UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2014
Commission file number 001-09718
THE PNC FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania |
25-1435979 |
|||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
(Address of principal executive offices, including zip code)
Registrants telephone number, including area code - (412) 762-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Name of Each Exchange on Which Registered |
|||
Common Stock, par value $5.00 |
New York Stock Exchange | |||
Depositary Shares Each Representing a 1/4,000 Interest in a Share of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series P |
New York Stock Exchange | |||
Depositary Shares Each Representing a 1/4,000 Interest in a Share of 5.375% Non-Cumulative Perpetual Preferred Stock, Series Q Warrants (expiring December 31, 2018) to purchase Common Stock |
New York Stock Exchange
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
$1.80 Cumulative Convertible Preferred Stock - Series B, par value $1.00
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer X |
Accelerated filer | Non-accelerated filer | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No X
The aggregate market value of the registrants outstanding voting common stock held by nonaffiliates on June 30, 2014, determined using the per share closing price on that date on the New York Stock Exchange of $89.05, was approximately $47.3 billion. There is no non-voting common equity of the registrant outstanding.
Number of shares of registrants common stock outstanding at February 13, 2015: 520,689,714
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of The PNC Financial Services Group, Inc. to be filed pursuant to Regulation 14A for the 2015 annual meeting of shareholders (Proxy Statement) are incorporated by reference into Part III of this Form 10-K.
T HE PNC F INANCIAL S ERVICES G ROUP , I NC .
Cross-Reference Index to 2014 Form 10-K
T HE PNC F INANCIAL S ERVICES G ROUP , I NC .
Cross-Reference Index to 2014 Form 10-K (continued)
TABLE OF CONTENTS (Continued)
Page | ||||||
Item 8 |
Financial Statements and Supplementary Data. (continued) | |||||
128 | ||||||
142 | ||||||
Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit |
143 | |||||
146 | ||||||
151 | ||||||
171 | ||||||
174 | ||||||
174 | ||||||
174 | ||||||
Note 12 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities |
175 | |||||
177 | ||||||
184 | ||||||
187 | ||||||
195 | ||||||
196 | ||||||
198 | ||||||
200 | ||||||
202 | ||||||
203 | ||||||
212 | ||||||
218 | ||||||
219 | ||||||
221 | ||||||
Statistical Information (Unaudited) | 222 | |||||
Item 9 |
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. | 231 | ||||
Item 9A |
Controls and Procedures. | 231 | ||||
Item 9B |
Other Information. | 231 | ||||
Item 10 |
Directors, Executive Officers and Corporate Governance. | 231 | ||||
Item 11 |
Executive Compensation. | 232 | ||||
Item 12 |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. | 232 | ||||
Item 13 |
Certain Relationships and Related Transactions, and Director Independence. | 234 | ||||
Item 14 |
Principal Accounting Fees and Services. | 234 | ||||
Item 15 |
Exhibits, Financial Statement Schedules. | 234 | ||||
235 | ||||||
EXHIBIT INDEX |
T HE PNC F INANCIAL S ERVICES G ROUP , I NC .
Cross-Reference Index to 2014 Form 10-K (continued)
MD&A TABLE REFERENCE
T HE PNC F INANCIAL S ERVICES G ROUP , I NC .
Cross-Reference Index to 2014 Form 10-K (continued)
MD&A TABLE REFERENCE (Continued)
T HE PNC F INANCIAL S ERVICES G ROUP , I NC .
Cross-Reference Index to 2014 Form 10-K (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE
T HE PNC F INANCIAL S ERVICES G ROUP , I NC .
Cross-Reference Index to 2014 Form 10-K (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE (Continued)
T HE PNC F INANCIAL S ERVICES G ROUP , I NC .
Cross-Reference Index to 2014 Form 10-K (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE (Continued)
Forward-Looking Statements: From time to time, The PNC Financial Services Group, Inc. (PNC or the Corporation) has made and may continue to make written or oral forward-looking statements regarding our outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position and other matters regarding or affecting PNC and its future business and operations or the impact of legal, regulatory or supervisory matters on our business operations or performance. This Annual Report on Form 10-K (the Report or Form 10-K) also includes forward-looking statements. With respect to all such forward-looking statements, you should review our Risk Factors discussion in Item 1A, our Risk Management, Critical Accounting Estimates And Judgments, and Cautionary Statement Regarding Forward-Looking Information sections included in Item 7, and Note 21 Legal Proceedings and Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements included in Item 8 of this Report. See page 99 for a glossary of certain terms used in this Report.
Business Overview
Headquartered in Pittsburgh, Pennsylvania, we are one of the largest diversified financial services companies in the United States. We have businesses engaged in retail banking, corporate and institutional banking, asset management, and residential mortgage banking, providing many of our products and services nationally, as well as other products and services in our primary geographic markets located in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, North Carolina, Florida, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Missouri, Georgia, Wisconsin and South Carolina. We also provide certain products and services internationally. At December 31, 2014, our consolidated total assets, total deposits and total shareholders equity were $345.1 billion, $232.2 billion and $44.6 billion, respectively.
We were incorporated under the laws of the Commonwealth of Pennsylvania in 1983 with the consolidation of Pittsburgh National Corporation and Provident National Corporation. Since 1983, we have diversified our geographical presence, business mix and product capabilities through internal growth, strategic bank and non-bank acquisitions and equity investments, and the formation of various non-banking subsidiaries.
Review Of Business Segments
In addition to the following information relating to our lines of business, we incorporate the information under the captions Business Segment Highlights and Business Segments Review in Item 7 of this Report here by reference. Also, we include the financial and other information by business in Note 24 Segment Reporting in the Notes To Consolidated Financial Statements in Item 8 of this Report here by reference.
Assets, revenue and earnings attributable to foreign activities were not material in the periods presented. Business segment results for periods prior to 2014 have been reclassified to reflect current methodologies and current business and management structure and to present those periods on the same basis.
Retail Banking provides deposit, lending, brokerage, investment management and cash management services to consumer and small business customers within our primary geographic markets. Our customers are serviced through our branch network, ATMs, call centers, online banking and mobile channels. The branch network is located primarily in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, North Carolina, Florida, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Missouri, Georgia, Wisconsin and South Carolina.
Our core strategy is to acquire and retain customers who maintain their primary checking and transaction relationships with PNC. We also seek revenue growth by deepening our share of our customers financial assets, such as savings and liquidity deposits, loans and investable assets, including retirement assets. A strategic priority for PNC is to redefine the retail banking business in response to changing customer preferences. A key element of this strategy is to expand the use of lower-cost alternative distribution channels while continuing to optimize the traditional branch network. In addition, we have a disciplined process to continually improve the engagement of both our employees and customers, which is a strong indicator of customer growth, retention and relationship expansion.
Corporate & Institutional Banking provides lending, treasury management, and capital markets-related products and services to mid-sized and large corporations, government and not-for-profit entities. Lending products include secured and unsecured loans, letters of credit and equipment leases. Treasury management services include cash and investment management, receivables management, disbursement services, funds transfer services, information reporting and global trade services. Capital markets-related products and services include foreign exchange, derivatives, securities, loan syndications, mergers and acquisitions advisory, equity capital markets advisory and related services. We also provide commercial loan servicing and real estate advisory and technology solutions for the commercial real estate finance industry. Products and services are generally provided within our primary geographic markets, with certain products and services offered nationally and internationally.
The PNC Financial Services Group, Inc. Form 10-K 1 |
Corporate & Institutional Bankings strategy is to be the leading relationship-based provider of traditional banking products and services to its customers through the economic cycles. We aim to expand our market share and drive higher returns by growing and deepening customer relationships while maintaining prudent risk and expense management.
Asset Management Group includes personal wealth management for high net worth and ultra high net worth clients and institutional asset management. Wealth management products and services include investment and retirement planning, customized investment management, private banking, tailored credit solutions, and trust management and administration for individuals and their families. Hawthorn provides multi-generational family planning including wealth strategy, investment management, private banking, tax and estate planning guidance, performance reporting and personal administration services to ultra high net worth families. Institutional asset management provides investment management, custody administration and retirement administration services. Institutional clients include corporations, unions, municipalities, non-profits, foundations and endowments, primarily located in our geographic footprint.
Asset Management Group is focused on being one of the premier bank-held individual and institutional asset managers in each of the markets it serves. The business seeks to deliver high quality banking advice and trust and investment management services to our high net worth, ultra high net worth and institutional client sectors through a broad array of products and services. Asset Management Groups primary goals are to service our clients, grow the business and deliver solid financial performance with prudent risk and expense management.
Residential Mortgage Banking directly originates first lien residential mortgage loans on a nationwide basis with a significant presence within the retail banking footprint. Mortgage loans represent loans collateralized by one-to-four-family residential real estate. These loans are typically underwritten to government agency and/or third-party standards, and either sold, servicing retained, or held on PNCs balance sheet. Loan sales are primarily to secondary mortgage conduits of Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal Home Loan Banks and third-party investors, or are securitized and issued under the Government National Mortgage Association (GNMA) program, as described in more detail in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in Item 8 of this Report and included here by reference. The mortgage servicing operation performs all functions related to servicing mortgage loans, primarily those in first lien position, for various investors and for loans owned by PNC.
Residential Mortgage Banking is focused on adding value to the PNC franchise by building stronger customer relationships, providing quality investment loans and mortgage servicing opportunities, and delivering acceptable returns consistent with our desired risk appetite. A strategic priority for PNC is to build a stronger residential mortgage business offering seamless delivery to customers while improving efficiencies. Our national distribution capability provides volume that drives economies of scale, risk dispersion and cost-effective extension of the retail banking footprint for cross-selling opportunities.
BlackRock , in which we hold an equity investment, is a leading publicly traded investment management firm providing a broad range of investment and risk management services to institutional and retail clients worldwide. Using a diverse platform of active and index investment strategies across asset classes, BlackRock develops investment outcomes and asset allocation solutions for clients. Product offerings include single- and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. BlackRock also offers an investment and risk management technology platform, risk analytics and advisory services and solutions to a broad base of institutional investors. We hold our equity investment in BlackRock as a key component of our diversified revenue strategy. BlackRock is a publicly traded company, and additional information regarding its business is available in its filings with the Securities and Exchange Commission (SEC).
Non-Strategic Assets Portfolio includes a consumer portfolio of mainly residential mortgage and brokered home equity loans and lines of credit and a small commercial/commercial real estate loan and lease portfolio. We obtained a significant portion of these non-strategic assets through acquisitions of other companies.
Subsidiaries
Our corporate legal structure at December 31, 2014 consisted of one domestic subsidiary bank, including its subsidiaries, and approximately 80 active non-bank subsidiaries, in addition to various affordable housing investments. Our bank subsidiary is PNC Bank, National Association (PNC Bank), a national bank headquartered in Pittsburgh, Pennsylvania. For additional information on our subsidiaries, see Exhibit 21 to this Report.
2 The PNC Financial Services Group, Inc. Form 10-K |
Statistical Disclosure By Bank Holding Companies
The following statistical information is included on the indicated pages of this Report and is incorporated herein by reference:
Form 10-K page | ||
Average Consolidated Balance Sheet And Net Interest Analysis |
223-224 | |
Analysis Of Year-To-Year Changes In Net Interest Income |
225 | |
Book Values Of Securities |
43-44
and 146-151 |
|
Maturities And Weighted-Average Yield Of Securities |
150-151 | |
Loan Types |
39-43,
129-130 and 226 |
|
Selected Loan Maturities And Interest Sensitivity |
230 | |
Nonaccrual, Past Due And Restructured Loans And Other Nonperforming Assets |
72-79,
116-119,
|
|
Potential Problem Loans And Loans Held For Sale |
45 and 72-82 | |
Summary Of Loan Loss Experience |
80-82, 128-145
and 229 |
|
Assignment Of Allowance For Loan And Lease Losses |
80-82 and 229 | |
Average Amount And Average Rate Paid On Deposits |
223-224 | |
Time Deposits Of $100,000 Or More |
174 and 230 | |
Selected Consolidated Financial Data |
30-31 | |
Short-term borrowings not included as average balances during 2014, 2013, and 2012 were less than 30% of total shareholders equity at the end of each period. |
Supervision and Regulation
PNC is a bank holding company (BHC) registered under the Bank Holding Company Act of 1956 (BHC Act) and a financial holding company under the Gramm-Leach-Bliley Act (GLB Act).
We are subject to numerous governmental regulations, some of which are highlighted below. See Note 20 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information regarding our regulatory matters. Applicable laws and regulations restrict our permissible activities and investments, impose conditions and requirements on the products and services we offer and the manner in which they are offered and sold, and require compliance with protections for loan, deposit, brokerage,
fiduciary, investment management and other customers, among other things. They also restrict our ability to repurchase stock or pay dividends, or to receive dividends from our bank subsidiary, and impose capital adequacy requirements. The consequences of noncompliance can include substantial monetary and nonmonetary sanctions.
In addition, we are subject to comprehensive supervision and periodic examination by, among other regulatory bodies, the Board of Governors of the Federal Reserve System (Federal Reserve) and the Office of the Comptroller of the Currency (OCC). These examinations consider not only compliance with applicable laws, regulations and supervisory policies of the agency, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity and various other factors. The results of examination activity by any of our federal bank regulators potentially can result in the imposition of significant limitations on our activities and growth. These regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity and take enforcement action against a regulated entity where the relevant agency determines, among other things, that such operations fail to comply with applicable law or regulations or are conducted in an unsafe or unsound manner. This supervisory framework, including the examination reports and supervisory ratings (which are not publicly available) of the agencies, could materially impact the conduct, growth and profitability of our operations.
The Consumer Financial Protection Bureau (CFPB) is responsible for examining PNC Bank and its affiliates (including PNC) for compliance with most federal consumer financial protection laws, including the laws relating to fair lending and prohibiting unfair, deceptive or abusive acts or practices in connection with the offer, sale or provision of consumer financial products or services, and for enforcing such laws with respect to PNC Bank and its affiliates. The results of the CFPBs examinations, which are not publicly available, also can result in restrictions or limitations on the operations of a regulated entity as well as enforcement actions against a regulated entity, including the imposition of monetary penalties and nonmonetary requirements.
We also are subject to regulation by the SEC by virtue of our status as a public company and by the SEC and the Commodity Futures Trading Commission (CFTC) due to the nature of some of our businesses. Our banking and securities businesses with operations outside the United States, including those conducted by BlackRock, are also subject to regulation by appropriate authorities in the foreign jurisdictions in which they do business.
As a regulated financial services firm, our relationships and good standing with regulators are of fundamental importance to the operation and growth of our businesses. The Federal Reserve, OCC, CFPB, SEC, CFTC and other domestic and
The PNC Financial Services Group, Inc. Form 10-K 3 |
foreign regulators have broad enforcement powers, and certain of the regulators have the power to approve, deny, or refuse to act upon our applications or notices to conduct new activities, acquire or divest businesses, assets or deposits, or reconfigure existing operations.
We anticipate new legislative and regulatory initiatives over the next several years, focused specifically on banking and other financial services in which we are engaged. Legislative and regulatory developments to date, as well as those that come in the future, have had and are likely to continue to have an impact on the conduct of our business. The more detailed description of the significant regulations to which we are subject included in this Report is based on the current regulatory environment and is subject to potentially material change. See also the additional information included as Risk Factors in Item 1A of this Report discussing the impact of financial regulatory reform initiatives, including Dodd-Frank and regulations promulgated to implement it, on the regulatory environment for PNC and the financial services industry.
Among other areas that have been receiving a high level of regulatory focus over the last several years are compliance with the Bank Secrecy Act and anti-money laundering laws, the oversight of arrangements with third-party vendors and suppliers, the protection of confidential customer information, and cyber-security more generally. In addition, there is an increased focus on fair lending and other consumer protection issues.
Additional legislation, changes in rules promulgated by federal financial regulators, other federal and state regulatory authorities and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the method of operation and profitability of our businesses. The profitability of our businesses could also be affected by rules and regulations that impact the business and financial communities in general, including changes to the laws governing taxation, antitrust regulation and electronic commerce.
There are numerous rules governing the regulation of financial services institutions and their holding companies. Accordingly, the following discussion is general in nature and does not purport to be complete or to describe all of the laws, regulations and supervisory policies that apply to us. To a substantial extent, the purpose of the regulation and supervision of financial services institutions and their holding companies is not to protect our shareholders and our non-customer creditors, but rather to protect our customers (including depositors) and the financial markets in general.
Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which was signed into law on July 21, 2010, comprehensively reformed the regulation of financial institutions, products and services. Dodd-Frank
requires various federal regulatory agencies to implement numerous new rules and regulations. Because federal agencies are granted broad discretion in drafting these rules and regulations, and many implementing rules have not yet been issued, have only been issued in proposed form, or have only recently been finalized, many of the details and much of the impact of Dodd-Frank may not be known for months or years. Among other things, Dodd-Frank established the CFPB; provided for new capital standards that eliminate the treatment of trust preferred securities as Tier 1 regulatory capital; required that deposit insurance assessments be calculated based on an insured depository institutions assets rather than its insured deposits; raised the minimum Designated Reserve Ratio (the balance in the Deposit Insurance Fund divided by estimated insured deposits) to 1.35%; established a comprehensive regulatory regime for the derivatives activities of financial institutions; prohibited banking entities, after a transition period, from engaging in certain types of proprietary trading, as well as having investments in, sponsoring, and maintaining certain types of relationships with hedge funds and private equity funds (through provisions commonly referred to as the Volcker Rule); placed limitations on the interchange fees charged for debit card transactions; and established new minimum mortgage underwriting standards for residential mortgages.
Financial Stability Oversight Council . Dodd-Frank also established the 10-member inter-agency Financial Stability Oversight Council (FSOC), which is charged with identifying and monitoring systemic risks and strengthening the regulation of financial holding companies and certain non-bank companies deemed to be systemically important. In extraordinary cases, the FSOC, in conjunction with the Federal Reserve, could order the break-up of financial firms that are deemed to present a grave threat to the financial stability of the United States.
Banking Regulation and Supervision
Enhanced Prudential Requirements . Dodd-Frank requires the Federal Reserve to establish enhanced prudential standards for BHCs with total consolidated assets of $50 billion or more, such as PNC, as well as systemically important non-bank financial companies designated by the FSOC for Federal Reserve supervision. For such BHCs, these enhanced standards must be more stringent than the standards and requirements applicable to BHCs with less than $50 billion in assets, and must increase in stringency based on the Federal Reserves assessment of a BHCs risk to the financial system. The FSOC may make recommendations to the Federal Reserve concerning the establishment and refinement of these enhanced prudential standards.
The Federal Reserve in February 2014 issued final rules that establish the new enhanced prudential standards related to liquidity risk management and overall risk management for BHCs with $50 billion or more in assets. These new rules, which took effect for PNC on January 1, 2015, among other
4 The PNC Financial Services Group, Inc. Form 10-K |
things, require that covered BHCs conduct liquidity stress tests at least monthly, maintain a contingency funding plan and sufficient highly liquid assets to meet net stress cash-flow needs (as projected under the companys liquidity stress tests) for 30 days, and establish certain oversight and governance responsibilities for the chief risk officer, the board of directors and the risk committee of the board of directors of a covered company. In addition, the rules implement the provisions of Dodd-Frank that require the Federal Reserve to impose a maximum 15-to-1 debt to equity ratio on a BHC if the FSOC determines that the company poses a grave threat to the financial stability of the United States and that the imposition of such a debt-to-equity requirement would mitigate such risk. The rules issued in February 2014 did not finalize the other enhanced prudential standards that the Federal Reserve proposed in December 2011, including counterparty credit exposure limits and early remediation requirements, although the Federal Reserve has indicated that these matters remain under development. See the Recent Market and Industry Developments portion of Item 7 MD&A and Item 1A Risk Factors for additional information.
Regulatory Capital Requirements, Stress Testing and Capital Planning . PNC and PNC Bank are subject to the regulatory capital requirements established by the Federal Reserve and the OCC, respectively. These requirements have changed, and will continue to change significantly, as a result of the rules adopted by the U.S. banking agencies in July 2013 to implement the new international guidelines for determining regulatory capital established by the Basel Committee on Banking Supervision (Basel Committee) known as Basel III, as well as to implement certain provisions of Dodd-Frank. The rules adopted in July 2013 generally have three fundamental parts.
The first part, referred to as the Basel III capital rule, among other things, narrows the definition of regulatory capital, requires banking organizations with $15 billion or more in assets (including PNC) to phase-out trust preferred securities from Tier 1 regulatory capital, establishes a new common equity Tier 1 capital regulatory requirement for banking organizations, and revises the capital levels at which PNC and PNC Bank would be subject to prompt corrective action. These rules also require that significant common stock investments in unconsolidated financial institutions (as defined in the rule), as well as mortgage servicing rights and deferred tax assets, be deducted from Tier 1 common regulatory capital to the extent such items individually exceed 10%, or in the aggregate exceed 15%, of the organizations adjusted Basel III common equity Tier 1 regulatory capital. We previously referred to Basel III common equity Tier 1 capital as Basel III Tier 1 common capital. The Basel III capital rule also significantly limits the extent to which minority interests in consolidated subsidiaries (including minority interests in the form of REIT preferred securities) may be included in regulatory capital. In addition, for banking organizations, like PNC, which are subject to the advanced
approaches (described below), the rule includes other comprehensive income related to both available for sale securities and pension and other post-retirement plans as a component of common equity Tier 1 capital. The Basel III capital rule became effective on January 1, 2014 for PNC and PNC Bank, although many provisions are phased-in over a period of years, with the rules generally fully phased-in as of January 1, 2019.
The second part of the rules adopted in July 2013 is referred to as the advanced approaches and materially revises the framework for the risk-weighting of assets under Basel II. The Basel II framework, which was adopted by the Basel Committee in 2004, seeks to provide more risk-sensitive regulatory capital calculations and promote enhanced risk management practices among large, internationally active banking organizations. The advanced approaches modifications adopted by the U.S. banking agencies became effective on January 1, 2014, and generally apply to banking organizations that have $250 billion or more in total consolidated assets or that have $10 billion or more in on-balance sheet foreign exposure. Prior to fully implementing the advanced approaches to calculate risk-weighted assets, PNC and PNC Bank must successfully complete a parallel run qualification phase. PNC and PNC Bank entered this parallel run qualification phase on January 1, 2013. Although the minimum parallel run qualification period is four quarters, the parallel run period for PNC and PNC Bank, now in its third year, is consistent with the experience of other U.S. banks that have all had multi-year parallel run periods.
The third major part of the rules adopted in July 2013 is referred to as the standardized approach and materially revises the framework for the risk-weighting of assets under Basel I. The standardized approach, for example, establishes a new framework for the risk-weighting of securitization and non-U.S. sovereign exposures, and increases the risk-weights on certain types of assets including high-volatility commercial real estate and past due corporate and retail exposures. The standardized approach took effect on January 1, 2015.
The risk-based capital and leverage rules that the federal banking regulators have adopted require the capital-to-assets ratios of banking organizations, including PNC and PNC Bank, to meet certain minimum standards. The Basel III rule generally divides regulatory capital into three components: common equity Tier 1 capital, additional Tier 1 capital (which, together with common equity Tier 1 capital, comprises Tier 1 capital) and Tier 2 capital. Common equity Tier 1 capital is generally common stock, retained earnings, qualifying minority interest and, for advanced approaches banking organizations, accumulated other comprehensive income, less the deductions required to be made from common equity Tier 1 capital. Additional Tier 1 generally includes, among other things, perpetual preferred stock and qualifying minority interests, less the deductions required to be made from additional Tier 1. Tier 2 capital generally comprises qualifying subordinated debt.
The PNC Financial Services Group, Inc. Form 10-K 5 |
Total capital is the sum of Tier 1 and Tier 2 capital, less the deductions required from total capital. For additional information regarding the differences between Basel III common equity Tier 1 capital and Basel I Tier 1 common capital, see the Capital section of the Consolidated Balance Sheet Review section of Item 7 of this Report.
Under the regulatory capital rules, a banking organizations risk-based capital ratios are calculated by allocating assets and specified off-balance sheet financial instruments into risk-weighted categories (with higher levels of capital being required for the categories perceived as representing greater risk), which are used to determine the amount of a banking organizations total risk-weighted assets (RWAs). Under the standardized approach, the nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are generally multiplied by one of several risk adjustment percentages set forth in the rules and that increase as the perceived credit risk of the relevant asset increases. For certain types of exposures, such as securitization exposures, the standardized approach establishes one or more methodologies that are to be used to calculate the risk-weighted asset amount for the exposure.
As a result of the staggered effective dates of the final U.S. capital rules issued in July 2013, as well as the fact that PNC remains in the parallel run qualification phase for the advanced approaches, PNCs regulatory risk-based capital ratios in 2014 were based on the definitions of, and deductions from, capital under Basel III (as such definitions and deductions are phased-in for 2014) and Basel I risk-weighted assets (but subject to certain adjustments as defined by the Basel III rules). As of January 1, 2015, and until PNC has exited parallel run, PNCs regulatory risk-based Basel III ratios will be calculated using the standardized approach for determining risk-weighted assets, and the definitions of, and deductions from, capital under Basel III (as such definitions and deductions are phased-in through 2019). Once PNC exits parallel run, its regulatory risk-based capital ratios will be the lower of the ratios calculated under the standardized approach or the advanced approaches. We refer to the capital ratios calculated using the phased-in Basel III provisions as the Transitional Basel III ratios. The Transitional Basel III regulatory capital ratios of PNC and PNC Bank as of December 31, 2014 exceeded the applicable minimum levels in effect for 2014. For additional information regarding the Transitional Basel III capital ratios of PNC and PNC Bank as of December 31, 2014, as well as the levels necessary to exceed the regulatory minimums and those needed to be considered well capitalized, see the Capital portion of the Consolidated Balance Sheet Review section of Item 7 of this Report.
The Basel III capital rule requires that banking organizations maintain a minimum common equity Tier 1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0%. Moreover, when fully phased-in on January 1, 2019, the rule
will require banking organizations to maintain a common equity Tier 1 capital ratio of at least 7.0%, a Tier 1 capital ratio of at least 8.5%, and a total capital ratio of at least 10.5% to avoid limitations on capital distributions (including common stock dividends and share repurchases) and certain discretionary incentive compensation payments. For banking organizations that are subject to the advanced approaches, these higher capital conservation buffer levels above the regulatory minimums could be supplemented by a countercyclical capital buffer of up to an additional 2.5% during periods of excessive credit growth, although this buffer is initially set at zero in the United States.
In December 2014, the Federal Reserve requested comment on proposed rules that would apply an additional risk-based common equity Tier 1 capital surcharge of between 1.0% and 4.5% (when fully phased-in on January 1, 2019) to firms identified as globally systemically important banks (GSIBs) using a scoring methodology that is based on five measures of global systemic importance (size, interconnectedness, substitutability, complexity, and cross-jurisdictional activity). Based on the methodology proposed, PNC would not be subject to the proposed GSIB surcharge. In its December 2014 release, the Federal Reserve indicated that there is a significant gap between the systemic scores of the eight U.S. BHCs that would be subject to the proposed GSIB surcharge and other BHCs (such as PNC).
The regulatory capital framework adopted by the federal banking regulators also requires that banking organizations maintain a minimum amount of Tier 1 capital to average consolidated assets, referred to as the leverage ratio. Banking organizations are required to maintain a minimum leverage ratio of Tier 1 capital to total assets of 4.0%. As of December 31, 2014, the leverage ratios of PNC and PNC Bank were above the required minimum level.
Under the Basel III capital rule, banking organizations subject to the advanced approaches (such as PNC and PNC Bank) also will be subject to a new minimum 3.0% supplementary leverage ratio that becomes effective on January 1, 2018, with public regulatory reporting of the ratio beginning in 2015. Unlike the existing leverage ratio, the denominator of the supplementary leverage ratio takes into account certain off-balance sheet items, including loan commitments and potential future exposure under derivative contracts. Consistent with the January 2014 Basel Committee revisions to the leverage ratio, the U.S. banking agencies in September 2014 adopted final rules that, among other things, revise the denominator of the supplementary leverage ratio and the supplementary leverage ratio disclosures that covered banking organizations are required to make beginning in 2015. In April 2014, the U.S. banking agencies released final rules imposing a higher supplementary leverage ratio requirement on BHCs with total consolidated assets of more than $700 billion or assets under custody of more than $10 trillion, as well as the insured depository institution subsidiaries of these BHCs.
6 The PNC Financial Services Group, Inc. Form 10-K |
Based on the asset and custody thresholds adopted in the final rules, these higher supplementary leverage requirements do not apply to PNC or PNC Bank.
The Federal Reserve and the international bodies responsible for establishing globally applicable regulatory standards for banks (the Financial Stability Board (FSB) and the Basel Committee) have been working during the past few years on developing a minimum total loss absorbing capacity (TLAC) requirement that would facilitate the orderly resolution of GSIBs by requiring that such firms maintain a minimum amount of regulatory capital and eligible debt that could be converted to equity upon failure. In November 2014, the FSB requested comment on a consultative document that would establish a global framework for the implementation of such a TLAC requirement. As the proposal would apply only to firms that are identified as a GSIB by the FSB, it would not apply to PNC. The comment period on the FSB proposal ended on February 2, 2015.
Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement remedies available to the federal bank regulatory agencies, including a limitation on the ability to pay dividends or repurchase shares, the issuance of a capital directive to increase capital and, in severe cases, the termination of deposit insurance by the FDIC, and the appointment of a conservator or receiver. In some cases, the extent of these powers depends upon whether the institution in question is considered well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized. Generally, the smaller an institutions capital base in relation to its risk-weighted or total assets, the greater the scope and severity of the agencies powers, ultimately permitting the agencies to appoint a receiver for the institution. Business activities may also be affected by an institutions capital classification. For instance, only a well capitalized insured depository institution may accept brokered deposits without prior regulatory approval. In addition, in order to remain a financial holding company and engage in the broader range of financial activities authorized for such a company, PNC and PNC Bank must remain well capitalized. At December 31, 2014, PNC and PNC Bank exceeded the required ratios for classification as well capitalized. The Basel III capital rule revised the thresholds at which an insured depositary institution is considered well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized. The new thresholds among other things (i) include the common equity Tier 1 capital metric; (ii) generally increase the amount of Tier 1 capital required to remain within each capital category (other than the critically undercapitalized category); and (iii) for institutions subject to the advanced approaches, include a supplementary leverage ratio threshold in the definitions of adequately capitalized and undercapitalized once the supplementary leverage ratio takes effect as a minimum requirement in 2018. The revised thresholds generally took effect on January 1, 2015. For
additional discussion of capital adequacy requirements, we refer you to the Capital portion of the Consolidated Balance Sheet Review section of Item 7 of this Report and to Note 20 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report.
In addition to these regulatory capital requirements, PNC is subject to the Federal Reserves capital plan rule, annual capital stress testing requirements and Comprehensive Capital Analysis and Review (CCAR) process, as well as the annual and mid-year Dodd-Frank capital stress testing (DFAST) requirements of the Federal Reserve and the OCC. As part of the CCAR process, the Federal Reserve undertakes a supervisory assessment of the capital adequacy of BHCs, including PNC, that have $50 billion or more in total consolidated assets. This capital adequacy assessment is based on a review of a comprehensive capital plan submitted by each participating BHC to the Federal Reserve that describes the companys planned capital actions during the nine quarter review period, as well as the results of stress tests conducted by both the company and the Federal Reserve under different hypothetical macro-economic scenarios, including a supervisory adverse and a severely adverse scenario provided by the Federal Reserve. In evaluating a BHCs capital plan, the Federal Reserve considers a number of qualitative factors. In assessing these qualitative factors, which have become increasingly important in the CCAR process in recent years, the Federal Reserve considers whether the BHCs capital adequacy processes are supported by strong foundational risk management, effective loss and capital estimation methodologies, a sufficient capital adequacy assessment process, comprehensive capital policies and capital planning processes, robust internal controls, and effective governance. From a quantitative perspective, the Federal Reserve considers whether under different hypothetical macro-economic scenarios, including the supervisory severely adverse scenario, the company would be able to maintain throughout each quarter of the nine quarter planning horizon, even if it maintained its base case planned capital actions, (i) a projected pro forma Basel I Tier 1 common capital ratio above 5%, and (ii) regulatory risk-based and leverage capital ratios that exceed the minimums that are, or would then be, in effect for the company, taking into account the Basel III capital rules adopted in July 2013 and any applicable phase-in periods. In addition, the Federal Reserve evaluates a companys projected path towards compliance with the Basel III regulatory capital framework on a fully implemented basis. After completing its review, the Federal Reserve may object or not object to the BHCs proposed capital actions, such as plans to pay or increase common stock dividends, reinstate or increase common stock repurchase programs, or redeem preferred stock or other regulatory capital instruments. In connection with the 2015 CCAR exercise, PNC filed its capital plan and stress testing results using financial data as of September 30, 2014 with the Federal Reserve on January 5, 2015. PNC expects to receive the Federal Reserves response (either a
The PNC Financial Services Group, Inc. Form 10-K 7 |
non-objection or objection) to the capital plan submitted as part of the 2015 CCAR in March 2015.
As part of the CCAR and annual DFAST processes, both the Federal Reserve and PNC release certain revenue, loss and capital results from their stress testing exercises. For the 2015 exercises, the Federal Reserve has announced that it intends to publish its supervisory revenue, loss and capital projections for participating BHCs under the supervisory adverse and severely adverse macro-economic scenarios using the common assumptions concerning capital distributions established by the Federal Reserve in its DFAST regulations (DFAST capital action assumptions), as well as capital ratio information using the firms proposed base case capital actions. Within 15 days after the Federal Reserve publishes its DFAST results, PNC also is required to publicly disclose its own estimates of certain capital, revenue and loss information under the same hypothetical supervisory severely adverse macro-economic scenario and applying the DFAST capital action assumptions. Federal Reserve regulations also require that PNC and other large BHCs conduct a separate mid-year stress test using financial data as of March 31 and three company-derived macro-economic scenarios (base, adverse and severely adverse) and publish a summary of the results under the severely adverse scenario. For the 2015 mid-year stress test, PNC must publish its results in the period between July 5 and August 4, 2015.
In October 2014, the Federal Reserve adopted amendments to its capital plan and stress testing rules that will modify the schedule for the CCAR and DFAST processes effective January 1, 2016. Beginning in 2016, covered BHCs are required to submit their annual capital plans and company-run stress test results to the Federal Reserve by April 5 of each year (rather than by January 5 as currently required). In order to transition to this new schedule, the Federal Reserves non-objection to a capital plan submitted in January 2015 will cover capital actions for the five quarter period from the second quarter of 2015 through and including the second quarter of 2016. Under the new schedule that becomes effective in 2016, the Federal Reserve will release its decisions on capital plans and release the results of its supervisory stress test by June 30, approximately three months later than currently. The amendments also shift the schedule for the company-run mid-cycle DFAST exercise, with PNCs submission date for this exercise shifting to October 5 (from July 5) and the release date for company results moving to October (from July).
Basel III Liquidity Requirements . The Basel III framework adopted by the Basel Committee also includes new short-term liquidity standards (the Liquidity Coverage Ratio or LCR) and long-term funding standards (the Net Stable Funding Ratio or NSFR).
In September 2014, the U.S. banking agencies released final rules to implement the LCR. The LCR rules are designed to
ensure that covered banking organizations maintain an adequate level of cash and high quality, unencumbered liquid assets (HQLA) to meet estimated net liquidity needs in a short-term stress scenario using liquidity inflow and outflow assumptions provided in the rules (net cash outflow). An institutions LCR is the amount of its HQLA, as defined and calculated in accordance with the haircuts and limitations in the rule, divided by its net cash outflow, with the quotient expressed as a percentage.
Top-tier BHCs (like PNC) that are subject to the advanced approaches for regulatory capital purposes, as well as any subsidiary depository institution of such a company that has $10 billion or more in total consolidated assets (such as PNC Bank), are subject to the full LCR (rather than the less stringent modified LCR) under the final rules that took effect January 1, 2015. However, the minimum required LCR and the requirement to calculate the LCR on a daily basis will be phased-in over a period of years. The minimum LCR PNC and PNC Bank are required to maintain in 2015 is 80% and increases to 90% in 2016 and then to 100% when fully phased-in in 2017. PNC and PNC Bank are required to calculate the LCR on a month-end basis until June 30, 2016, and then on a daily basis beginning on July 1, 2016. If an institution fails to meet the required minimum ratio, it must promptly notify its primary federal banking regulator and may be required to take remedial actions. An institution required to calculate its LCR on a month-end basis must consult with its regulator to determine whether the institution must provide a plan for achieving compliance with the minimum LCR. An institution required to calculate the LCR on a daily basis must promptly provide its regulator with a plan for achieving compliance with the minimum if its LCR is below the minimum for three consecutive business days.
For additional discussion of regulatory liquidity requirements, please refer to the Capital portion of the Consolidated Balance Sheet Review section and the Liquidity Risk Management portion of the Risk Management section of Item 7 of this Report.
The NSFR is designed to promote a stable maturity structure of assets and liabilities of banking organizations over a one-year time horizon. The Basel Committee, in October 2014, released the final NSFR framework. Under that framework, the NSFR would take effect as a minimum regulatory standard on January 1, 2018, although the U.S. banking agencies have not yet proposed rules to implement the NSFR.
Parent Company Liquidity and Dividends . The principal source of our liquidity at the parent company level is dividends from PNC Bank. PNC Bank is subject to various restrictions on its ability to pay dividends to PNC Bancorp, Inc., its direct parent, which is a wholly-owned direct subsidiary of PNC. PNC Bank is also subject to federal laws limiting extensions of credit to its parent holding company and non-bank affiliates as discussed in Note 20 Regulatory
8 The PNC Financial Services Group, Inc. Form 10-K |
Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report. Further information on bank level liquidity and parent company liquidity and on certain contractual restrictions is also available in the Liquidity Risk Management portion of the Risk Management section and the Trust Preferred Securities and REIT Preferred Securities portion of the Off-Balance Sheet Arrangements And Variable Interest Entities section of Item 7 of this Report, and in Note 12 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities in the Notes To Consolidated Financial Statements in Item 8 of this Report.
Federal Reserve rules provide that a BHC is expected to serve as a source of financial strength to its subsidiary banks and to commit resources to support such banks if necessary. Consistent with the source of strength policy for subsidiary banks, the Federal Reserve has stated that, as a matter of prudent banking, a BHC generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the corporations capital needs, asset quality and overall financial condition. Further, in providing guidance to the large BHCs participating in the 2015 CCAR, discussed above, the Federal Reserve stated that it expects capital plans submitted in 2015 to reflect conservative dividend payout ratios and net share repurchase programs, and that requests that imply common dividend payout ratios above 30% of projected after-tax net income available to common shareholders will receive particularly close scrutiny.
Additional Powers Under the GLB Act . The GLB Act permits a qualifying BHC to become a financial holding company and thereby engage in, or affiliate with financial companies engaging in, a broader range of activities than would otherwise be permitted for a BHC. Permitted affiliates include securities underwriters and dealers, insurance companies and companies engaged in other activities that are determined by the Federal Reserve, in consultation with the Secretary of the Treasury, to be financial in nature or incidental thereto or are determined by the Federal Reserve unilaterally to be complementary to financial activities. We became a financial holding company as of March 13, 2000. In order to be and remain a financial holding company, a BHC and its subsidiary depository institutions must be well capitalized and well managed. In addition, a financial holding company generally may not engage in a new financial activity, or acquire a company engaged in a new activity, if any of its insured depository institutions received a less than Satisfactory rating at its most recent evaluation under the Community Reinvestment Act (CRA). Among other activities, we currently rely on our status as a financial holding company to conduct merchant banking activities and securities underwriting and dealing activities. As subsidiaries of a financial holding company under the GLB Act, our non-bank subsidiaries are generally allowed to conduct new financial activities, and PNC is generally permitted to acquire non-bank
financial companies that have less than $10 billion in assets, with after-the-fact notice to the Federal Reserve.
The Federal Reserve is the umbrella regulator of a financial holding company, with its operating entities, such as its subsidiary broker-dealers, investment advisers, insurance companies and banks, as well as investment companies advised by investment adviser subsidiaries of the financial holding company, also being subject to the jurisdiction of various federal and state functional regulators with normal regulatory responsibility for companies in their lines of business.
In addition, the GLB Act permits qualifying national banks to engage in expanded activities through the formation of a financial subsidiary. PNC Bank has filed a financial subsidiary certification with the OCC and currently engages in insurance agency activities through financial subsidiaries. PNC Bank may also generally engage through a financial subsidiary in any activity that is determined to be financial in nature or incidental to a financial activity by the Secretary of the Treasury, in consultation with the Federal Reserve. Certain activities, however, are impermissible for a financial subsidiary of a national bank, including certain insurance underwriting activities, insurance company investment activities, real estate investment or development, and merchant banking. In order to have a financial subsidiary, a national bank and each of its depository institution affiliates must be and remain well capitalized and well managed. In addition, a financial subsidiary generally may not engage in a new financial activity, or acquire a company engaged in a new financial activity, if the national bank or any of its insured depository institution affiliates received a less than Satisfactory rating at its most recent evaluation under the CRA.
Volcker Rule . In December 2013, the U.S. banking agencies, SEC and CFTC issued final rules to implement the Volcker Rule provisions of Dodd-Frank. The rules prohibit banks and their affiliates (collectively, banking entities) from trading as principal on a short-term basis in securities, derivatives and certain other financial instruments, but also includes several important exclusions and exemptions from this prohibition. These exclusions and exemptions, for example, permit banking entities, subject to a variety of conditions and restrictions, to trade as principal for market making, risk-mitigating hedging, and securities underwriting purposes, and to trade in U.S. government and municipal securities. The rules also prohibit banking entities from investing in, sponsoring, and having certain relationships with private funds (such as, for example, private equity or hedge funds) that would be an investment company for purposes of the Investment Company Act of 1940 but for the exemptions in sections 3(c)(1) or 3(c)(7) of that act (covered funds). Again there are exemptions from these restrictions which themselves are subject to a variety of conditions. Moreover, the rules prohibit banking entities from engaging in permitted trading
The PNC Financial Services Group, Inc. Form 10-K 9 |
or covered fund activities if the activity would involve or result in a material conflict of interest between the banking entity and its clients, customers, or counterparties, result in a material exposure by the banking entity to a high-risk asset or a high-risk trading strategy, or pose a threat to the safety and soundness of the banking entity or to the financial stability of the United States. Banking entities, like PNC, that have $50 billion or more in total assets are required to establish and maintain an enhanced compliance program designed to ensure that the entity complies with the requirements of the final rule. Based on the level of PNCs trading assets and liabilities, PNC is not subject to the metrics reporting requirements of the final rules.
The Volcker rules prohibitions and restrictions generally become effective on July 21, 2015. In December 2014, the Federal Reserve granted an extension of the conformance period to give all banking entities until July 21, 2016 to conform their investments in, and relationships with, covered funds that were in place prior to December 31, 2013 (legacy covered funds). Moreover, the Federal Reserve indicated its intent to grant an additional one-year extension of the conformance period for legacy covered funds, which would give banking entities until July 21, 2017 to conform their ownership interests in, and relationships with, legacy covered funds. The Federal Reserve also has the ability to provide up to an additional 5-year conformance period for investments held as of May 1, 2010 in qualifying illiquid funds. For additional information concerning the potential impact of the Volcker Rule on PNCs operations, please refer to Item 1A Risk Factors of this Report.
Other Federal Reserve and OCC Regulation and Supervision . The federal banking agencies possess broad powers to take corrective action as deemed appropriate for an insured depository institution and its holding company.
Laws and regulations limit the scope of our permitted activities and investments. National banks (such as PNC Bank) and their operating subsidiaries generally may engage only in activities that are determined by the OCC to be part of or incidental to the business of banking, although a financial subsidiary may engage in a broader range of activities as described above.
Moreover, examination ratings of 3 or lower, lower capital ratios than peer group institutions, regulatory concerns regarding management, controls, assets, operations or other factors, can all potentially result in practical limitations on the ability of a bank or BHC to engage in new activities, grow, acquire new businesses, repurchase its stock or pay dividends, or to continue to conduct existing activities. The OCC, moreover, has been applying certain heightened risk management and governance expectations in its supervision of large national banks, including PNC Bank. In September 2014, the OCC incorporated these expectations into final enforceable guidelines established under section 39 of the
Federal Deposit Insurance Act (FDI Act). The guidelines establish minimum standards for the design and implementation of a risk governance framework at large insured national banks, including PNC Bank. The guidelines describe the appropriate risk management roles and responsibilities of front line units, independent risk management, internal audit, and the board of directors, and provide that a bank should have a comprehensive written statement that articulates its risk appetite and serves as a basis for the framework (a risk appetite statement). PNC Bank is required to be in compliance with the guidelines by May 10, 2015. If the OCC determines that a national bank is not in compliance with these or other guidelines established under section 39 of the FDI Act, the OCC may require the bank to submit a corrective action plan and may initiate enforcement action against the bank if an acceptable plan is not submitted or the bank fails to comply with an approved plan.
The Federal Reserves prior approval is required whenever we propose to acquire all or substantially all of the assets of any bank or thrift, to acquire direct or indirect ownership or control of more than 5% of any class of voting securities of any bank or thrift, or to merge or consolidate with any other BHC or thrift holding company. The BHC Act enumerates the factors the Federal Reserve must consider when reviewing the merger of BHCs, the acquisition of banks, or the acquisition of voting securities of a bank or BHC. These factors include the competitive effects of the proposal in the relevant geographic markets; the financial and managerial resources and future prospects of the companies and banks involved in the transaction; the effect of the transaction on the financial stability of the United States; the organizations compliance with anti-money laundering laws and regulations; the convenience and needs of the communities to be served; and the records of performance under the CRA of the insured depository institutions involved in the transaction. In cases involving interstate bank acquisitions, the Federal Reserve also must consider the concentration of deposits nationwide and in certain individual states. Under Dodd-Frank, a BHC also is generally prohibited from merging or consolidating with, or acquiring, another company if the resulting companys liabilities upon consummation would exceed 10% of the aggregate liabilities of the U.S. financial sector (including the U.S. liabilities of foreign financial companies). OCC prior approval is required for PNC Bank to acquire another insured bank or thrift by merger or to acquire deposits or substantially all of the assets of such institutions. In deciding whether to approve such a transaction, the OCC is required to consider factors similar to those that must be considered by the Federal Reserve. Our ability to grow through acquisitions could be limited by these approval requirements.
At December 31, 2014, PNC Bank had an Outstanding rating with respect to CRA.
10 The PNC Financial Services Group, Inc. Form 10-K |
Because of PNCs ownership interest in BlackRock, BlackRock is subject to the supervision and regulation of the Federal Reserve.
FDIC Insurance and Related Matters . PNC Bank is insured by the FDIC and subject to premium assessments. Regulatory matters could increase the cost of FDIC deposit insurance premiums to an insured bank as FDIC deposit insurance premiums are risk based. Therefore, higher fee percentages would be charged to banks that have lower capital ratios or higher risk profiles. These risk profiles take into account, among other things, weaknesses that are found by the primary banking regulator through its examination and supervision of the bank and the banks holdings of assets or liabilities classified as higher risk by the FDIC. For example, the amount of brokered deposits (as defined under the FDI Act) held by an insured depository institution can adversely affect the institutions deposit insurance assessments. A negative evaluation by the FDIC or a banks primary federal banking regulator could increase the costs to a bank and result in an aggregate cost of deposit funds higher than that of competing banks in a lower risk category. The methodology for the deposit insurance base calculation currently uses average assets less average tangible equity.
On January 5, 2015, the FDIC issued guidance in the form of frequently asked questions regarding the definition of brokered deposits under the FDI Act, as well as the acceptance and regulatory reporting of brokered deposits by insured depository institutions. Federal banking laws and regulations apply a variety of requirements or restrictions on insured depository institutions with respect to brokered deposits. For example, only a well capitalized insured depository institution may accept brokered deposits without prior regulatory approval and brokered deposits are generally subject to higher outflow assumptions than other types of deposits for purposes of the LCR.
Resolution Planning . Dodd-Frank requires BHCs that have $50 billion or more in assets, such as PNC, to periodically submit to the Federal Reserve and the FDIC a resolution plan that includes, among other things, an analysis of how the company could be resolved in a rapid and orderly fashion if the company were to fail or experience material financial distress. The Federal Reserve and the FDIC may jointly impose restrictions on a covered BHC, including additional capital requirements or limitations on growth, if the agencies jointly determine that the companys plan is not credible or would not facilitate a rapid and orderly resolution of the company under the U.S. Bankruptcy Code (or other applicable resolution framework), and additionally could require the company to divest assets or take other actions if the company did not submit an acceptable resolution plan within two years after any such restrictions were imposed. The FDIC also has adopted a rule that requires large insured depository institutions, including PNC Bank, to periodically submit a resolution plan to the FDIC that includes, among other things,
an analysis of how the institution could be resolved under the FDI Act in a manner that protects depositors and limits losses or costs to creditors of the bank in accordance with the FDI Act. Depending on how the agencies conduct their review of the resolution plans submitted by PNC and PNC Bank, these requirements could affect the ways in which PNC structures and conducts its business and result in higher compliance and operating costs. PNC and PNC Bank submitted their 2014 resolution plans under these rules in December 2014.
CFPB Regulation and Supervision . As noted above, Dodd-Frank gives the CFPB authority to examine PNC and PNC Bank for compliance with a broad range of federal consumer financial laws and regulations, including the laws and regulations that relate to credit card, deposit, mortgage, automobile loans and other consumer financial products and services we offer. In addition, Dodd-Frank gives the CFPB broad authority to take corrective action against PNC Bank and PNC as it deems appropriate. The CFPB also has the power to issue regulations and take enforcement actions to prevent and remedy acts and practices relating to consumer financial products and services that it deems to be unfair, deceptive or abusive, and to impose new disclosure requirements for any consumer financial product or service. These authorities are in addition to the authority the CFPB assumed on July 21, 2011 under existing consumer financial law governing the provision of consumer financial products and services. While the CFPB concentrated much of its initial rulemaking efforts on a variety of mortgage related topics required under Dodd-Frank, including ability-to-repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, appraisal and escrow standards and requirements for higher-priced mortgages, and disclosure requirements, it is also engaged in rulemakings relating to other products and services offered by PNC Bank, including prepaid cards.
In January 2014, new rules issued by the CFPB for mortgage origination and mortgage servicing became effective. The rules require lenders to conduct a reasonable and good faith determination at or before consummation of a residential mortgage loan that the borrower will have a reasonable ability to repay the loan. The regulations also define criteria for making Qualified Mortgages which entitle the lender and any assignee to either a conclusive or rebuttable presumption of compliance with the ability to repay rule. The new mortgage servicing rules include new standards for notices to consumers, loss mitigation procedures, and consumer requests for information. Both the origination and servicing rules create new private rights of action for consumers in the event of certain violations. In August 2015, broad new regulations take effect concerning the disclosures we provide to prospective residential mortgage customers. These regulations, among other things, require the provision of new disclosures near the time a prospective borrower submits an application and three days prior to closing of a mortgage loan. In addition to the
The PNC Financial Services Group, Inc. Form 10-K 11 |
exercise of its rulemaking authority, the CFPB is continuing its ongoing examination and supervisory activities with respect to a number of consumer businesses and products.
Securities and Derivatives Regulation
Our registered broker-dealer and investment adviser subsidiaries are subject to rules and regulations promulgated by the SEC.
Several of our subsidiaries are registered with the SEC as investment advisers and may provide investment advisory services to clients, other PNC affiliates or related entities, including registered investment companies. Certain of these advisers are registered as investment advisers to private equity funds under rules adopted under Dodd-Frank.
Broker-dealer subsidiaries are subject to the requirements of the Securities Exchange Act of 1934 and related regulations. The Financial Industry Regulatory Authority (FINRA) is the primary self-regulatory organization (SRO) for our registered broker-dealer subsidiaries. Investment adviser subsidiaries are subject to the requirements of the Investment Advisers Act of 1940 and related regulations. An investment adviser to a registered investment company is also subject to the requirements of the Investment Company Act of 1940 and related regulations. Our broker-dealer and investment adviser subsidiaries also are subject to additional regulation by states or local jurisdictions.
Over the past several years, the SEC and other regulatory agencies have increased their focus on the asset management, mutual fund and broker-dealer industries. Congress and the SEC have adopted regulatory reforms and are considering additional reforms that have increased, and are likely to continue to increase, the extent of regulation of the mutual fund and broker-dealer industries and impose additional compliance obligations and costs on our subsidiaries involved with those industries. Under provisions of the federal securities laws applicable to broker-dealers, investment advisers and registered investment companies and their service providers, a determination by a court or regulatory agency that certain violations have occurred at a company or its affiliates can result in fines, restitution, a limitation on permitted activities, disqualification to continue to conduct certain activities and an inability to rely on certain favorable exemptions. Certain types of infractions and violations can also affect a public company in its timing and ability to expeditiously issue new securities into the capital markets. In addition, certain changes in the activities of a broker-dealer require approval from FINRA, and FINRA takes into account a variety of considerations in acting upon applications for such approval, including internal controls, capital levels, management experience and quality, prior enforcement and disciplinary history and supervisory concerns.
Title VII of Dodd-Frank imposes new comprehensive and significant regulations on the activities of financial institutions
that are active in the U.S. over-the-counter derivatives and foreign exchange markets. Title VII was enacted to (i) address systemic risk issues, (ii) bring greater transparency to the derivatives markets, (iii) provide enhanced disclosures and protection to customers, and (iv) promote market integrity. Among other things, Title VII: (i) requires the registration of both swap dealers and major swap participants with one or both of the CFTC (in the case of non security-based swaps) and the SEC (in the case of security-based swaps); (ii) requires that most standardized swaps be centrally cleared through a regulated clearing house and traded on a centralized exchange or swap execution facility; (iii) subjects swap dealers and major swap participants to capital and margin requirements in excess of historical practice; (iv) subjects swap dealers and major swap participants to comprehensive new recordkeeping and real-time public reporting requirements; (v) subjects swap dealers and major swap participants to new business conduct requirements, including the provision of daily marks to counterparties and disclosing to counterparties (pre-execution) the material risks, material incentives, and any conflicts of interest associated with their swap; and (vi) imposes special duties on swap dealers and major swap participants when transacting a swap with a special entity ( e.g. , governmental agency (federal, state or local) or political subdivision thereof, pension plan or endowment).
Based on the definition of a swap dealer under Title VII, PNC Bank registered with the CFTC as a swap dealer on January 31, 2013. As a result, PNC Bank is subject to the regulations and requirements imposed on registered swap dealers, and the CFTC will have a meaningful supervisory role with respect to PNC Banks derivatives and foreign exchange businesses. Because of the limited volume of our security-based swap activities, PNC Bank has not registered with the SEC as a security-based swap dealer. The regulations and requirements applicable to swap dealers will collectively impose implementation and ongoing compliance burdens on PNC Bank and will introduce additional legal risks (including as a result of newly applicable antifraud and anti-manipulation provisions and private rights of action).
As originally enacted, the so-called swap push-out provisions of Section 716 of Dodd-Frank required an insured depository institution that is a swaps entity (defined to include a registered swap dealer like PNC Bank) to cease engaging in certain types of swaps by July 16, 2013, although the institutions appropriate Federal banking agency could extend this transition period. In 2013, PNC Bank received such an extension of the transition period to July 16, 2015 from its appropriate Federal banking agency. In December 2014, the U.S. Congress significantly narrowed the push-out restrictions of Section 716. These amendments generally allow insured depository institutions that are a swaps entity to engage in all types of swaps other than structured finance swaps (defined as a swap that references either an asset-backed security or a group or index primarily comprised of
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asset-backed securities). However, an insured depository institution is permitted to engage in structured finance swaps for hedging or other risk mitigating purposes. An insured depository institution that fails to comply with the restrictions in Section 716 could face restrictions on the institutions access to the Federal Reserves discount window or FDIC deposit insurance or guarantees.
In addition, an investment adviser to private funds or to registered investment companies may be required to register with the CFTC as a commodity pool operator. Registration could impose significant new regulatory compliance burdens. Presently, we expect our subsidiaries that serve as investment advisers to such entities to be eligible for exemptions from registration as a commodity pool operator.
BlackRock has subsidiaries in securities and related businesses subject to SEC, other governmental agencies, state, local and FINRA regulation, and a federally chartered nondepository trust company subsidiary subject to supervision and regulation by the OCC. For additional information about the regulation of BlackRock by these agencies and otherwise, we refer you to the discussion under the Regulation section of Item 1 Business in BlackRocks most recent Annual Report on Form 10-K, which may be obtained electronically at the SECs website at www.sec.gov.
Competition
We are subject to intense competition from other regulated banking organizations, as well as various other types of financial institutions and non-bank entities that can offer a number of similar products and services without being subject to bank regulatory supervision and restrictions.
In making loans, PNC Bank competes with traditional banking institutions as well as consumer finance companies, leasing companies and other non-bank lenders, and institutional investors including collateralized loan obligation (CLO) managers, hedge funds, mutual fund complexes and private equity firms. Loan pricing, structure and credit standards are extremely important in the current environment as we seek to achieve appropriate risk-adjusted returns. Traditional deposit-taking activities are also subject to pricing pressures and to customer migration as a result of intense competition for deposits and investments.
PNC Bank competes for deposits with:
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Other commercial banks, |
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Savings banks, |
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Savings and loan associations, |
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Credit unions, |
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Treasury management service companies, |
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Insurance companies, and |
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Issuers of commercial paper and other securities, including mutual funds. |
Our various non-bank businesses engaged in investment banking and alternative investment activities compete with:
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Commercial banks, |
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Investment banking firms, |
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Merchant banks, |
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Insurance companies, |
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Private equity firms, and |
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Other investment vehicles. |
In providing asset management services, our businesses compete with:
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Investment management firms, |
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Large banks and other financial institutions, |
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Brokerage firms, |
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Mutual fund complexes, and |
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Insurance companies. |
We include here by reference the additional information regarding competition and factors affecting our competitive position included in the Item 1A Risk Factors section of this Report.
Employees
Employees totaled 53,587 at December 31, 2014. This total includes 49,745 full-time and 3,842 part-time employees, of which 22,216 full-time and 3,274 part-time employees were employed by our Retail Banking business.
SEC Reports and Corporate Governance Information
We are subject to the informational requirements of the Securities Exchange Act of 1934 (Exchange Act) and, in accordance with the Exchange Act, we file annual, quarterly and current reports, proxy statements, and other information with the SEC. Our SEC File Number is 001-09718. You may read and copy this information at the SECs Public Reference Room located at 100 F Street NE, Room 1580, Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
You can also obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street NE, Washington, D.C. 20549, at prescribed rates.
The SEC also maintains an internet website that contains reports, including exhibits, proxy and information statements, and other information about issuers, like us, who file electronically with the SEC. The address of that site is www.sec.gov. You can also inspect reports, proxy statements and other information about us at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
We also make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed with or furnished to the
The PNC Financial Services Group, Inc. Form 10-K 13 |
SEC pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge on our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. PNCs corporate internet address is www.pnc.com and you can find this information at www.pnc.com/secfilings. Shareholders and bondholders may also obtain copies of these filings without charge by contacting Shareholder Services at 800-982-7652 or via the online contact form at www.computershare.com/contactus for copies without exhibits, and by contacting Shareholder Relations at 800-843-2206 or via e-mail at investor.relations@pnc.com for copies of exhibits, including financial statement and schedule exhibits where applicable. The interactive data file (XBRL) exhibit is only available electronically.
Information about our Board of Directors and its committees and corporate governance at PNC is available on PNCs corporate website at www.pnc.com/corporategovernance. Our PNC Code of Business Conduct and Ethics is available on our corporate website at www.pnc.com/corporategovernance. In addition, any future amendments to, or waivers from, a provision of the PNC Code of Business Conduct and Ethics that applies to our directors or executive officers (including our principal executive officer, principal financial officer, and principal accounting officer or controller) will be posted at this internet address.
Shareholders who would like to request printed copies of the PNC Code of Business Conduct and Ethics or our Corporate Governance Guidelines or the charters of our Boards Audit, Nominating and Governance, Personnel and Compensation, or Risk Committees (all of which are posted on the PNC corporate website at www.pnc.com/corporategovernance) may do so by sending their requests to PNCs Corporate Secretary at corporate headquarters at One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707. Copies will be provided without charge to shareholders.
Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol PNC.
Internet Information
The PNC Financial Services Group, Inc.s financial reports and information about its products and services are available on the internet at www.pnc.com. We provide information for investors on our corporate website under About Us Investor Relations, such as Investor Events, SEC Filings, Financial Information (including Quarterly Earnings, Annual Reports, Proxy Statements and Regulatory Disclosures), Financial Press Releases, Message from the Chairman and Corporate Governance. Under Investor Relations, we will from time to time post information that we believe may be important or useful to investors. We use our Twitter account, @pncnews, as an additional way of disseminating public information from time to time to investors. We generally post the following on our corporate website shortly before or promptly following its
first use or release: financially-related press releases (including earnings releases), various SEC filings, including SEC Reports, presentation materials associated with earnings and other investor conference calls or events, and access to live and taped audio from earnings and other investor conference calls or events. In some cases, we may post the presentation materials for other investor conference calls or events several days prior to the call or event. For earnings and other conference calls or events, we generally include in our posted materials a cautionary statement regarding forward-looking and adjusted information and we provide GAAP reconciliations when we refer to adjusted information and results. Where applicable, we provide GAAP reconciliations for such additional information in materials for that event or in materials for other prior investor presentations or in our annual, quarterly or current reports. When warranted, we will also use our website to expedite public access to time-critical information regarding PNC in advance of distribution of a press release or a filing with the SEC disclosing the same information.
PNC is also required to provide additional public disclosure regarding estimated income, losses and pro forma regulatory capital ratios in March 2015 under a supervisory hypothetical severely adverse economic scenario and in September 2015 under a PNC-developed hypothetical severely adverse economic scenario, as well as information concerning its capital stress testing processes, pursuant to the stress testing regulations adopted by the Federal Reserve and the OCC. The timing of these disclosures will change beginning in 2016, as discussed in Regulatory Capital Requirements, Stress Testing and Capital Planning in the Supervision and Regulation section above. PNC also is required to make certain market risk-related public disclosures and certain additional regulatory capital-related disclosures under the regulatory capital rules adopted by the Federal banking agencies. Under these regulations, PNC may be able to satisfy at least a portion of these requirements through postings on its website, and PNC has done so and expects to continue to do so without also providing disclosure of this information through filings with the Securities and Exchange Commission. We also post on our website communications to our shareholders, such as the letter to shareholders that accompanies the Form 10-K mailed to shareholders, and may not file them as exhibits to filings with the SEC when not expressly required.
Where we have included web addresses in this Report, such as our web address and the web address of the SEC, we have included those web addresses as inactive textual references only. Except as specifically incorporated by reference into this Report, information on those websites is not part hereof.
14 The PNC Financial Services Group, Inc. Form 10-K |
We are subject to a number of risks potentially impacting our business, financial condition, results of operations and cash flows. As a financial services organization, certain elements of risk are inherent in our transactions and operations and are present in the business decisions we make. Thus, we encounter risk as part of the normal course of our business, and we design risk management processes to help manage these risks.
Our success is dependent on our ability to identify, understand and manage the risks presented by our business activities so that we can appropriately balance revenue generation and profitability. These risks include, but are not limited to, credit risk, market risk, liquidity risk, operational risk, model risk, technology, compliance and legal risk, and strategic and reputation risk. We discuss our principal risk management processes and, in appropriate places, related historical performance in the Risk Management section included in Item 7 of this Report.
The following are the key risk factors that affect us. Any one or more of these risk factors could have a material adverse impact on our business, financial condition, results of operations or cash flows, in addition to presenting other possible adverse consequences, including those described below. These risk factors and other risks are also discussed further in other sections of this Report.
Difficult economic conditions or volatility in the financial markets would likely have an adverse effect on our business, financial position and results of operations.
As a financial services company, PNCs business and overall financial performance are vulnerable to the impact of poor or weak economic conditions, particularly in the United States but also to some extent in the global economy. Recessionary conditions, particularly if severe such as was experienced starting in 2007 and ending in 2009, are likely to have a negative financial impact across the financial services industry, including on PNC. Recessionary economic conditions can lead to turmoil and volatility in financial markets, which can increase the adverse impact on financial institutions such as PNC, with the impact increased to the extent the conditions are more severe. A return to recessionary economic conditions in the United States would likely adversely affect PNC, its business and financial performance, with the impact potentially as or more detrimental than that of the last recession.
The economic recovery from the last recession continued in 2014, but at a slower pace than for recoveries from prior recessions. Although unemployment rates have dropped significantly from the highest levels during the recession, employment is not yet at robust levels. Consumer and business confidence is improving but remains in the cautious zone.
Although Congress and the President have recently been able to reach agreement on budgets and the U.S. governments debt ceiling, significant long-term issues remain with respect to federal budgetary and spending matters, and it is unclear whether agreements to resolve these issues will be reached, particularly in light of the divided state of the U.S. government. Uncertainty resulting from these issues and recent difficulties in resolving these types of matters could contribute to slower economic growth. Another period where the Congress and the President cannot reach resolution of key federal budgetary and spending matters, leading to events such as actual or threatened government shutdowns or defaults, could adversely affect the U.S. economy. In recent years, a downgrade in the ratings for U.S. Treasury securities by a credit rating agency, an extended government shutdown, and substantial spending cuts through sequestration have resulted from government stalemate on budgetary issues.
The global recession and disruption of the financial markets led to concerns over the solvency of certain European countries, affecting these countries capital markets access and in some cases sovereign credit ratings, as well as market perception of financial institutions that have significant direct or indirect exposure to these countries. These concerns continue even as the global economy is recovering and some previously stressed European economies have experienced at least partial recoveries from their lowpoint during the recession. If measures to address sovereign debt and financial sector problems in Europe are inadequate, they may delay or weaken economic recovery, or result in the exit of one or more member states from the Eurozone or more severe economic and financial conditions. If realized, these risk scenarios could contribute to severe financial market stress or a global recession, likely affecting the economy and capital markets in the United States as well.
Other Risk Factors, presented below, address specific ways in which we may be adversely impacted by economic conditions.
Our business and financial results are subject to risks associated with the creditworthiness of our customers and counterparties.
Credit risk is inherent in the financial services business and results from, among other things, extending credit to customers, purchasing securities, and entering into financial derivative transactions and certain guarantee contracts. Credit risk is one of our most significant risks, particularly given the high percentage of our assets represented directly or indirectly by loans and the importance of lending to our overall business. We manage credit risk by assessing and monitoring the creditworthiness of our customers and counterparties and by diversifying our loan portfolio. Many factors impact credit risk.
A borrowers ability to repay a loan can be adversely affected by several factors, such as business performance, job losses or
The PNC Financial Services Group, Inc. Form 10-K 15 |
health issues. A weak or deteriorating economy and changes in the United States or global markets also could adversely impact the ability of our borrowers to repay outstanding loans. Any decrease in our borrowers ability to repay loans would result in higher levels of nonperforming loans, net charge-offs, provision for credit losses and valuation adjustments on loans held for sale.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of default of our counterparty or client.
Despite maintaining a diversified loan portfolio, in the ordinary course of business, we may have concentrated credit exposure to a particular person or entity, industry, region or counterparty. Events adversely affecting specific customers, industries, regions or markets, a decrease in the credit quality of a customer base, or an adverse change in the risk profile of a market, industry, or group of customers could adversely affect us.
Our credit risk may be exacerbated when collateral held by us to secure obligations to us cannot be realized upon or is liquidated at prices that are not sufficient to recover the full amount of the loan or derivative exposure due us.
In part due to improvement in economic conditions, as well as actions taken by PNC to manage its portfolio, PNCs provision for credit losses has declined substantially every year since the end of the recent recession. If we were to once again experience higher levels of provision for credit losses, it could result in lower levels of net income.
Our business and financial performance is impacted significantly by market interest rates and movements in those rates. The monetary, tax and other policies of governmental agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance over which we have no control and which we may not be able to predict adequately.
As a result of the high percentage of our assets and liabilities that are in the form of interest-bearing or interest-related instruments, changes in interest rates, in the shape of the yield curve, or in spreads between different market interest rates can have a material effect on our business, our profitability and the value of our financial assets and liabilities. For example:
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Changes in interest rates or interest rate spreads can affect the difference between the interest that we earn on assets and the interest that we pay on liabilities, |
which impacts our overall net interest income and profitability. |
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Such changes can affect the ability of borrowers to meet obligations under variable or adjustable rate loans and other debt instruments, and can, in turn, affect our loss rates on those assets. |
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Such changes may decrease the demand for interest rate-based products and services, including loans and deposit accounts. |
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Such changes can also affect our ability to hedge various forms of market and interest rate risk and may decrease the effectiveness of those hedges in helping to manage such risks. |
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Movements in interest rates also affect mortgage prepayment speeds and could result in impairments of mortgage servicing assets or otherwise affect the profitability of such assets. |
The monetary, tax and other policies of the government and its agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance. These governmental policies can thus affect the activities and results of operations of banking companies such as PNC. An important function of the Federal Reserve is to regulate the national supply of bank credit and certain interest rates. The actions of the Federal Reserve influence the rates of interest that we charge on loans and that we pay on borrowings and interest-bearing deposits and can also affect the value of our on-balance sheet and off-balance sheet financial instruments. Both due to the impact on rates and by controlling access to direct funding from the Federal Reserve Banks, the Federal Reserves policies also influence, to a significant extent, our cost of funding. We cannot predict the nature or timing of future changes in monetary, tax and other policies or the effects that they may have on our activities and financial results. The current very low interest rate environment has had a negative impact on our ability to increase our net interest income, and its continuation, which is expected at least through mid-year 2015 based on statements by the Chair of the Federal Reserve, could affect consumer and business behavior in ways that are adverse to us in addition to continuing to affect our net interest income. Even once the Federal Reserve begins increasing the interest rates it directly influences, there may be a prolonged period before interest rates return to more historically typical levels.
In addition, monetary and fiscal policy actions by governmental and regulatory decision makers in other countries or in the European Union could have an impact on global interest rates, affecting rates in the United States as well as rates on instruments denominated in currencies other than the United States dollar, any of which could have one or more of the potential effects on PNC described above.
16 The PNC Financial Services Group, Inc. Form 10-K |
Our business and financial performance are vulnerable to the impact of changes in the values of financial assets.
As a financial institution, a substantial majority of PNCs assets and liabilities are financial in nature (items such as loans, securities, servicing rights, deposits and borrowings). Such assets and liabilities will fluctuate in value, often significantly, due to movements in the financial markets or market volatility as well as developments specific to the asset or liability in question.
Credit-based assets and liabilities will fluctuate in value due to changes in the perceived creditworthiness of the borrowers and also due to changes in market interest rates. A lessening of confidence in the creditworthiness of the United States or other governments whose securities we hold could impact the value of those holdings. Changes in loan prepayment speeds, usually based on fluctuations in market interest rates, could adversely impact the value of our mortgage servicing rights. The financial strength of counterparties, with whom we have hedged some of our exposure to certain types of assets, could affect the value of such transactions and assets. Additionally, the underlying value of an asset under lease may decrease due to supply and demand for the asset or the condition of the asset at the end of the lease. This could cause our recorded lease value to decline.
In many cases, PNC marks its assets and liabilities to market on its financial statements, either through its Net income and Retained earnings or through adjustments to Accumulated other comprehensive income on its balance sheet. We may need to record losses in the value of financial assets even where our expectation of realizing the face value of the underlying instrument has not changed.
In addition, asset management revenue is primarily based on a percentage of the value of the assets being managed and thus is impacted by general changes in market valuations. Thus, although we are not directly impacted by changes in the value of such assets, decreases in the value of those assets would affect related fee income.
Our business and financial performance are dependent on our ability to attract and retain customers for our products and services, which may be negatively impacted by a lack of consumer and business economic confidence as well as our actions, including our ability to anticipate and satisfy customer demands for products and services.
As a financial institution, our performance is subject to risks associated with the loss of customer confidence and demand. Economic and market developments, in the United States, Europe or elsewhere, may affect consumer and business confidence levels. If customers lose confidence due to a weak or deteriorating economy or uncertainty surrounding the future
of the economy, the demand for our products and services could suffer.
We may also fail to attract or retain customers if we are unable to develop and market products and services that meet evolving customer needs or demands or if we are unable to deliver them effectively and securely to our customers, particularly to the extent that our competitors are able to do so.
News or other publicity that impairs our reputation, or the reputation of our industry generally, also could cause a loss of customers.
If we fail to attract and retain customers, demand for our loans and other financial products and services could decrease and we could experience adverse changes in payment patterns. We could lose interest income from a decline in credit usage and fee income from a decline in product sales, investments and other transactions. PNCs customers could remove money from checking and savings accounts and other types of deposit accounts in favor of other banks or other types of investment products. Deposits are a low cost source of funds. Therefore, losing deposits could increase our funding costs and reduce our net interest income.
For several years, the United States has been in a very low interest rate environment. This situation has decreased the attractiveness of alternatives to bank checking and savings accounts, which may lack deposit insurance and some of the convenience associated with more traditional banking products and which may no longer be able to offer much higher interest rates. If interest rates were to rise significantly, customers may be less willing to maintain balances in non-interest bearing or low interest bank accounts, which could result in a loss of deposits or a relatively higher cost of funds to PNC. This could also result in a loss of fee income.
In our asset management business, investment performance is an important factor influencing the level of assets that we manage. Poor investment performance could impair revenue and growth as existing clients might withdraw funds in favor of better performing products. Additionally, the ability to attract funds from existing and new clients might diminish. Overall economic conditions may limit the amount that customers are able or willing to invest as well as the value of the assets they do invest. The failure or negative performance of products of other financial institutions could lead to a loss of confidence in similar products offered by us without regard to the performance of our products. Such a negative contagion could lead to withdrawals, redemptions and liquidity issues in such products and have a material adverse impact on our assets under management and asset management revenues and earnings.
The PNC Financial Services Group, Inc. Form 10-K 17 |
As a regulated financial services firm, we are subject to numerous governmental regulations, and the financial services industry as a whole is subject to significant regulatory reform initiatives in the United States and elsewhere.
PNC is a bank holding company (BHC) and a financial holding company and is subject to numerous governmental regulations involving both its business and organization.
Our businesses are subject to regulation by multiple banking, consumer protection, securities and derivatives regulatory bodies. Applicable laws and regulations restrict our ability to repurchase stock or to receive dividends from subsidiaries that operate in the banking and securities businesses and impose capital adequacy requirements. PNCs ability to service its obligations and pay dividends to shareholders is largely dependent on the receipt of dividends and advances from its subsidiaries, primarily PNC Bank. The Federal Reserve requires a BHC to act as a source of financial and managerial strength for its subsidiary banks. The Federal Reserve could require PNC to commit resources to PNC Bank when doing so is not otherwise in the interests of PNC or its shareholders or creditors.
Applicable laws and regulations restrict permissible activities and investments and require compliance with protections for loan, deposit, brokerage, fiduciary, mutual fund and other customers, and for the protection of customer information, among other things. We are also subject to laws and regulations designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities.
Starting shortly after the beginning of the financial crisis in 2007, we have faced, and expect to continue to face for the foreseeable future, increased regulation of the financial services industry as a result of initiatives intended to promote the safety and soundness of financial institutions, financial market stability, the transparency and liquidity of financial markets, and consumer and investor protection. We also expect, in many cases, more intense scrutiny from bank, consumer protection and other supervisors in the examination process and more aggressive enforcement of laws and regulations on both the federal and state levels. Compliance with regulations and other supervisory initiatives will likely increase the companys costs and reduce its revenue, and may limit the companys ability to pursue certain desirable business opportunities. New reforms will also introduce additional legal risk (including as a result of newly applicable antifraud and anti-manipulation provisions and private rights of action) and affect regulatory oversight, applicable capital and liquidity requirements, and residential mortgage and other consumer financial products. The consequences of noncompliance with applicable laws and regulations can include substantial monetary and nonmonetary sanctions as well as damage to our reputation and businesses.
A number of reform provisions are likely to significantly impact the ways in which banks and BHCs, including PNC, do business. Some of the reform initiatives have led to the formation of new regulatory bodies, such as the CFPB, which has authority to regulate consumer financial products and services sold by banks and non-bank companies and to supervise banks with assets of more than $10 billion and their affiliates for compliance with federal consumer protection laws. Other agencies have significant new powers relevant to PNC, such as the authority now held by the CFTC to regulate non security-based swaps, which, among other things, led PNC Bank to register with the CFTC as a swap dealer in early 2013.
See Supervision and Regulation in Item 1 of this Report for more information concerning the regulation of PNC and recent initiatives to reform financial institution regulation, including some of the matters discussed in this Risk Factor. Note 20 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report also discusses some of the regulation applicable to PNC.
The following describes the key risks associated with some of the initiatives recently undertaken as part of the regulatory reform initiatives affecting the financial services industry, either where pending rules have not yet been finalized or where the impact of new rules has not been substantially realized.
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In December 2013, the U.S. banking agencies, the SEC and the CFTC adopted regulations implementing the Volcker Rule provisions of Dodd-Frank. The Volcker Rule prohibits banks and their affiliates from engaging in some types of proprietary trading and restricts the ability of banks and their affiliates to sponsor, invest in or have specified other financial relationships with certain types of private funds (referred to as covered funds). We discuss the Volcker Rule in the Supervision and Regulation section included in Item 1 of this Report. PNC discontinued its designated proprietary trading operations several years ago. We currently do not expect the proprietary trading aspects of the final regulations to have a material effect on PNCs businesses or revenue. Nevertheless, the Volcker Rule regulations place limits and conditions on many types of permissible trading activities, including transactions conducted for purposes of hedging, liquidity management, underwriting or to facilitate customer transactions. These limits and restrictions could cause PNC to forego engaging in hedging or other transactions that it would otherwise undertake in the ordinary course of business and, thus, to some extent, may limit the ability of PNC to most effectively hedge its risks, manage its balance sheet or provide products or services to its customers. |
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In addition, as of December 31, 2014, PNC held interests in private equity and hedge funds that are |
18 The PNC Financial Services Group, Inc. Form 10-K |
covered funds subject to the Volcker Rule regulations totaling approximately $579 million, including $140 million of sponsored funds. Certain of PNCs REIT Preferred Securities also were issued by statutory trusts that, as currently structured, are considered covered funds. As of December 31, 2014, PNC also held approximately $1.5 billion of senior debt interests in collateralized loan obligations and certain other investment securities that may be considered ownership interests in covered funds. The unrealized loss associated with these securities was approximately $11 million. In December 2014, the Federal Reserve extended the conformance period for the Volcker Rule, which generally goes into effect on July 21, 2015, to give all banking entities until July 21, 2016 to conform their investments in, and relationships with, covered funds that were in place prior to December 31, 2013 (legacy covered funds). Moreover, the Federal Reserve also indicated its intent to grant an additional one-year extension of the conformance period for legacy covered funds in order to permit banking entities until July 21, 2017 to conform their ownership interests in, and relationships with, these funds. Substantially all of PNCs interests in covered funds qualify for the extended conformance period granted for holdings in legacy covered funds. Moreover, certain of PNCs legacy covered funds may qualify for an additional 5-year conformance period ( i.e., until July 21, 2022), subject to Federal Reserve approval. It is likely that at least some of the amounts invested in legacy covered funds will reduce over time in the ordinary course before compliance is required. A forced sale or restructuring of PNCs investments due to the Volcker Rule would likely result in PNC receiving less value than it would otherwise have received or experiencing other adverse consequences. |
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In February 2014, the Federal Reserve issued final rules establishing new enhanced prudential standards relating to liquidity risk and overall risk management for BHCs (like PNC) that have $50 billion or more in consolidated total assets. The Federal Reserve, however, continues to develop the other enhanced prudential standards that are required under Dodd-Frank for bank holding companies with $50 billion or more in consolidated total assets, including the counterparty credit exposure limits and early remediation requirements that were the subject of proposed rules issued in December 2011. Under these proposed rules, PNC could be subject to increasingly stringent actions by the Federal Reserve if its financial condition or risk management deteriorated as reflected by the companys current or projected post-stress capital levels, compliance with supervisory liquidity and risk management standards and, in some instances, market-based indicators, such as credit default swap spreads. In addition, the |
Federal Reserve has indicated that it intends to continue to develop the set of enhanced prudential standards that apply to large bank holding companies in order to further promote the resiliency of such firms and the U.S. financial system. Until the Federal Reserves rules and initiatives to establish these enhanced prudential standards are completed, we are unable to fully estimate their impact on PNC, although we expect these initiatives will result in increased compliance costs. |
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In October 2014, six federal agencies (the Federal Reserve, OCC, FDIC, SEC, Federal Housing Finance Agency and the Department of Housing and Urban Development) adopted final rules to implement the credit risk retention requirements of Section 941 of Dodd-Frank for asset-backed securitization transactions. The regulations specify when and how securitizers of different types of asset-backed securitizations, including transactions backed by residential mortgages, commercial mortgages, and commercial, credit card and auto loans, must comply with the Dodd-Frank requirement that they retain at least five percent of the credit risk of the assets being securitized. The final rules also implement the exemptions from these credit risk retention requirements for transactions that are backed by qualified residential mortgages or other high-quality commercial mortgage, commercial or automobile loans, each as defined in the final rules. The regulations will take effect on December 24, 2015 with respect to new securitization transactions backed by residential mortgages and on December 24, 2016 with respect to new securitization transactions backed by other types of assets. The final rules are likely to have an impact on PNC both directly as well as indirectly. The extent and magnitude of these impacts is not yet known and will, to some extent, depend on how the markets and market participants (including PNC) adjust to the new rules. |
On the indirect impact side, PNC originates loans of a variety of types, including residential and commercial mortgages, credit card, auto, and student, that historically have commonly been securitized, and PNC is also a significant servicer of residential and commercial mortgages held by others, including securitization vehicles. PNC anticipates that the risk retention requirements will impact the market for loans of types that historically have been securitized, potentially affecting the volumes of loans securitized, the types of loan products made available, the terms on which loans are offered, consumer and business demand for loans, and the market for third-party loan servicers. The risk retention rules also could have the effect of slowing the rebound in the securitization markets. One effect of having substantially reduced
The PNC Financial Services Group, Inc. Form 10-K 19 |
opportunities to securitize loans would likely be a reduction in the willingness of banks, including PNC, to make loans due to balance sheet management requirements. Any of these potential impacts of the Dodd-Frank risk retention rules could affect the way in which PNC conducts its business, including its product offerings.
Even after new rules are finalized and become effective, it still may take a period of time before the manner in which the rules will be interpreted and administered by the relevant agencies becomes clarified and known. A failure to comply, or to have adequate policies and procedures designed to comply, with these and other regulatory requirements could expose us to damages, fines and regulatory penalties and other regulatory actions, which could be significant, and could also injure our reputation with customers and others with whom we do business.
New capital and liquidity standards will result in banks and bank holding companies needing to maintain more and higher quality capital and greater liquidity than has historically been the case.
We are subject to regulatory capital and liquidity requirements established by the Federal Reserve and the OCC, and discuss these requirements and standards in the Supervision and Regulation section included in Item 1 of this Report.
The regulatory capital requirements applicable to banks and BHCs have undergone, and continue to undergo, significant changes. For example, the final rules adopted by the U.S. banking agencies in July 2013 to implement the new international guidelines for determining regulatory capital established by the Basel Committee known as Basel III, as well as to implement certain provisions of Dodd-Frank, fundamentally altered the U.S. regulatory capital requirements for U.S. BHCs and banks. Significant parts of these rules became effective for PNC on January 1, 2014 and on January 1, 2015, although as a result of the staggered effective dates of the rules many provisions are phased-in over a period of years, with the rules generally fully phased-in as of January 1, 2019. The Basel Committee, moreover, continues to consider additional, significant changes to the international capital framework for banking organizations, including modifications that would significantly alter the international frameworks governing the market risk capital requirements for trading positions and the standardized risk weighting approach for credit risk, establish a capital floor for banking organizations subject to the advanced approaches for the risk weighting of assets, modify the treatment of securitization positions, and seek to enhance the transparency and consistency of capital requirements amongst banks and jurisdictions. It is unclear how these or other initiatives by the Basel Committee may be finalized and implemented in the
United States and, thus, we are unable to estimate what potential impact such initiatives may have on PNC.
The U.S. banking agencies also recently have implemented rules that significantly strengthen and alter the framework for liquidity regulation in the United States. In September 2014, the U.S. banking agencies adopted final rules to implement the LCR, a new, short-term quantitative liquidity requirement. These rules require PNC and PNC Bank to maintain an amount of qualifying high-quality liquid assets sufficient to cover the entitys projected net cash outflows over a 30-day stress period using inflow, outflow and maturity assumptions included in the rule. The LCR rules became effective for PNC and PNC Bank on January 1, 2015, and the minimum required LCR and the requirement to calculate the LCR on a daily basis will be phased-in over a period of years, with the standard being fully implemented on January 1, 2017. In anticipation of the final rules, PNC undertook several actions to prepare for implementation of the LCR. The Federal Reserves new liquidity risk management requirements for bank holding companies with $50 billion or more in consolidated total assets (like PNC) also became effective on January 1, 2015. The new rules require covered BHCs to, among other things, conduct internal liquidity stress tests over a range of time horizons, maintain a buffer of highly liquid assets sufficient to meet projected net outflows under the BHCs 30-day liquidity stress test, and maintain a contingency funding plan that meets detailed requirements.
Additional liquidity standards also are expected to be implemented in the coming years. For example, the Basel Committee, in October 2014, released the final framework for the NSFR standard, which is designed to ensure that banking organizations maintain a stable, long-term funding profile in relation to their asset composition and off-balance sheet activities. Under that framework, the NSFR would take effect as a minimum regulatory standard on January 1, 2018, although the U.S. banking agencies have not yet proposed rules to implement the NSFR.
The need to maintain more and higher quality capital, as well as greater liquidity, going forward than historically has been required could limit PNCs business activities, including lending, and its ability to expand, either organically or through acquisitions. It could also result in PNC taking steps to increase its capital that may be dilutive to shareholders or being limited in its ability to pay dividends or otherwise return capital to shareholders, or selling or refraining from acquiring assets, the capital requirements for which are inconsistent with the assets underlying risks. In addition, the new liquidity standards require PNC to maintain holdings of highly liquid short-term investments, thereby reducing PNCs ability to invest in longer-term or less liquid assets even if more desirable from a balance sheet or interest rate risk management perspective. Moreover, although these new requirements are being phased in over time, U.S. federal
20 The PNC Financial Services Group, Inc. Form 10-K |
banking agencies have been taking into account expectations regarding the ability of banks to meet these new requirements, including under stressed conditions, in approving actions that represent uses of capital, such as dividend increases, share repurchases and acquisitions. Moreover, PNC, as a BHC that is subject to the advanced approaches for regulatory capital purposes, is subject to a higher LCR requirement than other BHCs that have more than $50 billion in total assets but are not subject to the advanced approaches. Until the scope and terms of pending or future rulemakings relating to capital, liquidity, or liability composition are known, the extent to which such rules may apply to PNC and the potential impact of such rules on PNC will remain uncertain.
We depend on information systems, both internally and through third-parties, to conduct our business and could suffer a material adverse impact from interruptions in the effective operation of, or security breaches affecting, those systems.
As a large financial company, we handle a substantial volume of customer and other financial transactions virtually on a continuous basis. As a result, we rely heavily on information systems to conduct our business and to process, record, and monitor our transactions. In recent years, PNC has increased substantially in size, scope and complexity. We have also seen more customer usage of technological solutions for financial needs and higher expectations of customers and regulators regarding effective and safe systems operation. We expect these trends to continue for the foreseeable future. The need to ensure proper functioning of these systems has become more challenging, and the costs involved in that effort are greater than ever.
The risks to these systems result from a variety of factors, both internal and external. In some cases, these factors are largely outside of our control, including the potential for bad acts on the part of hackers, criminals, employees and others. In other cases, our systems could fail to operate as needed due to factors such as design or performance issues, human error, unexpected transaction volumes, or inadequate measures to protect against unauthorized access or transmissions. We are also at risk for the impact of natural or other disasters, terrorism, international hostilities and the like on our systems or for the effect of outages or other failures involving power or communications systems operated by others. In addition, we face a variety of types of cyber attacks, some of which are discussed in more detail below. Cyber attacks often include efforts to disrupt our ability to provide services or to gain access to confidential company and customer information.
We rely on other companies for the provision of a broad range of products and services. Many of these products and services include information systems themselves or involve the use of such systems in connection with providing the products or services. In some cases, these other companies provide the infrastructure that supports electronic communications. These
other companies are generally subject to many of the same risks we face with respect to our systems. To the extent we rely on these other companies, we could be adversely affected if they are impacted by system failures, cyber attacks or employee misconduct.
All of these types of events, whether resulting from cyber attacks or other internal or external sources, expose customer and other confidential information to security risks. They also could disrupt our ability to use our accounting, deposit, loan and other systems and could cause errors in transactions with customers, vendors or other counterparties.
In addition, our customers often use their own devices, such as computers, smartphones and tablets, to do business with us. We have limited ability to assure the safety and security of our customers transactions with us to the extent they are utilizing their own devices.
We are faced with ongoing efforts by others to breach data security at financial institutions or with respect to financial transactions. Some of these involve efforts to enter our systems directly by going through or around our security protections. Others involve the use of schemes such as phishing to gain access to identifying customer information, often from customers themselves. Most corporate and commercial transactions are now handled electronically, and our retail customers increasingly use online access and mobile devices to bank with us. The ability to conduct business with us in this manner depends on the transmission of confidential information, which increases the risk of data security breaches.
Starting in late 2012, there have been several well-publicized series of apparently related denial of service attacks on large financial services companies, including PNC. In a denial of service attack, individuals or organizations flood commercial websites with extraordinarily high volumes of traffic, with the goal of disrupting the ability of commercial enterprises to process transactions and possibly making their websites unavailable to customers for extended periods of time. The attacks against PNC have resulted in temporary disruptions in customers ability to access the corporate website and to perform on-line banking transactions. To date, no customer data has been lost or compromised as a result of these attacks and these efforts have not had a material impact on PNC. We cannot, however, provide assurance that future attacks of this type might not have a greater effect on PNC.
As our customers regularly use PNC-issued credit and debit cards to pay for transactions with retailers and other businesses, there is the risk of data security breaches at those other businesses covering PNC account information. When our customers use PNC-issued cards to make purchases from those businesses, card account information may be provided to the business. If the businesss systems that process or store card account information are subject to a data security breach,
The PNC Financial Services Group, Inc. Form 10-K 21 |
holders of our cards who have made purchases from that business may experience fraud on their card accounts. PNC may suffer losses associated with reimbursing our customers for such fraudulent transactions on customers card accounts, as well as for other costs related to data security compromise events, such as replacing cards associated with compromised card accounts. In addition, PNC provides card transaction processing services to some merchant customers under agreements we have with payment networks such as Visa and MasterCard. Under these agreements, we may be responsible for certain losses and penalties if one of our merchant customers suffers a data security breach.
Over the last several years, several large retailers, prominently including Target and Home Depot, disclosed that they had suffered substantial data security breaches compromising millions of card accounts. To date, PNCs losses and costs related to these breaches have not been material, but other similar events in the future could be more significant to PNC.
There have been other recent publicly announced cyber attacks that were not focused on gaining access to credit card information but instead sought access to a range of other types of confidential information including internal emails and other forms of customer financial information or sought to capture and possibly shutdown systems and devices maintained by target companies. Notable examples include attacks in 2014 on JP Morgan Chase and Sony Pictures and in early 2015 on Anthem. These other attacks have generally not had any financial impact on PNC but demonstrate the risks to confidential information and systems operations potentially posed by cyber attacks.
Methods used by others to attack information systems change frequently (with generally increasing sophistication), often are not recognized until launched against a target, may be supported by foreign governments or other well-financed entities, and may originate from less regulated and remote areas around the world. As a result, we may be unable to address these methods in advance of attacks, including by implementing adequate preventive measures.
We have policies, procedures and systems (including business continuity programs) designed to prevent or limit the effect of possible failures, interruptions or breaches in security of information systems. We design our business continuity and other information and technology risk management programs to manage our capabilities to provide services in the case of an event resulting in material disruptions of business activities affecting our employees, facilities, technology or suppliers. We regularly seek to test the effectiveness of and enhance these policies, procedures and systems.
Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our business continuity planning and our ability to anticipate the timing and nature of any such event that occurs. The adverse impact of
natural and other disasters, terrorist activities, international hostilities and the like could be increased to the extent that there is a lack of preparedness on the part of national or regional governments, including emergency responders, or on the part of other organizations and businesses with which we deal, particularly those on which we depend but have no control over.
In recent years, we have incurred significant expense towards improving the reliability of our systems and their security against external and internal threats. Nonetheless, there remains the risk that an adverse event might occur. If one does occur, we might not be able to remediate the event or its consequences timely or adequately. To the extent that the risk relates to products or services provided by others, we seek to engage in due diligence and monitoring to limit the risk, but here as well we cannot eliminate it. Should an adverse event affecting another companys systems occur, we may not have indemnification or other protection from the other company sufficient to compensate us or otherwise protect us from the consequences.
The occurrence of any failure, interruption or security breach of any of our information or communications systems, or the systems of other companies on which we rely, could result in a wide variety of adverse consequences to PNC. This risk is greater if the issue is widespread or results in financial losses to our customers. Possible adverse consequences include damage to our reputation or a loss of customer business. We also could face litigation or additional regulatory scrutiny. Litigation or regulatory actions in turn could lead to liability or other sanctions, including fines and penalties or reimbursement of customers adversely affected by a systems problem or security breach. Even if we do not suffer any material adverse consequences as a result of events affecting us directly, successful attacks or systems failures at other financial institutions could lead to a general loss of customer confidence in financial institutions, including PNC. Also, systems problems, including those resulting from third party attacks, whether at PNC or at our competitors, would likely increase regulatory and customer concerns regarding the functioning, safety and security of such systems generally. In that case, we would expect to incur even higher levels of costs with respect to prevention and mitigation of these risks.
We continually encounter technological change and we could falter in our ability to remain competitive in this arena.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. We have been investing in technology and connectivity to automate functions previously performed manually, to facilitate the ability of customers to engage in financial
22 The PNC Financial Services Group, Inc. Form 10-K |
transactions, and otherwise to enhance the customer experience with respect to our products and services. On the retail side, this has included developments such as more sophisticated ATMs and expanded access to banking transactions through the internet, smart phones, tablets and other remote devices. These efforts have all been in response to actual and anticipated customer behavior and expectations. Our continued success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that satisfy customer demands and create efficiencies in our operations. A failure to maintain or enhance our competitive position with respect to technology, whether because we fail to anticipate customer expectations or because our technological developments fail to perform as desired or are not rolled out in a timely manner, may cause us to lose market share or incur additional expense.
There are risks resulting from the extensive use of models in our business.
PNC relies on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy, and calculating economic and regulatory capital levels, as well as to estimate the value of financial instruments and balance sheet items. Poorly designed or implemented models present the risk that our business decisions based on information incorporating models will be adversely affected due to the inadequacy of that information. Also, information we provide to the public or to our regulators based on poorly designed or implemented models could be inaccurate or misleading. Some of the decisions that our regulators make, including those related to capital distributions to our shareholders, could be affected adversely due to their perception that the quality of the models used to generate the relevant information is insufficient. See the Model Risk Management portion of the Risk Management section included in Item 7 of this Report.
Our asset and liability valuations and the determination of the amount of loss allowances and impairments taken on our assets are highly subjective, and inaccurate estimates could materially impact our results of operations or financial position.
We must use estimates, assumptions, and judgments when assets and liabilities are measured and reported at fair value. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Changes in underlying factors or assumptions in any of the areas underlying our estimates could materially impact our future financial condition and results of operations. During periods of market disruption, it may be more difficult to value certain of our assets if trading becomes less frequent and/or market data becomes less observable. There may be certain asset
classes that were historically in active markets with significant observable data that rapidly become illiquid due to market volatility, a loss in market confidence or other factors. Further, rapidly changing and unprecedented market conditions in any particular market could materially impact the valuation of assets as reported within our consolidated financial statements.
The determination of the amount of loss allowances and asset impairments varies by asset type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. Although we have policies and procedures in place to determine loss allowance and asset impairments, due to the substantial subjective nature of this area, there can be no assurance that our management has accurately assessed the level of impairments taken and allowances reflected in our financial statements. Furthermore, additional impairments may need to be taken or allowances provided for in the future. Historical trends may not be indicative of future impairments or allowances.
Our business and financial results could be impacted materially by adverse results in legal proceedings.
Many aspects of our business involve substantial risk of legal liability. We have been named or threatened to be named as defendants in various lawsuits arising from our business activities (and in some cases from the activities of companies we have acquired). In addition, we are regularly the subject of governmental investigations and other forms of regulatory inquiry. We also are at risk when we have agreed to indemnify others for losses related to legal proceedings, including litigation and governmental investigations and inquiries, they face, such as in connection with the sale of a business or assets by us. The results of these legal proceedings could lead to significant monetary damages or penalties, restrictions on the way in which we conduct our business, or reputational harm.
Although we establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have accruals for all legal proceedings where we face a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss to us from the legal proceedings in question. Thus, our ultimate losses may be higher, and possibly significantly so, than the amounts accrued for legal loss contingencies.
We discuss further the unpredictability of legal proceedings and describe certain of our pending legal proceedings in Note 21 Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8 of this Report.
The PNC Financial Services Group, Inc. Form 10-K 23 |
PNC faces legal and regulatory risk arising out of its residential mortgage businesses.
Numerous federal and state governmental, legislative and regulatory authorities are investigating practices in the business of mortgage and home equity loan lending and servicing and in the mortgage-related insurance and reinsurance industries. PNC has received inquiries from governmental, legislative and regulatory authorities on these topics and is responding to these inquiries. These inquiries and investigations could lead to administrative, civil or criminal proceedings, possibly resulting in remedies including fines, penalties, restitution, alterations in our business practices and additional expenses and collateral costs. They could also result in reputational harm to PNC, either individually or as part of the overall industry, regardless of the extent to which PNC is penalized.
In addition to governmental or regulatory inquiries and investigations, PNC, like other companies with residential mortgage and home equity loan origination and servicing operations, faces the risk of class actions, other litigation and claims from: the owners of, investors in, or purchasers of such loans originated or serviced by PNC (or securities backed by such loans), homeowners involved in foreclosure proceedings or various mortgage-related insurance programs, downstream purchasers of homes sold after foreclosure, title insurers, and other potential claimants. Included among these claims are claims from purchasers of mortgage and home equity loans seeking the repurchase of loans where the loans allegedly breached origination covenants and representations and warranties made to the purchasers in the purchase and sale agreements.
At this time PNC cannot predict the ultimate overall cost to or effect upon PNC from governmental, legislative or regulatory actions and private litigation or claims arising out of residential mortgage and home equity loan lending, servicing or reinsurance practices, although such actions, litigation and claims could, individually or in the aggregate, result in significant expense. See Note 21 Legal Proceedings and Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information regarding federal and state governmental, legislative and regulatory inquiries and investigations and additional information regarding potential repurchase obligations relating to mortgage and home equity loans.
There is a continuing risk of incurring costs related to further remedial and related efforts required by governmental or regulatory authorities and related to repurchase requests arising out of either the foreclosure process or origination issues. Reputational damage arising out of this industry-wide inquiry could also have an adverse effect upon our existing mortgage and home equity loan business and could reduce future business opportunities. Investors in mortgage loans and
other assets that we sell are more likely to seek indemnification from us against losses or otherwise seek to have us share in such losses.
The CFPB has issued new rules for mortgage origination and mortgage servicing. Both the origination and servicing rules create new private rights of action for consumers against lenders and servicers like PNC in the event of certain violations. For additional information concerning the mortgage rules, see Supervision and Regulation in Item 1 of this Report.
Additionally, two government-sponsored enterprises (GSEs) (FHLMC and FNMA) are currently in conservatorship, with its primary regulator acting as a conservator. We cannot predict when or if the conservatorships will end or whether, as a result of legislative or regulatory action, there will be any associated changes to the structure of these GSEs or the housing finance industry more generally, including, but not limited to, changes to the relationship among these GSEs, the government and the private markets. The effects of any such reform on our business and financial results are uncertain.
Our regional concentrations make us at risk to adverse economic conditions in our primary retail banking footprint.
Our retail banking business is primarily concentrated within our retail branch network footprint. Although our other businesses are national in scope, to a lesser extent these other businesses also have a greater presence within these primary geographic markets. Thus, we are particularly vulnerable to adverse changes in economic conditions in the Mid-Atlantic, Midwest, and Southeast regions.
We grow our business in part by acquiring other financial services companies or assets from time to time, and these acquisitions present a number of risks and uncertainties related both to the acquisition transactions themselves and to the integration of the acquired businesses into PNC after closing.
Acquisitions of other financial services companies, financial assets and related deposits and other liabilities present risks and uncertainties to PNC in addition to those presented by the nature of the business acquired.
In general, acquisitions may be substantially more expensive or take longer to complete than anticipated (including unanticipated costs incurred in connection with the integration of the acquired company). Anticipated benefits (including anticipated cost savings and strategic gains, for example resulting from being able to offer product sets to a broader potential customer base) may be significantly harder or take longer to achieve than expected or may not be achieved in their entirety as a result of unexpected factors or events.
24 The PNC Financial Services Group, Inc. Form 10-K |
Our ability to achieve anticipated results from acquisitions is often dependent also on the extent of credit losses in the acquired loan portfolios and the extent of deposit attrition, which are, in part, related to the state of economic and financial markets.
Also, litigation and governmental investigations that may be pending at the time of the acquisition or be filed or commenced thereafter, as a result of an acquisition or otherwise, could impact the timing or realization of anticipated benefits to PNC. Note 21 Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8 of this Report describes several legal proceedings related to pre-acquisition activities of companies we have acquired, including National City. Other such legal proceedings may be commenced in the future.
Integration of an acquired companys business and operations into PNC, including conversion of the acquired companys different systems and procedures, may take longer than anticipated or be more costly than anticipated or have unanticipated adverse results relating to the acquired companys or PNCs existing businesses. In some cases, acquisitions involve our entry into new businesses or new geographic or other markets, and these situations also present risks and uncertainties in instances where we may be inexperienced in these new areas.
Our ability to analyze the risks presented by prospective acquisitions, as well as our ability to prepare in advance of closing for integration, depends, in part, on the information we can gather with respect to the target, which is more limited than the information we have regarding companies we already own.
As a regulated financial institution, our ability to pursue or complete attractive acquisition opportunities could be negatively impacted by regulatory delays or other regulatory issues. In addition, our ability to make large acquisitions in the future may be negatively impacted by regulatory rules or future regulatory initiatives designed to limit the potential for a financial institution to become too big to fail.
We operate in a highly competitive environment, in terms of the products and services we offer and the geographic markets in which we conduct business, as well as in our labor markets where we compete for talented employees. Competition could adversely impact our customer acquisition, growth and retention, as well as our credit spreads and product pricing, causing us to lose market share and deposits and revenues.
We are subject to intense competition from various financial institutions as well as from non-bank entities that engage in many similar activities without being subject to bank regulatory supervision and restrictions. This competition is described in Item 1 of this Report under Competition.
Competition in our industry could intensify as a result of the increasing consolidation of financial services companies, in connection with current market conditions or otherwise.
In all, the principal bases for competition are pricing (including the interest rates charged on loans or paid on interest-bearing deposits), product structure, the range of products and services offered, and the quality of customer service (including convenience and responsiveness to customer needs and concerns). The ability to access and use technology is an increasingly important competitive factor in the financial services industry, and it is a critically important component to customer satisfaction as it affects our ability to deliver the right products and services.
Another increasingly competitive factor in the financial services industry is the competition to attract and retain talented employees across many of our business and support areas. This competition leads to increased expenses in many business areas and can also cause us to not pursue certain business opportunities. Limitations on the manner in which regulated financial institutions can compensate their officers and employees may make it more difficult for regulated financial institutions to compete with unregulated financial institutions for talent.
A failure to adequately address the competitive pressures we face could make it harder for us to attract and retain customers across our businesses. On the other hand, meeting these competitive pressures could require us to incur significant additional expense or to accept risk beyond what we would otherwise view as desirable under the circumstances. In addition, in our interest rate sensitive businesses, pressures to increase rates on deposits or decrease rates on loans could reduce our net interest margin with a resulting negative impact on our net interest income.
Our business and financial performance could be adversely affected, directly or indirectly, by disasters, natural or otherwise, by terrorist activities or by international hostilities.
Neither the occurrence nor the potential impact of disasters (such as earthquakes, hurricanes, tornadoes, floods and other severe weather conditions, pandemics, dislocations, fires, explosions, and other catastrophic accidents or events), terrorist activities and international hostilities can be predicted. However, these occurrences could impact us directly (for example, by causing significant damage to our facilities or preventing us from conducting our business in the ordinary course), or indirectly as a result of their impact on our borrowers, depositors, other customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in any particular region. These types of impacts could lead, for example, to an increase in delinquencies,
The PNC Financial Services Group, Inc. Form 10-K 25 |
bankruptcies or defaults that could result in our experiencing higher levels of nonperforming assets, net charge-offs and provisions for credit losses.
Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning, and our ability, if any, to anticipate the nature of any such event that occurs. The adverse impact of disasters or terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses that we deal with, particularly those that we depend upon but have no control over.
ITEM 1B UNRESOLVED STAFF COMMENTS
There are no SEC staff comments regarding PNCs periodic or current reports under the Exchange Act that are pending resolution.
Our executive and primary administrative offices are currently located at One PNC Plaza, Pittsburgh, Pennsylvania. The 30-story structure is owned by PNC Bank, National Association.
We own or lease numerous other premises for use in conducting business activities, including operations centers, offices, and branch and other facilities. We consider the facilities owned or occupied under lease by our subsidiaries to be adequate for the purposes of our business operations. We include here by reference the additional information regarding our properties in Note 9 Premises, Equipment and Leasehold Improvements in the Notes To Consolidated Financial Statements in Item 8 of this Report.
See the information set forth in Note 21 Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8 of this Report, which is incorporated here by reference.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding each of our executive officers as of February 23, 2015 is set forth below. Executive officers do not have a stated term of office. Each executive officer has held the position or positions indicated or another executive position with the same entity or one of its affiliates for the past five years unless otherwise indicated below.
Name | Age | Position with PNC |
Year
Employed (a) |
|||||||
William S. Demchak |
52 |
Chairman, Chief Executive Officer and President (b) |
2002 | |||||||
Joseph C. Guyaux |
64 |
Senior Vice Chairman and Chief Executive Officer and President of PNC Mortgage |
1972 | |||||||
Orlando C. Esposito |
56 |
Executive Vice President and Head of Asset Management Group |
1988 | |||||||
Neil F. Hall |
66 |
Executive Vice President and Head of Retail Banking |
1995 | |||||||
Michael J. Hannon |
58 |
Executive Vice President and Chief Credit Officer |
1982 | |||||||
Vicki C. Henn |
46 |
Executive Vice President and Chief Human Resources Officer |
1994 | |||||||
Gregory B. Jordan |
55 |
Executive Vice President, General Counsel and Head of Regulatory and Government Affairs |
2013 | |||||||
Stacy M. Juchno |
39 |
Executive Vice President and General Auditor |
2009 | |||||||
Karen L. Larrimer |
52 |
Executive Vice President and Chief Customer Officer |
1995 | |||||||
Michael P. Lyons |
44 |
Executive Vice President and Head of Corporate & Institutional Banking |
2011 | |||||||
E. William Parsley, III |
49 |
Executive Vice President, Chief Investment Officer, and Treasurer |
2003 | |||||||
Robert Q. Reilly |
50 |
Executive Vice President and Chief Financial Officer |
1987 | |||||||
Joseph E. Rockey |
50 |
Executive Vice President and Chief Risk Officer |
1999 | |||||||
Steven Van Wyk |
56 |
Executive Vice President and Head of Technology and Operations |
2013 | |||||||
Gregory H. Kozich |
51 |
Senior Vice President and Controller |
2010 |
(a) | Where applicable, refers to year employed by predecessor company. |
(b) | Mr. Demchak also serves as a director. Biographical information for Mr. Demchak is included in Election of Directors (Item 1) in our proxy statement for the 2015 annual meeting of shareholders. See Item 10 of this Report. |
26 The PNC Financial Services Group, Inc. Form 10-K |
Joseph C. Guyaux has served as Senior Vice Chairman since February 2012 and was appointed chief executive officer and president of PNC Mortgage in January 2015. Mr. Guyaux was Chief Risk Officer from February 2012 to January 2015, prior to which he served as President.
