In addition, our success will depend upon, among other things:
Execution of our strategic priorities and achieving targeted outcomes, including our ability to:
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Effectively managing capital and liquidity including:
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Managing credit risk in our portfolio;
Our ability to manage and implement strategic business objectives within the changing regulatory environment;
The impact of legal and regulatory-related contingencies; and
The appropriateness of reserves needed for critical accounting estimates and related contingencies.
For additional information, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2015 Form 10-K.
Income Statement Highlights
Net income for the secondthird quarter of 2016 was $989 million,$1.0 billion, or $1.82$1.84 per diluted common share, a decrease of 5%6%, compared to $1.044$1.1 billion, or $1.88$1.90 per diluted common share, for the secondthird quarter of 2015.
Net interest income increased $16$33 million, or 2%, to $2.1 billion.
Net interest margin increased to 2.68% compared to 2.67% in third quarter 2015.
Noninterest income increased $21 million, or 1%, to $2.1 billion.
Net interest margin decreased to 2.70% compared to 2.73% in second quarter 2015.
Noninterest income decreased $88 million, or 5%, to $1.7 billion as highergrowth in fee income was more thanmostly offset by lowera decline in other noninterest income.
Noninterest expense decreased $6increased $42 million to $2.4 billion, reflecting PNC’s effectivea new Federal Deposit Insurance Corporation (FDIC) deposit insurance surcharge and higher costs associated with business activities as PNC continued to focus on disciplined expense management.
The effective tax rate was 25.4% compared to 20.0% in the third quarter of 2015.
For additional detail, see the Consolidated Income Statement Review section in this Financial Review.
Credit Quality Highlights
Overall credit quality remained relatively stable at JuneSeptember 30, 20162016.
Nonperforming assets decreased $50 million, or 2%, to $2.4 billion compared to December 31, 2015, except for certain energy related loans.
Nonperforming assets increased $90 million, or 4%, to $2.5 billion.2015.
Overall loan delinquencies of $1.5 billion decreased $179$184 million, or 11%. compared to December 31, 2015.
Provision for credit losses increased modestly to $127$87 million for the secondthird quarter of 2016 compared to $46$81 million for the secondthird quarter of 2015. Second quarter 2016 provision included $48 million for energy related loans in the oil, gas and coal sectors.
Net charge-offs of $134$154 million for the secondthird quarter of 2016 increased $67$58 million compared to the secondthird quarter of 2015.
For additional detail, see the Credit Risk Management portion of the Risk Management section of the Consolidated Balance Sheet Review of this Financial Review.
The PNC Financial Services Group, Inc. –Form 10-Q3
Balance Sheet Liquidity and CapitalLiquidity Highlights
PNC’s balance sheet continued to be well-positionedwell positioned at JuneSeptember 30, 2016 compared to December 31, 2015 reflecting strong liquidity and capital.2015.
Total loans increased $2.4$3.8 billion to $209.1$210.4 billion.
Total commercial lending grew $4.6 billion, or 3%. Total consumer lending decreased $.8 billion, or 1%. |
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Total deposits increased $.8$10.9 billion to $249.8$259.9 billion.
Investment securities increased $1.3$8.0 billion, or 2%11%, to $71.8$78.5 billion.
The Liquidity Coverage Ratio (LCR) at September 30, 2016 for both PNC maintained a strong liquidity position.and PNC Bank exceeded the 2017 fully phased-in requirement of 100%.
Capital Highlights |
PNC maintained a strong capital position.
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PNCposition and continued to return capital to shareholders.
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4The Transitional Basel III common equity Tier 1 capital ratio remained stable at 10.6% at September 30, 2016 compared to December 31, 2015.
Pro forma fully phased-in Basel III common equity Tier 1 capital ratio, a non-GAAP financial measure, increased to an estimated 10.2% at September 30, 2016 compared to 10.0% at December 31, 2015 based on the standardized approach rules.
In the third quarter of 2016, we returned $.8 billion of capital to common shareholders through repurchases of 5.9 million common shares for $.5 billion, made under new share repurchase programs, and dividends on common shares of $.3 billion.
On October 4, 2016, the PNC Financial Services Group, Inc. –Form 10-QBoard of Directors declared a quarterly cash dividend on common stock of 55 cents per share effective with the November 5, 2016 payment date.
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See the Capital portion of the Consolidated Balance Sheet Review and the Liquidity Risk Management portion of the Risk Management section of this Financial Review for more detail on our 2016 capital and liquidity actions as well as more detail on our capital ratios.
Our ability to take certain capital actions, including plans to pay or increase common stock dividends or to repurchase shares under current or future programs, is subject to the results of the supervisory assessment of capital adequacy undertaken by the Federal Reserve as part of the CCAR
process. For additional information, see the Supervision and Regulation section in Item 1 Business of our 2015 Form 10-K.
Our Consolidated Income Statement and Consolidated Balance Sheet Review sections of this Financial Review describe in greater detail our results during the first sixnine months of 2016 and 2015 and balances at JuneSeptember 30, 2016 and December 31, 2015, respectively.
Business Outlook
Statements regarding our business outlook are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous assumptions, risks and uncertainties, including our current view that the U.S. economy will grow moderately in the latter half of 2016, boosted by stable oil/energy prices, improving housing activity and moderate job gains, and that short-term interest rates and bond yields will hold fairly steady before gradually rising late this year and do not take into account the impact of potential legal and regulatory contingencies. 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. See the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2015 From 10-K for other factors that could cause future events to differ, perhaps materially, from those anticipated in these forward-looking statements.
In the fourth quarter of 2016, we expect:
Modest loan growth compared to the third quarter of 2016;
Stable net interest income compared to the third quarter, and purchase accounting accretion to be approximately $50 million;
Stable fee income compared to the third quarter of 2016, with fee income consisting of asset management, consumer services, corporate services, residential mortgage and service charges on deposits;
Provision for credit losses to be between $75 million and $125 million; and
Noninterest expense to increase by low single digits, on a percentage basis, compared to the third quarter 2016.
We also expect full year 2016 noninterest expense to remain stable compared to full year 2015, and the full year 2016 effective tax rate to be approximately 25%.
4 The PNC Financial Services Group, Inc. –Form 10-Q
Average Consolidated Balance Sheet Highlights
Table 2: Summarized Average Balance Sheet
Six months ended June 30 Dollars in millions | Change | |||||||||||||||||||||||||||||||
| 2016 | 2015 | $ | % | |||||||||||||||||||||||||||||
Nine months ended September 30 Dollars in millions | Change | |||||||||||||||||||||||||||||||
| 2016 | 2015 | $ | % | |||||||||||||||||||||||||||||
Average assets | ||||||||||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||||||||||
Investment securities | $ | 70,232 | $ | 58,310 | $ | 11,922 | 20 | % | $ | 70,706 | $ | 59,578 | $ | 11,128 | 19 | % | ||||||||||||||||
Loans | 207,757 | 205,272 | 2,485 | 1 | % | 208,124 | 205,122 | 3,002 | 1 | % | ||||||||||||||||||||||
Interest-earning deposits with banks | 25,998 | 31,392 | (5,394 | ) | (17 | )% | 26,691 | 33,380 | (6,689 | ) | (20 | )% | ||||||||||||||||||||
Other | 7,606 | 9,236 | (1,630 | ) | (18 | )% | 7,797 | 9,048 | (1,251 | ) | (14 | )% | ||||||||||||||||||||
Total interest-earning assets | 311,593 | 304,210 | 7,383 | 2 | % | 313,318 | 307,128 | 6,190 | 2 | % | ||||||||||||||||||||||
Noninterest-earning assets | 45,858 | 46,151 | (293 | ) | (1 | )% | 46,289 | 46,005 | 284 | 1 | % | |||||||||||||||||||||
Total average assets | $ | 357,451 | $ | 350,361 | $ | 7,090 | 2 | % | $ | 359,607 | $ | 353,133 | $ | 6,474 | 2 | % | ||||||||||||||||
Average liabilities and equity | ||||||||||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||||||||||
Interest-bearing deposits | $ | 170,335 | $ | 161,236 | $ | 9,099 | 6 | % | $ | 171,635 | $ | 162,790 | $ | 8,845 | 5 | % | ||||||||||||||||
Borrowed funds | 53,629 | 56,757 | (3,128 | ) | (6 | )% | 53,411 | 57,018 | (3,607 | ) | (6 | )% | ||||||||||||||||||||
Total interest-bearing liabilities | 223,964 | 217,993 | 5,971 | 3 | % | 225,046 | 219,808 | 5,238 | 2 | % | ||||||||||||||||||||||
Noninterest-bearing deposits | 76,541 | 74,245 | 2,296 | 3 | % | 77,133 | 75,359 | 1,774 | 2 | % | ||||||||||||||||||||||
Other liabilities | 10,822 | 12,181 | (1,359 | ) | (11 | )% | 11,169 | 12,091 | (922 | ) | (8 | )% | ||||||||||||||||||||
Equity | 46,124 | 45,942 | 182 | - | % | 46,259 | 45,875 | 384 | 1 | % | ||||||||||||||||||||||
Total average liabilities and equity | $ | 357,451 | $ | 350,361 | $ | 7,090 | 2 | % | $ | 359,607 | $ | 353,133 | $ | 6,474 | 2 | % | ||||||||||||||||
Average investment securities increased due to higher average agency residential mortgage-backed securities and U.S. Treasury and government agency securities, partially offset by a decrease in average non-agency residential mortgage-backed securities. Total investment securities increased from 19% to 23% of average interest-earning assets.
The increase in average loans was driven by growth in average commercial real estate loans of $3.9 billion and average
commercial loans of $1.4$1.7 billion, principally in our Corporate & Institutional Banking segment, partially offset by a decrease in consumer loans of $3.0$2.8 billion. The decline in consumer loans was primarily attributable to lower home equity and education loans, and included runoffdeclines in the non-strategic portfolio of residential mortgagenonstrategic consumer and brokered home equity loans.the government guaranteed education loan portfolios. Loans remained stable at 67%represented 66% of average interest-earning assets for the first nine months of 2016 and 67% in both periods.the same period of 2015.
The PNC Financial Services Group, Inc. –Form 10-Q5
Average interest-earning deposits with banks, which are primarily maintained with the Federal Reserve Bank, decreased in the comparison reflecting a shift to higher yielding investment securities, loan growth and loans as well as lower borrowed funds, partially offset by an increase in deposits.
Average total deposits increased $11.4$10.6 billion, primarily due to higher average savings deposits, which reflected a shift from money market deposits to relationship-based savings products. Additionally, average interest-bearing demand
deposits and average noninterest-bearing deposits increased as
overall deposits grew. Average total deposits increased from 67% to 69% of average assets in the comparison.
Average borrowed funds declined due to decreases in average commercial paper and Federal Home Loan Bank (FHLB) borrowings, and federal funds purchased and repurchase agreements, partially offset by an increase in average bank notes and senior debt. The Liquidity Risk Management portion of this Financial Review includes additional information regarding our sources and uses of borrowed funds.
Various seasonal and other factors impact our period-end balances, whereas average balances are generally more indicative of underlying business trends apart from the impact of acquisitions and divestitures. Total assets were $361.3$369.3 billion at JuneSeptember 30, 2016 compared with $358.5 billion at December 31, 2015. The Consolidated Balance Sheet Review section of this Financial Review provides information on changes in selected Consolidated Balance Sheet categories at JuneSeptember 30, 2016 compared with December 31, 2015.
The PNC Financial Services Group, Inc. –Form 10-Q5
Recent Market and Industry Developments
On June 29,As previously disclosed in our First Quarter 2016 the Federal Reserve announced the results of the 2016 CCAR exercise. As we previously announced, the Federal Reserve accepted the capital plan that PNC submitted in April 2016 and did not object to the capital actions included in that plan. See the Capital portion of the Consolidated Balance Sheet Review section of this Financial Review.
On July 6, 2016, the Federal Reserve grantedForm 10-Q, the final one-year extensionrules adopted by the FDIC imposing a deposit insurance assessment surcharge (Surcharge) on insured depository institutions with total consolidated assets of $10 billion or more (including PNC Bank) became effective on July 1, 2016. The Surcharge took effect beginning with the general conformance period available under the Volcker Rule provisionsthird quarter 2016 assessment period. Based on data as of the Dodd-Frank ActSeptember 30, 2016, PNC Bank’s quarterly assessment increased by approximately $25 million compared to give all banking entities until July 21, 2017, to conform their investments in, and relationships with, covered funds (as defined in the Volcker Rule) that were in place prior to December 31, 2013 (legacy covered funds). As a result, PNC now has until at least July 21, 2017, to divest or conform its remaining investments in, and relationships with, legacy covered funds, including certain of PNC’s REIT preferred securities that, as currently structured, are considered legacy covered funds. In the second quarter of 2016, reflecting the impact of the Surcharge and the reduction of regular assessments that went into effect at the same time.
In September 2016, the Office of the Comptroller of the Currency (OCC) issued final enforceable guidelines under section 39 of the Federal Deposit Insurance Act that establish standards for recovery planning for insured national banks with average total consolidated assets of $50 billion or more, including PNC recorded negative valuation adjustmentsBank. The guidelines require a covered bank to develop and maintain a recovery plan that, among other things, identifies a range of $51 millionoptions that could be undertaken by the covered bank to restore its financial strength and viability should identified triggering events occur. For PNC Bank the compliance date for these guidelines is January 1, 2018.
Also in noninterest income primarily associated with nonconforming investments underSeptember 2016, the Volcker Rule. For additional information regarding the Volcker Rule and related considerations, see the Supervision and Regulation section in Item 1 Business and Item 1A Risk Factors of our 2015 Form 10-K. The Federal Reserve hasproposed amendments to its capital plan rule that would, among other things, reduce, from 1% to 0.25% of Tier 1 capital, the ability to provide up to an additional 5-year extended conformance period for investments heldamount of capital distributions that a bank holding company may make above the amounts included in and relationships with, covered funds that qualify as illiquid funds under the Volcker Rule andits most recently approved capital plan without seeking the Federal Reserve’s regulations.
In June 2016, following a period of public comments, the FDIC revised and updated its FAQs concerning brokered deposits that were originally released in 2015. Federal banking laws and regulations apply a variety of requirements or restrictions on insured depository institutions with respect to brokered deposits. For example, as explained in these FAQs, only a “well capitalized” insured depository institution may accept or retain brokered deposits without prior regulatory approval and brokered deposits are generally subjectprohibit bank holding companies from seeking to higher outflow assumptions than other typesuse this “de minimis” capital distribution authority during the second calendar quarter of deposits for purposeseach year. The comment period on the proposal closes on November 25, 2016. Governor Daniel Tarullo of the LCR. We doFederal Reserve also outlined additional changes that the Federal Reserve is considering to its capital plan rule and CCAR process, including the establishment of a new “stress capital buffer,” in a speech delivered on September 26, 2016. Governor Tarullo indicated that such potential changes would be issued for public comment at a later date and, accordingly, the precise nature of these additional potential changes is not anticipate that these revised FAQs will have a material impact on PNC’s deposit-taking activities or LCR.known at this time.
6 The PNC Financial Services Group, Inc. –Form 10-Q
Business Segment Highlights
Table 3: Results Of Businesses – Summary (a)
(Unaudited)
| Net Income | Revenue | Average Assets (b) | ||||||||||||||||||||||
| Six months ended June 30 – in millions | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
Retail Banking | $ | 575 | $ | 443 | $ | 3,332 | $ | 3,161 | $ | 71,880 | $ | 73,691 | ||||||||||||
Corporate & Institutional Banking | 921 | 990 | 2,691 | 2,647 | 136,913 | 131,711 | ||||||||||||||||||
Asset Management Group | 97 | 99 | 569 | 595 | 7,822 | 7,974 | ||||||||||||||||||
Residential Mortgage Banking | 33 | 47 | 340 | 413 | 6,037 | 7,190 | ||||||||||||||||||
BlackRock | 246 | 269 | 311 | 351 | 6,919 | 6,760 | ||||||||||||||||||
Non-Strategic Assets Portfolio | 81 | 137 | 175 | 230 | 5,677 | 7,094 | ||||||||||||||||||
Total business segments | 1,953 | 1,985 | 7,418 | 7,397 | 235,248 | 234,420 | ||||||||||||||||||
Other (c) (d) | (21 | ) | 63 | 41 | 200 | 122,203 | 115,941 | |||||||||||||||||
Total | $ | 1,932 | $ | 2,048 | $ | 7,459 | $ | 7,597 | $ | 357,451 | $ | 350,361 | ||||||||||||
CONSOLIDATED INCOME STATEMENT REVIEW
Our Consolidated Income Statement is presented in Part I, Item 1 of this Report.
Net income for the secondthird quarter of 2016 was $989 million,$1.0 billion, or $1.82$1.84 per diluted common share, a decrease of 5%,6% compared with $1.044$1.1 billion, or $1.88$1.90 per diluted common share, for the secondthird quarter of 2015. For the first sixnine months of 2016, net income was $1.9$2.9 billion, or $3.49$5.33 per diluted common share, a decrease of 6%, compared with $2.0$3.1 billion, or $3.63$5.52 per diluted common share, for the first sixnine months of 2015.
Net income decreased in both comparisonsthe quarterly comparison as revenue growth, driven by a 2% increase in net interest income and a 1% increase in noninterest income, was more than offset by a higher effective tax rate and a 2% increase in noninterest expense. Net income decreased in the year-to-date comparison driven by higher provision for credit losses and a 2% decline in revenue, partially offset by a 2% decrease in noninterest expense in the year-to-date comparison. Lower revenue in both comparisons reflected a 5%3% decline in noninterest income, partially offset by a 1% increase in net interest income.income and lower noninterest expense.
Net Interest Income
Table 4:3: Net Interest Income and Net Interest Margin
| Three months ended June 30 | Six months ended June 30 | Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||||||||||||
| Dollars in millions | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||||||||
Net interest income | $ | 2,068 | $ | 2,052 | $ | 4,166 | $ | 4,124 | $ | 2,095 | $ | 2,062 | $ | 6,261 | $ | 6,186 | ||||||||||||||||
Net interest margin (a) | 2.70 | % | 2.73 | % | 2.73 | % | 2.78 | % | 2.68 | % | 2.67 | % | 2.71 | % | 2.74 | % | ||||||||||||||||
| (a) | See footnote (c) in Table 1: Consolidated Financial Highlights on page 1. |
Changes in net interest income and margin result from the interaction of the volume and composition of interest-earning assets and related yields, interest-bearing liabilities and related rates paid, and noninterest-bearing sources of funding. See the Statistical Information (Unaudited) – Average Consolidated Balance Sheet And Net Interest Analysis section of this Report for additional information.
Net interest income increased $16by $33 million, or 1%2%, and $42$75 million, or 1%, for the secondthird quarter and first sixnine months of 2016, respectively, compared to the same periods in 2015. The increases in both comparisons were attributable to increases in loan and securities balances and higher loan yields, partially offset by lower purchase accounting accretion, higher borrowing costs and lower securities yields.yields and an increase in borrowing costs.
Net interest marginsmargin increased in the quarterly comparison largely reflecting the impact of the December 2015 increase in the federal funds rate and decreased in both comparisons mainly due tothe year-to-date comparison as the impact of the rate increase was more than offset by a lower benefit from purchase accounting accretion, partially offset by the impact of lower balances on deposit with the Federal Reserve.
In the third quarter of 2016, we expect net interest income to be stable with the second quarter of 2016.
For full year 2016, we expect purchase accounting accretion to be down approximately $175 million compared to 2015.accretion.
6The PNC Financial Services Group, Inc. –Form 10-Q7
Noninterest Income
| Three months ended June 30 | Six months ended June 30 | Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2015 | Change | 2016 | 2015 | Change | 2016 | 2015 | Change | 2016 | 2015 | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset management | $ | 377 | $ | 416 | $ | (39 | ) | (9 | )% | $ | 718 | $ | 792 | $ | (74 | ) | (9 | )% | $ | 404 | $ | 376 | $ | 28 | 7 | % | $ | 1,122 | $ | 1,168 | $ | (46 | ) | (4 | )% | |||||||||||||||||||||||||||||
Consumer services | 354 | 334 | 20 | 6 | % | 691 | 645 | 46 | 7 | % | 348 | 341 | 7 | 2 | % | 1,039 | 986 | 53 | 5 | % | ||||||||||||||||||||||||||||||||||||||||||||
Corporate services | 403 | 369 | 34 | 9 | % | 728 | 713 | 15 | 2 | % | 389 | 384 | 5 | 1 | % | 1,117 | 1,097 | 20 | 2 | % | ||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage | 165 | 164 | 1 | 1 | % | 265 | 328 | (63 | ) | (19 | )% | 160 | 125 | 35 | 28 | % | 425 | 453 | (28 | ) | (6 | )% | ||||||||||||||||||||||||||||||||||||||||||
Service charges on deposits | 163 | 156 | 7 | 4 | % | 321 | 309 | 12 | 4 | % | 174 | 172 | 2 | 1 | % | 495 | 481 | 14 | 3 | % | ||||||||||||||||||||||||||||||||||||||||||||
Net gains on sales of securities | 4 | 8 | (4 | ) | (50 | )% | 13 | 50 | (37 | ) | (74 | )% | 7 | (9 | ) | 16 | (178 | )% | 20 | 41 | (21 | ) | (51 | )% | ||||||||||||||||||||||||||||||||||||||||
Other | 260 | 367 | (107 | ) | (29 | )% | 557 | 636 | (79 | ) | (12 | )% | 252 | 324 | (72 | ) | (22 | )% | 809 | 960 | (151 | ) | (16 | )% | ||||||||||||||||||||||||||||||||||||||||
Total noninterest income | $ | 1,726 | $ | 1,814 | $ | (88 | ) | (5 | )% | $ | 3,293 | $ | 3,473 | $ | (180 | ) | (5 | )% | $ | 1,734 | $ | 1,713 | $ | 21 | 1 | % | $ | 5,027 | $ | 5,186 | $ | (159 | ) | (3 | )% | |||||||||||||||||||||||||||||
Noninterest income increased in the third quarter of 2016 compared to the third quarter of 2015 and decreased in both the quarterly and year-to-date comparisons.first nine months compared to the same period in 2015. Noninterest income as a percentage of total revenue was 45% forin both the second quarter of 2016 compared to 47% for the same period in 2015. The comparable amounts for the year-to-date periodsthird quarters of 2016 and 2015 were 44%and 45% and 46%, on a year-to-date basis, respectively.
Asset management revenue decreasedincreased in both comparisons driven by lower earnings from our BlackRock equity investment andthe quarterly comparison primarily due to the impact of lowerhigher average equity markets on both BlackRock and our asset management business segment. The decreases also includedyear-to-date comparison decreased mainly due to lower earnings from BlackRock and the impact from a $30 million trust settlement during the second quarter of 2015 in our asset management business segment. Discretionary client assets under management were $135$138 billion at JuneSeptember 30, 2016 compared with $134$132 billion at JuneSeptember 30, 2015.
Consumer services fees increased in both the quarterly and year-to-date comparisons,comparison primarily due to growth in payment-related products including debit card, credit card and merchant services, as well as increasedhigher brokerage fees.
Corporate services revenue increased in both comparisonsthe year-to-date comparison primarily reflecting higher capital markets-related revenue and higher treasury management fees.
Residential mortgage revenue increased in the quarterly comparison as a result of higher mergerloan sales revenue from higher origination volumes and acquisition advisory fees and higher loan syndication fees.
Residential mortgage revenue decreased in the year-to-date comparison as a result of lowerincreased benefit from residential mortgage servicing rights valuation, net of economic hedge, andhedge. The year-to-date comparison decreased mainly due to lower loan sales revenue partially offset by higherand a lower benefit from residential mortgage servicing fee revenue.rights valuation, net of economic hedge.
Other noninterest income decreased in both comparisons mainlyprimarily attributable to secondthe impact of third quarter valuation adjustments2015 net gains of $51$43 million primarily associated with nonconforming investments under the Volcker Rule as well as lower net gains on sales of 0.5 million Visa Class B
common shares.shares and lower revenue from private equity investments. There were no sales of Visa shares in the third quarter of 2016. Net gains on the sale of Visa Class B common shares for the first nine months of 2016 were $63$52 million on sales of 1.35 million shares for the first six monthscompared with net gains of 2016, including $31$124 million on the salesales of 0.851.5 million shares in the second
quarter of 2016, compared to $79 million on the sale of 1.0 million shares in the second quarterfirst nine months of 2015. Net gains consist of gains on Visa sales reduced byinclude derivative fair value adjustments related to swap agreements with purchasers of Visa Class B common shares in connection with all prior sales.
In the third quarter of 2016, we expect fee incomesales to remain stable with the second quarter of 2016. Fee income, a non-GAAP financial measure, refers to noninterest income categories of asset management, consumer services, corporate services, residential mortgage and service charges on deposits.
For full year 2016, we expect total revenue to be stable compared to 2015.date.
Provision For Credit Losses
The provision for credit losses increased $81 millionmodestly to $127$87 million in the secondthird quarter of 2016 compared to $81 million in the secondthird quarter of 2015 and increased $179$185 million to $279$366 million for the first sixnine months of 2016 compared to the same period in 2015. The increase in both comparisonsthe year-to-date comparison was primarily dueattributable to a higher provision for energy related loans in the oil, gas, and coal sectors which was $128of $130 million in the first nine months of 2016 compared to $86 million for the first sixnine months of 2016, including $48 million2015, as well as slowing credit quality improvement in our commercial and consumer lending portfolios and the second quarterimpact of 2016. The energy relatedcontinued loan portfolio weakened slightly in the second quarter of 2016 compared to the first quarter of 2016, but at a slower pace.
We expect our provision for credit losses in the third quarter of 2016 to be between $100 million and $150 million.growth.
The Credit Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding factors impacting the provision for credit losses.
8 The PNC Financial Services Group, Inc. –Form 10-Q
Noninterest Expense
Noninterest expense for the secondthird quarter of 2016 remained stable atincreased $42 million to $2.4 billion compared to the secondthird quarter of 2015. Noninterest2015, while noninterest expense decreased $74 million, or 2%, to $4.6 billion for the first sixnine months of 2016 compared to the same period in 2015 primarily duedecreased $32 million to the release of $24 million$7.0 billion. Both comparisons reflected increases to noninterest expense resulting from a new FDIC deposit insurance surcharge, higher variable compensation costs associated with increased business activity and investments in residential mortgage foreclosure-related reservestechnology and business infrastructure as PNC continued to
The PNC Financial Services Group, Inc. –Form 10-Q7
focus on disciplined expense management. These were offset by net lower legalcontingency accruals and reflectedthe impact from our effective expense management.
As of JuneSeptember 30, 2016, we have completed actions to capture more than two-thirds75% of our 2016 continuous improvement savings goal of $400 million, and are on track to achieve the full-year goal. Through this program, we intendare helping to help fund our continued investments in technology and business infrastructure throughout 2016.
We expect noninterest expense in the third quarter of 2016 to remain stable compared to the second quarter 2016, and full year 2016 noninterest expense to remain stable compared to full year 2015.infrastructure.
Effective Income Tax Rate
The effective income tax rate was 24.3%25.4% in the secondthird quarter of 2016 compared to 28.2%20.0% in the secondthird quarter of 2015 and 23.9%24.4% in the first sixnine months of 2016 compared to 26.4%24.3% in the same period of 2015. Both declines were primarilyThe lower effective tax rate for the third quarter of 2015 reflected tax benefits attributable to increasedeffectively settling acquired entity tax credit investments and a change in 2015 to record the impact of historic tax credits as a reduction to the associated investment asset balance.contingencies.
The effective tax rate is generally lower than the statutory rate primarily due to tax credits PNC receives from our investments in low income housing and new markets investments, as well as earnings in other tax exempt investments.
We expect our full-year 2016 effective tax rate to be approximately 25%.
CONSOLIDATED BALANCE SHEET REVIEW
Table 6:5: Summarized Balance Sheet Data
June 30 2016 | December 31 2015 | Change | September 30 2016 | December 31 2015 | Change | |||||||||||||||||||||||||||
| Dollars in millions | $ | % | $ | % | ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Interest-earning deposits with banks | $ | 26,750 | $ | 30,546 | $ | (3,796 | ) | (12 | )% | $ | 27,058 | $ | 30,546 | $ | (3,488 | ) | (11 | )% | ||||||||||||||
Loans held for sale | 2,296 | 1,540 | 756 | 49 | % | 2,053 | 1,540 | 513 | 33 | % | ||||||||||||||||||||||
Investment securities | 71,801 | 70,528 | 1,273 | 2 | % | 78,514 | 70,528 | 7,986 | 11 | % | ||||||||||||||||||||||
Loans | 209,056 | 206,696 | 2,360 | 1 | % | 210,446 | 206,696 | 3,750 | 2 | % | ||||||||||||||||||||||
Allowance for loan and lease losses | (2,685 | ) | (2,727 | ) | 42 | 2 | % | (2,619 | ) | (2,727 | ) | 108 | 4 | % | ||||||||||||||||||
Goodwill | 9,103 | 9,103 | — | — | 9,103 | 9,103 | – | – | ||||||||||||||||||||||||
Mortgage servicing rights | 1,222 | 1,589 | (367 | ) | (23 | )% | 1,293 | 1,589 | (296 | ) | (19 | )% | ||||||||||||||||||||
Other intangible assets | 329 | 379 | (50 | ) | (13 | )% | 304 | 379 | (75 | ) | (20 | )% | ||||||||||||||||||||
Other, net | 43,463 | 40,839 | 2,624 | 6 | % | 43,196 | 40,839 | 2,357 | 6 | % | ||||||||||||||||||||||
Total assets | $ | 361,335 | $ | 358,493 | $ | 2,842 | 1 | % | $ | 369,348 | $ | 358,493 | $ | 10,855 | 3 | % | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Deposits | $ | 249,778 | $ | 249,002 | $ | 776 | — | $ | 259,895 | $ | 249,002 | $ | 10,893 | 4 | % | |||||||||||||||||
Borrowed funds | 54,571 | 54,532 | 39 | — | 51,541 | 54,532 | (2,991 | ) | (5 | )% | ||||||||||||||||||||||
Other | 10,287 | 8,979 | 1,308 | 15 | % | 11,067 | 8,979 | 2,088 | 23 | % | ||||||||||||||||||||||
Total liabilities | 314,636 | 312,513 | 2,123 | 1 | % | 322,503 | 312,513 | 9,990 | 3 | % | ||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||
Total shareholders’ equity | 45,558 | 44,710 | 848 | 2 | % | 45,707 | 44,710 | 997 | 2 | % | ||||||||||||||||||||||
Noncontrolling interests | 1,141 | 1,270 | (129 | ) | (10 | )% | 1,138 | 1,270 | (132 | ) | (10 | )% | ||||||||||||||||||||
Total equity | 46,699 | 45,980 | 719 | 2 | % | 46,845 | 45,980 | 865 | 2 | % | ||||||||||||||||||||||
Total liabilities and equity | $ | 361,335 | $ | 358,493 | $ | 2,842 | 1 | % | $ | 369,348 | $ | 358,493 | $ | 10,855 | 3 | % | ||||||||||||||||
The PNC Financial Services Group, Inc. –Form 10-Q9
The summarized balance sheet data above is based upon our Consolidated Balance Sheet in Part 1, Item 1 of this Report.
