Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2017

or

 

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

For the transition period from              to             

Commission file number 001-09718

The PNC Financial Services Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   25-1435979

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

The Tower at PNC Plaza, 300 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2401

(Address of principal executive offices, including zip code)

(888) 762-2265

(Registrant’s telephone number, including area code)

 

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically 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  ☒    No  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.    ☐

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

As of July 21, 2017, there were 479,206,546 shares of the registrant’s common stock ($5 par value) outstanding.

 

 

 


THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2017 Form 10-Q

 

     Pages  

PART I – FINANCIAL INFORMATION

  

Item 1.      Financial Statements (Unaudited).

  

Consolidated Income Statement

     38  

Consolidated Statement of Comprehensive Income

     39  

Consolidated Balance Sheet

     40  

Consolidated Statement of Cash Flows

     41  

Notes To Consolidated Financial Statements (Unaudited)

 

Note 1   Accounting Policies

     43  

Note 2   Loan Sale and Servicing Activities and Variable Interest Entities

     43  

Note 3   Asset Quality

     45  

Note 4   Allowance for Loan and Lease Losses

     52  

Note 5   Investment Securities

     53  

Note 6   Fair Value

     56  

Note 7   Goodwill and Mortgage Servicing Rights

     67  

Note 8   Employee Benefit Plans

     68  

Note 9   Financial Derivatives

     69  

Note 10 Earnings Per Share

     73  

Note 11 Total Equity and Other Comprehensive Income

     74  

Note 12 Legal Proceedings

     76  

Note 13 Commitments

     77  

Note 14 Segment Reporting

     78  

Note 15 Subsequent Events

     81  

Statistical Information (Unaudited)

  

Average Consolidated Balance Sheet And Net Interest Analysis

     82  

Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP)

     84  

Transitional Basel III and Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios (Non-GAAP) – 2016 Periods

     84  

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

  

Financial Review

     1  

Consolidated Financial Highlights

     1  

Executive Summary

     3  

Consolidated Income Statement Review

     5  

Consolidated Balance Sheet Review

     8  

Business Segments Review

     12  

Risk Management

     20  

Recent Regulatory Developments

     33  

Critical Accounting Estimates and Judgments

     33  

Off-Balance Sheet Arrangements and Variable Interest Entities

     35  

Internal Controls and Disclosure Controls and Procedures

     36  

Glossary of Terms

     36  

Cautionary Statement Regarding Forward-Looking Information

     36  

Item 3.      Quantitative and Qualitative Disclosures about Market Risk.

    
20-33, 56-66
and 69-73
 
 

Item 4.      Controls and Procedures.

     36  

PART       II – OTHER INFORMATION

  

Item 1.      Legal Proceedings.

     85  

Item 1A.  Risk Factors.

     85  

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds.

     85  

Item 6.      Exhibits.

     85  

Exhibit     Index

     85  

CorporateInformation

     86  

Signature 

     87  


THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2017 Form 10-Q (continued)

 

MD&A TABLE REFERENCE

 

Table

  

Description

   Page  
1    Consolidated Financial Highlights      1  
2    Summarized Average Balances and Net Interest Income      5  
3    Noninterest Income      6  
4    Noninterest Expense      7  
5    Summarized Balance Sheet Data      8  
6    Details of Loans      9  
7    Investment Securities      10  
8    Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities      10  
9    Details of Funding Sources      11  
10    Retail Banking Table      13  
11    Corporate & Institutional Banking Table      16  
12    Asset Management Group Table      19  
13    BlackRock Table      20  
14    Nonperforming Assets by Type      21  
15    Change in Nonperforming Assets      21  
16    Accruing Loans Past Due      22  
17    Home Equity Lines of Credit – Draw Period End Dates      23  
18    Consumer Real Estate Related Loan Modifications      23  
19    Summary of Troubled Debt Restructurings      24  
20    Allowance for Loan and Lease Losses      25  
21    Loan Charge-Offs and Recoveries      25  
22    Senior and Subordinated Debt      26  
23    PNC Bank Notes Issued During Second Quarter 2017      27  
24    Credit Ratings as of June 30, 2017 for PNC and PNC Bank      28  
25    Basel III Capital      29  
26    Interest Sensitivity Analysis      31  
27    Net Interest Income Sensitivity to Alternative Rate Scenarios (Second Quarter 2017)      31  
28    Alternate Interest Rate Scenarios: One Year Forward      31  
29    Equity Investments Summary      32  
30    Fair Value Measurements – Summary      33  

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE

 

  

Table

  

Description

   Page  
31    Cash Flows Associated with Loan Sale and Servicing Activities      44  
32    Principal Balance, Delinquent Loans and Net Charge-offs Related to Serviced Loans For Others      44  
33    Non-Consolidated VIEs      45  
34    Analysis of Loan Portfolio      46  
35    Nonperforming Assets      47  
36    Commercial Lending Asset Quality Indicators      47  
37    Asset Quality Indicators for Home Equity and Residential Real Estate Loans  – Excluding Purchased Impaired and Government Insured or Guaranteed Loans      48  
38    Credit Card and Other Consumer Loan Classes Asset Quality Indicators      50  
39    Financial Impact and TDRs by Concession Type      50  
40    Impaired Loans      51  
41    Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data      52  
42    Investment Securities Summary      53  
43    Gross Unrealized Loss and Fair Value of Debt Securities      54  
44    Gains (Losses) on Sales of Securities Available for Sale      55  
45    Contractual Maturity of Debt Securities      55  
46    Fair Value of Securities Pledged and Accepted as Collateral      56  
47    Fair Value Measurements – Recurring Basis Summary      57  
48    Reconciliation of Level 3 Assets and Liabilities      58  


THE PNC FINANCIAL SERVICES GROUP, INC.

Cross-Reference Index to Second Quarter 2017 Form 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE (Continued)

 

Table

  

Description

   Page  
49    Fair Value Measurements – Recurring Quantitative Information      62  
50    Fair Value Measurements – Nonrecurring      64  
51    Fair Value Measurements – Nonrecurring Quantitative Information      64  

52

   Fair Value Option – Fair Value and Principal Balances      65  

53

   Fair Value Option – Changes in Fair Value      65  

54

   Additional Fair Value Information Related to Other Financial Instruments      66  

55

   Mortgage Servicing Rights      67  

56

   Commercial Mortgage Loan Servicing Rights – Key Valuation Assumptions      67  

57

   Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions      68  

58

   Components of Net Periodic Benefit Cost      68  

59

   Total Gross Derivatives      69  

60

   Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges      70  

61

   Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges      71  

62

   Gains (Losses) on Derivatives Not Designated for Hedging under GAAP      71  

63

   Derivative Assets and Liabilities Offsetting      72  

64

   Basic and Diluted Earnings Per Common Share      73  

65

   Rollforward of Total Equity      74  

66

   Other Comprehensive Income      75  

67

   Accumulated Other Comprehensive Income (Loss) Components      76  

68

   Commitments to Extend Credit and Other Commitments      77  

69

   Results of Businesses      80  


FINANCIAL REVIEW

THE PNC FINANCIAL SERVICES GROUP, INC.

This Financial Review, including the Consolidated Financial Highlights, should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report and with Items 6, 7, 8 and 9A of our 2016 Annual Report on Form 10-K (2016 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: the Risk Management section of this Financial Review and of Item 7 in our 2016 Form 10-K; Item 1A Risk Factors included in our 2016 Form 10-K; and the Legal Proceedings and Commitments Notes of the Notes To Consolidated Financial Statements included in Item 1 of this Report and Item 8 of our 2016 Form 10-K. Also, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and the Critical Accounting Estimates And Judgments section in this Financial Review and in our 2016 Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this Report. See Note 14 Segment Reporting in the Notes To Consolidated Financial Statements included in this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a generally accepted accounting principles (GAAP) basis. In this Report, “PNC”, “we” or “us” refers to The PNC Financial Services Group, Inc. and its subsidiaries on a consolidated basis. References to The PNC Financial Services Group, Inc. or to any of its subsidiaries are specifically made where applicable.