Orlando C. Esposito was appointed Executive Vice President and head of PNCs Asset Management Group in April 2013. Prior to being named to his current position, he held numerous leadership positions including Executive Vice President of Corporate Banking from November 2006 to April 2013.
Neil F. Hall has been an Executive Vice President since April 2012 and head of PNCs Retail Banking since February 2012. Prior to being named to his current position, Mr. Hall led the delivery of sales and service to PNCs retail and small business customers, directed branch banking, business banking, community development and PNC Investments.
Michael J. Hannon has served as Executive Vice President since February 2009, prior to which he served as Senior Vice President. He has served as Chief Credit Officer since November 2001. He also served as Interim Chief Risk Officer from December 2011 to February 2012.
Vicki C. Henn has served as Executive Vice President and Chief Human Resources Officer of PNC since July 2014. Ms. Henn joined PNC in 1994 and has held numerous management positions. Prior to being named to her current position, Ms. Henn was a Senior Vice President, responsible for Human Resources for Retail Banking.
Gregory B. Jordan joined PNC as Executive Vice President, General Counsel and Head of Regulatory and Government Affairs in October 2013. Prior to joining PNC, he served as the Global Managing Partner for the last 13 years of his 29 year tenure at Reed Smith LLP.
Stacy M. Juchno has served as Executive Vice President and General Auditor of PNC since April 2014. Ms. Juchno joined PNC in 2009 and previously served as a Senior Vice President and Finance Governance and Oversight Director.
Karen L. Larrimer was appointed Executive Vice President in May 2013. She has served as Chief Customer Officer since April 2014, prior to which she served as Chief Marketing Officer.
Michael P. Lyons has been an Executive Vice President since November 2011 and is head of Corporate and Institutional Banking. Prior to joining PNC in October 2011, from May 2010 until October 2011, Mr. Lyons was head of corporate development and strategic planning for Bank of America. Prior to joining Bank of America, from September 2004 to May 2010, Mr. Lyons held various positions at Maverick Capital, most recently as a principal focused on financial institutions investments.
E. William Parsley, III has served as Treasurer and Chief Investment Officer since January 2004. He was appointed Executive Vice President in February 2009.
Robert Q. Reilly was appointed Chief Financial Officer in August 2013. He served as the head of PNCs Asset Management Group from 2005 until April 2013. Previously, he held numerous management roles in both Corporate Banking and Asset Management. He was appointed Executive Vice President in February 2009.
Joseph E. Rockey was appointed Chief Risk Officer in January 2015. Prior to his appointment, Mr. Rockey led enterprise risk management and the Basel office within PNCs risk management organization. Mr. Rockey joined PNC in 1999 and was appointed Executive Vice President in January 2015.
Steven Van Wyk joined PNC as Head of Technology and Operations in January 2013. From 2007 until joining PNC, Mr. Van Wyk served as Global Chief Operating Officer for ING. He was appointed Executive Vice President of PNC in February 2013.
Gregory H. Kozich has served as a Senior Vice President and Controller of PNC since 2011. Mr. Kozich joined PNC as Senior Vice President of PNC Bank in October 2010. Prior to joining PNC, Mr. Kozich was with FNMA from 2005 until late 2010, most recently serving as its corporate controller.
The PNC Financial Services Group, Inc. Form 10-K 27 |
The name, age and principal occupation of each of our directors as of February 23, 2015 and the year he or she first became a director is set forth below:
|
Richard O. Berndt, 72, Managing Partner of Gallagher, Evelius & Jones LLP ( law firm ) (2007) |
|
Charles E. Bunch, 65, Chairman and Chief Executive Officer of PPG Industries, Inc. ( coatings, sealants and glass products ) (2007) |
|
Paul W. Chellgren, 72, Operating Partner, Snow Phipps Group, LLC ( private equity ) (1995) |
|
Marjorie Rodgers Cheshire, 46, President and Chief Operating Officer, A&R Development Corp. (real estate development company) (2014) |
|
William S. Demchak, 52, Chairman, Chief Executive Officer and President of PNC (2013) |
|
Andrew T. Feldstein, 50, Chief Executive Officer and Co-Chief Investment Officer of BlueMountain Capital Management, LLC ( asset management firm) (2013) |
|
Kay Coles James, 65, President and Founder of The Gloucester Institute ( non-profit ) (2006) |
|
Richard B. Kelson, 68, Chairman, President and Chief Executive Officer, ServCo LLC ( strategic sourcing, supply chain management ) (2002) |
|
Anthony A. Massaro, 70, Retired Chairman and Chief Executive Officer of Lincoln Electric Holdings, Inc. ( manufacturer of welding and cutting products ) (2002) |
|
Jane G. Pepper, 69, Retired President of the Pennsylvania Horticultural Society ( non-profit ) (1997) |
|
Donald J. Shepard, 68, Retired Chairman of the Executive Board and Chief Executive Officer of AEGON N.V. ( insurance ) (2007) |
|
Lorene K. Steffes, 69, Independent Business Advisor ( executive, business management and technical expertise ) (2000) |
|
Dennis F. Strigl, 68, Retired President and Chief Operating Officer of Verizon Communications Inc. ( telecommunications ) (2001) |
|
Thomas J. Usher, 72, Non-executive Chairman of Marathon Petroleum Corporation ( oil and gas industry ) (1992) |
|
George H. Walls, Jr., 72, former Chief Deputy Auditor for the State of North Carolina (2006) |
|
Helge H. Wehmeier, 72, Retired Vice Chairman of Bayer Corporation ( international life sciences, polymers and specialty chemicals ) (1992) |
ITEM 5 MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) (1) Our common stock is listed on the New York Stock Exchange and is traded under the symbol PNC. At the close of business on February 18, 2015, there were 69,964 common shareholders of record.
Holders of PNC common stock are entitled to receive dividends when declared by the Board of Directors out of funds legally available for this purpose. Our Board of Directors may not pay or set apart dividends on the common stock until dividends for all past dividend periods on any series of outstanding preferred stock have been paid or declared and set apart for payment. The Board presently intends to continue the policy of paying quarterly cash dividends. The amount of any future dividends will depend on economic and market conditions, our financial condition and operating results, and other factors, including contractual restrictions and applicable government regulations and policies (such as those relating to the ability of bank and non-bank subsidiaries to pay dividends to the parent company and regulatory capital limitations). The amount of our dividend is also currently subject to the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve and our primary bank regulators as part of the 2015 Comprehensive Capital Analysis and Review (CCAR) process as described in the Supervision and Regulation section in Item 1 of this Report.
The Federal Reserve has the power to prohibit us from paying dividends without its approval. For further information concerning dividend restrictions and other factors that could limit PNCs ability to pay dividends, as well as restrictions on loans, dividends or advances from bank subsidiaries to the parent company, see the Supervision and Regulation section in Item 1, Item 1A Risk Factors, the Capital portion of the Consolidated Balance Sheet Review section, the Liquidity Risk Management portion of the Risk Management section, and the Trust Preferred Securities and REIT Preferred Securities portion of the Off-Balance Sheet Arrangements And Variable Interest Entities section in Item 7, and Note 12 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities and Note 20 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report, which we include here by reference.
We include here by reference additional information relating to PNC common stock under the Common Stock Prices/Dividends Declared section in the Statistical Information (Unaudited) section of Item 8 of this Report.
We include here by reference the information regarding our compensation plans under which PNC equity securities are authorized for issuance as of December 31, 2014 in the table (with introductory paragraph and notes) that appears in Item 12 of this Report.
28 The PNC Financial Services Group, Inc. Form 10-K |
Our stock transfer agent and registrar is:
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
800-982-7652
Registered shareholders may contact the above phone number regarding dividends and other shareholder services.
We include here by reference the information that appears under the Common Stock Performance Graph caption at the end of this Item 5.
(a)(2) | None. |
(b) | Not applicable. |
(c) | Details of our repurchases of PNC common stock during the fourth quarter of 2014 are included in the following table: |
In thousands, except per share data
2014 period |
Total shares
purchased (a) |
Average
price paid per share |
Total shares
purchased as part of publicly announced programs (b) |
Maximum
number of shares that may yet be purchased under the programs (b) |
||||||||||||
October 1 31 |
2,772 | $ | 82.77 | 2,734 | 11,417 | |||||||||||
November 1 30 |
1,311 | $ | 87.63 | 1,309 | 10,108 | |||||||||||
December 1 31 |
2,026 | $ | 90.38 | 2,022 | 8,086 | |||||||||||
Total |
6,109 | $ | 86.33 | 6,065 |
(a) | Includes PNC common stock purchased in connection with our various employee benefit plans generally related to forfeitures of unvested restricted stock awards and shares used to cover employee payroll tax withholding requirements. Note 13 Employee Benefit Plans and Note 14 Stock Based Compensation Plans in the Notes To Consolidated Financial Statements in Item 8 of this Report include additional information regarding our employee benefit and equity compensation plans that use PNC common stock. |
(b) | On October 4, 2007, our Board of Directors authorized the repurchase of up to 25 million shares of PNC common stock. The repurchases are made in open market or privately negotiated transactions and the repurchase program will remain in effect until fully utilized or until modified, superseded or terminated. The timing and exact amount of common stock repurchases will depend on a number of factors including, among others, market and general economic conditions, economic capital and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations, including the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve and our primary bank regulators as part of the CCAR process. |
Our 2014 capital plan, submitted as part of the CCAR process and approved by the Federal Reserve, included share repurchase programs of up to $1.5 billion for the four quarter period beginning with the second quarter of 2014. This amount does not include share repurchases in connection with various employee benefit plans referenced in note (a). In the fourth quarter of 2014, in accordance with the 2014 capital plan, we repurchased 6.065 million shares of common stock on the open market, with an average price of $86.41 per share and an aggregate repurchase price of $524 million. |
Common Stock Performance Graph
This graph shows the cumulative total shareholder return ( i.e. , price change plus reinvestment of dividends) on our common stock during the five-year period ended December 31, 2014, as compared with: (1) a selected peer group as set forth below and referred to as the Peer Group; (2) an overall stock market index, the S&P 500 Index; and (3) a published industry
index, the S&P 500 Banks. The yearly points marked on the horizontal axis of the graph correspond to December 31 of that year. The stock performance graph assumes that $100 was invested on January 1, 2010 for the five-year period and that any dividends were reinvested. The table below the graph shows the resultant compound annual growth rate for the performance period.
Base
Period |
Assumes $100
investment at Close of
Total Return = Price change
plus
of dividends |
5-Year
Compound Growth Rate |
||||||||||||||||||||||||||
Dec. 09 | Dec. 10 | Dec. 11 | Dec. 12 | Dec. 13 | Dec. 14 | |||||||||||||||||||||||
PNC |
100 | 115.81 | 112.26 | 116.38 | 158.80 | 191.07 | 13.83 | % | ||||||||||||||||||||
S&P 500 Index |
100 | 115.06 | 117.48 | 136.27 | 180.39 | 205.07 | 15.45 | % | ||||||||||||||||||||
S&P 500 Banks |
100 | 119.84 | 107.00 | 132.74 | 180.15 | 208.10 | 15.79 | % | ||||||||||||||||||||
Peer Group |
100 | 120.80 | 104.59 | 137.49 | 186.35 | 216.01 | 16.65 | % |
The Peer Group for the preceding chart and table consists of the following companies: BB&T Corporation; Comerica Inc.; Fifth Third Bancorp; KeyCorp; The PNC Financial Services Group, Inc.; SunTrust Banks, Inc.; U.S. Bancorp; Regions Financial Corporation; Wells Fargo & Company; Capital One Financial, Inc.; Bank of America Corporation; M&T Bank; and JP Morgan Chase and Company. This Peer Group was approved for 2014 by the Boards Personnel and Compensation Committee. Such Committee has approved a peer group of twelve for 2015, consisting of all of the same companies as those in the 2014 Peer Group other than Comerica Inc.
Each yearly point for the Peer Group is determined by calculating the cumulative total shareholder return for each company in the Peer Group from December 31, 2009 to December 31 of that year (End of Month Dividend Reinvestment Assumed) and then using the median of these returns as the yearly plot point.
In accordance with the rules of the SEC, this section, captioned Common Stock Performance Graph, shall not be incorporated by reference into any of our future filings made under the Securities Exchange Act of 1934 or the Securities Act of 1933. The Common Stock Performance Graph, including its accompanying table and footnotes, is not deemed to be soliciting material or to be filed under the Exchange Act or the Securities Act.
The PNC Financial Services Group, Inc. Form 10-K 29 |
ITEM 6 SELECTED FINANCIAL DATA
Year ended December 31 | ||||||||||||||||||||||
Dollars in millions, except per share data | 2014 (a) | 2013 (a) | 2012 (a) | 2011 | 2010 | |||||||||||||||||
S UMMARY O F O PERATIONS | ||||||||||||||||||||||
Interest income |
$ | 9,431 | $ | 10,007 | $ | 10,734 | $ | 10,194 | $ | 11,150 | ||||||||||||
Interest expense |
906 | 860 | 1,094 | 1,494 | 1,920 | |||||||||||||||||
Net interest income |
8,525 | 9,147 | 9,640 | 8,700 | 9,230 | |||||||||||||||||
Noninterest income |
6,850 | 6,865 | 5,872 | 5,626 | 5,946 | |||||||||||||||||
Total revenue |
15,375 | 16,012 | 15,512 | 14,326 | 15,176 | |||||||||||||||||
Provision for credit losses |
273 | 643 | 987 | 1,152 | 2,502 | |||||||||||||||||
Noninterest expense (b) |
9,488 | 9,681 | 10,486 | 9,022 | 8,529 | |||||||||||||||||
Income from continuing operations before income taxes and noncontrolling interests |
5,614 | 5,688 | 4,039 | 4,152 | 4,145 | |||||||||||||||||
Income taxes (b) |
1,407 | 1,476 | 1,045 | 1,087 | 1,127 | |||||||||||||||||
Income from continuing operations before noncontrolling interests |
4,207 | 4,212 | 2,994 | 3,065 | 3,018 | |||||||||||||||||
Income from discontinued operations (net of income taxes of zero, zero, zero, zero and $338) (c) |
373 | |||||||||||||||||||||
Net income (b) |
4,207 | 4,212 | 2,994 | 3,065 | 3,391 | |||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests (b) |
23 | 11 | (7 | ) | 16 | (11 | ) | |||||||||||||||
Preferred stock dividends (d) |
232 | 237 | 177 | 56 | 146 | |||||||||||||||||
Preferred stock discount accretion and redemptions (d) |
5 | 12 | 4 | 2 | 255 | |||||||||||||||||
Net income attributable to common shareholders (d) |
$ | 3,947 | $ | 3,952 | $ | 2,820 | $ | 2,991 | $ | 3,001 | ||||||||||||
P ER C OMMON S HARE |
||||||||||||||||||||||
Basic earnings |
||||||||||||||||||||||
Continuing operations (b) |
$ | 7.44 | $ | 7.45 | $ | 5.33 | $ | 5.69 | $ | 5.06 | ||||||||||||
Discontinued operations (c) |
.72 | |||||||||||||||||||||
Net income |
$ | 7.44 | $ | 7.45 | $ | 5.33 | $ | 5.69 | $ | 5.78 | ||||||||||||
Diluted earnings |
||||||||||||||||||||||
Continuing operations (b) |
$ | 7.30 | $ | 7.36 | $ | 5.28 | $ | 5.62 | $ | 5.00 | ||||||||||||
Discontinued operations (c) |
.72 | |||||||||||||||||||||
Net income |
$ | 7.30 | $ | 7.36 | $ | 5.28 | $ | 5.62 | $ | 5.72 | ||||||||||||
Book value (b) |
$ | 77.61 | $ | 72.07 | $ | 66.95 | $ | 61.44 | $ | 56.22 | ||||||||||||
Cash dividends declared |
$ | 1.88 | $ | 1.72 | $ | 1.55 | $ | 1.15 | $ | .40 |
(a) | Includes the impact of RBC Bank (USA), which we acquired on March 2, 2012. |
(b) | Amounts for prior periods have been updated to reflect the first quarter 2014 adoption of Accounting Standards Update (ASU) 2014-01 related to investments in low income housing tax credits. |
(c) | Includes results of operations for PNC Global Investment Servicing Inc. (GIS) through June 30, 2010 and the related after-tax gain on sale. We sold GIS effective July 1, 2010, resulting in a gain of $639 million, or $328 million after taxes, recognized during the third quarter of 2010. |
(d) | We redeemed the Series N (TARP) Preferred Stock on February 10, 2010. In connection with the redemption, we accelerated the accretion of the remaining issuance discount on the Series N Preferred Stock and recorded a corresponding reduction in retained earnings of $250 million in the first quarter of 2010. This resulted in a noncash reduction in net income attributable to common shareholders and related basic and diluted earnings per share. The Series N Preferred Stock was issued on December 31, 2008. |
Certain prior period amounts have been reclassified to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements.
This Selected Financial Data should be reviewed in conjunction with the Consolidated Financial Statements and Notes included in Item 8 of this Report as well as the other disclosure in this Report concerning our historical financial performance, our future prospects and the risks associated with our business and financial performance.
30 The PNC Financial Services Group, Inc. Form 10-K |
At or for the year ended December 31 | ||||||||||||||||||||||
Dollars in millions, except as noted | 2014 (a) | 2013 (a) | 2012 (a) | 2011 | 2010 | |||||||||||||||||
B ALANCE S HEET H IGHLIGHTS |
||||||||||||||||||||||
Assets (b) (c) |
$ | 345,072 | $ | 320,192 | $ | 305,029 | $ | 271,141 | $ | 264,230 | ||||||||||||
Loans (c) (d) |
204,817 | 195,613 | 185,856 | 159,014 | 150,595 | |||||||||||||||||
Allowance for loan and lease losses (c) |
3,331 | 3,609 | 4,036 | 4,347 | 4,887 | |||||||||||||||||
Interest-earning deposits with banks (c) (e) |
31,779 | 12,135 | 3,984 | 1,169 | 1,610 | |||||||||||||||||
Investment securities (c) |
55,823 | 60,294 | 61,406 | 60,634 | 64,262 | |||||||||||||||||
Loans held for sale (d) |
2,262 | 2,255 | 3,693 | 2,936 | 3,492 | |||||||||||||||||
Goodwill and other intangible assets |
10,947 | 11,290 | 10,869 | 10,144 | 10,753 | |||||||||||||||||
Equity investments (b) (c) (f) |
10,728 | 10,560 | 10,799 | 10,070 | 9,166 | |||||||||||||||||
Noninterest-bearing deposits |
73,479 | 70,306 | 69,980 | 59,048 | 50,019 | |||||||||||||||||
Interest-bearing deposits |
158,755 | 150,625 | 143,162 | 128,918 | 133,371 | |||||||||||||||||
Total deposits |
232,234 | 220,931 | 213,142 | 187,966 | 183,390 | |||||||||||||||||
Transaction deposits (g) |
198,267 | 186,391 | 176,705 | 147,637 | 134,654 | |||||||||||||||||
Borrowed funds (c) (d) (h) |
56,768 | 46,105 | 40,907 | 36,704 | 39,488 | |||||||||||||||||
Total shareholders equity (b) |
44,551 | 42,334 | 38,948 | 34,010 | 30,206 | |||||||||||||||||
Common shareholders equity (b) |
40,605 | 38,392 | 35,358 | 32,374 | 29,560 | |||||||||||||||||
C LIENT I NVESTMENT A SSETS (billions) |
||||||||||||||||||||||
Discretionary client assets under management |
$ | 135 | $ | 127 | $ | 112 | $ | 107 | $ | 108 | ||||||||||||
Nondiscretionary client assets under management |
128 | 120 | 112 | 103 | 104 | |||||||||||||||||
Total client assets under administration |
263 | 247 | 224 | 210 | 212 | |||||||||||||||||
Brokerage account client assets |
43 | 41 | 38 | 34 | 34 | |||||||||||||||||
Total |
$ | 306 | $ | 288 | $ | 262 | $ | 244 | $ | 246 | ||||||||||||
S ELECTED R ATIOS |
||||||||||||||||||||||
Net interest margin (i) |
3.08 | % | 3.57 | % | 3.94 | % | 3.92 | % | 4.14 | % | ||||||||||||
Noninterest income to total revenue |
45 | 43 | 38 | 39 | 39 | |||||||||||||||||
Efficiency (b) |
62 | 60 | 68 | 63 | 56 | |||||||||||||||||
Return on |
||||||||||||||||||||||
Average common shareholders equity (b) |
9.91 | 10.85 | 8.29 | 9.56 | 10.87 | |||||||||||||||||
Average assets (b) |
1.28 | 1.38 | 1.02 | 1.16 | 1.28 | |||||||||||||||||
Loans to deposits |
88 | 89 | 87 | 85 | 82 | |||||||||||||||||
Dividend payout (b) |
25.3 | 23.1 | 29.1 | 20.2 | 6.8 | |||||||||||||||||
Transitional Basel III common equity Tier 1 capital ratio (j) (k) |
10.9 | N/A | N/A | N/A | N/A | |||||||||||||||||
Transitional Basel III Tier 1 risk-based capital ratio (j) (k) |
12.6 | N/A | N/A | N/A | N/A | |||||||||||||||||
Pro forma fully phased-in Basel III common equity Tier 1 capital ratio (k) (l) (m) |
10.0 | 9.4 | 7.5 | N/A | N/A | |||||||||||||||||
Basel I Tier 1 common capital ratio (m) |
N/A | 10.5 | 9.6 | 10.3 | 9.8 | |||||||||||||||||
Basel I Tier 1 risk-based capital ratio (m) |
N/A | 12.4 | 11.6 | 12.6 | 12.1 | |||||||||||||||||
Common shareholders equity to total assets (b) |
11.8 | 12.0 | 11.6 | 11.9 | 11.2 | |||||||||||||||||
Average common shareholders equity to average assets (b) |
12.1 | 11.9 | 11.5 | 11.9 | 10.4 | |||||||||||||||||
S ELECTED S TATISTICS |
||||||||||||||||||||||
Employees |
53,587 | 54,433 | 56,285 | 51,891 | 50,769 | |||||||||||||||||
Retail Banking branches |
2,697 | 2,714 | 2,881 | 2,511 | 2,470 | |||||||||||||||||
ATMs |
8,605 | 7,445 | 7,282 | 6,806 | 6,673 | |||||||||||||||||
Residential mortgage servicing portfolio Serviced for Third Parties (in billions) |
$ | 108 | $ | 114 | $ | 119 | $ | 118 | $ | 125 | ||||||||||||
Commercial mortgage servicing portfolio Serviced for PNC and Others (in billions) |
$ | 336 | $ | 308 | $ | 282 | $ | 267 | $ | 266 |
(a) | Includes the impact of RBC Bank (USA), which we acquired on March 2, 2012. |
(b) | Amounts for prior periods have been updated to reflect the first quarter 2014 adoption of Accounting Standards Update (ASU) 2014-01 related to investments in low income housing tax credits. |
(c) | Amounts include consolidated variable interest entities. See Consolidated Balance Sheet in Item 8 of this Report for additional information. |
(d) | Amounts include assets and liabilities for which we have elected the fair value option. See Consolidated Balance Sheet in Item 8 of this Report for additional information. |
(e) | Amounts include balances held with the Federal Reserve Bank of Cleveland of $31.4 billion, $11.7 billion, $3.5 billion, $.4 billion and $1.0 billion as of December 31, 2014, 2013, 2012, 2011 and 2010, respectively. |
(f) | Amounts include our equity interest in BlackRock. |
(g) | Represents the sum of interest-bearing money market deposits, interest-bearing demand deposits, and noninterest-bearing deposits. |
(h) | Includes long-term borrowings of $41.5 billion, $27.6 billion, $19.3 billion, $20.9 billion and $24.8 billion for 2014, 2013, 2012, 2011 and 2010, respectively. Borrowings which mature more than one year after December 31, 2014 are considered to be long-term. |
(i) | Calculated as taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under accounting principles generally accepted in the United States of America (GAAP) on the Consolidated Income Statement. The taxable-equivalent adjustments to net interest income for the years 2014, 2013, 2012, 2011 and 2010 were $189 million, $168 million, $144 million, $104 million and $81 million, respectively. |
(j) | Calculated using the regulatory capital methodology applicable to PNC during 2014. |
(k) | See capital ratios discussion in the Supervision and Regulation section of Item 1 and in the Consolidated Balance Sheet Review section in Item 7 of this Report for additional discussion on these capital ratios. |
(l) | Pro forma ratios as of December 31, 2014 and December 31, 2013 were calculated under the standardized approach and the pro forma ratio as of December 31, 2012 was calculated under the advanced approaches. The prior period ratios have not been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
(m) | See additional information on the pro forma ratios and Basel I ratios in the Statistical Information (Unaudited) section in Item 8 of this Report. |
The PNC Financial Services Group, Inc. Form 10-K 31 |
ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
Key Strategic Goals
At PNC we manage our company for the long term. We are focused on the fundamentals of growing customers, loans, deposits and fee revenue and improving profitability, while investing for the future and managing risk, expenses and capital. We continue to invest in our products, markets and brand, and embrace our corporate responsibility to the communities where we do business.
We strive to expand and deepen customer relationships by offering a broad range of deposit, fee-based and credit products and services. We are focused on delivering those products and services where, when and how our customers choose with the goal of offering insight that addresses their specific needs. Our approach is concentrated on organically growing and deepening client relationships that meet our risk/return measures. Our strategies for growing fee income across our lines of business are focused on achieving deeper market penetration and cross selling our diverse product mix.
Our strategic priorities are designed to enhance value over the long term. A key priority is to drive growth in acquired and underpenetrated geographic markets, including in the Southeast. In addition, we are seeking to attract more of the investable assets of new and existing clients. PNC is focused on transforming our retail banking business to a more customer-centric and sustainable model while lowering delivery costs as customer banking preferences evolve. We are also working to build a stronger residential mortgage banking business with the goal of becoming the provider of choice for our customers. Additionally, we continue to focus on expense management while investing in technology and business infrastructure and streamlining our processes.
Our capital priorities are to support client growth and business investment, maintain appropriate capital in light of economic uncertainty and the Basel III framework and return excess capital to shareholders, in accordance with the capital plan included in our 2015 Comprehensive Capital Analysis and Review (CCAR) submission to the Board of Governors of the Federal Reserve System (Federal Reserve). We continue to maintain a strong capital position and expect to build capital through retention of future earnings net of dividend payments and share repurchases. PNC has increased its liquidity positions at both PNC and PNC Bank, National Association (PNC Bank). For more detail, see the Capital and Liquidity Actions portion of this Executive Summary, the Capital portion of the Consolidated Balance Sheet Review section and the Liquidity Risk Management portion of the Risk
Management section of this Item 7 and the Supervision and Regulation section in Item 1 Business of this Report.
PNC faces a variety of risks that may impact various aspects of our risk profile from time to time. The extent of such impacts may vary depending on factors such as the current economic, political and regulatory environment, merger and acquisition activity and operational challenges. Many of these risks and our risk management strategies are described in more detail elsewhere in this Report.
Recent Market and Industry Developments
There have been numerous legislative and regulatory developments and significant changes in the competitive landscape of our industry over the last several years. The United States and other governments have undertaken major reform of the regulation of the financial services industry, including engaging in new efforts to impose requirements designed to strengthen the stability of the financial system and protect consumers and investors. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), enacted in July 2010, mandates the most wide-ranging overhaul of financial industry regulation in decades. Many parts of the law are now in effect, and others are now in the implementation stage, which is likely to continue for several years. We expect to face further increased regulation of our industry as a result of Dodd-Frank as well as other current and future initiatives intended to enhance the regulation of financial services companies, the stability of the financial system, the protection of consumers and investors, and the liquidity and solvency of financial institutions and markets. We also expect in many cases more intense scrutiny from our supervisors in the examination process and more aggressive enforcement of laws and regulations on both the federal and state levels. Compliance with new regulations will increase our costs and reduce our revenue. Some new regulations may limit our ability to pursue certain desirable business opportunities.
On January 20, 2015, the U.S. Supreme Court denied a writ of certiorari in NACS v. Board of Governors of the Federal Reserve System , with the effect that the decision of the U.S. Court of Appeals for the D.C. Circuit in this case will stand. In March 2014, the court of appeals had upheld the Federal Reserves network processing rule and its interchange fee rule except as to the issue of transaction monitoring costs, which it remanded to the Federal Reserve for further explanation. The court of appeals decision reversed the grant of summary judgment in July 2013 by the U.S. District Court for the District of Columbia in favor of the plaintiffs in this case vacating these rules.
For additional information concerning recent legislative and regulatory developments, as well as certain governmental, legislative and regulatory inquiries and investigations that may affect PNC, please see the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors, and Note 21 Legal
32 The PNC Financial Services Group, Inc. Form 10-K |
Proceedings and Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Item 8 of this Report.
Key Factors Affecting Financial Performance
Our financial performance is substantially affected by a number of external factors outside of our control, including the following:
|
General economic conditions, including the continuity, speed and stamina of the current U.S. economic expansion in general and on our customers in particular, |
|
The monetary policy actions and statements of the Federal Reserve and the Federal Open Market Committee (FOMC), |
|
The level of, and direction, timing and magnitude of movement in, interest rates and the shape of the interest rate yield curve, |
|
The functioning and other performance of, and availability of liquidity in, the capital and other financial markets, |
|
Loan demand, utilization of credit commitments and standby letters of credit, and asset quality, |
|
Customer demand for non-loan products and services, |
|
Changes in the competitive and regulatory landscape and in counterparty creditworthiness and performance as the financial services industry restructures in the current environment, |
|
The impact of the extensive reforms enacted in the Dodd-Frank legislation and other legislative, regulatory and administrative initiatives and actions, including those outlined elsewhere in this Report and in our other SEC filings, and |
|
The impact of market credit spreads on asset valuations. |
In addition, our success will depend upon, among other things:
|
Focused execution of strategic priorities for organic customer growth opportunities, |
|
Further success in growing profitability through the acquisition and retention of customers and deepening relationships, |
|
Driving growth in acquired and underpenetrated geographic markets, including our Southeast markets, |
|
Our ability to effectively manage PNCs balance sheet and generate net interest income, |
|
Revenue growth from fee income and our ability to provide innovative and valued products to our customers, |
|
Our ability to utilize technology to develop and deliver products and services to our customers and protect PNCs systems and customer information, |
|
Our ability to bolster our critical infrastructure and streamline our core processes, |
|
Our ability to manage and implement strategic business objectives within the changing regulatory environment, |
|
A sustained focus on expense management, |
|
Improving our overall asset quality, |
|
Managing the non-strategic assets portfolio and impaired assets, |
|
Continuing to maintain and grow our deposit base as a low-cost funding source, |
|
Prudent risk and capital management related to our efforts to manage risk to acceptable levels and to meet evolving CCAR compliance, regulatory capital and liquidity standards, |
|
Actions we take within the capital and other financial markets, |
|
The impact of legal and regulatory-related contingencies, and |
|
The appropriateness of reserves needed for critical accounting estimates and related contingencies. |
For additional information, please see the Cautionary Statement Regarding Forward-Looking Information section in this Item 7 and Item 1A Risk Factors in this Report.
Table 1: Summary Financial Results
Year ended December 31 | 2014 | 2013 | ||||||
Net income (millions) |
$ | 4,207 | $ | 4,212 | ||||
Diluted earnings per common share from net income |
$ | 7.30 | $ | 7.36 | ||||
Return from net income on: |
||||||||
Average common shareholders equity |
9.91 | % | 10.85 | % | ||||
Average assets |
1.28 | % | 1.38 | % |
Income Statement Highlights
Our performance in 2014 included the following:
|
Net income for 2014 of $4.2 billion was stable compared with 2013, as a 4% decrease in revenue was mostly offset by a reduction in provision for credit losses and a 2% decline in noninterest expense. Lower revenue in the comparison was driven by a 7% decline in net interest income, as noninterest income was essentially unchanged. For additional detail, please see the Consolidated Income Statement Review section in this Item 7. |
|
Net interest income of $8.5 billion for 2014 decreased 7% compared with 2013, as lower yields on loans and investment securities, a decline in investment securities balances and a reduction in purchase accounting accretion were partially offset by commercial and commercial real estate loan growth. |
|
Net interest margin decreased to 3.08 % for 2014 compared to 3.57 % for 2013. The decline reflected the impact of lower loan and securities yields in the ongoing low rate environment, lower purchase accounting accretion and the impact of higher interest-earning deposits with the Federal Reserve Bank. |
The PNC Financial Services Group, Inc. Form 10-K 33 |
|
Noninterest income was $6.9 billion for 2014 and 2013, as strong overall client fee income was offset by lower residential mortgage revenue, declines in asset valuations and reduced sales of securities. |
|
The provision for credit losses decreased to $273 million for 2014 compared to $643 million for 2013 due to overall credit quality improvement. |
|
Noninterest expense was $9.5 billion for 2014, a decrease of 2% compared with 2013, primarily reflecting well managed expenses. |
Credit Quality Highlights
|
Asset quality trends in 2014 improved from 2013. For additional detail, see the Credit Risk Management portion of the Risk Management section of this Item 7. |
|
Nonperforming assets decreased $.6 billion, or 17%, to $2.9 billion at December 31, 2014 compared to December 31, 2013. Nonperforming assets to total assets were 0.83% at December 31, 2014, compared to 1.08% at December 31, 2013. |
|
Overall loan delinquencies of $1.9 billion at December 31, 2014 decreased $.5 billion, or 22%, compared with December 31, 2013. |
|
The allowance for loan and lease losses was 1.63% of total loans and 133% of nonperforming loans at December 31, 2014, compared with 1.84% and 117% at December 31, 2013, respectively. |
|
Net charge-offs of $.5 billion in 2014 declined 51% compared to net charge-offs of $1.1 billion for 2013. Net charge-offs were 0.27% of average loans in 2014 and 0.57% of average loans in 2013. These comparisons were impacted by alignment with interagency guidance in the first quarter of 2013 on practices for loans and lines of credit related to consumer lending. In the first quarter 2013, this alignment had the overall effect of (i) accelerating charge-offs, (ii) increasing nonperforming loans and (iii) in the case of loans accounted for under the fair value option, increasing nonaccrual loans. |
Balance Sheet Highlights
|
Total loans increased by $9.2 billion to $205 billion at December 31, 2014 compared to December 31, 2013. |
|
Total commercial lending increased by $11.2 billion, or 10%, as a result of growth in commercial and commercial real estate loans. |
|
Total consumer lending decreased $2.0 billion, or 3%, due to lower home equity, education and residential mortgage loans, partially offset by growth in automobile loans. |
|
Total deposits increased by $11.3 billion, or 5%, to $232 billion at December 31, 2014 compared with December 31, 2013, driven by growth in transaction deposits. |
|
PNC further increased its liquidity position as reflected in higher deposit balances maintained with the Federal Reserve Bank. |
|
The regulatory short-term Liquidity Coverage Ratio became effective for PNC as an advanced approaches bank beginning January 1, 2015, with a minimum phased-in requirement of 80% in 2015, calculated as of month end. The estimated pro forma ratio at December 31, 2014 exceeded 100% and 95% for PNC and PNC Bank, respectively. |
|
PNCs well-positioned balance sheet remained core funded with a loans to deposits ratio of 88% at December 31, 2014. |
|
The Transitional Basel III common equity Tier 1 capital ratio, calculated using the regulatory capital methodology applicable to PNC during 2014, was 10.9% at December 31, 2014. |
|
Pro forma fully phased-in Basel III common equity Tier 1 capital ratio increased to an estimated 10.0% at December 31, 2014 from 9.4% at December 31, 2013 based on the standardized approach rules. See the Capital discussion and Table 18 in the Consolidated Balance Sheet Review section of this Item 7 and the December 31, 2013 capital ratio tables in the Statistical Information (Unaudited) section in Item 8 of this Report for more detail. |
Our Consolidated Income Statement and Consolidated Balance Sheet Review sections of this Item 7 describe in greater detail the various items that impacted our results during 2014 and 2013 and balances at December 31, 2014 and December 31, 2013, respectively.
Capital and Liquidity Actions
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 and our primary bank regulators as part of the CCAR process.
In connection with the 2014 CCAR, PNC submitted its 2014 capital plan, as approved by its Board of Directors, to the Federal Reserve in January 2014. As we announced on March 26, 2014, the Federal Reserve accepted the capital plan and did not object to our proposed capital actions, which included a recommendation to increase the quarterly common stock dividend in the second quarter of 2014. The capital plan also included share repurchase programs of up to $1.5 billion for the four quarter period beginning in the second quarter of 2014 under PNCs existing common stock repurchase authorization. These programs include repurchases of up to $200 million to mitigate the financial impact of employee benefit plan transactions. In the last three quarters of 2014, in
34 The PNC Financial Services Group, Inc. Form 10-K |
accordance with the 2014 capital plan, we repurchased 12.9 million shares of common stock on the open market, with an average price of $85.95 per share and an aggregate repurchase price of $1.1 billion.
On April 3, 2014, consistent with our 2014 capital plan, our Board of Directors approved an increase to PNCs quarterly common stock dividend from 44 cents per common share to 48 cents per common share beginning with the May 5, 2014 dividend payment.
In connection with the 2015 CCAR, PNC submitted its 2015 capital plan, as approved by its Board of Directors, to the Federal Reserve in January 2015. PNC expects to receive the Federal Reserves response (either a non-objection or objection) to the capital plan submitted as part of the 2015 CCAR in March 2015. For additional information concerning the CCAR process and the factors the Federal Reserve takes into consideration in evaluating capital plans, see the Supervision and Regulation section of Item 1 of this Report.
See the Liquidity Risk Management portion of the Risk Management section of this Item 7 for more detail on our 2014 capital and liquidity actions.
Average Consolidated Balance Sheet Highlights
Table 2: Summarized Average Balance Sheet
Year ended December 31 | Change | |||||||||||||||
Dollars in millions | 2014 | 2013 | $ | % | ||||||||||||
Average assets |
||||||||||||||||
Interest-earning assets |
||||||||||||||||
Investment securities |
$ | 55,820 | $ | 57,319 | $ | (1,499 | ) | (3 | )% | |||||||
Loans |
199,648 | 189,973 | 9,675 | 5 | % | |||||||||||
Interest-earning deposits with banks |
19,204 | 4,910 | 14,294 | 291 | % | |||||||||||
Other |
8,633 | 8,443 | 190 | 2 | % | |||||||||||
Total interest-earning assets |
283,305 | 260,645 | 22,660 | 9 | % | |||||||||||
Noninterest-earning assets |
44,548 | 45,019 | (471 | ) | (1 | )% | ||||||||||
Total average assets |
$ | 327,853 | $ | 305,664 | $ | 22,189 | 7 | % | ||||||||
Average liabilities and equity |
||||||||||||||||
Interest-bearing liabilities |
||||||||||||||||
Interest-bearing deposits |
$ | 152,814 | $ | 146,000 | $ | 6,814 | 5 | % | ||||||||
Borrowed funds |
48,817 | 40,022 | 8,795 | 22 | % | |||||||||||
Total interest-bearing liabilities |
201,631 | 186,022 | 15,609 | 8 | % | |||||||||||
Noninterest-bearing deposits |
70,108 | 66,168 | 3,940 | 6 | % | |||||||||||
Other liabilities |
10,768 | 11,159 | (391 | ) | (4 | )% | ||||||||||
Equity |
45,346 | 42,315 | 3,031 | 7 | % | |||||||||||
Total average liabilities and equity |
$ | 327,853 | $ | 305,664 | $ | 22,189 | 7 | % |
Total assets were $345.1 billion at December 31, 2014 compared with $320.2 billion at December 31, 2013. The increase from year end 2013 was primarily due to higher interest-earning deposits with banks and loan growth, partially offset by lower investment securities.
Various seasonal and other factors impact our period-end balances, whereas average balances are generally more indicative of underlying business trends apart from the impact of acquisitions and divestitures. The Consolidated Balance Sheet Review section of this Item 7 provides information on changes in selected Consolidated Balance Sheet categories at December 31, 2014 compared with December 31, 2013.
Average investment securities decreased during 2014 compared with 2013, primarily due to a net decline in average residential and commercial mortgage-backed securities from principal payments, partially offset by an increase in average U.S. Treasury and government agencies securities, which was largely driven by purchases to enhance our liquidity position.
Total investment securities comprised 20% of average interest-earning assets in 2014 and 22% in 2013.
Average loans grew in 2014, driven by increases in average commercial loans of $6.4 billion and average commercial real estate loans of $3.2 billion. The overall increase in loans reflected organic loan growth, primarily in our Corporate & Institutional Banking segment.
Loans represented 70% of average interest-earning assets for 2014 and 73% of average interest-earning assets for 2013.
The PNC Financial Services Group, Inc. Form 10-K 35 |
Average interest-earning deposits with banks, which are primarily maintained with the Federal Reserve Bank, increased significantly in the comparison to the prior year period as we continued to enhance our liquidity position.
Average noninterest-earning assets decreased in 2014 compared with 2013, primarily reflecting lower unsettled securities sales, partially offset by higher investment securities valuation adjustments, both of which are included in noninterest-earning assets for average balance sheet purposes.
Average total deposits increased $10.8 billion in 2014 compared with the prior year, driven by an increase of $12.1 billion in average transaction deposits, which grew to $189 billion in 2014. Higher average money market deposits, average noninterest-bearing deposits, and average interest-bearing demand deposits drove the increase in both commercial and consumer average transaction deposits. These increases were partially offset by a decrease of $2.6 billion in average retail certificates of deposit attributable to runoff of
maturing accounts. Total deposits at December 31, 2014 were $232.2 billion compared with $220.9 billion at December 31, 2013 and are further discussed within the Consolidated Balance Sheet Review section of this Item 7.
Average total deposits represented 68% of average total assets for 2014 and 69% for 2013.
Average borrowed funds increased in 2014 compared with 2013 primarily due to increases in average Federal Home Loan Bank (FHLB) borrowings, average bank notes and senior debt, and average subordinated debt, in part to enhance our liquidity position. These increases were partially offset by a decline in average commercial paper. Total borrowed funds at December 31, 2014 were $56.8 billion compared with $46.1 billion at December 31, 2013 and are further discussed within the Consolidated Balance Sheet Review section of this Item 7. The Liquidity Risk Management portion of the Risk Management section of this Item 7 includes additional information regarding our borrowed funds.
Business Segment Highlights
Total business segment earnings were $3.9 billion in 2014 and $4.0 billion in 2013. The Business Segments Review section of this Item 7 includes further analysis of our business segment results during 2014 and 2013, including presentation differences from Note 24 Segment Reporting in our Notes To Consolidated Financial Statements in Item 8 of this Report. Note 24 Segment Reporting presents results of businesses for 2014, 2013 and 2012.
We provide a reconciliation of total business segment earnings to PNC total consolidated net income as reported on a GAAP basis in Note 24 Segment Reporting in our Notes To Consolidated Financial Statements in Item 8 of this Report.
Table 3: Results Of Businesses Summary
(Unaudited)
Year ended December 31 | Net Income (a) | Revenue | Average Assets (a) (b) | |||||||||||||||||||||
In millions | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||
Retail Banking |
$ | 728 | $ | 550 | $ | 6,049 | $ | 6,100 | $ | 75,046 | $ | 74,971 | ||||||||||||
Corporate & Institutional Banking |
2,106 | 2,264 | 5,476 | 5,506 | 122,927 | 112,970 | ||||||||||||||||||
Asset Management Group |
181 | 162 | 1,107 | 1,040 | 7,745 | 7,366 | ||||||||||||||||||
Residential Mortgage Banking |
35 | 148 | 800 | 1,100 | 7,857 | 9,896 | ||||||||||||||||||
BlackRock |
530 | 469 | 703 | 621 | 6,640 | 6,272 | ||||||||||||||||||
Non-Strategic Assets Portfolio |
367 | 379 | 587 | 742 | 8,338 | 9,987 | ||||||||||||||||||
Total business segments |
3,947 | 3,972 | 14,722 | 15,109 | 228,553 | 221,462 | ||||||||||||||||||
Other (c) (d) (e) |
260 | 240 | 653 | 903 | 99,300 | 84,202 | ||||||||||||||||||
Total |
$ | 4,207 | $ | 4,212 | $ | 15,375 | $ | 16,012 | $ | 327,853 | $ | 305,664 |
(a) | Amounts for 2013 period have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
(b) | Period-end balances for BlackRock. |
(c) | Other average assets include investment securities associated with asset and liability management activities. |
(d) | Other includes differences between the total business segment financial results and our total consolidated net income. Additional detail is included in Note 24 Segment Reporting in the Notes To Consolidated Financial Statements in Item 8 of this Report. |
(e) | Net income for Other in 2014 increased slightly compared to 2013 as lower noninterest expense due to a reduction in benefits costs was mostly offset by lower interest income from investment securities. |
36 The PNC Financial Services Group, Inc. Form 10-K |
C ONSOLIDATED I NCOME S TATEMENT R EVIEW
Our Consolidated Income Statement is presented in Item 8 of this Report.
Net income for 2014 of $4.2 billion was stable compared with 2013, as a 4% decrease in revenue was mostly offset by a reduction in provision for credit losses and a 2% decline in noninterest expense. Lower revenue in the comparison was driven by a 7% decline in net interest income, as noninterest income was essentially unchanged.
Net Interest Income
Table 4: Net Interest Income and Net Interest Margin
Year ended
December 31 |
||||||||
Dollars in millions | 2014 | 2013 | ||||||
Net interest income |
$ | 8,525 | $ | 9,147 | ||||
Net interest margin |
3.08 | % | 3.57 | % |
Changes in net interest income and margin result from the interaction of the volume and composition of interest-earning assets and related yields, interest-bearing liabilities and related rates paid, and noninterest-bearing sources of funding. See the Statistical Information (Unaudited) Average Consolidated Balance Sheet And Net Interest Analysis and Analysis Of Year-To-Year Changes In Net Interest Income in Item 8 of this Report and the discussion of purchase accounting accretion on purchased impaired loans in the Consolidated Balance Sheet review in this Item 7 for additional information.
Net interest income decreased by $622 million, or 7%, in 2014 compared with 2013 reflecting the ongoing low rate environment. Lower yields on loans and investment securities, a decline in investment securities balances and a reduction in purchase accounting accretion were partially offset by commercial and commercial real estate loan growth. Lower net interest income also included the impact from the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to noninterest income.
Net interest margin decreased in the comparison to the prior year, driven by a 50 basis point decline in the yield on total interest-earning assets, which included the impact of lower purchase accounting accretion, continued spread compression, and repricing of new and existing loans and securities in the ongoing low rate environment. The decline also included the impact of the second quarter 2014 correction to reclassify certain commercial facility fees and the impact of higher interest-earning deposits maintained with the Federal Reserve Bank.
We expect net interest income for the first quarter of 2015 to remain stable with fourth quarter 2014. However, for full year 2015, we expect purchase accounting accretion to be down approximately $225 million compared to 2014.
Noninterest Income
Year ended December 31 | Change | |||||||||||||||
Dollars in millions | 2014 | 2013 | $ | % | ||||||||||||
Noninterest income |
||||||||||||||||
Asset management |
$ | 1,513 | $ | 1,342 | $ | 171 | 13 | % | ||||||||
Consumer services |
1,254 | 1,253 | 1 | | ||||||||||||
Corporate services |
1,415 | 1,210 | 205 | 17 | % | |||||||||||
Residential mortgage |
618 | 871 | (253 | ) | (29 | )% | ||||||||||
Service charges on deposits |
662 | 597 | 65 | 11 | % | |||||||||||
Net gains on sales of securities |
4 | 99 | (95 | ) | (96 | )% | ||||||||||
Net other-than-temporary impairments |
(11 | ) | (16 | ) | 5 | (31 | )% | |||||||||
Other |
1,395 | 1,509 | (114 | ) | (8 | )% | ||||||||||
Total noninterest income |
$ | 6,850 | $ | 6,865 | $ | (15 | ) | |
Noninterest income remained relatively stable in 2014 compared to the prior year, as strong overall client fee income was offset by lower residential mortgage revenue, declines in asset valuations and reduced sales of securities. Noninterest income as a percentage of total revenue was 45% for 2014, up from 43% for 2013.
Asset management revenue increased in 2014 compared to 2013, driven by increased earnings from our BlackRock investment, as well as stronger average equity markets and positive net flows, after adjustments for cyclical client activities. Discretionary client assets under management in the Asset Management Group increased to $135 billion at December 31, 2014 compared with $127 billion at December 31, 2013.
Consumer service fees were relatively unchanged in 2014 compared to the prior year, as higher consumer service fees in Retail Banking were offset by lower revenue from previously discontinued insurance programs, as well as the termination of our debit card rewards program in the fourth quarter of 2013, which resulted in a prior year benefit and consequently diluted the year-over-year growth comparison.
Corporate service fees increased to $1.4 billion in 2014 compared to $1.2 billion in 2013, driven by higher merger and acquisition advisory fees from a record year for our mergers and acquisition advisory firm, Harris Williams, and the impact of the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to noninterest income. These increases were partially offset by lower net commercial mortgage servicing rights valuation gains, which were $38 million in 2014 compared to $68 million in 2013.
The PNC Financial Services Group, Inc. Form 10-K 37 |
Residential mortgage revenue decreased to $618 million in 2014 from $871 million in 2013, primarily due to lower loan sales revenue from a reduction in origination volume and significantly lower net hedging gains on residential mortgage servicing rights, partially offset by higher loan servicing fee revenue and the impact of second quarter 2014 gains on sales of previously underperforming portfolio loans.
Lower residential mortgage revenue in the comparison also reflected the impact of the 2013 net benefit from release of reserves for residential mortgage repurchase obligations of $53 million, as the impact to 2014 was not significant. This net release of reserves in 2013 was largely the result of agreements with two government-sponsored enterprises (GSEs), FHLMC and FNMA, for loans sold into agency securitizations. See the Recourse And Repurchase Obligations section of this Item 7 for further detail.
Service charges on deposits increased in 2014, benefitting from changes in product offerings and higher customer-related activity.
Other noninterest income decreased to $1.4 billion in 2014 compared to $1.5 billion in 2013. The decline was driven by a reduction in asset valuations, lower revenue associated with private equity investments, decreased revenue due to the lower market value of investments related to deferred compensation obligations, and lower revenue associated with customer-related derivative activities, including credit valuations. These decreases were partially offset by higher gains on sales of other assets.
The decline in revenue from credit valuations for customer-related derivatives activities was driven primarily by market interest rate changes impacting the valuations. The 2013 impact of these customer-related derivatives activities was $56 million, while the 2014 impact was not significant.
Higher gains on sales of other assets in the comparison included $94 million on the fourth quarter 2014 sale of PNCs Washington, D.C. regional headquarters building, as well as increased gains on sales of Visa Class B Common shares, which were $209 million on sales of 3.5 million shares in 2014 compared to $168 million on the sale of 4 million shares in 2013. As of December 31, 2014, we held approximately 7 million Visa Class B common shares with a fair value of approximately $742 million and a recorded investment of approximately $77 million.
Other noninterest income typically fluctuates from period to period depending on the nature and magnitude of transactions completed. Further details regarding our customer-related trading activities are included in the Market Risk Management Customer-Related Trading Risk portion of the Risk Management section of this Item 7. Further details regarding private and other equity investments are included in the Market Risk Management Equity And Other Investment Risk section, and further details regarding gains or losses related to our equity investment in BlackRock are included in the Business Segments Review section of this Item 7.
In the first quarter of 2015, we expect fee income to be down mid-single digits, on a percentage basis, compared with the fourth quarter of 2014 due to seasonality.
For full year 2015, we expect revenue to continue to be under pressure compared with 2014, as we expect the combined revenue growth from our businesses to partially offset the decline in purchase accounting accretion.
Provision For Credit Losses
The provision for credit losses totaled $273 million in 2014 compared with $643 million in 2013. The decrease in provision reflected improved overall credit quality, including lower consumer loan delinquencies. A contributing economic factor was the increasing value of residential real estate, which improved expected cash flows from our purchased impaired loans.
We currently expect our provision for credit losses in the first quarter of 2015 to be between $50 million and $100 million.
The Credit Risk Management portion of the Risk Management section of this Item 7 includes additional information regarding factors impacting the provision for credit losses.
Noninterest Expense
Noninterest expense was $9.5 billion for 2014, a decrease of $.2 billion, or 2%, from $9.7 billion for 2013, reflecting overall disciplined expense management. The decline was driven by a decrease in personnel expense related to lower headcount and benefits costs, partially offset by investments in technology and infrastructure. Additionally, noncash charges of $57 million in 2013 for unamortized discounts related to redemption of trust preferred securities contributed to the decline. See Note 14 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in Item 8 of our 2013 Form 10-K for additional detail on the 2013 redemption of trust preferred securities.
During 2014, we completed actions and exceeded our 2014 continuous improvement goal of $500 million in cost savings. These cost savings are funding investments in our infrastructure, including those related to cybersecurity and our datacenters, and investments in our diversified businesses, including our Retail Banking transformation, consistent with our strategic priorities.
In 2015, we expect to continue this approach and have a goal of an additional $400 million in cost savings through our Continuous Improvement Program, which again we expect will help to fund our business and technology investments.
For the first quarter of 2015, we expect noninterest expense to be down by high-single digits on a percentage basis compared with the fourth quarter of 2014.
38 The PNC Financial Services Group, Inc. Form 10-K |
Effective Income Tax Rate
The effective income tax rate was 25.1% for 2014 compared with 25.9% for 2013. The effective tax rate is generally lower than the statutory rate primarily due to tax credits PNC receives from our investments in low income housing and new markets investments, as well as earnings in other tax exempt investments.
The effective tax rates for both 2014 and 2013 reflect the adoption of Accounting Standards Update (ASU) 2014-01, which relates to amortization of investments in low income housing tax credits. See the Recently Adopted Accounting Standards portion of Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Item 8 of this Report for further detail. The retrospective application of this guidance resulted in increased income tax expenses in both periods due to the reclassification of noninterest expense associated with these investments.
C ONSOLIDATED B ALANCE S HEET R EVIEW
Table 6: Summarized Balance Sheet Data
Dollars in millions |
December 31 2014 |
December 31 2013 |
Change | |||||||||||||
$ | % | |||||||||||||||
Assets |
||||||||||||||||
Interest-earning deposits with banks |
$ | 31,779 | $ | 12,135 | $ | 19,644 | 162 | % | ||||||||
Loans held for sale |
2,262 | 2,255 | 7 | | % | |||||||||||
Investment securities |
55,823 | 60,294 | (4,471 | ) | (7 | )% | ||||||||||
Loans |
204,817 | 195,613 | 9,204 | 5 | % | |||||||||||
Allowance for loan and lease losses |
(3,331 | ) | (3,609 | ) | 278 | (8 | )% | |||||||||
Goodwill |
9,103 | 9,074 | 29 | | % | |||||||||||
Other intangible assets |
1,844 | 2,216 | (372 | ) | (17 | )% | ||||||||||
Other, net |
42,775 | 42,214 | 561 | 1 | % | |||||||||||
Total assets |
$ | 345,072 | $ | 320,192 | $ | 24,880 | 8 | % | ||||||||
Liabilities |
||||||||||||||||
Deposits |
$ | 232,234 | $ | 220,931 | $ | 11,303 | 5 | % | ||||||||
Borrowed funds |
56,768 | 46,105 | 10,663 | 23 | % | |||||||||||
Other |
9,996 | 9,119 | 877 | 10 | % | |||||||||||
Total liabilities |
298,998 | 276,155 | 22,843 | 8 | % | |||||||||||
Equity |
||||||||||||||||
Total shareholders equity |
44,551 | 42,334 | 2,217 | 5 | % | |||||||||||
Noncontrolling interests |
1,523 | 1,703 | (180 | ) | (11 | )% | ||||||||||
Total equity |
46,074 | 44,037 | 2,037 | 5 | % | |||||||||||
Total liabilities and equity |
$ | 345,072 | $ | 320,192 | $ | 24,880 | 8 | % |
The summarized balance sheet data above is based upon our Consolidated Balance Sheet in Item 8 of this Report.
The increase in total assets was primarily due to higher interest-earning deposits with banks and loan growth, partially offset by lower investment securities. The increase in interest-earning deposits with banks was driven by higher deposit balances maintained with the Federal Reserve Bank due to regulatory short-term liquidity standards that became effective for PNC as an advanced approaches bank beginning January 1, 2015. Interest-earning deposits with banks included balances held with the Federal Reserve Bank of Cleveland of $31.4 billion and $11.7 billion at December 31, 2014 and December 31, 2013, respectively. The increase in liabilities was largely due to growth in deposits and higher Federal Home Loan Bank borrowings and issuances of bank notes and senior debt and subordinated debt, partially offset by a decline in federal funds purchased and repurchase agreements. An analysis of changes in selected balance sheet categories follows.
The PNC Financial Services Group, Inc. Form 10-K 39 |
Loans
Outstanding loan balances of $204.8 billion at December 31, 2014 and $195.6 billion at December 31, 2013 were net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.7 billion at December 31, 2014 and $2.1 billion at December 31, 2013, respectively. The balances include purchased impaired loans but do not include future accretable net interest ( i.e. , the difference between the undiscounted expected cash flows and the carrying value of the loan) on those loans.
December 31 | December 31 | Change | ||||||||||||||
Dollars in millions | 2014 | 2013 | $ | % | ||||||||||||
Commercial lending |
||||||||||||||||
Commercial |
||||||||||||||||
Retail/wholesale trade |
$ | 16,972 | $ | 15,530 | $ | 1,442 | 9 | % | ||||||||
Manufacturing |
18,744 | 16,208 | 2,536 | 16 | % | |||||||||||
Service providers |
14,103 | 13,052 | 1,051 | 8 | % | |||||||||||
Real estate related (a) |
10,812 | 10,729 | 83 | 1 | % | |||||||||||
Financial services |
6,178 | 4,927 | 1,251 | 25 | % | |||||||||||
Health care |
9,017 | 8,690 | 327 | 4 | % | |||||||||||
Other industries |
21,594 | 19,242 | 2,352 | 12 | % | |||||||||||
Total commercial |
97,420 | 88,378 | 9,042 | 10 | % | |||||||||||
Commercial real estate |
||||||||||||||||
Real estate projects (b) |
14,577 | 13,613 | 964 | 7 | % | |||||||||||
Commercial mortgage |
8,685 | 7,578 | 1,107 | 15 | % | |||||||||||
Total commercial real estate |
23,262 | 21,191 | 2,071 | 10 | % | |||||||||||
Equipment lease financing |
7,686 | 7,576 | 110 | 1 | % | |||||||||||
Total commercial lending (c) |
128,368 | 117,145 | 11,223 | 10 | % | |||||||||||
Consumer lending |
||||||||||||||||
Home equity |
||||||||||||||||
Lines of credit |
20,361 | 21,696 | (1,335 | ) | (6 | )% | ||||||||||
Installment |
14,316 | 14,751 | (435 | ) | (3 | )% | ||||||||||
Total home equity |
34,677 | 36,447 | (1,770 | ) | (5 | )% | ||||||||||
Residential real estate |
||||||||||||||||
Residential mortgage |
13,885 | 14,418 | (533 | ) | (4 | )% | ||||||||||
Residential construction |
522 | 647 | (125 | ) | (19 | )% | ||||||||||
Total residential real estate |
14,407 | 15,065 | (658 | ) | (4 | )% | ||||||||||
Credit card |
4,612 | 4,425 | 187 | 4 | % | |||||||||||
Other consumer |
||||||||||||||||
Education |
6,626 | 7,534 | (908 | ) | (12 | )% | ||||||||||
Automobile |
11,616 | 10,827 | 789 | 7 | % | |||||||||||
Other |
4,511 | 4,170 | 341 | 8 | % | |||||||||||
Total consumer lending |
76,449 | 78,468 | (2,019 | ) | (3 | )% | ||||||||||
Total loans |
$ | 204,817 | $ | 195,613 | $ | 9,204 | 5 | % |
(a) | Includes loans to customers in the real estate and construction industries. |
(b) | Includes both construction loans and intermediate financing for projects. |
(c) | Construction loans with interest reserves and A/B Note restructurings are not significant to PNC. |
40 The PNC Financial Services Group, Inc. Form 10-K |
The increase in loans was driven by the increase in commercial lending as a result of growth in commercial and commercial real estate loans, primarily from new customers and organic growth. The decline in consumer lending resulted from lower home equity, education and residential mortgage loans, partially offset by growth in automobile loans.
Loans represented 59% of total assets at December 31, 2014 and 61% at December 31, 2013. Commercial lending represented 63% of the loan portfolio at December 31, 2014 and 60% at December 31, 2013. Consumer lending represented 37% of the loan portfolio at December 31, 2014 and 40% at December 31, 2013.
Commercial real estate loans represented 11% of total loans at both December 31, 2014 and December 31, 2013 and represented 7% of total assets at both December 31, 2014 and December 31, 2013. See the Credit Risk Management portion of the Risk Management section of this Item 7 for additional information regarding our loan portfolio.
Total loans above include purchased impaired loans of $4.9 billion, or 2% of total loans, at December 31, 2014, and $6.1 billion, or 3% of total loans, at December 31, 2013.
Our loan portfolio continued to be diversified among numerous industries, types of businesses and consumers across our principal geographic markets.
Allowance for Loan and Lease Losses (ALLL)
Our total ALLL of $3.3 billion at December 31, 2014 consisted of $1.6 billion and $1.7 billion established for the commercial lending and consumer lending categories, respectively. The ALLL included what we believe to be appropriate loss coverage on all loans, including higher risk loans, in the commercial and consumer portfolios. We do not consider government insured or guaranteed loans to be higher risk as defaults have historically been materially mitigated by payments of insurance or guarantee amounts for approved claims. Additional information regarding our higher risk loans is included in the Credit Risk Management portion of the Risk Management section of this Item 7 and Note 1 Accounting Policies, Note 3 Asset Quality and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in our Notes To Consolidated Financial Statements included in Item 8 of this Report.
Purchase Accounting Accretion and Valuation of Purchased Impaired Loans
Information related to purchase accounting accretion and accretable yield for 2014 and 2013 follows. Additional information is provided in Note 4 Purchased Loans in the Notes To Consolidated Financial Statements included in Item 8 of this Report.
Table 8: Accretion Purchased Impaired Loans
In millions | 2014 | 2013 | ||||||
Accretion on purchased impaired loans |
||||||||
Scheduled accretion |
$ | 460 | $ | 580 | ||||
Reversal of contractual interest on impaired loans |
(253 | ) | (314 | ) | ||||
Scheduled accretion net of contractual interest |
207 | 266 | ||||||
Excess cash recoveries (a) |
127 | 115 | ||||||
Total |
$ | 334 | $ | 381 |
(a) | Relates to excess cash recoveries for purchased impaired commercial loans. |
Table 9: Purchased Impaired Loans Accretable Yield
In millions | 2014 | 2013 | ||||||
January 1 |
$ | 2,055 | $ | 2,166 | ||||
Scheduled accretion |
(460 | ) | (580 | ) | ||||
Excess cash recoveries |
(127 | ) | (115 | ) | ||||
Net reclassification to accretable from non-accretable and other activity (a) |
90 | 584 | ||||||
December 31 (b) |
$ | 1,558 | $ | 2,055 |
(a) | Approximately 93% and 37% of the net reclassifications for the years ended December 31, 2014 and 2013, respectively, were driven by the commercial portfolio and were due to improvements of cash expected to be collected on acquired loans in future periods, with the remainder predominantly due to future cash flow changes in the consumer portfolio. |
(b) | As of December 31, 2014, we estimate that the reversal of contractual interest on purchased impaired loans will total approximately $.9 billion in future periods. This will partially offset the total net accretable interest in future interest income of $1.6 billion on purchased impaired loans. |
The PNC Financial Services Group, Inc. Form 10-K 41 |
Information related to the valuation of purchased impaired loans at December 31, 2014 and December 31, 2013 follows.
Table 10: Valuation of Purchased Impaired Loans
December 31, 2014 | December 31, 2013 | |||||||||||||||
Dollars in millions | Balance | Net Investment | Balance | Net Investment | ||||||||||||
Commercial and commercial real estate loans: |
||||||||||||||||
Outstanding balance (a) |
$ | 466 | $ | 937 | ||||||||||||
Recorded investment |
$ | 310 | $ | 673 | ||||||||||||
Allowance for loan losses |
(79 | ) | (133 | ) | ||||||||||||
Net investment/Carrying value |
$ | 231 | 50 | % | $ | 540 | 58 | % | ||||||||
Consumer and residential mortgage loans: |
||||||||||||||||
Outstanding balance (a) |
$ | 4,541 | $ | 5,548 | ||||||||||||
Recorded investment |
$ | 4,548 | $ | 5,433 | ||||||||||||
Allowance for loan losses |
(793 | ) | (871 | ) | ||||||||||||
Net investment/Carrying value |
$ | 3,755 | 83 | % | $ | 4,562 | 82 | % | ||||||||
Total purchased impaired loans: |
||||||||||||||||
Outstanding balance (a) |
$ | 5,007 | $ | 6,485 | ||||||||||||
Recorded investment |
$ | 4,858 | $ | 6,106 | ||||||||||||
Allowance for loan losses |
(872 | ) | (1,004 | ) | ||||||||||||
Net investment/Carrying value |
$ | 3,986 | 80 | % | $ | 5,102 | 79 | % |
(a) | Outstanding balance represents the balance on the loan servicing system for active loans. It is possible for the outstanding balance to be lower than the recorded investment for certain loans due to the use of pool accounting. See Note 4 Purchased Loans for more information on purchased impaired loans. |
At December 31, 2014, our largest individual purchased impaired loan had a recorded investment of $9 million. We currently expect to collect total cash flows of $5.6 billion on purchased impaired loans, representing the $4.0 billion net investment at December 31, 2014 and the accretable net interest of $1.6 billion shown in Table 9.
Weighted Average Life of the Purchased Impaired Portfolios
The table below provides the weighted average life (WAL) for each of the purchased impaired portfolios as of December 31, 2014.
Table 11: Weighted Average Life of the Purchased Impaired Portfolios
As of December 31, 2014 Dollars in millions |
Recorded Investment | WAL (a) | ||||||
Commercial |
$ | 74 | 1.8 years | |||||
Commercial real estate |
236 | 1.3 years | ||||||
Consumer (b) |
1,989 | 3.9 years | ||||||
Residential real estate |
2,559 | 4.8 years | ||||||
Total |
$ | 4,858 | 4.1 years |
(a) | Weighted average life represents the average number of years for which each dollar of unpaid principal remains outstanding. |
(b) | Portfolio primarily consists of nonrevolving home equity products. |
Purchased Impaired Loans Accretable Difference Sensitivity Analysis
The following table provides a sensitivity analysis on the Total Purchased Impaired Loans portfolio. The analysis reflects hypothetical changes in key drivers for expected cash flows over the life of the loans under declining and improving conditions at a point in time. Any unusual significant economic events or changes, as well as other variables not considered below ( e.g ., natural or widespread disasters), could result in impacts outside of the ranges represented below. Additionally, commercial and commercial real estate loan settlements or sales proceeds can vary widely from appraised values due to a number of factors including, but not limited to, special use considerations, liquidity premiums and improvements/deterioration in other income sources.
Table 12: Accretable Difference Sensitivity Total Purchased Impaired Loans
In billions |
December 31,
2014 |
Declining
Scenario (a) |
Improving
Scenario (b) |
|||||||||
Expected cash flows |
$ | 5.6 | $ | (.2 | ) | $ | .2 | |||||
Accretable difference |
1.6 | | | |||||||||
Allowance for loan and lease losses |
(.9 | ) | (.1 | ) | .2 |
(a) | Declining Scenario Reflects hypothetical changes that would decrease future cash flow expectations. For consumer loans, we assume home price forecast decreases by ten percent and unemployment rate forecast increases by two percentage points; for commercial loans, we assume that collateral values decrease by ten percent. |
(b) | Improving Scenario Reflects hypothetical changes that would increase future cash flow expectations. For consumer loans, we assume home price forecast increases by ten percent, unemployment rate forecast decreases by two percentage points and interest rate forecast increases by two percentage points; for commercial loans, we assume that collateral values increase by ten percent. |
42 The PNC Financial Services Group, Inc. Form 10-K |
The present value impact of declining cash flows is primarily reflected as an immediate impairment charge to the provision for credit losses, resulting in an increase to the allowance for loan and lease losses. The present value impact of increased cash flows is first recognized as a reversal of the allowance with any additional cash flow increases reflected as an increase in accretable yield over the life of the loan.
Net unfunded credit commitments are comprised of the following:
Table 13: Net Unfunded Loan Commitments
In millions |
December 31
2014 |
December 31
2013 |
||||||
Total commercial lending (a) |
$ | 99,837 | $ | 90,104 | ||||
Home equity lines of credit |
17,839 | 18,754 | ||||||
Credit card |
17,833 | 16,746 | ||||||
Other |
4,178 | 4,266 | ||||||
Total |
$ | 139,687 | $ | 129,870 |
(a) | Less than 5% of net unfunded loan commitments relate to commercial real estate at each date. |
Commitments to extend credit represent arrangements to lend funds or provide liquidity subject to specified contractual conditions.
Standby bond purchase agreements totaled $1.1 billion at December 31, 2014 and $1.3 billion at December 31, 2013 and are included in the preceding table, primarily within the Total commercial lending category.
In addition to the credit commitments set forth in the table above, our net outstanding standby letters of credit totaled $10.0 billion at December 31, 2014 and $10.5 billion at December 31, 2013. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.
Information regarding our credit extension commitments and our allowance for unfunded loan commitments and letters of credit is included in Note 1 Accounting Policies, Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit and Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Item 8 of this Report.
The following table presents the distribution of our investment securities portfolio. We have included credit ratings information because the information is an indicator of the degree of credit risk to which we are exposed. Changes in credit ratings classifications could indicate increased or decreased credit risk and could be accompanied by a reduction or increase in the fair value of our investment securities portfolio. For those securities, where during our quarterly security-level impairment assessments we determined losses represented other-than-temporary impairment (OTTI), we have recorded cumulative credit losses of $1.2 billion in earnings and accordingly have reduced the amortized cost of our securities. See Table 78 in Note 6 Investment Securities in the Notes To Consolidated Financial Statements in Item 8 of this Report for more detail. The majority of these cumulative impairment charges related to non-agency residential mortgage-backed and asset-backed securities rated BB or lower.
Table 14: Investment Securities
December 31, 2014 | December 31, 2013 |
Ratings (a) As of December 31, 2014 |
||||||||||||||||||||||||||||||||||
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 |
$ | 5,485 | $ | 5,714 | $ | 4,229 | $ | 4,361 | 100 | % | ||||||||||||||||||||||||||
Agency residential mortgage-backed (b) |
23,382 | 23,935 | 27,370 | 27,535 | 100 | |||||||||||||||||||||||||||||||
Non-agency residential mortgage-backed |
4,993 | 5,225 | 5,750 | 5,894 | 10 | 1 | % | 3 | % | 81 | % | 5 | % | |||||||||||||||||||||||
Agency commercial mortgage-backed (b) |
3,378 | 3,440 | 2,996 | 3,063 | 100 | |||||||||||||||||||||||||||||||
Non-agency commercial mortgage-backed (c) |
5,095 | 5,191 | 5,624 | 5,744 | 77 | 7 | 7 | 4 | 5 | |||||||||||||||||||||||||||
Asset-backed (d) |
5,900 | 5,940 | 6,763 | 6,773 | 90 | 2 | 7 | 1 | ||||||||||||||||||||||||||||
State and municipal |
3,995 | 4,191 | 3,664 | 3,678 | 86 | 7 | 7 | |||||||||||||||||||||||||||||
Other debt |
2,099 | 2,142 | 2,845 | 2,891 | 65 | 23 | 11 | 1 | ||||||||||||||||||||||||||||
Corporate stock and other |
442 | 441 | 434 | 433 | 100 | |||||||||||||||||||||||||||||||
Total investment securities (e) |
$ | 54,769 | $ | 56,219 | $ | 59,675 | $ | 60,372 | 85 | % | 2 | % | 1 | % | 10 | % | 2 | % |
(a) | Ratings percentages allocated based on amortized cost. |
(b) | These line items were corrected for the prior period due to a misclassification of Government National Mortgage Association (GNMA) securities collateralized by project loans. $1.1 billion was previously reported as residential mortgage-backed agency securities and was reclassified to commercial mortgage-backed agency securities. |
(c) | Collateralized primarily by retail properties, office buildings, lodging properties and multi-family housing. |
(d) | Collateralized primarily by government guaranteed student loans and other consumer credit products and corporate debt. |
(e) | Includes available for sale and held to maturity securities. |
The PNC Financial Services Group, Inc. Form 10-K 43 |
Investment securities represented 16% of total assets at December 31, 2014 and 19% at December 31, 2013.
We evaluate our investment securities portfolio in light of changing market conditions and other factors and, where appropriate, take steps to improve our overall positioning. We consider the portfolio to be well-diversified and of high quality. At December 31, 2014, 85% of the securities in the portfolio were rated AAA/AA, with U.S. Treasury and government agencies, agency residential mortgage-backed and agency commercial mortgage-backed securities collectively representing 59% of the portfolio.
The investment securities portfolio includes both available for sale and held to maturity securities. Securities classified as available for sale are carried at fair value with net unrealized gains and losses, representing the difference between amortized cost and fair value, included in Shareholders equity as Accumulated other comprehensive income or loss, net of tax, on our Consolidated Balance Sheet. Securities classified as held to maturity are carried at amortized cost. As of December 31, 2014, the amortized cost and fair value of available for sale securities totaled $43.2 billion and $44.2 billion, respectively, compared to an amortized cost and fair value as of December 31, 2013 of $48.0 billion and $48.6 billion, respectively. The amortized cost and fair value of held to maturity securities were $11.6 billion and $12.0 billion, respectively, at December 31, 2014, compared to $11.7 billion and $11.8 billion, respectively, at December 31, 2013.
The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally decreases when credit spreads widen and vice versa. Net unrealized gains in the total investment securities portfolio increased to $1.5 billion at December 31, 2014 from $.7 billion at December 31, 2013 primarily due to the impact of market interest rates and credit spreads. The comparable amounts for the securities available for sale portfolio were $1.1 billion and $.6 billion, respectively.
Unrealized gains and losses on available for sale debt securities do not impact liquidity. However these gains and losses do affect risk-based capital under the regulatory capital rules that became effective beginning in 2014 for PNC. Also, a change in the securities credit ratings could impact the liquidity of the securities and may be indicative of a change in credit quality, which could affect our risk-weighted assets and, therefore, our regulatory capital ratios under the regulatory capital rules in effect starting with 2014. In addition, the amount representing the credit-related portion of OTTI on available for sale securities would reduce our earnings and regulatory capital ratios.
During the second quarter of 2014, we transferred securities with a fair value of $1.4 billion from available for sale to held to maturity. We changed our intent and committed to hold these high-quality securities to maturity in order to reduce the impact of price volatility on Accumulated other comprehensive income and certain capital measures, after taking into consideration market conditions and regulatory capital requirements under Basel III capital standards. See additional discussion of this transfer in Note 6 Investment Securities in our Notes To Consolidated Financial Statements included in Item 8 of this Report.
The duration of investment securities was 2.2 years at December 31, 2014. We estimate that, at December 31, 2014, the effective duration of investment securities was 2.2 years for an immediate 50 basis points parallel increase in interest rates and 2.1 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2013 for the effective duration of investment securities were 3.0 years and 2.8 years, respectively.
At least quarterly, we conduct a comprehensive security-level impairment assessment on all securities. For securities in an unrealized loss position, we determine whether the loss represents OTTI. For debt securities that we neither intend to sell nor believe we will be required to sell prior to expected recovery, we recognize the credit portion of OTTI charges in current earnings and include the noncredit portion of OTTI in Net unrealized gains (losses) on OTTI securities on our Consolidated Statement of Comprehensive Income and net of tax in Accumulated other comprehensive income (loss) on our Consolidated Balance Sheet. In 2014 and 2013 we recognized OTTI credit losses of $11 million and $16 million, respectively. The credit losses related to residential mortgage-backed and asset-backed securities collateralized by non-agency residential loans.
If economic conditions, including housing values, were to deteriorate from current levels, and if market volatility and illiquidity were to deteriorate from current levels, or if market interest rates were to increase or credit spreads were to widen appreciably, the valuation of our investment securities portfolio would likely be adversely affected and we could incur additional OTTI credit losses that would impact our Consolidated Income Statement.
Additional information regarding our investment securities is included in Note 6 Investment Securities and Note 7 Fair Value in the Notes To Consolidated Financial Statements included in Item 8 of this Report.
44 The PNC Financial Services Group, Inc. Form 10-K |
Loans Held for Sale
In millions |
December 31
2014 |
December 31
2013 |
||||||
Commercial mortgages at fair value |
$ | 893 | $ | 586 | ||||
Commercial mortgages at lower of cost or fair value |
29 | 281 | ||||||
Total commercial mortgages |
922 | 867 | ||||||
Residential mortgages at fair value |
1,261 | 1,315 | ||||||
Residential mortgages at lower of cost or fair value |
18 | 41 | ||||||
Total residential mortgages |
1,279 | 1,356 | ||||||
Other |
61 | 32 | ||||||
Total |
$ | 2,262 | $ | 2,255 |
As of September 1, 2014, we have elected to apply the fair value option to commercial mortgage loans held for sale to agencies. This election applies to all new commercial mortgage loans held for sale originated for sale to the agencies effective on or after September 1, 2014. The election of fair value option aligns the accounting for the commercial mortgages with the related commitments to sell the loans.
We sold $3.5 billion of commercial mortgage loans to agencies in 2014 compared to $2.8 billion in 2013. Total gains of $80 million were recognized on the valuation and sale of commercial mortgage loans held for sale, net of hedges, in 2014, and $79 million in 2013. These amounts are included in
Other noninterest income on our Consolidated Income Statement.
Residential mortgage loan origination volume was $9.5 billion in 2014 compared to $15.1 billion in 2013. The majority of such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $8.3 billion of loans and recognized loan sales revenue of $420 million in 2014. The comparable amounts for 2013 were $14.7 billion and $568 million.
Interest income on loans held for sale was $99 million in 2014 and $157 million in 2013. These amounts are included in Other interest income on our Consolidated Income Statement.
Additional information regarding our loan sale and servicing activities is included in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities and Note 7 Fair Value in our Notes To Consolidated Financial Statements included in Item 8 of this Report.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets totaled $10.9 billion at December 31, 2014 and $11.3 billion at December 31, 2013. The decrease of $.4 billion was primarily due to fair value changes of mortgage servicing rights, partially offset by new additions, including purchases of mortgage servicing rights. See additional information regarding our goodwill and intangible assets in Note 8 Goodwill and Other Intangible Assets included in the Notes To Consolidated Financial Statements in Item 8 of this Report.
Funding Sources
Table 16: Details Of Funding Sources
Dollars in millions |
December 31 2014 |
December 31 2013 |
Change | |||||||||||||
$ | % | |||||||||||||||
Deposits |
||||||||||||||||
Money market |
$ | 115,438 | $ | 108,631 | $ | 6,807 | 6 | % | ||||||||
Demand |
82,829 | 77,756 | 5,073 | 7 | % | |||||||||||
Retail certificates of deposit |
18,544 | 20,795 | (2,251 | ) | (11 | )% | ||||||||||
Savings |
12,571 | 11,078 | 1,493 | 13 | % | |||||||||||
Time deposits in foreign offices and other time deposits |
2,852 | 2,671 | 181 | 7 | % | |||||||||||
Total deposits |
232,234 | 220,931 | 11,303 | 5 | % | |||||||||||
Borrowed funds |
||||||||||||||||
Federal funds purchased and repurchase agreements |
3,510 | 4,289 | (779 | ) | (18 | )% | ||||||||||
Federal Home Loan Bank borrowings |
20,005 | 12,912 | 7,093 | 55 | % | |||||||||||
Bank notes and senior debt |
15,750 | 12,603 | 3,147 | 25 | % | |||||||||||
Subordinated debt |
9,151 | 8,244 | 907 | 11 | % | |||||||||||
Commercial paper |
4,995 | 4,997 | (2 | ) | | % | ||||||||||
Other |
3,357 | 3,060 | 297 | 10 | % | |||||||||||
Total borrowed funds |
56,768 | 46,105 | 10,663 | 23 | % | |||||||||||
Total funding sources |
$ | 289,002 | $ | 267,036 | $ | 21,966 | 8 | % |
The PNC Financial Services Group, Inc. Form 10-K 45 |
See the Liquidity Risk Management portion of the Risk Management section of this Item 7 for additional information regarding our 2014 capital and liquidity activities.
Total deposits increased $11.3 billion at December 31, 2014 compared with December 31, 2013 due to strong growth in demand and money market, partially offset by lower retail certificates of deposit. Interest-bearing deposits represented 68% of total deposits at both December 31, 2014 and December 31, 2013. Total borrowed funds increased $10.7 billion since December 31, 2013 as higher Federal Home Loan Bank borrowings and issuances of bank notes and senior debt and subordinated debt were partially offset by a decline in federal funds purchased and repurchase agreements.
Capital
Table 17: Shareholders Equity
Dollars in millions |
December 31 2014 |
December 31 2013 |
Change | |||||||||||||
$ | % | |||||||||||||||
Shareholders equity |
||||||||||||||||
Preferred stock (a) |
||||||||||||||||
Common stock |
$ | 2,705 | $ | 2,698 | $ | 7 | | % | ||||||||
Capital surplus preferred stock |
3,946 | 3,941 | 5 | | % | |||||||||||
Capital surplus common stock and other |
12,627 | 12,416 | 211 | 2 | % | |||||||||||
Retained earnings |
26,200 | 23,251 | 2,949 | 13 | % | |||||||||||
Accumulated other comprehensive income |
503 | 436 | 67 | 15 | % | |||||||||||
Common stock held in treasury at cost |
(1,430 | ) | (408 | ) | (1,022 | ) | (250 | )% | ||||||||
Total shareholders equity |
$ | 44,551 | $ | 42,334 | $ | 2,217 | 5 | % |
(a) | Par value less than $.5 million at each date. |
We manage our funding and capital positions by making adjustments to our balance sheet size and composition, issuing debt, equity or other capital instruments, executing treasury stock transactions and capital redemptions, managing dividend policies and retaining earnings.
The increase in total shareholders equity compared to the prior year end reflected an increase in retained earnings, partially offset by share repurchases of $1.2 billion under PNCs existing common stock repurchase authorization. The increase in retained earnings was driven by net income of $4.2 billion, reduced by $1.2 billion of common and preferred dividends declared. Accumulated other comprehensive income increased slightly as the impact of market interest rates and credit spreads on securities available for sale and derivatives that are part of cash flow hedging strategies were mostly offset by the impact of pension and other postretirement benefit plan adjustments. Common shares outstanding were 523 million at December 31, 2014 and 533 million at December 31, 2013.
Our current common stock repurchase program authorization permits us to purchase up to 25 million shares of PNC common stock on the open market or in privately negotiated transactions. This program will remain in effect until fully utilized or until modified, superseded or terminated. The extent and timing of share repurchases under this program will depend on a number of factors including, among others, market and general economic conditions, economic and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, contractual and regulatory limitations, and the results of the supervisory assessment of capital adequacy
and capital planning processes undertaken by the Federal Reserve and our primary bank regulators as part of the CCAR process. The Federal Reserve accepted our 2014 capital plan and did not object to our proposed capital actions. The capital plan included share repurchase programs of up to $1.5 billion for the four quarter period beginning in the second quarter of 2014 under PNCs existing common stock repurchase authorization. These programs include repurchases of up to $200 million to mitigate the financial impact of employee benefit plan transactions. Under the capital plan authorization, PNC repurchased 2.6 million common shares for $223 million in the second quarter of 2014, 4.2 million common shares for $360 million in the third quarter of 2014 and 6.1 million common shares for $524 million in the fourth quarter of 2014. Under the de minimis safe harbor of the Federal Reserves capital plan rule, PNC may make limited repurchases of common stock or other capital distributions in amounts that exceed the amounts included in its most recently approved capital plan, provided that, among other things, such distributions do not exceed, in the aggregate, 1% of PNCs Tier 1 capital and the Federal Reserve does not object to the additional repurchases or distributions. Under this de minimis safe harbor, PNC repurchased $50 million of common shares to mitigate the financial impact of employee benefit plan transactions in the first quarter of 2014. See the Supervision and Regulation section of Item 1 Business in this Report for further information concerning the CCAR process and the factors the Federal Reserve takes into consideration in its evaluation of capital plans and the Capital and Liquidity Actions portion of the Executive Summary section of this Item 7 for the impact of the Federal Reserves current supervisory assessment of the capital adequacy program.
46 The PNC Financial Services Group, Inc. Form 10-K |
December 31, 2014 | ||||||||
Dollars in millions |
Transitional Basel III (a) |
Pro forma Fully
Phased-In Basel III (b)(c) |
||||||
Common equity Tier 1 capital |
||||||||
Common stock plus related surplus, net of treasury stock |
$ | 13,903 | $ | 13,903 | ||||
Retained earnings |
26,200 | 26,200 | ||||||
Accumulated other comprehensive income for securities currently and previously held as available for sale |
144 | 721 | ||||||
Accumulated other comprehensive income for pension and other postretirement plans |
(104 | ) | (520 | ) | ||||
Goodwill, net of associated deferred tax liabilities |
(8,855 | ) | (8,855 | ) | ||||
Other disallowed intangibles, net of deferred tax liabilities |
(84 | ) | (421 | ) | ||||
Other adjustments/(deductions) |
(63 | ) | (121 | ) | ||||
Total common equity Tier 1 capital before threshold deductions |
31,141 | 30,907 | ||||||
Total threshold deductions |
(212 | ) | (1,081 | ) | ||||
Common equity Tier 1 capital |
30,929 | 29,826 | ||||||
Additional Tier 1 capital |
||||||||
Preferred stock plus related surplus |
3,946 | 3,946 | ||||||
Trust preferred capital securities |
99 | |||||||
Noncontrolling interests (d) |
790 | 43 | ||||||
Other adjustments/(deductions) |
(77 | ) | (104 | ) | ||||
Tier 1 capital |
35,687 | 33,711 | ||||||
Additional Tier 2 capital |
||||||||
Qualifying subordinated debt |
5,473 | 4,764 | ||||||
Trust preferred capital securities |
99 | |||||||
Allowance for loan and lease losses included in Tier 2 capital |
3,521 | 215 | ||||||
Other |
2 | 10 | ||||||
Total Basel III capital |
$ | 44,782 | $ | 38,700 | ||||
Risk-weighted assets (e) |
||||||||
Basel I risk-weighted assets calculated in accordance with transition rules for 2014 (f) |
$ | 284,018 | N/A | |||||
Estimated Basel III standardized approach risk-weighted assets (g) |
N/A | $ | 298,786 | |||||
Estimated Basel III advanced approaches risk-weighted assets (h) |
N/A | 285,870 | ||||||
Average quarterly adjusted total assets |
329,827 | 328,562 | ||||||
Basel III risk-based capital and leverage ratios |
||||||||
Common equity Tier 1 |
10.9 | % | 10.0 | % (i)(k) | ||||
Tier 1 |
12.6 | 11.3 | (i)(l) | |||||
Total |
15.8 | 13.5 | (j)(m) | |||||
Leverage (n) |
10.8 | 10.3 |
(a) | Calculated using the regulatory capital methodology applicable to PNC during 2014. |
(b) | PNC utilizes the pro forma fully phased-in Basel III capital ratios to assess its capital position (without the benefit of phase-ins), including comparison to similar estimates made by other financial institutions. |
(c) | Basel III capital ratios and estimates may be impacted by additional regulatory guidance or analysis and, in the case of those ratios calculated using the advanced approaches, the ongoing evolution, validation and regulatory approval of PNCs models integral to the calculation of advanced approaches risk-weighted assets. |
(d) | Primarily includes REIT Preferred Securities. |
(e) | Calculated as of period end. |
(f) | Includes credit and market risk-weighted assets. |
(g) | Estimated based on Basel III standardized approach rules and includes credit and market risk-weighted assets. |
(h) | Estimated based on Basel III advanced approaches rules and includes credit, market and operational risk-weighted assets. |
(i) | Pro forma fully phased-in Basel III capital ratio based on estimated Basel III standardized approach risk-weighted assets and rules. |
(j) | Pro forma fully phased-in Basel III capital ratio based on estimated Basel III advanced approaches risk-weighted assets and rules. |
(k) | For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Common equity Tier 1 capital ratio is 10.4%. This capital ratio is calculated using Common equity Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets. |
(l) | For comparative purposes only, the pro forma fully phased-in advanced approaches Basel III Tier 1 risk-based capital ratio is 11.8%. This capital ratio is calculated using Tier 1 capital and dividing by estimated Basel III advanced approaches risk-weighted assets. |
(m) | For comparative purposes only, the pro forma fully phased-in standardized approach Basel III Total capital risk-based capital ratio is 14.1%. This ratio is calculated using additional Tier 2 capital which, under the standardized approach, reflects allowance for loan and lease losses of up to 1.25% of credit risk related risk-weighted assets and dividing by estimated Basel III standardized approach risk-weighted assets. |
(n) | Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets. |
The PNC Financial Services Group, Inc. Form 10-K 47 |
The Basel II framework, which was adopted by the Basel Committee on Banking Supervision in 2004, seeks to provide more risk-sensitive regulatory capital calculations and promote enhanced risk management practices among large, internationally active banking organizations. The U.S. banking agencies initially adopted rules to implement the Basel II capital framework in 2004. In July 2013, the U.S. banking agencies adopted final rules (referred to as the advanced approaches) that modified the Basel II framework effective January 1, 2014. See the Supervision and Regulation section in Item 1 Business and Item 1A Risk Factors in this Report. Prior to fully implementing the advanced approaches to calculate risk-weighted assets, PNC and PNC Bank must successfully complete a parallel run qualification phase. Both PNC and PNC Bank entered this parallel run phase on January 1, 2013. Although the minimum parallel run qualification period is four quarters, the parallel run period for PNC and PNC Bank, now in its third year, is consistent with the experience of other U.S. banks that have all had multi-year parallel run periods. After PNC exits parallel run, its regulatory risk-based capital ratio for each measure ( e.g. , Common equity Tier 1 ratio) will be the lower of the ratios as calculated under the standardized approach and the advanced approaches.
As a result of the staggered effective dates of the final U.S. capital rules issued in July 2013, as well as the fact that PNC remains in the parallel run qualification phase for the advanced approaches, PNCs regulatory risk-based capital ratios in 2014 were based on the definitions of, and deductions from, capital under Basel III (as such definitions and deductions are phased-in for 2014) and Basel I risk-weighted assets (subject to certain adjustments as defined by the Basel III rules). We refer to the capital ratios calculated using the Basel III phased-in provisions and applicable risk-weighted assets as the Transitional Basel III ratios.
Federal banking regulators have stated that they expect the largest U.S. bank holding companies, including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largest U.S. bank holding companies, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers through estimated stress scenarios. We seek to manage our capital consistent with these regulatory principles, and believe that our December 31, 2014 capital levels were aligned with them.
At December 31, 2014, PNC and PNC Bank, our domestic bank subsidiary, were both considered well capitalized, based on applicable U.S. regulatory capital ratio requirements. To qualify as well capitalized, PNC and PNC Bank were required during 2014 to maintain Transitional Basel III capital ratios of at least 6% for Tier 1 risk-based and 10% for Total risk-based, and PNC Bank was required to have a Transitional Basel III leverage ratio of at least 5%.
Common equity Tier 1 capital as defined under the Basel III rules adopted by the U.S. banking agencies differs materially from Basel I. For example, under Basel III, significant common stock investments in unconsolidated financial institutions, mortgage servicing rights and deferred tax assets must be deducted from capital to the extent they individually exceed 10%, or in the aggregate exceed 15%, of the institutions adjusted Common equity Tier 1 capital. Also, Basel I regulatory capital excludes accumulated other comprehensive income related to securities currently and previously held as available for sale, as well as pension and other postretirement plans, whereas under Basel III these items are a component of PNCs capital. The Basel III final rules also eliminate the Tier 1 treatment of trust preferred securities for bank holding companies with $15 billion or more in assets. In 2013, we completed the redemption of several series of trust preferred securities previously assumed through acquisitions. PNC still holds trust preferred securities in one Trust, which would not be included within Common equity Tier 1 capital under the Basel III final rules. See Note 12 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities in the Notes To Consolidated Financial Statements in Item 8 of this Report for more detail on this Trust.
The access to and cost of funding for new business initiatives, the ability to undertake new business initiatives including acquisitions, the ability to engage in expanded business activities, the ability to pay dividends or repurchase shares or other capital instruments, the level of deposit insurance costs, and the level and nature of regulatory oversight depend, in large part, on a financial institutions capital strength.
We provide additional information regarding regulatory capital requirements and some of their potential impacts on PNC in the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 20 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report.
PNCs Basel I ratios as of December 31, 2013, which were PNCs effective regulatory capital ratios as of that date, were 10.5% for Tier 1 common capital ratio, 12.4% for Tier 1 risk-based capital ratio, 15.8% for Total risk-based capital ratio and 11.1% for leverage ratio. Our 2013 Form 10-K included additional information regarding our Basel I capital ratios.
48 The PNC Financial Services Group, Inc. Form 10-K |
O FF -B ALANCE S HEET A RRANGEMENTS A ND V ARIABLE I NTEREST E NTITIES
We engage in a variety of activities that involve unconsolidated entities or that are otherwise not reflected in our Consolidated Balance Sheet that are generally referred to as off-balance sheet arrangements. Additional information on these types of activities is included in the following sections of this Report:
|
Commitments, including contractual obligations and other commitments, included within the Risk Management section of this Item 7, |
|
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements included in Item 8 of this Report, |
|
Note 12 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities in the Notes To Consolidated Financial Statements included in Item 8 of this Report, and |
|
Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements included in Item 8 of this Report. |
PNC consolidates variable interest entities (VIEs) when we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.
A summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements, as of December 31, 2014 and December 31, 2013 is included in Note 2 in the Notes To Consolidated Financial Statements included in Item 8 of this Report.
Trust Preferred Securities and REIT Preferred Securities
We are subject to certain restrictions, including restrictions on dividend payments, in connection with $206 million in principal amount of an outstanding junior subordinated debenture associated with $200 million of trust preferred securities (both amounts as of December 31, 2014) that were issued by PNC Capital Trust C, a subsidiary statutory trust. Generally, if there is (i) an event of default under the debenture, (ii) PNC elects to defer interest on the debenture, (iii) PNC exercises its right to defer payments on the related trust preferred security issued by the statutory trust, or (iv) there is a default under PNCs guarantee of such payment obligations, as specified in the applicable governing documents, then PNC would be subject during the period of such default or deferral to restrictions on dividends and other provisions protecting the status of the debenture holders similar to or in some ways more restrictive than those potentially imposed under the Exchange Agreement with PNC Preferred Funding Trust II. See Note 12 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information on contractual limitations on dividend payments resulting from securities issued by PNC Preferred Funding Trust I and PNC Preferred Funding Trust II and additional discussion of trust preferred securities.
The PNC Financial Services Group, Inc. Form 10-K 49 |
In addition to the following, see Note 7 Fair Value in the Notes To Consolidated Financial Statements in Item 8 of this Report for further information regarding fair value.
The following table summarizes the assets and liabilities measured at fair value at December 31, 2014 and December 31, 2013, respectively, and the portions of such assets and liabilities that are classified within Level 3 of the valuation hierarchy. Level 3 assets and liabilities are those where the fair value is estimated using significant unobservable inputs.
Table 19: Fair Value Measurements Summary
December 31, 2014 | December 31, 2013 | |||||||||||||||
Dollars in millions |
Total Fair Value |
Level 3 |
Total Fair Value |
Level 3 | ||||||||||||
Total assets |
$ | 58,973 | $ | 10,257 | $ | 63,221 | $ | 10,650 | ||||||||
Total assets at fair value as a percentage of consolidated assets |
17 | % | 20 | % | ||||||||||||
Level 3 assets as a percentage of total assets at fair value |
17 | % | 17% | |||||||||||||
Level 3 assets as a percentage of consolidated assets |
3 | % | 3% | |||||||||||||
Total liabilities |
$ | 5,799 | $ | 716 | $ | 5,585 | $ | 638 | ||||||||
Total liabilities at fair value as a percentage of consolidated liabilities |
2 | % | 2 | % | ||||||||||||
Level 3 liabilities as a percentage of total liabilities at fair value |
12 | % | 11% | |||||||||||||
Level 3 liabilities as a percentage of consolidated liabilities |
<1 | % | <1% |
The majority of assets recorded at fair value are included in the securities available for sale portfolio. The majority of Level 3 assets represent non-agency residential mortgage-backed securities in the securities available for sale portfolio, equity investments and mortgage servicing rights.
An instruments categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification (transfer) of assets or liabilities between hierarchy levels. PNCs policy is to recognize transfers in and transfers out as of the end of the reporting period. For additional information regarding the transfers of assets or liabilities between hierarchy levels, see Note 7 Fair Value in the Notes To Consolidated Financial Statements in Item 8 of this Report.
We have six reportable business segments:
|
Retail Banking |
|
Corporate & Institutional Banking |
|
Asset Management Group |
|
Residential Mortgage Banking |
|
BlackRock |
|
Non-Strategic Assets Portfolio |
Business segment results, including the basis of presentation of inter-segment revenues, and a description of each business are included in Note 24 Segment Reporting included in the Notes To Consolidated Financial Statements in Item 8 of this Report. Certain amounts included in this Business Segments Review section and the Business Segment Highlights in the Executive Summary section of this Item 7 differ from those amounts shown in Note 24, primarily due to the presentation in Item 7 of this Report of business net interest revenue on a taxable-equivalent basis. Note 24 presents results of businesses for 2014, 2013 and 2012.
50 The PNC Financial Services Group, Inc. Form 10-K |
Retail Banking
(Unaudited)
Table 20: Retail Banking Table
Year ended December 31 Dollars in millions, except as noted |
2014 | 2013 | ||||||
I NCOME S TATEMENT |
||||||||
Net interest income |
$ | 3,924 | $ | 4,079 | ||||
Noninterest income |
||||||||
Service charges on deposits |
633 | 570 | ||||||
Brokerage |
240 | 224 | ||||||
Consumer services |
961 | 935 | ||||||
Other |
291 | 292 | ||||||
Total noninterest income |
2,125 | 2,021 | ||||||
Total revenue |
6,049 | 6,100 | ||||||
Provision for credit losses |
277 | 657 | ||||||
Noninterest expense |
4,625 | 4,576 | ||||||
Pretax earnings |
1,147 | 867 | ||||||
Income taxes |
419 | 317 | ||||||
Earnings |
$ | 728 | $ | 550 | ||||
A VERAGE B ALANCE S HEET |
||||||||
Loans |
||||||||
Consumer |
||||||||
Home equity |
$ | 28,852 | $ | 29,300 | ||||
Indirect auto |
9,122 | 7,746 | ||||||
Indirect other |
703 | 909 | ||||||
Education |
7,208 | 7,923 | ||||||
Credit cards |
4,364 | 4,142 | ||||||
Other |
2,238 | 2,148 | ||||||
Total consumer |
52,487 | 52,168 | ||||||
Commercial and commercial real estate |
10,867 | 11,266 | ||||||
Floor plan |
2,215 | 2,055 | ||||||
Residential mortgage |
601 | 741 | ||||||
Total loans |
66,170 | 66,230 | ||||||
Goodwill and other intangible assets |
6,034 | 6,116 | ||||||
Other assets |
2,842 | 2,625 | ||||||
Total assets |
$ | 75,046 | $ | 74,971 | ||||
Deposits |
||||||||
Noninterest-bearing demand |
$ | 22,134 | $ | 21,248 | ||||
Interest-bearing demand |
33,992 | 31,811 | ||||||
Money market |
50,263 | 48,784 | ||||||
Total transaction deposits |
106,389 | 101,843 | ||||||
Savings |
11,847 | 10,835 | ||||||
Certificates of deposit |
18,972 | 21,488 | ||||||
Total deposits |
137,208 | 134,166 | ||||||
Other liabilities |
469 | 337 | ||||||
Total liabilities |
$ | 137,677 | $ | 134,503 |
Year ended December 31 Dollars in millions, except as noted |
2014 | 2013 | ||||||
P ERFORMANCE R ATIOS |
||||||||
Return on average assets |
.97 | % | .73 | % | ||||
Noninterest income to total revenue |
35 | 33 | ||||||
Efficiency |
76 | 75 | ||||||
O THER I NFORMATION (a) |
||||||||
Credit-related statistics: |
||||||||
Commercial nonperforming assets |
$ | 139 | $ | 208 | ||||
Consumer nonperforming assets |
1,059 | 1,077 | ||||||
Total nonperforming assets (b) |
$ | 1,198 | $ | 1,285 | ||||
Purchased impaired loans (c) |
$ | 575 | $ | 692 | ||||
Commercial lending net charge-offs |
$ | 31 | $ | 89 | ||||
Credit card lending net charge-offs |
142 | 156 | ||||||
Consumer lending (excluding credit card) net charge-offs |
285 | 468 | ||||||
Total net charge-offs |
$ | 458 | $ | 713 | ||||
Commercial lending net charge-off ratio |
.24 | % | .67 | % | ||||
Credit card lending net charge-off ratio |
3.25 | % | 3.77 | % | ||||
Consumer lending (excluding credit card) net charge-off ratio (d) |
.58 | % | .96 | % | ||||
Total net charge-off ratio (d) |
.69 | % | 1.08 | % | ||||
Home equity portfolio credit statistics: (e) |
||||||||
% of first lien positions at origination (f) |
54 | % | 52 | % | ||||
Weighted-average loan-to-value ratios (LTVs) (f) (g) |
77 | % | 81 | % | ||||
Weighted-average updated FICO scores (h) |
748 | 745 | ||||||
Net charge-off ratio (d) |
.54 | % | 1.14 | % | ||||
Delinquency data % of total loans: (i) |
||||||||
Loans 30 59 days past due |
.20 | % | .20 | % | ||||
Loans 60 89 days past due |
.09 | % | .09 | % | ||||
Accruing loans past due |
.29 | % | .29 | % | ||||
Nonperforming loans |
3.13 | % | 3.15 | % | ||||
Other statistics: |
||||||||
ATMs |
8,605 | 7,445 | ||||||
Branches (j) |
2,697 | 2,714 | ||||||
Brokerage account client assets (in billions) (k) |
$ | 43 | $ | 41 | ||||
Customer-related statistics (average): |
||||||||
Non-teller deposit transactions (l) |
35 | % | 25 | % | ||||
Digital consumer customers (m) |
46 | % | 38 | % |
(a) | Presented as of December 31, except for net charge-offs, net charge-off ratios and customer-related statistics, which are for the year ended. |
(b) | Includes nonperforming loans of $1.1 billion at December 31, 2014 and $1.2 billion at December 31, 2013. |
(c) | Recorded investment of purchased impaired loans related to acquisitions. |
(d) | Ratio for 2013 includes additional consumer charge-offs taken as a result of alignment with interagency guidance on practices for loans and lines of credit that we implemented in the first quarter of 2013. |
(e) | Lien position, LTV and FICO statistics are based upon customer balances. |
(f) | Lien position and LTV calculations reflect management assumptions where data limitations exist. |
(g) | LTV statistics are based upon current information. |
(h) | Represents FICO scores that are updated at least quarterly. |
(i) | Data based upon recorded investment. Past due amounts exclude purchased impaired loans, even if contractually past due, as we are currently accreting interest income over the expected life of the loans. |
(j) | Excludes satellite offices ( e.g. , drive-ups, electronic branches and retirement centers) that provide limited products and/or services. |
(k) | Amounts include cash and money market balances. |
(l) | Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application. |
(m) | Represents consumer checking relationships that process the majority of their transactions through non-teller channels. |
The PNC Financial Services Group, Inc. Form 10-K 51 |
Retail Banking earned $728 million in 2014 compared with earnings of $550 million in 2013. The increase in earnings was driven by a lower provision for credit losses, and increased noninterest income due to strong fee income growth. These increases in earnings were partially offset by lower net interest income driven by lower yields on loans, interest rate spread compression on the value of deposits, and lower purchase accounting accretion.
Retail Banking continues to augment and refine its core checking account products to enhance the customer experience and grow value. In 2014, we completed the conversion of consumer and business banking customers from free checking. We also focused on product value for consumers and small businesses and growing customer share of wallet through the sale of liquidity, banking and investment products.
|
Completed the market rollout of PNC Total Insight SM , an integrated online banking and investing experience for our customers. |
|
Offered Apple Pay TM to our customers as a convenient payment option. |
|
Enhanced business banking Cash Flow Insight SM features and customer experience. |
|
Introduced relationship pricing for business banking customers. |
Retail Banking also continued to focus on serving more customers through cost effective channels that meet their evolving preferences for convenience.
|
In 2014, approximately 46% of consumer customers used non-teller channels for the majority of their transactions compared with 38% for 2013. |
|
Deposit transactions via ATM and mobile channels increased to 35% of total deposit transactions in 2014 compared with 25% for 2013. |
|
As part of PNCs retail branch transformation strategy, we continue to evolve our network. We converted 156 branches to universal branches in 2014; additional branches will be converted in 2015. In 2014, 48 branches were closed or consolidated. |
|
Retail Bankings primary geographic footprint extends across 17 states and Washington, D.C. Our retail branch network covers nearly half the U.S. population, with 2,697 branches and 8,605 ATMs. |
Total revenue declined $51 million to $6.0 billion in 2014. Net interest income of $3.9 billion decreased $155 million compared with 2013. The decrease resulted primarily from lower yields on loans, interest rate spread compression on the value of deposits, and lower purchase accounting accretion on loans and deposits.
Noninterest income of $2.1 billion increased $104 million, or 5%, compared to 2013. Noninterest income included strong customer-related fee income growth primarily resulting from changes in product offerings, increases in customer-initiated transactions, and increased brokerage and merchant processing revenue. Gains on sales of Visa Class B common shares totaled $209 million in 2014 compared to $168 million in 2013; 3.5 million shares were sold in 2014 compared to four million shares in 2013.
52 The PNC Financial Services Group, Inc. Form 10-K |
The provision for credit losses was $277 million and net charge-offs were $458 million in 2014 compared with $657 million and $713 million, respectively, for 2013. Provision for credit losses decreased due to improved credit metrics. The decrease in the net charge-offs was attributable to the impact of additional consumer charge-offs taken as a result of alignment with interagency guidance in the first quarter of 2013 and improved credit quality during 2014.
Noninterest expense of $4.6 billion was $49 million, or 1%, higher than 2013. Increases in technology investments, customer transaction-related costs, and non-credit losses were offset by reduced branch network expenses as a result of transaction migration to lower cost digital and ATM channels.
Growing core checking deposits is key to Retail Bankings growth and to providing a source of low-cost funding and liquidity to PNC. The deposit product strategy of Retail Banking is to remain disciplined on pricing, target specific products and markets for growth, and focus on the retention and growth of customer balances. In 2014, average total deposits of $137.2 billion increased $3.0 billion, or 2%, compared with 2013.
|
Average transaction deposits grew $4.5 billion, or 4%, and average savings deposit balances grew $1.0 billion, or 9%, over 2013 as a result of organic deposit growth. In 2014, average demand deposits increased $3.1 billion, or 6%, to $56.1 billion and average money market deposits increased $1.5 billion, or 3%, to $50.3 billion. |
|
Total average certificates of deposit decreased $2.5 billion, or 12%, compared to 2013. The decline in average certificates of deposit was due to the expected run-off of maturing accounts. |
Retail Banking continued to focus on a relationship-based lending strategy that targets specific products and markets for growth, small businesses, and auto dealerships. In 2014, average total loans declined $60 million to $66.2 billion as growth in specific products was offset by declines from run-off of non-strategic portions of the portfolios.
|
Average indirect auto loans increased $1.4 billion, or 18%, compared to 2013. The increase was primarily due to increases in auto sales as well as the expansion of our indirect sales force and product introduction into the Southeast market. |
|
Average credit card balances increased $222 million, or 5%, over 2013 as a result of efforts to increase credit card share of wallet through organic growth. |
|
Average auto dealer floor plan loans grew $160 million, or 8%, in 2014, primarily resulting from sales growth and additional dealer relationships. |
|
Average home equity loans decreased $448 million compared to 2013. The decrease in lines of credit of approximately $1.0 billion was partially offset by an increase of approximately $600 million in term loans. The overall portfolio declines resulted from reduced refinance activity. Retail Bankings home equity loan portfolio is relationship based, with 97% of the portfolio attributable to borrowers in our primary geographic footprint. |
|
Average loan balances for the remainder of the portfolio declined a net $1.4 billion, driven by declines in the education portfolio of $715 million and commercial & commercial real estate of $399 million. The discontinued government guaranteed education loan, indirect other and residential mortgage portfolios are primarily run-off portfolios. In December 2014 we sold $148 million of education loans. The impacts of the sale to 2014 average loans and earnings were not significant. |
Nonperforming assets totaled $1.2 billion at December 31, 2014, a decrease of $87 million, or 7%, over 2013. The decrease was driven by declines in both commercial and consumer non-performing loans.