PNC’s balance sheet reflected asset growth compared to December 31, 2015 and strong liquidity and capital positions at JuneSeptember 30, 2016 as compared to December 31, 2015.2016.
Total assets increased in the comparison primarily due to increases in loans,higher investment securities and other assets driven by accounts receivable for trade date securities sales,loan balances, partially offset by lower interest-earning deposits with banks.
TotalHigher total liabilities increased mainly due to deposit growth and higher other liabilitieswere driven by accounts payable for trade date securities purchases.deposit growth.
TotalThe increase to total equity increased mainly due toreflected increased retained earnings driven by net income, partially offset by share repurchases.
8 The PNC Financial Services Group, Inc. –Form 10-Q
Loans
Outstanding loan balances of $209.1$210.4 billion at JuneSeptember 30, 2016 and $206.7 billion at December 31, 2015 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.3 billion at September 30, 2016 and $1.4 billion at both June 30, 2016 and December 31, 2015.
June 30 2016 | December 31 2015 | Change | September 30 2016 | December 31 2015 | Change | |||||||||||||||||||||||||||
| Dollars in millions | $ | % | $ | % | ||||||||||||||||||||||||||||
Commercial lending | ||||||||||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||
Manufacturing | $ | 19,665 | $ | 19,014 | $ | 651 | 3 | % | $ | 19,813 | $ | 19,014 | $ | 799 | 4 | % | ||||||||||||||||
Retail/wholesale trade | 16,786 | 16,661 | 125 | 1 | % | 17,211 | 16,661 | �� | 550 | 3 | % | |||||||||||||||||||||
Service providers | 14,258 | 13,970 | 288 | 2 | % | 14,159 | 13,970 | 189 | 1 | % | ||||||||||||||||||||||
Real estate related (a) | 11,965 | 11,659 | 306 | 3 | % | 12,045 | 11,659 | 386 | 3 | % | ||||||||||||||||||||||
Health care | 9,092 | 9,210 | (118 | ) | (1 | )% | 9,148 | 9,210 | (62 | ) | (1 | )% | ||||||||||||||||||||
Financial services | 7,400 | 7,234 | 166 | 2 | % | 7,203 | 7,234 | (31 | ) | – | ||||||||||||||||||||||
Other industries | 21,396 | 20,860 | 536 | 3 | % | 21,933 | 20,860 | 1,073 | 5 | % | ||||||||||||||||||||||
Total commercial | 100,562 | 98,608 | 1,954 | 2 | % | 101,512 | 98,608 | 2,904 | 3 | % | ||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||||||||||
Real estate projects (b) | 16,468 | 15,697 | 771 | 5 | % | 16,851 | 15,697 | 1,154 | 7 | % | ||||||||||||||||||||||
Commercial mortgage | 12,372 | 11,771 | 601 | 5 | % | 12,422 | 11,771 | 651 | 6 | % | ||||||||||||||||||||||
Total commercial real estate | 28,840 | 27,468 | 1,372 | 5 | % | 29,273 | 27,468 | 1,805 | 7 | % | ||||||||||||||||||||||
Equipment lease financing | 7,620 | 7,468 | 152 | 2 | % | 7,378 | 7,468 | (90 | ) | (1 | )% | |||||||||||||||||||||
Total commercial lending | 137,022 | 133,544 | 3,478 | 3 | % | 138,163 | 133,544 | 4,619 | 3 | % | ||||||||||||||||||||||
Consumer lending | ||||||||||||||||||||||||||||||||
Home equity | ||||||||||||||||||||||||||||||||
Lines of credit | 18,203 | 18,828 | (625 | ) | (3 | )% | 18,014 | 18,828 | (814 | ) | (4 | )% | ||||||||||||||||||||
Installment | 12,680 | 13,305 | (625 | ) | (5 | )% | 12,418 | 13,305 | (887 | ) | (7 | )% | ||||||||||||||||||||
Total home equity | 30,883 | 32,133 | (1,250 | ) | (4 | )% | 30,432 | 32,133 | (1,701 | ) | (5 | )% | ||||||||||||||||||||
Residential real estate | ||||||||||||||||||||||||||||||||
Residential mortgage | 14,562 | 14,162 | 400 | 3 | % | 14,915 | 14,162 | 753 | 5 | % | ||||||||||||||||||||||
Residential construction | 237 | 249 | (12 | ) | (5 | )% | 226 | 249 | (23 | ) | (9 | )% | ||||||||||||||||||||
Total residential real estate | 14,799 | 14,411 | 388 | 3 | % | 15,141 | 14,411 | 730 | 5 | % | ||||||||||||||||||||||
Credit card | 4,896 | 4,862 | 34 | 1 | % | 5,029 | 4,862 | 167 | 3 | % | ||||||||||||||||||||||
Other consumer | ||||||||||||||||||||||||||||||||
Automobile | 11,449 | 11,157 | 292 | 3 | % | 11,898 | 11,157 | 741 | 7 | % | ||||||||||||||||||||||
Education | 5,482 | 5,881 | (399 | ) | (7 | )% | 5,337 | 5,881 | (544 | ) | (9 | )% | ||||||||||||||||||||
Other | 4,525 | 4,708 | (183 | ) | (4 | )% | 4,446 | 4,708 | (262 | ) | (6 | )% | ||||||||||||||||||||
Total consumer lending | 72,034 | 73,152 | (1,118 | ) | (2 | )% | 72,283 | 73,152 | (869 | ) | (1 | )% | ||||||||||||||||||||
Total loans | $ | 209,056 | $ | 206,696 | $ | 2,360 | 1 | % | $ | 210,446 | $ | 206,696 | $ | 3,750 | 2 | % | ||||||||||||||||
| (a) | Includes loans to customers in the real estate and construction industries. |
| (b) | Includes both construction loans and intermediate financing for projects. |
10The PNC Financial Services Group, Inc. –Form 10-Q9
Loan growth was the result of an increase in total commercial lending driven by higher commercial and commercial real estate loans, partially offset by a decline inwhile consumer lending declined due to lower home equity and education loans, partially offset by higher automobile and residential mortgage loans.
Loans represented 58%57% of total assets at both JuneSeptember 30, 2016 and 58% at December 31, 2015. Commercial lending represented 66% of the loan portfolio at JuneSeptember 30, 2016 and 65% at December 31, 2015. Consumer lending represented 34% of the loan portfolio at JuneSeptember 30, 2016 and 35% at December 31, 2015. See the Credit Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our loan portfolio.
Total loans above include purchased impaired loans of $3.2$3.1 billion, or 2%1% of total loans, at JuneSeptember 30, 2016, and $3.5 billion, or 2% of total loans, at December 31, 2015.
For the third quarter of 2016, we expect total loans to be up modestly compared to the second quarter of 2016.
Allowance for Loan and Lease Losses (ALLL)
Information regarding our higher risk loans and ALLL is included in the Credit Risk Management portion of the Risk Management section of this Financial Review, Note 1 Accounting Policies in our 2015 Form 10-K and Note 3 Asset Quality and Note 4 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in our Notes To Consolidated Financial Statements included in Part 1, Item 1 of this Report.
Purchased Impaired Loans
The following table provides further detail on purchased impaired loans at JuneSeptember 30, 2016 and December 31, 2015:
Table 8:7: Purchased Impaired Loans – Balances
| June 30, 2016 | December 31, 2015 | |||||||||||||||||||||||
| In millions | Outstanding Balance (a) | Recorded Investment | Carrying Value | Outstanding Balance (a) | Recorded Investment | Carrying Value | ||||||||||||||||||
Total commercial lending | $ | 185 | $ | 138 | $ | 94 | $ | 249 | $ | 169 | $ | 120 | ||||||||||||
Total consumer lending | 3,379 | 3,098 | 2,817 | 3,684 | 3,353 | 3,092 | ||||||||||||||||||
Total | $ | 3,564 | $ | 3,236 | $ | 2,911 | $ | 3,933 | $ | 3,522 | $ | 3,212 | ||||||||||||
| September 30, 2016 | December 31, 2015 | |||||||||||||||||||||||
| In millions | Outstanding Balance | Recorded Investment | Carrying Value | Outstanding Balance | Recorded Investment | Carrying Value | ||||||||||||||||||
Total commercial lending | $ | 156 | $ | 122 | $ | 80 | $ | 249 | $ | 169 | $ | 120 | ||||||||||||
Total consumer lending | 3,211 | 2,958 | 2,677 | 3,684 | 3,353 | 3,092 | ||||||||||||||||||
Total | $ | 3,367 | $ | 3,080 | $ | 2,757 | $ | 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. Activity for the accretable yield during the first sixnine months of 2016 and 2015 follows:
Table 9:8: Purchased Impaired Loans – Accretable Yield
| In millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
January 1 | $ | 1,250 | $ | 1,558 | $ | 1,250 | $ | 1,558 | ||||||||
Accretion (including excess cash recoveries) | (199 | ) | (252 | ) | (292 | ) | (359 | ) | ||||||||
Net reclassifications to accretable from non-accretable | 110 | 146 | 155 | 218 | ||||||||||||
Disposals | (4 | ) | (9 | ) | (5 | ) | (66 | ) | ||||||||
June 30 | $ | 1,157 | $ | 1,443 | ||||||||||||
September 30 | $ | 1,108 | $ | 1,351 | ||||||||||||
We currently expect to collect total cash flows of $4.1$3.9 billion on purchased impaired loans, representing the $2.9$2.8 billion carrying value at JuneSeptember 30, 2016 and accretable net interest of $1.2$1.1 billion.
The table below provides the weighted average life (WAL) for each of the purchased impaired portfolios as of JuneSeptember 30, 2016.
Table 10:9: Weighted Average Life of the Purchased Impaired Portfolios
| As of June 30, 2016 Dollars in millions | Recorded Investment | WAL (a) | ||||||||||||||
As of September 30, 2016 Dollars in millions | Recorded Investment | WAL (a) | ||||||||||||||
Commercial | $ | 26 | 2.2 years | $ | 21 | 2.2 years | ||||||||||
Commercial real estate | 112 | 1.5 years | 101 | 1.7 years | ||||||||||||
Consumer (b) | 1,263 | 3.9 years | 1,188 | 3.9 years | ||||||||||||
Residential real estate | 1,835 | 4.6 years | 1,770 | 4.6 years | ||||||||||||
Total | $ | 3,236 | 4.2 years | $ | 3,080 | 4.2 years | ||||||||||
| (a) | Weighted average life represents the average number of years for which each dollar of unpaid principal remains outstanding. |
| (b) | Portfolio primarily consists of nonrevolving home equity products. |
For more information on purchased impaired loans and the accretable yield, see Note 1 Accounting Policies in our 2015 FormForm 10-K.
10The PNC Financial Services Group, Inc. –Form 10-Q11
Investment Securities
The following table presents the distribution of our investment securities portfolio by credit rating. We have included credit ratings information because we believe that the information is an indicator of the degree of credit risk to which we are exposed. Changes in credit ratings classifications could indicate increased or decreased credit risk and could be accompanied by a reduction or increase in the fair value of our investment securities portfolio.
Table 11:10: Investment Securities
| June 30, 2016 | December 31, 2015 | Ratings (a) As of June 30, 2016 | September 30, 2016 | December 31, 2015 | Ratings (a) As of September 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | Amortized Cost | Fair Value | Amortized Cost | Fair Value | AAA/ AA | A | BBB | BB and Lower | No Rating | Amortized Cost | Fair Value | Amortized Cost | Fair Value | AAA/ AA | A | BBB | BB and Lower | No Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 10,057 | $ | 10,429 | $ | 10,022 | $ | 10,172 | 100 | % | $ | 12,327 | $ | 12,680 | $ | 10,022 | $ | 10,172 | 100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Agency residential mortgage-backed | 35,274 | 36,068 | 34,250 | 34,408 | 100 | 39,066 | 39,868 | 34,250 | 34,408 | 100 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-agency residential mortgage-backed | 3,772 | 3,920 | 4,225 | 4,392 | 11 | 4 | % | 80 | % | 5 | % | 3,576 | 3,754 | 4,225 | 4,392 | 11 | 4 | % | 80 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Agency commercial mortgage-backed | 2,849 | 2,918 | 3,045 | 3,086 | 100 | 3,352 | 3,408 | 3,045 | 3,086 | 100 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-agency commercial mortgage-backed (b) | 5,171 | 5,242 | 5,624 | 5,630 | 79 | 9 | % | 2 | 2 | 8 | 4,762 | 4,837 | 5,624 | 5,630 | 80 | 7 | % | 3 | 1 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed (c) | 6,387 | 6,394 | 6,134 | 6,130 | 90 | 3 | 6 | 1 | 6,922 | 6,958 | 6,134 | 6,130 | 90 | 3 | 7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
State and municipal | 3,915 | 4,206 | 3,936 | 4,126 | 89 | 6 | 5 | 3,883 | 4,146 | 3,936 | 4,126 | 89 | 6 | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other debt | 2,638 | 2,703 | 2,211 | 2,229 | 50 | 34 | 15 | 1 | 2,830 | 2,878 | 2,211 | 2,229 | 51 | 32 | 16 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate stock and other | 483 | 484 | 590 | 589 | 100 | 525 | 525 | 590 | 589 | 100 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total investment securities(d) | $ | 70,546 | $ | 72,364 | $ | 70,037 | $ | 70,762 | 90 | % | 3 | % | 1 | % | 5 | % | 1 | % | $ | 77,243 | $ | 79,054 | $ | 70,037 | $ | 70,762 | 91 | % | 2 | % | 1 | % | 4 | % | 2 | % | ||||||||||||||||||||||||||||||||||||
| (a) | Ratings percentages allocated based on amortized cost. |
| (b) | Collateralized primarily by retail properties, office buildings, lodging properties and multi-family housing. |
| (c) | Collateralized primarily by corporate debt, government guaranteed |
| (d) | Includes available for sale and held to maturity securities. |
Investment securities represented 20%21% of total assets at both JuneSeptember 30, 2016 and 20% at December 31, 2015.
We evaluate our investment securities portfolio in light of changing market conditions and other factors and, where appropriate, take steps to improve our overall positioning. We consider the portfolio to be well-diversified and of high quality. At JuneSeptember 30, 2016, 90%91% of the securities in the portfolio were rated AAA/AA, with U.S. Treasury and government agencies, agency residential mortgage-backed and agency commercial mortgage-backed securities collectively representing 68%71% of the portfolio.
The investment securities portfolio includes both available for sale and held to maturity securities. Securities classified as available for sale are carried at fair value with net unrealized gains and losses, representing the difference between amortized cost and fair value, included in Shareholders’ equity as Accumulated other comprehensive income or loss, net of tax, on our Consolidated Balance Sheet. Securities classified as held to maturity are carried at amortized cost. As of June 30, 2016, the amortized cost and fair value of available for sale securities totaled $55.6 billion and $56.9 billion, respectively, compared to an amortized cost and fair value as of December 31, 2015 of $55.3 billion and $55.8 billion, respectively. The amortized cost and fair value of held to maturity securities were $14.9 billion and $15.5 billion, respectively, at June 30, 2016, compared to $14.8 billion and $15.0 billion, respectively, at December 31, 2015.
The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair
value generally decreases when credit spreads widen and
vice versa. Net unrealized gains in the total investment securities portfolio increased to $1.8 billion at JuneSeptember 30, 2016 from $0.7$.7 billion at December 31, 2015. The comparable amounts for the securities available for sale portfolio were $1.3 billion at JuneSeptember 30, 2016 and $0.5$.5 billion at December 31, 2015.
Unrealized gains and losses on available for sale debt securities do not impact liquidity; however, these gains and losses do affect capital under the regulatory capital rules. Also, a change in the securities’ credit ratings could impact the liquidity of the securities and may be indicative of a change in credit quality, which could affect our risk-weighted assets and, therefore, our risk-based regulatory capital ratios under the regulatory capital rules. In addition, the amount representing the credit-related portion of other-than-temporary impairment (OTTI) on securities would reduce our earnings and regulatory capital ratios.
The duration of investment securities was 2.01.8 years at JuneSeptember 30, 2016. We estimate that at JuneSeptember 30, 2016 the effective duration of investment securities was 2.12.0 years for an immediate 50 basis points parallel increase in interest rates and 1.81.6 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2015 for the effective duration of investment securities were 2.8 years and 2.6 years, respectively.
The PNC Financial Services Group, Inc. –Form 10-Q11
Based on current interest rates and expected prepayment speeds, the weighed-average expected maturity of the investment securities portfolio (excluding corporate stock and other) was 4.0 years at JuneSeptember 30, 2016 compared to 4.8 years at December 31, 2015. The weighted-average expected maturities of mortgage and other asset-backed debt securities were as follows as of JuneSeptember 30, 2016:
12 The PNC Financial Services Group, Inc. –Form 10-Q
Table 12:11: Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities
| Years | ||||
Agency residential mortgage-backed securities | 3.4 | |||
Non-agency residential mortgage-backed securities | 5.3 | |||
Agency commercial mortgage-backed securities | ||||
Non-agency commercial mortgage-backed securities | ||||
Asset-backed securities | ||||
At least quarterly, we conduct a comprehensive security-level impairment assessment on all securities. If economic conditions, including home prices, were to deteriorate from current levels, and if market volatility and liquidity were to deteriorate from current levels, or if market interest rates were to increase or credit spreads were to widen appreciably, the valuation of our investment securities portfolio would likely be adversely affected and we could incur additional OTTI credit losses that would impact our Consolidated Income Statement. For those securities on our balance sheet at JuneSeptember 30, 2016, where during our quarterly security-level impairment assessments we determined losses represented OTTI, we have recorded cumulative credit losses of $1.1 billion in earnings and accordingly have reduced the amortized cost of our securities. The majority of these cumulative impairment charges related to non-agency residential mortgage-backed and asset-backed securities rated BB or lower.
Additional information regarding our investment securities is included in Note 5 Investment Securities and Note 6 Fair Value in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.
Loans Held for Sale
Table 13:12: Loans Held For Sale
June 30 2016 | December 31 2015 | Change | September 30 2016 | December 31 2015 | Change | |||||||||||||||||||||||
| In millions | $ | % | $ | % | ||||||||||||||||||||||||
Commercial mortgages | $ | 1,000 | $668 | $ | 332 | 50 | % | $ | 876 | $668 | $ | 208 | 31 | % | ||||||||||||||
Residential mortgages | 1,137 | 850 | 287 | 34 | % | 1,129 | 850 | 279 | 33 | % | ||||||||||||||||||
Other | 159 | 22 | 137 | 623 | % | 48 | 22 | 26 | 118 | % | ||||||||||||||||||
Total | $ | 2,296 | $1,540 | $ | 756 | 49 | % | $ | 2,053 | $1,540 | $ | 513 | 33 | % | ||||||||||||||
Loans held for sale increased in the comparison reflecting higheras origination volumes exceeded loan sales during the first nine months of 2016 in both commercial and residential mortgages.
We sold $1.5$2.8 billion of commercial mortgage loans to agencies during the first sixnine months of 2016 compared to $2.2$3.0 billion during the first sixnine months of 2015. Total revenue of $33$51 million was recognized on the valuation and sale of commercial mortgage loans held for sale, net of hedges, during the first sixnine months of 2016, including $16$18 million in the secondthird quarter. Comparable amounts for 2015 were $51
$64 million and $36$13 million, respectively. These amounts are included in Other noninterest income on the Consolidated Income Statement.
Residential mortgage loan origination volume was $4.5$7.6 billion during the first sixnine months of 2016 compared to $5.5$8.2 billion in the same period in 2015. The majority of such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $2.8$4.8 billion of loans and recognized loan sales revenue of $159$262 million during the first sixnine months of 2016, of which $95$103 million occurred in the secondthird quarter. The comparable amounts for 2015 were $4.0$6.2 billion and $203$278 million, respectively, including $99$75 million in the secondthird quarter. These loan sales revenue amounts are included in Residential mortgage noninterest income on the Consolidated Income Statement.
Interest income on loans held for sale was $34$55 million during the first sixnine months of 2016, including $18$21 million in the secondthird quarter. Comparable amounts for 2015 were $46$68 million and $23$22 million, respectively. These amounts are included in Other interest income on the Consolidated Income Statement.
Additional information regarding our loan sale and servicing activities is included in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities and Note 6 Fair Value in our Notes To Consolidated Financial Statements included in Part 1, Item 1 of this Report.
Funding Sources
Table 14:13: Details Of Funding Sources
June 30 2016 | December 31 2015 | Change | September 30 2016 | December 31 2015 | Change | |||||||||||||||||||||||||||
| Dollars in millions | $ | % | $ | % | ||||||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||||||||||
Money market | $ | 110,435 | $ | 118,079 | $ | (7,644 | ) | (6 | )% | $ | 115,324 | $ | 118,079 | $ | (2,755 | ) | (2 | )% | ||||||||||||||
Demand | 90,356 | 90,038 | 318 | – | 92,282 | 90,038 | 2,244 | 2 | % | |||||||||||||||||||||||
Savings | 29,936 | 20,375 | 9,561 | 47 | % | 33,540 | 20,375 | 13,165 | 65 | % | ||||||||||||||||||||||
Retail certificates of deposit | 17,359 | 17,405 | (46 | ) | – | 16,979 | 17,405 | (426 | ) | (2 | )% | |||||||||||||||||||||
Time deposits in foreign offices and other time deposits | 1,692 | 3,105 | (1,413 | ) | (46 | )% | 1,770 | 3,105 | (1,335 | ) | (43 | )% | ||||||||||||||||||||
Total deposits | 249,778 | 249,002 | 776 | – | 259,895 | 249,002 | 10,893 | 4 | % | |||||||||||||||||||||||
Borrowed funds | ||||||||||||||||||||||||||||||||
Federal funds purchased and repurchase agreements | 1,620 | 1,777 | (157 | ) | (9 | )% | 1,235 | 1,777 | (542 | ) | (31 | )% | ||||||||||||||||||||
FHLB borrowings | 18,055 | 20,108 | (2,053 | ) | (10 | )% | 17,050 | 20,108 | (3,058 | ) | (15 | )% | ||||||||||||||||||||
Bank notes and senior debt | 23,588 | 21,298 | 2,290 | 11 | % | 22,431 | 21,298 | 1,133 | 5 | % | ||||||||||||||||||||||
Subordinated debt | 8,764 | 8,556 | 208 | 2 | % | 8,708 | 8,556 | 152 | 2 | % | ||||||||||||||||||||||
Other | 2,544 | 2,793 | (249 | ) | (9 | )% | 2,117 | 2,793 | (676 | ) | (24 | )% | ||||||||||||||||||||
Total borrowed funds | 54,571 | 54,532 | 39 | – | 51,541 | 54,532 | (2,991 | ) | (5 | )% | ||||||||||||||||||||||
Total funding sources | $ | 304,349 | $ | 303,534 | $ | 815 | – | $ | 311,436 | $ | 303,534 | $ | 7,902 | 3 | % | |||||||||||||||||
12The PNC Financial Services Group, Inc. –Form 10-Q13
See the Liquidity Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our 2016 capital and liquidity activities.
Total deposits increased in the comparison mainly due to growth in savings deposits reflecting in part a shift from money market deposits to relationship-based savings products. Interest-bearing deposits represented 69%68% of total deposits at Juneboth September 30, 2016 and 68% at December 31, 2015.
Total borrowed funds increased slightlydecreased in the comparison asdue to maturities of FHLB borrowings, partially offset by higher bank notes and senior debt were substantially offset by maturities of FHLB borrowings.debt.
Capital
We manage our funding and capital positions by making adjustments to our balance sheet size and composition, issuing or redeeming debt, issuing equity or other capital instruments, executing treasury stock transactions and capital redemptions, managing dividend policies and retaining earnings.
We repurchase shares of PNC common stock under common stock repurchase authorizations approved by PNC’s Board of Directors and consistent with capital plans submitted to, and accepted by, the Federal Reserve. The extent and timing of share repurchases under authorizations will depend on a number of factors including, among others, market and general economic conditions, economic and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, contractual and regulatory limitations, and the results of future supervisory assessments of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process.
In the second quarter of 2016, we repurchased 6.1 million common shares for $.5 billion, completingcompleted our common stock repurchase programs for the five quarter period that ended in June 2016. We returned a2016 with total of $4.0 billion of capital to shareholders through repurchases of 29.9 million common shares for $2.7 billion and dividends on common shares of $1.3 billion over the five quarter period, consistent with thebillion. These repurchases were included in our capital plan accepted by the Federal Reserve as part of our 2015 CCAR submission. Additionally, we paid $1.3 billion in common stock dividends for a total of $4.0 billion of capital returned to shareholders during this five quarter period.
In connection with the 2016 CCAR process, we submitted our capital plan as approved by PNC’s Board of Directors, to the Federal Reserve in April 2016. The Federal Reserve accepted the capital plan and did not object to our proposed capital actions. As provided for in the 2016 capital plan, PNC announced new share repurchase programs of up to $2.0 billion for the four-quarter period beginning in the third quarter of 2016, including repurchases of up to $200 million related to employee benefit plans. In the third quarter of 2016, we repurchased 5.9 million common shares for $.5 billion.
We paid dividends on common stock of $.3 billion, or 5155 cents per common share, during the secondthird quarter of 2016. On July 7,October 4, 2016, the PNC Board of Directors raised thedeclared a quarterly common stock cash dividend of 55 cents per share payable on November 5, 2016. In July 2016, the Board of Directors raised the quarterly dividend on common stock to 55 cents per share, an increase of 4 cents per share, or 8%, payable oneffective with the August 5, 2016.dividend.
See the Supervision and Regulation section of Item 1 Business of our 2015 Form 10-K for further information concerning the CCAR process and the factors the Federal Reserve takes into consideration in its evaluation of capital plans. See also the Capital section of the Consolidated Balance Sheet Review in our 2015 Form 10-K for additional information on our 2015 CCAR submission and current capital plan.
Table 15:14: Shareholders’ Equity
June 30 2016 | December 31 2015 | Change | September 30 2016 | December 31 2015 | Change | |||||||||||||||||||||||||||
| Dollars in millions | $ | % | $ | % | ||||||||||||||||||||||||||||
Shareholders’ equity | ||||||||||||||||||||||||||||||||
Preferred stock (a) | ||||||||||||||||||||||||||||||||
Common stock | $ | 2,709 | $ | 2,708 | $ | 1 | – | $ | 2,709 | $ | 2,708 | $ | 1 | – | ||||||||||||||||||
Capital surplus – preferred stock | 3,455 | 3,452 | 3 | – | 3,456 | 3,452 | 4 | – | ||||||||||||||||||||||||
Capital surplus – common stock and other | 12,653 | 12,745 | (92 | ) | (1 | )% | 12,703 | 12,745 | (42 | ) | – | |||||||||||||||||||||
Retained earnings | 30,309 | 29,043 | 1,266 | 4 | % | 30,958 | 29,043 | 1,915 | 7 | % | ||||||||||||||||||||||
Accumulated other comprehensive income | 736 | 130 | 606 | 466 | % | 646 | 130 | 516 | 397 | % | ||||||||||||||||||||||
Common stock held in treasury at cost | (4,304 | ) | (3,368 | ) | (936 | ) | (28 | )% | (4,765 | ) | (3,368 | ) | (1,397 | ) | (41 | )% | ||||||||||||||||
Total shareholders’ equity | $ | 45,558 | $ | 44,710 | $ | 848 | 2 | % | $ | 45,707 | $ | 44,710 | $ | 997 | 2 | % | ||||||||||||||||
| (a) | Par value less than $.5 million at each date. |
The increasegrowth in total shareholders’ equity as of September 30, 2016 compared to December 31, 2015 was mainly due to a $1.3 billionan increase in retained earnings and higher accumulated other comprehensive income primarily related to net securities gains, partially offset by common share repurchases of $1.0$1.5 billion. The increasegrowth in retained earnings was driven byresulted from net income of $1.9$2.9 billion during the period, reduced by $.6$1.0 billion of common and preferred dividends declared. Common shares outstanding were 493488 million and 504 million at JuneSeptember 30, 2016, and December 31, 2015, respectively.respectively, reflecting repurchases of 17.9 million shares during the period.
