Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 001-09718

The PNC Financial Services Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   25-1435979

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707

(Address of principal executive offices, including zip code)

(412) 762-2000

(Registrant’s telephone number, including area code)

 

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

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of July 24, 2015, there were 513,599,824 shares of the registrant’s common stock ($5 par value) outstanding.

 

 

 


THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2015 Form 10-Q

 

     Pages  

PART I – FINANCIAL INFORMATION

  

Item 1.      Financial Statements (Unaudited).

  

Consolidated Income Statement

     56   

Consolidated Statement of Comprehensive Income

     57   

Consolidated Balance Sheet

     58   

Consolidated Statement Of Cash Flows

     59   

Notes To Consolidated Financial Statements (Unaudited)

  

Note 1   Accounting Policies

     61   

Note 2   Loan Sale and Servicing Activities and Variable Interest Entities

     65   

Note 3   Asset Quality

     69   

Note 4   Purchased Loans

     82   

Note 5    Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit

     83   

Note 6   Investment Securities

     86   

Note 7   Fair Value

     90   

Note 8   Goodwill and Intangible Assets

     101   

Note 9   Capital Securities of a Subsidiary Trust and Perpetual Trust Securities

     103   

Note 10 Certain Employee Benefit And Stock Based Compensation Plans

     103   

Note 11 Financial Derivatives

     106   

Note 12 Earnings Per Share

     113   

Note 13 Total Equity And Other Comprehensive Income

     114   

Note 14 Income Taxes

     119   

Note 15 Legal Proceedings

     119   

Note 16 Commitments and Guarantees

     122   

Note 17 Segment Reporting

     126   

Note 18 Subsequent Events

     129   

Statistical Information (Unaudited)

  

Average Consolidated Balance Sheet And Net Interest Analysis

     130   

Transitional Basel III and Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios – 2014 Periods

     132   

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

  

Financial Review

  

Consolidated Financial Highlights

     1   

Executive Summary

     3   

Consolidated Income Statement Review

     8   

Consolidated Balance Sheet Review

     11   

Off-Balance Sheet Arrangements And Variable Interest Entities

     21   

Fair Value Measurements

     22   

Business Segments Review

     22   

Critical Accounting Estimates and Judgments

     31   

Status Of Qualified Defined Benefit Pension Plan

     32   

Recourse And Repurchase Obligations

     33   

Risk Management

     34   

Internal Controls And Disclosure Controls And Procedures

     49   

Glossary Of Terms

     49   

Cautionary Statement Regarding Forward-Looking Information

     54   

Item 3.       Quantitative and Qualitative Disclosures About Market Risk.

    
 
34-49, 90-100
and 106-113
  
  

Item 4.      Controls and Procedures.

     49   

PART II – OTHER INFORMATION

  

Item 1.      Legal Proceedings.

     133   

Item 1A.   RiskFactors.

     133   

Item 2.       Unregistered Sales Of Equity Securities And Use Of Proceeds.

     133   

Item 6.      Exhibits.

     133   

Exhibit Index.

     133   

Corporate Information

     134   

Signature

     135   


THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2015 Form 10-Q (continued)

 

MD&A TABLE REFERENCE

 

Table

  

Description

   Page  

1

  

Consolidated Financial Highlights

     1   

2

  

Summarized Average Balance Sheet

     7   

3

  

Results Of Businesses – Summary

     8   

4

  

Net Interest Income and Net Interest Margin

     8   

5

  

Noninterest Income

     9   

6

  

Summarized Balance Sheet Data

     11   

7

  

Details Of Loans

     12   

8

  

Accretion – Purchased Impaired Loans

     13   

9

  

Purchased Impaired Loans – Accretable Yield

     13   

10

  

Valuation of Purchased Impaired Loans

     13   

11

  

Weighted Average Life of the Purchased Impaired Portfolios

     14   

12

  

Accretable Difference Sensitivity – Total Purchased Impaired Loans

     14   

13

  

Commitments to Extend Credit

     14   

14

  

Investment Securities

     15   

15

  

Weighted-Average Expected Maturity of Mortgage and Other Asset-Backed Debt Securities

     16   

16

  

Loans Held For Sale

     16   

17

  

Details Of Funding Sources

     17   

18

  

Shareholders’ Equity

     18   

19

  

Basel III Capital

     19   

20

  

Fair Value Measurements – Summary

     22   

21

  

Retail Banking Table

     23   

22

  

Corporate & Institutional Banking Table

     26   

23

  

Asset Management Group Table

     28   

24

  

Residential Mortgage Banking Table

     29   

25

  

BlackRock Table

     30   

26

  

Non-Strategic Assets Portfolio Table

     30   

27

  

Pension Expense – Sensitivity Analysis

     32   

28

  

Nonperforming Assets By Type

     35   

29

  

Change in Nonperforming Assets

     35   

30

  

OREO and Foreclosed Assets

     35   

31

  

Accruing Loans Past Due

     36   

32

  

Home Equity Lines of Credit – Draw Period End Dates

     37   

33

  

Consumer Real Estate Related Loan Modifications

     37   

34

  

Summary of Troubled Debt Restructurings

     38   

35

  

Loan Charge-Offs And Recoveries

     39   

36

  

Allowance for Loan and Lease Losses

     40   

37

  

PNC Bank Bank Notes Issued During 2015

     42   

38

  

PNC Bank Senior and Subordinated Debt

     42   

39

  

FHLB Borrowings

     42   

40

  

Parent Company Senior and Subordinated Debt and Hybrid Capital Instruments

     44   

41

  

Credit Ratings as of June 30, 2015 for PNC and PNC Bank

     44   

42

  

Contractual Obligations

     44   

43

  

Other Commitments

     45   

44

  

Interest Sensitivity Analysis

     46   

45

  

Net Interest Income Sensitivity to Alternative Rate Scenarios (Second Quarter 2015)

     46   

46

  

Alternate Interest Rate Scenarios: One Year Forward

     46   

47

  

Enterprise-Wide Gains/Losses Versus Value-at-Risk

     47   

48

  

Equity Investments Summary

     47   

49

  

Financial Derivatives Summary

     49   


THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2015 Form 10-Q (continued)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE

 

Table

  

Description

   Page  

50

  

Certain Financial Information and Cash Flows Associated with Loan Sale and Servicing Activities

     66   

51

  

Principal Balance, Delinquent Loans, and Net Charge-offs Related to Serviced Loans

     67   

52

  

Consolidated VIEs – Carrying Value

     68   

53

  

Non-Consolidated VIEs

     69   

54

  

Analysis of Loan Portfolio

     70   

55

  

Nonperforming Assets

     71   

56

  

Commercial Lending Asset Quality Indicators

     73   

57

  

Home Equity and Residential Real Estate Balances

     74   

58

   Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans      74   

59

  

Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans

     76   

60

  

Credit Card and Other Consumer Loan Classes Asset Quality Indicators

     77   

61

  

Summary of Troubled Debt Restructurings

     78   

62

  

Financial Impact and TDRs by Concession Type

     78   

63

  

TDRs that were Modified in the Past Twelve Months which have Subsequently Defaulted

     80   

64

  

Impaired Loans

     81   

65

  

Purchased Impaired Loans – Balances

     82   

66

  

Purchased Impaired Loans – Accretable Yield

     83   

67

  

Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data

     84   

68

  

Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit

     85   

69

  

Investment Securities Summary

     86   

70

  

Gross Unrealized Loss and Fair Value of Securities Available for Sale

     87   

71

  

Gains (Losses) on Sales of Securities Available for Sale

     89   

72

  

Contractual Maturity of Debt Securities

     89   

73

  

Fair Value of Securities Pledged and Accepted as Collateral

     90   

74

  

Fair Value Measurements – Recurring Basis Summary

     91   

75

  

Reconciliation of Level 3 Assets and Liabilities

     92   

76

  

Fair Value Measurements – Recurring Quantitative Information

     96   

77

  

Fair Value Measurements – Nonrecurring

     98   

78

  

Fair Value Measurements – Nonrecurring Quantitative Information

     98   

79

  

Fair Value Option – Changes in Fair Value

     98   

80

  

Fair Value Option – Fair Value and Principal Balances

     99   

81

  

Additional Fair Value Information Related to Other Financial Instruments

     100   

82

  

Goodwill by Business Segment

     101   

83

  

Mortgage Servicing Rights

     101   

84

  

Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions

     102   

85

  

Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions

     102   

86

  

Fees from Mortgage and Other Loan Servicing

     102   

87

  

Other Intangible Assets

     102   

88

  

Amortization Expense on Existing Intangible Assets

     102   

89

  

Net Periodic Pension and Postretirement Benefits Costs

     104   

90

  

Stock Option Rollforward

     105   

91

   Nonvested Incentive/Performance Unit Share Awards and Restricted Stock/Share Unit Awards – Rollforward      105   

92

  

Nonvested Cash-Payable Incentive/Performance Units and Restricted Share Units – Rollforward

     105   

93

  

Total Gross Derivatives

     106   

94

  

Derivatives Designated As Hedging Instruments under GAAP

     107   

95

  

Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges

     107   

96

  

Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges

     108   

97

  

Gains (Losses) on Derivatives – Net Investment Hedges

     108   

98

  

Derivatives Not Designated As Hedging Instruments under GAAP

     109   

99

  

Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP

     110   

100

  

Credit Default Swaps

     110   


THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2015 Form 10-Q (continued)

 

Table

  

Description

   Page  

101

  

Credit Ratings of Credit Default Swaps

     110   

102

  

Referenced/Underlying Assets of Credit Default Swaps

     110   

103

  

Risk Participation Agreements Sold

     111   

104

  

Derivative Assets and Liabilities Offsetting

     112   

105

  

Basic and Diluted Earnings per Common Share

     113   

106

  

Rollforward of Total Equity

     114   

107

  

Other Comprehensive Income

     115   

108

  

Accumulated Other Comprehensive Income (Loss) Components

     118   

109

  

Net Operating Loss Carryforwards and Tax Credit Carryforwards

     119   

110

  

Commitments to Extend Credit and Other Commitments

     122   

111

  

Internal Credit Ratings Related to Net Outstanding Standby Letters of Credit

     122   

112

  

Reinsurance Agreements Exposure

     122   

113

  

Reinsurance Reserves – Rollforward

     123   

114

  

Analysis of Commercial Mortgage Recourse Obligations

     124   

115

  

Analysis of Indemnification and Repurchase Liability for Asserted Claims and Unasserted Claims

     125   

116

  

Resale and Repurchase Agreements Offsetting

     126   

117

  

Repurchase Agreements By Type of Collateral Pledged

     126   

118

  

Results Of Businesses

     128   


FINANCIAL REVIEW

THE PNC FINANCIAL SERVICES GROUP, INC.

This Financial Review, including the Consolidated Financial Highlights, should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report and with Items 6, 7, 8 and 9A of our 2014 Annual Report on Form 10-K (2014 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business, regulatory and legal risks, see the following sections as they appear in this Report and in our 2014 Form 10-K and our First Quarter 2015 Form 10-Q: the Risk Management and Recourse And Repurchase Obligations sections of the Financial Review portion of the respective report; Item 1A Risk Factors included in our 2014 Form 10-K; and the Legal Proceedings and Commitments and Guarantees Notes of the Notes To Consolidated Financial Statements included in the respective report. Also, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and the Critical Accounting Estimates And Judgments section in this Financial Review and in our 2014 Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this Report. See Note 17 Segment Reporting in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a GAAP basis.

Table 1: Consolidated Financial Highlights

THE PNC FINANCIAL SERVICES GROUP, INC. (PNC)

 

Dollars in millions, except per share data

Unaudited

  Three months ended June 30     Six months ended June 30  
      2015             2014             2015             2014      

Financial Results (a)

         

Revenue

         

Net interest income

  $ 2,052      $ 2,129      $ 4,124      $ 4,324   

Noninterest income

    1,814        1,681        3,473        3,263   

Total revenue

    3,866        3,810        7,597        7,587   

Noninterest expense

    2,366        2,328        4,715        4,592   

Pretax, pre-provision earnings (b)

    1,500        1,482        2,882        2,995   

Provision for credit losses

    46        72        100        166   

Income before income taxes and noncontrolling interests

  $ 1,454      $ 1,410      $ 2,782      $ 2,829   

Net income

  $ 1,044      $ 1,052      $ 2,048      $ 2,112   

Less:

         

Net income (loss) attributable to noncontrolling interests

    4        3        5        1   

Preferred stock dividends and discount accretion and redemptions

    48        48        118        118   

Net income attributable to common shareholders

  $ 992      $ 1,001      $ 1,925      $ 1,993   

Less:

         

Dividends and undistributed earnings allocated to nonvested restricted shares

           3        2        6   

Impact of BlackRock earnings per share dilution

    5        3        10        9   

Net income attributable to diluted common shares

  $ 987      $ 995      $ 1,913      $ 1,978   

Diluted earnings per common share

  $ 1.88      $ 1.85      $ 3.63      $ 3.67   

Cash dividends declared per common share

  $ .51      $ .48      $ .99      $ .92   

Performance Ratios

         

Net interest margin (c)

    2.73     3.12     2.78     3.19

Noninterest income to total revenue

    47        44        46        43   

Efficiency

    61        61        62        61   

Return on:

         

Average common shareholders’ equity

    9.75        10.12        9.54        10.24   

Average assets

    1.19        1.31        1.18        1.33   

See page 49 for a glossary of certain terms used in this Report.

Certain prior period amounts have been reclassified to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements.

(a) The Executive Summary and Consolidated Income Statement Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.
(b) We believe that pretax, pre-provision earnings, a non-GAAP measure, is useful as a tool to help evaluate the ability to provide for credit costs through operations.
(c) Calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under generally accepted accounting principles (GAAP) in the Consolidated Income Statement. The taxable-equivalent adjustments to net interest income for the three months ended June 30, 2015 and June 30, 2014 were $49 million and $47 million, respectively. The taxable-equivalent adjustments to net interest income for the six months ended June 30, 2015 and June 30, 2014 were $98 million and $93 million, respectively.

 

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


Table 1: Consolidated Financial Highlights (Continued) (a)

 

Unaudited   June 30
2015
    December 31
2014
    June 30
2014
 

Balance Sheet Data (dollars in millions, except per share data)

  

Assets

  $ 353,945      $ 345,072      $ 327,064   

Loans

    205,153        204,817        200,984   

Allowance for loan and lease losses

    3,272        3,331        3,453   

Interest-earning deposits with banks (b)

    33,969        31,779        16,876   

Investment securities

    61,362        55,823        56,602   

Loans held for sale

    2,357        2,262        2,228   

Goodwill

    9,103        9,103        9,074   

Mortgage servicing rights

    1,558        1,351        1,482   

Equity investments (c)

    10,531        10,728        10,583   

Other assets

    24,032        23,482        23,527   
 

Noninterest-bearing deposits

    77,369        73,479        71,001   

Interest-bearing deposits

    162,335        158,755        151,553   

Total deposits

    239,704        232,234        222,554   

Transaction deposits

    205,296        198,267        188,489   

Borrowed funds

    58,276        56,768        49,066   

Total shareholders’ equity

    44,515        44,551        44,205   

Common shareholders’ equity

    41,066        40,605        40,261   

Accumulated other comprehensive income

    379        503        881   
 

Book value per common share

  $ 79.64      $ 77.61      $ 75.62   

Common shares outstanding (millions)

    516        523        532   

Loans to deposits

    86     88     90
 

Client Investment Assets (billions)

       

Discretionary client assets under management

  $ 134      $ 135      $ 131   

Nondiscretionary client assets under administration

    128        128        126   

Total client assets under administration

    262        263        257   

Brokerage account client assets

    44        43        43   

Total

  $ 306      $ 306      $ 300   
 

Capital Ratios

       

Transitional Basel III (d) (e)

       

Common equity Tier 1

    10.6     10.9     11.0

Tier 1 risk-based

    12.0        12.6        12.7   

Total capital risk-based

    14.9        15.8        16.0   

Leverage

    10.3        10.8        11.2   
 

Pro forma Fully Phased-In Basel III (e)

       

Common equity Tier 1

    10.0     10.0     10.0
 

Common shareholders’ equity to assets

    11.6     11.8     12.3
 

Asset Quality

       

Nonperforming loans to total loans

    1.10     1.23     1.39

Nonperforming assets to total loans, OREO and foreclosed assets

    1.25        1.40        1.57   

Nonperforming assets to total assets

    .73        .83        .97   

Net charge-offs to average loans (for the three months ended) (annualized)

    .13        .23        .29   

Allowance for loan and lease losses to total loans

    1.59        1.63        1.72   

Allowance for loan and lease losses to nonperforming loans (f)

    145     133     123

Accruing loans past due 90 days or more (in millions)

  $ 914      $ 1,105      $ 1,252   
(a) The Executive Summary and Consolidated Balance Sheet Review portions of the Financial Review section of this Report provide information regarding items impacting the comparability of the periods presented.
(b) Amounts include balances held with the Federal Reserve Bank of Cleveland (Federal Reserve Bank) of $33.6 billion, $31.4 billion, and $16.5 billion as of June 30, 2015, December 31, 2014 and June 30, 2014, respectively.
(c) Amounts include our equity interest in BlackRock.
(d) Calculated using the regulatory capital methodology applicable to PNC during each period presented.
(e) See Basel III Capital discussion in the Capital portion of the Consolidated Balance Sheet Review section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business in our 2014 Form 10-K. See also the Estimated Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratio – 2014 Periods table in the Statistical Information section of this Report for a reconciliation of the 2014 periods’ ratios.
(f) The allowance for loan and lease losses includes impairment reserves attributable to purchased impaired loans. Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans.

 

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


EXECUTIVE SUMMARY

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

We have businesses engaged in retail banking, corporate and institutional banking, asset management and residential mortgage banking, providing many of our products and services nationally, as well as other products and services in our primary geographic markets located in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, North Carolina, Florida, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Missouri, Georgia, Wisconsin and South Carolina. We also provide certain products and services internationally.

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 fee 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 corporate responsibility to the communities where we do business.

We strive to expand and deepen customer relationships by offering a broad range of deposit, fee-based and credit products and services. We are focused on delivering those products and services where, when and how our customers choose with the goal of offering insight that addresses their specific financial needs. Our approach is concentrated on organically growing and deepening client relationships that meet our risk/return measures. Our strategies for growing fee income across our lines of business are focused on achieving deeper market penetration and cross selling our diverse product mix.

Our strategic priorities are designed to enhance value over the long term. A key priority is to drive growth in acquired and underpenetrated geographic markets, including in the Southeast. In addition, we are seeking to attract more of the investable assets of new and existing clients. PNC is focused on transforming our retail banking business to a more customer-centric and sustainable model while lowering delivery costs as customer banking preferences evolve. We are also working to build a stronger residential mortgage banking business with the goal of becoming the provider of choice for our customers. Additionally, we continue to focus on expense management while investing in technology and business infrastructure and streamlining our processes.

Our capital priorities are to support client growth and business investment, maintain appropriate capital in light of economic conditions and the Basel III framework and return excess capital to shareholders, in accordance with the capital plan included in our 2015 Comprehensive Capital Analysis and Review (CCAR) submission to the Board of Governors of the

Federal Reserve System (Federal Reserve). New regulatory short-term liquidity standards became effective for PNC and PNC Bank, National Association (PNC Bank) beginning January 1, 2015. For more detail, see the Balance Sheet, Liquidity and Capital Highlights portion of this Executive Summary, the Capital portion of the Consolidated Balance Sheet Review section and the Liquidity Risk Management portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2014 Form 10-K.

Recent Market and Industry Developments

There have been numerous legislative and regulatory developments and significant changes in the competitive landscape of our industry over the last several years. The United States and other governments have undertaken major reform of the regulation of the financial services industry, including engaging in new efforts to impose requirements designed to strengthen the stability of the financial system and protect consumers and investors. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), enacted in July 2010, mandates the most wide-ranging overhaul of financial industry regulation in decades. Many parts of the law are now in effect, and others are now in the implementation stage, which is likely to continue for several years. We expect to face additional regulation of our industry as a result of Dodd-Frank as well as other current and future initiatives intended to enhance the regulation of financial services companies, the stability of the financial system, the protection of consumers and investors, and the liquidity and solvency of financial institutions and markets. We also expect the scrutiny from our supervisors in the examination process and the enforcement of laws and regulations on both the federal and state levels to remain at elevated levels. Compliance with new regulations will increase our costs and reduce our revenue. Some new regulations may limit our ability to pursue certain desirable business opportunities.

On June 17, 2015, the OCC terminated the 2011 consent order and 2013 amended consent order against PNC Bank entered into following a publicly-disclosed interagency horizontal review of residential mortgage servicing operations at 14 federally regulated mortgage servicers. For more information, see Note 15 Legal Proceedings of this Report and Note 21 Legal Proceedings in our 2014 Form 10-K.

On July 20, 2015, the Federal Reserve issued final rules to implement an additional risk-based common equity Tier 1 capital surcharge on U.S. bank holding companies (BHCs) identified as global systemically important banks (GSIBs) using a scoring methodology that is based on five measures of global systemic importance (size, interconnectedness, substitutability, complexity, and cross-jurisdictional activity). Based on that methodology, PNC is not subject to the surcharge. The release accompanying the final rules indicates that there is a wide gap between the scores of U.S. BHCs identified as GSIBs and the

 

 

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


significantly lower scores of other advanced approaches BHCs (such as PNC) that are not identified as GSIBs.

On July 21, 2015, the Consumer Financial Protection Bureau issued final rules delaying to October 3, 2015 (from August 2015) the effective date of broad new regulations concerning the disclosures required to be provided to prospective residential mortgage customers. These regulations, among other things, require the provision of new disclosures near the time a prospective borrower submits an application and three days prior to closing of a mortgage loan.

For additional information concerning recent legislative and regulatory developments, as well as certain governmental, legislative and regulatory inquiries and investigations that may affect PNC, please see the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors, and Note 21 Legal Proceedings and Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements in our 2014 Form 10-K, as well as Note 15 Legal Proceedings and Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

Key Factors Affecting Financial Performance

PNC faces 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 economic, political and regulatory environment, merger and acquisition activity and operational challenges. Many of these risks and our risk management strategies are described in more detail in our 2014 Form 10-K and elsewhere in this Report.

Our financial performance is substantially affected by a number of external factors outside of our control, including the following:

   

General economic conditions, including the continuity, speed and stamina of the current U.S. economic expansion in general and on our customers in particular,

   

The monetary policy actions and statements of the Federal Reserve and the Federal Open Market Committee (FOMC),

   

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, the capital and other financial markets,

   

Loan demand, utilization of credit commitments and standby letters of credit, and asset quality,

   

Customer demand for non-loan products and services,

   

Changes in the competitive and regulatory landscape and in counterparty creditworthiness and performance as the financial services industry restructures in the current environment,

   

The impact of the extensive reforms enacted in the Dodd-Frank legislation and other legislative,

   

regulatory and administrative initiatives and actions, including those outlined elsewhere in this Report, in our 2014 Form 10-K and in subsequent filings with the SEC, and

   

The impact of market credit spreads on asset valuations.

In addition, our success will depend upon, among other things:

   

Focused execution of strategic priorities for organic customer growth opportunities,

   

Further success in growing profitability through the acquisition and retention of customers and deepening relationships,

   

Driving growth in acquired and underpenetrated geographic markets, including our Southeast markets,

   

Our ability to effectively manage PNC’s balance sheet and generate net interest income,

   

Revenue growth from fee income and our ability to provide innovative and valued products to our customers,

   

Our ability to utilize technology to develop and deliver products and services to our customers and protect PNC’s systems and customer information,

   

Our ability to bolster our critical infrastructure and streamline our core processes,

   

Our ability to manage and implement strategic business objectives within the changing regulatory environment,

   

A sustained focus on expense management,

   

Managing our credit risk in our portfolio,

   

Managing the non-strategic assets portfolio and impaired assets,

   

Continuing to maintain and grow our deposit base as a low-cost funding source,

   

Prudent risk, liquidity and capital management related to our efforts to manage risk to acceptable levels and to meet evolving regulatory capital, capital planning, stress testing and liquidity standards,

   

Actions we take within the capital and other financial markets,

   

The impact of legal and regulatory-related contingencies, and

   

The appropriateness of reserves needed for critical accounting estimates and related contingencies.

For additional information, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2014 Form 10-K.

Income Statement Highlights

Net income decreased $8 million, or 1%, in the second quarter of 2015 to $1.0 billion, or $1.88 per diluted common share, compared to $1.1 billion, or $1.85 per diluted common share for the second quarter of 2014. Growth in noninterest income and a lower provision for credit losses were more than offset by lower net interest income and higher noninterest expense.

 

 

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


   

Net interest income of $2.1 billion for the second quarter of 2015 decreased 4% compared with the second quarter of 2014, reflective of the ongoing low rate environment, primarily resulting in lower loan yields, and decreased purchase accounting accretion, partially offset by commercial and commercial real estate loan growth and higher securities balances.

   

Net interest margin decreased to 2.73% for the second quarter of 2015 compared to 3.12% for the second quarter of 2014 principally due to the impact of increasing the company’s liquidity position, lower loan yields and lower benefit from purchase accounting accretion.

   

Noninterest income of $1.8 billion for the second quarter of 2015 increased $133 million, or 8%, compared to the second quarter of 2014, due to strong client fee income growth and higher gains on asset sales, including gains on sales of Visa Class B common shares.

   

The provision for credit losses decreased to $46 million for the second quarter of 2015 compared to $72 million for the second quarter of 2014 reflecting improved credit quality.

   

Noninterest expense of $2.4 billion for the second quarter of 2015 increased $38 million, or 2%, compared with the second quarter of 2014 due to investments in technology and business infrastructure in support of its strategic priorities and higher personnel expense associated with higher business activity, partially offset by lower asset impairment charges related to historic tax credits recorded as reductions to the associated investment asset balance. PNC maintains a continued focus on disciplined expense management.

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

Credit Quality Highlights

Overall credit quality improved during the first six months of 2015.

   

Nonperforming assets decreased $.3 billion, or 10%, to $2.6 billion at June 30, 2015 compared to December 31, 2014. Nonperforming assets to total assets were 0.73% at June 30, 2015, compared to 0.83% at December 31, 2014.

   

Overall loan delinquencies of $1.6 billion at June 30, 2015 decreased $.3 billion, or 16%, compared with December 31, 2014.

   

The allowance for loan and lease losses was 1.59% of total loans and 145% of nonperforming loans at June 30, 2015, compared with 1.63% and 133% at December 31, 2014, respectively.

   

Net charge-offs of $67 million for the second quarter of 2015 were down 54% compared to net charge-offs of $145 million for the second quarter of 2014.

   

Annualized net charge-offs were 0.13% of average loans in the second quarter of 2015 and 0.29% of average loans in the second quarter of 2014. For the first six months of 2015, net charge-offs were $170 million, and 0.17% of average loans on an annualized basis, compared with $331 million and 0.34% for the first six months of 2014.

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

Balance Sheet, Liquidity and Capital Highlights

PNC’s balance sheet was well-positioned at June 30, 2015 reflecting strong liquidity and capital positions.

   

Total loans increased by $.3 billion to $205.2 billion at June 30, 2015 compared to December 31, 2014.

   

Total commercial lending increased $2.3 billion, or 2%, as a result of increases in commercial real estate and commercial loans.

   

Total consumer lending decreased $2.0 billion, or 3%, due to declines in home equity, automobile, education and credit card loans, including runoff in the nonstrategic portfolio.

   

Investment securities increased $5.5 billion, or 10%, to $61.4 billion at June 30, 2015 compared to December 31, 2014, primarily funded by deposit growth.

   

Total deposits increased $7.5 billion, or 3%, to $239.7 billion at June 30, 2015 compared with December 31, 2014, driven by higher retail deposits.

   

PNC’s balance sheet remained core funded with a loans to deposits ratio of 86% at June 30, 2015.

   

PNC maintained a strong liquidity position.

   

New regulatory short-term liquidity standards became effective for PNC and PNC Bank as advanced approaches banking organizations beginning January 1, 2015, with a minimum phased-in Liquidity Coverage Ratio requirement of 80% in 2015, calculated as of month end.

   

The Liquidity Coverage Ratio (LCR) at June 30, 2015 exceeded 100% for both PNC and PNC Bank.

   

PNC maintained a strong capital position.

   

The Transitional Basel III common equity Tier 1 capital ratio was 10.6% at June 30, 2015 and 10.9% at December 31, 2014, calculated using the regulatory capital methodologies applicable to PNC during 2015 and 2014, respectively. The decline in the capital ratio during the comparable periods was mainly due to higher risk-weighted assets.

   

Pro forma fully phased-in Basel III common equity Tier 1 capital ratio was an estimated 10.0% at June 30, 2015 and 10.0% at December 31, 2014 based on the standardized approach rules. See the Capital discussion and Table 19 in the Consolidated Balance Sheet

 

 

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


   

Review section of this Financial Review and the December 31, 2014 capital ratio tables in the Statistical Information (Unaudited) section of this Report for more detail.

   

PNC returned capital to shareholders.

   

In the first quarter of 2015, in accordance with the 2014 capital plan, PNC repurchased 4.4 million shares of common stock on the open market, with an average price of $89.48 per share and an aggregate repurchase price of $.4 billion. These first quarter 2015 repurchases completed PNC’s common stock repurchase program for the four quarter period that began in second quarter 2014 with total repurchases of 17.3 million common shares for $1.5 billion.

   

In connection with the 2015 CCAR process, PNC submitted its 2015 capital plan, as approved by its Board of Directors, to the Federal Reserve in January 2015. As we announced on March 11, 2015, the Federal Reserve accepted the capital plan and did not object to our proposed capital actions, which included the actions discussed below.

   

In the second quarter of 2015, we repurchased 5.9 million shares of common stock on the open market, with an average price of $93.93 per share and an aggregate repurchase price of $.6 billion. Purchases were made under share repurchase programs of up to $2.875 billion for the five quarter period beginning in the second quarter of 2015. See the Capital portion of the Consolidated Balance Sheet review of this Financial Review for more detail on these share repurchase programs.

   

In April 2015, the Board of Directors raised the quarterly dividend on common stock to 51 cents per share, an increase of 3 cents per share, or 6 percent, effective with the May dividend. On July 2, 2015, the PNC Board of Directors declared a quarterly common stock cash dividend of 51 cents per share payable on August 5, 2015.

   

On May 4, 2015, we redeemed $500 million of PNC’s Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series K, as well as all Depositary Shares representing interests therein. Each Depositary Share represented a 1/10 interest in a share of the Series K Preferred Stock. All 50,000 shares of Series K Preferred Stock, as well as all 500,000 Depositary Shares representing interests therein, were redeemed. The redemption price was $10,000 per share of Series K Preferred Stock equivalent to $1,000 per Depositary Share, plus declared and unpaid dividends up to but excluding the redemption date.

Our Consolidated Income Statement and Consolidated Balance Sheet Review sections of this Item 7 describe in greater detail the various items that impacted our results during the first six months of 2015 and 2014 and balances at June 30, 2015 and December 31, 2014, respectively.

Our ability to take certain capital actions, including plans to pay or increase common stock dividends or to repurchase shares under current or future programs, is subject to the results of the supervisory assessment of capital adequacy undertaken by the Federal Reserve as part of the CCAR process. For additional information, see the Supervision and Regulation section in Item 1 Business of our 2014 Form 10-K.

See the Capital portion of the Consolidated Balance Sheet Review and the Liquidity Risk Management portion of the Risk Management section of this Financial Review for more detail on our 2015 capital and liquidity actions.

 

 

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


Average Consolidated Balance Sheet Highlights

Table 2: Summarized Average Balance Sheet

 

Six months ended June 30                    Change  
Dollars in millions    2015      2014      $      %  

Average assets

             

Interest-earning assets

             

Investment securities

   $ 58,310       $ 57,342       $ 968         2

Loans

     205,272         197,914         7,358         4

Interest-earning deposits with banks

     31,392         13,410         17,982         134

Other

     9,236         8,415         821         10

Total interest-earning assets

     304,210         277,081         27,129         10

Noninterest-earning assets

     46,151         43,968         2,183         5

Total average assets

   $ 350,361       $ 321,049       $ 29,312         9

Average liabilities and equity

             

Interest-bearing liabilities

             

Interest-bearing deposits

   $ 161,236       $ 151,212       $ 10,024         7

Borrowed funds

     56,757         46,747         10,010         21

Total interest-bearing liabilities

     217,993         197,959         20,034         10

Noninterest-bearing deposits

     74,245         67,951         6,294         9

Other liabilities

     12,181         10,313         1,868         18

Equity

     45,942         44,826         1,116         2

Total average liabilities and equity

   $ 350,361       $ 321,049       $ 29,312         9

Seasonal and other factors may impact our period-end balances, whereas average balances are generally more indicative of underlying business trends apart from the impact of acquisitions and divestitures. The Consolidated Balance Sheet Review section of this Financial Review provides information on changes in selected Consolidated Balance Sheet categories at June 30, 2015 compared with December 31, 2014. Total assets were $353.9 billion at June 30, 2015 compared with $345.1 billion at December 31, 2014.

Average investment securities increased in the first six months of 2015 compared with the first six months of 2014, due to increases in average residential mortgage-backed securities and U.S. Treasury and government agency securities, partially offset by a decrease in average asset-backed securities. Total investment securities comprised 19% of average interest-earning assets for the first six months of 2015 and 21% for the first six months of 2014.

 

The increase in average total loans in the first six months of 2015 compared with the first six months of 2014 was driven by growth in average commercial loans of $7.4 billion and average commercial real estate loans of $2.2 billion, principally in our Corporate & Institutional Banking segment. These increases were partially offset by a decrease in consumer loans of $1.9 billion primarily attributable to lower home equity and education loans. Runoff in the non-strategic portfolio of residential mortgage and brokered home equity loans contributed to the decrease in loans.

Loans represented 67% of average interest-earning assets for the first six months of 2015 and 71% of average interest-earning assets for the first six months of 2014.

Average interest-earning deposits with banks, which are primarily maintained with the Federal Reserve Bank, increased in the comparison to the prior year period in part due to regulatory short-term liquidity standards phased in starting January 1, 2015 and also due to deposit growth.

The increase in average noninterest-earning assets in the first six months of 2015 compared with the first six months of 2014 was primarily driven by higher accounts receivable from trade date securities sales, which are included in noninterest-earnings assets for average balance sheet purposes, and an increase in trading assets, primarily net customer related derivatives values.

Average total deposits increased $16.3 billion, or 7%, to $235.5 billion in the first six months of 2015 compared with the first six months of 2014, primarily due to an increase in average transaction deposits, which grew to $201.4 billion for the first six months of 2015. Higher average money market deposits, average noninterest-bearing deposits and average interest-bearing demand deposits drove the increase in both commercial and consumer average transaction deposits. These increases were partially offset by a decrease of $1.8 billion in average retail certificates of deposit attributable to runoff of maturing accounts. Total deposits at June 30, 2015 were

$239.7 billion compared with $232.2 billion at December 31, 2014 and are further discussed within the Consolidated Balance Sheet Review section of this Financial Review.

Average total deposits represented 67% of average total assets for the first six months of 2015 and 68% for the first six months of 2014.

The increase in average borrowed funds in the first six months of 2015 compared with the first six months of 2014 was primarily due to increases in average Federal Home Loan Bank (FHLB) borrowings and average bank notes and senior debt. The Liquidity Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding our sources and uses of borrowed funds.

 

 

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


Business Segment Highlights

Total business segment earnings were $2.0 billion for both the first six months of 2015 and 2014. The Business Segments Review section of this Financial Review includes further analysis of our business segment results over the first six months of 2015 and 2014, including presentation differences from Note 17 Segment Reporting in our Notes To Consolidated Financial Statements of this Report. Note 17 Segment Reporting presents results of businesses for the three and six months ended June 30, 2015 and 2014.

We provide a reconciliation of total business segment earnings to PNC total consolidated net income as reported on a GAAP basis in Note 17 Segment Reporting in our Notes To Consolidated Financial Statements of this Report.

Table 3: Results Of Businesses – Summary (a)

(Unaudited)

 

     Net Income      Revenue      Average Assets (b)  
Six months ended June 30 – in millions    2015      2014      2015      2014      2015      2014  

Retail Banking

   $ 443       $ 383       $ 3,161       $ 3,008       $ 73,691       $ 75,559   

Corporate & Institutional Banking

     990         993         2,647         2,646         131,711         119,992   

Asset Management Group

     99         90         595         549         7,974         7,642   

Residential Mortgage Banking

     47         32         413         433         7,190         8,128   

BlackRock

     269         253         351         332         6,760         6,400   

Non-Strategic Assets Portfolio

     137         209         230         295         7,094         8,732   

Total business segments

     1,985         1,960         7,397         7,263         234,420         226,453   

Other (c) (d) (e)

     63         152         200         324         115,941         94,596   

Total

   $ 2,048       $ 2,112       $ 7,597       $ 7,587       $ 350,361       $ 321,049   
(a) Our business information is presented based on our internal management reporting practices. We periodically refine our internal methodologies as management reporting practices are enhanced. Net interest income in business segment results reflects PNC’s internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors. In the first quarter of 2015, enhancements were made to PNC’s funds transfer pricing methodology primarily for costs related to the new regulatory short-term liquidity standards. The enhancements incorporate an additional charge assigned to assets, including for unfunded loan commitments. Conversely, a higher transfer pricing credit has been assigned to those deposits that are accorded higher value under LCR rules for liquidity purposes. These adjustments apply to business segment results, primarily favorably impacting Retail Banking and adversely impacting Corporate & Institutional Banking, prospectively beginning with the first quarter of 2015. Prior periods have not been adjusted due to the impracticability of estimating the impact of the change for prior periods.
(b) Period-end balances for BlackRock.
(c) “Other” average assets include investment securities associated with asset and liability management activities.
(d) “Other” includes differences between the total business segment financial results and our total consolidated net income. Additional detail is included in the Business Segments Review section of this Financial Review and in Note 17 Segment Reporting in the Notes To Consolidated Financial Statements in this Report.
(e) The decreases in net income and revenue in the first six months of 2015 compared to the first six months of 2014 for “Other” primarily reflected a decline in net interest income, partially offset by higher net securities gains.

 

CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for the first six months of 2015 was $2.0 billion, a decrease of 3% compared with $2.1 billion for the first six months of 2014. The decrease was driven by a 5% decline in net interest income and a 3% increase in noninterest expense, partially offset by a 6% increase in noninterest income and lower provision for credit losses.

Second quarter 2015 net income decreased $8 million to $1.0 billion, compared with second quarter 2014. Growth in noninterest income of 8% and lower provision for credit losses were more than offset by a 4% decline in net interest income and higher noninterest expense.

Net Interest Income

Table 4: Net Interest Income and Net Interest Margin

 

     Six months ended
June 30
     Three months ended
June 30
 
Dollars in millions    2015     2014      2015      2014  

Net interest income

   $ 4,124      $ 4,324       $ 2,052       $ 2,129   

Net interest margin

     2.78     3.19      2.73      3.12

Changes in net interest income and margin result from the interaction of the volume and composition of interest-earning assets and related yields, interest-bearing liabilities and related rates paid, and noninterest-bearing sources of funding. See the Statistical Information (Unaudited) – Average Consolidated Balance Sheet And Net Interest Analysis section of this Report and the discussion of purchase accounting accretion on purchased impaired loans in the Consolidated Balance Sheet Review section of this Financial Review for additional information.

 

 

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


Net interest income decreased by $200 million, or 5%, in the first six months of 2015 compared with the prior year period, including a decline of $77 million, or 4%, in the second quarter compared with the same prior year quarter. The declines in both comparisons are reflective of the ongoing low rate environment, primarily resulting in lower loan yields, and decreased purchase accounting accretion, partially offset by commercial and commercial real estate loan growth and higher securities balances. The year-to-date declines also reflected the impact from the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to noninterest income.

Lower net interest margins in both comparisons were driven by 41 basis point and 39 basis point declines in the yields on total interest-earning assets in the year-to-date and quarterly

comparisons, respectively, which were principally due to the impact of increasing the company’s liquidity position, lower loan yields, and lower benefit from purchase accounting accretion. The year-to-date decline also included the impact of the second quarter 2014 correction to reclassify certain commercial facilities fees.

In the third quarter of 2015, we expect net interest income to remain stable compared with the second quarter of 2015.

For full year 2015, we expect purchase accounting accretion to be down compared to 2014 by approximately $200 million, rather than $225 million as previously disclosed, as cash recoveries on purchased impaired loans in the first six months of 2015 were higher than expected.

 

 

Noninterest Income

Table 5: Noninterest Income

 

     Six months ended June 30      Three months ended June 30  
                   Change             Change  
Dollars in millions    2015      2014      $      %      2015      2014      $      %  

Noninterest income

                           

Asset management

   $ 792       $ 726       $ 66         9    $ 416       $ 362       $ 54         15

Consumer services

     645         613         32         5      334         323         11         3

Corporate services

     713         644         69         11      369         343         26         8

Residential mortgage

     328         343         (15      (4)      164         182         (18      (10)

Service charges on deposits

     309         303         6         2      156         156                

Net gains on sales of securities

     50         4         46         *         8         (6      14         *   

Other

     636         630         6         1      367         321         46         14

Total noninterest income

   $ 3,473       $ 3,263       $ 210         6    $ 1,814       $ 1,681       $ 133         8

 

 

* Not meaningful

 

Noninterest income increased in both quarterly and year-to-date comparisons primarily due to strong fee income growth and higher gains on asset sales. Noninterest income as a percentage of total revenue was 46% for the first six months of 2015, up from 43% for the first six months of 2014. The comparable amounts for the second quarters of 2015 and 2014 were 47% and 44%, respectively.

Asset management revenue increased in both comparisons due to increased earnings from our BlackRock investment, stronger average equity markets, and new business. The increases also included the impact from a $30 million trust settlement during the second quarter of 2015. Discretionary client assets under management increased to $134 billion at June 30, 2015 compared with $131 billion at June 30, 2014 driven by higher equity markets, new sales and positive net flows, after adjustments for cyclical client activities.

Consumer service fees increased in both the year-to-date and quarterly comparisons, primarily due to growth in customer-initiated transaction volumes.

 

Corporate services revenue increased in both comparisons due to increased treasury management and equity capital markets advisory fees, partially offset by lower mergers and acquisition advisory fees. The year-to-date results also reflect the impact of the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to noninterest income.

Residential mortgage revenue decreased in both quarterly and year-to-date comparisons mainly driven by lower loan sales revenue, reflecting the impact from the second quarter 2014 sale of previously underperforming portfolio loans and lower servicing fee revenue, partially offset by higher net hedging gains on residential mortgage servicing rights.

Service charges on deposits for the first six months of 2015 increased slightly compared to the first six months of 2014, due to changes in product offerings and higher customer-related activity. Service charges on deposits for the second quarter of 2015 were stable with the prior year quarter.

 

 

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


Other noninterest income for the second quarter of 2015 included gains of $79 million on the sale of 1 million Visa Class B common shares compared with gains of $54 million on the sale of 1 million Visa Class B common shares in the second quarter of 2014. For the first six months of 2015 and 2014, gains on sales of Visa Class B common shares were $79 million and $116 million on the sale of 1 million and 2 million shares, respectively. In both comparisons, gains on loans held for sale increased.

As of June 30, 2015, we held approximately 6 million Visa Class B common shares with a fair value of approximately $649 million and a recorded investment of approximately $54 million.

Other noninterest income typically fluctuates from period to period depending on the nature and magnitude of transactions completed. 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 Financial Review. Details regarding private and other equity investments are included in the Market Risk Management – Equity And Other Investment Risk section, and further details regarding gains or losses related to our equity investment in BlackRock are included in the Business Segments Review section.

In the third quarter of 2015, we expect the fee categories of noninterest income (asset management, consumer services, corporate services, residential mortgage and service charges on deposits) to remain stable compared to second quarter of 2015. We anticipate that continued growth in business activity in the third quarter will offset the impact to asset management revenue from the second quarter 2015 trust settlement.

Provision For Credit Losses

The provision for credit losses totaled $100 million for the first six months of 2015 compared with $166 million for the first six months of 2014, and was $46 million for the second quarter of 2015 compared with $72 million for the second quarter of 2014. The decreases in provision in both comparisons reflected improved credit quality.

We expect our provision for credit losses in the third quarter of 2015 to be between $50 million and $100 million.

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

Noninterest Expense

Noninterest expense increased $123 million, or 3%, to $4.7 billion for the first six months of 2015 compared to the first six months of 2014, and increased $38 million, or 2%, to $2.4 billion for the second quarter of 2015 compared to the prior year quarter. These increases were primarily related to PNC’s investments in technology and business infrastructure in support of its strategic priorities and higher personnel expense associated with higher business activity, partially offset by lower asset impairment charges related to historic tax credits recorded as reductions to the associated investment asset balance. In prior periods, these credits were recorded as a reduction to income tax expense. This change in application of historic tax credits was not material to PNC’s financial results.

In the second quarter of 2015, we have identified initiatives that support increasing our 2015 continuous improvement savings goal by an additional $100 million to $500 million.

For the third quarter of 2015, we expect noninterest expense to remain stable compared to second quarter 2015. We expect our full year 2015 expenses to be approximately one percent lower than full year 2014 expenses.

Effective Income Tax Rate

The effective income tax rate was 26.4% in the first six months of 2015 compared to 25.3% in the first six months of 2014. For the second quarter of 2015, our effective income tax rate was 28.2% compared with 25.4% for the second quarter of 2014. The effective tax rate is generally lower than the statutory rate primarily due to tax credits PNC receives from our investments in low income housing and new markets investments, as well as earnings in other tax exempt investments.

The increases to the effective tax rate in both comparisons were primarily related to the second quarter 2015 impact of historic tax credits recorded as a reduction to the associated investment asset balances, while in prior periods these credits were recorded as a reduction of income tax expense.

We expect our 2015 effective tax rate to be approximately 26%.

 

 

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


CONSOLIDATED BALANCE SHEET REVIEW

Table 6: Summarized Balance Sheet Data

 

     June 30     December 31           Change  
Dollars in millions    2015     2014        $      %  

Assets

              

Interest-earning deposits with banks

   $ 33,969      $ 31,779         $ 2,190         7

Loans held for sale

     2,357        2,262           95         4

Investment securities

     61,362        55,823           5,539         10

Loans

     205,153        204,817           336        

Allowance for loan and lease losses

     (3,272     (3,331        59         (2 )% 

Goodwill

     9,103        9,103                  

Mortgage servicing rights

     1,558        1,351           207         15

Other intangible assets

     435        493           (58      (12 )% 

Other, net

     43,280        42,775           505         1

Total assets

   $ 353,945      $ 345,072         $ 8,873         3

Liabilities

              

Deposits

   $ 239,704      $ 232,234         $ 7,470         3

Borrowed funds

     58,276        56,768           1,508         3

Other

     10,053        9,996           57         1

Total liabilities

     308,033        298,998           9,035         3

Equity

              

Total shareholders’ equity

     44,515        44,551           (36     

Noncontrolling interests

     1,397        1,523           (126      (8 )% 

Total equity

     45,912        46,074           (162     

Total liabilities and equity

   $ 353,945      $ 345,072           $ 8,873         3

 

 

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

The increase in total assets was primarily due to higher investment securities balances and higher deposit balances maintained with the Federal Reserve. Interest-earning deposits with banks increased due to regulatory short-term liquidity standards phased in starting January 1, 2015. The increase in investment securities was primarily funded by deposit growth. The increase in liabilities was largely due to growth in deposits and higher FHLB borrowings and issuances of bank notes and senior debt, partially offset by a decline in federal funds purchased and repurchase agreements along with commercial paper. An analysis of changes in selected balance sheet categories follows.

Loans

Outstanding loan balances of $205.2 billion at June 30, 2015 and $204.8 billion at December 31, 2014 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.6 billion at June 30, 2015 and $1.7 billion at December 31, 2014, respectively. The balances include purchased impaired loans but do not include future accretable net interest (i.e., the difference between the undiscounted expected cash flows and the carrying value of the loan) on those loans.

 

 

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


Table 7: Details Of Loans

 

     June 30      December 31           Change  
Dollars in millions    2015      2014        $      %  

Commercial lending

               

Commercial

               

Retail/wholesale trade

   $ 17,162       $ 16,972         $ 190         1

Manufacturing

     19,775         18,744           1,031         6

Service providers

     14,054         14,103           (49     

Real estate related (a)

     10,931         10,812           119         1

Financial services

     5,966         6,178           (212      (3 )% 

Health care

     9,396         9,017           379         4

Other industries

     20,849         21,594           (745      (3 )% 

Total commercial

     98,133         97,420           713         1

Commercial real estate

               

Real estate projects (b)

     15,142         14,577           565         4

Commercial mortgage

     9,664         8,685           979         11

Total commercial real estate

     24,806         23,262           1,544         7

Equipment lease financing

     7,783         7,686           97         1

Total commercial lending (c)

     130,722         128,368           2,354         2

Consumer lending

               

Home equity

               

Lines of credit

     19,589         20,361           (772      (4 )% 

Installment

     13,946         14,316           (370      (3 )% 

Total home equity

     33,535         34,677           (1,142      (3 )% 

Residential real estate

               

Residential mortgage

     14,041         13,885           156         1

Residential construction

     491         522           (31      (6 )% 

Total residential real estate

     14,532         14,407           125         1

Credit card

     4,520         4,612           (92      (2 )% 

Other consumer

               

Education

     6,212         6,626           (414      (6 )% 

Automobile

     11,057         11,616           (559      (5 )% 

Other

     4,575         4,511           64         1

Total consumer lending

     74,431         76,449           (2,018      (3 )% 

Total loans

   $ 205,153       $ 204,817           $ 336        
(a) Includes loans to customers in the real estate and construction industries.
(b) Includes both construction loans and intermediate financing for projects.
(c) Construction loans with interest reserves and A/B Note restructurings are not significant to PNC.

 

The slight increase in loans was driven by an increase in total commercial lending driven by commercial real estate and commercial loans, offset by a decline in consumer lending due to lower home equity, auto and education loans.

Loans represented 58% of total assets at June 30, 2015 and 59% at December 31, 2014. Commercial lending represented 64% of the loan portfolio at June 30, 2015 and 63% at December 31, 2014. Consumer lending represented 36% of the loan portfolio at June 30, 2015 and 37% at December 31, 2014.

Commercial real estate loans represented 12% of total loans at June 30, 2015 and 11% of total loans at December 31, 2014 and represented 7% of total assets at both June 30, 2015 and December 31, 2014. See the Credit Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our loan portfolio.

Total loans above include purchased impaired loans of $4.5 billion, or 2% of total loans, at June 30, 2015, and $4.9 billion, or 2% of total loans, at December 31, 2014.

Our loan portfolio continued to be diversified among numerous industries, types of businesses and consumers across our principal geographic markets.

 

 

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


Allowance for Loan and Lease Losses (ALLL)

Information regarding our higher risk loans and ALLL is included in the Credit Risk Management portion of the Risk Management section of this Financial Review and Note 1 Accounting Policies, Note 3 Asset Quality and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in our Notes To Consolidated Financial Statements included in Part 1, Item 1 of this Report.

Purchase Accounting Accretion and Valuation of Purchased Impaired Loans

Information related to purchase accounting accretion and accretable yield for the second quarter and first six months of 2015 and 2014 follows. Additional information on our policies for ALLL for purchased impaired loans is provided in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements of this Report. A description of our purchased impaired loan accounting and loan data is included in Note 4 Purchased Loans in the Notes To Consolidated Financial Statements of this Report.

Table 8: Accretion – Purchased Impaired Loans

 

    

Three months ended

June 30

     Six months ended
June 30
 
In millions    2015     2014      2015      2014  

Accretion on purchased impaired loans

            

Scheduled accretion

   $ 92      $ 120       $ 191       $ 245   

Reversal of contractual interest on impaired loans

     (52     (70      (107      (138

Scheduled accretion net of contractual interest

     40        50         84         107   

Excess cash recoveries (a)

     28        35         61         64   

Total

   $ 68      $ 85       $ 145       $ 171   
(a) Relates to excess cash recoveries for purchased impaired commercial loans.

Table 9: Purchased Impaired Loans – Accretable Yield

 

In millions    2015     2014  

January 1

   $ 1,558      $ 2,055   

Scheduled accretion

     (191     (245

Excess cash recoveries

     (61     (64

Net reclassification to accretable from non-accretable and other activity (a)

     137        190   

June 30 (b)

   $ 1,443      $ 1,936   
(a) Approximately 70% and 78% of the net reclassification for the first six months ended June 30, 2015 and 2014, respectively, were driven by the consumer portfolio and were due to improvements of cash expected to be collected on loans in future periods. The remaining net reclassifications were predominantly due to future cash flow changes in the commercial portfolio.
(b) As of June 30, 2015, we estimate that the reversal of contractual interest on purchased impaired loans will total approximately $.8 billion in future periods. This will offset the total net accretable interest in future interest income of $1.4 billion on purchased impaired loans.
 

 

Information related to the valuation of purchased impaired loans at June 30, 2015 and December 31, 2014 follows.

Table 10: Valuation of Purchased Impaired Loans

 

     June 30, 2015      December 31, 2014  
Dollars in millions    Balance     Net Investment      Balance      Net Investment  

Commercial and commercial real estate loans:

            

Outstanding balance (a)

   $ 346         $ 466        

Recorded investment

   $ 235         $ 310        

Allowance for loan losses

     (67              (79         

Net investment/Carrying value

   $ 168        49    $ 231         50

Consumer and residential mortgage loans:

            

Outstanding balance (a)

   $ 4,136         $ 4,541        

Recorded investment

   $ 4,230         $ 4,548        

Allowance for loan losses

     (788              (793         

Net investment/Carrying value

   $ 3,442        83    $ 3,755         83

Total purchased impaired loans:

            

Outstanding balance (a)

   $ 4,482         $ 5,007        

Recorded investment

   $ 4,465         $ 4,858        

Allowance for loan losses

     (855              (872         

Net investment/Carrying value

   $ 3,610        81    $ 3,986         80
(a) Outstanding balance represents the balance on the loan servicing system for active loans. It is possible for the outstanding balance to be lower than the recorded investment for certain loans due to the use of pool accounting. See Note 4 Purchased Loans for additional information on purchased impaired loans.

 

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


At June 30, 2015, our largest individual purchased impaired loan had a recorded investment of $9 million. We currently expect to collect total cash flows of $5.0 billion on purchased impaired loans, representing the $3.6 billion net investment at June 30, 2015 and the accretable net interest of $1.4 billion shown in Table 9.

At June 30, 2015, and as noted in Table 10 above, our ALLL and our recorded investment balance for purchased impaired loans is $855 million and $4.5 billion, respectively. The ratio of total ALLL less purchased impaired loan ALLL to total loans less purchased impaired loans is 1.20%. The comparable amounts at June 30, 2014 were $886 million, $5.6 billion, and 1.31%, respectively. See Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in the Notes To Consolidated Financial Statements in this Report for additional information.

Weighted Average Life of the Purchased Impaired Portfolios

The table below provides the weighted average life (WAL) for each of the purchased impaired portfolios as of June 30, 2015.

Table 11: Weighted Average Life of the Purchased Impaired Portfolios

 

As of June 30, 2015

Dollars in millions

               
   Recorded Investment      WAL (a)  

Commercial

   $ 50         2.2 years   

Commercial real estate

     185         1.4 years   

Consumer (b)

     1,833         3.9 years   

Residential real estate

     2,397         4.8 years   

Total

   $ 4,465         4.2 years   
(a) Weighted average life represents the average number of years for which each dollar of unpaid principal remains outstanding.
(b) Portfolio primarily consists of nonrevolving home equity products.

Through the National City Corporation (National City) and RBC Bank (USA) acquisitions, we acquired purchased impaired loans with a recorded investment of $14.7 billion. As noted in Table 11 above, at June 30, 2015, those balances are now $4.5 billion, of which $4.2 billion is accounted for using pool accounting. In anticipation of the end of our purchased impaired loan balances and in light of supervisory guidance on industry practices for purchased impaired loans that are pooled and accounted for as single asset, management is re-evaluating its derecognition policies for purchased impaired loans that are pooled and accounted for as a single asset. Any resulting change in these policies would likely result in an acceleration of when a pool’s recorded investment and associated ALLL balances are reduced. At implementation, we do not expect this potential change to impact the net carrying values of the pools or result in additional provision for credit losses for purchased impaired loans that are pooled, as a pool’s recorded investment and associated ALLL balances are to be reduced in equal amounts. See Note 4

Purchased Loans in the Notes To Consolidated Financial Statements in this Report for additional information.

Purchased Impaired Loans – Accretable Difference Sensitivity Analysis

The following table provides a sensitivity analysis on the Total Purchased Impaired Loans portfolio. The analysis reflects hypothetical changes in key drivers for expected cash flows over the life of the loans under declining and improving conditions at a point in time. Any unusual significant economic events or changes, as well as other variables not

considered below (e.g., natural or widespread disasters), could result in impacts outside of the ranges represented below. Additionally, commercial and commercial real estate loan settlements or sales proceeds can vary widely from appraised values due to a number of factors including, but not limited to, special use considerations, liquidity premiums and improvements/deterioration in other income sources.