The PNC Financial Services Group, Inc. Form 10-K 53 |
Corporate & Institutional Banking
(Unaudited)
Table 21: Corporate & Institutional Banking Table
Year ended December 31 Dollars in millions, except as noted |
2014 | 2013 | ||||||
I NCOME S TATEMENT |
||||||||
Net interest income |
$ | 3,733 | $ | 3,804 | ||||
Noninterest income |
||||||||
Corporate service fees |
1,295 | 1,097 | ||||||
Other |
448 | 605 | ||||||
Noninterest income |
1,743 | 1,702 | ||||||
Total revenue |
5,476 | 5,506 | ||||||
Provision for credit losses (benefit) |
107 | (25 | ) | |||||
Noninterest expense |
2,064 | 1,999 | ||||||
Pretax earnings |
3,305 | 3,532 | ||||||
Income taxes |
1,199 | 1,268 | ||||||
Earnings |
$ | 2,106 | $ | 2,264 | ||||
A VERAGE B ALANCE S HEET |
||||||||
Loans |
||||||||
Commercial |
$ | 78,688 | $ | 72,256 | ||||
Commercial real estate |
21,127 | 17,668 | ||||||
Equipment lease financing |
6,892 | 6,642 | ||||||
Total commercial lending |
106,707 | 96,566 | ||||||
Consumer |
1,198 | 947 | ||||||
Total loans |
107,905 | 97,513 | ||||||
Goodwill and other intangible assets |
3,826 | 3,804 | ||||||
Loans held for sale |
1,006 | 1,017 | ||||||
Other assets |
10,190 | 10,636 | ||||||
Total assets |
$ | 122,927 | $ | 112,970 | ||||
A VERAGE B ALANCE S HEET (C ONTINUED ) |
||||||||
Deposits |
||||||||
Noninterest-bearing demand |
$ | 44,210 | $ | 41,514 | ||||
Money market |
21,377 | 18,168 | ||||||
Other |
7,958 | 7,124 | ||||||
Total deposits |
73,545 | 66,806 | ||||||
Other liabilities |
7,551 | 14,465 | ||||||
Total liabilities |
$ | 81,096 | $ | 81,271 | ||||
P ERFORMANCE R ATIOS |
||||||||
Return on average assets |
1.71 | % | 2.00 | % | ||||
Noninterest income to total revenue |
32 | 31 | ||||||
Efficiency |
38 | 36 | ||||||
C OMMERCIAL M ORTGAGE S ERVICING P ORTFOLIO S ERVICED F OR PNC AND O THERS (in billions) |
||||||||
Beginning of period |
$ | 308 | $ | 282 | ||||
Acquisitions/additions |
96 | 83 | ||||||
Repayments/transfers |
(68 | ) | (57 | ) | ||||
End of period |
$ | 336 | $ | 308 | ||||
O THER I NFORMATION |
||||||||
Consolidated revenue from: (a) |
||||||||
Treasury Management (b) |
$ | 1,288 | $ | 1,260 | ||||
Capital Markets (c) |
$ | 777 | $ | 722 | ||||
Commercial mortgage banking activities |
||||||||
Commercial mortgage loans held for sale (d) |
$ | 126 | $ | 133 | ||||
Commercial mortgage loan servicing income (e) |
222 | 226 | ||||||
Commercial mortgage servicing rights valuation, net of economic hedge (f) |
38 | 68 | ||||||
Total |
$ | 386 | $ | 427 |
Year ended December 31 Dollars in millions, except as noted |
2014 | 2013 | ||||||
Average Loans (by C&IB business) |
||||||||
Corporate Banking |
$ | 54,341 | $ | 50,620 | ||||
Real Estate |
27,740 | 22,287 | ||||||
Business Credit |
13,270 | 11,678 | ||||||
Equipment Finance |
10,474 | 9,994 | ||||||
Other |
2,080 | 2,934 | ||||||
Total average loans |
$ | 107,905 | $ | 97,513 | ||||
Total loans (g) |
$ | 113,935 | $ | 101,773 | ||||
Net carrying amount of commercial mortgage servicing rights (g) |
$ | 506 | $ | 549 | ||||
Credit-related statistics: |
||||||||
Nonperforming assets (g) (h) |
$ | 557 | $ | 804 | ||||
Purchased impaired loans (g) (i) |
$ | 246 | $ | 515 | ||||
Net charge-offs |
$ | 8 | $ | 105 |
(a) | Represents consolidated PNC amounts. See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of the Corporate & Institutional Banking portion of this Business Segments Review section. |
(b) | Includes amounts reported in net interest income and corporate service fees. |
(c) | Includes amounts reported in net interest income, corporate service fees and other noninterest income. |
(d) | 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. |
(e) | Includes net interest income and noninterest income, primarily in corporate services fees, from loan servicing and ancillary services, net of changes in fair value on commercial mortgage servicing rights due to time and payoffs for 2014 and net of commercial mortgage servicing rights amortization for 2013. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately. |
(f) | Includes amounts reported in corporate services fees. |
(g) | As of December 31. |
(h) | Includes nonperforming loans of $.5 billion at December 31, 2014 and $.7 billion at December 31, 2013. |
(i) | Recorded investment of purchased impaired loans related to acquisitions. |
Corporate & Institutional Banking earned $2.1 billion in 2014, a decrease of $158 million compared with 2013. The decrease in earnings was due to narrower spreads on loans and deposits, lower purchase accounting accretion, an increase in the provision for credit losses, and decreases in asset valuations, partially offset by the impact of higher average loans and deposits. We continue to focus on building client relationships where the risk-return profile is attractive, including the Southeast.
Net interest income was $3.7 billion in 2014, a decrease of $71 million from 2013 primarily due to continued spread compression on loans and deposits, lower purchase accounting accretion and the impact from the second quarter 2014 correction to reclassify certain commercial facility usage fees from net interest income to corporate service fees, partially offset by the impact of higher average loans and deposits.
Corporate service fees were $1.3 billion in 2014, increasing $198 million compared to 2013. This increase was primarily due to higher merger and acquisition advisory fees and the impact of the second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to corporate service fees, partially offset by a lower commercial mortgage servicing rights valuation, net of economic hedge.
54 The PNC Financial Services Group, Inc. Form 10-K |
Other noninterest income was $448 million in 2014 compared with $605 million in 2013. The decrease of $157 million was driven by lower revenue associated with credit valuations for customer-related derivatives activities, lower gains on asset sales and lower derivatives sales.
The provision for credit losses was $107 million in 2014 compared with a benefit of $25 million in 2013 reflecting portfolio growth over recent quarters paired with the slowing of the reserve releases related to credit quality improvement. Net charge-offs were $8 million in 2014, which represents a decrease of $97 million compared with 2013 primarily attributable to a decrease in commercial and commercial real estate charge-offs.
Nonperforming assets were $557 million, a 31% decrease from December 31, 2013 resulting from continued improving credit quality.
Noninterest expense was $2.1 billion in 2014, an increase of $65 million primarily driven by higher incentive compensation costs associated with business activity.
Average loans were $107.9 billion in 2014 compared with $97.5 billion in 2013, an increase of 11% reflecting strong growth in Corporate Banking, Real Estate, Business Credit and Equipment Finance:
|
Corporate Banking business provides lending, treasury management and capital markets-related products and services to mid-sized and large corporations, government and not-for-profit entities. Average loans for this business increased $3.7 billion, or 7%, in 2014 compared with 2013, primarily due to an increase in loan commitments from specialty lending businesses. |
|
PNC Real Estate provides commercial real estate and real estate-related lending through both conventional and affordable multifamily financing. Average loans for this business increased $5.5 billion, or 24%, in 2014 compared with 2013 due to increased originations. |
|
PNC Business Credit provides asset-based lending. The loan portfolio is relatively high yielding, with acceptable risk as the loans are mainly secured by short-term assets. Average loans increased $1.6 billion, or 14%, in 2014 compared with 2013 due to increasing deal sizes and higher utilization. |
|
PNC Equipment Finance provides equipment financing solutions with $11.9 billion in equipment finance assets as of December 31, 2014. Average equipment finance assets in 2014 were $11.2 billion, an increase of $.6 billion or 5% compared with 2013. |
Loan commitments increased 8%, or $16.2 billion, to $212.3 billion at December 31, 2014 compared to $196.1 billion at December 31, 2013, primarily due to growth in our Real Estate, Corporate Banking and Business Credit businesses.
Period-end loan balances increased by 12%, or $12.2 billion, to $113.9 billion at December 31, 2014 compared with $101.8 billion at December 31, 2013.
Average deposits were $73.5 billion in 2014, an increase of $6.7 billion, or 10%, compared with 2013 as a result of business growth and inflows into money market and noninterest-bearing deposits.
The commercial mortgage servicing portfolio was $336 billion at December 31, 2014, an increase of 9% compared with December 31, 2013 as servicing additions exceeded portfolio run-off.
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 other 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 21 in the Corporate & Institutional Banking portion of this Business Segments Review section includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows.
Treasury management revenue, comprised of fees and net interest income from customer deposit balances, totaled $1.3 billion in 2014 compared with $1.3 billion in 2013. Higher average deposit balances were offset by lower spreads on deposits.
Capital markets revenue includes merger and acquisition advisory fees, loan syndications, derivatives, foreign exchange, asset-backed finance revenue, fixed income and equity capital markets advisory activities. Revenue from capital markets-related products and services totaled $777 million in 2014 compared with $722 million in 2013. The increase in the comparison was driven by higher merger and acquisition advisory fees and to a lesser extent higher loan syndications and foreign exchange revenue, which was partially offset by lower revenue associated with credit valuations for customer-related derivatives activities and related derivatives sales.
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 commercial mortgage banking activities resulted in revenue of $386 million in 2014 compared with $427 million in 2013. The decrease in the comparison was mainly due to lower net commercial mortgage servicing rights valuations.
The PNC Financial Services Group, Inc. Form 10-K 55 |
Asset Management Group
(Unaudited)
Table 22: Asset Management Group Table
Year ended December 31 Dollars in millions, except as noted |
2014 | 2013 | ||||||
I NCOME S TATEMENT |
||||||||
Net interest income |
$ | 289 | $ | 288 | ||||
Noninterest income |
818 | 752 | ||||||
Total revenue |
1,107 | 1,040 | ||||||
Provision for credit losses (benefit) |
(1 | ) | 10 | |||||
Noninterest expense |
821 | 774 | ||||||
Pretax earnings |
287 | 256 | ||||||
Income taxes |
106 | 94 | ||||||
Earnings |
$ | 181 | $ | 162 | ||||
A VERAGE B ALANCE S HEET |
||||||||
Loans |
||||||||
Consumer |
$ | 5,457 | $ | 5,025 | ||||
Commercial and commercial real estate |
986 | 1,047 | ||||||
Residential mortgage |
809 | 776 | ||||||
Total loans |
7,252 | 6,848 | ||||||
Goodwill and other intangible assets |
259 | 293 | ||||||
Other assets |
234 | 225 | ||||||
Total assets |
$ | 7,745 | $ | 7,366 | ||||
Deposits |
||||||||
Noninterest-bearing demand |
$ | 1,366 | $ | 1,311 | ||||
Interest-bearing demand |
3,954 | 3,491 | ||||||
Money market |
3,944 | 3,754 | ||||||
Total transaction deposits |
9,264 | 8,556 | ||||||
CDs/IRAs/savings deposits |
454 | 438 | ||||||
Total deposits |
9,718 | 8,994 | ||||||
Other liabilities |
51 | 60 | ||||||
Total liabilities |
$ | 9,769 | $ | 9,054 | ||||
P ERFORMANCE R ATIOS |
||||||||
Return on average assets |
2.34 | % | 2.20 | % | ||||
Noninterest income to total revenue |
74 | 72 | ||||||
Efficiency |
74 | 74 | ||||||
O THER I NFORMATION |
||||||||
Total nonperforming assets (a) (b) |
$ | 66 | $ | 75 | ||||
Purchased impaired loans (a) (c) |
$ | 83 | $ | 99 | ||||
Total net charge-offs |
$ | 3 | $ | 1 |
Year ended December 31 Dollars in millions, except as noted |
2014 | 2013 | ||||||
C LIENT A SSETS U NDER A DMINISTRATION (in billions) (a) (d) |
||||||||
Personal |
$ | 115 | $ | 111 | ||||
Institutional |
148 | 136 | ||||||
Total |
$ | 263 | $ | 247 | ||||
Asset Type |
||||||||
Equity |
$ | 151 | $ | 142 | ||||
Fixed Income |
72 | 70 | ||||||
Liquidity/Other |
40 | 35 | ||||||
Total |
$ | 263 | $ | 247 | ||||
Discretionary client assets under management |
||||||||
Personal |
$ | 87 | $ | 83 | ||||
Institutional |
48 | 44 | ||||||
Total |
$ | 135 | $ | 127 | ||||
Asset Type |
||||||||
Equity |
$ | 75 | $ | 70 | ||||
Fixed Income |
40 | 39 | ||||||
Liquidity/Other |
20 | 18 | ||||||
Total |
$ | 135 | $ | 127 | ||||
Nondiscretionary client assets under administration |
||||||||
Personal |
$ | 28 | $ | 28 | ||||
Institutional |
100 | 92 | ||||||
Total |
$ | 128 | $ | 120 | ||||
Asset Type |
||||||||
Equity |
$ | 76 | $ | 72 | ||||
Fixed Income |
32 | 31 | ||||||
Liquidity/Other |
20 | 17 | ||||||
Total |
$ | 128 | $ | 120 |
(a) | As of December 31. |
(b) | Includes nonperforming loans of $62 million at December 31, 2014 and $70 million at December 31, 2013. |
(c) | Recorded investment of purchased impaired loans related to acquisitions. |
(d) | Excludes brokerage account client assets. |
56 The PNC Financial Services Group, Inc. Form 10-K |
Asset Management Group earned $181 million in 2014 compared with $162 million in 2013. Client assets under administration were $263 billion as of December 31, 2014 compared to $247 billion as of December 31, 2013. Earnings increased due to higher noninterest income from higher assets, partially offset by higher noninterest expense from strategic growth.
The core growth strategies of the business include increasing sales sourced from other PNC lines of business, maximizing front line productivity and optimizing market presence including additions to staff in high opportunity markets. Wealth Management and Hawthorn have over 100 offices operating in 7 out of the 10 most affluent states in the U.S. with a majority co-located with retail banking branches. The businesses strategies primarily focus on growing client assets under management through expanding relationships directly and through cross-selling from PNCs other lines of business.
Institutional Asset Management provides advisory, custody, and retirement administration services to institutional clients primarily within our banking footprint. The business also offers PNC proprietary mutual funds. Institutional Asset Management is strengthening its partnership with the Corporate Bank to drive growth and is focused on building retirement capabilities and expanding product solutions for all customers.
Client assets under administration of $263 billion increased $16 billion compared to a year ago. Discretionary client assets under management were $135 billion at December 31, 2014 increased $8 billion compared with December 31, 2013. The increase was driven by higher equity markets, new sales, and positive net flows, after adjustments for cyclical client activities.
Total revenue for 2014 increased $67 million to $1.1 billion compared with $1.0 billion for 2013, primarily relating to noninterest income due to stronger average equity markets and positive net flows, after adjustments for cyclical client activities.
Noninterest expense was $821 million in 2014, an increase of $47 million, or 6%, from the prior year. The increase was primarily attributable to compensation expense from increases in headcount and investments in technology. Over the last 12 months, total full-time headcount has increased by approximately 43 positions, or 1%. Asset Management Group remains focused on disciplined expense management as it invests in strategic growth opportunities.
Average deposits for 2014 increased $.7 billion, or 8%, from the prior year. Average transaction deposits grew 8% to $9.3 billion compared with 2013 and were partially offset by the run-off of maturing certificates of deposit. Average loan balances of $7.3 billion increased $.4 billion, or 6%, from the prior year due to continued growth in the consumer loan portfolio.
The PNC Financial Services Group, Inc. Form 10-K 57 |
Residential Mortgage Banking
(Unaudited)
Table 23: Residential Mortgage Banking Table
Year ended December 31 Dollars in millions, except as noted |
2014 | 2013 | ||||||
I NCOME S TATEMENT |
||||||||
Net interest income |
$ | 149 | $ | 194 | ||||
Noninterest income |
||||||||
Loan servicing revenue |
||||||||
Servicing fees |
224 | 174 | ||||||
Mortgage servicing rights valuation, net of economic hedge |
12 | 121 | ||||||
Loan sales revenue |
||||||||
Benefit / (Provision) for residential mortgage repurchase obligations |
| 53 | ||||||
Loan sales revenue |
420 | 568 | ||||||
Other |
(5 | ) | (10 | ) | ||||
Total noninterest income |
651 | 906 | ||||||
Total revenue |
800 | 1,100 | ||||||
Provision for credit losses (benefit) |
(2 | ) | 21 | |||||
Noninterest expense |
746 | 845 | ||||||
Pretax earnings |
56 | 234 | ||||||
Income taxes |
21 | 86 | ||||||
Earnings |
$ | 35 | $ | 148 | ||||
A VERAGE B ALANCE S HEET |
||||||||
Portfolio loans |
$ | 1,689 | $ | 2,376 | ||||
Loans held for sale |
1,120 | 1,896 | ||||||
Mortgage servicing rights (MSR) |
1,014 | 938 | ||||||
Other assets |
4,034 | 4,686 | ||||||
Total assets |
$ | 7,857 | $ | 9,896 | ||||
Deposits |
$ | 2,285 | $ | 2,920 | ||||
Borrowings and other liabilities |
2,879 | 3,142 | ||||||
Total liabilities |
$ | 5,164 | $ | 6,062 | ||||
P ERFORMANCE R ATIOS |
||||||||
Return on average assets |
.45 | % | 1.50 | % | ||||
Noninterest income to total revenue |
81 | 82 | ||||||
Efficiency |
93 | 77 |
Year ended December 31 Dollars in millions, except as noted |
2014 | 2013 | ||||||
R ESIDENTIAL M ORTGAGE S ERVICING P ORTFOLIO S ERVICED FOR T HIRD P ARTIES (in billions) |
||||||||
Beginning of period |
$ | 114 | $ | 119 | ||||
Acquisitions |
4 | 10 | ||||||
Additions |
8 | 15 | ||||||
Repayments/transfers |
(18 | ) | (30 | ) | ||||
End of period |
$ | 108 | $ | 114 | ||||
Servicing portfolio third-party statistics: (a) |
||||||||
Fixed rate |
94 | % | 93 | % | ||||
Adjustable rate/balloon |
6 | % | 7 | % | ||||
Weighted-average interest rate |
4.47 | % | 4.59 | % | ||||
MSR asset value (in billions) |
$ | 0.8 | $ | 1.1 | ||||
MSR capitalization value (in basis points) |
78 | 95 | ||||||
Weighted-average servicing fee (in basis points) |
27 | 28 | ||||||
R ESIDENTIAL M ORTGAGE R EPURCHASE R ESERVE |
||||||||
Beginning of period |
$ | 131 | $ | 614 | ||||
(Benefit)/ Provision |
(53 | ) | ||||||
Agency settlements |
(191 | ) | ||||||
Losses loan repurchases |
(24 | ) | (239 | ) | ||||
End of Period |
$ | 107 | $ | 131 | ||||
O THER I NFORMATION |
||||||||
Loan origination volume (in billions) |
$ | 9.5 | $ | 15.1 | ||||
Loan sale margin percentage |
4.41 | % | 3.76 | % | ||||
Percentage of originations represented by: |
||||||||
Purchase volume (b) |
45 | % | 30 | % | ||||
Refinance volume |
55 | % | 70 | % | ||||
Total nonperforming assets (a) (c) |
$ | 120 | $ | 189 |
(a) | As of December 31. |
(b) | Mortgages with borrowers as part of residential real estate purchase transactions. |
(c) | Includes nonperforming loans of $79 million at December 31, 2014 and $143 million at December 31, 2013. |
58 The PNC Financial Services Group, Inc. Form 10-K |
Residential Mortgage Banking earned $35 million in 2014 compared with $148 million in 2013. Earnings declined from the prior year primarily as a result of decreased loan sales revenue and lower net hedging gains on residential mortgage servicing rights, partially offset by increased servicing fees and lower origination and servicing expenses.
The strategic focus of the business is the acquisition of new customers through a retail loan officer sales force with an emphasis on home purchase transactions. Our strategy involves competing on the basis of superior service to new and existing customers in serving their home purchase and refinancing needs. A key consideration in pursuing this approach is the cross-sell opportunity, especially in the bank footprint markets.
Residential Mortgage Banking overview:
|
Total loan originations were $9.5 billion for 2014 compared with $15.1 billion for 2013. Loans continue to be originated primarily through direct channels under Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Federal Housing Administration (FHA)/Department of Veterans Affairs agency guidelines. Refinancings were 55% of originations for 2014 and 70% in 2013. During 2014, 21% of loan originations were under the original or revised Home Affordable Refinance Program (HARP or HARP 2). |
|
Investors having purchased mortgage loans may request PNC to indemnify them against losses on certain loans or to repurchase loans that they believe do not comply with applicable contractual loan origination covenants and representations and warranties we have made. At December 31, 2014, the liability for estimated losses on repurchase and indemnification claims for the Residential Mortgage Banking business segment was $107 million compared with $131 million at December 31, 2013. See the Recourse And Repurchase Obligations section of this Item 7 and Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements under Item 8 of this Report for additional information. |
|
Residential mortgage loans serviced for others totaled $108 billion at December 31, 2014 and $114 billion at December 31, 2013 as payoffs continued to outpace new direct loan origination volume and acquisitions. |
|
Noninterest income was $651 million in 2014 compared with $906 million in 2013. Decreased loan sales revenue and lower net hedging gains on residential mortgage servicing rights were partially offset by increased servicing fees. In addition, the comparison was impacted by a residential mortgage repurchase obligation benefit of $53 million recorded in 2013. |
|
Provision for credit losses in 2014 was a $2 million benefit, compared with an expense of $21 million in 2013. |
|
Net interest income was $149 million in 2014 compared with $194 million in 2013. The decrease in net interest income was primarily due to the decline in origination volume. |
|
Noninterest expense was $746 million in 2014 compared with $845 million in 2013. Lower origination and servicing costs, as well as lower residential mortgage foreclosure-related costs, drove the decline in expenses. |
BlackRock
(Unaudited)
Information related to our equity investment in BlackRock follows:
Year ended December 31 Dollars in millions |
2014 | 2013 | ||||||
Business segment earnings (a) |
$ | 530 | $ | 469 | ||||
PNCs economic interest in BlackRock (b) |
22 | % | 22 | % |
(a) | Includes PNCs share of BlackRocks reported GAAP earnings and additional income taxes on those earnings incurred by PNC. |
(b) | At December 31. |
In billions |
December 31
2014 |
December 31
2013 |
||||||
Carrying value of PNCs investment in BlackRock (c) |
$ | 6.3 | $ | 6.0 | ||||
Market value of PNCs investment in BlackRock (d) |
12.6 | 11.3 |
(c) | PNC accounts for its investment in BlackRock under the equity method of accounting, exclusive of a related deferred tax liability of $2.1 billion at December 31, 2014 and $2.0 billion at December 31, 2013. Our voting interest in BlackRock common stock was approximately 21% at December 31, 2014. |
(d) | Does not include liquidity discount. |
At December 31, 2014, we held approximately 1.3 million shares of BlackRock Series C Preferred Stock, which are available to fund our obligation in connection with certain BlackRock long-term incentive plan (LTIP) programs. Additional information regarding our BlackRock LTIP shares obligation is included in Note 14 Stock Based Compensation Plans in the Notes To Consolidated Financial Statements in Item 8 of this Report.
We account for the BlackRock Series C Preferred Stock at fair value, which offsets the impact of marking-to-market the obligation to deliver these shares to BlackRock. The fair value amount of the BlackRock Series C Preferred Stock is included on our Consolidated Balance Sheet in the caption Other assets. Additional information regarding the valuation of the BlackRock Series C Preferred Stock is included in Note 7 Fair Value in the Notes To Consolidated Financial Statements in Item 8 of this Report.
The PNC Financial Services Group, Inc. Form 10-K 59 |
Non-Strategic Assets Portfolio
(Unaudited)
Table 25: Non-Strategic Assets Portfolio Table
Year ended December 31 Dollars in millions |
2014 | 2013 | ||||||
I NCOME S TATEMENT |
||||||||
Net interest income |
$ | 547 | $ | 689 | ||||
Noninterest income |
40 | 53 | ||||||
Total revenue |
587 | 742 | ||||||
Provision for credit losses (benefit) |
(119 | ) | (21 | ) | ||||
Noninterest expense |
125 | 163 | ||||||
Pretax earnings |
581 | 600 | ||||||
Income taxes |
214 | 221 | ||||||
Earnings |
$ | 367 | $ | 379 | ||||
A VERAGE B ALANCE S HEET |
||||||||
Commercial Lending: |
||||||||
Commercial/Commercial real estate |
$ | 180 | $ | 382 | ||||
Lease financing |
675 | 687 | ||||||
Total commercial lending |
855 | 1,069 | ||||||
Consumer Lending: |
||||||||
Home equity |
3,396 | 3,993 | ||||||
Residential real estate |
4,812 | 5,613 | ||||||
Total consumer lending |
8,208 | 9,606 | ||||||
Total portfolio loans |
9,063 | 10,675 | ||||||
Other assets (a) |
(725 | ) | (688 | ) | ||||
Total assets |
$ | 8,338 | $ | 9,987 | ||||
Deposits and other liabilities |
$ | 225 | $ | 236 | ||||
Total liabilities |
$ | 225 | $ | 236 | ||||
P ERFORMANCE R ATIOS |
||||||||
Return on average assets |
4.40 | % | 3.79 | % | ||||
Noninterest income to total revenue |
7 | 7 | ||||||
Efficiency |
21 | 22 | ||||||
O THER I NFORMATION |
||||||||
Nonperforming assets (b) (c) |
$ | 710 | $ | 834 | ||||
Purchased impaired loans (b) (d) |
$ | 3,943 | $ | 4,797 | ||||
Net charge-offs |
$ | 47 | $ | 172 | ||||
Net charge-off ratio |
.52 | % | 1.61 | % | ||||
Loans (b) |
||||||||
Commercial Lending |
||||||||
Commercial/Commercial real estate |
$ | 130 | $ | 236 | ||||
Lease financing |
625 | 680 | ||||||
Total commercial lending |
755 | 916 | ||||||
Consumer Lending |
||||||||
Home equity |
3,091 | 3,692 | ||||||
Residential real estate |
4,290 | 5,267 | ||||||
Total consumer lending |
7,381 | 8,959 | ||||||
Total loans |
$ | 8,136 | $ | 9,875 |
(a) | Other assets includes deferred taxes, ALLL and other real estate owned (OREO). Other assets were negative in both periods due to the ALLL. |
(b) | As of December 31. |
(c) | Includes nonperforming loans of $.6 billion at December 31, 2014 and $.7 billion at December 31, 2013. |
(d) | Recorded investment of purchased impaired loans related to acquisitions. At December 31, 2014, this segment contained 80% of PNCs purchased impaired loans. |
This business segment consists of non-strategic assets primarily obtained through acquisitions of other companies. The business activity of this segment is to manage the wind-down of the portfolios while maximizing the value and mitigating risk.
Non-Strategic Assets Portfolio had earnings of $367 million in 2014 compared with $379 million in 2013. Earnings decreased year-over-year due to lower income driven by a smaller portfolio partially offset by an increased benefit from the provision for credit losses, driven by improved economic conditions and, lower non-interest expense.
Non-Strategic Assets Portfolio overview:
|
Net interest income was $547 million in 2014 compared with $689 million in 2013. The decrease was driven by lower purchase accounting accretion and interest earned on a declining average loan portfolio. |
|
Noninterest income was $40 million in 2014 compared with $53 million in 2013. The decrease was driven by lower loss reimbursements on insured loans and higher provision for estimated losses on repurchase obligations on home equity loans and lines. |
|
The 2014 period reflected a benefit from the provision for credit losses of $119 million compared to a benefit of $21 million in 2013. The decline in provision reflected overall improvement in credit quality. A contributing economic factor was the increasing value of residential real estate that improved expected cash flows on purchased impaired loans. |
|
Noninterest expense in 2014 was $125 million compared with $163 million in 2013. A smaller portfolio and improving market conditions drove lower cost on nonaccrual residential mortgages and lower commercial OREO expense. |
|
Average portfolio loans declined to $9.1 billion in 2014 compared with $10.7 billion in 2013. The overall decline was driven by customer payment activity and portfolio management activities to reduce under-performing assets. |
60 The PNC Financial Services Group, Inc. Form 10-K |
C RITICAL A CCOUNTING E STIMATES AND J UDGMENTS
Our consolidated financial statements are prepared by applying certain accounting policies. Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Item 8 of this Report describes the most significant accounting policies that we use. Certain of these policies require us to make estimates or economic assumptions that may vary under different assumptions or conditions and such variations may significantly affect our reported results and financial position for the period or in future periods.
Fair Value Measurements
We must use estimates, assumptions, and judgments when assets and liabilities are required to be recorded at, or adjusted to reflect, fair value.
Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by independent third-party sources, including appraisers and valuation specialists, when available. When such third-party information is not available, we estimate fair value primarily by using cash flow and other financial modeling techniques. Changes in underlying factors, assumptions, or estimates in any of these areas could materially impact our future financial condition and results of operations.
PNC applies ASC 820 Fair Value Measurements. This guidance defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. This guidance requires a three level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable.
The following sections of this Report provide further information on this type of activity:
|
Fair Value Measurements included within this Item 7, and |
|
Note 7 Fair Value included in the Notes To Consolidated Financial Statements in Item 8 of this Report. |
Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit
We maintain the ALLL and the Allowance for Unfunded Loan Commitments and Letters of Credit at levels that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan and lease portfolios and on these unfunded credit facilities as of the balance sheet date. Our determination of the allowances is based on periodic evaluations of the loan and lease portfolios and unfunded credit facilities and other relevant factors. These critical estimates include significant use of PNCs own historical data and complex methods to interpret them. We have an ongoing process to evaluate and enhance the quality, quantity and timeliness of our data and interpretation methods used in the determination of these allowances. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change, and include, among others:
|
Probability of default (PD), |
|
Loss given default (LGD), |
|
Outstanding balance of the loan, |
|
Movement through delinquency stages, |
|
Amounts and timing of expected future cash flows, |
|
Value of collateral, which may be obtained from third parties, and |
|
Qualitative factors, such as changes in current economic conditions, that may not be reflected in modeled results. |
For all loans, the ALLL is the sum of three components: (i) asset specific/individual impaired reserves, (ii) quantitative (formulaic or pooled) reserves and (iii) qualitative (judgmental) reserves. The reserve calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, and economic conditions. For unfunded commitments, the reserve estimate also includes estimation of the probability of funding. Key reserve assumptions are periodically updated.
To the extent actual outcomes differ from our estimates, additional provision for credit losses may be required that would reduce future earnings. See the following for additional information:
|
Allowances For Loan And Lease Losses And Unfunded Loan Commitments And Letters Of Credit in the Credit Risk Management section of this Item 7, and |
|
Note 1 Accounting Policies and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in the Notes To Consolidated Financial Statements and Allocation of Allowance for Loan and Lease Losses in the Statistical Information (Unaudited) section of Item 8 of this Report. |
The PNC Financial Services Group, Inc. Form 10-K 61 |
Estimated Cash Flows On Purchased Impaired Loans
ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly SOP 03-3) provides the GAAP guidance for the accounting for purchased impaired loans. These loans have experienced a deterioration of credit quality from origination to acquisition for which it is probable that the investor will be unable to collect all contractually required payments receivable, including both principal and interest.
In our assessment of credit quality deterioration, we must make numerous assumptions, interpretations and judgments, using internal and third-party credit quality information to determine whether it is probable that we will be able to collect all contractually required payments. This point in time assessment is inherently subjective due to the nature of the available information and judgment involved.
Those loans that qualify under ASC 310-30 are recorded at fair value at acquisition, which involves estimating the expected cash flows to be received. Measurement of the fair value of the loan is based on the provisions of ASC 820. ASC 310-30 prohibits the carryover or establishment of an allowance for loan losses on the acquisition date.
Subsequent to the acquisition of the loan, we are required to continue to estimate cash flows expected to be collected over the life of the loan (or pool of loans). The measurement of expected cash flows involves assumptions and judgments as to credit risk, interest rate risk, prepayment risk, default rates, loss severity, payment speeds and collateral values. All of these factors are inherently subjective and can result in significant changes in the cash flow estimates over the life of the loan. Such changes in expected cash flows could increase future earnings volatility.
See Note 1 Accounting Policies, Note 4 Purchased Loans, and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information.
Goodwill
Goodwill arising from business acquisitions represents the value attributable to unidentifiable intangible elements in the business acquired. Most of our goodwill relates to value inherent in the Retail Banking and Corporate & Institutional Banking businesses. The value of this goodwill is dependent upon our ability to provide quality, cost-effective services in the face of competition from other market participants on a national and, with respect to some products and services, an international basis. We also rely upon continuing investments in processing systems, the development of value-added service features, and the ease of access by customers to our services.
As such, the value of goodwill is supported by earnings, which is driven by transaction volume and, for certain businesses, the market value of assets under administration or for which processing services are provided. Lower earnings resulting from a lack of growth or our inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill, which could result in a current period charge to earnings. At least annually, in the fourth quarter, or more frequently if events occur or circumstances have changed significantly from the annual test date, management reviews the current operating environment and strategic direction of each reporting unit taking into consideration any events or changes in circumstances that may have an effect on the unit. For this review, inputs are generated and used in calculating the fair value of the reporting unit, which is compared to its carrying amount (Step 1 of the goodwill impairment test) as further discussed below. The fair values of the majority of our reporting units are determined using a discounted cash flow valuation model with assumptions based upon market comparables. Additionally, we may also evaluate certain financial metrics that are indicative of fair value, including market quotes, price to earnings ratios and recent acquisitions involving other financial institutions. A reporting unit is defined as an operating segment or one level below an operating segment. If the fair value of the reporting unit exceeds its carrying amount, the reporting unit is not considered impaired. However, if the fair value of the reporting unit is less than its carrying amount, the reporting units goodwill would be evaluated for impairment. In this circumstance, the implied fair value of reporting unit goodwill would be compared to the carrying amount of that goodwill (Step 2 of the goodwill impairment test). If the carrying amount of goodwill exceeds the implied fair value of goodwill, the difference is recognized as an impairment loss. The implied fair value of reporting unit goodwill is determined by assigning the fair value of a reporting unit to its assets and liabilities (including any unrecognized intangible assets) with the residual amount equal to the implied fair value of goodwill as if the reporting unit had been acquired in a business combination.
A reporting units carrying amount is based upon assigned economic capital as determined by PNCs internal management methodologies. Additionally, in performing Step 1 of our goodwill impairment testing, we utilize three equity metrics:
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Assigned reporting unit economic capital as determined by our internal management methodologies, inclusive of goodwill. |
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A 7% fully phased-in Basel III common equity Tier 1 capital ratio for the reporting unit consistent with PNCs risk framework guidelines. |
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The capital levels for comparable companies (as reported in comparable company public financial statements), adjusted for differences in risk characteristics between the comparable companies and the reporting unit. |
62 The PNC Financial Services Group, Inc. Form 10-K |
In determining a reporting units fair value and comparing it to its carrying value, we generally utilize the highest of these three amounts (the targeted equity) in our discounted cash flow methodology. Under this methodology, if necessary, we will infuse capital to achieve the targeted equity amount. As of October 1, 2014 (annual impairment testing date), unallocated excess capital (difference between shareholders equity minus total economic capital assigned and increased by the incremental targeted equity capital infusion) represented capital reserved for potential future capital needs.
The results of our annual 2014 impairment test indicated that the estimated fair values of our reporting units exceeded their carrying values by at least 10% and are not considered to be at risk of not passing Step 1. By definition, assumptions utilized in estimating the fair value of a reporting unit are judgmental and inherently uncertain, but absent a significant change in economic conditions of a reporting unit, we would not expect the fair values of these reporting units to decrease below their respective carrying values. Similarly, there were no impairment charges related to goodwill in 2013.
During 2012, our residential mortgage banking business, similar to other residential mortgage banking businesses, experienced higher operating costs and increased uncertainties such as elevated indemnification and repurchase liabilities and foreclosure related issues. As a result of our annual impairment test, we determined that the carrying amount of goodwill relating to the Residential Mortgage Banking reporting unit was impaired. We recorded an impairment charge of $45 million within noninterest expense which reduced the carrying value of goodwill attributed to Residential Mortgage Banking to zero.
See Note 8 Goodwill and Other Intangible Assets in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information.
Lease Residuals
We provide financing for various types of equipment, including aircraft, energy and power systems, and vehicles through a variety of lease arrangements. Direct financing leases are carried at the sum of lease payments and the estimated residual value of the leased property, less unearned income. Residual values are subject to judgments as to the value of the underlying equipment that can be affected by changes in economic and market conditions and the financial viability of the residual guarantors. Residual values are derived from historical remarketing experience, secondary market contacts, and industry publications. To the extent not guaranteed or assumed by a third-party, we bear the risk of ownership of the leased assets. This includes the risk that the actual value of the leased assets at the end of the lease term will be less than the estimated residual value, which could result in an impairment charge and reduce earnings in the
future. Residual values are reviewed for impairment at least annually.
Revenue Recognition
We earn net interest and noninterest income from various sources, including:
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Lending, |
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Securities portfolio, |
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Asset management, |
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Customer deposits, |
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Loan sales and servicing, |
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Brokerage services, |
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Sale of loans and securities, |
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Certain private equity activities, and |
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Securities, derivatives and foreign exchange activities. |
We also earn fees and commissions from issuing loan commitments, standby letters of credit and financial guarantees, selling various insurance products, providing treasury management services, providing merger and acquisition advisory and related services, and participating in certain capital markets transactions. Revenue earned on interest-earning assets, including the accretion of discounts recognized on acquired or purchased loans recorded at fair value, is recognized based on the constant effective yield of the financial instrument or based on other applicable accounting guidance.
The timing and amount of revenue that we recognize in any period is dependent on estimates, judgments, assumptions, and interpretation of contractual terms. Changes in these factors can have a significant impact on revenue recognized in any period due to changes in products, market conditions or industry norms.
Residential And Commercial Mortgage Servicing Rights
We elect to measure our residential mortgage servicing rights (MSRs) at fair value. This election was made to be consistent with our risk management strategy to hedge changes in the fair value of these assets as described below. The fair value of residential MSRs is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors which are determined based on current market conditions.
As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial MSRs at fair value in order to eliminate any potential measurement mismatch between our economic hedges and the commercial MSRs. The impact of this election was not material. The fair value of commercial MSRs is estimated by using a discounted cash flow model incorporating inputs for assumptions as to constant prepayment rates, discount rates and other factors determined based on current market conditions and
The PNC Financial Services Group, Inc. Form 10-K 63 |
expectations. We recognize gain/(loss) on changes in the fair value of commercial MSRs as a result of that election. Commercial MSRs are subject to declines in value from actual or expected prepayment of the underlying loans and also from defaults. We manage this risk by economically hedging the fair value of commercial MSRs with securities and derivatives instruments which are expected to increase (or decrease) in value when the value of commercial MSRs declines (or increases). Prior to 2014, commercial MSRs were initially recorded at fair value and subsequently accounted for at the lower of amortized cost or fair value. Commercial MSRs were periodically evaluated for impairment. For purposes of impairment, the commercial MSRs were stratified based on asset type, which characterizes the predominant risk of the underlying financial asset.
PNC employs risk management strategies designed to protect the value of MSRs from changes in interest rates and related market factors. The values of the residential MSRs are economically hedged with securities and derivatives, including interest-rate swaps, options, and forward mortgage-backed and futures contracts. As interest rates change, these financial instruments are expected to have changes in fair value negatively correlated to the change in fair value of the hedged residential MSRs portfolio. The hedge relationships are actively managed in response to changing market conditions over the life of the residential MSRs. Commercial MSRs are economically hedged at a macro level or with specific derivatives and securities to protect against a significant decline in interest rates. Selecting appropriate financial instruments to economically hedge residential or commercial MSRs requires significant management judgment to assess how mortgage rates and prepayment speeds could affect the future values of MSRs. Hedging results can frequently be less predictable in the short term, but over longer periods of time are expected to protect the economic value of the MSRs.
The following sections of this Report provide further information on residential and commercial MSRs:
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Note 7 Fair Value included in the Notes To Consolidated Financial Statements in Item 8 of this Report. |
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Note 8 Goodwill and Other Intangible Assets included in the Notes To Consolidated Financial Statements in Item 8 of this Report. |
Income Taxes
In the normal course of business, we and our subsidiaries enter into transactions for which the tax treatment is unclear or subject to varying interpretations. In addition, filing requirements, methods of filing and the calculation of taxable income in various state and local jurisdictions are subject to differing interpretations.
We evaluate and assess the relative risks and merits of the tax treatment of transactions, filing positions, filing methods and taxable income calculations after considering statutes, regulations, judicial precedent, and other information, and maintain tax accruals consistent with our evaluation of these relative risks and merits. The result of our evaluation and assessment is by its nature an estimate. We and our subsidiaries are routinely subject to audit and challenges from taxing authorities. In the event we resolve a challenge for an amount different than amounts previously accrued, we will account for the difference in the period in which we resolve the matter.
Recently Issued Accounting Standards
In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-04, Receivables Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure . This ASU clarifies that an in substance repossession or foreclosure is considered to have occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. We adopted this guidance as of January 1, 2015. Adoption of this ASU did not have a material effect on our results of operations or financial position.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP with one accounting model. The core principle of the guidance is that an entity should recognize revenue to depict the satisfaction of a performance obligation by transfer of promised goods or services to customers. The ASU also requires additional qualitative and quantitative disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The requirements within the ASU should be applied retrospectively to each prior period presented (with several practical expedients for certain completed contracts) or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. We are currently evaluating the impact of this ASU on our results of operations and financial position.
In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This ASU changes
64 The PNC Financial Services Group, Inc. Form 10-K |
the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The ASU also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty ( i.e. , a repurchase financing), which will result in secured borrowing treatment for the repurchase agreement. We adopted this guidance as of January 1, 2015. Adoption of this ASU did not have a material effect on our results of operations or financial position.
In August 2014, the FASB issued ASU 2014-14, Receivables Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force) . This ASU requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure when a) the loan has a government guarantee that is not separable from the loan before foreclosure; b) the creditor has the intent to convey the real estate to the guarantor and make a claim on the guarantee and the creditor has the ability to recover under that claim at the time of foreclosure; and c) any amount of the claim that is determined upon the basis of the real estate is fixed at the time of foreclosure. The receivable should be measured based on the loan balance (inclusive of principal and interest) that is expected to be recovered from the guarantor. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The ASU may be adopted using either a prospective or modified retrospective transition method consistent with the method elected to adopt ASU 2014-04, Receivables Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure . We adopted this guidance as of January 1, 2015. Adoption of this ASU did not have a material effect on our results of operations or financial position.
In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force) . This ASU clarifies that an entity should consider all relevant terms and features, inclusive of the embedded derivative feature being evaluated for bifurcation, when evaluating whether the nature of the host contract in a hybrid financial instrument issued in the form of a share, is debt-like or equity-like. When making this determination, the ASU also clarifies that the substance of the economic characteristics of the relevant terms and features, and circumstances under which the instrument was issued should be considered. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015 and should be applied on a modified retrospective basis to existing hybrid
financial instruments issued in the form of a share as of the beginning of the period of adoption. Retrospective application is permitted to all relevant prior periods. We are currently evaluating the impact of this ASU on our results of operations and financial position.
Recently Adopted Accounting Pronouncements
See Note 1 Accounting Policies in the Notes To the Consolidated Financial Statements in Item 8 of this Report regarding the impact of new accounting pronouncements which we have adopted.
S TATUS OF Q UALIFIED D EFINED B ENEFIT P ENSION P LAN
We have a noncontributory, qualified defined benefit pension plan (plan or pension plan) covering eligible employees. Benefits are determined using a cash balance formula where earnings credits are applied as a percentage of eligible compensation. Pension contributions are based on an actuarially determined amount necessary to fund total benefits payable to plan participants. Consistent with our investment strategy, plan assets are primarily invested in equity investments and fixed income instruments. Plan fiduciaries determine and review the plans investment policy, which is described more fully in Note 13 Employee Benefit Plans in the Notes To Consolidated Financial Statements in Item 8 of this Report.
We calculate the expense associated with the pension plan and the assumptions and methods that we use include a policy of reflecting plan assets at their fair market value. On an annual basis, we review the actuarial assumptions related to the pension plan. The primary assumptions used to measure pension obligations and costs are the discount rate, mortality, compensation increase and expected long-term return on plan assets. Among these, the compensation increase assumption does not significantly affect pension expense.
ASC 715-30 and ASC 715-60 stipulate that each individual assumption, including mortality, should reflect the plan sponsors best estimate. PNC has historically utilized a version of the Society of Actuaries (SOA) published mortality tables in developing its best estimate of mortality. On October 27, 2014, the SOA published a new study on mortality rates that included updated mortality tables and mortality improvement scale, which both reflect longer life expectancy. Based on an evaluation of the mortality experience of PNCs qualified pension plan participants in conjunction with the updated SOA mortality study, PNC adopted an adjusted version of the SOAs new mortality table and improvement scale for purposes of measuring the plans benefit obligations at December 31, 2014. This change to the mortality assumption increased the qualified pension plans benefit obligations by approximately $115 million at December 31, 2014.
The PNC Financial Services Group, Inc. Form 10-K 65 |
The discount rate used to measure pension obligations is determined by comparing the expected future benefits that will be paid under the plan with yields available on high quality corporate bonds of similar duration. The impact on pension expense of a .5% decrease in discount rate in the current environment is an increase of $18 million per year. This sensitivity depends on the economic environment and amount of unrecognized actuarial gains or losses on the measurement date.
The expected long-term return on assets assumption also has a significant effect on pension expense. The expected return on plan assets is a long-term assumption established by considering historical and anticipated returns of the asset classes invested in by the pension plan and the asset allocation policy currently in place. For purposes of setting and reviewing this assumption, long term refers to the period over which the plans projected benefit obligations will be disbursed. We review this assumption at each measurement date and adjust it if warranted. Our selection process references certain historical data and the current environment, but primarily utilizes qualitative judgment regarding future return expectations.
To evaluate the continued reasonableness of our assumption, we examine a variety of viewpoints and data. Various studies have shown that portfolios comprised primarily of U.S. equity securities have historically returned approximately 9% annually over long periods of time, while U.S. debt securities have returned approximately 6% annually over long periods. Application of these historical returns to the plans allocation ranges for equities and bonds produces a result between 6.50% and 7.25% and is one point of reference, among many other factors, that is taken into consideration. We also examine the plans actual historical returns over various periods and consider the current economic environment. Recent experience is considered in our evaluation with appropriate consideration that, especially for short time periods, recent returns are not reliable indicators of future returns. While annual returns can vary significantly (actual returns for 2014, 2013 and 2012 were +6.50%, +15.48%, and +15.29%, respectively), the selected assumption represents our estimated long-term average prospective returns.
Acknowledging the potentially wide range for this assumption, we also annually examine the assumption used by other companies with similar pension investment strategies, so that we can ascertain whether our determinations markedly differ from others. In all cases, however, this data simply informs our process, which places the greatest emphasis on our qualitative judgment of future investment returns, given the conditions existing at each annual measurement date.
Taking into consideration all of these factors, the expected long-term return on plan assets for determining net periodic pension cost for 2014 was 7.00%, down from 7.50% for 2013. After considering the views of both internal and external
capital market advisors, particularly with regard to the effects of the recent economic environment on long-term prospective fixed income returns, we are reducing our expected long-term return on assets to 6.75% for determining pension cost for 2015.
Under current accounting rules, the difference between expected long-term returns and actual returns is accumulated and amortized to pension expense over future periods. Each one percentage point difference in actual return compared with our expected return can cause expense in subsequent years to increase or decrease by up to $9 million as the impact is amortized into results of operations.
We currently estimate pretax pension expense of $9 million in 2015 compared with pretax income of $7 million in 2014. This year-over-year expected increase in expense reflects the effects of the lower expected return on asset assumption, improved mortality, and the lower discount rate required to be used in 2015. These factors will be partially offset by the favorable impact of the increase in plan assets at December 31, 2014 and the assumed return on a $200 million voluntary contribution to the plan made in February 2015.
The table below reflects the estimated effects on pension expense of certain changes in annual assumptions, using 2015 estimated expense as a baseline.
Table 26: Pension Expense Sensitivity Analysis
Change in Assumption (a) |
Estimated
Pension Expense (In millions) |
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.5% decrease in discount rate |
$ | 18 | ||
.5% decrease in expected long-term return on assets |
$ | 22 | ||
.5% increase in compensation rate |
$ | 2 |
(a) | The impact is the effect of changing the specified assumption while holding all other assumptions constant. |
Our pension plan contribution requirements are not particularly sensitive to actuarial assumptions. Investment performance has the most impact on contribution requirements and will drive the amount of required contributions in future years. Also, current law, including the provisions of the Pension Protection Act of 2006, sets limits as to both minimum and maximum contributions to the plan. Notwithstanding the voluntary contribution made in February 2015 noted above, we do not expect to be required to make any contributions to the plan during 2015.
We maintain other defined benefit plans that have a less significant effect on financial results, including various nonqualified supplemental retirement plans for certain employees, which are described more fully in Note 13 Employee Benefit Plans in the Notes To Consolidated Financial Statements in Item 8 of this Report.
66 The PNC Financial Services Group, Inc. Form 10-K |
R ECOURSE AND R EPURCHASE O BLIGATIONS
As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in Item 8 of this Report, PNC has sold commercial mortgage, residential mortgage and home equity loans directly or indirectly through securitization and loan sale transactions in which we have continuing involvement. One form of continuing involvement includes certain recourse and loan repurchase obligations associated with the transferred assets.
Commercial Mortgage Loan Recourse Obligations
We originate, close and service certain multi-family commercial mortgage loans which are sold to FNMA under FNMAs Delegated Underwriting and Servicing (DUS) program. We participated in a similar program with the FHLMC. Our exposure and activity associated with these recourse obligations are reported in the Corporate & Institutional Banking segment. For more information regarding our commercial mortgage loan recourse obligations, see the Recourse and Repurchase Obligations section of Note 22 Commitments and Guarantees included in the Notes To Consolidated Financial Statements in Item 8 of this Report.
Residential Mortgage and Home Equity Repurchase Obligations
As a result of alleged breaches of loan covenants and representations and warranties, investors may request PNC to indemnify them against losses on certain loans or to repurchase loans. Indemnification and repurchase claims are often settled on an individual basis through make whole payments or loan repurchases, although we may also negotiate pooled settlements with investors. In connection with pooled settlements, we typically do not repurchase loans and the consummation of such transactions generally results in us no longer having indemnification and repurchase exposure with the investor in the transaction.
Residential Mortgage Repurchase Obligations
While residential mortgage loans are sold on a non-recourse basis, we assume certain loan repurchase obligations associated with mortgage loans we have sold to investors. These loan repurchase obligations primarily relate to situations where PNC is alleged to have breached certain origination covenants and representations and warranties made to purchasers of the loans in the respective purchase and sale agreements. Residential mortgage loans covered by these loan repurchase obligations include first and second-lien mortgage loans we have sold through Agency securitizations, Non-Agency securitizations, and loan sale transactions. As discussed in Note 2 in the Notes To Consolidated Financial Statements in Item 8 of this Report, Agency securitizations consist of mortgage loan sale transactions with FNMA, FHLMC and the Government National Mortgage Association (GNMA), while Non-Agency securitizations consist of
mortgage loan sale transactions with private investors. Mortgage loan sale transactions that are not part of a securitization may involve FNMA, FHLMC or private investors. Our historical exposure and activity associated with Agency securitization repurchase obligations has primarily been related to transactions with FNMA and FHLMC, as indemnification and repurchase losses associated with FHA and VA-insured and uninsured loans pooled in GNMA securitizations historically have been minimal. In addition to indemnification and repurchase risk, we face other risks of loss with respect to our participation in these programs, some of which are described in Note 21 Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8 of this Report with respect to governmental inquiries related to FHA-insured loans. Repurchase obligation activity associated with residential mortgages is reported in the Residential Mortgage Banking segment.
Origination and sale of residential mortgages is an ongoing business activity and, accordingly, management continually assesses the need to recognize indemnification and repurchase liabilities pursuant to the associated investor sale agreements. We establish indemnification and repurchase liabilities for estimated losses on sold first and second-lien mortgages for which indemnification is expected to be provided or for loans that are expected to be repurchased. For the first and second-lien mortgage sold portfolio, we have established an indemnification and repurchase liability pursuant to investor sale agreements based on claims made and our estimate of future claims on a loan by loan basis. To estimate the mortgage repurchase liability arising from breaches of representations and warranties, we consider the following factors: (i) borrower performance in our historically sold portfolio (both actual and estimated future defaults); (ii) the level of outstanding unresolved repurchase claims; (iii) estimated probable future repurchase claims, considering information about expected investor behaviors, delinquent and liquidated loans, resolved and unresolved mortgage insurance rescission notices and our historical experience with claim rescissions; (iv) the potential ability to cure the defects identified in the repurchase claims (rescission rate) and (v) the estimated severity of loss upon repurchase of the loan or collateral, make-whole settlement or indemnification.
For more information on our Residential Mortgage Repurchase Obligations, see Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Item 8 of this Report.
The PNC Financial Services Group, Inc. Form 10-K 67 |
The following tables present the unpaid principal balance of repurchase claims by vintage and total unresolved repurchase claims for the quarter ended and as of December 31, 2014, respectively, compared to the quarter ended and as of December 31, 2013, respectively. These comparisons reflect the impact of settlement agreements reached late in the fourth quarter of 2013.
Table 27: Analysis of Quarterly Residential Mortgage Repurchase Claims by Vintage
Three months ended Dollars in millions |
December 31
2014 |
December 31
2013 |
||||||
2004 & Prior |
$ | 3 | $ | 66 | ||||
2005 |
2 | 88 | ||||||
2006 |
2 | 27 | ||||||
2007 |
2 | 35 | ||||||
2008 |
9 | |||||||
Subtotal 2008 & Prior |
9 | 225 | ||||||
2009 2014 |
16 | 19 | ||||||
Total |
$ | 25 | $ | 244 | ||||
FNMA, FHLMC and GNMA % |
81 | % | 96 | % |
Table 28: Analysis of Residential Mortgage Unresolved Asserted Indemnification and Repurchase Claims
Dollars in millions |
December 31
2014 |
December 31
2013 |
||||||
FNMA, FHLMC and GNMA securitizations |
$ | 12 | $ | 13 | ||||
Private investors (a) |
32 | 22 | ||||||
Total unresolved claims |
$ | 44 | $ | 35 | ||||
FNMA, FHLMC and GNMA % |
27 | % | 37 | % |
(a) | Activity relates to loans sold through Non-Agency securitization and loan sale transactions. |
The table below details our indemnification and repurchase claim settlement activity during 2014 and 2013.
Table 29: Analysis of Residential Mortgage Indemnification and Repurchase Claim Settlement Activity
2014 | 2013 | |||||||||||||||||||||||
Year ended December 31 In millions |
Unpaid
Principal Balance (a) |
Losses
Incurred (b) |
Fair Value of
Repurchased Loans (c) |
Unpaid
Principal Balance (a) |
Losses
Incurred (b) |
Fair Value of
Repurchased Loans (c) |
||||||||||||||||||
Residential mortgages (d): |
||||||||||||||||||||||||
FNMA, FHLMC and GNMA securitizations |
$ | 47 | $ | 17 | $ | 15 | $ | 378 | $ | 399 | $ | 89 | ||||||||||||
Private investors (e) |
10 | 7 | 2 | 47 | 31 | 6 | ||||||||||||||||||
Total indemnification and repurchase settlements |
$ | 57 | $ | 24 | $ | 17 | $ | 425 | $ | 430 | $ | 95 |
(a) | Represents unpaid principal balance of loans at the indemnification or repurchase date. Excluded from these balances are amounts associated with pooled settlement payments as loans are typically not repurchased in these transactions. |
(b) | Represents both i) amounts paid for indemnification/settlement payments and ii) the difference between loan repurchase price and fair value of the loan at the repurchase date. These losses are charged to the indemnification and repurchase liability. |
(c) | Represents fair value of loans repurchased only as we have no exposure to changes in the fair value of loans or underlying collateral when indemnification/settlement payments are made to investors. |
(d) | Repurchase activity associated with insured loans, government-guaranteed loans and loans repurchased through the exercise of our removal of account provision (ROAP) option are excluded from this table. Refer to Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in Item 8 of this Report for further discussion of ROAPs. |
(e) | Activity relates to loans sold through Non-Agency securitizations and loan sale transactions. |
Residential mortgages that we service through FNMA, FHLMC and GNMA securitizations, and for which we could experience a loss if required to repurchase a delinquent loan due to a breach in representations or warranties, were $49 billion at December 31, 2014, of which $251 million was 90 days or more delinquent. These amounts were $48 billion and $253 million, respectively, at December 31, 2013.
In the fourth quarter of 2013, PNC reached agreements with both FNMA and FHLMC to resolve their repurchase claims with respect to loans sold between 2000 and 2008. PNC paid a total of $191 million related to these settlements. The volume of new repurchase demand claims dropped significantly in 2014 compared to the same period in 2013 as a result of the settlement
68 The PNC Financial Services Group, Inc. Form 10-K |
agreements in the fourth quarter of 2013. Additionally, the liability for estimated losses on indemnification and repurchase claims for residential mortgages decreased to $107 million at December 31, 2014 from $131 million at December 31, 2013.
We believe our indemnification and repurchase liability appropriately reflects the estimated probable losses on indemnification and repurchase claims for all residential mortgage loans sold and outstanding as of December 31, 2014 and December 31, 2013. In making these estimates, we consider the losses that we expect to incur over the life of the sold loans. See Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information.
Home Equity Repurchase Obligations
PNCs repurchase obligations include obligations with respect to certain brokered home equity loans/lines of credit that were sold to a limited number of private investors in the financial services industry by National City prior to our acquisition of National City. PNC is no longer engaged in the brokered home equity lending business, and our exposure under these loan repurchase obligations is limited to repurchases of the loans sold in these transactions. Repurchase activity associated with brokered home equity loans/lines of credit is reported in the Non-Strategic Assets Portfolio segment.
Loan covenants and representations and warranties were established through loan sale agreements with various investors to provide assurance that loans PNC sold to the investors were of sufficient investment quality. Key aspects of such covenants and representations and warranties include the loans compliance with any applicable loan criteria established for the transaction, including underwriting standards, delivery of all required loan documents to the investor or its designated party, sufficient collateral valuation, and the validity of the lien securing the loan. As a result of alleged breaches of these contractual obligations, investors may request PNC to indemnify them against losses on certain loans or to repurchase loans.
Investor indemnification or repurchase claims are typically settled on an individual loan basis through make-whole payments or loan repurchases; however, on occasion we may negotiate pooled settlements with investors. In connection with pooled settlements, we typically do not repurchase loans and the consummation of such transactions generally results in us no longer having indemnification and repurchase exposure with the investor in the transaction.
An indemnification and repurchase liability for estimated losses for which indemnification is expected to be provided or for loans that are expected to be repurchased was established at the acquisition of National City. Managements evaluation of these indemnification and repurchase liabilities is based upon trends in indemnification and repurchase claims, actual loss experience, risks in the underlying serviced loan
portfolios, current economic conditions and the periodic negotiations that management may enter into with investors to settle existing and potential future claims.
Indemnification and repurchase liabilities, which are included in Other liabilities on the Consolidated Balance sheet, are evaluated by management on a quarterly basis. Initial recognition and subsequent adjustments to the indemnification are recognized in Other noninterest income on the Consolidated Income Statement. For more information regarding our Home Equity Repurchase Obligations, see Note 22 Commitments and Guarantees in the Notes To Consolidated Statements in Item 8 of this Report.
Enterprise Risk Management
PNC encounters risk as part of the normal course of operating our business. Accordingly, we design risk management processes to help manage this risk. We take risks we understand in order to optimize long term shareholder value.
This Risk Management section describes our risk framework, including risk appetite and strategy, culture, governance, risk identification, controls and reporting. The overall Risk Management section of this Item 7 also provides an analysis of our key areas of risk, which include but are not limited to credit, operational, compliance, market, liquidity and model. Our use of financial derivatives as part of our overall asset and liability risk management process is also addressed within the risk management section.
PNC operates within a rapidly evolving regulatory environment. Accordingly, we are actively focused on the timely adoption of regulatory pronouncements within our Enterprise Risk Management (ERM) Framework.
We view risk management as a cohesive combination of the following risk elements which form PNCs ERM Framework:
The PNC Financial Services Group, Inc. Form 10-K 69 |
Risk Appetite and Strategy
PNC manages risk in light of our risk appetite to optimize long term shareholder value while supporting our employees, customers, and communities. PNCs risk appetite represents the organizations desired enterprise risk position, set within our capital-based risk and liquidity capacity to achieve our strategic objectives and business plans. Reviewed periodically through the risk reporting and Strategic Planning processes, the risk appetite serves as an operating guide for making balanced risk decisions that support our business strategies; it will adjust over time to reflect the current and anticipated economic environment, growth objectives, risk capacity and our risk profile.
We establish guiding principles for each of the risks within our taxonomy to support the Risk Appetite Statement. The guiding principles are qualitative statements that guide risk-taking activities and are supported by quantitative metrics, risk limits, and risk appetite descriptions as defined in policy and managed through the ERM framework.
Risk Culture
All employees are considered risk managers, and are responsible for understanding PNCs Risk Appetite Statement, guiding principles and ERM framework and how they apply to their respective roles. PNCs governance structure establishes clear roles and responsibilities for risk management throughout the organization. All employees are encouraged to collaborate across groups to identify and mitigate risks and elevate issues as required. PNC reinforces risk management responsibilities through a performance management system where employee performance goals include risk management objectives. Incentives for eligible employees incorporate risk management results through balanced measures of risk-adjusted performance.
Proactive communication, between groups and up to the Board of Directors, facilitates timely identification and resolution of risk issues. PNCs multi-level risk committee structure provides a formal channel to identify, decision, and report risk. Risk committee membership includes representatives from business and risk stakeholder groups that are responsible for helping ensure risk issues are proactively identified, decisioned, monitored, communicated and managed appropriately within the enterprise risk management framework.
Risk Organization and Governance
PNC employs a comprehensive risk management governance structure to help ensure that risks are identified, balanced decisions are made that consider risk and return, and risks are adequately monitored and managed. Risk committees established within this governance structure provide oversight for risk management activities at the Board, corporate, and business levels. Committee composition is designed to provide effective oversight balanced across the three lines of defense in accordance with the OCCs heightened risk management and governance expectations and guidelines. See
further discussion in the Supervision and Regulation section in Item 1 of this Report. Within the three lines of defense, the risk organization has sufficient authority to influence material decisions. The Board oversees enterprise risk management of PNC for any material changes to the risk profile and periodically reviews core elements of enterprise risk including the Risk Appetite Statement, Risk Capacity, Appetite and Strategy, and Risk Controls and Limits.
We use our governance structure to assess the effectiveness of our risk management practices on an ongoing basis, based on how we manage our day-to-day business activities and on our development and execution of more specific strategies to mitigate risks. Specific responsibilities include:
Board of Directors The Board oversees enterprise risk management. The Risk Committee of the Board of Directors evaluates PNCs risk appetite, managements assessment of the enterprise risk profile, and the enterprise-wide risk structure and processes established by management to identify, measure, monitor, and manage risk. The Audit Committee of the Board also has responsibility for select areas of risk ( e.g. , Financial Reporting, Ethics and Internal Controls over Financial Reporting).
Corporate Committees The corporate committees are responsible for overseeing risk standards and strategies, recommending risk limits, policies and metrics, monitoring risk exposures, reviewing risk profiles and key risk issues, and approving significant transactions and initiatives. At the management level, PNC has established several senior management-level committees to facilitate the review, evaluation, and management of risk. The management-level Executive Committee (EC) is the corporate committee that is responsible for developing enterprise-wide strategy and achieving PNCs strategic objectives. The EC evaluates risk management, in part, by monitoring risk reporting from the other corporate committees, which are the supporting committees for EC.
Working Committees The working committees are generally subcommittees of the corporate committees and include risk management committees for each of PNCs major businesses or functions. Working committees are intended to define, design and develop the risk management framework, including risk appetite, at the business or function level. The working committees help to implement key enterprise-level activities within a business or function. These committees recommend risk management policies for the business or function that are consistent with the enterprise-wide risk management objectives and policies. The business level committees are also responsible for approving significant initiatives under a certain threshold.
70 The PNC Financial Services Group, Inc. Form 10-K |
Working Groups Where appropriate, management will also form ad hoc groups (working groups) to address specific risk topics and report to a working committee or corporate committee. These working groups generally have a more narrow scope and may be limited in their duration.
Policies and Procedures PNC has established risk management policies and procedures to provide direction, guidance, and clarity on roles and responsibilities to management and the Board of Directors. These policies and procedures are organized in a multi-tiered framework and require periodic review and approval by relevant committees within the governance structure.
Business Activities Our businesses strive to enhance risk management and internal control processes. Integrated and comprehensive processes are designed to adequately identify, measure, manage, monitor, and report risks which may significantly impact each business.
Risk Identification and Quantification
Risk identification takes place across a variety of risk types throughout the organization. These risk types consist of, but are not limited to, credit, operational, compliance, market, liquidity and model. Risks are identified based on a balanced use of analytical tools and management judgment for both on- and off-balance sheet exposures. Our governance structure supports risk identification by facilitating assessment of key risk issues, emerging risks, and idiosyncratic risks and implementation of mitigation strategies as appropriate. These risks are prioritized based on quantitative and qualitative analysis and assessed against the risk appetite. Multiple tools and approaches are used to help identify and prioritize risks, including Risk Appetite Metrics, Key Risk Indicators (KRIs), Key Performance Indicators (KPIs), Risk Control and Self-Assessments (RCSAs), scenario analysis, stress testing, special investigations and controls.
Risks are aggregated and assessed within and across risk functions or businesses. The aggregated risk information is reviewed and reported at an enterprise level for adherence to the risk appetite as established through the policy framework and approved by the Board of Directors or by appropriate managing committees. This enterprise aggregation and reporting approach promotes the identification and appropriate escalation of material risks across the organization and supports an understanding of the cumulative impact of risk in relation to our risk appetite.
Risk Control and Limits
PNC uses a multi-tiered risk policy, procedure, and committee charter framework to provide direction and guidance for identifying, decisioning, monitoring, communicating and managing risk, including appropriate processes to escalate control parameter exceptions when applicable.
Risk controls and limits provide the linkage from PNCs Risk Appetite Statement and associated guiding principles to the risk taking activities of our businesses. Risk limits are quantitative measures, including forward looking assumptions, which allocate the firms aggregate risk appetite statement to lines of business and functional risk areas. They are established within policy across risk categories and are embedded within each risk appetite description.
When setting risk limits, PNC considers major risks, aligns with the established risk appetite, balances risk-reward, leverages analytics including stressed scenarios along with historical data, and adjusts limits in a timely manner in response to changes in internal and external environments. Quantitative and qualitative operating guidelines support risk limits and serve as an early warning system for potential violations of the limits. These operating guidelines trigger mitigation strategies and management escalation protocols if limits are breached.
PNCs control structure is balanced in terms of efficiency and effectiveness with the risks that we are willing to take, as defined by our risk appetite. Controls are in place across the risk taxonomy to monitor established risk limits.
Risk Monitoring and Reporting
PNC uses similar tools to monitor and report risk as when performing Risk Identification. These tools include Risk Appetite Metrics, KRIs, KPIs, RCSAs, scenario analysis, stress testing, special investigations and controls.
The risk identification and quantification processes, the risk control and limits reviews, and the tools used for risk monitoring provide the basis for risk reporting. The objective of risk reporting is comprehensive risk aggregation and transparent communication of aggregated risks, issues, risk level compared to appetite, outlook as well as mitigation strategies where appropriate, to the Risk Committee of the Board of Directors, Corporate Committees, Working Committees and other designated parties for effective decision making.
Risk reports are produced at the line of business level, functional risk level and the enterprise level. The enterprise level risk report aggregates risks identified in the functional and business reports to define the enterprise risk profile. The enterprise risk profile is a point-in-time assessment of enterprise risk. The risk profile represents PNCs overall risk position in relation to the desired enterprise risk appetite and overall risk capacity. The determination of the enterprise risk profile is based on analysis of quantitative reporting of risk limits and other measures along with qualitative assessments. Quarterly aggregation of our risk profile enables a clear view of our risk level relative to our quantitative risk appetite and overall risk capacity. The enterprise level report is provided through the governance structure to the Board of Directors.
The PNC Financial Services Group, Inc. Form 10-K 71 |
Credit Risk Management
Credit risk represents the possibility that a customer, counterparty or issuer may not perform in accordance with contractual terms. Credit risk is inherent in the financial services business and results from extending credit to customers, purchasing securities, and entering into financial derivative transactions and certain guarantee contracts. Credit risk is one of our most significant risks. Our processes for managing credit risk are embedded in PNCs risk culture and in our decision-making processes using a systematic approach whereby credit risks and related exposures are identified and assessed, managed through specific policies and processes, measured and evaluated against our risk appetite and credit concentration limits, and reported, along with specific mitigation activities, to management and the Board through our governance structure.
Asset Quality Overview
Asset quality trends in 2014 improved from 2013.
|
Nonperforming assets at December 31, 2014 decreased $577 million compared with December 31, 2013 as a result of improvements in both consumer and commercial nonperforming loans. Consumer lending nonperforming loans decreased $224 million, commercial real estate nonperforming loans declined $184 million and commercial nonperforming loans decreased $167 million. Nonperforming assets were 0.83% of total assets at December 31, 2014 compared with 1.08% at December 31, 2013. |
|
Overall loan delinquencies of $1.9 billion decreased $.5 billion, or 22%, from year-end 2013 levels. The reduction was due in large part to a reduction in accruing government insured residential real estate loans past due 90 days or more of $.3 billion, the majority of which we took possession of and conveyed the real estate, or are in the process of conveyance and claim resolution. |
|
Net charge-offs were $.5 billion in 2014, down 51% from net charge-offs in 2013 of $1.1 billion, due primarily to improved overall credit quality. Net charge-offs for 2013 included $134 million of charge-offs due to the impact of alignment with interagency supervisory guidance on practices for loans and lines of credit related to consumer lending in the first quarter of 2013. |
|
Provision for credit losses in 2014 decreased to $273 million compared with $643 million in 2013. The smaller provision is attributed to improved overall credit quality, including lower consumer loan delinquencies, and the increasing value of residential real estate which resulted in greater expected cash flows from our purchased impaired loans. |
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The level of ALLL decreased to $3.3 billion at December 31, 2014 from $3.6 billion at December 31, 2013. |
Nonperforming Assets and Loan Delinquencies
Nonperforming Assets, including OREO and Foreclosed Assets
Nonperforming assets include nonperforming loans and leases for which ultimate collectability of the full amount of contractual principal and interest is not probable and include nonperforming troubled debt restructurings (TDRs), OREO and foreclosed assets. Loans held for sale, certain government insured or guaranteed loans, purchased impaired loans and loans accounted for under the fair value option are excluded from nonperforming loans. Additional information regarding our nonperforming loans and nonaccrual policies is included in Note 1 Accounting Policies in the Notes To Consolidated Financial Statements in Item 8 of this Report. The major categories of nonperforming assets are presented in Table 30.
In the first quarter of 2013, we completed our alignment of certain nonaccrual and charge-off policies consistent with interagency supervisory guidance on practices for loans and lines of credit related to consumer lending. This alignment primarily related to (i) subordinate consumer loans (home equity loans and lines of credit and residential mortgages) where the first-lien loan was 90 days or more past due, (ii) government guaranteed loans where the guarantee may not result in collection of substantially all contractual principal and interest and (iii) certain loans with borrowers in or discharged from bankruptcy. In the first quarter of 2013, nonperforming loans increased by $426 million and net charge-offs increased by $134 million as a result of completing the alignment of the aforementioned policies. Additionally, overall delinquencies decreased $395 million due to loans now being reported as either nonperforming or, in the case of loans accounted for under the fair value option, nonaccruing or having been charged off. Certain consumer nonperforming loans were charged-off to the respective collateral value less costs to sell, and any associated allowance at the time of charge-off was reduced to zero. As the interagency guidance was adopted, incremental provision for credit losses was recorded if the related loan charge-off exceeded the associated allowance. Subsequent declines in collateral value for these loans will result in additional charge-offs to maintain recorded investment at collateral value less costs to sell.
At December 31, 2014, TDRs included in nonperforming loans were $1.4 billion, or 55%, of total nonperforming loans compared to $1.5 billion, or 49%, of total nonperforming loans as of December 31, 2013. Within consumer nonperforming loans, residential real estate TDRs comprise 60% of total residential real estate nonperforming loans at December 31, 2014, up from 59% at December 31, 2013. Home equity TDRs comprise 54% of home equity nonperforming loans at both December 31, 2014 and at December 31, 2013. 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
72 The PNC Financial Services Group, Inc. Form 10-K |
through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.
At December 31, 2014, our largest nonperforming asset was $35 million in the Real Estate, Rental and Leasing Industry and our average nonperforming loans associated with commercial lending were under $1 million. All of the ten largest outstanding nonperforming assets are from the commercial lending portfolio and represent 21% and 4% of total commercial lending nonperforming loans and total nonperforming assets, respectively, as of December 31, 2014.
Table 30: Nonperforming Assets By Type
Dollars in millions |
December 31
2014 |
December 31
2013 |
||||||
Nonperforming loans |
||||||||
Commercial lending |
||||||||
Commercial |
||||||||
Retail/wholesale trade |
$ | 48 | $ | 57 | ||||
Manufacturing |
59 | 58 | ||||||
Service providers |
67 | 108 | ||||||
Real estate related (a) |
66 | 124 | ||||||
Financial services |
4 | 7 | ||||||
Health care |
28 | 19 | ||||||
Other industries |
18 | 84 | ||||||
Total commercial |
290 | 457 | ||||||
Commercial real estate |
||||||||
Real estate projects (b) |
290 | 436 | ||||||
Commercial mortgage |
44 | 82 | ||||||
Total commercial real estate |
334 | 518 | ||||||
Equipment lease financing |
2 | 5 | ||||||
Total commercial lending |
626 | 980 | ||||||
Consumer lending (c) |
||||||||
Home equity |
1,112 | 1,139 | ||||||
Residential real estate |
||||||||
Residential mortgage |
694 | 890 | ||||||
Residential construction |
12 | 14 | ||||||
Credit card |
3 | 4 | ||||||
Other consumer |
63 | 61 | ||||||
Total consumer lending |
1,884 | 2,108 | ||||||
Total nonperforming loans (d) |
2,510 | 3,088 | ||||||
OREO and foreclosed assets |
||||||||
Other real estate owned (OREO) (e) |
351 | 360 | ||||||
Foreclosed and other assets |
19 | 9 | ||||||
Total OREO and foreclosed assets |
370 | 369 | ||||||
Total nonperforming assets |
$ | 2,880 | $ | 3,457 | ||||
Amount of TDRs included in nonperforming loans |
$ | 1,370 | $ | 1,511 | ||||
Percentage of total nonperforming loans |
55 | % | 49 | % | ||||
Nonperforming loans to total loans |
1.23 | % | 1.58 | % | ||||
Nonperforming assets to total loans, OREO and foreclosed assets |
1.40 | 1.76 | ||||||
Nonperforming assets to total assets |
0.83 | 1.08 | ||||||
Allowance for loan and lease losses to total nonperforming loans (f) |
133 | 117 |
(a) | Includes loans related to customers in the real estate and construction industries. |
(b) | Includes both construction loans and intermediate financing for projects. |
(c) | 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. |
(d) | Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. |
(e) | OREO excludes $194 million and $245 million at December 31, 2014 and December 31, 2013, respectively, related to commercial and residential real estate that was acquired by us upon foreclosure of serviced loans because they are insured by the FHA or guaranteed by the VA or guaranteed by the Department of Housing and Urban Development. |
(f) | The allowance for loan and lease losses includes impairment reserves attributable to purchased impaired loans. See Note 1 Accounting Policies and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information. |
Table 31: OREO and Foreclosed Assets
In millions |
December 31
2014 |
December 31
2013 |
||||||
Other real estate owned (OREO): |
||||||||
Residential properties |
$ | 183 | $ | 164 | ||||
Residential development properties |
48 | 74 | ||||||
Commercial properties |
120 | 122 | ||||||
Total OREO |
351 | 360 | ||||||
Foreclosed and other assets |
19 | 9 | ||||||
Total OREO and foreclosed assets |
$ | 370 | $ | 369 |
Total OREO and foreclosed assets increased $1 million during 2014 from $369 million at December 31, 2013 to $370 million at December 31, 2014 and is 13% of total nonperforming assets at December 31, 2014. As of December 31, 2014 and December 31, 2013, 62% and 64%, respectively, of our OREO and foreclosed assets were comprised of residential related properties.
The PNC Financial Services Group, Inc. Form 10-K 73 |
Table 32: Change in Nonperforming Assets
In millions | 2014 | 2013 | ||||||
January 1 |
$ | 3,457 | $ | 3,794 | ||||
New nonperforming assets (a) |
2,127 | 3,343 | ||||||
Charge-offs and valuation adjustments (b) |
(585 | ) | (1,002 | ) | ||||
Principal activity, including paydowns and payoffs |
(1,001 | ) | (1,016 | ) | ||||
Asset sales and transfers to loans held for sale |
(570 | ) | (492 | ) | ||||
Returned to performing status |
(548 | ) | (1,170 | ) | ||||
December 31 |
$ | 2,880 | $ | 3,457 |
(a) | New nonperforming assets in the 2013 period include $560 million of loans added in the first quarter of 2013 due to the alignment with interagency supervisory guidance on practices for loans and lines of credit related to consumer lending. |
(b) | Charge-offs and valuation adjustments in the 2013 period include $134 million of charge-offs due to the alignment with interagency supervisory guidance discussed in footnote (a) above. |
The table above presents nonperforming asset activity during 2014 and 2013, respectively. Nonperforming assets decreased $577 million from $3.5 billion at December 31, 2013 to $2.9 billion at December 31, 2014, as a result of improvements in both consumer and commercial lending. Consumer lending nonperforming loans decreased $224 million, commercial real estate nonperforming loans declined $184 million and commercial nonperforming loans decreased $167 million. As of December 31, 2014, approximately 90% of total nonperforming loans were secured by collateral which lessens reserve requirements and is expected to reduce credit losses in the event of default. As of December 31, 2014, commercial lending nonperforming loans were carried at approximately 65% of their unpaid principal balance, due to charge-offs recorded to date, before consideration of the ALLL. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information on these loans.
Purchased impaired loans are considered performing, even if contractually past due (or if we do not expect to receive payment in full based on the original contractual terms), as we accrete interest income over the expected life of the loans. The accretable yield represents the excess of the expected cash flows on the loans at the measurement date over the carrying value. Generally decreases, other than interest rate decreases for variable rate notes, in the net present value of expected cash flows of individual commercial or pooled purchased impaired loans would result in an impairment charge to the provision for credit losses in the period in which the change is deemed probable. Generally increases in the net present value of expected cash flows of purchased impaired loans would
first result in a recovery of previously recorded allowance for loan losses, to the extent applicable, and then an increase to accretable yield for the remaining life of the purchased impaired loans. Total nonperforming loans and assets in the tables above are significantly lower than they would have been due to this accounting treatment for purchased impaired loans. This treatment also results in a lower ratio of nonperforming loans to total loans and a higher ratio of ALLL to nonperforming loans. See Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information on these loans.
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.
Total early stage loan delinquencies (accruing loans past due 30 to 89 days) decreased from $1.0 billion at December 31, 2013 to $0.8 billion at December 31, 2014. The reduction in both consumer and commercial lending early stage delinquencies resulted from improved credit quality. See Note 1 Accounting Policies in the Notes To Consolidated Financial Statements of this Report for additional information regarding our nonperforming loan and nonaccrual policies.
Accruing loans past due 90 days or more are referred to as late stage delinquencies. These loans are not included in nonperforming loans and continue to accrue interest because they are well secured by collateral, and/or are in the process of collection, are managed in homogenous portfolios with specified charge-off timeframes adhering to regulatory guidelines, or are certain government insured or guaranteed loans. These loans decreased $.4 billion, or 26%, from $1.5 billion at December 31, 2013 to $1.1 billion at December 31, 2014, mainly due to a decline in government insured residential real estate loans of $.3 billion, the majority of which we took possession of and conveyed the real estate, or are in the process of conveyance and claim resolution. The following tables display the delinquency status of our loans at December 31, 2014 and December 31, 2013. Additional information regarding accruing loans past due is included in Note 3 Asset Quality in the Notes To Consolidated Financial Statements of this Report.
74 The PNC Financial Services Group, Inc. Form 10-K |
Table 33: Accruing Loans Past Due 30 To 59 Days (a)
Amount | Percentage of Total Outstandings | |||||||||||||||
Dollars in millions |
December 31 2014 |
December 31
2013 |
December 31
2014 |
December 31
2013 |
||||||||||||
Commercial |
$ | 73 | $ | 81 | .07 | % | .09 | % | ||||||||
Commercial real estate |
23 | 54 | .10 | .25 | ||||||||||||
Equipment lease financing |
11 | 31 | .14 | .41 | ||||||||||||
Home equity |
70 | 86 | .20 | .24 | ||||||||||||
Residential real estate |
||||||||||||||||
Non government insured |
95 | 112 | .66 | .74 | ||||||||||||
Government insured |
68 | 105 | .47 | .70 | ||||||||||||
Credit card |
28 | 29 | .61 | .66 | ||||||||||||
Other consumer |
||||||||||||||||
Non government insured |
62 | 62 | .27 | .28 | ||||||||||||
Government insured |
152 | 154 | .67 | .68 | ||||||||||||
Total |
$ | 582 | $ | 714 | .28 | .37 |
(a) | Amounts in table represent recorded investment. |
Table 34: Accruing Loans Past Due 60 To 89 Days (a)
Amount | Percentage of Total Outstandings | |||||||||||||||
Dollars in millions |
December 31
2014 |
December 31
2013 |
December 31
2014 |
December 31
2013 |
||||||||||||
Commercial |
$ | 24 | $ | 20 | .02 | % | .02 | % | ||||||||
Commercial real estate |
2 | 11 | .01 | .05 | ||||||||||||
Equipment lease financing |
1 | 2 | .01 | .03 | ||||||||||||
Home equity |
32 | 34 | .09 | .09 | ||||||||||||
Residential real estate |
||||||||||||||||
Non government insured |
25 | 30 | .17 | .20 | ||||||||||||
Government insured |
43 | 57 | .30 | .38 | ||||||||||||
Credit card |
20 | 19 | .43 | .43 | ||||||||||||
Other consumer |
||||||||||||||||
Non government insured |
19 | 18 | .08 | .08 | ||||||||||||
Government insured |
93 | 94 | .41 | .42 | ||||||||||||
Total |
$ | 259 | $ | 285 | .13 | .15 |
(a) | Amounts in table represent recorded investment. |
Table 35: Accruing Loans Past Due 90 Days Or More (a)
Amount | Percentage of Total Outstandings | |||||||||||||||
Dollars in millions |
December 31
2014 |
December 31
2013 |
December 31
2014 |
December 31 2013 |
||||||||||||
Commercial |
$ | 37 | $ | 42 | .04 | % | .05 | % | ||||||||
Commercial real estate |
2 | .01 | ||||||||||||||
Residential real estate |
||||||||||||||||
Non government insured |
23 | 35 | .16 | .23 | ||||||||||||
Government insured |
719 | 1,025 | 4.99 | 6.80 | ||||||||||||
Credit card |
33 | 34 | .72 | .77 | ||||||||||||
Other consumer |
||||||||||||||||
Non government insured |
16 | 14 | .07 | .06 | ||||||||||||
Government insured |
277 | 339 | 1.22 | 1.50 | ||||||||||||
Total |
$ | 1,105 | $ | 1,491 | .54 | .76 |
(a) | Amounts in table represent recorded investment. |
The PNC Financial Services Group, Inc. Form 10-K 75 |
On a regular basis our Special Asset Committee closely monitors loans, primarily commercial loans, that are not included in the nonperforming or accruing past due categories and for which we are uncertain about the borrowers ability to comply with existing repayment terms. These loans totaled $.2 billion at both December 31, 2014 and December 31, 2013.
Home Equity Loan Portfolio
Our home equity loan portfolio totaled $34.7 billion as of December 31, 2014, or 17% of the total loan portfolio. Of that total, $20.4 billion, or 59%, was outstanding under primarily variable-rate home equity lines of credit and $14.3 billion, or 41%, consisted of closed-end home equity installment loans. Approximately 3% of the home equity portfolio was on nonperforming status as of December 31, 2014.
As of December 31, 2014, we are in an originated first lien position for approximately 51% of the total portfolio and, where originated as a second lien, we currently hold or service the first lien position for approximately an additional 2% of the portfolio. The remaining 47% 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. However, after origination PNC is not typically notified when a senior lien position that is not held by PNC is satisfied. Therefore, information about the current lien status of junior lien loans is less readily available in cases where PNC does not also hold the senior lien. Additionally, PNC is not typically notified when a junior lien position is added after origination of a PNC first lien. This updated information for both junior and senior liens must be obtained from external sources, and therefore, PNC has contracted with 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, updated FICO scores at least quarterly, updated LTVs 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 delinquency, modification status and bankruptcy status of
these loans, 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 primarily utilize a delinquency roll-rate methodology for pools of loans. In accordance with accounting principles, under this methodology, we establish our allowance based upon incurred losses, not lifetime expected losses. The roll-rate methodology estimates transition/roll of loan balances from one delinquency state ( e.g. , 30-59 days past due) to another delinquency state ( e.g. , 60-89 days past due) and ultimately to charge-off. The roll through to charge-off is based on PNCs 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 liens 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 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 borrowers ability to satisfy the loan terms upon the draw period ending is considered in establishing our ALLL. Based upon outstanding balances at December 31, 2014, the following table presents the periods when home equity lines of credit draw periods are scheduled to end.
Table 36: Home Equity Lines of Credit Draw Period End Dates
In millions |
Interest Only
Product |
Principal and
Interest Product |
||||||
2015 |
$ | 1,597 | $ | 541 | ||||
2016 |
1,366 | 437 | ||||||
2017 |
2,434 | 596 | ||||||
2018 |
1,072 | 813 | ||||||
2019 and thereafter |
3,880 | 5,391 | ||||||
Total (a)(b) |
$ | 10,349 | $ | 7,778 |
(a) | Includes all home equity lines of credit that mature in 2015 or later, including those with borrowers where we have terminated borrowing privileges. |
(b) | Includes approximately $154 million, $48 million, $57 million, $42 million and $564 million of home equity lines of credit with balloon payments, including those where we have terminated borrowing privileges, with draw periods scheduled to end in 2015, 2016, 2017, 2018 and 2019 and thereafter, respectively. |
76 The PNC Financial Services Group, Inc. Form 10-K |
Based upon outstanding balances, and excluding purchased impaired loans, at December 31, 2014, for home equity lines of credit for which the borrower can no longer draw ( e.g. , draw period has ended or borrowing privileges have been terminated), approximately 3% were 30-89 days past due and approximately 5% were 90 days or more past due. Generally, when a borrower becomes 60 days past due, we terminate borrowing privileges and those privileges are not subsequently reinstated. At that point, we continue our collection/recovery processes, which may include loan modification resulting in a loan that is classified as a TDR.
See Note 3 Asset Quality in the Notes To Consolidated Financial Statements of this Report for additional information.
Loan Modifications and Troubled Debt Restructurings
Consumer Loan Modifications
We modify loans under government and PNC-developed programs based upon our commitment to help eligible homeowners and borrowers avoid foreclosure, where appropriate. Initially, a borrower is evaluated for a modification under a government program. If a borrower does not qualify under a government program, the borrower is then evaluated under a PNC program. Our programs utilize both temporary and permanent modifications and typically reduce the interest rate, extend the term and/or defer principal. Loans that are either temporarily or permanently modified under programs involving a change to loan terms are generally classified as TDRs. Further, loans that have certain types of payment plans and trial payment arrangements which do not include a contractual change to loan terms may be classified as TDRs. Additional detail on TDRs is discussed below as well as in Note 3 Asset Quality in the Notes To Consolidated Financial Statements of this Report.
A temporary modification, with a term between 3 and 24 months, involves a change in original loan terms for a period of time and reverts to a calculated exit rate for the remaining term of the loan as of a specific date. A permanent modification, with a term greater than 24 months, is a modification in which the terms of the original loan are changed. Permanent modification programs primarily include the government-created Home Affordable Modification Program (HAMP) and PNC-developed HAMP-like modification programs.
For home equity lines of credit, we will enter into a temporary modification when the borrower has indicated a temporary hardship and a willingness to bring current the delinquent loan balance. Examples of this situation often include delinquency due to illness or death in the family or loss of employment. Permanent modifications are entered into when it is confirmed that the borrower does not possess the income necessary to continue making loan payments at the current amount, but our expectation is that the borrower can make payments at a lower amount.
We also monitor the success rates and delinquency status of our loan modification programs to assess their effectiveness in serving our customers needs while mitigating credit losses. Table 37 provides the number of accounts and unpaid principal balance of modified consumer real estate related loans at the end of each year presented and Table 38 provides the number of accounts and unpaid principal balance of modified loans that were 60 days or more past due as of six months, nine months, twelve months and fifteen months after the modification date.
Table 37: Consumer Real Estate Related Loan Modifications
December 31, 2014 | December 31, 2013 | |||||||||||||||
Dollars in millions |
Number of
Accounts |
Unpaid
Principal Balance |
Number of
Accounts |
Unpaid
Principal Balance |
||||||||||||
Home equity |
||||||||||||||||
Temporary Modifications |
5,346 | $ | 417 | 6,683 | $ | 539 | ||||||||||
Permanent Modifications |
13,128 | 968 | 11,717 | 889 | ||||||||||||
Total home equity |
18,474 | 1,385 | 18,400 | 1,428 | ||||||||||||
Residential Mortgages |
||||||||||||||||
Permanent Modifications |
5,876 | 1,110 | 7,397 | 1,445 | ||||||||||||
Non-Prime Mortgages |
||||||||||||||||
Permanent Modifications |
4,358 | 611 | 4,400 | 621 | ||||||||||||
Residential Construction |
||||||||||||||||
Permanent Modifications |
2,292 | 629 | 2,260 | 763 | ||||||||||||
Total Consumer Real Estate Related Loan Modifications |
31,000 | $ | 3,735 | 32,457 | $ | 4,257 |
The PNC Financial Services Group, Inc. Form 10-K 77 |
Table 38: Consumer Real Estate Related Loan Modifications Re-Default by Vintage (a) (b)
Six Months | Nine Months | Twelve Months | Fifteen Months | |||||||||||||||||||||||||||||||||
December 31, 2014 Dollars in thousands |
Number
of
Accounts Re-defaulted |
%
of
Vintage Re-defaulted |
Number
of
Accounts Re-defaulted |
%
of
Vintage Re-defaulted |
Number
of
Accounts Re-defaulted |
%
of
Vintage Re-defaulted |
Number
of
Accounts Re-defaulted |
%
of
Vintage Re-defaulted |
Unpaid
Principal Balance (c) |
|||||||||||||||||||||||||||
Permanent Modifications |
||||||||||||||||||||||||||||||||||||
Home Equity |
||||||||||||||||||||||||||||||||||||
Second Quarter 2014 |
16 | 2.8 | % | $ | 1,053 | |||||||||||||||||||||||||||||||
First Quarter 2014 |
19 | 2.7 | 29 | 4.2 | % | 1,749 | ||||||||||||||||||||||||||||||
Fourth Quarter 2013 |
29 | 2.5 | 47 | 4.0 | 66 | 5.7 | % | 4,539 | ||||||||||||||||||||||||||||
Third Quarter 2013 |
30 | 2.6 | 44 | 3.7 | 60 | 5.1 | 65 | 5.5 | % | 6,376 | ||||||||||||||||||||||||||
Second Quarter 2013 |
25 | 2.0 | 43 | 3.5 | 63 | 5.1 | 87 | 7.0 | 10,046 | |||||||||||||||||||||||||||
Residential Mortgages |
||||||||||||||||||||||||||||||||||||
Second Quarter 2014 |
29 | 7.9 | 4,538 | |||||||||||||||||||||||||||||||||
First Quarter 2014 |
50 | 6.1 | 96 | 11.8 | 14,143 | |||||||||||||||||||||||||||||||
Fourth Quarter 2013 |
84 | 9.4 | 121 | 13.6 | 173 | 19.4 | 24,450 | |||||||||||||||||||||||||||||
Third Quarter 2013 |
97 | 8.9 | 150 | 13.8 | 216 | 19.8 | 255 | 23.4 | 40,999 | |||||||||||||||||||||||||||
Second Quarter 2013 |
137 | 16.4 | 163 | 19.5 | 187 | 22.4 | 227 | 27.2 | 42,977 | |||||||||||||||||||||||||||
Non-Prime Mortgages |
||||||||||||||||||||||||||||||||||||
Second Quarter 2014 |
12 | 13.8 | 2,174 | |||||||||||||||||||||||||||||||||
First Quarter 2014 |
29 | 16.4 | 42 | 23.7 | 6,383 | |||||||||||||||||||||||||||||||
Fourth Quarter 2013 |
18 | 9.9 | 35 | 19.2 | 40 | 22.0 | 5,817 | |||||||||||||||||||||||||||||
Third Quarter 2013 |
23 | 13.7 | 26 | 15.5 | 38 | 22.6 | 47 | 28.0 | 6,119 | |||||||||||||||||||||||||||
Second Quarter 2013 |
24 | 18.8 | 35 | 27.3 | 41 | 32.0 | 43 | 33.6 | 8,927 | |||||||||||||||||||||||||||
Residential Construction |
||||||||||||||||||||||||||||||||||||
Second Quarter 2014 |
3 | 2.5 | 757 | |||||||||||||||||||||||||||||||||
First Quarter 2014 |
3 | 2.2 | 3 | 2.2 | 469 | |||||||||||||||||||||||||||||||
Fourth Quarter 2013 |
1 | 0.7 | 3 | 2.2 | 4 | 2.9 | 2,354 | |||||||||||||||||||||||||||||
Third Quarter 2013 |
1 | 0.7 | 1 | 0.7 | 1 | 0.7 | 1 | 0.7 | 50 | |||||||||||||||||||||||||||
Second Quarter 2013 |
1 | 0.5 | 2 | 1.1 | 4 | 2.1 | 6 | 3.2 | 1,166 | |||||||||||||||||||||||||||
Temporary Modifications |
||||||||||||||||||||||||||||||||||||
Home Equity |
||||||||||||||||||||||||||||||||||||
Second Quarter 2014 |
12 | 37.5 | % | $ | 779 | |||||||||||||||||||||||||||||||
First Quarter 2014 |
3 | 15.8 | 3 | 15.8 | % | 249 | ||||||||||||||||||||||||||||||
Fourth Quarter 2013 |
10 | 19.6 | 12 | 23.5 | 13 | 25.5 | % | 1,442 | ||||||||||||||||||||||||||||
Third Quarter 2013 |
4 | 9.8 | 9 | 22.0 | 11 | 26.8 | 13 | 31.7 | % | 925 | ||||||||||||||||||||||||||
Second Quarter 2013 |
11 | 14.9 | 18 | 24.3 | 18 | 24.3 | 17 | 23.0 | 1,757 |
(a) | An account is considered in re-default if it is 60 days or more delinquent after modification. The data in this table represents loan modifications completed during the quarters ending June 30, 2013 through June 30, 2014 and represents a vintage look at all quarterly accounts and the number of those modified accounts (for each quarterly vintage) 60 days or more delinquent at six, nine, twelve, and fifteen months after modification. Account totals include active and inactive accounts that were delinquent when they achieved inactive status. Accounts that are no longer 60 days or more delinquent, or were re-modified since prior period, are removed from re-default status in the period in which they are cured or re-modified. |
(b) | Vintage refers to the quarter in which the modification occurred. |
(c) | Reflects December 31, 2014 unpaid principal balances of the re-defaulted accounts for the Second Quarter 2014 vintage at Six Months, for the First Quarter 2014 vintage at Nine Months, for the Fourth Quarter 2013 vintage at Twelve Months, and for the Third Quarter 2013 and prior vintages at Fifteen Months. |
In addition to temporary loan modifications, we may make available to a borrower a payment plan or a HAMP trial payment period. Under a payment plan or a HAMP trial payment period, there is no change to the loans contractual terms so the borrower remains legally responsible for payment of the loan under its original terms.
Payment plans may include extensions, re-ages and/or forbearance plans. All payment plans bring an account current once certain requirements are achieved and are primarily intended to demonstrate a borrowers renewed willingness and ability to re-pay. Due to the short term nature of the payment plan, there is a minimal impact to the ALLL.
Under a HAMP trial payment period, we establish an alternate payment, generally at an amount less than the contractual payment amount, for the borrower during this short time period. This allows a borrower to demonstrate successful payment performance
78 The PNC Financial Services Group, Inc. Form 10-K |
before permanently restructuring the loan into a HAMP modification. Subsequent to successful borrower performance under the trial payment period, we will capitalize the original contractual amount past due, to include accrued interest and fees receivable, and restructure the loans contractual terms, along with bringing the restructured account current. As the borrower is often already delinquent at the time of participation in the HAMP trial payment period, generally enrollment in the program does not significantly increase the ALLL. If the trial payment period is unsuccessful, the loan will be evaluated for further action based upon our existing policies.
Residential conforming and certain residential construction loans have been permanently modified under HAMP or, if they do not qualify for a HAMP modification, under PNC-developed programs, which in some cases may operate similarly to HAMP. These programs first require a reduction of the interest rate followed by an extension of term and, if appropriate, deferral of principal payments. As of December 31, 2014 and December 31, 2013, 6,349 accounts with a balance of $.9 billion and 5,834 accounts with a balance of $.9 billion, respectively, of residential real estate loans had been modified under HAMP and were still outstanding on our balance sheet.
Commercial Loan Modifications and Payment Plans
Modifications of terms for commercial loans are based on individual facts and circumstances. Commercial loan modifications may involve reduction of the interest rate, extension of the loan term and/or forgiveness of principal. Modified commercial loans are usually already nonperforming prior to modification. We evaluate these modifications for TDR classification based upon whether we granted a concession to a borrower experiencing financial difficulties. Additional detail on TDRs is discussed below as well as in Note 3 Asset Quality in the Notes To Consolidated Financial Statements of this Report.
We have established certain commercial loan modification and payment programs for small business loans, Small Business Administration loans, and investment real estate loans. As of December 31, 2014 and December 31, 2013, $34 million and $47 million, respectively, in loan balances were covered under these modification and payment plan programs. Of these loan balances, $12 million and $16 million have been determined to be TDRs as of December 31, 2014 and December 31, 2013, respectively.
Troubled Debt Restructurings
A TDR is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs result from our loss mitigation activities and include rate reductions, principal forgiveness, postponement/reduction of scheduled amortization and
extensions, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Additionally, TDRs also result from borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC. For the twelve months ended December 31, 2014, $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, were excluded from the TDR population. The comparable amount for the twelve months ended December 31, 2013 was $2.3 billion.
Table 39: Summary of Troubled Debt Restructurings (a)
In millions |
December 31
2014 |
December 31
2013 |
||||||
Consumer lending: |
||||||||
Real estate-related |
$ | 1,864 | $ | 1,939 | ||||
Credit card |
130 | 166 | ||||||
Other consumer |
47 | 56 | ||||||
Total consumer lending |
2,041 | 2,161 | ||||||
Total commercial lending |
542 | 578 | ||||||
Total TDRs |
$ | 2,583 | $ | 2,739 | ||||
Nonperforming |
$ | 1,370 | $ | 1,511 | ||||
Accruing (b) |
1,083 | 1,062 | ||||||
Credit card |
130 | 166 | ||||||
Total TDRs |
$ | 2,583 | $ | 2,739 |
(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 have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make principal and interest payments under the restructured terms are not returned to accrual status. |
Total TDRs decreased $156 million, or 6%, during 2014. Nonperforming TDRs totaled $1.4 billion, which represents approximately 55% of total nonperforming loans, and 53% of total TDRs.
TDRs that are performing, including credit card loans, are excluded from nonperforming loans. These TDRs decreased $15 million, or 1%, during 2014 to $1.2 billion as of December 31, 2014. Generally, the accruing category is comprised of loans where borrowers have been performing under the restructured terms for at least six consecutive months. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status. See Note 3 Asset Quality in the Notes To Consolidated Financial Statements in this Report for additional information.
The PNC Financial Services Group, Inc. Form 10-K 79 |
Allowances For Loan And Lease Losses And Unfunded Loan Commitments And Letters Of Credit
We recorded $.5 billion in net charge-offs for 2014, compared to $1.1 billion for 2013. Commercial lending net charge-offs decreased from $249 million in 2013 to $55 million in 2014. Consumer lending net charge-offs decreased from $828 million in 2013, which included $134 million due to the impact of alignment with interagency supervisory guidance, to $476 million in 2014.
Table 40: Loan Charge-Offs And Recoveries
Year ended December 31 Dollars in millions |
Gross
Charge-offs |
Recoveries |
Net
Charge-offs /
|
Percent of
Average Loans |
||||||||||||
2014 |
||||||||||||||||
Commercial |
$ | 276 | $ | 207 | $ | 69 | .07 | % | ||||||||
Commercial real estate |
70 | 84 | (14 | ) | (.06 | ) | ||||||||||
Equipment lease financing |
14 | 14 | ||||||||||||||
Home equity |
275 | 78 | 197 | .56 | ||||||||||||
Residential real estate |
40 | 26 | 14 | .10 | ||||||||||||
Credit card |
163 | 21 | 142 | 3.24 | ||||||||||||
Other consumer |
183 | 60 | 123 | .54 | ||||||||||||
Total |
$ | 1,021 | $ | 490 | $ | 531 | .27 | |||||||||
2013 |
||||||||||||||||
Commercial |
$ | 395 | $ | 248 | $ | 147 | .17 | % | ||||||||
Commercial real estate |
203 | 93 | 110 | .57 | ||||||||||||
Equipment lease financing |
8 | 16 | (8 | ) | (.11 | ) | ||||||||||
Home equity |
486 | 73 | 413 | 1.14 | ||||||||||||
Residential real estate |
133 | 4 | 129 | .86 | ||||||||||||
Credit card |
178 | 22 | 156 | 3.75 | ||||||||||||
Other consumer |
185 | 55 | 130 | .60 | ||||||||||||
Total |
$ | 1,588 | $ | 511 | $ | 1,077 | .57 |
Total net charge-offs are lower than they would have been otherwise due to the accounting treatment for purchased impaired loans. This treatment also results in a lower ratio of net charge-offs to average loans. See Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information on net charge-offs related to these loans.
We maintain an ALLL to absorb losses from the loan and lease portfolio and determine this allowance based on quarterly assessments of the estimated probable credit losses incurred in the loan and lease portfolio. We maintain the ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan and lease portfolio as of the balance sheet date. The reserve calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan and lease portfolio performance experience, the financial
strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.
We establish specific allowances for loans considered impaired using methods prescribed by GAAP. All impaired loans are subject to individual analysis, except leases and large groups of smaller-balance homogeneous loans which may include, but are not limited to, credit card, residential real estate secured and consumer installment loans. Specific allowances for individual loans (including commercial and consumer TDRs) are determined based on an analysis of the present value of expected future cash flows from the loans discounted at their effective interest rate, observable market price or the fair value of the underlying collateral.
Reserves allocated to non-impaired commercial loan classes are based on PD and LGD credit risk ratings.
Our commercial pool reserve methodology is sensitive to changes in key risk parameters such as PD and LGD. The results of these parameters are then applied to the loan balance and unfunded loan commitments and letters of credit to determine the amount of the respective reserves. Our PDs and LGDs are primarily determined using internal commercial loan loss data. This internal data is supplemented with third-party data and management judgment, as deemed necessary. We continue to evaluate and enhance our use of internal commercial loss data and will periodically update our PDs and LGDs as well as consider third-party data, regulatory guidance and management judgment.
The majority of the commercial portfolio is secured by collateral, including loans to asset-based lending customers, which continues to demonstrate lower LGD compared to loans not secured by collateral. Further, the large investment grade or equivalent portion of the loan portfolio has performed well and has not been subject to significant deterioration. Additionally, guarantees on loans greater than $1 million and owner guarantees for small business loans do not significantly impact our ALLL.
Allocations to non-impaired consumer loan classes are primarily based upon a roll-rate model which uses statistical relationships, calculated from historical data that estimate the movement of loan outstandings through the various stages of delinquency and ultimately charge-off.
A portion of the ALLL is related to qualitative and measurement factors. These factors may include, but are not limited to, the following:
|
Industry concentrations and conditions, |
|
Recent credit quality trends, |
|
Recent loss experience in particular portfolios, |
|
Recent macro-economic factors, |
|
Model imprecision, |
|
Changes in lending policies and procedures, |
80 The PNC Financial Services Group, Inc. Form 10-K |
|
Timing of available information, including the performance of first lien positions, and |
|
Limitations of available historical data. |
PNCs determination of the ALLL for non-impaired loans is sensitive to the risk grades assigned to commercial loans and loss rates for consumer loans. There are several other qualitative and quantitative factors considered in determining the ALLL. This sensitivity analysis does not necessarily reflect the nature and extent of future changes in the ALLL. It is intended to provide insight into the impact of adverse changes to risk grades and loss rates only and does not imply any expectation of future deterioration in the risk ratings or loss rates. Given the current processes used, we believe the risk grades and loss rates currently assigned are appropriate. In the hypothetical event that the aggregate weighted average commercial loan risk grades would experience a 1% deterioration, assuming all other variables remain constant, the allowance for commercial loans would increase by approximately $35 million as of December 31, 2014. In the hypothetical event that consumer loss rates would increase by 10%, assuming all other variables remain constant, the allowance for consumer loans would increase by approximately $37 million at December 31, 2014.
Purchased impaired loans are initially recorded at fair value and applicable accounting guidance prohibits the carry over or creation of valuation allowances at acquisition. Because the initial fair values of these loans already reflect a credit component, additional reserves are established when performance is expected to be worse than our expectations as of the acquisition date. At December 31, 2014, we had established reserves of $.9 billion for purchased impaired loans. In addition, loans (purchased impaired and non-impaired) acquired after January 1, 2009 were recorded at fair value . No allowance for loan losses was carried over and no allowance was created at the date of acquisition. See Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information.
In determining the appropriateness of the ALLL, we make specific allocations to impaired loans and allocations to portfolios of commercial and consumer loans. We also allocate reserves to provide coverage for probable losses incurred in the portfolio at the balance sheet date based upon current market conditions, which may not be reflected in historical loss data. Commercial lending is the largest category of credits and is sensitive to changes in assumptions and judgments underlying the determination of the ALLL. We have allocated approximately $1.6 billion, or 47%, of the ALLL at December 31, 2014 to the commercial lending category. Consumer lending allocations are made based on historical loss experience adjusted for recent activity. Approximately $1.7 billion, or 53%, of the ALLL at December 31, 2014 has been allocated to these consumer lending categories.
In addition to the ALLL, we maintain an allowance for unfunded loan commitments and letters of credit. We report this allowance as a liability on our Consolidated Balance Sheet. We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable losses on these unfunded credit facilities. We determine this amount using estimates of the probability of the ultimate funding and losses related to those credit exposures. Other than the estimation of the probability of funding, this methodology is very similar to the one we use for determining our ALLL.
We refer you to Note 1 Accounting Policies and Note 3 Asset Quality in the Notes To Consolidated Financial Statements in Item 8 of this Report for further information on certain key asset quality indicators that we use to evaluate our portfolios and establish the allowances.
