PNC FINANCIAL SERVICES GROUP, INC. 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 Supervision and Regulation section in Item 1 Business, the Capital Highlights portion of this Executive Summary and the Liquidity and Capital Management portion of the Risk Management section in this Item 7. Key Factors Affecting Financial Performance We face a variety of risks that may impact various aspects of our risk profile from time to time. The extent of such impacts may vary depending on factors such as the current business and economic conditions, political and regulatory environment and operational challenges. Many of these risks and our risk management strategies are described in more detail elsewhere in this Report. Our success will depend upon, among other things, the following factors that we manage or control: •Effectively managing capital and liquidity including: •Continuing to maintain and grow our deposit base as a low-cost stable funding source, •Prudent liquidity and capital management to meet evolving regulatory capital, capital planning, stress testing and liquidity standards, and •Actions we take within the capital and other financial markets. •Execution of our strategic priorities, •Management of credit risk in our portfolio, •Our ability to manage and implement strategic business objectives within the changing regulatory environment, •The impact of legal and regulatory-related contingencies, •The appropriateness of reserves needed for critical accounting estimates and related contingencies, and •The closing of the pending BBVA acquisition and integration of its business into PNC after closing. Our financial performance is also substantially affected by a number of external factors outside of our control, including the following: •Global and domestic economic conditions, including the length and extent of the economic impacts of the pandemic, •The actions by theFederal Reserve ,U.S. Treasury and other government agencies, including those that impact money supply and market interest rates, •The level of, and direction, timing and magnitude of movement in, interest rates and the shape of the interest rate yield curve, •The functioning and other performance of, and availability of liquidity in,U.S. and global financial markets, including capital markets, •The impact of tariffs and other trade policies of theU.S. and its global trading partners,The PNC Financial Services Group, Inc. - 2020 Form 10-K 41 -------------------------------------------------------------------------------- •Changes in the competitive and regulatory landscape, •The impact of the results of the recentU.S. elections on the regulatory landscape, capital markets, and the response to and management of the pandemic, •The impact of market credit spreads on asset valuations, •The ability of customers, counterparties and issuers to perform in accordance with contractual terms, and the resulting impact on our asset quality, •Loan demand, utilization of credit commitments and standby letters of credit, and •The impact on customers and changes in customer behavior due to changing business and economic conditions or regulatory or legislative initiatives. For additional information on the risks we face, see the Cautionary Statement Regarding Forward-Looking Information section in this Item 7 and Item 1A Risk Factors in this Report. Second Quarter Sale ofEquity Investment in BlackRock, Inc. In the second quarter of 2020, PNC divested its entire 22.4% equity investment in BlackRock. Net proceeds from the sale were$14.2 billion . The after-tax gain on the sale of$4.3 billion , and donation expense and BlackRock's historical results for all periods presented, are reported as discontinued operations. For additional details on the divestiture of our equity investment in BlackRock, see Note 2 Acquisition and Divestiture Activity in the Notes to Consolidated Financial Statements in Item 8 of this Report. Pending Acquisition ofBBVA USA Bancshares, Inc. OnNovember 16, 2020 PNC announced a definitive agreement to acquire BBVA, including itsU.S. banking subsidiaryBBVA USA , from the Spanish financial groupBBVA, S.A for a fixed purchase price of$11.6 billion in cash.BBVA USA operates over 600 branches inTexas ,Alabama ,Arizona ,California ,Florida ,Colorado andNew Mexico . The transaction is expected to close in mid-2021 and add approximately$102 billion in total assets,$86 billion of deposits and$66 billion of loans, creating the fifth largest bank by assets and a PNC presence in 29 of the 30 largest markets in theU.S. See Note 2 Acquisition and Divestiture Activity in the Notes to Consolidated Financial Statements in Item 8 of this Report for details on the pending acquisition. Income Statement Highlights Net income from continuing operations for 2020 was$3.0 billion , or$6.36 per diluted common share, a decrease of 35% compared to net income from continuing operations of$4.6 billion , or$9.57 per diluted common share, for 2019. •Total revenue increased$62 million to$16.9 billion . •Net interest income decreased$19 million to$9.9 billion . •Net interest margin decreased to 2.53% for 2020 compared to 2.89% for 2019. •Noninterest income increased$81 million , or 1%, to$7.0 billion . •Provision for credit losses of$3.2 billion in 2020, calculated under the CECL accounting standard adoptedJanuary 1, 2020 , increased$2.4 billion compared to$0.8 billion for 2019, reflecting changes due to the adoption of CECL, together with the significantly adverse economic impacts of the pandemic and its resulting effects on loan portfolio credit quality and loan growth. •Noninterest expense decreased$277 million , or 3%, to$10.3 billion . •We generated positive operating leverage in 2020 of 3%.
For additional detail, see the Consolidated Income Statement Review section of this Item 7.
Balance Sheet Highlights Our balance sheet was strong and well positioned atDecember 31, 2020 and 2019. In comparison toDecember 31, 2019 : •Total assets increased$56.4 billion , or 14%, to$466.7 billion . •Total loans increased$2.1 billion , or 1%, to$241.9 billion . •Total commercial loans grew$6.6 billion , or 4%, to$167.2 billion . •Total consumer loans decreased$4.5 billion , or 6%, to$74.7 billion . •Investment securities increased$2.0 billion , or 2%, to$88.8 billion . •Interest earning deposits with banks, primarily with theFederal Reserve Bank , increased$61.8 billion to$85.2 billion due to higher liquidity from deposit growth and proceeds from the sale of our equity investment in BlackRock. •Total deposits increased$76.8 billion , or 27%, to$365.3 billion , due to growth in commercial deposits reflecting pandemic-related accumulation of liquidity by customers and higher consumer deposits driven by government stimulus payments and lower consumer spending. •Borrowed funds of$37.2 billion decreased$23.1 billion , or 38%, reflecting use of liquidity from deposit growth and proceeds from the sale of our equity investment in BlackRock.
42
For additional detail, see the Consolidated Balance Sheet Review section of this Item 7.
Credit Quality Highlights Credit quality metrics in 2020 reflected a challenging economic environment. •AtDecember 31, 2020 compared toDecember 31, 2019 : •Nonperforming assets of$2.3 billion increased$585 million , or 33%, primarily due to the significantly adverse economic impacts of the pandemic. •Overall loan delinquencies of$1.4 billion decreased$141 million , or 9%, reflecting CARES Act and other forbearance and extension treatments. •Net charge-offs of$832 million , or 0.33% of average loans, in 2020 increased 30% compared to net charge-offs of$642 million , or 0.27% of average loans, for 2019. Commercial loan net charge-offs increased$175 million , primarily in industries adversely impacted by the pandemic, and consumer loan net charge-offs increased$15 million compared to 2019. •The ACL related to loans increased to$5.9 billion , or 2.46% of total loans, atDecember 31, 2020 , calculated under the CECL accounting standard adoptedJanuary 1, 2020 , compared to$3.1 billion , or 1.28% of total loans, atDecember 31, 2019 . The increase was due to the transition impact from the adoption of the CECL standard along with the significantly adverse economic impacts of the pandemic and its resulting effects on loan portfolio credit quality and loan growth.
For additional detail, see the Credit Risk Management portion of the Risk Management section of this Item 7.
Capital Highlights We maintained a strong capital position during 2020. •The Basel III CET1 capital ratio was 12.2% atDecember 31, 2020 compared with 9.5% atDecember 31, 2019 . •TheDecember 31, 2020 ratio reflects higher capital due in part to the gain from the sale of our equity investment in BlackRock and changes under the Tailoring Rules, effectiveJanuary 1, 2020 for PNC, partially offset by the impact of the CECL accounting standard. •Additionally, capital benefited from our election of a five-year transition period for CECL's estimated impact on CET1 capital. CECL's estimated impact on CET1 capital is defined as 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 capital throughDecember 31, 2021 , then phased-out over the following three years. •Common shareholder's equity increased 11% to$50.5 billion atDecember 31, 2020 , compared to$45.3 billion atDecember 31, 2019 . •OnJanuary 5, 2021 , the PNC board of directors declared a quarterly cash dividend on common stock of$1.15 per share payable onFebruary 5, 2021 . •PNC announced onMarch 16, 2020 a temporary suspension of our common stock repurchase program in conjunction with theFederal Reserve's effort to support theU.S. economy during the pandemic, and continued the suspension through the fourth quarter of 2020, consistent with the extension of theFederal Reserve's special capital distribution restrictions. We repurchased$99 million of common shares in the third quarter to offset the effects of employee benefit plan-related issuances in 2020 as permitted by guidance from theFederal Reserve . In 2021, our plan is to refrain from share repurchases, excluding employee benefit-related purchases, during the period leading up to our pending BBVA transaction close date. PNC's ability to take certain capital actions, including returning capital to shareholders, is subject to PNC meeting or exceeding a stress capital buffer established by theFederal Reserve Board in connection with theFederal Reserve Board's CCAR process. TheFederal Reserve also has imposed additional limitations on capital distributions through the first quarter of 2021 by CCAR-participating bank holding companies and may extend these limitations, potentially in modified form. See additional discussion of the CCAR process in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of this Report. See the Liquidity and Capital Management portion of the Risk Management section of this Item 7 for more detail on our 2020 capital and liquidity actions as well as our capital ratios. Business Outlook Statements regarding our business outlook are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. 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: •TheU.S. economy is in an economic recovery, following a very severe but very short economic contraction in the first half of 2020 due to the COVID-19 pandemic and public health measures to contain it.The PNC Financial Services Group, Inc. - 2020 Form 10-K 43 -------------------------------------------------------------------------------- •Despite the improvement in the economy since the spring of 2020, economic activity remains far below its prepandemic level and unemployment remains elevated. •Growth will be much weaker in early 2021 because of record COVID-19 cases and continued government restrictions of economic activity. Growth should then pick up in the spring of 2021 as vaccines are more widely available and the federal government provides aid to households and small and medium-sized businesses. PNC does not expect real GDP to return to its pre-pandemic level until late 2021, and does not expect employment to return to its pre-pandemic level until at least 2023. •PNC expects theFOMC to keep the fed funds rate in its current range of 0.00% to 0.25% through at least mid-2024. See the Cautionary Statement Regarding Forward-Looking Information section in this Item 7 and Item 1A Risk Factors in this Report for other factors that could cause future events to differ, perhaps materially, from those anticipated in these forward-looking statements.
For information on financial results for the fourth quarter of 2020, see the Selected Quarterly Financial Data section in the Statistical Information (Unaudited) section of Item 8 of this Report.
For the PNC standalone full year 2021, excluding one-time costs related to the BBVA transaction, compared to full year 2020 where appropriate, we expect: •Average loan growth to be down in the low-single digits range, and spot loan growth to be up in the low single-digits range, on a percentage basis, •Revenue growth to be stable, which includes net interest income down modestly, •Noninterest expense to remain stable, and •The effective tax rate to be approximately 17%.
Assuming a mid-2021 close date and excluding one-time integration costs, we
expect the pending BBVA acquisition to be approximately
For the first quarter of 2021, compared to the fourth quarter of 2020 where appropriate, we expect: •Average loans to be stable to down modestly, with PPP loans to be up approximately$2 billion , •Net interest income to decline approximately 1%, which includes the impact of two fewer days in the quarter, •Excluding the impact of PPP, net interest income to decline approximately 3%. •Noninterest income to decline mid-single digits, on a percentage basis, with other noninterest income to be between$275 million and$325 million , •Noninterest expense to be down in the mid-single digit range, on a percentage basis, and •Net loan charge-offs to be between$200 million and$250 million . CONSOLIDATED INCOME STATEMENT REVIEW Our Consolidated Income Statement is presented in Item 8 of this Report. For the comparison of 2019 over 2018, see the Consolidated Income Statement Review section in our 2019 Form 10-K. Net income from continuing operations for 2020 was$3.0 billion , or$6.36 per diluted common share, a decrease of$1.6 billion compared with net income from continuing operations of$4.6 billion , or$9.57 per diluted common share, for 2019. The decrease was primarily driven by a$2.4 billion increase in the provision for credit losses reflecting changes due to the adoption of CECL, together with the significantly adverse economic impacts of the pandemic and its resulting effects on loan portfolio credit quality and loan growth, partially offset by lower noninterest expense. 44The PNC Financial Services Group, Inc. - 2020 Form 10-K -------------------------------------------------------------------------------- Net Interest Income Table 1: Summarized Average Balances and Net Interest Income (a) 2020 2019 Average Interest Average Interest Year ended December 31 Average Yields/ Income/ Average Yields/ Income/ Dollars in millions Balances Rates Expense Balances Rates Expense Assets Interest-earning assets Investment securities$ 87,279 2.36 %$ 2,064 $ 83,666 2.93 %$ 2,450 Loans 252,633 3.55 % 8,979 235,016 4.51 % 10,604 Interest-earning deposits with banks 47,333 0.21 % 100 16,878 2.09 % 353 Other 9,553 2.50 % 239 12,425 3.69 % 458 Total interest-earning assets/interest income$ 396,798 2.87 % 11,382$ 347,985 3.98 % 13,865
Liabilities
Interest-bearing liabilities Interest-bearing deposits$ 238,771 0.27 % 643$ 204,588 0.97 % 1,986 Borrowed funds 47,938 1.50 % 718 61,528 2.94 % 1,811 Total interest-bearing liabilities/interest expense$ 286,709 0.47 % 1,361$ 266,116 1.43 % 3,797 Net interest margin/income (Non-GAAP) 2.53 % 10,021 2.89 % 10,068 Taxable-equivalent adjustments (75) (103) Net interest income (GAAP)$ 9,946 $ 9,965 (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 8 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 and Analysis Of Year-To-Year Changes In Net Interest Income in Item 8 of this Report. Net interest income decreased$19 million in 2020 compared with 2019. The decrease was driven by lower yields on interest-earning assets, partially offset by lower rates on deposits, higher interest earning asset balances, and lower borrowing rates and balances. Net interest margin decreased 36 basis points reflecting the impact of the 1.5% reduction in the federal funds rate by theFederal Reserve inMarch 2020 and related changes in other short-term rates. Average investment securities increased$3.6 billion , or 4%, primarily due to an increase in residential mortgage-backed securities. Average investment securities represented 22% of average interest-earning assets in 2020, compared to 24% in 2019. Average loans grew$17.6 billion , or 8%, driven by commercial and consumer loan growth. Average commercial loans increased by$15.5 billion , or 10%, reflecting new production, including PPP lending under the CARES Act, and higher multifamily agency warehouse lending, partially offset by lower average utilization of loan commitments. Average consumer loans increased$2.1 billion , or 3%, to$77.8 billion as growth in residential mortgage, auto, unsecured installment and credit card loans was partially offset by declines in education loans due to runoff in the guaranteed government loan portfolio and home equity loan paydowns and payoffs that exceeded new origination volumes.
Average loans represented 64% of average interest-earning assets in 2020 compared to 68% in 2019.
Average interest-earning deposits grew$30.5 billion as average balances held with theFederal Reserve Bank increased due to higher liquidity from deposit growth and proceeds from the sale of our equity investment in BlackRock.
Average interest-bearing deposits grew
Further details regarding average loans and deposits are included in the Business Segments Review section of this Item 7.
Average borrowed funds decreased
The PNC Financial Services Group, Inc. - 2020 Form 10-K 45 --------------------------------------------------------------------------------
Noninterest Income Table 2: Noninterest Income Year ended December 31 Change Dollars in millions 2020 2019 $ % Noninterest income Asset management$ 836 $ 862 $ (26) (3) % Consumer services 1,484 1,555 (71) (5) % Corporate services 2,167 1,914 253 13 % Residential mortgage 604 368 236 64 % Service charges on deposits 500 702 (202) (29) % Other 1,364 1,473 (109) (7) % Total noninterest income$ 6,955 $ 6,874 $ 81 1 %
Noninterest income as a percentage of total revenue was 41% for both 2020 and 2019.
Asset management revenue declined due to the impact of PNC's divestiture activity in 2019 of the retirement recordkeeping business and PNC's proprietary mutual funds, partially offset by the impact of higher average equity markets. PNC's discretionary client assets under management increased to$170 billion atDecember 31, 2020 compared with$154 billion atDecember 31, 2019 , primarily attributable to higher equity markets.
Consumer services revenue declined as a result of lower transaction volumes and activities, reflecting lower consumer spending.