Table 12: Accretable Difference Sensitivity – Total Purchased Impaired Loans

 

In billions   June 30,
2015
    Declining
Scenario (a)
    Improving
Scenario (b)
 

Expected cash flows

  $ 5.0      $ (.1   $ .2   

Accretable difference

    1.4                 

Allowance for loan and lease losses

    (.9     (.1     .2   
(a) Declining Scenario – Reflects hypothetical changes that would decrease future cash flow expectations. For consumer loans, we assume home price forecast decreases by ten percent and unemployment rate forecast increases by two percentage points; for commercial loans, we assume that collateral values decrease by ten percent.
(b) Improving Scenario – Reflects hypothetical changes that would increase future cash flow expectations. For consumer loans, we assume home price forecast increases by ten percent, unemployment rate forecast decreases by two percentage points and interest rate forecast increases by two percentage points; for commercial loans, we assume that collateral values increase by ten percent.

The present value impact of declining cash flows is primarily reflected as an immediate impairment charge to the provision for credit losses, resulting in an increase to the allowance for loan and lease losses. The present value impact of increased cash flows is first recognized as a reversal of the allowance with any additional cash flow increases reflected as an increase in accretable yield over the life of the loan.

Commitments to Extend Credit

Commitment to extend credit are comprised of the following:

Table 13: Commitments to Extend Credit (a)

 

In millions   

June 30

2015

     December 31
2014
 

Total commercial lending

   $ 97,334       $ 98,742   

Home equity lines of credit

     17,570         17,839   

Credit card

     18,999         17,833   

Other

     4,339         4,178   

Total

   $ 138,242       $ 138,592   
(a) Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions.
 

 

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


In addition to the credit commitments set forth in the table above, our net outstanding standby letters of credit totaled $9.5 billion at June 30, 2015 and $10.0 billion at December 31, 2014. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

Information regarding our commitments to extend credit and our allowance for unfunded loan commitments and letters of credit is included in Note 1 Accounting Policies, Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit and Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part 1, Item 1 of this Report.

INVESTMENT SECURITIES

The following table presents the distribution of our investment securities portfolio by credit rating. We have included credit ratings information because we believe that the information is an indicator of the degree of credit risk to which we are exposed. Changes in credit ratings classifications could indicate increased or decreased credit risk and could be accompanied by a reduction or increase in the fair value of our investment securities portfolio. For those securities on our balance sheet at June 30, 2015, where during our quarterly security-level impairment assessments we determined losses represented other-than-temporary impairment (OTTI), we have recorded cumulative credit losses of $1.2 billion in earnings and accordingly have reduced the amortized cost of our securities. The majority of these cumulative impairment charges related to non-agency residential mortgage-backed and asset-backed securities rated BB or lower.

Table 14: Investment Securities

 

                                Ratings (a)  
    June 30, 2015     December 31, 2014     As of June 30, 2015  
Dollars in millions   Amortized
Cost
    Fair
Value
    Amortized
Cost
    Fair
Value
   

AAA/

AA

    A     BBB    

BB

and

Lower

   

No

Rating

 

U.S. Treasury and government agencies

  $ 6,184      $ 6,385      $ 5,485      $ 5,714        100          

Agency residential mortgage-backed

    28,828        29,100        23,382        23,935        100             

Non-agency residential mortgage-backed

    4,609        4,811        4,993        5,225        10        1     2     82     5

Agency commercial mortgage-backed

    3,122        3,184        3,378        3,440        100             

Non-agency commercial mortgage-backed (b)

    5,180        5,247        5,095        5,191        76        8        7        3        6   

Asset-backed (c)

    6,113        6,168        5,900        5,940        89        3          7        1   

State and municipal

    3,992        4,118        3,995        4,191        88        6            6   

Other debt

    2,129        2,167        2,099        2,142        61        30        8          1   

Corporate stock and other

    428        427        442        441                                        100   

Total investment securities (d)

  $ 60,585      $ 61,607      $ 54,769      $ 56,219        87     3     1     7     2

 

(a) Ratings percentages allocated based on amortized cost.
(b) Collateralized primarily by retail properties, office buildings, lodging properties and multi-family housing.
(c) Collateralized primarily by government guaranteed student loans and other consumer credit products and corporate debt.
(d) Includes available for sale and held to maturity securities.

Investment securities represented 17% of total assets at June 30, 2015 and 16% at December 31, 2014.

We evaluate our investment securities portfolio in light of changing market conditions and other factors and, where appropriate, take steps to improve our overall positioning. We consider the portfolio to be well-diversified and of high quality. At June 30, 2015, 87% of the securities in the portfolio were rated AAA/AA, with U.S. Treasury and government agencies, agency residential mortgage-backed and agency commercial mortgage-backed securities collectively representing 63% of the portfolio.

The investment securities portfolio includes both available for sale and held to maturity securities. Securities classified as available for sale are carried at fair value with net unrealized gains and losses, representing the difference between amortized cost and fair value, included in Shareholders’ equity as Accumulated other comprehensive income or loss, net of tax, on our Consolidated Balance Sheet. Securities classified as held to maturity are carried at amortized cost. As of June 30, 2015, the amortized cost and fair value of available for sale securities totaled $46.9 billion and $47.7 billion, respectively, compared to an amortized cost and fair value as of December 31, 2014 of $43.2 billion and $44.2 billion, respectively. The amortized cost and fair value of held to maturity securities were $13.7 billion and $13.9 billion, respectively, at June 30, 2015, compared to $11.6 billion and $12.0 billion, respectively, at December 31, 2014.

 

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


The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally decreases when credit spreads widen and vice versa. Net unrealized gains in the total investment securities portfolio decreased to $1.0 billion at June 30, 2015 from $1.5 billion at December 31, 2014 primarily due to the impact of market interest rates. The comparable amounts for the securities available for sale portfolio were $.8 billion at June 30, 2015 and $1.1 billion at December 31, 2014.

Unrealized gains and losses on available for sale debt securities do not impact liquidity. However these gains and losses do affect capital under the regulatory capital rules. Also, a change in the securities’ credit ratings could impact the liquidity of the securities and may be indicative of a change in credit quality, which could affect our risk-weighted assets and, therefore, our risk-based regulatory capital ratios under the regulatory capital rules. In addition, the amount representing the credit-related portion of OTTI on securities would reduce our earnings and regulatory capital ratios.

The duration of investment securities was 2.7 years at June 30, 2015. We estimate that, at June 30, 2015, the effective duration of investment securities was 2.8 years for an immediate 50 basis points parallel increase in interest rates and 2.6 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2014 for the effective duration of investment securities were 2.2 years and 2.1 years, respectively.

Based on current interest rates and expected prepayment speeds, the weighed-average expected maturity of the investment securities portfolio (excluding corporate stock and other) was 4.6 years at June 30, 2015 compared to 4.3 years at December 31, 2014. The weighted-average expected maturities of mortgage and other asset-backed debt securities were as follows as of June 30, 2015:

Table 15: Weighted-Average Expected Maturity of Mortgage and Other Asset-Backed Debt Securities

 

June 30, 2015    Years  

Agency residential mortgage-backed securities

     4.4   

Non-agency residential mortgage-backed securities

     5.3   

Agency commercial mortgage-backed securities

     3.4   

Non-agency commercial mortgage-backed securities

     2.9   

Asset-backed securities

     3.0   

At least quarterly, we conduct a comprehensive security-level impairment assessment on all securities. If economic conditions, including home prices, were to deteriorate from current levels, and if market volatility and liquidity were to deteriorate from current levels, or if market interest rates were

to increase or credit spreads were to widen appreciably, the valuation of our investment securities portfolio would likely be adversely affected and we could incur additional OTTI credit losses that would impact our Consolidated Income Statement.

Additional information regarding our investment securities is included in Note 6 Investment Securities and Note 7 Fair Value in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report.

Loans Held for Sale

Table 16: Loans Held For Sale

 

In millions    June 30
2015
     December 31
2014
 

Commercial mortgages at fair value

   $ 757       $ 893   

Commercial mortgages at lower of cost or fair value

     27         29   

Total commercial mortgages

     784         922   

Residential mortgages at fair value

     1,364         1,261   

Residential mortgages at lower of cost or fair value

     5         18   

Total residential mortgages

     1,369         1,279   

Other

     204         61   

Total

   $ 2,357       $ 2,262   

As of September 1, 2014, we have elected to apply the fair value option to commercial mortgage loans held for sale to agencies. This election applies to all new commercial mortgage loans held for sale originated for sale to the agencies effective on or after September 1, 2014. The election of fair value option aligns the accounting for the commercial mortgages with the related commitments to sell the loans.

We sold $2.2 billion of commercial mortgage loans to agencies during the first six months of 2015 compared to $935 million during the first six months of 2014. Total gains of $51 million were recognized on the valuation and sale of commercial mortgage loans held for sale, net of hedges, during the first six months of 2015, including $36 million in the second quarter. Comparable amounts for 2014 were $29 million and $22 million, respectively. These amounts are included in Other noninterest income on our Consolidated Income Statement.

Residential mortgage loan origination volume was $5.5 billion during the first six months of 2015 compared to $4.5 billion during the first six months of 2014. The majority of such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $4.0 billion of loans and recognized loan sales revenue of $203 million during the first six months of 2015, of which $99 million occurred in the second quarter. The comparable amounts for the first six months of 2014 were $4.3 billion and $242 million, respectively, including $135 million in the second quarter.

 

 

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


Interest income on loans held for sale was $46 million during the first six months of 2015, including $23 million in the second quarter. Comparable amounts for 2014 were $47 million and $24 million, respectively. These amounts are included in Other interest income on our Consolidated Income Statement.

Additional information regarding our loan sale and servicing activities is included in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities and Note 7 Fair Value in our Notes To Consolidated Financial Statements included in Part 1, Item 1 of this Report.

Goodwill and Intangible Assets

Goodwill and intangible assets of $11.1 billion remained relatively flat at June 30, 2015. See additional information regarding our goodwill and intangible assets in Note 8 Goodwill and Intangible Assets included in the Notes To Consolidated Financial Statements in Part 1, Item 1 of this Report.

Funding Sources

Table 17: Details Of Funding Sources

 

Dollars in millions   

June 30

2015

    

December 31

2014

           Change  
            $      %  

Deposits

                                        

Money market

   $ 122,643       $ 115,438          $ 7,205         6

Demand

     82,653         82,829            (176     

Retail certificates of deposit

     18,265         18,544            (279      (2 )% 

Savings

     13,818         12,571            1,247         10

Time deposits in foreign offices and other time deposits

     2,325         2,852            (527      (18 )% 

Total deposits

     239,704         232,234            7,470         3

Borrowed funds

                

Federal funds purchased and repurchase agreements

     2,190         3,510            (1,320      (38 )% 

FHLB borrowings

     22,193         20,005            2,188         11

Bank notes and senior debt

     18,529         15,750            2,779         18

Subordinated debt

     9,121         9,151            (30     

Commercial paper

     2,956         4,995            (2,039      (41 )% 

Other

     3,287         3,357            (70      (2 )% 

Total borrowed funds

     58,276         56,768            1,508         3

Total funding sources

   $ 297,980       $ 289,002            $ 8,978         3

See the Liquidity Risk Management portion of the Risk Management section of this Financial Review for additional information regarding our 2015 capital and liquidity activities.

Total deposits increased $7.5 billion at June 30, 2015 compared with December 31, 2014 due to strong growth in money market and savings, partially offset by lower other time deposits. Interest-bearing deposits represented 68% of total deposits at both June 30, 2015 and December 31, 2014. Total borrowed funds increased $1.5 billion since December 31, 2014 as higher issuances of bank notes and senior debt and FHLB borrowings were partially offset by a decline in commercial paper and federal funds purchased and repurchase agreements.

 

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


Capital

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

We repurchase shares of PNC common stock under common stock repurchase authorizations approved from time to time by PNC’s Board of Directors and consistent with capital plans submitted to, and accepted by, the Federal Reserve. Through the first quarter of 2015, we repurchased stock under our 2007 common stock repurchase program authorization that permitted us to purchase up to 25 million shares of PNC common stock on the open market or in privately negotiated transactions. Effective as of March 31, 2015, PNC’s Board of Directors approved the termination of the 2007 common stock repurchase program authorization, and replaced it with a new stock repurchase program authorization in the amount of 100 million shares of PNC common stock, effective April 1, 2015. The extent and timing of share repurchases under this authorization will depend on a number of factors including, among others, market and general economic conditions, economic and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, contractual and regulatory limitations, and the results of future supervisory assessments of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process.

In the first quarter of 2015, we completed our common stock repurchase programs for the four quarter period that began in second quarter 2014 with total repurchases of 17.3 million common shares for $1.5 billion. These repurchases were included in our 2014 capital plan accepted by the Federal Reserve as part of our 2014 CCAR submission.

In connection with 2015 CCAR, we submitted our 2015 capital plan, as approved by PNC’s Board of Directors, to the Federal Reserve in January 2015. The Federal Reserve accepted the capital plan and did not object to our proposed capital actions in March 2015. As provided for in the 2015 capital plan, we announced new share repurchase programs of up to $2.875 billion for the five quarter period beginning in the second quarter of 2015. These programs include repurchases of up to $375 million over the five quarter period related to stock issuances under employee benefit-related programs.

Under the Federal Reserve’s capital plan rule, a bank holding company must resubmit a new capital plan prior to the annual submission date if, among other things, there has been or will be a material change in the bank holding company’s risk profile, financial condition, or corporate structure since its last capital plan submission.

See the Supervision and Regulation section of Item 1 Business of our 2014 Form 10-K for further information concerning the CCAR process and the factors the Federal Reserve takes into consideration in its evaluation of capital plans and the Balance Sheet, Liquidity and Capital Highlights portion of the Executive Summary section of this Financial Review for the impact of the Federal Reserve’s current supervisory assessment of the capital adequacy program.

 

 

Table 18: Shareholders’ Equity

 

Dollars in millions   

June 30

2015

   

December 31

2014

          Change  
          $      %  

Shareholders’ equity

                                      

Preferred stock (a)

              

Common stock

   $ 2,708      $ 2,705         $ 3        

Capital surplus – preferred stock

     3,449        3,946           (497      (13 )% 

Capital surplus – common stock and other

     12,632        12,627           5        

Retained earnings

     27,609        26,200           1,409         5

Accumulated other comprehensive income

     379        503           (124      (25 )% 

Common stock held in treasury at cost

     (2,262     (1,430        (832      (58 )% 

Total shareholders’ equity

   $ 44,515      $ 44,551           $ (36     
(a) Par value less than $.5 million at each date.

 

The slight decline in total shareholders’ equity compared to December 31, 2014 reflected common share repurchases of $1.0 billion and the redemption of $500 million of preferred stock, partially offset by an increase in retained earnings. The increase in retained earnings was driven by net income of $2.0 billion, reduced by $631 million of common and preferred dividends declared. Common shares outstanding were 516 million at June 30, 2015 and 523 million at December 31, 2014.

In the first quarter of 2015, PNC repurchased 4.4 million common shares for $.4 billion. In the second quarter of 2015, PNC repurchased 5.9 million common shares for $.6 billion. All of these repurchases were under the authorizations and programs then in effect, as described above.

 

 

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


Table 19: Basel III Capital

 

     June 30, 2015       
Dollars in millions   

Transitional

Basel III (a)

    Pro forma Fully
Phased-In Basel  III
(b)(c)
      

Common equity Tier 1 capital

        

Common stock plus related surplus, net of treasury stock

   $ 13,079      $ 13,079       

Retained earnings

     27,609        27,609       

Accumulated other comprehensive income for securities currently and previously held as available for sale

     217        541       

Accumulated other comprehensive income for pension and other postretirement plans

     (195     (488    

Goodwill, net of associated deferred tax liabilities

     (8,849     (8,849    

Other disallowed intangibles, net of deferred tax liabilities

     (150     (374    

Other adjustments/(deductions)

     (101     (148    

Total common equity Tier 1 capital before threshold deductions

     31,610        31,370       

Total threshold deductions

     (430     (1,159    

Common equity Tier 1 capital

     31,180        30,211       

Additional Tier 1 capital

        

Preferred stock plus related surplus

     3,449        3,449       

Trust preferred capital securities

     50         

Noncontrolling interests (d)

     604        44       

Other adjustments/(deductions)

     (90     (105    

Tier 1 capital

     35,193        33,599       

Additional Tier 2 capital

        

Qualifying subordinated debt

     4,841        4,415       

Trust preferred capital securities

     149         

Allowance for loan and lease losses included in Tier 2 capital

     3,518        223       

Other

     5        10       

Total Basel III capital

   $ 43,706      $ 38,247       

Risk-weighted assets

        

Basel III standardized approach risk-weighted assets (e)

   $ 293,862      $ 301,688       

Estimated Basel III advanced approaches risk-weighted assets (f)

     N/A        286,277       

Average quarterly adjusted total assets

     342,680        341,687       

Supplementary leverage exposure (g)

     405,726        404,792       

Basel III risk-based capital and leverage ratios

        

Common equity Tier 1

     10.6     10.0 % (h)(j)     

Tier 1

     12.0        11.1 (h)(k)     

Total

     14.9        13.4 (i)(l)     

Leverage (m)

     10.3        9.8       

Supplementary leverage ratio (n)

     8.7        8.3       
(a) Calculated using the regulatory capital methodology applicable to PNC during 2015.
(b) PNC utilizes the pro forma fully phased-in Basel III capital ratios to assess its capital position (without the benefit of phase-ins), including comparison to similar estimates made by other financial institutions. Pro forma fully phased-in capital amounts, ratios and risk-weighted and leverage-related assets are estimated.
(c) Basel III capital ratios and estimates may be impacted by additional regulatory guidance or analysis and, in the case of those ratios calculated using the advanced approaches, the ongoing evolution, validation and regulatory approval of PNC’s models integral to the calculation of advanced approaches risk-weighted assets.
(d) Primarily includes REIT Preferred Securities.
(e) Includes credit and market risk-weighted assets.
(f) Includes credit, market and operational risk-weighted assets.
(g) Supplementary leverage exposure is the sum of Adjusted average assets and certain off-balance sheet exposures including undrawn credit commitments and derivative potential future exposures.
(h) Pro forma fully phased-in Basel III capital ratio based on estimated Basel III standardized approach risk-weighted assets and rules.
(i) Pro forma fully phased-in Basel III capital ratio based on estimated Basel III advanced approaches risk-weighted assets and rules.
(j) For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Common equity Tier 1 capital ratio estimate is 10.6%. This capital ratio is calculated using pro forma fully phased-in Common equity Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets.
(k) For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Tier 1 risk-based capital ratio estimate is 11.7%. This capital ratio is calculated using fully phased-in Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets.
(l) For comparative purposes only, the pro forma fully phased-in standardized approach Basel III Total capital risk-based capital ratio estimate is 13.8%. This ratio is calculated using fully phased-in additional Tier 2 capital which, under the standardized approach, reflects allowance for loan and lease losses of up to 1.25% of credit risk related risk-weighted assets and dividing by estimated Basel III standardized approach risk-weighted assets.
(m) Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets.
(n) Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure. As advanced approaches banking organizations, PNC and PNC Bank will be subject to a 3% minimum supplementary leverage ratio effective January 1, 2018.

 

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


The Basel II framework, which was adopted by the Basel Committee on Banking Supervision in 2004, seeks to provide more risk-sensitive regulatory capital calculations and promote enhanced risk management practices among large, internationally active banking organizations. The U.S. banking agencies initially adopted rules to implement the Basel II capital framework in 2004. In July 2013, the U.S. banking agencies adopted final rules (referred to as the advanced approaches) that modified the Basel II framework effective January 1, 2014. See the Supervision and Regulation section in Item 1 Business and Item 1A Risk Factors of our 2014 Form 10-K for additional information. Prior to fully implementing the advanced approaches to calculate risk-weighted assets, PNC and PNC Bank must successfully complete a “parallel run” qualification phase. Both PNC and PNC Bank entered this parallel run phase on January 1, 2013. Although the minimum parallel run qualification period is four quarters, the parallel run period for PNC and PNC Bank, now in its third year, is consistent with the experience of other U.S. advanced approaches banks that have all had multi-year parallel run periods. After PNC exits parallel run, its regulatory risk-based capital ratio for each measure (e.g., Common equity Tier 1 capital ratio) will be the lower of the ratios as calculated under the standardized approach and the advanced approaches.

As a result of the staggered effective dates of the final U.S. Basel III regulatory capital rules (Basel III rules), as well as the fact that PNC remains in the parallel run qualification phase for the advanced approaches, PNC’s regulatory risk-based ratios in 2015 will be calculated using the standardized approach, effective January 1, 2015, for determining risk-weighted assets, and the definitions of, and deductions from, regulatory capital under the Basel III rules (as such definitions and deductions are phased-in for 2015). We refer to the capital ratios calculated using the phased-in Basel III provisions in effect for 2015 and, for the risk-based ratios, standardized approach risk-weighted assets as the 2015 Transitional Basel III ratios. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, past due exposures, equity exposures and securitization exposures are generally subject to higher risk weights than other types of exposures.

Under the Basel III rules adopted by the U.S. banking agencies, significant common stock investments in unconsolidated financial institutions, mortgage servicing rights and deferred tax assets must be deducted from capital (subject to a phase-in schedule) to the extent they individually exceed 10%, or in the aggregate exceed 15%, of the institution’s adjusted common equity Tier 1 capital. Also, Basel III regulatory capital includes (subject to a phase-in schedule) accumulated other comprehensive income related to securities currently and previously held as available for sale, as well as pension and other postretirement plans.

Federal banking regulators have stated that they expect the largest U.S. bank holding companies, including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largest U.S. bank holding companies, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers through estimated stress scenarios. We seek to manage our capital consistent with these regulatory principles, and believe that our June 30, 2015 capital levels were aligned with them.

At June 30, 2015, PNC and PNC Bank, our sole bank subsidiary, were both considered “well capitalized,” based on applicable U.S. regulatory capital ratio requirements. To qualify as “well capitalized” during 2015, PNC and PNC Bank must have Transitional Basel III capital ratios of at least 6.5% for Common equity Tier 1 capital, 8% for Tier 1 risk-based and 10% for Total risk-based, and PNC Bank is required to have a Transitional Basel III leverage ratio of at least 5%.

The access to and cost of funding for new business initiatives, the ability to undertake new business initiatives including acquisitions, the ability to engage in expanded business activities, the ability to pay dividends or repurchase shares or other capital instruments, the level of deposit insurance costs, and the level and nature of regulatory oversight depend, in large part, on a financial institution’s capital strength.

We provide additional information regarding regulatory capital requirements and some of their potential impacts on PNC in the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 20 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of our 2014 Form 10-K.

 

 

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


OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

We engage in a variety of activities that involve unconsolidated entities or that are otherwise not reflected in our Consolidated Balance Sheet that are generally referred to as “off-balance sheet arrangements.” Additional information on these types of activities is included in our 2014 Form 10-K and in the following sections of this Report:

   

Commitments, including contractual obligations and other commitments, included within the Risk Management section of this Financial Review,

   

Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements,

   

Note 9 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities in the Notes To Consolidated Financial Statements, and

   

Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements.

PNC consolidates variable interest entities (VIEs) when we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.

A summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements, as of June 30, 2015 and December 31, 2014 is included in Note 2 of this Report.

Trust Preferred Securities

We are subject to certain restrictions, including restrictions on dividend payments, in connection with $206 million in principal amount of an outstanding junior subordinated debenture associated with $200 million of trust preferred securities that were issued by PNC Capital Trust C, a subsidiary statutory trust (both amounts as of June 30, 2015). Generally, if there is (i) an event of default under the debenture, (ii) PNC elects to defer interest on the debenture, (iii) PNC exercises its right to defer payments on the related trust preferred security issued by the statutory trust or (iv) there is a default under PNC’s guarantee of such payment obligations, as specified in the applicable governing documents, then PNC would be subject during the period of such default or deferral to restrictions on dividends and other provisions protecting the status of the debenture holders similar to or in some ways more restrictive than those potentially imposed under the Exchange Agreement with PNC Preferred Funding Trust II. See Note 12 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in the Notes To Consolidated Financial Statements in Item 8 of our 2014 Form 10-K for information on contractual limitations on dividend payments resulting from securities issued by PNC Preferred Funding Trust I and PNC Preferred Funding Trust II.

 

 

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


FAIR VALUE MEASUREMENTS

In addition to the following, see Note 7 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for further information regarding fair value.

The following table summarizes the assets and liabilities measured at fair value at June 30, 2015 and December 31, 2014, respectively, and the portions of such assets and liabilities that are classified within Level 3 of the valuation hierarchy. Level 3 assets and liabilities are those where the fair value is estimated using significant unobservable inputs.

Table 20: Fair Value Measurements – Summary

 

     June 30, 2015      December 31, 2014  
Dollars in millions   

Total Fair

Value

    Level 3     

Total Fair

Value

     Level 3  

Total assets

   $ 62,102      $ 9,719       $ 58,973       $ 10,257   

Total assets at fair value as a percentage of consolidated assets

     18          17     

Level 3 assets as a percentage of total assets at fair value

       16         17

Level 3 assets as a percentage of consolidated assets

             3               3

Total liabilities

   $ 5,493      $ 673       $ 5,799       $ 716   

Total liabilities at fair value as a percentage of consolidated liabilities

     2          2     

Level 3 liabilities as a percentage of total liabilities at fair value

       12         12

Level 3 liabilities as a percentage of consolidated liabilities

             <1               <1

The majority of assets recorded at fair value are included in the securities available for sale portfolio. The majority of Level 3 assets represent non-agency residential mortgage-backed securities in the securities available for sale portfolio, equity investments and mortgage servicing rights.

An instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification (transfer) of assets or liabilities between hierarchy levels. PNC’s policy is to recognize transfers in and transfers out as of the end of the reporting period. For additional information regarding the transfers of assets or liabilities between hierarchy levels, see Note 7 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

 

BUSINESS SEGMENTS REVIEW

We have six reportable business segments:

   

Retail Banking

   

Corporate & Institutional Banking

   

Asset Management Group

   

Residential Mortgage Banking

   

BlackRock

   

Non-Strategic Assets Portfolio

Business segment results, including inter-segment revenues, and a description of each business are included in Note 17 Segment Reporting included in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report. Certain amounts included in this Financial Review differ from those amounts shown in Note 17 primarily due to the presentation in this Financial Review of business net interest revenue on a taxable-equivalent basis. Note 17 presents results of businesses for the first six months and second quarter of 2015 and 2014.

Net interest income in business segment results reflects PNC’s internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors. In the first quarter of 2015, enhancements were made to PNC’s funds transfer pricing methodology primarily for costs related to the new regulatory short-term liquidity standards. The enhancements incorporate an additional charge assigned to assets, including for unfunded loan commitments. Conversely, a higher transfer pricing credit has been assigned to those deposits that are accorded higher value under LCR rules for liquidity purposes. Please see the Supervision and Regulation section in Item 1 and the Liquidity Risk Management section in Item 7 of our 2014 Form 10-K for more information about the LCR. These adjustments apply to business segment results, primarily favorably impacting Retail Banking and adversely impacting Corporate & Institutional Banking, prospectively beginning with the first quarter of 2015. Prior periods have not been adjusted due to the impracticability of estimating the impact of the change for prior periods.

 

 

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


Retail Banking

(Unaudited)

Table 21: Retail Banking Table

 

Six months ended June 30

Dollars in millions, except as noted

   2015     2014  

Income Statement

      

Net interest income

   $ 2,083      $ 1,953   

Noninterest income

      

Service charges on deposits

     294        288   

Brokerage

     138        116   

Consumer services

     487        466   

Other

     159        185   

Total noninterest income

     1,078        1,055   

Total revenue

     3,161        3,008   

Provision for credit losses

     94        149   

Noninterest expense

     2,368        2,255   

Pretax earnings

     699        604   

Income taxes

     256        221   

Earnings

   $ 443      $ 383   

Average Balance Sheet

      

Loans

      

Consumer

      

Home equity

   $ 27,964      $ 29,137   

Indirect auto

     9,287        9,043   

Indirect other

     580        751   

Education

     6,506        7,422   

Credit cards

     4,446        4,289   

Other

     2,360        2,164   

Total consumer

     51,143        52,806   

Commercial and commercial real estate

     10,612        10,986   

Floor plan

     2,200        2,332   

Residential mortgage

     731        635   

Total loans

     64,686        66,759   

Goodwill and other intangible assets

     5,983        6,052   

Other assets

     3,022        2,748   

Total assets

   $ 73,691      $ 75,559   

Deposits

      

Noninterest-bearing demand

   $ 23,015      $ 21,634   

Interest-bearing demand

     36,054        33,883   

Money market

     54,071        49,815   

Total transaction deposits

     113,140        105,332   

Savings

     13,245        11,568   

Certificates of deposit

     17,032        19,617   

Total deposits

     143,417        136,517   

Other liabilities

     603        405   

Total liabilities

   $ 144,020      $ 136,922   

Performance Ratios

      

Return on average assets

     1.21     1.02

Noninterest income to total revenue

     34        35   

Efficiency

     75        75   

Other Information (a)

      

Credit-related statistics:

      

Commercial nonperforming assets

   $ 126      $ 158   

Consumer nonperforming assets

     1,001        1,037   

Total nonperforming assets (b)

   $ 1,127      $ 1,195   

Purchased impaired loans (c)

   $ 531      $ 631   

Commercial lending net charge-offs

   $ 2      $ 31   

Credit card lending net charge-offs

     73        74   

Consumer lending (excluding credit card) net charge-offs

     110        156   

Total net charge-offs

   $ 185      $ 261   

Commercial lending annualized net charge-off ratio

     .03     .47

Credit card lending annualized net charge-off ratio

     3.29     3.48

Consumer lending (excluding credit card) annualized net charge-off ratio

     .47     .64

Total annualized net charge-off ratio

     .58     .79
At June 30    2015      2014  

Other Information (Continued) (a)

  

Home equity portfolio credit statistics: (d)

       

% of first lien positions at origination (e)

     55      53

Weighted-average loan-to-value ratios (LTVs) (e) (f)

     76      79

Weighted-average updated FICO scores (g)

     751         748   

Annualized net charge-off ratio

     .38      .65

Delinquency data – % of total loans: (h)

       

Loans 30 – 59 days past due

     .20      .19

Loans 60 – 89 days past due

     .08      .07

Accruing loans past due

     .28      .26

Nonperforming loans

     3.13      3.08

Other statistics:

       

ATMs

     8,880         7,977   

Branches (i)

     2,644         2,695   

Brokerage account client assets
(in billions) (j)

   $ 44       $ 43   

Customer-related statistics (average):

       

Non-teller deposit transactions (k)

     41      32

Digital consumer customers (l)

     51      44
(a) Presented as of June 30, except for net charge-offs, net charge-off ratios, which are for the six months ended and customer-related statistics which are averages for the six months ended.
(b) Includes nonperforming loans of $1.1 billion at both June 30, 2015 and June 30, 2014.
(c) Recorded investment of purchased impaired loans related to acquisitions.
(d) Lien position, LTV and FICO statistics are based upon customer balances.
(e) Lien position and LTV calculations reflect management assumptions where data limitations exist.
(f) LTV statistics are based upon current information.
(g) Represents FICO scores that are updated at least quarterly.
(h) Data based upon recorded investment. Past due amounts exclude purchased impaired loans, even if contractually past due, as we are currently accreting interest income over the expected life of the loans.
(i) Excludes satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services.
(j) Amounts include cash and money market balances.
(k) Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application.
(l) Represents consumer checking relationships that process the majority of their transactions through non-teller channels.
 

 

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


Retail Banking earned $443 million in the first six months of 2015 compared with earnings of $383 million for the same period a year ago. The increase in earnings was driven by increased net interest income and noninterest income and lower provision for credit losses partially offset by higher noninterest expense. Noninterest income included lower gains on sales of Visa Class B common shares.

Retail Banking continues to enhance the customer experience with refinements to product offerings that drive product value for consumers and small businesses. We are focused on growing customer share of wallet through the sale of liquidity, banking, and investment products.

Retail Banking continued to focus on the strategic priority of transforming the customer experience through transaction migration, branch network transformation and multi-channel sales strategies.

   

In the first six months of 2015, approximately 51% of consumer customers used non-teller channels for the majority of their transactions compared with 44% for the same period in 2014.

   

Deposit transactions via ATM and mobile channels increased to 41% of total deposit transactions in the first half of 2015 compared with 32% for the same period a year ago.

   

Integral to PNC’s retail branch transformation strategy, more than 300 branches operate under the universal model designed to drive higher ATM and mobile deposits and enhance sales opportunities for branch personnel. During the first half of 2015, the total branch network was reduced by 53 branches and the ATM network was increased by 275 ATMs. PNC had a network of 2,644 branches and 8,880 ATMs at June 30, 2015.

   

As part of Retail Banking’s transformation and multi-channel sales strategy, PNC’s proactive customer appointment setting model was rolled out to all markets.

   

Instant debit card issuance is now available in more than 500 branches, approximately 20% of the branch network.

   

By the end of third quarter, all branches will have Apple iPad™ technology to demonstrate product capabilities to customers and prospects.

Total revenue for the first six months of 2015 increased $153 million compared to the same period a year ago, which included a $130 million increase in net interest income. In addition to the benefit from the enhancements to internal funds transfer pricing methodology in the first quarter of 2015, net interest income increased slightly, as growth in deposit balances was partially offset by lower loan balances and yields and lower purchase accounting accretion on loans and deposits.

Noninterest income increased $23 million, or 2%, compared to the first six months of 2014. Noninterest income included gains on sales of Visa Class B common shares of $79 million on one million shares and $116 million on two million shares, in the first six months of 2015 and 2014, respectively. Excluding these gains, noninterest income increased $60 million, or 6%, as a result of increases in customer-initiated transactions, brokerage fees, changes in product offerings, and increased merchant processing revenue.

Provision for credit losses and net charge-offs in the first six months of 2015 declined by $55 million and $76 million, respectively, in the comparison to the same period a year ago. Provision for credit losses decreased due to improved credit metrics. Lower net charge-offs were driven by improved credit quality in both the consumer and commercial portfolios.

 

 

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


Noninterest expense increased $113 million in the first six months of 2015 compared to the same period in 2014. Increases in technology investments, sales incentive compensation, marketing, and customer transaction-related costs were offset by reduced branch network expenses as a result of transaction migration to lower cost digital and ATM channels.

Growing core checking deposits is key to Retail Banking’s growth and to providing a source of low-cost funding and liquidity to PNC. The deposit product strategy of Retail Banking is to remain disciplined on pricing, target specific products and markets for growth, and focus on the retention and growth of customer balances. In the first half of 2015, average total deposits increased $6.9 billion, or 5%, compared with the same period in 2014.

   

Average transaction deposits grew $7.8 billion, or 7%, and average savings deposit balances grew $1.7 billion, or 14%, compared to the first six months of 2014 as a result of organic deposit growth. Compared to the same period a year ago, average demand deposits increased $3.6 billion, or 6%, to $59.1 billion and average money market deposits increased $4.3 billion, or 9%.

   

Total average certificates of deposit decreased $2.6 billion in the first six months of 2015, or 13%, compared to the same period in 2014. The decline in average certificates of deposit was due to the expected run-off of maturing accounts.

Retail Banking continued to focus on a relationship-based lending strategy that targets specific products and markets for growth, including small businesses and auto dealerships. In the first six months of 2015, average total loans declined $2.1 billion, compared to the same period a year ago, driven by a decline in home equity loans and declines from run-off of non-strategic portions of the portfolios.

   

Average home equity loans decreased $1.2 billion, or 4%, compared to the first six months of 2014. The overall portfolio decline resulted from pay-downs and payoffs on loans exceeding new booked volume. Retail Banking’s home equity loan portfolio is relationship based, with 97% of the portfolio attributable to borrowers in our primary geographic footprint.

   

Average auto dealer floor plan loans declined $132 million, or 6%, in the first half of 2015, compared to the same period in 2014, primarily resulting from lower dealer line utilization.

   

Average indirect auto loans increased $244 million, or 3%, compared to the first six months 2014. The increase was primarily due to growth in newer footprint indirect auto markets.

   

Average credit card balances increased $157 million, or 4%, over the same period in 2014 as a result of efforts to increase credit card share of wallet through organic growth.

   

Average residential mortgage balances increased $96 million, or 15%, compared to the first six months of 2014. The increase was due to the transfer of $198 million in Community Reinvestment Act (CRA) mortgage loans from the Residential Mortgage Banking business segment in January 2015.

   

In the first half of 2015, average loan balances for the remainder of the portfolio declined a net $1.3 billion, compared to the same period a year ago, driven by declines in the education portfolio of $916 million and commercial & commercial real estate of $374 million. The discontinued government guaranteed education loan and indirect other portfolios are primarily run-off portfolios.

Nonperforming assets declined $68 million, or 6%, at June 30, 2015 compared to June 30, 2014. The decrease was driven by declines in both commercial and consumer non-performing loans.

 

 

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


Corporate & Institutional Banking

(Unaudited)

Table 22: Corporate & Institutional Banking Table

 

Six months ended June 30

Dollars in millions, except as noted

   2015     2014  

Income Statement

      

Net interest income

   $ 1,726      $ 1,855   

Noninterest income

      

Corporate service fees

     651        580   

Other

     270        211   

Noninterest income

     921        791   

Total revenue

     2,647        2,646   

Provision for credit losses

     37        90   

Noninterest expense

     1,061        992   

Pretax earnings

     1,549        1,564   

Income taxes

     559        571   

Earnings

   $ 990      $ 993   

Average Balance Sheet

      

Loans

      

Commercial

   $ 85,228      $ 76,771   

Commercial real estate

     22,319        20,640   

Equipment lease financing

     6,920        6,834   

Total commercial lending

     114,467        104,245   

Consumer

     1,113        1,070   

Total loans

     115,580        105,315   

Goodwill and other intangible assets

     3,840        3,815   

Loans held for sale

     1,048        913   

Other assets

     11,243        9,949   

Total assets

   $ 131,711      $ 119,992   

Deposits

      

Noninterest-bearing demand

   $ 47,449      $ 42,646   

Money market

     22,002        20,476   

Other

     9,368        7,548   

Total deposits

     78,819        70,670   

Other liabilities

     8,083        7,477   

Total liabilities

   $ 86,902      $ 78,147   

Performance Ratios

      

Return on average assets

     1.52     1.67

Noninterest income to total revenue

     35        30   

Efficiency

     40        37   

Commercial Loan Servicing Portfolio – Serviced For PNC and Others (in billions)

      

Beginning of period

   $ 377      $ 347   

Acquisitions/additions

     96        39   

Repayments/transfers

     (37     (33

End of period

   $ 436      $ 353   

Other Information

      

Consolidated revenue from: (a)

      

Treasury Management (b)

   $ 653      $ 624   

Capital Markets (b)

   $ 385      $ 335   

Commercial mortgage banking activities

      

Commercial mortgage loans held for sale (c)

   $ 73      $ 52   

Commercial mortgage loan servicing income (d)

     121        108   

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

     24        25   

Total

   $ 218      $ 185   

Average Loans (by C&IB business)

      

Corporate Banking

   $ 58,323      $ 52,947   

Real Estate

     30,248        26,827   

Business Credit

     14,415        12,868   

Equipment Finance

     10,938        10,250   

Other

     1,656        2,423   

Total average loans

   $ 115,580      $ 105,315   

Total loans (f)

   $ 115,708      $ 108,990   

Net carrying amount of commercial mortgage servicing rights (f)

   $ 543      $ 515   

Credit-related statistics:

      

Nonperforming assets (f) (g)

   $ 463      $ 715   

Purchased impaired loans (f) (h)

   $ 181      $ 370   

Net charge-offs (recoveries)

   $ (20   $ 17   
(a) Represents consolidated PNC amounts. See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of the Corporate & Institutional Banking portion of this Business Segments Review section.
(b) Includes amounts reported in net interest income, corporate service fees and other noninterest income.
(c) Includes other noninterest income for valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, origination fees, gains on sale of loans held for sale and net interest income on loans held for sale.
(d) Includes net interest income and noninterest income, primarily in corporate services fees, from loan servicing and ancillary services, net of changes in fair value on commercial mortgage servicing rights due to time and payoffs. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.
(e) Includes amounts reported in corporate services fees.
(f) As of June 30.
(g) Includes nonperforming loans of $.4 billion at June 30, 2015 and $.6 billion at June 30, 2014.
(h) Recorded investment of purchased impaired loans related to acquisitions.

Corporate & Institutional Banking earned $990 million in the first six months of 2015 compared with earnings of $993 million for the same period a year ago. The slight decrease in earnings was due to lower net interest income and an increase in noninterest expense, mostly offset by higher noninterest income and a decrease in the provision for credit losses. We continue to focus on building client relationships where the risk-return profile is attractive, including the Southeast.

Net interest income decreased $129 million in the first six months of 2015 compared to the first six months of 2014. The decline was due to the impact of first quarter 2015 enhancements to internal funds transfer pricing methodology, continued spread compression on loans, and lower purchase accounting accretion, partially offset by the impact of higher average loans and deposits. Decreased net interest income in the comparison also reflected the impact from the second quarter 2014 correction to reclassify certain commercial facility usage fees from net interest income to corporate service fees.

Corporate service fees increased $71 million in the first six months of 2015 compared to the first six months of 2014. This increase was primarily due to the impact of the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to corporate service fees and increases in treasury management and equity capital markets advisory fees.

Other noninterest income increased $59 million in the first six months of 2015 compared to the first six months of 2014. This increase was driven by higher multifamily loans originated for sale to agencies, higher revenue associated with credit valuations for customer-related derivatives activities and related derivatives sales and higher corporate securities underwriting activity.

The provision for credit losses declined $53 million in the first six months of 2015 compared with the first six months of 2014 reflecting improved credit quality.

 

 

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


Noninterest expense increased $69 million in the first six months of 2015 compared to the prior year period, primarily driven by investments in technology and infrastructure, higher asset writedowns, and expenses related to equity capital markets advisory fees.

Average loans increased $10.3 billion, or 10%, for the first six months of 2015 compared to the first six months of 2014, reflecting solid growth in Corporate Banking, Real Estate, Business Credit and Equipment Finance:

   

Corporate Banking business provides lending, treasury management and capital markets-related products and services to midsized and large corporations, government and not-for-profit entities. Average loans for this business increased $5.4 billion, or 10%, in the first six months of 2015 compared with the first six months of 2014, primarily due to an increase in loan commitments from specialty lending businesses and large corporate clients.

   

PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. Average loans for this business increased $3.4 billion, or 13%, in first six months of 2015 compared with the first six months of 2014 due to increased originations and higher utilization.

   

PNC Business Credit provides asset-based lending. The loan portfolio is relatively high yielding, with acceptable risk as the loans are mainly secured by short-term assets. Average loans for this business increased $1.5 billion, or 12%, in first six months of 2015 compared with the first six months of 2014 due to new originations, increasing deal sizes and higher utilization.

   

PNC Equipment Finance provides equipment financing solutions for clients throughout the U.S. and Canada. Average equipment finance loans and operating leases were $11.8 billion in the first six months of 2015, an increase of $.8 billion, or 7%, compared with the first six months of 2014.

Period-end loan balances increased by 6%, or $6.7 billion, at June 30, 2015 compared to June 30, 2014 primarily due to growth in our Corporate Banking, Real Estate and Business Credit businesses.

Loan commitments increased 5%, or $10.1 billion, to $213.1 billion at June 30, 2015 compared to June 30, 2014, primarily due to growth in our Corporate Banking, Real Estate and Business Credit businesses.

Average deposits for the first six months of 2015 increased $8.1 billion, or 12%, compared with the first six months of 2014 as a result of business growth and inflows into demand and money market deposits.

The commercial loan servicing portfolio increased $83 billion, or 24% at June 30, 2015, compared to June 30, 2014, as servicing additions exceeded portfolio run-off.

Nonperforming assets declined 35% at June 30, 2015 compared to June 30, 2014 reflecting improved credit quality.

Product Revenue

In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management, capital markets-related products and services, and commercial mortgage banking activities, for customers of all business segments. On a consolidated basis, the revenue from these other services is included in net interest income, corporate service fees and other noninterest income. From a segment perspective, the majority of the revenue and expense related to these services is reflected in the Corporate & Institutional Banking segment results and the remainder is reflected in the results of other businesses. The Other Information section in Table 22 in the Corporate & Institutional Banking portion of this Business Segments Review section includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.

Treasury management revenue, comprised of fees and net interest income from customer deposit balances, increased $29 million in the comparison of the first six months of 2015 to the first six months of 2014, driven by growth in our commercial card, wholesale lockbox and PINACLE® products.

Capital markets revenue includes merger and acquisition advisory fees, loan syndications, derivatives, foreign exchange, asset-backed finance revenue and fixed income and equity capital markets advisory activities. Revenue from capital markets-related products and services increased $50 million in the first six months of 2015 compared with the first six months of 2014. The increase in the comparison was primarily driven by higher revenue associated with credit valuations for customer-related derivatives activities and related derivatives sales, higher equity capital markets advisory fees and increased corporate securities underwriting activity.

Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (including net interest income and noninterest income) and revenue derived from commercial mortgage loans held for sale and related hedges. Revenue from total commercial mortgage banking activities increased $33 million in the first six months of 2015 compared with the first six months of 2014. The increase in the comparison was mainly due to higher multifamily loans originated for sale to agencies and higher mortgage servicing revenue.

 

 

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


Asset Management Group

(Unaudited)

Table 23: Asset Management Group Table

 

Six months ended June 30

Dollars in millions, except as noted

   2015      2014  

Income Statement

       

Net interest income

   $ 144       $ 143   

Noninterest income

     451         406   

Total revenue

     595         549   

Provision for credit losses

     13         6   

Noninterest expense

     425         401   

Pretax earnings

     157         142   

Income taxes

     58         52   

Earnings

   $ 99       $ 90   

Average Balance Sheet

       

Loans

       

Consumer

   $ 5,669       $ 5,361   

Commercial and commercial real estate

     938         1,011   

Residential mortgage

     878         780   

Total loans

     7,485         7,152   

Goodwill and other intangible assets

     234         268   

Other assets

     255         222   

Total assets

   $ 7,974       $ 7,642   

Deposits

       

Noninterest-bearing demand

   $ 1,344       $ 1,333   

Interest-bearing demand

     4,127         3,902   

Money market

     4,873         3,873   

Total transaction deposits

     10,344         9,108   

CDs/IRAs/savings deposits

     456         441   

Total deposits

     10,800         9,549   

Other liabilities

     45         50   

Total liabilities

   $ 10,845       $ 9,599   

Performance Ratios

       

Return on average assets

     2.50      2.37

Noninterest income to total revenue

     76         74   

Efficiency

     71         73   

Other Information

       

Total nonperforming assets (a) (b)

   $ 56       $ 76   

Purchased impaired loans (a) (c)

   $ 77       $ 94   

Total net charge-offs

   $ 11       $ 3   

Client Assets Under Administration (a) (d) (in billions)

       

Personal

   $ 113       $ 113   

Institutional

     149         144   

Total

   $ 262       $ 257   

Asset Type

       

Equity

   $ 152       $ 149   

Fixed Income

     73         71   

Liquidity/Other

     37         37   

Total

   $ 262       $ 257   

Discretionary client assets under management

       

Personal

   $ 86       $ 85   

Institutional

     48         46   

Total

   $ 134       $ 131   

Asset Type

       

Equity

   $ 75       $ 73   

Fixed Income

     41         40   

Liquidity/Other

     18         18   

Total

   $ 134       $ 131   

Nondiscretionary client assets under administration

       

Personal

   $ 27       $ 28   

Institutional

     101         98   

Total

   $ 128       $ 126   

Asset Type

       

Equity

   $ 77       $ 76   

Fixed Income

     32         31   

Liquidity/Other

     19         19   

Total

   $ 128       $ 126   
(a) As of June 30.
(b) Includes nonperforming loans of $53 million at June 30, 2015 and $72 million at June 30, 2014.
(c) Recorded investment of purchased impaired loans related to acquisitions.
(d) Excludes brokerage account client assets.

Asset Management Group earned $99 million through the first six months of 2015 compared with $90 million in the same period of 2014. Assets under administration were $262 billion as of June 30, 2015 compared to $257 billion as of June 30, 2014. Earnings for the first six months of 2015 increased compared with the first six months of 2014 due to higher noninterest income, including a $30 million trust settlement in the second quarter of 2015, partially offset by higher noninterest expense.

The core growth strategies of the business include increasing sales sourced from other PNC lines of business, maximizing front line productivity and optimizing market presence including additions to staff in high opportunity markets. Wealth Management and Hawthorn have over 100 offices operating in 7 out of the 10 most affluent states in the U.S. with a majority co-located with retail banking branches. The businesses’ strategies primarily focus on growing client assets under management through expanding relationships directly and through cross-selling from PNC’s other lines of business.

Institutional Asset Management provides advisory, custody, and retirement administration services to institutional clients primarily within our banking footprint. The business also offers PNC proprietary mutual funds. Institutional Asset Management is strengthening its partnership with Corporate and Institutional Banking to drive growth and is focused on building retirement capabilities and expanding product solutions for all customers.

Client assets under administration at June 30, 2015 increased $5 billion compared to June 30, 2014. Discretionary client assets under management increased $3 billion in the same comparison, driven by higher equity markets, new sales and positive net flows after adjustments for cyclical client activities.

Total revenue increased $46 million in the first half of 2015 compared with the same period in 2014, primarily relating to noninterest income due to a $30 million trust settlement, stronger average equity markets, and new business.

Noninterest expense increased $24 million, or 6% in the first half of 2015 compared to the prior year period, primarily attributable to higher compensation and technology expenses. Over the last 12 months, total full-time headcount has increased by approximately 63 positions, or 2%. Asset Management Group remains focused on disciplined expense management as it invests in strategic growth opportunities.

Average loan balances for the first half of 2015 increased $.3 billion, or 5%, compared to the prior year period due to continued growth in the consumer loan portfolio.

Average deposits for the first half of 2015 increased $1.3 billion, or 13%, over the prior year period. Average transaction deposits grew $1.2 billion, or 14%, compared with the first half of 2014.

 

 

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


Residential Mortgage Banking

(Unaudited)

Table 24: Residential Mortgage Banking Table

 

Six months ended June 30

Dollars in millions, except as noted

   2015     2014  

Income Statement

      

Net interest income

   $ 60      $ 77   

Noninterest income

      

Loan servicing revenue

      

Servicing fees

     94        117   

Mortgage servicing rights valuation, net of economic hedge

     58          

Loan sales revenue

     203        242   

Other

     (2     (3

Total noninterest income

     353        356   

Total revenue

     413        433   

Provision for credit losses

              

Noninterest expense

     339        382   

Pretax earnings

     74        51   

Income taxes

     27        19   

Earnings

   $ 47      $ 32   

Average Balance Sheet

      

Portfolio loans

   $ 1,223      $ 1,888   

Loans held for sale

     1,127        1,102   

Mortgage servicing rights (MSR)

     896        1,054   

Other assets

     3,944        4,084   

Total assets

   $ 7,190      $ 8,128   

Deposits

   $ 2,357      $ 2,210   

Borrowings and other liabilities

     2,636        2,930   

Total liabilities

   $ 4,993      $ 5,140   

Performance Ratios

      

Return on average assets

     1.32     .79

Noninterest income to total revenue

     85        82   

Efficiency

     82        88   

Residential Mortgage Servicing Portfolio – Serviced for Third Parties (in billions)

      

Beginning of period

   $ 108      $ 114   

Acquisitions

     14        2   

Additions

     4        4   

Repayments/transfers

     (11     (9

End of period

   $ 115      $ 111   

Servicing portfolio – third-party statistics: (a)

      

Fixed rate

     94     94

Adjustable rate/balloon

     6     6

Weighted-average interest rate

     4.35     4.54

MSR asset value (in billions)

   $ 1.0      $ 1.0   

MSR capitalization value (in basis points)

     88        87   

Weighted-average servicing fee (in basis points)

     27        27   

Residential Mortgage Repurchase Reserve

      

Beginning of period

   $ 107      $ 131   

(Benefit)/ Provision

     2        (17

Losses – loan repurchases

     (12     (13

End of Period

   $ 97      $ 101   

Other Information

      

Loan origination volume (in billions)

   $ 5.5      $ 4.5   

Loan sale margin percentage

     3.74     5.01

Percentage of originations represented by:

      

Purchase volume (b)

     41     45

Refinance volume

     59     55

Total nonperforming assets (a) (c)

   $ 88      $ 160   
(a) As of June 30.
(b) Mortgages with borrowers as part of residential real estate purchase transactions.
(c) Includes nonperforming loans of $55 million at June 30, 2015 and $113 million at June 30, 2014.

Residential Mortgage Banking earned $47 million in the first six months of 2015 compared to $32 million in the first six months of 2014. Earnings increased from the prior year as a result of higher net hedging gains on residential mortgage servicing rights and lower noninterest expense, offset by lower loan sales and servicing revenue.

The strategic focus of the business is the acquisition of new customers through a retail loan officer sales force with an emphasis on home purchase transactions. Our strategy involves competing on the basis of superior service to new and existing customers in serving their home purchase and refinancing needs. A key consideration in pursuing this approach is the cross-sell opportunity, especially in the bank footprint markets.

Residential Mortgage Banking overview:

   

Total loan originations increased $1.0 billion in the first six months of 2015 compared to the same 2014 period. Loans continue to be originated primarily through direct channels under Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Federal Housing Administration (FHA)/Department of Veterans Affairs agency guidelines. Refinancings were 59% of originations for the first six months of 2015 and 55% in the first six months of 2014. During the first six months of 2015, 14% of loan originations were under the original or revised Home Affordable Refinance Program (HARP or HARP 2).

   

Investors having purchased mortgage loans may request PNC to indemnify them against losses on certain loans or to repurchase loans that they believe do not comply with applicable contractual loan origination covenants and representations and warranties we have made. At June 30, 2015, the liability for estimated losses on repurchase and indemnification claims for the Residential Mortgage Banking business segment was $97 million, compared with $101 million at June 30, 2014. See the Recourse And Repurchase Obligations section of this Financial Review and Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements of this Report for additional information.

   

Residential mortgage loans serviced for others increased $4 billion at June 30, 2015 compared to June 30, 2014. During the first six months of 2015, $14 billion of residential mortgage servicing rights were acquired, compared with $2 billion in the comparable period of 2014.

   

Noninterest income declined slightly in the first six months of 2015 compared with the prior year period, as increased net hedging gains on residential mortgage servicing rights were more than offset by decreased servicing revenue and loan sales revenue, which reflected the impact from a $17 million benefit from the release of reserves for residential mortgage repurchase obligations in the first six months of 2014.

 

 

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


   

Net interest income decreased $17 million in the first six months of 2015 compared with the first six months of 2014. This decline was primarily due to lower balances of portfolio loans held for investment.

   

Noninterest expense declined $43 million in the first six months of 2015 compared with the 2014 period, primarily as a result of lower legal accruals.

BlackRock

(Unaudited)

Table 25: BlackRock Table

Information related to our equity investment in BlackRock follows:

 

Six months ended June 30

Dollars in millions

   2015      2014  

Business segment earnings (a)

   $ 269       $ 253   

PNC’s economic interest in BlackRock (b)

     22      22
(a) Includes PNC’s share of BlackRock’s reported GAAP earnings and additional income taxes on those earnings incurred by PNC.
(b) At June 30.

 

In billions    June 30
2015
     December 31
2014
 

Carrying value of PNC’s investment in BlackRock (c)

   $ 6.5       $ 6.3   

Market value of PNC’s investment in
BlackRock (d)

     12.2         12.6   
(c) PNC accounts for its investment in BlackRock under the equity method of accounting, exclusive of a related deferred tax liability of $2.1 billion at both June 30, 2015 and December 31, 2014. Our voting interest in BlackRock common stock was approximately 21% at June 30, 2015.
(d) Does not include liquidity discount.

In addition to our investment in BlackRock reflected in Table 25, at June 30, 2015, we held approximately 1.3 million shares of BlackRock Series C Preferred Stock valued at $363 million, which are available to fund our obligation in connection with certain BlackRock long-term incentive plan (LTIP) programs. We account for the BlackRock Series C Preferred Stock at fair value, which offsets the impact of marking-to-market the obligation to deliver these shares to BlackRock. The fair value amount of the BlackRock Series C Preferred Stock is included on our Consolidated Balance Sheet in the caption Other assets. Additional information regarding the valuation of the BlackRock Series C Preferred Stock is included in Note 7 Fair Value in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report and in Note 7 Fair Value in the Notes To Consolidated Financial Statements in Item 8 of our 2014 Form 10-K.

Our 2014 Form 10-K includes additional information about our investment in BlackRock.