Table 41: Allowance for Loan and Lease Losses
Dollars in millions | 2014 | 2013 | ||||||
January 1 |
$ | 3,609 | $ | 4,036 | ||||
Total net charge-offs (a) |
(531 | ) | (1,077 | ) | ||||
Provision for credit losses |
273 | 643 | ||||||
Net change in allowance for unfunded loan commitments and letters of credit |
(17 | ) | 8 | |||||
Other |
(3 | ) | (1 | ) | ||||
December 31 |
$ | 3,331 | $ | 3,609 | ||||
Net charge-offs to average loans (for the year ended) (a) |
.27 | % | .57 | % | ||||
Allowance for loan and lease losses to total loans |
1.63 | 1.84 | ||||||
Commercial lending net charge-offs |
$ | (55 | ) | $ | (249 | ) | ||
Consumer lending net charge-offs (a) |
(476 | ) | (828 | ) | ||||
Total net charge-offs |
$ | (531 | ) | $ | (1,077 | ) | ||
Net charge-offs to average loans (for the year ended) |
||||||||
Commercial lending |
.04 | % | .22 | % | ||||
Consumer lending (a) |
0.62 | 1.07 |
(a) | Includes charge-offs of $134 million taken pursuant to alignment with interagency guidance on practices for loans and lines of credit related to consumer lending in the first quarter of 2013. |
The provision for credit losses totaled $273 million for 2014 compared to $643 million for 2013. The primary drivers of the decrease to the provision were improved overall credit quality, including lower consumer loan delinquencies, and the increasing value of residential real estate which resulted in greater expected cash flows from our purchased impaired loans. For 2014, the provision for commercial lending credit losses increased by $64 million, or 178%, from 2013 primarily due to continued growth in the commercial book, paired with slowing of the reserve releases related to credit quality improvement. The provision for consumer lending credit losses decreased $434 million, or 71%, from 2013.
The PNC Financial Services Group, Inc. Form 10-K 81 |
At December 31, 2014, total ALLL to total nonperforming loans was 133%. The comparable amount for December 31, 2013 was 117%. These ratios are 85% and 72%, respectively, when excluding the $1.2 billion and $1.4 billion, respectively, of ALLL at December 31, 2014 and December 31, 2013 allocated to consumer loans and lines of credit not secured by residential real estate and purchased impaired loans. We have excluded consumer loans and lines of credit not secured by real estate as they are charged off after 120 to 180 days past due and not placed on nonperforming status. Additionally, we have excluded purchased impaired loans as they are considered performing regardless of their delinquency status as interest is accreted in accordance with ASC 310-30 based on the recorded investment balance. Additional allowance is recorded when the net present value of expected cash flows is lower than the recorded investment balance. See Table 30 within this Credit Risk Management section for additional information.
The ALLL balance increases or decreases across periods in relation to fluctuating risk factors, including asset quality trends, net charge-offs and changes in aggregate portfolio balances. During 2014, improved asset quality trends, including, but not limited to, delinquency status and improving economic conditions, as well as reduced net charge-offs and overall portfolio growth combined to result in the ALLL balance declining $.3 billion, or 8% to $3.3 billion as of December 31, 2014 compared to December 31, 2013.
See Note 1 Accounting Policies and Note 4 Purchased Loans in the Notes To Consolidated Financial Statements in Item 8 of this Report regarding changes in the ALLL and in the allowance for unfunded loan commitments and letters of credit.
Operational Risk Management
Operational risk is the risk of loss resulting from inadequate or failed internal processes or systems, human factors, or external events. This includes losses that may arise as a result of non-compliance with laws or regulations, failure to fulfill fiduciary responsibilities, as well as litigation or other legal actions. Operational risk may occur in any of our business activities and manifests itself in various ways, including but not limited to:
|
Transaction processing errors, |
|
Unauthorized transactions and fraud by employees or third parties, |
|
Material disruption in business activities, |
|
System breaches and misuse of sensitive information, |
|
Regulatory or governmental actions, fines or penalties, and |
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Significant legal expenses, judgments or settlements. |
PNCs Operational Risk Management is inclusive of Technology Risk Management and Business Continuity Risk. Enterprise Compliance is responsible for coordinating the
compliance risk component of PNCs Operational Risk framework. Operational Risk Management focuses on balancing business needs, regulatory expectations and risk management priorities through an adaptive and proactive program that is designed to provide a strong governance model, sound and consistent risk management processes and transparent operational risk reporting across the enterprise.
The PNC Board determines the strategic approach to operational risk via establishment of guiding principles, risk appetite and appropriate risk management structure. This includes establishment of risk metrics and limits and operational risk committee hierarchy and reporting structure to identify, understand and manage operational risks.
Executive Management has responsibility for operational risk management. The executive management team is responsible for monitoring significant risks, key controls and related issues through management reporting and a governance structure of risk committees, to help ensure that objectives are pursued within the bounds of our risk appetite.
Within the Independent Risk Management function, Operational Risk Management (ORM) is responsible for developing and maintaining the policies, methodologies, tools, and technology utilized across the enterprise to identify, assess, monitor, and report operational risks. ORM monitors enterprise-wide adherence with related policies and procedures and regularly assesses overall program effectiveness. In addition, ORM independently challenges the results and conclusions generated by the business units during the execution of the operational risk management program.
Business Unit management is responsible for the day-to-day management of operational risks inherent in the products, services, and activities for which they are responsible. Business Unit management is also responsible for adhering to PNCs enterprise-wide operational risk management policies and procedures including regularly identifying, measuring, and monitoring operational risks in their respective areas, as well as capturing, analyzing and reporting operational risks and issues.
Management of operational risk is based upon a comprehensive framework designed to enable PNC to determine the enterprise and individual business units operational risk profile in comparison to the established risk appetite and identify operational risks that may require further mitigation. This framework is established around a set of enterprise-wide policies and a system of internal controls that are designed to manage risk and to provide management with timely and accurate information about the operations of PNC. This framework employs a number of techniques to manage operational risk, including:
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Risk and Control Self Assessments (RCSAs) that are performed at least annually across PNCs businesses, processes, systems and products. RCSA methodology |
82 The PNC Financial Services Group, Inc. Form 10-K |
is a standard process for business units to document and assess operational risks, evaluate key control design and operating effectiveness, and determine if control enhancements are required, |
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A Scenario Analysis program that is leveraged to proactively evaluate operational risks with the potential for severe business, financial, operational or regulatory impact on the company or a major business unit. This methodology leverages standard processes and tools to evaluate a wide range of business and operational risks encompassing both external and internal events relevant to the company. Based upon scenario analysis conclusions, management may implement additional controls or risk management activities to reduce exposure to an acceptable level, |
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A Metrics and Key Risk Indicator framework that allows management to proactively monitor and assess shifts in operational risk exposure or key control effectiveness compared to expectations and thresholds. Enterprise-level Operational Risk Appetite metrics support PNCs Operational Risk Management framework and guiding principles with the objective of maintaining a risk profile within risk appetite. A broad set of operational risk indicators are in place to monitor and report exposures across the different inherent operational risk types. Lastly, business-specific risk indicators are established to monitor the most significant risks and controls identified in the individual risk and control self assessments, and |
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Operational loss events as well as technology and operational breakdowns that do not result in direct loss (near miss events) across the enterprise are continuously captured and maintained in a central repository. This information is analyzed and used to help determine the root causes of these events and to identify trends that could indicate changes in the companys risk exposure or control effectiveness. PNCs External Loss Event program utilizes a number of sources to monitor and identify external loss events occurring across the financial services industry. Relevant external events are evaluated by appropriate business and risk management personnel to determine whether PNC is exposed to similar events, and if so, whether appropriate controls are in place. |
We continue to refine our methodology to estimate capital requirements for operational risk using a proprietary version of an Advanced Measurement Approach (AMA) as prescribed in Basel II. Under the AMA, the results of the program elements described above are key inputs directly incorporated into the capital calculation methodology.
Risk professionals from Operational Risk, Technology Risk Management, Compliance and Legal work closely with business areas to evaluate risks and challenge that appropriate
key controls are established prior to the introduction of new or enhanced products, services and technologies. These risk professionals also challenge Business Units design and implementation of mitigation strategies to address risks and issues identified through ongoing assessment and monitoring activities.
PNCs Technology Risk Management (TRM) program is aligned with the operational risk framework. Technology risk represents the risk associated with the use, ownership, operation, involvement, influence and adoption of technology within an enterprise.
Management of technology risk is embedded into the culture and decision-making processes of PNC through an information and technology risk management framework designed to help ensure secure, sound, and compliant IT systems and infrastructure in support of business strategies and goals. The management of technology risk is a core business skill and an integral part of day-to-day activity.
Cybersecurity is a principal concern for financial institutions and is a very high priority for PNC. The ever changing and complex threat landscape is closely monitored and PNC participates in proactive information sharing with intelligence sources, law enforcement, and the private sector. The cyber security program is based on a continuous improvement strategy by assessing current and emerging threats to protect our critical business functions, as well as the integrity, privacy, and confidentiality of data. We continue to strengthen our controls, processes and systems to help protect our networks, computers, software, and data from attack, damage or unauthorized access. See Item 1A Risk Factors in this Report for additional information regarding the risk of a material adverse impact from interruptions in the effective operation of, or security breaches affecting, those systems.
Managers and staff at all levels are responsible for applying risk management policies, procedures, and strategies in their areas of responsibility. PNCs TRM function supports enterprise management of technology risk by independently assessing technology and information security risks, and by serving in an oversight role by measuring, monitoring, and challenging enterprise technology capabilities. Specifically, Technology Risk Management has the following objectives:
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A sound control infrastructure is in place to effectively manage technology risks to help drive informed business decisions, |
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Technology risks related to ongoing business and operational activities are identified, assessed, and monitored, |
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Technology risks related to new key initiatives are assessed and appropriately managed, and |
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Emerging technology risks are monitored and assessed to verify their potential impact to PNCs overall risk profile. |
The PNC Financial Services Group, Inc. Form 10-K 83 |
To support PNCs overall risk profile within risk appetite and the Enterprise Risk Appetite Statement, Technology Risk Management has established governance, operating structures, metrics, and guiding principles designed to ensure that technology risk is distinctly considered in business activities and strategic decision making processes.
PNC has defined an enterprise-wide business continuity program that provides structure and guidelines to ensure resiliency and recovery of PNCs facilities, employees, suppliers and technology should there be a business disruption. It is a comprehensive program based upon a life cycle containing repeatable activities to identify and mitigate internal and external business disruptive threats. It is the responsibility of PNCs business units to execute and comply with the business continuity program. The program is administered by a separate group, with governance and oversight being provided by additional resources in the Independent Risk Management function.
PNCs Corporate Insurance Group is responsible for managing insurance risk across the organization, and is aligned within the enterprise risk management governance framework. PNC retains select corporate risks through its wholly-owned captive insurance company Alpine Indemnity Limited, and transfers excess risk through the purchase of insurance where appropriate, to mitigate the effects of operational loss events. PNCs risks associated with its participation as an insurer for these programs are mitigated through policy and annual aggregate limits. Decisions surrounding PNCs retention of its operating risks through deductibles or captive participation are made in conjunction with the enterprise risk management governance framework.
The Corporate Insurance Group monitors and manages insurable risks through a combination of risk mitigation, retention and transfer consistent with the organizations risk appetite and philosophy. To ensure the lines of business have a clear understanding of insurance risk and the ability to retain or transfer risk, management holds regular meetings with the lines of business regarding risk evaluation and the utilization of insurance as a risk transfer technique. Furthermore, Corporate Insurance management and the Insurance Risk Committee have primary oversight of reporting insurance related activities through the governance structure that allows management to fully vet risk information.
Quarterly, an enterprise operational risk report is developed to report key operational risks to senior management and the Board of Directors. The report encompasses key operational risk management conclusions, including the overall operational risk level, risk management effectiveness and outlook, grounded in quantitative measures and qualitative factors. Key enterprise operational risks are also included in the enterprise risk report. In addition, operational risk is an integrated part of the quarterly business-specific risk reports.
Compliance Risk
Enterprise Compliance is responsible for coordinating the compliance risk component of PNCs Operational Risk framework. Compliance issues are identified and tracked through enterprise-wide monitoring and tracking programs. Key compliance risk issues are escalated through a comprehensive risk reporting process at both a business and enterprise level and incorporated, as appropriate, into the development and assessment of the firms operational risk profile. The Compliance, Conflicts & Ethics Policy Committee, chaired by the Chief Compliance Officer, provides oversight for compliance, conflicts and ethics programs and strategies across PNC. This committee also oversees the compliance processes related to fiduciary and investment risk. In order to help understand, and where appropriate, proactively address emerging regulatory issues, Enterprise Compliance communicates regularly with various regulators with supervisory or regulatory responsibilities with respect to PNC, its subsidiaries or businesses and participates in forums focused on regulatory and compliance matters in the financial services industry.
Risk professionals from Operational Risk, Technology Risk Management, Compliance and Legal work closely with business areas to evaluate risks and challenge that appropriate key controls are established prior to the introduction of new or enhanced products, services and technologies. These risk professionals also challenge Business Units design and implementation of mitigation strategies to address risks and issues identified through ongoing assessment and monitoring activities.
84 The PNC Financial Services Group, Inc. Form 10-K |
Model Risk Management
PNC relies on quantitative models to measure risks, to estimate certain financial values, and to support or inform certain business decisions. Models may be used in processes such as determining the pricing of various products, grading and granting loans, measuring interest rate risks and other market risks, predicting losses, and assessing capital adequacy, as well as to estimate the value of financial instruments and balance sheet items.
There are risks involved in the use of models as they have the potential to provide inaccurate output or results, could be used for purposes other than those for which they have been designed, or may be operated in an uncontrolled environment where unauthorized changes can take place and where other control risks exist.
The Model Risk Management Group is responsible for policies and procedures describing how model risk is evaluated and managed, and the application of the governance process to implement these practices throughout the enterprise. The Model Risk Management Group, a subgroup of the Enterprise Risk Management Committee, oversees all aspects of model risk, including PNCs compliance with regulatory requirements related to model risk management, and approves exceptions to policy when appropriate.
To better manage our business, our practices around the use of models, and to comply with regulatory guidance and requirements, we have policies and procedures in place that define our governance processes for assessing and controlling model risk. These processes focus on identifying, reporting and remediating any problems with the soundness, accuracy, improper use or operating environment of our models. We recognize that models must be monitored over time to ensure their continued accuracy and functioning, and our policies also address the type and frequency of performance monitoring that is appropriate according to the importance of each model. PNC also monitors key metrics designed to assess our level of model risk and its alignment with our risk appetite.
There are a number of practices we undertake to identify and control model risk. A primary consideration is that models be well understood by those who use them as well as by other parties. Our policies require detailed written model documentation for significant models to assist in making their use transparent and understood by users, independent reviewers, and regulatory and auditing bodies. The documentation must include details on the data and methods used to develop each model, assumptions utilized within the model, an assessment of model performance and a description of model limitations and circumstances in which a model should not be relied upon.
Our modeling methods and data are reviewed by independent model reviewers not involved in the development of the model to identify possible errors or areas where the soundness of the model could be in question. Issues identified by the independent reviewer are tracked and reported using our existing governance structure until the issue has been fully remediated.
It is important that models operate in a controlled environment where access to code or the ability to make changes is limited to those who are authorized to do so. Additionally, proper back-up and recovery mechanisms are needed for the ongoing functioning of models. Our use of independent model control reviewers aids in the evaluation of the existing control mechanisms to help ensure that controls are appropriate and are functioning properly.
The PNC Financial Services Group, Inc. Form 10-K 85 |
Liquidity Risk Management
Liquidity risk has two fundamental components. The first is potential loss assuming we were unable to meet our funding requirements at a reasonable cost. The second is the potential inability to operate our businesses because adequate contingent liquidity is not available. We manage liquidity risk at the consolidated company level (bank, parent company, and nonbank subsidiaries combined) to help ensure that we can obtain cost-effective funding to meet current and future obligations under both normal business as usual and stressful circumstances, and to help ensure that we maintain an appropriate level of contingent liquidity.
Management monitors liquidity through a series of early warning indicators that may indicate a potential market, or PNC-specific, liquidity stress event. In addition, management performs a set of liquidity stress tests over multiple time horizons with varying levels of severity and maintains a contingency funding plan to address a potential stress event. In the most severe liquidity stress simulation, we assume that PNCs liquidity position is under pressure, while the market in general is under systemic pressure. The simulation considers, among other things, the impact of restricted access to both secured and unsecured external sources of funding, accelerated run-off of customer deposits, valuation pressure on assets and heavy demand to fund contingent obligations. Parent company liquidity guidelines are designed to help ensure that sufficient liquidity is available to meet our parent company obligations over the succeeding 24-month period. Liquidity-related risk limits are established within our Enterprise Liquidity Management Policy and supporting policies. Management committees, including the Asset and Liability Committee, and the Board of Directors and its Risk Committee regularly review compliance with key established limits.
In addition to these liquidity monitoring measures and tools described above, PNC also monitors its liquidity by reference to the LCR, a new regulatory minimum liquidity requirement designed to ensure that covered banking organizations maintain an adequate level of liquidity to meet net liquidity needs over the course of a 30-day stress scenario. The LCR is calculated by dividing the amount of an institutions high quality, unencumbered liquid assets (HQLA), as defined and calculated in accordance with the haircuts and limitations of the LCR rules, by its estimated net cash outflow, with net cash outflows determined by applying assumed outflow factors in the LCR rules. The resulting quotient is expressed as a percentage. For PNC and PNC Bank, the LCR became effective January 1, 2015. The minimum required LCR and the requirement to calculate the LCR on a daily basis will be phased-in over a period of years. For 2015, PNC and PNC Bank are required to calculate the LCR on a month-end basis and the minimum LCR that PNC and PNC Bank are required to maintain is 80%.
As of January 31, 2015, PNC and PNC Bank exceeded the minimum LCR requirement in effect for 2015. The estimated January 31, 2015 LCR calculation and the underlying components are based on PNCs current interpretation and understanding of the final LCR rules and are subject to, among other things, further regulatory guidance.
We provide additional information regarding regulatory liquidity requirements and their potential impact on PNC in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of this Report.
Bank Level Liquidity Uses
At the bank level, primary contractual obligations include funding loan commitments, satisfying deposit withdrawal requests and maturities and debt service related to bank borrowings. As of December 31, 2014, there were approximately $7.2 billion of bank borrowings with contractual maturities of less than one year. We also maintain adequate bank liquidity to meet future potential loan demand and provide for other business needs, as necessary. See the Bank Level Liquidity Sources section below.
Bank Level Liquidity Sources
Our largest source of bank liquidity on a consolidated basis is the deposit base generated by our retail and commercial businesses. Total deposits increased to $232.2 billion at December 31, 2014 from $220.9 billion at December 31, 2013, primarily driven by growth in transaction deposits. Assets determined by PNC to be liquid (liquid assets) and unused borrowing capacity from a number of sources are also available to maintain our liquidity position. Borrowed funds come from a diverse mix of short-term and long-term funding sources.
At December 31, 2014, our liquid assets consisted of short-term investments (Federal funds sold, resale agreements, trading securities and interest-earning deposits with banks) totaling $36.0 billion and securities available for sale totaling $44.2 billion. The level of liquid assets fluctuates over time based on many factors, including market conditions, loan and deposit growth and balance sheet management activities. Of our total liquid assets of $80.2 billion, we had $6.1 billion of securities available for sale and trading securities pledged as collateral to secure public and trust deposits, repurchase agreements and for other purposes. In addition to the liquid assets we pledged, $4.8 billion of securities held to maturity were also pledged as collateral for these purposes.
In addition to the customer deposit base, which has historically provided the single largest source of relatively stable and low-cost funding, the bank also obtains liquidity through the issuance of traditional forms of funding including long-term debt (senior notes and subordinated debt and FHLB advances) and short-term borrowings (Federal funds purchased, securities sold under repurchase agreements, commercial paper issuances and other short-term borrowings).
86 The PNC Financial Services Group, Inc. Form 10-K |
On January 16, 2014, PNC Bank established a new bank note program under which it may from time to time offer up to $25 billion aggregate principal amount at any one time outstanding of its unsecured senior and subordinated notes due more than nine months from their date of issue (in the case of senior notes) and due five years or more from their date of issue (in the case of subordinated notes). The $25 billion of notes authorized to be issued and outstanding at any one time includes notes issued by PNC Bank prior to January 16, 2014 under the 2004 bank note program and those notes PNC Bank has assumed through the acquisition of other banks, in each case for so long as such notes remain outstanding. The terms of the new program do not affect any of the bank notes issued prior to January 16, 2014. At December 31, 2014, PNC Bank had $16.0 billion of bank notes outstanding. The following table details all issuances during 2014:
Table 42: PNC Bank Bank Notes Issued During 2014
Issuance Date | Amount | Description of Issuance | ||
January 28, 2014 |
$1.0 billion | Senior notes with a maturity date of January 27, 2017. Interest is payable semi-annually, at a fixed rate of 1.125% on January 27 and July 27 of each year, beginning on July 27, 2014. | ||
January 28, 2014 |
$750 million | Senior notes with a maturity date of January 28, 2019. Interest is payable semi-annually, at a fixed rate of 2.200% on January 28 and July 28 of each year, beginning on July 28, 2014. | ||
March 28, 2014 |
$1.0 billion (a) | Senior extendible floating rate bank notes issued to an affiliate with an initial maturity date of April 15, 2015, subject to the holders monthly option to extend, and a final maturity date of April 15, 2016. Interest is payable at the 3-month LIBOR rate, reset quarterly, plus a spread of .235%, which spread is subject to four potential one basis point increases in the event of certain extensions of maturity by the holder. Interest is payable on January 15, April 15, July 15 and October 15 of each year, beginning on July 15, 2014. | ||
June 20, 2014 |
$1.0 billion | Senior notes with a maturity date of July 2, 2019. Interest is payable semi-annually, at a fixed rate of 2.25% on January 2 and July 2 of each year, beginning on January 2, 2015. | ||
June 20, 2014 |
$900 million (a) | Senior extendible floating rate bank notes with an initial maturity date of July 20, 2015, subject to the holders monthly option to extend, and a final maturity date of July 20, 2016. Interest is payable at the 3-month LIBOR rate, reset quarterly, plus a spread of .235%, which spread is subject to four potential one basis point increases in the event of certain extensions of maturity by the holder. Interest is payable on March 20, June 20, September 20 and December 20 of each year, beginning on September 20, 2014. | ||
June 27, 2014 |
$1.0 billion (a) | Senior extendible floating rate bank notes issued to an affiliate with an initial maturity date of July 15, 2015, subject to the holders monthly option to extend, and a final maturity date of July 15, 2016. Interest is payable at the 3-month LIBOR rate, reset quarterly, plus a spread of .235%, which spread is subject to four potential one basis point increases in the event of certain extensions of maturity by the holder. Interest is payable on January 15, April 15, July 15 and October 15 of each year, beginning on October 15, 2014. | ||
August 1, 2014 |
$300 million | Floating rate senior notes with a maturity date of August 1, 2017. Interest is payable at the 3-month LIBOR rate, reset quarterly, plus a spread of .30% on February 1, May 1, August 1 and November 1 of each year beginning on November 1, 2014. | ||
August 18, 2014 |
$1.25 billion (a) | Senior extendible floating rate bank notes issued to an affiliate with an initial maturity date of September 18, 2015, subject to the holders monthly option to extend, and a final maturity date of August 18, 2016. Interest is payable at the 3-month LIBOR rate, reset quarterly, plus a spread of .235%, which spread is subject to four potential one basis point increases in the event of certain extensions of maturity by the holder. Interest is payable on February 18, May 18, August 18 and November 18 of each year, beginning on November 18, 2014. | ||
September 18, 2014 |
$500 million | Senior notes with a maturity date of October 18, 2017. Interest is payable semi-annually, at a fixed rate of 1.500% on April 18 and October 18 of each year, beginning on April 18, 2015. | ||
September 18, 2014 and October 30, 2014 (reopening) |
$500 million $750 million |
Senior notes with a maturity date of October 18, 2019. Interest is payable semi-annually, at a fixed rate of 2.40% on April 18 and October 18 of each year, beginning on April 18, 2015. | ||
October 30, 2014 |
$500 million | Senior notes with a maturity date of October 30, 2024. Interest is payable semi-annually, at a fixed rate of 3.30% on April 30 and October 30 of each year, beginning on April 30, 2015. | ||
November 26, 2014 |
$1.25 billion | Floating rate senior notes issued to an affiliate with a maturity date of August 18, 2016. Interest is payable at the 3-month LIBOR rate, reset quarterly, plus a spread of .25% on February 18, May 18, August 18 and November 18 of each year, beginning on February 18, 2015. |
(a) | These issuances were called in the fourth quarter of 2014. |
The PNC Financial Services Group, Inc. Form 10-K 87 |
Total senior and subordinated debt of PNC Bank increased to $17.5 billion at December 31, 2014 from $14.6 billion at December 31, 2013 due to the following activity in the period.
Table 43: PNC Bank Senior and Subordinated Debt
In billions | 2014 | |||
January 1 |
$ | 14.6 | ||
Issuances |
10.7 | |||
Calls and maturities |
(8.0 | ) | ||
Other |
.2 | |||
December 31 |
$ | 17.5 |
On February 6, 2015, PNC Bank issued $600 million of floating rate senior notes with a maturity date of January 26, 2017 to an affiliate. Interest is payable at the 3-month LIBOR rate, reset quarterly, plus a spread of .30%, on January 26, April 26, July 26 and October 26 of each year, beginning on April 26, 2015. These floating rate notes were subsequently purchased by PNC. See the Parent Company Liquidity Uses portion of this Liquidity Risk Management section for further detail.
See Note 25 Subsequent Events in the Notes To Consolidated Financial Statements in Item 8 of this Report for information on the issuance of senior notes of $750 million and $1.0 billion on February 23, 2015.
PNC Bank is a member of the FHLB-Pittsburgh and, as such, has access to advances from FHLB-Pittsburgh secured generally by residential mortgage loans, other mortgage-related loans and commercial mortgage-backed securities. At December 31, 2014, our unused secured borrowing capacity was $13.9 billion with FHLB-Pittsburgh. Total FHLB borrowings increased to $20.0 billion at December 31, 2014 from $12.9 billion at December 31, 2013 due to the following activity in the period.
In billions | 2014 | |||
January 1 |
$ | 12.9 | ||
Issuances |
15.7 | |||
Calls and maturities |
(8.6 | ) | ||
December 31 |
$ | 20.0 |
The FHLB-Pittsburgh also periodically provides standby letters of credit on behalf of PNC Bank to secure certain public deposits. PNC Bank began using standby letters of credit issued by the FHLB-Pittsburgh in response to the regulatory liquidity standards finalized during 2014. If the FHLB-Pittsburgh is required to make payment for a beneficiarys draw, the payment amount is converted into a collateralized advance to PNC Bank. At both December 31, 2014 and December 31, 2013, standby letters of credit issued on our behalf by the FHLB-Pittsburgh totaled $6.2 billion.
PNC Bank has the ability to offer up to $10.0 billion of its commercial paper to provide additional liquidity. As of December 31, 2014, there was $5.0 billion outstanding under this program. During the fourth quarter of 2013, PNC finalized the wind down of Market Street Funding LLC (Market Street), a multi-seller asset-backed commercial paper conduit administered by PNC Bank. As part of the wind down process, the commitments and outstanding loans of Market Street were assigned to PNC Bank, which will fund these commitments and loans by utilizing its diversified funding sources. In conjunction with the assignment of commitments and loans, the associated liquidity facilities were terminated along with the program-level credit enhancement provided to Market Street. The wind down did not have a material impact to PNCs financial condition or results of operations.
PNC Bank can also borrow from the Federal Reserve Bank of Clevelands (Federal Reserve Bank) discount window to meet short-term liquidity requirements. The Federal Reserve Bank, however, is not viewed as the primary means of funding our routine business activities, but rather as a potential source of liquidity in a stressed environment or during a market disruption. These potential borrowings are secured by commercial loans. At December 31, 2014, our unused secured borrowing capacity was $15.6 billion with the Federal Reserve Bank.
Parent Company Liquidity
As of December 31, 2014, available parent company liquidity totaled $7.1 billion. Parent company liquidity is primarily held in short-term investments, the terms of which provide for the availability of cash in 31 days or less. Investments with longer durations may also be acquired, but if so, the related maturities are aligned with scheduled cash needs, such as the maturity of parent company debt obligations.
Parent Company Liquidity Uses
The parent companys contractual obligations consist primarily of debt service related to parent company borrowings and funding non-bank affiliates. As of December 31, 2014, there were approximately $2.5 billion of parent company borrowings with contractual maturities of less than one year. Additionally, the parent company maintains adequate liquidity to fund discretionary activities such as paying dividends to PNC shareholders, share repurchases, and acquisitions. See the Parent Company Liquidity Sources section below.
See Capital and Liquidity Actions in the Executive Summary section of this Item 7 for information on our 2014 capital plan that was accepted by the Federal Reserve, which included certain share repurchases that are described in more detail in the Capital portion of the Consolidated Balance Sheet Review section in this Item 7 and the dividend increase described below.
88 The PNC Financial Services Group, Inc. Form 10-K |
On April 3, 2014, consistent with our 2014 capital plan, our Board of Directors approved an increase to PNCs quarterly common stock dividend from 44 cents per common share to 48 cents per common share beginning with the May 5, 2014 dividend payment.
In connection with the 2015 CCAR, PNC submitted its 2015 capital plan, as approved by its Board of Directors, to the Federal Reserve in January 2015. PNC expects to receive the Federal Reserves response (either a non-objection or objection) to the capital plan submitted as part of the 2015 CCAR in March 2015.
See the Supervision and Regulation section in Item 1 of this Report for additional information regarding the Federal Reserves CCAR process and the factors the Federal Reserve takes into consideration in evaluating capital plans, qualitative and quantitative liquidity risk management standards proposed by the U.S. banking agencies, and final rules issued by the Federal Reserve that make certain modifications to the Federal Reserves capital planning and stress testing rules.
See Table 42 for information on affiliate purchases of notes issued by PNC Bank during 2014.
On February 6, 2015, PNC used $600 million of parent company/non-bank subsidiary cash to purchase floating rate senior notes that were issued by PNC Bank to an affiliate on that same date.
Parent Company Liquidity Sources
The principal source of parent company liquidity is the dividends it receives from its subsidiary bank, which may be impacted by the following:
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Bank-level capital needs, |
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Laws and regulations, |
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Corporate policies, |
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Contractual restrictions, and |
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Other factors. |
There are statutory and regulatory limitations on the ability of national banks to pay dividends or make other capital distributions or to extend credit to the parent company or its non-bank subsidiaries. The amount available for dividend payments by PNC Bank to the parent company without prior regulatory approval was approximately $1.5 billion at December 31, 2014. See Note 20 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report for a further discussion of these limitations. We provide additional information on certain contractual restrictions in Note 12 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities in the Notes To Consolidated Financial Statements in Item 8 of this Report.
In addition to dividends from PNC Bank, other sources of parent company liquidity include cash and investments, as well as dividends and loan repayments from other subsidiaries and dividends or distributions from equity investments.
We can also generate liquidity for the parent company and PNCs non-bank subsidiaries through the issuance of debt and equity securities, including certain capital instruments, in public or private markets and commercial paper. We have an effective shelf registration statement pursuant to which we can issue additional debt, equity and other capital instruments.
During 2014, we issued the following parent company debt under our shelf registration statement:
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$750 million of subordinated notes with a maturity date of April 29, 2024. Interest is payable semi-annually, at a fixed rate of 3.90%, on April 29 and October 29 of each year, beginning on October 29, 2014. |
Total parent company senior and subordinated debt and hybrid capital instruments decreased to $10.1 billion at December 31, 2014 from $10.7 billion at December 31, 2013 due to the following activity in the period.
Table 45: Parent Company Senior and Subordinated Debt and Hybrid Capital Instruments
In billions | 2014 | |||
January 1 |
$ | 10.7 | ||
Issuances |
.8 | |||
Maturities |
(1.4 | ) | ||
December 31 |
$ | 10.1 |
On October 16, 2014, the parent company established a $5.0 billion commercial paper program to provide additional liquidity. As of December 31, 2014, there were no issuances outstanding under this program. Following the establishment of this parent company program, PNC Funding Corp terminated its $3.0 billion commercial paper program.
Note 17 Equity in the Notes To Consolidated Financial Statements in Item 8 of this Report describes the 16,885,192 warrants outstanding, each to purchase one share of PNC common stock at an exercise price of $67.33 per share. These warrants were sold by the U.S. Treasury in a secondary public offering in May 2010 after the U.S. Treasury exchanged its TARP Warrant. These warrants will expire December 31, 2018, and are considered in the calculation of diluted earnings per common share in Note 16 Earnings Per Share in the Notes To Consolidated Financial Statements in Item 8 of this Report.
Status of Credit Ratings
The cost and availability of short-term and long-term funding, as well as collateral requirements for certain derivative instruments, is influenced by PNCs debt ratings.
In general, rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, level and quality of earnings, and the current legislative and regulatory environment, including implied government support. In
The PNC Financial Services Group, Inc. Form 10-K 89 |
addition, rating agencies themselves have been subject to scrutiny arising from the most recent financial crisis and could make or be required to make substantial changes to their ratings policies and practices, particularly in response to legislative and regulatory changes. Potential changes in the legislative and regulatory environment and the timing of those changes could impact our ratings, which as noted above, could impact our liquidity and financial condition. A decrease, or potential decrease, in credit ratings could impact access to the capital markets and/or increase the cost of debt, and thereby adversely affect liquidity and financial condition.
Table 46: Credit Ratings as of December 31, 2014 for PNC and PNC Bank
Moodys |
Standard &
Poors |
Fitch | ||||||||||
The PNC Financial Services Group, Inc. |
||||||||||||
Senior debt |
A3 | A- | A+ | |||||||||
Subordinated debt |
Baa1 | BBB+ | A | |||||||||
Preferred stock |
Baa3 | BBB- | BBB- | |||||||||
PNC Bank |
||||||||||||
Senior debt |
A2 | A | A+ | |||||||||
Subordinated debt |
A3 | A- | A | |||||||||
Long-term deposits |
A2 | A | AA- | |||||||||
Short-term deposits |
P-1 | A-1 | F1+ |
Commitments
The following tables set forth contractual obligations and various other commitments as of December 31, 2014 representing required and potential cash outflows.
Table 47: Contractual Obligations
Payment Due By Period | ||||||||||||||||||||
December 31, 2014 in millions | Total |
Less than
one year |
One to
three years |
Four to
five years |
After five
years |
|||||||||||||||
Remaining contractual maturities of time deposits (a) |
$ | 21,396 | $ | 15,185 | $ | 2,709 | $ | 694 | $ | 2,808 | ||||||||||
Borrowed funds (a) (b) |
56,768 | 15,243 | 19,116 | 13,291 | 9,118 | |||||||||||||||
Minimum annual rentals on noncancellable leases |
2,655 | 376 | 622 | 478 | 1,179 | |||||||||||||||
Nonqualified pension and postretirement benefits |
519 | 56 | 109 | 108 | 246 | |||||||||||||||
Purchase obligations (c) |
703 | 468 | 144 | 63 | 28 | |||||||||||||||
Total contractual cash obligations |
$ | 82,041 | $ | 31,328 | $ | 22,700 | $ | 14,634 | $ | 13,379 |
(a) | Includes purchase accounting adjustments. |
(b) | Includes basis adjustment relating to accounting hedges. |
(c) | Includes purchase obligations for goods and services covered by noncancellable contracts and contracts including cancellation fees. |
At December 31, 2014, we had unrecognized tax benefits of $77 million, which represents a reserve for tax positions that we have taken in our tax returns which ultimately may not be sustained upon examination by taxing authorities. Since the ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty, this estimate has been excluded from the contractual obligations table. See Note 19 Income Taxes in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information.
Our contractual obligations totaled $73.5 billion at December 31, 2013. The increase in the comparison is primarily attributable to an increase in borrowed funds partially offset by the decline in time deposits. See Funding Sources in the Consolidated Balance Sheet Review section of this Item 7 for additional information regarding our funding sources.
Table 48: Other Commitments (a)
Amount Of Commitment Expiration By Period | ||||||||||||||||||||
December 31, 2014 in millions |
Total
Amounts Committed |
Less than one
year |
One to
three years |
Four to
five years |
After
five years |
|||||||||||||||
Net unfunded loan commitments |
$ | 139,687 | $ | 53,849 | $ | 47,180 | $ | 37,873 | $ | 785 | ||||||||||
Net outstanding standby letters of credit (b) |
9,991 | 4,973 | 4,043 | 973 | 2 | |||||||||||||||
Reinsurance agreements (c) |
4,342 | 2,071 | 20 | 36 | 2,215 | |||||||||||||||
Other commitments (d) |
962 | 693 | 236 | 32 | 1 | |||||||||||||||
Total commitments |
$ | 154,982 | $ | 61,586 | $ | 51,479 | $ | 38,914 | $ | 3,003 |
(a) | Other commitments are funding commitments that could potentially require performance in the event of demands by third parties or contingent events. Loan commitments are reported net of syndications, assignments and participations. |
(b) | Includes $5.2 billion of standby letters of credit that support remarketing programs for customers variable rate demand notes. |
(c) | Reinsurance agreements are with third-party insurers related to insurance sold to or placed on behalf of our customers. Balances represent estimates based on availability of financial information. |
(d) | Includes unfunded commitments related to equity investments of $169 million that were not on our Consolidated Balance Sheet, of which $140 million relate to private equity investments. The remaining $793 million of commitments were included in Other liabilities on our Consolidated Balance Sheet, of which $717 million related to tax credit investments. |
90 The PNC Financial Services Group, Inc. Form 10-K |
Our total commitments totaled $146.8 billion at December 31, 2013. The increase in the comparison is primarily due to an increase in exposure on net unfunded loan commitments partially offset by a decline in reinsurance agreements and net outstanding standby letters of credit. See Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information on net unfunded loan commitments, our reinsurance agreements, net outstanding standby letters of credit, and certain other commitments.
Market Risk Management
Market risk is the risk of a loss in earnings or economic value due to adverse movements in market factors such as interest rates, credit spreads, foreign exchange rates and equity prices. We are exposed to market risk primarily by our involvement in the following activities, among others:
|
Traditional banking activities of taking deposits and extending loans, |
|
Equity and other investments and activities whose economic values are directly impacted by market factors, and |
|
Fixed income securities, derivatives and foreign exchange activities, as a result of customer activities and securities underwriting. |
We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. Market Risk Management provides independent oversight by monitoring compliance with these limits and guidelines, and reporting significant risks in the business to the Risk Committee of the Board.
Market Risk Management Interest Rate Risk
Interest rate risk results primarily from our traditional banking activities of gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest that we earn on assets and the interest that we pay on liabilities and the level of our noninterest-bearing funding sources. Due to the repricing term mismatches and embedded options inherent in certain of these products, changes in market interest rates not only affect expected near-term earnings, but also the economic values of these assets and liabilities.
Asset and Liability Management centrally manages interest rate risk as prescribed in our risk management policies, which are approved by managements Asset and Liability Committee and the Risk Committee of the Board.
Sensitivity results and market interest rate benchmarks for the fourth quarters of 2014 and 2013 follow:
Table 49: Interest Sensitivity Analysis
Fourth
Quarter 2014 |
Fourth
Quarter 2013 |
|||||||
Net Interest Income Sensitivity Simulation (a) |
||||||||
Effect on net interest income in first year from gradual interest rate change over following 12 months of: |
||||||||
100 basis point increase |
2.1 | % | 2.2 | % | ||||
100 basis point decrease |
(1.0 | )% | (.9 | )% | ||||
Effect on net interest income in second year from gradual interest rate change over the preceding 12 months of: |
||||||||
100 basis point increase |
5.8 | % | 7.4 | % | ||||
100 basis point decrease |
(5.7 | )% | (3.8 | )% | ||||
Duration of Equity Model (a) |
||||||||
Base case duration of equity (in years) |
(4.6 | ) | (1.2 | ) | ||||
Key Period-End Interest Rates |
||||||||
One-month LIBOR |
.17 | % | .17 | % | ||||
Three-year swap |
1.30 | % | .88 | % |
(a) | Given the inherent limitations in certain of these measurement tools and techniques, results become less meaningful as interest rates approach zero. |
In addition to measuring the effect on net interest income assuming parallel changes in current interest rates, we routinely simulate the effects of a number of nonparallel interest rate environments. Table 50 reflects the percentage change in net interest income over the next two 12-month periods assuming (i) the PNC Economists most likely rate forecast, (ii) implied market forward rates and (iii) Yield Curve Slope Flattening (a 100 basis point yield curve slope flattening between 1-month and ten-year rates superimposed on current base rates) scenario.
Table 50: Net Interest Income Sensitivity to Alternative Rate Scenarios (Fourth Quarter 2014)
PNC
Economist |
Market
Forward |
Slope
Flattening |
||||||||||
First year sensitivity |
1.3 | % | 1.0 | % | (1.0 | )% | ||||||
Second year sensitivity |
5.3 | % | 3.6 | % | (4.8 | )% |
All changes in forecasted net interest income are relative to results in a base rate scenario where current market rates are assumed to remain unchanged over the forecast horizon.
When forecasting net interest income, we make assumptions about interest rates and the shape of the yield curve, the volume and characteristics of new business and the behavior of existing on- and off-balance sheet positions. These assumptions determine the future level of simulated net interest income in the base interest rate scenario and the other interest rate scenarios presented in Tables 49 and 50 above.
The PNC Financial Services Group, Inc. Form 10-K 91 |
These simulations assume that as assets and liabilities mature, they are replaced or repriced at then current market rates. We also consider forward projections of purchase accounting accretion when forecasting net interest income.
The following graph presents the LIBOR/Swap yield curves for the base rate scenario and each of the alternate scenarios one year forward.
Table 51: Alternate Interest Rate Scenarios: One Year Forward
The fourth quarter 2014 interest sensitivity analyses indicate that our Consolidated Balance Sheet is positioned to benefit from an increase in interest rates and an upward sloping interest rate yield curve. We believe that we have the deposit funding base and balance sheet flexibility to adjust, where appropriate and permissible, to changing interest rates and market conditions.
Market Risk Management Customer-Related Trading Risk
We engage in fixed income securities, derivatives and foreign exchange transactions to support our customers investing and hedging activities. These transactions, related hedges and the credit valuation adjustment (CVA) related to our customer derivatives portfolio are marked-to-market daily and reported as customer-related trading activities. We do not engage in proprietary trading of these products.
We use value-at-risk (VaR) as the primary means to measure and monitor market risk in customer-related trading activities. We calculate a diversified VaR at a 95% confidence interval. VaR is used to estimate the probability of portfolio losses based on the statistical analysis of historical market risk factors. A diversified VaR reflects empirical correlations across different asset classes.
During 2014, our 95% VaR ranged between $.8 million and $3.9 million, averaging $2.1 million. During 2013, our 95% VaR ranged between $1.7 million and $5.5 million, averaging $3.5 million.
To help ensure the integrity of the models used to calculate VaR for each portfolio and enterprise-wide, we use a process
known as backtesting. The backtesting process consists of comparing actual observations of gains or losses against the VaR levels that were calculated at the close of the prior day. This assumes that market exposures remain constant throughout the day and that recent historical market variability is a good predictor of future variability. Our customer-related trading activity includes customer revenue and intraday hedging which helps to reduce losses, and may reduce the number of instances of actual losses exceeding the prior day VaR measure. There were two instances during 2014 under our diversified VaR measure where actual losses exceeded the prior day VaR measure. In comparison, there was one such instance during 2013. We use a 500 day look back period for backtesting and include customer-related trading revenue.
The following graph shows a comparison of enterprise-wide gains and losses against prior day diversified VaR for the period indicated.
Table 52: Enterprise Wide Gains/Losses Versus Value-at-Risk
Total customer-related trading revenue was as follows:
Table 53: Customer-Related Trading Revenue (a)
Year ended December 31 In millions |
2014 | 2013 | ||||||
Net interest income |
$ | 31 | $ | 30 | ||||
Noninterest income |
147 | 234 | ||||||
Total customer-related trading revenue |
$ | 178 | $ | 264 | ||||
Securities trading (b) |
$ | 33 | $ | 21 | ||||
Foreign exchange |
96 | 98 | ||||||
Financial derivatives and other |
49 | 145 | ||||||
Total customer-related trading revenue |
$ | 178 | $ | 264 |
(a) | Customer-related trading revenues exclude underwriting fees for both periods presented. |
(b) | Includes changes in fair value for certain loans accounted for at fair value. |
Customer-related trading revenues for 2014 decreased $86 million compared with 2013. The decrease was primarily due to market interest rate changes impacting credit valuations for customer-related derivatives activities and reduced derivatives client sales revenues, which were partially offset by improved securities and foreign exchange client sales results.
92 The PNC Financial Services Group, Inc. Form 10-K |
Market Risk Management Equity And Other Investment Risk
Equity investment risk is the risk of potential losses associated with investing in both private and public equity markets. In addition to extending credit, taking deposits, securities underwriting and trading financial instruments, we make and manage direct investments in a variety of transactions, including management buyouts, recapitalizations and growth financings in a variety of industries. We also have investments in affiliated and non-affiliated funds that make similar investments in private equity and in debt and equity-oriented hedge funds. The economic and/or book value of these investments and other assets such as loan servicing rights are directly affected by changes in market factors.
The primary risk measurement for equity and other investments is economic capital. Economic capital is a common measure of risk for credit, market and operational risk. It is an estimate of the potential value depreciation over a one year horizon commensurate with solvency expectations of an institution rated single-A by the credit rating agencies. Given the illiquid nature of many of these types of investments, it can be a challenge to determine their fair values. See Note 7 Fair Value in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information.
Various PNC business units manage our equity and other investment activities. Our businesses are responsible for making investment decisions within the approved policy limits and associated guidelines.
A summary of our equity investments follows:
Table 54: Equity Investments Summary
In millions |
December 31
2014 |
December 31
2013 |
||||||
BlackRock |
$ | 6,265 | $ | 5,940 | ||||
Tax credit investments (a) |
2,616 | 2,572 | ||||||
Private equity |
1,615 | 1,656 | ||||||
Visa |
77 | 158 | ||||||
Other |
155 | 234 | ||||||
Total |
$ | 10,728 | $ | 10,560 |
(a) | The December 31, 2013 amount has been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
BlackRock
PNC owned approximately 35 million common stock equivalent shares of BlackRock equity at December 31, 2014, accounted for under the equity method. The primary risk measurement, similar to other equity investments, is economic capital. The Business Segments Review section of this Item 7 includes additional information about BlackRock.
Tax Credit Investments
Included in our equity investments are direct tax credit investments and equity investments held by consolidated partnerships which totaled $2.6 billion at both December 31, 2014 and December 31, 2013. These equity investment balances include unfunded commitments totaling $717 million and $802 million at December 31, 2014 and December 31, 2013, respectively. These unfunded commitments are included in Other Liabilities on our Consolidated Balance Sheet.
Note 2 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes To Consolidated Financial Statements in Item 8 of this Report has further information on Tax Credit Investments.
Private Equity
The private equity portfolio is an illiquid portfolio comprised of mezzanine and equity investments that vary by industry, stage and type of investment.
Private equity investments carried at estimated fair value totaled $1.6 billion at December 31, 2014 and $1.7 billion at December 31, 2013. As of December 31, 2014, $1.1 billion was invested directly in a variety of companies and $.5 billion was invested indirectly through various private equity funds. Included in direct investments are investment activities of two private equity funds that are consolidated for financial reporting purposes. The noncontrolling interests of these funds totaled $212 million as of December 31, 2014. The interests held in indirect private equity funds are not redeemable, but PNC may receive distributions over the life of the partnership from liquidation of the underlying investments. See Item 1 Business Supervision and Regulation and Item 1A Risk Factors of this Report for discussion of the potential impacts of the Volcker Rule provisions of Dodd-Frank on our interests in and sponsorship of private funds covered by the Volcker Rule.
Our unfunded commitments related to private equity totaled $140 million at December 31, 2014 compared with $164 million at December 31, 2013.
The PNC Financial Services Group, Inc. Form 10-K 93 |
Visa
During 2014, we sold 3.5 million Visa Class B common shares, in addition to the 13 million shares sold in the previous two years. We have entered into swap agreements with the purchaser of the shares as part of these sales. See Note 7 Fair Value in the Notes To Consolidated Financial Statements in Item 8 of this Report for additional information. At December 31, 2014, our investment in Visa Class B common shares totaled approximately 7 million shares and had a carrying value of $77 million. Based on the December 31, 2014 closing price of $262.20 for the Visa Class A common shares, the fair value of our total investment was approximately $742 million at the current conversion rate, which reflects adjustments in respect of all litigation funding by Visa to date. The Visa Class B common shares that we own are transferable only under limited circumstances (including those applicable to the sales in 2014 and the previous two years) until they can be converted into shares of the publicly traded class of stock, which cannot happen until the settlement of all of the specified litigation.
Note 21 Legal Proceedings and Note 22 Commitments and Guarantees in the Notes To Consolidated Financial Statements in Item 8 of this Report have additional information regarding the October 2007 Visa restructuring, our involvement with judgment and loss sharing agreements with Visa and certain other banks, and the status of pending interchange litigation.
Other Investments
We also make investments in affiliated and non-affiliated funds with both traditional and alternative investment strategies. The economic values could be driven by either the fixed-income market or the equity markets, or both. At December 31, 2014, other investments totaled $155 million compared with $234 million at December 31, 2013. We recognized net gains related to these investments of $19 million during 2014, compared with $39 million during 2013.
Given the nature of these investments, if market conditions affecting their valuation were to worsen, we could incur future losses.
Our unfunded commitments related to other investments were immaterial at both December 31, 2014 and December 31, 2013.
See the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of this Report for additional information on the potential impact of the Volcker Rule on PNCs investments in and relationships with private funds that are covered by that rule, as well as PNCs ability to maximize the value of its investments in such funds.
Impact of Inflation
Our assets and liabilities are primarily financial in nature and typically have varying maturity dates. Accordingly, future changes in prices do not affect the obligations to pay or receive fixed and determinable amounts of money. However, during periods of inflation, there may be a subsequent impact affecting certain fixed costs or expenses, an erosion of consumer and customer purchasing power, and fluctuations in the need or demand for our products and services. Should significant levels of inflation occur, our business could potentially be impacted by, among other things, reducing our tolerance for extending credit or causing us to incur additional credit losses resulting from possible increased default rates.
Financial Derivatives
We use a variety of financial derivatives as part of the overall asset and liability risk management process to help manage exposure to market and credit risk inherent in our business activities. Substantially all such instruments are used to manage risk related to changes in interest rates. Interest rate and total return swaps, interest rate caps and floors, swaptions, options, forwards and futures contracts are the primary instruments we use for interest rate risk management. We also enter into derivatives with customers to facilitate their risk management activities.
Financial derivatives involve, to varying degrees, market and credit risk. For interest rate swaps and total return swaps, options and futures contracts, only periodic cash payments and, with respect to options, premiums are exchanged. Therefore, cash requirements and exposure to credit risk are significantly less than the notional amount on these instruments.
Further information on our financial derivatives is presented in Note 1 Accounting Policies, Note 7 Fair Value and Note 15 Financial Derivatives in the Notes To Consolidated Financial Statements in Item 8 of this Report, which is incorporated here by reference.
Not all elements of market and credit risk are addressed through the use of financial derivatives, and such instruments may be ineffective for their intended purposes due to unanticipated market changes, among other reasons.
94 The PNC Financial Services Group, Inc. Form 10-K |
The following table summarizes the notional or contractual amounts and net fair value of financial derivatives at December 31, 2014 and December 31, 2013.
Table 55: Financial Derivatives Summary
December 31, 2014 | December 31, 2013 | |||||||||||||||
In millions |
Notional/
Contractual Amount |
Net Fair
Value (a) |
Notional/
Contractual Amount |
Net Fair
Value (a) |
||||||||||||
Derivatives designated as hedging instruments under GAAP |
||||||||||||||||
Total derivatives designated as hedging instruments |
$ | 49,061 | $ | 1,075 | $ | 36,197 | $ | 825 | ||||||||
Derivatives not designated as hedging instruments under GAAP |
||||||||||||||||
Total derivatives used for residential mortgage banking activities |
$ | 76,102 | $ | 409 | $ | 119,679 | $ | 330 | ||||||||
Total derivatives used for commercial mortgage banking activities |
26,290 | 26 | 53,149 | (12 | ) | |||||||||||
Total derivatives used for customer-related activities |
183,474 | 122 | 169,534 | 138 | ||||||||||||
Total derivatives used for other risk management activities |
5,390 | (425 | ) | 2,697 | (422 | ) | ||||||||||
Total derivatives not designated as hedging instruments |
$ | 291,256 | $ | 132 | $ | 345,059 | $ | 34 | ||||||||
Total Derivatives |
$ | 340,317 | $ | 1,207 | $ | 381,256 | $ | 859 |
(a) | Represents the net fair value of assets and liabilities. |
Consolidated Income Statement Review
Summary Results
Net income for 2013 was $4.2 billion, or $7.36 per diluted common share, compared with $3.0 billion, or $5.28 per diluted common share, for 2012. The increase was driven by an 8% decline in noninterest expense, a 3% increase in revenue and lower provision for credit losses. The decline in noninterest expense reflected our continued focus on disciplined expense management. Higher revenue in the comparison was driven by improvement in the provision for residential mortgage repurchase obligations, strong client fee income and higher gains on asset valuations, partially offset by lower net interest income and lower gains on asset sales.
Net Interest Income
Net interest income decreased by $493 million, or 5%, in 2013 compared with 2012, reflecting a decline in purchase accounting accretion in the comparison, the impact of lower yields on loans and securities, and the impact of lower securities balances. These decreases were partially offset by higher loan balances, reflecting commercial and consumer loan growth over the period, and lower rates paid on borrowed funds and deposits. Total purchase accounting accretion was $.8 billion for 2013 compared to $1.1 billion in 2012.
Net interest margin declined 37 basis points in 2013 compared with 2012 due to lower purchase accounting accretion and lower yields on interest-earning assets, which decreased 48 basis points, partially offset by a decrease in the weighted-average rate paid on total interest-bearing liabilities of 14 basis points.
The decrease in the yield on interest-earning assets was primarily due to lower rates on new loans and purchased
securities in the ongoing low interest rate environment, as well as the impact of higher levels of interest-earning deposits with banks maintained in light of anticipated regulatory requirements. The decrease in the rate paid on interest-bearing liabilities was primarily due to redemptions of higher-rate bank notes and senior debt and subordinated debt, including the redemption of trust preferred and hybrid capital securities.
Noninterest Income
Noninterest income increased to $6.9 billion in 2013 compared to $5.9 billion in 2012, due to higher residential mortgage revenue, which was driven by improvement in the provision for residential mortgage repurchase obligations, strong client fee income and higher gains on asset valuations, partially offset by lower gains on asset sales. Noninterest income as a percentage of total revenue was 43% for 2013, up from 38% for 2012.
Asset management revenue increased to $1.3 billion in 2013 compared to $1.2 billion in 2012, driven by higher earnings from our BlackRock investment, stronger average equity markets and strong sales resulting in positive net flows, after adjustments for cyclical client activities. Discretionary client assets under management increased to $127 billion at December 31, 2013 compared with $112 billion at December 31, 2012.
The increase in consumer service fees to $1.3 billion in 2013 compared to $1.1 billion in 2012 was due to growth in brokerage fees and the impact of higher customer-initiated fee based transactions.
Corporate services revenue increased $44 million, or 4%, to $1.2 billion in 2013 compared with 2012. This increase included the impact of higher valuation gains from rising interest rates on net commercial mortgage servicing rights valuations, which were gains of $68 million in 2013 compared
The PNC Financial Services Group, Inc. Form 10-K 95 |
with $31 million for 2012. The increase in corporate services revenue was primarily due to higher net commercial mortgage servicing rights valuations, higher commercial mortgage fees, net of amortization, and higher treasury management fees, partially offset by lower merger and acquisition advisory fees.
Residential mortgage revenue increased to $871 million in 2013 from $284 million in 2012. The increase was driven by improvement in the provision for residential mortgage repurchase obligations, which was a benefit of $53 million in 2013 compared with a provision of $761 million in 2012. The release of reserves in 2013 was largely the result of agreements with two government-sponsored enterprises (GSEs), FHLMC and FNMA, for loans sold into agency securitizations. See the Recourse And Repurchase Obligations section of this Item 7 and Item 7 in our 2013 Form 10-K for further detail. This benefit was partially offset by lower loan sales revenue resulting from an increase in mortgage interest rates which had the effect of reducing gain on sale margins and, to a lesser extent, loan origination volume.
Service charges on deposits were $597 million in 2013 compared with $573 million in 2012.
Net gains on sales of securities totaled $99 million for 2013 and $204 million for 2012. The net credit component of other-than-temporary impairment (OTTI) of securities recognized in earnings was $16 million in 2013 compared with $111 million for 2012.
Other noninterest income increased by $58 million, or 4%, to $1.5 billion in 2013 due to higher revenue associated with private equity investments and commercial mortgage loans held for sale. In addition, the increase reflected higher revenue from credit valuations for customer-related derivatives activities as higher market interest rates reduced the fair value of PNCs credit exposure on these activities. The impact to 2013 revenue due to these credit valuations was $56 million, while the impact to 2012 revenue was not significant. These increases were partially offset by lower gains on sale of Visa Class B common shares, which were $168 million on the sale of 4 million shares in 2013 compared with gains of $267 million on the sale of 9 million shares in 2012. We held approximately 10 million Visa Class B common shares with a fair value of approximately $971 million and recorded investment of $158 million as of December 31, 2013.
Provision For Credit Losses
The provision for credit losses totaled $643 million in 2013 compared with $987 million in 2012. The decrease in provision compared to prior year was the result of continued credit quality improvement, including improvement in our purchased impaired loan portfolio. Increasing value of residential real estate resulted in greater expected cash flows from our purchased impaired loans.
Noninterest Expense
Noninterest expense was $9.7 billion for 2013, a decrease of $.8 billion, or 8%, from $10.5 billion for 2012. The decline reflected the impact of 2012 integration costs of $267 million and a reduction in noncash charges related to redemption of trust preferred securities to $57 million in 2013 from $295 million in 2012. Additionally, residential mortgage foreclosure-related expenses declined to $56 million from $225 million in the same comparison. These decreases to noninterest expense were partially offset by the impact of a full year of operating expense for the March 2012 RBC Bank (USA) acquisition during 2013 compared to 2012.
In the third quarter of 2013, we concluded redemptions of discounted trust preferred securities assumed in our acquisitions. From the fourth quarter of 2011 through 2013, we redeemed a total of $3.2 billion of these higher-rate trust preferred securities, resulting in noncash charges totaling approximately $550 million. See Note 14 Capital Securities of Subsidiary Trusts and Perpetual Trust Securities in Item 8 of our 2013 Form 10-K and 2012 Form 10-K for more information on our redemption of trust preferred securities in 2013 and 2012, respectively.
Effective Income Tax Rate
The effective income tax rate was 25.9% in both 2013 and 2012. The effective tax rate is generally lower than the statutory rate primarily due to tax credits PNC receives from our investments in low income housing and new markets investments, as well as earnings in other tax exempt investments.
Consolidated Balance Sheet Review
Loans
Loans increased $9.8 billion to $195.6 billion as of December 31, 2013 compared with December 31, 2012. The increase in loans was driven by the increase in commercial lending as a result of growth in commercial and commercial real estate loans, primarily from new customers and organic growth. The increase in consumer lending resulted from growth in automobile and home equity loans, partially offset by paydowns of education loans.
Average total loans increased by $13.4 billion to $190.0 billion in 2013, which was driven by increases in average commercial loans of $9.4 billion, average consumer loans of $2.4 billion and average commercial real estate loans of $1.4 billion. The overall increase in loans reflected organic loan growth, primarily in our Corporate & Institutional Banking segment.
Loans represented 61% of total assets at both December 31, 2013 and December 31, 2012. Commercial lending
96 The PNC Financial Services Group, Inc. Form 10-K |
represented 60% of the loan portfolio at December 31, 2013 and 59% at December 31, 2012. Consumer lending represented 40% of the loan portfolio at December 31, 2013 and 41% at December 31, 2012. Commercial real estate loans represented 11% of total loans at December 31, 2013 and 10% at December 31, 2012 and represented 7% of total assets at December 31, 2013 and 6% at December 31, 2012.
The total loan balances above included purchased impaired loans of $6.1 billion, or 3% of total loans, at December 31, 2013, and $7.4 billion, or 4% of total loans, at December 31, 2012.
Investment Securities
As of December 31, 2013, the amortized cost and fair value of available for sale securities totaled $48.0 billion and $48.6 billion, respectively, compared to an amortized cost and fair value as of December 31, 2012 of $49.4 billion and $51.1 billion, respectively. The amortized cost and fair value of held to maturity securities were $11.7 billion and $11.8 billion, respectively, at December 31, 2013, compared to $10.4 billion and $10.9 billion, respectively, at December 31, 2012. Investment securities represented 19% of total assets at December 31, 2013 and 20% at December 31, 2012. Average investment securities decreased to $57.3 billion during 2013 compared to $60.8 billion during 2012.
The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase and vice versa. In addition, the fair value generally decreases when credit spreads widen and vice versa. Net unrealized gains in the total investment securities portfolio decreased to $.7 billion at December 31, 2013 from $2.1 billion at December 31, 2012 due primarily to an increase in market interest rates. The comparable amounts for the securities available for sale portfolio were $.6 billion and $1.6 billion, respectively.
During 2013, we transferred securities with a fair value of $1.9 billion from available for sale to held to maturity. We changed our intent and committed to hold these high-quality securities to maturity in order to reduce the impact of price volatility on Accumulated other comprehensive income and certain capital measures, taking into consideration market conditions and changes to regulatory capital requirements under Basel III capital standards.
The weighted-average expected maturity of the investment securities portfolio (excluding corporate stocks and other) was 4.9 years at December 31, 2013 and 4.0 years at December 31, 2012.
Loans Held For Sale
Loans held for sale totaled $2.3 billion at December 31, 2013 compared with $3.7 billion at December 31, 2012.
For commercial mortgages held for sale designated at fair value, the balance relating to these loans was $586 million at December 31, 2013 compared to $772 million at December 31, 2012. For commercial mortgages held for sale carried at lower of cost or fair value, we sold $2.8 billion in 2013 compared to $2.2 billion in 2012. All of these loan sales were to government agencies. Total gains of $79 million were recognized on the valuation and sale of commercial mortgage loans held for sale, net of hedges, in 2013, and $41 million in 2012.
Residential mortgage loan origination volume was $15.1 billion in 2013 compared to $15.2 billion in 2012. Substantially all such loans were originated under agency or Federal Housing Administration (FHA) standards. We sold $14.7 billion of loans and recognized related gains of $568 million in 2013. The comparable amounts for 2012 were $13.8 billion and $747 million, respectively.
Asset Quality
Overall credit quality continued to improve during 2013. Nonperforming assets decreased $.3 billion, or 9%, to $3.5 billion at December 31, 2013 compared to December 31, 2012. Nonperforming assets to total assets were 1.08% at December 31, 2013, compared to 1.24% at December 31, 2012. Overall delinquencies of $2.5 billion decreased $1.3 billion, or 33%, compared with December 31, 2012. Net charge-offs of $1.1 billion in 2013 were down 16% compared to net charge-offs of $1.3 billion in 2012. Net charge-offs were 0.57% of average loans in 2013 and 0.73% of average loans in 2012.
The ALLL was $3.6 billion, or 1.84% of total loans and 117% of nonperforming loans, as of December 31, 2013, compared to $4.0 billion, or 2.17% of total loans and 124% of nonperforming loans, as of December 31, 2012.
At December 31, 2013, our largest nonperforming asset was $36 million in the Real Estate, Rental and Leasing Industry and our average nonperforming loans associated with commercial lending were under $1 million.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets totaled $11.3 billion at December 31, 2013 and $10.9 billion at December 31, 2012. The increase of $.4 billion was primarily due to additions to and changes in value of mortgage and other loan servicing rights.
The PNC Financial Services Group, Inc. Form 10-K 97 |
Funding Sources
Total funding sources increased $13.0 billion to $267.0 billion at December 31, 2013 compared with December 31, 2012.
Total deposits increased $7.8 billion at December 31, 2013 compared with December 31, 2012 due to increases in money market, demand, and savings accounts, partially offset by decreases in retail certificates of deposit. Interest-bearing deposits represented 68% of total deposits at December 31, 2013 compared to 67% at December 31, 2012
Average total deposits increased $10.6 billion to $212.2 billion in 2013 compared with the prior year, primarily due to an increase of $15.0 billion in average transaction deposits, which grew to $176.9 billion in 2013. Higher average interest-bearing demand deposits, average money market deposits and average noninterest-bearing deposits drove the increase in average transaction deposits. These increases were partially offset by a decrease of $4.3 billion in average retail certificates of deposit attributable to runoff of maturing accounts. Average total deposits represented 69% of average total assets for 2013 and 68% for 2012.
Total borrowed funds increased $5.2 billion to $46.1 billion at December 31, 2013 as higher Federal Home Loan Bank borrowings and bank notes and senior debt were partially offset by a decrease in commercial paper.
Average borrowed funds were $40.0 billion in 2013 compared with $41.8 billion in 2012. The decrease was primarily due to lower average commercial paper, lower average Federal Home Loan Bank (FHLB) borrowings and lower average federal funds purchased and repurchase agreements.
Shareholders Equity
Total shareholders equity increased $3.4 billion, to $42.3 billion at December 31, 2013 compared with December 31, 2012, primarily reflecting an increase in retained earnings of $3.0 billion (driven by net income of $4.2 billion and the impact of $1.1 billion of common and preferred dividends declared) and an increase of $.6 billion in capital surplus due to the net issuances of preferred stock and common stock and other. These increases were partially offset by the decline of accumulated other comprehensive income of $.4 billion. This decline was primarily due to the impact of an increase in market interest rates and widening asset spreads on securities available for sale and derivatives that are part of cash flow hedging strategies, partially offset by the impact of pension and other postretirement benefit plan adjustments. Common shares outstanding were 533 million at December 31, 2013 and 528 million at December 31, 2012.
Risk-Based Capital
Regulatory Basel I capital ratios at December 31, 2013 were 10.5% for Tier 1 common, 11.1% for leverage, 12.4% for Tier 1 risk-based and 15.8% for total risk-based capital. At December 31, 2012, the Basel I regulatory capital ratios were 9.6% for Tier 1 common, 10.4% for leverage, 11.6% for Tier 1 risk-based and 14.7% for total risk-based capital. The Basel I capital ratios increased in all comparisons primarily due to growth in retained earnings. The net issuance of preferred stock during 2013 partially offset by the redemption of trust preferred securities favorably impacted the December 31, 2013 Basel I Tier 1 risk-based and Basel I total risk-based capital ratios. Basel I risk-weighted assets increased $11.3 billion to $272.2 billion at December 31, 2013 compared to December 31, 2012.
98 The PNC Financial Services Group, Inc. Form 10-K |
Accretable net interest (Accretable yield) The excess of cash flows expected to be collected on a purchased impaired loan over the carrying value of the loan. The accretable net interest is recognized into interest income over the remaining life of the loan using the constant effective yield method.
Adjusted average total assets Primarily comprised of total average quarterly (or annual) assets plus (less) unrealized losses (gains) on investment securities, less goodwill and certain other intangible assets (net of eligible deferred taxes).
Annualized Adjusted to reflect a full year of activity.
Basel III common equity Tier 1 capital Common stock plus related surplus, net of treasury stock, plus retained earnings, plus accumulated other comprehensive income for securities currently and previously held as available for sale, plus accumulated other comprehensive income for pension and other post postretirement benefit plans, less goodwill, net of associated deferred tax liabilities, less other disallowed intangibles, net of deferred tax liabilities and plus/less other adjustments.
Basel III common equity Tier 1 capital ratio Common equity Tier 1 capital divided by period-end risk-weighted assets (as applicable).
Basel III Tier 1 capital Common equity Tier 1 capital, plus preferred stock, plus certain trust preferred capital securities, plus certain noncontrolling interests that are held by others and plus/ less other adjustments.
Basel III Tier 1 capital ratio Tier 1 capital divided by period-end risk-weighted assets (as applicable).
Basel III Total capital Tier 1 capital plus qualifying subordinated debt, plus certain trust preferred securities, plus, under the Basel III transitional rules and the standardized approach, the allowance for loan and lease losses included in Tier 2 capital and other.
Basel III Total capital ratio Total capital divided by period-end risk-weighted assets (as applicable).
Basis point One hundredth of a percentage point.
Carrying value of purchased impaired loans The net value on the balance sheet which represents the recorded investment less any valuation allowance.
Cash recoveries Cash recoveries used in the context of purchased impaired loans represent cash payments for a single purchased impaired loan not included within a pool of loans from customers that exceeded the recorded investment of that loan.
Charge-off Process of removing a loan or portion of a loan from our balance sheet because it is considered uncollectible. We also record a charge-off when a loan is transferred from portfolio holdings to held for sale by reducing the loan carrying amount to the fair value of the loan, if fair value is less than carrying amount.
Combined loan-to-value ratio (CLTV) This is the aggregate principal balance(s) of the mortgages on a property divided by its appraised value or purchase price.
Common shareholders equity to total assets Common shareholders equity divided by total assets. Common shareholders equity equals total shareholders equity less the liquidation value of preferred stock.
Core net interest income Core net interest income is total net interest income less purchase accounting accretion.
Credit derivatives Contractual agreements, primarily credit default swaps, that provide protection against a credit event of one or more referenced credits. The nature of a credit event is established by the protection buyer and protection seller at the inception of a transaction, and such events include bankruptcy, insolvency and failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic fee in return for a payment by the protection seller upon the occurrence, if any, of a credit event.
Credit spread The difference in yield between debt issues of similar maturity. The excess of yield attributable to credit spread is often used as a measure of relative creditworthiness, with a reduction in the credit spread reflecting an improvement in the borrowers perceived creditworthiness.
Credit valuation adjustment (CVA) Represents an adjustment to the fair value of our derivatives for our own and counterparties non-performance risk.
Derivatives Financial contracts whose value is derived from changes in publicly traded securities, interest rates, currency exchange rates or market indices. Derivatives cover a wide assortment of financial contracts, including but not limited to forward contracts, futures, options and swaps.
Discretionary client assets under management Assets over which we have sole or shared investment authority for our customers/clients. We do not include these assets on our Consolidated Balance Sheet.
Duration of equity An estimate of the rate sensitivity of our economic value of equity. A negative duration of equity is associated with asset sensitivity ( i.e. , positioned for rising interest rates), while a positive value implies liability sensitivity ( i.e. , positioned for declining interest rates). For example, if the duration of equity is -1.5 years, the economic value of equity increases by 1.5% for each 100 basis point increase in interest rates.
The PNC Financial Services Group, Inc. Form 10-K 99 |
Earning assets Assets that generate income, which include: federal funds sold; resale agreements; trading securities; interest-earning deposits with banks; loans held for sale; loans; investment securities; and certain other assets.
Effective duration A measurement, expressed in years, that, when multiplied by a change in interest rates, would approximate the percentage change in value of on- and off- balance sheet positions.
Efficiency Noninterest expense divided by total revenue.
Enterprise risk management framework An enterprise process designed to identify potential risks that may affect PNC, manage risk to be within our risk appetite and provide reasonable assurance regarding achievement of our objectives.
Fair value The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fee income When referring to the components of Noninterest income, we use the term fee income to refer to the following categories within Noninterest income: Asset management; Consumer services; Corporate services; Residential mortgage; and Service charges on deposits.
FICO score A credit bureau-based industry standard score created by Fair Isaac Co. which predicts the likelihood of borrower default. We use FICO scores both in underwriting and assessing credit risk in our consumer lending portfolio. Lower FICO scores indicate likely higher risk of default, while higher FICO scores indicate likely lower risk of default. FICO scores are updated on a periodic basis.
Foreign exchange contracts Contracts that provide for the future receipt and delivery of foreign currency at previously agreed-upon terms.
Funds transfer pricing A management accounting methodology designed to recognize the net interest income effects of sources and uses of funds provided by the assets and liabilities of a business segment. We assign these balances LIBOR-based funding rates at origination that represent the interest cost for us to raise/invest funds with similar maturity and repricing structures.
Futures and forward contracts Contracts in which the buyer agrees to purchase and the seller agrees to deliver a specific financial instrument at a predetermined price or yield. May be settled either in cash or by delivery of the underlying financial instrument.
GAAP Accounting principles generally accepted in the United States of America.
Home price index (HPI) A broad measure of the movement of single-family house prices in the U.S.
Impaired loans Loans are determined to be impaired when, based on current information and events, it is probable that all contractually required payments will not be collected. Impaired loans include commercial nonperforming loans and consumer and commercial TDRs, regardless of nonperforming status. Excluded from impaired loans are nonperforming leases, loans held for sale, loans accounted for under the fair value option, smaller balance homogenous type loans and purchased impaired loans.
Interest rate floors and caps Interest rate protection instruments that involve payment from the protection seller to the protection buyer of an interest differential, which represents the difference between a short-term rate ( e.g. , three-month LIBOR) and an agreed-upon rate (the strike rate) applied to a notional principal amount.
Interest rate swap contracts Contracts that are entered into primarily as an asset/liability management strategy to reduce interest rate risk. Interest rate swap contracts are exchanges of interest rate payments, such as fixed-rate payments for floating-rate payments, based on notional principal amounts.
Intrinsic value The difference between the price, if any, required to be paid for stock issued pursuant to an equity compensation arrangement and the fair market value of the underlying stock.
Leverage ratio Tier 1 capital divided by average quarterly adjusted total assets.
LIBOR Acronym for London InterBank Offered Rate. LIBOR is the average interest rate charged when banks in the London wholesale money market (or interbank market) borrow unsecured funds from each other. LIBOR rates are used as a benchmark for interest rates on a global basis. PNCs product set includes loans priced using LIBOR as a benchmark.
Loan-to-value ratio (LTV) A calculation of a loans collateral coverage that is used both in underwriting and assessing credit risk in our lending portfolio. LTV is the sum total of loan obligations secured by collateral divided by the market value of that same collateral. Market values of the collateral are based on an independent valuation of the collateral. For example, a LTV of less than 90% is better secured and has less credit risk than a LTV of greater than or equal to 90%.
Loss given default (LGD) An estimate of loss, net of recovery based on collateral type, collateral value, loan exposure, or the guarantor(s) quality and guaranty type (full or partial). Each loan has its own LGD. The LGD risk rating measures the percentage of exposure of a specific credit obligation that we expect to lose if default occurs. LGD is net of recovery, through any means, including but not limited to the liquidation of collateral or deficiency judgments rendered from foreclosure or bankruptcy proceedings.
100 The PNC Financial Services Group, Inc. Form 10-K |
Net interest margin Annualized taxable-equivalent net interest income divided by average earning assets.
Nonaccretable difference Contractually required payments receivable on a purchased impaired loan in excess of the cash flows expected to be collected.
Nonaccrual loans Loans for which we do not accrue interest income. Nonaccrual loans include nonperforming loans, in addition to loans accounted for under fair value option and loans accounted for as held for sale for which full collection of contractual principal and/or interest is not probable.
Nondiscretionary client assets under administration Assets we hold for our customers/clients in a nondiscretionary, custodial capacity. We do not include these assets on our Consolidated Balance Sheet.
Nonperforming assets Nonperforming assets include nonperforming loans and OREO and foreclosed assets, but exclude certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. We do not accrue interest income on assets classified as nonperforming.
Nonperforming loans Loans accounted for at amortized cost for which we do not accrue interest income. Nonperforming loans include loans to commercial, commercial real estate, equipment lease financing, home equity, residential real estate, credit card and other consumer customers as well as TDRs which have not returned to performing status. Nonperforming loans exclude certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. Nonperforming loans exclude purchased impaired loans as we are currently accreting interest income over the expected life of the loans.
Notional amount A number of currency units, shares, or other units specified in a derivative contract.
Operating leverage The period to period dollar or percentage change in total revenue (GAAP basis) less the dollar or percentage change in noninterest expense. A positive variance indicates that revenue growth exceeded expense growth ( i.e. , positive operating leverage) while a negative variance implies expense growth exceeded revenue growth ( i.e. , negative operating leverage).
Options Contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to either purchase or sell the associated financial instrument at a set price during a specified period or at a specified date in the future.
Other real estate owned (OREO) and foreclosed assets Assets taken in settlement of troubled loans primarily through deed-in-lieu of foreclosure or foreclosure. Foreclosed assets include real and personal property, equity interests in corporations, partnerships, and limited liability companies.
Other-than-temporary impairment (OTTI) When the fair value of a security is less than its amortized cost basis, an assessment is performed to determine whether the impairment is other-than-temporary. If we intend to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, an other-than-temporary impairment is considered to have occurred. In such cases, an other-than-temporary impairment is recognized in earnings equal to the entire difference between the investments amortized cost basis and its fair value at the balance sheet date. Further, if we do not expect to recover the entire amortized cost of the security, an other-than-temporary impairment is considered to have occurred. However for debt securities, if we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before its recovery, the other-than-temporary loss is separated into (a) the amount representing the credit loss, and (b) the amount related to all other factors. The other-than-temporary impairment related to credit losses is recognized in earnings while the amount related to all other factors is recognized in other comprehensive income, net of tax.
Parent company liquidity coverage Liquid assets divided by funding obligations within a two year period.
Pretax earnings Income before income taxes and noncontrolling interests.
Pretax, pre-provision earnings Total revenue less noninterest expense.
Primary client relationship A corporate banking client relationship with annual revenue generation of $10,000 to $50,000 or more, and for Asset Management Group, a client relationship with annual revenue generation of $10,000 or more.
Probability of default (PD) An internal risk rating that indicates the likelihood that a credit obligor will enter into default status.
Purchase accounting accretion Accretion of the discounts and premiums on acquired assets and liabilities. The purchase accounting accretion is recognized in net interest income over the weighted-average life of the financial instruments using the constant effective yield method. Accretion for a single purchased impaired loan not included within a pool of loans includes any cash recoveries on that loan received in excess of the recorded investment.
The PNC Financial Services Group, Inc. Form 10-K 101 |
Purchased impaired loans Acquired loans (or pools of loans) determined to be credit impaired under FASB ASC 310-30 (AICPA SOP 03-3). Loans (or pools of loans) are determined to be impaired if there is evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected.
Recorded investment (purchased impaired loans) The initial investment of a purchased impaired loan plus interest accretion and less any cash payments and writedowns to date. The recorded investment excludes any valuation allowance which is included in our allowance for loan and lease losses.
Recovery Cash proceeds received on a loan that we had previously charged off. We credit the amount received to the allowance for loan and lease losses.
Residential development loans Project-specific loans to commercial customers for the construction or development of residential real estate including land, single family homes, condominiums and other residential properties.
Return on average assets Annualized net income divided by average assets.
Return on average capital Annualized net income divided by average capital.
Return on average common shareholders equity Annualized net income attributable to common shareholders divided by average common shareholders equity.
Risk The potential that an event or series of events could occur that would threaten PNCs ability to achieve its strategic objectives, thereby negatively affecting shareholder value or reputation.
Risk appetite A dynamic, forward-looking view on the aggregate amount of risk PNC is willing and able to take in executing business strategy in light of the current business environment.
Risk limits Quantitative measures based on forward looking assumptions that allocate the firms aggregate risk appetite ( e.g. measure of loss or negative events) to business lines, legal entities, specific risk categories, concentrations and as appropriate, other levels.
Risk profile The risk profile is a point-in-time assessment of risk. The profile represents overall risk position in relation to the desired risk appetite. The determination of the risk profiles position is based on qualitative and quantitative analysis of reported risk limits, metrics, operating guidelines and qualitative assessments.
Risk-weighted assets Computed by the assignment of specific risk-weights (as defined by the Board of Governors of the Federal Reserve System) to assets and off-balance sheet instruments.
Securitization The process of legally transforming financial assets into securities.
Servicing rights An intangible asset or liability created by an obligation to service assets for others. Typical servicing rights include the right to receive a fee for collecting and forwarding payments on loans and related taxes and insurance premiums held in escrow.
Swaptions Contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to enter into an interest rate swap agreement during a specified period or at a specified date in the future.
Taxable-equivalent interest The interest income earned on certain assets is completely or partially exempt from Federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of yields and margins for all interest-earning assets, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margins by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on other taxable investments. This adjustment is not permitted under GAAP on the Consolidated Income Statement.
Total equity Total shareholders equity plus noncontrolling interests.
Total return swap A non-traditional swap where one party agrees to pay the other the total return of a defined underlying asset ( e.g., a loan), usually in return for receiving a stream of LIBOR-based cash flows. The total returns of the asset, including interest and any default shortfall, are passed through to the counterparty. The counterparty is, therefore, assuming the credit and economic risk of the underlying asset.
Transaction deposits The sum of interest-bearing money market deposits, interest-bearing demand deposits, and noninterest-bearing deposits.
Transitional Basel III common equity Common equity calculated under Basel III using phased in definitions and deductions applicable to PNC for 2014.
Troubled debt restructuring (TDR) A loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties.
102 The PNC Financial Services Group, Inc. Form 10-K |
Value-at-risk (VaR) A statistically-based measure of risk that describes the amount of potential loss which may be incurred due to adverse market movements. The measure is of the maximum loss which should not be exceeded on 95 out of 100 days for a 95% VaR.
Watchlist A list of criticized loans, credit exposure or other assets compiled for internal monitoring purposes. We define criticized exposure for this purpose as exposure with an internal risk rating of other assets especially mentioned, substandard, doubtful or loss.
Yield curve A graph showing the relationship between the yields on financial instruments or market indices of the same credit quality with different maturities. For example, a normal or positive yield curve exists when long-term bonds have higher yields than short-term bonds. A flat yield curve exists when yields are the same for short-term and long-term bonds. A steep yield curve exists when yields on long-term bonds are significantly higher than on short-term bonds. An inverted or negative yield curve exists when short-term bonds have higher yields than long-term bonds.
C AUTIONARY S TATEMENT R EGARDING F ORWARD -L OOKING I NFORMATION
We make statements in this Report, and we may from time to time make other statements, regarding our outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting PNC and its future business and operations that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as believe, plan, expect, anticipate, see, look, intend, outlook, project, forecast, estimate, goal, will, should and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time.
Forward-looking statements speak only as of the date made. We do not assume any duty and do not undertake to update forward-looking statements. Actual results or future events could differ, possibly materially, from those anticipated in forward-looking statements, as well as from historical performance.
Our forward-looking statements are subject to the following principal risks and uncertainties.
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Our businesses, financial results and balance sheet values are affected by business and economic conditions, including the following: |
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Changes in interest rates and valuations in debt, equity and other financial markets. |
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Disruptions in the liquidity and other functioning of U.S. and global financial markets. |
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The impact on financial markets and the economy of any changes in the credit ratings of U.S. Treasury obligations and other U.S. government-backed debt, as well as issues surrounding the levels of U.S. and European government debt and concerns regarding the creditworthiness of certain sovereign governments, supranationals and financial institutions in Europe. |
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Actions by the Federal Reserve, U.S. Treasury and other government agencies, including those that impact money supply and market interest rates. |
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Changes in customers, suppliers and other counterparties performance and creditworthiness. |
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Slowing or reversal of the current U.S. economic expansion. |
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Continued residual effects of recessionary conditions and uneven spread of positive impacts of recovery on the economy and our counterparties, including adverse impacts on levels of unemployment, loan utilization rates, delinquencies, defaults and counterparty ability to meet credit and other obligations. |
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Changes in customer preferences and behavior, whether due to changing business and economic conditions, legislative and regulatory initiatives, or other factors. |
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Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than we are currently expecting. These statements are based on our current view that the U.S. economic expansion will speed up to an above trend growth rate near 3.5 percent in 2015, boosted by lower oil/energy prices, and that short-term interest rates and bond yields will rise only slowly in the latter half of 2015. These forward-looking statements also do not, unless otherwise indicated, take into account the impact of potential legal and regulatory contingencies. |
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PNCs ability to take certain capital actions, including paying dividends and any plans to increase common stock dividends, repurchase common stock under current or future programs, or issue or redeem preferred stock or other regulatory capital instruments, is subject to the review of such proposed actions by the Federal Reserve as part of PNCs comprehensive capital plan for the applicable period in connection with the regulators Comprehensive Capital Analysis and Review (CCAR) process and to the acceptance of such capital plan and non-objection to such capital actions by the Federal Reserve. |
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PNCs regulatory capital ratios in the future will depend on, among other things, the companys financial performance, the scope and terms of final capital regulations then in effect (particularly those implementing the Basel Capital Accords), and management actions affecting the composition of PNCs balance sheet. In addition, PNCs ability to determine, evaluate and |
The PNC Financial Services Group, Inc. Form 10-K 103 |
forecast regulatory capital ratios, and to take actions (such as capital distributions) based on actual or forecasted capital ratios, will be dependent at least in part on the development, validation and regulatory approval of related models. |
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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: |
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Changes resulting from legislative and regulatory reforms, including major reform of the regulatory oversight structure of the financial services industry and changes to laws and regulations involving tax, pension, bankruptcy, consumer protection, and other industry aspects, and changes in accounting policies and principles. We will be impacted by extensive reforms provided for in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and otherwise growing out of the most recent financial crisis, the precise nature, extent and timing of which, and their impact on us, remains uncertain. |
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Changes to regulations governing bank capital and liquidity standards, including due to the Dodd-Frank Act and to Basel-related initiatives. |
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Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries. In addition to matters relating to PNCs current and historical business and activities, such matters may include proceedings, claims, investigations, or inquiries relating to pre-acquisition business and activities of acquired companies, such as National City. These matters may result in monetary judgments or settlements or other remedies, including fines, penalties, restitution or alterations in our business practices, and in additional expenses and collateral costs, and may cause reputational harm to PNC. |
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Results of the regulatory examination and supervision process, including our failure to satisfy requirements of agreements with governmental agencies. |
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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. |
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Business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through effective use of third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards. In particular, our results currently depend on our ability to manage elevated levels of impaired assets. |
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Business and operating results also include impacts relating to our equity interest in BlackRock, Inc. and rely to a significant extent on information provided to us by BlackRock. Risks and uncertainties that could affect BlackRock are discussed in more detail by BlackRock in its SEC filings. |
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We grow our business in part by acquiring from time to time other financial services companies, financial services assets and related deposits and other liabilities. Acquisition risks and uncertainties include those presented by the nature of the business acquired, including in some cases those associated with our entry into new businesses or new geographic or other markets and risks resulting from our inexperience in those new areas, as well as risks and uncertainties related to the acquisition transactions themselves, regulatory issues, and the integration of the acquired businesses into PNC after closing. |
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Competition can have an impact on customer acquisition, growth and retention and on credit spreads and product pricing, which can affect market share, deposits and revenues. Industry restructuring in the current environment could also impact our business and financial performance through changes in counterparty creditworthiness and performance and in the competitive and regulatory landscape. Our ability to anticipate and respond to technological changes can also impact our ability to respond to customer needs and meet competitive demands. |
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Business and operating results can also be affected by widespread natural and other disasters, pandemics, dislocations, terrorist activities, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically. |
We provide greater detail regarding these as well as other factors elsewhere in this Report, including in the Risk Factors and Risk Management sections and the Legal Proceedings and Commitments and Guarantees Notes of the Notes To Consolidated Financial Statements in this Report. Our forward-looking statements may also be subject to other risks and uncertainties, including those discussed elsewhere in this Report or in our other filings with the SEC.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is set forth in the Risk Management section of Item 7 and in Note 1 Accounting Policies, Note 7 Fair Value, and Note 15 Financial Derivatives in the Notes To Consolidated Financial Statements in Item 8 of this Report.
104 The PNC Financial Services Group, Inc. Form 10-K |
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
R EPORT OF I NDEPENDENT R EGISTERED P UBLIC A CCOUNTING F IRM
To the Board of Directors and Shareholders of The PNC Financial Services Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of comprehensive income, of changes in equity, and of cash flows present fairly, in all material respects, the financial position of The PNC Financial Services Group, Inc. and its subsidiaries at December 31, 2014 and December 31, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Managements Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express opinions on these financial statements and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 27, 2015
The PNC Financial Services Group, Inc. Form 10-K 105 |
THE PNC FINANCIAL SERVICES GROUP, INC.
Year ended December 31 | ||||||||||||
In millions, except per share data | 2014 | 2013 | 2012 | |||||||||
Interest Income |
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Loans |
$ | 7,427 | $ | 7,866 | $ | 8,284 | ||||||
Investment securities |
1,624 | 1,749 | 2,035 | |||||||||
Other |
380 | 392 | 415 | |||||||||
Total interest income |
9,431 | 10,007 | 10,734 | |||||||||
Interest Expense |
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Deposits |
325 | 344 | 386 | |||||||||
Borrowed funds |
581 | 516 | 708 | |||||||||
Total interest expense |
906 | 860 | 1,094 | |||||||||
Net interest income |
8,525 | 9,147 | 9,640 | |||||||||
Noninterest Income |
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Asset management |
1,513 | 1,342 | 1,169 | |||||||||
Consumer services |
1,254 | 1,253 | 1,136 | |||||||||
Corporate services |
1,415 | 1,210 | 1,166 | |||||||||
Residential mortgage |
618 | 871 | 284 | |||||||||
Service charges on deposits |
662 | 597 | 573 | |||||||||
Net gains on sales of securities |
4 | 99 | 204 | |||||||||
Other-than-temporary impairments |
(35 | ) | (14 | ) | (79 | ) | ||||||
Less: Noncredit portion of other-than-temporary impairments (a) |
(24 | ) | 2 | 32 | ||||||||
Net other-than-temporary impairments |
(11 | ) | (16 | ) | (111 | ) | ||||||
Other |
1,395 | 1,509 | 1,451 | |||||||||
Total noninterest income |
6,850 | 6,865 | 5,872 | |||||||||
Total revenue |
15,375 | 16,012 | 15,512 | |||||||||
Provision For Credit Losses |
273 | 643 | 987 | |||||||||
Noninterest Expense |
||||||||||||
Personnel |
4,611 | 4,743 | 4,617 | |||||||||
Occupancy |
833 | 833 | 827 | |||||||||
Equipment |
859 | 763 | 735 | |||||||||
Marketing |
253 | 246 | 279 | |||||||||
Other (b) |
2,932 | 3,096 | 4,028 | |||||||||
Total noninterest expense |
9,488 | 9,681 | 10,486 | |||||||||
Income before income taxes and noncontrolling interests |
5,614 | 5,688 | 4,039 | |||||||||
Income taxes (b) |
1,407 | 1,476 | 1,045 | |||||||||
Net income (b) |
4,207 | 4,212 | 2,994 | |||||||||
Less: Net income (loss) attributable to noncontrolling interests (b) |
23 | 11 | (7 | ) | ||||||||
Preferred stock dividends |
232 | 237 | 177 | |||||||||
Preferred stock discount accretion and redemptions |
5 | 12 | 4 | |||||||||
Net income attributable to common shareholders |
$ | 3,947 | $ | 3,952 | $ | 2,820 | ||||||
Earnings Per Common Share |
||||||||||||
Basic |
$ | 7.44 | $ | 7.45 | $ | 5.33 | ||||||
Diluted |
$ | 7.30 | $ | 7.36 | $ | 5.28 | ||||||
Average Common Shares Outstanding |
||||||||||||
Basic |
529 | 528 | 526 | |||||||||
Diluted |
537 | 532 | 529 |
(a) | Included in accumulated other comprehensive income (loss). |
(b) | Amounts for 2012 and 2013 periods have been updated to reflect the first quarter 2014 adoption of Accounting Standards Update (ASU) 2014-01 related to investments in low income housing tax credits. |
See accompanying Notes To Consolidated Financial Statements.
106 The PNC Financial Services Group, Inc. Form 10-K |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
THE PNC FINANCIAL SERVICES GROUP, INC.
Year ended December 31 | ||||||||||||
In millions | 2014 | 2013 | 2012 | |||||||||
Net income (a) |
$ | 4,207 | $ | 4,212 | $ | 2,994 | ||||||
Other comprehensive income (loss), before tax and net of reclassifications into Net income: |
||||||||||||
Net unrealized gains (losses) on non-OTTI securities |
375 | (1,211 | ) | 760 | ||||||||
Net unrealized gains (losses) on OTTI securities |
79 | 231 | 971 | |||||||||
Net unrealized gains (losses) on cash flow hedge derivatives |
168 | (527 | ) | (220 | ) | |||||||
Pension and other postretirement benefit plan adjustments |
(446 | ) | 852 | (35 | ) | |||||||
Other |
(39 | ) | 21 | 10 | ||||||||
Other comprehensive income (loss), before tax and net of reclassifications into Net income |
137 | (634 | ) | 1,486 | ||||||||
Income tax benefit (expense) related to items of other comprehensive income |
(70 | ) | 236 | (547 | ) | |||||||
Other comprehensive income (loss), after tax and net of reclassifications into Net income |
67 | (398 | ) | 939 | ||||||||
Comprehensive income (a) |
4,274 | 3,814 | 3,933 | |||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests (a) |
23 | 11 | (7 | ) | ||||||||
Comprehensive income attributable to PNC (a) |
$ | 4,251 | $ | 3,803 | $ | 3,940 |
(a) | Amounts for 2013 and 2012 periods have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
See accompanying Notes To Consolidated Financial Statements.
The PNC Financial Services Group, Inc. Form 10-K 107 |
THE PNC FINANCIAL SERVICES GROUP, INC.
In millions, except par value |
December 31
2014 |
December 31
2013 |
||||||
Assets |
||||||||
Cash and due from banks (includes $6 and $5 for VIEs) (a) |
$ | 4,360 | $ | 4,043 | ||||
Federal funds sold and resale agreements (includes $155 and $207 measured at fair value) (b) |
1,852 | 1,986 | ||||||
Trading securities |
2,353 | 3,073 | ||||||
Interest-earning deposits with banks (includes $6 and $7 for VIEs) (a) |
31,779 | 12,135 | ||||||
Loans held for sale (includes $2,154 and $1,901 measured at fair value) (b) |
2,262 | 2,255 | ||||||
Investment securities |
55,823 | 60,294 | ||||||
Loans (includes $1,606 and $1,736 for VIEs) (a) (includes $1,034 and $1,150 measured at fair value) (b) |
204,817 | 195,613 | ||||||
Allowance for loan and lease losses (includes $(50) and $(58) for VIEs) (a) |
(3,331 | ) | (3,609 | ) | ||||
Net loans |
201,486 | 192,004 | ||||||
Goodwill |
9,103 | 9,074 | ||||||
Other intangible assets |
1,844 | 2,216 | ||||||
Equity investments (includes $492 and $582 for VIEs) (a)(c) |
10,728 | 10,560 | ||||||
Other (includes $483 and $591 for VIEs) (a) (includes $412 and $338 measured at fair value) (b) |
23,482 | 22,552 | ||||||
Total assets |
$ | 345,072 | $ | 320,192 | ||||
Liabilities |
||||||||
Deposits |
||||||||
Noninterest-bearing |
$ | 73,479 | $ | 70,306 | ||||
Interest-bearing |
158,755 | 150,625 | ||||||
Total deposits |
232,234 | 220,931 | ||||||
Borrowed funds |
||||||||
Federal funds purchased and repurchase agreements |
3,510 | 4,289 | ||||||
Federal Home Loan Bank borrowings |
20,005 | 12,912 | ||||||
Bank notes and senior debt |
15,750 | 12,603 | ||||||
Subordinated debt |
9,151 | 8,244 | ||||||
Commercial paper |
4,995 | 4,997 | ||||||
Other (includes $347 and $414 for VIEs) (a) (includes $273 and $309 measured at fair value) (b) |
3,357 | 3,060 | ||||||
Total borrowed funds |
56,768 | 46,105 | ||||||
Allowance for unfunded loan commitments and letters of credit |
259 | 242 | ||||||
Accrued expenses (includes $70 and $83 for VIEs) (a) (c) |
5,187 | 4,690 | ||||||
Other (includes $206 and $252 for VIEs) (a) |
4,550 | 4,187 | ||||||
Total liabilities |
298,998 | 276,155 | ||||||
Equity |
||||||||
Preferred stock (d) |
||||||||
Common stock ($5 par value, authorized 800 shares, issued 541 and 540 shares) |
2,705 | 2,698 | ||||||
Capital surplus preferred stock |
3,946 | 3,941 | ||||||
Capital surplus common stock and other |
12,627 | 12,416 | ||||||
Retained earnings (c) |
26,200 | 23,251 | ||||||
Accumulated other comprehensive income |
503 | 436 | ||||||
Common stock held in treasury at cost: 18 and 7 shares |
(1,430 | ) | (408 | ) | ||||
Total shareholders equity |
44,551 | 42,334 | ||||||
Noncontrolling interests (c) |
1,523 | 1,703 | ||||||
Total equity |
46,074 | 44,037 | ||||||
Total liabilities and equity |
$ | 345,072 | $ | 320,192 |
(a) | Amounts represent the assets or liabilities of consolidated variable interest entities (VIEs). |
(b) | Amounts represent items for which we have elected the fair value option. |
(c) | Amounts for 2013 period have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
(d) | Par value less than $.5 million at each date. |
See accompanying Notes To Consolidated Financial Statements.
108 The PNC Financial Services Group, Inc. Form 10-K |
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
THE PNC FINANCIAL SERVICES GROUP, INC.
Shareholders Equity | ||||||||||||||||||||||||||||||||||||
In millions |
Shares
Outstanding Common Stock |
Common
Stock |
Capital
Surplus -
|
Capital
Surplus - Common Stock and Other |
Retained
Earnings |
Accumulated
Other Comprehensive Income (Loss) |
Treasury
Stock |
Noncontrolling
Interests |
Total
Equity |
|||||||||||||||||||||||||||
Balance at December 31, 2011 (a) |
527 | $ | 2,683 | $ | 1,637 | $ | 12,072 | $ | 18,253 | $ | (105 | ) | $ | (487 | ) | $ | 3,193 | $ | 37,246 | |||||||||||||||||
Cumulative effect of adopting ASU 2014-01 (b) |
(43 | ) | 5 | (38 | ) | |||||||||||||||||||||||||||||||
Balance at January 1, 2012 |
527 | $ | 2,683 | $ | 1,637 | $ | 12,072 | $ | 18,210 | $ | (105 | ) | $ | (487 | ) | $ | 3,198 | $ | 37,208 | |||||||||||||||||
Net income (b) |
3,001 | (7 | ) | 2,994 | ||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
939 | 939 | ||||||||||||||||||||||||||||||||||
Cash dividends declared |
||||||||||||||||||||||||||||||||||||
Common |
(820 | ) | (820 | ) | ||||||||||||||||||||||||||||||||
Preferred |
(177 | ) | (177 | ) | ||||||||||||||||||||||||||||||||
Preferred stock discount accretion |
4 | (4 | ) | |||||||||||||||||||||||||||||||||
Common stock activity |
1 | 7 | 45 | 52 | ||||||||||||||||||||||||||||||||
Treasury stock activity (c) |
51 | (82 | ) | (31 | ) | |||||||||||||||||||||||||||||||
Preferred stock issuance Series P (d) |
1,482 | 1,482 | ||||||||||||||||||||||||||||||||||
Preferred stock issuance Series Q (e) |
467 | 467 | ||||||||||||||||||||||||||||||||||
Other |
25 | (419 | ) | (394 | ) | |||||||||||||||||||||||||||||||
Balance at December 31, 2012 (a) (f) |
528 | $ | 2,690 | $ | 3,590 | $ | 12,193 | $ | 20,210 | $ | 834 | $ | (569 | ) | $ | 2,772 | $ | 41,720 | ||||||||||||||||||
Net income (loss) (b) |
4,201 | 11 | 4,212 | |||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax |
(398 | ) | (398 | ) | ||||||||||||||||||||||||||||||||
Cash dividends declared |
||||||||||||||||||||||||||||||||||||
Common |
(911 | ) | (911 | ) | ||||||||||||||||||||||||||||||||
Preferred |
(237 | ) | (237 | ) | ||||||||||||||||||||||||||||||||
Preferred stock discount accretion |
5 | (5 | ) | |||||||||||||||||||||||||||||||||
Redemption of noncontrolling interests (g) |
(7 | ) | (368 | ) | (375 | ) | ||||||||||||||||||||||||||||||
Common stock activity |
2 | 8 | 97 | 105 | ||||||||||||||||||||||||||||||||
Treasury stock activity |
3 | (47 | ) | 161 | 114 | |||||||||||||||||||||||||||||||
Preferred stock redemption Series L (h) |
(150 | ) | (150 | ) | ||||||||||||||||||||||||||||||||
Preferred stock issuance Series R (i) |
496 | 496 | ||||||||||||||||||||||||||||||||||
Other (j) |
173 | (712 | ) | (539 | ) | |||||||||||||||||||||||||||||||
Balance at December 31, 2013 (a) |
533 | $ | 2,698 | $ | 3,941 | $ | 12,416 | $ | 23,251 | $ | 436 | $ | (408 | ) | $ | 1,703 | $ | 44,037 | ||||||||||||||||||
Cumulative effect of adopting ASC 860-50 (k) |
2 | 2 | ||||||||||||||||||||||||||||||||||
Balance at January 1, 2014 |
533 | $ | 2,698 | $ | 3,941 | $ | 12,416 | 23,253 | $ | 436 | $ | (408 | ) | $ | 1,703 | 44,039 | ||||||||||||||||||||
Net income |
4,184 | 23 | 4,207 | |||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
67 | 67 | ||||||||||||||||||||||||||||||||||
Cash dividends declared |
||||||||||||||||||||||||||||||||||||
Common |
(1,000 | ) | (1,000 | ) | ||||||||||||||||||||||||||||||||
Preferred |
(232 | ) | (232 | ) | ||||||||||||||||||||||||||||||||
Preferred stock discount accretion |
5 | (5 | ) | |||||||||||||||||||||||||||||||||
Common stock activity |
1 | 7 | 81 | 88 | ||||||||||||||||||||||||||||||||
Treasury stock activity |
(11 | ) | 14 | (1,022 | ) | (1,008 | ) | |||||||||||||||||||||||||||||
Other |
116 | (203 | ) | (87 | ) | |||||||||||||||||||||||||||||||
Balance at December 31, 2014 (a) |
523 | $ | 2,705 | $ | 3,946 | $ | 12,627 | $ | 26,200 | $ | 503 | $ | (1,430 | ) | $ | 1,523 | $ | 46,074 |
(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) | Amounts for 2012 and 2013 periods have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. See Note 1 Accounting Policies for further detail of the adoption. |
(c) | Net treasury stock activity totaled less than .5 million shares issued or redeemed. |
(d) | 15,000 Series P preferred shares with a $1 par value were issued on April 24, 2012. |
(e) | 4,500 Series Q preferred shares with a $1 par value were issued on September 21, 2012 and 300 shares were issued on October 9, 2012. |
(f) | 5,001 Series M preferred shares with a $1 par value were issued and redeemed on December 10, 2012. |
(g) | Relates to the redemption of REIT preferred securities in the first quarter of 2013. See Note 12 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities for additional information. |
(h) | 1,500 Series L preferred shares with a $1 par value were redeemed on April 19, 2013. |
(i) | 5,000 Series R preferred shares with a $1 par value were issued on May 7, 2013. |
(j) | Includes an impact to noncontrolling interests for deconsolidation of limited partnership or non-managing member interests related to tax credit investments in the amount of $675 million during the second quarter of 2013. |
(k) | Amount represents the cumulative impact of our January 1, 2014 irrevocable election to prospectively measure all classes of commercial MSRs at fair value. See Note 1 Accounting Policies and Note 8 Goodwill and Other Intangible Assets for more information on this election. |
See accompanying Notes To Consolidated Financial Statements.
The PNC Financial Services Group, Inc. Form 10-K 109 |
CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
Year ended December 31 | ||||||||||||
In millions | 2014 | 2013 | 2012 | |||||||||
Operating Activities |
||||||||||||
Net income (a) |
$ | 4,207 | $ | 4,212 | $ | 2,994 | ||||||
Adjustments to reconcile net income to net cash provided (used) by operating activities |
||||||||||||
Provision for credit losses |
273 | 643 | 987 | |||||||||
Depreciation and amortization |
988 | 1,146 | 1,159 | |||||||||
Deferred income taxes (a) |
255 | 1,196 | 563 | |||||||||
Net gains on sales of securities |
(4 | ) | (99 | ) | (204 | ) | ||||||
Net other-than-temporary impairments |
11 | 16 | 111 | |||||||||
Charge for goodwill impairment |
45 | |||||||||||
Changes in fair value of mortgage servicing rights |
514 | (261 | ) | 284 | ||||||||
Gain on sales of Visa Class B common shares |
(209 | ) | (168 | ) | (267 | ) | ||||||
Noncash charges on trust preferred securities redemptions |
57 | 295 | ||||||||||
Undistributed earnings of BlackRock |
(441 | ) | (373 | ) | (302 | ) | ||||||
Excess tax benefits from share-based payment arrangements |
(28 | ) | (23 | ) | (18 | ) | ||||||
Net change in |
||||||||||||
Trading securities and other short-term investments |
757 | (455 | ) | 1,350 | ||||||||
Loans held for sale |
(405 | ) | (94 | ) | (1,125 | ) | ||||||
Other assets |
(8 | ) | 3,954 | 1,928 | ||||||||
Accrued expenses and other liabilities (a) |
169 | (3,990 | ) | (690 | ) | |||||||
Other (a) |
(522 | ) | (206 | ) | (301 | ) | ||||||
Net cash provided (used) by operating activities |
5,557 | 5,555 | 6,809 | |||||||||
Investing Activities |
||||||||||||
Sales |
||||||||||||
Securities available for sale |
4,432 | 7,974 | 9,358 | |||||||||
Loans |
2,870 | 2,559 | 1,611 | |||||||||
Repayments/maturities |
||||||||||||
Securities available for sale |
6,915 | 9,668 | 9,195 | |||||||||
Securities held to maturity |
1,987 | 2,483 | 3,174 | |||||||||
Purchases |
||||||||||||
Securities available for sale |
(7,989 | ) | (18,419 | ) | (17,164 | ) | ||||||
Securities held to maturity |
(500 | ) | (1,883 | ) | (1,479 | ) | ||||||
Loans |
(750 | ) | (1,975 | ) | (1,796 | ) | ||||||
Net change in |
||||||||||||
Federal funds sold and resale agreements |
131 | (530 | ) | 732 | ||||||||
Interest-earning deposits with banks |
(19,643 | ) | (8,151 | ) | (2,526 | ) | ||||||
Loans |
(12,147 | ) | (10,790 | ) | (14,333 | ) | ||||||
Net cash (paid for) received from acquisition and divestiture activity |
(62 | ) | (4,130 | ) | ||||||||
Other (b) |
(137 | ) | 129 | 97 | ||||||||
Net cash provided (used) by investing activities |
(24,893 | ) | (18,935 | ) | (17,261 | ) |
(continued on following page)
110 The PNC Financial Services Group, Inc. Form 10-K |
CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
(continued from previous page)
Year ended December 31 | ||||||||||||
In millions | 2014 | 2013 | 2012 | |||||||||
Financing Activities |
||||||||||||
Net change in |
||||||||||||
Noninterest-bearing deposits |
$ | 3,182 | $ | 341 | $ | 7,149 | ||||||
Interest-bearing deposits |
8,130 | 7,463 | 902 | |||||||||
Federal funds purchased and repurchase agreements |
(778 | ) | 965 | (2 | ) | |||||||
Federal Home Loan Bank borrowings |
(1,000 | ) | ||||||||||
Commercial paper |
(112 | ) | (5,607 | ) | 4,762 | |||||||
Other borrowed funds |
221 | 221 | (279 | ) | ||||||||
Sales/issuances |
||||||||||||
Federal Home Loan Bank borrowings |
15,685 | 16,435 | 13,000 | |||||||||
Bank notes and senior debt |
6,184 | 3,938 | 2,093 | |||||||||
Subordinated debt |
745 | 1,986 | 995 | |||||||||
Commercial paper |
8,797 | 12,595 | 16,480 | |||||||||
Other borrowed funds |
505 | 695 | 1,011 | |||||||||
Preferred stock |
496 | 2,449 | ||||||||||
Common and treasury stock |
252 | 244 | 158 | |||||||||
Repayments/maturities |
||||||||||||
Federal Home Loan Bank borrowings |
(8,592 | ) | (12,960 | ) | (10,500 | ) | ||||||
Bank notes and senior debt |
(3,089 | ) | (1,420 | ) | (4,037 | ) | ||||||
Subordinated debt |
57 | (731 | ) | (1,769 | ) | |||||||
Commercial paper |
(8,687 | ) | (10,444 | ) | (17,060 | ) | ||||||
Other borrowed funds |
(467 | ) | (340 | ) | (1,090 | ) | ||||||
Preferred stock |
(150 | ) | ||||||||||
Excess tax benefits from share-based payment arrangements |
28 | 23 | 18 | |||||||||
Redemption of noncontrolling interests |
(375 | ) | (500 | ) | ||||||||
Acquisition of treasury stock |
(1,176 | ) | (24 | ) | (216 | ) | ||||||
Preferred stock cash dividends paid |
(232 | ) | (237 | ) | (177 | ) | ||||||
Common stock cash dividends paid |
(1,000 | ) | (911 | ) | (820 | ) | ||||||
Net cash provided (used) by financing activities |
19,653 | 12,203 | 11,567 | |||||||||
Net Increase (Decrease) In Cash And Due From Banks |
317 | (1,177 | ) | 1,115 | ||||||||
Cash and due from banks at beginning of period |
4,043 | 5,220 | 4,105 | |||||||||
Cash and due from banks at end of period |
$ | 4,360 | $ | 4,043 | $ | 5,220 | ||||||
Supplemental Disclosures |
||||||||||||
Interest paid |
$ | 863 | $ | 891 | $ | 1,208 | ||||||
Income taxes paid |
1,102 | 234 | 39 | |||||||||
Income taxes refunded |
12 | 3 | 16 | |||||||||
Non-cash Investing and Financing Items |
||||||||||||
Transfer from (to) loans to (from) loans held for sale, net |
724 | (119 | ) | 665 | ||||||||
Transfer from loans to foreclosed assets |
604 | 703 | 1,042 | |||||||||
Exchange of junior subordinated debentures for senior notes |
500 |
(a) | Amounts for 2013 and 2012 have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
(b) | Includes the impact of the consolidation of a variable interest entity as of March 31, 2013. |
See accompanying Notes To Consolidated Financial Statements.
