Nine months ended September 30 Dollars in millions, except as noted | Change | |||||||||||||||
| 2016 | 2015 | $ | % | |||||||||||||
Income Statement | ||||||||||||||||
Net interest income | $ | 3,351 | $ | 3,152 | $ | 199 | 6 | % | ||||||||
Noninterest income | 1,628 | 1,652 | (24 | ) | (1 | )% | ||||||||||
Total revenue | 4,979 | 4,804 | 175 | 4 | % | |||||||||||
Provision for credit losses | 210 | 151 | 59 | 39 | % | |||||||||||
Noninterest expense | 3,509 | 3,558 | (49 | ) | (1 | )% | ||||||||||
Pretax earnings | 1,260 | 1,095 | 165 | 15 | % | |||||||||||
Income taxes | 462 | 401 | 61 | 15 | % | |||||||||||
Earnings | $ | 798 | $ | 694 | $ | 104 | 15 | % | ||||||||
Average Balance Sheet | ||||||||||||||||
Loans | ||||||||||||||||
Consumer | ||||||||||||||||
Home equity | $ | 26,351 | $ | 27,810 | $ | (1,459 | ) | (5 | )% | |||||||
Automobile | 11,040 | 10,374 | 666 | 6 | % | |||||||||||
Education | 5,653 | 6,402 | (749 | ) | (12 | )% | ||||||||||
Credit cards | 4,818 | 4,476 | 342 | 8 | % | |||||||||||
Other | 1,800 | 1,886 | (86 | ) | (5 | )% | ||||||||||
Total consumer | 49,662 | 50,948 | (1,286 | ) | (3 | )% | ||||||||||
Commercial and commercial real estate | 12,268 | 12,744 | (476 | ) | (4 | )% | ||||||||||
Residential mortgage | 546 | 704 | (158 | ) | (22 | )% | ||||||||||
Total loans | $ | 62,476 | $ | 64,396 | $ | (1,920 | ) | (3 | )% | |||||||
Total assets | $ | 71,658 | $ | 73,430 | $ | (1,772 | ) | (2 | )% | |||||||
Deposits | ||||||||||||||||
Noninterest-bearing demand | $ | 26,895 | $ | 23,353 | $ | 3,542 | 15 | % | ||||||||
Interest-bearing demand | 38,432 | 36,009 | 2,423 | 7 | % | |||||||||||
Money market | 47,230 | 54,775 | (7,545 | ) | (14 | )% | ||||||||||
Savings | 25,738 | 13,471 | 12,267 | 91 | % | |||||||||||
Certificates of deposit | 15,008 | 16,763 | (1,755 | ) | (10 | )% | ||||||||||
Total deposits | $ | 153,303 | $ | 144,371 | $ | 8,932 | 6 | % | ||||||||
Performance Ratios | ||||||||||||||||
Return on average assets | 1.49 | % | 1.26 | % | ||||||||||||
Noninterest income to total revenue | 33 | % | 34 | % | ||||||||||||
Efficiency | 70 | % | 74 | % | ||||||||||||
Supplemental Noninterest Income Information | ||||||||||||||||
Service charges on deposits | $ | 474 | $ | 459 | $ | 15 | 3 | % | ||||||||
Brokerage | $ | 222 | $ | 212 | $ | 10 | 5 | % | ||||||||
Consumer services | $ | 792 | $ | 747 | $ | 45 | 6 | % | ||||||||
Other Information (a) | ||||||||||||||||
Customer-related statistics (average): | ||||||||||||||||
Non-teller deposit transactions (b) | 49 | % | 43 | % | ||||||||||||
Digital consumer customers (c) | 57 | % | 52 | % | ||||||||||||
Credit-related statistics: | ||||||||||||||||
Nonperforming assets (d) | $ | 970 | $ | 1,092 | $ | (122 | ) | (11 | )% | |||||||
Net charge-offs | $ | 260 | $ | 251 | $ | 9 | 4 | % | ||||||||
Other statistics: | ||||||||||||||||
ATMs | 9,045 | 8,996 | 49 | 1 | % | |||||||||||
Branches (e) | 2,600 | 2,645 | (45 | ) | (2 | )% | ||||||||||
Universal branches (f) | 475 | 355 | 120 | 34 | % | |||||||||||
Brokerage account client assets (billions) (g) | $ | 44 | $ | 42 | $ | 2 | 5 | % | ||||||||
(continued on following page)
The PNC Financial Services Group, Inc. –Form 10-Q17
(continued from previous page)
| (a) | Presented as of |
| (b) | Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application. |
| (c) | Represents consumer checking relationships that process the majority of their transactions through non-teller channels. |
| (d) | Includes nonperforming loans of $.9 billion at September 30, 2016 and $1.0 billion at |
| (e) | Excludes satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services. |
| (f) | Included in total branches, represents branches operating under our Universal model. |
| (g) | Amounts include cash and money market balances. |
Retail Banking earned $268$798 million in the first threenine months of 2016 compared with earnings of $202$694 million for the same period a year ago.first nine months of 2015. The increase in earnings was driven by higher net interest income and a decrease in noninterest income,expense, partially offset by higherincreased provision for credit losses. Retail Banking continues to enhance the customer experience with refinements to product offerings that drive product value for consumers and small businesses. We are focused on growing customer sharemeeting the financial needs of wallet through the saleour customers by providing a broad range of liquidity, banking and investment products that meet the broad range of financial needs of our customers.products.
Retail Banking continued to focus on the strategic priority of transforming the customer experience through transaction migration, branch network transformation and multi-channel salesengagement and service strategies.
In the first threenine months of 2016, approximately 56%57% of consumer customers used non-teller channels for the majority of their transactions compared with 50%52% for the same period in 2015.
Deposit transactions via ATM and mobile channels increased to 47%49% of total deposit transactions in the first quarternine months of 2016 compared with 40%43% for the same period in 2015.
Integral to PNC’s retail branch transformation strategy, approximately 14% of branches operate under the universal model designed to enhance sales opportunities for branch personnel, in part, by driving higher ATM and mobile deposits. PNC had a network of 2,6132,600 branches and 8,9409,045 ATMs at March 31,September 30, 2016. Approximately 18% of the branch network operates under the universal model.
Instant debit card issuance, which enables us to print a customer’s debit card in minutes, is nowwas available in nearly 9001,812 branches, over 34%or 70% of the branch network.network, as of September 30, 2016.
Total revenue for the first three months of 2016 increased $124 million compared to the same period in 2015, driven by increases in both net interest income and noninterest income. Net interest income increased $75 million in the comparison due to growth in deposit balances and interest rate spread on the value of deposits, partially offset by lower loan balances and interest rate spread compression on the value of loans.
NoninterestThe decline in noninterest income increased $49 million in the first quarter of 2016 compared to the prior year period reflected the impact of higher net gains on sales of Visa Class B common shares in the 2015 period, as the first nine months of 2016 reflected net gains of $52 million on sales of 1.35 million Visa shares compared with net gains of $124 million on the sale of 1.5 million shares for the same period a year ago. Executionin 2015. Net gains on Visa sales include derivative fair value adjustments related to swap agreements with purchasers of Visa shares in connection with all sales to date.
Excluding the impact of these Visa sales, noninterest income grew in the comparison, reflecting execution on our share of wallet strategy resulted in growth into provide diverse product and service offerings, which contributed to higher consumer
20 The PNC Financial Services Group, Inc. –Form 10-Q
service fee income from payment-related products, specifically in debit card, credit card and merchant services, as well as increased brokerage fees. Increased
The decline in noninterest incomeexpense in the comparison also reflectedwas due to a gaindecrease in compensation expense, lower marketing expense and reduced branch network expenses as a result of $44 million on the sale of 0.5 million Visa Class B common shares in the first quarter of 2016.network transformation and transaction migration to lower cost digital and ATM channels.
Provision for credit losses increased $28 million and net charge-offs declined $3 million in the first three months of 2016, compared to the same period in 2015. The increase in provision for credit losses reflecteda year ago, reflecting slowing credit quality improvement.
18 The PNC Financial Services Group, Inc. –Form 10-Q
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 threenine months of 2016, average total deposits of $151.6 billion increased $10.0 billion, or 7%, compared to the same period a year ago, driven by organic growth in the following deposit categories:
Savings deposits increased $8.9 billion, or 69%, to $21.8 billion.
Demand deposits increased $5.8 billion, or 10%, to $64.1 billion.
The increase in savings deposits wasreflecting in part a shift from money market deposits to relationship-based savings products. Additionally, demand deposit categories increased, partially offset by lower money market deposits, which declined $2.7 billion, or 5%, reflecting a shift to new relationship-based savings products. Certificatesdecline in certificates of deposit declined $2.0 billion, or 11%, in the comparison, fromdue to the net runoff of maturing accounts.
Retail Banking continued to focus on a relationship-based lending strategy that targets specific products and markets for growth. In the first three months of 2016,strategy. The decrease in average total loans
declined $2.0 billion, or 3%, compared in the comparison was due to the same period in 2015, driven by a decline in home equity and commercial loans, andas well as runoff of non-strategiccertain portions of the portfolios, as more fully described below.
Average home equity loans decreased $1.4 billion, or 5%, as pay-downs and payoffs on loans exceeded new booked volume, consistent with lower mortgage refinance demand.originated volume. Retail Banking’s home equity loan portfolio is relationship based, with over 97% of the portfolio attributable to borrowers in our primary geographic footprint. The weighted-average updated FICO scores for this portfolio was 750were 748 at March 31,September 30, 2016 compared toand 752 at December 31, 2015.
Average commercial and commercial real estate loans declined $316 million, or 2%, as pay-downs and payoffs on loans exceeded new volume.
Average automobile loans, comprised of both direct and indirect auto loans, increased $446 million, or 4%, primarily due to portfolio growth in previously underpenetrated markets.
Average credit card balances increased $278 million, or 6%, as a result of efforts to increase credit card share of wallet through organic growth.
In the first threenine months of 2016, average loan balances for the remainder of the portfolio declined $972$993 million, or 11%, compared to the same period in 2015, driven by declines in the discontinued government guaranteed education, indirect other, and residential mortgage portfolios, which are primarily runoff portfolios.
Nonperforming assets declined $151 million, or 13%, at March 31, 2016decreased compared to March 31, 2015. The decrease wasSeptember 30, 2015 driven by declines in both consumer and commercial nonperforming loans.
The PNC Financial Services Group, Inc. –Form 10-Q 2119
Corporate & Institutional Banking
(Unaudited)
Table 18: Corporate & Institutional Banking Table
| Three months ended March 31 Dollars in millions, except as noted | 2016 | 2015 | ||||||
Income Statement | ||||||||
Net interest income | $ | 870 | $ | 855 | ||||
Noninterest income | 434 | 429 | ||||||
Total revenue | 1,304 | 1,284 | ||||||
Provision for credit losses | 107 | 17 | ||||||
Noninterest expense | 521 | 514 | ||||||
Pretax earnings | 676 | 753 | ||||||
Income taxes | 245 | 271 | ||||||
Earnings | $ | 431 | $ | 482 | ||||
Average Balance Sheet | ||||||||
Loans held for sale | $ | 708 | $ | 1,106 | ||||
Loans | ||||||||
Commercial | $ | 86,645 | $ | 84,712 | ||||
Commercial real estate | 25,817 | 22,090 | ||||||
Equipment lease financing | 6,783 | 6,914 | ||||||
Total commercial lending | 119,245 | 113,716 | ||||||
Consumer | 499 | 1,352 | ||||||
Total loans | $ | 119,744 | $ | 115,068 | ||||
Total assets | $ | 135,521 | $ | 131,178 | ||||
Deposits | ||||||||
Noninterest-bearing demand | $ | 46,962 | $ | 46,976 | ||||
Money market | 21,229 | 22,286 | ||||||
Other | 11,316 | 9,340 | ||||||
Total deposits | $ | 79,507 | $ | 78,602 | ||||
Performance Ratios | ||||||||
Return on average assets | 1.29 | % | 1.49 | % | ||||
Noninterest income to total revenue | 33 | % | 33 | % | ||||
Efficiency | 40 | % | 40 | % | ||||
Other Information | ||||||||
Commercial loan servicing portfolio (a) (b) | $ | 453 | $ | 390 | ||||
Consolidated revenue from: (c) | ||||||||
Treasury Management (d) | $ | 377 | $ | 319 | ||||
Capital Markets (d) | $ | 152 | $ | 180 | ||||
Commercial mortgage banking activities | ||||||||
Commercial mortgage loans held for | $ | 26 | $ | 26 | ||||
Commercial mortgage loan servicing income (f) | 66 | 56 | ||||||
Commercial mortgage servicing rights valuation, net of economic hedge (g) | 1 | 16 | ||||||
Total | $ | 93 | $ | 98 | ||||
Average Loans (by C&IB business) | ||||||||
Corporate Banking | $ | 56,166 | $ | 58,227 | ||||
Real Estate | 35,784 | 29,918 | ||||||
Business Credit | 14,672 | 14,217 | ||||||
Equipment Finance | 11,014 | 10,941 | ||||||
Other | 2,108 | 1,765 | ||||||
Total average loans | $ | 119,744 | $ | 115,068 | ||||
Net carrying amount of commercial mortgage servicing rights (a) | $ | 460 | $ | 494 | ||||
Credit-related statistics: | ||||||||
Nonperforming assets (a) (h) | $ | 701 | $ | 516 | ||||
Net charge-offs (recoveries) | $ | 41 | $ | (1 | ) | |||
Nine months ended September 30 Dollars in millions, except as noted | Change | |||||||||||||||
| 2016 | 2015 | $ | % | |||||||||||||
Income Statement | ||||||||||||||||
Net interest income | $ | 2,597 | $ | 2,613 | $ | (16 | ) | (1 | )% | |||||||
Noninterest income | 1,484 | 1,397 | 87 | 6 | % | |||||||||||
Total revenue | 4,081 | 4,010 | 71 | 2 | % | |||||||||||
Provision for credit losses | 188 | 83 | 105 | 127 | % | |||||||||||
Noninterest expense | 1,625 | 1,594 | 31 | 2 | % | |||||||||||
Pretax earnings | 2,268 | 2,333 | (65 | ) | (3 | )% | ||||||||||
Income taxes | 810 | 841 | (31 | ) | (4 | )% | ||||||||||
Earnings | $ | 1,458 | $ | 1,492 | $ | (34 | ) | (2 | )% | |||||||
Average Balance Sheet | ||||||||||||||||
Loans held for sale | $ | 835 | $ | 973 | $ | (138 | ) | (14 | )% | |||||||
Loans | ||||||||||||||||
Commercial | $ | 87,625 | $ | 85,304 | $ | 2,321 | 3 | % | ||||||||
Commercial real estate | 26,395 | 22,536 | 3,859 | 17 | % | |||||||||||
Equipment lease financing | 6,843 | 6,965 | (122 | ) | (2 | )% | ||||||||||
Total commercial lending | 120,863 | 114,805 | 6,058 | 5 | % | |||||||||||
Consumer | 445 | 971 | (526 | ) | (54 | )% | ||||||||||
Total loans | $ | 121,308 | $ | 115,776 | $ | 5,532 | 5 | % | ||||||||
Total assets | $ | 137,884 | $ | 131,678 | $ | 6,206 | 5 | % | ||||||||
Deposits | ||||||||||||||||
Noninterest-bearing demand | $ | 45,712 | $ | 48,168 | $ | (2,456 | ) | (5 | )% | |||||||
Money market | 21,452 | 22,319 | (867 | ) | (4 | )% | ||||||||||
Other | 13,111 | 9,776 | 3,335 | 34 | % | |||||||||||
Total deposits | $ | 80,275 | $ | 80,263 | $ | 12 | – | |||||||||
Performance Ratios | ||||||||||||||||
Return on average assets | 1.41 | % | 1.51 | % | ||||||||||||
Noninterest income to total revenue | 36 | % | 35 | % | ||||||||||||
Efficiency | 40 | % | 40 | % | ||||||||||||
Other Information | ||||||||||||||||
Commercial loan servicing portfolio (in billions) (a) (b) | $ | 461 | $ | 441 | $ | 20 | 5 | % | ||||||||
Consolidated revenue from: (c) | ||||||||||||||||
Treasury Management (d) | $ | 1,162 | $ | 999 | $ | 163 | 16 | % | ||||||||
Capital Markets (d) | $ | 600 | $ | 592 | $ | 8 | 1 | % | ||||||||
Commercial mortgage banking activities | ||||||||||||||||
Commercial mortgage loans held for sale (e) | $ | 77 | $ | 94 | $ | (17 | ) | (18 | )% | |||||||
Commercial mortgage loan servicing income (f) | 198 | 191 | 7 | 4 | % | |||||||||||
Commercial mortgage servicing rights valuation, net of economic hedge (g) | 22 | 25 | (3 | ) | (12 | )% | ||||||||||
Total | $ | 297 | $ | 310 | $ | (13 | ) | (4 | )% | |||||||
Net carrying amount of commercial mortgage servicing rights (a) | $ | 473 | $ | 505 | $ | (32 | ) | (6 | )% | |||||||
Average Loans (by C&IB business) | ||||||||||||||||
Corporate Banking | $ | 57,372 | $ | 58,108 | $ | (736 | ) | (1 | )% | |||||||
Real Estate | 36,235 | 30,621 | 5,614 | 18 | % | |||||||||||
Business Credit | 14,770 | 14,503 | 267 | 2 | % | |||||||||||
Equipment Finance | 11,094 | 10,956 | 138 | 1 | % | |||||||||||
Other | 1,837 | 1,588 | 249 | 16 | % | |||||||||||
Total average loans | $ | 121,308 | $ | 115,776 | $ | 5,532 | 5 | % | ||||||||
Credit-related statistics: | ||||||||||||||||
Nonperforming assets (a) (h) | $ | 671 | $ | 484 | $ | 187 | 39 | % | ||||||||
Net charge-offs | $ | 169 | $ | 6 | $ | 163 | * | |||||||||
20 The PNC Financial Services Group, Inc. –Form 10-Q
* – Not meaningful.
| (a) | As of |
| (b) | Represents loans serviced for PNC and others. |
| (c) | Represents consolidated PNC amounts. See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of the Corporate & Institutional Banking portion of this Business Segments Review section. |
| (d) | Includes amounts reported in net interest income, corporate service fees and other noninterest income. |
| (e) | Includes other noninterest income for valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, origination fees, gains on sale of loans held for sale and net interest income on loans held for sale. |
| (f) | Includes net interest income and noninterest income (primarily in corporate services fees) from loan servicing net of reduction in commercial mortgage servicing rights due to time decay and payoffs. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately. |
| (g) | Amounts reported in corporate services |
| (h) | Includes nonperforming loans of $.6 billion at |
Corporate & Institutional Banking earned $431 million$1.5 billion in the first quarternine months of both 2016 a decrease of $51and 2015. Earnings decreased by $34 million or 11%, compared with the first quarter of 2015. The decrease in earnings was primarily due to an increase in the provision for credit losses, partially offset by increased net interesthigher noninterest income. We continue to focus on building client relationships where the risk-return profile is attractive, including in the Southeast.
Net interest income increased $15 million, or 2%,decreased in the first three months of 2016 compared to the first three months of 2015. The increase primarily reflects the impact of higher average loans and deposits as well as interest rate spread expansion on deposits, partially offsetcomparison, driven by continued interest rate spread compression on loans and lower purchase accounting accretion.accretion, which were mostly offset by the impact of higher average loans as well as interest rate spread expansion on deposits.
NoninterestHigher noninterest income increased slightly in the first three months of 2016 comparedcomparison was primarily due to the first three months of 2015 reflecting an equity investment gain, an increase in gains on asset sales, higher capital markets-related revenue and higher treasury management fees. These increases were partially offset by lower noninterest income from commercial mortgage loan servicing rights valuation, net of economic hedge, and lower capital markets activity.commercial mortgage loans held for sale activities.
Overall credit quality for the first quarternine months of 2016 remained relatively stable, except for deterioration related toof certain energy related loans, which was the primary driver for the increase in provision for credit losses, of $90 million, net charge-offs of $42 million and nonperforming assets of $185 million in the year over year comparisons. Increased provision for credit losses also reflected the impact of continued loan growth.
Noninterest expense increased in the comparison due to higher variable compensation and other costs associated with increased business activity and investments in technology and infrastructure, partially offset by our continued expense management.
Average loans increased $4.7 billion, or 4%, forin the first quarter of 2016 comparedcomparison due to the prior year quarter, reflecting solidstrong growth in Real Estate, and Business Credit, partially offset by a decline in Corporate Banking:
PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. AverageHigher average loans for this business increased $5.9 billion, or 20%, in the first quarter of 2016 compared with the first quarter of 2015,were primarily due to growth in commercial lending driven by higher term REIT and agency warehouseREIT lending.
Corporate Banking provides lending, treasury management and capital markets-related products and services to midsized and large corporations, government and not-for-profit entities. Average loans for this business declined in the comparison, reflecting the impact of capital and liquidity management activities, partially offset by increased lending to large corporate clients.
22 The PNC Financial Services Group, Inc. –Form 10-Q
PNC Business Credit provides asset-based lending. The loan portfolio is relatively high yielding, with acceptable risk as the loans are mainly secured by short-term assets. Average loans for this business increased $455 million, or 3%, in the first three months of 2016 compared to the first three months of 2015,comparison due to new originations.
Corporate Banking provides lending, treasury management and capital markets-related products and services to midsized and large corporations, government and not-for-profit entities. Average loans for this business decreased $2.1 billion, or 4%, in the first quarter of 2016 compared with the first quarter of 2015, reflecting the impact of ongoing capital and liquidity management activities, partially offset by increased lending to large corporate clients.
PNC Equipment Finance provides equipment financing solutions for clients throughout the U.S. and Canada. Average loans, including commercial loans and finance leases, and operating leases were $11.8 billion in the first quarternine months of 2016, unchanged comparedstable with the first quarternine months of 2015.
Average deposits forincreased nominally compared to the first quarter of 2016 increased $.9 billion, or 1%, compared with the first quarter of 2015,prior year period, as a result of interest-bearing demand deposit growth partiallywas essentially offset by a decreasedecreases in noninterest-bearing demand deposits and money market deposits.
TheGrowth in the commercial loan servicing portfolio increased $63 billion, or 16%, at March 31, 2016 compared to March 31, 2015, aswas driven by servicing additions from new and existing customers exceededexceeding portfolio run-off.runoff.
The PNC Financial Services Group, Inc. –Form 10-Q21
Product Revenue
In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management, capital markets-related products and services, and commercial mortgage banking activities, for customers of all business segments. On a consolidated basis, the revenue from these other services is included in net interest income, corporate service fees and other noninterest income. From a segment perspective, the majority of the revenue and expense related to these services is reflected in the Corporate & Institutional Banking segment results and the remainder is reflected in the results of other businesses. The Other Information section in Table 18 in the Corporate & Institutional Banking portion of this Business Segments Review section includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.
Treasury management revenue, comprised of fees and net interest income from customer deposit balances, increased $58 million, or 18%, in the first quarter of 2016 compared withcomparison to the first quarter of 2015,prior year period, driven by liquidity-related revenue.
Capital markets-related products and services include foreign exchange, derivatives, securities, loan syndications, mergers and acquisitions advisory and equity capital markets advisory activities and related services. Revenue from capital markets-related products and services decreased $28 million, or 16%, in the first three months of 2016 compared with the first three months of 2015. The decreaseincreased slightly in the comparison was primarily driven by loweras higher merger and acquisition advisory fees decreased corporate securities underwriting activity and structuring fees on asset securitizations were mostly offset by lower loan syndication fees.revenue associated with credit valuations for customer-related derivative activities.
CommercialRevenue from commercial mortgage banking activities include revenue derived from commercial mortgage servicing (including net interest income and noninterest income) includes those derived from commercial mortgage servicing and revenue derived from commercial mortgage loans held for sale and related hedges. Total revenue from commercial mortgage banking activities decreased $5 million, or 5%, in the first quarter of 2016 compared with the first quarter of 2015. The decrease in the comparison was mainly due to lower revenue from commercial mortgage servicing rights valuation, net of economic hedge, largelyloans held for sale, partially offset by higher commercial mortgage loan servicing revenue.income.
22The PNC Financial Services Group, Inc. –Form 10-Q23
Asset Management Group
(Unaudited)
Table 19: Asset Management Group Table
Three months ended March 31 Dollars in millions, except as noted | 2016 | 2015 | ||||||||||||||||||||||
Nine months ended September 30 Dollars in millions, except as noted | Change | |||||||||||||||||||||||
| 2016 | 2015 | $ | % | |||||||||||||||||||||
Income Statement | ||||||||||||||||||||||||
Net interest income | $ | 77 | $ | 73 | $ | 227 | $ | 215 | $ | 12 | 6 | % | ||||||||||||
Noninterest income | 203 | 208 | 636 | 658 | (22 | ) | (3 | )% | ||||||||||||||||
Total revenue | 280 | 281 | 863 | 873 | (10 | ) | (1 | )% | ||||||||||||||||
Provision for credit losses (benefit) | (3 | ) | 12 | |||||||||||||||||||||
Provision for credit losses | – | 11 | (11 | ) | (100 | )% | ||||||||||||||||||
Noninterest expense | 206 | 210 | 618 | 636 | (18 | ) | (3 | )% | ||||||||||||||||
Pretax earnings | 77 | 59 | 245 | 226 | 19 | 8 | % | |||||||||||||||||
Income taxes | 28 | 22 | 90 | 83 | 7 | 8 | % | |||||||||||||||||
Earnings | $ | 49 | $ | 37 | $ | 155 | $ | 143 | $ | 12 | 8 | % | ||||||||||||
Average Balance Sheet | ||||||||||||||||||||||||
Loans | ||||||||||||||||||||||||
Consumer | $ | 5,630 | $ | 5,650 | $ | 5,493 | $ | 5,656 | $ | (163 | ) | (3 | )% | |||||||||||
Commercial and commercial real estate | 788 | 932 | 759 | 901 | (142 | ) | (16 | )% | ||||||||||||||||
Residential mortgage | 1,003 | 865 | 1,032 | 899 | 133 | 15 | % | |||||||||||||||||
Total loans | $ | 7,421 | $ | 7,447 | $ | 7,284 | $ | 7,456 | $ | (172 | ) | (2 | )% | |||||||||||
Total assets | $ | 7,887 | $ | 7,943 | $ | 7,743 | $ | 7,922 | $ | (179 | ) | (2 | )% | |||||||||||
Deposits | ||||||||||||||||||||||||
Noninterest-bearing demand | $ | 1,407 | $ | 1,345 | $ | 1,409 | $ | 1,207 | $ | 202 | 17 | % | ||||||||||||
Interest-bearing demand | 4,280 | 4,241 | 4,069 | 4,126 | (57 | ) | (1 | )% | ||||||||||||||||
Money market | 4,758 | 4,621 | 4,278 | 5,072 | (794 | ) | (16 | )% | ||||||||||||||||
Savings | 1,563 | 165 | 2,032 | 193 | 1,839 | 953 | % | |||||||||||||||||
Other | 275 | 290 | 275 | 279 | (4 | ) | (1 | )% | ||||||||||||||||
Total deposits | $ | 12,283 | $ | 10,662 | $ | 12,063 | $ | 10,877 | $ | 1,186 | 11 | % | ||||||||||||
Performance Ratios | ||||||||||||||||||||||||
Return on average assets | 2.52 | % | 1.89 | % | 2.68 | % | 2.41 | % | ||||||||||||||||
Noninterest income to total revenue | 73 | % | 74 | % | 74 | % | 75 | % | ||||||||||||||||
Efficiency | 74 | % | 75 | % | 72 | % | 73 | % | ||||||||||||||||
Other Information | ||||||||||||||||||||||||
Total nonperforming assets (a) (b) | $ | 54 | $ | 63 | ||||||||||||||||||||
Total net charge-offs | $ | 4 | $ | 4 | ||||||||||||||||||||
Client Assets Under Administration (a) (c) (d) (in billions) | ||||||||||||||||||||||||
Nonperforming assets (a) (b) | $ | 51 | $ | 52 | $ | (1 | ) | (2 | )% | |||||||||||||||
Net charge-offs | $ | 7 | $ | 14 | $ | (7 | ) | (50 | )% | |||||||||||||||
Client Assets Under Administration(in billions) (a) (c) (d) | ||||||||||||||||||||||||
Discretionary client assets under management | $ | 135 | $ | 136 | $ | 138 | $ | 132 | $ | 6 | 5 | % | ||||||||||||
Nondiscretionary client assets under administration | 125 | 129 | 128 | 124 | 4 | 3 | % | |||||||||||||||||
Total | $ | 260 | $ | 265 | $ | 266 | $ | 256 | $ | 10 | 4 | % | ||||||||||||
Discretionary client assets under management | ||||||||||||||||||||||||
Personal | $ | 84 | $ | 88 | $ | 85 | $ | 84 | $ | 1 | 1 | % | ||||||||||||
Institutional | 51 | 48 | 53 | 48 | $ | 5 | 10 | % | ||||||||||||||||
Total | $ | 135 | $ | 136 | $ | 138 | $ | 132 | ||||||||||||||||
Equity | $ | 72 | $ | 75 | $ | 73 | $ | 70 | $ | 3 | 4 | % | ||||||||||||
Fixed Income | 40 | 41 | 40 | 40 | – | – | ||||||||||||||||||
Liquidity/Other | 23 | 20 | 25 | 22 | $ | 3 | 14 | % | ||||||||||||||||
Total | $ | 135 | $ | 136 | $ | 138 | $ | 132 | ||||||||||||||||
| (a) | As of |
| (b) | Includes nonperforming loans of |
| (c) | Excludes brokerage account client assets. |
| (d) | As a result of certain investment advisory services performed by one of our registered investment advisors, certain assets are reported as both discretionary client assets under management and nondiscretionary client assets under administration. The amount of such assets was approximately |
The PNC Financial Services Group, Inc. –Form 10-Q23
Asset Management Group earned $49$155 million through the first nine months of 2016 compared with $143 million in the first quarter of 2016 and $37 million in the first quartersame period of 2015. Earnings for the first nine months of 2016 increased compared with the prior year quarter asdue to lower noninterest expense and a reductiondecline in the provision for credit losses, and lower noninterest expense was partially offset by a declinedecreased revenue.
The decrease in noninterest income.
Totaltotal revenue forin the first quarter of 2016 decreased slightly compared to the first quarter of 2015, as a decline incomparison was driven by lower noninterest income, from lower average equity markets was largelypartially offset by an increase in net interest income. The decline in noninterest income reflected the impact of a $30 million trust settlement in the second quarter of 2015, which was partially offset by net business growth.
Noninterest expense decreased $4 million, or 2%, in the first quarternine months of 2016 compared to the first quarter of 2015.prior year period, primarily attributable to lower personnel expense. Asset Management Group remains focused on disciplined expense management as it invests inmakes strategic investments.
Asset Management Group’s growth opportunities.
The core growth strategiesstrategy is focused on capturing more investable assets by delivering an enhanced client experience, and involves new client acquisition and expanding products and services based on our clients’ needs and investment objectives while leveraging our open architecture platform with a full array of the business include increasing sales sourced from other PNC lines of business,investment products and banking solutions for all clients. Key considerations are maximizing front line productivity, a relationship-based focus with other line of business partners, and optimizing market presence in high opportunity markets.
Wealth Management and Hawthorn have overnearly 100 offices operating in 7seven out of the 10ten most affluent states in the U.S. with a majority co-located with retail banking branches. The businesses’ strategies primarily focus on growing client assets under management through expanding relationships directlybusinesses provide customized investments, wealth planning, trust and through cross-selling from PNC’s other lines of business.estate administration and private banking solutions to affluent individuals and ultra-affluent families.
Institutional Asset Management provides advisory, custody, and retirement administration services to institutional clients primarily within our banking footprint.such as corporations, unions, municipalities, non-profits, foundations, and endowments. The business also offers PNC proprietary mutual funds and investment strategies. Institutional Asset Management is strengthening its partnership with Corporate and& Institutional Banking and other internal channels to drive growth and is focused on building retirement capabilities and expanding product solutions for all customers.
Assets under administration were $260 billion as of March 31, 2016 compared with $265 billion as of March 31, 2015 largely due to a decline in nondiscretionary client assets under administration. DiscretionaryAsset Management Group’s discretionary client assets under management decreased $1 billion compared to March 31, 2015.
Average deposits forincreased in the first quarter of 2016 increased $1.6 billion, or 15%, from the prior year first quarter, primarily driven by an increase in savings products. Average loan balances of $7.4 billion remained stable comparedcomparison to the prior year, quarter.primarily attributable to higher equity markets as of September 30, 2016 and net business growth.
24 The PNC Financial Services Group, Inc. –Form 10-Q
Residential Mortgage Banking
(Unaudited)
Table 20: Residential Mortgage Banking Table
Three months ended March 31 Dollars in millions, except as noted | 2016 | 2015 | ||||||||||||||||||||||
| Nine months ended September 30 | Change | |||||||||||||||||||||||
| Dollars in millions, except as noted | 2016 | 2015 | $ | % | ||||||||||||||||||||
Income Statement | ||||||||||||||||||||||||
Net interest income | $ | 25 | $ | 30 | $ | 81 | $ | 91 | $ | (10 | ) | (11 | )% | |||||||||||
Noninterest income | 105 | 177 | 450 | 488 | (38 | ) | (8 | )% | ||||||||||||||||
Total revenue | 130 | 207 | 531 | 579 | (48 | ) | (8 | )% | ||||||||||||||||
Provision for credit losses (benefit) | (1 | ) | 2 | |||||||||||||||||||||
Provision for credit losses | – | 2 | (2 | ) | (100 | )% | ||||||||||||||||||
Noninterest expense | 152 | 161 | 458 | 510 | (52 | ) | (10 | )% | ||||||||||||||||
Pretax earnings (loss) | (21 | ) | 44 | |||||||||||||||||||||
Income taxes (benefit) | (8 | ) | 16 | |||||||||||||||||||||
Earnings (loss) | $ | (13 | ) | $ | 28 | |||||||||||||||||||
Pretax earnings | 73 | 67 | 6 | 9 | % | |||||||||||||||||||
Income taxes | 27 | 24 | 3 | 13 | % | |||||||||||||||||||
Earnings | $ | 46 | $ | 43 | $ | 3 | 7 | % | ||||||||||||||||
Average Balance Sheet | ||||||||||||||||||||||||
Loans held for sale | $ | 800 | $ | 1,147 | $ | 897 | $ | 1,160 | $ | (263 | ) | (23 | )% | |||||||||||
Loans | $ | 1,028 | $ | 1,282 | $ | 979 | $ | 1,175 | $ | (196 | ) | (17 | )% | |||||||||||
Mortgage servicing rights (MSR) | $ | 995 | $ | 843 | $ | 913 | $ | 967 | $ | (54 | ) | (6 | )% | |||||||||||
Total assets | $ | 6,306 | $ | 7,245 | $ | 6,078 | $ | 6,962 | $ | (884 | ) | (13 | )% | |||||||||||
Total deposits | $ | 2,330 | $ | 2,215 | $ | 2,685 | $ | 2,415 | $ | 270 | 11 | % | ||||||||||||
Performance Ratios | ||||||||||||||||||||||||
Return on average assets | (.84 | )% | 1.57 | % | 1.01 | % | .83 | % | ||||||||||||||||
Noninterest income to total revenue | 81 | % | 86 | % | 85 | % | 84 | % | ||||||||||||||||
Efficiency | 117 | % | 78 | % | 86 | % | 88 | % | ||||||||||||||||
Supplemental Noninterest Income Information | ||||||||||||||||||||||||
Loan servicing revenue | ||||||||||||||||||||||||
Servicing fees | $ | 62 | $ | 48 | $ | 171 | $ | 143 | $ | 28 | 20 | % | ||||||||||||
Mortgage servicing rights valuation, net of economic hedge | $ | (21 | ) | $ | 25 | |||||||||||||||||||
Mortgage servicing rights valuation, net of economic hedge (a) | $ | 16 | $ | 70 | $ | (54 | ) | (77 | )% | |||||||||||||||
Loan sales revenue | $ | 64 | $ | 104 | $ | 262 | $ | 278 | $ | (16 | ) | (6 | )% | |||||||||||
Residential Mortgage Servicing Portfolio(in billions) (a) | ||||||||||||||||||||||||
Serviced portfolio balance (b) | $ | 125 | $ | 113 | ||||||||||||||||||||
Residential Mortgage Servicing Portfolio(in billions) (b) | ||||||||||||||||||||||||
Serviced portfolio balance (c) | $ | 126 | $ | 122 | $ | 4 | 3 | % | ||||||||||||||||
Portfolio acquisitions | $ | 5 | $ | 8 | $ | 16 | $ | 24 | $ | (8 | ) | (33 | )% | |||||||||||
MSR asset value (b) | $ | .9 | $ | .8 | ||||||||||||||||||||
MSR capitalization value (in basis | 69 | 74 | ||||||||||||||||||||||
MSR asset value (c) | $ | .8 | $ | 1.0 | $ | (.2 | ) | (20 | )% | |||||||||||||||
MSR capitalization value (in basis points) (c) | 65 | 79 | (14 | ) | (18 | )% | ||||||||||||||||||
Other Information | ||||||||||||||||||||||||
Loan origination volume (in billions) | $ | 1.9 | $ | 2.6 | $ | 7.6 | $ | 8.2 | $ | (.6 | ) | (7 | )% | |||||||||||
Loan sale margin percentage | 3.21 | % | 4.09 | % | 3.33 | % | 3.43 | % | ||||||||||||||||
Percentage of originations represented by: | ||||||||||||||||||||||||
Purchase volume (c) | 40 | % | 31 | % | ||||||||||||||||||||
Purchase volume (d) | 43 | % | 46 | % | ||||||||||||||||||||
Refinance volume | 60 | % | 69 | % | 57 | % | 54 | % | ||||||||||||||||
Total nonperforming assets (b) (d) | $ | 75 | $ | 105 | ||||||||||||||||||||
Nonperforming assets (c) (e) | $ | 57 | $ | 88 | $ | (31 | ) | (35 | )% | |||||||||||||||
| (a) | Consolidated PNC amounts, which include asset and liability management activities reported in the “Other” business segment, were $57 million and $83 million for the nine months ended September 30, 2016 and 2015, respectively. |
| (b) | Represents loans serviced for third parties. |
| As of |
| Mortgages with borrowers as part of residential real estate purchase transactions. |
| Includes nonperforming loans of |
The PNC Financial Services Group, Inc. –Form 10-Q25
Residential Mortgage Banking reported a loss of $13earned $46 million in the first threenine months of 2016 compared with earnings of $28$43 million in the first threenine months of 2015, primarily driven by a decline in noninterest income, partiallyexpense, which was mostly offset by lower noninterest expense. The decline in noninterest income reflected lower residential mortgage servicing rights valuation,and net of economic hedge, as well as lower loan sales revenue in the comparison, partially offset by increased servicing feeinterest income.
The strategic focus of the business is the acquisition of new customers through a retail loan officer sales force with an emphasis on home purchase transactions. Our strategy involvestransactions, competing on the basis of superior service, to new and existing customers in serving their home purchase and refinancing needs. A key consideration in pursuing this approach is the cross-sell opportunity, especially inleveraging the bank footprint markets.
Residential Mortgage Banking overview:
Total loan originations decreased $.7 billion in first quarter 2016declined 7% compared to first quarterthe same period in 2015. Loans continue to be originated primarily through direct channels under Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Federal Housing Administration (FHA)/Department of Veterans Affairs agency guidelines. Refinancings were 60%57% of originations in the first 3nine months of 2016 and 69%54% in the first three months 2015.
Residential mortgage loans serviced for others increased by $12 billion at March 31, 2016 compared to March 31, 2015. During the first threenine months of 2016, $5 billion of residential mortgage servicing rights were acquired, compared with $8 billion2015.
The decline in the comparable period of 2015.
Netnet interest income decreased $5 millionwas driven by the decrease in the first three months in 2016 compared with the 2015 period. This decline was primarily due to lowerloan originations and lower balances of portfolio loans held for investment.
Noninterest income declined $72 million in the first three months of 2016 compared with the prior year period,comparison, as increased servicing fee income was more than offset by lower benefit from residential mortgage servicing rights valuation, net of economic hedge, as well as lowerand decreased loan sales revenue.
Noninterest expense declined $9 million in the first three months of 2016 compared with the 2015 period, primarily as a result of lower residential mortgage foreclosure-related expenses, including reserve releases of $24 million, as well as lower servicing and compliance costs.
The PNC Financial Services Group, Inc. –Form 10-Q25
BlackRock
(Unaudited)
Information related to our equity investment in BlackRock follows:
Three months ended March 31 Dollars in millions | 2016 | 2015 | ||||||||||||||
Nine months ended September 30 Dollars in millions | 2016 | 2015 | ||||||||||||||
Business segment earnings (a) | $ | 114 | $ | 135 | $ | 390 | $ | 407 | ||||||||
PNC’s economic interest in BlackRock (b) | 22 | % | 22 | % | 22 | % | 22 | % | ||||||||
| (a) | Includes PNC’s share of BlackRock’s reported GAAP earnings and additional income taxes on those earnings incurred by PNC. |
| (b) | At |
| In billions | March 31 2016 | December 31 2015 | ||||||
Carrying value of PNC’s investment in | $ | 6.7 | $ | 6.7 | ||||
Market value of PNC’s investment in | 12.0 | 12.0 | ||||||
| In billions | September 30 2016 | December 31 2015 | ||||||
Carrying value of PNC’s investment in BlackRock (c) | $ | 6.9 | $ | 6.7 | ||||
Market value of PNC’s investment in BlackRock (d) | 12.8 | 12.0 | ||||||
| (c) | PNC accounts for its investment in BlackRock under the equity method of accounting, exclusive of a related deferred tax liability of $2.2 billion at both |
| (d) | Does not include liquidity discount. |
In addition to our investment in BlackRock reflected in Table 21, at March 31,September 30, 2016, we held approximately 0.8 million shares of BlackRock Series C Preferred Stock valued at $208$221 million, which are available to fund our obligation in connection with certain BlackRock long-term incentive plan (LTIP) programs. We account for the BlackRock Series C Preferred Stock at fair value, which offsets the impact of marking-to-market the obligation to deliver these shares to BlackRock. The fair value amount of the BlackRock Series C Preferred Stock is included on our Consolidated Balance Sheet in the caption Other assets. Additional information regarding the valuation of the BlackRock Series C Preferred Stock is included in Note 76 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report and in Note 7 Fair Value in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K.
On February 1, 2016, we transferred 0.5 million shares of BlackRock Series C Preferred Stock to BlackRock to satisfy a portion of our LTIP obligation. The transfer reduced Other assets and Other liabilities on our Consolidated Balance Sheet by $138 million.
Our 2015 Form 10-K includes additional information about our investment in BlackRock.
Non-Strategic Assets Portfolio
(Unaudited)
Table 22: Non-Strategic Assets Portfolio Table
Three months ended March 31 Dollars in millions | 2016 | 2015 | ||||||
Income Statement | ||||||||
Net interest income | $ | 75 | $ | 112 | ||||
Noninterest income | 22 | 9 | ||||||
Total revenue | 97 | 121 | ||||||
Provision for credit losses (benefit) | (7 | ) | (31 | ) | ||||
Noninterest expense | 21 | 24 | ||||||
Pretax earnings | 83 | 128 | ||||||
Income taxes | 31 | 47 | ||||||
Earnings | $ | 52 | $ | 81 | ||||
Average Balance Sheet | ||||||||
Loans | ||||||||
Commercial Lending | $ | 708 | $ | 750 | ||||
Consumer Lending | ||||||||
Home equity | 2,144 | 3,021 | ||||||
Residential real estate | 3,245 | 4,184 | ||||||
Total consumer lending | 5,389 | 7,205 | ||||||
Total loans | 6,097 | 7,955 | ||||||
Other assets (a) | (281 | ) | (679 | ) | ||||
Total assets | $ | 5,816 | $ | 7,276 | ||||
Performance Ratios | ||||||||
Return on average assets | 3.63 | % | 4.51 | % | ||||
Noninterest income to total revenue | 23 | 7 | ||||||
Efficiency | 22 | 20 | ||||||
Other Information | ||||||||
Nonperforming assets (b) (c) | $ | 499 | $ | 669 | ||||
Purchased impaired loans (b) (d) | $ | 2,737 | $ | 3,808 | ||||
Net charge-offs | $ | 8 | $ | – | ||||
Loans (b) | ||||||||
Commercial Lending | $ | 703 | $ | 746 | ||||
Consumer Lending | ||||||||
Home equity | 2,088 | 2,944 | ||||||
Residential real estate | 3,190 | 4,139 | ||||||
Total consumer lending | 5,278 | 7,083 | ||||||
Total loans | $ | 5,981 | $ | 7,829 | ||||
26 The PNC Financial Services Group, Inc. –Form 10-Q
Non-Strategic Assets Portfolio
(Unaudited)
Table 22: Non-Strategic Assets Portfolio Table
| Nine months ended September 30 | Change | |||||||||||||||
| Dollars in millions | 2016 | 2015 | $ | % | ||||||||||||
Income Statement | ||||||||||||||||
Net interest income | $ | 220 | $ | 302 | $ | (82 | ) | (27 | )% | |||||||
Noninterest income | 35 | 34 | 1 | 3 | % | |||||||||||
Total revenue | 255 | 336 | (81 | ) | (24 | )% | ||||||||||
Provision for credit losses (benefit) | (16 | ) | (61 | ) | 45 | 74 | % | |||||||||
Noninterest expense | 57 | 73 | (16 | ) | (22 | )% | ||||||||||
Pretax earnings | 214 | 324 | (110 | ) | (34 | )% | ||||||||||
Income taxes | 79 | 119 | (40 | ) | (34 | )% | ||||||||||
Earnings | $ | 135 | $ | 205 | $ | (70 | ) | (34 | )% | |||||||
Average Balance Sheet | ||||||||||||||||
Loans | ||||||||||||||||
Commercial lending | $ | 702 | $ | 742 | $ | (40 | ) | (5 | )% | |||||||
Consumer lending | ||||||||||||||||
Home equity | 2,015 | 2,859 | (844 | ) | (30 | )% | ||||||||||
Residential real estate | 3,125 | 3,981 | (856 | ) | (22 | )% | ||||||||||
Total consumer lending | 5,140 | 6,840 | (1,700 | ) | (25 | )% | ||||||||||
Total loans | 5,842 | 7,582 | (1,740 | ) | (23 | )% | ||||||||||
Other assets (a) | (262 | ) | (702 | ) | 440 | 63 | % | |||||||||
Total assets | $ | 5,580 | $ | 6,880 | $ | (1,300 | ) | (19 | )% | |||||||
Performance Ratios | ||||||||||||||||
Return on average assets | 3.23 | % | 3.98 | % | ||||||||||||
Noninterest income to total revenue | 14 | % | 10 | % | ||||||||||||
Efficiency | 22 | % | 22 | % | ||||||||||||
Other Information | ||||||||||||||||
Nonperforming assets (b) (c) | $ | 433 | $ | 571 | $ | (138 | ) | (24 | )% | |||||||
Purchased impaired loans (b) (d) | $ | 2,512 | $ | 3,411 | $ | (899 | ) | (26 | )% | |||||||
Net charge-offs (recoveries) | $ | – | $ | (8 | ) | $ | 8 | 100 | % | |||||||
Loans (b) | ||||||||||||||||
Commercial lending | $ | 693 | $ | 731 | $ | (38 | ) | (5 | )% | |||||||
Consumer lending | ||||||||||||||||
Home equity | 1,826 | 2,586 | (760 | ) | (29 | )% | ||||||||||
Residential real estate | 2,933 | 3,625 | (692 | ) | (19 | )% | ||||||||||
Total consumer lending | 4,759 | 6,211 | (1,452 | ) | (23 | )% | ||||||||||
Total loans | $ | 5,452 | $ | 6,942 | $ | (1,490 | ) | (21 | )% | |||||||
| (a) | Other assets were negative in both periods due to the ALLL. |
| (b) | As of September 30. |
| (c) | Includes nonperforming loans of $.4 billion at September 30, 2016 and $.5 billion at September 30, 2015. |
| (d) | Recorded investment of purchased impaired loans related to acquisitions. This segment contained 82% of PNC’s purchased impaired loans at both September 30, 2016 and September 30, 2015. |
This business segment consists of non-strategic assets primarily obtained through acquisitions of other companies. The business activity of this segment is to manage the liquidation of the portfolios while maximizing the value and mitigating risk.
Non-Strategic Assets Portfolio had earnings of $52earned $135 million in the first threenine months of 2016 compared with $81$205 million in the first threenine months of 2015. Earnings decreased year-over-year primarily due to a declining loan portfolio and a reducedlower benefit from the provision for credit losses.losses in 2016.
The PNC Financial Services Group, Inc. –Form 10-Q27
Non-Strategic Assets Portfolio overview:
NetLower net interest income declined $37 million, or 33%, in the first three months of 2016 compared with the first three months of 2015, resultingresulted from lower purchase accounting accretion and the impact of the declining average balance of the loan portfolio.
Noninterest income increased $13 million in the first three months of 2016 compared to the first three months of 2015 driven by a release of excess reserves for estimated losses on repurchase obligations in the first quarter of 2016 related to a settlement.
ProvisionThe reduced benefit from provision for credit losses was a benefitdriven by higher releases of reserves in both the first three months of 2016 and the first three months of 2015, reflecting improved actual and expected purchased impaired loan losses.2015.
Noninterest expense declined $3 million, or 13%, in the first three months of 2016 compared with the first three months of 2015, due tocomparison, driven by lower costs of managing and servicing the loan portfolios as the portfolio continues to decline.
Average portfolio loans declined $1.9 billion, or 23%, in the first three months of 2016 compared to the first three months of 2015,decreased due to customer payment activity and portfolio management activities to reduce under-performing assets. The declinedecrease also reflects the impact of our change in derecognition policy effective December 31, 2015 for certain purchased impaired loans.
CRITICAL ACCOUNTING ESTIMATESAND JUDGMENTS
Note 1 Accounting Policies in Item 8 of our 2015 Form 10-K and in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report describe the most significant accounting policies that we use to prepare our consolidated financial statements. Certain of these policies require us to make estimates or economic assumptions that may vary under different assumptions or conditions and such variations may significantly affect our reported results and financial position for the period or in future periods.
We must use estimates, assumptions and judgments when assets and liabilities are required to be recorded at, or adjusted to reflect, fair value.
Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by independent third-party sources, including appraisers and valuation specialists, when available. When such third-party information is not available, we estimate fair value primarily by using discounted cash flow and other financial modeling techniques. Changes in underlying factors, assumptions or estimates in any of these areas could materially impact our future financial condition and results of operations.
The following critical accounting policies and judgments are described in more detail in Critical Accounting Estimates and Judgments in Item 7 of our 2015 Form 10-K:
Fair Value Measurements
Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit
Estimated Cash Flows on Purchased Impaired Loans
Goodwill
Lease Residuals
Revenue Recognition
Residential and Commercial Mortgage Servicing Rights
Income Taxes
Recently Issued Accounting Standards
We provide additional information about many of these items in the Notes To Consolidated Financial Statements included in Part I, Item l of this Report.
The PNC Financial Services Group, Inc. –Form 10-Q27
Recently Issued Accounting Standards
Revenue Recognition
In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP with one accounting model. The core principle of the guidance is that an entity should recognize
revenue to depict the satisfaction of a performance obligation by transfer of promised goods or services to customers. The ASU also requires additional qualitative and quantitative disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has subsequently released several amendments to ASU 2014-09.
In August 2015, the FASB issued guidance deferring the mandatory effective date of the ASU 2014-09 for one year, to annual reporting periods beginning after December 15, 2017. In MarchDuring 2016, the FASB has also issued three separate ASUs which amend the original standard to clarify guidance clarifying how an entity should assess whether it is aregarding principal or anversus agent with respect to the delivery of promised goods or services to customers, which impacts whether revenue should be recorded on a gross or net basis. Finally, in April 2016, the FASB issued additional guidance onconsiderations, identifying performance obligations and licensing. licensing, and certain narrow-scope amendments which address the presentation of sales tax, noncash consideration, contract modifications at transition and assessing collectability.
The requirements within ASU 2014-09 and its subsequent amendments should be applied retrospectively to each prior period presented (with several practical expedients for certain completed contracts) or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application.application (i.e., modified retrospective application). We plan to adopt the ASU consistent with the deferred mandatory effective date.date using the modified retrospective approach. Based on our evaluation to date, we do not expect the adoption of this standard to have a significant impact on our consolidated results of operations or our consolidated financial position.
Financial Instruments
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU changes the accounting for certain equity investments, financial liabilities under the fair value option and presentation and disclosure requirements for financial instruments. Equity investments not accounted for under the equity method of accounting will be measured at fair value with any changes in fair value recognized in net income. The ASU also simplifies the impairment assessment of equity investments for which fair value is not readily determinable. Additionally, the ASU changes the presentation of certain fair value changes for financial liabilities measured at fair value; and amends certain disclosure requirements relating to the fair value of financial instruments. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and should be applied using a modified retrospective approach through a cumulative-effect adjustment to the balance sheet, except for the amendment related to equity securities without readily determinable fair values, which should be applied prospectively. We plan to adopt all provisions consistent with
the effective date and are currently evaluating the impact of this ASU on our results of operations and financial position.
28 The PNC Financial Services Group, Inc. –Form 10-Q
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The primary change in the new guidance is the recognition of lease assets and lease liabilities by lessees for operating leases. The ASU requires lessees to recognize a right-of-use asset and related lease liability for all leases with lease terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 using a modified retrospective approach through a cumulative-effect adjustment. Early adoption is permitted. We are currently evaluating the impact of adopting this standard.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments. The ASU requires the use of an expected credit loss methodology; specifically, expected credit losses for the remaining life of the asset will be recognized at the time of origination or acquisition. The expected credit loss methodology will apply to loans, debt securities, and other financial assets and net investment in leases not accounted for at fair value through net income. It will also apply to off-balance sheet credit exposures except for unconditionally cancellable commitments. Assets in the scope of the ASU, except for purchased credit deteriorated assets, will be presented at the net amount expected to be collected after deducting the allowance for credit losses from the amortized cost basis of the assets.
Enhanced credit quality disclosures will be required including disaggregation of credit quality indicators by vintage. The development of an expected credit loss methodology and new disclosures will require significant data collection, loss model upgrades, and process re-development prior to adoption. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact of adopting this standard.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):Classification of Certain Cash Receipts and Cash Payments.The ASU provides guidance on eight specific issues related to classification within the statement of cash flows with the objective of reducing existing diversity in practice. The specific issues cover cash payments for debt prepayment or debt extinguishment costs; cash outflows for settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are
insignificant; contingent consideration payments that are not made soon after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests received in securitization transactions; and clarifies that when no specific GAAP guidance exists and the source of the cash flows are not separately identifiable, then the predominant source of cash flows should be used to determine the classification for the item. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. We are currently evaluating the impact of adopting this standard.
Recently Adopted Accounting Standards
See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements included in Part I, Item I of this Report regarding the impact of new accounting pronouncements adopted in 2016.
STATUSOF QUALIFIED DEFINED BENEFIT PENSION PLAN
We have a noncontributory, qualified defined benefit pension plan (plan or pension plan) covering eligible employees. Benefits are determined using a cash balance formula where earnings credits are applied as a percentage of eligible compensation. We calculate the expense associated with the pension plan and the assumptions and methods that we use include a policy of reflecting plan assets at their fair market value. Annually, we review the actuarial assumptions for the pension plan.
We currently estimate pretax pension expense of $43 million for 2016 compared with pretax expense of $9 million in 2015. This year-over-year expected increase in expense is mainly due to lower than expected asset returns during 2015, which reduced year-end pension asset balances and increased the amortization of actuarial losses in 2016.
28 The PNC Financial Services Group, Inc. –Form 10-Q
The table below reflects the estimated effects on pension expense of certain changes in annual assumptions, using 2016 estimated expense as a baseline.
Table 23: Pension Expense – Sensitivity Analysis
Change in Assumption (a) (In millions) | Estimated Increase to 2016 Pension Expense | |||
.5% decrease in discount rate | $ | 18 | ||
.5% decrease in expected long-term return on assets | $ | 21 | ||
.5% increase in compensation rate | $ | 2 | ||
We provide additional information on our pension plan in Note 12 Employee Benefit Plans in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K.
RECOURSEAND REPURCHASE OBLIGATIONS
As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in our 2015 Form 10-K, PNC has sold commercial mortgage, residential mortgage and home equity loans/lines of credit directly or indirectly through securitization and loan sale transactions in which we have continuing involvement. One form of continuing involvement includes certain recourse and loan repurchase obligations associated with the transferred assets. For additional discussion regarding our recourse and repurchase obligations, see the Recourse and Repurchase Obligations section in Item 7 of our 2015 Form 10-K.
The Risk Management section included in Item 7 of our 2015 Form 10-K describes our enterprise risk management framework including risk appetite and strategy, risk culture, risk organization and governance, risk identification and quantification, risk control and limits, and risk monitoring and reporting. Additionally, our 2015 Form 10-K provides an analysis of our key areas of risk, which include but are not limited to credit, operational, compliance, model, liquidity and market. Our use of financial derivatives as part of our overall asset and liability risk management process is also addressed within the Risk Management section.
The following information updates our 2015 Form 10-K risk management disclosures.
The PNC Financial Services Group, Inc. –Form 10-Q29
Credit Risk Management
See the Credit Risk Management portion of the Risk Management section in our 2015 Form 10-K for additional discussion regarding credit risk.
Asset Quality Overview
Asset quality trends remained relatively stable during the first threenine months of 2016, except for certain energy related loans.2016.
Provision for credit losses for the firstthird quarter of 2016 increased modestly to $152$87 million compared to $54$81 million for the firstthird quarter of 2015. The first quarterFor the nine months ended September 30, 2016, provision for credit losses increased to $366 million compared with $181 million for the nine months ended September 30, 2015. During the first nine months of 2016, the provision included $80$130 million for energy related loans in the oil, gas, and coal sectors.sectors compared to $86 million for the first nine months of 2015. The increase in provision also reflected slowing credit quality improvement in the commercial and consumer lending portfolios and the impact of continued loan growth.
Nonperforming assets at March 31,September 30, 2016 increased $127decreased $50 million compared with December 31, 2015 due to declining home equity and residential real estate nonperforming loans, and lower other real estate owned (OREO) and foreclosed assets, partially offset by higher nonperforming commercial loans driven by energy related loans, partially offset by declining commercial real estate and consumer lending nonperforming loans. Nonperforming assets were 0.71%0.64% of total assets at March 31,September 30, 2016 compared with 0.68% at December 31, 2015.
Overall loan delinquencies totaled $1.5 billion at March 31,September 30, 2016, a decrease of $143$184 million, or 9%11%, from year-end 2015. The reduction was due in large part to a reduction in accruing government insured consumer lending loans past due of $95 million.
large part to a decrease in accruing government insured residential real estate and education past due loans of $117 million. |
Net charge-offs were $149 million infor the firstthird quarter of 2016 up 45%, or $46increased to $154 million fromcompared to $96 million for the third quarter of 2015. For the nine months ended September 30, 2016, net charge-offs inincreased to $437 million compared with $266 million for the first quarter of 2015 due tonine months ended September 30, 2015. Increases were driven by higher commercial loan net charge-offs.
The level of ALLL remaineddecreased to $2.6 billion at September 30, 2016 from $2.7 billion at both March 31, 2016 and December 31, 2015.
Nonperforming Assets and Loan Delinquencies
Nonperforming Assets, including OREO and Foreclosed Assets
Nonperforming assets include nonperforming loans and leases for which ultimate collectability of the full amount of contractual principal and interest is not probable and include nonperforming troubled debt restructurings (TDRs), OREO and foreclosed assets. Loans held for sale, certain government insured or guaranteed loans, purchased impaired loans and loans accounted for under the fair value option are excluded from nonperforming loans. Additional information regarding our nonperforming loans and nonaccrual policies is included in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.our 2015 Form 10-K. A summary of the major categories of nonperforming assets are presented in Table 24.23. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in this Report for further detail of nonperforming asset categories.