Table 1: Consolidated Financial Highlights

 

Dollars in millions, except per share data

Unaudited

  Three months ended
June 30
    Six months ended
June 30
 
  2017     2016     2017     2016  

Financial Results (a)

         

Revenue

         

Net interest income

  $ 2,258     $ 2,068     $ 4,418     $ 4,166  

Noninterest income

    1,802       1,726       3,526       3,293  

Total revenue

    4,060       3,794       7,944       7,459  

Provision for credit losses

    98       127       186       279  

Noninterest expense

    2,479       2,360       4,881       4,641  

Income before income taxes and noncontrolling interests

  $ 1,483     $ 1,307     $ 2,877     $ 2,539  

Net income

  $ 1,097     $ 989     $ 2,171     $ 1,932  

Less:

         

Net income attributable to noncontrolling interests

    10       23       27       42  

Preferred stock dividends

    55       42       118       105  

Preferred stock discount accretion and redemptions

    2       1       23       3  

Net income attributable to common shareholders

  $ 1,030     $ 923     $ 2,003     $ 1,782  

Less:

         

Dividends and undistributed earnings allocated to nonvested restricted shares

    4       6       10       12  

Impact of BlackRock earnings per share dilution

    1       3       5       6  

Net income attributable to diluted common shares

  $ 1,025     $ 914     $ 1,988     $ 1,764  

Diluted earnings per common share

  $ 2.10     $ 1.82     $ 4.05     $ 3.49  

Cash dividends declared per common share

  $ .55     $ .51     $ 1.10     $ 1.02  

Effective tax rate (b)

    26.0     24.3     24.5     23.9

Performance Ratios

         

Net interest margin (c)

    2.84     2.70     2.81     2.73

Noninterest income to total revenue

    44     45     44     44

Efficiency

    61     62     61     62

Return on:

         

Average common shareholders’ equity

    9.88     8.87     9.69     8.66

Average assets

    1.19     1.11     1.19     1.09
(a) The Executive Summary and Consolidated Income Statement Review portions of this Financial Review section provide information regarding items impacting the comparability of the periods presented.
(b) The effective income tax rates are generally lower than the statutory rate due to the relationship of pretax income to tax credits and earnings that are not subject to tax.
(c) Calculated as annualized taxable-equivalent net interest income divided by average earning assets. To provide more meaningful comparisons of net interest margins, 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, 2017 and June 30, 2016 were $54 million and $48 million, respectively. The taxable-equivalent adjustments to net interest income for the six months ended June 30, 2017 and June 30, 2016 were $106 million and $96 million, respectively. For additional information, see Statistical Information (Unaudited) section in Item 1 of this Report.

 

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


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

 

Unaudited  

June 30

2017

    December 31
2016
   

June 30

2016

 

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

       

Assets

  $ 372,190     $ 366,380     $ 361,335  

Loans

  $ 218,034     $ 210,833     $ 209,056  

Allowance for loan and lease losses

  $ 2,561     $ 2,589     $ 2,685  

Interest-earning deposits with banks (b)

  $ 22,482     $ 25,711     $ 26,750  

Investment securities

  $ 76,431     $ 75,947     $ 71,801  

Loans held for sale

  $ 2,030     $ 2,504     $ 2,296  

Equity investments (c)

  $ 10,819     $ 10,728     $ 10,469  

Mortgage servicing rights

  $ 1,867     $ 1,758     $ 1,222  

Goodwill

  $ 9,163     $ 9,103     $ 9,103  

Other assets

  $ 28,886     $ 27,506     $ 29,127  
 

Noninterest-bearing deposits

  $ 79,550     $ 80,230     $ 77,866  

Interest-bearing deposits

  $ 179,626     $ 176,934     $ 171,912  

Total deposits

  $ 259,176     $ 257,164     $ 249,778  

Borrowed funds

  $ 56,406     $ 52,706     $ 54,571  

Total shareholders’ equity

  $ 46,084     $ 45,699     $ 45,558  

Common shareholders’ equity

  $ 42,103     $ 41,723     $ 42,103  

Accumulated other comprehensive income (loss)

  $ (98   $ (265   $ 736  
 

Book value per common share

  $ 87.78     $ 85.94     $ 85.33  

Common shares outstanding (in millions)

    480       485       493  

Loans to deposits

    84     82     84
 

Client Assets (in billions)

       

Discretionary client assets under management

  $ 141     $ 137     $ 135  

Nondiscretionary client assets under administration

    125       120       117  

Total client assets under administration (d)

    266       257       252  

Brokerage account client assets

    46       44       44  

Total client assets

  $ 312     $ 301     $ 296  
 

Capital Ratios

       

Transitional Basel III (e) (f)

       

Common equity Tier 1

    10.3     10.6     10.6

Tier 1 risk-based

    11.6     12.0     11.9

Total capital risk-based

    13.7     14.3     14.3

Leverage

    9.9     10.1     10.2

Pro forma Fully Phased-In Basel III (Non-GAAP) (f)

       

Common equity Tier 1

    9.8     10.0     10.2

Common shareholders’ equity to assets

    11.3     11.4     11.7
 

Asset Quality

       

Nonperforming loans to total loans

    .90     1.02     1.08

Nonperforming assets to total loans, OREO, foreclosed and other assets

    .99     1.12     1.20

Nonperforming assets to total assets

    .58     .65     .70

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

    .20     .20     .26

Allowance for loan and lease losses to total loans

    1.17     1.23     1.28

Allowance for loan and lease losses to total nonperforming loans

    131     121     119

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

  $ 674     $ 782     $ 754  
(a) The Executive Summary and Consolidated Balance Sheet Review portions of this Financial Review provide information regarding items impacting the comparability of the periods presented.
(b) Amounts include balances held with the Federal Reserve Bank of Cleveland (Federal Reserve Bank) of $22.1 billion, $25.1 billion and $26.3 billion as of June 30, 2017, December 31, 2016 and June 30, 2016, respectively.
(c) Amounts include our equity interest in BlackRock.
(d) As a result of certain investment advisory services performed by one of our registered investment advisors, certain assets were previously reported as both discretionary client assets under management and nondiscretionary client assets under administration. Effective for the first quarter of 2017, these amounts are only reported as discretionary assets under management. Prior periods were adjusted to remove amounts previously included in nondiscretionary assets under administration of approximately $9 billion at both December 31, 2016 and June 30, 2016.
(e) Calculated using the regulatory capital methodology applicable to PNC during each period presented.
(f) See Basel III Capital discussion in the Capital Management portion of the Risk Management section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business in our 2016 Form 10-K. See also the Transitional Basel III and Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratios (Non-GAAP) – 2016 Periods table in the Statistical Information section of this Report for a reconciliation of the 2016 periods’ ratios.

 

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


EXECUTIVE SUMMARY

The PNC Financial Services Group, Inc. 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, including residential mortgage, corporate and institutional banking and asset management, providing many of our products and services nationally. Our primary geographic markets are located in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, Florida, North Carolina, Kentucky, Washington, D.C., Delaware, Virginia, Georgia, Alabama, Missouri, 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 revenue and improving profitability, while investing for the future and managing risk, expenses and capital. We continue to invest in our products, markets and brand, and embrace our commitments to our customers, shareholders, employees and the communities where we do business.

We strive to 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 to our customers with the goal of addressing their financial objectives and putting customers’ needs first. Our business model is built on customer loyalty and engagement, understanding our customers’ financial goals and offering our diverse products and services to help them achieve financial wellbeing. Our approach is concentrated on organically growing and deepening client relationships across our businesses that meet our risk/return measures.

Our strategic priorities are designed to enhance value over the long term. One of our priorities is to build a leading banking franchise in our underpenetrated geographic markets. We are focused on reinventing the retail banking experience by transforming the retail distribution network and the home lending process for a better customer experience and improved efficiency, and growing our consumer loan portfolio. In addition, we are seeking to attract more of the investable assets of new and existing clients and we continue to focus on expense management while investing in technology to bolster critical business infrastructure and streamline core 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 currently effective capital plan included in our Comprehensive Capital Analysis and Review (CCAR) submission to the Board of Governors of the Federal Reserve System (Federal Reserve). For more detail, see the Capital Highlights portion of this Executive Summary and the Liquidity and Capital Management portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2016 Form 10-K.

Income Statement Highlights

Net income for the second quarter of 2017 was $1.1 billion, or $2.10 per diluted common share, an increase of 11%, compared to $1.0 billion, or $1.82 per diluted common share, for the second quarter of 2016.

   

Total revenue increased $266 million, or 7%, to $4.1 billion.

   

Net interest income increased $190 million, or 9%, to $2.3 billion.

   

Net interest margin increased to 2.84% compared to 2.70% for the second quarter of 2016.

   

Noninterest income increased $76 million, or 4%, to $1.8 billion.

   

Provision for credit losses decreased to $98 million compared to $127 million for the second quarter of 2016.

   

Noninterest expense increased $119 million, or 5%, to $2.5 billion, reflecting overall higher levels of business activity.

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

Balance Sheet Highlights

Our balance sheet was strong and well positioned at June 30, 2017 and December 31, 2016.

   

Total loans increased $7.2 billion, or 3%, to $218.0 billion.

   

Total commercial lending grew $7.8 billion, or 6%.

   

Total consumer lending decreased $.6 billion, or 1%.

   

Total deposits increased $2.0 billion, or 1%, to $259.2 billion.

   

Investment securities increased $.5 billion, or 1%, to $76.4 billion.

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

 

 

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


Credit Quality Highlights

Overall credit quality remained stable at June 30, 2017 compared to December 31, 2016.

   

Nonperforming assets decreased $221 million, or 9%, to $2.2 billion at June 30, 2017 compared with December 31, 2016.

   

Overall loan delinquencies decreased $250 million, or 16%, as of June 30, 2017 compared with December 31, 2016.

   

Net charge-offs of $110 million in the second quarter of 2017 decreased 18% compared to net charge-offs of $134 million for the second quarter of 2016.

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

Capital Highlights

We maintained a strong capital position and continued to return capital to shareholders.

   

The Transitional Basel III common equity Tier 1 capital ratio was 10.3% at June 30, 2017 compared to 10.6% at December 31, 2016.

   

Pro forma fully phased-in Basel III common equity Tier 1 capital ratio, a non-GAAP financial measure, was an estimated 9.8% at June 30, 2017 compared to 10.0% at December 31, 2016 based on the standardized approach rules.

