losses and is assigned to our business segments using our risk-based economic capital model, including consideration of the goodwill at those business segments, as well as the diversification of risk among the business segments, ultimately reflecting PNC’s portfolio risk adjusted capital allocation.

We have allocated the allowances for loan and lease losses and for unfunded loan commitments and letters of credit based on the loan exposures within each business segment’s portfolio. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.

Our allocation of the costs incurred by operations and other shared support areas not directly aligned with the businesses is primarily based on the use of services.

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    105


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Total business segment financial results differ from total consolidated net income. The impact of these differences is reflected in the “Other” category in the business segment tables. “Other” includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as gains or losses related to BlackRock transactions, integration costs, asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities and certain trading activities, exited businesses, private equity investments, intercompany eliminations, most corporate overhead, tax adjustments that are not allocated to business segments, and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests as the segments’ results exclude their portion of net income attributable to noncontrolling interests. Assets, revenue and earnings attributable to foreign activities were not material in the periods presented for comparative purposes.

Business Segment Products and Services

Retail Banking provides deposit, lending, brokerage, investment management and cash management services to consumer and small business customers within our primary geographic markets. Our customers are serviced through our branch network, ATMs, call centers, online banking and mobile channels. The branch network is located primarily in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, Florida, North Carolina, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Georgia, Missouri, Wisconsin and South Carolina.

Corporate & Institutional Banking provides lending, treasury management, and capital markets-related products and services to mid-sized and large corporations, government and not-for-profit entities. Lending products include secured and unsecured loans, letters of credit and equipment leases. Treasury management services include cash and investment management, receivables management, disbursement services, funds transfer services, information reporting and global trade services. Capital markets-related products and services include foreign exchange, derivatives, securities, loan syndications, mergers and acquisitions advisory, equity capital markets advisory activities and related services. We also provide commercial loan servicing and technology solutions for the commercial real estate finance industry. Products and services are generally provided within our primary geographic markets, with certain products and services offered nationally and internationally.

Asset Management Group includes personal wealth management for high net worth and ultra high net worth clients and institutional asset management. Wealth management products and services include investment and retirement planning, customized investment management, private banking, tailored credit solutions, and trust

management and administration for individuals and their families. Our Hawthorn unit provides multi-generational family planning including wealth strategy, investment management, private banking, tax and estate planning guidance, performance reporting and personal administration services to ultra high net worth families. Institutional asset management provides investment management, custody administration and retirement administration services. The business also offers PNC proprietary mutual funds. Institutional clients include corporations, unions, municipalities, non-profits, foundations and endowments, primarily located in our geographic footprint.

Residential Mortgage Banking directly originates first lien residential mortgage loans on a nationwide basis with a significant presence within the retail banking footprint. Mortgage loans represent loans collateralized by one-to-four family residential real estate. These loans are typically underwritten to government agency and/or third-party standards, and either sold, servicing retained, or held on PNC’s balance sheet. Loan sales are primarily to secondary mortgage conduits of FNMA, FHLMC, Federal Home Loan Banks and third-party investors, or are securitized and issued under the GNMA program. The mortgage servicing operation performs all functions related to servicing mortgage loans, primarily those in first lien position, for various investors and for loans owned by PNC.

BlackRock is a leading publicly traded investment management firm providing a broad range of investment and risk management services to institutional and retail clients worldwide. Using a diverse platform of active and index investment strategies across asset classes, BlackRock develops investment outcomes and asset allocation solutions for clients. Product offerings include single- and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. BlackRock also offers an investment and risk management technology platform, risk analytics and advisory services and solutions to a broad base of institutional investors.

We hold an equity investment in BlackRock, which provides us with an additional source of noninterest income and increases our overall revenue diversification. BlackRock is a publicly traded company, and additional information regarding its business is available in its filings with the Securities and Exchange Commission (SEC). At March 31, 2016, our economic interest in BlackRock was 22%. PNC received cash dividends from BlackRock of $83 million and $80 million during the first three months of 2016 and 2015, respectively.

