Loading...
Docoh

PNC Financial Services (PNC)

Filed: 5 May 20, 11:56am
false--12-31Q1202000007136760.9900.0000.6340.9701.0000.1210.0600.5810.9361.0000.0360.7671.0000.0360.7261.6231.6230.1600.1603/31/20216/30/202116.55.08.516.55.08.40.29350.05300.18890.02150.01880.14350.03200.07690.07690.37150.06000.23570.06430.04930.14810.03790.07700.077043940000003702000000496000000196000000006000000000.0801.0000.0500.0000.0520.0480.1450.0800.0650.9940.0651.0000.0450.0000.0450.0000.0620.3830.0490.0380.1240.080100000000P4Y1MP5Y2MP4Y1MP2Y11M558000000008000000005420000005420000000.010.010.011000000000.04380.02200.02150.03900.01890.03500.04200.00320.01130.02700.2200.0721.0000.0100.0100.3000.0750.0340.5760.3620.1410.9570.0100.0000.2660.0990.0430.5190.3500.0721.0000.0100.0100.3000.0770.0330.5790.3620.1410.9570.0100.0000.2000.0990.0430.5198000000000000000000001620000000016500000000P10Y3060000005000005000000.1810.0810.0350.0560.0460.0790.5380.0000.1350.2530.0810.0340.0410.0450.0760.5860.0000.271109000000118000000<div class="af2"><div class="af3"><font class="af4">S</font><font class="af5">UBSEQUENT</font><font class="af4"> E</font><font class="af5">VENTS [To be updated through date of 10-Q filing]</font></div></div> 0000713676 us-gaap:TreasuryStockMember 2019-01-01 2019-03-31 0000713676 us-gaap:InterestRateContractMember us-gaap:MortgageBankingMember us-gaap:NondesignatedMember 2019-01-01 2019-03-31

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________________________
FORM 10-Q
______________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to         
    
Commission file number 001-09718
The PNC Financial Services Group, Inc.
(Exact name of registrant as specified in its charter)
___________________________________________________________
Pennsylvania 25-1435979
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
The Tower at PNC Plaza, 300 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2401
(Address of principal executive offices, including zip code)

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)
 Name of Each Exchange
    on Which Registered    
Common Stock, par value $5.00PNCNew York Stock Exchange
Depositary Shares Each Representing a 1/4,000 Interest in a Share of Fixed-to-
Floating Rate Non-Cumulative Perpetual Preferred Stock, Series P
PNC PNew York Stock Exchange
Depositary Shares Each Representing a 1/4,000 Interest in a Share of 5.375%
Non-Cumulative Perpetual Preferred Stock, Series Q
PNC QNew York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   Accelerated filer 
Non-accelerated filer   Smaller reporting company 
     Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
    Yes    No  
As of April 16, 2020, there were 424,260,434 shares of the registrant’s common stock ($5 par value) outstanding.
 


THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to First Quarter 2020 Form 10-Q


 Pages
PART I – FINANCIAL INFORMATION 
Item 1.   Financial Statements (Unaudited). 
 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.22-40, 53-64 and 94-99
Item 4. Controls and Procedures.
 


THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to First Quarter 2020 Form 10-Q (continued)



THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to First Quarter 2020 Form 10-Q (continued)

   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE 
TableDescriptionPage
33
34
35

36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80




FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.

This Financial Review, including the Consolidated Financial Highlights, should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Quarterly Report on Form 10-Q (the Report or Form 10-Q) and with Items 6, 7, 8 and 9A of our 2019 Annual Report on Form 10-K (2019 Form 10-K). For information regarding certain business, regulatory and legal risks, see the following: the Risk Management section of this Financial Review and of Item 7 in our 2019 Form 10-K; Item 1A Risk Factors included in this Report and our 2019 Form 10-K; and the Commitments and Legal Proceedings Notes of the Notes To Consolidated Financial Statements included in Item 1 of this Report and Item 8 of our 2019 Form 10-K. Also, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and the Critical Accounting Estimates And Judgments section in this Financial Review and in our 2019 Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this Report. See Note 14 Segment Reporting in the Notes To Consolidated Financial Statements included in this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a generally accepted accounting principles (GAAP) basis. In this Report, “PNC”, “we” or “us” refers to The PNC Financial Services Group, Inc. and its subsidiaries on a consolidated basis (except when referring to PNC as a public company, its common stock or other securities issued by PNC, which just refer to The PNC Financial Services Group, Inc.). References to The PNC Financial Services Group, Inc. or to any of its subsidiaries are specifically made where applicable.
Table 1: Consolidated Financial Highlights
Dollars in millions, except per share data
Unaudited
Three months ended
March 31
 
20202019 
Financial Results (a)   
Revenue   
Net interest income$2,511
$2,475
 
Noninterest income2,006
1,811
 
Total revenue4,517
4,286
 
Provision for credit losses914
189
 
Noninterest expense2,543
2,578
 
Income before income taxes and noncontrolling interests$1,060
$1,519
 
Net income$915
$1,271
 
Less:   
Net income attributable to noncontrolling interests7
10
 
Preferred stock dividends63
63
 
Preferred stock discount accretion and redemptions1
1
 
Net income attributable to common shareholders844
1,197
 
Less:   
Dividends and undistributed earnings allocated to participating securities4
5
 
Impact of BlackRock earnings per share dilution1
3
 
Net income attributable to diluted common shares$839
$1,189
 
Diluted earnings per common share$1.95
$2.61
 
Cash dividends declared per common share$1.15
$.95
 
Effective tax rate (b)13.7%16.3% 
Performance Ratios   
Net interest margin (c)2.84%2.98% 
Noninterest income to total revenue44%42% 
Efficiency56%60% 
Return on:   
Average common shareholders’ equity7.51%11.13% 
Average assets.89%1.34% 
(a)The Executive Summary and Consolidated Income Statement Review portions of this Financial Review section provide information regarding items impacting the comparability of the periods presented.
(b)The effective income tax rates are generally lower than the statutory rate due to the relationship of pretax income to tax credits and earnings that are not subject to tax.
(c)Net interest margin is the total yield on interest-earning assets minus the total rate on interest-bearing liabilities and includes the benefit from use of noninterest-bearing sources. To provide more meaningful comparisons of net interest margins, we use net interest income on a taxable-equivalent basis in calculating average yields used in the calculation of net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP in the Consolidated Income Statement. For additional information, see Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP) in the Statistical Information (Unaudited) section in Item 1 of this Report.

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



Table 1: Consolidated Financial Highlights (Continued) (a)
UnauditedMarch 31
2020

December 31
2019

March 31
2019

 
Balance Sheet Data (dollars in millions, except per share data)
    
Assets$445,493
$410,295
$392,837
 
Loans$264,643
$239,843
$232,293
 
Allowance for credit losses - loans and leases (b)



$3,944
$2,742
$2,692
 
Interest-earning deposits with banks (c)$19,986
$23,413
$15,261
 
Investment securities (d)$90,546
$86,824
$83,869
 
Loans held for sale$1,693
$1,083
$686
 
Equity investments (e)$13,205
$13,734
$12,567
 
Mortgage servicing rights$1,082
$1,644
$1,812
 
Goodwill$9,233
$9,233
$9,218
 
Other assets (d)$41,556
$32,202
$34,761
 
Noninterest-bearing deposits$81,614
$72,779
$71,606
 
Interest-bearing deposits$223,590
$215,761
$199,615
 
Total deposits$305,204
$288,540
$271,221
 
Borrowed funds$73,399
$60,263
$59,860
 
Allowance for credit losses - unfunded lending related commitments (b)

$450
$318
$279
 
Total shareholders’ equity$49,263
$49,314
$48,536
 
Common shareholders’ equity$45,269
$45,321
$44,546
 
Accumulated other comprehensive income (loss)$2,518
$799
$(5) 
Book value per common share$106.70
$104.59
$98.47
 
Period-end common shares outstanding (in millions)424
433
452
 
Loans to deposits87%83%86% 
Common shareholders’ equity to total assets10.2%11.0%11.3% 
Client Assets (in billions)
    
Discretionary client assets under management$136
$154
$158
 
Nondiscretionary client assets under administration128
143
130
 
Total client assets under administration264
297
288
 
Brokerage account client assets49
54
51
 
Total client assets$313
$351
$339
 
Basel III Capital Ratios (f) (g)    
Common equity Tier 19.4%9.5%9.8% 
Common equity Tier 1 fully implemented (h)9.2%N/A
N/A
 
Tier 1 risk-based10.5%10.7%10.9% 
Total capital risk-based (i)12.6%12.7%13.0% 
Leverage9.5%9.1%9.6% 
Supplementary leverage7.9%7.6%8.0% 
Asset Quality    
Nonperforming loans to total loans.62%.68%.71% 
Nonperforming assets to total loans, OREO and foreclosed assets.66%.73%.77% 
Nonperforming assets to total assets.39%.43%.45% 
Net charge-offs to average loans (for the three months ended) (annualized).35%.35%.24% 
Allowance for credit losses - loans and leases to total loans (j)

1.49%1.14%1.16% 
Allowance for credit losses to total loans (k)1.66%1.28%1.28% 
Allowance for credit losses - loans and leases to nonperforming loans (j)


240%168%163% 
Accruing loans past due 90 days or more (in millions)$534
$585
$590
 
(a)The Executive Summary and Consolidated Balance Sheet Review portions of this Financial Review provide information regarding items impacting the comparability of the periods presented.
(b)
Amount at March 31, 2020 reflects the impact of adopting Accounting Standards Update 2016-13 - Financial Instruments - Credit Losses, which is commonly referred to as the Current Expected Credit Losses (CECL) standard and our transition from an incurred loss methodology for these reserves to an expected credit loss methodology. Prior period amounts represent Allowance for Loan and Lease Losses (ALLL) under the incurred loss methodology. See Note 1 Accounting Policies of this Report for additional information related to our adoption of this standard.
(c)Amounts include balances held with the Federal Reserve Bank of Cleveland (Federal Reserve Bank) of $19.6 billion, $23.2 billion and $15.0 billion as of March 31, 2020, December 31, 2019 and March 31, 2019, respectively.
(d)
Amounts as of March 31, 2020 are net of the related Allowance for Credit Losses (ACL) recorded in accordance with the adoption of the CECL standard, which totaled $2 million and $19 million for Investment securities and Other assets, respectively. See Note 1 Accounting Policies of this Report for additional detail related to our adoption of this standard.

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




(e)Amounts include our equity interest in BlackRock, Inc.
(f)All ratios are calculated using the regulatory capital methodology applicable to PNC during each period presented and calculated based on the standardized approach. See Basel III Capital discussion in the Capital Management portion of the Risk Management section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business and Item 1A Risk Factors in our 2019 Form 10-K.
(g)The March 31, 2020 ratios are calculated to reflect PNC's election to adopt the CECL optional five-year transition provision, unless noted differently.
(h)The March 31, 2020 ratio is calculated to reflect the full impact of CECL and excludes the benefits of phase-ins under the optional transition provision.
(i)The 2020 and 2019 Basel III Total risk-based capital ratios include nonqualifying trust preferred capital securities of $40 million and $60 million, respectively, that are subject to a phase-out period that runs through 2021.
(j)Prior period ratios are calculated with ALLL as the numerator under the incurred loss methodology prior to the adoption of the CECL standard.
(k)Calculated as the ACL for loans and leases and the ACL for unfunded lending related commitments divided by total loans.

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

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

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

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

Our capital priorities are to support customers and business investment, maintain appropriate capital in light of economic conditions, the Basel III framework, and other regulatory expectations, and return excess capital to shareholders. For more detail, see the Capital Highlights portion of this Executive Summary and the Liquidity and Capital Management portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2019 Form 10-K.

Economic Environment
The coronavirus (COVID-19) outbreak and public health response to contain it have resulted in recessionary economic and financial market conditions as of the end of the first quarter that did not exist at the beginning of the quarter. These conditions have worsened since the end of the first quarter. In response to these evolving conditions, the Federal Reserve reduced the federal funds rate 1.5 percentage points to 0.00% to 0.25% in March 2020. The recession that has started in the U.S. as a result of government-mandated closures and stay at home orders is significantly impacting the U.S. labor market, consumer spending, business investment and profitability. As a result, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act), the largest economic stimulus package in the nation’s history in an effort to lessen the impact of COVID-19 on consumers and businesses.

PNC is committed to putting our resources to work to support our customers and the broader financial system. We are working to provide relief and flexibility to our customers through a variety of solutions during these uncertain times, including fee waivers, loan modifications, payment deferrals, and Paycheck Protection Program (PPP) loans under the CARES Act. For commercial lending, we are offering emergency relief for small and medium-sized business loans, including those being provided for commercial mortgage clients pursuant to the federally enacted CARES Act. For example, we are granting short-term loan modifications to our commercial clients, primarily in the form of principal and/or interest deferrals. We are analyzing and making decisions on these modifications based on each individual borrower’s situation. In addition, in April and May, we registered more than 70,500 customer applications with the SBA under the PPP, totaling $14 billion, and we will continue to submit completed applications for as long as the SBA is accepting them from banks such as PNC.


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



We are also granting short-term loan modifications for our consumer loan customers through extensions, deferrals and forbearance and providing relief from deposit-related fees. Through April 30, 2020, we have completed more than 156,000 consumer requests on loans totaling $9.3 billion; granted more than $2.6 million in emergency personal loans; and waived more than $8.1 million in deposit fees. In addition, we have halted involuntary auto repossessions and mortgage foreclosures and while we will continue to monitor the situation, we plan to continue this practice for the foreseeable future.

Our branch operations have been temporarily modified as we prioritize the safety and well-being of our customers and employees.  A majority of our branch locations remain open, with equipped branches providing drive-up services only as well as other services through appointment only.  Furthermore, non-teller digital, and call center channels have experienced elevated customer activity.

See the Recent Regulatory Developments section of this Report for additional detail on the CARES Act and other governmental responses to the COVID-19 outbreak and its economic and financial impacts. See also Risk Factors in Part II, Item 1A of this Report for a description of the risks associated with the current situation.

Income Statement Highlights
Net income of $915 million, or $1.95 per diluted common share for the first quarter of 2020 decreased $356 million, or 28%, compared to $1.3 billion, or $2.61 per diluted common share, for the first quarter of 2019.
Total revenue increased $231 million, or 5%, to $4.5 billion.
Net interest income of $2.5 billion increased $36 million, or 1%.
Net interest margin decreased to 2.84% compared to 2.98% for the first quarter of 2019.
Noninterest income increased $195 million, or 11%, to $2.0 billion.
Provision for credit losses of $914 million, which was calculated under the Current Expected Credit Losses (CECL) accounting standard effective January 1, 2020, increased $725 million compared to the first quarter of 2019 reflecting the change in methodology together with the significant economic impact of COVID-19 and loan growth.
Noninterest expense decreased $35 million, or 1%, to $2.5 billion.
Earnings per diluted common share decreased primarily due to lower net income partially offset by lower average common shares outstanding due to share repurchases.

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

Balance Sheet Highlights
Our balance sheet was strong and well positioned at March 31, 2020 and December 31, 2019. In comparison to December 31, 2019:
Total assets increased $35.2 billion, or 9%, to $445.5 billion.
Total loans increased $24.8 billion, or 10%, to $264.6 billion.
Total commercial lending grew $24.1 billion, or 15%, to $184.7 billion, reflecting higher utilization of loan commitments near quarter end driven by the economic impact of COVID-19.
Total consumer lending increased $.7 billion, or 1%, to $79.9 billion.
Investment securities increased $3.7 billion, or 4%, to $90.5 billion.
Interest-earning deposits with banks, primarily with the Federal Reserve Bank, decreased $3.4 billion to $20.0 billion.
Total deposits increased $16.7 billion, or 6%, to $305.2 billion as higher commercial deposits near quarter end reflected liquidity maintained by customers due to the economic impact of COVID-19.
Borrowed funds increased $13.1 billion, or 22%, to $73.4 billion in part related to enhanced liquidity to meet customer needs caused by the economic impact of COVID-19.

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

Credit Quality Highlights
Credit quality metrics remained strong in the first quarter of 2020 entering a challenging environment.
At March 31, 2020 compared to December 31, 2019:
Nonperforming assets of $1.8 billion increased $3 million.
Overall loan delinquencies of $1.5 billion decreased $21 million, or 1%.
Net charge-offs were $212 million, or .35% of average loans on annualized basis, in the first quarter of 2020 compared to $136 million, or .24%, for the first quarter of 2019.
The allowance for credit losses of $4.4 billion to total loans was 1.66% at March 31, 2020, and reflects the January 1, 2020 transition adjustment of $.6 billion for the adoption of the CECL accounting standard.

For additional detail, including the adoption of the CECL accounting standard and the significant economic impact of COVID-19, see the Credit Risk Management portion of the Risk Management section of this Financial Review.

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




Capital Highlights
We maintained a strong capital position and continued to return capital to shareholders.
The Basel III common equity Tier 1 (CET1) capital ratio was 9.4% at March 31, 2020 and 9.5% at December 31, 2019.
The March 31, 2020 ratio reflects 2019 Tailoring Rules changes and our election of a five-year transition provision that delays CECL's estimated impact on CET1 capital, as defined by the rule. CECL's estimated impact on CET1 capital is the change in retained earnings at adoption plus or minus 25% of the change in CECL ACL at the balance sheet date compared to CECL ACL at transition. The estimated CECL impact is added to CET1 through December 31, 2021, then phased-out over the following three years.
Common shareholders' equity was $45.3 billion at both March 31, 2020 and December 31, 2019.
In the first quarter of 2020, we returned $1.9 billion of capital to shareholders through repurchases of 10.1 million common shares for $1.4 billion and dividends on common shares of $.5 billion.
We announced on March 16, 2020 a temporary suspension of our common stock share repurchase program through June 30, 2020 in conjunction with the Federal Reserve's effort to support the U.S. economy during the COVID-19 outbreak.
On April 2, 2020, the PNC board of directors declared a quarterly cash dividend on common stock of $1.15 per share effective with the May 5, 2020 dividend payment date.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for more detail on our 2020 liquidity and capital actions as well as our capital ratios.

PNC’s ability to take certain capital actions, including returning capital to shareholders, is subject to review by the Federal Reserve Board as part of PNC’s comprehensive capital plan for the applicable period in connection with the Federal Reserve Board’s Comprehensive Capital Analysis and Review (CCAR) process. During the third quarter of 2020, the Federal Reserve’s revised capital plan rule permits PNC to make capital distributions in an amount equal to the average quarterly amount that was approved by the Federal Reserve for the 2019 capital plan year (July 1, 2019 through June 30, 2020). Once the Federal Reserve's new stress capital buffer rules become effective on October 1, 2020, our ability to take certain capital actions, including returning capital to shareholders, will be subject to PNC meeting or exceeding a stress capital buffer established by the Federal Reserve Board as part of the annual CCAR process. For additional information, see the Recent Regulatory Developments section in this Report and the Supervision and Regulation section in Item 1 Business of our 2019 Form 10-K.

Business Outlook
Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory contingencies. These statements are based on our view that:
Our baseline economic forecast is for a severe but short recession in the first half of 2020. Restrictions on movement because of the COVID-19 pandemic have led to a substantial drop in consumer spending and a steep drop in output as many businesses are closed or operating at significantly reduced levels, and many workers are unable to get to their jobs. PNC expects a significant contraction in U.S. real GDP and steep job losses over the next few months and a large increase in the unemployment rate through mid-2020.
In the baseline forecast, economic growth resumes in the third quarter as businesses re-open and consumers start to spend again. Fiscal stimulus and extremely low interest rates support the recovery. Real GDP surpasses its pre-recession peak in the second half of 2021, and growth is well above its long-term trend through 2022.
The baseline forecast assumes that the Federal Open Market Committee keeps the federal funds rate in its current range of 0.00% to 0.25% into 2023.

Given the unprecedented circumstances and fluidity of the current environment, our forward-looking statements are subject to potentially substantial shifts in risk conditions, which accordingly, could alter our expected results materially. Past performance trends are not necessarily predictive of future performance in the current economic environment.

For the second quarter of 2020 compared to the first quarter of 2020, we expect:
Average loans to be up approximately 10% to 15%;
Net interest income to be stable;
Noninterest income to be down approximately 15% to 20%;
Noninterest expense to be stable to down; and
Net charge-offs to be between $250 million and $350 million.

Average commercial loans are expected to grow due to substantial PPP loans and the full quarter impact of ending loan balances at March 31, 2020, which resulted from higher utilization. Average consumer loans are expected to be stable with first quarter of 2020.

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



Noninterest income is expected to be down, reflecting the elevated residential mortgage servicing rights and security gains we generated in the first quarter in addition to some general softening in fee categories in the second quarter, reflective of the current economic environment. We expect to continue to waive certain consumer services fees during the second quarter, which will also contribute to the decline.
For the full year 2020, we expect total revenue and noninterest expense to each be down between 5% and 10%.

See the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in this Report and our 2019 Form 10-K for other factors that could cause future events to differ, perhaps materially, from those anticipated in these forward-looking statements.
CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for the first quarter of 2020 was $915 million, or $1.95 per diluted common share, a decrease of $356 million, or 28%, compared to $1.3 billion, or $2.61 per diluted common share, for the first quarter of 2019. The decrease was primarily driven by a $725 million increase in the provision for credit losses, which was calculated under the CECL accounting standard effective January 1, 2020 and reflects the change in methodology together with the significant economic impact of COVID-19 and loan growth, partially offset by an increase in revenue of $231 million, or 5% resulting from higher noninterest income and net interest income.
Net Interest Income
Table 2: Summarized Average Balances and Net Interest Income (a)
  2020
2019 
Three months ended March 31
Dollars in millions
 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Assets             
Interest-earning assets             
Investment securities $84,422
 2.78% $588
 $82,318
 3.05% $627
 
Loans 243,572
 4.08% 2,496
 228,545
 4.61% 2,622
 
Interest-earning deposits with banks 17,569
 1.27% 56
 15,017
 2.43% 91
 
Other 9,468
 3.51% 82
 11,068
 4.14% 115
 
Total interest-earning assets/interest income $355,031
 3.62% 3,222
 $336,948
 4.11% 3,455
 
Liabilities             
Interest-bearing liabilities             
Interest-bearing deposits $215,336
 .70% 375
 $195,816
 .98% 472
 
Borrowed funds 57,188
 2.18% 314
 59,783
 3.21% 481
 
Total interest-bearing liabilities/interest expense $272,524
 1.00% 689
 $255,599
 1.50% 953
 
Net interest margin/income (Non-GAAP)   2.84% 2,533
   2.98% 2,502
 
Taxable-equivalent adjustments     (22)     (27) 
Net interest income (GAAP)     $2,511
     $2,475
 
(a)Interest income calculated as taxable-equivalent interest income. To provide more meaningful comparisons of interest income and yields for all interest-earning assets, as well as net interest margins, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margins by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP on the Consolidated Income Statement. For more information, see Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP) in the Statistical Information (Unaudited) section in Item 1 of this Report.
Changes in net interest income and margin result from the interaction of the volume and composition of interest-earning assets and related yields, interest-bearing liabilities and related rates paid, and noninterest-bearing sources of funding. See the Statistical Information (Unaudited) – Average Consolidated Balance Sheet And Net Interest Analysis section of this Report for additional information.

Net interest income increased $36 million, or 1%, for the first quarter of 2020 compared with the first quarter of 2019. The increase was driven by lower rates on borrowings and deposits, higher loan and securities balances and one additional day in the first quarter of 2020 substantially offset by lower asset yields due to the decrease in interest rates. Net interest margin decreased 14 basis points reflecting the impact of lower interest rates.

Average investment securities increased $2.1 billion, or 3%. The increase was due to net purchase activity of agency residential mortgage-backed securities of $5.0 billion and commercial mortgage-backed securities of $.8 billion, partially offset by decreases of

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




$2.3 billion of U.S. Treasury and government agency securities, $.9 billion of other securities, and $.5 billion of both nonagency residential mortgage-backed and asset-backed securities.

Average investment securities represented 24% of average interest-earning assets for both periods in the comparison.

Average loans grew $15.0 billion, or 7%, driven by an increase in both commercial and consumer lending. Average commercial lending increased by $9.3 billion, or 6%, to $164.0 billion reflecting loan growth and higher utilization of loan commitments at the end of the first quarter of 2020 driven by the economic impact of COVID-19 on customer liquidity needs.

Average consumer lending increased $5.7 billion, or 8%. Growth in residential mortgage, auto, credit card, and unsecured installment loans was partially offset by declines in home equity and education loans due to runoff of brokered home equity and government guaranteed education loans. Average loans represented 69% of average interest-earning assets for the first quarter of 2020 compared to 68% for the first quarter of 2019.

Average interest-earning deposits with banks increased $2.6 billion, reflecting higher average balances held with the Federal Reserve Bank.

Average interest-bearing deposits grew $19.5 billion, or 10%, reflecting overall deposit and customer growth. The increase includes a shift from money market deposits to relationship-based savings products as well as growth in both consumer and commercial deposits. In total, average interest-bearing deposits increased to 79% of average interest-bearing liabilities compared to 77% for the first quarter of 2019.

Average borrowed funds decreased by $2.6 billion, or 4%, primarily due to a decline in Federal Home Loan Bank (FHLB) borrowings of $8.0 billion, partially offset by an increase in bank notes and senior debt of $4.6 billion and an increase in other borrowed funds of $.8 billion driven by federal funds purchased and repurchase agreements.

Further details regarding average loans and deposits are included in the Business Segments Review section of this Financial Review.
Noninterest Income
Table 3: Noninterest Income
  Three months ended March 31
      Change 
Dollars in millions 2020

2019
 $ % 
Noninterest income         
Asset management $382
 $437
 $(55) (13)% 
Consumer services 377
 371
 6
 2 % 
Corporate services 526
 462
 64
 14 % 
Residential mortgage 210
 65
 145
 223 % 
Service charges on deposits 168
 168
 
 
 
Other 343
 308
 35
 11 % 
Total noninterest income $2,006

$1,811

$195
 11 % 
 
Noninterest income as a percentage of total revenue was 44% for the first quarter of 2020 compared to 42% for the same period in 2019.

Asset management revenue declined due to lower earnings from our equity investment in BlackRock, including the impact of BlackRock's charitable contribution in the first quarter of 2020, and the impact on fees of PNC's divestiture activity in 2019. PNC's discretionary client assets under management decreased to $136 billion at March 31, 2020 compared to $158 billion at March 31, 2019 as a result of declines in the equity markets and our fourth quarter 2019 sale of PNC's proprietary mutual funds.

Growth in consumer service revenue resulted from increases in debit card and brokerage fees, partially offset by increased credit card rewards.

Corporate services revenue increased primarily due to higher treasury management product revenue, a higher benefit from commercial mortgage servicing rights valuation, net of economic hedge, and higher merger and acquisition advisory fees.

Residential mortgage revenue increased due to higher results from residential mortgage servicing rights valuation, net of economic hedge, and higher loan sales revenue, partially offset by lower servicing fees.


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



The increase in other noninterest income was primarily attributable to higher net securities gains partially offset by negative private equity valuation adjustments related to the economic impact of COVID-19.

Provision For Credit Losses
The provision for credit losses increased $725 million to $914 million in the first quarter of 2020 compared to $189 million in the first quarter of 2019. The provision for the first quarter of 2020 was calculated under the CECL accounting standard effective January 1, 2020 and the increase compared to the first quarter 2019 was due to the change in methodology together with the significant economic impact of COVID-19 and loan 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.

Noninterest Expense

Table 4: Noninterest Expense
  Three months ended March 31 
      Change 
Dollars in millions 2020

2019
 $ % 
Noninterest expense         
Personnel $1,369
 $1,414
 $(45) (3)% 
Occupancy 207
 215
 (8) (4)% 
Equipment 287
 273
 14
 5 % 
Marketing 58
 65
 (7) (11)% 
Other 622
 611
 11
 2 % 
Total noninterest expense $2,543

$2,578

$(35) (1)% 
 
Noninterest expense decreased primarily due to lower personnel expense reflecting lower incentive compensation partially offset by business growth.

Effective Income Tax Rate

The effective income tax rate decreased to 13.7% in the first quarter of 2020 compared to 16.3% in the first quarter of 2019 primarily due to the benefit from resolution of certain tax matters and the impact of lower pretax earnings in the first quarter 2020.