The PNC Financial Services Group, Inc. –Form 10-Q29
Table 24:23: Nonperforming Assets By Type
Dollars in millions | September 30 2016 | December 31 2015 | Change | |||||||||||||||||||||
| March 31 2016 | December 31 2015 | $ | % | |||||||||||||||||||||
Nonperforming loans | ||||||||||||||||||||||||
Commercial lending | $ | 732 | $ | 545 | $ | 691 | $ | 545 | $ | 146 | 27 | % | ||||||||||||
Consumer lending (a) | 1,549 | 1,581 | 1,455 | 1,581 | (126 | ) | (8 | )% | ||||||||||||||||
Total nonperforming loans (b)(c) | 2,281 | 2,126 | ||||||||||||||||||||||
Total nonperforming loans (b) (c) | 2,146 | 2,126 | 20 | 1 | % | |||||||||||||||||||
OREO and foreclosed assets | 271 | 299 | 229 | 299 | (70 | ) | (23 | )% | ||||||||||||||||
Total nonperforming assets | $ | 2,552 | $ | 2,425 | $ | 2,375 | $ | 2,425 | $ | (50 | ) | (2 | )% | |||||||||||
Amount of TDRs included in nonperforming loans | $ | 1,172 | $ | 1,119 | $ | 1,177 | $ | 1,119 | $ | 58 | 5 | % | ||||||||||||
Percentage of total nonperforming loans | 51 | % | 53 | % | 55 | % | 53 | % | ||||||||||||||||
Nonperforming loans to total loans | 1.10 | % | 1.03 | % | 1.02 | % | 1.03 | % | ||||||||||||||||
Nonperforming assets to total loans, OREO and foreclosed assets | 1.23 | 1.17 | 1.13 | % | 1.17 | % | ||||||||||||||||||
Nonperforming assets to total assets | .71 | .68 | .64 | % | .68 | % | ||||||||||||||||||
Allowance for loan and lease losses to total nonperforming loans | 119 | 128 | 122 | % | 128 | % | ||||||||||||||||||
| (a) | Excludes most consumer loans and lines of credit, not secured by residential real estate, which are charged off after 120 to 180 days past due and are not placed on nonperforming status. |
| (b) | Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. |
| (c) | The recorded investment of loans collateralized by residential real estate property that are in process of foreclosure was |
30 The PNC Financial Services Group, Inc. –Form 10-Q
Table 25:24: Change in Nonperforming Assets
| In millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
January 1 | $ | 2,425 | $ | 2,880 | $ | 2,425 | $ | 2,880 | ||||||||
New nonperforming assets | 542 | 336 | 1,317 | 1,089 | ||||||||||||
Charge-offs and valuation adjustments | (161 | ) | (124 | ) | (472 | ) | (367 | ) | ||||||||
Principal activity, including paydowns and payoffs | (98 | ) | (170 | ) | (418 | ) | (544 | ) | ||||||||
Asset sales and transfers to loans held for sale | (90 | ) | (93 | ) | (279 | ) | (296 | ) | ||||||||
Returned to performing status | (66 | ) | (75 | ) | (198 | ) | (272 | ) | ||||||||
March 31 | $ | 2,552 | $ | 2,754 | ||||||||||||
September 30 | $ | 2,375 | $ | 2,490 | ||||||||||||
Nonperforming assets increased $127 million at March 31, 2016 compared to December 31, 2015. Commercial lending nonperforming loans increased $187 million and consumer lending nonperforming loans decreased $32 million. As of March 31,September 30, 2016, approximately 83%84% of total nonperforming loans were secured by collateral which lessenslessened reserve requirements and is expected to reduce credit losses in the event of default. As of March 31,September 30, 2016, commercial lending nonperforming loans were carried at approximately 67%66% of their unpaid principal balance, due to charge-offs recorded to date, before consideration of the ALLL. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information on these loans.
Within consumer nonperforming loans, residential real estate TDRs comprise 70%72% of total residential real estate nonperforming loans at March 31,September 30, 2016, up from 68% at December 31, 2015. Home equity TDRs comprise 53% of home equity nonperforming loans at March 31,September 30, 2016, up from 51% at December 31, 2015. TDRs generally remain in nonperforming status until a borrower has made at least six consecutive months of both principal and interest payments under the modified terms or ultimate resolution occurs. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.
At March 31,September 30, 2016, our largest nonperforming asset was $55$50 million in the Mining, Quarrying, Oil and Gas Extraction Industry and our average nonperforming loan associated with commercial lending was less than $1 million. The ten largest outstandingindividual nonperforming assets are from the commercial lending portfolio and represent 42%represented 44% and 12%13% of total commercial lending nonperforming loans and total nonperforming assets, respectively, as of March 31,September 30, 2016.
Table 26:25: OREO and Foreclosed Assets
September 30 2016 | December 31 2015 | Change | ||||||||||||||||||||||
| In millions | March 31 2016 | December 31 2015 | $ | % | ||||||||||||||||||||
Other real estate owned (OREO): | ||||||||||||||||||||||||
Residential properties | $ | 135 | $ | 146 | $ | 116 | $ | 146 | $ | (30 | ) | (21 | )% | |||||||||||
Residential development properties | 27 | 31 | 23 | 31 | (8 | ) | (26 | )% | ||||||||||||||||
Commercial properties | 97 | 102 | 78 | 102 | (24 | ) | (24 | )% | ||||||||||||||||
Total OREO | 259 | 279 | 217 | 279 | (62 | ) | (22 | )% | ||||||||||||||||
Foreclosed and other assets | 12 | 20 | 12 | 20 | (8 | ) | (40 | )% | ||||||||||||||||
Total OREO and foreclosed assets | $ | 271 | $ | 299 | $ | 229 | $ | 299 | $ | (70 | ) | (23 | )% | |||||||||||
Total OREO and foreclosed assets decreased $28 million during the first three months of 2016 and were 11%10% of total nonperforming assets at MarchSeptember 30, 2016, compared to 12% at December 31, 2016.2015. As of March 31,September 30, 2016, and December 31, 2015, 60% and 59%, respectively,61% of our OREO and foreclosed assets were comprised of residential related properties.properties, compared to 59% at December 31, 2015.
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.
30The PNC Financial Services Group, Inc. –Form 10-Q31
Table 27:26: Accruing Loans Past Due (a) (b)
| Amount | Percentage of Total Loans Outstanding | |||||||||||||||||||||||||||||||||||
| Amount | Percentage of Total Outstandings | September 30 2016 | December 31 2015 | Change | September 30 2016 | December 31 2015 | ||||||||||||||||||||||||||||||
| Dollars in millions | March 31 2016 | December 31 2015 | March 31 2016 | December 31 2015 | $ | % | ||||||||||||||||||||||||||||||
Early stage loan delinquencies | ||||||||||||||||||||||||||||||||||||
Accruing loans past due 30 to 59 days | $ | 506 | $ | 511 | .24 | % | .25 | % | $ | 454 | $ | 511 | $ | (57 | ) | (11 | )% | .22% | .25% | |||||||||||||||||
Accruing loans past due 60 to 89 days | 209 | 248 | .10 | % | .12 | % | 236 | 248 | (12 | ) | (5 | )% | .11% | .12% | ||||||||||||||||||||||
Total | 715 | 759 | .34 | % | .37 | % | 690 | 759 | (69 | ) | (9 | )% | .33% | .37% | ||||||||||||||||||||||
Late stage loan delinquencies | ||||||||||||||||||||||||||||||||||||
Accruing loans past due 90 days or more | 782 | 881 | .38 | % | .43 | % | 766 | 881 | (115 | ) | (13 | )% | .36% | .43% | ||||||||||||||||||||||
Total | $ | 1,497 | $ | 1,640 | .72 | % | .80 | % | $ | 1,456 | $ | 1,640 | $ | (184 | ) | (11 | )% | .69% | .80% | |||||||||||||||||
| (a) |
| Past due loan amounts at |
Total early stage loan delinquencies (accruing loans past due 30 to 89 days) decreased $44 million, or 6%, at March 31,September 30, 2016 compared to December 31, 2015 driven bydue primarily to reductions in consumer early stage delinquencies.
Accruing loans past due 90 days or more decreased $99 million, or 11 %, at March 31,September 30, 2016 compared to December 31, 2015 due todriven by declines in government insured residential real estate and other consumer lending loans of $89 million.loans. Accruing loans past due 90 days or more are referred to as late stage loan delinquencies. These loans are not included in nonperforming loans and continue to accrue interest because they are well secured by collateral and are in the process of collection, or are managed in homogenous portfolios with specified charge-off timeframes adhering to regulatory guidelines, or are certain government insured or guaranteed loans.
On a regular basis our Special Asset Committee closely monitors loans, primarily commercial loans, that are not included in the nonperforming or accruing past due categories and for which we are uncertain about the borrower’s ability to comply with existing repayment terms. These loans totaled $.3 billion and $.1 billion at March 31,September 30, 2016 and December 31, 2015, respectively.
See Note 1 Accounting Policies and Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information regarding our nonperforming loan and nonaccrual policies and further information on loan delinquencies.
Home Equity Loan Portfolio
Our home equity loan portfolio totaled $31.5$30.4 billion as of March 31,September 30, 2016, or 15%14% of the total loan portfolio. Of that total, $18.5$18.0 billion, or 59%, waswere outstanding under primarily variable-rate home equity lines of credit and $13.0$12.4 billion, or 41%, consisted of closed-end home equity installment loans. Approximately 4% of the home equity portfolio was purchased impaired and 3% of the home equity portfolio was on nonperforming status as of March 31,September 30, 2016.
As of March 31,September 30, 2016, we arewere in an originated first lien position for approximately 54% of the total outstanding portfolio and, where originated as a second lien, we currently holdheld or serviceserviced the first lien position for an additional 2%3% of the portfolio. The remaining 44%43% of the portfolio was secured by second liens where we do not hold the first lien position. The credit performance of the majority of the home equity
portfolio where we are in, hold or service the first lien position, is superior to the portion of the portfolio where we hold the second lien position but do not hold the first lien.
Generally, our variable-rate home equity lines of credit have either a seven or ten year draw period, followed by a 20-year amortization term. During the draw period, we have home equity lines of credit where borrowers pay either interest only or principal and interest. We view home equity lines of credit where borrowers are paying principal and interest under the draw period as less risky than those where the borrowers are paying interest only, as these borrowers have a demonstrated ability to make some level of principal and interest payments. The risk associated with the borrower’s ability to satisfy the loan terms upon the draw period ending is considered in establishing our ALLL. Based upon outstanding balances at March 31,September 30, 2016, the following table presents the periods when home equity lines of credit draw periods are scheduled to end.
Table 28:27: Home Equity Lines of Credit – Draw Period End Dates
| In millions | Interest Only Product | Principal and Interest Product | Interest Only Product | Principal and Interest Product | ||||||||||||
Remainder of 2016 | $ | 801 | $ | 270 | $ | 223 | $ | 72 | ||||||||
2017 | 2,025 | 522 | 1,813 | 473 | ||||||||||||
2018 | 898 | 711 | 830 | 660 | ||||||||||||
2019 | 623 | 553 | 575 | 508 | ||||||||||||
2020 | 494 | 494 | 461 | 457 | ||||||||||||
2021 and thereafter | 2,842 | 5,445 | 2,927 | 6,134 | ||||||||||||
Total (a) (b) | $ | 7,683 | $ | 7,995 | $ | 6,829 | $ | 8,304 | ||||||||
| (a) | Includes all home equity lines of credit that mature in the remainder 2016 or later, including those with borrowers where we have terminated borrowing privileges. |
| (b) | Includes |
32The PNC Financial Services Group, Inc. –Form 10-Q31
Based upon outstanding balances, and excluding purchased impaired loans, at March 31,September 30, 2016, for home equity lines of credit for which the borrower can no longer draw (e.g., draw period has ended or borrowing privileges have been terminated), approximately 3% were 30-89 days past due and approximately 5% were 90 days or more past due.due, which are accounted for as nonperforming. Generally, when a borrower becomes 60 days past due, we terminate borrowing privileges and those privileges are not subsequently reinstated. At that point, we continue our collection/recovery processes, which may include loan modification resulting in a loan that is classified as a TDR.
See the Credit Risk Management portion of the Risk Management section in our 2015 Form 10-K for more information on our home equity loan portfolio. See also Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.
Auto Loan Portfolio
The auto loan portfolio totaled $11.2$11.9 billion as of March 31,September 30, 2016, or 5%6% of our total loan portfolio. Of that total, $9.6$10.4 billion resides in the indirect auto portfolio, $1.1$1.2 billion in the direct auto portfolio, and $.5$.3 billion in acquired or securitized portfolios, which has been declining as no pools have been recently acquired. The indirect auto portfolio is the largest segment and generatesIndirect auto loan applications are generated from franchised automobile dealers. This business is strategically aligned with our core retail business.
We have elected not to pursue non-prime auto lending as evidenced by an average new loan origination FICO score over the last twelve months of 759760 for indirect auto loans and 773776 for direct auto loans. As of March 31,September 30, 2016, 0.3%.3% of theour auto loan portfolio was nonperforming and 0.4%.4% of our auto loanthe portfolio was accruing past due. We offer both new and used automobile financing to customers through our various channels. The portfolio comprised 59%was composed of 58% new vehicle loans and 41%42% used vehicle loans at March 31,September 30, 2016.
The auto loan portfolio’s performance is measured monthly, including updated collateral values that are obtained monthly and updated FICO scores that are obtained at least quarterly. For internal reporting and risk management, we analyze the portfolio by product channel and product type, and regularly evaluate default and delinquency experience. As part of our overall risk analysis and monitoring, we segment the portfolio by loan structure, collateral attributes, and credit metrics which include FICO score, loan-to-value and term.
Energy Related Loan Portfolio
Our portfolio of loans outstanding in the oil and gas industry totaled $2.7$2.5 billion as of March 31,September 30, 2016, or 1% of our total loan portfolio and 2% of our total commercial lending portfolio. This portfolio comprised approximately $1.0 billion in the midstream and downstream sectors, $.9 billion to oil services companies and $.8$.6 billion to upstream sectors. Of the
oil services portfolio, approximately $.2 billion is not asset-basedasset-
based or investment grade. Nonperforming loans in the oil and gas sector as of March 31,September 30, 2016 totaled $161$197 million, or 6%8% of total nonperforming assets.
Our portfolio of loans outstanding in the coal industry totaled $.5 billion as of March 31,September 30, 2016, or less than 1% of both our total loan portfolio and our total commercial lending portfolio. Nonperforming loans in the coal industry as of March 31,September 30, 2016 totaled $140$63 million, or 5%3% of total nonperforming assets.
Our ALLL at March 31, 2016 reflects the incremental impact of the continued decline in energy prices. Higher reserves for oil, gas and coal exposure drove the overall increase in the provision for credit losses. For the first quarter of 2016, $80 million, or 53%, of the provision was related to these sectors. Net charge-offs related to energy loans totaled $25 million for the three months ended March 31, 2016, or 17% of total net-charge-offs.
Loan Modifications and Troubled Debt Restructurings
Consumer Loan Modifications
We modify loans under government and PNC-developed programs based upon our commitment to help eligible homeowners and borrowers avoid foreclosure, where appropriate. Initially, a borrower is evaluated for a modification under a government program. If a borrower does not qualify under a government program, the borrower is then evaluated under a PNC program. Our programs utilize both temporary and permanent modifications and typically reduce the interest rate, extend the term and/or defer principal. Loans that are either temporarily or permanently modified under programs involving a change to loan terms are generally classified as TDRs. Further, loans that have certain types of payment plans and trial payment arrangements which do not include a contractual change to loan terms may be classified as TDRs. Additional detail on TDRs is discussed below as well as in Note 3 Asset Quality in our 2015 Form 10-K.
A temporary modification, with a term between 3three and 24 months, involves a change in original loan terms for a period of time and reverts to a calculated exit rate for the remaining term of the loan as of a specific date. A permanent modification, with a term greater than 24 months, is a modification in which the terms of the original loan are changed. Permanent modification programs, including both government-created Home Affordable Modification Program (HAMP) and PNC-developed modification programs, generally result in principal forgiveness, interest rate reduction, term extension, capitalization of past due amounts, interest onlyinterest-only period or deferral of principal.
32 The PNC Financial Services Group, Inc. –Form 10-Q
We also monitor the success rates and delinquency status of our loan modification programs to assess their effectiveness in serving our borrowers’ and servicing customers’ needs while
mitigating credit losses. Table 2928 provides the number of accounts and unpaid principal balance of modified consumer real estate related loans at the end of each year presented.
The PNC Financial Services Group, Inc. –Form 10-Q33
Table 29:28: Consumer Real Estate Related Loan Modifications
| March 31, 2016 | December 31, 2015 | September 30, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||
| Dollars in millions | Number of Accounts | Unpaid Principal Balance | Number of Accounts | Unpaid Principal Balance | Number of Accounts | Unpaid Principal Balance | Number of Accounts | Unpaid Principal Balance | ||||||||||||||||||||||||
Temporary modifications (a) | 4,083 | $ | 309 | 4,469 | $ | 337 | 3,672 | $ | 273 | 4,469 | $ | 337 | ||||||||||||||||||||
Permanent modifications | ||||||||||||||||||||||||||||||||
Home equity | 15,339 | 1,099 | 15,268 | 1,088 | 15,543 | 1,108 | 15,268 | 1,088 | ||||||||||||||||||||||||
Residential real estate | 8,474 | 1,649 | 8,787 | 1,721 | 8,410 | 1,615 | 8,787 | 1,721 | ||||||||||||||||||||||||
Total permanent modifications | 23,813 | 2,748 | 24,055 | 2,809 | 23,953 | 2,723 | 24,055 | 2,809 | ||||||||||||||||||||||||
Total consumer real estate related loan modifications | 27,896 | $ | 3,057 | 28,524 | $ | 3,146 | 27,625 | $ | 2,996 | 28,524 | $ | 3,146 | ||||||||||||||||||||
| (a) | All temporary modifications are home equity loans. |
In addition to temporary loan modifications, we may make a payment plan or a HAMP trial payment period available to a borrower. Under a payment plan or a HAMP trial payment period, there is no change to the loan’s contractual terms so the borrower remains legally responsible for payment of the loan under its original terms.
Payment plans may include extensions, re-ages and/or forbearance plans. All payment plans bring an account current once certain requirements are achieved and are primarily intended to demonstrate a borrower’s renewed willingness and ability to re-pay.repay. Due to the short term nature of the payment plan, there is a minimal impact to the ALLL.
Under a HAMP trial payment period, we establish an alternate payment, generally at an amount less than the contractual payment amount, for the borrower during this short time period. This allows a borrower to demonstrate successful payment performance before permanently restructuring the loan into a HAMP modification. Subsequent to successful borrower performance under the trial payment period, we will capitalize the original contractual amount past due, to include accrued interest and fees receivable, and restructure the loan’s contractual terms, along with bringing the restructured account current. As the borrower is often already delinquent at the time of participation in the HAMP trial payment period, generally enrollment in the program does not significantly increase the ALLL. If the trial payment period is unsuccessful, the loan will be evaluated for further action based upon our existing policies. After December 31, 2016, the government-created HAMP program will expire. As such, no new modifications will be offered under the program after that date.
Commercial Loan Modifications and Payment Plans
Modifications of terms for commercial loans are based on individual facts and circumstances. Commercial loan modifications may involve reduction of the interest rate, extension of the loan term and/or forgiveness of principal.
Modified commercial loans are usually already nonperforming prior to modification. We evaluate these modifications for TDR classification based upon whether we granted a concession to a borrower experiencing financial difficulties. Additional detail on TDRs is discussed below as well as in Note 3 Asset Quality in our 2015 Form 10-K.
We have established certain commercial loan modification and payment programs for small business loans, Small Business Administration loans, and investment real estate loans. As of March 31,September 30, 2016 and December 31, 2015, $22 million and $23 million, respectively, inthe loan balances were covered under these modification and payment plan programs. Of these loan balances, $8 million and $9 million have beenprograms, including those determined to be TDRs, as of March 31, 2016 and December 31, 2015, respectively.were not significant.
Troubled Debt Restructurings
A TDR is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs result from our loss mitigation activities and include rate reductions, principal forgiveness, postponement/reduction of scheduled amortization and extensions, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Additionally, TDRs also result from court imposed concessions (e.g.(e.g. a Chapter 7 bankruptcy thatwhere the debtor is discharged from personal liability to PNC and a court approved Chapter 13 bankruptcy repayment plan).
TDRs totaled $2.4 billion at March 31,September 30, 2016, an increase of $40$8 million or 2%, during the first threenine months of 2016. Excluded from TDRs are $1.1 billion and $1.2 billion of consumer loans held for sale, loans accounted for under the fair value option and pooled purchased impaired loans, as well as certain government insured or guaranteed loans at both March 31,September 30, 2016 and December 31, 2015.2015, respectively. Nonperforming TDRs representrepresented approximately 51%55% and 53% of total nonperforming loans, and 49%50% and 48% of total TDRs at March 31,September 30, 2016 and
The PNC Financial Services Group, Inc. –Form 10-Q33
December 31, 2015, respectively. The remaining portion of TDRs represents TDRs that have been returned to accrual accounting after performing under the restructured terms for at least six consecutive months.
See Note 3 Asset Quality and Note 1 Accounting Policies in Part I, Item 1 of this report for additional information on loan modifications and TDRs.
34 The PNC Financial Services Group, Inc. –Form 10-Q
Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit
Table 30:29: Loan Charge-Offs And Recoveries
Three months ended March 31 Dollars in millions | Gross Charge-offs | Recoveries | Net Charge-offs / | Percent of Average Loans (annualized) | ||||||||||||||||||||||||||||
Nine months ended September 30 Dollars in millions | Gross Charge-offs | Recoveries | Net Charge-offs / | Percent of Average Loans (annualized) | ||||||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||
Commercial | $ | 78 | $ | 33 | $ | 45 | .18 | % | $ | 271 | $ | 87 | $ | 184 | .25 | % | ||||||||||||||||
Commercial real estate | 10 | 12 | (2 | ) | (.03 | ) | 22 | 37 | (15 | ) | (.07 | )% | ||||||||||||||||||||
Equipment lease financing | 1 | 1 | 4 | 9 | (5 | ) | (.09 | )% | ||||||||||||||||||||||||
Home equity | 48 | 21 | 27 | .34 | 115 | 63 | 52 | .22 | % | |||||||||||||||||||||||
Residential real estate | 8 | 3 | 5 | .14 | 11 | 7 | 4 | .04 | % | |||||||||||||||||||||||
Credit card | 42 | 4 | 38 | 3.23 | 122 | 14 | 108 | 2.99 | % | |||||||||||||||||||||||
Other consumer | 49 | 13 | 36 | .67 | 147 | 38 | 109 | .67 | % | |||||||||||||||||||||||
Total | $ | 236 | $ | 87 | $ | 149 | .29 | $ | 692 | $ | 255 | $ | 437 | .28 | % | |||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
Commercial | $ | 34 | $ | 32 | $ | 2 | .01 | % | $ | 145 | $ | 139 | $ | 6 | .01 | % | ||||||||||||||||
Commercial real estate | 12 | 12 | 29 | 46 | (17 | ) | (.09 | )% | ||||||||||||||||||||||||
Equipment lease financing | 1 | (1 | ) | (.05 | ) | 2 | 3 | (1 | ) | (.02 | )% | |||||||||||||||||||||
Home equity | 52 | 20 | 32 | .38 | 139 | 69 | 70 | .28 | % | |||||||||||||||||||||||
Residential real estate | 2 | (2 | ) | (.06 | ) | 17 | 10 | 7 | .07 | % | ||||||||||||||||||||||
Credit card | 43 | 5 | 38 | 3.46 | 121 | 16 | 105 | 3.13 | % | |||||||||||||||||||||||
Other consumer | 48 | 14 | 34 | .61 | 136 | 40 | 96 | .58 | % | |||||||||||||||||||||||
Total | $ | 189 | $ | 86 | $ | 103 | .20 | $ | 589 | $ | 323 | $ | 266 | .17 | % | |||||||||||||||||
Net charge-offs increased by $46$171 million, or 45%64%, in the first quarternine months of 2016 compared to the first quarternine months of 2015 due to higher commercial loan net charge-offs. Total net charge-offs exclude write-offs and recoveries related to purchased impaired loans.
We maintain an ALLL to absorb losses from the loan and lease portfolio and determine this allowance based on quarterly assessments of the estimated probable credit losses incurred in the loan and lease portfolio. Our total ALLL of $2.7$2.6 billion at March 31,September 30, 2016 consisted of $1.6$1.5 billion and $1.1 billion established for the commercial lending and consumer lending categories, respectively. We maintain the
ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan and lease portfolio as of the balance sheet date. The reserve calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan and lease portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.
We establish specific allowances for loans considered impaired using methods prescribed by GAAP. All impaired loans are subject to individual analysis, except leases and large groups of smaller-balance homogeneous loans which may include, but are not limited to, credit card, residential real estate secured and consumer installment loans. Specific allowances for individual loans (including commercial and
consumer TDRs) are determined based on an analysis of the present value of expected future cash flows from the loans discounted at their effective interest rate, observable market price or the fair value of the underlying collateral.
Reserves allocated to non-impaired commercial loan classes are based on PDprobability of default (PD) and LGDloss given default (LGD) credit risk ratings.
Our commercial pool reserve methodology is sensitive to changes in key risk parameters such as PD and LGD. The results of these parameters are then applied to the loan balance and unfunded loan commitments and letters of credit to determine the amount of the respective reserves. 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 lossloan data and will periodically updaterefine our PDs and LGDs as well as consider third-party data, regulatory guidance and management judgment.
The majority of the commercial portfolio is secured by collateral, including loans to asset-based lending customers, which generally demonstrate lower LGD compared to loans not secured by collateral. Additionally, guarantees on loans greater than $1 million and owner guarantees for small business loans do not significantly impact our ALLL.
Allocations to non-impaired consumer loan classes are primarily based upon a roll-rate model which uses statistical relationships, calculated from historical data that estimate the movement of loan outstandings through the various stages of delinquency and ultimately charge-off.
The PNC Financial Services Group, Inc. –Form 10-Q35
A portion of the ALLL is related to qualitative and measurement factors. These factors may include, but are not limited to, the following:
Industry concentrations and conditions,
Recent credit quality trends,
Recent loss experience in particular portfolios,
34 The PNC Financial Services Group, Inc. –Form 10-Q
Recent macro-economic factors,
Model imprecision,
Changes in lending policies and procedures,
Timing of available information, including the performance of first lien positions, and
Limitations of available historical data.
Purchased impaired loans are initially recorded at fair value and applicable accounting guidance prohibits the carry over or creation of valuation allowances at acquisition. Because the initial fair values of these loans already reflect a credit component, additional reserves are established when performance is expected to be worse than our expectations as of the acquisition date. At March 31,September 30, 2016, we had reserves of $.3 billion for purchased impaired loans. In addition, loans (purchased impaired and non-impaired) acquired after January 1, 2009 were recorded at fair value. No allowance for loan losses was carried over and no allowance was created at the date of acquisition. See Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information.
In determining the appropriateness of the ALLL, we make specific allocations to impaired loans and allocations to portfolios of commercial and consumer loans. We also allocate reserves to provide coverage for probable losses incurred in the portfolio at the balance sheet date based upon current market conditions, which may not be reflected in historical loss data. Commercial lending is the largest category of credits and is sensitive to changes in assumptions and judgments underlying the determination of the ALLL. We have allocated approximately $1.6 billion, or 60%, of the ALLL at March 31, 2016 to the commercial lending category. Consumer lending allocations are made based on historical loss experience adjusted for recent activity. Approximately $1.1 billion, or 40%, of the ALLL at March 31, 2016 has been allocated to these consumer lending categories.
In addition to the ALLL, we maintain an allowance for unfunded loan commitments and letters of credit. We report this allowance as a liability on our Consolidated Balance Sheet. We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable losses on these unfunded credit facilities. We determine this amount using estimates of the probability of the ultimate funding and losses related to those credit exposures. Other than the estimation of the probability of funding, this methodology is very similar to the one we use for determining our ALLL.
We refer you toSee Note 1 Accounting Policies in our 2015 Form 10-K and Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for further information on certain key asset quality indicators that we use to evaluate our portfolios and establish the allowances.
Table 31:30: Allowance for Loan and Lease Losses
| Dollars in millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
January 1 | $ | 2,727 | $ | 3,331 | $ | 2,727 | $ | 3,331 | ||||||||
Total net charge-offs | (149 | ) | (103 | ) | (437 | ) | (266 | ) | ||||||||
Provision for credit losses | 152 | 54 | 366 | 181 | ||||||||||||
Net change in allowance for unfunded loan commitments and letters of credit | (21 | ) | 25 | (49 | ) | (7 | ) | |||||||||
Net recoveries of purchased impaired loans | 1 | |||||||||||||||
Other | 1 | (1 | ) | |||||||||||||
March 31 | $ | 2,711 | $ | 3,306 | ||||||||||||
Net charge-offs to average loans (for the three months ended) (annualized) | .29 | % | .20 | % | ||||||||||||
Net recoveries of purchased impaired loans and other | 12 | (2 | ) | |||||||||||||
September 30 | $ | 2,619 | $ | 3,237 | ||||||||||||
Net charge-offs to average loans (for the nine months ended) (annualized) | .28 | % | .17 | % | ||||||||||||
Total allowance for loan and lease losses to total loans (a) | 1.31 | 1.61 | 1.24 | % | 1.58 | % | ||||||||||
Commercial lending net charge-offs | $ | (43 | ) | $ | (1 | ) | ||||||||||
Commercial lending (net charge-offs) / recoveries | $ | (164 | ) | $ | 12 | |||||||||||
Consumer lending net charge-offs | (106 | ) | (102 | ) | (273 | ) | (278 | ) | ||||||||
Total net charge-offs | $ | (149 | ) | $ | (103 | ) | $ | (437 | ) | $ | (266 | ) | ||||
Net charge-offs to average loans (for the three months ended) (annualized) | ||||||||||||||||
Net charge-offs / (recoveries) to average loans (for the nine months ended) (annualized) | ||||||||||||||||
Commercial lending | .13 | % | .00 | % | .16 | % | (.01 | )% | ||||||||
Consumer lending | .59 | .55 | .50 | % | .50 | % | ||||||||||
| (a) | See Note 1 Accounting Policies in our 2015 Form 10-K for information on our change in derecognition policy effective December 31, 2015 for certain purchased impaired loans. |
The provision for credit losses increased to $152$366 million for the first threenine months of 2016 compared to $54$181 million for the first threenine months of 2015, primarily driven by reserves for energy related exposure. Forexposure, slowing credit quality improvement and the first three monthsimpact of 2016, the provision for commercial lending credit losses increased by $86 million from the first three months of 2015. The provision for consumer lending credit losses increased $12 million, or 21%, from the first three months of 2015.continued loan growth.
At March 31,September 30, 2016, total ALLL to total nonperforming loans was 119%122%. The comparable amount for December 31, 2015 was 128%. These ratios are 91% and 98%, respectively, when excluding the $.7 billion and $.6 billion of ALLL at both March 31,September 30, 2016 and December 31, 2015, respectively, allocated to consumer loans and lines of credit not secured by residential real estate and purchased impaired loans. We have excluded consumer loans and lines of credit not secured by real estate as they are charged off after 120 to 180 days past due and not placed on nonperforming status. Additionally, we have excluded purchased impaired loans as they are considered performing regardless of their delinquency status as interest is accreted in accordance with ASC 310-30 based on the recorded investment balance. See Table 2423 within this Credit Risk Management section for additional information.
The ALLL balance increases or decreases across periods in relation to fluctuating risk factors, including asset quality trends, net charge-offs and changes in aggregate portfolio balances. During the first threenine months of 2016, overall credit
The PNC Financial Services Group, Inc. –Form 10-Q35
quality remained relatively stable offsetting impacts from certain energy related loans, which resulted in an essentially flata slight ALLL balance decline of $.1 billion, or 4% to $2.6 billion as of March 31,September 30, 2016 compared to December 31, 2015.
36 The PNC Financial Services Group, Inc. –Form 10-Q
See Note 1 Accounting Policies in our 2015 Form 10-K and Note 4 Purchased LoansAllowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report regarding changes infor additional information on the ALLL and in the allowance for unfunded loan commitments and letters of credit.
Liquidity Risk Management
Liquidity risk, including our liquidity monitoring measures and tools, is described in further detail in the Liquidity Risk Management section of our 2015 Form 10-K.
One of the ways PNC monitors its liquidity is by reference to the Liquidity Coverage Ratio (LCR), a regulatory minimum liquidity requirement designed to ensure that covered banking organizations maintain an adequate level of liquidity to meet net liquidity needs over the course of a 30-day stress scenario. The LCR is calculated by dividing the amount of an institution’s high quality, unencumbered liquid assets (HQLA), as defined and calculated in accordance with the LCR rules, by its estimated net cash outflow,outflows, with net cash outflows determined by applying the assumed outflow factors in the LCR rules. The resulting quotient is expressed as a percentage. For PNC and PNC Bank, the LCR became effective January 1, 2015. The minimum required LCR will be phased-in over a period of years. The minimum LCR that PNC and PNC Bank wereare required to maintain was 80% in 2015 and such minimum increased tois 90% in 2016. Between January 1, 2016 and June 30, 2016, PNC and PNC Bank arewere required to calculate the LCR on a month-end basis. Effective July 1, 2016, PNC and PNC Bank must beginbegan calculating their respectivethe LCR ratios on a daily basis.
As of March 31,September 30, 2016, the LCR for PNC and PNC Bank exceeded 100 percent.the 2017 fully phased-in requirement of 100%.
We provide additional information regarding regulatory liquidity requirements and their potential impact on PNC in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of our 2015 Form 10-K.
Bank Level Liquidity – Uses
At the bank level, primary contractual obligations include funding loan commitments, satisfying deposit withdrawal requests and maturities and debt service related to bank borrowings. As of March 31,September 30, 2016, there were approximately $9.8$10.5 billion of bank borrowings with contractual maturities of less than one year, including $2.3$1.1 billion in borrowings from an affiliate. We also maintain adequate bank liquidity to meet future potential loan demand and provide for other business needs, as necessary.
Bank Level Liquidity – Sources
Our largest source of bank liquidity on a consolidated basis is the deposit base generated by our retail and commercial banking businesses. Total deposits increased to $250.4$259.9 billion at March 31,September 30, 2016 from $249.0 billion at December 31, 2015, driven by growth in savings deposits and demand deposits, partially offset by a decline in money market deposits and time deposits in foreign offices and other time deposits. Assets determined by PNC to be liquid (liquid assets) and unused borrowing capacity from a number of sources are also available to maintain our liquidity position. Borrowed funds come from a diverse mix of short-term and long-term funding sources.
At March 31,September 30, 2016, our liquid assets consisted of short-term investments (Federal funds sold, resale agreements, trading securities and interest-earning deposits with banks) totaling $32.5$30.4 billion and securities available for sale totaling $57.4$61.9 billion. The level of liquid assets fluctuates over time based on many factors, including market conditions, loan and deposit growth and balance sheet management activities. Of our total liquid assets of $89.9$92.3 billion, we had $4.9$3.5 billion of securities available for sale and trading securities pledged as collateral to secure public and trust deposits, repurchase agreements and for other purposes. In addition to the liquid assets we pledged, $6.1$6.5 billion of securities held to maturity were also pledged as collateral for these purposes.
In addition to the customer deposit base, which has historically provided the single largest source of relatively stable and low-cost funding, the bank also obtains liquidity through the issuance of traditional forms of funding, including long-term debt (senior notes, subordinated debt and FHLB advances) and short-term borrowings (Federal funds purchased, securities sold under repurchase agreements, commercial paper and other short-term borrowings).
36 The PNC Financial Services Group, Inc. –Form 10-Q
Under PNC Bank’s 2014 bank note program, dated January 16, 2014 and amended May 22, 2015 and May 27, 2016, PNC Bank may from time to time offer up to $30.0$40.0 billion aggregate principal amount at any one time outstanding of its unsecured senior and subordinated notes with maturity dates more than nine months (in the case of senior notes) and five years or more (in the case of subordinated notes) from their date of issue. The $30.0$40.0 billion of notes includes notes issued by PNC Bank under the 2004 bank note program and those notes PNC Bank has assumed through the acquisition of other banks, in each case for so long as such notes remain outstanding. The terms of the 2014 bank note program, as amended, do not affect any of the bank notes issued prior to January 16, 2014. At March 31,September 30, 2016, , PNC Bank had $24.1$24.9 billion of notes outstanding under this program of which $17.9$18.7 billion was senior bank notes and $6.2 billion was subordinated bank notes. The following table details all issuances during 2016:
The PNC Financial Services Group, Inc. –Form 10-Q37
Table 32:31: PNC Bank Notes Issued During 2016
| Issuance Date | Amount | Description of Issuance | ||
March 4, 2016 | $1.0 billion | Senior notes with a maturity date of March 4, 2019. Interest is payable semi-annually at a fixed rate of 1.950% on March 4 and September 4 of each year, beginning September 4, 2016. | ||
April 29, 2016 | $600 million | Senior notes with a maturity date of June 1, 2025. Interest is payable semi-annually at a fixed rate of 3.250% on June 1 and December 1 of each year, beginning June 1, 2016. | ||
April 29, 2016 | $1.25 billion | Senior notes with a maturity date of April 29, 2021. Interest is payable semi-annually at a fixed rate of 2.150% on April 29 and October 29 of each year, beginning October 29, 2016. | ||
July 29, 2016 | $1.0 billion | Senior notes with a maturity date of July 29, 2019. Interest is payable semi-annually at a fixed rate of 1.450% on January 29 and July 29 of each year, beginning January 29, 2017. |
Total senior and subordinated debt of PNC Bank increased to $25.9$26.7 billion at March 31,September 30, 2016 from $25.5 billion at December 31, 2015 due to the following activity in the period.
Table 33:32: PNC Bank Senior and Subordinated Debt
| In billions | 2016 | |||
January 1 | $ | 25.5 | ||
Issuances | 1.0 | |||
Calls and maturities | (1.0 | ) | ||
Other | .4 | |||
March 31 | $ | 25.9 | ||
See Note 17 Subsequent Events in the Notes to Consolidated Financial Statements of this Report for information on the issuances of senior notes by PNC Bank on April 29, 2016.
| In billions | 2016 | |||
January 1 | $ | 25.5 | ||
Issuances | 3.9 | |||
Calls and maturities | (3.0 | ) | ||
Other | .3 | |||
September 30 | $ | 26.7 | ||
PNC Bank is a member of the FHLB-Pittsburgh and, as such, has access to advances from FHLB-Pittsburgh secured generally by residential mortgage loans, other mortgage-related loans and commercial mortgage-backed securities. At March 31,September 30, 2016, our unused secured borrowing capacity was $22.7$26.8 billion with the FHLB-Pittsburgh. Total FHLB borrowings decreased to $19.1$17.1 billion at March 31,September 30, 2016 from $20.1 billion at December 31, 2015 due to the following activity in the period.
| In billions | 2016 | 2016 | ||||||
January 1 | $ | 20.1 | $ | 20.1 | ||||
Issuances | 2.0 | 4.5 | ||||||
Calls and maturities | (3.0 | ) | (7.5 | ) | ||||
March 31 | $ | 19.1 | ||||||
September 30 | $ | 17.1 | ||||||
The FHLB-Pittsburgh also periodically provides standby letters of credit on behalf of PNC Bank to secure certain public deposits. PNC Bank began using standby letters of credit issued by the FHLB-Pittsburgh for these purposes in response to the regulatory liquidity standards finalized during 2014. If the FHLB-Pittsburgh is required to make payment for a beneficiary’s draw, the payment amount is converted into a collateralized advance to PNC Bank. At March 31,September 30, 2016, standby letters of credit issued on our behalf by the FHLB-Pittsburgh totaled $5.3$4.7 billion.
PNC Bank has the ability to offer up to $10.0 billion of its commercial paper to provide additional liquidity. As of March 31,September 30, 2016, there was approximately $1 millionwere no issuances outstanding under this program.
PNC Bank can also borrow from the Federal Reserve Bank discount window to meet short-term liquidity requirements. The Federal Reserve Bank, however, is not viewed as thea primary means of funding our routine business activities, but rather as a potential source of liquidity in a stressed environment or during a market disruption. These potential borrowings are secured by commercial loans. At March 31,September 30, 2016, our unused secured borrowing capacity was $15.8$17.2 billion with the Federal Reserve Bank.
Parent Company Liquidity
As of March 31,September 30, 2016, available parent company liquidity totaled $4.8$3.3 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.
Parent Company Liquidity – Uses
The parent company’s contractual obligations consist primarily of debt service related to parent company borrowings and funding non-bank affiliates. As of March 31,September 30, 2016, there were approximately $1.9$.6 billion of parent company borrowings with contractual maturities of less than one year. Additionally, the parent company maintains adequate liquidity to fund discretionary activities such as paying dividends to PNC shareholders, share repurchases, and acquisitions.
See the Capital portion of the Consolidated Balance Sheet Review insection of this Financial Review for more information on our 2016 capital plan that was accepted by the Federal Reserve. Our capital plan included a recommendation to
38The PNC Financial Services Group, Inc. –Form 10-Q37
increase the quarterly common stock dividend in the third quarter of 2016 and also included share repurchase programs of up to $2.0 billion for the four-quarter period beginning in the third quarter of 2016. More information on our share repurchase programs, including detail on our firstthird quarter repurchase of 5.9 million common shares for $.5 billion.billion, is included in the Capital portion of the Consolidated Balance Sheet Review in this Financial Review.
On July 7, 2016, consistent with our 2016 capital plan, our Board of Directors approved an increase to PNC’s quarterly common stock dividend from 51 cents per common share to 55 cents per common share beginning with the August 5, 2016 dividend payment.
See the Supervision and Regulation section in Item 1 Business of our 2015 Form 10-K for additional information regarding the Federal Reserve’s CCAR process and the factors the Federal Reserve takes into consideration in evaluating capital plans, qualitative and quantitative liquidity risk management standards proposed by the U.S. banking agencies, and final rules issued by the Federal Reserve that make certain modifications to the Federal Reserve’s capital planning and stress testing rules.
Parent Company Liquidity – Sources
The principal source of parent company liquidity is the dividends it receives from its subsidiary bank, which may be impacted by the following:
Bank-level capital needs,
Laws and regulations,
Corporate policies,
Contractual restrictions, and
Other factors.
There are statutory and regulatory limitations on the ability of a national bank to pay dividends or make other capital distributions or to extend credit to the parent company or its non-bank subsidiaries. The amount available for dividend payments by PNC Bank to the parent company without prior regulatory approval was approximately $1.1$1.5 billion at March 31,September 30, 2016. See Note 19 Regulatory Matters in our 2015 Form 10-K for a further discussion of these limitations. We provide additional information on certain contractual restrictions in Note 16 Equity in our 2015 Form 10-K.
In addition to dividends from PNC Bank, other sources of parent company liquidity include cash and investments, as well as dividends and loan repayments from other subsidiaries and dividends or distributions from equity investments.
We can also generate liquidity for the parent company and PNC’s non-bank subsidiaries through the issuance of debt and equity securities, including certain capital instruments, in public or private markets and commercial paper.
Total parent company senior and subordinated debt and hybrid capital instruments increaseddecreased to $7.6$6.4 billion at March 31, September 30,
2016 from $7.5 billion at December��December 31, 2015 due to the following activity in the period.
See Note 15 Subsequent Events in the Notes to Consolidated Financial Statements of this Report for information on the issuance of depository shares, each representing a 1/100thinterest in a share of our Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series S.
Table 35:34: Parent Company Senior and Subordinated Debt and Hybrid Capital Instruments
| In billions | 2016 | |||
January 1 | $ | 7.5 | ||
Other | .1 | |||
March 31 | $ | 7.6 | ||
| In billions | 2016 | |||
January 1 | $ | 7.5 | ||
Calls and Maturities | (1.2 | ) | ||
Other | .1 | |||
September 30 | $ | 6.4 | ||
The parent company has the ability to offer up to $5.0 billion of commercial paper to provide additional liquidity. As of March 31,September 30, 2016, there were no issuances outstanding under this program.
Status of Credit Ratings
The cost and availability of short-term and long-term funding, as well as collateral requirements for certain derivative instruments, is influenced by PNC’s credit ratings. See the Liquidity Risk Management portion of the Risk Management section in our 2015 Form 10-K for more information on credit ratings.
Table 36:35: Credit Ratings as of March 31,September 30, 2016 for PNC and PNC Bank
| Moody’s | Standard & Poor’s | Fitch | ||||||||||
PNC | ||||||||||||
Senior debt | A3 | A- | A+ | |||||||||
Subordinated debt | A3 | BBB+ | A | |||||||||
Preferred stock | Baa2 | BBB- | BBB- | |||||||||
PNC Bank | ||||||||||||
Senior debt | A2 | A | A+ | |||||||||
Subordinated debt | A3 | A- | A | |||||||||
Long-term deposits | Aa2 | A | AA- | |||||||||
Short-term deposits | P-1 | A-1 | F1+ | |||||||||
Short-term notes | P-1 | A-1 | F1 | |||||||||
Contractual Obligations and Commitments
We have contractual obligations representing required future payments on borrowed funds, time deposits, leases, pension and postretirement benefits, and purchase obligations. See the Liquidity Risk Management portion of the Risk Management section in our 2015 Form 10-K for more information on these future cash outflows. Additionally, in the normal course of business we have various commitments outstanding, certain of which are not included on our Consolidated Balance Sheet.
The PNC Financial Services Group, Inc. –Form 10-Q39
We provide information on our commitments in Note 1513 Commitments and Guarantees in Part I, Item 1 of this Report.
Market Risk Management
Market risk is the risk of a loss in earnings or economic value due to adverse movements in market factors such as interest rates, credit spreads, foreign exchange rates, commodity prices and equity prices. We are exposed to market risk primarily by our involvement in the following activities, among others:
Traditional banking activities of gathering deposits and extending loans,
Equity and other investments and activities whose economic values are directly impacted by market factors, and
Fixed income securities, derivatives and foreign exchange activities, as a result of customer activities and securities underwriting.
38 The PNC Financial Services Group, Inc. –Form 10-Q
We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. Market Risk Management provides independent oversight by monitoring compliance with established guidelines, and reporting significant risks in the business to the Risk Committee of the Board.
Market Risk Management–Interest Rate Risk
Interest rate risk results primarily from our traditional banking activities of gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest that we earn on assets and the interest that we pay on liabilities and the level of our noninterest-bearing funding sources. Due to the repricing term mismatches and embedded options inherent in certain of these products, changes in market interest rates not only affect expected near-term earnings, but also the economic values of these assets and liabilities.
Asset and Liability Management centrally manages interest rate risk as prescribed in our risk management policies, which are approved by management’s Asset and Liability Committee and the Risk Committee of the Board.
Sensitivity results and market interest rate benchmarks for the firstthird quarters of 2016 and 2015 follow:
Table 37:36: Interest Sensitivity Analysis
| First Quarter 2016 | First Quarter 2015 | Third Quarter 2016 | Third Quarter 2015 | |||||||||||||
Net Interest Income Sensitivity Simulation (a) | ||||||||||||||||
Effect on net interest income in first year from gradual interest rate change over the following 12 months of: | ||||||||||||||||
100 basis point increase | 2.7 | % | 2.1 | % | 3.0 | % | 2.7 | % | ||||||||
100 basis point decrease | (2.9 | )% | (1.2 | )% | (3.9 | )% | (.7 | )% | ||||||||
Effect on net interest income in second year from gradual interest rate change over the preceding 12 months of: | ||||||||||||||||
100 basis point increase | 6.7 | % | 6.2 | % | 6.1 | % | 6.4 | % | ||||||||
100 basis point decrease | (7.8 | )% | (6.0 | )% | (8.3 | )% | (5.3 | )% | ||||||||
Duration of Equity Model (a) | ||||||||||||||||
Base case duration of equity (in years) | (7.1 | ) | (6.2 | ) | (6.5 | ) | (5.2 | ) | ||||||||
Key Period-End Interest Rates | ||||||||||||||||
One-month LIBOR | .44 | % | .18 | % | .53 | % | .19 | % | ||||||||
Three-year swap | .95 | % | 1.11 | % | 1.07 | % | .98 | % | ||||||||
| (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 3837 reflects the percentage change in net interest income over the next two 12-month
periods assuming (i) the PNC Economist’s most likely rate forecast, (ii) implied market forward rates and (iii) Yield Curve Slope Flattening (a 100 basis point yield curve slope flattening between 1-month and ten-year rates superimposed on current base rates) scenario.
Table 38:37: Net Interest Income Sensitivity to Alternative Rate Scenarios (First(Third Quarter 2016)
| PNC Economist | Market Forward | Slope Flattening | PNC Economist | Market Forward | Slope Flattening | |||||||||||||||
First year sensitivity | 3.4 | % | 1.1 | % | (2.0 | )% | 2.6 | % | 3.1% | (3.1)% | ||||||||||
Second year sensitivity | 9.6 | % | 2.3 | % | (6.4 | )% | 6.7 | % | 3.6% | (8.6)% | ||||||||||
40 The PNC Financial Services Group, Inc. –Form 10-Q
All changes in forecasted net interest income are relative to results in a base rate scenario where current market rates are assumed to remain unchanged over the forecast horizon.
When forecasting net interest income, we make assumptions about interest rates and the shape of the yield curve, the volume and characteristics of new business and the behavior of existing on- and off-balance sheet positions. These assumptions determine the future level of simulated net interest income in the base interest rate scenario and the other interest rate scenarios presented in Tables 3736 and 3837 above. These simulations assume that as assets and liabilities mature, they are replaced or repriced at then current market rates. We also consider forward projections of purchase accounting accretion when forecasting net interest income.
The following graph presents the LIBOR/Swap yield curves for the base rate scenario and each of the alternate scenarios one year forward.
Table 39:38: Alternate Interest Rate Scenarios: One Year Forward
The firstthird quarter 2016 interest sensitivity analyses indicate that our Consolidated Balance Sheet is positioned to benefit from an increase in interest rates and an upward sloping interest rate yield curve. We believe that we have the deposit funding base and balance sheet flexibility to adjust, where appropriate and permissible, to changing interest rates and market conditions.
The PNC Financial Services Group, Inc. –Form 10-Q39
Market Risk Management – Customer-Related Trading Risk
We engage in fixed income securities, derivatives and foreign exchange transactions to support our customers’ investing and hedging activities. These transactions, related hedges and the credit valuation adjustment (CVA) related to our customer derivatives portfolio are marked-to-market daily and reported as customer-related trading activities. We do not engage in proprietary trading of these products.
We use value-at-risk (VaR) as the primary means to measure and monitor market risk in customer-related trading activities. VaR is used to estimate the probability of portfolio losses based on the statistical analysis of historical market risk
factors. A diversified VaR reflects empirical correlations across different asset classes. We calculate a diversified VaR at a 95% confidence interval and the results for the first threenine months of 2016 and 2015 were within our acceptable limits.
See the Market Risk Management – Customer-Related Trading Risk section of our 2015 Form 10-K for more information on the models and backtesting.
Customer-relatedCustomer related trading revenue decreased to $39was $140 million for the first nine months of 2016 compared with $155 million for the first nine months of 2015. This decrease was primarily due to changes in credit valuations for customer-related derivatives.
Customer related trading revenue was $51 million for the third quarter of 2016 compared with $49$53 million for the firstthird quarter of 2015. TheThis decrease was primarily due to reduced client-related trading results, lower derivative client sales revenues and market interest rate changes impacting credit valuations for customer-related derivatives.related foreign exchange results.
Market Risk Management – Equity And Other Investment Risk
Equity investment risk is the risk of potential losses associated with investing in both private and public equity markets. In addition to extending credit, taking deposits, securitiesand underwriting and trading financial instruments, we make and manage direct investments in a variety of transactions, including management buyouts, recapitalizations, and growth financings in a variety of industries. We also have investments in affiliated and non-affiliated funds that make similar investments in private equity and in debt and equity-oriented hedge funds. The economic and/or book value of these investments and other assets such as loan servicing rights are directly affected by changes in market factors.
The primary risk measurement for equity and other investments is economic capital. Economic capital is a common measure of risk for credit, market and operational risk. It is an estimate of the potential value depreciation over a one year horizon commensurate with solvency expectations of an institution rated single-A by the credit rating agencies. Given the illiquid nature of many of these types of investments, it can be a challenge to determine their fair values. See Note 76 Fair Value in the Notes To Consolidated Financial Statements in this Report and Note 7 Fair Value in our 2015 Form 10-K for additional information.
Various PNC business units manage our equity and other investment activities. Our businesses are responsible for making investment decisions within the approved policy limits and associated guidelines.
The PNC Financial Services Group, Inc. –Form 10-Q41
A summary of our equity investments follows:
Table 40:39: Equity Investments Summary
September 30 2016 | December 31 2015 | Change | ||||||||||||||||||||||
| In millions | March 31 2016 | December 31 2015 | $ | % | ||||||||||||||||||||
BlackRock | $ | 6,567 | $ | 6,626 | $ | 6,805 | $ | 6,626 | $ | 179 | 3 | % | ||||||||||||
Tax credit investments | 2,061 | 2,254 | 2,141 | 2,254 | (113 | ) | (5 | )% | ||||||||||||||||
Private equity | 1,500 | 1,441 | 1,340 | 1,441 | (101 | ) | (7 | )% | ||||||||||||||||
Visa | 19 | 31 | 2 | 31 | (29 | ) | (94 | )% | ||||||||||||||||
Other | 244 | 235 | 317 | 235 | 82 | 35 | % | |||||||||||||||||
Total | $ | 10,391 | $ | 10,587 | $ | 10,605 | $ | 10,587 | $ | 18 | 0 | % | ||||||||||||
BlackRock
PNC owned approximately 35 million common stock equivalent shares of BlackRock equity at March 31,September 30, 2016, accounted for under the equity method. The primary risk measurement, similar to other equity investments, is economic capital. The Business Segments Review section of this Financial Review includes additional information about BlackRock.
Tax Credit Investments
Included in our equity investments are direct tax credit investments and equity investments held by consolidated partnerships which totaled $2.1 billion at March 31, 2016 and $2.3 billion at December 31, 2015.partnerships. These equity investment balances include unfunded commitments totaling $655$719 million and $669 million at March 31,September 30, 2016 and December 31, 2015, respectively. These unfunded commitments are included in Other Liabilities on our Consolidated Balance Sheet.
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K has further information on Tax Credit Investments.
Private Equity
The private equity portfolio is an illiquid portfolio comprised of mezzanine and equity investments that vary by industry, stage and type of investment. Private equity investmentsinvestment and are carried at estimated fair value totaled $1.5 billion at March 31, 2016 and $1.4 billion at December 31, 2015.value. As of March 31,September 30, 2016, $1.2$1.1 billion was invested directly in a variety of companies and $.3 billion was invested indirectly through various private equity funds. Included in direct investments are investment activities of two private equity funds that are consolidated for financial reporting purposes. The interests held in indirect private equity funds are not redeemable, but PNC may receive distributions over the life of the partnership from liquidation of the underlying investments. See Item 1
40 The PNC Financial Services Group, Inc. –Form 10-Q
Business – Supervision and Regulation and Item 1A Risk Factors included in our 2015 Form 10-K for discussiondiscussions of the potential impacts of the Volcker Rule provisions of Dodd-Frank on our interests in and sponsorship of private funds covered by the Volcker Rule.
Our unfunded commitments related to private equity totaled $133$128 million at March 31,September 30, 2016 compared withand $126 million at December 31, 2015.
Visa
Our 2015 Form 10-K includes information regarding the October 2007 Visa restructuring, our involvement with judgment and loss sharing agreements with Visa and certain other banks, the status of pending interchange litigation, the sales of portions of our Visa Class B common shares and the related swap agreements with the purchaser. See Note 12 Legal Proceedings in our Second Quarter 2016 Form 10-Q for more detail on the status of the pending interchange litigation.
During the first threenine months of 2016, we sold .51.35 million Visa Class B common shares, in addition to the 18.5 million shares sold in previous years. We have entered into swap agreements with the purchasers of the shares as part of these sales. At March 31,September 30, 2016, our investment in Visa Class B common shares totaled approximately 4.43.5 million shares and had a carrying value of $19 million.shares. Based on the March 31,September 30, 2016 closing price of $76.48$82.70 for the Visa Class A common shares, the fair value of our total investment was approximately $550$479 million at the current conversion rate. The Visa Class B common shares that we own are transferable only under limited circumstances until they can be converted into shares
of the publicly traded class of stock, which cannot happen until the final resolution of all of the specified litigation.
Other Investments
We also have certain other equity investments, the majority of which represent investments in affiliated and non-affiliated funds with both traditional and alternative investment strategies. The economic values could be driven by either the fixed-income market or the equity markets, or both. Given the nature of these investments, if market conditions affecting their valuation were to worsen, we could incur future losses. Net gains related to these investments were not significant for the first threenine months of 2016 and 2015.
Our unfunded commitments related to other investments at March 31,September 30, 2016 and December 31, 2015 were not significant.
Financial Derivatives
Information on our financial derivatives is presented in Note 1 Accounting Policies and Note 7 Fair Value in our Notes To Consolidated Financial Statements under Item 8 of our 2015 Form 10-K and in Note 76 Fair Value and Note 109 Financial Derivatives in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report, which is incorporated here by reference.
Not all elements of market and credit risk are addressed through the use of financial derivatives, and such instruments may be ineffective for their intended purposes due to unanticipated market changes, among other reasons.
42 The PNC Financial Services Group, Inc. –Form 10-Q
The following table summarizes the notional or contractual amounts and net fair value of financial derivatives at March 31,September 30, 2016 and December 31, 2015.
Table 41:40: Financial Derivatives Summary
| March 31, 2016 | December 31, 2015 | September 30, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||
| In millions | Notional/ Contractual Amount | Net Fair Value (a) | Notional/ Contractual Amount | Net Fair Value (a) | Notional/ Contractual Amount | Net Fair Value (a) | Notional/ Contractual Amount | Net Fair Value (a) | ||||||||||||||||||||||||
Derivatives designated as hedging instruments under GAAP | ||||||||||||||||||||||||||||||||
Total derivatives designated as hedging instruments | $ | 51,508 | $ | 1,362 | $ | 52,074 | $ | 985 | $ | 52,466 | $ | 1,336 | $ | 52,074 | $ | 985 | ||||||||||||||||
Derivatives not designated as hedging instruments under GAAP | ||||||||||||||||||||||||||||||||
Total derivatives used for residential mortgage banking activities | $ | 88,207 | $ | 470 | $ | 73,891 | $ | 376 | 72,281 | 516 | 73,891 | 376 | ||||||||||||||||||||
Total derivatives used for commercial mortgage banking activities | 21,074 | 67 | 24,091 | 36 | 9,689 | 80 | 24,091 | 36 | ||||||||||||||||||||||||
Total derivatives used for customer-related activities | 202,157 | 185 | 192,621 | 151 | 208,437 | 170 | 192,621 | 151 | ||||||||||||||||||||||||
Total derivatives used for other risk management activities | 5,550 | (389 | ) | �� | 5,299 | (409 | ) | 5,914 | (362 | ) | 5,299 | (409 | ) | |||||||||||||||||||
Total derivatives not designated as hedging instruments | $ | 316,988 | $ | 333 | $ | 295,902 | $ | 154 | 296,321 | 404 | 295,902 | 154 | ||||||||||||||||||||
Total Derivatives | $ | 368,496 | $ | 1,695 | $ | 347,976 | $ | 1,139 | $ | 348,787 | $ | 1,740 | $ | 347,976 | $ | 1,139 | ||||||||||||||||
| (a) | Represents the net fair value of assets and liabilities. |
The PNC Financial Services Group, Inc. –Form 10-Q41
INTERNAL CONTROLSAND DISCLOSURE CONTROLSAND PROCEDURES
As of March 31,September 30, 2016, we performed an evaluation under the supervision of and with the participation of our management, including the Chairman, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures and of changes in our internal control over financial reporting.
Based on that evaluation, our Chairman, President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934) were effective as of March 31,September 30, 2016, and that there has been no change in PNC’s internal control over financial reporting that occurred during the firstthird quarter of 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Accretable net interest (Accretable yield) – The excessFor a glossary of cash flows expected to be collected on a purchased impaired loan overterms commonly used in our filings, please see the carrying valueglossary of the loan. The accretable net interest is recognized into interest income over the remaining life of the loan using the constant effective yield method.
Adjusted average total assets – Primarily comprised of total average quarterly (or annual) assets plus (less) unrealized losses (gains) on investment securities, less goodwill and certain other intangible assets (net of eligible deferred taxes).
Annualized – Adjusted to reflect a full year of activity.
Basel III common equity Tier 1 capital – Common stock plus related surplus, net of treasury stock, plus retained earnings, plus accumulated other comprehensive income for securities currently and previously held as available for sale, plus accumulated other comprehensive income for pension and other postretirement benefit plans, less goodwill, net of associated deferred tax liabilities, less other disallowed intangibles, net of deferred tax liabilities and plus/less other adjustments.
Basel III common equity Tier 1 capital ratio – Common equity Tier 1 capital divided by period-end risk-weighted assets (as applicable).
Basel III Tier 1 capital – Common equity Tier 1 capital, plus preferred stock, plus certain trust preferred capital securities, plus certain noncontrolling interests that are held by others and plus/less other adjustments.
Basel III Tier 1 capital ratio – Tier 1 capital divided by period-end risk-weighted assets (as applicable).
