PNC 10-Q Quarterly Report Sept. 30, 2019 | Alphaminr
PNC FINANCIAL SERVICES GROUP, INC.
ALPHAMINR

PNC 10-Q Quarter ended Sept. 30, 2019

Balance Sheet
Cash Flow
Income Statement
Debt
PNC FINANCIAL SERVICES GROUP, INC.
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Document
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xbrli:shares iso4217:USD xbrli:shares pnc:my_loan


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________________________
FORM 10-Q
______________________________________
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to         
    
Commission file number 001-09718
The PNC Financial Services Group, Inc.
(Exact name of registrant as specified in its charter)
___________________________________________________________
Pennsylvania
 
25-1435979
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
The Tower at PNC Plaza, 300 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2401
(Address of principal executive offices, including zip code)

(888) 762-2265
(Registrant’s telephone number including area code)

(Former name, former address and former fiscal year, if changed since last report)
___________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
☒
  
Accelerated filer
 
☐
Non-accelerated filer
 
☐
  
Smaller reporting company
 
☐
 
 
 
  
Emerging growth company
 
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
    Yes  ☐  No  ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
 Name of Each Exchange
    on Which Registered    
Common Stock, par value $5.00
PNC
New York Stock Exchange
Depositary Shares Each Representing a 1/4,000 Interest in a Share of Fixed-to-
Floating Rate Non-Cumulative Perpetual Preferred Stock, Series P
PNC P
New York Stock Exchange
Depositary Shares Each Representing a 1/4,000 Interest in a Share of 5.375%
Non-Cumulative Perpetual Preferred Stock, Series Q
PNC Q
New York Stock Exchange
As of October 17, 2019, there were 438,170,412 shares of the registrant’s common stock ($5 par value) outstanding.
 

THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to Third Quarter 2019 Form 10-Q


 
Pages
PART I – FINANCIAL INFORMATION
 
Item 1.   Financial Statements (Unaudited).
 
 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
18-33, 55-61 and 64-69
Item 4. Controls and Procedures.
 

THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to Third Quarter 2019 Form 10-Q (continued)

 
 
 
MD&A TABLE REFERENCE
 
Table
Description
Page
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32

THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to Third Quarter 2019 Form 10-Q (continued)

 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE
 
Table
Description
Page
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76



FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.

This Financial Review, including the Consolidated Financial Highlights, should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Quarterly Report on Form 10-Q (the Report or Form 10-Q) and with Items 6, 7, 8 and 9A of our 2018 Annual Report on Form 10-K (2018 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business, regulatory and legal risks, see the following: the Risk Management section of this Financial Review and of Item 7 in our 2018 Form 10-K; Item 1A Risk Factors included in our 2018 Form 10-K; and the Legal Proceedings and Commitments Notes of the Notes To Consolidated Financial Statements included in Item 1 of this Report and Item 8 of our 2018 Form 10-K. Also, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and the Critical Accounting Estimates And Judgments section in this Financial Review and in our 2018 Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this Report. See Note 14 Segment Reporting in the Notes To Consolidated Financial Statements included in this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a generally accepted accounting principles (GAAP) basis. In this Report, “PNC”, “we” or “us” refers to The PNC Financial Services Group, Inc. and its subsidiaries on a consolidated basis (except when referring to PNC as a public company, its common stock or other securities issued by PNC, which just refer to The PNC Financial Services Group, Inc.). References to The PNC Financial Services Group, Inc. or to any of its subsidiaries are specifically made where applicable.
Table 1: Consolidated Financial Highlights
Dollars in millions, except per share data
Unaudited
Three months ended
September 30
Nine months ended
September 30
 
2019
2018
2019
2018
 
Financial Results (a)
 
 
 
 
 
Revenue
 
 
 
 
 
Net interest income
$
2,504

$
2,466

$
7,477

$
7,240

 
Noninterest income
1,989

1,891

5,741

5,552

 
Total revenue
4,493

4,357

13,218

12,792

 
Provision for credit losses
183

88

552

260

 
Noninterest expense
2,623

2,608

7,812

7,719

 
Income before income taxes and noncontrolling interests
$
1,687

$
1,661

$
4,854

$
4,813

 
Net income
$
1,392

$
1,400

$
4,037

$
3,995

 
Less:
 
 
 
 
 
Net income attributable to noncontrolling interests
13

11

35

31

 
Preferred stock dividends
63

63

181

181

 
Preferred stock discount accretion and redemptions
1

1

3

3

 
Net income attributable to common shareholders
1,315

1,325

3,818

3,780

 
Less:
 
 
 
 
 
Dividends and undistributed earnings allocated to participating securities
6

6

15

16

 
Impact of BlackRock earnings per share dilution
2

2

7

7

 
Net income attributable to diluted common shares
$
1,307

$
1,317

$
3,796

$
3,757

 
Diluted earnings per common share
$
2.94

$
2.82

$
8.42

$
7.96

 
Cash dividends declared per common share
$
1.15

$
.95

$
3.05

$
2.45

 
Effective tax rate (b)
17.5
%
15.7
%
16.8
%
17.0
%
 
Performance Ratios
 
 
 
 
 
Net interest margin (c)
2.84
%
2.99
%
2.91
%
2.95
%
 
Noninterest income to total revenue
44
%
43
%
43
%
43
%
 
Efficiency
58
%
60
%
59
%
60
%
 
Return on:
 
 
 
 
 
Average common shareholders’ equity
11.56
%
12.32
%
11.48
%
11.83
%
 
Average assets
1.36
%
1.47
%
1.36
%
1.42
%
 
(a)
The Executive Summary and Consolidated Income Statement Review portions of this Financial Review section provide information regarding items impacting the comparability of the periods presented.
(b)
The effective income tax rates are generally lower than the statutory rate due to the relationship of pretax income to tax credits and earnings that are not subject to tax.
(c)
Net interest margin is the total yield on interest-earning assets minus the total rate on interest-bearing liabilities and includes the benefit from use of noninterest-bearing sources. To provide more meaningful comparisons of net interest margins, we use net interest income on a taxable-equivalent basis in calculating average yields used in the calculation of net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP in the Consolidated Income Statement. For additional information, see Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP) in the Statistical Information (Unaudited) section in Item 1 of this Report.


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


Table 1: Consolidated Financial Highlights (Continued) (a)
Unaudited
September 30
2019

December 31
2018

September 30
2018

 
Balance Sheet Data (dollars in millions, except per share data)
 
 
 
 
Assets
$
408,916

$
382,315

$
380,080

 
Loans
$
237,377

$
226,245

$
223,053

 
Allowance for loan and lease losses
$
2,738

$
2,629

$
2,584

 
Interest-earning deposits with banks (b)
$
19,036

$
10,893

$
19,800

 
Investment securities
$
87,883

$
82,701

$
80,804

 
Loans held for sale
$
1,872

$
994

$
1,108

 
Equity investments (c)
$
13,325

$
12,894

$
12,446

 
Mortgage servicing rights
$
1,483

$
1,983

$
2,136

 
Goodwill
$
9,233

$
9,218

$
9,218

 
Other assets
$
35,774

$
34,408

$
28,851

 
Noninterest-bearing deposits
$
74,077

$
73,960

$
74,736

 
Interest-bearing deposits
$
211,506

$
193,879

$
190,148

 
Total deposits
$
285,583

$
267,839

$
264,884

 
Borrowed funds
$
61,354

$
57,419

$
57,955

 
Total shareholders’ equity
$
49,420

$
47,728

$
47,058

 
Common shareholders’ equity
$
45,428

$
43,742

$
43,076

 
Accumulated other comprehensive income (loss)
$
837

$
(725
)
$
(1,260
)
 
Book value per common share
$
103.37

$
95.72

$
93.22

 
Period-end common shares outstanding (in millions)
439

457

462

 
Loans to deposits
83
%
84
%
84
%
 
Common shareholders’ equity to total assets
11.1
%
11.4
%
11.3
%
 
Client Assets (in billions)
 
 
 
 
Discretionary client assets under management
$
163

$
148

$
159

 
Nondiscretionary client assets under administration
135

124

134

 
Total client assets under administration
298

272

293

 
Brokerage account client assets
52

47

51

 
Total client assets
$
350

$
319

$
344

 
Basel III Capital Ratios (d)
 
 
 
 
Common equity Tier 1
9.6
%
9.6
%
9.3
%
 
Tier 1 risk-based
10.7
%
10.8
%
10.5
%
 
Total capital risk-based (e)
12.7
%
13.0
%
12.7
%
 
Leverage
9.3
%
9.4
%
9.2
%
 
Supplementary leverage
7.8
%
7.8
%
7.7
%
 
Asset Quality
 
 
 
 
Nonperforming loans to total loans
.73
%
.75
%
.76
%
 
Nonperforming assets to total loans, OREO and foreclosed assets
.78
%
.80
%
.82
%
 
Nonperforming assets to total assets
.45
%
.47
%
.48
%
 
Net charge-offs to average loans (for the three months ended) (annualized)
.26
%
.19
%
.16
%
 
Allowance for loan and lease losses to total loans
1.15
%
1.16
%
1.16
%
 
Allowance for loan and lease losses to total nonperforming loans
158
%
155
%
153
%
 
Accruing loans past due 90 days or more (in millions)
$
532

$
629

$
619

 
(a)
The Executive Summary and Consolidated Balance Sheet Review portions of this Financial Review provide information regarding items impacting the comparability of the periods presented.
(b)
Amounts include balances held with the Federal Reserve Bank of Cleveland (Federal Reserve Bank) of $18.8 billion, $10.5 billion and $19.6 billion as of September 30, 2019, December 31, 2018 and September 30, 2018, respectively.
(c)
Amounts include our equity interest in BlackRock, Inc..
(d)
All ratios are calculated based on the standardized approach. See Basel III Capital discussion in the Capital Management portion of the Risk Management section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business and Item 1A Risk Factors in our 2018 Form 10-K.
(e)
The 2019 and 2018 Basel III Total risk-based capital ratios include nonqualifying trust preferred capital securities of $60 million and $80 million, respectively, that are subject to a phase-out period that runs through 2021.


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


EXECUTIVE SUMMARY
Headquartered in Pittsburgh, Pennsylvania, we are one of the largest diversified financial services companies in the United States. We have businesses engaged in retail banking, including residential mortgage, corporate and institutional banking and asset management, providing many of our products and services nationally. Our retail branch network is located in markets across the Mid-Atlantic, Midwest and Southeast. We also have strategic international offices in four countries outside the U.S.

Key Strategic Goals
At PNC we manage our company for the long term. We are focused on the fundamentals of growing customers, loans, deposits and revenue and improving profitability, while investing for the future and managing risk, expenses and capital. We continue to invest in our products, markets and brand, and embrace our commitments to our customers, shareholders, employees and the communities where we do business.

We strive to expand and deepen customer relationships by offering a broad range of deposit, credit and fee-based products and services. We are focused on delivering those products and services to our customers with the goal of addressing their financial objectives and putting customers’ needs first. Our business model is built on customer loyalty and engagement, understanding our customers’ financial goals and offering our diverse products and services to help them achieve financial well-being. Our approach is concentrated on organically growing and deepening client relationships across our businesses that meet our risk/return measures.

We are focused on our strategic priorities, which are designed to enhance value over the long term, and consist of:
•
Expanding our leading banking franchise to new markets and digital platforms;
•
Deepening customer relationships by delivering a superior banking experience and financial solutions; and
•
Leveraging technology to innovate and enhance products, services, security and processes.

Our capital priorities are to support client growth and business investment, maintain appropriate capital in light of economic conditions, the Basel III framework, and other regulatory expectations, and return excess capital to shareholders. For more detail, see the Capital Highlights portion of this Executive Summary and the Liquidity and Capital Management portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2018 Form 10-K.

Income Statement Highlights
Net income of $1.4 billion, or $2.94 per diluted common share for the third quarter of 2019 decreased $8 million, or 1%, compared to $1.4 billion, or $2.82 per diluted common share, for the third quarter of 2018.
•
Total revenue increased $136 million, or 3%, to $4.5 billion.
•
Net interest income of $2.5 billion increased $38 million, or 2%.
•
Net interest margin decreased to 2.84% compared to 2.99% for the third quarter of 2018.
•
Noninterest income of $2.0 billion increased $98 million, or 5%.
•
Provision for credit losses increased to $183 million from $88 million for the third quarter of 2018.
•
Noninterest expense of $2.6 billion increased $15 million, or 1%.
•
We generated positive operating leverage in the third quarter of 2019.
•
Earnings per diluted common share increased reflecting lower average common shares outstanding due to share repurchases.

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

Balance Sheet Highlights
Our balance sheet was strong and well positioned at September 30, 2019 and December 31, 2018. In comparison to December 31, 2018:
•
Total assets increased $26.6 billion, or 7%, to $408.9 billion.
•
Total loans increased $11.1 billion, or 5%, to $237.4 billion.
•
Total commercial lending grew $7.9 billion, or 5%, to $160.2 billion.
•
Total consumer lending increased $3.2 billion, or 4%, to $77.2 billion.
•
Investment securities increased $5.2 billion, or 6%, to $87.9 billion.
•
Interest-earning deposits with banks, primarily with the Federal Reserve Bank, increased $8.1 billion to $19.0 billion.
•
Total deposits increased $17.7 billion, or 7%, to $285.6 billion.
•
Borrowed funds increased $3.9 billion, or 7%, to $61.4 billion.

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



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


Credit Quality Highlights
Overall credit quality remained strong.
•
At September 30, 2019 compared to December 31, 2018:
•
Nonperforming assets of $1.8 billion increased $39 million, or 2%.
•
Overall loan delinquencies decreased $137 million, or 9%, to $1.3 billion.
•
Net charge-offs were $155 million, or .26% of average loans on annualized basis, in the third quarter of 2019 compared to $91 million, or .16%, for the third quarter of 2018.
•
The allowance for loan and lease losses (ALLL) to total loans was 1.15% at September 30, 2019 and 1.16% at December 31, 2018.

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

Capital Highlights
We maintained a strong capital position and continued to return capital to shareholders.
•
The Basel III common equity Tier 1 capital ratio was 9.6% at both September 30, 2019 and December 31, 2018.
•
Common shareholders' equity increased to $45.4 billion at September 30, 2019 compared to $43.7 billion at December 31, 2018.
•
In the third quarter of 2019, we returned $1.5 billion of capital to shareholders through repurchases of 7.5 million common shares for $1.0 billion and dividends on common shares of $.5 billion.
•
For the nine months ended September 30, 2019, we returned $3.9 billion of capital to shareholders through repurchases of 19.4 million common shares for $2.5 billion and dividends on common shares of $1.4 billion.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for more detail on our 2019 liquidity and capital actions as well as our capital ratios.

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 Board of Governors of the Federal Reserve System (Federal Reserve) as part of the Comprehensive Capital Analysis and Review (CCAR) process. For additional information, see the Supervision and Regulation section in Item 1 Business of our 2018 Form 10-K.

Business Outlook
Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory contingencies. These statements are based on our view that:
•
U.S. economic growth, after accelerating a few years ago, has slowed since mid-2018 and is expected to slow further through the rest of this year and into 2020.
•
Job growth will continue into 2020, but at a slower pace due to both difficulty in finding workers and slower economic growth. The unemployment rate is expected to increase slightly in the near term, but the labor market will remain tight, pushing wages higher and supporting continued gains in consumer spending.
•
Slower global economic growth, trade restrictions and geopolitical concerns are downside risks to the forecast, which have increased in 2019, and risks are weighted to the downside.
•
Inflation has slowed in 2019, to below the Federal Open Market Committee's (FOMC's) 2% objective, but is expected to gradually increase over the next two years.
•
Our baseline forecast includes the 0.25% federal funds rate cut on October 30, 2019. We expect the funds rate to remain in a range of 1.50% to 1.75% through the rest of 2019.

For the fourth quarter of 2019 compared to the third quarter of 2019, we expect:
•
Average loans to be up approximately 1%;
•
Net interest income to be down approximately 1%;
•
Fee income to be stable to up 1%. Fee income consists of asset management, consumer services, corporate services, residential mortgage and service charges on deposits;
•
Other noninterest income to be in the range of $300 million to $350 million, excluding net securities gains (losses) and activity related to Visa Class B common shares;
•
Provision for credit losses to be between $175 million and $225 million; and
•
Noninterest expense to be up approximately 1%.

For the full year 2019, we expect the effective tax rate to be approximately 17%.


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


See the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2018 Form 10-K for other factors that could cause future events to differ, perhaps materially, from those anticipated in these forward-looking statements.
CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for the third quarter of 2019 was $1.4 billion, or $2.94 per diluted common share, a decrease of $8 million, or 1%, compared to $1.4 billion, or $2.82 per diluted common share, for the third quarter of 2018. For the first nine months of 2019, net income was $4.0 billion, or $8.42 per diluted common share, an increase of $42 million, or 1%, compared to $4.0 billion, or $7.96 per diluted common share, for the first nine months of 2018.

Net income decreased slightly compared to the third quarter of 2018 as a result of higher provision for credit losses and noninterest expense, partially offset by increases in noninterest income and net interest income. Net income increased compared to the first nine months of 2018 driven by higher net interest income and noninterest income, partially offset by increases in provision for credit losses and noninterest expense.
Net Interest Income
Table 2: Summarized Average Balances and Net Interest Income (a)
 
 
2019

2018
 
Three months ended September 30
Dollars in millions
 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
 
$
85,166

 
2.91
%
 
$
622

 
$
80,766

 
2.92
%
 
$
591

 
Loans
 
237,682

 
4.47
%
 
2,698

 
223,342

 
4.36
%
 
2,474

 
Interest-earning deposits with banks
 
15,632

 
2.17
%
 
85

 
19,151

 
1.97
%
 
95

 
Other
 
14,094

 
3.49
%
 
123

 
7,114

 
5.19
%
 
92

 
Total interest-earning assets/interest income
 
$
352,574

 
3.95
%
 
3,528

 
$
330,373

 
3.89
%
 
3,252

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
206,942

 
1.02
%
 
531

 
$
186,320

 
.71
%
 
336

 
Borrowed funds
 
63,933

 
2.87
%
 
468

 
59,838

 
2.76
%
 
421

 
Total interest-bearing liabilities/interest expense
 
$
270,875

 
1.45
%
 
999

 
$
246,158

 
1.21
%
 
757

 
Net interest margin/income (Non-GAAP)
 
 
 
2.84
%
 
2,529

 
 
 
2.99
%
 
2,495

 
Taxable-equivalent adjustments
 
 
 
 
 
(25
)
 
 
 
 
 
(29
)
 
Net interest income (GAAP)
 
 
 
 
 
$
2,504

 
 
 
 
 
$
2,466

 
 
 
2019
 
2018
 
Nine months ended September 30
Dollars in millions
 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
 
$
83,719

 
3.00
%
 
$
1,884

 
$
77,656

 
2.87
%
 
$
1,674

 
Loans
 
233,724

 
4.54
%
 
8,013

 
222,385

 
4.23
%
 
7,091

 
Interest-earning deposits with banks
 
14,708

 
2.32
%
 
256

 
21,921

 
1.74
%
 
286

 
Other
 
12,780

 
3.70
%
 
354

 
7,305

 
4.74
%
 
259

 
Total interest-earning assets/interest income
 
$
344,931

 
4.04
%
 
10,507

 
$
329,267

 
3.75
%
 
9,310

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
201,371

 
1.01
%
 
1,518

 
$
184,716

 
.59
%
 
810

 
Borrowed funds
 
62,033

 
3.05
%
 
1,433

 
59,481

 
2.60
%
 
1,173

 
Total interest-bearing liabilities/interest expense
 
$
263,404

 
1.48
%
 
2,951

 
$
244,197

 
1.08
%
 
1,983

 
Net interest margin/income (Non-GAAP)
 
 
 
2.91
%
 
7,556

 
 
 
2.95
%
 
7,327

 
Taxable-equivalent adjustments
 
 
 
 
 
(79
)
 
 
 
 
 
(87
)
 
Net interest income (GAAP)
 
 
 
 
 
$
7,477

 
 
 
 
 
$
7,240

 
(a)
Interest income calculated as taxable-equivalent interest income. To provide more meaningful comparisons of interest income and yields for all interest-earning assets, as well as net interest margins, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margins by increasing the interest income


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


earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP on the Consolidated Income Statement. For more information, see Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP) in the Statistical Information (Unaudited) section in Item 1 of this Report.
Changes in net interest income and margin result from the interaction of the volume and composition of interest-earning assets and related yields, interest-bearing liabilities and related rates paid, and noninterest-bearing sources of funding. See the Statistical Information (Unaudited) – Average Consolidated Balance Sheet And Net Interest Analysis section of this Report for additional information.

Net interest income increased $38 million, or 2%, and $237 million, or 3%, for the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018. The increase in both comparisons reflected higher loan and securities balances and higher loan yields, partially offset by higher deposit and borrowing costs and balances. Net interest margin in both comparisons decreased as higher loan yields were more than offset by higher deposit costs.

Average investment securities increased $4.4 billion, or 5%, in the quarterly comparison and $6.1 billion, or 8% in the year-to-date comparison. Both increases were due to net purchase activity of agency residential mortgage-backed securities, U.S. Treasury and government agency securities and commercial mortgage-backed securities, partially offset by lower non-agency residential mortgage-backed securities and other securities.

Average investment securities represented 24% of average interest-earning assets for all periods presented.

Average loans grew $14.3 billion, or 6%, and $11.3 billion, or 5%, in the quarterly and year-to-date comparisons, respectively. Loan growth was driven by increases in commercial lending of $11.5 billion, or 8%, and $9.5 billion, or 6%, in the respective comparisons, reflecting broad-based growth primarily in the Corporate Banking and Business Credit businesses in our Corporate & Institutional Banking segment.

Average consumer lending increased $2.8 billion, or 4%, and $1.8 billion, or 2%, in the quarterly and year-to-date comparisons, respectively. Growth in residential mortgage, auto, credit card and unsecured installment loans was partially offset by declines in home equity and education loans. Lower home equity loans reflected paydowns and payoffs exceeding new originated volume. In addition, runoff of brokered home equity and government guaranteed education loans contributed to the declines. Average loans represented 67% of average interest-earning assets for the third quarter of 2019 compared to 68% for the third quarter of 2018 and both year-to-date periods.

Average interest-earning deposits with banks decreased $3.5 billion and $7.2 billion in the respective quarterly and year-to-date comparisons, reflecting lower average balances held with the Federal Reserve Bank as investment of liquidity continued.

Average interest-bearing deposits grew $20.6 billion, or 11%, and $16.7 billion, or 9%, in the respective quarterly and year-to-date comparisons, reflecting overall deposit and customer growth. Additionally, the increases reflected a shift of deposits to interest-bearing from noninterest-bearing deposits, which declined $4.0 billion and $4.9 billion in the respective comparisons. Consumer deposit growth from the retail national expansion strategy also contributed to the deposit increases.

Average borrowed funds increased $4.1 billion, or 7%, compared with the third quarter of 2018 primarily due to higher Federal Home Loan Bank (FHLB) borrowings. Average borrowed funds increased $2.6 billion, or 4%, compared with the first nine months of 2018 primarily due to higher FHLB borrowings and federal funds purchased partially offset by lower bank notes and senior debt.

Further details regarding average loans and deposits are included in the Business Segments Review section of this Financial Review.

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


Noninterest Income
Table 3: Noninterest Income
 
 
Three months ended September 30

Nine months ended September 30
 
 
 
 
 
 
 
Change
 
 
 
 
 
Change
 
Dollars in millions
 
2019


2018

 
$
 
%
 
2019

 
2018

 
$

 
%

 
Noninterest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset management
 
$
464

 
$
486

 
$
(22
)
 
(5
)%
 
$
1,346

 
$
1,397

 
$
(51
)
 
(4
)%
 
Consumer services
 
402

 
377

 
25

 
7
 %
 
1,165

 
1,115

 
50

 
4
 %
 
Corporate services
 
469

 
465

 
4

 
1
 %
 
1,415

 
1,381

 
34

 
2
 %
 
Residential mortgage
 
134

 
76

 
58

 
76
 %
 
281

 
257

 
24

 
9
 %
 
Service charges on deposits
 
178

 
186

 
(8
)
 
(4
)%
 
517

 
522

 
(5
)
 
(1
)%
 
Other
 
342

 
301

 
41

 
14
 %
 
1,017

 
880

 
137

 
16
 %
 
Total noninterest income
 
$
1,989


$
1,891


$
98

 
5
 %
 
$
5,741


$
5,552


$
189

 
3
 %
 
 
Noninterest income to total revenue was 44% for the third quarter of 2019 and 43% for the third quarter of 2018 and first nine months of both 2019 and 2018.

Asset management revenue declined in both periods due to lower earnings from our equity investment in BlackRock and lower yielding assets under management for both periods. PNC's discretionary client assets under management increased to $163 billion at September 30, 2019 compared to $159 billion at September 30, 2018 as a result of increases in equity markets.

Growth in consumer services revenue in both comparisons resulted from higher debit and credit card fees, net of rewards, and higher brokerage fees, reflecting continued momentum in both transaction activity and customer growth.

Corporate services revenue increased in both comparisons due to higher treasury management product revenue, partially offset by lower merger and acquisition advisory fees. The year-to-date comparison also reflected a decrease in loan syndication fees.

Residential mortgage revenue increased in both comparisons due to a higher benefit from residential mortgage servicing rights, net of economic hedge, and higher loan sales revenue from increased origination volumes.

Other noninterest income for the third quarter of 2019 increased over the third quarter of 2018 primarily attributable to higher capital markets-related revenue, the benefit of lower negative Visa Class B derivative fair value adjustments and higher net gains on commercial mortgage loans held for sale partially offset by lower revenue from private equity investments. Other noninterest income increased in the first nine months of 2019 compared to 2018 primarily due to higher gains on asset sales, including the sale of the retirement recordkeeping business in second quarter 2019 and higher net securities gains, partially offset by larger negative derivative fair value adjustments related to Visa Class B common shares and lower revenue from private equity investments.

Provision For Credit Losses
The provision for credit losses increased $95 million to $183 million in the third quarter of 2019 compared to $88 million in the third quarter of 2018 and increased $292 million to $552 million for the first nine months of 2019 compared to the same period in 2018. The increases reflected growth in both the commercial and consumer lending portfolios and included higher reserves for auto and credit card loans.

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



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


Noninterest Expense

Table 4: Noninterest Expense
 
 
Three months ended September 30
 
Nine months ended September 30
 
 
 
 
 
 
 
Change
 
 
 
 
 
Change
 
Dollars in millions
 
2019


2018

 
$
 
%
 
2019

 
2018

 
$

 
%

 
Noninterest expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel
 
$
1,400

 
$
1,413

 
$
(13
)
 
(1
)%
 
$
4,179

 
$
4,123

 
$
56

 
1
 %
 
Occupancy
 
206

 
195

 
11

 
6
 %
 
633

 
616

 
17

 
3
 %
 
Equipment
 
291

 
264

 
27

 
10
 %
 
862

 
818

 
44

 
5
 %
 
Marketing
 
76

 
71

 
5

 
7
 %
 
224

 
201

 
23

 
11
 %
 
Other
 
650

 
665

 
(15
)
 
(2
)%
 
1,914

 
1,961

 
(47
)
 
(2
)%
 
Total noninterest expense
 
$
2,623


$
2,608


$
15

 
1
 %
 
$
7,812

 
$
7,719

 
$
93

 
1
 %
 
 
Noninterest expense increased in both comparisons as investments in support of business growth were reflected in higher equipment and occupancy expense as well as higher marketing expense, which included costs for the retail national expansion strategy. In the third quarter of 2019, personnel expense declined due to lower variable compensation and in both comparisons other expense decreased as a result of lower Federal Deposit Insurance Corporation (FDIC) deposit insurance cost from the elimination of the surcharge assessment.

PNC continued to focus on disciplined expense management, and for full-year 2019 we are on track to achieve our goal of $300 million in cost savings through our continuous improvement program, which will contribute to funding a portion of our technology and business investments.

Effective Income Tax Rate

The effective income tax rate was 17.5% in the third quarter of 2019 compared to 15.7% in the third quarter of 2018 and 16.8% in the first nine months of 2019 compared to 17.0% in the same period of 2018.

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


CONSOLIDATED BALANCE SHEET REVIEW
Table 5: Summarized Balance Sheet Data
 
September 30

 
December 31

 
Change
 
Dollars in millions
2019

 
2018

 
$
%
 
Assets
 
 
 
 
 
 
 
Interest-earning deposits with banks
$
19,036

 
$
10,893

 
$
8,143

75
 %
 
Loans held for sale
1,872

 
994

 
878

88
 %
 
Investment securities
87,883

 
82,701

 
5,182

6
 %
 
Loans
237,377

 
226,245

 
11,132

5
 %
 
Allowance for loan and lease losses
(2,738
)
 
(2,629
)
 
(109
)
(4
)%
 
Mortgage servicing rights
1,483

 
1,983

 
(500
)
(25
)%
 
Goodwill
9,233

 
9,218

 
15

—

 
Other
54,770

 
52,910

 
1,860

4
 %
 
Total assets
$
408,916

 
$
382,315

 
$
26,601

7
 %
 
Liabilities
 
 
 
 




 
Deposits
$
285,583

 
$
267,839

 
$
17,744

7
 %
 
Borrowed funds
61,354

 
57,419

 
3,935

7
 %
 
Other
12,524

 
9,287

 
3,237

35
 %
 
Total liabilities
359,461

 
334,545

 
24,916

7
 %
 
Equity
 
 
 
 




 
Total shareholders’ equity
49,420

 
47,728

 
1,692

4
 %
 
Noncontrolling interests
35

 
42

 
(7
)
(17
)%
 
Total equity
49,455

 
47,770

 
1,685

4
 %
 
Total liabilities and equity
$
408,916

 
$
382,315

 
$
26,601

7
 %
 

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

Our balance sheet was strong and well positioned at both September 30, 2019 and December 31, 2018.
•
Total assets increased as a result of loan growth, higher interest-earning deposits with banks and higher investment securities;
•
Total liabilities increased due to deposit growth and higher borrowed funds;
•
Total equity increased due to higher retained earnings driven by net income partially offset by share repurchases and common and preferred dividends and as a result of higher accumulated other comprehensive income (AOCI).

The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and regulatory compliance is included in the Liquidity and Capital Management portion of the Risk Management section in this Financial Review and in Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements included in our 2018 Form 10-K.
Loans
Table 6: Loans
 
September 30

 
December 31

 
Change
 
Dollars in millions
2019

 
2018

 
$
%
 
Commercial lending
 
 
 
 
 
 
 
Commercial
$
124,014

 
$
116,834

 
$
7,180

6
 %
 
Commercial real estate
28,884

 
28,140

 
744

3
 %
 
Equipment lease financing
7,290

 
7,308

 
(18
)
—

 
Total commercial lending
160,188

 
152,282

 
7,906

5
 %
 
Consumer lending
 
 
 
 




 
Home equity
24,971

 
26,123

 
(1,152
)
(4
)%
 
Residential real estate
21,082

 
18,657

 
2,425

13
 %
 
Automobile
16,004

 
14,419

 
1,585

11
 %
 
Credit card
6,815

 
6,357

 
458

7
 %
 
Education
3,461

 
3,822

 
(361
)
(9
)%
 
Other consumer
4,856

 
4,585

 
271

6
 %
 
Total consumer lending
77,189

 
73,963

 
3,226

4
 %
 
Total loans
$
237,377

 
$
226,245

 
$
11,132

5
 %
 



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


Commercial loans increased reflecting broad-based growth across our Corporate Banking and Business Credit businesses within our Corporate & Institutional Banking segment. In Corporate Banking, commercial loan growth was primarily driven by asset-backed finance securitizations as well as increased lending to large and mid-size corporate clients. In Business Credit, commercial loans increased as a result of new originations and higher utilization. Commercial real estate loans increased due to higher commercial mortgage balances, partially offset by project loan payoffs.

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

Consumer lending balances increased as growth in residential real estate, auto, credit card and other consumer loans was partially offset by lower home equity and education loans.

Residential real estate loans increased primarily from originations of nonconforming loans, which are loans that do not meet government agency standards as a result of exceeding agency conforming loan limits. The growth in auto loans reflected higher indirect auto loans from continued new loan originations and expansion into franchised dealers in new markets as well as growth in direct auto loans. Credit card balances increased as we continued to focus on our long-term objective of deepening penetration within our existing customer base as well as new client acquisition. The growth in other consumer balances due to unsecured installment loans was driven by product enhancements, including a new mobile-optimized digital application.

Home equity loans declined as paydowns and payoffs exceeded new originated volume and brokered home equity loans continued to run off. Education loans declined primarily due to continued runoff of the government guaranteed education loan portfolio.

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

For additional information regarding our loan portfolio see the Note 3 Asset Quality and Note 4 Allowance for Loan and Lease Losses in our Notes To Consolidated Financial Statements included in this Report, and Note 1 Accounting Policies in our 2018 Form 10-K.

Investment Securities

Investment securities of $87.9 billion at September 30, 2019 increased $5.2 billion, or 6%, compared to December 31, 2018, driven by net purchases and changes in unrealized gains and losses of agency residential mortgage backed securities of $5.4 billion.

The level and composition of the investment securities portfolio fluctuates over time based on many factors including market conditions, loan and deposit growth, and balance sheet management activities. We manage our investment securities portfolio to optimize returns, while providing a reliable source of liquidity for our banking and other activities, considering the Liquidity Coverage Ratio (LCR) and other internal and external guidelines and constraints.
Table 7: Investment Securities
 
September 30, 2019
 
December 31, 2018
 
Ratings (a) as of September 30, 2019
 
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
$
18,369

 
$
18,852

 
$
18,862

 
$
18,863

 
100
%
 

 

 

 

 
Agency residential mortgage-backed
49,657

 
50,330

 
45,153

 
44,407

 
100
%
 

 

 

 

 
Non-agency residential mortgage-backed
1,766

 
2,078

 
2,076

 
2,365

 
13
%
 
2
%
 
2
%
 
47
%
 
36
%
 
Agency commercial mortgage-backed
2,998

 
3,031

 
2,773

 
2,720

 
100
%
 

 

 

 

 
Non-agency commercial mortgage-backed (b)
3,658

 
3,701

 
3,177

 
3,145

 
87
%
 
4
%
 


 


 
9
%
 
Asset-backed (c)
5,310

 
5,394

 
5,115

 
5,155

 
89
%
 
2
%
 
1
%
 
7
%
 
1
%
 
Other (d)
4,687

 
4,881

 
5,670

 
5,753

 
73
%
 
16
%
 
8
%
 
1
%
 
2
%
 
Total investment securities (e)
$
86,445

 
$
88,267

 
$
82,826

 
$
82,408

 
96
%
 
1
%
 
1
%
 
1
%
 
1
%
 
(a)
Ratings percentages allocated based on amortized cost.
(b)
Collateralized primarily by retail properties, office buildings, lodging properties and multifamily housing.
(c)
Collateralized primarily by corporate debt, government guaranteed education loans and other consumer credit products.
(d)
Includes state and municipal securities.
(e)
Includes available for sale and held to maturity securities, which are recorded on our balance sheet at fair value and amortized cost, respectively.