Non-Strategic Assets Portfolio

(Unaudited)

Table 26: Non-Strategic Assets Portfolio Table

 

Six months ended June 30

Dollars in millions

  2015     2014  

Income Statement

     

Net interest income

  $ 212      $ 279   

Noninterest income

    18        16   

Total revenue

    230        295   

Provision for credit losses (benefit)

    (36     (91

Noninterest expense

    50        56   

Pretax earnings

    216        330   

Income taxes

    79        121   

Earnings

  $ 137      $ 209   

Average Balance Sheet

     

Commercial Lending:

     

Commercial/Commercial real estate

  $ 119      $ 203   

Lease financing

    627        684   

Total commercial lending

    746        887   

Consumer Lending:

     

Home equity

    2,937        3,553   

Residential real estate

    4,103        5,032   

Total consumer lending

    7,040        8,585   

Total portfolio loans

    7,786        9,472   

Other assets (a)

    (692     (740

Total assets

  $ 7,094      $ 8,732   

Deposits and other liabilities

  $ 223      $ 229   

Total liabilities

  $ 223      $ 229   

Performance Ratios

     

Return on average assets

    3.89     4.83

Noninterest income to total revenue

    8        5   

Efficiency

    22        19   

Other Information

     

Nonperforming assets (b) (c)

  $ 616      $ 798   

Purchased impaired loans (b) (d)

  $ 3,663      $ 4,497   

Net charge-offs (recoveries)

  $ (7   $ 41   

Annualized net charge-off (recoveries) ratio

    (.18 )%      0.87

Loans (b)

     

Commercial Lending

     

Commercial/Commercial real estate

  $ 108      $ 176   

Lease financing

    630        688   

Total commercial lending

    738        864   

Consumer Lending

     

Home equity

    2,765        3,410   

Residential real estate

    3,941        4,928   

Total consumer lending

    6,706        8,338   

Total loans

  $ 7,444      $ 9,202   
(a) Other assets includes deferred taxes, ALLL and other real estate owned (OREO). Other assets were negative in both periods due to the ALLL.
(b) As of June 30.
(c) Includes nonperforming loans of $.5 billion at June 30, 2015 and $.6 billion at June 30, 2014.
(d) Recorded investment of purchased impaired loans related to acquisitions. At June 30, 2015, this segment contained 82% of PNC’s purchased impaired loans.
 

 

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


This business segment consists of non-strategic assets primarily obtained through acquisitions of other companies. The business activity of this segment is to manage the liquidation of the portfolios while maximizing the value and mitigating risk.

Non-Strategic Assets Portfolio had earnings of $137 million in the first six months of 2015 compared with $209 million in the first six months of 2014. Earnings decreased year-over-year due to lower net interest income and a reduced benefit from the provision for credit losses.

Non-Strategic Assets Portfolio overview:

   

Net interest income declined $67 million, or 24% in the first six months of 2015 compared with the first six months of 2014, resulting from lower purchase accounting accretion and the impact of the declining average balance of the loan portfolio.

   

Provision for credit losses was a benefit in both the first six months of 2015 and 2014, reflecting continued improvements in credit quality.

   

Noninterest expense declined $6 million, or 11% in the first six months of 2015 compared with in the first six months of 2014, due to lower costs of managing and servicing the loan portfolios.

   

Average portfolio loans declined $1.7 billion, or 18% in the first six months of 2015 compared to the first six months of 2014, due to customer payment activity and portfolio management activities to reduce under-performing assets.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Note 1 Accounting Policies in Item 8 of our 2014 Form 10-K and in the Notes To Consolidated Financial Statements included in Part I, Item 1 of this Report describe the most significant accounting policies that we use to prepare our consolidated financial statements. Certain of these policies require us to make estimates or economic assumptions that may prove inaccurate or be subject to variations that may significantly affect our reported results and financial position for the period or in future periods.

We must use estimates, assumptions and judgments when assets and liabilities are required to be recorded at, or adjusted to reflect, fair value.

Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by independent third-party sources, including appraisers and valuation specialists, when available. When such third-party information is not available, we estimate fair value primarily by using discounted cash flow and other financial modeling techniques. Changes in underlying factors, assumptions or estimates could materially impact our future financial condition and results of operations.

We discuss the following critical accounting policies and judgments under this same heading in Item 7 of our 2014 Form 10-K:

   

Fair Value Measurements

   

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

   

Estimated Cash Flows on Purchased Impaired Loans

   

Goodwill

   

Lease Residuals

   

Revenue Recognition

   

Residential and Commercial Mortgage Servicing Rights

   

Income Taxes

   

Recently Issued Accounting Standards

We provide additional information about many of these items in the Notes To Consolidated Financial Statements included in Part I, Item l of this Report.

 

 

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


Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standard Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP with one accounting model. The core principle of the guidance is that an entity should recognize revenue to depict the satisfaction of a performance obligation by transfer of promised goods or services to customers. The ASU also requires additional qualitative and quantitative disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB agreed to defer the mandatory effective date of the ASU for one year, to annual reporting periods beginning after December 15, 2017. The requirements within ASU 2014-09 should be applied retrospectively to each prior period presented (with several practical expedients for certain completed contracts) or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. We are currently evaluating the impact of this ASU on our results of operations and financial position.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. All legal entities are subject to re-evaluation under this ASU, including investment companies and certain other entities measured in a manner consistent with ASC 946 Financial Services – Investment Companies which were previously excluded. The ASU will change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, the ASU modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; eliminates the presumption that a general partner should consolidate a limited partnership; potentially changes the consolidation conclusions of reporting entities that are involved with VIEs, in particular those that have fee arrangements and related party arrangements, and provides a scope exception for reporting entities with interests held in certain money market funds. The ASU is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2015 and may be applied through a retrospective or modified retrospective approach. We are currently evaluating the impact of this ASU on our results of operations and financial position.

Recently Adopted Accounting Standards

See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements included in Part I, Item I of this Report regarding the impact of new accounting pronouncements adopted in 2015.

STATUS OF QUALIFIED DEFINED BENEFIT PENSION PLAN

We have a noncontributory, qualified defined benefit pension plan (plan or pension plan) covering eligible employees. Benefits are determined using a cash balance formula where earnings credits are applied as a percentage of eligible compensation. We calculate the expense associated with the pension plan and the assumptions and methods that we use include a policy of reflecting plan assets at their fair market value. On an annual basis, we review the actuarial assumptions related to the pension plan.

We currently estimate pretax pension expense of $9 million in 2015 compared with pretax income of $7 million in 2014. This year-over-year expected increase in expense reflects the effects of the lower expected return on asset assumption, improved mortality, and the lower discount rate required to be used in 2015. These factors are partially offset by the favorable impact of the increase in plan assets at December 31, 2014 and the assumed return on a $200 million voluntary contribution to the plan made in February 2015.

The table below reflects the estimated effects on pension expense of certain changes in annual assumptions, using 2015 estimated expense as a baseline.

Table 27: Pension Expense – Sensitivity Analysis

 

Change in Assumption (a)   

Estimated
Increase/(Decrease)
to 2015

Pension

Expense

(In millions)

 

.5% decrease in discount rate

   $ 18   

.5% decrease in expected long-term return on assets

   $ 22   

.5% increase in compensation rate

   $ 2   
(a) The impact is the effect of changing the specified assumption while holding all other assumptions constant.

We provide additional information on our pension plan in Note 13 Employee Benefit Plans in the Notes To Consolidated Financial Statements in Item 8 of our 2014 Form 10-K.

 

 

 

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


RECOURSE AND REPURCHASE OBLIGATIONS

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report, PNC has sold commercial mortgage, residential mortgage and home equity loans/lines of credit directly or indirectly through securitization and loan sale transactions in which we have continuing involvement. One form of continuing involvement includes certain recourse and loan repurchase obligations associated with the transferred assets.

Commercial Mortgage Loan Recourse Obligations

We originate and service certain multi-family commercial mortgage loans which are sold to FNMA under FNMA’s Delegated Underwriting and Servicing (DUS) program. We participated in a similar program with the FHLMC. Our exposure and activity associated with these recourse obligations are reported in the Corporate & Institutional Banking segment. For more information regarding our Commercial Mortgage Loan Recourse Obligations, see the Recourse and Repurchase Obligations section of Note 16 Commitments and Guarantees included in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report.

Residential Mortgage Repurchase Obligations

While residential mortgage loans are sold on a non-recourse basis, we assume certain loan repurchase obligations associated with mortgage loans we have sold to investors. These loan repurchase obligations primarily relate to situations where PNC is alleged to have breached certain origination covenants and representations and warranties made to purchasers of the loans in the respective purchase and sale agreements. Residential mortgage loans covered by these loan repurchase obligations include first and second-lien mortgage loans we have sold through Agency securitizations, Non-Agency securitizations, and loan sale transactions. As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2014 Form 10-K, Agency securitizations consist of mortgage loan sale transactions with FNMA, FHLMC and the Government National Mortgage Association (GNMA), while Non-Agency securitizations consist of mortgage loan sale transactions with private investors. Mortgage loan sale transactions that are not part of a securitization may involve FNMA, FHLMC or private investors. Our historical exposure and activity associated with Agency securitization repurchase obligations has primarily been related to transactions with FNMA and FHLMC, as indemnification and repurchase losses associated with FHA and VA-insured and uninsured loans pooled in GNMA securitizations historically have been minimal. In addition to indemnification and repurchase risk, we face other risks of loss with respect to our participation in these programs, some

of which are described in Note 15 Legal Proceedings in the Notes To Consolidated Financial Statements in Part I, Item 1

of this Report with respect to governmental inquiries related to FHA-insured loans. Repurchase obligation activity associated with residential mortgages is reported in the Residential Mortgage Banking segment.

Origination and sale of residential mortgages is an ongoing business activity and, accordingly, management continually assesses the need to recognize indemnification and repurchase liabilities pursuant to the associated investor sale agreements. We establish indemnification and repurchase liabilities for estimated losses on sold first and second-lien mortgages for which indemnification is expected to be provided or for loans that are expected to be repurchased. For the first and second-lien mortgage sold portfolio, we have established an indemnification and repurchase liability pursuant to investor sale agreements based on claims made and our estimate of future claims on a loan by loan basis. To estimate the mortgage repurchase liability arising from breaches of representations and warranties, we consider the following factors: (i) borrower performance in our historically sold portfolio (both actual and estimated future defaults); (ii) the level of outstanding unresolved repurchase claims; (iii) estimated probable future repurchase claims, considering information about expected investor behaviors, delinquent and liquidated loans, resolved and unresolved mortgage insurance rescission notices and our historical experience with claim rescissions; (iv) the potential ability to cure the defects identified in the repurchase claims (“rescission rate”); (v) the availability of legal defenses; and (vi) the estimated severity of loss upon repurchase of the loan or collateral, make-whole settlement or indemnification.

We previously reached agreements with both FNMA and FHLMC to resolve their repurchase claims with respect to loans sold between 2000 and 2008. Thus, our repurchase obligations involve Agency securitizations and other loan sales with FNMA and FHLMC subsequent to 2008 only, as well as Agency securitizations with GNMA and Non-Agency securitizations and other loan sales with private investors. The unpaid principal balance of loans associated with our exposure to repurchase obligations totaled $66.5 billion at June 30, 2015, of which $1.3 billion was 90 days or more delinquent. The comparative amounts were $68.3 billion and $1.5 billion, respectively, at December 31, 2014.

We believe our indemnification and repurchase liability appropriately reflects the estimated probable losses on indemnification and repurchase claims for all residential mortgage loans sold and outstanding as of June 30, 2015 and December 31, 2014. In making these estimates we consider the losses that we expect to incur over the life of the sold loans. See Note 16 Commitments and Guarantees in this Report for additional information on residential mortgage repurchase obligations.

 

 

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


Home Equity Repurchase Obligations

PNC’s repurchase obligations include obligations with respect to certain brokered home equity loans/lines of credit that were sold to a limited number of private investors in the financial services industry by National City prior to our acquisition of National City. PNC is no longer engaged in the brokered home equity lending business, and our exposure under these loan repurchase obligations is limited to repurchases of the loans sold in these transactions. Repurchase activity associated with brokered home equity loans/lines of credit is reported in the Non-Strategic Assets Portfolio segment.

For more information regarding our Home Equity Repurchase Obligations, see the Recourse and Repurchase Obligations section under Item 7 of our 2014 Form 10-K and Note 16 Commitments and Guarantees included in this Report.

RISK MANAGEMENT

PNC encounters risk as part of the normal course of operating our business. Accordingly, we design risk management processes to help manage these risks.

The Risk Management section included in Item 7 of our 2014 Form 10-K describes our enterprise risk management framework including risk appetite and strategy, risk culture, risk organization and governance, risk identification and quantification, risk control and limits, and risk monitoring and reporting. Additionally, our 2014 Form 10-K provides an analysis of our key areas of risk, which include but are not limited to credit, operational, compliance, model, liquidity and market. Our use of financial derivatives as part of our overall asset and liability risk management process is also addressed within the Risk Management section.

The following information updates our 2014 Form 10-K risk management disclosures.

Credit Risk Management

As more fully discussed in the Credit Risk Management portion of the Risk Management section in our 2014 Form 10-K, credit risk represents the possibility that a customer, counterparty or issuer may not perform in accordance with contractual terms. Credit risk is inherent in the financial services business and results from extending credit to customers, purchasing securities, and entering into financial derivative transactions and certain guarantee contracts. Credit risk is one of our most significant risks. Our processes for managing credit risk are embedded in PNC’s 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 through our governance structure.

Asset Quality Overview

Asset quality trends improved during the first six months of 2015.

   

Nonperforming assets at June 30, 2015 decreased $302 million compared with December 31, 2014 as a result of improvements in both consumer and commercial nonperforming loans. Consumer lending nonperforming loans decreased $135 million, commercial real estate nonperforming loans declined $92 million and commercial nonperforming loans decreased $32 million. Nonperforming assets were 0.73% of total assets at June 30, 2015 compared with 0.83% at December 31, 2014.

   

Overall loan delinquencies of $1.6 billion decreased $305 million, or 16%, from year-end 2014 levels. The reduction was due in large part to a reduction in accruing government insured residential real estate loans past due 90 days or more of $134 million, the majority of which we took possession of and conveyed the real estate, or are in the process of conveyance and claim resolution.

   

Net charge-offs were $67 million in the second quarter of 2015, down 54% from net charge-offs in the same quarter of 2014 of $145 million, due primarily to improved overall credit quality. For the six months ended June 30, 2015, net charge-offs were $170 million, down from $331 million for the six months ending June 30, 2014.

   

Provision for credit losses in the second quarter of 2015 decreased to $46 million compared with $72 million in the second quarter of 2014. The smaller provision is attributed to improved overall credit quality. Provision for credit losses for the six months ending June 30, 2015 declined to $100 million compared to $166 million for the six months ending June 30, 2014.

   

The level of ALLL remained at $3.3 billion at both June 30, 2015 and December 31, 2014.

Nonperforming Assets and Loan Delinquencies

Nonperforming Assets, including OREO and Foreclosed Assets

Nonperforming assets include nonperforming loans and leases for which ultimate collectability of the full amount of contractual principal and interest is not probable and include nonperforming troubled debt restructurings (TDRs), OREO and foreclosed assets. Loans held for sale, certain government insured or guaranteed loans, purchased impaired loans and loans accounted for under the fair value option are excluded from nonperforming loans. Additional information regarding our nonperforming loans and nonaccrual policies is included in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report. A summary of the major categories of nonperforming assets are presented in Table 28. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements of this Report for further detail of nonperforming asset categories.

 

 

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


Table 28: Nonperforming Assets By Type

 

Dollars in millions   June 30
2015
    December 31
2014
 

Nonperforming loans

     

Commercial lending

  $ 503      $ 626   

Consumer lending (a)

    1,749        1,884   

Total nonperforming loans (b) (c)

    2,252        2,510   

OREO and foreclosed assets

    326        370   

Total nonperforming assets

  $ 2,578      $ 2,880   

Amount of TDRs included in nonperforming loans

  $ 1,208      $ 1,370   

Percentage of total nonperforming loans

    54     55

Nonperforming loans to total loans

    1.10     1.23

Nonperforming assets to total loans, OREO and foreclosed assets

    1.25        1.40   

Nonperforming assets to total assets

    .73        .83   

Allowance for loan and lease losses to total nonperforming loans (d)

    145        133   
(a) Excludes most consumer loans and lines of credit, not secured by residential real estate, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.
(b) Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans.
(c) The recorded investment of loans collateralized by residential real estate property that are in process of foreclosure was $.6 billion and $.8 billion at June 30, 2015 and December 31, 2014.
(d) The allowance for loan and lease losses includes impairment reserves attributable to purchased impaired loans. See Note 1 Accounting Policies and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information.

Table 29: Change in Nonperforming Assets

 

In millions    2015      2014  

January 1

   $ 2,880       $ 3,457   

New nonperforming assets

     708         1,277   

Charge-offs and valuation adjustments

     (253      (300

Principal activity, including paydowns and payoffs

     (377      (623

Asset sales and transfers to loans held for sale

     (190      (297

Returned to performing status

     (190      (346

June 30

   $ 2,578       $ 3,168   

Nonperforming assets decreased $302 million at June 30, 2015 compared to December 31, 2014, as a result of improvements in both consumer and commercial lending. Consumer lending nonperforming loans decreased $135 million, commercial real estate nonperforming loans declined $92 million and commercial nonperforming loans decreased $32 million. As of June 30, 2015, approximately 91% of total nonperforming loans were secured by collateral which lessens reserve requirements and is expected to reduce credit losses in the event of default. As of June 30, 2015, commercial lending nonperforming loans were carried at approximately 64% of their unpaid principal balance, due to charge-offs recorded to

date, before consideration of the ALLL. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information on these loans.

Within consumer nonperforming loans, residential real estate TDRs comprise 65% of total residential real estate nonperforming loans at June 30, 2015, up from 60% at December 31, 2014. Home equity TDRs comprise 53% of home equity nonperforming loans at June 30, 2015, down from 54% at December 31, 2014. TDRs generally remain in nonperforming status until a borrower has made at least six consecutive months of both principal and interest payments under the modified terms or ultimate resolution occurs. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

At June 30, 2015, our largest nonperforming asset was $34 million in the Real Estate, Rental and Leasing Industry and our average nonperforming loans associated with commercial lending was under $1 million. Seven of the ten largest outstanding nonperforming assets are from the commercial lending portfolio and represent 21% and 4% of total commercial lending nonperforming loans and total nonperforming assets, respectively, as of June 30, 2015.

Purchased impaired loans are considered performing, even if contractually past due (or if we do not expect to receive payment in full based on the original contractual terms), as we accrete interest income over the expected life of the loans. Total nonperforming loans and assets in the tables above are significantly lower than they would have been due to this accounting treatment for purchased impaired loans. This treatment also results in a lower ratio of nonperforming loans to total loans and a higher ratio of ALLL to nonperforming loans. See Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report, as well as the Credit Risk Management portion of the Risk Management section in our 2014 Form 10-K for additional information, including the accounting treatment, on these loans.

Table 30: OREO and Foreclosed Assets

 

In millions    June 30
2015
     December 31
2014
 

Other real estate owned (OREO):

       

Residential properties

   $ 153       $ 183   

Residential development properties

     38         48   

Commercial properties

     111         120   

Total OREO

     302         351   

Foreclosed and other assets

     24         19   

Total OREO and foreclosed assets

   $ 326       $ 370   
 

 

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


Total OREO and foreclosed assets decreased $44 million during the first six months of 2015 and is 13% of total nonperforming assets at June 30, 2015. As of both June 30, 2015 and December 31, 2014, 62% of our OREO and foreclosed assets were comprised of residential related properties.

Loan Delinquencies

We regularly monitor the level of loan delinquencies and believe these levels may be a key indicator of loan portfolio asset quality. Measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of payment are considered delinquent. Loan delinquencies exclude loans held for sale and purchased impaired loans, but include government insured or guaranteed loans and loans accounted for under the fair value option.

 

 

Table 31: Accruing Loans Past Due (a) (b)

 

     Amount      Percentage of Total
Outstandings
 
Dollars in millions    June 30
2015
     December 31
2014
     June 30
2015
     December 31
2014
 

Early stage loan delinquencies

             

Accruing loans past due 30 to 59 days

   $ 492       $ 582         .24      .28

Accruing loans past due 60 to 89 days

     235         259         .11      .13

Total

     727         841         .35      .41

Late stage loan delinquencies

             

Accruing loans past due 90 days or more

     914         1,105         .45      .54

Total

   $ 1,641       $ 1,946         .80      .95
(a) Amounts in table represent recorded investment.
(b) Past due loan amounts at June 30, 2015 include government insured or guaranteed loans of $185 million, $119 million, and $817 million for accruing loans past due 30 to 59 days, past due 60 to 89 days, and past due 90 days or more, respectively. The comparative amounts as of December 31, 2014 were $220 million, $136 million, and $996 million, respectively.

 

Total early stage loan delinquencies (accruing loans past due 30 to 89 days) decreased $114 million, or 14%, at June 30, 2015 compared to December 31, 2014, driven by reductions in both consumer and commercial real estate early stage delinquencies, which more than offset an increase in commercial lending accruing loans past due 30 to 59 days.

Accruing loans past due 90 days or more decreased $191 million, or 17%, at June 30, 2015 compared to December 31, 2014 due to a decline in government insured residential real estate loans of $134 million, the majority of which we took possession of and conveyed the real estate, or are in the process of conveyance and claim resolution. Accruing loans past due 90 days or more are referred to as late stage loan delinquencies. These loans are not included in nonperforming loans and continue to accrue interest because they are well secured by collateral and are in the process of collection, or are managed in homogenous portfolios with specified charge-off timeframes adhering to regulatory guidelines, or are certain government insured or guaranteed loans.

On a regular basis our Special Asset Committee closely monitors loans, primarily commercial loans, that are not included in the nonperforming or accruing past due categories and for which we are uncertain about the borrower’s ability to comply with existing repayment terms. These loans totaled $.2 billion at both June 30, 2015 and December 31, 2014.

See Note 1 Accounting Policies and Note 3 Asset Quality in the Notes To Consolidated Financial Statements of this Report for additional information regarding our nonperforming loan and nonaccrual policies and further information on loan delinquencies.

Home Equity Loan Portfolio

Our home equity loan portfolio totaled $33.5 billion as of June 30, 2015, or 16% of the total loan portfolio. Of that total, $19.6 billion, or 58%, was outstanding under primarily variable-rate home equity lines of credit and $13.9 billion, or 42%, consisted of closed-end home equity installment loans. Approximately 5% of the home equity portfolio was purchased credit impaired and 3% of the home equity portfolio was on nonperforming status as of June 30, 2015.

As of June 30, 2015, we are in an originated first lien position for approximately 52% of the total outstanding portfolio and, where originated as a second lien, we currently hold or service the first lien position for an additional 2% of the portfolio. The remaining 46% of the portfolio was secured by second liens where we do not hold the first lien position. The credit performance of the majority of the home equity portfolio where we are in, hold or service the first lien position, is superior to the portion of the portfolio where we hold the second lien position but do not hold the first lien.

Generally, our variable-rate home equity lines of credit have either a seven or ten year draw period, followed by a 20-year amortization term. During the draw period, we have home equity lines of credit where borrowers pay either interest or principal and interest. We view home equity lines of credit where borrowers are paying principal and interest under the draw period as less risky than those where the borrowers are paying interest only, as these borrowers have a demonstrated ability to make some level of principal and interest payments. The risk associated with the borrower’s ability to satisfy the loan terms upon the draw period ending is considered in establishing our ALLL. Based upon outstanding balances at

 

 

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


June 30, 2015, the following table presents the periods when home equity lines of credit draw periods are scheduled to end.

Table 32: Home Equity Lines of Credit – Draw Period End Dates

 

In millions    Interest Only
Product
     Principal and
Interest Product
 

Remainder of 2015

   $ 573       $ 242   

2016

     1,276         413   

2017

     2,270         567   

2018

     996         772   

2019

     685         612   

2020 and thereafter

     3,332         5,350   

Total (a) (b)

   $ 9,132       $ 7,956   
(a) Includes all home equity lines of credit that mature in the remainder of 2015 or later, including those with borrowers where we have terminated borrowing privileges.
(b) Includes approximately $28 million, $45 million, $52 million, $37 million, $25 million and $537 million of home equity lines of credit with balloon payments, including those where we have terminated borrowing privileges, with draw periods scheduled to end in the remainder of 2015, 2016, 2017, 2018, 2019 and 2020 and thereafter, respectively.

Based upon outstanding balances, and excluding purchased impaired loans, at June 30, 2015, for home equity lines of credit for which the borrower can no longer draw (e.g., draw period has ended or borrowing privileges have been terminated), approximately 3% were 30-89 days past due and approximately 5% were 90 days or more past due. Generally, when a borrower becomes 60 days past due, we terminate borrowing privileges and those privileges are not subsequently reinstated. At that point, we continue our collection/recovery processes, which may include loan modification resulting in a loan that is classified as a TDR.

See the Credit Risk Management portion of the Risk Management section in our 2014 Form 10-K for more information on our home equity loan portfolio.

Loan Modifications and Troubled Debt Restructurings

Consumer Loan Modifications

We modify loans under government and PNC-developed programs based upon our commitment to help eligible homeowners and borrowers avoid foreclosure, where appropriate. Initially, a borrower is evaluated for a modification under a government program. If a borrower does not qualify under a government program, the borrower is then evaluated under a PNC program. Our programs utilize both temporary and permanent modifications and typically reduce the interest rate, extend the term and/or defer principal. Loans that are either temporarily or permanently modified under programs involving a change to loan terms are generally classified as TDRs. Further, loans that have certain types of payment plans and trial payment arrangements which do not include a contractual change to loan terms may be classified as TDRs. Additional detail on TDRs is discussed below as well as in Note 3 Asset Quality in our 2014 Form 10-K.

A temporary modification, with a term between 3 and 24 months, involves a change in original loan terms for a period of time and reverts to a calculated exit rate for the remaining term of the loan as of a specific date. A permanent modification, with a term greater than 24 months, is a modification in which the terms of the original loan are changed. Permanent modification programs primarily include the government-created Home Affordable Modification Program (HAMP) and PNC-developed HAMP-like modification programs. These programs first require a reduction of the interest rate followed by an extension of term and, if appropriate, deferral of principal payments.

We also monitor the success rates and delinquency status of our loan modification programs to assess their effectiveness in serving our borrowers’ and servicing customers’ needs while mitigating credit losses. Table 33 provides the number of bank-owned accounts and unpaid principal balance of modified consumer real estate related loans at the end of each year presented.

 

 

Table 33: Consumer Real Estate Related Loan Modifications

 

     June 30, 2015      December 31, 2014  
Dollars in millions    Number of
Accounts
     Unpaid
Principal
Balance
     Number of
Accounts
     Unpaid
Principal
Balance
 

Home equity

             

Temporary Modifications

     4,808       $ 366         5,346       $ 417   

Permanent Modifications

     14,024         1,013         13,128         968   

Total home equity

     18,832         1,379         18,474         1,385   

Residential Mortgages

             

Permanent Modifications

     5,640         1,065         5,876         1,110   

Non-Prime Mortgages

             

Permanent Modifications

     4,338         601         4,358         611   

Residential Construction

             

Permanent Modifications

     2,304         605         2,292         629   

Total Consumer Real Estate Related Loan Modifications

     31,114       $ 3,650         31,000       $ 3,735   

 

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


In addition to temporary loan modifications, we may make available to a borrower a payment plan or a HAMP trial payment period. Under a payment plan or a HAMP trial payment period, there is no change to the loan’s contractual terms so the borrower remains legally responsible for payment of the loan under its original terms.

Payment plans may include extensions, re-ages and/or forbearance plans. All payment plans bring an account current once certain requirements are achieved and are primarily intended to demonstrate a borrower’s renewed willingness and ability to re-pay. Due to the short term nature of the payment plan, there is a minimal impact to the ALLL.

Under a HAMP trial payment period, we establish an alternate payment, generally at an amount less than the contractual payment amount, for the borrower during this short time period. This allows a borrower to demonstrate successful payment performance before permanently restructuring the loan into a HAMP modification. Subsequent to successful borrower performance under the trial payment period, we will capitalize the original contractual amount past due, to include accrued interest and fees receivable, and restructure the loan’s contractual terms, along with bringing the restructured account current. As the borrower is often already delinquent at the time of participation in the HAMP trial payment period, generally enrollment in the program does not significantly increase the ALLL. If the trial payment period is unsuccessful, the loan will be evaluated for further action based upon our existing policies.

Commercial Loan Modifications and Payment Plans

Modifications of terms for commercial loans are based on individual facts and circumstances. Commercial loan modifications may involve reduction of the interest rate, extension of the loan term and/or forgiveness of principal. Modified commercial loans are usually already nonperforming prior to modification. We evaluate these modifications for TDR classification based upon whether we granted a concession to a borrower experiencing financial difficulties. Additional detail on TDRs is discussed below as well as in Note 3 Asset Quality in our 2014 Form 10-K.

We have established certain commercial loan modification and payment programs for small business loans, Small Business Administration loans, and investment real estate loans. As of June 30, 2015 and December 31, 2014, $27 million and $34 million, respectively, in loan balances were covered under these modification and payment plan programs. Of these loan balances, $11 million and $12 million have been determined to be TDRs as of June 30, 2015 and December 31, 2014, respectively.

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 borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC. For the six months ended June 30, 2015, $442 million of Consumer loans held for sale, loans accounted for under the fair value option and pooled purchased impaired loans, as well as certain government insured or guaranteed loans, were excluded from the TDR population. The comparable amount for the six months ended June 30, 2014 was $615 million.

Table 34: Summary of Troubled Debt Restructurings (a)

 

In millions    June 30
2015
     December 31
2014
 

Consumer lending:

       

Real estate-related

   $ 1,845       $ 1,864   

Credit card

     117         130   

Other consumer

     40         47   

Total consumer lending

     2,002         2,041   

Total commercial lending

     414         542   

Total TDRs

   $ 2,416       $ 2,583   

Nonperforming

   $ 1,208       $ 1,370   

Accruing

     1,091         1,083   

Credit card

     117         130   

Total TDRs

   $ 2,416       $ 2,583   
(a) Amounts in table represent recorded investment, which includes the unpaid principal balance plus accrued interest and net accounting adjustments, less any charge-offs. Recorded investment does not include any associated valuation allowance.

Total TDRs decreased $167 million, or 6%, during the first six months of 2015. Nonperforming TDRs were approximately 54% of total nonperforming loans, and 50% of total TDRs.

TDRs that are performing, including credit card loans, are excluded from nonperforming loans. These TDRs remained flat during the first six months of 2015 at $1.2 billion. Generally, the accruing category is comprised of loans where borrowers have been performing under the restructured terms for at least six consecutive months. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

See Note 3 Asset Quality and the Credit Risk Management portion of the Risk Management section in our 2014 Form 10-K for additional information on loan modifications and TDRs.

 

 

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


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

Table 35: Loan Charge-Offs And Recoveries

 

Six months ended June 30

Dollars in millions

   Gross
Charge-offs
     Recoveries     

Net

Charge-offs /
(Recoveries)

     Percent of
Average Loans
(annualized)
 

2015

             

Commercial

   $ 82       $ 97       $ (15      (.03 )% 

Commercial real estate

     25         35         (10      (.08

Equipment lease financing

     1         2         (1      (.03

Home equity

     102         44         58         .34   

Residential real estate

     6         6           

Credit card

     84         11         73         3.30   

Other consumer

     92         27         65         .59   

Total

   $ 392       $ 222       $ 170         .17   

2014

             

Commercial

   $ 171       $ 94       $ 77         .17

Commercial real estate

     32         49         (17      (.15

Equipment lease financing

     6         6           

Home equity

     163         39         124         .70   

Residential real estate

     15         2         13         .18   

Credit card

     85         11         74         3.47   

Other consumer

     92         32         60         .54   

Total

   $ 564       $ 233       $ 331         .34   

 

Total net charge-offs are lower than they would have been otherwise due to the accounting treatment for purchased impaired loans. This treatment also results in a lower ratio of net charge-offs to average loans. See Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information on net charge-offs related to these loans.

We maintain an ALLL to absorb losses from the loan and lease portfolio and determine this allowance based on quarterly assessments of the estimated probable credit losses incurred in the loan and lease portfolio. Our total ALLL of $3.3 billion at June 30, 2015 consisted of $1.6 billion and $1.7 billion established for the commercial lending and consumer lending categories, respectively. We maintain the ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan and lease portfolio as of the balance sheet date. The reserve calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan and lease portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.

We establish specific allowances for loans considered impaired using methods prescribed by GAAP. All impaired loans are subject to individual analysis, except leases and

large groups of smaller-balance homogeneous loans which may include, but are not limited to, credit card, residential real estate secured and consumer installment loans. Specific allowances for individual loans (including commercial and consumer TDRs) are determined based on an analysis of the present value of expected future cash flows from the loans discounted at their effective interest rate, observable market price or the fair value of the underlying collateral.

Reserves allocated to non-impaired commercial loan classes are based on PD and LGD credit risk ratings.

Our commercial pool reserve methodology is sensitive to changes in key risk parameters such as PD and LGD. The results of these parameters are then applied to the loan balance and unfunded loan commitments and letters of credit to determine the amount of the respective reserves. Our PDs and LGDs are primarily determined using internal commercial loan loss data. This internal data is supplemented with third-party data and management judgment, as deemed necessary. We continue to evaluate and enhance our use of internal commercial loss data and will periodically update our PDs and LGDs as well as consider third-party data, regulatory guidance and management judgment.

The majority of the commercial portfolio is secured by collateral, including loans to asset-based lending customers, which generally demonstrate lower LGD compared to loans

 

 

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


not secured by collateral. Additionally, guarantees on loans greater than $1 million and owner guarantees for small business loans do not significantly impact our ALLL.

Allocations to non-impaired consumer loan classes are primarily based upon a roll-rate model which uses statistical relationships, calculated from historical data that estimate the movement of loan outstandings through the various stages of delinquency and ultimately charge-off.

A portion of the ALLL is related to qualitative and measurement factors. These factors may include, but are not limited to, the following:

   

Industry concentrations and conditions,

   

Recent credit quality trends,

   

Recent loss experience in particular portfolios,

   

Recent macro-economic factors,

   

Model imprecision,

   

Changes in lending policies and procedures,

   

Timing of available information, including the performance of first lien positions, and

   

Limitations of available historical data.

Purchased impaired loans are initially recorded at fair value and applicable accounting guidance prohibits the carry over or creation of valuation allowances at acquisition. Because the initial fair values of these loans already reflect a credit component, additional reserves are established when performance is expected to be worse than our expectations as of the acquisition date. At June 30, 2015, we had established reserves of $.9 billion for purchased impaired loans. In addition, loans (purchased impaired and non-impaired) acquired after January 1, 2009 were recorded at fair value. No allowance for loan losses was carried over and no allowance was created at the date of acquisition. See Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information.

In determining the appropriateness of the ALLL, we make specific allocations to impaired loans and allocations to portfolios of commercial and consumer loans. We also allocate reserves to provide coverage for probable losses incurred in the portfolio at the balance sheet date based upon current market conditions, which may not be reflected in historical loss data. Commercial lending is the largest category of credits and is sensitive to changes in assumptions and judgments underlying the determination of the ALLL. We have allocated approximately $1.6 billion, or 50%, of the ALLL at June 30, 2015 to the commercial lending category. Consumer lending allocations are made based on historical loss experience adjusted for recent activity. Approximately $1.7 billion, or 50%, of the ALLL at June 30, 2015 has been allocated to these consumer lending categories.

In addition to the ALLL, we maintain an allowance for unfunded loan commitments and letters of credit. We report this allowance as a liability on our Consolidated Balance

Sheet. We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable losses on these unfunded credit facilities. We determine this amount using estimates of the probability of the ultimate funding and losses related to those credit exposures. Other than the estimation of the probability of funding, this methodology is very similar to the one we use for determining our ALLL.

We refer you to Note 1 Accounting Policies and Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report and in our 2014 Form 10-K for further information on certain key asset quality indicators that we use to evaluate our portfolios and establish the allowances.

Table 36: Allowance for Loan and Lease Losses

 

Dollars in millions    2015     2014  

January 1

   $ 3,331      $ 3,609   

Total net charge-offs

     (170     (331

Provision for credit losses

     100        166   

Net change in allowance for unfunded loan commitments and letters of credit

     13        10   

Other

     (2     (1

June 30

   $ 3,272      $ 3,453   

Net charge-offs to average loans (for the six months ended) (annualized)

     .17     .34

Total allowance for loan and lease losses to total loans

     1.59        1.72   

Commercial lending net (charge-offs) / recoveries

   $ 26      $ (60

Consumer lending net charge-offs

     (196     (271

Total net charge-offs

   $ (170   $ (331

Net charge-offs (recoveries) to average loans (for the six months ended) (annualized)

      

Commercial lending

     (.04 )%      .10

Consumer lending

     .53        .71   

The provision for credit losses totaled $100 million for the first six months of 2015 compared to $166 million for the first six months of 2014. The primary driver of the decrease to the provision was improved overall credit quality. For the first six months of 2015, the provision for commercial lending credit losses decreased by $88 million, or 81%, from the first six months of 2014. The provision for consumer lending credit losses increased $22 million, or 38%, from the first six months of 2014.

At June 30, 2015, total ALLL to total nonperforming loans was 145%. The comparable amount for December 31, 2014 was 133%. These ratios are 94% and 85%, respectively, when excluding the $1.2 billion of ALLL at both June 30, 2015 and December 31, 2014 allocated to consumer loans and lines of credit not secured by residential real estate and purchased impaired loans. We have excluded consumer loans and lines

 

 

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


of credit not secured by real estate as they are charged off after 120 to 180 days past due and not placed on nonperforming status. Additionally, we have excluded purchased impaired loans as they are considered performing regardless of their delinquency status as interest is accreted in accordance with ASC 310-30 based on the recorded investment balance. See Table 28 within this Credit Risk Management section for additional information.

The ALLL balance increases or decreases across periods in relation to fluctuating risk factors, including asset quality trends, net charge-offs and changes in aggregate portfolio balances. During the first six months of 2015, improving asset quality trends, including, but not limited to, delinquency status and improving economic conditions, as well as reduced net charge-offs and overall portfolio growth combined to result in the ALLL remaining essentially flat at June 30, 2015 compared to December 31, 2014.

See Note 1 Accounting Policies and Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report regarding changes in the ALLL and in the allowance for unfunded loan commitments and letters of credit. See also the Purchase Accounting Accretion and Valuation of Purchased Impaired Loans portion of the Consolidated Balance Sheet Review section of this Financial Review for additional information on our ALLL related to purchased impaired loans.

Liquidity Risk Management

Liquidity risk, including our liquidity monitoring measures and tools, is described in further detail in the Liquidity Risk Management section of our 2014 Form 10-K.

PNC also monitors its liquidity by reference to the LCR, a regulatory minimum liquidity requirement designed to ensure that covered banking organizations maintain an adequate level of liquidity to meet net liquidity needs over the course of a 30-day stress scenario. The LCR is calculated by dividing the amount of an institution’s high quality, unencumbered liquid assets (HQLA), as defined and calculated in accordance with the haircuts and limitations of the LCR rules, by its estimated net cash outflow, with net cash outflows determined by applying assumed outflow factors in the LCR rules. The resulting quotient is expressed as a percentage. For PNC and PNC Bank, the LCR became effective January 1, 2015. The minimum required LCR will be phased-in over a period of years. For 2015, PNC and PNC Bank are required to calculate the LCR on a month-end basis and the minimum LCR that PNC and PNC Bank are required to maintain is 80 percent. Effective July 1, 2016, PNC and PNC Bank must begin calculating their respective LCR ratios on a daily basis.

As of June 30, 2015, the LCR for PNC and PNC Bank exceeded 100 percent. The June 30, 2015 LCR calculation and the underlying components are based on PNC’s current interpretation and understanding of the final LCR rules and are subject to, among other things, further regulatory guidance.

We provide additional information regarding regulatory liquidity requirements and their potential impact on PNC in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of our 2014 Form 10-K.

Bank Level Liquidity – Uses

At the bank level, primary contractual obligations include funding loan commitments, satisfying deposit withdrawal requests and maturities and debt service related to bank borrowings. As of June 30, 2015, there were approximately $8.1 billion of bank borrowings with contractual maturities of less than one year. We also maintain adequate bank liquidity to meet future potential loan demand and provide for other business needs, as necessary.

Bank Level Liquidity – Sources

Our largest source of bank liquidity on a consolidated basis is the deposit base generated by our retail and commercial banking businesses. Total deposits increased to $239.7 billion at June 30, 2015 from $232.2 billion at December 31, 2014, driven primarily by higher money market deposits. Assets determined by PNC to be liquid (liquid assets) and unused borrowing capacity from a number of sources are also available to maintain our liquidity position. Borrowed funds come from a diverse mix of short-term and long-term funding sources.

At June 30, 2015, our liquid assets consisted of short-term investments (Federal funds sold, resale agreements, trading securities and interest-earning deposits with banks) totaling $38.3 billion and securities available for sale totaling $47.7 billion. The level of liquid assets fluctuates over time based on many factors, including market conditions, loan and deposit growth and balance sheet management activities. Of our total liquid assets of $86.0 billion, we had $4.0 billion of securities available for sale and trading securities pledged as collateral to secure public and trust deposits, repurchase agreements and for other purposes. In addition to the liquid assets we pledged, $6.1 billion of securities held to maturity were also pledged as collateral for these purposes.

In addition to the customer deposit base, which has historically provided the single largest source of relatively stable and low-cost funding, the bank also obtains liquidity through the issuance of traditional forms of funding including long-term debt (senior notes and subordinated debt and FHLB advances) and short-term borrowings (Federal funds purchased, securities sold under repurchase agreements, commercial paper and other short-term borrowings).

 

 

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


Under the 2014 bank note program, PNC Bank may from time to time offer unsecured senior and subordinated notes due more than nine months from their date of issue (in the case of senior notes) and due five years or more from their date of issue (in the case of subordinated notes). On May 22, 2015, PNC Bank increased the capacity of this program by $5.0 billion to a maximum aggregate principal amount at any one time outstanding of $30.0 billion. The $30.0 billion of notes authorized to be issued and outstanding at any one time includes notes issued by PNC Bank under the 2004 bank note program and those notes PNC Bank has assumed through the acquisition of other banks, in each case for so long as such notes remain outstanding. The terms of the 2014 bank note program do not affect any of the bank notes issued prior to January 16, 2014. At June 30, 2015, PNC Bank had $20.8 billion of notes outstanding under this program. The following table details all issuances through June 30, 2015:

Table 37: PNC Bank Bank Notes Issued During 2015

 

Issuance Date    Amount      Description of Issuance

February 6, 2015

   $ 600 million       Floating rate senior notes issued to an affiliate with a maturity date of January 26, 2017. Interest is payable at the 3-month LIBOR rate, reset quarterly, plus a spread of .30%, on January 26, April 26, July 26 and October 26 of each year, beginning on April 26, 2015.
 

February 23, 2015

   $ 750 million       Senior notes with a maturity date of February 23, 2025. Interest is payable semi-annually at a fixed rate of 2.950% on February 23 and August 23 of each year, beginning on August 23, 2015.
 

February 23, 2015

     $1.0 billion       Senior notes with a maturity date of February 23, 2018. Interest is payable semi-annually at a fixed rate of 1.500% on February 23 and August 23 of each year, beginning on August 23, 2015.
 

May 27, 2015

   $ 200 million       Floating rate senior notes with a maturity date of May 27, 2021. Interest is payable at the 3-month LIBOR rate, reset quarterly, plus a spread of .65%, on February 27, May 27, August 27 and November 27 of each year, beginning on August 27, 2015.
 

June 1, 2015

   $ 550 million       Floating rate senior notes with a maturity date of June 1, 2018. Interest is payable at the 3-month LIBOR rate, reset quarterly, plus a spread of .42%, on March 1, June 1, September 1 and December 1 of each year, beginning on September 1, 2015.
 

June 1, 2015

     $1.3 billion       Senior notes with a maturity date of June 1, 2018. Interest is payable semi-annually at a fixed rate of 1.600% on June 1 and December 1 of each year, beginning on December 1, 2015.
 

June 1, 2015

   $ 750 million       Senior notes with a maturity date of June 1, 2020. Interest is payable semi-annually at a fixed rate of 2.300% on June 1 and December 1 of each year, beginning on December 1, 2015.
 

June 1, 2015

   $ 400 million       Senior notes with a maturity date of June 1, 2025. Interest is payable semi-annually at a fixed rate of 3.250% on June 1 and December 1 of each year, beginning on December 1, 2015.

 

Total senior and subordinated debt of PNC Bank increased to $22.3 billion at June 30, 2015 from $17.5 billion at December 31, 2014 due to the following activity in the period.

Table 38: PNC Bank Senior and Subordinated Debt

 

In billions    2015  

January 1

   $ 17.5   

Issuances

     5.5   

Calls and maturities

     (.7

June 30

   $ 22.3   

See Note 18 Subsequent Events in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for information on two $750 million issuances of senior notes on July 21, 2015.

PNC Bank is a member of the FHLB-Pittsburgh and, as such, has access to advances from FHLB-Pittsburgh secured generally by residential mortgage loans, other mortgage-related loans and commercial mortgage-backed securities. At June 30, 2015, our unused secured borrowing capacity was

$14.3 billion with FHLB-Pittsburgh. Total FHLB borrowings increased to $22.2 billion at June 30, 2015 from $20.0 billion at December 31, 2014 due to the following activity in the period.

Table 39: FHLB Borrowings

 

In billions    2015  

January 1

   $ 20.0   

Issuances

     2.2   

June 30

   $ 22.2   

The FHLB-Pittsburgh also periodically provides standby letters of credit on behalf of PNC Bank to secure certain public deposits. PNC Bank began using standby letters of credit issued by the FHLB-Pittsburgh for these purposes in response to the regulatory liquidity standards finalized during 2014. If the FHLB-Pittsburgh is required to make payment for a beneficiary’s draw, the payment amount is converted into a collateralized advance to PNC Bank. At June 30, 2015 standby letters of credit issued on our behalf by the FHLB-Pittsburgh totaled $6.0 billion.

 

 

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


PNC Bank has the ability to offer up to $10.0 billion of its commercial paper to provide additional liquidity. As of June 30, 2015, there was $3.0 billion outstanding under this program.

PNC Bank can also borrow from the Federal Reserve Bank discount window to meet short-term liquidity requirements. The Federal Reserve Bank, however, is not viewed as the primary means of funding our routine business activities, but rather as a potential source of liquidity in a stressed environment or during a market disruption. These potential borrowings are secured by commercial loans. At June 30, 2015, our unused secured borrowing capacity was $15.3 billion with the Federal Reserve Bank.

Parent Company Liquidity

As of June 30, 2015, available parent company liquidity totaled $5.6 billion. Parent company liquidity is primarily held in short-term investments, the terms of which provide for the availability of cash in 31 days or less. Investments with longer durations may also be acquired, but if so, the related maturities are aligned with scheduled cash needs, such as the maturity of parent company debt obligations.

Parent Company Liquidity – Uses

The parent company’s contractual obligations consist primarily of debt service related to parent company borrowings and funding non-bank affiliates. As of June 30, 2015, there were approximately $1.1 billion of parent company borrowings with contractual maturities of less than one year. Additionally, the parent company maintains adequate liquidity to fund discretionary activities such as paying dividends to PNC shareholders, share repurchases, and acquisitions.

See Balance Sheet, Liquidity and Capital Highlights in the Executive Summary section of this Financial Review for information on our 2015 capital plan that was accepted by the Federal Reserve. Our capital plan included a recommendation to increase the quarterly common stock dividend in the second quarter of 2015 and the ability to redeem the Series K Preferred Stock, as further described below, and also included share repurchase programs of up to $2.875 billion for the five quarter period beginning in the second quarter of 2015. See the Capital portion of the Consolidated Balance Sheet Review in this Financial Review for more information on our share repurchase programs, including detail on our first quarter repurchase of 4.4 million common shares for $.4 billion and our second quarter repurchase of 5.9 million common shares for $.6 billion.

On April 2, 2015, consistent with our 2015 capital plan, our Board of Directors approved an increase to PNC’s quarterly common stock dividend from 48 cents per common share to 51 cents per common share beginning with the May 5, 2015 dividend payment.

On May 4, 2015, we redeemed $500 million of PNC’s Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series K, as well as all Depositary Shares representing interests therein. Each Depositary Share represented a 1/10 interest in a share of the Series K Preferred Stock. All 50,000 shares of Series K Preferred Stock, as well as all 500,000 Depositary Shares representing interests therein, were redeemed. The redemption price was $10,000 per share of Series K Preferred Stock equivalent to $1,000 per Depositary Share, plus declared and unpaid dividends up to but excluding the redemption date.

See the Supervision and Regulation section of Item 1 Business in our 2014 Form 10-K for additional information regarding the Federal Reserve’s CCAR process and the factors the Federal Reserve takes into consideration in evaluating capital plans, qualitative and quantitative liquidity risk management standards proposed by the U.S. banking agencies, and final rules issued by the Federal Reserve that make certain modifications to the Federal Reserve’s capital planning and stress testing rules.

See Table 37 for information on an affiliate purchase of notes issued by PNC Bank during 2015.

Parent Company Liquidity – Sources

The principal source of parent company liquidity is the dividends it receives from its subsidiary bank, which may be impacted by the following:

   

Bank-level capital needs,

   

Laws and regulations,

   

Corporate policies,

   

Contractual restrictions, and

   

Other factors.

There are statutory and regulatory limitations on the ability of national banks to pay dividends or make other capital distributions or to extend credit to the parent company or its non-bank subsidiaries. The amount available for dividend payments by PNC Bank to the parent company without prior regulatory approval was approximately $1.5 billion at June 30, 2015. See Note 20 Regulatory Matters in our 2014 Form 10-K for a further discussion of these limitations. We provide additional information on certain contractual restrictions in Note 12 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities in our 2014 Form 10-K.

In addition to dividends from PNC Bank, other sources of parent company liquidity include cash and investments, as well as dividends and loan repayments from other subsidiaries and dividends or distributions from equity investments.

We can also generate liquidity for the parent company and PNC’s non-bank subsidiaries through the issuance of debt and equity securities, including certain capital instruments, in public or private markets and commercial paper. We have an effective shelf registration statement pursuant to which we can issue additional debt, equity and other capital instruments.

 

 

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


Total parent company senior and subordinated debt and hybrid capital instruments decreased to $8.6 billion at June 30, 2015 from $10.1 billion at December 31, 2014 due to the following activity in the period.

Table 40: Parent Company Senior and Subordinated Debt and Hybrid Capital Instruments

 

In billions    2015  

January 1

   $ 10.1   

Maturities

     (1.4

Other

     (.1

June 30

   $ 8.6   

The parent company has the ability to offer up to $5.0 billion of commercial paper to provide additional liquidity. As of June 30, 2015, there were no issuances outstanding under this program.

Status of Credit Ratings

The cost and availability of short-term and long-term funding, as well as collateral requirements for certain derivative instruments, is influenced by PNC’s debt ratings.

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. In addition, rating agencies themselves have been subject to scrutiny arising from the most recent financial crisis and could make or be required to make substantial changes to their ratings policies and practices, particularly in response to legislative and regulatory changes. Potential changes in the legislative and regulatory environment and the timing of those

changes could impact our ratings, which as noted above, could impact our liquidity and financial condition. 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.

In March 2015, Moody’s Investors Service (Moody’s) published a new bank ratings methodology which has been implemented on a global basis and includes assessment of expected loss ratings on instruments ranging from bank deposits to preferred stock. In the second quarter of 2015, Moody’s concluded its review for PNC and PNC Bank under this new methodology. As a result, Moody’s upgraded PNC Bank’s long-term deposit rating three notches to Aa2, confirmed PNC Bank’s senior debt and issuer ratings at A2, and confirmed PNC Bank’s Prime-1 short-term notes rating. The Moody’s rating outlook for PNC and PNC Bank is stable.

Table 41: Credit Ratings as of June 30, 2015 for PNC and PNC Bank

 

      Moody’s      Standard &
Poor’s
     Fitch  

PNC

          

Senior debt

     A3         A-         A+   

Subordinated debt

     A3         BBB+         A   

Preferred stock

     Baa2         BBB-         BBB-   
 

PNC Bank

          

Senior debt

     A2         A         A+   

Subordinated debt

     A3         A-         A   

Long-term deposits

     Aa2         A         AA-   

Short-term deposits

     P-1         A-1         F1+   

Short-term notes

     P-1         A-1         F1   
 

 

Commitments

The following tables set forth contractual obligations and various other commitments as of June 30, 2015 representing required and potential cash outflows.

Table 42: Contractual Obligations

 

             Payment Due By Period  
June 30, 2015 – in millions    Total      Less than one
year
     One to three
years
     Four to five
years
     After five
years
 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Remaining contractual maturities of time deposits (a)

   $ 20,590       $ 14,807       $ 2,003       $ 955       $ 2,825   

Borrowed funds (a) (b)

     58,276         13,263         21,617         14,079         9,317   

Minimum annual rentals on noncancellable leases

     2,723         379         646         490         1,208   

Nonqualified pension and postretirement benefits

     519         56         109         108         246   

Purchase obligations (c)

     647         416         136         71         24   

Total contractual cash obligations

   $ 82,755       $ 28,921       $ 24,511       $ 15,703       $ 13,620   
(a) Includes purchase accounting adjustments.
(b) Includes basis adjustment relating to accounting hedges.
(c) Includes purchase obligations for goods and services covered by noncancellable contracts and contracts including cancellation fees.

 

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


At June 30, 2015, we had unrecognized tax benefits of $80 million, which represents a reserve for tax positions that we have taken in our tax returns which ultimately may not be sustained upon examination by taxing authorities. Since the ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty, this estimate has been excluded from the contractual obligations table. See Note 14 Income Taxes in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information.

Our contractual obligations totaled $82.0 billion at December 31, 2014. The slight increase in the comparison is primarily attributable to an increase in borrowed funds offset by a decrease in time deposits. See Funding Sources in the Consolidated Balance Sheet Review section of this Financial Review for additional information regarding our funding sources.

Table 43: Other Commitments (a)

 

            Amount Of Commitment Expiration By Period  
June 30, 2015 – in millions    Total
Amounts
Committed
    Less than one
year
     One to three
years
     Four to five
years
     After five
years
 

Commitments to extend credit (b)

   $ 138,242      $ 52,622       $ 47,142       $ 37,633       $ 845   

Net outstanding standby letters of credit (c)

     9,509        4,361         4,053         1,094         1   

Reinsurance agreements (d)

     2,118        10         18         30         2,060   

Standby bond purchase agreements

     959        306         653           

Other commitments (e)

     964        764         166         33         1   

Total commitments

   $ 151,792      $ 58,063       $ 52,032       $ 38,790       $ 2,907   
(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 $5.2 billion of standby letters of credit that support remarketing programs for customers’ variable rate demand notes.
(d) Reinsurance agreements are with third-party insurers related to insurance sold to or placed on behalf of our customers. Balances represent estimates based on availability of financial information.
(e) Includes other commitments of $283 million that were not on our Consolidated Balance Sheet. The remaining $681 million of other commitments were included in Other liabilities on our Consolidated Balance Sheet.

Our total commitments were $154.9 billion at December 31, 2014. The decrease in the comparison is primarily due to the decline in reinsurance agreements driven by the programs being in run-off. See Note 16 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report for additional information related to our commitments.

 

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 these limits and guidelines, and reporting significant risks in the business to the Risk Committee of the Board.

Market Risk Management – Interest Rate Risk

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

Asset and Liability Management centrally manages interest rate risk as prescribed in our risk management policies, which are approved by management’s Asset and Liability Committee and the Risk Committee of the Board.

 

 

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


Sensitivity results and market interest rate benchmarks for the second quarters of 2015 and 2014 follow:

Table 44: Interest Sensitivity Analysis

 

     

Second
Quarter

2015

   

Second
Quarter

2014

 

Net Interest Income Sensitivity Simulation (a)

      

Effect on net interest income in first year from gradual interest rate change over following 12 months of:

      

100 basis point increase

     1.7     2.0

100 basis point decrease

     (.5 )%      (.9 )% 

Effect on net interest income in second year from gradual interest rate change over the preceding 12 months of:

      

100 basis point increase

     5.7     6.8

100 basis point decrease

     (4.6 )%      (4.6 )% 

Duration of Equity Model (a)

      

Base case duration of equity (in years)

     (3.5     (2.7

Key Period-End Interest Rates

      

One-month LIBOR

     .19     .16

Three-year swap

     1.25     1.00
(a) Given the inherent limitations in certain of these measurement tools and techniques, results become less meaningful as interest rates approach zero.

In addition to measuring the effect on net interest income assuming parallel changes in current interest rates, we routinely simulate the effects of a number of nonparallel interest rate environments. Table 45 reflects the percentage change in net interest income over the next two 12-month periods assuming (i) the PNC Economist’s most likely rate forecast, (ii) implied market forward rates and (iii) Yield Curve Slope Flattening (a 100 basis point yield curve slope flattening between 1-month and ten-year rates superimposed on current base rates) scenario.

Table 45: Net Interest Income Sensitivity to Alternative Rate Scenarios (Second Quarter 2015)

 

     

PNC

Economist

    Market
Forward
     Slope
Flattening
 

First year sensitivity

     2.9     1.1      (.8 )% 

Second year sensitivity

     7.0     4.5      (4.1 )% 

 

All changes in forecasted net interest income are relative to results in a base rate scenario where current market rates are assumed to remain unchanged over the forecast horizon.