Basel III Total capital – Tier 1 capital plus qualifying subordinated debt, plus certain trust preferred securities, plus, under the Basel III transitional rules and the standardized approach, the allowance for loan and lease lossesterms included in Tier 2 capital and other.
Basel III Total capital ratio – Total capital divided by period-end risk-weighted assets (as applicable).
Basis point – One hundredth of a percentage point.
Carrying value of purchased impaired loans – The net value on the balance sheet which represents the recorded investment less any valuation allowance.
Cash recoveries – Cash recoveries used in the context of purchased impaired loans represent cash payments for a single purchased impaired loan not included within a pool of loans from customers that exceeded the recorded investment of that loan.
Charge-off – Process of removing a loan or portion of a loan from our balance sheet because it is considered uncollectible. We also record a charge-off when a loan is transferred from portfolio holdings to held for sale by reducing the loan carrying amount to the fair value of the loan, if fair value is less than carrying amount.
Combined loan-to-value ratio (CLTV) – This is the aggregate principal balance(s) of the mortgages on a property divided by its appraised value or purchase price.
Common shareholders’ equity to total assets – Common shareholders’ equity divided by total assets. Common shareholders’ equity equals total shareholders’ equity less the liquidation value of preferred stock.
Core net interest income – Core net interest income is total net interest income less purchase accounting accretion.
Credit derivatives – Contractual agreements, primarily credit default swaps, that provide protection against a credit event of one or more referenced credits. The nature of a credit event is established by the protection buyer and protection seller at the inception of a transaction, and such events include bankruptcy, insolvency and failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic fee in return for a payment by the protection seller upon the occurrence, if any, of a credit event.
Credit spread – The difference in yield between debt issues of similar maturity. The excess of yield attributable to credit
42 The PNC Financial Services Group, Inc. –2015 Form 10-Q
spread is often used as a measure of relative creditworthiness, with a reduction in the credit spread reflecting an improvement in the borrower’s perceived creditworthiness.
Credit valuation adjustment (CVA) – Represents an adjustment to the fair value of our derivatives for our own and counterparties’ non-performance risk.
Criticized commercial loans – Loans with potential or identified weaknesses based upon internal risk ratings that comply with the regulatory classification definitions of “Special Mention,” “Substandard” or “Doubtful.”
Derivatives – Financial contracts whose value is derived from changes in publicly traded securities, interest rates, currency exchange rates or market indices. Derivatives cover a wide assortment of financial contracts, including but not limited to forward contracts, futures, options and swaps.
Discretionary client assets under management – Assets over which we have sole or shared investment authority for our customers/clients. We do not include these assets on our Consolidated Balance Sheet.
Duration of equity – An estimate of the rate sensitivity of our economic value of equity. A negative duration of equity is associated with asset sensitivity (i.e., positioned for rising interest rates), while a positive value implies liability sensitivity (i.e., positioned for declining interest rates). For example, if the duration of equity is -1.5 years, the economic value of equity increases by 1.5% for each 100 basis point increase in interest rates.
Earning assets – Assets that generate income, which include: federal funds sold; resale agreements; trading securities; interest-earning deposits with banks; loans held for sale; loans; investment securities; and certain other assets.
Effective duration – A measurement, expressed in years, that, when multiplied by a change in interest rates, would approximate the percentage change in value of on- and off- balance sheet positions.
Efficiency – Noninterest expense divided by total revenue.
Enterprise risk management framework – An enterprise process designed to identify potential risks that may affect PNC, manage risk to be within our risk appetite and provide reasonable assurance regarding achievement of our objectives.
Fair value – The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fee income – When referring to the components of Noninterest income, we use the term fee income to refer to the
following categories within Noninterest income: Asset management; Consumer services; Corporate services; Residential mortgage; and Service charges on deposits.
FICO score – A credit bureau-based industry standard score created by Fair Isaac Co. which predicts the likelihood of borrower default. We use FICO scores both in underwriting and assessing credit risk in our consumer lending portfolio. Lower FICO scores indicate likely higher risk of default, while higher FICO scores indicate likely lower risk of default. FICO scores are updated on a periodic basis.
Foreign exchange contracts – Contracts that provide for the future receipt and delivery of foreign currency at previously agreed-upon terms.
Funds transfer pricing – A management accounting methodology designed to recognize the net interest income effects of sources and uses of funds provided by the assets and liabilities of a business segment. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors.
Futures and forward contracts – Contracts in which the buyer agrees to purchase and the seller agrees to deliver a specific financial instrument at a predetermined price or yield. May be settled either in cash or by delivery of the underlying financial instrument.
GAAP – Accounting principles generally accepted in the United States of America.
Home price index (HPI) – A broad measure of the movement of single-family house prices in the U.S.
Impaired loans – Loans are determined to be impaired when, based on current information and events, it is probable that all contractually required payments will not be collected. Impaired loans include commercial nonperforming loans and consumer and commercial TDRs, regardless of nonperforming status. Excluded from impaired loans are nonperforming leases, loans held for sale, loans accounted for under the fair value option, smaller balance homogenous type loans and purchased impaired loans.
Interest rate floors and caps – Interest rate protection instruments that involve payment from the protection seller to the protection buyer of an interest differential, which represents the difference between a short-term rate (e.g., three-month LIBOR) and an agreed-upon rate (the strike rate) applied to a notional principal amount.
Interest rate swap contracts – Contracts that are entered into primarily as an asset/liability management strategy to reduce interest rate risk. Interest rate swap contracts are exchanges of interest rate payments, such as fixed-rate payments for floating-rate payments, based on notional principal amounts.10-K.
The PNC Financial Services Group, Inc. –Form 10-Q 43
Intrinsic value – The difference between the price, if any, required to be paid for stock issued pursuant to an equity compensation arrangement and the fair market value of the underlying stock.
Leverage ratio – Tier 1 capital divided by average quarterly adjusted total assets.
LIBOR – Acronym for London InterBank Offered Rate. LIBOR is the average interest rate charged when banks in the London wholesale money market (or interbank market) borrow unsecured funds from each other. LIBOR rates are used as a benchmark for interest rates on a global basis. PNC’s product set includes loans priced using LIBOR as a benchmark.
Loan-to-value ratio (LTV) – A calculation of a loan’s collateral coverage that is used both in underwriting and assessing credit risk in our lending portfolio. LTV is the sum total of loan obligations secured by collateral divided by the market value of that same collateral. Market values of the collateral are based on an independent valuation of the collateral. For example, a LTV of less than 90% is better secured and has less credit risk than a LTV of greater than or equal to 90%.
Loss given default (LGD) –An estimate of loss, net of recovery based on collateral type, collateral value, loan exposure, and other factors. Each loan has its own LGD. The LGD risk rating measures the percentage of exposure of a specific credit obligation that we expect to lose if default occurs. LGD is net of recovery, through any means, including but not limited to the liquidation of collateral or deficiency judgments rendered from foreclosure or bankruptcy proceedings.
Net interest margin – Annualized taxable-equivalent net interest income divided by average earning assets.
Nonaccretable difference – Contractually required payments receivable on a purchased impaired loan in excess of the cash flows expected to be collected.
Nonaccrual loans – Loans for which we do not accrue interest income. Nonaccrual loans include nonperforming loans, in addition to loans accounted for under fair value option and loans accounted for as held for sale for which full collection of contractual principal and/or interest is not probable.
Nondiscretionary client assets under administration – Assets we hold for our customers/clients in a nondiscretionary, custodial capacity. We do not include these assets on our Consolidated Balance Sheet.
Nonperforming assets – Nonperforming assets include nonperforming loans and OREO and foreclosed assets, but exclude certain government insured or guaranteed loans for
which we expect to collect substantially all principal and interest, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. We do not accrue interest income on assets classified as nonperforming.
Nonperforming loans – Loans accounted for at amortized cost for which we do not accrue interest income. Nonperforming loans include loans to commercial, commercial real estate, equipment lease financing, home equity, residential real estate, credit card and other consumer customers as well as TDRs which have not returned to performing status. Nonperforming loans exclude certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. Nonperforming loans exclude purchased impaired loans as we are currently accreting interest income over the expected life of the loans.
Notional amount – A number of currency units, shares, or other units specified in a derivative contract.
Operating leverage – The period to period dollar or percentage change in total revenue (GAAP basis) less the dollar or percentage change in noninterest expense. A positive variance indicates that revenue growth exceeded expense growth (i.e., positive operating leverage) while a negative variance implies expense growth exceeded revenue growth (i.e., negative operating leverage).
Options – Contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to either purchase or sell the associated financial instrument at a set price during a specified period or at a specified date in the future.
Other real estate owned (OREO) and foreclosed assets – Assets taken in settlement of troubled loans primarily through deed-in-lieu of foreclosure or foreclosure. Foreclosed assets include real and personal property, equity interests in corporations, partnerships, and limited liability companies. Excludes certain assets that have a government-guarantee which are classified as other receivables.
Other-than-temporary impairment (OTTI) – When the fair value of a security is less than its amortized cost basis, an assessment is performed to determine whether the impairment is other-than-temporary. If we intend to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, an other-than-temporary impairment is considered to have occurred. In such cases, an other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Further, if we do not expect to recover the entire amortized cost of the security, an other-than-temporary impairment is considered to have
44 The PNC Financial Services Group, Inc. –Form 10-Q
occurred. However for debt securities, if we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before its recovery, the other-than-temporary loss is separated into (a) the amount representing the credit loss, and (b) the amount related to all other factors. The other-than-temporary impairment related to credit losses is recognized in earnings while the amount related to all other factors is recognized in other comprehensive income, net of tax.
Parent company liquidity coverage – Liquid assets divided by funding obligations within a two year period.
Pretax earnings – Income before income taxes and noncontrolling interests.
Pretax, pre-provision earnings – Total revenue less noninterest expense.
Probability of default (PD) – An internal risk rating that indicates the likelihood that a credit obligor will enter into default status.
Purchase accounting accretion – Accretion of the discounts and premiums on acquired assets and liabilities. The purchase accounting accretion is recognized in net interest income over the weighted-average life of the financial instruments using the constant effective yield method. Accretion for a single purchased impaired loan not included within a pool of loans includes any cash recoveries on that loan received in excess of the recorded investment.
Purchased impaired loans – Acquired loans (or pools of loans) determined to be credit impaired under FASB ASC 310-30 (AICPA SOP 03-3). Loans (or pools of loans) are determined to be impaired if there is evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected.
Recorded investment (purchased impaired loans) – The initial investment of a purchased impaired loan plus interest accretion and less any cash payments and writedowns to date. The recorded investment excludes any valuation allowance which is included in our allowance for loan and lease losses.
Recovery – Cash proceeds received on a loan that we had previously charged off. We credit the amount received to the allowance for loan and lease losses.
Residential development loans – Project-specific loans to commercial customers for the construction or development of residential real estate including land, single family homes, condominiums and other residential properties.
Return on average assets – Annualized net income divided by average assets.
Return on average capital – Annualized net income divided by average capital.
Return on average common shareholders’ equity – Annualized net income attributable to common shareholders divided by average common shareholders’ equity.
Risk – The potential that an event or series of events could occur that would threaten PNC’s ability to achieve its strategic objectives, thereby negatively affecting shareholder value or reputation.
Risk appetite – A dynamic, forward-looking view on the aggregate amount of risk PNC is willing and able to take in executing business strategy in light of the current business environment.
Risk limits – Quantitative measures based on forward looking assumptions that allocate the firm’s aggregate risk appetite (e.g. measure of loss or negative events) to business lines, legal entities, specific risk categories, concentrations and as appropriate, other levels.
Risk profile – The risk profile is a point-in-time assessment of risk. The profile represents overall risk position in relation to the desired risk appetite. The determination of the risk profile’s position is based on qualitative and quantitative analysis of reported risk limits, metrics, operating guidelines and qualitative assessments.
Risk-weighted assets – Computed by the assignment of specific risk-weights (as defined by the Board of Governors of the Federal Reserve System) to assets and off-balance sheet instruments.
Securitization – The process of legally transforming financial assets into securities.
Servicing rights – An intangible asset or liability created by an obligation to service assets for others. Typical servicing rights include the right to receive a fee for collecting and forwarding payments on loans and related taxes and insurance premiums held in escrow.
Swaptions – Contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to enter into an interest rate swap agreement during a specified period or at a specified date in the future.
Taxable-equivalent interest – The interest income earned on certain assets is completely or partially exempt from Federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of yields and margins for all interest-earning assets, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margins by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on other taxable investments. This adjustment is not permitted under GAAP on the Consolidated Income Statement.
The PNC Financial Services Group, Inc. –Form 10-Q45
Total equity – Total shareholders’ equity plus noncontrolling interests.
Total return swap – A non-traditional swap where one party agrees to pay the other the “total return” of a defined underlying asset (e.g., a loan), usually in return for receiving a stream of LIBOR-based cash flows. The total returns of the asset, including interest and any default shortfall, are passed through to the counterparty. The counterparty is, therefore, assuming the credit and economic risk of the underlying asset.
Transitional Basel III common equity – Common equity calculated under Basel III using phased in definitions and deductions applicable to PNC during the applicable presentation period.
Troubled debt restructuring (TDR) – A loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties.
Value-at-risk (VaR) – A statistically-based measure of risk that describes the amount of potential loss which may be incurred due to adverse market movements. The measure is of the maximum loss which should not be exceeded on 95 out of 100 days for a 95% VaR.
Watchlist – A list of criticized loans, credit exposure or other assets compiled for internal monitoring purposes. We define criticized exposure for this purpose as exposure with an internal risk rating of other assets especially mentioned, substandard, doubtful or loss.
Yield curve – A graph showing the relationship between the yields on financial instruments or market indices of the same credit quality with different maturities. For example, a “normal” or “positive” yield curve exists when long-term bonds have higher yields than short-term bonds. A “flat” yield curve exists when yields are the same for short-term and long-term bonds. A “steep” yield curve exists when yields on long-term bonds are significantly higher than on short-term bonds. An “inverted” or “negative” yield curve exists when short-term bonds have higher yields than long-term bonds.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
We make statements in this Report, and we may from time to time make other statements, regarding our outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting PNC and its future business and operations that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “look,” “intend,” “outlook,” “project,” “forecast,” “estimate,” “goal,” “will,” “should” and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time.
Forward-looking statements speak only as of the date made. We do not assume any duty and do not undertake to update forward-looking statements. Actual results or future events could differ, possibly materially, from those anticipated in forward-looking statements, as well as from historical performance.
Our forward-looking statements are subject to the following principal risks and uncertainties.
Our businesses, financial results and balance sheet values are affected by business and economic conditions, including the following:
| – | Changes in interest rates and valuations in debt, equity and other financial markets. |
| – | Disruptions in the U.S. and global financial markets. |
| – | The impact on financial markets and the economy of any changes in the credit ratings of U.S. Treasury obligations and other U.S. government-backed debt, as well as issues surrounding the levels of U.S. and European government debt and concerns regarding the creditworthiness of certain sovereign governments, supranationals and financial institutions in Europe. |
| – | Actions by the Federal Reserve, U.S. Treasury and other government agencies, including those that impact money supply and market interest rates. |
| – | Changes in customers’, suppliers’ and other counterparties’ performance and creditworthiness. |
| – | Slowing or reversal of the current U.S. economic expansion. |
| – | Continued residual effects of recessionary conditions and uneven spread of positive impacts of recovery on the economy and our counterparties, including adverse impacts on levels of unemployment, loan utilization rates, delinquencies, defaults and counterparty ability to meet credit and other obligations. |
| – | Commodity price volatility. |
| – | Changes in customer preferences and behavior, whether due to changing business and economic conditions, legislative and regulatory initiatives, or other factors. |
Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting. These statements are based on our current view that the U.S. economy will grow moderately again in the latter half of 2016, boosted by lowerstable oil/energy prices, improving housing activity and solidmoderate job gains, and that short-term interest rates and bond yields will rise veryhold fairly steady before gradually duringrising late this year. Specifically, our business outlook reflects our expectation of a 25 basis point increase in short-term interest rates by the Federal Reserve in December 2016. These forward-looking statements also do not, unless otherwise indicated, take into account the impact of potential legal and regulatory contingencies.
PNC’s ability to take certain capital actions, including paying dividends and any plans to increase common stock dividends, repurchase common stock under current or future programs, or issue or redeem preferred stock or other regulatory capital instruments, is subject to the review of such proposed actions by the Federal Reserve as part of PNC’s comprehensive capital plan for the applicable period in connection with the Federal Reserve’s CCAR process and to the acceptance of such capital plan and non-objection to such capital actions by the Federal Reserve.
46 The PNC Financial Services Group, Inc. –Form 10-Q
|
PNC’s regulatory capital ratios in the future will depend on, among other things, the company’s financial performance, the scope and terms of final capital regulations then in effect (particularly those implementing the international regulatory capital framework developed by the Basel Capital Accords)Committee on Banking Supervision (Basel Committee), the international body responsible for developing global regulatory standards for banking organizations for consideration and adoption by national jurisdictions), and management actions affecting the composition of PNC’s balance sheet. In addition, PNC’s ability to determine, evaluate and forecast regulatory capital ratios, and to take actions (such as capital distributions) based on actual or forecasted capital ratios, will be dependent at least in part on the development, validation and regulatory approval of related models.
Legal and regulatory developments could have an impact on our ability to operate our businesses, financial condition, results of operations, competitive position, reputation, or pursuit of attractive acquisition opportunities. Reputational impacts could affect matters such as business generation and retention, liquidity, funding, and ability to attract and retain management. These developments could include:
| – | Changes resulting from legislative and regulatory reforms, including major reform of the regulatory oversight structure of the financial services industry and changes to laws and regulations involving tax, pension, bankruptcy, consumer protection, and other industry aspects, and changes in accounting policies |
44 The PNC Financial Services Group, Inc. –Form 10-Q
| and principles. We will be impacted by extensive reforms provided for in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and otherwise growing out of the most recent financial crisis, the precise nature, extent and timing of which, and their impact on us, remains uncertain. |
| – | Changes to regulations governing bank capital and liquidity standards, including due to the Dodd-Frank Act and |
| – | Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries. In addition to matters relating to PNC’s current and historical business and activities, such matters may include proceedings, claims, investigations, or inquiries relating topre-acquisition business and activities of acquired companies, such as National City. These matters may result in monetary judgments or settlements or other remedies, including fines, penalties, restitution or alterations in our business practices, and in additional expenses and collateral costs, and may cause reputational harm to PNC. |
| – | Results of the regulatory examination and supervision process, including our failure to satisfy requirements of agreements with governmental agencies. |
| – | Impact on business and operating results of any costs associated with obtaining rights in intellectual property claimed by others and of adequacy of our intellectual property protection in general. |
Business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through effective use of third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards. In particular, our results currently depend on our ability to manage elevated levels of impaired assets.
Business and operating results also include impacts relating to our equity interest in BlackRock, Inc. and rely to a significant extent on information provided to us by BlackRock. Risks and uncertainties that could affect BlackRock are discussed in more detail by BlackRock in its SEC filings.
BlackRock. Risks and uncertainties that could affect BlackRock are discussed in more detail by BlackRock in its SEC filings. |
We grow our business in part by acquiring from time to time other financial services companies, financial services assets and related deposits and other liabilities. Acquisition risks and uncertainties include those presented by the nature of the business acquired, including in some cases those associated with our entry into new businesses or new geographic or other markets and risks resulting from our inexperience in those new areas, as well as risks and uncertainties related to the acquisition transactions themselves, regulatory issues, and the integration of the acquired businesses into PNC after closing.
Competition can have an impact on customer acquisition, growth and retention and on credit spreads and product pricing, which can affect market share, deposits and revenues. Industry restructuring in the current environment could also impact our business and financial performance through changes in counterparty creditworthiness and performance and in the competitive and regulatory landscape. Our ability to anticipate and respond to technological changes can also impact our ability to respond to customer needs and meet competitive demands.
Business and operating results can also be affected by widespread natural and other disasters, pandemics, dislocations, terrorist activities, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically.
We provide greater detail regarding these as well as other factors in our 2015 Form 10-K, our 2016 Form 10-Qs and elsewhere in this Report, including in the Risk Factors and Risk Management sections and the Legal Proceedings and Commitments and Guarantees Notes of the Notes To Consolidated Financial Statements in those Reports.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 4745
THE PNC FINANCIAL SERVICES GROUP, INC.
| Unaudited | Three months ended March 31 | |||||||||||||||||||||||
| In millions, except per share data | 2016 | 2015 | ||||||||||||||||||||||
Unaudited In millions, except per share data | Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||
Interest Income | ||||||||||||||||||||||||
Loans | $ | 1,843 | $ | 1,802 | $ | 1,856 | $ | 1,804 | $ | 5,528 | $ | 5,397 | ||||||||||||
Investment securities | 462 | 406 | 451 | 423 | 1,369 | 1,236 | ||||||||||||||||||
Other | 102 | 111 | 101 | 114 | 302 | 332 | ||||||||||||||||||
Total interest income | 2,407 | 2,319 | 2,408 | 2,341 | 7,199 | 6,965 | ||||||||||||||||||
Interest Expense | ||||||||||||||||||||||||
Deposits | 105 | 92 | 107 | 107 | 316 | 297 | ||||||||||||||||||
Borrowed funds | 204 | 155 | 206 | 172 | 622 | 482 | ||||||||||||||||||
Total interest expense | 309 | 247 | 313 | 279 | 938 | 779 | ||||||||||||||||||
Net interest income | 2,098 | 2,072 | 2,095 | 2,062 | 6,261 | 6,186 | ||||||||||||||||||
Noninterest Income | ||||||||||||||||||||||||
Asset management | 341 | 376 | 404 | 376 | 1,122 | 1,168 | ||||||||||||||||||
Consumer services | 337 | 311 | 348 | 341 | 1,039 | 986 | ||||||||||||||||||
Corporate services | 325 | 344 | 389 | 384 | 1,117 | 1,097 | ||||||||||||||||||
Residential mortgage | 100 | 164 | 160 | 125 | 425 | 453 | ||||||||||||||||||
Service charges on deposits | 158 | 153 | 174 | 172 | 495 | 481 | ||||||||||||||||||
Net gains on sales of securities | 9 | 42 | ||||||||||||||||||||||
Net gains (losses) on sales of securities | 7 | (9 | ) | 20 | 41 | |||||||||||||||||||
Other | 297 | 269 | 252 | 324 | 809 | 960 | ||||||||||||||||||
Total noninterest income | 1,567 | 1,659 | 1,734 | 1,713 | 5,027 | 5,186 | ||||||||||||||||||
Total revenue | 3,665 | 3,731 | 3,829 | 3,775 | 11,288 | 11,372 | ||||||||||||||||||
Provision For Credit Losses | 152 | 54 | 87 | 81 | 366 | 181 | ||||||||||||||||||
Noninterest Expense | ||||||||||||||||||||||||
Personnel | 1,145 | 1,157 | 1,239 | 1,222 | 3,610 | 3,579 | ||||||||||||||||||
Occupancy | 221 | 216 | 215 | 209 | 651 | 634 | ||||||||||||||||||
Equipment | 234 | 222 | 246 | 227 | 720 | 680 | ||||||||||||||||||
Marketing | 54 | 62 | 72 | 64 | 187 | 193 | ||||||||||||||||||
Other | 627 | 692 | 622 | 630 | 1,867 | 1,981 | ||||||||||||||||||
Total noninterest expense | 2,281 | 2,349 | 2,394 | 2,352 | 7,035 | 7,067 | ||||||||||||||||||
Income before income taxes and noncontrolling interests | 1,232 | 1,328 | 1,348 | 1,342 | 3,887 | 4,124 | ||||||||||||||||||
Income taxes | 289 | 324 | 342 | 269 | 949 | 1,003 | ||||||||||||||||||
Net income | 943 | 1,004 | 1,006 | 1,073 | 2,938 | 3,121 | ||||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | 19 | 1 | 18 | 18 | 60 | 23 | ||||||||||||||||||
Preferred stock dividends and discount accretion and redemptions | 65 | 70 | 64 | 64 | 172 | 182 | ||||||||||||||||||
Net income attributable to common shareholders | $ | 859 | $ | 933 | $ | 924 | $ | 991 | $ | 2,706 | $ | 2,916 | ||||||||||||
Earnings Per Common Share | ||||||||||||||||||||||||
Basic | $ | 1.70 | $ | 1.79 | $ | 1.87 | $ | 1.93 | $ | 5.41 | $ | 5.64 | ||||||||||||
Diluted | 1.68 | 1.75 | $ | 1.84 | $ | 1.90 | $ | 5.33 | $ | 5.52 | ||||||||||||||
Average Common Shares Outstanding | ||||||||||||||||||||||||
Basic | 501 | 521 | 490 | 512 | 496 | 516 | ||||||||||||||||||
Diluted | 507 | 529 | 496 | 520 | 502 | 525 | ||||||||||||||||||
See accompanying Notes To Consolidated Financial Statements.
4846 The PNC Financial Services Group, Inc. –Form 10-Q
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
THE PNC FINANCIAL SERVICES GROUP, INC.
Unaudited In millions | Three months ended March 31 | Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||
Net income | $ | 943 | $ | 1,004 | $ | 1,006 | $ | 1,073 | $ | 2,938 | $ | 3,121 | ||||||||||||
Other comprehensive income (loss), before tax and net of reclassifications into Net income: | ||||||||||||||||||||||||
Net unrealized gains (losses) on non-OTTI securities | 504 | 74 | (25 | ) | 154 | 752 | (137 | ) | ||||||||||||||||
Net unrealized gains (losses) on OTTI securities | (38 | ) | 3 | 38 | 4 | 17 | 11 | |||||||||||||||||
Net unrealized gains (losses) on cash flow hedge derivatives | 200 | 239 | (125 | ) | 234 | 138 | 303 | |||||||||||||||||
Pension and other postretirement benefit plan adjustments | 12 | 60 | 11 | 7 | 26 | 57 | ||||||||||||||||||
Other | (27 | ) | (27 | ) | (25 | ) | (1 | ) | (40 | ) | (37 | ) | ||||||||||||
Other comprehensive income (loss), before tax and net of reclassifications into Net income | 651 | 349 | (126 | ) | 398 | 893 | 197 | |||||||||||||||||
Income tax benefit (expense) related to items of other comprehensive income | (249 | ) | (149 | ) | 36 | (162 | ) | (377 | ) | (85 | ) | |||||||||||||
Other comprehensive income (loss), after tax and net of reclassifications into Net income | 402 | 200 | (90 | ) | 236 | 516 | 112 | |||||||||||||||||
Comprehensive income | 1,345 | 1,204 | 916 | 1,309 | 3,454 | 3,233 | ||||||||||||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests | 19 | 1 | 18 | 18 | 60 | 23 | ||||||||||||||||||
Comprehensive income attributable to PNC | $ | 1,326 | $ | 1,203 | $ | 898 | $ | 1,291 | $ | 3,394 | $ | 3,210 | ||||||||||||
See accompanying Notes To Consolidated Financial Statements.
The PNC Financial Services Group, Inc. –Form 10-Q 4947
THE PNC FINANCIAL SERVICES GROUP, INC.
Unaudited In millions, except par value | March 31 2016 | December 31 2015 | ||||||||||||||
| September 30 2016 | December 31 2015 | |||||||||||||||
Assets | ||||||||||||||||
Cash and due from banks (a) | $ | 3,861 | $ | 4,065 | $ | 4,531 | $ | 4,065 | ||||||||
Federal funds sold and resale agreements (b) | 1,123 | 1,369 | 718 | 1,369 | ||||||||||||
Trading securities | 1,884 | 1,726 | 2,612 | 1,726 | ||||||||||||
Interest-earning deposits with banks (a) | 29,478 | 30,546 | 27,058 | 30,546 | ||||||||||||
Loans held for sale (b) | 1,541 | 1,540 | 2,053 | 1,540 | ||||||||||||
Investment securities | 72,569 | 70,528 | 78,514 | 70,528 | ||||||||||||
Loans (b) | 207,485 | 206,696 | 210,446 | 206,696 | ||||||||||||
Allowance for loan and lease losses | (2,711 | ) | (2,727 | ) | (2,619 | ) | (2,727 | ) | ||||||||
Net loans (a) | 204,774 | 203,969 | 207,827 | 203,969 | ||||||||||||
Goodwill | 9,103 | 9,103 | 9,103 | 9,103 | ||||||||||||
Mortgage servicing rights | 1,323 | 1,589 | 1,293 | 1,589 | ||||||||||||
Other intangible assets | 353 | 379 | 304 | 379 | ||||||||||||
Equity investments (a) | 10,391 | 10,587 | 10,605 | 10,587 | ||||||||||||
Other (a) (b) | 24,585 | 23,092 | 24,730 | 23,092 | ||||||||||||
Total assets | $ | 360,985 | $ | 358,493 | $ | 369,348 | $ | 358,493 | ||||||||
Liabilities | ||||||||||||||||
Deposits | ||||||||||||||||
Noninterest-bearing | $ | 78,151 | $ | 79,435 | $ | 82,159 | $ | 79,435 | ||||||||
Interest-bearing | 172,208 | 169,567 | 177,736 | 169,567 | ||||||||||||
Total deposits | 250,359 | 249,002 | 259,895 | 249,002 | ||||||||||||
Borrowed funds | ||||||||||||||||
Federal funds purchased and repurchase agreements | 2,495 | 1,777 | 1,235 | 1,777 | ||||||||||||
Federal Home Loan Bank borrowings | 19,058 | 20,108 | 17,050 | 20,108 | ||||||||||||
Bank notes and senior debt | 21,594 | 21,298 | 22,431 | 21,298 | ||||||||||||
Subordinated debt | 8,707 | 8,556 | 8,708 | 8,556 | ||||||||||||
Other (c) (d) | 2,324 | 2,793 | 2,117 | 2,793 | ||||||||||||
Total borrowed funds | 54,178 | 54,532 | 51,541 | 54,532 | ||||||||||||
Allowance for unfunded loan commitments and letters of credit | 282 | 261 | 310 | 261 | ||||||||||||
Accrued expenses (c) | 4,850 | 4,975 | 5,226 | 4,975 | ||||||||||||
Other (c) | 4,988 | 3,743 | 5,531 | 3,743 | ||||||||||||
Total liabilities | 314,657 | 312,513 | 322,503 | 312,513 | ||||||||||||
Equity | ||||||||||||||||
Preferred stock (e) | ||||||||||||||||
Common stock ($5 par value, authorized 800 shares, issued 542 and 542 shares) | 2,708 | 2,708 | ||||||||||||||
Common stock ($5 par value, authorized 800 shares, issued 542 shares) | 2,709 | 2,708 | ||||||||||||||
Capital surplus – preferred stock | 3,453 | 3,452 | 3,456 | 3,452 | ||||||||||||
Capital surplus – common stock and other | 12,586 | 12,745 | 12,703 | 12,745 | ||||||||||||
Retained earnings | 29,642 | 29,043 | 30,958 | 29,043 | ||||||||||||
Accumulated other comprehensive income (loss) | 532 | 130 | 646 | 130 | ||||||||||||
Common stock held in treasury at cost: 43 and 38 shares | (3,791 | ) | (3,368 | ) | ||||||||||||
Common stock held in treasury at cost: 54 and 38 shares | (4,765 | ) | (3,368 | ) | ||||||||||||
Total shareholders’ equity | 45,130 | 44,710 | 45,707 | 44,710 | ||||||||||||
Noncontrolling interests | 1,198 | 1,270 | 1,138 | 1,270 | ||||||||||||
Total equity | 46,328 | 45,980 | 46,845 | 45,980 | ||||||||||||
Total liabilities and equity | $ | 360,985 | $ | 358,493 | $ | 369,348 | $ | 358,493 | ||||||||
| (a) | Our consolidated assets at |
| (b) | Our consolidated assets at |
| (c) | Our consolidated liabilities at |
| (d) | Our consolidated liabilities at |
| (e) | Par value less than $.5 million at each date. |
See accompanying Notes To Consolidated Financial Statements.
5048 The PNC Financial Services Group, Inc. –Form 10-Q
CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
Unaudited In millions | Three months ended March 31 | Nine months ended September 30 | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
Operating Activities | ||||||||||||||||
Net income | $ | 943 | $ | 1,004 | $ | 2,938 | $ | 3,121 | ||||||||
Adjustments to reconcile net income to net cash provided (used) by operating activities | ||||||||||||||||
Provision for credit losses | 152 | 54 | 366 | 181 | ||||||||||||
Depreciation and amortization | 270 | 252 | 917 | 802 | ||||||||||||
Deferred income taxes | (49 | ) | 40 | (171 | ) | 128 | ||||||||||
Net gains on sales of securities | (9 | ) | (42 | ) | (20 | ) | (41 | ) | ||||||||
Changes in fair value of mortgage servicing rights | 341 | 143 | 559 | 297 | ||||||||||||
Gain on sales of Visa Class B common shares | (44 | ) | (126 | ) | (122 | ) | ||||||||||
Undistributed earnings of BlackRock | (61 | ) | (96 | ) | (256 | ) | (292 | ) | ||||||||
Net change in | ||||||||||||||||
Trading securities and other short-term investments | (946 | ) | (229 | ) | (1,029 | ) | 165 | |||||||||
Loans held for sale | 51 | (268 | ) | (490 | ) | (86 | ) | |||||||||
Other assets | (1,310 | ) | (1,449 | ) | (2,179 | ) | (2,415 | ) | ||||||||
Accrued expenses and other liabilities | 1,084 | 1,044 | 2,197 | 2,280 | ||||||||||||
Other | (146 | ) | (193 | ) | (411 | ) | (385 | ) | ||||||||
Net cash provided (used) by operating activities | 276 | 260 | 2,295 | 3,633 | ||||||||||||
Investing Activities | ||||||||||||||||
Sales | ||||||||||||||||
Securities available for sale | 782 | 1,787 | 2,517 | 3,341 | ||||||||||||
Loans | 371 | 389 | 1,538 | 1,613 | ||||||||||||
Repayments/maturities | ||||||||||||||||
Securities available for sale | 2,005 | 1,762 | 7,683 | 6,013 | ||||||||||||
Securities held to maturity | 523 | 486 | 2,013 | 1,541 | ||||||||||||
Purchases | ||||||||||||||||
Securities available for sale | (3,441 | ) | (6,170 | ) | (15,179 | ) | (17,546 | ) | ||||||||
Securities held to maturity | (687 | ) | (2,000 | ) | (3,741 | ) | (3,735 | ) | ||||||||
Loans | (363 | ) | (242 | ) | (963 | ) | (564 | ) | ||||||||
Net change in | ||||||||||||||||
Federal funds sold and resale agreements | 246 | (41 | ) | 651 | 317 | |||||||||||
Interest-earning deposits with banks | 1,067 | 581 | 3,487 | (2,445 | ) | |||||||||||
Loans | (1,530 | ) | (173 | ) | (5,451 | ) | (1,502 | ) | ||||||||
Other | 119 | (265 | ) | (159 | ) | (567 | ) | |||||||||
Net cash provided (used) by investing activities | (908 | ) | (3,886 | ) | (7,604 | ) | (13,534 | ) | ||||||||
(continued on following page)
The PNC Financial Services Group, Inc. –Form 10-Q 5149
CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
(continued from previous page)
Unaudited In millions | Three months ended March 31 | Nine months ended September 30 | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
Financing Activities | ||||||||||||||||
Net change in | ||||||||||||||||
Noninterest-bearing deposits | $ | (877 | ) | $ | 1,488 | $ | 3,162 | $ | 4,772 | |||||||
Interest-bearing deposits | 2,641 | 2,804 | 8,169 | 7,985 | ||||||||||||
Federal funds purchased and repurchase agreements | 718 | (1,308 | ) | (542 | ) | (1,433 | ) | |||||||||
Commercial paper | (109 | ) | (2 | ) | ||||||||||||
Other borrowed funds | 128 | 1,104 | (15 | ) | 276 | |||||||||||
Sales/issuances | ||||||||||||||||
Federal Home Loan Bank borrowings | 1,250 | 2,250 | ||||||||||||||
Bank notes and senior debt | 997 | 1,743 | 3,855 | 6,428 | ||||||||||||
Commercial paper | 1,322 | 1,394 | ||||||||||||||
Other borrowed funds | 80 | 549 | 143 | 613 | ||||||||||||
Common and treasury stock | 18 | 60 | 63 | 130 | ||||||||||||
Repayments/maturities | ||||||||||||||||
Federal Home Loan Bank borrowings | (1,050 | ) | (31 | ) | (3,058 | ) | (591 | ) | ||||||||
Bank notes and senior debt | (997 | ) | (1,397 | ) | (3,000 | ) | (2,629 | ) | ||||||||
Subordinated debt | 18 | 14 | 57 | |||||||||||||
Commercial paper | (13 | ) | (1,809 | ) | (14 | ) | (5,262 | ) | ||||||||
Other borrowed funds | (360 | ) | (1,481 | ) | (470 | ) | (1,557 | ) | ||||||||
Preferred stock redemption | (500 | ) | ||||||||||||||
Acquisition of treasury stock | (551 | ) | (463 | ) | (1,559 | ) | (1,598 | ) | ||||||||
Preferred stock cash dividends paid | (64 | ) | (68 | ) | (168 | ) | (178 | ) | ||||||||
Common stock cash dividends paid | (260 | ) | (251 | ) | (791 | ) | (779 | ) | ||||||||
Net cash provided (used) by financing activities | 428 | 3,417 | 5,775 | 9,376 | ||||||||||||
Net Increase (Decrease) In Cash And Due From Banks | (204 | ) | (209 | ) | 466 | (525 | ) | |||||||||
Cash and due from banks at beginning of period | 4,065 | 4,360 | 4,065 | 4,360 | ||||||||||||
Cash and due from banks at end of period | $ | 3,861 | $ | 4,151 | $ | 4,531 | $ | 3,835 | ||||||||
Supplemental Disclosures | ||||||||||||||||
Interest paid | $ | 345 | $ | 251 | $ | 980 | $ | 764 | ||||||||
Income taxes paid | 19 | 28 | $ | 461 | $ | 527 | ||||||||||
Income taxes refunded | 33 | 1 | $ | 97 | $ | 2 | ||||||||||
Non-cash Investing and Financing Items | ||||||||||||||||
Transfer from (to) loans to (from) loans held for sale, net | 191 | (7 | ) | $ | 497 | $ | 153 | |||||||||
Transfer from loans to foreclosed assets | 81 | 103 | $ | 225 | $ | 340 | ||||||||||
See accompanying Notes To Consolidated Financial Statements.
5250 The PNC Financial Services Group, Inc. –Form 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PNC FINANCIAL SERVICES GROUP, INC.
BUSINESS
The PNC Financial Services Group, Inc. (PNC) is one of the largest diversified financial services companies in the United States and is headquartered in Pittsburgh, Pennsylvania.
We have businesses engaged in retail banking, corporate and institutional banking, asset management and residential mortgage banking, providing many of our products and services nationally, as well as other products and services in our primary geographic markets located in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, Florida, North Carolina, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Georgia, Missouri, Wisconsin and South Carolina. We also provide certain products and services internationally.
Basis of Financial Statement Presentation
Our consolidated financial statements include the accounts of the parent company and its subsidiaries, most of which are wholly-owned, certain partnership interests, and variable interest entities.
We prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). We have eliminated intercompany accounts and transactions. We have also reclassified certain prior year amounts to conform to the 2016 presentation, which did not have a material impact on our consolidated financial condition or results of operations. Additionally, we evaluate the materiality of identified errors in the financial statements using both an income statement and a balance sheet approach, based on relevant quantitative and qualitative factors. The consolidated financial statements include certain adjustments to correct immaterial errors related to previously reported periods.
In our opinion, the unaudited interim consolidated financial statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
We have also considered the impact of subsequent events on these consolidated financial statements.
When preparing these unaudited interim consolidated financial statements, we have assumed that you have read the audited consolidated financial statements included in our 2015
Annual Report on Form 10-K. Reference is made to Note 1 Accounting Policies in the 2015 Form 10-K for a detailed description of significant accounting policies. Included herein areThere have been no significant changes to our accounting policies that are required to beas disclosed in the 2015 Annual Report on an interim basis as well as policies where there has been a significant change within the first three months of 2016.Form 10-K. These interim consolidated financial statements serve to update the 2015 Form 10-K and may not include all information and notes necessary to constitute a complete set of financial statements.
Use of Estimates
We prepared these consolidated financial statements using financial information available at the time of preparation, which requires us to make estimates and assumptions that affect the amounts reported. Our most significant estimates pertain to our fair value measurements, allowances for loan and lease losses and unfunded loan commitments and letters of credit, and accretion on purchased impaired loans. Actual results may differ from the estimates and the differences may be material to the consolidated financial statements.
The PNC Financial Services Group, Inc. –Form 10-Q53
Nonperforming Loans and Leases
The matrix below summarizes PNC’s policies for classifying certain loans as nonperforming loans and/or discontinuing the accrual of loan interest income.
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54 The PNC Financial Services Group, Inc. –Form 10-Q
See Note 3 Asset Quality in this Report for additional detail on nonperforming assets and asset quality indicators for commercial and consumer loans.
Commercial Loans
We generally charge off Commercial Lending (Commercial, Commercial Real Estate, and Equipment Lease Financing) nonperforming loans when we determine that a specific loan, or portion thereof, is uncollectible. This determination is based on the specific facts and circumstances of the individual loans. In making this determination, we consider the viability of the business or project as a going concern, the past due status when the asset is not well-secured, the expected cash flows to repay the loan, the value of the collateral, and the ability and willingness of any guarantors to perform.
Additionally, in general, for smaller dollar commercial loans of $1 million or less, a partial or full charge-off occurs at 120 days past due for term loans and 180 days past due for revolvers. Certain small business credit card balances that are placed on nonaccrual status when they become 90 days or more past due are charged-off at 180 days past due.
Consumer Loans
Home equity installment loans, home equity lines of credit, and residential real estate loans that are not well-secured and in the process of collection are charged-off at no later than 180 days past due. At that time, the basis in the loan is reduced to the fair value of the collateral less costs to sell. In addition to this policy, the bank recognizes a charge-off on a secured consumer loan when:
The bank holds a subordinate lien position in the loan and a foreclosure notice has been received on the first lien loan;
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The loan is modified or otherwise restructured in a manner that results in the loan becoming collateral dependent;
Notification of bankruptcy has been received within the last 60 days and the loan is 60 days or more past due;
The borrower has been discharged from personal liability through Chapter 7 bankruptcy and has not formally reaffirmed his or her loan obligation to PNC; or
The collateral securing the loan has been repossessed and the value of the collateral is less than the recorded investment of the loan outstanding.
For loans that continue to meet any of the above policies, collateral values are updated annually and subsequent declines in collateral values are charged-off resulting in incremental provision for credit loss.
Most consumer loans and lines of credit, not secured by residential real estate, are charged off after 120-180 days past due.
Accounting for Nonperforming Assets and Leases and Other Nonaccrual Loans
For accrual loans, interest income is accrued on a monthly basis and certain fees and costs are deferred upon origination and recognized in income over the term of the loan utilizing an effective yield method. For nonaccrual loans, interest income accrual and deferred fee/cost recognition is discontinued. Additionally, the current year accrued and uncollected interest is reversed through Net interest income and prior year accrued and uncollected interest is charged-off. Nonaccrual loans may also be charged-off to reduce the basis to the fair value of collateral less costs to sell.
If payment is received on a nonaccrual loan, generally the payment is first applied to the recorded investment; payments are then applied to recover any charged-off amounts related to the loan. Finally, if both recorded investment and any charge-offs have been recovered, then the payment will be recorded as fee and interest income.
For TDRs, payments are applied based upon their contractual terms unless the related loan is deemed non-performing. TDRs are generally included in nonperforming and nonaccrual loans. However, after a reasonable period of time in which the loan performs under restructured terms and meets other performance indicators, it is returned to performing/accruing status. This return to performing/accruing status demonstrates that the bank expects to collect all of the loan’s remaining contractual principal and interest. TDRs resulting from 1) borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and 2) borrowers that are not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.
Other nonaccrual loans are generally not returned to accrual status until the borrower has performed in accordance with the contractual terms and other performance indicators for at least six months, the period of time which was determined to demonstrate the expected collection of the loan’s remaining contractual principal and interest. When a nonperforming loan is returned to accrual status, it is then considered a performing loan.
See Note 3 Asset Quality and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in this Report, as well as Note 3 Asset Quality in Item 8 of our 2015 Form 10-K, for additional TDR information.
The PNC Financial Services Group, Inc. –Form 10-Q55
Allowance for Loan and Lease Losses
We maintain the ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan and lease portfolios as of the balance sheet date. Our determination of the allowance is based on periodic evaluations of these loan and lease portfolios and other relevant factors. This critical estimate includes significant use of PNC’s own historical data and complex methods to interpret this data. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change, and include, among others:
Probability of default (PD),
Loss given default (LGD),
Outstanding balance of the loan,
Movement through delinquency stages,
Amounts and timing of expected future cash flows,
Value of collateral, which may be obtained from third parties, and
Qualitative factors, such as changes in current economic conditions, that may not be reflected in modeled results.
For all loans, except purchased impaired loans, the ALLL is the sum of three components: (i) asset specific/individual impaired reserves, (ii) quantitative (formulaic or pooled) reserves and (iii) qualitative (judgmental) reserves.
The reserve calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.
Asset Specific/Individual Component
Nonperforming loans that are considered impaired under ASC 310 – Receivables, which include all commercial and consumer TDRs, are evaluated for a specific reserve. Specific reserve allocations are determined as follows:
For commercial nonperforming loans and commercial TDRs greater than or equal to a defined dollar threshold, specific reserves are based on an analysis of the present value of the loan’s expected future cash flows, the loan’s observable market price or the fair value of the collateral.
For commercial nonperforming loans and commercial TDRs below the defined dollar threshold, the individual loan’s loss given default (LGD) percentage is multiplied by the loan balance and the results are aggregated for purposes of measuring specific reserve impairment.
Consumer nonperforming loans are collectively reserved for unless classified as consumer TDRs. For consumer TDRs, specific reserves are determined through an analysis of the present value of the loan’s
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Commercial Lending Quantitative Component
The estimates of the quantitative component of ALLL for incurred losses within the commercial lending portfolio segment are determined through statistical loss modeling utilizing PD, LGD and outstanding balance of the loan. Based upon loan risk ratings, we assign PDs and LGDs. Each of these statistical parameters is determined based on internal historical data and market data. PD is influenced by such factors as liquidity, industry, obligor financial structure, access to capital and cash flow. LGD is influenced by collateral type, original and/or updated loan-to-value ratio (LTV), facility structure and other factors.
Consumer Lending Quantitative Component
Quantitative estimates within the consumer lending portfolio segment are calculated primarily using a roll-rate model based on statistical relationships, calculated from historical data that estimate the movement of loan outstandings through the various stages of delinquency and ultimately charge-off over our loss emergence period.
Qualitative Component
While our reserve methodologies strive to reflect all relevant risk factors, there continues to be uncertainty associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal variations between estimates and actual outcomes. We provide additional reserves that are designed to provide coverage for losses attributable to such risks. The ALLL also includes factors that may not be directly measured in the determination of specific or pooled reserves. Such qualitative factors may include:
Industry concentrations and conditions,
Recent credit quality trends,
Recent loss experience in particular portfolios,
Recent macro-economic factors,
Model imprecision,
Changes in lending policies and procedures,
Timing of available information, including the performance of first lien positions, and
Limitations of available historical data.
Allowance for Purchased Non-Impaired Loans
ALLL for purchased non-impaired loans is determined based upon a comparison between the methodologies described above and the remaining acquisition date fair value discount that has yet to be accreted into interest income. After making
56 The PNC Financial Services Group, Inc. –Form 10-Q
the comparison, an ALLL is recorded for the amount greater than the discount, or no ALLL is recorded if the discount is greater.
Allowance for Purchased Impaired Loans
ALLL for purchased impaired loans is determined in accordance with ASC 310-30 by comparing the net present value of the cash flows expected to be collected to the recorded investment for a given loan (or pool of loans). In cases where the net present value of expected cash flows is lower than the recorded investment, ALLL is established. Cash flows expected to be collected represent management’s best estimate of the cash flows expected over the life of a loan (or pool of loans). For large balance commercial loans, cash flows are separately estimated at the loan level. For smaller balance pooled loans, pool cash flows are estimated using cash flow models. Pools were defined at acquisition based on the risk characteristics of the loan. Our cash flow models use loan data including, but not limited to, contractual loan balance, delinquency status of the loan, updated borrower FICO credit scores, geographic information, historical loss experience, and updated LTVs, as well as best estimates for changes in unemployment rates, home prices and other economic factors, to determine estimated cash flows.
See Note 4 Purchased Loans and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional loan data and application of the policies disclosed herein.
Our credit risk management policies, procedures and practices are designed to promote sound lending standards and prudent credit risk management. We have policies, procedures and practices that address financial statement requirements, collateral review and appraisal requirements, advance rates based upon collateral types, appropriate levels of exposure, cross-border risk, lending to specialized industries or borrower type, guarantor requirements, and regulatory compliance.
Allowance for Unfunded Loan Commitments and Letters of Credit
We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable credit losses incurred on these unfunded credit facilities as of the balance sheet date. We determine the allowance based on periodic evaluations of the unfunded credit facilities, including an assessment of the probability of commitment usage, credit risk factors, and, solely for commercial lending, the terms and expiration dates of the unfunded credit facilities. Other than the estimation of the probability of funding, the reserve for unfunded loan commitments is estimated in a manner similar to the methodology used for determining reserves for funded exposures. The allowance for unfunded loan commitments and letters of credit is recorded as a liability on the Consolidated Balance Sheet. Net adjustments to the allowance for unfunded
loan commitments and letters of credit are included in the provision for credit losses.
See Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional loan data and application of the policies disclosed herein.
Earnings Per Common Share
Basic earnings per common share is calculated using the two-class method to determine income attributable to common shareholders. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities under the two-class method. Distributed dividends and dividend equivalents related to participating securities and an allocation of undistributed net income reduce the amount of income attributable to common shareholders. Income attributable to common shareholders is then divided by the weighted-average common shares outstanding for the period.
Diluted earnings per common share is calculated under the more dilutive of either the treasury method or the two-class method. For the diluted calculation, we increase the weighted-average number of shares of common stock outstanding by the assumed conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance, if later, and the number of shares of common stock that would be issued assuming the exercise of stock options and warrants and the issuance of incentive shares using the treasury stock method. These adjustments to the weighted-average number of shares of common stock outstanding are made only when such adjustments will dilute earnings per common share. See Note 11 Earnings Per Share for additional information.
Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting. This ASU simplifies the accounting for several aspects of share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The changes which impacted PNC included a requirement that all excess tax benefits and deficiencies that pertain to share-based payment arrangements be recognized within income tax expense line instead of Capital surplus – common stock and other. This change also removes the impact of the excess tax benefits and deficiencies from the calculation of diluted earnings per share. PNC is required to apply these changes on a prospective basis. Additionally, the ASU no longer requires a presentation of excess tax benefits and deficiencies related to the vesting and exercise of share-based compensation as both an operating outflow and financing inflow on the statement of cash flows. This change was applied on a retrospective basis.
The PNC Financial Services Group, Inc. –Form 10-Q57
We elected to early adopt this standard as of January 1, 2016. Adoption of this ASU did not haveadopt new accounting standards that had a materialsignificant impact on our resultsduring the third quarter of operations or financial position.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810):Amendments to the Consolidation Analysis. All legal entities are subject to evaluation under this ASU, including investment companies and certain other entities measured in a manner consistent with ASC 946 Financial Services – Investment Companies which were previously excluded. The ASU changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, the ASU modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities (VOEs); eliminates the presumption that a general partner should consolidate a limited partnership; potentially changes the consolidation conclusions of reporting entities that are involved with VIEs, in particular those that have fee arrangements and related party arrangements; and provides a scope exception for reporting entities with interests held in certain money market funds. We adopted this standard as of January 1, 2016 under a modified retrospective approach. The impact of adoption resulted in a decrease of $.4 billion in consolidated total assets at January 1, 2016. In addition the adoption impacted the classification of certain limited partnerships and legal entities as either VIEs or VOEs. See Note 2 Loan Sale and Servicing Activities and Variable Interest Entities for further disclosure on adoption of the standard.
NOTE 2 LOAN SALEAND SERVICING ACTIVITIESAND VARIABLE INTEREST ENTITIES
Loan Sale and Servicing Activities
As more fully described in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2015 Form10-K, we have transferred residential and commercial mortgage loans in securitization or sales transactions in which we have continuing involvement. Our continuing involvement generally consists of servicing, repurchasing previously transferred loans under certain conditions and loss share arrangements, and, in limited circumstances, holding of mortgage-backed securities issued by the securitization SPEs.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 PNC retains the servicing, we recognize a servicing right at fair value. See Note 87 Goodwill and Intangible Assets for information on our servicing rights, including the carrying value of servicing assets.
The PNC Financial Services Group, Inc. –Form 10-Q51
The following table provides cash flows associated with PNC’s loan sale and servicing activities:
Table 42:41: Cash Flows Associated with Loan Sale and Servicing Activities
| In millions | Residential Mortgages | Commercial Mortgages (a) | Home Equity Loans/Lines (b) | Residential Mortgages | Commercial Mortgages (a) | Home Equity Loans/Lines (b) | ||||||||||||||||||
CASH FLOWS – Three months ended March 31, 2016 | ||||||||||||||||||||||||
CASH FLOWS – Three months ended September 30, 2016 | ||||||||||||||||||||||||
Sales of loans (c) | $ | 1,438 | $ | 650 | $ | 1,950 | $ | 1,342 | ||||||||||||||||
Repurchases of previously transferred loans (d) | 160 | $ | 133 | |||||||||||||||||||||
Servicing fees (e) | 93 | 30 | $ | 3 | $ | 95 | $ | 31 | $ | 2 | ||||||||||||||
Servicing advances recovered/(funded), net | 28 | 31 | 24 | $ | 13 | $ | (7 | ) | $ | 1 | ||||||||||||||
Cash flows on mortgage-backed securities held (f) | 352 | 105 | $ | 466 | $ | 31 | ||||||||||||||||||
CASH FLOWS – Three months ended March 31, 2015 | ||||||||||||||||||||||||
CASH FLOWS – Three months ended September 30, 2015 | ||||||||||||||||||||||||
Sales of loans (c) | $ | 1,940 | $ | 1,020 | $ | 2,329 | $ | 846 | ||||||||||||||||
Repurchases of previously transferred loans (d) | 169 | $ | 2 | $ | 129 | $ | 90 | |||||||||||||||||
Servicing fees (e) | 83 | 32 | 4 | $ | 84 | $ | 35 | $ | 4 | |||||||||||||||
Servicing advances recovered/(funded), net | (9 | ) | 7 | 24 | $ | 32 | $ | (6 | ) | $ | 3 | |||||||||||||
Cash flows on mortgage-backed securities held (f) | 240 | 60 | $ | 424 | $ | 41 | ||||||||||||||||||
CASH FLOWS – Nine months ended September 30, 2016 | ||||||||||||||||||||||||
Sales of loans (c) | $ | 4,796 | $ | 2,796 | ||||||||||||||||||||
Repurchases of previously transferred loans (d) | $ | 396 | ||||||||||||||||||||||
Servicing fees (e) | $ | 281 | $ | 93 | $ | 8 | ||||||||||||||||||
Servicing advances recovered/(funded), net | $ | 89 | $ | 21 | ||||||||||||||||||||
Cash flows on mortgage-backed securities held (f) | $ | 1,235 | $ | 228 | ||||||||||||||||||||
CASH FLOWS – Nine months ended September 30, 2015 | ||||||||||||||||||||||||
Sales of loans (c) | $ | 6,284 | $ | 3,025 | ||||||||||||||||||||
Repurchases of previously transferred loans (d) | $ | 432 | $ | 92 | ||||||||||||||||||||
Servicing fees (e) | $ | 249 | $ | 103 | $ | 12 | ||||||||||||||||||
Servicing advances recovered/(funded), net | $ | 70 | $ | 22 | $ | 28 | ||||||||||||||||||
Cash flows on mortgage-backed securities held (f) | $ | 1,093 | $ | 155 | ||||||||||||||||||||
| (a) | Represents cash flow information associated with both commercial mortgage loan transfer and servicing activities. |
| (b) | These activities were part of an acquired brokered home equity lending business in which PNC is no longer engaged. |
| (c) | Gains/losses recognized on sales of loans were insignificant for the periods presented. |
| (d) | Includes residential mortgage government insured or guaranteed loans eligible for repurchase through the exercise of our Removal of Account Provision (ROAP) option, and loans repurchased due to alleged breaches of origination covenants or representations and warranties made to purchasers. Includes home equity lines of credit repurchased at the end of their draw periods due to contractual requirements. |
| (e) | Includes contractually specified servicing fees, late charges and ancillary fees. |
| (f) | Represents cash flows on securities we hold issued by a securitization SPE in which PNC transferred to and/or services loans. The carrying values of such securities held were |
58 The PNC Financial Services Group, Inc. –Form 10-Q
The table below presents information about the principal balances of transferred loans that we service and are not recorded on our Consolidated Balance Sheet. We would only experience a loss on these transferred loans if we were required to repurchase a loan due to a breach in representations and warranties or a loss sharing arrangement associated with our continuing involvement with these loans. For more information regarding our recourse and repurchase obligations, including our reserve of estimated losses, see the Recourse and Repurchase Obligations section of Note 1521 Commitments and Guarantees.Guarantees in our 2015 Form 10-K.
52 The PNC Financial Services Group, Inc. –Form 10-Q
Table 43:42: Principal Balance, Delinquent Loans, and Net Charge-offs Related to Serviced Loans For Others
| In millions | Residential Mortgages | Commercial Mortgages (a) | Home Equity Loans/Lines (b) | Residential Mortgages | Commercial Mortgages (a) | Home Equity Loans/Lines (b) | ||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||
Total principal balance | $ | 71,275 | $ | 51,369 | $ | 2,683 | $ | 67,585 | $ | 46,652 | $ | 2,410 | ||||||||||||
Delinquent loans (c) | 1,693 | 1,051 | 896 | $ | 1,485 | $ | 1,082 | $ | 889 | |||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||
Total principal balance | $ | 72,898 | $ | 53,789 | $ | 2,806 | $ | 72,898 | $ | 53,789 | $ | 2,806 | ||||||||||||
Delinquent loans (c) | 1,923 | 1,057 | 904 | $ | 1,923 | $ | 1,057 | $ | 904 | |||||||||||||||
Three months ended March 31, 2016 | ||||||||||||||||||||||||
Three months ended September 30, 2016 | ||||||||||||||||||||||||
Net charge-offs (d) | $ | 26 | $ | 912 | $ | 7 | $ | 24 | $ | 168 | $ | 9 | ||||||||||||
Three months ended March 31, 2015 | ||||||||||||||||||||||||
Three months ended September 30, 2015 | ||||||||||||||||||||||||
Net charge-offs (d) | $ | 32 | $ | 107 | $ | 7 | $ | 23 | $ | 236 | $ | 6 | ||||||||||||
Nine months ended September 30, 2016 | ||||||||||||||||||||||||
Net charge-offs (d) | $ | 78 | $ | 1,237 | $ | 25 | ||||||||||||||||||
Nine months ended September 30, 2015 | ||||||||||||||||||||||||
Net charge-offs (d) | $ | 92 | $ | 491 | $ | 21 | ||||||||||||||||||
| (a) | Represents information at the securitization level in which PNC has sold loans and is the servicer for the securitization. |
| (b) | These activities were part of an acquired brokered home equity lending business in which PNC is no longer engaged. |
| (c) | Serviced delinquent loans are 90 days or more past due or are in process of foreclosure. |
| (d) | Net charge-offs for Residential mortgages and Home equity loans/lines represent credit losses less recoveries distributed and as reported to investors during the period. Net charge-offs for Commercial mortgages represent credit losses less recoveries distributed and as reported by the trustee for commercial mortgage backed securitizations. Realized losses for Agency securitizations are not reflected as we do not manage the underlying real estate upon foreclosure and, as such, do not have access to loss information. |
Variable Interest Entities (VIEs)
As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2015 Form 10-K, we are involved with various entities in the normal course of business that are deemed to be VIEs. The following provides a summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements as of March 31,September 30, 2016 and December 31, 2015, respectively. Amounts presented for March 31,September 30, 2016 are based on the assessments performed in accordance with ASC 810 as amended by ASU 2015-02.2015-02 and adopted in the first quarter of 2016. Specifically, the ASU modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or VOEs.voting interest entities (VOEs). We have not provided additional financial support to these entities which we are not contractually required to provide.