Broad-based growth in corporate services revenue was driven by higher capital markets-related revenue, primarily from increased equity capital markets advisory fees and asset-backed financing fees, higher revenue from commercial mortgage banking activities and higher treasury management product revenue. Residential mortgage revenue increased due to higher loan sales revenue driven by increased loan volume and favorable gain on sale margins and revenue from RMSR valuation, net of economic hedge, partially offset by lower servicing fees due to increased payoff volumes. Service charges on deposits decreased due to lower transaction volumes, fees waived for customers experiencing pandemic-related hardships and the elimination of certain checking product fees. Other noninterest income decreased due to lower revenue from private equity investments reflecting the significantly adverse economic impacts of the pandemic, lower gains on asset sales including the 2019 divestitures of PNC's retirement recordkeeping business and proprietary mutual funds and higher negative Visa Class B derivative fair value adjustments, primarily related to the extension of anticipated litigation resolution timing, partially offset by higher net securities gains and capital markets-related revenue. Other noninterest income typically fluctuates from period to period depending on the nature and magnitude of transactions completed. Further details regarding our customer-related trading activities are included in the Market Risk Management - Customer-Related Trading Risk portion of the Risk Management section of this Item 7. Further details regarding private and other equity investments are included in the Market Risk Management - Equity and Other Investment Risk section. Noninterest Expense Table 3: Noninterest Expense Year ended December 31 Change Dollars in millions 2020 2019 $ % Noninterest expense Personnel$ 5,673 $ 5,647 $ 26 - Occupancy 826 834 (8) (1) % Equipment 1,176 1,210 (34) (3) % Marketing 236 301 (65) (22) % Other 2,386 2,582 (196) (8) % Total noninterest expense$ 10,297 $ 10,574 $ (277) (3) %
46
The decrease in noninterest expense reflected lower business activity related to the significantly adverse economic impacts of the pandemic, including lower costs associated with business travel, marketing expense and lower equipment expense primarily due to technology-related write-offs in 2019, partially offset by higher personnel expense reflecting continued investment in our employees. We achieved our 2020 continuous improvement program savings goal of$300 million . In 2021, our goal will once again be$300 million in cost savings, without regard to cost saves related to BBVA, which we expect to contribute to the funding of our business and technology investments.
Effective Income Tax Rate The effective income tax rate from continuing operations was 12.4% for 2020 compared with 16.4% for 2019. The decrease was primarily due to tax credit benefits and the favorable resolution of certain tax matters in the third quarter of 2020.
The effective tax rate is generally lower than the statutory rate primarily due to tax credits we receive from our investments in low income housing and new markets investments, as well as earnings on other tax exempt investments. Additional information regarding our effective tax rate is included in the Reconciliation of Statutory and Effective Tax Rates table in Note 19 Income Taxes in Item 8 of this Report. Provision for Credit Losses Table 4: Provision for Credit Losses Year endedDecember 31 Dollars in millions 2020 2019 Provision for credit losses Loans and leases$ 2,985 $ 773
Unfunded lending related commitments (a) 87 Investment securities
80
Other financial assets 23
Total provision for credit losses
(a)For the year ended
The provision for credit losses was$3.2 billion in 2020 compared to$0.8 billion in 2019. The provision in 2020 was calculated under the CECL accounting standard adoptedJanuary 1, 2020 . The increase reflected changes due to the adoption of CECL, together with the significantly adverse economic impacts of the pandemic and its resulting effects on loan portfolio credit quality and loan growth.
Net interest income less the provision for credit losses was
The Credit Risk Management portion of the Risk Management section of this Item 7 includes additional information regarding factors impacting the provision for credit losses.
Net Income from Discontinued Operations The following table summarizes net income from our investment in BlackRock, which is now reported as discontinued operations as a result of the second quarter 2020 divestiture.
Table 5: Discontinued Operations
Year endedDecember 31 Dollars in millions 2020 2019
Net income from discontinued operations
For additional details on the divestiture of our equity investment in BlackRock,
see Note 2 Acquisition and Divestiture Activity in the Notes to Consolidated
Financial Statements in Item 8 of this Report.
The PNC Financial Services Group, Inc. - 2020 Form 10-K 47
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CONSOLIDATED BALANCE SHEET REVIEW
The summarized balance sheet data in Table 6 is based upon our Consolidated
Balance Sheet in Item 8 of this Report. For additional detail of the comparison
of 2019 over 2018, see the Consolidated Balance Sheet Review section in our 2019
Form 10-K.
Table 6: Summarized Balance Sheet Data
December 31 December 31 Change
Dollars in millions 2020 2019 $ %
Assets
Interest-earning deposits with banks $ 85,173 $ 23,413 $ 61,760 264 %
Loans held for sale 1,597 1,083 514 47 %
Asset held for sale (a) 8,558 (8,558) (100) %
Investment securities 88,799 86,824 1,975 2 %
Loans 241,928 239,843 2,085 1 %
Allowance for loan and lease losses (b) (5,361) (2,742) (2,619) (96) %
Mortgage servicing rights 1,242 1,644 (402) (24) %
Goodwill 9,233 9,233
Other, net 44,068 42,439 1,629 4 %
Total assets $ 466,679 $ 410,295 $ 56,384 14 %
Liabilities
Deposits $ 365,345 $ 288,540 $ 76,805 27 %
Borrowed funds 37,195 60,263 (23,068) (38) %
Allowance for unfunded lending related commitments (b) 584 318 266 84 %
Other 9,514 11,831 (2,317) (20) %
Total liabilities 412,638 360,952 51,686 14 %
Equity
Total shareholders' equity 54,010 49,314 4,696 10 %
Noncontrolling interests 31 29 2 7 %
Total equity 54,041 49,343 4,698 10 %
Total liabilities and equity $ 466,679 (a)Represents our held for sale investment in BlackRock. In the second quarter of 2020, PNC divested its entire investment in BlackRock. The prior period BlackRock investment balance has been reclassified to the Asset held for sale line in accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations. Refer to Note 1 Accounting Policies and Note 2 Acquisition and Divestiture Activity in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional details. (b) Amount as ofDecember 31, 2020 reflects 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 ALLL under the incurred loss methodology. Refer to Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional detail on the adoption of this standard. Our balance sheet was strong and well-positioned atDecember 31, 2020 andDecember 31, 2019 . •Total assets increased as a result of higher interest-earning deposits with banks, primarily theFederal Reserve Bank , loan growth and higher investment securities. •Total liabilities increased due to deposit growth reflecting customer liquidity accumulation, partially offset by lower borrowed funds, primarily FHLB borrowings, federal funds purchased and bank notes and senior debt. •Total equity increased due to higher retained earnings driven by the gain on sale of our equity investment in BlackRock and higher AOCI, partially offset by dividends on common and preferred stock, share repurchases, the day-one effect of adopting the CECL accounting standard and the redemption of our Series Q preferred stock. The ACL related to loans totaled$5.9 billion atDecember 31, 2020 , an increase of$2.9 billion sinceDecember 31, 2019 . The increase was attributable to a$0.6 billion day-one CECL transition adjustment and a$3.1 billion provision for credit losses, partially offset by net charge-offs of$0.8 billion . The provision reflects changes due to the adoption of the CECL standard, together with the significantly adverse economic impacts of the pandemic and its resulting effects on loan portfolio credit quality and loan growth. See the following for additional information regarding our ACL related to loans: •Allowance for Credit Losses in the Credit Risk Management section of this Item 7, and •Note 1 Accounting Policies and Note 4 Loans and Related Allowance for Credit Losses in the Notes To Consolidated Financial Statements included in Item 8 of this Report. 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 of this Item 7 and in Note 20 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report. 48The PNC Financial Services Group, Inc. - 2020 Form 10-K --------------------------------------------------------------------------------
Loans
Table 7: Loans
December 31 December 31 Change
Dollars in millions 2020 2019 $ %
Commercial
Commercial and industrial $ 132,073 $ 125,337 $ 6,736 5 %
Commercial real estate 28,716 28,110 606 2 %
Equipment lease financing 6,414 7,155 (741) (10) %
Total commercial 167,203 160,602 6,601 4 %
Consumer
Home equity 24,088 25,085 (997) (4) %
Residential real estate 22,560 21,821 739 3 %
Automobile 14,218 16,754 (2,536) (15) %
Credit card 6,215 7,308 (1,093) (15) %
Education 2,946 3,336 (390) (12) %
Other consumer 4,698 4,937 (239) (5) %
Total consumer 74,725 79,241 (4,516) (6) %
Total loans $ 241,928 $ 239,843 $ 2,085 1 %
Commercial loans increased primarily due to PPP loan originations and higher
multifamily agency warehouse lending, partially offset by lower utilization of
loan commitments. At December 31, 2020 PNC had $12.0 billion of PPP loans
outstanding.
For commercial and industrial loans by industry and commercial real estate loans
by geography and property type, see Loan Portfolio Characteristics and Analysis
in the Credit Risk Management portion of the Risk Management section in this
Item 7.
Total consumer loans declined as new originations decreased due to the
significantly adverse economic impacts of the pandemic and lower consumer
spending. Education loans declined primarily due to continued runoff of the
government guaranteed education loan portfolio. Residential mortgage loans
increased as the low interest rate environment resulted in an increase in the
volume of originations retained by PNC, primarily of nonconforming loans, which
are loans that do not meet agency standards as a result of exceeding agency
conforming loan limits.
For information on 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 Item 7.
For additional information regarding our loan portfolio, see the Credit Risk
Management portion of the Risk Management section in this Item 7 and Note 1
Accounting Policies, Note 4 Loans and Related Allowance for Credit Losses in our
Notes To Consolidated Financial Statements included in Item 8 of this Report.
Investment Securities
Investment securities of $88.8 billion at December 31, 2020 increased $2.0
billion , or 2%, compared to December 31, 2019 , due primarily to net purchases of
U.S. Treasury and government agency securities, partially offset by portfolio
run-off of agency residential mortgage-backed 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 LCR and other internal and
external guidelines and constraints. During 2020, $16.2 billion of debt
securities were transferred from held to maturity to available for sale pursuant
to elections made under recently adopted accounting standards. See further
discussion in Note 1 Accounting Policies in the Notes To Consolidated Financial
Statements in Item 8 of this Report.
The PNC Financial Services Group, Inc. - 2020 Form 10-K 49
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Table 8:
Ratings (a)
December 31, 2020 December 31, 2019 As of December 31, 2020
Amortized Fair Amortized Fair AAA/ BB and No
Dollars in millions Cost (b) Value Cost Value AA A BBB Lower Rating
U.S. Treasury and government
agencies $ 20,616 $ 21,631 $ 16,926 $ 17,348 100 %
Agency residential mortgage-backed 47,355 48,911 50,266 50,984 100 %
Non-agency residential
mortgage-backed 1,272 1,501 1,648 1,954 10 % 1 % 2 % 48 % 39 %
Agency commercial mortgage-backed 2,571 2,688 3,153 3,178 100 %
Non-agency commercial
mortgage-backed (c) 3,678 3,689 3,782 3,806 87 % 1 % 5 % 7 %
Asset-backed (d) 5,060 5,150 5,096 5,166 92 % 1 % 6 % 1 %
Other debt (e) 5,061 5,393 4,580 4,771 67 % 21 % 10 % 2 %
Total investment securities (f)
96 % 1 % 1 % 1 % 1 %
(a)Ratings percentages allocated based on amortized cost.
(b)Amortized cost is presented net of applicable allowance for securities of $82
million at December 31, 2020 in accordance with the adoption of the CECL
accounting standard. See the Recently Adopted Accounting Standards portion of
Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in
Item 8 of this Report for additional detail on the CECL accounting standard.
(c)Collateralized primarily by office buildings, multifamily housing, industrial
properties, retail properties and lodging properties.
(d)Collateralized primarily by corporate debt, government guaranteed and private
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 8 presents the distribution of our total investment securities portfolio
by amortized cost and fair value, as well as by credit rating. We have included
credit ratings information because we believe that the information is an
indicator of the degree of credit risk to which we are exposed, which could
affect our risk-weighted assets and, therefore, our risk-based regulatory
capital ratios under the regulatory capital rules. Changes in credit ratings
classifications could indicate increased or decreased credit risk and could be
accompanied by a reduction or increase in the fair value of our investment
securities portfolio. We continually monitor the credit risk in our portfolio
and maintain the allowance for securities 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 3 Investment Securities in the Notes To
Consolidated Financial Statements included in Item 8 of this Report for
additional details regarding the methodology for determining the allowance and
the amount of the allowance for investment securities, respectively.
The duration of investment securities was 2.6 years at December 31, 2020 . We
estimate that at December 31, 2020 the effective
duration of investment securities was 3.1 years for an immediate 50 basis points
parallel increase in interest rates and 2.0 years for an
immediate 50 basis points parallel decrease in interest rates. Comparable
amounts at December 31, 2019 for the effective duration of
investment securities were 2.8 years and 2.4 years, respectively.
Based on expected prepayment speeds, the weighted-average expected maturity of
the investment securities portfolio was 3.4 years at December 31, 2020 compared
to 4.1 years at December 31, 2019 .
Table 9: Weighted-Average Expected Maturities of Mortgage and Asset-Backed Debt
Securities
December 31, 2020 Years
Agency residential mortgage-backed 2.9
Non-agency residential mortgage-backed 6.0
Agency commercial mortgage-backed 4.2
Non-agency commercial mortgage-backed 2.5
Asset-backed 2.4
Additional information regarding our investment securities is included in Note 3
50
Funding Sources
Table 10: Details of Funding Sources
December 31 December 31 Change
Dollars in millions 2020 2019 $ %
Deposits
Noninterest-bearing $ 112,637 $ 72,779 $ 39,858 55 %
Interest-bearing
Money market 59,737 54,115 5,622 10 %
Demand 92,294 71,692 20,602 29 %
Savings 80,985 68,291 12,694 19 %
Time deposits 19,692 21,663 (1,971) (9) %
Total interest-bearing deposits 252,708 215,761 36,947 17 %
Total deposits 365,345 288,540 76,805 27 %
Borrowed funds
Federal Home Loan Bank borrowings 3,500 16,341 (12,841) (79) %
Bank notes and senior debt 24,271 29,010 (4,739) (16) %
Subordinated debt 6,403 6,134 269 4 %
Other 3,021 8,778 (5,757) (66) %
Total borrowed funds 37,195 60,263 (23,068) (38) %
Total funding sources $ 402,540 $ 348,803 $ 53,737 15 %
Growth in total deposits reflected growth in commercial deposits reflecting pandemic-related accumulation of liquidity by customers and higher consumer deposits driven by government stimulus payments and lower consumer spending.
