PNC FINANCIAL SERVICES GROUP, INC. - Quarter Report: 2020 September (Form 10-Q)

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(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)	Dividends are payable quarterly other than Series O, Series R and Series S preferred stock, which are payable semiannually, with the Series O payable in different quarters than the Series R and Series S preferred stock.

(c)	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.

(d)

Net interest margin is the total yield on interest-earning assets minus the total rate on interest-bearing liabilities and includes the benefit from use of noninterest-bearing sources. To provide more meaningful comparisons of net interest margins, we use net interest income on a taxable-equivalent basis in calculating average yields used in the calculation of net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP in the Consolidated Income Statement. For additional information, see Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP) in the Statistical Information (Unaudited) section in Item 1 of this Report.

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(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 at September 30, 2020 reflect the impact of adopting Accounting Standards Update 2016-13 - Financial Instruments - Credit Losses, which is commonly referred to as the Current Expected Credit Losses (CECL) standard and our transition from an incurred loss methodology for these reserves to an expected credit loss methodology. See Note 1 Accounting Policies of this Report for additional information related to our adoption of this standard.

(c)	Amounts include balances held with the Federal Reserve Bank of Cleveland (Federal Reserve Bank) of $70.6 billion, $23.2 billion and $18.8 billion as of September 30, 2020, December 31, 2019 and September 30, 2019, respectively.

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(d)

Represents our held for sale investment in BlackRock, Inc. In the second quarter of 2020, PNC divested its entire investment in BlackRock. Prior period BlackRock investment balances have been reclassified to the Asset held for sale line in accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations. Refer to Note 1 Accounting Policies and Note 2 Discontinued Operations for additional details.

(e)

All ratios are calculated using the regulatory capital methodology applicable to PNC during each period presented and calculated based on the standardized approach. See Basel III Capital discussion in the Capital Management portion of the Risk Management section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business and Item 1A Risk Factors in our 2019 Form 10-K.

(f)	The September 30, 2020 ratios are calculated to reflect PNC's election to adopt the CECL optional five-year transition provision, unless noted differently.

(g)	The September 30, 2020 fully implemented CET1 ratio is calculated to reflect the full impact of CECL and excludes the benefits of the five-year transition provision.

(h)	The 2020 and 2019 Basel III Total risk-based capital ratios include nonqualifying trust preferred capital securities of $40 million and $60 million, respectively, that are subject to a phase-out period that runs through 2021.

(i)	Ratios at September 30, 2020 reflect the changes in methodology due to the adoption of the CECL accounting standard on January 1, 2020, along with increases in reserves during 2020 due to the significantly adverse economic impact of the pandemic and its resulting effects on loan portfolio credit quality and loan growth.

(j)	Calculated as the Allowance for loan and lease losses plus the Allowance for unfunded lending related commitments divided by total loans.

•	Expanding our leading banking franchise to new markets and digital platforms;

•	Deepening customer relationships by delivering a superior banking experience and financial solutions; and

•	Leveraging technology to innovate and enhance products, services, security and processes.

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•	Total revenue increased $39 million, or 1%, to $4.3 billion.

•	Net interest income of $2.5 billion decreased $20 million, or 1%.

▪	Net interest margin decreased to 2.39% compared to 2.84% for the third quarter of 2019.

•	Noninterest income increased $59 million, or 3%, to $1.8 billion.

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Provision for credit losses for the third quarter of 2020 of $52 million, which was calculated under the Current Expected Credit Losses (CECL) accounting standard adopted January 1, 2020, reflected a provision recapture for consumer loans, offset by a provision for expected losses for certain borrowers in industries adversely impacted by the pandemic, primarily within the commercial real estate portfolio. In addition, the third quarter 2020 provision for credit losses included $39 million related to investment securities. Provision for credit losses decreased $131 million compared to the third quarter of 2019.

•	Noninterest expense decreased $92 million, or 4%, to $2.5 billion, reflecting a continuous focus on expense management as well as lower business activity related to the economic impact of the pandemic.

•	We generated positive operating leverage of 4.4% in the third quarter of 2020 and 4.3% for the first nine months of 2020 compared to the same periods in 2019.

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•	Total assets increased $51.5 billion, or 13%, to $461.8 billion.

•	Total loans increased $9.4 billion, or 4%, to $249.3 billion.

•	Total commercial loans grew $12.1 billion, or 8%, to $172.7 billion, reflecting broad based growth including PPP loan originations under the CARES Act.

•	Total consumer loans decreased $2.7 billion, or 3%, to $76.6 billion primarily in auto, credit card and home equity loans, partially offset by higher residential mortgage loans.

•	Investment securities increased $4.4 billion, or 5%, to $91.2 billion.

•	Interest-earning deposits with banks, primarily with the Federal Reserve Bank, increased $47.5 billion to $71.0 billion due to higher liquidity from deposit growth and proceeds from the sale of our equity investment in BlackRock.

•	Total deposits increased $66.5 billion, or 23%, to $355.1 billion due to growth in commercial deposits reflecting customer liquidity accumulation and higher consumer deposits driven by government stimulus and lower consumer spending.

•	Borrowed funds decreased $18.2 billion, or 30%, to $42.1 billion reflecting use of liquidity from deposit growth and proceeds from the sale of our equity investment in BlackRock.

•	At September 30, 2020 compared to December 31, 2019:

•	Nonperforming assets of $2.2 billion increased $400 million, or 23%, driven by higher nonperforming commercial loans in industries adversely impacted by the pandemic and the energy industry.

•	Overall loan delinquencies of $1.2 billion decreased $266 million, or 18%, reflecting CARES Act and other forbearance and extension treatments.