   

In the second quarter of 2017, we returned $1.0 billion of capital to shareholders through repurchases of 5.7 million common shares for $.7 billion and dividends on common shares of $.3 billion, completing our common stock repurchase program for the four quarter period ending in the second quarter of 2017.

   

In June 2017, we announced share repurchase programs of up to $2.7 billion for the four-quarter period beginning in the third quarter of 2017, including repurchases of up to $.3 billion related to employee benefit plans.

   

In July 2017, our board of directors raised the quarterly cash dividend on common stock to 75 cents per share, an increase of 20 cents per share, or 36%, effective with the August 2017 dividend.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for more detail on our 2017 capital and liquidity actions as well as our capital ratios.

Our ability to take certain capital actions, including plans to pay or increase common stock dividends or to repurchase shares under current or future programs, is subject to the results of the supervisory assessment of capital adequacy undertaken by the Federal Reserve as part of the CCAR

process. For additional information, see the Supervision and Regulation section in Item 1 Business of our 2016 Form 10-K.

Business Outlook

Statements regarding our business outlook are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory contingencies. These statements are based on our current view that the U.S. economy and the labor market will grow moderately in 2017, boosted by stable oil/energy prices, improving consumer spending and housing activity, and some federal fiscal policy stimulus as a result of the 2016 elections. Short-term interest rates and bond yields are expected to continue rising in 2017; inflation has slowed in the first half of 2017, but should gradually accelerate into 2018. Specifically, our business outlook reflects our expectation of continued steady growth in GDP, one 25 basis point increase in short-term interest rates by the Federal Reserve in December of 2017, and an announcement from the Federal Reserve that it will begin to reduce the size of its balance sheet in the fall of 2017. We are also assuming that long-term rates rise at a slower pace than short-term rates. See the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2016 Form 10-K for other factors that could cause future events to differ, perhaps materially, from those anticipated in these forward-looking statements.

For the full year 2017 compared to full year 2016, we continue to expect:

   

Loans to increase by mid-single digits, on a percentage basis;

   

Revenue growth in the upper end of the mid-single digit range, on a percentage basis;

   

Noninterest expense to increase by low single digits, on a percentage basis; and

   

The effective tax rate to be between 25% and 26% absent the impact of any tax reform.

For each remaining quarter of 2017, we expect other noninterest income to be between $250 million and $300 million.

For the third quarter of 2017 compared to the second quarter of 2017, we expect:

   

Modest loan growth;

   

Net interest income to increase by low single digits, on a percentage basis;

   

Fee income to be stable. Fee income consists of asset management, consumer services, corporate services, residential mortgage and service charges on deposits;

   

Provision for credit losses to be between $75 million and $125 million; and

   

Noninterest expense to be stable.

 

 

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


CONSOLIDATED INCOME STATEMENT REVIEW

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

Net income for the second quarter of 2017 was $1.1 billion, or $2.10 per diluted common share, an increase of 11% compared to $1.0 billion, or $1.82 per diluted common share, for the second quarter of 2016. For the first six months of 2017, net income was $2.2 billion, or $4.05 per diluted common share, an increase of 12% compared to $1.9 billion, or $3.49 per diluted common share, for the first six months of 2016.

Net income increased in both comparisons driven by a 7% increase in revenue from higher net interest income and noninterest income and a lower provision for credit losses, partially offset by a 5% increase in noninterest expense.

Net Interest Income

Table 2: Summarized Average Balances and Net Interest Income (a)

 

     2017             2016  

Three months ended June 30

Dollars in millions

   Average
Balances
     Average
Yields/
Rates
    Interest
Income/
Expense
            Average
Balances
     Average
Yields/
Rates
    Interest
Income/
Expense
 

Assets

                   

Interest-earning assets

                   

Investment securities

   $ 75,352        2.71   $ 511        $ 70,194        2.68   $ 472  

Loans

     216,373        3.82     2,077          208,330        3.56     1,860  

Interest-earning deposits with banks

     22,543        1.04     58          26,463        .51     33  

Other

     9,748        3.38     82          7,449        3.59     67  

Total interest-earning assets/interest income

   $ 324,016        3.35     2,728        $ 312,436        3.10     2,432  

Liabilities

                   

Interest-bearing liabilities

                   

Interest-bearing deposits

   $ 179,012        .32     143        $ 171,847        .24     104  

Borrowed funds

     57,524        1.89     273          53,633        1.57     212  

Total interest-bearing liabilities/interest expense

   $ 236,536        .70     416        $ 225,480        .56     316  

Net interest margin/income (Non-GAAP)

        2.84     2,312             2.70     2,116  

Taxable-equivalent adjustments

          (54             (48

Net interest income (GAAP)

                    $ 2,258                               $ 2,068  

 

     2017             2016  

Six months ended June 30

Dollars in millions

   Average
Balances
     Average
Yields/
Rates
    Interest
Income/
Expense
            Average
Balances
     Average
Yields/
Rates
    Interest
Income/
Expense
 

Assets

                   

Interest-earning assets

                   

Investment securities

   $ 75,800        2.69   $ 1,019        $ 70,232        2.70   $ 950  

Loans

     214,324        3.75     4,018          207,757        3.58     3,735  

Interest-earning deposits with banks

     23,363        .92     107          25,998        .50     65  

Other

     9,076        3.46     156          7,606        3.61     137  

Total interest-earning assets/interest income

   $ 322,563        3.29     5,300        $ 311,593        3.13     4,887  

Liabilities

                   

Interest-bearing liabilities

                   

Interest-bearing deposits

   $ 177,947        .30     263        $ 170,335        .25     209  

Borrowed funds

     56,241        1.82     513          53,629        1.54     416  

Total interest-bearing liabilities/interest expense

   $ 234,188        .66     776        $ 223,964        .56     625  

Net interest margin/income (Non-GAAP)

        2.81     4,524             2.73     4,262  

Taxable-equivalent adjustments

          (106             (96

Net interest income (GAAP)

                    $ 4,418                               $ 4,166  
(a) Interest income calculated as taxable-equivalent interest income. To provide more meaningful comparisons of interest income and yields for all interest-earning assets, as well as net interest margins, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margins by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP on the Consolidated Income Statement.

 

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


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

Net interest income increased by $190 million, or 9%, and $252 million, or 6%, for the second quarter and first six months of 2017, respectively, compared to the same periods in 2016. The increase in both comparisons was attributable to higher loan yields and loan growth, as well as increased securities balances, partially offset by an increase in borrowing and deposit costs. Net interest margin increased in both comparisons largely reflecting the benefit from higher interest rates in the 2017 periods.

Average investment securities increased $5.2 billion, or 7%, and $5.6 billion, or 8%, in the quarterly and year-to-date comparisons, respectively. The increase in both comparisons reflected net purchases of agency residential mortgage-backed securities and U.S Treasury securities, partially offset by declines in average commercial mortgage-backed securities and non-agency residential mortgage-backed securities. Total investment securities increased to 23% of average interest-earning assets compared to 22% in the quarterly comparison and was 23% in both of the year-to-date periods.

Average loans grew $8.0 billion, or 4%, and $6.6 billion, or 3%, in the quarterly and year-to-date comparisons, respectively. The increase in average loans in both comparisons was driven by broad growth across our businesses within our Corporate & Institutional Banking segment, as well as higher residential mortgage loans within our Retail Banking segment. Both comparisons also reflected the impact of our acquisition of a commercial and vendor finance business with $1.0 billion of loans and leases. These increases were partially offset by decreases in consumer loans driven by runoff in the non-strategic consumer loan portfolios of brokered home equity and government guaranteed education loans. Loans remained stable at 67% of average interest-earning assets in the quarterly comparison and 66% for the first six months of 2017 compared to 67% for the same period in 2016.

Average total deposits of $256.4 billion for the second quarter of 2017 grew $8.8 billion, or 4%, over the second quarter of 2016, and average year-to-date deposits grew $8.8 billion, or 4%, over the same period of 2016, largely due to growth in average interest-bearing deposits, which increased $7.2 billion and $7.6 billion in both comparisons. This growth was driven by higher average savings deposits, which reflected a shift from money market deposits to relationship-based savings products, as well as higher average interest-bearing demand deposits. Average interest-bearing deposits represented 76% of average interest-bearing liabilities in both the quarterly and year-to-date comparison.

 

 

Noninterest Income

Table 3: Noninterest Income

 

     Three months ended June 30      Six months ended June 30  
                   Change                    Change  
Dollars in millions    2017      2016      $      %      2017      2016      $      %  

Noninterest income

                         

Asset management

   $ 398      $ 377      $ 21        6    $ 801      $ 718      $ 83        12

Consumer services

     360        354        6        2      692        691        1         

Corporate services

     434        403        31        8      827        728        99        14

Residential mortgage

     104        165        (61      (37 )%       217        265        (48      (18 )% 

Service charges on deposits

     170        163        7        4      331        321        10        3

Other

     336        264        72        27      658        570        88        15

Total noninterest income

   $ 1,802      $ 1,726      $ 76        4    $ 3,526      $ 3,293      $ 233        7

 

Noninterest income as a percentage of total revenue was 44% for the second quarter of 2017 compared to 45% for the same period in 2016. The comparable amounts for the year-to-date periods were both 44%.