14The PNC Financial Services Group, Inc. –Form 10-Q13
Table 16:15: Basel III Capital
| June 30, 2016 | September 30, 2016 | |||||||||||||||
| Dollars in millions | 2016 Basel III (a) | Pro forma Fully Phased-In Basel III (estimated) (b)(c) | 2016 Basel III (a) | Pro forma Fully Phased-In Basel III (Non-GAAP) (estimated) (b)(c) | ||||||||||||
Common equity Tier 1 capital | ||||||||||||||||
Common stock plus related surplus, net of treasury stock | $ | 11,058 | $ | 11,058 | $ | 10,646 | $ | 10,646 | ||||||||
Retained earnings | 30,309 | 30,309 | 30,958 | 30,958 | ||||||||||||
Accumulated other comprehensive income for securities currently and previously held as available for sale | 499 | 831 | 504 | 840 | ||||||||||||
Accumulated other comprehensive income for pension and other postretirement plans | (327 | ) | (545 | ) | (323 | ) | (538 | ) | ||||||||
Goodwill, net of associated deferred tax liabilities | (8,833 | ) | (8,833 | ) | (8,830 | ) | (8,830 | ) | ||||||||
Other disallowed intangibles, net of deferred tax liabilities | (175 | ) | (291 | ) | (163 | ) | (272 | ) | ||||||||
Other adjustments/(deductions) | (158 | ) | (165 | ) | (177 | ) | (180 | ) | ||||||||
Total common equity Tier 1 capital before threshold deductions | 32,373 | 32,364 | 32,615 | 32,624 | ||||||||||||
Total threshold deductions | (710 | ) | (1,185 | ) | (731 | ) | (1,218 | ) | ||||||||
Common equity Tier 1 capital | 31,663 | 31,179 | 31,884 | 31,406 | ||||||||||||
Additional Tier 1 capital | ||||||||||||||||
Preferred stock plus related surplus | 3,455 | 3,455 | 3,456 | 3,456 | ||||||||||||
Trust preferred capital securities | – | – | ||||||||||||||
Noncontrolling interests (d) | 418 | 45 | 418 | 45 | ||||||||||||
Other adjustments/(deductions) | (86 | ) | (109 | ) | (86 | ) | (111 | ) | ||||||||
Tier 1 capital | 35,450 | 34,570 | 35,672 | 34,796 | ||||||||||||
Additional Tier 2 capital | ||||||||||||||||
Qualifying subordinated debt | 4,041 | 3,845 | 3,929 | 3,755 | ||||||||||||
Trust preferred capital securities | 119 | – | 119 | – | ||||||||||||
Allowance for loan and lease losses included in Tier 2 capital | 2,989 | 2,989 | 2,929 | 2,929 | ||||||||||||
Other (d) | 6 | 11 | 6 | 11 | ||||||||||||
Total Basel III capital | $ | 42,605 | $ | 41,415 | $ | 42,655 | $ | 41,491 | ||||||||
Risk-weighted assets | ||||||||||||||||
Basel III standardized approach risk-weighted assets (e) | $ | 297,724 | $ | 305,918 | $ | 300,308 | $ | 308,665 | ||||||||
Basel III advanced approaches risk-weighted assets (f) | N/A | $ | 278,863 | N/A | $ | 280,150 | ||||||||||
Average quarterly adjusted total assets | $ | 348,195 | $ | 347,572 | $ | 352,860 | $ | 352,231 | ||||||||
Supplementary leverage exposure (g) | $ | 411,912 | $ | 411,289 | $ | 417,565 | $ | 416,937 | ||||||||
Basel III risk-based capital and leverage ratios | ||||||||||||||||
Common equity Tier 1 | 10.6 | % | 10.2 | %(h)(i) | 10.6 | % | 10.2 | %(h)(i) | ||||||||
Tier 1 | 11.9 | % | 11.3 | %(h)(j) | 11.9 | % | 11.3 | %(h)(j) | ||||||||
Total | 14.3 | % | 13.5 | %(h)(k) | 14.2 | % | 13.4 | %(h)(k) | ||||||||
Leverage (l) | 10.2 | % | 9.9 | % | 10.1 | % | 9.9 | % | ||||||||
Supplementary leverage ratio (m) | 8.6 | % | 8.4 | % | 8.5 | % | 8.3 | % | ||||||||
| (a) | Calculated using the regulatory capital methodology applicable to PNC during 2016. |
| (b) | PNC utilizes the pro forma fully phased-in Basel III capital ratios to assess its capital position (without the benefit of phase-ins), |
| (c) | Basel III capital ratios and estimates may be impacted by additional regulatory guidance or analysis and, in the case of those ratios calculated using the advanced approaches, may be subject to variability based on the ongoing evolution, validation and regulatory approval of PNC’s models integral to the calculation of advanced approaches risk-weighted assets. |
| (d) | Primarily includes REIT Preferred Securities for transitional and pro forma fully phased-in. |
| (e) | Includes credit and market risk-weighted assets. |
| (f) | Basel III advanced approaches risk-weighted assets are estimated based on the Basel III advanced approaches rules, and include credit, market, and operational risk-weighted assets. During the parallel run qualification phase PNC has refined the data, models, and internal processes used as part of the advanced approaches for determining risk-weighted assets. We anticipate additional refinements to this estimate through the parallel run qualification phase. |
| (g) | Supplementary leverage exposure is the sum of Adjusted average assets and certain off-balance sheet exposures including undrawn credit commitments and derivative potential future exposures. |
| (h) | Pro forma fully phased-in Basel III capital ratio based on Basel III standardized approach risk-weighted assets and rules. |
(continued on following page)
The PNC Financial Services Group, Inc. –Form 10-Q15
(continued from previous page)
| (i) | For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Common equity Tier 1 capital ratio estimate is 11.2%. This capital ratio is calculated using pro forma fully phased-in Common equity Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets. |
14 The PNC Financial Services Group, Inc. –Form 10-Q
| (j) | For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Tier 1 risk-based capital ratio estimate is 12.4%. This capital ratio is calculated using fully phased-in Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets. |
| (k) | For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Total capital risk-based capital ratio estimate is 13.8%. This ratio is calculated using fully phased-in Total Basel III capital, which under the advanced approaches, Additional Tier 2 capital includes allowance for loan and lease losses in excess of Basel expected credit losses, if any, up to 0.6% of credit risk related risk-weighted assets, and dividing by estimated Basel III advanced approach risk-weighted assets. |
| (l) | Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets. |
| (m) | Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure. As advanced approaches banking organizations, PNC and PNC Bank will be subject to a 3% minimum supplementary leverage ratio effective January 1, 2018. |
As a result of the staggered effective dates of the final U.S. Basel III regulatory capital rules (Basel III rules), as well as the fact that PNC remains in the parallel run qualification phase for the advanced approaches, PNC’s regulatory risk-based ratios in 2016 are calculated using the standardized approach for determining risk-weighted assets, and the definitions of, and deductions from, regulatory capital under the Basel III rules (as such definitions and deductions are phased-in for 2016). We refer to the capital ratios calculated using the phased-in Basel III provisions in effect for 2016 and, for the risk-based ratios, standardized approach risk-weighted assets, as the 2016 Transitional Basel III ratios. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, past due exposures, equity exposures and securitization exposures are generally subject to higher risk weights than other types of exposures.
Under the Basel III rules adopted by the U.S. banking agencies, significant common stock investments in unconsolidated financial institutions, mortgage servicing rights and deferred tax assets must be deducted from capital (subject to a phase-in schedule and net of associated deferred tax liabilities) to the extent they individually exceed 10%, or in the aggregate exceed 15%, of the institution’s adjusted common equity Tier 1 capital. Also, Basel III regulatory capital includes (subject to a phase-in schedule) accumulated other comprehensive income related to securities currently and previously held as available for sale, as well as pension and other postretirement plans.
Federal banking regulators have stated that they expect the largest U.S. bank holding companies, including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largest U.S. bank holding companies, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers through estimated stress scenarios. We seek to manage our capital consistent with these regulatory principles, and believe that our JuneSeptember 30, 2016 capital levels were aligned with them.
At JuneSeptember 30, 2016, PNC and PNC Bank, our sole bank subsidiary, were both considered “well capitalized,” based on applicable U.S. regulatory capital ratio requirements. To qualify as “well capitalized”, PNC must have Transitional Basel III capital ratios of at least 6% for Tier 1 risk-based
capital and 10% for Total risk-based capital, and PNC Bank must have Transitional Basel III capital ratios of at least 6.5% for Common equity Tier 1 risk-based capital, 8% for Tier 1 risk-based capital, 10% for Total risk-based capital, and a Leverage ratio of at least 5%.
We provide additional information regarding regulatory capital requirements and some of their potential impacts on PNC in the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 19 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K. See the Statistical Information (Unaudited) section of this Report for details on PNC’s December 31, 2015 and JuneSeptember 30, 2015 Transitional Basel III and Pro forma fully phased-in Basel III common equity tier 1 capital ratios.
OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES
We engage in a variety of activities that involve unconsolidated entities or that are otherwise not reflected in our Consolidated Balance Sheet that are generally referred to as “off-balance sheet arrangements.” Additional information on these types of activities is included in our 2015 Form 10-K and in the following sections of this Report:
Commitments, including contractual obligations and other commitments, included within the Risk Management section of this Financial Review,
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements, and
Note 13 Commitments and Guarantees in the Notes To Consolidated Financial Statements.
PNC consolidates variable interest entities (VIEs) when we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.
A summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements, as of JuneSeptember 30, 2016 and December 31, 2015, is included in Note 2 of this Report.
16The PNC Financial Services Group, Inc. –Form 10-Q15
Trust Preferred Securities and REIT Preferred Securities
See Note 11 Borrowed Funds and Note 16 Equity in the Notes To Consolidated Financial Statements in Item 8 of our 2015 Form 10-K for additional information on trust preferred securities issued by PNC Capital Trust C and REIT preferred securities issued by PNC Preferred Funding Trust I and PNC Preferred Funding Trust II including information on contractual limitations potentially imposed on payments (including dividends) with respect to PNC and PNC Bank’s equity capital securities.
In addition to the following, see Note 6 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for further information regarding fair value.
The following table summarizes the assets and liabilities measured at fair value on a recurring basis at JuneSeptember 30, 2016 and December 31, 2015, respectively, and the portions of such assets and liabilities that are classified within Level 3 of the valuation hierarchy. Level 3 assets and liabilities are those where the fair value is estimated using significant unobservable inputs.
Table 17:16: Fair Value Measurements – Summary
| June 30, 2016 | December 31, 2015 | September 30, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||
| Dollars in millions | Total Fair Value | Level 3 | Total Fair Value | Level 3 | Total Fair Value | Level 3 | Total Fair Value | Level 3 | ||||||||||||||||||||||||
Total assets | $ | 73,459 | $ | 8,188 | $ | 68,804 | $ | 8,606 | $ | 78,010 | $ | 7,929 | $ | 68,804 | $ | 8,606 | ||||||||||||||||
Total assets at fair value as a percentage of consolidated assets | 20 | % | 19 | % | 21 | % | 19 | % | ||||||||||||||||||||||||
Level 3 assets as a percentage of total assets at fair value | 11 | % | 13 | % | 10 | % | 13 | % | ||||||||||||||||||||||||
Level 3 assets as a percentage of consolidated assets | 2 | % | 2 | % | 2 | % | 2 | % | ||||||||||||||||||||||||
Total liabilities | $ | 7,197 | $ | 406 | $ | 4,892 | $ | 495 | $ | 6,040 | $ | 424 | $ | 4,892 | $ | 495 | ||||||||||||||||
Total liabilities at fair value as a percentage of consolidated liabilities | 2 | % | 2 | % | 2 | % | 2 | % | ||||||||||||||||||||||||
Level 3 liabilities as a percentage of total liabilities at fair value | 6 | % | 10 | % | 7 | % | 10 | % | ||||||||||||||||||||||||
Level 3 liabilities as a percentage of consolidated liabilities | <1 | % | <1 | % | <1 | % | <1 | % | ||||||||||||||||||||||||
We have six reportable business segments:
Retail Banking
Corporate & Institutional Banking
Asset Management Group
Residential Mortgage Banking
BlackRock
Non-Strategic Assets Portfolio
Business segment results, including the basis of presentation of inter-segment revenues, and a description of each business are included in Note 14 Segment Reporting included in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report. Certain amounts included in this Business Segments Review and the Business Segments Highlights in the Executive Summary section of this Financial Review differ from those amounts shown in Note 14, primarily due to the presentation in this Financial Review of business net interest revenue on a taxable-equivalent basis.
Net interest income in business segment results reflects PNC’s internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors.
16The PNC Financial Services Group, Inc. –Form 10-Q17
Retail Banking
(Unaudited)
Table 18:17: Retail Banking Table
Six months ended June 30 Dollars in millions, except as noted | Change | |||||||||||||||||||||||||||||||
| 2016 | 2015 | $ | % | |||||||||||||||||||||||||||||
Nine months ended September 30 Dollars in millions, except as noted | Change | |||||||||||||||||||||||||||||||
| 2016 | 2015 | $ | % | |||||||||||||||||||||||||||||
Income Statement | ||||||||||||||||||||||||||||||||
Net interest income | $ | 2,231 | $ | 2,083 | $ | 148 | 7 | % | $ | 3,351 | $ | 3,152 | $ | 199 | 6 | % | ||||||||||||||||
Noninterest income | 1,101 | 1,078 | 23 | 2 | % | 1,628 | 1,652 | (24 | ) | (1 | )% | |||||||||||||||||||||
Total revenue | 3,332 | 3,161 | 171 | 5 | % | 4,979 | 4,804 | 175 | 4 | % | ||||||||||||||||||||||
Provision for credit losses | 106 | 94 | 12 | 13 | % | 210 | 151 | 59 | 39 | % | ||||||||||||||||||||||
Noninterest expense | 2,318 | 2,368 | (50 | ) | (2 | )% | 3,509 | 3,558 | (49 | ) | (1 | )% | ||||||||||||||||||||
Pretax earnings | 908 | 699 | 209 | 30 | % | 1,260 | 1,095 | 165 | 15 | % | ||||||||||||||||||||||
Income taxes | 333 | 256 | 77 | 30 | % | 462 | 401 | 61 | 15 | % | ||||||||||||||||||||||
Earnings | $ | 575 | $ | 443 | $ | 132 | 30 | % | $ | 798 | $ | 694 | $ | 104 | 15 | % | ||||||||||||||||
Average Balance Sheet | ||||||||||||||||||||||||||||||||
Loans | ||||||||||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||
Home equity | $ | 26,526 | $ | 27,964 | $ | (1,438 | ) | (5 | )% | $ | 26,351 | $ | 27,810 | $ | (1,459 | ) | (5 | )% | ||||||||||||||
Automobile | 10,882 | 10,340 | 542 | 5 | % | 11,040 | 10,374 | 666 | 6 | % | ||||||||||||||||||||||
Education | 5,754 | 6,506 | (752 | ) | (12 | )% | 5,653 | 6,402 | (749 | ) | (12 | )% | ||||||||||||||||||||
Credit cards | 4,755 | 4,446 | 309 | 7 | % | 4,818 | 4,476 | 342 | 8 | % | ||||||||||||||||||||||
Other | 1,807 | 1,887 | (80 | ) | (4 | )% | 1,800 | 1,886 | (86 | ) | (5 | )% | ||||||||||||||||||||
Total consumer | 49,724 | 51,143 | (1,419 | ) | (3 | )% | 49,662 | 50,948 | (1,286 | ) | (3 | )% | ||||||||||||||||||||
Commercial and commercial real estate | 12,435 | 12,812 | (377 | ) | (3 | )% | 12,268 | 12,744 | (476 | ) | (4 | )% | ||||||||||||||||||||
Residential mortgage | 567 | 731 | (164 | ) | (22 | )% | 546 | 704 | (158 | ) | (22 | )% | ||||||||||||||||||||
Total loans | $ | 62,726 | $ | 64,686 | $ | (1,960 | ) | (3 | )% | $ | 62,476 | $ | 64,396 | $ | (1,920 | ) | (3 | )% | ||||||||||||||
Total assets | $ | 71,880 | $ | 73,691 | $ | (1,811 | ) | (2 | )% | $ | 71,658 | $ | 73,430 | $ | (1,772 | ) | (2 | )% | ||||||||||||||
Deposits | ||||||||||||||||||||||||||||||||
Noninterest-bearing demand | $ | 26,577 | $ | 23,015 | $ | 3,562 | 15 | % | $ | 26,895 | $ | 23,353 | $ | 3,542 | 15 | % | ||||||||||||||||
Interest-bearing demand | 38,378 | 36,054 | 2,324 | 6 | % | 38,432 | 36,009 | 2,423 | 7 | % | ||||||||||||||||||||||
Money market | 48,739 | 54,071 | (5,332 | ) | (10 | )% | 47,230 | 54,775 | (7,545 | ) | (14 | )% | ||||||||||||||||||||
Savings | 23,954 | 13,245 | 10,709 | 81 | % | 25,738 | 13,471 | 12,267 | 91 | % | ||||||||||||||||||||||
Certificates of deposit | 15,199 | 17,032 | (1,833 | ) | (11 | )% | 15,008 | 16,763 | (1,755 | ) | (10 | )% | ||||||||||||||||||||
Total deposits | $ | 152,847 | $ | 143,417 | $ | 9,430 | 7 | % | $ | 153,303 | $ | 144,371 | $ | 8,932 | 6 | % | ||||||||||||||||
Performance Ratios | ||||||||||||||||||||||||||||||||
Return on average assets | 1.61 | % | 1.21 | % | 1.49 | % | 1.26 | % | ||||||||||||||||||||||||
Noninterest income to total revenue | 33 | % | 34 | % | 33 | % | 34 | % | ||||||||||||||||||||||||
Efficiency | 70 | % | 75 | % | 70 | % | 74 | % | ||||||||||||||||||||||||
Supplemental Noninterest Income Information | ||||||||||||||||||||||||||||||||
Service charges on deposits | $ | 306 | $ | 294 | $ | 12 | 4 | % | $ | 474 | $ | 459 | $ | 15 | 3 | % | ||||||||||||||||
Brokerage | $ | 149 | $ | 138 | $ | 11 | 8 | % | $ | 222 | $ | 212 | $ | 10 | 5 | % | ||||||||||||||||
Consumer services | $ | 525 | $ | 487 | $ | 38 | 8 | % | $ | 792 | $ | 747 | $ | 45 | 6 | % | ||||||||||||||||
Other Information (a) | ||||||||||||||||||||||||||||||||
Customer-related statistics (average): | ||||||||||||||||||||||||||||||||
Non-teller deposit transactions (b) | 48 | % | 41 | % | 49 | % | 43 | % | ||||||||||||||||||||||||
Digital consumer customers (c) | 57 | % | 51 | % | 57 | % | 52 | % | ||||||||||||||||||||||||
Credit-related statistics: | ||||||||||||||||||||||||||||||||
Nonperforming assets (d) | $ | 995 | $ | 1,127 | $ | (132 | ) | (12 | )% | $ | 970 | $ | 1,092 | $ | (122 | ) | (11 | )% | ||||||||||||||
Net charge-offs | $ | 171 | $ | 185 | $ | (14 | ) | (8 | )% | $ | 260 | $ | 251 | $ | 9 | 4 | % | |||||||||||||||
Annualized net charge-off ratio | .55 | % | .58 | % | ||||||||||||||||||||||||||||
Other statistics: | ||||||||||||||||||||||||||||||||
ATMs | 8,993 | 8,880 | 113 | 1 | % | 9,045 | 8,996 | 49 | 1 | % | ||||||||||||||||||||||
Branches (e) | 2,601 | 2,644 | (43 | ) | (2 | )% | 2,600 | 2,645 | (45 | ) | (2 | )% | ||||||||||||||||||||
Universal branches (f) | 467 | 347 | 120 | 35 | % | 475 | 355 | 120 | 34 | % | ||||||||||||||||||||||
Brokerage account client assets (billions) (g) | $ | 44 | $ | 44 | – | – | $ | 44 | $ | 42 | $ | 2 | 5 | % | ||||||||||||||||||
(continued on following page)
18The 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 |
| (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 $575$798 million in the first sixnine months of 2016 compared with earnings of $443$694 million for the first sixnine months of 2015. The increase in earnings was driven by higher revenue, including both net interest income and noninterest income, as well as a decrease in noninterest expense.expense, partially offset by increased 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 sixnine months of 2016, approximately 57% of consumer customers used non-teller channels for the majority of their transactions compared with 51%52% for the same period in 2015.
Deposit transactions via ATM and mobile channels increased to 48%49% of total deposit transactions in the first sixnine months of 2016 compared with 41%43% for the same period in 2015.
Integral to PNC’s retail branch transformation strategy, 467PNC had a network of 2,600 branches orand 9,045 ATMs at September 30, 2016. Approximately 18% of the branch network operateoperates 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 2,601 branches and 8,993 ATMs at June 30, 2016.model.
Instant debit card issuance, which enables us to print a customer’s debit card in minutes, was available in 1,7761,812 branches, or 68%70% of the branch network, as of JuneSeptember 30, 2016.
Net interest income increased 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.
GrowthThe decline in noninterest income primarily resulted fromcompared 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 in 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 to provide diverse product and service offerings, which drove increasedcontributed to higher consumer service fee income from payment-related products, specifically in debit card, credit card and merchant services, as well as increased brokerage fees. Noninterest income in the first six months of 2016 also reflected net gains of $63 million on sales of 1.35 million Visa Class B common shares compared with a net gain of $79 million on the sale of 1.0 million shares in the second quarter of 2015. Net gains on Visa sales include derivative fair value adjustments related to swap agreements with purchasers of Visa Class B common shares in connection with all prior sales.
The decline in noninterest expense in the comparison was due to a decrease in compensation expense, lower marketing expense and reduced branch network
expenses as a result of network transformation and transaction migration to lower cost digital and ATM channels.
Provision for credit losses increased compared to the same period a 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 sixnine months of 2016, average total deposits of $152.8 billion increased compared to the same period a year ago, driven by growth in savings deposits reflecting in part a shift from money market deposits to relationship-based savings products. Additionally, demand deposit categories increased, partially offset by a decline in certificates of deposit due 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.strategy. The declinedecrease in average total loans in the comparison was due to 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 as pay-downs and payoffs on loans exceeded new originated volume, consistent with lower mortgage refinance demand.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 752were 748 at both JuneSeptember 30, 2016 and 752 at December 31, 2015.
Average commercial and commercial real estate loans declined as pay-downs and payoffs on loans exceeded new volume.
Average automobile loans, comprised of both direct and indirect auto loans, increased primarily due to portfolio growth in previously underpenetrated markets.
Average credit card balances increased as a result of efforts to increase credit card share of wallet through organic growth.
In the first sixnine months of 2016, average loan balances for the remainder of the portfolio declined $996$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 decreased compared to JuneSeptember 30, 2015 driven by declines in both consumer and commercial nonperforming loans.
The PNC Financial Services Group, Inc. –Form 10-Q 19
Corporate & Institutional Banking
(Unaudited)
Table 19:18: Corporate & Institutional Banking Table
Six months ended June 30 Dollars in millions, except as noted | Change | |||||||||||||||
| 2016 | 2015 | $ | % | |||||||||||||
Income Statement | ||||||||||||||||
Net interest income | $ | 1,724 | $ | 1,726 | $ | (2 | ) | – | ||||||||
Noninterest income | 967 | 921 | 46 | 5 | % | |||||||||||
Total revenue | 2,691 | 2,647 | 44 | 2 | % | |||||||||||
Provision for credit losses | 176 | 37 | 139 | 376 | % | |||||||||||
Noninterest expense | 1,070 | 1,061 | 9 | 1 | % | |||||||||||
Pretax earnings | 1,445 | 1,549 | (104 | ) | (7 | )% | ||||||||||
Income taxes | 524 | 559 | (35 | ) | (6 | )% | ||||||||||
Earnings | $ | 921 | $ | 990 | $ | (69 | ) | (7 | )% | |||||||
Average Balance Sheet | ||||||||||||||||
Loans held for sale | $ | 754 | $ | 1,048 | $ | (294 | ) | (28 | )% | |||||||
Loans | ||||||||||||||||
Commercial | $ | 87,193 | $ | 85,228 | $ | 1,965 | 2 | % | ||||||||
Commercial real estate | 26,157 | 22,319 | 3,838 | 17 | % | |||||||||||
Equipment lease financing | 6,856 | 6,920 | (64 | ) | (1 | )% | ||||||||||
Total commercial lending | 120,206 | 114,467 | 5,739 | 5 | % | |||||||||||
Consumer | 470 | 1,113 | (643 | ) | (58 | )% | ||||||||||
Total loans | $ | 120,676 | $ | 115,580 | $ | 5,096 | 4 | % | ||||||||
Total assets | $ | 136,913 | $ | 131,711 | $ | 5,202 | 4 | % | ||||||||
Deposits | ||||||||||||||||
Noninterest-bearing demand | $ | 45,588 | $ | 47,449 | $ | (1,861 | ) | (4 | )% | |||||||
Money market | 21,185 | 22,002 | (817 | ) | (4 | )% | ||||||||||
Other | 12,137 | 9,368 | 2,769 | 30 | % | |||||||||||
Total deposits | $ | 78,910 | $ | 78,819 | $ | 91 | – | |||||||||
Performance Ratios | ||||||||||||||||
Return on average assets | 1.36 | % | 1.52 | % | ||||||||||||
Noninterest income to total revenue | 36 | % | 35 | % | ||||||||||||
Efficiency | 40 | % | 40 | % | ||||||||||||
Other Information | ||||||||||||||||
Commercial loan servicing portfolio (a) (b) | $ | 459 | $ | 436 | $ | 23 | 5 | % | ||||||||
Consolidated revenue from: (c) | ||||||||||||||||
Treasury Management (d) | $ | 762 | $ | 653 | $ | 109 | 17 | % | ||||||||
Capital Markets (d) | $ | 387 | $ | 385 | $ | 2 | 1 | % | ||||||||
Commercial mortgage banking activities | ||||||||||||||||
Commercial mortgage loans held for sale (e) | $ | 50 | $ | 73 | $ | (23 | ) | (32 | )% | |||||||
Commercial mortgage loan servicing income (f) | 132 | 121 | 11 | 9 | % | |||||||||||
Commercial mortgage servicing rights valuation, net of economic hedge (g) | 21 | 24 | (3 | ) | (13 | )% | ||||||||||
Total | $ | 203 | $ | 218 | $ | (15 | ) | (7 | )% | |||||||
Average Loans (by C&IB business) | ||||||||||||||||
Corporate Banking | $ | 56,933 | $ | 58,323 | $ | (1,390 | ) | (2 | )% | |||||||
Real Estate | 35,989 | 30,248 | 5,741 | 19 | % | |||||||||||
Business Credit | 14,769 | 14,415 | 354 | 2 | % | |||||||||||
Equipment Finance | 11,079 | 10,938 | 141 | 1 | % | |||||||||||
Other | 1,906 | 1,656 | 250 | 15 | % | |||||||||||
Total average loans | $ | 120,676 | $ | 115,580 | $ | 5,096 | 4 | % | ||||||||
Net carrying amount of commercial mortgage servicing rights (a) | $ | 448 | $ | 543 | $ | (95 | ) | (17 | )% | |||||||
Credit-related statistics: | ||||||||||||||||
Nonperforming assets (a) (h) | $ | 752 | $ | 463 | $ | 289 | 62 | % | ||||||||
Net charge-offs / (recoveries) | $ | 100 | $ | (20 | ) | $ | 120 | 600 | % | |||||||
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 September 30. |
| (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 revenue. |
| (h) | Includes nonperforming loans of |
Corporate & Institutional Banking earned $921 million$1.5 billion in the first sixnine months of both 2016 compared with earnings of $990and 2015. Earnings decreased by $34 million for the first six months of 2015. The decrease in earnings was primarily due to an increase in the provision for credit losses, partially offset by higher noninterest income. We continue to focus on building client relationships where the risk-return profile is attractive, including in the Southeast.
Net interest income decreased slightly in the comparison, asdriven by continued interest rate spread compression on loans and lower purchase accounting accretion, which were essentiallymostly offset by the impact of higher average loans and deposits as well as interest rate spread expansion on deposits.
Higher noninterest income in the comparison was primarily due to an equity investment gain, an increase in gains on asset sales, higher capital markets-related revenue and higher merger and acquisition advisory fees, structuring fees on asset securitizations and loan syndicationtreasury management fees. These increases were partially offset by lower multifamilynoninterest income from commercial mortgage loan servicing and commercial mortgage loans originatedheld for sale to agencies and lower revenue associated with credit valuations for customer-related derivative activities.
Overall credit quality for the first sixnine months of 2016 remained relatively stable, except for deterioration related toof certain energy related loans, which was the primary driver for the increasesincrease in provision for credit losses, net charge-offs and nonperforming assets in the year over year comparisons. Increased provision for credit losses also reflected the impact of continued loan growth.
Noninterest expense increased nominally in the comparison reflecting disciplineddue 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 in the comparison due to strong growth in Real Estate, 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. Higher average loans for this business waswere primarily due to growth in commercial lending driven by higher term and REIT 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 ongoing capital and liquidity management activities, partially offset by increased lending to large corporate clients.
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 in the comparison due to new originations.
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 nine months of 2016, stable with the first nine months of 2015.
|
Average deposits increased slightlynominally compared to the prior year period, as a result of interest-bearing demand deposit growth mostlywas essentially offset by decreases in noninterest-bearing demand deposits and money market deposits.
Growth in the commercial loan servicing portfolio was driven by servicing additions from new and existing customers exceeding 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 19 in the Corporate & Institutional Banking portion of this Business Segments Review section18 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 in the comparison to the 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 related services. Revenue from capital markets-related products and services increased slightly in the comparison as higher merger and acquisition advisory fees and structuring fees on asset securitizations and loan syndication fees were mostly offset by lower revenue associated with credit valuations for customer-related derivative activities and lower equity capital markets advisory fees.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 in the comparison due to lower multifamilyrevenue from commercial mortgage loans originatedheld for sale, to agencies, partially offset by higher commercial mortgage loan servicing revenue.income.
22The PNC Financial Services Group, Inc. –Form 10-Q21
Asset Management Group
(Unaudited)
Table 20:19: Asset Management Group Table
Six months ended June 30 Dollars in millions, except as noted | Change | |||||||||||||||||||||||||||||||
| 2016 | 2015 | $ | % | |||||||||||||||||||||||||||||
Nine months ended September 30 Dollars in millions, except as noted | Change | |||||||||||||||||||||||||||||||
| 2016 | 2015 | $ | % | |||||||||||||||||||||||||||||
Income Statement | ||||||||||||||||||||||||||||||||
Net interest income | $ | 153 | $ | 144 | $ | 9 | 6 | % | $ | 227 | $ | 215 | $ | 12 | 6 | % | ||||||||||||||||
Noninterest income | 416 | 451 | (35 | ) | (8 | )% | 636 | 658 | (22 | ) | (3 | )% | ||||||||||||||||||||
Total revenue | 569 | 595 | (26 | ) | (4 | )% | 863 | 873 | (10 | ) | (1 | )% | ||||||||||||||||||||
Provision for credit losses | 3 | 13 | (10 | ) | (77 | )% | – | 11 | (11 | ) | (100 | )% | ||||||||||||||||||||
Noninterest expense | 412 | 425 | (13 | ) | (3 | )% | 618 | 636 | (18 | ) | (3 | )% | ||||||||||||||||||||
Pretax earnings | 154 | 157 | (3 | ) | (2 | )% | 245 | 226 | 19 | 8 | % | |||||||||||||||||||||
Income taxes | 57 | 58 | (1 | ) | (2 | )% | 90 | 83 | 7 | 8 | % | |||||||||||||||||||||
Earnings | $ | 97 | $ | 99 | $ | (2 | ) | (2 | )% | $ | 155 | $ | 143 | $ | 12 | 8 | % | |||||||||||||||
Average Balance Sheet | ||||||||||||||||||||||||||||||||
Loans | ||||||||||||||||||||||||||||||||
Consumer | $ | 5,565 | $ | 5,669 | $ | (104 | ) | (2 | )% | $ | 5,493 | $ | 5,656 | $ | (163 | ) | (3 | )% | ||||||||||||||
Commercial and commercial real estate | 778 | 938 | (160 | ) | (17 | )% | 759 | 901 | (142 | ) | (16 | )% | ||||||||||||||||||||
Residential mortgage | 1,014 | 878 | 136 | 15 | % | 1,032 | 899 | 133 | 15 | % | ||||||||||||||||||||||
Total loans | $ | 7,357 | $ | 7,485 | $ | (128 | ) | (2 | )% | $ | 7,284 | $ | 7,456 | $ | (172 | ) | (2 | )% | ||||||||||||||
Total assets | $ | 7,822 | $ | 7,974 | $ | (152 | ) | (2 | )% | $ | 7,743 | $ | 7,922 | $ | (179 | ) | (2 | )% | ||||||||||||||
Deposits | ||||||||||||||||||||||||||||||||
Noninterest-bearing demand | $ | 1,400 | $ | 1,344 | $ | 56 | 4 | % | $ | 1,409 | $ | 1,207 | $ | 202 | 17 | % | ||||||||||||||||
Interest-bearing demand | 4,183 | 4,127 | 56 | 1 | % | 4,069 | 4,126 | (57 | ) | (1 | )% | |||||||||||||||||||||
Money market | 4,494 | 4,873 | (379 | ) | (8 | )% | 4,278 | 5,072 | (794 | ) | (16 | )% | ||||||||||||||||||||
Savings | 1,783 | 171 | 1,612 | 943 | % | 2,032 | 193 | 1,839 | 953 | % | ||||||||||||||||||||||
Other | 276 | 285 | (9 | ) | (3 | )% | 275 | 279 | (4 | ) | (1 | )% | ||||||||||||||||||||
Total deposits | $ | 12,136 | $ | 10,800 | $ | 1,336 | 12 | % | $ | 12,063 | $ | 10,877 | $ | 1,186 | 11 | % | ||||||||||||||||
Performance Ratios | ||||||||||||||||||||||||||||||||
Return on average assets | 2.50 | % | 2.50 | % | 2.68 | % | 2.41 | % | ||||||||||||||||||||||||
Noninterest income to total revenue | 73 | % | 76 | % | 74 | % | 75 | % | ||||||||||||||||||||||||
Efficiency | 72 | % | 71 | % | 72 | % | 73 | % | ||||||||||||||||||||||||
Other Information | ||||||||||||||||||||||||||||||||
Total nonperforming assets (a) (b) | $ | 48 | $ | 56 | $ | (8 | ) | (14 | )% | |||||||||||||||||||||||
Total net charge-offs | $ | 6 | $ | 11 | $ | (5 | ) | (45 | )% | |||||||||||||||||||||||
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 | $ | 134 | $ | 1 | 1 | % | $ | 138 | $ | 132 | $ | 6 | 5 | % | ||||||||||||||||
Nondiscretionary client assets under administration | 126 | 128 | (2 | ) | (2 | )% | 128 | 124 | 4 | 3 | % | |||||||||||||||||||||
Total | $ | 261 | $ | 262 | $ | (1 | ) | – | $ | 266 | $ | 256 | $ | 10 | 4 | % | ||||||||||||||||
Discretionary client assets under management | ||||||||||||||||||||||||||||||||
Personal | $ | 84 | $ | 86 | $ | (2 | ) | (2 | )% | $ | 85 | $ | 84 | $ | 1 | 1 | % | |||||||||||||||
Institutional | 51 | 48 | $ | 3 | 6 | % | 53 | 48 | $ | 5 | 10 | % | ||||||||||||||||||||
Total | $ | 135 | $ | 134 | $ | 138 | $ | 132 | ||||||||||||||||||||||||
Equity | $ | 72 | $ | 75 | $ | (3 | ) | (4 | )% | $ | 73 | $ | 70 | $ | 3 | 4 | % | |||||||||||||||
Fixed Income | 40 | 41 | $ | (1 | ) | (2 | )% | 40 | 40 | – | – | |||||||||||||||||||||
Liquidity/Other | 23 | 18 | $ | 5 | 28 | % | 25 | 22 | $ | 3 | 14 | % | ||||||||||||||||||||
Total | $ | 135 | $ | 134 | $ | 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 $9 billion at |
22The PNC Financial Services Group, Inc. –Form 10-Q23
Asset Management Group earned $97$155 million through the first sixnine months of 2016 compared with earnings of $99$143 million forin the first six monthssame period of 2015. Earnings for the first sixnine months of 2016 decreased compared with the first six months of 2015increased due to lower revenue, partially offset by lower noninterest expense and a decline in the provision for credit losses.losses, partially offset by decreased revenue.