Non-Strategic Assets Portfolio includes a consumer portfolio of mainly residential mortgage and brokered home equity loans and lines of credit and a small commercial/commercial real estate loan and lease portfolio. We obtained a significant portion of these non-strategic assets through acquisitions of other companies.

 

 

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


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Table 96: Results Of Businesses

 

Three months ended March 31

In millions

   Retail
Banking
     Corporate &
Institutional
Banking
     Asset
Management
Group
     Residential
Mortgage
Banking
     BlackRock      Non-Strategic
Assets
Portfolio
     Other      Consolidated  

2016

                         

Income Statement

                         

Net interest income

   $ 1,113       $ 838       $ 77       $ 25          $ 75       $ (30    $ 2,098   

Noninterest income

     537         434         203         105       $ 141         22         125         1,567   

Total revenue

     1,650         1,272         280         130         141         97         95         3,665   

Provision for credit losses (benefit)

     77         107         (3      (1         (7      (21      152   

Depreciation and amortization

     40         35         11         3               113         202   

Other noninterest expense

     1,110         486         195         149                  21         118         2,079   

Income (loss) before income taxes and noncontrolling interests

     423         644         77         (21      141         83         (115      1,232   

Income taxes (benefit)

     155         213         28         (8      27         31         (157      289   

Net income (loss)

   $ 268       $ 431       $ 49       $ (13    $ 114       $ 52       $ 42       $ 943   

Inter-segment revenue

   $ 2       $ 9       $ 2       $ 6       $ 3       $ (2    $ (20         

Average Assets (a)

   $ 72,216       $ 135,521       $ 7,887       $ 6,306       $ 6,775       $ 5,816       $ 121,392       $ 355,913   

2015

                         

Income Statement

                         

Net interest income

   $ 1,037       $ 823       $ 73       $ 30          $ 112       $ (3    $ 2,072   

Noninterest income

     488         429         208         177       $ 175         9         173         1,659   

Total revenue

     1,525         1,252         281         207         175         121         170         3,731   

Provision for credit losses (benefit)

     49         17         12         2            (31      5         54   

Depreciation and amortization

     43         36         11         4               99         193   

Other noninterest expense

     1,115         478         199         157                  24         183         2,156   

Income (loss) before income taxes and noncontrolling interests

     318         721         59         44         175         128         (117      1,328   

Income taxes (benefit)

     116         239         22         16         40         47         (156      324   

Net income

   $ 202       $ 482       $ 37       $ 28       $ 135       $ 81       $ 39       $ 1,004   

Inter-segment revenue

            $ 2       $ 2       $ 5       $ 4       $ (2    $ (11         

Average Assets (a)

   $ 74,017       $ 131,178       $ 7,943       $ 7,245       $ 6,645       $ 7,276       $ 113,753       $ 348,057   
(a) Period-end balances for BlackRock.

 

NOTE 17 SUBSEQUENT EVENTS

On April 29, 2016, PNC Bank issued an additional $600 million of senior notes with a maturity date of June 1, 2025. Interest is payable semi-annually in arrears at a fixed rate of 3.250% on June 1 and December 1 of each year, beginning on June 1, 2016. These notes form part of the same series as the outstanding 3.250% senior notes issued on June 1, 2015. Following the issuance of these additional notes, the aggregate principal amount of such series was $1.0 billion.

On April 29, 2016, PNC Bank issued $1.25 billion of senior notes with a maturity date of April 29, 2021. Interest is payable semi-annually in arrears at a fixed rate of 2.150% on April 29 and October 29 of each year, beginning on October 29, 2016.

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    107


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STATISTICAL INFORMATION (UNAUDITED)

The PNC Financial Services Group, Inc.