Table 7 presents the distribution of our total investment securities portfolio by amortized cost and fair value, as well as by credit rating. We have included credit ratings information because we believe that the information is an indicator of the degree of credit risk to which we are exposed, which could affect our risk-weighted assets and, therefore, our risk-based regulatory capital ratios under the

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


current regulatory capital rules. 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.

The duration of investment securities was 2.4 years at September 30, 2019. We estimate that at September 30, 2019 the effective duration of investment securities was 2.5 years for an immediate 50 basis points parallel increase in interest rates and 2.2 years for an immediate 50 basis points parallel decrease in interest rates.

Based on expected prepayment speeds, the weighted-average expected maturity of the investment securities portfolio was 3.8 years at September 30, 2019 compared to 5.3 years at December 31, 2018.

Table 8: Weighted-Average Expected Maturities of Mortgage and Asset-Backed Debt Securities
September 30, 2019
Years

 
Agency residential mortgage-backed
3.6

 
Non-agency residential mortgage-backed
6.6

 
Agency commercial mortgage-backed
4.1

 
Non-agency commercial mortgage-backed
2.6

 
Asset-backed
2.0

 

Additional information regarding our investment securities is included in Note 5 Investment Securities and Note 6 Fair Value in the Notes To Consolidated Financial Statements included in this Report.

Funding Sources
Table 9: Details of Funding Sources
 
September 30

 
December 31

 
Change
 
Dollars in millions
2019

 
2018

 
$
%
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing
$
74,077

 
$
73,960

 
$
117

—

 
Interest-bearing
 
 
 
 




 
Money market
55,215

 
53,368

 
1,847

3
 %
 
Demand
69,161

 
65,211

 
3,950

6
 %
 
Savings
65,195

 
56,793

 
8,402

15
 %
 
Time deposits
21,935

 
18,507

 
3,428

19
 %
 
Total interest-bearing deposits
211,506

 
193,879

 
17,627

9
 %
 
Total deposits
285,583

 
267,839

 
17,744

7
 %
 
Borrowed funds
 
 
 
 




 
FHLB borrowings
21,901

 
21,501

 
400

2
 %
 
Bank notes and senior debt
27,148

 
25,018

 
2,130

9
 %
 
Subordinated debt
5,473

 
5,895

 
(422
)
(7
)%
 
Other
6,832

 
5,005

 
1,827

37
 %
 
Total borrowed funds
61,354

 
57,419

 
3,935

7
 %
 
Total funding sources
$
346,937

 
$
325,258

 
$
21,679

7
 %
 

Total deposits increased with growth primarily in interest-bearing deposits, including a shift from noninterest-bearing deposits driven by a higher rate environment in the comparison. The increase in deposits reflected both commercial and consumer deposit growth, including from the retail national expansion strategy which contributed to the increase in savings. Interest-bearing demand deposits at September 30, 2019 included $3.9 billion of balances for a new sweep deposit product for asset management clients previously held off-balance sheet primarily in PNC proprietary money market mutual funds.

Borrowed funds increased due to higher bank notes and senior debt as a result of net issuances in the first nine months of 2019. The increase in other borrowed funds included higher federal funds purchased. The level and composition of borrowed funds fluctuates over time based on many factors including market conditions, loan, investment securities and deposit growth, and capital considerations. We manage our borrowed funds to provide a reliable source of liquidity for our banking and other activities, considering our LCR requirements and other internal and external guidelines and constraints.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for additional information regarding our 2019 liquidity and capital activities.


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


Shareholders’ Equity

Total shareholders’ equity was $49.4 billion at September 30, 2019, an increase of $1.7 billion compared to December 31, 2018. The increase resulted from net income of $4.0 billion and higher AOCI of $1.6 billion primarily related to net unrealized securities gains, partially offset by common share repurchases of $2.5 billion and common and preferred dividends of $1.6 billion.

Common shares outstanding declined to 439 million at September 30, 2019 from 457 million at December 31, 2018 as repurchases of 19.4 million shares during the period were partially offset by stock-based compensation activity.
BUSINESS SEGMENTS REVIEW

We have four reportable business segments:
•
Retail Banking
•
Corporate & Institutional Banking
•
Asset Management Group
•
BlackRock

Business segment results and a description of each business are included in Note 14 Segment Reporting in the Notes To Consolidated Financial Statements in this Report. Certain amounts included in this Business Segments Review differ from those amounts shown in Note 14, primarily due to the presentation in this Financial Review of business net interest income on a taxable-equivalent basis.

Net interest income in business segment results reflects our internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors.
Total business segment financial results differ from total consolidated net income. These differences are reflected in the “Other” category as shown in Table 71 in Note 14 Segment Reporting in Item 1 of this Report. “Other” includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities, certain trading activities, certain runoff consumer loan portfolios, private equity investments, intercompany eliminations, certain corporate overhead, tax adjustments that are not allocated to business segments, gains or losses related to BlackRock transactions, exited businesses, and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests as the segments’ results exclude their portion of net income attributable to noncontrolling interests.


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


Retail Banking

Retail Banking's core strategy is to acquire and retain customers who maintain their primary checking and transaction relationships with us. We seek to deepen relationships by meeting the broad range of our customers’ financial needs with savings, liquidity, lending, investment and retirement solutions. A strategic priority for us is to differentiate the customer experience and drive transformation and automation. A key element of our strategy is to expand the use of lower-cost alternative distribution channels, with an emphasis on digital capabilities, while continuing to optimize the traditional branch network. In addition, we have a disciplined process to continually improve the engagement of both our employees and customers, which is a strong driver of customer growth, retention and relationship expansion. In 2018, we launched our national expansion strategy designed to grow customers with digitally-led banking and an ultra-thin branch network in markets outside of our existing retail branch network, and began offering our digital high yield savings deposit product and opened our first solution center.

Table 10: Retail Banking Table
(Unaudited)
 
 
 
 
 
 
 
Nine months ended September 30
  
 
  
 
Change
 
Dollars in millions, except as noted
2019
 
2018
 
$
%
 
Income Statement
 
 
 
 
 
 
 
Net interest income
$
4,118

 
$
3,800

 
$
318

8
 %
 
Noninterest income
1,996

 
1,935

 
61

3
 %
 
Total revenue
6,114

 
5,735

 
379

7
 %
 
Provision for credit losses
356

 
254

 
102

40
 %
 
Noninterest expense
4,531

 
4,491

 
40

1
 %
 
Pretax earnings
1,227

 
990

 
237

24
 %
 
Income taxes
291

 
239

 
52

22
 %
 
Earnings
$
936

 
$
751

 
$
185

25
 %
 
Average Balance Sheet
 
 
 
 
 
 
 
Loans held for sale
$
586

 
$
662

 
$
(76
)
(11
)%
 
Loans
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
Home equity
$
22,679

 
$
24,188

 
$
(1,509
)
(6
)%
 
Automobile
15,201

 
13,643

 
1,558

11
 %
 
Education
3,672

 
4,208

 
(536
)
(13
)%
 
Credit cards
6,403

 
5,746

 
657

11
 %
 
Other
2,187

 
1,794

 
393

22
 %
 
Total consumer
50,142

 
49,579

 
563

1
 %
 
Commercial and commercial real estate
10,440

 
10,397

 
43

—

 
Residential mortgage
15,806

 
13,767

 
2,039

15
 %
 
Total loans
$
76,388

 
$
73,743

 
$
2,645

4
 %
 
Total assets
$
92,282

 
$
89,259

 
$
3,023

3
 %
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing demand
$
31,338

 
$
30,555

 
$
783

3
 %
 
Interest-bearing demand
42,207

 
42,172

 
35

—

 
Money market
25,786

 
30,656

 
(4,870
)
(16
)%
 
Savings
55,659

 
46,091

 
9,568

21
 %
 
Certificates of deposit
12,619

 
11,957

 
662

6
 %
 
Total deposits
$
167,609

 
$
161,431

 
$
6,178

4
 %
 
Performance Ratios
 
 
 
 
 
 
 
Return on average assets
1.36
%
 
1.12
%
 
 
 
 
Noninterest income to total revenue
33
%
 
34
%
 
 
 
 
Efficiency
74
%
 
78
%
 
 
 
 


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



Nine months ended September 30
  
 
  
 
Change
 
Dollars in millions, except as noted
2019

 
2018

 
$
%
 
Supplemental Noninterest Income Information
 
 
 
 
 
 
 
Consumer services
$
881

 
$
837

 
$
44

5
 %
 
Brokerage
$
267

 
$
260

 
$
7

3
 %
 
Residential mortgage
$
281

 
$
257

 
$
24

9
 %
 
Service charges on deposits
$
504

 
$
503

 
$
1

—

 
Residential Mortgage Information
 
 
 
 
 
 
 
Residential mortgage servicing statistics (in billions, except as noted) (a)
 
 
 
 
 
 
 
Serviced portfolio balance (b)
$
123

 
$
127

 
$
(4
)
(3
)%
 
Serviced portfolio acquisitions
$
9

 
$
10

 
$
(1
)
(10
)%
 
MSR asset value (b)
$
0.9

 
$
1.4

 
$
(.5
)
(36
)%
 
MSR capitalization value (in basis points) (b)
72

 
108

 
(36
)
(33
)%
 
Servicing income: (in millions)
 
 
 
 
 
 
 
Servicing fees, net (c)
$
139

 
$
132

 
$
7

5
 %
 
Mortgage servicing rights valuation, net of economic hedge
$
38

 
$
22

 
$
16

73
 %
 
Residential mortgage loan statistics
 
 
 
 
 
 
 
Loan origination volume (in billions)
$
8.0

 
$
5.8

 
$
2.2

38
 %
 
Loan sale margin percentage
2.41
%
 
2.39
%
 
 
 
 
Percentage of originations represented by:
 
 
 
 
 
 
 
Purchase volume (d)
50
%
 
67
%
 
 
 
 
Refinance volume
50
%
 
33
%
 
 
 
 
Other Information (b)
 
 
 
 
 
 
 
Customer-related statistics (average)
 
 
 
 
 
 
 
Non-teller deposit transactions (e)
57
%
 
54
%
 
 
 
 
Digital consumer customers (f)
69
%
 
65
%
 
 
 
 
Credit-related statistics
 
 
 
 
 
 
 
Nonperforming assets (g)
$
1,056

 
$
1,145

 
$
(89
)
(8
)%
 
Net charge-offs
$
380

 
$
308

 
$
72

23
 %
 
Other statistics
 
 
 
 
 
 
 
ATMs
9,102

 
9,093

 
9

—

 
Branches (h)
2,310

 
2,388

 
(78
)
(3
)%
 
Brokerage account client assets (in billions) (i)
$
52

 
$
51

 
$
1

2
 %
 
(a)
Represents mortgage loan servicing balances for third parties and the related income.
(b)
Presented as of September 30, except for customer-related statistics, which are averages for the nine months ended, and net charge-offs, which are for the nine months ended.
(c)
Servicing fees net of impact of decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan payments, prepayments, and loans that were paid down or paid off during the period.
(d)
Mortgages with borrowers as part of residential real estate purchase transactions.
(e)
Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application.
(f)
Represents consumer checking relationships that process the majority of their transactions through non-teller channels.
(g)
Primarily nonperforming loans of $1.1 billion for both September 30, 2019 and September 30, 2018.
(h)
Excludes stand-alone mortgage offices and satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services.
(i)
Includes cash and money market balances.

Retail Banking earned $936 million in the first nine months of 2019 compared with $751 million for the same period in 2018. The increase in earnings was attributable to higher net interest income and noninterest income partially offset by an increase in provision for credit losses and higher noninterest expense.

Net interest income increased primarily due to wider interest rate spreads on the value of deposits as well as growth in deposit and loan balances.

Noninterest income increased largely due to growth in consumer services, including debit and credit card, brokerage, and merchant service fees, and higher residential mortgage revenue attributable to a higher benefit from residential mortgage servicing rights valuation, net of economic hedge, and increased loan sales revenue from higher origination volumes. These increases were partially offset by negative derivative fair value adjustments related to Visa Class B common shares of $55 million compared with negative adjustments of $7 million in the same period of 2018.


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


Provision for credit losses increased in the first nine months of 2019 compared to the same period of 2018 primarily as a result of higher auto loan, unsecured installment loan and credit card portfolio reserves attributed in part to loan growth.

Higher noninterest expense primarily resulted from an increase in ATM expense driven by enhanced checking product benefits, higher equipment expense, and increased marketing activity, including expenses related to our national expansion initiative.

The deposit strategy of Retail Banking is to remain disciplined on pricing and focused on growing and retaining relationship-based balances, executing on market-specific deposit growth strategies and providing a source of low-cost funding and liquidity to PNC. In the first nine months of 2019, average total deposits increased compared to the same period in 2018, as both interest-bearing and noninterest-bearing demand deposits increased. Savings deposits increased due, in part, to a shift from money market deposits to relationship-based savings products as well as growth in consumer deposits, including from our national expansion initiative. Certificates of deposit increased reflecting shifts in consumer preferences to time deposits.

Retail Banking average total loans increased in the first nine months of 2019 compared with the same period in 2018.
•
Average residential mortgages increased primarily as a result of growth in nonconforming residential mortgage loans.
•
Average auto loans increased primarily due to strong new indirect auto loan volumes, including in our Southeast and expansion markets, as well as growth in direct auto loans.
•
Average credit card balances increased as we continued to focus on our long-term objective of deepening penetration within our existing customer base as well as new client acquisition.
•
Average home equity loans decreased as paydowns and payoffs on loans exceeded new originated volume.
•
Average education loans decreased driven by a decline in the runoff portfolio of government guaranteed education loans.

Our national expansion initiative launched in 2018. Deposit products are led by a digital high yield savings account. Following the first solution center opening in Kansas City in 2018, three additional solution centers have opened in 2019 with a second in Kansas City and two in the Dallas/Fort Worth market. We also offer digital unsecured installment and small business loans in the expansion markets.

Retail Banking continues to enhance the customer experience with refinements to product and service offerings that drive value for consumers and small businesses. We are focused on meeting the financial needs of our customers by providing a broad range of liquidity, banking and investment products. Retail Banking continued to execute on its strategy of transforming the customer experience through transaction migration, branch network and home lending transformations and multi-channel engagement and service strategies.
•
Approximately 69% of consumer customers used non-teller channels for the majority of their transactions in the first nine months of 2019 compared with 65% for the same period in 2018.
•
Deposit transactions via ATM and mobile channels increased to 57% of total deposit transactions in the first nine months of 2019 from 54% for the same period in 2018.

Retail Banking continues to make progress on its multi-year initiative to redesign the home lending process. Technology enhancements supported increased residential mortgage origination volumes in 2019. The home equity origination cycle is the focus in 2019 as we enhance current capabilities in order to improve speed of delivery and convenience for customers.




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


Corporate & Institutional Banking
 
Corporate & Institutional Banking’s strategy is to be the leading relationship-based provider of traditional banking products and services to its customers through the economic cycles. We aim to grow our market share and drive higher returns by delivering value-added solutions that help our clients better run their organizations, all while maintaining prudent risk and expense management. We continue to focus on building client relationships where the risk-return profile is attractive.

Table 11: Corporate & Institutional Banking Table
(Unaudited)
 
 
 
 
 
 
 
Nine months ended September 30
  
 
  
 
Change
 
Dollars in millions
2019
 
2018
 
$
%
 
Income Statement
 
 
 
 
 
 
 
Net interest income
$
2,745

 
$
2,707

 
$
38

1
 %
 
Noninterest income
1,891

 
1,774

 
117

7
 %
 
Total revenue
4,636

 
4,481

 
155

3
 %
 
Provision for credit losses
219

 
43

 
176

409
 %
 
Noninterest expense
2,087

 
2,019

 
68

3
 %
 
Pretax earnings
2,330

 
2,419

 
(89
)
(4
)%
 
Income taxes
531

 
562

 
(31
)
(6
)%
 
Earnings
$
1,799

 
$
1,857

 
$
(58
)
(3
)%
 
Average Balance Sheet
 
 
 
 
 
 
 
Loans held for sale
$
467

 
$
763

 
$
(296
)
(39
)%
 
Loans
 
 
 
 
 
 
 
Commercial
$
112,371

 
$
102,342

 
$
10,029

10
 %
 
Commercial real estate
26,257

 
26,699

 
(442
)
(2
)%
 
Equipment lease financing
7,273

 
7,512

 
(239
)
(3
)%
 
Total commercial lending
145,901

 
136,553

 
9,348

7
 %
 
Consumer
16

 
49

 
(33
)
(67
)%
 
Total loans
$
145,917

 
$
136,602

 
$
9,315

7
 %
 
Total assets
$
163,126

 
$
153,149

 
$
9,977

7
 %
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing demand
$
39,016

 
$
44,577

 
$
(5,561
)
(12
)%
 
Money market
27,358

 
23,511

 
3,847

16
 %
 
Other
25,285

 
19,182

 
6,103

32
 %
 
Total deposits
$
91,659

 
$
87,270

 
$
4,389

5
 %
 
Performance Ratios
 
 
 
 
 
 
 
Return on average assets
1.47
%
 
1.62
%
 
 
 
 
Noninterest income to total revenue
41
%
 
40
%
 
 
 
 
Efficiency
45
%
 
46
%
 
 
 
 
Other Information
 
 
 
 
 
 
 
Consolidated revenue from: (a)
 
 
 
 
 
 
 
Treasury Management (b)
$
1,372

 
$
1,318

 
$
54

4
 %
 
Capital Markets (b)
$
849

 
$
816

 
$
33

4
 %
 
Commercial mortgage banking activities:
 
 
 
 
 
 
 
Commercial mortgage loans held for sale (c)
$
73

 
$
78

 
$
(5
)
(6
)%
 
Commercial mortgage loan servicing income (d)
190

 
179

 
11

6
 %
 
Commercial mortgage servicing rights valuation, net of economic hedge (e)
17

 
26

 
(9
)
(35
)%
 
Total
$
280

 
$
283

 
$
(3
)
(1
)%
 
Commercial mortgage servicing rights asset value (f)
$
595

 
$
766

 
$
(171
)
(22
)%
 
Average Loans by C&IB business (g)
 
 
 
 
 
 
 
Corporate Banking
$
73,460

 
$
66,145

 
$
7,315

11
 %
 
Real Estate
37,231

 
37,379

 
(148
)
—

 
Business Credit
22,480

 
20,588

 
1,892

9
 %
 
Commercial Banking
8,048

 
8,135

 
(87
)
(1
)%
 
Other
4,698

 
4,355

 
343

8
 %
 
Total average loans
$
145,917

 
$
136,602

 
$
9,315

7
 %
 
Credit-related statistics
 
 
 
 
 
 
 
Nonperforming assets (f) (h)
$
526

 
$
355

 
$
171

48
 %
 
Net charge-offs
$
58

 
$
8

 
$
50

625
 %
 

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


(a)
See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of this Corporate & Institutional Banking section.
(b)
Amounts are reported in net interest income and noninterest income.
(c)
Represents other noninterest income for valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, originations fees, gains on sale of loans held for sale and net interest income on loans held for sale.
(d)
Represents net interest income and noninterest income (primarily in corporate service fees) from loan servicing net of reduction in commercial mortgage servicing rights due to amortization expense and payoffs. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.
(e)
Amounts are reported in corporate service fees.
(f)
As of September 30.
(g)
As a result of our first quarter 2019 C&IB business realignment, average loans previously reported as Equipment Finance were reclassified to other C&IB businesses for all periods presented.
(h)
Primarily nonperforming loans of $.5 billion and $.3 billion at September 30, 2019 and September 30, 2018, respectively.

Corporate & Institutional Banking earned $1.8 billion in the first nine months of 2019, down $58 million compared to the same period in 2018. Higher revenue was more than offset by an increase in the provision for credit losses and higher noninterest expense.

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

Growth in noninterest income in the comparison was primarily driven by higher treasury management product revenue, capital markets-related revenue and gains on asset sales.

Overall credit quality remained stable. The increase in provision for credit losses was primarily driven by loan growth. Nonperforming assets and net charge-offs in the first nine months of 2019 reflect increases from recent historic lows.

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

Average loans increased compared to the first nine months of 2018 mostly due to strong growth in Corporate Banking and Business Credit:
•
Corporate Banking provides lending, treasury management and capital markets-related products and services to mid-sized and large corporations, and government and not-for-profit entities. Average loans for this business grew reflecting strong production in asset-backed financing as well as increased lending to large and mid-sized corporate clients.
•
PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients nationwide. Average loans for this business decreased primarily driven by project loan payoffs, partially offset by higher commercial mortgage balances.
•
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 as new originations and higher utilization were partially offset by payoffs.
•
Commercial Banking provides lending, treasury management and capital markets-related products and services to smaller corporations and businesses. Average loans for this business were relatively unchanged.

The deposit strategy of Corporate & Institutional Banking is to remain disciplined on pricing and focused on growing and retaining relationship-based balances over time, executing on customer and segment-specific deposit growth strategies and continuing to provide funding and liquidity to PNC. Average total deposits increased in the comparison driven by growth in interest-bearing deposits including a shift from noninterest-bearing deposits. We continue to monitor and balance the relationship between rates paid and the overall profitability of our deposit balances.

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

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 11 includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.


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


The Treasury Management business provides payables, receivables, deposit and account services, liquidity and investments, and online and mobile banking products and services to our clients. Treasury management revenue is reported in noninterest income and net interest income. Noninterest income includes treasury management product revenue less earnings credits provided to customers on compensating deposit balances used to pay for products and services. Net interest income primarily includes revenue from all treasury management customer deposit balances. Compared with the first nine months of 2018, treasury management revenue increased primarily due to higher product revenue and higher deposit balances.

Capital markets-related products and services include foreign exchange, derivatives, securities underwriting, loan syndications, mergers and acquisitions advisory and equity capital markets advisory related services. Capital markets-related revenue increased in the comparison primarily due to higher asset-backed finance structuring fees, corporate securities underwriting and customer-related derivatives fees, partially offset by lower loan syndication fees.

Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (both net interest income and noninterest income) and revenue derived from commercial mortgage loans held for sale and related hedges. Total revenue from commercial mortgage banking activities decreased in the comparison due to a lower benefit from commercial mortgage servicing rights valuation, net of economic hedge and lower revenue from commercial mortgage loans held for sale and related hedges, mostly offset by higher commercial mortgage loan servicing income.


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


Asset Management Group

Asset Management Group is focused on being a premier bank-held individual and institutional asset manager in each of the markets it serves. The business seeks to deliver high quality banking, trust and investment management services to our high net worth, ultra high net worth and institutional client sectors through a broad array of products and services. Asset Management Group’s priorities are to serve our clients' financial objectives, grow and deepen customer relationships and deliver solid financial performance with prudent risk and expense management.

Table 12: Asset Management Group Table
(Unaudited)
 
 
 
 
 
 
 
Nine months ended September 30
  
 
  
 
Change
 
Dollars in millions, except as noted
2019
 
2018
 
$
%
 
Income Statement
 
 
 
 
 
 
 
Net interest income
$
208

 
$
217

 
$
(9
)
(4
)%
 
Noninterest income
719

 
676

 
43

6
 %
 
Total revenue
927

 
893

 
34

4
 %
 
Provision for credit losses (benefit)
(2
)
 
2

 
(4
)
*

 
Noninterest expense
707

 
681

 
26

4
 %
 
Pretax earnings
222

 
210

 
12

6
 %
 
Income taxes
51

 
50

 
1

2
 %
 
Earnings
$
171

 
$
160

 
$
11

7
 %
 
Average Balance Sheet
 
 
 
 
 
 
 
Loans
 
 
 
 
 
 
 
Consumer
$
4,261

 
$
4,702

 
$
(441
)
(9
)%
 
Commercial and commercial real estate
747

 
734

 
13

2
 %
 
Residential mortgage
1,833

 
1,561

 
272

17
 %
 
Total loans
$
6,841

 
$
6,997

 
$
(156
)
(2
)%
 
Total assets
$
7,247

 
$
7,455

 
$
(208
)
(3
)%
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing demand
$
1,344

 
$
1,455

 
$
(111
)
(8
)%
 
Interest-bearing demand
3,121

 
3,413

 
(292
)
(9
)%
 
Money market
1,852

 
2,339

 
(487
)
(21
)%
 
Savings
5,969

 
4,754

 
1,215

26
 %
 
Other
797

 
408

 
389

95
 %
 
Total deposits
$
13,083

 
$
12,369

 
$
714

6
 %
 
Performance Ratios
 
 
 
 
 
 
 
Return on average assets
3.15
%
 
2.87
%
 
 
 
 
Noninterest income to total revenue
78
%
 
76
%
 
 
 
 
Efficiency
76
%
 
76
%
 
 
 
 
Supplemental Noninterest Income Information
 
 
 
 
 
 
 
Asset management fees
$
646

 
$
669

 
$
(23
)
(3
)%
 
Other Information
 
 
 
 
 
 
 
Nonperforming assets (a) (b)
$
42

 
$
51

 
$
(9
)
(18
)%
 
Net charge-offs
$
1

 
$
8

 
$
(7
)
(88
)%
 
Client Assets Under Administration (in billions) (a) (c)
 
 
 
 
 
 
 
Discretionary client assets under management
$
163

 
$
159

 
$
4

3
 %
 
Nondiscretionary client assets under administration
135

 
134

 
1

1
 %
 
Total
$
298

 
$
293

 
$
5

2
 %
 
Discretionary client assets under management
 
 
 
 
 
 
 
Personal
$
98

 
$
97

 
$
1

1
 %
 
Institutional
65

 
62

 
3

5
 %
 
Total
$
163

 
$
159

 
$
4

3
 %
 
* - Not meaningful
(a)
As of September 30.
(b)
Primarily nonperforming loans of $42 million at September 30, 2019 and $48 million at September 30, 2018.
(c)
Excludes brokerage account client assets. 



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


Asset Management Group earned $171 million in the first nine months of 2019 compared to $160 million for the same period in 2018. Earnings increased due to higher revenue partially offset by higher noninterest expense.

Higher revenue in the comparison was driven by a gain on the sale of the retirement recordkeeping business in the second quarter partially offset by lower net interest income due to lower average loan balances and narrower interest rate spreads on loans, as well as lower asset management fees as a result of the retirement recordkeeping sale and lower yielding assets under management.

Noninterest expense increased in the comparison and was primarily attributable to higher personnel expenses and costs associated with the sale transaction, including asset write-offs.

Asset Management Group’s discretionary client assets under management increased in the comparison to the prior year, primarily attributable to higher equity markets as of September 30, 2019.

The Asset Management Group entered into a definitive agreement in May 2019 to divest components of its PNC Capital Advisor's investment management business, including its PNC family of proprietary mutual funds of approximately $16 billion in assets under management as of September, 30 2019. The transaction is expected to close in the fourth quarter of 2019.

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

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

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

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

Table 13: BlackRock Table
(Unaudited)
 
 
 
Nine months ended September 30
 
 
 
Dollars in millions
2019
2018
 
Business segment earnings (a)
$
597

$
608

 
PNC’s economic interest in BlackRock (b)
22
%
22
%
 
(a)
Represents our share of BlackRock’s reported GAAP earnings net of income taxes on those earnings incurred by us.
(b)
At September 30.
In billions
September 30, 2019

December 31, 2018

 
Carrying value of our investment in BlackRock (c)
$
8.5

$
8.2

 
Market value of our investment in BlackRock (d)
$
15.5

$
13.7

 
(c)
We account for our investment in BlackRock under the equity method of accounting, exclusive of a related deferred tax liability of $1.8 billion and $1.7 billion at September 30, 2019 and December 31, 2018, respectively. Our voting interest in BlackRock common stock was approximately 22% at September 30, 2019.
(d)
Does not include liquidity discount.

Our 2018 Form 10-K includes additional information about our investment in BlackRock.

RISK MANAGEMENT

The Risk Management section included in Item 7 of our 2018 Form 10-K describes our enterprise risk management framework including risk culture, enterprise strategy, risk governance and framework, risk identification, risk assessment, risk controls and monitoring, and risk aggregation and reporting. Additionally, our 2018 Form 10-K provides an analysis of our key areas of risk, which include but are not limited to credit, liquidity and capital, market, operational and compliance.


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


Credit Risk Management

See the Credit Risk Management portion of the Risk Management section in our 2018 Form 10-K for additional discussion regarding credit risk.

Loan Portfolio Characteristics and Analysis

Table 14: Details of Loans
In billions
chart-493d4af0ade7577d8d7.jpg
We use several asset quality indicators, as further detailed in Note 3 Asset Quality, to monitor and measure our exposure to credit risk within our loan portfolio. The following provides additional information about our significant loan classes.

Commercial
Commercial loans comprised 52% of our total loan portfolio at both September 30, 2019 and December 31, 2018. The majority of our commercial loans are secured by collateral that provides a secondary source of repayment for the loan should the borrower experience cash generation difficulties. Examples of this collateral include short-term assets, such as accounts receivable, inventory and securities, and long-lived assets, such as equipment, real estate and other business assets.

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

Table 15: Commercial Loans by Industry
 
September 30, 2019
 
 
December 31, 2018
 
Dollars in millions
Amount
 
% of Total
 
 
Amount
 
% of Total
 
Commercial
 
 
 
 
 
 
 
 
 
Manufacturing
$
21,846

 
18
%
 
 
$
21,207

 
18
%
 
Retail/wholesale trade
21,761

 
18

 
 
20,850

 
18

 
Service providers
16,189

 
13

 
 
14,869

 
13

 
Real estate related (a)
12,294

 
10

 
 
12,312

 
11

 
Financial services
10,437

 
8

 
 
9,500

 
8

 
Health care
8,137

 
7

 
 
8,886

 
8

 
Transportation and warehousing
7,216

 
6

 
 
5,781

 
5

 
Other industries
26,134

 
20

 
 
23,429

 
19

 
Total commercial loans
$
124,014

 
100
%
 
 
$
116,834

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



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


Commercial Real Estate
Commercial real estate loans comprised $6.0 billion of real estate project loans, $6.2 billion of intermediate term financing loans and $16.7 billion related to commercial mortgages as of September 30, 2019. Comparable amounts were $6.6 billion, $7.1 billion and $14.4 billion, respectively, as of December 31, 2018.
We monitor credit risk associated with our commercial real estate loans similar to commercial loans by analyzing PD and LGD. Additionally, risks associated with these types of credit activities tend to be correlated to the loan structure, collateral location, project progress and business environment. These attributes are also monitored and utilized in assessing credit risk. The portfolio is geographically diverse due to the nature of our business involving clients throughout the U.S. The following table presents our commercial real estate loans by geographic market and property type.
Table 16: Commercial Real Estate Loans by Geography and Property Type
 
September 30, 2019
 
 
December 31, 2018
 
Dollars in millions
Amount
 
% of Total
 
 
Amount
 
% of Total
 
Geography
 
 
 
 
 
 
 
 
 
California
$
4,383

 
15
%
 
 
$
4,154

 
15
%
 
Florida
2,425

 
8

 
 
2,157

 
8

 
Maryland
1,832

 
6

 
 
1,966

 
7

 
Virginia
1,533

 
5

 
 
1,682

 
6

 
Texas
1,866

 
6

 
 
1,531

 
5

 
Illinois
1,117

 
4

 
 
1,368

 
5

 
Pennsylvania
1,235

 
4

 
 
1,214

 
4

 
New York
884

 
3

 
 
1,151

 
4

 
Ohio
1,151

 
4

 
 
1,053

 
4

 
North Carolina
1,035

 
4

 
 
915

 
3

 
All other states
11,423

 
41

 
 
10,949

 
39

 
Total commercial real estate loans
$
28,884

 
100
%
 
 
$
28,140

 
100
%
 
Property Type
 
 
 
 
 
 
 
 
 
Multifamily
$
9,099

 
32
%
 
 
$
8,770

 
31
%
 
Office
7,620

 
26

 
 
7,279

 
26

 
Retail
3,811

 
13

 
 
4,065

 
14

 
Hotel/Motel
1,801

 
6

 
 
1,686

 
6

 
Industrial/Warehouse
1,759

 
6

 
 
1,678

 
6

 
Senior Housing
1,195

 
4

 
 
1,092

 
4

 
Mixed Use
1,051

 
4

 
 
933

 
3

 
Other
2,548

 
9

 
 
2,637

 
10

 
Total commercial real estate loans
$
28,884

 
100
%
 
 
$
28,140

 
100
%
 

Home Equity
Home equity loans comprised $14.3 billion of primarily variable-rate home equity lines of credit and $10.7 billion of closed-end home equity installment loans at September 30, 2019. Comparable amounts were $15.5 billion and $10.6 billion, respectively, as of December 31, 2018.

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

The home equity portfolio is primarily originated within markets located in the Mid-Atlantic, Midwest, and Southeast, with less than 5% of the portfolio in states outside of those markets at September 30, 2019. The credit quality of newly originated loans over the last twelve months was strong overall with a weighted-average LTV on originations of 68% and a weighted-average FICO score of 769.

The credit performance of the majority of the home equity portfolio where we hold the first lien position is superior to the portion of the portfolio where we hold the second lien position, but do not hold the first lien. Lien position information is generally based upon

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


original LTV at the time of origination. We use an industry-leading third-party service provider to obtain updated loan, lien and collateral data that is aggregated from public and private sources.

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

Table 17: Home Equity Loans by Geography and by Lien Type
 
September 30, 2019
 
 
December 31, 2018
 
Dollars in millions
Amount
 
% of Total
 
 
Amount
 
% of Total
 
Geography
 
 
 
 
 
 
 
 
 
Pennsylvania
$
5,835

 
23
%
 
 
$
6,160

 
24
%
 
New Jersey
3,741

 
15

 
 
3,935

 
15

 
Ohio
2,913

 
12

 
 
3,095

 
12

 
Illinois
1,535

 
6

 
 
1,634

 
6

 
Maryland
1,419

 
6

 
 
1,481

 
6

 
Michigan
1,325

 
5

 
 
1,340

 
5

 
Florida
1,248

 
5

 
 
1,227

 
5

 
North Carolina
1,098

 
4

 
 
1,161

 
4

 
Kentucky
987

 
4

 
 
1,040

 
4

 
Indiana
813

 
3

 
 
845

 
3

 
All other states
4,057

 
17

 
 
4,205

 
16

 
Total home equity loans
$
24,971

 
100
%
 
 
$
26,123

 
100
%
 
Lien type
 
 
 
 
 
 
 
 
 
1st lien
 
 
58
%
 
 
 
 
58
%
 
2nd lien
 
 
42

 
 
 
 
42

 
Total

 
100
%
 
 
 
 
100
%
 

Residential Real Estate
Residential real estate loans primarily consisted of residential mortgage loans at both September 30, 2019 and December 31, 2018.