Asset management revenue increased in both comparisons driven by higher earnings from BlackRock and the impact of higher average equity markets in our asset management business. Discretionary client assets under management increased to $141 billion at June 30, 2017 compared with $135 billion at June 30, 2016.

Corporate services revenue increased in both comparisons largely reflecting higher merger and acquisition advisory fees and other capital markets-related revenue, including both higher loan syndication fees and treasury management fees.

Residential mortgage revenue decreased in both the quarterly and year-to-date comparisons as a result of lower loan sales revenue and a lower benefit from residential mortgage servicing rights valuation, net of economic hedge.

 

 

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


Other noninterest income increased in both comparisons largely driven by higher revenue from private equity investments reflecting positive impacts from valuation adjustments on equity investments subject to the Volcker Rule provisions of the Dodd-Frank Act and higher revenue from credit valuations on customer-related derivative activities. These increases were partially offset by the impact of 2016 net gains on the sale of Visa Class B common shares. The quarterly comparison also reflected higher revenue from commercial mortgage loans held for sale activities and higher operating lease income.

Provision For Credit Losses

The provision for credit losses decreased $29 million to $98 million in the second quarter of 2017 compared to the second quarter of 2016 and decreased $93 million to $186 million for the first six months of 2017 compared to the same period in 2016. The decrease in both periods was due to lower provisions for certain energy related loans in the oil, gas and coal sectors partially offset by an initial provision for a loan and lease portfolio obtained through the acquisition of a commercial and vendor finance business in the second quarter of 2017.

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

 

 

Noninterest Expense

Table 4: Noninterest Expense

 

     Three months ended June 30      Six months ended June 30  
                   Change                    Change  
Dollars in millions    2017      2016      $      %      2017      2016      $      %  

Noninterest expense

                         

Personnel

   $ 1,263      $ 1,226      $ 37        3    $ 2,512      $ 2,371      $ 141        6

Occupancy

     202        215        (13      (6 )%       424        436        (12      (3 )% 

Equipment

     281        240        41        17      532        474        58        12

Marketing

     67        61        6        10      122        115        7        6

Other

     666        618        48        8      1,291        1,245        46        4

Total noninterest expense

   $ 2,479      $ 2,360      $ 119        5    $ 4,881      $ 4,641      $ 240        5

 

Higher noninterest expense in both the quarterly and year-to-date comparisons reflected overall higher levels of business activity and ongoing investments in technology and business infrastructure as PNC continued to focus on disciplined expense management.

As of June 30, 2017, we were on track to achieve our full-year 2017 goal of $350 million in cost savings through our continuous improvement program, which we expect will fund a significant portion of our 2017 business and technology investments, including our Retail branch strategy, enhanced digital capabilities and our home lending transformation.

Effective Income Tax Rate

The effective income tax rate was 26.0% in the second quarter of 2017 compared to 24.3% in the second quarter of 2016 and 24.5% in the first six months of 2017 compared to 23.9% in the same period of 2016. The increases in both comparisons were primarily related to higher pretax earnings, and in the year-to-date comparison, partially offset by the impact of higher tax deductions related to stock-based compensation in the first quarter of 2017.

 

 

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


CONSOLIDATED BALANCE SHEET REVIEW

Table 5: Summarized Balance Sheet Data

 

    

June 30

2017

    

December 31

2016

            Change  
Dollars in millions            $      %  

Assets

                                           

Interest-earning deposits with banks

   $ 22,482      $ 25,711        $ (3,229      (13 )% 

Loans held for sale

     2,030        2,504          (474      (19 )% 

Investment securities

     76,431        75,947          484        1

Loans

     218,034        210,833          7,201        3

Allowance for loan and lease losses

     (2,561      (2,589        28        1

Mortgage servicing rights

     1,867        1,758          109        6

Goodwill

     9,163        9,103          60        1

Other, net

     44,744        43,113          1,631        4

Total assets

   $ 372,190      $ 366,380        $ 5,810        2

Liabilities

               

Deposits

   $ 259,176      $ 257,164        $ 2,012        1

Borrowed funds

     56,406        52,706          3,700        7

Other

     10,423        9,656          767        8

Total liabilities

     326,005        319,526          6,479        2

Equity

               

Total shareholders’ equity

     46,084        45,699          385        1

Noncontrolling interests

     101        1,155          (1,054      (91 )% 

Total equity

     46,185        46,854          (669      (1 )% 

Total liabilities and equity

   $ 372,190      $ 366,380              $ 5,810        2

 

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

Our balance sheet was strong and well positioned at both June 30, 2017 and December 31, 2016.

   

Total assets increased as loan growth was partially offset by lower deposits held with the Federal Reserve Bank;

   

Total liabilities increased due to higher borrowed funds and deposit growth;

   

Total equity decreased due to a decline in noncontrolling interests related to the redemption of Perpetual Trust Securities in the first quarter of 2017.

The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and regulatory compliance is included in the Liquidity and Capital Management portion of the Risk Management section of this Financial Review and in Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements included in our 2016 Form 10-K.

 

 

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


Loans

Table 6: Details of Loans

 

    

June 30

2017

    

December 31

2016

            Change  
Dollars in millions            $     %  

Commercial lending

                                          

Commercial

              

Manufacturing

   $ 20,533      $ 18,891        $ 1,642       9

Retail/wholesale trade

     18,101        16,752          1,349       8

Service providers

     15,111        14,707          404       3

Real estate related (a)

     12,179        11,920          259       2

Health care

     9,541        9,491          50       1

Financial services

     8,493        7,241          1,252       17

Other industries

     24,599        22,362          2,237       10

Total commercial

     108,557        101,364          7,193       7

Commercial real estate

     29,489        29,010          479       2

Equipment lease financing

     7,719        7,581          138       2

Total commercial lending

     145,765        137,955          7,810       6

Consumer lending

              

Home equity

     29,219        29,949          (730     (2 )% 

Residential real estate

     16,049        15,598          451       3

Credit card

     5,211        5,282          (71     (1 )% 

Other consumer

              

Automobile

     12,488        12,380          108       1

Education

     4,751        5,159          (408     (8 )% 

Other

     4,551        4,510          41       1

Total consumer lending

     72,269        72,878          (609     (1 )% 

Total loans

   $ 218,034      $ 210,833              $ 7,201       3
(a) Includes loans to customers in the real estate and construction industries.

 

Growth in commercial lending was broad based across our lending businesses and included the acquisition of a commercial and vendor finance business with $1.0 billion of loans and leases. Lower consumer lending was driven by declines in home equity and education loans, partially offset by higher residential real estate loans. The decreases in home equity and education reflected runoff in the non-strategic brokered home equity and government guaranteed education loan portfolios.

See 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 4 Allowances for Loan and Lease Losses in our Notes To Consolidated Financial Statements included in this Report for additional information regarding our loan portfolio.

 

 

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


Investment Securities

Table 7: Investment Securities

 

     June 30, 2017      December 31, 2016      Ratings (a) As of June 30, 2017  
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

   $ 13,570      $ 13,750      $ 13,627      $ 13,714        100          

Agency residential mortgage-backed

     39,522        39,428        37,319        37,109        100            

Non-agency residential mortgage-backed

     3,004        3,254        3,382        3,564        11         4     76     9

Agency commercial mortgage-backed

     2,683        2,676        3,053        3,046        100            

Non-agency commercial mortgage-backed (b)

     3,768        3,798        4,590        4,602        86       3     1       1       9  

Asset-backed (c)

     6,287        6,349        6,496        6,524        87       4       3       6      

Other debt (d)

     6,583        6,803        6,679        6,810        74       15       8         3  

Corporate stock and other

     491        489        603        601                100  

Total investment securities (e)

   $ 75,908      $ 76,547      $ 75,749      $ 75,970        92     2     1     3     2
(a) Ratings percentages allocated based on amortized cost.
(b) Collateralized primarily by retail properties, office buildings, lodging properties and multi-family housing.
(c) Collateralized primarily by corporate debt, government guaranteed education loans and other consumer credit products.
(d) Includes state and municipal securities.
(e) Includes available for sale and held to maturity securities.

 

Investment securities increased $.5 billion at June 30, 2017 compared to December 31, 2016. Growth in investment securities was driven by net purchases of agency residential mortgage-backed securities, largely offset by declines in commercial mortgage-backed securities.

Table 7 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, which could affect our risk-weighted assets and, therefore, our risk-based regulatory capital ratios under the regulatory capital rules. Changes in credit ratings classifications could indicate increased or decreased credit risk and could be accompanied by a reduction or increase in the fair value of our investment securities portfolio.

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.

 

The duration of investment securities was 3.3 years at June 30, 2017. We estimate that at June 30, 2017 the effective duration of investment securities was 3.5 years for an immediate 50 basis points parallel increase in interest rates and 3.1 years for an immediate 50 basis points parallel decrease in interest rates.

Based on expected prepayment speeds, the weighted-average expected maturity of the investment securities portfolio (excluding corporate stock and other) was 5.0 years at both June 30, 2017 and December 31, 2016.

Table 8: Weighted-Average Expected Maturities of Mortgage and Other Asset-Backed Debt Securities

 

June 30, 2017    Years  

Agency residential mortgage-backed

     5.2  

Non-agency residential mortgage-backed

     5.8  

Agency commercial mortgage-backed

     3.4  

Non-agency commercial mortgage-backed

     3.8  

Asset-backed

     2.5  

Additional information regarding our investment securities is included in Note 5 Investment Securities and Note 6 Fair Value in the Notes To Consolidated Financial Statements included in this Report.