Average Consolidated Balance Sheet And Net Interest Analysis (a) (b) (c)

 

        First Quarter 2016        Fourth Quarter 2015  

Taxable-equivalent basis

Dollars in millions

     Average
Balances
       Interest
Income/
Expense
       Average
Yields/
    Rates
       Average
Balances
       Interest
Income/
Expense
       Average
Yields/
Rates
 

Assets

                             

Interest-earning assets:

                             

Investment securities

                             

Securities available for sale

                             

Residential mortgage-backed

                             

Agency

     $ 24,696         $ 159           2.57      $ 23,777         $ 152           2.55

Non-agency

       3,936           44           4.45           4,089           50           4.90   

Commercial mortgage-backed

       6,586           46           2.79           6,709           48           2.85   

Asset-backed

       5,486           30           2.19           5,280           28           2.14   

U.S. Treasury and government agencies

       9,936           39           1.55           8,996           25           1.09   

State and municipal

       1,957           23           4.60           1,991           23           4.72   

Other debt

       2,295           13           2.32           1,963           12           2.44   

Corporate stock and other

       595                      .32           657                      .21   

Total securities available for sale

       55,487           354           2.55           53,462           338           2.53   

Securities held to maturity

                             

Residential mortgage-backed

       9,906           75           3.02           9,345           70           2.98   

Commercial mortgage-backed

       1,821           16           3.53           1,878           17           3.67   

Asset-backed

       715           3           1.84           723           2           1.61   

U.S. Treasury and government agencies

       259           2           3.80           257           3           3.82   

State and municipal

       1,950           27           5.50           1,965           28           5.48   

Other

       131           1           3.17           228           2           3.32   

Total securities held to maturity

       14,782           124           3.37           14,396           122           3.36   

Total investment securities

       70,269           478           2.72           67,858           460           2.71   

Loans

                             

Commercial

       99,068           771           3.08           98,212           745           2.97   

Commercial real estate

       27,967           248           3.51           26,714           237           3.47   

Equipment lease financing

       7,420           63           3.40           7,501           64           3.41   

Consumer

       58,212           621           4.29           59,108           618           4.15   

Residential real estate

       14,517           172           4.74           14,486           174           4.79   

Total loans

       207,184           1,875           3.60           206,021           1,838           3.52   

Interest-earning deposits with banks

       25,533           32           .50           31,509           23           .29   

Loans held for sale

       1,509           16           4.34           1,897           22           4.66   

Federal funds sold and resale agreements

       1,299           2           .47           1,469                .29   

Other

       4,956           52           4.23           5,109           63           4.83   

Total interest-earning assets/interest income

       310,750           2,455           3.15           313,863           2,406           3.03   

Noninterest-earning assets:

                             

Allowance for loan and lease losses

       (2,711                  (3,204          

Cash and due from banks

       3,919                     4,115             

Other

       43,955                     45,622             

Total assets

     $ 355,913                   $ 360,396             

Liabilities and Equity

                             

Interest-bearing liabilities:

                             

Interest-bearing deposits

                             

Money market

     $ 76,392           42           .22         $ 81,199           51           .25   

Demand

       49,770           9           .07           47,778           7           .06   

Savings

       23,343           23           .39           17,851           15           .33   

Retail certificates of deposit

       17,278           30           .70           17,916           32           .69   

Time deposits in foreign offices and other time

       2,040           1           .27           2,709           1           .16   

Total interest-bearing deposits

       168,823           105           .25           167,453           106           .25   

Borrowed funds

                             

Federal funds purchased and repurchase agreements

       2,048           1           .26           1,925                .14   

Federal Home Loan Bank borrowings

       19,855           34           .68           20,796           28           .52   

Bank notes and senior debt

       20,690           87           1.66           20,458           58           1.11   

Subordinated debt

       8,317           68           3.29           8,600           57           2.65   

Commercial paper

       3                .40           302           1           .39   

Other

       2,713           14           1.99           2,932           16           2.16   

Total borrowed funds

       53,626           204           1.51           55,013           160           1.15   