•	Net charge-offs were $155 million in both third quarters of 2020 and 2019, representing .24% of average loans on an annualized basis in the third quarter of 2020 and .26% for the same quarter of 2019.

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The allowance for credit losses (ACL) related to loans increased to $6.4 billion, or 2.58% of total loans, at September 30, 2020, calculated under the CECL accounting standard adopted January 1, 2020, compared to $3.1 billion, or 1.28% of total loans, at December 31, 2019. The increase was due to the change in methodology together with the significantly adverse economic impact of the pandemic and its resulting effects on loan portfolio credit quality and loan growth.

•	The Basel III common equity Tier 1 (CET1) capital ratio increased to 11.7% at September 30, 2020 from 9.5% at December 31, 2019.

•	The September 30, 2020 ratio reflects higher capital due in part to the gain from the sale of our equity investment in BlackRock and changes under the Tailoring Rules, effective January 1, 2020 for PNC, partially offset by the impact of the CECL accounting standard.

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Additionally, capital benefited from our election of a five-year transition period for CECL's estimated impact on CET1 capital. CECL's estimated impact on CET1 capital is defined as the change in retained earnings at adoption plus or minus 25% of the change in CECL ACL at the balance sheet date compared to CECL ACL at transition. The estimated CECL impact is added to CET1 capital through December 31, 2021, then phased-out over the following three years.

•	Common shareholders' equity increased 10% to $49.8 billion at September 30, 2020, compared to $45.3 billion at December 31, 2019.

•	On October 1, 2020, the PNC board of directors declared a quarterly cash dividend on common stock of $1.15 per share payable on November 5, 2020.

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We announced on March 16, 2020 a temporary suspension of our common stock repurchase program in conjunction with the Federal Reserve's effort to support the U.S. economy during the pandemic, and will continue the suspension through the fourth quarter of 2020, consistent with the extension of the Federal Reserve's special capital distribution restrictions. We repurchased $99 million of common shares in the third quarter to offset the effects of employee benefit plan-related issuances in 2020 as permitted by guidance from the Federal Reserve.

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The U.S. economy is in a nascent economic recovery in the second half of 2020, following a very severe but very short economic contraction in the first half of the year due to the COVID-19 pandemic and public health measures to contain it. Real GDP declined significantly in the first and second quarters of 2020, as many firms closed, at least temporarily, and consumers stayed at home. Since the late spring/early summer economic activity has picked up due to loosening restrictions on businesses, massive federal stimulus, and extremely low interest rates. Between May and September the economy added back slightly more than half of the 22 million jobs lost in March and April.

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Despite the improvement in the economy in recent months, economic activity remains far below its pre-pandemic level and unemployment remains elevated. Real GDP growth in the third quarter was extremely strong, at an annual rate of 33.1%, but will slow in the fourth quarter and through 2021. PNC does not expect real GDP to return to its pre-pandemic level until late 2021, and does not expect employment to return to its pre-pandemic level until 2023. Risks to this outlook are weighted to the downside; they include a further resurgence in the spread of the coronavirus and a lack of additional stimulus from the federal government.

•	Monetary policy remains extremely supportive of economic growth. PNC expects the Federal Open Market Committee to keep the federal funds rate in its current range of 0.00% to 0.25% through at least mid-2024.

•	Average loans to decline in the low-single digits percentage range;

•	Net interest income to be stable;

•	Fee income to be stable and other noninterest income to be between $275 million and $325 million, resulting in our expectation that total noninterest income will be down in the high-single digit percentage range;

•	Noninterest expense to be up approximately 1%; and

•	Net loan charge-offs to be between $200 million and $250 million.

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(a)

Interest income calculated as taxable-equivalent interest income. To provide more meaningful comparisons of interest income and yields for all interest-earning assets, as well as net interest margins, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margins by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP on the Consolidated Income Statement. For more information, see Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP) in the Statistical Information (Unaudited) section in Item 1 of this Report.

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(a)

Represents our held for sale investment in BlackRock. In the second quarter of 2020, PNC divested its entire investment in BlackRock. Prior period BlackRock investment balances have been reclassified to the Asset held for sale line in accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations. Refer to Note 1 Accounting Policies and Note 2 Discontinued Operations in the Notes To Consolidated Financial Statements of this Report and the second quarter Form 10-Q for additional details.

(b)	Amount as of September 30, 2020 reflects the impact of adopting the CECL accounting standard and our transition from an incurred loss methodology for these reserves to an expected credit loss methodology. Prior period amounts represent ALLL under the incurred loss methodology. Refer to Note 1 Accounting Policies in this Report for additional detail on the adoption of this standard.

•	Total assets increased as a result of higher interest-earning deposits with banks, primarily the Federal Reserve Bank, loan growth, and higher investment securities;

•	Total liabilities increased primarily due to deposit growth reflecting customer liquidity accumulation, partially offset by lower FHLB borrowings and federal funds purchased;

•	Total equity increased primarily due to higher retained earnings driven by the gain on sale of our equity investment in BlackRock and higher accumulated other comprehensive income (AOCI), partially offset by dividends on common and preferred stock, share repurchases, the day-one effect of adopting the CECL accounting standard and the redemption of our Series Q preferred stock.

•	Allowance for Credit Losses in the Credit Risk Management section of this Financial Review, and

•	Note 1 Accounting Policies and Note 4 Loans and Related Allowance for Credit Losses in the Notes To Consolidated Financial Statements included in this Report.

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(a)	Ratings percentages allocated based on amortized cost, net of allowance for securities.

(b)	Amortized cost is presented net of applicable allowance for securities of $71 million at September 30, 2020 in accordance with the adoption of the CECL accounting standard. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies for additional detail on the adoption of this ASU.