The PNC Financial Services Group, Inc. Form 10-K 111 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
T HE PNC F INANCIAL S ERVICES G ROUP , I NC .
B USINESS
PNC is one of the largest diversified financial services companies in the United States and is headquartered in Pittsburgh, Pennsylvania.
PNC has businesses engaged in retail banking, corporate and institutional banking, asset management, and residential mortgage banking, providing many of its products and services nationally, as well as other products and services in PNCs primary geographic markets located in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, North Carolina, Florida, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Missouri, Georgia, Wisconsin and South Carolina. PNC also provides certain products and services internationally.
Basis Of Financial Statement Presentation
Our consolidated financial statements include the accounts of the parent company and its subsidiaries, most of which are wholly-owned, and certain partnership interests and variable interest entities.
We prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). We have eliminated intercompany accounts and transactions. We have also reclassified certain prior year amounts to conform to the 2014 presentation, which did not have a material impact on our consolidated financial condition or results of operations. Additionally, we evaluate the materiality of identified errors in the financial statements using both an income statement and a balance sheet approach, based on relevant quantitative and qualitative factors. The consolidated financial statements include certain adjustments to correct immaterial errors related to previously reported periods. The current year financial statements reflect a second quarter 2014 correction to reclassify certain commercial facility fees from net interest income to noninterest income. The impact of this reclassification to prior periods was not significant, and as such, prior periods were not adjusted. In addition, as disclosed in certain Notes to the Consolidated Financial Statements, we made adjustments to previously reported periods for immaterial errors. Prior period financial statements also reflect the retrospective application of Accounting Standards Update (ASU) 2014-01, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects.
We have also considered the impact of subsequent events on these consolidated financial statements.
Use Of Estimates
We prepared these consolidated financial statements using financial information available at the time of preparation, which requires us to make estimates and assumptions that affect the amounts reported. Our most significant estimates pertain to our fair value measurements, allowances for loan and lease losses and unfunded loan commitments and letters of credit, and accretion on purchased impaired loans. Actual results may differ from the estimates and the differences may be material to the consolidated financial statements.
Investment In BlackRock, Inc.
We account for our investment in the common stock and Series B Preferred Stock of BlackRock (deemed to be in-substance common stock) under the equity method of accounting. The investment in BlackRock is reflected on our Consolidated Balance Sheet in Equity investments, while our equity in earnings of BlackRock is reported on our Consolidated Income Statement in Asset management revenue.
We also hold shares of Series C Preferred Stock of BlackRock pursuant to our obligation to partially fund a portion of certain BlackRock long-term incentive plan (LTIP) programs. Since these preferred shares are not deemed to be in-substance common stock, we have elected to account for these preferred shares at fair value and the changes in fair value will offset the impact of marking-to-market the obligation to deliver these shares to BlackRock. Our investment in the BlackRock Series C Preferred Stock is included on our Consolidated Balance Sheet in Other assets. Our obligation to transfer these shares to BlackRock is classified as a derivative not designated as a hedging instrument under GAAP as disclosed in Note 15 Financial Derivatives.
Business Combinations
We record the net assets of companies that we acquire at their estimated fair value at the date of acquisition and we include the results of operations of the acquired companies on our Consolidated Income Statement from the date of acquisition. We recognize, as goodwill, the excess of the acquisition price over the estimated fair value of the net assets acquired.
Special Purpose Entities
Special purpose entities (SPEs) are defined as legal entities structured for a particular purpose. We use special purpose entities in various legal forms to conduct normal business activities. We review the structure and activities of special purpose entities for possible consolidation under the applicable GAAP guidance.
112 The PNC Financial Services Group, Inc. Form 10-K |
A variable interest entity (VIE) is a corporation, partnership, limited liability company, or any other legal structure used to conduct activities or hold assets that either:
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Does not have equity investors with voting rights that can directly or indirectly make decisions about the entitys activities through those voting rights or similar rights, or |
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Has equity investors that do not provide sufficient equity for the entity to finance its activities without additional subordinated financial support. |
A VIE often holds financial assets, including loans or receivables, real estate or other property.
VIEs are assessed for consolidation under ASC 810 Consolidation when we hold a variable interest in these entities. We consolidate a VIE if we are its primary beneficiary. The primary beneficiary of a VIE is determined to be the party that meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Upon consolidation of a VIE, we recognize all of the VIEs assets, liabilities and noncontrolling interests on our Consolidated Balance Sheet. On a quarterly basis, we determine whether any changes occurred requiring a reassessment of whether PNC is the primary beneficiary of an entity.
In applying this guidance, we consolidate a credit card securitization trust, a non-agency securitization trust, and certain tax credit investments and other arrangements. See Note 2 Loan Sale and Servicing Activities and Variable Interest Entities for information about VIEs that we consolidate as well as those that we do not consolidate but in which we hold a significant variable interest.
Revenue Recognition
We earn interest and noninterest income from various sources, including:
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Lending, |
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Securities portfolio, |
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Asset management, |
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Customer deposits, |
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Loan sales and servicing, |
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Brokerage services, |
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Sale of loans and securities, |
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Certain private equity activities, and |
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Securities, derivatives and foreign exchange activities. |
We earn fees and commissions from:
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Issuing loan commitments, standby letters of credit and financial guarantees, |
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Selling various insurance products, |
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Providing treasury management services, |
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Providing merger and acquisition advisory and related services, and |
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Participating in certain capital markets transactions. |
Revenue earned on interest-earning assets, including unearned income and the amortization/accretion of premiums or discounts recognized on acquired loans and debt securities, is recognized based on the constant effective yield of the financial instrument or based on other applicable accounting guidance.
The Consolidated Income Statement caption Asset management includes asset management fees, which are generally based on a percentage of the fair value of the assets under management. Additionally, Asset management noninterest income includes our share of the earnings of BlackRock recognized under the equity method of accounting.
Service charges on deposit accounts are recognized when earned. Brokerage fees and gains and losses on the sale of securities and certain derivatives are recognized on a trade-date basis.
We record private equity income or loss based on changes in the valuation of the underlying investments or when we dispose of our interest.
We recognize gain/(loss) on changes in the fair value of certain financial instruments where we have elected the fair value option. These financial instruments include certain commercial and residential mortgage loans originated for sale, certain residential mortgage portfolio loans, resale agreements and our investment in BlackRock Series C preferred stock. We also recognize gain/(loss) on changes in the fair value of residential mortgage servicing rights (MSRs) and commercial mortgage servicing rights.
We recognize revenue from servicing residential mortgages, commercial mortgages and other consumer loans as earned based on the specific contractual terms. These revenues, as well as changes in fair value and impairment on servicing rights prior to 2014, are reported on the Consolidated Income Statement in the line items Residential mortgage, Corporate services and Consumer services. We recognize revenue from securities, derivatives and foreign exchange customer-related trading, as well as securities underwriting activities, as these transactions occur or as services are provided. We generally recognize gains from the sale of loans upon receipt of cash. Mortgage revenue recognized is reported net of mortgage repurchase reserves.
When appropriate, revenue is reported net of associated expenses in accordance with GAAP.
Cash And Cash Equivalents
Cash and due from banks are considered cash and cash equivalents for financial reporting purposes.
The PNC Financial Services Group, Inc. Form 10-K 113 |
Investments
We hold interests in various types of investments. The accounting for these investments is dependent on a number of factors including, but not limited to, items such as:
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Ownership interest, |
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Our plans for the investment, and |
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The nature of the investment. |
Debt Securities
Debt securities are recorded on a trade-date basis. We classify debt securities as held to maturity and carry them at amortized cost if we have the positive intent and ability to hold the securities to maturity. Debt securities that we purchase for certain risk management activities, customer-related trading activities, or those with embedded derivatives that otherwise may require bifurcation are carried at fair value and classified as Trading securities on our Consolidated Balance Sheet. Realized and unrealized gains and losses on trading securities are included in Other noninterest income.
Debt securities not classified as held to maturity or trading are designated as securities available for sale and carried at fair value with unrealized gains and losses, net of income taxes, reflected in Accumulated other comprehensive income (loss).
On at least a quarterly basis, we review all debt securities that are in an unrealized loss position for other than temporary impairment (OTTI). An investment security is deemed impaired if the fair value of the investment is less than its amortized cost. Amortized cost includes adjustments (if any) made to the cost basis of an investment for accretion, amortization, previous other-than-temporary impairments and hedging gains and losses. After an investment security is determined to be impaired, we evaluate whether the decline in value is other-than-temporary. As part of this evaluation, we take into consideration whether we intend to sell the security or whether it is more likely than not that we will be required to sell the security before expected recovery of its amortized cost. We also consider whether or not we expect to receive all of the contractual cash flows from the investment based on factors that include, but are not limited to: the creditworthiness of the issuer and, in the case of securities collateralized by consumer and commercial loan assets, the historical and projected performance of the underlying collateral. In addition, we may also evaluate the business and financial outlook of the issuer, as well as broader industry and sector performance indicators. Declines in the fair value of available for sale debt securities that are deemed other-than-temporary and are attributable to credit deterioration are recognized on our Consolidated Income Statement in the period in which the determination is made. Declines in fair value which are deemed other-than-temporary and attributable to factors other than credit deterioration are recognized in Accumulated other comprehensive income (loss) on our Consolidated Balance Sheet.
We include all interest on debt securities, including amortization of premiums and accretion of discounts on investment securities, in net interest income using the constant effective yield method. Effective yields reflect either the effective interest rate implicit in the security at the date of acquisition or the effective interest rate determined based on improved cash flows subsequent to impairment. We compute gains and losses realized on the sale of available for sale debt securities on a specific security basis. These securities gains/(losses) are included in the caption Net gains on sales of securities on the Consolidated Income Statement.
In certain situations, management may elect to transfer certain debt securities from the securities available for sale to the held to maturity classification. In such cases, the securities are reclassified at fair value at the time of transfer. Any unrealized gain or loss included in Accumulated other comprehensive income (loss) at the time of transfer is retained therein and amortized over the remaining life of the security as a yield adjustment, such that only the remaining initial discount/premium from the purchase date is recognized in income.
Equity Securities and Partnership Interests
We account for equity securities and equity investments other than BlackRock and private equity investments under one of the following methods:
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Marketable equity securities are recorded on a trade-date basis and are accounted for based on the securities quoted market prices from a national securities exchange. Those purchased with the intention of recognizing short-term profits are classified as trading and included in Trading securities on our Consolidated Balance Sheet. Both realized and unrealized gains and losses on trading securities are included in Noninterest income. Marketable equity securities not classified as trading are designated as securities available for sale with unrealized gains and losses, net of income taxes, reflected in Accumulated other comprehensive income (loss). Any unrealized losses that we have determined to be other-than-temporary on securities classified as available for sale are recognized in current period earnings. |
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For investments in limited partnerships, limited liability companies and other investments that are not required to be consolidated, we use either the equity method or the cost method of accounting. We use the equity method for general and limited partner ownership interests and limited liability companies in which we are considered to have significant influence over the operations of the investee and when the net asset value of our investment reflects our economic interest in the underlying investment. Under the equity method, we record our equity ownership share of net income or loss of the investee in Noninterest income. We use the cost method for all other investments. Under the cost method, there is no |
114 The PNC Financial Services Group, Inc. Form 10-K |
change to the cost basis unless there is an other-than-temporary decline in value or dividends received are considered a return on investment. If the decline is determined to be other-than-temporary, we write down the cost basis of the investment to a new cost basis that represents realizable value. The amount of the write-down is accounted for as a loss included in Noninterest income. Distributions received from the income of an investee on cost method investments are included in Noninterest income. Investments described above are included in the caption Equity investments on the Consolidated Balance Sheet. |
Private Equity Investments
We report private equity investments, which include direct investments in companies, affiliated partnership interests and indirect investments in private equity funds, at estimated fair value. These estimates are based on available information and may not necessarily represent amounts that we will ultimately realize through distribution, sale or liquidation of the investments. Fair values of publicly traded direct investments are determined using quoted market prices and are subject to various discount factors for lack of marketability, when appropriate. The valuation procedures applied to direct investments in private companies include techniques such as multiples of adjusted earnings of the entity, independent appraisals, anticipated financing and sale transactions with third parties, or the pricing used to value the entity in a recent financing transaction. We value affiliated partnership interests based on the underlying investments of the partnership using procedures consistent with those applied to direct investments. We value indirect investments in private equity funds based on net asset value as provided in the financial statements that we receive from their managers. Due to the time lag in our receipt of the financial information and based on a review of investments and valuation techniques applied, adjustments to the manager-provided values are made when available recent portfolio company information or market information indicates significant changes in value from that provided by the manager of the fund. We include all private equity investments on the Consolidated Balance Sheet in the caption Equity investments. Changes in the fair value of private equity investments are recognized in Noninterest income.
We consolidate affiliated partnerships when we are the general partner and have determined that we have control of the partnership or are the primary beneficiary if the entity is a VIE. The portion we do not own is reflected in the caption Noncontrolling interests on the Consolidated Balance Sheet.
Loans
Loans are classified as held for investment when management has both the intent and ability to hold the loan for the foreseeable future, or until maturity or payoff. Managements
intent and view of the foreseeable future may change based on changes in business strategies, the economic environment, market conditions and the availability of government programs.
Measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of payment are considered delinquent.
Except as described below, loans held for investment are stated at the principal amounts outstanding, net of unearned income, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans. Interest on performing loans (excluding interest on purchased impaired loans, which is further discussed below) is accrued based on the principal amount outstanding and recorded in Interest income as earned using the constant effective yield method. Loan origination fees, direct loan origination costs, and loan premiums and discounts are deferred and accreted or amortized into Net interest income, over periods not exceeding the contractual life of the loan.
When loans are redesignated from held for investment to held for sale, specific reserves and allocated pooled reserves included in the Allowance for loan and lease losses (ALLL) are charged-off to reduce the basis of the loans to the lower of cost or estimated fair value less cost to sell.
In addition to originating loans, we also acquire loans through portfolio purchases or acquisitions of other financial services companies. For certain acquired loans that have experienced a deterioration of credit quality, we follow the guidance contained in ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality. Under this guidance, acquired purchased impaired loans are to be recorded at fair value without the carryover of any existing valuation allowances. Evidence of credit quality deterioration may include information and statistics regarding bankruptcy events, updated borrower credit scores, such as Fair Isaac Corporation scores (FICO), past due status, and updated loan-to-value (LTV) ratios. We review the loans acquired for evidence of credit quality deterioration and determine if it is probable that we will be unable to collect all contractual amounts due, including both principal and interest. When both conditions exist, we estimate the amount and timing of undiscounted expected cash flows at acquisition for each loan either individually or on a pool basis. We estimate the cash flows expected to be collected using internal models that incorporate managements best estimate of current key assumptions, such as default rates, loss severity and payment speeds. Collateral values are also incorporated into cash flow estimates. Late fees, which are contractual but not expected to be collected, are excluded from expected future cash flows.
The excess of cash flows expected to be collected on a purchased impaired loan (or pool of loans) over its carrying value represents the accretable yield which is recognized into
The PNC Financial Services Group, Inc. Form 10-K 115 |
interest income over the remaining life of the loan (or pool of loans) using the constant effective yield method. The accretable yield is calculated based upon the difference between the undiscounted expected future cash flows of the loans and the recorded investment in the loans. Subsequent decreases in expected cash flows that are attributable, at least in part, to credit quality are recognized as impairments through a charge to the provision for credit losses resulting in an increase in the ALLL. Subsequent increases in expected cash flows are recognized as a provision recapture of previously recorded ALLL or prospectively through an adjustment of the loans or pools yield over its remaining life.
Leases
We provide financing for various types of equipment, including aircraft, energy and power systems, and vehicles through a variety of lease arrangements. Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, less unearned income. Leveraged leases, a form of financing lease, are carried net of nonrecourse debt. We recognize income over the term of the lease using the constant effective yield method. Lease residual values are reviewed for impairment at least annually. Gains or losses on the sale of leased assets are included in Other noninterest income while valuation adjustments on lease residuals are included in Other noninterest expense.
Loan Sales, Loan Securitizations And Retained Interests
We recognize the sale of loans or other financial assets when the transferred assets are legally isolated from our creditors and the appropriate accounting criteria are met. We have sold mortgage, credit card and other loans through securitization transactions. In a securitization, financial assets are transferred into trusts or to SPEs in transactions to effectively legally isolate the assets from PNC.
ASC 860 Transfers and Servicing requires a true sale legal analysis to address several relevant factors, such as the nature and level of recourse to the transferor, and the amount and nature of retained interests in the loans sold to support whether the transferred loans would be legally isolated from the transferors assets in the case of bankruptcy. Once the legal isolation test has been met, other factors concerning the nature and extent of the transferors control and the rights of the transferee over the transferred assets are taken into account in order to determine whether derecognition of assets is warranted.
In a securitization, the trust or SPE issues beneficial interests in the form of senior and subordinated securities backed or collateralized by the assets sold to the trust. The senior classes of the asset-backed securities typically receive investment grade credit ratings at the time of issuance. These ratings are generally achieved through the creation of lower-rated subordinated
classes of asset-backed securities, as well as subordinated or residual interests. In certain cases, we may retain a portion or all of the securities issued, interest-only strips, one or more subordinated tranches, servicing rights and, in some cases, cash reserve accounts. Securitized loans are removed from the balance sheet and a net gain or loss is recognized in Noninterest income at the time of initial sale. Gains or losses recognized on the sale of the loans depend on the fair value of the loans sold and the retained interests at the date of sale. We generally estimate the fair value of the retained interests based on the present value of future expected cash flows using assumptions as to discount rates, interest rates, prepayment speeds, credit losses and servicing costs, if applicable.
With the exception of loan sales to certain U.S. government-chartered entities, our loan sales and securitizations are generally structured without recourse to us except for representations and warranties and with no restrictions on the retained interests. We originate, sell and service commercial mortgage loans under the Federal National Mortgage Association (FNMA) Delegated Underwriting and Servicing (DUS) program. Under the provisions of the DUS program, we participate in a loss-sharing arrangement with FNMA. We participated in a similar program with the Federal Home Loan Mortgage Corporation (FHLMC). When we are obligated for loss-sharing or recourse, our policy is to record such liabilities initially at fair value and subsequently reserve for estimated losses in accordance with guidance contained in applicable GAAP. Refer to Note 22 Commitments and Guarantees for more information about our obligations related to sales of loans under these programs.
Loans Held For Sale
We designate loans as held for sale when we have the intent to sell them. We transfer loans to the Loans held for sale category at the lower of cost or estimated fair value less cost to sell. At the time of transfer, write-downs on the loans are recorded as charge-offs. We establish a new cost basis upon transfer. Any subsequent lower-of-cost-or-market adjustment is determined on an individual loan basis and is recognized as a valuation allowance with any charges included in Other noninterest income. Sale proceeds that are in excess of the new cost basis upon transfer and are received within 90 days of classifying the loan as held for sale are recorded as a recovery to the ALLL up to the amount previously charged off. Any remaining proceeds that exist after recovery are recorded as a gain on sale included in Other noninterest income. Sale proceeds that are less than the new cost basis upon transfer and are received within 90 days of classifying the loan as held for sale are recorded as a charge off to the ALLL. Any proceeds received after 90 days of classifying the loan as held for sale are recorded as a gain or loss on sale and included in Other noninterest income.
We have elected to account for certain commercial and residential mortgage loans held for sale at fair value. The
116 The PNC Financial Services Group, Inc. Form 10-K |
changes in the fair value of the commercial mortgage loans are measured and recorded in Other noninterest income while the residential mortgage loans are measured and recorded in Residential mortgage noninterest income each period. See Note 7 Fair Value for additional information.
Interest income with respect to loans held for sale is accrued based on the principal amount outstanding and the loans contractual interest rate.
In certain circumstances, loans designated as held for sale may be transferred to held for investment based on a change in strategy. We transfer these loans at the lower of cost or estimated fair value; however, any loans held for sale and designated at fair value remain at fair value for the life of the loan.
Nonperforming Assets
Nonperforming assets consists of nonperforming loans and leases, other real estate owned (OREO) and foreclosed assets. Nonperforming loans and leases include nonperforming troubled debt restructurings (TDRs).
Nonperforming loans are those loans accounted for at amortized cost that have deteriorated in credit quality to the extent that full collection of contractual principal and interest is not probable. These loans are also classified as nonaccrual. For these loans, the current year accrued and uncollected interest is reversed through Net interest income and prior year accrued and uncollected interest is charged-off. Additionally, these loans may be charged-off to reduce the basis to the fair value of collateral less costs to sell.
Loans acquired and accounted for under ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality are reported as performing and accruing loans due to the accretion of interest income.
Loans accounted for under the fair value option and loans accounted for as held for sale that would otherwise be classified as nonperforming, based on the nonaccrual policies discussed below, are reported as performing loans as these loans are accounted for at fair value and the lower of carrying value or the fair value less costs to sell, respectively. However, based upon these nonaccrual policies, interest income is not accrued on those loans. Additionally, based upon the nonaccrual policies discussed below, certain government insured loans accounted for at amortized cost for which we do not expect to collect substantially all principal and interest are reported as nonperforming and do not accrue interest. Alternatively, certain government insured loans accounted for at amortized cost for which we expect to collect substantially all principal and interest are not reported as nonperforming loans and continue to accrue interest.
Commercial Loans
We generally classify Commercial Lending (Commercial, Commercial Real Estate, and Equipment Lease Financing) loans as nonperforming and place them on nonaccrual status when we determine that the full collection of interest or principal is not probable, including when delinquency of interest or principal payments has existed for 90 days or more and the loans are not well-secured and/or in the process of collection. A loan is considered well-secured when the collateral in the form of liens on (or pledges of) real or personal property, including marketable securities, has a realizable value sufficient to discharge the debt in full, including accrued interest. Such factors that would lead to nonperforming status would include, but are not limited to, the following:
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Deterioration in the financial position of the borrower resulting in the loan moving from accrual to cash basis accounting; |
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The collection of principal or interest is 90 days or more past due unless the asset is well-secured and/or in the process of collection; |
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Reasonable doubt exists as to the certainty of the borrowers future debt service ability, according to the terms of the credit arrangement, regardless of whether 90 days have passed or not; |
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The borrower has filed or will likely file for bankruptcy; |
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The bank advances additional funds to cover principal or interest; |
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We are in the process of liquidating a commercial borrower; or |
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We are pursuing remedies under a guarantee. |
We charge off commercial nonperforming loans when we determine that a specific loan, or portion thereof, is uncollectible. This determination is based on the specific facts and circumstances of the individual loans. In making this determination, we consider the viability of the business or project as a going concern, the past due status when the asset is not well-secured, the expected cash flows to repay the loan, the value of the collateral, and the ability and willingness of any guarantors to perform.
Additionally, in general, for smaller dollar commercial loans of $1 million or less, a partial or full charge-off occurs at 120 days past due for term loans and 180 days past due for revolvers.
Certain small business credit card balances are placed on nonaccrual status when they become 90 days or more past due. Such loans are charged-off at 180 days past due.
Consumer Loans
A consumer loan is considered well-secured when the collateral in the form of liens on (or pledges of) real or
The PNC Financial Services Group, Inc. Form 10-K 117 |
personal property, including marketable securities, has a realizable value sufficient to discharge the debt in full, including accrued interest. Home equity installment loans and lines of credit, whether well-secured or not, are classified as nonaccrual at 90 days past due. Well-secured residential real estate loans are classified as nonaccrual at 180 days past due. In addition to these delinquency-related policies, a consumer loan may also be placed on nonaccrual status when:
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The loan has been modified and classified as a TDR, as further discussed below; |
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Notification of bankruptcy has been received and the loan is 30 days or more past due; |
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The bank holds a subordinate lien position in the loan and the first lien loan is seriously stressed ( i.e ., 90 days or more past due); |
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Other loans within the same borrower relationship have been placed on nonaccrual or charge-offs have been taken on them; |
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The bank has repossessed non-real estate collateral securing the loan; or |
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The bank has charged-off the loan to the value of the collateral. |
Most consumer loans and lines of credit, not secured by residential real estate, are charged off after 120 to 180 days past due. Generally, they are not placed on nonaccrual status as permitted by regulatory guidance.
Home equity installment loans, home equity lines of credit, and residential real estate loans that are not well-secured and in the process of collection are charged-off at no later than 180 days past due to reduce the basis to the fair value of collateral less costs to sell. In addition to this policy, the bank also recognizes a charge-off on a secured consumer loan when:
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The bank holds a subordinate lien position in the loan and a foreclosure notice has been received on the first lien loan; |
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The bank holds a subordinate lien position in the loan which is 30 days or more past due with a combined loan to value ratio of greater than or equal to 110% and the first lien loan is seriously stressed ( i.e ., 90 days or more past due); |
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The loan is modified or otherwise restructured in a manner that results in the loan becoming collateral dependent; |
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Notification of bankruptcy has been received within the last 60 days and the loan is 60 days or more past due; |
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The borrower has been discharged from personal liability through Chapter 7 bankruptcy and has not formally reaffirmed his or her loan obligation to PNC; or |
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The collateral securing the loan has been repossessed and the value of the collateral is less than the recorded investment of the loan outstanding. |
Loans where a borrower has been discharged from personal liability in bankruptcy and has not formally reaffirmed its loan obligation to PNC are classified as nonperforming TDRs.
These loans are charged off to reduce the basis to the fair value of collateral less costs to sell, and any associated allowance at the time of charge-off is reduced to zero. The charge-off activity results in a reduction in the allowance, an increase in provision for credit losses, if the related loan charge-off exceeds the associated allowance, as well as a difference in the pre-TDR recorded investment to the post-TDR recorded investment reflected in Table 68. Collateral values are updated annually. Subsequent declines in collateral values are charged-off and incremental provision for credit loss is incurred. PNC does not return these TDRs or loans to borrowers not currently obligated to make principal and interest payments under the restructured terms to performing status.
Accounting for Nonperforming Assets and Other Nonaccrual Loans
If payment is received on a nonaccrual loan, generally the payment is first applied to the recorded investment; payments are then applied to recover any charged-off amounts related to the loan. Finally, if both recorded investment and any charge-offs have been recovered, then the payment will be recorded as fee and interest income.
Nonaccrual loans are generally not returned to accrual status until the borrower has performed in accordance with the contractual terms and other performance indicators for at least six months, the period of time which was determined to demonstrate the expected collection of the loans remaining contractual principal and interest. When a nonperforming loan is returned to accrual status, it is then considered a performing loan.
A TDR is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs may include restructuring certain terms of loans, receipts of assets from debtors in partial satisfaction of loans, or a combination thereof. For TDRs, payments are applied based upon their contractual terms unless the related loan is deemed non-performing. TDRs are generally included in nonperforming loans until returned to performing status through the fulfilling of restructured terms and other performance indicators for a reasonable period of time demonstrating that the bank expects to collect all of the loans remaining contractual principal and interest. TDRs resulting from 1) borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and 2) borrowers that are not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.
See Note 3 Asset Quality and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional TDR information.
118 The PNC Financial Services Group, Inc. Form 10-K |
Foreclosed assets are comprised of any asset seized or property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure. Other real estate owned is comprised principally of commercial real estate and residential real estate properties obtained in partial or total satisfaction of loan obligations. After obtaining a foreclosure judgment, or in some jurisdictions the initiation of proceedings under a power of sale in the loan instruments, the property will be sold. When we are awarded title, we transfer the loan to foreclosed assets included in Other assets on our Consolidated Balance Sheet. Property obtained in satisfaction of a loan is initially recorded at estimated fair value less cost to sell. Based upon the estimated fair value less cost to sell, the recorded investment of the loan is adjusted and, typically, a charge-off/recovery is recognized to the Allowance for Loan and Lease Losses (ALLL). We estimate fair values primarily based on appraisals, or sales agreements with third parties. Fair value also considers the proceeds expected from government insurance and guarantees upon the conveyance of the other real estate owned (OREO).
Subsequently, foreclosed assets are valued at the lower of the amount recorded at acquisition date or estimated fair value less cost to sell. Valuation adjustments on these assets and gains or losses realized from disposition of such property are reflected in Other noninterest expense.
See Note 3 Asset Quality and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional data and application of the policies disclosed herein.
Allowance f or Loan and Lease Losses
We maintain the ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan and lease portfolios as of the balance sheet date. Our determination of the allowance is based on periodic evaluations of these loan and lease portfolios and other relevant factors. This critical estimate includes significant use of PNCs own historical data and complex methods to interpret this data. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change, and include, among others:
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Probability of default (PD), |
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Loss given default (LGD), |
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Outstanding balance of the loan, |
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Movement through delinquency stages, |
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Amounts and timing of expected future cash flows, |
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Value of collateral, which may be obtained from third parties, and |
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Qualitative factors, such as changes in current economic conditions, that may not be reflected in modeled results. |
For all loans, except purchased impaired loans, the ALLL is the sum of three components: (i) asset specific/individual
impaired reserves, (ii) quantitative (formulaic or pooled) reserves and (iii) qualitative (judgmental) reserves.
The reserve calculation and determination process is dependent on the use of key assumptions. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.
Asset Specific/Individual Component
Nonperforming loans that are considered impaired under ASC 310 Receivables, which include all commercial and consumer TDRs, are evaluated for a specific reserve. Specific reserve allocations are determined as follows:
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For commercial nonperforming loans and commercial TDRs greater than or equal to a defined dollar threshold, specific reserves are based on an analysis of the present value of the loans expected future cash flows, the loans observable market price or the fair value of the collateral. |
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For commercial nonperforming loans and commercial TDRs below the defined dollar threshold, the individual loans loss given default (LGD) percentage is multiplied by the loan balance and the results are aggregated for purposes of measuring specific reserve impairment. |
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Consumer nonperforming loans are collectively reserved for unless classified as consumer TDRs. For consumer TDRs, specific reserves are determined through an analysis of the present value of the loans expected future cash flows, except for those instances where loans have been deemed collateral dependent, including loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC. Once that determination has been made, those TDRs are charged down to the fair value of the collateral less costs to sell at each period end. |
Commercial Lending Quantitative Component
The estimates of the quantitative component of ALLL for incurred losses within the commercial lending portfolio segment are determined through statistical loss modeling utilizing PD, LGD and outstanding balance of the loan. Based upon loan risk ratings, we assign PDs and LGDs. Each of these statistical parameters is determined based on internal historical data and market data. PD is influenced by such factors as liquidity, industry, obligor financial structure, access to capital and cash flow. LGD is influenced by collateral type, original and/or updated loan-to-value ratio (LTV) and guarantees by related parties.
The PNC Financial Services Group, Inc. Form 10-K 119 |
Consumer Lending Quantitative Component
Quantitative estimates within the consumer lending portfolio segment are calculated primarily using a roll-rate model based on statistical relationships, calculated from historical data that estimate the movement of loan outstandings through the various stages of delinquency and ultimately charge-off over our loss emergence period.
Qualitative Component
While our reserve methodologies strive to reflect all relevant risk factors, there continues to be uncertainty associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal variations between estimates and actual outcomes. We provide additional reserves that are designed to provide coverage for losses attributable to such risks. The ALLL also includes factors that may not be directly measured in the determination of specific or pooled reserves. Such qualitative factors may include:
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Industry concentrations and conditions, |
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Recent credit quality trends, |
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Recent loss experience in particular portfolios, |
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Recent macro-economic factors, |
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Model imprecision, |
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Changes in lending policies and procedures, |
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Timing of available information, including the performance of first lien positions, and |
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Limitations of available historical data. |
Allowance for Purchased Non-Impaired Loans
ALLL for purchased non-impaired loans is determined based upon a comparison between the methodologies described above and the remaining acquisition date fair value discount that has yet to be accreted into interest income. After making the comparison, an ALLL is recorded for the amount greater than the discount, or no ALLL is recorded if the discount is greater.
Allowance for Purchased Impaired Loans
ALLL for purchased impaired loans is determined in accordance with ASC 310-30 by comparing the net present value of the cash flows expected to be collected to the recorded investment for a given loan (or pool of loans). In cases where the net present value of expected cash flows is lower than the recorded investment, ALLL is established. Cash flows expected to be collected represent managements best estimate of the cash flows expected over the life of a loan (or pool of loans). For large balance commercial loans, cash flows are separately estimated and compared to the recorded investment at the loan level. For smaller balance pooled loans, cash flows are estimated using cash flow models and compared at the risk pool level, which was defined at acquisition based on the risk characteristics of the loan. Our cash flow models use loan data including, but not limited to,
delinquency status of the loan, updated borrower FICO credit scores, geographic information, historical loss experience, and updated LTVs, as well as best estimates for changes in unemployment rates, home prices and other economic factors, to determine estimated cash flows.
See Note 3 Asset Quality, Note 4 Purchased Loans, and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional loan data and application of the policies disclosed herein.
Our credit risk management policies, procedures and practices are designed to promote sound lending standards and prudent credit risk management. We have policies, procedures and practices that address financial statement requirements, collateral review and appraisal requirements, advance rates based upon collateral types, appropriate levels of exposure, cross-border risk, lending to specialized industries or borrower type, guarantor requirements, and regulatory compliance.
Allowance for Unfunded Loan Commitments and Letters of Credit
We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable credit losses on these unfunded credit facilities as of the balance sheet date. We determine the allowance based on periodic evaluations of the unfunded credit facilities, including an assessment of the probability of commitment usage, credit risk factors, and, solely for commercial lending, the terms and expiration dates of the unfunded credit facilities. Other than the estimation of the probability of funding, the reserve for unfunded loan commitments is estimated in a manner similar to the methodology used for determining reserves for funded exposures. The allowance for unfunded loan commitments and letters of credit is recorded as a liability on the Consolidated Balance Sheet. Net adjustments to the allowance for unfunded loan commitments and letters of credit are included in the provision for credit losses.
See Note 3 Asset Quality and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional loan data and application of the policies disclosed herein.
Mortgage And Other Servicing Rights
We provide servicing under various loan servicing contracts for commercial, residential and other consumer loans. These contracts are either purchased in the open market or retained as part of a loan securitization or loan sale. All newly acquired or originated servicing rights are initially measured at fair value. Fair value is based on the present value of the expected future net cash flows, including assumptions as to:
|
Deposit balances and interest rates for escrow and commercial reserve earnings, |
|
Discount rates, |
120 The PNC Financial Services Group, Inc. Form 10-K |
|
Stated note rates, |
|
Estimated prepayment speeds, and |
|
Estimated servicing costs. |
As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial MSRs at fair value in order to eliminate any potential measurement mismatch between our economic hedges and the commercial MSRs. The impact was not material. As a result of that election, changes in the fair value of commercial MSRs are recognized as gains/(losses).
Prior to January 1, 2014, we elected to utilize the amortization method for subsequent measurement of our commercial mortgage loan servicing rights. This election was made based on the unique characteristics of the commercial mortgage loans underlying these servicing rights. Specific risk characteristics of commercial mortgages include loan type, currency or exchange rate, interest rates, expected cash flows and changes in the cost of servicing. We record these servicing assets as Other intangible assets and amortized them over their estimated lives based on estimated net servicing income. On a quarterly basis, we tested the assets for impairment by categorizing the pools of assets underlying the servicing rights into various strata. If the estimated fair value of the assets was less than the carrying value, an impairment loss was recognized and a valuation reserve was established.
For servicing rights related to residential real estate loans, we apply the fair value method. This election was made to be consistent with our risk management strategy to hedge changes in the fair value of these assets. We manage this risk by hedging the fair value of this asset with derivatives and securities which are expected to increase in value when the value of the servicing right declines. The fair value of these servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors which are determined based on current market conditions.
Revenue from the various loan servicing contracts for commercial, residential and other consumer loans is reported on the Consolidated Income Statement in line items Corporate services, Residential mortgage and Consumer services.
Fair Value Of Financial Instruments
The fair value of financial instruments and the methods and assumptions used in estimating fair value amounts and financial assets and liabilities for which fair value was elected are detailed in Note 9 Fair Value.
Goodwill And Other Intangible Assets
We assess goodwill for impairment at least annually, in the fourth quarter, or when events or changes in circumstances
indicate the assets might be impaired. Finite-lived intangible assets are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives. We review finite-lived intangible assets for impairment when events or changes in circumstances indicate that the assets carrying amount may not be recoverable from undiscounted future cash flows or that it may exceed its fair value.
Depreciation And Amortization
For financial reporting purposes, we depreciate premises and equipment, net of salvage value, principally using the straight-line method over their estimated useful lives.
We use estimated useful lives for furniture and equipment ranging from one to 10 years, and depreciate buildings over an estimated useful life of up to 40 years. We amortize leasehold improvements over their estimated useful lives of up to 15 years or the respective lease terms, whichever is shorter.
We purchase, as well as internally develop and customize, certain software to enhance or perform internal business functions. Software development costs incurred in the planning and post-development project stages are charged to Noninterest expense. Costs associated with designing software configuration and interfaces, installation, coding programs and testing systems are capitalized and amortized using the straight-line method over periods ranging from one to 10 years.
Repurchase And Resale Agreements
Repurchase and resale agreements are treated as collateralized financing transactions and are carried at the amounts at which the securities will be subsequently reacquired or resold, including accrued interest, as specified in the respective agreements. Our policy is to take possession of securities purchased under agreements to resell. We monitor the market value of securities to be repurchased and resold and additional collateral may be obtained where considered appropriate to protect against credit exposure. We have elected to account for structured resale agreements at fair value.
Other Comprehensive Income
Other comprehensive income consists, on an after-tax basis, primarily of unrealized gains or losses, excluding OTTI attributable to credit deterioration, on investment securities classified as available for sale, unrealized gains or losses on derivatives designated as cash flow hedges, and changes in pension and other postretirement benefit plan liability adjustments. Details of each component are included in Note 18 Other Comprehensive Income.
Treasury Stock
We record common stock purchased for treasury at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on the first-in, first-out basis.
The PNC Financial Services Group, Inc. Form 10-K 121 |
Derivative Instruments And Hedging Activities
We use a variety of financial derivatives as part of our overall asset and liability risk management process to help manage exposure to interest rate, market and credit risk inherent in our business activities. Interest rate and total return swaps, swaptions, interest rate caps and floors, options, forwards, and futures contracts are the primary instruments we use for interest rate risk management.
Financial derivatives involve, to varying degrees, interest rate, market and credit risk. We manage these risks as part of our asset and liability management process and through credit policies and procedures.
We recognize all derivative instruments at fair value as either Other assets or Other liabilities on the Consolidated Balance Sheet and the related cash flows in the Operating Activities section of the Consolidated Statement Of Cash Flows. Adjustments for counterparty credit risk are included in the determination of fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a cash flow or net investment hedging relationship. For all other derivatives, changes in fair value are recognized in earnings.
We utilize a net presentation for derivative instruments on the Consolidated Balance Sheet taking into consideration the effects of legally enforceable master netting agreements. Cash collateral exchanged with counterparties is also netted against the applicable derivative exposures by offsetting obligations to return, or rights to reclaim, cash collateral against the fair values of the net derivatives being collateralized.
For those derivative instruments that are designated and qualify as accounting hedges, we designate the hedging instrument, based on the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of the net investment in a foreign operation.
We formally document the relationship between the hedging instruments and hedged items, as well as the risk management objective and strategy, before undertaking an accounting hedge. To qualify for hedge accounting, the derivatives and related hedged items must be designated as a hedge at inception of the hedge relationship. For accounting hedge relationships, we formally assess, both at the inception of the hedge and on an ongoing basis, if the derivatives are highly effective in offsetting designated changes in the fair value or cash flows of the hedged item. If it is determined that the derivative instrument is not highly effective, hedge accounting is discontinued.
For derivatives that are designated as fair value hedges ( i.e ., hedging the exposure to changes in the fair value of an asset or a liability attributable to a particular risk, such as changes in LIBOR), changes in the fair value of the hedging
instrument are recognized in earnings and offset by also recognizing in earnings the changes in the fair value of the hedged item attributable to the hedged risk. To the extent the change in fair value of the derivative does not offset the change in fair value of the hedged item, the difference or ineffectiveness is reflected in the Consolidated Income Statement in the same financial statement category as the hedged item.
For derivatives designated as cash flow hedges ( i.e ., hedging the exposure to variability in expected future cash flows), the effective portions of the gain or loss on derivatives are reported as a component of Accumulated other comprehensive income (loss) and subsequently reclassified to income in the same period or periods during which the hedged transaction affects earnings. The change in fair value attributable to the ineffective portion of the hedging instrument is recognized immediately in Noninterest income.
For derivatives designated as a hedge of net investment in a foreign operation, the effective portions of the gain or loss on the derivatives are reported as a component of Accumulated other comprehensive income (loss). The change in fair value attributable to the ineffective portion of the hedging instrument is recognized immediately in Noninterest income.
We discontinue hedge accounting when it is determined that the derivative no longer qualifies as an effective hedge; the derivative expires or is sold, terminated or exercised; or the derivative is de-designated as a fair value or cash flow hedge or, for a cash flow hedge, it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period. If we determine that the derivative no longer qualifies as a fair value or cash flow hedge and hedge accounting is discontinued, the derivative will continue to be recorded on the balance sheet at its fair value with changes in fair value included in current earnings. For a discontinued fair value hedge, the previously hedged item is no longer adjusted for changes in fair value.
When hedge accounting is discontinued because it is no longer probable that a forecasted transaction will occur, the derivative will continue to be recorded on the balance sheet at its fair value with changes in fair value included in current earnings, and the gains and losses in Accumulated other comprehensive income (loss) will be recognized immediately into earnings. When we discontinue hedge accounting because the hedging instrument is sold, terminated or no longer designated, the amount reported in Accumulated other comprehensive income (loss) up to the date of sale, termination or de-designation continues to be reported in Other comprehensive income or loss until the forecasted transaction affects earnings. We did not terminate any cash flow hedges in 2014, 2013 or 2012 due to a determination that a forecasted transaction was no longer probable of occurring.
122 The PNC Financial Services Group, Inc. Form 10-K |
We purchase or originate financial instruments that contain an embedded derivative. At the inception of the transaction, we assess if the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the host contract, whether the hybrid financial instrument is measured at fair value with changes in fair value reported in earnings, and whether a separate instrument with the same terms as the embedded derivative would be a derivative. If the embedded derivative does not meet all of these conditions, the embedded derivative is recorded separately from the host contract with changes in fair value recorded in earnings, unless we elect to account for the hybrid instrument at fair value.
We have elected on an instrument-by-instrument basis, fair value measurement for certain financial instruments with embedded derivatives.
We enter into commitments to originate residential and commercial mortgage loans for sale. We also enter into commitments to purchase or sell commercial and residential real estate loans. These commitments are accounted for as free-standing derivatives which are recorded at fair value in Other assets or Other liabilities on the Consolidated Balance Sheet. Any gain or loss from the change in fair value after the inception of the commitment is recognized in Noninterest income.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that we expect will apply at the time when we believe the differences will reverse. The recognition of deferred tax assets requires an assessment to determine the realization of such assets. Realization refers to the incremental benefit achieved through the reduction in future taxes payable or refunds receivable from the deferred tax assets, assuming that the underlying deductible differences and carryforwards are the last items to enter into the determination of future taxable income. We establish a valuation allowance for tax assets when it is more likely than not that they will not be realized, based upon all available positive and negative evidence.
Earnings Per Common Share
Basic earnings per common share is calculated using the two-class method to determine income attributable to common shareholders. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities under the two-class method. Income attributable to common shareholders is then divided by the weighted-average common shares outstanding for the period.
Diluted earnings per common share is calculated under the more dilutive of either the treasury method or the two-class method. For the diluted calculation, we increase the weighted-average number of shares of common stock outstanding by the assumed conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance, if later, and the number of shares of common stock that would be issued assuming the exercise of stock options and warrants and the issuance of incentive shares using the treasury stock method. These adjustments to the weighted-average number of shares of common stock outstanding are made only when such adjustments will dilute earnings per common share. See Note 16 Earnings Per Share for additional information.
Recently Adopted Accounting Standards
In January 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-01, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. This ASU provided guidance on accounting for investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low income housing tax credit. If certain criteria are satisfied, investment amortization, net of tax credits, may be recognized in the income statement as a component of income taxes attributable to continuing operations under either the proportional amortization method or the practical expedient method to the proportional amortization method. This ASU was effective for annual periods beginning after December 15, 2014. Retrospective application was required and early adoption was permitted. We early adopted this guidance in the first quarter of 2014 for interim and annual reporting periods because we believe the presentation more accurately reflects the economics of tax credit investments. We elected to amortize our qualifying investments in low income housing tax credits under the practical expedient method to the proportional amortization method while continuing to account for our other tax credit investments under the equity method.
For prior periods, pursuant to ASU 2014-01, (a) amortization expense related to our qualifying investments in low income housing tax credits was reclassified from Other noninterest expense to Income taxes, and (b) additional amortization, net of the associated tax benefits was recognized in Income taxes as a result of our adoption of the practical expedient to the proportional amortization method. The cumulative effect to retained earnings as of January 1, 2012 of adopting this guidance was a reduction of $43 million as presented in the Consolidated Statement of Changes in Equity. The 2012 and 2013 periods within the Consolidated Income Statement have been updated to reflect the retrospective application.
During 2014, we recognized $181 million of amortization, $212 million of tax credits, and $66 million of other tax benefits associated with these investments within Income taxes. At December 31, 2014, the amount of investments in
The PNC Financial Services Group, Inc. Form 10-K 123 |
low income housing tax credits that were accounted for under ASU 2014-01 was $1.8 billion. These investments are reflected in Equity investments on our Consolidated Balance Sheet.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU clarified existing guidance to require that an unrecognized tax benefit or a portion thereof be presented in the statement of financial position as a reduction to a deferred tax asset for a net operating loss (NOL) carryforward, similar tax loss, or a tax credit carryforward except when an NOL carryforward, similar tax loss, or tax credit carryforward is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. In such a case, the unrecognized tax benefit should be presented in the statement of financial position as a liability. This ASU was effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We adopted ASU 2013-11 in the first quarter of 2014 using prospective application to all unrecognized tax benefits that existed at the effective date. Adoption of this ASU did not have a material effect on our results of operations or financial position.
In June 2013, the FASB issued ASU 2013-08, Financial Services Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements. This ASU modified the guidance in ASC 946 for determining whether an entity is an investment company, as well as the measurement and disclosure requirements for investment companies. The ASU does not change current accounting where a noninvestment company parent retains the specialized accounting applied by an investment company subsidiary in consolidation. We prospectively adopted ASU 2013-08 in the first quarter of 2014. Adoption of the ASU did not have a material effect on our results of operations or financial position. See Note 7 Fair Value for the new required disclosures.
N OTE 2 L OAN S ALE AND S ERVICING A CTIVITIES AND V ARIABLE I NTEREST E NTITIES
Loan Sale and Servicing Activities
We have transferred residential and commercial mortgage loans in securitization or sales transactions in which we have continuing involvement. These transfers have occurred through Agency securitization, Non-agency securitization, and loan sale transactions. Agency securitizations consist of securitization transactions with Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA) (collectively the Agencies). FNMA and FHLMC generally securitize our transferred loans into mortgage-backed securities for sale into the secondary market through special purpose entities (SPEs) that they sponsor. We, as an authorized GNMA issuer/servicer, pool Federal Housing Administration (FHA) and Department of Veterans Affairs
(VA) insured loans into mortgage-backed securities for sale into the secondary market. In Non-agency securitizations, we have transferred loans into securitization SPEs. In other instances, third-party investors have also purchased our loans in loan sale transactions and in certain instances have subsequently sold these loans into securitization SPEs. Securitization SPEs utilized in the Agency and Non-agency securitization transactions are variable interest entities (VIEs).
Our continuing involvement in the FNMA, FHLMC, and GNMA securitizations, Non-agency securitizations, and loan sale transactions generally consists of servicing, repurchasing previously transferred loans under certain conditions and loss share arrangements, and, in limited circumstances, holding of mortgage-backed securities issued by the securitization SPEs.
Depending on the transaction, we may act as the master, primary, and/or special servicer to the securitization SPEs or third-party investors. Servicing responsibilities typically consist of collecting and remitting monthly borrower principal and interest payments, maintaining escrow deposits, performing loss mitigation and foreclosure activities, and, in certain instances, funding of servicing advances. Servicing advances, which are reimbursable, are made for principal and interest and collateral protection and are recognized in Other assets at cost.
We earn servicing and other ancillary fees for our role as servicer and, depending on the contractual terms of the servicing arrangement, we can be terminated as servicer with or without cause. At the consummation date of each type of loan transfer where PNC retains the servicing, we recognize a servicing right at fair value. See Note 7 Fair Value and Note 8 Goodwill and Other Intangible Assets for further discussion of our servicing rights.
Certain loans transferred to the Agencies contain removal of account provisions (ROAPs). Under these ROAPs, we hold an option to repurchase at par individual delinquent loans that meet certain criteria. In other limited cases, the U.S. Department of Housing and Urban Development (HUD) has granted us the right to repurchase current loans when we intend to modify the borrowers interest rate under established guidelines. When we have the unilateral ability to repurchase a loan, effective control over the loan has been regained and we recognize an asset (in either Loans or Loans held for sale) and a corresponding liability (in Other borrowed funds) on the balance sheet regardless of our intent to repurchase the loan. At December 31, 2014 and December 31, 2013, these assets and liabilities both totaled $136 million and $128 million, respectively.
The Agency and Non-agency mortgage-backed securities issued by the securitization SPEs that are purchased and held on our balance sheet are typically purchased in the secondary market. PNC does not retain any credit risk on its Agency mortgage-backed security positions as FNMA, FHLMC, and the U.S. Government (for GNMA) guarantee losses of principal and interest. Substantially all of the Non-agency mortgage-backed securities acquired and held on our balance sheet are senior tranches in the securitization structure.
124 The PNC Financial Services Group, Inc. Form 10-K |
We also have involvement with certain Agency and Non-agency commercial securitization SPEs where we have not transferred commercial mortgage loans. These SPEs were sponsored by independent third-parties and the loans held by these entities were purchased exclusively from other third-parties. Generally, our involvement with these SPEs is as servicer with servicing activities consistent with those described above.
We recognize a liability for our loss exposure associated with contractual obligations to repurchase previously transferred loans due to breaches of representations and warranties and also for loss sharing arrangements (recourse obligations) with the Agencies. Other than providing temporary liquidity under servicing advances and our loss exposure associated with our repurchase and recourse obligations, we have not provided nor are we required to provide any type of credit support, guarantees, or commitments to the securitization SPEs or third-party investors in these transactions. See Note 22 Commitments and Guarantees for further discussion of our repurchase and recourse obligations.
The following table provides certain financial information and cash flows associated with PNCs loan sale and servicing activities:
Table 56: Certain Financial Information and Cash Flows Associated with Loan Sale and Servicing Activities
In millions |
Residential
Mortgages |
Commercial
Mortgages (a) |
Home Equity
Loans/Lines (b) |
|||||||||
FINANCIAL INFORMATION December 31, 2014 |
||||||||||||
Servicing portfolio (c) |
$ | 108,010 | $ | 186,032 | $ | 3,833 | ||||||
Carrying value of servicing assets (d) |
845 | 506 | ||||||||||
Servicing advances (e) |
501 | 299 | 31 | |||||||||
Repurchase and recourse obligations (f) |
107 | 35 | 29 | |||||||||
Carrying value of mortgage-backed securities held (g) |
3,365 | 1,269 | ||||||||||
FINANCIAL INFORMATION December 31, 2013 |
||||||||||||
Servicing portfolio (c) |
$ | 113,994 | $ | 176,510 | $ | 4,321 | (h) | |||||
Carrying value of servicing assets (d) |
1,087 | 549 | ||||||||||
Servicing advances (e) |
571 | 412 | 11 | |||||||||
Repurchase and recourse obligations (f) |
131 | 33 | 22 | |||||||||
Carrying value of mortgage-backed securities held (g) |
4,144 | 1,475 | ||||||||||
In millions |
Residential
Mortgages |
Commercial
Mortgages (a) |
Home Equity
Loans/Lines (b) |
|||||||||
CASH FLOWS Year ended December 31, 2014 |
||||||||||||
Sales of loans (i) |
$ | 8,344 | $ | 3,469 | ||||||||
Repurchases of previously transferred loans (j) |
744 | $ | 14 | |||||||||
Servicing fees (k) |
346 | 132 | 19 | |||||||||
Servicing advances recovered/(funded), net |
70 | 113 | (20 | ) | ||||||||
Cash flows on mortgage-backed securities held (g) |
934 | 308 | ||||||||||
CASH FLOWS Year ended December 31, 2013 |
||||||||||||
Sales of loans (i) |
$ | 14,650 | $ | 2,754 | ||||||||
Repurchases of previously transferred loans (j) |
1,191 | $ | 9 | |||||||||
Servicing fees (k) |
362 | 176 | 21 | |||||||||
Servicing advances recovered/(funded), net |
11 | 93 | (6 | ) | ||||||||
Cash flows on mortgage-backed securities held (g) |
1,456 | 411 |
(a) | Represents financial information and cash flows associated with both commercial mortgage loan transfer and servicing activities. |
(b) | These activities were part of an acquired brokered home equity lending business in which PNC is no longer engaged. See Note 22 Commitments and Guarantees for further information. |
(c) | For our continuing involvement with residential mortgages, this amount represents the outstanding balance of loans we service, including loans transferred by us and loans originated by others where we have purchased the associated servicing rights. For home equity loan/line of credit transfers, this amount represents the outstanding balance of loans transferred and serviced. For commercial mortgages, this amount represents our overall servicing portfolio in which loans have been transferred by us or third parties to VIEs. |
(d) | See Note 7 Fair Value and Note 8 Goodwill and Other Intangible Assets for further information. |
(e) | Pursuant to certain contractual servicing agreements, represents outstanding balance of funds advanced (i) to investors for monthly collections of borrower principal and interest, (ii) for borrower draws on unused home equity lines of credit, and (iii) for collateral protection associated with the underlying mortgage collateral. |
(f) | Represents liability for our loss exposure associated with loan repurchases for breaches of representations and warranties for our Residential Mortgage Banking and Non-Strategic Assets Portfolio segments, and our commercial mortgage loss share arrangements for our Corporate & Institutional Banking segment. See Note 22 Commitments and Guarantees for further information. |
(Continued on following page)
The PNC Financial Services Group, Inc. Form 10-K 125 |
(g) | Represents securities held where PNC transferred to and/or services loans for a securitization SPE and we hold securities issued by that SPE. |
(h) | In prior periods, the unpaid principal balance reflected the outstanding balance at the time of charge-off. During the second quarter of 2014, we corrected the outstanding principal balance to reflect the unpaid principal balance as of the reporting date. Amounts reported in prior periods were decreased by approximately $581 million. |
(i) | Gains/losses recognized on sales of loans were insignificant for the periods presented. |
(j) | Includes government insured or guaranteed loans eligible for repurchase through the exercise of our ROAP option and loans repurchased due to breaches of origination covenants or representations and warranties made to purchasers. |
(k) | Includes contractually specified servicing fees, late charges and ancillary fees. |
The table below presents information about the principal balances of transferred loans that we service and are not recorded on our balance sheet.
Table 57: Principal Balance, Delinquent Loans, and Net Charge-offs Related to Serviced Loans
In millions |
Residential
Mortgages |
Commercial
Mortgages (a) |
Home Equity
Loans/Lines (b) |
|||||||||
December 31, 2014 |
||||||||||||
Total principal balance |
$ | 79,108 | $ | 60,873 | $ | 3,833 | ||||||
Delinquent loans (c) |
2,657 | 707 | 1,303 | |||||||||
December 31, 2013 |
||||||||||||
Total principal balance |
$ | 85,758 | $ | 62,872 | $ | 4,321 | (d) | |||||
Delinquent loans (c) |
3,562 | 2,353 | 1,404 | (d) | ||||||||
In millions |
Residential
Mortgages |
Commercial
Mortgages (a) |
Home Equity
Loans/Lines (b) |
|||||||||
Year ended December 31, 2014 |
||||||||||||
Net charge-offs (e) |
$ | 136 | $ | 1,288 | $ | 61 | ||||||
Year ended December 31, 2013 |
||||||||||||
Net charge-offs (e) |
$ | 213 | $ | 916 | $ | 119 |
(a) | Represents information at the securitization level in which PNC has sold loans and is the servicer for the securitization. |
(b) | These activities were part of an acquired brokered home equity lending business in which PNC is no longer engaged. See Note 22 Commitments and Guarantees for further information. |
(c) | Serviced delinquent loans are 90 days or more past due or are in process of foreclosure. |
(d) | In prior periods, the unpaid principal balance reflected the outstanding balance at the time of charge-off. During the second quarter of 2014, we corrected the outstanding principal balance to reflect the unpaid principal balance as of the reporting date. Amounts reported in prior periods were decreased by approximately $581 million. |
(e) | Net charge-offs for Residential mortgages and Home equity loans/lines represent credit losses less recoveries distributed and as reported to investors during the period. Net charge-offs for Commercial mortgages represent credit losses less recoveries distributed and as reported by the trustee for CMBS securitizations. Realized losses for Agency securitizations are not reflected as we do not manage the underlying real estate upon foreclosure and, as such, do not have access to loss information. |
Variable Interest Entities (VIEs)
We are involved with various entities in the normal course of business that are deemed to be VIEs. We assess VIEs for consolidation based upon the accounting policies described in Note 1 Accounting Policies. The following provides a summary of VIEs, including those that we have consolidated and those in which we hold variable interests but have not consolidated into our financial statements as of December 31, 2014 and December 31, 2013. We have not provided additional financial support to these entities which we are not contractually required to provide.
Table 58: Consolidated VIEs Carrying Value (a) (b)
December 31, 2014 In millions |
Credit Card and Other
Securitization Trusts |
Tax Credit
Investments |
Total | |||||||||
Assets |
||||||||||||
Cash and due from banks |
$ | 6 | $ | 6 | ||||||||
Interest-earning deposits with banks |
6 | 6 | ||||||||||
Loans |
$ | 1,606 | 1,606 | |||||||||
Allowance for loan and lease losses |
(50 | ) | (50 | ) | ||||||||
Equity investments |
492 | 492 | ||||||||||
Other assets |
31 | 452 | 483 | |||||||||
Total assets |
$ | 1,587 | $ | 956 | $ | 2,543 | ||||||
Liabilities |
||||||||||||
Other borrowed funds |
$ | 166 | $ | 181 | $ | 347 | ||||||
Accrued expenses |
70 | 70 | ||||||||||
Other liabilities |
206 | 206 | ||||||||||
Total liabilities |
$ | 166 | $ | 457 | $ | 623 |
December 31, 2013 In millions |
Credit Card and Other
Securitization Trusts |
Tax Credit
Investments |
Total | |||||||||
Assets |
||||||||||||
Cash and due from banks |
$ | 5 | $ | 5 | ||||||||
Interest-earning deposits with banks |
7 | 7 | ||||||||||
Loans |
$ | 1,736 | 1,736 | |||||||||
Allowance for loan and lease losses |
(58 | ) | (58 | ) | ||||||||
Equity investments |
582 | 582 | ||||||||||
Other assets |
25 | 566 | 591 | |||||||||
Total assets |
$ | 1,703 | $ | 1,160 | $ | 2,863 | ||||||
Liabilities |
||||||||||||
Other borrowed funds |
$ | 184 | $ | 230 | $ | 414 | ||||||
Accrued expenses |
83 | 83 | ||||||||||
Other liabilities |
252 | 252 | ||||||||||
Total liabilities |
$ | 184 | $ | 565 | $ | 749 |
(a) | Amounts represent carrying value on PNCs Consolidated Balance Sheet. |
(b) | Difference between total assets and total liabilities represents the equity portion of the VIE or intercompany assets and liabilities which are eliminated in consolidation. |
126 The PNC Financial Services Group, Inc. Form 10-K |
Table 59: Non-Consolidated VIEs
In millions |
Aggregate
Assets |
Aggregate
Liabilities |
PNC Risk
of Loss (a) |
Carrying Value of
Assets Owned by PNC |
Carrying Value of
Liabilities Owned by PNC |
|||||||||||||||
December 31, 2014 |
||||||||||||||||||||
Commercial Mortgage-Backed Securitizations (b) |
$ | 53,436 | $ | 53,436 | $ | 1,550 | $ | 1,550 | (d) | $ | 1 | (f) | ||||||||
Residential Mortgage-Backed Securitizations (b) |
62,236 | 62,236 | 3,385 | 3,385 | (d) | 4 | (f) | |||||||||||||
Tax Credit Investments and Other (c) |
7,493 | 2,933 | 2,270 | 2,304 | (e) | 777 | (g) | |||||||||||||
Total |
$ | 123,165 | $ | 118,605 | $ | 7,205 | $ | 7,239 | $ | 782 |
In millions |
Aggregate
Assets |
Aggregate
Liabilities |
PNC Risk
of Loss (a) |
Carrying Value of
Assets Owned by PNC |
Carrying Value of
Liabilities Owned by PNC |
|||||||||||||||
December 31, 2013 |
||||||||||||||||||||
Commercial Mortgage-Backed Securitizations (b) |
$ | 65,757 | $ | 65,757 | $ | 1,747 | $ | 1,747 | (d) | |||||||||||
Residential Mortgage-Backed Securitizations (b) |
37,962 | 37,962 | 4,171 | 4,171 | (d) | $ | 5 | (f) | ||||||||||||
Tax Credit Investments and Other (c) (h) |
7,086 | 2,622 | 2,030 | 2,055 | (e) | 826 | (g) | |||||||||||||
Total |
$ | 110,805 | $ | 106,341 | $ | 7,948 | $ | 7,973 | $ | 831 |
(a) | This represents loans, investments and other assets related to non-consolidated VIEs, net of collateral (if applicable). Our total exposure related to our involvement in loan sale and servicing activities is disclosed in Table 56. Additionally, we also invest in other mortgage and asset-backed securities issued by third-party VIEs with which we have no continuing involvement. Further information on these securities is included in Note 6 Investment Securities and values disclosed represent our maximum exposure to loss for those securities holdings. |
(b) | Amounts reflect involvement with securitization SPEs where PNC transferred to and/or services loans for an SPE and we hold securities issued by that SPE. Asset amounts equal outstanding liability amounts of the SPEs due to limited availability of SPE financial information. |
(c) | Aggregate assets and aggregate liabilities are based on limited availability of financial information associated with certain acquired partnerships and certain LLCs engaged in solar power generation to which PNC provides lease financing. The aggregate assets and aggregate liabilities of LLCs engaged in solar power generation may not be reflective of the size of these VIEs due to differences in classification of leases by these entities. |
(d) | Included in Trading securities, Investment securities, Other intangible assets and Other assets on our Consolidated Balance Sheet. |
(e) | Included in Loans, Equity investments and Other assets on our Consolidated Balance Sheet. |
(f) | Included in Other liabilities on our Consolidated Balance Sheet. |
(g) | Included in Deposits and Other liabilities on our Consolidated Balance Sheet. |
(h) | PNC Risk of Loss and Carrying Value of Assets Owned by PNC have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
Credit Card Securitization Trust
We were the sponsor of several credit card securitizations facilitated through a trust. This bankruptcy-remote SPE was established to purchase credit card receivables from the sponsor and to issue and sell asset-backed securities created by it to independent third-parties. The SPE was financed primarily through the sale of these asset-backed securities. These transactions were originally structured to provide liquidity and to afford favorable capital treatment.
Our continuing involvement in these securitization transactions consisted primarily of holding certain retained interests and acting as the primary servicer. We consolidated the SPE as we were deemed the primary beneficiary of the entity based upon our level of continuing involvement. Our role as primary servicer gave us the power to direct the activities of the SPE that most significantly affect its economic performance and our holding of retained interests gave us the obligation to absorb expected losses, or the ability to receive residual returns that could be potentially significant to the SPE. The underlying assets of the consolidated SPE were restricted only for payment of the beneficial interests issued by the SPE. Additionally, creditors of the SPE have no direct recourse to PNC.
During the first quarter of 2012, the last series issued by the SPE, Series 2007-1, matured. At December 31, 2014, the SPE continued to exist and we consolidated the entity as we
continued to be the primary beneficiary of the SPE through our holding of sellers interest and our role as the primary servicer.
Tax Credit Investments and Other
We make certain equity investments in various tax credit limited partnerships or limited liability companies (LLCs). The purpose of these investments is to achieve a satisfactory return on capital and to assist us in achieving goals associated with the Community Reinvestment Act.
Also, we are a national syndicator of affordable housing equity. In these syndication transactions, we create funds in which our subsidiaries are the general partner or managing member and sell limited partnership or non-managing member interests to third parties. In some cases PNC may also purchase a limited partnership or non-managing member interest in the fund. The purpose of this business is to generate income from the syndication of these funds, generate servicing fees by managing the funds, and earn tax credits to reduce our tax liability. General partner or managing member activities include identifying, evaluating, structuring, negotiating, and closing the fund investments in operating limited partnerships or LLCs, as well as oversight of the ongoing operations of the fund portfolio.
Typically, the general partner or managing member will be the party that has the right to make decisions that will most
The PNC Financial Services Group, Inc. Form 10-K 127 |
significantly impact the economic performance of the entity. However, certain partnership or LLC agreements provide the limited partner or non-managing member the ability to remove the general partner or managing member without cause. This results in the limited partner or non-managing member being the party that has the right to make decisions that will most significantly impact the economic performance of the entity. The primary sources of benefits for these investments are the tax credits and passive losses which reduce our tax liability. We have consolidated investments in which we have the power to direct the activities that most significantly impact the entitys performance, and have an obligation to absorb expected losses or receive benefits that could be potentially significant. The assets are primarily included in Equity investments and Other assets on our Consolidated Balance Sheet with the liabilities classified in Other borrowed funds, Accrued expenses, and Other liabilities and the third-party investors interests included in the Equity section as Noncontrolling interests. Neither creditors nor equity investors in these investments have any recourse to our general credit. The consolidated assets and liabilities of these investments are provided in Table 58 and are reflected in the Other business segment.
For tax credit investments in which we do not have the right to make decisions that will most significantly impact the economic performance of the entity, we are not the primary beneficiary and thus they are not consolidated. These investments are disclosed in Table 59. The table also reflects our maximum exposure to loss exclusive of any potential tax credit recapture. Our maximum exposure to loss is equal to our legally binding equity commitments adjusted for recorded impairment, partnership results, or amortization for qualifying low income housing tax credit investments when applicable. For all legally binding unfunded equity commitments, we increase our recognized investment and recognize a liability. As of December 31, 2014, we had a liability of $441 million related to investments in qualified affordable housing projects which is reflected in Other liabilities on our Consolidated Balance Sheet.
Table 59 also includes our involvement in lease financing transactions with LLCs engaged in solar power generation that to a large extent provided returns in the form of tax credits. The outstanding financings and operating lease assets are reflected as Loans and Other assets, respectively, on our Consolidated Balance Sheet, whereas related liabilities are reported in Deposits and Other liabilities.
Residential and Commercial Mortgage-Backed Securitizations
In connection with each Agency and Non-agency securitization discussed above, we evaluate each SPE utilized in these transactions for consolidation. In performing these assessments, we evaluate our level of continuing involvement in these transactions as the nature of our involvement
ultimately determines whether or not we hold a variable interest and/or are the primary beneficiary of the SPE. Factors we consider in our consolidation assessment include the significance of (i) our role as servicer, (ii) our holdings of mortgage-backed securities issued by the securitization SPE, and (iii) the rights of third-party variable interest holders.
The first step in our assessment is to determine whether we hold a variable interest in the securitization SPE. We hold variable interests in Agency and Non-agency securitization SPEs through our holding of mortgage-backed securities issued by the SPEs and/or our recourse obligations. Each SPE in which we hold a variable interest is evaluated to determine whether we are the primary beneficiary of the entity. For Agency securitization transactions, our contractual role as servicer does not give us the power to direct the activities that most significantly affect the economic performance of the SPEs. Thus, we are not the primary beneficiary of these entities. For Non-agency securitization transactions, we would be the primary beneficiary to the extent our servicing activities give us the power to direct the activities that most significantly affect the economic performance of the SPE and we hold a more than insignificant variable interest in the entity.
Details about the Agency and Non-agency securitization SPEs where we hold a variable interest and are not the primary beneficiary are included in Table 59. Our maximum exposure to loss as a result of our involvement with these SPEs is the carrying value of the mortgage-backed securities, servicing assets, servicing advances, and our liabilities associated with our recourse obligations. Creditors of the securitization SPEs have no recourse to PNCs assets or general credit.
Asset Quality
We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency rates may be a key indicator, among other considerations, of credit risk within the loan portfolios. The measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of payment are considered delinquent. Loan delinquencies exclude loans held for sale, purchased impaired loans, nonperforming loans and loans accounted for under the fair value option which are on nonaccrual status, but include government insured or guaranteed loans and accruing loans accounted for under the fair value option.
The trends in nonperforming assets represent another key indicator of the potential for future credit losses. Nonperforming assets include nonperforming loans, OREO and foreclosed assets. Nonperforming loans are those loans
128 The PNC Financial Services Group, Inc. Form 10-K |
accounted for at amortized cost whose credit quality has deteriorated to the extent that full collection of contractual principal and interest is not probable. Interest income is not recognized on these loans. Loans accounted for under the fair value option are reported as performing loans as these loans are accounted for at fair value. However, when nonaccrual criteria is met, interest income is not recognized on these loans. Additionally, certain government insured or guaranteed loans for which we expect to collect substantially all principal and interest are not reported as nonperforming loans and continue to accrue interest. Purchased impaired loans are excluded from nonperforming loans as we are currently accreting interest income over the expected life of the loans. See Note 4 Purchased Loans for further information.
See Note 1 Accounting Policies for additional delinquency, nonperforming, and charge-off information.
The following tables display the delinquency status of our loans and our nonperforming assets at December 31, 2014 and December 31, 2013, respectively.
Table 60: Analysis of Loan Portfolio (a)
Accruing | ||||||||||||||||||||||||||||||||||||
Dollars in millions |
Current or Less
Than 30 Days Past Due |
30-59
Days Past Due |
60-89
Days Past Due |
90 Days
Or More Past Due |
Total
Past Due (b) |
Nonperforming
Loans |
Fair Value
Option Nonaccrual Loans (c) |
Purchased
Impaired Loans |
Total Loans
(d) (e) |
|||||||||||||||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||||||||||||||
Commercial Lending |
||||||||||||||||||||||||||||||||||||
Commercial |
$ | 96,922 | $ | 73 | $ | 24 | $ | 37 | $ | 134 | $ | 290 | $ | 74 | $ | 97,420 | ||||||||||||||||||||
Commercial real estate |
22,667 | 23 | 2 | 25 | 334 | 236 | 23,262 | |||||||||||||||||||||||||||||
Equipment lease financing |
7,672 | 11 | 1 | 12 | 2 | 7,686 | ||||||||||||||||||||||||||||||
Total commercial lending |
127,261 | 107 | 27 | 37 | 171 | 626 | 310 | 128,368 | ||||||||||||||||||||||||||||
Consumer Lending |
||||||||||||||||||||||||||||||||||||
Home equity |
31,474 | 70 | 32 | 102 | 1,112 | 1,989 | 34,677 | |||||||||||||||||||||||||||||
Residential real estate (f) |
9,900 | 163 | 68 | 742 | 973 | 706 | $ | 269 | 2,559 | 14,407 | ||||||||||||||||||||||||||
Credit card |
4,528 | 28 | 20 | 33 | 81 | 3 | 4,612 | |||||||||||||||||||||||||||||
Other consumer (g) |
22,071 | 214 | 112 | 293 | 619 | 63 | 22,753 | |||||||||||||||||||||||||||||
Total consumer lending |
67,973 | 475 | 232 | 1,068 | 1,775 | 1,884 | 269 | 4,548 | 76,449 | |||||||||||||||||||||||||||
Total |
$ | 195,234 | $ | 582 | $ | 259 | $ | 1,105 | $ | 1,946 | $ | 2,510 | $ | 269 | $ | 4,858 | $ | 204,817 | ||||||||||||||||||
Percentage of total loans |
95.32 | % | .28 | % | .13 | % | .54 | % | 0.95 | % | 1.23 | % | .13 | % | 2.37 | % | 100.00 | % | ||||||||||||||||||
December 31, 2013 |
||||||||||||||||||||||||||||||||||||
Commercial Lending |
||||||||||||||||||||||||||||||||||||
Commercial |
$ | 87,621 | $ | 81 | $ | 20 | $ | 42 | $ | 143 | $ | 457 | $ | 157 | $ | 88,378 | ||||||||||||||||||||
Commercial real estate |
20,090 | 54 | 11 | 2 | 67 | 518 | 516 | 21,191 | ||||||||||||||||||||||||||||
Equipment lease financing |
7,538 | 31 | 2 | 33 | 5 | 7,576 | ||||||||||||||||||||||||||||||
Total commercial lending |
115,249 | 166 | 33 | 44 | 243 | 980 | 673 | 117,145 | ||||||||||||||||||||||||||||
Consumer Lending |
||||||||||||||||||||||||||||||||||||
Home equity |
32,877 | 86 | 34 | 120 | 1,139 | 2,311 | 36,447 | |||||||||||||||||||||||||||||
Residential real estate (f) |
9,311 | 217 | 87 | 1,060 | 1,364 | 904 | $ | 365 | 3,121 | 15,065 | ||||||||||||||||||||||||||
Credit card |
4,339 | 29 | 19 | 34 | 82 | 4 | 4,425 | |||||||||||||||||||||||||||||
Other consumer (g) |
21,788 | 216 | 112 | 353 | 681 | 61 | 1 | 22,531 | ||||||||||||||||||||||||||||
Total consumer lending |
68,315 | 548 | 252 | 1,447 | 2,247 | 2,108 | 365 | 5,433 | 78,468 | |||||||||||||||||||||||||||
Total |
$ | 183,564 | $ | 714 | $ | 285 | $ | 1,491 | $ | 2,490 | $ | 3,088 | $ | 365 | $ | 6,106 | $ | 195,613 | ||||||||||||||||||
Percentage of total loans |
93.83 | % | .37 | % | .15 | % | .76 | % | 1.28 | % | 1.58 | % | .19 | % | 3.12 | % | 100.00 | % |
(a) | Amounts in table represent recorded investment and exclude loans held for sale. |
(b) | Past due loan amounts exclude purchased impaired loans, even if contractually past due (or if we do not expect to receive payment in full based on the original contractual terms), as we are currently accreting interest income over the expected life of the loans. |
(c) | Consumer loans accounted for under the fair value option for which we do not expect to collect substantially all principal and interest are subject to nonaccrual accounting and classification upon meeting any of our nonaccrual policies. Given that these loans are not accounted for at amortized cost, these loans have been excluded from the nonperforming loan population. |
(d) | Net of unearned income, net deferred loan fees, unamortized discounts and premiums, and purchase discounts and premiums totaling $1.7 billion and $2.1 billion at December 31, 2014 and December 31, 2013, respectively. |
(Continued on following page)
The PNC Financial Services Group, Inc. Form 10-K 129 |
(e) | Future accretable yield related to purchased impaired loans is not included in the analysis of loan portfolio. |
(f) | Past due loan amounts at December 31, 2014 include government insured or guaranteed Residential real estate mortgages totaling $68 million for 30 to 59 days past due, $43 million for 60 to 89 days past due and $719 million for 90 days or more past due. Past due loan amounts at December 31, 2013 include government insured or guaranteed Residential real estate mortgages totaling $105 million for 30 to 59 days past due, $57 million for 60 to 89 days past due and $1,025 million for 90 days or more past due. |
(g) | Past due loan amounts at December 31, 2014 include government insured or guaranteed Other consumer loans totaling $152 million for 30 to 59 days past due, $93 million for 60 to 89 days past due and $277 million for 90 days or more past due. Past due loan amounts at December 31, 2013 include government insured or guaranteed Other consumer loans totaling $154 million for 30 to 59 days past due, $94 million for 60 to 89 days past due and $339 million for 90 days or more past due. |
In the normal course of business, we originate or purchase loan products with contractual characteristics that, when concentrated, may increase our exposure as a holder of those loan products. Possible product features that may create a concentration of credit risk would include a high original or updated LTV ratio, terms that may expose the borrower to future increases in repayments above increases in market interest rates, and interest-only loans, among others. We also originate home equity and residential real estate loans that are concentrated in our primary geographic markets.
We originate interest-only loans to commercial borrowers. Such credit arrangements are usually designed to match borrower cash flow expectations ( e.g. , working capital lines, revolvers). These products are standard in the financial services industry and product features are considered during the underwriting process to mitigate the increased risk that the interest-only feature may result in borrowers not being able to make interest and principal payments when due. We do not believe that these product features create a concentration of credit risk.
At December 31, 2014, we pledged $19.2 billion of commercial loans to the Federal Reserve Bank (FRB) and $52.8 billion of residential real estate and other loans to the Federal Home Loan Bank (FHLB) as collateral for the contingent ability to borrow, if necessary. The comparable amounts at December 31, 2013 were $23.4 billion and $40.4 billion, respectively.
Table 61: Nonperforming Assets
Dollars in millions |
December 31
2014 |
December 31
2013 |
||||||
Nonperforming loans |
||||||||
Commercial lending |
||||||||
Commercial |
$ | 290 | $ | 457 | ||||
Commercial real estate |
334 | 518 | ||||||
Equipment lease financing |
2 | 5 | ||||||
Total commercial lending |
626 | 980 | ||||||
Consumer lending (a) |
||||||||
Home equity |
1,112 | 1,139 | ||||||
Residential real estate |
706 | 904 | ||||||
Credit card |
3 | 4 | ||||||
Other consumer |
63 | 61 | ||||||
Total consumer lending |
1,884 | 2,108 | ||||||
Total nonperforming loans (b) |
2,510 | 3,088 | ||||||
OREO and foreclosed assets |
||||||||
Other real estate owned (OREO) (c) |
351 | 360 | ||||||
Foreclosed and other assets |
19 | 9 | ||||||
Total OREO and foreclosed assets |
370 | 369 | ||||||
Total nonperforming assets |
$ | 2,880 | $ | 3,457 | ||||
Nonperforming loans to total loans |
1.23 | % | 1.58 | % | ||||
Nonperforming assets to total loans, OREO and foreclosed assets |
1.40 | 1.76 | ||||||
Nonperforming assets to total assets |
.83 | 1.08 | ||||||
Interest on nonperforming loans |
||||||||
Computed on original terms |
125 | 163 | ||||||
Recognized prior to nonperforming status |
25 | 30 |
(a) | Excludes most consumer loans and lines of credit, not secured by residential real estate, which are charged off after 120 to 180 days past due and are not placed on nonperforming status. |
(b) | Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. |
(c) | OREO excludes $194 million and $245 million at December 31, 2014 and December 31, 2013, respectively, related to residential real estate that was acquired by us upon foreclosure of serviced loans because they are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or guaranteed by the Department of Housing and Urban Development (HUD). |
130 The PNC Financial Services Group, Inc. Form 10-K |
Nonperforming loans also include certain loans whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. In accordance with applicable accounting guidance, these loans are considered TDRs. See Note 1 Accounting Policies and the TDR section of this Note 3 for additional information. For the twelve months ended December 31, 2014, $1.2 billion of Consumer loans held for sale, loans accounted for under the fair value option, pooled purchased impaired loans, as well as certain government insured or guaranteed loans which were evaluated for TDR consideration, are not classified as TDRs. The comparable amount for the twelve months ended December 31, 2013 was $2.3 billion.
Total nonperforming loans in the nonperforming assets table above include TDRs of $1.4 billion at December 31, 2014 and $1.5 billion at December 31, 2013. TDRs that are performing, including all credit card TDR loans, totaled $1.2 billion at December 31, 2014 and December 31, 2013, respectively, and are excluded from nonperforming loans. These performing TDR loans, excluding credit cards which are not placed on nonaccrual status as permitted by regulatory guidance, have demonstrated a period of at least six months of consecutive performance under the restructured terms. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status.
Additional Asset Quality Indicators
We have two overall portfolio segments Commercial Lending and Consumer Lending. Each of these two segments is comprised of multiple loan classes. Classes are characterized by similarities in initial measurement, risk attributes and the manner in which we monitor and assess credit risk. The Commercial Lending segment is comprised of the commercial, commercial real estate, equipment lease financing, and commercial purchased impaired loan classes. The Consumer Lending segment is comprised of the home equity, residential real estate, credit card, other consumer, and consumer purchased impaired loan classes. Asset quality indicators for each of these loan classes are discussed in more detail below.
Commercial Lending Asset Classes
Commercial Loan Class
For commercial loans, we monitor the performance of the borrower in a disciplined and regular manner based upon the level of credit risk inherent in the loan. To evaluate the level of credit risk, we assign an internal risk rating reflecting the borrowers PD and LGD. This two-dimensional credit risk rating methodology provides granularity in the risk monitoring process on an ongoing basis. These ratings are reviewed and updated on a risk-adjusted basis, generally at least once per year. Additionally, no less frequently than on an annual basis, we review PD rates related to each rating grade based upon internal historical data. These rates are updated as needed and augmented by market data as deemed necessary. For small balance homogenous pools of commercial loans, mortgages and leases, we apply statistical modeling to assist in determining the probability of default within these pools. Further, on a periodic basis, we update our LGD estimates associated with each rating grade based upon historical data. The combination of the PD and LGD ratings assigned to a commercial loan, capturing both the combination of expectations of default and loss severity in event of default, reflects the relative estimated likelihood of loss for that loan at the reporting date. In general, loans with better PD and LGD tend to have a lower likelihood of loss compared to loans with worse PD and LGD. The loss amount also considers exposure at date of default, which we also periodically update based upon historical data.
Based upon the amount of the lending arrangement and our risk rating assessment, we follow a formal schedule of written periodic review. Quarterly, we conduct formal reviews of a markets or business units entire loan portfolio, focusing on those loans which we perceive to be of higher risk, based upon PDs and LGDs, or loans for which credit quality is weakening. If circumstances warrant, it is our practice to review any customer obligation and its level of credit risk more frequently. We attempt to proactively manage our loans by using various procedures that are customized to the risk of a given loan, including ongoing outreach, contact, and assessment of obligor financial conditions, collateral inspection and appraisal.
The PNC Financial Services Group, Inc. Form 10-K 131 |
Commercial Real Estate Loan Class
We manage credit risk associated with our commercial real estate projects and commercial mortgage activities similar to commercial loans by analyzing PD and LGD. Additionally, risks connected with commercial real estate projects and commercial mortgage activities tend to be correlated to the loan structure and collateral location, project progress and business environment. As a result, these attributes are also monitored and utilized in assessing credit risk.
As with the commercial class, a formal schedule of periodic review is also performed to assess market/geographic risk and business unit/industry risk. Often as a result of these overviews, more in-depth reviews and increased scrutiny are placed on areas of higher risk, including adverse changes in risk ratings, deteriorating operating trends, and/or areas that concern management. These reviews are designed to assess risk and take actions to mitigate our exposure to such risks.
Equipment Lease Financing Loan Class
We manage credit risk associated with our equipment lease financing loan class similar to commercial loans by analyzing PD and LGD.
Based upon the dollar amount of the lease and of the level of credit risk, we follow a formal schedule of periodic review. Generally, this occurs quarterly, although we have established practices to review such credit risk more frequently if circumstances warrant. Our review process entails analysis of the following factors: equipment value/residual value, exposure levels, jurisdiction risk, industry risk, guarantor requirements, and regulatory compliance.
Commercial Purchased Impaired Loan Class
Estimates of the expected cash flows primarily determine the valuation of commercial purchased impaired loans. Commercial cash flow estimates are influenced by a number of credit related items, which include but are not limited to: estimated collateral value, receipt of additional collateral, secondary trading prices, circumstances of possible and/or ongoing liquidation, capital availability, business operations and payment patterns.
We attempt to proactively manage these factors by using various procedures that are customized to the risk of a given loan. These procedures include a review by our Special Asset Committee (SAC), ongoing outreach, contact, and assessment of obligor financial conditions, collateral inspection and appraisal.
See Note 4 Purchased Loans for additional information.
Table 62: Commercial Lending Asset Quality Indicators (a)(b)
Criticized Commercial Loans | ||||||||||||||||||||
In millions | Pass Rated |
Special
Mention (c) |
Substandard (d) | Doubtful (e) | Total Loans | |||||||||||||||
December 31, 2014 |
||||||||||||||||||||
Commercial |
$ | 92,884 | $ | 1,984 | $ | 2,424 | $ | 55 | $ | 97,347 | ||||||||||
Commercial real estate |
22,066 | 285 | 639 | 35 | 23,025 | |||||||||||||||
Equipment lease financing |
7,518 | 73 | 93 | 2 | 7,686 | |||||||||||||||
Purchased impaired loans |
4 | 280 | 26 | 310 | ||||||||||||||||
Total commercial lending |
$ | 122,468 | $ | 2,346 | $ | 3,436 | $ | 118 | $ | 128,368 | ||||||||||
December 31, 2013 |
||||||||||||||||||||
Commercial |
$ | 83,903 | $ | 1,894 | $ | 2,352 | $ | 72 | $ | 88,221 | ||||||||||
Commercial real estate |
19,175 | 301 | 1,113 | 86 | 20,675 | |||||||||||||||
Equipment lease financing |
7,403 | 77 | 93 | 3 | 7,576 | |||||||||||||||
Purchased impaired loans |
10 | 31 | 469 | 163 | 673 | |||||||||||||||
Total commercial lending |
$ | 110,491 | $ | 2,303 | $ | 4,027 | $ | 324 | $ | 117,145 |
(a) | Based upon PDs and LGDs. We apply a split rating classification to certain loans meeting threshold criteria. By assigning a split classification, a loans exposure amount may be split into more than one classification category in the above table. |
(b) | Loans are included above based on the Regulatory Classification definitions of Pass, Special Mention, Substandard and Doubtful. |
(c) | Special Mention rated loans have a potential weakness that deserves managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects at some future date. These loans do not expose us to sufficient risk to warrant a more adverse classification at this time. |
(d) | Substandard rated loans have a well-defined weakness or weaknesses that jeopardize the collection or liquidation of debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. |
(e) | Doubtful rated loans possess all the inherent weaknesses of a Substandard loan with the additional characteristics that the weakness makes collection or liquidation in full improbable due to existing facts, conditions, and values. |
132 The PNC Financial Services Group, Inc. Form 10-K |
Consumer Lending Asset Classes
Home Equity and Residential Real Estate Loan Classes
We use several credit quality indicators, including delinquency information, nonperforming loan information, updated credit scores, originated and updated LTV ratios, and geography, to monitor and manage credit risk within the home equity and residential real estate loan classes. We evaluate mortgage loan performance by source originators and loan servicers. A summary of asset quality indicators follows:
Delinquency/Delinquency Rates : We monitor trending of delinquency/delinquency rates for home equity and residential real estate loans. See the Asset Quality section of this Note 3 for additional information.
Nonperforming Loans : We monitor trending of nonperforming loans for home equity and residential real estate loans. See the Asset Quality section of this Note 3 for additional information.
Credit Scores : We use a national third-party provider to update FICO credit scores for home equity loans and lines of credit and residential real estate loans at least quarterly. The updated scores are incorporated into a series of credit management reports, which are utilized to monitor the risk in the loan classes.
LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions) : At least annually, we update the property values of real estate collateral and calculate an updated LTV ratio. For open-end credit lines secured by real estate in regions experiencing significant declines in property values, more frequent valuations may occur. We examine LTV migration and stratify LTV into categories to monitor the risk in the loan classes.
Historically, we used, and we continue to use, a combination of original LTV and updated LTV for internal risk management and reporting purposes ( e.g. , line management, loss mitigation strategies). In addition to the fact that estimated property values by their nature are estimates, given certain data limitations it is important to note that updated LTVs may be based upon managements assumptions ( e.g. , if an updated LTV is not provided by the third-party service provider, home price index (HPI) changes will be incorporated in arriving at managements estimate of updated LTV).
Geography : Geographic concentrations are monitored to evaluate and manage exposures. Loan purchase programs are sensitive to, and focused within, certain regions to manage geographic exposures and associated risks.
A combination of updated FICO scores, originated and updated LTV ratios and geographic location assigned to home equity loans and lines of credit and residential real estate loans is used to monitor the risk in the loan classes. Loans with higher FICO scores and lower LTVs tend to have a lower level of risk. Conversely, loans with lower FICO scores, higher LTVs, and in certain geographic locations tend to have a higher level of risk.
Consumer Purchased Impaired Loan Class
Estimates of the expected cash flows primarily determine the valuation of consumer purchased impaired loans. Consumer cash flow estimates are influenced by a number of credit related items, which include, but are not limited to: estimated real estate values, payment patterns, updated FICO scores, the current economic environment, updated LTV ratios and the date of origination. These key factors are monitored to help ensure that concentrations of risk are managed and cash flows are maximized.
See Note 4 Purchased Loans for additional information.
Table 63: Home Equity and Residential Real Estate Balances
In millions |
December 31
2014 |
December 31
2013 |
||||||
Home equity and residential real estate loans excluding purchased impaired loans (a) |
$ | 43,348 | $ | 44,376 | ||||
Home equity and residential real estate loans purchased impaired loans (b) |
4,541 | 5,548 | ||||||
Government insured or guaranteed residential real estate mortgages (a) |
1,188 | 1,704 | ||||||
Purchase accounting adjustments purchased impaired loans |
7 | (116 | ) | |||||
Total home equity and residential real estate loans (a) |
$ | 49,084 | $ | 51,512 |
(a) | Represents recorded investment. |
(b) | Represents outstanding balance. |
The PNC Financial Services Group, Inc. Form 10-K 133 |
Table 64: Home Equity and Residential Real Estate Asset Quality Indicators Excluding Purchased Impaired Loans (a) (b)
Home Equity | Residential Real Estate |
Total |
||||||||||||||
December 31, 2014 in millions | 1st Liens | 2nd Liens | ||||||||||||||
Current estimated LTV ratios (c) |
||||||||||||||||
Greater than or equal to 125% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
$ | 333 | $ | 1,399 | $ | 360 | $ | 2,092 | ||||||||
Less than or equal to 660 (d) (e) |
57 | 273 | 92 | 422 | ||||||||||||
Missing FICO |
1 | 9 | 8 | 18 | ||||||||||||
Greater than or equal to 100% to less than 125% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
839 | 2,190 | 772 | 3,801 | ||||||||||||
Less than or equal to 660 (d) (e) |
118 | 383 | 153 | 654 | ||||||||||||
Missing FICO |
1 | 5 | 12 | 18 | ||||||||||||
Greater than or equal to 90% to less than 100% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
891 | 1,703 | 755 | 3,349 | ||||||||||||
Less than or equal to 660 |
103 | 271 | 118 | 492 | ||||||||||||
Missing FICO |
2 | 3 | 5 | 10 | ||||||||||||
Less than 90% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
13,878 | 7,874 | 7,703 | 29,455 | ||||||||||||
Less than or equal to 660 |
1,319 | 995 | 573 | 2,887 | ||||||||||||
Missing FICO |
27 | 14 | 109 | 150 | ||||||||||||
Total home equity and residential real estate loans |
$ | 17,569 | $ | 15,119 | $ | 10,660 | $ | 43,348 |
Home Equity | Residential Real Estate |
Total |
||||||||||||||
December 31, 2013 in millions | 1st Liens | 2nd Liens | ||||||||||||||
Current estimated LTV ratios (c) |
||||||||||||||||
Greater than or equal to 125% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
$ | 438 | $ | 1,914 | $ | 563 | $ | 2,915 | ||||||||
Less than or equal to 660 (d) (e) |
74 | 399 | 185 | 658 | ||||||||||||
Missing FICO |
1 | 11 | 20 | 32 | ||||||||||||
Greater than or equal to 100% to less than 125% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
987 | 2,794 | 1,005 | 4,786 | ||||||||||||
Less than or equal to 660 (d) (e) |
150 | 501 | 210 | 861 | ||||||||||||
Missing FICO |
2 | 5 | 32 | 39 | ||||||||||||
Greater than or equal to 90% to less than 100% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
1,047 | 1,916 | 844 | 3,807 | ||||||||||||
Less than or equal to 660 |
134 | 298 | 131 | 563 | ||||||||||||
Missing FICO |
2 | 3 | 22 | 27 | ||||||||||||
Less than 90% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
13,445 | 7,615 | 6,309 | 27,369 | ||||||||||||
Less than or equal to 660 |
1,349 | 1,009 | 662 | 3,020 | ||||||||||||
Missing FICO |
25 | 17 | 256 | 298 | ||||||||||||
Missing LTV and updated FICO scores: |
||||||||||||||||
Greater than 660 |
1 | 1 | ||||||||||||||
Total home equity and residential real estate loans |
$ | 17,654 | $ | 16,482 | $ | 10,240 | $ | 44,376 |
(a) | Excludes purchased impaired loans of approximately $4.5 billion and $5.4 billion in recorded investment, certain government insured or guaranteed residential real estate mortgages of approximately $1.2 billion and $1.7 billion, and loans held for sale at December 31, 2014 and December 31, 2013, respectively. See the Home Equity and Residential Real Estate Asset Quality Indicators Purchased Impaired Loans table below for additional information on purchased impaired loans. |
(b) | Amounts shown represent recorded investment. |
(c) |
Based upon updated LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions). Updated LTV is estimated using modeled property values. These ratios are updated at least semi-annually. The related estimates and inputs are based upon an approach that uses a combination of third-party automated valuation models (AVMs), broker price opinions (BPOs), HPI indices, property location, internal and external balance information, origination data and management assumptions. In cases where we are in an originated second lien position, we generally utilize origination balances provided by a third-party which do not include an amortization assumption when calculating updated LTV. |
134 The PNC Financial Services Group, Inc. Form 10-K |
Accordingly, the results of these calculations do not represent actual appraised loan level collateral or updated LTV based upon a current first lien balance, and as such, are necessarily imprecise and subject to change as we enhance our methodology. |
(d) | Higher risk loans are defined as loans with both an updated FICO score of less than or equal to 660 and an updated LTV greater than or equal to 100%. |
(e) | The following states had the highest percentage of higher risk loans at December 31, 2014: New Jersey 14%, Pennsylvania 12%, Illinois 12%, Ohio 12%, Florida 8%, Maryland 6%, Michigan 5% and North Carolina 4%. The remainder of the states had lower than 4% of the higher risk loans individually, and collectively they represent approximately 28% of the higher risk loans. The following states had the highest percentage of higher risk loans at December 31, 2013: New Jersey 13%, Illinois 12%, Pennsylvania 12%, Ohio 11%, Florida 9%, Maryland 5%, Michigan 5%, and California 4%. The remainder of the states had lower than 4% of the high risk loans individually, and collectively they represent approximately 29% of the higher risk loans. |
Table 65: Home Equity and Residential Real Estate Asset Quality Indicators Purchased Impaired Loans (a)
Home Equity (b) (c) | Residential Real Estate (b) (c) |
Total |
||||||||||||||
December 31, 2014 in millions | 1st Liens | 2nd Liens | ||||||||||||||
Current estimated LTV ratios (d) |
||||||||||||||||
Greater than or equal to 125% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
$ | 8 | $ | 243 | $ | 276 | $ | 527 | ||||||||
Less than or equal to 660 |
9 | 125 | 144 | 278 | ||||||||||||
Missing FICO |
8 | 6 | 14 | |||||||||||||
Greater than or equal to 100% to less than 125% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
15 | 426 | 272 | 713 | ||||||||||||
Less than or equal to 660 |
12 | 194 | 200 | 406 | ||||||||||||
Missing FICO |
11 | 5 | 16 | |||||||||||||
Greater than or equal to 90% to less than 100% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
12 | 207 | 186 | 405 | ||||||||||||
Less than or equal to 660 |
9 | 93 | 123 | 225 | ||||||||||||
Missing FICO |
5 | 3 | 8 | |||||||||||||
Less than 90% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
102 | 339 | 626 | 1,067 | ||||||||||||
Less than or equal to 660 |
109 | 200 | 515 | 824 | ||||||||||||
Missing FICO |
1 | 12 | 15 | 28 | ||||||||||||
Missing LTV and updated FICO scores: |
||||||||||||||||
Greater than 660 |
1 | 14 | 15 | |||||||||||||
Less than or equal to 660 |
4 | 10 | 14 | |||||||||||||
Missing FICO |
1 | 1 | ||||||||||||||
Total home equity and residential real estate loans |
$ | 282 | $ | 1,863 | $ | 2,396 | $ | 4,541 |
The PNC Financial Services Group, Inc. Form 10-K 135 |
Home Equity (b) (c) | Residential Real Estate (b) (c) |
Total |
||||||||||||||
December 31, 2013 in millions | 1st Liens | 2nd Liens | ||||||||||||||
Current estimated LTV ratios (d) |
||||||||||||||||
Greater than or equal to 125% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
$ | 13 | $ | 435 | $ | 361 | $ | 809 | ||||||||
Less than or equal to 660 |
15 | 215 | 296 | 526 | ||||||||||||
Missing FICO |
12 | 24 | 36 | |||||||||||||
Greater than or equal to 100% to less than 125% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
21 | 516 | 373 | 910 | ||||||||||||
Less than or equal to 660 |
15 | 239 | 281 | 535 | ||||||||||||
Missing FICO |
14 | 14 | 28 | |||||||||||||
Greater than or equal to 90% to less than 100% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
15 | 202 | 197 | 414 | ||||||||||||
Less than or equal to 660 |
12 | 101 | 163 | 276 | ||||||||||||
Missing FICO |
7 | 6 | 13 | |||||||||||||
Less than 90% and updated FICO scores: |
||||||||||||||||
Greater than 660 |
93 | 261 | 646 | 1,000 | ||||||||||||
Less than or equal to 660 |
126 | 198 | 590 | 914 | ||||||||||||
Missing FICO |
1 | 11 | 47 | 59 | ||||||||||||
Missing LTV and updated FICO scores: |
||||||||||||||||
Greater than 660 |
1 | 11 | 12 | |||||||||||||
Less than or equal to 660 |
13 | 13 | ||||||||||||||
Missing FICO |
3 | 3 | ||||||||||||||
Total home equity and residential real estate loans |
$ | 312 | $ | 2,211 | $ | 3,025 | $ | 5,548 |
(a) | Amounts shown represent outstanding balance. See Note 4 Purchased Loans for additional information. |
(b) | For the estimate of cash flows utilized in our purchased impaired loan accounting, other assumptions and estimates are made, including amortization of first lien balances, pre-payment rates, etc., which are not reflected in this table. |
(c) | The following states had the highest percentage of purchased impaired loans at December 31, 2014: California 17%, Florida 15%, Illinois 11%, Ohio 8%, North Carolina 7%, and Michigan 5%. The remainder of the states had lower than a 4% concentration of purchased impaired loans individually, and collectively they represent approximately 37% of the purchased impaired portfolio. The following states had the highest percentage of purchased impaired loans at December 31, 2013: California 17%, Florida 16%, Illinois 11%, Ohio 8%, North Carolina 8% and Michigan 5%. The remainder of the states had lower than a 4% concentration of purchased impaired loans individually, and collectively they represent approximately 35% of the purchased impaired portfolio. |
(d) | Based upon updated LTV (inclusive of combined loan-to-value (CLTV) for first and subordinate lien positions). Updated LTV is estimated using modeled property values. These ratios are updated at least semi-annually. The related estimates and inputs are based upon an approach that uses a combination of third-party automated valuation models (AVMs), broker price opinions (BPOs), HPI indices, property location, internal and external balance information, origination data and management assumptions. In cases where we are in an originated second lien position, we generally utilize origination balances provided by a third-party which do not include an amortization assumption when calculating updated LTV. Accordingly, the results of these calculations do not represent actual appraised loan level collateral or updated LTV based upon a current first lien balance, and as such, are necessarily imprecise and subject to change as we enhance our methodology. |
136 The PNC Financial Services Group, Inc. Form 10-K |
Credit Card and Other Consumer Loan Classes
We monitor a variety of asset quality information in the management of the credit card and other consumer loan classes. Other consumer loan classes include education, automobile, and other secured and unsecured lines and loans. Along with the trending of delinquencies and losses for each class, FICO credit score updates are generally obtained monthly, as well as a variety of credit bureau attributes. Loans with high FICO scores tend to have a lower likelihood of loss. Conversely, loans with low FICO scores tend to have a higher likelihood of loss.
Table 66: Credit Card and Other Consumer Loan Classes Asset Quality Indicators
Credit Card (a) | Other Consumer (b) | |||||||||||||||
Dollars in millions | Amount |
% of Total Loans
Using FICO Credit Metric |
Amount |
% of Total Loans
Using FICO Credit Metric |
||||||||||||
December 31, 2014 |
||||||||||||||||
FICO score greater than 719 |
$ | 2,717 | 59 | % | $ | 9,156 | 64 | % | ||||||||
650 to 719 |
1,288 | 28 | 3,459 | 24 | ||||||||||||
620 to 649 |
203 | 4 | 528 | 4 | ||||||||||||
Less than 620 |
239 | 5 | 619 | 4 | ||||||||||||
No FICO score available or required (c) |
165 | 4 | 557 | 4 | ||||||||||||
Total loans using FICO credit metric |
4,612 | 100 | % | 14,319 | 100 | % | ||||||||||
Consumer loans using other internal credit metrics (b) |
8,434 | |||||||||||||||
Total loan balance |
$ | 4,612 | $ | 22,753 | ||||||||||||
Weighted-average updated FICO score (d) |
732 | 744 | ||||||||||||||
December 31, 2013 (e) |
||||||||||||||||
FICO score greater than 719 |
$ | 2,546 | 58 | % | $ | 8,596 | 63 | % | ||||||||
650 to 719 |
1,253 | 28 | 3,511 | 26 | ||||||||||||
620 to 649 |
203 | 4 | 527 | 4 | ||||||||||||
Less than 620 |
258 | 6 | 628 | 4 | ||||||||||||
No FICO score available or required (c) |
165 | 4 | 474 | 3 | ||||||||||||
Total loans using FICO credit metric |
4,425 | 100 | % | 13,736 | 100 | % | ||||||||||
Consumer loans using other internal credit metrics (b) |
8,795 | |||||||||||||||
Total loan balance |
$ | 4,425 | $ | 22,531 | ||||||||||||
Weighted-average updated FICO score (d) |
730 | 741 |
(a) | At December 31, 2014, we had $35 million of credit card loans that are higher risk (i.e., loans with both updated FICO scores less than 660 and in late stage (90+ days) delinquency status). The majority of the December 31, 2014 balance related to higher risk credit card loans is geographically distributed throughout the following areas: Ohio 17%, Pennsylvania 16%, Michigan 9%, New Jersey 7%, Illinois 7%, Indiana 6%, Florida 6% and North Carolina 4%. All other states had less than 4% individually and make up the remainder of the balance. At December 31, 2013, we had $35 million of credit card loans that are higher risk. The majority of the December 31, 2013 balance related to higher risk credit card loans is geographically distributed throughout the following areas: Ohio 18%, Pennsylvania 17%, Michigan 11%, Illinois 7%, New Jersey 7%, Indiana 6%, Florida 6% and Kentucky 4%. All other states had less than 4% individually and make up the remainder of the balance. |
(b) | Other consumer loans for which updated FICO scores are used as an asset quality indicator include non-government guaranteed or insured education loans, automobile loans and other secured and unsecured lines and loans. Other consumer loans for which other internal credit metrics are used as an asset quality indicator include primarily government guaranteed or insured education loans, as well as consumer loans to high net worth individuals. Other internal credit metrics may include delinquency status, geography or other factors. |
(c) | Credit card loans and other consumer loans with no FICO score available or required generally refers to new accounts issued to borrowers with limited credit history, accounts for which we cannot obtain an updated FICO score (e.g., recent profile changes), cards issued with a business name, and/or cards secured by collateral. Management proactively assesses the risk and size of this loan portfolio and, when necessary, takes actions to mitigate the credit risk. |
(d) | Weighted-average updated FICO score excludes accounts with no FICO score available or required. |
(e) | In the second quarter of 2014, we corrected our credit card FICO score determination process by further refining the data. This impacted FICO scores greater than 719, 650 to 719, 620 to 649, less than 620 and no FICO score available. This resulted in an adjustment to amounts previously reported in 2013 of $242 million from No FICO score available or required to the other line items. The majority of the adjustment to amounts previously reported in 2013 went to the FICO score greater than 719 category. |
The PNC Financial Services Group, Inc. Form 10-K 137 |
Troubled Debt Restructurings (TDRs)
A TDR is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulty. TDRs result from our loss mitigation activities, and include rate reductions, principal forgiveness, postponement/reduction of scheduled amortization, and extensions, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Additionally, TDRs also result from borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC. In those situations where principal is forgiven, the amount of such principal forgiveness is immediately charged off.
Some TDRs may not ultimately result in the full collection of principal and interest, as restructured, and result in potential incremental losses. These potential incremental losses have been factored into our overall ALLL estimate. The level of any subsequent defaults will likely be affected by future economic conditions. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, the collateral is foreclosed upon, or it is fully charged off. We held specific reserves in the ALLL of $.4 billion and $.5 billion at December 31, 2014 and December 31, 2013, respectively, for the total TDR portfolio.
Table 67: Summary of Troubled Debt Restructurings
In millions |
December 31
2014 |
December 31
2013 |
||||||
Total consumer lending |
$ | 2,041 | $ | 2,161 | ||||
Total commercial lending |
542 | 578 | ||||||
Total TDRs |
$ | 2,583 | $ | 2,739 | ||||
Nonperforming |
$ | 1,370 | $ | 1,511 | ||||
Accruing (a) |
1,083 | 1,062 | ||||||
Credit card |
130 | 166 | ||||||
Total TDRs |
$ | 2,583 | $ | 2,739 |
(a) | Accruing TDR loans have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status. |
Table 68 quantifies the number of loans that were classified as TDRs as well as the change in the recorded investments as a result of the TDR classification during 2014, 2013, and 2012, respectively. Additionally, the table provides information about the types of TDR concessions. The Principal Forgiveness TDR category includes principal forgiveness and accrued interest forgiveness. These types of TDRs result in a write down of the recorded investment and a charge-off if such action has not already taken place. The Rate Reduction TDR category includes reduced interest rate and interest deferral. The TDRs within this category result in reductions to future interest income. The Other TDR category primarily includes consumer borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC, as well as postponement/reduction of scheduled amortization and contractual extensions for both consumer and commercial borrowers.
In some cases, there have been multiple concessions granted on one loan. This is most common within the commercial loan portfolio. When there have been multiple concessions granted in the commercial loan portfolio, the principal forgiveness concession was prioritized for purposes of determining the inclusion in Table 68. For example, if there is principal forgiveness in conjunction with lower interest rate and postponement of amortization, the type of concession will be reported as Principal Forgiveness. Second in priority would be rate reduction. For example, if there is an interest rate reduction in conjunction with postponement of amortization, the type of concession will be reported as a Rate Reduction. In the event that multiple concessions are granted on a consumer loan, concessions resulting from discharge from personal liability through Chapter 7 bankruptcy without formal affirmation of the loan obligations to PNC would be prioritized and included in the Other type of concession in the table below. After that, consumer loan concessions would follow the previously discussed priority of concessions for the commercial loan portfolio.