Total interest-bearing liabilities/interest expense

       222,449           309           .55           222,466           266           .47   

Noninterest-bearing liabilities and equity:

                             

Noninterest-bearing deposits

       77,306                     79,479             

Allowance for unfunded loan commitments and letters of credit

       262                     266             

Accrued expenses and other liabilities

       9,993                     12,297             

Equity

       45,903                     45,888             

Total liabilities and equity

     $ 355,913                               $ 360,396                         

Interest rate spread

                 2.60                     2.56   

Impact of noninterest-bearing sources

                             .15                                 .14   

Net interest income/margin

                $ 2,146           2.75                 $ 2,140           2.70

 

(a) Nonaccrual loans are included in loans, net of unearned income. The impact of financial derivatives used in interest rate risk management is included in the interest income/expense and average yields/rates of the related assets and liabilities. Basis adjustments related to hedged items are included in noninterest-earning assets and noninterest-bearing liabilities. Average balances of securities are based on amortized historical cost (excluding adjustments to fair value, which are included in other assets). Average balances for certain loans and borrowed funds accounted for at fair value, with changes in fair value recorded in trading noninterest income, are included in noninterest-earning assets and noninterest-bearing liabilities.

 

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


Table of Contents

Average Consolidated Balance Sheet and Net Interest Analysis (Continued)

 

Third Quarter 2015     Second Quarter 2015     First Quarter 2015  

Average

Balances

   

Interest

Income/

Expense

   

Average

Yields/
Rates

   

Average

Balances

   

Interest

Income/
Expense

   

Average

Yields/
Rates

   

Average

Balances

   

Interest

Income/
Expense

   

Average

Yields/
Rates

 
               
               
               
               
               
  $21,813      $ 134        2.47   $ 20,550      $ 125        2.43   $ 19,290      $ 129        2.67
  4,279        52        4.83        4,480        52        4.70        4,657        53        4.51   
  6,228        49        3.20        6,286        48        3.03        6,260        50        3.19   
  5,287        28        2.15        5,228        28        2.12        5,140        27        2.08   
  6,558        23        1.36        5,204        15        1.12        5,142        16        1.27   
  1,995        25        4.83        1,973        23        4.76        1,969        22        4.45   
  1,837        11        2.44        1,796        18        4.01        1,777        11        2.53   
  542        1        .26        414                .10        457                .10   
  48,539        323        2.66        45,931        309        2.69        44,692        308        2.75   
               
  8,352        63        3.05        8,196        61        2.95        7,035        57        3.26   
  1,927        18        3.65        2,005        18        3.63        2,097        22        4.16   
  733        4        1.57        743        2        1.53        755        3        1.52   
  254        2        3.82        252        3        3.81        249        2        3.77   
  1,979        27        5.50        2,004        27        5.49        2,018        28        5.52   
  289        2        3.37        311        3        3.12        320        2        2.89   
  13,534        116        3.43        13,511        114        3.37        12,474        114        3.67   
  62,073        439        2.83        59,442        423        2.85        57,166        422        2.95   
               
  97,926        756        3.02        98,364        746        3.00        97,866        728        2.98   
  25,228        216        3.35        24,812        215        3.44        23,924        228        3.80   
  7,683        66        3.42        7,556        65        3.45        7,539        65        3.47   
  59,584        628        4.18        60,240        621        4.13        61,476        638        4.21   
  14,406        171        4.76        14,416        177        4.91        14,350        175        4.88   
  204,827        1,837        3.54        205,388        1,824        3.54        205,155        1,834        3.59   
  37,289        24        .25        32,368        20        .25        30,405        19        .25   
  2,048        22        4.23        2,092        23        4.33        2,246        23        4.20   
  1,598        2        .33        1,959        1        .22        1,655        1        .22   
  5,033        67        5.33        5,470        63        4.65        5,046        69        5.43   
  312,868        2,391        3.02        306,719        2,354        3.06        301,673        2,368        3.15   
               