TotalThe decrease in total revenue declined in the comparison due towas driven by lower noninterest income, reflectingpartially 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, and lower average equity markets,which was partially offset by higher net interest income.business growth.
Noninterest expense declineddecreased in the first nine months of 2016 compared to the 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 nearly 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 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.funds and investment strategies. Institutional Asset Management is strengthening its partnership with Corporate & Institutional Banking to drive growth and is focused on building retirement capabilities and expanding product solutions for all customers.
DiscretionaryAsset Management Group’s discretionary client assets under management increased in the comparison to the prior year, primarily attributable to higher equity market increasesmarkets as of JuneSeptember 30, 2016 compared to the prior year and newnet business activities.growth.
24The PNC Financial Services Group, Inc. –Form 10-Q23
Residential Mortgage Banking
(Unaudited)
Table 21:20: Residential Mortgage Banking Table
| Six months ended June 30 | Change | |||||||||||||||||||||||||||||||
| Nine months ended September 30 | Change | |||||||||||||||||||||||||||||||
| Dollars in millions, except as noted | 2016 | 2015 | $ | % | 2016 | 2015 | $ | % | ||||||||||||||||||||||||
Income Statement | ||||||||||||||||||||||||||||||||
Net interest income | $ | 53 | $ | 60 | $ | (7 | ) | (12 | )% | $ | 81 | $ | 91 | $ | (10 | ) | (11 | )% | ||||||||||||||
Noninterest income | 287 | 353 | (66 | ) | (19 | )% | 450 | 488 | (38 | ) | (8 | )% | ||||||||||||||||||||
Total revenue | 340 | 413 | (73 | ) | (18 | )% | 531 | 579 | (48 | ) | (8 | )% | ||||||||||||||||||||
Provision for credit losses | – | – | – | – | – | 2 | (2 | ) | (100 | )% | ||||||||||||||||||||||
Noninterest expense | 288 | 339 | (51 | ) | (15 | )% | 458 | 510 | (52 | ) | (10 | )% | ||||||||||||||||||||
Pretax earnings | 52 | 74 | (22 | ) | (30 | )% | 73 | 67 | 6 | 9 | % | |||||||||||||||||||||
Income taxes | 19 | 27 | (8 | ) | (30 | )% | 27 | 24 | 3 | 13 | % | |||||||||||||||||||||
Earnings | $ | 33 | $ | 47 | $ | (14 | ) | (30 | )% | $ | 46 | $ | 43 | $ | 3 | 7 | % | |||||||||||||||
Average Balance Sheet | ||||||||||||||||||||||||||||||||
Loans held for sale | $ | 821 | $ | 1,127 | $ | (306 | ) | (27 | )% | $ | 897 | $ | 1,160 | $ | (263 | ) | (23 | )% | ||||||||||||||
Loans | $ | 995 | $ | 1,223 | $ | (228 | ) | (19 | )% | $ | 979 | $ | 1,175 | $ | (196 | ) | (17 | )% | ||||||||||||||
Mortgage servicing rights (MSR) | $ | 949 | $ | 896 | $ | 53 | 6 | % | $ | 913 | $ | 967 | $ | (54 | ) | (6 | )% | |||||||||||||||
Total assets | $ | 6,037 | $ | 7,190 | $ | (1,153 | ) | (16 | )% | $ | 6,078 | $ | 6,962 | $ | (884 | ) | (13 | )% | ||||||||||||||
Total deposits | $ | 2,553 | $ | 2,357 | $ | 196 | 8 | % | $ | 2,685 | $ | 2,415 | $ | 270 | 11 | % | ||||||||||||||||
Performance Ratios | ||||||||||||||||||||||||||||||||
Return on average assets | 1.10 | % | 1.32 | % | 1.01 | % | .83 | % | ||||||||||||||||||||||||
Noninterest income to total revenue | 84 | % | 85 | % | 85 | % | 84 | % | ||||||||||||||||||||||||
Efficiency | 85 | % | 82 | % | 86 | % | 88 | % | ||||||||||||||||||||||||
Supplemental Noninterest Income Information | ||||||||||||||||||||||||||||||||
Loan servicing revenue | ||||||||||||||||||||||||||||||||
Servicing fees | $ | 118 | $ | 94 | $ | 24 | 26 | % | $ | 171 | $ | 143 | $ | 28 | 20 | % | ||||||||||||||||
Mortgage servicing rights valuation, net of economic hedge (a) | $ | 9 | $ | 58 | $ | (49 | ) | (84 | )% | $ | 16 | $ | 70 | $ | (54 | ) | (77 | )% | ||||||||||||||
Loan sales revenue | $ | 159 | $ | 203 | $ | (44 | ) | (22 | )% | $ | 262 | $ | 278 | $ | (16 | ) | (6 | )% | ||||||||||||||
Residential Mortgage Servicing Portfolio(in billions) (b) | ||||||||||||||||||||||||||||||||
Serviced portfolio balance (c) | $ | 126 | $ | 115 | $ | 11 | 10 | % | $ | 126 | $ | 122 | $ | 4 | 3 | % | ||||||||||||||||
Portfolio acquisitions | $ | 11 | $ | 14 | $ | (3 | ) | (21 | )% | $ | 16 | $ | 24 | $ | (8 | ) | (33 | )% | ||||||||||||||
MSR asset value (c) | $ | .8 | $ | 1.0 | $ | (.2 | ) | (20 | )% | $ | .8 | $ | 1.0 | $ | (.2 | ) | (20 | )% | ||||||||||||||
MSR capitalization value (in basis points) (c) | 61 | 88 | (27 | ) | (30 | )% | 65 | 79 | (14 | ) | (18 | )% | ||||||||||||||||||||
Other Information | ||||||||||||||||||||||||||||||||
Loan origination volume (in billions) | $ | 4.5 | $ | 5.5 | $ | (1.0 | ) | (18 | )% | $ | 7.6 | $ | 8.2 | $ | (.6 | ) | (7 | )% | ||||||||||||||
Loan sale margin percentage | 3.33 | % | 3.74 | % | 3.33 | % | 3.43 | % | ||||||||||||||||||||||||
Percentage of originations represented by: | ||||||||||||||||||||||||||||||||
Purchase volume (d) | 44 | % | 41 | % | 43 | % | 46 | % | ||||||||||||||||||||||||
Refinance volume | 56 | % | 59 | % | 57 | % | 54 | % | ||||||||||||||||||||||||
Total nonperforming assets (c) (e) | $ | 65 | $ | 88 | $ | (23 | ) | (26 | )% | |||||||||||||||||||||||
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 |
| (b) | Represents loans serviced for third parties. |
| (c) | As of |
| (d) | Mortgages with borrowers as part of residential real estate purchase transactions. |
| (e) | Includes nonperforming loans of |
24The PNC Financial Services Group, Inc. –Form 10-Q25
Residential Mortgage Banking earned $33$46 million in the first sixnine months of 2016 compared with earnings of $47$43 million forin the first sixnine months of 2015, primarily driven by a decline in noninterest income, partiallyexpense, which was mostly offset by lower noninterest expense.income and net interest 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 $1 billion in the first six months of 2016declined 7% compared to the 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 57% of originations in the first nine months of 2016 and 54% in the first nine months of 2015.
LowerThe decline in net interest income was primarily due to lowerdriven by the decrease in loan originations and lower balances of portfolio loans held for investment.
Noninterest income declined in the comparison, as increased servicing fee income was more than offset by lower benefit from residential mortgage servicing rights valuation, net of economic hedge, and decreased loan sales revenue.
Noninterest expense declined primarily as a result of lower residential mortgage foreclosure-related expenses, including reserve releases of $24 million, as well as lower legal accruals and servicing costs.
BlackRock
(Unaudited)
Information related to our equity investment in BlackRock follows:
Six months ended June 30 Dollars in millions | 2016 | 2015 | ||||||||||||||
Nine months ended September 30 Dollars in millions | 2016 | 2015 | ||||||||||||||
Business segment earnings (a) | $ | 246 | $ | 269 | $ | 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 | June 30 2016 | December 31 2015 | September 30 2016 | December 31 2015 | ||||||||||
Carrying value of PNC’s investment in BlackRock (c) | $ | 6.8 | $6.7 | $ | 6.9 | $ | 6.7 | |||||||
Market value of PNC’s investment in BlackRock (d) | 12.1 | 12.0 | 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 22,21, at JuneSeptember 30, 2016, we held approximately 0.8 million shares of BlackRock Series C Preferred Stock valued at $209$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 6 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.
Our 2015 Form 10-K includes additional information about our investment in BlackRock.
26The PNC Financial Services Group, Inc. –Form 10-Q25
Non-Strategic Assets Portfolio
(Unaudited)
Table 23:22: Non-Strategic Assets Portfolio Table
| Six months ended June 30 | Change | |||||||||||||||||||||||||||||||
| Nine months ended September 30 | Change | |||||||||||||||||||||||||||||||
| Dollars in millions | 2016 | 2015 | $ | % | 2016 | 2015 | $ | % | ||||||||||||||||||||||||
Income Statement | ||||||||||||||||||||||||||||||||
Net interest income | $ | 148 | $ | 212 | $ | (64 | ) | (30 | )% | $ | 220 | $ | 302 | $ | (82 | ) | (27 | )% | ||||||||||||||
Noninterest income | 27 | 18 | 9 | 50 | % | 35 | 34 | 1 | 3 | % | ||||||||||||||||||||||
Total revenue | 175 | 230 | (55 | ) | (24 | )% | 255 | 336 | (81 | ) | (24 | )% | ||||||||||||||||||||
Provision for credit losses (benefit) | 6 | (36 | ) | 42 | 117 | % | (16 | ) | (61 | ) | 45 | 74 | % | |||||||||||||||||||
Noninterest expense | 41 | 50 | (9 | ) | (18 | )% | 57 | 73 | (16 | ) | (22 | )% | ||||||||||||||||||||
Pretax earnings | 128 | 216 | (88 | ) | (41 | )% | 214 | 324 | (110 | ) | (34 | )% | ||||||||||||||||||||
Income taxes | 47 | 79 | (32 | ) | (41 | )% | 79 | 119 | (40 | ) | (34 | )% | ||||||||||||||||||||
Earnings | $ | 81 | $ | 137 | $ | (56 | ) | (41 | )% | $ | 135 | $ | 205 | $ | (70 | ) | (34 | )% | ||||||||||||||
Average Balance Sheet | ||||||||||||||||||||||||||||||||
Loans | ||||||||||||||||||||||||||||||||
Commercial Lending | $ | 704 | $ | 746 | $ | (42 | ) | (6 | )% | |||||||||||||||||||||||
Consumer Lending | ||||||||||||||||||||||||||||||||
Commercial lending | $ | 702 | $ | 742 | $ | (40 | ) | (5 | )% | |||||||||||||||||||||||
Consumer lending | ||||||||||||||||||||||||||||||||
Home equity | 2,081 | 2,937 | (856 | ) | (29 | )% | 2,015 | 2,859 | (844 | ) | (30 | )% | ||||||||||||||||||||
Residential real estate | 3,189 | 4,103 | (914 | ) | (22 | )% | 3,125 | 3,981 | (856 | ) | (22 | )% | ||||||||||||||||||||
Total consumer lending | 5,270 | 7,040 | (1,770 | ) | (25 | )% | 5,140 | 6,840 | (1,700 | ) | (25 | )% | ||||||||||||||||||||
Total loans | 5,974 | 7,786 | (1,812 | ) | (23 | )% | 5,842 | 7,582 | (1,740 | ) | (23 | )% | ||||||||||||||||||||
Other assets (a) | (297 | ) | (692 | ) | 395 | 57 | % | (262 | ) | (702 | ) | 440 | 63 | % | ||||||||||||||||||
Total assets | $ | 5,677 | $ | 7,094 | $ | (1,417 | ) | (20 | )% | $ | 5,580 | $ | 6,880 | $ | (1,300 | ) | (19 | )% | ||||||||||||||
Performance Ratios | ||||||||||||||||||||||||||||||||
Return on average assets | 2.88 | % | 3.89 | % | 3.23 | % | 3.98 | % | ||||||||||||||||||||||||
Noninterest income to total revenue | 15 | % | 8 | % | 14 | % | 10 | % | ||||||||||||||||||||||||
Efficiency | 23 | %�� | 22 | % | 22 | % | 22 | % | ||||||||||||||||||||||||
Other Information | ||||||||||||||||||||||||||||||||
Nonperforming assets (b) (c) | $ | 460 | $ | 616 | $ | (156 | ) | (25 | )% | $ | 433 | $ | 571 | $ | (138 | ) | (24 | )% | ||||||||||||||
Purchased impaired loans (b) (d) | $ | 2,628 | $ | 3,663 | $ | (1,035 | ) | (28 | )% | $ | 2,512 | $ | 3,411 | $ | (899 | ) | (26 | )% | ||||||||||||||
Net charge-offs / (recoveries) | $ | 6 | $ | (7 | ) | $ | 13 | 186 | % | |||||||||||||||||||||||
Net charge-offs (recoveries) | $ | – | $ | (8 | ) | $ | 8 | 100 | % | |||||||||||||||||||||||
Loans (b) | ||||||||||||||||||||||||||||||||
Commercial Lending | $ | 696 | $ | 738 | $ | (42 | ) | (6 | )% | |||||||||||||||||||||||
Consumer Lending | ||||||||||||||||||||||||||||||||
Commercial lending | $ | 693 | $ | 731 | $ | (38 | ) | (5 | )% | |||||||||||||||||||||||
Consumer lending | ||||||||||||||||||||||||||||||||
Home equity | 1,952 | 2,765 | (813 | ) | (29 | )% | 1,826 | 2,586 | (760 | ) | (29 | )% | ||||||||||||||||||||
Residential real estate | 3,062 | 3,941 | (879 | ) | (22 | )% | 2,933 | 3,625 | (692 | ) | (19 | )% | ||||||||||||||||||||
Total consumer lending | 5,014 | 6,706 | (1,692 | ) | (25 | )% | 4,759 | 6,211 | (1,452 | ) | (23 | )% | ||||||||||||||||||||
Total loans | $ | 5,710 | $ | 7,444 | $ | (1,734 | ) | (23 | )% | $ | 5,452 | $ | 6,942 | $ | (1,490 | ) | (21 | )% | ||||||||||||||
| (a) |
| (b) | As of |
| (c) | Includes nonperforming loans of $.4 billion at |
| (d) | Recorded investment of purchased impaired loans related to acquisitions. This segment contained |
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 $81earned $135 million in the first sixnine months of 2016 compared with $137$205 million in the first sixnine months of 2015. Earnings decreased primarily due to a declining loan portfolio and alower benefit from provision for credit losses in the current period compared to a benefit in the prior year period.2016.
26The PNC Financial Services Group, Inc. –Form 10-Q27
Non-Strategic Assets Portfolio overview:
Lower net interest income resulted from lower purchase accounting accretion and the impact of the declining average balance of the loan portfolio.
Noninterest income increased in the comparison, driven by a release of excess reserves for estimated losses on repurchase obligations in the first quarter 2016 related to a settlement.
The change inreduced benefit from provision for credit losses (benefit) was driven by higher commercial recoveries and a releasereleases of reserves in 2015.
Noninterest expense declined due toin the comparison, driven by lower costs of managing and servicing the loan portfolios as the portfolio balance continues to decline.
Average portfolio loans declined in the comparisondecreased due to customer payment activity and portfolio management activities to reduce under-performing assets. The decrease also reflects the impact of our change in derecognition policy effective December 31, 2015 for certain purchasepurchased 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.
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
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.
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.
In August 2015, the FASB issued guidance deferring the mandatory effective date of ASU 2014-09 for one year, to annual reporting periods beginning after December 15, 2017. During 2016, the FASB has also issued three separate ASUs which amend the original standard to clarify guidance regarding principal versus agent considerations, identifying performance obligations and 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.
28The PNC Financial Services Group, Inc. –Form 10-Q27
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 public business entities that are SEC filers 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.
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 sixnine months of 2016, except for certain energy related loans.2016.
Provision for credit losses for the secondthird quarter of 2016 increased modestly to $127$87 million compared to $46$81 million for the secondthird quarter of 2015. For the sixnine months ended JuneSeptember 30, 2016, provision for credit losses increased to $279$366 million compared with $100$181 million for the sixnine months ended JuneSeptember 30, 2015. During the first sixnine months of 2016, the provision included $128$130 million for energy related to energy loans in the oil, gas, and coal sectors compared to $86 million for the first nine months of which $48 million was included2015. The increase in provision also reflected slowing credit quality improvement in the second quarter.commercial and consumer lending portfolios and the impact of continued loan growth.
Nonperforming assets at JuneSeptember 30, 2016 increased $90decreased $50 million compared with December 31, 2015 due to higher nonperforming commercial loans driven by energy related loans, partially offset by declining home equity and residential real estate nonperforming loans, and lower OREOother real estate owned (OREO) and foreclosed assets.assets, partially offset by higher nonperforming commercial loans driven by energy related loans. Nonperforming assets were 0.70%0.64% of total assets at JuneSeptember 30, 2016 compared with 0.68% at December 31, 2015.
28 The PNC Financial Services Group, Inc. –Form 10-Q
Overall loan delinquencies totaled $1.5 billion at JuneSeptember 30, 2016, a decrease of $179$184 million, or 11%, from year-end 2015. The reduction was due in large part to a decrease in accruing government insured consumer lending past due loans of $129 million.
large part to a decrease in accruing government insured residential real estate and education past due loans of $117 million. |
Net charge-offs for the secondthird quarter of 2016 increased to $134$154 million compared to $67$96 million for the secondthird quarter of 2015. For the sixnine months ended JuneSeptember 30, 2016, net charge-offs increased to $283$437 million compared with $170$266 million for the sixnine months ended JuneSeptember 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 June 30, 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 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.
Table 24:23: Nonperforming Assets By Type
Dollars in millions | June 30 2016 | December 31 2015 | Change | September 30 2016 | December 31 2015 | Change | ||||||||||||||||||||||||||
| $ | % | $ | % | |||||||||||||||||||||||||||||
Nonperforming loans | ||||||||||||||||||||||||||||||||
Commercial lending | $ | 768 | $ | 545 | $ | 223 | 41 | % | $ | 691 | $ | 545 | $ | 146 | 27 | % | ||||||||||||||||
Consumer lending (a) | 1,496 | 1,581 | (85 | ) | (5 | )% | 1,455 | 1,581 | (126 | ) | (8 | )% | ||||||||||||||||||||
Total nonperforming loans (b) (c) | 2,264 | 2,126 | 138 | 6 | % | 2,146 | 2,126 | 20 | 1 | % | ||||||||||||||||||||||
OREO and foreclosed assets | 251 | 299 | (48 | ) | (16 | )% | 229 | 299 | (70 | ) | (23 | )% | ||||||||||||||||||||
Total nonperforming assets | $ | 2,515 | $ | 2,425 | $ | 90 | 4 | % | $ | 2,375 | $ | 2,425 | $ | (50 | ) | (2 | )% | |||||||||||||||
Amount of TDRs included in nonperforming loans | $ | 1,240 | $ | 1,119 | $ | 121 | 11 | % | $ | 1,177 | $ | 1,119 | $ | 58 | 5 | % | ||||||||||||||||
Percentage of total nonperforming loans | 55 | % | 53 | % | 55 | % | 53 | % | ||||||||||||||||||||||||
Nonperforming loans to total loans | 1.08 | % | 1.03 | % | 1.02 | % | 1.03 | % | ||||||||||||||||||||||||
Nonperforming assets to total loans, OREO and foreclosed assets | 1.20 | % | 1.17 | % | 1.13 | % | 1.17 | % | ||||||||||||||||||||||||
Nonperforming assets to total assets | .70 | % | .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 $.4 billion and $.6 billion at |
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 | 947 | 708 | 1,317 | 1,089 | ||||||||||||
Charge-offs and valuation adjustments | (319 | ) | (253 | ) | (472 | ) | (367 | ) | ||||||||
Principal activity, including paydowns and payoffs | (247 | ) | (377 | ) | (418 | ) | (544 | ) | ||||||||
Asset sales and transfers to loans held for sale | (166 | ) | (190 | ) | (279 | ) | (296 | ) | ||||||||
Returned to performing status | (125 | ) | (190 | ) | (198 | ) | (272 | ) | ||||||||
June 30 | $ | 2,515 | $ | 2,578 | ||||||||||||
September 30 | $ | 2,375 | $ | 2,490 | ||||||||||||
As of JuneSeptember 30, 2016, approximately 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 JuneSeptember 30, 2016, commercial lending
nonperforming loans were carried at approximately 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 71%72% of total residential real estate nonperforming loans at JuneSeptember 30, 2016, up from 68% at December 31, 2015. Home equity TDRs comprise 52%53% of home equity nonperforming loans at JuneSeptember 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
The PNC Financial Services Group, Inc. –Form 10-Q29
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 JuneSeptember 30, 2016, our largest nonperforming asset was $41$50 million in the Real Estate, RentalMining, Quarrying, Oil and LeasingGas 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 41%represented 44% and 13% of total commercial lending nonperforming loans and total nonperforming assets, respectively, as of JuneSeptember 30, 2016.
Table 26:25: OREO and Foreclosed Assets
June 30 2016 | December 31 2015 | Change | September 30 2016 | December 31 2015 | Change | |||||||||||||||||||||||||
| In millions | $ | % | $ | % | ||||||||||||||||||||||||||
Other real estate owned (OREO): | ||||||||||||||||||||||||||||||
Residential properties | $ | 125 | $146 | $ | (21 | ) | (14 | )% | $ | 116 | $ | 146 | $ | (30 | ) | (21 | )% | |||||||||||||
Residential development properties | 24 | 31 | (7 | ) | (23 | )% | 23 | 31 | (8 | ) | (26 | )% | ||||||||||||||||||
Commercial properties | 90 | 102 | (12 | ) | (12 | )% | 78 | 102 | (24 | ) | (24 | )% | ||||||||||||||||||
Total OREO | 239 | 279 | (40 | ) | (14 | )% | 217 | 279 | (62 | ) | (22 | )% | ||||||||||||||||||
Foreclosed and other assets | 12 | 20 | (8 | ) | (40 | )% | 12 | 20 | (8 | ) | (40 | )% | ||||||||||||||||||
Total OREO and foreclosed assets | $ | 251 | $299 | $ | (48 | ) | (16 | )% | $ | 229 | $ | 299 | $ | (70 | ) | (23 | )% | |||||||||||||
Total OREO and foreclosed assets were 10% of total nonperforming assets at JuneSeptember 30, 2016, compared to 12% at December 31, 2015. As of both JuneSeptember 30, 2016, and December 31, 2015, 59%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.
The PNC Financial Services Group, Inc. –Form 10-Q31
Table 27:26: Accruing Loans Past Due (a)
| Amount | Percentage of Total Loans Outstanding | Amount | Percentage of Total Loans Outstanding | |||||||||||||||||||||||||||||||||||
June 30 2016 | December 31 2015 | Change | June 30 2016 | December 31 2015 | September 30 2016 | December 31 2015 | Change | September 30 2016 | December 31 2015 | |||||||||||||||||||||||||||||
| Dollars in millions | $ | % | $ | % | ||||||||||||||||||||||||||||||||||
Early stage loan delinquencies | ||||||||||||||||||||||||||||||||||||||
Accruing loans past due 30 to 59 days | $ | 464 | $ 511 | $ | (47 | ) | (9 | )% | .22% | .25% | $ | 454 | $ | 511 | $ | (57 | ) | (11 | )% | .22% | .25% | |||||||||||||||||
Accruing loans past due 60 to 89 days | 243 | 248 | (5 | ) | (2 | )% | .12% | .12% | 236 | 248 | (12 | ) | (5 | )% | .11% | .12% | ||||||||||||||||||||||
Total | 707 | 759 | (52 | ) | (7 | )% | .34% | .37% | 690 | 759 | (69 | ) | (9 | )% | .33% | .37% | ||||||||||||||||||||||
Late stage loan delinquencies | ||||||||||||||||||||||||||||||||||||||
Accruing loans past due 90 days or more | 754 | 881 | (127 | ) | (14 | )% | .36% | .43% | 766 | 881 | (115 | ) | (13 | )% | .36% | .43% | ||||||||||||||||||||||
Total | $ | 1,461 | $1,640 | $ | (179 | ) | (11 | )% | .70% | .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 at JuneSeptember 30, 2016 compared to December 31, 2015 due primarily to reductions in consumer early stage delinquencies.
Accruing loans past due 90 days or more decreased at JuneSeptember 30, 2016 compared to December 31, 2015 driven by declines in government insured residential real estate and other consumer lending loans. TheseAccruing loans past due 90 days or more are not included in nonperforming loans and continue to accrue interest because they are well secured by collateral and are in the process of collection, or are managed in 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 $.2$.3 billion and $.1 billion at JuneSeptember 30, 2016 and December 31, 2015, respectively.
See 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 additional information regarding our nonperforming loan and nonaccrual policies and further information on loan delinquencies.
30 The PNC Financial Services Group, Inc. –Form 10-Q
Home Equity Loan Portfolio
Our home equity loan portfolio totaled $30.9$30.4 billion as of JuneSeptember 30, 2016, or 15%14% of the total loan portfolio. Of that total, $18.2$18.0 billion, or 59%, were outstanding under primarily variable-rate home equity lines of credit and $12.7$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 JuneSeptember 30, 2016.
As of JuneSeptember 30, 2016, we were in an originated first lien position for approximately 54% of the total outstanding portfolio and, where originated as a second lien, we held or serviced 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 JuneSeptember 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 | $ | 476 | $ 156 | $ | 223 | $ | 72 | |||||||
2017 | 1,927 | 500 | 1,813 | 473 | ||||||||||
2018 | 863 | 689 | 830 | 660 | ||||||||||
2019 | 601 | 531 | 575 | 508 | ||||||||||
2020 | 480 | 478 | 461 | 457 | ||||||||||
2021 and thereafter | 2,876 | 5,767 | 2,927 | 6,134 | ||||||||||
Total (a) (b) | $ | 7,223 | $8,121 | $ | 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 home equity lines of credit with balloon payments, including those where we have terminated borrowing privileges of |
32 The PNC Financial Services Group, Inc. –Form 10-Q
Based upon outstanding balances, and excluding purchased impaired loans, at JuneSeptember 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, 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 $11.4$11.9 billion as of JuneSeptember 30, 2016, or 5%6% of our total loan portfolio. Of that total, $9.9$10.4 billion resides in the indirect auto portfolio, $1.1$1.2 billion in the direct auto portfolio, and $.4$.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 JuneSeptember 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 JuneSeptember 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 JuneSeptember 30, 2016, or 1% of our total loan portfolio and 2% of our total commercial lending portfolio. This portfolio comprised approximately $1.1$1.0 billion in the midstream and downstream sectors, $.9 billion to oil services companies and $.7$.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 JuneSeptember 30, 2016 totaled $187$197 million, or 7%8% of total nonperforming assets.
The PNC Financial Services Group, Inc. –Form 10-Q31
Our portfolio of loans outstanding in the coal industry totaled $.5 billion as of JuneSeptember 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 JuneSeptember 30, 2016 totaled $106$63 million, or 4%3% of total nonperforming assets.
Our ALLL at June 30, 2016 included the impact of our lending exposure to energy companies. Higher reserves for oil, gas and coal exposure drove the overall increase in the provision for credit losses. For the first six months of 2016, $128 million, or 46%, of the provision was related to these sectors. For the second quarter of 2016, these amounts were $48 million and 38%, respectively. Net charge-offs related to energy loans totaled $72 million for the six months ended June 30, 2016, or 25% of total net-charge-offs. For the second quarter of 2016, these amounts were $47 million and 35%, respectively.
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.
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
| June 30, 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) | 3,893 | $ 293 | 4,469 | $ 337 | 3,672 | $ | 273 | 4,469 | $ | 337 | ||||||||||||||||
Permanent modifications | ||||||||||||||||||||||||||
Home equity | 15,467 | 1,104 | 15,268 | 1,088 | 15,543 | 1,108 | 15,268 | 1,088 | ||||||||||||||||||
Residential real estate | 8,398 | 1,626 | 8,787 | 1,721 | 8,410 | 1,615 | 8,787 | 1,721 | ||||||||||||||||||
Total permanent modifications | 23,865 | 2,730 | 24,055 | 2,809 | 23,953 | 2,723 | 24,055 | 2,809 | ||||||||||||||||||
Total consumer real estate related loan modifications | 27,758 | $3,023 | 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.