138 The PNC Financial Services Group, Inc. Form 10-K |
Table 68: Financial Impact and TDRs by Concession Type (a)
Number
|
Pre-TDR
Recorded
|
Post-TDR Recorded Investment (c) | ||||||||||||||||||||||
During the year ended December 31, 2014 Dollars in millions |
Principal
Forgiveness |
Rate
Reduction |
Other | Total | ||||||||||||||||||||
Commercial lending |
||||||||||||||||||||||||
Commercial |
131 | $ | 192 | $ | 10 | $ | 11 | $ | 137 | $ | 158 | |||||||||||||
Commercial real estate |
79 | 171 | 27 | 11 | 100 | 138 | ||||||||||||||||||
Total commercial lending (d) |
210 | 363 | 37 | 22 | 237 | 296 | ||||||||||||||||||
Consumer lending |
||||||||||||||||||||||||
Home equity |
2,950 | 193 | 51 | 132 | 183 | |||||||||||||||||||
Residential real estate |
527 | 73 | 26 | 45 | 71 | |||||||||||||||||||
Credit card |
7,720 | 60 | 57 | 57 | ||||||||||||||||||||
Other consumer |
1,092 | 18 | 1 | 13 | 14 | |||||||||||||||||||
Total consumer lending |
12,289 | 344 | 135 | 190 | 325 | |||||||||||||||||||
Total TDRs |
12,499 | $ | 707 | $ | 37 | $ | 157 | $ | 427 | $ | 621 | |||||||||||||
During the year ended December 31, 2013 Dollars in millions |
||||||||||||||||||||||||
Commercial lending |
||||||||||||||||||||||||
Commercial |
168 | $ | 216 | $ | 10 | $ | 21 | $ | 132 | $ | 163 | |||||||||||||
Commercial real estate |
116 | 284 | 28 | 51 | 144 | 223 | ||||||||||||||||||
Equipment lease financing |
1 | 3 | ||||||||||||||||||||||
Total commercial lending |
285 | 503 | 38 | 72 | 276 | 386 | ||||||||||||||||||
Consumer lending |
||||||||||||||||||||||||
Home equity |
4,132 | 289 | 139 | 126 | 265 | |||||||||||||||||||
Residential real estate |
911 | 127 | 39 | 86 | 125 | |||||||||||||||||||
Credit card |
8,397 | 64 | 61 | 61 | ||||||||||||||||||||
Other consumer |
1,379 | 22 | 1 | 19 | 20 | |||||||||||||||||||
Total consumer lending |
14,819 | 502 | 240 | 231 | 471 | |||||||||||||||||||
Total TDRs |
15,104 | $ | 1,005 | $ | 38 | $ | 312 | $ | 507 | $ | 857 | |||||||||||||
During the year ended December 31, 2012 Dollars in millions |
||||||||||||||||||||||||
Commercial lending |
||||||||||||||||||||||||
Commercial (e) |
220 | $ | 335 | $ | 19 | $ | 58 | $ | 206 | $ | 283 | |||||||||||||
Commercial real estate (e) |
68 | 244 | 19 | 77 | 121 | 217 | ||||||||||||||||||
Equipment lease financing (e) |
1 | 1 | 1 | 1 | ||||||||||||||||||||
Total commercial lending |
289 | 580 | 38 | 135 | 328 | 501 | ||||||||||||||||||
Consumer lending |
||||||||||||||||||||||||
Home equity |
4,813 | 313 | 200 | 110 | 310 | |||||||||||||||||||
Residential real estate |
754 | 147 | 60 | 83 | 143 | |||||||||||||||||||
Credit card |
13,306 | 93 | 90 | 90 | ||||||||||||||||||||
Other consumer |
835 | 20 | 2 | 19 | 21 | |||||||||||||||||||
Total consumer lending |
19,708 | 573 | 352 | 212 | 564 | |||||||||||||||||||
Total TDRs |
19,997 | $ | 1,153 | $ | 38 | $ | 487 | $ | 540 | $ | 1,065 |
(a) | Impact of partial charge-offs at TDR date are included in this table. |
(b) | Represents the recorded investment of the loans as of the quarter end prior to TDR designation, and excludes immaterial amounts of accrued interest receivable. |
(c) | Represents the recorded investment of the TDRs as of the end of the quarter in which the TDR occurs, and excludes immaterial amounts of accrued interest receivable. |
(d) | During the twelve months ended December 31, 2014, there were no loans classified as TDRs in the Equipment lease financing loan class. |
(e) | Certain amounts within the Commercial lending portfolio for 2012 were reclassified to conform to the presentation in 2013. |
The PNC Financial Services Group, Inc. Form 10-K 139 |
TDRs may result in charge-offs and interest income not being recognized. The amount of principal balance charged off at or around the time of modification for the twelve months ended December 31, 2014 was not material. A financial effect of rate reduction TDRs is that interest income is not recognized for the difference between the original contractual interest rate terms and the restructured terms. Interest income not recognized that otherwise would have been earned in the twelve months ended December 31, 2014 and 2013, related to all commercial TDRs and consumer TDRs, was not material.
After a loan is determined to be a TDR, we continue to track its performance under its most recent restructured terms. In Table 69, we consider a TDR to have subsequently defaulted when it becomes 60 days past due after the most recent date the loan was restructured. The following table presents the recorded investment of loans that both (i) were classified as TDRs or were subsequently modified during each 12-month period preceding January 1, 2014, 2013, and 2012, respectively, and (ii) subsequently defaulted during 2014, 2013, and 2012, respectively.
Table 69: TDRs that were Modified in the Past Twelve Months which have Subsequently Defaulted
During the year ended December 31, 2014 Dollars in millions |
Number of Contracts | Recorded Investment | ||||||
Commercial lending |
||||||||
Commercial |
38 | $ | 26 | |||||
Commercial real estate |
43 | 80 | ||||||
Total commercial lending (a) |
81 | 106 | ||||||
Consumer lending |
||||||||
Home equity |
400 | 21 | ||||||
Residential real estate |
155 | 24 | ||||||
Credit card |
3,397 | 27 | ||||||
Other consumer |
132 | 1 | ||||||
Total consumer lending |
4,084 | 73 | ||||||
Total TDRs |
4,165 | $ | 179 | |||||
During the year ended December 31, 2013 Dollars in millions |
Number of Contracts | Recorded Investment | ||||||
Commercial lending |
||||||||
Commercial |
67 | $ | 47 | |||||
Commercial real estate |
38 | 59 | ||||||
Total commercial lending (a) |
105 | 106 | ||||||
Consumer lending (b) |
||||||||
Home equity |
592 | 39 | ||||||
Residential real estate |
255 | 35 | ||||||
Credit card |
4,598 | 34 | ||||||
Other consumer |
249 | 4 | ||||||
Total consumer lending |
5,694 | 112 | ||||||
Total TDRs |
5,799 | $ | 218 |
During the year ended December 31, 2012 Dollars in millions |
Number of Contracts | Recorded Investment | ||||||
Commercial lending |
||||||||
Commercial (c) |
112 | $ | 67 | |||||
Commercial real estate (c) |
42 | 69 | ||||||
Equipment lease financing |
1 | 1 | ||||||
Total commercial lending |
155 | 137 | ||||||
Consumer lending |
||||||||
Home equity |
542 | 50 | ||||||
Residential real estate |
482 | 70 | ||||||
Credit card |
4,551 | 32 | ||||||
Other consumer |
118 | 4 | ||||||
Total consumer lending |
5,693 | 156 | ||||||
Total TDRs |
5,848 | $ | 293 |
(a) | During 2014 and 2013, there were no loans classified as TDRs in the Equipment lease financing loan class that have subsequently defaulted. |
(b) | In the second quarter of 2014, we corrected our Consumer lending subsequent default (excluding credit card) determination process by further refining the data. For the twelve months ended December 31, 2013, this correction removed 1,426 contracts for approximately $130 million from Total consumer lending (excluding credit card). |
(c) | Certain amounts within the 2012 Commercial lending portfolio were reclassified during the fourth quarter of 2013. |
The impact to the ALLL for commercial lending TDRs is the effect of moving to the specific reserve methodology from the quantitative reserve methodology, described below, for those loans that were not already classified as nonaccrual. There is an impact to the ALLL as a result of the concession made, which generally results in a reduction of expected future cash flows. The decline in expected future cash flows, consideration of collateral value, and/or the application of a present value discount rate, when compared to the recorded investment, results in either an increased ALLL or a charge-off. As TDRs are individually evaluated under the specific reserve methodology, which builds in expectations of future performance, generally subsequent defaults do not significantly impact the ALLL.
For consumer lending TDRs, except TDRs resulting from borrowers that have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to PNC as discussed in Note 1 Accounting Policies under the Allowance for Loans and Lease Losses section, the ALLL is calculated using a discounted cash flow model, which leverages subsequent default, prepayment, and severity rate assumptions based upon historically observed data. Similar to the commercial lending specific reserve methodology, the reduced expected cash flows resulting from the concessions granted impact the consumer lending ALLL. The decline in expected cash flows due to the application of a present value discount rate or the consideration of collateral value, when compared to the recorded investment, results in either an increased ALLL or a charge-off. Loans where a borrower has been discharged from personal liability in bankruptcy and has not formally
140 The PNC Financial Services Group, Inc. Form 10-K |
reaffirmed its loan obligation to PNC are charged off to collateral value less costs to sell, and any associated allowance at the time of charge-off is reduced to zero.
Impaired Loans
Impaired loans include commercial nonperforming loans and consumer and commercial TDRs, regardless of nonperforming status. TDRs that were previously recorded at amortized cost and are now classified and accounted for as held for sale are also included. Excluded from impaired loans are nonperforming leases, loans accounted for as held for sale other than the TDRs described in the preceding sentence, loans accounted for under the fair value option, smaller balance homogeneous type loans and purchased impaired loans. See Note 4 Purchased Loans for additional information. Nonperforming equipment lease financing loans of $2 million and $5 million at December 31, 2014 and December 31, 2013, respectively, are excluded from impaired loans pursuant to authoritative lease accounting guidance. We did not recognize any interest income on impaired loans that have not returned to performing status, while they were impaired during the years ended December 31, 2014 and December 31, 2013. The following table provides further detail on impaired loans individually evaluated for impairment and the associated ALLL. Certain commercial impaired loans and loans to consumers discharged from bankruptcy and not formally reaffirmed do not have a related ALLL as the valuation of these impaired loans exceeded the recorded investment.
In millions |
Unpaid
Principal Balance |
Recorded
Investment (a) |
Associated
Allowance (b) |
Average
Recorded Investment (c) |
||||||||||||
December 31, 2014 |
||||||||||||||||
Impaired loans with an associated allowance |
||||||||||||||||
Commercial |
$ | 432 | $ | 318 | $ | 74 | $ | 360 | ||||||||
Commercial real estate |
418 | 262 | 65 | 283 | ||||||||||||
Home equity |
1,021 | 984 | 215 | 986 | ||||||||||||
Residential real estate |
397 | 420 | 75 | 422 | ||||||||||||
Credit card |
130 | 130 | 32 | 147 | ||||||||||||
Other consumer |
64 | 47 | 2 | 51 | ||||||||||||
Total impaired loans with an associated allowance |
$ | 2,462 | $ | 2,161 | $ | 463 | $ | 2,249 | ||||||||
Impaired loans without an associated allowance |
||||||||||||||||
Commercial |
$ | 106 | $ | 84 | $ | $ | 133 | |||||||||
Commercial real estate |
249 | 187 | 276 | |||||||||||||
Home equity |
403 | 145 | 134 | |||||||||||||
Residential real estate |
344 | 315 | 365 | |||||||||||||
Total impaired loans without an associated allowance |
$ | 1,102 | $ | 731 | $ | $ | 908 | |||||||||
Total impaired loans |
$ | 3,564 | $ | 2,892 | $ | 463 | $ | 3,157 | ||||||||
December 31, 2013 |
||||||||||||||||
Impaired loans with an associated allowance |
||||||||||||||||
Commercial |
$ | 549 | $ | 400 | $ | 90 | $ | 442 | ||||||||
Commercial real estate |
517 | 349 | 89 | 478 | ||||||||||||
Home equity |
999 | 992 | 334 | 900 | ||||||||||||
Residential real estate |
573 | 436 | 74 | 645 | ||||||||||||
Credit card |
166 | 166 | 36 | 189 | ||||||||||||
Other consumer |
71 | 57 | 2 | 68 | ||||||||||||
Total impaired loans with an associated allowance |
$ | 2,875 | $ | 2,400 | $ | 625 | $ | 2,722 | ||||||||
Impaired loans without an associated allowance |
||||||||||||||||
Commercial |
$ | 309 | $ | 163 | $ | $ | 161 | |||||||||
Commercial real estate |
421 | 315 | 354 | |||||||||||||
Home equity |
366 | 124 | 166 | |||||||||||||
Residential real estate |
415 | 386 | 267 | |||||||||||||
Total impaired loans without an associated allowance |
$ | 1,511 | $ | 988 | $ | $ | 948 | |||||||||
Total impaired loans |
$ | 4,386 | $ | 3,388 | $ | 625 | $ | 3,670 |
(a) | Recorded investment in a loan includes the unpaid principal balance plus accrued interest and net accounting adjustments, less any charge-offs. Recorded investment does not include any associated valuation allowance. |
(b) | Associated allowance amounts include $.4 billion and $.5 billion for TDRs at December 31, 2014 and December 31, 2013, respectively. |
(c) | Average recorded investment is for the years ended December 31, 2014 and December 31, 2013, respectively. |
The PNC Financial Services Group, Inc. Form 10-K 141 |
Purchased Impaired Loans
Purchased impaired loan accounting addresses differences between contractual cash flows and cash flows expected to be collected from the initial investment in loans if those differences are attributable, at least in part, to credit quality. Several factors were considered when evaluating whether a loan was considered a purchased impaired loan, including the delinquency status of the loan, updated borrower credit status, geographic information, and updated LTV. GAAP allows purchasers to account for loans individually or to aggregate purchased impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Purchased impaired homogeneous consumer, residential real estate and smaller balance commercial loans with common risk characteristics are aggregated into pools where appropriate, whereas commercial loans with a total commitment greater than a defined threshold are accounted for individually. For pooled loans, proceeds of individual loans are not applied individually to each loan within a pool, but to the pools recorded investment since it is
accounted for as a single asset. Upon final disposition of a loan within a pool ( e.g ., payoff, short-sale, foreclosure, etc .), the loans carrying value is removed from the pool and any gain or loss associated with the transaction is retained in the pools recorded investment. For example, upon final disposition of a loan by short-sale, the proceeds of the short-sale may be less (or more) than the loans recorded investment. This shortfall or loss (excess or gain) is not accounted for as an individual loan sale in our income statement and is instead retained as part of the pools recorded investment consistent with our accounting for the pool as a single asset. This treatment is designed to maintain a constant effective yield for recognition of interest income. Accordingly, a pools recorded investment includes the net accumulation of realized losses or gains attributable to these final dispositions. As there are no future expected cash flows related to these dispositions, their net carrying value is $0. The recorded investment, including these realized losses and gains, is evaluated for collectability based upon the net present value of the pools remaining expected cash flows when establishing our allowance for loan losses. See below and Note 1 Accounting Policies and Note 5 Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit for additional information.
The following table provides balances of purchased impaired loans at December 31, 2014 and December 31, 2013:
Table 71: Purchased Impaired Loans Balances
December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
In millions |
Outstanding Balance (a) |
Recorded
Investment |
Carrying
Value |
Outstanding Balance (a) |
Recorded
Investment |
Carrying
Value |
||||||||||||||||||
Commercial lending |
||||||||||||||||||||||||
Commercial |
$ | 159 | $ | 74 | $ | 57 | $ | 282 | $ | 157 | $ | 131 | ||||||||||||
Commercial real estate |
307 | 236 | 174 | 655 | 516 | 409 | ||||||||||||||||||
Total commercial lending |
466 | 310 | 231 | 937 | 673 | 540 | ||||||||||||||||||
Consumer lending |
||||||||||||||||||||||||
Consumer |
2,145 | 1,989 | 1,661 | 2,523 | 2,312 | 1,971 | ||||||||||||||||||
Residential real estate |
2,396 | 2,559 | 2,094 | 3,025 | 3,121 | 2,591 | ||||||||||||||||||
Total consumer lending |
4,541 | 4,548 | 3,755 | 5,548 | 5,433 | 4,562 | ||||||||||||||||||
Total |
$ | 5,007 | $ | 4,858 | $ | 3,986 | $ | 6,485 | $ | 6,106 | $ | 5,102 |
(a) | Outstanding balance represents the balance on the loan servicing system for active loans. It is possible for the outstanding balance to be lower than the recorded investment for certain loans due to the use of pool accounting. |
The excess of undiscounted cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the loan using the constant effective yield method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and is not recognized in income. Subsequent changes in the expected cash flows of individual or pooled purchased impaired loans will either impact the accretable yield or result in an impairment charge to provision for credit losses in the period in which the changes become probable. Decreases to the net present value of expected cash flows will generally result in an impairment charge recorded as a provision for credit losses, resulting in an increase to the allowance for loan and lease losses, and a reclassification from accretable yield to non-accretable difference.
142 The PNC Financial Services Group, Inc. Form 10-K |
During 2014, $91 million of provision recapture was recorded for purchased impaired loans compared to $11 million of provision expense for 2013. The charge-offs (which were specifically for commercial loans greater than a defined threshold) during 2014 were $42 million compared to $104 million for 2013. At December 31, 2014, the allowance for loan and lease losses was $.9 billion on $4.4 billion of purchased impaired loans while the remaining $.5 billion of purchased impaired loans required no allowance as the net present value of expected cash flows equaled or exceeded the recorded investment. As of December 31, 2013, the allowance for loan and lease losses related to purchased impaired loans was $1.0 billion. If any allowance for loan losses is recognized on a purchased impaired pool, which is accounted for as a single asset, the entire balance of that pool would be disclosed as requiring an allowance. Subsequent increases in the net present value of cash flows will result in a provision recapture of any previously recorded allowance for loan and lease losses, to the extent applicable, and/or a reclassification from non-accretable difference to accretable yield, which will be recognized prospectively. Individual loan transactions where final dispositions have occurred (as noted above) result in removal of the loans from their applicable pools for cash flow estimation purposes. The cash flow re-estimation process is completed quarterly to evaluate the appropriateness of the allowance associated with the purchased impaired loans.
Activity for the accretable yield during 2014 and 2013 follows:
Table 72: Purchased Impaired Loans Accretable Yield
In millions | 2014 | 2013 | ||||||
January 1 |
$ | 2,055 | $ | 2,166 | ||||
Accretion (including excess cash recoveries) |
(587 | ) | (695 | ) | ||||
Net reclassifications to accretable from non-accretable (a) |
208 | 613 | ||||||
Disposals |
(118 | ) | (29 | ) | ||||
December 31 |
$ | 1,558 | $ | 2,055 |
(a) | Approximately 93% of net reclassifications for the year ended December 31, 2014 were within the commercial portfolio as compared to 37% for year ended December 31, 2013. |
N OTE 5 A LLOWANCES FOR L OAN AND L EASE L OSSES AND U NFUNDED L OAN C OMMITMENTS AND L ETTERS OF C REDIT
Allowance for Loan and Lease Losses
We maintain the ALLL at levels that we believe to be appropriate to absorb estimated probable credit losses incurred in the portfolios as of the balance sheet date. We use the two main portfolio segments Commercial Lending and Consumer Lending and develop and document the ALLL under separate methodologies for each of these segments as discussed in Note 1 Accounting Policies. A rollforward of the ALLL and associated loan data is presented below.
The PNC Financial Services Group, Inc. Form 10-K 143 |
Table 73: Rollforward of Allowance for Loan and Lease Losses and Associated Loan Data
In millions |
Commercial
Lending |
Consumer
Lending |
Total | |||||||||
December 31, 2014 |
||||||||||||
Allowance for Loan and Lease Losses |
||||||||||||
January 1 |
$ | 1,547 | $ | 2,062 | $ | 3,609 | ||||||
Charge-offs |
(360 | ) | (661 | ) | (1,021 | ) | ||||||
Recoveries |
305 | 185 | 490 | |||||||||
Net charge-offs |
(55 | ) | (476 | ) | (531 | ) | ||||||
Provision for credit losses |
100 | 173 | 273 | |||||||||
Net change in allowance for unfunded loan commitments and letters of credit |
(18 | ) | 1 | (17 | ) | |||||||
Other |
(3 | ) | (3 | ) | ||||||||
December 31 |
$ | 1,571 | $ | 1,760 | $ | 3,331 | ||||||
TDRs individually evaluated for impairment |
$ | 62 | $ | 324 | $ | 386 | ||||||
Other loans individually evaluated for impairment |
77 | 77 | ||||||||||
Loans collectively evaluated for impairment |
1,353 | 643 | 1,996 | |||||||||
Purchased impaired loans |
79 | 793 | 872 | |||||||||
December 31 |
$ | 1,571 | $ | 1,760 | $ | 3,331 | ||||||
Loan Portfolio |
||||||||||||
TDRs individually evaluated for impairment (a) |
$ | 542 | $ | 2,041 | $ | 2,583 | ||||||
Other loans individually evaluated for impairment |
309 | 309 | ||||||||||
Loans collectively evaluated for impairment (b) |
127,207 | 68,826 | 196,033 | |||||||||
Fair value option loans (c) |
1,034 | 1,034 | ||||||||||
Purchased impaired loans |
310 | 4,548 | 4,858 | |||||||||
December 31 |
$ | 128,368 | $ | 76,449 | $ | 204,817 | ||||||
Portfolio segment ALLL as a percentage of total ALLL |
47 | % | 53 | % | 100 | % | ||||||
Ratio of the allowance for loan and lease losses to total loans |
1.22 | % | 2.30 | % | 1.63 | % | ||||||
December 31, 2013 |
||||||||||||
Allowance for Loan and Lease Losses |
||||||||||||
January 1 |
$ | 1,774 | $ | 2,262 | $ | 4,036 | ||||||
Charge-offs (d) |
(606 | ) | (982 | ) | (1,588 | ) | ||||||
Recoveries |
357 | 154 | 511 | |||||||||
Net charge-offs |
(249 | ) | (828 | ) | (1,077 | ) | ||||||
Provision for credit losses |
36 | 607 | 643 | |||||||||
Net change in allowance for unfunded loan commitments and letters of credit |
(13 | ) | 21 | 8 | ||||||||
Other |
(1 | ) | (1 | ) | ||||||||
December 31 |
$ | 1,547 | $ | 2,062 | $ | 3,609 | ||||||
TDRs individually evaluated for impairment |
$ | 24 | $ | 446 | $ | 470 | ||||||
Other loans individually evaluated for impairment |
155 | 155 | ||||||||||
Loans collectively evaluated for impairment |
1,235 | 745 | 1,980 | |||||||||
Purchased impaired loans |
133 | 871 | 1,004 | |||||||||
December 31 |
$ | 1,547 | $ | 2,062 | $ | 3,609 | ||||||
Loan Portfolio |
||||||||||||
TDRs individually evaluated for impairment (a) |
$ | 578 | $ | 2,161 | $ | 2,739 | ||||||
Other loans individually evaluated for impairment |
649 | 649 | ||||||||||
Loans collectively evaluated for impairment (b) |
115,245 | 69,724 | 184,969 | |||||||||
Fair value option loans (c) |
1,150 | 1,150 | ||||||||||
Purchased impaired loans |
673 | 5,433 | 6,106 | |||||||||
December 31 |
$ | 117,145 | $ | 78,468 | $ | 195,613 | ||||||
Portfolio segment ALLL as a percentage of total ALLL |
43 | % | 57 | % | 100 | % | ||||||
Ratio of the allowance for loan and lease losses to total loans |
1.32 | % | 2.63 | % | 1.84 | % |
144 The PNC Financial Services Group, Inc. Form 10-K |
In millions |
Commercial
Lending |
Consumer
Lending |
Total | |||||||||
December 31, 2012 |
||||||||||||
Allowance for Loan and Lease Losses |
||||||||||||
January 1 |
$ | 1,995 | $ | 2,352 | $ | 4,347 | ||||||
Charge-offs |
(804 | ) | (1,066 | ) | (1,870 | ) | ||||||
Recoveries |
445 | 136 | 581 | |||||||||
Net charge-offs |
(359 | ) | (930 | ) | (1,289 | ) | ||||||
Provision for credit losses |
138 | 849 | 987 | |||||||||
Net change in allowance for unfunded loan commitments and letters of credit |
(1 | ) | (9 | ) | (10 | ) | ||||||
Other |
1 | 1 | ||||||||||
December 31 |
$ | 1,774 | $ | 2,262 | $ | 4,036 | ||||||
TDRs individually evaluated for impairment |
$ | 40 | $ | 547 | $ | 587 | ||||||
Other loans individually evaluated for impairment |
253 | 253 | ||||||||||
Loans collectively evaluated for impairment |
1,242 | 857 | 2,099 | |||||||||
Purchased impaired loans |
239 | 858 | 1,097 | |||||||||
December 31 |
$ | 1,774 | $ | 2,262 | $ | 4,036 | ||||||
Loan Portfolio |
||||||||||||
TDRs individually evaluated for impairment (a) |
$ | 541 | $ | 2,318 | $ | 2,859 | ||||||
Other loans individually evaluated for impairment |
1,057 | 1,057 | ||||||||||
Loans collectively evaluated for impairment |
106,095 | 68,014 | 174,109 | |||||||||
Fair value option loans (c) |
425 | 425 | ||||||||||
Purchased impaired loans |
1,249 | 6,157 | 7,406 | |||||||||
December 31 |
$ | 108,942 | $ | 76,914 | $ | 185,856 | ||||||
Portfolio segment ALLL as a percentage of total ALLL |
44 | % | 56 | % | 100 | % | ||||||
Ratio of the allowance for loan and lease losses to total loans |
1.63 | % | 2.94 | % | 2.17 | % |
(a) | TDRs individually evaluated for impairment exclude TDRs that were subsequently accounted for as held for sale loans, but continue to be disclosed as TDRs. |
(b) | Includes $195 million of loans collectively evaluated for impairment based upon collateral values and written down to the respective collateral value less costs to sell at December 31, 2014. Accordingly, there is no allowance recorded for these loans. The comparative amount as of December 31, 2013 was $252 million. |
(c) | Loans accounted for under the fair value option are not evaluated for impairment as these loans are accounted for at fair value. Accordingly there is no allowance recorded on these loans. |
(d) | Pursuant to alignment with interagency guidance on practices for loans and lines of credit related to consumer lending in the first quarter of 2013, additional charge-offs of $134 million were taken. |
Net interest income less the provision for credit losses was $8.3 billion for 2014 compared with $8.5 billion for 2013 and $8.7 billion for 2012.
Allowance for Unfunded Loan Commitments and Letters of Credit
We maintain the allowance for unfunded loan commitments and letters of credit at a level we believe is appropriate to absorb estimated probable credit losses on these unfunded credit facilities as of the balance sheet date as discussed in Note 1 Accounting Policies. A rollforward of the allowance is presented below.
Table 74: Rollforward of Allowance for Unfunded Loan Commitments and Letters of Credit
In millions | 2014 | 2013 | 2012 | |||||||||
January 1 |
$ | 242 | $ | 250 | $ | 240 | ||||||
Net change in allowance for unfunded loan commitments and letters of credit |
17 | (8 | ) | 10 | ||||||||
December 31 |
$ | 259 | $ | 242 | $ | 250 |
The PNC Financial Services Group, Inc. Form 10-K 145 |
N OTE 6 I NVESTMENT S ECURITIES
Table 75: Investment Securities Summary
In millions |
Amortized
Cost |
Unrealized |
Fair
Value |
|||||||||||||
Gains | Losses | |||||||||||||||
December 31, 2014 |
||||||||||||||||
S ECURITIES A VAILABLE FOR S ALE |
||||||||||||||||
Debt securities |
||||||||||||||||
U.S. Treasury and government agencies |
$ | 5,237 | $ | 186 | $ | (1 | ) | $ | 5,422 | |||||||
Residential mortgage-backed |
||||||||||||||||
Agency |
17,646 | 438 | (41 | ) | 18,043 | |||||||||||
Non-agency |
4,723 | 318 | (99 | ) | 4,942 | |||||||||||
Commercial mortgage-backed |
||||||||||||||||
Agency |
2,178 | 23 | (14 | ) | 2,187 | |||||||||||
Non-agency |
4,085 | 88 | (11 | ) | 4,162 | |||||||||||
Asset-backed |
5,141 | 78 | (32 | ) | 5,187 | |||||||||||
State and municipal |
1,953 | 88 | (3 | ) | 2,038 | |||||||||||
Other debt |
1,776 | 43 | (6 | ) | 1,813 | |||||||||||
Total debt securities |
42,739 | 1,262 | (207 | ) | 43,794 | |||||||||||
Corporate stocks and other |
442 | (1 | ) | 441 | ||||||||||||
Total securities available for sale |
$ | 43,181 | $ | 1,262 | $ | (208 | ) | $ | 44,235 | |||||||
S ECURITIES H ELD TO M ATURITY (a) |
||||||||||||||||
Debt securities |
||||||||||||||||
U.S. Treasury and government agencies |
$ | 248 | $ | 44 | $ | 292 | ||||||||||
Residential mortgage-backed |
||||||||||||||||
Agency |
5,736 | 166 | $ | (10 | ) | 5,892 | ||||||||||
Non-agency |
270 | 13 | 283 | |||||||||||||
Commercial mortgage-backed |
||||||||||||||||
Agency |
1,200 | 53 | 1,253 | |||||||||||||
Non-agency |
1,010 | 19 | 1,029 | |||||||||||||
Asset-backed |
759 | 2 | (8 | ) | 753 | |||||||||||
State and municipal |
2,042 | 111 | 2,153 | |||||||||||||
Other debt |
323 | 6 | 329 | |||||||||||||
Total securities held to maturity |
$ | 11,588 | $ | 414 | $ | (18 | ) | $ | 11,984 | |||||||
December 31, 2013 |
||||||||||||||||
S ECURITIES A VAILABLE FOR S ALE |
||||||||||||||||
Debt securities |
||||||||||||||||
U.S. Treasury and government agencies |
$ | 3,990 | $ | 135 | $ | (7 | ) | $ | 4,118 | |||||||
Residential mortgage-backed |
||||||||||||||||
Agency (b) |
21,556 | 367 | (209 | ) | 21,714 | |||||||||||
Non-agency |
5,457 | 308 | (160 | ) | 5,605 | |||||||||||
Commercial mortgage-backed |
||||||||||||||||
Agency (b) |
1,745 | 32 | (14 | ) | 1,763 | |||||||||||
Non-agency |
3,937 | 123 | (18 | ) | 4,042 | |||||||||||
Asset-backed |
5,754 | 66 | (48 | ) | 5,772 | |||||||||||
State and municipal |
2,609 | 52 | (44 | ) | 2,617 | |||||||||||
Other debt |
2,506 | 55 | (18 | ) | 2,543 | |||||||||||
Total debt securities |
47,554 | 1,138 | (518 | ) | 48,174 | |||||||||||
Corporate stocks and other |
434 | (1 | ) | 433 | ||||||||||||
Total securities available for sale |
$ | 47,988 | $ | 1,138 | $ | (519 | ) | $ | 48,607 | |||||||
S ECURITIES H ELD TO M ATURITY (a) |
||||||||||||||||
Debt securities |
||||||||||||||||
U.S. Treasury and government agencies |
$ | 239 | $ | 8 | $ | (4 | ) | $ | 243 | |||||||
Residential mortgage-backed |
||||||||||||||||
Agency |
5,814 | 71 | (64 | ) | 5,821 | |||||||||||
Non-agency |
293 | (4 | ) | 289 |
146 The PNC Financial Services Group, Inc. Form 10-K |
In millions |
Amortized
Cost |
Unrealized |
Fair
Value |
|||||||||||||
Gains | Losses | |||||||||||||||
Commercial mortgage-backed |
||||||||||||||||
Agency |
1,251 | 49 | 1,300 | |||||||||||||
Non-agency |
1,687 | 20 | (5 | ) | 1,702 | |||||||||||
Asset-backed |
1,009 | 2 | (10 | ) | 1,001 | |||||||||||
State and municipal |
1,055 | 10 | (4 | ) | 1,061 | |||||||||||
Other debt |
339 | 9 | 348 | |||||||||||||
Total securities held to maturity |
$ | 11,687 | $ | 169 | $ | (91 | ) | $ | 11,765 |
(a) | Held to maturity securities transferred from available for sale are included in held to maturity at fair value at the time of transfer. The amortized cost of held to maturity securities included net unrealized gains of $125 million and $111 million at December 31, 2014 and 2013, respectively, related to securities transferred, which are offset in Accumulated Other Comprehensive Income, net of tax. |
(b) | These line items were corrected for the prior periods due to a misclassification of Government National Mortgage Association (GNMA) securities collateralized by project loans. $1.1 billion was previously reported as residential mortgage-backed agency securities at December 31, 2013, and was reclassified to commercial mortgage-backed agency securities. |
The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the securities available for sale portfolio are included in Shareholders equity as Accumulated other comprehensive income or loss, net of tax, unless credit-related. Securities held to maturity are carried at amortized cost. At December 31, 2014, Accumulated other comprehensive income included pretax gains of $63 million from derivatives that hedged the purchase of investment securities classified as held to maturity. The gains will be accreted into interest income as an adjustment of yield on the securities.
During the second quarter of 2014, we transferred securities with a fair value of $1.4 billion from available for sale to held to maturity. The securities transferred included $1.0 billion of state and municipal securities, $.2 billion of agency residential and commercial mortgage-backed securities, and $.2 billion of non-agency commercial mortgage-backed securities. The non-agency commercial mortgage-backed and state and municipal securities were all rated either AAA or AA. We changed our intent and committed to hold these high-quality securities to maturity in order to reduce the impact of price volatility on Accumulated other comprehensive income and certain capital measures, after taking into consideration market conditions. The securities were reclassified at fair value at the time of transfer and the transfer represented a non-cash transaction. Accumulated other comprehensive income included net pretax unrealized gains of $44 million at transfer, which are being accreted over the remaining life of the related securities as an adjustment of yield in a manner consistent with the amortization of the net premium on the same transferred securities, resulting in no impact on net income.
Table 76 presents gross unrealized losses on securities available for sale at December 31, 2014 and December 31, 2013. The securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and twelve months or more based on the point in time that the fair value declined below the amortized cost basis. The table includes debt securities where a portion of other-than-temporary impairment (OTTI) has been recognized in Accumulated other comprehensive income (loss).
The PNC Financial Services Group, Inc. Form 10-K 147 |
Table 76: Gross Unrealized Loss and Fair Value of Securities Available for Sale
In millions |
Unrealized loss position
less than 12 months |
Unrealized loss position
12 months or more |
Total | |||||||||||||||||||||
Unrealized
Loss |
Fair
Value |
Unrealized
Loss |
Fair
Value |
Unrealized
Loss |
Fair
Value |
|||||||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||
Debt securities |
||||||||||||||||||||||||
U.S. Treasury and government agencies |
$ | (1 | ) | $ | 1,426 | $ | (1 | ) | $ | 1,426 | ||||||||||||||
Residential mortgage-backed |
||||||||||||||||||||||||
Agency |
(4 | ) | 644 | $ | (37 | ) | $ | 1,963 | (41 | ) | 2,607 | |||||||||||||
Non-agency |
(5 | ) | 276 | (94 | ) | 1,487 | (99 | ) | 1,763 | |||||||||||||||
Commercial mortgage-backed |
||||||||||||||||||||||||
Agency |
(2 | ) | 681 | (12 | ) | 322 | (14 | ) | 1,003 | |||||||||||||||
Non-agency |
(4 | ) | 928 | (7 | ) | 335 | (11 | ) | 1,263 | |||||||||||||||
Asset-backed |
(4 | ) | 913 | (28 | ) | 1,133 | (32 | ) | 2,046 | |||||||||||||||
State and municipal |
(a) | 41 | (3 | ) | 77 | (3 | ) | 118 | ||||||||||||||||
Other debt |
(2 | ) | 314 | (4 | ) | 186 | (6 | ) | 500 | |||||||||||||||
Total debt securities |
(22 | ) | 5,223 | (185 | ) | 5,503 | (207 | ) | 10,726 | |||||||||||||||
Corporate stocks and other |
(1 | ) | 15 | (1 | ) | 15 | ||||||||||||||||||
Total |
$ | (22 | ) | $ | 5,223 | $ | (186 | ) | $ | 5,518 | $ | (208 | ) | $ | 10,741 | |||||||||
December 31, 2013 |
||||||||||||||||||||||||
Debt securities |
||||||||||||||||||||||||
U.S. Treasury and government agencies |
$ | (7 | ) | $ | 1,066 | $ | (7 | ) | $ | 1,066 | ||||||||||||||
Residential mortgage-backed |
||||||||||||||||||||||||
Agency (b) |
(198 | ) | 7,519 | $ | (11 | ) | $ | 287 | (209 | ) | 7,806 | |||||||||||||
Non-agency |
(18 | ) | 855 | (142 | ) | 1,719 | (160 | ) | 2,574 | |||||||||||||||
Commercial mortgage-backed |
||||||||||||||||||||||||
Agency (b) |
(13 | ) | 454 | (1 | ) | 6 | (14 | ) | 460 | |||||||||||||||
Non-agency |
(18 | ) | 1,315 | (a) | 14 | (18 | ) | 1,329 | ||||||||||||||||
Asset-backed |
(11 | ) | 1,752 | (37 | ) | 202 | (48 | ) | 1,954 | |||||||||||||||
State and municipal |
(23 | ) | 897 | (21 | ) | 286 | (44 | ) | 1,183 | |||||||||||||||
Other debt |
(17 | ) | 844 | (1 | ) | 12 | (18 | ) | 856 | |||||||||||||||
Total debt securities |
(305 | ) | 14,702 | (213 | ) | 2,526 | (518 | ) | 17,228 | |||||||||||||||
Corporate stocks and other |
(1 | ) | 15 | (1 | ) | 15 | ||||||||||||||||||
Total |
$ | (306 | ) | $ | 14,717 | $ | (213 | ) | $ | 2,526 | $ | (519 | ) | $ | 17,243 |
(a) | The unrealized loss on these securities was less than $.5 million. |
(b) | These line items were corrected for the prior period due to a misclassification of Government National Mortgage Association (GNMA) securities collateralized by project loans. $1.1 billion was previously reported as residential mortgage-backed agency securities and was reclassified to commercial mortgage-backed agency securities. |
The gross unrealized loss on debt securities held to maturity was $22 million at December 31, 2014 and $98 million at December 31, 2013. The majority of the gross unrealized loss at December 31, 2014 related to agency residential mortgage-backed securities. The fair value of debt securities held to maturity that were in a continuous loss position for less than 12 months was $134 million and $3.6 billion at December 31, 2014 and December 31, 2013, respectively, and for positions that were in a continuous loss position for 12 months or more was $1.6 billion and $48 million at December 31, 2014 and December 31, 2013, respectively. For securities transferred to held to maturity from available for sale, the unrealized loss for purposes of this analysis is determined by comparing the securitys original amortized cost to its current estimated fair value.
Evaluating Investment Securities for Other-than-Temporary Impairments
For the securities in the preceding Table 76, as of December 31, 2014 we do not intend to sell and believe we will not be required to sell the securities prior to recovery of the amortized cost basis.
At least quarterly, we conduct a comprehensive security-level assessment on all securities. For those securities in an unrealized loss position we determine if OTTI exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. An OTTI loss must be recognized for a debt security in an unrealized loss position if we intend to sell the security or it is more likely than not we will be required to sell the security
148 The PNC Financial Services Group, Inc. Form 10-K |
prior to recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between the fair value and the amortized cost basis of the security. Even if we do not expect to sell the security, we must evaluate the expected cash flows to be received to determine if we believe a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in accumulated other comprehensive income (loss).
The security-level assessment is performed on each security, regardless of the classification of the security as available for sale or held to maturity. Our assessment considers the security structure, recent security collateral performance metrics if applicable, external credit ratings, failure of the issuer to make scheduled interest or principal payments, our judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts. Results of the periodic assessment are reviewed by a cross-functional senior management team representing Asset & Liability Management, Finance, and Market Risk Management. The senior management team considers the results of the assessments, as well as other factors, in determining whether the impairment is other-than-temporary.
Substantially all of the credit impairment we have recognized relates to non-agency residential mortgage-backed securities and asset-backed securities collateralized by first-lien and second-lien non-agency residential mortgage loans. Potential credit losses on these securities are evaluated on a security-by-security basis. Collateral performance assumptions are developed for each security after reviewing collateral composition and collateral performance statistics. This includes analyzing recent delinquency roll rates, loss severities, voluntary prepayments and various other collateral and performance metrics. This information is then combined with general expectations on the housing market, employment and other macroeconomic factors to develop estimates of future performance.
Security level assumptions for prepayments, loan defaults and loss given default are applied to each non-agency residential mortgage-backed security and asset-backed security collateralized by first-lien and second-lien non-agency residential mortgage loans using a third-party cash flow model. The third-party cash flow model then generates projected cash flows according to the structure of each security. Based on the results of the cash flow analysis, we determine whether we expect that we will recover the amortized cost basis of our security.
The following table provides detail on the significant assumptions used to determine credit impairment for non-agency residential mortgage-backed and asset-backed securities collateralized by first-lien and second-lien non-agency residential mortgage loans.
Table 77: Credit Impairment Assessment Assumptions Non-Agency Residential Mortgage-Backed and Asset-Backed Securities
December 31, 2014 | Range |
Weighted-
average (a) |
||||||
Long-term prepayment rate (annual CPR) |
||||||||
Prime |
7 20 | % | 13 | % | ||||
Alt-A |
5 12 | 6 | ||||||
Option ARM |
3 6 | 3 | ||||||
Remaining collateral expected to default |
||||||||
Prime |
0 32 | % | 13 | % | ||||
Alt-A |
6 50 | 27 | ||||||
Option ARM |
11 53 | 36 | ||||||
Loss severity |
||||||||
Prime |
20 70 | % | 41 | % | ||||
Alt-A |
30 83 | 60 | ||||||
Option ARM |
45 71 | 62 |
(a) | Calculated by weighting the relevant assumption for each individual security by the current outstanding cost basis of the security. |
The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings for all debt securities for which a portion of an OTTI loss was recognized in Accumulated other comprehensive income (loss).
Table 78: Rollforward of Cumulative OTTI Credit Losses Recognized in Earnings
Year ended December 31 In millions |
2014 | 2013 | ||||||
Balance at beginning of period |
$ | (1,160 | ) | $ | (1,201 | ) | ||
Loss where impairment was not previously recognized |
(6 | ) | ||||||
Additional loss where credit impairment was previously recognized |
(5 | ) | (16 | ) | ||||
Reduction due to credit impaired securities sold or matured |
7 | 57 | ||||||
Balance at end of period |
$ | (1,164 | ) | $ | (1,160 | ) |
The PNC Financial Services Group, Inc. Form 10-K 149 |
Information relating to gross realized securities gains and losses from the sales of securities is set forth in the following table.
Table 79: Gains (Losses) on Sales of Securities Available for Sale
In millions | Proceeds |
Gross
Gains |
Gross
Losses |
Net
Gains |
Tax
Expense |
|||||||||||||||
For the year ended December 31 |
||||||||||||||||||||
2014 |
$ | 4,480 | $ | 33 | $ | (29 | ) | $ | 4 | $ | 1 | |||||||||
2013 |
8,178 | 146 | (47 | ) | 99 | 35 | ||||||||||||||
2012 |
9,441 | 214 | (10 | ) | 204 | 71 |
The following table presents, by remaining contractual maturity, the amortized cost, fair value and weighted-average yield of debt securities at December 31, 2014.
Table 80: Contractual Maturity of Debt Securities
December 31, 2014 Dollars in millions |
1 Year or
Less |
After 1 Year
through 5 Years |
After 5 Years
through 10 Years |
After 10
Years |
Total | |||||||||||||||
S ECURITIES A VAILABLE FOR S ALE |
||||||||||||||||||||
U.S. Treasury and government agencies |
$ | 2 | $ | 1,312 | $ | 3,437 | $ | 486 | $ | 5,237 | ||||||||||
Residential mortgage-backed |
||||||||||||||||||||
Agency |
120 | 456 | 17,070 | 17,646 | ||||||||||||||||
Non-agency |
6 | 1 | 4,716 | 4,723 | ||||||||||||||||
Commercial mortgage-backed |
||||||||||||||||||||
Agency |
128 | 206 | 20 | 1,824 | 2,178 | |||||||||||||||
Non-agency |
50 | 4,035 | 4,085 | |||||||||||||||||
Asset-backed |
4 | 1,014 | 1,977 | 2,146 | 5,141 | |||||||||||||||
State and municipal |
5 | 134 | 324 | 1,490 | 1,953 | |||||||||||||||
Other debt |
91 | 1,045 | 437 | 203 | 1,776 | |||||||||||||||
Total debt securities available for sale |
$ | 230 | $ | 3,887 | $ | 6,652 | $ | 31,970 | $ | 42,739 | ||||||||||
Fair value |
$ | 231 | $ | 3,976 | $ | 6,760 | $ | 32,827 | $ | 43,794 | ||||||||||
Weighted-average yield, GAAP basis |
3.49 | % | 2.55 | % | 2.36 | % | 2.99 | % | 2.85 | % | ||||||||||
S ECURITIES H ELD TO M ATURITY |
||||||||||||||||||||
U.S. Treasury and government agencies |
$ | 248 | $ | 248 | ||||||||||||||||
Residential mortgage-backed |
||||||||||||||||||||
Agency |
5,736 | 5,736 | ||||||||||||||||||
Non-agency |
270 | 270 | ||||||||||||||||||
Commercial mortgage-backed |
||||||||||||||||||||
Agency |
$ | 996 | $ | 145 | 59 | 1,200 | ||||||||||||||
Non-agency |
6 | 1,004 | 1,010 | |||||||||||||||||
Asset-backed |
17 | 408 | 334 | 759 | ||||||||||||||||
State and municipal |
$ | 20 | 26 | 809 | 1,187 | 2,042 | ||||||||||||||
Other debt |
323 | 323 | ||||||||||||||||||
Total debt securities held to maturity |
$ | 20 | $ | 1,045 | $ | 1,685 | $ | 8,838 | $ | 11,588 | ||||||||||
Fair value |
$ | 20 | $ | 1,085 | $ | 1,751 | $ | 9,128 | $ | 11,984 | ||||||||||
Weighted-average yield, GAAP basis |
4.42 | % | 3.44 | % | 3.29 | % | 3.72 | % | 3.63 | % |
150 The PNC Financial Services Group, Inc. Form 10-K |
Based on current interest rates and expected prepayment speeds, the weighted-average expected maturity of the investment securities portfolio (excluding corporate stocks and other) was 4.3 years at December 31, 2014 and 4.9 years at December 31, 2013. The weighted-average expected maturities of mortgage and other asset-backed debt securities were as follows as of December 31, 2014:
Table 81: Weighted-Average Expected Maturity of Mortgage and Other Asset-Backed Debt Securities
December 31, 2014 | Years | |||
Agency residential mortgage-backed securities |
3.6 | |||
Non-agency residential mortgage-backed securities |
5.4 | |||
Agency commercial mortgage-backed securities |
3.4 | |||
Non-agency commercial mortgage-backed securities |
3.2 | |||
Asset-backed securities |
3.4 |
Weighted-average yields are based on historical cost with effective yields weighted for the contractual maturity of each security. At December 31, 2014, there were no securities of a single issuer, other than FNMA, that exceeded 10% of Total shareholders equity.
The following table presents the fair value of securities that have been either pledged to or accepted from others to collateralize outstanding borrowings.
Table 82: Fair Value of Securities Pledged and Accepted as Collateral
In millions |
December 31
2014 |
December 31
2013 |
||||||
Pledged to others (a) |
$ | 10,874 | $ | 12,572 | ||||
Accepted from others: |
||||||||
Permitted by contract or custom
|
1,658 | 1,571 | ||||||
Permitted amount repledged to others |
1,488 | 1,343 |
(a) | In the prior period, the pledged to others balance incorrectly included FHLB standby letters of credit. During the fourth quarter of 2014, we corrected the pledged to others balance to exclude the FHLB standby letters of credit. Accordingly, the prior period amount as of December 31, 2013 was reduced by $6.2 billion. |
The securities pledged to others include positions held in our portfolio of investment securities, trading securities, and securities accepted as collateral from others that we are permitted by contract or custom to sell or repledge, and were used to secure public and trust deposits, repurchase agreements, and for other purposes.
Fair Value Measurement
Fair value is defined in GAAP as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date. GAAP focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP establishes a fair value reporting hierarchy to maximize the use of observable inputs when measuring fair value and defines the three levels of inputs as noted below.
Level 1
Fair value is determined using a quoted price in an active market for identical assets or liabilities. Level 1 assets and liabilities may include debt securities, equity securities and listed derivative contracts that are traded in an active exchange market and certain U.S. Treasury securities that are actively traded in over-the-counter markets.
Level 2
Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable for assets or liabilities, either directly or indirectly. The majority of Level 2 assets and liabilities include debt securities, equity securities and listed derivative contracts with quoted prices that are traded in markets that are not active, and certain debt and equity securities and over-the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable inputs.
Level 3
Fair value is estimated using unobservable inputs that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models and discounted cash flow methodologies, or similar techniques for which the significant valuation inputs are not observable and the determination of fair value requires significant management judgment or estimation.
Certain assets which have been adjusted due to impairment are accounted for at lower of amortized cost or fair value on a nonrecurring basis and consist primarily of certain nonaccrual loans, loans held for sale, commercial mortgage servicing rights (in years prior to 2014), equity investments and other assets. These assets, which are generally classified as Level 3, are included in Table 86 in this Note 7.
We characterize active markets as those where transaction volumes are sufficient to provide objective pricing information, with reasonably narrow bid/ask spreads and where dealer quotes received do not vary widely and are based on current information. Inactive markets are typically characterized by low transaction volumes, price quotations that vary substantially among market participants or are not based on current information, wide bid/ask spreads, a
The PNC Financial Services Group, Inc. Form 10-K 151 |
significant increase in implied liquidity risk premiums, yields, or performance indicators for observed transactions or quoted prices compared to historical periods, a significant decline or absence of a market for new issuance, or any combination of the above factors. We also consider nonperformance risks including credit risk as part of our valuation methodology for all assets and liabilities measured at fair value.
Any models used to determine fair values or to validate dealer quotes based on the descriptions below are subject to review and independent testing as part of our model validation and internal control testing processes. Our Model Risk Management Committee reviews significant models on at least an annual basis. In addition, the Valuation Committee approves valuation methodologies and reviews the results of independent valuation reviews and processes for assets and liabilities measured at fair value on a recurring basis.
Assets and liabilities measured at fair value, by their nature, result in a higher degree of financial statement volatility. Assets and liabilities classified within Level 3 inherently require the use of various assumptions, estimates and judgments when measuring their fair value. As observable market activity is commonly not available to use when estimating the fair value of Level 3 assets and liabilities, we must estimate fair value using various modeling techniques. These techniques include the use of a variety of inputs/assumptions including credit quality, liquidity, interest rates or other relevant inputs across the entire population of our Level 3 assets and liabilities. Changes in the significant underlying factors or assumptions (either an increase or a decrease) in any of these areas underlying our estimates may result in a significant increase/decrease in the Level 3 fair value measurement of a particular asset and/or liability from period to period.
Financial Instruments Accounted For at Fair Value on a Recurring Basis
Securities Available for Sale and Trading Securities
Securities accounted for at fair value include both the available for sale and trading portfolios. We primarily use prices obtained from pricing services, dealer quotes, or recent trades to determine the fair value of securities. As of December 31, 2014, 78% of the positions in these portfolios were priced by using pricing services provided by third-party vendors. The third-party vendors use a variety of methods when pricing securities that incorporate relevant market data to arrive at an estimate of what a buyer in the marketplace would pay for a security under current market conditions. One of the vendors prices are set with reference to market activity for highly liquid assets, such as U.S. Treasury and agency securities and agency residential mortgage-backed securities, and matrix pricing for other asset classes, such as commercial mortgage-backed and other asset-backed securities. Another vendor primarily uses discounted cash flow pricing models considering adjustments for spreads and prepayments for the instruments we value using this service, such as non-agency
residential mortgage-backed securities, agency adjustable rate mortgage securities, agency collateralized mortgage obligations (CMOs), commercial mortgage-backed securities and municipal bonds. The vendors we use provide pricing services on a global basis and have quality management processes in place to monitor the integrity of the valuation inputs and the prices provided to users, including procedures to consider and incorporate information received from pricing service users who may challenge a price. We monitor and validate the reliability of vendor pricing on an ongoing basis through pricing methodology reviews, by performing detailed reviews of the assumptions and inputs used by the vendor to price individual securities, and through price validation testing. Price validation testing is performed independent of the risk-taking function and involves corroborating the prices received from third-party vendors with prices from another third-party source, by reviewing valuations of comparable instruments, by comparison to internal valuations, or by reference to recent sales of similar securities. Securities not priced by one of our pricing vendors may be valued using a dealer quote. Dealer quotes received are typically non-binding. Securities priced using a dealer quote are subject to corroboration either with another dealer quote, by comparison to similar securities priced by either a third-party vendor or another dealer, or through internal valuation in order to validate that the quote is representative of the market. Security prices are also validated through actual cash settlement upon sale of a security.
Securities are classified within the fair value hierarchy after giving consideration to the activity level in the market for the security type and the observability of the inputs used to determine the fair value. When a quoted price in an active market exists for the identical security, this price is used to determine fair value and the security is classified within Level 1 of the hierarchy. Level 1 securities include certain U.S. Treasury securities and exchange-traded equities. When a quoted price in an active market for the identical security is not available, fair value is estimated using either an alternative market approach, such as a recent trade or matrix pricing, or an income approach, such as a discounted cash flow pricing model. If the inputs to the valuation are based primarily on market observable information, then the security is classified within Level 2 of the hierarchy. Level 2 securities include agency debt securities, agency residential mortgage-backed securities, agency and non-agency commercial mortgage-backed securities, certain non-agency residential mortgage-backed securities, asset-backed securities collateralized by non-mortgage-related consumer loans, municipal securities, and other debt securities. Level 2 securities are predominantly priced by third parties, either a pricing vendor or dealer.
In certain cases where there is limited activity or less transparency around the inputs to the valuation, securities are classified within Level 3 of the hierarchy. Securities classified as Level 3 consist primarily of non-agency residential mortgage-backed and asset-backed securities collateralized by first- and second-lien residential mortgage loans. Fair value
152 The PNC Financial Services Group, Inc. Form 10-K |
for these securities is primarily estimated using pricing obtained from third-party vendors. In some cases, fair value is estimated using a dealer quote, by reference to prices of securities of a similar vintage and collateral type or by reference to recent sales of similar securities. Market activity for these security types is limited with little price transparency. As a result, these securities are generally valued by the third-party vendor using a discounted cash flow approach that incorporates observable market activity where available. Significant inputs to the valuation include prepayment projections and credit loss assumptions (default rate and loss severity) and discount rates that are deemed representative of current market conditions. The discount rates used incorporate a spread over the benchmark curve that takes into consideration liquidity risk and potential credit risk not already included in the credit loss assumptions. Significant increases (decreases) in any of those assumptions in isolation would result in a significantly lower (higher) fair value measurement. Prepayment estimates generally increase when market interest rates decline and decrease when market interest rates rise. Credit loss estimates are driven by the ability of borrowers to pay their loans and housing market prices and are impacted by changes in overall macroeconomic conditions, typically increasing when economic conditions worsen and decreasing when conditions improve. An increase in the estimated prepayment rate typically results in a decrease in estimated credit losses and vice versa. Discount rates typically increase when market interest rates increase and/or credit and liquidity risks increase. Similarly, discount rates typically decrease when market interest rates decline and/or credit and liquidity conditions improve. Price validation procedures performed for these securities include comparing current prices to historical pricing trends by collateral type and vintage, and by obtaining corroborating prices from another third-party source.
Certain infrequently traded debt securities within the State and municipal and Other debt securities available-for-sale and Trading securities categories are also classified in Level 3. The significant unobservable inputs used to estimate the fair value of these securities include an estimate of expected credit losses and a discount for liquidity risk. These inputs are incorporated into the fair value measurement by either increasing the spread over the benchmark curve or by applying a credit and liquidity discount to the par value of the security. Significant increases (decreases) in credit and/or liquidity risk could result in a significantly lower (higher) fair value estimate.
Financial Derivatives
Exchange-traded derivatives are valued using quoted market prices and are classified as Level 1. However, the majority of derivatives that we enter into are executed over-the-counter and are valued using internal models. These derivatives are primarily classified as Level 2 as the readily observable market inputs to these models are validated to external sources. The external sources for these inputs include industry
pricing services, or are corroborated through recent trades, dealer quotes, yield curves, implied volatility or other market-related data. Level 2 financial derivatives are primarily estimated using a combination of Eurodollar future prices and observable benchmark interest rate swaps to construct projected discounted cash flows. Financial derivatives that are priced using significant management judgment or assumptions are classified as Level 3.
Fair value information for Level 3 financial derivatives is presented separately for interest rate contracts and other contracts. Interest rate contracts include residential and commercial mortgage interest rate lock commitments and certain interest rate options. Other contracts include risk participation agreements, swaps related to the sale of certain Visa Class B common shares and other types of contracts.
The fair values of residential mortgage loan commitment assets as of December 31, 2014 and 2013 are included in the Insignificant Level 3 assets, net of liabilities line item in Table 85 in this Note 7. Significant unobservable inputs for these commitments include the probability of funding and embedded servicing. The probability of funding for residential mortgage loan commitments represents the expected proportion of loan commitments in the pipeline that will fund. Additionally, embedded in the market price of the underlying loan is a value for retaining servicing of the loan once it is sold. Significant increases (decreases) in the fair value of a residential mortgage loan commitment asset (liability) result when the probability of funding increases (decreases) and when the embedded servicing value increases (decreases).
The fair values of commercial mortgage loan commitment assets and liabilities as of December 31, 2014 and 2013 are included in the Insignificant Level 3 assets, net of liabilities line item in Table 85 in this Note 7. Significant unobservable inputs for these commitments include spread over the benchmark interest rate and the estimated servicing cash flows for loans sold to the agencies with servicing retained. The spread over the benchmark curve reflects management assumptions regarding credit and liquidity risks. Significant increases (decreases) in the fair value of commercial mortgage loan commitments result when the spread over the benchmark curve decreases (increases) or the estimated servicing cash flows for loans sold to the agencies with servicing retained increases (decreases).
The fair values of interest rate option assets and liabilities as of December 31, 2014 and 2013 are included in the Insignificant Level 3 assets, net of liabilities line item in Table 85 in this Note 7. The significant unobservable input used in the fair value measurement of the interest rate options is expected interest rate volatility. Significant increases (decreases) in interest rate volatility would result in a significantly higher (lower) fair value measurement.
The PNC Financial Services Group, Inc. Form 10-K 153 |
The fair values of risk participation agreement assets and liabilities as of December 31, 2014 and 2013 are included in the Insignificant Level 3 assets, net of liabilities line item in Table 85 in this Note 7. The significant unobservable inputs used in the fair value measurement of risk participation agreements are probability of default and loss severity. Significant increases (decreases) in probability of default and loss severity would result in a significantly higher (lower) fair value measurement.
In connection with the sales of portions of our Visa Class B common shares, we entered into swap agreements with the purchaser of the shares to account for any future risk of converting Class B common shares to Class A common shares and to account for the corresponding change in value to the Class B shares. These adjustments result from resolution of the specified litigation or the changes in the amount in the litigation escrow account funded by Visa as well as from changes in the estimated litigation resolution date (see Note 21 Legal Proceedings and Note 22 Commitments and Guarantees for additional information). These swaps also require payments calculated by reference to the market price of the Class A common shares and a fixed rate of interest. The swaps are classified as Level 3 instruments and the fair values of the liability positions totaled $135 million at December 31, 2014 and $90 million at December 31, 2013, respectively. The fair values of the swap agreements are determined using a discounted cash flow methodology. The significant unobservable inputs to the valuations are estimated changes in the conversion rate of the Class B common shares into Class A common shares and the estimated growth rate of the Class A share price. A decrease in the conversion rate will have a negative impact on the fair value of the swaps and vice versa. Independent of changes in the conversion rate, an increase in the estimated growth rate of the Class A share price will have a negative impact on the fair value of the swaps and vice versa, through its impact on periodic payments due to the counterparty until the maturity dates of the swaps.
The fair values of our derivatives include a credit valuation adjustment (CVA) to reflect our own and our counterparties nonperformance risk. Our CVA is computed using new loan pricing and considers externally available bond spreads, in conjunction with internal historical recovery observations.
Residential Mortgage Loans Held for Sale
We account for certain residential mortgage loans originated for sale at fair value on a recurring basis. The election of the fair value option aligns the accounting for the residential mortgages with the related hedges. Additionally, we have elected to account for loans repurchased due to breaches of representations and warranties at fair value.
Residential mortgage loans are valued based on quoted market prices, where available, prices for other traded mortgage loans with similar characteristics, and purchase commitments and bid information received from market participants. The prices
are adjusted as necessary to include the embedded servicing value in the loans and to take into consideration the specific characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation but are not considered significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans. Accordingly, the majority of residential mortgage loans held for sale are classified as Level 2. This category also includes repurchased and temporarily unsalable residential mortgage loans. These loans are repurchased due to a breach of representations and warranties in the loan sales agreement and typically occur after the loan is in default. The temporarily unsalable loans have an origination defect that makes them currently unable to be sold into the performing loan sales market. Because transaction details regarding sales of this type of loan are often unavailable, unobservable bid information from brokers and investors is heavily relied upon. Accordingly, based on the significance of unobservable inputs, these loans are classified as Level 3.
Trading Loans
We have elected to account for certain trading loans at fair value. The fair value for trading loans is based on pricing from average bid broker quotes received from a loan pricing service, sale commitments, or a model based on indications received in marketing the credit or on the loans characteristics in comparison to market data on similar loans. These instruments are primarily classified as Level 2.
Commercial Mortgage Servicing Rights
As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial mortgage servicing rights (MSRs) at fair value in order to eliminate any potential measurement mismatch between our economic hedges and the commercial MSRs. We recognize recurring gains/(losses) on changes in the fair value of commercial MSRs as a result of the election. Assumptions incorporated into the commercial valuation model reflect managements best estimate of factors that a market participant would use in valuing the commercial MSRs. Although sales of commercial MSRs do occur, commercial MSRs do not trade in an active, open market with readily observable prices so the precise terms and conditions of sales are not available. Due to the nature of the valuation inputs and the limited availability of market pricing, commercial MSRs are classified as Level 3.
The fair value of commercial MSRs is estimated by using a discounted cash flow model incorporating unobservable inputs for assumptions such as constant prepayment rates, discount rates and other factors. Significant increases/(decreases) in constant prepayment rates and discount rates would result in significantly lower/(higher) commercial MSR value determined based on current market conditions and expectations.
154 The PNC Financial Services Group, Inc. Form 10-K |
Residential Mortgage Servicing Rights
Residential MSRs are carried at fair value on a recurring basis. Assumptions incorporated into the residential MSRs valuation model reflect managements best estimate of factors that a market participant would use in valuing the residential MSRs. Although sales of residential MSRs do occur, residential MSRs do not trade in an active, open market with readily observable prices so the precise terms and conditions of sales are not available. As a benchmark for the reasonableness of its residential MSRs fair value, PNC obtained opinions of value from independent parties (brokers). These brokers provided a range (+/- 10 bps) based upon their own discounted cash flow calculations of our portfolio that reflect conditions in the secondary market and any recently executed servicing transactions. PNC compares its internally-developed residential MSRs value to the ranges of values received from the brokers. If our residential MSRs fair value falls outside of the brokers ranges, management will assess whether a valuation adjustment is warranted. For the periods presented, PNCs residential MSRs value did not fall outside of the brokers ranges. We consider our residential MSRs value to represent a reasonable estimate of fair value. Due to the nature of the unobservable valuation inputs, residential MSRs are classified as Level 3.
The significant unobservable inputs used in the fair value measurement of residential MSRs are constant prepayment rates and spread over the benchmark curve. Significant increases (decreases) in prepayment rates and spread over the benchmark curve would result in lower (higher) fair market value of residential MSRs.
Commercial Mortgage Loans Held for Sale
We account for certain commercial mortgage loans classified as held for sale in whole loan transactions at fair value. In addition, as of September 1, 2014, we have elected to apply the fair value option to commercial mortgage loans held for sale to agencies. This election applies to all new commercial mortgage loans held for sale originated for sale to the agencies effective on or after September 1, 2014. The election of the fair value option aligns the accounting for the commercial mortgages with the related commitments to sell the loans.
We determine the fair value of commercial mortgage loans held for sale based upon discounted cash flows. Fair value is determined using sale valuation assumptions that management believes a market participant would use in pricing the loans. Valuation assumptions may include observable inputs based on the benchmark interest rate swap curves, whole loan sales and agency sales transactions. The significant unobservable inputs are managements assumption of the spread applied to the benchmark rate and the estimated servicing cash flows for loans sold to the agencies with servicing retained. The spread over the benchmark curve includes managements assumptions of the impact of credit and liquidity risk. Significant increases (decreases) in the spread applied to the benchmark would result in a significantly lower (higher) asset
value. The wide range of the spread over the benchmark curve is due to the varying risk and underlying property characteristics within our portfolio. Significant increases (decreases) in the estimated servicing cash flows would result in significantly higher (lower) asset value. Based on the significance of unobservable inputs, we classified this portfolio as Level 3.
Equity Investments
The valuation of direct and indirect private equity investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such investments. The carrying values of direct and affiliated partnership interests reflect the expected exit price and are based on various techniques including multiples of adjusted earnings of the entity, independent appraisals, anticipated financing and sale transactions with third parties, or the pricing used to value the entity in a recent financing transaction. A multiple of adjusted earnings calculation is the valuation technique utilized most frequently and the multiple of earnings is the primary and most significant unobservable input used in such calculation. The multiple of earnings is utilized in conjunction with portfolio company financial results and our ownership interest in portfolio company securities to determine PNCs interest in the enterprise value of the portfolio company. Significant decreases (increases) in the multiple of earnings could result in a significantly lower (higher) fair value measurement. The magnitude of the change in fair value is dependent on the significance of the change in the multiple of earnings and the significance of portfolio company adjusted earnings. Valuation inputs or analysis are supported by portfolio company or market documentation. Due to the size, private and unique nature of each portfolio company, lack of liquidity and the long-term nature of investments, relevant benchmarking is not always feasible. A valuation committee reviews the portfolio company valuations on a quarterly basis and oversight is provided by senior management of the business.
We value indirect investments in private equity funds based on net asset value as provided in the financial statements that we receive from their managers. Due to the time lag in our receipt of the financial information and based on a review of investments and valuation techniques applied, adjustments to the manager-provided value are made when available recent portfolio company information or market information indicates a significant change in value from that provided by the manager of the fund. These investments are classified as Level 3.
Customer Resale Agreements
We have elected to account for structured resale agreements, which are economically hedged using free-standing financial derivatives, at fair value. The fair value for structured resale agreements is determined using a model that includes observable market data such as interest rates as inputs. Readily observable market inputs to this model can be
The PNC Financial Services Group, Inc. Form 10-K 155 |
validated to external sources, including yield curves, implied volatility or other market-related data. These instruments are classified as Level 2.
Loans
Loans accounted for at fair value consist primarily of residential mortgage loans. These loans are generally valued similarly to residential mortgage loans held for sale and are classified as Level 2. However, similar to residential mortgage loans held for sale, if these loans are repurchased and unsalable, they are classified as Level 3. In addition, repurchased VA loans, where only a portion of the principal will be reimbursed, are classified as Level 3. The fair value is determined using a discounted cash flow calculation based on our historical loss rate. Due to the unobservable nature of this pool level approach, these loans are classified as Level 3. Significant increases (decreases) in these assumptions would result in a significantly lower (higher) fair value measurement.
During 2013, we elected to account for certain home equity lines of credit at fair value. These loans are classified as Level 3. This category also includes repurchased brokered home equity loans. These loans are repurchased due to a breach of representations or warranties in the loan sales agreement and occur typically after the loan is in default. Similar to existing loans classified as Level 3 due to being repurchased and unsalable, the fair value price is based on bids and market observations of transactions of similar vintage. Because transaction details regarding the credit and underwriting quality are often unavailable, unobservable bid information from brokers and investors is heavily relied upon. Accordingly, based on the significance of unobservable inputs, these loans are classified as Level 3. The fair value of these loans is included in the Loans Home equity line item in Table 85 in this Note 7.
Significant inputs to the valuation of residential mortgage loans include credit and liquidity discount, cumulative default rate, loss severity and gross discount rate and are deemed representative of current market conditions. Significant increases (decreases) in an assumption would result in a significantly lower (higher) fair value measurement.
BlackRock Series C Preferred Stock
We have elected to account for the shares of BlackRock Series C Preferred Stock received in a stock exchange with BlackRock at fair value. On January 31, 2013, we transferred .2 million shares to BlackRock pursuant to our obligation to partially fund a portion of certain BlackRock LTIP programs. After this transfer and at December 31, 2014, we hold approximately 1.3 million shares of BlackRock Series C Preferred Stock, which are available to fund our obligation in connection with the BlackRock LTIP programs. The Series C Preferred Stock economically hedges the BlackRock LTIP liability that is accounted for as a derivative. The fair value of the Series C Preferred Stock is determined using a third-party modeling approach, which includes both observable and
unobservable inputs. This approach considers expectations of a default/liquidation event and the use of liquidity discounts based on our inability to sell the security at a fair, open market price in a timely manner. Although dividends are equal to common shares and other preferred series, significant transfer restrictions exist on our Series C shares for any purpose other than to satisfy the BlackRock LTIP obligation. Due to the significance of unobservable inputs, this security is classified as Level 3. Significant increases (decreases) in the liquidity discount would result in a significantly lower (higher) asset value for the BlackRock Series C and vice versa for the BlackRock LTIP liability.
Other Assets and Liabilities
We have entered into a prepaid forward contract with a financial institution to mitigate the risk on a portion of PNCs deferred compensation, supplemental incentive savings plan liabilities and certain stock based compensation awards that are based on PNCs stock price and are subject to market risk. The prepaid forward contract is initially valued at the transaction price and is subsequently valued by reference to the market price of PNCs stock and is recorded in either Other Assets or Other Liabilities at fair value and is classified as Level 2. In addition, deferred compensation and supplemental incentive savings plan participants may also invest based on fixed income and equity-based funds. PNC utilizes a Rabbi Trust to hedge the returns by purchasing similar funds on which the participant returns are based. The Rabbi Trust balances are recorded in Other Assets at fair value using the quoted market price. These assets are primarily being classified in Levels 1 and 2. The other asset category also includes FHLB interests and the retained interests related to the Small Business Administration (SBA) securitizations which are classified as Level 3. The other liabilities category includes a contingent liability which is classified as Level 3. All Level 3 other assets and liabilities are included in the Insignificant Level 3 assets, net of liabilities line item in Table 85 in this Note 7.
Other Borrowed Funds
During the first quarter of 2013, we elected to account for certain other borrowed funds consisting primarily of secured debt at fair value. These other borrowed funds are classified as Level 3. Significant unobservable inputs for these borrowed funds include credit and liquidity discount and spread over the benchmark curve. Significant increases (decreases) in these assumptions would result in significantly lower (higher) fair value measurement.
Other borrowed funds also includes the related liability for transferred loans over which PNC regained effective control pursuant to ASC 860. These other borrowed funds are classified as either Level 2 or Level 3 consistent with the corresponding loans described above. All Level 3 amounts are included in the Insignificant Level 3 assets, net of liabilities line item in Table 85 in this Note 7.
156 The PNC Financial Services Group, Inc. Form 10-K |
Assets and liabilities measured at fair value on a recurring basis, including instruments for which PNC has elected the fair value option, follow.
Table 83: Fair Value Measurements Recurring Basis Summary
December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||||||||||
In millions | Level 1 | Level 2 | Level 3 |
Total Fair Value |
Level 1 | Level 2 | Level 3 |
Total Fair Value |
||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Securities available for sale |
||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies |
$ | 4,795 | $ | 627 | $ | 5,422 | $ | 3,460 | $ | 658 | $ | 4,118 | ||||||||||||||||||||
Residential mortgage-backed |
||||||||||||||||||||||||||||||||
Agency (a) |
18,043 | 18,043 | 21,714 | 21,714 | ||||||||||||||||||||||||||||
Non-agency |
144 | $ | 4,798 | 4,942 | 247 | $ | 5,358 | 5,605 | ||||||||||||||||||||||||
Commercial mortgage-backed |
||||||||||||||||||||||||||||||||
Agency (a) |
2,187 | 2,187 | 1,763 | 1,763 | ||||||||||||||||||||||||||||
Non-agency |
4,162 | 4,162 | 4,042 | 4,042 | ||||||||||||||||||||||||||||
Asset-backed |
4,624 | 563 | 5,187 | 5,131 | 641 | 5,772 | ||||||||||||||||||||||||||
State and municipal |
1,904 | 134 | 2,038 | 2,284 | 333 | 2,617 | ||||||||||||||||||||||||||
Other debt |
1,783 | 30 | 1,813 | 2,505 | 38 | 2,543 | ||||||||||||||||||||||||||
Total debt securities |
4,795 | 33,474 | 5,525 | 43,794 | 3,460 | 38,344 | 6,370 | 48,174 | ||||||||||||||||||||||||
Corporate stocks and other |
426 | 15 | 441 | 417 | 16 | 433 | ||||||||||||||||||||||||||
Total securities available for sale |
5,221 | 33,489 | 5,525 | 44,235 | 3,877 | 38,360 | 6,370 | 48,607 | ||||||||||||||||||||||||
Financial derivatives (b) (c) |
||||||||||||||||||||||||||||||||
Interest rate contracts |
4 | 4,874 | 40 | 4,918 | 25 | 4,540 | 34 | 4,599 | ||||||||||||||||||||||||
Other contracts |
314 | 2 | 316 | 192 | 2 | 194 | ||||||||||||||||||||||||||
Total financial derivatives |
4 | 5,188 | 42 | 5,234 | 25 | 4,732 | 36 | 4,793 | ||||||||||||||||||||||||
Residential mortgage loans held for sale (d) |
1,255 | 6 | 1,261 | 1,307 | 8 | 1,315 | ||||||||||||||||||||||||||
Trading securities (e) |
||||||||||||||||||||||||||||||||
Debt (f) |
1,340 | 960 | 32 | 2,332 | 2,159 | 862 | 32 | 3,053 | ||||||||||||||||||||||||
Equity |
21 | 21 | 20 | 20 | ||||||||||||||||||||||||||||
Total trading securities |
1,361 | 960 | 32 | 2,353 | 2,179 | 862 | 32 | 3,073 | ||||||||||||||||||||||||
Trading loans (b) |
30 | 7 | 37 | 6 | 6 | |||||||||||||||||||||||||||
Residential mortgage servicing rights (g) |
845 | 845 | 1,087 | 1,087 | ||||||||||||||||||||||||||||
Commercial mortgage servicing rights (g) (h) |
506 | 506 | ||||||||||||||||||||||||||||||
Commercial mortgage loans held for sale (d) |
893 | 893 | 586 | 586 | ||||||||||||||||||||||||||||
Equity investments (b) (i) |
||||||||||||||||||||||||||||||||
Direct investments |
1,152 | 1,152 | 1,069 | 1,069 | ||||||||||||||||||||||||||||
Indirect investments (j) |
469 | 469 | 595 | 595 | ||||||||||||||||||||||||||||
Total equity investments |
1,621 | 1,621 | 1,664 | 1,664 | ||||||||||||||||||||||||||||
Customer resale agreements (k) |
155 | 155 | 207 | 207 | ||||||||||||||||||||||||||||
Loans (l) (m) |
637 | 397 | 1,034 | 623 | 527 | 1,150 | ||||||||||||||||||||||||||
Other assets (b) |
||||||||||||||||||||||||||||||||
BlackRock Series C Preferred Stock (n) |
375 | 375 | 332 | 332 | ||||||||||||||||||||||||||||
Other |
190 | 226 | 8 | 424 | 209 | 184 | 8 | 401 | ||||||||||||||||||||||||
Total other assets |
190 | 226 | 383 | 799 | 209 | 184 | 340 | 733 | ||||||||||||||||||||||||
Total assets |
$ | 6,776 | $ | 41,940 | $ | 10,257 | $ | 58,973 | $ | 6,290 | $ | 46,281 | $ | 10,650 | $ | 63,221 | ||||||||||||||||
Liabilities |
||||||||||||||||||||||||||||||||
Financial derivatives (c) (o) |
||||||||||||||||||||||||||||||||
Interest rate contracts |
$ | 3,260 | $ | 12 | $ | 3,272 | $ | 6 | $ | 3,307 | $ | 13 | $ | 3,326 | ||||||||||||||||||
BlackRock LTIP |
375 | 375 | 332 | 332 | ||||||||||||||||||||||||||||
Other contracts |
241 | 139 | 380 | 182 | 94 | 276 | ||||||||||||||||||||||||||
Total financial derivatives |
3,501 | 526 | 4,027 | 6 | 3,489 | 439 | 3,934 | |||||||||||||||||||||||||
Trading securities sold short (p) |
||||||||||||||||||||||||||||||||
Debt |
$ | 1,479 | 11 | 1,490 | 1,341 | 1 | 1,342 | |||||||||||||||||||||||||
Total trading securities sold short |
1,479 | 11 | 1,490 | 1,341 | 1 | 1,342 | ||||||||||||||||||||||||||
Other borrowed funds (m) (p) |
92 | 181 | 273 | 110 | 199 | 309 | ||||||||||||||||||||||||||
Other liabilities (o) |
9 | 9 | ||||||||||||||||||||||||||||||
Total liabilities |
$ | 1,479 | $ | 3,604 | $ | 716 | $ | 5,799 | $ | 1,347 | $ | 3,600 | $ | 638 | $ | 5,585 |
(continued on following page)
The PNC Financial Services Group, Inc. Form 10-K 157 |
(a) | In our third quarter 2014 10-Q, these line items were corrected as of December 31, 2013 due to a misclassification of Government National Mortgage Association (GNMA) securities collateralized by project loans. $1.1 billion was previously reported as residential mortgage-backed agency securities and was reclassified to commercial mortgage-backed agency securities. |
(b) | Included in Other assets on our Consolidated Balance Sheet. |
(c) | Amounts at December 31, 2014 and December 31, 2013 are presented gross and are not reduced by the impact of legally enforceable master netting agreements that allow PNC to net positive and negative positions and cash collateral held or placed with the same counterparty. The net asset amounts were $2.6 billion at December 31, 2014 and $1.7 billion at December 31, 2013, and the net liability amounts were $1.4 billion and $.9 billion, respectively. |
(d) | Included in Loans held for sale on our Consolidated Balance Sheet. PNC has elected the fair value option for certain residential and commercial mortgage loans held for sale. |
(e) | Fair value includes net unrealized gains of $54 million at December 31, 2014 compared with net unrealized gains of $11 million at December 31, 2013. |
(f) | Approximately 34% of these securities are residential mortgage-backed securities and 57% are U.S. Treasury and government agencies securities at December 31, 2014. Comparable amounts at December 31, 2013 were 17% and 69%, respectively. |
(g) | Included in Other intangible assets on our Consolidated Balance Sheet. |
(h) | As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial MSRs at fair value. Accordingly, beginning with the first quarter of 2014, commercial MSRs are measured at fair value on a recurring basis. |
(i) | Our adoption of ASU 2013-08, Financial Services Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements , did not result in a change in classification or status of our accounting for investment companies. |
(j) | The indirect equity funds are not redeemable, but PNC receives distributions over the life of the partnership from liquidation of the underlying investments by the investee, which we expect to occur over the next twelve years. The amount of unfunded contractual commitments as of December 31, 2014 related to indirect equity investments was $112 million and related to direct equity investments was $28 million, respectively. Comparable amounts at December 31, 2013 were $128 million and $36 million, respectively. |
(k) | Included in Federal funds sold and resale agreements on our Consolidated Balance Sheet. PNC has elected the fair value option for these items. |
(l) | Included in Loans on our Consolidated Balance Sheet. |
(m) | In our third quarter 2014 10-Q, these line items were corrected as of December 31, 2013 to include transferred loans over which PNC regained effective control and the related liabilities that are recorded pursuant to ASC 860. This resulted in a $125 million increase of both Loans and Other borrowed funds as of December 31, 2013. |
(n) | PNC has elected the fair value option for these shares. |
(o) | Included in Other liabilities on our Consolidated Balance Sheet. |
(p) | Included in Other borrowed funds on our Consolidated Balance Sheet. |
158 The PNC Financial Services Group, Inc. Form 10-K |
Reconciliations of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for 2014 and 2013 follow.
Table 84: Reconciliation of Level 3 Assets and Liabilities
Year Ended December 31, 2014
Total realized / unrealized
|
Unrealized
Consolidated
at Dec. 31,
|
|||||||||||||||||||||||||||||||||||||||||||
Level 3 Instruments Only In millions |
Fair Value
Dec. 31, 2013 |
Included in
Earnings |
Included
in Other
|
Purchases | Sales | Issuances | Settlements |
Transfers
into Level 3 (b) |
Transfers
out of Level 3 (b) |
Fair Value
Dec. 31, 2014 |
||||||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale |
||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage- backed non-agency |
$ | 5,358 | $ | 120 | $ | 64 | $ | (821 | ) | $ | 77 | $ | 4,798 | $ | (10 | ) | ||||||||||||||||||||||||||||
Commercial mortgage backed non-agency |
1 | (1 | ) | |||||||||||||||||||||||||||||||||||||||||
Asset-backed |
641 | 13 | 23 | (114 | ) | 563 | (1 | ) | ||||||||||||||||||||||||||||||||||||
State and municipal |
333 | (2 | ) | 15 | (198 | ) | $ | (14 | ) | 134 | ||||||||||||||||||||||||||||||||||
Other debt |
38 | 1 | $ | 1 | $ | (8 | ) | (2 | ) | 30 | ||||||||||||||||||||||||||||||||||
Total securities available for sale |
6,370 | 133 | 102 | 1 | (8 | ) | (1,136 | ) | 77 | (14 | ) | 5,525 | (11 | ) | ||||||||||||||||||||||||||||||
Financial derivatives |
36 | 226 | 3 | (223 | ) | 42 | 142 | |||||||||||||||||||||||||||||||||||||
Residential mortgage loans held for sale |
8 | 1 | 15 | (3 | ) | (1 | ) | 11 | (25 | ) | 6 | 1 | ||||||||||||||||||||||||||||||||
Trading securities Debt |
32 | 2 | (31 | ) | 29 | 32 | 2 | |||||||||||||||||||||||||||||||||||||
Trading loans |
7 | 7 | ||||||||||||||||||||||||||||||||||||||||||
Residential mortgage servicing rights |
1,087 | (238 | ) | 45 | $ | 85 | (134 | ) | 845 | (231 | ) | |||||||||||||||||||||||||||||||||
Commercial mortgage servicing rights |
(53 | ) | 43 | 53 | 463 | (g) | 506 | (53 | ) | |||||||||||||||||||||||||||||||||||
Commercial mortgage loans held for sale |
586 | 38 | 1,790 | (1,521 | ) | 893 | 6 | |||||||||||||||||||||||||||||||||||||
Equity investments |
||||||||||||||||||||||||||||||||||||||||||||
Direct investments |
1,069 | 184 | 306 | (407 | ) | 1,152 | 134 | |||||||||||||||||||||||||||||||||||||
Indirect investments |
595 | 78 | 23 | (223 | ) | (4 | ) | 469 | 74 | |||||||||||||||||||||||||||||||||||
Total equity investments |
1,664 | 262 | 329 | (630 | ) | (4 | ) | 1,621 | 208 | |||||||||||||||||||||||||||||||||||
Loans |
527 | 74 | 120 | (153 | ) | (86 | ) | 20 | (105 | ) | 397 | 46 | ||||||||||||||||||||||||||||||||
Other assets |
||||||||||||||||||||||||||||||||||||||||||||
BlackRock Series C Preferred Stock |
332 | 43 | 375 | 43 | ||||||||||||||||||||||||||||||||||||||||
Other |
8 | 8 | ||||||||||||||||||||||||||||||||||||||||||
Total other assets |
340 | 43 | 383 | 43 | ||||||||||||||||||||||||||||||||||||||||
Total assets |
$ | 10,650 | $ | 488 | (e) | $ | 102 | $ | 556 | $ | (794 | ) | $ | 1,928 | $ | (2,673 | ) | $ | 144 | $ | (144 | ) | $ | 10,257 | $ | 153 | (f) | |||||||||||||||||
Liabilities |
||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives (d) |
$ | 439 | $ | 222 | $ | 1 | $ | (136 | ) | $ | 526 | $ | (51 | ) | ||||||||||||||||||||||||||||||
Other borrowed funds |
199 | 5 | $ | 57 | (80 | ) | 181 | |||||||||||||||||||||||||||||||||||||
Other liabilities |
9 | 9 | ||||||||||||||||||||||||||||||||||||||||||
Total liabilities |
$ | 638 | $ | 227 | (e) | $ | 1 | $ | 57 | $ | (207 | ) | $ | 716 | $ | (51 | ) (f) |
(continued on following page)
The PNC Financial Services Group, Inc. Form 10-K 159 |
Year Ended December 31, 2013
Total realized / unrealized gains or losses for the period (a) |
Unrealized
Consolidated
at Dec. 31,
|
|||||||||||||||||||||||||||||||||||||||||||
Level 3 Instruments Only In millions |
Fair Value
Dec. 31, 2012 |
Included in
Earnings |
Included in
Other comprehensive income |
Purchases | Sales | Issuances | Settlements |
Transfers
into Level 3 (b) |
Transfers
out of Level 3 (b) |
Fair Value
Dec. 31, 2013 |
||||||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale |
||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed non-agency |
$ | 6,107 | $ | 189 | $ | 147 | $ | (1,085 | ) | $ | 5,358 | $ | (10 | ) | ||||||||||||||||||||||||||||||
Commercial mortgage-backed non-agency |
3 | (3 | ) | |||||||||||||||||||||||||||||||||||||||||
Asset-backed |
708 | 9 | 53 | (129 | ) | 641 | (6 | ) | ||||||||||||||||||||||||||||||||||||
State and municipal |
339 | 1 | 2 | $ | 4 | (13 | ) | 333 | ||||||||||||||||||||||||||||||||||||
Other debt |
48 | 3 | $ | (10 | ) | (3 | ) | 38 | ||||||||||||||||||||||||||||||||||||
Total securities available for sale |
7,202 | 202 | 202 | 7 | (10 | ) | (1,233 | ) | 6,370 | (16 | ) | |||||||||||||||||||||||||||||||||
Financial derivatives |
106 | 297 | 4 | (369 | ) | $ | (2 | ) | 36 | 166 | ||||||||||||||||||||||||||||||||||
Residential mortgage loans held for sale |
27 | 2 | 61 | (3 | ) | 4 | $ | 13 | (96 | ) | 8 | 2 | ||||||||||||||||||||||||||||||||
Trading securities Debt |
32 | 32 | ||||||||||||||||||||||||||||||||||||||||||
Residential mortgage servicing rights |
650 | 366 | 110 | (4 | ) | $ | 158 | (193 | ) | 1,087 | 354 | |||||||||||||||||||||||||||||||||
Commercial mortgage loans held for sale |
772 | (11 | ) | (130 | ) | (45 | ) | 586 | (12 | ) | ||||||||||||||||||||||||||||||||||
Equity investments |
||||||||||||||||||||||||||||||||||||||||||||
Direct investments |
1,171 | 141 | 177 | (420 | ) | 1,069 | 62 | |||||||||||||||||||||||||||||||||||||
Indirect investments |
642 | 81 | (3 | ) | 26 | (151 | ) | 595 | 76 | |||||||||||||||||||||||||||||||||||
Total equity investments |
1,813 | 222 | (3 | ) | 203 | (571 | ) | 1,664 | 138 | |||||||||||||||||||||||||||||||||||
Loans (h) |
134 | 46 | 1 | (1 | ) | 83 | 292 | (28 | ) | 527 | 34 | |||||||||||||||||||||||||||||||||
Other assets |
||||||||||||||||||||||||||||||||||||||||||||
BlackRock Series C Preferred Stock |
243 | 122 | (33 | ) | 332 | 122 | ||||||||||||||||||||||||||||||||||||||
Other |
9 | (1 | ) | 8 | ||||||||||||||||||||||||||||||||||||||||
Total other assets |
252 | 122 | (1 | ) | (33 | ) | 340 | 122 | ||||||||||||||||||||||||||||||||||||
Total assets |
$ | 10,988 | $ | 1,246 | (e) | $ | 198 | $ | 386 | $ | (719 | ) | $ | 158 | $ | (1,786 | ) | $ | 305 | $ | (126 | ) | $ | 10,650 | $ | 788 | (f) | |||||||||||||||||
Liabilities |
||||||||||||||||||||||||||||||||||||||||||||
Financial derivatives (d) |
$ | 376 | $ | 317 | $ | 2 | $ | (256 | ) | $ | 439 | $ | 181 | |||||||||||||||||||||||||||||||
Other borrowed funds (h) |
9 | 175 | $ | 15 | 199 | |||||||||||||||||||||||||||||||||||||||
Total liabilities |
$ | 376 | $ | 326 | (e) | $ | 2 | $ | (81 | ) | $ | 15 | $ | 638 | $ | 181 | (f) |
(a) | Losses for assets are bracketed while losses for liabilities are not. |
(b) | PNCs policy is to recognize transfers in and transfers out as of the end of the reporting period. |
(c) | The amount of the total gains or losses for the period included in earnings that is attributable to the change in unrealized gains or losses related to those assets and liabilities held at the end of the reporting period. |
(d) | Includes swaps entered into in connection with sales of certain Visa Class B common shares. |
(e) | Net gains (realized and unrealized) included in earnings relating to Level 3 assets and liabilities were $261 million for 2014 compared with net gains (realized and unrealized) of $920 million for 2013. These amounts also included amortization and accretion of $146 million for 2014 compared with $217 million for 2013. The amortization and accretion amounts were included in Interest income on the Consolidated Income Statement, and the remaining net gains/(losses) (realized and unrealized) were included in Noninterest income on the Consolidated Income Statement. |
(f) | Net unrealized gains relating to those assets and liabilities held at the end of the reporting period were $204 million for 2014, compared with net unrealized gains of $607 million for 2013. These amounts were included in Noninterest income on the Consolidated Income Statement. |
(g) | Settlements relating to commercial MSRs of $552 million represent the fair value as of January 1, 2014 as a result of an irrevocable election to measure all classes of commercial MSRs at fair value. Refer to Note 8 Goodwill and Other Intangible Assets for additional information on commercial MSRs. |
(h) | These line items were corrected for the year ended December 31, 2013 to include transferred loans over which PNC regained effective control and the related liabilities that are recorded pursuant to ASC 860. This resulted in additional transfers into Level 3 of $15 million for both Loans and Other borrowed funds. |
160 The PNC Financial Services Group, Inc. Form 10-K |
An instruments categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification (transfer) of assets or liabilities between hierarchy levels. PNCs policy is to recognize transfers in and transfers out as of the end of the reporting period.
During 2014, there were transfers of one available for sale residential mortgage-backed non-agency security and one debt trading security of $77 million and $29 million, respectively, from Level 2 to Level 3 due to valuation inputs that were deemed to be unobservable. Additionally, there were transfers of available for sale state and municipal securities from Level 3 to Level 2 of $14 million due to an increase in valuation inputs that were deemed to be observable. Also during 2014, there were transfers of residential mortgage loans held for sale from Level 2 to Level 3 of $11 million as a result of reduced marketability in the secondary residential mortgage sales market which reduced the observability of valuation inputs. In addition, there were also transfers out of Level 3 residential mortgage loans held for sale and loans of $5 million and $105 million, respectively, primarily due to the transfer of residential mortgage loans held for sale and loans to OREO. Finally, there was approximately $20 million of Level 3 residential mortgage loans held for sale reclassified to Level 3 loans during 2014 due to the loans being reclassified from held for sale loans to held in portfolio loans. This amount was included in Transfers out of Level 3 residential mortgages loans held for sale and Transfers into Level 3 loans within Table 84.
During 2013, there were transfers of residential mortgage loans held for sale and loans from Level 2 to Level 3 of $13 million and $29 million, respectively, as a result of reduced marketability in the secondary residential mortgage sales market which reduced the observability of valuation inputs. In addition, there were transfers of residential mortgage loans of $164 million that were reclassified from Level 2 to Level 3 due to the unobservable nature of the pool level pricing methodology. Also during 2013, there were transfers out of Level 3 residential mortgage loans held for sale and loans of $12 million and $28 million, respectively, primarily due to the transfer of residential mortgage loans held for sale and loans to OREO. In addition, there was approximately $84 million of Level 3 residential mortgage loans held for sale reclassified to Level 3 loans during 2013 due to the loans being reclassified from held for sale loans to held in portfolio loans. This amount was included in Transfers out of Level 3 residential mortgage loans held for sale and Transfers into Level 3 loans within Table 84. Furthermore, there were transfers of $15 million into Level 3 loans and other borrowed funds reflecting the correction to include transferred loans over which PNC regained effective control and the related liabilities recorded pursuant to ASC 860.
The PNC Financial Services Group, Inc. Form 10-K 161 |
Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities follows.
Table 85: Fair Value Measurements Recurring Quantitative Information
December 31, 2014
Level 3 Instruments Only Dollars in millions |
Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||||
Residential mortgage-backed non-agency securities |
$ | 4,798 |
Priced by a third-party vendor using a discounted cash flow pricing model (a) |
Constant prepayment rate (CPR) Constant default rate (CDR) Loss severity Spread over the benchmark curve (b) |
1.0%-28.9% (6.8%) 0%-16.7% (5.6%) 6.1%-100.0% (53.1%) 249bps weighted average |
(a)
(a) (a) (a) |
||||||
Asset-backed securities |
563 |
Priced by a third-party vendor using a discounted cash flow pricing model (a) |
Constant prepayment rate (CPR) Constant default rate (CDR) Loss severity Spread over the benchmark curve (b) |
1.0%-15.7% (5.9%) 1.7%-13.9% (7.6%) 14.6%-100% (73.5%) 352bps weighted average |
(a)
(a) (a) (a) |
|||||||
State and municipal securities |
|
132
2 |
|
Discounted cash flow Consensus pricing (c) |
Spread over the benchmark curve (b) Credit and Liquidity discount |
55bps-165bps (67bps) 0%-20.0% (14.9%) |
||||||
Other debt securities |
30 | Consensus pricing (c) | Credit and Liquidity discount | 7.0%-95.0% (88.6%) | ||||||||
Trading securities Debt |
32 | Consensus pricing (c) | Credit and Liquidity discount | 0.0%-15.0% (8.0%) | ||||||||
Residential mortgage servicing rights |
845 | Discounted cash flow |
Constant prepayment rate (CPR) Spread over the benchmark curve (b) |
3.8%-32.7% (11.2%) 889bps-1,888bps (1,036bps) |
||||||||
Commercial mortgage servicing rights |
506 | Discounted cash flow |
Constant prepayment rate (CPR) Discount rate |
7.0%-16.8% (8.0%) 2.5%-8.6% (6.6%) |
||||||||
Commercial mortgage loans held for sale |
893 | Discounted cash flow |
Spread over the benchmark curve (b) Estimated servicing cash flows |
37bps-4,025bps (549bps) 0.0%-2.0% (1.2%) |
||||||||
Equity investments Direct investments |
1,152 | Multiple of adjusted earnings | Multiple of earnings | 3.2x-13.9x (7.7x) | ||||||||
Equity investments Indirect (d) |
469 | Net asset value | Net asset value | |||||||||
Loans Residential real estate |
|
114
154 |
|
Consensus pricing (c)
Discounted cash flow |
Cumulative default rate Loss severity Discount rate Loss severity Discount rate |
2.0%-100% (90.5%) 0%-100% (35.6%) 5.4%-7.0% (6.4%) 8.0% weighted average 3.4% weighted average |
||||||
Loans Home equity |
129 | Consensus pricing (c) | Credit and Liquidity discount | 26.0%-99.0% (51.0%) | ||||||||
BlackRock Series C Preferred Stock |
375 | Consensus pricing (c) | Liquidity discount | 20.0% | ||||||||
BlackRock LTIP |
(375 | ) | Consensus pricing (c) | Liquidity discount | 20.0% | |||||||
Swaps related to sales of certain Visa Class B common shares |
(135 | ) | Discounted cash flow |
Estimated conversion factor of
Estimated growth rate of Visa
|
41.1%
14.8% |
|||||||
Other borrowed funds non-agency securitization |
(166 | ) | Consensus pricing (c) |
Credit and Liquidity discount Spread over the benchmark curve (b) |
0%-99.0% (18.0%) 113bps |
|||||||
Insignificant Level 3 assets, net of liabilities (e) |
23 | |||||||||||
|
|
|||||||||||
Total Level 3 assets, net of liabilities (f) |
$ | 9,541 |
162 The PNC Financial Services Group, Inc. Form 10-K |
December 31, 2013
Level 3 Instruments Only Dollars in millions |
Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||||
Residential mortgage-backed non-agency securities |
$ | 5,358 |
Priced by a third-party vendor using a discounted cash flow pricing model (a) |
Constant prepayment rate (CPR) Constant default rate (CDR) Loss severity Spread over the benchmark curve (b) |
1.0%-32.1% (6.0%) 0%-21.9% (6.6%) 6.1%-92.9% (52.3%) 237bps weighted average |
(a)
(a) (a) (a) |
||||||
Asset-backed securities |
641 |
Priced by a third-party vendor using a discounted cash flow pricing model (a) |
Constant prepayment rate (CPR) Constant default rate (CDR) Loss severity Spread over the benchmark curve (b) |
1.0%-11.1% (5.0%) 1.0%-13.9% (8.7%) 10.0%-100% (70.1%) 326bps weighted average |
(a)
(a) (a) (a) |
|||||||
State and municipal securities |
|
132
201 |
|
Discounted cash flow Consensus pricing (c) |
Spread over the benchmark curve (b) Credit and Liquidity discount |
80bps-240bps (97bps) 0%-25.0% (8.3%) |
||||||
Other debt securities |
38 | Consensus pricing (c) | Credit and Liquidity discount | 7.0%-95.0% (88.4%) | ||||||||
Trading securities Debt |
32 | Consensus pricing (c) | Credit and Liquidity discount | 0%-20.0% (8.3%) | ||||||||
Residential mortgage servicing rights |
1,087 | Discounted cash flow |
Constant prepayment rate (CPR) Spread over the benchmark curve (b) |
2.2%-32.9% (7.6%) 889bps-1,888bps (1,024bps) |
||||||||
Commercial mortgage loans held for sale |
586 | Discounted cash flow | Spread over the benchmark curve (b) | 460bps-6,655bps (972bps) | ||||||||
Equity investments Direct investments |
1,069 | Multiple of adjusted earnings | Multiple of earnings | 4.5x-10.8x (7.2x) | ||||||||
Equity investments Indirect (d) |
595 | Net asset value | Net asset value | |||||||||
Loans Residential real estate |
|
225
179
|
|
Consensus pricing (c)
Discounted cash flow
|
Cumulative default rate Loss severity Discount rate Loss severity Discount rate |
2.0%-100% (80.0%) 0%-100% (48.4%) 12.0%-13.0% (12.2%) 8.0% weighted average 10.0% weighted average |
||||||
Loans Home equity |
123 | Consensus pricing (c) | Credit and Liquidity discount | 36.0%-99.0% (55.0%) | ||||||||
BlackRock Series C Preferred Stock |
332 | Consensus pricing (c) | Liquidity discount | 20.0% | ||||||||
BlackRock LTIP |
(332 | ) | Consensus pricing (c) | Liquidity discount | 20.0% | |||||||
Swaps related to sales of certain Visa Class B common shares |
(90 | ) | Discounted cash flow |
Estimated conversion factor of Class B shares into Class A shares Estimated growth rate of Visa Class A share price |
41.7%
8.6% |
|||||||
Other borrowed funds-non-agency securitization |
(184 | ) | Consensus pricing (c) |
Credit and Liquidity discount Spread over the benchmark curve (b) |
0%-99.0% (18.0%) 13bps |
|||||||
Insignificant Level 3 assets, net of liabilities (e) |
20 | |||||||||||
Total Level 3 assets, net of liabilities (f) |
$ | 10,012 |
(a) | Level 3 residential mortgage-backed non-agency and asset-backed securities with fair values as of December 31, 2014 totaling $4,081 million and $532 million, respectively, were priced by a third-party vendor using a discounted cash flow pricing model that incorporates consensus pricing, where available. The comparable amounts as of December 31, 2013 were $4,672 million and $610 million, respectively. The significant unobservable inputs for these securities were provided by the third-party vendor and are disclosed in the table. Our procedures to validate the prices provided by the third-party vendor related to these securities are discussed further in the Fair Value Measurement section of this Note 7. Certain Level 3 residential mortgage-backed non-agency and asset-backed securities with fair values as of December 31, 2014 of $717 million and $31 million, respectively, were valued using a pricing source, such as a dealer quote or comparable security price, for which the significant unobservable inputs used to determine the price were not reasonably available. The comparable amounts as of December 31, 2013 were $686 million and $31 million, respectively. |
(b) | The assumed yield spread over the benchmark curve for each instrument is generally intended to incorporate non-interest-rate risks, such as credit and liquidity risks. |
(c) | Consensus pricing refers to fair value estimates that are generally internally developed using information such as dealer quotes or other third-party provided valuations or comparable asset prices. |
(d) | The range on these indirect equity investments has not been disclosed since these investments are recorded at their net asset redemption values. |
(e) | 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, residential mortgage loans held for sale, trading loans, other assets, other borrowed funds (ROAPs) and other liabilities. For additional information, please see the Fair Value Measurement discussion included in this Note 7. |
(f) | Consisted of total Level 3 assets of $10,257 million and total Level 3 liabilities of $716 million as of December 31, 2014 and $10,650 million and $638 million as of December 31, 2013, respectively. |
The PNC Financial Services Group, Inc. Form 10-K 163 |
Financial Assets Accounted for at Fair Value on a Nonrecurring Basis
We may be required to measure certain other financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment and are included in Table 86 and Table 87.
Nonaccrual Loans
Nonaccrual loans represent the fair value of those loans which have been adjusted due to impairment. The impairment is primarily based on the appraised value of the collateral or LGD percentage. The LGD percentage is used to determine the weighted average loss severity of the nonaccrual loans.
As part of the appraisal process, persons ordering or reviewing appraisals are independent of the asset manager. Appraisals must be provided by licensed or certified appraisers and conform to the Uniform Standards of Professional Appraisal Practice. For loans secured by commercial properties where the underlying collateral is in excess of $250,000, appraisals are obtained at least annually. In certain instances ( e.g. , physical changes in the property), a more recent appraisal is obtained. Additionally, borrower ordered appraisals are not permitted, and PNC ordered appraisals are regularly reviewed. For loans secured by commercial properties where the underlying collateral is $250,000 and less, there is no requirement to obtain an appraisal. In instances where an appraisal is not obtained, the collateral value is determined consistent with external third-party appraisal standards by an internal person independent of the asset manager. PNC has a real estate valuation services group whose sole function is to manage the real estate appraisal solicitation and evaluation process for commercial loans. All third-party appraisals are reviewed by this group, including consideration of comments/questions on the appraisal by the reviewer, customer relationship manager, credit officer, and underwriter. Upon resolving these comments/questions through discussions with the third-party appraiser, adjustments to the initial appraisal may occur and be incorporated into the final issued appraisal report.
If an appraisal is outdated due to changed project or market conditions, or if the net book value is utilized, management uses an LGD percentage which represents the exposure PNC expects to lose in the event a borrower defaults on an obligation. Accordingly, LGD, which represents the loss severity, is a function of collateral recovery rates and loan-to-value. Those rates are established based upon actual PNC loss experience and external market data. In instances where we have agreed to sell the property to a third party, the fair value is based on the contractual sales price adjusted for costs to sell. In these instances, the most significant unobservable input is the appraised value or the sales price. The estimated costs to sell are incremental direct costs to transact a sale such as broker commissions, legal, closing costs and title transfer fees. The costs must be essential to the sale and would not have been incurred if the decision to sell had not been made. The costs to sell are based on costs associated with our actual sales of commercial and residential OREO and foreclosed assets, which are assessed annually.
Loans Held for Sale
Loans held for sale includes syndicated commercial loan inventory. The fair value of the syndicated commercial loan inventory is primarily determined based on prices provided by a third-party vendor. The third-party vendor prices are based upon dealer quotes. For nonrecurring fair value measurements, these instruments are classified within Level 2. There were no loans held for sale categorized as Level 2 at December 31, 2013.
Prior to September 1, 2014, loans held for sale also included the carrying value of commercial mortgage loans which are intended to be sold to agencies with servicing retained. The fair value of the commercial mortgage loans held for sale is determined using discounted cash flows. Significant observable market data includes the applicable benchmark interest rates. These instruments are classified within Level 3. Significant unobservable inputs include a spread over the benchmark curve and the estimated servicing cash flows for loans sold to the agencies with servicing retained. Significant increases (decreases) to the spread over the benchmark curve would result in a significantly lower (higher) carrying value of the assets. Significant increases (decreases) in the estimated servicing cash flows for loans sold to the agencies with servicing retained would result in significantly higher (lower) carrying value.
Refer to the Fair Value Measurement section of this Note 7 for information on commercial mortgages held for sale to agencies subsequent to our September 1, 2014 election of fair value option.
164 The PNC Financial Services Group, Inc. Form 10-K |
Equity Investments
Equity investments represent the carrying value of Low Income Housing Tax Credit (LIHTC) investments held for sale calculated using a discounted cash flow model. The significant unobservable input is managements estimate of required market rate of return. The market rate of return is based on comparison to recent LIHTC sales in the market. Significant increases (decreases) in this input would result in a significantly lower (higher) carrying value of the investments.
Commercial Mortgage Servicing Rights
As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial MSRs at fair value in order to eliminate any potential measurement mismatch between our economic hedges and the commercial MSRs. Refer to the Fair Value Measurement section of this Note 7 regarding the fair value of commercial MSRs.
Prior to 2014, commercial MSRs were initially recorded at fair value and subsequently accounted for at the lower of amortized cost or fair value. They were periodically evaluated for impairment and the amounts in Table 86 reflect an impairment of three strata at December 31, 2013 and two strata at December 31, 2012, respectively. For purposes of impairment, the commercial MSRs were stratified based on asset type, which characterizes the predominant risk of the underlying financial asset. The fair value of commercial MSRs was estimated by using a discounted cash flow model incorporating unobservable inputs for assumptions as to constant prepayment rates, discount rates and other factors. Significant increases (decreases) in constant prepayment rates and discount rates would result in significantly lower (higher) commercial MSR value determined based on current market conditions and expectations.
OREO and Foreclosed Assets
OREO and foreclosed assets represent the carrying value of OREO and foreclosed assets for which valuation adjustments were recorded subsequent to the transfer to OREO and foreclosed assets. Valuation adjustments are based on the fair value less cost to sell of the property. Fair value is based on appraised value or sales price.
The appraisal process for OREO and foreclosed properties is the same as described above for nonaccrual loans. In instances where we have agreed to sell the property to a third party, the fair value is based on the contractual sale price adjusted for costs to sell. The significant unobservable inputs for OREO and foreclosed assets are the appraised value or the sales price. The estimated costs to sell are incremental direct costs to transact a sale such as broker commissions, legal, closing costs and title transfer fees. The costs must be essential to the sale and would not have been incurred if the decision to sell had not been made. The costs to sell are based on costs associated with our sales of commercial and residential OREO and foreclosed assets, which are assessed annually.
Long-Lived Assets Held for Sale
Long-lived assets held for sale represent the carrying value of the asset for which valuation adjustments were recorded during the current year and subsequent to the transfer to Long-lived assets held for sale. Valuation adjustments are based on the fair value of the property less an estimated cost to sell. Fair value is determined either by a recent appraisal, recent sales offer or changes in market or property conditions. Appraisals are provided by licensed or certified appraisers. Where we have agreed to sell the property to a third party, the fair value is based on the contractual sale price. The significant unobservable inputs for Long-lived assets held for sale are the appraised value, the sales price or the changes in market or property conditions. Changes in market or property conditions are subjectively determined by management through observation of the physical condition of the property along with the condition of properties in the surrounding market place. The availability and recent sales of similar properties is also considered. The range of fair values can vary significantly as this category often includes smaller properties such as offsite ATM locations and smaller rural branches up to large commercial buildings, operation centers or urban branches.