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

The credit quality of newly originated loans that we retained on our balance sheet over the last twelve months was strong overall as evidenced by a weighted-average LTV on originations of 70% and a weighted-average FICO score of 768.

The following table presents our residential real estate loans by geographic market.

Table 18: Residential Real Estate Loans by Geography
 
September 30, 2019
 
 
December 31, 2018
 
Dollars in millions
Amount
 
% of Total
 
 
Amount
 
% of Total
 
Geography
 
 
 
 
 
 
 
 
 
California
$
6,249

 
30
%
 
 
$
4,666

 
25
%
 
New Jersey
1,747

 
8

 
 
1,649

 
9

 
Florida
1,574

 
8

 
 
1,544

 
8

 
Illinois
1,122

 
5

 
 
1,161

 
6

 
Pennsylvania
1,093

 
5

 
 
1,031

 
6

 
New York
992

 
5

 
 
956

 
5

 
Maryland
927

 
4

 
 
913

 
5

 
North Carolina
873

 
4

 
 
854

 
5

 
Virginia
858

 
4

 
 
825

 
4

 
Ohio
696

 
3

 
 
682

 
4

 
All other states
4,951

 
24

 
 
4,376

 
23

 
Total residential real estate loans
$
21,082

 
100
%
 
 
$
18,657

 
100
%
 


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



We originate residential mortgage loans nationwide through our national mortgage business as well as within our branch network. Residential mortgage loans underwritten to government agency standards, including conforming loan amount limits, are typically sold with servicing retained by us. We also originate nonconforming residential mortgage loans that do not meet government agency standards, which we retain on our balance sheet. The nonconforming residential mortgage portfolio had strong credit quality at September 30, 2019 with an average original LTV of 70% and an average original FICO score of 772. Our portfolio of nonconforming residential mortgage loans totaled $15.1 billion at September 30, 2019 with 36% located in California.

Automobile
Within auto loans, $14.4 billion resided in the indirect auto portfolio while $1.6 billion were in the direct auto portfolio as of September 30, 2019. Comparable amounts as of December 31, 2018 were $12.9 billion and $1.5 billion, respectively. The indirect auto portfolio relates to loan applications originated through franchised dealers. This business is strategically aligned with our core retail banking business.

We continue to focus on borrowers with strong credit profiles as evidenced by a weighted-average loan origination FICO score over the last twelve months of 745 for indirect auto loans and 765 for direct auto loans. The weighted-average term of loan originations over the last twelve months was 74 months for indirect auto loans and 63 months for direct auto loans. We offer both new and used auto financing to customers through our various channels. At both September 30, 2019 and December 31, 2018, the portfolio was composed of 53% new vehicle loans and 47% used vehicle loans.

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

Nonperforming Assets and Loan Delinquencies

Nonperforming Assets
Nonperforming assets include nonperforming loans and leases for which ultimate collectability of the full amount of contractual principal and interest is not probable and include nonperforming troubled debt restructurings (TDRs), other real estate owned (OREO) and foreclosed assets. Loans held for sale, certain government insured or guaranteed loans, 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 our 2018 Form 10-K. A summary of the major categories of nonperforming assets are presented in Table 19. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in this Report for further detail of nonperforming asset categories.

Table 19: Nonperforming Assets by Type
 
September 30, 2019

December 31, 2018

 
Change
Dollars in millions
$
 
%
Nonperforming loans
 
 
 
 
 
 
Commercial lending
$
576

$
432

 
$
144

 
33
 %
Consumer lending (a)
1,152

1,262

 
(110
)
 
(9
)%
Total nonperforming loans
1,728

1,694

 
34

 
2
 %
OREO and foreclosed assets
119

114

 
5

 
4
 %
Total nonperforming assets
$
1,847

$
1,808

 
$
39

 
2
 %
TDRs included in nonperforming loans
$
911

$
863

 
$
48

 
6
 %
Percentage of total nonperforming loans
53
%
51
%
 
 
 
 
Nonperforming loans to total loans
.73
%
.75
%
 
 
 
 
Nonperforming assets to total loans, OREO and foreclosed assets
.78
%
.80
%
 
 
 
 
Nonperforming assets to total assets
.45
%
.47
%
 
 
 
 
Allowance for loan and lease losses to total nonperforming loans
158
%
155
%
 
 
 
 
(a)
Excludes most unsecured consumer loans and lines of credit, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.


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


Table 20: Change in Nonperforming Assets
In millions
 
2019

 
2018

 
January 1
 
$
1,808

 
$
2,035

 
New nonperforming assets
 
985

 
785

 
Charge-offs and valuation adjustments
 
(446
)
 
(408
)
 
Principal activity, including paydowns and payoffs
 
(315
)
 
(379
)
 
Asset sales and transfers to loans held for sale
 
(74
)
 
(101
)
 
Returned to performing status
 
(111
)
 
(107
)
 
September 30
 
$
1,847

 
$
1,825

 

As of September 30, 2019, approximately 88% of total nonperforming loans were secured by collateral which lessened reserve requirements and is expected to reduce credit losses in the event of default. As of September 30, 2019, commercial lending nonperforming loans were carried at approximately 78% of their unpaid principal balance, due to charge-offs recorded to date, before consideration of the ALLL.

Within consumer lending nonperforming loans, residential real estate TDRs comprised 78% and 81% of total residential real estate nonperforming loans at September 30, 2019 and December 31, 2018, respectively. Home equity TDRs comprised 50% of home equity nonperforming loans at September 30, 2019, up from 47% at December 31, 2018. TDRs generally remain in nonperforming status until a borrower has made at least six consecutive months of both principal and interest payments under the modified terms or ultimate resolution occurs. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to us and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

At September 30, 2019, our largest nonperforming asset was $33 million in the Information industry and the ten largest individual nonperforming assets represented 13% of total nonperforming assets.

Loan Delinquencies
We regularly monitor the level of loan delinquencies and believe these levels may be a key indicator of loan portfolio asset quality. Measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of payment are considered delinquent. Loan delinquencies 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.
Table 21: Accruing Loans Past Due (a)
 
 
Amount
 
  
 
Percentage of Total Loans Outstanding
 
 
 
September 30
2019

 
December 31
2018

 
Change
 
September 30
2019

 
December 31
2018

 
Dollars in millions
 
$
 
%
 
 
Early stage loan delinquencies
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing loans past due 30 to 59 days
 
$
547

 
$
585

 
$
(38
)
 
(6
)%
 
.23
%
 
.26
%
 
Accruing loans past due 60 to 89 days
 
269

 
271

 
(2
)
 
(1
)%
 
.11
%
 
.12
%
 
Total
 
816

 
856

 
(40
)
 
(5
)%
 
.34
%
 
.38
%
 
Late stage loan delinquencies
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing loans past due 90 days or more
 
532

 
629

 
(97
)
 
(15
)%
 
.22
%
 
.28
%
 
Total
 
$
1,348

 
$
1,485

 
$
(137
)
 
(9
)%
 
.57
%
 
.66
%
 
(a)
Past due loan amounts include government insured or guaranteed loans of $.6 billion at September 30, 2019 and $.7 billion at December 31, 2018.

Accruing loans past due 90 days or more 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 homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines, or are certain government insured or guaranteed loans.

Troubled Debt Restructurings and Loan Modifications

Troubled Debt Restructurings
A TDR is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs result from our loss mitigation activities and include rate reductions, principal forgiveness, postponement/reduction of scheduled amortization and extensions, which are intended to minimize economic loss and to avoid foreclosure or repossession of


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


collateral. Additionally, TDRs also result from court imposed concessions (e.g., a Chapter 7 bankruptcy where the debtor is discharged from personal liability to us and a court approved Chapter 13 bankruptcy repayment plan).
Table 22: Summary of Troubled Debt Restructurings (a)
 
 
September 30
2019

 
December 31
2018

 
Change
 
Dollars in millions
 
$
 
%
 
Total commercial lending
 
$
420

 
$
409

 
$
11

 
3
 %
 
Total consumer lending
 
1,343

 
1,442

 
(99
)
 
(7
)%
 
Total TDRs
 
$
1,763

 
$
1,851

 
$
(88
)
 
(5
)%
 
Nonperforming
 
$
911

 
$
863

 
$
48

 
6
 %
 
Accruing (b)
 
852

 
988

 
(136
)
 
(14
)%
 
Total TDRs
 
$
1,763

 
$
1,851

 
$
(88
)
 
(5
)%
 
(a)
Amounts in table represent recorded investment, which includes the unpaid principal balance plus net accounting adjustments, less any charge-offs. Recorded investment does not include any associated valuation allowance.
(b)
Accruing loans include consumer credit card loans and loans that have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans.

Excluded from TDRs are $1.0 billion and $1.1 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 September 30, 2019 and December 31, 2018, respectively. Nonperforming TDRs represented approximately 53% and 51% of total nonperforming loans at September 30, 2019 and December 31, 2018, respectively, and 52% and 47% of total TDRs at September 30, 2019 and December 31, 2018, respectively. The remaining portion of TDRs represents TDRs that have been returned to accrual status after performing under the restructured terms for at least six consecutive months.

See Note 3 Asset Quality in the Notes to Consolidated Financial Statements in this Report for additional information on TDRs. See the Credit Risk Management portion of the Risk Management section in our 2018 Form 10-K for information related to loan modifications.

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

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 September 30, 2019 consisted of $1.8 billion and $.9 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 and estimation processes are periodically updated.

Reserves are established for non-impaired commercial loan classes based primarily on PD and LGD.

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. 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. 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.
Allowances for non-impaired consumer loan classes are primarily based upon transition matrices, including using a roll-rate model. The roll-rate model uses statistical relationships, calculated from historical data that estimate the movement of loan outstandings through the various stages of delinquency and ultimately charge-off.

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.


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


A portion of the ALLL is related to qualitative measurement factors. These factors may include, but are not limited to, the following:
•
Industry concentrations and conditions,
•
Changes in market conditions,
•
Recent credit quality trends,
•
Recent loss experience in particular portfolios, including specific and unique events,
•
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.

Our determination of the ALLL for non-impaired loans is sensitive to the risk grades assigned to commercial loans and loss rates for consumer loans. There are several other qualitative and quantitative factors considered in determining the ALLL. Periodically, reserve sensitivity analyses are performed. Such analyses provide insight into the impact of adverse changes to risk grades and loss rates. Given the current processes used, we believe the risk grades and loss rates currently assigned are appropriate.

Purchased impaired loans are initially recorded at fair value and applicable accounting guidance prohibits the carryover 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 September 30, 2019, we had established 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.

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.

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.

See Note 1 Accounting Policies in our 2018 Form 10-K and Note 3 Asset Quality in the Notes To Consolidated Financial Statements in this Report for further information on certain key asset quality indicators that we use to evaluate our portfolios and establish the allowances.

Table 23: Allowance for Loan and Lease Losses
Dollars in millions
 
2019
 
2018
 
January 1
 
$
2,629

 
$
2,611

 
Total net charge-offs
 
(433
)
 
(313
)
 
Provision for credit losses
 
552

 
260

 
Net (increase) / decrease in allowance for unfunded loan commitments and letters of credit
 
(19
)
 
9

 
Other
 
9

 
17

 
September 30
 
$
2,738

 
$
2,584

 
Net charge-offs to average loans (for the nine months ended) (annualized)
 
.25
%
 
.19
%
 
Ratio of ALLL to total loans
 
1.15
%
 
1.16
%
 
Commercial lending net charge-offs
 
$
(79
)
 
$
(18
)
 
Consumer lending net charge-offs
 
(354
)
 
(295
)
 
Total net charge-offs
 
$
(433
)
 
$
(313
)
 
Net charge-offs to average loans (for the nine months ended) (annualized)
 
 
 
 
 
Commercial lending
 
.07
%
 
.02
%
 
Consumer lending
 
.63
%
 
.54
%
 

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 nine months of 2019, overall credit quality remained strong, which resulted in an essentially flat ratio of ALLL to total loans as of September 30, 2019 compared to December 31, 2018.



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


The following table summarizes our loan charge-offs and recoveries.
Table 24: Loan Charge-Offs and Recoveries
Nine months ended September 30
 
Gross
Charge-offs

 
Recoveries

 
Net Charge-offs /
(Recoveries)

 
Percent of Average
Loans (Annualized)

 
Dollars in millions
2019
 
 
 
 
 
 
 
 
 
Commercial
 
$
116

 
$
45

 
$
71

 
.08
 %
 
Commercial real estate
 
16

 
8

 
8

 
.04
 %
 
Equipment lease financing
 
6

 
6

 
—

 
—
 %
 
Home equity
 
52

 
56

 
(4
)
 
(.02
)%
 
Residential real estate
 
5

 
11

 
(6
)
 
(.04
)%
 
Automobile
 
183

 
85

 
98

 
.86
 %
 
Credit card
 
193

 
21

 
172

 
3.58
 %
 
Education
 
20

 
6

 
14

 
.51
 %
 
Other consumer
 
92

 
12

 
80

 
2.29
 %
 
  Total
 
$
683

 
$
250

 
$
433

 
.25
 %
 
2018
 
 
 
 
 
 
 
 
 
Commercial
 
$
78

 
$
50

 
$
28

 
.03
 %
 
Commercial real estate
 
8

 
18

 
(10
)
 
(.05
)%
 
Equipment lease financing
 
6

 
6

 
—

 
—
 %
 
Home equity
 
85

 
67

 
18

 
.09
 %
 
Residential real estate
 
9

 
18

 
(9
)
 
(.07
)%
 
Automobile
 
117

 
56

 
61

 
.60
 %
 
Credit card
 
161

 
18

 
143

 
3.32
 %
 
Education
 
24

 
6

 
18

 
.57
 %
 
Other consumer
 
76

 
12

 
64

 
1.94
 %
 
  Total
 
$
564

 
$
251

 
$
313

 
.19
 %
 

Total net charge-offs increased $120 million, or 38%, for the first nine months of 2019 compared to the same period in 2018. The increase in commercial net charge-offs reflected the impact of certain individual credits, while the increases in automobile, credit card and other consumer loan net charge-offs were due in part to loan portfolio growth. See Note 1 Accounting Policies in our 2018 Form 10-K and Note 4 Allowance for Loan and Lease Losses in the Notes To Consolidated Financial Statements in this Report for additional information on the ALLL.

The Recently Issued Accounting Standards section within Critical Accounting Estimates and Judgments of this Financial Review describes our upcoming implementation of Accounting Standards Update (ASU) 2016-13 - Credit Losses, including our estimated impact upon adoption on its effective date of January 1, 2020.
Liquidity and Capital Management
Liquidity risk, including our liquidity monitoring measures and tools, is described in further detail in the Liquidity and Capital Management section of our 2018 Form 10-K.

One of the ways we monitor our liquidity is by reference to the LCR, a regulatory minimum liquidity requirement designed to ensure that covered banking organizations maintain an adequate level of liquidity to meet net liquidity needs over the course of a hypothetical 30-day stress scenario. 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 outflows, with net cash outflows determined by applying the assumed outflow factors in the LCR rules. The resulting quotient is expressed as a percentage. The minimum LCR that PNC and PNC Bank are required to maintain is 100%. PNC and PNC Bank calculate the LCR daily, and as of September 30, 2019, the LCR for PNC and PNC Bank exceeded the requirement of 100%.

See the Recent Regulatory Developments section of this Report for information on the Final Tailoring Rules and the impact on LCR requirements.

We provide additional information regarding regulatory liquidity requirements and their potential impact on us in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of our 2018 Form 10-K.



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


Sources of Liquidity
Our largest source of liquidity on a consolidated basis is the customer deposit base generated by our banking businesses. These deposits provide relatively stable and low-cost funding. Total deposits increased to $285.6 billion at September 30, 2019 from $267.8 billion at December 31, 2018 driven by growth in both interest-bearing and non-interest bearing deposits. See the Funding Sources portion of the Consolidated Balance Sheet Review section of this Financial Review for additional information related to our deposits. Additionally, certain assets determined by us to be liquid as well as unused borrowing capacity from a number of sources are also available to manage our liquidity position.
At September 30, 2019, our liquid assets consisted of short-term investments (federal funds sold, resale agreements, trading securities and interest-earning deposits with banks) totaling $26.3 billion and securities available for sale totaling $69.1 billion. The level of liquid assets fluctuates over time based on many factors, including market conditions, loan and deposit growth and balance sheet management activities. Our liquid assets included $4.0 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, $8.7 billion of securities held to maturity were also pledged as collateral for these purposes.

We also obtain liquidity through various forms of funding, including long-term debt (senior notes, subordinated debt and FHLB borrowings) and short-term borrowings (securities sold under repurchase agreements, commercial paper and other short-term borrowings). See Note 10 Borrowed Funds in our 2018 Form 10-K and the Funding Sources section of the Consolidated Balance Sheet Review for additional information related to our borrowings.
Total senior and subordinated debt, on a consolidated basis, increased due to the following activity:
Table 25: Senior and Subordinated Debt
In billions
2019

 
January 1
$
30.9

 
Issuances
6.9

 
Calls and maturities
(6.3
)
 
Other
1.1

 
September 30
$
32.6

 
Bank Liquidity
Under PNC Bank’s 2014 bank note program, as amended, PNC Bank may from time to time offer up to $40.0 billion aggregate principal amount outstanding at any one time of its unsecured senior and subordinated notes with maturity dates more than nine months (in the case of senior notes) and five years or more (in the case of subordinated notes) from their date of issue. At September 30, 2019, PNC Bank had $22.9 billion of notes outstanding under this program of which $18.6 billion were senior bank notes and $4.3 billion were subordinated bank notes. The following table details issuances for the three months ended September 30, 2019.
Table 26: PNC Bank Notes Issued
Issuance Date
Amount
Description of Issuance
July 23, 2019
$900 million


Senior floating rate notes with a maturity date of July 22, 2022. Redeemable in whole, but not in part, on July 22, 2021, and in whole or in part on or after June 22, 2022. Interest is payable quarterly, at the 3-month LIBOR rate, reset quarterly, plus 45 basis points, on January 22, April 22, July 22 and October 22 of each year, beginning October 22, 2019.

July 23, 2019
$600 million
Senior fixed-to-floating rate notes with a maturity date of July 22, 2022. Redeemable in whole, but not in part, on July 22, 2021, and in whole or in part on or after June 22, 2022. Interest is initially payable semi-annually at a fixed rate of 2.232% on July 22 and January 22 of each year, beginning January 22, 2020, and ending on July 22, 2021. Beginning on July 22, 2021, interest is payable quarterly, at the 3-month LIBOR rate, reset quarterly, plus 44 basis points, on January 22, April 22, July 22, and October 22, beginning on October 22, 2021.


See Note 17 Subsequent Events for information on the October 2019 issuance of $750 million of subordinated notes by PNC Bank.

PNC Bank maintains additional secured borrowing capacity with the FHLB-Pittsburgh and through the Federal Reserve Bank discount window. The Federal Reserve Bank, however, is not viewed as a primary means of funding our routine business activities, but rather as a potential source of liquidity in a stressed environment or during a market disruption. At September 30, 2019, our unused secured borrowing capacity at the FHLB-Pittsburgh and the Federal Reserve Bank totaled $44.3 billion.

PNC Bank has the ability to offer up to $10.0 billion of its commercial paper to provide additional liquidity. As of September 30, 2019, there were no issuances outstanding under this program.



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


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

As of September 30, 2019, available parent company liquidity totaled $6.3 billion. Parent company liquidity is primarily held in intercompany short-term investments, the terms of which provide for the availability of cash in 31 days or less. Investments with longer durations may also be acquired, but if so, the related maturities are aligned with scheduled cash needs, such as the maturity of parent company debt obligations.

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

There are statutory and regulatory limitations on the ability of a national bank to pay dividends or make other capital distributions or to extend credit to the parent company or its non-bank subsidiaries. The amount available for dividend payments by PNC Bank to the parent company without prior regulatory approval was approximately $3.0 billion at September 30, 2019. See Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements in our 2018 Form 10-K for a further discussion of these limitations.

In addition to dividends from PNC Bank, other sources of parent company liquidity include cash and investments, as well as dividends and loan repayments from other subsidiaries and dividends or distributions from equity investments. We can also generate liquidity for the parent company and PNC’s non-bank subsidiaries through the issuance of debt and equity securities, including certain capital instruments, in public or private markets and commercial paper. The parent company has the ability to offer up to $5.0 billion of commercial paper to provide additional liquidity. As of September 30, 2019, there were no commercial paper issuances outstanding.

The parent company has an effective shelf registration statement pursuant to which we can issue additional debt, equity and other capital instruments. Under this shelf registration statement, on July 23, 2019, the parent company issued $1.0 billion of senior notes with a maturity date of July 23, 2026. Interest is payable semi-annually at a fixed rate of 2.60% on July 23 and January 23 of each year, beginning on January 23, 2020. See Note 17 Subsequent Events in the Notes To Consolidated Financial Statements of this Report for information on the November 1, 2019 issuance of $650 million of senior fixed rate notes by the parent company utilizing this shelf registration.

Parent company senior and subordinated debt outstanding totaled $9.3 billion and $6.7 billion at September 30, 2019 and December 31, 2018, respectively.

Contractual Obligations and Commitments
We have contractual obligations representing required future payments on borrowed funds, time deposits, leases, pension and postretirement benefits and purchase obligations. See the Liquidity and Capital Management portion of the Risk Management section in our 2018 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 13 Commitments in the Notes To Consolidated Financial Statements of this Report.

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

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

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


Table 27: Credit Ratings for PNC and PNC Bank
 
September 30, 2019
  
Moody’s
Standard & Poor’s
Fitch
PNC
 
 
 
Senior debt
A3
A-
A+
Subordinated debt
A3
BBB+
A
Preferred stock
Baa2
BBB-
BBB-
PNC Bank
 
 
 
Senior debt
A2
A
A+
Subordinated debt
A3
A-
A
Long-term deposits
Aa2
A
AA-
Short-term deposits
P-1
A-1
F1+
Short-term notes
P-1
A-1
F1

Capital Management
Detailed information on our capital management processes and activities, including additional information on our previous CCAR submissions and capital plans, is included in the Capital Management portion of the Risk Management section in our 2018 Form 10-K.

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

In connection with the 2019 CCAR process, we submitted our capital plan, as approved by PNC's Board of Directors, to the Federal Reserve in April 2019. The Federal Reserve accepted the capital plan and did not object to our proposed capital actions. As provided in the 2019 capital plan, we announced new share repurchase programs of up to $4.3 billion for the four-quarter period beginning in the third quarter of 2019. In the third quarter of 2019, we repurchased 7.5 million common shares for $1.0 billion.
 
We paid dividends on common stock of $.5 billion, or $1.15 per common share, during the third quarter of 2019. On October 3, 2019, the PNC Board of Directors declared a quarterly common stock cash dividend of $1.15 per share, with a payment date of November 5, 2019.

We completed our common stock repurchase programs for the four quarter period that ended June 30, 2019, with total repurchases of 21.4 million common shares for $2.8 billion. These repurchases were included in our capital plan accepted by the Federal Reserve as part of our 2018 CCAR submission. Additionally, we paid $1.7 billion in common stock dividends for a total of $4.5 billion of capital returned to shareholders during this four quarter period.


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



Table 28: Basel III Capital
Dollars in millions
Basel III
September 30, 2019
 
Common equity Tier 1 capital
 
 
Common stock plus related surplus, net of treasury stock
$
3,179

 
Retained earnings
41,413

 
Accumulated other comprehensive income (loss) for securities currently, and those transferred from, available for sale
1,119

 
Accumulated other comprehensive income (loss) for pension and other postretirement plans
(481
)
 
Goodwill, net of associated deferred tax liabilities
(9,030
)
 
Other disallowed intangibles, net of deferred tax liabilities
(238
)
 
Other adjustments/(deductions)
(209
)
 
Total common equity Tier 1 capital before threshold deductions
35,753

 
Total threshold deductions
(2,952
)
 
Common equity Tier 1 capital
$
32,801

 
Additional Tier 1 capital
 
 
Preferred stock plus related surplus
3,992

 
Other adjustments/(deductions)
(162
)
 
Tier 1 capital
$
36,631

 
Additional Tier 2 capital
 
 
Qualifying subordinated debt
3,481

 
Trust preferred capital securities
60

 
Eligible credit reserves includable in Tier 2 capital
3,042

 
Total Basel III capital
$
43,214

 
Risk-weighted assets
 
 
Basel III standardized approach risk-weighted assets (a)
$
340,912

 
Basel III advanced approaches risk-weighted assets (b)
$
319,960

 
Average quarterly adjusted total assets
$
393,009

 
Supplementary leverage exposure (c)
$
471,906

 
Basel III risk-based capital and leverage ratios (d)
 
 
Common equity Tier 1
9.6
%
 
Tier 1
10.7
%
 
Total (e)
12.7
%
 
Leverage (f)
9.3
%
 
Supplementary leverage ratio (g)
7.8
%
 
(a)
Includes credit and market risk-weighted assets.
(b)
Basel III advanced approaches risk-weighted assets are calculated 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.
(c)
Supplementary leverage exposure is the sum of Average quarterly adjusted total assets and certain off-balance sheet exposures including undrawn credit commitments and derivative potential future exposures.
(d)
For comparative purposes only, the advanced approaches Basel III Common equity Tier 1, Tier 1 risk-based and Total risk-based ratios for September 30, 2019 were 10.3%, 11.4% and 12.5%, respectively.
(e)
The 2019 Basel III Total risk-based capital ratio includes nonqualifying trust preferred capital securities of $60 million that are subject to a phase-out period that runs through 2021. For comparative purposes only, as of September 30, 2019 the ratio was 12.7%, assuming nonqualifying trust preferred capital securities are phased out.
(f)
Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets.
(g)
Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure.

Because PNC remains in the parallel run qualification phase for the advanced approaches, our regulatory risk-based capital ratios in 2019 are calculated using the standardized approach for determining risk-weighted assets. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, past due exposures and equity exposures are generally subject to higher risk weights than other types of exposures. Once we exit parallel run, our regulatory risk-based capital ratios will be the lower of the ratios calculated under the standardized approach and the advanced approaches.

Under the Basel III rules applicable to PNC, significant common stock investments in unconsolidated financial institutions (for PNC, primarily BlackRock), mortgage servicing rights and deferred tax assets must be deducted from capital (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

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


Tier 1 capital. Also, Basel III regulatory capital includes AOCI related to securities currently, and those transferred from, 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 (BHCs), including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largest U.S. BHCs, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers through estimated stress scenarios. We seek to manage our capital consistent with these regulatory principles, and believe that our September 30, 2019 capital levels were aligned with them.

At September 30, 2019, PNC and PNC Bank, our sole bank subsidiary, were both considered “well capitalized,” based on applicable U.S. regulatory capital ratio requirements. To qualify as “well capitalized”, PNC must have Basel III capital ratios of at least 6% for Tier 1 risk-based capital and 10% for Total risk-based capital, and PNC Bank must have Basel III capital ratios of at least 6.5% for Common equity Tier 1 risk-based capital, 8% for Tier 1 risk-based capital, 10% for Total risk-based capital and a Leverage ratio of at least 5%.

See the Recent Regulatory Developments section of this Report for information regarding the Final Tailoring Rules and the impact to Basel III capital rules. We provide additional information regarding regulatory capital requirements and some of their potential impacts on us in the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 18 Regulatory Matters in our 2018 Form 10-K.

Market Risk Management
See the Market Risk Management portion of the Risk Management Section in our 2018 Form 10-K for additional discussion regarding market risk.

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

Our Asset and Liability Management group centrally manages interest rate risk as prescribed in our risk management policies, which are approved by management’s Asset and Liability Committee and the Risk Committee of the Board of Directors.
Sensitivity results and market interest rate benchmarks for the third quarters of 2019 and 2018 follow.

Table 29: Interest Sensitivity Analysis
 
Third Quarter 2019

 
Third Quarter 2018

 
Net Interest Income Sensitivity Simulation (a)
 
 
 
 
Effect on net interest income in first year from gradual interest rate change over the
   following 12 months of:
 
 
 
 
100 basis point increase
1.9
 %
 
1.8
 %
 
100 basis point decrease
(2.6
)%
 
(2.3
)%
 
Effect on net interest income in second year from gradual interest rate change over the
    preceding 12 months of:
 
 
 
 
100 basis point increase
4.6
 %
 
3.6
 %
 
100 basis point decrease
(7.3
)%
 
(5.9
)%
 
Duration of Equity Model (a)
 
 
 
 
Base case duration of equity (in years)
(6.5
)
 
.2

 
Key Period-End Interest Rates
 
 
 
 
One-month LIBOR
2.02
 %
 
2.26
 %
 
Three-month LIBOR
2.09
 %
 
2.40
 %
 
Three-year swap
1.55
 %
 
3.05
 %
 
(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 30 reflects the percentage change in net interest income over the next two 12-month periods assuming (i) the PNC Economist’s most likely rate forecast, (ii) implied market forward rates and


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


(iii) yield curve slope flattening (a 100 basis point yield curve slope flattening between one-month and ten-year rates superimposed on current base rates) scenario.

All changes in forecasted net interest income are relative to results in a base rate scenario where current market rates are assumed to remain unchanged over the forecast horizon.
Table 30: Net Interest Income Sensitivity to Alternative Rate Scenarios
 
September 30, 2019
 
 
PNC
Economist

Market
Forward

Slope
Flattening

 
First year sensitivity
.2
%
.7
%
(1.2
)%
 
Second year sensitivity
1.3
%
.5
%
(4.7
)%
 

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

The following graph presents the LIBOR/Swap yield curves for the base rate scenario and each of the alternate scenarios one year forward.
Table 31: Alternate Interest Rate Scenarios: One Year Forward
capturea27.jpg
The third quarter 2019 interest sensitivity analyses indicate that our Consolidated Balance Sheet is positioned to benefit from an increase in interest rates and an upward sloping interest rate yield curve. We believe that we have the deposit funding base and balance sheet flexibility to adjust, where appropriate and permissible, to changing interest rates and market conditions.

The planned discontinuance of the requirement that banks submit rates for the calculation of LIBOR after 2021 presents risks to the financial instruments originated, held or serviced by PNC that use LIBOR as a reference rate.  PNC holds instruments and services its instruments and instruments owned by others that may be impacted by the likely discontinuance of LIBOR, including loans, investments, hedging products, floating-rate obligations, and other financial instruments that use LIBOR as a benchmark rate. PNC is coordinating with regulators and industry groups to identify an appropriate replacement reference rate for contracts expiring after 2021, as well as preparing for this transition as it relates to both new and existing exposures. PNC has established a cross-functional governance structure to oversee the overall strategy for the transition from LIBOR. An initial LIBOR impact and risk assessment has been performed, which identified the associated risks across products, systems, models, and processes.

See the Risk Factors section in Part I, Item IA disclosed in PNC's 2018 Form 10-K for additional information regarding the planned discontinuance of LIBOR as a reference rate.
Market Risk Management – Customer-Related Trading Risk
We engage in fixed income securities, derivatives and foreign exchange transactions to support our customers’ investing and hedging activities. These transactions, related hedges and the credit valuation adjustment related to our customer derivatives portfolio are marked-to-market daily and reported as customer-related trading activities. We do not engage in proprietary trading of these products.
We use value-at-risk (VaR) as the primary means to measure and monitor market risk in customer-related trading activities. VaR is used to estimate the probability of portfolio losses based on the statistical analysis of historical market risk factors. A diversified VaR

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


reflects empirical correlations across different asset classes. We calculate a diversified VaR at a 95% confidence interval and the results for the first nine months of 2019 and 2018 were within our acceptable limits.
See the Market Risk Management – Customer-Related Trading Risk section of our 2018 Form 10-K for more information on our models used to calculate VaR and our backtesting process.
Customer related trading revenue was $212 million for the nine months ended September 30, 2019 compared to $196 million for the same period in 2018. The increase was primarily due to improved derivative clients sales revenue partially offset by a reduction in foreign exchange client revenue. For the quarterly period, customer related trading revenue was $77 million for the third quarter of 2019 compared to $53 million in 2018. The increase was driven by the improved derivative client sales revenue and, to a lesser extent, improved client related trading results and the impact of changes in 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, underwriting securities and trading financial instruments, we make and manage direct investments in a variety of transactions, including management buyouts, recapitalizations and growth financings in a variety of industries. We also have investments in affiliated and non-affiliated funds that make similar investments in private equity. The economic and/or book value of these investments and other assets are directly affected by changes in market factors.
Various PNC business units manage our equity and other investment activities. Our businesses are responsible for making investment decisions within the approved policy limits and associated guidelines.
A summary of our equity investments follows:
Table 32: Equity Investments Summary
 
September 30
2019

 
December 31
2018

 
Change
 
Dollars in millions
 
$

 
%

 
BlackRock
$
8,321

 
$
8,016

 
$
305

 
4
%
 
Tax credit investments
2,252

 
2,219

 
33

 
1
%
 
Private equity and other
2,752

 
2,659

 
93

 
3
%
 
Total
$
13,325

 
$
12,894

 
$
431

 
3
%
 

BlackRock
We owned approximately 35 million common stock equivalent shares of BlackRock equity at September 30, 2019, accounted for under the equity method. The Business Segments Review section of this Financial Review includes additional information about BlackRock.
Tax Credit Investments
Included in our equity investments are direct tax credit investments and equity investments held by consolidated entities. These tax credit investment balances included unfunded commitments totaling $.9 billion and $.8 billion at September 30, 2019 and December 31, 2018, respectively. These unfunded commitments are included in Other liabilities on our Consolidated Balance Sheet.

Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in our 2018 Form 10-K has further information on Tax Credit Investments.

Private Equity and Other
The majority of our other equity investments consists of our private equity portfolio. The private equity portfolio is an illiquid portfolio consisting of mezzanine and equity investments that vary by industry, stage and type of investment. Private equity investments carried at estimated fair value totaled $1.6 billion and $1.5 billion at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, $1.4 billion was invested directly in a variety of companies and $.2 billion was invested indirectly through various private equity funds. See the Supervision and Regulation section in Item 1 of our 2018 Form 10-K for discussion of the potential impacts of the Volcker Rule provisions of Dodd-Frank on our interests in and other relationships with private funds covered by the Volcker Rule.