(c)	Collateralized primarily by retail properties, office buildings, lodging properties and multifamily housing.

(d)	Collateralized primarily by corporate debt, government guaranteed education loans and other consumer credit products.

(e)	Includes state and municipal securities.

(f)	Includes available for sale and held to maturity securities, which are recorded on our balance sheet at fair value and amortized cost, respectively.

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•	Retail Banking

•	Corporate & Institutional Banking

•	Asset Management Group

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(a)	Represents mortgage loan servicing balances for third parties and the related income.

(b)	Presented as of September 30, except for average customer-related statistics and net charge-offs which are both for the nine months ended.

(c)	Servicing fees net of impact of decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan payments, prepayments, and loans that were paid down or paid off during the period.

(d)	Mortgages with borrowers as part of residential real estate purchase transactions.

(e)	Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application.

(f)	Represents consumer checking relationships that process the majority of their transactions through non-teller channels.

(g)	Primarily nonperforming loans of $1.1 billion for both September 30, 2020 and September 30, 2019.

(h)	Excludes stand-alone mortgage offices and satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services.

(i)	Includes cash and money market balances.

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•	Average residential mortgages increased primarily as a result of growth in nonconforming residential mortgage loans and a robust refinance market driven by historically low interest rates.

•	Average commercial loans increased primarily due to PPP loans.

•	Average auto loans increased primarily due to new indirect auto loan volumes, including in our Southeast and expansion markets.

•	Average credit card balances increased as we continued to focus on our long-term objective of deepening penetration within our existing customer base as well as new client acquisition.

•	Average unsecured installment loans increased primarily driven by growth in originations through digital channels.

•	Average home equity loans increased as new originated volume exceeded paydowns and payoffs on loans.

•	Average education loans decreased driven by a decline in the runoff portfolio of government guaranteed education loans.

•	Approximately 73% of consumer customers used non-teller channels for the majority of their transactions in the first nine months of 2020 compared with 69% for the same period in 2019.

•	Deposit transactions via ATM and mobile channels increased to 63% of total deposit transactions in the first nine months of 2020 from 57% for the same period in 2019.

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(a)	See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of this Corporate & Institutional Banking section.

(b)	Amounts are reported in net interest income and noninterest income.

(c)	Represents other noninterest income for valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, originations fees, gains on sale of loans held for sale and net interest income on loans held for sale.

(d)	Represents net interest income and noninterest income (primarily in corporate service fees) from loan servicing net of reduction in commercial mortgage servicing rights due to amortization expense and payoffs. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately.

(e)	Amounts are reported in corporate service fees.

(f)	As of September 30.

(g)	Primarily nonperforming loans of $.8 billion and $.5 billion at September 30, 2020 and September 30, 2019, respectively.

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•	Corporate Banking provides lending, treasury management and capital markets-related products and services to mid-sized and large corporations, and government and not-for-profit entities. Average loans for this business grew reflecting increased year-to-date average utilization due to the impact of draws made at the onset of the pandemic and new production, including PPP loan originations.

•	PNC Real Estate provides banking, financing and servicing solutions for commercial real estate clients across the country. Average loans for this business increased primarily driven by higher commercial mortgage and multifamily agency warehouse lending, partially offset by project loan payoffs.

•	Commercial Banking provides lending, treasury management and capital markets-related products and services to smaller corporations and businesses. Average loans for this business increased primarily driven by PPP loan originations.

•	Business Credit provides asset-based lending. The loan portfolio is relatively high yielding, with acceptable risk as the loans are mainly secured by short-term assets. Average loans for this business increased primarily due to new originations, partially offset by lower utilization.

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(a)	As of September 30.

(b)	Primarily nonperforming loans of $39 million at September 30, 2020 and $42 million at September 30, 2019.

(c)	Excludes brokerage account client assets.

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(a)	Presented in descending order based on loan balances at September 30, 2020.

•	Non-real estate related

•	Leisure recreation: restaurants, casinos, hotels, convention centers

•	Non-essential retail: retail excluding auto, gas, staples

•	Healthcare facilities: elective, private practices

•	Consumer services: religious organizations, childcare

•	Leisure travel: cruise, airlines, other travel/transportation

•	Other impacted areas: shipping, senior living, specialty education

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•	Real estate related

•	Non-essential retail and restaurants: malls, lifestyle centers, outlets, restaurants

•	Hotel: full service, limited service, extended stay

•	Seniors housing: assisted living, independent living

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(a)	Presented in descending order based on loan balances at September 30, 2020.

(a)	Presented in descending order based on loan balances at September 30, 2020.

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(a)	Excludes most unsecured consumer loans and lines of credit, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.

(b)	Ratio at September 30, 2020 reflects the changes in ALLL methodology due to the adoption of the CECL accounting standard on January 1, 2020, along with increases in reserves during 2020 due to the significantly adverse economic impact of the pandemic and its resulting effects on loan portfolio credit quality and loan growth.

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•	if current at the time of modification, the loan remains current throughout the modification period,

•	if delinquent at the time of modification and the borrower was not made current as part of the modification, the loan maintains its reported delinquent status during the modification period, or

•	if delinquent at the time of modification and the borrower was made current as part of the modification or became current during the modification period, the loan is reported as current.

(a)	Past due loan amounts include government insured or guaranteed loans of $.5 billion at September 30, 2020 and $.6 billion at December 31, 2019.

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(a)	Amounts in table do not include associated valuation allowances.

(b)	Accruing loans include consumer credit card loans and loans that have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans.

•	the loan modification resulted from a COVID-19 related hardship,

•	the borrower was no more than 30 days past due as of December 31, 2019, and

•	the loan modification did not result in a permanent reduction of interest or principal.