  (3,265         (3,309         (3,317    
  3,890            3,954            4,067       
  45,094            45,276            45,634       
  $358,587          $ 352,640          $ 348,057       
               
               
               
  $84,554        61        .29      $ 81,857        55        .27      $ 79,994        47        .24   
  46,390        7        .06        46,281        5        .05        46,131        7        .06   
  14,150        6        .18        13,775        6        .17        13,053        5        .15   
  18,392        32        .68        18,334        31        .68        18,541        32        .71   
  2,361        1        .17        2,300        1        .16        2,192        1        .19   
  165,847        107        .26        162,547        98        .24        159,911        92        .23   
               
  2,298        1        .14        2,718        1        .14        3,116        1        .12   
  21,882        27        .49        22,001        25        .46        20,774        24        .45   
  19,455        63        1.27        16,408        50        1.19        15,351        52        1.36   
  8,882        63        2.81        8,861        58        2.61        8,851        58        2.64   
  1,867        2        .38        3,640        3        .35        4,986        4        .34   
  3,147        16        2.03        3,537        18        1.95        3,274        16        1.99   
  57,531        172        1.18        57,165        155        1.07        56,352        155        1.10   
  223,378        279        .49        219,712        253        .46        216,263        247        .46   
               
  77,553            75,299            73,178       
  246            234            260       
  11,667            11,540            12,326       
  45,743            45,855            46,030       
  $358,587                      $ 352,640                      $ 348,057                   
      2.53            2.60            2.69   
                  .14                        .13                        .13   
        $ 2,112        2.67           $ 2,101        2.73           $ 2,121        2.82

 

(b) Loan fees for the three months ended March 31, 2016, December 31, 2015, September 30, 2015, June 30, 2015 and March 31, 2015 were $26 million, $30 million, $26 million, $23 million and $27 million, respectively.
(c) Interest income includes the effects of taxable-equivalent adjustments using a statutory federal income tax rate of 35% to increase tax-exempt interest income to a taxable-equivalent basis. The taxable-equivalent adjustments to interest income for the three months ended March 31, 2016, December 31, 2015, September 30, 2015, June 30, 2015 and March 31, 2015 were $48 million, $48 million, $50 million, $49 million and $49 million, respectively.

 

The PNC Financial Services Group, Inc. – Form 10-Q    109


Table of Contents

TRANSITIONAL BASEL III AND PRO FORMA FULLY PHASED-IN BASEL III COMMON EQUITY TIER 1 CAPITAL RATIOS – 2015 PERIODS

 

     2015 Transitional Basel III      Pro forma Fully Phased-In
Basel III (estimated) (a) (b)
 
Dollars in millions    December 31
2015
     March 31
2015
     December 31
2015
     March 31
2015
 

Common stock, related surplus and retained earnings, net of treasury stock

   $ 41,128       $ 40,374       $ 41,128       $ 40,374   

Less regulatory capital adjustments:

               

Goodwill and disallowed intangibles, net of deferred tax liabilities

     (8,972      (9,011      (9,172      (9,249

Basel III total threshold deductions

     (470      (414      (1,294      (1,045

Accumulated other comprehensive income (c)

     (81      115         (201      288   

All other adjustments

     (112      (112      (182      (150

Basel III Common equity Tier 1 capital

   $ 31,493       $ 30,952       $ 30,279       $ 30,218   

Basel III standardized approach risk-weighted assets (d)

   $ 295,905       $ 295,114       $ 303,707       $ 302,784   

Basel III advanced approaches risk-weighted assets (e)

     N/A         N/A       $ 264,931       $ 287,293   

Basel III Common equity Tier 1 capital ratio

     10.6      10.5      10.0      10.0

Risk weight and associated rules utilized

    
 