When forecasting net interest income, we make assumptions about interest rates and the shape of the yield curve, the volume and characteristics of new business and the behavior of existing on- and off-balance sheet positions. These assumptions determine the future level of simulated net interest income in the base interest rate scenario and the other interest rate scenarios presented in Tables 44 and 45 above.

These simulations assume that as assets and liabilities mature, they are replaced or repriced at then current market rates. We also consider forward projections of purchase accounting accretion when forecasting net interest income.

The following graph presents the LIBOR/Swap yield curves for the base rate scenario and each of the alternate scenarios one year forward.

Table 46: Alternate Interest Rate Scenarios: One Year Forward

 

LOGO

The second quarter 2015 interest sensitivity analyses indicate that our Consolidated Balance Sheet is positioned to benefit from an increase in interest rates and an upward sloping interest rate yield curve. We believe that we have the deposit funding base and balance sheet flexibility to adjust, where appropriate and permissible, to changing interest rates and market conditions.

Market Risk Management – Customer-Related Trading Risk

We engage in fixed income securities, derivatives and foreign exchange transactions to support our customers’ investing and hedging activities. These transactions, related hedges and the credit valuation adjustment (CVA) related to our customer derivatives portfolio are marked-to-market daily and reported as customer-related trading activities. We do not engage in proprietary trading of these products.

We use value-at-risk (VaR) as the primary means to measure and monitor market risk in customer-related trading activities. We calculate a diversified VaR at a 95% confidence interval. 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.

During the first six months of 2015, our 95% VaR ranged between $1.4 million and $3.6 million, averaging $2.1 million. During the first six months of 2014, our 95% VaR ranged between $1.4 million and $3.9 million, averaging $3.1 million.

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

 

 

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


VaR levels that were calculated at the close of the prior day. This assumes that market exposures remain constant throughout the day and that recent historical market variability is a good predictor of future variability. Our customer-related trading activity includes customer revenue and intraday hedging which helps to reduce losses, and may reduce the number of instances of actual losses exceeding the prior day VaR measure. There were three such instances during the first six months of 2015 where actual losses exceeded the prior day VaR measure under our diversified VaR measure. In comparison, there were no such instances during the first six months of 2014. We use a 500 day look back period for backtesting and include customer-related revenue.

The following graph shows a comparison of enterprise-wide gains and losses against prior day diversified VaR for the period indicated.

Table 47: Enterprise-Wide Gains/Losses Versus Value-at-Risk

 

LOGO

Customer-related trading revenue increased to $102 million for the first six months of 2015 compared with $84 million for the first six months of 2014. This increase was primarily due to market interest rate changes impacting credit valuations for customer-related derivatives activities and improved derivatives client sales revenues, which were partially offset by reduced client related trading results.

Customer-related trading revenue increased to $53 million for the second quarter of 2015 compared with $44 million for the second quarter of 2014. This increase was primarily due to market interest rate changes impacting credit valuations for customer-related derivatives activities.

Market Risk Management – Equity And Other

Investment Risk

Equity investment risk is the risk of potential losses associated with investing in both private and public equity markets. In addition to extending credit, taking deposits, and underwriting and trading financial instruments, we make and manage direct investments in a variety of transactions, including management buyouts, recapitalizations, and growth financings in a variety of industries. We also have investments in

affiliated and non-affiliated funds that make similar investments in private equity and in debt and equity-oriented hedge funds. The economic and/or book value of these investments and other assets such as loan servicing rights are directly affected by changes in market factors.

The primary risk measurement for equity and other investments is economic capital. Economic capital is a common measure of risk for credit, market and operational risk. It is an estimate of the potential value depreciation over a one year horizon commensurate with solvency expectations of an institution rated single-A by the credit rating agencies. Given the illiquid nature of many of these types of investments, it can be a challenge to determine their fair values. See Note 7 Fair Value in the Notes To Consolidated Financial Statements in this Report and Note 7 Fair Value in our 2014 Form 10-K for additional information.

Various PNC business units manage our equity and other investment activities. Our businesses are responsible for making investment decisions within the approved policy limits and associated guidelines.

A summary of our equity investments follows:

Table 48: Equity Investments Summary

 

In millions   

June 30

2015

    

December 31

2014

 

BlackRock

   $ 6,397       $ 6,265   

Tax credit investments

     2,312         2,616   

Private equity

     1,611         1,615   

Visa

     54         77   

Other

     157         155   

Total

   $ 10,531       $ 10,728   

BlackRock

PNC owned approximately 35 million common stock equivalent shares of BlackRock equity at June 30, 2015, accounted for under the equity method. The primary risk measurement, similar to other equity investments, is economic capital. The Business Segments Review section of this Financial Review includes additional information about BlackRock.

Tax Credit Investments

Included in our equity investments are direct tax credit investments and equity investments held by consolidated partnerships which totaled $2.3 billion at June 30, 2015 and $2.6 billion at December 31, 2014. These equity investment balances include unfunded commitments totaling $611 million and $717 million at June 30, 2015 and December 31, 2014, respectively. These unfunded commitments are included in Other Liabilities on our Consolidated Balance Sheet.

Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial

 

 

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


Statements in Part I, Item 1 of this Report has further information on Tax Credit Investments.

Private Equity

The private equity portfolio is an illiquid portfolio comprised of mezzanine and equity investments that vary by industry, stage and type of investment.

Private equity investments carried at estimated fair value totaled $1.6 billion at both June 30, 2015 and December 31, 2014. As of June 30, 2015, $1.2 billion was invested directly in a variety of companies and $.4 billion was invested indirectly through various private equity funds. Included in direct investments are investment activities of two private equity funds that are consolidated for financial reporting purposes. The noncontrolling interests of these funds totaled $182 million as of June 30, 2015. The interests held in indirect private equity funds are not redeemable, but PNC may receive distributions over the life of the partnership from liquidation of the underlying investments. See Item 1 Business – Supervision and Regulation and Item 1A Risk Factors included in our 2014 Form 10-K for discussion of the potential impacts of the Volcker Rule provisions of Dodd-Frank on our interests in and sponsorship of private funds covered by the Volcker Rule.

Our unfunded commitments related to private equity totaled $144 million at June 30, 2015 compared with $140 million at December 31, 2014.

Visa

Our 2014 Form 10-K includes information regarding the October 2007 Visa restructuring, our involvement with judgment and loss sharing agreements with Visa and certain other banks, the status of pending interchange litigation, the sales of portions of our Visa Class B common shares and the related swap agreements with the purchaser.

During the first six months of 2015, we sold 1 million Visa Class B common shares, in addition to the 16.5 million shares sold in previous years. We have entered into swap agreements with the purchaser of the shares as part of these sales. At June 30, 2015, our investment in Visa Class B common shares totaled approximately 6 million shares and had a carrying value of $54 million. Based on the June 30, 2015 closing price of $67.15 for the Visa Class A common shares, the fair value of our total investment was approximately $649 million at the current conversion rate. The Visa Class B common shares that we own are transferable only under limited circumstances until they can be converted into shares of the publicly traded class of stock, which cannot happen until the settlement of all of the specified litigation.

Other Investments

We also make investments in affiliated and non-affiliated funds with both traditional and alternative investment strategies. The economic values could be driven by either the fixed-income market or the equity markets, or both. At June 30, 2015 other investments totaled $157 million compared with $155 million at December 31, 2014. Net gains related to these investments were not significant for the first six months of 2015 and 2014.

Given the nature of these investments, if market conditions affecting their valuation were to worsen, we could incur future losses.

Our unfunded commitments related to other investments at June 30, 2015 and December 31, 2014 were not significant.

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 and credit risk inherent in our business activities. Substantially all such instruments are used to manage risk related to changes in interest rates. Interest rate swaps, interest rate caps and floors, swaptions, options, forwards and futures contracts are the primary instruments we use for interest rate risk management. We also enter into derivatives with customers to facilitate their risk management activities.

Financial derivatives involve, to varying degrees, market and credit risk. For interest rate swaps, options and futures contracts, only periodic cash payments and, with respect to options, premiums are exchanged. Therefore, cash requirements and exposure to credit risk are significantly less than the notional amount on these instruments.

Further information on our financial derivatives is presented in Note 1 Accounting Policies and Note 7 Fair Value in our Notes To Consolidated Financial Statements under Item 8 of our 2014 Form 10-K and in Note 7 Fair Value and Note 11 Financial Derivatives in the Notes To Consolidated Financial Statements in Part I, Item 1 of this Report, which is incorporated here by reference.

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

 

 

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


The following table summarizes the notional or contractual amounts and net fair value of financial derivatives at June 30, 2015 and December 31, 2014.

Table 49: Financial Derivatives Summary

 

     June 30, 2015      December 31, 2014  
In millions    Notional/
Contractual
Amount
     Net Fair
Value (a)
     Notional/
Contractual
Amount
     Net Fair
Value (a)
 

Derivatives designated as hedging instruments under GAAP

                                   

Total derivatives designated as hedging instruments

   $ 53,342       $ 947       $ 49,061       $ 1,075   

Derivatives not designated as hedging instruments under GAAP

             

Total derivatives used for residential mortgage banking activities

   $ 100,773       $ 357       $ 76,102       $ 409   

Total derivatives used for commercial mortgage banking activities

     25,756         17         26,290         26   

Total derivatives used for customer-related activities

     187,110         171         183,474         122   

Total derivatives used for other risk management activities

     4,568         (468      5,390         (425

Total derivatives not designated as hedging instruments

   $ 318,207       $ 77       $ 291,256       $ 132   

Total Derivatives

   $ 371,549       $ 1,024       $ 340,317       $ 1,207   
(a) Represents the net fair value of assets and liabilities.

 

INTERNAL CONTROLS AND DISCLOSURE CONTROLS AND PROCEDURES

As of June 30, 2015, we performed an evaluation under the supervision of and with the participation of our management, including the Chairman, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures and of changes in our internal control over financial reporting.

Based on that evaluation, our Chairman, President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934) were effective as of June 30, 2015, and that there has been no change in PNC’s internal control over financial reporting that occurred during the second quarter of 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

GLOSSARY OF TERMS

Accretable net interest (Accretable yield) – The excess of cash flows expected to be collected on a purchased impaired loan over the carrying value of the loan. The accretable net interest is recognized into interest income over the remaining life of the loan using the constant effective yield method.

Adjusted average total assets – Primarily comprised of total average quarterly (or annual) assets plus (less) unrealized losses (gains) on investment securities, less goodwill and certain other intangible assets (net of eligible deferred taxes).

Annualized – Adjusted to reflect a full year of activity.

Basel III common equity Tier 1 capital – Common stock plus related surplus, net of treasury stock, plus retained earnings, plus accumulated other comprehensive income for securities currently and previously held as available for sale, plus accumulated other comprehensive income for pension and other postretirement benefit plans, less goodwill, net of associated deferred tax liabilities, less other disallowed intangibles, net of deferred tax liabilities and plus/less other adjustments.

Basel III common equity Tier 1 capital ratio – Common equity Tier 1 capital divided by period-end risk-weighted assets (as applicable).

Basel III Tier 1 capital – Common equity Tier 1 capital, plus preferred stock, plus certain trust preferred capital securities, plus certain noncontrolling interests that are held by others and plus/ less other adjustments.

Basel III Tier 1 capital ratio – Tier 1 capital divided by period-end risk-weighted assets (as applicable).

Basel III Total capital – Tier 1 capital plus qualifying subordinated debt, plus certain trust preferred securities, plus, under the Basel III transitional rules and the standardized approach, the allowance for loan and lease losses included in Tier 2 capital and other.

Basel III Total capital ratio – Total capital divided by period-end risk-weighted assets (as applicable).

Basis point – One hundredth of a percentage point.

Carrying value of purchased impaired loans – The net value on the balance sheet which represents the recorded investment less any valuation allowance.

 

 

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


Cash recoveries – Cash recoveries used in the context of purchased impaired loans represent cash payments for a single purchased impaired loan not included within a pool of loans from customers that exceeded the recorded investment of that loan.

Charge-off – Process of removing a loan or portion of a loan from our balance sheet because it is considered uncollectible. We also record a charge-off when a loan is transferred from portfolio holdings to held for sale by reducing the loan carrying amount to the fair value of the loan, if fair value is less than carrying amount.

Combined loan-to-value ratio (CLTV) – This is the aggregate principal balance(s) of the mortgages on a property divided by its appraised value or purchase price.

Common shareholders’ equity to total assets – Common shareholders’ equity divided by total assets. Common shareholders’ equity equals total shareholders’ equity less the liquidation value of preferred stock.

Core net interest income – Core net interest income is total net interest income less purchase accounting accretion.

Credit derivatives – Contractual agreements, primarily credit default swaps, that provide protection against a credit event of one or more referenced credits. The nature of a credit event is established by the protection buyer and protection seller at the inception of a transaction, and such events include bankruptcy, insolvency and failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic fee in return for a payment by the protection seller upon the occurrence, if any, of a credit event.

Credit spread – The difference in yield between debt issues of similar maturity. The excess of yield attributable to credit spread is often used as a measure of relative creditworthiness, with a reduction in the credit spread reflecting an improvement in the borrower’s perceived creditworthiness.

Credit valuation adjustment (CVA) – Represents an adjustment to the fair value of our derivatives for our own and counterparties’ non-performance risk.

Derivatives – Financial contracts whose value is derived from changes in publicly traded securities, interest rates, currency exchange rates or market indices. Derivatives cover a wide assortment of financial contracts, including but not limited to forward contracts, futures, options and swaps.

Discretionary client assets under management – Assets over which we have sole or shared investment authority for our customers/clients. We do not include these assets on our Consolidated Balance Sheet.

Duration of equity – An estimate of the rate sensitivity of our economic value of equity. A negative duration of equity is associated with asset sensitivity (i.e., positioned for rising interest rates), while a positive value implies liability sensitivity (i.e., positioned for declining interest rates). For example, if the duration of equity is -1.5 years, the economic value of equity increases by 1.5% for each 100 basis point increase in interest rates.

Earning assets – Assets that generate income, which include: federal funds sold; resale agreements; trading securities; interest-earning deposits with banks; loans held for sale; loans; investment securities; and certain other assets.

Effective duration – A measurement, expressed in years, that, when multiplied by a change in interest rates, would approximate the percentage change in value of on- and off- balance sheet positions.

Efficiency – Noninterest expense divided by total revenue.

Enterprise risk management framework – An enterprise process designed to identify potential risks that may affect PNC, manage risk to be within our risk appetite and provide reasonable assurance regarding achievement of our objectives.

Fair value – The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fee income – When referring to the components of Noninterest income, we use the term fee income to refer to the following categories within Noninterest income: Asset management; Consumer services; Corporate services; Residential mortgage; and Service charges on deposits.

FICO score – A credit bureau-based industry standard score created by Fair Isaac Co. which predicts the likelihood of borrower default. We use FICO scores both in underwriting and assessing credit risk in our consumer lending portfolio. Lower FICO scores indicate likely higher risk of default, while higher FICO scores indicate likely lower risk of default. FICO scores are updated on a periodic basis.

Foreign exchange contracts – Contracts that provide for the future receipt and delivery of foreign currency at previously agreed-upon terms.

Funds transfer pricing – A management accounting methodology designed to recognize the net interest income effects of sources and uses of funds provided by the assets and liabilities of a business segment. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors.

 

 

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


Futures and forward contracts – Contracts in which the buyer agrees to purchase and the seller agrees to deliver a specific financial instrument at a predetermined price or yield. May be settled either in cash or by delivery of the underlying financial instrument.

GAAP – Accounting principles generally accepted in the United States of America.

Home price index (HPI) – A broad measure of the movement of single-family house prices in the U.S.

Impaired loans – Loans are determined to be impaired when, based on current information and events, it is probable that all contractually required payments will not be collected. Impaired loans include commercial nonperforming loans and consumer and commercial TDRs, regardless of nonperforming status. Excluded from impaired loans are nonperforming leases, loans held for sale, loans accounted for under the fair value option, smaller balance homogenous type loans and purchased impaired loans.

Interest rate floors and caps – Interest rate protection instruments that involve payment from the protection seller to the protection buyer of an interest differential, which represents the difference between a short-term rate (e.g., three-month LIBOR) and an agreed-upon rate (the strike rate) applied to a notional principal amount.

Interest rate swap contracts – Contracts that are entered into primarily as an asset/liability management strategy to reduce interest rate risk. Interest rate swap contracts are exchanges of interest rate payments, such as fixed-rate payments for floating-rate payments, based on notional principal amounts.

Intrinsic value – The difference between the price, if any, required to be paid for stock issued pursuant to an equity compensation arrangement and the fair market value of the underlying stock.

Leverage ratio – Tier 1 capital divided by average quarterly adjusted total assets.

LIBOR – Acronym for London InterBank Offered Rate. LIBOR is the average interest rate charged when banks in the London wholesale money market (or interbank market) borrow unsecured funds from each other. LIBOR rates are used as a benchmark for interest rates on a global basis. PNC’s product set includes loans priced using LIBOR as a benchmark.

Loan-to-value ratio (LTV) – A calculation of a loan’s collateral coverage that is used both in underwriting and assessing credit risk in our lending portfolio. LTV is the sum total of loan obligations secured by collateral divided by the market value of that same collateral. Market values of the collateral are based on an independent valuation of the

collateral. For example, a LTV of less than 90% is better secured and has less credit risk than a LTV of greater than or equal to 90%.

Loss given default (LGD)An estimate of loss, net of recovery based on collateral type, collateral value, loan exposure, and other factors. Each loan has its own LGD. The LGD risk rating measures the percentage of exposure of a specific credit obligation that we expect to lose if default occurs. LGD is net of recovery, through any means, including but not limited to the liquidation of collateral or deficiency judgments rendered from foreclosure or bankruptcy proceedings.

Net interest margin – Annualized taxable-equivalent net interest income divided by average earning assets.

Nonaccretable difference – Contractually required payments receivable on a purchased impaired loan in excess of the cash flows expected to be collected.

Nonaccrual loans – Loans for which we do not accrue interest income. Nonaccrual loans include nonperforming loans, in addition to loans accounted for under fair value option and loans accounted for as held for sale for which full collection of contractual principal and/or interest is not probable.

Nondiscretionary client assets under administration – Assets we hold for our customers/clients in a nondiscretionary, custodial capacity. We do not include these assets on our Consolidated Balance Sheet.

Nonperforming assets – Nonperforming assets include nonperforming loans and OREO and foreclosed assets, but exclude certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. We do not accrue interest income on assets classified as nonperforming.

Nonperforming loans – Loans accounted for at amortized cost for which we do not accrue interest income. Nonperforming loans include loans to commercial, commercial real estate, equipment lease financing, home equity, residential real estate, credit card and other consumer customers as well as TDRs which have not returned to performing status. Nonperforming loans exclude certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. Nonperforming loans exclude purchased impaired loans as we are currently accreting interest income over the expected life of the loans.

Notional amount – A number of currency units, shares, or other units specified in a derivative contract.

 

 

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


Operating leverage – The period to period dollar or percentage change in total revenue (GAAP basis) less the dollar or percentage change in noninterest expense. A positive variance indicates that revenue growth exceeded expense growth (i.e., positive operating leverage) while a negative variance implies expense growth exceeded revenue growth (i.e., negative operating leverage).

Options – Contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to either purchase or sell the associated financial instrument at a set price during a specified period or at a specified date in the future.

Other real estate owned (OREO) and foreclosed assets – Assets taken in settlement of troubled loans primarily through deed-in-lieu of foreclosure or foreclosure. Foreclosed assets include real and personal property, equity interests in corporations, partnerships, and limited liability companies. Excludes certain assets that have a government-guarantee which are classified as other receivables.

Other-than-temporary impairment (OTTI) – When the fair value of a security is less than its amortized cost basis, an assessment is performed to determine whether the impairment is other-than-temporary. If we intend to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, an other-than-temporary impairment is considered to have occurred. In such cases, an other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Further, if we do not expect to recover the entire amortized cost of the security, an other-than-temporary impairment is considered to have occurred. However for debt securities, if we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before its recovery, the other-than-temporary loss is separated into (a) the amount representing the credit loss, and (b) the amount related to all other factors. The other-than-temporary impairment related to credit losses is recognized in earnings while the amount related to all other factors is recognized in other comprehensive income, net of tax.

Parent company liquidity coverage – Liquid assets divided by funding obligations within a two year period.

Pretax earnings – Income before income taxes and noncontrolling interests.

Pretax, pre-provision earnings – Total revenue less noninterest expense.

Primary client relationship – A corporate banking client relationship with annual revenue generation of $10,000 to $50,000 or more, and for Asset Management Group, a client relationship with annual revenue generation of $10,000 or more.

Probability of default (PD) – An internal risk rating that indicates the likelihood that a credit obligor will enter into default status.

Purchase accounting accretion – Accretion of the discounts and premiums on acquired assets and liabilities. The purchase accounting accretion is recognized in net interest income over the weighted-average life of the financial instruments using the constant effective yield method. Accretion for a single purchased impaired loan not included within a pool of loans includes any cash recoveries on that loan received in excess of the recorded investment.

Purchased impaired loans – Acquired loans (or pools of loans) determined to be credit impaired under FASB ASC 310-30 (AICPA SOP 03-3). Loans (or pools of loans) are determined to be impaired if there is evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected.

Recorded investment (purchased impaired loans) – The initial investment of a purchased impaired loan plus interest accretion and less any cash payments and writedowns to date. The recorded investment excludes any valuation allowance which is included in our allowance for loan and lease losses.

Recovery – Cash proceeds received on a loan that we had previously charged off. We credit the amount received to the allowance for loan and lease losses.

Residential development loans – Project-specific loans to commercial customers for the construction or development of residential real estate including land, single family homes, condominiums and other residential properties.

Return on average assets – Annualized net income divided by average assets.

Return on average capital – Annualized net income divided by average capital.

Return on average common shareholders’ equity – Annualized net income attributable to common shareholders divided by average common shareholders’ equity.

Risk – The potential that an event or series of events could occur that would threaten PNC’s ability to achieve its strategic objectives, thereby negatively affecting shareholder value or reputation.

Risk appetite – A dynamic, forward-looking view on the aggregate amount of risk PNC is willing and able to take in executing business strategy in light of the current business environment.

 

 

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


Risk limits – Quantitative measures based on forward looking assumptions that allocate the firm’s aggregate risk appetite (e.g. measure of loss or negative events) to business lines, legal entities, specific risk categories, concentrations and as appropriate, other levels.

Risk profile – The risk profile is a point-in-time assessment of risk. The profile represents overall risk position in relation to the desired risk appetite. The determination of the risk profile’s position is based on qualitative and quantitative analysis of reported risk limits, metrics, operating guidelines and qualitative assessments.

Risk-weighted assets – Computed by the assignment of specific risk-weights (as defined by the Board of Governors of the Federal Reserve System) to assets and off-balance sheet instruments.

Securitization – The process of legally transforming financial assets into securities.

Servicing rights – An intangible asset or liability created by an obligation to service assets for others. Typical servicing rights include the right to receive a fee for collecting and forwarding payments on loans and related taxes and insurance premiums held in escrow.

Swaptions – Contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to enter into an interest rate swap agreement during a specified period or at a specified date in the future.

Taxable-equivalent interest – The interest income earned on certain assets is completely or partially exempt from Federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of yields and margins for all interest-earning assets, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margins by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on other taxable investments. This adjustment is not permitted under GAAP on the Consolidated Income Statement.

Total equity – Total shareholders’ equity plus noncontrolling interests.

Total return swap – A non-traditional swap where one party agrees to pay the other the “total return” of a defined underlying asset (e.g., a loan), usually in return for receiving a stream of LIBOR-based cash flows. The total returns of the asset, including interest and any default shortfall, are passed through to the counterparty. The counterparty is, therefore, assuming the credit and economic risk of the underlying asset.

Transaction deposits – The sum of interest-bearing money market deposits, interest-bearing demand deposits, and noninterest-bearing deposits.

Transitional Basel III common equity – Common equity calculated under Basel III using phased in definitions and deductions applicable to PNC during the applicable presentation period.

Troubled debt restructuring (TDR) – A loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties.

Value-at-risk (VaR) – A statistically-based measure of risk that describes the amount of potential loss which may be incurred due to adverse market movements. The measure is of the maximum loss which should not be exceeded on 95 out of 100 days for a 95% VaR.

Watchlist – A list of criticized loans, credit exposure or other assets compiled for internal monitoring purposes. We define criticized exposure for this purpose as exposure with an internal risk rating of other assets especially mentioned, substandard, doubtful or loss.

Yield curve – A graph showing the relationship between the yields on financial instruments or market indices of the same credit quality with different maturities. For example, a “normal” or “positive” yield curve exists when long-term bonds have higher yields than short-term bonds. A “flat” yield curve exists when yields are the same for short-term and long-term bonds. A “steep” yield curve exists when yields on long-term bonds are significantly higher than on short-term bonds. An “inverted” or “negative” yield curve exists when short-term bonds have higher yields than long-term bonds.

 

 

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


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

We make statements in this Report, and we may from time to time make other statements, regarding our outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting PNC and its future business and operations that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “look,” “intend,” “outlook,” “project,” “forecast,” “estimate,” “goal,” “will,” “should” and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time.

Forward-looking statements speak only as of the date made. We do not assume any duty and do not undertake to update forward-looking statements. Actual results or future events could differ, possibly materially, from those anticipated in forward-looking statements, as well as from historical performance.

Our forward-looking statements are subject to the following principal risks and uncertainties.

 

Our businesses, financial results and balance sheet values are affected by business and economic conditions, including the following:

   

Changes in interest rates and valuations in debt, equity and other financial markets.

   

Disruptions in the U.S. and global financial markets.

   

The impact on financial markets and the economy of any changes in the credit ratings of U.S. Treasury obligations and other U.S. government-backed debt, as well as issues surrounding the levels of U.S. and European government debt and concerns regarding the creditworthiness of certain sovereign governments, supranationals and financial institutions in Europe.

   

Actions by the Federal Reserve, U.S. Treasury and other government agencies, including those that impact money supply and market interest rates.

   

Changes in customers’, suppliers’ and other counterparties’ performance and creditworthiness.

   

Slowing or reversal of the current U.S. economic expansion.

   

Continued residual effects of recessionary conditions and uneven spread of positive impacts of recovery on the economy and our counterparties, including adverse impacts on levels of unemployment, loan utilization rates, delinquencies, defaults and counterparty ability to meet credit and other obligations.

   

Changes in customer preferences and behavior, whether due to changing business and economic

   

conditions, legislative and regulatory initiatives, or other factors.

 

Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than we are currently expecting. These statements are based on our current view that the U.S. economic expansion will speed up to an above trend growth rate near 3.2 percent in the second half of 2015, boosted by lower oil/energy prices, and that short-term interest rates and bond yields will rise slowly in the latter half of 2015. These forward-looking statements also do not, unless otherwise indicated, take into account the impact of potential legal and regulatory contingencies.

 

PNC’s ability to take certain capital actions, including paying dividends and any plans to increase common stock dividends, repurchase common stock under current or future programs, or issue or redeem preferred stock or other regulatory capital instruments, is subject to the review of such proposed actions by the Federal Reserve as part of PNC’s comprehensive capital plan for the applicable period in connection with the regulators’ Comprehensive Capital Analysis and Review (CCAR) process and to the acceptance of such capital plan and non-objection to such capital actions by the Federal Reserve.

 

PNC’s regulatory capital ratios in the future will depend on, among other things, the company’s financial performance, the scope and terms of final capital regulations then in effect (particularly those implementing the Basel Capital Accords), and management actions affecting the composition of PNC’s balance sheet. In addition, PNC’s ability to determine, evaluate and forecast regulatory capital ratios, and to take actions (such as capital distributions) based on actual or forecasted capital ratios, will be dependent at least in part on the development, validation and regulatory approval of related models.

 

Legal and regulatory developments could have an impact on our ability to operate our businesses, financial condition, results of operations, competitive position, reputation, or pursuit of attractive acquisition opportunities. Reputational impacts could affect matters such as business generation and retention, liquidity, funding, and ability to attract and retain management. These developments could include:

   

Changes resulting from legislative and regulatory reforms, including major reform of the regulatory oversight structure of the financial services industry and changes to laws and regulations involving tax, pension, bankruptcy, consumer protection, and other industry aspects, and changes in accounting policies and principles. We will be impacted by extensive reforms provided for in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and otherwise growing out of the most recent financial

 

 

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


   

crisis, the precise nature, extent and timing of which, and their impact on us, remains uncertain.

   

Changes to regulations governing bank capital and liquidity standards, including due to the Dodd-Frank Act and to Basel-related initiatives.

   

Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries. In addition to matters relating to PNC’s current and historical business and activities, such matters may include proceedings, claims, investigations, or inquiries relating to pre-acquisition business and activities of acquired companies, such as National City. These matters may result in monetary judgments or settlements or other remedies, including fines, penalties, restitution or alterations in our business practices, and in additional expenses and collateral costs, and may cause reputational harm to PNC.

   

Results of the regulatory examination and supervision process, including our failure to satisfy requirements of agreements with governmental agencies.

   

Impact on business and operating results of any costs associated with obtaining rights in intellectual property claimed by others and of adequacy of our intellectual property protection in general.

 

Business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through effective use of third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards. In particular, our results currently depend on our ability to manage elevated levels of impaired assets.

 

Business and operating results also include impacts relating to our equity interest in BlackRock, Inc. and rely to a significant extent on information provided to us by BlackRock. Risks and uncertainties that could affect BlackRock are discussed in more detail by BlackRock in its SEC filings.

 

We grow our business in part by acquiring from time to time other financial services companies, financial services assets and related deposits and other liabilities. Acquisition risks and uncertainties include those presented by the nature of the business acquired, including in some cases those associated with our entry into new businesses or new geographic or other markets and risks resulting from our inexperience in those new areas, as well as risks and uncertainties related to the acquisition transactions themselves, regulatory issues, and the integration of the acquired businesses into PNC after closing.

 

Competition can have an impact on customer acquisition, growth and retention and on credit spreads and product pricing, which can affect market share, deposits and revenues. Industry restructuring in the current environment could also impact our business and financial performance through changes in counterparty creditworthiness and performance and in the competitive and regulatory landscape. Our ability to anticipate and respond to technological changes can also impact our ability to respond to customer needs and meet competitive demands.

 

Business and operating results can also be affected by widespread natural and other disasters, pandemics, dislocations, terrorist activities, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically.

We provide greater detail regarding these as well as other factors in our 2014 10-K, in our first quarter 2015 Form 10-Q, and elsewhere in this Report, including in the Risk Factors and Risk Management sections and the Legal Proceedings and Commitments and Guarantees Notes of the Notes To Consolidated Financial Statements in such reports. Our forward-looking statements may also be subject to other risks and uncertainties, including those discussed elsewhere in this Report or in our other filings with the SEC.

 

 

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


CONSOLIDATED INCOME STATEMENT

THE PNC FINANCIAL SERVICES GROUP, INC.

 

Unaudited

In millions, except per share data

     Three months ended
June 30
    Six months ended
June 30
 
           2015      2014           2015      2014  

Interest Income

            

Loans

     $ 1,791       $ 1,845      $ 3,593       $ 3,744   

Investment securities

       407         412        813         839   

Other

       107         99        218         183   

Total interest income

       2,305         2,356        4,624         4,766   

Interest Expense

            

Deposits

       98         80        190         158   

Borrowed funds

       155         147        310         284   

Total interest expense

       253         227        500         442   

Net interest income

       2,052         2,129        4,124         4,324   

Noninterest Income

            

Asset management

       416         362        792         726   

Consumer services

       334         323        645         613   

Corporate services

       369         343        713         644   

Residential mortgage

       164         182        328         343   

Service charges on deposits

       156         156        309         303   

Net gains (losses) on sales of securities

       8         (6     50         4   

Other

       367         321        636         630   

Total noninterest income

       1,814         1,681        3,473         3,263   

Total revenue

       3,866         3,810        7,597         7,587   

Provision For Credit Losses

       46         72        100         166   

Noninterest Expense

            

Personnel

       1,200         1,172        2,357         2,252   

Occupancy

       209         199        425         417   

Equipment

       231         204        453         405   

Marketing

       67         68        129         120   

Other

       659         685        1,351         1,398   

Total noninterest expense

       2,366         2,328        4,715         4,592   

Income before income taxes and noncontrolling interests

       1,454         1,410        2,782         2,829   

Income taxes

       410         358        734         717   

Net income

       1,044         1,052        2,048         2,112   

Less: Net income (loss) attributable to noncontrolling interests

       4         3        5         1   

Preferred stock dividends and discount accretion and redemptions

       48         48        118         118   

Net income attributable to common shareholders

     $ 992       $ 1,001      $ 1,925       $ 1,993   

Earnings Per Common Share

            

Basic

     $ 1.92       $ 1.88      $ 3.71       $ 3.73   

Diluted

       1.88         1.85        3.63         3.67   

Average Common Shares Outstanding

            

Basic

       517         532        519         532   

Diluted

       525         539        527         539   

See accompanying Notes To Consolidated Financial Statements.

 

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


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

THE PNC FINANCIAL SERVICES GROUP, INC.

 

Unaudited

In millions

   Three months ended
June 30
   

Six months ended

June 30

 
   2015      2014     2015      2014  

Net income

   $ 1,044       $ 1,052      $ 2,048       $ 2,112   

Other comprehensive income (loss), before tax and net of reclassifications into Net income:

          

Net unrealized gains (losses) on non-OTTI securities

     (365      212        (291      401   

Net unrealized gains (losses) on OTTI securities

     4         41        7         107   

Net unrealized gains (losses) on cash flow hedge derivatives

     (170      81        69         76   

Pension and other postretirement benefit plan adjustments

     (10      9        50         91   

Other

     (9      (4     (36      7   

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

     (550      339        (201      682   

Income tax benefit (expense) related to items of other comprehensive income

     226         (114     77         (237

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

     (324      225        (124      445   

Comprehensive income

     720         1,277        1,924         2,557   

Less: Comprehensive income (loss) attributable to noncontrolling interests

     4         3        5         1   

Comprehensive income attributable to PNC

   $ 716       $ 1,274      $ 1,919       $ 2,556   

See accompanying Notes To Consolidated Financial Statements.

 

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


CONSOLIDATED BALANCE SHEET

THE PNC FINANCIAL SERVICES GROUP, INC.

 

Unaudited

In millions, except par value

   June 30
2015
    December 31
2014
 

Assets

    

Cash and due from banks (includes $5 and $6 for VIEs) (a)

   $ 4,412      $ 4,360   

Federal funds sold and resale agreements (includes $150 and $155 measured at fair value) (b)

     1,971        1,852   

Trading securities

     2,334        2,353   

Interest-earning deposits with banks (includes $5 and $6 for VIEs) (a)

     33,969        31,779   

Loans held for sale (includes $2,121 and $2,154 measured at fair value) (b)

     2,357        2,262   

Investment securities

     61,362        55,823   

Loans (includes $1,463 and $1,606 for VIEs) (a) (includes $941 and $1,034 measured at fair value) (b)

     205,153        204,817   

Allowance for loan and lease losses (includes $(44) and $(50) for VIEs) (a)

     (3,272     (3,331

Net loans

     201,881        201,486   

Goodwill

     9,103        9,103   

Mortgage servicing rights

     1,558        1,351   

Other intangible assets

     435        493   

Equity investments (includes $256 and $492 for VIEs) (a)

     10,531        10,728   

Other (includes $440 and $483 for VIEs) (a) (includes $411 and $412 measured at fair value) (b)

     24,032        23,482   

Total assets

   $ 353,945      $ 345,072   

Liabilities

    

Deposits

    

Noninterest-bearing

   $ 77,369      $ 73,479   

Interest-bearing

     162,335        158,755   

Total deposits

     239,704        232,234   

Borrowed funds

    

Federal funds purchased and repurchase agreements

     2,190        3,510   

Federal Home Loan Bank borrowings

     22,193        20,005   

Bank notes and senior debt

     18,529        15,750   

Subordinated debt

     9,121        9,151   

Commercial paper

     2,956        4,995   

Other (includes $311 and $347 for VIEs) (a) (includes $224 and $273 measured at fair value) (b)

     3,287        3,357   

Total borrowed funds

     58,276        56,768   

Allowance for unfunded loan commitments and letters of credit

     246        259   

Accrued expenses (includes $63 and $70 for VIEs) (a)

     5,031        5,187   

Other (includes $136 and $206 for VIEs) (a)

     4,776        4,550   

Total liabilities

     308,033        298,998   

Equity

    

Preferred stock (c)

    

Common stock ($5 par value, authorized 800 shares, issued 542 and 541 shares)

     2,708        2,705   

Capital surplus – preferred stock

     3,449        3,946   

Capital surplus – common stock and other

     12,632        12,627   

Retained earnings

     27,609        26,200   

Accumulated other comprehensive income (loss)

     379        503   

Common stock held in treasury at cost: 26 and 18 shares

     (2,262     (1,430

Total shareholders’ equity

     44,515        44,551   

Noncontrolling interests

     1,397        1,523   

Total equity

     45,912        46,074   

Total liabilities and equity

   $ 353,945      $ 345,072   
(a) Amounts represent the assets or liabilities of consolidated variable interest entities (VIEs).
(b) Amounts represent items for which we have elected the fair value option.
(c) Par value less than $.5 million at each date.

See accompanying Notes To Consolidated Financial Statements.

 

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


CONSOLIDATED STATEMENT OF CASH FLOWS

THE PNC FINANCIAL SERVICES GROUP, INC.

 

Unaudited

In millions

     Six months ended
June 30
 
     2015      2014  

Operating Activities

       

Net income

     $ 2,048       $ 2,112   

Adjustments to reconcile net income to net cash provided (used) by operating activities

       

Provision for credit losses

       100         166   

Depreciation and amortization

       530         476   

Deferred income taxes

       109         104   

Net gains on sales of securities

       (50      (4

Changes in fair value of mortgage servicing rights

       43         250   

Gain on sales of Visa Class B common shares

       (79      (116

Undistributed earnings of BlackRock

       (196      (193

Excess tax benefits from share-based payment arrangements

       (27      (36

Net change in

       

Trading securities and other short-term investments

       (22      839   

Loans held for sale

       (391      (99

Other assets

       22         (262

Accrued expenses and other liabilities

       (186      381   

Other

       (272      (148

Net cash provided (used) by operating activities

       1,629         3,470   

Investing Activities

       

Sales

       

Securities available for sale

       2,402         3,359   

Loans

       958         1,295   

Repayments/maturities

       

Securities available for sale

       3,933         3,434   

Securities held to maturity

       1,054         992   

Purchases

       

Securities available for sale

       (9,706      (3,608

Securities held to maturity

       (3,049   

Loans

       (355      (369

Net change in

       

Federal funds sold and resale agreements

       (119      459   

Interest-earning deposits with banks

       (2,190      (4,741

Loans

       (1,017      (6,837

Other

       (394      (266

Net cash provided (used) by investing activities

       (8,483      (6,282

 

(continued on following page)

 

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


CONSOLIDATED STATEMENT OF CASH FLOWS

THE PNC FINANCIAL SERVICES GROUP, INC.

(continued from previous page)

 

Unaudited

In millions

     Six months ended
June 30
 
     2015      2014  

Financing Activities

       

Net change in

       

Noninterest-bearing deposits

     $ 3,909       $ 723   

Interest-bearing deposits

       3,580         928   

Federal funds purchased and repurchase agreements

       (1,320      (1,156

Commercial paper

       (158      (268

Other borrowed funds

       712         (494

Sales/issuances

       

Federal Home Loan Bank borrowings

       2,250         7,650   

Bank notes and senior debt

       4,932         3,636   

Subordinated debt

          745   

Commercial paper

       1,393         4,532   

Other borrowed funds

       586         380   

Common and treasury stock

       109         179   

Repayments/maturities

       

Federal Home Loan Bank borrowings

       (62      (5,539

Bank notes and senior debt

       (2,134      (2,200

Subordinated debt

       39         22   

Commercial paper

       (3,274      (4,262

Other borrowed funds

       (1,532      (354

Preferred stock redemption

       (500   

Excess tax benefits from share-based payment arrangements

       27         36   

Acquisition of treasury stock

       (1,020      (291

Preferred stock cash dividends paid

       (115      (115

Common stock cash dividends paid

       (516      (491

Net cash provided (used) by financing activities

       6,906         3,661   

Net Increase (Decrease) In Cash And Due From Banks

       52         849   

Cash and due from banks at beginning of period

       4,360         4,043   

Cash and due from banks at end of period

     $ 4,412       $ 4,892   

Supplemental Disclosures

       

Interest paid

     $ 503       $ 418   

Income taxes paid

       191         551   

Income taxes refunded

       1         9   

Non-cash Investing and Financing Items

       

Transfer from (to) loans to (from) loans held for sale, net

       3         390   

Transfer from loans to foreclosed assets

       227         315   

See accompanying Notes To Consolidated Financial Statements.

 

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


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THE PNC FINANCIAL SERVICES GROUP, INC.

 

BUSINESS

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

We have businesses engaged in retail banking, corporate and institutional banking, asset management and residential mortgage banking, providing many of our products and services nationally, as well as other products and services in our primary geographic markets located in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, North Carolina, Florida, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Missouri, Georgia, Wisconsin and South Carolina. We also provide certain products and services internationally.

NOTE 1 ACCOUNTING POLICIES

Basis Of Financial Statement Presentation

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

We prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). We have eliminated intercompany accounts and transactions. We have also reclassified certain prior year amounts to conform to the 2015 presentation, which did not have a material impact on our consolidated financial condition or results of operations. Additionally, we evaluate the materiality of identified errors in the financial statements using both an income statement and a balance sheet approach, based on relevant quantitative and qualitative factors. The consolidated financial statements include certain adjustments to correct immaterial errors related to previously reported periods. In addition, as disclosed in certain Notes to the Consolidated Financial Statements, we made adjustments to previously reported periods for immaterial errors.

In our opinion, the unaudited interim consolidated financial statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

When preparing these unaudited interim consolidated financial statements, we have assumed that you have read the audited consolidated financial statements included in our 2014 Annual Report on Form 10-K. Reference is made to Note 1 Accounting Policies in the 2014 Form 10-K for a detailed description of significant accounting policies. Included herein are policies that are required to be disclosed on an interim basis as well as policies where there has been a significant change within the first six months of 2015. These interim consolidated financial statements serve to update the 2014 Form 10-K and may not include all information and notes necessary to constitute a complete set of financial statements.

We have also considered the impact of subsequent events on these consolidated financial statements.

Use Of Estimates

We prepared these consolidated financial statements using financial information available at the time of preparation, which requires us to make estimates and assumptions that affect the amounts reported. Our most significant estimates pertain to our fair value measurements, allowances for loan and lease losses and unfunded loan commitments and letters of credit, and accretion on purchased impaired loans. Actual results may differ from the estimates and the differences may be material to the consolidated financial statements.

 

 

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


Nonperforming Loans and Leases

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

 

Commercial loans
   
Loans Classified as Nonperforming and Accounted for as Nonaccrual   

•      Loans accounted for at amortized cost where:

  

–      The loan is 90 days or more past due.

  

–      The loan is rated substandard or worse due to the determination that full collection of principal and interest is not probable as demonstrated by the following conditions:

   
    

•      The collection of principal or interest is 90 days or more past due;

   
    

•      Reasonable doubt exists as to the certainty of the borrower’s future debt service ability, according to the terms of the credit arrangement, regardless of whether 90 days have passed or not;

   
    

•      The borrower has filed or will likely file for bankruptcy;

   
    

•      The bank advances additional funds to cover principal or interest;

   
    

•      We are in the process of liquidating a commercial borrower; or

   
    

•      We are pursuing remedies under a guarantee.

   
Loans Excluded from Nonperforming Classification but Accounted for as Nonaccrual   

•      Loans accounted for under the fair value option when we determine that full collection of principal and interest is not probable.

 

•      Loans accounted for at the lower of cost or market less costs to sell (Held for Sale) when we determine that full collection of principal and interest is not probable.

  
   
Loans Excluded from Nonperforming Classification and Nonaccrual Accounting   

•      Purchased impaired loans because interest income is accreted by nature of the accounting for these assets.

 

•      Loans that are well secured and in the process of collection.

  
    
Consumer loans
   
Loans Classified as Nonperforming and Accounted for as Nonaccrual   

•      Loans accounted for at amortized cost where full collection of contractual principal and interest is not deemed probable as demonstrated in the policies below:

  

–      The loan is 90 days past due for home equity and installment loans, and 180 days past due for well secured residential real estate loans;

   
    

–      The loan has been modified and classified as a troubled debt restructuring (TDR);

   
    

–      Notification of bankruptcy has been received and the loan is 30 days or more past due;

   
    

–      The bank holds a subordinate lien position in the loan and the first lien loan is seriously stressed (i.e., 90 days or more past due);

   
    

–      Other loans within the same borrower relationship have been placed on nonaccrual or charge-offs have been taken on them;

   
    

–      The bank has repossessed non-real estate collateral securing the loan; or

   
    

–      The bank has charged-off the loan to the value of the collateral.

   
Loans Excluded from Nonperforming Classification but Accounted for as Nonaccrual   

•      Loans accounted for under the fair value option when we determine that full collection of principal and interest is not probable.

 

•      Loans accounted for at the lower of cost or market less costs to sell (Held for Sale) when we determine that full collection of principal and interest is not probable.

  
   
Loans Excluded from Nonperforming Classification and Nonaccrual Accounting   

•      Purchased impaired loans because interest income is accreted through the accounting model.

  

•      Certain government insured loans where substantially all principal and interest is insured.

  

•      Residential real estate loans that are well secured and in the process of collection.

  

•      Consumer loans and lines of credit, not secured by residential real estate, as permitted by regulatory guidance.

See Note 3 Asset Quality in this Report for additional detail on nonperforming assets and asset quality indicators for commercial and consumer loans.

 

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


Commercial Loans

We generally charge off Commercial Lending (Commercial, Commercial Real Estate, and Equipment Lease Financing) nonperforming loans when we determine that a specific loan, or portion thereof, is uncollectible. This determination is based on the specific facts and circumstances of the individual loans. In making this determination, we consider the viability of the business or project as a going concern, the past due

status when the asset is not well-secured, the expected cash

flows to repay the loan, the value of the collateral, and the ability and willingness of any guarantors to perform.

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

Consumer Loans

Home equity installment loans, home equity lines of credit, and residential real estate loans that are not well-secured and in the process of collection are charged-off at no later than 180 days past due. At that time, the basis in the loan is reduced to the fair value of the collateral less costs to sell. In addition to this policy, the bank recognizes a charge-off on a secured consumer loan when:

   

The bank holds a subordinate lien position in the loan and a foreclosure notice has been received on the first lien loan;

   

The bank holds a subordinate lien position in the loan which is 30 days or more past due with a combined loan to value ratio of greater than or equal to 110% and the first lien loan is seriously stressed (i.e., 90 days or more past due);

   

The loan is modified or otherwise restructured in a manner that results in the loan becoming collateral dependent;

   

Notification of bankruptcy has been received within the last 60 days and the loan is 60 days or more past due;

   

The borrower has been discharged from personal liability through Chapter 7 bankruptcy and has not formally reaffirmed his or her loan obligation to PNC; or

   

The collateral securing the loan has been repossessed and the value of the collateral is less than the recorded investment of the loan outstanding.

For loans that continue to meet any of the above policies, collateral values are updated annually and subsequent declines in collateral values are charged-off resulting in incremental provision for credit loss.

Most consumer loans and lines of credit, not secured by residential real estate, are charged off after 120-180 days past due.

Accounting for Nonperforming Loans and Leases and Other Nonaccrual Loans

For accrual loans, interest income is accrued on a monthly basis and certain fees and costs are deferred upon origination and recognized in income over the term of the loan utilizing an effective yield method. For nonaccrual loans, interest income accrual and deferred fee/cost amortization is discontinued. Additionally, the current year accrued and uncollected interest is reversed through Net interest income and prior year accrued and uncollected interest is charged-off. Nonaccrual loans may also be charged-off to reduce the basis to the fair value of collateral less costs to sell.

If payment is received on a nonaccrual loan, generally the payment is first applied to the recorded investment; payments are then applied to recover any charged-off amounts related to the loan. Finally, if both recorded investment and any charge-offs have been recovered, then the payment will be recorded as fee and interest income.

For TDRs, payments are applied based upon their contractual terms unless the related loan is deemed non-performing. TDRs are generally included in nonperforming and nonaccrual loans until returned to performing/accruing status through performance under restructured terms and other performance indicators for a reasonable period of time demonstrating that the bank expects to collect all of the loan’s remaining contractual principal and interest. TDRs resulting from 1) borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and 2) borrowers that are not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

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

See Note 3 Asset Quality and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in this Report and in our 2014 Form 10-K for additional TDR information.

Allowance for Loan and Lease Losses

We maintain the ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan and lease portfolios as of the balance sheet date. Our determination of the allowance is based on periodic evaluations of these loan and lease portfolios and other relevant factors. This critical estimate includes significant use

 

 

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


of PNC’s own historical data and complex methods to interpret this data. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change, and include, among others:

   

Probability of default (PD),

   

Loss given default (LGD),

   

Outstanding balance of the loan,

   

Movement through delinquency stages,

   

Amounts and timing of expected future cash flows,

   

Value of collateral, which may be obtained from third parties, and

   

Qualitative factors, such as changes in current economic conditions, that may not be reflected in modeled results.

For all loans, except purchased impaired loans, the ALLL is the sum of three components: (i) asset specific/individual impaired reserves, (ii) quantitative (formulaic or pooled) reserves and (iii) qualitative (judgmental) reserves.

The reserve calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.

Asset Specific/Individual Component

Nonperforming loans that are considered impaired under ASC 310 – Receivables, which include all commercial and consumer TDRs, are evaluated for a specific reserve. Specific reserve allocations are determined as follows:

   

For commercial nonperforming loans and commercial TDRs greater than or equal to a defined dollar threshold, specific reserves are based on an analysis of the present value of the loan’s expected future cash flows, the loan’s observable market price or the fair value of the collateral.

   

For commercial nonperforming loans and commercial TDRs below the defined dollar threshold, the individual loan’s loss given default (LGD) percentage is multiplied by the loan balance and the results are aggregated for purposes of measuring specific reserve impairment.

   

Consumer nonperforming loans are collectively reserved for unless classified as consumer TDRs. For consumer TDRs, specific reserves are determined through an analysis of the present value of the loan’s expected future cash flows, except for those instances where loans have been deemed collateral dependent, including loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC. Once that determination has

   

been made, those TDRs are charged down to the fair value of the collateral less costs to sell at each period end.

Commercial Lending Quantitative Component

The estimates of the quantitative component of ALLL for incurred losses within the commercial lending portfolio segment are determined through statistical loss modeling utilizing PD, LGD and outstanding balance of the loan. Based upon loan risk ratings, we assign PDs and LGDs. Each of these statistical parameters is determined based on internal historical data and market data. PD is influenced by such factors as liquidity, industry, obligor financial structure, access to capital and cash flow. LGD is influenced by collateral type, original and/or updated loan-to-value ratio (LTV), facility structure and other factors.

Consumer Lending Quantitative Component

Quantitative estimates within the consumer lending portfolio segment are calculated primarily using a roll-rate model based on statistical relationships, calculated from historical data that estimate the movement of loan outstandings through the various stages of delinquency and ultimately charge-off over our loss emergence period.

Qualitative Component

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

   

Industry concentrations and conditions,

   

Recent credit quality trends,

   

Recent loss experience in particular portfolios,

   

Recent macro-economic factors,

   

Model imprecision,

   

Changes in lending policies and procedures,

   

Timing of available information, including the performance of first lien positions, and

   

Limitations of available historical data.

Allowance for Purchased Non-Impaired Loans

ALLL for purchased non-impaired loans is determined based upon a comparison between the methodologies described above and the remaining acquisition date fair value discount that has yet to be accreted into interest income. After making the comparison, an ALLL is recorded for the amount greater than the discount, or no ALLL is recorded if the discount is greater.

 

 

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


Allowance for Purchased Impaired Loans

ALLL for purchased impaired loans is determined in accordance with ASC 310-30 by comparing the net present value of the cash flows expected to be collected to the recorded investment for a given loan (or pool of loans). In cases where the net present value of expected cash flows is lower than the recorded investment, ALLL is established. Cash flows expected to be collected represent management’s best estimate of the cash flows expected over the life of a loan (or pool of loans). For large balance commercial loans, cash flows are separately estimated at the loan level. For smaller balance pooled loans, pool cash flows are estimated using cash flow models. Pools were defined at acquisition based on the risk characteristics of the loan. Our cash flow models use loan data including, but not limited to, contractual loan balance, delinquency status of the loan, updated borrower FICO credit scores, geographic information, historical loss experience, and updated LTVs, as well as best estimates for changes in unemployment rates, home prices and other economic factors, to determine estimated cash flows.

See Note 4 Purchased Loans and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional loan data and application of the policies disclosed herein.

Our credit risk management policies, procedures and practices are designed to promote sound lending standards and prudent credit risk management. We have policies, procedures and practices that address financial statement requirements, collateral review and appraisal requirements, advance rates based upon collateral types, appropriate levels of exposure, cross-border risk, lending to specialized industries or borrower type, guarantor requirements, and regulatory compliance.

Allowance for Unfunded Loan Commitments and Letters of Credit

We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable credit losses on these unfunded credit facilities as of the balance sheet date. We determine the allowance based on periodic evaluations of the unfunded credit facilities, including an assessment of the probability of commitment usage, credit risk factors, and, solely for commercial lending, the terms and expiration dates of the unfunded credit facilities. Other than the estimation of the probability of funding, the reserve for unfunded loan commitments is estimated in a manner similar to the methodology used for determining reserves for funded exposures. The allowance for unfunded loan commitments and letters of credit is recorded as a liability on the Consolidated Balance Sheet. Net adjustments to the allowance for unfunded loan commitments and letters of credit are included in the provision for credit losses.

See Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional loan data and application of the policies disclosed herein.

Earnings Per Common Share

Basic earnings per common share is calculated using the two-class method to determine income attributable to common shareholders. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities under the two-class method. Income attributable to common shareholders is then divided by the weighted-average common shares outstanding for the period.

Diluted earnings per common share is calculated under the more dilutive of either the treasury method or the two-class method. For the diluted calculation, we increase the weighted-average number of shares of common stock outstanding by the assumed conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance, if later, and the number of shares of common stock that would be issued assuming the exercise of stock options and warrants and the issuance of incentive shares using the treasury stock method. These adjustments to the weighted-average number of shares of common stock outstanding are made only when such adjustments will dilute earnings per common share. See Note 12 Earnings Per Share for additional information.

Recently Adopted Accounting Standards

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This ASU impacts the accounting for repurchase-to-maturity transactions and transfers executed contemporaneously with a repurchase agreement with the same counterparty (i.e., a repurchase financing) by requiring secured borrowing accounting. We adopted this accounting as of January 1, 2015. The disclosure requirements were adopted in the current reporting period. Adoption of this ASU did not have a material effect on our results of operations or financial position.

NOTE 2 LOAN SALE AND SERVICING ACTIVITIES AND VARIABLE INTEREST ENTITIES

Loan Sale and Servicing Activities

As more fully described in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2014 Form 10-K, we have transferred residential and commercial mortgage loans in securitization or sales transactions in which we have continuing involvement. Our continuing involvement generally consists of servicing, repurchasing previously transferred loans under certain conditions and loss share arrangements, and, in limited circumstances, holding of mortgage-backed securities issued by the securitization SPEs.