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•	Industry concentrations and conditions,

•	Changes in market conditions, including regulatory and legal requirements,

•	Changes in the nature and volume of our portfolio,

•	Recent credit quality trends, including the impact of COVID-19 hardship related loan modifications,

•	Recent loss experience in particular portfolios, including specific and unique events,

•	Recent macro-economic factors that may not be reflected in the forecast information,

•	Limitations of available input data, including historical loss information and recent data such as collateral values,

•	Model imprecision,

•	Changes in lending policies and procedures, including changes in loss recognition and mitigation policies and procedures,

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

•	Other relevant factors.

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(a)	Excludes allowances for investment securities and other financial assets, which together totaled $98 million at September 30, 2020.

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•	Bank-level capital needs,

•	Laws and regulations,

•	Corporate policies,

•	Contractual restrictions, and

•	Other factors.

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•	Pay common dividends at the same per share level as paid during the second quarter of 2020, provided that the amount does not exceed the average of the firm's net income for the four preceding calendar quarters;

•	Purchase common shares in an amount that equals the amount of share issuances related to expensed employee compensation; and

•	Make scheduled payments on additional Tier 1 and Tier 2 capital instruments.

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(a)	The ratios are calculated to reflect PNC's election to adopt the CECL optional five-year transition provision.

(b)	The ratios are calculated to reflect the full impact of CECL and excludes the benefits of the optional five-year transition provision.

(c)	Basel III standardized approach weighted-assets are based on the Basel III standardized approach rules and include credit and market risk-weighted assets.

(d)	As of September 30, 2020 the Supplementary leverage exposure and Supplementary leverage ratio reflects the temporary exclusions of U.S. Treasury securities and deposits at Federal Reserve Banks.

(e)	All ratios are calculated using the regulatory capital methodology applicable to PNC and calculated based on the standardized approach.

(f)	The Basel III Total risk-based capital ratios include nonqualifying trust preferred capital securities of $40 million that are subject to a phase-out period that runs through 2021.

(g)	Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets.

(h)	The Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure, which takes into account both on balance sheet assets as well as certain off-balance sheet items, including loan commitments and potential future exposure under derivative contracts.

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(a)	Given the inherent limitations in certain of these measurement tools and techniques, results become less meaningful as interest rates approach zero. Senior management approved the suspension of the 100bps decrease in rate change sensitivities considering the current low rate environment.

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•	enhancing fallback language in new contracts and reviewing existing legal contracts/agreements to assess fallback language impacts;

•	making preparations for internal operational readiness;

•	making necessary enhancements to our infrastructure including systems, models, valuation tools and processes;

•	developing and delivering on internal and external LIBOR cessation communication plans;

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•	engaging with our clients, industry working groups and regulators; and

•	monitoring developments associated with LIBOR alternatives and industry practices related to LIBOR-indexed instruments.

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•	Fair Value Measurements

•	Residential and Commercial Mortgage Servicing Rights

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•	Scenario weights and design: Our loss estimates are sensitive to the shape and severity of macroeconomic forecasts and thus

•	Portfolio volume and mix: Changes to portfolio volume and mix could materially affect our estimates, as CECL reserves

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•	Allowance For Credit Losses in the Credit Risk Management section of this Financial Review, and

•	Note 1 Accounting Policies, Note 3 Investment Securities and Note 4 Loans and Related Allowance for Credit Losses in the Notes To Consolidated Financial Statements included in this Report.

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

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

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

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

–	Changes in customer behavior due to changing business and economic conditions or legislative or regulatory initiatives.

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

–	Impacts of tariffs and other trade policies of the U.S. and its global trading partners.

–	The length and extent of economic contraction as a result of the COVID-19 pandemic.

–	The impact of the upcoming U.S. elections on the regulatory landscape, capital markets, and the response to and management of the COVID-19 pandemic.

–	Commodity price volatility.

•	Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory contingencies. These statements are based on our view that:

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The U.S. economy is in a nascent economic recovery in the second half of 2020, following a very severe but very short economic contraction in the first half of the year due to the COVID-19 pandemic and public health measures to contain it. Real GDP declined significantly in the first and second quarters of 2020, as many firms closed, at least temporarily, and consumers stayed at home. Since the late spring/early summer, economic activity has picked up due to loosening restrictions on businesses, massive federal stimulus, and extremely low interest rates. Between May and September the economy added back slightly more than half of the 22 million jobs lost in March and April.

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Despite the improvement in the economy in recent months, economic activity remains far below its pre-pandemic level and unemployment remains elevated. Real GDP growth in the third quarter was extremely strong, at an annual rate of 33.1%, but will slow in the fourth quarter and through 2021. PNC does not expect real GDP to return to its pre-pandemic level until late 2021, and does not expect employment to return to its pre-pandemic level until 2023. Risks to this outlook are weighted to the downside; they include a further resurgence in the spread of the coronavirus and a lack of additional stimulus from the federal government.

–	Monetary policy remains extremely supportive of economic growth. PNC expects the Federal Open Market Committee to keep the federal funds rate in its current range of 0.00% to 0.25% through at least mid-2024.

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Given the many unknowns and risks being heavily weighted to the downside, our forward-looking statements are subject to the risk that conditions will be substantially different than we are currently expecting. If efforts to contain COVID-19 are unsuccessful and restrictions on businesses and activities are not further lifted or are reimposed, the recovery would be much weaker. There is even the potential that the economy could fall back into recession. PNC's baseline scenario assumes additional fiscal stimulus; continued inaction on stimulus is another major downside risk. The longer it takes to combat the pandemic, the more permanent damage it will cause to business and consumer fundamentals and sentiment; this could make the recovery weaker and result in permanently lower long-run economic growth. An extended global recession due to COVID-19 would weaken the U.S. recovery. As a result, the outbreak and its consequences, including responsive measures to manage it, have had and are likely to continue to have an adverse effect, possibly materially, on our business and financial performance by adversely affecting the demand and profitability of our products and services, the valuation of assets and our ability to meet the needs of our customers.