Included in our other equity investments are Visa Class B common shares, which are recorded at cost. Visa Class B common shares that we own are transferable only under limited circumstances until they can be converted into shares of the publicly-traded Class A common shares, which cannot happen until the resolution of the pending interchange litigation. Based upon the September 30, 2019 per share closing price of $172.01 for a Visa Class A common share, the estimated value of our total investment in the Class B common shares was approximately $981 million at the current conversion rate of Visa B shares to Visa A shares, while our cost basis was not significant. See Note 6 Fair Value and Note 19 Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8


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


of our 2018 10-K for additional information regarding our Visa agreements. The estimated value does not represent fair value of the Visa B common shares given the share’s limited transferability and the lack of observable transactions in the marketplace.

We also have certain other equity investments, the majority of which represent investments in affiliated and non-affiliated funds with both traditional and alternative investment strategies. Net gains related to these investments were not significant at September 30, 2019 and September 30, 2018.

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

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

Further information on our financial derivatives is presented in Note 1 Accounting Policies and Note 6 Fair Value in our Notes To Consolidated Financial Statements in our 2018 Form 10-K and in Note 6 Fair Value and Note 9 Financial Derivatives in the Notes To Consolidated Financial Statements in this Report.

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

RECENT REGULATORY DEVELOPMENTS

Agency Actions to Better Tailor Regulations to An Institution’s Risk Profile
In October 2019, the Federal Reserve, Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) adopted final rules to tailor the application of the agencies’ capital (including stress testing) and liquidity rules, and the Federal Reserve’s enhanced prudential standards adopted under Section 165 of Dodd-Frank, to banking organizations with $100 billion or more in consolidated total assets (the Final Tailoring Rules). The Final Tailoring Rules classify all bank holding companies (BHCs) with $100 billion or more in total assets into one of four categories (Category I, Category II, Category III and Category IV), with the most stringent capital, liquidity and enhanced prudential requirements applying to Category I firms and the least restrictive requirements applying to Category IV firms. The classification of any bank subsidiary of a BHC will generally follow that of its parent BHC. PNC and PNC Bank are considered Category III firms under the Final Tailoring Rules because PNC (i) has more than $250 billion in consolidated total assets, (ii) is not designated as a globally systemically important bank (GSIB), and (iii) has less than $75 billion in cross-jurisdictional activity (as defined in the final rules). The Final Tailoring Rules become effective on December 31, 2019 or allow organizations to begin complying with the new rules beginning December 31, 2019, although certain related changes (such as the changes to the Basel III threshold deductions applicable to PNC and PNC Bank described below) do not become effective until January 1, 2020. As such, we expect the changes to be fully effective for PNC and PNC Bank no later than the first quarter of 2020.
As described below, the Final Tailoring Rules make several important changes to the capital, liquidity and enhanced prudential standards requirements applicable to PNC and PNC Bank.

First, the Final Tailoring Rules significantly modify the threshold deductions for significant common stock investments in unconsolidated financial institutions, as well as mortgage servicing rights and deferred tax assets, from Common equity Tier 1 (CET1) capital (in each case, net of associated deferred tax liabilities) applicable to PNC and PNC Bank. Under the Final Tailoring Rules, PNC and PNC Bank will have to deduct its significant common stock investments in unconsolidated financial institutions, mortgage servicing rights and deferred tax assets from CET1 capital (in each case, net of associated deferred tax liabilities) only to the extent such items individually exceed 25% of the institution's adjusted CET1 capital. PNC's common stock investment in BlackRock is treated as a significant common stock investment in an unconsolidated financial institution for these purposes. As of September 30, 2019, a portion of PNC’s common stock investment in BlackRock was required to be deducted from CET1 capital. If the Final Tailoring Rules had been in effect as of September 30, 2019, no portion of PNC’s common stock investment in BlackRock would have been deducted from CET1 capital.

As a result, upon effectiveness of the Final Tailoring Rules, PNC may have the ability to return more capital to shareholders, through dividends or buybacks, while still maintaining capital in excess of regulatory and policy minimums. We are evaluating how best to deploy that excess capital in light of the impact of the Final Tailoring Rules and will continue to do so. The timing and amount of any dividends and buybacks will continue to be subject, among other things, to the CCAR process described in the Supervision and Regulation section of Item 1 Business in our 2018 Form 10-K.


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



Second, under the Final Tailoring Rules, PNC and PNC Bank will have the ability to opt-out of the inclusion of accumulated other comprehensive income (AOCI) related to both available for sale securities and pension and other post-retirement plans in CET1 capital. PNC and PNC Bank must make this election in the organization’s relevant regulatory reporting forms for the first period ending after the effective date of the Final Tailoring Rules. We expect to make this election.

Third, the Final Tailoring Rules reduce the LCR requirements for Category III banking organizations that, like PNC and PNC Bank, have less than $75 billion in weighted short-term wholesale funding (as defined by the rules). Under the Final Tailoring Rules, the net cash outflows of PNC and PNC Bank under the LCR rules are scaled by a factor of 85% (rather than the 100% standard under current rules), thereby reducing the amount of HQLA that the organization has to maintain to meet its LCR requirements.

In addition, under the Final Tailoring Rules:

•
PNC and PNC Bank will no longer be required to use the model-based advanced approaches to calculate risk-weighted assets for capital purposes;
•
PNC will no longer have to conduct a mid-cycle company-run stress test using balance sheet data as of June 30 and publicly disclose the results of such test; and
•
PNC and PNC Bank will have to conduct a company-run stress test under the Dodd-Frank Act stress testing regulations of the Federal Reserve and OCC (a “DFAST stress test”) biennially (rather than annually) using two scenarios (a baseline and severely adverse scenario), and publicly disclose the results of such tests.

Finally, the Federal Reserve and FDIC in October 2019 adopted modifications to their resolution plan regulations for covered BHCs, including PNC. Under the modifications, which we expect to go into effect in the first quarter of 2020, PNC will generally have to file a resolution plan on a 3-year cycle, with submissions alternating between a full plan and a targeted plan. Pursuant to these modifications and a filing extension received from the Federal Reserve and FDIC in July 2019, PNC’s next resolution plan is scheduled to be filed by July 1, 2021. The modifications, however, provide the agencies with the ability to alter the scheduled filing date for a covered company, request an interim update before a covered company’s next scheduled filing date, and require a covered company to submit a full resolution plan in lieu of a scheduled targeted plan.

Volcker Rule
In October, the U.S. banking agencies, SEC, and Commodity Futures Trading Commission approved changes to the regulations implementing the Volcker Rule that, among other things, simplify and tailor the compliance program requirements for banking entities, like PNC, that have trading assets and liabilities of more than $1 billion, but less than $20 billion. The final regulations also provide that for institutions subject to the market risk capital rule, like PNC, only certain market risk capital rules and dealer positions are subject to the Volcker Rule’s restrictions on proprietary trading. The final regulations also simplify the requirements for underwriting, market-making, and risk-mitigating hedging activities. Banking entities must comply with the final regulations by January 1, 2021, but may elect to comply with the modifications beginning January 1, 2020.

FDIC Recordkeeping Requirements
In July 2019, the FDIC approved amendments to its regulations regarding (i) enhanced deposit insurance recordkeeping requirements for insured depository institutions (IDIs) with at least 2 million deposit accounts, including PNC Bank, and (ii) deposit insurance recordkeeping requirements for joint deposit accounts applicable to all IDIs.  Among other things, the amendments revise the attestation requirement under the deposit insurance recordkeeping regulations and allow covered IDIs to elect to extend the April 1, 2020 compliance date for the enhanced deposit insurance recordkeeping requirements by up to one year.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Note 1 Accounting Policies of our 2018 Form 10-K describes 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.

The following critical accounting policies and judgments are described in more detail in Critical Accounting Estimates and Judgments in Item 7 of our 2018 Form 10-K:
•
Fair Value Measurements
•
Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit
•
Residential and Commercial Mortgage Servicing Rights



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


Recently Issued Accounting Standards
ASU
Description
Financial Statement Impact
Credit Losses - ASU 2016-13

Issued June 2016


Codification Improvements - ASU 2019-04

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

Issued April 2019


Targeted Transition Relief - Credit Losses - ASU 2019-05

Issued May 2019










• Required effective date of January 1, 2020. 
• Requires the use of an expected credit loss methodology; specifically, current expected credit losses (CECL) for the remaining life of the asset will be recognized at the time of origination or acquisition.
• Methodology will apply to loans, net investment in leases, debt securities and certain financial assets not accounted for at fair value through net income. It will also apply to off-balance sheet credit exposures except for unconditionally cancellable commitments.
• In-scope assets will be presented at the net amount expected to be collected after deducting the allowance for credit losses (ACL) from the amortized cost basis of the assets.
• Requires inclusion of expected recoveries of previously charged-off amounts for in-scope assets.
• Requires enhanced credit quality disclosures including disaggregation of credit quality indicators by vintage.
• Requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.
• We plan to adopt the CECL standard on its effective date.
• We have a company-wide, cross-functional governance structure that we established in the third quarter of 2016 to oversee overall strategy for implementation of the CECL standard.
• We have prepared CECL accounting policies and continue to refine and test our models, estimation techniques, data, operational processes and financial controls which will be used to calculate our ACL under the CECL standard. We will continue to refine our interpretations, methodology, data and operational processes based upon our reviews and tests.
• The Financial Accounting Standards Board (FASB) recently issued ASU's 2019-04 and 2019-05. ASU 2019-04 clarified treatment of several topics in the CECL standard, including recoveries and accrued interest, which we plan to implement. ASU 2019-05 provided an option to elect fair value option at transition for certain assets in scope for CECL, which we plan to utilize. The FASB is also expected to publish an ASU providing additional guidance on selected topics and we are awaiting final guidance to implement any necessary changes.
• The ACL will be developed using various models and estimation techniques utilizing our historical loss experience, current borrower characteristics, current conditions, reasonable and supportable forecasts and other relevant factors. For expected losses in our reasonable and supportable forecast period of three years, we will use four macroeconomic scenarios and their estimated probabilities. These will be produced by our economics team using a combination of structural models and expert judgment and will be designed to reflect a range of plausible economic conditions and emerging business cycles over the next three years.
• We will also apply qualitative factors that could be related to idiosyncratic risk factors, changes in current economic conditions that may not be reflected in quantitatively derived results, or other relevant factors to ensure the ACL reflects our best estimate of current expected credit losses.
• Based on our analysis of results from the parallel run periods in 2019 thus far, our CECL estimate will be sensitive to various factors, including, but not limited to, the following major factors:
- Current economic conditions and borrower quality: Our forecast of expected losses depends on current conditions and portfolio quality. As current conditions evolve, forecasted losses could be materially affected.
- Scenario weights and design: Our loss estimates are sensitive to the shape and severity of macroeconomic forecasts and thus vary significantly between upside and downside scenarios. Change to probabilities and timing of peak business cycles could materially affect our loss estimates.
- Methodology changes: Enhancements to our CECL methodologies could materially affect our reserve estimates.
• Based on our forecasted economic conditions and portfolio balances at September 30, 2019, the adoption of the CECL standard could result in an overall ACL increase of approximately 20%, as compared to our current aggregate reserve levels. The overall change is primarily due to the difference between current loss reserve periods versus the estimated remaining contractual lives, as required by the CECL standard. We believe that given current conditions, our consumer loss reserves will increase significantly, while our commercial loan reserves will decrease slightly. Additionally, the CECL ACL could produce higher volatility in the quarterly provision for credit losses than our current reserve process.
• The estimated impact of the CECL standard implementation is based on the current state of our end-to-end CECL process and is inclusive of quantitative results and qualitative factors. This process is still under development, including refinement and development of certain models, estimation techniques and the build-out of the operational and control structure supporting the end-to-end process. The reserve amount to be recorded at the January 1, 2020 transition date may differ from our estimate due to the factors noted above, further process refinements and other assumptions.
Goodwill - ASU 2017-04

Issued January 2017
• Required effective date of January 1, 2020.
• Eliminates Step 2 from the goodwill impairment test to simplify the subsequent measurement of goodwill under which a loss was recognized only if the estimated implied fair value of the goodwill is below its carrying value.
• Requires impairment to be recognized if the carrying amount exceeds the reporting unit’s fair value.


• We plan to adopt the standard on its effective date and we do not expect the adoption of this standard to impact our consolidated results of operations or our consolidated financial position.


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


Codification Improvements - ASU 2019-04

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

Issued April 2019
• Required effective date of January 1, 2020 with early adoption permitted if ASU 2017-12 was previously adopted.
• Targeted improvements related to:
     - Partial-term fair value hedges of interest rate risk
     - Amortization of fair value hedge basis adjustments
     - Disclosure of fair value hedge basis adjustments
     - Consideration of the hedged contractually specified interest rate under the hypothetical derivative method
     - Application of a first-payments-received cash flow hedging technique to overall cash flows on a group of variable interest payments
     - Update to transition guidance for ASU 2017-12



• We are currently assessing the potential impact to PNC upon adoption of these codification improvements.



OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

We engage in a variety of activities that involve entities that are not consolidated or otherwise reflected in our Consolidated Balance Sheet that are generally referred to as off-balance sheet arrangements. Additional information on these types of activities is included in our 2018 Form 10-K and in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities and Note 13 Commitments in the Notes To Consolidated Financial Statements included in this Report.

A summary and further description of variable interest entities (VIEs) is included in Note 1 Accounting Policies and Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2018 Form 10-K.

Trust Preferred Securities
See Note 10 Borrowed Funds in the Notes To Consolidated Financial Statements in our 2018 Form 10-K for additional information on trust preferred securities issued by PNC Capital Trust C including information on contractual limitations potentially imposed on payments (including dividends) with respect to PNC's equity securities.
INTERNAL CONTROLS AND DISCLOSURE CONTROLS AND PROCEDURES

As of September 30, 2019, we performed an evaluation under the supervision of and with the participation of our management, including the Chairman, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures and of changes in our internal control over financial reporting.

Based on that evaluation, our Chairman, President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were effective as of September 30, 2019, and that there has been no change in PNC’s internal control over financial reporting that occurred during the third quarter of 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
GLOSSARY OF TERMS
For a glossary of terms commonly used in our filings, please see the glossary of terms included in our 2018 Form 10-K.


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


 
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, tax rates, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting us and our future business and operations that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “look,” “intend,” “outlook,” “project,” “forecast,” “estimate,” “goal,” “will,” “should” and other similar words and expressions.
Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Future events or circumstances may change our outlook and may also affect the nature of the assumptions, risks and uncertainties to which our forward-looking statements are subject. Forward-looking statements speak only as of the date made. We do not assume any duty and do not undertake to update forward-looking statements. Actual results or future events could differ, possibly materially, from those anticipated in forward-looking statements, as well as from historical performance. As a result, we caution against undue reliance on any forward-looking statements.
Our forward-looking statements are subject to the following principal risks and uncertainties.
•
Our businesses, financial results and balance sheet values are affected by business and economic conditions, including the following:
–
Changes in interest rates and valuations in debt, equity and other financial markets.
–
Disruptions in the U.S. and global financial markets.
–
Actions by the Federal Reserve Board, U.S. Treasury and other government agencies, including those that impact money supply and market interest rates.
–
Changes in customer behavior due to changing business and economic conditions or legislative or regulatory initiatives.
–
Changes in customers’, suppliers’ and other counterparties’ performance and creditworthiness.
–
Impacts of tariffs and other trade policies of the U.S. and its global trading partners.
–
Slowing or reversal of the current U.S. economic expansion.
–
Commodity price volatility.
•
Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory contingencies. These statements are based on our views that:
–
U.S. economic growth, after accelerating a few years ago, has slowed since mid-2018 and is expected to slow further through the rest of this year and into 2020.
–
Job growth will continue into 2020, but at a slower pace due to both difficulty in finding workers and slower economic growth. The unemployment rate is expected to increase slightly in the near term, but the labor market will remain tight, pushing wages higher and supporting continued gains in consumer spending.
–
Slower global economic growth, trade restrictions and geopolitical concerns are downside risks to the forecast, which have increased in 2019, and risks are weighted to the downside.
–
Inflation has slowed in 2019, to below the FOMC’s 2% objective, but is expected to gradually increase over the next two years.
–
Our baseline forecast includes the 0.25% federal funds rate cut on October 30, 2019. We expect the funds rate to remain in a range of 1.50% to 1.75% through the rest of 2019.
•
Our ability to take certain capital actions, including returning capital to shareholders, is subject to review by the Federal Reserve Board as part of our comprehensive capital plan for the applicable period in connection with the Federal Reserve Board’s CCAR process and to the acceptance of such capital plan and non-objection to such capital actions by the Federal Reserve Board.
•
Our regulatory capital ratios in the future will depend on, among other things, the company’s financial performance, the scope and terms of final capital regulations then in effect and management actions affecting the composition of our balance sheet. In addition, our ability to determine, evaluate and forecast regulatory capital ratios, and to take actions (such as capital distributions) based on actual or forecasted capital ratios, will be dependent at least in part on the development, validation and regulatory review of related models.
•
Legal and regulatory developments could have an impact on our ability to operate our businesses, financial condition, results of operations, competitive position, reputation, or pursuit of attractive acquisition opportunities. Reputational impacts could affect matters such as business generation and retention, liquidity, funding, and ability to attract and retain management. These developments could include:
–
Changes to laws and regulations, including changes affecting oversight of the financial services industry, consumer protection, bank capital and liquidity standards, pension, bankruptcy and other industry aspects, and changes in accounting policies and principles.
–
Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries. These matters may result in monetary judgments or settlements or other remedies, including fines, penalties,

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


restitution or alterations in our business practices, and in additional expenses and collateral costs, and may cause reputational harm to us.
–
Results of the regulatory examination and supervision process, including our failure to satisfy requirements of agreements with governmental agencies.
–
Impact on business and operating results of any costs associated with obtaining rights in intellectual property claimed by others and of adequacy of our intellectual property protection in general.
•
Business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through effective use of systems and controls, third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards.
•
Business and operating results also include impacts relating to our equity interest in BlackRock, Inc. and rely to a significant extent on information provided to us by BlackRock. Risks and uncertainties that could affect BlackRock are discussed in more detail by BlackRock in its SEC filings.
•
We grow our business in part through acquisitions and new strategic initiatives. Risks and uncertainties include those presented by the nature of the business acquired and strategic initiative, including in some cases those associated with our entry into new businesses or new geographic or other markets and risks resulting from our inexperience in those new areas, as well as risks and uncertainties related to the acquisition transactions themselves, regulatory issues, and the integration of the acquired businesses into PNC after closing.
•
Competition can have an impact on customer acquisition, growth and retention and on credit spreads and product pricing, which can affect market share, deposits and revenues. Our ability to anticipate and respond to technological changes can also impact our ability to respond to customer needs and meet competitive demands.
•
Business and operating results can also be affected by widespread natural and other disasters, pandemics, dislocations, terrorist activities, system failures, security breaches, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically.

We provide greater detail regarding these as well as other factors in our 2018 Form 10-K and elsewhere in this Report, including in the Risk Factors and Risk Management sections and the Legal Proceedings and Commitments Notes of the Notes To Consolidated Financial Statements in these reports. Our forward-looking statements may also be subject to other risks and uncertainties, including those discussed elsewhere in this Report or in our other filings with the SEC.


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


CONSOLIDATED INCOME STATEMENT
THE PNC FINANCIAL SERVICES GROUP, INC.
 
Unaudited
Three months ended
September 30
 
Nine months ended
September 30
In millions, except per share data
2019

 
2018

 
2019

 
2018

Interest Income
 
 
 
 
 
 
 
Loans
$
2,678

 
$
2,452

 
$
7,952

 
$
7,025

Investment securities
617

 
584

 
1,866

 
1,653

Other
208

 
187

 
610

 
545

Total interest income
3,503

 
3,223

 
10,428

 
9,223

Interest Expense
 
 
 
 
 
 
 
Deposits
531

 
336

 
1,518

 
810

Borrowed funds
468

 
421

 
1,433

 
1,173

Total interest expense
999

 
757

 
2,951

 
1,983

Net interest income
2,504

 
2,466

 
7,477

 
7,240

Noninterest Income
 
 
 
 
 
 
 
Asset management
464

 
486

 
1,346

 
1,397

Consumer services
402

 
377

 
1,165

 
1,115

Corporate services
469

 
465

 
1,415

 
1,381

Residential mortgage
134

 
76

 
281

 
257

Service charges on deposits
178

 
186

 
517

 
522

Other
342

 
301

 
1,017

 
880

Total noninterest income
1,989

 
1,891

 
5,741

 
5,552

Total revenue
4,493

 
4,357

 
13,218

 
12,792

Provision For Credit Losses
183

 
88

 
552

 
260

Noninterest Expense
 
 
 
 
 
 
 
Personnel
1,400

 
1,413

 
4,179

 
4,123

Occupancy
206

 
195

 
633

 
616

Equipment
291

 
264

 
862

 
818

Marketing
76

 
71

 
224

 
201

Other
650

 
665

 
1,914

 
1,961

Total noninterest expense
2,623

 
2,608

 
7,812

 
7,719

Income before income taxes and noncontrolling interests
1,687

 
1,661

 
4,854

 
4,813

Income taxes
295

 
261

 
817

 
818

Net income
1,392

 
1,400

 
4,037

 
3,995

Less: Net income attributable to noncontrolling interests
13

 
11

 
35

 
31

Preferred stock dividends
63

 
63

 
181

 
181

Preferred stock discount accretion and redemptions
1

 
1

 
3

 
3

Net income attributable to common shareholders
$
1,315

 
$
1,325

 
$
3,818

 
$
3,780

Earnings Per Common Share
 
 
 
 
 
 
 
Basic
$
2.95

 
$
2.84

 
$
8.45

 
$
8.03

Diluted
$
2.94

 
$
2.82

 
$
8.42

 
$
7.96

Average Common Shares Outstanding
 
 
 
 
 
 
 
Basic
444

 
465

 
450

 
469

Diluted
445

 
467

 
451

 
472

See accompanying Notes To Consolidated Financial Statements.

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


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
THE PNC FINANCIAL SERVICES GROUP, INC.
 
Unaudited
In millions
 
Three months ended
September 30
 
Nine months ended
September 30
 
2019

 
2018

 
2019

 
2018

 
Net income
 
$
1,392

 
$
1,400

 
$
4,037

 
$
3,995

 
Other comprehensive income (loss), before tax and net of reclassifications into Net income:
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on non-OTTI securities
 
196

 
(324
)
 
1,529

 
(1,125
)
 
Net unrealized gains (losses) on OTTI securities
 
18

 
(1
)
 
27

 
16

 
Net unrealized gains (losses) on cash flow hedge derivatives
 
79

 
(71
)
 
433

 
(377
)
 
Pension and other postretirement benefit plan adjustments
 
2

 
1

 
63

 
70

 
Other
 
(19
)
 
(17
)
 
(15
)
 
(25
)
 
Other comprehensive income (loss), before tax and net of reclassifications into Net income
 
276


(412
)

2,037


(1,441
)
 
Income tax benefit (expense) related to items of other comprehensive income
 
(70
)
 
92

 
(475
)
 
323

 
Other comprehensive income (loss), after tax and net of reclassifications into Net income
 
206


(320
)

1,562


(1,118
)
 
Comprehensive income
 
1,598

 
1,080

 
5,599

 
2,877

 
Less: Comprehensive income attributable to noncontrolling interests
 
13

 
11

 
35

 
31

 
Comprehensive income attributable to PNC
 
$
1,585


$
1,069


$
5,564


$
2,846

 
See accompanying Notes To Consolidated Financial Statements.


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


CONSOLIDATED BALANCE SHEET
THE PNC FINANCIAL SERVICES GROUP, INC.
 
Unaudited
September 30
2019

 
December 31
2018

In millions, except par value
Assets
 
 
 
Cash and due from banks
$
5,671

 
$
5,608

Interest-earning deposits with banks
19,036

 
10,893

Loans held for sale (a)
1,872

 
994

Investment securities – available for sale
69,057

 
63,389

Investment securities – held to maturity
18,826

 
19,312

Loans (a)
237,377

 
226,245

Allowance for loan and lease losses
(2,738
)
 
(2,629
)
Net loans
234,639

 
223,616

Equity investments (b)
13,325

 
12,894

Mortgage servicing rights
1,483

 
1,983

Goodwill
9,233

 
9,218

Other (a)
35,774

 
34,408

Total assets
$
408,916

 
$
382,315

Liabilities
 
 
 
Deposits
 
 
 
Noninterest-bearing
$
74,077

 
$
73,960

Interest-bearing
211,506

 
193,879

Total deposits
285,583

 
267,839

Borrowed funds
 
 
 
Federal Home Loan Bank borrowings
21,901

 
21,501

Bank notes and senior debt
27,148

 
25,018

Subordinated debt
5,473

 
5,895

Other (c)
6,832

 
5,005

Total borrowed funds
61,354

 
57,419

Allowance for unfunded loan commitments and letters of credit
304

 
285

Accrued expenses and other liabilities
12,220

 
9,002

Total liabilities
359,461

 
334,545

Equity
 
 
 
Preferred stock (d)

 
 
Common stock ($5 par value, Authorized 800 shares, issued 542 shares)
2,711

 
2,711

Capital surplus
16,297

 
16,277

Retained earnings
41,413

 
38,919

Accumulated other comprehensive income (loss)
837

 
(725
)
Common stock held in treasury at cost: 103 and 85 shares
(11,838
)
 
(9,454
)
Total shareholders’ equity
49,420

 
47,728

Noncontrolling interests
35

 
42

Total equity
49,455

 
47,770

Total liabilities and equity
$
408,916

 
$
382,315

(a)
Our consolidated assets included the following for which we have elected the fair value option: Loans held for sale of $1.5 billion, Loans of $.8 billion and Other assets of $.1 billion at September 30, 2019 and Loans held for sale of $.9 billion, Loans of $.8 billion and Other assets of $.2 billion at December 31, 2018.
(b)
Amounts include our equity interest in BlackRock.
(c)
Our consolidated liabilities at both September 30, 2019 and December 31, 2018 included Other borrowed funds of $.1 billion for which we have elected the fair value option.
(d)
Par value less than $.5 million at each date.

See accompanying Notes To Consolidated Financial Statements.

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


CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
 
Unaudited
In millions
 
Nine months ended
September 30
 
2019

 
2018

 
Operating Activities
 
 
 
 
 
Net income
 
$
4,037

 
$
3,995

 
Adjustments to reconcile net income to net cash provided (used) by operating activities
 
 
 
 
 
Provision for credit losses
 
552

 
260

 
Depreciation and amortization
 
904

 
839

 
Deferred income taxes
 
83

 
(116
)
 
Changes in fair value of mortgage servicing rights
 
715

 
(57
)
 
Undistributed earnings of BlackRock
 
(356
)
 
(421
)
 
Net change in
 
 
 
 
 
Trading securities and other short-term investments
 
741

 
293

 
Loans held for sale
 
(882
)
 
910

 
Other assets
 
(2,086
)
 
(2,194
)
 
Accrued expenses and other liabilities
 
831

 
2,195

 
Other
 
(291
)
 
(1
)
 
Net cash provided (used) by operating activities
 
$
4,248

 
$
5,703

 
Investing Activities
 
 
 
 
 
Sales
 
 
 
 
 
Securities available for sale
 
$
5,201

 
$
5,422

 
Loans
 
1,237

 
1,180

 
Repayments/maturities
 
 
 
 
 
Securities available for sale
 
7,962

 
6,941

 
Securities held to maturity
 
2,193

 
1,917

 
Purchases
 
 
 
 
 
Securities available for sale
 
(17,179
)
 
(17,635
)
 
Securities held to maturity
 
(1,739
)
 
(3,072
)
 
Loans
 
(898
)
 
(430
)
 
Net change in
 
 
 
 
 
Federal funds sold and resale agreements
 
3,192

 
313

 
Interest-earning deposits with banks
 
(8,143
)
 
8,795

 
Loans
 
(11,978
)
 
(4,120
)
 
Other
 
(573
)
 
(965
)
 
Net cash provided (used) by investing activities
 
$
(20,725
)
 
$
(1,654
)
 
(continued on following page)


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


CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
(continued from previous page)
 
Unaudited
In millions
 
Nine Months Ended
September 30
 
2019

 
2018

 
Financing Activities
 
 
 
 
 
Net change in
 
 
 
 
 
Noninterest-bearing deposits
 
$
180

 
$
(5,114
)
 
Interest-bearing deposits
 
17,627

 
4,959

 
Federal funds purchased and repurchase agreements
 
1,934

 
1,037

 
Federal Home Loan Bank borrowings
 
1,400

 


 
Commercial paper
 
 
 
(100
)
 
Other borrowed funds
 
(77
)
 
(109
)
 
Sales/issuances
 
 
 
 
 
Federal Home Loan Bank borrowings
 
12,000

 
6,500

 
Bank notes and senior debt
 
6,930

 
3,238

 
Subordinated debt
 


 
1,243

 
Other borrowed funds
 
929

 
400

 
Common and treasury stock
 
73

 
61

 
Repayments/maturities
 
 
 
 
 
Federal Home Loan Bank borrowings
 
(13,000
)
 
(7,501
)
 
Bank notes and senior debt
 
(5,600
)
 
(4,175
)
 
Subordinated debt
 
(700
)
 
(575
)
 
Other borrowed funds
 
(963
)
 
(429
)
 
Acquisition of treasury stock
 
(2,626
)
 
(2,145
)
 
Preferred stock cash dividends paid
 
(181
)
 
(181
)
 
Common stock cash dividends paid
 
(1,386
)
 
(1,159
)
 
Net cash provided (used) by financing activities
 
$
16,540

 
$
(4,050
)
 
Net Increase (Decrease) In Cash And Due From Banks
 
63

 
(1
)
 
Cash and due from banks at beginning of period
 
5,608

 
5,249

 
Cash and due from banks at end of period
 
$
5,671

 
$
5,248

 
Supplemental Disclosures
 
 
 
 
 
Interest paid
 
$
2,915

 
$
1,881

 
Income taxes paid
 
$
321

 
$
324

 
Income taxes refunded
 
$
7

 
$
463

 
Leased assets obtained in exchange for new operating lease liabilities
 
$
238

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

 
 
 
Non-cash Investing and Financing Items
 
 
 
 
 
Transfer from loans to loans held for sale, net
 
$
771

 
$
359

 
Transfer from loans to foreclosed assets
 
$
131

 
$
145

 
Transfer from trading securities to investment securities
 
$
228

 


 
See accompanying Notes To Consolidated Financial Statements.

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


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

BUSINESS

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

We have businesses engaged in retail banking, including residential mortgage, corporate and institutional banking and asset management, providing many of our products and services nationally. Our retail branch network is located in markets across the Mid-Atlantic, Midwest and Southeast. We also have strategic international offices in four countries outside the U.S.
NOTE 1 ACCOUNTING POLICIES

Basis of Financial Statement Presentation

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

We prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). We have eliminated intercompany accounts and transactions. We have also reclassified certain prior year amounts to conform to the current period presentation, which did not have a material impact on our consolidated financial condition or results of operations.

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 2018 Form 10-K. Reference is made to Note 1 Accounting Policies in our 2018 Form 10-K for a detailed description of significant accounting policies. There have been no significant changes to our accounting policies as disclosed in our 2018 Form 10-K, except for the adoption of the new leasing standard included in this Note 1 in the first quarter of 2019. These interim consolidated financial statements serve to update our 2018 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 and allowances for loan and lease losses and unfunded loan commitments and letters of credit. Actual results may differ from the estimates and the differences may be material to the consolidated financial statements.

Leases

We provide financing for various types of equipment, including aircraft, energy and power systems, and vehicles through a variety of lease arrangements. Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased equipment, less unearned income. We recognize income over the term of the lease using the constant effective yield method. Direct financing lease residual values are reviewed for impairment in accordance with the Allowance for Loan and Lease (ALLL) processes. Gains or losses on the sale of leased assets are included in Other noninterest income while impairment on the net investment of leases is included in Provision for credit losses.

We also enter into various lease arrangements, primarily involving real estate, and other equipment, as the lessee. For those classified as operating leases, we recognize a lease liability, representing the present value of the minimum lease payments, and a corresponding right of use (ROU) asset. On the consolidated balance sheet, the ROU asset and lease liability are included in Other assets and Other liabilities, respectively.



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


When we adopted the Accounting Standards Update (ASU) 2016-02 - Leases as of January 1, 2019, we recognized lease liabilities and right-of-use assets of $2.1 billion and $2.0 billion, respectively. In addition, we recognized a one-time pretax adjustment of $83 million to retained earnings, related primarily to deferred gains on previous sale-leaseback transactions. See Note 16 Leases for additional information related to leases within the scope of ASC 842.

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 2018 Form 10-K, we have transferred residential and commercial mortgage loans in securitization or sales transactions in which we have continuing involvement. Our continuing involvement generally consists of servicing, repurchasing previously transferred loans under certain conditions and loss share arrangements, and, in limited circumstances, holding of mortgage-backed securities issued by the securitization special purpose entities (SPEs).

We earn servicing and other ancillary fees for our role as servicer and, depending on the contractual terms of the servicing arrangement, we can be terminated as servicer with or without cause. At the consummation date of each type of loan transfer where we retain the servicing, we recognize a servicing right at fair value. See Note 6 Fair Value and Note 7 Goodwill and Mortgage Servicing Rights for information on our servicing rights, including the carrying value of servicing assets.