 

 

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


Funding Sources

Table 9: Details of Funding Sources

 

Dollars in millions

  

June 30

2017

   

December 31

2016

           Change  
         $     %  

Deposits

                                        

Money market

   $ 103,727     $ 105,849       $ (2,122     (2 )% 

Demand

     95,070       96,799         (1,729     (2 )% 

Savings

     42,975       36,956         6,019       16

Time deposits

     17,404       17,560         (156     (1 )% 

Total deposits

     259,176       257,164         2,012       1

Borrowed funds

            

FHLB borrowings

     19,039       17,549         1,490       8

Bank notes and senior debt

     26,054       22,972         3,082       13

Subordinated debt

     6,111       8,009         (1,898     (24 )% 

Other

     5,202       4,176         1,026       25

Total borrowed funds

     56,406       52,706         3,700       7

Total funding sources

   $ 315,582     $ 309,870             $ 5,712       2

Growth in total deposits was driven by higher consumer savings deposits, partially offset by lower money market deposits and a seasonal decline in commercial demand deposits. The overall increase in savings deposits reflected in part a shift from money market deposits to relationship-based savings products.

The increase in total borrowed funds reflected net increases in bank notes and senior debt and FHLB borrowings, as new issuances outpaced maturities and calls. These increases were partially offset by subordinated debt maturities.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for additional information regarding our 2017 capital and liquidity activities.

Shareholders’ Equity

Total shareholders’ equity as of June 30, 2017 increased $.4 billion compared to December 31, 2016. Increased retained earnings, driven by net income of $2.2 billion partially offset by $.7 billion of common and preferred dividends, was largely offset by common share repurchases of $1.3 billion.

Common shares outstanding were 480 million at June 30, 2017 and 485 million at December 31, 2016, as repurchases of 10.7 million shares during the period were partially offset by share issuances from treasury stock related to warrants exercised and stock-based compensation activity.

 

 

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


BUSINESS SEGMENTS REVIEW

Effective for the first quarter of 2017, as a result of changes to how we manage our businesses, we realigned our segments and, accordingly, have changed the basis of presentation of our segments, resulting in four reportable business segments:

   

Retail Banking

   

Corporate & Institutional Banking

   

Asset Management Group

   

BlackRock

Our changes in business segment presentation resulting from the realignment included the following:

   

The Residential Mortgage Banking segment was combined into Retail Banking as a result of our strategic initiative to transform the home lending process by integrating mortgage and home equity lending to enhance product capability and speed of delivery for a better customer experience and to improve efficiency. In conjunction with this shift, residential mortgages previously reported within the “Other” category were also moved to Retail Banking.

   

The Non-Strategic Assets Portfolio segment was eliminated. The segment’s remaining consumer assets were moved to the “Other” category as they are unrelated to the ongoing strategy of any segment, while its commercial assets were transferred to Corporate & Institutional Banking in order to continue the relationships we have with those customers.

   

A portion of business banking clients was moved from Retail Banking to Corporate & Institutional Banking to facilitate enhanced product offerings to meet the financial needs of our business banking clients.

Net interest income in business segment results reflects our internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors. Effective for the first quarter of 2017, we made certain adjustments to our internal funds transfer pricing methodology primarily relating to weighted average lives of certain non-maturity deposits based on our recent historical experience. These changes in methodology affected business segment results, primarily adversely impacting net interest income for Corporate & Institutional Banking and Retail Banking, offset by increased net interest income in the “Other” category.

The prior period presented was revised to conform to the new segment alignment and to our change in internal funds transfer pricing methodology.

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

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, certain non-strategic runoff consumer loan portfolios, 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.

 

 

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


Retail Banking

(Unaudited)

Table 10: Retail Banking Table

 

Six months ended June 30

Dollars in millions, except as noted

                         Change  
   2017     2016             $      %  

Income Statement

              

Net interest income

   $ 2,260     $ 2,255        $ 5         

Noninterest income

     1,248       1,358          (110      (8 )% 

Total revenue

     3,508       3,613          (105      (3 )% 

Provision for credit losses

     121       108          13        12

Noninterest expense

     2,685       2,604          81        3

Pretax earnings

     702       901          (199      (22 )% 

Income taxes

     259       330          (71      (22 )% 

Earnings

   $ 443     $ 571              $ (128      (22 )% 

Average Balance Sheet

              

Loans held for sale

   $ 786     $ 828        $ (42      (5 )% 

Loans

              

Consumer

              

Home equity

   $ 25,506     $ 26,526        $ (1,020      (4 )% 

Automobile

     12,185       10,882          1,303        12

Education

     5,021       5,754          (733      (13 )% 

Credit cards

     5,129       4,755          374        8

Other

     1,757       1,807          (50      (3 )% 

Total consumer

     49,598       49,724          (126       

Commercial and commercial real estate

     10,965       11,682          (717      (6 )% 

Residential mortgage

     11,804       10,376          1,428        14

Total loans

   $ 72,367     $ 71,782        $ 585        1

Total assets

   $ 88,559     $ 85,780              $ 2,779        3

Deposits

              

Noninterest-bearing demand

   $ 29,285     $ 27,573        $ 1,712        6

Interest-bearing demand

     41,059       38,333          2,726        7

Money market

     38,416       47,658          (9,242      (19 )% 

Savings

     36,851       23,954          12,897        54

Certificates of deposit

     13,518       15,169          (1,651      (11 )% 

Total deposits

   $ 159,129     $ 152,687              $ 6,442        4

Performance Ratios

              

Return on average assets

     1.01     1.34          

Noninterest income to total revenue

     36     38          

Efficiency

     77     72                          

(continued on following page)

 

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


(continued from previous page)

 

                    Change  
Dollars in millions, except as noted    2017     2016      $     %  

Supplemental Noninterest Income Information

           

Consumer services

   $ 527     $ 525      $ 2        

Brokerage

   $ 154     $ 149      $ 5       3

Residential mortgage

   $ 217     $ 265      $ (48     (18 )% 

Service charges on deposits

   $ 317     $ 306      $ 11       4

Residential Mortgage Information

           

Residential mortgage servicing statistics (in billions, except as noted) (a)

           

Serviced portfolio balance (b)

   $ 131     $ 126      $ 5       4

Serviced portfolio acquisitions

   $ 16     $ 11      $ 5       45

MSR asset value (b)

   $ 1.2     $ .8      $ .4       50

MSR capitalization value (in basis points) (b)

     95       61        34       56

Servicing income: (in millions)

           

Servicing fees, net (c)

   $ 96     $ 105      $ (9     (9 )% 

Mortgage servicing rights valuation, net of economic hedge

   $ 23     $ 27      $ (4     (15 )% 

Residential mortgage loan statistics

           

Loan origination volume (in billions)

   $ 4.1     $ 4.5      $ (.4     (9 )% 

Loan sale margin percentage

     2.84     3.33       

Percentage of originations represented by:

           

Purchase volume (d)

     53     44       

Refinance volume

     47     56                 

Other Information (b)

           

Customer-related statistics (average)

           

Non-teller deposit transactions (e)

     52     48       

Digital consumer customers (f)

     61     57       

Credit-related statistics

           

Nonperforming assets (g)

   $ 1,149     $ 1,255      $ (106     (8 )% 

Net charge-offs

   $ 187     $ 171      $ 16       9

Other statistics

           

ATMs

     8,972       8,993        (21      

Branches (h)

     2,481       2,601        (120     (5 )% 

Universal branches (i)

     518       467        51       11

Brokerage account client assets (in billions) (j)

   $ 46     $ 44      $ 2       5
(a) Represents mortgage loan servicing balances for third parties and the related income.
(b) Presented as of June 30, except for customer-related statistics, which are averages for the six months ended, and net charge-offs, which are for the six months ended.
(c) Servicing fees net of impact of decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan prepayments and loans that were paid down or paid off during the period.
(d) Mortgages with borrowers as part of residential real estate purchase transactions.
(e) Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application.
(f) Represents consumer checking relationships that process the majority of their transactions through non-teller channels.
(g) Includes nonperforming loans of $1.1 billion at June 30, 2017 and $1.2 billion at June 30, 2016.
(h) Excludes stand-alone mortgage offices and satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services.
(i) Included in total branches, represents branches operating under our universal model.
(j) Includes cash and money market balances.

 

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


Retail Banking earned $443 million in the first six months of 2017 compared with $571 million for the same period in 2016. The decrease in earnings was driven by lower noninterest income and increased noninterest expense.

Noninterest income declined in the comparison due to the impact of 2016 net gains on sales of Visa Class B common shares and lower residential mortgage loan sales revenue, partially offset by higher service charges on deposits and debit card revenue.

The increase in noninterest expense in the comparison primarily resulted from investments in technology, higher personnel expense, and the impact of lower 2016 residential mortgage foreclosure-related expenses which included reserve releases.

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 meeting the financial needs of our customers by providing a broad range of liquidity, banking and investment products.