 

 

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


The following table provides certain financial information and cash flows associated with PNC’s loan sale and servicing activities:

Table 50: Certain Financial Information and Cash Flows Associated with Loan Sale and Servicing Activities

 

In millions    Residential
Mortgages
     Commercial
Mortgages (a)
     Home Equity
Loans/Lines (b)
 

FINANCIAL INFORMATION – June 30, 2015

          

Servicing portfolio (c)

   $ 115,454       $ 197,932       $ 3,438   

Carrying value of servicing assets (d)

     1,015         543        

Servicing advances (e)

     463         271         6   

Repurchase and recourse obligations (f)

     97         35         28   

Carrying value of mortgage-backed securities held (g)

     5,639         1,170            

FINANCIAL INFORMATION – December 31, 2014

          

Servicing portfolio (c)

   $ 108,010       $ 186,032       $ 3,833   

Carrying value of servicing assets (d)

     845         506        

Servicing advances (e)

     501         299         31   

Repurchase and recourse obligations (f)

     107         35         29   

Carrying value of mortgage-backed securities held (g)

     3,365         1,269            

CASH FLOWS – Three months ended June 30, 2015

          

Sales of loans (h)

   $ 2,015       $ 1,159        

Repurchases of previously transferred loans (i)

     134           

Servicing fees (j)

     82         36       $        4   

Servicing advances recovered/(funded), net

     47         21         1   

Cash flows on mortgage-backed securities held (g)

     429         54            

CASH FLOWS – Three months ended June 30, 2014

          

Sales of loans (h)

   $ 2,189       $ 496        

Repurchases of previously transferred loans (i)

     159          $ 3   

Servicing fees (j)

     87         26         5   

Servicing advances recovered/(funded), net

     39         23         3   

Cash flows on mortgage-backed securities held (g)

     254         47            

CASH FLOWS – Six months ended June 30, 2015

          

Sales of loans (h)

   $ 3,955       $ 2,179        

Repurchases of previously transferred loans (i)

     303          $ 2   

Servicing fees (j)

     165         68         8   

Servicing advances recovered/(funded), net

     38         28         25   

Cash flows on mortgage-backed securities held (g)

     669         114            

CASH FLOWS – Six months ended June 30, 2014

          

Sales of loans (h)

   $ 4,284       $ 935        

Repurchases of previously transferred loans (i)

     368          $ 9   

Servicing fees (j)

     174         67         10   

Servicing advances recovered/(funded), net

     69         55         6   

Cash flows on mortgage-backed securities held (g)

     486         191            
(a) Represents financial and cash flow information associated with both commercial mortgage loan transfer and servicing activities.
(b) These activities were part of an acquired brokered home equity lending business in which PNC is no longer engaged.
(c) For our continuing involvement with residential mortgages, this amount represents the outstanding balance of loans we service, including loans transferred by us and loans originated by others where we have purchased the associated servicing rights. For home equity loan/line of credit transfers, this amount represents the outstanding balance of loans transferred and serviced. For commercial mortgages, this amount represents our overall servicing portfolio in which loans have been transferred by us or third parties to VIEs.
(d) See Note 7 Fair Value and Note 8 Goodwill and Other Intangible Assets for further information.
(e) Pursuant to certain contractual servicing agreements, represents outstanding balance of funds advanced (i) to investors for monthly collections of borrower principal and interest, (ii) for borrower draws on unused home equity lines of credit, and (iii) for collateral protection associated with the underlying mortgage collateral.
(f) Represents liability for our loss exposure associated with loan repurchases for breaches of representations and warranties for our Residential Mortgage Banking and Non-Strategic Assets Portfolio segments, and our commercial mortgage loss share arrangements for our Corporate & Institutional Banking segment. See Note 16 Commitments and Guarantees for further information.
(g) Represents securities held where PNC transferred to and/or services loans for a securitization SPE and we hold securities issued by that SPE.
(h) Gains/losses recognized on sales of loans were insignificant for the periods presented.
(i) Includes government insured or guaranteed loans eligible for repurchase through the exercise of our ROAP option and loans repurchased due to breaches of origination covenants or representations and warranties made to purchasers.
(j) Includes contractually specified servicing fees, late charges and ancillary fees.

 

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


The table below presents information about the principal balances of transferred loans that we service and are not recorded on our balance sheet.

Table 51: Principal Balance, Delinquent Loans, and Net Charge-offs Related to Serviced Loans

 

In millions    Residential
Mortgages
     Commercial
Mortgages (a)
     Home Equity
Loans/Lines (b)
 

June 30, 2015

          

Total principal balance

   $ 75,639       $ 56,552       $ 3,438   

Delinquent loans (c)

     2,161         672         1,129   

December 31, 2014

          

Total principal balance

   $ 79,108       $ 60,873       $ 3,833   

Delinquent loans (c)

     2,657         707         1,303   

Three months ended June 30, 2015

                          

Net charge-offs (d)

   $ 37       $ 148       $ 8   

Three months ended June 30, 2014

          

Net charge-offs (d)

   $ 34       $ 345       $ 15   

Six months ended June 30, 2015

          

Net charge-offs (d)

   $ 69       $ 255       $ 15   

Six months ended June 30, 2014

          

Net charge-offs (d)

   $ 75       $ 700       $ 32   
(a) Represents information at the securitization level in which PNC has sold loans and is the servicer for the securitization.
(b) These activities were part of an acquired brokered home equity lending business in which PNC is no longer engaged.
(c) Serviced delinquent loans are 90 days or more past due or are in process of foreclosure.
(d) Net charge-offs for Residential mortgages and Home equity loans/lines represent credit losses less recoveries distributed and as reported to investors during the period. Net charge-offs for Commercial mortgages represent credit losses less recoveries distributed and as reported by the trustee for CMBS securitizations. Realized losses for Agency securitizations are not reflected as we do not manage the underlying real estate upon foreclosure and, as such, do not have access to loss information.

 

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


Variable Interest Entities (VIEs)

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2014 Form 10-K, we are involved with various entities in the normal course of business that are deemed to be VIEs. The following provides a summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements as of June 30, 2015 and December 31, 2014, respectively. We have not provided additional financial support to these entities which we are not contractually required to provide.

Table 52: Consolidated VIEs – Carrying Value (a) (b)

 

June 30, 2015

In millions

   Credit Card and Other
Securitization Trusts
     Tax Credit
Investments
     Total  

Assets

            

Cash and due from banks

      $ 5       $ 5   

Interest-earning deposits with banks

        5         5   

Loans

   $ 1,457         6         1,463   

Allowance for loan and lease losses

     (44           (44

Equity investments

        256         256   

Other assets

     20         420         440   

Total assets

   $ 1,433       $ 692       $ 2,125   

Liabilities

            

Other borrowed funds

   $ 154       $ 157       $ 311   

Accrued expenses

        63         63   

Other liabilities

              136         136   

Total liabilities

   $ 154       $ 356       $ 510   

 

December 31, 2014

In millions

   Credit Card and Other
Securitization Trusts
     Tax Credit
Investments
     Total  

Assets

            

Cash and due from banks

      $ 6       $ 6   

Interest-earning deposits with banks

        6         6   

Loans

   $ 1,606              1,606   

Allowance for loan and lease losses

     (50           (50

Equity investments

        492         492   

Other assets

     31         452         483   

Total assets

   $ 1,587       $ 956       $ 2,543   

Liabilities

            

Other borrowed funds

   $ 166       $ 181       $ 347   

Accrued expenses

        70         70   

Other liabilities

              206         206   

Total liabilities

   $ 166       $ 457       $ 623   
(a) Amounts represent carrying value on PNC’s Consolidated Balance Sheet.
(b) Difference between total assets and total liabilities represents the equity portion of the VIE or intercompany assets and liabilities which are eliminated in consolidation.

 

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


Table 53: Non-Consolidated VIEs

 

In millions    Aggregate
Assets
     Aggregate
Liabilities
     PNC Risk
of Loss (a)
     Carrying Value of
Assets Owned by
PNC
     Carrying Value of
Liabilities Owned
by PNC
 

June 30, 2015

                        

Commercial Mortgage-Backed Securitizations (b)

   $ 45,797       $ 45,797       $ 1,415       $ 1,415  (d)      

Residential Mortgage-Backed Securitizations (b)

     323,975         323,975         5,678         5,678  (d)     $ (f) 

Tax Credit Investments and Other (c)

     7,576         2,937         2,237         2,281  (e)       695  (g) 

Total

   $ 377,348       $ 372,709       $ 9,330       $ 9,374       $ 696   

 

In millions    Aggregate
Assets
     Aggregate
Liabilities
     PNC Risk
of Loss (a)
     Carrying Value of
Assets Owned by
PNC
     Carrying Value of
Liabilities Owned
by PNC
 

December 31, 2014

                        

Commercial Mortgage-Backed Securitizations (b)

   $ 53,436       $ 53,436       $ 1,550       $ 1,550  (d)     $ (f) 

Residential Mortgage-Backed Securitizations (b)

     62,236         62,236         3,385         3,385  (d)       (f) 

Tax Credit Investments and Other (c)

     7,493         2,933         2,270         2,304  (e)       777  (g) 

Total

   $ 123,165       $ 118,605       $ 7,205       $ 7,239       $ 782   
(a) This represents loans, investments and other assets related to non-consolidated VIEs, net of collateral (if applicable). Our total exposure related to our involvement in loan sale and servicing activities is disclosed in Table 50. Additionally, we also invest in other mortgage and asset-backed securities issued by third-party VIEs with which we have no continuing involvement. Further information on these securities is included in Note 6 Investment Securities and values disclosed represent our maximum exposure to loss for those securities’ holdings.
(b) Amounts reflect involvement with securitization SPEs where PNC transferred to and/or services loans for an SPE and we hold securities issued by that SPE. Asset amounts equal outstanding liability amounts of the SPEs due to limited availability of SPE financial information.
(c) Aggregate assets and aggregate liabilities are based on limited availability of financial information associated with certain acquired partnerships and certain LLCs engaged in solar power generation to which PNC provides lease financing. The aggregate assets and aggregate liabilities of LLCs engaged in solar power generation may not be reflective of the size of these VIEs due to differences in classification of leases by these entities.
(d) Included in Trading securities, Investment securities, Other intangible assets and Other assets on our Consolidated Balance Sheet.
(e) Included in Loans, Equity investments and Other assets on our Consolidated Balance Sheet.
(f) Included in Other liabilities on our Consolidated Balance Sheet.
(g) Included in Deposits and Other liabilities on our Consolidated Balance Sheet.

Our involvement with VIEs is discussed in further detail in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in our 2014 Form 10-K.

NOTE 3 ASSET QUALITY

Asset Quality

We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency rates may be a key indicator, among other considerations, of credit risk within the loan portfolios. The measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of payment are considered delinquent. Loan delinquencies exclude loans held for sale, purchased impaired loans, nonperforming loans and loans accounted for under the fair value option which are on nonaccrual status, but include government insured or guaranteed loans and accruing loans accounted for under the fair value option.

Nonperforming assets include nonperforming loans and leases, OREO and foreclosed assets, and nonperforming TDRs. Nonperforming loans are those loans accounted for at amortized cost whose credit quality has deteriorated to the extent that full collection of contractual principal and interest is not probable. Interest income is not recognized on these loans. Loans accounted for under the fair value option are reported as performing loans as these loans are accounted for at fair value. Accordingly, when nonaccrual criteria is met, interest income is not recognized on these loans. Additionally, certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest are not reported as nonperforming loans and continue to accrue interest. Purchased impaired loans are excluded from nonperforming loans as we are currently accreting interest income over the expected life of the loans. See Note 4 Purchased Loans for further information.

See Note 1 Accounting Policies for additional delinquency, nonperforming, and charge-off information.

The following tables display the delinquency status of our loans and our nonperforming assets at June 30, 2015 and December 31, 2014, respectively.

 

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


Table 54: Analysis of Loan Portfolio (a)

 

    Accruing                              
Dollars in millions   Current or Less
Than 30 Days
Past Due
    30-59 Days
Past Due
    60-89 Days
Past Due
    90 Days
Or More
Past Due
    Total Past
Due (b)
    Nonperforming
Loans
    Fair Value
Option
Nonaccrual
Loans (c)
    Purchased
Impaired
Loans
   

Total

Loans

(d) (e)

 

June 30, 2015

                             

Commercial Lending

                             

Commercial

  $ 97,675      $ 83      $ 32      $ 35      $ 150      $ 258          $ 50      $ 98,133   

Commercial real estate

    24,368        5        5        1        11        242            185        24,806   

Equipment lease financing

    7,778        2                        2        3                        7,783   

Total commercial lending

    129,821        90        37        36        163        503                235        130,722   

Consumer Lending

                             

Home equity

    30,555        65        25            90        1,057            1,833        33,535   

Residential real estate (f)

    10,456        142        58        604        804        633      $ 242        2,397        14,532   

Credit card

    4,448        23        17        29        69        3                4,520   

Other consumer (g)

    21,273        172        98        245        515        56                        21,844   

Total consumer lending

    66,732        402        198        878        1,478        1,749        242        4,230        74,431   

Total

  $ 196,553      $ 492      $ 235      $ 914      $ 1,641      $ 2,252      $ 242      $ 4,465      $ 205,153   

Percentage of total loans

    95.80     .24     .11     .45     .80     1.10     .12     2.18     100.00

December 31, 2014

                             

Commercial Lending

                             

Commercial

  $ 96,922      $ 73      $ 24      $ 37      $ 134      $ 290          $ 74      $ 97,420   

Commercial real estate

    22,667        23        2            25        334            236        23,262   

Equipment lease financing

    7,672        11        1                12        2                        7,686   

Total commercial lending

    127,261        107        27        37        171        626                310        128,368   

Consumer Lending

                             

Home equity

    31,474        70        32            102        1,112            1,989        34,677   

Residential real estate (f)

    9,900        163        68        742        973        706      $ 269        2,559        14,407   

Credit card

    4,528        28        20        33        81        3                4,612   

Other consumer (g)

    22,071        214        112        293        619        63                        22,753   

Total consumer lending

    67,973        475        232        1,068        1,775        1,884        269        4,548        76,449   

Total

  $ 195,234      $ 582      $ 259      $ 1,105      $ 1,946      $ 2,510      $ 269      $ 4,858      $ 204,817   

Percentage of total loans

    95.32     .28     .13     .54     .95     1.23     .13     2.37     100.00
(a) Amounts in table represent recorded investment and exclude loans held for sale.
(b) Past due loan amounts exclude purchased impaired loans, even if contractually past due (or if we do not expect to receive payment in full based on the original contractual terms), as we are currently accreting interest income over the expected life of the loans.
(c) Consumer loans accounted for under the fair value option for which we do not expect to collect substantially all principal and interest are subject to nonaccrual accounting and classification upon meeting any of our nonaccrual policies. Given that these loans are not accounted for at amortized cost, these loans have been excluded from the nonperforming loan population.
(d) Net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.6 billion and $1.7 billion at June 30, 2015 and December 31, 2014, respectively.
(e) Future accretable yield related to purchased impaired loans is not included in the analysis of loan portfolio.
(f) Past due loan amounts at June 30, 2015 include government insured or guaranteed Residential real estate mortgages totaling $64 million for 30 to 59 days past due, $38 million for 60 to 89 days past due and $585 million for 90 days or more past due. Past due loan amounts at December 31, 2014 include government insured or guaranteed Residential real estate mortgages totaling $68 million for 30 to 59 days past due, $43 million for 60 to 89 days past due and $719 million for 90 days or more past due.
(g) Past due loan amounts at June 30, 2015 include government insured or guaranteed Other consumer loans totaling $121 million for 30 to 59 days past due, $81 million for 60 to 89 days past due and $232 million for 90 days or more past due. Past due loan amounts at December 31, 2014 include government insured or guaranteed Other consumer loans totaling $152 million for 30 to 59 days past due, $93 million for 60 to 89 days past due and $277 million for 90 days or more past due.

 

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


At June 30, 2015, we pledged $18.7 billion of commercial loans to the Federal Reserve Bank (FRB) and $52.6 billion of residential real estate and other loans to the Federal Home Loan Bank (FHLB) as collateral for the contingent ability to borrow, if necessary. The comparable amounts at December 31, 2014 were $19.2 billion and $52.8 billion, respectively.

In the normal course of business, we originate or purchase loan products with contractual characteristics that, when concentrated, may increase our exposure as a holder of those loan products. Possible product features that may create a concentration of credit risk would include a high original or updated LTV ratio, terms that may expose the borrower to future increases in repayments above increases in market interest rates, and interest-only loans, among others.

We originate interest-only loans to commercial borrowers. Such credit arrangements are usually designed to match borrower cash flow expectations (e.g., working capital lines, revolvers). These products are standard in the financial services industry and product features are considered during the underwriting process to mitigate the increased risk that the interest-only feature may result in borrowers not being able to make interest and principal payments when due. We do not believe that these product features create a concentration of credit risk.

Table 55: Nonperforming Assets

 

Dollars in millions    June 30
2015
    December 31
2014
 

Nonperforming loans

      

Commercial lending

      

Commercial

   $ 258      $ 290   

Commercial real estate

     242        334   

Equipment lease financing

     3        2   

Total commercial lending

     503        626   

Consumer lending (a)

      

Home equity

     1,057        1,112   

Residential real estate

     633        706   

Credit card

     3        3   

Other consumer

     56        63   

Total consumer lending

     1,749        1,884   

Total nonperforming loans (b) (c)

     2,252        2,510   

OREO and foreclosed assets

      

Other real estate owned (OREO)

     302        351   

Foreclosed and other assets

     24        19   

Total OREO and foreclosed assets

     326        370   

Total nonperforming assets

   $ 2,578      $ 2,880   

Nonperforming loans to total loans

     1.10     1.23

Nonperforming assets to total loans, OREO and foreclosed assets

     1.25        1.40   

Nonperforming assets to total assets

     .73        .83   
(a) Excludes most consumer loans and lines of credit, not secured by residential real estate, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.
(b) Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans.
(c) The recorded investment of loans collateralized by residential real estate property that are in process of foreclosure was $.6 billion and $.8 billion at June 30, 2015 and December 31, 2014, which included $.4 billion and $.5 billion, respectively, of loans that are government insured/guaranteed.

Nonperforming loans also include certain loans whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. In accordance with applicable accounting guidance, these loans are considered TDRs. See Note 1 Accounting Policies and the TDR section of Note 3 in our 2014 Form 10-K for additional information. For the six months ended June 30, 2015, $442 million of Consumer loans held for sale, loans accounted for under the fair value option, pooled purchased impaired loans, as well as certain government insured or guaranteed loans which were evaluated for TDR consideration, are not classified as TDRs. The comparable amount for the six months ended June 30, 2014 was $615 million.

Total nonperforming loans in the nonperforming assets table above include TDRs of $1.2 billion at June 30, 2015 and $1.4 billion at December 31, 2014. TDRs that are performing, including credit card TDR loans, totaled $1.2 billion at June 30, 2015 and December 31, 2014 and are excluded from nonperforming loans. These include TDRs that are not placed on nonaccrual status as permitted by regulatory guidance. Nonperforming TDRs are returned to accrual and classified as performing after demonstrating a period of at least six months of consecutive performance under the restructured terms. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

Additional Asset Quality Indicators

We have two overall portfolio segments – Commercial Lending and Consumer Lending. Each of these two segments is comprised of multiple loan classes. Classes are characterized by similarities in initial measurement, risk attributes and the manner in which we monitor and assess credit risk. The Commercial Lending segment is comprised of the commercial, commercial real estate, equipment lease financing, and commercial purchased impaired loan classes. The Consumer Lending segment is comprised of the home equity, residential real estate, credit card, other consumer, and consumer purchased impaired loan classes.

 

 

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


Commercial Lending Asset Classes

Commercial Loan Class

For commercial loans, we monitor the performance of the borrower in a disciplined and regular manner based upon the level of credit risk inherent in the loan. To evaluate the level of credit risk, we assign an internal risk rating reflecting the borrower’s PD and LGD. This two-dimensional credit risk rating methodology provides granularity in the risk monitoring process on an ongoing basis. These ratings are reviewed and updated, generally at least once per year. Additionally, no less frequently than on an annual basis, we review PD rates related to each rating grade based upon internal historical data. These rates are updated as needed and augmented by market data as deemed necessary. For small balance homogenous pools of commercial loans, mortgages and leases, we apply statistical modeling to assist in determining the probability of default within these pools. Further, on a periodic basis, we update our LGD estimates associated with each rating grade based upon historical data. The combination of the PD and LGD ratings assigned to a commercial loan, capturing both the combination of expectations of default and loss severity in event of default, reflects the relative estimated likelihood of loss for that loan at the reporting date. In general, loans with better PD and LGD tend to have a lower likelihood of loss compared to loans with worse PD and LGD. The loss amount also considers exposure at date of default, which we also periodically update based upon historical data.

Based upon the amount of the lending arrangement and our risk rating assessment, we follow a formal schedule of written periodic review. Quarterly, we conduct formal reviews of a market’s or business unit’s entire loan portfolio, focusing on those loans which we perceive to be of higher risk, based upon PDs and LGDs, or loans for which credit quality is weakening. If circumstances warrant, it is our practice to review any customer obligation and its level of credit risk more frequently. We attempt to proactively manage our loans by using various procedures that are customized to the risk of a given loan, including ongoing outreach, contact, and assessment of obligor financial conditions, collateral inspection and appraisal.

Commercial Real Estate Loan Class

We manage credit risk associated with our commercial real estate projects and commercial mortgage activities similar to commercial loans by analyzing PD and LGD. Additionally, risks connected with commercial real estate projects and commercial mortgage activities tend to be correlated to the loan structure and collateral location, project progress and business environment. As a result, these attributes are also monitored and utilized in assessing credit risk.

As with the commercial class, a formal schedule of periodic review is also performed to assess market/geographic risk and business unit/industry risk. Often as a result of these overviews, more in-depth reviews and increased scrutiny are placed on areas of higher risk, including adverse changes in risk ratings, deteriorating operating trends, and/or areas that concern management. These reviews are designed to assess risk and take actions to mitigate our exposure to such risks.

Equipment Lease Financing Loan Class

We manage credit risk associated with our equipment lease financing loan class similar to commercial loans by analyzing PD and LGD.

Based upon the dollar amount of the lease and of the level of credit risk, we follow a formal schedule of periodic review. Generally, this occurs quarterly, although we have established practices to review such credit risk more frequently if circumstances warrant. Our review process entails analysis of the following factors: equipment value/residual value, exposure levels, jurisdiction risk, industry risk, guarantor requirements, and regulatory compliance.

Commercial Purchased Impaired Loan Class

Estimates of the expected cash flows primarily determine the valuation of commercial purchased impaired loans. Commercial cash flow estimates are influenced by a number of credit related items, which include but are not limited to: estimated collateral value, receipt of additional collateral, secondary trading prices, circumstances of possible and/or ongoing liquidation, capital availability, business operations and payment patterns.

We attempt to proactively manage these factors by using various procedures that are customized to the risk of a given loan. These procedures include a review by our Special Asset Committee (SAC), ongoing outreach, contact, and assessment of obligor financial conditions, collateral inspection and appraisal.

See Note 4 Purchased Loans for additional information.

 

 

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


Table 56: Commercial Lending Asset Quality Indicators (a)(b)

 

             Criticized Commercial Loans          
In millions    Pass Rated      Special
Mention (c)
     Substandard (d)      Doubtful (e)      Total Loans  

June 30, 2015

                

Commercial

   $ 93,470       $ 1,848       $ 2,696       $ 69       $ 98,083   

Commercial real estate

     23,828         215         564         14         24,621   

Equipment lease financing

     7,621         84         76         2         7,783   

Purchased impaired loans

              6         208         21         235   

Total commercial lending

   $ 124,919       $ 2,153       $ 3,544       $ 106       $ 130,722   

December 31, 2014

                

Commercial

   $ 92,884       $ 1,984       $ 2,424       $ 55       $ 97,347   

Commercial real estate

     22,066         285         639         35         23,025   

Equipment lease financing

     7,518         73         93         2         7,686   

Purchased impaired loans

              4         280         26         310   

Total commercial lending

   $ 122,468       $ 2,346       $ 3,436       $ 118       $ 128,368   
(a) Based upon PDs and LGDs. We apply a split rating classification to certain loans meeting threshold criteria. By assigning a split classification, a loan’s exposure amount may be split into more than one classification category in the above table.
(b) Loans are included above based on the Regulatory Classification definitions of “Pass”, “Special Mention”, “Substandard” and “Doubtful”.
(c) Special Mention rated loans have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects at some future date. These loans do not expose us to sufficient risk to warrant a more adverse classification at this time.
(d) Substandard rated loans have a well-defined weakness or weaknesses that jeopardize the collection or liquidation of debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.
(e) Doubtful rated loans possess all the inherent weaknesses of a Substandard loan with the additional characteristics that the weakness makes collection or liquidation in full improbable due to existing facts, conditions, and values.

 

Consumer Lending Asset Classes

Home Equity and Residential Real Estate Loan Classes

We use several credit quality indicators, including delinquency information, nonperforming loan information, updated credit scores, originated and updated LTV ratios, and geography, to monitor and manage credit risk within the home equity and residential real estate loan classes. We evaluate mortgage loan performance by source originators and loan servicers. A summary of asset quality indicators follows:

Delinquency/Delinquency Rates: We monitor trending of delinquency/delinquency rates for home equity and residential real estate loans. See the Asset Quality section of this Note 3 for additional information.

Nonperforming Loans: We monitor trending of nonperforming loans for home equity and residential real estate loans. See the Asset Quality section of this Note 3 for additional information.

Credit Scores: We use a national third-party provider to update FICO credit scores for home equity loans and lines of credit and residential real estate loans at least quarterly. The updated scores are incorporated into a series of credit management reports, which are utilized to monitor the risk in the loan classes.

LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions): At least annually, we update the property values of real estate collateral and calculate an

updated LTV ratio. For open-end credit lines secured by real estate in regions experiencing significant declines in property values, more frequent valuations may occur. We examine LTV migration and stratify LTV into categories to monitor the risk in the loan classes.

Historically, we used, and we continue to use, a combination of original LTV and updated LTV for internal risk management and reporting purposes (e.g., line management, loss mitigation strategies). In addition to the fact that estimated property values by their nature are estimates, given certain data limitations it is important to note that updated LTVs may be based upon management’s assumptions (e.g., if an updated LTV is not provided by the third-party service provider, home price index (HPI) changes will be incorporated in arriving at management’s estimate of updated LTV).

Geography: Geographic concentrations are monitored to evaluate and manage exposures. Loan purchase programs are sensitive to, and focused within, certain regions to manage geographic exposures and associated risks.

A combination of updated FICO scores, originated and updated LTV ratios and geographic location assigned to home equity loans and lines of credit and residential real estate loans is used to monitor the risk in the loan classes. Loans with higher FICO scores and lower LTVs tend to have a lower level of risk. Conversely, loans with lower FICO scores, higher LTVs, and in certain geographic locations tend to have a higher level of risk.

 

 

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


Consumer Purchased Impaired Loan Class

Estimates of the expected cash flows primarily determine the valuation of consumer purchased impaired loans. Consumer cash flow estimates are influenced by a number of credit related items, which include, but are not limited to: estimated real estate values, payment patterns, updated FICO scores, the current economic environment, updated LTV ratios and the date of origination. These key factors are monitored to help ensure that concentrations of risk are managed and cash flows are maximized.

See Note 4 Purchased Loans for additional information.

Table 57: Home Equity and Residential Real Estate Balances

 

     June 30      December 31  
In millions    2015      2014  

Home equity and residential real estate loans – excluding purchased impaired loans (a)

   $ 42,830       $ 43,348   

Home equity and residential real estate loans – purchased impaired loans (b)

     4,136         4,541   

Government insured or guaranteed residential real estate mortgages (a)

     1,007         1,188   

Difference between outstanding balance and recorded investment in purchased impaired loans (c)

     94         7   

Total home equity and residential real estate loans (a)

   $ 48,067       $ 49,084   
(a) Represents recorded investment.
(b) Represents outstanding balance.
(c) Outstanding balance represents the balance on the loan servicing system for active loans. It is possible for the outstanding balance to be lower than the recorded investment for certain loans due to the use of pool accounting.
 

 

Table 58: Home Equity and Residential Real Estate Asset Quality Indicators – Excluding Purchased Impaired Loans (a) (b)

 

     Home Equity      Residential Real Estate          
June 30, 2015 – in millions    1st Liens      2nd Liens              Total  

Current estimated LTV ratios (c)

                 

Greater than or equal to 125% and updated FICO scores:

                 

Greater than 660

   $ 315       $ 1,223       $ 346       $ 1,884   

Less than or equal to 660 (d) (e)

     55         236         89         380   

Missing FICO

     1         7         6         14   
     

Greater than or equal to 100% to less than 125% and updated FICO scores:

                 

Greater than 660

     797         2,016         763         3,576   

Less than or equal to 660 (d) (e)

     114         341         137         592   

Missing FICO

     2         5         8         15   
     

Greater than or equal to 90% to less than 100% and updated FICO scores:

                 

Greater than 660

     863         1,659         774         3,296   

Less than or equal to 660

     98         236         102         436   

Missing FICO

     2         4         9         15   
     

Less than 90% and updated FICO scores:

                 

Greater than 660

     13,957         7,574         8,216         29,747   

Less than or equal to 660

     1,251         902         566         2,719   

Missing FICO

     29         15         112         156   

Total home equity and residential real estate loans

   $ 17,484       $ 14,218       $ 11,128       $ 42,830   

 

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


     Home Equity      Residential Real Estate          
December 31, 2014 – in millions    1st Liens      2nd Liens              Total  

Current estimated LTV ratios (c)

                 

Greater than or equal to 125% and updated FICO scores:

                 

Greater than 660

   $ 333       $ 1,399       $ 360       $ 2,092   

Less than or equal to 660 (d) (e)

     57         273         92         422   

Missing FICO

     1         9         8         18   
     

Greater than or equal to 100% to less than 125% and updated FICO scores:

                 

Greater than 660

     839         2,190         772         3,801   

Less than or equal to 660 (d) (e)

     118         383         153         654   

Missing FICO

     1         5         12         18   
     

Greater than or equal to 90% to less than 100% and updated FICO scores:

                 

Greater than 660

     891         1,703         755         3,349   

Less than or equal to 660

     103         271         118         492   

Missing FICO

     2         3         5         10   
     

Less than 90% and updated FICO scores:

                 

Greater than 660

     13,878         7,874         7,703         29,455   

Less than or equal to 660

     1,319         995         573         2,887   

Missing FICO

     27         14         109         150   

Total home equity and residential real estate loans

   $ 17,569       $ 15,119       $ 10,660       $ 43,348   
(a) Excludes purchased impaired loans of approximately $4.2 billion and $4.5 billion in recorded investment, certain government insured or guaranteed residential real estate mortgages of approximately $1.0 billion and $1.2 billion, and loans held for sale at June 30, 2015 and December 31, 2014, respectively. See the Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans table below for additional information on purchased impaired loans.
(b) Amounts shown represent recorded investment.
(c) Based upon updated LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions). Updated LTV is estimated using modeled property values. These ratios are updated at least semi-annually. The related estimates and inputs are based upon an approach that uses a combination of third-party automated valuation models (AVMs), broker price opinions (BPOs), HPI indices, property location, internal and external balance information, origination data and management assumptions. In cases where we are in an originated second lien position, we generally utilize origination balances provided by a third-party which do not include an amortization assumption when calculating updated LTV. Accordingly, the results of these calculations do not represent actual appraised loan level collateral or updated LTV based upon a current first lien balance, and as such, are necessarily imprecise and subject to change as we enhance our methodology.
(d) Higher risk loans are defined as loans with both an updated FICO score of less than or equal to 660 and an updated LTV greater than or equal to 100%.
(e) The following states had the highest percentage of higher risk loans at June 30, 2015: New Jersey 15%, Ohio 12%, Illinois 12%, Pennsylvania 12%, Florida 7%, Maryland 6% and Michigan 5%. The remainder of the states had lower than 4% of the higher risk loans individually, and collectively they represent approximately 31% of the higher risk loans. The following states had the highest percentage of higher risk loans at December 31, 2014: New Jersey 14%, Illinois 12%, Pennsylvania 12%, Ohio 12%, Florida 8%, Maryland 6%, Michigan 5%, and North Carolina 4%. The remainder of the states had lower than 4% of the high risk loans individually, and collectively they represent approximately 28% of the higher risk loans.

 

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


Table 59: Home Equity and Residential Real Estate Asset Quality Indicators – Purchased Impaired Loans (a)

 

     Home Equity (b) (c)      Residential Real Estate (b) (c)          
June 30, 2015 – in millions    1st Liens      2nd Liens              Total  

Current estimated LTV ratios (d)

                 

Greater than or equal to 125% and updated FICO scores:

                 

Greater than 660

   $ 6       $ 225       $ 221       $ 452   

Less than or equal to 660

     9         105         121         235   

Missing FICO

        7         7         14   
     

Greater than or equal to 100% to less than 125% and updated FICO scores:

                 

Greater than 660

     14         387         245         646   

Less than or equal to 660

     11         166         173         350   

Missing FICO

        10         9         19   
     

Greater than or equal to 90% to less than 100% and updated FICO scores:

                 

Greater than 660

     12         186         157         355   

Less than or equal to 660

     7         84         103         194   

Missing FICO

        4         6         10   
     

Less than 90% and updated FICO scores:

                 

Greater than 660

     109         320         625         1,054   

Less than or equal to 660

     97         175         472         744   

Missing FICO

     1         13         28         42   
     

Missing LTV and updated FICO scores:

                 

Greater than 660

     1              12         13   

Less than or equal to 660

     3                  5         8   

Total home equity and residential real estate loans

   $ 270       $ 1,682       $ 2,184       $ 4,136   

 

     Home Equity (b) (c)      Residential Real Estate (b) (c)          
December 31, 2014 – in millions    1st Liens      2nd Liens              Total  

Current estimated LTV ratios (d)

                 

Greater than or equal to 125% and updated FICO scores:

                 

Greater than 660

   $ 8       $ 243       $ 276       $ 527   

Less than or equal to 660

     9         125         144         278   

Missing FICO

        8         6         14   
     

Greater than or equal to 100% to less than 125% and updated FICO scores:

                 

Greater than 660

     15         426         272         713   

Less than or equal to 660

     12         194         200         406   

Missing FICO

        11         5         16   
     

Greater than or equal to 90% to less than 100% and updated FICO scores:

                 

Greater than 660

     12         207         186         405   

Less than or equal to 660

     9         93         123         225   

Missing FICO

        5         3         8   
     

Less than 90% and updated FICO scores:

                 

Greater than 660

     102         339         626         1,067   

Less than or equal to 660

     109         200         515         824   

Missing FICO

     1         12         15         28   
     

Missing LTV and updated FICO scores:

                 

Greater than 660

     1              14         15   

Less than or equal to 660

     4              10         14   

Missing FICO

                       1         1   

Total home equity and residential real estate loans

   $ 282       $ 1,863       $ 2,396       $ 4,541   

 

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


(a) Amounts shown represent outstanding balance. See Note 4 Purchased Loans for additional information.
(b) For the estimate of cash flows utilized in our purchased impaired loan accounting, other assumptions and estimates are made, including amortization of first lien balances, pre-payment rates, etc., which are not reflected in this table.
(c) The following states had the highest percentage of purchased impaired loans at June 30, 2015: California 16%, Florida 14%, Illinois 11%, Ohio 8%, North Carolina 7%, and Michigan 5%. The remainder of the states had lower than a 4% concentration of purchased impaired loans individually, and collectively they represent approximately 39% of the purchased impaired portfolio. The following states had the highest percentage of purchased impaired loans at December 31, 2014: California 17%, Florida 15%, Illinois 11%, Ohio 8%, North Carolina 7% and Michigan 5%. The remainder of the states had lower than a 4% concentration of purchased impaired loans individually, and collectively they represent approximately 37% of the purchased impaired portfolio.
(d) Based upon updated LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions). Updated LTV is estimated using modeled property values. These ratios are updated at least semi-annually. The related estimates and inputs are based upon an approach that uses a combination of third-party automated valuation models (AVMs), broker price opinions (BPOs), HPI indices, property location, internal and external balance information, origination data and management assumptions. In cases where we are in an originated second lien position, we generally utilize origination balances provided by a third-party which do not include an amortization assumption when calculating updated LTV. Accordingly, the results of these calculations do not represent actual appraised loan level collateral or updated LTV based upon a current first lien balance, and as such, are necessarily imprecise and subject to change as we enhance our methodology.

Credit Card and Other Consumer Loan Classes

Table 60: Credit Card and Other Consumer Loan Classes Asset Quality Indicators

 

     Credit Card (a)      Other Consumer (b)  
Dollars in millions    Amount      % of Total Loans
Using FICO
Credit Metric
     Amount      % of Total Loans
Using FICO
Credit Metric
 

June 30, 2015

               

FICO score greater than 719

   $ 2,680         59    $ 9,293         65

650 to 719

     1,265         28         3,425         24   

620 to 649

     193         4         503         3   

Less than 620

     208         5         578         4   

No FICO score available or required (c)

     174         4         517         4   

Total loans using FICO credit metric

     4,520         100      14,316         100

Consumer loans using other internal credit metrics (b)

                       7,528            

Total loan balance

   $ 4,520                $ 21,844            

Weighted-average updated FICO score (d)

              734                  745   

December 31, 2014

               

FICO score greater than 719

   $ 2,717         59    $ 9,156         64

650 to 719

     1,288         28         3,459         24   

620 to 649

     203         4         528         4   

Less than 620

     239         5         619         4   

No FICO score available or required (c)

     165         4         557         4   

Total loans using FICO credit metric

     4,612         100      14,319         100

Consumer loans using other internal credit metrics (b)

                       8,434            

Total loan balance

   $ 4,612                $ 22,753            

Weighted-average updated FICO score (d)

              732                  744   
(a) At June 30, 2015, we had $30 million of credit card loans that are higher risk (i.e., loans with both updated FICO scores less than 660 and in late stage (90+ days) delinquency status). The majority of the June 30, 2015 balance related to higher risk credit card loans was geographically distributed throughout the following areas: Ohio 17%, Pennsylvania 16%, Michigan 9%, New Jersey 8%, Illinois 7%, Florida 7% and Indiana 5%. All other states had less than 4% individually and make up the remainder of the balance. At December 31, 2014, we had $35 million of credit card loans that are higher risk. The majority of the December 31, 2014 balance related to higher risk credit card loans was geographically distributed throughout the following areas: Ohio 17%, Pennsylvania 16%, Michigan 9%, Illinois 7%, New Jersey 7%, Indiana 6%, Florida 6% and North Carolina 4%. All other states had less than 4% individually and make up the remainder of the balance.
(b) Other consumer loans for which updated FICO scores are used as an asset quality indicator include non-government guaranteed or insured education loans, automobile loans and other secured and unsecured lines and loans. Other consumer loans for which other internal credit metrics are used as an asset quality indicator include primarily government guaranteed or insured education loans, as well as consumer loans to high net worth individuals. Other internal credit metrics may include delinquency status, geography or other factors.
(c) Credit card loans and other consumer loans with no FICO score available or required generally refers to new accounts issued to borrowers with limited credit history, accounts for which we cannot obtain an updated FICO score (e.g., recent profile changes), cards issued with a business name, and/or cards secured by collateral. Management proactively assesses the risk and size of this loan portfolio and, when necessary, takes actions to mitigate the credit risk.
(d) Weighted-average updated FICO score excludes accounts with no FICO score available or required.

Troubled Debt Restructurings (TDRs)

See Note 3 Asset Quality in our 2014 Form 10-K for additional discussion on TDRs. We held specific reserves in the ALLL of $.3 billion and $.4 billion at June 30, 2015 and December 31, 2014, respectively, for the total TDR portfolio.

 

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


Table 61: Summary of Troubled Debt Restructurings

 

In millions    June 30
2015
     December 31
2014
 

Total consumer lending

   $ 2,002       $ 2,041   

Total commercial lending

     414         542   

Total TDRs

   $ 2,416       $ 2,583   

Nonperforming

   $ 1,208       $ 1,370   

Accruing (a)

     1,091         1,083   

Credit card

     117         130   

Total TDRs

   $ 2,416       $ 2,583   
(a) Accruing TDR loans have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

Table 62 quantifies the number of loans that were classified as TDRs as well as the change in the recorded investments as a result of the TDR classification during the first six months and second quarters of 2015 and 2014, respectively. Additionally, the table provides information about the types of TDR concessions. The Principal Forgiveness TDR category includes principal forgiveness and accrued interest forgiveness. These types of TDRs result in a write down of the recorded investment and a charge-off if such action has not already taken place. The Rate Reduction TDR category includes reduced interest rate and interest deferral. The TDRs

within this category result in reductions to future interest income. The Other TDR category primarily includes consumer borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC, as well as postponement/reduction of scheduled amortization and contractual extensions for both consumer and commercial borrowers.

In some cases, there have been multiple concessions granted on one loan. This is most common within the commercial loan portfolio. When there have been multiple concessions granted in the commercial loan portfolio, the principal forgiveness concession was prioritized for purposes of determining the inclusion in Table 62. For example, if there is principal forgiveness in conjunction with lower interest rate and postponement of amortization, the type of concession will be reported as Principal Forgiveness. Second in priority would be rate reduction. For example, if there is an interest rate reduction in conjunction with postponement of amortization, the type of concession will be reported as a Rate Reduction. In the event that multiple concessions are granted on a consumer loan, concessions resulting from discharge from personal liability through Chapter 7 bankruptcy without formal affirmation of the loan obligations to PNC would be prioritized and included in the Other type of concession in the table below. After that, consumer loan concessions would follow the previously discussed priority of concessions for the commercial loan portfolio.

 

 

Table 62: Financial Impact and TDRs by Concession Type (a)

 

            

Pre-TDR

Recorded
Investment (b)

     Post-TDR Recorded Investment (c)  

During the three months ended June 30, 2015

Dollars in millions

   Number
of Loans
        Principal
Forgiveness
     Rate
Reduction
     Other      Total  

Commercial lending

                                                     

Commercial

     27       $ 38       $ 4       $ 2       $ 19       $ 25   

Commercial real estate

     9         4            1         2         3   

Equipment lease financing

     1                                               

Total commercial lending

     37         42         4         3         21         28   

Consumer lending

                         

Home equity

     818         57            27         28         55   

Residential real estate

     78         12            6         6         12   

Credit card

     1,641         14            13              13   

Other consumer

     232         3                  1         2         3   

Total consumer lending

     2,769         86                  47         36         83   

Total TDRs

     2,806       $ 128       $ 4       $ 50       $ 57       $ 111   
       

During the three months ended June 30, 2014

Dollars in millions

                                               

Commercial lending

                         

Commercial

     29       $ 48       $ 3       $ 4       $ 40       $ 47   

Commercial real estate

     23         40                  4         32         36   

Total commercial lending (d)

     52         88         3         8         72         83   

Consumer lending

                         

Home equity

     561         40            9         29         38   

Residential real estate

     161         22            7         15         22   

Credit card

     1,717         14            14              14   

Other consumer

     222         4                           3         3   

Total consumer lending

     2,661         80                  30         47         77   

Total TDRs

     2,713       $ 168       $ 3       $ 38       $ 119       $ 160   

 

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


Table 62: Financial Impact and TDRs by Concession Type (Continued) (a)

 

            

Pre-TDR

Recorded
Investment (b)

     Post-TDR Recorded Investment (c)  

During the six months ended June 30, 2015

Dollars in millions

   Number
of Loans
        Principal
Forgiveness
     Rate
Reduction
     Other      Total  

Commercial lending

                                                     

Commercial

     57       $ 91       $ 5       $ 2       $ 68       $ 75   

Commercial real estate

     17         14         1         1         4         6   

Equipment lease financing

     1                                               

Total commercial lending

     75         105         6         3         72         81   

Consumer lending

                         

Home equity

     1,530         102            50         47         97   

Residential real estate

     148         20            11         10         21   

Credit card

     3,204         26            25              25   

Other consumer

     504         7                  2         4         6   

Total consumer lending

     5,386         155                  88         61         149   

Total TDRs

     5,461       $ 260       $ 6       $ 91       $ 133       $ 230   
       

During the six months ended June 30, 2014

Dollars in millions

                                               

Commercial lending

                         

Commercial

     63       $ 89       $ 3       $ 4       $ 78       $ 85   

Commercial real estate

     46         81         19         4         43         66   

Total commercial lending (d)

     109         170         22         8         121         151   

Consumer lending

                         

Home equity

     1,392         92            29         56         85   

Residential real estate

     280         40            13         27         40   

Credit card

     3,568         29            28              28   

Other consumer

     487         8                           6         6   

Total consumer lending

     5,727         169                  70         89         159   

Total TDRs

     5,836       $ 339       $ 22       $ 78       $ 210       $ 310   
(a) Impact of partial charge-offs at TDR date are included in this table.
(b) Represents the recorded investment of the loans as of the quarter end immediately preceding TDR designation, and excludes immaterial amounts of accrued interest receivable.
(c) Represents the recorded investment of the TDRs as of the quarter end and immediately following the TDR designation, and excludes immaterial amounts of accrued interest receivable.
(d) During the three and six months ended June 30, 2014, there were no loans classified as TDRs in the Equipment lease financing loan class.

After a loan is determined to be a TDR, we continue to track its performance under its most recent restructured terms. In Table 63, we consider a TDR to have subsequently defaulted when it becomes 60 days past due after the most recent date the loan was restructured. The following table presents the recorded investment of loans that both (i) were classified as TDRs or were subsequently modified during each 12-month period preceding April 1, 2015, January 1, 2015, April 1, 2014 and January 1, 2014, respectively, and (ii) subsequently defaulted during these reporting periods.

 

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


Table 63: TDRs that were Modified in the Past Twelve Months which have Subsequently Defaulted

 

During the three months ended June 30, 2015

Dollars in millions

   Number of
Contracts
     Recorded
Investment
 

Commercial lending

       

Commercial

     8       $ 3   

Commercial real estate

     1         1   

Equipment lease financing

     1            

Total commercial lending

     10         4   

Consumer lending

       

Home equity

     102         5   

Residential real estate

     60         8   

Credit card

     1,140         10   

Other consumer

     38            

Total consumer lending

     1,340         23   

Total TDRs

     1,350       $ 27   
 

During the three months ended June 30, 2014

Dollars in millions

   Number of
Contracts
     Recorded
Investment
 

Commercial lending

       

Commercial

     23       $ 16   

Commercial real estate

     14         21   

Total commercial lending (a)

     37         37   

Consumer lending

       

Home equity

     100         6   

Residential real estate

     51         11   

Credit card

     1,446         12   

Other consumer

     34            

Total consumer lending

     1,631         29   

Total TDRs

     1,668       $ 66   

 

During the six months ended June 30, 2015

Dollars in millions

   Number of
Contracts
     Recorded
Investment
 

Commercial lending

       

Commercial

     13       $ 4   

Commercial real estate

     8         9   

Equipment lease financing

     1            

Total commercial lending (a)

     22         13   

Consumer lending

       

Home equity

     168         9   

Residential real estate

     71         10   

Credit card

     1,482         12   

Other consumer

     75         1   

Total consumer lending

     1,796         32   

Total TDRs

     1,818       $ 45   

During the six months ended June 30, 2014

Dollars in millions

   Number of
Contracts
     Recorded
Investment
 

Commercial lending

       

Commercial

     33       $ 22   

Commercial real estate

     21         31   

Total commercial lending (a)

     54         53   

Consumer lending

       

Home equity

     216         13   

Residential real estate

     76         14   

Credit card

     1,894         15   

Other consumer

     79         1   

Total consumer lending

     2,265         43   

Total TDRs

     2,319       $ 96   
(a) During the three and six months ended June 30, 2014, there were no loans classified as TDRs in the Equipment lease financing loan class that have subsequently defaulted.

Impaired Loans

Impaired loans include commercial nonperforming loans and consumer and commercial TDRs, regardless of nonperforming status. TDRs that were previously recorded at amortized cost and are now classified and accounted for as held for sale are also included. Excluded from impaired loans are nonperforming leases, loans accounted for as held for sale other than the TDRs described in the preceding sentence, loans accounted for under the fair value option, smaller balance homogeneous type loans and purchased impaired loans. See Note 4 Purchased Loans for additional information. Nonperforming equipment lease financing loans of $3 million at June 30, 2015 and $2 million at December 31, 2014 are excluded from impaired loans pursuant to authoritative lease accounting guidance. We did not recognize any interest income on impaired loans that have not returned to performing status, while they were impaired during the six months ended June 30, 2015 and June 30, 2014. The following table provides further detail on impaired loans individually evaluated for impairment and the associated ALLL. Certain commercial impaired loans and loans to consumers discharged from bankruptcy and not formally reaffirmed do not have a related ALLL as the valuation of these impaired loans exceeded the recorded investment.

 

 

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


Table 64: Impaired Loans

 

In millions    Unpaid
Principal
Balance
     Recorded
Investment (a)
     Associated
Allowance (b)
     Average
Recorded
Investment (c)
 

June 30, 2015

             

Impaired loans with an associated allowance

             

Commercial

   $ 398       $ 305       $ 59       $ 305   

Commercial real estate

     367         196         41         230   

Home equity

     1,006         982         189         984   

Residential real estate

     478         362         58         398   

Credit card

     117         117         26         124   

Other consumer

     58         40         1         44   

Total impaired loans with an associated allowance

   $ 2,424       $ 2,002       $ 374       $ 2,085   

Impaired loans without an associated allowance

             

Commercial

   $ 45       $ 38          $ 73   

Commercial real estate

     183         157            171   

Home equity

     421         147            144   

Residential real estate

     369         354                  328   

Total impaired loans without an associated allowance

   $ 1,018       $ 696                $ 716   

Total impaired loans

   $ 3,442       $ 2,698       $ 374       $ 2,801   

December 31, 2014

             

Impaired loans with an associated allowance

             

Commercial

   $ 432       $ 318       $ 74       $ 360   

Commercial real estate

     418         262         65         283   

Home equity

     1,021         984         215         986   

Residential real estate

     397         420         75         422   

Credit card

     130         130         32         147   

Other consumer

     64         47         2         51   

Total impaired loans with an associated allowance

   $ 2,462       $ 2,161       $ 463       $ 2,249   

Impaired loans without an associated allowance

             

Commercial

   $ 106       $ 84          $ 133   

Commercial real estate

     249         187            276   

Home equity

     403         145            134   

Residential real estate

     344         315                  365   

Total impaired loans without an associated allowance

   $ 1,102       $ 731                $ 908   

Total impaired loans

   $ 3,564       $ 2,892       $ 463       $ 3,157   
(a) Recorded investment in a loan includes the unpaid principal balance plus accrued interest and net accounting adjustments, less any charge-offs. Recorded investment does not include any associated valuation allowance.
(b) Associated allowance amounts include $.3 billion and $.4 billion for TDRs at June 30, 2015 and December 31, 2014, respectively.
(c) Average recorded investment is for the six months ended June 30, 2015 and the year ended December 31, 2014, respectively.

 

 

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


NOTE 4 PURCHASED LOANS

Purchased Impaired Loans

Purchased impaired loan accounting addresses differences between contractual cash flows and cash flows expected to be collected from the initial investment in loans if those differences are attributable, at least in part, to credit quality. Several factors were considered when evaluating whether a loan was considered a purchased impaired loan, including the delinquency status of the loan, updated borrower credit status, geographic information, and updated LTV. GAAP allows purchasers to account for loans individually or to aggregate purchased impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Purchased impaired homogeneous consumer, residential real estate and smaller balance commercial loans with common risk characteristics are aggregated into pools where appropriate, whereas commercial loans with a total commitment greater than a defined threshold are accounted for individually. For pooled loans, proceeds of individual loans are not applied individually to each loan within a pool, but to the pool’s recorded investment since it is

accounted for as a single asset. Upon final disposition of a loan within a pool (e.g., payoff, short-sale, foreclosure, etc.), the loan’s carrying value is removed from the pool and any gain or loss associated with the transaction is retained in the pool’s recorded investment. For example, upon final disposition of a loan by short-sale, the proceeds of the short-sale may be less (or more) than the loan’s recorded investment. This shortfall or loss (excess or gain) is not accounted for as an individual loan sale in our income statement and is instead retained as part of the pool’s recorded investment consistent with our accounting for the pool as a single asset. This treatment is designed to maintain a constant effective yield for recognition of interest income. Accordingly, a pool’s recorded investment includes the net accumulation of realized losses or gains attributable to these final dispositions. As there are no future expected cash flows related to these dispositions, their net carrying value is $0. The recorded investment, including these realized losses and gains, is evaluated for collectability based upon the net present value of the pool’s remaining expected cash flows when establishing our allowance for loan losses. See below and Note 1 Accounting Policies and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional information.

 

 

The following table provides balances of purchased impaired loans at June 30, 2015 and December 31, 2014:

Table 65: Purchased Impaired Loans – Balances

 

     June 30, 2015      December 31, 2014  
In millions   

Outstanding

Balance (a)

     Recorded
Investment
     Carrying Value     

Outstanding

Balance (a)

     Recorded
Investment
     Carrying Value  

Commercial lending

                   

Commercial

   $ 129       $ 50       $ 34       $ 159       $ 74       $ 57   

Commercial real estate

     217         185         134         307         236         174   

Total commercial lending

     346         235         168         466         310         231   

Consumer lending

                   

Consumer

     1,952         1,833         1,517         2,145         1,989         1,661   

Residential real estate

     2,184         2,397         1,925         2,396         2,559         2,094   

Total consumer lending

     4,136         4,230         3,442         4,541         4,548         3,755   

Total

   $ 4,482       $ 4,465       $ 3,610       $ 5,007       $ 4,858       $ 3,986   
(a) Outstanding balance represents the balance on the loan servicing system for active loans. It is possible for the outstanding balance to be lower than the recorded investment for certain loans due to the use of pool accounting.

 

The excess of undiscounted cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the loan using the constant effective yield method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and is not recognized in income. Subsequent changes in the expected cash flows of individual or pooled purchased impaired loans will either impact the accretable yield or result in an impairment charge to provision for credit losses in the period in which the changes become probable. Decreases to

the net present value of expected cash flows will generally result in an impairment charge recorded as a provision for credit losses, resulting in an increase to the allowance for loan and lease losses, and a reclassification from accretable yield to non-accretable difference.

During the first six months of 2015, $12 million of provision recapture was recorded for purchased impaired loans compared to $95 million of provision recapture during the first six months of 2014. Charge-offs (which were specifically for commercial loans greater than a defined threshold) during the first six months of 2015 were $5 million compared to $24

 

 

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


million during the first six months of 2014. At both June 30, 2015 and December 31, 2014, the allowance for loan and lease losses on total purchased impaired loans was $.9 billion. At June 30, 2015, an allowance was recognized on each consumer purchased impaired loan pool. Subsequent increases in the net present value of cash flows will result in a provision recapture of any previously recorded allowance for loan and lease losses, to the extent applicable, and/or a reclassification from non-accretable difference to accretable yield, which will be recognized prospectively. Individual loan transactions where final dispositions have occurred (as noted above) result in removal of the loans from their applicable pools for cash flow estimation purposes. The cash flow re-estimation process is completed quarterly to evaluate the appropriateness of the allowance associated with the purchased impaired loans.

Activity for the accretable yield during the first six months of 2015 and 2014 follows:

Table 66: Purchased Impaired Loans – Accretable Yield

 

In millions    2015     2014  

January 1

   $ 1,558      $ 2,055   

Accretion (including excess cash recoveries)

     (252     (309

Net reclassifications to accretable from non-accretable (a)

     146        208   

Disposals

     (9     (18

June 30

   $ 1,443      $ 1,936   
(a) Approximately 70% and 78% of the net reclassifications for the six months ended June 30, 2015 and 2014, respectively, were driven by the consumer portfolio and were due to improvements of cash expected to be collected on loans in future periods. The remaining net reclassifications were predominantly due to future cash flow changes in the commercial portfolio.

NOTE 5 ALLOWANCES FOR LOAN AND LEASE LOSSES AND UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT

Allowance for Loan and Lease Losses

We maintain the ALLL at levels that we believe to be appropriate to absorb estimated probable credit losses incurred in the portfolios as of the balance sheet date. We use the two main portfolio segments – Commercial Lending and Consumer Lending – and develop and document the ALLL under separate methodologies for each of these segments as discussed in Note 1 Accounting Policies. A rollforward of the ALLL and associated loan data follows.

 

 

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


Table 67: Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data

 

In millions    Commercial
Lending
    Consumer
Lending
     Total  

June 30, 2015

         

Allowance for Loan and Lease Losses

         

January 1

   $ 1,571      $ 1,760       $ 3,331   

Charge-offs

     (108     (284      (392

Recoveries

     134        88         222   

Net (charge-offs) / recoveries

     26        (196      (170

Provision for credit losses

     20        80         100   

Net change in allowance for unfunded loan commitments and letters of credit

     13           13   

Other

     (2              (2

June 30

   $ 1,628      $ 1,644       $ 3,272   

TDRs individually evaluated for impairment

   $ 35      $ 274       $ 309   

Other loans individually evaluated for impairment

     65           65   

Loans collectively evaluated for impairment

     1,461        582         2,043   

Purchased impaired loans

     67        788         855   

June 30

   $ 1,628      $ 1,644       $ 3,272   

Loan Portfolio

         

TDRs individually evaluated for impairment (a)

   $ 414      $ 2,002       $ 2,416   

Other loans individually evaluated for impairment

     282           282   

Loans collectively evaluated for impairment (b)

     129,791        67,258         197,049   

Fair value option loans (c)

       941         941   

Purchased impaired loans

     235        4,230         4,465   

June 30

   $ 130,722      $ 74,431       $ 205,153   

Portfolio segment ALLL as a percentage of total ALLL

     50     50      100

Ratio of the allowance for loan and lease losses to total loans

     1.25     2.21      1.59

June 30, 2014

         

Allowance for Loan and Lease Losses

         

January 1

   $ 1,547      $ 2,062       $ 3,609   

Charge-offs

     (209     (355      (564

Recoveries

     149        84         233   

Net charge-offs

     (60     (271      (331

Provision for credit losses

     108        58         166   

Net change in allowance for unfunded loan commitments and letters of credit

     10           10   

Other

     (1              (1

June 30

   $ 1,604      $ 1,849       $ 3,453   

TDRs individually evaluated for impairment

   $ 29      $ 407       $ 436   

Other loans individually evaluated for impairment

     118           118   

Loans collectively evaluated for impairment

     1,349        664         2,013   

Purchased impaired loans

     108        778         886   

June 30

   $ 1,604      $ 1,849       $ 3,453   

Loan Portfolio

         

TDRs individually evaluated for impairment (a)

   $ 545      $ 2,121       $ 2,666   

Other loans individually evaluated for impairment

     526           526   

Loans collectively evaluated for impairment (b) (d)

     122,533        68,717         191,250   

Fair value option loans (c) (d)

       985         985   

Purchased impaired loans

     479        5,078         5,557   

June 30

   $ 124,083      $ 76,901       $ 200,984   

Portfolio segment ALLL as a percentage of total ALLL

     46     54      100

Ratio of the allowance for loan and lease losses to total loans

     1.29     2.40      1.72
(a) TDRs individually evaluated for impairment exclude TDRs that were subsequently accounted for as held for sale loans, but continue to be disclosed as TDRs.
(b) Includes $174 million of loans collectively evaluated for impairment based upon collateral values and written down to the respective collateral value less costs to sell at June 30, 2015. Accordingly, there is no allowance recorded for these loans. The comparative amount as of June 30, 2014 was $232 million.
(c) Loans accounted for under the fair value option are not evaluated for impairment as these loans are accounted for at fair value. Accordingly, there is no allowance recorded on these loans.
(d) Prior period amounts were corrected to include transferred loans over which PNC regained effective control as fair value option loans. This resulted in an increase of $101 million in consumer lending fair value option loans and a corresponding decrease of $101 million in consumer lending loans collectively evaluated for impairment.