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




CONSOLIDATED BALANCE SHEET REVIEW
Table 5: Summarized Balance Sheet Data
 March 31
 December 31
 Change 
Dollars in millions2020
 2019
 $% 
Assets       
Interest-earning deposits with banks$19,986
 $23,413
 $(3,427)(15)% 
Loans held for sale1,693
 1,083
 610
56 % 
Investment securities (a)90,546
 86,824
 3,722
4 % 
Loans264,643
 239,843
 24,800
10 % 
Allowance for credit losses - loans and leases (b)(3,944) (2,742) (1,202)(44)% 
Mortgage servicing rights1,082
 1,644
 (562)(34)% 
Goodwill9,233
 9,233
 

 
Other (a)62,254
 50,997
 11,257
22 % 
Total assets$445,493
 $410,295
 $35,198
9 % 
Liabilities    



 
Deposits$305,204
 $288,540
 $16,664
6 % 
Borrowed funds73,399
 60,263
 13,136
22 % 
Allowance for credit losses - unfunded lending related commitments (b)450
 318
 132
42 % 
Other17,150
 11,831
 5,319
45 % 
Total liabilities396,203
 360,952
 35,251
10 % 
Equity    



 
Total shareholders’ equity49,263
 49,314
 (51)
 
Noncontrolling interests27
 29
 (2)(7)% 
Total equity49,290
 49,343
 (53)
 
Total liabilities and equity$445,493
 $410,295
 $35,198
9 % 
(a)Amount as of March 31, 2020 is net of the related Allowance for Credit Losses recorded in accordance with the adoption of the CECL accounting standard. Refer to Note 1 Accounting Policies in this Report for additional detail on the adoption of this standard.
(b)
Amounts as of March 31, 2020 reflect the impact of adopting the CECL accounting standard and our transition from an incurred loss methodology for these reserves to an expected credit loss methodology. Prior period amounts represent Allowance for Loan and Lease losses (ALLL) under the incurred loss methodology. Refer to Note 1 Accounting Policies in this Report for additional detail on the adoption of this standard.

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

Our balance sheet was strong and well positioned at both March 31, 2020 and December 31, 2019.
Total assets increased driven by loan growth, higher other assets due to timing of unsettled securities sales at quarter end and an increase in derivative values, and higher investment securities;
Total liabilities increased due to deposit growth and higher borrowed funds, and higher other liabilities due to timing of unsettled securities purchases at quarter end and higher derivative values;
Total equity decreased due to higher accumulated other comprehensive income (AOCI) and net income more than offset by share repurchases and dividends and the day-one effect of adopting the CECL accounting standard.

The allowance for credit losses totaled $4.4 billion at March 31, 2020, an increase of $1.3 billion since December 31, 2019. The increase was attributable to the $.6 billion day-one CECL transition adjustment and the $.9 billion provision for credit losses partially offset by net charge-offs of $.2 billion. The provision for credit losses reflects the change in methodology together with the significant economic impact of COVID-19 and loan growth.

The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and regulatory compliance is included in the Liquidity and Capital Management portion of the Risk Management section in this Financial Review and in Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements included in our 2019 Form 10-K.

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



Loans
Table 6: Loans
 March 31
 December 31
 Change 
Dollars in millions2020
 2019
 $% 
Commercial lending       
Commercial$149,131
 $125,337
 $23,794
19 % 
Commercial real estate28,544
 28,110
 434
2 % 
Equipment lease financing7,061
 7,155
 (94)(1)% 
Total commercial lending184,736
 160,602
 24,134
15 % 
Consumer lending    



 
Home equity25,081
 25,085
 (4)
 
Residential real estate22,250
 21,821
 429
2 % 
Automobile17,194
 16,754
 440
3 % 
Credit card7,132
 7,308
 (176)(2)% 
Education3,247
 3,336
 (89)(3)% 
Other consumer5,003
 4,937
 66
1 % 
Total consumer lending79,907
 79,241
 666
1 % 
Total loans$264,643
 $239,843
 $24,800
10 % 

Commercial lending increased reflecting broad-based growth across our Corporate & Institutional Banking segment, including higher utilization of loan commitments, primarily driven by the economic impact of COVID-19.

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

Consumer lending balances increased as growth in auto, residential real estate and unsecured installment loans was partially offset by lower credit card and education loans.

The growth in auto loans reflected higher indirect auto loans from continued new loan originations and expansion into franchised dealers in new markets. Residential real estate loans increased primarily from originations of nonconforming loans, which are loans that do not meet agency standards as a result of exceeding agency conforming loan limits.

Credit card balances declined due to lower consumer spending, both seasonally and due to the economic impact of COVID-19. Education loans declined primarily due to continued runoff of the government guaranteed education loan portfolio.

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

For additional information regarding our loan portfolio see Note 1 Accounting Policies and Note 3 Loans in the Notes To Consolidated Financial Statements included in this Report.

Investment Securities

Investment securities of $90.5 billion at March 31, 2020 increased $3.7 billion, or 4%, compared to December 31, 2019, driven primarily by an increase in the fair value of U.S. Treasury and agency residential mortgage-backed securities due to a decline in market interest rates and net purchases of agency residential mortgage-backed securities, non-agency commercial mortgage-backed securities, asset-backed securities, and other debt securities.

The level and composition of the investment securities portfolio fluctuates over time based on many factors including market conditions, loan and deposit growth, and balance sheet management activities. We manage our investment securities portfolio to optimize returns, while providing a reliable source of liquidity for our banking and other activities, considering the Liquidity Coverage Ratio (LCR) and other internal and external guidelines and constraints. Effective January 1, 2020, upon the adoption of ASU 2019-04, $16.2 billion of debt securities were transferred from held to maturity to available for sale. See further discussion in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Item 1 of this Report.

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




Table 7: Investment Securities
 March 31, 2020 December 31, 2019 Ratings (a) as of March 31, 2020 
Dollars in millions
Amortized
Cost (b)

 
Fair
Value

 
Amortized
Cost

 
Fair
Value

 
AAA/
AA

 A
 BBB
 BB and Lower
 
No
Rating

 
U.S. Treasury and government agencies$16,883
 $17,905
 $16,926
 $17,348
 100% 
 
 
 
 
Agency residential mortgage-backed50,828
 52,628
 50,266
 50,984
 100% 
 
 
 
 
Non-agency residential mortgage-backed1,563
 1,643
 1,648
 1,954
 13% 1% 2% 47% 37% 
Agency commercial mortgage-backed3,181
 3,289
 3,153
 3,178
 100% 
 
 
 
 
Non-agency commercial mortgage-backed (c)4,249
 4,082
 3,782
 3,806
 81% 1% 4% 2% 12% 
Asset-backed (d)5,389
 5,327
 5,096
 5,166
 91% 2%   6% 1% 
Other (e)5,600
 5,824
 4,580
 4,771
 68% 22% 8%   2% 
Total investment securities (f)$87,693
 $90,698
 $85,451
 $87,207
 95% 2% 1% 1% 1% 
(a)Ratings percentages allocated based on amortized cost.
(b)
Amortized cost is presented net of applicable ACL of $2 million at March 31, 2020 in accordance with the adoption of the CECL accounting standard. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies for additional detail on the adoption of this ASU.
(c)Collateralized primarily by retail properties, office buildings, lodging properties and multifamily housing.
(d)Collateralized primarily by corporate debt, government guaranteed education loans and other consumer credit products.
(e)Includes state and municipal securities.
(f)Includes available for sale and held to maturity securities, which are recorded on our balance sheet at fair value and amortized cost, respectively.

Table 7 presents the distribution of our total investment securities portfolio by amortized cost and fair value, as well as by credit rating. We have included credit ratings information because we believe that the information is an indicator of the degree of credit risk to which we are exposed. 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. We continually monitor the credit risk in our portfolio and maintain an ACL at an appropriate level to absorb expected credit losses on our investment securities portfolio for the remaining contractual term of the securities adjusted for expected prepayments. See Note 1 Accounting Policies and Note 2 Investment Securities in the Notes To Consolidated Financial Statements for additional details regarding the methodology for determining the ACL and the amount of the ACL for investment securities.

The duration of investment securities was 2.2 years at March 31, 2020. We estimate that at March 31, 2020 the effective duration of investment securities was 2.3 years for an immediate 50 basis points parallel increase in interest rates and 2.1 years for an immediate 50 basis points parallel decrease in interest rates.

Based on expected prepayment speeds, the weighted-average expected maturity of the investment securities portfolio was 3.5 years at March 31, 2020 compared to 4.1 years at December 31, 2019.

Table 8: Weighted-Average Expected Maturities of Mortgage and Asset-Backed Debt Securities
March 31, 2020Years
 
Agency residential mortgage-backed3.0
 
Non-agency residential mortgage-backed6.2
 
Agency commercial mortgage-backed3.6
 
Non-agency commercial mortgage-backed2.9
 
Asset-backed1.9
 

Additional information regarding our investment securities is included in Note 2 Investment Securities and Note 11 Fair Value in the Notes To Consolidated Financial Statements included in this Report.


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



Funding Sources
Table 9: Details of Funding Sources
 March 31
 December 31
 Change 
Dollars in millions2020
 2019
 $% 
Deposits       
Noninterest-bearing$81,614
 $72,779
 $8,835
12 % 
Interest-bearing    



 
Money market54,039
 54,115
 (76)
 
Demand74,457
 71,692
 2,765
4 % 
Savings72,654
 68,291
 4,363
6 % 
Time deposits22,440
 21,663
 777
4 % 
Total interest-bearing deposits223,590
 215,761
 7,829
4 % 
Total deposits305,204
 288,540
 16,664
6 % 
Borrowed funds    



 
FHLB borrowings23,491
 16,341
 7,150
44 % 
Bank notes and senior debt31,438
 29,010
 2,428
8 % 
Subordinated debt6,475
 6,134
 341
6 % 
Other11,995
 8,778
 3,217
37 % 
Total borrowed funds73,399
 60,263
 13,136
22 % 
Total funding sources$378,603
 $348,803
 $29,800
9 % 

Total deposits increased with growth in both noninterest-bearing and interest-bearing. Commercial deposits increased near the end of the first quarter reflecting liquidity maintained by customers due to the economic impact of COVID-19.

Borrowed funds increased primarily due to higher FHLB borrowings, bank notes and senior debt, and repurchase agreements included in other borrowed funds, in part related to enhanced liquidity to meet customer needs caused by the economic impact of COVID-19. The level and composition of borrowed funds fluctuates over time based on many factors including market conditions, loan, investment securities and deposit growth, and capital considerations. We manage our borrowed funds to provide a reliable source of liquidity for our banking and other activities, considering our LCR requirements and other internal and external guidelines and constraints.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for additional information regarding our 2020 liquidity and capital activities. See Note 7 Borrowed Funds in the Notes to Consolidated Financial Statements in Item 1 of this Report for additional information related to our borrowings.
Shareholders’ Equity

Total shareholders’ equity of $49.3 billion at both March 31, 2020 and December 31, 2019 decreased $51 million. The slight decline resulted from common share repurchases of $1.4 billion, common and preferred dividends of $.6 billion, and a transition adjustment of $.7 billion for the adoption of the CECL accounting standard, substantially offset by higher AOCI of $1.7 billion and net income of $915 million.

Common shares outstanding declined to 424 million at March 31, 2020 from 433 million at December 31, 2019 as repurchases of 10.1 million shares during the period were partially offset by stock-based compensation activity. On March 16, 2020, PNC announced a temporary suspension of its common stock repurchase program through June 30, 2020 in conjunction with the Federal Reserve's effort to support the U.S. economy during the COVID-19 outbreak.
BUSINESS SEGMENTS REVIEW

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

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


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




Net interest income in business segment results reflects our internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors.
Total business segment financial results differ from total consolidated net income. The impact of these differences is reflected in the “Other” category as shown in Table 77 in Note 14 Segment Reporting in Item 1 of this Report. “Other” includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as asset and liability management activities including net securities gains or losses, ACL for investment securities, certain trading activities, certain runoff consumer loan portfolios, private equity investments, intercompany eliminations, certain corporate overhead, tax adjustments that are not allocated to business segments, gains or losses related to BlackRock transactions, exited businesses, and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests as the segments’ results exclude their portion of net income attributable to noncontrolling interests.

See the Executive Summary of this Financial Review for our discussion of the impact of COVID-19 related developments on our business and operations, including loan modifications and COVID-19 relief efforts for our customers.


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



Retail Banking

Retail Banking's core strategy is to acquire and retain customers who maintain their primary checking and transaction relationships with us. We seek to deepen relationships by meeting the broad range of our customers’ financial needs with savings, liquidity, lending, investment and retirement solutions. A strategic priority for us is to differentiate the customer experience and drive transformation and automation. A key element of our strategy is to expand the use of lower-cost alternative distribution channels, with an emphasis on digital capabilities, while continuing to optimize the traditional branch network. In addition, we have a disciplined process to continually improve the engagement of both our employees and customers, which is a strong driver of customer growth, retention and relationship expansion.

Table 10: Retail Banking Table
(Unaudited)       
Three months ended March 31      Change 
Dollars in millions, except as noted2020 2019 $% 
Income Statement       
Net interest income$1,456
 $1,349
 $107
8 % 
Noninterest income788
 595
 193
32 % 
Total revenue2,244
 1,944
 300
15 % 
Provision for credit losses445
 128
 317
248 % 
Noninterest expense1,536
 1,468
 68
5 % 
Pretax earnings263
 348
 (85)(24)% 
Income taxes62
 84
 (22)(26)% 
Earnings$201
 $264
 $(63)(24)% 
Average Balance Sheet       
Loans held for sale$779
 $441
 $338
77 % 
Loans       
Consumer lending       
Home equity$22,736
 $22,990
 $(254)(1)% 
Residential real estate17,964
 15,034
 2,930
19 % 
Automobile17,096
 14,608
 2,488
17 % 
Credit cards7,207
 6,204
 1,003
16 % 
Education3,343
 3,816
 (473)(12)% 
Other2,533
 2,068
 465
22 % 
Total consumer lending70,879
 64,720
 6,159
10 % 
Commercial and commercial real estate10,524
 10,461
 63
1 % 
Total loans$81,403
 $75,181
 $6,222
8 % 
Total assets$97,062
 $91,255
 $5,807
6 % 
Deposits       
Noninterest-bearing demand$32,225
 $30,389
 $1,836
6 % 
Interest-bearing demand42,865
 42,477
 388
1 % 
Money market22,866
 26,773
 (3,907)(15)% 
Savings62,781
 53,100
 9,681
18 % 
Certificates of deposit12,233
 12,381
 (148)(1)% 
Total deposits$172,970
 $165,120
 $7,850
5 % 
Performance Ratios       
Return on average assets.84% 1.17%    
Noninterest income to total revenue35% 31%    
Efficiency68% 76%    

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





Three months ended March 31      Change 
Dollars in millions, except as noted2020
 2019
 $% 
Supplemental Noninterest Income Information       
Consumer services$372
 $366
 $6
2 % 
Residential mortgage$210
 $65
 $145
223 % 
Service charges on deposits$166
 $162
 $4
2 % 
Residential Mortgage Information       
Residential mortgage servicing statistics (in billions, except as noted) (a)       
Serviced portfolio balance (b)$118
 $123
 $(5)(4)% 
Serviced portfolio acquisitions$2
 $1
 $1
100 % 
MSR asset value (b)$0.6
 $1.1
 $(.5)(45)% 
MSR capitalization value (in basis points) (b)51
 92
 (41)(45)% 
Servicing income: (in millions)       
Servicing fees, net (c)$44
 $53
 $(9)(17)% 
Mortgage servicing rights valuation, net of economic hedge$101
 $(9) $110
*
 
Residential mortgage loan statistics       
Loan origination volume (in billions)$3.2
 $1.7
 $1.5
88 % 
Loan sale margin percentage3.16% 2.35%    
Percentage of originations represented by:       
Purchase volume (d)36% 56%    
Refinance volume64% 44%    
Other Information (b)       
Customer-related statistics (average)       
Non-teller deposit transactions (e)59% 57%    
Digital consumer customers (f)71% 68%    
Credit-related statistics       
Nonperforming assets (g)$1,011
 $1,109
 $(98)(9)% 
Net charge-offs - loans and leases$166
 $132
 $34
26 % 
Other statistics       
ATMs9,048
 9,112
 (64)(1)% 
Branches (h)2,277
 2,347
 (70)(3)% 
Brokerage account client assets (in billions) (i)$49
 $51
 $(2)(4)% 
* - Not Meaningful
(a)Represents mortgage loan servicing balances for third parties and the related income.
(b)Presented as of March 31, except for customer-related statistics, which are averages for the three months ended, and net charge-offs, which are for the three months ended.
(c)
Servicing fees net of impact of decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan payments, prepayments, and loans that were paid down or paid off during the period.
(d)
Mortgages with borrowers as part of residential real estate purchase transactions.
(e)
Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application.
(f)
Represents consumer checking relationships that process the majority of their transactions through non-teller channels.
(g)Primarily nonperforming loans of $1.0 billion for both March 31, 2020 and March 31, 2019.
(h)
Excludes stand-alone mortgage offices and satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services.
(i)Includes cash and money market balances.

Retail Banking earned $201 million in the first three months of 2020 compared with $264 million for the same period in 2019. The decrease in earnings was attributable to higher provision for credit losses and increased noninterest expense partially offset by higher noninterest income and net interest income.

Net interest income increased primarily due to growth in loan and deposit balances and wider interest rate spreads on the value of loans, partially offset by narrower interest rate spreads on the value of deposits.
  
Noninterest income increased largely due to growth in residential mortgage revenue attributable to higher results from residential mortgage servicing rights valuation, net of economic hedge, and increased loan sales revenue from higher origination volumes. Also contributing to the increase in noninterest income was the impact of slightly positive derivative fair value adjustments related to Visa Class B common shares for the first quarter of 2020 compared with the negative adjustments of $31 million for the same period in 2019.


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



Provision for credit losses increased in the first three months of 2020 compared to the same period of 2019 due to the adoption of the CECL accounting standard and the significant economic impact of COVID-19 and loan growth.

Higher noninterest expense primarily resulted from higher customer-related transaction costs, personnel, equipment, and ATM expense resulting from enhanced checking product benefits.

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 quarter of 2020, average total deposits increased compared to the same period in 2019 primarily driven by savings deposits which increased due, in part, to a shift from money market deposits to relationship-based savings products as well as growth in consumer deposits, including from our national expansion.

Retail Banking average total loans increased in the first three months of 2020 compared with the same period in 2019.
Average residential mortgages increased primarily as a result of growth in nonconforming residential mortgage loans.
Average auto loans increased primarily due to strong new indirect auto loan volumes, including in our Southeast and expansion markets, as well as growth in direct auto loans.
Average credit card balances increased as we continued to focus on our long-term objective of deepening penetration within our existing customer base as well as new client acquisition.
Average education loans decreased driven by a decline in the runoff portfolio of government guaranteed education loans.
Average unsecured installment loans increased primarily driven by growth in originations through digital channels.
Average home equity loans decreased as paydowns and payoffs on loans exceeded new originated volume.

In 2018, we launched our national expansion strategy designed to grow customers with digitally-led banking and an ultra-thin branch network in markets outside of our existing retail branch network and began offering our digital high yield savings deposit product and opened our first solution center. Solution centers are an emerging branch operating model with a distinctive layout, where routine transactions are supported through a combination of technology and skilled banker assistance to create personalized experiences. The primary focus of the solution center is to bring a community element to our digital banking capabilities. The solution center provides a collaborative environment that connects our customers with our digital solutions and banking services, beyond deposits and withdrawals. Deposit products are led by a digital high yield savings account. Following the first solution center opening in Kansas City in 2018, four additional solution centers opened in 2019 with a second in Kansas City and three in the Dallas/Fort Worth market. We also offer digital unsecured installment and small business loans in the expansion markets. In 2020, our plan is to continue to execute our national expansion strategy.

Retail Banking continues to enhance the customer experience with refinements to product and service offerings that drive value for consumers and small businesses. We are focused on meeting the financial needs of our customers by providing a broad range of liquidity, banking and investment products. Retail Banking continued to execute on its strategy of transforming the customer experience through transaction channel migration, branch network and home lending process transformations and multi-channel engagement and service strategies.
Approximately 71% of consumer customers used non-teller channels for the majority of their transactions in the first three months of 2020 compared with 68% for the same period in 2019.
Deposit transactions via ATM and mobile channels increased to 59% of total deposit transactions in the first three months of 2020 from 57% for the same period in 2019.

Retail Banking continues to make progress on its multi-year initiative to redesign the home lending process, including integrating mortgage and home equity lending into a common platform. Technology enhancements supported increased residential mortgage origination volume. In addition, we enhanced the home equity origination process to make it easier and to reach additional customers by offering the product in new states. The improvements and expansion are planned to continue throughout 2020.


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




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

Table 11: Corporate & Institutional Banking Table
(Unaudited)       
Three months ended March 31      Change 
Dollars in millions2020 2019 $% 
Income Statement       
Net interest income$966
 $898
 $68
8 % 
Noninterest income694
 576
 118
20 % 
Total revenue1,660
 1,474
 186
13 % 
Provision for credit losses458
 71
 387
545 % 
Noninterest expense722
 686
 36
5 % 
Pretax earnings480
 717
 (237)(33)% 
Income taxes110
 165
 (55)(33)% 
Earnings$370
 $552
 $(182)(33)% 
Average Balance Sheet       
Loans held for sale$395
 $347
 $48
14 % 
Loans       
Commercial lending       
Commercial$117,288
 $108,641
 $8,647
8 % 
Commercial real estate26,589
 25,971
 618
2 % 
Equipment lease financing7,066
 7,264
 (198)(3)% 
Total commercial lending150,943
 141,876
 9,067
6 % 
Consumer9
 20
 (11)(55)% 
Total loans$150,952
 $141,896
 $9,056
6 % 
Total assets$172,502
 $157,169
 $15,333
10 % 
Deposits       
Noninterest-bearing demand$40,651
 $39,551
 $1,100
3 % 
Interest-bearing demand21,101
 17,827
 $3,274
18 % 
Money market28,468
 25,630
 2,838
11 % 
Other7,868
 5,547
 2,321
42 % 
Total deposits$98,088
 $88,555
 $9,533
11 % 
Performance Ratios       
Return on average assets.87% 1.42%    
Noninterest income to total revenue42% 39%    
Efficiency43% 45%    
Other Information       
Consolidated revenue from: (a)       
Treasury Management (b)$491
 $445
 $46
10 % 
Capital Markets (b)$344
 $246
 $98
40 % 
Commercial mortgage banking activities:       
Commercial mortgage loans held for sale (c)$29
 $15
 $14
93 % 
Commercial mortgage loan servicing income (d)69
 54
 15
28 % 
Commercial mortgage servicing rights valuation, net of economic hedge (e)20
 5
 15
300 % 
Total$118
 $74
 $44
59 % 
Commercial mortgage servicing rights asset value (f)$477
 $681
 $(204)(30)% 
Average Loans by C&IB business       
Corporate Banking$78,057
 $71,089
 $6,968
10 % 
Real Estate37,368
 36,357
 1,011
3 % 
Business Credit23,251
 21,728
 1,523
7 % 
Commercial Banking7,784
 8,118
 (334)(4)% 
Other4,492
 4,604
 (112)(2)% 
Total average loans$150,952
 $141,896
 $9,056
6 % 
Credit-related statistics       
Nonperforming assets (f) (g)$508
 $388
 $120
31 % 
Net charge-offs - loans and leases$50
 $5
 $45
900 % 
(a)See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of this Corporate & Institutional Banking section.
(b)Amounts are reported in net interest income and noninterest income.
(c)Represents other noninterest income for valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, originations fees, gains on sale of loans held for sale and net interest income on loans held for sale.
(d)Represents net interest income and noninterest income (primarily in corporate service fees) from loan servicing net of reduction in commercial mortgage servicing rights due to amortization expense and payoffs. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.
(e)Amounts are reported in corporate service fees.
(f)As of March 31.
(g)Primarily nonperforming loans of $.5 billion and $.4 billion at March 31, 2020 and March 31, 2019, respectively.

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




Corporate & Institutional Banking earned $370 million in the first quarter of 2020 compared to $552 million for the same period in 2019. Higher provision for credit losses and higher noninterest expense were partially offset by higher revenue.

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

Growth in noninterest income in the comparison reflected broad-based increases including higher capital markets-related revenue, commercial mortgage banking activities and treasury management product revenue.

Provision for credit losses in the first quarter of 2020 reflected the adoption of the CECL accounting standard, the significant economic impact of COVID-19 and portfolio growth, including new loans and increased utilization. First quarter 2020 experienced an increase in nonperforming assets and net loan and lease charge-offs compared to the same period in 2019.

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

Average loans increased compared to the first quarter of 2019 driven by strong growth in Corporate Banking, Business Credit and PNC Real Estate due in part to increased utilization in March as the need for liquidity in the current economic environment increased:
Corporate Banking provides lending, treasury management and capital markets-related products and services to mid-sized and large corporations, and government and not-for-profit entities. Average loans for this business grew reflecting strong new production and increased utilization in asset-backed financing, and increased lending to large and mid-sized 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 primarily due to new originations, partially offset by payoffs.
PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. Average loans for this business increased primarily driven by higher commercial mortgage balances, partially offset by loan payoffs.
Commercial Banking provides lending, treasury management and capital markets-related products and services to smaller corporations and businesses. Average loans for this business decreased as portfolio runoff outpaced new originations.

The deposit strategy of Corporate & Institutional Banking is to remain disciplined on pricing and focused on growing and retaining relationship-based balances over time, executing on customer and segment-specific deposit growth strategies and continuing to provide funding and liquidity to PNC. Average total deposits increased in the comparison driven by growth in interest-bearing deposits. Additionally, due to recent economic uncertainties and interest rate changes, first quarter 2020 experienced an increase in noninterest-bearing deposits compared to the same period in 2019. We continue to actively monitor the interest rate environment and make adjustments in response to evolving market conditions, bank funding needs and client relationship dynamics.

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

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 business perspective, the majority of the revenue and expense related to these services is reflected in the Corporate & Institutional Banking segment results and the remainder is reflected in the results of other businesses. The Other Information section in Table 11 includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.
The Treasury Management business provides payables, receivables, deposit and account services, liquidity and investments, and online and mobile banking products and services to our clients. Treasury management revenue is reported in noninterest income and net interest income. Noninterest income includes treasury management product revenue less earnings credits provided to customers on compensating deposit balances used to pay for products and services. Net interest income primarily includes revenue from all treasury

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




management customer deposit balances. Compared with the first quarter of 2019, treasury management revenue increased primarily due to higher deposit balances and product revenue.

Capital markets-related products and services include foreign exchange, derivatives, securities underwriting, loan syndications, mergers and acquisitions advisory and equity capital markets advisory related services. The increase in capital markets-related revenue in the comparison was broad-based across most products and services and included higher revenue from credit valuations and fees on customer-related derivatives activities and higher underwriting fees.

Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (both net interest income and noninterest income) and revenue derived from commercial mortgage loans held for sale and related hedges. Total revenue from commercial mortgage banking activities increased in the comparison due to higher revenue across all activities.