32 The PNC Financial Services Group, Inc. –Form 10-Q
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 JuneSeptember 30, 2016 and December 31, 2015, the loan balances covered under these modification and payment plan programs, including those determined to be TDRs, 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.ge.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 JuneSeptember 30, 2016, an increase of $97$8 million or 4%, during the first sixnine 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 JuneSeptember 30, 2016 and December 31, 2015, respectively. Nonperforming TDRs representrepresented approximately 55% and 53% of total nonperforming loans, and 51%50% and 48% of total TDRs at JuneSeptember 30, 2016 and 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 1 Accounting Policies in our 2015 Form 10-K and Note 3 Asset Quality 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
Six months ended June 30 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 | $ | 164 | $ | 61 | $ | 103 | .21 | % | $ | 271 | $ | 87 | $ | 184 | .25 | % | ||||||||||||||||
Commercial real estate | 20 | 25 | (5 | ) | (.04 | )% | 22 | 37 | (15 | ) | (.07 | )% | ||||||||||||||||||||
Equipment lease financing | 3 | 2 | 1 | .03 | % | 4 | 9 | (5 | ) | (.09 | )% | |||||||||||||||||||||
Home equity | 76 | 38 | 38 | .24 | % | 115 | 63 | 52 | .22 | % | ||||||||||||||||||||||
Residential real estate | 8 | 5 | 3 | .04 | % | 11 | 7 | 4 | .04 | % | ||||||||||||||||||||||
Credit card | 83 | 9 | 74 | 3.12 | % | 122 | 14 | 108 | 2.99 | % | ||||||||||||||||||||||
Other consumer | 95 | 26 | 69 | .64 | % | 147 | 38 | 109 | .67 | % | ||||||||||||||||||||||
Total | $ | 449 | $ | 166 | $ | 283 | .27 | % | $ | 692 | $ | 255 | $ | 437 | .28 | % | ||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
Commercial | $ | 82 | $ | 97 | $ | (15 | ) | (.03 | )% | $ | 145 | $ | 139 | $ | 6 | .01 | % | |||||||||||||||
Commercial real estate | 25 | 35 | (10 | ) | (.08 | )% | 29 | 46 | (17 | ) | (.09 | )% | ||||||||||||||||||||
Equipment lease financing | 1 | 2 | (1 | ) | (.03 | )% | 2 | 3 | (1 | ) | (.02 | )% | ||||||||||||||||||||
Home equity | 102 | 44 | 58 | .34 | % | 139 | 69 | 70 | .28 | % | ||||||||||||||||||||||
Residential real estate | 6 | 6 | 17 | 10 | 7 | .07 | % | |||||||||||||||||||||||||
Credit card | 84 | 11 | 73 | 3.30 | % | 121 | 16 | 105 | 3.13 | % | ||||||||||||||||||||||
Other consumer | 92 | 27 | 65 | .59 | % | 136 | 40 | 96 | .58 | % | ||||||||||||||||||||||
Total | $ | 392 | $ | 222 | $ | 170 | .17 | % | $ | 589 | $ | 323 | $ | 266 | .17 | % | ||||||||||||||||
Net charge-offs increased by $113$171 million, or 66%64%, in the first sixnine months of 2016 compared to the first sixnine 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 JuneSeptember 30, 2016 consisted of $1.6$1.5 billion and $1.1 billion established for the commercial lending and consumer
The PNC Financial Services Group, Inc. –Form 10-Q33
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 probability of default (PD) and loss 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,
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 JuneSeptember 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.
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 June 30, 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 June 30, 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.
34 The PNC Financial Services Group, Inc. –Form 10-Q
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 | (283 | ) | (170 | ) | (437 | ) | (266 | ) | ||||||||
Provision for credit losses | 279 | 100 | 366 | 181 | ||||||||||||
Net change in allowance for unfunded loan commitments and letters of credit | (42 | ) | 13 | (49 | ) | (7 | ) | |||||||||
Net recoveries of purchased impaired loans | 4 | |||||||||||||||
Other | (2 | ) | ||||||||||||||
June 30 | $ | 2,685 | $ | 3,272 | ||||||||||||
Net charge-offs to average loans (for the six months ended) (annualized) | .27 | % | .17 | % | ||||||||||||
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) | 1.28 | % | 1.59 | % | 1.24 | % | 1.58 | % | ||||||||
Commercial lending (net charge-offs) / recoveries | $ | (99 | ) | $ | 26 | $ | (164 | ) | $ | 12 | ||||||
Consumer lending net charge-offs | (184 | ) | (196 | ) | (273 | ) | (278 | ) | ||||||||
Total net charge-offs | $ | (283 | ) | $ | (170 | ) | $ | (437 | ) | $ | (266 | ) | ||||
Net charge-offs / (recoveries) to average loans (for the six months ended) (annualized) | ||||||||||||||||
Net charge-offs / (recoveries) to average loans (for the nine months ended) (annualized) | ||||||||||||||||
Commercial lending | .15 | % | (.04 | )% | .16 | % | (.01 | )% | ||||||||
Consumer lending | .51 | % | .53 | % | .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 $279$366 million for the first sixnine months of 2016 compared to $100$181 million for the first sixnine months of 2015, primarily driven by reserves for energy related exposure. Forexposure, slowing credit quality improvement and the first six monthsimpact of 2016, the provision for commercial lending credit losses increased by $133 million from the first six months of 2015. The provision for consumer lending credit losses increased $46 million from the first six months of 2015.continued loan growth.
At JuneSeptember 30, 2016, total ALLL to total nonperforming loans was 119%122%. The comparable amount for December 31, 2015 was 128%. These ratios are 90%91% and 98%, respectively, when excluding the $.7 billion and $.6 billion of ALLL at both JuneSeptember 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 sixnine months of 2016, overall credit
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 JuneSeptember 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 Allowances 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 for additional information on the ALLL and 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 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 were required to calculate the LCR on a month-end basis. Effective July 1, 2016, PNC and PNC Bank began calculating the LCR on a daily basis.
As of JuneSeptember 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 JuneSeptember 30, 2016, there were approximately $10.7$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.
The PNC Financial Services Group, Inc. –Form 10-Q35
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 $249.8$259.9 billion at JuneSeptember 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 JuneSeptember 30, 2016, our liquid assets consisted of short-term investments (Federal funds sold, resale agreements, trading securities and interest-earning deposits with banks) totaling $30.2$30.4 billion and securities available for sale totaling $56.9$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 $87.1$92.3 billion, we had $4.3$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, $5.4$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).
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 $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. On May 27, 2016, PNC Bank increased the capacity of this program by $10.0 billion to a maximum aggregate principal amount at any one time outstanding of $40.0 billion. The $40.0 billion of notes authorized to be issued and outstanding at any one time 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 JuneSeptember 30, 2016, PNC Bank had $25.9$24.9 billion of notes outstanding under this program of which $19.7$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 $27.9$26.7 billion at JuneSeptember 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 | 2.9 | |||
Calls and maturities | (1.0 | ) | ||
Other | .5 | |||
June 30 | $ | 27.9 | ||
See Note 15 Subsequent Events in the Notes to Consolidated Financial Statements of this Report for information on the issuance of senior notes by PNC Bank on July 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 JuneSeptember 30, 2016, our unused secured borrowing capacity was $25.0$26.8 billion with the FHLB-Pittsburgh. Total FHLB borrowings decreased to $18.1$17.1 billion at JuneSeptember 30, 2016 from $20.1 billion at December 31, 2015 due to the following activity in the period.
36 The PNC Financial Services Group, Inc. –Form 10-Q
| In billions | 2016 | 2016 | ||||||
January 1 | $ | 20.1 | $ | 20.1 | ||||
Issuances | 3.0 | 4.5 | ||||||
Calls and maturities | (5.0 | ) | (7.5 | ) | ||||
June 30 | $ | 18.1 | ||||||
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 JuneSeptember 30, 2016, standby letters of credit issued on our behalf by the FHLB-Pittsburgh totaled $4.9$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 JuneSeptember 30, 2016, there were 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 a primary means of funding our routine business activities, but rather as a potential source of liquidity in a stressed environment or during a market disruption. These potential borrowings are secured by commercial loans. At JuneSeptember 30, 2016, our unused secured borrowing capacity was $16.1$17.2 billion with the Federal Reserve Bank.
Parent Company Liquidity
As of JuneSeptember 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 JuneSeptember 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 Note 15 Subsequent Events in the Notes To Consolidated Financial Statements of this Report for information on the redemption notice issued on July 18, 2016 with respect to Senior Notes issued by PNC Funding Corp.
See the Capital portion of the Consolidated Balance Sheet Review section of this Financial Review for information on our 2016 capital plan that was accepted by the Federal Reserve. Our capital plan included a recommendation to
38 The PNC Financial Services Group, Inc. –Form 10-Q
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 secondthird quarter repurchase of 6.15.9 million common shares for $.5 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 $1.3$1.5 billion at JuneSeptember 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.
The PNC Financial Services Group, Inc. –Form 10-Q37
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 $7.7$6.4 billion at JuneSeptember 30,
2016 from $7.5 billion at 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 | 2016 | ||||||
January 1 | $ | 7.5 | $ | 7.5 | ||||
Calls and Maturities | (1.2 | ) | ||||||
Other | .2 | .1 | ||||||
June 30 | $ | 7.7 | ||||||
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 JuneSeptember 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 JuneSeptember 30, 2016 for PNC and PNC Bank
| Moody’s | Standard &
| 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 13 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.
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.
38 The PNC Financial Services Group, Inc. –Form 10-Q
Sensitivity results and market interest rate benchmarks for the secondthird quarters of 2016 and 2015 follow:
Table 37:36: Interest Sensitivity Analysis
| Second Quarter 2016 | Second 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 | 3.1 | % | 1.7 | % | 3.0 | % | 2.7 | % | ||||||||
100 basis point decrease | (3.2 | )% | (.5 | )% | (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 | 8.1 | % | 5.7 | % | 6.1 | % | 6.4 | % | ||||||||
100 basis point decrease | (8.5 | )% | (4.6 | )% | (8.3 | )% | (5.3 | )% | ||||||||
Duration of Equity Model (a) | ||||||||||||||||
Base case duration of equity (in years) | (8.5 | ) | (3.5 | ) | (6.5 | ) | (5.2 | ) | ||||||||
Key Period-End Interest Rates | ||||||||||||||||
One-month LIBOR | .47 | % | .19 | % | .53 | % | .19 | % | ||||||||
Three-year swap | .81 | % | 1.25 | % | 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 (Second(Third Quarter 2016)
| PNC Economist | Market Forward | Slope Flattening | PNC Economist | Market Forward | Slope Flattening | |||||||||||
First year sensitivity | 2.9 | % | .7% | (2.0)% | 2.6 | % | 3.1% | (3.1)% | ||||||||
Second year sensitivity | 9.8 | % | 1.8% | (7.0)% | 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 36 and 37 and 38 above.
These simulations assume that as assets and liabilities mature, they are replaced or repriced at then current market rates. We also consider forward projections of purchase accounting accretion when forecasting net interest income.
The following graph presents the LIBOR/Swap yield curves for the base rate scenario and each of the alternate scenarios one year forward.
Table 39:38: Alternate Interest Rate Scenarios: One Year Forward
The secondthird 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.
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 sixnine 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 $89was $140 million for the first sixnine months of 2016 compared with $102$155 million for the first sixnine months of 2015. This decrease was primarily due to market interest rate changes impactingin credit valuations for customer-related derivatives.
The PNC Financial Services Group, Inc. –Form 10-Q39
Customer-relatedCustomer related trading revenue decreased to $50was $51 million for the secondthird quarter of 2016 compared with $53 million for the secondthird quarter of 2015. This decrease was primarily due to market interest rate changes impacting credit valuations for customer-related derivatives, partially offset by higher derivativereduced client sales and improved client-related tradingrelated 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, and 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 6 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
June 30 2016 | December 31 2015 | Change | September 30 2016 | December 31 2015 | Change | |||||||||||||||||||||||||||
| In millions | $ | % | $ | % | ||||||||||||||||||||||||||||
BlackRock | $ | 6,710 | $ | 6,626 | $ | 84 | 1 | % | $ | 6,805 | $ | 6,626 | $ | 179 | 3 | % | ||||||||||||||||
Tax credit investments | 2,093 | 2,254 | (161 | ) | (7 | )% | 2,141 | 2,254 | (113 | ) | (5 | )% | ||||||||||||||||||||
Private equity | 1,398 | 1,441 | (43 | ) | (3 | )% | 1,340 | 1,441 | (101 | ) | (7 | )% | ||||||||||||||||||||
Visa | 2 | 31 | (29 | ) | (94 | )% | 2 | 31 | (29 | ) | (94 | )% | ||||||||||||||||||||
Other | 266 | 235 | 31 | 13 | % | 317 | 235 | 82 | 35 | % | ||||||||||||||||||||||
Total | $ | 10,469 | $ | 10,587 | $ | (118 | ) | (1 | )% | $ | 10,605 | $ | 10,587 | $ | 18 | 0 | % | |||||||||||||||
BlackRock
PNC owned approximately 35 million common stock equivalent shares of BlackRock equity at JuneSeptember 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. These equity investment balances include unfunded commitments totaling $671$719 million and $669 million at JuneSeptember 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 and are carried at estimated fair value. As of JuneSeptember 30, 2016, $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 Business – Supervision and Regulation and Item 1A Risk Factors included in our 2015 Form 10-K and the Recent Market and Industry Developments portion of the Executive Summary section of this Financial Review for discussions 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 $131$128 million at JuneSeptember 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 the Notes To Consolidated Financial Statements in this Reportour Second Quarter 2016 Form 10-Q for more detail on the status of the pending interchange litigation.
During the first sixnine months of 2016, we sold 1.35 million Visa Class B common shares, in addition to the 18.5 million shares
40 The PNC Financial Services Group, Inc. –Form 10-Q
sold in previous years. We have entered into swap agreements with the purchasers of the shares as part of these sales. At JuneSeptember 30, 2016, our investment in Visa Class B common shares totaled approximately 3.5 million shares. Based on the JuneSeptember 30, 2016 closing price of $74.17$82.70 for the Visa Class A common shares, the fair value of our total investment was approximately $430$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 sixnine months of 2016 and 2015.
Our unfunded commitments related to other investments at JuneSeptember 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 6 Fair Value and Note 9 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 JuneSeptember 30, 2016 and December 31, 2015.
Table 41:40: Financial Derivatives Summary
| June 30, 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 | $ | 53,982 | $ | 1,660 | $ | 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 | 77,058 | 561 | 73,891 | 376 | 72,281 | 516 | 73,891 | 376 | ||||||||||||||||||||||||
Total derivatives used for commercial mortgage banking activities | 10,557 | 90 | 24,091 | 36 | 9,689 | 80 | 24,091 | 36 | ||||||||||||||||||||||||
Total derivatives used for customer-related activities | 209,394 | 155 | 192,621 | 151 | 208,437 | 170 | 192,621 | 151 | ||||||||||||||||||||||||
Total derivatives used for other risk management activities | 5,734 | (307 | ) | 5,299 | (409 | ) | 5,914 | (362 | ) | 5,299 | (409 | ) | ||||||||||||||||||||
Total derivatives not designated as hedging instruments | 302,743 | 499 | 295,902 | 154 | 296,321 | 404 | 295,902 | 154 | ||||||||||||||||||||||||
Total Derivatives | $ | 356,725 | $ | 2,159 | $ | 347,976 | $ | 1,139 | $ | 348,787 | $ | 1,740 | $ | 347,976 | $ | 1,139 | ||||||||||||||||
| (a) | Represents the net fair value of assets and liabilities. |
INTERNAL CONTROLSAND DISCLOSURECONTROLSAND PROCEDURES
As of JuneSeptember 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 JuneSeptember 30, 2016, and that there has been no change in PNC’s internal control over financial reporting that occurred during the secondthird quarter of 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
For a glossary of terms commonly used in our filings, please see the glossary of terms included in our 2015 Form 10-K.
The PNC Financial Services Group, Inc. –Form 10-Q 4143
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 in the latter half of 2016, boosted by stable oil/energy prices, improving housing activity and moderate job gains, and that lower short-term interest rates and bond yields in the aftermath of Brexit will hold fairly steady before gradually rising 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.
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 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:
42 The PNC Financial Services Group, Inc. –Form 10-Q
| – | 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 initiatives of the Basel Committee. |
| – | 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 first quarter 2016 Form 10-Q10-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. 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 4345
THE PNC FINANCIAL SERVICES GROUP, INC.
Unaudited In millions, except per share data | Three months ended June 30 | Six months ended June 30 | Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||
Interest Income | ||||||||||||||||||||||||||||||||
Loans | $ | 1,829 | $ | 1,791 | $ | 3,672 | $ | 3,593 | $ | 1,856 | $ | 1,804 | $ | 5,528 | $ | 5,397 | ||||||||||||||||
Investment securities | 456 | 407 | 918 | 813 | 451 | 423 | 1,369 | 1,236 | ||||||||||||||||||||||||
Other | 99 | 107 | 201 | 218 | 101 | 114 | 302 | 332 | ||||||||||||||||||||||||
Total interest income | 2,384 | 2,305 | 4,791 | 4,624 | 2,408 | 2,341 | 7,199 | 6,965 | ||||||||||||||||||||||||
Interest Expense | ||||||||||||||||||||||||||||||||
Deposits | 104 | 98 | 209 | 190 | 107 | 107 | 316 | 297 | ||||||||||||||||||||||||
Borrowed funds | 212 | 155 | 416 | 310 | 206 | 172 | 622 | 482 | ||||||||||||||||||||||||
Total interest expense | 316 | 253 | 625 | 500 | 313 | 279 | 938 | 779 | ||||||||||||||||||||||||
Net interest income | 2,068 | 2,052 | 4,166 | 4,124 | 2,095 | 2,062 | 6,261 | 6,186 | ||||||||||||||||||||||||
Noninterest Income | ||||||||||||||||||||||||||||||||
Asset management | 377 | 416 | 718 | 792 | 404 | 376 | 1,122 | 1,168 | ||||||||||||||||||||||||
Consumer services | 354 | 334 | 691 | 645 | 348 | 341 | 1,039 | 986 | ||||||||||||||||||||||||
Corporate services | 403 | 369 | 728 | 713 | 389 | 384 | 1,117 | 1,097 | ||||||||||||||||||||||||
Residential mortgage | 165 | 164 | 265 | 328 | 160 | 125 | 425 | 453 | ||||||||||||||||||||||||
Service charges on deposits | 163 | 156 | 321 | 309 | 174 | 172 | 495 | 481 | ||||||||||||||||||||||||
Net gains on sales of securities | 4 | 8 | 13 | 50 | ||||||||||||||||||||||||||||
Net gains (losses) on sales of securities | 7 | (9 | ) | 20 | 41 | |||||||||||||||||||||||||||
Other | 260 | 367 | 557 | 636 | 252 | 324 | 809 | 960 | ||||||||||||||||||||||||
Total noninterest income | 1,726 | 1,814 | 3,293 | 3,473 | 1,734 | 1,713 | 5,027 | 5,186 | ||||||||||||||||||||||||
Total revenue | 3,794 | 3,866 | 7,459 | 7,597 | 3,829 | 3,775 | 11,288 | 11,372 | ||||||||||||||||||||||||
Provision For Credit Losses | 127 | 46 | 279 | 100 | 87 | 81 | 366 | 181 | ||||||||||||||||||||||||
Noninterest Expense | ||||||||||||||||||||||||||||||||
Personnel | 1,226 | 1,200 | 2,371 | 2,357 | 1,239 | 1,222 | 3,610 | 3,579 | ||||||||||||||||||||||||
Occupancy | 215 | 209 | 436 | 425 | 215 | 209 | 651 | 634 | ||||||||||||||||||||||||
Equipment | 240 | 231 | 474 | 453 | 246 | 227 | 720 | 680 | ||||||||||||||||||||||||
Marketing | 61 | 67 | 115 | 129 | 72 | 64 | 187 | 193 | ||||||||||||||||||||||||
Other | 618 | 659 | 1,245 | 1,351 | 622 | 630 | 1,867 | 1,981 | ||||||||||||||||||||||||
Total noninterest expense | 2,360 | 2,366 | 4,641 | 4,715 | 2,394 | 2,352 | 7,035 | 7,067 | ||||||||||||||||||||||||
Income before income taxes and noncontrolling interests | 1,307 | 1,454 | 2,539 | 2,782 | 1,348 | 1,342 | 3,887 | 4,124 | ||||||||||||||||||||||||
Income taxes | 318 | 410 | 607 | 734 | 342 | 269 | 949 | 1,003 | ||||||||||||||||||||||||
Net income | 989 | 1,044 | 1,932 | 2,048 | 1,006 | 1,073 | 2,938 | 3,121 | ||||||||||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | 23 | 4 | 42 | 5 | 18 | 18 | 60 | 23 | ||||||||||||||||||||||||
Preferred stock dividends and discount accretion and redemptions | 43 | 48 | 108 | 118 | 64 | 64 | 172 | 182 | ||||||||||||||||||||||||
Net income attributable to common shareholders | $ | 923 | $ | 992 | $ | 1,782 | $ | 1,925 | $ | 924 | $ | 991 | $ | 2,706 | $ | 2,916 | ||||||||||||||||
Earnings Per Common Share | ||||||||||||||||||||||||||||||||
Basic | $ | 1.84 | $ | 1.92 | $ | 3.54 | $ | 3.71 | $ | 1.87 | $ | 1.93 | $ | 5.41 | $ | 5.64 | ||||||||||||||||
Diluted | $ | 1.82 | $ | 1.88 | $ | 3.49 | $ | 3.63 | $ | 1.84 | $ | 1.90 | $ | 5.33 | $ | 5.52 | ||||||||||||||||
Average Common Shares Outstanding | ||||||||||||||||||||||||||||||||
Basic | 497 | 517 | 499 | 519 | 490 | 512 | 496 | 516 | ||||||||||||||||||||||||
Diluted | 503 | 525 | 505 | 527 | 496 | 520 | 502 | 525 | ||||||||||||||||||||||||
See accompanying Notes To Consolidated Financial Statements.
4446 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 June 30 | Six months ended June 30 | Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||
Net income | $ | 989 | $ | 1,044 | $ | 1,932 | $ | 2,048 | $ | 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 | 273 | (365 | ) | 777 | (291 | ) | (25 | ) | 154 | 752 | (137 | ) | ||||||||||||||||||||
Net unrealized gains (losses) on OTTI securities | 17 | 4 | (21 | ) | 7 | 38 | 4 | 17 | 11 | |||||||||||||||||||||||
Net unrealized gains (losses) on cash flow hedge derivatives | 63 | (170 | ) | 263 | 69 | (125 | ) | 234 | 138 | 303 | ||||||||||||||||||||||
Pension and other postretirement benefit plan adjustments | 3 | (10 | ) | 15 | 50 | 11 | 7 | 26 | 57 | |||||||||||||||||||||||
Other | 12 | (9 | ) | (15 | ) | (36 | ) | (25 | ) | (1 | ) | (40 | ) | (37 | ) | |||||||||||||||||
Other comprehensive income (loss), before tax and net of reclassifications into Net income | 368 | (550 | ) | 1,019 | (201 | ) | (126 | ) | 398 | 893 | 197 | |||||||||||||||||||||
Income tax benefit (expense) related to items of other comprehensive income | (164 | ) | 226 | (413 | ) | 77 | 36 | (162 | ) | (377 | ) | (85 | ) | |||||||||||||||||||
Other comprehensive income (loss), after tax and net of reclassifications into Net income | 204 | (324 | ) | 606 | (124 | ) | (90 | ) | 236 | 516 | 112 | |||||||||||||||||||||
Comprehensive income | 1,193 | 720 | 2,538 | 1,924 | 916 | 1,309 | 3,454 | 3,233 | ||||||||||||||||||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests | 23 | 4 | 42 | 5 | 18 | 18 | 60 | 23 | ||||||||||||||||||||||||
Comprehensive income attributable to PNC | $ | 1,170 | $ | 716 | $ | 2,496 | $ | 1,919 | $ | 898 | $ | 1,291 | $ | 3,394 | $ | 3,210 | ||||||||||||||||
See accompanying Notes To Consolidated Financial Statements.
The PNC Financial Services Group, Inc. –Form 10-Q 4547
THE PNC FINANCIAL SERVICES GROUP, INC.
Unaudited In millions, except par value | June 30 2016 | December 31 2015 | September 30 2016 | December 31 2015 | ||||||||||||
Assets | ||||||||||||||||
Cash and due from banks (a) | $ | 4,196 | $ | 4,065 | $ | 4,531 | $ | 4,065 | ||||||||
Federal funds sold and resale agreements (b) | 1,476 | 1,369 | 718 | 1,369 | ||||||||||||
Trading securities | 2,006 | 1,726 | 2,612 | 1,726 | ||||||||||||
Interest-earning deposits with banks (a) | 26,750 | 30,546 | 27,058 | 30,546 | ||||||||||||
Loans held for sale (b) | 2,296 | 1,540 | 2,053 | 1,540 | ||||||||||||
Investment securities | 71,801 | 70,528 | 78,514 | 70,528 | ||||||||||||
Loans (b) | 209,056 | 206,696 | 210,446 | 206,696 | ||||||||||||
Allowance for loan and lease losses | (2,685 | ) | (2,727 | ) | (2,619 | ) | (2,727 | ) | ||||||||
Net loans (a) | 206,371 | 203,969 | 207,827 | 203,969 | ||||||||||||
Goodwill | 9,103 | 9,103 | 9,103 | 9,103 | ||||||||||||
Mortgage servicing rights | 1,222 | 1,589 | 1,293 | 1,589 | ||||||||||||
Other intangible assets | 329 | 379 | 304 | 379 | ||||||||||||
Equity investments (a) | 10,469 | 10,587 | 10,605 | 10,587 | ||||||||||||
Other (a) (b) | 25,316 | 23,092 | 24,730 | 23,092 | ||||||||||||
Total assets | $ | 361,335 | $ | 358,493 | $ | 369,348 | $ | 358,493 | ||||||||
Liabilities | ||||||||||||||||
Deposits | ||||||||||||||||
Noninterest-bearing | $ | 77,866 | $ | 79,435 | $ | 82,159 | $ | 79,435 | ||||||||
Interest-bearing | 171,912 | 169,567 | 177,736 | 169,567 | ||||||||||||
Total deposits | 249,778 | 249,002 | 259,895 | 249,002 | ||||||||||||
Borrowed funds | ||||||||||||||||
Federal funds purchased and repurchase agreements | 1,620 | 1,777 | 1,235 | 1,777 | ||||||||||||
Federal Home Loan Bank borrowings | 18,055 | 20,108 | 17,050 | 20,108 | ||||||||||||
Bank notes and senior debt | 23,588 | 21,298 | 22,431 | 21,298 | ||||||||||||
Subordinated debt | 8,764 | 8,556 | 8,708 | 8,556 | ||||||||||||
Other (c) (d) | 2,544 | 2,793 | 2,117 | 2,793 | ||||||||||||
Total borrowed funds | 54,571 | 54,532 | 51,541 | 54,532 | ||||||||||||
Allowance for unfunded loan commitments and letters of credit | 303 | 261 | 310 | 261 | ||||||||||||
Accrued expenses (c) | 5,080 | 4,975 | 5,226 | 4,975 | ||||||||||||
Other (c) | 4,904 | 3,743 | 5,531 | 3,743 | ||||||||||||
Total liabilities | 314,636 | 312,513 | 322,503 | 312,513 | ||||||||||||
Equity | ||||||||||||||||
Preferred stock (e) | ||||||||||||||||
Common stock ($5 par value, authorized 800 shares, issued 542 shares) | 2,709 | 2,708 | 2,709 | 2,708 | ||||||||||||
Capital surplus – preferred stock | 3,455 | 3,452 | 3,456 | 3,452 | ||||||||||||
Capital surplus – common stock and other | 12,653 | 12,745 | 12,703 | 12,745 | ||||||||||||
Retained earnings | 30,309 | 29,043 | 30,958 | 29,043 | ||||||||||||
Accumulated other comprehensive income (loss) | 736 | 130 | 646 | 130 | ||||||||||||
Common stock held in treasury at cost: 49 and 38 shares | (4,304 | ) | (3,368 | ) | ||||||||||||
Common stock held in treasury at cost: 54 and 38 shares | (4,765 | ) | (3,368 | ) | ||||||||||||
Total shareholders’ equity | 45,558 | 44,710 | 45,707 | 44,710 | ||||||||||||
Noncontrolling interests | 1,141 | 1,270 | 1,138 | 1,270 | ||||||||||||
Total equity | 46,699 | 45,980 | 46,845 | 45,980 | ||||||||||||
Total liabilities and equity | $ | 361,335 | $ | 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.