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PNC’s ability to take certain capital actions, including returning capital to shareholders, is subject to PNC meeting or exceeding a stress capital buffer established by the Federal Reserve Board in connection with the Federal Reserve Board's CCAR process. The Federal Reserve also has imposed additional limitations on capital distributions through the fourth quarter of 2020 by CCAR-participating bank holding companies and may extend these limitations, potentially in modified form.

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

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

–	Changes to laws and regulations, including changes affecting oversight of the financial services industry, consumer protection, bank capital and liquidity standards, pension, bankruptcy and other industry aspects, and changes in accounting policies and principles.

–	Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries. These matters may result in monetary judgments or settlements or other remedies, including fines, penalties, restitution or alterations in our business practices, and in additional expenses and collateral costs, and may cause reputational harm to PNC.

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

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

•	Business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through effective use of systems and controls, third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards.

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We grow our business in part through acquisitions and new strategic initiatives. Risks and uncertainties include those presented by the nature of the business acquired and strategic initiative, including in some cases those associated with our entry into new businesses or new geographic or other markets and risks resulting from our inexperience in those new areas, as well as risks and uncertainties related to the acquisition transactions themselves, regulatory issues, and the integration of the acquired businesses into PNC after closing.

•	Competition can have an impact on customer acquisition, growth and retention and on credit spreads and product pricing, which can affect market share, deposits and revenues. Our ability to anticipate and respond to technological changes can also impact our ability to respond to customer needs and meet competitive demands.

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

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(a)	Our consolidated assets included the following for which we have elected the fair value option: Loans held for sale of $1.4 billion, Loans of $1.3 billion and Other assets of $.1 billion at September 30, 2020 and Loans held for sale of $1.1 billion, Loans of $.7 billion and Other assets of $.1 billion at December 31, 2019.

(b)

Represents our held for sale investment in BlackRock. In the second quarter of 2020, PNC divested its entire investment in BlackRock. Prior period BlackRock investment balances have been reclassified to the Asset held for sale line in accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations. Refer to Note 1 Accounting Policies and Note 2 Discontinued Operations for additional details.

(c)

Amounts as of September 30, 2020 reflects the impact of adopting Accounting Standards Update 2016-13, Financial Instruments - Credit Losses, which is commonly referred to as the Current Expected Credit Losses (CECL) standard and our transition from an incurred loss methodology for these reserves to an expected credit loss methodology. Refer to Note 1 Accounting Policies in this Report for additional detail on the adoption of this standard.

(d)	Our consolidated liabilities at September 30, 2020 and December 31, 2019 included Other borrowed funds of less than $.1 billion and $.1 billion, respectively, for which we have elected the fair value option.

(e)	Par value less than $.5 million at each date.

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•	Nonperforming Loans and Leases section of this Note 1,

•	Allowance for Credit Losses section of this Note 1, and

•	Note 4 Loans and Related Allowance for Credit Losses.

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For commercial nonperforming loans greater than or equal to a defined dollar threshold, reserves are based on an analysis of the present value of the loan’s expected future cash flows or the fair value of the collateral, if appropriate under our policy for collateral dependent loans. Nonperforming commercial loans below the defined threshold and accruing TDRs are reserved for under a pooled basis.

•	For consumer nonperforming loans classified as collateral dependent, charge-off and ALLL related to recovery of amounts previously charged-off are evaluated through an analysis of the fair value of the collateral less costs to sell.

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•	Industry concentrations and conditions,

•	Changes in market conditions, including regulatory and legal requirements,

•	Changes in the nature and volume of our portfolio,

•	Recent credit quality trends, including the impact of COVID-19 hardship related loan modifications,

•	Recent loss experience in particular portfolios, including specific and unique events,

•	Recent macro-economic factors that may not be reflected in the forecast information,

•	Limitations of available input data, including historical loss information and recent data such as collateral values,

•	Model imprecision,

•	Changes in lending policies and procedures, including changes in loss recognition and mitigation policies and procedures,

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

•	Other relevant factors

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(a)	Balances at December 31, 2019 include $2.0 billion in fair value of securities accepted from others to collateralize short-term investments in resale agreements that were not repledged.

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•	if current at the time of modification, the loan remains current throughout the modification period,

•	if delinquent at the time of modification and the borrower was not made current as part of the modification, the loan maintains its reported delinquent status during the modification period, or

•	if delinquent at the time of modification and the borrower was made current as part of the modification or became current during the modification period, the loan is reported as current.

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(a)	Amounts in table represent loans held for investment and do not include any associated valuation allowance.

(b)	The accrued interest associated with our loan portfolio at September 30, 2020 totaled $.7 billion and is included in Other assets on the Consolidated Balance Sheet.

(c)	Past due loan amounts include government insured or guaranteed Residential real estate loans and Education loans totaling $.4 billion and $.1 billion, respectively, at September 30, 2020.

(d)	Consumer loans accounted for under the fair value option for which we do not expect to collect substantially all principal and interest are subject to nonaccrual accounting and classification upon meeting any of our nonaccrual policies. Given that these loans are not accounted for at amortized cost, these loans have been excluded from the nonperforming loan population.

(e)	Net of unearned income, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans totaling $1.4 billion at September 30, 2020.