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



Asset Management Group

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

Table 12: Asset Management Group Table
(Unaudited)       
Three months ended March 31      Change 
Dollars in millions, except as noted2020 2019 $% 
Income Statement       
Net interest income$88
 $70
 $18
26 % 
Noninterest income204
 217
 (13)(6)% 
Total revenue292
 287
 5
2 % 
Provision for credit losses3
 (1) 4
*
 
Noninterest expense219
 230
 (11)(5)% 
Pretax earnings70
 58
 12
21 % 
Income taxes16
 13
 3
23 % 
Earnings$54
 $45
 $9
20 % 
Average Balance Sheet       
Loans       
Consumer lending       
Residential real estate$2,385
 $1,723
 662
38 % 
Other4,052
 4,362
 (310)(7)% 
Total consumer lending6,437
 6,085
 352
6 % 
Commercial and commercial real estate856
 752
 104
14 % 
Total loans$7,293
 $6,837
 $456
7 % 
Total assets$7,801
 $7,259
 $542
7 % 
Deposits       
Noninterest-bearing demand$1,468
 $1,388
 $80
6 % 
Interest-bearing demand6,850
 3,076
 3,774
123 % 
Money market1,709
 2,036
 (327)(16)% 
Savings7,197
 5,723
 1,474
26 % 
Other847
 697
 150
22 % 
Total deposits$18,071
 $12,920
 $5,151
40 % 
Performance Ratios       
Return on average assets2.81% 2.51%    
Noninterest income to total revenue70% 76%    
Efficiency75% 80%    
Supplemental Noninterest Income Information       
Asset management fees$201
 $212
 $(11)(5)% 
Other Information       
Nonperforming assets (a) (b)$34
 $48
 $(14)(29)% 
Net charge-offs - loans and leases$(1) $1
 $(2)(200)% 
Client Assets Under Administration (in billions) (a) (c)
       
Discretionary client assets under management$136
 $158
 $(22)(14)% 
Nondiscretionary client assets under administration128
 130
 (2)(2)% 
Total$264
 $288
 $(24)(8)% 
Discretionary client assets under management       
Personal$84
 $95
 $(11)(12)% 
Institutional52
 63
 (11)(17)% 
Total$136
 $158
 $(22)(14)% 
* - Not meaningful
(a)As of March 31.
(b)Primarily nonperforming loans of $34 million at March 31, 2020 and $47 million at March 31, 2019.
(c)Excludes brokerage account client assets. 

Asset Management Group earned $54 million in the first three months of 2020 compared to $45 million for the same period in 2019. Earnings increased due to higher revenue and lower noninterest expense.


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




Growth in revenue was driven by higher net interest income due to higher average deposit balances. This increase was partially offset by lower asset management fees related to the 2019 sale of the retirement recordkeeping and the sale of components of the PNC Capital Advisors investment management business, including its PNC family of proprietary mutual funds businesses.

Noninterest expense decreased primarily attributable to the impact of the 2019 divestitures.

Asset Management Group’s discretionary client assets under management decreased primarily attributable to lower equity markets as of March 31, 2020 and the sale of components of the PNC Capital Advisors investment management business.

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

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

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

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

Table 13: BlackRock Table
(Unaudited)   
Three months ended March 31   
Dollars in millions20202019 
Business segment earnings (a)$157
$197
 
PNC’s economic interest in BlackRock (b)22%22% 
(a)Represents our share of BlackRock’s reported GAAP earnings net of income taxes on those earnings incurred by us.
(b)At March 31.
In billionsMarch 31, 2020
December 31, 2019
 
Carrying value of our investment in BlackRock (c)$8.7
$8.7
 
Market value of our investment in BlackRock (d)$15.3
$17.5
 
(c)We account for our investment in BlackRock under the equity method of accounting, exclusive of a related deferred tax liability of $1.8 billion for both March 31, 2020 and December 31, 2019, respectively. Our voting interest in BlackRock common stock was approximately 22% at March 31, 2020.
(d)Does not include liquidity discount.

Our 2019 Form 10-K includes additional information about our investment in BlackRock.


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



RISK MANAGEMENT

The Risk Management section included in Item 7 of our 2019 Form 10-K describes our enterprise risk management framework including risk culture, enterprise strategy, risk governance and framework, risk identification, risk assessment, risk controls and monitoring, and risk aggregation and reporting. Additionally, our 2019 Form 10-K provides an analysis of our key areas of risk, which include but are not limited to credit, liquidity and capital, market, operational, compliance and information security.

Credit Risk Management
Credit risk represents the possibility that a customer, counterparty or issuer may not perform in accordance with contractual terms. Credit risk is inherent in the financial services business and results from extending credit to customers, purchasing securities, and entering into financial derivative transactions and certain guarantee contracts. Credit risk is one of our most significant risks. Our processes for managing credit risk are embedded in our risk culture and in our decision-making processes using a systematic approach whereby credit risks and related exposures are identified and assessed, managed through specific policies and processes, measured and evaluated against our risk appetite and credit concentration limits, and reported, along with specific mitigation activities, to management and the Board of Directors through our governance structure. Our most significant concentration of credit risk is in our loan portfolio.

Loan Portfolio Characteristics and Analysis

Table 14: Details of Loans
In billions
chart-66fdea0bc66259c69cc.jpg
We use several asset quality indicators, as further detailed in Note 3 Loans in the Notes To Consolidated Financial Statements in this Report, to monitor and measure our exposure to credit risk within our loan portfolio. The following provides additional information about our significant loan classes.

Commercial Lending

Commercial
Commercial loans comprised 56% and 52% of our total loan portfolio at March 31, 2020 and December 31, 2019, respectively. The majority of our commercial loans are secured by collateral that provides a secondary source of repayment for the loan should the borrower experience cash generation difficulties. Examples of this collateral include short-term assets, such as accounts receivable, inventory and securities, and long-lived assets, such as equipment, real estate and other business assets.

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


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




Table 15: Commercial Loans by Industry
 March 31, 2020  December 31, 2019 
Dollars in millionsAmount % of Total  Amount % of Total 
Commercial         
Manufacturing$27,225
 18%  $21,540
 17% 
Retail/wholesale trade24,408
 16
  21,565
 17
 
Service providers19,411
 13
  16,112
 13
 
Real estate related (a)14,843
 10
  12,346
 10
 
Financial services13,473
 9
  11,318
 9
 
Health care9,238
 6
  8,035
 6
 
Transportation and warehousing8,160
 5
  7,474
 6
 
Other industries32,373
 23
  26,947
 22
 
Total commercial loans$149,131
 100%  $125,337
 100% 
(a) Represents loans to customers in the real estate and construction industries.

Commercial loan increases at March 31, 2020 were driven by loan growth, including higher utilization of loan commitments near the end of the first quarter, primarily due to the economic impact of COVID-19. See the Commercial Lending High Impact Industries discussion within Credit Risk Management for additional discussion of the impact of COVID-19 on loans and how we are evaluating and monitoring the portfolio for elevated levels of credit risk.

Commercial Real Estate
Commercial real estate loans comprised $17.4 billion related to commercial mortgages, $5.8 billion of real estate project loans and $5.3 billion of intermediate term financing loans as of March 31, 2020. Comparable amounts were $17.0 billion, $5.6 billion and $5.5 billion, respectively, as of December 31, 2019.
We monitor credit risk associated with our commercial real estate loans similar to commercial loans by analyzing PD and LGD. Additionally, risks associated with these types of credit activities tend to be correlated to the loan structure, collateral location, project progress and business environment. These attributes are also monitored and utilized in assessing credit risk. The portfolio is geographically diverse due to the nature of our business involving clients throughout the U.S. The following table presents our commercial real estate loans by geography and property type.

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



Table 16: Commercial Real Estate Loans by Geography and Property Type
 March 31, 2020  December 31, 2019 
Dollars in millionsAmount % of Total  Amount % of Total 
Geography         
California$4,406
 15%  $4,393
 16% 
Florida2,651
 9
  2,557
 9
 
Texas1,844
 6
  1,717
 6
 
Maryland1,743
 6
  1,889
 7
 
Virginia1,509
 5
  1,547
 6
 
Pennsylvania1,341
 5
  1,310
 4
 
Ohio1,265
 4
  1,307
 4
 
New Jersey1,159
 4
  1,106
 4
 
Illinois1,028
 4
  1,001
 4
 
North Carolina997
 4
  1,015
 4
 
Other10,601
 38
  10,268
 36
 
Total commercial real estate loans$28,544
 100%  $28,110
 100% 
Property Type         
Multifamily$9,123
 32%  $9,003
 32% 
Office7,794
 27
  7,641
 27
 
Retail3,599
 13
  3,702
 13
 
Industrial/Warehouse2,169
 8
  2,003
 7
 
Hotel/Motel1,892
 7
  1,813
 7
 
Senior Housing1,238
 4
  1,123
 4
 
Mixed Use871
 3
  943
 3
 
Other1,858
 6
  1,882
 7
 
Total commercial real estate loans$28,544
 100%  $28,110
 100% 

Commercial Lending High Impact Industries
In light of the current economic circumstances related to COVID-19, we are evaluating and monitoring our entire commercial lending portfolio for elevated levels of credit risk; however, we believe the industry sectors likely to be most impacted are:
Non-real estate related
Leisure recreation: restaurants, casinos, hotels, convention centers
Non-essential retail: retail excluding auto, gas, staples
Healthcare facilities: elective, private practices
Leisure travel: cruise, airlines, other travel/transportation
Consumer services: religious organizations, childcare
Other impacted areas: shipping, senior living, specialty education
Real estate related
Non-essential retail and restaurants: malls, lifestyle centers, outlets, restaurants
Hotel: full service, limited service, extended stay
Senior housing: assisted living, independent living

As of March 31, 2020, our outstanding loan balances in these industries totaled $19.3 billion, with additional exposures totaling $7.0 billion, and we are carefully monitoring and managing these loans and exposures.
At this time we are most closely monitoring our non-real estate related loans to non-essential retail, restaurants and certain parts of leisure travel. At March 31, 2020:
Non-essential retail loans outstanding totaled $2.5 billion, 60% of which were asset-based loans;
Restaurant loan outstanding balances were $1.5 billion; and
Cruise line and commercial airline loan outstanding balances were less than $600 million.

Within the commercial real estate related category, we have $8.7 billion in outstanding loans to borrowers that we assess as likely to be most impacted by COVID-19. This includes real estate projects of $5.1 billion, 40% of which are under construction and have a portfolio loan-to-value ratio (LTV) of 55%. The remaining $3.6 billion of loans outstanding are to real estate investment trusts (REITs), approximately two-thirds of which are investment grade.



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




Oil and Gas Loan Portfolio
We are also monitoring our oil and gas portfolio closely for elevated levels of credit risk given the continued pressures on the energy industry. As of March 31, 2020, our outstanding loans in the oil and gas sector totaled $4.6 billion or 2% of total loans, with additional exposures totaling $7.0 billion. This portfolio comprised approximately $2.2 billion in the midstream and downstream sectors, $1.2 billion of oil services companies and $1.2 billion related to exploration and production companies. Of the oil services category, approximately $.3 billion is not asset-based or investment grade. Nonperforming loans in the oil and gas sector as of March 31, 2020 totaled $106 million, or 6% of total nonperforming loans.

Consumer Lending
Given the uncertainty of the current economic environment, we recently tightened underwriting requirements across our consumer lending portfolio. See the discussion that follows for analysis of credit risk in our significant consumer loan classes as of March 31, 2020.

Home Equity
Home equity loans comprised $13.7 billion of primarily variable-rate home equity lines of credit and $11.4 billion of closed-end home equity installment loans at March 31, 2020. Comparable amounts were $13.9 billion and $11.2 billion, respectively, as of December 31, 2019.

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

The credit quality of newly originated loans over the last twelve months was strong overall with a weighted-average LTV on originations of 68% and a weighted-average FICO score of 768.

The credit performance of the majority of the home equity portfolio where we hold the first lien position is superior to the portion of the portfolio where we hold the second lien position, but do not hold the first lien. Lien position information is generally determined at the time of origination and monitored on an ongoing basis for risk management purposes. We use an industry-leading third-party service provider to obtain updated loan information, including lien and collateral data that is aggregated from public and private sources.

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

Table 17: Home Equity Loans by Geography and by Lien Type
 March 31, 2020  December 31, 2019 
Dollars in millionsAmount % of Total  Amount % of Total 
Geography         
Pennsylvania$5,778
 23%  $5,812
 23% 
New Jersey3,729
 15
  3,728
 15
 
Ohio2,893
 12
  2,899
 12
 
Illinois1,541
 6
  1,544
 6
 
Florida1,431
 6
  1,340
 5
 
Maryland1,429
 6
  1,420
 6
 
Michigan1,404
 6
  1,371
 5
 
North Carolina1,098
 4
  1,092
 4
 
Kentucky985
 4
  990
 4
 
Virginia835
 3
  810
 3
 
Other3,958
 15
  4,079
 17
 
Total home equity loans$25,081
 100%  $25,085
 100% 
Lien type         
1st lien  60%    59% 
2nd lien  40
    41
 
Total
 100%    100% 


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



Residential Real Estate
Residential real estate loans primarily consisted of residential mortgage loans at both March 31, 2020 and December 31, 2019.

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

The credit quality of newly originated loans that we retained on our balance sheet over the last twelve months was strong overall as evidenced by a weighted-average LTV on originations of 69% and a weighted-average FICO score of 770.

The following table presents our residential real estate loans by geography.

Table 18: Residential Real Estate Loans by Geography
 March 31, 2020  December 31, 2019 
Dollars in millionsAmount % of Total  Amount % of Total 
Geography         
California$7,343
 33%  $6,800
 31% 
New Jersey1,786
 8
  1,779
 8
 
Florida1,550
 7
  1,580
 7
 
Pennsylvania1,110
 5
  1,113
 5
 
Illinois1,076
 5
  1,118
 5
 
New York993
 4
  1,008
 5
 
Maryland898
 4
  923
 4
 
Virginia887
 4
  868
 4
 
North Carolina863
 4
  877
 4
 
Washington782
 4
  646
 3
 
Other4,962
 22
  5,109
 24
 
Total residential real estate loans$22,250
 100%  $21,821
 100% 

We originate residential mortgage loans nationwide through our national mortgage business as well as within our branch network. Residential mortgage loans underwritten to agency standards, including conforming loan amount limits, are typically sold with servicing retained by us. We also originate nonconforming residential mortgage loans that do not meet agency standards, which we retain on our balance sheet. The originated nonconforming residential mortgage portfolio had strong credit quality at March 31, 2020 with an average original LTV of 70% and an average original FICO score of 773. Our portfolio of originated nonconforming residential mortgage loans totaled $16.8 billion at March 31, 2020 with 39% located in California.

Automobile
Within auto loans, $15.5 billion resided in the indirect auto portfolio while $1.7 billion were in the direct auto portfolio as of March 31, 2020. Comparable amounts as of December 31, 2019 were $15.1 billion and $1.7 billion, respectively. The indirect auto portfolio pertains to loans originated through franchised dealers, including from expansion into new markets. This business is strategically aligned with our core retail banking business.

We continue to focus on borrowers with strong credit profiles as evidenced by a weighted-average loan origination FICO score over the last twelve months of 765 for indirect auto loans and 769 for direct auto loans. The weighted-average term of loan originations over the last twelve months was 73 months for indirect auto loans and 63 months for direct auto loans. We offer both new and used auto financing to customers through our various channels. At March 31, 2020, the portfolio was composed of 56% new vehicle loans and 44% used vehicle loans. Comparable amounts at December 31, 2019 were 55% and 45%, respectively.

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




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




Nonperforming Assets and Loan Delinquencies

Nonperforming Assets
Nonperforming assets include nonperforming loans and leases for which ultimate collectability of the full amount of contractual principal and interest is not probable and include nonperforming troubled debt restructurings (TDRs), other real estate owned (OREO) and foreclosed assets. Loans held for sale, certain government insured or guaranteed loans and loans accounted for under the fair value option are excluded from nonperforming loans. Amounts as of December 31, 2019 also excluded purchased impaired loans. In connection with the adoption of the CECL standard, nonperforming loans as of March 31, 2020 include purchased credit deteriorated loans which meet the criteria to be classified as nonperforming. See Note 1 Accounting Policies and Note 3 Loans in the Notes To Consolidated Financial Statements in this Report for additional information regarding our nonperforming loans and nonaccrual policies and further detail of nonperforming asset categories.

The following table presents a summary of nonperforming assets by major category, Table 20 provides details on the change in nonperforming assets during the three months ended March 31, 2020 and 2019.

Table 19: Nonperforming Assets by Type
 March 31, 2020
December 31, 2019
 Change
Dollars in millions$ %
Nonperforming loans      
Commercial lending$566
$501
 $65
 13 %
Consumer lending (a)1,078
1,134
 (56) (5)%
Total nonperforming loans1,644
1,635
 9
 1 %
OREO and foreclosed assets111
117
 (6) (5)%
Total nonperforming assets$1,755
$1,752
 $3
 
TDRs included in nonperforming loans$767
$843
 $(76) (9)%
Percentage of total nonperforming loans47%52%    
Nonperforming loans to total loans.62%.68%    
Nonperforming assets to total loans, OREO and foreclosed assets.66%.73%    
Nonperforming assets to total assets.39%.43%    
Allowance for credit losses - loans and leases to total nonperforming loans (b)240%168%    
(a)Excludes most unsecured consumer loans and lines of credit, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.
(b)Ratio at March 31, 2020 reflects the transition impact on our allowance for loans and leases from the adoption of the CECL standard along with the increases in reserves during the first quarter of 2020 due to the significant economic impact of COVID-19 and loan growth.

Table 20: Change in Nonperforming Assets
In millions 2020
 2019
 
January 1 $1,752
 $1,808
 
New nonperforming assets 391
 287
 
Charge-offs and valuation adjustments (145) (164) 
Principal activity, including paydowns and payoffs (158) (92) 
Asset sales and transfers to loans held for sale (20) (13) 
Returned to performing status (65) (41) 
March 31 $1,755
 $1,785
 

As of March 31, 2020, approximately 83% of total nonperforming loans were secured by collateral which lessened reserve requirements and is expected to reduce credit losses. As of March 31, 2020, commercial lending nonperforming loans were carried at approximately 74% of their unpaid principal balance, due to charge-offs recorded to date, before consideration of the ACL.

Within consumer lending nonperforming loans, residential real estate TDRs comprised 76% and 79% of total residential real estate nonperforming loans at March 31, 2020 and December 31, 2019, respectively, while home equity TDRs comprised 46% and 49% of home equity nonperforming loans at March 31, 2020 and December 31, 2019, respectively. TDRs generally remain in nonperforming status until a borrower has made at least six consecutive months of both principal and interest payments under the modified terms or ultimate resolution occurs. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to us and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status. Loans that have been restructured for COVID-19

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



related hardships and meet certain criteria under the CARES Act are not identified as TDRs. See the Recent Regulatory Developments section of this Report for more information on the treatment of loan modifications under the CARES Act.

At March 31, 2020, our largest nonperforming asset was $41 million in the Mining, Quarrying, and Oil and Gas Extraction industry and the ten largest individual nonperforming assets represented 13% of total nonperforming assets.

Loan Delinquencies
We regularly monitor the level of loan delinquencies and believe these levels may be a key indicator of loan portfolio asset quality. Measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of payment are considered delinquent. Loan delinquencies include government insured or guaranteed loans, loans accounted for under the fair value option and at March 31, 2020 also include purchased credit deteriorated loans. Amounts exclude loans held for sale, while amounts as of December 31, 2019 also excluded purchased impaired loans.
Table 21: Accruing Loans Past Due (a)
  Amount 
  
 Percentage of Total Loans Outstanding 
  March 31
2020

 December 31
2019

 Change March 31
2020

 December 31
2019

 
Dollars in millions $ %  
Early stage loan delinquencies             
Accruing loans past due 30 to 59 days $688
 $661
 $27
 4 % .26% .28% 
Accruing loans past due 60 to 89 days 261
 258
 3
 1 % .10% .11% 
Total 949
 919
 30
 3 % .36% .38% 
Late stage loan delinquencies             
Accruing loans past due 90 days or more 534
 585
 (51) (9)% .20% .24% 
Total $1,483
 $1,504
 $(21) (1)% .56% .63% 
(a)Past due loan amounts include government insured or guaranteed loans of $.5 billion at March 31, 2020 and $.6 billion at December 31, 2019. Additionally, in connection with the adoption of the CECL standard, past due loan amounts at March 31, 2020 include purchased credit deteriorated loans totaling $.1 billion.
 
Accruing loans past due 90 days or more continue to accrue interest because they are (i) well secured by collateral and are in the process of collection, (ii) managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines, or (iii) certain government insured or guaranteed loans. As such, they are excluded from nonperforming loans.

Troubled Debt Restructurings and Loan Modifications

Troubled Debt Restructurings
A TDR is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs result from our loss mitigation activities and include rate reductions, principal forgiveness, postponement/reduction of scheduled amortization and extensions, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Additionally, TDRs also result from court imposed concessions (e.g., a Chapter 7 bankruptcy where the debtor is discharged from personal liability to us and a court approved Chapter 13 bankruptcy repayment plan). Loans to borrowers experiencing COVID-19 related hardships and meet certain criteria under the CARES Act are not categorized as TDRs. See the Recent Regulatory Developments section of this Report for additional information on the updated agency guidance on TDRs under the CARES Act.
Table 22: Summary of Troubled Debt Restructurings (a)
  March 31
2020

 December 31
2019

 Change 
Dollars in millions $ % 
Total commercial lending $349
 $361
 $(12) (3)% 
Total consumer lending 1,191
 1,303
 (112) (9)% 
Total TDRs $1,540
 $1,664
 $(124) (7)% 
Nonperforming $767
 $843
 $(76) (9)% 
Accruing (b) 773
 821
 (48) (6)% 
Total TDRs $1,540
 $1,664
 $(124) (7)% 
(a)Amounts in table do not include associated valuation allowances.
(b)Accruing loans include consumer credit card loans and loans that have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans.

Excluded from TDRs are $.9 billion of consumer loans held for sale, loans accounted for under the fair value option, certain government insured or guaranteed loans, and purchased credit deteriorated loans that did not meet the criteria to be classified as TDRs at March 31, 2020. Excluded from TDRs at December 31, 2019 are $1.0 billion of consumer loans held for sale, loans accounted for

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




under the fair value option and pooled purchased impaired loans, as well as certain government insured or guaranteed loans. Nonperforming TDRs represented approximately 47% and 52% of total nonperforming loans at March 31, 2020 and December 31, 2019, respectively, and 50% and 51% of total TDRs at March 31, 2020 and December 31, 2019, respectively. The remaining portion of TDRs represents TDRs that have been returned to accrual status after performing under the restructured terms for at least six consecutive months.

See Note 3 Loans in the Notes to Consolidated Financial Statements in this Report for additional information on TDRs.

Loan Modifications
See the Executive Summary of this Financial Review for information on short-term loan modifications being made for both commercial and consumer customers in light of the current economic circumstances related to COVID-19. For additional information related to loan modifications, see the Credit Risk Management portion of the Risk Management section in our 2019 Form 10-K.

Allowances for Credit Losses

On January 1, 2020 we adopted the CECL standard which replaced the incurred loss methodology for our credit related reserves with an expected credit loss methodology for the remaining estimated contractual term of in-scope assets and off-balance sheet exposures. Our ACL is based on historical loss experience, borrower characteristics, current economic conditions, reasonable and supportable forecasts of future conditions and other relevant factors. We maintain the ACL at an appropriate level for expected losses on our existing investment securities, loans, finance leases, trade receivables and other financial assets and off-balance sheet credit exposures and determine this allowance based on quarterly assessments of the remaining estimated contractual term of the assets or exposures as of the balance sheet date.

Expected losses are estimated using a combination of (i) the expected losses over a reasonable and supportable forecast period (RSFP), (ii) a period of reversion to long run average expected losses (reversion period) where applicable, and (iii) long run average (LRA) expected losses for the remaining estimated contractual term.

We use forward-looking information in estimating expected credit losses for the RSFP. For this purpose, we have established a framework which includes a three year reasonable and supportable forecast period and the use of four economic scenarios and associated probability weights, which in combination create a forecast of expected economic outcomes over our RSFP of three years. Forward looking information, such as forecasted relevant macroeconomic variables, is incorporated into the expected credit loss estimates using quantitative techniques, as well as through analysis from PNC economists and management’s judgment in qualitatively assessing the ACL.

The reversion period is used to bridge RSFP and LRA expected credit losses. We may consider a number of factors in determining the duration of the reversion period, such as contractual maturity of the asset, observed historical patterns and the estimated credit loss rates at the end of RSFP relative to the beginning of the LRA period.

The LRA expected credit losses are derived from our available historical credit information. We use LRA expected loss for the portfolio for the estimated remaining contractual term beyond the RSFP and reversion period.

The following discussion provides additional information related to our reserves under CECL for loans and leases as well as unfunded lending related commitments. See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in this Report for further discussion on our ACL, including details of our methodologies and discussion of the allowances for investment securities and other financial assets. See also the Critical Accounting Estimates and Judgments section of this Financial Review for further discussion of the assumptions used in the determination of the ACL and the predicted impacts on the ACL of deteriorating economic conditions as a result of COVID-19.

Allowance for Credit Losses - Loans and Leases
Our pooled expected loss methodology is based upon the quantification of PD, LGD, exposure at default (EAD) and the remaining estimated contractual term for a loan or loan segment. The impact of prepayments is considered in our expected loss estimates by adjusting the aforementioned risk parameters. We use historical data, current borrower characteristics and forecasted economic variables in complex methods, including statistical models, to estimate these risk parameters by credit risk characteristics. PDs represent a quantification of risk that a borrower may not be able to pay their contractual obligation over a defined period of time. LGD describes the estimate of potential loss if a borrower were to default, and EAD (or utilization rates for revolving loans) is the estimated balance outstanding at the time of default and loss. These parameters are calculated for each forecasted scenario, and are combined to generate expected loss estimates by scenario in proportion to the scenario weights.

We use a discounted cash flow methodology for our consumer real estate related loan classes and for certain commercial and consumer TDR loans. For non-TDR residential real estate loans and lines, we determine effective interest rates considering

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



contractual cash flows adjusted for prepayments and market interest rates. We then determine the net present value of expected cash flows and ACL by discounting contractual cash flows adjusted for both prepayments and expected credit losses using the effective interest rates.

We establish individually assessed reserves for loans and leases that do not share similar risk characteristics with a pool of loans using methods prescribed by GAAP. Reserves for individual commercial nonperforming loans and commercial TDRs exceeding a defined dollar threshold are based on an analysis of the present value of the loan’s expected future cash flows or the fair value of the collateral, if appropriate under our policy for collateral dependent loans. Commercial loans that are below the defined threshold and accruing TDRs are collectively reserved for, as we believe these loans continue to share similar risk characteristics. For consumer nonperforming loans classified as collateral dependent, charge-off and ACL related to recovery of amounts previously charged-off are evaluated through an analysis of the fair value of the collateral less costs to sell.

While our reserve methodologies strive to reflect all relevant credit risk factors, there continues to be uncertainty associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal variations between expected and actual outcomes. We may hold additional reserves that are designed to provide coverage for losses attributable to such risks. A portion of the ACL is related to qualitative measurement factors. These factors may include, but are not limited to, the following:
Industry concentrations and conditions,
Changes in market conditions, including regulatory and legal requirements,
Changes in the nature and volume of our portfolio,
Recent credit quality trends,
Recent loss experience in particular portfolios, including specific and unique events,
Recent macro-economic factors that may not be reflected in the forecast information,
Limitations of available data, including historical loss information and recent data such as collateral values,
Model imprecision,
Changes in lending policies and procedures, including changes in loss recognition and mitigation policies and procedures,
Timing of available information, including the performance of first lien positions, and
Other relevant factors.

Allowance for Credit Losses - Unfunded Lending Related Commitments
We maintain the allowance for unfunded lending related commitments on off-balance sheet credit exposures that are not unconditionally cancelable, (e.g., unfunded loan commitments, letters of credit and certain financial guarantees) at a level we believe is appropriate as of the balance sheet date to absorb expected credit losses on these exposures. Other than the estimation of the probability of funding, this reserve is estimated in a manner similar to the methodology used for determining reserves for loans and leases. The allowance for unfunded lending related commitments is recorded as a liability on the Consolidated Balance Sheet. Net adjustments to this reserve are included in the provision for credit losses.


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




Table 23: Allowance for Credit Losses by Loan Class (a)
  March 31, 2020 December 31, 2019 

Dollars in millions
 Allowance AmountTotal Loans% of Total Loans Allowance Amount (b)Total Loans% of Total Loans 
Allowance for credit losses - loans and leases         
Commercial Lending         
Commercial $1,596
$149,131
1.07% $1,489
$125,337
1.19% 
Commercial real estate 269
28,544
.94% 278
28,110
.99% 
Equipment lease financing 114
7,061
1.61% 45
7,155
.63% 
Total commercial lending 1,979
184,736
1.07% 1,812
160,602
1.13% 
Consumer Lending   

   

 
Home equity 332
25,081
1.32% 87
25,085
.35% 
Residential real estate 18
22,250
.08% 258
21,821
1.18% 
Automobile 377
17,194
2.19% 160
16,754
.95% 
Credit card 746
7,132
10.46% 288
7,308
3.94% 
Education 123
3,247
3.79% 17
3,336
.51% 
Other consumer 369
5,003
7.38% 120
4,937
2.43% 
Total consumer lending 1,965
79,907
2.46% 930
79,241
1.17% 
Total 3,944
$264,643
1.49% 2,742
$239,843
1.14% 
Allowance for credit losses - unfunded lending related commitments 450
   318
   
Allowance for credit losses $4,394
   $3,060
   
Allowance for credit losses to total loans (c) 1.66%   1.28%   
Commercial lending 1.26%   1.33%   
Consumer lending 2.59%   1.18%   
(a) Excludes allowances for investment securities and other financial assets.
(b) Prior period reserve amounts represent the ALLL and allowance for unfunded loan commitments and letters of credit, respectively.
(c) Calculated as the ACL for loans and leases and the ACL for unfunded lending related commitments divided by total loans.