Table 44:43: Consolidated VIEs – Carrying Value (a)
March 31, 2016 (b) In millions | Total | |||||||
September 30, 2016 (b) In millions | Total | |||||||
Assets | ||||||||
Equity investments | $ | 326 | $ | 205 | ||||
Other assets | 41 | 21 | ||||||
Total assets | $ | 367 | $ | 226 | ||||
Total liabilities | $ | 9 | $ | 9 | ||||
Noncontrolling interests | $ | 156 | $ | 121 | ||||
December 31, 2015 In millions | Total | Total | ||||||
Assets | ||||||||
Cash and due from banks | $ | 11 | $ | 11 | ||||
Interest-earning deposits with banks | 4 | 4 | ||||||
Loans | 1,341 | 1,341 | ||||||
Allowance for loan and lease losses | (48 | ) | (48 | ) | ||||
Equity investments | 183 | 183 | ||||||
Other assets | 402 | 402 | ||||||
Total assets | $ | 1,893 | $ | 1,893 | ||||
Liabilities | ||||||||
Other borrowed funds | $ | 148 | $ | 148 | ||||
Accrued expenses | 44 | 44 | ||||||
Other liabilities | 202 | 202 | ||||||
Total liabilities | $ | 394 | $ | 394 | ||||
Noncontrolling interests | $ | 99 | $ | 99 | ||||
| (a) | Amounts represent carrying value on PNC’s Consolidated Balance Sheet. |
| (b) | Amounts for |
The following table provides a summary of non-consolidated VIEs with which we have significant continuing involvement but are not the primary beneficiary. We do not consider our continuing involvement to be significant when it relates to a VIE where we only invest in securities issued by the VIE and were not involved in the design of the VIE or where no transfers have occurred between PNC and the VIE. We have excluded certain transactions with non-consolidated VIEs from the balances presented in Table 4544 where we have determined that our continuing involvement is not significant.
In addition, where PNC only has lending arrangements in the normal course of business with entities that could be VIEs, we have excluded these transactions with non-consolidated entities from the balances presented in Table 45.44. These loans are included as part of the asset quality disclosures that we make in Note 3 Asset Quality.
The PNC Financial Services Group, Inc. –Form 10-Q 5953
Table 45:44: Non-Consolidated VIEs
| In millions | PNC Risk of Loss (a) | Carrying Value of Assets Owned by PNC | Carrying Value of Liabilities Owned by PNC | PNC Risk of Loss (a) | Carrying Value of Assets Owned by PNC | Carrying Value of Liabilities Owned by PNC | ||||||||||||||||||
March 31, 2016 (b) | ||||||||||||||||||||||||
September 30, 2016 (b) | ||||||||||||||||||||||||
Commercial Mortgage-Backed Securitizations (c) | $ | 1,420 | $ | 1,420 | (d) | $ | 1,089 | $ | 1,089 | (d) | ||||||||||||||
Residential Mortgage-Backed Securitizations (c) | 6,579 | 6,579 | (d) | $ | 2 | (f) | 6,764 | 6,764 | (d) | $ | 1 | (f) | ||||||||||||
Tax Credit Investments and Other | 3,004 | 2,918 | (e) | 743 | (g) | 3,138 | 3,072 | (e) | 807 | (g) | ||||||||||||||
Total | $ | 11,003 | $ | 10,917 | $ | 745 | $ | 10,991 | $ | 10,925 | $ | 808 | ||||||||||||
December 31, 2015 | ||||||||||||||||||||||||
Commercial Mortgage-Backed Securitizations (c) | $ | 1,498 | $ | 1,498 | (d) | $ | 1 | (f) | $ | 1,498 | $ | 1,498 | (d) | $ | 1 | (f) | ||||||||
Residential Mortgage-Backed Securitizations (c) | 6,680 | 6,680 | (d) | 1 | (f) | 6,680 | 6,680 | (d) | 1 | (f) | ||||||||||||||
Tax Credit Investments and Other | 2,551 | 2,622 | (e) | 836 | (g) | 2,551 | 2,622 | (e) | 836 | (g) | ||||||||||||||
Total | $ | 10,729 | $ | 10,800 | $ | 838 | $ | 10,729 | $ | 10,800 | $ | 838 | ||||||||||||
| (a) | This represents loans, investments and other assets related to non-consolidated VIEs, net of collateral (if applicable). |
| (b) | Amounts for |
| (c) | Amounts reflect involvement with securitization SPEs where PNC transferred to and/or services loans for an SPE and we hold securities issued by that SPE. Values disclosed in the PNC Risk of Loss column represent our maximum exposure to loss for those securities’ holdings. |
| (d) | Included in Trading securities, Investment securities, Other intangible assets and Other assets on our Consolidated Balance Sheet. |
| (e) | Included in Loans, Equity investments and Other assets on our Consolidated Balance Sheet. |
| (f) | Included in Other liabilities on our Consolidated Balance Sheet. |
| (g) | Included in Deposits and Other liabilities on our Consolidated Balance Sheet. |
Our involvementWe 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 VIEs is discussed furtherthe Community Reinvestment Act. During the nine months ended September 30, 2016, we recognized $160 million of amortization, $167 million of tax credits, and $58 million of other tax benefits associated with qualified investments in detail in Note 2 Loan Salelow income housing tax credits within Income taxes. The amounts for the third quarter of 2016 were $55 million, $56 million and Servicing Activities and Variable Interest Entities in our 2015 Form 10-K.$20 million, respectively.
We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency rates may be a key indicator, among other considerations, of credit risk within the loan portfolios. The measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of payment are considered delinquent. Loan delinquencies exclude loans held for sale, purchased impaired loans, nonperforming loans and loans accounted for under the fair value option which are on nonaccrual status, but include government insured or guaranteed loans and accruing loans accounted for under the fair value option.
Nonperforming assets include nonperforming loans and leases, OREO and foreclosed assets, and nonperforming TDRs.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 4 Purchased Loans for further information.
See Note 1 Accounting Policies in our 2015 Form 10-K for additional delinquency, nonperforming, and charge-off information.
6054 The PNC Financial Services Group, Inc. –Form 10-Q
The following tables display the delinquency status of our loans and our nonperforming assets at March 31,September 30, 2016 and December 31, 2015, respectively.
Table 46:45: Analysis of Loan Portfolio (a)
| Accruing | Accruing | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | Current or Less Than 30 Days Past Due | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days Or More Past Due | Total Past Due (b) | Nonperforming Loans | Fair Value Option Nonaccrual Loans (c) | Purchased Impaired Loans | Total Loans (d) (e) | 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 Due (b) | Nonperforming Loans | Fair Value Option Nonaccrual Loans (c) | Purchased Impaired Loans | Total Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Lending | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 98,593 | $ | 85 | $ | 18 | $ | 39 | $ | 142 | $ | 552 | $ | 29 | $ | 99,316 | $ | 100,845 | $ | 64 | $ | 24 | $ | 37 | $ | 125 | $ | 521 | $ | 21 | $ | 101,512 | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 27,943 | 6 | 1 | 7 | 160 | 120 | 28,230 | 28,993 | 26 | 1 | 27 | 152 | 101 | 29,273 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equipment lease financing | 7,543 | 21 | 21 | 20 | 7,584 | 7,357 | 1 | 2 | 3 | 18 | 7,378 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total commercial lending | 134,079 | 112 | 19 | 39 | 170 | 732 | 149 | 135,130 | 137,195 | 91 | 27 | 37 | 155 | 691 | 122 | 138,163 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer Lending | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Home equity | 29,079 | 57 | 27 | 84 | 957 | 1,338 | 31,458 | 28,267 | 55 | 27 | 82 | 895 | 1,188 | 30,432 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate (f) | 11,322 | 139 | 61 | 506 | 706 | 536 | $ | 215 | 1,893 | 14,672 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | 11,969 | 110 | 71 | 496 | 677 | (f) | 502 | $ | 223 | 1,770 | 15,141 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit card | 4,668 | 25 | 17 | 32 | 74 | 4 | 4,746 | 4,947 | 28 | 19 | 31 | 78 | 4 | 5,029 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other consumer (g) | 20,964 | 173 | 85 | 205 | 463 | 52 | 21,479 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other consumer | 21,163 | 170 | 92 | 202 | 464 | (g) | 54 | 21,681 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total consumer lending | 66,033 | 394 | 190 | 743 | 1,327 | 1,549 | 215 | 3,231 | 72,355 | 66,346 | 363 | 209 | 729 | 1,301 | 1,455 | 223 | 2,958 | 72,283 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 200,112 | $ | 506 | $ | 209 | $ | 782 | $ | 1,497 | $ | 2,281 | $ | 215 | $ | 3,380 | $ | 207,485 | $ | 203,541 | $ | 454 | $ | 236 | $ | 766 | $ | 1,456 | $ | 2,146 | $ | 223 | $ | 3,080 | $ | 210,446 | ||||||||||||||||||||||||||||||||||||
Percentage of total loans | 96.45 | % | .24 | % | .10 | % | .38 | % | .72 | % | 1.10 | % | .10 | % | 1.63 | % | 100.00 | % | 96.72 | % | .22 | % | .11 | % | .36 | % | .69 | % | 1.02 | % | .11 | % | 1.46 | % | 100.00 | % | ||||||||||||||||||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Lending | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 98,075 | $ | 69 | $ | 32 | $ | 45 | $ | 146 | $ | 351 | $ | 36 | $ | 98,608 | $ | 98,075 | $ | 69 | $ | 32 | $ | 45 | $ | 146 | $ | 351 | $ | 36 | $ | 98,608 | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 27,134 | 10 | 4 | 14 | 187 | 133 | 27,468 | 27,134 | 10 | 4 | 14 | 187 | 133 | 27,468 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equipment lease financing | 7,440 | 19 | 2 | 21 | 7 | 7,468 | 7,440 | 19 | 2 | 21 | 7 | 7,468 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total commercial lending | 132,649 | 98 | 38 | 45 | 181 | 545 | 169 | 133,544 | 132,649 | 98 | 38 | 45 | 181 | 545 | 169 | 133,544 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer Lending | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Home equity | 29,656 | 63 | 30 | 93 | 977 | 1,407 | 32,133 | 29,656 | 63 | 30 | 93 | 977 | 1,407 | 32,133 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate (f) | 10,918 | 142 | 65 | 566 | 773 | 549 | $ | 225 | 1,946 | 14,411 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | 10,918 | 142 | 65 | 566 | 773 | (f) | 549 | $ | 225 | 1,946 | 14,411 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit card | 4,779 | 28 | 19 | 33 | 80 | 3 | 4,862 | 4,779 | 28 | 19 | 33 | 80 | 3 | 4,862 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other consumer (g) | 21,181 | 180 | 96 | 237 | 513 | 52 | 21,746 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other consumer | 21,181 | 180 | 96 | 237 | 513 | (g) | 52 | 21,746 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total consumer lending | 66,534 | 413 | 210 | 836 | 1,459 | 1,581 | 225 | 3,353 | 73,152 | 66,534 | 413 | 210 | 836 | 1,459 | 1,581 | 225 | 3,353 | 73,152 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 199,183 | $ | 511 | $ | 248 | $ | 881 | $ | 1,640 | $ | 2,126 | $ | 225 | $ | 3,522 | $ | 206,696 | $ | 199,183 | $ | 511 | $ | 248 | $ | 881 | $ | 1,640 | $ | 2,126 | $ | 225 | $ | 3,522 | $ | 206,696 | ||||||||||||||||||||||||||||||||||||
Percentage of total loans | 96.36 | % | .25 | % | .12 | % | .43 | % | .80 | % | 1.03 | % | .11 | % | 1.70 | % | 100.00 | % | 96.36 | % | .25 | % | .12 | % | .43 | % | .80 | % | 1.03 | % | .11 | % | 1.70 | % | 100.00 | % | ||||||||||||||||||||||||||||||||||||
| (a) | Amounts in table represent recorded investment and exclude loans held for sale. Recorded investment in a loan includes the unpaid principal balance plus accrued interest and net accounting adjustments, less any charge-offs. Recorded investment does not include any associated valuation allowance. |
| (b) | Past due loan amounts exclude purchased impaired loans, even if contractually past due (or if we do not expect to receive payment in full based on the original contractual terms), as we are currently accreting interest income over the expected life of the loans. |
| (c) | Consumer loans accounted for under the fair value option for which we do not expect to collect substantially all principal and interest are subject to nonaccrual accounting and classification upon meeting any of our nonaccrual policies. Given that these loans are not accounted for at amortized cost, these loans have been excluded from the nonperforming loan population. |
| (d) | Net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.3 billion and $1.4 billion at |
| (e) | Future accretable yield related to purchased impaired loans is not included in the analysis of loan portfolio. |
| (f) | Past due loan amounts |
| (g) | Past due loan amounts |
The PNC Financial Services Group, Inc. –Form 10-Q61
In the normal course of business, we originate or purchase loan products with contractual characteristics that, when concentrated, may increase our exposure as a holder of those loan products. Possible product features that may create a concentration of credit risk would include a high original or updated LTV ratio, terms that may expose the borrower to future increases in repayments above increases in market interest rates, and interest-only loans, among others. We also originate home equity and residential real estate loans that are concentrated in our primary geographic markets.
We originate interest-only loans to commercial borrowers. Such credit arrangements are usually designed to match borrower cash flow expectations (e.g., working capital lines, revolvers). These products are standard in the financial services industry and product features are considered during the underwriting process to mitigate the increased risk that the interest-only feature may result in borrowers not being able to make interest and principal payments when due. We do not believe that these product features create a concentration of credit risk.
At March 31,September 30, 2016, we pledged $21.3$21.9 billion of commercial loans to the Federal Reserve Bank (FRB) and $56.9$59.1 billion of residential real estate and other loans to the Federal Home Loan Bank (FHLB) as collateral for the contingent ability to borrow, if necessary. The comparable amounts at December 31, 2015 were $20.2 billion and $56.4 billion, respectively.
The PNC Financial Services Group, Inc. –Form 10-Q55
Table 47:46: Nonperforming Assets
| Dollars in millions | March 31 2016 | December 31 2015 | September 30 2016 | December 31 2015 | ||||||||||||
Nonperforming loans | ||||||||||||||||
Total commercial lending | $ | 732 | $ | 545 | $ | 691 | $ | 545 | ||||||||
Total consumer lending (a) | 1,549 | 1,581 | 1,455 | 1,581 | ||||||||||||
Total nonperforming loans (b)(c) | 2,281 | 2,126 | ||||||||||||||
Total nonperforming loans (b) (c) | 2,146 | 2,126 | ||||||||||||||
OREO and foreclosed assets | ||||||||||||||||
Other real estate owned (OREO) | 259 | 279 | 217 | 279 | ||||||||||||
Foreclosed and other assets | 12 | 20 | 12 | 20 | ||||||||||||
Total OREO and foreclosed assets | 271 | 299 | 229 | 299 | ||||||||||||
Total nonperforming assets | $ | 2,552 | $ | 2,425 | $ | 2,375 | $ | 2,425 | ||||||||
Nonperforming loans to total loans | 1.10 | % | 1.03 | % | 1.02 | % | 1.03 | % | ||||||||
Nonperforming assets to total loans, OREO and foreclosed assets | 1.23 | 1.17 | 1.13 | % | 1.17 | % | ||||||||||
Nonperforming assets to total assets | .71 | .68 | .64 | % | .68 | % | ||||||||||
| (a) | Excludes most consumer loans and lines of credit, not secured by residential real estate, which are charged off after 120 to 180 days past due and are not placed on nonperforming status. |
| (b) | Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. |
| (c) | The recorded investment of loans collateralized by residential real estate property that are in process of foreclosure was |
Nonperforming loans also include certain loans whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. In accordance with applicable accounting guidance, these loans are considered TDRs. See Note 1 Accounting Policies in our 2015 Form 10-K and the TDR section within this Note.
Total nonperforming loans in the nonperforming assets table above include TDRs of $1.2 billion at March 31,September 30, 2016 and $1.1 billion at December 31, 2015. TDRs that are performing, including consumer credit card TDR loans, totaled $1.2 billion at both March 31,September 30, 2016 and December 31, 2015, and are excluded from nonperforming loans. Nonperforming TDRs are returned to accrual and classified as performing after demonstrating a period of at least six months of consecutive performance under the restructured terms. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.
Additional Asset Quality Indicators
We have two overall portfolio segments – Commercial Lending and Consumer Lending. Each of these two segments is comprised ofcomprises 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 comprisedcomposed of the commercial, commercial real estate, equipment lease financing, and commercial purchased impaired loan classes. The Consumer Lending segment is comprisedcomposed of the home equity, residential real estate, credit card, other consumer, and consumer purchased impaired loan classes.
62 The PNC Financial Services Group, Inc. –Form 10-Q
Commercial Lending Asset Classes
Commercial Loan Class
For commercial loans, we monitor the performance of the borrower in a disciplined and regular manner based upon the level of credit risk inherent in the loan. To evaluate the level of credit risk, we assign an internal risk rating reflecting the borrower’s PD and LGD. This two-dimensional credit risk rating methodology provides granularity in the risk monitoring process on an ongoing basis. These ratings are reviewed and updated, generally at least once per year. Additionally, no less frequently than on an annual basis, we review PD rates related to each rating grade based upon internal historical data. These rates are updated as needed and augmented by market data as deemed necessary. For small balance homogenoushomogeneous pools of commercial loans, mortgages and leases, we apply statistical modeling to assist in determining the probability of default within these pools. Further, on a periodic basis, we update our LGD estimates associated with each rating grade based upon historical data. The combination of the PD and LGD ratings assigned to a commercial loan, capturing both the combination of expectations of default and loss severity in event of default, reflects the relative estimated likelihood of loss for that loan at the reporting date. In general, loans with better PD and LGD tend to have a lower likelihood of loss compared to loans with worse PD and LGD. The loss amount also considers an estimate of exposure at date of default, which we also periodically update based upon historical data.
Based upon the amount of the lending arrangement and our risk rating assessment, we follow a formal schedule of written periodic review. Quarterly, we conduct formal reviews of a market’s or business unit’s entire loan portfolio, focusing on those loans which we perceive to be of higher risk, based upon PDs and LGDs, or loans for which credit quality is weakening. If circumstances warrant, it is our practice to review any customer obligation and its level of credit risk more frequently. We attempt to proactively manage our loans by using various procedures that are customized to the risk of a given loan, including ongoing outreach, contact, and assessment of obligor financial conditions, collateral inspection and appraisal.
56 The PNC Financial Services Group, Inc. –Form 10-Q
Commercial Real Estate Loan Class
We manage credit risk associated with our commercial real estate projects and commercial mortgage activities similar to commercial loans by analyzing PD and LGD. Additionally, risks connected with commercial real estate projects and commercial mortgage activities tend to be correlated to the loan structure and collateral location, project progress and business environment. As a result, these attributes are also monitored and utilized in assessing credit risk.
As with the commercial class, a formal schedule of periodic review is also performed to assess market/geographic risk and business unit/industry risk. Often as a result of these overviews, more in-depth reviews and increased scrutiny are placed on areas of higher risk, including adverse changes in risk ratings, deteriorating operating trends, and/or areas that concern management. These reviews are designed to assess risk and take actions to mitigate our exposure to such risks.
Equipment Lease Financing Loan Class
We manage credit risk associated with our equipment lease financing loan class similar to commercial loans by analyzing PD and LGD.
Based upon the dollar amount of the lease and of the level of credit risk, we follow a formal schedule of periodic review. Generally, this occurs quarterly, although we have established practices to review such credit risk more frequently if circumstances warrant. Our review process entails analysis of the following factors: equipment value/residual value, exposure levels, jurisdiction risk, industry risk, guarantor requirements, and regulatory compliance.
Commercial Purchased Impaired Loan Class
Estimates of the expected cash flows primarily determine the valuation of commercial purchased impaired loans. Commercial cash flow estimates are influenced by a number of credit related items, which include but are not limited to: estimated collateral value, receipt of additional collateral, secondary trading prices, circumstances of possible and/or ongoing liquidation, capital availability, business operations and payment patterns.
We attempt to proactively manage these factors by using various procedures that are customized to the risk of a given loan. These procedures include a review by our Special Asset Committee, (SAC), ongoing outreach, contact, and assessment of obligor financial conditions, collateral inspection and appraisal.
See Note 4 Purchased Loans for additional information.
The PNC Financial Services Group, Inc. –Form 10-Q63
Table 48:47: Commercial Lending Asset Quality Indicators (a)(b)
| Criticized Commercial Loans | Criticized Commercial Loans | |||||||||||||||||||||||||||||||||||||||
| In millions | Pass Rated | Special Mention (c) | Substandard (d) | Doubtful (e) | Total Loans | Pass Rated | Special Mention (c) | Substandard (d) | Doubtful (e) | Total Loans | ||||||||||||||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 93,617 | $ | 1,837 | $ | 3,680 | $ | 153 | $ | 99,287 | $ | 96,035 | $ | 2,046 | $ | 3,335 | $ | 75 | $ | 101,491 | ||||||||||||||||||||
Commercial real estate | 27,571 | 91 | 441 | 7 | 28,110 | 28,768 | 60 | 328 | 16 | 29,172 | ||||||||||||||||||||||||||||||
Equipment lease financing | 7,245 | 100 | 231 | 8 | 7,584 | 7,185 | 69 | 116 | 8 | 7,378 | ||||||||||||||||||||||||||||||
Purchased impaired loans | 23 | 2 | 100 | 24 | 149 | 35 | 1 | 80 | 6 | 122 | ||||||||||||||||||||||||||||||
Total commercial lending | $ | 128,456 | $ | 2,030 | $ | 4,452 | $ | 192 | $ | 135,130 | $ | 132,023 | $ | 2,176 | $ | 3,859 | $ | 105 | $ | 138,163 | ||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 93,364 | $ | 2,029 | $ | 3,089 | $ | 90 | $ | 98,572 | $ | 93,364 | $ | 2,029 | $ | 3,089 | $ | 90 | $ | 98,572 | ||||||||||||||||||||
Commercial real estate | 26,729 | 120 | 481 | 5 | 27,335 | 26,729 | 120 | 481 | 5 | 27,335 | ||||||||||||||||||||||||||||||
Equipment lease financing | 7,230 | 87 | 150 | 1 | 7,468 | 7,230 | 87 | 150 | 1 | 7,468 | ||||||||||||||||||||||||||||||
Purchased impaired loans | 6 | 157 | 6 | 169 | 6 | 157 | 6 | 169 | ||||||||||||||||||||||||||||||||
Total commercial lending | $ | 127,323 | $ | 2,242 | $ | 3,877 | $ | 102 | $ | 133,544 | $ | 127,323 | $ | 2,242 | $ | 3,877 | $ | 102 | $ | 133,544 | ||||||||||||||||||||
| (a) | Based upon PDs and LGDs. We apply a split rating classification to certain loans meeting threshold criteria. By assigning a split classification, a loan’s exposure amount may be split into more than one classification category in the above table. |
| (b) | Loans are included above based on the Regulatory Classification definitions of “Pass”, “Special Mention”, “Substandard” and “Doubtful”. |
| (c) | Special Mention rated loans have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects at some future date. These loans do not expose us to sufficient risk to warrant a more adverse classification at this time. |
| (d) | Substandard rated loans have a well-defined weakness or weaknesses that jeopardize the collection or liquidation of debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. |
| (e) | Doubtful rated loans possess all the inherent weaknesses of a Substandard loan with the additional characteristics that the weakness makes collection or liquidation in full improbable due to existing facts, conditions, and values. |
The PNC Financial Services Group, Inc. –Form 10-Q57
Consumer Lending Asset Classes
Home Equity and Residential Real Estate Loan Classes
We use several credit quality indicators, including delinquency information, nonperforming loan information, updated credit scores, originated and updated LTVloan-to-value (LTV) ratios, and geography, to monitor and manage credit risk within the home equity and residential real estate loan classes. We evaluate mortgage loan performance by source originators and loan servicers. A summary of asset quality indicators follows:
Delinquency/Delinquency Rates: We monitor trending of delinquency/delinquency rates for home equity and residential real estate loans. See the Asset Quality section of this Note 3 for additional information.
Nonperforming Loans: We monitor trending of nonperforming loans for home equity and residential real estate loans. See the Asset Quality section of this Note 3 for additional information.
Credit Scores: We use a national third-party provider to update FICO credit scores for home equity loans and lines of credit and residential real estate loans at least quarterly. The updated scores are incorporated into a series of credit management reports, which are utilized to monitor the risk in the loan classes.
LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions): At least annually, we update the property values of real estate collateral and calculate an
updated LTV ratio. For open-end credit lines secured by real estate in regions experiencing significant declines in property values, more frequent valuations may occur. We examine LTV migration and stratify LTV into categories to monitor the risk in the loan classes.
Historically, we used, and we continue to use, a combination of original LTV and updated LTV for internal risk management and reporting purposes (e.g., line management, loss mitigation strategies). In addition to the fact that estimated property values by their nature are estimates, given certain data limitations it is important to note that updated LTVs may be based upon management’s assumptions (e.g., if an updated LTV is not provided by the third-party service provider, home price index (HPI) changes will be incorporated in arriving at management’s estimate of updated LTV).
Geography: Geographic concentrations are monitored to evaluate and manage exposures. Loan purchase programs are sensitive to, and focused within, certain regions to manage geographic exposures and associated risks.
A combination of updated FICO scores, originated and updated LTV ratios and geographic location assigned to home equity loans and lines of credit and residential real estate loans is used to monitor the risk in the loan classes. Loans with higher FICO scores and lower LTVs tend to have a lower level of risk. Conversely, loans with lower FICO scores, higher LTVs, and in certain geographic locations tend to have a higher level of risk.
64 The PNC Financial Services Group, Inc. –Form 10-Q
Consumer Purchased Impaired Loan Class
Estimates of the expected cash flows primarily determine the valuation of consumer purchased impaired loans. Consumer cash flow estimates are influenced by a number of credit related items, which include, but are not limited to: estimated real estate values, payment patterns, updated FICO scores, the current economic environment, updated LTV ratios and the date of origination. These key factors are monitored to help ensure that concentrations of risk are managed and cash flows are maximized.
See Note 4 Purchased Loans for additional information.
Table 49:48: Home Equity and Residential Real Estate Balances
| In millions | March 31 2016 | December 31 2015 | September 30 2016 | December 31 2015 | ||||||||||||
Home equity and residential real estate loans – excluding purchased impaired loans (a) | $ | 42,007 | $ | 42,268 | $ | 41,764 | $ | 42,268 | ||||||||
Home equity and residential real estate loans – purchased impaired loans (b) | 3,537 | 3,684 | 3,211 | 3,684 | ||||||||||||
Government insured or guaranteed residential real estate mortgages (a) | 892 | 923 | 851 | 923 | ||||||||||||
Difference between outstanding balance and recorded investment in purchased impaired loans | (306 | ) | (331 | ) | (253 | ) | (331 | ) | ||||||||
Total home equity and residential real estate loans (a) | $ | 46,130 | $ | 46,544 | $ | 45,573 | $ | 46,544 | ||||||||
| (a) | Represents recorded investment. |
| (b) | Represents outstanding balance. |
58 The PNC Financial Services Group, Inc. –Form 10-Q
Table 50:49: Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans (a) (b)
| Home Equity | Residential Real Estate | |||||||||||||||
| March 31, 2016 – in millions | 1st Liens | 2nd Liens | Total | |||||||||||||
Current estimated LTV ratios (c) | ||||||||||||||||
Greater than or equal to 125% and updated FICO scores: | ||||||||||||||||
Greater than 660 | $ | 238 | $ | 917 | $ | 275 | $ | 1,430 | ||||||||
Less than or equal to 660 (d) (e) | 41 | 173 | 62 | 276 | ||||||||||||
Missing FICO | 1 | 6 | 3 | 10 | ||||||||||||
Greater than or equal to 100% to less than 125% and updated FICO scores: | ||||||||||||||||
Greater than 660 | 626 | 1,668 | 554 | 2,848 | ||||||||||||
Less than or equal to 660 (d) (e) | 87 | 286 | 98 | 471 | ||||||||||||
Missing FICO | 3 | 4 | 6 | 13 | ||||||||||||
Greater than or equal to 90% to less than 100% and updated FICO scores: | ||||||||||||||||
Greater than 660 | 682 | 1,449 | 596 | 2,727 | ||||||||||||
Less than or equal to 660 | 94 | 217 | 81 | 392 | ||||||||||||
Missing FICO | 1 | 3 | 9 | 13 | ||||||||||||
Less than 90% and updated FICO scores: | ||||||||||||||||
Greater than 660 | 13,762 | 7,638 | 9,515 | 30,915 | ||||||||||||
Less than or equal to 660 | 1,288 | 888 | 584 | 2,760 | ||||||||||||
Missing FICO | 33 | 16 | 103 | 152 | ||||||||||||
Total home equity and residential real estate loans | $ | 16,856 | $ | 13,265 | $ | 11,886 | $ | 42,007 | ||||||||
(continued on following page)
| Home Equity | Residential Real Estate | |||||||||||||||
| September 30, 2016 – in millions | 1st Liens | 2nd Liens | Total | |||||||||||||
Current estimated LTV ratios (c) | ||||||||||||||||
Greater than or equal to 125% and updated FICO scores: | ||||||||||||||||
Greater than 660 | $ | 197 | $ | 726 | $ | 205 | $ | 1,128 | ||||||||
Less than or equal to 660 (d) (e) | 40 | 135 | 38 | 213 | ||||||||||||
Missing FICO | 5 | 3 | 8 | |||||||||||||
Greater than or equal to 100% to less than 125% and updated FICO scores: | ||||||||||||||||
Greater than 660 | 480 | 1,372 | 391 | 2,243 | ||||||||||||
Less than or equal to 660 (d) (e) | 78 | 240 | 88 | 406 | ||||||||||||
Missing FICO | 1 | 3 | 12 | 16 | ||||||||||||
Greater than or equal to 90% to less than 100% and updated FICO scores: | ||||||||||||||||
Greater than 660 | 535 | 1,233 | 520 | 2,288 | ||||||||||||
Less than or equal to 660 | 77 | 195 | 78 | 350 | ||||||||||||
Missing FICO | 2 | 2 | 12 | 16 | ||||||||||||
Less than 90% and updated FICO scores: | ||||||||||||||||
Greater than 660 | 13,934 | 7,771 | 10,458 | 32,163 | ||||||||||||
Less than or equal to 660 | 1,334 | 850 | 593 | 2,777 | ||||||||||||
Missing FICO | 22 | 12 | 122 | 156 | ||||||||||||
Total home equity and residential real estate loans | $ | 16,700 | $ | 12,544 | $ | 12,520 | $ | 41,764 | ||||||||
The PNC Financial Services Group, Inc. –Form 10-Q65
(continued from previous page)
| Home Equity | Residential Real Estate | Home Equity | Residential Real Estate | |||||||||||||||||||||||||||||
| December 31, 2015 – in millions | 1st Liens | 2nd Liens | Total | 1st Liens | 2nd Liens | Total | ||||||||||||||||||||||||||
Current estimated LTV ratios (c) | ||||||||||||||||||||||||||||||||
Greater than or equal to 125% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | $ | 283 | $ | 960 | $ | 284 | $ | 1,527 | $ | 283 | $ | 960 | $ | 284 | $ | 1,527 | ||||||||||||||||
Less than or equal to 660 (d) (e) | 40 | 189 | 68 | 297 | 40 | 189 | 68 | 297 | ||||||||||||||||||||||||
Missing FICO | 1 | 8 | 5 | 14 | 1 | 8 | 5 | 14 | ||||||||||||||||||||||||
Greater than or equal to 100% to less than 125% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 646 | 1,733 | 564 | 2,943 | 646 | 1,733 | 564 | 2,943 | ||||||||||||||||||||||||
Less than or equal to 660 (d) (e) | 92 | 302 | 102 | 496 | 92 | 302 | 102 | 496 | ||||||||||||||||||||||||
Missing FICO | 3 | 4 | 8 | 15 | 3 | 4 | 8 | 15 | ||||||||||||||||||||||||
Greater than or equal to 90% to less than 100% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 698 | 1,492 | 615 | 2,805 | 698 | 1,492 | 615 | 2,805 | ||||||||||||||||||||||||
Less than or equal to 660 | 88 | 226 | 94 | 408 | 88 | 226 | 94 | 408 | ||||||||||||||||||||||||
Missing FICO | 1 | 3 | 10 | 14 | 1 | 3 | 10 | 14 | ||||||||||||||||||||||||
Less than 90% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 13,895 | 7,808 | 9,117 | 30,820 | 13,895 | 7,808 | 9,117 | 30,820 | ||||||||||||||||||||||||
Less than or equal to 660 | 1,282 | 923 | 570 | 2,775 | 1,282 | 923 | 570 | 2,775 | ||||||||||||||||||||||||
Missing FICO | 31 | 18 | 105 | 154 | 31 | 18 | 105 | 154 | ||||||||||||||||||||||||
Total home equity and residential real estate loans | $ | 17,060 | $ | 13,666 | $ | 11,542 | $ | 42,268 | $ | 17,060 | $ | 13,666 | $ | 11,542 | $ | 42,268 | ||||||||||||||||
| (a) | Excludes purchased impaired loans of approximately |
| (b) | Amounts shown represent recorded investment. |
| (c) | Based upon updated LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions). Updated LTV is estimated using modeled property values. These ratios are updated at least semi-annually. The related estimates and inputs are based upon an approach that uses a combination of third-party automated valuation models (AVMs), broker price opinions (BPOs), HPI indices, property location, internal and external balance information, origination data and management assumptions. We generally utilize origination lien balances provided by a third-party, where applicable, which do not include an amortization assumption when calculating updated LTV. Accordingly, the results of these calculations do not represent actual appraised loan level collateral or updated LTV based upon lien balances held by others, and as such, are necessarily imprecise and subject to change as we enhance our methodology. |
| (d) | Higher risk loans are defined as loans with both an updated FICO score of less than or equal to 660 and an updated LTV greater than or equal to 100%. |
| (e) | The following states had the highest percentage of higher risk loans at |
66The PNC Financial Services Group, Inc. –Form 10-Q59
Table 51:50: Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans (a)
| Home Equity (b) (c) | Residential Real Estate (b) (c) | |||||||||||||||
| March 31, 2016 – in millions | 1st Liens | 2nd Liens | Total | |||||||||||||
Current estimated LTV ratios (d) | ||||||||||||||||
Greater than or equal to 125% and updated FICO scores: | ||||||||||||||||
Greater than 660 | $ | 6 | $ | 157 | $ | 179 | $ | 342 | ||||||||
Less than or equal to 660 | 5 | 71 | 73 | 149 | ||||||||||||
Missing FICO | 6 | 4 | 10 | |||||||||||||
Greater than or equal to 100% to less than 125% and updated FICO scores: | ||||||||||||||||
Greater than 660 | 9 | 311 | 167 | 487 | ||||||||||||
Less than or equal to 660 | 10 | 132 | 115 | 257 | ||||||||||||
Missing FICO | 8 | 7 | 15 | |||||||||||||
Greater than or equal to 90% to less than 100% and updated FICO scores: | ||||||||||||||||
Greater than 660 | 9 | 161 | 120 | 290 | ||||||||||||
Less than or equal to 660 | 6 | 72 | 70 | 148 | ||||||||||||
Missing FICO | 4 | 3 | 7 | |||||||||||||
Less than 90% and updated FICO scores: | ||||||||||||||||
Greater than 660 | 115 | 335 | 617 | 1,067 | ||||||||||||
Less than or equal to 660 | 87 | 176 | 443 | 706 | ||||||||||||
Missing FICO | 1 | 12 | 30 | 43 | ||||||||||||
Missing LTV and updated FICO scores: | ||||||||||||||||
Greater than 660 | 1 | 11 | 12 | |||||||||||||
Less than or equal to 660 | 4 | 4 | ||||||||||||||
Total home equity and residential real estate loans | $ | 249 | $ | 1,445 | $ | 1,843 | $ | 3,537 | ||||||||
(continued on following page)
| Home Equity (b) (c) | Residential Real Estate (b) (c) | |||||||||||||||
| September 30, 2016 – in millions | 1st Liens | 2nd Liens | Total | |||||||||||||
Current estimated LTV ratios (d) | ||||||||||||||||
Greater than or equal to 125% and updated FICO scores: | ||||||||||||||||
Greater than 660 | $ | 4 | $ | 118 | $ | 144 | $ | 266 | ||||||||
Less than or equal to 660 | 4 | 53 | 49 | 106 | ||||||||||||
Missing FICO | 3 | 6 | 9 | |||||||||||||
Greater than or equal to 100% to less than 125% and updated FICO scores: | ||||||||||||||||
Greater than 660 | 8 | 284 | 146 | 438 | ||||||||||||
Less than or equal to 660 | 8 | 117 | 94 | 219 | ||||||||||||
Missing FICO | 4 | 9 | 13 | |||||||||||||
Greater than or equal to 90% to less than 100% and updated FICO scores: | ||||||||||||||||
Greater than 660 | 7 | 152 | 106 | 265 | ||||||||||||
Less than or equal to 660 | 5 | 66 | 55 | 126 | ||||||||||||
Missing FICO | 2 | 6 | 8 | |||||||||||||
Less than 90% and updated FICO scores: | ||||||||||||||||
Greater than 660 | 110 | 322 | 607 | 1,039 | ||||||||||||
Less than or equal to 660 | 83 | 166 | 399 | 648 | ||||||||||||
Missing FICO | 1 | 5 | 48 | 54 | ||||||||||||
Missing LTV and updated FICO scores: | ||||||||||||||||
Greater than 660 | 1 | 14 | 15 | |||||||||||||
Less than or equal to 660 | 1 | 3 | 4 | |||||||||||||
Missing FICO | 1 | 1 | ||||||||||||||
Total home equity and residential real estate loans | $ | 232 | $ | 1,292 | $ | 1,687 | $ | 3,211 | ||||||||
The PNC Financial Services Group, Inc. –Form 10-Q67
(continued from previous page)
| Home Equity (b) (c) | Residential Real Estate (b) (c) | Home Equity (b) (c) | Residential Real Estate (b) (c) | |||||||||||||||||||||||||||||
| December 31, 2015 – in millions | 1st Liens | 2nd Liens | Total | 1st Liens | 2nd Liens | Total | ||||||||||||||||||||||||||
Current estimated LTV ratios (d) | ||||||||||||||||||||||||||||||||
Greater than or equal to 125% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | $ | 6 | $ | 164 | $ | 147 | $ | 317 | $ | 6 | $ | 164 | $ | 147 | $ | 317 | ||||||||||||||||
Less than or equal to 660 | 6 | 79 | 76 | 161 | 6 | 79 | 76 | 161 | ||||||||||||||||||||||||
Missing FICO | 7 | 5 | 12 | 7 | 5 | 12 | ||||||||||||||||||||||||||
Greater than or equal to 100% to less than 125% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 12 | 331 | 186 | 529 | 12 | 331 | 186 | 529 | ||||||||||||||||||||||||
Less than or equal to 660 | 9 | 145 | 118 | 272 | 9 | 145 | 118 | 272 | ||||||||||||||||||||||||
Missing FICO | 8 | 7 | 15 | 8 | 7 | 15 | ||||||||||||||||||||||||||
Greater than or equal to 90% to less than 100% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 10 | 167 | 133 | 310 | 10 | 167 | 133 | 310 | ||||||||||||||||||||||||
Less than or equal to 660 | 6 | 75 | 68 | 149 | 6 | 75 | 68 | 149 | ||||||||||||||||||||||||
Missing FICO | 4 | 3 | 7 | 4 | 3 | 7 | ||||||||||||||||||||||||||
Less than 90% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 106 | 345 | 665 | 1,116 | 106 | 345 | 665 | 1,116 | ||||||||||||||||||||||||
Less than or equal to 660 | 91 | 182 | 455 | 728 | 91 | 182 | 455 | 728 | ||||||||||||||||||||||||
Missing FICO | 1 | 13 | 31 | 45 | 1 | 13 | 31 | 45 | ||||||||||||||||||||||||
Missing LTV and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 1 | 14 | 15 | 1 | 14 | 15 | ||||||||||||||||||||||||||
Less than or equal to 660 | 1 | 6 | 7 | 1 | 6 | 7 | ||||||||||||||||||||||||||
Missing FICO | 1 | 1 | 1 | 1 | ||||||||||||||||||||||||||||
Total home equity and residential real estate loans | $ | 249 | $ | 1,520 | $ | 1,915 | $ | 3,684 | $ | 249 | $ | 1,520 | $ | 1,915 | $ | 3,684 | ||||||||||||||||
| (a) | Amounts shown represent outstanding balance. |
| (b) | For the estimate of cash flows utilized in our purchased impaired loan accounting, other assumptions and estimates are made, including amortization of first lien balances, pre-payment rates, etc., which are not reflected in this table. |
| (c) | The following states had the highest percentage of purchased impaired loans at |
| (d) | Based upon updated LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions) |
6860 The PNC Financial Services Group, Inc. –Form 10-Q
Credit Card and Other Consumer Loan Classes
We monitor a variety of asset quality information in the management of the credit card and other consumer loan classes. Other consumer loan classes include education, automobile, and other secured and unsecured lines and loans. Along with the trending of delinquencies and losses for each class, FICO credit score updates are generally obtained monthly, as well as a variety of credit bureau attributes. Loans with high FICO scores tend to have a lower likelihood of loss. Conversely, loans with low FICO scores tend to have a higher likelihood of loss.
Table 52:51: Credit Card and Other Consumer Loan Classes Asset Quality Indicators
| Credit Card (a) | Other Consumer (b) | Credit Card (a) | Other Consumer (b) | |||||||||||||||||||||||||||||
| Dollars in millions | Amount | % of Total Loans Using FICO Credit Metric | Amount | % of Total Loans Using FICO Credit Metric | Amount | % of Total Loans Using FICO Credit Metric | Amount | % of Total Loans Using FICO Credit Metric | ||||||||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||||||||||
FICO score greater than 719 | $ | 2,845 | 60 | % | $ | 9,424 | 65 | % | $ | 3,029 | 60 | % | $ | 10,073 | 66 | % | ||||||||||||||||
650 to 719 | 1,333 | 28 | 3,584 | 25 | 1,412 | 28 | 3,717 | 24 | ||||||||||||||||||||||||
620 to 649 | 199 | 4 | 537 | 4 | 209 | 4 | 512 | 3 | ||||||||||||||||||||||||
Less than 620 | 219 | 5 | 625 | 4 | 225 | 5 | 577 | 4 | ||||||||||||||||||||||||
No FICO score available or required (c) | 150 | 3 | 388 | 2 | 154 | 3 | 438 | 3 | ||||||||||||||||||||||||
Total loans using FICO credit metric | 4,746 | 100 | % | 14,558 | 100 | % | 5,029 | 100 | % | 15,317 | 100 | % | ||||||||||||||||||||
Consumer loans using other internal credit metrics (b) | 6,921 | 6,364 | ||||||||||||||||||||||||||||||
Total loan balance | $ | 4,746 | $ | 21,479 | $ | 5,029 | $ | 21,681 | ||||||||||||||||||||||||
Weighted-average updated FICO score (d) | 734 | 744 | 734 | 746 | ||||||||||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||
FICO score greater than 719 | $ | 2,936 | 60 | % | $ | 9,371 | 65 | % | $ | 2,936 | 60 | % | $ | 9,371 | 65 | % | ||||||||||||||||
650 to 719 | 1,346 | 28 | 3,534 | 24 | 1,346 | 28 | 3,534 | 24 | ||||||||||||||||||||||||
620 to 649 | 202 | 4 | 523 | 4 | 202 | 4 | 523 | 4 | ||||||||||||||||||||||||
Less than 620 | 227 | 5 | 604 | 4 | 227 | 5 | 604 | 4 | ||||||||||||||||||||||||
No FICO score available or required (c) | 151 | 3 | 501 | 3 | 151 | 3 | 501 | 3 | ||||||||||||||||||||||||
Total loans using FICO credit metric | 4,862 | 100 | % | 14,533 | 100 | % | 4,862 | 100 | % | 14,533 | 100 | % | ||||||||||||||||||||
Consumer loans using other internal credit metrics (b) | 7,213 | 7,213 | ||||||||||||||||||||||||||||||
Total loan balance | $ | 4,862 | $ | 21,746 | $ | 4,862 | $ | 21,746 | ||||||||||||||||||||||||
Weighted-average updated FICO score (d) | 734 | 744 | 734 | 744 | ||||||||||||||||||||||||||||
| (a) | At |
| (b) | Other consumer loans for which updated FICO scores are used as an asset quality indicator include non-government guaranteed or insured education loans, automobile loans and other secured and unsecured lines and loans. Other consumer loans for which other internal credit metrics are used as an asset quality indicator include primarily government guaranteed or insured education loans, as well as consumer loans to high net worth individuals. Other internal credit metrics may include delinquency status, geography or other factors. |
| (c) | Credit card loans and other consumer loans with no FICO score available or required generally refers to new accounts issued to borrowers with limited credit history, accounts for which we cannot obtain an updated FICO score (e.g., recent profile changes), cards issued with a business name, and/or cards secured by collateral. Management proactively assesses the risk and size of this loan portfolio and, when necessary, takes actions to mitigate the credit risk. |
| (d) | Weighted-average updated FICO score excludes accounts with no FICO score available or required. |
The PNC Financial Services Group, Inc. –Form 10-Q69
Troubled Debt Restructurings (TDRs)
Table 53:52: Summary of Troubled Debt Restructurings
| In millions | March 31 2016 | December 31 2015 | September 30 2016 | December 31 2015 | ||||||||||||
Total commercial lending | $ | 500 | $ | 434 | $ | 527 | $ | 434 | ||||||||
Total consumer lending | 1,891 | 1,917 | 1,832 | 1,917 | ||||||||||||
Total TDRs | $ | 2,391 | $ | 2,351 | $ | 2,359 | $ | 2,351 | ||||||||
Nonperforming | $ | 1,172 | $ | 1,119 | $ | 1,177 | $ | 1,119 | ||||||||
Accruing (a) | 1,219 | 1,232 | 1,182 | 1,232 | ||||||||||||
Total TDRs | $ | 2,391 | $ | 2,351 | $ | 2,359 | $ | 2,351 | ||||||||
| (a) | Accruing loans include consumer credit card loans and loans that have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status. |
The PNC Financial Services Group, Inc. –Form 10-Q61
We held specific reserves in the ALLL of $.3 billion at both March 31,September 30, 2016 and December 31, 2015 respectively, for the total TDR portfolio.
Table 5453 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 threefirst nine months ended March 31,and third quarters of 2016 and March 31, 2015, respectively. Additionally, the table provides information about the types of TDR concessions. See Note 3 Asset Quality in our 2015 Form 10-K for additional discussion of TDR concessions.
Table 54:53: Financial Impact and TDRs by Concession Type (a)
During the three months ended March 31, 2016 Dollars in millions | Number | Pre-TDR Recorded | Post-TDR Recorded Investment (c) | |||||||||||||||||||||||||||||||||||||||||||||
| Principal Forgiveness (d) | Rate Reduction (e) | Other (f) | Total | |||||||||||||||||||||||||||||||||||||||||||||
Pre-TDR Recorded | Post-TDR Recorded Investment (c) | |||||||||||||||||||||||||||||||||||||||||||||||
During the three months ended September 30, 2016 Dollars in millions | Number of Loans | Principal Forgiveness (d) | Rate Reduction (e) | Other (f) | Total | |||||||||||||||||||||||||||||||||||||||||||
Total commercial lending | 42 | $ | 168 | $ | 10 | $ | 142 | $ | 152 | 37 | $ | 108 | $ | 1 | $ | 96 | $ | 97 | ||||||||||||||||||||||||||||||
Total consumer lending | 2,965 | 68 | 44 | 20 | 64 | 2,800 | 62 | 37 | 22 | 59 | ||||||||||||||||||||||||||||||||||||||
Total TDRs | 3,007 | $ | 236 | $ | 54 | $ | 162 | $ | 216 | 2,837 | $ | 170 | $ | 38 | $ | 118 | $ | 156 | ||||||||||||||||||||||||||||||
During the three months ended March 31, 2015 Dollars in millions | ||||||||||||||||||||||||||||||||||||||||||||||||
During the three months ended September 30, 2015 Dollars in millions | ||||||||||||||||||||||||||||||||||||||||||||||||
Total commercial lending | 38 | $ | 63 | $ | 1 | $ | 2 | $ | 50 | $ | 53 | 39 | $ | 80 | $ | 15 | $ | 47 | $ | 62 | ||||||||||||||||||||||||||||
Total consumer lending | 2,738 | 71 | 42 | 25 | 67 | 3,014 | 95 | $ | 62 | 28 | 90 | |||||||||||||||||||||||||||||||||||||
Total TDRs | 2,776 | $ | 134 | $ | 1 | $ | 44 | $ | 75 | $ | 120 | 3,053 | $ | 175 | $ | 15 | $ | 62 | $ | 75 | $ | 152 | ||||||||||||||||||||||||||
Pre-TDR Recorded | Post-TDR Recorded Investment (c) | |||||||||||||||||||||||
During the nine months ended September 30, 2016 Dollars in millions | Number of Loans | Principal Forgiveness (d) | Rate Reduction (e) | Other (f) | Total | |||||||||||||||||||
Total commercial lending | 109 | $ | 480 | $ | 53 | $ | 379 | $ | 432 | |||||||||||||||
Total consumer lending | 8,435 | 187 | 119 | 58 | 177 | |||||||||||||||||||
Total TDRs | 8,544 | $ | 667 | $ | 172 | $ | 437 | $ | 609 | |||||||||||||||
During the nine months ended September 30, 2015 Dollars in millions | ||||||||||||||||||||||||
Total commercial lending | 114 | $ | 185 | $ | 20 | $ | 4 | $ | 120 | $ | 144 | |||||||||||||
Total consumer lending | 8,400 | 250 | 150 | 89 | 239 | |||||||||||||||||||
Total TDRs | 8,514 | $ | 435 | $ | 20 | $ | 154 | $ | 209 | $ | 383 | |||||||||||||
| (a) | Impact of partial charge-offs at TDR date are included in this table. |
| (b) | Represents the recorded investment of the loans as of the quarter end prior to TDR designation, and excludes immaterial amounts of accrued interest receivable. |
| (c) | Represents the recorded investment of the TDRs as of the end of the quarter in which the TDR occurs, and excludes immaterial amounts of accrued interest receivable. |
| (d) | Includes principal forgiveness and accrued interest forgiveness. These types of TDRs result in a write down of the recorded investment and a charge-off if such action has not already taken place. |
| (e) | Includes reduced interest rate and interest deferral. The TDRs within this category result in reductions to future interest income. |
| (f) | Primarily includes consumer borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC, as well as postponement/reduction of scheduled amortization and contractual extensions for both consumer and commercial borrowers. |
After a loan is determined to be a TDR, we continue to track its performance under its most recent restructured terms. We consider a TDR to have subsequently defaulted when it becomes 60 days past due after the most recent date the loan was restructured. The recorded investment of loans that were both (i) classified as TDRs or were subsequently modified during each 12-month period preceding January 1, 2016 and January 1, 2015, respectively, and (ii) subsequently defaulted during the three months and nine months ended March 31,September 30, 2016 totaled $66 million and March 31,$118 million, respectively. The comparable amounts for the three months and nine months ended September 30, 2015 totaled $27$29 million and $23$69 million, respectively.
See Note 3 Asset Quality in our 2015 Form 10-K for additional discussion on TDRs.
7062 The PNC Financial Services Group, Inc. –Form 10-Q
Impaired Loans
Impaired loans include commercial nonperforming loans and consumer and commercial TDRs, regardless of nonperforming status. TDRs that were previously recorded at amortized cost and are now classified and accounted for as held for sale are also included. Excluded from impaired loans are nonperforming leases, loans accounted for as held for sale other than the TDRs described in the preceding sentence, loans accounted for under the fair value option, smaller balance homogeneous type loans and purchased impaired loans. See Note 4 Purchased Loans for additional information. Nonperforming equipment lease financing loans of $20 million and $7 million at March 31, 2016 and December 31, 2015, respectively, are excluded from impaired loans pursuant to authoritative lease accounting guidance. We did not recognize any interest income on impaired loans that have not returned to performing status, while they were impaired during the threenine months ended March 31,September 30, 2016 and March 31,September 30, 2015. The following table provides further detail on impaired loans individually evaluated for impairment and the associated ALLL. Certain commercial and consumer impaired loans do not have a related ALLL as the valuation of these impaired loans exceeded the recorded investment.
| In millions | Unpaid Principal Balance | Recorded Investment | Associated Allowance (a) | Average Recorded Investment (b) | Unpaid Principal Balance | Recorded Investment | Associated Allowance (a) | Average Recorded Investment (b) | ||||||||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||||||||||
Impaired loans with an associated allowance | ||||||||||||||||||||||||||||||||
Commercial | $ | 468 | $ | 359 | $ | 134 | $ | 348 | $ | 544 | $ | 389 | $ | 92 | $ | 394 | ||||||||||||||||
Commercial real estate | 218 | 105 | 30 | 117 | 221 | 102 | 28 | 108 | ||||||||||||||||||||||||
Home equity | 1,036 | 929 | 205 | 920 | 891 | 859 | 186 | 893 | ||||||||||||||||||||||||
Residential real estate | 274 | 264 | 32 | 264 | 227 | 222 | 29 | 249 | ||||||||||||||||||||||||
Credit card | 107 | 106 | 23 | 107 | 104 | 104 | 24 | 106 | ||||||||||||||||||||||||
Other consumer | 31 | 24 | 1 | 25 | 27 | 25 | 1 | 25 | ||||||||||||||||||||||||
Total impaired loans with an associated allowance | $ | 2,134 | $ | 1,787 | $ | 425 | $ | 1,781 | $ | 2,014 | $ | 1,701 | $ | 360 | $ | 1,775 | ||||||||||||||||
Impaired loans without an associated allowance | ||||||||||||||||||||||||||||||||
Commercial | $ | 416 | $ | 316 | $ | 217 | $ | 379 | $ | 265 | $ | 232 | ||||||||||||||||||||
Commercial real estate | 210 | 156 | 157 | 135 | 115 | 143 | ||||||||||||||||||||||||||
Home equity | 409 | 179 | 192 | 486 | 221 | 205 | ||||||||||||||||||||||||||
Residential real estate | 495 | 381 | 389 | 508 | 394 | 390 | ||||||||||||||||||||||||||
Other consumer | 24 | 8 | 8 | 23 | 7 | 8 | ||||||||||||||||||||||||||
Total impaired loans without an associated allowance | $ | 1,554 | $ | 1,040 | $ | 963 | $ | 1,531 | $ | 1,002 | $ | 978 | ||||||||||||||||||||
Total impaired loans | $ | 3,688 | $ | 2,827 | $ | 425 | $ | 2,744 | $ | 3,545 | $ | 2,703 | $ | 360 | $ | 2,753 | ||||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||
Impaired loans with an associated allowance | ||||||||||||||||||||||||||||||||
Commercial | $ | 442 | $ | 337 | $ | 84 | $ | 306 | $ | 442 | $ | 337 | $ | 84 | $ | 306 | ||||||||||||||||
Commercial real estate | 254 | 130 | 35 | 197 | 254 | 130 | 35 | 197 | ||||||||||||||||||||||||
Home equity | 978 | 909 | 216 | 965 | 978 | 909 | 216 | 965 | ||||||||||||||||||||||||
Residential real estate | 272 | 264 | 35 | 359 | 272 | 264 | 35 | 359 | ||||||||||||||||||||||||
Credit card | 108 | 108 | 24 | 118 | 108 | 108 | 24 | 118 | ||||||||||||||||||||||||
Other consumer | 31 | 26 | 1 | 32 | 31 | 26 | 1 | 32 | ||||||||||||||||||||||||
Total impaired loans with an associated allowance | $ | 2,085 | $ | 1,774 | $ | 395 | $ | 1,977 | $ | 2,085 | $ | 1,774 | $ | 395 | $ | 1,977 | ||||||||||||||||
Impaired loans without an associated allowance | ||||||||||||||||||||||||||||||||
Commercial | $ | 201 | $ | 118 | $ | 87 | $ | 201 | $ | 118 | $ | 87 | ||||||||||||||||||||
Commercial real estate | 206 | 158 | 168 | 206 | 158 | 168 | ||||||||||||||||||||||||||
Home equity | 464 | 206 | 158 | 464 | 206 | 158 | ||||||||||||||||||||||||||
Residential real estate | 512 | 396 | 346 | 512 | 396 | 346 | ||||||||||||||||||||||||||
Other consumer | 24 | 8 | 8 | 24 | 8 | 8 | ||||||||||||||||||||||||||
Total impaired loans without an associated allowance | $ | 1,407 | $ | 886 | $ | 767 | $ | 1,407 | $ | 886 | $ | 767 | ||||||||||||||||||||
Total impaired loans | $ | 3,492 | $ | 2,660 | $ | 395 | $ | 2,744 | $ | 3,492 | $ | 2,660 | $ | 395 | $ | 2,744 | ||||||||||||||||
| (a) | Associated allowance amounts include $.3 billion for TDRs at both |
| (b) | Average recorded investment is for the |
The PNC Financial Services Group, Inc. –Form 10-Q 7163
Purchased Impaired Loans
Purchased impaired loan accounting addresses differences between contractual cash flows and cash flows expected to be collected from the initial investment in loans if those differences are attributable, at least in part, to credit quality. Several factors were considered when evaluating whether a loan was considered a purchased impaired loan, including the delinquency status of the loan, updated borrower credit status, geographic information, and updated LTV. GAAP allows purchasers to account for loans individually or to aggregate purchased impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Purchased impaired homogeneous consumer, residential real estate and smaller balance
commercial loans with common risk characteristics are aggregated into pools where appropriate, whereas commercial loans with a total commitment greater than a defined threshold are accounted for individually. For pooled loans, proceeds of individual loans are not applied individually to each loan within a pool, but to the pool’s recorded investment since it is accounted for as a single asset.
Upon final disposition of a loan within a pool and for loans that have nominal collateral value/expected cash flows, the loan’s recorded investment is written-off and the associated ALLL is derecognized, thus removing it from the carrying value of the pool. Gains and losses on such loans are recognized as either an adjustment to the pool’s associated ALLL, or yield, as appropriate. For more information regarding our derecognition policy, see Note 1 Accounting Policies in our 2015 Form 10-K.
The following table provides balances of purchased impaired loans at March 31, 2016 and December 31, 2015:
Table 56: Purchased Impaired Loans – Balances
| March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||
| In millions | Outstanding Balance (a) | Recorded Investment | Carrying Value | Outstanding Balance (a) | Recorded Investment | Carrying Value | ||||||||||||||||||
Commercial lending | ||||||||||||||||||||||||
Commercial | $ | 78 | $ | 29 | $ | 18 | $ | 94 | $ | 36 | $ | 24 | ||||||||||||
Commercial real estate | 128 | 120 | 81 | 155 | 133 | 96 | ||||||||||||||||||
Total commercial lending | 206 | 149 | 99 | 249 | 169 | 120 | ||||||||||||||||||
Consumer lending | ||||||||||||||||||||||||
Consumer | 1,694 | 1,338 | 1,313 | 1,769 | 1,407 | 1,392 | ||||||||||||||||||
Residential real estate | 1,843 | 1,893 | 1,656 | 1,915 | 1,946 | 1,700 | ||||||||||||||||||
Total consumer lending | 3,537 | 3,231 | 2,969 | 3,684 | 3,353 | 3,092 | ||||||||||||||||||
Total | $ | 3,743 | $ | 3,380 | $ | 3,068 | $ | 3,933 | $ | 3,522 | $ | 3,212 | ||||||||||||
The excess of undiscounted cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the loan using the constant effective yield method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and is not recognized in income. Subsequent changes in the expected cash flows of individual or pooled purchased impaired loans will either impact the accretable yield or result in an impairment charge to provision for credit losses in the period in which the changes become probable. Decreases to the net present value of expected cash flows will generally result in an impairment charge recorded as a provision for credit losses, resulting in an increase to the ALLL, and a reclassification from accretable yield to non-accretable difference.
At March 31, 2016 and December 31, 2015, the ALLL on total purchased impaired loans was $.3 billion. For purchased impaired loan pools where an allowance has been recognized, subsequent increases in the net present value of cash flows will result in a provision recapture of any previously recorded ALLL to the extent applicable, and/or a reclassification from non-accretable difference to accretable yield, which will be recognized prospectively. Individual loan transactions where final dispositions have occurred (as noted above) result in removal of the loans from their applicable pools for cash flow estimation purposes. The cash flow re-estimation process is completed quarterly to evaluate the appropriateness of the ALLL associated with the purchased impaired loans.