(f)	Collateral dependent loans totaled $1.2 billion at September 30, 2020. The majority of these loans are within the Home equity and Residential real estate loan classes and are secured by consumer real estate.

(g)	Amounts in table represent recorded investment and exclude loans held for sale. Recorded investment does not include any associated valuation allowance.

(h)

Past due loan amounts exclude purchased impaired loans, even if contractually past due (or if we do not expect to receive payment in full based on the original contractual terms), as we accreted interest income over the expected life of the loans. Past due loan amounts include government insured or guaranteed Residential real estate loans totaling $.4 billion and Education loans totaling $.2 billion at December 31, 2019.

(i)	Consumer loans accounted for under the fair value option for which we do not expect to collect substantially all principal and interest are subject to nonaccrual accounting and classification upon meeting any of our nonaccrual policies. Given that these loans are not accounted for at amortized cost, these loans have been excluded from the nonperforming loan population.

(j)	Net of unearned income, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans totaling $1.1 billion at December 31, 2019.

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(a)	Excludes most unsecured consumer loans and lines of credit, which are charged off after 120 to 180 days past due and are not placed on nonperforming status.

(b)	Nonperforming loans for which there is no related ALLL totaled $.6 billion at September 30, 2020, and is primarily comprised of loans with a valuation that exceeds the amortized cost basis.

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(a)	Loans in our commercial portfolio are classified as Pass Rated or Criticized based on the regulatory definitions, which are driven by the PD and LGD ratings that we assign. The Criticized classification includes loans that were rated special mention, substandard or doubtful as of September 30, 2020 and December 31, 2019.

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(a)

Loans with no FICO score available or required generally refers to new accounts issued to borrowers with limited credit history, accounts for which we cannot obtain an updated FICO score (e.g., recent profile changes), cards issued with a business name and/or cards secured by collateral. Management proactively assesses the risk and size of this loan category and, when necessary, takes actions to mitigate the credit risk.

(b)	Weighted-average updated FICO score excludes accounts with no FICO score available or required.

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(a)	Excludes allowances for investment securities and other financial assets, which together totaled $98 million at September 30, 2020.

(b)	Represents the impact of adopting ASU 2016-13, Financial Instruments - Credit Losses on January 1, 2020 and our transition from an incurred loss methodology for our reserves to an expected credit loss methodology.

(c)	See Note 9 Commitments for additional information about the underlying commitments related to this allowance.

•	Commercial reserves increased $2.2 billion attributable to the significantly adverse economic impact of the pandemic and its resulting effects on credit quality and loan growth.

•	Consumer reserves increased $.5 billion primarily reflecting the significantly adverse economic impact of the pandemic.

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(a)	Represents cash flow information associated with both commercial mortgage loan transfers and servicing activities.

(b)	Gains/losses recognized on sales of loans were insignificant for the periods presented.

(c)	Includes both residential and commercial mortgage government insured or guaranteed loans eligible for repurchase through the exercise of our removal of account provision option, as well as residential mortgage loans repurchased due to alleged breaches of origination covenants or representations and warranties made to purchasers.

(d)	Includes contractually specified servicing fees, late charges and ancillary fees.

(e)

Represents cash flows on securities where we transferred to and/or service loans for a securitization SPE and we hold securities issued by that SPE. The carrying values of such securities held were $19.5 billion, $17.8 billion, and $17.7 billion in residential mortgage-backed securities and $.8 billion, $.6 billion, and $.6 billion in commercial mortgage-backed securities at September 30, 2020, December 31, 2019 and September 30, 2019, respectively.

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(a)	Represents information at the securitization level in which we have sold loans and we are the servicer for the securitization.

(b)	Serviced delinquent loans are 90 days or more past due or are in process of foreclosure.

(c)

Net charge-offs for Residential mortgages represent credit losses less recoveries distributed and as reported to investors during the period. Net charge-offs for Commercial mortgages represent credit losses less recoveries distributed and as reported by the trustee for commercial mortgage-backed securitizations. Realized losses for Agency securitizations are not reflected as we do not manage the underlying real estate upon foreclosure and, as such, do not have access to loss information.

(a)	Represents loans, investments and other assets related to non-consolidated VIEs, net of collateral (if applicable). The risk of loss excludes any potential tax recapture associated with tax credit investments.

(b)	Amounts reflect involvement with securitization SPEs where we transferred to and/or service loans for an SPE and we hold securities issued by that SPE. Values disclosed in the PNC Risk of Loss column represent our maximum exposure to loss for those securities’ holdings.

(c)	Included in Investment securities, Mortgage servicing rights and Other assets on our Consolidated Balance Sheet.

(d)	Included in Investment securities, Loans, Equity investments and Other assets on our Consolidated Balance Sheet.

(e)	Included in Deposits and Other liabilities on our Consolidated Balance Sheet.

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(a)	Represents decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period.

(b)	Represents MSR value changes resulting primarily from market-driven changes in interest rates.

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(a)	FHLB borrowings are generally collateralized by residential mortgage loans, other mortgage-related loans and investment securities.

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(a)	Net outstanding standby letters of credit include $3.9 billion and $4.1 billion at September 30, 2020 and December 31, 2019, respectively, which support remarketing programs.

(b)

Represents aggregate maximum exposure up to the specified limits of the reinsurance contracts provided by our wholly-owned captive insurance subsidiary. These amounts reflect estimates based on availability of financial information from insurance carriers. As of September 30, 2020, the aggregate maximum exposure amount was zero for accidental death and dismemberment contracts, and $.1 billion for credit life, accident and health contracts. Comparable amounts at December 31, 2019 were $1.3 billion and $.1 billion, respectively.