Borrowed funds decreased due to lower FHLB borrowings, federal funds purchased (included in other borrowed funds) and bank notes and senior debt, reflecting the use of liquidity from deposit growth and proceeds from the sale of our equity investment in BlackRock. 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 Item 7 for additional information regarding our 2020 liquidity and capital activities. See Note 10 Borrowed Funds in the Notes to Consolidated Financial Statements in Item 8 of this Report for additional information related to our borrowings. Shareholders' Equity Total shareholders' equity was$54.0 billion atDecember 31, 2020 , an increase of$4.7 billion , or 10%, compared toDecember 31, 2019 . The increase resulted from net income of$7.6 billion , which included the gain on sale of our equity investment in BlackRock, and higher AOCI of$2.0 billion , partially offset by common and preferred dividends of$2.2 billion , common share repurchases of$1.4 billion , a day-one transition adjustment of$0.7 billion for the adoption of the CECL accounting standard and$0.5 billion for the redemption of our Series Q preferred stock. PNC announced onMarch 16, 2020 a temporary suspension of our common stock repurchase program in conjunction with theFederal Reserve's effort to support theU.S. economy during the pandemic, and continued the suspension through the fourth quarter of 2020, consistent with the extension of theFederal Reserve's special capital distribution restrictions. We repurchased$99 million of common shares in the third quarter to offset the effects of employee benefit plan-related issuances in 2020 as permitted by guidance from theFederal Reserve . In 2021, our plan is to refrain from share repurchases, excluding employee benefit-related purchases, during the period leading up to our pending BBVA transaction close date.The PNC Financial Services Group, Inc. - 2020 Form 10-K 51 --------------------------------------------------------------------------------
BUSINESS SEGMENTS REVIEW
We have three reportable business segments: •Retail Banking •Corporate & Institutional Banking •Asset Management Group Business segment results and a description of each business are included in Note 23 Segment Reporting in the Notes To Consolidated Financial Statements in Item 8 of this Report. Certain amounts included in this Business Segments Review differ from those amounts shown in Note 23, primarily due to the presentation in this Item 7 of business net interest income on a taxable-equivalent basis. Note 23 presents results of businesses for 2020, 2019 and 2018. During the second quarter of 2020, we divested our entire 22.4% investment in BlackRock, which had previously been reported as a separate business segment. See Note 2 Acquisition and Divestiture Activity in the Notes To Consolidated Financial Statements included in Item 8 of this Report for additional information on the sale and details on our results and cash flows for 2020, 2019 and 2018. 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 114 in Note 23 Segment Reporting in the Notes To Consolidated Financial Statements included in Item 8 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, exited businesses, and differences between business segment performance reporting and financial statement reporting (GAAP). See the Executive Summary of this Item 7 for our discussion of the impact of pandemic-related developments on our business and operations, including pandemic relief efforts for our customers. We have granted loan modifications through various hardship relief programs to assist our customers in need during the pandemic. See Loan Modifications in the Troubled Debt Restructurings and Loan Modifications section of Credit Risk Management for details on these programs. 52The PNC Financial Services Group, Inc. - 2020 Form 10-K -------------------------------------------------------------------------------- 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 11: Retail Banking Table (Unaudited) Year endedDecember 31
Change
Dollars in millions, except as noted 2020 2019 $ % Income Statement Net interest income$ 5,609 $ 5,520 $ 89 2 % Noninterest income 2,519 2,648 (129) (5) % Total revenue 8,128 8,168 (40) - Provision for credit losses 968 517 451 87 % Noninterest expense 6,019 6,011 8 - Pretax earnings 1,141 1,640 (499) (30) % Income taxes 266 377 (111) (29) % Noncontrolling interest 31 50 (19) (38) % Earnings$ 844 $ 1,213 $ (369) (30) % Average Balance Sheet Loans held for sale$ 745 $ 627 $ 118 19 % Loans Consumer Home equity$ 22,633 $ 22,657 $ (24) - Residential real estate 18,171 16,196 1,975 12 % Automobile 15,968 15,510 458 3 % Credit card 6,629 6,550 79 1 % Education 3,176 3,611 (435) (12) % Other consumer 2,334 2,244 90 4 % Total consumer 68,911 66,768 2,143 3 % Commercial 12,573 10,410 2,163 21 % Total loans$ 81,484 $ 77,178 $ 4,306 6 % Total assets$ 97,643 $ 92,959 $ 4,684 5 % Deposits Noninterest-bearing demand$ 39,754 $ 31,675 $ 8,079 26 % Interest-bearing demand 47,557 42,077 5,480 13 % Money market 23,436 25,317 (1,881) (7) % Savings 68,267 56,722 11,545 20 % Certificates of deposit 11,222 12,613 (1,391) (11) % Total deposits$ 190,236 $ 168,404 $ 21,832 13 % Performance Ratios Return on average assets 0.86 % 1.30 % Noninterest income to total revenue 31 % 32 % Efficiency 74 % 74 %
(continued on following page)
The PNC Financial Services Group, Inc. - 2020 Form 10-K 53
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Year ended December 31 Change
Dollars in millions, except as noted 2020 2019 $ %
Supplemental Noninterest Income Information
Consumer services $ 1,427 $ 1,530 $ (103) (7) %
Residential mortgage $ 604 $ 368 $ 236 64 %
Service charges on deposits $ 497 $ 687 $ (190) (28) %
Residential Mortgage Information
Residential mortgage servicing statistics (in
billions, except as noted) (a)
Serviced portfolio balance (b) $ 121 $ 120 $ 1 1 %
Serviced portfolio acquisitions $ 33 $ 12 $ 21 175 %
MSR asset value (b) $ 0.7 $ 1.0 $ (0.3) (30) %
MSR capitalization value (in basis points) (b) 56 83 (27) (33) %
Servicing income: (in millions)
Servicing fees, net (c) $ 118 $ 178 $ (60) (34) %
Mortgage servicing rights valuation, net of economic hedge
$ 137 $ 47 $ 90 191 % Residential mortgage loan statistics Loan origination volume (in billions)$ 15.1 $ 11.5 $ 3.6 31 % Loan sale margin percentage 3.57 % 2.41 % Percentage of originations represented by: Purchase volume (d) 40 % 47 % Refinance volume 60 % 53 % Other Information (b) Customer-related statistics (average) Non-teller deposit transactions (e) 64 % 57 % Digital consumer customers (f) 74 % 69 % Credit-related statistics Nonperforming assets$ 1,211 $ 1,046 $ 165 16 % Net charge-offs - loans and leases$ 569 $ 534 $ 35 7 % Other statistics ATMs 8,900 9,091 (191) (2) % Branches (g) 2,162 2,296 (134) (6) %
Brokerage account client assets (in billions) (h)
54$ 5 9 % (a)Represents mortgage loan servicing balances for third parties and the related income. (b)Presented as of period end, except for average customer-related statistics and net charge-offs, which are both shown for the year ended, respectively. (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)Excludes stand-alone mortgage offices and satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services. (h)Includes cash and money market balances. Retail Banking earned$0.8 billion in 2020 compared with$1.2 billion in 2019. The decrease in earnings was primarily attributable to a higher provision for credit losses and lower noninterest income, partially offset by higher net interest income. Net interest income increased primarily due to wider interest rate spreads on the value of loans, as well as growth in average deposits and average loan balances, partially offset by narrower interest rate spreads on the value of deposits. Noninterest income decreased largely due to declines in service charges on deposits as a result of fees waived for customers experiencing pandemic-related hardships and the elimination of certain checking product fees, as well as a decline in consumer services, including merchant services, and credit and debit card. Lower noninterest income also reflected the impact of negative derivative fair value adjustments related to Visa Class B common shares of$195 million in 2020 compared with negative adjustments of$100 million in 2019. These declines were partially offset by growth in residential mortgage revenue attributable to increased loan sales revenue as a result of the low interest rate environment and higher revenue from residential mortgage servicing rights valuation, net of economic hedge.
54
Provision for credit losses increased in 2020 compared to 2019 reflecting changes due to the adoption of the CECL accounting standard, together with the significantly adverse economic impacts of the pandemic.
Noninterest expense increased marginally, primarily as a result of higher personnel, branch-related expenses due in part to the impacts of the pandemic, equipment, and technology costs, partially offset by lower advertising and marketing.
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 2020, average total deposits increased compared to 2019 primarily driven by growth in demand and savings deposits which benefited from the impact of government stimulus payments and lower consumer spending due to the pandemic. Savings and demand deposits also increased due, in part, to a shift from money market deposits to relationship-based savings products. Retail Banking average total loans grew in 2020 compared with 2019: •Average commercial loans increased primarily due to PPP loans. •Average residential real estate loans increased primarily as a result of growth in nonconforming residential mortgages and a robust refinance market driven by historically low interest rates. •Average auto loan balances in 2020 grew at a lower rate than in recent years due to the impacts of the pandemic on auto sales. •Average other consumer loans in 2020 increased at a lower rate than in 2019 as growth in the first quarter of 2020 primarily driven by unsecured installment loan originations through digital channels was muted for the remainder of the year as originations declined in part due to effects of the pandemic and customer behavior. •Average credit card balances increased marginally in 2020 as balance growth in the first quarter of 2020 was largely offset by lower consumer spending for the remainder of the year due to the effects of the pandemic. •Average education loans decreased driven by a decline in the runoff portfolio of government guaranteed education loans. •Average home equity loans decreased as paydowns and payoffs exceeded new originated volume. In 2018, we launched our national expansion strategy designed to grow customers with digitally-led banking and a 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 inKansas City . 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 customer 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 services, beyond deposits and withdrawals. Following the first solution center opening in 2018, four additional solution centers opened in 2019 with a second inKansas City and three in theDallas/Fort Worth market. In 2020, we expanded into three new markets,Boston ,Houston andNashville and opened seventeen new solution centers. We also offer digital unsecured installment and small business loans in the expansion markets. Beginning in mid-2021, we expect the BBVA acquisition will accelerate our Retail National expansion efforts to become a coast-to-coastRetail Bank . 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. We are also continually assessing our current branch network for optimization opportunities as usage of alternative channels has increased and have closed 162 branches in 2020. •Approximately 74% of consumer customers used non-teller channels for the majority of their transactions in 2020 compared with 69% in 2019, in part reflecting consumer transaction behavior changes during the pandemic. •Deposit transactions via ATM and mobile channels increased to 64% of total deposit transactions in 2020 from 57% in 2019, in part reflecting consumer transaction behavior changes during the pandemic. 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 enhanced product is currently available in forty-three states and we are moving toward offering the product in most of the remaining states in 2021. Additional improvements for both mortgage and home equity are planned to continue throughout 2021.The PNC Financial Services Group, Inc. - 2020 Form 10-K 55
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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 12: Corporate & Institutional Banking Table (Unaudited) Year ended December 31 Change Dollars in millions 2020 2019 $ % Income Statement Net interest income$ 4,049 $ 3,714 $ 335 9 % Noninterest income 3,062 2,537 525 21 % Total revenue 7,111 6,251 860 14 % Provision for credit losses 2,088 284 1,804 635 % Noninterest expense 2,856 2,813 43 2 % Pretax earnings 2,167 3,154 (987) (31) % Income taxes 483 706 (223) (32) % Noncontrolling interest 10 10 * Earnings$ 1,674 $ 2,448 $ (774) (32) % Average Balance Sheet Loans held for sale$ 762 $ 505 $ 257 51 % Loans Commercial Commercial and industrial$ 125,426 $ 112,809 $ 12,617 11 % Commercial real estate 27,180 26,340 840 3 % Equipment lease financing 6,813 7,255 (442) (6) % Total commercial 159,419 146,404 13,015 9 % Consumer 10 15 (5) (33) % Total loans$ 159,429 $ 146,419 $ 13,010 9 % Total assets$ 183,189 $ 164,243 $ 18,946 12 % Deposits Noninterest-bearing demand$ 53,681 $ 39,141 $ 14,540 37 % Interest-bearing demand 26,838 19,487 7,351 38 % Money market 34,959 28,091 6,868 24 % Other 8,825 6,676 2,149 32 % Total deposits$ 124,303 $ 93,395 $ 30,908 33 % Performance Ratios Return on average assets 0.91 % 1.49 % Noninterest income to total revenue 43 % 41 % Efficiency 40 % 45 % Other Information Consolidated revenue from: (a) Treasury Management (b)$ 1,884 $ 1,866 $ 18 1 % Capital Markets (b)$ 1,607 $ 1,140 $ 467 41 % Commercial mortgage banking activities: Commercial mortgage loans held for sale (c)$ 162 $ 97 $ 65 67 % Commercial mortgage loan servicing income (d) 294 261 33 13 % Commercial mortgage servicing rights valuation, net of economic hedge (e) 72 19 53 279 % Total$ 528 $ 377 $ 151 40 % MSR asset value (f)$ 569 $ 649 $ (80) (12) % Average Loans by C&IB business Corporate Banking$ 81,977 $ 74,016 $ 7,961 11 % Real Estate 40,381 37,149 3,232 9 % Business Credit 22,589 22,586 3 - Commercial Banking 10,415 7,984 2,431 30 % Other 4,067 4,684 (617) (13) % Total average loans$ 159,429 $ 146,419 $ 13,010 9 % Credit-related statistics Nonperforming assets (f)$ 827 $ 444 $ 383 86 % Net charge-offs - loans and leases$ 280 $ 105 $ 175 167 % * - Not Meaningful (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. 56The PNC Financial Services Group, Inc. - 2020 Form 10-K -------------------------------------------------------------------------------- (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 ofDecember 31 . Corporate & Institutional Banking earned$1.7 billion in 2020 compared to$2.4 billion in 2019, as higher provision for credit losses was partially offset by higher revenue. Net interest income increased in the comparison primarily due to higher average 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.
Growth in noninterest income in the comparison reflected broad-based increases including higher capital markets-related revenue, revenue from commercial mortgage banking activities and treasury management product revenue.
Provision for credit losses increased in 2020 compared to 2019, primarily reflecting changes due to the adoption of the CECL accounting standard, together with the significantly adverse economic impacts of the pandemic and its resulting effects on loan portfolio credit quality.
Nonperforming assets at
Noninterest expense increased in the comparison largely due to higher variable costs associated with increased business activity and investments in strategic initiatives. Average loans increased compared with 2019 due to strong growth in Corporate Banking,PNC Real Estate and Commercial Banking: •Corporate Banking provides lending, equipment financing, 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 new production, including PPP loan originations, partially offset by lower average utilization of loan commitments. •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 and multifamily agency warehouse lending, partially offset by project 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 increased primarily driven by PPP loan originations, partially offset by lower average utilization of loan commitments. •Business Credit provides asset-based lending and equipment financing solutions. The loan and lease portfolio is relatively high yielding, with acceptable risk as the loans are mainly secured by marketable collateral. Average loans for this business were relatively unchanged as new originations were mostly offset by lower average utilization of loan commitments. 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 reflecting customers maintaining liquidity due to the economic impacts of the pandemic. 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 executed on our expansion plans into theSeattle andPortland markets in 2020, and in 2021, we expect the BBVA acquisition to accelerate our expansion efforts across the Southwest, but this has not changed our strategy regarding our de novo expansion efforts. This follows offices opened inBoston andPhoenix in 2019,Denver ,Houston andNashville in 2018, andDallas ,Kansas City andMinneapolis 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 12 includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.The PNC Financial Services Group, Inc. - 2020 Form 10-K 57 -------------------------------------------------------------------------------- The Treasury Management business provides payables, receivables, deposit and account services, liquidity and investments, and online and mobile banking products and services to our clients.Treasury management revenue is reported in noninterest income and net interest income. Noninterest income includes treasury management product revenue less earnings credits provided to customers on compensating deposit balances used to pay for products and services. Net interest income primarily includes revenue from all treasury management customer deposit balances. Compared with 2019, treasury management revenue increased primarily due to higher deposit balances and product revenue, partially offset by narrower interest rate spreads on the value of deposits. 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 credit valuations and fees on customer-related derivatives activities, underwriting fees, equity capital market advisory fees and asset-backed financing 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.
58
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 13: Asset Management Group Table (Unaudited) Year ended December 31 Change Dollars in millions, except as noted 2020 2019 $ % Income Statement Net interest income$ 357 $ 288 $ 69 24 % Noninterest income 854 991 (137) (14) % Total revenue 1,211 1,279 (68) (5) % Provision for (recapture of) credit losses 21 (1) 22 * Noninterest expense 858 939 (81) (9) % Pretax earnings 332 341 (9) (3) % Income taxes 77 79 (2) (3) % Earnings$ 255 $ 262 $ (7) (3) % Average Balance Sheet Loans Consumer Residential real estate$ 2,832 $ 1,923 $ 909 47 % Other consumer 4,042 4,232 (190) (4) % Total consumer 6,874 6,155 719 12 % Commercial 831 759 72 9 % Total loans$ 7,705 $ 6,914 $ 791 11 % Total assets$ 8,186 $ 7,360 $ 826 11 % Deposits Noninterest-bearing demand$ 1,568 $ 1,360 $ 208 15 % Interest-bearing demand 7,777 4,060 3,717 92 % Money market 1,613 1,832 (219) (12) % Savings 7,307 6,216 1,091 18 % Other 650 822 (172) (21) % Total deposits$ 18,915 $ 14,290 $ 4,625 32 % Performance Ratios Return on average assets 3.12 % 3.56 % Noninterest income to total revenue 71 % 77 % Efficiency 71 % 73 % Supplemental Noninterest Income Information Asset management fees$ 836 $ 862 $ (26) (3) % Other Information Nonperforming assets (a)$ 66 $ 39 $ 27 69 % Net charge-offs - loans and leases$ 1 $ 5 $ (4) (80) %
$ 170 $ 154 $ 16 10 % Nondiscretionary client assets under administration 154 143 11 8 % Total$ 324 $ 297 $ 27 9 % Discretionary client assets under management Personal$ 108 $ 99 $ 9 9 % Institutional 62 55 7 13 % Total$ 170 $ 154 $ 16 10 % * - Not Meaningful (a)As ofDecember 31 . (b)Excludes brokerage account client assets. The PNC Financial Services Group, Inc. - 2020 Form 10-K 59 --------------------------------------------------------------------------------
Net interest income increased due to growth in average loan and deposit balances and wider interest rate spreads on loans, partially offset by narrower interest rate spreads on the value of deposits. Noninterest income decreased due to lower asset management fees resulting from the impact of 2019 divestiture activities and the gains recognized on the retirement recordkeeping and thePNC Capital Advisors investment management business divestitures in the prior period. This decline was partially offset by increases in the average equity markets.
Noninterest expense decreased in the comparison and was primarily attributable to the impact of the 2019 divestitures and lower variable costs.