Standardized (with 2015
transition adjustments)
  
  
     Standardized   
(a) PNC utilizes the pro forma fully phased-in Basel III capital ratios to assess its capital position (without the benefit of phase-ins), including comparison to similar estimates made by other financial institutions.
(b) Basel III capital ratios and estimates may be impacted by additional regulatory guidance and, in the case of those ratios calculated using the advanced approaches, may be subject to variability based on the ongoing evolution, validation and regulatory approval of PNC’s models that are integral to the calculation of advanced approaches risk-weighted assets as PNC moves through the parallel run process.
(c) Represents net adjustments related to accumulated other comprehensive income for securities currently and previously held as available for sale, as well as pension and other postretirement plans.
(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) Basel III advanced approaches risk-weighted assets are based on the Basel III advanced approaches rules, and include credit, market and operational risk-weighted assets. During the parallel run qualification phase PNC has refined the data, models and internal processes used as part of the advanced approaches for determining risk-weighted assets. Refinements implemented in the fourth quarter of 2015 reduced estimated Basel III advanced approaches risk-weighted assets. We anticipate additional refinements may result in increases or decreases to this estimate through the parallel run qualification phase.

 

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


Table of Contents

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See the information set forth in Note 14 Legal Proceedings in the Notes To Consolidated Financial Statements under Part I, Item 1 of this Report, which is incorporated by reference in response to this item.

ITEM 1A. RISK FACTORS

There are no material changes from any of the risk factors previously disclosed in PNC’s 2015 Form 10-K in response to Part I, Item 1A.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Details of our repurchases of PNC common stock during the first quarter of 2016 are included in the following table:

 

In thousands, except per

share data 2016 period

  Total shares
purchased
(a)
    Average
price
paid per
share
    Total shares
purchased
as part of
publicly
announced
programs
(b)
    Maximum
number of
shares
that may
yet be
purchased
under the
programs
(b)
 

January 1 – 31

    1,988      $ 87.44        1,979        80,132   

February 1 – 29

    2,878      $ 82.50        2,371        77,761   

March 1 – 31

    1,645      $ 85.53        1,577        76,184   

Total

    6,511      $ 84.77                   
(a) Includes PNC common stock purchased in connection with our various employee benefit plans generally related to forfeitures of unvested restricted stock awards and shares used to cover employee payroll tax withholding requirements. Note 12 Employee Benefit Plans and Note 13 Stock Based Compensation Plans in the Notes to Consolidated Financial Statements in Item 8 of our 2015 Annual Report on Form 10-K include additional information regarding our employee benefit and equity compensation plans that use PNC common stock.
(b) On March 11, 2015, we announced that our Board of Directors had approved the establishment of a new stock repurchase program authorization in the amount of 100 million shares of PNC common stock, effective April 1, 2015. Repurchases are made in open market or privately negotiated transactions and the timing and exact amount of common stock repurchases will depend on a number of factors including, among others, market and general economic conditions, economic capital and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations, including the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process.

Our 2015 capital plan, submitted as part of the CCAR process and approved by the Federal Reserve, included share repurchase programs of up to $2.875 billion for the five quarter period ending with the second quarter of 2016. This amount does not include share repurchases in connection with various employee benefit plans referenced in note (a). In the first quarter of 2016, in accordance with PNC’s 2015 capital plan and under the share repurchase authorization in effect during that period, we repurchased 5.9 million shares of common stock on the open market, with an average price of $85.02 per share and an aggregate repurchase price of $.5 billion.