(c)	We enter into standby bond purchase agreements to support municipal bond obligations.

(d)	Includes $.6 billion related to investments in qualified affordable housing projects for both September 30, 2020 and December 31, 2019.

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(a)	The par value of our preferred stock outstanding was less than $.5 million at each date and, therefore, is excluded from this presentation.

(b)	On September 1, 2020, PNC redeemed all 4,800 shares of its Series Q Preferred Stock, as well as all 19.2 million Depositary Shares representing fractional interests in such shares.

(c)	Represents the cumulative effect of adopting ASU 2016-02 - Leases related primarily to deferred gains on previous sale-leaseback transactions. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in our 2019 Form 10-K for additional detail.

(d)	Represents the cumulative effect of adopting ASU 2016-13 - Financial Instruments - Credit Losses. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in this Report for additional detail on this adoption.

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(a)	Reclassifications for pre-tax debt securities and cash flow hedges are recorded in interest income and noninterest income on the Consolidated Income Statement.

(b)	Reclassifications include amortization of actuarial losses (gains) and amortization of prior period services costs (credits) which are recorded in noninterest expense on the Consolidated Income Statement.

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(a)	Basic and diluted earnings per share under the two-class method are determined on net income reported on the income statement less earnings allocated to nonvested restricted shares and restricted share units with nonforfeitable dividends and dividend rights (participating securities).

(b)	See Note 1 Accounting Policies in the Notes to Consolidated Financial Statements of this Report for additional information on our policy for not allocating losses to participating securities.

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(a)	Certain investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

(b)	Included in Other assets on the Consolidated Balance Sheet.

(c)	Amounts at September 30, 2020 and December 31, 2019 are presented gross and are not reduced by the impact of legally enforceable master netting agreements that allow us to net positive and negative positions and cash collateral held or placed with the same counterparty. See Note 13 Financial Derivatives for additional information related to derivative offsetting.

(d)

Total assets at fair value as a percentage of total consolidated assets was 23% and 20% as of September 30, 2020 and December 31, 2019, respectively. Level 3 assets as a percentage of total assets at fair value was 5% and 7% as of September 30, 2020 and December 31, 2019, respectively. Level 3 assets as a percentage of total consolidated assets was 1% at both September 30, 2020 and December 31, 2019.

(e)	Included in Other liabilities on the Consolidated Balance Sheet.

(f)

Total liabilities at fair value as a percentage of total consolidated liabilities was 1% at both September 30, 2020 and December 31, 2019. Level 3 liabilities as a percentage of total liabilities at fair value was 6% and 13% as of September 30, 2020 and December 31, 2019, respectively. Level 3 liabilities as a percentage of total consolidated liabilities was less than 1% at both September 30, 2020 and December 31, 2019.

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(a)	Losses for assets are bracketed while losses for liabilities are not.

(b)	The difference in unrealized gains and losses for the period included in Other comprehensive income and changes in unrealized gains and losses for the period included in Other comprehensive income for securities available for sale held at the end of the reporting period were not significant.

(c)	The amount of the total gains or losses for the period included in earnings that is attributable to the change in unrealized gains or losses related to those assets and liabilities held at the end of the reporting period.

(d)	Upon adoption of ASU 2016-13 - Credit Losses, we discontinued the accounting for purchased impaired loans and elected the one-time fair value option election for some of these loans and certain nonperforming loans.

(e)	Residential mortgage loan transfers out of Level 3 are primarily driven by residential mortgage loans transferring to OREO as well as reclassification of mortgage loans held for sale to held for investment.

(f)	Net gains (losses) realized and unrealized included in earnings related to Level 3 assets and liabilities included amortization and accretion. The amortization and accretion amounts were included in Interest income on the Consolidated Income Statement and the remaining net gains (losses) realized and unrealized were included in Noninterest income on the Consolidated Income Statement.

(g)	Net unrealized gains (losses) related to assets and liabilities held at the end of the reporting period were included in Noninterest income on the Consolidated Income Statement.

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(a)	Unobservable inputs were weighted by the relative fair value of the instruments.

(b)	The assumed yield spread over the benchmark curve for each instrument is generally intended to incorporate non-interest rate risks, such as credit and liquidity risks.

(c)	Consensus pricing refers to fair value estimates that are generally internally developed using information such as dealer quotes or other third-party provided valuations or comparable asset prices.

(d)	Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes certain financial derivative assets and liabilities, trading securities, other securities, residential mortgage loans held for sale, other assets, other borrowed funds and other liabilities.

(e)	Consisted of total Level 3 assets of $5.0 billion and total Level 3 liabilities of $.2 billion as of September 30, 2020 and $5.4 billion and $.3 billion as of December 31, 2019, respectively.

(a)	All Level 3 for the periods presented.

(b)	Valuation techniques applied were fair value of property or collateral.

(c)	Unobservable inputs used were appraised value/sales price, broker opinions or projected income/required improvement costs. Additional quantitative information was not meaningful for the periods presented.

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(a)	There were no accruing loans 90 days or more past due within this category at September 30, 2020 or December 31, 2019.

(a)	The impact on earnings of offsetting hedged items or hedging instruments is not reflected in these amounts.

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•	financial instruments recorded at fair value on a recurring basis (as they are disclosed in Table 69);

•	investments accounted for under the equity method;

•	equity securities without a readily determinable fair value that apply for the alternative measurement approach to fair value under ASU 2016-01;

•	real and personal property;

•	lease financing;

•	loan customer relationships;

•	deposit customer intangibles;

•	mortgage servicing rights (MSRs);

•	retail branch networks;

•	fee-based businesses, such as asset management and brokerage;

•	trademarks and brand names;

•	trade receivables and payables due in one year or less; and

•	deposit liabilities with no defined or contractual maturities under ASU 2016-01.