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



The following table summarizes our loan charge-offs and recoveries.
Table 24: Loan Charge-Offs and Recoveries
Three months ended March 31 
Gross
Charge-offs

 Recoveries
 
Net Charge-offs /
(Recoveries)

 
Percent of Average
Loans (Annualized)

 
Dollars in millions
2020         
Commercial Lending         
Commercial $78
 $18
 $60
 .19 % 
Commercial real estate 
 4
 (4) (.06)% 
Equipment lease financing 5
 2
 3
 .17 % 
Total commercial lending 83

24

59
 .14 % 
Consumer Lending         
Home equity 11
 14
 (3) (.05)% 
Residential real estate 2
 4
 (2) (.04)% 
Automobile 84
 35
 49
 1.15 % 
Credit card 78
 8
 70
 3.90 % 
Education 6
 2
 4
 .48 % 
Other consumer 40
 5
 35
 2.83 % 
Total consumer lending 221

68

153
 .77 % 
  Total $304

$92

$212
 .35 % 
2019         
Commercial Lending         
Commercial $25
 $14
 $11
 .04 % 
Commercial real estate 3
 3
 
 
 
Equipment lease financing 3
 2
 1
 .06 % 
Total commercial lending 31

19

12
 .03 % 
Consumer Lending         
Home equity 23
 18
 5
 .08 % 
Residential real estate 2
 3
 (1) (.02)% 
Automobile 58
 26
 32
 .89 % 
Credit card 67
 7
 60
 3.91 % 
Education 6
 2
 4
 .43 % 
Other consumer 28
 4
 24
 2.13 % 
Total consumer lending 184

60

124
 .68 % 
  Total $215

$79

$136
 .24 % 

Total net charge-offs increased $76 million, or 56%, for the first three months of 2020 compared to the same period in 2019. The increase in commercial net charge-offs reflected the impact of certain individual credits, while the increases in automobile, credit card and other consumer loan net charge-offs were due in part to loan portfolio growth.

See Note 1 Accounting Policies and Note 3 Loans in the Notes To Consolidated Financial Statements in this report for additional information.
Liquidity and Capital Management
Liquidity risk, including our liquidity monitoring measures and tools, is described in further detail in the Liquidity and Capital Management section of our 2019 Form 10-K.

One of the ways we monitor our 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 hypothetical 30-day stress scenario. The LCR is calculated by dividing the amount of an institution’s high quality, unencumbered liquid assets (HQLA), as defined and calculated in accordance with the LCR rules, by its estimated, weighted 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. Effective January 1, 2020, PNC and PNC Bank, as Category III institutions under the Tailoring Rules, were subject to a reduced LCR requirement, with each company's net outflows reduced by 15%, thereby reducing the amount of HQLA each institution must hold to meet the LCR minimum requirement. The minimum LCR that PNC and PNC Bank are required to

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




maintain continues to be 100%. PNC and PNC Bank calculate the LCR daily, and as of March 31, 2020, the LCR for PNC and PNC Bank exceeded the requirement of 100%.

We provide additional information regarding regulatory liquidity requirements and their potential impact on us in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of our 2019 Form 10-K.

Sources of Liquidity
Our largest source of liquidity on a consolidated basis is the customer deposit base generated by our banking businesses. These deposits provide relatively stable and low-cost funding. Total deposits increased to $305.2 billion at March 31, 2020 from $288.5 billion at December 31, 2019 driven by growth in both interest-bearing and noninterest-bearing deposits. See the Funding Sources portion of the Consolidated Balance Sheet Review section of this Financial Review for additional information related to our deposits. Additionally, certain assets determined by us to be liquid as well as unused borrowing capacity from a number of sources are also available to manage our liquidity position.
At March 31, 2020, our liquid assets consisted of cash and due from banks and short-term investments (federal funds sold, resale agreements, trading securities and interest-earning deposits with banks) totaling $33.0 billion and securities available for sale totaling $89.1 billion. The level of liquid assets fluctuates over time based on many factors, including market conditions, loan and deposit growth and balance sheet management activities. Our liquid assets included $24.4 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, $1.3 billion of securities held to maturity were also pledged as collateral for these purposes.

We also obtain liquidity through various forms of funding, including long-term debt (senior notes, subordinated debt and FHLB borrowings) and short-term borrowings (securities sold under repurchase agreements, commercial paper and other short-term borrowings). See Note 7 Borrowed Funds in the Notes To Consolidated Financial Statements and the Funding Sources section of the Consolidated Balance Sheet Review in this Report, and Note 10 Borrowed Funds in Item 8 of our 2019 Form 10-K for additional information related to our borrowings.
Total senior and subordinated debt, on a consolidated basis, increased due to the following activity:
Table 25: Senior and Subordinated Debt
In billions2020
 
January 1$35.1
 
Issuances3.5
 
Calls and maturities(2.1) 
Other1.4
 
March 31$37.9
 
Bank Liquidity
Under PNC Bank’s 2014 bank note program, as amended, PNC Bank may from time to time offer up to $40.0 billion aggregate principal amount outstanding at any one time of its unsecured senior and subordinated notes with maturity dates more than nine months (in the case of senior notes) and five years or more (in the case of subordinated notes) from their date of issue. At March 31, 2020, PNC Bank had $25.4 billion of notes outstanding under this program of which $20.4 billion were senior bank notes and $5.0 billion were subordinated bank notes. The following table details issuances for the three months ended March 31, 2020.
Table 26: PNC Bank Notes Issued
Issuance DateAmountDescription of Issuance
February 25, 2020$1.0 billion
$1.0 billion of senior floating rate notes with a maturity date of February 24, 2023. Interest is payable quarterly at the 3-month LIBOR rate, reset quarterly, plus 32.5 basis points, on February 24, May 24, August 24, and November 24, commencing on May 24, 2020.

February 25, 2020$500 million
$500 million of senior fixed-to-floating rate notes with a maturity date of February 24, 2023. Interest is payable semi-annually at a fixed rate of 1.743% per annum, on February 24 and August 24 of each year, beginning on August 24, 2020. Beginning on February 24, 2022, interest is payable quarterly at the floating rate equal to the 3-month LIBOR rate, reset quarterly, plus 32.3 basis points, on February 24, May 24, August 24, and November 24, commencing on May 24, 2022.


PNC Bank maintains additional secured borrowing capacity with the FHLB-Pittsburgh and through the Federal Reserve Bank discount window. The Federal Reserve Bank, however, is not viewed as a primary means of funding our routine business activities, but rather as a potential source of liquidity in a stressed environment or during a market disruption. At March 31, 2020, our unused secured borrowing capacity at the FHLB-Pittsburgh and the Federal Reserve Bank totaled $51.4 billion, including $20.2 billion through the

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



Federal Reserve Bank discount window. The Federal Reserve also has established certain special liquidity facilities under its emergency lending authority in Section 13(3) of the Federal Reserve Act in response to the economic impact of COVID-19. For additional information on these special liquidity facilities see the Recent Regulatory Developments section of this Report.

PNC Bank has the ability to offer up to $10.0 billion of its commercial paper to provide additional liquidity. As of March 31, 2020, there were no issuances outstanding under this program.

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

As of March 31, 2020, available parent company liquidity totaled $6.5 billion. Parent company liquidity is primarily held in intercompany short-term investments, the terms of which provide for the availability of cash in 31 days or less. Investments with longer durations may also be acquired, but if so, the related maturities are aligned with scheduled cash needs, such as the maturity of parent company debt obligations.

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

There are statutory and regulatory limitations on the ability of a national bank to pay dividends or make other capital distributions or to extend credit to the parent company or its non-bank subsidiaries. The amount available for dividend payments by PNC Bank to the parent company without prior regulatory approval was approximately $2.5 billion at March 31, 2020. See Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements in our 2019 Form 10-K for a further discussion of these limitations.

In addition to dividends from PNC Bank, other sources of parent company liquidity include cash and investments, as well as dividends and loan repayments from other subsidiaries and dividends or distributions from equity investments. We can also generate liquidity for the parent company and PNC’s non-bank subsidiaries through the issuance of debt and equity securities, including certain capital instruments, in public or private markets and commercial paper. The parent company has the ability to offer up to $5.0 billion of commercial paper to provide additional liquidity. As of March 31, 2020, there were no commercial paper issuances outstanding.

The parent company has an effective shelf registration statement pursuant to which we can issue additional debt, equity and other capital instruments. On January 22, 2020, the parent company issued $2.0 billion of senior notes with a maturity date of January 22, 2030, redeemable, in whole or in part, on or after October 24, 2029. Interest is payable semi-annually at a fixed rate of 2.550% per annum, on January 22 and July 22 of each year, commencing on July 22, 2020.

Parent company senior and subordinated debt outstanding totaled $11.5 billion and $9.8 billion at March 31, 2020 and December 31, 2019, respectively.

Contractual Obligations and Commitments
We have contractual obligations representing required future payments on borrowed funds, time deposits, leases, pension and postretirement benefits and purchase obligations. See the Liquidity and Capital Management portion of the Risk Management section in our 2019 Form 10-K for more information on these future cash outflows. Additionally, in the normal course of business we have various commitments outstanding, certain of which are not included on our Consolidated Balance Sheet. We provide information on our commitments in Note 8 Commitments in the Notes To Consolidated Financial Statements of this Report.

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

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

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




Table 27: Credit Ratings for PNC and PNC Bank
 March 31, 2020
  
Moody’sStandard & Poor’sFitch
PNC   
Senior debtA3A-A+
Subordinated debtA3BBB+A
Preferred stockBaa2BBB-BBB-
PNC Bank   
Senior debtA2AA+
Subordinated debtA3A-A
Long-term depositsAa2AAA-
Short-term depositsP-1A-1F1+
Short-term notesP-1A-1F1

Capital Management
Detailed information on our capital management processes and activities, including additional information on our previous CCAR submissions and capital plans, is included in the Capital Management portion of the Risk Management section in our 2019 Form 10-K.

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

In connection with the capital plan accepted by the Federal Reserve as part of our 2019 CCAR submission, we repurchased 10.1 million common shares for $1.4 billion in the first quarter of 2020. As of March 31, 2020, PNC has repurchased a total of 24.0 million shares for $3.4 billion under current share repurchase programs that will end June 30, 2020.

PNC announced on March 16, 2020, a temporary suspension of our common stock repurchase program through June 30, 2020, in conjunction with the Federal Reserve's effort to support the U.S. economy during the COVID-19 outbreak.

We paid dividends on common stock of $.5 billion, or $1.15 per common share, during the first quarter of 2020. On April 2, 2020, the PNC Board of Directors declared a quarterly common stock cash dividend of $1.15 per share, with a payment date of May 5, 2020. On April 6, 2020, PNC submitted its capital plan and stress test results to the Federal Reserve and OCC as part of the 2020 annual Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress testing (DFAST) process.


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



Table 28: Basel III Capital
Dollars in millions
Basel III
March 31, 2020 (a)
 
March 31, 2020 (Fully Implemented)
(estimated) (b)
 
Common equity Tier 1 capital    
Common stock plus related surplus, net of treasury stock$866
 $866
 
Retained earnings42,730
 41,885
 
Goodwill, net of associated deferred tax liabilities(9,027) (9,027) 
Other disallowed intangibles, net of deferred tax liabilities(210) (210) 
Other adjustments/(deductions)(220) (224) 
Total common equity Tier 1 capital before threshold deductions34,139
 33,290
 
Total threshold deductions (c)
 
 
Common equity Tier 1 capital$34,139
 $33,290
 
Additional Tier 1 capital    
Preferred stock plus related surplus3,994
 3,994
 
Other adjustments/(deductions)
 
 
Tier 1 capital$38,133
 $37,284
 
Additional Tier 2 capital    
Qualifying subordinated debt4,249
 4,249
 
Trust preferred capital securities40
   
Eligible credit reserves includable in Tier 2 capital3,511
 4,346
 
Total Basel III capital$45,933
 $45,879
 
Risk-weighted assets    
Basel III standardized approach risk-weighted assets (d)$363,631
 $363,651
 
Average quarterly adjusted total assets$402,018
 $401,169
 
Supplementary leverage exposure$481,144
 $481,140
 
Basel III risk-based capital and leverage ratios (a)(e)    
Common equity Tier 19.4% 9.2% 
Tier 110.5% 10.3% 
Total (f)12.6% 12.6% 
Leverage (g)9.5% 9.3% 
Supplementary leverage ratio (h)7.9% 7.7% 
(a)The ratios are calculated to reflect PNC's election to adopt the CECL optional five-year transition provision.
(b)The ratios are calculated to reflect the full impact of CECL and excludes the benefits of phase-ins under the optional transition provision.
(c)Based on the Tailoring Rules, effective January 1, 2020 for PNC, the quantitative threshold limits increased, resulting in no deduction as of March 31, 2020.
(d)Basel III standardized approach weighted-assets are based on the Basel III standardized approach rules and include credit and market risk-weighted assets.
(e)All ratios are calculated using the regulatory capital methodology applicable to PNC and calculated based on the standardized approach.
(f)The Basel III Total risk-based capital ratios include nonqualifying trust preferred capital securities of $40 million that are subject to a phase-out period that runs through 2021.
(g)Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets.
(h)Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure. PNC and PNC Bank are subject to a 3% minimum supplementary leverage ratio.

As of January 1, 2020, the 2019 Tailoring Rules became effective for PNC. The most significant changes involve the election to exclude specific AOCI items from common equity Tier 1 (CET1) capital and higher thresholds used to calculate CET1 capital deductions. Effective January 1, 2020, PNC must deduct from CET1 capital (net of associated deferred tax liabilities) investments in unconsolidated financial institutions (for PNC, primarily BlackRock), mortgage servicing rights and deferred tax assets to the extent such items individually exceed 25% of the institution’s adjusted CET1 capital.
PNC’s regulatory risk-based capital ratios in 2020 are calculated using the standardized approach for determining risk-weighted assets. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, past due exposures and equity exposures are generally subject to higher risk weights than other types of exposures.
On March 27, 2020, the regulatory agencies issued an interim final rule delaying the estimated impact on regulatory capital stemming from implementing CECL. CECL’s estimated impact on CET1 capital, as defined by the rule, is the change in retained earnings at adoption plus or minus 25% of the change in CECL ACL at the balance sheet date compared to the CECL ACL at transition.  The

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




estimated CECL impact is added to CET1 through December 31, 2021, then phased-out over the following three years.  PNC elected to adopt this optional transition provision effective March 31, 2020. See additional discussion of this interim final rule in Recent Regulatory Developments in this Financial Review.
Federal banking regulators have stated that they expect the largest U.S. bank holding companies (BHCs), including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largest U.S. BHCs, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers through estimated stress scenarios. We seek to manage our capital consistent with these regulatory principles, and believe that our March 31, 2020 capital levels were aligned with them.

At March 31, 2020, PNC and PNC Bank, our sole bank subsidiary, were both considered “well capitalized,” based on applicable U.S. regulatory capital ratio requirements. To qualify as “well capitalized”, PNC must have Basel III capital ratios of at least 6% for Tier 1 risk-based capital and 10% for Total risk-based capital, and PNC Bank must have Basel III capital ratios of at least 6.5% for Common equity Tier 1 risk-based capital, 8% for Tier 1 risk-based capital, 10% for Total risk-based capital and a Leverage ratio of at least 5%.

See the Recent Regulatory Developments section of this Report for recent developments that could have a potential impact on our Basel III capital ratios. We provide additional information regarding regulatory capital requirements and some of their potential impacts on us in the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 18 Regulatory Matters in our 2019 Form 10-K.

Market Risk Management
See the Market Risk Management portion of the Risk Management Section in our 2019 Form 10-K for additional discussion regarding market risk.

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

Our Asset and Liability Management group centrally manages interest rate risk as prescribed in our risk management policies, which are approved by management’s Asset and Liability Committee and the Risk Committee of the Board of Directors.
Sensitivity results and market interest rate benchmarks for the first quarters of 2020 and 2019 follow.

Table 29: Interest Sensitivity Analysis
 First Quarter 2020
 First Quarter 2019
 
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 increase1.4% 1.5% 
Effect on net interest income in second year from gradual interest rate change over the
    preceding 12 months of:
    
100 basis point increase6.1% 4.0% 
Duration of Equity Model (a)    
Base case duration of equity (in years)(7.3) (3.7) 
Key Period-End Interest Rates    
One-month LIBOR.99% 2.49% 
Three-month LIBOR1.45% 2.60% 
Three-year swap.46% 2.31% 
(a)Given the inherent limitations in certain of these measurement tools and techniques, results become less meaningful as interest rates approach zero. Senior management recently approved the suspension of the 100bps decrease in rate shock sensitivities considering the current low rate environment.
In addition to measuring the effect on net interest income assuming parallel changes in current interest rates, we routinely simulate the effects of a number of nonparallel interest rate environments. Table 30 reflects the percentage change in net interest income over the next two 12-month periods assuming (i) the PNC Economist’s most likely rate forecast, (ii) implied market forward rates and (iii) yield curve slope flattening (a 50 basis point yield curve slope flattening between one-month and ten-year rates superimposed on current base rates) scenario.

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



All changes in forecasted net interest income are relative to results in a base rate scenario where current market rates are assumed to remain unchanged over the forecast horizon.
Table 30: Net Interest Income Sensitivity to Alternative Rate Scenarios
 March 31, 2020 
 
PNC
Economist

Market
Forward

Slope
Flattening

 
First year sensitivity(5.3)%(3.6)%(.6)% 
Second year sensitivity(7.4)%(7.0)%(2.6)% 

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

The following graph presents the LIBOR/Swap yield curves for the base rate scenario and each of the alternate scenarios one year forward.
Table 31: Alternate Interest Rate Scenarios: One Year Forward
q12020irfinala02.jpg

The first quarter 2020 interest sensitivity analyses indicate that our Consolidated Balance Sheet is positioned to benefit from an increase in interest rates and an upward sloping interest rate yield curve. We believe that we have the deposit funding base and balance sheet flexibility to adjust, where appropriate and permissible, to changing interest rates and market conditions.

The planned discontinuance of the requirement that banks submit rates for the calculation of LIBOR after 2021 presents risks to the financial instruments originated, held, or serviced by PNC that use LIBOR as a reference rate. PNC holds instruments and services its instruments and instruments owned by others that may be impacted by the likely discontinuance of LIBOR, including loans, investments, hedging products, floating-rate obligations, and other financial instruments that use LIBOR as a reference rate. The transition from LIBOR as an interest rate benchmark will subject PNC to financial, legal, operational, and reputational risks.

PNC has established a cross functional governance structure to oversee the overall strategy for the transition from LIBOR and mitigate risks associated with the transition. An initial LIBOR impact and risk assessment has been performed, which identified the associated risks across products, systems, models and processes. PNC is actively monitoring its overall firm-wide exposure to LIBOR and using these results to plan transitional strategies and track progress versus these goals.

We also continue to focus our transition efforts on:
enhancing fallback language in new contracts and reviewing existing legal contracts/agreements to assess fallback language impacts;
making preparations for internal operational readiness;
making necessary enhancements to our infrastructure including systems, models, valuation tools, and processes;
developing and delivering on internal and external LIBOR cessation communication plans;
engaging with our clients, industry working groups, and regulators; and
monitoring developments associated with LIBOR alternatives and industry practices related to LIBOR-indexed instruments.

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




See the Risk Factors section in Item IA and Risk Management Market Rate Management - Interest Rate Risk section in Item 7 disclosed in our 2019 Form 10-K for additional information regarding the planned discontinuance of LIBOR as a reference rate.
Market Risk Management – Customer-Related Trading Risk
We engage in fixed income securities, derivatives and foreign exchange transactions to support our customers’ investing and hedging activities. These transactions, related hedges and the credit valuation adjustment related to our customer derivatives portfolio are marked-to-market daily and reported as customer-related trading activities. We do not engage in proprietary trading of these products.
We use value-at-risk (VaR) as the primary means to measure and monitor market risk in customer-related trading activities. VaR is used to estimate the probability of portfolio losses based on the statistical analysis of historical market risk factors. A diversified VaR reflects empirical correlations across different asset classes. We calculate a diversified VaR at a 95% confidence interval and the results for the first three months of 2020 and 2019 were within our acceptable limits.
See the Market Risk Management – Customer-Related Trading Risk section of our 2019 Form 10-K for more information on our models used to calculate VaR and our backtesting process.
Customer related trading revenue was $71 million for the three months ended March 31, 2020 compared to $48 million for the same period in 2019. The increase was primarily due to higher derivative clients sales revenue partially offset by client-related trading losses due to market volatility resulting from COVID-19.
Market Risk Management – Equity And Other Investment Risk
Equity investment risk is the risk of potential losses associated with investing in both private and public equity markets. In addition to extending credit, taking deposits, underwriting securities and trading financial instruments, we make and manage direct investments in a variety of transactions, including management buyouts, recapitalizations and growth financings in a variety of industries. We also have investments in affiliated and non-affiliated funds that make similar investments in private equity. The economic and/or book value of these investments and other assets are directly affected by changes in market factors.
Various PNC business units manage our equity and other investment activities. Our businesses are responsible for making investment decisions within the approved policy limits and associated guidelines.
A summary of our equity investments follows:
Table 32: Equity Investments Summary
 March 31
2020

 December 31
2019

 Change 
Dollars in millions $
 %
 
BlackRock$8,511
 $8,558
 $(47) (1)% 
Tax credit investments2,134
 2,218
 (84) (4)% 
Private equity and other2,560
 2,958
 (398) (13)% 
Total$13,205
 $13,734
 $(529) (4)% 

BlackRock
We owned approximately 35 million common stock equivalent shares of BlackRock equity at March 31, 2020, accounted for under the equity method. The Business Segments Review section of this Financial Review includes additional information about BlackRock.
Tax Credit Investments
Included in our equity investments are direct tax credit investments and equity investments held by consolidated entities. These tax credit investment balances included unfunded commitments totaling $.9 billion and $1.0 billion at March 31, 2020 and December 31, 2019, respectively. These unfunded commitments are included in Other liabilities on our Consolidated Balance Sheet.

Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in our 2019 Form 10-K has further information on Tax Credit Investments.

Private Equity and Other
The majority of our other equity investments consists of our private equity portfolio. The private equity portfolio is an illiquid portfolio consisting of mezzanine and equity investments that vary by industry, stage and type of investment. Private equity investments carried at estimated fair value totaled $1.4 billion and $1.5 billion at March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020, $1.2 billion was invested directly in a variety of companies and $.2 billion was invested indirectly through various private equity funds. See the Supervision and Regulation section in Item 1 of our 2019 Form 10-K for discussion of the potential impacts of the Volcker Rule provisions of Dodd-Frank on our interests in and other relationships with private funds covered by the Volcker Rule.


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



Included in our other equity investments are Visa Class B common shares, which are recorded at cost. Visa Class B common shares that we own are transferable only under limited circumstances until they can be converted into shares of the publicly-traded Class A common shares, which cannot happen until the resolution of the pending interchange litigation. Based upon the March 31, 2020 per share closing price of $161.12 for a Visa Class A common share, the estimated value of our total investment in the Class B common shares was approximately $919 million at the current conversion rate of Visa B shares to Visa A shares, while our cost basis was not significant. See Note 6 Fair Value and Note 19 Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8 of our 2019 10-K for additional information regarding our Visa agreements. The estimated value does not represent fair value of the Visa B common shares given the share’s limited transferability and the lack of observable transactions in the marketplace.

We also have certain other equity investments, the majority of which represent investments in affiliated and non-affiliated funds with both traditional and alternative investment strategies. Net gains related to these investments were not significant at March 31, 2020 and March 31, 2019.

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

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

Further information on our financial derivatives is presented in Note 1 Accounting Policies and Note 6 Fair Value in our Notes To Consolidated Financial Statements in our 2019 Form 10-K and in Note 11 Fair Value and Note 12 Financial Derivatives in the Notes To Consolidated Financial Statements in this Report.

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

RECENT REGULATORY DEVELOPMENTS

The outbreak of COVID–19 resulted in legislative, regulatory and supervisory actions. See Part II, Item 1A Risk Factors for a description of the risks presented by COVID–19.

Coronavirus Aid, Relief and Economic Security Act
In March 2020, the U.S. Congress passed, and President Trump signed into law, the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which includes a variety of provisions designed to aid business and consumers financially impacted by the COVID-19 pandemic and associated public health directives. The provisions of the CARES Act applicable to individuals and businesses generally include, among other things:
Refundable tax credits for eligible taxpayers of $1,200 ($2,400 for married taxpayers filing jointly), plus $500 per child,
subject to income limitations;
Funding for an additional 13 weeks of unemployment benefits, an additional $600 a week (for up to four months) of unemployment payments, and payments during the first week of an individual’s unemployment on a temporary basis;
Delays in the payment of the employer portion of Social Security taxes otherwise payable through January 1, 2021, with 50% of delayed amounts due by each of December 31, 2021 and December 31, 2022;
An expansion of the ability of corporate taxpayers to take advantage of net operating losses; and
Refundable tax credits for eligible employers against their portion of Social Security taxes equal to 50% of eligible wages paid between March 13, 2020 and December 31, 2020 (up to a maximum of $10,000 per employee) if the employer’s operations were fully or partially suspended by governmental authorities due to the COVID-19 crisis or the employer experienced a significant decline in gross receipts (as measured in the manner specified in the CARES Act).

The CARES Act, as subsequently amended by the Paycheck Protection Program and Health Care Enhancement Act, also authorizes the Small Business Administration (SBA) and the Treasury Department to expend up to $659 billion to support the issuance by SBA approved lenders of loans of up to $10 million to small and medium-sized businesses that meet certain size and other eligibility requirements under a new Paycheck Protection Program (PPP). Of the authorized amount, the SBA is required to reserve at least $60 billion in funding for PPP loans made by lenders with $50 billion or less in total assets. Borrowers may use the proceeds of a PPP loan only for specified purposes (such as meeting payroll) and borrowers can have the loan partially or fully forgiven (and repaid by the SBA) to the extent the borrower expends funds during the eight weeks following receipt of the loan proceeds for payroll costs or other specified expenses. Borrowers and lenders are required to provide certain certifications and documentation, and conduct certain

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




reviews, in connection with PPP loan applications as specified in the PPP rules and associated guidance, which are subject to change upon further clarification by the SBA and Treasury. PNC Bank is participating in the PPP. However, in light of the exceptionally strong demand for PPP loans, both among customers of PNC Bank and small businesses generally, it is possible that not all eligible applicants for PPP loans will be processed and receive SBA approval before the currently available funding runs out.

The CARES Act also permits residential and multifamily mortgage borrowers with federally backed mortgages to request payment forbearance for up to six months or 30 days, respectively, under a streamlined process if the borrower is experiencing a financial hardship due to the COVID-19 national emergency. The borrower may request an extension of these forbearance periods, for up to an additional six months for residential borrowers and 60 days for multifamily borrowers. Residential mortgage borrowers with federally backed mortgages, and tenants of multifamily borrowers that receive forbearance under these provisions, also benefit from certain foreclosure and eviction protections. For these purposes, federally backed mortgages include those guaranteed by the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), the Federal Housing Administration or the Veterans Administration. Under revised Federal Housing Finance Agency policies, servicers of FNMA and FHLMC-guaranteed residential mortgages, such as PNC Bank, will no longer have an obligation to advance scheduled payments on a mortgage loan that is in a mortgage-backed security once the servicer has advanced four months of missed payments on the loan. Various states and municipalities also have imposed new foreclosure and eviction limitations of varying scope and degree in response to the COVID-19 pandemic. The CARES Act also provides consumers certain temporary protections against the reporting of negative credit information to a credit reporting agency as a result of loan accommodations provided during the COVID-19 national emergency.