4648 The PNC Financial Services Group, Inc. –Form 10-Q
CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
Unaudited In millions | Six months ended June 30 | |||||||
| 2016 | 2015 | |||||||
Operating Activities | ||||||||
Net income | $ | 1,932 | $ | 2,048 | ||||
Adjustments to reconcile net income to net cash provided (used) by operating activities | ||||||||
Provision for credit losses | 279 | 100 | ||||||
Depreciation and amortization | 561 | 530 | ||||||
Deferred income taxes | (68 | ) | 109 | |||||
Net gains on sales of securities | (13 | ) | (50 | ) | ||||
Changes in fair value of mortgage servicing rights | 527 | 43 | ||||||
Gain on sales of Visa Class B common shares | (126 | ) | (79 | ) | ||||
Undistributed earnings of BlackRock | (148 | ) | (196 | ) | ||||
Net change in | ||||||||
Trading securities and other short-term investments | (865 | ) | (22 | ) | ||||
Loans held for sale | (728 | ) | (391 | ) | ||||
Other assets | (2,516 | ) | 22 | |||||
Accrued expenses and other liabilities | 2,179 | (186 | ) | |||||
Other | (253 | ) | (272 | ) | ||||
Net cash provided (used) by operating activities | 761 | 1,656 | ||||||
Investing Activities | ||||||||
Sales | ||||||||
Securities available for sale | 2,084 | 2,402 | ||||||
Loans | 875 | 958 | ||||||
Repayments/maturities | ||||||||
Securities available for sale | 4,895 | 3,933 | ||||||
Securities held to maturity | 1,251 | 1,054 | ||||||
Purchases | ||||||||
Securities available for sale | (7,182 | ) | (9,706 | ) | ||||
Securities held to maturity | (1,587 | ) | (3,049 | ) | ||||
Loans | (504 | ) | (355 | ) | ||||
Net change in | ||||||||
Federal funds sold and resale agreements | (107 | ) | (119 | ) | ||||
Interest-earning deposits with banks | 3,796 | (2,190 | ) | |||||
Loans | (3,659 | ) | (1,017 | ) | ||||
Other | 49 | (394 | ) | |||||
Net cash provided (used) by investing activities | (89 | ) | (8,483 | ) | ||||
Unaudited In millions | Nine months ended September 30 | |||||||
| 2016 | 2015 | |||||||
Operating Activities | ||||||||
Net income | $ | 2,938 | $ | 3,121 | ||||
Adjustments to reconcile net income to net cash provided (used) by operating activities | ||||||||
Provision for credit losses | 366 | 181 | ||||||
Depreciation and amortization | 917 | 802 | ||||||
Deferred income taxes | (171 | ) | 128 | |||||
Net gains on sales of securities | (20 | ) | (41 | ) | ||||
Changes in fair value of mortgage servicing rights | 559 | 297 | ||||||
Gain on sales of Visa Class B common shares | (126 | ) | (122 | ) | ||||
Undistributed earnings of BlackRock | (256 | ) | (292 | ) | ||||
Net change in | ||||||||
Trading securities and other short-term investments | (1,029 | ) | 165 | |||||
Loans held for sale | (490 | ) | (86 | ) | ||||
Other assets | (2,179 | ) | (2,415 | ) | ||||
Accrued expenses and other liabilities | 2,197 | 2,280 | ||||||
Other | (411 | ) | (385 | ) | ||||
Net cash provided (used) by operating activities | 2,295 | 3,633 | ||||||
Investing Activities | ||||||||
Sales | ||||||||
Securities available for sale | 2,517 | 3,341 | ||||||
Loans | 1,538 | 1,613 | ||||||
Repayments/maturities | ||||||||
Securities available for sale | 7,683 | 6,013 | ||||||
Securities held to maturity | 2,013 | 1,541 | ||||||
Purchases | ||||||||
Securities available for sale | (15,179 | ) | (17,546 | ) | ||||
Securities held to maturity | (3,741 | ) | (3,735 | ) | ||||
Loans | (963 | ) | (564 | ) | ||||
Net change in | ||||||||
Federal funds sold and resale agreements | 651 | 317 | ||||||
Interest-earning deposits with banks | 3,487 | (2,445 | ) | |||||
Loans | (5,451 | ) | (1,502 | ) | ||||
Other | (159 | ) | (567 | ) | ||||
Net cash provided (used) by investing activities | (7,604 | ) | (13,534 | ) | ||||
(continued on following page)
The PNC Financial Services Group, Inc. –Form 10-Q 4749
CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
(continued from previous page)
Unaudited In millions | Six months ended June 30 | Nine months ended September 30 | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
Financing Activities | ||||||||||||||||
Net change in | ||||||||||||||||
Noninterest-bearing deposits | $ | (1,113 | ) | $ | 3,909 | $ | 3,162 | $ | 4,772 | |||||||
Interest-bearing deposits | 2,345 | 3,580 | 8,169 | 7,985 | ||||||||||||
Federal funds purchased and repurchase agreements | (157 | ) | (1,320 | ) | (542 | ) | (1,433 | ) | ||||||||
Commercial paper | (158 | ) | (2 | ) | ||||||||||||
Other borrowed funds | 524 | 712 | (15 | ) | 276 | |||||||||||
Sales/issuances | ||||||||||||||||
Federal Home Loan Bank borrowings | 2,250 | 2,250 | ||||||||||||||
Bank notes and senior debt | 2,856 | 4,932 | 3,855 | 6,428 | ||||||||||||
Commercial paper | 1,393 | 1,394 | ||||||||||||||
Other borrowed funds | 133 | 586 | 143 | 613 | ||||||||||||
Common and treasury stock | 29 | 109 | 63 | 130 | ||||||||||||
Repayments/maturities | ||||||||||||||||
Federal Home Loan Bank borrowings | (2,053 | ) | (62 | ) | (3,058 | ) | (591 | ) | ||||||||
Bank notes and senior debt | (993 | ) | (2,134 | ) | (3,000 | ) | (2,629 | ) | ||||||||
Subordinated debt | 38 | 39 | 57 | |||||||||||||
Commercial paper | (14 | ) | (3,274 | ) | (14 | ) | (5,262 | ) | ||||||||
Other borrowed funds | (461 | ) | (1,532 | ) | (470 | ) | (1,557 | ) | ||||||||
Preferred stock redemption | (500 | ) | (500 | ) | ||||||||||||
Acquisition of treasury stock | (1,054 | ) | (1,020 | ) | (1,559 | ) | (1,598 | ) | ||||||||
Preferred stock cash dividends paid | (105 | ) | (115 | ) | (168 | ) | (178 | ) | ||||||||
Common stock cash dividends paid | (516 | ) | (516 | ) | (791 | ) | (779 | ) | ||||||||
Net cash provided (used) by financing activities | (541 | ) | 6,879 | 5,775 | 9,376 | |||||||||||
Net Increase (Decrease) In Cash And Due From Banks | 131 | 52 | 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 | $ | 4,196 | $ | 4,412 | $ | 4,531 | $ | 3,835 | ||||||||
Supplemental Disclosures | ||||||||||||||||
Interest paid | $ | 664 | $ | 503 | $ | 980 | $ | 764 | ||||||||
Income taxes paid | $ | 284 | $ | 191 | $ | 461 | $ | 527 | ||||||||
Income taxes refunded | $ | 35 | $ | 1 | $ | 97 | $ | 2 | ||||||||
Non-cash Investing and Financing Items | ||||||||||||||||
Transfer from (to) loans to (from) loans held for sale, net | $ | 367 | $ | 3 | $ | 497 | $ | 153 | ||||||||
Transfer from loans to foreclosed assets | $ | 158 | $ | 227 | $ | 225 | $ | 340 | ||||||||
See accompanying Notes To Consolidated Financial Statements.
4850 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. There have been no significant changes to our accounting policies as disclosed in the 2015 Annual Report on 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.
Recently Adopted Accounting Standards
We did not adopt new accounting standards that had a significant impact during the secondthird quarter of 2016.
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 2015Form 10-K, we have transferred residential and commercial mortgage loans in securitization or sales transactions in which we have continuing involvement. Our continuing involvement generally consists of servicing, repurchasing previously transferred loans under certain conditions and loss share arrangements, and, in limited circumstances, holding of mortgage-backed securities issued by the securitization special purpose entities (SPEs).
We earn servicing and other ancillary fees for our role as servicer and, depending on the contractual terms of the servicing arrangement, we can be terminated as servicer with or without cause. At the consummation date of each type of loan transfer where PNC retains the servicing, we recognize a servicing right at fair value. See Note 7 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-Q 4951
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 June 30, 2016 | ||||||||||||||||||||||||
CASH FLOWS – Three months ended September 30, 2016 | ||||||||||||||||||||||||
Sales of loans (c) | $ | 1,408 | $ | 804 | $ | 1,950 | $ | 1,342 | ||||||||||||||||
Repurchases of previously transferred loans (d) | $ | 103 | $ | 133 | ||||||||||||||||||||
Servicing fees (e) | $ | 93 | $ | 32 | $ | 3 | $ | 95 | $ | 31 | $ | 2 | ||||||||||||
Servicing advances recovered/(funded), net | $ | 48 | $ | (24 | ) | $ | (4 | ) | $ | 13 | $ | (7 | ) | $ | 1 | |||||||||
Cash flows on mortgage-backed securities held (f) | $ | 417 | $ | 92 | $ | 466 | $ | 31 | ||||||||||||||||
CASH FLOWS – Three months ended June 30, 2015 | ||||||||||||||||||||||||
CASH FLOWS – Three months ended September 30, 2015 | ||||||||||||||||||||||||
Sales of loans (c) | $ | 2,015 | $ | 1,159 | $ | 2,329 | $ | 846 | ||||||||||||||||
Repurchases of previously transferred loans (d) | $ | 134 | $ | 129 | $ | 90 | ||||||||||||||||||
Servicing fees (e) | $ | 82 | $ | 36 | $ | 4 | $ | 84 | $ | 35 | $ | 4 | ||||||||||||
Servicing advances recovered/(funded), net | $ | 47 | $ | 21 | $ | 1 | $ | 32 | $ | (6 | ) | $ | 3 | |||||||||||
Cash flows on mortgage-backed securities held (f) | $ | 429 | $ | 54 | $ | 424 | $ | 41 | ||||||||||||||||
CASH FLOWS – Six months ended June 30, 2016 | ||||||||||||||||||||||||
CASH FLOWS – Nine months ended September 30, 2016 | ||||||||||||||||||||||||
Sales of loans (c) | $ | 2,846 | $ | 1,454 | $ | 4,796 | $ | 2,796 | ||||||||||||||||
Repurchases of previously transferred loans (d) | $ | 263 | $ | 396 | ||||||||||||||||||||
Servicing fees (e) | $ | 186 | $ | 62 | $ | 6 | $ | 281 | $ | 93 | $ | 8 | ||||||||||||
Servicing advances recovered/(funded), net | $ | 76 | $ | 7 | $ | 20 | $ | 89 | $ | 21 | ||||||||||||||
Cash flows on mortgage-backed securities held (f) | $ | 769 | $ | 197 | $ | 1,235 | $ | 228 | ||||||||||||||||
CASH FLOWS – Six months ended June 30, 2015 | ||||||||||||||||||||||||
CASH FLOWS – Nine months ended September 30, 2015 | ||||||||||||||||||||||||
Sales of loans (c) | $ | 3,955 | $ | 2,179 | $ | 6,284 | $ | 3,025 | ||||||||||||||||
Repurchases of previously transferred loans (d) | $ | 303 | $ | 2 | $ | 432 | $ | 92 | ||||||||||||||||
Servicing fees (e) | $ | 165 | $ | 68 | $ | 8 | $ | 249 | $ | 103 | $ | 12 | ||||||||||||
Servicing advances recovered/(funded), net | $ | 38 | $ | 28 | $ | 25 | $ | 70 | $ | 22 | $ | 28 | ||||||||||||
Cash flows on mortgage-backed securities held (f) | $ | 669 | $ | 114 | $ | 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 |
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 21 Commitments and Guarantees in our 2015 Form 10-K.
5052 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) | ||||||||||||||||||
June 30, 2016 | ||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||
Total principal balance | $ | 69,268 | $ | 49,625 | $ | 2,533 | $ | 67,585 | $ | 46,652 | $ | 2,410 | ||||||||||||
Delinquent loans (c) | $ | 1,555 | $ | 1,035 | $ | 893 | $ | 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 June 30, 2016 | ||||||||||||||||||||||||
Three months ended September 30, 2016 | ||||||||||||||||||||||||
Net charge-offs (d) | $ | 28 | $ | 157 | $ | 9 | $ | 24 | $ | 168 | $ | 9 | ||||||||||||
Three months ended June 30, 2015 | ||||||||||||||||||||||||
Three months ended September 30, 2015 | ||||||||||||||||||||||||
Net charge-offs (d) | $ | 37 | $ | 148 | $ | 8 | $ | 23 | $ | 236 | $ | 6 | ||||||||||||
Six months ended June 30, 2016 | ||||||||||||||||||||||||
Nine months ended September 30, 2016 | ||||||||||||||||||||||||
Net charge-offs (d) | $ | 54 | $ | 1,069 | $ | 16 | $ | 78 | $ | 1,237 | $ | 25 | ||||||||||||
Six months ended June 30, 2015 | ||||||||||||||||||||||||
Nine months ended September 30, 2015 | ||||||||||||||||||||||||
Net charge-offs (d) | $ | 69 | $ | 255 | $ | 15 | $ | 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 JuneSeptember 30, 2016 and December 31, 2015, respectively. Amounts presented for JuneSeptember 30, 2016 are based on the assessments performed in accordance with ASC 810 as amended by ASU 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 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)
June 30, 2016 (b) In millions | Total | |||||||
September 30, 2016 (b) In millions | Total | |||||||
Assets | ||||||||
Equity investments | $ | 220 | $ | 205 | ||||
Other assets | 47 | 21 | ||||||
Total assets | $ | 267 | $ | 226 | ||||
Total liabilities | $ | 11 | $ | 9 | ||||
Noncontrolling interests | $ | 123 | $ | 121 | ||||
December 31, 2015 In millions | Total | |||
Assets | ||||
Cash and due from banks | $ | 11 | ||
Interest-earning deposits with banks | 4 | |||
Loans | 1,341 | |||
Allowance for loan and lease losses | (48 | ) | ||
Equity investments | 183 | |||
Other assets | 402 | |||
Total assets | $ | 1,893 | ||
Liabilities | ||||
Other borrowed funds | $ | 148 | ||
Accrued expenses | 44 | |||
Other liabilities | 202 | |||
Total liabilities | $ | 394 | ||
Noncontrolling interests | $ | 99 | ||
| (a) | Amounts represent carrying value on PNC’s Consolidated Balance Sheet. |
| (b) | Amounts for |
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 5153
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 | ||||||||||||||||||
June 30, 2016 (b) | ||||||||||||||||||||||||
September 30, 2016 (b) | ||||||||||||||||||||||||
Commercial Mortgage-Backed Securitizations (c) | $ | 1,284 | $ | 1,284 | (d) | $ | 1,089 | $ | 1,089 | (d) | ||||||||||||||
Residential Mortgage-Backed Securitizations (c) | 6,406 | 6,406 | (d) | $ | 1 | (f) | 6,764 | 6,764 | (d) | $ | 1 | (f) | ||||||||||||
Tax Credit Investments and Other | 3,042 | 2,963 | (e) | 771 | (g) | 3,138 | 3,072 | (e) | 807 | (g) | ||||||||||||||
Total | $ | 10,732 | $ | 10,653 | $ | 772 | $ | 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. |
We make certain equity investments in various tax credit limited partnerships or limited liability companies (LLCs). The purpose of these investments is to achieve a satisfactory return on capital and to assist us in achieving goals associated with the Community Reinvestment Act. During the sixnine months ended JuneSeptember 30, 2016, we recognized $105$160 million of amortization, $111$167 million of tax credits, and $38$58 million of other tax benefits associated with qualified investments in low income housing tax credits within Income taxes. The amounts for the secondthird quarter of 2016 were $53 million, $55 million, $56 million and $19$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. Nonperforming loans are those loans accounted for at amortized cost whose credit quality has deteriorated to the extent that full collection of contractual principal and interest is not probable. Interest income is not recognized on these loans. Loans accounted for under the fair value option are reported as performing loans as these loans are accounted for at fair value. However, when nonaccrual criteria is met, interest income is not recognized on these loans. Additionally, certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest are not reported as nonperforming loans and continue to accrue interest. Purchased impaired loans are excluded from nonperforming loans as we are currently accreting interest income over the expected life of the loans.
See Note 1 Accounting Policies in our 2015 Form 10-K for additional delinquency, nonperforming, and charge-off information.
5254 The PNC Financial Services Group, Inc. –Form 10-Q
The following tables display the delinquency status of our loans and our nonperforming assets at JuneSeptember 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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Lending | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 99,797 | $ | 61 | $ | 34 | $ | 38 | $ | 133 | $ | 606 | $ | 26 | $ | 100,562 | $ | 100,845 | $ | 64 | $ | 24 | $ | 37 | $ | 125 | $ | 521 | $ | 21 | $ | 101,512 | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 28,569 | 5 | 11 | 16 | 143 | 112 | 28,840 | 28,993 | 26 | 1 | 27 | 152 | 101 | 29,273 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equipment lease financing | 7,596 | 1 | 4 | 5 | 19 | 7,620 | 7,357 | 1 | 2 | 3 | 18 | 7,378 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total commercial lending | 135,962 | 67 | 49 | 38 | 154 | 768 | 138 | 137,022 | 137,195 | 91 | 27 | 37 | 155 | 691 | 122 | 138,163 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer Lending | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Home equity | 28,604 | 63 | 27 | 90 | 926 | 1,263 | 30,883 | 28,267 | 55 | 27 | 82 | 895 | 1,188 | 30,432 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate (f) | 11,554 | 128 | 65 | 489 | 682 | 513 | $ | 215 | 1,835 | 14,799 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | 11,969 | 110 | 71 | 496 | 677 | (f) | 502 | $ | 223 | 1,770 | 15,141 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit card | 4,820 | 25 | 17 | 30 | 72 | 4 | 4,896 | 4,947 | 28 | 19 | 31 | 78 | 4 | 5,029 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other consumer (g) | 20,940 | 181 | 85 | 197 | 463 | 53 | 21,456 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other consumer | 21,163 | 170 | 92 | 202 | 464 | (g) | 54 | 21,681 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total consumer lending | 65,918 | 397 | 194 | 716 | 1,307 | 1,496 | 215 | 3,098 | 72,034 | 66,346 | 363 | 209 | 729 | 1,301 | 1,455 | 223 | 2,958 | 72,283 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 201,880 | $ | 464 | $ | 243 | $ | 754 | $ | 1,461 | $ | 2,264 | $ | 215 | $ | 3,236 | $ | 209,056 | $ | 203,541 | $ | 454 | $ | 236 | $ | 766 | $ | 1,456 | $ | 2,146 | $ | 223 | $ | 3,080 | $ | 210,446 | ||||||||||||||||||||||||||||||||||||
Percentage of total loans | 96.57 | % | .22 | % | .12 | % | .36 | % | .70 | % | 1.08 | % | .10 | % | 1.55 | % | 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 |
At JuneSeptember 30, 2016, we pledged $20.9$21.9 billion of commercial loans to the Federal Reserve Bank (FRB) and $58.1$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-Q 5355
Table 47:46: Nonperforming Assets
| Dollars in millions | June 30 2016 | December 31 2015 | September 30 2016 | December 31 2015 | ||||||||||||
Nonperforming loans | ||||||||||||||||
Total commercial lending | $ | 768 | $ | 545 | $ | 691 | $ | 545 | ||||||||
Total consumer lending (a) | 1,496 | 1,581 | 1,455 | 1,581 | ||||||||||||
Total nonperforming loans (b) (c) | 2,264 | 2,126 | 2,146 | 2,126 | ||||||||||||
OREO and foreclosed assets | ||||||||||||||||
Other real estate owned (OREO) | 239 | 279 | 217 | 279 | ||||||||||||
Foreclosed and other assets | 12 | 20 | 12 | 20 | ||||||||||||
Total OREO and foreclosed assets | 251 | 299 | 229 | 299 | ||||||||||||
Total nonperforming assets | $ | 2,515 | $ | 2,425 | $ | 2,375 | $ | 2,425 | ||||||||
Nonperforming loans to total loans | 1.08 | % | 1.03 | % | 1.02 | % | 1.03 | % | ||||||||
Nonperforming assets to total loans, OREO and foreclosed assets | 1.20 | 1.17 | 1.13 | % | 1.17 | % | ||||||||||
Nonperforming assets to total assets | .70 | .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 $.4 billion and $.6 billion at |
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 JuneSeptember 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 JuneSeptember 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.
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 homogeneous 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.
5456 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.
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 | ||||||||||||||||||||||||||||||
June 30, 2016 | ||||||||||||||||||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 94,962 | $ | 2,174 | $ | 3,237 | $ | 163 | $ | 100,536 | $ | 96,035 | $ | 2,046 | $ | 3,335 | $ | 75 | $ | 101,491 | ||||||||||||||||||||
Commercial real estate | 28,251 | 68 | 398 | 11 | 28,728 | 28,768 | 60 | 328 | 16 | 29,172 | ||||||||||||||||||||||||||||||
Equipment lease financing | 7,336 | 56 | 219 | 9 | 7,620 | 7,185 | 69 | 116 | 8 | 7,378 | ||||||||||||||||||||||||||||||
Purchased impaired loans | 35 | 1 | 91 | 11 | 138 | 35 | 1 | 80 | 6 | 122 | ||||||||||||||||||||||||||||||
Total commercial lending | �� | $ | 130,584 | $ | 2,299 | $ | 3,945 | $ | 194 | $ | 137,022 | $ | 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-Q 5557
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.
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.
Table 49:48: Home Equity and Residential Real Estate Balances
| In millions | June 30 2016 | December 31 2015 | September 30 2016 | December 31 2015 | ||||||||||||
Home equity and residential real estate loans – excluding purchased impaired loans (a) | $ | 41,750 | $ | 42,268 | $ | 41,764 | $ | 42,268 | ||||||||
Home equity and residential real estate loans – purchased impaired loans (b) | 3,379 | 3,684 | 3,211 | 3,684 | ||||||||||||
Government insured or guaranteed residential real estate mortgages (a) | 834 | 923 | 851 | 923 | ||||||||||||
Difference between outstanding balance and recorded investment in purchased impaired loans | (281 | ) | (331 | ) | (253 | ) | (331 | ) | ||||||||
Total home equity and residential real estate loans (a) | $ | 45,682 | $ | 46,544 | $ | 45,573 | $ | 46,544 | ||||||||
| (a) | Represents recorded investment. |
| (b) | Represents outstanding balance. |
5658 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 | Home Equity | Residential Real Estate | |||||||||||||||||||||||||||||
| June 30, 2016 – in millions | 1st Liens | 2nd Liens | Total | |||||||||||||||||||||||||||||
| 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 | $ | 213 | $ | 815 | $ | 227 | $ | 1,255 | $ | 197 | $ | 726 | $ | 205 | $ | 1,128 | ||||||||||||||||
Less than or equal to 660 (d) (e) | 35 | 148 | 51 | 234 | 40 | 135 | 38 | 213 | ||||||||||||||||||||||||
Missing FICO | 1 | 6 | 9 | 16 | 5 | 3 | 8 | |||||||||||||||||||||||||
Greater than or equal to 100% to less than 125% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 553 | 1,541 | 444 | 2,538 | 480 | 1,372 | 391 | 2,243 | ||||||||||||||||||||||||
Less than or equal to 660 (d) (e) | 78 | 260 | 105 | 443 | 78 | 240 | 88 | 406 | ||||||||||||||||||||||||
Missing FICO | 3 | 3 | 12 | 18 | 1 | 3 | 12 | 16 | ||||||||||||||||||||||||
Greater than or equal to 90% to less than 100% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 626 | 1,357 | 561 | 2,544 | 535 | 1,233 | 520 | 2,288 | ||||||||||||||||||||||||
Less than or equal to 660 | 81 | 203 | 82 | 366 | 77 | 195 | 78 | 350 | ||||||||||||||||||||||||
Missing FICO | 1 | 2 | 16 | 19 | 2 | 2 | 12 | 16 | ||||||||||||||||||||||||
Less than 90% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 13,928 | 7,631 | 9,734 | 31,293 | 13,934 | 7,771 | 10,458 | 32,163 | ||||||||||||||||||||||||
Less than or equal to 660 | 1,257 | 842 | 600 | 2,699 | 1,334 | 850 | 593 | 2,777 | ||||||||||||||||||||||||
Missing FICO | 24 | 12 | 287 | 323 | 22 | 12 | 122 | 156 | ||||||||||||||||||||||||
Missing LTV and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 2 | 2 | ||||||||||||||||||||||||||||||
Total home equity and residential real estate loans | $ | 16,800 | $ | 12,820 | $ | 12,130 | $ | 41,750 | $ | 16,700 | $ | 12,544 | $ | 12,520 | $ | 41,764 | ||||||||||||||||
| Home Equity | Residential Real Estate | Total | Home Equity | Residential Real Estate | ||||||||||||||||||||||||||||
| December 31, 2015 – in millions | 1st Liens | 2nd Liens | 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 |
The PNC Financial Services Group, Inc. –Form 10-Q 5759
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) | Total | Home Equity (b) (c) | Residential Real Estate (b) (c) | ||||||||||||||||||||||||||||
| June 30, 2016 – in millions | 1st Liens | 2nd Liens | ||||||||||||||||||||||||||||||
| 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 | $ | 5 | $ | 138 | $ | 162 | $ | 305 | $ | 4 | $ | 118 | $ | 144 | $ | 266 | ||||||||||||||||
Less than or equal to 660 | 5 | 62 | 60 | 127 | 4 | 53 | 49 | 106 | ||||||||||||||||||||||||
Missing FICO | 2 | 4 | 6 | 3 | 6 | 9 | ||||||||||||||||||||||||||
Greater than or equal to 100% to less than 125% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 9 | 314 | 165 | 488 | 8 | 284 | 146 | 438 | ||||||||||||||||||||||||
Less than or equal to 660 | 8 | 126 | 104 | 238 | 8 | 117 | 94 | 219 | ||||||||||||||||||||||||
Missing FICO | 2 | 6 | 8 | 4 | 9 | 13 | ||||||||||||||||||||||||||
Greater than or equal to 90% to less than 100% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 8 | 158 | 122 | 288 | 7 | 152 | 106 | 265 | ||||||||||||||||||||||||
Less than or equal to 660 | 5 | 71 | 66 | 142 | 5 | 66 | 55 | 126 | ||||||||||||||||||||||||
Missing FICO | 1 | 3 | 4 | 2 | 6 | 8 | ||||||||||||||||||||||||||
Less than 90% and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 116 | 325 | 609 | 1,050 | 110 | 322 | 607 | 1,039 | ||||||||||||||||||||||||
Less than or equal to 660 | 81 | 168 | 421 | 670 | 83 | 166 | 399 | 648 | ||||||||||||||||||||||||
Missing FICO | 1 | 3 | 26 | 30 | 1 | 5 | 48 | 54 | ||||||||||||||||||||||||
Missing LTV and updated FICO scores: | ||||||||||||||||||||||||||||||||
Greater than 660 | 2 | 15 | 17 | 1 | 14 | 15 | ||||||||||||||||||||||||||
Less than or equal to 660 | 1 | 4 | 5 | 1 | 3 | 4 | ||||||||||||||||||||||||||
Missing FICO | 1 | 1 | 1 | 1 | ||||||||||||||||||||||||||||
Total home equity and residential real estate loans | $ | 241 | $ | 1,370 | $ | 1,768 | $ | 3,379 | $ | 232 | $ | 1,292 | $ | 1,687 | $ | 3,211 | ||||||||||||||||
| Home Equity (b) (c) | Residential Real Estate (b) (c) | Total | Home Equity (b) (c) | Residential Real Estate (b) (c) | ||||||||||||||||||||||||||||
| December 31, 2015 – in millions | 1st Liens | 2nd Liens | 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) |
5860 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 | ||||||||||||||||||||||||
June 30, 2016 | ||||||||||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||||||||||
FICO score greater than 719 | $ | 2,979 | 61 | % | $ | 9,765 | 66 | % | $ | 3,029 | 60 | % | $ | 10,073 | 66 | % | ||||||||||||||||
650 to 719 | 1,362 | 28 | 3,594 | 24 | 1,412 | 28 | 3,717 | 24 | ||||||||||||||||||||||||
620 to 649 | 196 | 4 | 507 | 3 | 209 | 4 | 512 | 3 | ||||||||||||||||||||||||
Less than 620 | 207 | 4 | 584 | 4 | 225 | 5 | 577 | 4 | ||||||||||||||||||||||||
No FICO score available or required (c) | 152 | 3 | 368 | 3 | 154 | 3 | 438 | 3 | ||||||||||||||||||||||||
Total loans using FICO credit metric | 4,896 | 100 | % | 14,818 | 100 | % | 5,029 | 100 | % | 15,317 | 100 | % | ||||||||||||||||||||
Consumer loans using other internal credit metrics (b) | 6,638 | 6,364 | ||||||||||||||||||||||||||||||
Total loan balance | $ | 4,896 | $ | 21,456 | $ | 5,029 | $ | 21,681 | ||||||||||||||||||||||||
Weighted-average updated FICO score (d) | 735 | 746 | 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. |
Troubled Debt Restructurings (TDRs)
Table 53:52: Summary of Troubled Debt Restructurings
| In millions | June 30 2016 | December 31 2015 | September 30 2016 | December 31 2015 | ||||||||||||
Total commercial lending | $ | 588 | $ | 434 | $ | 527 | $ | 434 | ||||||||
Total consumer lending | 1,860 | 1,917 | 1,832 | 1,917 | ||||||||||||
Total TDRs | $ | 2,448 | $ | 2,351 | $ | 2,359 | $ | 2,351 | ||||||||
Nonperforming | $ | 1,240 | $ | 1,119 | $ | 1,177 | $ | 1,119 | ||||||||
Accruing (a) | 1,208 | 1,232 | 1,182 | 1,232 | ||||||||||||
Total TDRs | $ | 2,448 | $ | 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-Q 5961
We held specific reserves in the ALLL of $.4 billion and $.3 billion at Juneboth 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 first sixnine months and secondthird quarters of 2016 and 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)
Pre-TDR Recorded | Post-TDR Recorded Investment (c) | |||||||||||||||||||||||
During the three months ended June 30, 2016 Dollars in millions | Number of Loans | Principal Forgiveness (d) | Rate Reduction (e) | Other (f) | Total | |||||||||||||||||||
Total commercial lending | 30 | $ | 204 | $ | 42 | $ | 141 | $ | 183 | |||||||||||||||
Total consumer lending | 2,670 | 57 | 38 | 16 | 54 | |||||||||||||||||||
Total TDRs | 2,700 | $ | 261 | $ | 80 | $ | 157 | $ | 237 | |||||||||||||||
During the three months ended June 30, 2015 Dollars in millions | ||||||||||||||||||||||||
Total commercial lending | 37 | $ | 42 | $ | 4 | $ | 3 | $ | 21 | $ | 28 | |||||||||||||
Total consumer lending | 2,769 | 86 | 47 | 36 | 83 | |||||||||||||||||||
Total TDRs | 2,806 | $ | 128 | $ | 4 | $ | 50 | $ | 57 | $ | 111 | |||||||||||||
Table 54: Financial Impact and TDRs by Concession Type (Continued) (a)
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 | 37 | $ | 108 | $ | 1 | $ | 96 | $ | 97 | |||||||||||||||
Total consumer lending | 2,800 | 62 | 37 | 22 | 59 | |||||||||||||||||||
Total TDRs | 2,837 | $ | 170 | $ | 38 | $ | 118 | $ | 156 | |||||||||||||||
During the three months ended September 30, 2015 Dollars in millions | ||||||||||||||||||||||||
Total commercial lending | 39 | $ | 80 | $ | 15 | $ | 47 | $ | 62 | |||||||||||||||
Total consumer lending | 3,014 | 95 | $ | 62 | 28 | 90 | ||||||||||||||||||
Total TDRs | 3,053 | $ | 175 | $ | 15 | $ | 62 | $ | 75 | $ | 152 | |||||||||||||
Pre-TDR Recorded | Post-TDR Recorded Investment (c) | Pre-TDR Recorded | Post-TDR Recorded Investment (c) | |||||||||||||||||||||||||||||||||||||||||||||
During the six months ended June 30, 2016 Dollars in millions | Number of Loans | Principal Forgiveness (d) | Rate Reduction (e) | Other (f) | Total | |||||||||||||||||||||||||||||||||||||||||||
During the nine months ended September 30, 2016 Dollars in millions | Number of Loans | Pre-TDR Recorded | Principal Forgiveness (d) | Rate Reduction (e) | Other (f) | Total | ||||||||||||||||||||||||||||||||||||||||||
Total commercial lending | 72 | $ | 372 | $ | 52 | $ | 283 | $ | 335 | 109 | $ | 53 | $ | 379 | $ | 432 | ||||||||||||||||||||||||||||||||
Total consumer lending | 5,635 | 125 | 82 | 36 | 118 | 8,435 | 187 | 119 | 58 | 177 | ||||||||||||||||||||||||||||||||||||||
Total TDRs | 5,707 | $ | 497 | $ | 134 | $ | 319 | $ | 453 | 8,544 | $ | 667 | $ | 172 | $ | 437 | $ | 609 | ||||||||||||||||||||||||||||||
During the six months ended June 30, 2015 Dollars in millions | ||||||||||||||||||||||||||||||||||||||||||||||||
During the nine months ended September 30, 2015 Dollars in millions | ||||||||||||||||||||||||||||||||||||||||||||||||
Total commercial lending | 75 | $ | 105 | $ | 6 | $ | 3 | $ | 72 | $ | 81 | 114 | $ | 185 | $ | 20 | $ | 4 | $ | 120 | $ | 144 | ||||||||||||||||||||||||||
Total consumer lending | 5,386 | 155 | 88 | 61 | 149 | 8,400 | 250 | 150 | 89 | 239 | ||||||||||||||||||||||||||||||||||||||
Total TDRs | 5,461 | $ | 260 | $ | 6 | $ | 91 | $ | 133 | $ | 230 | 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 sixnine months ended JuneSeptember 30, 2016 totaled $38$66 million and $59$118 million, respectively. The comparable amounts for the three months and sixnine months ended JuneSeptember 30, 2015 totaled $27$29 million and $45$69 million, respectively.
See Note 3 Asset Quality in our 2015 Form 10-K for additional discussion on TDRs.