Provision for credit losses increased reflecting changes due to the adoption of the CECL accounting standard, together with the significantly adverse economic impacts of the pandemic.Asset Management Group's discretionary client assets under management increased in comparison to the prior year primarily attributable to higher equity markets as ofDecember 31, 2020 .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 theU.S. with a majority co-located with retail banking branches. The businesses provide 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. We expect that the BBVA acquisition will allow meaningful opportunities to grow theAsset Management Group segment by entering into new markets for both the Wealth Management and Institutional Asset Management businesses. RISK MANAGEMENT Enterprise Risk Management We encounter risk as part of the normal course of operating our business. Accordingly, we design our risk governance framework, referred to as the (ERM) Framework, and risk management processes to help manage this risk. We manage risk in light of our risk appetite to optimize long-term shareholder value while supporting our employees, customers and communities. Our ERM Framework is structurally aligned with enhanced prudential standards and heightened standards which establish minimum requirements for the design and implementation of a risk governance framework. This Risk Management section describes our ERM Framework which consists of seven core components that provide executive management and the Board of Directors with an aggregate view of significant risks impacting the organization. The seven core components are risk culture, enterprise strategy (including risk appetite, strategic planning, capital planning and stress testing), risk governance and oversight, risk identification, risk assessments, risk controls and monitoring, and risk aggregation and reporting (see the figure below). The overall Risk Management section of this Item 7 also provides an analysis of the firm's Capital Management and our key areas of risk, which include but are not limited to Credit, Market, Liquidity and Operational (including Compliance and Information Security). Our use of financial derivatives as part of our overall asset and liability risk management process is also addressed within this Risk Management section. We operate within a rapidly evolving regulatory environment. Accordingly, we are actively focused on the timely adoption of applicable regulatory pronouncements within our ERM Framework. 60The PNC Financial Services Group, Inc. - 2020 Form 10-K -------------------------------------------------------------------------------- [[Image Removed: pnc-20201231_g1.jpg]] Risk Culture A strong risk culture helps us make well-informed decisions, ensures individuals conform to the established culture, reduces an individual's ability to do something for personal gain, and rewards employees working toward a common goal rather than individual interests. Our risk culture reinforces the appropriate protocols for responsible and ethical behavior. These protocols are especially critical in terms of our risk awareness, risk-taking behavior and risk management practices. Managing risk is every employee's responsibility. All of our employees individually and collectively are responsible for ensuring the organization is performing with the utmost integrity, is applying sound risk management practices and is striving to achieve our stated objectives rather than pursuing individual interests. All employees are also responsible for understanding our Enterprise Risk Appetite Statement, the ERM Framework and how risk management applies to their respective roles and responsibilities. Employees are encouraged to collaborate across groups to identify and mitigate risks and elevate issues as required. We reinforce risk management responsibilities through a performance management system where employee performance goals include risk management objectives and incentives for employees to reinforce balanced measures of risk-adjusted performance. Proactive and open communication, between groups and up to the Board of Directors, facilitates timely identification and resolution of risk issues. Our multi-level risk committee structure provides formal channels to identify and report risk. Enterprise Strategy We ensure that our overall enterprise strategy is within acceptable risk parameters through our risk appetite, strategic planning, capital planning and stress testing processes. These components are reviewed and approved at least annually by the Board of Directors. Risk Appetite: Our risk appetite represents the organization's desired enterprise risk position, set within our capital based risk and liquidity capacity to achieve our strategic objectives and business plans. The Enterprise Risk Appetite Statement qualitatively describes the aggregate level of risk we are willing to accept in order to execute our business strategies. Qualitative guiding principles further define each of the risks within our taxonomy to support the risk appetite statement. Risk appetite metrics and limits, including forward-looking metrics, quantitatively measure whether we are operating within our stated Risk Appetite. Our risk appetite metrics reflect material risks, align with our established Risk Appetite Framework, balance risk and reward, leverage analytics, and adjust in a timely manner to changes in the external and internal risk environments. Strategic Planning: Our enterprise and line of business strategic plans outline major objectives, strategies and goals which are expected to be achieved over the next five years while seeking to ensure we remain compliant with all capital, risk appetite and liquidity targets and guidelines. Our CEO and CFO lead the development of the corporate strategic plan, the strategic objectives and the comprehensive identification of material risks that could hinder successful implementation and execution of strategies. Strategic planning is linked to our risk management and capital planning processes. Capital Planning and Stress Testing: Capital planning helps to ensure we are maintaining safe and sound operations and viability. The capital planning process and the resulting capital plan evolve as our overall risks, activities and risk management practices change. Capital planning aligns with our strategic planning process. Stress testing is an essential element of the capital planning process. Effective stress testing enables us to consider the estimated effect on capital of various hypothetical scenarios.The PNC Financial Services Group, Inc. - 2020 Form 10-K 61 -------------------------------------------------------------------------------- Risk Governance and Oversight We employ a comprehensive risk management governance framework to help ensure that risks are identified, balanced decisions are made that consider risk and return, and risks are adequately monitored and managed. Risk committees established within this risk governance and oversight framework provide oversight for risk management activities at the Board of Directors, executive, corporate and business levels. Committee composition is designed to provide effective oversight balanced across the three lines of defense in accordance with the OCC's Heightened Risk Management and Governance Standards and Guidelines and theFederal Reserve Board's Enhanced Prudential Standards rules. See the Supervision and Regulation section in Item 1 of this Report for more information. To ensure the appropriate risks are being taken and effectively managed and controlled, risk is managed across three lines of defense. The Board of Directors' and each line of defense's responsibilities are detailed below: Board of Directors - The Board of Directors oversees our risk-taking activities, holds management accountable for adhering to the ERM Framework and is responsible for exercising sound, independent judgment when assessing risk. First line of defense - The front line units are accountable for identifying, owning and managing risks to within acceptable levels while adhering to the ERM Framework. Our businesses strive to enhance risk management and internal control processes within their areas. Integrated and comprehensive processes are designed to adequately manage the business' risk profile and risk appetite through identifying, assessing, monitoring and reporting risks which may significantly impact each business. Second line of defense - The second line of defense is independent from the first line of defense and is responsible for establishing the risk governance framework and the standards by each independent risk area for identifying, measuring, monitoring, controlling and reporting aggregate risks. As the second line of defense, the independent risk areas monitor the risks generated by the first line of defense, review and challenge the implementation of effective risk management practices, and report any issues or exceptions. The risk areas help to ensure processes and controls owned by the businesses are designed and operating as intended, and they may intervene directly in modifying and developing first line of defense risk processes and controls. Third line of defense - As the third line of defense, Internal Audit is independent from the first and second lines of defense. Internal Audit provides the Board of Directors and executive management comprehensive assurance on the effectiveness of the ERM Framework and the risk management practices across the organization. Within the three lines of defense, the independent risk organization has sufficient authority to influence material decisions. Our business oversight and decision-making is supported through a governance structure at the Board of Directors and management level. Specific responsibilities include: Board of Directors - Our Board of Directors oversees our business and affairs as managed by our officers and employees. The Board of Directors may receive assistance in carrying out its duties and may delegate authority through the following standing committees: •Audit Committee: monitors the integrity of our consolidated financial statements; monitors internal control over financial reporting; monitors compliance with our code of ethics; evaluates and monitors the qualifications and independence of our independent auditors; and evaluates and monitors the performance of our Internal Audit function and our independent auditors. •Nominating and Governance Committee: oversees the implementation of sound corporate governance principles and practices while promoting our best interests and those of our shareholders. •Personnel and Compensation Committee: oversees the compensation of our executive officers and other specified responsibilities related to personnel and compensation matters affecting us. The committee is also responsible for evaluating the relationship between risk-taking activities and incentive compensation plans. •Risk Committee: oversees enterprise-wide risk structure and the processes established to identify, measure, monitor and manage the organization's risks and evaluates and approves our risk governance framework. The Risk Committee has formed a Technology Subcommittee and a Compliance Subcommittee to facilitate Board-level oversight of risk management in these areas. In 2020, the Board created theSpecial Committee on Equity & Inclusion , which assists the Board in its oversight of management's equity and inclusion efforts, internally and externally, focusing on our systemic processes (including for employees and suppliers); low and moderate income communities (including community development banking, and product offerings and financial support for such communities); and advocacy (including partnerships with leading organizations, and advocacy for necessary structural changes to help provide greater access to the banking system and end systemic racism). Management Level Executive Committee - The Management Level Executive Committee is responsible for guiding the creation and execution of our business strategy across the company. With this responsibility, the Management Level Executive Committee executes various strategic approval and review activities, with a focus on capital deployment, business performance and risk management. This Committee also helps ensure PNC is staffed with sufficient resources and talent to operate within its risk appetite. 62The PNC Financial Services Group, Inc. - 2020 Form 10-K -------------------------------------------------------------------------------- Corporate Committees - The Corporate Committees generally operate based on the delegated approval authority from a Board-level Committee, the Management Level Executive Committee or other Corporate Committees. These Committees operate at the senior management level and are designed to facilitate the review, evaluation, oversight and approval of key risk activities. Working Committees - The Working Committees generally operate on delegated approval authority from a Corporate Committee, other Working Committees or provide oversight of regulatory/legal matters. Working Committees are intended to assist in the implementation of key enterprise-level activities within a business or function and support the oversight of the businesses key risk activities. Transactional Committees - Transactional Committees generally operate based on delegated approval authority from a Corporate or Working Committee to approve individual transactions, transactional related activities or movements on the organization's balance sheet. Policies and Procedures - We have established risk management Policies and Procedures to support our ERM Framework, articulate our risk culture, define the parameters and processes within which employees are to manage risk and conduct our business activities and to provide direction, guidance and clarity on roles and responsibilities to management and the Board of Directors. These Policies and Procedures are organized in a multi-tiered framework and require periodic review and approval by relevant Committees or management. Risk Identification Risk identification takes place across a variety of risk types throughout the organization. These risk types include, but are not limited to, credit, liquidity and capital, market, operational and compliance. Risks are identified based on a balanced use of analytical tools and management judgment for both on- and off-balance sheet exposures. Our governance structure supports risk identification by facilitating assessment of key risk issues, emerging risks and idiosyncratic risks and implementation of mitigation strategies as appropriate. These risks are prioritized based on quantitative and qualitative analysis and assessed against the risk appetite. Multiple tools and approaches are used to help identify and prioritize risks, including Risk Appetite Metrics,Key Risk Indicators, Key Performance Indicators, Risk Control and Self-Assessments, scenario analysis, stress testing and special investigations. Risks are aggregated and assessed within and across risk functions or businesses. The aggregated risk information is reviewed and reported at an enterprise level for adherence to the Risk Appetite Framework and approved by the Board of Directors or by appropriate committees. This enterprise aggregation and reporting approach promotes the identification and appropriate escalation of material risks across the organization and supports an understanding of the cumulative impact of risk in relation to our risk appetite. Risk Assessment Once risks are identified, they are evaluated based on quantitative and qualitative analysis to determine whether they are material. Risk assessments support the overall management of an effective ERM Framework and allow us to control and monitor our actual risk level and risk management effectiveness through the use of risk measures. Comprehensive, accurate and timely assessments of risk are essential to an effective ERM Framework. Effective risk measurement practices will uncover recurring risks that have been experienced in the past; make the known risks easy to monitor, understand, compare and report; and reveal unanticipated risks that may not be easy to understand or predict. Risk Controls and Monitoring Our ERM Framework consists of policies, processes, personnel and control systems. Risk controls and limits provide the linkage from our Risk Appetite Statement and associated guiding principles to the risk-taking activities of our businesses. In addition to risk appetite limits, a system of more detailed internal controls exists which oversees and monitors our various processes and functions. These control systems measure performance, help employees make correct decisions, help ensure information is accurate and reliable and document compliance with laws and regulations. We design our monitoring and evaluation of risks and controls to provide assurance that policies, procedures and controls are effective and also to result in the identification of control improvement recommendations. Risk monitoring is a daily, ongoing process used by both the first and second line of defense to ensure compliance with our ERM Framework. Risk monitoring is accomplished in many ways, including performing risk assessments at the prime process and risk assessment unit level, monitoring an area's key controls, the timely reporting of issues, and establishing a quality control and/or quality assurance function, as applicable. Risk Aggregation and Reporting Risk reporting is a comprehensive way to: (i) aggregate risks; (ii) identify concentrations; (iii) help ensure we remain within our established risk appetite; (iv) serve as a basis for monitoring our risk profile in relation to our risk appetite and (v) communicate risks to the Board of Directors and executive management. Risk reports are produced at the line of business, functional risk and enterprise levels. The enterprise level risk report aggregates risks identified in the risk area reports and in the business reports to define the enterprise risk profile. The enterprise risk profile is a point-in-time assessment of enterprise risk and represents our overall risk position in relation to the desired enterprise risk appetite. TheThe PNC Financial Services Group, Inc. - 2020 Form 10-K 63 -------------------------------------------------------------------------------- determination of the enterprise risk profile is based on analysis of quantitative reporting of risk limits and other measures along with qualitative assessments. Quarterly aggregation of risk reports from the risk areas and lines of business to inform our risk profile enables a clear view of our risk level relative to our quantitative risk appetite. The enterprise level report is provided through the governance structure to the Risk Committee of the Board of Directors. Each individual risk report includes an assessment of inherent risk, quality of risk management, residual risk, risk appetite and risk outlook. The enterprise level risk report includes an aggregate view of risks identified in the individual report and provides a summary of our overall risk profile compared to our risk appetite. 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 designed to be 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 [[Image Removed: pnc-20201231_g2.jpg]] We use several credit quality indicators, as further detailed in Note 4 Loans and Related Allowance for Credit Losses in the Notes To Consolidated Financial Statements in Item 8 of this Report, to monitor and measure our exposure to credit risk within our loan portfolio. The following provides additional information about the significant loan classes that comprise our Commercial and Consumer portfolio segments.
Commercial
Environmental and social risks are incorporated into the transaction and portfolio management policies and procedures that govern our underwriting and portfolio management practices. All Corporate & Institutional Banking transactions are subject to an Environmental and Social Risk Management assessment designed to help us better identify and mitigate environmental, human rights and other social risks early in the credit application process. Transactions identified as having a potential environmental, human rights or other social risk are evaluated to determine whether enhanced due diligence is warranted. We have also chosen to limit new originations in sectors that are no longer consistent with our strategic direction, such as mountain-top removal coal mining and private prisons. We periodically review environmental and social risk topics in PNC's Credit Portfolio Strategy Committee, and outcomes of these reviews may result in changes to our due diligence, origination requirements, or limits on credit exposure. Our approach to identifying environmental and social risks is regularly reviewed by senior management and overseen by our Board of Directors. PNC will continue to refine its approach as banking conditions, regulatory requirements, investors' perspectives and our strategic direction evolve.
64
Commercial and Industrial Commercial and industrial loans comprised 55% and 52% of our total loan portfolio atDecember 31, 2020 and 2019, respectively. The majority of our commercial and industrial 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 and industrial 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 PD and 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 commercial and industrial portfolio is well-diversified as shown in the following table which provides a breakout by industry classification (classified based on the NAICS).
Table 15: Commercial and Industrial Loans by Industry
December 31, 2020 December 31, 2019
Dollars in millions Amount % of Total Amount % of Total
Commercial and industrial
Manufacturing $ 20,712 16 % $ 21,540 17 %
Retail/wholesale trade 20,218 15 21,565 17
Service providers 19,419 15 16,112 13
Financial services 14,909 11 11,318 9
Real estate related (a) 13,369 10 12,346 10
Health care 8,987 7 8,035 6
Transportation and warehousing 7,095 5 7,474 6
Other industries 27,364 21 26,947 22
Total commercial and industrial loans $ 132,073 100 % $ 125,337 100 %
(a) Represents loans to customers in the real estate and construction industries.