 

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


Allowance for Unfunded Loan Commitments and Letters of Credit

We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable credit losses on these unfunded credit facilities as of the balance sheet date as discussed in Note 1 Accounting Policies. A rollforward of the allowance is presented below.

Table 68: Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit

 

In millions    2015     2014  

January 1

   $ 259      $ 242   

Net change in allowance for unfunded loan commitments and letters of credit

     (13     (10

June 30

   $ 246      $ 232   
 

 

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


NOTE 6 INVESTMENT SECURITIES

Table 69: Investment Securities Summary

 

   

Amortized

Cost

    Unrealized    

Fair

Value

 
In millions     Gains     Losses    

June 30, 2015

                               

Securities Available for Sale

         

Debt securities

         

U.S. Treasury and government agencies

  $ 5,931      $ 166      $ (2   $ 6,095   

Residential mortgage-backed

         

Agency

    20,629        331        (118     20,842   

Non-agency

    4,357        284        (89     4,552   

Commercial mortgage-backed

         

Agency

    1,980        21        (7     1,994   

Non-agency

    4,368        62        (8     4,422   

Asset-backed

    5,377        82        (24     5,435   

State and municipal

    2,010        59        (11     2,058   

Other debt

    1,822        39        (7     1,854   

Total debt securities

    46,474        1,044        (266     47,252   

Corporate stocks and other

    428                (1     427   

Total securities available for sale

  $ 46,902      $ 1,044      $ (267   $ 47,679   

Securities Held to Maturity (a)

         

Debt securities

         

U.S. Treasury and government agencies

  $ 253      $ 37        $ 290   

Residential mortgage-backed

         

Agency

    8,199        117      $ (58     8,258   

Non-agency

    252        7          259   

Commercial mortgage-backed

         

Agency

    1,142        48          1,190   

Non-agency

    812        13          825   

Asset-backed

    736        3        (6     733   

State and municipal

    1,982        78          2,060   

Other debt

    307        6                313   

Total securities held to maturity

  $ 13,683      $ 309      $ (64   $ 13,928   

December 31, 2014

         

Securities Available for Sale

         

Debt securities

         

U.S. Treasury and government agencies

  $ 5,237      $ 186      $ (1   $ 5,422   

Residential mortgage-backed

         

Agency

    17,646        438        (41     18,043   

Non-agency

    4,723        318        (99     4,942   

Commercial mortgage-backed

         

Agency

    2,178        23        (14     2,187   

Non-agency

    4,085        88        (11     4,162   

Asset-backed

    5,141        78        (32     5,187   

State and municipal

    1,953        88        (3     2,038   

Other debt

    1,776        43        (6     1,813   

Total debt securities

    42,739        1,262        (207     43,794   

Corporate stocks and other

    442                (1     441   

Total securities available for sale

  $ 43,181      $ 1,262      $ (208   $ 44,235   

Securities Held to Maturity (a)

         

Debt securities

         

U.S. Treasury and government agencies

  $ 248      $ 44        $ 292   

Residential mortgage-backed

         

Agency

    5,736        166      $ (10     5,892   

Non-agency

    270        13          283   

Commercial mortgage-backed

         

Agency

    1,200        53          1,253   

Non-agency

    1,010        19          1,029   

Asset-backed

    759        2        (8     753   

State and municipal

    2,042        111          2,153   

Other debt

    323        6                329   

Total securities held to maturity

  $ 11,588      $ 414      $ (18   $ 11,984   
(a) Held to maturity securities transferred from available for sale are included in held to maturity at fair value at the time of transfer. The amortized cost of held to maturity securities included net unrealized gains of $110 million and $125 million at June 30, 2015 and December 31, 2014, respectively, related to securities transferred, which are offset in Accumulated Other Comprehensive Income, net of tax.

 

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


The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the securities available for sale portfolio are included in Shareholders’ equity as Accumulated other comprehensive income or loss, net of tax, unless credit-related. Securities held to maturity are carried at amortized cost. At June 30, 2015, Accumulated other comprehensive income included pretax gains of $93 million from derivatives that hedged the purchase of investment securities classified as held to maturity. The gains will be accreted into interest income as an adjustment of yield on the securities.

Table 70 presents gross unrealized losses on securities available for sale at June 30, 2015 and December 31, 2014. The securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and twelve months or more based on the point in time that the fair value declined below the amortized cost basis. The table includes debt securities where a portion of other-than-temporary impairment (OTTI) has been recognized in Accumulated other comprehensive income (loss).

Table 70: Gross Unrealized Loss and Fair Value of Securities Available for Sale

 

In millions   

Unrealized loss position less

than 12 months

     Unrealized loss position
12 months or more
     Total  
      Unrealized
Loss
    Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
 

June 30, 2015

                  

Debt securities

                  

U.S. Treasury and government agencies

   $ (2   $ 1,167             $ (2    $ 1,167   

Residential mortgage-backed

                  

Agency

     (94     7,736       $ (24    $ 1,259         (118      8,995   

Non-agency

     (5     443         (84      1,395         (89      1,838   

Commercial mortgage-backed

                  

Agency

     (2     429         (5      150         (7      579   

Non-agency

     (5     1,504         (3      339         (8      1,843   

Asset-backed

     (5     946         (19      605         (24      1,551   

State and municipal

     (8     503         (3      49         (11      552   

Other debt

     (4     332         (3      139         (7      471   

Total debt securities

     (125     13,060         (141      3,936         (266      16,996   

Corporate stocks and other

                      (1      61         (1      61   

Total

   $ (125   $ 13,060       $ (142    $ 3,997       $ (267    $ 17,057   

December 31, 2014

                  

Debt securities

                  

U.S. Treasury and government agencies

   $ (1   $ 1,426             $ (1    $ 1,426   

Residential mortgage-backed

                  

Agency

     (4     644       $ (37    $ 1,963         (41      2,607   

Non-agency

     (5     276         (94      1,487         (99      1,763   

Commercial mortgage-backed

                  

Agency

     (2     681         (12      322         (14      1,003   

Non-agency

     (4     928         (7      335         (11      1,263   

Asset-backed

     (4     913         (28      1,133         (32      2,046   

State and municipal

           (a)      41         (3      77         (3      118   

Other debt

     (2     314         (4      186         (6      500   

Total debt securities

     (22     5,223         (185      5,503         (207      10,726   

Corporate stocks and other

                      (1      15         (1      15   

Total

   $ (22   $ 5,223       $ (186    $ 5,518       $ (208    $ 10,741   
(a) The unrealized loss on these securities was less than $.5 million.

 

The PNC Financial Services Group, Inc. – Form 10-Q    87


The gross unrealized loss on debt securities held to maturity was $74 million at June 30, 2015, with $51 million of the loss related to securities with a fair value of $4.0 billion that had been in a continuous loss position less than 12 months and $23 million of the loss related to securities with a fair value of $1.0 billion that had been in a continuous loss position for more than 12 months. The gross unrealized loss on debt securities held to maturity was $22 million at December 31, 2014, with $1 million of the loss related to securities with a fair value of $134 million that had been in a continuous loss position less than 12 months and $21 million of the loss related to securities with a fair value of $1.6 billion that had been in a continuous loss position for more than 12 months. For securities transferred to held to maturity from available for sale, the unrealized loss for purposes of this analysis is determined by comparing the security’s original amortized cost to its current estimated fair value.

Evaluating Investment Securities for Other-than-Temporary Impairments

For the securities in the preceding Table 70, as of June 30, 2015 we do not intend to sell and believe we will not be required to sell the securities prior to recovery of the amortized cost basis.

At least quarterly, we conduct a comprehensive security-level assessment on all securities. For those securities in an unrealized loss position we determine if OTTI exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. An OTTI loss must be recognized for a debt security in an unrealized loss position if we intend to sell the security or it is more likely than not we will be required to sell the security prior to recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between the fair value and the amortized cost basis of the security. Even if we do not expect to sell the security, we must evaluate the expected cash flows to be received to determine if we believe a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in accumulated other comprehensive income (loss).

The security-level assessment is performed on each investment security. Our assessment considers the security structure, recent security collateral performance metrics if applicable, external credit ratings, failure of the issuer to make scheduled interest or principal payments, our judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts. Results of the periodic assessment are reviewed by a cross-functional senior management team representing Asset & Liability Management, Finance, and Market Risk Management. The senior management team considers the results of the assessments, as well as other factors, in determining whether the impairment is other-than-temporary.

Substantially all of the credit impairment we have recognized relates to non-agency residential mortgage-backed securities and asset-backed securities collateralized by first-lien and second-lien non-agency residential mortgage loans. Potential credit losses on these securities are evaluated on a security-by-security basis. Collateral performance assumptions are developed for each security after reviewing collateral composition and collateral performance statistics. This includes analyzing recent delinquency roll rates, loss severities, voluntary prepayments and various other collateral and performance metrics. This information is then combined with general expectations on the housing market, employment and other macroeconomic factors to develop estimates of future performance.

Security level assumptions for prepayments, loan defaults and loss given default are applied to each non-agency residential mortgage-backed security and asset-backed security collateralized by first-lien and second-lien non-agency residential mortgage loans using a third-party cash flow model. The third-party cash flow model then generates projected cash flows according to the structure of each security. Based on the results of the cash flow analysis, we determine whether we expect that we will recover the amortized cost basis of our security.

For those securities on our balance sheet where we determined losses represented OTTI, we have recorded cumulative credit losses of $1.2 billion at June 30, 2015. During the first six months and second quarters of 2015 and 2014, the OTTI credit losses recognized in noninterest income and the OTTI noncredit losses recognized in accumulated other comprehensive income (loss), net of tax, on securities were not significant.

 

 

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


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

Table 71: Gains (Losses) on Sales of Securities Available for Sale

 

In millions    Proceeds      Gross
Gains
     Gross
Losses
    Net
Gains
     Tax
Expense
 

Six months ended June 30

               

2015

   $ 2,441       $ 51       $ (1   $ 50       $ 17   

2014

   $ 3,401       $ 29       $ (25   $ 4       $ 1   

The following table presents, by remaining contractual maturity, the amortized cost, fair value and weighted-average yield of debt securities at June 30, 2015.

Table 72: Contractual Maturity of Debt Securities

 

June 30, 2015
Dollars in millions
   1 Year or Less     After 1 Year
through 5 Years
     After 5 Years
through 10 Years
     After 10
Years
     Total  

Securities Available for Sale

               

U.S. Treasury and government agencies

   $ 513      $ 804       $ 3,976       $ 638       $ 5,931   

Residential mortgage-backed

               

Agency

       123         760         19,746         20,629   

Non-agency

       5         1         4,351         4,357   

Commercial mortgage-backed

               

Agency

     83        136         48         1,713         1,980   

Non-agency

       85            4,283         4,368   

Asset-backed

     5        1,150         2,104         2,118         5,377   

State and municipal

     9        129         316         1,556         2,010   

Other debt

     140        1,174         327         181         1,822   

Total debt securities available for sale

   $ 750      $ 3,606       $ 7,532       $ 34,586       $ 46,474   

Fair value

   $ 757      $ 3,682       $ 7,628       $ 35,185       $ 47,252   

Weighted-average yield, GAAP basis

     2.96     2.46      2.33      2.98      2.83

Securities Held to Maturity

               

U.S. Treasury and government agencies

           $ 253       $ 253   

Residential mortgage-backed

               

Agency

        $ 215         7,984         8,199   

Non-agency

             252         252   

Commercial mortgage-backed

               

Agency

     $ 940         144         58         1,142   

Non-agency

       6            806         812   

Asset-backed

       9         592         135         736   

State and municipal

       56         825         1,101         1,982   

Other debt

                      307                  307   

Total debt securities held to maturity

           $ 1,011       $ 2,083       $ 10,589       $ 13,683   

Fair value

     $ 1,050       $ 2,134       $ 10,744       $ 13,928   

Weighted-average yield, GAAP basis

             3.49      3.04      3.56      3.48

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    89


Weighted-average yields are based on historical cost with effective yields weighted for the contractual maturity of each security. At June 30, 2015, there were no securities of a single issuer, other than FNMA, that exceeded 10% of Total shareholders’ equity.

The following table presents the fair value of securities that have been either pledged to or accepted from others to collateralize outstanding borrowings.

Table 73: Fair Value of Securities Pledged and Accepted as Collateral

 

In millions   June 30
2015
    December 31
2014
 

Pledged to others

  $ 10,051      $ 10,874   

Accepted from others:

     

Permitted by contract or custom to sell or repledge

    1,569        1,658   

Permitted amount repledged to others

    1,399        1,488   

The securities pledged to others include positions held in our portfolio of investment securities, trading securities, and securities accepted as collateral from others that we are permitted by contract or custom to sell or repledge, and were used to secure public and trust deposits, repurchase agreements, and for other purposes.

NOTE 7 FAIR VALUE

Fair Value Measurement

PNC measures certain financial assets and liabilities at fair value in accordance with GAAP. Fair value is defined in GAAP as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date. GAAP focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also establishes a fair value hierarchy to maximize the use of observable inputs when measuring fair value. For more information regarding the fair value hierarchy see Note 7 Fair Value in our 2014 Form 10-K.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

For more information on the valuation methodologies used to measure assets and liabilities at fair value on a recurring basis, see Note 7 Fair Value in our 2014 Form 10-K. The following table summarizes our assets and liabilities measured at fair value on a recurring basis, including instruments for which PNC has elected the fair value option.

 

 

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


Table 74: Fair Value Measurements – Recurring Basis Summary

 

     June 30, 2015      December 31, 2014  
In millions    Level 1      Level 2      Level 3      Total
Fair Value
     Level 1      Level 2      Level 3      Total
Fair Value
 

Assets

                           

Securities available for sale

                           

U.S. Treasury and government agencies

   $ 5,476       $ 619          $ 6,095       $ 4,795       $ 627          $ 5,422   

Residential mortgage-backed

                           

Agency

        20,842            20,842            18,043            18,043   

Non-agency

        128       $ 4,424         4,552            144       $ 4,798         4,942   

Commercial mortgage-backed

                           

Agency

        1,994            1,994            2,187            2,187   

Non-agency

        4,422            4,422            4,162            4,162   

Asset-backed

        4,904         531         5,435            4,624         563         5,187   

State and municipal

        2,042         16         2,058            1,904         134         2,038   

Other debt

              1,821         33         1,854                  1,783         30         1,813   

Total debt securities

     5,476         36,772         5,004         47,252         4,795         33,474         5,525         43,794   

Corporate stocks and other

     365         62                  427         426         15                  441   

Total securities available for sale

     5,841         36,834         5,004         47,679         5,221         33,489         5,525         44,235   

Financial derivatives (a) (b)

                           

Interest rate contracts

     5         4,560         34         4,599         4         4,874         40         4,918   

Other contracts

              250         2         252                  314         2         316   

Total financial derivatives

     5         4,810         36         4,851         4         5,188         42         5,234   

Residential mortgage loans held for sale (c)

        1,354         10         1,364            1,255         6         1,261   

Trading securities (d)

                           

Debt (e)

     1,048         1,272         3         2,323         1,340         960         32         2,332   

Equity

     11                           11         21                           21   

Total trading securities

     1,059         1,272         3         2,334         1,361         960         32         2,353   

Trading loans (a)

        48            48            30         7         37   

Residential mortgage servicing rights (f)

           1,015         1,015               845         845   

Commercial mortgage servicing rights (f)

           543         543               506         506   

Commercial mortgage loans held for sale (c)

           757         757               893         893   

Equity investments (a)

                           

Direct investments

           1,191         1,191               1,152         1,152   

Indirect investments (g)

                       425         425                           469         469   

Total equity investments

                       1,616         1,616                           1,621         1,621   

Customer resale agreements (h)

        150            150            155            155   

Loans (i)

        576         365         941            637         397         1,034   

Other assets (a)

                           

BlackRock Series C Preferred Stock (j)

           363         363               375         375   

Other

     248         186         7         441         190         226         8         424   

Total other assets

     248         186         370         804         190         226         383         799   

Total assets

   $ 7,153       $ 45,230       $ 9,719       $ 62,102       $ 6,776       $ 41,940       $ 10,257       $ 58,973   

Liabilities

                           

Financial derivatives (b) (k)

                           

Interest rate contracts

   $ 3       $ 3,101       $ 8       $ 3,112          $ 3,260       $ 12       $ 3,272   

BlackRock LTIP

           363         363               375         375   

Other contracts

              225         127         352                  241         139         380   

Total financial derivatives

     3         3,326         498         3,827                  3,501         526         4,027   

Trading securities sold short (l)

                           

Debt

     1,410         19                  1,429       $ 1,479         11                  1,490   

Total trading securities sold short

     1,410         19                  1,429         1,479         11                  1,490   

Other borrowed funds (l)

        59         165         224            92         181         273   

Other liabilities (k)

              3         10         13                           9         9   

Total liabilities

   $ 1,413       $ 3,407       $ 673       $ 5,493       $ 1,479       $ 3,604       $ 716       $ 5,799   

(continued on following page)

 

The PNC Financial Services Group, Inc. – Form 10-Q    91


(continued from previous page)

 

(a) Included in Other assets on our Consolidated Balance Sheet.
(b) Amounts at June 30, 2015 and December 31, 2014 are presented gross and are not reduced by the impact of legally enforceable master netting agreements that allow PNC to net positive and negative positions and cash collateral held or placed with the same counterparty. At both June 30, 2015 and December 31, 2014, the net asset amounts were $2.6 billion and the net liability amounts were $1.4 billion.
(c) Included in Loans held for sale on our Consolidated Balance Sheet. PNC has elected the fair value option for certain residential and commercial mortgage loans held for sale.
(d) Fair value includes net unrealized gains of $18 million at June 30, 2015 compared with net unrealized gains of $54 million at December 31, 2014.
(e) Approximately 37% of these securities are residential mortgage-backed securities and 45% are U.S. Treasury and government agencies securities at June 30, 2015. Comparable amounts at December 31, 2014 were 34% and 57%, respectively.
(f) Included in Other intangible assets on our Consolidated Balance Sheet.
(g) The indirect equity funds are not redeemable, but PNC receives distributions over the life of the partnership from liquidation of the underlying investments by the investee, which we expect to occur over the next twelve years. The amount of unfunded contractual commitments as of June 30, 2015 related to indirect equity investments was $118 million and related to direct equity investments was $26 million, respectively. Comparable amounts at December 31, 2014 were $112 million and $28 million, respectively.
(h) Included in Federal funds sold and resale agreements on our Consolidated Balance Sheet. PNC has elected the fair value option for these items.
(i) Included in Loans on our Consolidated Balance Sheet.
(j) PNC has elected the fair value option for these shares.
(k) Included in Other liabilities on our Consolidated Balance Sheet.
(l) Included in Other borrowed funds on our Consolidated Balance Sheet.

Reconciliations of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the three and six months ended June 30, 2015 and 2014 follow:

Table 75: Reconciliation of Level 3 Assets and Liabilities

Three Months Ended June 30, 2015

 

           Total realized / unrealized
gains or losses for the period (a)
                                                    

Unrealized
gains

(losses)

on assets

and
liabilities

held on

Consolidated
Balance

Sheet

at June 30,

2015 (c)

 

Level 3 Instruments Only

In millions

 

Fair

Value

March 31,

2015

   

Included

in

Earnings

   

Included in

Other

comprehensive

income

    Purchases     Sales     Issuances     Settlements    

Transfers

into

Level 3

(b)

   

Transfers

out of

Level 3

(b)

   

Fair

Value

June

30,

2015

   

Assets

                         

Securities available for sale

                         

Residential mortgage-backed non-agency

  $ 4,624      $ 30      $ (8         $ (222       $ 4,424       

Commercial mortgage-backed non-agency

      1                (1            

Asset-backed

    548        5        5              (27         531       

State and municipal

    133                  (117         16       

Other debt

    33                                                                        33           

Total securities available for sale

    5,338        36        (3                             (367                     5,004           

Financial derivatives

    54        16                (34         36      $ 33   

Residential mortgage loans held for sale

    7          $ 11      $ (2       (1   $ 1      $ (6     10       

Trading securities – Debt

    3                        3       

Trading loans

    2              (2                

Residential mortgage servicing rights

    839        135          67        $ 21        (47         1,015        134   

Commercial mortgage servicing rights

    494        34          17          20        (22         543        34   

Commercial mortgage loans held for sale

    975        23            (56     1,008        (1,193         757       

Equity investments

                         

Direct investments

    1,149        27          95        (80             1,191        22   

Indirect investments

    442        21                5        (43                                     425        20   

Total equity investments

    1,591        48                100        (123                                     1,616        42   

Loans

    383        5          23        (4       (35     6        (13     365        1   

Other assets

                         

BlackRock Series C Preferred Stock

    384        (21                   363        (21

Other

    8                                                (1                     7           

Total other assets

    392        (21                                     (1                     370        (21

Total assets

  $ 10,078      $ 276  (e)    $ (3   $ 218      $ (187   $ 1,049      $ (1,700   $ 7      $ (19   $ 9,719      $ 223  (f) 

Liabilities

                         

Financial derivatives (d)

  $ 529      $ (15       $ 1        $ (17       $ 498      $ (25

Other borrowed funds

    171        3            $ 21        (30         165       

Other liabilities

    10                                                                        10           

Total liabilities

  $ 710      $ (12)  (e)                    $ 1      $ 21      $ (47                   $ 673      $ (25)  (f) 

 

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


Three Months Ended June 30, 2014

 

          

 

 

Total realized /

unrealized gains or losses
for the period (a)

                                                    

Unrealized
gains
(losses)

on assets and
liabilities

held on
Consolidated
Balance
Sheet at
June 30,

2014 (c)

 

Level 3 Instruments Only

In millions

  Fair
Value
March 31,
2014
   

Included

in

Earnings

    Included
in Other
comprehensive
income
    Purchases     Sales     Issuances     Settlements    

Transfers
into
Level 3

(b)

   

Transfers
out of
Level 3

(b)

    Fair
Value
June 30,
2014
   

Assets

                                                                                       

Securities available for sale

                         

Residential mortgage-backed non-agency

  $ 5,234      $ 40      $ 31            $ (198       $ 5,107      $ (1

Asset-backed

    642        4                (27         619       

State and municipal

    331          13              1            345       

Other debt

    32                      $ 1      $ (1             (1                     31           

Total securities available for sale

    6,239        44        44        1        (1             (225                     6,102        (1

Financial derivatives

    30        59          1            (49         41        47   

Residential mortgage loans held for sale

    5        1          3        (1       (1   $ 1      $ (4     4        1   

Trading securities – Debt

    32        1                      33        2   

Residential mortgage servicing rights

    1,039        (57         $ 20        (35         967        (57

Commercial mortgage servicing rights

    529        (11       9          10        (22)            515        (11

Commercial mortgage loans held for sale

    577        5                (61         521        5   

Equity investments

                         

Direct investments

    1,163        38          99        (81             1,219        30   

Indirect investments

    594        15                6        (39             (2                     574        14   

Total equity investments

    1,757        53                105        (120             (2                     1,793        44   

Loans (g)

    518        10          25        (132       (26     3        (25     373        8   

Other assets

                         

BlackRock Series C

                         

Preferred Stock

    330        5                      335        5   

Other

    8                                                                        8           

Total other assets

    338        5                                                                343        5   

Total assets

  $ 11,064      $ 110  (e)    $ 44      $ 144      $ (254   $ 30      $ (421   $ 4      $ (29   $ 10,692      $ 43  (f) 

Liabilities

                         

Financial derivatives (d)

  $ 440      $ 30              $ (16       $ 454      $ 16   

Other borrowed funds (g)

    193        (7                           $ 10        (13                     183           

Total liabilities

  $ 633      $ 23  (e)                            $ 10      $ (29                   $ 637      $ 16  (f) 

(continued on following page)

 

The PNC Financial Services Group, Inc. – Form 10-Q    93


(continued from previous page)

Six Months Ended June 30, 2015

 

           Total realized / unrealized
gains or losses for the period (a)
                                                    

Unrealized

gains

(losses)

on assets

and

liabilities

held on

Consolidated

Balance

Sheet

at June 30,

2015 (c)

 

Level 3 Instruments Only

In millions

 

Fair

Value

Dec.
31,

2014

   

Included

in

Earnings

   

Included in

Other

comprehensive

income

    Purchases     Sales     Issuances     Settlements    

Transfers
into
Level 3

(b)

   

Transfers
out of
Level 3

(b)

   

Fair

Value
June
30,
2015

   

Assets

                         

Securities available for sale

                         

Residential mortgage-backed non-agency

  $ 4,798      $ 55      $ (22         $ (407       $ 4,424      $ (1

Commercial mortgage backed non-agency

      8                (8            

Asset-backed

    563        11        9              (52         531       

State and municipal

    134          (1           (117         16       

Other debt

    30        1              $ 3                        (1                     33           

Total securities available for sale

    5,525        75        (14     3                        (585                     5,004        (1

Financial derivatives

    42        87          1            (94         36        76   

Residential mortgage loans held for sale

    6            17      $ (2       (1   $ 2      $ (12     10       

Trading securities – Debt

    32                  (29         3       

Trading loans

    7              (7                

Residential mortgage servicing rights

    845        68          150        $ 38        (86         1,015        72   

Commercial mortgage servicing rights

    506        18          28          34        (43         543        18   

Commercial mortgage loans held for sale

    893        44            (56     2,091        (2,215         757        2   

Equity investments

                         

Direct investments

    1,152        56          138        (155             1,191        40   

Indirect investments

    469        35                8        (87                                     425        33   

Total equity investments

    1,621        91                146        (242                                     1,616        73   

Loans

    397        15          55        (8       (72     11        (33     365        9   

Other assets

                         

BlackRock Series C Preferred Stock

    375        (12                   363        (12

Other

    8                                                (1                     7           

Total other assets

    383        (12                                     (1                     370        (12

Total assets

  $ 10,257      $ 386 (e)    $ (14   $ 400      $ (315   $ 2,163      $ (3,126   $ 13      $ (45   $ 9,719      $ 237 (f) 

Liabilities

                         

Financial derivatives (d)

  $ 526      $ 26          $ 1        $ (55       $ 498      $ (17

Other borrowed funds

    181        3            $ 46        (65         165       

Other liabilities

    9        1                                                                10           

Total liabilities

  $ 716      $ 30 (e)                    $ 1      $ 46      $ (120                   $ 673      $ (17) (f) 

 

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


Six Months Ended June 30, 2014

 

           Total realized / unrealized
gains or  losses for the period (a)
                                                    

Unrealized

gains

(losses)

on assets

and

liabilities

held on

Consolidated
Balance

Sheet
at June 30,

2014 (c)

 

Level 3 Instruments Only

In millions

 

Fair

Value
Dec. 31,
2013

   

Included

in Earnings

    Included in
Other
comprehensive
income
    Purchases     Sales     Issuances     Settlements    

Transfers
into
Level 3

(b)

   

Transfers
out of
Level 3

(b)

   

Fair

Value
June
30,
2014

   

Assets

                                                                                       

Securities available for sale

                         

Residential mortgage-backed non-agency

  $ 5,358      $ 74      $ 85            $ (410       $ 5,107      $ (3

Asset-backed

    641        8        19              (49         619       

State and municipal

    333        (2     14                    345       

Other debt

    38        1              $ 1      $ (7             (2                     31           

Total securities available for sale

    6,370        81        118        1        (7             (461                     6,102        (3

Financial derivatives

    36        119          1            (115         41        80   

Residential mortgage loans held for sale

    8        1          8        (3       (1   $ 4      $ (13     4        1   

Trading securities – Debt

    32        1                      33        2   

Residential mortgage servicing rights

    1,087        (116       17        $ 43        (64         967        (114

Commercial mortgage servicing rights

      (25       16          17        507(h)            515        (25

Commercial mortgage loans held for sale

    586        7                (72         521        7   

Equity investments

                         

Direct investments

    1,069        72          168        (90             1,219        63   

Indirect investments

    595        33                12        (65             (1                     574        31   

Total equity investments

    1,664        105                180        (155             (1                     1,793        94   

Loans (g)

    527        19          24        (138       (47     42        (54     373        14   

Other assets

                         

BlackRock Series C

                         

Preferred Stock

    332        3                      335        3   

Other

    8                                                                        8           

Total other assets

    340        3                                                                343        3   

Total assets

  $ 10,650      $ 195  (e)    $ 118      $ 247      $ (303   $ 60      $ (254   $ 46      $ (67   $ 10,692      $ 59 (f) 

Liabilities

                         

Financial derivatives (d)

  $ 439      $ 70          $ 1        $ (56       $ 454      $ 22   

Other borrowed funds (g)

    199        (3                           $ 19        (32                     183           

Total liabilities

  $ 638      $ 67  (e)                    $ 1      $ 19      $ (88                   $ 637      $ 22 (f) 
(a) Losses for assets are bracketed while losses for liabilities are not.
(b) PNC’s policy is to recognize transfers in and transfers out as of the end of the reporting period.
(c) The amount of the total gains or losses for the period included in earnings that is attributable to the change in unrealized gains or losses related to those assets and liabilities held at the end of the reporting period.
(d) Includes swaps entered into in connection with sales of certain Visa Class B common shares.
(e) Net gains (realized and unrealized) included in earnings relating to Level 3 assets and liabilities were $288 million for the second quarter of 2015, while for the first six months of 2015 there were $356 million of net gains (realized and unrealized) included in earnings. The comparative amounts included net gains (realized and unrealized) of $87 million for the second quarter of 2014 and net gains (realized and unrealized) of $128 million for the first six months of 2014. These amounts also included amortization and accretion of $37 million for the second quarter of 2015 and $77 million for the first six months of 2015. The comparative amounts were $44 million for the second quarter of 2014 and $85 million for the first six months of 2014. The amortization and accretion amounts were included in Interest income on the Consolidated Income Statement and the remaining net gains/(losses) (realized and unrealized) were included in Noninterest income on the Consolidated Income Statement.
(f) Net unrealized gains relating to those assets and liabilities held at the end of the reporting period were $248 million for the second quarter of 2015, while for the first six months of 2015 there were $254 million of net unrealized gains. The comparative amounts included net unrealized gains of $27 million for the second quarter of 2014 and net unrealized gains of $37 million for the first six months of 2014. These amounts were included in Noninterest income on the Consolidated Income Statement.
(g) These line items were corrected for the three and six months ended June 30, 2014 to include transferred loans over which PNC regained effective control and the related liabilities that are recorded pursuant to ASC 860.
(h) Settlements relating to commercial MSRs include $552 million, which represents the fair value as of January 1, 2014 as a result of an irrevocable election to measure all classes of commercial MSRs at fair value. Refer to Note 8 Goodwill and Other Intangible Assets in our 2014 Form 10-K for additional information on this election.

An instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification (transfer) of assets or liabilities between hierarchy levels. PNC’s policy is to recognize transfers in and transfers out as of the end of the reporting period. There were no significant transfers into or out of Level 3 assets and liabilities during the first six months of 2015 and 2014.

 

The PNC Financial Services Group, Inc. – Form 10-Q    95


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

Table 76: Fair Value Measurements – Recurring Quantitative Information

June 30, 2015

 

Level 3 Instruments Only

Dollars in millions

  Fair Value     Valuation Techniques   Unobservable Inputs   Range (Weighted Average)  

Residential mortgage-backed non-agency
securities

 

 

$

 

4,424

 

  

 

 

Priced by a third-party vendor using a discounted cash flow pricing model (a)

 

 

Constant prepayment rate (CPR)

Constant default rate (CDR)

Loss severity

 

 

1.0% - 24.2% (6.9%)

0.0% - 16.7% (5.4%)

10.0% - 98.5% (53.1%)

 

 

 
 
 

 

(a)
(a)
(a)

 

  
  
  

      Spread over the benchmark curve (b)   242bps weighted average     (a)   

Asset-backed securities

    531      Priced by a third-party vendor   Constant prepayment rate (CPR)   1.0% - 15.7% (6.4%)     (a)   
    using a discounted cash flow   Constant default rate (CDR)   1.7% - 13.9% (6.9%)     (a)   
    pricing model (a)   Loss severity   15.0% - 100% (76.4%)     (a)   
      Spread over the benchmark curve (b)   308bps weighted average     (a)   

Other debt securities

    33      Consensus pricing (c)   Credit and Liquidity discount   7.0% - 100.0% (88.4%)    

Residential mortgage servicing rights

    1,015      Discounted cash flow   Constant prepayment rate (CPR)   0.3% - 38.4% (9.7%)    
      Spread over the benchmark curve (b)   558bps - 1,861bps (966bps)    

Commercial mortgage servicing rights

    543      Discounted cash flow   Constant prepayment rate (CPR) Discount rate  

4.8% - 13.8% (5.9%)

3.5% - 9.1% (7.6%)

   

Commercial mortgage loans held for sale

    757      Discounted cash flow   Spread over the benchmark curve (b) Estimated servicing cash flows  

32bps - 3,115bps (455bps)

0.0% - 5.2% (2.5%)

   

Equity investments – Direct investments

    1,191      Multiple of adjusted earnings   Multiple of earnings   4.2x - 14.0x (7.7x)    

Equity investments – Indirect (d)

    425      Net asset value   Net asset value      

Loans – Residential real estate

    123      Consensus pricing (c)   Cumulative default rate   2.0% - 100% (86.6%)    
      Loss severity   0.0% - 100% (30.2%)    
      Discount rate   4.9% - 7.0% (5.1%)    
    123      Discounted cash flow   Loss severity   8.0% weighted average    
      Discount rate   3.5% weighted average    

Loans – Home equity

    119      Consensus pricing (c)   Credit and Liquidity discount   26.0% - 99.0% (52.0%)    

BlackRock Series C Preferred Stock

    363      Consensus pricing (c)   Liquidity discount   20.0%    

BlackRock LTIP

    (363   Consensus pricing (c)   Liquidity discount   20.0%    

Swaps related to sales of certain Visa Class B common shares

 

 

 

 

(122

 

 

 

Discounted cash flow

 

 

Estimated conversion factor of

Class B shares into Class A shares

  164.3%     (e)   
      Estimated growth rate of Visa      
      Class A share price   17.3%    

Other borrowed funds – non-agency securitization

    (154   Consensus pricing (c)   Credit and Liquidity discount   0% - 99.0% (18.0%)    
      Spread over the benchmark curve (b)   112bps    

Insignificant Level 3 assets, net of liabilities (f)

    38             
 

 

 

           
Total Level 3 assets, net of liabilities (g)   $ 9,046                       

 

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


December 31, 2014

 

Level 3 Instruments Only

Dollars in millions

  Fair Value     Valuation Techniques    Unobservable Inputs   Range (Weighted Average)  

Residential mortgage-backed non-
agency securities

 

 

$

 

4,798

 

  

 

 

Priced by a third-party vendor using a discounted cash flow pricing model (a)

  

 

Constant prepayment rate (CPR)

Constant default rate (CDR)

Loss severity

Spread over the benchmark curve (b)

 

 

1.0% - 28.9% (6.8%)

0.0% - 16.7% (5.6%)

6.1% - 100.0% (53.1%)

249bps weighted average

  

 

 

 

 

 

 

(a

(a

(a

(a

 

Asset-backed securities

    563      Priced by a third-party vendor using a discounted cash flow pricing model (a)   

Constant prepayment rate (CPR)

Constant default rate (CDR)

Loss severity

Spread over the benchmark curve (b)

  1.0% - 15.7% (5.9%)

1.7% - 13.9% (7.6%)

14.6% - 100.0% (73.5%)

352bps weighted average

    

 

 

 

(a

(a

(a

(a


State and municipal securities

   

 

132

2

  

  

  Discounted cash flow Consensus pricing (c)   

Spread over the benchmark curve (b)

Credit and Liquidity discount

  55bps - 165bps (67bps)

0.0% - 20.0% (14.9%)

    

Other debt securities

    30      Consensus pricing (c)    Credit and Liquidity discount   7.0% - 95.0% (88.6%)     

Trading securities – Debt

    32      Consensus pricing (c)    Credit and Liquidity discount   0.0% - 15.0% (8.0%)     

Residential mortgage servicing rights

    845      Discounted cash flow   

Constant prepayment rate (CPR)

Spread over the benchmark curve (b)

  3.8% - 32.7% (11.2%)

889bps - 1,888bps (1,036bps)

    

Commercial mortgage servicing rights

    506      Discounted cash flow   

Constant prepayment rate (CPR)

Discount rate

  7.0% - 16.8% (8.0%)

2.5% - 8.6% (6.6%)

    

Commercial mortgage loans held for
sale

 

 

 

 

893

 

  

 

 

Discounted cash flow

  

 

Spread over the benchmark curve (b)

Estimated servicing cash flows

 

 

37bps - 4,025bps (549bps)

0.0% - 2.0% (1.2%)

    

Equity investments – Direct
investments

    1,152      Multiple of adjusted earnings    Multiple of earnings   3.2x - 13.9x (7.7x)     

Equity investments – Indirect (d)

    469      Net asset value    Net asset value       

Loans – Residential real estate

   

 

 

114

 

154

  

 

  

 

Consensus pricing (c)

 

Discounted cash flow

  

Cumulative default rate

Loss severity

Discount rate

Loss severity

Discount rate

  2.0% - 100.0% (90.5%)

0.0% - 100.0% (35.6%)

5.4% - 7.0% (6.4%)
8.0% weighted average
3.4% weighted average

    

Loans – Home equity

    129      Consensus pricing (c)    Credit and Liquidity discount   26.0% - 99.0% (51.0%)     

BlackRock Series C Preferred Stock

    375      Consensus pricing (c)    Liquidity discount   20.0%     

BlackRock LTIP

    (375   Consensus pricing (c)    Liquidity discount   20.0%     

Swaps related to sales of certain
Visa Class B common shares

 

 

 

 

(135

 

 

 

Discounted cash flow

  

 

Estimated conversion factor of

Class B shares into Class A shares

Estimated growth rate of Visa

Class A share price

  41.1%

 

14.8%

    

Other borrowed funds – non-agency securitization

 

 

 

 

(166

 

 

 

Consensus pricing (c)

  

 

Credit and Liquidity discount

Spread over the benchmark curve (b)

 

 

0.0% - 99.0% (18.0%)
113bps

    

Insignificant Level 3 assets, net of
liabilities (f)

    23               
 

 

 

             

Total Level 3 assets, net of liabilities (g)

  $ 9,541                         
(a) Level 3 residential mortgage-backed non-agency and asset-backed securities with fair values as of June 30, 2015 totaling $3,749 million and $500 million, respectively, were priced by a third-party vendor using a discounted cash flow pricing model that incorporates consensus pricing, where available. The comparable amounts as of December 31, 2014 were $4,081 million and $532 million, respectively. The significant unobservable inputs for these securities were provided by the third-party vendor and are disclosed in the table. Our procedures to validate the prices provided by the third-party vendor related to these securities are discussed further in the Fair Value Measurement section of Note 7 Fair Value in our 2014 Form 10-K. Certain Level 3 residential mortgage-backed non-agency and asset-backed securities with fair values as of June 30, 2015 of $675 million and $31 million, respectively, were valued using a pricing source, such as a dealer quote or comparable security price, for which the significant unobservable inputs used to determine the price were not reasonably available. The comparable amounts as of December 31, 2014 were $717 million and $31 million, respectively.
(b) The assumed yield spread over the benchmark curve for each instrument is generally intended to incorporate non-interest-rate risks, such as credit and liquidity risks.
(c) Consensus pricing refers to fair value estimates that are generally internally developed using information such as dealer quotes or other third-party provided valuations or comparable asset prices.
(d) The range on these indirect equity investments has not been disclosed since these investments are recorded at their net asset redemption values.
(e) This conversion factor reflects the 4-for-1 split of Visa Class A common shares, which occurred during the first quarter of 2015.
(f) Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes certain financial derivative assets and liabilities, trading securities (for the 2015 period), state and municipal securities (for the 2015 period), residential mortgage loans held for sale, trading loans, other assets, other borrowed funds (ROAPs) and other liabilities. For additional information, please see the Fair Value Measurement discussion included in Note 7 Fair Value in our 2014 Form 10-K.
(g) Consisted of total Level 3 assets of $9,719 million and total Level 3 liabilities of $673 million as of June 30, 2015 and $10,257 million and $716 million as of December 31, 2014, respectively.

Financial Assets Accounted for at Fair Value on a Nonrecurring Basis

We may be required to measure certain financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment and are included in Table 77 and Table 78. For more information regarding the valuation methodologies of our financial assets measured at fair value on a nonrecurring basis, see Note 7 Fair Value in our 2014 Form 10-K.

 

The PNC Financial Services Group, Inc. – Form 10-Q    97


Table 77: Fair Value Measurements – Nonrecurring

 

     Fair Value (a)     

Gains (Losses)

Three months ended

    

Gains (Losses)

Six months ended

 
In millions    June 30
2015
     December 31
2014
     June 30
2015
    June 30
2014
     June 30
2015
    June 30
2014
 

Assets

                 

Nonaccrual loans

   $ 33       $ 54       $ (15   $ (11    $ (15   $ (15

Loans held for sale

        8           (1        (1

Equity investments

        17           (3        (3

OREO and foreclosed assets

     110         168         (12     (7      (18     (15

Long-lived assets held for sale

     19         22         (5     (6      (13     (9

Total assets

   $ 162       $ 269       $ (32   $ (28    $ (46   $ (43
(a) All Level 3 as of June 30, 2015 and December 31, 2014, except for $8 million included in Loans held for sale which was categorized as Level 2 as of December 31, 2014.

Quantitative information about the significant unobservable inputs within Level 3 nonrecurring assets follows.

Table 78: Fair Value Measurements – Nonrecurring Quantitative Information

 

Level 3 Instruments Only

Dollars in millions

   Fair Value      Valuation Techniques   Unobservable Inputs    Range (Weighted  Average)

June 30, 2015

            

Assets

            

Nonaccrual loans (a)

   $ 19       LGD percentage (b)   Loss severity    10.9%-99.2% (44.1%)

Other (c)

     143       Fair value of property or collateral   Appraised value/sales price    Not meaningful
  

 

 

           

Total assets

   $ 162                 

December 31, 2014

            

Assets

            

Nonaccrual loans (a)

   $ 29       LGD percentage (b)   Loss severity    2.9%-68.5% (42.1%)

Equity investments

     17       Discounted cash flow   Market rate of return    6.0%

Other (c)

     215       Fair value of property or collateral   Appraised value/sales price    Not meaningful
  

 

 

           

Total assets

   $ 261                 
(a) The fair value of nonaccrual loans included in this line item is determined based on internal loss rates. The fair value of nonaccrual loans where the fair value is determined based on the appraised value or sales price is included within Other, below.
(b) LGD percentage represents the amount that PNC expects to lose in the event a borrower defaults on an obligation.
(c) Other included Nonaccrual loans of $14 million, OREO and foreclosed assets of $110 million and Long-lived assets held for sale of $19 million as of June 30, 2015. Comparably, as of December 31, 2014, Other included Nonaccrual loans of $25 million, OREO and foreclosed assets of $168 million and Long-lived assets held for sale of $22 million. The fair value of these assets is determined based on appraised value or sales price, the range of which is not meaningful to disclose.

Financial Instruments Accounted For Under Fair Value Option

We elect the fair value option to account for certain financial instruments. For more information on these financial instruments for which the fair value option election has been made, please refer to Note 7 Fair Value in our 2014 Form 10-K.

The changes in fair value included in Noninterest income for items for which we elected the fair value option follow.

Table 79: Fair Value Option – Changes in Fair Value (a)

 

     Gains (Losses)
Three months ended
    

Gains (Losses)

Six months ended

 
In millions    June 30
2015
    June 30
2014
     June 30
2015
     June 30
2014
 

Assets

              

Customer resale agreements

             $ (1

Trading loans

   $ 1      $ 1       $ 2         1   

Commercial mortgage loans held for sale

     31        5         56         7   

Residential mortgage loans held for sale

     25        64         71         129   

Residential mortgage loans – portfolio

     13        59         29         87   

BlackRock Series C Preferred Stock

     (21     5         (12      3   

Liabilities

              

Other borrowed funds

     (2     7         (2      3   
(a) The impact on earnings of offsetting hedged items or hedging instruments is not reflected in these amounts.

 

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


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

Table 80: Fair Value Option – Fair Value and Principal Balances

 

In millions    Fair Value      Aggregate Unpaid
Principal Balance
     Difference  

June 30, 2015

          

Assets

          

Customer resale agreements

   $ 150       $ 143       $ 7   

Trading loans

     48         48        

Residential mortgage loans held for sale

          

Performing loans

     1,338         1,300         38   

Accruing loans 90 days or more past due

     3         3        

Nonaccrual loans

     23         25         (2

Total

     1,364         1,328         36   

Commercial mortgage loans held for sale (a)

          

Performing loans

     755         768         (13

Nonaccrual loans

     2         3         (1

Total

     757         771         (14

Residential mortgage loans – portfolio

          

Performing loans

     230         289         (59

Accruing loans 90 days or more past due

     468         471         (3

Nonaccrual loans

     243         397         (154

Total

     941         1,157         (216

Liabilities

          

Other borrowed funds

   $ 224       $ 260       $ (36

December 31, 2014

          

Assets

          

Customer resale agreements

   $ 155       $ 148       $ 7   

Trading loans

     37         37        

Residential mortgage loans held for sale

          

Performing loans

     1,236         1,176         60   

Accruing loans 90 days or more past due

     9         9        

Nonaccrual loans

     16         17         (1

Total

     1,261         1,202         59   

Commercial mortgage loans held for sale (a)

          

Performing loans

     873         908         (35

Nonaccrual loans

     20         64         (44

Total

     893         972         (79

Residential mortgage loans – portfolio

          

Performing loans

     194         256         (62

Accruing loans 90 days or more past due

     570         573         (3

Nonaccrual loans

     270         449         (179

Total

     1,034         1,278         (244

Liabilities

          

Other borrowed funds

   $ 273       $ 312       $ (39
(a) There were no accruing loans 90 days or more past due within this category at June 30, 2015 or December 31, 2014.

 

The PNC Financial Services Group, Inc. – Form 10-Q    99


Additional Fair Value Information Related to Other Financial Instruments

The following table presents the carrying amounts and estimated fair values, including the level within the fair value hierarchy, of all other financial instruments that are not measured on the consolidated financial statements at fair value as of June 30, 2015 and December 31, 2014.

Table 81: Additional Fair Value Information Related to Other Financial Instruments

 

     Carrying
Amount
     Fair Value  
In millions       Total      Level 1      Level 2      Level 3  

June 30, 2015

                                            

Assets

                

Cash and due from banks

   $ 4,412       $ 4,412       $ 4,412           

Short-term assets

     36,743         36,743          $ 36,743        

Securities held to maturity

     13,683         13,928         290         13,631       $ 7   

Loans held for sale

     236         236            203         33   

Net loans (excludes leases)

     192,980         194,807               194,807   

Other assets

     1,936         2,531                  1,882         649 (a) 

Total assets

   $ 249,990       $ 252,657       $ 4,702       $ 52,459       $ 195,496   
 

Liabilities

                

Demand, savings and money market deposits

   $ 219,114       $ 219,114          $ 219,114        

Time deposits

     20,590         20,509            20,509        

Borrowed funds

     56,931         57,316            56,020       $ 1,296   

Unfunded loan commitments and letters of credit

     228         228                     228   

Total liabilities

   $ 296,863       $ 297,167                $ 295,643       $ 1,524   

December 31, 2014

                

Assets

                

Cash and due from banks

   $ 4,360       $ 4,360       $ 4,360           

Short-term assets

     34,380         34,380          $ 34,380        

Securities held to maturity

     11,588         11,984         292         11,683       $ 9   

Loans held for sale

     108         108            56         52   

Net loans (excludes leases)

     192,573         194,564               194,564   

Other assets

     1,879         2,544                  1,802         742 (a) 

Total assets

   $ 244,888       $ 247,940       $ 4,652       $ 47,921       $ 195,367   
 

Liabilities

                

Demand, savings and money market deposits

   $ 210,838       $ 210,838          $ 210,838        

Time deposits

     21,396         21,392            21,392        

Borrowed funds

     55,329         56,011            54,574       $ 1,437   

Unfunded loan commitments and letters of credit

     240         240                     240   

Total liabilities

   $ 287,803       $ 288,481                $ 286,804       $ 1,677   
(a) Represents estimated fair value of Visa Class B common shares, which was estimated solely based upon the June 30, 2015 and December 31, 2014 closing price for the Visa Class A common shares, respectively, and the Visa Class B common share conversion rate, which reflects adjustments in respect of all litigation funding by Visa as of that date. The transfer restrictions on the Visa Class B common shares could impact the aforementioned estimate, until they can be converted to Class A common shares. See Note 22 Commitments and Guarantees in our 2014 Form 10-K for additional information.

 

The aggregate fair values in the preceding table represent only a portion of the total market value of PNC’s assets and liabilities as, in accordance with the guidance related to fair values of financial instruments, Table 81 excludes the following:

   

financial instruments recorded at fair value on a recurring basis,

   

real and personal property,

   

lease financing,

   

loan customer relationships,

   

deposit customer intangibles,

   

mortgage servicing rights,

   

retail branch networks,

   

fee-based businesses, such as asset management and brokerage, and

   

trademarks and brand names.

For more information regarding the methods and assumptions used to estimate the fair values of financial instruments included in Table 81, see Note 7 Fair Value in our 2014 Form 10-K.

 

 

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


NOTE 8 GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill by business segment consisted of the following:

Table 82: Goodwill by Business Segment (a)

 

In millions    June 30
2015
     December 31
2014
 
  

 

 

    

 

 

 

Retail Banking

   $ 5,795       $ 5,795   

Corporate & Institutional Banking

     3,244         3,244   

Asset Management Group

     64         64   

Total

   $ 9,103       $ 9,103   
(a) The Residential Mortgage Banking and Non-Strategic Assets Portfolio business segments did not have any goodwill allocated to them as of June 30, 2015 and December 31, 2014.

Mortgage Servicing Rights

We recognize the right to service mortgage loans for others as an intangible asset. MSRs are purchased or originated when loans are sold with servicing retained. MSRs totaled $1.6 billion and $1.4 billion at June 30, 2015 and December 31, 2014, respectively, and consisted of loan servicing contracts for commercial and residential mortgages measured at fair value.

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

See the Sensitivity Analysis section of this Note 8, as well as Note 7 Fair Value for more detail on our fair value measurement of MSRs. Refer to Note 8 Goodwill and Other Intangible Assets in our 2014 Form 10-K for more information on our accounting and measurement of MSRs.

 

 

Changes in the commercial and residential MSRs follow:

Table 83: Mortgage Servicing Rights

 

     Commercial MSRs      Residential MSRs  
In millions    2015     2014      2015     2014  

January 1

   $ 506      $ 552       $ 845      $ 1,087   

Additions:

             

From loans sold with servicing retained

     34        17         38        43   

Purchases

     28        16         150        17   

Changes in fair value due to:

             

Time and payoffs (a)

     (43     (45      (86     (64

Other (b)

     18        (25      68        (116

June 30

   $ 543      $ 515       $ 1,015      $ 967   

Related unpaid principal balance at June 30

   $ 144,416      $ 143,226       $ 115,454      $ 110,933   
(a) Represents decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period.
(b) Represents MSR value changes resulting primarily from market-driven changes in interest rates.

 

Sensitivity Analysis

The fair value of commercial and residential MSRs and significant inputs to the valuation models as of June 30, 2015 are shown in the tables below. The expected and actual rates of mortgage loan prepayments are significant factors driving the fair value. Management uses both internal proprietary models and a third-party model to estimate future commercial mortgage loan prepayments and a third-party model to estimate future residential mortgage loan prepayments. These models have been refined based on current market conditions and management judgment. Future interest rates are another important factor in the valuation of MSRs. Management utilizes market implied forward interest rates to estimate the future direction of mortgage and discount rates. The forward

rates utilized are derived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. Changes in the shape and slope of the forward curve in future periods may result in volatility in the fair value estimate.

A sensitivity analysis of the hypothetical effect on the fair value of MSRs to adverse changes in key assumptions is presented below. These sensitivities do not include the impact of the related hedging activities. Changes in fair value generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    101


independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the interest rate spread), which could either magnify or counteract the sensitivities.

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

Table 84: Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions

 

Dollars in millions    June 30
2015
    December 31
2014
 

Fair value

   $ 543      $ 506   

Weighted-average life (years)

     4.9        4.7   

Weighted-average constant prepayment rate

     5.94     8.03

Decline in fair value from 10% adverse change

   $ 10      $ 10   

Decline in fair value from 20% adverse change

   $ 20      $ 19   

Effective discount rate

     7.62     6.59

Decline in fair value from 10% adverse change

   $ 15      $ 13   

Decline in fair value from 20% adverse change

   $ 29      $ 26   

Table 85: Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions

 

Dollars in millions    June 30
2015
    December 31
2014
 

Fair value

   $ 1,015      $ 845   

Weighted-average life (years)

     6.7        6.1   

Weighted-average constant prepayment rate

     9.69     11.16

Decline in fair value from 10% adverse change

   $ 41      $ 36   

Decline in fair value from 20% adverse change

   $ 78      $ 69   

Weighted-average option adjusted spread

     9.66     10.36

Decline in fair value from 10% adverse change

   $ 37      $ 31   

Decline in fair value from 20% adverse change

   $ 72      $ 61   

Fees from mortgage and other loan servicing, comprised of contractually specified servicing fees, late fees and ancillary fees, follows:

Table 86: Fees from Mortgage and Other Loan Servicing

 

In millions    2015      2014  

Six months ended June 30

   $ 248       $ 256   

Three months ended June 30

   $ 127       $ 127   

We also generate servicing fees from fee-based activities provided to others for which we do not have an associated servicing asset.

Fees from commercial and residential MSRs are reported on our Consolidated Income Statement in the line items Corporate services and Residential mortgage, respectively.

Other Intangible Assets

Other intangible assets consist primarily of core deposit intangibles, customer lists and non-compete agreements. Core deposit intangibles are amortized on an accelerated basis, whereas the remaining other intangible assets are amortized on a straight-line basis. The estimated remaining useful lives of our other intangible assets range from 1 year to 10 years, with a weighted-average remaining useful life of 6 years.

Other intangible assets were as follows at June 30, 2015 and December 31, 2014:

Table 87: Other Intangible Assets

 

In millions    June 30
2015
    December 31
2014
 

Gross carrying amount

   $ 1,499      $ 1,502   

Accumulated amortization

     (1,064     (1,009

Net carrying amount

   $ 435      $ 493   

Amortization expense on existing other intangible assets for the first six months of 2015 and 2014, as well as future amortization expense for the remainder of 2015 and the next five fiscal years, follows:

Table 88: Amortization Expense on Existing Other Intangible Assets

 

In millions        

Six months ended June 30, 2015

   $ 58   

Six months ended June 30, 2014

     65   

Remainder of 2015

     56   

2016

     97   

2017

     83   

2018

     72   

2019

     61   

2020

     37   
 

 

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


NOTE 9 CAPITAL SECURITIES OF A SUBSIDIARY TRUST AND PERPETUAL TRUST SECURITIES

Capital Securities of a Subsidiary Trust

Our capital securities of a subsidiary trust (“Trust”) are described in Note 12 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities in our 2014 Form 10-K. This Trust is a wholly-owned finance subsidiary of PNC. In the event of certain changes or amendments to regulatory requirements or federal tax rules, the capital securities are redeemable in whole. In accordance with GAAP, the financial statements of the Trust are not included in PNC’s consolidated financial statements.