The CARES Act permits financial institutions to temporarily suspend the requirements under GAAP to categorize loan modifications related to the COVID-19 pandemic as a TDR, and the determination of such a loan modification as being a TDR. The federal banking agencies, along with the Consumer Financial Protection Bureau (CFPB) and the National Credit Union Administration, in April 2020, released an interagency statement that, among other things, clarifies the agencies’ views on TDRs, including the interaction between agency guidance on TDRs and the CARES Act. We are following the provisions within the CARES Act and interagency statement when evaluating our COVID-19 related loan modification requests.

Federal Reserve Liquidity Facilities
To help promote the flow of credit and the orderly functioning of financial markets, the Federal Reserve has announced the establishment of a number of new lending or liquidity facilities using its emergency lending authority under section 13(3) of the Federal Reserve Act. Many of these facilities are supported by funding provided by the Treasury Department, either from the Emergency Stabilization Fund or under the CARES Act. These emergency facilities include:
Main Street Lending Facility, which will purchase up to $600 billion of participations in eligible loans made by U.S. banking organizations to eligible small- and medium-sized U.S. businesses;
Commercial Paper Funding Facility, which will purchase highly rated unsecured and asset-backed commercial paper issued by eligible U.S. issuers;
Primary Market Corporate Credit Facility, which will purchase up to $750 billion (in combination with the Secondary Market Corporate Facility) in corporate bonds and loans issued by eligible, investment grade U.S. issuers;
Secondary Market Corporate Credit Facility, which will purchase up to $750 billion (in combination with the Primary Market Corporate Facility) in investment grade corporate debt issued by eligible U.S issuers or shares of exchange traded funds that primarily invest in investment grade debt of U.S. issuers;
Municipal Liquidity Facility, which will purchase up to $500 billion of certain types of debt obligations issued by states and eligible cities and counties;
Term Asset-Backed Securities Loan Facility, which will purchase up to $100 billion in highly rated asset-backed securities that are backed by specified types of consumer, small business or commercial loans;
Paycheck Protection Program Lending Facility, which will provide lenders funding secured by SBA-guaranteed loans made under the PPP described above;
Primary Dealer Credit Facility, which will provide secured funding to broker-dealers that are registered as primary dealers with the Federal Reserve in exchange for a broad range of collateral; and
Money Market Mutual Fund Liquidity Facility, which is intended to provide liquidity to money market mutual funds by lending to U.S. banking entities in exchange for highly-rated collateral acquired from money market mutual funds.

These facilities generally will stop making loans or asset purchases no later than September 30, 2020, unless the Federal Reserve and the Secretary of the Treasury approve an extension.

In addition, in March 2020, the Federal Reserve announced changes to its discount window lending for insured depository institutions, such as PNC Bank. These changes permit insured depository institutions to borrow from the discount window, on a fully collateralized basis, for periods of up to 90 days, with such loans being prepayable and renewable by the borrowing institution on a daily basis. These changes, which will remain in effect until the Federal Reserve announces otherwise, provide insured depository institutions additional tools for managing their liquidity profile, including for purposes of the Liquidity Coverage Ratio (for institutions, like PNC and PNC Bank, subject to that regulatory metric).

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



The Federal Reserve must publicly disclose the details (including the name of the borrower or counterparty) of discount window transactions and transactions conducted by facilities established by the Federal Reserve under section 13(3) of the Federal Reserve Act on a delayed basis.

Capital, Capital Planning and Liquidity
In March 2020, the Federal banking agencies adopted an interim final rule that permits banking organizations that are subject to the Accounting Standards Board Accounting Standard Update No. 2016-13 (Measurement of Credit Losses on Financial Instruments) (commonly referred to as the Current Expected Credit Loss standard or “CECL”) during 2020 to delay CECL's estimated impact on CET1 capital, as defined by the rule. CECL's estimated impact on CET1 capital is the change in retained earnings at adoption plus or minus 25% of the change in CECL ACL at the balance sheet date compared to CECL ACL at transition. The estimated CECL impact is added to CET1 through December 31, 2021, then phased-out over the following three years. PNC and PNC Bank have elected the five-year transition period effective March 31, 2020 impacting regulatory capital ratios disclosed in this Report. Comments on the interim final rule are due by May 15, 2020. Separately, PNC and PNC Bank have not elected, and do not expect to elect in the future, to defer implementation of the CECL standard for financial reporting purposes, as otherwise permitted by the CARES Act.

In March 2020, the Federal Reserve issued a final rule to integrate its capital plan rule and stress testing process with its Basel III regulatory capital rules. Among other things, the rules introduce a new common equity tier 1 (CET1) stress capital buffer (SCB) that will replace the Basel III capital conservation buffer for covered bank holding companies (BHCs). The SCB is calculated based on the start-to-trough change (as projected by the Federal Reserve) in the organization’s CET1 ratio in the Supervisory Severely Adverse scenario during the Comprehensive Capital Analysis and Review (CCAR) process, plus four quarters of the organization’s planned common stock dividends (expressed as a percentage of risk-weighted assets), subject to a floor of 2.5%. Under the rules, once the SCB rules become effective, PNC would be subject to automatic restrictions on capital distributions and certain discretionary incentive compensation payments if its CET1 ratio fell below (i) 4.5%, plus (ii) its applicable stress capital buffer, plus (iii) any countercyclical capital buffer (which is currently set at zero in the United States). Similar SCB-based buffers apply to Tier 1 and Total Risk-Based capital. The SCB becomes effective on October 1, 2020, and the Federal Reserve has indicated that it will provide covered BHCs their preliminary and final SCB amounts by June 30 and August 31, respectively, each year. Once the SCB becomes effective, covered BHCs, such as PNC, may increase their capital distributions without seeking prior Federal Reserve approval, provided the BHC otherwise complies with its SCB and any other applicable buffer requirement. In connection with these changes, the Federal Reserve announced that covered BHCs (including PNC) would no longer be subject to a capital plan objection from the Federal Reserve during the CCAR process for quantitative reasons.

In March 2020, the Federal Reserve, OCC and FDIC also adopted an interim final rule that revises the definition of “eligible retained income” for purposes of the SCB and other Basel III capital buffers. This revision is designed to phase in the potential application of these buffers more gradually, especially in periods when banking organizations are distributing all or a substantial majority of their net income. Under the interim final rule, eligible retained income is the greater of (i) the banking organization’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (ii) the average of the banking organization’s net income over the preceding four quarters. Comments on the interim final rule are due by May 4, 2020.

In April 2020, the Federal Reserve adopted an interim final rule that permits BHCs that are subject to the supplementary leverage ratio requirement, including PNC, to exclude, through March 31, 2021, treasury securities and balances held at Federal Reserve Banks from the organization’s total leverage exposure for purposes of calculating its supplementary leverage ratio. This rule became effective on April 14, 2020, and comments on the rule are due by May 29, 2020.

During March and April 2020, the Federal banking agencies released two interim final rules to encourage banking organizations to use the Money Market Mutual Fund Liquidity Facility and Paycheck Protection Program Liquidity Facility. Under the interim final rules, banking organizations may exclude from leverage and risk-based capital requirements any eligible assets sold or pledged to the Federal Reserve on a non-recourse basis as part of these programs. The banking agencies also clarified that, consistent with the CARES Act, covered loans originated by a banking organization under the PPP will receive a zero percent risk weight for regulatory capital purposes, even if not pledged to the Federal Reserve. Comments on these interim final rules are due by May 7 and May 13, 2020, respectively.

Other COVID-19 Related Financial Agency Developments
The Federal banking agencies, SEC, and Commodity Futures Trading Commission (CFTC) have issued other rules, guidance, statements, orders or other actions to, among other things, facilitate the continued provision of financial services, encourage financial institutions to work with customers affected by the pandemic, and reduce operational or regulatory challenges resulting from the pandemic and the private-sector and governmental actions designed to mitigate its effects, including directives for personnel to work from home to the fullest extent possible. These actions and statements, among others, have outlined temporary changes to supervisory and enforcement practices, clarified when appraisals or evaluations are required for real estate-secured transactions and allowed required appraisals and evaluations to be deferred in certain circumstances, encouraged banking organizations to use their capital and

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




liquidity buffers to continue to provide credit to customers and support the smooth functioning of markets, and encouraged financial institutions to make available small-dollar loans to consumers and small businesses affected by COVID-19.

In March 2020, the CFTC extended the schedule for registered swap dealers to post and collect initial margin with certain swap dealer counterparties, including PNC Bank, that have small uncleared swap portfolios. Under the extension, swap dealers will not have to collect initial margin on trades with PNC Bank until September 1, 2021, an extension of one year from the prior schedule.

Also in March 2020, the Federal Reserve delayed, until September 30, 2020, the effective date of its new framework for determining when a company is presumed to “control” another company for purposes of the Bank Holding Company Act. The FDIC extended, until June 9, 2020, the public comment period on its proposed rules which define when a deposit is considered “brokered” for purposes of the Federal Deposit Insurance Act. PNC Bank also received approval from the OCC, with the concurrence of the Federal Reserve, permitting it, for a limited period of time and subject to certain conditions, to purchase municipal variable-rate demand notes (VRDNs) from PNC Capital Markets LLC, a nonbank affiliate, in order to promote liquidity in the market for VRDNs without such transactions counting towards the quantitative limits on affiliate transactions in section 23A of the Federal Reserve Act and the Federal Reserve’s Regulation W. As of March 31, 2020, PNC Bank had not acquired any VRDNs from PNC Capital Markets LLC in reliance on this approval.

Finally, in March 2020, the OCC requested public comment on proposed amendments to its licensing policies and procedures that govern when and how national banks, such as PNC Bank, may engage in a host of corporate transactions or activities such as business combinations, branching, operating subsidiaries, and dividend payments. The proposed rules would, among other things, permit national banks to elect to follow state procedures for certain business combinations, expand the scope of operating subsidiary activities that qualify for an after-the-fact notice procedure (rather than an application), modify the standards for when a national bank is considered “well managed” for certain procedures and requirements, and relax the restrictions applicable to permissible non-controlling investments. Comments on the proposed rules are due by May 4, 2020.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Note 1 Accounting Policies of our 2019 Form 10-K describes the most significant accounting policies that we use to prepare our consolidated financial statements, including discussion of our policies for the Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit prior to the adoption of the CECL standard. See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in this Report regarding the impact of new accounting pronouncements, including CECL, that were adopted in the first quarter of 2020.

Certain 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 2019 Form 10-K:
Fair Value Measurements
Residential and Commercial Mortgage Servicing Rights

Allowance for Credit Losses

We maintain the ACL at levels that we believe to be appropriate as of the balance sheet date to absorb expected credit losses on our existing investment securities, loans, finance leases (including residual values), trade receivables and other financial assets and unfunded lending related commitments, for the remaining contractual term of the assets taking into consideration expected prepayments. Our determination of the ACL is based on historical loss experience, borrower characteristics, current economic conditions, reasonable and supportable forecasts of future conditions and other relevant factors. We use methods sensitive to changes in economic conditions, to interpret these factors to estimate expected credit losses. We evaluate and, when appropriate, enhance the quality of our data and models and other methods used to estimate ACL on an ongoing basis. We apply qualitative factors to reflect in the ACL our best estimate of amounts that we do not expect to collect because of, among other things, idiosyncratic risk factors, changes in economic conditions that may not be reflected in forecasted results, or other potential methodology weaknesses. The ACL estimates are therefore susceptible to various factors, including, but not limited to, the following major factors:
Current economic conditions and borrower quality: Our forecast of expected losses depends on conditions and portfolio
quality as of the estimation date. As current conditions evolve, forecasted losses could be materially affected.
Scenario weights and design: Our loss estimates are sensitive to the shape and severity of macroeconomic forecasts and thus
vary significantly between upside and downside scenarios. Change to probability weights assigned to these scenarios and
timing of peak business cycles reflected by the scenarios could materially affect our loss estimates.
Portfolio volume and mix: Changes to portfolio volume and mix could materially affect our estimates, as CECL reserves
would be recognized at origination or acquisition.

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



For all assets and unfunded lending related commitments within the scope of the CECL standard, the applicable ACL is composed of one or a combination of the following components: (i) collectively assessed or pooled reserves, (ii) individually assessed reserves, and
(iii) qualitative (judgmental) reserves. Our methodologies and key assumptions for each of the components are discussed in Note 1
Accounting Policies in the Notes To Consolidated Financial Statements of this Report.

Reasonable and Supportable Economic Forecast
Under CECL, we are required to consider reasonable and supportable forecasts in estimating expected credit losses. For this purpose,
we have established a framework which includes a three year reasonable and supportable economic forecast period and the use of four
economic scenarios with associated probability weights, which in combination create a forecast of expected economic outcomes over
our reasonable and supportable forecast period (RSFP).

To generate the four economic forecast scenarios we use a combination of quantitative macroeconomic models, other measures of economic activity and forward-looking expert judgment to forecast the distribution of economic outcomes over the RSFP. Each scenario is then given an associated probability (weight) in order to represent our current expectation within that distribution over the RSFP. This process is informed by current economic conditions, expected business cycle evolution and the expert judgment of PNC’s CECL Reserve Adequacy Committee (CECL RAC). This approach seeks to provide a reasonable representation of the forecast of expected economic outcomes and is used to estimate expected credit losses across a variety of loans and securities. Each quarter the scenarios are presented for approval to PNC’s CECL RAC and the committee determines and approves CECL scenarios weights for use for the current reporting period.

The scenarios used for the period ended March 31, 2020 were designed to address the emerging COVID-19 crisis, based on our best estimate as of March 31, 2020. We used a number of economic variables, a large driver being GDP. Using a weighted average of our four economic forecast scenarios, we estimated at March 31, 2020 that annualized GDP contracts 11.2% in the second quarter of 2020 and ends 2020 down 2.3%, with recovery to the pre-recession peak levels occurring by the fourth quarter of 2021. Since March 31, 2020, the macro-economic backdrop has worsened, suggesting additional deterioration in GDP, unemployment and other economic factors than what our forecasted scenarios contemplated. Should this macro-economic environment persist, we will adjust our scenarios accordingly, which would likely result in a material build to our allowance for credit losses during the second quarter of 2020.

Our RSFP credit loss estimates are sensitive to the shape and severity of the scenarios used and weights assigned to them. For example, as of March 31, 2020, our most severe forecasted scenario assumed a 30% annualized contraction in GDP in the second quarter of 2020 followed by another 20% annualized contraction in GDP in the third quarter of 2020, leading to a peak-to-trough decline of 14%. For our stress informational purposes, we considered our most severe forecast scenario in isolation to determine a hypothetical impact. A 100% weighting of this severe forecast scenario at March 31, 2020 would have resulted in full year 2020 provision for credit losses of approximately $9.4 billion. This scenario was not our expectation at March 31, 2020 and does not reflect our current expectation, nor does it capture all the potential unknown variables that would likely arise over 2020, but it provides an approximation of losses under our worst case scenario as of March 31, 2020. The CECL methodology inherently requires a high degree of judgment. As a result, it is possible that we may, at another point in time, reach different conclusions regarding our credit loss estimates.
See the following for additional details on the components of our ACL, as well as the methodologies and related assumptions:
Allowance For Credit Losses in the Credit Risk Management section of this Financial Review, and
Note 1 Accounting Policies, Note 2 Investment Securities and Note 3 Loans in the Notes To Consolidated Financial Statements included in this Report.

OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

We engage in a variety of activities that involve entities that are not consolidated or otherwise reflected in our Consolidated Balance Sheet that are generally referred to as off-balance sheet arrangements. Additional information on these types of activities is included in our 2019 Form 10-K and in Note 4 Loan Sale and Servicing Activities and Variable Interest Entities and Note 8 Commitments in the Notes To Consolidated Financial Statements included in this Report.

A summary and further description of variable interest entities (VIEs) is included in Note 1 Accounting Policies and Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2019 Form 10-K.

Trust Preferred Securities
See Note 10 Borrowed Funds in the Notes To Consolidated Financial Statements in our 2019 Form 10-K for additional information on trust preferred securities issued by PNC Capital Trust C including information on contractual limitations potentially imposed on payments (including dividends) with respect to PNC's equity securities.

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




INTERNAL CONTROLS AND DISCLOSURE CONTROLS AND PROCEDURES

As of March 31, 2020, we performed an evaluation under the supervision of and with the participation of our management, including the Chairman, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures and of changes in our internal control over financial reporting.

Based on that evaluation, our Chairman, President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were effective as of March 31, 2020, and that there has been no change in PNC’s internal control over financial reporting that occurred during the first quarter of 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
GLOSSARY OF TERMS
For a glossary of terms commonly used in our filings, please see the glossary of terms included in our 2019 Form 10-K. Below are terms that have been added or updated based upon our adoption of CECL and the 2019 Tailoring Rules on January 1, 2020.

Allowance for credit losses (ACL) – A valuation account that is deducted from or added to the amortized cost basis of the related financial assets to present the net carrying value at the amount expected to be collected on the financial asset.

Amortized cost basis – Amount at which a financial asset is originated or acquired, adjusted for applicable accretion or amortization of premiums, discounts and net deferred fees or costs, collection of cash, charge-offs, foreign exchange and fair value hedge accounting adjustments.

Basel III common equity Tier 1 capital (Tailoring Rules) - Common stock plus related surplus, net of treasury stock, plus retained earnings, less goodwill, net of associated deferred tax liabilities, less other disallowed intangibles, net of deferred tax liabilities and plus/less other adjustments. Investments in unconsolidated financial institutions, as well as mortgage servicing rights and deferred tax assets, must then be deducted to the extent such items individually exceed 25% of our adjusted Basel III common equity Tier 1 capital.

Collateral dependent loans – Loans expected to be repaid substantially through the operation or sale of the collateral when a borrower is experiencing financial difficulty, and for which the related ACL is determined by the loan collateral's fair value (less cost to sell, where appropriate).

Current Expected Credit Loss (CECL) – Methodology for estimating the allowance for credit losses on in-scope financial assets held at amortized cost and unfunded lending related commitments, which uses a combination of expected losses over a reasonable and supportable forecast period, a reversion period and long run average credit losses for their estimated contractual term.

Estimated contractual term - In the context of CECL, contractual term of the financial asset or credit exposure, adjusted for estimated draws and prepayments, certain embedded extension options and extensions granted under troubled debt restructurings.

Exposure at default (EAD) – The credit exposure estimated to be outstanding in the event of default of a credit obligor.

Long run average (LRA) – In the context of CECL, expected credit losses or credit risk parameters for the remaining estimated contractual maturity beyond the reasonable and supportable forecast and reversion periods. The long run average is generally derived from historical loss information and current portfolio characteristics, without considering current or forecasted conditions.

Loss given default (LGD) - Assuming a credit obligor enters default status, an estimate of loss, based on collateral type, collateral value, loan exposure and other factors. LGD is net of recovery, through any means, including but not limited to the liquidation of collateral or deficiency judgments rendered from foreclosure or bankruptcy proceedings.

Probability of default (PD) - An estimate of the likelihood that a credit obligor will enter default status.

Purchased credit deteriorated assets – Acquired loans or debt securities that, at acquisition, are determined to have experienced a more-than-insignificant deterioration in credit quality since origination or issuance.

Reasonable and supportable forecast period (RSFP) – In the context of CECL, the period for which forecasts and projections of macroeconomic variables have been determined to be reasonable and supportable, and are used as inputs for ACL measurement.


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



Reversion period – In the context of CECL, the period between the end of the reasonable and supportable forecast period and the point at which losses are expected to have reverted to their long run average, in order to reflect an overall reasonable estimate of expected credit losses.

Unfunded lending related commitments – Standby letters of credit, financial guarantees, commitments to extend credit and similar unfunded obligations that are not unilaterally, unconditionally, cancelable at PNC’s option.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

We also make statements in this Report, and we may from time to time make other statements, regarding our outlook for earnings, revenues, expenses, tax rates, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting us and our future business and operations that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “look,” “intend,” “outlook,” “project,” “forecast,” “estimate,” “goal,” “will,” “should” and other similar words and expressions.
Forward-looking statements are necessarily subject to numerous assumptions, risks and uncertainties, which change over time. Future events or circumstances may change our outlook and may also affect the nature of the assumptions, risks and uncertainties to which our forward-looking statements are subject. Forward-looking statements speak only as of the date made. We do not assume any duty and do not undertake to update forward-looking statements. Actual results or future events could differ, possibly materially, from those anticipated in forward-looking statements, as well as from historical performance. As a result, we caution against placing undue reliance on any forward-looking statements.
Our forward-looking statements are subject to the following principal risks and uncertainties. 
Our businesses, financial results and balance sheet values are affected by business and economic conditions, including the following:
Changes in interest rates and valuations in debt, equity and other financial markets.
Disruptions in the U.S. and global financial markets.
Actions by the Federal Reserve Board, U.S. Treasury and other government agencies, including those that impact money supply and market interest rates.
Changes in customer behavior due to changing business and economic conditions or legislative or regulatory initiatives.
Changes in customers’, suppliers’ and other counterparties’ performance and creditworthiness.
Impacts of tariffs and other trade policies of the U.S. and its global trading partners.
The length and extent of economic contraction as a result of the coronavirus (COVID-19) pandemic.
Commodity price volatility.
Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory contingencies. These statements are based on our view that:
Our baseline economic forecast is for a severe but short recession in the first half of 2020. Restrictions on movement because of the COVID-19 pandemic have led to a huge drop in consumer spending and a steep drop in output as many workers are unable to get to their jobs. We expect a significant contraction in U.S. real GDP and steep job losses over the next few months and a large increase in the unemployment rate in through mid-2020.
In the baseline forecast, economic growth resumes in the third quarter as consumers start to spend again. Fiscal stimulus and extremely low interest rates support the recovery. Real GDP surpasses its pre-recession peak in the second half of 2021, and growth is well above its long-term trend through 2022.
The baseline forecast assumes that the Federal Open Market Committee keeps the federal funds rate in its current range of 0.00% to 0.25% into 2023.
Given the many unknowns and risks being heavily weighted to the downside, our forward-looking statements are subject to the risk that conditions will be substantially different than we are currently expecting. If efforts to contain COVID-19 are unsuccessful and restrictions on movement last into the third quarter or beyond, the recession would be much longer and much more severe. Ineffective fiscal stimulus, or an extended delay in implementing it, are also major downside risks. The deeper the recession is, and the longer it lasts, the more it will damage consumer fundamentals and sentiment. This could both prolong the recession, and/or make any recovery weaker. Similarly, the recession could damage business fundamentals. And an extended global recession due to COVID-19 would weaken the U.S. recovery. As a result, the outbreak and its consequences, including responsive measures to manage it, have had and are likely to continue to have an adverse effect, possibly materially, on our business and financial performance by adversely affecting, possibly materially, the demand and profitability of our products and services, the valuation of assets and our ability to meet the needs of our customers.
PNC’s ability to take certain capital actions, including returning capital to shareholders, is subject to review by the Federal Reserve Board as part of PNC’s comprehensive capital plan for the applicable period in connection with the Federal Reserve

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




Board’s Comprehensive Capital Analysis and Review (CCAR) process. During the third quarter of 2020, the Federal Reserve’s revised capital plan rule permits PNC to make capital distributions in an amount equal to the average quarterly amount that was approved by the Federal Reserve for the 2019 capital plan year (July 1, 2019 through June 30, 2020). Once the Federal Reserve's new stress capital buffer rules become effective on October 1, 2020, our ability to take certain capital actions, including returning capital to shareholders, will be subject to PNC meeting or exceeding a stress capital buffer established by the Federal Reserve Board as part of the annual CCAR process.
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 and management actions affecting the composition of PNC’s balance sheet. In addition, PNC’s ability to determine, evaluate and forecast regulatory capital ratios, and to take actions (such as capital distributions) based on actual or forecasted capital ratios, will be dependent at least in part on the development, validation and regulatory review of related models.
Legal and regulatory developments could have an impact on our ability to operate our businesses, financial condition, results of operations, competitive position, reputation, or pursuit of attractive acquisition opportunities. Reputational impacts could affect matters such as business generation and retention, liquidity, funding, and ability to attract and retain management. These developments could include:
Changes to laws and regulations, including changes affecting oversight of the financial services industry, consumer protection, bank capital and liquidity standards, pension, bankruptcy and other industry aspects, and changes in accounting policies and principles.
Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries. These matters may result in monetary judgments or settlements or other remedies, including fines, penalties, 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 systems and controls, third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards.
Business and operating results also include impacts relating to our equity interest in BlackRock, Inc. and rely to a significant extent on information provided to us by BlackRock. Risks and uncertainties that could affect BlackRock are discussed in more detail by BlackRock in its SEC filings.
We grow our business in part through acquisitions and new strategic initiatives. Risks and uncertainties include those presented by the nature of the business acquired and strategic initiative, including in some cases those associated with our entry into new businesses or new geographic or other markets and risks resulting from our inexperience in those new areas, as well as risks and uncertainties related to the acquisition transactions themselves, regulatory issues, and the integration of the acquired businesses into PNC after closing.
Competition can have an impact on customer acquisition, growth and retention and on credit spreads and product pricing, which can affect market share, deposits and revenues. Our ability to anticipate and respond to technological changes can also impact our ability to respond to customer needs and meet competitive demands.
Business and operating results can also be affected by widespread natural and other disasters, pandemics, dislocations, terrorist activities, system failures, security breaches, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically.
We provide greater detail regarding these as well as other factors in our 2019 Form 10-K and elsewhere in this Report, including in the Risk Factors and Risk Management sections and the Commitments and Legal Proceedings Notes of the Notes To Consolidated Financial Statements in these reports. Our forward-looking statements may also be subject to other risks and uncertainties, including those we may discuss elsewhere in this Report or in our other filings with the SEC.


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



CONSOLIDATED INCOME STATEMENT
THE PNC FINANCIAL SERVICES GROUP, INC.
 
UnauditedThree months ended
March 31
In millions, except per share data2020
 2019
Interest Income   
Loans$2,480
 $2,602
Investment securities582
 620
Other138
 206
Total interest income3,200
 3,428
Interest Expense   
Deposits375
 472
Borrowed funds314
 481
Total interest expense689
 953
Net interest income2,511
 2,475
Noninterest Income   
Asset management382
 437
Consumer services377
 371
Corporate services526
 462
Residential mortgage210
 65
Service charges on deposits168
 168
Other343
 308
Total noninterest income2,006
 1,811
Total revenue4,517
 4,286
Provision For Credit Losses914
 189
Noninterest Expense   
Personnel1,369
 1,414
Occupancy207
 215
Equipment287
 273
Marketing58
 65
Other622
 611
Total noninterest expense2,543
 2,578
Income before income taxes and noncontrolling interests1,060
 1,519
Income taxes145
 248
Net income915
 1,271
Less: Net income attributable to noncontrolling interests7
 10
Preferred stock dividends63
 63
Preferred stock discount accretion and redemptions1
 1
Net income attributable to common shareholders$844
 $1,197
Earnings Per Common Share   
Basic$1.96
 $2.62
Diluted$1.95
 $2.61
Average Common Shares Outstanding   
Basic429
 455
Diluted430
 456
See accompanying Notes To Consolidated Financial Statements.

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




CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
THE PNC FINANCIAL SERVICES GROUP, INC.
 
Unaudited
In millions
 Three months ended
March 31
2020
��2019
Net income $915
 $1,271
Other comprehensive income (loss), before tax and net of reclassifications into Net income:    
Net unrealized gains (losses) on securities without an allowance for credit losses 1,487
  
Net unrealized gains (losses) on securities with an allowance for credit losses (7)  
Net unrealized gains (losses) on non-OTTI securities   639
Net unrealized gains (losses) on OTTI securities   9
Net unrealized gains (losses) on cash flow hedge derivatives 785
 100
Pension and other postretirement benefit plan adjustments 12
 145
Other (26) 34
Other comprehensive income (loss), before tax and net of reclassifications into Net income 2,251

927
Income tax benefit (expense) related to items of other comprehensive income (532) (207)
Other comprehensive income (loss), after tax and net of reclassifications into Net income 1,719

720
Comprehensive income 2,634
 1,991
Less: Comprehensive income attributable to noncontrolling interests 7
 10
Comprehensive income attributable to PNC $2,627

$1,981
See accompanying Notes To Consolidated Financial Statements.