Commercial and industrial loan growth atDecember 31, 2020 primarily reflects the impact of PPP lending under the CARES Act and higher multifamily agency warehouse lending, partially offset by lower utilization of loan commitments. AtDecember 31, 2020 PNC had$12.0 billion of PPP loans outstanding. See theCommercial High Impact Industries discussion within this Credit Risk Management section for additional discussion of the impact of COVID-19 on our commercial portfolio and how we are evaluating and monitoring the portfolio for elevated levels of credit risk.Commercial Real Estate Commercial real estate loans comprised$17.3 billion related to commercial mortgages,$6.3 billion of real estate project loans and$5.1 billion of intermediate term financing loans as ofDecember 31, 2020 . Comparable amounts were$17.0 billion ,$5.6 billion and$5.5 billion , respectively, as ofDecember 31, 2019 . We monitor credit risk associated with our commercial real estate loans similar to commercial and industrial 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 theU.S. The PNC Financial Services Group, Inc. - 2020 Form 10-K 65 --------------------------------------------------------------------------------
The following table presents our commercial real estate loans by geography and property type:
Table 16: Commercial Real Estate Loans by Geography and Property Type
December 31, 2020 December 31, 2019
Dollars in millions Amount % of Total Amount % of Total
Geography (a)
California $ 4,458 16 % $ 4,393 16 %
Florida 2,991 10 2,557 9
Texas 2,031 7 1,717 6
Maryland 1,770 6 1,889 7
Virginia 1,586 6 1,547 6
Pennsylvania 1,425 5 1,310 4
Ohio 1,247 4 1,307 4
New Jersey 1,117 4 1,106 4
Illinois 900 3 1,001 4
Georgia 859 3 876 3
Other 10,332 36 10,407 37
Total commercial real estate loans $ 28,716 100 % $ 28,110 100 %
Property Type
Multifamily $ 9,617 33 % $ 9,003 32 %
Office 7,691 27 7,641 27
Retail 3,490 12 3,702 13
Industrial/warehouse 1,999 7 2,003 7
Hotel/motel 1,954 7 1,813 7
Seniors housing 1,417 5 1,123 4
Mixed use 835 3 943 3
Other 1,713 6 1,882 7
Total commercial real estate loans $ 28,716 100 % $ 28,110 100 %
(a) Presented in descending order based on loan balances at
Commercial High Impact Industries In light of the current economic circumstances related to COVID-19, we are evaluating and monitoring our entire commercial portfolio for elevated levels of credit risk; however, the industry sectors that have been and we believe will continue to be most likely impacted by the effects of the pandemic 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 •Consumer services: religious organizations, childcare •Leisure travel: cruise, airlines, other travel/transportation •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 •Seniors housing: assisted living, independent living As ofDecember 31, 2020 , our outstanding loan balances in these industries totaled$17.2 billion , or approximately 7% of our total loan portfolio, while additional unfunded loan commitments totaled$11.2 billion . We continue to carefully monitor and manage these loans, and while we have not yet experienced material charge-offs in these industries, we do expect to see further stress. In our non-real estate related category we have$9.7 billion in loans outstanding,$1.9 billion of which are funded through the PPP and guaranteed by the SBA under the CARES Act. Nonperforming loans in these industries totaled$0.1 billion , or 1% of total loans outstanding in the non-real estate related category, while criticized assets totaled$1.3 billion atDecember 31, 2020 with the greatest stress seen in the leisure recreation and leisure travel sectors. Within the real estate related category we have$7.5 billion in loans outstanding, which includes real estate projects of$5.0 billion and unsecured real estate of$2.5 billion . Nonperforming loans in this category totaled$0.2 billion atDecember 31, 2020 , or 3% of total 66The PNC Financial Services Group, Inc. - 2020 Form 10-K --------------------------------------------------------------------------------
loans outstanding in the commercial real estate related category, driven primarily by loans related to two real estate investment trusts. In this category, we continue to see substantial stress in the non-essential retail and hotel segments.
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 ofDecember 31, 2020 , our outstanding loans in the oil and gas sector totaled$3.4 billion , or 1% of total loans, which included$0.1 billion funded through the PPP and guaranteed by the SBA under the CARES Act. This portfolio comprised approximately$1.6 billion in the midstream and downstream sectors,$0.9 billion of oil services companies and$0.9 billion related to exploration and production companies. Of the oil services category, approximately$0.2 billion is not asset-based or investment grade. Nonperforming loans in the oil and gas sector as ofDecember 31, 2020 totaled$0.2 billion , or 6% of total loans outstanding in this sector. Additional unfunded loan commitments for the oil and gas portfolio totaled$7.1 billion atDecember 31, 2020 .
Consumer
Home Equity Home equity loans comprised$12.6 billion of primarily variable-rate home equity lines of credit and$11.5 billion of closed-end home equity installment loans atDecember 31, 2020 . Comparable amounts were$13.9 billion and$11.2 billion , as ofDecember 31, 2019 , respectively. We track borrower performance monthly, including obtaining original LTVs, updated FICO scores at least quarterly, updated LTVs at least quarterly, and other credit metrics at least quarterly, including the historical performance of any related mortgage loans regardless of whether we hold the lien. 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). This information is used for internal reporting and risk management. 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 in 2020 was strong overall with a weighted-average LTV on originations of 67% and a weighted-average FICO score of 776. 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
December 31, 2020 December 31, 2019
Dollars in millions Amount % of Total Amount % of Total
Geography (a)
Pennsylvania $ 5,602 23 % $ 5,812 23 %
New Jersey 3,462 14 3,728 15
Ohio 2,753 11 2,899 12
Florida 1,536 6 1,340 5
Illinois 1,411 6 1,544 6
Michigan 1,398 6 1,371 5
Maryland 1,332 6 1,420 6
North Carolina 1,043 4 1,092 4
Kentucky 922 4 990 4
Indiana 813 3 820 3
Other 3,816 17 4,069 17
Total home equity loans $ 24,088 100 % $ 25,085 100 %
Lien type
1st lien 63 % 59 %
2nd lien 37 41
Total 100 % 100 %
(a) Presented in descending order based on loan balances at
The PNC Financial Services Group, Inc. - 2020 Form 10-K 67 --------------------------------------------------------------------------------Residential Real Estate Residential real estate loans primarily consisted of residential mortgage loans at bothDecember 31, 2020 and 2019. We track borrower performance of this portfolio monthly similarly to home equity loans. We also segment the mortgage portfolio into pools based on product type (e.g., nonconforming, conforming). This information is used for internal reporting and risk management. 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 in 2020 was strong overall as evidenced by a weighted-average LTV on originations of 67% and a weighted-average FICO score of 775.
The following table presents our residential real estate loans by geography:
Table 18: Residential Real Estate Loans by Geography
December 31, 2020 December 31, 2019
Dollars in millions Amount % of Total Amount % of Total
Geography (a)
California $ 7,828 35 % $ 6,800 31 %
New Jersey 1,635 7 1,779 8
Florida 1,620 7 1,580 7
Washington 1,104 5 646 3
Illinois 1,039 5 1,118 5
Pennsylvania 1,036 5 1,113 5
New York 1,020 5 1,008 5
Virginia 864 4 868 4
Maryland 857 4 923 4
North Carolina 796 4 877 4
Other 4,761 19 5,109 24
Total residential real estate loans $ 22,560 100 % $ 21,821 100 %
(a) Presented in descending order based on loan balances at
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 atDecember 31, 2020 with an average original LTV of 69% and an average original FICO score of 775. Our portfolio of originated nonconforming residential mortgage loans totaled$17.9 billion atDecember 31, 2020 with 41% located inCalifornia .
Automobile
Within auto loans,$12.7 billion resided in the indirect auto portfolio while$1.5 billion were in the direct auto portfolio as ofDecember 31, 2020 . Comparable amounts as ofDecember 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.
The following table presents certain key statistics related to our indirect and direct auto portfolios:
Table 19: Auto Loan Key Statistics
December 31, 2020 December 31, 2019
Weighted-average loan origination FICO score (a)
Indirect auto 784 757
Direct auto 768 769
Weighted-average term of loan originations - in months (a)
Indirect auto 72 74
Direct auto 62 63
(a) Weighted-averages calculated for the years ended
68
We continue to focus on borrowers with strong credit profiles as evidenced by the weighted-average loan origination FICO scores noted in Table 19. We offer both new and used auto financing to customers through our various channels. AtDecember 31, 2020 , the portfolio balance was composed of 56% new vehicle loans and 44% used vehicle loans. Comparable amounts atDecember 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.
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 TDRs, 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 ofDecember 31, 2019 also excluded purchased impaired loans as we were accreting interest income over the expected life of the loans. In connection with the adoption of the CECL standard, nonperforming loans as ofDecember 31, 2020 include PCD loans which meet the criteria to be classified as nonperforming. See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Item 8 of this Report for details on our nonaccrual policies and additional information related to the adoption of the CECL standard, including the discontinuation of purchased impaired loan accounting.
The following table presents a summary of nonperforming assets by major category:
Table 20: Nonperforming Assets by Type
December 31 December 31 Change
Dollars in millions 2020 2019 $ %
Nonperforming loans
Commercial $ 923 $ 501 $ 422 84%
Consumer (a) 1,363 1,134 229 20%
Total nonperforming loans 2,286 1,635 651 40%
OREO and foreclosed assets 51 117 (66) (56)%
Total nonperforming assets $ 2,337 $ 1,752 $ 585 33%
TDRs included in nonperforming loans $ 902 $ 843 $ 59 7%
Percentage of total nonperforming loans 39 % 52 %
Nonperforming loans to total loans 0.94 % 0.68 %
Nonperforming assets to total loans, OREO and foreclosed assets
0.97 % 0.73 %
Nonperforming assets to total assets 0.50 % 0.43 %
Allowance for loan and lease losses to nonperforming loans (b)
235 % 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 December 31, 2020 reflects the changes in ALLL methodology due to
the adoption of the CECL accounting standard on January 1, 2020 , along with
increases in reserves during 2020 due to the significantly adverse economic
impacts of the pandemic and its resulting effects on loan portfolio credit
quality and loan growth.
The increase in nonperforming assets at December 31, 2020 was primarily
attributable to higher nonperforming commercial loans in industries adversely
impacted by the pandemic and the energy industry and an increase in residential
real estate nonperforming loans primarily related to borrowers exiting
forbearance and deferring payments to the end of the loan term, partially offset
by the decline in OREO and foreclosed assets due to asset sales and the
suspension of pandemic-related foreclosures. See the discussion of Commercial
High Impact Industries and the Oil and Gas Loan Portfolio within this Credit
Risk Management section for further detail on these industries.
The PNC Financial Services Group, Inc. - 2020 Form 10-K 69
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The following table provides details on the change in nonperforming assets for
the years ended
Table 21: Change in Nonperforming Assets In millions 2020 2019 January 1$ 1,752 $ 1,808 New nonperforming assets 1,947 1,342 Charge-offs and valuation adjustments (421)
(664)
Principal activity, including paydowns and payoffs (603) (472) Asset sales and transfers to loans held for sale
(82) (95)
Returned to performing status (256) (167)
December 31 $ 2,337 $ 1,752
As of December 31, 2020 , approximately 97% of total nonperforming loans were
secured by collateral which lessened reserve requirements and is expected to
reduce credit losses. As of December 31, 2020 , commercial nonperforming loans
were carried at approximately 83% of their unpaid principal balance, due to
charge-offs and interest applied to principal, before consideration of the ALLL.
Within consumer nonperforming loans, residential real estate TDRs comprised 47%
of total residential real estate nonperforming loans, while home equity TDRs
comprised 41% of home equity nonperforming loans at December 31, 2020 .
Comparable amounts at December 31, 2019 were 79% and 49%, 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 related hardships and meet certain criteria under the CARES Act are not
identified as TDRs. Refer to the Troubled Debt Restructurings and Loan
Modifications discussion in this Credit Risk Management section for more
information on the treatment of loan modifications under the CARES Act.
At December 31, 2020 , our largest nonperforming asset was $141 million in the
Real Estate and Rental and Leasing industry and the ten largest individual
nonperforming assets represented 19% of total nonperforming assets.
Loan Delinquencies
We regularly monitor the level of loan delinquencies and believe these levels
may be a key indicator of credit quality in our loan portfolio. 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 and loans accounted
for under the fair value option, and at December 31, 2020 also include PCD
loans. Amounts exclude loans held for sale, while amounts as of December 31,
2019 also excluded purchased impaired loans.
Pursuant to the interagency guidance issued in April 2020 and in connection with
the credit reporting rules from the CARES Act, the December 31, 2020 delinquency
status of loans modified due to COVID-19 related hardships aligns with the rules
set forth for banks to report delinquency status to the credit agencies. These
rules require that COVID-19 related loan modifications be reported as follows:
•if current at the time of modification, the loan remains current throughout the
modification period,
•if delinquent at the time of modification and the borrower was not made current
as part of the modification, the loan maintains its reported delinquent status
during the modification period, or
•if delinquent at the time of modification and the borrower was made current as
part of the modification or became current during the modification period, the
loan is reported as current.
As a result, certain loans modified due to COVID-19 related hardships are not
being reported as past due as of December 31, 2020 based on the contractual
terms of the loan, even where borrowers may not be making payments on their
loans during the modification period. Loan modifications due to COVID-19 related
hardships that permanently reduce either the contractual interest rate or the
principal balance of a loan do not qualify for TDR relief under the CARES Act or
the interagency guidance. See the COVID-19 Relief section in Item 1 of this
Report for more information on the CARES Act and the related interagency
guidance.
70 The PNC Financial Services Group, Inc. - 2020 Form 10-K
--------------------------------------------------------------------------------Table 22: Accruing Loans Past Due (a)
Amount % of Total Loans Outstanding
December 31 December 31 Change December 31 December 31
Dollars in millions 2020 2019 $ % 2020 2019
Early stage loan delinquencies
Accruing loans past due 30 to 59
days $ 620 $ 661 $ (41) (6) % 0.26 % 0.28 %
Accruing loans past due 60 to 89
days 234 258 (24) (9) % 0.10 % 0.11 %
Total early stage loan delinquencies 854 919 (65) (7) % 0.35 % 0.38 %
Late stage loan delinquencies
Accruing loans past due 90 days or
more 509 585 (76) (13) % 0.21 % 0.24 %
Total accruing loans past due $ 1,363 $ 1,504 $ (141) (9) % 0.56 % 0.63 %
(a)Past due loan amounts include government insured or guaranteed loans of
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 that have been restructured but that meet certain criteria under the CARES Act are not categorized as TDRs.
The following table provides a summary of Troubled Debt Restructurings at
Table 23: Summary of Troubled Debt Restructurings (a)
December 31 Change
Dollars in millions December 31 2020 2019 $ %
Commercial $ 528 $ 361 $ 167 46%
Consumer 1,116 1,303 (187) (14)%
Total TDRs $ 1,644 $ 1,664 $ (20) (1)%
Nonperforming $ 902 $ 843 $ 59 7%
Accruing (b) 742 821 (79) (10)%
Total TDRs $ 1,644 $ 1,664 $ (20) (1)%
(a)Amounts in table do not include associated valuation allowances. (b)Accruing loans include consumer credit card loans and certain loans that have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans.
Nonperforming TDRs represented approximately 39% of total nonperforming loans and 55% of total TDRs atDecember 31, 2020 . Comparable amounts atDecember 31, 2019 were 52% and 51%, 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 1 Accounting Policies and Note 4 Loans and Related Allowance for Credit Losses in the Notes To Consolidated Financial Statements in Item 8 of this Report and the COVID-19 Relief section within Item 1 of this Report for additional information on TDRs. For additional information on the CARES Act, also see the COVID-19 Relief section within Item 1 of this Report. Loan Modifications During the fourth quarter of 2020, PNC continued to provide relief to our customers from the economic impacts of COVID-19 through a variety of solutions, including additional grants and extensions of loan and lease modifications under our hardship relief programs. Under the CARES Act, loan modifications meeting certain criteria qualify the loan for relief from TDR treatment. These criteria include: •the loan modification resulted from a COVID-19 related hardship, •the borrower was no more than 30 days past due as ofDecember 31, 2019 , and •the loan modification did not result in a permanent reduction of interest or principal.The PNC Financial Services Group, Inc. - 2020 Form 10-K 71 -------------------------------------------------------------------------------- Loans that do not meet the criteria for TDR relief under the CARES Act may be evaluated under interagency guidance, which allows banks to not designate certain short-term modifications as TDRs for borrowers with COVID-19 hardships who were current on their payments prior to the modification. Loan modifications related to COVID-19 hardships that permanently reduce either the contractual interest rate and/or principal balance of the loan are designated as TDRs. For additional information on the CARES Act and interagency guidance, see the COVID-19 Relief section within Item 1 of this Report. The impact of these modifications was considered within the quarterly reserve determination. See the Allowance for Credit Losses discussion within the Critical Accounting Estimates and Judgments section for additional information. Refer to the Loan Delinquencies discussion in this Credit Risk Management section for information on how these hardship related loan modifications are reported from a delinquency perspective as ofDecember 31, 2020 . Commercial Loan and Lease Modifications Under COVID-19 Hardship Relief Programs During the fourth quarter of 2020, PNC continued to selectively grant temporary loan and lease modifications to our commercial clients although the volume of this activity declined significantly from earlier in the year. Modifications made were in the form of principal and/or interest (payment) deferrals, covenant waivers and other types of modifications, including term extensions, and were based on each individual borrower's situation. Commercial accounts in active assistance under COVID-19 hardship relief payment deferral programs totaled$0.1 billion , or 0.1% of total commercial loans atDecember 31, 2020 . We are monitoring the delinquency status of loans exiting assistance as a measure to assess credit risk. As ofDecember 31, 2020 , approximately 99% of the accruing commercial loans that have exited COVID-19 payment deferral programs were current or less than 30 days past due.