The deposit strategy of Retail Banking is to remain disciplined on pricing and focused on growing and retaining relationship-based balances, executing on market-specific deposit growth strategies and providing a source of low-cost funding and liquidity to PNC. In the first six months of 2017, average total deposits increased compared to the same period a year ago, driven by growth in savings deposits reflecting in part a shift from money market deposits to relationship-based savings products. Additionally, demand deposits increased, partially offset by a decline in certificates of deposit due to the net runoff of maturing accounts.

Retail Banking continued to focus on a relationship-based lending strategy. Average total loans increased in the comparison due to increases in residential mortgage and automobile loans partially offset by declines in home equity and commercial loans, as well as runoff of certain portfolios, as more fully described below.

   

Average residential mortgages increased as a result of new volumes exceeding portfolio liquidations.

   

Average automobile loans increased primarily due to portfolio growth in previously underpenetrated markets.

   

Average credit card balances increased as a result of organic growth as we continue to focus on delivering on our long-term objective of deepening penetration within our existing customer base.

   

Average home equity loans decreased as pay-downs and payoffs on loans exceeded new originated volume. Retail Banking’s home equity loan portfolio is relationship based, with 98% of the portfolio attributable to borrowers in our primary geographic footprint. The weighted-average updated FICO scores for this portfolio were 748 at June 30, 2017 and 746 at December 31, 2016.

   

Average commercial and commercial real estate loans declined as pay-downs and payoffs on loans exceeded new volume.

   

In the first six months of 2017, average loan balances for the education and other loan portfolios decreased $783 million, or 10%, compared to same period in 2016, driven by declines in the government guaranteed education and indirect other portfolios, which are primarily runoff portfolios.

Nonperforming assets decreased compared to June 30, 2016 due to declines in both consumer and commercial nonperforming loans.

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

   

In the first six months of 2017, approximately 61% of consumer customers used non-teller channels for the majority of their transactions compared with 57% for the same period a year ago.

   

Deposit transactions via ATM and mobile channels increased to 52% of total deposit transactions in the first six months of 2017 compared with 48% for the same period in 2016.

   

We had a network of 2,481 branches and 8,972 ATMs at June 30, 2017. Approximately 21% of the branch network operates under the universal model.

   

Instant debit card issuance, which enables us to print a customer’s debit card in minutes, was available in 89% of the branch network as of June 30, 2017.

   

Mortgage loan originations for the first six months of 2017 were down 9% compared to the same period in 2016. 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.

 

 

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


Corporate & Institutional Banking

(Unaudited)

Table 11: Corporate & Institutional Banking Table

 

Six months ended June 30                          Change  
Dollars in millions, except as noted    2017     2016             $      %  

Income Statement

              

Net interest income

   $ 1,729     $ 1,622        $ 107        7

Noninterest income

     1,112       980          132        13

Total revenue

     2,841       2,602          239        9

Provision for credit losses

     112       172          (60      (35 )% 

Noninterest expense

     1,186       1,090          96        9

Pretax earnings

     1,543       1,340          203        15

Income taxes

     541       485          56        12

Earnings

   $ 1,002     $ 855              $ 147        17

Average Balance Sheet

              

Loans held for sale

   $ 915     $ 754        $ 161        21

Loans

              

Commercial

   $ 94,067     $ 87,875        $ 6,192        7

Commercial real estate

     27,334       26,294          1,040        4

Equipment lease financing

     7,550       7,495          55        1

Total commercial lending

     128,951       121,664          7,287        6

Consumer

     304       474          (170      (36 )% 

Total loans

   $ 129,255     $ 122,138        $ 7,117        6

Total assets

   $ 145,445     $ 138,663              $ 6,782        5

Deposits

              

Noninterest-bearing demand

   $ 46,872     $ 47,350        $ (478      (1 )% 

Money market

     21,204       22,264          (1,060      (5 )% 

Interest-bearing demand and other

     15,706       12,213          3,493        29

Total deposits

   $ 83,782     $ 81,827              $ 1,955        2

Performance Ratios

              

Return on average assets

     1.39     1.24          

Noninterest income to total revenue

     39     38          

Efficiency

     42     42                          

Other Information

              

Commercial loan servicing portfolio (in billions) (a) (b)

   $ 502     $ 459        $ 43        9

Consolidated revenue from: (c)

              

Treasury Management (d)

   $ 731     $ 643        $ 88        14

Capital Markets (d)

   $ 515     $ 387        $ 128        33

Commercial mortgage banking activities

              

Commercial mortgage loans held for sale (e)

   $ 51     $ 50        $ 1        2

Commercial mortgage loan servicing income (f)

     113       124          (11      (9 )% 

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

     35       21          14        67

Total

   $ 199     $ 195        $ 4        2

Net carrying amount of commercial mortgage servicing rights (a)

   $ 618     $ 448        $ 170        38

Average Loans (by C&IB business)

              

Corporate Banking

   $ 54,416     $ 50,361        $ 4,055        8

Real Estate

     37,730       35,989          1,741        5

Business Credit

     15,244       14,769          475        3

Equipment Finance

     12,982       11,718          1,264        11

Commercial Banking

     7,057       7,327          (270      (4 )% 

Other

     1,826       1,974          (148      (7 )% 

Total average loans

   $ 129,255     $ 122,138        $ 7,117        6

Credit-related statistics

              

Nonperforming assets (a) (h)

   $ 586     $ 802        $ (216      (27 )% 

Net charge-offs

   $ 42     $ 98              $ (56      (57 )% 

 

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


(a) As of June 30.
(b) Represents loans serviced for PNC and others.
(c) Represents consolidated amounts. See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of the Corporate & Institutional Banking portion of this Business Segments Review section.
(d) Includes amounts reported in net interest income and noninterest income, predominantly in corporate service fees.
(e) Includes other noninterest income for valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, origination fees, gains on sale of loans held for sale and net interest income on loans held for sale.
(f) Includes net interest income and noninterest income (primarily in corporate services fees) from loan servicing net of reduction in commercial mortgage servicing rights due to time decay and payoffs. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.
(g) Amounts reported in corporate service fees.
(h) Includes nonperforming loans of $.5 billion at June 30, 2017 and $.7 billion at June 30, 2016.

 

Corporate & Institutional Banking earned $1.0 billion in the first six months of 2017 compared to $855 million for the same period in 2016. The increase of $147 million, or 17%, was primarily due to higher revenue and a decrease in the provision for credit losses, partially offset by higher noninterest expense. We continue to focus on building client relationships where the risk-return profile is attractive.

Net interest income increased in the comparison, reflecting higher average loan balances as well as interest rate spread expansion on deposits.

Growth in noninterest income in the comparison was primarily driven by higher merger and acquisition advisory fees and other capital markets-related revenue, including higher revenue from credit valuations on customer-related derivative activities and increased loan syndication fees, and higher treasury management fees.

The decrease in provision for credit losses in the comparison reflected lower provision for certain energy related loans in the oil, gas and coal sectors, partially offset by an initial provision for a loan and lease portfolio obtained through the acquisition of a commercial and vendor finance business in the second quarter of 2017.

Noninterest expense increased in the comparison largely driven by higher variable compensation commensurate with increased business activity, operating expense related to the acquired business and investments in technology and infrastructure.

Average loans increased in the comparison due to broad growth across many of our businesses:

   

Corporate Banking provides lending, treasury management and capital markets-related products and services to midsized and large corporations, government and not-for-profit entities. Average loans for this business grew in the comparison reflecting increased lending to large corporate and middle market clients and strong production in specialty lending verticals.

   

PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. Higher average loans for this business were primarily due to growth in commercial real estate, both mortgage and project loans, as well as commercial loans.

   

PNC Business Credit provides asset-based lending. The loan portfolio is relatively high yielding, with acceptable risk as the loans are mainly secured by more liquid assets. Average loans for this business increased in the comparison as new originations and a slight increase in utilization were partially offset by payoffs.

   

PNC Equipment Finance provides equipment financing solutions for clients throughout the U.S. and Canada. Average loans, including commercial loans and finance leases, and operating leases were $13.8 billion in the first six months of 2017, an increase of $1.4 billion in the year-over-year comparison due to strong new production and the loan and lease portfolio obtained through our business acquisition.

   

Commercial Banking provides lending, treasury management and capital markets-related products and services to smaller corporations and businesses. Average loans for this business decreased in the comparison primarily due to the impact of capital management activities in 2016.

Growth in the commercial loan servicing portfolio was driven by servicing additions from new and existing customers exceeding portfolio runoff.

 

 

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


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 11 includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.

Treasury management revenue comprises fees and net interest income from customer deposit balances. Compared with the first six months of 2016, treasury management revenue increased due to liquidity-related revenue associated with customer deposit balances, including interest rate spread expansion, and higher fee income.

Capital markets-related products and services include foreign exchange, derivatives, securities, loan syndications, mergers and acquisitions advisory and equity capital markets advisory related services. Revenue from capital markets-related products and services increased in the comparison primarily due to higher merger and acquisition advisory fees, higher revenue from credit valuations on customer-related derivative activities and increased loan syndication fees.

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. Total revenue from commercial mortgage banking activities increased slightly in the comparison as a higher benefit from commercial mortgage servicing rights valuation, net of economic hedge, was mostly offset by a decline in commercial mortgage loan servicing income.