The obligations of the parent of the Trust, when taken collectively, are the equivalent of a full and unconditional guarantee of the obligations of the Trust under the terms of the Capital Securities. Such guarantee is subordinate in right of payment in the same manner as other junior subordinated debt. There are certain restrictions on PNC’s overall ability to obtain funds from its subsidiaries. For additional disclosure on these funding restrictions, including an explanation of dividend and intercompany loan limitations, see Note 20 Regulatory Matters in our 2014 Form 10-K.

PNC is also subject to restrictions on dividends and other provisions potentially imposed under the Exchange Agreement with PNC Preferred Funding Trust II, as described in Note 12 in our 2014 Form 10-K in the Perpetual Trust Securities section, and to other provisions similar to or in some ways more restrictive than those potentially imposed under that agreement.

Perpetual Trust Securities

Our perpetual trust securities are described in Note 12 in our 2014 Form 10-K. Our 2014 Form 10-K also includes additional information regarding the PNC Preferred Funding Trust I and Trust II Securities, including descriptions of replacement capital and dividend restriction covenants.

NOTE 10 CERTAIN EMPLOYEE BENEFIT AND STOCK BASED COMPENSATION PLANS

Pension And Postretirement Plans

As described in Note 13 Employee Benefit Plans in our 2014 Form 10-K, we have a noncontributory, qualified defined benefit pension plan covering eligible employees. Benefits are determined using a cash balance formula where earnings credits are a percentage of eligible compensation. Pension contributions are based on an actuarially determined amount necessary to fund total benefits payable to plan participants.

We also maintain nonqualified supplemental retirement plans for certain employees and provide certain health care and life insurance benefits for qualifying retired employees (postretirement benefits) through various plans. The nonqualified pension and postretirement benefit plans are unfunded. PNC reserves the right to terminate plans or make plan changes at any time.

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    103


The components of our net periodic pension and postretirement benefit cost for the first six months of 2015 and 2014, respectively, were as follows:

Table 89: Net Periodic Pension and Postretirement Benefits Costs

 

Three months ended June 30

In millions

   Qualified Pension Plan      Nonqualified Retirement
Plans
     Postretirement Benefits  
   2015      2014      2015      2014      2015      2014  

Net periodic cost consists of:

                       

Service cost

   $ 26       $ 26       $ 1       $ 1       $ 2       $ 1   

Interest cost

     45         47         3         3         3         4   

Expected return on plan assets

     (74      (72                

Amortization of prior service credit

     (2      (2                

Amortization of actuarial losses

     8                  1         1                     

Net periodic cost/(benefit)

   $ 3       $ (1    $ 5       $ 5       $ 5       $ 5   

 

Six months ended June 30

In millions

   Qualified Pension Plan      Nonqualified Retirement
Plans
     Postretirement Benefits  
   2015      2014      2015      2014      2015      2014  

Net periodic cost consists of:

                       

Service cost

   $ 53       $ 51       $ 1       $ 2       $ 3       $ 2   

Interest cost

     89         94         6         6         7         8   

Expected return on plan assets

     (148      (144                

Amortization of prior service credit

     (4      (4                

Amortization of actuarial losses

     15                  3         2                     

Net periodic cost/(benefit)

   $ 5       $ (3    $ 10       $ 10       $ 10       $ 10   

 

Stock Based Compensation Plans

As more fully described in Note 14 Stock Based Compensation Plans in our 2014 Form 10-K, we have long-term incentive award plans (Incentive Plans) that provide for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, incentive shares/performance units, restricted stock, restricted share units, other share-based awards and dollar-denominated awards to executives and, other than incentive stock options, to non-employee directors. Certain Incentive Plan awards may be paid in stock, cash or a combination of stock and cash. We typically grant a substantial portion of our stock-based compensation awards during the first quarter of the year. As of June 30, 2015, no stock appreciation rights were outstanding.

Total compensation expense recognized related to all share-based payment arrangements during the first six months of 2015 and 2014 was $88 million and $104 million, respectively. At June 30, 2015, there was $252 million of unamortized share-based compensation expense related to nonvested equity compensation arrangements, including liability awards granted under the Incentive Plans. This unamortized cost is expected to be recognized as expense over a period of no longer than five years.

Nonqualified Stock Options

Beginning in 2014, PNC discontinued the use of stock options as a standard element of our long-term equity incentive compensation programs under our Incentive Plans. Additional information regarding PNC stock options is more fully described in Note 14 Stock Based Compensation Plans in our 2014 Form 10-K.

 

 

 

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


The following table represents the stock option activity for the first six months of 2015.

Table 90: Stock Option Rollforward

 

     PNC      PNC Options Converted From
National City Options
     Total  
In thousands, except weighted-average data    Shares      Weighted-Average
Exercise Price
     Shares      Weighted-Average
Exercise Price
     Shares      Weighted-Average
Exercise Price
 

Outstanding at December 31, 2014

     6,701       $ 56.41         343       $ 585.23         7,044       $ 82.17   

Granted (a)

                       

Exercised

     (1,533      59.42                 (1,533      59.42   

Cancelled

     (28      44.42         (14      474.12         (42      187.83   

Outstanding at June 30, 2015

     5,140       $ 55.58         329       $ 590.02         5,469       $ 87.73   

Exercisable at June 30, 2015

     5,092       $ 55.50         329       $ 590.02         5,421       $ 87.94   
(a) PNC did not grant any stock options in the first six months of 2015.

 

During the first six months of 2015, we issued approximately 1.1 million common shares from treasury stock in connection with stock option exercise activity. As with past exercise activity, we currently intend to utilize primarily treasury stock for any future stock option exercises.

Incentive/Performance Unit Share Awards and Restricted Stock/Share Unit Awards

Information on incentive/performance unit share awards and restricted stock/share unit awards is more fully described in Note 14 Stock Based Compensation Plans in our 2014 Form 10-K.

 

 

Table 91: Nonvested Incentive/Performance Unit Share Awards and Restricted Stock/Share Unit Awards – Rollforward

 

Shares in thousands    Nonvested
Incentive/
Performance
Unit Shares
     Weighted-
Average
Grant Date
Fair Value
     Nonvested
Restricted
Stock/Share
Units
     Weighted-
Average
Grant Date
Fair Value
 

December 31, 2014

     1,837       $ 69.84         3,652       $ 69.03   

Granted

     649         90.35         1,019         92.17   

Vested/Released

     (682      66.17         (1,149      61.17   

Forfeited

     (24      70.15         (90      76.96   

June 30, 2015

     1,780       $ 78.72         3,432       $ 78.41   

In the preceding table, the unit shares and related weighted-average grant date fair value of the incentive/performance awards exclude the effect of dividends on the underlying shares, as those dividends will be paid in cash if and when the underlying unit shares are released to the participants.

 

Liability Awards

A summary of all nonvested, cash-payable incentive/performance units and restricted share unit activity follows:

Table 92: Nonvested Cash-Payable Incentive/Performance Units and Restricted Share Units – Rollforward

 

In thousands    Cash-Payable
Incentive/
Performance
Units
     Cash-Payable
Restricted
Share Units
     Total  

Outstanding at December 31, 2014

     177         658         835   

Granted

     81         347         428   

Vested and Released

     (98      (349      (447

Forfeited

     (43      (4      (47

Outstanding at June 30, 2015

     117         652         769   

Included in the preceding table are cash-payable restricted share units granted to certain executives. These grants were made primarily as part of an annual bonus incentive deferral plan. While there are time-based and other vesting criteria, there are generally no market or performance criteria associated with these awards. Prior to the 2015 grant, compensation expense recognized related to these awards was recorded in prior periods as part of the annual cash bonus process. Due to certain requisite service period changes in the award agreements starting with the 2015 grant (for the 2014 performance year), compensation expense is recognized ratably over a four year period commensurate with the performance year plus the three years of service-based vesting requirements. As of June 30, 2015, the aggregate intrinsic value of all outstanding nonvested cash-payable incentive/performance units and restricted share units was approximately $74 million.

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    105


NOTE 11 FINANCIAL DERIVATIVES

We use derivative financial instruments (derivatives) primarily to help manage exposure to interest rate, market and credit risk and reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. We also enter into derivatives with customers to facilitate their risk management activities. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract.

For more information regarding derivatives see Note 1 Accounting Policies and Note 15 Financial Derivatives in our Notes To Consolidated Financial Statements under Item 8 of our 2014 Form 10-K.

The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by PNC:

Table 93: Total Gross Derivatives

 

     June 30, 2015      December 31, 2014  
In millions    Notional/
Contract
Amount
     Asset
Fair
Value (a)
     Liability
Fair
Value (b)
     Notional/
Contract
Amount
     Asset
Fair
Value (a)
     Liability
Fair
Value (b)
 

Derivatives designated as hedging instruments under GAAP

   $ 53,342       $ 1,172       $ 225       $ 49,061       $ 1,261       $ 186   

Derivatives not designated as hedging instruments under GAAP

     318,207         3,679         3,602         291,256         3,973         3,841   

Total gross derivatives

   $ 371,549       $ 4,851       $ 3,827       $ 340,317       $ 5,234       $ 4,027   
(a) Included in Other assets on our Consolidated Balance Sheet.
(b) Included in Other liabilities on our Consolidated Balance Sheet.

All derivatives are carried on our Consolidated Balance Sheet at fair value. Derivative balances are presented on the Consolidated Balance Sheet on a net basis taking into consideration the effects of legally enforceable master netting agreements and any related cash collateral exchanged with counterparties. Further discussion regarding the rights of setoff associated with these legally enforceable master netting agreements is included in the Offsetting, Counterparty Credit Risk, and Contingent Features section below. Our exposure related to risk participations where we sold protection is discussed in the Credit Derivatives section below. Any nonperformance risk, including credit risk, is included in the determination of the estimated net fair value of the derivatives.

Derivatives Designated As Hedging Instruments under GAAP

Certain derivatives used to manage interest rate and foreign exchange risk as part of our asset and liability risk management activities are designated as accounting hedges under GAAP. Derivatives hedging the risks associated with changes in the fair value of assets or liabilities are considered fair value hedges, derivatives hedging the variability of expected future cash flows are considered cash flow hedges, and derivatives hedging a net investment in a foreign subsidiary are considered net investment hedges. Designating derivatives as accounting hedges allows for gains and losses on those derivatives, to the extent effective, to be recognized in the income statement in the same period the hedged items affect earnings.

 

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


Further detail regarding the notional amounts and fair values related to derivatives designated in hedge relationships is presented in the following table:

Table 94: Derivatives Designated As Hedging Instruments under GAAP

 

     June 30, 2015      December 31, 2014  
In millions    Notional/
Contract
Amount
     Asset
Fair
Value (a)
     Liability
Fair
Value (b)
     Notional/
Contract
Amount
     Asset
Fair
Value (a)
     Liability
Fair
Value (b)
 

Interest rate contracts:

                   

Fair value hedges:

                   

Receive-fixed swaps

   $ 23,713       $ 733       $ 59       $ 20,930       $ 827       $ 38   

Pay-fixed swaps (c)

     3,997         9         125         4,233         3         138   

Subtotal

   $ 27,710       $ 742       $ 184       $ 25,163       $ 830       $ 176   

Cash flow hedges:

                   

Receive-fixed swaps

   $ 20,516       $ 427       $ 17       $ 19,991       $ 400       $ 10   

Forward purchase commitments

     3,959         3         19         2,778         25            

Subtotal

   $ 24,475       $ 430       $ 36       $ 22,769       $ 425       $ 10   

Foreign exchange contracts:

                   

Net investment hedges

   $ 1,157                $ 5       $ 1,129       $ 6            

Total derivatives designated as hedging instruments

   $ 53,342       $ 1,172       $ 225       $ 49,061       $ 1,261       $ 186   
(a) Included in Other assets on our Consolidated Balance Sheet.
(b) Included in Other liabilities on our Consolidated Balance Sheet.
(c) Includes zero-coupon swaps.

Fair Value Hedges

We enter into receive-fixed, pay-variable interest rate swaps to hedge changes in the fair value of outstanding fixed-rate debt and borrowings caused by fluctuations in market interest rates. We also enter into pay-fixed, receive-variable interest rate swaps and zero-coupon swaps to hedge changes in the fair value of fixed rate and zero-coupon investment securities caused by fluctuations in market interest rates. For these hedge relationships, we use statistical regression analysis to assess hedge effectiveness at both the inception of the hedge relationship and on an ongoing basis. There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness.

Further detail regarding gains (losses) on fair value hedge derivatives and related hedged items is presented in the following table:

Table 95: Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges

 

            Three months ended     Six months ended  
            June 30, 2015     June 30, 2014     June 30, 2015     June 30, 2014  
In millions   Hedged Items   Location   Gain
(Loss) on
Derivatives
Recognized
in Income
    Gain (Loss)
on Related
Hedged
Items
Recognized
in Income
    Gain
(Loss) on
Derivatives
Recognized
in Income
    Gain (Loss)
on Related
Hedged
Items
Recognized
in Income
    Gain
(Loss) on
Derivatives
Recognized
in Income
    Gain (Loss)
on Related
Hedged
Items
Recognized
in Income
    Gain
(Loss) on
Derivatives
Recognized
in Income
    Gain (Loss)
on Related
Hedged
Items
Recognized
in Income
 
      Amount     Amount     Amount     Amount     Amount     Amount     Amount     Amount  

Interest rate contracts

  U.S. Treasury and
Government
Agencies Securities
  Investment
securities
(interest
income)
  $ 63      $ (65   $ (53   $ 55      $ 12      $ (12   $ (83   $ 86   

Interest rate contracts

  Other Debt
Securities
  Investment
securities
(interest
income)
    1        (1     (2     1            (1     1   

Interest rate contracts

  Subordinated debt   Borrowed
funds
(interest
expense)
    (138     130        51        (60     (84     67        74        (89

Interest rate contracts

  Bank notes and
senior debt
  Borrowed
funds
(interest
expense)
    (126     129        50        (52     (23     20        59        (62

Total (a)

          $ (200   $ 193      $ 46      $ (56   $ (95   $ 75      $ 49      $ (64
(a)

The ineffective portion of the change in value of our fair value hedge derivatives resulted in net losses of $7 million for the three months ended June 30, 2015 and net losses of $20 million for the six months ended June 30, 2015 compared with net losses of $10 million for the three months ended June 30, 2014 and net losses of $15 million for the six months ended June 30, 2014.

 

The PNC Financial Services Group, Inc. – Form 10-Q    107


Cash Flow Hedges

We enter into receive-fixed, pay-variable interest rate swaps to modify the interest rate characteristics of designated commercial loans from variable to fixed in order to reduce the impact of changes in future cash flows due to market interest rate changes. For these cash flow hedges, any changes in the fair value of the derivatives that are effective in offsetting changes in the forecasted interest cash flows are recorded in Accumulated other comprehensive income and are reclassified to interest income in conjunction with the recognition of interest received on the loans. In the 12 months that follow June 30, 2015, we expect to reclassify from the amount currently reported in Accumulated other comprehensive income, net derivative gains of $256 million pretax, or $167 million after-tax, in association with interest received on the hedged loans. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to June 30, 2015. The maximum length of time over which forecasted loan cash flows are hedged is 10 years. We use statistical regression analysis to assess the effectiveness of these hedge relationships at both the inception of the hedge relationship and on an ongoing basis.

We also periodically enter into forward purchase and sale contracts to hedge the variability of the consideration that will be paid or received related to the purchase or sale of investment securities. The forecasted purchase or sale is consummated upon gross settlement of the forward contract itself. As a result, hedge ineffectiveness, if any, is typically minimal. Gains and losses on these forward contracts are recorded in Accumulated other comprehensive income and are recognized in earnings when the hedged cash flows affect earnings. In the 12 months that follow June 30, 2015, we expect to reclassify from the amount currently reported in Accumulated other comprehensive income, net derivative gains of $19 million pretax, or $12 million after-tax, as adjustments of yield on investment securities. As of June 30, 2015, the maximum length of time over which forecasted purchase contracts are hedged is three months.

There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to either cash flow hedge strategy.

During the first six months of 2015 and 2014, there were no gains or losses from cash flow hedge derivatives reclassified to earnings because it became probable that the original forecasted transaction would not occur.

Further detail regarding gains (losses) on derivatives and related cash flows is presented in the following table:

Table 96: Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges (a) (b)

 

     Three months
ended June 30
     Six months ended
June 30
 
In millions    2015      2014      2015      2014  

Gains (losses) on derivatives recognized in OCI – (effective portion)

   $ (102    $ 138       $ 196       $ 210   

Less: Gains (losses) reclassified from accumulated OCI into income – (effective portion)

             

Interest income

     72         64         140         136   

Noninterest income

     (4      (7      (13      (2

Total gains (losses) reclassified from accumulated OCI into income – (effective portion)

     68         57         127         134   

Net unrealized gains (losses) on cash flow hedge derivatives

   $ (170    $ 81       $ 69       $ 76   
(a) All cash flow hedge derivatives are interest rate contracts as of June 30, 2015 and June 30, 2014.
(b) The amount of cash flow hedge ineffectiveness recognized in income was not material for the periods presented.

Net Investment Hedges

We enter into foreign currency forward contracts to hedge non-U.S. Dollar (USD) net investments in foreign subsidiaries against adverse changes in foreign exchange rates. We assess whether the hedging relationship is highly effective in achieving offsetting changes in the value of the hedge and hedged item by qualitatively verifying that the critical terms of the hedge and hedged item match at the inception of the hedging relationship and on an ongoing basis. There were no components of derivative gains or losses excluded from the assessment of the hedge effectiveness.

For the first six months of 2015 and 2014, there was no net investment hedge ineffectiveness.

Further detail on gains (losses) on net investment hedge derivatives is presented in the following table:

Table 97: Gains (Losses) on Derivatives – Net Investment Hedges

 

     Three months ended
June 30
     Six months ended
June 30
 
In millions    2015      2014      2015      2014  

Gains (losses) on derivatives recognized in OCI (effective portion)

             

Foreign exchange contracts

   $ (65    $ (26    $ (11    $ (33
 

 

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


Derivatives Not Designated As Hedging Instruments under GAAP

We also enter into derivatives that are not designated as accounting hedges under GAAP.

For additional information on derivatives not designated as hedging instruments under GAAP see Note 15 Financial Derivatives in our 2014 Form 10-K.

Further detail regarding the notional amounts and fair values related to derivatives not designated in hedge relationships is presented in the following table:

Table 98: Derivatives Not Designated As Hedging Instruments under GAAP

 

     June 30, 2015      December 31, 2014  
In millions    Notional/
Contract
Amount
     Asset
Fair
Value (a)
     Liability
Fair
Value (b)
     Notional/
Contract
Amount
     Asset
Fair
Value (a)
     Liability
Fair
Value (b)
 

Derivatives used for residential mortgage banking activities:

                   

Residential mortgage servicing

                   

Interest rate contracts:

                   

Swaps

   $ 35,043       $ 709       $ 396       $ 32,459       $ 777       $ 394   

Swaptions

     3,176         23         21         1,498         29         22   

Futures (c)

     19,177               22,084           

Futures options

     30,000         6         3         12,225         4        

Mortgage-backed securities commitments

     2,390         4         8         710         4            

Subtotal

     89,786         742         428         68,976         814         416   

Loan sales

                   

Interest rate contracts:

                   

Futures (c)

     40               58           

Bond options

     300         4            300           

Mortgage-backed securities commitments

     8,210         39         21         4,916         10         21   

Residential mortgage loan commitments

     2,437         21                  1,852         22            

Subtotal

     10,987         64         21         7,126         32         21   

Subtotal

   $ 100,773       $ 806       $ 449       $ 76,102       $ 846       $ 437   

Derivatives used for commercial mortgage banking activities:

                   

Interest rate contracts:

                   

Swaps

   $ 3,793       $ 62       $ 49       $ 3,801       $ 67       $ 48   

Swaptions

     439         1         1         439         2         1   

Futures (c)

     20,146               19,913           

Commercial mortgage loan commitments

     1,295         10         6         2,042         16         10   

Subtotal

     25,673         73         56         26,195         85         59   

Credit contracts:

                   

Credit default swaps

     83                           95                     

Subtotal

   $ 25,756       $ 73       $ 56       $ 26,290       $ 85       $ 59   

Derivatives used for customer-related activities:

                   

Interest rate contracts:

                   

Swaps

   $ 149,054       $ 2,455       $ 2,350       $ 146,008       $ 2,632       $ 2,559   

Caps/floors – Sold

     5,142            15         4,846            16   

Caps/floors – Purchased

     6,462         28            6,339         34        

Swaptions

     4,496         59         17         3,361         62         12   

Futures (c)

     2,433               3,112           

Mortgage-backed securities commitments

     3,552         6         5         2,137         3         3   

Subtotal

     171,139         2,548         2,387         165,803         2,731         2,590   

Foreign exchange contracts

     10,895         215         202         12,547         223         240   

Credit contracts:

                   

Risk participation agreements

     5,076         2         5         5,124         2         4   

Subtotal

   $ 187,110       $ 2,765       $ 2,594       $ 183,474       $ 2,956       $ 2,834   

Derivatives used for other risk management activities:

                   

Interest rate contracts

            $ 833       $ 1        

Foreign exchange contracts

   $ 2,519       $ 35       $ 18         2,661         85       $ 1   

Credit contracts:

                   

Credit default swaps

     15               15           

Other contracts (d)

     2,034                  485         1,881                  510   

Subtotal

     4,568         35         503         5,390         86         511   

Total derivatives not designated as hedging instruments

   $ 318,207       $ 3,679       $ 3,602       $ 291,256       $ 3,973       $ 3,841   
(a) Included in Other assets on our Consolidated Balance Sheet.
(b) Included in Other liabilities on our Consolidated Balance Sheet.
(c) Futures contracts settle in cash daily and, therefore, no derivative asset or derivative liability is recognized on our Consolidated Balance Sheet.
(d) Includes PNC’s obligation to fund a portion of certain BlackRock LTIP programs and the swaps entered into in connection with sales of a portion of Visa Class B common shares.

 

The PNC Financial Services Group, Inc. – Form 10-Q    109


Further detail regarding the gains (losses) on derivatives not designated in hedging relationships is presented in the following table:

Table 99: Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP

 

     Three months ended
June 30
     Six months ended
June 30
 
In millions    2015     2014      2015      2014  

Derivatives used for residential mortgage banking activities:

            

Residential mortgage servicing

            

Interest rate contracts

   $ (83   $ 57       $ 15       $ 110   

Loan sales

            

Interest rate contracts

     47        (10      68         (12

Gains (losses) included in residential mortgage banking activities (a)

   $ (36   $ 47       $ 83       $ 98   

Derivatives used for commercial mortgage banking activities:

            

Interest rate contracts (b) (c)

   $ (25   $ 23       $ 5       $ 43   

Credit contracts (c)

     1        (1               (1

Gains (losses) from commercial mortgage banking activities

   $ (24   $ 22       $ 5       $ 42   

Derivatives used for customer-related activities:

            

Interest rate contracts

   $ 30      $ 11       $ 34       $ 10   

Foreign exchange contracts

     32        22         33         48   

Credit contracts

             (1                  

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

   $ 62      $ 32       $ 67       $ 58   

Derivatives used for other risk management activities:

            

Interest rate contracts

   $ 1      $ (11    $ 1       $ (15

Foreign exchange contracts

     (69     (5      114         (7

Other contracts (d)

     14        (19      7         (27

Gains (losses) from other risk management activities (c)

   $ (54   $ (35    $ 122       $ (49

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

   $ (52   $ 66       $ 277       $ 149   
(a) Included in Residential mortgage noninterest income.
(b) Included in Corporate services noninterest income.
(c) Included in Other noninterest income.
(d) Includes BlackRock LTIP funding obligation and the swaps entered into in connection with sales of a portion of Visa Class B common shares.

 

Credit Derivatives

We enter into credit derivatives, specifically credit default swaps and risk participation agreements, as part of our commercial mortgage banking hedging activities and for customer and other risk management purposes. The credit derivative underlying is based on the credit risk of a specific entity, entities, or an index. Detail regarding credit default swaps purchased and risk participations sold follows.

Table 100: Credit Default Swaps (a)

 

    June 30, 2015     December 31, 2014  
Dollars in millions   Notional
Amount
    Weighted-
Average
Remaining
Maturity
In Years
    Notional
Amount
    Weighted-
Average
Remaining
Maturity
In Years
 

Credit Default Swaps – Purchased (b)

         

Single name

  $ 50        5.2      $ 50        5.7   

Index traded

    48        33.7        60        34.2   

Total

  $ 98        19.1      $ 110        21.3   
(a) There were no credit default swaps sold as of June 30, 2015 and December 31, 2014.
(b) The fair value of credit default swaps purchased was less than $1 million as of June 30, 2015 and December 31, 2014.

The notional amount of these credit default swaps by credit rating is presented in the following table:

Table 101: Credit Ratings of Credit Default Swaps (a)

 

In millions    June 30, 2015      December 31, 2014  

Credit Default Swaps – Purchased

       

Investment grade (b)

   $ 83       $ 95   

Subinvestment grade (c)

     15         15   

Total

   $ 98       $ 110   
(a) There were no credit default swaps sold as of June 30, 2015 and December 31, 2014.
(b) Investment grade with a rating of BBB-/Baa3 or above based on published rating agency information.
(c) Subinvestment grade represents a rating below BBB-/Baa3 based on published rating agency information.

The referenced/underlying assets for these credit default swaps are presented in the following table:

Table 102: Referenced/Underlying Assets of Credit Default Swaps

 

      June 30, 2015     December 31, 2014  

Corporate debt

     51     45

Commercial mortgage-backed securities

     49     55
 

 

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


Risk Participation Agreements

We also periodically enter into risk participation agreements to share some of the credit exposure with other counterparties related to interest rate derivative contracts or to take on credit exposure to generate revenue. We will make/receive payments under these agreements if a customer defaults on its obligation to perform under certain derivative swap contracts. Risk participation agreements purchased and sold are included in these derivative tables: Tables 98, 99, and 103.

Further detail regarding the notional amount, fair value and weighted-average remaining maturities in years for risk participation agreements sold is presented in the following table:

Table 103: Risk Participation Agreements Sold

 

     June 30, 2015      December 31, 2014  
Dollars in millions    Notional
Amount
     Fair
Value
     Weighted-
Average
Remaining
Maturity
In Years
     Notional
Amount
     Fair
Value
     Weighted-
Average
Remaining
Maturity
In Years
 

Risk Participation Agreements Sold

   $ 2,669       $ (5      5.0       $ 2,796       $ (4      5.4   

 

Based on our internal risk rating process of the underlying third party customers referenced in the swap contracts, all exposure related to risk participation agreements sold have an internal credit rating of pass, which indicates the expected risk of default is currently low.

We have sold risk participation agreements with terms ranging from less than 1 year to 22 years. We will be required to make payments under these agreements if a customer defaults on its obligation to perform under certain derivative swap contracts with third parties. Assuming all underlying third party customers referenced in the swap contracts defaulted at June 30, 2015, the exposure from these agreements would be $115 million based on the fair value of the underlying swaps, compared with $124 million at December 31, 2014.

Offsetting, Counterparty Credit Risk, and Contingent Features

We, generally, utilize a net presentation on the Consolidated Balance Sheet for those derivative financial instruments entered into with counterparties under legally enforceable master netting agreements. The master netting agreements reduce credit risk by permitting the closeout netting of various types of derivative instruments with the same counterparty upon the occurrence of an event of default.

For additional information on derivative offsetting, counterparty credit risk, and contingent features see Note 15 Financial Derivatives in our 2014 Form 10-K. Refer to Note 16 Commitments and Guarantees in this Report for additional information related to resale and repurchase agreements offsetting.

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    111


The following derivative Table 104 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities as of June 30, 2015 and December 31, 2014. The table also includes the fair value of any securities collateral held or pledged under legally enforceable master netting agreements. Cash and securities collateral amounts are included in the table only to the extent of the related net derivative fair values.

Table 104: Derivative Assets and Liabilities Offsetting

 

    

Gross
Fair Value

Derivative
Assets

     Amounts
Offset on the
Consolidated Balance Sheet
    

Net
Fair Value

Derivative
Assets

   

Securities
Collateral
Held Under

Master Netting
Agreements

     Net
Amounts
 

June 30, 2015

In millions

      Fair Value
Offset Amount
     Cash
Collateral
         

Derivative assets

                  

Interest rate contracts

   $ 4,599       $ 1,806       $ 337       $ 2,456      $ 130       $ 2,326   

Foreign exchange contracts

     250         138         11         101        3         98   

Credit contracts

     2         1         1                             

Total derivative assets (a)

   $ 4,851       $ 1,945       $ 349       $ 2,557  (b)    $ 133       $ 2,424   
    

Gross
Fair Value

Derivative
Liabilities

     Amounts
Offset on the
Consolidated Balance Sheet
     Net
Fair Value
Derivative
Liabilities
   

Securities
Collateral
Pledged Under

Master Netting
Agreements

     Net
Amounts
 

June 30, 2015

In millions

      Fair Value
Offset Amount
     Cash
Collateral
         

Derivative liabilities

                  

Interest rate contracts

   $ 3,112       $ 1,856       $ 470       $ 786         $ 786   

Foreign exchange contracts

     225         85         20         120           120   

Credit contracts

     5         4         1             

Other contracts

     485                           485                 485   

Total derivative liabilities (a)

   $ 3,827       $ 1,945       $ 491       $ 1,391  (c)             $ 1,391   
                  
    

Gross
Fair Value

Derivative
Assets

     Amounts
Offset on the
Consolidated Balance Sheet
     Net
Fair Value
Derivative
Assets
   

Securities
Collateral
Held Under

Master Netting
Agreements

     Net
Amounts
 

December 31, 2014

In millions

      Fair Value
Offset Amount
     Cash
Collateral
         

Derivative assets

                  

Interest rate contracts

   $ 4,918       $ 1,981       $ 458       $ 2,479      $ 143       $ 2,336   

Foreign exchange contracts

     314         159         47         108        1         107   

Credit contracts

     2         1         1                             

Total derivative assets (a)

   $ 5,234       $ 2,141       $ 506       $ 2,587  (b)    $ 144       $ 2,443   
                  
    

Gross
Fair Value

Derivative
Liabilities

     Amounts
Offset on the
Consolidated Balance Sheet
     Net
Fair Value
Derivative
Liabilities
   

Securities
Collateral
Pledged Under

Master Netting
Agreements

     Net
Amounts
 

December 31, 2014

In millions

      Fair Value
Offset Amount
     Cash
Collateral
         

Derivative liabilities

                                                    

Interest rate contracts

   $ 3,272       $ 2,057       $ 483       $ 732         $ 732   

Foreign exchange contracts

     241         80         20         141           141   

Credit contracts

     4         4                

Other contracts

     510                           510                 510   

Total derivative liabilities (a)

   $ 4,027       $ 2,141       $ 503       $ 1,383  (c)             $ 1,383   
(a) Included derivative assets and derivative liabilities as of June 30, 2015 totaling $889 million and $725 million, respectively, related to interest rate contracts executed bilaterally with counterparties in the U.S. over-the-counter market and novated to and cleared through a central clearing house. The comparable amounts as of December 31, 2014 totaled $807 million and $657 million, respectively. Derivative assets and liabilities as of June 30, 2015 and December 31, 2014 related to exchange-traded interest rate contracts were not material. As of June 30, 2015 and December 31, 2014, these contracts were not subject to offsetting. The remaining gross and net derivative assets and liabilities relate to contracts executed bilaterally with counterparties that are not settled through an organized exchange or central clearing house.
(b) Represents the net amount of derivative assets included in Other assets on our Consolidated Balance Sheet.
(c) Represents the net amount of derivative liabilities included in Other liabilities on our Consolidated Balance Sheet.

In addition to using master netting and related collateral agreements to reduce credit risk associated with derivative instruments, we also seek to manage credit risk by evaluating credit ratings of counterparties, by taking collateral and by using internal credit analysis, limits, and monitoring procedures. Collateral may also be exchanged under certain derivative agreements that are not considered master netting agreements.

 

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


At June 30, 2015, we held cash, U.S. government securities and mortgage-backed securities totaling $681 million under master netting and other collateral agreements to collateralize net derivative assets due from counterparties, and we have pledged cash totaling $555 million under these agreements to collateralize net derivative liabilities owed to counterparties. These totals may differ from the amounts presented in the preceding offsetting table because they may include collateral exchanged under an agreement that does not qualify as a master netting agreement or because the total amount of collateral held or pledged exceeds the net derivative fair value with the counterparty as of the balance sheet date due to timing or other factors. To the extent not netted against the derivative fair value under a master netting agreement, the receivable for cash pledged is included in Other assets and the obligation for cash held is included in Other borrowed funds on our Consolidated Balance Sheet. Securities held from counterparties are not recognized on our balance sheet. Likewise securities we have pledged to counterparties remain on our balance sheet.

 

Certain of the master netting agreements and certain other derivative agreements also contain provisions that require PNC’s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If PNC’s debt ratings were to fall below investment grade, we would be in violation of these provisions and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on June 30, 2015 was $.6 billion for which PNC had posted collateral of $.5 billion in the normal course of business. The maximum additional amount of collateral PNC would have been required to post if the credit-risk-related contingent features underlying these agreements had been triggered on June 30, 2015 would be $.1 billion.

 

 

NOTE 12 EARNINGS PER SHARE

Table 105: Basic and Diluted Earnings per Common Share

 

     Three months ended
June 30
     Six months ended
June 30
 
In millions, except per share data    2015      2014      2015      2014  

Basic

             

Net income

   $ 1,044       $ 1,052       $ 2,048       $ 2,112   

Less:

             

Net income (loss) attributable to noncontrolling interests

     4         3         5         1   

Preferred stock dividends and discount accretion and redemptions

     48         48         118         118   

Net income attributable to common shares

     992         1,001         1,925         1,993   

Less:

             

Dividends and undistributed earnings allocated to nonvested restricted shares

              3         2         6   

Net income attributable to basic common shares

   $ 992       $ 998       $ 1,923       $ 1,987   

Basic weighted-average common shares outstanding

     517         532         519         532   

Basic earnings per common share (a)

   $ 1.92       $ 1.88       $ 3.71       $ 3.73   

Diluted

             

Net income attributable to basic common shares

   $ 992       $ 998       $ 1,923       $ 1,987   

Less: Impact of BlackRock earnings per share dilution

     5         3         10         9   

Net income attributable to diluted common shares

   $ 987       $ 995       $ 1,913       $ 1,978   

Basic weighted-average common shares outstanding

     517         532         519         532   

Dilutive potential common shares (b) (c)

     8         7         8         7   

Diluted weighted-average common shares outstanding

     525         539         527         539   

Diluted earnings per common share (a)

   $ 1.88       $ 1.85       $ 3.63       $ 3.67   
(a) Basic and diluted earnings per share under the two-class method are determined on net income reported on the income statement less earnings allocated to nonvested restricted shares (participating securities).
(b) Excludes number of stock options considered to be anti-dilutive of 1 million for the three and six months ended June 30, 2014. No stock options were considered to be anti-dilutive for the three and six months ended June 30, 2015.
(c) No warrants were considered to be anti-dilutive for the three and six months ended June 30, 2015 and June 30, 2014, respectively.

 

The PNC Financial Services Group, Inc. – Form 10-Q    113


NOTE 13 TOTAL EQUITY AND OTHER COMPREHENSIVE INCOME

Activity in total equity for the first six months of 2014 and 2015 follows.

Table 106: Rollforward of Total Equity

 

            Shareholders’ Equity                
In millions   Shares
Outstanding
Common
Stock
    Common
Stock
    Capital
Surplus -
Preferred
Stock
    Capital
Surplus -
Common
Stock
and Other
    Retained
Earnings
   

Accumulated
Other
Comprehensive
Income

(Loss)

    Treasury
Stock
   

Non-

controlling
Interests

    Total
Equity
 

Balance at December 31, 2013

    533      $ 2,698      $ 3,941      $ 12,416      $ 23,251      $ 436      $ (408   $ 1,703      $ 44,037   

Cumulative effect of adopting ASC 860-50 (a)

                                    2                                2   

Balance at January 1, 2014

    533      $ 2,698      $ 3,941      $ 12,416      $ 23,253      $ 436      $ (408   $ 1,703      $ 44,039   

Net income

            2,111              1        2,112   

Other comprehensive income (loss), net of tax

              445              445   

Cash dividends declared

                     

Common ($.92 per share)

            (491             (491

Preferred

            (115             (115

Preferred stock discount accretion

        3          (3            

Common stock activity

    1        5          55                  60   

Treasury stock activity

    (2         11            (176       (165

Other

                            24                                (116     (92

Balance at June 30, 2014 (b)

    532      $ 2,703      $ 3,944      $ 12,506      $ 24,755      $ 881      $ (584   $ 1,588      $ 45,793   

Balance at January 1, 2015

    523      $ 2,705      $ 3,946      $ 12,627      $ 26,200      $ 503      $ (1,430   $ 1,523      $ 46,074   

Net income

            2,043              5        2,048   

Other comprehensive income (loss), net of tax

              (124           (124

Cash dividends declared

                     

Common ($.99 per share)

            (516             (516

Preferred

            (115             (115

Preferred stock discount accretion

        3          (3            

Common stock activity

    1        3          34                  37   

Treasury stock activity

    (8         (55         (832       (887

Preferred stock redemption – Series K (c)

        (500                 (500

Other

                            26                                (131     (105

Balance at June 30, 2015 (b)

    516      $ 2,708      $ 3,449      $ 12,632      $ 27,609      $ 379      $ (2,262   $ 1,397      $ 45,912   
(a) Amount represents the cumulative impact of our January 1, 2014 irrevocable election to prospectively measure all classes of commercial MSRs at fair value. See Note 1 Accounting Policies and Note 8 Goodwill and Other Intangible Assets for more information on this election in our Notes To Consolidated Financial Statements under Item 8 of our 2014 Form 10-K.
(b) The par value of our preferred stock outstanding was less than $.5 million at each date and, therefore, is excluded from this presentation.
(c) On May 4, 2015, PNC redeemed all 50,000 shares of its Series K Preferred Stock, as well as all 500,000 Depositary Shares representing fractional interests in such shares, resulting in net outflow of $500 million.

Warrants

We had 13,685,932 warrants outstanding as of June 30, 2015 compared to 16,885,192 as of December 31, 2014. The reduction was due to 3,199,260 warrants that were exercised during 2015. Each warrant entitles the holder to purchase one share of PNC common stock at an exercise price of $67.33 per share. In accordance with the terms of the warrants, the warrants are exercised on a non-cash net basis with the warrant holder receiving PNC common shares determined based on the excess of the market price of PNC common stock on the exercise date over the exercise price of the warrant. In 2015, we issued 971,570 common shares resulting from the exercise of the warrants. The issuance of these shares resulted in a reclassification within Capital surplus – Common stock and other with no impact on PNC’s Shareholder’s equity. The remaining outstanding warrants will expire as of December 31, 2018, and are considered in the calculation of diluted earnings per common share in Note 12 Earnings Per Share in this Report.

 

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


Table 107: Other Comprehensive Income

Details of other comprehensive income (loss) are as follows:

 

In millions    Pretax     Tax      After-tax  

Net unrealized gains (losses) on non-OTTI securities

         

Balance at March 31, 2014

   $ 836      $ (307    $ 529   

Second Quarter 2014 activity

         

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

     220        (80      140   

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

     7        (2      5   

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

     1                 1   

Net unrealized gains (losses) on non-OTTI securities

     212        (78      134   

Balance at June 30, 2014

     1,048        (385      663   

Balance at March 31, 2015

     1,096        (402      694   

Second Quarter 2015 activity

         

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

     (346     128         (218

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

     7        (2      5   

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

     12        (4      8   

Net unrealized gains (losses) on non-OTTI securities

     (365     134         (231

Balance at June 30, 2015

   $ 731      $ (268    $ 463   

Net unrealized gains (losses) on OTTI securities

         

Balance at March 31, 2014

   $ 102      $ (37    $ 65   

Second Quarter 2014 activity

         

Increase in net unrealized gains (losses) on OTTI securities

     40        (14      26   

Less: OTTI losses realized on securities reclassified to noninterest income

     (1              (1

Net unrealized gains (losses) on OTTI securities

     41        (14      27   

Balance at June 30, 2014

     143        (51      92   

Balance at March 31, 2015

     118        (42      76   

Second Quarter 2015 activity

         

Increase in net unrealized gains (losses) on OTTI securities

     3        (1      2   

Less: OTTI losses realized on securities reclassified to noninterest income

     (1     1            

Net unrealized gains (losses) on OTTI securities

     4        (2      2   

Balance at June 30, 2015

   $ 122      $ (44    $ 78   

Net unrealized gains (losses) on cash flow hedge derivatives

         

Balance at March 31, 2014

   $ 379      $ (139    $ 240   

Second Quarter 2014 activity

         

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

     138        (50      88   

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

     61        (23      38   

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

     3        (1      2   

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

     (7     3         (4

Net unrealized gains (losses) on cash flow hedge derivatives

     81        (29      52   

Balance at June 30, 2014

     460        (168      292   

Balance at March 31, 2015

     791        (290      501   

Second Quarter 2015 activity

         

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

     (102     38         (64

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

     64        (24      40   

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

     8        (3      5   

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

     (4     2         (2

Net unrealized gains (losses) on cash flow hedge derivatives

     (170     63         (107

Balance at June 30, 2015

   $ 621      $ (227    $ 394   

(continued on following page)

 

The PNC Financial Services Group, Inc. – Form 10-Q    115


(continued from previous page)

 

In millions    Pretax      Tax      After-tax  

Pension and other postretirement benefit plan adjustments

          

Balance at March 31, 2014

   $ (292    $ 107       $ (185

Second Quarter 2014 activity

          

Net pension and other postretirement benefit plan activity

     10         (4      6   

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

     1         (1     

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

     (2      1         (1

Total Second Quarter 2014 activity

     9         (4      5   

Balance at June 30, 2014

     (283      103         (180

Balance at March 31, 2015

     (760      278         (482

Second Quarter 2015 activity

          

Net pension and other postretirement benefit plan activity

     (17      7         (10

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

     9         (4      5   

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

     (2      1         (1

Total Second Quarter 2015 activity

     (10      4         (6

Balance at June 30, 2015

   $ (770    $ 282       $ (488

Other

          

Balance at March 31, 2014

   $ (9    $ 16       $ 7   

Second Quarter 2014 Activity

          

PNC’s portion of BlackRock’s OCI

     (4      2         (2

Net investment hedge derivatives (b)

     (26      9         (17

Foreign currency translation adjustments (c)

     26                  26   

Total Second Quarter 2014 activity

     (4      11         7   

Balance at June 30, 2014

     (13      27         14   

Balance at March 31, 2015

     (86         (86

Second Quarter 2015 Activity

          

PNC’s portion of BlackRock’s OCI

     (9      3         (6

Net investment hedge derivatives (b)

     (65      24         (41

Foreign currency translation adjustments (c)

     65                  65   

Total Second Quarter 2015 activity

     (9      27         18   

Balance at June 30, 2015

   $ (95    $ 27       $ (68

 

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


In millions    Pretax     Tax      After-tax  

Net unrealized gains (losses) on non-OTTI securities

         

Balance at December 31, 2013

   $ 647      $ (238    $ 409   

2014 activity

         

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

     421        (154      267   

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

     14        (5      9   

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

     6        (2      4   

Net unrealized gains (losses) on non-OTTI securities

     401        (147      254   

Balance at June 30, 2014

     1,048        (385      663   

Balance at December 31, 2014

     1,022        (375      647   

2015 activity

         

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

     (214     79         (135

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

     14        (5      9   

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

     63        (23      40   

Net unrealized gains (losses) on non-OTTI securities

     (291     107         (184

Balance at June 30, 2015

   $ 731      $ (268    $ 463   

Net unrealized gains (losses) on OTTI securities

         

Balance at December 31, 2013

   $ 36      $ (12    $ 24   

2014 activity

         

Increase in net unrealized gains (losses) on OTTI securities

     104        (38      66   

Less: OTTI losses realized on securities reclassified to noninterest income

     (3     1         (2

Net unrealized gains (losses) on OTTI securities

     107        (39      68   

Balance at June 30, 2014

     143        (51      92   

Balance at December 31, 2014

     115        (41      74   

2015 activity

         

Increase in net unrealized gains (losses) on OTTI securities

     5        (2      3   

Less: OTTI losses realized on securities reclassified to noninterest income

     (2     1         (1

Net unrealized gains (losses) on OTTI securities

     7        (3      4   

Balance at June 30, 2015

   $ 122      $ (44    $ 78   

Net unrealized gains (losses) on cash flow hedge derivatives

         

Balance at December 31, 2013

   $ 384      $ (141    $ 243   

2014 activity

         

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

     210        (76      134   

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

     130        (48      82   

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

     6        (2      4   

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

     (2     1         (1

Net unrealized gains (losses) on cash flow hedge derivatives

     76        (27      49   

Balance at June 30, 2014

     460        (168      292   

Balance at December 31, 2014

     552        (202      350   

2015 activity

         

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

     196        (72      124   

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

     128        (47      81   

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

     12        (5      7   

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

     (13     5         (8

Net unrealized gains (losses) on cash flow hedge derivatives

     69        (25      44   

Balance at June 30, 2015

   $ 621      $ (227    $ 394   

(continued on following page)

 

The PNC Financial Services Group, Inc. – Form 10-Q    117


(continued from previous page)

 

In millions    Pretax     Tax      After-tax  

Pension and other postretirement benefit plan adjustments

         

Balance at December 31, 2013

   $ (374   $ 137       $ (237

2014 Activity

         

Net pension and other postretirement benefit plan activity

     93        (35      58   

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

     2        (1      1   

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

     (4     2         (2

Total 2014 activity

     91        (34      57   

Balance at June 30, 2014

     (283     103         (180

Balance at December 31, 2014

     (820     300         (520

2015 Activity

         

Net pension and other postretirement benefit plan activity

     36        (13      23   

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

     18        (7      11   

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

     (4     2         (2

Total 2015 Activity

     50        (18      32   

Balance at June 30, 2015

   $ (770   $ 282       $ (488

Other

         

Balance at December 31, 2013

   $ (20   $ 17       $ (3

2014 Activity

         

PNC’s portion of BlackRock’s OCI

     7        (2      5   

Net investment hedge derivatives (b)

     (33     12         (21

Foreign currency translation adjustments

     33                 33   

Total 2014 activity

     7        10         17   

Balance at June 30, 2014

     (13     27         14   

Balance at December 31, 2014

     (59     11         (48

2015 Activity

         

PNC’s portion of BlackRock’s OCI

     (34     12         (22

Net investment hedge derivatives (b)

     (11     4         (7

Foreign currency translation adjustments (c)

     9                 9   

Total 2015 activity

     (36     16         (20

Balance at June 30, 2015

   $ (95   $ 27       $ (68
(a) Cash flow hedge derivatives are interest rate contract derivatives designated as hedging instruments under GAAP.
(b) Net investment hedge derivatives are foreign exchange contracts designated as hedging instruments under GAAP.
(c) The earnings of PNC’s Luxembourg-UK lending business have been indefinitely reinvested: therefore, no U.S. deferred income tax has been recorded on the foreign currency translation of the investment.

Table 108: Accumulated Other Comprehensive Income (Loss) Components

 

     June 30, 2015      December 31, 2014  
In millions    Pretax     After-tax      Pretax      After-tax  

Net unrealized gains (losses) on non-OTTI securities

   $ 731      $ 463       $ 1,022       $ 647   

Net unrealized gains (losses) on OTTI securities

     122        78         115         74   

Net unrealized gains (losses) on cash flow hedge derivatives

     621        394         552         350   

Pension and other postretirement benefit plan adjustments

     (770     (488      (820      (520

Other

     (95     (68      (59      (48

Accumulated other comprehensive income (loss)

   $ 609      $ 379       $ 810       $ 503   

 

 

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


NOTE 14 INCOME TAXES

Table 109: Net Operating Loss Carryforwards and Tax Credit Carryforwards

 

In millions   June 30
2015
    December 31
2014
 

Net Operating Loss Carryforwards:

     

Federal

  $ 947      $ 997   

State

  $ 2,486      $ 2,594   

Tax Credit Carryforwards:

     

Federal

  $ 35      $ 35   

State

  $ 7      $ 7   

The federal net operating loss carryforwards expire in 2032. The state net operating loss carryforwards will expire from 2015 to 2035. The majority of the tax credit carryforwards expire in 2032. All federal and most state net operating loss and credit carryforwards are from acquired entities and utilization is subject to various statutory limitations. It is anticipated that the company will be able to fully utilize its carryforwards for federal tax purposes, but a valuation allowance of $64 million has been recorded against certain state tax carryforwards as of June 30, 2015. If select uncertain tax positions were successfully challenged by a state, the state net operating losses listed above could be reduced by $60 million.

The Internal Revenue Service (IRS) is currently examining PNC’s 2011 through 2013 returns. National City’s consolidated federal income tax returns through 2008 have been audited by the IRS. Certain adjustments remain under review by the IRS Appeals Division for years 2004 through 2008.

The Company had unrecognized tax benefits of $80 million at June 30, 2015 and $77 million at December 31, 2014. At June 30, 2015, $66 million of unrecognized tax benefits, if recognized, would favorably impact the effective income tax rate.

It is reasonably possible that the balance of unrecognized tax benefits could increase or decrease in the next twelve months due to completion of tax authorities’ exams or the expiration of statutes of limitations. Management estimates that the balance of unrecognized tax benefits could decrease by $53 million within the next twelve months.

During the six months ended June 30, 2015, we recognized $102 million of amortization, $111 million of tax credits, and $37 million of other tax benefits associated with qualified investments in low income housing tax credits within Income taxes. The amounts for the second quarter of 2015 were $51 million, $56 million and $18 million, respectively.

NOTE 15 LEGAL PROCEEDINGS

We establish accruals for legal proceedings, including litigation and regulatory and governmental investigations and inquiries, when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changed circumstances. When we are able to do so, we also determine estimates of possible losses or ranges of possible losses, whether in excess of any related accrued liability or where there is no accrued liability, for disclosed legal proceedings (“Disclosed Matters,” which are those matters disclosed in this Note 15 as well as those matters disclosed in Note 21 Legal Proceedings in Part II, Item 8 of our 2014 Form 10-K and in Note 15 Legal Proceedings in Part I, Item 1 of our first quarter 2015 Form 10-Q (such prior disclosure collectively referred to as “Prior Disclosure”)). For Disclosed Matters where we are able to estimate such possible losses or ranges of possible losses, as of June 30, 2015, we estimate that it is reasonably possible that we could incur losses in an aggregate amount of up to approximately $725 million. The estimates included in this amount are based on our analysis of currently available information and are subject to significant judgment and a variety of assumptions and uncertainties. As new information is obtained we may change our estimates. Due to the inherent subjectivity of the assessments and unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to us from the legal proceedings in question. Thus, our exposure and ultimate losses may be higher, and possibly significantly so, than the amounts accrued or this aggregate amount.

In our experience, legal proceedings are inherently unpredictable. One or more of the following factors frequently contribute to this inherent unpredictability: the proceeding is in its early stages; the damages sought are unspecified, unsupported or uncertain; it is unclear whether a case brought as a class action will be allowed to proceed on that basis or, if permitted to proceed as a class action, how the class will be defined; the other party is seeking relief other than or in addition to compensatory damages (including, in the case of regulatory and governmental investigations and inquiries, the possibility of fines and penalties); the matter presents meaningful legal uncertainties, including novel issues of law; we have not engaged in meaningful settlement discussions; discovery has not started or is not complete; there are significant facts in dispute; the possible outcomes may not be amenable to the use of statistical or quantitative analytical tools; predicting possible outcomes depends on making assumptions about future decisions of courts or regulatory bodies or the behavior of other parties; and there are a large number of parties named as defendants (including where it is uncertain how damages or liability, if any, will be shared among multiple defendants). Generally, the less progress that has been made in the proceedings or the broader the range of potential results, the harder it is for us to estimate losses or ranges of losses that it is reasonably possible we could incur.

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    119


As a result of these types of factors, we are unable, at this time, to estimate the losses that it is reasonably possible that we could incur or ranges of such losses with respect to some of the matters disclosed, and the aggregate estimated amount provided above does not include an estimate for every Disclosed Matter. Therefore, as the estimated aggregate amount disclosed above does not include all of the Disclosed Matters, the amount disclosed above does not represent our maximum reasonably possible loss exposure for all of the Disclosed Matters. The estimated aggregate amount also does not reflect any of our exposure to matters not so disclosed, as discussed below under “Other.”

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

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

The following updates our disclosure of legal proceedings from that provided in Prior Disclosure.

CBNV Mortgage Litigation

Between 2001 and 2003, on behalf of either individual plaintiffs or proposed classes of plaintiffs, several separate lawsuits were filed in state and federal courts against Community Bank of Northern Virginia (CBNV), a PNC Bank predecessor, and other defendants asserting claims arising from second mortgage loans made to the plaintiffs. The state lawsuits were removed to federal court and, with the lawsuits that had been filed in federal court, were consolidated for pre-trial proceedings in a multidistrict litigation (MDL) proceeding in the United States District Court for the Western District of Pennsylvania under the caption In re: Community Bank of Northern Virginia Lending Practices Litigation (No. 03-0425 (W.D. Pa.), MDL No. 1674).

MDL Proceedings in Pennsylvania. In July 2015, the United States Court of Appeals for the Third Circuit affirmed the grant of class certification by the Pennsylvania district court.

North Carolina Proceedings. In January 2008, the Pennsylvania district court issued an order sending back to the General Court of Justice, Superior Court Division, for Wake

County, North Carolina the claims of two proposed class members, asserted in a case originally filed in 2001 and captioned Bumpers, et al. v. Community Bank of Northern Virginia (01-CVS-011342). The plaintiffs in Bumpers made similar allegations to those included in the amended complaint in the MDL proceedings. Following the remand to North Carolina state court, the plaintiffs in Bumpers sought to represent a class of North Carolina borrowers in state court proceedings in North Carolina. The plaintiffs claimed that this class consisted of approximately 650 borrowers. The district court in Pennsylvania handling the MDL proceedings enjoined class proceedings in Bumpers in March 2008. In April 2008, the North Carolina Superior Court granted the Bumpers plaintiffs’ motion for summary judgment on their individual claims and awarded them approximately $11,000 each plus interest. CBNV appealed the grant of the motion for summary judgment. In September 2011, the North Carolina Court of Appeals affirmed in part and reversed in part the granting of the plaintiffs’ motion for summary judgment. The court affirmed the judgment on the plaintiffs’ claim that they paid a loan discount fee but were not provided a loan discount. It reversed the judgment on the plaintiffs’ claim that they were overcharged for settlement services and remanded that claim for trial. The court also held that, in light of the Pennsylvania district court’s injunction against class proceedings having been vacated in September 2010, the trial court may on remand consider the issue of class certification. In August 2012, the North Carolina Supreme Court granted our petition for discretionary review of the decision of the North Carolina Court of Appeals. The appeal was argued in January 2013. In August 2013, the North Carolina Supreme Court reversed the decision of the Court of Appeals and remanded the case to the Superior Court for further proceedings. In September 2013, after the other plaintiff voluntarily dismissed his case, the remaining plaintiff filed a motion for leave to amend his complaint in the trial court. The plaintiff’s remaining claims, as reflected in the proposed amended complaint, related exclusively to loan discount fees. In June 2015 the court denied the plaintiff’s motion to amend his complaint. The plaintiff then moved for an order allowing dismissal of his remaining claims, which was granted, thus ending the North Carolina proceedings.

Lender Placed Insurance Litigation

In May 2015, the parties reached an agreement to settle on a nationwide settlement class basis Montoya, et al. v. PNC Bank, N.A., et al., (Case No. 1:14-cv-20474-JEM), pending in the United States District Court for the Southern District of Florida against, among others, PNC Bank. The agreement is subject to, among other things, notice to the class members and final approval by the court. In June 2015, the plaintiffs filed a motion for preliminary approval of the settlement. Notice to the class members will be provided following preliminary approval, if granted. In connection with the settlement agreement, the plaintiffs also filed a fourth amended complaint, which, among other things, adds claims

 

 

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


regarding wind and flood insurance. The proposed settlement provides for certification of a class of borrowers who were charged by PNC under a hazard, flood, flood gap or wind only lender placed insurance policy for residential property during the period January 1, 2008 through the date of preliminary approval of the settlement. The overall cost of the settlement is not expected to be material to PNC.

Patent Infringement Litigation

In separate decisions issued in April and May 2015, the Patent and Trademark Office (PTO) invalidated all claims with respect to the patents that were still at issue in Intellectual Ventures I LLC and Intellectual Ventures II LLC vs. PNC Financial Services Group, Inc., and PNC Bank, NA, (Case No. 2:13-cv-00740-AJS)(“IV 1”), pending in the United States District Court for the Western District of Pennsylvania against PNC and PNC Bank. In July 2015, in an appeal arising out of proceedings against a different defendant relating to some of the same patents, the United States Court of Appeals for the Federal Circuit affirmed a district court decision invalidating two of those same patents. As a result, all of the patents still at issue in IV 1 have been invalidated, and accordingly PNC should have no liability in this matter.