Consumer Loan Modifications Under Hardship Relief Programs
Our consumer loan modification programs are being granted in response to
customer hardships that extended beyond the initial relief period. These loan
and line modifications include all hardship related modifications, and the
primary offerings as of
Modification Type Home Equity Residential Real Estate Automobile Credit Card Education Other Consumer
Extensions - Defers current payments and
moves them to the end of the loan by
extending the loan's maturity or the
extension re-amortizes the remaining
principal balance. a a a a
Forbearance - Part or all of the payments
are deferred and moved to the end of the
forbearance period. Balance is due at the
end of the forbearance period, but payment
options may be available to repay the
forborne amount, including for many
borrowers an option to delay payment until
the payoff or maturity of the loan. a a
Minimum payment suspension - Reduces
required minimum payment to $0 for a
period of time. a a a
New loan terms - Sets loan terms to a new
monthly payment of principal and interest
based on customer's financial situation. a a a
Reduced payments - Allows the customer to
make a lower payment for a period of time,
with any deferred balance being moved to
the end of the loan term or extending the
loan's maturity. a a
Repayment plan - Allows reduced payment
and interest rate for a period of time. a a
Interest continues to accrue during the relief period for loans modified in
these programs unless the loan was designated as a nonperforming TDR or was on
nonaccrual at the date of modification. The method of collection of the accrued
interest is dependent on the product type and modification offered.
During the fourth quarter of 2020, we continued to see a reduction in the number
of consumers requesting hardship assistance from the peak in the summer of 2020,
which has led to additional declines in loans under modification that present
credit risk to PNC at December 31, 2020 .
72
The following table provides a summary of consumer accounts in active assistance under hardship relief programs that were on our balance sheet atDecember 31, 2020 . We have excluded government insured or guaranteed loans totaling$426 million and$262 million in the Residential real estate and Education loan classes, respectively, from Table 24 as these loans present minimal credit risk to PNC.
Table 24: Consumer Loans in Active Hardship Relief Programs (a) (b)
Unpaid % Making
Number of Principal % of Loan Payment in Last
As of December 31, 2020 - Dollars in millions Accounts Balance Class (c) Payment Cycle
Consumer
Home equity 1,316 $ 112 0.5 % 66.9 %
Residential real estate 2,185 577 2.6 % 29.5 %
Automobile 8,104 197 1.4 % 71.5 %
Credit card 8,936 63 1.0 % 68.0 %
Education 3,772 56 1.9 % 15.2 %
Other consumer 1,928 25 0.5 % 73.0 %
Total consumer (d) 26,241 $ 1,030 1.4 % 59.9 %
(a) In cases where there have been multiple modifications on an individual loan,
regardless of the number of modifications granted, each loan is counted only
once in this table.
(b) Amounts include loan modifications that qualify for TDR accounting totaling
$149 million .
(c) Based on total loans outstanding at December 31, 2020 .
(d) Approximately 86% of these loan balances were secured by collateral at
December 31, 2020 .
Modifications are considered to have exited active assistance after the
modification period has expired or the modification was exited. As of
December 31, 2020 , approximately 95% of the accruing consumer loans that have
exited hardship relief program modifications were current or less than 30 days
past due.
The initial consumer loan modifications granted in response to the COVID-19
outbreak and the surrounding economic circumstances were short-term and
temporary in nature and generally meet the qualifications for relief from TDR
treatment under the CARES Act. However, in response to customers' hardships that
have extended beyond the initial relief period, PNC has offered options to
customers which include both temporary and permanent modifications that may
reduce the payment, the interest rate or extend the term and/or defer principal
and interest payments. Loan modifications that permanently reduce either the
contractual interest rate and/or principal balance of the loan would not meet
the qualifications for relief from TDR treatment under the CARES Act.
Allowance for Credit Losses
OnJanuary 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, current borrower risk 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, equipment 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, (ii) a period of reversion to long run average expected losses where applicable and (iii) long run average expected losses for the remaining estimated contractual term. We use forward-looking information in estimating expected credit losses for our reasonable and supportable forecast period. For this purpose, we have established a framework which includes a three year forecast period and the use of four economic scenarios and associated probability weights, which in combination create a forecast of expected economic outcomes over the forecasted period. 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's economists and management's judgment in qualitatively assessing the ACL. The reversion period is used to bridge our three year reasonable and supportable forecast period and the long run average 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 the forecast period relative to the beginning of the long run average period. The reversion period is typically 1-3 years, if not immediate.
The long run average expected credit losses are derived from our available historical credit information. We use long run average
The PNC Financial Services Group, Inc. - 2020 Form 10-K 73 --------------------------------------------------------------------------------
expected loss for the portfolio over the estimated remaining contractual term beyond our forecast period and the 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 Item 8 of 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 for further discussion of the assumptions used in the determination of the ACL. Allowance for Loan and Lease Losses Our pooled expected loss methodology is based upon the quantification of PD, LGD, EAD and the remaining estimated contractual term 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 data, current borrower characteristics and forecasted economic variables in quantitative methods to estimate these risk parameters by loan or loan segments. 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 expected 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 contractual cash flows adjusted for prepayments and market interest rates. We then determine the net present value of expected cash flows and ALLL 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 ALLL 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 allowance is related to qualitative measurement factors. These factors may include, but are not limited to, the following: •Industry concentrations and conditions, including the impacts of COVID-19 on highly impacted segments, •Changes in market conditions, including regulatory and legal requirements, •Changes in the nature and volume of our portfolio, •Recent credit quality trends, including the impact of COVID-19 hardship related loan modifications, •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 input data, including historical loss information and recent data such as collateral values, •Model imprecision and limitations, •Changes in lending policies and procedures, including changes in loss recognition and mitigation policies and procedures, and •Timing of available information, including the performance of first lien positions. Allowance for 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.
74
The following table summarizes our allowance for credit loss by loan class:
Table 25: Allowance for Credit Losses by Loan Class (a)
December 31, 2020 December 31, 2019
Allowance % of Total Allowance % of Total
Dollars in millions Amount Total Loans Loans Amount Total Loans Loans
Allowance for loans and lease losses
Commercial
Commercial and industrial $ 2,300 $ 132,073 1.74 % $ 1,489 $ 125,337 1.19 %
Commercial real estate 880 28,716 3.06 % 278 28,110 0.99 %
Equipment lease financing 157 6,414 2.45 % 45 7,155 0.63 %
Total commercial 3,337 167,203 2.00 % 1,812 160,602 1.13 %
Consumer
Home equity 313 24,088 1.30 % 87 25,085 0.35 %
Residential real estate 28 22,560 0.12 % 258 21,821 1.18 %
Automobile 379 14,218 2.67 % 160 16,754 0.95 %
Credit card 816 6,215 13.13 % 288 7,308 3.94 %
Education 129 2,946 4.38 % 17 3,336 0.51 %
Other consumer 359 4,698 7.64 % 120 4,937 2.43 %
Total consumer 2,024 74,725 2.71 % 930 79,241 1.17 %
Total $ 5,361 $ 241,928 2.22 % $ 2,742 $ 239,843 1.14 %
Allowance for unfunded lending
related commitments 584 318
Allowance for credit losses $ 5,945 $ 3,060
Allowance for credit losses to total
loans 2.46 % 1.28 %
Commercial 2.29 % 1.33 %
Consumer 2.84 % 1.18 %
(a) Excludes allowances for investment securities and other financial assets,
which together totaled
The PNC Financial Services Group, Inc. - 2020 Form 10-K 75
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The following table summarizes our loan charge-offs and recoveries:
Table 26: Loan Charge-Offs and Recoveries
Year ended
Net Charge-offs / % of Average Loans
Dollars in millions Gross Charge-offs Recoveries (Recoveries) (Annualized)
2020
Commercial
Commercial and industrial $ 382 $ 75 $ 307 0.22 %
Commercial real estate 2 9 (7) (0.02) %
Equipment lease financing 23 10 13 0.19 %
Total Commercial 407 94 313 0.18 %
Consumer
Home equity 42 61 (19) (0.08) %
Residential real estate 10 16 (6) (0.03) %
Automobile 265 128 137 0.86 %
Credit card 300 35 265 3.99 %
Education 16 8 8 0.25 %
Other consumer 152 18 134 2.75 %
Total Consumer $ 785 $ 266 $ 519 0.67 %
Total $ 1,192 $ 360 $ 832 0.33 %
2019
Commercial
Commercial and industrial $ 183 $ 59 $ 124 0.10 %
Commercial real estate 18 11 7 0.02 %
Equipment lease financing 15 8 7 0.10 %
Total Commercial 216 78 138 0.09 %
Consumer
Home equity 68 74 (6) (0.02) %
Residential real estate 9 14 (5) (0.02) %
Automobile 261 114 147 0.95 %
Credit card 263 27 236 3.60 %
Education 26 8 18 0.50 %
Other consumer 131 17 114 2.41 %
Total Consumer $ 758 $ 254 $ 504 0.67 %
Total $ 974 $ 332 $ 642 0.27 %
Total net charge-offs increased $190 million , or 30%, in 2020 compared to 2019.
The increase is primarily attributable to commercial net charge-offs, which were
driven by industries adversely impacted by the pandemic.
See Note 1 Accounting Policies and Note 4 Loans and Related Allowance for Credit Losses in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information.
Liquidity and Capital Management
Liquidity risk has two fundamental components. The first is potential loss assuming we were unable to meet our funding requirements at a reasonable cost. The second is the potential inability to operate our businesses because adequate contingent liquidity is not available. We manage liquidity risk at the consolidated company level (bank, parent company and nonbank subsidiaries combined) to help ensure that we can obtain cost-effective funding to meet current and future obligations under both normal "business as usual" and stressful circumstances, and to help ensure that we maintain an appropriate level of contingent liquidity. Management monitors liquidity through a series of early warning indicators that may indicate a potential market, or PNC-specific, liquidity stress event. In addition, management performs a set of liquidity stress tests over multiple time horizons with varying levels of severity and maintains a contingency funding plan to address a potential liquidity stress event. In the most severe liquidity stress simulation, we assume that our liquidity position is under pressure, while the market in general is under systemic pressure. The simulation considers, among other things, the impact of restricted access to both secured and unsecured external sources of funding, accelerated runoff of customer deposits, valuation pressure on assets and heavy demand to fund committed obligations. Parent company liquidity guidelines are designed to help ensure that sufficient liquidity is available to meet our parent company obligations over the succeeding 24-month period. Liquidity-related risk limits are established within our Enterprise Liquidity Management Policy 76The PNC Financial Services Group, Inc. - 2020 Form 10-K --------------------------------------------------------------------------------
and supporting policies. Management committees, including the
In addition to these liquidity monitoring measures and tools described above, we also monitor our liquidity by reference to the LCR which is further described in the Supervision and Regulation section in Item 1 of this Report.PNC andPNC Bank calculate the LCR on a daily basis, and as ofDecember 31, 2020 , the LCR forPNC andPNC Bank exceeded the requirement of 100%. We provide additional information regarding regulatory liquidity requirements, including information on the 2019 Tailoring Rules, and their potential impact on us in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of this Report. 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$365.3 billion atDecember 31, 2020 from$288.5 billion atDecember 31, 2019 driven by growth in noninterest-bearing deposits and interest-bearing deposits. See the Funding Sources section of the Consolidated Balance Sheet Review in this Item 7 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. AtDecember 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$95.1 billion and securities available for sale totaling$87.4 billion . The level of liquid assets fluctuates over time based on many factors, including market conditions, loan and deposit growth and balance sheet management activities. Our liquid assets included$22.7 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,$0.1 billion of securities held to maturity were also pledged as collateral for these purposes. We also obtain liquidity through various forms of funding, including long-term debt (senior notes, subordinated debt and FHLB borrowings) and short-term borrowings (securities sold under repurchase agreements, commercial paper and other short-term borrowings). See Note 10 Borrowed Funds in the Notes To Consolidated Financial Statements in Item 8 and the Funding Sources section of the Consolidated Balance Sheet Review in this Item 7 for additional information related to our borrowings. Total senior and subordinated debt, on a consolidated basis, decreased due to the following activity: Table 27: Senior and Subordinated Debt In billions 2020 January 1$ 35.1 Issuances 3.5 Calls and maturities (9.0) Other 1.1 December 31$ 30.7 Bank LiquidityUnder 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. AtDecember 31, 2020 ,PNC Bank had$19.2 billion of notes outstanding under this program of which$14.2 billion were senior bank notes and$5.0 billion were subordinated bank notes. The following table details issuances in 2020: Table 28: PNC Bank Notes Issued Issuance Date Amount Description of Issuance
February 24, 2023 . Interest is
payable quarterly at the 3-month LIBOR
rate, reset quarterly, plus 32.5
basis points, on
August 24 , andNovember 24 ,
commencing on
date of February 24, 2023 . Interest is payable semi-annually at a fixed
rate of 1.743% per annum, on
beginning on August 24, 2020 .
Beginning on
is payable quarterly at the floating rate equal to the 3-month LIBOR
rate, reset quarterly, plus 32.3
basis points, on
August 24 , andNovember 24 ,
commencing on
The PNC Financial Services Group, Inc. - 2020 Form 10-K 77
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The following table details redemptions in 2020:
Table 29: PNC Bank Notes Redeemed
Redemption Date Amount Description of Redemption
March 12, 2020 $1.1 billion $1.1 billion of all outstanding Senior Floating Rate Notes with an
original scheduled maturity date
of
price was equal to $1,000 per
accrued and unpaid distributions
to the redemption date of
2020.
April 20, 2020 $1.0 billion $1.0 billion of all outstanding Senior Notes with an original
scheduled maturity date of May 19, 2020. The securities have a
distribution rate of 2.000%. The redemption price was equal to
$1,000 per$1,000 in principal
amount, plus any accrued and unpaid
distributions to the redemption date of April 20, 2020.
May 4, 2020 $750 million $750 million of all outstanding Senior Notes with an original
scheduled maturity date of June 1, 2020. The securities have a
distribution rate of 2.300%. The redemption price was equal to
$1,000 per$1,000 in principal
amount, plus any accrued and unpaid
distributions to the redemption date of May 4, 2020.
June 10, 2020 $800 million $800 million of all outstanding Senior Floating Rate Notes with an
original scheduled maturity date
of
price was equal to $1,000 per
accrued and unpaid distributions
to the redemption date of
2020.
June 22, 2020 $750 million $750 million of all outstanding Senior Notes with an original
scheduled maturity date of July 21, 2020. The securities have a
distribution rate of 2.600%. The redemption price was equal to
$1,000 per$1,000 in principal
amount, plus any accrued and unpaid
distributions to the redemption
date of
scheduled maturity date of
distribution rate of 2.450%. The redemption price was equal to
$1,000 per$1,000 in principal
amount, plus any accrued and unpaid
distributions to the redemption
date of
scheduled maturity date of
distribution rate of 2.500%. The redemption price was equal to
$1,000 per$1,000 in principal
amount, plus any accrued and unpaid
distributions to the redemption date of December 23, 2020 .
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 December 31, 2020 , our
unused secured borrowing capacity at the FHLB-Pittsburgh and the Federal Reserve
Bank totaled $81.1 billion . 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 impacts of the
pandemic. For additional information, see the Supervision and Regulation section
in Item 1 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 December 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 December 31, 2020 , available parent company liquidity totaled
$14.1 billion . Parent company liquidity is held in intercompany cash.
Investments with longer durations may also be acquired, but if so, the related
maturities are aligned with scheduled cash needs, such as the maturity of parent
company debt obligations.
The principal source of parent company liquidity is the dividends it receives
from PNC Bank , which may be impacted by the following:
•Bank-level capital needs,
•Laws and regulations,
•Corporate policies,
•Contractual restrictions, and
•Other factors.
There are statutory and regulatory limitations on the ability of a national bank
to pay dividends or make other capital distributions or to extend credit to the
parent company or its non-bank subsidiaries. The amount available for dividend
payments by PNC Bank to the parent company without prior regulatory approval was
approximately $3.1 billion at December 31, 2020 . See Note 20 Regulatory Matters
in the Notes To Consolidated Financial Statements in Item 8 of this Report for a
further discussion of these limitations.
78
In addition to dividends fromPNC 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. Authorized by the Board of Directors, the parent company has the ability to offer up to$5.0 billion of commercial paper to provide additional liquidity. As ofDecember 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. OnJanuary 22, 2020 , the parent company issued$2.0 billion of senior notes with a maturity date ofJanuary 22, 2030 , redeemable, in whole or in part, on or afterOctober 24, 2029 . Interest is payable semi-annually at a fixed rate of 2.550% per annum, onJanuary 22 andJuly 22 of each year, commencing onJuly 22, 2020 .