Table 86: Fair Value Measurements Nonrecurring
Fair Value | ||||||||
In millions |
December 31
2014 |
December 31
2013 |
||||||
Assets (a) |
||||||||
Nonaccrual loans |
$ | 54 | $ | 35 | ||||
Loans held for sale (b) |
8 | 224 | ||||||
Equity investments |
17 | 6 | ||||||
Commercial mortgage servicing rights (c) |
543 | |||||||
OREO and foreclosed assets |
168 | 181 | ||||||
Long-lived assets held for sale |
22 | 51 | ||||||
Total assets |
$ | 269 | $ | 1,040 |
Year ended December 31 In millions |
Gains (Losses) | |||||||||||
2014 | 2013 | 2012 | ||||||||||
Assets |
||||||||||||
Nonaccrual loans |
$ | (19 | ) | $ | (8 | ) | $ | (68 | ) | |||
Loans held for sale (b) |
(7 | ) | (4 | ) | ||||||||
Equity investments |
(2 | ) | (1 | ) | ||||||||
Commercial mortgage servicing rights (c) |
88 | (5 | ) | |||||||||
OREO and foreclosed assets |
(19 | ) | (26 | ) | (73 | ) | ||||||
Long-lived assets held for sale |
(14 | ) | (40 | ) | (20 | ) | ||||||
Total assets |
$ | (54 | ) | $ | 6 | $ | (170 | ) |
(a) | All Level 3 as of December 31, 2014 and 2013 except for $8 million included in Loans held for sale which was categorized as Level 2 as of December 31, 2014. |
(b) | As of September 1, 2014, PNC elected to account for agency loans held for sale at fair value. Accordingly, beginning on September 1, 2014, all new commercial mortgage loans held for sale originated for sale to the agencies are measured at fair value on a recurring basis. |
(c) | As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial MSRs at fair value. Accordingly, beginning with the first quarter of 2014, commercial MSRs are measured at fair value on a recurring basis. |
The PNC Financial Services Group, Inc. Form 10-K 165 |
Quantitative information about the significant unobservable inputs within Level 3 nonrecurring assets follows.
Table 87: Fair Value Measurements Nonrecurring Quantitative Information
Level 3 Instruments Only Dollars in millions |
Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) | ||||||
December 31, 2014 |
||||||||||
Assets |
||||||||||
Nonaccrual loans (a) |
$ | 29 | LGD percentage (b) | Loss severity | 2.9%-68.5% (42.1%) | |||||
Equity investments |
17 | Discounted cash flow | Market rate of return | 6.0% | ||||||
Other (c) |
215 | Fair value of property or collateral | Appraised value/sales price | Not meaningful | ||||||
Total Assets |
$ | 261 | ||||||||
December 31, 2013 |
||||||||||
Assets |
||||||||||
Nonaccrual loans (a) |
$ | 21 | LGD percentage (b) | Loss severity | 7.0%-84.9% (36.6%) | |||||
Loans held for sale (d) |
224 | Discounted cash flow |
Spread over the benchmark curve (e) Estimated servicing cash flows |
35bps-220bps (144bps) .8%-3.5% (2.0%) |
||||||
Equity investments |
6 | Discounted cash flow | Market rate of return | 6.5% | ||||||
Commercial mortgage servicing rights (f) |
543 | Discounted cash flow | Constant prepayment rate (CPR) Discount rate |
7.1%-11.8% (7.7%) 5.4%-7.6% (6.7%) |
||||||
Other (c) |
246 | Fair value of property or collateral | Appraised value/sales price | Not meaningful | ||||||
Total Assets |
$ | 1,040 |
(a) | The fair value of nonaccrual loans included in this line item is determined based on internal loss rates. The fair value of nonaccrual loans where the fair value is determined based on the appraised value or sales price is included within Other, below. |
(b) | LGD percentage represents the amount that PNC expects to lose in the event a borrower defaults on an obligation. |
(c) | Other included Nonaccrual loans of $25 million, OREO and foreclosed assets of $168 million and Long-lived assets held for sale of $22 million as of December 31, 2014. Comparably, as of December 31, 2013, Other included Nonaccrual loans of $14 million, OREO and foreclosed assets of $181 million and Long-lived assets held for sale of $51 million. The fair value of these assets is determined based on appraised value or sales price, the range of which is not meaningful to disclose. |
(d) | As of September 1, 2014, PNC elected to account for agency loans held for sale at fair value. Accordingly, beginning on September 1, 2014, all new commercial mortgage loans held for sale originated for sale to the agencies are measured at fair value on a recurring basis. |
(e) | The assumed yield spread over benchmark curve for each instrument is generally intended to incorporate non-interest-rate risks such as credit and liquidity risks. |
(f) | As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial MSRs at fair value. Accordingly, beginning with the first quarter of 2014, commercial MSRs are measured at fair value on a recurring basis. |
166 The PNC Financial Services Group, Inc. Form 10-K |
Financial Instruments Accounted For Under Fair Value Option
We elect the fair value option to account for certain financial instruments. For more information on these financial instruments for which the fair value option election has been made, please refer to the Fair Value Measurement section of this Note 7. These financial instruments are initially measured at fair value, gains and losses from initial measurement and any changes in fair value are subsequently recognized in earnings. Additional information about the financial instruments for which we elected the fair value option follows.
Customer Resale Agreements
Interest income on structured resale agreements is reported on the Consolidated Income Statement in Other interest income. Changes in fair value due to instrument-specific credit risk for 2014 and 2013 were not material.
Residential Mortgage-Backed Agency Securities with Embedded Derivatives
Interest income on these securities is reported on the Consolidated Income Statement in Other interest income.
Trading Loans
Interest income on trading loans is reported on the Consolidated Income Statement in Other interest income.
Commercial Mortgage Loans Held for Sale
Interest income on these loans is recorded as earned and reported on the Consolidated Income Statement in Other interest income. The impact on earnings of offsetting economic hedges is not reflected in these amounts. Changes in fair value due to instrument-specific credit risk for both 2014 and 2013 were not material.
Residential Mortgage Loans Held for Sale
Interest income on these loans is recorded as earned and reported on the Consolidated Income Statement in Other interest income. Throughout 2014 and 2013, certain residential mortgage loans for which we elected the fair value option were subsequently reclassified to portfolio loans. Changes in fair value due to instrument-specific credit risk for 2014 and 2013 were not material.
Residential Mortgage Loans Portfolio
Interest income on these loans is recorded as earned and reported on the Consolidated Income Statement in either Loan interest income or Other interest income. Interest income on the Home Equity Lines of Credit for which we elected the fair value option during first quarter 2013 is reported on the Consolidated Income Statement in Loan interest income.
Other Borrowed Funds
Interest expense on the Other borrowed funds for which we have elected the fair value option is reported on the Consolidated Income Statement in Borrowed funds interest expense.
The changes in fair value included in Noninterest income for items for which we elected the fair value option follow.
Table 88: Fair Value Option Changes in Fair Value (a)
Year ended December 31 In millions |
Gains (Losses) | |||||||||||
2014 | 2013 | 2012 | ||||||||||
Assets |
||||||||||||
Customer resale agreements |
$ | (3 | ) | $ | (7 | ) | $ | (10 | ) | |||
Residential mortgage-backed agency securities with embedded derivatives (b) |
13 | |||||||||||
Trading loans |
2 | 3 | 2 | |||||||||
Commercial mortgage loans held for sale |
50 | (10 | ) | (5 | ) | |||||||
Residential mortgage loans held for sale (c) |
212 | 213 | (223 | ) | ||||||||
Residential mortgage loans portfolio (c) |
157 | 60 | 7 | |||||||||
BlackRock Series C Preferred Stock |
43 | 122 | 33 | |||||||||
Liabilities |
||||||||||||
Other borrowed funds |
(5 | ) | (9 | ) |
(a) | The impact on earnings of offsetting hedged items or hedging instruments is not reflected in these amounts. |
(b) | At December 31, 2014, 2013 and 2012, the balance of residential mortgage-backed agency securities with embedded derivatives carried in Trading securities was zero. |
(c) | Prior periods were corrected for the allocation between Residential mortgage loans held for sale and Residential mortgage loans portfolio. This resulted in a decrease of $34 million from gains on Residential mortgage loans held for sale and an increase of $33 million to gains on Residential mortgage loans portfolio for 2013. Comparable amounts for 2012 were a decrease of $43 million from gains on Residential mortgage loans held for sale and an increase of $43 million to gains on Residential mortgage loans portfolio. |
The PNC Financial Services Group, Inc. Form 10-K 167 |
Fair values and aggregate unpaid principal balances of items for which we elected the fair value option follow.
Table 89: Fair Value Option Fair Value and Principal Balances
In millions | Fair Value |
Aggregate Unpaid
Principal Balance |
Difference | |||||||||
December 31, 2014 |
||||||||||||
Assets |
||||||||||||
Customer resale agreements |
$ | 155 | $ | 148 | $ | 7 | ||||||
Trading loans |
37 | 37 | ||||||||||
Residential mortgage loans held for sale |
||||||||||||
Performing loans |
1,236 | 1,176 | 60 | |||||||||
Accruing loans 90 days or more past due |
9 | 9 | ||||||||||
Nonaccrual loans |
16 | 17 | (1 | ) | ||||||||
Total |
1,261 | 1,202 | 59 | |||||||||
Commercial mortgage loans held for sale (a) |
||||||||||||
Performing loans |
873 | 908 | (35 | ) | ||||||||
Nonaccrual loans |
20 | 64 | (44 | ) | ||||||||
Total |
893 | 972 | (79 | ) | ||||||||
Residential mortgage loans portfolio |
||||||||||||
Performing loans |
194 | 256 | (62 | ) | ||||||||
Accruing loans 90 days or more past due (b) |
570 | 573 | (3 | ) | ||||||||
Nonaccrual loans |
270 | 449 | (179 | ) | ||||||||
Total |
1,034 | 1,278 | (244 | ) | ||||||||
Liabilities |
||||||||||||
Other borrowed funds |
$ | 273 | $ | 312 | $ | (39 | ) | |||||
December 31, 2013 |
||||||||||||
Assets |
||||||||||||
Customer resale agreements |
$ | 207 | $ | 196 | $ | 11 | ||||||
Trading loans |
6 | 6 | ||||||||||
Residential mortgage loans held for sale |
||||||||||||
Performing loans |
1,298 | 1,260 | 38 | |||||||||
Accruing loans 90 days or more past due |
2 | 2 | ||||||||||
Nonaccrual loans |
15 | 18 | (3 | ) | ||||||||
Total |
1,315 | 1,280 | 35 | |||||||||
Commercial mortgage loans held for sale (a) |
||||||||||||
Performing loans |
583 | 669 | (86 | ) | ||||||||
Nonaccrual loans |
3 | 9 | (6 | ) | ||||||||
Total |
586 | 678 | (92 | ) | ||||||||
Residential mortgage loans portfolio (c) |
||||||||||||
Performing loans |
233 | 332 | (99 | ) | ||||||||
Accruing loans 90 days or more past due (b) |
552 | 626 | (74 | ) | ||||||||
Nonaccrual loans |
365 | 598 | (233 | ) | ||||||||
Total |
1,150 | 1,556 | (406 | ) | ||||||||
Liabilities |
||||||||||||
Other borrowed funds (c) |
$ | 309 | $ | 353 | $ | (44 | ) |
(a) | There were no accruing loans 90 days or more past due within this category at December 31, 2014 or December 31, 2013. |
(b) | Included in this population are government insured loans and non-government insured home equity loans. Loans that are insured by the government result in a higher fair value than those that do not have that guarantee. |
(c) | Prior period amounts were corrected in our third quarter 2014 10-Q to include transferred loans over which PNC regained effective control and the related liabilities that are recorded pursuant to ASC 860. This resulted in increases of $125 million in fair value and $128 million in aggregate unpaid principal balance for both Residential mortgage loans portfolio and Other borrowed funds as of December 31, 2013. |
168 The PNC Financial Services Group, Inc. Form 10-K |
Additional Fair Value Information Related to Other Financial Instruments
The following table presents the carrying amounts and estimated fair values, including the level within the fair value hierarchy, of all other financial instruments that are not measured on the consolidated financial statements at fair value as of December 31, 2014 and 2013.
Table 90: Additional Fair Value Information Related to Other Financial Instruments
In millions |
Carrying Amount |
Fair Value | ||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Cash and due from banks |
$ | 4,360 | $ | 4,360 | $ | 4,360 | ||||||||||||||||||
Short-term assets |
34,380 | 34,380 | $ | 34,380 | ||||||||||||||||||||
Securities held to maturity |
11,588 | 11,984 | 292 | 11,683 | $ | 9 | ||||||||||||||||||
Loans held for sale |
108 | 108 | 56 | 52 | ||||||||||||||||||||
Net loans (excludes leases) |
192,573 | 194,564 | 194,564 | |||||||||||||||||||||
Other assets |
1,879 | 2,544 | 1,802 | 742 | (a | ) | ||||||||||||||||||
Total Assets |
$ | 244,888 | $ | 247,940 | $ | 4,652 | $ | 47,921 | $ | 195,367 | ||||||||||||||
Liabilities |
||||||||||||||||||||||||
Demand, savings and money market deposits |
$ | 210,838 | $ | 210,838 | $ | 210,838 | ||||||||||||||||||
Time deposits |
21,396 | 21,392 | 21,392 | |||||||||||||||||||||
Borrowed funds |
55,329 | 56,011 | 54,574 | $ | 1,437 | |||||||||||||||||||
Unfunded loan commitments and letters of credit |
240 | 240 | 240 | |||||||||||||||||||||
Total Liabilities |
$ | 287,803 | $ | 288,481 | $ | 286,804 | $ | 1,677 | ||||||||||||||||
December 31, 2013 |
||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Cash and due from banks |
$ | 4,043 | $ | 4,043 | $ | 4,043 | ||||||||||||||||||
Short-term assets |
14,906 | 14,906 | $ | 14,906 | ||||||||||||||||||||
Securities held to maturity |
11,687 | 11,765 | 243 | 11,505 | $ | 17 | ||||||||||||||||||
Loans held for sale |
354 | 355 | 355 | |||||||||||||||||||||
Net loans (excludes leases) |
183,155 | 184,737 | 184,737 | |||||||||||||||||||||
Other assets |
1,765 | 2,578 | 1,607 | 971 | (a | ) | ||||||||||||||||||
Total Assets |
$ | 215,910 | $ | 218,384 | $ | 4,286 | $ | 28,018 | $ | 186,080 | ||||||||||||||
Liabilities |
||||||||||||||||||||||||
Demand, savings and money market deposits |
$ | 197,465 | $ | 197,465 | $ | 197,465 | ||||||||||||||||||
Time deposits |
23,466 | 23,487 | 23,487 | |||||||||||||||||||||
Borrowed funds |
44,776 | 45,607 | 44,320 | $ | 1,287 | |||||||||||||||||||
Unfunded loan commitments and letters of credit |
224 | 224 | 224 | |||||||||||||||||||||
Total Liabilities |
$ | 265,931 | $ | 266,783 | $ | 265,272 | $ | 1,511 |
(a) | Represents estimated fair value of Visa Class B common shares, which was estimated solely based upon the December 31, 2014 and December 31, 2013 closing price for the Visa Class A common shares, respectively, and the Visa Class B common share conversion rate, which reflects adjustments in respect of all litigation funding by Visa as of that date. The transfer restrictions on the Visa Class B common shares could impact the aforementioned estimate, until they can be converted to Class A common shares. See Note 22 Commitments and Guarantees for additional information. |
The PNC Financial Services Group, Inc. Form 10-K 169 |
The aggregate fair values in the preceding table represent only a portion of the total market value of PNCs assets and liabilities as, in accordance with the guidance related to fair values of financial instruments, Table 90 excludes the following:
|
financial instruments recorded at fair value on a recurring basis, |
|
real and personal property, |
|
lease financing, |
|
loan customer relationships, |
|
deposit customer intangibles, |
|
mortgage servicing rights, |
|
retail branch networks, |
|
fee-based businesses, such as asset management and brokerage, and |
|
trademarks and brand names. |
We used the following methods and assumptions to estimate the fair value amounts for financial instruments included in Table 90.
General
For short-term financial instruments realizable in three months or less, the carrying amount reported on our Consolidated Balance Sheet approximates fair value. Unless otherwise stated, the rates used in discounted cash flow analyses are based on market yield curves.
Cash and due from banks
The carrying amounts reported on our Consolidated Balance Sheet for cash and due from banks approximate fair values. For purposes of this disclosure only, cash and due from banks includes the following:
|
due from banks, and |
|
non-interest-earning deposits with banks. |
Short-Term Assets
The carrying amounts reported on our Consolidated Balance Sheet for short-term investments approximate fair values primarily due to their short-term nature. For purposes of this disclosure only, short-term assets include the following:
|
federal funds sold and resale agreements, |
|
cash collateral, |
|
customers acceptances, |
|
accrued interest receivable, and |
|
interest-earning deposits with banks. |
Securities held to maturity
We primarily use prices obtained from pricing services, dealer quotes or recent trades to determine the fair value of securities. As of December 31, 2014, 94% of the positions in the held to maturity portfolio were priced by pricing services provided by third-party vendors. Refer to the Fair Value Measurement section of this Note 7 for additional information relating to our pricing processes and procedures.
Net Loans And Loans Held For Sale
Fair values are estimated based on the discounted value of expected net cash flows incorporating assumptions about prepayment rates, net credit losses and servicing fees. For purchased impaired loans, fair value is assumed to equal PNCs carrying value, which represents the present value of expected future principal and interest cash flows, as adjusted for any ALLL recorded for these loans. See Note 4 Purchased Loans for additional information. For revolving home equity loans and commercial credit lines, this fair value does not include any amount for new loans or the related fees that will be generated from the existing customer relationships. Nonaccrual loans are valued at their estimated recovery value. Loans are presented net of the ALLL and do not include future accretable discounts related to purchased impaired loans.
Other Assets
Other assets as shown in Table 90 includes equity investments carried at cost as well as FHLB and FRB stock. The aggregate carrying value of our FHLB and FRB stock was $1.8 billion at December 31, 2014 and was $1.6 billion at December 31, 2013, which approximates fair value at each date.
Investments accounted for under the equity method, including our investment in BlackRock, are not included in Table 90.
Deposits
For deposits with no defined maturity, such as noninterest-bearing and interest-bearing demand and interest-bearing money market and savings deposits, carrying values approximate fair values. For time deposits, fair values are estimated by discounting contractual cash flows using current market rates for instruments with similar maturities. The value of long-term relationships with depositors was not taken into account in estimating fair values.
Borrowed Funds
For short-term borrowings, including Federal funds purchased, commercial paper, repurchase agreements, and certain other short-term borrowings and payables, carrying values approximated fair values. For long-term borrowed funds, quoted market prices are used, when available, to estimate fair value. When quoted market prices are not available, fair value is estimated based on current market interest rates and credit spreads for debt with similar terms and maturities.
Unfunded Loan Commitments And Letters Of Credit
The fair value of unfunded loan commitments and letters of credit is determined from a market participants view including the impact of changes in interest rates and credit. Because our obligation on substantially all unfunded loan commitments and letters of credit varies with changes in interest rates, these instruments are subject to little fluctuation in fair value due to changes in interest rates. We establish a liability on these facilities related to the creditworthiness of our counterparty.
170 The PNC Financial Services Group, Inc. Form 10-K |
N OTE 8 G OODWILL AND O THER I NTANGIBLE A SSETS
Assets and liabilities of acquired entities are recorded at estimated fair value as of the acquisition date.
Goodwill
Changes in goodwill by business segment during 2014 and 2013 follow:
Table 91: Changes in Goodwill by Business Segment (a)
In millions |
Retail
Banking |
Corporate &
Institutional Banking |
Asset
Management Group |
Total | ||||||||||||
December 31, 2012 |
$ | 5,794 | $ | 3,214 | $ | 64 | $ | 9,072 | ||||||||
Other |
1 | 1 | 2 | |||||||||||||
December 31, 2013 |
$ | 5,795 | $ | 3,215 | $ | 64 | $ | 9,074 | ||||||||
Other |
29 | 29 | ||||||||||||||
December 31, 2014 |
$ | 5,795 | $ | 3,244 | $ | 64 | $ | 9,103 |
(a) | The Residential Mortgage Banking and Non-Strategic Assets Portfolio business segments did not have any goodwill allocated to them during 2014 and 2013. |
We conduct a goodwill impairment test on our reporting units at least annually, in the fourth quarter, or more frequently if events occur or circumstances have changed significantly from the annual test date. The fair value of our reporting units is determined by using discounted cash flow and, when applicable, market comparability methodologies. Based on the results of our analysis, there were no impairment charges related to goodwill in 2014 or 2013.
Other Intangible Assets
As of January 1, 2014, PNC made an irrevocable election to measure all classes of commercial MSRs at fair value, which precludes the recognition of valuation allowance or accumulated amortization. Refer to the Mortgage Servicing Rights section of this Note 8 for additional information regarding commercial mortgage servicing rights.
The gross carrying amount, accumulated amortization and net carrying amount of other intangible assets by major category consisted of the following:
Table 92: Other Intangible Assets
In millions |
December 31
2014 |
December 31
2013 |
||||||
Customer-related and other intangibles |
||||||||
Gross carrying amount (a) |
$ | 1,502 | $ | 1,676 | ||||
Accumulated amortization (a) |
(1,009 | ) | (1,096 | ) | ||||
Net carrying amount |
$ | 493 | $ | 580 | ||||
Mortgage servicing rights (b) |
||||||||
Gross carrying amount |
$ | 1,351 | $ | 2,620 | ||||
Valuation allowance |
(88 | ) | ||||||
Accumulated amortization |
(896 | ) | ||||||
Net carrying amount |
$ | 1,351 | $ | 1,636 | ||||
Total |
$ | 1,844 | $ | 2,216 |
(a) | The decrease in the gross carrying amount and accumulated amortization from December 31, 2013 was due to the removal of fully amortized assets. |
(b) | Upon the first quarter 2014 irrevocable election of fair value for commercial MSRs, the gross carrying amount of MSRs as of December 31, 2014 represents the fair value of commercial and residential MSRs. |
Amortization expense on existing intangible assets follows:
Table 93: Amortization Expense on Existing Intangible Assets
In millions | ||||
2012 (a) |
$ | 310 | ||
2013 (a) |
243 | |||
2014 |
128 | |||
2015 |
114 | |||
2016 |
97 | |||
2017 |
83 | |||
2018 |
72 | |||
2019 |
61 |
(a) | Amounts include amortization expense related to commercial MSRs. As of January 1, 2014, PNC made an irrevocable election to measure commercial MSRs at fair value, and, accordingly, amortization expense for commercial MSRs is no longer recorded. |
Customer-Related and Other Intangible Assets
Our customer-related and other intangible assets have finite lives. Core deposit intangibles are amortized on an accelerated basis, whereas the remaining other intangible assets are amortized on a straight-line basis. For customer-related and other intangibles, the estimated remaining useful lives range from less than 1 year to 10 years, with a weighted-average remaining useful life of 7 years.
Changes in customer-related intangible assets during 2014 and 2013 follow:
Table 94: Summary of Changes in Customer-Related and Other Intangible Assets
In millions |
Customer-
Related |
|||
December 31, 2012 |
$ | 726 | ||
Amortization |
(146 | ) | ||
December 31, 2013 |
$ | 580 | ||
Additions |
41 | |||
Amortization |
(128 | ) | ||
December 31, 2014 |
$ | 493 |
Mortgage Servicing Rights
We recognize as an other intangible asset the right to service mortgage loans for others. MSRs are purchased or originated when loans are sold with servicing retained.
Commercial Mortgage Servicing Rights
As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial MSRs at fair value in order to eliminate any potential measurement mismatch between our economic hedges and the commercial MSRs. The impact of the cumulative-effect adjustment to retained earnings was not material, and the valuation allowance associated with the commercial MSRs was
The PNC Financial Services Group, Inc. Form 10-K 171 |
reclassified to the gross carrying amount of commercial MSRs. We recognize gains/(losses) on changes in the fair value of commercial MSRs as a result of the election. Commercial MSRs are subject to declines in value from actual or expected prepayment of the underlying loans and also from defaults. We manage this risk by economically hedging the fair value of commercial MSRs with securities and derivative instruments which are expected to increase (or decrease) in value when the value of commercial MSRs declines (or increases).
The fair value of commercial MSRs is estimated by using a discounted cash flow model incorporating inputs for assumptions as to constant prepayment rates, discount rates and other factors determined based on current market conditions and expectations.
Changes in commercial MSRs accounted for at fair value during 2014 follow:
Table 95: Commercial Mortgage Servicing Rights Accounted for at Fair Value
In millions | 2014 | |||
January 1 |
$ | 552 | ||
Additions: |
||||
From loans sold with servicing retained |
53 | |||
Purchases |
43 | |||
Changes in fair value due to: |
||||
Time and payoffs (a) |
(89 | ) | ||
Other (b) |
(53 | ) | ||
December 31 |
$ | 506 | ||
Unpaid principal balance of loans serviced for others at December 31 |
$ | 143,738 |
(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. |
Prior to 2014, commercial MSRs were initially recorded at fair value and subsequently accounted for at the lower of amortized cost or fair value. These rights were substantially amortized in proportion to and over the period of estimated net servicing income of 5 to 10 years. Commercial MSRs were periodically evaluated for impairment. For purposes of impairment, the commercial MSRs were stratified based on asset type, which characterized the predominant risk of the underlying financial asset. If the carrying amount of any individual stratum exceeded its fair value, a valuation reserve was established with a corresponding charge to Corporate services on our Consolidated Income Statement.
Changes in commercial MSRs during 2013 and 2012, prior to the irrevocable fair value election, follow:
Table 96: Commercial Mortgage Servicing Rights Accounted for Under the Amortization Method
In millions | 2013 | 2012 | ||||||
Commercial Mortgage Servicing Rights Net Carrying Amount |
||||||||
January 1 |
$ | 420 | $ | 468 | ||||
Additions (a) |
138 | 73 | ||||||
Amortization expense (b) |
(97 | ) | (142 | ) | ||||
Change in valuation allowance |
88 | 21 | ||||||
December 31 |
$ | 549 | $ | 420 | ||||
Commercial Mortgage Servicing Rights Valuation Allowance |
||||||||
January 1 |
$ | (176 | ) | $ | (197 | ) | ||
Provision |
(21 | ) | (46 | ) | ||||
Recoveries |
108 | 43 | ||||||
Other (b) |
1 | 24 | ||||||
December 31 |
$ | (88 | ) | $ | (176 | ) |
(a) | Additions for 2013 included $53 million from loans sold with servicing retained and $85 million from purchases of servicing rights from third parties. Comparable amounts were $45 million and $28 million, respectively, for 2012. |
(b) | Includes a direct write-down of servicing rights for $24 million recognized in the first quarter of 2012 primarily due to market-driven changes in interest rates. |
Residential Mortgage Servicing Rights
We recognize mortgage servicing right assets on residential real estate loans when we retain the obligation to service these loans upon sale and the servicing fee is more than adequate compensation. Residential MSRs are subject to declines in value principally from actual or expected prepayment of the underlying loans and also from defaults. We manage this risk by economically hedging the fair value of residential MSRs with securities and derivative instruments which are expected to increase (or decrease) in value when the value of residential MSRs declines (or increases).
The fair value of residential MSRs is estimated by using a discounted cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors which are determined based on current market conditions.
172 The PNC Financial Services Group, Inc. Form 10-K |
Changes in the residential MSRs follow:
Table 97: Residential Mortgage Servicing Rights
In millions | 2014 | 2013 | 2012 | |||||||||
January 1 |
$ | 1,087 | $ | 650 | $ | 647 | ||||||
Additions: |
||||||||||||
From loans sold with servicing retained |
85 | 158 | 117 | |||||||||
RBC Bank (USA) acquisition (a) |
16 | |||||||||||
Purchases |
45 | 110 | 175 | |||||||||
Sales |
(4 | ) | ||||||||||
Changes in fair value due to: |
||||||||||||
Time and payoffs (b) |
(134 | ) | (193 | ) | (167 | ) | ||||||
Other (c) |
(238 | ) | 366 | (138 | ) | |||||||
December 31 |
$ | 845 | $ | 1,087 | $ | 650 | ||||||
Unpaid principal balance of loans serviced for others at December 31 |
$ | 108,010 | $ | 113,994 | $ | 119,262 |
(a) | See Note 2 Acquisition and Divestiture Activity in our 2013 Form 10-K for additional discussion of our 2012 acquisition of RBC Bank (USA). |
(b) | 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. |
(c) | Represents MSR value changes resulting primarily from market-driven changes in interest rates. |
The fair value of commercial and residential MSRs and significant inputs to the valuation models as of December 31, 2014 are shown in the tables below. The expected and actual rates of mortgage loan prepayments are significant factors driving the fair value. Management uses both internal proprietary models and a third-party model to estimate future commercial mortgage loan prepayments and a third-party model to estimate future residential mortgage loan prepayments. These models have been refined based on current market conditions and management judgment. Future interest rates are another important factor in the valuation of MSRs. Management utilizes market implied forward interest rates to estimate the future direction of mortgage and discount rates. The forward rates utilized are derived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. Changes in the shape and slope of the forward curve in future periods may result in volatility in the fair value estimate.
A sensitivity analysis of the hypothetical effect on the fair value of MSRs to adverse changes in key assumptions is presented below. These sensitivities do not include the impact of the related hedging activities. Changes in fair value generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the interest rate spread), which could either magnify or counteract the sensitivities.
The following tables set forth the fair value of commercial and residential MSRs and the sensitivity analysis of the hypothetical effect on the fair value of MSRs to immediate adverse changes of 10% and 20% in those assumptions:
Table 98: Commercial Mortgage Loan Servicing Rights Key Valuation Assumptions
Dollars in millions |
December 31
2014 |
December 31
2013 |
||||||
Fair value |
$ | 506 | $ | 552 | ||||
Weighted-average life (years) |
4.7 | 5.3 | ||||||
Weighted-average constant prepayment rate |
8.03 | % | 7.52 | % | ||||
Decline in fair value from 10% adverse change |
$ | 10 | $ | 12 | ||||
Decline in fair value from 20% adverse change |
$ | 19 | $ | 23 | ||||
Effective discount rate |
6.59 | % | 6.91 | % | ||||
Decline in fair value from 10% adverse change |
$ | 13 | $ | 18 | ||||
Decline in fair value from 20% adverse change |
$ | 26 | $ | 35 |
Table 99: Residential Mortgage Loan Servicing Rights Key Valuation Assumptions
Dollars in millions |
December 31
2014 |
December 31
2013 |
||||||
Fair value |
$ | 845 | $ | 1,087 | ||||
Weighted-average life (years) |
6.1 | 7.9 | ||||||
Weighted-average constant prepayment rate |
11.16 | % | 7.61 | % | ||||
Decline in fair value from 10% adverse change |
$ | 36 | $ | 34 | ||||
Decline in fair value from 20% adverse change |
$ | 69 | $ | 67 | ||||
Weighted-average option adjusted spread |
10.36 | % | 10.24 | % | ||||
Decline in fair value from 10% adverse change |
$ | 31 | $ | 47 | ||||
Decline in fair value from 20% adverse change |
$ | 61 | $ | 91 |
Fees from mortgage and other loan servicing, comprised of contractually specified servicing fees, late fees and ancillary fees, follows:
Table 100: Fees from Mortgage and Other Loan Servicing
In millions | 2014 | 2013 | 2012 | |||||||||
Fees from mortgage and other loan servicing |
$ | 503 | $ | 544 | $ | 557 |
We also generate servicing fees from fee-based activities provided to others for which we do not have an associated servicing asset.
Fees from commercial and residential MSRs are reported on our Consolidated Income Statement in the line items Corporate services and Residential mortgage, respectively.
The PNC Financial Services Group, Inc. Form 10-K 173 |
N OTE 9 P REMISES , E QUIPMENT AND L EASEHOLD I MPROVEMENTS
Premises, equipment and leasehold improvements, stated at cost less accumulated depreciation and amortization, were as follows:
Table 101: Premises, Equipment and Leasehold Improvements
In millions |
December 31
2014 |
December 31
2013 |
||||||
Total Premises, equipment and leasehold improvements (a) |
$ | 9,416 | $ | 8,903 | ||||
Accumulated depreciation and amortization |
(3,773 | ) | (3,285 | ) | ||||
Net book value |
$ | 5,643 | $ | 5,618 |
(a) | Primarily relates to equipment and buildings. |
Depreciation expense on premises, equipment and leasehold improvements and amortization expense, excluding intangible assets and primarily for capitalized internally developed software, was as follows:
Table 102: Depreciation and Amortization Expense
Year ended December 31 In millions |
2014 | 2013 | 2012 | |||||||||
Continuing operations: |
||||||||||||
Depreciation |
$ | 618 | $ | 546 | $ | 521 | ||||||
Amortization |
30 | 23 | 19 |
We lease certain facilities and equipment under agreements expiring at various dates through the year 2081. We account for these as operating leases. Rental expense on such leases was as follows:
Table 103: Lease Rental Expense
Year ended December 31 In millions |
2014 | 2013 | 2012 | |||||||||
Continuing operations: |
$ | 414 | $ | 412 | $ | 405 |
Required minimum annual rentals that we owe on noncancelable leases having initial or remaining terms in excess of one year totaled $2.7 billion at December 31, 2014. Future minimum annual rentals are as follows:
|
2015: $376 million, |
|
2016: $329 million, |
|
2017: $293 million, |
|
2018: $261 million, |
|
2019: $217 million, and |
|
2020 and thereafter: $1.2 billion. |
The aggregate amount of time deposits with a denomination of $100,000 or more was $8.8 billion at December 31, 2014 and $9.0 billion at December 31, 2013.
Total time deposits of $21.4 billion at December 31, 2014 have future contractual maturities, including related purchase accounting adjustments, as follows:
|
2015: $15.2 billion, |
|
2016: $2.2 billion, |
|
2017: $0.5 billion, |
|
2018: $0.3 billion, |
|
2019: $0.4 billion, and |
|
2020 and thereafter: $2.8 billion. |
The following shows the carrying value of total borrowed funds of $56.8 billion at December 31, 2014 (including adjustments related to purchase accounting, accounting hedges and unamortized original issuance discounts) by remaining contractual maturity:
|
2015: $15.3 billion, |
|
2016: $8.4 billion, |
|
2017: $10.7 billion, |
|
2018: $6.4 billion, |
|
2019: $6.9 billion, and |
|
2020 and thereafter: $9.1 billion. |
Included in the following table are balances of long-term bank notes along with senior and subordinated debt and the related contractual rates and maturity dates at December 31, 2014.
Table 104: Bank Notes, Senior Debt and Subordinated Debt
December 31, 2014 Dollars
in millions |
Carrying Value | Stated Rate | Maturity | |||||||||
Bank notes |
$ | 8,574 | zero-3.30 | % | 2015-2043 | |||||||
Senior debt |
7,176 | 2.70%-6.70 | % | 2015-2022 | ||||||||
Bank notes and senior debt |
$ | 15,750 | ||||||||||
Subordinated debt |
||||||||||||
Junior |
$ | 205 | .81 | % | 2028 | |||||||
Other |
8,946 | .61%-6.88 | % | 2015-2025 | ||||||||
Subordinated debt |
$ | 9,151 |
In the table above, the carrying values for senior debt, subordinated debt and bank notes include basis adjustments of $193 million, $317 million and $20 million, respectively, related to fair value accounting hedges as of December 31, 2014.
174 The PNC Financial Services Group, Inc. Form 10-K |
The $205 million of junior subordinated debt included in the above table represents the carrying value of debt redeemable prior to maturity. This carrying value and related net discounts of $1 million comprise the $206 million principal amount of junior subordinated debentures that are discussed in Note 12 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities.
Included in borrowed funds are FHLB borrowings of $20.0 billion at December 31, 2014, which are generally collateralized by residential mortgage loans, other mortgage-related loans and commercial mortgage-backed securities. FHLB borrowings have balances that will mature from 2015 2030, with interest rates ranging from zero to 7.33%. There were no short-term FHLB advances as of December 31, 2014.
Also included in borrowed funds are repurchase agreements. See Note 22 Commitments and Guarantees for additional information on those agreements. Additionally, certain borrowings are reported at fair value. Refer to Note 7 Fair Value for more information on those borrowings.
N OTE 12 C APITAL S ECURITIES OF A S UBSIDIARY T RUST AND P ERPETUAL T RUST S ECURITIES
At December 31, 2014, PNC had $206 million in principal amount of an outstanding junior subordinated debenture associated with $200 million of trust preferred securities that were issued by a subsidiary statutory trust. These trust preferred securities represented non-voting preferred beneficial interests in the assets of the following Trust:
Table 105: Capital Securities of a Subsidiary Trust
Trust | Date Formed | Description of Capital Securities | Redeemable | |||||||
PNC Capital Trust C |
June 1998 | $200 million due June 1, 2028, bearing interest at a floating rate per annum equal to 3-month LIBOR plus 57 basis points. The rate in effect at December 31, 2014 was .806%. | On or after June 1, 2008 at par. |
This Trust is a wholly-owned finance subsidiary of PNC. In the event of certain changes or amendments to regulatory requirements or federal tax rules, the capital securities are redeemable in whole. In accordance with GAAP, the financial statements of the Trust are not included in PNCs consolidated financial statements.
At December 31, 2014, PNCs junior subordinated debt with a carrying value of $205 million represented debentures purchased and held as assets by the Trust and redeemable prior to maturity.
The obligations of the parent of the Trust, when taken collectively, are the equivalent of a full and unconditional guarantee of the obligations of the Trust under the terms of the Capital Securities. Such guarantee is subordinate in right of payment in the same manner as other junior subordinated debt. There are certain restrictions on PNCs overall ability to obtain funds from its subsidiaries. For additional disclosure on these funding restrictions, including an explanation of dividend and intercompany loan limitations, see Note 20 Regulatory Matters. PNC is also subject to restrictions on dividends and other provisions potentially imposed under the Exchange Agreement with PNC Preferred Funding Trust II, as described in the following Perpetual Trust Securities section, and to other provisions similar to or in some ways more restrictive than those potentially imposed under that agreement.
Table 106: Perpetual Trust Securities Summary
We have issued certain hybrid capital vehicles, and the following table lists those that are outstanding as of December 31, 2014.
Date | Entity (a) | Private Placement (b) | Rate (c) | Trust Issuing Notes (d) | ||||
March 2007 |
PNC Preferred Funding LLC | $500 million | 1.463% | PNC Preferred Funding Trust II (e) | ||||
December 2006 |
PNC Preferred Funding LLC | $500 million | 1.891% | PNC Preferred Funding Trust I (f) |
(a) | PNC REIT Corp. owns 100% of the LLCs common voting securities. As a result, the LLC is an indirect subsidiary of PNC and is consolidated on PNCs Consolidated Balance Sheet. |
(b) | Fixed-to-Floating Rate Non-cumulative Exchangeable Perpetual Trust Securities. |
(c) | As of December 31, 2014. |
(d) | The trusts investments in the LLCs preferred securities are characterized as a noncontrolling interest on our Consolidated Balance Sheet. This noncontrolling interest totaled approximately $981 million at December 31, 2014. |
(e) | Automatically exchangeable into a share of Series I Non-Cumulative Perpetual Preferred Stock of PNC (Series I Preferred Stock). |
(f) | Automatically exchangeable into a share of Series F Non-Cumulative Perpetual Preferred Stock of PNC Bank (PNC Bank Preferred Stock). |
The PNC Financial Services Group, Inc. Form 10-K 175 |
These Trust Securities are automatically exchangeable as set forth above under certain conditions relating to the capitalization or the financial condition of PNC Bank, National Association (PNC Bank) and upon the direction of the Office of the Comptroller of the Currency.
On March 15, 2013 we redeemed all $375 million of the PNC Preferred Funding Trust III securities with a distribution rate of 8.7%.
Table 107: Summary of Replacement Capital Covenants of Perpetual Trust Securities
Replacement Capital Covenant (RCC) (a) | Trust | Description of Capital Covenants | ||
Trust I RCC |
PNC Preferred Funding Trust I | Neither we nor our subsidiaries (other than PNC Bank and its subsidiaries) would purchase the Trust Securities, the LLC Preferred Securities or the PNC Bank Preferred Stock unless such repurchases or redemptions are made from proceeds of the issuance of certain qualified securities and pursuant to the other terms and conditions set forth in the Trust I RCC. | ||
Trust II RCC |
PNC Preferred Funding Trust II | Until March 29, 2017, neither we nor our subsidiaries would purchase or redeem the Trust II Securities, the LLC Preferred Securities or the Series I Preferred Stock unless such repurchases or redemptions are made from proceeds of the issuance of certain qualified securities and pursuant to the other terms and conditions set forth in the Trust II RCC. |
(a) | As of December 31, 2014, each of the Trust I RCC and the Trust II RCC are for the benefit of holders of our $200 million of Floating Rate Junior Subordinated Notes issued in June 1998. |
Table 108: Summary of Contractual Commitments of Perpetual Trust Securities
Trust | Description of Restrictions on Dividend Payments (c) | |
PNC Preferred Funding Trust I (a) |
If full dividends are not paid in a dividend period, neither PNC Bank nor its subsidiaries will declare or pay dividends or other distributions with respect to, or redeem, purchase or acquire or make a liquidation payment with respect to, any of its equity capital securities during the next succeeding period (other than to holders of the LLC Preferred Securities and any parity equity securities issued by the LLC). (d) | |
PNC Preferred Funding Trust II (b) |
If full dividends are not paid in a dividend period, PNC will not declare or pay dividends with respect to, or redeem, purchase or acquire, any of its equity capital securities during the next succeeding dividend period. (e) |
(a) | Contractual commitments made by PNC Bank. |
(b) | Contractual commitments made by PNC. |
(c) | Applies to the applicable Trust Securities and the LLC Preferred Securities. |
(d) | Except: (i) in the case of dividends payable to subsidiaries of PNC Bank, to PNC Bank or another wholly-owned subsidiary of PNC Bank or (ii) in the case of dividends payable to persons that are not subsidiaries of PNC Bank, to such persons only if, (A) in the case of a cash dividend, PNC has first irrevocably committed to contribute amounts at least equal to such cash dividend or (B) in the case of in-kind dividends payable by PNC REIT Corp., PNC has committed to purchase such in-kind dividend from the applicable PNC REIT Corp. holders in exchange for a cash payment representing the market value of such in-kind dividend, and PNC has committed to contribute such in-kind dividend to PNC Bank. |
(e) | Except for: (i) purchases, redemptions or other acquisitions of shares of capital stock of PNC in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of employees, officers, directors or consultants, (ii) purchases of shares of common stock of PNC pursuant to a contractually binding requirement to buy stock existing prior to the commencement of the extension period, including under a contractually binding stock repurchase plan, (iii) any dividend in connection with the implementation of a shareholders rights plan, or the redemption or repurchase of any rights under any such plan, (iv) as a result of any exchange or conversion of any class or series of PNCs capital stock for any other class or series of PNCs capital stock, (v) the purchase of fractional interests in shares of PNC capital stock pursuant to the conversion or exchange provisions of such stock or the security being converted or exchanged or (vi) any stock dividends paid by PNC where the dividend stock is the same stock as that on which the dividend is being paid. |
176 The PNC Financial Services Group, Inc. Form 10-K |
N OTE 13 E MPLOYEE B ENEFIT P LANS
Pension And Postretirement Plans
We have a noncontributory, qualified defined benefit pension plan covering eligible employees. Benefits are determined using a cash balance formula where earnings credits are a percentage of eligible compensation. Earnings credit percentages for those employees who were plan participants on December 31, 2009 are frozen at their level earned to that point. Earnings credits for all employees who become participants on or after January 1, 2010 are a flat 3% of eligible compensation. Plan participants at December 31, 2009 earn interest based on 30-year Treasury securities with a minimum rate, while new participants on or after January 1, 2010 are not subject to the minimum rate. Pension contributions are based on an actuarially determined amount necessary to fund total benefits payable to plan participants.
We also maintain nonqualified supplemental retirement plans for certain employees and provide certain health care and life insurance benefits for qualifying retired employees (postretirement benefits) through various plans. The nonqualified pension and postretirement benefit plans are unfunded. PNC currently intends to begin funding some or all of the postretirement medical benefit obligations through a voluntary employee beneficiary association (VEBA) in mid-to-late 2015. PNC reserves the right to terminate plans or make plan changes at any time.
We use a measurement date of December 31 for plan assets and benefit obligations. A reconciliation of the changes in the projected benefit obligation for qualified pension, nonqualified pension and postretirement benefit plans as well as the change in plan assets for the qualified pension plan follows.
Table 109: Reconciliation of Changes in Projected Benefit Obligation and Change in Plan Assets
Qualified Pension |
Nonqualified Pension |
Postretirement Benefits |
||||||||||||||||||||||
December 31 (Measurement Date) in millions | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||
Accumulated benefit obligation at end of year |
$ | 4,427 | $ | 3,890 | $ | 316 | $ | 287 | ||||||||||||||||
Projected benefit obligation at beginning of year |
$ | 3,966 | $ | 4,512 | $ | 292 | $ | 362 | $ | 375 | $ | 394 | ||||||||||||
Service cost |
103 | 113 | 3 | 3 | 5 | 6 | ||||||||||||||||||
Interest cost |
187 | 170 | 12 | 12 | 16 | 14 | ||||||||||||||||||
Plan amendments |
(7 | ) | ||||||||||||||||||||||
Actuarial (gains)/losses and changes in assumptions |
504 | (453 | ) | 40 | (26 | ) | 4 | (9 | ) | |||||||||||||||
Participant contributions |
8 | 13 | ||||||||||||||||||||||
Federal Medicare subsidy on benefits paid |
2 | 2 | ||||||||||||||||||||||
Benefits paid |
(254 | ) | (376 | ) | (25 | ) | (20 | ) | (31 | ) | (34 | ) | ||||||||||||
Settlement payments |
(39 | ) | (11 | ) | ||||||||||||||||||||
Projected benefit obligation at end of year |
$ | 4,499 | $ | 3,966 | $ | 322 | $ | 292 | $ | 379 | $ | 375 | ||||||||||||
Fair value of plan assets at beginning of year |
$ | 4,252 | $ | 4,009 | ||||||||||||||||||||
Actual return on plan assets |
359 | 619 | ||||||||||||||||||||||
Employer contribution |
$ | 25 | $ | 59 | $ | 21 | $ | 30 | ||||||||||||||||
Participant contributions |
8 | 13 | ||||||||||||||||||||||
Federal Medicare subsidy on benefits paid |
2 | 2 | ||||||||||||||||||||||
Benefits paid |
(254 | ) | (376 | ) | (25 | ) | (20 | ) | (31 | ) | (34 | ) | ||||||||||||
Settlement payments |
(39 | ) | (11 | ) | ||||||||||||||||||||
Fair value of plan assets at end of year |
$ | 4,357 | $ | 4,252 | ||||||||||||||||||||
Funded status |
$ | (142 | ) | $ | 286 | $ | (322 | ) | $ | (292 | ) | $ | (379 | ) | $ | (375 | ) | |||||||
Amounts recognized on the consolidated balance sheet |
||||||||||||||||||||||||
Noncurrent asset |
$ | 286 | ||||||||||||||||||||||
Current liability |
$ | (31 | ) | $ | (28 | ) | $ | (25 | ) | $ | (29 | ) | ||||||||||||
Noncurrent liability |
$ | (142 | ) | (291 | ) | (264 | ) | (354 | ) | (346 | ) | |||||||||||||
Net amount recognized on the consolidated balance sheet |
$ | (142 | ) | $ | 286 | $ | (322 | ) | $ | (292 | ) | $ | (379 | ) | $ | (375 | ) | |||||||
Amounts recognized in accumulated other comprehensive income consist of: |
||||||||||||||||||||||||
Prior service cost (credit) |
$ | (22 | ) | $ | (23 | ) | $ | 1 | $ | 1 | $ | (4 | ) | $ | (6 | ) | ||||||||
Net actuarial loss |
673 | 239 | 88 | 52 | 31 | 27 | ||||||||||||||||||
Amount recognized in AOCI |
$ | 651 | $ | 216 | $ | 89 | $ | 53 | $ | 27 | $ | 21 |
The PNC Financial Services Group, Inc. Form 10-K 177 |
At December 31, 2014, the fair value of the qualified pension plan assets was less than both the accumulated benefit obligation and the projected benefit obligation.
The nonqualified pension plan is unfunded. Contributions from PNC and, in the case of the postretirement benefit plans, participant contributions cover all benefits paid under the nonqualified pension plan and postretirement benefit plans. The postretirement plan provides benefits to certain retirees that are at least actuarially equivalent to those provided by Medicare Part D and accordingly, we receive a federal subsidy as shown in Table 109.
In March 2010, the Patient Protection and Affordable Care Act (PPACA) was enacted. Key aspects of the PPACA which are reflected in our consolidated financial statements include the excise tax on high-cost health plans beginning in 2018 and fees for the Transitional Reinsurance Program and the Patient-Centered Outcomes Research Institute. These provisions did not have a significant effect on our postretirement medical liability or costs. The Early Retiree Reinsurance Program (ERRP) was established by the PPACA. Congress appropriated funding of $5.0 billion for this temporary ERRP to provide financial assistance to employers, unions, and state and local governments to help them maintain coverage for early retirees age 55 and older who are not yet eligible for Medicare, including their spouses, surviving spouses, and dependents. In 2014, PNC did not receive reimbursement related to the 2013 plan year and did not receive reimbursement in 2013 related to the 2012 plan year. In 2012, the amount of reimbursement PNC received related to the 2011 plan year was not significant.
PNC Pension Plan Assets
Assets related to our qualified pension plan (the Plan) are held in trust (the Trust). Effective July 1, 2011, the trustee is The Bank of New York Mellon. The Trust is exempt from tax pursuant to section 501(a) of the Internal Revenue Code (the Code). The Plan is qualified under section 401(a) of the Code. Plan assets consist primarily of listed domestic and international equity securities, U.S. government and agency securities, corporate debt securities, and real estate investments. The Plan held no PNC common stock as of December 31, 2014 and December 31, 2013.
The PNC Financial Services Group, Inc. Administrative Committee (the Administrative Committee) adopted the Pension Plan Investment Policy Statement, including target allocations and allowable ranges, on August 13, 2008. On February 25, 2010, the Administrative Committee amended the investment policy to include a dynamic asset allocation approach and also updated target allocation ranges for certain asset categories. On February 24, 2014, the Administrative Committee amended the investment policy to update the target allocation ranges for certain asset categories.
The long-term investment strategy for pension plan assets is to:
|
Meet present and future benefit obligations to all participants and beneficiaries, |
|
Cover reasonable expenses incurred to provide such benefits, including expenses incurred in the administration of the Trust and the Plan, |
|
Provide sufficient liquidity to meet benefit and expense payment requirements on a timely basis, and |
|
Provide a total return that, over the long term, maximizes the ratio of trust assets to liabilities by maximizing investment return, at an appropriate level of risk. |
Under the dynamic asset allocation strategy, scenarios are outlined in which the Administrative Committee has the ability to make short to intermediate term asset allocation shifts based on factors such as the Plans funded status, the Administrative Committees view of return on equities relative to long term expectations, the Administrative Committees view on the direction of interest rates and credit spreads, and other relevant financial or economic factors which would be expected to impact the ability of the Trust to meet its obligation to participants and beneficiaries. Accordingly, the allowable asset allocation ranges have been updated to incorporate the flexibility required by the dynamic allocation policy.
The Plans specific investment objective is to meet or exceed the investment policy benchmark over the long term. The investment policy benchmark compares actual performance to a weighted market index, and measures the contribution of active investment management and policy implementation. This investment objective is expected to be achieved over the long term (one or more market cycles) and is measured over rolling five-year periods. Total return calculations are time-weighted and are net of investment-related fees and expenses.
The asset strategy allocations for the Trust at the end of 2014 and 2013, and the target allocation range at the end of 2014, by asset category, are as follows.
Table 110: Asset Strategy Allocations
Target
Allocation Range |
Percentage of
Plan Assets by Strategy at December 31 |
|||||||||||
PNC Pension Plan | 2014 | 2013 | ||||||||||
Asset Category |
||||||||||||
Domestic Equity |
20 40 | % | 34 | % | 33 | % | ||||||
International Equity |
10 25 | % | 23 | % | 23 | % | ||||||
Private Equity |
0 15 | % | 6 | % | 4 | % | ||||||
Total Equity |
40 70 | % | 63 | % | 60 | % | ||||||
Domestic Fixed Income |
10 40 | % | 17 | % | 21 | % | ||||||
High Yield Fixed Income |
0 25 | % | 13 | % | 13 | % | ||||||
Total Fixed Income |
10 65 | % | 30 | % | 34 | % | ||||||
Real estate |
0 15 | % | 5 | % | 5 | % | ||||||
Other |
0 5 | % | 2 | % | 1 | % | ||||||
Total |
100 | % | 100 | % |
178 The PNC Financial Services Group, Inc. Form 10-K |
The asset category represents the allocation of Plan assets in accordance with the investment objective of each of the Plans investment managers. Certain domestic equity investment managers utilize derivatives and fixed income securities as described in their Investment Management Agreements to achieve their investment objective under the Investment Policy Statement. Other investment managers may invest in eligible securities outside of their assigned asset category to meet their investment objectives. The actual percentage of the fair value of total Plan assets held as of December 31, 2014 for equity securities, fixed income securities, real estate and all other assets are 69%, 22%, 5% and 4%, respectively.
We believe that, over the long term, asset allocation is the single greatest determinant of risk. Asset allocation will deviate from the target percentages due to market movement, cash flows, investment manager performance and implementation of shifts under the dynamic allocation policy. Material deviations from the asset allocation targets can alter the expected return and risk of the Trust. On the other hand, frequent rebalancing to the asset allocation targets may result in significant transaction costs, which can impair the Trusts ability to meet its investment objective. Accordingly, the Trust portfolio is periodically rebalanced to maintain asset allocation within the target ranges described above.
In addition to being diversified across asset classes, the Trust is diversified within each asset class. Secondary diversification provides a reasonable basis for the expectation that no single security or class of securities will have a disproportionate impact on the total risk and return of the Trust.
The Administrative Committee selects investment managers for the Trust based on the contributions that their respective investment styles and processes are expected to make to the investment performance of the overall portfolio. The managers Investment Objectives and Guidelines, which are a part of each managers Investment Management Agreement, document performance expectations and each managers role in the portfolio. The Administrative Committee uses the Investment Objectives and Guidelines to establish, guide, control and measure the strategy and performance for each manager.
The purpose of investment manager guidelines is to:
|
Establish the investment objective and performance standards for each manager, |
|
Provide the manager with the capability to evaluate the risks of all financial instruments or other assets in which the managers account is invested, and |
|
Prevent the manager from exposing its account to excessive levels of risk, undesired or inappropriate risk, or disproportionate concentration of risk. |
The guidelines also indicate which investments and strategies the manager is permitted to use to achieve its performance objectives, and which investments and strategies it is prohibited from using.
Where investment strategies permit the use of derivatives and/or currency management, language is incorporated in the managers guidelines to define allowable and prohibited transactions and/or strategies. Derivatives are typically employed by investment managers to modify risk/return characteristics of their portfolio(s), implement asset allocation changes in a cost-effective manner, or reduce transaction costs. Under the managers investment guidelines, derivatives may not be used solely for speculation or leverage. Derivatives are to be used only in circumstances where they offer the most efficient economic means of improving the risk/reward profile of the portfolio.
BlackRock receives compensation for providing investment management services. The Asset Management Group business segment also receives compensation for payor-related services. Compensation for such services is paid by PNC and was not significant for 2014, 2013 or 2012. Non-affiliate service providers for the Trust are compensated from Plan assets.
Fair Value Measurements
As further described in Note 7 Fair Value, GAAP establishes the framework for measuring fair value, including a hierarchy used to classify the inputs used in measuring fair value.
A description of the valuation methodologies used for assets measured at fair value at both December 31, 2014 and December 31, 2013 follows:
|
Money market and mutual funds are valued at the net asset value of the shares held by the pension plan at year end. |
|
U.S. government and agency securities, corporate debt, common stock and preferred stock are valued at the closing price reported on the active market on which the individual securities are traded. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Such securities are generally classified within Level 2 of the valuation hierarchy but may be a Level 3 depending on the level of liquidity and activity in the market for the security. |
|
The collective trust fund investments are valued based upon the units of such collective trust fund held by the Plan at year end multiplied by the respective unit value. The unit value of the collective trust fund is based upon significant observable inputs, although it is not based upon quoted marked prices in an active market. The underlying investments of the collective trust funds consist primarily of equity |
The PNC Financial Services Group, Inc. Form 10-K 179 |
securities, debt obligations, short-term investments, and other marketable securities. Due to the nature of these securities, there are no unfunded commitments or redemption restrictions. |
|
Limited partnerships are valued by investment managers based on recent financial information used to estimate fair value. Other investments held by the pension plan include derivative financial instruments and real estate, which are recorded at estimated fair value as determined by third-party appraisals and pricing models, and group annuity contracts, which are measured at fair value by discounting the related cash flows based on current yields of similar instruments with comparable durations considering the credit-worthiness of the issuer. |
These methods may result in fair value calculations that may not be indicative of net realizable values or future fair values. Furthermore, while the pension plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table sets forth by level, within the fair value hierarchy, the Plans assets at fair value as of December 31, 2014 and 2013.
Table 111: Pension Plan Assets Fair Value Hierarchy
(a) | Corporate debt includes $63 million and $84 million of non-agency mortgage-backed securities as of December 31, 2014 and 2013, respectively. |
(b) | The benefit plans own commingled funds that invest in equity securities. The funds seek to mirror the benchmark of the S&P 500 Index, Morgan Stanley Capital International ACWI X US Index, Morgan Stanley Capital EAFE Index, Morgan Stanley Capital Emerging Markets Index and the NCREIF ODCE NOF Index with the exception of the BlackRock Index Fund. |
(c) | The benefit plans own commingled funds that invest in equity and fixed income securities. The funds seek to mirror the performance of the S&P 500 Index, Russell 3000 Index, Morgan Stanley Capital International ACWI X US Index and the Dow Jones U.S. Select Real Estate Securities Index. The commingled fund that holds fixed income securities invests in domestic investment grade securities and seeks to mimic the performance of the Barclays Aggregate Bond Index. |
180 The PNC Financial Services Group, Inc. Form 10-K |
The following summarizes changes in the fair value of the pension plans Level 3 assets during 2014 and 2013.
Table 112: Rollforward of Pension Plan Level 3 Assets
In millions |
Interest in
Collective Funds |
Corporate
Debt |
Limited
Partnerships |
|||||||||
January 1, 2014 |
$ | 98 | $ | 13 | $ | 182 | ||||||
Net realized gain/(loss) on sale of investments |
3 | 3 | 48 | |||||||||
Net unrealized gain/(loss) on assets held at end of year |
4 | 58 | ||||||||||
Purchases |
5 | 92 | ||||||||||
Sales |
(1 | ) | (6 | ) | (108 | ) | ||||||
December 31, 2014 |
$ | 109 | $ | 10 | $ | 272 |
In millions |
Interest in
Collective Funds |
Corporate
Debt |
Limited
Partnerships |
|||||||||
January 1, 2013 |
$ | 88 | $ | 22 | $ | 127 | ||||||
Net realized gain/(loss) on sale of investments |
7 | 7 | 10 | |||||||||
Net unrealized gain/(loss) on assets held at end of year |
3 | (1 | ) | 21 | ||||||||
Purchases |
87 | 40 | 48 | |||||||||
Sales |
(87 | ) | (55 | ) | (24 | ) | ||||||
December 31, 2013 |
$ | 98 | $ | 13 | $ | 182 |
The following table provides information regarding our estimated future cash flows related to our various plans.
Table 113: Estimated Cash Flows
Postretirement Benefits | ||||||||||||||||
In millions |
Qualified
Pension |
Nonqualified
Pension |
Gross PNC
Benefit Payments |
Reduction in PNC
Benefit Payments Due to Medicare Part D Subsidy |
||||||||||||
Estimated 2015 employer contributions |
$ | 200 | $ | 31 | $ | 200 | $ | 2 | ||||||||
Estimated future benefit payments |
||||||||||||||||
2015 |
$ | 259 | $ | 31 | $ | 27 | $ | 2 | ||||||||
2016 |
265 | 29 | 28 | 2 | ||||||||||||
2017 |
277 | 27 | 29 | 2 | ||||||||||||
2018 |
281 | 27 | 30 | 2 | ||||||||||||
2019 |
282 | 25 | 30 | 2 | ||||||||||||
2020-2024 |
1,474 | 112 | 141 | 7 |
The qualified pension plan contributions are deposited into the Trust, and the qualified pension plan benefit payments are paid from the Trust. In February 2015, PNC made a $200 million voluntary contribution to the Trust. Notwithstanding the contribution, we do not expect to be required to make a contribution to the qualified plan for 2015 based on the funding calculations under the Pension Protection Act of 2006. For the other plans, total contributions and the benefit payments are the same and represent expected benefit amounts, which are paid from general assets. Postretirement benefits are net of participant contributions. If PNC decides to fund, or partially fund, postretirement medical benefits in the future, as is its current intention, this will also be reflected in estimated cash flows at that time.
The PNC Financial Services Group, Inc. Form 10-K 181 |
The components of net periodic benefit cost/(income) and other amounts recognized in Other comprehensive income (OCI) were as follows.
Table 114: Components of Net Periodic Benefit Cost
Qualified Pension Plan | Nonqualified Pension Plan |
Postretirement
Benefits |
||||||||||||||||||||||||||||||||||
Year ended December 31 in millions | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||
Net periodic cost consists of: |
||||||||||||||||||||||||||||||||||||
Service cost |
$ | 103 | $ | 113 | $ | 101 | $ | 3 | $ | 3 | $ | 4 | $ | 5 | $ | 6 | $ | 5 | ||||||||||||||||||
Interest cost |
187 | 170 | 191 | 12 | 12 | 14 | 16 | 14 | 16 | |||||||||||||||||||||||||||
Expected return on plan assets |
(289 | ) | (288 | ) | (284 | ) | ||||||||||||||||||||||||||||||
Amortization of prior service cost/(credit) |
(8 | ) | (8 | ) | (8 | ) | (2 | ) | (3 | ) | (3 | ) | ||||||||||||||||||||||||
Amortization of actuarial (gain)/loss |
87 | 89 | 4 | 8 | 6 | (1 | ) | |||||||||||||||||||||||||||||
Settlement (gain)/loss |
7 | 1 | ||||||||||||||||||||||||||||||||||
Net periodic cost (benefit) |
(7 | ) | 74 | 89 | 19 | 30 | 24 | 19 | 18 | 17 | ||||||||||||||||||||||||||
Other changes in plan assets and benefit obligations recognized in Other comprehensive income: |
||||||||||||||||||||||||||||||||||||
Current year prior service cost/(credit) |
(7 | ) | ||||||||||||||||||||||||||||||||||
Amortization of prior service (cost)/credit |
8 | 8 | 8 | 2 | 3 | 3 | ||||||||||||||||||||||||||||||
Current year actuarial loss/(gain) |
434 | (784 | ) | 112 | 40 | (26 | ) | 27 | 4 | (9 | ) | (18 | ) | |||||||||||||||||||||||
Amortization of actuarial gain/(loss) |
(87 | ) | (89 | ) | (4 | ) | (15 | ) | (6 | ) | (1 | ) | ||||||||||||||||||||||||
Total recognized in OCI |
435 | (863 | ) | 31 | 36 | (41 | ) | 21 | 6 | (7 | ) | (15 | ) | |||||||||||||||||||||||
Total recognized in net periodic cost and OCI |
$ | 428 | $ | (789 | ) | $ | 120 | $ | 55 | $ | (11 | ) | $ | 45 | $ | 25 | $ | 11 | $ | 2 |
The weighted-average assumptions used (as of the beginning of each year) to determine the net periodic costs shown above were as follows.
Table 115: Net Periodic Costs Assumptions
Net Periodic Cost Determination | ||||||||||||
Year ended December 31 | 2014 | 2013 | 2012 | |||||||||
Discount rate |
||||||||||||
Qualified pension |
4.75 | % | 3.80 | % | 4.60 | % | ||||||
Nonqualified pension |
4.35 | 3.45 | 4.20 | |||||||||
Postretirement benefits |
4.50 | 3.60 | 4.40 | |||||||||
Rate of compensation increase (average) |
4.00 | 4.00 | 4.00 | |||||||||
Assumed health care cost trend rate |
||||||||||||
Initial trend |
7.75 | 8.00 | 8.00 | |||||||||
Ultimate trend |
5.00 | 5.00 | 5.00 | |||||||||
Year ultimate reached |
2025 | 2019 | 2019 | |||||||||
Expected long-term return on plan assets |
7.00 | 7.50 | 7.75 |
The weighted-average assumptions used (as of the end of each year) to determine year end obligations for pension and postretirement benefits were as follows.
Table 116: Other Pension Assumptions
Year ended December 31 | 2014 | 2013 | ||||||
Discount rate |
||||||||
Qualified pension |
3.95 | % | 4.75 | % | ||||
Nonqualified pension |
3.65 | 4.35 | ||||||
Postretirement benefits |
3.80 | 4.50 | ||||||
Rate of compensation increase (average) |
4.00 | 4.00 | ||||||
Assumed health care cost trend rate |
||||||||
Initial trend |
7.50 | 7.75 | ||||||
Ultimate trend |
5.00 | 5.00 | ||||||
Year ultimate reached |
2025 | 2025 |
The discount rates are determined independently for each plan by comparing the expected future benefits that will be paid under each plan with yields available on high quality corporate bonds of similar duration. For this analysis, 10% of bonds with the highest yields and 40% with the lowest yields were removed from the bond universe.
The expected return on plan assets is a long-term assumption established by considering historical and anticipated returns of the asset classes invested in by the pension plan and the allocation strategy currently in place among those classes. We review this assumption at each measurement date and adjust it if warranted. This assumption will be changed from 7.00% to 6.75% for determining 2015 net periodic cost.
182 The PNC Financial Services Group, Inc. Form 10-K |
The health care cost trend rate assumptions shown in the preceding tables relate only to the postretirement benefit plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects.
Table 117: Effect of One Percent Change in Assumed Health Care Cost
Year ended December 31, 2014 In millions |
Increase | Decrease | ||||||
Effect on year end benefit obligation |
$ | 12 | (10 | ) |
Unamortized actuarial gains and losses and prior service costs and credits are recognized in AOCI each December 31, with amortization of these amounts through net periodic benefit cost. The estimated amounts that will be amortized in 2015 are as follows.
Table 118: Estimated Amortization of Unamortized Actuarial Gains and Losses 2015
Year ended December 31 | 2015 Estimate | |||||||||||
Qualified Pension |
Nonqualified Pension |
Postretirement Benefits |
||||||||||
In millions | ||||||||||||
Prior service (credit) |
$ | (9 | ) | $ | (1 | ) | ||||||
Net actuarial loss |
29 | $ | 8 | |||||||||
Total |
$ | 20 | $ | 8 | $ | (1 | ) |
PNC has historically utilized a version of the Society of Actuaries (SOA) published mortality tables in developing its best estimate of mortality. On October 27, 2014, the SOA published updated mortality tables and an updated mortality improvement scale, which both reflect longer life expectancy. Based on an evaluation of the mortality experience of PNCs qualified pension plan and the updated SOA study, PNC adopted an adjusted version of the SOAs new mortality table and improvement scale for purposes of measuring pension and other postretirement benefit obligations at year-end 2014. The change to the mortality assumption increased the total year-end obligations by approximately $145 million.
Defined Contribution Plans
Our PNC Incentive Savings Plan (ISP) is a qualified defined contribution plan that covers all eligible PNC employees. Employees hired prior to January 1, 2010 became 100% vested immediately, while employees hired on or after January 1, 2010 become 100% vested after three years of service. Employee benefits expense related to the ISP was $108 million in 2014, $120 million in 2013 and $111 million in 2012, representing cash contributed to the ISP by PNC.
Under the ISP, employee contributions up to 4% of eligible compensation as defined by the ISP are matched 100%, subject to IRS Code limitations. PNC will contribute a minimum matching contribution of $2,000 annually for employees who contribute at least 4% of eligible compensation every pay period he or she is eligible during the year. This amount is prorated for certain employees, including part-time employees and those who are eligible for the company match for less than a full year. Additionally, PNC makes an annual true-up matching contribution to ensure that eligible participants receive the full company match available. Effective January 1, 2012, in the case of both the minimum and true-up matching contributions, eligible employees must remain employed on the last day of the applicable plan year in order to receive the contribution. Minimum matching contributions made with respect to the 2014 and 2013 plan years are immediately 100% vested. Effective January 1, 2015, newly-hired full-time employees and part-time employees who become eligible to participate in the ISP after that date will be automatically enrolled in the ISP with a deferral rate equal to 4% of eligible compensation in the absence of an affirmative election otherwise.
The ISP is a 401(k) Plan and includes an employee stock ownership (ESOP) feature. Employee contributions are invested in a number of investment options, including pre mixed portfolios and individual core funds, available under the ISP at the direction of the employee. Although employees were also historically permitted to direct the investment of their contributions into the PNC common stock fund, this fund was frozen to future investments of such contributions effective January 1, 2010. All shares of PNC common stock held by the ISP are part of the ESOP. Effective January 1, 2011, employer matching contributions were made in cash.
We also maintain a nonqualified supplemental savings plan for certain employees, known as The PNC Financial Services Group, Inc. Supplemental Incentive Savings Plan. Effective January 1, 2012, the Supplemental Incentive Savings Plan was frozen to new participants and for any deferrals of amounts earned on or after such date. It was replaced by a new plan called The PNC Financial Services Group, Inc. Deferred Compensation and Incentive Plan.
The PNC Financial Services Group, Inc. Form 10-K 183 |
N OTE 14 S TOCK B ASED C OMPENSATION P LANS
We have long-term incentive award plans (Incentive Plans) that provide for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, incentive shares/performance units, restricted stock, restricted share units, other share-based awards and dollar-denominated awards to executives and, other than incentive stock options, to non-employee directors. Certain Incentive Plan awards may be paid in stock, cash or a combination of stock and cash. We typically grant a substantial portion of our stock-based compensation awards during the first quarter of the year. As of December 31, 2014, no stock appreciation rights were outstanding.
Total compensation expense recognized related to all share-based payment arrangements during 2014, 2013 and 2012 was approximately $181 million, $154 million and $101 million, respectively. The total tax benefit recognized related to compensation expense on all share-based payment arrangements during 2014, 2013 and 2012 was approximately $66 million, $56 million and $37 million, respectively. At December 31, 2014, there was $153 million of unamortized share-based compensation expense related to nonvested equity compensation arrangements granted under the Incentive Plans. This unamortized cost is expected to be recognized as expense over a period of no longer than five years.
Nonqualified Stock Options
Beginning in 2014, PNC discontinued the use of stock options as a standard element of our long-term equity incentive compensation programs under our Incentive Plans and did not grant any options in 2014. Prior to 2014, options were granted at exercise prices not less than the market value of common stock on the grant date. Generally, options become exercisable in installments after the grant date. No option may be exercisable after 10 years from its grant date. Payment of the option exercise
price may be in cash or by surrendering shares of common stock at market value on the exercise date. The exercise price may also be paid by using previously owned shares.
Option Pricing Assumptions
For purposes of computing stock option expense for grants made in 2013 and 2012, we estimated the fair value of stock options at the grant date primarily by using the Black-Scholes option-pricing model. Option pricing models require the use of numerous assumptions, many of which are subjective.
We used the following assumptions in the option pricing models to determine 2013 and 2012 grant date fair value:
|
The risk-free interest rate is based on the U.S. Treasury yield curve, |
|
The dividend yield typically represents average yields over the previous three-year period, however starting with the grants made after the first quarter of 2009, we used a yield indicative of our current dividend rate, |
|
Volatility is measured using the fluctuation in month-end closing stock prices over a period which corresponds with the average expected option life, but in no case less than a five-year period, and |
|
The expected life assumption represents the period of time that options granted are expected to be outstanding and is based on a weighted-average of historical option activity. |
Table 119: Option Pricing Assumptions (a)
Weighted-average for the year ended December 31 |
2013 | 2012 | ||||||
Risk-free interest rate |
.9 | % | 1.1 | % | ||||
Dividend yield |
2.5 | 2.3 | ||||||
Volatility |
34.0 | 35.1 | ||||||
Expected life |
6.5yrs. | 5.9yrs. | ||||||
Grant date fair value |
$ | 16.35 | $ | 16.22 |
(a) | PNC did not grant any stock options in 2014. |
There were no options granted in 2013 and 2012 where the grant date fair value exceeded the market value.
PNC |
PNC Options
Converted From National City |
Total |
||||||||||||||||||||||||||||||
Year ended December 31, 2014 In thousands, except weighted-average data |
Shares |
Weighted-
Average Exercise Price |
Shares |
Weighted-
Average Exercise Price |
Shares |
Weighted-
Average Exercise Price |
Weighted-
Average Remaining Contractual Life |
Aggregate
Intrinsic Value |
||||||||||||||||||||||||
Outstanding, January 1 |
10,354 | $ | 57.57 | 544 | $ | 662.28 | 10,898 | $ | 87.75 | |||||||||||||||||||||||
Granted (a) |
||||||||||||||||||||||||||||||||
Exercised |
(3,589 | ) | 59.80 | (3,589 | ) | 59.80 | ||||||||||||||||||||||||||
Cancelled |
(64 | ) | 53.42 | (201 | ) | 793.93 | (265 | ) | 615.70 | |||||||||||||||||||||||
Outstanding, December 31 |
6,701 | $ | 56.41 | 343 | $ | 585.23 | 7,044 | $ | 82.17 | 3.9 years | $ | 233,345 | ||||||||||||||||||||
Vested and expected to vest, December 31 (b) |
6,699 | $ | 56.41 | 343 | $ | 585.23 | 7,042 | $ | 82.18 | 3.9 years | $ | 233,277 | ||||||||||||||||||||
Exercisable, December 31 |
6,467 | $ | 56.21 | 343 | $ | 585.23 | 6,810 | $ | 82.86 | 3.8 years | $ | 226,506 |
(a) | PNC did not grant any stock options in 2014. |
(b) | Adjusted for estimated forfeitures on unvested options. |
184 The PNC Financial Services Group, Inc. Form 10-K |
To determine stock-based compensation expense, the grant date fair value is applied to the options granted with a reduction for estimated forfeitures. We recognize compensation expense for stock options on a straight-line basis over the specified vesting period.
At December 31, 2013 and 2012, options for 10,204,000 and 12,759,000 shares of common stock were exercisable at a weighted-average price of $89.46 and $90.86, respectively. The total intrinsic value of options exercised during 2014, 2013 and 2012 was $90 million, $86 million and $37 million, respectively.
Cash received from option exercises under all Incentive Plans for 2014, 2013 and 2012 was approximately $215 million, $208 million and $118 million, respectively. The tax benefit realized from option exercises under all Incentive Plans for 2014, 2013 and 2012 was approximately $33 million, $31 million and $14 million, respectively.
Shares of common stock available during the next year for the granting of options and other awards under the Incentive Plans were 17,997,353 at December 31, 2014. Total shares of PNC common stock authorized for future issuance under equity compensation plans totaled 19,017,057 shares at December 31, 2014, which includes shares available for issuance under the Incentive Plans and the Employee Stock Purchase Plan (ESPP) as described below.
During 2014, we issued approximately 2.4 million shares from treasury stock in connection with stock option exercise activity. As with past exercise activity, we currently intend to utilize primarily treasury stock for any future stock option exercises.
Awards granted to non-employee directors in 2014, 2013 and 2012 include 21,490, 27,076 and 25,620 deferred stock units, respectively, awarded under the Outside Directors Deferred Stock Unit Plan. A deferred stock unit is a phantom share of our common stock, which is accounted for as a liability until such awards are paid to the participants in cash. As there are no vesting or service requirements on these awards, total compensation expense is recognized in full for these awards on the date of grant.
Incentive/Performance Unit Share Awards and Restricted Stock/Share Unit Awards
The fair value of nonvested incentive/performance unit share awards and restricted stock/share unit awards is initially determined based on prices not less than the market value of our common stock on the date of grant. The value of certain incentive/performance unit share awards is subsequently remeasured based on the achievement of one or more financial and other performance goals. The Personnel and Compensation Committee (P&CC) of the Board of Directors approves the final award payout with respect to certain incentive/performance unit share awards. These awards have either a three-year or a four-year performance period and are payable in either stock or a combination of stock and cash. Restricted stock/share unit awards have various vesting periods generally ranging from 3 years to 5 years.
Beginning in 2013, we incorporated several enhanced risk-related performance changes to certain long-term incentive compensation programs. In addition to achieving certain financial performance metrics on both an absolute basis and relative to our peers, final payout amounts will be subject to reduction if PNC fails to meet certain risk-related performance metrics as specified in the award agreements. However, the P&CC has the discretion to waive any or all of this reduction under certain circumstances.
The weighted-average grant date fair value of incentive/performance unit share awards and restricted stock/unit awards granted in 2014, 2013 and 2012 was $80.79, $64.77 and $60.68 per share, respectively. The total fair value of incentive/performance unit share and restricted stock/unit awards vested during 2014, 2013 and 2012 was approximately $119 million, $63 million and $55 million, respectively. We recognize compensation expense for such awards ratably over the corresponding vesting and/or performance periods for each type of program.
Table 121: Nonvested Incentive/Performance Unit Share Awards and Restricted Stock/Share Unit Awards Rollforward
Shares in thousands |
Nonvested
Incentive/ Performance Unit Shares |
Weighted-
Average Grant Date Fair Value |
Nonvested
Restricted Stock/ Share Units |
Weighted-
Average Grant Date Fair Value |
||||||||||||
December 31, 2013 |
1,647 | $ | 63.49 | 3,483 | $ | 62.70 | ||||||||||
Granted |
723 | 79.90 | 1,276 | 81.29 | ||||||||||||
Vested/Released |
(513 | ) | 63.64 | (962 | ) | 62.32 | ||||||||||
Forfeited |
(20 | ) | 69.18 | (145 | ) | 69.44 | ||||||||||
December 31, 2014 |
1,837 | $ | 69.84 | 3,652 | $ | 69.03 |
The PNC Financial Services Group, Inc. Form 10-K 185 |
In the preceding table, the unit shares and related weighted-average grant date fair value of the incentive/performance awards exclude the effect of dividends on the underlying shares, as those dividends will be paid in cash if and when the underlying unit shares are released to the participants.
Liability Awards
A summary of all nonvested, cash-payable incentive/performance units and restricted share unit activity follows:
Table 122: Nonvested Cash-Payable Incentive/Performance Units and Restricted Share Units Rollforward
In thousands |
Cash-Payable
Incentive/ Performance Units |
Cash-Payable
Restricted Share Units |
Total | |||||||||
Outstanding at December 31, 2013 |
116 | 825 | 941 | |||||||||
Granted |
100 | 269 | 369 | |||||||||
Vested and Released |
(39 | ) | (425 | ) | (464 | ) | ||||||
Forfeited |
(11 | ) | (11 | ) | ||||||||
Outstanding at December 31, 2014 |
177 | 658 | 835 |
Included in the preceding table are cash-payable restricted share units granted to certain executives. These grants were made primarily as part of an annual bonus incentive deferral plan. While there are time-based and other vesting criteria, there are generally no market or performance criteria associated with these awards. Compensation expense recognized related to these awards was recorded in prior periods as part of the annual cash bonus process. As of December 31, 2014, the aggregate intrinsic value of all outstanding nonvested cash-payable incentive/performance units and restricted share units was $76 million.
The total of all share-based liability awards paid out during 2014, 2013 and 2012 was approximately $38 million, $29 million and $39 million, respectively.
Employee Stock Purchase Plan
As of December 31, 2014, our ESPP had approximately 1 million shares available for issuance. Full-time employees with six months and part-time employees with 12 months of continuous employment with a participating PNC entity are eligible to participate in the ESPP at the commencement of the next six-month offering period. Eligible participants may purchase our common stock at 95% of the fair market value on the last day of each six-month offering period. No charge to earnings is recorded with respect to the ESPP.
Table 123: Employee Stock Purchase Plan Summary
Year ended December 31 | Shares Issued | Purchase Price Per Share | ||||||
2014 |
157,856 | $ | 84.60 and $86.67 | |||||
2013 |
167,260 | $ | 69.27 and $73.70 | |||||
2012 |
183,892 | $ | 58.05 and $55.39 |
BlackRock LTIP and Exchange Agreements
BlackRock adopted the 2002 LTIP program to help attract and retain qualified professionals. At that time, PNC agreed to transfer up to 4 million shares of BlackRock common stock to fund a portion of the 2002 LTIP program and future LTIP programs approved by BlackRocks Board of Directors, subject to certain conditions and limitations. Approximately 1.1 million shares of BlackRock common stock were transferred by PNC and distributed to LTIP participants in connection with the 2002 LTIP program.
In 2009, PNCs obligation to deliver its BlackRock common shares to BlackRock under LTIP programs was replaced with an obligation to deliver shares of BlackRocks Series C Preferred Stock. This change was part of an Exchange Agreement with BlackRock whereby PNC acquired 2.9 million shares of Series C Preferred Stock from BlackRock in exchange for common shares.
In 2011, we transferred approximately 1.3 million shares of BlackRock Series C Preferred Stock to BlackRock in connection with our obligation. On January 31, 2013, we transferred an additional .2 million shares to BlackRock. After this transfer and at December 31, 2014, we hold approximately 1.3 million shares of BlackRock Series C Preferred Stock which are available to fund our obligation in connection with the BlackRock LTIP programs.
PNC accounts for its BlackRock Series C Preferred Stock at fair value, which offsets the impact of marking-to-market the obligation to deliver these shares to BlackRock. The fair value of the BlackRock Series C Preferred Stock is included on our Consolidated Balance Sheet in the caption Other assets. Additional information regarding the valuation of the BlackRock Series C Preferred Stock is included in Note 7 Fair Value.
186 The PNC Financial Services Group, Inc. Form 10-K |
N OTE 15 F INANCIAL D ERIVATIVES
We use derivative financial instruments (derivatives) primarily to help manage exposure to interest rate, market and credit risk and reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. We also enter into derivatives with customers to facilitate their risk management activities.
Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract. Derivative transactions are often measured in terms of notional amount, but this amount is generally not exchanged and it is not recorded on the balance sheet. The notional amount is the basis to which the underlying is applied to determine required payments under the derivative contract. The underlying is a referenced interest rate (commonly LIBOR), security price, credit spread or other index. Residential and commercial real estate loan commitments associated with loans to be sold also qualify as derivative instruments.
The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by PNC:
Table 124: Total Gross Derivatives
December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
In millions |
Notional/
Contract Amount |
Asset
Fair Value (a) |
Liability
Fair Value (b) |
Notional/
Contract Amount |
Asset
Fair Value (a) |
Liability
Fair Value (b) |
||||||||||||||||||
Derivatives designated as hedging instruments under GAAP |
$ | 49,061 | $ | 1,261 | $ | 186 | $ | 36,197 | $ | 1,189 | $ | 364 | ||||||||||||
Derivatives not designated as hedging instruments under GAAP |
291,256 | 3,973 | 3,841 | 345,059 | 3,604 | 3,570 | ||||||||||||||||||
Total gross derivatives |
$ | 340,317 | $ | 5,234 | $ | 4,027 | $ | 381,256 | $ | 4,793 | $ | 3,934 |
(a) | Included in Other assets on our Consolidated Balance Sheet. |
(b) | Included in Other liabilities on our Consolidated Balance Sheet. |
All derivatives are carried on our Consolidated Balance Sheet at fair value. Derivative balances are presented on the Consolidated Balance Sheet on a net basis taking into consideration the effects of legally enforceable master netting agreements and any related cash collateral exchanged with counterparties. Further discussion regarding the rights of setoff associated with these legally enforceable master netting agreements is included in the Offsetting, Counterparty Credit Risk, and Contingent Features section below. Our exposure related to risk participations where we sold protection is discussed in the Credit Derivatives section below. Any nonperformance risk, including credit risk, is included in the determination of the estimated net fair value of the derivatives.
Further discussion on how derivatives are accounted for is included in Note 1 Accounting Policies.
Derivatives Designated As Hedging Instruments under GAAP
Certain derivatives used to manage interest rate and foreign exchange risk as part of our asset and liability risk management activities are designated as accounting hedges under GAAP. Derivatives hedging the risks associated with changes in the fair value of assets or liabilities are considered fair value hedges, derivatives hedging the variability of expected future cash flows are considered cash flow hedges, and derivatives hedging a net investment in a foreign subsidiary are considered net investment hedges. Designating derivatives as accounting hedges allows for gains and losses on those derivatives, to the extent effective, to be recognized in the income statement in the same period the hedged items affect earnings.
The PNC Financial Services Group, Inc. Form 10-K 187 |
Further detail regarding the notional amounts and fair values related to derivatives designated in hedge relationships is presented in the following table:
Table 125: Derivatives Designated As Hedging Instruments under GAAP
In millions | December 31, 2014 | December 31, 2013 | ||||||||||||||||||||||
Notional/
Amount |
Asset
Fair Value (a) |
Liability
Fair Value (b) |
Notional/
Contract Amount |
Asset
Fair Value (a) |
Liability
Fair Value (b) |
|||||||||||||||||||
Interest rate contracts: |
||||||||||||||||||||||||
Fair value hedges: |
||||||||||||||||||||||||
Receive-fixed swaps |
$ | 20,930 | $ | 827 | $ | 38 | $ | 16,446 | $ | 871 | $ | 230 | ||||||||||||
Pay-fixed swaps (c) |
4,233 | 3 | 138 | 4,076 | 54 | 66 | ||||||||||||||||||
Subtotal |
$ | 25,163 | $ | 830 | $ | 176 | $ | 20,522 | $ | 925 | $ | 296 | ||||||||||||
Cash flow hedges: |
||||||||||||||||||||||||
Receive-fixed swaps |
$ | 19,991 | $ | 400 | $ | 10 | $ | 14,737 | $ | 264 | $ | 58 | ||||||||||||
Forward purchase commitments |
2,778 | 25 | ||||||||||||||||||||||
Subtotal |
$ | 22,769 | $ | 425 | $ | 10 | $ | 14,737 | $ | 264 | $ | 58 | ||||||||||||
Foreign exchange contracts: |
||||||||||||||||||||||||
Net investment hedges |
1,129 | 6 | 938 | 10 | ||||||||||||||||||||
Total derivatives designated as hedging instruments |
$ | 49,061 | $ | 1,261 | $ | 186 | $ | 36,197 | $ | 1,189 | $ | 364 |
(a) | Included in Other assets on our Consolidated Balance Sheet. |
(b) | Included in Other liabilities on our Consolidated Balance Sheet. |
(c) | Includes zero-coupon swaps. |
Fair Value Hedges
We enter into receive-fixed, pay-variable interest rate swaps to hedge changes in the fair value of outstanding fixed-rate debt and borrowings caused by fluctuations in market interest rates. We also enter into pay-fixed, receive-variable interest rate swaps and zero-coupon swaps to hedge changes in the fair value of fixed rate and zero-coupon investment securities caused by fluctuations in market interest rates. For these hedge relationships, we use statistical regression analysis to assess hedge effectiveness at both the inception of the hedge relationship and on an ongoing basis. There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness.
Further detail regarding gains (losses) on fair value hedge derivatives and related hedged items is presented in the following table:
Table 126: Gains (Losses) on Derivatives and Related Hedged Items Fair Value Hedges
Year ended | ||||||||||||||||||||||||||||
December 31, 2014 | December 31, 2013 | December 31, 2012 | ||||||||||||||||||||||||||
Gain
(Loss) on Derivatives Recognized in Income |
Gain
(Loss) on Related Hedged Items Recognized in Income |
Gain
(Loss) on Derivatives Recognized in Income |
Gain
(Loss) on Related Hedged Items Recognized in Income |
Gain
(Loss) on Derivatives Recognized in Income |
Gain
(Loss) on Related Hedged Items Recognized in Income |
|||||||||||||||||||||||
In millions | Hedged Items | Location | Amount | Amount | Amount | Amount | Amount | Amount | ||||||||||||||||||||
Interest rate contracts |
U.S. Treasury and Government Agencies Securities | Investment securities (interest income) | $ | (111 | ) | $ | 116 | $ | 102 | $ | (107 | ) | $ | (26 | ) | $ | 23 | |||||||||||
Interest rate contracts |
Other Debt Securities | Investment securities (interest income) | 9 | (8 | ) | (1 | ) | 1 | ||||||||||||||||||||
Interest rate contracts |
Subordinated debt | Borrowed funds (interest expense) | 78 | (106 | ) | (393 | ) | 368 | (30 | ) | (9 | ) | ||||||||||||||||
Interest rate contracts |
Bank notes and senior debt | Borrowed funds (interest expense) | 45 | (52 | ) | (351 | ) | 343 | 68 | (80 | ) | |||||||||||||||||
Total (a) |
$ | 12 | $ | (42 | ) | $ | (633 | ) | $ | 596 | $ | 11 | $ | (65 | ) |
(a) | The ineffective portion of the change in value of our fair value hedge derivatives resulted in net losses of $30 million for 2014 compared with net losses of $37 million for 2013 and net losses of $54 million for 2012. |
188 The PNC Financial Services Group, Inc. Form 10-K |
Cash Flow Hedges
We enter into receive-fixed, pay-variable interest rate swaps to modify the interest rate characteristics of designated commercial loans from variable to fixed in order to reduce the impact of changes in future cash flows due to market interest rate changes. For these cash flow hedges, any changes in the fair value of the derivatives that are effective in offsetting changes in the forecasted interest cash flows are recorded in Accumulated other comprehensive income and are reclassified to interest income in conjunction with the recognition of interest received on the loans. In the 12 months that follow December 31, 2014, we expect to reclassify from the amount currently reported in Accumulated other comprehensive income, net derivative gains of $245 million pretax, or $159 million after-tax, in association with interest received on the hedged loans. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to December 31, 2014. The maximum length of time over which forecasted loan cash flows are hedged is 10 years. We use statistical regression analysis to assess the effectiveness of these hedge relationships at both the inception of the hedge relationship and on an ongoing basis.
We also periodically enter into forward purchase and sale contracts to hedge the variability of the consideration that will be paid or received related to the purchase or sale of investment securities. The forecasted purchase or sale is consummated upon gross settlement of the forward contract itself. As a result, hedge ineffectiveness, if any, is typically minimal. Gains and losses on these forward contracts are recorded in Accumulated other comprehensive income and are recognized in earnings when the hedged cash flows affect earnings. In the 12 months that follow December 31, 2014, we expect to reclassify from the amount currently reported in Accumulated other comprehensive income, net derivative gains of $26 million pretax, or $17 million after-tax, as adjustments of yield on investment securities. As of December 31, 2014, the maximum length of time over which forecasted purchase contracts are hedged is two months.
There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to either cash flow hedge strategy.
During 2014, 2013, and 2012, there were no gains or losses from cash flow hedge derivatives reclassified to earnings because it became probable that the original forecasted transaction would not occur.
Further detail regarding gains (losses) on derivatives and related cash flows is presented in the following table:
Table 127: Gains (Losses) on Derivatives and Related Cash Flows Cash Flow Hedges (a) (b)
Year ended December 31 |
||||||||||||
In millions | 2014 | 2013 | 2012 | |||||||||
Gains (losses) on derivatives recognized in OCI (effective portion) |
$ | 431 | $ | (141 | ) | $ | 312 | |||||
Less: Gains (losses) reclassified from accumulated OCI into income (effective portion) |
||||||||||||
Interest income |
263 | 337 | 456 | |||||||||
Noninterest income |
| 49 | 76 | |||||||||
Total gains (losses) reclassified from accumulated OCI into income (effective portion) |
263 | 386 | 532 | |||||||||
Net unrealized gains (losses) on cash flow hedge derivatives |
$ | 168 | $ | (527 | ) | $ | (220 | ) |
(a) | All cash flow hedge derivatives are interest rate contracts as of December 31, 2014, December 31, 2013 and December 31, 2012. |
(b) | The amount of cash flow hedge ineffectiveness recognized in income was not material for the periods presented. |
Net Investment Hedges
We enter into foreign currency forward contracts to hedge non-U.S. Dollar (USD) net investments in foreign subsidiaries against adverse changes in foreign exchange rates. We assess whether the hedging relationship is highly effective in achieving offsetting changes in the value of the hedge and hedged item by qualitatively verifying that the critical terms of the hedge and hedged item match at the inception of the hedging relationship and on an ongoing basis. There were no components of derivative gains or losses excluded from the assessment of the hedge effectiveness.
For 2014, 2013, and 2012, there was no net investment hedge ineffectiveness.
Further detail on gains (losses) on net investment hedge derivatives is presented in the following table:
Table 128: Gains (Losses) on Derivatives Net Investment Hedges
Year ended December 31 |
||||||||||||
In millions | 2014 | 2013 | 2012 | |||||||||
Gains (losses) on derivatives recognized in OCI (effective portion) |
||||||||||||
Foreign exchange contracts |
$ | 54 | $ | (21 | ) | $ | (27 | ) |
The PNC Financial Services Group, Inc. Form 10-K 189 |
Derivatives Not Designated As Hedging Instruments under GAAP
We also enter into derivatives that are not designated as accounting hedges under GAAP.
Further detail regarding the notional amounts and fair values related to derivatives not designated in hedge relationships is presented in the following table:
Table 129: Derivatives Not Designated As Hedging Instruments under GAAP
December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
In millions |
Notional/
Contract Amount |
Asset
Fair Value (a) |
Liability
Fair Value (b) |
Notional/
Contract Amount |
Asset
Fair Value (a) |
Liability
Fair Value (b) |
||||||||||||||||||
Derivatives used for residential mortgage banking activities: |
||||||||||||||||||||||||
Residential mortgage servicing |
||||||||||||||||||||||||
Interest rate contracts: |
||||||||||||||||||||||||
Swaps |
$ | 32,459 | $ | 777 | $ | 394 | $ | 37,424 | $ | 654 | $ | 360 | ||||||||||||
Swaptions |
1,498 | 29 | 22 | 845 | 18 | 18 | ||||||||||||||||||
Futures (c) |
22,084 | 49,250 | ||||||||||||||||||||||
Futures options |
12,225 | 4 | 24,000 | 10 | 2 | |||||||||||||||||||
Mortgage-backed securities commitments |
710 | 4 | 832 | 3 | ||||||||||||||||||||
Subtotal |
$ | 68,976 | $ | 814 | $ | 416 | $ | 112,351 | $ | 682 | $ | 383 | ||||||||||||
Loan sales |
||||||||||||||||||||||||
Interest rate contracts: |
||||||||||||||||||||||||
Futures (c) |
$ | 58 | $ | 350 | ||||||||||||||||||||
Bond options |
300 | 200 | $ | 1 | ||||||||||||||||||||
Mortgage-backed securities commitments |
4,916 | $ | 10 | $ | 21 | 5,173 | 26 | $ | 9 | |||||||||||||||
Residential mortgage loan commitments |
1,852 | 22 | 1,605 | 13 | ||||||||||||||||||||
Subtotal |
$ | 7,126 | $ | 32 | $ | 21 | $ | 7,328 | $ | 40 | $ | 9 | ||||||||||||
Subtotal |
$ | 76,102 | $ | 846 | $ | 437 | $ | 119,679 | $ | 722 | $ | 392 | ||||||||||||
Derivatives used for commercial mortgage banking activities: |
||||||||||||||||||||||||
Interest rate contracts: |
||||||||||||||||||||||||
Swaps |
$ | 3,801 | $ | 67 | $ | 48 | $ | 2,158 | $ | 23 | $ | 52 | ||||||||||||
Swaptions |
439 | 2 | 1 | 125 | 3 | |||||||||||||||||||
Futures (c) |
19,913 | 4,598 | ||||||||||||||||||||||
Futures options |
45,500 | 15 | 4 | |||||||||||||||||||||
Commercial mortgage loan commitments |
2,042 | 16 | 10 | 673 | 20 | 11 | ||||||||||||||||||
Subtotal |
$ | 26,195 | $ | 85 | $ | 59 | $ | 53,054 | $ | 58 | $ | 70 | ||||||||||||
Credit contracts: |
||||||||||||||||||||||||
Credit default swaps |
95 | 95 | ||||||||||||||||||||||
Subtotal |
$ | 26,290 | $ | 85 | $ | 59 | $ | 53,149 | $ | 58 | $ | 70 | ||||||||||||
Derivatives used for customer-related activities: |
||||||||||||||||||||||||
Interest rate contracts: |
||||||||||||||||||||||||
Swaps |
$ | 146,008 | $ | 2,632 | $ | 2,559 | $ | 134,408 | $ | 2,540 | $ | 2,445 | ||||||||||||
Caps/floors Sold |
4,846 | 16 | 4,789 | 11 | ||||||||||||||||||||
Caps/floors Purchased |
6,339 | 34 | 5,519 | 37 | ||||||||||||||||||||
Swaptions |
3,361 | 62 | 12 | 2,354 | 49 | 51 | ||||||||||||||||||
Futures (c) |
3,112 | 1,856 | ||||||||||||||||||||||
Mortgage-backed securities commitments |
2,137 | 3 | 3 | 1,515 | 4 | 3 | ||||||||||||||||||
Subtotal |
$ | 165,803 | $ | 2,731 | $ | 2,590 | $ | 150,441 | $ | 2,630 | $ | 2,510 | ||||||||||||
Foreign exchange contracts |
12,547 | 223 | 240 | 14,316 | 192 | 172 | ||||||||||||||||||
Credit contracts: |
||||||||||||||||||||||||
Risk participation agreements |
5,124 | 2 | 4 | 4,777 | 2 | 4 | ||||||||||||||||||
Subtotal |
$ | 183,474 | $ | 2,956 | $ | 2,834 | $ | 169,534 | $ | 2,824 | $ | 2,686 | ||||||||||||
Derivatives used for other risk management activities: |
||||||||||||||||||||||||
Interest rate contracts: |
||||||||||||||||||||||||
Swaps |
$ | 225 | $ | 511 | ||||||||||||||||||||
Futures (c) |
533 | 838 | ||||||||||||||||||||||
Mortgage-backed securities commitments |
75 | $ | 1 | |||||||||||||||||||||
Subtotal |
$ | 833 | $ | 1 | $ | 1,349 | ||||||||||||||||||
Foreign exchange contracts |
2,661 | 85 | $ | 1 | 8 | |||||||||||||||||||
Credit contracts: |
||||||||||||||||||||||||
Credit default swaps |
15 | |||||||||||||||||||||||
Other contracts (d) |
1,881 | 510 | 1,340 | $ | 422 | |||||||||||||||||||
Subtotal |
$ | 5,390 | $ | 86 | $ | 511 | $ | 2,697 | $ | 422 | ||||||||||||||
Total derivatives not designated as hedging instruments |
$ | 291,256 | $ | 3,973 | $ | 3,841 | $ | 345,059 | $ | 3,604 | $ | 3,570 |
190 The PNC Financial Services Group, Inc. Form 10-K |
(a) | Included in Other assets on our Consolidated Balance Sheet. |
(b) | Included in Other liabilities on our Consolidated Balance Sheet. |
(c) | Futures contracts settle in cash daily and, therefore, no derivative asset or derivative liability is recognized on our Consolidated Balance Sheet. |
(d) | Includes PNCs obligation to fund a portion of certain BlackRock LTIP programs and the swaps entered into in connection with sales of a portion of Visa Class B common shares. Refer to Note 7 Fair Value for additional information on the Visa swaps. |
Our residential mortgage banking activities consist of originating, selling and servicing mortgage loans. Residential mortgage loans that will be sold in the secondary market, and the related loan commitments, which are considered derivatives, are accounted for at fair value. Changes in the fair value of the loans and commitments due to interest rate risk are hedged with forward contracts to sell mortgage-backed securities, as well as U.S. Treasury and Eurodollar futures and options. Gains and losses on the loans and commitments held for sale and the derivatives used to economically hedge them are included in Residential mortgage noninterest income on the Consolidated Income Statement.
We typically retain the servicing rights related to residential mortgage loans that we sell. Residential mortgage servicing rights are accounted for at fair value with changes in fair value influenced primarily by changes in interest rates. Derivatives used to hedge the fair value of residential mortgage servicing rights include interest rate futures, swaps, options, and forward contracts to purchase mortgage-backed securities. Gains and losses on residential mortgage servicing rights and the related derivatives used for hedging are included in Residential mortgage noninterest income.
Commercial mortgage loans held for sale and the related loan commitments, which are considered derivatives, are accounted for at fair value. Derivatives used to economically hedge these loans and commitments from changes in fair value due to interest rate risk and credit risk include forward loan sale contracts, interest rate swaps, and credit default swaps. Gains and losses on the commitments, loans and derivatives are included in Other noninterest income. Derivatives used to economically hedge the change in value of commercial mortgage servicing rights include interest rate futures, swaps and options. Gains or losses on these derivatives are included in Corporate services noninterest income.
The residential and commercial mortgage loan commitments associated with loans to be sold which are accounted for as derivatives are valued based on the estimated fair value of the underlying loan and the probability that the loan will fund within the terms of the commitment. The fair value also takes into account the fair value of the embedded servicing right.
We offer derivatives to our customers in connection with their risk management needs. These derivatives primarily consist of interest rate swaps, interest rate caps, floors, swaptions and foreign exchange contracts. We primarily manage our market risk exposure from customer transactions by entering into a variety of hedging transactions with third-party dealers. Gains and losses on customer-related derivatives are included in Other noninterest income.
Included in the customer, mortgage banking risk management, and other risk management portfolios are written interest-rate caps and floors entered into with customers and for risk management purposes. We receive an upfront premium from the counterparty and are obligated to make payments to the counterparty if the underlying market interest rate rises above or falls below a certain level designated in the contract. Our ultimate obligation under written options is based on future market conditions.
The derivatives portfolio also includes derivatives used for other risk management activities. These derivatives are entered into based on stated risk management objectives and include credit default swaps (CDSs) used to mitigate the risk of economic loss on a portion of our loan exposure. We enter into credit default swaps under which we buy loss protection from or sell loss protection to a counterparty for the occurrence of a credit event related to a referenced entity or index. The fair values of these derivatives typically are based on related credit spreads. Gains and losses on the derivatives entered into for other risk management are included in Other noninterest income. CDSs are included in these derivative tables: Tables 129, 130, 131, 132 and 133.
The PNC Financial Services Group, Inc. Form 10-K 191 |
Further detail regarding the gains (losses) on derivatives not designated in hedging relationships is presented in the following table:
Table 130: Gains (Losses) on Derivatives Not Designated As Hedging Instruments under GAAP
Year ended December 31 | ||||||||||||
In millions | 2014 | 2013 | 2012 | |||||||||
Derivatives used for residential mortgage banking activities: |
||||||||||||
Residential mortgage servicing |
||||||||||||
Interest rate contracts |
$ | 240 | $ | (223 | ) | $ | 269 | |||||
Loan sales |
||||||||||||
Interest rate contracts |
(3 | ) | 286 | 127 | ||||||||
Gains (losses) included in residential mortgage banking activities (a) |
$ | 237 | $ | 63 | $ | 396 | ||||||
Derivatives used for commercial mortgage banking activities: |
||||||||||||
Interest rate contracts (b) (c) |
$ | 82 | $ | 12 | $ | 35 | ||||||
Credit contracts (c) |
(1 | ) | (2 | ) | (3 | ) | ||||||
Gains (losses) from commercial mortgage banking activities |
$ | 81 | $ | 10 | $ | 32 | ||||||
Derivatives used for customer-related activities: |
||||||||||||
Interest rate contracts |
$ | 41 | $ | 149 | $ | 106 | ||||||
Foreign exchange contracts |
47 | 80 | 83 | |||||||||
Equity contracts |
(3 | ) | (4 | ) | ||||||||
Credit contracts |
(1 | ) | (1 | ) | (3 | ) | ||||||
Gains (losses) from customer-related activities (c) |
$ | 87 | $ | 225 | $ | 182 | ||||||
Derivatives used for other risk management activities: |
||||||||||||
Interest rate contracts |
$ | (19 | ) | $ | 3 | $ | (11 | ) | ||||
Foreign exchange contracts |
188 | 2 | (2 | ) | ||||||||
Credit contracts |
(1 | ) | ||||||||||
Other contracts (d) |
(134 | ) | (168 | ) | (94 | ) | ||||||
Gains (losses) from other risk management activities (c) |
$ | 35 | $ | (163 | ) | $ | (108 | ) | ||||
Total gains (losses) from derivatives not designated as hedging instruments |
$ | 440 | $ | 135 | $ | 502 |
(a) | Included in Residential mortgage noninterest income. |
(b) | Included in Corporate services noninterest income. |
(c) | Included in Other noninterest income. |
(d) | Includes BlackRock LTIP funding obligation and the swaps entered into in connection with sales of a portion of Visa Class B common shares. |
Credit Derivatives
We enter into credit derivatives, specifically credit default swaps and risk participation agreements, as part of our commercial mortgage banking hedging activities and for customer and other risk management purposes. The credit derivative underlying is based on the credit risk of a specific entity, entities, or an index. Detail regarding credit default swaps purchased and risk participations sold follows.
Table 131: Credit Default Swaps (a)
December 31, 2014 | December 31, 2013 | |||||||||||||||
Dollars in millions |
Notional
Amount |
Weighted-
Average Remaining Maturity In Years |
Notional
Amount |
Weighted-
Average Remaining Maturity In Years |
||||||||||||
Credit Default Swaps Purchased (b) |
||||||||||||||||
Single name |
$ | 50 | 5.7 | $ | 35 | 7.3 | ||||||||||
Index traded |
60 | 34.2 | 60 | 35.2 | ||||||||||||
Total |
$ | 110 | 21.3 | $ | 95 | 24.9 |
(a) | There were no credit default swaps sold as of December 31, 2014 and December 31, 2013. |
(b) | The fair value of credit default swaps purchased was less than $1 million as of December 31, 2014 and December 31, 2013. |
192 The PNC Financial Services Group, Inc. Form 10-K |
The notional amount of these credit default swaps by credit rating is presented in the following table:
Table 132: Credit Ratings of Credit Default Swaps (a)
In millions |
December 31,
2014 |
December 31,
2013 |
||||||
Credit Default Swaps Purchased |
||||||||
Investment grade (b) |
$ | 95 | $ | 95 | ||||
Subinvestment grade (c) |
15 | |||||||
Total |
$ | 110 | $ | 95 |
(a) | There were no credit default swaps sold as of December 31, 2014 and December 31, 2013. |
(b) | Investment grade with a rating of BBB-/Baa3 or above based on published rating agency information. |
(c) | There were no subinvestment grade credit default swaps purchased as of December 31, 2013. Subinvestment grade represents a rating below BBB-/Baa3 based on published rating agency information. |
The referenced/underlying assets for these credit default swaps are presented in the following table:
Table 133: Referenced/Underlying Assets of Credit Default Swaps
December 31,
2014 |
December 31,
2013 |
|||||||
Corporate debt |
45 | % | 37 | % | ||||
Commercial mortgage-backed securities |
55 | % | 63 | % |
Risk Participation Agreements
We also periodically enter into risk participation agreements to share some of the credit exposure with other counterparties related to interest rate derivative contracts or to take on credit exposure to generate revenue. We will make/receive payments under these agreements if a customer defaults on its obligation to perform under certain derivative swap contracts. Risk participation agreements purchased and sold are included in these derivative tables: Tables 129, 130, 134 and 135.
Further detail regarding the notional amount, fair value and weighted-average remaining maturities in years for risk participation agreements sold is presented in the following table:
Table 134: Risk Participation Agreements Sold
December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
Dollars in millions |
Notional
Amount |
Fair
Value |
Weighted-
Average Remaining Maturity In Years |
Notional
Amount |
Fair
Value |
Weighted-
Average Remaining Maturity In Years |
||||||||||||||||||
Risk Participation Agreements Sold |
$ | 2,796 | $ | (4 | ) | 5.4 | $ | 2,770 | $ | (4 | ) | 6.1 |
Based on our internal risk rating process of the underlying third party customers referenced in the swap contracts, the percentages of the exposure amount of risk participation agreements sold by internal credit rating follow:
Table 135: Internal Credit Ratings of Risk Participation Agreements Sold
December 31,
2014 |
December 31,
2013 |
|||||||
Pass (a) |
100 | % | 98 | % | ||||
Below pass (b) |
0 | % | 2 | % |
(a) | Indicates the expected risk of default is currently low. |
(b) | Indicates a higher degree of risk of default. |
We have sold risk participation agreements with terms ranging from less than 1 year to 22 years. We will be required to make payments under these agreements if a customer defaults on its obligation to perform under certain derivative swap contracts with third parties. Assuming all underlying third party customers referenced in the swap contracts defaulted at December 31, 2014, the exposure from these agreements would be $124 million based on the fair value of the underlying swaps, compared with $77 million at December 31, 2013.