ITEM 6. EXHIBITS

The following exhibit index lists Exhibits filed, or in the case of Exhibits 32.1 and 32.2 furnished, with this Quarterly Report on Form 10-Q:

EXHIBIT INDEX

 

  12.1    Computation of Ratio of Earnings to Fixed Charges
  12.2    Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350
  32.2    Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101    Interactive Data File (XBRL)

You can obtain copies of these Exhibits electronically at the SEC’s website at www.sec.gov or by mail from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, DC 20549 at prescribed rates. The Exhibits are also available as part of this Form 10-Q on PNC’s corporate website at www.pnc.com/secfilings. Shareholders and bondholders may also obtain copies of Exhibits, without charge, by contacting Shareholder Relations at 800-843-2206 or via e-mail at investor.relations@pnc.com. The interactive data file (XBRL) exhibit is only available electronically.

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    111


Table of Contents

CORPORATE INFORMATION

The PNC Financial Services Group, Inc.

Corporate Headquarters

The PNC Financial Services Group, Inc.

The Tower at PNC Plaza, 300 Fifth Avenue

Pittsburgh, Pennsylvania 15222-2401

412-762-2000

Stock Listing

The common stock of The PNC Financial Services Group, Inc. is listed on the New York Stock Exchange under the symbol “PNC”.

Internet Information

The PNC Financial Services Group, Inc.’s financial reports and information about its products and services are available on the internet at www.pnc.com. We provide information for investors on our corporate website under “About Us – Investor Relations.” We use our Twitter account, @pncnews, as an additional way of disseminating to the public information that may be relevant to investors.

We generally post the following under “About Us – Investor Relations” shortly before or promptly following its first use or release: financially-related press releases, including earnings releases and supplemental financial information, various SEC filings, including annual, quarterly and current reports and proxy statements, presentation materials associated with earnings and other investor conference calls or events, and access to live and recorded audio from earnings and other investor conference calls or events. In some cases, we may post the presentation materials for other investor conference calls or events several days prior to the call or event. When warranted, we will also use our website to expedite public access to time-critical information regarding PNC in advance of distribution of a press release or a filing with the SEC disclosing the same information. For earnings and other conference calls or events, we generally include in our posted materials a cautionary statement regarding forward-looking and adjusted information and we provide GAAP reconciliations when we refer to adjusted information and results. Where applicable, we provide GAAP reconciliations for such additional information in materials for that event or in materials for other prior investor presentations or in our annual, quarterly or current reports.

PNC is required periodically to provide additional public disclosure regarding estimated income, losses and pro forma regulatory capital ratios under supervisory and PNC-developed hypothetical severely adverse economic scenarios, as well as information concerning our capital stress testing processes, pursuant to the stress testing regulations adopted by the Federal Reserve and the OCC. PNC is also required to

make certain additional regulatory capital-related public disclosures about PNC’s capital structure, risk exposures, risk assessment processes, risk-weighted assets and overall capital adequacy, including market risk-related disclosures, under the regulatory capital rules adopted by the Federal banking agencies. Under these regulations, PNC may satisfy these requirements through postings on our website, and PNC has done so and expects to continue to do so without also providing disclosure of this information through filings with the SEC.

Other information posted on our corporate website that may not be available in our filings with the SEC includes information relating to our corporate governance and quarterly and annual communications from our chairman to shareholders.

Where we have included web addresses in this Report, such as our web address and the web address of the SEC, we have included those web addresses as inactive textual references only. Except as specifically incorporated by reference into this Report, information on those websites is not part hereof.

Financial Information

We are subject to the informational requirements of the Securities Exchange Act of 1934 (Exchange Act) and, in accordance with the Exchange Act, we file annual, quarterly and current reports, proxy statements, and other information with the SEC. Our SEC File Number is 001-09718. You can obtain copies of these and other filings, including exhibits, electronically at the SEC’s internet website at www.sec.gov or on PNC’s corporate internet website at www.pnc.com/secfilings. Shareholders and bond holders may also obtain copies of these filings without charge by contacting Shareholder Services at 800-982-7652 or via the online contact form at www.computershare.com/contactus for copies without exhibits, and by contacting Shareholder Relations at 800-843-2206 or via email at investor.relations@pnc.com for copies of exhibits, including financial statement and schedule exhibits where applicable. The interactive data file (XBRL) exhibit is only available electronically.