72 The PNC Financial Services Group, Inc. –Form 10-Q
Activity for the accretable yield during the first three months of 2016 and 2015 follows:
Table 57: Purchased Impaired Loans – Accretable Yield
| In millions | 2016 | 2015 | ||||||
January 1 | $ | 1,250 | $ | 1,558 | ||||
Accretion (including excess cash recoveries) | (107 | ) | (132 | ) | ||||
Net reclassifications to accretable from non-accretable | 17 | 64 | ||||||
Disposals | (4 | ) | (6 | ) | ||||
March 31 | $ | 1,156 | $ | 1,484 | ||||
NOTE 5 ALLOWANCESFOR LOANAND LEASE LOSSESAND UNFUNDED LOAN COMMITMENTSAND LETTERSOF CREDIT
Allowance for Loan and Lease Losses
We maintain the ALLL at levels that we believe to be appropriate to absorb estimated probable credit losses incurred in the portfolios as of the balance sheet date. We use the two main portfolio segments – Commercial Lending and Consumer Lending – and–and develop and document the ALLL under separate methodologies for each of these segments as discussed in Note 1 Accounting Policies.Policies of our 2015 Form 10-K. A rollforward of the ALLL and associated loan data follows.
The PNC Financial Services Group, Inc. –Form 10-Q73
Table 58:55: Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data
| In millions | Commercial Lending | Consumer Lending | Total | Commercial Lending | Consumer Lending | Total | ||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||
Allowance for Loan and Lease Losses | ||||||||||||||||||||||||
January 1 | $ | 1,605 | $ | 1,122 | $ | 2,727 | $ | 1,605 | $ | 1,122 | $ | 2,727 | ||||||||||||
Charge-offs | (89 | ) | (147 | ) | (236 | ) | (297 | ) | (395 | ) | (692 | ) | ||||||||||||
Recoveries | 46 | 41 | 87 | 133 | 122 | 255 | ||||||||||||||||||
Net (charge-offs) / recoveries | (43 | ) | (106 | ) | (149 | ) | (164 | ) | (273 | ) | (437 | ) | ||||||||||||
Provision for credit losses | 84 | 68 | 152 | 156 | 210 | 366 | ||||||||||||||||||
Net change in allowance for unfunded loan commitments and letters of credit | (19 | ) | (2 | ) | (21 | ) | (48 | ) | (1 | ) | (49 | ) | ||||||||||||
Net recoveries of purchased impaired loans | 1 | 1 | ||||||||||||||||||||||
Other | 1 | 1 | ||||||||||||||||||||||
March 31 | $ | 1,628 | $ | 1,083 | $ | 2,711 | ||||||||||||||||||
Net recoveries of purchased impaired loans and other | 1 | 11 | 12 | |||||||||||||||||||||
September 30 | $ | 1,550 | $ | 1,069 | $ | 2,619 | ||||||||||||||||||
TDRs individually evaluated for impairment | $ | 49 | $ | 261 | $ | 310 | $ | 76 | $ | 240 | $ | 316 | ||||||||||||
Other loans individually evaluated for impairment | 115 | 115 | 44 | 44 | ||||||||||||||||||||
Loans collectively evaluated for impairment | 1,414 | 560 | 1,974 | 1,388 | 548 | 1,936 | ||||||||||||||||||
Purchased impaired loans | 50 | 262 | 312 | 42 | 281 | 323 | ||||||||||||||||||
March 31 | $ | 1,628 | $ | 1,083 | $ | 2,711 | ||||||||||||||||||
September 30 | $ | 1,550 | $ | 1,069 | $ | 2,619 | ||||||||||||||||||
Loan Portfolio | ||||||||||||||||||||||||
TDRs individually evaluated for impairment (a) | $ | 500 | $ | 1,891 | $ | 2,391 | $ | 527 | $ | 1,832 | $ | 2,359 | ||||||||||||
Other loans individually evaluated for impairment | 436 | 436 | 344 | 344 | ||||||||||||||||||||
Loans collectively evaluated for impairment (b) | 134,045 | 66,338 | 200,383 | 137,170 | 66,619 | 203,789 | ||||||||||||||||||
Fair value option loans (c) | 895 | 895 | 874 | 874 | ||||||||||||||||||||
Purchased impaired loans | 149 | 3,231 | 3,380 | 122 | 2,958 | 3,080 | ||||||||||||||||||
March 31 | $ | 135,130 | $ | 72,355 | $ | 207,485 | ||||||||||||||||||
September 30 | $ | 138,163 | $ | 72,283 | $ | 210,446 | ||||||||||||||||||
Portfolio segment ALLL as a percentage of total ALLL | 60 | % | 40 | % | 100 | % | 59 | % | 41 | % | 100 | % | ||||||||||||
Ratio of the allowance for loan and lease losses to total loans (d) | 1.20 | % | 1.50 | % | 1.31 | % | 1.12 | % | 1.48 | % | 1.24 | % | ||||||||||||
March 31, 2015 | ||||||||||||||||||||||||
September 30, 2015 | ||||||||||||||||||||||||
Allowance for Loan and Lease Losses | ||||||||||||||||||||||||
January 1 | $ | 1,571 | $ | 1,760 | $ | 3,331 | $ | 1,571 | $ | 1,760 | $ | 3,331 | ||||||||||||
Charge-offs | (46 | ) | (143 | ) | (189 | ) | (176 | ) | (413 | ) | (589 | ) | ||||||||||||
Recoveries | 45 | 41 | 86 | 188 | 135 | 323 | ||||||||||||||||||
Net charge-offs | (1 | ) | (102 | ) | (103 | ) | ||||||||||||||||||
Net (charge-offs) / recoveries | 12 | (278 | ) | (266 | ) | |||||||||||||||||||
Provision for credit losses | (2 | ) | 56 | 54 | 48 | 133 | 181 | |||||||||||||||||
Net change in allowance for unfunded loan commitments and letters of credit | 25 | 25 | (7 | ) | (7 | ) | ||||||||||||||||||
Other | (1 | ) | (1 | ) | (2 | ) | (2 | ) | ||||||||||||||||
March 31 | $ | 1,592 | $ | 1,714 | $ | 3,306 | ||||||||||||||||||
September 30 | $ | 1,622 | $ | 1,615 | $ | 3,237 | ||||||||||||||||||
TDRs individually evaluated for impairment | $ | 47 | $ | 295 | $ | 342 | $ | 39 | $ | 263 | $ | 302 | ||||||||||||
Other loans individually evaluated for impairment | 70 | 70 | 70 | 70 | ||||||||||||||||||||
Loans collectively evaluated for impairment | 1,395 | 638 | 2,033 | 1,446 | 601 | 2,047 | ||||||||||||||||||
Purchased impaired loans | 80 | 781 | 861 | 67 | 751 | 818 | ||||||||||||||||||
March 31 | $ | 1,592 | $ | 1,714 | $ | 3,306 | ||||||||||||||||||
September 30 | $ | 1,622 | $ | 1,615 | $ | 3,237 | ||||||||||||||||||
Loan Portfolio | ||||||||||||||||||||||||
TDRs individually evaluated for impairment (a) | $ | 510 | $ | 2,020 | $ | 2,530 | $ | 420 | $ | 1,948 | $ | 2,368 | ||||||||||||
Other loans individually evaluated for impairment | 278 | 278 | 291 | 291 | ||||||||||||||||||||
Loans collectively evaluated for impairment (b) | 128,611 | 67,627 | 196,238 | 130,249 | 66,993 | 197,242 | ||||||||||||||||||
Fair value option loans (c) | 1,001 | 1,001 | 915 | 915 | ||||||||||||||||||||
Purchased impaired loans | 276 | 4,399 | 4,675 | 204 | 3,963 | 4,167 | ||||||||||||||||||
March 31 | $ | 129,675 | $ | 75,047 | $ | 204,722 | ||||||||||||||||||
September 30 | $ | 131,164 | $ | 73,819 | $ | 204,983 | ||||||||||||||||||
Portfolio segment ALLL as a percentage of total ALLL | 48 | % | 52 | % | 100 | % | 50 | % | 50 | % | 100 | % | ||||||||||||
Ratio of the allowance for loan and lease losses to total loans | 1.23 | % | 2.28 | % | 1.61 | % | 1.24 | % | 2.19 | % | 1.58 | % | ||||||||||||
7464 The PNC Financial Services Group, Inc. –Form 10-Q
| (a) | TDRs individually evaluated for impairment exclude TDRs that were subsequently accounted for as held for sale loans, but continue to be disclosed as TDRs. |
| (b) | Includes |
| (c) | Loans accounted for under the fair value option are not evaluated for impairment as these loans are accounted for at fair value. Accordingly, there is no allowance recorded on these loans. |
| (d) | See Note 1 Accounting Policies in our 2015 Form 10-K for information on our change in derecognition policy effective December 31, 2015 for certain purchased impaired loans. |
Allowance for Unfunded Loan Commitments and Letters of Credit
We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable credit losses incurred on these unfunded credit facilities as of the balance sheet date as discussed in Note 1 Accounting Policies.Policies of our 2015 Form 10-K. A rollforward of the allowance is presented below.
Table 59:56: Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit
| In millions | 2016 | 2015 | ||||||
January 1 | $ | 261 | $ | 259 | ||||
Net change in allowance for unfunded loan commitments and letters of credit | 21 | (25 | ) | |||||
March 31 | $ | 282 | $ | 234 | ||||
Table 60: Investment Securities Summary
Amortized Cost | Unrealized | Fair Value | ||||||||||||||
| In millions | Gains | Losses | ||||||||||||||
March 31, 2016 | ||||||||||||||||
Securities Available for Sale | ||||||||||||||||
Debt securities | ||||||||||||||||
U.S. Treasury and government agencies | $ | 10,237 | $ | 263 | $ | (28 | ) | $ | 10,472 | |||||||
Residential mortgage-backed | ||||||||||||||||
Agency | 25,241 | 466 | (22 | ) | 25,685 | |||||||||||
Non-agency | 3,836 | 216 | (101 | ) | 3,951 | |||||||||||
Commercial mortgage-backed | ||||||||||||||||
Agency | 1,851 | 22 | (3 | ) | 1,870 | |||||||||||
Non-agency | 4,727 | 51 | (35 | ) | 4,743 | |||||||||||
Asset-backed | 5,634 | 45 | (54 | ) | 5,625 | |||||||||||
State and municipal | 1,954 | 91 | (3 | ) | 2,042 | |||||||||||
Other debt | 2,562 | 57 | (5 | ) | 2,614 | |||||||||||
Total debt securities | 56,042 | 1,211 | (251 | ) | 57,002 | |||||||||||
Corporate stocks and other | 413 | 413 | ||||||||||||||
Total securities available for sale | $ | 56,455 | $ | 1,211 | $ | (251 | ) | $ | 57,415 | |||||||
Securities Held to Maturity (a) | ||||||||||||||||
Debt securities | ||||||||||||||||
U.S. Treasury and government agencies | $ | 260 | $ | 57 | $ | 317 | ||||||||||
Residential mortgage-backed | ||||||||||||||||
Agency | 10,109 | 194 | $ | (7 | ) | 10,296 | ||||||||||
Non-agency | 227 | 11 | 238 | |||||||||||||
Commercial mortgage-backed | ||||||||||||||||
Agency | 1,121 | 48 | 1,169 | |||||||||||||
Non-agency | 683 | 18 | 701 | |||||||||||||
Asset-backed | 711 | (11 | ) | 700 | ||||||||||||
State and municipal | 1,943 | 145 | 2,088 | |||||||||||||
Other debt | 100 | (1 | ) | 99 | ||||||||||||
Total securities held to maturity | $ | 15,154 | $ | 473 | $ | (19 | ) | $ | 15,608 | |||||||
(continued on following page)
| In millions | 2016 | 2015 | ||||||
January 1 | $ | 261 | $ | 259 | ||||
Net change in allowance for unfunded loan commitments and letters of credit | 49 | 7 | ||||||
September 30 | $ | 310 | $ | 266 | ||||
The PNC Financial Services Group, Inc. –Form 10-Q 7565
(continued from previous page)NOTE 5 INVESTMENT SECURITIES
Table 57: Investment Securities Summary
Amortized Cost | Unrealized | Fair Value | Amortized | Unrealized | Fair | |||||||||||||||||||||||||||
| In millions | Gains | Losses | Cost | Gains | Losses | Value | ||||||||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||||||||||
Securities Available for Sale | ||||||||||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 9,764 | $ | 152 | $ | (42 | ) | $ | 9,874 | $ | 12,062 | $ | 301 | $ | (13 | ) | $ | 12,350 | ||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 24,698 | 250 | (128 | ) | 24,820 | 27,429 | 568 | (18 | ) | 27,979 | ||||||||||||||||||||||
Non-agency | 3,992 | 247 | (88 | ) | 4,151 | 3,372 | 226 | (61 | ) | 3,537 | ||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 1,917 | 11 | (10 | ) | 1,918 | 2,301 | 21 | (4 | ) | 2,318 | ||||||||||||||||||||||
Non-agency | 4,902 | 30 | (29 | ) | 4,903 | 4,183 | 69 | (19 | ) | 4,233 | ||||||||||||||||||||||
Asset-backed | 5,417 | 54 | (48 | ) | 5,423 | 6,123 | 66 | (26 | ) | 6,163 | ||||||||||||||||||||||
State and municipal | 1,982 | 79 | (5 | ) | 2,056 | 1,963 | 107 | (3 | ) | 2,067 | ||||||||||||||||||||||
Other debt | 2,007 | 31 | (12 | ) | 2,026 | 2,712 | 60 | (3 | ) | 2,769 | ||||||||||||||||||||||
Total debt securities | 54,679 | 854 | (362 | ) | 55,171 | 60,145 | 1,418 | (147 | ) | 61,416 | ||||||||||||||||||||||
Corporate stocks and other | 590 | (1 | ) | 589 | 525 | 525 | ||||||||||||||||||||||||||
Total securities available for sale | $ | 55,269 | $ | 854 | $ | (363 | ) | $ | 55,760 | $ | 60,670 | $ | 1,418 | $ | (147 | ) | $ | 61,941 | ||||||||||||||
Securities Held to Maturity (a) | ||||||||||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 258 | $ | 40 | $ | 298 | $ | 265 | $ | 65 | $ | 330 | ||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 9,552 | 101 | $ | (65 | ) | 9,588 | 11,637 | 254 | $ | (2 | ) | 11,889 | ||||||||||||||||||||
Non-agency | 233 | 8 | 241 | 204 | 13 | 217 | ||||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 1,128 | 40 | 1,168 | 1,051 | 39 | 1,090 | ||||||||||||||||||||||||||
Non-agency | 722 | 6 | (1 | ) | 727 | 579 | 25 | 604 | ||||||||||||||||||||||||
Asset-backed | 717 | (10 | ) | 707 | 799 | (4 | ) | 795 | ||||||||||||||||||||||||
State and municipal | 1,954 | 116 | 2,070 | 1,920 | 159 | 2,079 | ||||||||||||||||||||||||||
Other debt | 204 | (1 | ) | 203 | 118 | (9 | ) | 109 | ||||||||||||||||||||||||
Total securities held to maturity | $ | 14,768 | $ | 311 | $ | (77 | ) | $ | 15,002 | $ | 16,573 | $ | 555 | $ | (15 | ) | $ | 17,113 | ||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||
Securities Available for Sale | ||||||||||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 9,764 | $ | 152 | $ | (42 | ) | $ | 9,874 | |||||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 24,698 | 250 | (128 | ) | 24,820 | |||||||||||||||||||||||||||
Non-agency | 3,992 | 247 | (88 | ) | 4,151 | |||||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 1,917 | 11 | (10 | ) | 1,918 | |||||||||||||||||||||||||||
Non-agency | 4,902 | 30 | (29 | ) | 4,903 | |||||||||||||||||||||||||||
Asset-backed | 5,417 | 54 | (48 | ) | 5,423 | |||||||||||||||||||||||||||
State and municipal | 1,982 | 79 | (5 | ) | 2,056 | |||||||||||||||||||||||||||
Other debt | 2,007 | 31 | (12 | ) | 2,026 | |||||||||||||||||||||||||||
Total debt securities | 54,679 | 854 | (362 | ) | 55,171 | |||||||||||||||||||||||||||
Corporate stocks and other | 590 | (1 | ) | 589 | ||||||||||||||||||||||||||||
Total securities available for sale | $ | 55,269 | $ | 854 | $ | (363 | ) | $ | 55,760 | |||||||||||||||||||||||
66 The PNC Financial Services Group, Inc. –Form 10-Q
| Amortized | Unrealized | Fair | ||||||||||||||
| In millions | Cost | Gains | Losses | Value | ||||||||||||
Securities Held to Maturity (a) | ||||||||||||||||
Debt securities | ||||||||||||||||
U.S. Treasury and government agencies | $ | 258 | $ | 40 | $ | 298 | ||||||||||
Residential mortgage-backed | ||||||||||||||||
Agency | 9,552 | 101 | $ | (65 | ) | 9,588 | ||||||||||
Non-agency | 233 | 8 | 241 | |||||||||||||
Commercial mortgage-backed | ||||||||||||||||
Agency | 1,128 | 40 | 1,168 | |||||||||||||
Non-agency | 722 | 6 | (1 | ) | 727 | |||||||||||
Asset-backed | 717 | (10 | ) | 707 | ||||||||||||
State and municipal | 1,954 | 116 | 2,070 | |||||||||||||
Other debt | 204 | (1 | ) | 203 | ||||||||||||
Total securities held to maturity | $ | 14,768 | $ | 311 | $ | (77 | ) | $ | 15,002 | |||||||
| (a) | Held to maturity securities transferred from available for sale are recorded in held to maturity at fair value at the time of transfer. The amortized cost of held to maturity securities included net unrealized gains of |
The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the securities available for sale portfolio are included in Shareholders’ equity as Accumulated other comprehensive income or loss, net of tax, unless credit-related. Securities held to maturity are carried at amortized cost. At March 31,September 30, 2016, Accumulated other comprehensive income included pretax gains of $100$103 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 6158 presents gross unrealized losses on securities available for sale at March 31,September 30, 2016 and December 31, 2015. The securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and twelve months or more based on the point in time that the fair value declined below the amortized cost basis. The table includes debt securities where a portion of other-than-temporary impairment (OTTI) has been recognized in Accumulated other comprehensive income (loss). The decrease in total unrealized losses at March 31,September 30, 2016 when compared to December 31, 2015 was due to a decline in market interest rates.
76The PNC Financial Services Group, Inc. –Form 10-Q67
Table 61:58: Gross Unrealized Loss and Fair Value of Securities Available for Sale
| Unrealized loss position less than 12 months | Unrealized loss position 12 months or more | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| In millions | Unrealized loss position less than 12 months | Unrealized loss position 12 months or more | Total | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | |||||||||||||||||||||||||||||||||||||||
| Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | |||||||||||||||||||||||||||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | (21 | ) | $ | 3,195 | $ | (7 | ) | $ | 637 | $ | (28 | ) | $ | 3,832 | $ | (1 | ) | $ | 1,197 | $ | (12 | ) | $ | 2,805 | $ | (13 | ) | $ | 4,002 | ||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||||||||||||||||||
Agency | (6 | ) | 1,451 | (16 | ) | 1,153 | (22 | ) | 2,604 | (5 | ) | 699 | (13 | ) | 943 | (18 | ) | 1,642 | ||||||||||||||||||||||||||||||
Non-agency | (8 | ) | 392 | (93 | ) | 1,516 | (101 | ) | 1,908 | (1 | ) | 146 | (60 | ) | 1,222 | (61 | ) | 1,368 | ||||||||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||||||||||||||||||
Agency | (a | ) | 71 | (3 | ) | 241 | (3 | ) | 312 | (3 | ) | 400 | (1 | ) | 114 | (4 | ) | 514 | ||||||||||||||||||||||||||||||
Non-agency | (20 | ) | 1,839 | (15 | ) | 693 | (35 | ) | 2,532 | (4 | ) | 587 | (15 | ) | 1,269 | (19 | ) | 1,856 | ||||||||||||||||||||||||||||||
Asset-backed | (36 | ) | 3,341 | (18 | ) | 477 | (54 | ) | 3,818 | (2 | ) | 445 | (24 | ) | 1,629 | (26 | ) | 2,074 | ||||||||||||||||||||||||||||||
State and municipal | (2 | ) | 219 | (1 | ) | 64 | (3 | ) | 283 | (1 | ) | 207 | (2 | ) | 123 | (3 | ) | 330 | ||||||||||||||||||||||||||||||
Other debt | (3 | ) | 160 | (2 | ) | 144 | (5 | ) | 304 | (1 | ) | 195 | (2 | ) | 125 | (3 | ) | 320 | ||||||||||||||||||||||||||||||
Total debt securities | (96 | ) | 10,668 | (155 | ) | 4,925 | (251 | ) | 15,593 | (18 | ) | 3,876 | (129 | ) | 8,230 | (147 | ) | 12,106 | ||||||||||||||||||||||||||||||
Corporate stocks and other | (a | ) | 15 | (a | ) | 15 | (a | ) | 16 | (a | ) | 16 | ||||||||||||||||||||||||||||||||||||
Total | $ | (96 | ) | $ | 10,668 | $ | (155 | ) | $ | 4,940 | $ | (251 | ) | $ | 15,608 | $ | (18 | ) | $ | 3,876 | $ | (129 | ) | $ | 8,246 | $ | (147 | ) | $ | 12,122 | ||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | (40 | ) | $ | 5,885 | $ | (2 | ) | $ | 120 | $ | (42 | ) | $ | 6,005 | $ | (40 | ) | $ | 5,885 | $ | (2 | ) | $ | 120 | $ | (42 | ) | $ | 6,005 | ||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||||||||||||||||||
Agency | (103 | ) | 11,799 | (25 | ) | 1,094 | (128 | ) | 12,893 | (103 | ) | 11,799 | (25 | ) | 1,094 | (128 | ) | 12,893 | ||||||||||||||||||||||||||||||
Non-agency | (3 | ) | 368 | (85 | ) | 1,527 | (88 | ) | 1,895 | (3 | ) | 368 | (85 | ) | 1,527 | (88 | ) | 1,895 | ||||||||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||||||||||||||||||
Agency | (7 | ) | 745 | (3 | ) | 120 | (10 | ) | 865 | (7 | ) | 745 | (3 | ) | 120 | (10 | ) | 865 | ||||||||||||||||||||||||||||||
Non-agency | (22 | ) | 2,310 | (7 | ) | 807 | (29 | ) | 3,117 | (22 | ) | 2,310 | (7 | ) | 807 | (29 | ) | 3,117 | ||||||||||||||||||||||||||||||
Asset-backed | (30 | ) | 3,477 | (18 | ) | 494 | (48 | ) | 3,971 | (30 | ) | 3,477 | (18 | ) | 494 | (48 | ) | 3,971 | ||||||||||||||||||||||||||||||
State and municipal | (3 | ) | 326 | (2 | ) | 60 | (5 | ) | 386 | (3 | ) | 326 | (2 | ) | 60 | (5 | ) | 386 | ||||||||||||||||||||||||||||||
Other debt | (8 | ) | 759 | (4 | ) | 188 | (12 | ) | 947 | (8 | ) | 759 | (4 | ) | 188 | (12 | ) | 947 | ||||||||||||||||||||||||||||||
Total debt securities | (216 | ) | 25,669 | (146 | ) | 4,410 | (362 | ) | 30,079 | (216 | ) | 25,669 | (146 | ) | 4,410 | (362 | ) | 30,079 | ||||||||||||||||||||||||||||||
Corporate stocks and other | (a | ) | 46 | (1 | ) | 15 | (1 | ) | 61 | (a | ) | 46 | (1 | ) | 15 | (1 | ) | 61 | ||||||||||||||||||||||||||||||
Total | $ | (216 | ) | $ | 25,715 | $ | (147 | ) | $ | 4,425 | $ | (363 | ) | $ | 30,140 | $ | (216 | ) | $ | 25,715 | $ | (147 | ) | $ | 4,425 | $ | (363 | ) | $ | 30,140 | ||||||||||||||||||
| (a) | The unrealized loss on these securities was less than $.5 million. |
The gross unrealized loss on debt securities held to maturity was $19$16 million at March 31,September 30, 2016, with $6$10 million of the loss related to securities with a fair value of $.6$.1 billion that had been in a continuous loss position less than 12 months and $13$6 million of the loss related to securities with a fair value of $1.7$.9 billion that had been in a continuous loss position for more than 12 months. The gross unrealized loss on debt securities held to maturity was $82 million at December 31, 2015, with $59 million of the loss related to securities with a fair value of $5.5 billion that had been in a continuous loss position less than 12 months and $23 million of the loss related to securities with a fair value of $953 million that had been in a continuous loss position for more than 12 months. For securities transferred to held to maturity from available for sale, the unrealized loss for purposes of this analysis is determined by comparing the security’s original amortized cost to its current estimated fair value.
Evaluating Investment Securities for Other-than-Temporary Impairments
For the securities in the preceding Table 61,58, as of March 31,September 30, 2016 we do not intend to sell and believe we will not be required to sell the securities prior to recovery of the amortized cost basis.
As more fully described in Note 6 Investment Securities in our 2015 Form 10-K, at least quarterly, we conduct a comprehensive security-level assessment on all securities. For those securities in an unrealized loss position we determine if OTTI exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. An OTTI loss must be recognized for a debt security in an unrealized loss position if we intend to sell the security or it
68 The PNC Financial Services Group, Inc. –Form 10-Q
is more likely than not we will be required to sell the security
The PNC Financial Services Group, Inc. –Form 10-Q77
prior to recovery of its amortized cost basis. Even if we do not expect to sell the security, we must evaluate the expected cash flows to be received to determine if we believe a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in accumulated other comprehensive income (loss). See Note 6 Investment Securities in our 2015 Form 10-K for additional details on this quarterly assessment.
For those securities on our balance sheet where we determined losses represented OTTI, we have recorded cumulative credit losses of $1.1 billion at March 31,September 30, 2016. During the first
nine months of 2016 and 2015, the OTTI credit losses recognized in noninterest income and the OTTI noncredit losses recognized in accumulated other comprehensive income (loss), net of tax, on securities were not significant.
Information relating to gross realized securities gains and losses from the sales of securities is set forth in the following table.
Table 62:59: Gains (Losses) on Sales of Securities Available for Sale
| In millions | Proceeds | Gross Gains | Gross Losses | Net Gains | Tax Expense | |||||||||||||||||||||||||||||||||||
Three months ended March 31 | ||||||||||||||||||||||||||||||||||||||||
Nine months ended September 30 In millions | Proceeds | Gross Gains | Gross Losses | Net Gains | Tax Expense | |||||||||||||||||||||||||||||||||||
2016 | $ | 788 | $ | 9 | $ | – | $ | 9 | $ | 3 | $ | 2,546 | $ | 20 | $ | 20 | $ | 7 | ||||||||||||||||||||||
2015 | $ | 1,804 | $ | 43 | $ | (1 | ) | $ | 42 | $ | 15 | $ | 3,445 | $ | 54 | $ | (13 | ) | $ | 41 | $ | 14 | ||||||||||||||||||
The following table presents, by remaining contractual maturity, the amortized cost, fair value and weighted-average yield of debt securities at March 31,September 30, 2016.
Table 63:60: Contractual Maturity of Debt Securities
March 31, 2016 Dollars in millions | 1 Year or Less | After 1 Year through 5 Years | After 5 Years through 10 Years | After 10 Years | Total | |||||||||||||||||||||||||||||||||||
September 30, 2016 Dollars in millions | 1 Year or Less | After 1 Year through 5 Years | After 5 Years through 10 Years | After 10 Years | Total | |||||||||||||||||||||||||||||||||||
Securities Available for Sale | ||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 953 | $ | 4,466 | $ | 3,756 | $ | 1,062 | $ | 10,237 | $ | 404 | $ | 5,251 | $ | 5,244 | $ | 1,163 | $ | 12,062 | ||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||||||||||
Agency | 128 | 919 | 24,194 | 25,241 | 137 | 912 | 26,380 | 27,429 | ||||||||||||||||||||||||||||||||
Non-agency | 3 | 3,833 | 3,836 | 2 | 3,370 | 3,372 | ||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||||||||||
Agency | 21 | 124 | 252 | 1,454 | 1,851 | 78 | 44 | 828 | 1,351 | 2,301 | ||||||||||||||||||||||||||||||
Non-agency | 50 | 28 | 8 | 4,641 | 4,727 | 17 | 8 | 4,158 | 4,183 | |||||||||||||||||||||||||||||||
Asset-backed | 18 | 1,622 | 1,814 | 2,180 | 5,634 | 12 | 2,104 | 1,987 | 2,020 | 6,123 | ||||||||||||||||||||||||||||||
State and municipal | 2 | 127 | 348 | 1,477 | 1,954 | 2 | 146 | 383 | 1,432 | 1,963 | ||||||||||||||||||||||||||||||
Other debt | 206 | 1,916 | 298 | 142 | 2,562 | 213 | 2,151 | 238 | 110 | 2,712 | ||||||||||||||||||||||||||||||
Total debt securities available for sale | $ | 1,250 | $ | 8,414 | $ | 7,395 | $ | 38,983 | $ | 56,042 | $ | 709 | $ | 9,852 | $ | 9,600 | $ | 39,984 | $ | 60,145 | ||||||||||||||||||||
Fair value | $ | 1,256 | $ | 8,529 | $ | 7,510 | $ | 39,707 | $ | 57,002 | $ | 714 | $ | 10,004 | $ | 9,739 | $ | 40,959 | $ | 61,416 | ||||||||||||||||||||
Weighted-average yield, GAAP basis | 2.79 | % | 2.19 | % | 2.32 | % | 2.90 | % | 2.71 | % | 2.74 | % | 2.17 | % | 2.08 | % | 2.87 | % | 2.62 | % | ||||||||||||||||||||
Securities Held to Maturity | ||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 260 | $ | 260 | $ | 265 | $ | 265 | ||||||||||||||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||||||||||
Agency | $ | 7 | $ | 376 | 9,726 | 10,109 | $ | 10 | $ | 500 | 11,127 | 11,637 | ||||||||||||||||||||||||||||
Non-agency | 227 | 227 | 204 | 204 | ||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||||||||||
Agency | $ | 118 | 824 | 122 | 57 | 1,121 | $ | 164 | 827 | 5 | 55 | 1,051 | ||||||||||||||||||||||||||||
Non-agency | 683 | 683 | 579 | 579 | ||||||||||||||||||||||||||||||||||||
Asset-backed | 2 | 589 | 120 | 711 | 1 | 688 | 110 | 799 | ||||||||||||||||||||||||||||||||
State and municipal | 62 | 948 | 933 | 1,943 | 4 | 69 | 1,008 | 839 | 1,920 | |||||||||||||||||||||||||||||||
Other debt | 100 | 100 | 7 | 33 | 28 | 50 | 118 | |||||||||||||||||||||||||||||||||
Total debt securities held to maturity | $ | 118 | $ | 995 | $ | 2,035 | $ | 12,006 | $ | 15,154 | $ | 175 | $ | 940 | $ | 2,229 | $ | 13,229 | $ | 16,573 | ||||||||||||||||||||
Fair value | $ | 118 | $ | 1,030 | $ | 2,128 | $ | 12,332 | $ | 15,608 | $ | 175 | $ | 979 | $ | 2,328 | $ | 13,631 | $ | 17,113 | ||||||||||||||||||||
Weighted-average yield, GAAP basis | 3.02 | % | 3.48 | % | 3.26 | % | 3.44 | % | 3.42 | % | 3.29 | % | 3.60 | % | 3.03 | % | 3.55 | % | 3.48 | % | ||||||||||||||||||||
78The PNC Financial Services Group, Inc. –Form 10-Q69
Weighted-average yields are based on historical cost with effective yields weighted for the contractual maturity of each security. At March 31,September 30, 2016, there were no securities of a single issuer, other than FHLMC and FNMA, that exceeded 10% of Total shareholders’ equity. The FHLMC investments had a total amortized cost of $4.8 billion and fair value of $4.9 billion. The FNMA investments had a total amortized cost of $22.8$28.4 billion and fair value of $23.2$29.0 billion.
The following table presents the fair value of securities that have been either pledged to or accepted from others to collateralize outstanding borrowings.
Table 64:61: Fair Value of Securities Pledged and Accepted as Collateral
| In millions | March 31 2016 | December 31 2015 | September 30 2016 | December 31 2015 | ||||||||||||
Pledged to others | $ | 11,047 | $ | 9,674 | $ | 9,991 | $ | 9,674 | ||||||||
Accepted from others: | ||||||||||||||||
Permitted by contract or custom to sell or repledge | 1,003 | 1,100 | $ | 655 | $ | 1,100 | ||||||||||
Permitted amount repledged to others | 843 | 943 | $ | 499 | $ | 943 | ||||||||||
The securities pledged to others include positions held in our portfolio of investment securities, trading securities, and securities accepted as collateral from others that we are permitted by contract or custom to sell or repledge, and were used to secure public and trust deposits, repurchase agreements, and for other purposes.
Fair Value Measurement
PNC measures certain financial assets and liabilities at fair value in accordance with GAAP. Fair value is defined in GAAP as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date. GAAP focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also establishes a fair value hierarchy to maximize the use of observable inputs when measuring fair value. For more information regarding the fair value hierarchy see Note 7 Fair Value in our 2015 Form 10-K.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
For more information on the valuation methodologies used to measure assets and liabilities at fair value on a recurring basis, see Note 7 Fair Value in our 2015 Form 10-K. The following table summarizes our assets and liabilities measured at fair value on a recurring basis, including instruments for which PNC has elected the fair value option.
The PNC Financial Services Group, Inc. –Form 10-Q79
Table 65:Fair Value Measurements – Recurring Basis Summary
| March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||||
| In millions | Level 1 | Level 2 | Level 3 | Total Fair Value | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 9,859 | $ | 613 | $ | 10,472 | $ | 9,267 | $ | 607 | $ | 9,874 | ||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 25,685 | 25,685 | 24,820 | 24,820 | ||||||||||||||||||||||||||||
Non-agency | 141 | $ | 3,810 | 3,951 | 143 | $ | 4,008 | 4,151 | ||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 1,870 | 1,870 | 1,918 | 1,918 | ||||||||||||||||||||||||||||
Non-agency | 4,743 | 4,743 | 4,903 | 4,903 | ||||||||||||||||||||||||||||
Asset-backed | 5,174 | 451 | 5,625 | 4,941 | 482 | 5,423 | ||||||||||||||||||||||||||
State and municipal | 2,028 | 14 | 2,042 | 2,041 | 15 | 2,056 | ||||||||||||||||||||||||||
Other debt | 2,584 | 30 | 2,614 | 1,996 | 30 | 2,026 | ||||||||||||||||||||||||||
Total debt securities | 9,859 | 42,838 | 4,305 | 57,002 | 9,267 | 41,369 | 4,535 | 55,171 | ||||||||||||||||||||||||
Corporate stocks and other | 350 | 63 | 413 | 527 | 62 | 589 | ||||||||||||||||||||||||||
Total securities available for sale | 10,209 | 42,901 | 4,305 | 57,415 | 9,794 | 41,431 | 4,535 | 55,760 | ||||||||||||||||||||||||
Financial derivatives (a) (b) | ||||||||||||||||||||||||||||||||
Interest rate contracts | 2 | 6,634 | 38 | 6,674 | 4,626 | 29 | 4,655 | |||||||||||||||||||||||||
Other contracts | 253 | 3 | 256 | 284 | 2 | 286 | ||||||||||||||||||||||||||
Total financial derivatives | 2 | 6,887 | 41 | 6,930 | 4,910 | 31 | 4,941 | |||||||||||||||||||||||||
Residential mortgage loans held for sale (c) | 776 | 4 | 780 | 838 | 5 | 843 | ||||||||||||||||||||||||||
Trading securities (d) | ||||||||||||||||||||||||||||||||
Debt | 762 | 1,108 | 2 | 1,872 | 987 | 727 | 3 | 1,717 | ||||||||||||||||||||||||
Equity | 12 | 12 | 9 | 9 | ||||||||||||||||||||||||||||
Total trading securities | 774 | 1,108 | 2 | 1,884 | 996 | 727 | 3 | 1,726 | ||||||||||||||||||||||||
Residential mortgage servicing rights | 863 | 863 | 1,063 | 1,063 | ||||||||||||||||||||||||||||
Commercial mortgage servicing rights | 460 | 460 | 526 | 526 | ||||||||||||||||||||||||||||
Commercial mortgage loans held for sale (c) | 655 | 655 | 641 | 641 | ||||||||||||||||||||||||||||
Equity investments – direct investments | 1,156 | 1,156 | 1,098 | 1,098 | ||||||||||||||||||||||||||||
Equity investments – indirect investments (e) (f) | 347 | 347 | ||||||||||||||||||||||||||||||
Customer resale agreements (g) | 138 | 138 | 137 | 137 | ||||||||||||||||||||||||||||
Loans (h) | 566 | 329 | 895 | 565 | 340 | 905 | ||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||
BlackRock Series C Preferred Stock (i) | 208 | 208 | 357 | 357 | ||||||||||||||||||||||||||||
Other | 250 | 195 | 6 | 451 | 254 | 199 | 7 | 460 | ||||||||||||||||||||||||
Total other assets | 250 | 195 | 214 | 659 | 254 | 199 | 364 | 817 | ||||||||||||||||||||||||
Total assets | $ | 11,235 | $ | 52,571 | $ | 8,029 | $ | 72,182 | $ | 11,044 | $ | 48,807 | $ | 8,606 | $ | 68,804 | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Financial derivatives (b) (j) | ||||||||||||||||||||||||||||||||
Interest rate contracts | $ | 3 | $ | 4,654 | $ | 10 | $ | 4,667 | $ | 1 | $ | 3,124 | $ | 7 | $ | 3,132 | ||||||||||||||||
BlackRock LTIP | 208 | 208 | 357 | 357 | ||||||||||||||||||||||||||||
Other contracts | 245 | 115 | 360 | 204 | 109 | 313 | ||||||||||||||||||||||||||
Total financial derivatives | 3 | 4,899 | 333 | 5,235 | 1 | 3,328 | 473 | 3,802 | ||||||||||||||||||||||||
Trading securities sold short (k) | ||||||||||||||||||||||||||||||||
Debt | 847 | 9 | 856 | 960 | 27 | 987 | ||||||||||||||||||||||||||
Total trading securities sold short | 847 | 9 | 856 | 960 | 27 | 987 | ||||||||||||||||||||||||||
Other borrowed funds | 55 | 8 | 63 | 81 | 12 | 93 | ||||||||||||||||||||||||||
Other liabilities | 14 | 14 | 10 | 10 | ||||||||||||||||||||||||||||
Total liabilities | $ | 850 | $ | 4,963 | $ | 355 | $ | 6,168 | $ | 961 | $ | 3,436 | $ | 495 | $ | 4,892 | ||||||||||||||||
8070 The PNC Financial Services Group, Inc. –Form 10-Q
Table 62: Fair Value Measurements – Recurring Basis Summary
| September 30, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||||
| In millions | Level 1 | Level 2 | Level 3 | Total Fair Value | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 11,740 | $ | 610 | $ | 12,350 | $ | 9,267 | $ | 607 | $ | 9,874 | ||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 27,979 | 27,979 | 24,820 | 24,820 | ||||||||||||||||||||||||||||
Non-agency | 124 | $ | 3,413 | 3,537 | 143 | $ | 4,008 | 4,151 | ||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 2,318 | 2,318 | 1,918 | 1,918 | ||||||||||||||||||||||||||||
Non-agency | 4,233 | 4,233 | 4,903 | 4,903 | ||||||||||||||||||||||||||||
Asset-backed | 5,738 | 425 | 6,163 | 4,941 | 482 | 5,423 | ||||||||||||||||||||||||||
State and municipal | 2,053 | 14 | 2,067 | 2,041 | 15 | 2,056 | ||||||||||||||||||||||||||
Other debt | 2,748 | 21 | 2,769 | 1,996 | 30 | 2,026 | ||||||||||||||||||||||||||
Total debt securities | 11,740 | 45,803 | 3,873 | 61,416 | 9,267 | 41,369 | 4,535 | 55,171 | ||||||||||||||||||||||||
Corporate stocks and other | 462 | 63 | 525 | 527 | 62 | 589 | ||||||||||||||||||||||||||
Total securities available for sale | 12,202 | 45,866 | 3,873 | 61,941 | 9,794 | 41,431 | 4,535 | 55,760 | ||||||||||||||||||||||||
Financial derivatives (a) (b) | ||||||||||||||||||||||||||||||||
Interest rate contracts | 6,703 | 49 | 6,752 | 4,626 | 29 | 4,655 | ||||||||||||||||||||||||||
Other contracts | 392 | 3 | 395 | 284 | 2 | 286 | ||||||||||||||||||||||||||
Total financial derivatives | 7,095 | 52 | 7,147 | 4,910 | 31 | 4,941 | ||||||||||||||||||||||||||
Residential mortgage loans held for sale (c) | 1,124 | 3 | 1,127 | 838 | 5 | 843 | ||||||||||||||||||||||||||
Trading securities | ||||||||||||||||||||||||||||||||
Debt | 826 | 1,774 | 2 | 2,602 | 987 | 727 | 3 | 1,717 | ||||||||||||||||||||||||
Equity | 10 | 10 | 9 | 9 | ||||||||||||||||||||||||||||
Total trading securities | 836 | 1,774 | 2 | 2,612 | 996 | 727 | 3 | 1,726 | ||||||||||||||||||||||||
Residential mortgage servicing rights | 820 | 820 | 1,063 | 1,063 | ||||||||||||||||||||||||||||
Commercial mortgage servicing rights | 473 | 473 | 526 | 526 | ||||||||||||||||||||||||||||
Commercial mortgage loans held for sale (c) | 860 | 860 | 641 | 641 | ||||||||||||||||||||||||||||
Equity investments – direct investments | 1,075 | 1,075 | 1,098 | 1,098 | ||||||||||||||||||||||||||||
Equity investments – indirect investments (d) (e) | 220 | 268 | 347 | |||||||||||||||||||||||||||||
Customer resale agreements (f) | 136 | 136 | 137 | 137 | ||||||||||||||||||||||||||||
Loans (g) | 550 | 324 | 874 | 565 | 340 | 905 | ||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||
BlackRock Series C Preferred Stock (h) | 221 | 221 | 357 | 357 | ||||||||||||||||||||||||||||
Other | 263 | 187 | 6 | 456 | 254 | 199 | 7 | 460 | ||||||||||||||||||||||||
Total other assets | 263 | 187 | 227 | 677 | 254 | 199 | 364 | 817 | ||||||||||||||||||||||||
Total assets | $ | 13,301 | $ | 56,732 | $ | 7,929 | $ | 78,010 | $ | 11,044 | $ | 48,807 | $ | 8,606 | $ | 68,804 | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Financial derivatives (b) (i) | ||||||||||||||||||||||||||||||||
Interest rate contracts | $ | 4,830 | $ | 9 | $ | 4,839 | $ | 1 | $ | 3,124 | $ | 7 | $ | 3,132 | ||||||||||||||||||
BlackRock LTIP | 221 | 221 | 357 | 357 | ||||||||||||||||||||||||||||
Other contracts | 183 | 164 | 347 | 204 | 109 | 313 | ||||||||||||||||||||||||||
Total financial derivatives | 5,013 | 394 | 5,407 | 1 | 3,328 | 473 | 3,802 | |||||||||||||||||||||||||
Trading securities sold short (j) | ||||||||||||||||||||||||||||||||
Debt | $ | 505 | 30 | 535 | 960 | 27 | 987 | |||||||||||||||||||||||||
Total trading securities sold short | 505 | 30 | 535 | 960 | 27 | 987 | ||||||||||||||||||||||||||
Other borrowed funds | 68 | 10 | 78 | 81 | 12 | 93 | ||||||||||||||||||||||||||
Other liabilities | 20 | 20 | 10 | 10 | ||||||||||||||||||||||||||||
Total liabilities | $ | 505 | $ | 5,111 | $ | 424 | $ | 6,040 | $ | 961 | $ | 3,436 | $ | 495 | $ | 4,892 | ||||||||||||||||
(continued on following page)
The PNC Financial Services Group, Inc. –Form 10-Q71
(continued from previous page)
| (a) | Included in Other assets on the Consolidated Balance Sheet. |
| (b) | Amounts at |
| (c) | Included in Loans held for sale on the Consolidated Balance Sheet. PNC has elected the fair value option for certain residential and commercial mortgage loans held for sale. |
| (d) |
| In accordance with ASC 820-10, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the Consolidated Balance Sheet. |
| The indirect equity funds are not redeemable, but PNC receives distributions over the life of the partnership from liquidation of the underlying investments by the investee, which we expect to occur over the next twelve years. The amount of unfunded contractual commitments as of |
| Included in Federal funds sold and resale agreements on the Consolidated Balance Sheet. PNC has elected the fair value option for these items. |
| Included in Loans on the Consolidated Balance Sheet. |
| PNC has elected the fair value option for these shares. |
| Included in Other liabilities on the Consolidated Balance Sheet. |
| Included in Other borrowed funds on the Consolidated Balance Sheet. |
Reconciliations of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the three and nine months ended March 31,September 30, 2016 and 2015 follow:
Table 66:63: Reconciliation of Level 3 Assets and Liabilities
Three Months Ended March 31,September 30, 2016
Total realized / unrealized gains or losses for the period (a) | Unrealized gains /losses on assets and liabilities held on Consolidated Balance Sheet at Mar. 31, 2016 (a) (b) | Total realized / unrealized gains or losses for the period (a) | Unrealized Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Level 3 Instruments Only In millions | Fair Value Dec. 31, 2015 | Included in Earnings | Included in Other comprehensive income | Purchases | Sales | Issuances | Settlements | Transfers into Level 3 | Transfers out of Level 3 | Fair Value Mar. 31, 2016 | Fair Value Jun. 30, 2016 | Included in Earnings | Included in Other | Purchases | Sales | Issuances | Settlements | Transfers into Level 3 | Transfers out of Level 3 | Fair Value Sept. 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed non-agency | $ | 4,008 | $ | 22 | $ | (45 | ) | $ | (175 | ) | $ | 3,810 | $ | (1 | ) | $ | 3,557 | $ | 25 | $ | 32 | $ | (201 | ) | $ | 3,413 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed | 482 | 3 | (12 | ) | (22 | ) | 451 | 436 | 4 | 8 | (23 | ) | 425 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
State and municipal | 15 | (1 | ) | 14 | 15 | (1 | ) | 14 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other debt | 30 | $ | 2 | $ | (2 | ) | 30 | 33 | 1 | $ | 1 | $ | (14 | ) | 21 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total securities available for sale | 4,535 | 25 | (58 | ) | 2 | (2 | ) | (197 | ) | 4,305 | (1 | ) | 4,041 | 30 | 40 | 1 | (14 | ) | (225 | ) | 3,873 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives | 31 | 34 | (24 | ) | 41 | 28 | 51 | 37 | (36 | ) | 52 | $ | 34 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans held for sale | 5 | 3 | (1 | ) | $ | 2 | $ | (5 | ) | 4 | 6 | 3 | (1 | ) | $ | 3 | $ | (8 | ) | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading securities – Debt | 3 | (1 | ) | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading securities –Debt | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage servicing rights | 1,063 | (226 | ) | 52 | $ | 11 | (37 | ) | 863 | (225 | ) | 774 | 23 | 49 | $ | 16 | (42 | ) | 820 | 23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage servicing rights | 526 | (55 | ) | 3 | 9 | (23 | ) | 460 | (55 | ) | 448 | 8 | 16 | 22 | (21 | ) | 473 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans held for sale | 641 | 16 | (649 | ) | 647 | 655 | 12 | 981 | 18 | (1,343 | ) | 1,205 | (1 | ) | 860 | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity investments – direct investments | 1,098 | 51 | 23 | (16 | ) | 1,156 | 50 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity investments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Direct investments | 1,120 | 19 | 17 | (81 | ) | 1,075 | 21 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Indirect investments | 233 | 16 | (31 | ) | 2 | 220 | 9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans | 340 | 2 | 33 | (8 | ) | (25 | ) | (13 | ) | 329 | 1 | 317 | 3 | 27 | (4 | ) | (15 | ) | (4 | ) | 324 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BlackRock Series C | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | 357 | (11 | ) | (138 | ) | 208 | (11 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BlackRock Series C Preferred Stock | 209 | 12 | 221 | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 7 | 2 | (2 | ) | (1 | ) | 6 | 6 | 6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total other assets | 364 | (9 | ) | (2 | ) | (1 | ) | (138 | ) | 214 | (11 | ) | 215 | 12 | 227 | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 8,606 | $ | (162 | ) (c) | $ | (60 | ) | $ | 116 | $ | (677 | ) | $ | 667 | $ | (445 | ) | $ | 2 | $ | (18 | ) | $ | 8,029 | $ | (201 | ) (d) | $ | 8,188 | $ | 166 | (c) | $ | 40 | $ | 113 | $ | (1,474 | ) | $ | 1,243 | $ | (340 | ) | $ | 5 | $ | (12 | ) | $ | 7,929 | $ | 114 | (d) | |||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives (e) | $ | 473 | $ | 7 | $ | 2 | $ | (149 | ) | $ | 333 | $ | 8 | $ | 385 | $ | 21 | $ | 1 | $ | (13 | ) | $ | 394 | $ | 25 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other borrowed funds | 12 | $ | 23 | (27 | ) | 8 | 8 | $ | 24 | (22 | ) | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 10 | 38 | (34 | ) | 14 | 13 | 42 | (35 | ) | 20 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | $ | 495 | $ | 7 | (c) | $ | 2 | $ | 61 | $ | (210 | ) | $ | 355 | $ | 8 | (d) | $ | 406 | $ | 21 | (c) | $ | 1 | $ | 66 | $ | (70 | ) | $ | 424 | $ | 25 | (d) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
72 The PNC Financial Services Group, Inc. –Form 10-Q
Three Months Ended September 30, 2015
Total realized / | Unrealized Consolidated | |||||||||||||||||||||||||||||||||||||||||||
Level 3 Instruments Only In millions | Fair Value Jun. 30, 2015 | 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, 2015 | ||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage- backed non-agency | $ | 4,424 | $ | 30 | $ | (9 | ) | $ | (230 | ) | $ | 4,215 | ||||||||||||||||||||||||||||||||
Asset-backed | 531 | 5 | 2 | (27 | ) | 511 | $ | (1 | ) | |||||||||||||||||||||||||||||||||||
State and municipal | 16 | 16 | ||||||||||||||||||||||||||||||||||||||||||
Other debt | 33 | (1 | ) | $ | 8 | $ | (5 | ) | (5 | ) | 30 | |||||||||||||||||||||||||||||||||
Total securities available for sale | 5,004 | 35 | (8 | ) | 8 | (5 | ) | (262 | ) | 4,772 | (1 | ) | ||||||||||||||||||||||||||||||||
Financial derivatives | 36 | 39 | (30 | ) | 45 | 48 | ||||||||||||||||||||||||||||||||||||||
Residential mortgage loans held for sale | 10 | 1 | 4 | (1 | ) | $ | 2 | $ | (11 | ) | 5 | |||||||||||||||||||||||||||||||||
Trading securities – Debt | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||
Residential mortgage servicing rights | 1,015 | (137 | ) | 111 | $ | 23 | (50 | ) | 962 | (136 | ) | |||||||||||||||||||||||||||||||||
Commercial mortgage servicing rights | 543 | (44 | ) | 15 | 14 | (23 | ) | 505 | (44 | ) | ||||||||||||||||||||||||||||||||||
Commercial mortgage loans held for sale | 757 | 19 | (846 | ) | 874 | (2 | ) | 802 | 7 | |||||||||||||||||||||||||||||||||||
Equity investments – direct investments | 1,191 | 36 | 87 | (99 | ) | 1,215 | 39 | |||||||||||||||||||||||||||||||||||||
Loans | 365 | 4 | 29 | (13 | ) | (24 | ) | 10 | (21 | ) | 350 | 1 | ||||||||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||||||||||||||
BlackRock Series C | ||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | 363 | (51 | ) | 312 | (51 | ) | ||||||||||||||||||||||||||||||||||||||
Other | 7 | 7 | ||||||||||||||||||||||||||||||||||||||||||
Total other assets | 370 | (51 | ) | 319 | (51 | ) | ||||||||||||||||||||||||||||||||||||||
Total assets | $ | 9,294 | $ | (98 | ) (c) | $ | (8 | ) | $ | 254 | $ | (964 | ) | $ | 911 | $ | (391 | ) | $ | 12 | $ | (32 | ) | $ | 8,978 | $ | (137 | )(d) | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives (e) | $ | 498 | $ | (54 | ) | $ | (1 | ) | $ | 443 | $ | (57 | ) | |||||||||||||||||||||||||||||||
Other borrowed funds | 165 | 1 | $ | 23 | (127 | ) | 62 | |||||||||||||||||||||||||||||||||||||
Other liabilities | 10 | 10 | ||||||||||||||||||||||||||||||||||||||||||
Total liabilities | $ | 673 | $ | (53 | ) (c) | $ | 23 | $ | (128 | ) | $ | 515 | $ | (57 | )(d) | |||||||||||||||||||||||||||||
(continued on following page)
The PNC Financial Services Group, Inc. –Form 10-Q 8173
(continued from previous page)
Nine Months Ended September 30, 2016
Total realized / gains or losses | Unrealized liabilities | |||||||||||||||||||||||||||||||||||||||||||
Level 3 Instruments In millions | Fair Value Dec. 31, 2015 | Included in Earnings | Included in Other | Purchases | Sales | Issuances | Settlements | Transfers into Level 3 | Transfers out of Level 3 | Fair Value Sept. 30, 2016 | ||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed non-agency | $ | 4,008 | $ | 58 | $ | 4 | $ | (60 | ) | $ | (597 | ) | $ | 3,413 | $ | (1 | ) | |||||||||||||||||||||||||||
Asset-backed | 482 | 10 | (67 | ) | 425 | |||||||||||||||||||||||||||||||||||||||
State and municipal | 15 | (1 | ) | 14 | ||||||||||||||||||||||||||||||||||||||||
Other debt | 30 | 1 | $ | 10 | (18 | ) | (2 | ) | 21 | |||||||||||||||||||||||||||||||||||
Total securities available for sale | 4,535 | 69 | 4 | 10 | (78 | ) | (667 | ) | 3,873 | (1 | ) | |||||||||||||||||||||||||||||||||
Financial derivatives | 31 | 106 | 1 | (86 | ) | 52 | 101 | |||||||||||||||||||||||||||||||||||||
Residential mortgage loans held for sale | 5 | 9 | (2 | ) | $ | 8 | $ | (17 | ) | 3 | ||||||||||||||||||||||||||||||||||
Trading securities – Debt | 3 | (1 | ) | 2 | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage servicing rights | 1,063 | (316 | ) | 154 | $ | 39 | (120 | ) | 820 | (308 | ) | |||||||||||||||||||||||||||||||||
Commercial mortgage servicing rights | 526 | (56 | ) | 25 | 45 | (67 | ) | 473 | (56 | ) | ||||||||||||||||||||||||||||||||||
Commercial mortgage loans held for sale | 641 | 55 | (2,797 | ) | 2,981 | (20 | ) | 860 | 4 | |||||||||||||||||||||||||||||||||||
Equity investments | ||||||||||||||||||||||||||||||||||||||||||||
Direct investments | 1,098 | 85 | 135 | (243 | ) | 1,075 | 84 | |||||||||||||||||||||||||||||||||||||
Indirect investments | 16 | (31 | ) | 235 | (f) | 220 | 9 | |||||||||||||||||||||||||||||||||||||
Loans | 340 | 6 | 82 | (18 | ) | (57 | ) | (29 | ) | 324 | 3 | |||||||||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||||||||||||||
BlackRock Series C Preferred Stock | 357 | 2 | (138 | ) | 221 | 2 | ||||||||||||||||||||||||||||||||||||||
Other | 7 | 2 | (2 | ) | (1 | ) | 6 | |||||||||||||||||||||||||||||||||||||
Total other assets | 364 | 4 | (2 | ) | (1 | ) | (138 | ) | 227 | 2 | ||||||||||||||||||||||||||||||||||
Total assets | $ | 8,606 | $ | (31 | ) (c) | $ | 2 | $ | 416 | $ | (3,170 | ) | $ | 3,065 | $ | (1,156 | ) | $ | 243 | $ | (46 | ) | $ | 7,929 | $ | (162 | ) (d) | |||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives (e) | $ | 473 | $ | 90 | $ | 4 | $ | (173 | ) | $ | 394 | $ | 92 | |||||||||||||||||||||||||||||||
Other borrowed funds | 12 | $ | 64 | (66 | ) | 10 | ||||||||||||||||||||||||||||||||||||||
Other liabilities | 10 | 1 | 114 | (105 | ) | 20 | ||||||||||||||||||||||||||||||||||||||
Total liabilities | $ | 495 | $ | 91 | (c) | $ | 4 | $ | 178 | $ | (344 | ) | $ | 424 | $ | 92 | (d) | |||||||||||||||||||||||||||
74 The PNC Financial Services Group, Inc. –Form 10-Q
ThreeNine Months Ended March 31,September 30, 2015
Level 3 Instruments Only In millions | Fair Value | Purchases | Sales | Issuances | Settlements | Transfers | Transfers | Fair | Unrealized on assets and (a)(b) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total realized / unrealized gains or losses for the period (a) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total realized / | Unrealized liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Level 3 Instruments Only In millions | Fair Value | Included in Earnings | Included in Other comprehensive income | Purchases | Sales | Issuances | Settlements | Transfers | Transfers | Fair | Unrealized on assets and (a)(b) | Fair Value Dec. 31, 2014 | 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, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed non-agency | $ | 4,798 | $ | 25 | $ | (14 | ) | $ | (185 | ) | $ | 4,624 | $ | (1 | ) | $ | 4,798 | $ | 85 | $ | (31 | ) | $ | (637 | ) | $ | 4,215 | $ | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed non-agency | 7 | (7 | ) | 8 | (8 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed | 563 | 6 | 4 | (25 | ) | 548 | 563 | 16 | 11 | (79 | ) | 511 | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
State and municipal | 134 | (1 | ) | 133 | 134 | (1 | ) | (117 | ) | 16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other debt | 30 | 1 | $ | 3 | (1 | ) | 33 | 30 | 1 | (1 | ) | $ | 11 | $ | (5 | ) | (6 | ) | 30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total securities available for sale | 5,525 | 39 | (11 | ) | 3 | (218 | ) | 5,338 | (1 | ) | 5,525 | 110 | (22 | ) | 11 | (5 | ) | (847 | ) | 4,772 | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives | 42 | 71 | 1 | (60 | ) | 54 | 59 | 42 | 126 | 1 | (124 | ) | 45 | 115 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans held for sale | 6 | 6 | $ | 1 | $ | (6 | ) | 7 | 6 | 1 | 21 | (3 | ) | (1 | ) | $ | 4 | $ | (23 | ) | 5 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading securities – Debt | 32 | (29 | ) | 3 | 32 | (29 | ) | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage servicing rights | 845 | (67 | ) | 83 | $ | 17 | (39 | ) | 839 | (65 | ) | 845 | (69 | ) | 261 | $ | 61 | (136 | ) | 962 | (69 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage servicing rights | 506 | (16 | ) | 11 | 14 | (21 | ) | 494 | (16 | ) | 506 | (26 | ) | 43 | 48 | (66 | ) | 505 | (26 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans held for sale | 893 | 21 | $ | (1,020 | ) | 1,083 | (2 | ) | 975 | 15 | 893 | 63 | (3,081 | ) | 2,965 | (38 | ) | 802 | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity investments – direct investments | 1,152 | 29 | 43 | (75 | ) | 1,149 | 18 | 1,152 | 92 | 225 | (254 | ) | 1,215 | 79 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans | 397 | 10 | 32 | (4 | ) | (37 | ) | 5 | (20 | ) | 383 | 8 | 397 | 19 | 84 | (21 | ) | (96 | ) | 21 | (54 | ) | 350 | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BlackRock Series C Preferred Stock | 375 | 9 | 384 | 9 | 375 | (63 | ) | 312 | (63 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 15 | (5 | ) | 10 | 15 | (7 | ) | (1 | ) | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total other assets | 390 | 9 | (5 | ) | 394 | 9 | 390 | (63 | ) | (7 | ) | (1 | ) | 319 | (63 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 9,788 | $ | 96 | (c) | $ | (11 | ) | $ | 179 | $ | (1,104 | ) | $ | 1,114 | $ | (406 | ) | $ | 6 | $ | (26 | ) | $ | 9,636 | $ | 27 | (d) | $ | 9,788 | $ | 253 | (c) | $ | (22 | ) | $ | 646 | $ | (3,371 | ) | $ | 3,074 | $ | (1,338 | ) | $ | 25 | $ | (77 | ) | $ | 8,978 | $ | 48 | (d) | ||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives (e) | $ | 526 | $ | 41 | $ | (38 | ) | $ | 529 | $ | (6 | ) | $ | 526 | $ | (28 | ) | $ | 1 | $ | (56 | ) | $ | 443 | $ | (69 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other borrowed funds | 181 | $ | 25 | (35 | ) | 171 | 181 | 4 | $ | 69 | (192 | ) | 62 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 9 | 1 | 10 | 9 | 1 | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | $ | 716 | $ | 42 | (c) | $ | 25 | $ | (73 | ) | $ | 710 | $ | (6 | ) (d) | $ | 716 | $ | (23 | ) (c) | $ | 1 | $ | 69 | $ | (248 | ) | $ | 515 | $ | (69 | ) (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 |
| (d) | Net unrealized |
| (e) | Includes swaps entered into in connection with sales of certain Visa Class B common shares. |
| (f) | Reflects transfers into Level 3 associated with a change in valuation methodology. |
An instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification (transfer) of assets or liabilities between hierarchy levels. PNC’s policy is to recognize transfers in and transfers out as of the end of the reporting period. There were no significant transfers into or out of Level 3 assets and liabilities during the first three months of 2016 and 2015.