The following table provides cash flows associated with our loan sale and servicing activities:
Table 33: Cash Flows Associated with Loan Sale and Servicing Activities
In millions
Residential
Mortgages

 
Commercial
Mortgages (a)
 
 
Cash Flows - Three months ended September 30, 2019
 
 
 
 
 
Sales of loans (b)
$
1,296

 
 
$
1,122

 
Repurchases of previously transferred loans (c)
$
81

 
 
 
 
Servicing fees (d)
$
90

 
 
$
34

 
Servicing advances recovered/(funded), net
$
5

 
 
$
45

 
Cash flows on mortgage-backed securities held (e)
$
1,394

 
 
$
14

 
Cash Flows - Three months ended September 30, 2018
 
 
 
 
 
Sales of loans (b)
$
1,242

 
 
$
953

 
Repurchases of previously transferred loans (c)
$
90

 
 
 
 
Servicing fees (d)
$
88

 
 
$
34

 
Servicing advances recovered/(funded), net
$
2

 
 
$
19

 
Cash flows on mortgage-backed securities held (e)
$
574

 
 
$
51

 
Cash Flows - Nine months ended September 30, 2019
 
 
 
 
 
Sales of loans (b)
$
2,902

 
 
$
2,212

 
Repurchases of previously transferred loans (c)
$
235

 
 
$
4

 
Servicing fees (d)
$
264

 
 
$
97

 
Servicing advances recovered/(funded), net
$
33

 
 
$
61

 
Cash flows on mortgage-backed securities held (e)
$
2,653

 
 
$
43

 
Cash Flows - Nine months ended September 30, 2018
 
 
 
 
 
Sales of loans (b)
$
3,486

 
 
$
2,613

 
Repurchases of previously transferred loans (c)
$
286

 
 
 
 
Servicing fees (d)
$
269

 
 
$
100

 
Servicing advances recovered/(funded), net
$
45

 
 
$
24

 
Cash flows on mortgage-backed securities held (e)
$
1,445

 
 
$
100

 
(a)
Represents cash flow information associated with both commercial mortgage loan transfers and servicing activities.
(b)
Gains/losses recognized on sales of loans were insignificant for the periods presented.
(c)
Includes both residential and commercial mortgage government insured or guaranteed loans eligible for repurchase through the exercise of our removal of account provision option, as well as residential mortgage loans repurchased due to alleged breaches of origination covenants or representations and warranties made to purchasers.
(d)
Includes contractually specified servicing fees, late charges and ancillary fees.
(e)
Represents cash flows on securities where we transferred to and/or service loans for a securitization SPE and we hold securities issued by that SPE. The carrying values of such securities held were $17.7 billion, $13.3 billion, and $13.0 billion in residential mortgage-backed securities and $.6 billion, $.6 billion, and $.6 billion in commercial mortgage-backed securities at September 30, 2019, December 31, 2018, and September 30, 2018, respectively.
Table 34 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,

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


where the repurchase price exceeded the loan's fair value, due to a breach in representations and warranties or a loss sharing arrangement associated with our continuing involvement with these loans. The estimate of losses related to breaches in representations and warranties was insignificant at September 30, 2019.
Table 34: Principal Balance, Delinquent Loans and Net Charge-offs Related to Serviced Loans For Others
In millions
Residential Mortgages

 
 
Commercial Mortgages (a)

 
September 30, 2019
 
 
 
 
 
Total principal balance
$
50,786

 
 
$
50,723

 
Delinquent loans (b)
$
529

 
 
$
64

 
December 31, 2018
 
 
 
 
 
Total principal balance
$
54,028

 
 
$
47,969

 
Delinquent loans (b)
$
622

 
 
$
234

 
Three months ended September 30, 2019
 
 
 
 
 
Net charge-offs (c)
$
8

 
 
$
52

 
Three months ended September 30, 2018
 
 
 
 
 
Net charge-offs (c)
$
9

 
 
$
117

 
Nine months ended September 30, 2019
 
 
 
 
 
Net charge-offs (c)
$
32

 
 
$
348

 
Nine months ended September 30, 2018
 
 
 
 
 
Net charge-offs (c)
$
34

 
 
$
169

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

Variable Interest Entities (VIEs)

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2018 Form 10-K, we are involved with various entities in the normal course of business that are deemed to be VIEs.

The following table provides a summary of non-consolidated VIEs with which we have significant continuing involvement but are not the primary beneficiary. We have excluded certain transactions with non-consolidated VIEs from the balances presented in Table 35 where we have determined that our continuing involvement is not significant. We do not consider our continuing involvement to be significant when it relates to a VIE where we only invest in securities issued by the VIE and were not involved in the design of the VIE or where no transfers have occurred between us and the VIE. In addition, where we only have lending arrangements in the normal course of business with entities that could be VIEs, we have excluded these transactions with non-consolidated entities from the balances presented in Table 35. These loans are included as part of the asset quality disclosures that we make in Note 3 Asset Quality.
Table 35: Non-Consolidated VIEs
In millions
PNC Risk of Loss (a)

 
 
Carrying Value of Assets
Owned by PNC

 
 
 
Carrying Value of Liabilities
Owned by PNC

 
September 30, 2019
 
 
 
 
 
 
 
 
 
Mortgage-backed securitizations (b)
$
19,084

 
 
$
19,084

(c) 
 
 
 
 
Tax credit investments and other
3,077

 
 
3,048

(d) 
 
 
$
1,111

(e) 
Total
$
22,161

 
 
$
22,132

 
 
 
$
1,111

 
December 31, 2018
 
 
 
 
 
 
 
 
 
Mortgage-backed securitizations (b)
$
14,266

 
 
$
14,266

(c) 
 
 
 
 
Tax credit investments and other
2,949

 
 
2,911

(d) 
 
 
$
806

(e) 
Total
$
17,215

 
 
$
17,177

 
 
 
$
806

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



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


We make certain equity investments in various tax credit limited partnerships or limited liability companies (LLCs). The purpose of these investments is to achieve a satisfactory return on capital and to assist us in achieving goals associated with the Community Reinvestment Act. During the nine months ended September 30, 2019, we recognized $152 million of amortization, $165 million of tax credits and $35 million of other tax benefits associated with qualified investments in low income housing tax credits within Income taxes. The amounts for the third quarter of 2019 were $52 million, $54 million and $11 million, respectively.

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.

Nonperforming assets include nonperforming loans and leases, other real estate owned (OREO) and foreclosed assets. Nonperforming loans are those loans accounted for at amortized cost whose credit quality has deteriorated to the extent that full collection of contractual principal and interest is not probable. Interest income is not recognized on these loans. Loans accounted for under the fair value option are reported as performing loans 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 1 Accounting Policies in our 2018 Form 10-K for additional information on our loan related policies.

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


The following tables present the delinquency status of our loans and our nonperforming assets at September 30, 2019 and December 31, 2018, respectively.

Table 36: 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)

 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Commercial Lending
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
123,328

$
82

$
49

$
64

$
195

 
$
491

 
 
$
124,014

 
Commercial real estate
28,803

3

3

 
6

 
75

 
 
28,884

 
Equipment lease financing
7,270

6

4

 
10

 
10

 
 
7,290

 
Total commercial lending
159,401

91

56

64

211

 
576

 


160,188

 
Consumer Lending

 
 
 
 
 
 
 
 
 
 
Home equity
23,631

53

24


77

 
685

 
$
578

24,971

 
Residential real estate
18,867

129

77

302

508

(b)
325

$
166

1,216

21,082

 
Automobile
15,684

145

36

11

192

 
128

 
 
16,004

 
Credit card
6,660

56

33

57

146

 
9

 
 
6,815

 
Education
3,280

56

35

90

181

(b) 
 
 
 
3,461

 
Other consumer
4,818

17

8

8

33

 
5

 
 
4,856

 
Total consumer lending
72,940

456

213

468

1,137

 
1,152

166

1,794

77,189

 
Total
$
232,341

$
547

$
269

$
532

$
1,348

 
$
1,728

$
166

$
1,794

$
237,377

 
Percentage of total loans
97.88
%
.23
%
.11
%
.22
%
.56
%
 
.73
%
.07
%
.76
%
100.00
%
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Commercial Lending
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
116,300

$
82

$
54

$
52

$
188

 
$
346

 
 
$
116,834

 
Commercial real estate
28,056

6

3

 
9

 
75

 
 
28,140

 
Equipment lease financing
7,229

56

12

 
68

 
11

 
 
7,308

 
Total commercial lending
151,585

144

69

52

265

 
432

 
 
152,282

 
Consumer Lending
 
 
 
 
 
 
 
 
 
 
 
Home equity
24,556

66

25



91

 
797

 
$
679

26,123

 
Residential real estate
16,216

135

73

363

571

(b) 
350

$
182

1,338

18,657

 
Automobile
14,165

113

29

12

154

 
100

 
 
14,419

 
Credit card
6,222

46

29

53

128

 
7

 
 
6,357

 
Education
3,571

69

41

141

251

(b) 


 
 
3,822

 
Other consumer
4,552

12

5

8

25

 
8

 
 
4,585

 
Total consumer lending
69,282

441

202

577

1,220

 
1,262

182

2,017

73,963

 
Total
$
220,867

$
585

$
271

$
629

$
1,485

 
$
1,694

$
182

$
2,017

$
226,245

 
Percentage of total loans
97.62
%
.26
%
.12
%
.28
%
.66
%
 
.75
%
.08
%
.89
%
100.00
%
 
(a)
Amounts in table represent recorded investment and exclude loans held for sale. 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. Past due loan amounts include government insured or guaranteed Residential real estate mortgages totaling $.4 billion and $.5 billion at September 30, 2019 and December 31, 2018, respectively, and Education loans totaling $.2 billion at both September 30, 2019 and December 31, 2018.
(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 $1.2 billion at both September 30, 2019 December 31, 2018.

At September 30, 2019, we pledged $16.2 billion of commercial loans to the Federal Reserve Bank and $66.7 billion of residential real estate and other loans to the Federal Home Loan Bank as collateral for the ability to borrow, if necessary. The comparable amounts at December 31, 2018 were $17.3 billion and $63.2 billion, respectively. Amounts pledged reflect the unpaid principal balances.


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


Table 37: Nonperforming Assets
Dollars in millions
 
September 30
2019

 
December 31
2018

 
Nonperforming loans
 
 
 
 
 
Total commercial lending
 
$
576

 
$
432

 
Total consumer lending (a)
 
1,152

 
1,262

 
Total nonperforming loans
 
1,728

 
1,694

 
OREO and foreclosed assets
 
119

 
114

 
Total nonperforming assets
 
$
1,847

 
$
1,808

 
Nonperforming loans to total loans
 
.73
%
 
.75
%
 
Nonperforming assets to total loans, OREO and foreclosed assets
 
.78
%
 
.80
%
 
Nonperforming assets to total assets
 
.45
%
 
.47
%
 
(a)
Excludes most unsecured consumer loans and lines of credit, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.

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 troubled debt restructurings (TDRs). See Note 1 Accounting Policies in our 2018 Form 10-K and the TDR section of this Note 3 for additional information on TDRs.

Total nonperforming loans in Table 37 include TDRs of $.9 billion at both September 30, 2019 and December 31, 2018. TDRs that are performing, including consumer credit card TDR loans, totaled $.9 billion and $1.0 billion at September 30, 2019 and December 31, 2018, respectively, and are excluded from nonperforming loans.

Additional Asset Quality Indicators

We have two portfolio segments – Commercial Lending and Consumer Lending. Each of these segments comprises 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 composed of the commercial, commercial real estate and equipment lease financing loan classes. The Consumer Lending segment is composed of the home equity, residential real estate, automobile, credit card, education and other consumer loan classes.

Commercial Lending Loan Classes

The following table presents asset quality indicators for the Commercial Lending loan classes. See Note 3 Asset Quality in our 2018 Form 10-K for additional information related to our Commercial Lending loan classes, including discussion around the asset quality indicators that we use to monitor and manage the credit risk associated with each loan class.
Table 38: Commercial Lending Asset Quality Indicators (a)
In millions
 
Pass Rated

 
Criticized

 
Total Loans

 
September 30, 2019
 
 
 
 
 
 
 
Commercial
 
$
118,316

 
$
5,698

 
$
124,014

 
Commercial real estate
 
28,050

 
834

 
28,884

 
Equipment lease financing
 
7,065

 
225

 
7,290

 
Total commercial lending
 
$
153,431

 
$
6,757

 
$
160,188

 
December 31, 2018
 
 
 
 
 
 
 
Commercial
 
$
111,276

 
$
5,558

 
$
116,834

 
Commercial real estate
 
27,682

 
458

 
28,140

 
Equipment lease financing
 
7,180

 
128

 
7,308

 
Total commercial lending
 
$
146,138

 
$
6,144

 
$
152,282

 
(a)
Loans are classified as Pass Rated and Criticized based on the Regulatory classification definitions. The Criticized classification includes loans that were rated special mention, substandard or doubtful as of September 30, 2019 and December 31, 2018. We use probability of default and loss given default to rate loans in the commercial lending portfolio.

Consumer Lending Loan Classes

See Note 3 Asset Quality in our 2018 Form 10-K for additional information related to our Consumer Lending loan classes, including discussion around the asset quality indicators that we use to monitor and manage the credit risk associated with each loan class.





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


Home Equity and Residential Real Estate Loan Classes
The following table presents asset quality indicators for the home equity and residential real estate loan classes.

Table 39: Asset Quality Indicators for Home Equity and Residential Real Estate Loans
 
September 30, 2019
December 31, 2018
 
Home equity

Residential real estate

Home equity

Residential real estate

In millions
Current estimated LTV ratios
 
 
 
 
Greater than or equal to 125%
$
382

$
123

$
461

$
116

Greater than or equal to 100% to less than 125%
911

228

1,020

255

Greater than or equal to 90% to less than 100%
1,096

340

1,174

335

Less than 90%
21,821

18,384

22,644

15,922

No LTV ratio available
183

218

145

6

Government insured or guaranteed loans
 
573

 
685

Purchased impaired loans
578

1,216

679

1,338

Total loans
$
24,971

$
21,082

$
26,123

$
18,657

Updated FICO Scores
 
 
 
 
Greater than 660
$
22,066

$
18,455

$
22,996

$
15,956

Less than or equal to 660
2,045

547

2,210

585

No FICO score available
282

291

238

93

Government insured or guaranteed loans
 
573

 
685

Purchased impaired loans
578

1,216

679

1,338

Total loans
$
24,971

$
21,082

$
26,123

$
18,657


Automobile, Credit Card, Education and Other Consumer Loan Classes

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

Table 40: Asset Quality Indicators for Automobile, Credit Card, Education and Other Consumer Loans
 
 
 
 
Dollars in millions
 
Automobile
Credit Card
Education
Other Consumer
September 30, 2019
 
 
 
 
 
FICO score greater than 719
 
$
8,444

$
3,989

$
1,184

$
1,452

650 to 719
 
4,845

1,955

185

755

620 to 649
 
1,152

325

22

122

Less than 620
 
1,240

376

22

107

No FICO score available or required (a)
 
323

170

42

27

Total loans using FICO credit metric
 
16,004

6,815

1,455

2,463

Consumer loans using other internal credit metrics
 
 
 
2,006

2,393

Total loans
 
$
16,004

$
6,815

$
3,461

$
4,856

Weighted-average updated FICO score (b)
 
724

731

775

731

December 31, 2018
 
 
 
 
 
FICO score greater than 719
 
$
7,740

$
3,809

$
1,240

$
1,280

650 to 719
 
4,365

1,759

194

641

620 to 649
 
1,007

280

26

106

Less than 620
 
1,027

332

24

105

No FICO score available or required (a)
 
280

177

57

25

Total loans using FICO credit metric
 
14,419

6,357

1,541

2,157

Consumer loans using other internal credit metrics
 
 
 
2,281

2,428

Total loans
 
$
14,419

$
6,357

$
3,822

$
4,585

Weighted-average updated FICO score (b)
 
726

733

774

732

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



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


Troubled Debt Restructurings (TDRs)
Table 41 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 and nine months ended September 30, 2019 and September 30, 2018. Additionally, the table provides information about the types of TDR concessions. See Note 3 Asset Quality in our 2018 Form 10-K for additional discussion of TDRs.
Table 41: Financial Impact and TDRs by Concession Type (a)
 
 
 
Pre-TDR
Recorded
Investment (b)

 
Post-TDR Recorded Investment (c)
 
During the three months ended September 30, 2019
Dollars in millions
Number
of Loans
 
 
Principal
Forgiveness

 
Rate
Reduction

 
Other

 
Total

 
Total commercial lending
 
21

 
$
97

 
 
 
 
 
$
72

 
$
72

 
Total consumer lending
 
3,656

 
45

 
 
 
$
24

 
19

 
43

 
Total TDRs
 
3,677

 
$
142

 

 
$
24

 
$
91

 
$
115

 
During the three months ended September 30, 2018
Dollars in millions
 
 
 
 
 
 
 
 
 
 
 
 
 
Total commercial lending
 
18

 
$
115

 
$
2

 
$
24

 
$
81

 
$
107

 
Total consumer lending
 
3,147

 
45

 


 
19

 
23

 
42

 
Total TDRs
 
3,165

 
$
160

 
$
2

 
$
43

 
$
104

 
$
149

 

 
 
 
Pre-TDR
Recorded
Investment (b)

 
Post-TDR Recorded Investment (c)
 
During the nine months ended September 30, 2019
Dollars in millions
Number
of Loans
 
 
Principal
Forgiveness

 
Rate
Reduction

 
Other

 
Total

 
Total commercial lending

58

 
$
233

 
 
 
$
1

 
$
208

 
$
209

 
Total consumer lending
 
11,009

 
131

 
 
 
72

 
51

 
123

 
Total TDRs
 
11,067

 
$
364

 

 
$
73

 
$
259

 
$
332

 
During the nine months ended September 30, 2018
Dollars in millions
 
 
 
 
 
 
 
 
 
 
 
 
 
Total commercial lending
 
65

 
$
145

 
$
2

 
$
26

 
$
105

 
$
133

 
Total consumer lending
 
9,015

 
129

 
1

 
66

 
52

 
119

 
Total TDRs
 
9,080

 
$
274

 
$
3

 
$
92

 
$
157

 
$
252

 
(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.

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, 2019 and January 1, 2018, respectively, and (ii) subsequently defaulted during three and nine months ended September 30, 2019 totaled $42 million and $68 million, respectively. The comparable amounts for the three and nine months ended September 30, 2018 totaled $19 million and $44 million, respectively.

Impaired Loans

Impaired loans include commercial and consumer nonperforming loans and 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. We did not recognize any interest income on impaired loans that have not returned to performing status, while they were impaired during the nine months ended September 30, 2019 and September 30, 2018. Table 42 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.

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


Table 42: Impaired Loans
In millions
 
Unpaid
Principal Balance

 
Recorded
Investment

 
Associated
Allowance

 
Average Recorded
Investment (a)

 
September 30, 2019
 
 
 
 
 
 
 
 
 
Impaired loans with an associated allowance
 
 
 
 
 
 
 
 
 
Total commercial lending
 
$
491

 
$
375

 
$
81

 
$
367

 
Total consumer lending
 
734

 
697

 
95

 
775

 
Total impaired loans with an associated allowance
 
1,225

 
1,072

 
176

 
1,142

 
Impaired loans without an associated allowance
 
 
 
 
 
 
 
 
 
Total commercial lending
 
360

 
310

 
 
 
297

 
Total consumer lending
 
1,045

 
646

 
 
 
620

 
Total impaired loans without an associated allowance
 
1,405

 
956

 


 
917

 
Total impaired loans
 
$
2,630

 
$
2,028

 
$
176

 
$
2,059

 
December 31, 2018
 
 
 
 
 
 
 
 
 
Impaired loans with an associated allowance
 
 
 
 
 
 
 
 
 
Total commercial lending
 
$
440

 
$
315

 
$
73

 
$
349

 
Total consumer lending
 
863

 
817

 
136

 
904

 
Total impaired loans with an associated allowance
 
1,303

 
1,132

 
209

 
1,253

 
Impaired loans without an associated allowance
 
 
 
 
 
 
 
 
 
Total commercial lending
 
413

 
326

 
 
 
294

 
Total consumer lending
 
1,042

 
625

 
 
 
645

 
Total impaired loans without an associated allowance
 
1,455

 
951

 
 
 
939

 
Total impaired loans
 
$
2,758

 
$
2,083

 
$
209

 
$
2,192

 
(a)
Average recorded investment is for the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively.
NOTE 4 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 have two portfolio segments – Commercial Lending and Consumer Lending, and develop and document the ALLL under separate methodologies for each of these portfolio segments. See Note 1 Accounting Policies in our 2018 Form 10-K for a description of the accounting policies for the ALLL. A rollforward of the ALLL and associated loan data follows:
Table 43: Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data
 
 
2019
 
2018
 
At or for the nine months ended September 30
Dollars in millions
 
Commercial
Lending

 
Consumer
Lending

 
Total

 
Commercial
Lending

 
Consumer
Lending

 
Total

 
Allowance for Loan and Lease Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
January 1
 
$
1,663

 
$
966

 
$
2,629

 
$
1,582

 
$
1,029

 
$
2,611

 
Charge-offs
 
(138
)
 
(545
)
 
(683
)
 
(92
)
 
(472
)
 
(564
)
 
Recoveries
 
59

 
191

 
250

 
74

 
177

 
251

 
Net (charge-offs)
 
(79
)
 
(354
)
 
(433
)
 
(18
)
 
(295
)
 
(313
)
 
Provision for credit losses
 
247

 
305

 
552

 
48

 
212

 
260

 
Net (increase) / decrease in allowance for unfunded loan
  commitments and letters of credit
 
(20
)
 
1

 
(19
)
 
7

 
2

 
9

 
Other
 
 
 
9

 
9

 
(1
)
 
18

 
17

 
September 30
 
$
1,811


$
927


$
2,738

 
$
1,618

 
$
966

 
$
2,584

 
TDRs individually evaluated for impairment
 
$
34

 
$
95

 
$
129

 
$
28

 
$
145

 
$
173

 
Other loans individually evaluated for impairment
 
47

 
 
 
47

 
37

 
 
 
37

 
Loans collectively evaluated for impairment
 
1,730

 
554

 
2,284

 
1,553

 
547

 
2,100

 
Purchased impaired loans
 
 
 
278

 
278

 
 
 
274

 
274

 
September 30
 
$
1,811

 
$
927

 
$
2,738

 
$
1,618

 
$
966

 
$
2,584

 
Loan Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
TDRs individually evaluated for impairment
 
$
420

 
$
1,343

 
$
1,763

 
$
389

 
$
1,497

 
$
1,886

 
Other loans individually evaluated for impairment
 
265

 
 
 
265

 
206

 
 
 
206

 
Loans collectively evaluated for impairment
 
159,503

 
73,298

 
232,801

 
148,853

 
69,253

 
218,106

 
Fair value option loans (a)
 
 
 
754

 
754

 
 
 
753

 
753

 
Purchased impaired loans
 
 
 
1,794

 
1,794

 
 
 
2,102

 
2,102

 
September 30
 
$
160,188

 
$
77,189

 
$
237,377

 
$
149,448

 
$
73,605

 
$
223,053

 
Portfolio segment ALLL as a percentage of total ALLL
 
66
%
 
34
%
 
100
%
 
63
%
 
37
%
 
100
%
 
Ratio of ALLL to total loans
 
1.13
%
 
1.20
%
 
1.15
%
 
1.08
%
 
1.31
%
 
1.16
%
 
(a)
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.


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


NOTE 5 INVESTMENT SECURITIES
Table 44: Investment Securities Summary
 
 
September 30, 2019
 
 
December 31, 2018
In millions
 
Amortized
Cost

 
Unrealized
 
Fair
Value

 
 
Amortized
Cost

 
Unrealized
 
Fair
Value

Gains

 
Losses

 
 
 
Gains

 
Losses

 
Securities Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
17,597

 
$
420

 
$
(12
)
 
$
18,005

 
 
$
18,104

 
$
133

 
$
(137
)
 
$
18,100

Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
34,130

 
506

 
(56
)
 
34,580

 
 
29,413

 
104

 
(524
)
 
28,993

Non-agency
 
1,626

 
308

 
(3
)
 
1,931

 
 
1,924

 
300

 
(13
)
 
2,211

Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
2,909

 
54

 
(24
)
 
2,939

 
 
2,630

 
13

 
(66
)
 
2,577

Non-agency
 
3,209

 
41

 
(4
)
 
3,246

 
 
2,689

 
5

 
(37
)
 
2,657

Asset-backed
 
5,256

 
89

 
(6
)
 
5,339

 
 
4,933

 
59

 
(20
)
 
4,972

Other
 
2,892

 
126

 
(1
)
 
3,017

 
 
3,821

 
96

 
(38
)
 
3,879

Total securities available for sale
 
$
67,619

 
$
1,544

 
$
(106
)
 
$
69,057

 
 
$
63,514

 
$
710

 
$
(835
)
 
$
63,389

Securities Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
772

 
$
75

 
 
 
$
847

 
 
$
758

 
$
28

 
$
(23
)
 
$
763

Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
15,527

 
257

 
$
(34
)
 
15,750

 
 
15,740

 
32

 
(358
)
 
15,414

Non-agency
 
140

 
7

 
 
 
147

 
 
152

 
2

 
 
 
154

Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
89

 
3

 
 
 
92

 
 
143

 
1

 
(1
)
 
143

Non-agency
 
449

 
6

 
 
 
455

 
 
488

 
1

 
(1
)
 
488

Asset-backed
 
54

 
1

 
 
 
55

 
 
182

 
1

 
 
 
183

Other
 
1,795

 
85

 
(16
)
 
1,864

 
 
1,849

 
53

 
(28
)
 
1,874

Total securities held to maturity
 
$
18,826

 
$
434

 
$
(50
)
 
$
19,210

 
 
$
19,312

 
$
118

 
$
(411
)
 
$
19,019



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 (AOCI), unless credit-related. Securities held to maturity are carried at amortized cost. Investment securities at September 30, 2019 included $280 million of net unsettled purchases which represent non-cash investing activity, and accordingly, are not reflected on the Consolidated Statement of Cash Flows.

At September 30, 2019, AOCI included pretax gains of $28 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 45 presents gross unrealized losses and fair value of debt securities at September 30, 2019 and December 31, 2018. 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 AOCI.


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


Table 45: Gross Unrealized Loss and Fair Value of Securities
 
 
Unrealized loss position less than 12 months
 
Unrealized loss position 12 months or more
 
Total
 
In millions
 
Unrealized
Loss

 
Fair
Value

 
Unrealized
Loss

 
Fair
Value

 
Unrealized
Loss

 
Fair
Value

 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
(11
)
 
$
2,300

 
$
(1
)
 
$
248

 
$
(12
)
 
$
2,548

 
Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
(5
)
 
1,329

 
(51
)
 
5,471

 
(56
)
 
6,800

 
Non-agency
 
 
 
 
 
(3
)
 
242

 
(3
)
 
242

 
Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
 
 
 
 
(24
)
 
1,121

 
(24
)
 
1,121

 
Non-agency
 
(1
)
 
413

 
(3
)
 
217

 
(4
)
 
630

 
Asset-backed
 
(2
)
 
464

 
(4
)
 
794

 
(6
)
 
1,258

 
Other
 
 
 
 
 
(1
)
 
503

 
(1
)
 
503

 
Total securities available for sale
 
$
(19
)
 
$
4,506

 
$
(87
)
 
$
8,596

 
$
(106
)
 
$
13,102

 
Securities Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed - Agency
 
 
 
 
 
$
(34
)
 
$
3,709

 
$
(34
)
 
$
3,709

 
Other
 
$
(1
)
 
$
27

 
(15
)
 
119

 
(16
)
 
146

 
Total securities held to maturity
 
$
(1
)
 
$
27

 
$
(49
)
 
$
3,828

 
$
(50
)
 
$
3,855

 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
(21
)
 
$
4,125

 
$
(116
)
 
$
5,423

 
$
(137
)
 
$
9,548

 
Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
(57
)
 
4,823

 
(467
)
 
13,830

 
(524
)
 
18,653

 
Non-agency
 
(1
)
 
74

 
(12
)
 
310

 
(13
)
 
384

 
Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
(1
)
 
65

 
(65
)
 
1,516

 
(66
)
 
1,581

 
Non-agency
 
(23
)
 
1,809

 
(14
)
 
498

 
(37
)
 
2,307

 
Asset-backed
 
(11
)
 
2,149

 
(9
)
 
1,032

 
(20
)
 
3,181

 
Other
 
(12
)
 
868

 
(26
)
 
1,293

 
(38
)
 
2,161

 
Total securities available for sale
 
$
(126
)
 
$
13,913

 
$
(709
)
 
$
23,902

 
$
(835
)
 
$
37,815

 
Securities Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
 
 
 
 
$
(23
)
 
$
446

 
$
(23
)
 
$
446

 
Residential mortgage-backed - Agency
 
$
(58
)
 
$
4,191

 
(300
)
 
7,921

 
(358
)
 
12,112

 
Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
(1
)
 
88

 
 
 
 
 
(1
)
 
88

 
Non-agency
 
(1
)
 
152

 
 
 
 
 
(1
)
 
152

 
Other
 
(2
)
 
75

 
(26
)
 
123

 
(28
)
 
198

 
Total securities held to maturity
 
$
(62
)
 
$
4,506

 
$
(349
)
 
$
8,490

 
$
(411
)
 
$
12,996

 


Evaluating Investment Securities for OTTI

For the securities in Table 45, as of September 30, 2019 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.

On at least a quarterly basis, we review all debt securities that are in an unrealized loss position for OTTI, as discussed in Note 1 Accounting Policies of our 2018 Form 10-K. For those securities on our Consolidated Balance Sheet at September 30, 2019, where during our quarterly security-level impairment assessments we determined losses represented 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. During the first nine months of 2019 and 2018, the OTTI credit losses recognized in noninterest income and the OTTI noncredit losses recognized in AOCI 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 46: Gains (Losses) on Sales of Securities Available for Sale
Nine months ended September 30
In millions
Gross Gains

Gross Losses

Net Gains (Losses)

Tax Expense (Benefit)

 
2019
$
57

$
(21
)
$
36

$
8

 
2018
$
43

$
(48
)
$
(5
)
$
(1
)
 



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


The following table presents, by remaining contractual maturity, the amortized cost, fair value and weighted-average yield of debt securities at September 30, 2019.
Table 47: Contractual Maturity of Securities
September 30, 2019
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
 
$
2,456

 
$
11,133

 
$
3,111

 
$
897

 
$
17,597

 
Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
Agency
 
 
 
61

 
1,149

 
32,920

 
34,130

 
Non-agency
 
 
 
 
 
 
 
1,626

 
1,626

 
Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
Agency
 
17

 
610

 
292

 
1,990

 
2,909

 
Non-agency
 
 
 
 
 
331

 
2,878

 
3,209

 
Asset-backed
 
34

 
2,350

 
1,652

 
1,220

 
5,256

 
Other
 
286

 
1,421

 
436

 
749

 
2,892

 
Total securities available for sale at amortized cost
 
$
2,793

 
$
15,575

 
$
6,971

 
$
42,280

 
$
67,619

 
Fair value
 
$
2,811

 
$
15,754

 
$
7,163

 
$
43,329

 
$
69,057

 
Weighted-average yield, GAAP basis
 
2.64
%
 
2.27
%
 
2.84
%
 
3.30
%
 
2.98
%
 
Securities Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
 
 
$
198

 
$
297

 
$
277

 
$
772

 
Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
Agency
 
 
 
59

 
500

 
14,968

 
15,527

 
Non-agency
 
 
 
 
 
 
 
140

 
140

 
Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
Agency
 
 
 
40

 
 
 
49

 
89

 
Non-agency
 
 
 
 
 
 
 
449

 
449

 
Asset-backed
 
 
 
6

 
20

 
28

 
54

 
Other
 
$
37

 
732

 
664

 
362

 
1,795

 
Total securities held to maturity at amortized cost
 
$
37

 
$
1,035

 
$
1,481

 
$
16,273

 
$
18,826

 
Fair value
 
$
37

 
$
1,070

 
$
1,573

 
$
16,530

 
$
19,210

 
Weighted-average yield, GAAP basis
 
3.92
%
 
3.56
%
 
3.56
%
 
3.33
%
 
3.36
%
 

Weighted-average yields are based on amortized cost with effective yields weighted for the contractual maturity of each security. At September 30, 2019, there were no securities of a single issuer, other than the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corp (FHLMC), that exceeded 10% of Total shareholders’ equity. The FNMA and FHLMC investments had a total amortized cost of $40.4 billion and $6.4 billion and fair value of $41.0 billion and $6.5 billion, respectively.
The following table presents the fair value of securities that have been either pledged to or accepted from others to collateralize outstanding borrowings.
Table 48: Fair Value of Securities Pledged and Accepted as Collateral
In millions
September 30
2019

December 31
2018

Pledged to others
$
12,666

$
7,597

Accepted from others:
 
 
Permitted by contract or custom to sell or repledge (a)
$
3,980

$
6,905

Permitted amount repledged to others
$
702

$
923

(a)
Includes $3.3 billion and $6.0 billion in fair value of securities accepted from others to collateralize short-term investments in resale agreements that were not repledged at September 30, 2019 and December 31, 2018, respectively.

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.


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


NOTE 6 FAIR VALUE

Fair Value Measurement

We measure certain financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date, determined using an exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair value hierarchy established by GAAP requires us to maximize the use of observable inputs when measuring fair value. For more information regarding the fair value hierarchy, see Note 6 Fair Value in our 2018 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 6 Fair Value in our 2018 Form 10-K. The following table summarizes our assets and liabilities measured at fair value on a recurring basis, including instruments for which we have elected the fair value option.
Table 49: Fair Value Measurements – Recurring Basis Summary
 
September 30, 2019
 
 
December 31, 2018
 
In millions
Level 1

 
Level 2

 
Level 3

 
Total
Fair Value

 
 
Level 1

 
Level 2

 
Level 3

 
Total
Fair Value

 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
 
 
$
781

 
$
4

 
$
785

 
 
 
 
$
493

 
$
2

 
$
495

 
Commercial mortgage loans held for sale
 
 
678

 
72

 
750

 
 
 
 
309

 
87

 
396

 
Securities available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
U.S. Treasury and government agencies
$
17,725

 
280

 
 
 
18,005

 
 
$
17,753

 
347

 
 
 
18,100

 
Residential mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
Agency
 
 
34,580

 
 
 
34,580

 
 
 
 
28,993

 
 
 
28,993

 
Non-agency
 
 
78

 
1,853

 
1,931

 
 
 
 
83

 
2,128

 
2,211

 
Commercial mortgage-backed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
Agency
 
 
2,939

 
 
 
2,939

 
 
 
 
2,577

 
 
 
2,577

 
Non-agency
 
 
3,246

 
 
 
3,246

 
 
 
 
2,657

 
 
 
2,657

 
Asset-backed
 
 
5,087

 
252

 
5,339

 
 
 
 
4,698

 
274

 
4,972

 
Other
 
 
2,940

 
77

 
3,017

 
 
 
 
3,795

 
84

 
3,879

 
Total securities available for sale
17,725

 
49,150

 
2,182

 
69,057

 
 
17,753

 
43,150

 
2,486

 
63,389

 
Loans
 
 
425

 
329

 
754

 
 
 
 
510

 
272

 
782

 
Equity investments (a)
590

 
 
 
1,390

 
2,177

 
 
751

 
 
 
1,255

 
2,209

 
Residential mortgage servicing rights
 
 
 
 
888

 
888

 
 
 
 
 
 
1,257

 
1,257

 
Commercial mortgage servicing rights
 
 
 
 
595

 
595

 
 
 
 
 
 
726

 
726

 
Trading securities (b)
854

 
2,243

 
 
 
3,097

 
 
2,137

 
1,777

 
2

 
3,916

 
Financial derivatives (b) (c)
2

 
4,546

 
90

 
4,638

 
 
3

 
2,053

 
25

 
2,081

 
Other assets
323

 
129

 
 
 
452

 
 
291

 
157

 
45

 
493

 
Total assets
$
19,494

 
$
57,952

 
$
5,550

 
$
83,193

 
 
$
20,935


$
48,449


$
6,157


$
75,744

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
Other borrowed funds
$
723

 
$
91

 
$
6

 
$
820

 
 
$
868

 
$
132

 
$
7

 
$
1,007

 
Financial derivatives (c) (d)
3

 
2,123

 
206

 
2,332

 
 
1

 
2,021

 
268

 
2,290

 
Other liabilities
 
 
 
 
105

 
105

 
 
 
 
 
 
58

 
58

 
Total liabilities
$
726

 
$
2,214

 
$
317

 
$
3,257

 
 
$
869

 
$
2,153

 
$
333

 
$
3,355

 
(a)
Certain investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)
Included in Other assets on the Consolidated Balance Sheet.
(c)
Amounts at September 30, 2019 and December 31, 2018 are presented gross and are not reduced by the impact of legally enforceable master netting agreements that allow us to net positive and negative positions and cash collateral held or placed with the same counterparty. See Note 9 Financial Derivatives for additional information related to derivative offsetting.
(d)
Included in Other liabilities on the Consolidated Balance Sheet.