 

 

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


Asset Management Group

(Unaudited)

Table 12: Asset Management Group Table

 

Six months ended June 30                          Change  
Dollars in millions, except as noted    2017      2016            $     %  

Income Statement

             

Net interest income

   $ 144      $ 153       $ (9     (6 )% 

Noninterest income

     435        416         19       5

Total revenue

     579        569         10       2

Provision for credit losses (benefit)

     (9      3         (12     (400 )% 

Noninterest expense

     432        412         20       5

Pretax earnings

     156        154         2       1

Income taxes

     57        57                

Earnings

   $ 99      $ 97             $ 2       2

Average Balance Sheet

             

Loans

             

Consumer

   $ 5,101      $ 5,565       $ (464     (8 )% 

Commercial and commercial real estate

     719        778         (59     (8 )% 

Residential mortgage

     1,218        1,014         204       20

Total loans

   $ 7,038      $ 7,357       $ (319     (4 )% 

Total assets

   $ 7,517      $ 7,822             $ (305     (4 )% 

Deposits

             

Noninterest-bearing demand

   $ 1,519      $ 1,400       $ 119       9

Interest-bearing demand

     3,766        4,183         (417     (10 )% 

Money market

     3,358        4,494         (1,136     (25 )% 

Savings

     3,769        1,783         1,986       111

Other

     239        276         (37     (13 )% 

Total deposits

   $ 12,651      $ 12,136             $ 515       4

Performance Ratios

             

Return on average assets

     2.66      2.50        

Noninterest income to total revenue

     75      73        

Efficiency

     75      72                        

Other Information

             

Nonperforming assets (a) (b)

   $ 49      $ 48       $ 1       2

Net charge-offs

   $ 2      $ 6             $ (4     (67 )% 

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

             

Discretionary client assets under management

   $ 141      $ 135       $ 6       4

Nondiscretionary client assets under administration

     125        117         8       7

Total

   $ 266      $ 252             $ 14       6

Discretionary client assets under management

             

Personal

   $ 89      $ 84       $ 5       6

Institutional

     52        51         1       2

Total

   $ 141      $ 135             $ 6       4

Equity

   $ 72      $ 66       $ 6       9

Fixed Income

     49        47         2       4

Liquidity/Other

     20        22         (2     (9 )% 

Total

   $ 141      $ 135             $ 6       4
(a) As of June 30.
(b) Includes nonperforming loans of $45 million at June 30, 2017 and $44 million at June 30, 2016.
(c) Excludes brokerage account client assets.

(continued on following page)

 

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


(continued from previous page)

 

(d) Effective for the first quarter of 2017, we have adjusted nondiscretionary client assets under administration for prior periods to remove assets which, as a result of certain investment advisory services performed by one of our registered investment advisors, were previously reported as both discretionary client assets under management and nondiscretionary client assets under administration. Effective for the first quarter of 2017, these amounts are only reported as discretionary assets under management. The prior period presented was adjusted to remove approximately $9 billion as of June 30, 2016 previously included in nondiscretionary assets under administration. In addition, effective for the first quarter of 2017, we have refined our methodologies for allocating discretionary client assets under management by asset type. As a result, we have updated the presentation of discretionary client assets under management by asset type for the prior period presented.

 

Asset Management Group earned $99 million through the first six months of 2017 compared with earnings of $97 million for the first six months of 2016. Earnings increased as higher revenue and lower provision for credit losses was mostly offset by higher noninterest expense.

The increase in revenue in the comparison was driven by higher noninterest income due to stronger average equity markets. This increase was partially offset by lower net interest income due to lower average loan balances and interest rate spread compression within the loan portfolio.

The decrease in provision for credit losses in the comparison reflected lower provision on the consumer loan portfolio due to improved credit quality.

Noninterest expense increased in the first six months of 2017 compared to the prior year primarily attributable to higher compensation and technology expenses. Asset Management Group remains focused on disciplined expense management as it invests in strategic growth opportunities.

Asset Management Group’s strategy is focused on growing investable assets by continually evolving the client experience and products and services. The business offers an open architecture platform with a full array of investment products and banking solutions.

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

Institutional Asset Management provides advisory, custody and retirement administration services to institutional clients such as corporations, unions, municipalities, non-profits, foundations and endowments. The business also offers PNC proprietary mutual funds and investment strategies. Institutional Asset Management is strengthening its partnership with Corporate & Institutional Banking to drive growth and is focused on building retirement capabilities and expanding product solutions for all customers.

Asset Management Group’s discretionary client assets under management increased in the comparison to the prior year, primarily attributable to higher equity markets as of June 30, 2017 and net business growth.

BlackRock

(Unaudited)

Information related to our equity investment in BlackRock follows:

Table 13: BlackRock Table

 

Six months ended June 30

Dollars in millions

     2017      2016  

Business segment earnings (a)

     $ 289      $ 246  

PNC’s economic interest in BlackRock (b)

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

 

In billions    June 30
2017
     December 31
2016
 

Carrying value of our investment in BlackRock (c)

   $ 7.2      $ 7.0  

Market value of our investment in BlackRock (d)

   $ 14.9      $ 13.4  
(c) We account for our investment in BlackRock under the equity method of accounting, exclusive of a related deferred tax liability of $2.3 billion at both June 30, 2017 and December 31, 2016. Our voting interest in BlackRock common stock was approximately 21% at June 30, 2017.
(d) Does not include liquidity discount.

In addition to our investment in BlackRock reflected in Table 13, at June 30, 2017, we held approximately 0.25 million shares of BlackRock Series C Preferred Stock valued at $83 million, which are available to fund our obligation in connection with certain BlackRock long-term incentive plan (LTIP) programs.

Our 2016 Form 10-K and our first quarter 2017 Form 10-Q include additional information about our investment in BlackRock.

RISK MANAGEMENT

The Risk Management section included in Item 7 of our 2016 Form 10-K describes our enterprise risk management framework including risk culture, enterprise strategy, risk governance and oversight, risk identification, risk assessment, risk controls and monitoring, and risk aggregation and reporting. Additionally, our 2016 Form 10-K provides an analysis of our key areas of risk, which include but are not limited to credit, liquidity and capital, market, operational and compliance. 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 2016 Form 10-K risk management disclosures.

 

 

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


Credit Risk Management

See the Credit Risk Management portion of the Risk Management section in our 2016 Form 10-K for additional discussion regarding credit risk.

Nonperforming Assets and Loan Delinquencies

Nonperforming Assets

Nonperforming assets include nonperforming loans and leases for which ultimate collectability of the full amount of contractual principal and interest is not probable and include nonperforming troubled debt restructurings (TDRs), other real estate owned (OREO), foreclosed and other assets. Loans held for sale, certain government insured or guaranteed loans, purchased impaired loans and loans accounted for under the fair value option are excluded from nonperforming loans. Additional information regarding our nonperforming loans and nonaccrual policies is included in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in our 2016 Form 10-K. A summary of the major categories of nonperforming assets are presented in Table 14. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in this Report for further detail of nonperforming asset categories.

Table 14: Nonperforming Assets by Type

 

   

June 30

2017

   

December 31

2016

           Change  
Dollars in millions             $     %  

Nonperforming loans

                                       

Commercial lending

  $ 599     $ 655       $ (56     (9 )% 

Consumer lending (a)

    1,358       1,489         (131     (9 )% 

Total nonperforming loans (b)

    1,957       2,144         (187     (9 )% 

OREO, foreclosed and other assets

    196       230         (34     (15 )% 

Total nonperforming assets

  $ 2,153     $ 2,374             $ (221     (9 )% 

Amount of TDRs included in nonperforming loans

  $ 1,055     $ 1,112       $ (57     (5 )% 

Percentage of total nonperforming loans

    54     52                        

Nonperforming loans to total loans

    .90     1.02        

Nonperforming assets to total loans, OREO, foreclosed and other assets

    .99     1.12        

Nonperforming assets to total assets

    .58     .65        

Allowance for loan and lease losses to total nonperforming loans

    131     121                        
(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) The recorded investment of loans collateralized by residential real estate property that are in process of foreclosure was $.4 billion at both June 30, 2017 and December 31, 2016, which included $.2 billion of loans that are government insured/guaranteed.

Table 15: Change in Nonperforming Assets

 

In millions    2017     2016  

January 1

   $ 2,374     $ 2,425  

New nonperforming assets

     766       947  

Charge-offs and valuation adjustments

     (302     (319

Principal activity, including paydowns and payoffs

     (389     (247

Asset sales and transfers to loans held for sale

     (100     (166

Returned to performing status

     (196     (125

June 30

   $ 2,153     $ 2,515  

As of June 30, 2017, approximately 85% of total nonperforming loans were secured by collateral which lessened reserve requirements and is expected to reduce credit losses in the event of default. As of June 30, 2017, commercial lending nonperforming loans were carried at approximately 53% of their unpaid principal balance, due to charge-offs recorded to date, before consideration of the ALLL.

Within consumer nonperforming loans, residential real estate TDRs comprise 75% of total residential real estate nonperforming loans at June 30, 2017, up from 70% at December 31, 2016. Home equity TDRs comprise 50% of home equity nonperforming loans at June 30, 2017 and 52% at December 31, 2016. TDRs generally remain in nonperforming status until a borrower has made at least six consecutive months of both principal and interest payments under the modified terms or ultimate resolution occurs. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to us and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.