82The PNC Financial Services Group, Inc. –Form 10-Q75
Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities follows.
Table 67:64: Fair Value Measurements – Recurring Quantitative Information
March 31,September 30, 2016
| Level 3 Instruments Only | ||||||||||||
| Dollars in millions | Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||||
Residential mortgage-backed non-agency securities | $ | 3,810 | Priced by a third-party vendor using a discounted cash flow pricing model (a) | Constant prepayment rate (CPR) Constant default rate (CDR) Loss severity Spread over the benchmark curve (b) | 1.0%-24.2%(7.0%) 0.0%-16.7%(5.4%) 10.0%-98.5%(53.3%) 283bps weighted average | (a) (a) (a) (a) | ||||||
Asset-backed securities | 451 | Priced by a third-party vendor using a discounted cash flow pricing model (a) | Constant prepayment rate (CPR) Constant default rate (CDR) Loss severity Spread over the benchmark curve (b) | 1.0%-14.0%(6.3%) 1.7%-13.9%(6.7%) 24.2%-100%(77.8%) 397bps weighted average | (a) (a) (a) (a) | |||||||
Residential mortgage servicing rights | 863 | Discounted cash flow | Constant prepayment rate (CPR) Spread over the benchmark curve (b) | 0.3%-36.6%(15.7%) 171bps-1,856bps (882bps) | ||||||||
Commercial mortgage servicing rights | 460 | Discounted cash flow | Constant prepayment rate (CPR) Discount rate | 5.4%-42.0%(7.3%) 5.1%-7.5%(7.4%) | ||||||||
Commercial mortgage loans held for sale | 655 | Discounted cash flow | Spread over the benchmark curve (b) Estimated servicing cash flows | 64bps-5,540bps (561bps) 0.0%-6.5%(3.0%) | ||||||||
Equity investments – Direct investments | 1,156 | Multiple of adjusted earnings | Multiple of earnings | 4.5x-13.8x (8.0x) | ||||||||
Loans – Residential real estate | 126 | Consensus pricing (c) | Cumulative default rate Loss severity Discount rate | 2.0%-100%(81.5%) 0.0%-100%(25.5%) 4.9%-7.0%(5.2%) | ||||||||
| 110 | Discounted cash flow | Loss severity
Discount rate | 8.0% weighted average
3.8% weighted average | |||||||||
Loans – Home equity | 93 | Consensus pricing (c) | Credit and Liquidity discount | 26.0%-99.0%(55.0%) | ||||||||
BlackRock Series C Preferred Stock | 208 | Consensus pricing (c) | Liquidity discount | 20.0% | ||||||||
BlackRock LTIP | (208 | ) | Consensus pricing (c) | Liquidity discount | 20.0% | |||||||
Swaps related to sales of certain Visa Class B common shares | (109 | ) | Discounted cash flow | Estimated conversion factor of Class B shares into Class A shares Estimated growth rate of Visa Class A share price | 164.3% 18.0% | |||||||
Insignificant Level 3 assets, net of liabilities (d) | 59 | |||||||||||
Total Level 3 assets, net of liabilities (e) | $ | 7,674 | ||||||||||
(continued on following page)
Level 3 Instruments Only Dollars in millions | Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||||||
Residential mortgage-backed | $ | 3,413 | Priced by a third-party vendor | Constant prepayment rate (CPR) | 1.0%-24.2% (7.2%) | (a | ) | |||||||
| using a discounted cash flow | Constant default rate (CDR) | 0.0%-16.7% (5.4%) | (a | ) | ||||||||||
| pricing model (a) | Loss severity | 10.0%-98.5% (53.2%) | (a | ) | ||||||||||
| Spread over the benchmark curve (b) | 260bps weighted average | (a | ) | |||||||||||
Asset-backed securities | 425 | Priced by a third-party vendor | Constant prepayment rate (CPR) | 1.0%-15.0% (6.3%) | (a | ) | ||||||||
| using a discounted cash flow | Constant default rate (CDR) | 2.0%-13.9% (6.6%) | (a | ) | ||||||||||
| pricing model (a) | Loss severity | 24.2%-100.0% (78.0%) | (a | ) | ||||||||||
| Spread over the benchmark curve (b) | 333bps weighted average | (a | ) | |||||||||||
Residential mortgage servicing | 820 | Discounted cash flow | Constant prepayment rate (CPR) | 0.0%-41.3% (18.3%) | ||||||||||
| Spread over the benchmark curve (b) | 195bps-1,871bps (847bps) | |||||||||||||
Commercial mortgage servicing |
| 473 |
| Discounted cash flow | Constant prepayment rate (CPR) Discount rate | 6.1%-45.6% (7.8%) 5.1%-7.7% (7.5%) | ||||||||
Commercial mortgage loans held for sale |
| 860 |
| Discounted cash flow | Spread over the benchmark curve (b) Estimated servicing cash flows | 66bps-1,220bps (527bps)0.0%-4.7% (1.4%) | ||||||||
Equity investments – Direct investments | 1,075 | Multiple of adjusted earnings | Multiple of earnings | 4.1x-12.0x (7.6x) | ||||||||||
Equity investments – Indirect investments | 220 | Consensus pricing (c) | Liquidity discount | 0.0%-40.0% | ||||||||||
Loans – Residential real estate | 127 | Consensus pricing (c) | Cumulative default rate | 11.0%-100.0% (88.0%) | ||||||||||
| Loss severity | 0.0%-100.0% (24.4%) | |||||||||||||
| Discount rate | 4.7%-6.7% (5.1%) | |||||||||||||
| 114 | Discounted cash flow | Loss severity | 8.0% weighted average | |||||||||||
| Discount rate | 3.9% weighted average | |||||||||||||
Loans – Home equity | 83 | Consensus pricing (c) | Credit and Liquidity discount | 0.0%-99.0% (57.0%) | ||||||||||
BlackRock Series C Preferred Stock | 221 | Consensus pricing (c) | Liquidity discount | 20.0% | ||||||||||
BlackRock LTIP | (221 | ) | Consensus pricing (c) | Liquidity discount | 20.0% | |||||||||
Swaps related to sales of certain Visa Class B common shares | (156 | ) | Discounted cash flow | Estimated conversion factor of Class B shares into Class A shares | 164.4% weighted average | |||||||||
| Estimated growth rate of Visa | ||||||||||||||
| Class A share price | 14.0% | |||||||||||||
Insignificant Level 3 assets, net of liabilities (d) | 51 | |||||||||||||
|
| |||||||||||||
Total Level 3 assets, net of liabilities (e) | $ | 7,505 | ||||||||||||
76The PNC Financial Services Group, Inc. –Form 10-Q83
(continued from previous page)
December 31, 2015
Level 3 Instruments Only Dollars in millions | ||||||||||||
| Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | |||||||||
Residential mortgage-backed non-agency securities | $ | 4,008 | Priced by a third-party vendor using a discounted cash flow pricing model (a) | Constant prepayment rate (CPR) Constant default rate (CDR) Loss severity Spread over the benchmark curve (b) | 1.0%-24.2%(7.0%) 0.0%-16.7%(5.4%) 10.0%-98.5%(53.3%) 241bps weighted average | (a) (a) (a) (a) | ||||||
Asset-backed securities | 482 | Priced by a third-party vendor using a discounted cash flow pricing model (a) | Constant prepayment rate (CPR) Constant default rate (CDR) Loss severity Spread over the benchmark curve (b) | 1.0%-14.0%(6.3%) 1.7%-13.9%(6.8%) 24.2%-100.0%(77.5%) 324bps weighted average | (a) (a) (a) (a) | |||||||
Residential mortgage servicing rights | 1,063 | Discounted cash flow | Constant prepayment rate (CPR) | 0.3%-46.5%(10.6%) | ||||||||
| Spread over the benchmark curve (b) | 559bps-1,883bps (893bps) | |||||||||||
Commercial mortgage servicing rights | 526 | Discounted cash flow | Constant prepayment rate (CPR) | 3.9%-26.5%(5.7%) | ||||||||
| Discount rate | 2.6%-7.7%(7.5%) | |||||||||||
Commercial mortgage loans held for sale | 641 | Discounted cash flow | Spread over the benchmark curve (b) | 85bps-4,270bps (547bps) | ||||||||
| Estimated servicing cash flows | 0.0%-7.0%(0.9%) | |||||||||||
Equity investments – Direct investments | 1,098 | Multiple of adjusted earnings | Multiple of earnings | 4.2x-14.1x (7.6x) | ||||||||
Loans – Residential real estate | 123 | Consensus pricing (c) | Cumulative default rate | 2.0%-100.0%(85.1%) | ||||||||
| Loss severity | 0.0%-100.0%(27.3%) | |||||||||||
| Discount rate | 4.9%-7.0%(5.2%) | |||||||||||
| 116 | Discounted cash flow | Loss severity | 8.0% weighted average | |||||||||
| Discount rate | 3.9% weighted average | |||||||||||
Loans – Home equity | 101 | Consensus pricing (c) | Credit and Liquidity discount | 26.0%-99.0%(54.0%) | ||||||||
BlackRock Series C Preferred Stock | 357 | Consensus pricing (c) | Liquidity discount | 20.0% | ||||||||
BlackRock LTIP | (357 | ) | Consensus pricing (c) | Liquidity discount | 20.0% | |||||||
Swaps related to sales of certain Visa Class B common shares | (104 | ) | Discounted cash flow | Estimated conversion factor of Class B shares into Class A shares | 164.3% | |||||||
| Estimated growth rate of Visa Class A share price | 16.3% | |||||||||||
Insignificant Level 3 assets, net of | 57 | |||||||||||
Total Level 3 assets, net of liabilities (e) | $ | 8,111 | ||||||||||
Level 3 Instruments Only Dollars in millions | Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||||
Residential mortgage-backed non-agency securities | $ | 4,008 | Priced by a third-party vendor | Constant prepayment rate (CPR) | 1.0%-24.2% (7.0%) | (a) | ||||||
| using a discounted cash flow | Constant default rate (CDR) | 0.0%-16.7% (5.4%) | (a) | |||||||||
| pricing model (a) | Loss severity | 10.0%-98.5% (53.3%) | (a) | |||||||||
| Spread over the benchmark curve (b) | 241bps weighted average | (a) | ||||||||||
Asset-backed securities | 482 | Priced by a third-party vendor | Constant prepayment rate (CPR) | 1.0%-14.0% (6.3%) | (a) | |||||||
| using a discounted cash flow | Constant default rate (CDR) | 1.7%-13.9% (6.8%) | (a) | |||||||||
| pricing model (a) | Loss severity | 24.2%-100.0% (77.5%) | (a) | |||||||||
| Spread over the benchmark curve (b) | 324bps weighted average | (a) | ||||||||||
Residential mortgage servicing rights | 1,063 | Discounted cash flow | Constant prepayment rate (CPR) Spread over the benchmark curve (b) | 0.3%-46.5% (10.6%)559bps-1,883bps (893bps) | ||||||||
Commercial mortgage servicing rights | 526 | Discounted cash flow | Constant prepayment rate (CPR) | 3.9%-26.5% (5.7%) | ||||||||
| Discount rate | 2.6%-7.7% (7.5%) | |||||||||||
Commercial mortgage loans held for sale | 641 | Discounted cash flow | Spread over the benchmark curve (b)
| 85bps-4,270bps (547bps) | ||||||||
| Estimated servicing cash flows | 0.0%-7.0% (0.9%) | |||||||||||
Equity investments – Direct investments | 1,098 | Multiple of adjusted earnings | Multiple of earnings | 4.2x-14.1x (7.6x) | ||||||||
Loans – Residential real estate | 123 | Consensus pricing (c) | Cumulative default rate | 2.0%-100.0% (85.1%) | ||||||||
| Loss severity | 0.0%-100.0% (27.3%) | |||||||||||
| Discount rate | 4.9%-7.0% (5.2%) | |||||||||||
| 116 | Discounted cash flow | Loss severity | 8.0% weighted average | |||||||||
| Discount rate | 3.9% weighted average | |||||||||||
Loans – Home equity | 101 | Consensus pricing (c) | Credit and Liquidity discount | 26.0%-99.0% (54.0%) | ||||||||
BlackRock Series C Preferred Stock | 357 | Consensus pricing (c) | Liquidity discount | 20.0% | ||||||||
BlackRock LTIP | (357 | ) | Consensus pricing (c) | Liquidity discount | 20.0% | |||||||
Swaps related to sales of certain Visa Class B common shares | (104 | ) | Discounted cash flow | Estimated conversion factor of
Class B shares into Class A shares
| 164.3% weighted average | |||||||
| Estimated growth rate of Visa Class | ||||||||||||
| A share price | 16.3% | |||||||||||
Insignificant Level 3 assets, net of | ||||||||||||
liabilities (d) | 57 | |||||||||||
|
| |||||||||||
Total Level 3 assets, net of liabilities (e) | $ | 8,111 | ||||||||||
| (a) | Level 3 residential mortgage-backed non-agency and asset-backed securities with fair values as of |
| (b) | The assumed yield spread over the benchmark curve for each instrument is generally intended to incorporate non-interest-rate risks, such as credit and liquidity risks. |
| (c) | Consensus pricing refers to fair value estimates that are generally internally developed using information such as dealer quotes or other third-party provided valuations or comparable asset prices. |
| (d) | Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes certain financial derivative assets and liabilities, trading securities, state and municipal securities, other debt securities, residential mortgage loans held for sale, other assets, other borrowed funds (ROAPs) and other liabilities. For additional information, please see the Assets and Liabilities Measured at Fair Value on a Recurring Basis discussion included in Note 7 Fair Value in our 2015 Form 10-K. |
| (e) | Consisted of total Level 3 assets of |
84 The PNC Financial Services Group, Inc. –Form 10-Q
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 6865 and Table 69.66. For more information regarding the valuation methodologies of our financial assets measured at fair value on a nonrecurring basis, see Note 7 Fair Value in our 2015 Form 10-K.
The PNC Financial Services Group, Inc. –Form 10-Q77
Table 68:65: Fair Value Measurements–Nonrecurring
| Fair Value (a) | Gains (Losses) Three months ended | Fair Value (a) | Gains (Losses) Three months ended | Gains (Losses) Nine months ended | ||||||||||||||||||||||||||||
| In millions | March 31 2016 | December 31 2015 | March 31 2016 | March 31 2015 | September 30 2016 | December 31 2015 | September 30 2016 | September 30 2015 | September 30 2016 | September 30 2015 | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Nonaccrual loans | $ | 87 | $ | 30 | $ | (47 | ) | $ | 3 | $ | 180 | $ | 30 | $(32) | $(41) | $(81) | $(48) | |||||||||||||||
Equity investments | 1 | 5 | (4 | ) | (1 | ) | ||||||||||||||||||||||||||
OREO and foreclosed assets | 70 | 137 | (8 | ) | (10 | ) | 108 | 137 | (6) | (6) | (15) | (18) | ||||||||||||||||||||
Long-lived assets held for sale | 6 | 23 | (3 | ) | (8 | ) | ||||||||||||||||||||||||||
Insignificant assets (b) | 19 | 28 | (2) | (5) | (16) | |||||||||||||||||||||||||||
Total assets | $ | 164 | $ | 195 | $ | (62 | ) | $ | (16 | ) | $ | 307 | $ | 195 | $(38) | $(49) | $(101) | $(82) | ||||||||||||||
| (a) | All Level 3 as of |
| (b) | Represents the aggregate amount of assets measured at fair value on a nonrecurring basis that are individually and in the aggregate insignificant. The amount includes certain equity investments and long-lived assets held for sale. |
Quantitative information about the significant unobservable inputs within Level 3 nonrecurring assets follows.
Table 69:66: Fair Value Measurements – Nonrecurring Quantitative Information
Level 3 Instruments Only Dollars in millions | Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||
March 31, 2016 | ||||||||||
Assets | ||||||||||
Nonaccrual loans (a) | $ | 62 | LGD percentage (b) | Loss severity | 6.7%-62.7%(33.8%) | |||||
Equity investments | 1 | Discounted cash flow | Market rate of return | 5.0% | ||||||
Other (c) | 101 | Fair value of property or collateral | Appraised value/sales price | Not meaningful | ||||||
|
| |||||||||
Total assets | $ | 164 | ||||||||
December 31, 2015 | ||||||||||
Assets | ||||||||||
Nonaccrual loans (a) | $ | 20 | LGD percentage (b) | Loss severity | 8.1%-73.3%(58.6%) | |||||
Equity investments | 5 | Discounted cash flow | Market rate of return | 5.0% | ||||||
Other (c) | 170 | Fair value of property or collateral | Appraised value/sales price | Not meaningful | ||||||
|
| |||||||||
Total assets | $ | 195 | ||||||||
Level 3 Instruments Only Dollars in millions | Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||
September 30, 2016 | ||||||||||
Assets | ||||||||||
Nonaccrual loans | $ 126 | LGD percentage (a) | Loss severity | 5.4%-77.8% (35.3%) | ||||||
| 54 | Fair value of | Appraised value/sales price | Not meaningful | |||||||
OREO and foreclosed assets | 108 | Fair value of | Appraised value/sales price | Not meaningful | ||||||
Insignificant assets | 19 | |||||||||
Total assets | $307 | |||||||||
December 31, 2015 | ||||||||||
Assets | ||||||||||
Nonaccrual loans | $ 20 | LGD percentage (a) | Loss severity | 8.1%-73.3% (58.6%) | ||||||
| 10 | Fair value of property or collateral | Appraised value/sales price | Not meaningful | |||||||
OREO and foreclosed assets | 137 | Fair value of property or collateral | Appraised value/sales price | Not meaningful | ||||||
Insignificant assets | 28 | |||||||||
Total assets | $195 | |||||||||
| LGD percentage represents the amount that PNC expects to lose in the event a borrower defaults on an obligation. |
Financial Instruments Accounted For Under Fair Value Option
We elect the fair value option to account for certain financial instruments. For more information on these financial instruments for which the fair value option election has been made, please refer to Note 7 Fair Value in our 2015 Form 10-K.
The changes in fair value for items for which we elected the fair value option are included in Noninterest income and Noninterest expense on the Consolidated Income Statement and are as follows:
Table 70:67: Fair Value Option – Changes in Fair Value (a)
| Gains (Losses) Three months ended | Gains (Losses) Three months ended | Gains (Losses) Nine months ended | ||||||||||||||||||||||
| In millions | March 31 2016 | March 31 2015 | September 30 2016 | September 30 2015 | September 30 2016 | September 30 2015 | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Customer resale agreements | $ | (1 | ) | $ | (1 | ) | $ | (1 | ) | $ | (1 | ) | ||||||||||||
Commercial mortgage loans held for sale | $ | 27 | $ | 25 | $ | 16 | $ | 25 | $ | 65 | $ | 81 | ||||||||||||
Residential mortgage loans held for sale | 47 | 46 | $ | 55 | $ | 56 | $ | 161 | $ | 127 | ||||||||||||||
Residential mortgage loans – portfolio | 6 | 16 | $ | 7 | $ | 8 | $ | 24 | $ | 37 | ||||||||||||||
BlackRock Series C Preferred Stock | (11 | ) | 9 | $ | 12 | $ | (51 | ) | $ | 2 | $ | (63 | ) | |||||||||||
Other assets | (16 | ) | 1 | $ | 15 | $ | (5 | ) | $ | 2 | ||||||||||||||
Liabilities | ||||||||||||||||||||||||
Other borrowed funds | $ | (2 | ) | $ | (4 | ) | ||||||||||||||||||
| (a) | The impact on earnings of offsetting hedged items or hedging instruments is not reflected in these amounts. |
78The PNC Financial Services Group, Inc. –Form 10-Q85
Fair values and aggregate unpaid principal balances of items for which we elected the fair value option follow.
Table 71:68: Fair Value Option – Fair Value and Principal Balances
| In millions | Fair Value | Aggregate Unpaid Principal Balance | Difference | Fair Value | Aggregate Unpaid Principal Balance | Difference | ||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Customer resale agreements | $ | 138 | $ | 134 | $ | 4 | $ | 136 | $ | 133 | $ | 3 | ||||||||||||
Residential mortgage loans held for sale | ||||||||||||||||||||||||
Performing loans | 767 | 731 | 36 | 1,122 | 1,071 | 51 | ||||||||||||||||||
Accruing loans 90 days or more past due | 4 | 4 | 1 | 1 | ||||||||||||||||||||
Nonaccrual loans | 9 | 9 | 4 | 5 | (1 | ) | ||||||||||||||||||
Total | 780 | 744 | 36 | 1,127 | 1,077 | 50 | ||||||||||||||||||
Commercial mortgage loans held for sale (a) | ||||||||||||||||||||||||
Performing loans | 652 | 657 | (5 | ) | 855 | 865 | (10 | ) | ||||||||||||||||
Nonaccrual loans | 3 | 5 | (2 | ) | 5 | 9 | (4 | ) | ||||||||||||||||
Total | 655 | 662 | (7 | ) | 860 | 874 | (14 | ) | ||||||||||||||||
Residential mortgage loans – portfolio | ||||||||||||||||||||||||
Performing loans | 270 | 313 | (43 | ) | 231 | 276 | (45 | ) | ||||||||||||||||
Accruing loans 90 days or more past due | 410 | 410 | 420 | 420 | ||||||||||||||||||||
Nonaccrual loans | 215 | 361 | (146 | ) | 223 | 354 | (131 | ) | ||||||||||||||||
Total | 895 | 1,084 | (189 | ) | 874 | 1,050 | (176 | ) | ||||||||||||||||
Other assets | 167 | 172 | (5 | ) | 163 | 164 | (1 | ) | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Other borrowed funds | $ | 63 | $ | 64 | $ | (1 | ) | $ | 78 | $ | 80 | $ | (2 | ) | ||||||||||
December 31, 2015 | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Customer resale agreements | $ | 137 | $ | 133 | $ | 4 | $ | 137 | $ | 133 | $ | 4 | ||||||||||||
Residential mortgage loans held for sale | ||||||||||||||||||||||||
Performing loans | 832 | 804 | 28 | 832 | 804 | 28 | ||||||||||||||||||
Accruing loans 90 days or more past due | 4 | 4 | 4 | 4 | ||||||||||||||||||||
Nonaccrual loans | 7 | 8 | (1 | ) | 7 | 8 | (1 | ) | ||||||||||||||||
Total | 843 | 816 | 27 | 843 | 816 | 27 | ||||||||||||||||||
Commercial mortgage loans held for sale (a) | ||||||||||||||||||||||||
Performing loans | 639 | 659 | (20 | ) | 639 | 659 | (20 | ) | ||||||||||||||||
Nonaccrual loans | 2 | 3 | (1 | ) | 2 | 3 | (1 | ) | ||||||||||||||||
Total | 641 | 662 | (21 | ) | 641 | 662 | (21 | ) | ||||||||||||||||
Residential mortgage loans – portfolio | ||||||||||||||||||||||||
Performing loans | 204 | 260 | (56 | ) | 204 | 260 | (56 | ) | ||||||||||||||||
Accruing loans 90 days or more past due | 475 | 478 | (3 | ) | 475 | 478 | (3 | ) | ||||||||||||||||
Nonaccrual loans | 226 | 361 | (135 | ) | 226 | 361 | (135 | ) | ||||||||||||||||
Total | 905 | 1,099 | (194 | ) | 905 | 1,099 | (194 | ) | ||||||||||||||||
Other assets | 164 | 159 | 5 | 164 | 159 | 5 | ||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Other borrowed funds | $ | 93 | $ | 95 | $ | (2 | ) | $ | 93 | $ | 95 | $ | (2 | ) | ||||||||||
| (a) | There were no accruing loans 90 days or more past due within this category at |
86The PNC Financial Services Group, Inc. –Form 10-Q79
Additional Fair Value Information Related to Other Financial Instruments
The following table presents the carrying amounts and estimated fair values, including the level within the fair value hierarchy, of all other financial instruments that are not measured on the consolidated financial statements at fair value as of March 31,September 30, 2016 and December 31, 2015.
Table 72:69: Additional Fair Value Information Related to Other Financial Instruments
| Fair Value | ||||||||||||||||||||
| In millions | Carrying Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
March 31, 2016 | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and due from banks | $ | 3,861 | $ | 3,861 | $ | 3,861 | ||||||||||||||
Short-term assets | 31,787 | 31,787 | $ | 31,787 | ||||||||||||||||
Securities held to maturity | 15,154 | 15,608 | 317 | 15,285 | $ | 6 | ||||||||||||||
Loans held for sale | 106 | 109 | 94 | 15 | ||||||||||||||||
Net loans (excludes leases) | 196,280 | 199,002 | 199,002 | |||||||||||||||||
Other assets | 1,767 | 2,298 | 1,748 | 550 | (a) | |||||||||||||||
Total assets | $ | 248,955 | $ | 252,665 | $ | 4,178 | $ | 48,914 | $ | 199,573 | ||||||||||
Liabilities | ||||||||||||||||||||
Demand, savings and money market deposits | $ | 231,304 | $ | 231,304 | $ | 231,304 | ||||||||||||||
Time deposits | 19,055 | 19,132 | 19,132 | |||||||||||||||||
Borrowed funds | 53,545 | 54,109 | 52,775 | $ | 1,334 | |||||||||||||||
Unfunded loan commitments and letters of credit | 263 | 263 | 263 | |||||||||||||||||
Other liabilities | 53 | 53 | 53 | |||||||||||||||||
Total liabilities | $ | 304,220 | $ | 304,861 | $ | 303,264 | $ | 1,597 | ||||||||||||
December 31, 2015 | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and due from banks | $ | 4,065 | $ | 4,065 | $ | 4,065 | ||||||||||||||
Short-term assets | 32,959 | 32,959 | $ | 32,959 | ||||||||||||||||
Securities held to maturity | 14,768 | 15,002 | 298 | 14,698 | $ | 6 | ||||||||||||||
Loans held for sale | 56 | 56 | 22 | 34 | ||||||||||||||||
Net loans (excludes leases) | 195,579 | 197,611 | 197,611 | |||||||||||||||||
Other assets | 1,817 | 2,408 | 1,786 | 622 | (a) | |||||||||||||||
Total assets | $ | 249,244 | $ | 252,101 | $ | 4,363 | $ | 49,465 | $ | 198,273 | ||||||||||
Liabilities | ||||||||||||||||||||
Demand, savings and money market deposits | $ | 228,492 | $ | 228,492 | $ | 228,492 | ||||||||||||||
Time deposits | 20,510 | 20,471 | 20,471 | |||||||||||||||||
Borrowed funds | 53,761 | 54,002 | 52,578 | $ | 1,424 | |||||||||||||||
Unfunded loan commitments and letters of credit | 245 | 245 | 245 | |||||||||||||||||
Total liabilities | $ | 303,008 | $ | 303,210 | $ | 301,541 | $ | 1,669 | ||||||||||||
| Carrying | Fair Value | |||||||||||||||||||
| In millions | Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
September 30, 2016 | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and due from banks | $ | 4,531 | $ | 4,531 | $ | 4,531 | ||||||||||||||
Short-term assets | 29,125 | 29,125 | $ | 29,125 | ||||||||||||||||
Securities held to maturity | 16,573 | 17,113 | 330 | 16,669 | $ | 114 | ||||||||||||||
Loans held for sale | 66 | 65 | 47 | 18 | ||||||||||||||||
Net loans (excludes leases) | 199,570 | 202,758 | 202,758 | |||||||||||||||||
Other assets | 1,748 | 2,225 | 1,731 | 494 | ||||||||||||||||
Total assets | $ | 251,613 | $ | 255,817 | $ | 4,861 | $ | 47,572 | $ | 203,384 | ||||||||||
Liabilities | ||||||||||||||||||||
Demand, savings and money market deposits | $ | 241,146 | $ | 241,146 | $ | 241,146 | ||||||||||||||
Time deposits | 18,749 | 18,806 | 18,806 | |||||||||||||||||
Borrowed funds | 51,222 | 52,073 | 50,616 | $ | 1,457 | |||||||||||||||
Unfunded loan commitments and letters of credit | 289 | 289 | 289 | |||||||||||||||||
Other liabilities | 67 | 67 | 67 | |||||||||||||||||
Total liabilities | $ | 311,473 | $ | 312,381 | $ | 310,635 | $ | 1,746 | ||||||||||||
December 31, 2015 | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and due from banks | $ | 4,065 | $ | 4,065 | $ | 4,065 | ||||||||||||||
Short-term assets | 32,959 | 32,959 | $ | 32,959 | ||||||||||||||||
Securities held to maturity | 14,768 | 15,002 | 298 | 14,698 | $ | 6 | ||||||||||||||
Loans held for sale | 56 | 56 | 22 | 34 | ||||||||||||||||
Net loans (excludes leases) | 195,579 | 197,611 | 197,611 | |||||||||||||||||
Other assets | 1,817 | 2,408 | 1,786 | 622 | ||||||||||||||||
Total assets | $ | 249,244 | $ | 252,101 | $ | 4,363 | $ | 49,465 | $ | 198,273 | ||||||||||
Liabilities | ||||||||||||||||||||
Demand, savings and money market deposits | $ | 228,492 | $ | 228,492 | $ | 228,492 | ||||||||||||||
Time deposits | 20,510 | 20,471 | 20,471 | |||||||||||||||||
Borrowed funds | 53,761 | 54,002 | 52,578 | $ | 1,424 | |||||||||||||||
Unfunded loan commitments and letters of credit | 245 | 245 | 245 | |||||||||||||||||
Total liabilities | $ | 303,008 | $ | 303,210 | $ | 301,541 | $ | 1,669 | ||||||||||||
The PNC Financial Services Group, Inc. –Form 10-Q87
The aggregate fair values in the preceding table represent only a portion of the total market value of PNC’s assets and liabilities as, in accordance with the guidance related to fair valuesvalue of financial instruments, Table 7269 excludes the following:
financial instruments recorded at fair value on a recurring basis,
real and personal property,
lease financing,
loan customer relationships,
deposit customer intangibles,
mortgage servicing rights,
retail branch networks,
fee-based businesses, such as asset management and brokerage, and
trademarks and brand names.
For more information regarding the methods and assumptions used to estimate the fair values of financial instruments included in Table 72,69, see Note 7 Fair Value in our 2015 Form 10-K.
80 The PNC Financial Services Group, Inc. –Form 10-Q
NOTE 87 GOODWILLAND INTANGIBLE ASSETS
Goodwill
See Note 8 Goodwill and Intangible Assets ofin our 2015 Form 10-K for more information regarding our goodwill.
Mortgage Servicing Rights
We recognize the right to service mortgage loans for others as an intangible asset. MSRs are purchased or originated when loans are sold with servicing retained. MSRs totaled $1.3 billion and $1.6 billion at March 31,September 30, 2016 and December 31, 2015, respectively, and consisted of loan servicing contracts for commercial and residential mortgages measured at fair value.
MSRs are subject to declines in value from actual or expected prepayment of the underlying loans and defaults as well as market driven changes in interest rates. We manage this risk by economically hedging the fair value of MSRs with securities and derivative instruments which are expected to increase (or decrease) in value when the value of MSRs declinesdecreases (or increases).
See the Sensitivity Analysis section of this Note 8,7, as well as Note 76 Fair Value for more detail on our fair value measurement of MSRs. Refer to Note 8 Goodwill and Intangible Assets in our 2015 Form 10-K for more information on our accounting and measurement of MSRs.
Changes in the commercial and residential MSRs follow:
Table 73:70: Mortgage Servicing Rights
| Commercial MSRs | Residential MSRs | Commercial MSRs | Residential MSRs | |||||||||||||||||||||||||||||
| In millions | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||||||||
January 1 | $ | 526 | $ | 506 | $ | 1,063 | $ | 845 | $ | 526 | $ | 506 | $ | 1,063 | $ | 845 | ||||||||||||||||
Additions: | ||||||||||||||||||||||||||||||||
From loans sold with servicing retained | 9 | 14 | 11 | 17 | 45 | 48 | 39 | 61 | ||||||||||||||||||||||||
Purchases | 3 | 11 | 52 | 83 | 25 | 43 | 154 | 261 | ||||||||||||||||||||||||
Changes in fair value due to: | ||||||||||||||||||||||||||||||||
Time and payoffs (a) | (23 | ) | (21 | ) | (37 | ) | (39 | ) | (67 | ) | (66 | ) | (120 | ) | (136 | ) | ||||||||||||||||
Other (b) | (55 | ) | (16 | ) | (226 | ) | (67 | ) | (56 | ) | (26 | ) | (316 | ) | (69 | ) | ||||||||||||||||
March 31 | $ | 460 | $ | 494 | $ | 863 | $ | 839 | ||||||||||||||||||||||||
Related unpaid principal balance at March 31 | $ | 143,922 | $ | 143,724 | $ | 124,839 | $ | 112,932 | ||||||||||||||||||||||||
Servicing advances at March 31 | $ | 220 | $ | 292 | $ | 383 | $ | 510 | ||||||||||||||||||||||||
September 30 | $ | 473 | $ | 505 | $ | 820 | $ | 962 | ||||||||||||||||||||||||
Related unpaid principal balance at September 30 | $ | 139,976 | $ | 143,915 | $ | 126,189 | $ | 121,680 | ||||||||||||||||||||||||
Servicing advances at September 30 | $ | 251 | $ | 277 | $ | 322 | $ | 431 | ||||||||||||||||||||||||
| (a) | Represents decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period. |
| (b) | Represents MSR value changes resulting primarily from market-driven changes in interest rates. |
Sensitivity Analysis
The fair value of commercial and residential MSRs and significant inputs to the valuation models as of March 31,September 30, 2016 are shown in the tables below. The expected and actual rates of mortgage loan prepayments are significant factors driving the fair value. Management uses both internal proprietary models and a third-party model to estimate future commercial mortgage loan prepayments and a third-party model to estimate future residential mortgage loan prepayments. These models have been refined based on current market conditions and management judgment. Future interest rates are another important factor in the valuation of MSRs. Management utilizes market implied forward interest rates to estimate the future direction of mortgage and discount rates. The forward rates utilized are derived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments.
Changes in the shape and slope of the forward curve in future periods may result in volatility in the fair value estimate.
88 The PNC Financial Services Group, Inc. –Form 10-Q
A sensitivity analysis of the hypothetical effect on the fair value of MSRs to adverse changes in key assumptions is presented below. These sensitivities do not include the impact of the related hedging activities. Changes in fair value generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the interest rate spread), which could either magnify or counteract the sensitivities.
The PNC Financial Services Group, Inc. –Form 10-Q81
The following tables set forth the fair value of commercial and residential MSRs and the sensitivity analysis of the hypothetical effect on the fair value of MSRs to immediate adverse changes of 10% and 20% in those assumptions:
Table 74:71: Commercial Mortgage Loan Servicing Rights – Key–Key Valuation Assumptions
| Dollars in millions | March 31 | December 31 | ||||||||||||||
| 2016 | 2015 | September 30 2016 | December 31 2015 | |||||||||||||
Fair value | $ | 460 | $ | 526 | $ | 473 | $ | 526 | ||||||||
Weighted-average life (years) | 4.6 | 4.7 | 4.4 | 4.7 | ||||||||||||
Weighted-average constant prepayment rate | 7.30 | % | 5.71 | % | 7.75 | % | 5.71 | % | ||||||||
Decline in fair value from 10% adverse change | $ | 10 | $ | 10 | $ | 10 | $ | 10 | ||||||||
Decline in fair value from 20% adverse change | $ | 19 | $ | 19 | $ | 20 | $ | 19 | ||||||||
Effective discount rate | 7.38 | % | 7.49 | % | 7.53 | % | 7.49 | % | ||||||||
Decline in fair value from 10% adverse change | $ | 13 | $ | 14 | $ | 12 | $ | 14 | ||||||||
Decline in fair value from 20% adverse change | $ | 26 | $ | 29 | $ | 24 | $ | 29 | ||||||||
Table 75:72: Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions
| March 31 | December 31 | |||||||
| Dollars in millions | 2016 | 2015 | ||||||
Fair value | $ | 863 | $ | 1,063 | ||||
Weighted-average life (years) | 4.8 | 6.3 | ||||||
Weighted-average constant prepayment rate | 15.71 | % | 10.61 | % | ||||
Decline in fair value from 10% adverse change | $ | 48 | $ | 44 | ||||
Decline in fair value from 20% adverse change | $ | 92 | $ | 85 | ||||
Weighted-average option adjusted spread | 8.82 | % | 8.93 | % | ||||
Decline in fair value from 10% adverse change | $ | 26 | $ | 34 | ||||
Decline in fair value from 20% adverse change | $ | 51 | $ | 67 | ||||
| Dollars in millions | September 30 2016 | December 31 2015 | ||||||
Fair value | $ | 820 | $ | 1,063 | ||||
Weighted-average life (years) | 4.2 | 6.3 | ||||||
Weighted-average constant prepayment rate | 18.28 | % | 10.61 | % | ||||
Decline in fair value from 10% adverse change | $ | 50 | $ | 44 | ||||
Decline in fair value from 20% adverse change | $ | 94 | $ | 85 | ||||
Weighted-average option adjusted spread | 847bps | 893bps | ||||||
Decline in fair value from 10% adverse change | $ | 23 | $ | 34 | ||||
Decline in fair value from 20% adverse change | $ | 44 | $ | 67 | ||||
Fees from mortgage loan servicing, which includes contractually specified servicing fees, late fees and ancillary fees follows:
Table 76: Fees from Mortgage Loan Servicing
| In millions | 2016 | 2015 | ||||||
Three months ended March 31 | $ | 129 | $ | 121 | ||||
were $.1 billion for both the three months ended September 30, 2016 and 2015, respectively, and $.4 billion for both the nine months ended September 30, 2016 and 2015, respectively. We also generate servicing fees from fee-based activities provided to others for which we do not have an associated servicing asset.
Fees from commercial and residential MSRs are reported on our Consolidated Income Statement in the line items Corporate services and Residential mortgage, respectively.
Other Intangible Assets
Other intangible assets consist primarily of core deposit intangibles, customer lists and non-compete agreements. See Note 8 Goodwill and Intangible Assets ofin our 2015 Form 10-K for more information regarding our other intangible assets.
The PNC Financial Services Group, Inc. –Form 10-Q89
NOTE 9 CERTAIN8 EMPLOYEE BENEFIT AND STOCK BASED COMPENSATION PLANS
Pension And Postretirement Plans
As described in Note 12 Employee Benefit Plans in our 2015 Form 10-K, we have a noncontributory, qualified defined benefit pension plan covering eligible employees. Benefits are determined using a cash balance formula where earnings credits are a percentage of eligible compensation. Any pension contributions to the plan are based on an actuarially determined amount necessary to fund total benefits payable to plan participants.
We also maintain nonqualified supplemental retirement plans for certain employees and provide certain health care and life insurance benefits for qualifying retired employees (postretirement benefits) through various plans. PNC reserves the right to terminate or make changes to these plans at any time. The nonqualified pension is unfunded.
The components of our net periodic pension and postretirement benefit cost for the first three and nine months ofended September 30, 2016 and 2015, respectively, were as follows:
Table 77: Net Periodic Pension and Postretirement Benefit Costs
| Qualified Pension Plan | Nonqualified Retirement Plans | Postretirement Benefit | ||||||||||||||||||||||
| Three months ended March 31 | ||||||||||||||||||||||||
| In millions | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
Net periodic cost consists of: | ||||||||||||||||||||||||
Service cost | $ | 26 | $ | 27 | $ | 1 | $ | 1 | ||||||||||||||||
Interest cost | 46 | 44 | $ | 3 | $ | 3 | 4 | 4 | ||||||||||||||||
Expected return on plan assets | (70 | ) | (74 | ) | (1 | ) | ||||||||||||||||||
Amortization of prior service credit | (2 | ) | (2 | ) | ||||||||||||||||||||
Amortization of actuarial losses | 11 | 7 | 1 | 2 | ||||||||||||||||||||
Net periodic cost/(benefit) | $ | 11 | $ | 2 | $ | 4 | $ | 5 | $ | 4 | $ | 5 | ||||||||||||
Stock Based Compensation Plans
As more fully described in Note 13 Stock Based Compensation Plans in our 2015 Form 10-K, we have long-term incentive award plans (Incentive Plans) that provide for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, incentive shares/performance units, restricted shares, restricted share units, other share-based awards and dollar-denominated awards to executives and, other than incentive stock options, to non-employee directors. Certain Incentive Plan awards may be paid in stock, cash or a combination of stock and cash. We typically grant a substantial portion of our stock-based compensation awards during the first quarter of the year. As of March 31, 2016, no stock appreciation rights were outstanding.
Total compensation expense recognized related to all share-based payment arrangements during the first three months of 2016 and 2015 was $13 million and $40 million, respectively. At March 31, 2016, there was $314 million of unamortized share-based compensation expense related to nonvested equity compensation arrangements granted under the Incentive Plans. This unamortized cost is expected to be recognized as expense over a period of no longer than five years.
Nonqualified Stock Options
Additional information regarding PNC stock options is more fully described in Note 13 Stock Based Compensation Plans in our 2015 Form 10-K.
9082 The PNC Financial Services Group, Inc. –Form 10-Q
The following table represents the stock option activity for the first three months of 2016.
Table 78: Stock Options – Rollforward73: Net Periodic Pension and Postretirement Benefit Costs
| PNC | PNC Options Converted From National City Options | Total | ||||||||||||||||||||||
| In thousands, except weighted-average data | Shares | Weighted-Average Exercise Price | Shares | Weighted-Average Exercise Price | Shares | Weighted-Average Exercise Price | ||||||||||||||||||
Outstanding at December 31, 2015 | 4,931 | $ | 55.50 | 243 | $ | 522.54 | 5,174 | $ | 77.47 | |||||||||||||||
Granted (a) | ||||||||||||||||||||||||
Exercised | (49 | ) | 63.82 | (49 | ) | 63.82 | ||||||||||||||||||
Cancelled | (3 | ) | 372.30 | (3 | ) | 372.30 | ||||||||||||||||||
Outstanding and Exercisable at March 31, 2016 | 4,882 | $ | 55.42 | 240 | $ | 524.27 | 5,122 | $ | 77.44 | |||||||||||||||
Incentive/Performance Unit Awards and Restricted Share/Restricted Share Unit Awards
Information on incentive/performance unit share awards and restricted share/restricted share unit awards is more fully described in Note 13 Stock Based Compensation Plans in our 2015 Form 10-K.
Table 79: Nonvested Incentive/Performance Unit Awards and Restricted Share/Restricted Share Unit Awards – Rollforward
| Shares in thousands | Nonvested Incentive/ Performance Unit Shares | Weighted- Average Grant Date Fair Value | Nonvested Restricted Share/ Restricted Share Units | Weighted- Average Grant Date Fair Value | ||||||||||||
December 31, 2015 | 1,830 | $ | 79.27 | 3,333 | $ | 79.26 | ||||||||||
Granted (a) | 776 | 77.71 | 1,264 | 78.22 | ||||||||||||
Vested/Released (a) | (691 | ) | 71.55 | (897 | ) | 64.00 | ||||||||||
Forfeited | (30 | ) | 79.65 | |||||||||||||
March 31, 2016 | 1,915 | $ | 81.42 | 3,670 | $ | 82.63 | ||||||||||
In the preceding table, the units and related weighted-average grant date fair value of the incentive/performance unit share awards exclude the effect of dividends on the underlying shares, as those dividends will be paid in cash if and when the underlying shares are issued to the participants.
Liability Awards
A summary of all nonvested, cash-payable incentive/performance units and restricted share unit activity follows:
Table 80: Nonvested Cash-Payable Incentive/Performance Units and Restricted Share Units – Rollforward
| In thousands | Cash-Payable Incentive/ Performance Units | Cash-Payable Restricted Share Units | Total | |||||||||
Outstanding at December 31, 2015 | 117 | 664 | 781 | |||||||||
Granted (a) | 85 | 395 | 480 | |||||||||
Vested and Released (a) | (94 | ) | (327 | ) | (421 | ) | ||||||
Forfeited | (4 | ) | (4 | ) | ||||||||
Outstanding at March 31, 2016 | 108 | 728 | 836 | |||||||||
Included in the preceding table are cash-payable restricted share units granted to certain executives. These grants were made primarily as part of an annual bonus incentive deferral plan. While there are time-based and other vesting criteria, there are generally no market or performance criteria associated with these awards. Prior to the 2015 grant, compensation expense recognized related to these awards was recorded in prior periods as part of the annual cash bonus process. Due to certain requisite service period changes in the award agreements starting with the 2015 grant (for the 2014 performance year), compensation expense is recognized ratably over a four-year period commensurate with the performance year plus the three years of service-based vesting requirements. As of March 31, 2016, the aggregate intrinsic value of all outstanding nonvested cash-payable incentive/performance units and restricted share units was approximately $71 million.
The PNC Financial Services Group, Inc. –Form 10-Q91
| Qualified Pension Plan | Nonqualified Retirement Plans | Postretirement Benefits | ||||||||||||||||||||||
Three months ended September 30 In millions | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
Net periodic cost consists of: | ||||||||||||||||||||||||
Service cost | $ | 26 | $ | 27 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | ||||||||||||
Interest cost | 46 | 44 | 3 | 3 | 4 | 4 | ||||||||||||||||||
Expected return on plan assets | (70 | ) | (75 | ) | (1 | ) | ||||||||||||||||||
Amortization of prior service credit | (2 | ) | (2 | ) | (1 | ) | ||||||||||||||||||
Amortization of actuarial losses | 12 | 8 | 1 | 2 | ||||||||||||||||||||
Net periodic cost/(benefit) | $ | 12 | $ | 2 | $ | 5 | $ | 6 | $ | 4 | $ | 4 | ||||||||||||
| Qualified Pension Plan | Nonqualified Retirement Plans | Postretirement Benefits | ||||||||||||||||||||||
Nine months ended September 30 In millions | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
Net periodic cost consists of: | ||||||||||||||||||||||||
Service cost | $ | 77 | $ | 80 | $ | 2 | $ | 2 | $ | 4 | $ | 4 | ||||||||||||
Interest cost | 139 | 133 | 9 | 9 | 11 | 11 | ||||||||||||||||||
Expected return on plan assets | (211 | ) | (223 | ) | (3 | ) | ||||||||||||||||||
Amortization of prior service credit | (5 | ) | (6 | ) | (1 | ) | (1 | ) | ||||||||||||||||
Amortization of actuarial losses | 34 | 23 | 3 | 5 | ||||||||||||||||||||
Net periodic cost/(benefit) | $ | 34 | $ | 7 | $ | 14 | $ | 16 | $ | 11 | $ | 14 | ||||||||||||
NOTE 109 FINANCIAL DERIVATIVES
We use derivative financial instruments (derivatives) primarily to help manage exposure to interest rate, market and credit risk and reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. We also enter into derivatives with customers to facilitate their risk management activities. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract.
For more information regarding derivatives see Note 1 Accounting Policies and Note 14 Financial Derivatives in our Notes To Consolidated Financial Statements under Item 8 ofin our 2015 Form 10-K.
The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by PNC:
Table 81:74: Total Gross Derivatives
| March 31, 2016 | December 31, 2015 | September 30, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||||||||||||||||||
| In millions | Notional/ Contract Amount | Asset Fair Value (a) | Liability Fair Value (b) | Notional/ Contract Amount | Asset Fair Value (a) | Liability Fair Value (b) | Notional/ Contract Amount | Asset Fair Value (a) | Liability Fair Value (b) | Notional/ Contract Amount | Asset Fair Value (a) | Liability Fair Value (b) | ||||||||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments under GAAP | $ | 51,508 | $ | 1,663 | $ | 301 | $ | 52,074 | $ | 1,159 | $ | 174 | $ | 52,466 | $ | 1,645 | $ | 309 | $ | 52,074 | $ | 1,159 | $ | 174 | ||||||||||||||||||||||||
Derivatives not designated as hedging instruments under GAAP | 316,988 | 5,267 | 4,934 | 295,902 | 3,782 | 3,628 | 296,321 | 5,502 | 5,098 | 295,902 | 3,782 | 3,628 | ||||||||||||||||||||||||||||||||||||
Total gross derivatives | $ | 368,496 | $ | 6,930 | $ | 5,235 | $ | 347,976 | $ | 4,941 | $ | 3,802 | $ | 348,787 | $ | 7,147 | $ | 5,407 | $ | 347,976 | $ | 4,941 | $ | 3,802 | ||||||||||||||||||||||||
| (a) | Included in Other assets on our Consolidated Balance Sheet. |
| (b) | Included in Other liabilities on our Consolidated Balance Sheet. |
All derivatives are carried on our Consolidated Balance Sheet at fair value. Derivative balances are presented on the Consolidated Balance Sheet on a net basis taking into consideration the effects of legally enforceable master netting agreements and, when appropriate, any related cash collateral exchanged with counterparties. Further discussion regarding the offsetting rights associated with these legally enforceable master netting agreements is included in the Offsetting, Counterparty Credit Risk, and Contingent Features section below. Any nonperformance risk, including credit risk, is included in the determination of the estimated net fair value of the derivatives.
Derivatives Designated As Hedging Instruments under GAAP
Certain derivatives used to manage interest rate and foreign exchange risk as part of our asset and liability risk management activities are designated as accounting hedges under GAAP. Derivatives hedging the risks associated with changes in the fair value of assets or liabilities are considered fair value hedges, derivatives hedging the variability of expected future cash flows are
The PNC Financial Services Group, Inc. –Form 10-Q83
considered cash flow hedges, and derivatives hedging a net investment in a foreign subsidiary are considered net investment hedges. Designating derivatives as accounting hedges allows for gains and losses on those derivatives, to the extent effective, to be recognized in the income statement in the same period the hedged items affect earnings.
92 The PNC Financial Services Group, Inc. –Form 10-Q
Further detail regarding the notional amounts and fair values related to derivatives designated in hedge relationships is presented in the following table:
Table 82:75: Derivatives Designated As Hedging Instruments under GAAP
| March 31, 2016 | December 31, 2015 | September 30, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||||||||||||||||||
| In millions | Notional/ Contract Amount | Asset Fair Value (a) | Liability Fair Value (b) | Notional/ Contract Amount | Asset Fair Value (a) | Liability Fair Value (b) | Notional/ Contract Amount | Asset Fair Value (a) | Liability Fair Value (b) | Notional/ Contract Amount | Asset Fair Value (a) | Liability Fair Value (b) | ||||||||||||||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||
Fair value hedges: | ||||||||||||||||||||||||||||||||||||||||||||||||
Receive-fixed swaps | $ | 25,928 | $ | 1,064 | $ | 25,756 | $ | 699 | $ | 18 | $ | 25,972 | $ | 989 | $ | 1 | $ | 25,756 | $ | 699 | $ | 18 | ||||||||||||||||||||||||||
Pay-fixed swaps (c) | 5,934 | $ | 301 | 5,934 | 13 | 153 | 7,715 | 1 | 307 | 5,934 | 13 | 153 | ||||||||||||||||||||||||||||||||||||
Subtotal | 31,862 | 1,064 | 301 | 31,690 | 712 | 171 | 33,687 | 990 | 308 | 31,690 | 712 | 171 | ||||||||||||||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||||||||||||
Receive-fixed swaps | 17,413 | 534 | 17,879 | 412 | 2 | 17,579 | 487 | 1 | 17,879 | 412 | 2 | |||||||||||||||||||||||||||||||||||||
Forward purchase commitments | 1,150 | 6 | 1,400 | 4 | 1 | 200 | 1 | 1,400 | 4 | 1 | ||||||||||||||||||||||||||||||||||||||
Subtotal | 18,563 | 540 | 19,279 | 416 | 3 | 17,779 | 488 | 1 | 19,279 | 416 | 3 | |||||||||||||||||||||||||||||||||||||
Foreign exchange contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||
Net investment hedges | 1,083 | 59 | 1,105 | 31 | 1,000 | 167 | 1,105 | 31 | ||||||||||||||||||||||||||||||||||||||||
Total derivatives designated as hedging instruments | $ | 51,508 | $ | 1,663 | $ | 301 | $ | 52,074 | $ | 1,159 | $ | 174 | $ | 52,466 | $ | 1,645 | $ | 309 | $ | 52,074 | $ | 1,159 | $ | 174 | ||||||||||||||||||||||||
| (a) | Included in Other assets on our Consolidated Balance Sheet. |
| (b) | Included in Other liabilities on our Consolidated Balance Sheet. |
| (c) | Includes zero-coupon swaps. |
Fair Value Hedges
We enter into receive-fixed, pay-variable interest rate swaps to hedge changes in the fair value of outstanding fixed-rate debt caused by fluctuations in market interest rates. We also enter into pay-fixed, receive-variable interest rate swaps and zero-coupon swaps to hedge changes in the fair value of fixed rate and zero-coupon investment securities caused by fluctuations in market interest rates. For these hedge relationships, we use statistical regression analysis to assess hedge effectiveness at both the inception of the hedge relationship and on an ongoing basis. There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness.
Further detail regarding gains (losses) on fair value hedge derivatives and related hedged items is presented in the following table:
Table 83:76: Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges (a)
| Three months ended | Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2016 | March 31, 2015 | September 30, 2016 | September 30, 2015 | September 30, 2016 | September 30, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | Hedged Items | Location | Gain (Loss) on Derivatives Recognized in Income | Gain (Loss) on Related Hedged Items Recognized in Income | Gain (Loss) on Derivatives Recognized in Income | Gain (Loss) on Related Hedged Items Recognized in Income | Hedged Items | Location | Gain (Loss) on Derivatives Recognized in Income | Gain (Loss) on Related Hedged Items Recognized in Income | Gain (Loss) on Derivatives Recognized in Income | Gain (Loss) on Related Hedged Items Recognized in Income | Gain (Loss) on Derivatives Recognized in Income | Gain (Loss) on Related Hedged Items Recognized in Income | Gain (Loss) on Derivatives Recognized in Income | Gain (Loss) on Related Hedged Items Recognized in Income | ||||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts | U.S. Treasury and Government Agencies Securities and Other Debt Securities | Investment securities (interest income) | $ | (154 | ) | $ | 158 | $ | (52 | ) | $ | 54 | | U.S. Treasury and Government Agencies and Other Debt Securities | | | Investment securities (interest income) | | $ | 51 | $ | (53 | ) | $ | (92 | ) | $ | 94 | $ | (158 | ) | $ | 161 | $ | (80 | ) | $ | 82 | ||||||||||||||||||||||
Interest rate contracts | Subordinated debt and Bank notes and senior debt | Borrowed funds (interest expense) | 407 | (432 | ) | 157 | (172 | ) | | Subordinated Debt and Bank Notes and Senior Debt | | | Borrowed funds (interest expense) | | (232 | ) | 231 | 305 | (323 | ) | 330 | (369 | ) | 198 | (236 | ) | ||||||||||||||||||||||||||||||||||
Total (a) | $ | 253 | $ | (274 | ) | $ | 105 | $ | (118 | ) | $ | (181 | ) | $ | 178 | $ | 213 | $ | (229 | ) | $ | 172 | $ | (208 | ) | $ | 118 | $ | (154 | ) | ||||||||||||||||||||||||||||||
| (a) | The difference between the gains (losses) recognized in income on derivatives and their related hedged items represents the ineffective portion of the change in value of our fair value hedge |
84The PNC Financial Services Group, Inc. –Form 10-Q93
Cash Flow Hedges
We enter into receive-fixed, pay-variable interest rate swaps to modify the interest rate characteristics of designated commercial loans from variable to fixed in order to reduce the impact of changes in future cash flows due to market interest rate changes. For these cash flow hedges, any changes in the fair value of the derivatives that are effective in offsetting changes in the forecasted interest cash flows are recorded in Accumulated other comprehensive income and are reclassified to interest income in conjunction with the recognition of interest received on the loans. In the 12 months that follow March 31,September 30, 2016, we expect to reclassify from the amount currently reported in Accumulated other comprehensive income, net derivative gains of $198$199 million pretax, or $129$130 million after-tax, in association with interest received on the hedged loans. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to March 31,September 30, 2016. The maximum length of time over which forecasted loan cash flows are hedged is 6five years. We use statistical regression analysis to assess the effectiveness of these hedge relationships at both the inception of the hedge relationship and on an ongoing basis.
We also periodically enter into forward purchase and sale contracts to hedge the variability of the consideration that will be paid or received related to the purchase or sale of investment securities. The forecasted purchase or sale is consummated upon gross settlement of the forward contract itself. As a result, hedge ineffectiveness, if any, is typically minimal. Gains and losses on these forward contracts are recorded in Accumulated other comprehensive income and are recognized in earnings when the hedged cash flows affect earnings. In the 12 months that follow March 31,September 30, 2016, we expect to reclassify from the amount currently reported in Accumulated other comprehensive income, net derivative gains of $45$56 million pretax, or $29$36 million after-tax, as adjustments of yield on investment securities. As of March 31,September 30, 2016, the maximum length of time over which forecasted purchase contracts are hedged is 2 months.one month.
There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to either cash flow hedge strategy.
During the first threenine months of 2016 and 2015, there were no gains or losses from cash flow hedge derivatives reclassified to earnings because it became probable that the original forecasted transaction would not occur.
Further detail regarding gains (losses) on derivatives and related cash flows is presented in the following table:
Table 84:77: Gains (Losses) on Derivatives and Related Cash Flows–Cash Flow Hedges (a) (b)
| Three months ended March 31 | Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| In millions | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
Gains (losses) on derivatives recognized in OCI – (effective portion) | $ | 265 | $ | 298 | $ | (63 | ) | $ | 326 | $ | 328 | $ | 522 | |||||||||||
Less: Gains (losses) reclassified from accumulated OCI into income – (effective portion) | ||||||||||||||||||||||||
Interest income | 65 | 68 | 61 | 80 | 190 | 220 | ||||||||||||||||||
Noninterest income | (9 | ) | 1 | 12 | (1 | ) | ||||||||||||||||||
Total gains (losses) reclassified from accumulated OCI into income – (effective portion) | $ | 65 | $ | 59 | $ | 62 | $ | 92 | $ | 190 | $ | 219 | ||||||||||||
Net unrealized gains (losses) on cash flow hedge derivatives | $ | 200 | $ | 239 | $ | (125 | ) | $ | 234 | $ | 138 | $ | 303 | |||||||||||
| (a) | All cash flow hedge derivatives are interest rate contracts as of |
| (b) | The amount of cash flow hedge ineffectiveness recognized in income was not |
Net Investment Hedges
We enter into foreign currency forward contracts to hedge non-U.S. Dollar (USD) net investments in foreign subsidiaries against adverse changes in foreign exchange rates. We assess whether the hedging relationship is highly effective in achieving offsetting changes in the value of the hedge and hedged item by qualitatively verifying that the critical terms of the hedge and hedged item match at the inception of the hedging relationship and on an ongoing basis. Net investment hedge derivatives are classified as foreign exchange contracts. There were no components of derivative gains or losses excluded from the assessment of the hedge effectiveness. During the first threenine months of 2016 and 2015, there was no
net investment hedge ineffectiveness. Gains (losses) on net investment hedge derivatives recognized in OCI waswere net
gains of $29$27 million for the three months ended March 31,September 30, 2016 and net gains of $136 million for the nine months ended September 30, 2016 compared with net gains of $54$43 million at March 31,for the three months ended September 30, 2015 and net gains of $32 million for the nine months ended September 30, 2015.
Derivatives Not Designated As Hedging Instruments under GAAP
We also enter into derivatives that are not designated as accounting hedges under GAAP.
For additional information on derivatives not designated as hedging instruments under GAAP see Note 14 Financial Derivatives in our 2015 Form 10-K.