6062 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. Nonperforming equipment lease financing loans of $19 million and $7 million at June 30, 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 sixnine months ended JuneSeptember 30, 2016 and JuneSeptember 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) | ||||||||||||||||||||||||
June 30, 2016 | ||||||||||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||||||||||
Impaired loans with an associated allowance | ||||||||||||||||||||||||||||||||
Commercial | $ | 661 | $ | 489 | $ | 140 | $ | 395 | $ | 544 | $ | 389 | $ | 92 | $ | 394 | ||||||||||||||||
Commercial real estate | 200 | 97 | 27 | 110 | 221 | 102 | 28 | 108 | ||||||||||||||||||||||||
Home equity | 919 | 875 | 196 | 904 | 891 | 859 | 186 | 893 | ||||||||||||||||||||||||
Residential real estate | 246 | 245 | 31 | 258 | 227 | 222 | 29 | 249 | ||||||||||||||||||||||||
Credit card | 104 | 104 | 26 | 106 | 104 | 104 | 24 | 106 | ||||||||||||||||||||||||
Other consumer | 27 | 24 | 1 | 25 | 27 | 25 | 1 | 25 | ||||||||||||||||||||||||
Total impaired loans with an associated allowance | $ | 2,157 | $ | 1,834 | $ | 421 | $ | 1,798 | $ | 2,014 | $ | 1,701 | $ | 360 | $ | 1,775 | ||||||||||||||||
Impaired loans without an associated allowance | ||||||||||||||||||||||||||||||||
Commercial | $ | 328 | $ | 230 | $ | 222 | $ | 379 | $ | 265 | $ | 232 | ||||||||||||||||||||
Commercial real estate | 201 | 144 | 152 | 135 | 115 | 143 | ||||||||||||||||||||||||||
Home equity | 471 | 215 | 200 | 486 | 221 | 205 | ||||||||||||||||||||||||||
Residential real estate | 509 | 389 | 389 | 508 | 394 | 390 | ||||||||||||||||||||||||||
Other consumer | 23 | 8 | 8 | 23 | 7 | 8 | ||||||||||||||||||||||||||
Total impaired loans without an associated allowance | $ | 1,532 | $ | 986 | $ | 971 | $ | 1,531 | $ | 1,002 | $ | 978 | ||||||||||||||||||||
Total impaired loans | $ | 3,689 | $ | 2,820 | $ | 421 | $ | 2,769 | $ | 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 |
| (b) | Average recorded investment is for the |
The PNC Financial Services Group, Inc. –Form 10-Q 6163
NOTE 4 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 of our 2015 Form 10-K. A rollforward of the ALLL and associated loan data follows.
Table 56:55: Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data
| In millions | Commercial Lending | Consumer Lending | Total | Commercial Lending | Consumer Lending | Total | ||||||||||||||||||
June 30, 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 | (187 | ) | (262 | ) | (449 | ) | (297 | ) | (395 | ) | (692 | ) | ||||||||||||
Recoveries | 88 | 78 | 166 | 133 | 122 | 255 | ||||||||||||||||||
Net (charge-offs) / recoveries | (99 | ) | (184 | ) | (283 | ) | (164 | ) | (273 | ) | (437 | ) | ||||||||||||
Provision for credit losses | 153 | 126 | 279 | 156 | 210 | 366 | ||||||||||||||||||
Net change in allowance for unfunded loan commitments and letters of credit | (41 | ) | (1 | ) | (42 | ) | (48 | ) | (1 | ) | (49 | ) | ||||||||||||
Net recoveries of purchased impaired loans | 4 | 4 | ||||||||||||||||||||||
June 30 | $ | 1,618 | $ | 1,067 | $ | 2,685 | ||||||||||||||||||
Net recoveries of purchased impaired loans and other | 1 | 11 | 12 | |||||||||||||||||||||
September 30 | $ | 1,550 | $ | 1,069 | $ | 2,619 | ||||||||||||||||||
TDRs individually evaluated for impairment | $ | 103 | $ | 254 | $ | 357 | $ | 76 | $ | 240 | $ | 316 | ||||||||||||
Other loans individually evaluated for impairment | 64 | 64 | 44 | 44 | ||||||||||||||||||||
Loans collectively evaluated for impairment | 1,407 | 532 | 1,939 | 1,388 | 548 | 1,936 | ||||||||||||||||||
Purchased impaired loans | 44 | 281 | 325 | 42 | 281 | 323 | ||||||||||||||||||
June 30 | $ | 1,618 | $ | 1,067 | $ | 2,685 | ||||||||||||||||||
September 30 | $ | 1,550 | $ | 1,069 | $ | 2,619 | ||||||||||||||||||
Loan Portfolio | ||||||||||||||||||||||||
TDRs individually evaluated for impairment (a) | $ | 588 | $ | 1,860 | $ | 2,448 | $ | 527 | $ | 1,832 | $ | 2,359 | ||||||||||||
Other loans individually evaluated for impairment | 372 | 372 | 344 | 344 | ||||||||||||||||||||
Loans collectively evaluated for impairment (b) | 135,924 | 66,225 | 202,149 | 137,170 | 66,619 | 203,789 | ||||||||||||||||||
Fair value option loans (c) | 851 | 851 | 874 | 874 | ||||||||||||||||||||
Purchased impaired loans | 138 | 3,098 | 3,236 | 122 | 2,958 | 3,080 | ||||||||||||||||||
June 30 | $ | 137,022 | $ | 72,034 | $ | 209,056 | ||||||||||||||||||
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) | 1.18 | % | 1.48 | % | 1.28 | % | 1.12 | % | 1.48 | % | 1.24 | % | ||||||||||||
June 30, 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 | (108 | ) | (284 | ) | (392 | ) | (176 | ) | (413 | ) | (589 | ) | ||||||||||||
Recoveries | 134 | 88 | 222 | 188 | 135 | 323 | ||||||||||||||||||
Net charge-offs | 26 | (196 | ) | (170 | ) | |||||||||||||||||||
Net (charge-offs) / recoveries | 12 | (278 | ) | (266 | ) | |||||||||||||||||||
Provision for credit losses | 20 | 80 | 100 | 48 | 133 | 181 | ||||||||||||||||||
Net change in allowance for unfunded loan commitments and letters of credit | 13 | 13 | (7 | ) | (7 | ) | ||||||||||||||||||
Other | (2 | ) | (2 | ) | (2 | ) | (2 | ) | ||||||||||||||||
June 30 | $ | 1,628 | $ | 1,644 | $ | 3,272 | ||||||||||||||||||
September 30 | $ | 1,622 | $ | 1,615 | $ | 3,237 | ||||||||||||||||||
TDRs individually evaluated for impairment | $ | 35 | $ | 274 | $ | 309 | $ | 39 | $ | 263 | $ | 302 | ||||||||||||
Other loans individually evaluated for impairment | 65 | 65 | 70 | 70 | ||||||||||||||||||||
Loans collectively evaluated for impairment | 1,461 | 582 | 2,043 | 1,446 | 601 | 2,047 | ||||||||||||||||||
Purchased impaired loans | 67 | 788 | 855 | 67 | 751 | 818 | ||||||||||||||||||
June 30 | $ | 1,628 | $ | 1,644 | $ | 3,272 | ||||||||||||||||||
September 30 | $ | 1,622 | $ | 1,615 | $ | 3,237 | ||||||||||||||||||
Loan Portfolio | ||||||||||||||||||||||||
TDRs individually evaluated for impairment (a) | $ | 414 | $ | 2,002 | $ | 2,416 | $ | 420 | $ | 1,948 | $ | 2,368 | ||||||||||||
Other loans individually evaluated for impairment | 282 | 282 | 291 | 291 | ||||||||||||||||||||
Loans collectively evaluated for impairment (b) | 129,791 | 67,258 | 197,049 | 130,249 | 66,993 | 197,242 | ||||||||||||||||||
Fair value option loans (c) | 941 | 941 | 915 | 915 | ||||||||||||||||||||
Purchased impaired loans | 235 | 4,230 | 4,465 | 204 | 3,963 | 4,167 | ||||||||||||||||||
June 30 | $ | 130,722 | $ | 74,431 | $ | 205,153 | ||||||||||||||||||
September 30 | $ | 131,164 | $ | 73,819 | $ | 204,983 | ||||||||||||||||||
Portfolio segment ALLL as a percentage of total ALLL | 50 | % | 50 | % | 100 | % | 50 | % | 50 | % | 100 | % | ||||||||||||
Ratio of the allowance for loan and lease losses to total loans | 1.25 | % | 2.21 | % | 1.59 | % | 1.24 | % | 2.19 | % | 1.58 | % | ||||||||||||
6264 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 of our 2015 Form 10-K. A rollforward of the allowance is presented below.
Table 57:56: Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit
| In millions | 2016 | 2015 | 2016 | 2015 | ||||||||||||
January 1 | $ | 261 | $ | 259 | $ | 261 | $ | 259 | ||||||||
Net change in allowance for unfunded loan commitments and letters of credit | 42 | (13 | ) | 49 | 7 | |||||||||||
June 30 | $ | 303 | $ | 246 | ||||||||||||
September 30 | $ | 310 | $ | 266 | ||||||||||||
The PNC Financial Services Group, Inc. –Form 10-Q 6365
Table 58:57: Investment Securities Summary
| Amortized | Unrealized | Fair | Amortized | Unrealized | Fair | |||||||||||||||||||||||||||
| In millions | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||||||||||||||
June 30, 2016 | ||||||||||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||||||||||
Securities Available for Sale | ||||||||||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 9,794 | $ | 323 | $ | (19 | ) | $ | 10,098 | $ | 12,062 | $ | 301 | $ | (13 | ) | $ | 12,350 | ||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 25,216 | 568 | (16 | ) | 25,768 | 27,429 | 568 | (18 | ) | 27,979 | ||||||||||||||||||||||
Non-agency | 3,555 | 214 | (80 | ) | 3,689 | 3,372 | 226 | (61 | ) | 3,537 | ||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 1,740 | 26 | (3 | ) | 1,763 | 2,301 | 21 | (4 | ) | 2,318 | ||||||||||||||||||||||
Non-agency | 4,559 | 70 | (25 | ) | 4,604 | 4,183 | 69 | (19 | ) | 4,233 | ||||||||||||||||||||||
Asset-backed | 5,682 | 55 | (40 | ) | 5,697 | 6,123 | 66 | (26 | ) | 6,163 | ||||||||||||||||||||||
State and municipal | 1,984 | 119 | (3 | ) | 2,100 | 1,963 | 107 | (3 | ) | 2,067 | ||||||||||||||||||||||
Other debt | 2,616 | 69 | (4 | ) | 2,681 | 2,712 | 60 | (3 | ) | 2,769 | ||||||||||||||||||||||
Total debt securities | 55,146 | 1,444 | (190 | ) | 56,400 | 60,145 | 1,418 | (147 | ) | 61,416 | ||||||||||||||||||||||
Corporate stocks and other | 483 | 1 | 484 | 525 | 525 | |||||||||||||||||||||||||||
Total securities available for sale | $ | 55,629 | $ | 1,445 | $ | (190 | ) | $ | 56,884 | $ | 60,670 | $ | 1,418 | $ | (147 | ) | $ | 61,941 | ||||||||||||||
Securities Held to Maturity (a) | ||||||||||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 263 | $ | 68 | $ | 331 | $ | 265 | $ | 65 | $ | 330 | ||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 10,058 | 245 | $ | (3 | ) | 10,300 | 11,637 | 254 | $ | (2 | ) | 11,889 | ||||||||||||||||||||
Non-agency | 217 | 14 | 231 | 204 | 13 | 217 | ||||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 1,109 | 46 | 1,155 | 1,051 | 39 | 1,090 | ||||||||||||||||||||||||||
Non-agency | 612 | 26 | 638 | 579 | 25 | 604 | ||||||||||||||||||||||||||
Asset-backed | 705 | (8 | ) | 697 | 799 | (4 | ) | 795 | ||||||||||||||||||||||||
State and municipal | 1,931 | 175 | 2,106 | 1,920 | 159 | 2,079 | ||||||||||||||||||||||||||
Other debt | 22 | 22 | 118 | (9 | ) | 109 | ||||||||||||||||||||||||||
Total securities held to maturity | $ | 14,917 | $ | 574 | $ | (11 | ) | $ | 15,480 | $ | 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 | $ | 9,764 | $ | 152 | $ | (42 | ) | $ | 9,874 | ||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 24,698 | 250 | (128 | ) | 24,820 | 24,698 | 250 | (128 | ) | 24,820 | ||||||||||||||||||||||
Non-agency | 3,992 | 247 | (88 | ) | 4,151 | 3,992 | 247 | (88 | ) | 4,151 | ||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 1,917 | 11 | (10 | ) | 1,918 | 1,917 | 11 | (10 | ) | 1,918 | ||||||||||||||||||||||
Non-agency | 4,902 | 30 | (29 | ) | 4,903 | 4,902 | 30 | (29 | ) | 4,903 | ||||||||||||||||||||||
Asset-backed | 5,417 | 54 | (48 | ) | 5,423 | 5,417 | 54 | (48 | ) | 5,423 | ||||||||||||||||||||||
State and municipal | 1,982 | 79 | (5 | ) | 2,056 | 1,982 | 79 | (5 | ) | 2,056 | ||||||||||||||||||||||
Other debt | 2,007 | 31 | (12 | ) | 2,026 | 2,007 | 31 | (12 | ) | 2,026 | ||||||||||||||||||||||
Total debt securities | 54,679 | 854 | (362 | ) | 55,171 | 54,679 | 854 | (362 | ) | 55,171 | ||||||||||||||||||||||
Corporate stocks and other | 590 | (1 | ) | 589 | 590 | (1 | ) | 589 | ||||||||||||||||||||||||
Total securities available for sale | $ | 55,269 | $ | 854 | $ | (363 | ) | $ | 55,760 | $ | 55,269 | $ | 854 | $ | (363 | ) | $ | 55,760 | ||||||||||||||
6466 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 JuneSeptember 30, 2016, Accumulated other comprehensive income included pretax gains of $98$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 5958 presents gross unrealized losses on securities available for sale at JuneSeptember 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 JuneSeptember 30, 2016 when compared to December 31, 2015 was due to a decline in market interest rates.
The PNC Financial Services Group, Inc. –Form 10-Q 6567
Table 59:58: 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 | Unrealized loss position less than 12 months | Unrealized loss position 12 months or more | Total | |||||||||||||||||||||||||||||||||||||||||||
| In millions | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | ||||||||||||||||||||||||||||||||||||
June 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | (6 | ) | $ | 1,030 | $ | (13 | ) | $ | 2,445 | $ | (19 | ) | $ | 3,475 | $ | (1 | ) | $ | 1,197 | $ | (12 | ) | $ | 2,805 | $ | (13 | ) | $ | 4,002 | ||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||||||||||||||||||
Agency | (3 | ) | 662 | (13 | ) | 879 | (16 | ) | 1,541 | (5 | ) | 699 | (13 | ) | 943 | (18 | ) | 1,642 | ||||||||||||||||||||||||||||||
Non-agency | (6 | ) | 344 | (74 | ) | 1,292 | (80 | ) | 1,636 | (1 | ) | 146 | (60 | ) | 1,222 | (61 | ) | 1,368 | ||||||||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||||||||||||||||||
Agency | (2 | ) | 122 | (1 | ) | 186 | (3 | ) | 308 | (3 | ) | 400 | (1 | ) | 114 | (4 | ) | 514 | ||||||||||||||||||||||||||||||
Non-agency | (5 | ) | 1,006 | (20 | ) | 1,169 | (25 | ) | 2,175 | (4 | ) | 587 | (15 | ) | 1,269 | (19 | ) | 1,856 | ||||||||||||||||||||||||||||||
Asset-backed | (8 | ) | 1,081 | (32 | ) | 1,567 | (40 | ) | 2,648 | (2 | ) | 445 | (24 | ) | 1,629 | (26 | ) | 2,074 | ||||||||||||||||||||||||||||||
State and municipal | (3 | ) | 239 | (a | ) | 55 | (3 | ) | 294 | (1 | ) | 207 | (2 | ) | 123 | (3 | ) | 330 | ||||||||||||||||||||||||||||||
Other debt | (2 | ) | 79 | (2 | ) | 102 | (4 | ) | 181 | (1 | ) | 195 | (2 | ) | 125 | (3 | ) | 320 | ||||||||||||||||||||||||||||||
Total debt securities | (35 | ) | 4,563 | (155 | ) | 7,695 | (190 | ) | 12,258 | (18 | ) | 3,876 | (129 | ) | 8,230 | (147 | ) | 12,106 | ||||||||||||||||||||||||||||||
Corporate stocks and other | (a | ) | 15 | (a | ) | 15 | (a | ) | 16 | (a | ) | 16 | ||||||||||||||||||||||||||||||||||||
Total | $ | (35 | ) | $ | 4,563 | $ | (155 | ) | $ | 7,710 | $ | (190 | ) | $ | 12,273 | $ | (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 $10$16 million at JuneSeptember 30, 2016, with less than $.5$10 million of the loss related to securities with a fair value of $.2$.1 billion that had been in a continuous loss position less than 12 months and $10$6 million of the loss related to securities with a fair value of $.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 59,58, as of JuneSeptember 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 is more likely than not we will be required to sell the security
6668 The PNC Financial Services Group, Inc. –Form 10-Q
is more likely than not we will be required to sell the security 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 JuneSeptember 30, 2016. During the first six
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 60:59: Gains (Losses) on Sales of Securities Available for Sale
Six months ended June 30 In millions | Proceeds | Gross Gains | Gross Losses | Net Gains | Tax Expense | |||||||||||||||||||||||||||
Nine months ended September 30 In millions | Proceeds | Gross Gains | Gross Losses | Net Gains | Tax Expense | |||||||||||||||||||||||||||
2016 | $ | 2,093 | $14 | $(1) | $13 | $5 | $ | 2,546 | $ | 20 | $ | 20 | $ | 7 | ||||||||||||||||||
2015 | $ | 2,441 | $51 | $(1) | $50 | $17 | $ | 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 JuneSeptember 30, 2016.
Table 61:60: Contractual Maturity of Debt Securities
June 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 | |||||||||||||||||||||||||||||||||||
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 | $ | 445 | $ | 5,014 | $ | 3,260 | $ | 1,075 | $ | 9,794 | $ | 404 | $ | 5,251 | $ | 5,244 | $ | 1,163 | $ | 12,062 | ||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||||||||||
Agency | 129 | 849 | 24,238 | 25,216 | 137 | 912 | 26,380 | 27,429 | ||||||||||||||||||||||||||||||||
Non-agency | 3 | 3,552 | 3,555 | 2 | 3,370 | 3,372 | ||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||||||||||
Agency | 6 | 122 | 282 | 1,330 | 1,740 | 78 | 44 | 828 | 1,351 | 2,301 | ||||||||||||||||||||||||||||||
Non-agency | 50 | 21 | 8 | 4,480 | 4,559 | 17 | 8 | 4,158 | 4,183 | |||||||||||||||||||||||||||||||
Asset-backed | 13 | 1,801 | 1,833 | 2,035 | 5,682 | 12 | 2,104 | 1,987 | 2,020 | 6,123 | ||||||||||||||||||||||||||||||
State and municipal | 2 | 147 | 349 | 1,486 | 1,984 | 2 | 146 | 383 | 1,432 | 1,963 | ||||||||||||||||||||||||||||||
Other debt | 272 | 1,910 | 303 | 131 | 2,616 | 213 | 2,151 | 238 | 110 | 2,712 | ||||||||||||||||||||||||||||||
Total debt securities available for sale | $ | 788 | $ | 9,147 | $ | 6,884 | $ | 38,327 | $ | 55,146 | $ | 709 | $ | 9,852 | $ | 9,600 | $ | 39,984 | $ | 60,145 | ||||||||||||||||||||
Fair value | $ | 794 | $ | 9,305 | $ | 7,033 | $ | 39,268 | $ | 56,400 | $ | 714 | $ | 10,004 | $ | 9,739 | $ | 40,959 | $ | 61,416 | ||||||||||||||||||||
Weighted-average yield, GAAP basis | 2.44 | % | 2.21 | % | 2.31 | % | 2.89 | % | 2.70 | % | 2.74 | % | 2.17 | % | 2.08 | % | 2.87 | % | 2.62 | % | ||||||||||||||||||||
Securities Held to Maturity | ||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 263 | $ | 263 | $ | 265 | $ | 265 | ||||||||||||||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||||||||||
Agency | $ | 11 | $ | 382 | 9,665 | 10,058 | $ | 10 | $ | 500 | 11,127 | 11,637 | ||||||||||||||||||||||||||||
Non-agency | 217 | 217 | 204 | 204 | ||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||||||||||
Agency | $ | 157 | 774 | 121 | 57 | 1,109 | $ | 164 | 827 | 5 | 55 | 1,051 | ||||||||||||||||||||||||||||
Non-agency | 612 | 612 | 579 | 579 | ||||||||||||||||||||||||||||||||||||
Asset-backed | 2 | 589 | 114 | 705 | 1 | 688 | 110 | 799 | ||||||||||||||||||||||||||||||||
State and municipal | 4 | 57 | 979 | 891 | 1,931 | 4 | 69 | 1,008 | 839 | 1,920 | ||||||||||||||||||||||||||||||
Other debt | 22 | 22 | 7 | 33 | 28 | 50 | 118 | |||||||||||||||||||||||||||||||||
Total debt securities held to maturity | $ | 161 | $ | 866 | $ | 2,071 | $ | 11,819 | $ | 14,917 | $ | 175 | $ | 940 | $ | 2,229 | $ | 13,229 | $ | 16,573 | ||||||||||||||||||||
Fair value | $ | 161 | $ | 901 | $ | 2,184 | $ | 12,234 | $ | 15,480 | $ | 175 | $ | 979 | $ | 2,328 | $ | 13,631 | $ | 17,113 | ||||||||||||||||||||
Weighted-average yield, GAAP basis | 3.25 | % | 3.47 | % | 3.27 | % | 3.40 | % | 3.39 | % | 3.29 | % | 3.60 | % | 3.03 | % | 3.55 | % | 3.48 | % | ||||||||||||||||||||
The PNC Financial Services Group, Inc. –Form 10-Q 6769
Weighted-average yields are based on historical cost with effective yields weighted for the contractual maturity of each security. At JuneSeptember 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 $4.7 billion and fair value of $4.8 billion. The FNMA investments had a total amortized cost of $23.3$28.4 billion and fair value of $23.8$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 62:61: Fair Value of Securities Pledged and Accepted as Collateral
| In millions | June 30 2016 | December 31 2015 | September 30 2016 | December 31 2015 | ||||||||||||
Pledged to others | $ | 9,699 | $ | 9,674 | $ | 9,991 | $ | 9,674 | ||||||||
Accepted from others: | ||||||||||||||||
Permitted by contract or custom to sell or repledge | $ | 1,183 | $ | 1,100 | $ | 655 | $ | 1,100 | ||||||||
Permitted amount repledged to others | $ | 1,023 | $ | 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.