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


Reconciliations of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the three and nine months ended September 30, 2019 and 2018 follow:
Table 50: Reconciliation of Level 3 Assets and Liabilities
Three Months Ended September 30, 2019
 
  
Total realized / unrealized
gains or losses for the 
period (a)
  
  
  
  
  
 
  
  
Unrealized
gains / losses
on assets and
liabilities held on
Consolidated
Balance Sheet at
Sept. 30, 2019
(a) (b)
Level 3 Instruments Only
In millions
Fair Value June 30, 2019

Included in
Earnings

Included
in Other
comprehensive
income
 
Purchases

Sales

Issuances

Settlements

Transfers
into
Level 3

 
Transfers
out of
Level 3

Fair
Value Sept. 30, 2019

Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
held for sale
$
2

 
 
 
$
3

 
 
$
(1
)
$
8

 
$
(8
)
$
4

 
 
Commercial mortgage
loans held for sale
73

 
 
 
 
 
 
(1
)
 
 
 
72

 
 
Securities available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-
backed non-agency
1,976

$
23

 
$
(3
)
 
 
 
(143
)
 
 
 
1,853

 
 
Asset-backed
261

2

 
 
1

 
 
(12
)
 
 
 
252

 
 
Other
80

1

 
(3
)
5

 
 
(6
)
 
 
 
77

 
 
Total securities
available for sale
2,317

26


(6
)
6





(161
)





2,182

 
 
Loans
259

5

 
 
93

$
(7
)
$
1

(14
)
2

 
(10
)
329

$
4

 
Equity investments
1,323

48

 
 
65

(46
)
 
 
 
 
 
1,390

50

 
Residential mortgage
servicing rights
997

(100
)
 
 
22

 
9

(40
)
 
 
 
888

(97
)
 
Commercial mortgage
servicing rights
630

(38
)
 
 
25

 
13

(35
)
 
 
 
595

(38
)
 
Trading securities
 
 
 
 
 
 
 
 
 
 
 


 
 
Financial derivatives
86

17

 
 
6

 
 
(19
)
 
 
 
90

16

 
Other assets
 
 
 
 
 
 
 
 
 
 
 


 
 
Total assets
$
5,687

$
(42
)
 
$
(6
)
$
220

$
(53
)
$
23

$
(271
)
$
10


$
(18
)
$
5,550

$
(65
)
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other borrowed funds
$
5

 
 
 
 
 
$
13

$
(12
)
 
 
 
$
6

 
 
Financial derivatives
221

$
8

 
 
 
$
4

 
(27
)
 
 
 
206

$
13

 
Other liabilities
78

14

 
 
$
16

 
13

(16
)
 
 
 
105

8

 
Total liabilities
$
304

$
22

 
 
$
16

$
4

$
26

$
(55
)
 
 
 
$
317

$
21

 
Net gains (losses)
 
$
(64
)
(c) 
 
 
 
 
 
 
 
 
 
$
(86
)
(d) 



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


Three Months Ended September 30, 2018
 
  
Total realized / unrealized
gains or losses for the 
period (a)
  
  
  
  
  
  
 
  
Unrealized gains/losses on assets and liabilities held on Consolidated Balance Sheet at Sept. 30, 2018
(a) (b)
Level 3 Instruments Only
In millions
Fair Value June 30, 2018

Included in Earnings

Included in Other comprehensive income
 
Purchases

Sales

Issuances

Settlements

Transfers into Level 3

Transfers out of Level 3

 
Fair Value Sept. 30, 2018

Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
held for sale
$
4

 
 
 
$
2

$
(1
)
 
 
$
5

$
(7
)
 
$
3

 
 
Commercial mortgage
loans held for sale
91

$
1

 
 
 


$
(3
)
 
 
 
89


 
Securities available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-
backed non-agency
2,405

18

 
$
(1
)
 
 
 
(154
)
 
 
 
2,268

 
 
Asset-backed
308

2

 
(3
)
 

 
(14
)
 
 
 
293

 
 
Other
91


 
1

2


 

 
(5
)
 
89

 
 
Total securities
available for sale
2,804

20

 
(3
)
2


 
(168
)
 
(5
)
 
2,650

 
 
Loans
282

4

 
 
25

(18
)
 
(1
)
8

(19
)
 
281


 
Equity investments
1,167

81

 
 
52

(258
)
 
 
 
 
 
1,042

$
18

 
Residential mortgage
servicing rights
1,297

41

 
 
66

 
$
12

(46
)
 
 
 
1,370

41

 
Commercial mortgage
servicing rights
748

23

 
 
16

 
16

(37
)
 
 
 
766

23

 
Trading securities
2

 
 
 
 
 
 
 
 
 
 
2

 
 
Financial derivatives
16

9

 
 

 
 
(17
)
 
 
 
8

11

 
Other assets
63

(3
)
 
 
 
 
 
(2
)
 
 
 
58

(3
)
 
Total assets
$
6,474

$
176

 
$
(3
)
$
163

$
(277
)
$
28

$
(274
)
$
13

$
(31
)
 
$
6,269

$
90

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other borrowed funds
$
7

 
 
 
 
 
$
18

$
(16
)
 
 
 
$
9

 
 
Financial derivatives
384

$
26

 
 
 
$
5

 
(73
)
 
 
 
342

$
32

 
Other liabilities
47

4

 
 

 
58

(54
)
 
 
 
55


 
Total liabilities
$
438

$
30

 
 

$
5

$
76

$
(143
)
 
 
 
$
406

$
32

 
Net gains (losses)
 
$
146

(c)
 
 
 
 
 
 
 
 
 
$
58

(d)

(continued on following page)




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


(continued from previous page)

Nine Months Ended September 30, 2019
 
  
Total realized / unrealized
gains or losses for the 
period (a)
  
  
  
  
  
  
 
  
Unrealized gains / losses on assets and liabilities held on Consolidated Balance Sheet at Sept. 30, 2019 (a) (b)
Level 3 Instruments Only
In millions
Fair
Value
Dec. 31,
2018

Included in
Earnings

Included
in Other
comprehensive
income
 
Purchases

Sales

Issuances

Settlements

Transfers
into
Level 3

Transfers
out of
Level 3

 
Fair Value Sept. 30, 2019

Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
held for sale
$
2

 
 
 
$
5

$
(1
)
 
$
(1
)
$
12

$
(13
)
 
$
4

 
 
Commercial mortgage
loans held for sale
87

$
2

 
 
 
 
 
(17
)
 
 
 
72

$
2

 
Securities available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-
backed non-agency
2,128

59

 
$
18

 
 
 
(352
)
 
 
 
1,853

 
 
Asset-backed
274

4

 
6

1

 
 
(33
)
 
 
 
252

 
 
Other
84

1

 
(4
)
8

(3
)
 
(9
)
 
 
 
77

 
 
Total securities
available for sale
2,486

64

 
20

9

(3
)
 
(394
)
 

 
2,182


 
Loans
272

10

 
 
126

(18
)
 
(39
)
5

(27
)
 
329

6

 
Equity investments
1,255

104

 
 
260

(229
)
 
 
 
 
 
1,390

53

 
Residential mortgage
servicing rights
1,257

(362
)
 
 
87

 
$
23

(117
)
 
 
 
888

(353
)
 
Commercial mortgage
servicing rights
726

(126
)
 
 
76

 
29

(110
)
 
 
 
595

(126
)
 
Trading securities
2

 
 
 
 
 
 
(2
)
 
 
 

 
 
Financial derivatives
25

104

 
 
6

 
 
(45
)
 
 
 
90

100

 
Other assets
45

 
 
 
 
 
 
(45
)
 
 
 

 
 
Total assets
$
6,157

$
(204
)
 
$
20

$
569

$
(251
)
$
52

$
(770
)
$
17

$
(40
)
 
$
5,550

$
(318
)
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other borrowed funds
$
7

 
 
 
 
 
$
39

$
(40
)
 
 
 
$
6

 
 
Financial derivatives
268

$
58

 
 
 
$
5

 
(125
)
 
 
 
206

$
65

 
Other liabilities
58

34

 
 
$
16

2

66

(71
)
 
 
 
105

20

 
Total liabilities
$
333

$
92

 
 
$
16

$
7

$
105

$
(236
)
 
 
 
$
317

$
85

 
Net gains (losses)
 
$
(296
)
(c) 
 
 
 
 
 
 
 
 
 
$
(403
)
(d) 



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


Nine Months Ended September 30, 2018
 
  
Total realized / unrealized
gains or losses for the 
period (a)
  
  
  
  
  
  
 
  
Unrealized gains/losses on assets and liabilities held on Consolidated Balance Sheet at Sept. 30, 2018 (a) (b)
Level 3 Instruments Only
In millions
Fair
Value
Dec. 31,
2017

Included in
Earnings

Included
in Other
comprehensive
income
 
Purchases

Sales

Issuances

Settlements

Transfers
into
Level 3

Transfers
out of
Level 3

 
Fair Value Sept. 30, 2018

Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
held for sale
$
3

 
 
 
$
4

$
(2
)
 
 
$
10

$
(12
)
 
$
3

 
 
Commercial mortgage
loans held for sale
107


 
 
 


$
(18
)
 
 
 
89


 
Securities available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-
backed non-agency
2,661

$
38

 
$
7

 
 
 
(438
)
 
 
 
2,268


 
Asset-backed
332

2

 
1

 

 
(42
)
 
 
 
293

 
 
Other
87

5

 
8

6


 
(12
)
 
(5
)
 
89

 
 
Total securities
available for sale
3,080

45


16

6



(492
)

(5
)

2,650


 
Loans
298

9

 
 
80

(27
)
 
(44
)
8

(43
)
 
281

$
1

 
Equity investments
1,036

169

 
 
213

(376
)
 
 
 

 
1,042

77

 
Residential mortgage
servicing rights
1,164

188

 
 
113

 
$
35

(130
)
 
 
 
1,370

180

 
Commercial mortgage
servicing rights
668

104

 
 
60

 
39

(105
)
 
 
 
766

104

 
Trading securities
2

 
 
 
 
 
 
 
 
 
 
2

 
 
Financial derivatives
10

33

 
 
2

 
 
(37
)
 
 
 
8

37

 
Other assets
107

(5
)
 
 
 
 
 
(44
)
 
 
 
58

(5
)
 
Total assets
$
6,475

$
543


$
16

$
478

$
(405
)
$
74

$
(870
)
$
18

$
(60
)

$
6,269

$
394

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other borrowed funds
$
11

 
 
 
 
 
$
50

$
(52
)
 
 
 
$
9

 
 
Financial derivatives
487

$
3

 
 
 
$
10

 
(158
)
 
 
 
342

$
5

 
Other liabilities
33

9

 
 
$
12

 
92

(91
)
 
 
 
55

8

 
Total liabilities
$
531

$
12




$
12

$
10

$
142

$
(301
)





$
406

$
13

 
Net gains (losses)
 
$
531

(c)
 
 
 
 
 
 
 
 
 
$
381

(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 gains (losses) realized and unrealized included in earnings related to Level 3 assets and liabilities included amortization and accretion. The amortization and accretion amounts were included in Interest income on the Consolidated Income Statement and the remaining net gains (losses) realized and unrealized were included in Noninterest income on the Consolidated Income Statement.
(d)
Net unrealized gains (losses) related to assets and liabilities held at the end of the reporting period were included in Noninterest income on the Consolidated Income Statement.
An instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification (transfer) of assets or liabilities between hierarchy levels. Our policy is to recognize transfers in and transfers out as of the end of the reporting period.



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


Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities follows:

Table 51: Fair Value Measurements – Recurring Quantitative Information

September 30, 2019
Level 3 Instruments Only
Dollars in millions
Fair Value

Valuation Techniques
Unobservable Inputs
Range (Weighted-Average)
Commercial mortgage loans held for sale
$
72

Discounted cash flow
Spread over the benchmark curve (a)
530bps - 2,535bps (1,603bps)
Residential mortgage-backed
non-agency securities
1,853

Priced by a third-party vendor using a discounted cash flow pricing model
Constant prepayment rate
1.0% - 36.2% (10.2%)
Constant default rate
0.0% - 13.4% (4.6%)
Loss severity
25.0% - 95.7% (52.3%)
Spread over the benchmark curve (a)
194bps weighted-average
Asset-backed securities
252

Priced by a third-party vendor using a discounted cash flow pricing model
Constant prepayment rate
1.0% - 21.0% (7.5%)
Constant default rate
1.0% - 7.2% (3.6%)
Loss severity
20.0% - 100.0% (59.7%)
Spread over the benchmark curve (a)
214bps weighted-average
Loans
209

Consensus pricing (b)
Cumulative default rate
3.6% - 100.0% (75.9%)
Loss severity
0.0% - 100.0% (15.1%)
Discount rate
5.0% - 8.0% (5.2%)
 
74

Discounted cash flow
Loss severity
8.0% weighted-average
Discount rate
4.9% weighted-average
 
46

Consensus pricing (b)
Credit and Liquidity discount
0.0% - 99.0% (63.0%)
Equity investments
1,390

Multiple of adjusted earnings
Multiple of earnings
5.0x - 16.5x (8.7x)
Residential mortgage servicing rights
888

Discounted cash flow
Constant prepayment rate
0.0% - 56.9% (17.4%)
Spread over the benchmark curve (a)
173bps - 1,445bps (773bps)
Commercial mortgage servicing rights
595

Discounted cash flow
Constant prepayment rate
3.5% - 21.8% (4.6%)
Discount rate
5.2% - 8.1% (7.9%)
Financial derivatives - Swaps related to
sales of certain Visa Class B
common shares
(186
)
Discounted cash flow
Estimated conversion factor of Visa Class B shares into Class A shares
162.3% weighted-average
Estimated annual growth rate of Visa Class A share price
16.0%
Estimated length of litigation resolution date
Q4 2020
Insignificant Level 3 assets, net of
liabilities (c)
40

 
 
 
Total Level 3 assets, net of liabilities (d)
$
5,233

 
 
 

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


December 31, 2018
Level 3 Instruments Only
Dollars in millions
Fair Value

Valuation Techniques
Unobservable Inputs
Range (Weighted-Average)
Commercial mortgage loans held for sale
$
87

Discounted cash flow
Spread over the benchmark curve (a)
535bps - 1,900bps (1,217bps)
Residential mortgage-backed
non-agency securities
2,128

Priced by a third-party vendor using a discounted cash flow pricing model
Constant prepayment rate
1.0% - 33.0% (11.8%)
Constant default rate
0.0% - 18.8% (5.1%)
Loss severity
10.0% - 100.0% (50.8%)
Spread over the benchmark curve (a)
216bps weighted-average
Asset-backed securities
274

Priced by a third-party vendor using a discounted cash flow pricing model
Constant prepayment rate
1.0% - 19.0% (8.5%)
Constant default rate
1.0% - 18.5% (4.0%)
Loss severity
15.0% - 100.0% (63.8%)
Spread over the benchmark curve (a)
198bps weighted-average
Loans
129

Consensus pricing (b)
Cumulative default rate
11.0% - 100.0% (81.8%)
Loss severity
0.0% - 100.0% (17.2%)
Discount rate
5.5% - 8.3% (5.8%)
 
90

Discounted cash flow
Loss severity
8.0% weighted-average
Discount rate
5.8% weighted-average
 
53

Consensus pricing (b)
Credit and Liquidity discount
0.0% - 99.0% (61.3%)
Equity investments
1,255

Multiple of adjusted earnings
Multiple of earnings
4.5x - 16.0x (8.4x)
Residential mortgage servicing rights
1,257

Discounted cash flow
Constant prepayment rate
0.0% - 54.5% (8.7%)
Spread over the benchmark curve (a)
492bps - 1,455bps (806bps)
Commercial mortgage servicing rights
726

Discounted cash flow
Constant prepayment rate
4.6% - 14.7% (5.7%)
Discount rate
6.9% - 8.5% (8.4%)
Financial derivatives - Swaps related to
sales of certain Visa Class B
common shares
(210
)
Discounted cash flow
Estimated conversion factor of Visa Class B shares into Class A shares
163.0% weighted-average
Estimated annual growth rate of Visa Class A share price
16.0%
Estimated length of litigation
resolution date
Q4 2020
Insignificant Level 3 assets, net of
liabilities (c)
35

 
 
 
Total Level 3 assets, net of liabilities (d)
$
5,824

 
 
 
(a)
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.
(b)
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.
(c)
Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes certain financial derivative assets and liabilities, trading securities, other securities, residential mortgage loans held for sale, other assets, other borrowed funds and other liabilities.
(d)
Consisted of total Level 3 assets of $5.5 billion and total Level 3 liabilities of $.3 billion as of September 30, 2019 and $6.1 billion and $.3 billion as of December 31, 2018, respectively.

Financial Assets Accounted for at Fair Value on a Nonrecurring Basis

We may be required to measure certain financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment and are included in Table 52. For more information regarding the valuation methodologies of our financial assets measured at fair value on a nonrecurring basis, see Note 6 Fair Value in our 2018 Form 10-K.
Table 52: Fair Value Measurements – Nonrecurring (a) (b) (c)
 
Fair Value
 
Gains (Losses)
Three months ended
 
Gains (Losses)
Nine months ended
 
In millions
September 30
2019

 
December 31
2018

 
September 30
2019

 
September 30
2018

 
September 30
2019

 
September 30
2018

 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual loans
$
166

 
$
128

 
$
(22
)
 
$
(11
)
 
$
(55
)
 
$
(14
)
 
OREO and foreclosed assets
46

 
59

 
(2
)
 
(2
)
 
(6
)
 
(2
)
 
Long-lived assets
3

 
11

 
(1
)
 
(1
)
 
—

 
(1
)
 
Total assets
$
215

 
$
198

 
$
(25
)
 
$
(14
)
 
$
(61
)
 
$
(17
)
 
(a)
All Level 3 for the periods presented.
(b)
Valuation techniques applied were fair value of property or collateral.
(c)
Unobservable inputs used were appraised value/sales price, broker opinions or projected income/required improvement costs. Additional quantitative information was not meaningful for the periods presented.



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


Financial Instruments Accounted for under Fair Value Option

We elect the fair value option to account for certain financial instruments. For more information on these financial instruments for which the fair value option election has been made, see Note 6 Fair Value in our 2018 Form 10-K.

Fair values and aggregate unpaid principal balances of certain items for which we elected the fair value option follow:

Table 53: Fair Value Option – Fair Value and Principal Balances
 
September 30, 2019
 
December 31, 2018
 
In millions
Fair Value

 
Aggregate Unpaid
Principal Balance

 
Difference

 
Fair Value

 
Aggregate Unpaid
Principal Balance

 
Difference

 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
 
 
 
 
 
 
 
 
 
 
 
 
Performing loans
$
780

 
$
759

 
$
21

 
$
489

 
$
472

 
$
17

 
Accruing loans 90 days or more past due
1

 
1

 


 
2

 
2

 


 
Nonaccrual loans
4

 
4

 


 
4

 
4

 

 
Total
$
785

 
$
764

 
$
21

 
$
495

 
$
478

 
$
17

 
Commercial mortgage loans held for sale (a)
 
 
 
 
 
 
 
 
 
 
 
 
Performing loans
$
749

 
$
751

 
$
(2
)
 
$
396

 
$
411

 
$
(15
)
 
Nonaccrual loans
1

 
2

 
(1
)
 

 

 

 
Total
$
750

 
$
753

 
$
(3
)
 
$
396

 
$
411

 
$
(15
)
 
Residential mortgage loans
 
 
 
 
 
 
 
 
 
 
 
 
Performing loans
$
318

 
$
333

 
$
(15
)
 
$
279

 
$
298

 
$
(19
)
 
Accruing loans 90 days or more past due
270

 
281

 
(11
)
 
321

 
329

 
(8
)
 
Nonaccrual loans
166

 
266

 
(100
)
 
182

 
292

 
(110
)
 
Total
$
754

 
$
880

 
$
(126
)
 
$
782

 
$
919

 
$
(137
)
 
Other assets
$
128

 
$
121

 
$
7

 
$
156

 
$
176

 
$
(20
)
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other borrowed funds
$
54

 
$
55

 
$
(1
)
 
$
64

 
$
65

 
$
(1
)
 
(a)
There were no accruing loans 90 days or more past due within this category at September 30, 2019 or December 31, 2018.

The changes in fair value for items for which we elected the fair value option are as follows:

Table 54: Fair Value Option – Changes in Fair Value (a)
 
Gains (Losses)
 
Gains (Losses)
 
 
Three months ended
 
Nine months ended
 
 
September 30

 
September 30

 
September 30

 
September 30

 
In millions
2019

 
2018

 
2019

 
2018

 
Assets
 
 
 
 
 
 
 
 
Residential mortgage loans held for sale
$
29

 
$
13

 
$
63

 
$
25

 
Commercial mortgage loans held for sale
$
25

 
$
16

 
$
48

 
$
41

 
Residential mortgage loans
$
7

 
$
7

 
$
16

 
$
17

 
Other assets
$
3

 
$
(1
)
 
$
24

 
$
(11
)
 
(a)
The impact on earnings of offsetting hedged items or hedging instruments is not reflected in these amounts.

Additional Fair Value Information Related to Financial Instruments Not Recorded at Fair Value
The following table presents the carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of all other financial instruments that are not recorded on our Consolidated Balance Sheet at fair value as of September 30, 2019 and December 31, 2018. For more information regarding the methods and assumptions used to estimate the fair values of financial instruments included in Table 55, see Note 6 Fair Value in our 2018 Form 10-K.


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


Table 55: Additional Fair Value Information Related to Other Financial Instruments
 
Carrying

 
Fair Value
 
In millions
Amount

 
Total

 
Level 1

 
Level 2

 
Level 3

 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
5,671

 
$
5,671

 
$
5,671

 
 
 
 
 
Interest-earning deposits with banks
19,036

 
19,036

 
 
 
$
19,036

 
 
 
Securities held to maturity
18,826

 
19,210

 
847

 
18,201

 
$
162

 
Net loans (excludes leases)
226,595

 
229,838

 
 
 
 
 
229,838

 
Other assets
8,143

 
8,143

 
 
 
8,142

 
1

 
Total assets
$
278,271

 
$
281,898

 
$
6,518

 
$
45,379

 
$
230,001

 
Liabilities
 
 
 
 
 
 
 
 
 
 
Time deposits
$
21,935

 
$
21,790

 
 
 
$
21,790

 
 
 
Borrowed funds
60,534

 
60,904

 
 
 
59,141

 
$
1,763

 
Unfunded loan commitments and letters of credit
304

 
304

 
 
 
 
 
304

 
Other liabilities
440

 
440

 
 
 
440

 
 
 
Total liabilities
$
83,213

 
$
83,438

 
 
 
$
81,371

 
$
2,067

 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
5,608

 
$
5,608

 
$
5,608

 
 
 
 
 
Interest-earning deposits with banks
10,893

 
10,893

 
 
 
$
10,893

 
 
 
Securities held to maturity
19,312

 
19,019

 
763

 
18,112

 
$
144

 
Net loans (excludes leases)
215,525

 
216,492

 
 
 
 
 
216,492

 
Other assets
11,065

 
11,065

 
 
 
11,060

 
5

 
Total assets
$
262,403

 
$
263,077

 
$
6,371

 
$
40,065

 
$
216,641

 
Liabilities
 
 
 
 
 
 
 
 
 
 
Time deposits
$
18,507

 
$
18,246

 
 
 
$
18,246

 
 
 
Borrowed funds
56,412

 
56,657

 
 
 
54,872

 
$
1,785

 
Unfunded loan commitments and letters of credit
285

 
285

 
 
 
 
 
285

 
Other liabilities
393

 
393

 
 
 
393

 
 
 
Total liabilities
$
75,597

 
$
75,581

 

 
$
73,511

 
$
2,070

 


The aggregate fair values in Table 55 represent only a portion of the total market value of our assets and liabilities as, in accordance with the guidance related to fair values about financial instruments, we exclude the following:
•
financial instruments recorded at fair value on a recurring basis (as they are disclosed in Table 49);
•
investments accounted for under the equity method;
•
equity securities without a readily determinable fair value that apply for the alternative measurement approach to fair value under ASU 2016-01;
•
real and personal property;
•
lease financing;
•
loan customer relationships;
•
deposit customer intangibles;
•
mortgage servicing rights (MSRs);
•
retail branch networks;
•
fee-based businesses, such as asset management and brokerage;
•
trademarks and brand names;
•
trade receivables and payables due in one year or less; and
•
deposit liabilities with no defined or contractual maturities under ASU 2016-01.



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


NOTE 7 GOODWILL AND MORTGAGE SERVICING RIGHTS

Goodwill

See Note 7 Goodwill and Mortgage Servicing Rights in our 2018 Form 10-K for more information regarding our goodwill.

Mortgage Servicing Rights
We recognize the right to service mortgage loans for others when we recognize it as an intangible asset and the servicing income we receive is more than adequate compensation. MSRs totaled $1.5 billion and $2.0 billion at September 30, 2019 and December 31, 2018, respectively, and consisted of loan servicing contracts for commercial and residential mortgages measured at fair value.

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

See the Sensitivity Analysis section of this Note 7, as well as Note 6 Fair Value in our 2018 Form 10-K for more detail on our fair value measurement of MSRs. Refer to Note 7 Goodwill and Mortgage Servicing Rights in our 2018 Form 10-K for more information on our accounting and measurement of MSRs.

Changes in the commercial and residential MSRs follow:

Table 56: Mortgage Servicing Rights
 
Commercial MSRs
 
Residential MSRs
 
In millions
2019

2018

 
2019

2018

 
January 1
$
726

$
668

 
$
1,257

$
1,164

 
Additions:
 
 
 
 
 
 
From loans sold with servicing retained
29

39

 
23

35

 
Purchases
76

60

 
87

113

 
Changes in fair value due to:
 
 
 
 
 
 
Time and payoffs (a)
(110
)
(105
)
 
(117
)
(130
)
 
Other (b)
(126
)
104

 
(362
)
188

 
September 30
$
595

$
766

 
$
888

$
1,370

 
Related unpaid principal balance at September 30
$
203,808

$
174,664

 
$
122,886

$
127,099

 
Servicing advances at September 30
$
159

$
193

 
$
123

$
156

 
(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 September 30, 2019 are shown in Tables 57 and 58. The expected and actual rates of mortgage loan prepayments are significant factors driving the fair value. Management uses both internal proprietary models and a third-party model to estimate future commercial mortgage loan prepayments and a third-party model to estimate future residential mortgage loan prepayments. These models have been refined based on current market conditions and management judgment. Future interest rates are another important factor in the valuation of MSRs. Management utilizes market implied forward interest rates to estimate the future direction of mortgage and discount rates. The forward rates utilized are derived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. Changes in the shape and slope of the forward curve in future periods may result in volatility in the fair value estimate.

A sensitivity analysis of the hypothetical effect on the fair value of MSRs to adverse changes in key assumptions is presented in Tables 57 and 58. These sensitivities do not include the impact of the related hedging activities. Changes in fair value generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the interest rate spread), which could either magnify or counteract the sensitivities.


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


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 57: Commercial Mortgage Servicing Rights – Key Valuation Assumptions
Dollars in millions
September 30
2019

 
December 31
2018

 
Fair value
$
595

 
$
726

 
Weighted-average life (years)
4.0

 
4.1

 
Weighted-average constant prepayment rate
4.60
%
 
5.65
%
 
Decline in fair value from 10% adverse change
$
8

 
$
10

 
Decline in fair value from 20% adverse change
$
16

 
$
19

 
Effective discount rate
7.88
%
 
8.39
%
 
Decline in fair value from 10% adverse change
$
15

 
$
19

 
Decline in fair value from 20% adverse change
$
30

 
$
39

 


Table 58: Residential Mortgage Servicing Rights – Key Valuation Assumptions
Dollars in millions
September 30
2019

 
December 31
2018

 
Fair value
$
888

 
$
1,257

 
Weighted-average life (years)
4.3

 
6.9

 
Weighted-average constant prepayment rate
17.44
%
 
8.69
%
 
Decline in fair value from 10% adverse change
$
46

 
$
41

 
Decline in fair value from 20% adverse change
$
87

 
$
79

 
Weighted-average option adjusted spread
773

bps
806

bps
Decline in fair value from 10% adverse change
$
22

 
$
37

 
Decline in fair value from 20% adverse change
$
43

 
$
73

 


Fees from mortgage loan servicing, which includes contractually specified servicing fees, late fees and ancillary fees were $.2 billion for both three months ended September 30, 2019 and 2018 and $.4 billion for the nine months ended September 30, 2019 and 2018. We also generate servicing fees from fee-based activities provided to others for which we do not have an associated servicing asset. Fees from commercial and residential MSRs are reported within Noninterest income on our Consolidated Income Statement in Corporate services and Residential mortgage, respectively.

NOTE 8 EMPLOYEE BENEFIT PLANS

Pension and Postretirement Plans

As described in Note 11 Employee Benefit Plans in our 2018 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 and are subject to a minimum annual amount. 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. We reserve the right to terminate or make changes to these plans at any time.



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


The components of our net periodic benefit cost for the three and nine months ended September 30, 2019 and 2018, respectively, were as follows:
 
Table 59: Components of Net Periodic Benefit Cost (a)
 
Qualified Pension Plan
 
 
Nonqualified Pension Plan
 
 
Postretirement Benefits
 
Three months ended September 30
In millions
2019

 
2018

 
 
2019

 
2018

 
 
2019

 
2018

 
Net periodic cost consists of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
29

 
$
29

 
 
$
1

 
$
1

 
 
$
1

 
$
1

 
Interest cost
46

 
43

 
 
3

 
2

 
 
3

 
3

 
Expected return on plan assets
(72
)
 
(76
)
 
 
 
 

 
 
(1
)
 
(1
)
 
Amortization of prior service credit
1

 


 
 
 
 

 
 
 
 


 
Amortization of actuarial losses
 
 


 
 
1

 
1

 
 
 
 

 
Net periodic cost/(benefit)
$
4

 
$
(4
)
 
 
$
5

 
$
4

 
 
$
3

 
$
3

 

 
Qualified Pension Plan
 
 
Nonqualified Pension Plan
 
 
Postretirement Benefits
 
Nine months ended September 30
In millions
2019

 
2018

 
 
2019

 
2018

 
 
2019

 
2018

 
Net periodic cost consists of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
86

 
$
87

 
 
$
2

 
$
2

 
 
$
3

 
$
3

 
Interest cost
139

 
128

 
 
8

 
7

 
 
10

 
9

 
Expected return on plan assets
(215
)
 
(229
)
 
 
 
 

 
 
(4
)
 
(4
)
 
Amortization of prior service credit
3

 
1

 
 
 
 

 
 
 
 


 
Amortization of actuarial losses
3

 


 
 
3

 
3

 
 
 
 
 
 
Net periodic cost/(benefit)
$
16

 
$
(13
)
 
 
$
13

 
$
12

 
 
$
9

 
$
8

 

(a)
The service cost component is included in Personnel expense on the Consolidated Income Statement. All other components are included in Other noninterest expense on the Consolidated Income Statement.

NOTE 9 FINANCIAL DERIVATIVES

We use a variety of financial derivatives as part of our overall asset and liability risk management process to help manage exposure to market (primarily interest rate) and credit risk inherent in our business activities. We also enter into derivatives with customers to facilitate their risk management activities. 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 13 Financial Derivatives in our 2018 Form 10-K.

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


The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by us.
Table 60: Total Gross Derivatives
 
September 30, 2019
December 31, 2018
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 hedging under GAAP
 
 
 
 
 
 
Interest rate contracts (c):
 
 
 
 
 
 
Fair value hedges
$
31,474

 
 
$
30,919

$
7



Cash flow hedges
23,427

$
8

$
4

17,337

1



Foreign exchange contracts:
 
 
 
 
 
 
Net investment hedges
1,097

40

 
1,012



$
10

Total derivatives designated for hedging under GAAP
$
55,998

$
48

$
4

$
49,268

$
8

$
10

Derivatives not used for hedging under GAAP
 
 
 
 
 
 
Derivatives used for mortgage banking activities (d):
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
Swaps
$
50,776

$
9

$
3

$
43,084



$
3

Futures (e)
3,697

 
 
10,658



Mortgage-backed commitments
12,046

97

85

5,771

$
47

39

Other
6,867

54

40

6,509

10

3

Subtotal
73,386

160

128

66,022

57

45

Derivatives used for customer-related activities:
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
Swaps
243,626

3,553

1,329

218,496

1,352

1,432

Futures (e)
704

 
 
914



Mortgage-backed commitments
5,615

6

6

2,246

7

10

Other
22,062

167

43

20,109

77

33

Subtotal
272,007

3,726

1,378

241,765

1,436

1,475

Commodity contracts:
 
 
 
 
 
 
Swaps
4,619

242

239

4,813

244

238

Other
4,080

139

138

1,418

67

67

Subtotal
8,699

381

377

6,231

311

305

Foreign exchange contracts and other
25,491

270

253

23,253

194

192

Subtotal
306,197

4,377

2,008

271,249

1,941

1,972

Derivatives used for other risk management activities:
 
 
 
 
 
 
Foreign exchange contracts and other
11,372

53

192

7,908

75

263

Total derivatives not designated for hedging under GAAP
$
390,955

$
4,590

$
2,328

$
345,179

$
2,073

$
2,280

Total gross derivatives
$
446,953

$
4,638

$
2,332

$
394,447

$
2,081

$
2,290

Less: Impact of legally enforceable master netting agreements
 
890

890


688

688

Less: Cash collateral received/paid
 
914

770

 
341

539

Total derivatives
 
$
2,834

$
672



$
1,052

$
1,063

(a)
Included in Other assets on our Consolidated Balance Sheet.
(b)
Included in Other liabilities on our Consolidated Balance Sheet.
(c)
Represents primarily swaps.
(d)
Includes both residential and commercial mortgage banking activities.
(e)
Futures contracts settle in cash daily and, therefore, no derivative asset or derivative liability is recognized on our Consolidated Balance Sheet.