In April 2015, the PTO, in a proceeding brought by another defendant, upheld the patentability of one of the patents at issue in Intellectual Ventures I LLC and Intellectual Ventures II LLC v. PNC Bank Financial Services Group, Inc., PNC Bank NA, and PNC Merchant Services Company, LP, (Case No. 2:14-cv-00832-AKS)(“IV 2”), pending in the same court as IV 1. Three patents of the four other patents at issue in IV 2 remain under review by the PTO while PTO review has been denied as to the fourth patent.

Other Regulatory and Governmental Inquiries

PNC is the subject of investigations, audits and other forms of regulatory and governmental inquiry covering a broad range of issues in our banking, securities and other financial services businesses, in some cases as part of reviews of specified activities at multiple industry participants. Over the last few years, we have experienced an increase in regulatory and governmental investigations, audits and other inquiries. Areas of current regulatory or governmental inquiry with respect to PNC include consumer protection, fair lending, mortgage origination and servicing, mortgage and non mortgage-related insurance and reinsurance, municipal finance activities, conduct by broker-dealers, automobile lending practices, and participation in government insurance or guarantee programs, some of which are described below and in Prior Disclosure. These inquiries, including those described below and in Prior Disclosure, may lead to administrative, civil or criminal proceedings, and possibly result in remedies including fines, penalties, restitution, or alterations in our business practices, and in additional expenses and collateral costs.

Our practice is to cooperate fully with regulatory and governmental investigations, audits and other inquiries, including those described below and in Prior Disclosure.

Mortgage Servicing Consent Orders

In June 2015, the Office of the Comptroller of the Currency issued an order finding that PNC Bank had satisfied all of its obligations under the OCC’s 2013 amended consent order and terminating PNC Bank’s 2011 consent order and 2013 amended consent order relating to its residential mortgage servicing and foreclosure processes. The OCC retained jurisdiction over the distribution of remaining funds contributed by PNC Bank under its 2013 amended consent order. PNC’s consent order with the Board of Governors of the Federal Reserve System, as amended, relating to the same subject matter remains open and does not foreclose the potential for civil money penalties from the Federal Reserve. The range of potential penalties communicated to PNC from the Federal Reserve in connection with these consent orders is not material and we do not otherwise expect any additional financial charges from the Federal Reserve consent orders to be material.

Other

In addition to the proceedings or other matters described above and in Prior Disclosure, PNC and persons to whom we may have indemnification obligations, in the normal course of business, are subject to various other pending and threatened legal proceedings in which claims for monetary damages and other relief are asserted. We do not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of such other legal proceedings will have a material adverse effect on our financial position. However, we cannot now determine whether or not any claims asserted against us or others to whom we may have indemnification obligations, whether in the proceedings or other matters described above or otherwise, will have a material adverse effect on our results of operations in any future reporting period, which will depend on, among other things, the amount of the loss resulting from the claim and the amount of income otherwise reported for the reporting period.

See Note 16 Commitments and Guarantees for additional information regarding the Visa indemnification and our other obligations to provide indemnification, including to current and former officers, directors, employees and agents of PNC and companies we have acquired.

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    121


NOTE 16 COMMITMENTS AND GUARANTEES

Commitments

In the normal course of business, we have various commitments outstanding, certain of which are not included on our Consolidated Balance Sheet. The following table presents our outstanding commitments to extend credit along with significant other commitments as of June 30, 2015 and December 31, 2014, respectively.

Table 110: Commitments to Extend Credit and Other Commitments

 

In millions  

June 30

2015

    December 31
2014
 

Commitments to extend credit

     

Total commercial lending

  $ 97,334      $ 98,742   

Home equity lines of credit

    17,570        17,839   

Credit card

    18,999        17,833   

Other

    4,339        4,178   

Total commitments to extend credit

    138,242        138,592   

Net outstanding standby letters of credit (a)

    9,509        9,991   

Reinsurance agreements

    2,118        4,297   

Standby bond purchase agreements (b)

    959        1,095   

Other commitments (c)

    964        962   

Total commitments to extend credit and other commitments

  $ 151,792      $ 154,937   
(a) Net outstanding standby letters of credit include $5.2 billion which support remarketing programs at both June 30, 2015 and December 31, 2014, respectively.
(b) We enter into standby bond purchase agreements to support municipal bond obligations.
(c) Includes $579 million and $441 million related to investments in qualified affordable housing projects at June 30, 2015 and December 31, 2014, respectively.

Commitments to Extend Credit

Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. These commitments generally have fixed expiration dates, may require payment of a fee, and contain termination clauses in the event the customer’s credit quality deteriorates. Based on our historical experience, some commitments expire unfunded, and therefore cash requirements are substantially less than the total commitment.

Net Outstanding Standby Letters of Credit

We issue standby letters of credit and share in the risk of standby letters of credit issued by other financial institutions, in each case to support obligations of our customers to third parties, such as insurance requirements and the facilitation of transactions involving capital markets product execution. Internal credit ratings related to our net outstanding standby letters of credit were as follows:

Table 111: Internal Credit Ratings Related to Net Outstanding Standby Letters of Credit

 

     June 30
2015
    December 31
2014
 

Internal credit ratings (as a percentage of portfolio):

     

Pass (a)

    94     95

Below pass (b)

    6     5
(a) Indicates that expected risk of loss is currently low.
(b) Indicates a higher degree of risk of default.

If the customer fails to meet its financial or performance obligation to the third party under the terms of the contract or there is a need to support a remarketing program, then upon a draw by a beneficiary, subject to the terms of the letter of credit, we would be obligated to make payment to them. The standby letters of credit outstanding on June 30, 2015 had terms ranging from less than 1 year to 8 years.

As of June 30, 2015, assets of $1.0 billion secured certain specifically identified standby letters of credit. In addition, a portion of the remaining standby letters of credit issued on behalf of specific customers is also secured by collateral or guarantees that secure the customers’ other obligations to us. The carrying amount of the liability for our obligations related to standby letters of credit and participations in standby letters of credit was $187 million at June 30, 2015 and is included in Other liabilities on our Consolidated Balance Sheet.

Reinsurance Agreements

We have a wholly-owned captive insurance subsidiary which provides reinsurance for accidental death & dismemberment, credit life, accident & health and lender placed hazard, all of which are in run-off. Aggregate maximum exposure up to the specified limits for all reinsurance contracts is as follows:

Table 112: Reinsurance Agreements Exposure (a)

 

In millions   June 30
2015
    December 31
2014
 

Accidental Death & Dismemberment

  $ 1,705      $ 1,774   

Credit Life, Accident & Health

    413        467   

Lender Placed Hazard (b) (c)

            2,056   

Maximum Exposure (d)

  $ 2,118      $ 4,297   

Maximum Exposure to Quota Share Agreements with 100% Reinsurance

  $ 412      $ 466   
(a) Reinsurance agreements exposure balances represent estimates based on availability of financial information from insurance carriers.
(b) Through the purchase of catastrophe reinsurance connected to the Lender Placed Hazard Exposure, should a catastrophic event occur, PNC will benefit from this reinsurance. No credit for the catastrophe reinsurance protection is applied to the aggregate exposure figure.
(c) Program was placed into run-off for coverage issued or renewed on or after June 1, 2014 with policy terms one year or less.
(d) The Borrower and Lender Paid Mortgage Insurance program was placed into run-off. Most of these policies carry no liability to PNC, and due to immateriality this program is no longer included in the maximum exposure amount.
 

 

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


A rollforward of the reinsurance reserves for probable losses for the first six months of 2015 and 2014 follows:

Table 113: Reinsurance Reserves – Rollforward

 

In millions    2015     2014  

January 1

   $ 13      $ 32   

Paid Losses

     (6     (12

Net Provision

     4        6   

Changes to Agreements

             (10

June 30

   $ 11      $ 16   

The reinsurance reserves are declining as the programs are in run-off. There were no other changes to existing agreements nor did we enter into any new relationships.

There is a reasonable possibility that losses could be more than or less than the amount reserved due to ongoing uncertainty in various economic, social and other factors that could impact the frequency and severity of claims covered by these reinsurance agreements. At June 30, 2015, the reasonably possible loss above our accrual was not material.

Indemnifications

We are a party to numerous acquisition or divestiture agreements under which we have purchased or sold, or agreed to purchase or sell, various types of assets. These agreements can cover the purchase or sale of entire businesses, loan portfolios, branch banks, partial interests in companies, or other types of assets.

These agreements generally include indemnification provisions under which we indemnify the third parties to these agreements against a variety of risks to the indemnified parties as a result of the transaction in question. When PNC is the seller, the indemnification provisions will generally also provide the buyer with protection relating to the quality of the assets we are selling and the extent of any liabilities being assumed by the buyer. Due to the nature of these indemnification provisions, we cannot quantify the total potential exposure to us resulting from them.

We provide indemnification in connection with securities offering transactions in which we are involved. When we are the issuer of the securities, we provide indemnification to the underwriters or placement agents analogous to the indemnification provided to the purchasers of businesses from us, as described above. When we are an underwriter or placement agent, we provide a limited indemnification to the issuer related to our actions in connection with the offering and, if there are other underwriters, indemnification to the other underwriters intended to result in an appropriate sharing of the risk of participating in the offering. Due to the nature of these indemnification provisions, we cannot quantify the total potential exposure to us resulting from them.

In the ordinary course of business, we enter into certain types of agreements that include provisions for indemnifying third parties. We also enter into certain types of agreements, including leases, assignments of leases, and subleases, in which we agree to indemnify third parties for acts by our agents, assignees and/or sublessees, and employees. We also enter into contracts for the delivery of technology service in which we indemnify the other party against claims of patent and copyright infringement by third parties. Due to the nature of these indemnification provisions, we cannot calculate our aggregate potential exposure under them.

In the ordinary course of business, we enter into contracts with third parties under which the third parties provide services on behalf of PNC. In many of these contracts, we agree to indemnify the third party service provider under certain circumstances. The terms of the indemnity vary from contract to contract and the amount of the indemnification liability, if any, cannot be determined.

We are a general or limited partner in certain asset management and investment limited partnerships, many of which contain indemnification provisions that would require us to make payments in excess of our remaining unfunded commitments. While in certain of these partnerships the maximum liability to us is limited to the sum of our unfunded commitments and partnership distributions received by us, in the others the indemnification liability is unlimited. As a result, we cannot determine our aggregate potential exposure for these indemnifications.

In some cases, indemnification obligations of the types described above arise under arrangements entered into by predecessor companies for which we become responsible as a result of the acquisition.

Pursuant to their bylaws, PNC and its subsidiaries provide indemnification to directors, officers and, in some cases, employees and agents against certain liabilities incurred as a result of their service on behalf of or at the request of PNC and its subsidiaries. PNC and its subsidiaries also advance on behalf of covered individuals costs incurred in connection with certain claims or proceedings, subject to written undertakings by each such individual to repay all amounts advanced if it is ultimately determined that the individual is not entitled to indemnification. We generally are responsible for similar indemnifications and advancement obligations that companies we acquire had to their officers, directors and sometimes employees and agents at the time of acquisition. We advanced such costs on behalf of several such individuals with respect to pending litigation or investigations during 2015. It is not possible for us to determine the aggregate potential exposure resulting from the obligation to provide this indemnity or to advance such costs.

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    123


Visa Indemnification

Our payment services business issues and acquires credit and debit card transactions through Visa U.S.A. Inc. card association or its affiliates (Visa). For additional information on our Visa indemnification and the related interchange litigation see Note 21 Legal Proceedings and Note 22 Commitments and Guarantees in our 2014 Form 10-K.

Recourse and Repurchase Obligations

As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities, PNC has sold commercial mortgage, residential mortgage and home equity loans/lines of credit directly or indirectly through securitization and loan sale transactions in which we have continuing involvement. One form of continuing involvement includes certain recourse and loan repurchase obligations associated with the transferred assets.

Commercial Mortgage Loan Recourse Obligations

We originate and service certain multi-family commercial mortgage loans which are sold to FNMA under FNMA’s Delegated Underwriting and Servicing (DUS) program. We participated in a similar program with the FHLMC.

Under these programs, we generally assume up to a one-third pari passu risk of loss on unpaid principal balances through a loss share arrangement. At June 30, 2015 and December 31, 2014, the unpaid principal balance outstanding of loans sold as a participant in these programs was $12.9 billion and $12.3 billion, respectively. The potential maximum exposure under the loss share arrangements was $3.9 billion at June 30, 2015 and $3.7 billion at December 31, 2014.

If payment is required under these programs, we would not have a contractual interest in the collateral underlying the mortgage loans on which losses occurred, although the value of the collateral is taken into account in determining our share of such losses. Our exposure and activity associated with these recourse obligations are reported in the Corporate & Institutional Banking segment.

We maintain a reserve for estimated losses based upon our exposure. The reserve for losses under these programs totaled $35 million at both June 30, 2015 and June 30, 2014, and was included in Other liabilities on our Consolidated Balance

Sheet. An analysis of the changes in this liability during 2015 and 2014 follows:

Table 114: Analysis of Commercial Mortgage Recourse Obligations

 

In millions    2015      2014  

January 1

   $ 35       $ 33   

Reserve adjustments, net

              2   

June 30

   $ 35       $ 35   

Residential Mortgage Loan and Home Equity Loan/ Line of Credit Repurchase Obligations

While residential mortgage loans are sold on a non-recourse basis, we assume certain loan repurchase obligations associated with mortgage loans we have sold to investors. These loan repurchase obligations primarily relate to situations where PNC is alleged to have breached certain origination covenants and representations and warranties made to purchasers of the loans in the respective purchase and sale agreements. Repurchase obligation activity associated with residential mortgages is reported in the Residential Mortgage Banking segment.

PNC’s repurchase obligations also include certain brokered home equity loans/lines of credit that were sold to a limited number of private investors in the financial services industry by National City prior to our acquisition of National City. PNC is no longer engaged in the brokered home equity lending business, and our exposure under these loan repurchase obligations is limited to repurchases of loans sold in these transactions. Repurchase activity associated with brokered home equity loans/lines of credit is reported in the Non-Strategic Assets Portfolio segment.

Indemnification and repurchase liabilities are initially recognized when loans are sold to investors and are subsequently evaluated by management. Initial recognition and subsequent adjustments to the indemnification and repurchase liability for the sold residential mortgage portfolio are recognized in Residential mortgage revenue on the Consolidated Income Statement. Since PNC is no longer engaged in the brokered home equity lending business, only subsequent adjustments are recognized to the home equity loans/lines indemnification and repurchase liability. These adjustments are recognized in Other noninterest income on the Consolidated Income Statement.

 

 

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


Management’s subsequent evaluation of these indemnification and repurchase liabilities is based upon trends in indemnification and repurchase requests, actual loss experience, risks in the underlying serviced loan portfolios, and current economic conditions. As part of its evaluation, management considers estimated loss projections over the life of the subject loan portfolio. At June 30, 2015 and June 30, 2014, the total indemnification and repurchase liability for estimated losses on indemnification and repurchase claims totaled $125 million and $126 million, respectively, and was included in Other liabilities on the Consolidated Balance Sheet. An analysis of the changes in this liability during 2015 and 2014 follows:

Table 115: Analysis of Indemnification and Repurchase Liability for Asserted Claims and Unasserted Claims

 

     2015      2014  
In millions    Residential
Mortgages (a)
    Home
Equity
Loans/
Lines (b)
     Total      Residential
Mortgages (a)
     Home
Equity
Loans/
Lines (b)
     Total  

January 1

   $ 107      $ 29       $ 136       $ 131       $ 22       $ 153   

Reserve adjustments, net

     2           2         (17      12         (5

Losses – loan repurchases and private investor settlements

     (12     (1      (13      (13      (9      (22

June 30

   $ 97      $ 28       $ 125       $ 101       $ 25       $ 126   
(a) The unpaid principal balance of loans associated with our exposure to repurchase obligations totaled $66.5 billion and $69.8 billion at June 30, 2015 and June 30, 2014, respectively.
(b) Repurchase obligation was associated with sold loan portfolios of $2.3 billion and $2.7 billion at June 30, 2015 and June 30, 2014, respectively. PNC is no longer engaged in the brokered home equity lending business, which was acquired with National City.

 

Management believes the indemnification and repurchase liabilities appropriately reflect the estimated probable losses on indemnification and repurchase claims for all loans sold and outstanding as of June 30, 2015. In making these estimates, we consider the losses that we expect to incur over the life of the sold loans. While management seeks to obtain all relevant information in estimating the indemnification and repurchase liability, the estimation process is inherently uncertain and imprecise and, accordingly, it is reasonably possible that future indemnification and repurchase losses could be more or less than our established liability. Factors that could affect our estimate include the volume of valid claims driven by investor strategies and behavior, our ability to successfully negotiate claims with investors, housing prices and other economic conditions. At June 30, 2015, we estimate that it is reasonably possible that we could incur additional losses in excess of our accrued indemnification and repurchase liability of up to approximately $81 million for our portfolio of residential mortgage loans sold. At June 30, 2015, the reasonably possible loss above our accrual for our portfolio of home equity loans/lines of credit sold was not material. This estimate of potential additional losses in excess of our liability is based on assumed higher repurchase claims and lower claim rescissions than our current assumptions.

Resale and Repurchase Agreements

We enter into repurchase and resale agreements where we transfer investment securities to/from a third party with the agreement to repurchase/resell those investment securities at a future date for a specified price. These agreements are entered into primarily to provide short-term financing for securities inventory positions, acquire securities to cover short positions and accommodate customers’ investing and financing needs. Repurchase and resale agreements are treated as collateralized financing transactions for accounting purposes and are generally carried at the amounts at which the securities will be

subsequently reacquired or resold, including accrued interest. Our policy is to take possession of securities purchased under agreements to resell. We monitor the market value of securities to be repurchased and resold and additional collateral may be obtained where considered appropriate to protect against credit exposure.

Repurchase and resale agreements are typically entered into with counterparties under industry standard master netting agreements which provide for the right to setoff amounts owed to one another with respect to multiple repurchase and resale agreements under such master netting agreement (referred to as netting arrangements) and liquidate the purchased or borrowed securities in the event of counterparty default. In order for an arrangement to be eligible for netting under GAAP, we must obtain the requisite assurance that the offsetting rights included in the master netting agreement would be legally enforceable in the event of bankruptcy, insolvency, or a similar proceeding of such third party. Enforceability is evidenced by obtaining a legal opinion that supports, with sufficient confidence, the enforceability of the master netting agreement in bankruptcy.

Table 116 shows the amounts owed under resale and repurchase agreements and the securities collateral associated with those agreements where a legal opinion supporting the enforceability of the offsetting rights has been obtained. We do not present resale and repurchase agreements entered into with the same counterparty under a legally enforceable master netting agreement on a net basis on our Consolidated Balance Sheet or within Table 116. The amounts reported in Table 116 exclude the fair value adjustment on the structured resale agreements of $7 million at both June 30, 2015 and December 31, 2014, respectively, that we have elected to account for at fair value. Refer to Note 7 Fair Value for additional information regarding the structured resale agreements at fair value.

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    125


Refer to Note 11 Financial Derivatives for additional information related to offsetting of financial derivatives.

Table 116: Resale and Repurchase Agreements Offsetting

 

In millions   

Gross

Resale
Agreements

    

Amounts

Offset

on the
Consolidated
Balance Sheet

  

Net

Resale
Agreements (a)

    

Securities
Collateral

Held Under
Master Netting
Agreements (b)

     Net
Amounts (c)
 

Resale Agreements

                

June 30, 2015

   $ 1,548          $ 1,548       $ 1,474       $ 74   

December 31, 2014

   $ 1,646            $ 1,646       $ 1,569       $ 77   

 

In millions    Gross
Repurchase
Agreements
    

Amounts
Offset

on the
Consolidated
Balance Sheet

   Net
Repurchase
Agreements (d)
     Securities
Collateral
Pledged Under
Master  Netting
Agreements (b)
     Net
Amounts (e)
 

Repurchase Agreements

                

June 30, 2015

   $ 2,132          $ 2,132       $ 1,332       $ 800   

December 31, 2014

   $ 3,406            $ 3,406       $ 2,580       $ 826   
(a) Represents the resale agreement amount included in Federal funds sold and resale agreements on our Consolidated Balance Sheet and the related accrued interest income in the amount of less than $1 million at June 30, 2015 and $1 million at December 31, 2014, respectively, which is included in Other Assets on the Consolidated Balance Sheet.
(b) Represents the fair value of securities collateral purchased or sold, up to the amount owed under the agreement, for agreements supported by a legally enforceable master netting agreement.
(c) Represents certain long term resale agreements which are fully collateralized but do not have the benefits of a netting opinion and, therefore, might be subject to a stay in insolvency proceedings and therefore are not eligible under ASC 210-20 for netting.
(d) Represents the repurchase agreement amount included in Federal funds purchased and repurchase agreements on our Consolidated Balance Sheet and the related accrued interest expense in the amount of less than $1 million at both June 30, 2015 and December 31, 2014, which is included in Other Liabilities on the Consolidated Balance Sheet.
(e) Represents overnight repurchase agreements entered into with municipalities, pension plans, and certain trusts and insurance companies which are fully collateralized but do not have the benefits of a netting opinion and, therefore, might be subject to a stay in insolvency proceedings and therefore are not eligible under ASC 210-20 for netting. There were no long term repurchase agreements as of June 30, 2015 and December 31, 2014.

 

Table 117 summarizes our gross repurchase agreements as of June 30, 2015 by type of collateral pledged. All repurchase agreements have remaining contractual maturities that are classified as overnight or continuous as of June 30, 2015. Overnight repurchase agreements have a one-day maturity while continuous repurchase agreements have no fixed maturity date and are cancellable by either party at any time.

Table 117: Repurchase Agreements By Type of Collateral Pledged

 

June 30, 2015- In millions    Overnight
or Continuous
 

Gross Repurchase Agreements

    

U.S. Treasury and government agency securities

   $ 48   

Residential mortgage-backed agency securities

     1,994   

Commercial mortgage-backed agency securities

     90   

Total

   $ 2,132   

NOTE 17 SEGMENT REPORTING

We have six reportable business segments:

   

Retail Banking

   

Corporate & Institutional Banking

   

Asset Management Group

   

Residential Mortgage Banking

   

BlackRock

   

Non-Strategic Assets Portfolio

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

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

 

 

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


Net interest income in business segment results reflects PNC’s internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors. In the first quarter of 2015, enhancements were made to PNC’s funds transfer pricing methodology primarily for costs related to the new regulatory short-term liquidity standards. The enhancements incorporate an additional charge assigned to assets, including for unfunded loan commitments. Conversely, a higher transfer pricing credit has been assigned to those deposits that are accorded higher value under Liquidity Coverage Ratio (LCR) rules for liquidity purposes. Please see the Supervision and Regulation section in Item 1 and the Liquidity Risk Management section in Item 7 of our 2014 Form 10-K for more information about the LCR. These adjustments apply to business segment results, primarily favorably impacting Retail Banking and adversely impacting Corporate & Institutional Banking, prospectively beginning with the first quarter of 2015. Prior periods have not been adjusted due to the impracticability of estimating the impact of the change for prior periods.

A portion of capital is intended to cover unexpected losses and is assigned to our business segments using our risk-based economic capital model, including consideration of the goodwill at those business segments, as well as the diversification of risk among the business segments, ultimately reflecting PNC’s portfolio risk adjusted capital allocation.

We have allocated the allowances for loan and lease losses and for unfunded loan commitments and letters of credit based on the loan exposures within each business segment’s portfolio. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.

Our allocation of the costs incurred by operations and other shared support areas not directly aligned with the businesses is primarily based on the use of services.

Total business segment financial results differ from total consolidated net income. The impact of these differences is reflected in the “Other” category in the business segment tables. “Other” includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as gains or losses related to BlackRock transactions, integration costs, asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities and certain trading activities, exited businesses, private equity investments, intercompany eliminations, most corporate overhead, tax adjustments that are not allocated to business segments, and

differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests as the segments’ results exclude their portion of net income attributable to noncontrolling interests. Assets, revenue and earnings attributable to foreign activities were not material in the periods presented for comparative purposes.

Business Segment Products and Services

Retail Banking provides deposit, lending, brokerage, investment management and cash management services to consumer and small business customers within our primary geographic markets. Our customers are serviced through our branch network, ATMs, call centers, online banking and mobile channels. The branch network is located primarily in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, North Carolina, Florida, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Missouri, Georgia, Wisconsin and South Carolina.

Corporate & Institutional Banking provides lending, treasury management, and capital markets-related products and services to mid-sized and large corporations, government and not-for-profit entities. Lending products include secured and unsecured loans, letters of credit and equipment leases. Treasury management services include cash and investment management, receivables management, disbursement services, funds transfer services, information reporting and global trade services. Capital markets-related products and services include foreign exchange, derivatives, securities, loan syndications, mergers and acquisitions advisory, equity capital markets advisory and related services. We also provide commercial loan servicing and real estate advisory and technology solutions for the commercial real estate finance industry. Products and services are generally provided within our primary geographic markets, with certain products and services offered nationally and internationally.

Asset Management Group includes personal wealth management for high net worth and ultra high net worth clients and institutional asset management. Wealth management products and services include investment and retirement planning, customized investment management, private banking, tailored credit solutions, and trust management and administration for individuals and their families. Hawthorn provides multi-generational family planning including wealth strategy, investment management, private banking, tax and estate planning guidance, performance reporting and personal administration services to ultra high net worth families. Institutional asset management provides investment management, custody administration and retirement administration services. The business also offers PNC proprietary mutual funds. Institutional clients include corporations, unions, municipalities, non-profits, foundations and endowments, primarily located in our geographic footprint.

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    127


Residential Mortgage Banking directly originates first lien residential mortgage loans on a nationwide basis with a significant presence within the retail banking footprint. Mortgage loans represent loans collateralized by one-to-four family residential real estate. These loans are typically underwritten to government agency and/or third-party standards, and either sold, servicing retained, or held on PNC’s balance sheet. Loan sales are primarily to secondary mortgage conduits of FNMA, FHLMC, Federal Home Loan Banks and third-party investors, or are securitized and issued under the GNMA program. The mortgage servicing operation performs all functions related to servicing mortgage loans, primarily those in first lien position, for various investors and for loans owned by PNC.

BlackRock is a leading publicly traded investment management firm providing a broad range of investment and risk management services to institutional and retail clients worldwide. Using a diverse platform of active and index investment strategies across asset classes, BlackRock develops investment outcomes and asset allocation solutions for clients. Product offerings include single- and multi-asset class portfolios investing in equities, fixed income, alternatives and

money market instruments. BlackRock also offers an investment and risk management technology platform, risk analytics and advisory services and solutions to a broad base of institutional investors.

We hold an equity investment in BlackRock, which is a key component of our diversified revenue strategy. BlackRock is a publicly traded company, and additional information regarding its business is available in its filings with the Securities and Exchange Commission (SEC). At June 30, 2015, our economic interest in BlackRock was 22%.

PNC received cash dividends from BlackRock of $160 million and $142 million during the first six months of 2015 and 2014, respectively.

Non-Strategic Assets Portfolio includes a consumer portfolio of mainly residential mortgage and brokered home equity loans and lines of credit, and a small commercial/commercial real estate loan and lease portfolio. We obtained a significant portion of these non-strategic assets through acquisitions of other companies.

 

 

Table 118: Results Of Businesses

 

Three months ended June 30

In millions

  Retail
Banking
    Corporate &
Institutional
Banking
    Asset
Management
Group
    Residential
Mortgage
Banking
    BlackRock     Non-Strategic
Assets
Portfolio
    Other (a)     Consolidated (a)  

2015

                 

Income Statement

                 

Net interest income

  $ 1,045      $ 837      $ 71      $ 30        $ 100      $ (31   $ 2,052   

Noninterest income

    590        492        243        176      $ 175        9        129        1,814   

Total revenue

    1,635        1,329        314        206        175        109        98        3,866   

Provision for credit losses (benefit)

    45        20        1        (2       (5     (13     46   

Depreciation and amortization

    42        37        12        4            106        201   

Other noninterest expense

    1,168        510        203        174                26        84        2,165   

Income (loss) before income taxes and noncontrolling interests

    380        762        98        30        175        88        (79     1,454   

Income taxes (benefit)

    139        254        36        11        40        32        (102     410   

Net income

  $ 241      $ 508      $ 62      $ 19      $ 135      $ 56      $ 23      $ 1,044   

Inter-segment revenue

  $ 1      $ 11      $ 3      $ 4      $ 4      $ (2   $ (21        

Average Assets (a)

  $ 73,369      $ 132,239      $ 8,005      $ 7,136      $ 6,760      $ 6,914      $ 118,217      $ 352,640   

2014

                 

Income Statement

                 

Net interest income

  $ 973      $ 889      $ 72      $ 37        $ 137      $ 21      $ 2,129   

Noninterest income

    541        427        207        190      $ 172        10        134        1,681   

Total revenue

    1,514        1,316        279        227        172        147        155        3,810   

Provision for credit losses (benefit)

    4        103        (6     1          (39     9        72   

Depreciation and amortization

    44        32        11        3            95        185   

Other noninterest expense

    1,111        472        191        166                30        173        2,143   

Income (loss) before income taxes and noncontrolling interests

    355        709        83        57        172        156        (122     1,410   

Income taxes (benefit)

    130        239        30        21        42        57        (161     358   

Net income

  $ 225      $ 470      $ 53      $ 36      $ 130      $ 99      $ 39      $ 1,052   

Inter-segment revenue

  $ 1      $ 7      $ 3      $ 8      $ 4      $ (5   $ (18        

Average Assets (a)

  $ 75,203      $ 122,025      $ 7,685      $ 7,486      $ 6,400      $ 8,577      $ 95,144      $ 322,520   

 

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


Six months ended June 30

In millions

  Retail
Banking
    Corporate &
Institutional
Banking
    Asset
Management
Group
    Residential
Mortgage
Banking
    BlackRock     Non-Strategic
Assets
Portfolio
    Other     Consolidated  

2015

                 

Income Statement

                 

Net interest income

  $ 2,082      $ 1,660      $ 144      $ 60        $ 212      $ (34   $ 4,124   

Noninterest income

    1,078        921        451        353      $ 351        18        301        3,473   

Total revenue

    3,160        2,581        595        413        351        230        267        7,597   

Provision for credit losses (benefit)

    94        37        13            (36     (8     100   

Depreciation and amortization

    85        73        23        7            206        394   

Other noninterest expense

    2,283        988        402        332                50        266        4,321   

Income (loss) before income taxes and noncontrolling interests

    698        1,483        157        74        351        216        (197     2,782   

Income taxes (benefit)

    255        493        58        27        82        79        (260     734   

Net income

  $ 443      $ 990      $ 99      $ 47      $ 269      $ 137      $ 63      $ 2,048   

Inter-segment revenue

  $ 1      $ 13      $ 5      $ 9      $ 8      $ (4   $ (32        

Average Assets (a)

  $ 73,691      $ 131,711      $ 7,974      $ 7,190      $ 6,760      $ 7,094      $ 115,941      $ 350,361   

2014

                 

Income Statement

                 

Net interest income

  $ 1,953      $ 1,791      $ 143      $ 77        $ 279      $ 81      $ 4,324   

Noninterest income

    1,055        791        406        356      $ 332        16        307        3,263   

Total revenue

    3,008        2,582        549        433        332        295        388        7,587   

Provision for credit losses (benefit)

    149        90        6            (91     12        166   

Depreciation and amortization

    88        63        21        6            188        366   

Other noninterest expense

    2,167        929        380        376                56        318        4,226   

Income (loss) before income taxes and noncontrolling interests

    604        1,500        142        51        332        330        (130     2,829   

Income taxes (benefit)

    221        507        52        19        79        121        (282     717   

Net income

  $ 383      $ 993      $ 90      $ 32      $ 253      $ 209      $ 152      $ 2,112   

Inter-segment revenue

  $ 2      $ 5      $ 6      $ 12      $ 8      $ (8   $ (25        

Average Assets (a)

  $ 75,559      $ 119,992      $ 7,642      $ 8,128      $ 6,400      $ 8,732      $ 94,596      $ 321,049   
(a) Period-end balances for BlackRock.

NOTE 18 SUBSEQUENT EVENTS

On July 21, 2015, PNC Bank issued:

   

$750 million of senior notes with a maturity date of July 20, 2018. Interest is payable semi-annually at a fixed rate of 1.850% on January 20 and July 20 of each year, beginning on January 20, 2016, and

   

$750 million of senior notes with a maturity date of July 21, 2020. Interest is payable semi-annually at a fixed rate of 2.600% on January 21 and July 21 of each year, beginning on January 21, 2016.

 

The PNC Financial Services Group, Inc. – Form 10-Q    129


STATISTICAL INFORMATION (UNAUDITED)

The PNC Financial Services Group, Inc.

Average Consolidated Balance Sheet And Net Interest Analysis (a) (b) (c)

 

        Six months ended June 30  
       2015        2014  

Taxable-equivalent basis

Dollars in millions

     Average
Balances
       Interest
Income/
Expense
       Average
Yields/
Rates
       Average
Balances
       Interest
Income/
Expense
       Average
Yields/
Rates
 

Assets

                             

Interest-earning assets:

                             

Investment securities

                             

Securities available for sale

                             

Residential mortgage-backed (d)

                             

Agency

     $ 19,924         $ 254           2.55      $ 19,959         $ 262           2.63

Non-agency

       4,568           105           4.61           5,290           134           5.05   

Commercial mortgage-backed (d)

       6,273           98           3.11           5,435           96           3.54   

Asset-backed

       5,184           55           2.10           5,496           52           1.87   

U.S. Treasury and government agencies

       5,174           31           1.20           4,528           28           1.25   

State and municipal

       1,971           45           4.60           2,376           54           4.56   

Other debt

       1,786           29           3.27           2,265           27           2.38   

Corporate stocks and other

       435                      .10           386                      .11   

Total securities available for sale

       45,315           617           2.72           45,735           653           2.86   

Securities held to maturity

                             

Residential mortgage-backed

       7,618           118           3.09           5,966           106           3.56   

Commercial mortgage-backed

       2,050           40           3.90           2,674           52           3.90   

Asset-backed

       749           5           1.52           997           8           1.53   

U.S. Treasury and government agencies

       251           5           3.79           241           5           3.79   

State and municipal

       2,011           55           5.51           1,395           38           5.52   

Other

       316           5           3.00           334           5           2.94   

Total securities held to maturity

       12,995           228           3.51           11,607           214           3.69   

Total investment securities

       58,310           845           2.90           57,342           867           3.02   

Loans

                             

Commercial

       98,117           1,474           2.99           90,698           1,535           3.37   

Commercial real estate

       24,370           443           3.61           22,217           460           4.12   

Equipment lease financing

       7,547           130           3.46           7,517           136           3.62   

Consumer

       60,855           1,259           4.17           62,781           1,311           4.21   

Residential real estate

       14,383           352           4.89           14,701           366           4.98   

Total loans

       205,272           3,658           3.56           197,914           3,808           3.85   

Interest-earning deposits with banks

       31,392           39           .25           13,410           17           .25   

Loans held for sale

       2,169           46           4.26           2,005           47           4.75   

Federal funds sold and resale agreements

       1,808           2           .22           1,299           2           .40   

Other

       5,259           132           5.03           5,111           118           4.62   

Total interest-earning assets/interest income

       304,210           4,722           3.10           277,081           4,859           3.51   

Noninterest-earning assets:

                             

Allowance for loan and lease losses

       (3,313                  (3,551          

Cash and due from banks

       4,010                     3,832             

Other

       45,454                     43,687             

Total assets

     $ 350,361                   $ 321,049             

Liabilities and Equity

                             

Interest-bearing liabilities:

                             

Interest-bearing deposits

                             

Money market

     $ 80,930           102           .25         $ 74,148           65           .18   

Demand

       46,207           12           .05           42,977           10           .05   

Savings

       13,416           11           .16           11,694           6           .09   

Retail certificates of deposit

       18,437           63           .69           20,274           75           .75   

Time deposits in foreign offices and other time

       2,246           2           .18           2,119           2           .17   

Total interest-bearing deposits

       161,236           190           .24           151,212           158           .21   

Borrowed funds

                             

Federal funds purchased and repurchase agreements

       2,916           2           .13           3,794           2           .09   

Federal Home Loan Bank borrowings

       21,391           49           .46           13,649           34           .50   

Bank notes and senior debt

       15,883           102           1.27           13,409           101           1.50   

Subordinated debt

       8,852           116           2.62           8,307           108           2.59   

Commercial paper

       4,309           7           .34           4,923           7           .28   

Other

       3,406           34           1.97           2,665           32           2.40   

Total borrowed funds

       56,757           310           1.09           46,747           284           1.21   

Total interest-bearing liabilities/interest expense

       217,993           500           .45           197,959           442           .45   

Noninterest-bearing liabilities and equity:

                             

Noninterest-bearing deposits

       74,245                     67,951             

Allowance for unfunded loan commitments and letters of credit

       246                     235             

Accrued expenses and other liabilities

       11,935                     10,078             

Equity

       45,942                     44,826             

Total liabilities and equity

     $ 350,361                               $ 321,049                         

Interest rate spread

                 2.65                     3.06   

Impact of noninterest-bearing sources

                             .13                                 .13   

Net interest income/margin

                $ 4,222           2.78                 $ 4,417           3.19

 

(a) Nonaccrual loans are included in loans, net of unearned income. The impact of financial derivatives used in interest rate risk management is included in the interest income/expense and average yields/rates of the related assets and liabilities. Basis adjustments related to hedged items are included in noninterest-earning assets and noninterest-bearing liabilities. Average balances of securities are based on amortized historical cost (excluding adjustments to fair value, which are included in other assets). Average balances for certain loans and borrowed funds accounted for at fair value, with changes in fair value recorded in trading noninterest income, are included in noninterest-earning assets and noninterest-bearing liabilities.
(b) Loan fees for the six months ended June 30, 2015 and June 30, 2014 were $50 million and $92 million, respectively. Loan fees for the three months ended June 30, 2015, March 31, 2015 and June 30, 2014 were $23 million, $27 million and $33 million, respectively.

 

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


 

                                                            
Second Quarter 2015     First Quarter 2015     Second Quarter 2014  

Average

Balances

   

Interest

Income/

Expense

   

Average

Yields/

Rates

   

Average

Balances

   

Interest

Income/

Expense

   

Average

Yields/

Rates

   

Average

Balances

   

Interest

Income/

Expense

   

Average

Yields/

Rates

 
               
               
               
               
               
  $20,550      $ 125        2.43   $ 19,290      $ 129        2.67   $ 19,207      $ 125        2.62
  4,480        52        4.70        4,657        53        4.51        5,204        68        5.19   
  6,286        48        3.03        6,260        50        3.19        5,295        48        3.59   
  5,228        28        2.12        5,140        27        2.08        5,400        27        1.96   
  5,204        15        1.12        5,142        16        1.27        4,883        15        1.20   
  1,973        23        4.76        1,969        22        4.45        2,104        22        4.27   
  1,796        18        4.01        1,777        11        2.53        2,028        12        2.35   
  414                .10        457                .10        362                .11   
  45,931        309        2.69        44,692        308        2.75        44,483        317        2.84   
               
  8,196        61        2.95        7,035        57        3.26        5,977        53        3.55   
  2,005        18        3.63        2,097        22        4.16        2,560        24        3.76   
  743        2        1.53        755        3        1.52        990        4        1.54   
  252        3        3.81        249        2        3.77        242        3        3.80   
  2,004        27        5.49        2,018        28        5.52        1,732        23        5.47   
  311        3        3.12        320        2        2.89        331        2        2.87   
  13,511        114        3.37        12,474        114        3.67        11,832        109        3.69   
  59,442        423        2.85        57,166        422        2.95        56,315        426        3.02   
               
  98,364        746        3.00        97,866        728        2.98        91,866        751        3.24   
  24,812        215        3.44        23,924        228        3.80        22,775        232        4.04   
  7,556        65        3.45        7,539        65        3.47        7,564        68        3.61   
  60,240        621        4.13        61,476        638        4.21        62,472        649        4.16   
  14,416        177        4.91        14,350        175        4.88        14,556        177        4.86   
  205,388        1,824        3.54        205,155        1,834        3.59        199,233        1,877        3.75   
  32,368        20        .25        30,405        19        .25        14,650        10        .27   
  2,092        23        4.33        2,246        23        4.20        2,060        24        4.79   
  1,959        1        .22        1,655        1        .22        1,184        1        .49   
  5,470        63        4.65        5,046        69        5.43        4,927        65        5.26   
  306,719        2,354        3.06        301,673        2,368        3.15        278,369        2,403        3.44   
               
  (3,309         (3,317         (3,512    
  3,954            4,067            3,776       
  45,276            45,634            43,887       
  $352,640          $ 348,057          $ 322,520       
               
               
               
  $81,857        55        .27      $ 79,994        47        .24      $ 74,261        33        .18   
  46,281        5        .05        46,131        7        .06        43,316        5        .05   
  13,775        6        .17        13,053        5        .15        11,976        4        .10   
  18,334        31        .68        18,541        32        .71        20,012        37        .74   
  2,300        1        .16        2,192        1        .19        2,168        1        .17   
  162,547        98        .24        159,911        92        .23        151,733        80        .21   
               
  2,718        1        .14        3,116        1        .12        3,343        1        .07   
  22,001        25        .46        20,774        24        .45        14,193        17        .50   
  16,408        50        1.19        15,351        52        1.36        13,490        51        1.51   
  8,861        58        2.61        8,851        58        2.64        8,570        57        2.65   
  3,640        3        .35        4,986        4        .34        4,917        4        .29   
  3,537        18        1.95        3,274        16        1.99        2,591        17        2.60   
  57,165        155        1.07        56,352        155        1.10        47,104        147        1.24   
  219,712        253        .46        216,263        247        .46        198,837        227        .45   
               
  75,299            73,178            68,219       
  234            260            228       
  11,540            12,326            10,035       
  45,855            46,030            45,201       
  $352,640                      $ 348,057                      $ 322,520                   
      2.60            2.69            2.99   
      .13            .13            .13   
        $ 2,101        2.73           $ 2,121        2.82           $ 2,176        3.12

 

(c) Interest income includes the effects of taxable-equivalent adjustments using a statutory federal income tax rate of 35% to increase tax-exempt interest income to a taxable-equivalent basis. The taxable-equivalent adjustments to interest income for the six months ended June 30, 2015 and June 30, 2014 were $98 million and $93 million, respectively. The taxable-equivalent adjustments to interest income for the three months ended June 30, 2015, March 31, 2015 and June 30, 2014 were $49 million, $49 million and $47 million, respectively.
(d) In the third quarter of 2014, these line items were corrected for all periods then presented due to a misclassification of Government National Mortgage Association (GNMA) securities collateralized by project loans, which were previously reported as residential mortgage-backed agency securities and have been reclassified to commercial mortgage-backed securities, and these lines are now also corrected for the six months ended June 30, 2014.

 

The PNC Financial Services Group, Inc. – Form 10-Q    131


Transitional Basel III and Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios – 2014 Periods

 

     2014 Transitional Basel III      Pro forma Fully Phased-In
Basel III (a) (b)
 
Dollars in millions    December 31
2014
    

June 30

2014

     December 31
2014
    

June 30

2014

 

Common stock, related surplus and retained earnings, net of treasury stock

   $ 40,103       $ 39,380       $ 40,103       $ 39,380   
   

Less regulatory capital adjustments:

               

Goodwill and disallowed intangibles, net of deferred tax liabilities

     (8,939      (8,923      (9,276      (9,262

Basel III total threshold deductions

     (212      (216      (1,081      (1,075

Accumulated other comprehensive income (c)

     40         115         201         576   

All other adjustments

     (63      (5      (121      (74

Estimated Basel III Common equity Tier 1 capital

   $ 30,929       $ 30,351       $ 29,826       $ 29,545   

Estimated Basel I risk-weighted assets calculated in accordance with transition
rules (d)

   $ 284,018       $ 277,126         N/A         N/A   

Estimated Basel III standardized approach risk-weighted assets (e)

     N/A         N/A       $ 298,786       $ 295,217   

Estimated Basel III advanced approaches risk-weighted assets (f)

     N/A         N/A       $ 285,870       $ 290,063   

Estimated Basel III Common equity Tier 1 capital ratio

     10.9      11.0      10.0      10.0

Risk weight and associated rules utilized

    
 
Basel I (with 2014 transition
adjustments)
  
  
     Standardized   
(a) PNC utilizes the pro forma fully phased-in Basel III capital ratios to assess its capital position (without the benefit of phase-ins), including comparison to similar estimates made by other financial institutions.
(b) Basel III capital ratios and estimates may be impacted by additional regulatory guidance and, in the case of those ratios calculated using the advanced approaches, the ongoing evolution, validation and regulatory approval of PNC’s models integral to the calculation of advanced approaches risk-weighted assets.
(c) Represents net adjustments related to accumulated other comprehensive income for securities currently and previously held as available for sale, as well as pension and other postretirement plans.
(d) Includes credit and market risk-weighted assets.
(e) Basel III standardized approach risk-weighted assets were estimated based on the Basel III standardized approach rules and include credit and market risk-weighted assets.
(f) Basel III advanced approaches risk-weighted assets were estimated based on the Basel III advanced approaches rules, and include credit, market and operational risk-weighted assets.

 

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


PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See the information set forth in Note 15 Legal Proceedings in the Notes To Consolidated Financial Statements under Part I, Item 1 of this Report, which is incorporated by reference in response to this item.

ITEM 1A. RISK FACTORS

There are no material changes from any of the risk factors previously disclosed in PNC’s 2014 Form 10-K in response to Part I, Item 1A.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Details of our repurchases of PNC common stock during the second quarter of 2015 are included in the following table:

 

2015 period

In thousands, except per share data

  Total shares
purchased
(a)
    Average
price
paid per
share
    Total shares
purchased
as part of
publicly
announced
programs
(b)
   

Maximum
number

of shares
that may
yet be
purchased
under the
programs
(b)

 

April 1 – 30

    2,770      $ 92.13        2,730        97,270   

May 1 – 31

    1,739      $ 94.02        1,739        95,531   

June 1 – 30

    1,404      $ 97.29        1,399        94,132   

Total

    5,913      $ 93.91                   
(a) Includes PNC common stock purchased in connection with our various employee benefit plans generally related to forfeitures of unvested restricted stock awards and shares used to cover employee payroll tax withholding requirements. Note 13 Employee Benefit Plans and Note 14 Stock Based Compensation Plans in the Notes To Consolidated Financial Statements in Item 8 of our 2014 Annual Report on Form 10-K include additional information regarding our employee benefit and equity compensation plans that use PNC common stock.
(b) On March 11, 2015, we announced that our Board of Directors had approved the establishment of a new stock repurchase program authorization in the amount of 100 million shares of PNC common stock, effective April 1, 2015. Repurchases are made in open market or privately negotiated transactions and the timing and exact amount of common stock repurchases will depend on a number of factors including, among others, market and general economic conditions, economic capital and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations, including the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process.
  Our 2015 capital plan, submitted as part of the CCAR process and accepted by the Federal Reserve, included share repurchase programs of up to $2.875 billion for the five quarter period beginning with the second quarter of 2015. This amount does not include share repurchases in connection with various employee benefit plans referenced in note (a). In the second quarter of 2015, in accordance with PNC’s 2015 capital plan and under the share repurchase authorization in effect during that period, we repurchased 5.9 million shares of common stock on the open market, with an average price of $93.93 per share and an aggregate repurchase price of $.6 billion. See the Capital portion of the Consolidated Balance Sheet Review in Part I, Item 2 of this Report for more information on the share repurchase programs under the new share repurchase authorization referenced above for the period April 1, 2015 through June 30, 2016 included in the 2015 capital plan accepted by the Federal Reserve.

ITEM 6. EXHIBITS

The following exhibit index lists Exhibits filed, or in the case of Exhibits 32.1 and 32.2 furnished, with this Quarterly Report on Form 10-Q:

EXHIBIT INDEX

 

4.21.2    Amendment No. 1 to Issuing and Paying Agency Agreement, dated May 22, 2015, between PNC Bank, National Association and PNC Bank, National Association, relating to the $30 billion Global Bank Note Program for the Issue of Senior and Subordinated Bank Notes
4.29    Form of PNC Bank, National Association Global Bank Note for Fixed Rate Global Subordinated Bank Note issued after May 22, 2015 with Maturity of five years or more from Date of Issuance (incorporated herein by reference to Exhibit 4.21.2)
4.30    Form of PNC Bank, National Association Global Bank Note for Floating Rate Global Subordinated Bank Note issued after May 22, 2015 with Maturity of five years or more from Date of Issuance (incorporated herein by reference to Exhibit 4.21.2)
10.47.2    Amendment No. 1 to Distribution Agreement, dated May 22, 2015, between PNC Bank, National Association and the Dealers named therein, relating to the $30 billion Global Bank Note Program for the Issue of Senior and Subordinated Bank Notes
10.50    2015 Forms of Performance Restricted Share Unit Award Agreements
10.51    2015 Forms of Incentive Performance Unit Award Agreements
10.52    2015 Forms of Restricted Share Unit Award Agreements
12.1    Computation of Ratio of Earnings to Fixed Charges
12.2    Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2    Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101    Interactive Data File (XBRL)

You can obtain copies of these Exhibits electronically at the SEC’s website at www.sec.gov or by mail from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, DC 20549 at prescribed rates. The Exhibits are also available as part of this Form 10-Q on PNC’s corporate website at www.pnc.com/secfilings. Shareholders and bondholders may also obtain copies of Exhibits, without charge, by contacting Shareholder Relations at 800-843-2206 or via e-mail at investor.relations@pnc.com. The interactive data file (XBRL) exhibit is only available electronically.

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    133


CORPORATE INFORMATION

The PNC Financial Services Group, Inc.

Corporate Headquarters

The PNC Financial Services Group, Inc.

One PNC Plaza, 249 Fifth Avenue

Pittsburgh, Pennsylvania 15222-2707

412-762-2000

Stock Listing

The common stock of The PNC Financial Services Group, Inc. is listed on the New York Stock Exchange under the symbol “PNC”.

Internet Information

The PNC Financial Services Group, Inc.’s financial reports and information about its products and services are available on the internet at www.pnc.com. We provide information for investors on our corporate website under “About Us – Investor Relations,” such as Investor Events, SEC Filings, Financial Information (including Quarterly Earnings, Annual Reports, Proxy Statements and Regulatory Disclosures), Financial Press Releases, Message from the Chairman and Corporate Governance. Under “Investor Relations,” we will from time to time post information that we believe may be important or useful to investors. We use our Twitter account, @pncnews, as an additional way of disseminating public information from time to time to investors. We generally post the following on our corporate website shortly before or promptly following its first use or release: financially-related press releases (including earnings releases), various SEC filings, including annual, quarterly and current reports, presentation materials associated with earnings and other investor conference calls or events, and access to live and taped audio from earnings and other investor conference calls or events. In some cases, we may post the presentation materials for other investor conference calls or events several days prior to the call or event. For earnings and other conference calls or events, we generally include in our posted materials a cautionary statement regarding forward-looking and adjusted information and we provide GAAP reconciliations when we refer to adjusted information and results. Where applicable, we provide GAAP reconciliations for such additional information in materials for that event or in materials for other prior investor presentations or in our annual, quarterly or current reports. When warranted, we will also use our website to expedite public access to time-critical information regarding PNC in advance of distribution of a press release or a filing with the SEC disclosing the same information.

PNC was also required to provide additional public disclosure regarding estimated income, losses and pro forma regulatory capital ratios in March 2015 under a supervisory hypothetical severely adverse economic scenario and a similar public

disclosure in July 2015 under a PNC-developed hypothetical severely adverse economic scenario, as well as information concerning its capital stress testing processes, pursuant to the stress testing regulations adopted by the Federal Reserve and the OCC. PNC is also required to make certain additional regulatory capital-related public disclosures about PNC’s capital structure, risk exposures, risk assessment processes, risk-weighted assets and overall capital adequacy, including market risk-related disclosures, under the regulatory capital rules adopted by the Federal banking agencies. Under these regulations, PNC may satisfy these requirements through postings on its website, and PNC has done so and expects to continue to do so without also providing disclosure of this information through filings with the SEC. We also post on our website communications to our shareholders, such as the letter to shareholders that accompanies the Form 10-K mailed to shareholders, and may not file them as exhibits to filings with the SEC when not expressly required.

You can also find the SEC reports and corporate governance information described in the sections below in the Investor Relations section of our website.

Where we have included web addresses in this Report, such as our web address and the web address of the SEC, we have included those web addresses as inactive textual references only. Except as specifically incorporated by reference into this Report, information on those websites is not part hereof.

Financial Information

We are subject to the informational requirements of the Securities Exchange Act of 1934 (Exchange Act) and, in accordance with the Exchange Act, we file annual, quarterly and current reports, proxy statements, and other information with the SEC. Our SEC File Number is 001-09718. You can obtain copies of these and other filings, including exhibits, electronically at the SEC’s internet website at www.sec.gov or on PNC’s corporate internet website at www.pnc.com/secfilings. Shareholders and bond holders may also obtain copies of these filings without charge by contacting Shareholder Services at 800-982-7652 or via the online contact form at www.computershare.com/contactus for copies without exhibits, and by contacting Shareholder Relations at 800-843-2206 or via email at investor.relations@pnc.com for copies of exhibits, including financial statement and schedule exhibits where applicable. The interactive data file (XBRL) exhibit is only available electronically.

Corporate Governance at PNC

Information about our Board of Directors and its committees and corporate governance at PNC is available on PNC’s corporate website at www.pnc.com/corporategovernance. Our PNC Code of Business Conduct and Ethics is available on our corporate website at www.pnc.com/corporategovernance. In addition, any future amendments to, or waivers from, a

 

 

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


provision of the PNC Code of Business Conduct and Ethics that applies to our directors or executive officers (including our principal executive officer, principal financial officer, and principal accounting officer or controller) will be posted at this internet address.

Shareholders who would like to request printed copies of the PNC Code of Business Conduct and Ethics or our Corporate Governance Guidelines or the charters of our Board’s Audit, Nominating and Governance, Personnel and Compensation, or Risk Committees (all of which are posted on the PNC corporate website) may do so by sending their requests to PNC’s Corporate Secretary at corporate headquarters at the above address. Copies will be provided without charge to shareholders.

Inquiries

For financial services call 888-PNC-2265.

Individual shareholders should contact Shareholder Services at 800-982-7652.

Analysts and institutional investors should contact William H. Callihan, Senior Vice President, Director of Investor Relations, at 412-762-8257 or via email at investor.relations@pnc.com.

News media representatives and others seeking general information should contact Fred Solomon, Senior Vice President, Corporate Communications, at 412-762-4550 or via email at corporate.communications@pnc.com.

Common Stock Prices/Dividends Declared

The table below sets forth by quarter the range of high and low sale and quarter-end closing prices for The PNC Financial Services Group, Inc. common stock and the cash dividends declared per common share.

 

      High      Low      Close      Cash
Dividends
Declared
(a)
 

2015 Quarter

             

First

   $ 96.71       $ 81.84       $ 93.24       $ .48   

Second

     99.61         90.42         95.65         .51   

Total

                              $ .99   

2014 Quarter

             

First

   $ 87.80       $ 76.06       $ 87.00       $ .44   

Second

     89.85         79.80         89.05         .48   

Third

     90.00         80.43         85.58         .48   

Fourth

     93.45         76.69         91.23         .48   

Total

                              $ 1.88   
(a) Our Board approved a third quarter 2015 cash dividend of $.51 per common share, which was payable on August 5, 2015.

Dividend Policy

Holders of PNC common stock are entitled to receive dividends when declared by the Board of Directors out of funds legally available for this purpose. Our Board of Directors may not pay or set apart dividends on the common stock until dividends for all past dividend periods on any series of outstanding preferred stock have been paid or declared and set apart for payment. The Board presently intends to continue the policy of paying quarterly cash dividends. The amount of any future dividends will depend on economic and market conditions, our financial condition and operating results, and other factors, including contractual restrictions and applicable government regulations and policies (such as those relating to the ability of bank and non-bank subsidiaries to pay dividends to the parent company and regulatory capital limitations). The amount of our dividend is also currently subject to the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the 2015 Comprehensive Capital Analysis and Review (CCAR) process as described in the Executive Summary section of the Financial Review of this Report and in Supervision and Regulation section in Item 1 of our 2014 Form 10-K.

Dividend Reinvestment And Stock Purchase Plan

The PNC Financial Services Group, Inc. Dividend Reinvestment and Stock Purchase Plan enables holders of our common and preferred Series B stock to conveniently purchase additional shares of common stock. You can obtain a prospectus and enrollment form by contacting Shareholder Services at 800-982-7652.

Stock Transfer Agent And Registrar

Computershare Trust Company, N.A.

250 Royall Street

Canton, MA 02021

800-982-7652

Registered shareholders may contact the above phone number regarding dividends and other shareholder services.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on August 5, 2015 on its behalf by the undersigned thereunto duly authorized.

The PNC Financial Services Group, Inc.

/s/ Robert Q. Reilly

Robert Q. Reilly

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

 

The PNC Financial Services Group, Inc. – Form 10-Q    135