Corporate Governance at PNC

Information about our Board of Directors and its committees and corporate governance at PNC is available on PNC’s corporate website at www.pnc.com/corporategovernance. Our PNC Code of Business Conduct and Ethics is available on our corporate website at www.pnc.com/corporategovernance. In addition, any future amendments to, or waivers from, a provision of the PNC Code of Business Conduct and Ethics that applies to our directors or executive officers (including our principal executive officer, principal financial officer, and principal accounting officer or controller) will be posted at this internet address.

 

 

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


Table of Contents

Shareholders who would like to request printed copies of the PNC Code of Business Conduct and Ethics or our Corporate Governance Guidelines or the charters of our Board’s Audit, Nominating and Governance, Personnel and Compensation, or Risk Committees (all of which are posted on the PNC corporate website) may do so by sending their requests to PNC’s Corporate Secretary at corporate headquarters at the above address. Copies will be provided without charge to shareholders.

Inquiries

For financial services call 888-PNC-2265.

Registered shareholders should contact Shareholder Services at 800-982-7652.

Analysts and institutional investors should contact Bryan K. Gill, Senior Vice President, Director of Investor Relations, at 412-768-4143 or via email at investor.relations@pnc.com.

News media representatives and others seeking general information should contact Fred Solomon, Senior Vice President, Corporate Communications, at 412-762-4550 or via email at corporate.communications@pnc.com.

Common Stock Prices/Dividends Declared

The table below sets forth by quarter the range of high and low sale and quarter-end closing prices for The PNC Financial Services Group, Inc. common stock and the cash dividends declared per common share.

 

      High      Low      Close      Cash
Dividends
Declared (a)
 

2016 Quarter

             

First

   $ 94.26       $ 77.67       $ 84.57       $ .51   

2015 Quarter

             

First

   $ 96.71       $ 81.84       $ 93.24       $ .48   

Second

     99.61         90.42         95.65         .51   

Third

     100.52         82.77         89.20         .51   

Fourth

     97.50         84.93         95.31         .51   

Total

                              $ 2.01   
(a) Our Board approved a second quarter 2016 cash dividend of $.51 per common share, which is payable on May 5, 2016.

Dividend Policy

Holders of PNC common stock are entitled to receive dividends when declared by the Board of Directors out of funds legally available for this purpose. Our Board of Directors may not pay or set apart dividends on the common

stock until dividends for all past dividend periods on any series of outstanding preferred stock have been paid or declared and set apart for payment. The Board presently intends to continue the policy of paying quarterly cash dividends. The amount of any future dividends will depend on economic and market conditions, our financial condition and operating results, and other factors, including contractual restrictions and applicable government regulations and policies (such as those relating to the ability of bank and non-bank subsidiaries to pay dividends to the parent company and regulatory capital limitations). The amount of our dividend is also currently subject to the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the Comprehensive Capital Analysis and Review (CCAR) process as described in the Executive Summary section of the Financial Review of this Report and in the Supervision and Regulation section in Item 1 of our 2015 Form 10-K.

Dividend Reinvestment And Stock Purchase Plan

The PNC Financial Services Group, Inc. Dividend Reinvestment and Stock Purchase Plan enables holders of our common stock to conveniently purchase additional shares of common stock. You can obtain a prospectus and enrollment form by contacting Shareholder Services at 800-982-7652.

Stock Transfer Agent And Registrar

Computershare Trust Company, N.A.

250 Royall Street

Canton, MA 02021

800-982-7652

Registered shareholders may contact the above phone number regarding dividends and other shareholder services.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on May 4, 2016 on its behalf by the undersigned thereunto duly authorized.

 

The PNC Financial Services Group, Inc.

/s/ Robert Q. Reilly

Robert Q. Reilly
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 

 

The PNC Financial Services Group, Inc. – Form 10-Q    113