All derivatives are carried on our Consolidated Balance Sheet at fair value. Derivative balances are presented on the Consolidated Balance Sheet on a net basis taking into consideration the effects of legally enforceable master netting agreements and, when appropriate, any related cash collateral exchanged with counterparties. Further discussion regarding the offsetting rights associated with these legally enforceable master netting agreements is included in the Offsetting, Counterparty Credit Risk and Contingent Features section of this Note 9. 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


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


hedges, and derivatives hedging a net investment in a foreign subsidiary are considered net investment hedges. Designating derivatives as accounting hedges allows for gains and losses on those derivatives to be recognized in the same period and in the same income statement line item as the earnings impact of the hedged items.

Fair Value Hedges
We enter into receive-fixed, pay-variable interest rate swaps to hedge changes in the fair value of outstanding fixed-rate debt caused by fluctuations in market interest rates. We also enter into pay-fixed, receive-variable interest rate swaps and zero-coupon swaps to hedge changes in the fair value of fixed rate and zero-coupon investment securities caused by fluctuations in market interest rates. Gains and losses on the interest rate swaps designated in these hedge relationships, along with the offsetting gains and losses on the hedged items attributable to the hedged risk, are recognized in current earnings within the same income statement line item.

Cash Flow Hedges
We enter into receive-fixed, pay-variable interest rate swaps to modify the interest rate characteristics of designated commercial loans from variable to fixed in order to reduce the impact of changes in future cash flows due to market interest rate changes. We also periodically enter into forward purchase and sale contracts to hedge the variability of the consideration that will be paid or received related to the purchase or sale of investment securities. The forecasted purchase or sale is consummated upon gross settlement of the forward contract itself. For these cash flow hedges, gains and losses on the interest rate swaps and forward contracts are recorded in AOCI and are then reclassified into earnings in the same period the hedged cash flows affect earnings and within the same income statement line as the hedged cash flows.

In the 12 months that follow September 30, 2019, we expect to reclassify net derivative gains of $165 million pretax, or $130 million after-tax, from AOCI to interest income for both cash flow hedge strategies. This reclassified amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to September 30, 2019. As of September 30, 2019, the maximum length of time over which forecasted transactions are hedged is ten years.


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


Further detail regarding gains (losses) related to our fair value and cash flow hedge derivatives is presented in the following table.
Table 61: Gains (Losses) Recognized on Fair Value and Cash Flow Hedges in the Consolidated Income Statement (a) (b)
 
Location and Amount of Gains (Losses) Recognized in Income
 
Interest Income
Interest Expense
Noninterest Income
In millions
Loans
Investment Securities
Borrowed Funds
Other
For the three months ended September 30, 2019
 
 
 
 
Total amounts on the Consolidated Income Statement
$
2,678

$
617

$
468

$
342

Gains (losses) on fair value hedges recognized on:
 
 
 
 
Hedged items (c)
 
$
76

$
(271
)
 
Derivatives
 
$
(73
)
$
235

 
Amounts related to interest settlements on derivatives
 
$
4

$
16

 
Gains (losses) on cash flow hedges (d):
 
 
 
 
Amount of derivative gains (losses) reclassified from AOCI
$
2

$
3



 
For the three months ended September 30, 2018
 
 
 
 
Total amounts on the Consolidated Income Statement
$
2,452

$
584

$
421

$
301

Gains (losses) on fair value hedges recognized on:
 
 
 
 
Hedged items (c)
 
$
(31
)
$
107

 
Derivatives
 
$
30

$
(137
)
 
Amounts related to interest settlements on derivatives
 
$
2

$
24

 
Gains (losses) on cash flow hedges (d):
 
 
 
 
Amount of derivative gains (losses) reclassified from AOCI
$
6

$
2

 
$
1

For the nine months ended September 30, 2019
 
 
 
 
Total amounts on the Consolidated Income Statement
$
7,952

$
1,866

$
1,433

$
1,017

Gains (losses) on fair value hedges recognized on:
 
 
 
 
Hedged items (c)
 
$
250

$
(1,068
)
 
Derivatives
 
$
(241
)
$
948

 
Amounts related to interest settlements on derivatives
 
$
14

$
36

 
Gains (losses) on cash flow hedges (d):
 
 
 
 
Amount of derivative gains (losses) reclassified from AOCI
$
(18
)
$
5

 
$
18

For the nine months ended September 30, 2018
 
 
 
 
Total amounts on the Consolidated Income Statement
$
7,025

$
1,653

$
1,173

$
880

Gains (losses) on fair value hedges recognized on:
 
 
 
 
Hedged items (c)
 
$
(145
)
$
577

 
Derivatives
 
$
149

$
(632
)
 
Amounts related to interest settlements on derivatives
 


$
57

 
Gains (losses) on cash flow hedges (d):
 
 
 
 
Amount of derivative gains (losses) reclassified from AOCI
$
43

$
9

 
$
8

(a)
For all periods presented, there were no components of derivative gains or losses excluded from the assessment of hedge effectiveness for any of the fair value or cash flow hedge strategies.
(b)
All cash flow and fair value hedge derivatives were interest rate contracts for the periods presented.
(c)
Includes an insignificant amount of fair value hedge adjustments primarily related to discontinued borrowed funds hedge relationships.
(d)
For all periods presented, there were no gains or losses from cash flow hedge derivatives reclassified to income because it became probable that the original forecasted transaction would not occur.
Detail regarding the impact of fair value hedge accounting on the carrying value of the hedged items is presented in the following table.

Table 62: Hedged Items - Fair Value Hedges
 
 
September 30, 2019
 
December 31, 2018
In millions
Carrying Value of the Hedged Items

 
Cumulative Fair Value Hedge Adjustment included in the Carrying Value of Hedged Items (a)

 
Carrying Value of the Hedged Items

 
Cumulative Fair Value Hedge Adjustment included in the Carrying Value of Hedged Items (a)

 
Investment securities - available for sale (b)
$
6,787

 
$
132

 
$
6,216

 
$
(103
)
 
Borrowed funds
$
26,873

 
$
807

 
$
27,121

 
$
(260
)
 
(a)
Includes $(.3) billion and $(.5) billion of fair value hedge adjustments primarily related to discontinued borrowed funds hedge relationships for September 30, 2019 and December 31, 2018, respectively.
(b)
Carrying value shown represents amortized cost.


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


Net Investment Hedges
We enter into foreign currency forward contracts to hedge non-U.S. dollar net investments in foreign subsidiaries against adverse changes in foreign exchange rates. We assess whether the hedging relationship is highly effective in achieving offsetting changes in the value of the hedge and hedged item by qualitatively verifying that the critical terms of the hedge and hedged item match at the inception of the hedging relationship and on an ongoing basis. Net investment hedge derivatives are classified as foreign exchange contracts. There were no components of derivative gains or losses excluded from the assessment of the hedge effectiveness for all periods presented. Gains on net investment hedge derivatives recognized in OCI were $36 million and $50 million for the three and nine months ended September 30, 2019, respectively, compared with $17 million and $47 million for the three and nine months ended September 30, 2018, respectively.

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 13 Financial Derivatives in our 2018 Form 10-K.

Further detail regarding the gains (losses) on derivatives not designated in hedging relationships is presented in the following table.
Table 63: Gains (Losses) on Derivatives Not Designated for Hedging under GAAP
   
 
Three months ended
September 30
 
Nine months ended
September 30
 
In millions
2019

2018

 
2019

2018

 
Derivatives used for mortgage banking activities:
 
 
 
 
 
 
Interest rate contracts (a)
$
184

$
(34
)
 
$
530

$
(166
)
 
Derivatives used for customer-related activities:
 
 
 
 
 
 
Interest rate contracts
45

15

 
84

96

 
Foreign exchange contracts and other (b)
11

22

 
64

79

 
Gains (losses) from customer-related activities (c)
56

37

 
148

175

 
Derivatives used for other risk management activities:
 
 
 
 
 
 
Foreign exchange contracts and other (c)
103

(19
)
 
39

111

 
Total gains (losses) from derivatives not designated as hedging instruments
$
343

$
(16
)
 
$
717

$
120

 
(a)
Included in Residential mortgage, Corporate services and Other noninterest income on our Consolidated Income Statement.
(b)
Includes an insignificant amount of gains (losses) on commodity contracts for all periods presented.
(c)
Included in Other noninterest income on our Consolidated Income Statement.

Offsetting, Counterparty Credit Risk and Contingent Features

We generally utilize a net presentation on the Consolidated Balance Sheet for those derivative financial instruments entered into with counterparties under legally enforceable master netting agreements. The master netting agreements reduce credit risk by permitting the closeout netting of all outstanding derivative instruments under the master netting agreement with the same counterparty upon the occurrence of an event of default. The master netting agreement also may require the exchange of cash or marketable securities to collateralize either party’s net position. For additional information on derivative offsetting, counterparty credit risk and contingent features, see Note 13 Financial Derivatives in our 2018 Form 10-K.

Table 64 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities as of September 30, 2019 and December 31, 2018. 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.

Table 64 includes over-the-counter (OTC) derivatives and OTC derivatives cleared through a central clearing house. OTC derivatives represent contracts executed bilaterally with counterparties that are not settled through an organized exchange or cleared through a central clearing house. The majority of OTC derivatives are governed by the International Swaps and Derivatives Association (ISDA) documentation or other legally enforceable master netting agreements. OTC cleared derivatives represent contracts executed bilaterally with counterparties in the OTC market that are novated to a central clearing house who then becomes our counterparty. OTC cleared derivative instruments are typically settled in cash each day based on the prior day value.


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


Table 64: Derivative Assets and Liabilities Offsetting
In millions
 
  
 
Amounts Offset on the
Consolidated Balance Sheet
 
  
 
 
 
Securities Collateral Held/Pledged Under Master Netting Agreements

 
  
 
Gross
Fair Value

 
Fair Value
Offset Amount

 
Cash
Collateral

 
Net
Fair Value

 
 
 
Net Amounts

 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over-the-counter cleared
 
$
24

 
 
 
 
 
$
24

 
 
 
 
 
$
24

 
Over-the-counter
 
3,870

 
$
399

 
$
848

 
2,623

 
 
 
$
297

 
2,326

 
Commodity contracts
 
381

 
244

 
58

 
79

 
 
 
 
 
79

 
Foreign exchange and other contracts
 
363

 
247

 
8

 
108

 
 
 
1

 
107

 
Total derivative assets
 
$
4,638


$
890


$
914


$
2,834

 
(a) 
 
$
298

 
$
2,536

 
Derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over-the-counter cleared
 
$
26

 
 
 
 
 
$
26

 
 
 
 
 
$
26

 
Over-the-counter
 
1,484

 
$
648

 
$
722

 
114

 
 
 
 
 
114

 
Commodity contracts
 
377

 
163

 
2

 
212

 
 
 
 
 
212

 
Foreign exchange and other contracts
 
445

 
79

 
46

 
320

 
 
 
 
 
320

 
Total derivative liabilities
 
$
2,332

 
$
890

 
$
770

 
$
672

 
(b)
 


 
$
672

 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over-the-counter cleared
 
$
29

 
 
 
 
 
$
29

 
 
 
 
 
$
29

 
Over-the-counter
 
1,472

 
$
450

 
$
117

 
905

 
 
 
$
25

 
880

 
Commodity contracts
 
311

 
76

 
210

 
25

 
 
 
 
 
25

 
Foreign exchange and other contracts
 
269

 
162

 
14

 
93

 
 
 
 
 
93

 
Total derivative assets
 
$
2,081


$
688


$
341


$
1,052

 
(a)
 
$
25

 
$
1,027

 
Derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over-the-counter cleared
 
$
24

 
 
 
 
 
$
24

 
 
 
 
 
$
24

 
Over-the-counter
 
1,496

 
$
557

 
$
489

 
450

 
 
 
$
11

 
439

 
Commodity contracts
 
305

 
56

 
17

 
232

 
 
 
 
 
232

 
Foreign exchange and other contracts
 
465

 
75

 
33

 
357

 
 
 
 
 
357

 
Total derivative liabilities
 
$
2,290

 
$
688

 
$
539

 
$
1,063

 
(b)
 
$
11

 
$
1,052

 
(a)
Represents the net amount of derivative assets included in Other assets on our Consolidated Balance Sheet.
(b)
Represents the net amount of derivative liabilities included in Other liabilities on our Consolidated Balance Sheet.

In addition to using master netting agreements and other collateral agreements to reduce credit risk associated with derivative instruments, we also seek to manage credit risk by evaluating credit ratings of counterparties and by using internal credit analysis, limits and monitoring procedures.

At September 30, 2019, we held cash, U.S. government securities and mortgage-backed securities totaling $1.4 billion under master netting agreements and other collateral agreements to collateralize net derivative assets due from counterparties, and we pledged cash totaling $1.4 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.
 


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


Certain derivative agreements contain various credit-risk related contingent provisions, such as those that require our debt to maintain a specified credit rating from one or more of the major credit rating agencies. If our debt ratings were to fall below such specified ratings, the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on September 30, 2019 was $2.0 billion for which we had posted collateral of $1.4 billion in the normal course of business. The maximum additional amount of collateral we would have been required to post if the credit-risk-related contingent features underlying these agreements had been triggered on September 30, 2019 would be $.6 billion.

NOTE 10 EARNINGS PER SHARE

Table 65: Basic and Diluted Earnings Per Common Share
 
 
Three months ended
September 30
 
Nine months ended
September 30
 
In millions, except per share data
 
2019

 
2018

 
2019

 
2018

 
Basic
 
 
 
 
 
 
 
 
 
Net income
 
$
1,392

 
$
1,400

 
$
4,037

 
$
3,995

 
Less:
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
 
13

 
11

 
35

 
31

 
Preferred stock dividends
 
63

 
63

 
181

 
181

 
Preferred stock discount accretion and redemptions
 
1

 
1

 
3

 
3

 
Net income attributable to common shareholders
 
1,315


1,325


3,818


3,780

 
Less: Dividends and undistributed earnings allocated to participating securities
 
6

 
6

 
15

 
16

 
Net income attributable to basic common shareholders
 
$
1,309


$
1,319

 
$
3,803


$
3,764

 
Basic weighted-average common shares outstanding
 
444

 
465

 
450

 
469

 
Basic earnings per common share (a)
 
$
2.95

 
$
2.84

 
$
8.45

 
$
8.03

 
Diluted
 
 
 
 
 
 
 
 
 
Net income attributable to basic common shareholders
 
$
1,309

 
$
1,319

 
$
3,803

 
$
3,764

 
Less: Impact of BlackRock earnings per share dilution
 
2

 
2

 
7

 
7

 
Net income attributable to diluted common shareholders
 
$
1,307


$
1,317

 
$
3,796


$
3,757

 
Basic weighted-average common shares outstanding
 
444

 
465

 
450

 
469

 
Dilutive potential common shares
 
1

 
2

 
1

 
3

 
Diluted weighted-average common shares outstanding
 
445

 
467

 
451

 
472

 
Diluted earnings per common share (a)
 
$
2.94

 
$
2.82

 
$
8.42

 
$
7.96

 
(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).

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


NOTE 11 TOTAL EQUITY AND OTHER COMPREHENSIVE INCOME

Activity in total equity for the three and nine months ended September 30, 2019 and 2018 follows.
Table 66: Rollforward of Total Equity
 
 
 
Shareholders’ Equity
 
  
  
 
in millions
Shares
Outstanding
Common
Stock

 
Common
Stock

Capital
Surplus -
Preferred
Stock

Capital
Surplus -
Common
Stock and
Other

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

 
Non-
controlling
Interests

Total Equity

 
Three months ended
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2018 (a)
465

 
$
2,710

$
3,987

$
12,263

$
37,201

$
(940
)
$
(8,317
)
 
$
71

$
46,975

 
Net income
 
 
 
 
 
1,389

 
 
 
11

1,400

 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
(320
)
 
 
 
(320
)
 
Cash dividends declared - Common
 
 
 
 
 
(446
)
 
 
 
 
(446
)
 
Cash dividends declared - Preferred
 
 
 
 
 
(63
)
 
 
 
 
(63
)
 
Preferred stock discount accretion
 
 
 
1

 
(1
)
 
 
 
 


 
Common stock activity
 
 
 
 
1

 
 
 
 
 
1

 
Treasury stock activity
(3
)
 
 
 
(5
)
 
 
(454
)
 
 
(459
)
 
Other
 
 
 
(6
)
58

 
 
 
 
(38
)
14

 
Balance at September 30, 2018 (a)
462

 
$
2,710

$
3,982

$
12,317

$
38,080

$
(1,260
)
$
(8,771
)
 
$
44

$
47,102

 
Balance at June 30, 2019 (a)
447

 
$
2,711

$
3,991

$
12,257

$
40,616

$
631

$
(10,866
)
 
$
41

$
49,381

 
Net income
 
 
 
 
 
1,379

 
 
 
13

1,392

 
Other comprehensive income, net of tax
 
 
 
 
 
 
206

 
 
 
206

 
Cash dividends declared - Common
 
 
 
 
 
(518
)
 
 
 
 
(518
)
 
Cash dividends declared - Preferred
 
 
 
 
 
(63
)
 
 
 
 
(63
)
 
Preferred stock discount accretion
 
 
 
1

 
(1
)
 
 
 
 


 
Treasury stock activity
(8
)
 
 
 
(5
)
 
 
(972
)
 
 
(977
)
 
Other
 
 
 
 
53

 
 
 
 
(19
)
34

 
Balance at September 30, 2019 (a)
439

 
$
2,711

$
3,992

$
12,305

$
41,413

$
837

$
(11,838
)
 
$
35

$
49,455

 
Nine months ended
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017 (a)
473

 
$
2,710

$
3,985

$
12,389

$
35,481

$
(148
)
$
(6,904
)
 
$
72

$
47,585

 
Cumulative effect of ASU adoptions (b)
 
 
 
 
 
(22
)
6

 
 
 
(16
)
 
Balance at January 1, 2018 (a)
473

 
$
2,710

$
3,985

$
12,389

$
35,459

$
(142
)
$
(6,904
)
 
$
72

$
47,569

 
Net income
 
 
 
 
 
3,964

 
 
 
31

3,995

 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
(1,118
)
 
 
 
(1,118
)
 
Cash dividends declared - Common
 
 
 
 
 
(1,159
)
 
 
 
 
(1,159
)
 
Cash dividends declared - Preferred
 
 
 
 
 
(181
)
 
 
 
 
(181
)
 
Preferred stock discount accretion
 
 
 
3

 
(3
)
 
 
 
 


 
Common stock activity
 
 
 
 
10

 
 
 
 
 
10

 
Treasury stock activity
(11
)
 
 
 
(31
)
 
 
(1,867
)
 
 
(1,898
)
 
Other
 
 
 
(6
)
(51
)
 
 
 
 
(59
)
(116
)
 
Balance at September 30, 2018 (a)
462

 
$
2,710

$
3,982

$
12,317

$
38,080

$
(1,260
)
$
(8,771
)
 
$
44

$
47,102

 
Balance at December 31, 2018 (a)
457

 
$
2,711

$
3,986

$
12,291

$
38,919

$
(725
)
$
(9,454
)
 
$
42

$
47,770

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

 
 
 
 
62

 
Balance at January 1, 2019 (a)
457

 
$
2,711

$
3,986

$
12,291

$
38,981

$
(725
)
$
(9,454
)
 
$
42

$
47,832

 
Net income
 
 
 
 
 
4,002

 
 
 
35

4,037

 
Other comprehensive income, net of tax
 
 
 
 
 
 
1,562

 
 
 
1,562

 
Cash dividends declared - Common
 
 
 
 
 
(1,386
)
 
 
 
 
(1,386
)
 
Cash dividends declared - Preferred
 
 
 
 
 
(181
)
 
 
 
 
(181
)
 
Preferred stock discount accretion
 
 
 
3

 
(3
)
 
 
 
 


 
Common stock activity
 
 
 
 
10

 
 
 
 
 
10

 
Treasury stock activity
(18
)
 
 
 
4

 
 
(2,384
)
 
 
(2,380
)
 
Other
 
 
 
3

 
 
 
 
 
(42
)
(39
)
 
Balance at September 30, 2019 (a)
439

 
$
2,711

$
3,992

$
12,305

$
41,413

$
837

$
(11,838
)
 
$
35

$
49,455

 
(a)
The par value of our preferred stock outstanding was less than $.5 million at each date and, therefore, is excluded from this presentation.
(b)
Represents the cumulative effect of adopting ASU 2014-09, ASU 2016-01, ASU 2017-12 and ASU 2018-02. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our 2018 Form 10-K for additional detail on the adoption of these ASUs.
(c)
Represents the impact of the adoption of ASU 2016-02 related primarily to deferred gains on previous sale-leaseback transactions. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in the first quarter Form 10-Q for additional detail.



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


Other Comprehensive Income

Details of other comprehensive income (loss) are as follows:
Table 67: Other Comprehensive Income (Loss)
 
Three months ended
September 30
 
 
Nine months ended
September 30
 
In millions
2019

2018

 
 
2019

2018

 
Net unrealized gains (losses) on non-OTTI securities
 
 
 
 
 
 
 
Increase in net unrealized gains (losses) on non-OTTI securities
$
203

$
(323
)
 
 
$
1,556

$
(1,129
)
 
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest
    income
3

3

 
 
9

9

 
Less: Net gains (losses) realized on sales of securities reclassified to noninterest income
4

(2
)
 
 
18

(13
)
 
Net increase (decrease), pre-tax
196

(324
)
 
 
1,529

(1,125
)
 
Effect of income taxes
(45
)
73

 
 
(351
)
259

 
Net increase (decrease), after-tax
151

(251
)
 
 
1,178

(866
)
 
Net unrealized gains (losses) on OTTI securities
 
 
 
 
 
 
 
Increase in net unrealized gains (losses) on OTTI securities
18

(1
)
 
 
27

16

 
Net increase (decrease), pre-tax
18

(1
)
 
 
27

16

 
Effect of income taxes
(4
)
1

 
 
(6
)
(4
)
 
Net increase (decrease), after-tax
14

—

 
 
21

12

 
Net unrealized gains (losses) on cash flow hedge derivatives
 
 
 
 
 
 
 
Increase in net unrealized gains (losses) on cash flow hedge derivatives
84

(62
)
 
 
438

(317
)
 
Less: Net gains (losses) realized as a yield adjustment reclassified to loan interest income
2

6

 
 
(18
)
43

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

2

 
 
5

9

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


1

 
 
18

8

 
Net increase (decrease), pre-tax
79

(71
)
 
 
433

(377
)
 
Effect of income taxes
(18
)
17

 
 
(99
)
87

 
Net increase (decrease), after-tax
61

(54
)
 
 
334

(290
)
 
Pension and other postretirement benefit plan adjustments
 
 
 
 
 
 
 
Net pension and other postretirement benefit activity




 
 
54

66

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

1

 
 
6

3

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



 
 
3

1

 
Net increase (decrease), pre-tax
2

1

 
 
63

70

 
Effect of income taxes



 
 
(14
)
(16
)
 
Net increase (decrease), after-tax
2

1

 
 
49

54

 
Other
 
 
 
 
 
 
 
PNC’s portion of BlackRock’s OCI
(23
)
(22
)
 
 
(29
)
(37
)
 
Net investment hedge derivatives
36

17

 
 
50

47

 
Foreign currency translation adjustments and other
(32
)
(12
)
 
 
(36
)
(35
)
 
Net increase (decrease), pre-tax
(19
)
(17
)
 
 
(15
)
(25
)
 
Effect of income taxes
(3
)
1

 
 
(5
)
(3
)
 
Net increase (decrease), after-tax
(22
)
(16
)
 
 
(20
)
(28
)
 
Total other comprehensive income (loss), pre-tax
276

(412
)
 
 
2,037

(1,441
)
 
Total other comprehensive income (loss), tax effect
(70
)
92

 
 
(475
)
323

 
Total other comprehensive income (loss), after-tax
$
206

$
(320
)
 
 
$
1,562

$
(1,118
)
 


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


Table 68: 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 June 30, 2018
$
(494
)
 
$
227

 
$
(52
)
 
$
(489
)
 
$
(132
)
 
$
(940
)
 
Net activity
(251
)
 
 
 
(54
)
 
1

 
(16
)
 
(320
)
 
Balance at September 30, 2018
$
(745
)
 
$
227

 
$
(106
)
 
$
(488
)
 
$
(148
)
 
$
(1,260
)
 
Balance at June 30, 2019
$
743

 
$
211

 
$
320

 
$
(483
)
 
$
(160
)
 
$
631

 
Net activity
151

 
14

 
61

 
2

 
(22
)
 
206

 
Balance at September 30, 2019
$
894

 
$
225

 
$
381

 
$
(481
)
 
$
(182
)
 
$
837

 
Balance at December 31, 2017
$
62

 
$
215

 
$
151

 
$
(446
)
 
$
(130
)
 
$
(148
)
 
Cumulative effect of adopting ASU 2018-02 (a)
59

 
 
 
33

 
(96
)
 
10

 
6

 
Balance at January 1, 2018
121

 
215

 
184

 
(542
)
 
(120
)
 
(142
)
 
Net activity
(866
)
 
12

 
(290
)
 
54

 
(28
)
 
(1,118
)
 
Balance at September 30, 2018
$
(745
)
 
$
227

 
$
(106
)
 
$
(488
)
 
$
(148
)
 
$
(1,260
)
 
Balance at December 31, 2018
$
(284
)
 
$
204

 
$
47

 
$
(530
)
 
$
(162
)
 
$
(725
)
 
Net activity
1,178

 
21

 
334

 
49

 
(20
)
 
1,562

 
Balance at September 30, 2019
$
894

 
$
225

 
$
381

 
$
(481
)
 
$
(182
)
 
$
837

 

(a)
Represents the cumulative impact of adopting ASU 2018-02 which permits the reclassification to retained earnings of the income tax effects stranded within AOCI. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our 2018 Form 10-K for additional detail on this adoption.
The following table provides the dividends per share for PNC's common and preferred stock.

Table 69: Dividends Per Share (a)
 
Three months ended September 30
Nine months ended September 30
 
2019
2018
2019
2018
Common Stock
$
1.15

$
.95

$
3.05

$
2.45

Preferred Stock
 
 
 
 
   Series B
$
.45

$
.45

$
1.35

$
1.35

   Series O
$
3,375

$
3,375

$
6,750

$
6,750

   Series P
$
1,531

$
1,531

$
4,594

$
4,594

   Series Q
$
1,343

$
1,343

$
4,031

$
4,031

   Series R
 
 
$
2,425

$
2,425

   Series S
 
 
$
2,500

$
2,500

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

On October 3, 2019, we declared a quarterly common stock cash dividend of $1.15 per share payable on November 5, 2019.
NOTE 12 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 Note 19 Legal Proceedings in Part II, Item 8 of our 2018 Form 10-K and in Note 12 Legal Proceedings in Part I, Item 1 of our first and second quarter 2019 Form 10-Q (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 September 30, 2019, we estimate that it is reasonably possible that we could incur losses in excess of related accrual liabilities, if any, in an aggregate amount less than $100 million. The estimates included in this amount are based on our analysis of currently available information and are subject to significant judgment and a variety of assumptions and uncertainties. As new information is obtained we may change our estimates. Due to the inherent subjectivity of the assessments and unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to us from the legal proceedings in question. Thus, our exposure and ultimate losses may be higher, and possibly significantly so, than the amounts accrued or this aggregate amount.



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


As a result of the types of factors described in Note 19 in our 2018 Form 10-K, we are unable, at this time, to estimate the losses that are reasonably possible to be incurred or ranges of such losses with respect to some of the matters disclosed, and the aggregate estimated amount provided above does not include an estimate for every Disclosed Matter. Therefore, as the estimated aggregate amount disclosed above does not include all of the Disclosed Matters, the amount disclosed above does not represent our maximum reasonably possible loss exposure for all of the Disclosed Matters. The estimated aggregate amount also does not reflect any of our exposure to matters not so disclosed, as discussed below under “Other.”

We include in some of the descriptions of individual Disclosed Matters certain quantitative information related to the plaintiff’s claim against us as alleged in the plaintiff’s pleadings or other public filings or otherwise publicly available information. While information of this type may provide insight into the potential magnitude of a matter, it does not necessarily represent our estimate of reasonably possible loss or our judgment as to any currently appropriate accrual.

Some of our exposure in Disclosed Matters may be offset by applicable insurance coverage. We do not consider the possible availability of insurance coverage in determining the amounts of any accruals (although we record the amount of related insurance recoveries that are deemed probable up to the amount of the accrual) or in determining any estimates of possible losses or ranges of possible losses.

Other Regulatory and Governmental Inquiries

We are the subject of investigations, audits and other forms of regulatory and governmental inquiry covering a broad range of issues in our consumer, mortgage, brokerage, securities and other financial services businesses, as well as other aspects of our operations. In some cases, these inquiries are part of reviews of specified activities at multiple industry participants; in others, they are directed at PNC individually. 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 and other consequences. These inquiries may result in significant reputational harm or other adverse collateral consequences even if direct resulting remedies are not material to us.

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 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 13 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 September 30, 2019 and December 31, 2018, respectively.

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


Table 70: Commitments to Extend Credit and Other Commitments
In millions
September 30
2019

 
December 31
2018

 
Commitments to extend credit
 
 
 
 
Total commercial lending
$
129,787

 
$
120,165

 
Home equity lines of credit
16,881

 
16,944

 
Credit card
29,886

 
27,100

 
Other
6,527

 
5,069

 
Total commitments to extend credit
183,081

 
169,278

 
Net outstanding standby letters of credit (a)
9,763

 
8,655

 
Reinsurance agreements (b)
1,431

 
1,549

 
Standby bond purchase agreements (c)
1,302

 
1,000

 
Other commitments (d)
2,291

 
1,130

 
Total commitments to extend credit and other commitments
$
197,868

 
$
181,612

 
(a)
Net outstanding standby letters of credit include $4.1 billion and $3.7 billion at September 30, 2019 and December 31, 2018, respectively, which support remarketing programs.
(b)
Represents aggregate maximum exposure up to the specified limits of the reinsurance contracts provided by our wholly-owned captive insurance subsidiary. These amounts reflect estimates based on availability of financial information from insurance carriers. As of September 30, 2019, the aggregate maximum exposure amount comprised $1.3 billion for accidental death and dismemberment contracts, and $.1 billion for credit life, accident and health contracts. Comparable amounts at December 31, 2018 were $1.3 billion and $.2 billion, respectively.
(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 September 30, 2019 and December 31, 2018.

Commitments to Extend Credit

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

Net Outstanding Standby Letters of Credit

We issue standby letters of credit and share in the risk of standby letters of credit issued by other financial institutions, in each case to support obligations of our customers to third parties, such as insurance requirements and the facilitation of transactions involving capital markets product execution. Approximately 98% of our net outstanding standby letters of credit were rated as Pass as of September 30, 2019, with the remainder rated as Criticized. An internal credit rating of Pass indicates the expected risk of loss is currently low, while a rating of Criticized indicates a higher degree of risk.

If the customer fails to meet its financial or performance obligation to the third party under the terms of the contract or there is a need to support a remarketing program, then upon a draw by a beneficiary, subject to the terms of the letter of credit, we would be obligated to make payment to them. The standby letters of credit outstanding on September 30, 2019 had terms ranging from less than one year to six years.

As of September 30, 2019, assets of $1.0 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 September 30, 2019 and is included in Other liabilities on our Consolidated Balance Sheet.
NOTE 14 SEGMENT REPORTING

We have four reportable business segments:
•
Retail Banking
•
Corporate & Institutional Banking
•
Asset Management Group
•
BlackRock

Results of individual businesses are presented based on our internal management reporting practices. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of our individual businesses are not necessarily comparable with similar information for any other company. We periodically refine our internal methodologies as management reporting practices are enhanced. To the extent significant and practicable, retrospective application of


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


new methodologies is made to prior period reportable business segment results and disclosures to create comparability with the current period.

Total business segment financial results differ from total consolidated net income. These differences are reflected in the “Other” category in the business segment tables. “Other” includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities, certain trading activities, certain runoff consumer loan portfolios, private equity investments, intercompany eliminations, certain corporate overhead, tax adjustments that are not allocated to business segments, gains or losses related to BlackRock transactions, exited businesses and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests as the segments’ results exclude their portion of net income attributable to noncontrolling interests.

Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. Additionally, we have aggregated the results for corporate support functions within “Other” for financial reporting purposes.

Net interest income in business segment results reflects our internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors.

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 our 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.


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


Business Segment Results

Table 71: Results of Businesses
Three months ended September 30
In millions
 
Retail Banking

 
Corporate &
Institutional
Banking

 
Asset
Management
Group

 
BlackRock

 
Other

 
Consolidated (a) 

2019
 
 
 
 
 
 
 
 
 
 
 
 
Income Statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
1,393

 
$
911

 
$
70

 
 
 
$
130

 
$
2,504

Noninterest income
 
744

 
654

 
216

 
$
251

 
124

 
1,989

Total revenue
 
2,137

 
1,565

 
286

 
251

 
254

 
4,493

Provision for credit losses (benefit)
 
147

 
48

 
(1
)
 
 
 
(11
)
 
183

Depreciation and amortization
 
60

 
51

 
11

 
 
 
125

 
247

Other noninterest expense
 
1,476

 
652

 
217

 
 
 
31

 
2,376

Income before income taxes and noncontrolling interests
 
454

 
814

 
59

 
251

 
109

 
1,687

Income taxes (benefit)
 
107

 
169

 
13

 
40

 
(34
)
 
295

Net income
 
$
347

 
$
645

 
$
46

 
$
211

 
$
143

 
$
1,392

Average Assets (b)
 
$
93,222

 
$
168,193

 
$
7,331

 
$
8,321

 
$
129,642

 
$
406,709

2018
 
 
 
 
 
 
 
 
 
 
 
 
Income Statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
1,305

 
$
903

 
$
71

 
 
 
$
187

 
$
2,466

Noninterest income
 
622

 
592

 
228

 
$
265

 
184

 
1,891

Total revenue
 
1,927

 
1,495

 
299

 
265

 
371

 
4,357

Provision for credit losses (benefit)
 
113

 
(13
)
 
2

 
 
 
(14
)
 
88

Depreciation and amortization
 
52

 
47

 
13

 
 
 
112

 
224

Other noninterest expense
 
1,462

 
651

 
212

 
 
 
59

 
2,384

Income before income taxes and noncontrolling interests
 
300

 
810

 
72

 
265

 
214

 
1,661

Income taxes (benefit)
 
73

 
168

 
17

 
49

 
(46
)
 
261

Net income
 
$
227

 
$
642

 
$
55

 
$
216

 
$
260

 
$
1,400

Average Assets (b)
 
$
89,963

 
$
153,897

 
$
7,397

 
$
7,964

 
$
118,656

 
$
377,877

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30
In millions
 
Retail
Banking

 
Corporate &
Institutional
Banking

 
Asset
Management
Group

 
BlackRock

 
Other

 
Consolidated (a) 

2019
 
 
 
 
 
 
 
 
 
 
 
 
Income Statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
4,118

 
$
2,685

 
$
208

 
 
 
$
466

 
$
7,477

Noninterest income
 
1,996

 
1,891

 
719

 
$
708

 
427

 
5,741

Total revenue
 
6,114

 
4,576

 
927

 
708

 
893

 
13,218

Provision for credit losses (benefit)
 
356

 
219

 
(2
)
 
 
 
(21
)
 
552

Depreciation and amortization
 
170

 
151

 
51

 
 
 
366

 
738

Other noninterest expense
 
4,361

 
1,936

 
656

 
 
 
121

 
7,074

Income before income taxes and noncontrolling interests
 
1,227

 
2,270

 
222

 
708

 
427

 
4,854

Income taxes (benefit)
 
291

 
471

 
51

 
111

 
(107
)
 
817

Net income
 
$
936

 
$
1,799

 
$
171

 
$
597

 
$
534

 
$
4,037

Average Assets (b)
 
$
92,282

 
$
163,126

 
$
7,247

 
$
8,321

 
$
125,623

 
$
396,599

2018
 
 
 
 
 
 
 
 
 
 
 
 
Income Statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
3,800

 
$
2,641

 
$
217

 
 
 
$
582

 
$
7,240

Noninterest income
 
1,935

 
1,774

 
676

 
$
732

 
435

 
5,552

Total revenue
 
5,735

 
4,415

 
893

 
732

 
1,017

 
12,792

Provision for credit losses (benefit)
 
254

 
43

 
2

 
 
 
(39
)
 
260

Depreciation and amortization
 
144

 
140

 
38

 
 
 
372

 
694

Other noninterest expense
 
4,347

 
1,879

 
643

 
 
 
156

 
7,025

Income before income taxes and noncontrolling interests
 
990

 
2,353

 
210

 
732

 
528

 
4,813

Income taxes (benefit)
 
239

 
496

 
50

 
124

 
(91
)
 
818

Net income
 
$
751

 
$
1,857

 
$
160

 
$
608

 
$
619

 
$
3,995

Average Assets (b)
 
$
89,259

 
$
153,149

 
$
7,455

 
$
7,964

 
$
118,772

 
$
376,599

(a)
There were no material intersegment revenues for the three and nine months ended September 30, 2019 and 2018.
(b)
Period-end balances for BlackRock.