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



CONSOLIDATED BALANCE SHEET
THE PNC FINANCIAL SERVICES GROUP, INC.
UnauditedMarch 31
2020

 December 31
2019

In millions, except par value
Assets   
Cash and due from banks$7,493
 $5,061
Interest-earning deposits with banks19,986
 23,413
Loans held for sale (a)1,693
 1,083
Investment securities – available for sale89,077
 69,163
Investment securities – held to maturity (b)1,469
 17,661
Loans (a)264,643
 239,843
Allowance for credit losses – loan and lease losses (c)(3,944) (2,742)
Net loans260,699
 237,101
Equity investments (d)13,205
 13,734
Mortgage servicing rights1,082
 1,644
Goodwill9,233
 9,233
Other (a) (b)41,556
 32,202
Total assets$445,493
 $410,295
Liabilities   
Deposits   
Noninterest-bearing$81,614
 $72,779
Interest-bearing223,590
 215,761
Total deposits305,204
 288,540
Borrowed funds   
Federal Home Loan Bank borrowings23,491
 16,341
Bank notes and senior debt31,438
 29,010
Subordinated debt6,475
 6,134
Other (e)11,995
 8,778
Total borrowed funds73,399
 60,263
Allowance for credit losses – unfunded lending related commitments (c)450
 318
Accrued expenses and other liabilities17,150
 11,831
Total liabilities396,203
 360,952
Equity   
Preferred stock (f)
  
Common stock ($5 par value, Authorized 800 shares, issued 542 shares)2,712
 2,712
Capital surplus16,288
 16,369
Retained earnings41,885
 42,215
Accumulated other comprehensive income2,518
 799
Common stock held in treasury at cost: 118 and 109 shares(14,140) (12,781)
Total shareholders’ equity49,263
 49,314
Noncontrolling interests27
 29
Total equity49,290
 49,343
Total liabilities and equity$445,493
 $410,295
(a)Our consolidated assets included the following for which we have elected the fair value option: Loans held for sale of $1.5 billion, Loans of $1.1 billion and Other assets of $.1 billion at March 31, 2020 and Loans held for sale of $1.1 billion, Loans of $.7 billion and Other assets of $.1 billion at December 31, 2019.
(b)
Amounts as of March 31, 2020 are net of the related Allowances for Credit Losses recorded in accordance with the adoption of Accounting Standards Update 2016-13, Financial Instruments - Credit Losses, which totaled $2 million and $19 million for Investment securities and Other assets, respectively. See Recently Adopted Accounting Standards portion of Note 1 Accounting Policies for additional detail on the adoption of this ASU.
(c)Amounts as of March 31, 2020 reflect the impact of adopting the CECL accounting standard and our transition from an incurred loss methodology for these reserves to an expected credit loss methodology. Prior period amounts represent Allowance for Loans and Leases (ALLL) under the incurred loss methodology. Refer to Note 1 Accounting Policies in this Report for additional detail on the adoption of this standard.
(d)Amounts include our equity investment in BlackRock.
(e)Our consolidated liabilities at both March 31, 2020 and December 31, 2019 included Other borrowed funds of $.1 billion for which we have elected the fair value option.
(f)Par value less than $.5 million at each date.

See accompanying Notes To Consolidated Financial Statements.

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




CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
 
Unaudited
In millions
 Three months ended
March 31
 
2020
 2019
 
Operating Activities     
Net income $915
 $1,271
 
Adjustments to reconcile net income to net cash provided (used) by operating activities     
Provision for credit losses 914
 189
 
Depreciation and amortization 328
 272
 
Deferred income taxes (226) 111
 
Changes in fair value of mortgage servicing rights 620
 210
 
Undistributed earnings of BlackRock (56) (111) 
Net change in     
Trading securities and other short-term investments (1,014) 358
 
Loans held for sale (452) 320
 
Other assets (6,912) (2,931) 
Accrued expenses and other liabilities 5,376
 1,796
 
Other (189) (84) 
Net cash provided (used) by operating activities $(696) $1,401
 
Investing Activities     
Sales     
Securities available for sale $5,447
 $840
 
Loans 314
 306
 
Repayments/maturities     
Securities available for sale 4,332
 2,103
 
Securities held to maturity 12
 510
 
Purchases     
Securities available for sale (11,889) (3,861) 
Securities held to maturity (4) (23) 
Loans (100) (468) 
Net change in     
Federal funds sold and resale agreements 965
 4,810
 
Interest-earning deposits with banks 3,427
 (4,368) 
Loans (25,758) (6,085) 
Other (125) 213
 
Net cash provided (used) by investing activities $(23,379) $(6,023) 
(continued on following page)

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



CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
(continued from previous page)
 
Unaudited
In millions
 Three Months Ended
March 31
 
2020
 2019
 
Financing Activities     
Net change in     
Noninterest-bearing deposits $8,857
 $(2,337) 
Interest-bearing deposits 7,829
 5,736
 
Federal funds purchased and repurchase agreements 2,306
 2,232
 
Federal Home Loan Bank borrowings (400) 


 
Other borrowed funds 1,044
 250
 
Sales/issuances     
Federal Home Loan Bank borrowings 9,060
 5,000
 
Bank notes and senior debt 3,486
 2,147
 
Other borrowed funds 172
 397
 
Common and treasury stock 23
 22
 
Repayments/maturities     
Federal Home Loan Bank borrowings (1,510) (6,000) 
Bank notes and senior debt (2,100) (1,750) 
Other borrowed funds (172) (296) 
Acquisition of treasury stock (1,522) (826) 
Preferred stock cash dividends paid (63) (63) 
Common stock cash dividends paid (503) (436) 
Net cash provided (used) by financing activities $26,507
 $4,076
 
Net Increase (Decrease) In Cash And Due From Banks And Restricted Cash 2,432
 (546) 
Cash and due from banks and restricted cash at beginning of period 5,061
 5,608
 
Cash and due from banks and restricted cash at end of period $7,493
 $5,062
 
Cash and due from banks and restricted cash     
Cash and due from banks at end of period (unrestricted cash) $7,161
 $5,062
 
Restricted cash 332
   
Cash and due from banks and restricted cash at end of period $7,493
 $5,062
 
Supplemental Disclosures     
Interest paid $638
 $907
 
Income taxes paid $36
 $30
 
Income taxes refunded $5
 $2
 
Leased assets obtained in exchange for new operating lease liabilities $57
 $155
 
Right-of-use assets recognized at adoption of ASU 2016-02   $2,004
 
Non-cash Investing and Financing Items     
Transfer from loans to loans held for sale, net $313
 $139
 
Transfer from loans to foreclosed assets $37
 $48
 
See accompanying Notes To Consolidated Financial Statements.

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




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

BUSINESS

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

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

Basis of Financial Statement Presentation

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

We prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). We have eliminated intercompany accounts and transactions.

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 2019 Form 10-K. These interim consolidated financial statements serve to update our 2019 Form 10-K and may not include all information and Notes necessary to constitute a complete set of financial statements. There have been significant changes to our accounting policies as disclosed in our 2019 Form 10-K due to the adoption of the current expected credit losses standard. The updated policies impacted by this adoption are included in this Note 1 in the first quarter of 2020. Reference is made to Note 1 Accounting Policies in our 2019 Form 10-K for a detailed description of all other significant accounting policies.

Use of Estimates

We prepared these consolidated financial statements using financial information available at the time of preparation, which requires us to make estimates and assumptions that affect the amounts reported. Our most significant estimates pertain to our fair value measurements and allowance for credit losses (ACL). Actual results may differ from the estimates and the differences may be material to the consolidated financial statements.



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



Recently Adopted Accounting Standards

Accounting Standards Update (ASU)DescriptionFinancial Statement Impact
Credit Losses- ASU 2016-13

Issued June 2016

Codification Improvements - ASU 2019-04

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

Issued April 2019

Targeted Transition Relief - Credit Losses - ASU 2019-05

Issued May 2019

Codification Improvements - ASU 2019-11

Issued November 2019


• Commonly referred to as the Current Expected Credit Losses (CECL) standard.

•Replaces measurement, recognition and disclosure guidance for credit related reserves (i.e., the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit) and Other than Temporary Impairment (OTTI) for debt securities.

•Requires the use of an expected credit loss methodology; specifically, current expected credit losses for the remaining life of the asset will be recognized starting from the time of origination or acquisition.

•Methodology applies to loans, net investment in leases, debt securities and certain financial assets not accounted for at fair value through net income. It also applies to unfunded lending related commitments except for unconditionally cancellable commitments.

•In-scope assets are presented at the net amount expected to be collected after the deduction or addition of the ACL from the amortized cost basis of the assets.

• Requires inclusion of expected recoveries of previously charged-off amounts for in-scope assets.

• Requires enhanced credit quality disclosures including disaggregation of credit quality indicators by vintage.

• Requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings at adoption.


• Adopted January 1, 2020 under the modified retrospective approach. The cumulative-effect adjustment to retained earnings totaled $671 million at adoption.

• Amended presentation and disclosures are required prospectively. Refer to the disclosures in this Note 1, Note 2 Investment Securities, Note 3 Loans and Note 9 Total Equity and Other Comprehensive Income for additional information.

• With the adoption of CECL, we discontinued the accounting for purchased impaired loans and elected the one-time fair value option election for some of these loans and certain residential real estate collateral dependent loans. Loans that were previously accounted for as purchased impaired where the fair value option election was not made are now accounted for as purchased credit deteriorated loans.

• There was no impact to the recorded investment of our investment securities or loans, except for our purchased credit deteriorated loan portfolio. Accounting for these loans as purchased credit deteriorated required an adjustment to the remaining accretable discount and recorded investment in addition to the impact on ACL due to the adoption of CECL methodology.

• Refer to Table 33 for a summary of the impact of the CECL standard adoption.




Accounting Standards Update (ASU)DescriptionFinancial Statement Impact
Codification Improvements - ASU 2019-04

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

Issued April 2019
• Targeted improvements related to:
     - Partial-term fair value hedges of interest rate risk
     - Amortization of fair value hedge basis adjustments
     - Disclosure of fair value hedge basis adjustments
     - Consideration of the hedged contractually specified interest rate under the hypothetical derivative method
     - Application of a first-payments-received cash flow hedging technique to overall cash flows on a group of variable interest payments
     - Update to transition guidance for ASU 2017-12
• This ASU permits a one-time transfer out of held to maturity securities to provide entities the opportunity to hedge fixed rate, prepayable securities under a last of layer hedging strategy (although an entity is not required to hedge such securities subsequent to transfer).


• Adopted January 1, 2020.
• As permitted by the eligibility requirements in this guidance, at adoption we elected to transfer debt securities with an amortized cost of $16.2 billion (fair value of $16.5 billion) from held to maturity to the available for sale portfolio. The transfer resulted in a pretax increase to AOCI of $306 million. There were no other impacts to PNC's consolidated financial statements from the adoption of this guidance.



Accounting Standards Update (ASU)DescriptionFinancial Statement Impact
Goodwill -
ASU 2017-04

Issued January 2017
• Eliminates Step 2 from the goodwill impairment test to simplify the subsequent measurement of goodwill under which a loss was recognized only if the estimated implied fair value of the goodwill is below its carrying value.
• Requires impairment to be recognized if the reporting unit's carrying value exceeds the fair value.
• Adopted January 1, 2020.
• The adoption of this standard did not impact our consolidated results of operations or our consolidated financial position.



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




Accounting Standards Update (ASU)DescriptionFinancial Statement Impact
Reference Rate Reform - ASU 2020-04

Issued March 2020
• Provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.
• Includes optional expedients related to contract modifications that allow an entity to account for modifications (if certain criteria are met) as if the modifications were only minor (assets within the scope of ASC 310, Receivables), were not substantial (assets within the scope of ASC 470, Debt), and/or did not result in remeasurements or reclassifications (assets within the scope of ASC 842, Leases, and other Topics) of the existing contract.
• Includes optional expedients related to hedging relationships within the scope of ASC 815, Derivatives & Hedging, whereby changes to the critical terms of a hedging relationship do not require dedesignation if certain criteria are met. In addition, potential sources of ineffectiveness as a result of reference rate reform may be disregarded when performing some effectiveness assessments.
• Allows for a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020.
• Guidance in this ASU is effective as of March 12, 2020 through December 31, 2022.




• Adopted March 12, 2020, will apply prospectively.
• As of March 31, 2020, we have not yet elected any optional expedients outlined in this ASU. However, we plan to elect these optional expedients in the future.




The following table presents the impact of adopting the CECL standard on January 1, 2020 on our allowance and retained earnings.

Table 33: Impact of the CECL Standard Adoption
  ALLL (a) ACL (a)
In millions December 31, 2019Transition AdjustmentJanuary 1, 2020
Allowance (a)
    
Loans and leases    
Commercial lending $1,812
$(304)$1,508
Consumer lending 930
767
1,697
Total loans and leases allowance 2,742
463
3,205
Unfunded lending related commitments (b) 318
179
497
Other 
19
19
Total allowance $3,060
$661
$3,721
     
In millions December 31, 2019
Transition Adjustment
January 1, 2020
Impact to retained earnings (c) $42,215
$(671)$41,544
(a) Amounts at December 31, 2019 represent the ALLL and the allowance for unfunded loan commitments and letters of credit. The amounts at January 1, 2020 represent the ACL.
(b) Unfunded lending related commitments are primarily unfunded loan commitments and letters of credit. See Note 3 Loans for additional information.
(c) Transition adjustment includes the increase in the total allowance of $.7 billion and the impact of the fair value option election of $.2 billion, offset by the tax impact of $.2 billion.

Cash, Cash Equivalents and Restricted Cash

Cash and due from banks are considered cash and cash equivalents for financial reporting purposes because they represent a primary source of liquidity. Certain cash balances within Cash and due from banks on our Consolidated Balance Sheet are restricted as to withdrawal or usage by legally binding contractual agreements or regulatory requirements.







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



Investments

We hold interests in various types of investments. The accounting for these investments is dependent on a number of factors including,
but not limited to, items such as:
• Ownership interest,
• Our plans for the investment, and
• The nature of the investment.

Debt Securities
Debt securities are recorded on a trade-date basis. We classify debt securities as either trading, held to maturity, or available for sale. Debt securities that we purchase for certain risk management activities or customer-related trading activities are classified as trading securities, are reported in the Other assets line item on our Consolidated Balance Sheet, and are carried at fair value. Realized and unrealized gains and losses on trading securities are included in Other noninterest income. We classify debt securities as held to maturity when we have the positive intent and ability to hold the securities to maturity, and carry them at amortized cost, less any ACL. Debt securities not classified as held to maturity or trading are classified as securities available for sale, and are carried at fair value. Unrealized gains and losses on available for sale securities are included in Accumulated other comprehensive income (AOCI) net of income taxes.

We include all interest on debt securities, including amortization of premiums and accretion of discounts on investment securities, in
net interest income using the constant effective yield method generally calculated over the contractual lives of the securities. Effective
yields reflect either the effective interest rate implicit in the security at the date of acquisition or, for debt securities where an other-than-temporary impairment was recorded, the effective interest rate determined based on improved cash flows subsequent to an
impairment. We compute gains and losses realized on the sale of available for sale debt securities on a specific security basis. These
securities gains/(losses) are included in Other noninterest income on the Consolidated Income Statement.

As discussed in the Recently Adopted Accounting Standards section of this Note 1, we adopted the CECL standard as of January 1,
2020, which requires expected credit losses on both held to maturity and available for sale securities to be recognized through a
valuation allowance, ACL, instead of as a direct write-down to the amortized cost basis of the security. An available for sale security is considered impaired if the fair value is less than amortized cost basis. If any portion of the decline in fair value is related to credit, the amount of ACL is determined as the portion related to credit, limited to the difference between the amortized cost basis and the fair value of the security. If we have the intent to sell or believe it is more likely than not we will be required to sell an impaired available for sale security before recovery of the amortized cost basis, the credit loss is recorded as a direct write-down of the amortized cost basis. Credit losses on investment securities are recognized through the Provision for credit losses on our Consolidated Income Statement. Declines in the fair value of available for sale securities that are not considered credit related are recognized in AOCI on our Consolidated Balance Sheet. The CECL standard is applied prospectively to debt securities and, as a result, the amortized cost basis of investment securities for which OTTI had previously been recorded did not change upon adoption. For information on the policies previously applied to determine OTTI, see the Debt Securities section of Note 1 Accounting Policies in our 2019 Form 10-K.

We consider a security to be past due in terms of payment based on its contractual terms. A security may be placed on nonaccrual, with
interest no longer recognized until received, when collectability of principal or interest is doubtful. As of March 31, 2020, nonaccrual or past due held-to-maturity securities were immaterial.

A security may be partially or fully charged off against the ACL if it is determined to be uncollectible, including, for an available for
sale security, if we have the intent to sell or believe it is more likely than not we will be required to sell the security before recovery of
the amortized cost basis. Recoveries of previously charged-off available for sale securities are recognized when received, while
recoveries on held to maturity securities are recognized when expected.

See the Allowance for Credit Loss section of this Note 1 for further discussion regarding the methodologies used to determine the
ACL on investment securities. See Note 2 Investment Securities for additional information about the investment securities portfolio
and the related ACL.

Loans

Loans are classified as held for investment when management has both the intent and ability to hold the loan for the foreseeable
future, or until maturity or payoff. Management’s intent and view of the foreseeable future may change based on changes in business
strategies, the economic environment, market conditions and the availability of government programs.

Measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of
payment are considered delinquent.


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




Loans held for investment, excluding purchased credit deteriorated loans, are recorded at amortized cost basis unless we elect to measure these under the fair value option. Amortized cost basis represents principal amounts outstanding, net of unearned income, unamortized deferred fees, costs on originated loans, and premiums or discounts on purchased loans, and charge-offs. Amortized cost basis does not include accrued interest, as we include accrued interest in Other Assets on our Consolidated Balance Sheet. Interest on performing loans is accrued based on the principal amount outstanding and recorded in Interest income as earned using the constant effective yield method. Loan origination fees, direct loan origination costs, and loan premiums and discounts are deferred and accreted or amortized into Net interest income using the constant effective yield method, over the contractual life of the loan. Loans under the fair value option are reported at their fair value, with any changes to fair value reported as Noninterest income on the Consolidated Income Statement, and are excluded from measurement of ACL.

In addition to originating loans, we also acquire loans through the secondary loan market, portfolio purchases or acquisitions of other
financial services companies. Certain acquired loans that have experienced a deterioration of credit quality since origination (i.e.,
purchased credit deteriorated) are recognized at fair value. ACL for purchased credit deteriorated loans is measured at the acquisition date and added to the acquisition date fair value to determine the amortized cost basis for these loans. Subsequent decreases in expected cash flows that are attributable, at least in part, to credit quality are recognized through a charge to the provision for credit losses resulting in an increase in the ACL. Subsequent increases in expected cash flows are recognized as a provision recapture of previously recorded ACL.

We consider a loan to be collateral dependent when we determine that substantially all of the expected cash flows will be generated
from the operation or sale of the collateral underlying the loan, the borrower is experiencing financial difficulty and we have elected to
measure the loan at the estimated fair value of collateral (less costs to sell if sale or foreclosure of the property is expected).
Additionally, we consider a loan to be collateral dependent when foreclosure or liquidation of the underlying collateral is probable.

See the Allowance for Credit Losses section of this Note 1 for further discussion regarding the methodologies and significant inputs
used to determine the ACL on loans. See Note 3 Loans for additional information about our loan portfolio and the related ACL.

Loans Held for Sale

We designate loans as held for sale when we have the intent to sell them. At the time of designation to held for sale, any ACL is
reversed, and a valuation allowance for shortfall between the amortized cost basis and the net realizable value is recognized, excluding
the amounts already charged off. Similarly, when loans are no longer considered held for sale, the valuation allowance (net of writedowns) is reversed, and an allowance for credit losses is established, excluding the amounts already charged-off. Write-downs on these loans (if required) are recorded as charge-offs through the valuation allowance. Adjustments to the valuation allowance on held for sale loans are recognized in Other noninterest income.

We have elected to account for certain commercial and residential mortgage loans held for sale at fair value. The changes in the fair
value of the commercial mortgage loans are measured and recorded in Other noninterest income while such changes for the residential
mortgage loans are measured and recorded in Residential mortgage noninterest income each period. See Note 11 Fair Value for
additional information.

Interest income with respect to loans held for sale is accrued based on the principal amount outstanding and the loan’s contractual
interest rate.

In certain circumstances, loans designated as held for sale may be transferred to held for investment based on a change in strategy. We
transfer these loans at the lower of cost or estimated fair value; however, any loans originated or purchased as held for sale for which the fair value option has been elected remain at fair value for the life of the loan.

Nonperforming Loans and Leases

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

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



Commercial lending
Loans Classified as Nonperforming and Accounted for as Nonaccrual  
•     Loans accounted for at amortized cost where:
–      The loan is 90 days or more past due.
–      The loan is rated substandard or worse due to the determination that full collection of
        principal and interest is not probable as demonstrated by the following conditions:
•     The collection of principal or interest is 90 days or more past due;
•     Reasonable doubt exists as to the certainty of the borrower’s future debt service
       ability, according to the terms of the credit arrangement, regardless of whether 90
       days have passed or not;
•     The borrower has filed or will likely file for bankruptcy;
•     The bank advances additional funds to cover principal or interest;
•     We are in the process of liquidating a commercial borrower; or
•     We are pursuing remedies under a guarantee.
Loans Excluded from Nonperforming Classification but Accounted for as Nonaccrual  
•       Loans accounted for under the fair value option and full collection of principal and interest
        is not probable.
•       Loans accounted for at the lower of cost or market less costs to sell (held for sale) and full
        collection of principal and interest is not probable.
 
Loans Excluded from Nonperforming Classification and Nonaccrual Accounting
 
  •       Loans that are well secured and in the process of collection.

Consumer lending
Loans Classified as Nonperforming and Accounted for as Nonaccrual  
•       Loans accounted for at amortized cost where full collection of contractual principal and
         interest is not deemed probable as demonstrated in the policies below:
–      The loan is 90 days past due for home equity and installment loans, and 180 days past
        due for well secured residential real estate loans;
–      The loan has been modified and classified as a troubled debt restructuring (TDR);
–      Notification of bankruptcy has been received;
–      The bank holds a subordinate lien position in the loan and the first lien mortgage loan is
        seriously stressed (i.e., 90 days or more past due);
–      Other loans within the same borrower relationship have been placed on nonaccrual or
        charge-offs have been taken on them;
–      The bank has ordered the repossession of non-real estate collateral securing the loan; or
–      The bank has charged-off the loan to the value of the collateral.
Loans Excluded from Nonperforming Classification but Accounted for as Nonaccrual  
•       Loans accounted for under the fair value option and full collection of principal and interest
        is not probable.
•       Loans accounted for at the lower of cost or market less costs to sell (held for sale) and full
        collection of principal and interest is not probable.
Loans Excluded from Nonperforming Classification and Nonaccrual Accounting  
• Certain government insured loans where substantially all principal and interest is insured.
•       Residential real estate loans that are well secured and in the process of collection.
•       Consumer loans and lines of credit, not secured by residential real estate or automobiles, as
         permitted by regulatory guidance.
 

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

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

Consumer Lending
We generally charge off secured consumer (Home equity, Residential Real Estate and Automobile) nonperforming loans to the fair
value of collateral less costs to sell, if lower than the amortized cost basis of the loan outstanding, when delinquency of the loan, combined with other risk factors (e.g., bankruptcy, lien position, or troubled debt restructuring), indicates that the loan, or some portion thereof, is uncollectible as per our historical experience, or the collateral has been repossessed. We charge-off secured
consumer loans no later than 180 days past due. Most consumer loans and lines of credit, not secured by residential real estate, are

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




charged off once they have reached 120-180 days past due.

For secured collateral dependent loans, collateral values are updated at least annually and subsequent declines in collateral values are charged-off resulting in incremental provision for credit loss. Subsequent increases in collateral values may be reflected as an adjustment to ACL to reflect the expectation of recoveries in an amount greater than previously expected.

Accounting for Nonperforming Assets and Leases and Other Nonaccrual Loans
For nonaccrual loans, interest income accrual and deferred fee/cost recognition is discontinued. Additionally, the current year accrued and uncollected interest is reversed through Net interest income and prior year accrued and uncollected interest is charged-off, except for credit cards, where we reverse any accrued interest through Net interest income at the time of charge-off, as per industry standard practice. Nonaccrual loans that are also collateral dependent may be charged-off to reduce the basis to the fair value of collateral less costs to sell.

If payment is received on a nonaccrual loan, generally the payment is first applied to the remaining principal balance; payments are then applied to recover any charged-off amounts related to the loan. Finally, if both principal balance and any charge-offs have been recovered, then the payment will be recorded as fee and interest income. For certain consumer loans, the receipt of interest payments is recognized as interest income on a cash basis. Cash basis income recognition is applied if a loan’s amortized cost basis is deemed fully collectible and the loan has performed for at least six months.

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

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

Foreclosed assets consist of any asset seized or property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu
of foreclosure. Other real estate owned (OREO) comprises principally commercial and residential real estate properties obtained in
partial or total satisfaction of loan obligations. After obtaining a foreclosure judgment, or in some jurisdictions the initiation of
proceedings under a power of sale in the loan instruments, the property will be sold. When we are awarded title or completion of
deed-in-lieu of foreclosure, we transfer the loan to foreclosed assets included in Other assets on our Consolidated Balance Sheet.
Property obtained in satisfaction of a loan is initially recorded at estimated fair value less cost to sell. Based upon the estimated fair
value less cost to sell, the amortized cost basis of the loan is adjusted and a charge-off/recovery is recognized to the ACL. We
estimate fair values primarily based on appraisals, or sales agreements with third parties. Subsequently, foreclosed assets are
valued at the lower of the amount recorded at acquisition date or estimated fair value less cost to sell. Valuation adjustments on
these assets and gains or losses realized from disposition of such property are reflected in Other noninterest expense.

For certain mortgage loans that have a government guarantee, we establish a separate other receivable upon foreclosure. The
receivable is measured based on the loan balance (inclusive of principal and interest) that is expected to be recovered from the
guarantor.

See Note 3 Loans in this Report for additional information on nonperforming assets, TDRs and credit quality indicators related to our loan portfolio.

Allowance for Credit Losses

Our ACL, in accordance with the CECL standard, is based on historical loss experience, borrower characteristics, current economic
conditions, reasonable and supportable forecasts of future conditions and other relevant factors. We maintain the ACL at an
appropriate level for expected losses on our existing investment securities, loans, finance leases (including residual values), trade
receivables and other financial assets and unfunded lending related commitments, for the estimated contractual term of the assets or
exposures as of the balance sheet date. We estimate the estimated contractual term of assets in scope of CECL considering
contractual maturity dates, prepayment expectations, utilization or draw expectations and any embedded extension options that do
not allow us to unilaterally cancel the extension options. For products without a fixed contractual maturity date (e.g., credit cards),
we rely on historical payment behavior to determine the length of the pay down or default time period.

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




We estimate expected losses on a pooled basis using a combination of (i) the expected losses over a reasonable and supportable
forecast period (RSFP), (ii) a period of reversion to long run average expected losses (reversion period) where applicable, and (iii)
long run average (LRA) expected losses for the remaining estimated contractual term. For all assets and unfunded lending related commitments in the scope of CECL, the ACL also includes individually assessed reserves and qualitative reserves, as
applicable.

We use forward-looking information in estimating expected credit losses for the RSFP. For this purpose, we use the forecasted
scenarios produced by PNC's Economics Team, which are designed to reflect business cycles and their related estimated probabilities. The forecast length that we have determined to be reasonable and supportable is three years. As noted in the methodology discussions that follow, forward looking information, such as forecasted relevant macroeconomic variables, is incorporated into the expected credit loss estimates using quantitative techniques, as well as through analysis from PNC economists and management judgment.

The reversion period is used to bridge RSFP and LRA expected credit losses. We may consider a number of factors in determining the duration of the reversion period, such as contractual maturity of the asset, observed historical patterns and the estimated credit loss rates at the end of RSFP relative to the beginning of the LRA period.

The LRA expected credit losses are derived from long run historical credit loss information adjusted for the credit quality of the current portfolio, and therefore do not consider current and forecasted economic conditions.

See the following sections related to investment securities, loans, trade receivables, other financial assets and unfunded lending related commitments for details about specific methodologies.