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(a)	Centrally cleared derivatives are settled in cash daily and result in no derivative asset or derivative liability being recognized on our Consolidated Balance Sheet.

(b)	Included in Other assets on our Consolidated Balance Sheet.

(c)	Included in Other liabilities on our Consolidated Balance Sheet.

(d)	Represents primarily swaps.

(e)	Includes both residential and commercial mortgage banking activities.

(f)	Futures contracts settle in cash daily and, therefore, no derivative asset or derivative liability is recognized on our Consolidated Balance Sheet.

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(a)	For all periods presented, there were no components of derivative gains or losses excluded from the assessment of hedge effectiveness for any of the fair value or cash flow hedge strategies.

(b)	All cash flow and fair value hedge derivatives were interest rate contracts for the periods presented.

(c)	Includes an insignificant amount of fair value hedge adjustments related to discontinued hedge relationships.

(d)	For all periods presented, there were no gains or losses from cash flow hedge derivatives reclassified to income because it became probable that the original forecasted transaction would not occur.

(a)	Includes $(.2) billion and $(.3) billion of fair value hedge adjustments primarily related to discontinued borrowed funds hedge relationships for September 30, 2020 and December 31, 2019, respectively.

(b)	Carrying value shown represents amortized cost.

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(a)	Included in Residential mortgage, Corporate services and Other noninterest income on our Consolidated Income Statement.

(b)	Includes an insignificant amount of gains (losses) on commodity contracts for all periods presented.

(c)	Included in Other noninterest income on our Consolidated Income Statement.

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(a)	Represents the net amount of derivative assets included in Other assets on our Consolidated Balance Sheet.

(b)	Represents the net amount of derivative liabilities included in Other liabilities on our Consolidated Balance Sheet.

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•	Retail Banking

•	Corporate & Institutional Banking

•	Asset Management Group

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(a)	There were no material intersegment revenues for the three and nine months ended September 30, 2020 and 2019.

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•	Wealth Management provides products and services to individuals and their families including investment and retirement planning, customized investment management, private banking, and trust management and administration for individuals and their families.

•	Our Hawthorn unit provides multi-generational family planning including estate, financial, tax planning, fiduciary, investment management and consulting, private banking, personal administrative services, asset custody and customized performance reporting to ultra high net worth clients.

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

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(a)

Net credit card fees consists of interchange fees of $121 million and $128 million and credit card reward costs of $71 million and $78 million for the three months ended September 30, 2020 and 2019, respectively. Net credit card fees consists of interchange fees of $341 million and $366 million and credit card reward costs of $211 million and $217 million for the nine months ended September 30, 2020 and 2019, respectively.

(b)	Out-of-scope noninterest income includes revenue streams that fall under the scope of other accounting and disclosure requirements outside of Topic 606.

(a)	Out-of-scope noninterest income includes revenue streams that fall under the scope of other accounting and disclosure requirements outside of Topic 606.

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(a)	Out-of-scope noninterest income includes revenue streams that fall under the scope of other accounting and disclosure requirements outside of Topic 606.

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(a)

Nonaccrual loans are included in loans, net of unearned income. The impact of financial derivatives used in interest rate risk management is included in the interest income/expense and average yields/rates of the related assets and liabilities. Basis adjustments related to hedged items are included in noninterest-earning assets and noninterest-bearing liabilities. Average balances of securities are based on amortized historical cost (excluding adjustments to fair value, which are included in other assets). Average balances for certain loans and borrowed funds accounted for at fair value are included in noninterest-earning assets and noninterest-bearing liabilities, with changes in fair value recorded in Noninterest income.

(b)	Loan fees for the three months ended September 30, 2020 and September 30, 2019 were $38 million and $49 million, respectively. Loan fees for the nine months ended September 30, 2020 and September 30, 2019 were $117 million and $120 million, respectively.

(c)

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 margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP. See Reconciliation of Taxable-Equivalent Net Interest Income in this Statistical Information section for more information.

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(a)

The interest income earned on certain interest-earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest income, we use interest income on a taxable-equivalent basis by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.

(a)

Includes PNC common stock purchased in connection with our various employee benefit plans generally related to shares used to cover employee payroll tax withholding requirements. Note 11 Employee Benefit Plans and Note 12 Stock Based Compensation Plans in the Notes To Consolidated Financial Statements of our 2019 Annual Report on Form 10-K include additional information regarding our employee benefit and equity compensation plans that use PNC common stock.

(b)

On April 4, 2019, our Board of Directors approved the establishment of a new stock repurchase program authorization in the amount of 100 million shares of PNC common stock, effective July 1, 2019. Under this authorization, repurchases may be made in the open market or privately negotiated transactions, with the timing and exact amount of common stock repurchases depending on a number of factors including, among others, market and general economic conditions, regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations, including the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the CCAR process. In June 2019, we announced share repurchase programs of up to $4.3 billion for the four quarter period beginning with the third quarter of 2019, in accordance with PNC's 2019 capital plan. In January 2020, we announced an increase to these programs to repurchase up to an additional $1.0 billion in common shares through the end of the second quarter of 2020. We announced on March 16, 2020 a temporary suspension of our common stock repurchase program in conjunction with the Federal Reserve's effort to support the U.S. economy during the pandemic, and will continue the suspension through the fourth quarter of 2020, consistent with the extension of the Federal Reserve's special capital distribution restrictions. We repurchased $99 million of common shares in the third quarter to offset the effects of employee benefit plan-related issuances in 2020 as permitted by guidance from the Federal Reserve.

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