94The PNC Financial Services Group, Inc. –Form 10-Q85
Further detail regarding the notional amounts and fair values related to derivatives not designated in hedge relationships is presented in the following table:
Table 85:78: Derivatives Not Designated As Hedging Instruments under GAAP
| March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||
| In millions | Notional/ Contract Amount | Asset Fair Value (a) | Liability Fair Value (b) | Notional/ Contract Amount | Asset Fair Value (a) | Liability Fair Value (b) | ||||||||||||||||||
Derivatives used for residential mortgage banking activities: | ||||||||||||||||||||||||
Residential mortgage servicing | ||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||
Swaps | $ | 36,925 | $ | 1,225 | $ | 793 | $ | 37,505 | $ | 758 | $ | 416 | ||||||||||||
Swaptions | 1,103 | 39 | 23 | 650 | 27 | 14 | ||||||||||||||||||
Futures (c) | 20,626 | 17,653 | ||||||||||||||||||||||
Futures options | 18,000 | 2 | 3 | 6,000 | 1 | |||||||||||||||||||
Mortgage-backed securities commitments | 4,280 | 12 | 5 | 3,920 | 4 | 8 | ||||||||||||||||||
Subtotal | 80,934 | 1,278 | 824 | 65,728 | 789 | 439 | ||||||||||||||||||
Loan sales | ||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||
Futures (c) | 10 | 20 | ||||||||||||||||||||||
Bond options | 200 | 200 | 2 | |||||||||||||||||||||
Mortgage-backed securities commitments | 5,113 | 8 | 14 | 6,363 | 16 | 8 | ||||||||||||||||||
Residential mortgage loan commitments | 1,950 | 22 | 1,580 | 16 | ||||||||||||||||||||
Subtotal | 7,273 | 30 | 14 | 8,163 | 34 | 8 | ||||||||||||||||||
Subtotal | $ | 88,207 | $ | 1,308 | $ | 838 | $ | 73,891 | $ | 823 | $ | 447 | ||||||||||||
Derivatives used for commercial mortgage banking activities: | ||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||
Swaps | $ | 4,186 | $ | 129 | $ | 68 | $ | 3,945 | $ | 77 | $ | 46 | ||||||||||||
Swaptions | 439 | |||||||||||||||||||||||
Futures (c) | 15,450 | 18,454 | ||||||||||||||||||||||
Commercial mortgage loan commitments | 1,380 | 14 | 8 | 1,176 | 11 | 6 | ||||||||||||||||||
Subtotal | 21,016 | 143 | 76 | 24,014 | 88 | 52 | ||||||||||||||||||
Credit contracts | 58 | 77 | ||||||||||||||||||||||
Subtotal | $ | 21,074 | $ | 143 | $ | 76 | $ | 24,091 | $ | 88 | $ | 52 | ||||||||||||
Derivatives used for customer-related activities: | ||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||
Swaps | $ | 163,175 | $ | 3,445 | $ | 3,424 | $ | 157,041 | $ | 2,507 | $ | 2,433 | ||||||||||||
Caps/floors – Sold | 5,277 | 7 | 5,337 | 11 | ||||||||||||||||||||
Caps/floors – Purchased | 6,617 | 19 | 6,383 | 18 | ||||||||||||||||||||
Swaptions | 4,963 | 144 | 11 | 4,363 | 86 | 13 | ||||||||||||||||||
Futures (c) | 1,632 | 1,673 | ||||||||||||||||||||||
Mortgage-backed securities commitments | 3,457 | 11 | 10 | 1,910 | 5 | 2 | ||||||||||||||||||
Subtotal | 185,121 | 3,619 | 3,452 | 176,707 | 2,616 | 2,459 | ||||||||||||||||||
Foreign exchange contracts | 11,261 | 178 | 157 | 10,888 | 194 | 198 | ||||||||||||||||||
Credit contracts | 5,775 | 3 | 6 | 5,026 | 2 | 4 | ||||||||||||||||||
Subtotal | $ | 202,157 | $ | 3,800 | $ | 3,615 | $ | 192,621 | $ | 2,812 | $ | 2,661 | ||||||||||||
Derivatives used for other risk management activities: | ||||||||||||||||||||||||
Foreign exchange contracts | $ | 2,995 | $ | 16 | $ | 88 | $ | 2,742 | $ | 59 | $ | 6 | ||||||||||||
Other contracts (d) | 2,555 | 317 | 2,557 | 462 | ||||||||||||||||||||
Subtotal | $ | 5,550 | $ | 16 | $ | 405 | $ | 5,299 | $ | 59 | $ | 468 | ||||||||||||
Total derivatives not designated as hedging instruments | $ | 316,988 | $ | 5,267 | $ | 4,934 | $ | 295,902 | $ | 3,782 | $ | 3,628 | ||||||||||||
(continued on following page)
The PNC Financial Services Group, Inc. –Form 10-Q95
(continued from previous page)
| September 30, 2016 | December 31, 2015 | |||||||||||||||||||||||
| In millions | Notional/ Contract Amount | Asset Fair Value (a) | Liability Fair Value (b) | Notional/ Contract Amount | Asset Fair Value (a) | Liability Fair Value (b) | ||||||||||||||||||
Derivatives used for residential mortgage banking activities: | ||||||||||||||||||||||||
Residential mortgage servicing | ||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||
Swaps | $ | 37,604 | $ | 1,369 | $ | 893 | $ | 37,505 | $ | 758 | $ | 416 | ||||||||||||
Swaptions | 1,231 | 13 | 7 | 650 | 27 | 14 | ||||||||||||||||||
Futures (c) | 18,428 | 17,653 | ||||||||||||||||||||||
Futures options | 6,000 | 1 | ||||||||||||||||||||||
Mortgage-backed securities commitments | 6,026 | 14 | 1 | 3,920 | 4 | 8 | ||||||||||||||||||
Subtotal | 63,289 | 1,396 | 901 | 65,728 | 789 | 439 | ||||||||||||||||||
Loan sales | ||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||
Futures (c) | 15 | 20 | ||||||||||||||||||||||
Bond options | 200 | 200 | 2 | |||||||||||||||||||||
Mortgage-backed securities commitments | 6,546 | 8 | 19 | 6,363 | 16 | 8 | ||||||||||||||||||
Residential mortgage loan commitments | 2,231 | 32 | 1,580 | 16 | ||||||||||||||||||||
Subtotal | 8,992 | 40 | 19 | 8,163 | 34 | 8 | ||||||||||||||||||
Subtotal | $ | 72,281 | $ | 1,436 | $ | 920 | $ | 73,891 | $ | 823 | $ | 447 | ||||||||||||
Derivatives used for commercial mortgage banking activities: | ||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||
Swaps | $ | 4,925 | $ | 136 | $ | 64 | $ | 3,945 | $ | 77 | $ | 46 | ||||||||||||
Swaptions | 439 | |||||||||||||||||||||||
Futures (c) | 3,322 | 18,454 | ||||||||||||||||||||||
Commercial mortgage loan commitments | 1,407 | 15 | 7 | 1,176 | 11 | 6 | ||||||||||||||||||
Subtotal | 9,654 | 151 | 71 | 24,014 | 88 | 52 | ||||||||||||||||||
Credit contracts | 35 | 77 | ||||||||||||||||||||||
Subtotal | $ | 9,689 | $ | 151 | $ | 71 | $ | 24,091 | $ | 88 | $ | 52 | ||||||||||||
Derivatives used for customer-related activities: | ||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||
Swaps | $ | 168,512 | $ | 3,516 | $ | 3,520 | $ | 157,041 | $ | 2,507 | $ | 2,433 | ||||||||||||
Caps/floors – Sold | 5,140 | 10 | 5,337 | 11 | ||||||||||||||||||||
Caps/floors – Purchased | 6,462 | 19 | 6,383 | 18 | ||||||||||||||||||||
Swaptions | 4,773 | 150 | 6 | 4,363 | 86 | 13 | ||||||||||||||||||
Futures (c) | 3,077 | 1,673 | ||||||||||||||||||||||
Mortgage-backed securities commitments | 2,012 | 2 | 3 | 1,910 | 5 | 2 | ||||||||||||||||||
Subtotal | 189,976 | 3,687 | 3,539 | 176,707 | 2,616 | 2,459 | ||||||||||||||||||
Foreign exchange contracts | 12,064 | 185 | 159 | 10,888 | 194 | 198 | ||||||||||||||||||
Credit contracts | 6,397 | 3 | 7 | 5,026 | 2 | 4 | ||||||||||||||||||
Subtotal | $ | 208,437 | $ | 3,875 | $ | 3,705 | $ | 192,621 | $ | 2,812 | $ | 2,661 | ||||||||||||
Derivatives used for other risk management activities: | ||||||||||||||||||||||||
Foreign exchange contracts | $ | 3,061 | $ | 40 | $ | 25 | $ | 2,742 | $ | 59 | $ | 6 | ||||||||||||
Other contracts (d) | 2,853 | 377 | 2,557 | 462 | ||||||||||||||||||||
Subtotal | $ | 5,914 | $ | 40 | $ | 402 | $ | 5,299 | $ | 59 | $ | 468 | ||||||||||||
Total derivatives not designated as hedging instruments | $ | 296,321 | $ | 5,502 | $ | 5,098 | $ | 295,902 | $ | 3,782 | $ | 3,628 | ||||||||||||
| (a) | Included in Other assets on our Consolidated Balance Sheet. |
| (b) | Included in Other liabilities on our Consolidated Balance Sheet. |
| (c) | Futures contracts settle in cash daily and, therefore, no derivative asset or derivative liability is recognized on our Consolidated Balance Sheet. |
| (d) | Includes PNC’s obligation to fund a portion of certain BlackRock LTIP programs and the swaps entered into in connection with sales of a portion of Visa Class B common shares. |
86 The PNC Financial Services Group, Inc. –Form 10-Q
Further detail regarding the gains (losses) on derivatives not designated in hedging relationships is presented in the following table:
Table 86:79: Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP
| Three months ended March 31 | Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| In millions | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
Derivatives used for residential mortgage banking activities: | ||||||||||||||||||||||||
Residential mortgage servicing | ||||||||||||||||||||||||
Interest rate contracts | $ | 195 | $ | 98 | $ | 7 | $ | 144 | $ | 343 | $ | 159 | ||||||||||||
Loan sales | ||||||||||||||||||||||||
Interest rate contracts | (7 | ) | 21 | 16 | (6 | ) | 13 | 62 | ||||||||||||||||
Gains (losses) included in residential mortgage banking activities (a) | $ | 188 | $ | 119 | $ | 23 | $ | 138 | $ | 356 | $ | 221 | ||||||||||||
Derivatives used for commercial mortgage banking activities: | ||||||||||||||||||||||||
Interest rate contracts (b) (c) | $ | 53 | $ | 30 | $ | (5 | ) | $ | 42 | $ | 75 | $ | 47 | |||||||||||
Credit contracts (c) | (1 | ) | ||||||||||||||||||||||
Gains (losses) from commercial mortgage banking activities | $ | 53 | $ | 29 | $ | (5 | ) | $ | 42 | $ | 75 | $ | 47 | |||||||||||
Derivatives used for customer-related activities: | ||||||||||||||||||||||||
Interest rate contracts | $ | (4 | ) | $ | 4 | $ | 23 | $ | 10 | $ | 20 | $ | 44 | |||||||||||
Foreign exchange contracts | 29 | 1 | 26 | 23 | 72 | 56 | ||||||||||||||||||
Gains (losses) from customer-related activities (c) | $ | 25 | $ | 5 | $ | 49 | $ | 33 | $ | 92 | $ | 100 | ||||||||||||
Derivatives used for other risk management activities: | ||||||||||||||||||||||||
Interest rate contracts | $ | 1 | ||||||||||||||||||||||
Foreign exchange contracts | $ | (95 | ) | $ | 183 | $ | 26 | $ | 94 | $ | (3 | ) | 208 | |||||||||||
Other contracts (d) | (4 | ) | (7 | ) | (22 | ) | 47 | (88 | ) | 54 | ||||||||||||||
Gains (losses) from other risk management activities (c) | $ | (99 | ) | $ | 176 | $ | 4 | $ | 141 | $ | (91 | ) | $ | 263 | ||||||||||
Total gains (losses) from derivatives not designated as hedging instruments | $ | 167 | $ | 329 | $ | 71 | $ | 354 | $ | 432 | $ | 631 | ||||||||||||
| (a) | Included in Residential mortgage noninterest income. |
| (b) | Included in Corporate services noninterest income. |
| (c) | Included in Other noninterest income. |
| (d) | Includes BlackRock LTIP funding obligation and the swaps entered into in connection with sales of a portion of Visa Class B common shares. |
Credit Derivatives – Risk Participation Agreements
We have entered into risk participation agreements to share some of the credit exposure with other counterparties related to interest rate derivative contracts or to take on credit exposure to generate revenue. The notional amount of risk participation agreements sold was $3.2$3.9 billion at March 31,September 30, 2016 and $2.5 billion at December 31, 2015. Assuming all underlying third party customers referenced in the swap contracts defaulted at March 31,September 30, 2016, the exposure from these agreements would be $166$181 million based on the fair value of the underlying swaps, compared with $122 million at December 31, 2015.
Offsetting, Counterparty Credit Risk, and Contingent Features
We, generally, utilize a net presentation on the Consolidated Balance Sheet for those derivative financial instruments entered into with counterparties under legally enforceable master netting agreements. The master netting agreements reduce credit risk by permitting the closeout netting of all outstanding derivative instruments under the master netting
agreement with the same counterparty upon the occurrence of an event of default. The master netting agreement also may require the exchange of cash or marketable securities to collateralize either party’s net position.
For additional information on derivative offsetting, counterparty credit risk, and contingent features see Note 14 Financial Derivatives in our 2015 Form 10-K. Refer to Note 1513 Commitments and Guarantees in this Report for additional information related to resale and repurchase agreements offsetting.
The following derivative Table 8780 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities as of March 31,September 30, 2016 and December 31, 2015. The table includes cash collateral held or pledged under legally enforceable master netting agreements. The table also includes the fair value of any securities collateral held or pledged under legally enforceable master netting agreements. Cash and securities collateral amounts are included in the table only to the extent of the related net derivative fair values.
96The PNC Financial Services Group, Inc. –Form 10-Q87
Table 87:80: Derivative Assets and Liabilities Offsetting
March 31, 2016 In millions | Amounts Offset on the Consolidated Balance Sheet | Securities Netting | Net | |||||||||||||||||||||||||||||||||||||||||||||
| Gross Fair Value | Fair Value Offset Amount | Cash Collateral | Net Fair Value | |||||||||||||||||||||||||||||||||||||||||||||
| Gross Fair Value | Amounts Offset on the Consolidated Balance Sheet | Net Fair Value | Securities Under Master | Net Amounts | ||||||||||||||||||||||||||||||||||||||||||||
September 30, 2016 In millions | Fair Value Offset Amount | Cash Collateral | ||||||||||||||||||||||||||||||||||||||||||||||
Derivative assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cleared | $ | 1,844 | $ | 1,651 | $ | 152 | $ | 41 | $ | 41 | $ | 2,002 | $ | 1,793 | $ | 184 | $ | 25 | $ | 25 | ||||||||||||||||||||||||||||
Exchange-traded | 2 | 2 | 2 | |||||||||||||||||||||||||||||||||||||||||||||
Over-the-counter | 4,828 | 2,010 | 481 | 2,337 | $ | 296 | 2,041 | 4,750 | 1,844 | 557 | 2,349 | $ | 314 | 2,035 | ||||||||||||||||||||||||||||||||||
Foreign exchange contracts | 253 | 112 | 12 | 129 | 1 | 128 | 392 | 213 | 40 | 139 | 139 | |||||||||||||||||||||||||||||||||||||
Credit contracts | 3 | 1 | 1 | 1 | 1 | 3 | 1 | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||
Total derivative assets | $ | 6,930 | $ | 3,774 | $ | 646 | $ | 2,510 | (a) | $ | 297 | $ | 2,213 | $ | 7,147 | $ | 3,851 | $ | 782 | $ | 2,514 | (a) | $ | 314 | $ | 2,200 | ||||||||||||||||||||||
Derivative liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cleared | $ | 1,923 | $ | 1,651 | $ | 243 | $ | 29 | $ | 29 | $ | 2,192 | $ | 1,794 | $ | 376 | $ | 22 | $ | 22 | ||||||||||||||||||||||||||||
Exchange-traded | 3 | 3 | 3 | |||||||||||||||||||||||||||||||||||||||||||||
Over-the-counter | 2,741 | 1,996 | 663 | 82 | 82 | 2,647 | 1,947 | 643 | 57 | 57 | ||||||||||||||||||||||||||||||||||||||
Foreign exchange contracts | 245 | 123 | 35 | 87 | 87 | 184 | 105 | 24 | 55 | 55 | ||||||||||||||||||||||||||||||||||||||
Credit contracts | 6 | 4 | 2 | 7 | 5 | 2 | ||||||||||||||||||||||||||||||||||||||||||
Other contracts | 317 | 317 | 317 | 377 | 377 | 377 | ||||||||||||||||||||||||||||||||||||||||||
Total derivative liabilities | $ | 5,235 | $ | 3,774 | $ | 943 | $ | 518 | (b) | $ | 518 | $ | 5,407 | $ | 3,851 | $ | 1,045 | $ | 511 | (b) | $ | 511 | ||||||||||||||||||||||||||
December 31, 2015 In millions | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||
In millions | ||||||||||||||||||||||||||||||||||||||||||||||||
Derivative assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cleared | $ | 1,003 | $ | 779 | $ | 195 | $ | 29 | $ | 29 | $ | 1,003 | $ | 779 | $ | 195 | $ | 29 | $ | 29 | ||||||||||||||||||||||||||||
Over-the-counter | 3,652 | 1,645 | 342 | 1,665 | $ | 178 | 1,487 | 3,652 | 1,645 | 342 | 1,665 | $ | 178 | 1,487 | ||||||||||||||||||||||||||||||||||
Foreign exchange contracts | 284 | 129 | 13 | 142 | 2 | 140 | 284 | 129 | 13 | 142 | 2 | 140 | ||||||||||||||||||||||||||||||||||||
Credit contracts | 2 | 1 | 1 | 2 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||
Total derivative assets | $ | 4,941 | $ | 2,554 | $ | 551 | $ | 1,836 | (a) | $ | 180 | $ | 1,656 | $ | 4,941 | $ | 2,554 | $ | 551 | $ | 1,836 | (a) | $ | 180 | $ | 1,656 | ||||||||||||||||||||||
Derivative liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cleared | $ | 855 | $ | 779 | $ | 57 | $ | 19 | $ | 19 | $ | 855 | $ | 779 | $ | 57 | $ | 19 | $ | 19 | ||||||||||||||||||||||||||||
Exchange-traded | 1 | 1 | 1 | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||
Over-the-counter | 2,276 | 1,687 | 530 | 59 | 59 | 2,276 | 1,687 | 530 | 59 | 59 | ||||||||||||||||||||||||||||||||||||||
Foreign exchange contracts | 204 | 85 | 20 | 99 | 99 | 204 | 85 | 20 | 99 | 99 | ||||||||||||||||||||||||||||||||||||||
Credit contracts | 4 | 3 | 1 | 4 | 3 | 1 | ||||||||||||||||||||||||||||||||||||||||||
Other contracts | 462 | 462 | 462 | 462 | 462 | 462 | ||||||||||||||||||||||||||||||||||||||||||
Total derivative liabilities | $ | 3,802 | $ | 2,554 | $ | 608 | $ | 640 | (b) | $ | 640 | $ | 3,802 | $ | 2,554 | $ | 608 | $ | 640 | (b) | $ | 640 | ||||||||||||||||||||||||||
| (a) | Represents the net amount of derivative assets included in Other assets on our Consolidated Balance Sheet. |
| (b) | Represents the net amount of derivative liabilities included in Other liabilities on our Consolidated Balance Sheet. |
The table above includes over-the-counter (OTC) derivatives, cleared derivatives, and exchange-traded derivatives. OTC derivatives represent contracts executed bilaterally with counterparties that are not settled through an organized exchange or cleared through a central clearing house. The majority of OTC derivatives are governed by ISDA documentation or other legally enforceable industry standard master netting agreements. Cleared derivatives represent contracts executed bilaterally with counterparties in the OTC
market that are novated to a central clearing house who then becomes our counterparty. Exchange-traded derivatives represent standardized futures and options contracts executed directly on an organized exchange.
In addition to using master netting agreements and other collateral agreements to reduce credit risk associated with derivative instruments, we also seek to manage credit risk by evaluating credit ratings of counterparties and by using internal credit analysis, limits, and monitoring procedures.
88The PNC Financial Services Group, Inc. –Form 10-Q97
At March 31,September 30, 2016, we held cash, U.S. government securities and mortgage-backed securities totaling $.9$1.2 billion under master netting agreements and other collateral agreements to collateralize net derivative assets due from counterparties, and we pledged cash totaling $1.3$1.6 billion under these agreements to collateralize net derivative liabilities owed to counterparties and to meet initial margin requirements. These totals may differ from the amounts presented in the preceding offsetting table because these totals may include collateral exchanged under an agreement that does not qualify as a master netting agreement or because the total amount of collateral held or pledged exceeds the net derivative fair values with the counterparty as of the balance sheet date due to timing or other factors, such as initial margin. To the extent not netted against the derivative fair values under a master netting agreement, the receivable for cash pledged is included in Other assets and the obligation for cash held is included in Other liabilities on our Consolidated Balance Sheet. Securities held from counterparties are not recognized on our balance
sheet. Likewise securities we have pledged to counterparties remain on our balance sheet.
Certain derivative agreements contain various credit-risk related contingent provisions, such as those that require PNC’s debt to maintain a specified credit rating from one or more of the major credit rating agencies. If PNC’s debt ratings were to fall below such specified ratings, the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on March 31,September 30, 2016 was $1.2$1.3 billion for which PNC had posted collateral of $1.0$1.1 billion in the normal course of business. The maximum additional amount of collateral PNC would have been required to post if the credit-risk-related contingent features underlying these agreements had been triggered on March 31,September 30, 2016 would be $.2 billion.
Table 88:81: Basic and Diluted Earnings per Common Share
| Three months ended March 31 | Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| In millions, except per share data | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
Basic | ||||||||||||||||||||||||
Net income | $ | 943 | $ | 1,004 | $ | 1,006 | $ | 1,073 | $ | 2,938 | $ | 3,121 | ||||||||||||
Less: | ||||||||||||||||||||||||
Net income (loss) attributable to noncontrolling interests | 19 | 1 | 18 | 18 | 60 | 23 | ||||||||||||||||||
Preferred stock dividends and discount accretion and redemptions | 65 | 70 | 64 | 64 | 172 | 182 | ||||||||||||||||||
Net income attributable to common shares | 859 | 933 | 924 | 991 | 2,706 | 2,916 | ||||||||||||||||||
Less: | ||||||||||||||||||||||||
Dividends and undistributed earnings allocated to participating securities | 6 | 2 | 7 | 19 | 2 | |||||||||||||||||||
Net income attributable to basic common shares | $ | 853 | $ | 931 | $ | 917 | $ | 991 | $ | 2,687 | $ | 2,914 | ||||||||||||
Basic weighted-average common shares outstanding | 501 | 521 | 490 | 512 | 496 | 516 | ||||||||||||||||||
Basic earnings per common share (a) | $ | 1.70 | $ | 1.79 | $ | 1.87 | $ | 1.93 | $ | 5.41 | $ | 5.64 | ||||||||||||
Diluted | ||||||||||||||||||||||||
Net income attributable to basic common shares | $ | 853 | $ | 931 | $ | 917 | $ | 991 | $ | 2,687 | $ | 2,914 | ||||||||||||
Less: Impact of BlackRock earnings per share dilution | 3 | 5 | 4 | 4 | 10 | 14 | ||||||||||||||||||
Net income attributable to diluted common shares | $ | 850 | $ | 926 | $ | 913 | $ | 987 | $ | 2,677 | $ | 2,900 | ||||||||||||
Basic weighted-average common shares outstanding | 501 | 521 | 490 | 512 | 496 | 516 | ||||||||||||||||||
Dilutive potential common shares | 6 | 8 | 6 | 8 | 6 | 9 | ||||||||||||||||||
Diluted weighted-average common shares outstanding | 507 | 529 | 496 | 520 | 502 | 525 | ||||||||||||||||||
Diluted earnings per common share (a) | $ | 1.68 | $ | 1.75 | $ | 1.84 | $ | 1.90 | $ | 5.33 | $ | 5.52 | ||||||||||||
| (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). |
98The PNC Financial Services Group, Inc. –Form 10-Q89
NOTE 1211 TOTAL EQUITYAND OTHER COMPREHENSIVE INCOME
Activity in total equity for the first threenine months of 2015 and 2016 follows:
Table 89:82: Rollforward of Total Equity
| Shareholders’ Equity | Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | Shares Stock | Common Stock | Capital Surplus - Preferred Stock | Capital Surplus - Common Stock and Other | Retained Earnings | Accumulated (Loss) | Treasury Stock | Non- controlling Interests | Total Equity | Shares Outstanding Common Stock | Common Stock | Capital Surplus – Preferred | Capital Surplus – Common | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Non- controlling | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2015 | 523 | $ | 2,705 | $ | 3,946 | $ | 12,627 | $ | 26,200 | $ | 503 | $ | (1,430 | ) | $ | 1,523 | $ | 46,074 | 523 | $ | 2,705 | $ | 3,946 | $ | 12,627 | $ | 26,200 | $ | 503 | $ | (1,430 | ) | $ | 1,523 | $ | 46,074 | ||||||||||||||||||||||||||||||||||||
Net income | 1,003 | 1 | 1,004 | 3,098 | 23 | 3,121 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | 200 | 200 | 112 | 112 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common ($.48 per share) | (251 | ) | (251 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common ($1.50 per share) | (779 | ) | (779 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred | (178 | ) | (178 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock discount accretion | 4 | (4 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock activity | 1 | 3 | 36 | 39 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Treasury stock activity | (14 | ) | (58 | ) | (1,407 | ) | (1,465 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock redemption – Series K | (500 | ) | (500 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 70 | (216 | ) | (146 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2015 (a) | 510 | $ | 2,708 | $ | 3,450 | $ | 12,675 | $ | 28,337 | $ | 615 | $ | (2,837 | ) | $ | 1,330 | $ | 46,278 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2016 | 504 | $ | 2,708 | $ | 3,452 | $ | 12,745 | $ | 29,043 | $ | 130 | $ | (3,368 | ) | $ | 1,270 | $ | 45,980 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 2,878 | 60 | 2,938 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | 516 | 516 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common ($1.57 per share) | (791 | ) | (791 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred | (68 | ) | (68 | ) | (168 | ) | (168 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock discount accretion | 2 | (2 | ) | 4 | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock activity (b) | 1 | 8 | 9 | 1 | 10 | 11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Treasury stock activity | (3 | ) | (18 | ) | (345 | ) | (363 | ) | (16 | ) | (23 | ) | (1,397 | ) | (1,420 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | (56 | ) | (111 | ) | (167 | ) | (29 | ) | (192 | ) | (221 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2015 (a) | 520 | $ | 2,706 | $ | 3,948 | $ | 12,561 | $ | 26,882 | $ | 703 | $ | (1,775 | ) | $ | 1,413 | $ | 46,438 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2016 | 504 | $ | 2,708 | $ | 3,452 | $ | 12,745 | $ | 29,043 | $ | 130 | $ | (3,368 | ) | $ | 1,270 | $ | 45,980 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 924 | 19 | 943 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | 402 | 402 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common ($.51 per share) | (260 | ) | (260 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred | (64 | ) | (64 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock discount accretion | 1 | (1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock activity (b) | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Treasury stock activity | (5 | ) | (11 | ) | (423 | ) | (434 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | (150 | ) | (91 | ) | (241 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2016 (a) | 499 | $ | 2,708 | $ | 3,453 | $ | 12,586 | $ | 29,642 | $ | 532 | $ | (3,791 | ) | $ | 1,198 | $ | 46,328 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2016 (a) | 488 | $ | 2,709 | $ | 3,456 | $ | 12,703 | $ | 30,958 | $ | 646 | $ | (4,765 | ) | $ | 1,138 | $ | 46,845 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (a) | The par value of our preferred stock outstanding was less than $.5 million at each date and, therefore, is excluded from this presentation. |
| (b) | Common stock activity totaled less than .5 million shares issued. |
Warrants
We had 13.4 million warrants outstanding at both March 31,September 30, 2016 and December 31, 2015. Each warrant entitles the holder to purchase one share of PNC common stock at an exercise price of $67.33 per share. In accordance with the terms of the warrants, the warrants are exercised on a non-cash net basis with the warrant holder receiving PNC common shares determined based on the excess of the market price of PNC common stock on the exercise date over the exercise price of the warrant. The outstanding warrants will expire as of December 31, 2018, and are considered in the calculation of diluted earnings per common share in Note 1110 Earnings Per Share in this Report.
90The PNC Financial Services Group, Inc. –Form 10-Q99
Details of other comprehensive income (loss) are as follows:
Table 90:83: Other Comprehensive Income
| Three months ended March 31 | Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| In millions | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
Net unrealized gains (losses) on non-OTTI securities | ||||||||||||||||||||||||
Increase in net unrealized gains (losses) on non-OTTI securities | $ | 519 | $ | 132 | $ | (14 | ) | $ | 139 | $ | 791 | $ | (75 | ) | ||||||||||
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest income | 6 | 7 | 5 | 6 | 19 | 20 | ||||||||||||||||||
Less: Net gains (losses) realized on sales of securities reclassified to noninterest income | 9 | 51 | 6 | (21 | ) | 20 | 42 | |||||||||||||||||
Net increase (decrease), pre-tax | 504 | 74 | (25 | ) | 154 | 752 | (137 | ) | ||||||||||||||||
Effect of income taxes | (185 | ) | (27 | ) | 10 | (57 | ) | (275 | ) | 50 | ||||||||||||||
Net increase (decrease), after-tax | 319 | 47 | (15 | ) | 97 | 477 | (87 | ) | ||||||||||||||||
Net unrealized gains (losses) on OTTI securities | ||||||||||||||||||||||||
Increase in net unrealized gains (losses) on OTTI securities | (39 | ) | 2 | 38 | 3 | 16 | 8 | |||||||||||||||||
Less: OTTI losses realized on securities reclassified to noninterest income | (1 | ) | (1 | ) | (1 | ) | (1 | ) | (3 | ) | ||||||||||||||
Net increase (decrease), pre-tax | (38 | ) | 3 | 38 | 4 | 17 | 11 | |||||||||||||||||
Effect of income taxes | 14 | (1 | ) | (14 | ) | (1 | ) | (6 | ) | (4 | ) | |||||||||||||
Net increase (decrease), after-tax | (24 | ) | 2 | 24 | 3 | 11 | 7 | |||||||||||||||||
Net unrealized gains (losses) on cash flow hedge derivatives | ||||||||||||||||||||||||
Increase in net unrealized gains (losses) on cash flow hedge derivatives | 265 | 298 | (63 | ) | 326 | 328 | 522 | |||||||||||||||||
Less: Net gains (losses) realized as a yield adjustment reclassified to loan interest income | 60 | 64 | 51 | 74 | 167 | 202 | ||||||||||||||||||
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest income | 5 | 4 | 10 | 6 | 23 | 18 | ||||||||||||||||||
Less: Net gains (losses) realized on sales of securities reclassified to noninterest income | (9 | ) | 1 | 12 | (1 | ) | ||||||||||||||||||
Net increase (decrease), pre-tax | 200 | 239 | (125 | ) | 234 | 138 | 303 | |||||||||||||||||
Effect of income taxes | (73 | ) | (88 | ) | 45 | (86 | ) | (51 | ) | (111 | ) | |||||||||||||
Net increase (decrease), after-tax | 127 | 151 | (80 | ) | 148 | 87 | 192 | |||||||||||||||||
Pension and other postretirement benefit plan adjustments | ||||||||||||||||||||||||
Net pension and other postretirement benefit activity | 2 | 53 | (5 | ) | 36 | |||||||||||||||||||
Amortization of actuarial loss (gain) reclassified to other noninterest expense | 12 | 9 | 13 | 10 | 37 | 28 | ||||||||||||||||||
Amortization of prior service cost (credit) reclassified to other noninterest expense | (2 | ) | (2 | ) | (2 | ) | (3 | ) | (6 | ) | (7 | ) | ||||||||||||
Net increase (decrease), pre-tax | 12 | 60 | 11 | 7 | 26 | 57 | ||||||||||||||||||
Effect of income taxes | (4 | ) | (22 | ) | (5 | ) | (2 | ) | (10 | ) | (20 | ) | ||||||||||||
Net increase (decrease), after-tax | 8 | 38 | 6 | 5 | 16 | 37 | ||||||||||||||||||
Other | ||||||||||||||||||||||||
PNC’s portion of BlackRock’s OCI | (25 | ) | (25 | ) | (28 | ) | (40 | ) | (34 | ) | ||||||||||||||
Net investment hedge derivatives | 29 | 54 | 27 | 43 | 136 | 32 | ||||||||||||||||||
Foreign currency translation adjustments (a) | (29 | ) | (56 | ) | ||||||||||||||||||||
SBA I/O Strip sold | (2 | ) | ||||||||||||||||||||||
Foreign currency translation adjustments and other (a) | (24 | ) | (44 | ) | (136 | ) | (35 | ) | ||||||||||||||||
Net increase (decrease), pre-tax | (27 | ) | (27 | ) | (25 | ) | (1 | ) | (40 | ) | (37 | ) | ||||||||||||
Effect of income taxes (a) | (1 | ) | (11 | ) | (16 | ) | (35 | ) | ||||||||||||||||
Net increase (decrease), after-tax | (28 | ) | (38 | ) | (25 | ) | (17 | ) | (75 | ) | (37 | ) | ||||||||||||
Total other comprehensive income, pre-tax | 651 | 349 | (126 | ) | 398 | 893 | 197 | |||||||||||||||||
Total other comprehensive income, tax effect | (249 | ) | (149 | ) | 36 | (162 | ) | (377 | ) | (85 | ) | |||||||||||||
Total other comprehensive income, after-tax | $ | 402 | $ | 200 | $ | (90 | ) | $ | 236 | $ | 516 | $ | 112 | |||||||||||
| (a) | The earnings of PNC’s Luxembourg-UK lending business have been indefinitely |
100 The PNC Financial Services Group, Inc. –Form 10-Q
Table 91: Accumulated Other Comprehensive Income (Loss) Components
| In millions, after-tax | Net unrealized gains (losses) on non-OTTI securities | Net unrealized gains (losses) on OTTI securities | Net unrealized gains (losses) on cash flow hedge derivatives | Pension and other postretirement benefit plan adjustments | Other | Total | ||||||||||||||||||
Balance at December 31, 2014 | $ | 647 | $ | 74 | $ | 350 | $ | (520 | ) | $ | (48 | ) | $ | 503 | ||||||||||
Net activity | 47 | 2 | 151 | 38 | (38 | ) | 200 | |||||||||||||||||
Balance at March 31, 2015 | 694 | 76 | 501 | (482 | ) | (86 | ) | 703 | ||||||||||||||||
Balance at December 31, 2015 | 286 | 66 | 430 | (554 | ) | (98 | ) | 130 | ||||||||||||||||
Net activity | 319 | (24 | ) | 127 | 8 | (28 | ) | 402 | ||||||||||||||||
Balance at March 31, 2016 | $ | 605 | $ | 42 | $ | 557 | $ | (546 | ) | $ | (126 | ) | $ | 532 | ||||||||||
Table 92: Net Operating Loss Carryforwards and Tax Credit Carryforwards
| In millions | March 31 2016 | December 31 2015 | ||||||
Net Operating Loss Carryforwards: | ||||||||
Federal | $ | 858 | $ | 878 | ||||
State | $ | 2,249 | $ | 2,272 | ||||
Tax Credit Carryforwards: | ||||||||
Federal | $ | 59 | $ | 64 | ||||
State | $ | 3 | $ | 3 | ||||
The federal net operating loss carryforwards expire in 2032. The state net operating loss carryforwards will expire from 2016 to 2036. The majority of the tax credit carryforwards expire in 2032. All federal and most state net operating loss and credit carryforwards are from acquired entities and utilization is subject to various statutory limitations. It is anticipated that the company will be able to fully utilize its carryforwards for federal tax purposes, but a valuation allowance of $61 million has been recorded against certain state tax carryforwards as of March 31, 2016. If select uncertain tax positions were successfully challenged by a state, the state net operating losses listed above could be reduced by $60 million.
PNC is subject to U.S. federal income tax as well as income tax in most states and some foreign jurisdictions. Examinations were completed for PNC’s consolidated federal income tax returns for 2007 through 2010 and National City’s consolidated federal income tax returns through 2008 and were settled with the Internal Revenue Service (IRS). The IRS is currently examining PNC’s consolidated federal income tax returns for 2011 through 2013. In addition, we are under continuous examinations by various state taxing authorities. With few exceptions, we are no longer subject to state and local and foreign income tax examinations by taxing authorities for periods before 2010. For all open audits, any potential adjustments have been considered in establishing our unrecognized tax benefits as of March 31, 2016.
PNC had unrecognized tax benefits of $20 million at March 31, 2016 and $26 million at December 31, 2015. At March 31, 2016, these unrecognized tax benefits, if recognized, would favorably impact the effective income tax rate.
While it is reasonably possible that the balance of unrecognized tax benefits could increase or decrease in the next twelve months due to completion of tax authorities’ exams or the expiration of statutes of limitations, management believes it is unlikely that its unrecognized tax benefits will change by a significant amount during the next twelve months.
During the three months ended March 31, 2016, we recognized $52 million of amortization, $56 million of tax credits, and $19 million of other tax benefits associated with qualified investments in low income housing tax credits within Income taxes.
The PNC Financial Services Group, Inc. –Form 10-Q 10191
Table 84: 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, 2015 | $ | 463 | $ | 78 | $ | 394 | $ | (488 | ) | $ | (68 | ) | $ | 379 | ||||||||||
Net activity | 97 | 3 | 148 | 5 | (17 | ) | 236 | |||||||||||||||||
Balance at September 30, 2015 | $ | 560 | $ | 81 | $ | 542 | $ | (483 | ) | $ | (85 | ) | $ | 615 | ||||||||||
Balance at June 30, 2016 | $ | 778 | $ | 53 | $ | 597 | $ | (544 | ) | $ | (148 | ) | $ | 736 | ||||||||||
Net activity | (15 | ) | 24 | (80 | ) | 6 | (25 | ) | (90 | ) | ||||||||||||||
Balance at September 30, 2016 | $ | 763 | $ | 77 | $ | 517 | $ | (538 | ) | $ | (173 | ) | $ | 646 | ||||||||||
Balance at December 31, 2014 | $ | 647 | $ | 74 | $ | 350 | $ | (520 | ) | $ | (48 | ) | $ | 503 | ||||||||||
Net activity | (87 | ) | 7 | 192 | 37 | (37 | ) | 112 | ||||||||||||||||
Balance at September 30, 2015 | $ | 560 | $ | 81 | $ | 542 | $ | (483 | ) | $ | (85 | ) | $ | 615 | ||||||||||
Balance at December 31, 2015 | $ | 286 | $ | 66 | $ | 430 | $ | (554 | ) | $ | (98 | ) | $ | 130 | ||||||||||
Net activity | 477 | 11 | 87 | 16 | (75 | ) | 516 | |||||||||||||||||
Balance at September 30, 2016 | $ | 763 | $ | 77 | $ | 517 | $ | (538 | ) | $ | (173 | ) | $ | 646 | ||||||||||
We establish accruals for legal proceedings, including litigation and regulatory and governmental investigations and inquiries, when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changed circumstances. When we are able to do so, we also determine estimates of possible losses or ranges of possible losses, whether in excess of any related accrued liability or where there is no accrued liability, for disclosed legal proceedings (“Disclosed Matters,” which are those matters disclosed in this Note 1412 as well as those matters disclosed in Note 20 Legal Proceedings in Part II, Item 8 of our 2015 Form 10-K, in Note 14 Legal Proceedings in Part I, Item 1 of our first quarter 2016 Form 10-Q and in Note 12 Legal Proceedings in Part I, Item 1 of our second quarter 2016 Form 10-Q (such prior disclosure collectively referred to as “Prior Disclosure”)). For Disclosed Matters where we are able to estimate such possible losses or ranges of possible losses, as of March 31,September 30, 2016, we estimate that it is reasonably possible that we could incur losses in excess of related accrued liabilities, if any, in an aggregate amount of up to approximately $550$525 million. The estimates included in this amount are based on our analysis of currently available information and are subject to significant judgment and a variety of assumptions and uncertainties. As new information is obtained we may change our estimates. Due to the inherent subjectivity of the assessments and unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to us from the legal proceedings in question. Thus, our exposure and ultimate losses may be higher, and possibly significantly so, than the amounts accrued or this aggregate amount.
In our experience, legal proceedings are inherently unpredictable. One or more of the following factors frequently
contribute to this inherent unpredictability: the proceeding is in its early stages; the damages sought are unspecified, unsupported or uncertain; it is unclear whether a case brought as a class action will be allowed to proceed on that basis or, if permitted to proceed as a class action, how the class will be defined; the other party is seeking relief other than or in addition to compensatory damages (including, in the case of regulatory and governmental investigations and inquiries, the possibility of fines and penalties); the matter presents meaningful legal uncertainties, including novel issues of law; we have not engaged in meaningful settlement discussions; discovery has not started or is not complete; there are significant facts in dispute; the possible outcomes may not be amenable to the use of statistical or quantitative analytical tools; predicting possible outcomes depends on making assumptions about future decisions of courts or regulatory bodies or the behavior of other parties; and there are a large number of parties named as defendants (including where it is uncertain how damages or liability, if any, will be shared among multiple defendants). Generally, the less progress that has been made in the proceedings or the broader the range of
potential results, the harder it is for us to estimate losses or ranges of losses that it is reasonably possible we could incur.
As a result of these types of factors, we are unable, at this time, to estimate the losses that are reasonably possible to be incurred or ranges of such losses with respect to some of the matters disclosed, and the aggregate estimated amount provided above does not include an estimate for every Disclosed Matter. Therefore, as the estimated aggregate amount disclosed above does not include all of the Disclosed Matters, the amount disclosed above does not represent our maximum reasonably possible loss exposure for all of the Disclosed Matters. The estimated aggregate amount also does not reflect any of our exposure to matters not so disclosed, as discussed below under “Other.”
92 The PNC Financial Services Group, Inc. –Form 10-Q
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.
The following updates our disclosure of legal proceedings from that provided in Prior Disclosure.
CBNV Mortgage Litigation
Our petition for a writ of certiorari filed with the U.S. Supreme Court seeking review of the decision of the U.S. Court of Appeals for the Third CircuitIn August 2016, in the matter currently pendinglawsuits consolidated for pre-trial proceedings in the U.S. District Court for the Western District of Pennsylvania under the caption In re: Community Bank of Northern Virginia Lending Practices Litigation (No. 03-0425 (W.D. Pa.), MDL No. 1674) was denied in February 2016. We filed motions for decertification and summary judgment, we reached a settlement with the districtplaintiffs, subject to notice to the class and court in Aprilapproval. In September 2016, the court granted preliminary approval, authorized the sending of notice to the class, set the timing for objections and scheduled a final approval hearing for December 2016. Under this settlement, the matter will be submitted to binding arbitration before a panel of three arbitrators, who will determine whether we will pay the plaintiff class either an amount (inclusive of class counsel fees and expenses) we proposed ($24 million) or an amount proposed by the plaintiffs ($70 million), with no discretion to choose any other amount. The court has ordered the arbitrators to reach a decision by the end of March 2017.
Lender Placed InsuranceCaptive Mortgage Reinsurance Litigation
The U.S. District Court for the Southern District of Florida granted final approval of the settlementIn September 2016, inMontoya,White, et al. v. The PNC Bank, N.A.Financial Services Group, Inc., et al. (Case(Civil Action No. 1:14-cv-20474-JEM) in April 2016.
Pre-need Funeral Arrangements
In the lawsuit filed11-7928), pending in the U.S. District Court for the Eastern District of MissouriPennsylvania, the plaintiffs moved to lift the stay and for permission to file a Third Amended Class Action Complaint. The proposed amended complaint, if allowed, would add claims under the captionRacketeer Influenced and Corrupt Organizations Act (RICO) and would assert that the RESPA claim is not barred by the statute of limitations because every acceptance of a reinsurance premium is a new “occurrence” for these purposes. We have opposed the motion to amend.
Pre-need Funeral Arrangements
The cross appeals by the PNC defendants and the plaintiffs inJo Ann Howard, P.C., et al. v. Cassity, et al. (No. 4:09-CV-1252-ERW), the plaintiffs have cross-appealed to09-CV-
1252-ERW) were argued before the U.S. Court of Appeals for the Eighth Circuit from the trial court’s orders reducing the judgment by amounts paid in settlement by other defendants, denying plaintiffs’ motion for pre-judgment interest, and dismissing the plaintiffs’ aiding and abetting claims.September 2016.
102 The PNC Financial Services Group, Inc. –Form 10-Q
Other Regulatory and Governmental Inquiries
PNC is the subject of investigations, audits and other forms of regulatory and governmental inquiry covering a broad range of issues in our banking,consumer, mortgage, brokerage, securities and other financial services businesses, inas well as other aspects of our operations. In some cases, asthese inquiries are part of reviews of specified activities at multiple industry participants. Over the last few years, we have experienced an increaseparticipants; in regulatory and governmental investigations, audits and other inquiries. Areas of current regulatory or governmental inquiry with respect toothers, they are directed at PNC include consumer protection, fair lending, mortgage origination and servicing, mortgage and non mortgage-related insurance and reinsurance, municipal finance activities, conduct by broker-dealers, automobile lending practices, employment practices, and participation in government insurance or guarantee programs, some of which are described in Prior Disclosure.individually. These inquiries, including those described below and 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.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 PNC.
Through the U.S. Attorney’s Office for the District of Maryland, the office of the Inspector General for the Small Business Administration (SBA) served a subpoena on PNC in 2012 requesting documents concerning PNC’s relationship with, including SBA-guaranteed loans made through, a broker named Jade Capital Investments, LLC (Jade), as well as information regarding other PNC-originated SBA guaranteed loans made to businesses located in the State of Maryland, the Commonwealth of Virginia, and Washington, D.C. Certain of the Jade loans have been identified in an indictment and subsequent superseding indictment charging persons associated with Jade with conspiracy to commit bank fraud, substantive violations of the federal bank fraud statute, and money laundering. In August 2016, we completed a settlement, without any admission of liability, in the amount of $9.5 million that resolves the U.S. Attorney’s Office investigation.
Our practice is to cooperate fully with regulatory and governmental investigations, audits and other inquiries, including those described in this Note 12 and in Prior Disclosure.
Other
In addition to the proceedings or other matters described above, and in Prior Disclosure, PNC and persons to whom we may have indemnification obligations, in the normal course of business, are subject to various other pending and threatened legal proceedings in which claims for monetary damages and other relief are asserted. We do not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of such other legal proceedings will have a material adverse effect on our financial position. However, we cannot now determine whether or not any claims asserted against us or others to
The PNC Financial Services Group, Inc. –Form 10-Q93
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.
See Note 21 Commitments and Guarantees in Part II, Item 8 of our 2015 Form 10-K for additional information regarding the Visa indemnification and our other obligations to provide indemnification, including to current and former officers, directors, employees and agents of PNC and companies we have acquired.
NOTE 1513 COMMITMENTSAND GUARANTEES
Commitments
In the normal course of business, we have various commitments outstanding, certain of which are not included on our Consolidated Balance Sheet. The following table presents our outstanding commitments to extend credit along with significant other commitments as of March 31,September 30, 2016 and December 31, 2015, respectively.
Table 93:85: Commitments to Extend Credit and Other Commitments
| In millions | March 31 2016 | December 31 2015 | September 30 2016 | December 31 2015 | ||||||||||||
Commitments to extend credit | ||||||||||||||||
Total commercial lending | $ | 101,434 | $ | 101,252 | $ | 104,124 | $ | 101,252 | ||||||||
Home equity lines of credit | 17,311 | 17,268 | 17,316 | 17,268 | ||||||||||||
Credit card | 20,814 | 19,937 | 21,907 | 19,937 | ||||||||||||
Other | 4,399 | 4,032 | 4,493 | 4,032 | ||||||||||||
Total commitments to extend credit | 143,958 | 142,489 | 147,840 | 142,489 | ||||||||||||
Net outstanding standby letters of credit (a) | 8,969 | 8,765 | 8,760 | 8,765 | ||||||||||||
Reinsurance agreements (b) | 1,968 | 2,010 | 1,880 | 2,010 | ||||||||||||
Standby bond purchase agreements (c) | 891 | 911 | 868 | 911 | ||||||||||||
Other commitments (d) | 969 | 966 | 980 | 966 | ||||||||||||
Total commitments to extend credit and other commitments | $ | 156,755 | $ | 155,141 | $ | 160,328 | $ | 155,141 | ||||||||
| (a) | Net outstanding standby letters of credit include |
| (b) | Represents aggregate maximum exposure up to the specified limits of the reinsurance contracts, and reflects estimates based on availability of financial information from insurance carriers. As of |
| (c) | We enter into standby bond purchase agreements to support municipal bond obligations. |
| (d) | Includes $.4 billion and $.5 billion related to investments in qualified affordable housing projects at |
Commitments to Extend Credit
Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. These commitments generally have fixed expiration dates, may require payment of a fee, and contain termination clauses in the event the customer’s credit quality deteriorates. Based on our historical experience, some commitments expire unfunded, and therefore cash requirements are substantially less than the total commitment.
The PNC Financial Services Group, Inc. –Form 10-Q103
Net Outstanding Standby Letters of Credit
We issue standby letters of credit and share in the risk of standby letters of credit issued by other financial institutions, in each case to support obligations of our customers to third parties, such as insurance requirements and the facilitation of transactions involving capital markets product execution. Internal credit ratings related to our net outstanding standby letters of credit were as follows:
Table 94:86: Internal Credit Ratings Related to Net Outstanding Standby Letters of Credit
| March 31 2016 | December 31 2015 | September 30 2016 | December 31 2015 | |||||||||||
Internal credit ratings (as a percentage of portfolio): | ||||||||||||||
Pass (a) | 92 | % | 93 | % | 92 | % | 93% | |||||||
Below pass (b) | 8 | % | 7 | % | 8 | % | 7% | |||||||
| (a) | Indicates that expected risk of loss is currently low. |
| (b) | Indicates a higher degree of risk of default. |
94 The PNC Financial Services Group, Inc. –Form 10-Q
If the customer fails to meet its financial or performance obligation to the third party under the terms of the contract or there is a need to support a remarketing program, then upon a draw by a beneficiary, subject to the terms of the letter of credit, we would be obligated to make payment to them. The standby letters of credit outstanding on March 31,September 30, 2016 had terms ranging from less than 1 year to 98 years.
As of March 31,September 30, 2016, assets of $1.1$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 March 31,September 30, 2016 and is included in Other liabilities on our Consolidated Balance Sheet.
Reinsurance Agreements
We have a wholly-owned captive insurance subsidiary which provides reinsurance for accidental death & dismemberment, credit life, and accident & health, all of which are in run-off. This subsidiary previously entered into these various types of reinsurance agreements with third-party insurers where the subsidiary assumed the risk of loss through quota share agreements up to 100% reinsurance. In quota share agreements, the subsidiary and the third-party insurers share the responsibility for payment of all claims.
Recourse and Repurchase Obligations
As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities, PNC has sold commercial
mortgage, residential mortgage and home equity loans/lines of credit directly or indirectly through securitization and loan sale transactions in which we have continuing involvement. One form of continuing involvement includes certain recourse and loan repurchase obligations associated with the transferred assets. See Note 21 Commitments and Guarantees in our 2015 Form 10-K for details related to our Recourse and Repurchase Obligations.
Resale and Repurchase Agreements
We enter into repurchase and resale agreements where we transfer investment securities to/from a third party with the agreement to repurchase/resell those investment securities at a future date for a specified price. These agreements are entered into primarily to provide short-term financing for securities inventory positions, acquire securities to cover short positions and accommodate customers’ investing and financing needs. Repurchase and resale agreements are treated as collateralized financing transactions for accounting purposes and are generally carried at the amounts at which the securities will be subsequently reacquired or resold, including accrued interest. Our policy is to take possession of securities purchased under agreements to resell. We monitor the market value of securities to be repurchased and resold and additional collateral may be obtained where considered appropriate to protect against credit exposure.
Repurchase and resale agreements are typically entered into with counterparties under industry standard master netting agreements which provide for the right to offset amounts owed to one another with respect to multiple repurchase and resale agreements under such master netting agreement (referred to as netting arrangements) and liquidate the purchased or borrowed securities in the event of counterparty default. In order for an arrangement to be eligible for netting under GAAP, we must obtain the requisite assurance that the offsetting rights included in the master netting agreement would be legally enforceable in the event of bankruptcy, insolvency, or a similar proceeding of such third party. Enforceability is evidenced by obtaining a legal opinion that supports, with sufficient confidence, the enforceability of the master netting agreement in bankruptcy.
Table 9587 shows the amounts owed under resale and repurchase agreements and the securities collateral associated with those agreements where a legal opinion supporting the enforceability of the offsetting rights has been obtained. We do not present resale and repurchase agreements entered into with the same counterparty under a legally enforceable master netting agreement on a net basis on our Consolidated Balance Sheet or within Table 95.87.
104 The PNC Financial Services Group, Inc. –Form 10-Q
Refer to Note 109 Financial Derivatives for additional information related to offsetting of financial derivatives.
The PNC Financial Services Group, Inc. –Form 10-Q95
Table 95:87: Resale and Repurchase Agreements Offsetting
| In millions | Gross Resale | Amounts Offset on the | Net Resale | Securities Held Under | Net Amounts (c) | |||||||||||||
Resale Agreements | ||||||||||||||||||
March 31, 2016 | $ | 978 | $ | 978 | $ | 904 | $ | 74 | ||||||||||
December 31, 2015 | $ | 1,082 | $ | 1,082 | $ | 1,008 | $ | 74 | ||||||||||
| In millions | Gross Repurchase Agreements | Amounts on the | Net Repurchase Agreements (a) | Securities Collateral Pledged Under Master Netting Agreements (b) | Net Amounts (d) | Gross Resale/ Repurchase Agreements | Amounts Offset on the Consolidated Balance Sheet | Net Resale/ Repurchase Agreements (a) | Securities Collateral Held/Pledged Under Master Netting Agreements (b) | Net Amounts | ||||||||||||||||||||||||||||
Repurchase Agreements (e) | ||||||||||||||||||||||||||||||||||||||
March 31, 2016 | $ | 2,492 | $ | 2,492 | $ | 1,760 | $ | 732 | ||||||||||||||||||||||||||||||
Resale Agreements | ||||||||||||||||||||||||||||||||||||||
September 30, 2016 | $ | 637 | $ | 637 | $ | 563 | $ | 74 | (c) | |||||||||||||||||||||||||||||
December 31, 2015 | $ | 1,767 | $ | 1,767 | $ | 1,014 | $ | 753 | $ | 1,082 | $ | 1,082 | $ | 1,008 | $ | 74 | (c) | |||||||||||||||||||||
Repurchase Agreements (d) | ||||||||||||||||||||||||||||||||||||||
September 30, 2016 | $ | 1,231 | $ | 1,231 | $ | 532 | $ | 699 | (e) | |||||||||||||||||||||||||||||
December 31, 2015 | $ | 1,767 | $ | 1,767 | $ | 1,014 | $ | 753 | (e) | |||||||||||||||||||||||||||||
| (a) | Resale agreements are included on the Consolidated Balance Sheet in Federal funds sold and resale agreements. Repurchase agreements are included on the Consolidated Balance Sheet in Federal funds purchased and repurchase agreements. |
| (b) | Represents the fair value of securities collateral purchased or sold, up to the amount owed under the agreement, for agreements supported by a legally enforceable master netting agreement. |
| (c) | Represents certain long term resale agreements which are fully collateralized but do not have the benefits of a netting opinion and, therefore, might be subject to a stay in insolvency proceedings and therefore are not eligible under ASC 210-20 for netting. |
| (d) | Repurchase agreements have remaining contractual maturities that are classified as overnight or continuous. As of September 30, 2016 and December 31, 2015, the collateral pledged under these agreements consisted primarily of residential mortgage-backed agency securities. |
| (e) | Represents overnight repurchase agreements entered into with municipalities, pension plans, and certain trusts and insurance companies which are fully collateralized but do not have the benefits of a netting opinion and, therefore, might be subject to a stay in insolvency proceedings and therefore are not eligible under ASC 210-20 for netting. There were no long term repurchase agreements as of |
We have six reportable business segments:
Retail Banking
Corporate & Institutional Banking
Asset Management Group
Residential Mortgage Banking
BlackRock
Non-Strategic Assets Portfolio
Results of individual businesses are presented based on our internal management reporting practices. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of our individual businesses are not necessarily comparable with similar information for any other company. We periodically refine our internal methodologies as management reporting practices are enhanced. To the extent significant and practicable, retrospective application of new methodologies is made to prior period reportable business segment results and disclosures to create comparability with the current period.
Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. Additionally, we have aggregated the results for corporate support functions within “Other” for financial reporting purposes.
Net interest income in business segment results reflects PNC’s internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors.
A portion of capital is intended to cover unexpected losses and is assigned to our business segments using our risk-based
economic capital model, including consideration of the goodwill at those business segments, as well as the diversification of risk among the business segments, ultimately reflecting PNC’s portfolio risk adjusted capital allocation.
We have allocated the allowances for loan and lease losses and for unfunded loan commitments and letters of credit based on the loan exposures within each business segment’s portfolio. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.
Our allocation of the costs incurred by operations and other shared support areas not directly aligned with the businesses is primarily based on the use of services.
The PNC Financial Services Group, Inc. –Form 10-Q105
Total business segment financial results differ from total consolidated net income. The impact of these differences is reflected in the “Other” category in the business segment tables. “Other” includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as gains or losses related to BlackRock transactions, integration costs, asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities and certain trading activities, exited businesses, private equity investments, intercompany eliminations, most corporate overhead, tax adjustments that are not allocated to business segments, and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests as the segments’ results exclude their portion of net
96 The PNC Financial Services Group, Inc. –Form 10-Q
income attributable to noncontrolling interests. Assets, revenue and earnings attributable to foreign activities were not material in the periods presented for comparative purposes.
Business Segment Products and Services
Retail Bankingprovides deposit, lending, brokerage, investment management and cash management services to consumer and small business customers within our primary geographic markets. Our customers are serviced through our branch network, ATMs, call centers, online banking and mobile channels. The branch network is located primarily in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, Florida, North Carolina, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Georgia, Missouri, Wisconsin and South Carolina.
Corporate & Institutional Bankingprovides lending, treasury management, and capital markets-related products and services to mid-sized and large corporations, government and not-for-profit entities. Lending products include secured and unsecured loans, letters of credit and equipment leases. Treasury management services include cash and investment management, receivables management, disbursement services, funds transfer services, information reporting and global trade services. Capital markets-related products and services include foreign exchange, derivatives, securities, loan syndications, mergers and acquisitions advisory and equity capital markets advisory activities and related services. We also provide commercial loan servicing and technology solutions for the commercial real estate finance industry. Products and services are generally provided within our primary geographic markets, with certain products and services offered nationally and internationally.
Asset Management Groupincludes personal wealth management for high net worth and ultra high net worth clients and institutional asset management. Wealth management products and services include investment and retirement planning, customized investment management, private banking, tailored credit solutions, and trust
management and administration for individuals and their families. Our Hawthorn unit provides multi-generational family planning including wealth strategy, investment management, private banking, tax and estate planning guidance, performance reporting and personal administration services to ultra high net worth families. Institutional asset management provides investment management,advisory, custody administration and retirement administration services. The business also offers
PNC proprietary mutual funds.funds and investment strategies. Institutional clients include corporations, unions, municipalities, non-profits, foundations and endowments, primarily located in our geographic footprint.
Residential Mortgage Banking directly originates first lien residential mortgage loans on a nationwide basis with a significant presence within the retail banking footprint. Mortgage loans represent loans collateralized by one-to-four family residential real estate. These loans are typically underwritten to government agency and/or third-party standards, and either sold with servicing retained or held on PNC’s balance sheet. Loan sales are primarily to secondary mortgage conduits of FNMA, FHLMC, Federal Home Loan Banks and third-party investors, or are securitized and issued under the GNMA program. The mortgage servicing operation performs all functions related to servicing mortgage loans, primarily those in first lien position, for various investors and for loans owned by PNC.
BlackRock is a leading publicly traded investment management firm providing a broad range of investment and risk management services to institutional and retail clients worldwide. Using a diverse platform of active and index investment strategies across asset classes, BlackRock develops investment outcomes and asset allocation solutions for clients. Product offerings include single- and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. BlackRock also offers an investment and risk management technology platform, risk analytics and advisory services and solutions to a broad base of institutional investors.
We hold an equity investment in BlackRock, which provides us with an additional source of noninterest income and increases our overall revenue diversification. BlackRock is a publicly traded company, and additional information regarding its business is available in its filings with the Securities and Exchange Commission (SEC). At March 31,September 30, 2016, our economic interest in BlackRock was 22%. PNC received cash dividends from BlackRock of $83$248 million and $80$240 million during the first threenine months of 2016 and 2015, respectively.