Allowance for Credit Losses - Investment Securities
A significant portion of our investment securities are issued or guaranteed by either the U.S. government (U.S. Treasury or Government National Mortgage Association (GNMA)) or a government-sponsored agency (Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC)). Taking into consideration historical information and current and forecasted conditions, we do not expect to incur any credit losses on these securities.

Investment securities that are not issued or guaranteed by the U.S. government or a government-sponsored agency consist of both securitized products, such as non-agency mortgage and asset-backed securities, as well as non-securitized products, such as corporate and municipal debt securities. A discounted cash flow approach is primarily used to determine the amount of the ACL required. The estimates of expected cash flows are determined using macroeconomic sensitive models taking into consideration the RSFP and scenarios discussed above. The cash flows expected to be collected, after considering expected prepayments, are discounted at the effective interest rate. For an available-for-sale security, the amount of the ACL is limited to the difference between the amortized cost basis of the security and its estimated fair value.

See Note 2 Investment Securities in this Report for additional information about the investment securities portfolio.

Allowance for Credit Losses - Loans and Leases
Our pooled expected loss methodology is based upon the quantification of risk parameters, such as probability of default (PD), loss
given default (LGD) and exposure at default (EAD) for a loan or loan segment. We also consider the impact of prepayments and
amortization on contractual maturity in our expected loss estimates. We use historical credit loss information, current borrower
characteristics and forecasted economic variables for the RSFP, coupled with analytical methods, to estimate these risk parameters
by loan or loan segments. PD, LGD and EAD parameters are calculated for each forecasted scenario and the LRA period, and
combined to generate expected loss estimates by scenario. The following matrix provides key credit risk characteristics that we use to
estimate these risk parameters.


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




Loan Class Probability of Default (PD)Loss Given Default (LGD)Exposure at Default (EAD)
Commercial Lending
Commercial and Equipment Lease Financing 
• For wholesale obligors: internal risk ratings based on borrower characteristics and industry

•  For retail small balance obligors: credit scores, exposure characteristics and industry




•  Collateral type, collateral value, industry, size and outstanding exposure for secured loans

•  Capital structure, industry and size for unsecured loans

•  Product type and credit scores






•  Outstanding balances, contractual maturities and historical prepayment experience

•  Product type and historical prepayment experience



Commercial Real Estate 
•  Property performance metrics and capitalization rates for RSFP

• Internal risk ratings based on borrower characteristics for LRA

•  Property values and anticipated liquidation costs•  Outstanding balances, contractual maturities, historical prepayment experience and contractual extension options
Consumer Lending
Home Equity and Residential Real Estate •  Borrower credit scores, delinquency rates, origination vintage, loan-to-value (LTV) ratios and contractual maturity•  Collateral characteristics, LTV and costs to sell•  Outstanding balances, contractual maturities and historical prepayment experience
Automobile •  Borrower credit scores, borrower income, LTV and contractual maturity•  New vs. used, LTV and borrower credit scores•  Outstanding balances, contractual maturities and historical prepayment experience
Credit Card •  Borrower credit scores, customer type (individual vs. joint) and months on book• Borrower credit scores
•  Pay-down curves estimated using borrower behavior segments, payment ratios and borrower credit scores
•  Payment ratios are developed using a pro-rata method
Education and Other Consumer • Net charge-off rates by vintage are used to estimate expected losses in lieu of discrete risk parameters

The following matrix describes the key economic variables that are consumed during the RSFP by loan class, as well as other
assumptions that are used for our reversion and LRA approaches.


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



Loan Class RSFP - Key Economic VariablesReversion MethodLRA Approach
Commercial Lending

Commercial and Equipment Lease Financing 
•  Gross Domestic Product and Gross Domestic Income measures, imports, unemployment rates, House Price Index (HPI), credit spreads, personal income and consumption measures and stock market indices

•  Immediate reversion

•  Average parameters determined based on internal and external historical data

•  Modeled parameters using long run economic conditions for retail small business obligors

Commercial Real Estate •  Unemployment rates, Commercial Property Price Index, stock market indices /volatility measures, and interest rates•  Immediate reversion•  Average parameters determined based on internal and external historical data
Consumer Lending
Home Equity and Residential Real Estate •  Unemployment rates, HPI and interest rates•  Straight-line over 1-3 years based on economic scenario•  Modeled parameters using long run economic conditions
Automobile 
•  Unemployment rates, HPI, personal consumption, interest rates, Manheim used car index and domestic oil prices

•  Straight-line over 1 year

•  Average parameters determined based on internal and external historical data

Credit Card 
•  Unemployment rates, delinquency rates, personal consumption, HPI and housing data

•  Straight-line over 2 years

•  Modeled parameters using long run economic conditions

Education and Other Consumer •  Net charge-off rates by vintage are used to estimate expected losses in lieu of discrete risk parameters

After the RSFP, we revert to the LRA over the reversion period noted above, which is the period between the end of the RSFP and
when losses are estimated to have completely reverted to the LRA.

Once we have developed a combined estimate of credit losses (i.e., of the RSFP, reversion period and LRA) under each of the forecasted scenarios, we produce a probability-weighted credit loss estimate by loan class. We then add or deduct any qualitative components and other adjustments, such as individually assessed loans, to produce the ACL. See the Individually Assessed Component and Qualitative Component sections of this Note 1 for additional information about those adjustments.

Discounted Cash Flow
In addition to TDRs, we also use a discounted cash flow methodology for our Home Equity and Residential Real Estate loan classes. We determine effective interest rates considering contractual cash flows adjusted for estimated prepayments. Changes in the ACL due to the impact of the passage of time under the discounted cash flow estimate are recognized through the provision for credit losses.

Individually Assessed Component
Loans and leases that do not share similar risk characteristics with a pool of loans are individually assessed as follows:
For commercial nonperforming loans greater than or equal to a defined dollar threshold, reserves are based on an analysis of the present value of the loan’s expected future cash flows or the fair value of the collateral, if appropriate under our policy for collateral dependent loans. Nonperforming commercial loans below the defined threshold and accruing TDRs are reserved for under a pooled basis.
For consumer nonperforming loans classified as collateral dependent, charge-off and ACL related to recovery of amounts previously charged-off are evaluated through an analysis of the fair value of the collateral less costs to sell.

Qualitative Component
While our reserve methodologies strive to reflect all relevant credit risk factors, there continues to be uncertainty associated with,
but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal
variations between expected and actual outcomes. We may hold additional reserves that are designed to provide coverage for losses
attributable to such risks. The ACL also takes into account factors that may not be directly measured in the determination of
individually assessed or pooled reserves. Such qualitative factors may include, but are not limited to:

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




Industry concentrations and conditions,
Changes in market conditions, including regulatory and legal requirements,
Changes in the nature and volume of our portfolio,
Recent credit quality trends,
Recent loss experience in particular portfolios, including specific and unique events,
Recent macro-economic factors that may not be reflected in the forecast information,
Limitations of available data, including historical loss information and recent data such as collateral values,
Model imprecision,
Changes in lending policies and procedures, including changes in loss recognition and mitigation policies and procedures,
Timing of available information, including the performance of first lien positions, and
Other relevant factors

See Note 3 Loans for additional information about our loan portfolio and the related allowance.

Accrued Interest
When accrued interest is reversed or charged-off in a timely manner the CECL standard provides a practical expedient to exclude
accrued interest from ACL measurement. We consider our nonaccrual and charge-off policies to be timely for all of our investment
securities, loans and leases, with the exception of consumer credit cards, education loans and certain unsecured consumer lines of credit. We consider the length of time before nonaccrual/charge-off and the use of appropriate other triggering events for nonaccrual and charge-offs in making this determination. Pursuant to these policy elections, we calculate reserves for accrued interest on credit cards, education loans and certain consumer lines of credit, which are then included within the ACL for loans and leases. See the Debt Securities and Nonperforming Loans and Leases sections of this Note 1 for additional information on our nonaccrual and charge-off policies.

Additionally, pursuant to our use of a discounted cash flow methodology in estimating credit losses for our home equity and residential real estate loan classes, applicable reserves for accrued interest are also included within the ACL for loans and leases for these loan classes.

Purchased Credit Deteriorated Loans or Securities
The ACL for purchased credit deteriorated loans or securities is determined at the time of acquisition, as the estimated expected credit loss of the outstanding balance or par value, based on the methodologies described previously for loans and securities. In accordance with CECL, the ACL recognized at acquisition is added to the acquisition date purchase price to determine the asset’s amortized cost basis.

Allowance for Credit Losses - Unfunded Lending Related Commitments
We maintain the ACL for unfunded lending related commitments on off-balance sheet credit exposures that are not unconditionally cancelable (e.g., unfunded loan commitments, letters of credit and certain financial guarantees), at a level we believe is appropriate as of the balance sheet date to absorb expected credit losses on these exposures. Other than the estimation of the probability of funding, this reserve is estimated in a manner similar to the methodology used for determining reserves for loans and leases. The ACL for unfunded lending related commitments is recorded as a liability on the Consolidated Balance Sheet. Net adjustments to this reserve are included in the provision for credit losses.

See Note 3 Loans for additional information about this allowance.

Allowance for Credit Losses - Other Financial Assets
We determine the allowance for other financial assets (e.g., trade receivables, servicing advances, balances with banks) considering historical loss information and other available indicators. In certain cases where there are no historical, current or forecast indicators of an expected credit loss, we may estimate the reserve to be close to zero. As of March 31, 2020, the ACL for other financial assets was immaterial.

Goodwill

Goodwill arising from business acquisitions represents the value attributable to unidentifiable intangible elements in the business acquired. At least annually, in the fourth quarter, or more frequently if events occur or circumstances have changed significantly from the annual test date, management performs our goodwill impairment test at a reporting unit level.

PNC has the ability to first perform a qualitative analysis to evaluate whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, PNC determines it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative impairment test is not necessary. If PNC elects to bypass the qualitative analysis, or concludes via qualitative analysis that it is more-likely-than-

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



not that the fair value of a reporting unit is less than its carrying amount, a quantitative goodwill impairment test is performed. Inputs are generated and used in calculating the fair value of the reporting unit, which is compared to its carrying amount. The fair value of our reporting units is determined by using discounted cash flows and/or market comparability methodologies. If the fair value is greater than the carrying amount, then the reporting unit's goodwill is deemed not to be impaired. If the fair value is less than the carrying amount, an entity should recognize an impairment charge for the amount by which the carrying amount of goodwill exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

NOTE 2 INVESTMENT SECURITIES

With the adoption of the CECL standard on January 1, 2020, credit losses on investment securities are required to be recognized through the ACL, instead of as a direct write-down to the amortized cost basis of the security. The amortized cost basis of investment securities for which impairment had previously been recorded did not change upon adoption.

We maintain the ACL for investment securities at levels that we believe to be appropriate as of the balance sheet date to absorb expected credit losses on our portfolio. As of March 31, 2020, the ACL for investment securities totaled $2 million and primarily related to other debt securities in the held to maturity portfolio.

Additionally, upon adoption of ASU 2019-04 and as permitted by the eligibility requirements in this guidance, we elected to transfer debt securities with an amortized cost of $16.2 billion and a fair value of $16.5 billion from held to maturity to the available for sale portfolio.

See Note 1 Accounting Policies for additional information related to the adoption of the CECL standard, including the methodologies used to determine the ACL for investment securities, and the adoption of ASU 2019-04.

The following table summarizes our available for sale and held to maturity portfolios by major security type.
Table 34: Investment Securities Summary
  March 31, 2020 (a)  December 31, 2019
In millions 
Amortized
Cost (b)

 Unrealized 
Fair
Value

  
Amortized
Cost

 Unrealized 
Fair
Value

Gains
 Losses
   Gains
 Losses
 
Securities Available for Sale                 
U.S. Treasury and government agencies $16,102
 $879
   $16,981
  $16,150
 $382
 $(16) $16,516
Residential mortgage-backed                 
Agency 50,828
 1,810
 $(10) 52,628
  35,847
 517
 (43) 36,321
Non-agency 1,563
 142
 (62) 1,643
  1,515
 302
 (3) 1,814
Commercial mortgage-backed                 
Agency 3,181
 114
 (6) 3,289
  3,094
 42
 (18) 3,118
Non-agency 4,249
 27
 (194) 4,082
  3,352
 29
 (9) 3,372
Asset-backed 5,339
 43
 (104) 5,278
  5,044
 78
 (8) 5,114
Other 4,962
 218
 (4) 5,176
  2,788
 121
 (1) 2,908
Total securities available for sale $86,224
 $3,233
 $(380) $89,077
  $67,790
 $1,471
 $(98) $69,163
Securities Held to Maturity                 
U.S. Treasury and government agencies $781
 $143
   $924
  $776
 $56
   $832
Residential mortgage-backed                 
Agency   

      14,419
 270
 $(26) 14,663
Non-agency   

      133
 7
   140
Commercial mortgage-backed                 
Agency   

      59
 1
   60
Non-agency   

      430
 4
   434
Asset-backed 50
 


 $(1) 49
  52
 

   52
Other 638
 33
 (23) 648
  1,792
 85
 (14) 1,863
Total securities held to maturity, net of ACL (c) $1,469
 $176
 $(24) $1,621
  $17,661
 $423
 $(40) $18,044

(a) The accrued interest associated with our available for sale and held to maturity portfolios totaled $266 million and $2.7 million at March 31, 2020, respectively. These amounts are included in Other assets on the Consolidated Balance Sheet.
(b) Amortized cost is presented net of applicable ACL of $2 million at March 31, 2020 in accordance with the adoption of the CECL accounting standard. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies for additional detail on the adoption of this ASU.
(c) Credit ratings represent a primary credit quality indicator used to monitor and manage credit risk. As of March 31, 2020, 87% of our securities held to maturity were rated AAA/AA.


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




The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Securities available for sale are carried at fair value with net unrealized gains and losses included in Shareholders’ equity as AOCI, unless credit related. Net unrealized gains and losses are determined by taking the difference between the fair value of a security and its amortized cost, net of any ACL. Securities held to maturity are carried at amortized cost less any ACL. Investment securities at March 31, 2020 included $388 million of net unsettled purchases which represent non-cash investing activity, and accordingly, are not reflected on the Consolidated Statement of Cash Flows. The comparable amount for March 31, 2019 was $623 million.

Table 35 presents the gross unrealized losses and fair value of securities available for sale that do not have an associated ACL as of March 31, 2020. These securities are segregated between investments that had been in a continuous unrealized loss position for less than twelve months and twelve months or more based on the point in time that the fair value declined below the amortized cost basis. As of March 31, 2020, we do not intend to sell and believe we will not be required to sell these securities prior to recovery of the amortized cost basis.

Table 35: Gross Unrealized Loss and Fair Value of Securities Available for Sale Without an Allowance for Credit Losses

  
Unrealized loss position
less than 12 months
 
Unrealized loss position
12 months or more
 Total
In millions 
Unrealized
Loss

 
Fair
Value

 
Unrealized
Loss

 
Fair
Value

 
Unrealized
Loss

 
Fair
Value

March 31, 2020            
Securities Available for Sale            
U.S. Treasury and government agencies         

 

Residential mortgage-backed            
Agency $(3) $409
 $(7) $380
 $(10) $789
Non-agency (43) 537
 (17) 77
 (60) 614
Commercial mortgage-backed            
Agency (1) 187
 (5) 436
 (6) 623
Non-agency (172) 2,719
 (22) 147
 (194) 2,866
Asset-backed (75) 2,815
 (25) 538
 (100) 3,353
Other (3) 320
     (3) 320
Total securities available for sale $(297) $6,987
 $(76) $1,578
 $(373) $8,565


Table 36 presents the gross unrealized losses and fair value of debt securities at December 31, 2019, prior to the adoption of the CECL standard. These securities are segregated between investments that had been in a continuous unrealized loss position for less than twelve months and twelve months or more based on the point in time that the fair value declined below the amortized cost basis.

Table 36: Gross Unrealized Loss and Fair Value of Debt Securities
  Unrealized loss position less than 12 months Unrealized loss position 12 months or more Total 
In millions 
Unrealized
Loss

 
Fair
Value

 
Unrealized
Loss

 
Fair
Value

 
Unrealized
Loss

 
Fair
Value

 
December 31, 2019             
Securities Available for Sale             
U.S. Treasury and government agencies $(14) $2,451
 $(2) $607
 $(16) $3,058
 
Residential mortgage-backed             
Agency (6) 2,832
 (37) 4,659
 (43) 7,491
 
Non-agency 

 

 (3) 102
 (3) 102
 
Commercial mortgage-backed             
Agency (6) 852
 (12) 953
 (18) 1,805
 
Non-agency (4) 1,106
 (5) 230
 (9) 1,336
 
Asset-backed (3) 660
 (5) 561
 (8) 1,221
 
Other 

 

 (1) 403
 (1) 403
 
Total securities available for sale $(33) $7,901
 $(65) $7,515
 $(98) $15,416
 
Securities Held to Maturity             
Residential mortgage-backed - Agency 

 

 $(26) $2,960
 $(26) $2,960
 
Other $(1) $22
 (13) 105
 (14) 127
 
Total securities held to maturity $(1) $22
 $(39) $3,065
 $(40) $3,087
 



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



Information relating to gross realized securities gains and losses from the sales of securities is set forth in the following table.

Table 37: Gains (Losses) on Sales of Securities Available for Sale
Three months ended March 31
In millions
Gross Gains
Gross Losses
Net Gains (Losses)
Tax Expense (Benefit)
 
2020$184
$(2)$182
$38
 
2019$27
$(14)$13
$3
 

The following table presents, by remaining contractual maturity, the amortized cost, fair value and weighted-average yield of debt securities at March 31, 2020.
Table 38: Contractual Maturity of Debt Securities
March 31, 2020
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 $249
 $10,949
 $3,839
 $1,065
 $16,102
 
Residential mortgage-backed           
Agency 3
 117
 2,092
 48,616
 50,828
 
Non-agency       1,563
 1,563
 
Commercial mortgage-backed           
Agency 7
 466
 828
 1,880
 3,181
 
Non-agency   75
 351
 3,823
 4,249
 
Asset-backed 15
 2,721
 1,169
 1,434
 5,339
 
Other 505
 1,958
 1,355
 1,144
 4,962
 
Total securities available for sale at amortized cost $779
 $16,286
 $9,634
 $59,525
 $86,224
 
Fair value $785
 $16,788
 $10,017
 $61,487
 $89,077
 
Weighted-average yield, GAAP basis (a) 3.10% 2.16% 2.58% 3.14% 2.89% 
Securities Held to Maturity           
U.S. Treasury and government agencies   $198
 $303
 $280
 $781
 
Asset-backed   6
 18
 26
 50
 
Other $32
 379
 113
 114
 638
 
Total securities held to maturity at amortized cost $32
 $583
 $434
 $420
 $1,469
 
Fair value $32
 $613
 $516
 $460
 $1,621
 
Weighted-average yield, GAAP basis (a) 3.32% 3.23% 3.87% 2.63% 3.26% 

(a) Weighted-average yields are based on amortized cost with effective yields weighted for the contractual maturity of each security.
At March 31, 2020, there were no securities of a single issuer, other than FNMA and FHLMC, that exceeded 10% of Total shareholders’ equity. The FNMA and FHLMC investments had a total amortized cost of $38.6 billion and $7.1 billion and fair value of $40.0 billion and $7.3 billion, respectively.
The following table presents the fair value of securities that have been either pledged to or accepted from others to collateralize outstanding borrowings.
Table 39: Fair Value of Securities Pledged and Accepted as Collateral
In millionsMarch 31
2020

December 31
2019

Pledged to others$25,722
$14,609
Accepted from others:  
Permitted by contract or custom to sell or repledge (a)$1,439
$2,349
Permitted amount repledged to others$1,439
$360
(a)Balances at December 31, 2019 include $2.0 billion in fair value of securities accepted from others to collateralize short-term investments in resale agreements that were not repledged.

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.


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




NOTE 3 Loans

Loan Portfolio

Our loan portfolio consists of two portfolio segments – Commercial Lending and Consumer Lending. Each of these segments comprises multiple loan classes. Classes are characterized by similarities in risk attributes and the manner in which we monitor and assess credit risk.
Commercial Lending Consumer Lending
 
• Commercial
 
• Home equity
• Commercial real estate
 
• Residential real estate
• Equipment lease financing
 
• Automobile
  
• Credit card
  
• Education
  
• Other consumer
   
See Note 1 Accounting Policies for additional information on our loan related policies.

Credit Quality

We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk within the loan portfolio based on our defined loan classes. In doing so, we use several credit quality indicators, including trends in delinquency rates, nonperforming status, analysis of PD and LGD ratings, updated credit scores, and originated and updated LTV ratios.

The measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of payment are considered delinquent. With the adoption of the CECL standard, accruing loans past due as of March 31, 2020 include purchased credit deteriorated loans, while amounts as of December 31, 2019 excluded purchased impaired loans. See Note 1 Accounting Policies for additional information related to the adoption of this standard, including the discontinuation of purchased impaired loan accounting.

The following table presents the composition and delinquency status of our loan portfolio at March 31, 2020 and December 31, 2019.

Table 40: Analysis of Loan Portfolio
 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)

Total
Loans
(d)(e)

 
Accrued
Interest
Receivable (f)

March 31, 2020 (a)           
Commercial Lending           
Commercial$148,467
$97
$22
$51
$170
  $494
 $149,131
 $268
Commercial real estate28,495
6
1
 7
  42
 28,544
 68
Equipment lease financing6,987
42
2
 44
  30
 7,061
  
Total commercial lending183,949
145
25
51
221
  566
 184,736
 336
Consumer Lending           
Home equity24,311
65
28
 93
  617
$60
25,081
 118
Residential real estate20,934
173
82
300
555
(b) 292
469
22,250
 59
Automobile16,795
177
49
19
245
  154
 17,194
 64
Credit card6,956
59
37
70
166
  10
 7,132
  
Education3,081
52
30
84
166
(b)  3,247
 134
Other consumer4,961
17
10
10
37
 5
 5,003
 14
Total consumer lending77,038
543
236
483
1,262
  1,078
529
79,907
 389
Total$260,987
$688
$261
$534
$1,483
  $1,644
$529
$264,643
 $725
Percentage of total loans98.62%.26%.10%.20%.56% .62%.20%100.00%  
(a)Amounts in table represent loans held for investment and do not include any associated valuation allowance.
(b)Past due loan amounts include purchased credit deteriorated loans totaling $.1 billion and government insured or guaranteed Residential real estate loans and Education loans totaling $.4 billion and $.2 billion, respectively, at March 31, 2020.
(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, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans totaling $1.3 billion at March 31, 2020.

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



(e)Collateral dependent loans totaled $1.1 billion at March 31, 2020. The majority of these loans are within the Home equity and Residential real estate loan classes and are secured by consumer real estate.
(f)The accrued interest associated with our loan portfolio is included in Other assets on the Consolidated Balance Sheet.

 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 (h)

 
Nonperforming
Loans

Fair Value
Option
Nonaccrual
Loans (i)

Purchased
Impaired
Loans

Total
Loans (j)

 
December 31, 2019 (g)           
Commercial Lending           
Commercial$124,695
$102
$30
$85
$217
 $425
  $125,337
 
Commercial real estate28,061
4
1
 5
 44
  28,110
 
Equipment lease financing7,069
49
5
 54
 32
  7,155
 
Total commercial lending159,825
155
36
85
276
 501
  160,602
 
Consumer Lending           
Home equity23,791
58
24
 82
 669
 $543
25,085
 
Residential real estate19,640
140
69
315
524
(h) 315
$166
1,176
21,821
 
Automobile16,376
178
47
18
243
 135
  16,754
 
Credit card7,133
60
37
67
164
 11
  7,308
 
Education3,156
55
34
91
180
(h)    3,336
 
Other consumer4,898
15
11
9
35
 4
  4,937
 
Total consumer lending74,994
506
222
500
1,228
 1,134
166
1,719
79,241
 
Total$234,819
$661
$258
$585
$1,504
 $1,635
$166
$1,719
$239,843
 
Percentage of total loans97.90%.28%.11%.24%.63% .68%.07%.72%100.00% 
(g)Amounts in table represent recorded investment and exclude loans held for sale. Recorded investment does not include any associated valuation allowance.
(h)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 accreted interest income over the expected life of the loans. Past due loan amounts include government insured or guaranteed Residential real estate loans totaling $.4 billion and Education loans totaling $.2 billion at December 31, 2019.
(i)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.
(j)Net of unearned income, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans totaling $1.1 billion at December 31, 2019.

At March 31, 2020, we pledged $16.6 billion of commercial loans to the Federal Reserve Bank and $69.3 billion of residential real estate and other loans to the Federal Home Loan Bank as collateral for the ability to borrow, if necessary. The comparable amounts at December 31, 2019 were $16.9 billion and $68.0 billion, respectively. Amounts pledged reflect the unpaid principal balances.

Nonperforming Assets
Nonperforming assets include nonperforming loans and leases, OREO and foreclosed assets. Nonperforming loans are those loans accounted for at amortized cost whose credit quality has deteriorated to the extent that full collection of contractual principal and interest is not probable. Interest income is not recognized on these loans. Loans accounted for under the fair value option are reported as performing loans. However, when nonaccrual criteria is met, interest income is not recognized on these loans. Additionally, certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest are not reported as nonperforming loans and continue to accrue interest.

With the adoption of the CECL standard, nonperforming loans as of March 31, 2020 include purchased credit deteriorated loans. Amounts as of December 31, 2019 excluded purchased impaired loans as we were accreting interest income over the expected life of the loans. See Note 1 Accounting Policies for additional information related to the adoption of this standard and our nonperforming loan and lease policies.

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




The following table presents our nonperforming assets as of March 31, 2020 and December 31, 2019, respectively.
Table 41: Nonperforming Assets
Dollars in millions March 31
2020

 December 31
2019

 
Nonperforming loans     
Total commercial lending $566
 $501
 
Total consumer lending (a) 1,078
 1,134
 
Total nonperforming loans (b) 1,644
 1,635
 
OREO and foreclosed assets 111
 117
 
Total nonperforming assets $1,755
 $1,752
 
Nonperforming loans to total loans .62% .68% 
Nonperforming assets to total loans, OREO and foreclosed assets .66% .73% 
Nonperforming assets to total assets .39% .43% 
(a)Excludes most unsecured consumer loans and lines of credit, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.
(b)Nonperforming loans for which there is no related ACL totaled $.3 billion at March 31, 2020.

Nonperforming loans also include certain loans whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. In accordance with applicable accounting guidance, these loans are considered TDRs. See Note 1 Accounting Policies and the TDR section of this Note 3 for additional information on TDRs.

Total nonperforming loans in Table 41 include TDRs of $.7 billion and $.9 billion at March 31, 2020 and December 31, 2019, respectively. TDRs that are performing, including consumer credit card TDR loans, totaled $.8 billion at both March 31, 2020 and December 31, 2019 and are excluded from nonperforming loans.
Additional Credit Quality Indicators by Loan Class
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. These ratings are reviewed and updated, generally at least once per year. For small balance homogeneous pools of commercial loans, mortgages and leases, we apply scoring techniques to assist in determining the PD. 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 commercial loans, capturing both the combination of expectations of default and loss severity in event of default, reflects the relative estimated likelihood of loss at the reporting date. In general, loans with lower PD and LGD tend to have less likelihood of loss compared to loans with higher 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 loan portfolio, focusing on those loans which we perceive to be of higher risk, based upon PDs and LGDs, or loans for which credit quality is weakening. If circumstances warrant, it is our practice to review any customer obligation and its level of credit risk more frequently. We attempt to proactively manage our loans by using various procedures that are customized to the risk of a given loan, including ongoing outreach, contact, and assessment of obligor financial conditions, collateral inspection and appraisal.
Commercial Real Estate Loan Class
We manage credit risk associated with our commercial real estate projects and commercial mortgages similar to commercial loans by analyzing PD and LGD. Additionally, risks associated 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.