Parent company senior and subordinated debt outstanding totaled
PNC will use approximately
Contractual Obligations and Commitments
The following tables set forth contractual obligations and various other
commitments as of
Table 30: Contractual Obligations
Payment Due By Period
Less than One to Four to After five
December 31, 2020 - in millions Total one year three years five years years
Remaining contractual maturities of time
deposits $ 19,692 $ 17,452
37,195 7,958 11,956 5,706 11,575
Minimum annual rentals on noncancellable
operating leases 2,312 364 649 477 822
Nonqualified pension and postretirement
benefits 418 49 90 86 193
Purchase obligations (b) 1,111 519 463 103 26
Total contractual cash obligations $ 60,728 $ 26,342 (a)Includes basis adjustment relating to accounting hedges. (b)Includes purchase obligations for goods and services covered by noncancellable contracts and contracts including cancellation fees. Table 31: Other Commitments (a)
Amount Of Commitment Expiration By Period
Total Amounts Less than one One to Four to After
December 31, 2020 - in millions Committed year three years five years five years
Commitments to extend credit (b)
9,053 4,583 3,548 914 8
Standby bond purchase agreements 1,448 274 720 454
Other commitments (d) 2,046 1,086 585 48 327
Total commitments $ 220,368 $ 105,535 $ 69,809 $ 43,754 $ 1,270
(a)Other commitments are funding commitments that could potentially require
performance in the event of demands by third parties or contingent events. Loan
commitments are reported net of syndications, assignments and participations.
(b)Commitments to extend credit, or net unfunded loan commitments, represent
arrangements to lend funds or provide liquidity subject to specified contractual
conditions.
(c)Includes $3.8 billion of standby letters of credit that support remarketing
programs for customers' variable rate demand notes.
(d)Includes other commitments of $0.6 billion that were not on our Consolidated
Balance Sheet. The remaining $1.4 billion of other commitments were included in
Other liabilities on our Consolidated Balance Sheet.
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.
The PNC Financial Services Group, Inc. - 2020 Form 10-K 79--------------------------------------------------------------------------------
The following table presents credit ratings for
Table 32: Credit Ratings for
December 31, 2020
Moody's Standard & Poor's Fitch
PNC
Senior debt A3 A- A
Subordinated debt A3 BBB+ A-
Preferred stock Baa2 BBB- BBB
PNC Bank
Senior debt A2 A A+
Subordinated debt A3 A- A
Long-term deposits Aa2 A AA-
Short-term deposits P-1 A-1 F1+
Short-term notes P-1 A-1 F1
On November 16, 2020 , Moody's affirmed the ratings and assessments of The PNC
Financial Services Group, Inc. and its subsidiaries. At the same time, the
Moody's rating outlook on PNC Bank's long-term deposit, senior unsecured debt
and issuer ratings were changed from stable to negative, based on Moody's view
that recent deposit growth and the acquisition of BBVA may reduce the amount of
unsecured debt on PNC's balance sheet, a key input in Moody's rating
methodology.
Capital Management
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 2020, we returned $3.5 billion of capital to shareholders through repurchases
of 11 million shares for $1.5 billion and dividends on common shares of $2.0
billion .
We repurchase shares of PNC common stock under a share repurchase authorization
provided by our Board of Directors in the amount of up to 100 million shares and
consistent with capital plans submitted to the Federal Reserve . Repurchases are
made on the open market or in privately negotiated transactions and the extent
and timing of share repurchases under authorizations depend on a number of
factors including, among others, market and general economic conditions,
economic and regulatory capital considerations, alternative uses of capital, the
potential impact on our credit ratings, contractual and regulatory limitations,
and the results of supervisory assessments of capital adequacy and capital
planning processes undertaken by the Federal Reserve and the OCC as part of the
CCAR and DFAST processes.
In relation to the 2019 capital plan accepted by the Federal Reserve , we
repurchased a total of 24 million shares for $3.4 billion as of the end of the
first quarter 2020.
PNC announced on March 16, 2020 a temporary suspension of our common stock
repurchase program in conjunction with the Federal Reserve's effort to support
the U.S. economy during the pandemic.
Following completion of the 2020 CCAR/DFAST process, the Federal Reserve
announced certain limitations on the capital distributions of any
CCAR-participating bank holding company (including PNC) during the third quarter
of 2020. Under these limitations, PNC and other CCAR-participating firms, absent
Federal Reserve approval, were permitted to make only the following capital
distributions during the third quarter and fourth quarter of 2020:
•Pay common dividends at the same per share level as paid during the second
quarter of 2020, provided that the amount does not exceed the average of the
firm's net income for the four preceding calendar quarters,
•Purchase common shares in an amount that equals the amount of share issuances
related to expensed employee compensation, and
•Make scheduled payments on additional Tier 1 and Tier 2 capital instruments.
We continued the suspension of our common stock repurchase program through the
fourth quarter of 2020, with the exception of employee benefit-related
repurchases in the third quarter, consistent with the extension of the Federal
Reserve's special capital distribution restrictions.
The Federal Reserve extended these limitations through the first quarter of
2021, but modified the limitations to permit common stock share repurchases and
dividends provided that the aggregate amount of such repurchases and dividends
do not exceed the average of
80 The PNC Financial Services Group, Inc. - 2020 Form 10-K
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the firm's net income for the four preceding calendar quarters and the firm does
not increase its common dividend. The Federal Reserve may extend these
limitations to additional quarters, potentially in modified form. In 2021, our
plan is to refrain from share repurchases, excluding employee benefit-related
purchases, during the period leading up to our pending BBVA transaction close
date.
On
See the Supervision and Regulation section of Item 1 Business in this Report for further information concerning the CCAR and DFAST process and the factors theFederal Reserve takes into consideration in its evaluation of capital plans.
Table 33:
Basel III
December 31, 2020 Implemented) (estimated)
Dollars in millions (a) (b)
Common equity Tier 1 capital
Common stock plus related surplus, net of treasury stock $ 875 $ 875
Retained earnings 48,083 46,848
Goodwill, net of associated deferred tax liabilities (9,021) (9,021)
Other disallowed intangibles, net of deferred tax liabilities (172) (172)
Other adjustments/(deductions) (30) (33)
Common equity Tier 1 capital $ 39,735 $ 38,497
Additional Tier 1 capital
Preferred stock plus related surplus 3,517 3,517
Other adjustments/(deductions)
Tier 1 capital $ 43,252 $ 42,014
Additional Tier 2 capital
Qualifying subordinated debt 3,648 3,648
Trust preferred capital securities 40
Eligible credit reserves includable in Tier 2 capital 4,061 4,061 Total Basel III capital$ 51,001 $ 49,723 Risk-weighted assets Basel III standardized approach risk-weighted assets (c) $
326,772 $ 325,547
Average quarterly adjusted total assets$ 454,220 $ 452,983 Supplementary leverage exposure (d)$ 437,526 $ 539,999 Basel III risk-based capital and leverage ratios (a)(e) Common equity Tier 1 12.2 % 11.8 % Tier 1 13.2 % 12.9 % Total (f) 15.6 % 15.3 % Leverage (g) 9.5 % 9.3 % Supplementary leverage ratio (d) 9.9 % 7.8 % (a)The ratios are calculated to reflect PNC's election to adopt the CECL five-year transition provision. (b)The ratios are calculated to reflect the full impact of CECL and excludes the benefits of the optional five-year transition. (c)Basel III standardized approach weighted-assets are based on the Basel III standardized approach rules and include credit and market risk-weighted assets. (d)As ofDecember 31, 2020 , the BHC's Supplementary leverage exposure and Supplementary leverage ratio reflects the temporary exclusions ofU.S. Treasury securities and deposits at Federal Reserve Banks. The Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure, which takes into account both on balance sheets assets as well as certain off-balance sheet items, including loan commitments and potential future exposure under derivative contracts. (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. As ofJanuary 1, 2020 , the 2019 Tailoring Rules became effective for PNC. The most significant changes involve PNC's election to exclude specific AOCI items from CET1 capital and higher thresholds used to calculate CET1 capital deductions. EffectiveJanuary 1, 2020 , PNC must deduct from CET1 capital investments in unconsolidated financial institutions, mortgage servicing rights and deferred tax assets (in each case, net of associated deferred tax liabilities) to the extent such items individually exceed 25% of the institution's adjusted CET1 capital. PNC's regulatory risk-based capital ratios 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. The PNC Financial Services Group, Inc. - 2020 Form 10-K 81 -------------------------------------------------------------------------------- Exposures to high volatility commercial real estate, nonaccruals, TDRs, past due exposures and equity exposures are generally subject to higher risk weights than other types of exposures. The regulatory agencies have adopted a rule permitting banks to delay 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 estimated CECL impact is added to CET1 capital throughDecember 31, 2021 , then phased-out over the following three years. PNC elected to adopt this optional transition provision effective as ofMarch 31, 2020 . See additional discussion of this rule in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of this Report. In response to the economic conditions caused by the pandemic, theFederal Reserve has adopted a final rule that revises, on a temporary basis, the calculation of supplementary leverage exposure (the denominator of the SLR) by BHCs to exclude the on-balance sheet amounts ofU.S. Treasury securities and deposits at Federal Reserve Banks. The rule was effective as ofApril 14, 2020 and will remain in effect throughMarch 31, 2021 . The OCC also has permitted national banks to exclude such on-balance sheet amounts from the bank's supplementary leverage exposure, provided the bank agrees to obtain OCC approval of capital distributions during the effective period of the exclusion.PNC Bank has not elected to take advantage of this OCC rule. AtDecember 31, 2020 ,PNC andPNC Bank , our sole bank subsidiary, were both considered "well capitalized," based on applicableU.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, andPNC 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%. Federal banking regulators have stated that they expect the largestU.S. BHCs, including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largestU.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 ourDecember 31, 2020 capital levels were aligned with them. 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 20 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report. See the Statistical Information (Unaudited) section in Item 8 of this Report for details on ourDecember 31, 2017 and 2016 Fully Phased-in Basel III Common equity Tier 1 capital ratios. Market Risk Management Market risk is the risk of a loss in earnings or economic value due to adverse movements in market factors such as interest rates, credit spreads, foreign exchange rates, commodity prices and equity prices. We are exposed to market risk primarily by our involvement in the following activities, among others: •Traditional banking activities of gathering deposits and extending loans, •Equity and other investments and activities whose economic values are directly impacted by market factors, and •Fixed income securities, derivatives and foreign exchange activities, as a result of customer activities and securities underwriting. We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. Market Risk Management provides independent oversight by monitoring compliance with established guidelines and reporting significant risks in the business to the Risk Committee of the Board of Directors. 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'sAsset and Liability Committee and the Risk Committee of the Board of Directors.
82
Sensitivity results and market interest rate benchmarks for the fourth quarters
of 2020 and 2019 follow:
Table 34: Interest Sensitivity Analysis
Fourth Quarter Fourth Quarter
2020 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 increase 4.7 % 1.5 %
Effect on net interest income in second year from gradual
interest rate change over the preceding 12
months of:
100 basis point increase 12.5 % 3.8 %
Key Period-End Interest Rates
One-month LIBOR 0.14 % 1.76 %
Three-month LIBOR 0.24 % 1.91 %
Three-year swap 0.24 % 1.69 %
(a)Given the inherent limitations in certain of these measurement tools and
techniques, results become less meaningful as interest rates approach zero.
Senior management approved the suspension of the 100bps decrease in rate change
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 35 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.
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 35: Net Interest Income Sensitivity to Alternative Rate Scenarios
December 31, 2020
PNC Market Slope
Economist Forward Flattening
First year sensitivity 0.6 % 0.5 % (0.9) %
Second year sensitivity 3.3 % 1.9 % (3.1) %
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 34 and 35. 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 36: Alternate Interest Rate Scenarios: One Year Forward [[Image Removed: pnc-20201231_g3.jpg]]
The fourth 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 PNC Financial Services Group, Inc. - 2020 Form 10-K 83
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As discussed in Item 1A Risk Factors, the planned discontinuance of the
requirement that banks submit rates for the calculation of LIBOR after 2023
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, like other financial participants, to financial, legal,
operational, and reputational risks.
In order to address LIBOR cessation and the associated 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 also established an enterprise-level program, which is actively
monitoring PNC's overall firm-wide exposure to LIBOR and using these results to
plan transitional strategies and track progress versus these goals. Program
workstreams were formed by Line of Business to ensure accountability and
alignment with the appropriate operational, technology, and customer-facing
stakeholders, while establishing a centralized Program Management Office to
ensure consistency in execution and communication. Project plans and established
milestones have been developed and have continued to evolve and be refined in
line with industry developments and internal decisions and progress. PNC is also
involved in industry discussions, preparing milestones for readiness and
assessing progress against those milestones, along with developing and
delivering on internal and external LIBOR cessation communication plans.
Key efforts in 2020 included:
•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 PNC's infrastructure, including systems,
models, valuation tools and processes,
•Developing and delivering on internal and external LIBOR cessation
communication plans,
•Engaging with PNC clients, industry working groups and regulators, and
•Monitoring developments associated with LIBOR alternatives and industry
practices related to LIBOR-indexed instruments.
PNC also has been an active participant in efforts with the Federal Reserve and
other regulatory agencies to explore the potential need for a credit-sensitive
rate or add-on to SOFR for use in commercial loans. Those efforts led to the
formation of the Credit Sensitive Group , which has held a series of workshops to
assess how a credit-sensitive rate or add-on to SOFR might be constructed and
discuss associated implementation issues.
In addition, in the third quarter of 2020, PNC began offering conforming ARMs
using SOFR instead of USD LIBOR in line with Fannie Mae and Freddie Mac
requirements. Plans are in place to begin offering private student loans and
portfolio loans using non-LIBOR rates in the second quarter of 2021. PNC has
provided regular updates to Federal Reserve , OCC and FDIC examination staff
regarding its LIBOR cessation and transition plans.
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 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 2020 and 2019 were within our acceptable limits.
To help ensure the integrity of the models used to calculate VaR for each
portfolio and enterprise-wide, we use a process known as backtesting. The
backtesting process consists of comparing actual observations of gains or losses
against the VaR levels that were calculated at the close of the prior day. Our
VaR measure assumes that exposures remain constant and that recent market
variability is a good predictor of future variability. Actual observations
include customer related revenue and intraday hedging which helps to reduce
losses and can reduce the number of instances actual losses exceed the prior day
VaR measure. There were minimal instances during 2020 and 2019 under our
diversified VaR measure where actual losses exceeded the prior day VaR measure
and those losses were insignificant. Our portfolio and enterprise-wide VaR
models utilize a historical approach with a 500 day look back period.
Customer-related trading revenue was $466 million in 2020 compared with
$285 million in 2019 and is recorded in Other noninterest income and Other
interest income on our Consolidated Income Statement. The increase was primarily
due to the impact of the changes in credit valuations for customer-related
derivative activities and higher derivative client sales revenues.
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
84 The PNC Financial Services Group, Inc. - 2020 Form 10-K
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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 37: Equity Investments Summary
Change
Dollars in millions December 31 2020 December 31 2019 $ %
Tax credit investments $ 2,870 $ 2,218 $ 652 29 %
Private equity and other 3,182 2,958 224 8 %
Total $ 6,052 $ 5,176 $ 876 17 %
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 $1.4 billion and $1.0 billion at
December 31, 2020 and 2019, respectively. These unfunded commitments are
included in Other liabilities on our Consolidated Balance Sheet.
Note 5 Loan Sale and Servicing Activities and Variable Interest Entities in the
Notes To Consolidated Financial Statements in Item 8 of this Report 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
$1.5 billion at both December 31, 2020 and 2019. As of December 31, 2020 ,
$1.3 billion was invested directly in a variety of companies and $0.2 billion
was invested indirectly through various private equity funds. See the
Supervision and Regulation section in Item 1 of this Report for discussion of
the potential impacts of the Volcker Rule on our interests in and of private
funds covered by the Volcker Rule.
Included in our other equity investments are Visa Class B common shares, which
are recorded at cost. Visa Class B common shares that we own are transferable
only under limited circumstances until they can be converted into shares of the
publicly-traded Class A common shares, which cannot happen until the resolution
of the pending interchange litigation. Based upon the December 31, 2020 per
share closing price of $218.73 for a Visa Class A common share, the estimated
value of our total investment in the Class B common shares was approximately
$1.2 billion at the current conversion rate of Visa B shares to Visa A shares,
while our cost basis was not significant. See Note 15 Fair Value and Note 21
Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8 of
this Report for additional information regarding our Visa agreements. The
estimated value does not represent fair value of the Visa B common shares given
the shares' 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 during 2020 and 2019.