6870 The PNC Financial Services Group, Inc. –Form 10-Q
Table 63:62: Fair Value Measurements – Recurring Basis Summary
| June 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 | $ | 9,483 | $ | 615 | $ | 10,098 | $ | 9,267 | $ | 607 | $ | 9,874 | ||||||||||||||||||||
Residential mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 25,768 | 25,768 | 24,820 | 24,820 | ||||||||||||||||||||||||||||
Non-agency | 132 | $ | 3,557 | 3,689 | 143 | $ | 4,008 | 4,151 | ||||||||||||||||||||||||
Commercial mortgage-backed | ||||||||||||||||||||||||||||||||
Agency | 1,763 | 1,763 | 1,918 | 1,918 | ||||||||||||||||||||||||||||
Non-agency | 4,604 | 4,604 | 4,903 | 4,903 | ||||||||||||||||||||||||||||
Asset-backed | 5,261 | 436 | 5,697 | 4,941 | 482 | 5,423 | ||||||||||||||||||||||||||
State and municipal | 2,085 | 15 | 2,100 | 2,041 | 15 | 2,056 | ||||||||||||||||||||||||||
Other debt | 2,648 | 33 | 2,681 | 1,996 | 30 | 2,026 | ||||||||||||||||||||||||||
Total debt securities | 9,483 | 42,876 | 4,041 | 56,400 | 9,267 | 41,369 | 4,535 | 55,171 | ||||||||||||||||||||||||
Corporate stocks and other | 421 | 63 | 484 | 527 | 62 | 589 | ||||||||||||||||||||||||||
Total securities available for sale | 9,904 | 42,939 | 4,041 | 56,884 | 9,794 | 41,431 | 4,535 | 55,760 | ||||||||||||||||||||||||
Financial derivatives (a) (b) | ||||||||||||||||||||||||||||||||
Interest rate contracts | 7,761 | 47 | 7,808 | 4,626 | 29 | 4,655 | ||||||||||||||||||||||||||
Other contracts | 415 | 4 | 419 | 284 | 2 | 286 | ||||||||||||||||||||||||||
Total financial derivatives | 8,176 | 51 | 8,227 | 4,910 | 31 | 4,941 | ||||||||||||||||||||||||||
Residential mortgage loans held for sale (c) | 1,110 | 6 | 1,116 | 838 | 5 | 843 | ||||||||||||||||||||||||||
Trading securities (d) | ||||||||||||||||||||||||||||||||
Debt | 799 | 1,193 | 2 | 1,994 | 987 | 727 | 3 | 1,717 | ||||||||||||||||||||||||
Equity | 12 | 12 | 9 | 9 | ||||||||||||||||||||||||||||
Total trading securities | 811 | 1,193 | 2 | 2,006 | 996 | 727 | 3 | 1,726 | ||||||||||||||||||||||||
Residential mortgage servicing rights | 774 | 774 | 1,063 | 1,063 | ||||||||||||||||||||||||||||
Commercial mortgage servicing rights | 448 | 448 | 526 | 526 | ||||||||||||||||||||||||||||
Commercial mortgage loans held for sale (c) | 981 | 981 | 641 | 641 | ||||||||||||||||||||||||||||
Equity investments – direct investments | 1,120 | 1,120 | 1,098 | 1,098 | ||||||||||||||||||||||||||||
Equity investments – indirect investments (e) (f) | 233 | 281 | 347 | |||||||||||||||||||||||||||||
Customer resale agreements (g) | 137 | 137 | 137 | 137 | ||||||||||||||||||||||||||||
Loans (h) | 534 | 317 | 851 | 565 | 340 | 905 | ||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||
BlackRock Series C Preferred Stock (i) | 209 | 209 | 357 | 357 | ||||||||||||||||||||||||||||
Other | 254 | 165 | 6 | 425 | 254 | 199 | 7 | 460 | ||||||||||||||||||||||||
Total other assets | 254 | 165 | 215 | 634 | 254 | 199 | 364 | 817 | ||||||||||||||||||||||||
Total assets | $ | 10,969 | $ | 54,254 | $ | 8,188 | $ | 73,459 | $ | 11,044 | $ | 48,807 | $ | 8,606 | $ | 68,804 | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Financial derivatives (b) (j) | ||||||||||||||||||||||||||||||||
Interest rate contracts | $ | 3 | $ | 5,455 | $ | 11 | $ | 5,469 | $ | 1 | $ | 3,124 | $ | 7 | $ | 3,132 | ||||||||||||||||
BlackRock LTIP | 209 | 209 | 357 | 357 | ||||||||||||||||||||||||||||
Other contracts | 225 | 165 | 390 | 204 | 109 | 313 | ||||||||||||||||||||||||||
Total financial derivatives | 3 | 5,680 | 385 | 6,068 | 1 | 3,328 | 473 | 3,802 | ||||||||||||||||||||||||
Trading securities sold short (k) | ||||||||||||||||||||||||||||||||
Debt | 1,036 | 10 | 1,046 | 960 | 27 | 987 | ||||||||||||||||||||||||||
Total trading securities sold short | 1,036 | 10 | 1,046 | 960 | 27 | 987 | ||||||||||||||||||||||||||
Other borrowed funds | 62 | 8 | 70 | 81 | 12 | 93 | ||||||||||||||||||||||||||
Other liabilities | 13 | 13 | 10 | 10 | ||||||||||||||||||||||||||||
Total liabilities | $ | 1,039 | $ | 5,752 | $ | 406 | $ | 7,197 | $ | 961 | $ | 3,436 | $ | 495 | $ | 4,892 | ||||||||||||||||
| 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-Q 6971
(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 sixnine months ended JuneSeptember 30, 2016 and 2015 follow:
Table 64:63: Reconciliation of Level 3 Assets and Liabilities
Three Months Ended JuneSeptember 30, 2016
Total realized / | Unrealized gains / losses on assets and Consolidated | Total realized / unrealized gains or losses for the period (a) | Unrealized Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Level 3 Instruments Only In millions | Fair Value Mar. 31, 2016 | Included in Earnings | Included in Other comprehensive income | Purchases | Sales | Issuances | Settlements | Transfers into Level 3 | Transfers out of Level 3 | Fair Value June 30, 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 | $ | 3,810 | $ | 11 | $ | 17 | $ | (60 | ) | $ | (221 | ) | $ | 3,557 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed non-agency | $ | 3,557 | $ | 25 | $ | 32 | $ | (201 | ) | $ | 3,413 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed | 451 | 3 | 4 | (22 | ) | 436 | 436 | 4 | 8 | (23 | ) | 425 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
State and municipal | 14 | 1 | 15 | 15 | (1 | ) | 14 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other debt | 30 | $ | 7 | (2 | ) | (2 | ) | 33 | 33 | 1 | $ | 1 | $ | (14 | ) | 21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total securities available for sale | 4,305 | 14 | 22 | 7 | (62 | ) | (245 | ) | 4,041 | 4,041 | 30 | 40 | 1 | (14 | ) | (225 | ) | 3,873 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives | 41 | 35 | 1 | (26 | ) | 51 | $ | 32 | 51 | 37 | (36 | ) | 52 | $ | 34 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans held for sale | 4 | 3 | $ | 3 | $ | (4 | ) | 6 | 6 | 3 | (1 | ) | $ | 3 | $ | (8 | ) | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading securities – Debt | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading securities –Debt | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage servicing rights | 863 | (113 | ) | 53 | $ | 12 | (41 | ) | 774 | (113 | ) | 774 | 23 | 49 | $ | 16 | (42 | ) | 820 | 23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage servicing rights | 460 | (9 | ) | 6 | 14 | (23 | ) | 448 | (9 | ) | 448 | 8 | 16 | 22 | (21 | ) | 473 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans held for sale | 655 | 21 | (805 | ) | 1,129 | (19 | ) | 981 | 12 | 981 | 18 | (1,343 | ) | 1,205 | (1 | ) | 860 | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity investments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Direct investments | 1,156 | 15 | 95 | (146 | ) | 1,120 | 13 | 1,120 | 19 | 17 | (81 | ) | 1,075 | 21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Indirect investments | 233 | (c) | 233 | 233 | 16 | (31 | ) | 2 | 220 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans | 329 | 1 | 22 | (6 | ) | (17 | ) | (12 | ) | 317 | 1 | 317 | 3 | 27 | (4 | ) | (15 | ) | (4 | ) | 324 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BlackRock Series C Preferred Stock | 208 | 1 | 209 | 1 | 209 | 12 | 221 | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 6 | 6 | 6 | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total other assets | 214 | 1 | 215 | 1 | 215 | 12 | 227 | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 8,029 | $ | (35 | ) (d) | $ | 22 | $ | 187 | $ | (1,019 | ) | $ | 1,155 | $ | (371 | ) | $ | 236 | $ | (16 | ) | $ | 8,188 | $ | (63 | ) (e) | $ | 8,188 | $ | 166 | (c) | $ | 40 | $ | 113 | $ | (1,474 | ) | $ | 1,243 | $ | (340 | ) | $ | 5 | $ | (12 | ) | $ | 7,929 | $ | 114 | (d) | ||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives | $ | 333 | $ | 62 | $ | 1 | $ | (11 | ) | $ | 385 | $ | 65 | $ | 385 | $ | 21 | $ | 1 | $ | (13 | ) | $ | 394 | $ | 25 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other borrowed funds | 8 | $ | 17 | (17 | ) | 8 | 8 | $ | 24 | (22 | ) | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 14 | 1 | 34 | (36 | ) | 13 | 13 | 42 | (35 | ) | 20 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | $ | 355 | $ | 63 | (d) | $ | 1 | $ | 51 | $ | (64 | ) | $ | 406 | $ | 65 | (e) | $ | 406 | $ | 21 | (c) | $ | 1 | $ | 66 | $ | (70 | ) | $ | 424 | $ | 25 | (d) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
70 The PNC Financial Services Group, Inc. –Form 10-Q
Three Months Ended June 30, 2015
| Total realized / unrealized gains or losses for the period (a) | Unrealized gains / losses on assets and liabilities held on Consolidated Balance Sheet at June 30, 2015 (a) (b) | |||||||||||||||||||||||||||||||||||||||||||
Level 3 Instruments Only In millions | Fair Value Mar. 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 June 30, 2015 | ||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed non-agency | $ | 4,624 | $ | 30 | $ | (8 | ) | $ | (222 | ) | $ | 4,424 | ||||||||||||||||||||||||||||||||
Commercial mortgage-backed non-agency | 1 | (1 | ) | |||||||||||||||||||||||||||||||||||||||||
Asset-backed | 548 | 5 | 5 | (27 | ) | 531 | ||||||||||||||||||||||||||||||||||||||
State and municipal | 133 | (117 | ) | 16 | ||||||||||||||||||||||||||||||||||||||||
Other debt | 33 | 33 | ||||||||||||||||||||||||||||||||||||||||||
Total securities available for sale | 5,338 | 36 | (3 | ) | (367 | ) | 5,004 | |||||||||||||||||||||||||||||||||||||
Financial derivatives | 54 | 16 | (34 | ) | 36 | $ | 33 | |||||||||||||||||||||||||||||||||||||
Residential mortgage loans held for sale | 7 | $ | 11 | $ | (2 | ) | (1 | ) | $ | 1 | $ | (6 | ) | 10 | ||||||||||||||||||||||||||||||
Trading securities – Debt | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||
Residential mortgage servicing rights | 839 | 135 | 67 | $ | 21 | (47 | ) | 1,015 | 134 | |||||||||||||||||||||||||||||||||||
Commercial mortgage servicing rights | 494 | 34 | 17 | 20 | (22 | ) | 543 | 34 | ||||||||||||||||||||||||||||||||||||
Commercial mortgage loans held for sale | 975 | 23 | (1,215 | ) | 1,008 | (34 | ) | 757 | ||||||||||||||||||||||||||||||||||||
Equity investments - direct investments | 1,149 | 27 | 95 | (80 | ) | 1,191 | 22 | |||||||||||||||||||||||||||||||||||||
Loans | 383 | 5 | 23 | (4 | ) | (35 | ) | 6 | (13 | ) | 365 | 1 | ||||||||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||||||||||||||
BlackRock Series C Preferred Stock | 384 | (21 | ) | 363 | (21 | ) | ||||||||||||||||||||||||||||||||||||||
Other | 10 | (2 | ) | (1 | ) | 7 | ||||||||||||||||||||||||||||||||||||||
Total other assets | 394 | (21 | ) | (2 | ) | (1 | ) | 370 | (21 | ) | ||||||||||||||||||||||||||||||||||
Total assets | $ | 9,636 | $ | 255 | (d) | $ | (3 | ) | $ | 213 | $ | (1,303 | ) | $ | 1,049 | $ | (541 | ) | $ | 7 | $ | (19 | ) | $ | 9,294 | $ | 203 | (e) | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives (f) | $ | 529 | $ | (15 | ) | $ | 1 | $ | (17 | ) | $ | 498 | $ | (25 | ) | |||||||||||||||||||||||||||||
Other borrowed funds | 171 | 3 | $ | 21 | (30 | ) | 165 | |||||||||||||||||||||||||||||||||||||
Other liabilities | 10 | 10 | ||||||||||||||||||||||||||||||||||||||||||
Total liabilities | $ | 710 | $ | (12 | ) (d) | $ | 1 | $ | 21 | $ | (47 | ) | $ | 673 | $ | (25 | )(e) | |||||||||||||||||||||||||||
(continued on following page)
The PNC Financial Services Group, Inc. –Form 10-Q71
(continued from previous page)
Six Months Ended June 30, 2016
| Total realized / unrealized gains or losses for the period (a) | Unrealized liabilities June 30, | |||||||||||||||||||||||||||||||||||||||||||
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 June 30, 2016 | ||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed non-agency | $ | 4,008 | $ | 33 | $ | (28 | ) | $ | (60 | ) | $ | (396 | ) | $ | 3,557 | $ | (1 | ) | ||||||||||||||||||||||||||
Asset-backed | 482 | 6 | (8 | ) | (44 | ) | 436 | |||||||||||||||||||||||||||||||||||||
State and municipal | 15 | 15 | ||||||||||||||||||||||||||||||||||||||||||
Other debt | 30 | $ | 9 | (4 | ) | (2 | ) | 33 | ||||||||||||||||||||||||||||||||||||
Total securities available for sale | 4,535 | 39 | (36 | ) | 9 | (64 | ) | (442 | ) | 4,041 | (1 | ) | ||||||||||||||||||||||||||||||||
Financial derivatives | 31 | 69 | 1 | (50 | ) | 51 | 65 | |||||||||||||||||||||||||||||||||||||
Residential mortgage loans held for sale | 5 | 6 | (1 | ) | $ | 5 | $ | (9 | ) | 6 | ||||||||||||||||||||||||||||||||||
Trading securities – Debt | 3 | (1 | ) | 2 | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage servicing rights | 1,063 | (339 | ) | 105 | $ | 23 | (78 | ) | 774 | (336 | ) | |||||||||||||||||||||||||||||||||
Commercial mortgage servicing rights | 526 | (64 | ) | 9 | 23 | (46 | ) | 448 | (64 | ) | ||||||||||||||||||||||||||||||||||
Commercial mortgage loans held for sale | 641 | 37 | (1,454 | ) | 1,776 | (19 | ) | 981 | 13 | |||||||||||||||||||||||||||||||||||
Equity investments | ||||||||||||||||||||||||||||||||||||||||||||
Direct investments | 1,098 | 66 | 118 | (162 | ) | 1,120 | 63 | |||||||||||||||||||||||||||||||||||||
Indirect investments | 233 | (c) | 233 | |||||||||||||||||||||||||||||||||||||||||
Loans | 340 | 3 | 55 | (14 | ) | (42 | ) | (25 | ) | 317 | 2 | |||||||||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||||||||||||||
BlackRock Series C | ||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | 357 | (10 | ) | (138 | ) | 209 | (10 | ) | ||||||||||||||||||||||||||||||||||||
Other | 7 | 2 | (2 | ) | (1 | ) | 6 | |||||||||||||||||||||||||||||||||||||
Total other assets | 364 | (8 | ) | (2 | ) | (1 | ) | (138 | ) | 215 | (10 | ) | ||||||||||||||||||||||||||||||||
Total assets | $ | 8,606 | $ | (197 | )(d) | $ | (38 | ) | $ | 303 | $ | (1,696 | ) | $ | 1,822 | $ | (816 | ) | $ | 238 | $ | (34 | ) | $ | 8,188 | $ | (268 | )(e) | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives (f) | $ | 473 | $ | 69 | $ | 3 | $ | (160 | ) | $ | 385 | $ | 69 | |||||||||||||||||||||||||||||||
Other borrowed funds | 12 | $ | 40 | (44 | ) | 8 | ||||||||||||||||||||||||||||||||||||||
Other liabilities | 10 | 1 | 72 | (70 | ) | 13 | ||||||||||||||||||||||||||||||||||||||
Total liabilities | $ | 495 | $ | 70 | (d) | $ | 3 | $ | 112 | $ | (274 | ) | $ | 406 | $ | 69 | (e) | |||||||||||||||||||||||||||
72 The PNC Financial Services Group, Inc. –Form 10-Q
SixThree Months Ended JuneSeptember 30, 2015
Total realized / unrealized gains or | Unrealized on assets and liabilities held on June 30, |
Total realized / | Unrealized Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Level 3 Instruments Only In millions | Fair Value Dec. 31, 2014 | Included in Earnings | Included in Other | Purchases | Sales | Issuances | Settlements | Transfers into Level 3 | Transfers out of Level 3 | Fair Value | 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 | $ | 4,798 | $ | 55 | $ | (22 | ) | $ | (407 | ) | $ | 4,424 | $ | (1 | ) | $ | 4,424 | $ | 30 | $ | (9 | ) | $ | (230 | ) | $ | 4,215 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage- backed non-agency | 8 | (8 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed | 563 | 11 | 9 | (52 | ) | 531 | 531 | 5 | 2 | (27 | ) | 511 | $ | (1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
State and municipal | 134 | (1 | ) | (117 | ) | 16 | 16 | 16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other debt | 30 | 1 | $ | 3 | (1 | ) | 33 | 33 | (1 | ) | $ | 8 | $ | (5 | ) | (5 | ) | 30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total securities available for sale | 5,525 | 75 | (14 | ) | 3 | (585 | ) | 5,004 | (1 | ) | 5,004 | 35 | (8 | ) | 8 | (5 | ) | (262 | ) | 4,772 | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives | 42 | 87 | 1 | (94 | ) | 36 | 76 | 36 | 39 | (30 | ) | 45 | 48 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans held for sale | 6 | 17 | $ | (2 | ) | (1 | ) | $ | 2 | $ | (12 | ) | 10 | 10 | 1 | 4 | (1 | ) | $ | 2 | $ | (11 | ) | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading securities - Debt | 32 | (29 | ) | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading securities – Debt | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage servicing rights | 845 | 68 | 150 | $ | 38 | (86 | ) | 1,015 | 72 | 1,015 | (137 | ) | 111 | $ | 23 | (50 | ) | 962 | (136 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage servicing rights | 506 | 18 | 28 | 34 | (43 | ) | 543 | 18 | 543 | (44 | ) | 15 | 14 | (23 | ) | 505 | (44 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans held for sale | 893 | 44 | (2,235 | ) | 2,091 | (36 | ) | 757 | 2 | 757 | 19 | (846 | ) | 874 | (2 | ) | 802 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity investments - direct investments | 1,152 | 56 | 138 | (155 | ) | 1,191 | 40 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity investments – direct investments | 1,191 | 36 | 87 | (99 | ) | 1,215 | 39 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans | 397 | 15 | 55 | (8 | ) | (72 | ) | 11 | (33 | ) | 365 | 9 | 365 | 4 | 29 | (13 | ) | (24 | ) | 10 | (21 | ) | 350 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BlackRock Series C | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | 375 | (12 | ) | 363 | (12 | ) | 363 | (51 | ) | 312 | (51 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 15 | (7 | ) | (1 | ) | 7 | 7 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total other assets | 390 | (12 | ) | (7 | ) | (1 | ) | 370 | (12 | ) | 370 | (51 | ) | 319 | (51 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 9,788 | $ | 351 | (d) | $ | (14 | ) | $ | 392 | $ | (2,407 | ) | $ | 2,163 | $ | (947 | ) | $ | 13 | $ | (45 | ) | $ | 9,294 | $ | 204 | (e) | $ | 9,294 | $ | (98 | ) (c) | $ | (8 | ) | $ | 254 | $ | (964 | ) | $ | 911 | $ | (391 | ) | $ | 12 | $ | (32 | ) | $ | 8,978 | $ | (137 | )(d) | ||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives | $ | 526 | $ | 26 | $ | 1 | $ | (55 | ) | $ | 498 | $ | (17 | ) | $ | 498 | $ | (54 | ) | $ | (1 | ) | $ | 443 | $ | (57 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other borrowed funds | 181 | 3 | $ | 46 | (65 | ) | 165 | 165 | 1 | $ | 23 | (127 | ) | 62 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 9 | 1 | 10 | 10 | 10 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | $ | 716 | $ | 30 | (d) | $ | 1 | $ | 46 | $ | (120 | ) | $ | 673 | $ | (17 | )(e) | $ | 673 | $ | (53 | ) (c) | $ | 23 | $ | (128 | ) | $ | 515 | $ | (57 | )(d) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(continued on following page)
The PNC Financial Services Group, Inc. –Form 10-Q73
(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
Nine Months Ended September 30, 2015
Total realized / | Unrealized liabilities | |||||||||||||||||||||||||||||||||||||||||||
| Level 3 Instruments Only In millions | 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 | ||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed non-agency | $ | 4,798 | $ | 85 | $ | (31 | ) | $ | (637 | ) | $ | 4,215 | $ | (1 | ) | |||||||||||||||||||||||||||||
Commercial mortgage-backed non-agency | 8 | (8 | ) | |||||||||||||||||||||||||||||||||||||||||
Asset-backed | 563 | 16 | 11 | (79 | ) | 511 | (1 | ) | ||||||||||||||||||||||||||||||||||||
State and municipal | 134 | (1 | ) | (117 | ) | 16 | ||||||||||||||||||||||||||||||||||||||
Other debt | 30 | 1 | (1 | ) | $ | 11 | $ | (5 | ) | (6 | ) | 30 | ||||||||||||||||||||||||||||||||
Total securities available for sale | 5,525 | 110 | (22 | ) | 11 | (5 | ) | (847 | ) | 4,772 | (2 | ) | ||||||||||||||||||||||||||||||||
Financial derivatives | 42 | 126 | 1 | (124 | ) | 45 | 115 | |||||||||||||||||||||||||||||||||||||
Residential mortgage loans held for sale | 6 | 1 | 21 | (3 | ) | (1 | ) | $ | 4 | $ | (23 | ) | 5 | 1 | ||||||||||||||||||||||||||||||
Trading securities – Debt | 32 | (29 | ) | 3 | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage servicing rights | 845 | (69 | ) | 261 | $ | 61 | (136 | ) | 962 | (69 | ) | |||||||||||||||||||||||||||||||||
Commercial mortgage servicing rights | 506 | (26 | ) | 43 | 48 | (66 | ) | 505 | (26 | ) | ||||||||||||||||||||||||||||||||||
Commercial mortgage loans held for sale | 893 | 63 | (3,081 | ) | 2,965 | (38 | ) | 802 | 3 | |||||||||||||||||||||||||||||||||||
Equity investments – direct investments | 1,152 | 92 | 225 | (254 | ) | 1,215 | 79 | |||||||||||||||||||||||||||||||||||||
Loans | 397 | 19 | 84 | (21 | ) | (96 | ) | 21 | (54 | ) | 350 | 10 | ||||||||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||||||||||||||
BlackRock Series C Preferred Stock | 375 | (63 | ) | 312 | (63 | ) | ||||||||||||||||||||||||||||||||||||||
Other | 15 | (7 | ) | (1 | ) | 7 | ||||||||||||||||||||||||||||||||||||||
Total other assets | 390 | (63 | ) | (7 | ) | (1 | ) | 319 | (63 | ) | ||||||||||||||||||||||||||||||||||
Total assets | $ | 9,788 | $ | 253 | (c) | $ | (22 | ) | $ | 646 | $ | (3,371 | ) | $ | 3,074 | $ | (1,338 | ) | $ | 25 | $ | (77 | ) | $ | 8,978 | $ | 48 | (d) | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives (e) | $ | 526 | $ | (28 | ) | $ | 1 | $ | (56 | ) | $ | 443 | $ | (69 | ) | |||||||||||||||||||||||||||||
Other borrowed funds | 181 | 4 | $ | 69 | (192 | ) | 62 | |||||||||||||||||||||||||||||||||||||
Other liabilities | 9 | 1 | 10 | |||||||||||||||||||||||||||||||||||||||||
Total liabilities | $ | 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 |
| Net unrealized |
| 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.
The PNC Financial Services Group, Inc. –Form 10-Q 7375
Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities follows.
Table 65:64: Fair Value Measurements – Recurring Quantitative Information
JuneSeptember 30, 2016
Level 3 Instruments Only Dollars in millions | Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||||||||||||||||
Residential mortgage-backed | $ | 3,557 | Priced by a third-party vendor | Constant prepayment rate (CPR) | 1.0%-24.2% (7.0%) | (a | ) | $ | 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 | ) | 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 | ) | pricing model (a) | Loss severity | 10.0%-98.5% (53.2%) | (a | ) | |||||||||||||||||||
| Spread over the benchmark curve (b) | 284bps weighted average | (a | ) | Spread over the benchmark curve (b) | 260bps weighted average | (a | ) | |||||||||||||||||||||
Asset-backed securities | 436 | Priced by a third-party vendor | Constant prepayment rate (CPR) | 1.0%-14.0% (6.3%) | (a | ) | 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) | 1.7%-13.9% (6.5%) | (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% (78.1%) | (a | ) | pricing model (a) | Loss severity | 24.2%-100.0% (78.0%) | (a | ) | |||||||||||||||||||
| Spread over the benchmark curve (b) | 394bps weighted average | (a | ) | Spread over the benchmark curve (b) | 333bps weighted average | (a | ) | |||||||||||||||||||||
Residential mortgage servicing rights | 774 | Discounted cash flow | Constant prepayment rate (CPR) | 0.0%-45.3% (19.2%) | 820 | Discounted cash flow | Constant prepayment rate (CPR) | 0.0%-41.3% (18.3%) | ||||||||||||||||||||
| Spread over the benchmark curve (b) | 252bps-1,828bps (865bps) | Spread over the benchmark curve (b) | 195bps-1,871bps (847bps) | |||||||||||||||||||||||||
Commercial mortgage servicing | 448 | Discounted cash flow | Constant prepayment rate (CPR) Discount rate | 6.3%-51.5% (8.2%) 5.0%-7.6% (7.4%) |
| 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 | 981 | Discounted cash flow | Spread over the benchmark curve (b)
Estimated servicing cash flows | 59bps-14,570bps (487bps) 0.3%-5.6% (1.9%) |
| 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 | 1,120 | Multiple of adjusted earnings | Multiple of earnings | 4.5x-12.0x (7.4x) | 1,075 | Multiple of adjusted earnings | Multiple of earnings | 4.1x-12.0x (7.6x) | ||||||||||||||||||||
Equity investments – Indirect investments | 233 | Consensus pricing (c) | Liquidity discount | 0.0%-40.0% | 220 | Consensus pricing (c) | Liquidity discount | 0.0%-40.0% | ||||||||||||||||||||
Loans – Residential real estate | 125 | Consensus pricing (c) | Cumulative default rate | 11.0%-100% (87.7%) | 127 | Consensus pricing (c) | Cumulative default rate | 11.0%-100.0% (88.0%) | ||||||||||||||||||||
| Loss severity | 0.0%-100% (24.7%) | Loss severity | 0.0%-100.0% (24.4%) | |||||||||||||||||||||||||
| Discount rate | 4.7%-6.7% (5.1%) | Discount rate | 4.7%-6.7% (5.1%) | |||||||||||||||||||||||||
| 104 | Discounted cash flow | Loss severity | 8.0% weighted average | 114 | Discounted cash flow | Loss severity | 8.0% weighted average | |||||||||||||||||||||
| Discount rate | 3.7% weighted average | Discount rate | 3.9% weighted average | |||||||||||||||||||||||||
Loans – Home equity | 88 | Consensus pricing (c) | Credit and Liquidity discount | 0.0%-99.0% (57.0%) | 83 | Consensus pricing (c) | Credit and Liquidity discount | 0.0%-99.0% (57.0%) | ||||||||||||||||||||
BlackRock Series C Preferred Stock | 209 | Consensus pricing (c) | Liquidity discount | 20.0% | 221 | Consensus pricing (c) | Liquidity discount | 20.0% | ||||||||||||||||||||
BlackRock LTIP | (209 | ) | Consensus pricing (c) | Liquidity discount | 20.0% | (221 | ) | Consensus pricing (c) | Liquidity discount | 20.0% | ||||||||||||||||||
Swaps related to sales of certain Visa | (158 | ) | Discounted cash flow | Estimated conversion factor of | ||||||||||||||||||||||||
Class B common shares | Class B shares into Class A shares | 164.3% | ||||||||||||||||||||||||||
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 | Estimated growth rate of Visa | |||||||||||||||||||||||||||
| Class A share price | 14.0% | Class A share price | 14.0% | |||||||||||||||||||||||||
Insignificant Level 3 assets, net of | ||||||||||||||||||||||||||||
liabilities (d) | 74 | |||||||||||||||||||||||||||
Insignificant Level 3 assets, net of liabilities (d) | 51 | |||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Total Level 3 assets, net of liabilities (e) | $ | 7,782 | $ | 7,505 | ||||||||||||||||||||||||
7476 The PNC Financial Services Group, Inc. –Form 10-Q
December 31, 2015
Level 3 Instruments Only Dollars in millions | Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||||||||||||
Residential mortgage-backednon-agency securities | $ | 4,008 | Priced by a third-party vendor | Constant prepayment rate (CPR) | 1.0%-24.2% (7.0%) | (a) | ||||||||||||||||||
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) | 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) | pricing model (a) | Loss severity | 10.0%-98.5% (53.3%) | (a) | |||||||||||||||||
| Spread over the benchmark curve (b) | 241bps weighted average | (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) | 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) | 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) | pricing model (a) | Loss severity | 24.2%-100.0% (77.5%) | (a) | |||||||||||||||||
| Spread over the benchmark curve (b) | 324bps weighted average | (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) | 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%) | 526 | Discounted cash flow | Constant prepayment rate (CPR) | 3.9%-26.5% (5.7%) | ||||||||||||||||
| Discount rate | 2.6%-7.7% (7.5%) | 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) | 641 | Discounted cash flow | Spread over the benchmark curve (b)
| 85bps-4,270bps (547bps) | ||||||||||||||||
| Estimated servicing cash flows | 0.0%-7.0% (0.9%) | 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) | 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%) | 123 | Consensus pricing (c) | Cumulative default rate | 2.0%-100.0% (85.1%) | ||||||||||||||||
| Loss severity | 0.0%-100.0% (27.3%) | Loss severity | 0.0%-100.0% (27.3%) | |||||||||||||||||||||
| Discount rate | 4.9%-7.0% (5.2%) | Discount rate | 4.9%-7.0% (5.2%) | |||||||||||||||||||||
| 116 | Discounted cash flow | Loss severity | 8.0% weighted average | 116 | Discounted cash flow | Loss severity | 8.0% weighted average | |||||||||||||||||
| Discount rate | 3.9% 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%) | 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% | 357 | Consensus pricing (c) | Liquidity discount | 20.0% | ||||||||||||||||
BlackRock LTIP | (357 | ) | Consensus pricing (c) | Liquidity discount | 20.0% | (357 | ) | Consensus pricing (c) | Liquidity discount | 20.0% | ||||||||||||||
Swaps related to sales of certain | (104 | ) | Discounted cash flow | Estimated conversion factor of | ||||||||||||||||||||
Visa Class B common shares | Class B shares into Class A shares | 164.3% | ||||||||||||||||||||||
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 | Estimated growth rate of Visa Class | |||||||||||||||||||||||
| A share price | 16.3% | A share price | 16.3% | |||||||||||||||||||||
Insignificant Level 3 assets, net of | ||||||||||||||||||||||||
liabilities (d) | 57 | 57 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
Total Level 3 assets, net of liabilities (e) | $ | 8,111 | $ | 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 |
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 6665 and Table 67.66. 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-Q 7577
Table 66:65: Fair Value Measurements–Nonrecurring
| Fair Value (a) | Gains (Losses) Three months ended | Gains (Losses) Six months ended | Fair Value (a) | Gains (Losses) Three months ended | Gains (Losses) Nine months ended | |||||||||||||||||||||||||||
| In millions | June 30 2016 | December 31 2015 | June 30 2016 | June 30 2015 | June 30 2016 | June 30 2015 | September 30 2016 | December 31 2015 | September 30 2016 | September 30 2015 | September 30 2016 | September 30 2015 | ||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Nonaccrual loans | $ | 184 | $ | 30 | $(51) | $(15) | $(58) | $(15) | $ | 180 | $ | 30 | $(32) | $(41) | $(81) | $(48) | ||||||||||||||||
OREO and foreclosed assets | 103 | 137 | (6) | (12) | (12) | (18) | 108 | 137 | (6) | (6) | (15) | (18) | ||||||||||||||||||||
Insignificant assets (b) | 7 | 28 | (1) | (5) | (4) | (13) | 19 | 28 | (2) | (5) | (16) | |||||||||||||||||||||
Total assets | $ | 294 | $ | 195 | $(58) | $(32) | $(74) | $(46) | $ | 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 67:66: Fair Value Measurements – Nonrecurring Quantitative Information
Level 3 Instruments Only Dollars in millions | Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||
| ||||||||||
Assets | ||||||||||
Nonaccrual loans | $ | LGD percentage (a) | Loss severity | |||||||
| Fair value of property or collateral | Appraised value/sales price | Not meaningful | ||||||||
OREO and foreclosed assets | Fair value of property or collateral | Appraised value/sales price | Not meaningful | |||||||
Insignificant assets | ||||||||||
|
| |||||||||
Total assets | $ | |||||||||
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 | |||||||||
| (a) | 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.
Table 68:67: Fair Value Option—Option – Changes in Fair Value (a)
| Gains (Losses) Three months ended | Gains (Losses) Six months ended | Gains (Losses) Three months ended | Gains (Losses) Nine months ended | |||||||||||||||||||||||||||||
| In millions | June 30 2016 | June 30 2015 | June 30 2016 | June 30 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 | $ | 22 | $ | 31 | $ | 49 | $ | 56 | $ | 16 | $ | 25 | $ | 65 | $ | 81 | ||||||||||||||||
Residential mortgage loans held for sale | $ | 59 | $ | 25 | $ | 106 | $ | 71 | $ | 55 | $ | 56 | $ | 161 | $ | 127 | ||||||||||||||||
Residential mortgage loans – portfolio | $ | 11 | $ | 13 | $ | 17 | $ | 29 | $ | 7 | $ | 8 | $ | 24 | $ | 37 | ||||||||||||||||
BlackRock Series C Preferred Stock | $ | 1 | $ | (21 | ) | $ | (10 | ) | $ | (12 | ) | $ | 12 | $ | (51 | ) | $ | 2 | $ | (63 | ) | |||||||||||
Other assets | $ | (4 | ) | $ | 1 | $ | (20 | ) | $ | 2 | $ | 15 | $ | (5 | ) | $ | 2 | |||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Other borrowed funds | $ | (2 | ) | $ | (2 | ) | $ | (2 | ) | $ | (4 | ) | ||||||||||||||||||||
| (a) | The impact on earnings of offsetting hedged items or hedging instruments is not reflected in these amounts. |
7678 The PNC Financial Services Group, Inc. –Form 10-Q
Fair values and aggregate unpaid principal balances of items for which we elected the fair value option follow.
Table 69:68: Fair Value Option – Fair Value and Principal Balances
| In millions | Fair Value | Aggregate Unpaid Principal Balance | Difference | Fair Value | Aggregate Unpaid Principal Balance | Difference | ||||||||||||||||||
June 30, 2016 | ||||||||||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Customer resale agreements | $ | 137 | $ | 133 | $ | 4 | $ | 136 | $ | 133 | $ | 3 | ||||||||||||
Residential mortgage loans held for sale | ||||||||||||||||||||||||
Performing loans | 1,104 | 1,052 | 52 | 1,122 | 1,071 | 51 | ||||||||||||||||||
Accruing loans 90 days or more past due | 3 | 3 | 1 | 1 | ||||||||||||||||||||
Nonaccrual loans | 9 | 9 | 4 | 5 | (1 | ) | ||||||||||||||||||
Total | 1,116 | 1,064 | 52 | 1,127 | 1,077 | 50 | ||||||||||||||||||
Commercial mortgage loans held for sale (a) | ||||||||||||||||||||||||
Performing loans | 978 | 980 | (2 | ) | 855 | 865 | (10 | ) | ||||||||||||||||
Nonaccrual loans | 3 | 5 | (2 | ) | 5 | 9 | (4 | ) | ||||||||||||||||
Total | 981 | 985 | (4 | ) | 860 | 874 | (14 | ) | ||||||||||||||||
Residential mortgage loans – portfolio | ||||||||||||||||||||||||
Performing loans | 234 | 282 | (48 | ) | 231 | 276 | (45 | ) | ||||||||||||||||
Accruing loans 90 days or more past due | 402 | 402 | 420 | 420 | ||||||||||||||||||||
Nonaccrual loans | 215 | 349 | (134 | ) | 223 | 354 | (131 | ) | ||||||||||||||||
Total | 851 | 1,033 | (182 | ) | 874 | 1,050 | (176 | ) | ||||||||||||||||
Other assets | 140 | 148 | (8 | ) | 163 | 164 | (1 | ) | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Other borrowed funds | $ | 70 | $ | 71 | $ | (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 | ||||||||||||||||||||||||
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 |
The PNC Financial Services Group, Inc. –Form 10-Q 7779
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 JuneSeptember 30, 2016 and December 31, 2015.
Table 70:69: Additional Fair Value Information Related to Other Financial Instruments
Carrying Amount | Fair Value | |||||||||||||||||||
| In millions | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||
June 30, 2016 | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and due from banks | $ | 4,196 | $ | 4,196 | $ | 4,196 | ||||||||||||||
Short-term assets | 29,532 | 29,532 | $ | 29,532 | ||||||||||||||||
Securities held to maturity | 14,917 | 15,480 | 331 | 15,143 | $ | 6 | ||||||||||||||
Loans held for sale | 199 | 200 | 159 | 41 | ||||||||||||||||
Net loans (excludes leases) | 197,887 | 201,083 | 201,083 | |||||||||||||||||
Other assets | 1,711 | 2,139 | 1,709 | 430 | (a) | |||||||||||||||
Total assets | $ | 248,442 | $ | 252,630 | $ | 4,527 | $ | 46,543 | $ | 201,560 | ||||||||||
Liabilities | ||||||||||||||||||||
Demand, savings and money market deposits | $ | 230,727 | $ | 230,727 | $ | 230,727 | ||||||||||||||
Time deposits | 19,051 | 19,180 | 19,180 | |||||||||||||||||
Borrowed funds | 53,736 | 54,584 | 53,138 | $ | 1,446 | |||||||||||||||
Unfunded loan commitments and letters of credit | 286 | 286 | 286 | |||||||||||||||||
Other liabilities | 47 | 47 | 47 | |||||||||||||||||
Total liabilities | $ | 303,847 | $ | 304,824 | $ | 303,092 | $ | 1,732 | ||||||||||||
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 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 7069 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.
78 The PNC Financial Services Group, Inc. –Form 10-Q
For more information regarding the methods and assumptions used to estimate the fair values of financial instruments included in Table 70,69, see Note 7 Fair Value in our 2015 Form 10-K.