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



Based upon the dollar amount of the lease and 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 as applicable.
Table 42: Commercial Lending Credit Quality Indicators (a)
 Amortized Cost Basis by Origination Year   
March 31, 2020 - Dollars in millionsThree Months Ended March 31, 2020
2019
2018
2017
2016
Prior
Revolving Loans
Revolving Loans Converted to Term
Total
Loans

Commercial         
Pass Rated$7,250
$18,695
$11,957
$7,943
$5,399
$11,807
$78,664
$61
$141,776
Criticized16
373
580
435
307
530
5,098
16
7,355
Total commercial7,266
19,068
12,537
8,378
5,706
12,337
83,762
77
149,131
% of total commercial4.8%12.8%8.4%5.6%3.8%8.3%56.2%.1%100.0%
Commercial real estate         
Pass Rated898
6,812
4,221
3,766
2,973
8,908
203
 27,781
Criticized6
63
27
49
173
359
86
 763
Total commercial real estate904
6,875
4,248
3,815
3,146
9,267
289
 28,544
% of total commercial real estate3.2%24.0%14.9%13.4%11.0%32.5%1.0% 100.0%
Equipment lease financing         
Pass Rated334
1,438
1,252
1,038
680
2,059
  6,801
Criticized4
74
88
44
27
23
  260
Total equipment lease financing338
1,512
1,340
1,082
707
2,082
  7,061
% of total equipment lease financing4.8%21.4%19.0%15.3%10.0%29.5%  100.0%
Total commercial lending$8,508
$27,455
$18,125
$13,275
$9,559
$23,686
$84,051
$77
$184,736
% of total commercial lending

4.6%14.9%9.8%7.2%5.2%12.8%45.5%
100.0%
December 31, 2019 - Dollars in millions Pass Rated
 Criticized
 Total Loans
 
Commercial $119,761
 $5,576
 $125,337
 
Commercial real estate 27,424
 686
 28,110
 
Equipment lease financing 6,891
 264
 7,155
 
Total commercial lending $154,076
 $6,526
 $160,602
 
(a)Loans in our commercial lending portfolio are classified as Pass Rated or Criticized based on the regulatory definitions, which are driven by the PD and LGD ratings that we assign. The Criticized classification includes loans that were rated special mention, substandard or doubtful as of March 31, 2020 and December 31, 2019.

Home Equity and Residential Real Estate Loan Classes
We use several credit quality indicators, including delinquency information, nonperforming loan information, updated credit scores, originated and updated LTV ratios to monitor and manage credit risk within the home equity and residential real estate loan classes. A summary of credit quality indicators follows:
Delinquency/Delinquency Rates: We monitor trending of delinquency/delinquency rates for home equity and residential real estate loans. See Table 40 for additional information.
Nonperforming Loans: We monitor trending of nonperforming loans for home equity and residential real estate loans. See Table 40 for additional information.
Credit Scores: We use a national third-party provider to update FICO credit scores for home equity 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.
We 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

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




limitations it is important to note that updated LTVs may be based upon management’s assumptions (i.e., if an updated LTV is not provided by the third-party service provider, HPI changes will be incorporated in arriving at management’s estimate of updated LTV).
Updated LTV is estimated using modeled property values. The related estimates and inputs are based upon an approach that uses a combination of third-party automated valuation models, broker price opinions, 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 the 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 refine our methodology.

The following table presents credit quality indicators for the home equity and residential real estate loan classes.
Table 43: Home Equity and Residential Real Estate Loans Credit Quality Indicators
 Amortized Cost Basis by Origination Year   
March 31, 2020 – Dollars in millionsThree months ended March 31, 2020
2019
2018
2017
2016
Prior
Revolving Loans
Revolving Loans Converted to Term
Total Loans
Home Equity         
Current estimated LTV ratios        .
Greater than or equal to 100% $18
$27
$30
$18
$144
$722
$389
$1,348
Greater than or equal to 90% to less than 100% 45
37
20
15
87
684
263
1,151
Less than 90%$785
2,584
761
1,041
875
4,880
8,502
3,154
22,582
Total home equity$785
$2,647
$825
$1,091
$908
$5,111
$9,908
$3,806
$25,081
Updated FICO scores         
Greater than 660$773
$2,521
$761
$1,026
$856
$4,609
$9,339
$2,871
$22,756
Less than or equal to 66012
126
64
64
51
493
555
842
2,207
No FICO score available   1
1
9
14
93
118
Total home equity$785
$2,647
$825
$1,091
$908
$5,111
$9,908
$3,806
$25,081
% of total home equity3.1%10.6%3.3%4.3%3.6%20.4%39.5%15.2%100.0%
Residential Real Estate         
Current estimated LTV ratios         
Greater than or equal to 100% $3
$58
$74
$68
$241
  $444
Greater than or equal to 90% to less than 100%$4
27
61
64
50
155
  361
Less than 90%1,757
6,236
1,867
2,752
2,697
5,556
  20,865
Government insured or guaranteed loans 9
13
17
25
516
  580
Total residential real estate$1,761
$6,275
$1,999
$2,907
$2,840
$6,468
  $22,250
Updated FICO scores         
Greater than 660$1,757
$6,198
$1,945
$2,844
$2,732
$5,166
  $20,642
Less than or equal to 6602
65
41
41
79
693
  921
No FICO score available2
3
 5
4
93
  107
Government insured or guaranteed loans 9
13
17
25
516
  580
Total residential real estate$1,761
$6,275
$1,999
$2,907
$2,840
$6,468
  $22,250
% of total residential real estate7.9%28.1%9.0%13.1%12.8%29.1%  100.0%


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



 Home equityResidential real estate
December 31, 2019 - Dollars in millions
Current estimated LTV ratios  
Greater than or equal to 125%$366
$112
Greater than or equal to 100% to less than 125%877
221
Greater than or equal to 90% to less than 100%1,047
340
Less than 90%22,068
19,305
No LTV ratio available184
83
Government insured or guaranteed loans 584
Purchased impaired loans543
1,176
Total loans$25,085
$21,821
Updated FICO Scores  
Greater than 660$22,245
$19,341
Less than or equal to 6602,019
569
No FICO score available278
151
Government insured or guaranteed loans 584
Purchased impaired loans543
1,176
Total loans$25,085
$21,821


Automobile, Credit Card, Education and Other Consumer Loan Classes
We monitor a variety of credit quality information in the management of these consumer loan classes. For all loan types, we generally use a combination of internal loan parameters as well as an updated FICO score. We use FICO scores as a primary credit quality indicator for automobile and credit card loans, as well as non-government guaranteed or non-insured education loans and other secured and unsecured lines and loans. Internal credit metrics, such as delinquency status, are heavily relied upon as credit quality indicators for government guaranteed or insured education loans and consumer loans to high net worth individuals, as internal credit metrics are more relevant than FICO scores for these types of loans.

Along with the monitoring of delinquency trends and losses for each class, FICO credit score updates are obtained at least quarterly along with 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.


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




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

Table 44: Credit Quality Indicators for Automobile, Credit Card, Education and Other Consumer Loan Classes
 Amortized Cost Basis by Origination Year   
March 31, 2020 – Dollars in millionsThree months ended March 31, 2020
2019
2018
2017
2016
Prior
Revolving Loans
Revolving Loans Converted to Term
Total Loans
Automobile         
FICO score greater than 719$1,586
$4,090
$1,955
$1,164
$725
$275
  $9,795
650 to 719320
2,112
1,225
571
256
105
  4,589
620 to 64914
525
306
122
47
21
  1,035
Less than 6208
673
633
283
119
59
  1,775
Total automobile$1,928
$7,400
$4,119
$2,140
$1,147
$460
  $17,194
% of total automobile11.2%43.0%24.0%12.4%6.7%2.7%  100.0%
Credit card         
FICO score greater than 719      $3,564
$10
$3,574
650 to 719      2,370
27
2,397
620 to 649      442
12
454
Less than 620      547
49
596
No FICO score available or required (a)      108
3
111
Total credit card      $7,031
$101
$7,132
% total credit card      98.6%1.4%100.0%
Education         
FICO score greater than 719$7
$89
$121
$94
$78
$703
  $1,092
650 to 7192
14
19
12
9
124
  180
620 to 649 1
2
1
1
20
  25
Less than 620 1
1
1
1
24
  28
No FICO score available or required (a)3
11
7
6
1
1
  29
Total loans using FICO credit metric12
116
150
114
90
872
  1,354
Other internal credit metrics11
59
   1,823
  1,893
Total education$23
$175
$150
$114
$90
$2,695
  $3,247
% total education.7%5.4%4.6%3.5%2.8%83.0%  100.0%
Other consumer         
FICO score greater than 719$218
$623
$219
$71
$25
$90
$230
$1
$1,477
650 to 719126
349
158
40
13
26
162
1
875
620 to 64917
56
29
6
2
4
26
 140
Less than 6205
45
37
12
4
9
44
1
157
No FICO score available or required (a)1
    2
6
 9
Total loans using FICO credit metric367
1,073
443
129
44
131
468
3
2,658
Other internal credit metrics14
74
49
34
65
88
2,018
3
2,345
Total other consumer$381
$1,147
$492
$163
$109
$219
$2,486
$6
$5,003
% total other consumer7.6%22.9%9.8%3.3%2.2%4.4%49.7%.1%100.0%
    
Dollars in millions AutomobileCredit CardEducationOther Consumer
December 31, 2019     
FICO score greater than 719 $9,232
$3,867
$1,139
$1,421
650 to 719 4,577
2,326
197
843
620 to 649 1,001
419
25
132
Less than 620 1,603
544
27
143
No FICO score available or required (a) 341
152
15
27
Total loans using FICO credit metric 16,754
7,308
1,403
2,566
Consumer loans using other internal credit metrics   1,933
2,371
Total loans $16,754
$7,308
$3,336
$4,937
Weighted-average updated FICO score (b) 726
724
773
727
(a)Loans with no FICO score available or required generally refers to new accounts issued to borrowers with limited credit history, accounts for which we cannot obtain an updated FICO score (e.g., recent profile changes), cards issued with a business name and/or cards secured by collateral. Management proactively assesses the risk and size of this loan category and, when necessary, takes actions to mitigate the credit risk.
(b)Weighted-average updated FICO score excludes accounts with no FICO score available or required.


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



Troubled Debt Restructurings (TDRs)

A TDR is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulty. Loans that have been restructured for COVID-19 related hardships and meet certain criteria under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) are not categorized as TDRs. 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 borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to us. In those situations where principal is forgiven, the amount of such principal forgiveness is immediately charged off.

Potential incremental losses or recoveries on TDRs have been factored into the ACL estimates for each loan class under the methodologies described in Note 1 Accounting Policies. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, the collateral is foreclosed upon, or it is fully charged off.

Table 45 quantifies the number of loans that were classified as TDRs as well as the change in the loans’ amortized cost basis as a result of becoming a TDR during the three months ended March 31, 2020. Amounts for the three months ended March 31, 2019 represent recorded investment. Additionally, the table provides information about the types of TDR concessions. See Note 3 Asset Quality in our 2019 Form 10-K for additional discussion of TDRs.
Table 45: Financial Impact and TDRs by Concession Type
   
Pre-TDR
Amortized Cost Basis (b)

 Post-TDR Amortized Cost Basis (c) 
During the three months ended March 31, 2020
Dollars in millions (a)
Number
of Loans
  
Principal
Forgiveness

 
Rate
Reduction

 Other
 Total
 
Total commercial lending 13
 $62
 $6
   $37
 $43
 
Total consumer lending 3,567
 36
   $22
 10
 32
 
Total TDRs 3,580
 $98
 $6
 $22
 $47
 $75
 

(a) Impact of partial charge-offs at TDR date are included in this table.
(b) Represents the amortized cost basis of the loans as of the quarter end prior to TDR designation.
(c) Represents the amortized cost basis of the TDRs as of the end of the quarter in which the TDR occurs.
   
Pre-TDR
Recorded
Investment (e)

 Post-TDR Recorded Investment (f) 
During the three months ended March 31, 2019
Dollars in millions (d)
Number
of Loans
  
Principal
Forgiveness
 
Rate
Reduction

 Other
 Total
 
Total commercial lending
22
 $105
     $109
 $109
 
Total consumer lending 3,814
 42
   $24
 16
 40
 
Total TDRs 3,836
 $147
 

 $24
 $125
 $149
 
(d) Impact of partial charge-offs at TDR date are included in this table.
(e) Represents the recorded investment of the loans as of the quarter end prior to TDR designation, and excludes immaterial amounts of accrued interest receivable.
(f) Represents the recorded investment of the TDRs as of the end of the quarter in which the TDR occurs, and excludes immaterial amounts of accrued interest receivable.

After a loan is determined to be a TDR, we continue to track its performance under its most recent restructured terms. We consider a TDR to have subsequently defaulted when it becomes 60 days past due after the most recent date the loan was restructured. The amortized cost basis of loans that were both (i) classified as TDRs or were subsequently modified during each 12-month period preceding January 1, 2020 and January 1, 2019, respectively, and (ii) subsequently defaulted during the three months ended March 31, 2020 and March 31, 2019 totaled $29 million and $18 million respectively. The comparable amount reflects recorded investment.

















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




Allowance for Credit Losses

Allowance for Credit Losses - Loans and Leases
We maintain the ACL for loans and leases at levels that we believe to be appropriate to absorb expected credit losses incurred in the portfolios as of the balance sheet date. See Note 1 Accounting Policies for a discussion of the methodologies used to determine this allowance. A rollforward of the ACL for loans and leases follows.
Table 46: Rollforward of Allowance for Credit Losses - Loans and Leases
At or for the three months ended March 31, 2020
Dollars in millions
Commercial Lending
Consumer Lending
Total
ACL - loans and leases   
December 31, 2019 (a)$1,812
$930
$2,742
Adoption of ASU 2016-13 (b)(304)767
463
January 1, 2020$1,508
$1,697
$3,205
Charge-offs(83)(221)(304)
Recoveries24
68
92
Net (charge-offs)(59)(153)(212)
Provision for credit losses (c)531
421
952
Other(1) (1)
March 31, 2020$1,979
$1,965
$3,944
Portfolio segment ACL as a percentage of total ACL for loans and leases50%50%100%
Ratio of ACL for loans and leases to total loans1.07%2.46%1.49%
(a) Amounts as of December 31, 2019 represent the ALLL.
(b) Represents the impact of adopting ASU 2016-13, Financial Instruments - Credit Losses on January 1, 2020 and our transition from an incurred loss methodology for our reserves to an expected credit loss methodology.
(c) The Provision for credit losses on the Consolidated Income Statement includes $952 million related to loans and leases, $9 million related to other financial assets and a recapture of credit losses for unfunded lending related commitments totaling $47 million for the three months ended March 31, 2020. See Table 47 for additional information related to our unfunded lending related commitments.

Allowance for Credit Losses - Unfunded Lending Related Commitments
We maintain the ACL for unfunded lending related commitments at a level we believe is appropriate as of the balance sheet date to absorb expected credit losses on these exposures. See Note 1 Accounting Policies for additional information. A rollforward of this allowance follows.

Table 47: Rollforward of Allowance for Credit Losses - Unfunded Lending Related Commitments
At or for the three months ended March 31, 2020
Dollars in millions
Commercial Lending
Consumer Lending
Total
 
ACL - unfunded lending related commitments    
December 31, 2019 (a)$316
$2
$318
 
Adoption of ASU 2016-13 (b)53
126
179
 
January 1, 2020369
128
497
 
Provision for (recapture of ) credit losses(25)(22)(47) 
March 31, 2020$344
$106
$450
 
Portfolio segment ACL as a percentage of total ACL for unfunded lending related commitments76%24%100% 
(a) Amounts at December 31, 2019 represent the allowance for unfunded loan commitments and letters of credit.
(b) Represents the impact of adopting ASU 2016-13, Financial Instruments - Credit Losses on January 1, 2020 and our transition from an incurred loss methodology for our reserves to an expected credit loss methodology.

See Note 8 Commitments for additional information about the underlying commitments related to this allowance.


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



The following graph presents an analysis of changes impacting our ACL for the three months ended March 31, 2020.

Table 48: Analysis of Changes in the Allowance for Credit Losses (a)
In millions
chart-cb030eef0982e1929ff.jpg(a) Excludes allowances for investment securities and other financial assets.
(b) Portfolio changes represent the impact of increases/decreases in loan balances, age and mix due to new originations/purchases, as well as credit quality and net charge-off activity.
(c) Economics represent our evaluation and determination of an economic forecast applied to our loan portfolio.

The increase in the ACL as of March 31, 2020 was primarily attributable to the significant economic impact of COVID-19 along with loan growth in the commercial lending portfolio, reflecting higher utilization.

Allowance for Loan and Lease Losses
Prior to January 1, 2020, we maintained our ALLL at levels we believed to be appropriate to absorb estimated probable credit losses incurred in the portfolios as of the balance sheet date. We used the two main portfolio segments - Commercial Lending and Consumer Lending, and developed and documented the ALLL under separate methodologies for each of these portfolio segments. See Note 1 Accounting Policies in our 2019 Form 10-K for a description of the accounting policies for ALLL.


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





A rollforward of the ALLL and associated loan data follows:

Table 49: Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data
At or for the three months ended March 31, 2019
Dollars in millions
Commercial Lending
Consumer Lending
Total
Allowance for loan and lease losses   
January 1, 2019$1,663
$966
$2,629
Charge-offs(31)(184)(215)
Recoveries19
60
79
Net (charge-offs)(12)(124)(136)
Provision for credit losses80
109
189
Net decrease in allowance for unfunded loan commitments and letters
    of credit
5
1
6
Other 4
4
March 31, 2019$1,736
$956
$2,692
TDRs individually evaluated for impairment$27
$130
$157
Other loans individually evaluated for impairment60
 60
Loans collectively evaluated for impairment1,649
551
2,200
Purchased impaired loans 275
275
March 31, 2019$1,736
$956
$2,692
Loan portfolio   
TDRs individually evaluated for impairment$456
$1,412
$1,868
Other loans individually evaluated for impairment190
 190
Loans collectively evaluated for impairment157,796
69,732
227,528
Fair value option loans (a) 758
758
Purchased impaired loans 1,949
1,949
March 31, 2019$158,442
$73,851
$232,293
Portfolio segment ALLL as a percentage of total ALLL64%36%100%
Ratio of ALLL to total loans1.10%1.29%1.16%
(a) Loans accounted for under the fair value option were not evaluated for impairment as these loans are accounted for at fair value. Accordingly, there was no allowance recorded on those loans.

NOTE 4 LOAN SALE AND SERVICING ACTIVITIES AND VARIABLE INTEREST ENTITIES

Loan Sale and Servicing Activities

As more fully described in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2019 Form 10-K, we have transferred residential and commercial mortgage loans in securitization or sales transactions in which we have continuing involvement. Our continuing involvement generally consists of servicing, repurchasing previously transferred loans under certain conditions and loss share arrangements, and, in limited circumstances, holding of mortgage-backed securities issued by the securitization special purpose entities (SPEs).

We earn servicing and other ancillary fees for our role as servicer and, depending on the contractual terms of the servicing arrangement, we can be terminated as servicer with or without cause. At the consummation date of each type of loan transfer where we retain the servicing, we recognize a servicing right at fair value. See Note 8 Commitments and Note 11 Fair Value for information on our servicing rights, including the carrying value of servicing assets.


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



The following table provides cash flows associated with our loan sale and servicing activities:
Table 50: Cash Flows Associated with Loan Sale and Servicing Activities
In millionsResidential
Mortgages

 Commercial
Mortgages (a)
  
Cash Flows - Three months ended March 31, 2020     
Sales of loans (b)$1,334
  $493
 
Repurchases of previously transferred loans (c)$95
  $15
 
Servicing fees (d)$85
  $33
 
Servicing advances recovered/(funded), net$12
  $12
 
Cash flows on mortgage-backed securities held (e)$1,361
  $37
 
Cash Flows - Three months ended March 31, 2019     
Sales of loans (b)$715
  $644
 
Repurchases of previously transferred loans (c)$93
    
Servicing fees (d)$87
  $30
 
Servicing advances recovered/(funded), net$18
  $(23) 
Cash flows on mortgage-backed securities held (e)$507
  $14
 
(a)Represents cash flow information associated with both commercial mortgage loan transfers and servicing activities.
(b)Gains/losses recognized on sales of loans were insignificant for the periods presented.
(c)Includes both residential and commercial mortgage government insured or guaranteed loans eligible for repurchase through the exercise of our removal of account provision option, as well as residential mortgage loans repurchased due to alleged breaches of origination covenants or representations and warranties made to purchasers.
(d)Includes contractually specified servicing fees, late charges and ancillary fees.
(e)Represents cash flows on securities where we transferred to and/or service loans for a securitization SPE and we hold securities issued by that SPE. The carrying values of such securities held were $17.1 billion, $17.8 billion, and $14.6 billion in residential mortgage-backed securities and $.8 billion, $.6 billion, and $.6 billion in commercial mortgage-backed securities at March 31, 2020, December 31, 2019, and March 31, 2019, respectively.
Table 51 presents information about the principal balances of transferred loans that we service and are not recorded on our Consolidated Balance Sheet. We would only experience a loss on these transferred loans if we were required to repurchase a loan, where the repurchase price exceeded the loan's fair value, due to a breach in representations and warranties or a loss sharing arrangement associated with our continuing involvement with these loans. The estimate of losses related to breaches in representations and warranties was insignificant at March 31, 2020.
Table 51: Principal Balance, Delinquent Loans and Net Charge-offs Related to Serviced Loans For Others
In millionsResidential Mortgages
  Commercial Mortgages (a)
 
March 31, 2020     
Total principal balance$48,468
  $41,514
 
Delinquent loans (b)$446
  $10
 
December 31, 2019     
Total principal balance$49,323
  $42,414
 
Delinquent loans (b)$492
  $64
 
Three months ended March 31, 2020     
Net charge-offs (c)$8
  $99
 
Three months ended March 31, 2019     
Net charge-offs (c)$11
  $119
 
(a)Represents information at the securitization level in which we have sold loans and we are the servicer for the securitization.
(b)Serviced delinquent loans are 90 days or more past due or are in process of foreclosure.
(c)Net charge-offs for Residential mortgages represent credit losses less recoveries distributed and as reported to investors during the period. Net charge-offs for Commercial mortgages represent credit losses less recoveries distributed and as reported by the trustee for commercial mortgage-backed securitizations. Realized losses for Agency securitizations are not reflected as we do not manage the underlying real estate upon foreclosure and, as such, do not have access to loss information.

Variable Interest Entities (VIEs)

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2019 Form 10-K, we are involved with various entities in the normal course of business that are deemed to be VIEs.

The following table provides a summary of non-consolidated VIEs with which we have significant continuing involvement but are not the primary beneficiary. We have excluded certain transactions with non-consolidated VIEs from the balances presented in Table 52 where we have determined that our continuing involvement is not significant. We do not consider our continuing involvement to be significant when it relates to a VIE where we only invest in securities issued by the VIE and were not involved in the design of the VIE or where no transfers have occurred between us and the VIE. In addition, where we only have lending arrangements in the normal

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




course of business with entities that could be VIEs, we have excluded these transactions with non-consolidated entities from the balances presented in Table 52. These loans are included as part of the asset quality disclosures that we make in Note 3 Loans.
Table 52: Non-Consolidated VIEs
In millionsPNC Risk of Loss (a)
  Carrying Value of Assets
Owned by PNC

   Carrying Value of Liabilities
Owned by PNC

 
March 31, 2020         
Mortgage-backed securitizations (b)$19,067
  $19,067
(c)     
Tax credit investments and other3,023
  2,948
(d)   $992
(e) 
Total$22,090
  $22,015
   $992
 
December 31, 2019         
Mortgage-backed securitizations (b)$19,287
  $19,287
(c)     
Tax credit investments and other3,131
  3,028
(d)   $1,101
(e) 
Total$22,418
  $22,315
   $1,101
 
(a)Represents loans, investments and other assets related to non-consolidated VIEs, net of collateral (if applicable). The risk of loss excludes any potential tax recapture associated with tax credits investments.
(b)Amounts reflect involvement with securitization SPEs where we transferred to and/or service loans for an SPE and we hold securities issued by that SPE. Values disclosed in the PNC Risk of Loss column represent our maximum exposure to loss for those securities’ holdings.
(c)Included in Investment securities, Mortgage servicing rights and Other assets on our Consolidated Balance Sheet.
(d)Included in Investment securities, Loans, Equity investments and Other assets on our Consolidated Balance Sheet.
(e)Included in Deposits and Other liabilities on our Consolidated Balance Sheet.

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. Within Income taxes, during the three months ended March 31, 2020, we recognized $49 million of amortization, $50 million of tax credits and $12 million of other tax benefits associated with qualified investments in low income housing tax credits.

NOTE 5 GOODWILL AND MORTGAGE SERVICING RIGHTS

Goodwill

See Note 1 Accounting Policies in this Report and Note 7 Goodwill and Mortgage Servicing Rights in our 2019 Form 10-K for more information regarding our goodwill.

Mortgage Servicing Rights
We recognize the right to service mortgage loans for others as an intangible asset when the servicing income we receive is more than adequate compensation. MSRs totaled $1.1 billion and $1.6 billion at March 31, 2020 and December 31, 2019, respectively, and consisted of loan servicing contracts for commercial and residential mortgages measured at fair value.

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

See the Sensitivity Analysis section of this Note 5, as well as Note 6 Fair Value in our 2019 Form 10-K for more detail on our fair value measurement of MSRs. Refer to Note 7 Goodwill and Mortgage Servicing Rights in our 2019 Form 10-K for more information on our accounting and measurement of MSRs.


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



Changes in the commercial and residential MSRs follow:

Table 53: Mortgage Servicing Rights
 Commercial MSRs Residential MSRs 
In millions2020
2019
 2020
2019
 
January 1$649
$726
 $995
$1,257
 
Additions:      
From loans sold with servicing retained11
7
 10
7
 
Purchases19
19
 18
6
 
Changes in fair value due to:      
Time and payoffs (a)(35)(38) (39)(33) 
Other (b)(167)(33) (379)(106) 
March 31$477
$681
 $605
$1,131
 
Related unpaid principal balance at March 31$225,769
$186,946
 $118,104
$123,079
 
Servicing advances at March 31$145
$243
 $99
$138
 
(a)Represents decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period.
(b)Represents MSR value changes resulting primarily from market-driven changes in interest rates.

Sensitivity Analysis
The fair value of commercial and residential MSRs and significant inputs to the valuation models as of March 31, 2020 are shown in Tables 54 and 55. The expected and actual rates of mortgage loan prepayments are significant factors driving the fair value. Management uses both internal proprietary models and a third-party model to estimate future commercial mortgage loan prepayments and a third-party model to estimate future residential mortgage loan prepayments. These models have been refined based on current market conditions and management judgment. Future interest rates are another important factor in the valuation of MSRs. Management utilizes market implied forward interest rates to estimate the future direction of mortgage and discount rates. The forward rates utilized are derived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. Changes in the shape and slope of the forward curve in future periods may result in volatility in the fair value estimate.

A sensitivity analysis of the hypothetical effect on the fair value of MSRs to adverse changes in key assumptions is presented in Tables 54 and 55. These sensitivities do not include the impact of the related hedging activities. Changes in fair value generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the interest rate spread), which could either magnify or counteract the sensitivities.

The following tables set forth the fair value of commercial and residential MSRs and the sensitivity analysis of the hypothetical effect on the fair value of MSRs to immediate adverse changes of 10% and 20% in those assumptions.

Table 54: Commercial Mortgage Servicing Rights – Key Valuation Assumptions
Dollars in millionsMarch 31
2020

 December 31
2019

 
Fair value$477
 $649
 
Weighted-average life (years)4.1
 4.1
 
Weighted-average constant prepayment rate4.51% 4.56% 
Decline in fair value from 10% adverse change$8
 $9
 
Decline in fair value from 20% adverse change$16
 $17
 
Effective discount rate7.57% 7.91% 
Decline in fair value from 10% adverse change$12
 $17
 
Decline in fair value from 20% adverse change$24
 $34
 


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




Table 55: Residential Mortgage Servicing Rights – Key Valuation Assumptions
Dollars in millionsMarch 31
2020

 December 31
2019

 
Fair value$605
 $995
 
Weighted-average life (years)2.9
 5.2
 
Weighted-average constant prepayment rate27.14% 13.51% 
Decline in fair value from 10% adverse change$43
 $46
 
Decline in fair value from 20% adverse change$81
 $89
 
Weighted-average option adjusted spread770
bps769
bps
Decline in fair value from 10% adverse change$13
 $27
 
Decline in fair value from 20% adverse change$26
 $52