Impact of Inflation
Our assets and liabilities are primarily financial in nature and typically have
varying maturity dates. Accordingly, future changes in prices do not affect the
obligations to pay or receive fixed and determinable amounts of money. However,
during periods of inflation, there may be a subsequent impact affecting certain
fixed costs or expenses, an erosion of consumer and customer purchasing power,
and fluctuations in the need or demand for our products and services. Should
significant levels of inflation occur, our business could potentially be
impacted by, among other things, reducing our tolerance for extending credit or
causing us to incur additional credit losses resulting from possible increased
default rates.
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.
The PNC Financial Services Group, Inc. - 2020 Form 10-K 85
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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, Note 15 Fair Value and Note 16 Financial Derivatives in the Notes To Consolidated Financial Statements in Item 8 of 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.
Operational Risk Management Operational risk is the risk to the current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, human errors or misconduct, or adverse external events. Operational risk is inherent to the entire organization. Operational risk management is embedded in our culture and decision-making processes through a systematic approach whereby operational risks and exposures are: 1) identified and assessed; 2) managed through the design and implementation of controls; 3) measured and evaluated against our risk tolerance limits; and 4) appropriately reported to management and the Risk Committee. Strong operational risk management and well-informed risk-based decisions benefit us by improving the customer experience, enhancing compliance, reducing reputational risk, minimizing losses and establishing an appropriate amount of required operational risk capital held by us. The Operational Risk Management Framework is designed to provide effective and consistent management of operational risk. The primary purpose of the framework is to enable us to understand our operational risks and manage them to the desired risk profile, in line with our Risk Appetite. Additionally, the guidance established within the framework enables management to make well-informed risk-based business decisions. The framework provides a disciplined and structured process for us to manage operational risk across eight operational risk domains. These domains provide a comprehensive view of operational risk and allow us to discuss operational risk in a standard way, facilitating reporting and ongoing risk mitigation. The operational risk domains are: •Operations: Risk resulting from inadequate or failed internal processes, misconduct or errors of people or fraud. •Compliance: Risk of legal or regulatory sanctions, financial loss, or damage to reputation resulting from failure to comply with laws, regulations, rules, self-regulatory standards, or other regulatory requirements. •Data Management: Risk associated with incomplete or inaccurate data. •Model: Risk associated with the design, implementation, and ongoing use and management of a model. •Technology and Systems: Risk associated with the use, operation, and adoption of technology. •Information Security: Risk resulting from the failure to protect information and ensure appropriate access to, and use and handling of information assets. •Business Continuity: Risk of potential disruptive events to business activities. •Third Party: Risk arising from failure of third party providers to conduct activity in a safe and sound manner and in compliance with contract provisions and applicable laws and regulations. We utilize operational risk management programs within the framework, including Risk Control and Self-Assessments, scenario analysis, and internal and external loss event review and analysis, to assess existing risks, determine potential/emerging risks and evaluate the effectiveness of internal controls. The program tools and methodology enable our business managers to identify potential risks and control gaps. Lines of business are responsible for identifying, owning, managing and monitoring the operational risks and controls associated with its business activities and product or service offerings to within acceptable levels. Centralized functions, such as Business Continuity,Enterprise Third Party Management, and Information Security, are responsible for the development, implementation and management of their individual programs and for the development and maintenance of the policies, procedures, methodologies, tools and technology utilized across the enterprise to identify, assess, monitor and report program risks. Additionally, independent risk management reviews and challenges line of business adherence to the framework to ensure proper controls are in place and appropriate risk mitigation plans are established as necessary. Conduct, Reputational and Strategic Risk PNC's risk culture seeks to reinforce the appropriate protocols for responsible and ethical behavior through sound processes and controls. In order to promote a robust risk culture, the Board and executive management establish code of conduct and professional 86The PNC Financial Services Group, Inc. - 2020 Form 10-K -------------------------------------------------------------------------------- standards to which all employees must adhere. A strong risk culture discourages misconduct and supports Conduct risk management at PNC. Conduct risk is defined as the risk that employees fail to comply with the ethical standards expected of them. Strong Conduct risk management is important in supporting PNC's reputation and PNC maintains a corporate culture that emphasizes complying with laws, regulations, and managing reputational risks. Reputational risk is the risk to the franchise and/or shareholder value based on a negative perception of PNC by its stakeholders and/or the changing expectations of its stakeholders. While managing PNC's reputation preserves PNC's brand value, Strategic risk is another component of the ERM Framework that is also critical to optimizing shareholder returns. Strategic risk is the risk to earnings that may arise from adverse business decisions, improper implementation of business decisions and/or inadequate response to changes in the business environment. Strategic risk is considered and assessed by our businesses in the annual strategic planning processes and monitored on an on-going basis as those plans are carried out. Compliance Risk Enterprise Compliance is responsible for oversight of compliance risk for the organization. Compliance issues are identified and tracked through enterprise-wide monitoring and testing activities. Compliance risk issues are escalated through a comprehensive risk reporting process at both a business and enterprise level and incorporated, as appropriate, into the development and assessment of our operational risk profile. A management committee, co-chaired by the Chief Compliance Officer and the Chief BSA/AML Officer, is responsible for oversight of compliance and fiduciary risk management programs across PNC. Enterprise Compliance, through the Regulatory Change Program, helps PNC understand and proactively address emerging regulatory topics and risks as well as respond to changes in applicable laws and regulations. To understand emerging issues impacting the industry, Enterprise Compliance communicates regularly with various regulators having supervisory or regulatory responsibilities with respect to us, our subsidiaries, or businesses and participates in forums focused on regulatory and compliance matters in the financial services industry. Information Security Risk The Information Security component of our Operational Risk Management Framework is responsible for protecting information assets to achieve business objectives, which includes cyber security. PNC's cyber security program is designed to identify risks to sensitive information, protect that information, detect threats and events, and maintain an appropriate response and recovery capability to help ensure resilience against information security incidents. The program includes, among other things, annual security and privacy training for all PNC employees and quarterly phishing exercises to raise employee awareness. Our security program is also regularly examined by federal regulators for compliance with financial regulations and standards. The program also establishes expectations for information asset management, system development security, identity and access management, incident management, threat and vulnerability management, security operations management, and third and fourth party security. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Our consolidated financial statements are prepared by applying certain accounting policies. Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Item 8 of this Report describes the most significant accounting policies that we use. Certain of these policies require us to make estimates or economic assumptions that may vary under different assumptions or conditions, and such variations may significantly affect our reported results and financial position for the period or in future periods.
Allowance for Credit Losses
OnJanuary 1, 2020 , we adopted ASU 2016-13 - Credit Losses, commonly referred to as the CECL standard. The following discussion relates to our ACL, post implementation of CECL. For additional information on our allowances for loan and lease losses and unfunded loan commitments and letters of credit prior to this adoption see Note 1 Accounting Policies and Critical Accounting Estimates and Judgments in our 2019 Form 10-K. 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, equipment finance leases (including residual values), other financial assets and unfunded lending related commitments, for the remaining contractual term of the assets or exposures, taking into consideration expected prepayments. Our determination of the ACL is based on historical loss experience, current 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.The PNC Financial Services Group, Inc. - 2020 Form 10-K 87 -------------------------------------------------------------------------------- •Portfolio volume and mix: Changes to portfolio volume and mix could materially affect our estimates, as CECL reserves would be recognized upon origination or acquisition. 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 these components are discussed in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Item 8 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 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. Credit losses estimated in our reasonable and supportable forecast period are sensitive to the shape and severity of the scenarios used and weights assigned to them. 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 reasonable and supportable forecast period. Each scenario is then given an associated probability (weight) in order to represent our current expectation within that distribution over the forecast period. This process is informed by current economic conditions, expected business cycle evolution and the expert judgment of PNC's 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 endedDecember 31, 2020 were designed to reflect the economic recovery that began in May, which consistently outpaced market expectations and remained strong through the end of the year, but has begun to show signs of an impending slowdown. We used a number of economic variables in our scenarios, with the most significant drivers being GDP and unemployment rate measures. Using the weighted-average of our four economic forecast scenarios, we estimated that GDP grew 3.0% in the fourth quarter of 2020 finishing the year down 2.8% from fourth quarter 2019 levels with 2.3% growth in 2021, recovering to pre-recession peak levels in the first quarter of 2022. The weighted-average unemployment rate was estimated to rise to 7.8% in the first quarter of 2021, with the labor market beginning to recover again in third quarter 2021, and ending 2021 at 6.8%. The unemployment rate was estimated to reach 5.7% and 5.0% by the end of 2022 and 2023, respectively. One of the scenarios included in our weighted-average is our baseline prediction of the most likely economic outcome; which includes estimated GDP recovering to pre-pandemic levels in late 2021 with unemployment not expected to return to its pre-pandemic level until at least 2023. See our Business Outlook and the Cautionary Statement Regarding Forward-Looking Information in this Item 7 for additional discussion on our baseline prediction of the most likely economic outcome. While the economy saw significant recovery from the onset of the pandemic in national level macroeconomic indicators, considerable uncertainty remains regarding overall lifetime loss content for both our commercial and consumer portfolios, specifically as it relates to our customers that are less likely to benefit from the economic recovery currently underway. For commercial borrowers, there are substantial concerns around industries that are dependent on in-person gatherings, hospitality and tourism. For consumer borrowers, payment behavior once the CARES Act stimulus wanes is also difficult to predict but we believe the highest uncertainty is concentrated within consumer borrowers who have been afforded accommodation as it relates to payment deferral/forbearance. As such, for both our commercial and consumer loan portfolios, PNC identified and performed significant analysis around these key, highly impacted segments to ensure our reserves were adequate in light of the improved economic environment. We believe that the economic assumptions used in the scenarios for the fourth quarter of 2020, in combination with increased reserves for borrowers in segments most adversely impacted by the pandemic, sufficiently reflect the life of loan losses in the current portfolio. For internal analytical purposes, we considered what our capital ratios would be if we had an ACL atDecember 31, 2020 equal to theFederal Reserve's estimated nine quarter credit losses for PNC under the 2020 CCAR supervisory severely adverse scenario of$12.1 billion , increasing the reserves by approximately$6.0 billion at year end. This analysis resulted in a CET1 ratio of approximately 10.6% atDecember 31, 2020 , a level well above 7.0%, which is our regulatory minimum of 4.5% plus our SCB of 2.5%. This scenario was not our expectation atDecember 31, 2020 and does not reflect our current expectation, nor does it capture all the potential unknown variables, but it provides an approximation of a possible outcome under hypothetical severe conditions. 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. Residential and Commercial Mortgage Servicing Rights We elect to measure our MSRs at fair value. This election was made to be consistent with our risk management strategy to hedge changes in the fair value of these assets. The fair value of our MSRs is estimated by using a discounted cash flow valuation model 88The PNC Financial Services Group, Inc. - 2020 Form 10-K -------------------------------------------------------------------------------- which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other factors which are determined based on current market conditions. We employ risk management strategies designed to protect the value of MSRs from changes in interest rates and related market factors. The values of the MSRs are economically hedged with securities and derivatives, including interest-rate swaps, options, and forward mortgage-backed and futures contracts. As interest rates change, these financial instruments are expected to have changes in fair value negatively correlated to the change in fair value of the hedged MSR portfolios. The hedge relationships are actively managed in response to changing market conditions over the life of the MSRs. Selecting appropriate financial instruments to economically hedge residential or commercial MSRs requires significant management judgment to assess how mortgage rates and prepayment speeds could affect the future values of MSRs. Hedging results can frequently be less predictable in the short term, but over longer periods of time are expected to protect the economic value of the MSRs. For additional information on our residential and commercial MSRs, see Note 1 Accounting Policies, Note 6Goodwill and Mortgage Servicing Rights and Note 15 Fair Value in the Notes To Consolidated Financial Statements in Item 8 of this Report. Fair Value Measurements We must use estimates, assumptions and judgments when assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by independent third-party sources, including appraisers and valuation specialists, when available. When such third-party information is not available, we estimate fair value primarily by using cash flow and other financial modeling techniques. Changes in underlying factors, assumptions, or estimates in any of these areas could materially impact our future financial condition and results of operations. We apply ASC 820 - Fair Value Measurements. This guidance defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. This guidance requires a three level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable. Level 3 assets and liabilities are those where the fair value is estimated using significant unobservable inputs. For additional information on fair value measurements, see Note 15 Fair Value in the Notes To Consolidated Financial Statements in Item 8 of this Report. Recently Adopted Accounting Pronouncements See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Item 8 of this Report regarding the impact of new accounting pronouncements which we have adopted. 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 the following sections of this Report: •Contractual Obligations and Commitments included within the Risk Management section of this Item 7, and •Note 5 Loan Sale and Servicing Activities and Variable Interest Entities, •Note 10 Borrowed Funds, •Note 11 Commitments, and •Note 12 Equity, all of which are in the Notes To Consolidated Financial Statements included in Item 8 of this Report. A summary and further description of VIEs as ofDecember 31, 2020 and 2019 is included in Note 1 Accounting Policies and Note 5 Loan Sale and Servicing and Variable Interest Entities in the Notes To Consolidated Financial Statements included in Item 8 of this Report. Trust Preferred Securities See Note 10 Borrowed Funds in the Notes To Consolidated Financial Statements in Item 8 of this Report 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.The PNC Financial Services Group, Inc. - 2020 Form 10-K 89
-------------------------------------------------------------------------------- CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION We make statements in this Report, and we may from time to time make other statements, regarding our outlook for earnings, revenues, expenses, tax rates, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting us and our future business and operations that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as "believe," "plan," "expect," "anticipate," "see," "look," "intend," "outlook," "project," "forecast," "estimate," "goal," "will," "should" and other similar words and expressions. Forward-looking statements are 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 theU.S. and global financial markets, -Actions by theFederal 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 theU.S. and its global trading partners, -The length and extent of the economic impacts of the COVID-19 pandemic, -The impact of the results of the recentU.S. elections on the regulatory landscape, capital markets, and the response to and management of the COVID-19 pandemic, including whether there will be additional fiscal stimulus from the federal government and, if so, its size, scope and effectiveness, and -Commodity price volatility. ?Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory contingencies. These statements are based on our views that: -TheU.S. economy is in an economic recovery, following a very severe but very short economic contraction in the first half of 2020 due to the COVID-19 pandemic and public health measures to contain it. -Despite the improvement in the economy since the spring of 2020, economic activity remains far below its pre-pandemic level and unemployment remains elevated. -Growth will be much weaker in early 2021 because of record COVID-19 cases and continued government restrictions of economic activity. Growth should then pick up in the spring of 2021 as vaccines are more widely available and the federal government provides aid to households and small and medium-sized businesses. PNC does not expect real GDP to return to its pre-pandemic level until late 2021, and does not expect employment to return to its pre-pandemic level until at least 2023. -PNC expects theFOMC to keep the fed funds rate in its current range of 0.00% to 0.25% through at least mid-2024. •PNC's ability to take certain capital actions, including returning capital to shareholders, is subject to PNC meeting or exceeding a stress capital buffer established by theFederal Reserve Board in connection with theFederal Reserve Board's CCAR process. TheFederal Reserve also has imposed additional limitations on capital distributions through the first quarter of 2021 by CCAR-participating bank holding companies and may extend these limitations, potentially in modified form. •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. 90The PNC Financial Services Group, Inc. - 2020 Form 10-K -------------------------------------------------------------------------------- -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. •Our planned acquisition of BBVA presents us with risks and uncertainties related both to the acquisition transaction itself and to the integration of the acquired business into PNC after closing: -The business of BBVA, including itsU.S. banking subsidiary,BBVA USA , going forward may not perform as we currently project or in a manner consistent with historical performance. As a result, the anticipated benefits, including estimated cost savings, of the transaction may be significantly harder or take longer to achieve than expected or may not be achieved in their entirety as a result of unexpected factors or events, including those that are outside of our control. -The combination of BBVA, including itsU.S. banking subsidiary,BBVA USA , with that of PNC andPNC Bank may be more difficult to achieve than anticipated or have unanticipated adverse results relating to BBVA, including itsU.S. banking subsidiary,BBVA USA , or our existing businesses. -Completion of the transaction is dependent on the satisfaction of customary closing conditions, which cannot be assured. The timing of completion of the transaction is dependent on various factors that cannot be predicted with precision at this point. •In addition to the planned BBVA transaction, 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 this Report, including in Item 1A Risk Factors, the Risk Management section of Item 7, and Note 11 Commitments and Note 21 Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8 of this Report. Our forward-looking statements may also be subject to other risks and uncertainties, including those discussed elsewhere in this Report or in our other filings with theSEC .
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