Non-Strategic Assets Portfolio includes a consumer portfolio of mainly residential mortgage and brokered home equity loans and lines of credit and a small commercial/commercial real estate loan and leaselending portfolio. We obtained a significant portion of these non-strategic assets through acquisitions of other companies.
The PNC Financial Services Group, Inc. –Form 10-Q10697
Table 88: Results Of Businesses
Three months ended September 30 In millions | Retail Banking | Corporate & Institutional Banking | Asset Management Group | Residential Mortgage Banking | BlackRock | Non-Strategic Assets Portfolio | Other | Consolidated (a) | ||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||
Income Statement | ||||||||||||||||||||||||||||||||
Net interest income | $ | 1,120 | $ | 840 | $ | 74 | $ | 28 | $ | 72 | $ | (39 | ) | $ | 2,095 | |||||||||||||||||
Noninterest income | 527 | 517 | 220 | 163 | $ | 189 | 8 | 110 | 1,734 | |||||||||||||||||||||||
Total revenue | 1,647 | 1,357 | 294 | 191 | 189 | 80 | 71 | 3,829 | ||||||||||||||||||||||||
Provision for credit losses (benefit) | 104 | 12 | (3 | ) | (22 | ) | (4 | ) | 87 | |||||||||||||||||||||||
Depreciation and amortization | 40 | 35 | 11 | 3 | 120 | 209 | ||||||||||||||||||||||||||
Other noninterest expense | 1,151 | 520 | 195 | 167 | 16 | 136 | 2,185 | |||||||||||||||||||||||||
Income (loss) before income taxes and noncontrolling interests | 352 | 790 | 91 | 21 | 189 | 86 | (181 | ) | 1,348 | |||||||||||||||||||||||
Income taxes (benefit) | 129 | 253 | 33 | 8 | 41 | 32 | (154 | ) | 342 | |||||||||||||||||||||||
Net income (loss) | $ | 223 | $ | 537 | $ | 58 | $ | 13 | $ | 148 | $ | 54 | $ | (27 | ) | $ | 1,006 | |||||||||||||||
Average Assets (b) | $ | 71,219 | $ | 139,806 | $ | 7,588 | $ | 6,160 | $ | 7,026 | $ | 5,302 | $ | 126,769 | $ | 363,870 | ||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
Income Statement | ||||||||||||||||||||||||||||||||
Net interest income | $ | 1,068 | $ | 855 | $ | 71 | $ | 31 | $ | 90 | $ | (53 | ) | $ | 2,062 | |||||||||||||||||
Noninterest income | 574 | 476 | 207 | 135 | $ | 181 | 16 | 124 | 1,713 | |||||||||||||||||||||||
Total revenue | 1,642 | 1,331 | 278 | 166 | 181 | 106 | 71 | 3,775 | ||||||||||||||||||||||||
Provision for credit losses (benefit) | 57 | 46 | (2 | ) | 2 | (25 | ) | 3 | 81 | |||||||||||||||||||||||
Depreciation and amortization | 42 | 36 | 10 | 4 | 109 | 201 | ||||||||||||||||||||||||||
Other noninterest expense | 1,148 | 497 | 201 | 167 | 23 | 115 | 2,151 | |||||||||||||||||||||||||
Income (loss) before income taxes and noncontrolling interests | 395 | 752 | 69 | (7 | ) | 181 | 108 | (156 | ) | 1,342 | ||||||||||||||||||||||
Income taxes (benefit) | 144 | 250 | 25 | (3 | ) | 42 | 40 | (229 | ) | 269 | ||||||||||||||||||||||
Net income (loss) | $ | 251 | $ | 502 | $ | 44 | $ | (4 | ) | $ | 139 | $ | 68 | $ | 73 | $ | 1,073 | |||||||||||||||
Average Assets (b) | $ | 72,916 | $ | 131,613 | $ | 7,902 | $ | 6,513 | $ | 6,813 | $ | 6,460 | $ | 126,370 | $ | 358,587 | ||||||||||||||||
Nine months ended September 30 In millions | Retail Banking | Corporate & Institutional Banking | Asset Management Group | Residential Mortgage Banking | BlackRock | Non-Strategic Assets Portfolio | Other | Consolidated (a) | ||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||
Income Statement | ||||||||||||||||||||||||||||||||
Net interest income | $ | 3,350 | $ | 2,500 | $ | 227 | $ | 81 | $ | 220 | $ | (117 | ) | $ | 6,261 | |||||||||||||||||
Noninterest income | 1,628 | 1,484 | 636 | 450 | $ | 500 | 35 | 294 | 5,027 | |||||||||||||||||||||||
Total revenue | 4,978 | 3,984 | 863 | 531 | 500 | 255 | 177 | 11,288 | ||||||||||||||||||||||||
Provision for credit losses (benefit) | 210 | 188 | (16 | ) | (16 | ) | 366 | |||||||||||||||||||||||||
Depreciation and amortization | 121 | 107 | 34 | 8 | 356 | 626 | ||||||||||||||||||||||||||
Other noninterest expense | 3,388 | 1,518 | 584 | 450 | 57 | 412 | 6,409 | |||||||||||||||||||||||||
Income (loss) before income taxes and noncontrolling interests | 1,259 | 2,171 | 245 | 73 | 500 | 214 | (575 | ) | 3,887 | |||||||||||||||||||||||
Income taxes (benefit) | 461 | 713 | 90 | 27 | 110 | 79 | (531 | ) | 949 | |||||||||||||||||||||||
Net income (loss) | $ | 798 | $ | 1,458 | $ | 155 | $ | 46 | $ | 390 | $ | 135 | $ | (44 | ) | $ | 2,938 | |||||||||||||||
Average Assets (b) | $ | 71,658 | $ | 137,884 | $ | 7,743 | $ | 6,078 | $ | 7,026 | $ | 5,580 | $ | 123,638 | $ | 359,607 | ||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
Income Statement | ||||||||||||||||||||||||||||||||
Net interest income | $ | 3,150 | $ | 2,515 | $ | 215 | $ | 91 | $ | 302 | $ | (87 | ) | $ | 6,186 | |||||||||||||||||
Noninterest income | 1,652 | 1,397 | 658 | 488 | $ | 532 | 34 | 425 | 5,186 | |||||||||||||||||||||||
Total revenue | 4,802 | 3,912 | 873 | 579 | 532 | 336 | 338 | 11,372 | ||||||||||||||||||||||||
Provision for credit losses (benefit) | 151 | 83 | 11 | 2 | (61 | ) | (5 | ) | 181 | |||||||||||||||||||||||
Depreciation and amortization | 127 | 109 | 33 | 11 | 315 | 595 | ||||||||||||||||||||||||||
Other noninterest expense | 3,431 | 1,485 | 603 | 499 | 73 | 381 | 6,472 | |||||||||||||||||||||||||
Income (loss) before income taxes and noncontrolling interests | 1,093 | 2,235 | 226 | 67 | 532 | 324 | (353 | ) | 4,124 | |||||||||||||||||||||||
Income taxes (benefit) | 399 | 743 | 83 | 24 | 125 | 119 | (490 | ) | 1,003 | |||||||||||||||||||||||
Net income | $ | 694 | $ | 1,492 | $ | 143 | $ | 43 | $ | 407 | $ | 205 | $ | 137 | $ | 3,121 | ||||||||||||||||
Average Assets (b) | $ | 73,430 | $ | 131,678 | $ | 7,922 | $ | 6,962 | $ | 6,813 | $ | 6,880 | $ | 119,448 | $ | 353,133 | ||||||||||||||||
| (a) | There were no material intersegment revenues for the three and nine months ended September 30, 2016 and 2015. |
| (b) | Period-end balances for BlackRock. |
98 The PNC Financial Services Group, Inc. –Form 10-Q
Table 96: Results Of Businesses
Three months ended March 31 In millions | Retail Banking | Corporate & Institutional Banking | Asset Management Group | Residential Mortgage Banking | BlackRock | Non-Strategic Assets Portfolio | Other | Consolidated | ||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||
Income Statement | ||||||||||||||||||||||||||||||||
Net interest income | $ | 1,113 | $ | 838 | $ | 77 | $ | 25 | $ | 75 | $ | (30 | ) | $ | 2,098 | |||||||||||||||||
Noninterest income | 537 | 434 | 203 | 105 | $ | 141 | 22 | 125 | 1,567 | |||||||||||||||||||||||
Total revenue | 1,650 | 1,272 | 280 | 130 | 141 | 97 | 95 | 3,665 | ||||||||||||||||||||||||
Provision for credit losses (benefit) | 77 | 107 | (3 | ) | (1 | ) | (7 | ) | (21 | ) | 152 | |||||||||||||||||||||
Depreciation and amortization | 40 | 35 | 11 | 3 | 113 | 202 | ||||||||||||||||||||||||||
Other noninterest expense | 1,110 | 486 | 195 | 149 | 21 | 118 | 2,079 | |||||||||||||||||||||||||
Income (loss) before income taxes and noncontrolling interests | 423 | 644 | 77 | (21 | ) | 141 | 83 | (115 | ) | 1,232 | ||||||||||||||||||||||
Income taxes (benefit) | 155 | 213 | 28 | (8 | ) | 27 | 31 | (157 | ) | 289 | ||||||||||||||||||||||
Net income (loss) | $ | 268 | $ | 431 | $ | 49 | $ | (13 | ) | $ | 114 | $ | 52 | $ | 42 | $ | 943 | |||||||||||||||
Inter-segment revenue | $ | 2 | $ | 9 | $ | 2 | $ | 6 | $ | 3 | $ | (2 | ) | $ | (20 | ) | ||||||||||||||||
Average Assets (a) | $ | 72,216 | $ | 135,521 | $ | 7,887 | $ | 6,306 | $ | 6,775 | $ | 5,816 | $ | 121,392 | $ | 355,913 | ||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
Income Statement | ||||||||||||||||||||||||||||||||
Net interest income | $ | 1,037 | $ | 823 | $ | 73 | $ | 30 | $ | 112 | $ | (3 | ) | $ | 2,072 | |||||||||||||||||
Noninterest income | 488 | 429 | 208 | 177 | $ | 175 | 9 | 173 | 1,659 | |||||||||||||||||||||||
Total revenue | 1,525 | 1,252 | 281 | 207 | 175 | 121 | 170 | 3,731 | ||||||||||||||||||||||||
Provision for credit losses (benefit) | 49 | 17 | 12 | 2 | (31 | ) | 5 | 54 | ||||||||||||||||||||||||
Depreciation and amortization | 43 | 36 | 11 | 4 | 99 | 193 | ||||||||||||||||||||||||||
Other noninterest expense | 1,115 | 478 | 199 | 157 | 24 | 183 | 2,156 | |||||||||||||||||||||||||
Income (loss) before income taxes and noncontrolling interests | 318 | 721 | 59 | 44 | 175 | 128 | (117 | ) | 1,328 | |||||||||||||||||||||||
Income taxes (benefit) | 116 | 239 | 22 | 16 | 40 | 47 | (156 | ) | 324 | |||||||||||||||||||||||
Net income | $ | 202 | $ | 482 | $ | 37 | $ | 28 | $ | 135 | $ | 81 | $ | 39 | $ | 1,004 | ||||||||||||||||
Inter-segment revenue | $ | 2 | $ | 2 | $ | 5 | $ | 4 | $ | (2 | ) | $ | (11 | ) | ||||||||||||||||||
Average Assets (a) | $ | 74,017 | $ | 131,178 | $ | 7,943 | $ | 7,245 | $ | 6,645 | $ | 7,276 | $ | 113,753 | $ | 348,057 | ||||||||||||||||
On April 29,November 1, 2016, PNC Bankwe issued 525,000 depositary shares, each representing a 1/100th interest in a share of our Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series S, in an additional $600underwritten public offering resulting in gross proceeds of $525 million to us before commissions and expenses. We issued 5,250 shares of senior notes with a maturity date of June 1, 2025. Interest is payable semi-annuallySeries S Preferred Stock to the depositary in arrears at a fixed rate of 3.250% on June 1 and December 1 of each year, beginning on June 1, 2016. These notes form partthis transaction. We intend to use the net proceeds from the sale of the same series as thedepositary shares for general corporate purposes, which may include advances to our subsidiaries to finance their activities, repayment of outstanding 3.250% senior notesindebtedness, and repurchases and redemptions of issued on June 1, 2015. Following the issuanceand outstanding securities of these additional notes, the aggregate principal amount of such series was $1.0 billion.
On April 29, 2016, PNC Bank issued $1.25 billion of senior notes with a maturity date of April 29, 2021. Interest is payable semi-annually in arrears at a fixed rate of 2.150% on April 29 and October 29 of each year, beginning on October 29, 2016.its subsidiaries.
The PNC Financial Services Group, Inc. –Form 10-Q 10799
STATISTICAL INFORMATION (UNAUDITED)
TheTHE PNC Financial Services Group, Inc.FINANCIAL SERVICES GROUP, INC.
Average Consolidated Balance Sheet And Net Interest AnalysisAVERAGE CONSOLIDATED BALANCE SHEETAND NET INTEREST ANALYSIS (a) (b) (c)
| First Quarter 2016 | Fourth Quarter 2015 | |||||||||||||||||||||||
Taxable-equivalent basis Dollars in millions | Average Balances | Interest Income/ Expense | Average Yields/ Rates | Average Balances | Interest Income/ Expense | Average Yields/ Rates | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Investment securities | ||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||
Agency | $ | 24,696 | $ | 159 | 2.57 | % | $ | 23,777 | $ | 152 | 2.55 | % | ||||||||||||
Non-agency | 3,936 | 44 | 4.45 | 4,089 | 50 | 4.90 | ||||||||||||||||||
Commercial mortgage-backed | 6,586 | 46 | 2.79 | 6,709 | 48 | 2.85 | ||||||||||||||||||
Asset-backed | 5,486 | 30 | 2.19 | 5,280 | 28 | 2.14 | ||||||||||||||||||
U.S. Treasury and government agencies | 9,936 | 39 | 1.55 | 8,996 | 25 | 1.09 | ||||||||||||||||||
State and municipal | 1,957 | 23 | 4.60 | 1,991 | 23 | 4.72 | ||||||||||||||||||
Other debt | 2,295 | 13 | 2.32 | 1,963 | 12 | 2.44 | ||||||||||||||||||
Corporate stock and other | 595 | .32 | 657 | .21 | ||||||||||||||||||||
Total securities available for sale | 55,487 | 354 | 2.55 | 53,462 | 338 | 2.53 | ||||||||||||||||||
Securities held to maturity | ||||||||||||||||||||||||
Residential mortgage-backed | 9,906 | 75 | 3.02 | 9,345 | 70 | 2.98 | ||||||||||||||||||
Commercial mortgage-backed | 1,821 | 16 | 3.53 | 1,878 | 17 | 3.67 | ||||||||||||||||||
Asset-backed | 715 | 3 | 1.84 | 723 | 2 | 1.61 | ||||||||||||||||||
U.S. Treasury and government agencies | 259 | 2 | 3.80 | 257 | 3 | 3.82 | ||||||||||||||||||
State and municipal | 1,950 | 27 | 5.50 | 1,965 | 28 | 5.48 | ||||||||||||||||||
Other | 131 | 1 | 3.17 | 228 | 2 | 3.32 | ||||||||||||||||||
Total securities held to maturity | 14,782 | 124 | 3.37 | 14,396 | 122 | 3.36 | ||||||||||||||||||
Total investment securities | 70,269 | 478 | 2.72 | 67,858 | 460 | 2.71 | ||||||||||||||||||
Loans | ||||||||||||||||||||||||
Commercial | 99,068 | 771 | 3.08 | 98,212 | 745 | 2.97 | ||||||||||||||||||
Commercial real estate | 27,967 | 248 | 3.51 | 26,714 | 237 | 3.47 | ||||||||||||||||||
Equipment lease financing | 7,420 | 63 | 3.40 | 7,501 | 64 | 3.41 | ||||||||||||||||||
Consumer | 58,212 | 621 | 4.29 | 59,108 | 618 | 4.15 | ||||||||||||||||||
Residential real estate | 14,517 | 172 | 4.74 | 14,486 | 174 | 4.79 | ||||||||||||||||||
Total loans | 207,184 | 1,875 | 3.60 | 206,021 | 1,838 | 3.52 | ||||||||||||||||||
Interest-earning deposits with banks | 25,533 | 32 | .50 | 31,509 | 23 | .29 | ||||||||||||||||||
Loans held for sale | 1,509 | 16 | 4.34 | 1,897 | 22 | 4.66 | ||||||||||||||||||
Federal funds sold and resale agreements | 1,299 | 2 | .47 | 1,469 | .29 | |||||||||||||||||||
Other | 4,956 | 52 | 4.23 | 5,109 | 63 | 4.83 | ||||||||||||||||||
Total interest-earning assets/interest income | 310,750 | 2,455 | 3.15 | 313,863 | 2,406 | 3.03 | ||||||||||||||||||
Noninterest-earning assets: | ||||||||||||||||||||||||
Allowance for loan and lease losses | (2,711 | ) | (3,204 | ) | ||||||||||||||||||||
Cash and due from banks | 3,919 | 4,115 | ||||||||||||||||||||||
Other | 43,955 | 45,622 | ||||||||||||||||||||||
Total assets | $ | 355,913 | $ | 360,396 | ||||||||||||||||||||
Liabilities and Equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||||||||
Money market | $ | 76,392 | 42 | .22 | $ | 81,199 | 51 | .25 | ||||||||||||||||
Demand | 49,770 | 9 | .07 | 47,778 | 7 | .06 | ||||||||||||||||||
Savings | 23,343 | 23 | .39 | 17,851 | 15 | .33 | ||||||||||||||||||
Retail certificates of deposit | 17,278 | 30 | .70 | 17,916 | 32 | .69 | ||||||||||||||||||
Time deposits in foreign offices and other time | 2,040 | 1 | .27 | 2,709 | 1 | .16 | ||||||||||||||||||
Total interest-bearing deposits | 168,823 | 105 | .25 | 167,453 | 106 | .25 | ||||||||||||||||||
Borrowed funds | ||||||||||||||||||||||||
Federal funds purchased and repurchase agreements | 2,048 | 1 | .26 | 1,925 | .14 | |||||||||||||||||||
Federal Home Loan Bank borrowings | 19,855 | 34 | .68 | 20,796 | 28 | .52 | ||||||||||||||||||
Bank notes and senior debt | 20,690 | 87 | 1.66 | 20,458 | 58 | 1.11 | ||||||||||||||||||
Subordinated debt | 8,317 | 68 | 3.29 | 8,600 | 57 | 2.65 | ||||||||||||||||||
Commercial paper | 3 | .40 | 302 | 1 | .39 | |||||||||||||||||||
Other | 2,713 | 14 | 1.99 | 2,932 | 16 | 2.16 | ||||||||||||||||||
Total borrowed funds | 53,626 | 204 | 1.51 | 55,013 | 160 | 1.15 | ||||||||||||||||||
Total interest-bearing liabilities/interest expense | 222,449 | 309 | .55 | 222,466 | 266 | .47 | ||||||||||||||||||
Noninterest-bearing liabilities and equity: | ||||||||||||||||||||||||
Noninterest-bearing deposits | 77,306 | 79,479 | ||||||||||||||||||||||
Allowance for unfunded loan commitments and letters of credit | 262 | 266 | ||||||||||||||||||||||
Accrued expenses and other liabilities | 9,993 | 12,297 | ||||||||||||||||||||||
Equity | 45,903 | 45,888 | ||||||||||||||||||||||
Total liabilities and equity | $ | 355,913 | $ | 360,396 | ||||||||||||||||||||
Interest rate spread | 2.60 | 2.56 | ||||||||||||||||||||||
Impact of noninterest-bearing sources | .15 | .14 | ||||||||||||||||||||||
Net interest income/margin | $ | 2,146 | 2.75 | % | $ | 2,140 | 2.70 | % | ||||||||||||||||
| Nine months ended September 30 | ||||||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||||||
Taxable-equivalent basis Dollars in millions | Average Balances | Interest Income/ Expense | Average Yields/ Rates | Average Balances | Interest Income/ Expense | Average Yields/ Rates | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Investment securities | ||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||
Agency | $ | 25,129 | $ | 466 | 2.47 | % | $ | 20,560 | $ | 388 | 2.52% | |||||||||||||
Non-agency | 3,717 | 133 | 4.75 | % | 4,471 | 157 | 4.68% | |||||||||||||||||
Commercial mortgage-backed | 6,399 | 131 | 2.73 | % | 6,258 | 147 | 3.14% | |||||||||||||||||
Asset-backed | 5,661 | 96 | 2.27 | % | 5,219 | 83 | 2.12% | |||||||||||||||||
U.S. Treasury and government agencies | 9,846 | 109 | 1.46 | % | 5,640 | 54 | 1.26% | |||||||||||||||||
Other | 5,006 | 113 | 3.00 | % | 4,253 | 111 | 3.46% | |||||||||||||||||
Total securities available for sale | 55,758 | 1,048 | 2.50 | % | 46,401 | 940 | 2.70% | |||||||||||||||||
Securities held to maturity | ||||||||||||||||||||||||
Residential mortgage-backed | 10,215 | 218 | 2.85 | % | 7,865 | 181 | 3.07% | |||||||||||||||||
Commercial mortgage-backed | 1,747 | 47 | 3.55 | % | 2,009 | 58 | 3.82% | |||||||||||||||||
Asset-backed | 708 | 10 | 1.91 | % | 744 | 9 | 1.54% | |||||||||||||||||
U.S. Treasury and government agencies | 262 | 7 | 3.80 | % | 252 | 7 | 3.80% | |||||||||||||||||
Other | 2,016 | 87 | 5.77 | % | 2,307 | 89 | 5.19% | |||||||||||||||||
Total securities held to maturity | 14,948 | 369 | 3.29 | % | 13,177 | 344 | 3.49% | |||||||||||||||||
Total investment securities | 70,706 | 1,417 | 2.67 | % | 59,578 | 1,284 | 2.87% | |||||||||||||||||
Loans | ||||||||||||||||||||||||
Commercial | 99,795 | 2,331 | 3.07 | % | 98,053 | 2,230 | 3.00% | |||||||||||||||||
Commercial real estate | 28,555 | 717 | 3.30 | % | 24,659 | 659 | 3.52% | |||||||||||||||||
Equipment lease financing | 7,485 | 204 | 3.64 | % | 7,593 | 196 | 3.45% | |||||||||||||||||
Consumer | 57,612 | 1,852 | 4.29 | % | 60,426 | 1,887 | 4.17% | |||||||||||||||||
Residential real estate | 14,677 | 520 | 4.72 | % | 14,391 | 523 | 4.85% | |||||||||||||||||
Total loans | 208,124 | 5,624 | 3.58 | % | 205,122 | 5,495 | 3.55% | |||||||||||||||||
Interest-earning deposits with banks | 26,691 | 100 | .50 | % | 33,380 | 63 | .25% | |||||||||||||||||
Loans held for sale | 1,737 | 55 | 4.20 | % | 2,128 | 68 | 4.25% | |||||||||||||||||
Federal funds sold and resale agreements | 1,127 | 4 | .53 | % | 1,737 | 4 | .25% | |||||||||||||||||
Other | 4,933 | 144 | 3.89 | % | 5,183 | 199 | 5.13% | |||||||||||||||||
Total interest-earning assets/interest income | 313,318 | 7,344 | 3.11 | % | 307,128 | 7,113 | 3.08% | |||||||||||||||||
Noninterest-earning assets: | ||||||||||||||||||||||||
Allowance for loan and lease losses | (2,699 | ) | (3,297 | ) | ||||||||||||||||||||
Cash and due from banks | 3,996 | 3,969 | ||||||||||||||||||||||
Other | 44,992 | 45,333 | ||||||||||||||||||||||
Total assets | $ | 359,607 | $ | 353,133 | ||||||||||||||||||||
Liabilities and Equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||||||||
Money market | $ | 72,960 | 111 | .20 | % | $ | 82,151 | 163 | .27% | |||||||||||||||
Demand | 51,854 | 29 | .07 | % | 46,269 | 19 | .05% | |||||||||||||||||
Savings | 27,770 | 82 | .40 | % | 13,663 | 17 | .17% | |||||||||||||||||
Retail certificates of deposit | 17,236 | 91 | .70 | % | 18,422 | 95 | .69% | |||||||||||||||||
Time deposits in foreign offices and other time | 1,815 | 3 | .25 | % | 2,285 | 3 | .18% | |||||||||||||||||
Total interest-bearing deposits | 171,635 | 316 | .25 | % | 162,790 | 297 | .24% | |||||||||||||||||
Borrowed funds | ||||||||||||||||||||||||
Federal funds purchased and repurchase agreements | 1,924 | 4 | .29 | % | 2,708 | 3 | .13% | |||||||||||||||||
Federal Home Loan Bank borrowings | 18,694 | 110 | .78 | % | 21,556 | 76 | .47% | |||||||||||||||||
Bank notes and senior debt | 21,990 | 266 | 1.59 | % | 17,087 | 165 | 1.27% | |||||||||||||||||
Subordinated debt | 8,337 | 201 | 3.20 | % | 8,862 | 179 | 2.69% | |||||||||||||||||
Commercial paper | 1 | .43 | % | 3,486 | 9 | .35% | ||||||||||||||||||
Other | 2,465 | 41 | 2.17 | % | 3,319 | 50 | 1.99% | |||||||||||||||||
Total borrowed funds | 53,411 | 622 | 1.54 | % | 57,018 | 482 | 1.12% | |||||||||||||||||
Total interest-bearing liabilities/interest expense | 225,046 | 938 | .55 | % | 219,808 | 779 | .47% | |||||||||||||||||
Noninterest-bearing liabilities and equity: | ||||||||||||||||||||||||
Noninterest-bearing deposits | 77,133 | 75,359 | ||||||||||||||||||||||
Allowance for unfunded loan commitments and letters of credit | 282 | 246 | ||||||||||||||||||||||
Accrued expenses and other liabilities | 10,887 | 11,845 | ||||||||||||||||||||||
Equity | 46,259 | 45,875 | ||||||||||||||||||||||
Total liabilities and equity | $ | 359,607 | $ | 353,133 | ||||||||||||||||||||
Interest rate spread | 2.56 | % | 2.61% | |||||||||||||||||||||
Impact of noninterest-bearing sources | .15 | .13 | ||||||||||||||||||||||
Net interest income/margin | $ | 6,406 | 2.71 | % | $ | 6,334 | 2.74% | |||||||||||||||||
| (a) | Nonaccrual loans are included in loans, net of unearned income. The impact of financial derivatives used in interest rate risk management is included in the interest income/expense and average yields/rates of the related assets and liabilities. Basis adjustments related to hedged items are included in noninterest-earning assets and noninterest-bearing liabilities. Average balances of securities are based on amortized historical cost (excluding adjustments to fair value, which are included in other assets). Average balances for certain loans and borrowed funds accounted for at fair value, with changes in fair value recorded in trading noninterest income, are included in noninterest-earning assets and noninterest-bearing liabilities. |
108100 The PNC Financial Services Group, Inc. –Form 10-Q
Average Consolidated Balance Sheet and Net Interest Analysis (Continued)
| Third Quarter 2015 | Second Quarter 2015 | First Quarter 2015 | ||||||||||||||||||||||||||||||||
Average Balances | Interest Income/ Expense | Average Yields/ | Average Balances | Interest Income/ | Average Yields/ | Average Balances | Interest Income/ | Average Yields/ | ||||||||||||||||||||||||||
| $21,813 | $ | 134 | 2.47 | % | $ | 20,550 | $ | 125 | 2.43 | % | $ | 19,290 | $ | 129 | 2.67 | % | ||||||||||||||||||
| 4,279 | 52 | 4.83 | 4,480 | 52 | 4.70 | 4,657 | 53 | 4.51 | ||||||||||||||||||||||||||
| 6,228 | 49 | 3.20 | 6,286 | 48 | 3.03 | 6,260 | 50 | 3.19 | ||||||||||||||||||||||||||
| 5,287 | 28 | 2.15 | 5,228 | 28 | 2.12 | 5,140 | 27 | 2.08 | ||||||||||||||||||||||||||
| 6,558 | 23 | 1.36 | 5,204 | 15 | 1.12 | 5,142 | 16 | 1.27 | ||||||||||||||||||||||||||
| 1,995 | 25 | 4.83 | 1,973 | 23 | 4.76 | 1,969 | 22 | 4.45 | ||||||||||||||||||||||||||
| 1,837 | 11 | 2.44 | 1,796 | 18 | 4.01 | 1,777 | 11 | 2.53 | ||||||||||||||||||||||||||
| 542 | 1 | .26 | 414 | .10 | 457 | .10 | ||||||||||||||||||||||||||||
| 48,539 | 323 | 2.66 | 45,931 | 309 | 2.69 | 44,692 | 308 | 2.75 | ||||||||||||||||||||||||||
| 8,352 | 63 | 3.05 | 8,196 | 61 | 2.95 | 7,035 | 57 | 3.26 | ||||||||||||||||||||||||||
| 1,927 | 18 | 3.65 | 2,005 | 18 | 3.63 | 2,097 | 22 | 4.16 | ||||||||||||||||||||||||||
| 733 | 4 | 1.57 | 743 | 2 | 1.53 | 755 | 3 | 1.52 | ||||||||||||||||||||||||||
| 254 | 2 | 3.82 | 252 | 3 | 3.81 | 249 | 2 | 3.77 | ||||||||||||||||||||||||||
| 1,979 | 27 | 5.50 | 2,004 | 27 | 5.49 | 2,018 | 28 | 5.52 | ||||||||||||||||||||||||||
| 289 | 2 | 3.37 | 311 | 3 | 3.12 | 320 | 2 | 2.89 | ||||||||||||||||||||||||||
| 13,534 | 116 | 3.43 | 13,511 | 114 | 3.37 | 12,474 | 114 | 3.67 | ||||||||||||||||||||||||||
| 62,073 | 439 | 2.83 | 59,442 | 423 | 2.85 | 57,166 | 422 | 2.95 | ||||||||||||||||||||||||||
| 97,926 | 756 | 3.02 | 98,364 | 746 | 3.00 | 97,866 | 728 | 2.98 | ||||||||||||||||||||||||||
| 25,228 | 216 | 3.35 | 24,812 | 215 | 3.44 | 23,924 | 228 | 3.80 | ||||||||||||||||||||||||||
| 7,683 | 66 | 3.42 | 7,556 | 65 | 3.45 | 7,539 | 65 | 3.47 | ||||||||||||||||||||||||||
| 59,584 | 628 | 4.18 | 60,240 | 621 | 4.13 | 61,476 | 638 | 4.21 | ||||||||||||||||||||||||||
| 14,406 | 171 | 4.76 | 14,416 | 177 | 4.91 | 14,350 | 175 | 4.88 | ||||||||||||||||||||||||||
| 204,827 | 1,837 | 3.54 | 205,388 | 1,824 | 3.54 | 205,155 | 1,834 | 3.59 | ||||||||||||||||||||||||||
| 37,289 | 24 | .25 | 32,368 | 20 | .25 | 30,405 | 19 | .25 | ||||||||||||||||||||||||||
| 2,048 | 22 | 4.23 | 2,092 | 23 | 4.33 | 2,246 | 23 | 4.20 | ||||||||||||||||||||||||||
| 1,598 | 2 | .33 | 1,959 | 1 | .22 | 1,655 | 1 | .22 | ||||||||||||||||||||||||||
| 5,033 | 67 | 5.33 | 5,470 | 63 | 4.65 | 5,046 | 69 | 5.43 | ||||||||||||||||||||||||||
| 312,868 | 2,391 | 3.02 | 306,719 | 2,354 | 3.06 | 301,673 | 2,368 | 3.15 | ||||||||||||||||||||||||||
| (3,265 | ) | (3,309 | ) | (3,317 | ) | |||||||||||||||||||||||||||||
| 3,890 | 3,954 | 4,067 | ||||||||||||||||||||||||||||||||
| 45,094 | 45,276 | 45,634 | ||||||||||||||||||||||||||||||||
| $358,587 | $ | 352,640 | $ | 348,057 | ||||||||||||||||||||||||||||||
| $84,554 | 61 | .29 | $ | 81,857 | 55 | .27 | $ | 79,994 | 47 | .24 | ||||||||||||||||||||||||
| 46,390 | 7 | .06 | 46,281 | 5 | .05 | 46,131 | 7 | .06 | ||||||||||||||||||||||||||
| 14,150 | 6 | .18 | 13,775 | 6 | .17 | 13,053 | 5 | .15 | ||||||||||||||||||||||||||
| 18,392 | 32 | .68 | 18,334 | 31 | .68 | 18,541 | 32 | .71 | ||||||||||||||||||||||||||
| 2,361 | 1 | .17 | 2,300 | 1 | .16 | 2,192 | 1 | .19 | ||||||||||||||||||||||||||
| 165,847 | 107 | .26 | 162,547 | 98 | .24 | 159,911 | 92 | .23 | ||||||||||||||||||||||||||
| 2,298 | 1 | .14 | 2,718 | 1 | .14 | 3,116 | 1 | .12 | ||||||||||||||||||||||||||
| 21,882 | 27 | .49 | 22,001 | 25 | .46 | 20,774 | 24 | .45 | ||||||||||||||||||||||||||
| 19,455 | 63 | 1.27 | 16,408 | 50 | 1.19 | 15,351 | 52 | 1.36 | ||||||||||||||||||||||||||
| 8,882 | 63 | 2.81 | 8,861 | 58 | 2.61 | 8,851 | 58 | 2.64 | ||||||||||||||||||||||||||
| 1,867 | 2 | .38 | 3,640 | 3 | .35 | 4,986 | 4 | .34 | ||||||||||||||||||||||||||
| 3,147 | 16 | 2.03 | 3,537 | 18 | 1.95 | 3,274 | 16 | 1.99 | ||||||||||||||||||||||||||
| 57,531 | 172 | 1.18 | 57,165 | 155 | 1.07 | 56,352 | 155 | 1.10 | ||||||||||||||||||||||||||
| 223,378 | 279 | .49 | 219,712 | 253 | .46 | 216,263 | 247 | .46 | ||||||||||||||||||||||||||
| 77,553 | 75,299 | 73,178 | ||||||||||||||||||||||||||||||||
| 246 | 234 | 260 | ||||||||||||||||||||||||||||||||
| 11,667 | 11,540 | 12,326 | ||||||||||||||||||||||||||||||||
| 45,743 | 45,855 | 46,030 | ||||||||||||||||||||||||||||||||
| $358,587 | $ | 352,640 | $ | 348,057 | ||||||||||||||||||||||||||||||
| 2.53 | 2.60 | 2.69 | ||||||||||||||||||||||||||||||||
| .14 | .13 | .13 | ||||||||||||||||||||||||||||||||
| $ | 2,112 | 2.67 | % | $ | 2,101 | 2.73 | % | $ | 2,121 | 2.82 | % | |||||||||||||||||||||||
| Third Quarter 2016 | Second Quarter 2016 | Third Quarter 2015 | ||||||||||||||||||||||||||||||||
Average Balances | Interest Income/ Expense | Average Yields/ Rates | Average Balances | Interest Income/ Expense | Average Yields/ Rates | Average Balances | Interest Income/ Expense | Average Yields/ Rates | ||||||||||||||||||||||||||
| $25,825 | $ | 154 | 2.39 | % | $ | 24,856 | $ | 153 | 2.46 | % | $ | 21,813 | $ | 134 | 2.47 | % | ||||||||||||||||||
| 3,490 | 45 | 5.06 | % | 3,728 | 44 | 4.79 | % | 4,279 | 52 | 4.83 | % | |||||||||||||||||||||||
| 6,276 | 39 | 2.47 | % | 6,335 | 46 | 2.94 | % | 6,228 | 49 | 3.20 | % | |||||||||||||||||||||||
| 5,823 | 33 | 2.31 | % | 5,672 | 33 | 2.32 | % | 5,287 | 28 | 2.15 | % | |||||||||||||||||||||||
| 9,929 | 33 | 1.33 | % | 9,673 | 37 | 1.50 | % | 6,558 | 23 | 1.36 | % | |||||||||||||||||||||||
| 5,166 | 39 | 2.99 | % | 5,004 | 38 | 3.02 | % | 4,374 | 37 | 3.26 | % | |||||||||||||||||||||||
| 56,509 | 343 | 2.42 | % | 55,268 | 351 | 2.54 | % | 48,539 | 323 | 2.66 | % | |||||||||||||||||||||||
| 10,521 | 71 | 2.71 | % | 10,215 | 72 | 2.81 | % | 8,352 | 63 | 3.05 | % | |||||||||||||||||||||||
| 1,666 | 15 | 3.51 | % | 1,755 | 16 | 3.61 | % | 1,927 | 18 | 3.65 | % | |||||||||||||||||||||||
| 702 | 3 | 1.99 | % | 708 | 4 | 1.91 | % | 733 | 4 | 1.57 | % | |||||||||||||||||||||||
| 264 | 2 | 3.81 | % | 262 | 3 | 3.79 | % | 254 | 2 | 3.82 | % | |||||||||||||||||||||||
| 1,983 | 33 | 6.58 | % | 1,986 | 26 | 5.40 | % | 2,268 | 29 | 5.23 | % | |||||||||||||||||||||||
| 15,136 | 124 | 3.29 | % | 14,926 | 121 | 3.22 | % | 13,534 | 116 | 3.43 | % | |||||||||||||||||||||||
| 71,645 | 467 | 2.60 | % | 70,194 | 472 | 2.68 | % | 62,073 | 439 | 2.83 | % | |||||||||||||||||||||||
| 100,320 | 781 | 3.05 | % | 99,991 | 779 | 3.08 | % | 97,926 | 756 | 3.02 | % | |||||||||||||||||||||||
| 29,034 | 240 | 3.23 | % | 28,659 | 229 | 3.16 | % | 25,228 | 216 | 3.35 | % | |||||||||||||||||||||||
| 7,463 | 76 | 4.06 | % | 7,570 | 65 | 3.44 | % | 7,683 | 66 | 3.42 | % | |||||||||||||||||||||||
| 57,163 | 621 | 4.32 | % | 57,467 | 610 | 4.28 | % | 59,584 | 628 | 4.18 | % | |||||||||||||||||||||||
| 14,870 | 171 | 4.60 | % | 14,643 | 177 | 4.84 | % | 14,406 | 171 | 4.76 | % | |||||||||||||||||||||||
| 208,850 | 1,889 | 3.57 | % | 208,330 | 1,860 | 3.56 | % | 204,827 | 1,837 | 3.54 | % | |||||||||||||||||||||||
| 28,063 | 35 | .50 | % | 26,463 | 33 | .51 | % | 37,289 | 24 | .25 | % | |||||||||||||||||||||||
| 2,044 | 21 | 4.07 | % | 1,655 | 18 | 4.24 | % | 2,048 | 22 | 4.23 | % | |||||||||||||||||||||||
| 1,056 | 1 | .59 | % | 1,026 | 1 | .55 | % | 1,598 | 2 | .33 | % | |||||||||||||||||||||||
| 5,074 | 44 | 3.44 | % | 4,768 | 48 | 4.02 | % | 5,033 | 67 | 5.33 | % | |||||||||||||||||||||||
| 316,732 | 2,457 | 3.07 | % | 312,436 | 2,432 | 3.10 | % | 312,868 | 2,391 | 3.02 | % | |||||||||||||||||||||||
| (2,675) | (2,712 | ) | (3,265 | ) | ||||||||||||||||||||||||||||||
| 4,128 | 3,938 | 3,890 | ||||||||||||||||||||||||||||||||
| 45,685 | 45,328 | 45,094 | ||||||||||||||||||||||||||||||||
| $363,870 | $ | 358,990 | $ | 358,587 | ||||||||||||||||||||||||||||||
| $70,076 | 34 | .19 | % | $ | 72,442 | 35 | .20 | % | $ | 84,554 | 61 | .29 | % | |||||||||||||||||||||
| 53,428 | 10 | .08 | % | 52,218 | 10 | .08 | % | 46,390 | 7 | .06 | % | |||||||||||||||||||||||
| 31,791 | 32 | .40 | % | 28,131 | 27 | .39 | % | 14,150 | 6 | .18 | % | |||||||||||||||||||||||
| 17,153 | 31 | .70 | % | 17,277 | 30 | .70 | % | 18,392 | 32 | .68 | % | |||||||||||||||||||||||
| 1,757 | .24 | % | 1,779 | 2 | .24 | % | 2,361 | 1 | .17 | % | ||||||||||||||||||||||||
| 174,205 | 107 | .25 | % | 171,847 | 104 | .24 | % | 165,847 | 107 | .26 | % | |||||||||||||||||||||||
| 1,844 | 1 | .32 | % | 1,881 | 2 | .29 | % | 2,298 | 1 | .14 | % | |||||||||||||||||||||||
| 17,524 | 38 | .86 | % | 18,716 | 38 | .80 | % | 21,882 | 27 | .49 | % | |||||||||||||||||||||||
| 22,896 | 87 | 1.50 | % | 22,375 | 92 | 1.62 | % | 19,455 | 63 | 1.27 | % | |||||||||||||||||||||||
| 8,356 | 65 | 3.06 | % | 8,336 | 68 | 3.26 | % | 8,882 | 63 | 2.81 | % | |||||||||||||||||||||||
| 1 | .55 | % | 1,867 | 2 | .38 | % | ||||||||||||||||||||||||||||
| 2,361 | 15 | 2.27 | % | 2,324 | 12 | 2.29 | % | 3,147 | 16 | 2.03 | % | |||||||||||||||||||||||
| 52,981 | 206 | 1.53 | % | 53,633 | 212 | 1.57 | % | 57,531 | 172 | 1.18 | % | |||||||||||||||||||||||
| 227,186 | 313 | .54 | % | 225,480 | 316 | .56 | % | 223,378 | 279 | .49 | % | |||||||||||||||||||||||
| 78,303 | 75,775 | 77,553 | ||||||||||||||||||||||||||||||||
| 304 | 282 | 246 | ||||||||||||||||||||||||||||||||
| 11,551 | 11,108 | 11,667 | ||||||||||||||||||||||||||||||||
| 46,526 | 46,345 | 45,743 | ||||||||||||||||||||||||||||||||
| $363,870 | $ | 358,990 | $ | 358,587 | ||||||||||||||||||||||||||||||
| 2.53 | % | 2.54 | % | 2.53 | % | |||||||||||||||||||||||||||||
| .15 | .16 | .14 | ||||||||||||||||||||||||||||||||
| $ | 2,144 | 2.68 | % | $ | 2,116 | 2.70 | % | $ | 2,112 | 2.67 | % | |||||||||||||||||||||||
| (b) | Loan fees for the nine months ended September 30, 2016 and September 30, 2015 were $106 million and $76 million, respectively. Loan fees for the three months ended |
| (c) | Interest income includes the effects of taxable-equivalent adjustments. See the following table: Non-GAAP to GAAP Reconciliation of Net Interest Income. |
The PNC Financial Services Group, Inc. –Form 10-Q101
NON-GAAPTO GAAP RECONCILIATIONOF NET INTEREST INCOME (a)
| Nine months ended | Three months ended | |||||||||||||||||||
| Dollars in millions | September 30, 2016 | September 30, 2015 | September 30, 2016 | June 30, 2016 | September 30, 2015 | |||||||||||||||
Net interest income (GAAP) | $ | 6,261 | $ | 6,186 | $ | 2,095 | $ | 2,068 | $ | 2,062 | ||||||||||
Taxable-equivalent adjustments | 145 | 148 | 49 | 48 | 50 | |||||||||||||||
Net interest income (Non-GAAP) | $ | 6,406 | $ | 6,334 | $ | 2,144 | $ | 2116 | $ | 2,112 | ||||||||||
| (a) | To provide more meaningful comparisons of net interest yields for all earning assets, interest income includes the effects of taxable-equivalent adjustments using a statutory federal income tax rate of 35% to increase tax-exempt interest income to a taxable-equivalent basis. This adjustment is not permitted under GAAP. The |
The PNC Financial Services Group, Inc. –Form 10-Q109
TRANSITIONAL BASEL IIIAND PRO FORMA FULLY PHASED-IN BASEL III COMMON EQUITY TIER 1 CAPITAL RATIOS (NON-GAAP) – 2015 PERIODS
| 2015 Transitional Basel III | Pro forma Fully Phased-In Basel III (estimated) (a) (b) | 2015 Transitional Basel III | Pro forma Fully Phased-In Basel III (Non-GAAP) (estimated) (a) (b) | |||||||||||||||||||||||||||||
| Dollars in millions | December 31 2015 | March 31 2015 | December 31 2015 | March 31 2015 | December 31 2015 | September 30 2015 | December 31 2015 | September 30 2015 | ||||||||||||||||||||||||
Common stock, related surplus and retained earnings, net of treasury stock | $ | 41,128 | $ | 40,374 | $ | 41,128 | $ | 40,374 | $ | 41,128 | $ | 40,883 | $ | 41,128 | $ | 40,883 | ||||||||||||||||
Less regulatory capital adjustments: | ||||||||||||||||||||||||||||||||
Goodwill and disallowed intangibles, net of deferred tax liabilities | (8,972 | ) | (9,011 | ) | (9,172 | ) | (9,249 | ) | (8,972 | ) | (8,986 | ) | (9,172 | ) | (9,197 | ) | ||||||||||||||||
Basel III total threshold deductions | (470 | ) | (414 | ) | (1,294 | ) | (1,045 | ) | (470 | ) | (448 | ) | (1,294 | ) | (1,135 | ) | ||||||||||||||||
Accumulated other comprehensive income (c) | (81 | ) | 115 | (201 | ) | 288 | (81 | ) | 64 | (201 | ) | 159 | ||||||||||||||||||||
All other adjustments | (112 | ) | (112 | ) | (182 | ) | (150 | ) | (112 | ) | (111 | ) | (182 | ) | (148 | ) | ||||||||||||||||
Basel III Common equity Tier 1 capital | $ | 31,493 | $ | 30,952 | $ | 30,279 | $ | 30,218 | $ | 31,493 | $ | 31,402 | $ | 30,279 | $ | 30,562 | ||||||||||||||||
Basel III standardized approach risk-weighted assets (d) | $ | 295,905 | $ | 295,114 | $ | 303,707 | $ | 302,784 | $ | 295,905 | $ | 295,384 | $ | 303,707 | $ | 303,343 | ||||||||||||||||
Basel III advanced approaches risk-weighted assets (e) | N/A | N/A | $ | 264,931 | $ | 287,293 | N/A | N/A | $ | 264,931 | $ | 284,215 | ||||||||||||||||||||
Basel III Common equity Tier 1 capital ratio | 10.6 | % | 10.5 | % | 10.0 | % | 10.0 | % | 10.6 | % | 10.6 | % | 10.0 | % | 10.1 | % | ||||||||||||||||
Risk weight and associated rules utilized | | Standardized (with 2015 transition adjustments) | | Standardized | | Standardized (with 2015 transition adjustments) | | Standardized | ||||||||||||||||||||||||
| (a) | PNC utilizes the pro forma fully phased-in Basel III capital ratios, to assess its capital position (without the benefit of phase-ins), |
| (b) | Basel III capital ratios and estimates may be impacted by additional regulatory guidance and, in the case of those ratios calculated using the advanced approaches, may be subject to variability based on the ongoing evolution, validation and regulatory approval of PNC’s models that are integral to the calculation of advanced approaches risk-weighted assets as PNC moves through the parallel run process. |
| (c) | Represents net adjustments related to accumulated other comprehensive income for securities currently and previously held as available for sale, as well as pension and other postretirement plans. |
| (d) | Basel III standardized approach risk-weighted assets are based on the Basel III standardized approach rules and include credit and market risk-weighted assets. |
| (e) | Basel III advanced approaches risk-weighted assets are based on the Basel III advanced approaches rules, and include credit, market and operational risk-weighted assets. During the parallel run qualification phase PNC has refined the data, models and internal processes used as part of the advanced approaches for determining risk-weighted assets. Refinements implemented in the fourth quarter of 2015 reduced estimated Basel III advanced approaches risk-weighted assets. We anticipate additional refinements may result in increases or decreases to this estimate through the parallel run qualification phase. |
110102 The PNC Financial Services Group, Inc. –Form 10-Q
See the information set forth in Note 1412 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.
There are no material changes from any of thein our risk factors from those previously disclosed in PNC’s 2015 Form 10-K in response to Part I, Item 1A.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Details of our repurchases of PNC common stock during the firstthird quarter of 2016 are included in the following table:
In thousands, except per share data 2016 period | Total shares purchased (a) | Average price paid per share | Total shares purchased as part of publicly announced programs (b) | Maximum number of shares that may yet be purchased under the programs (b) | ||||||||||||
January 1 – 31 | 1,988 | $ | 87.44 | 1,979 | 80,132 | |||||||||||
February 1 – 29 | 2,878 | $ | 82.50 | 2,371 | 77,761 | |||||||||||
March 1 – 31 | 1,645 | $ | 85.53 | 1,577 | 76,184 | |||||||||||
Total | 6,511 | $ | 84.77 | |||||||||||||
2016 period In thousands, except per share data | Total shares purchased (a) | Average price | 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 | 2,578 | $ | 81.76 | 2,561 | 67,500 | |||||||||||
August 1 – 31 | 1,469 | $ | 85.63 | 1,469 | 66,031 | |||||||||||
September 1 – 30 | 1,824 | $ | 89.84 | 1,824 | 64,207 | |||||||||||
Total | 5,871 | $ | 85.24 | |||||||||||||
| (a) | Includes PNC common stock purchased in connection with our various employee benefit plans generally related to forfeitures of unvested restricted stock awards and shares used to cover employee payroll tax withholding requirements. Note 12 Employee Benefit Plans and Note 13 Stock Based Compensation Plans in the Notes |
| (b) | On March 11, 2015, we announced that our Board of Directors had approved the establishment of a new stock repurchase program authorization in the amount of 100 million shares of PNC common stock, effective April 1, 2015. Repurchases are made in open market or privately negotiated transactions and the timing and exact amount of common stock repurchases will depend on a number of factors including, among others, market and general economic conditions, economic capital and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations, including the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process. |
Our 2015 capital plan, submitted as part of the CCAR process and approved by the Federal Reserve, included share repurchase programs of up to $2.875 billion for the five quarter period ending with the second quarter of 2016. This amount does not include share repurchases in connection with various employee benefit plans referenced in note (a). In the first quarter of 2016, in accordance with PNC’s 2015 capital plan and under the share repurchase authorization in effect during that period, we repurchased 5.9 million shares of common stock on the open market, with an average price of $85.02 per share and an aggregate repurchase price of $.5 billion.
| Our 2016 capital plan, submitted as part of the CCAR process and accepted by the Federal Reserve, included share repurchase programs of up to $2.0 billion for the four quarter period beginning with the third quarter of 2016, including repurchases of up to $200 million related to employee benefit plans. In the third quarter of 2016, in accordance with PNC’s 2016 capital plan and under the share repurchase authorization in effect during that period, we repurchased 5.9 million shares of common stock on the open market, with an average price of $85.25 per share and an aggregate repurchase price of $.5 billion. See the Capital portion of the Consolidated Balance Sheet Review in Part I, Item 2 of this Report for more information on the share repurchase programs under the new share repurchase authorization for the period July 1, 2016 through June 30, 2017 included in the 2016 capital plan accepted by the Federal Reserve. |
The PNC Financial Services Group, Inc. –Form 10-Q103
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:
| 3.1.7 and 4.29 | Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series S (Incorporated by reference to Exhibit 3.1 of PNC’s Current Report on Form 8-K filed November 1, 2016) | |
| 3.2 | By-Laws of The PNC Financial Services Group, Inc., as amended and restated, effective as of August 11, 2016 (Incorporated by reference to Exhibit 3.2 of PNC’s Current Report on Form 8-K filed August 16, 2016) | |
| 10.51 | Form of Change of Control Employment Agreements (Incorporated by reference to Exhibit 10.51 of PNC’s Current Report on Form 8-K filed August 16, 2016) | |
| 10.52 | 2016 Form of Performance Restricted Share Units Award Agreement | |
| 10.53 | 2016 Form of Incentive Performance Units Award Agreement | |
| 10.54 | 2016 Form of Senior Leader Performance Restricted Share Units Award Agreement | |
| 10.55 | 2016 Form of ALM Incentive Performance Units Award Agreement | |
| 12.1 | Computation of Ratio of Earnings to Fixed Charges | |
| 12.2 | Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350 | |
| 32.2 | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | |
| 101 | Interactive Data File (XBRL) | |
You can obtain copies of these Exhibits electronically at the SEC’s website at www.sec.gov or by mail from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, DC 20549 at prescribed rates. The Exhibits are also available as part of this Form 10-Q on PNC’s corporate website at www.pnc.com/secfilings. Shareholders and bondholders may also obtain copies of Exhibits, without charge, by contacting Shareholder Relations at 800-843-2206 or via e-mail at investor.relations@pnc.com. The interactive data file (XBRL) exhibit is only available electronically.
104The PNC Financial Services Group, Inc. –Form 10-Q111
The PNC Financial Services Group, Inc.
Corporate Headquarters
The PNC Financial Services Group, Inc.
The Tower at PNC Plaza, 300 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2401
412-762-2000
Stock Listing
The common stock of The PNC Financial Services Group, Inc. is listed on the New York Stock Exchange under the symbol “PNC”.
Internet Information
The PNC Financial Services Group, Inc.’s financial reports and information about its products and services are available on the internet at www.pnc.com. We provide information for investors on our corporate website under “About Us – Investor Relations.” We use our Twitter account, @pncnews, as an additional way of disseminating to the public information that may be relevant to investors.
We generally post the following under “About Us – Investor Relations” shortly before or promptly following its first use or release: financially-related press releases, including earnings releases and supplemental financial information, various SEC filings, including annual, quarterly and current reports and proxy statements, presentation materials associated with earnings and other investor conference calls or events, and access to live and recorded audio from earnings and other investor conference calls or events. In some cases, we may post the presentation materials for other investor conference calls or events several days prior to the call or event. When warranted, we will also use our website to expedite public access to time-critical information regarding PNC in advance of distribution of a press release or a filing with the SEC disclosing the same information. For earnings and other conference calls or events, we generally include in our posted materials a cautionary statement regarding forward-looking and adjusted information and we provide GAAP reconciliations when we refer to adjusted information and results. Where applicable, we provide GAAP reconciliations for such additional information in materials for that event or in materials for other prior investor presentations or in our annual, quarterly or current reports.
PNC is required periodically to provide additional public disclosure regarding estimated income, losses and pro forma regulatory capital ratios under supervisory and PNC-developed hypothetical severely adverse economic scenarios, as well as information concerning our capital stress testing processes, pursuant to the stress testing regulations adopted by the Federal Reserve and the OCC. PNC is also required to
make certain additional regulatory capital-related public disclosures about PNC’s capital structure, risk exposures, risk assessment processes, risk-weighted assets and overall capital adequacy, including market risk-related disclosures, under the regulatory capital rules adopted by the Federal banking agencies. Under these regulations, PNC may satisfy these requirements through postings on our website, and PNC has done so and expects to continue to do so without also providing disclosure of this information through filings with the SEC.
Other information posted on our corporate website that may not be available in our filings with the SEC includes information relating to our corporate governance and quarterly and annual communications from our chairman to shareholders.
Where we have included web addresses in this Report, such as our web address and the web address of the SEC, we have included those web addresses as inactive textual references only. Except as specifically incorporated by reference into this Report, information on those websites is not part hereof.
The PNC Financial Services Group, Inc. –Form 10-Q105
Financial Information
We are subject to the informational requirements of the Securities Exchange Act of 1934 (Exchange Act) and, in accordance with the Exchange Act, we file annual, quarterly and current reports, proxy statements, and other information with the SEC. Our SEC File Number is 001-09718. You can obtain copies of these and other filings, including exhibits, electronically at the SEC’s internet website at www.sec.gov or on PNC’s corporate internet website at www.pnc.com/secfilings. Shareholders and bond holders may also obtain copies of these filings without charge by contacting Shareholder Services at 800-982-7652 or via the online contact form at www.computershare.com/contactus for copies without exhibits, and by contacting Shareholder Relations at 800-843-2206 or via email at investor.relations@pnc.com for copies of exhibits, including financial statement and schedule exhibits where applicable. The interactive data file (XBRL) exhibit is only available electronically.
Corporate Governance at PNC
Information about our Board of Directors and its committees and corporate governance at PNC is available on PNC’s corporate website at www.pnc.com/corporategovernance. Our PNC Code of Business Conduct and Ethics is available on our corporate website at www.pnc.com/corporategovernance. In addition, any future amendments to, or waivers from, a provision of the PNC Code of Business Conduct and Ethics that applies to our directors or executive officers (including our principal executive officer, principal financial officer, and principal accounting officer or controller) will be posted at this internet address.
112 The PNC Financial Services Group, Inc. –Form 10-Q
Shareholders who would like to request printed copies of the PNC Code of Business Conduct and Ethics or our Corporate Governance Guidelines or the charters of our Board’s Audit, Nominating and Governance, Personnel and Compensation, or Risk Committees (all of which are posted on the PNC corporate website) may do so by sending their requests to PNC’s Corporate Secretary at corporate headquarters at the above address. Copies will be provided without charge to shareholders.
Inquiries
For financial services call 888-PNC-2265.
Registered shareholders should contact Shareholder Services at 800-982-7652.
Analysts and institutional investors should contact Bryan K. Gill, Senior Vice President, Director of Investor Relations, at412-768-4143 or via email at investor.relations@pnc.com.
News media representatives and others seeking general information should contact Fred Solomon, Senior Vice President, Corporate Communications, at 412-762-4550 or via email at corporate.communications@pnc.com.
Common Stock Prices/Dividends Declared
The table below sets forth by quarter the range of high and low sale and quarter-end closing prices for The PNC Financial Services Group, Inc. common stock and the cash dividends declared per common share.
| High | Low | Close | Cash Dividends Declared (a) | High | Low | Close | Cash Dividends Declared (a) | |||||||||||||||||||||||||
2016 Quarter | ||||||||||||||||||||||||||||||||
First | $ | 94.26 | $ | 77.67 | $ | 84.57 | $ | .51 | $ | 94.26 | $ | 77.67 | $ | 84.57 | $ | .51 | ||||||||||||||||
Second | 90.85 | 77.40 | 81.39 | .51 | ||||||||||||||||||||||||||||
Third | 91.39 | 77.86 | 90.09 | .55 | ||||||||||||||||||||||||||||
Total | $ | 1.57 | ||||||||||||||||||||||||||||||
2015 Quarter | ||||||||||||||||||||||||||||||||
First | $ | 96.71 | $ | 81.84 | $ | 93.24 | $ | .48 | $ | 96.71 | $ | 81.84 | $ | 93.24 | $ | .48 | ||||||||||||||||
Second | 99.61 | 90.42 | 95.65 | .51 | 99.61 | 90.42 | 95.65 | .51 | ||||||||||||||||||||||||
Third | 100.52 | 82.77 | 89.20 | .51 | 100.52 | 82.77 | 89.20 | .51 | ||||||||||||||||||||||||
Fourth | 97.50 | 84.93 | 95.31 | .51 | 97.50 | 84.93 | 95.31 | .51 | ||||||||||||||||||||||||
Total | $ | 2.01 | $ | 2.01 | ||||||||||||||||||||||||||||
| (a) | Our Board approved a |
106 The PNC Financial Services Group, Inc. –Form 10-Q
Dividend Policy
Holders of PNC common stock are entitled to receive dividends when declared by the Board of Directors out of funds legally available for this purpose. Our Board of Directors may not pay or set apart dividends on the common
stock until dividends for all past dividend periods on any series of outstanding preferred stock have been paid or declared and set apart for payment. The Board presently intends to continue the policy of paying quarterly cash dividends. The amount of any future dividends will depend on economic and market conditions, our financial condition and operating results, and other factors, including contractual restrictions and applicable government regulations and policies (such as those relating to the ability of bank and non-bank subsidiaries to pay dividends to the parent company and regulatory capital limitations). The amount of our dividend is also currently subject to the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the Comprehensive Capital Analysis and Review (CCAR)CCAR process as described in the Executive SummaryCapital portion of the Consolidated Balance Sheet Review section of the Financial Review of this Report and in the Supervision and Regulation section in Item 1 of our 2015 Form 10-K.
Dividend Reinvestment And Stock Purchase Plan
The PNC Financial Services Group, Inc. Dividend Reinvestment and Stock Purchase Plan enables holders of our common stock to conveniently purchase additional shares of common stock. You can obtain a prospectus and enrollment form by contacting Shareholder Services at 800-982-7652.
Stock Transfer Agent And Registrar
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
800-982-7652
Registered shareholders may contact the above phone number regarding dividends and other shareholder services.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on MayNovember 4, 2016 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 113107