At June 30, 2017, our largest nonperforming asset was $45 million in the Mining, Quarrying and Oil and Gas Extraction Industry and our average nonperforming loan associated with commercial lending was less than $1 million. The ten largest individual nonperforming assets were from the commercial lending portfolio and represented 42% and 12% of total commercial lending nonperforming loans and total nonperforming assets, respectively, as of June 30, 2017.

Loan Delinquencies

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

 

 

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


Table 16: Accruing Loans Past Due (a)

 

     Amount                    Percentage of Total
Loans Outstanding
 
    

June 30

2017

    

December 31

2016

          Change     

June 30

2017

   

December 31

2016

 
Dollars in millions               $      %       

Early stage loan delinquencies

                                                           

Accruing loans past due 30 to 59 days

   $ 433      $ 562       $ (129      (23 )%       .20     .27

Accruing loans past due 60 to 89 days

     219        232         (13      (6 )%       .10     .11

Total

     652        794         (142      (18 )%       .30     .38

Late stage loan delinquencies

                   

Accruing loans past due 90 days or more

     674        782         (108      (14 )%       .31     .37

Total

   $ 1,326      $ 1,576             $ (250      (16 )%       .61     .75
(a) Past due loan amounts include government insured or guaranteed loans of $.8 billion at June 30, 2017 and $.9 billion at December 31, 2016.

 

Accruing loans past due 90 days or more decreased at June 30, 2017 compared to December 31, 2016 primarily driven by declines in government insured residential real estate, and government insured education loans within other consumer. Accruing loans past due 90 days or more are not included in nonperforming loans and continue to accrue interest because they are well secured by collateral and are in the process of collection, or are managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines, or are certain government insured or guaranteed loans.

Home Equity and Auto Loan Portfolios

Home Equity Loan Portfolio

Our home equity loan portfolio totaled $29.2 billion as of June 30, 2017, or 13% of the total loan portfolio. Of that total, $17.2 billion, or 59%, were outstanding under primarily variable-rate home equity lines of credit and $12.0 billion, or 41%, consisted of closed-end home equity installment loans. Approximately 3% of the home equity portfolio was purchased impaired and 3% of the home equity portfolio was on nonperforming status as of June 30, 2017.

As of June 30, 2017, we were in an originated first lien position for approximately 58% of the total outstanding portfolio and, where originated as a second lien, we held and serviced the first lien position for an additional 1% of the portfolio. The remaining 41% 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. Lien position information is generally based upon original LTV at the time of origination. We use an industry-leading third-party service provider to obtain updated loan, lien and collateral data that is aggregated from public and private sources.

We track borrower performance monthly, including obtaining original LTVs and updated FICO scores at least quarterly, updated LTVs at least semi-annually, and other credit metrics

at least quarterly, including the historical performance of any mortgage loans regardless of lien position that we do or do not hold. This information is used for internal reporting and risk management. For internal reporting and risk management we also segment the population into pools based on product type (e.g., home equity loans, brokered home equity loans, home equity lines of credit, brokered home equity lines of credit). As part of our overall risk analysis and monitoring, we segment the home equity portfolio based upon the loan delinquency, modification status and bankruptcy status, as well as the delinquency, modification status and bankruptcy status of any mortgage loan with the same borrower (regardless of whether it is a first lien senior to our second lien).

In establishing our ALLL for non-impaired loans, we utilize a delinquency roll-rate methodology for pools of loans. The roll-rate methodology estimates transition/roll of loan balances from one delinquency state to the next delinquency state and ultimately to charge-off. The roll through to charge-off is based on our actual loss experience for each type of pool. Each of our home equity pools contains both first and second liens. Our experience has been that the ratio of first to second lien loans has been consistent over time and the charge-off amounts for the pools, used to establish our allowance, include losses on both first and second lien loans.

Generally, our variable-rate home equity lines of credit have either a seven or ten year draw period, followed by a 20-year amortization term. During the draw period, we have home equity lines of credit where borrowers pay either interest only or principal and interest. We view home equity lines of credit where borrowers are paying principal and interest under the draw period as less risky than those where the borrowers are paying interest only, as these borrowers have a demonstrated ability to make some level of principal and interest payments. The risk associated with the borrower’s ability to satisfy the loan terms upon the draw period ending is considered in establishing our ALLL. Based upon outstanding balances at June 30, 2017, the following table presents the periods when home equity lines of credit draw periods are scheduled to end.

 

 

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


Table 17: Home Equity Lines of Credit – Draw Period End Dates

 

In millions    Interest Only
Product
     Principal and
Interest Product
 

Remainder of 2017

   $ 687      $ 181  

2018

     707        572  

2019

     493        441  

2020

     401        397  

2021

     422        610  

2022 and thereafter

     2,565        6,429  

Total (a) (b)

   $ 5,275      $ 8,630  
(a) Includes all home equity lines of credit that mature in the remainder of 2017 or later, including those with borrowers where we have terminated borrowing privileges.
(b) Includes home equity lines of credit with balloon payments, including those where we have terminated borrowing privileges, of $15 million, $22 million, $17 million, $67 million, $61 million and $329 million with draw periods scheduled to end in the remainder of 2017, 2018, 2019, 2020, 2021 and 2022 and thereafter, respectively.

Based upon outstanding balances, and excluding purchased impaired loans, at June 30, 2017, 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 6% were 90 days or more past due, which are accounted for as nonperforming. Generally, when a borrower becomes 60 days past due, we terminate borrowing privileges and those privileges are not subsequently reinstated. At that point, we continue our collection/recovery processes, which may include loan modification resulting in a loan that is classified as a TDR.

Auto Loan Portfolio

The auto loan portfolio totaled $12.5 billion as of June 30, 2017, or 6% of our total loan portfolio. Of that total, $11.0 billion resides in the indirect auto portfolio, $1.3 billion in the direct auto portfolio and $.2 billion in securitized portfolios. Indirect auto loan applications are generated from franchised automobile dealers. This business is strategically aligned with our core retail business.

We have elected not to pursue non-prime auto lending. Our average new loan origination FICO score over the last twelve months was 754 for indirect auto loans and 770 for direct auto loans. As of June 30, 2017, .5% of our auto loan portfolio was nonperforming and .5% of the portfolio was accruing past due. We offer both new and used automobile financing to customers through our various channels. The portfolio was composed of 55% new vehicle loans and 45% used vehicle loans at June 30, 2017.

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

by loan structure, collateral attributes and credit metrics which include FICO score, loan-to-value and term.

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.

A temporary modification, with a term between three 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 generally result in principal forgiveness, interest rate reduction, term extension, capitalization of past due amounts, interest-only period or deferral of principal.

We also monitor the success rates and delinquency status of our loan modification programs to assess their effectiveness in serving our borrowers’ and servicing customers’ needs while mitigating credit losses. Table 18 provides the number of accounts and unpaid principal balance of modified consumer real estate related loans at the end of each year presented.

Table 18: Consumer Real Estate Related Loan Modifications

 

    June 30, 2017     December 31, 2016  
Dollars in millions   Number of
Accounts
    Unpaid
Principal
Balance
    Number of
Accounts
    Unpaid
Principal
Balance
 

Temporary modifications

    3,146     $ 226       3,484     $ 258  

Permanent modifications

    23,522       2,652       23,904       2,693  

Total consumer real estate related loan modifications

    26,668     $ 2,878       27,388     $ 2,951  

Commercial Loan Modifications

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.

 

 

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


Troubled Debt Restructurings

A TDR is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs result from our loss mitigation activities and include rate reductions, principal forgiveness, postponement/reduction of scheduled amortization and extensions, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Additionally, TDRs also result from court imposed concessions (e.g., a Chapter 7 bankruptcy where the debtor is discharged from personal liability to us and a court approved Chapter 13 bankruptcy repayment plan).

Table 19: Summary of Troubled Debt Restructurings (a)

 

    

June 30

2017

    

December 31

2016

     Change  
In millions          $     %  

Total commercial lending

   $ 488      $ 428      $ 60       14

Total consumer lending

     1,718        1,793        (75     (4 )% 

Total TDRs

   $ 2,206      $ 2,221      $ (15     (1 )% 

Nonperforming

   $ 1,055      $ 1,112      $ (57     (5 )% 

Accruing (b)

     1,151        1,109        42       4

Total TDRs

   $ 2,206      $ 2,221      $ (15     (1 )% 
(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.
(b) Accruing loans include consumer credit card loans and loans that have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans.

Excluded from TDRs are $1.2 billion of consumer loans held for sale, loans accounted for under the fair value option and pooled purchased impaired loans, as well as certain government insured or guaranteed loans at both June 30, 2017 and December 31, 2016. Nonperforming TDRs represented approximately 54% and 52% of total nonperforming loans and 48% and 50% of total TDRs at June 30, 2017 and December 31, 2016, respectively. The remaining portion of TDRs represents TDRs that have been returned to accrual accounting after performing under the restructured terms for at least six consecutive months.

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

We maintain an ALLL to absorb losses from the loan and lease portfolio and determine this allowance based on quarterly assessments of the estimated probable credit losses incurred in the loan and lease portfolio. Our total ALLL of $2.6 billion at June 30, 2017 consisted of $1.6 billion and $1.0 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 usin