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


Business Segment Products and Services
   
Retail Banking provides deposit, lending, brokerage, insurance services, investment management and cash management products and services to consumer and small business customers. Our customers are serviced through our branch network, ATMs, call centers, online banking and mobile channels. The branch network is located in markets across the Mid-Atlantic, Midwest and Southeast. In 2018, Retail Banking launched its national retail digital strategy designed to grow customers with digitally-led banking and an ultra-thin branch network in markets outside of our existing retail branch network. Deposit products include checking, savings and money market accounts and certificates of deposit. Lending products include residential mortgages, home equity loans and lines of credit, auto loans, credit cards, education loans and personal and small business loans and lines of credit. The residential mortgage loans are directly originated within our branch network and nationwide, and are typically underwritten to government agency and/or third-party standards, and either sold, servicing retained, or held on our balance sheet. Brokerage, investment management and cash management products and services include managed, education, retirement and trust accounts.

Corporate & Institutional Banking provides lending, treasury management and capital markets-related products and services to mid-sized and large corporations, and government and not-for-profit entities. Lending products include secured and unsecured loans, letters of credit and equipment leases. The Treasury Management business provides payables, receivables, deposit and account services, liquidity and investments, and online and mobile banking products and services to our clients. Capital markets-related products and services include foreign exchange, derivatives, securities underwriting, loan syndications, mergers and acquisitions advisory and equity capital markets advisory related services. We also provide commercial loan servicing and technology solutions for the commercial real estate finance industry. Products and services are provided nationally.

Asset Management Group provides personal wealth management for high net worth and ultra high net worth clients and institutional asset management. The Asset Management group is composed of three distinct operating units:
•
Wealth Management provides products and services to individuals and their families including investment and retirement planning, customized investment management, private banking, and trust management and administration for individuals and their families.
•
Our Hawthorn unit provides multi-generational family planning including estate, financial, tax planning, fiduciary, investment management and consulting, private banking, personal administrative services, asset custody and customized performance reporting to ultra high net worth clients.
•
Institutional asset management provides outsourced chief investment officer, custody, private real estate, cash and fixed income client solutions, and fiduciary retirement advisory services to institutional clients including corporations, healthcare systems, insurance companies, unions, municipalities and non-profits.

BlackRock, in which we hold an equity investment, is a leading publicly-traded investment management firm providing a broad range of investment and technology services to institutional and retail clients worldwide. Using a diverse platform of alpha-seeking active, index and cash management investment strategies across asset classes, BlackRock tailors investment outcomes and asset allocation solutions for clients. Product offerings include single- and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. BlackRock also offers technology services, including an investment and risk management technology platform, as well as advisory services and solutions to a broad base of institutional and wealth management clients.

Our equity investment in BlackRock provides us with an additional source of noninterest income and increases our overall revenue diversification. At September 30, 2019, our economic interest in BlackRock was 22%. We received cash dividends from BlackRock of $344 million and $310 million during the first nine months of 2019 and 2018, respectively. BlackRock is a publicly-traded company, and additional information regarding its business is available in its filings with the Securities and Exchange Commission (SEC).

NOTE 15 FEE-BASED REVENUE FROM CONTRACTS WITH CUSTOMERS
As more fully described in Note 23 Fee-based Revenue from Contracts with Customers in our 2018 Form 10-K, a subset of our noninterest income relates to certain fee-based revenue within the scope of ASC Topic 606 - Revenue from Contracts with Customers (Topic 606).
Fee-based revenue within the scope of Topic 606 is recognized within three of our reportable business segments, Retail Banking, Corporate & Institutional Banking and Asset Management Group. Income recognized from our investment in BlackRock, also a reportable segment, is outside of the scope of the standard. Topic 606 also excludes interest income, income from lease contracts, fair value gains from financial instruments (including derivatives), income from mortgage servicing rights and guarantee products, letter of credit fees, non-refundable fees associated with acquiring or originating a loan and gains from the sale of financial assets.
The following tables present noninterest income within the scope of Topic 606 disaggregated by segment. A description of the fee-based revenue and how it is recognized for each segment’s principal services and products follows each table.


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


Retail Banking

Table 72: Retail Banking Noninterest Income Disaggregation
 
Three months ended
September 30
Nine months ended
September 30
In millions
2019

2018

2019

2018

Product
 
 
 
 
 Deposit account fees
$
166

$
162

$
468

$
451

 Debit card fees
139

130

399

374

 Brokerage fees
92

86

267

260

 Merchant services
55

54

159

156

 Net credit card fees (a)
50

45

149

139

 Other
65

71

193

214

Total in-scope noninterest income by product
$
567

$
548

$
1,635

$
1,594

Reconciliation to total Retail Banking noninterest income
 
 
 
 
Total in-scope noninterest income
$
567

$
548

$
1,635

$
1,594

Total out-of-scope noninterest income (b)
177

74

361

341

Total Retail Banking noninterest income
$
744

$
622

$
1,996

$
1,935

(a)
Net credit card fees consists of interchange fees of $128 million and $115 million and credit card reward costs of $78 million and $70 million for the three months ended September 30, 2019 and 2018, respectively. Net credit card fees consists of interchange fees of $366 million and $332 million and credit card reward costs of $217 million and $193 million for the nine months ended September 30, 2019 and 2018, respectively.
(b)
Out-of-scope noninterest income includes revenue streams that fall under the scope of other accounting and disclosure requirements outside of Topic 606.

Deposit Account Fees
Retail Banking provides demand deposit, money market and savings account products for consumer and small business customers. Services include online and branch banking, overdraft and wire transfer services, imaging services and cash alternative services such as money orders and cashier's checks. We recognize fee income at the time these services are performed for the customer.

Debit Card and Net Credit Card Fees
As an issuing bank, Retail Banking earns interchange fee revenue from debit and credit card transactions. By offering card products, we maintain and administer card-related services, such as credit card reward programs, account data and statement information, card activation, card renewals, and card suspension and blockage. Interchange fees are earned when cardholders make purchases and are presented net of credit card reward costs.

Brokerage Fees
Retail Banking earns fee revenue by providing its customers a wide range of investment options through its brokerage services including mutual funds, annuities, stocks, bonds, long-term care and insurance products, and managed accounts. We earn fee revenue for transaction-based brokerage services, such as the execution of market trades, once the transaction has been completed as of the trade date. In other cases, such as investment management services, we earn fee revenue over the term of the customer contract.

Merchant Services
Retail Banking earns fee revenue for debit and credit card processing services. We provide these services to merchant businesses including point-of-sale payment acceptance capabilities and customized payment processing built around the merchant’s specific requirements. We earn fee revenue as the merchant's customers make purchases.

Other
Other noninterest income primarily includes ATM fees earned from our customers and non-PNC customers. These fees are recognized as transactions occur.


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


Corporate & Institutional Banking

Table 73: Corporate & Institutional Banking Noninterest Income Disaggregation
 
Three months ended
September 30
Nine months ended
September 30
In millions
2019

2018

2019

2018

Product
 
 
 
 
 Treasury management fees
$
210

$
196

$
621

$
578

 Capital markets fees
131

147

407

397

 Commercial mortgage banking activities
26

23

75

65

 Other
17

16

53

51

Total in-scope noninterest income by product
$
384

$
382

$
1,156

$
1,091

Reconciliation to total Corporate & Institutional Banking noninterest income
 
 
 
 
Total in-scope noninterest income
$
384

$
382

$
1,156

$
1,091

Total out-of-scope noninterest income (a)
270

210

735

683

Total Corporate & Institutional Banking noninterest income
$
654

$
592

$
1,891

$
1,774

(a)
Out-of-scope noninterest income includes revenue streams that fall under the scope of other accounting and disclosure requirements outside of Topic 606.
Treasury Management Fees
Corporate & Institutional Banking provides corporations with cash and investment management services, receivables and disbursement management services, funds transfer services and access to online/mobile information management and reporting services. Treasury management fees are recognized over time as we perform these services.

Capital Markets Fees
Capital markets fees include securities underwriting fees, merger and acquisition advisory fees and other advisory related fees. We recognize these fees when the related transaction closes.

Commercial Mortgage Banking Activities
Commercial mortgage banking activities include servicing responsibilities where we do not own the servicing rights. Servicing responsibilities typically consist of collecting and remitting monthly borrower principal and interest payments, maintaining escrow deposits, performing loss mitigation and foreclosure activities, and, in certain instances, funding of servicing advances. We recognize servicing fees over time as we perform these activities.

Other
Other noninterest income within Corporate & Institutional Banking primarily comprised fees from collateral management and asset management services. We earn these fees over time as we perform these services.

Asset Management Group

Table 74: Asset Management Group Noninterest Income Disaggregation

Three months ended
September 30
Nine months ended
September 30
In millions
2019

2018

2019

2018

Customer Type
 
 
 
 
 Personal
$
155

$
156

$
459

$
462

 Institutional
58

70

187

206

Total in-scope noninterest income by customer type
$
213

$
226

$
646

$
668

Reconciliation to Asset Management Group noninterest income
 
 
 
 
Total in-scope noninterest income
$
213

$
226

$
646

$
668

Total out-of-scope noninterest income (a)
3

2

73

8

Total Asset Management Group noninterest income
$
216

$
228

$
719

$
676

(a)
Out-of-scope noninterest income includes revenue streams that fall under the scope of other accounting and disclosure requirements outside of Topic 606.
Asset Management Services
Asset Management Group provides both personal wealth and institutional asset management services including investment management, custody services, retirement planning, family planning, trust management and retirement administration services. We recognize fee revenue over the term of the customer contract based on the value of assets under management at a point in time.

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


NOTE 16 LEASES
We lease retail branches, datacenters, office space, land and equipment under operating and finance leases. Our leases have remaining lease terms of one year to sixty-two years, some of which may include options to renew the leases for up to ninety-nine years, and some of which may include options to terminate the leases prior to the end date. Certain leases also include options to purchase the leased asset. The exercise of lease renewal, termination and purchase options is at our sole discretion.

At adoption of ASU 2016-02 on January 1, 2019, we elected to account for the lease and nonlease components of existing real estate leases and leases of advertising assets, such as signage, as a single lease component. Effective January 1, 2019, lease and nonlease components of new lease agreements are accounted for separately. Lease components include fixed payments including rent, real estate taxes and insurance costs and nonlease components include common-area maintenance costs. Generally, we have elected to use the Overnight Indexed Swap rate corresponding to the term of the lease at the lease measurement date as our incremental borrowing rate to measure the ROU asset and lease liability. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Certain of our lease agreements include rental payments based on a percentage of revenue and others include rental payments if certain bank deposit levels are met. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Subleases to third parties were not material at September 30, 2019.

Operating lease assets and liabilities totaled $2.0 billion and $2.2 billion at September 30, 2019, respectively. Finance lease assets and liabilities at September 30, 2019 were not material.

Future undiscounted cash flows on our operating leases are as follows:

Table 75: Maturity of Operating Lease Liabilities
In millions
September 30, 2019
 
Remainder of 2019
$
85

 
2020
352

 
2021
331

 
2022
297

 
2023
264

 
After 2023
1,098

 
Total operating lease payments
$
2,427

 
Less: Interest
263

 
Present value of operating lease liabilities
$
2,164

 


At December 31, 2018, operating lease commitments under lessee arrangements were $374 million, $346 million, $308 million, $258 million, $228 million for 2019 through 2023, respectively, and $941 million in the aggregate for all years thereafter.

Operating lease term and discount rates at September 30, 2019 were as follows:

Table 76: Operating Lease Term and Discount Rates
 
September 30, 2019
 
Weighted-average remaining lease term (years)
9

 
Weighted-average discount rate
2.46
%
 


NOTE 17 SUBSEQUENT EVENTS

On October 22, 2019, PNC Bank issued $750 million of subordinated notes with a maturity date of October 22, 2029. Interest is payable semi-annually at a fixed rate of 2.70% per annum, on April 22 and October 22 of each year, beginning on April 22, 2020.

On November 1, 2019, the parent company issued $650 million of senior notes with a maturity date of November 1, 2024. Interest is payable semi-annually at a fixed rate of 2.20% per annum, on May 1 and November 1 of each year, beginning on May 1, 2020.



The PNC Financial Services Group, Inc. – Form 10-Q    87


STATISTICAL INFORMATION (UNAUDITED)
THE PNC FINANCIAL SERVICES GROUP, INC.
Average Consolidated Balance Sheet And Net Interest Analysis (a) (b) (c)
  
Nine months ended September 30
 
 
2019
 
2018
 
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
$
30,714

 
$
657

 
2.85
%
 
$
26,746

 
$
537

 
2.68
%
 
Non-agency
1,802

 
109

 
8.04
%
 
2,265

 
111

 
6.54
%
 
Commercial mortgage-backed
5,549

 
127

 
3.05
%
 
4,449

 
92

 
2.75
%
 
Asset-backed
5,247

 
131

 
3.33
%
 
5,260

 
123

 
3.12
%
 
U.S. Treasury and government agencies
18,207

 
341

 
2.47
%
 
15,603

 
260

 
2.20
%
 
Other
3,316

 
83

 
3.36
%
 
4,113

 
109

 
3.50
%
 
Total securities available for sale
64,835

 
1,448

 
2.97
%
 
58,436

 
1,232

 
2.80
%
 
Securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
15,582

 
340

 
2.91
%
 
15,578

 
337

 
2.88
%
 
Commercial mortgage-backed
571

 
15

 
3.59
%
 
807

 
23

 
3.73
%
 
Asset-backed
143

 
4

 
4.18
%
 
194

 
5

 
3.34
%
 
U.S. Treasury and government agencies
765

 
16

 
2.84
%
 
747

 
16

 
2.83
%
 
Other
1,823

 
61

 
4.41
%
 
1,894

 
61

 
4.42
%
 
Total securities held to maturity
18,884

 
436

 
3.08
%
 
19,220

 
442

 
3.07
%
 
Total investment securities
83,719

 
1,884

 
3.00
%
 
77,656

 
1,674

 
2.87
%
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
123,069

 
3,919

 
4.20
%
 
112,907

 
3,363

 
3.93
%
 
Commercial real estate
28,477

 
950

 
4.40
%
 
28,883

 
873

 
3.98
%
 
Equipment lease financing
7,273

 
215

 
3.94
%
 
7,512

 
199

 
3.54
%
 
Consumer
55,303

 
2,304

 
5.57
%
 
55,474

 
2,075

 
5.00
%
 
Residential real estate
19,602

 
625

 
4.25
%
 
17,609

 
581

 
4.40
%
 
Total loans
233,724

 
8,013

 
4.54
%
 
222,385

 
7,091

 
4.23
%
 
Interest-earning deposits with banks
14,708

 
256

 
2.32
%
 
21,921

 
286

 
1.74
%
 
Other interest-earning assets
12,780

 
354

 
3.70
%
 
7,305

 
259

 
4.74
%
 
Total interest-earning assets/interest income
344,931

 
10,507

 
4.04
%
 
329,267

 
9,310

 
3.75
%
 
Noninterest-earning assets
51,668

 
 
 
 
 
47,332

 
 
 
 
 
Total assets
$
396,599

 
 
 
 
 
$
376,599

 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
 
 
 
 
 
 
 
 
 
 
 
Money market
$
55,268

 
477

 
1.15
%
 
$
56,732

 
$
279

 
.66
%
 
Demand
64,459

 
265

 
.55
%
 
60,058

 
117

 
.26
%
 
Savings
61,627

 
532

 
1.15
%
 
50,845

 
284

 
.75
%
 
Time deposits
20,017

 
244

 
1.63
%
 
17,081

 
130

 
1.02
%
 
Total interest-bearing deposits
201,371

 
1,518

 
1.01
%
 
184,716

 
810

 
.59
%
 
Borrowed funds
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank borrowings
23,368

 
467

 
2.63
%
 
21,067

 
342

 
2.14
%
 
Bank notes and senior debt
26,571

 
675

 
3.35
%
 
28,352

 
594

 
2.76
%
 
Subordinated debt
5,530

 
169

 
4.09
%
 
5,096

 
159

 
4.16
%
 
Other
6,564

 
122

 
2.44
%
 
4,966

 
78

 
2.04
%
 
Total borrowed funds
62,033

 
1,433

 
3.05
%
 
59,481

 
1,173

 
2.60
%
 
Total interest-bearing liabilities/interest expense
263,404

 
2,951

 
1.48
%
 
244,197

 
1,983

 
1.08
%
 
Noninterest-bearing liabilities and equity:
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
71,736

 
 
 
 
 
76,666

 
 
 
 
 
Accrued expenses and other liabilities
12,975

 
 
 
 
 
8,971

 
 
 
 
 
Equity
48,484

 
 
 
 
 
46,765

 
 
 
 
 
Total liabilities and equity
$
396,599

 
 
 
 
 
$
376,599

 
 
 
 
 
Interest rate spread
 
 
 
 
2.56
%
 
 
 
 
 
2.67
%
 
Impact of noninterest-bearing sources
 
 
 
 
.35

 
 
 
 
 
.28

 
Net interest income/margin
 
 
$
7,556

 
2.91
%
 
 
 
$
7,327

 
2.95
%
 
(continued on following page)

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


Average Consolidated Balance Sheet And Net Interest Analysis (a) (b) (c) (Continued)
  
Three months ended September 30
 
 
2019
 
2018
 
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
$
32,926

 
$
223

 
2.70
%
 
$
28,241

 
$
194

 
2.76
%
 
Non-agency
1,716

 
38

 
8.89
%
 
2,128

 
38

 
7.18
%
 
Commercial mortgage-backed
5,728

 
43

 
2.97
%
 
4,366

 
30

 
2.72
%
 
Asset-backed
5,208

 
43

 
3.31
%
 
5,459

 
46

 
3.37
%
 
U.S. Treasury and government agencies
17,573

 
109

 
2.44
%
 
16,757

 
96

 
2.25
%
 
Other
3,053

 
26

 
3.41
%
 
3,996

 
34

 
3.28
%
 
Total securities available for sale
66,204

 
482

 
2.90
%
 
60,947

 
438

 
2.86
%
 
Securities held to maturity
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
15,768

 
110

 
2.78
%
 
16,292

 
119

 
2.92
%
 
Commercial mortgage-backed
544

 
5

 
3.68
%
 
715

 
7

 
3.71
%
 
Asset-backed
79

 
1

 
5.48
%
 
189

 
2

 
3.65
%
 
U.S. Treasury and government agencies
769

 
5

 
2.86
%
 
752

 
6

 
2.85
%
 
Other
1,802

 
19

 
4.40
%
 
1,871

 
19

 
4.42
%
 
Total securities held to maturity
18,962

 
140

 
2.98
%
 
19,819

 
153

 
3.10
%
 
Total investment securities
85,166

 
622

 
2.91
%
 
80,766

 
591

 
2.92
%
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
125,356

 
1,300

 
4.06
%
 
113,883

 
1,183

 
4.06
%
 
Commercial real estate
28,855

 
325

 
4.40
%
 
28,860

 
302

 
4.10
%
 
Equipment lease financing
7,272

 
70

 
3.82
%
 
7,202

 
68

 
3.78
%
 
Consumer
55,702

 
787

 
5.61
%
 
55,449

 
722

 
5.17
%
 
Residential real estate
20,497

 
216

 
4.21
%
 
17,948

 
199

 
4.45
%
 
Total loans
237,682

 
2,698

 
4.47
%
 
223,342

 
2,474

 
4.36
%
 
Interest-earning deposits with banks
15,632

 
85

 
2.17
%
 
19,151

 
95

 
1.97
%
 
Other interest-earning assets
14,094

 
123

 
3.49
%
 
7,114

 
92

 
5.19
%
 
Total interest-earning assets/interest income
352,574

 
3,528

 
3.95
%
 
330,373

 
3,252

 
3.89
%
 
Noninterest-earning assets
54,135

 
 
 
 
 
47,504

 
 
 
 
 
Total assets
$
406,709

 
 
 
 
 
$
377,877

 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
 
 
 
 
 
 
 
 
 
 
 
Money market
$
56,271

 
162

 
1.14
%
 
$
55,507

 
$
112

 
.80
%
 
Demand
65,444

 
95

 
.58
%
 
60,138

 
49

 
.32
%
 
Savings
64,054

 
185

 
1.14
%
 
52,919

 
122

 
.92
%
 
Time deposits
21,173

 
89

 
1.66
%
 
17,756

 
53

 
1.18
%
 
Total interest-bearing deposits
206,942

 
531

 
1.02
%
 
186,320

 
336

 
.71
%
 
Borrowed funds
 
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank borrowings
25,883

 
164

 
2.48
%
 
21,516

 
133

 
2.42
%
 
Bank notes and senior debt
27,409

 
224

 
3.21
%
 
27,301

 
204

 
2.92
%
 
Subordinated debt
5,189

 
45

 
3.53
%
 
5,253

 
54

 
4.10
%
 
Other
5,452

 
35

 
2.43
%
 
5,768

 
30

 
2.11
%
 
Total borrowed funds
63,933

 
468

 
2.87
%
 
59,838

 
421

 
2.76
%
 
Total interest-bearing liabilities/interest expense
270,875

 
999

 
1.45
%
 
246,158

 
757

 
1.21
%
 
Noninterest-bearing liabilities and equity:
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
72,149

 
 
 
 
 
76,155

 
 
 
 
 
Accrued expenses and other liabilities
14,529

 
 
 
 
 
8,853

 
 
 
 
 
Equity
49,156

 
 
 
 
 
46,711

 
 
 
 
 
Total liabilities and equity
$
406,709

 
 
 
 
 
$
377,877

 
 
 
 
 
Interest rate spread
 
 
 
 
2.50
%
 
 
 
 
 
2.68
%
 
Impact of noninterest-bearing sources
 
 
 
 
.34

 
 
 
 
 
.31

 
Net interest income/margin
 
 
$
2,529

 
2.84
%
 
 
 
$
2,495

 
2.99
%
 
(a)
Nonaccrual loans are included in loans, net of unearned income. The impact of financial derivatives used in interest rate risk management is included in the interest income/expense and average yields/rates of the related assets and liabilities. Basis adjustments related to hedged items are included in noninterest-earning assets and noninterest-bearing liabilities. Average balances of securities are based on amortized historical cost (excluding adjustments to fair value, which are included in other assets). Average balances for certain loans and borrowed funds accounted for at fair value are included in noninterest-earning assets and noninterest-bearing liabilities, with changes in fair value recorded in Noninterest income.
(b)
Loan fees for the three months ended September 30, 2019 and September 30, 2018 were $49 million and $34 million, respectively. Loan fees for the nine months ended September 30, 2019 and September 30, 2018 were $120 million and $99 million, respectfully.
(c)
Interest income calculated as taxable-equivalent interest income. To provide more meaningful comparisons of interest income and yields for all interest-earning assets, as well as net interest margins, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP. See Reconciliation of Taxable-Equivalent Net Interest Income in this Statistical Information section for more information.


The PNC Financial Services Group, Inc. – Form 10-Q    89


RECONCILIATION OF TAXABLE-EQUIVALENT NET INTEREST INCOME (NON-GAAP) (a)
 
 
 
Nine months ended
Three months ended
In millions
 
September 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

Net interest income (GAAP)
 
$
7,477

$
7,240

$
2,504

$
2,466

Taxable-equivalent adjustments
 
79

87

25

29

Net interest income (Non-GAAP)
 
$
7,556

$
7,327

$
2,529

$
2,495

(a)
The interest income earned on certain interest-earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest income, we use interest income on a taxable-equivalent basis by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the information set forth in Note 12 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 in our risk factors from those previously disclosed in PNC’s 2018 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 third quarter of 2019 are included in the following table.
2019 period
In thousands, except per share data
Total shares purchased (a)

Average price paid per share

Total shares purchased as part of publicly announced programs (b)

Maximum number of shares that may yet be purchased under the programs (b)

July 1 - 31
2,364

$
140.77

2,358

97,642

August 1 – 31
3,588

$
129.28

3,588

94,054

September 1 – 30
1,512

$
135.09

1,512

92,542

Total
7,464

$
134.10

 
 
(a)
Includes PNC common stock purchased in connection with our various employee benefit plans generally related to shares used to cover employee payroll tax withholding requirements. Note 11 Employee Benefit Plans and Note 12 Stock Based Compensation Plans in the Notes To Consolidated Financial Statements of our 2018 Annual Report on Form 10-K include additional information regarding our employee benefit and equity compensation plans that use PNC common stock.
(b)
On April 4, 2019, our Board of Directors approved the establishment of a new stock repurchase program authorization in the amount of 100 million shares of PNC common stock, effective July 1, 2019.  The previous 2015 authorization was terminated as of end of day on June 30, 2019. 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, regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations, including the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process. In June 2019, we announced share repurchase programs of up to $4.3 billion for the four quarter period beginning with the third quarter of 2019, in accordance with PNC's 2019 capital plan. In the third quarter of 2019, we repurchased 7.5 million shares of common stock on the open market, with an average price of $134.09 per share and an aggregate repurchase price of $1.0 billion.

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


ITEM 6. EXHIBITS
The following exhibit index lists Exhibits filed, or in the case of Exhibits 32.1 and 32.2 furnished, with this Quarterly Report on Form 10-Q:
EXHIBIT INDEX
10.45
 
 
 
10.46
 
 
 
10.47
 
 
 
31.1
  
 
 
31.2
  
 
 
32.1
  
 
 
32.2
  
 
 
 
101.INS
  
Inline XBRL Instance Document
 
 
 
101.SCH
 
Inline XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
104
 
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
 
 
 
You can obtain copies of these Exhibits electronically at the SEC’s website at www.sec.gov. The Exhibits are also available as part of this Form 10-Q on PNC’s corporate website at www.pnc.com/secfilings. Shareholders and bondholders may also obtain copies of Exhibits, without charge, by contacting Shareholder Relations at 800-843-2206 or via e-mail at investor.relations@pnc.com. The interactive data file (XBRL) exhibit is only available electronically.
CORPORATE INFORMATION
The PNC Financial Services Group, Inc.
Corporate Headquarters
The PNC Financial Services Group, Inc.
The Tower at PNC Plaza
300 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2401
888-762-2265
Internet Information
Our financial reports and information about our products and services are available on the internet at www.pnc.com. We provide information for investors on our corporate website under “About Us – Investor Relations.” We use our Twitter account, @pncnews, as an additional way of disseminating to the public information that may be relevant to investors.
We generally post the following under “About Us – Investor Relations” shortly before or promptly following its first use or release: financially-related press releases, including earnings releases and supplemental financial information, various SEC filings, including annual, quarterly and current reports and proxy statements, presentation materials associated with earnings and other investor conference calls or events, and access to live and recorded audio from earnings and other investor conference calls or events. In some cases, we may post the presentation materials for other investor conference calls or events several days prior to the call or event. For earnings and other conference calls or events, we generally include in our posted materials a cautionary statement regarding forward-looking and non-GAAP financial information, and we provide GAAP reconciliations when we include non-GAAP financial information. Such GAAP reconciliations may be in materials for the applicable presentation, in materials for prior presentations or in our annual, quarterly or current reports.
We may on occasion use our corporate website to expedite public access to time-critical information regarding PNC instead of using a press release or a filing with the SEC for first disclosure of the information. In some circumstances, the information may be relevant to investors but directed at customers, in which case it may be accessed directly through the home page rather than “About Us – Investor Relations.”


The PNC Financial Services Group, Inc. – Form 10-Q    91


We are required to provide additional public disclosure regarding estimated income, losses and pro forma regulatory capital ratios under supervisory and PNC-developed hypothetical severely adverse economic scenarios, as well as information concerning our capital stress testing processes, pursuant to the stress testing regulations adopted by the Federal Reserve and the OCC. We are also required to make certain additional regulatory capital-related public disclosures about our capital structure, risk exposures, risk assessment processes, risk-weighted assets and overall capital adequacy, including market risk-related disclosures and certain public disclosures regarding our liquidity position and liquidity risk management, under rules adopted by the Federal banking agencies. Under these regulations, we may satisfy these requirements through postings on our website, and we have done so and expect to continue to do so without also providing disclosure of this information through filings with the SEC.
Other information posted on our corporate website that may not be available in our filings with the SEC includes information relating to our corporate governance and annual communications from our chairman to shareholders, as well as our corporate social responsibility activities under “About Us – Corporate Responsibility.”
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 our corporate internet website at www.pnc.com/secfilings. Shareholders and bond holders may also obtain copies of these filings without charge by contacting Shareholder Services at 800-982-7652 or via the online contact form at www.computershare.com/contactus for copies without exhibits, or via email to investor.relations@pnc.com for copies of exhibits, including financial statement and schedule exhibits where applicable. The interactive data file (XBRL) exhibit is only available electronically.
Corporate Governance at PNC
Information about our Board of Directors and its committees and corporate governance, including our PNC Code of Business Conduct and Ethics (as amended from time to time), is available on our corporate website at www.pnc.com/corporategovernance. In addition, any future amendments to, or waivers from, a provision of the PNC Code of Business Conduct and Ethics 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.
Shareholders who would like to request printed copies of the PNC Code of Business Conduct and Ethics or our Corporate Governance Guidelines or the charters of our Board’s Audit, Nominating and Governance, Personnel and Compensation, or Risk Committees (all of which are posted on the PNC corporate website) may do so by sending their requests to our Corporate Secretary at corporate headquarters at the above address. Copies will be provided without charge to shareholders.
Inquiries
For financial services call 888-762-2265.
Registered shareholders should contact Shareholder Services at 800-982-7652.
Analysts and institutional investors should contact Bryan Gill, Executive Vice President, Director of Investor Relations, at 412-768-4143 or via email at investor.relations@pnc.com.
News media representatives should contact PNC Media Relations at 412-762-4550 or via email at media.relations@pnc.com.
Dividend Policy
Holders of PNC common stock are entitled to receive dividends when declared by the Board of Directors out of funds legally available for this purpose. Our Board of Directors may not pay or set apart dividends on the common stock until dividends for all past dividend periods on any series of outstanding preferred stock have been paid or declared and set apart for payment. The Board presently intends to continue the policy of paying quarterly cash dividends. The amount of any future dividends will depend on economic and market conditions, our financial condition and operating results, and other factors, including contractual restrictions and applicable government regulations and policies (such as those relating to the ability of bank and non-bank subsidiaries to pay dividends to the parent company and regulatory capital limitations). The amount of our dividend is also currently subject to the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process as described in the Capital Management portion of the Risk Management section of the Financial Review of this Report and in the Supervision and Regulation section in Item 1 of our 2018 Form 10-K.

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


Dividend Reinvestment and Stock Purchase Plan
The PNC Financial Services Group, Inc. Dividend Reinvestment and Stock Purchase Plan enables holders of our common stock to conveniently purchase additional shares of common stock. You can obtain a prospectus and enrollment form by contacting Shareholder Services at 800-982-7652. Registered shareholders may also contact this phone number regarding dividends and other shareholder services.
Stock Transfer Agent and Registrar
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
800-982-7652
www.computershare.com/pnc
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on November 4, 2019 on its behalf by the undersigned thereunto duly authorized.
/s/ Robert Q. Reilly
Robert Q. Reilly
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)


The PNC Financial Services Group, Inc. – Form 10-Q    93
TABLE OF CONTENTS
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in The Notes To Consolidated Financial Statements in OurprintNote 1 Accounting Policies Of OurprintNote 1 Accounting PoliciesprintNote 2 Loan Sale and Servicing Activities and Variable Interest EntitiesprintNote 3 Asset QualityprintNote 4 Allowance For Loan and Lease LossesprintNote 5 Investment SecuritiesprintNote 6 Fair ValueprintNote 7 Goodwill and Mortgage Servicing RightsprintNote 8 Employee Benefit PlansprintNote 9 Financial DerivativesprintNote 10 Earnings Per ShareprintNote 11 Total Equity and Other Comprehensive IncomeprintNote 12 Legal ProceedingsprintNote 13 CommitmentsprintNote 14 Segment ReportingprintNote 15 Fee-based Revenue From Contracts with CustomersprintNote 16 LeasesprintNote 17 Subsequent EventsprintPart II Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6. Exhibitsprint

Exhibits

10.45 2019 Form of Performance Share Units Award Agreement 10.46 2019 Form of Restricted Share Units Award Agreement 10.47 2019 Form of Restricted Share Units Award Agreement - Senior Leader Program 31.1 Certification of Chief Executive Officer pursuant to Section302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section302 of the Sarbanes-Oxley Act of 2002 32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section1350 32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section1350