Offsetting, Counterparty Credit Risk, and Contingent Features
We, generally, utilize a net presentation on the Consolidated Balance Sheet for those derivative financial instruments entered into with counterparties under legally enforceable master netting agreements. The master netting agreements reduce credit risk by permitting the closeout netting of various types of derivative instruments with the same counterparty upon the occurrence of an event of default. The master netting agreement also may require the exchange of cash or marketable securities to collateralize either partys net position. In certain cases, minimum thresholds must be exceeded before any collateral is exchanged. Collateral is typically exchanged daily based on the net fair value of the positions with the counterparty as of the preceding day. Any cash collateral exchanged with counterparties under these master netting agreements is also netted against the applicable derivative fair values on the Consolidated Balance Sheet. However, the fair value of any securities held or pledged is not included in the net presentation on the balance sheet. In order for an arrangement to be eligible for netting under GAAP (ASC 210-20), we must obtain the requisite assurance that the offsetting rights included in the master netting agreement would be legally enforceable in the event of bankruptcy, insolvency, or a similar proceeding of such third party. Enforceability is evidenced by obtaining a legal opinion that supports, with sufficient confidence, the enforceability of the master netting agreement in bankruptcy.
The PNC Financial Services Group, Inc. Form 10-K 193 |
The following derivative Table 136 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities as of December 31, 2014 and December 31, 2013. The table also includes the fair value of any securities collateral held or pledged under legally enforceable master netting agreements. Cash and securities collateral amounts are included in the table only to the extent of the related net derivative fair values.
Refer to Note 22 Commitments and Guarantees for additional information related to resale and repurchase agreements offsetting.
Table 136: Derivative Assets and Liabilities Offsetting
Gross Fair Value
Derivative
|
Amounts Offset on the Consolidated Balance Sheet |
Net Fair Value
Derivative
|
Securities
Held Under
Master Netting
|
Net Amounts |
||||||||||||||||||||
December 31, 2014 In millions |
Fair Value
Offset Amount |
Cash Collateral |
||||||||||||||||||||||
Derivative assets |
||||||||||||||||||||||||
Interest rate contracts |
$ | 4,918 | $ | 1,981 | $ | 458 | $ | 2,479 | $ | 143 | $ | 2,336 | ||||||||||||
Foreign exchange contracts |
314 | 159 | 47 | 108 | 1 | 107 | ||||||||||||||||||
Credit contracts |
2 | 1 | 1 | |||||||||||||||||||||
Total derivative assets (a) (b) |
$ | 5,234 | $ | 2,141 | $ | 506 | $ | 2,587 | (c) | $ | 144 | $ | 2,443 | |||||||||||
Gross Fair Value
Derivative
|
Amounts Offset on the Consolidated Balance Sheet |
Net Fair Value
Derivative
|
Securities
Pledged Under
Master
Netting
|
Net Amounts |
||||||||||||||||||||
December 31, 2014 In millions |
Fair Value
Offset Amount |
Cash Collateral |
||||||||||||||||||||||
Derivative liabilities |
||||||||||||||||||||||||
Interest rate contracts |
$ | 3,272 | $ | 2,057 | $ | 483 | $ | 732 | $ | 732 | ||||||||||||||
Foreign exchange contracts |
241 | 80 | 20 | 141 | 141 | |||||||||||||||||||
Credit contracts |
4 | 4 | ||||||||||||||||||||||
Other contracts |
510 | 510 | 510 | |||||||||||||||||||||
Total derivative liabilities (a) (b) |
$ | 4,027 | $ | 2,141 | $ | 503 | $ | 1,383 | (d) | $ | 1,383 | |||||||||||||
Gross Fair Value
Derivative
|
Amounts Offset on the Consolidated Balance Sheet |
Net Fair Value
Derivative
|
Securities
Held Under
Master
Netting
|
Net Amounts |
||||||||||||||||||||
December 31, 2013 In millions |
Fair Value
Offset Amount |
Cash Collateral |
||||||||||||||||||||||
Derivative assets |
||||||||||||||||||||||||
Interest rate contracts |
$ | 4,599 | $ | 2,468 | $ | 556 | $ | 1,575 | $ | 115 | $ | 1,460 | ||||||||||||
Foreign exchange contracts |
192 | 64 | 9 | 119 | 119 | |||||||||||||||||||
Credit contracts |
2 | 1 | 1 | 1 | ||||||||||||||||||||
Total derivative assets (a) (b) |
$ | 4,793 | $ | 2,533 | $ | 565 | $ | 1,695 | (c) | $ | 115 | $ | 1,580 | |||||||||||
Gross Fair Value
Derivative
|
Amounts Offset on the Consolidated Balance Sheet |
Net Fair
Derivative
|
Securities
Master Netting
|
Net
|
||||||||||||||||||||
December 31, 2013 In millions |
Fair Value
Offset Amount |
Cash
Collateral |
||||||||||||||||||||||
Derivative liabilities |
||||||||||||||||||||||||
Interest rate contracts |
$ | 3,326 | $ | 2,447 | $ | 473 | $ | 406 | $ | 406 | ||||||||||||||
Foreign exchange contracts |
182 | 83 | 23 | 76 | 76 | |||||||||||||||||||
Credit contracts |
4 | 3 | 1 | |||||||||||||||||||||
Other contracts |
422 | 422 | 422 | |||||||||||||||||||||
Total derivative liabilities (a) (b) |
$ | 3,934 | $ | 2,533 | $ | 497 | $ | 904 | (d) | $ | 904 |
(a) | There were no derivative assets or derivative liabilities equity contracts as of December 31, 2014 and December 31, 2013. |
(b) | Included derivative assets and derivative liabilities as of December 31, 2014 totaling $807 million and $657 million, respectively, related to interest rate contracts executed bilaterally with counterparties in the U.S. over-the-counter market and novated to and cleared through a central clearing house. The comparable amounts as of December 31, 2013 totaled $331 million and $224 million, respectively. Derivative assets and liabilities as of December 31, 2014 and December 31, 2013 related to exchange-traded interest rate contracts were not material. As of December 31, 2014 and December 31, 2013, these contracts were not subject to offsetting. The remaining gross and net derivative assets and liabilities relate to contracts executed bilaterally with counterparties that are not settled through an organized exchange or central clearing house. |
(c) | Represents the net amount of derivative assets included in Other assets on our Consolidated Balance Sheet. |
(d) | Represents the net amount of derivative liabilities included in Other liabilities on our Consolidated Balance Sheet. |
194 The PNC Financial Services Group, Inc. Form 10-K |
In addition to using master netting and related collateral agreements to reduce credit risk associated with derivative instruments, we also seek to manage credit risk by evaluating credit ratings of counterparties, by taking collateral and by using internal credit analysis, limits, and monitoring procedures. Collateral may also be exchanged under certain derivative agreements that are not considered master netting agreements.
At December 31, 2014, we held cash, U.S. government securities and mortgage-backed securities totaling $815 million under master netting and other collateral agreements to collateralize net derivative assets due from counterparties, and we have pledged cash totaling $514 million under these agreements to collateralize net derivative liabilities owed to counterparties. These totals may differ from the amounts presented in the preceding offsetting table because they may include collateral exchanged under an agreement that does not qualify as a master netting agreement or because the total amount of collateral held or pledged exceeds the net derivative fair value with the counterparty as of the balance sheet date due to timing or other factors. To the extent not netted against the derivative fair value under a master netting agreement, the receivable for cash pledged is included in Other assets and the
obligation for cash held is included in Other borrowed funds on our Consolidated Balance Sheet. Securities held from counterparties are not recognized on our balance sheet. Likewise securities we have pledged to counterparties remain on our balance sheet.
Certain of the master netting agreements and certain other derivative agreements also contain provisions that require PNCs debt to maintain an investment grade credit rating from each of the major credit rating agencies. If PNCs debt ratings were to fall below investment grade, we would be in violation of these provisions and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on December 31, 2014 was $681 million for which PNC had posted collateral of $508 million in the normal course of business. The maximum additional amount of collateral PNC would have been required to post if the credit-risk-related contingent features underlying these agreements had been triggered on December 31, 2014 would be $173 million.
N OTE 16 E ARNINGS P ER S HARE
Table 137: Basic and Diluted Earnings per Common Share
In millions, except per share data | 2014 | 2013 | 2012 | |||||||||
Basic |
||||||||||||
Net income (a) |
$ | 4,207 | $ | 4,212 | $ | 2,994 | ||||||
Less: |
||||||||||||
Net income (loss) attributable to noncontrolling interests (a) |
23 | 11 | (7 | ) | ||||||||
Preferred stock dividends and discount accretion and redemptions |
237 | 249 | 181 | |||||||||
Net income attributable to common shares |
3,947 | 3,952 | 2,820 | |||||||||
Less: |
||||||||||||
Dividends and undistributed earnings allocated to nonvested restricted shares |
11 | 18 | 14 | |||||||||
Net income attributable to basic common shares |
$ | 3,936 | $ | 3,934 | $ | 2,806 | ||||||
Basic weighted-average common shares outstanding |
529 | 528 | 526 | |||||||||
Basic earnings per common share (a) (b) |
$ | 7.44 | $ | 7.45 | $ | 5.33 | ||||||
Diluted |
||||||||||||
Net income attributable to basic common shares (a) |
$ | 3,936 | $ | 3,934 | $ | 2,806 | ||||||
Less: Impact of BlackRock earnings per share dilution |
18 | 18 | 14 | |||||||||
Net income attributable to diluted common shares |
$ | 3,918 | $ | 3,916 | $ | 2,792 | ||||||
Basic weighted-average common shares outstanding |
529 | 528 | 526 | |||||||||
Dilutive potential common shares (c) (d) |
8 | 4 | 3 | |||||||||
Diluted weighted-average common shares outstanding |
537 | 532 | 529 | |||||||||
Diluted earnings per common share (a) (b) |
$ | 7.30 | $ | 7.36 | $ | 5.28 |
(a) | Amounts for 2013 and 2012 periods have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
(b) | Basic and diluted earnings per share under the two-class method are determined on net income reported on the income statement less earnings allocated to nonvested restricted shares (participating securities). |
(c) | Excludes number of stock options considered to be anti-dilutive of 1 million for 2013 and 4 million for 2012. No stock options were considered to be anti-dilutive for 2014. |
(d) | Excludes number of warrants considered to be anti-dilutive of 17 million for 2012. No warrants were considered to be anti-dilutive for 2013 and 2014. |
The PNC Financial Services Group, Inc. Form 10-K 195 |
Preferred Stock
The following table provides the number of preferred shares issued and outstanding, the liquidation value per share and the number of authorized preferred shares that are available for future use.
Table 138: Preferred Stock Authorized, Issued and Outstanding
Preferred Shares | ||||||||||||
December 31 Shares in thousands |
Liquidation
value per share |
2014 | 2013 | |||||||||
Authorized |
||||||||||||
$1 par value |
16,588 | 16,588 | ||||||||||
Issued and outstanding |
||||||||||||
Series B |
$ | 40 | 1 | 1 | ||||||||
Series K |
10,000 | 50 | 50 | |||||||||
Series O |
100,000 | 10 | 10 | |||||||||
Series P |
100,000 | 15 | 15 | |||||||||
Series Q |
100,000 | 5 | 5 | |||||||||
Series R |
100,000 | 5 | 5 | |||||||||
Total issued and outstanding |
86 | 86 |
The following table discloses information related to the preferred stock outstanding as of December 31, 2014.
Table 139: Terms of Outstanding Preferred Stock
Preferred Stock |
Issue Date |
Number
of
Issued |
Fractional
Interest in a share of preferred stock represented by each Depositary Share |
Dividend Dates (a) |
Annual Per Share Dividend Rate |
Optional Redemption Date (b) |
||||||||||||
Series B (c) |
(c) | N/A | N/A | Quarterly from March 10 th | $1.80 | None | ||||||||||||
Series K (d) |
May 21, 2008 | 500,000 | 1/10 th |
Semi-annually beginning on November 21, 2008 until May 21, 2013
Quarterly beginning on August 21, 2013 |
8.25% until May 21, 2013
3 Mo. LIBOR plus 4.22% per annum beginning on May 21, 2013 |
May 21, 2013 | ||||||||||||
Series O (d) |
July 27, 2011 | 1 million | 1/100 th |
Semi-annually beginning on February 1, 2012 until August 1, 2021
Quarterly beginning on November 1, 2021 |
6.75% until August 1, 2021
3 Mo. LIBOR plus 3.678% per annum beginning on August 1, 2021 |
August 1, 2021 | ||||||||||||
Series P (d) |
April 24, 2012 | 60 million | 1/4,000 th | Quarterly beginning on August 1, 2012 |
6.125% until May 1, 2022
3 Mo. LIBOR plus 4.0675% per annum beginning on May 1, 2022 |
May 1, 2022 | ||||||||||||
Series Q (d) |
|
September 21, 2012
October 9, 2012 |
|
|
18 million
1.2 million |
|
1/4,000 th | Quarterly beginning on December 1, 2012 | 5.375% | December 1, 2017 | ||||||||
Series R (d) |
May 7, 2013 | 500,000 | 1/100 th |
Semi-annually beginning on December 1, 2013 until June 1, 2023
Quarterly beginning on September 1, 2023 |
4.85% until June 1, 2023
3 Mo. LIBOR plus 3.04% per annum beginning June 1, 2023 |
June 1, 2023 |
(a) | Dividends are payable when, as, and if declared by our Board of Directors or an authorized committee of our Board. |
(b) | Redeemable at PNCs option on or after the date stated. With the exception of the Series B and Series K preferred stock, redeemable at PNCs option within 90 days of a regulatory capital treatment event as defined in the designations. |
(c) | Cumulative preferred stock. Holders of Series B preferred stock are entitled to 8 votes per share, which is equal to the number of full shares of common stock into which the Series B preferred stock is convertible. The Series B preferred stock was issued in connection with the consolidation of Pittsburgh National Corporation and Provident National Corporation in 1983. |
(d) | Non-Cumulative preferred stock. |
196 The PNC Financial Services Group, Inc. Form 10-K |
Our Series L preferred stock was issued in connection with the National City transaction in exchange for National Citys Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series F. Dividends on the Series L preferred stock were payable if and when declared each 1 st of February, May, August and November. Dividends were paid at a rate of 9.875% prior to February 1, 2013 and at a rate of three-month LIBOR plus 633 basis points beginning February 1, 2013. On April 19, 2013, PNC redeemed all 6,000,000 depositary shares representing interests in PNCs Series L preferred stock and all 1,500 shares of Series L preferred stock underlying such depositary shares, resulting in a net outflow of $150 million.
We have authorized but unissued Series H and Series I preferred stock. As described in Note 12 Capital Securities of a Subsidiary Trust and Perpetual Trust Securities, the PNC Preferred Funding Trust II securities are automatically exchangeable into shares of PNC Series I preferred stock under certain conditions relating to the capitalization or the financial condition of PNC Bank and upon the direction of the Office of the Comptroller of the Currency. The Series A preferred stock of PNC REIT Corp. is also automatically exchangeable under similar conditions into shares of PNC Series H preferred stock. On March 15, 2013, we redeemed all $375 million of the PNC Preferred Funding Trust III securities that had been exchangeable under certain conditions into PNC Series J preferred stock.
Warrants
We have outstanding 16,885,192 warrants, each to purchase one share of PNC common stock at an exercise price of $67.33 per share. These warrants were sold by the U.S. Treasury in a secondary public offering that closed on May 5, 2010 after the U.S. Treasury exchanged its TARP Warrant (issued on December 31, 2008 under the TARP Capital Purchase Program) for 16,885,192 warrants. These warrants expire December 31, 2018.
Other Shareholders Equity Matters
We have a dividend reinvestment and stock purchase plan. Holders of preferred stock and PNC common stock may participate in the plan, which provides that additional shares of common stock may be purchased at market value with reinvested dividends and voluntary cash payments. Common shares issued pursuant to this plan were: 293,552 shares in 2014, 368,982 shares in 2013 and 422,642 shares in 2012.
At December 31, 2014, we had reserved approximately 99 million common shares to be issued in connection with certain stock plans.
Effective October 4, 2007, our Board of Directors approved a stock repurchase program to purchase up to 25 million shares of PNC common stock on the open market or in privately negotiated transactions. A maximum of 8.086 million shares remained available for repurchase under this program at December 31, 2014. This program will remain in effect until fully utilized or until modified, superseded or terminated. We repurchased 13.5 million shares in 2014 and 3.2 million shares in 2012. We did not repurchase any shares during 2013 under this program.
The PNC Financial Services Group, Inc. Form 10-K 197 |
N OTE 18 O THER C OMPREHENSIVE I NCOME
Details of other comprehensive income (loss) are as follows (in millions):
Table 140: Other Comprehensive Income
In millions | Pretax | Tax | After-tax | |||||||||
Net unrealized gains (losses) on non-OTTI securities |
||||||||||||
Balance at December 31, 2011 |
$ | 1,098 | $ | (402 | ) | $ | 696 | |||||
2012 activity |
||||||||||||
Increase in net unrealized gains (losses) on non-OTTI securities |
931 | (341 | ) | 590 | ||||||||
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest income |
37 | (13 | ) | 24 | ||||||||
Less: Net gains (losses) realized on sale of securities reclassified to noninterest income |
134 | (49 | ) | 85 | ||||||||
Net unrealized gains (losses) on non-OTTI securities |
760 | (279 | ) | 481 | ||||||||
Balance at December 31, 2012 |
1,858 | (681 | ) | 1,177 | ||||||||
2013 activity |
||||||||||||
Increase in net unrealized gains (losses) on non-OTTI securities |
(1,122 | ) | 411 | (711 | ) | |||||||
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest income |
39 | (14 | ) | 25 | ||||||||
Less: Net gains (losses) realized on sale of securities reclassified to noninterest income |
50 | (18 | ) | 32 | ||||||||
Net unrealized gains (losses) on non-OTTI securities |
(1,211 | ) | 443 | (768 | ) | |||||||
Balance at December 31, 2013 |
647 | (238 | ) | 409 | ||||||||
2014 activity |
||||||||||||
Increase in net unrealized gains (losses) on non-OTTI securities |
410 | (150 | ) | 260 | ||||||||
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest income |
31 | (11 | ) | 20 | ||||||||
Less: Net gains (losses) realized on sale of securities reclassified to noninterest income |
4 | (2 | ) | 2 | ||||||||
Net unrealized gains (losses) on non-OTTI securities |
375 | (137 | ) | 238 | ||||||||
Balance at December 31, 2014 |
$ | 1,022 | $ | (375 | ) | $ | 647 |
In millions | Pretax | Tax | After-tax | |||||||||
Net unrealized gains (losses) on OTTI securities |
||||||||||||
Balance at December 31, 2011 |
$ | (1,166 | ) | $ | 428 | $ | (738 | ) | ||||
2012 activity |
||||||||||||
Increase in net unrealized gains (losses) on OTTI securities |
854 | (313 | ) | 541 | ||||||||
Less: Net gains (losses) realized on sales of securities reclassified to noninterest income |
(6 | ) | 2 | (4 | ) | |||||||
Less: OTTI losses realized on securities reclassified to noninterest income |
(111 | ) | 41 | (70 | ) | |||||||
Net unrealized gains (losses) on OTTI securities |
971 | (356 | ) | 615 | ||||||||
Balance at December 31, 2012 |
(195 | ) | 72 | (123 | ) | |||||||
2013 activity |
||||||||||||
Increase in net unrealized gains (losses) on OTTI securities |
215 | (78 | ) | 137 | ||||||||
Less: OTTI losses realized on securities reclassified to noninterest income |
(16 | ) | 6 | (10 | ) | |||||||
Net unrealized gains (losses) on OTTI securities |
231 | (84 | ) | 147 | ||||||||
Balance at December 31, 2013 |
36 | (12 | ) | 24 | ||||||||
2014 activity |
||||||||||||
Increase in net unrealized gains (losses) on OTTI securities |
68 | (25 | ) | 43 | ||||||||
Less: OTTI losses realized on securities reclassified to noninterest income |
(11 | ) | 4 | (7 | ) | |||||||
Net unrealized gains (losses) on OTTI securities |
79 | (29 | ) | 50 | ||||||||
Balance at December 31, 2014 |
$ | 115 | $ | (41 | ) | $ | 74 | |||||
Net unrealized gains (losses) on cash flow hedge derivatives |
||||||||||||
Balance at December 31, 2011 |
$ | 1,131 | $ | (414 | ) | $ | 717 | |||||
2012 activity |
||||||||||||
Increase in net unrealized gains (losses) on cash flow hedge derivatives |
312 | (114 | ) | 198 | ||||||||
Less: Net gains (losses) realized as a yield adjustment reclassified to loan interest income (a) |
388 | (142 | ) | 246 | ||||||||
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest income (a) |
68 | (25 | ) | 43 | ||||||||
Less: Net gains (losses) realized on sales of securities reclassified to noninterest income (a) |
76 | (28 | ) | 48 | ||||||||
Net unrealized gains (losses) on cash flow hedge derivatives |
(220 | ) | 81 | (139 | ) | |||||||
Balance at December 31, 2012 |
911 | (333 | ) | 578 |
198 The PNC Financial Services Group, Inc. Form 10-K |
In millions | Pretax | Tax | After-tax | |||||||||
2013 activity |
||||||||||||
Increase in net unrealized gains (losses) on cash flow hedge derivatives |
(141 | ) | 52 | (89 | ) | |||||||
Less: Net gains (losses) realized as a yield adjustment reclassified to loan interest income (a) |
284 | (103 | ) | 181 | ||||||||
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest income (a) |
53 | (19 | ) | 34 | ||||||||
Less: Net gains (losses) realized on sales of securities reclassified to noninterest income (a) |
49 | (18 | ) | 31 | ||||||||
Net unrealized gains (losses) on cash flow hedge derivatives |
(527 | ) | 192 | (335 | ) | |||||||
Balance at December 31, 2013 |
384 | (141 | ) | 243 | ||||||||
2014 activity |
||||||||||||
Increase in net unrealized gains (losses) on cash flow hedge derivatives |
431 | (158 | ) | 273 | ||||||||
Less: Net gains (losses) realized as a yield adjustment reclassified to loan interest income (a) |
251 | (92 | ) | 159 | ||||||||
Less: Net gains (losses) realized as a yield adjustment reclassified to investment securities interest income (a) |
12 | (5 | ) | 7 | ||||||||
Net unrealized gains (losses) on cash flow hedge derivatives |
168 | (61 | ) | 107 | ||||||||
Balance at December 31, 2014 |
$ | 552 | $ | (202 | ) | $ | 350 | |||||
Pension and other postretirement benefit plan adjustments |
||||||||||||
Balance at December 31, 2011 |
$ | (1,191 | ) | $ | 436 | $ | (755 | ) | ||||
2012 Activity |
||||||||||||
Net pension and other postretirement benefit plan activity |
(118 | ) | 44 | (74 | ) | |||||||
Amortization of actuarial loss (gain) reclassified to other noninterest expense |
94 | (35 | ) | 59 | ||||||||
Amortization of prior service cost (credit) reclassified to other noninterest expense |
(11 | ) | 4 | (7 | ) | |||||||
Total 2012 activity |
(35 | ) | 13 | (22 | ) | |||||||
Balance at December 31, 2012 |
(1,226 | ) | 449 | (777 | ) | |||||||
2013 Activity |
||||||||||||
Net pension and other postretirement benefit plan activity |
760 | (279 | ) | 481 | ||||||||
Amortization of actuarial loss (gain) reclassified to other noninterest expense |
103 | (37 | ) | 66 | ||||||||
Amortization of prior service cost (credit) reclassified to other noninterest expense |
(11 | ) | 4 | (7 | ) | |||||||
Total 2013 activity |
852 | (312 | ) | 540 | ||||||||
Balance at December 31, 2013 |
(374 | ) | 137 | (237 | ) |
In millions | Pretax | Tax | After-tax | |||||||||
2014 Activity |
||||||||||||
Net pension and other postretirement benefit plan activity |
(440 | ) | 161 | (279 | ) | |||||||
Amortization of actuarial loss (gain) reclassified to other noninterest expense |
4 | (1 | ) | 3 | ||||||||
Amortization of prior service cost (credit) reclassified to other noninterest expense |
(10 | ) | 3 | (7 | ) | |||||||
Total 2014 Activity |
(446 | ) | 163 | (283 | ) | |||||||
Balance at December 31, 2014 |
$ | (820 | ) | $ | 300 | $ | (520 | ) | ||||
Other |
||||||||||||
Balance at December 31, 2011 |
$ | (51 | ) | $ | 26 | $ | (25 | ) | ||||
2012 Activity |
||||||||||||
PNCs portion of BlackRocks OCI |
3 | (4 | ) | (1 | ) | |||||||
Net investment hedge derivatives (b) |
(27 | ) | 10 | (17 | ) | |||||||
Foreign currency translation adjustments |
34 | (12 | ) | 22 | ||||||||
Total 2012 activity |
10 | (6 | ) | 4 | ||||||||
Balance at December 31, 2012 |
(41 | ) | 20 | (21 | ) | |||||||
2013 Activity |
||||||||||||
PNCs portion of BlackRocks OCI |
15 | (12 | ) | 3 | ||||||||
Net investment hedge derivatives (b) |
(21 | ) | 8 | (13 | ) | |||||||
Foreign currency translation adjustments |
27 | 1 | 28 | |||||||||
Total 2013 activity |
21 | (3 | ) | 18 | ||||||||
Balance at December 31, 2013 |
(20 | ) | 17 | (3 | ) | |||||||
2014 Activity |
||||||||||||
PNCs portion of BlackRocks OCI |
(36 | ) | 14 | (22 | ) | |||||||
Net investment hedge derivatives (b) |
54 | (20 | ) | 34 | ||||||||
Foreign currency translation adjustments (c) |
(57 | ) | | (57 | ) | |||||||
Total 2014 activity |
(39 | ) | (6 | ) | (45 | ) | ||||||
Balance at December 31, 2014 |
$ | (59 | ) | $ | 11 | $ | (48 | ) |
(a) | Cash flow hedge derivatives are interest rate contract derivatives designated as hedging instruments under GAAP. |
(b) | Net investment hedge derivatives are foreign exchange contracts designated as hedging instruments under GAAP. |
(c) | As of September 30, 2013, PNC made an assertion under ASC 740 Income Taxes that the earnings of PNCs Luxembourg-UK lending business were indefinitely reinvested; thereafter, no U.S. deferred income tax has been recorded on the foreign currency translation of the investment. |
The PNC Financial Services Group, Inc. Form 10-K 199 |
The accumulated balances related to each component of other comprehensive income (loss) are as follows:
Table 141: Accumulated Other Comprehensive Income (Loss) Components
2014 | 2013 | |||||||||||||||
At December 31 In millions | Pretax | After-tax | Pretax | After-tax | ||||||||||||
Net unrealized gains (losses) on non-OTTI securities |
$ | 1,022 | $ | 647 | $ | 647 | $ | 409 | ||||||||
Net unrealized gains (losses) on OTTI securities |
115 | 74 | 36 | 24 | ||||||||||||
Net unrealized gains (losses) on cash flow hedge derivatives |
552 | 350 | 384 | 243 | ||||||||||||
Pension and other postretirement benefit plan adjustments |
(820 | ) | (520 | ) | (374 | ) | (237 | ) | ||||||||
Other |
(59 | ) | (48 | ) | (20 | ) | (3 | ) | ||||||||
Accumulated other comprehensive income (loss) |
$ | 810 | $ | 503 | $ | 673 | $ | 436 |
The components of Income tax expense are as follows:
Table 142: Components of Income Tax Expense
Year ended December 31 In millions |
2014 | 2013 | 2012 | |||||||||
Current |
||||||||||||
Federal (a) |
$ | 1,084 | $ | 263 | $ | 453 | ||||||
State |
68 | 17 | 29 | |||||||||
Total current |
1,152 | 280 | 482 | |||||||||
Deferred |
||||||||||||
Federal (a) |
220 | 1,119 | 515 | |||||||||
State |
35 | 77 | 48 | |||||||||
Total deferred |
255 | 1,196 | 563 | |||||||||
Total |
$ | 1,407 | $ | 1,476 | $ | 1,045 |
(a) | Amounts for 2013 and 2012 have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
Significant components of deferred tax assets and liabilities are as follows:
Table 143: Deferred Tax Assets and Liabilities
December 31 in millions | 2014 | 2013 | ||||||
Deferred tax assets |
||||||||
Allowance for loan and lease losses |
$ | 1,250 | $ | 1,343 | ||||
Compensation and benefits |
822 | 581 | ||||||
Loss and credit carryforward |
545 | 797 | ||||||
Accrued expenses |
581 | 575 | ||||||
Other (a) |
537 | 580 | ||||||
Total gross deferred tax assets |
3,735 | 3,876 | ||||||
Valuation allowance |
(65 | ) | (61 | ) | ||||
Total deferred tax assets |
3,670 | 3,815 | ||||||
Deferred tax liabilities |
||||||||
Leasing |
1,494 | 1,498 | ||||||
Goodwill and intangibles |
328 | 342 | ||||||
Basis difference in loans |
44 | 48 | ||||||
Fixed assets |
381 | 397 | ||||||
Net unrealized gains on securities and financial instruments |
619 | 391 | ||||||
BlackRock basis difference |
2,166 | 2,031 | ||||||
Other |
575 | 730 | ||||||
Total deferred tax liabilities |
5,607 | 5,437 | ||||||
Net deferred tax liability |
$ | 1,937 | $ | 1,622 |
(a) | Amounts for 2013 have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
200 The PNC Financial Services Group, Inc. Form 10-K |
A reconciliation between the statutory and effective tax rates follows:
Table 144: Reconciliation of Statutory and Effective Tax Rates
Year ended December 31 | 2014 | 2013 | 2012 | |||||||||
Statutory tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Increases (decreases) resulting from |
||||||||||||
State taxes net of federal benefit |
1.2 | 1.1 | 1.3 | |||||||||
Tax-exempt interest (a) |
(2.2 | ) | (1.9 | ) | (2.3 | ) | ||||||
Life insurance |
(1.7 | ) | (1.7 | ) | (2.3 | ) | ||||||
Dividend received deduction (a) |
(1.5 | ) | (1.2 | ) | (1.6 | ) | ||||||
Tax credits (a) |
(4.4 | ) | (3.7 | ) | (4.6 | ) | ||||||
Other (a) |
(1.3 | ) | (1.7 | ) | .4 | |||||||
Effective tax rate |
25.1 | % | 25.9 | % | 25.9 | % |
(a) | Amounts for 2013 and 2012 have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
The net operating loss carryforwards at December 31, 2014 and 2013 follow:
Table 145: Net Operating Loss Carryforwards and Tax Credit Carryforwards
In millions |
December 31
2014 |
December 31
2013 |
||||||
Net Operating Loss Carryforwards: |
||||||||
Federal |
$ | 997 | $ | 1,116 | ||||
State |
2,594 | 2,958 | ||||||
Tax Credit Carryforwards: |
||||||||
Federal |
$ | 35 | $ | 221 | ||||
State |
7 | 7 |
The federal net operating loss carryforwards expire in 2032. The state net operating loss carryforwards will expire from 2015 to 2031. The majority of the tax credit carryforwards expire in 2032.
The federal net operating loss carryforwards and tax credit carryforwards above are substantially from the 2012 acquisition of RBC Bank (USA) and are subject to a federal annual Section 382 limitation under the Internal Revenue Code of 1986; and acquired state operating loss carryforwards are subject to similar limitations that exist for state tax purposes. The majority of the decrease to state net operating loss carryforwards is attributable to the estimated utilization on 2014 tax return filings. It is anticipated that the company will be able to fully utilize its carryforwards for federal tax purposes, but a valuation allowance of $65 million has been recorded against certain state tax carryforwards as of December 31, 2014. See Note 2 Acquisition and Divestiture Activity in our 2013 Form 10-K for additional discussion of our 2012 acquisition of RBC Bank (USA).
As of December 31, 2014, PNC had approximately $77 million of earnings attributed to foreign subsidiaries that have been indefinitely reinvested for which no incremental U.S. income tax provision has been recorded. If a U.S. deferred tax liability were to be recorded, the estimated tax liability on those undistributed earnings would be approximately $24 million.
Retained earnings at both December 31, 2014 and December 31, 2013 included $117 million in allocations for bad debt deductions of former thrift subsidiaries for which no income tax has been provided. Under current law, if certain subsidiaries use these bad debt reserves for purposes other than to absorb bad debt losses, they will be subject to Federal income tax at the current corporate tax rate.
PNC had unrecognized tax benefits of $77 million at December 31, 2014 and $110 million at December 31, 2013. At December 31, 2014, $64 million of unrecognized tax benefits, if recognized, would favorably impact the effective income tax rate.
A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows:
Table 146: Change in Unrecognized Tax Benefits
In millions | 2014 | 2013 | 2012 | |||||||||
Balance of gross unrecognized tax benefits at January 1 |
$ | 110 | $ | 176 | $ | 209 | ||||||
Increases: |
||||||||||||
Positions taken during a prior period |
11 | 23 | ||||||||||
Positions taken during the current period |
1 | |||||||||||
Decreases: |
||||||||||||
Positions taken during a prior period |
(27 | ) | (22 | ) | (51 | ) | ||||||
Settlements with taxing authorities |
(1 | ) | (48 | ) | (1 | ) | ||||||
Reductions resulting from lapse of statute of limitations |
(5 | ) | (7 | ) | (5 | ) | ||||||
Balance of gross unrecognized tax benefits at December 31 |
$ | 77 | $ | 110 | $ | 176 |
It is reasonably possible that the balance of unrecognized tax benefits could increase or decrease in the next twelve months due to completion of tax authorities exams or the expiration of statutes of limitations. Management estimates that the balance of unrecognized tax benefits could decrease by $54 million within the next twelve months.
Examinations are substantially completed for PNCs consolidated federal income tax returns for 2007 through 2010 and are effectively settled. The Internal Revenue Service (IRS) is currently examining PNCs 2011 through 2013 returns. National Citys consolidated federal income tax returns through 2008 have been audited by the IRS. Certain adjustments remain under review by the IRS Appeals Division for years 2004 through 2008.
The PNC Financial Services Group, Inc. Form 10-K 201 |
PNC files tax returns in most states and some non-U.S. jurisdictions each year and is under continuous examination by various state taxing authorities. With few exceptions, we are no longer subject to state and local and non-U.S. income tax examinations by taxing authorities for periods before 2009. For all open audits, any potential adjustments have been considered in establishing our unrecognized tax benefits as of December 31, 2014.
Our policy is to classify interest and penalties associated with income taxes as income tax expense. For 2014, we had a benefit of $5 million of gross interest and penalties, decreasing income tax expense. The total accrued interest and penalties at December 31, 2014 and December 31, 2013 was $41 million and $45 million, respectively.
ASU 2014-01 was adopted effective January 1, 2014. Under this standard, amortization of investments in qualified low income housing tax credits is reported within income tax expense. Certain amounts for 2013 and 2012 periods including income tax provision have been updated to reflect the adoption.
We are subject to the regulations of certain federal, state, and foreign agencies and undergo periodic examinations by such regulatory authorities.
The ability to undertake new business initiatives (including acquisitions), the access to and cost of funding for new business initiatives, the ability to pay dividends, the ability to repurchase shares or other capital instruments, the level of deposit insurance costs, and the level and nature of regulatory oversight depend, in large part, on a financial institutions capital strength.
At December 31, 2014, PNC and PNC Bank, our domestic banking subsidiary, were both considered well capitalized, based on applicable U.S. regulatory capital ratio requirements. To qualify as well capitalized, PNC and PNC Bank were required during 2014 to maintain Transitional Basel III capital ratios of at least 6% for Tier 1 risk-based and 10% for Total risk-based, and PNC Bank was required to have a Transitional Basel III leverage ratio of at least 5%.
The minimum U.S. regulatory capital ratios in effect during 2013 under Basel I, the applicable U.S. regulatory capital ratio requirements during 2013, were 4% for Tier 1 risk-based, 8% for Total risk-based and 4% for Leverage. To qualify as well capitalized under Basel I, bank holding companies and banks had to maintain capital ratios of at least 6% for Tier 1 risk-based, 10% for Total risk-based and 5% for Leverage. At December 31, 2013, PNC and PNC Bank met the well capitalized capital ratio requirements based on U.S. regulatory capital ratio requirements under Basel I.
The following table sets forth the Transitional Basel III regulatory capital ratios at December 31, 2014, and the Basel I regulatory capital ratios at December 31, 2013, for PNC and PNC Bank.
Table 147: Basel Regulatory Capital
Amount | Ratios | |||||||||||||||
December 31 Dollars in millions |
2014 (a) | 2013 (b)(c) | 2014 (a) | 2013 (b)(c) | ||||||||||||
Risk-based capital |
||||||||||||||||
Tier 1 |
||||||||||||||||
PNC |
$ | 35,687 | $ | 33,612 | 12.6 | % | 12.4 | % | ||||||||
PNC Bank |
29,328 | 28,731 | 10.7 | 11.0 | ||||||||||||
Total |
||||||||||||||||
PNC |
44,782 | 42,950 | 15.8 | 15.8 | ||||||||||||
PNC Bank |
37,559 | 37,575 | 13.7 | 14.3 | ||||||||||||
Leverage |
||||||||||||||||
PNC |
35,687 | 33,612 | 10.8 | 11.1 | ||||||||||||
PNC Bank |
29,328 | 28,731 | 9.2 | 9.8 |
(a) | Calculated using the Transitional Basel III regulatory capital methodology applicable to PNC during 2014. |
(b) | Calculated using the Basel I regulatory capital methodology applicable to PNC during 2013. |
(c) | Amounts for 2013 period have not been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
202 The PNC Financial Services Group, Inc. Form 10-K |
The principal source of parent company cash flow is the dividends it receives from its subsidiary bank, which may be impacted by the following:
|
Capital needs, |
|
Laws and regulations, |
|
Corporate policies, |
|
Contractual restrictions, and |
|
Other factors. |
Also, there are statutory and regulatory limitations on the ability of national banks to pay dividends or make other capital distributions. The amount available for dividend payments to the parent company by PNC Bank without prior regulatory approval was approximately $1.5 billion at December 31, 2014.
Under federal law, a bank subsidiary generally may not extend credit to, or engage in other types of covered transactions (including the purchase of assets) with, the parent company or its non-bank subsidiaries on terms and under circumstances that are not substantially the same as comparable transactions with nonaffiliates. A bank subsidiary may not extend credit to, or engage in a covered transaction with, the parent company or a non-bank subsidiary if the aggregate amount of the banks extensions of credit and other covered transactions with the parent company or non-bank subsidiary exceeds 10% of the capital stock and surplus of such bank subsidiary or the aggregate amount of the banks extensions of credit and other covered transactions with the parent company and all non-bank subsidiaries exceeds 20% of the capital and surplus of such bank subsidiary. Such extensions of credit, with limited exceptions, must be at least fully collateralized in accordance with specified collateralization thresholds, with the thresholds varying based on the type of assets serving as collateral. In certain circumstances, federal regulatory authorities may impose more restrictive limitations.
Federal Reserve Board regulations require depository institutions to maintain cash reserves with a Federal Reserve Bank (FRB). At December 31, 2014, the balance outstanding at the FRB was $31.4 billion.
We establish accruals for legal proceedings, including litigation and regulatory and governmental investigations and inquiries, when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changed circumstances. When we are able to do so, we also determine estimates of possible losses or ranges of possible losses, whether in excess of any related accrued liability or where there is no accrued liability, for disclosed legal proceedings (Disclosed Matters, which are those matters disclosed in this Note 21). For Disclosed Matters where we are able to estimate such possible losses or ranges of possible losses, as of December 31, 2014, we estimate that it is reasonably possible that we could incur losses in an aggregate amount of up to approximately $650 million. The estimates included in this amount are based on our analysis of currently available information and are subject to significant judgment and a variety of assumptions and uncertainties. As new information is obtained we may change our estimates. Due to the inherent subjectivity of the assessments and unpredictability of outcomes of legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to us from the legal proceedings in question. Thus, our exposure and ultimate losses may be higher, and possibly significantly so, than the amounts accrued or this aggregate amount.
In our experience, legal proceedings are inherently unpredictable. One or more of the following factors frequently contribute to this inherent unpredictability: the proceeding is in its early stages; the damages sought are unspecified, unsupported or uncertain; it is unclear whether a case brought as a class action will be allowed to proceed on that basis or, if permitted to proceed as a class action, how the class will be defined; the other party is seeking relief other than or in addition to compensatory damages (including, in the case of regulatory and governmental investigations and inquiries, the possibility of fines and penalties); the matter presents meaningful legal uncertainties, including novel issues of law; we have not engaged in meaningful settlement discussions; discovery has not started or is not complete; there are significant facts in dispute; the possible outcomes may not be amenable to the use of statistical or quantitative analytical tools; predicting possible outcomes depends on making assumptions about future decisions of courts or regulatory bodies or the behavior of other parties; and there are a large number of parties named as defendants (including where it is uncertain how damages or liability, if any, will be shared among multiple defendants). Generally, the less progress that has been made in the proceedings or the broader the range of potential results, the harder it is for us to estimate losses or ranges of losses that it is reasonably possible we could incur.
The PNC Financial Services Group, Inc. Form 10-K 203 |
As a result of these types of factors, we are unable, at this time, to estimate the losses that it is reasonably possible that we could incur or ranges of such losses with respect to some of the matters disclosed, and the aggregate estimated amount provided above does not include an estimate for every Disclosed Matter. Therefore, as the estimated aggregate amount disclosed above does not include all of the Disclosed Matters, the amount disclosed above does not represent our maximum reasonably possible loss exposure for all of the Disclosed Matters. The estimated aggregate amount also does not reflect any of our exposure to matters not so disclosed, as discussed below under Other.
We include in some of the descriptions of individual Disclosed Matters certain quantitative information related to the plaintiffs claim against us as alleged in the plaintiffs pleadings or other public filings or otherwise publicly available information. While information of this type may provide insight into the potential magnitude of a matter, it does not necessarily represent our estimate of reasonably possible loss or our judgment as to any currently appropriate accrual.
Some of our exposure in Disclosed Matters may be offset by applicable insurance coverage. We do not consider the possible availability of insurance coverage in determining the amounts of any accruals (although we record the amount of related insurance recoveries that are deemed probable up to the amount of the accrual) or in determining any estimates of possible losses or ranges of possible losses.
Interchange Litigation
Beginning in June 2005, a series of antitrust lawsuits were filed against Visa ® , MasterCard ® , and several major financial institutions, including cases naming National City (since merged into PNC) and its subsidiary, National City Bank of Kentucky (since merged into National City Bank which in turn was merged into PNC Bank, N.A.). The cases have been consolidated for pretrial proceedings in the United States District Court for the Eastern District of New York under the caption In re Payment Card Interchange Fee and Merchant-Discount Antitrust Litigation (Master File No. 1:05-md-1720-JG-JO). Those cases naming National City were brought as class actions on behalf of all persons or business entities who have accepted Visa ® or Master Card ® . The plaintiffs, merchants operating commercial businesses throughout the U.S. and trade associations, allege, among other things, that the defendants conspired to fix the prices for general purpose card network services and otherwise imposed unreasonable restraints on trade, resulting in the payment of inflated interchange fees, in violation of the antitrust laws. In January 2009, the plaintiffs filed amended and supplemental complaints adding, among other things, allegations that the restructuring of Visa and MasterCard, each of which included an initial public offering, violated the antitrust laws. In their complaints, the plaintiffs seek, among other things, injunctive
relief, unspecified damages (trebled under the antitrust laws) and attorneys fees.
In July 2012, the parties entered into a memorandum of understanding with the class plaintiffs and an agreement in principle with certain individual plaintiffs with respect to a settlement of these cases, under which the defendants will collectively pay approximately $6.6 billion to the class and individual settling plaintiffs and have agreed to changes in the terms applicable to their respective card networks (including an eight-month reduction in default credit interchange rates). The parties entered into a definitive agreement with respect to this settlement in October 2012. The court granted final approval of the settlement in December 2013. Several objectors have appealed the order of approval to the United States Court of Appeals for the Second Circuit, which appeal is pending. As a result of the previously funded litigation escrow (described in Note 22 Commitments and Guarantees), which will cover substantially all of our share of the Visa portion of this settlement, we anticipate no material financial impact from the monetary amount of this settlement. Numerous merchants, including some large national merchants, have objected to or requested exclusion (opted out) from the proposed class settlements, and some of those opting out have lawsuits pending in federal and state courts against Visa, MasterCard and, in some instances, one or more of the other issuing banks (including PNC).
National City and National City Bank entered into judgment and loss sharing agreements with Visa and certain other banks with respect to all of the above referenced litigation. All of the litigation against Visa is also subject to the indemnification obligations described in Note 22 Commitments and Guarantees. PNC Bank, N.A. is not named a defendant in any of the Visa or MasterCard related antitrust litigation nor was it initially a party to the judgment or loss sharing agreements, but it has been subject to these indemnification obligations and became responsible for National City Banks position in the litigation and responsibilities under the agreements upon completion of the merger of National City Bank into PNC Bank, N.A. In March 2011, we entered into a MasterCard Settlement and Judgment Sharing Agreement with MasterCard and other financial institution defendants and an Omnibus Agreement Regarding Interchange Litigation Sharing and Settlement Sharing with Visa, MasterCard and other financial institution defendants. If there is a resolution of all claims against all defendants, the Omnibus Agreement, in substance, apportions that resolution into a Visa portion and a MasterCard portion, with the Visa portion being two-thirds and the MasterCard portion being one-third. This apportionment only applies in the case of either a global settlement involving all defendants or an adverse judgment against the defendants, to the extent that damages either are related to the merchants inter-network conspiracy claims or are otherwise not attributed to specific MasterCard or Visa conduct or damages. The MasterCard portion (or any MasterCard-related liability not subject to the Omnibus
204 The PNC Financial Services Group, Inc. Form 10-K |
Agreement) will then be apportioned under the MasterCard Settlement and Judgment Sharing Agreement among MasterCard and PNC and the other financial institution defendants that are parties to this agreement. The responsibility for the Visa portion (or any Visa-related liability not subject to the Omnibus Agreement) will be apportioned under the pre-existing indemnification responsibilities and judgment and loss sharing agreements.
CBNV Mortgage Litigation
Between 2001 and 2003, on behalf of either individual plaintiffs or proposed classes of plaintiffs, several separate lawsuits were filed in state and federal courts against Community Bank of Northern Virginia (CBNV), a PNC Bank predecessor, and other defendants asserting claims arising from second mortgage loans made to the plaintiffs. The state lawsuits were removed to federal court and, with the lawsuits that had been filed in federal court, were consolidated for pre-trial proceedings in a multidistrict litigation (MDL) proceeding in the United States District Court for the Western District of Pennsylvania under the caption In re: Community Bank of Northern Virginia Lending Practices Litigation (No. 03-0425 (W.D. Pa.), MDL No. 1674). In January 2008, the Pennsylvania district court issued an order sending back to the General Court of Justice, Superior Court Division, for Wake County, North Carolina the claims of two proposed class members. These claims are asserted in a case originally filed in 2001 and captioned Bumpers, et al. v. Community Bank of Northern Virginia (01-CVS-011342).
MDL Proceedings in Pennsylvania . In October 2011, the plaintiffs filed a joint consolidated amended class action complaint covering all of the class action lawsuits pending in this proceeding. The amended complaint names CBNV, another bank, and purchasers of loans originated by CBNV and the other bank (including the Residential Funding Company, LLC (RFC)) as defendants. (In December 2013, the Chapter 11 bankruptcy proceeding involving the RFC was completed with the company being liquidated and claims against the company being resolved, including, through a settlement between the plaintiffs and RFC approved in November 2013, the claims in these lawsuits.) The principal allegations in the amended complaint are that a group of persons and entities collectively characterized as the Shumway/Bapst Organization referred prospective second residential mortgage loan borrowers to CBNV and the other bank, that CBNV and the other bank charged these borrowers improper title and loan fees at loan closings, that the disclosures provided to the borrowers at loan closings were inaccurate, and that CBNV and the other bank paid some of the loan fees to the Shumway/Bapst Organization as purported kickbacks for the referrals. The amended complaint asserts claims for violations of the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), as amended by the Home Ownership and Equity Protection Act (HOEPA),
and the Racketeer Influenced and Corrupt Organizations Act (RICO).
The amended complaint seeks to certify a class of all borrowers who obtained a second residential non-purchase money mortgage loan, secured by their principal dwelling, from either CBNV or the other defendant bank, the terms of which made the loan subject to HOEPA. The plaintiffs seek, among other things, unspecified damages (including treble damages under RICO and RESPA), rescission of loans, declaratory and injunctive relief, interest, and attorneys fees. In November 2011, the defendants filed a motion to dismiss the amended complaint. In June 2013, the court granted in part and denied in part the motion, dismissing the claims of any plaintiff whose loan did not originate or was not assigned to CBNV, narrowing the scope of the RESPA claim, and dismissing several of the named plaintiffs for lack of standing. The court also dismissed the claims against the other lender defendant on jurisdictional grounds. The limitation of the potential class to CBNV borrowers reduces its size to approximately 22,500 from the 50,000 members alleged in the amended complaint. Also in June 2013, the plaintiffs filed a motion for class certification, which was granted in July 2013. In August 2013, we filed a motion seeking leave to appeal the granting of the motion for class certification. The court granted the motion in October 2013, and our appeal is pending.
North Carolina Proceedings . The plaintiffs in Bumpers make similar allegations to those included in the amended complaint in the MDL proceedings. Following the remand to North Carolina state court, the plaintiffs in Bumpers sought to represent a class of North Carolina borrowers in state court proceedings in North Carolina. The plaintiffs claim that this class consists of approximately 650 borrowers. The district court in Pennsylvania handling the MDL proceedings enjoined class proceedings in Bumpers in March 2008. In April 2008, the North Carolina Superior Court granted the Bumpers plaintiffs motion for summary judgment on their individual claims and awarded them approximately $11,000 each plus interest. CBNV appealed the grant of the motion for summary judgment. In September 2011, the North Carolina Court of Appeals affirmed in part and reversed in part the granting of the plaintiffs motion for summary judgment. The court affirmed the judgment on the plaintiffs claim that they paid a loan discount fee but were not provided a loan discount. It reversed the judgment on the plaintiffs claim that they were overcharged for settlement services and remanded that claim for trial. The court also held that, in light of the Pennsylvania district courts injunction against class proceedings having been vacated in September 2010, the trial court may on remand consider the issue of class certification. In August 2012, the North Carolina Supreme Court granted our petition for discretionary review of the decision of the North Carolina Court of Appeals. The appeal was argued in January 2013. In August 2013, the North Carolina Supreme Court reversed the decision of the Court of Appeals and remanded the case to the Superior Court for further proceedings. In September 2013,
The PNC Financial Services Group, Inc. Form 10-K 205 |
after the other plaintiff voluntarily dismissed his case, the remaining plaintiff filed a motion for leave to amend his complaint in the trial court. The plaintiffs remaining claims, as reflected in the proposed amended complaint, relate exclusively to the loan discount fee.
Overdraft Litigation
Beginning in October 2009, PNC Bank, National City Bank and RBC Bank (USA) have been named in lawsuits brought as class actions relating to the manner in which they charged overdraft fees on ATM and debit transactions to customers and related matters. All but two of these lawsuits, both pending against RBC Bank (USA), have been settled. The following is a description of the remaining pending lawsuits.
The pending lawsuits naming RBC Bank (USA), along with similar lawsuits pending against numerous other banks, have been consolidated for pre-trial proceedings in the United States District Court for the Southern District of Florida (the MDL Court) under the caption In re Checking Account Overdraft Litigation (MDL No. 2036, Case No. 1:09-MD-02036-JLK ). A consolidated amended complaint was filed in December 2010 that consolidated all of the claims in these MDL Court cases. The first case against RBC Bank (USA) pending in the MDL Court ( Dasher v. RBC Bank (10-cv-22190-JLK)) was filed in July 2010 in the United States District Court for the Southern District of Florida. The other case against RBC Bank (USA) ( Avery v. RBC Bank (Case No. 10-cv-329)) was originally filed in North Carolina state court in July 2010 and was removed to the United States District Court for the Eastern District of North Carolina before being transferred to the MDL Court. An amended complaint was filed in Avery in August 2010.
These cases seek to certify multi-state classes of customers for the common law claims described below (covering all states in which RBC Bank (USA) had retail branch operations during the class periods), and subclasses of RBC Bank (USA) customers with accounts in North Carolina branches, with each subclass being asserted for purposes of claims under those states consumer protection statutes. No class periods are stated in any of the complaints, other than for the applicable statutes of limitations, which vary by state and claim.
The customer agreements with the plaintiffs in these two cases contain arbitration provisions. RBC Bank (USA)s original motion in Dasher to compel arbitration under these provisions was denied by the MDL Court. This denial was appealed to the United States Court of Appeals for the Eleventh Circuit. While this appeal was pending, the United States Supreme Court issued its decision in AT&T Mobility v. Concepcion , following which the court of appeals vacated the MDL Courts denial of the arbitration motion and remanded to the MDL Court for further consideration in light of the Concepcion decision. RBC Bank (USA)s motion to compel arbitration, now covering both Dasher and Avery , was denied
in January 2013. We appealed the denial of the motion to the United States Court of Appeals for the Eleventh Circuit, which, in February 2014, affirmed the order of the district court denying arbitration. We filed a motion asking the court of appeals to reconsider its decision, which it denied in March 2014. In April 2014, we filed a motion asking the court of appeals to stay its ruling pending the filing of a petition for a writ of certiorari with the U.S. Supreme Court. The court of appeals granted our motion later in April 2014 and stayed its ruling until July 2014. We filed a petition for a writ of certiorari in June 2014, which was denied in October 2014. Accordingly, the stay of the court of appeals ruling is no longer in effect. In December 2014, we filed a motion to dismiss the complaint.
The complaints in each of these lawsuits allege that the banks engaged in unlawful practices in assessing overdraft fees arising from electronic point-of-sale and ATM debits. The principal practice challenged in these lawsuits is the banks purportedly common policy of posting debit transactions on a daily basis from highest amount to lowest amount, thereby allegedly inflating the number of overdraft fees assessed. Other practices challenged include the failure to decline to honor debit card transactions where the account has insufficient funds to cover the transactions.
The plaintiffs assert claims for unconscionability; unjust enrichment; and violation of the consumer protection statute of North Carolina. In the Dasher complaint , the plaintiffs also assert claims for a breach of the covenant of good faith and fair dealing and for conversion. The plaintiffs seek, among other things, restitution of overdraft fees paid, unspecified actual and punitive damages (with actual damages, in some cases, trebled under state law), pre-judgment interest, attorneys fees, and declaratory relief finding the overdraft policies to be unfair and unconscionable.
Fulton Financial
In 2009, Fulton Financial Advisors, N.A. filed lawsuits against PNC Capital Markets, LLC and NatCity Investments, Inc. in the Court of Common Pleas of Lancaster County, Pennsylvania arising out of Fultons purchase of auction rate certificates (ARCs) through PNC and NatCity. Each of the lawsuits alleges violations of the Pennsylvania Securities Act, negligent misrepresentation, negligence, breach of fiduciary duty, common law fraud, and aiding and abetting common law fraud in connection with the purchase of the ARCs by Fulton. Specifically, Fulton alleges that, as a result of the decline of financial markets in 2007 and 2008, the market for ARCs became illiquid; that PNC and NatCity knew or should have known of the increasing threat of the ARC market becoming illiquid; and that PNC and NatCity did not inform Fulton of this increasing threat, but allowed Fulton to continue to purchase ARCs, to Fultons detriment. In its complaints, Fulton alleges that it then held ARCs purchased through PNC for a price of more than $123 million and purchased through
206 The PNC Financial Services Group, Inc. Form 10-K |
NatCity for a price of more than $175 million. In each complaint, Fulton seeks, among other things, unspecified actual and punitive damages, rescission, attorneys fees and interest.
In the case against PNC ( Fulton Financial Advisors, N.A. v. PNC Capital Markets, LLC (CI 09-10838)), PNC filed preliminary objections to Fultons complaint, which were denied. NatCity removed the case against it to the United States District Court for the Eastern District of Pennsylvania ( Fulton Financial Advisors, N.A. v. NatCity Investments, Inc . (No. 5:09-cv-04855)), and in November 2009 filed a motion to dismiss the complaint. In October 2013, the court granted the motion to dismiss with respect to claims under the Pennsylvania Securities Act and for negligent misrepresentation, common law fraud, and aiding and abetting common law fraud and denied the motion with respect to claims for negligence and breach of fiduciary duty. Fulton filed an amended complaint in December 2013, reasserting its negligence and breach of fiduciary duty claims and adding a new claim under the Pennsylvania Securities Act. Fulton and NatCity filed motions for summary judgment in February 2015.
Weavering Macro Fixed Income Fund
In July 2009, the liquidators of the Weavering Macro Fixed Income Fund Limited (Weavering) issued a Plenary Summons in the High Court, Dublin, Ireland, in connection with the provision of administration services to Weavering by a European subsidiary of PNC Global Investment Servicing (PNC GIS), then a subsidiary of PNC. The Plenary Summons was served on the PNC GIS subsidiary (GIS Europe) on or about June 30, 2010.
In July 2010, PNC completed the sale of PNC GIS to The Bank of New York Mellon Corporation (BNY Mellon), pursuant to a stock purchase agreement dated February 1, 2010. In May 2011, BNY Mellon provided notice to PNC of an indemnification claim pursuant to the stock purchase agreement related to this litigation. PNCs responsibility for this litigation was subject to the terms and limitations included in the indemnification provisions of the stock purchase agreement.
In November 2014, the parties reached a settlement of this litigation. The settlement is conditioned on court approval in the Cayman Islands, where Weavering was organized. The Cayman Islands court approved the settlement in February 2015. The amount of the settlement is not material to PNC.
In its Notice of Intention to Proceed and Statement of Claim, which the liquidator served in May 2011, the liquidator alleged, among other things, that GIS Europe breached its contractual duties to Weavering as well as an alleged duty of care to Weavering, and investors in Weavering, and made claims of breach of the administration and accounting services agreement, negligence, gross negligence, breach of duty,
misrepresentation and negligent misstatement. The statement of claim further alleged that investors in Weavering lost approximately 282,000,000 and that, in addition, expended approximately 98,000,000 in brokerage and exchange commissions, interest, and fees as a result of the transactions at issue. The statement of claim sought, among other things, damages, costs, and interest. In January 2014, in response to a motion made by GIS Europe, the court entered a consent order adjourning the motion and staying the plaintiffs claims until the plaintiff complies in full with its discovery obligations. The plaintiff was required to complete its production by early July 2014, but, in that month, the court extended the deadline for doing so until December 2014.
Captive Mortgage Reinsurance Litigation
In December 2011, a lawsuit ( White, et al. v. The PNC Financial Services Group, Inc., et al. (Civil Action No. 11-7928)) was filed against PNC (as successor in interest to National City Corporation and several of its subsidiaries) and several mortgage insurance companies in the United States District Court for the Eastern District of Pennsylvania. This lawsuit, which was brought as a class action, alleges that National City structured its program of reinsurance of private mortgage insurance in such a way as to avoid a true transfer of risk from the mortgage insurers to National Citys captive reinsurer. The plaintiffs allege that the payments from the mortgage insurers to the captive reinsurer constitute kickbacks, referral payments, or unearned fee splits prohibited under the Real Estate Settlement Procedures Act (RESPA), as well as common law unjust enrichment. The plaintiffs claim, among other things, that from the beginning of 2004 until the end of 2010 National Citys captive reinsurer collected from the mortgage insurance company defendants at least $219 million as its share of borrowers private mortgage insurance premiums and that its share of paid claims during this period was approximately $12 million. The plaintiffs seek to certify a nationwide class of all persons who obtained residential mortgage loans originated, funded or originated through correspondent lending by National City or any of its subsidiaries or affiliates between January 1, 2004 and the present and, in connection with these mortgage loans, purchased private mortgage insurance and whose residential mortgage loans were included within National Citys captive mortgage reinsurance arrangements. Plaintiffs seek, among other things, statutory damages under RESPA (which include treble damages), restitution of reinsurance premiums collected, disgorgement of profits, and attorneys fees. In August 2012, the district court directed the plaintiffs to file an amended complaint, which the plaintiffs filed in September 2012. In November 2012, we filed a motion to dismiss the amended complaint. The court dismissed, without prejudice, the amended complaint in June 2013 on statute of limitations grounds. A second amended complaint, in response to the courts dismissal order, was filed in July 2013. We filed a motion to dismiss the second amended complaint, also in July 2013. In August 2014, the court denied the motion to dismiss.
The PNC Financial Services Group, Inc. Form 10-K 207 |
We then filed an uncontested motion to stay all proceedings pending the outcome of another matter currently on appeal before the United States Court of Appeals for the Third Circuit that involves overlapping issues. In September 2014, the district court granted the stay. In October 2014, the court of appeals decided that other matter, holding that the RESPA claims in that case were barred by the statute of limitations. We then filed a motion for reconsideration of the denial of our motion to dismiss in light of the court of appeals decision. In January 2015, the district court denied our motion.
Residential Mortgage-Backed Securities Indemnification Demands
We have received indemnification demands from several entities sponsoring residential mortgage-backed securities and their affiliates where purchasers of the securities have brought litigation against the sponsors and other parties involved in the securitization transactions. National City Mortgage had sold whole loans to the sponsors or their affiliates that were allegedly included in certain of these securitization transactions. According to the indemnification demands, the plaintiffs claims in these lawsuits are based on alleged misstatements and omissions in the offering documents for these transactions. The indemnification demands assert that agreements governing the sale of these loans or the securitization transactions to which National City Mortgage was a party require us to indemnify the sponsors and their affiliates for losses suffered in connection with these lawsuits. The parties have settled several of these cases. There has not been any determination that the parties seeking indemnification have any liability to the plaintiffs in the other lawsuits and the amount, if any for which we are responsible in the settled cases has not been determined.
Lender Placed Insurance Litigation
In June 2013, a lawsuit ( Lauren vs. PNC Bank, N.A ., et al .(Case No. 2:14-cv-00230)) was filed in the United States District Court for the Western District of Pennsylvania, subsequently transferred to the United States District Court for the Southern District of Ohio, against PNC Bank and American Security Insurance Company (ASIC), a provider of property and casualty insurance to PNC for certain residential mortgages. This lawsuit, which was brought as a class action, alleges, with respect to PNC Bank, that it breached alleged contractual (including the implied covenant of good faith and fair dealing) and fiduciary duties to residential mortgage borrowers, and, as to Ohio borrowers, violated the Ohio Consumer Sales Practice Act, all in connection with the administration of PNC Banks program for placement of insurance for borrowers who fail to obtain hazard insurance coverages required by the terms of their mortgages. The plaintiff alleges, among other things, that defendants placed insurance in unnecessary and excessive amounts and that PNC Bank improperly profited from these arrangements, principally as a result of the payment of
commissions to PNC Bank and of reinsurance arrangements between PNC and the insurance provider. The plaintiff originally sought to certify a nationwide class and an Ohio sub-class of all persons who, during applicable periods, have or had a residential mortgage loan or line of credit with PNC Bank, and had hazard insurance placed upon the property by PNC Bank. The plaintiff seeks, among other things, damages, restitution or disgorgement of profits improperly obtained, injunctive relief, interest, and attorneys fees. In October 2013, the court ruled on our motion to dismiss the complaint, granting our motion with respect to the Ohio Consumer Sales Practice Act claim and otherwise denying the motion. We filed a motion seeking reconsideration of the denial as to the fiduciary duty claim, which motion was denied in November 2013. In January 2014, the court granted ASICs motion to dismiss the nationwide class action allegations with respect to the state common law claim of unjust enrichment pending against ASIC. Later in January 2014, PNC Bank filed a similar motion to dismiss the nationwide class action allegations, on the same grounds as asserted in ASICs motion to dismiss, with respect to the state common law claims of breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty pending against PNC Bank. The plaintiff thereafter agreed to withdraw those allegations. In February 2014, the court entered an order dismissing the plaintiffs nationwide class action allegations with regard to all remaining claims against PNC, thereby leaving an Ohio-only class sought by plaintiff as to those claims. Also in February 2014, the court on its own motion transferred the matter to the United States District Court for the Southern District of Ohio, and the plaintiff moved to amend her complaint to, among other things, assert a nationwide RICO claim on behalf of the class. In May 2014, the court granted the plaintiffs motion to amend her complaint, with the understanding that defendants may pursue their arguments against the viability of this claim by way of a motion to dismiss. In June 2014, the defendants moved to dismiss the amended complaint. The motion is pending.
In February and March 2014, two additional class action lawsuits were filed. One of them ( Montoya, et al. v. PNC Bank, N.A., et al. , Case No. 1:14-cv-20474-JEM) was filed in the United States District Court for the Southern District of Florida against PNC Bank, ASIC and its parent, Assurant, Inc. The other case ( Tighe v. PNC Bank, N.A., et al ., Case No. 14-CV-2017) was filed in the United States District Court for the Southern District of New York against these same parties as well as Alpine Indemnity Limited, a reinsurance subsidiary of PNC. The allegations of these complaints are similar to those found in the Lauren complaint. In May 2014, the Tighe lawsuit was transferred to the United States District Court for the Southern District of Ohio. In June 2014, the Tighe plaintiff filed a notice of voluntary dismissal without prejudice, thereby terminating that action.
In the complaint, the plaintiffs in Montoya assert breach of contract by PNC, breach of its duty of good faith and fair dealing, unjust enrichment, breach of a fiduciary duty, and
208 The PNC Financial Services Group, Inc. Form 10-K |
violations of Florida and New Jersey statutes pertaining to deceptive and unfair trade practices. These plaintiffs also assert claims under the federal TILA and RICO statutes. The plaintiffs seek a nationwide class on all claims except the state law statutory claims, for which they seek to certify subclasses of Florida and New Jersey residents, respectively. The plaintiffs seek, among other things, damages (including treble damages), disgorgement of unjust benefits, injunctive relief, interest and attorneys fees. PNC filed a motion to dismiss the complaint in Montoya in May 2014. In August 2014, the court in Montoya granted in part and denied in part PNCs motion to dismiss. Specifically, the court dismissed the breach of contract, Florida deceptive and unfair trade practices, and federal TILA and RICO claims, although it allowed the RICO claims to be re-pled. The remaining claims are state claims for breach of the covenant of good faith, unjust enrichment, the New Jersey Consumer Fraud Act, and breach of fiduciary duty. Thereafter, in September 2014, on plaintiffs uncontested motions, the Lauren lawsuit was voluntarily dismissed and a third amended complaint in Montoya was filed adding Lauren as a plaintiff there. In October 2014, PNC moved to partially dismiss the third amended complaint. The motion to dismiss seeks dismissal of the re-pleaded RICO claims and plaintiff Laurens state law claims for breach of the covenant of good faith and fair dealing and breach of fiduciary duty. At the same time, PNC also moved to strike nationwide class allegations with respect to the state law claims. Shortly thereafter, the plaintiffs stipulated to this relief, as a result of which the plaintiffs state law claims are now being brought solely as statewide class action claims in the three states in which the plaintiffs reside. In January 2015, the plaintiffs filed a motion for class certification.
Patent Infringement Litigation
In June 2013, a lawsuit ( Intellectual Ventures I LLC and Intellectual Ventures II LLC vs. PNC Financial Services Group, Inc., and PNC Bank, NA , Case No. 2:13-cv-00740-AJS) was filed in the United States District Court for the Western District of Pennsylvania against PNC and PNC Bank for patent infringement. The plaintiffs allege that multiple systems by which PNC and PNC Bank provide online banking services and other services via electronic means infringe five patents owned by the plaintiffs. The plaintiffs seek, among other things, a declaration that PNC and PNC Bank are infringing each of the patents, damages for past and future infringement, and attorneys fees. In July 2013, we filed an answer with counterclaims, denying liability and seeking declarations that the asserted patents are invalid and that PNC has not infringed them. In November 2013, PNC filed Covered Business Method/Post Grant Review petitions in the U.S. Patent & Trademark Office (PTO) seeking to invalidate all five of the patents. In December 2013, the court dismissed the plaintiffs claims as to two of the patents and entered a stay of the lawsuit pending the PTOs consideration of PNCs review petitions, including any appeals from decisions of the PTO. The PTO instituted review proceedings
in May 2014 on four of the five patents at issue, finding that the subject matter of those patents was more likely than not unpatentable. The court previously dismissed the plaintiffs claims with respect to the one patent not selected for review by the PTO.
In June 2014, Intellectual Ventures filed a second lawsuit ( Intellectual Ventures I LLC and Intellectual Ventures II LLC v. PNC Bank Financial Services Group, Inc., PNC Bank NA, and PNC Merchant Services Company, LP , Case No. 2:14-cv-00832-AKS) in the same court as the first lawsuit. This lawsuit alleges that PNC defendants infringed five patents, including the patent dismissed in the first lawsuit that is not subject to PTO review, and relates generally to the same technology and subject matter as the first lawsuit. The court has stayed this case pending the PTOs consideration of various review petitions of the patents at issue in this case, as well as the review of the patents at issue in the first lawsuit and the appeals from any PTO decisions.
Mortgage Repurchase Litigation
In December 2013, Residential Funding Company, LLC (RFC) filed a lawsuit in the United States District Court for the District of Minnesota against PNC Bank, N.A., as alleged successor in interest to National City Mortgage Co., NCMC Newco, Inc., and North Central Financial Corporation ( Residential Funding Company, LLC v. PNC Bank, N.A., et al. (Civil No. 13-3498- JRT-JSM)). In its complaint, RFC alleges that PNC Bank (through predecessors) sold $6.5 billion worth of residential mortgage loans to RFC during the timeframe at issue (approximately May 2006 through September 2008), a portion of which were allegedly materially defective, resulting in damages and losses to RFC. RFC alleges that PNC Bank breached representations and warranties made under seller contracts in connection with these sales. The complaint asserts claims for breach of contract and indemnification. RFC seeks, among other things, monetary damages, costs, and attorneys fees. In March 2014, we filed a motion to dismiss the complaint. RFC then filed an amended complaint, as well as a motion to transfer the lawsuit to the United States Bankruptcy Court for the Southern District of New York. In April 2014, we moved to dismiss the amended complaint. In June 2014, RFC withdrew its motion to transfer the lawsuit. In October 2014, the court granted our motion to dismiss with prejudice the breach of contract claims in the complaint with respect to loans sold before May 14, 2006 and otherwise denied our motion to dismiss.
Pre-need Funeral Arrangements
National City Bank and PNC Bank are defendants in a lawsuit pending in the United States District Court for the Eastern District of Missouri under the caption Jo Ann Howard, P.C., et al. v. Cassity, et al. (No. 4:09-CV-1252-ERW) arising out of trustee services provided by Allegiant Bank, a National City Bank and PNC Bank predecessor, with respect to Missouri trusts that held pre-need funeral contract assets. Under a pre-
The PNC Financial Services Group, Inc. Form 10-K 209 |
need funeral contract, a customer pays an amount up front in exchange for payment of funeral expenses following the customers death. In a number of states, including Missouri, pre-need funeral contract sellers are required to deposit a portion of the proceeds of the sale of pre-need funeral contracts in a trust account.
The lawsuit was filed in August 2009 by the Special Deputy Receiver for three insolvent affiliated companies, National Prearranged Services, Inc. a seller of pre-need funeral contracts (NPS), Lincoln Memorial Life Insurance Company (Lincoln), and Memorial Service Life Insurance Company (Memorial). Seven individual state life and health insurance guaranty associations, who claim they are liable under state law for payment of certain benefits under life insurance policies sold by Lincoln and Memorial, and the National Organization of Life & Health Guaranty Associations have also joined the action as plaintiffs. In addition to National City Bank and PNC Bank (added following filing of the lawsuit as successor-in-interest to National City Bank), other defendants included members of the Cassity family, who controlled NPS, Lincoln, and Memorial; officers and directors of NPS, Lincoln, and Memorial; auditors and attorneys for NPS, Lincoln, and Memorial; the trustees of each of the trusts that held pre-need funeral contract assets; and the investment advisor to the Pre-need Trusts. NPS retained several banks to act as trustees for the trusts holding NPS pre-need funeral contract assets (the NPS Trusts), with Allegiant Bank acting as one of these trustees with respect to seven Missouri NPS Trusts. All of the other defendants have settled with the plaintiffs, are otherwise no longer a party to the lawsuit, or are insolvent.
In their Third Amended Complaint, filed in 2012 following the granting by the court in part of motions to dismiss made by National City Bank and the other NPS Trust trustees, the plaintiffs allege that Allegiant Bank breached its fiduciary duties and acted negligently as the trustee for the Missouri NPS Trusts. In part as a result of these breaches, the plaintiffs allege, members of the Cassity family, acting in concert with other defendants, were able to improperly remove millions of dollars from the NPS Trusts, which in turn caused NPS, Lincoln, and Memorial to become insolvent. The complaint alleges $600 million in present and future losses to the plaintiffs due to the insolvency of NPS, Lincoln, and Memorial. The lawsuit seeks, among other things, unspecified actual and punitive damages, various equitable remedies including restitution, attorneys fees, costs of suit and interest.
In July 2013, five of the six defendants in a parallel federal criminal action, including two members of the Cassity family, entered into plea agreements with the United States to resolve criminal charges arising out of their conduct at NPS, Lincoln and Memorial. In August 2013, after a jury trial, the sixth defendant, the investment advisor to the NPS Trusts, was convicted on all criminal counts against him. The criminal charges against the defendants alleged, among other thing, a
scheme to defraud Allegiant Bank and the other trustees of the NPS Trusts.
In May 2014, the court granted the plaintiffs motion to disallow National City Banks affirmative defense relating to the plaintiffs alleged failure to mitigate damages. In July 2014, National City Banks motion for reconsideration was denied. In September 2014, the plaintiffs filed a motion seeking leave to amend their complaint to reassert aiding and abetting claims, previously dismissed by the court in 2012. The court denied this motion in December 2014. Also in December 2014, the court granted in part and denied in part National City Banks motion for summary judgment.
A jury trial in this case began in February 2015.
Other Regulatory and Governmental Inquiries
PNC is the subject of investigations, audits and other forms of regulatory and governmental inquiry covering a broad range of issues in our banking, securities and other financial services businesses, in some cases as part of reviews of specified activities at multiple industry participants. Over the last few years, we have experienced an increase in regulatory and governmental investigations, audits and other inquiries. Areas of current regulatory or governmental inquiry with respect to PNC include consumer protection, fair lending, mortgage origination and servicing, mortgage and non mortgage-related insurance and reinsurance, municipal finance activities, conduct by broker-dealers, automobile lending practices, and participation in government insurance or guarantee programs, some of which are described below. These inquiries, including those described below, may lead to administrative, civil or criminal proceedings, and possibly result in remedies including fines, penalties, restitution, or alterations in our business practices, and in additional expenses and collateral costs.
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One area of significant regulatory and governmental focus has been mortgage lending and servicing. Numerous federal and state governmental, legislative and regulatory authorities are investigating practices in this area. PNC has received inquiries from, or is the subject of investigations by, a broad range of governmental, legislative and regulatory authorities relating to our activities in this area and is cooperating with these investigations and inquiries. As a result of the number and range of authorities conducting the investigations and inquiries, as well as the nature of these types of investigations and inquiries, among other factors, PNC cannot at this time predict the ultimate overall cost to or effect on PNC from potential governmental, legislative or regulatory actions arising out of these investigations and inquiries. |
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In April 2011, as a result of a publicly-disclosed interagency horizontal review of residential mortgage servicing operations at fourteen federally regulated mortgage servicers, PNC entered into a consent order with the Board of |
210 The PNC Financial Services Group, Inc. Form 10-K |
Governors of the Federal Reserve System and PNC Bank entered into a consent order with the Office of the Comptroller of the Currency. Collectively, these consent orders describe certain foreclosure-related practices and controls that the regulators found to be deficient and require PNC and PNC Bank to, among other things, develop and implement plans and programs to enhance PNCs residential mortgage servicing and foreclosure processes, retain an independent consultant to review certain residential mortgage foreclosure actions, take certain remedial actions, and oversee compliance with the orders and the new plans and programs. The two orders do not foreclose the potential for civil money penalties from either of these regulators, although the range of potential penalties communicated to PNC by the regulators in connection with the agreements described below is not material to PNC. |
In connection with these orders, PNC established a Compliance Committee of the Boards of PNC and PNC Bank to monitor and coordinate PNCs and PNC Banks implementation of the commitments under the orders. PNC and PNC Bank are executing Action Plans designed to meet the requirements of the orders. Consistent with the orders, PNC also engaged an independent consultant to conduct a review of certain residential foreclosure actions, including those identified through borrower complaints, and identify whether any remedial actions for borrowers are necessary.
In early 2013, PNC and PNC Bank, along with twelve other residential mortgage servicers, reached agreements with the OCC and the Federal Reserve to amend these consent orders. Pursuant to the amended consent orders, in order to accelerate the remediation process, PNC agreed to make a payment of approximately $70 million for distribution to potentially affected borrowers in the review population and to provide approximately $111 million in additional loss mitigation or other foreclosure prevention relief, which may be satisfied pursuant to the amended consent orders by a variety of borrower relief actions or by additional cash payments or resource commitments to borrower counseling or education. Fulfillment of these commitments will satisfy all of PNCs and PNC Banks obligations under the consent orders in connection with the independent foreclosure review. We do not expect any additional financial charges related to the amendment to the consent orders to be material. PNCs and PNC Banks obligations to comply with the remaining provisions of the consent orders remain.
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In February 2012, the Department of Justice, other federal regulators and 49 state attorneys general announced agreements with the five largest mortgage servicers. Written agreements were filed with the U.S. District Court for the Southern District of New York in March 2012. Under these agreements, the mortgage servicers will make cash payments to federal and state governments, provide various forms of financial relief to borrowers, and implement new mortgage servicing standards. These governmental authorities are continuing their review of, and have engaged in discussions with, other mortgage servicers, including PNC, that were subject to the interagency horizontal review, which could result in the imposition of substantial payments and other forms of relief (similar to that agreed to by the five largest servicers) on some or all of these mortgage servicers, including PNC. Whether and to what extent any such relief may be imposed on PNC is not yet known. |
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PNC has received subpoenas from the U.S. Attorneys Office for the Southern District of New York. The first two subpoenas, served in 2011, concern National City Banks lending practices in connection with loans insured by the Federal Housing Administration (FHA) as well as certain non-FHA-insured loan origination, sale and securitization practices, and a third, served in 2013, seeks information regarding claims for costs that are incurred by foreclosure counsel in connection with the foreclosure of loans insured or guaranteed by FHA, FNMA, or FHLMC. PNC is cooperating with the investigations. |
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The Department of Justice, Consumer Protection Bureau, served a subpoena on PNC in 2013 seeking information concerning the return rate for certain merchant and payment processor customers with whom PNC has a depository relationship. We believe that the subpoena is intended to determine whether, and to what extent, PNC may have facilitated fraud committed by third-parties against consumers. We are cooperating with the subpoena. |
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Through the U.S. Attorneys Office for the District of Maryland, the office of the Inspector General for the Small Business Administration (SBA) served a subpoena on PNC in 2012 requesting documents concerning PNCs relationship with, including SBA-guaranteed loans made through, a broker named Jade Capital Investments, LLC (Jade), as well as information regarding other PNC-originated SBA guaranteed loans made to businesses located in the State of Maryland, the Commonwealth of Virginia, |
The PNC Financial Services Group, Inc. Form 10-K 211 |
and Washington, DC. Certain of the Jade loans have been identified in an indictment and subsequent superseding indictment charging persons associated with Jade with conspiracy to commit bank fraud, substantive violations of the federal bank fraud statute, and money laundering. PNC is cooperating with the U.S. Attorneys Office for the District of Maryland. |
Our practice is to cooperate fully with regulatory and governmental investigations, audits and other inquiries, including those described in this Note 21.
Other
In addition to the proceedings or other matters described above, PNC and persons to whom we may have indemnification obligations, in the normal course of business, are subject to various other pending and threatened legal proceedings in which claims for monetary damages and other relief are asserted. We do not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of such other legal proceedings will have a material adverse effect on our financial position. However, we cannot now determine whether or not any claims asserted against us or others to whom we may have indemnification obligations, whether in the proceedings or other matters described above or otherwise, will have a material adverse effect on our results of operations in any future reporting period, which will depend on, among other things, the amount of the loss resulting from the claim and the amount of income otherwise reported for the reporting period.
See Note 22 Commitments and Guarantees for additional information regarding the Visa indemnification and our other obligations to provide indemnification, including to current and former officers, directors, employees and agents of PNC and companies we have acquired.
N OTE 22 C OMMITMENTS AND G UARANTEES
Credit Extension Commitments
In millions |
December 31
2014 |
December 31
2013 |
||||||
Net unfunded loan commitments |
||||||||
Total commercial lending |
$ | 99,837 | $ | 90,104 | ||||
Home equity lines of credit |
17,839 | 18,754 | ||||||
Credit card |
17,833 | 16,746 | ||||||
Other |
4,178 | 4,266 | ||||||
Total net unfunded loan commitments |
139,687 | 129,870 | ||||||
Net outstanding standby letters of credit (a) |
9,991 | 10,521 | ||||||
Total credit commitments |
$ | 149,678 | $ | 140,391 |
(a) | Net outstanding standby letters of credit include $5.2 billion and $6.6 billion which support remarketing programs at December 31, 2014 and December 31, 2013, respectively. |
Net Unfunded Loan Commitments
Commitments to extend credit represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. These commitments generally have fixed expiration dates, may require payment of a fee, and contain termination clauses in the event the customers credit quality deteriorates. Based on our historical experience, some commitments expire unfunded, and therefore cash requirements are substantially less than the total commitment.
Net Outstanding Standby Letters of Credit
We issue standby letters of credit and have risk participations in standby letters of credit issued by other financial institutions, in each case to support obligations of our customers to third parties, such as insurance requirements and the facilitation of transactions involving capital markets product execution. Internal credit ratings related to our net outstanding standby letters of credit were as follows:
Table 149: Internal Credit Ratings Related to Net Outstanding Standby Letters of Credit
December 31
2014 |
December 31
2013 |
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Internal credit ratings (as a percentage of portfolio): |
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Pass (a) |
95 | % | 96 | % | ||||
Below pass (b) |
5 | % | 4 | % |
(a) | Indicates that expected risk of loss is currently low. |
(b) | Indicates a higher degree of risk of default. |
If the customer fails to meet its financial or performance obligation to the third party under the terms of the contract or there is a need to support a remarketing program, then upon a draw by a beneficiary, subject to the terms of the letter of credit, we would be obligated to make payment to them. The standby letters of credit outstanding on December 31, 2014 had terms ranging from less than 1 year to 8 years.
As of December 31, 2014, assets of $1.0 billion secured certain specifically identified standby letters of credit. In addition, a portion of the remaining standby letters of credit issued on behalf of specific customers is also secured by collateral or guarantees that secure the customers other obligations to us. The carrying amount of the liability for our obligations related to standby letters of credit and participations in standby letters of credit was $182 million at December 31, 2014 and is included in Other liabilities on our Consolidated Balance Sheet.
Other Commitments
Equity Funding and Other Commitments
During 2014, financial support to private equity investments including existing direct portfolio companies and indirect private equity investments of $63 million was provided. This amount is included in Equity Investments on our Consolidated Balance Sheet. Of this amount, $24 million was provided to
212 The PNC Financial Services Group, Inc. Form 10-K |
satisfy contingent fundings to various direct investments and capital calls for commitments to various indirect private equity investments. Support to direct investments is generally to provide for growth financing or to support acquisitions or recapitalizations.
Other commitments related to equity investments at December 31, 2014 were $962 million, of which $169 million were unfunded commitments that were not recorded on our Consolidated Balance Sheet. The remaining $793 million of commitments were included in Other liabilities on our Consolidated Balance Sheet, of which $717 million related to tax credit investments.
Standby Bond Purchase Agreements and Other Liquidity Facilities
We enter into standby bond purchase agreements to support municipal bond obligations. At December 31, 2014, the aggregate of our commitments under these facilities was $1.1 billion. We also enter into certain other liquidity facilities to support individual pools of receivables acquired by commercial paper conduits. There were no commitments under these facilities at December 31, 2014.
Indemnifications
We are a party to numerous acquisition or divestiture agreements under which we have purchased or sold, or agreed to purchase or sell, various types of assets. These agreements can cover the purchase or sale of entire businesses, loan portfolios, branch banks, partial interests in companies, or other types of assets.
These agreements generally include indemnification provisions under which we indemnify the third parties to these agreements against a variety of risks to the indemnified parties as a result of the transaction in question. When PNC is the seller, the indemnification provisions will generally also provide the buyer with protection relating to the quality of the assets we are selling and the extent of any liabilities being assumed by the buyer. Due to the nature of these indemnification provisions, we cannot quantify the total potential exposure to us resulting from them.
We provide indemnification in connection with securities offering transactions in which we are involved. When we are the issuer of the securities, we provide indemnification to the underwriters or placement agents analogous to the indemnification provided to the purchasers of businesses from us, as described above. When we are an underwriter or placement agent, we provide a limited indemnification to the issuer related to our actions in connection with the offering and, if there are other underwriters, indemnification to the other underwriters intended to result in an appropriate sharing of the risk of participating in the offering. Due to the nature of these indemnification provisions, we cannot quantify the total potential exposure to us resulting from them.
In the ordinary course of business, we enter into certain types of agreements that include provisions for indemnifying third parties. We also enter into certain types of agreements, including leases, assignments of leases, and subleases, in which we agree to indemnify third parties for acts by our agents, assignees and/or sublessees, and employees. We also enter into contracts for the delivery of technology service in which we indemnify the other party against claims of patent and copyright infringement by third parties. Due to the nature of these indemnification provisions, we cannot calculate our aggregate potential exposure under them.
In the ordinary course of business, we enter into contracts with third parties under which the third parties provide services on behalf of PNC. In many of these contracts, we agree to indemnify the third party service provider under certain circumstances. The terms of the indemnity vary from contract to contract and the amount of the indemnification liability, if any, cannot be determined.
We are a general or limited partner in certain asset management and investment limited partnerships, many of which contain indemnification provisions that would require us to make payments in excess of our remaining unfunded commitments. While in certain of these partnerships the maximum liability to us is limited to the sum of our unfunded commitments and partnership distributions received by us, in the others the indemnification liability is unlimited. As a result, we cannot determine our aggregate potential exposure for these indemnifications.
In some cases, indemnification obligations of the types described above arise under arrangements entered into by predecessor companies for which we become responsible as a result of the acquisition.
Pursuant to their bylaws, PNC and its subsidiaries provide indemnification to directors, officers and, in some cases, employees and agents against certain liabilities incurred as a result of their service on behalf of or at the request of PNC and its subsidiaries. PNC and its subsidiaries also advance on behalf of covered individuals costs incurred in connection with certain claims or proceedings, subject to written undertakings by each such individual to repay all amounts advanced if it is ultimately determined that the individual is not entitled to indemnification. We generally are responsible for similar indemnifications and advancement obligations that companies we acquire had to their officers, directors and sometimes employees and agents at the time of acquisition. We advanced such costs on behalf of several such individuals with respect to pending litigation or investigations during 2014. It is not possible for us to determine the aggregate potential exposure resulting from the obligation to provide this indemnity or to advance such costs.
The PNC Financial Services Group, Inc. Form 10-K 213 |
Visa Indemnification
Our payment services business issues and acquires credit and debit card transactions through Visa U.S.A. Inc. card association or its affiliates (Visa).
In October 2007, Visa completed a restructuring and issued shares of Visa Inc. common stock to its financial institution members (Visa Reorganization) in contemplation of its initial public offering (IPO). As part of the Visa Reorganization, we received our proportionate share of Class B Visa Inc. common stock allocated to the U.S. members. Prior to the IPO, the U.S. members, which included PNC, were obligated to indemnify Visa for judgments and settlements related to certain specified litigation.
As a result of the acquisition of National City, we became party to judgment and loss sharing agreements with Visa and certain other banks. The judgment and loss sharing agreements were designed to apportion financial responsibilities arising from any potential adverse judgment or negotiated settlements related to the specified litigation.
In September 2014, Visa funded $450 million into its litigation escrow account and reduced the conversion rate of Visa B to A shares. We continue to have an obligation to indemnify Visa for judgments and settlements for the remaining specified litigation.
Recourse and Repurchase Obligations
As discussed in Note 2 Loan Sale and Servicing Activities and Variable Interest Entities, PNC has sold commercial mortgage, residential mortgage and home equity loans/ lines of credit directly or indirectly through securitization and loan sale transactions in which we have continuing involvement. One form of continuing involvement includes certain recourse and loan repurchase obligations associated with the transferred assets.
Commercial Mortgage Loan Recourse Obligations
We originate and service certain multi-family commercial mortgage loans which are sold to FNMA under FNMAs Delegated Underwriting and Servicing (DUS) program. We participated in a similar program with the FHLMC.
Under these programs, we generally assume up to a one-third pari passu risk of loss on unpaid principal balances through a loss share arrangement. At December 31, 2014 and December 31, 2013, the unpaid principal balance outstanding of loans sold as a participant in these programs was $12.3 billion and $11.7 billion, respectively. The potential maximum exposure under the loss share arrangements was $3.7 billion at December 31, 2014 and $3.6 billion at December 31, 2013.
We maintain a reserve for estimated losses based upon our exposure. The reserve for losses under these programs totaled $35 million and $33 million as of December 31, 2014 and
December 31, 2013, respectively, and is included in Other liabilities on our Consolidated Balance Sheet.
If payment is required under these programs, we would not have a contractual interest in the collateral underlying the mortgage loans on which losses occurred, although the value of the collateral is taken into account in determining our share of such losses. Our exposure and activity associated with these recourse obligations are reported in the Corporate & Institutional Banking segment.
Table 150: Analysis of Commercial Mortgage Recourse Obligations
In millions | 2014 | 2013 | ||||||
January 1 |
$ | 33 | $ | 43 | ||||
Reserve adjustments, net |
2 | (9 | ) | |||||
Losses loan repurchases and settlements |
(1 | ) | ||||||
December 31 |
$ | 35 | $ | 33 |
Residential Mortgage Loan and Home Equity Loan/ Line of Credit Repurchase Obligations
While residential mortgage loans are sold on a non-recourse basis, we assume certain loan repurchase obligations associated with mortgage loans we have sold to investors. These loan repurchase obligations primarily relate to situations where PNC is alleged to have breached certain origination covenants and representations and warranties made to purchasers of the loans in the respective purchase and sale agreements. Repurchase obligation activity associated with residential mortgages is reported in the Residential Mortgage Banking segment.
In the fourth quarter of 2013, PNC reached agreements with both FNMA and FHLMC to resolve their repurchase claims with respect to loans sold between 2000 and 2008. PNC paid a total of $191 million related to these settlements.
PNCs repurchase obligations also include certain brokered home equity loans/lines of credit that were sold to a limited number of private investors in the financial services industry by National City prior to our acquisition of National City. PNC is no longer engaged in the brokered home equity lending business, and our exposure under these loan repurchase obligations is limited to repurchases of loans sold in these transactions. Repurchase activity associated with brokered home equity loans/lines of credit is reported in the Non-Strategic Assets Portfolio segment.
214 The PNC Financial Services Group, Inc. Form 10-K |
Indemnification and repurchase liabilities are initially recognized when loans are sold to investors and are subsequently evaluated by management. Initial recognition and subsequent adjustments to the indemnification and repurchase liability for the sold residential mortgage portfolio are recognized in Residential mortgage revenue on the Consolidated Income Statement. Since PNC is no longer engaged in the brokered home equity lending business, only subsequent adjustments are recognized to the home equity loans/lines indemnification and repurchase liability. These adjustments are recognized in Other noninterest income on the Consolidated Income Statement.
Managements subsequent evaluation of these indemnification and repurchase liabilities is based upon trends in indemnification and repurchase requests, actual loss experience, risks in the underlying serviced loan portfolios, and current economic conditions. As part of its evaluation, management considers estimated loss projections over the life of the subject loan portfolio. At December 31, 2014 and December 31, 2013, the total indemnification and repurchase liability for estimated losses on indemnification and repurchase claims totaled $136 million and $153 million, respectively, and was included in Other liabilities on the Consolidated Balance Sheet. An analysis of the changes in this liability during 2014 and 2013 follows:
Table 151: Analysis of Indemnification and Repurchase Liability for Asserted Claims and Unasserted Claims
2014 | 2013 | |||||||||||||||||||||||
In millions |
Residential
Mortgages (a) |
Home
Equity Loans/ Lines (b) |
Total |
Residential
Mortgages (a) |
Home
Equity Loans/ Lines (b) (c) |
Total | ||||||||||||||||||
January 1 |
$ | 131 | $ | 22 | $ | 153 | $ | 614 | $ | 58 | $ | 672 | ||||||||||||
Reserve adjustments, net |
20 | 20 | (53 | ) | (53 | ) | ||||||||||||||||||
Losses loan repurchases and private investor settlements |
(24 | ) | (13 | ) | (37 | ) | (239 | ) | (36 | ) | (275 | ) | ||||||||||||
Agency settlements |
(191 | ) | (191 | ) | ||||||||||||||||||||
December 31 |
$ | 107 | $ | 29 | $ | 136 | $ | 131 | $ | 22 | $ | 153 |
(a) | Repurchase obligation associated with sold loan portfolios of $57.4 billion and $91.9 billion at December 31, 2014 and December 31, 2013, respectively. The decrease at December 31, 2014 compared to December 31, 2013 reflects the exclusion of loans sold between 2000 and 2008 that were included in agency settlements and thus repurchase risk was mitigated. |
(b) | Repurchase obligation associated with sold loan portfolios of $2.5 billion and $2.8 billion at December 31, 2014 and December 31, 2013, respectively. PNC is no longer engaged in the brokered home equity lending business, which was acquired with National City. |
(c) | In prior periods, the unpaid principal balance of loans serviced for home equity loans/lines of credit in (b) above reflected the outstanding balance at the time of charge-off. During the second quarter of 2014, we corrected the outstanding principal balance to reflect the unpaid principal balance as of the reporting date. Accordingly, the prior period amount as of December 31, 2013 was reduced by $.8 billion. |
Management believes the indemnification and repurchase liabilities appropriately reflect the estimated probable losses on indemnification and repurchase claims for all loans sold and outstanding as of December 31, 2014. In making these estimates, we consider the losses that we expect to incur over the life of the sold loans. While management seeks to obtain all relevant information in estimating the indemnification and repurchase liability, the estimation process is inherently uncertain and imprecise and, accordingly, it is reasonably possible that future indemnification and repurchase losses could be more or less than our established liability. Factors that could affect our estimate include the volume of valid
claims driven by investor strategies and behavior, our ability to successfully negotiate claims with investors, housing prices and other economic conditions. At December 31, 2014, we estimate that it is reasonably possible that we could incur additional losses in excess of our accrued indemnification and repurchase liability of up to approximately $99 million for our portfolio of residential mortgage loans sold. At December 31, 2014, the reasonably possible loss above our accrual for our portfolio of home equity loans/lines of credit sold was not material. This estimate of potential additional losses in excess of our liability is based on assumed higher repurchase claims and lower claim rescissions than our current assumptions.
The PNC Financial Services Group, Inc. Form 10-K 215 |
Reinsurance Agreements
We have two wholly-owned captive insurance subsidiaries which provide reinsurance to third-party insurers related to insurance sold to or placed on behalf of our customers. These subsidiaries enter into various types of reinsurance agreements with third-party insurers where the subsidiary assumes the risk of loss through either an excess of loss or quota share agreement up to 100% reinsurance. In excess of loss agreements, these subsidiaries assume the risk of loss for an excess layer of coverage up to specified limits, once a defined first loss percentage is met. In quota share agreements, the subsidiaries and third-party insurers share the responsibility for payment of all claims.
These subsidiaries provide reinsurance for accidental death & dismemberment, credit life, accident & health, lender placed hazard and borrower and lender paid mortgage insurance, of which all programs are in run-off. Aggregate maximum exposure up to the specified limits for all reinsurance contracts is as follows:
Table 152: Reinsurance Agreements Exposure (a)
In millions |
December 31
2014 |
December 31
2013 |
||||||
Accidental Death & Dismemberment |
$ | 1,774 | $ | 1,902 | ||||
Credit Life, Accident & Health |
467 | 621 | ||||||
Lender Placed Hazard (b) (c) |
2,056 | 2,679 | ||||||
Borrower and Lender Paid Mortgage Insurance |
45 | 133 | ||||||
Maximum Exposure |
$ | 4,342 | $ | 5,335 | ||||
Percentage of reinsurance agreements: |
||||||||
Excess of Loss Mortgage Insurance |
1 | % | 2 | % | ||||
Quota Share |
99 | % | 98 | % | ||||
Maximum Exposure to Quota Share Agreements with 100% Reinsurance |
$ | 466 | $ | 620 |
(a) | Reinsurance agreements exposure balances represent estimates based on availability of financial information from insurance carriers. |
(b) | Through the purchase of catastrophe reinsurance connected to the Lender Placed Hazard Exposure, should a catastrophic event occur, PNC will benefit from this reinsurance. No credit for the catastrophe reinsurance protection is applied to the aggregate exposure figure. |
(c) | Program has been placed into run-off for coverage issued or renewed on or after June 1, 2014 with policy terms one year or less. |
A rollforward of the reinsurance reserves for probable losses for 2014 and 2013 follows:
Table 153: Reinsurance Reserves Rollforward
In millions | 2014 | 2013 | ||||||
January 1 |
$ | 32 | $ | 61 | ||||
Paid Losses |
(20 | ) | (45 | ) | ||||
Net Provision |
11 | 16 | ||||||
Changes to Agreements |
(10 | ) | ||||||
December 31 |
$ | 13 | $ | 32 |
The reinsurance reserves are declining as the programs are in run-off. Existing reinsurance agreements with a single third-party insurer of Borrower Paid Mortgage Insurance were terminated resulting in release of reinsurance reserves. The Lender Placed Hazard program has been placed in run-off as of June 1, 2014, but there was no material impact to reinsurance reserves. There were no other changes to existing agreements nor did we enter into any new relationships.
There is a reasonable possibility that losses could be more than or less than the amount reserved due to ongoing uncertainty in various economic, social and other factors that could impact the frequency and severity of claims covered by these reinsurance agreements. At December 31, 2014, the reasonably possible loss above our accrual was not material.
216 The PNC Financial Services Group, Inc. Form 10-K |
Resale and Repurchase Agreements
We enter into repurchase and resale agreements where we transfer investment securities to/from a third party with the agreement to repurchase/resell those investment securities at a future date for a specified price. Repurchase and resale agreements are treated as collateralized financing transactions for accounting purposes and are generally carried at the amounts at which the securities will be subsequently reacquired or resold, including accrued interest. Our policy is to take possession of securities purchased under agreements to resell. We monitor the market value of securities to be repurchased and resold and additional collateral may be obtained where considered appropriate to protect against credit exposure.
Repurchase and resale agreements are typically entered into with counterparties under industry standard master netting agreements which provide for the right to setoff amounts owed to one another with respect to multiple repurchase and resale agreements under such master netting agreement (referred to as netting arrangements) and liquidate the purchased or borrowed securities in the event of counterparty default. In order for an arrangement to be eligible for netting under GAAP, we must obtain the requisite assurance that the
offsetting rights included in the master netting agreement would be legally enforceable in the event of bankruptcy, insolvency, or a similar proceeding of such third party. Enforceability is evidenced by obtaining a legal opinion that supports, with sufficient confidence, the enforceability of the master netting agreement in bankruptcy.
In accordance with the disclosure requirements of ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, Table 154 shows the amounts owed under resale and repurchase agreements and the securities collateral associated with those agreements where a legal opinion supporting the enforceability of the offsetting rights has been obtained. We do not present resale and repurchase agreements entered into with the same counterparty under a legally enforceable master netting agreement on a net basis on our Consolidated Balance Sheet or within Table 154. The amounts reported in Table 154 exclude the fair value adjustment on the structured resale agreements of $7 million and $11 million at December 31, 2014 and December 31, 2013, respectively, that we have elected to account for at fair value. Refer to Note 7 Fair Value for additional information regarding the structured resale agreements at fair value.
Refer to Note 15 Financial Derivatives for additional information related to offsetting of financial derivatives.
Table 154: Resale and Repurchase Agreements Offsetting
In millions |
Gross
Resale
|
Amounts Offset
on
the
|
Net
Resale
|
Securities
Held Under
|
Net Amounts (b) |
|||||||||||||
Resale Agreements |
||||||||||||||||||
December 31, 2014 |
$ | 1,646 | $ | 1,646 | $ | 1,569 | $ | 77 | ||||||||||
December 31, 2013 |
1,542 | 1,542 | 1,453 | 89 |
In millions |
Gross
Repurchase Agreements |
Amounts
on the
|
Net
Repurchase
|
Securities
Collateral Pledged Under Master Netting Agreements (c) |
Net
Amounts (e) |
|||||||||||||
Repurchase Agreements |
||||||||||||||||||
December 31, 2014 |
$ | 3,406 | $ | 3,406 | $ | 2,580 | $ | 826 | ||||||||||
December 31, 2013 |
4,183 | 4,183 | 3,166 | 1,017 |
(a) | Represents the resale agreement amount included in Federal funds sold and resale agreements on our Consolidated Balance Sheet and the related accrued interest income in the amount of $1 million at both December 31, 2014 and December 31, 2013, respectively, which is included in Other Assets on the Consolidated Balance Sheet. |
(b) | These amounts include certain long term resale agreements of $77 million at December 31, 2014 and $89 million at December 31, 2013, respectively, which are fully collateralized but do not have the benefits of a netting opinion and, therefore, might be subject to a stay in insolvency proceedings and therefore are not eligible under ASC 210-20 for netting. |
(c) | In accordance with the requirements of ASU 2011-11, represents the fair value of securities collateral purchased or sold, up to the amount owed under the agreement, for agreements supported by a legally enforceable master netting agreement. |
(d) | Represents the repurchase agreement amount included in Federal funds purchased and repurchase agreements on our Consolidated Balance Sheet and the related accrued interest expense in the amount of less than $1 million at both December 31, 2014 and December 31, 2013, which is included in Other Liabilities on the Consolidated Balance Sheet. |
(e) | These amounts include overnight repurchase agreements of $826 million and $966 million at December 31, 2014 and December 31, 2013, respectively, entered into with municipalities, pension plans, and certain trusts and insurance companies as well as certain long term repurchase agreements of $50 million at December 31, 2013, which are fully collateralized but do not have the benefits of a netting opinion and, therefore, might be subject to a stay in insolvency proceedings and therefore are not eligible under ASC 210-20 for netting. There were no long term repurchase agreements as of December 31, 2014. |
The PNC Financial Services Group, Inc. Form 10-K 217 |
Summarized financial information of the parent company is as follows:
Table 155: Parent Company Income Statement
Year ended December 31 in millions | 2014 | 2013 | 2012 | |||||||||
Operating Revenue |
||||||||||||
Dividends from: |
||||||||||||
Bank subsidiaries and bank holding company |
$ | 3,115 | $ | 3,105 | $ | 2,660 | ||||||
Non-bank subsidiaries |
115 | 205 | 91 | |||||||||
Interest income |
4 | |||||||||||
Noninterest income |
30 | 28 | 22 | |||||||||
Total operating revenue |
3,264 | 3,338 | 2,773 | |||||||||
Operating Expense |
||||||||||||
Interest expense |
97 | 107 | 242 | |||||||||
Other expense |
127 | 93 | 359 | |||||||||
Total operating expense |
224 | 200 | 601 | |||||||||
Income before income taxes and equity in undistributed net income of subsidiaries |
3,040 | 3,138 | 2,172 | |||||||||
Income tax benefits |
(61 | ) | (89 | ) | (175 | ) | ||||||
Income before equity in undistributed net income of subsidiaries |
3,101 | 3,227 | 2,347 | |||||||||
Equity in undistributed net income of subsidiaries: |
||||||||||||
Bank subsidiaries and bank holding company (a) |
854 | 845 | 413 | |||||||||
Non-bank subsidiaries (a) |
229 | 129 | 241 | |||||||||
Net income (a) |
$ | 4,184 | $ | 4,201 | $ | 3,001 | ||||||
Other comprehensive income, net of tax: |
||||||||||||
Net pension and other postretirement benefit plan activity arising during the period |
(17 | ) | 34 | (40 | ) | |||||||
Other comprehensive income (loss) |
(17 | ) | 34 | (40 | ) | |||||||
Comprehensive income (a) |
$ | 4,167 | $ | 4,235 | $ | 2,961 |
(a) | Amounts for 2013 and 2012 periods have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. See Note 1 Accounting Policies for further detail of the adoption. |
Table 156: Parent Company Balance Sheet
December 31 in millions | 2014 | 2013 | ||||||
Assets |
||||||||
Cash held at banking subsidiary |
$ | 1 | $ | 1 | ||||
Restricted deposits with banking subsidiary |
400 | 400 | ||||||
Interest-earning deposits |
2,013 | 221 | ||||||
Investments in: |
||||||||
Bank subsidiaries and bank holding company (a) |
41,537 | 40,611 | ||||||
Non-bank subsidiaries (a) |
2,480 | 2,250 | ||||||
Other assets |
1,399 | 1,201 | ||||||
Total assets |
$ | 47,830 | $ | 44,684 | ||||
Liabilities |
||||||||
Subordinated debt (b) |
$ | 1,618 | $ | 824 | ||||
Senior debt (b) |
889 | 856 | ||||||
Bank affiliate borrowings |
102 | 63 | ||||||
Accrued expenses and other liabilities (a) |
670 | 607 | ||||||
Total liabilities |
3,279 | 2,350 | ||||||
Equity |
||||||||
Shareholders equity (a) |
44,551 | 42,334 | ||||||
Total liabilities and equity |
$ | 47,830 | $ | 44,684 |
(a) | Amounts for 2013 periods have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. See Note 1 Accounting Policies for further detail of the adoption. |
(b) | At December 31, 2014, debt that contractually matures in 2015 through 2019 totaled $400 million (senior debt), zero, zero, zero and $700 million (subordinated debt). |
Debt issued by PNC Funding Corp, a wholly-owned finance subsidiary, is fully and unconditionally guaranteed by the parent company. In addition, in connection with certain affiliates commercial and residential mortgage servicing operations, the parent company has committed to maintain such affiliates net worth above minimum requirements.
Table 157: Parent Company Interest Paid and Income Tax Refunds (Payments)
Year ended December 31 in millions |
Interest
Paid |
Income Tax
Refunds / (Payments) |
||||||
2014 |
$ | 103 | $ | (13 | ) | |||
2013 |
117 | 91 | ||||||
2012 |
255 | 453 |
218 The PNC Financial Services Group, Inc. Form 10-K |
Table 158: Parent Company Statement of Cash Flows
Year ended December 31 in millions | 2014 | 2013 | 2012 | |||||||||
Operating Activities |
||||||||||||
Net income (a) |
$ | 4,184 | $ | 4,201 | $ | 3,001 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Equity in undistributed net earnings of subsidiaries (a) |
(1,083 | ) | (974 | ) | (654 | ) | ||||||
Other |
118 | 152 | 566 | |||||||||
Net cash provided (used) by operating activities |
3,219 | 3,379 | 2,913 | |||||||||
Investing Activities |
||||||||||||
Net capital returned from (contributed to) subsidiaries |
87 | |||||||||||
Net cash paid for acquisition activity |
(3,432 | ) | ||||||||||
Net change in interest-earning deposits |
(1,792 | ) | (214 | ) | ||||||||
Other |
(79 | ) | (60 | ) | (50 | ) | ||||||
Net cash provided (used) by investing activities |
(1,871 | ) | (187 | ) | (3,482 | ) | ||||||
Financing Activities |
||||||||||||
Borrowings from subsidiaries |
2,430 | 3,624 | 8,374 | |||||||||
Repayments on borrowings from subsidiaries |
(2,392 | ) | (5,767 | ) | (6,943 | ) | ||||||
Other borrowed funds |
770 | (467 | ) | (1,753 | ) | |||||||
Preferred stock Other issuances |
495 | 2,446 | ||||||||||
Preferred stock Other redemptions |
(150 | ) | (500 | ) | ||||||||
Common and treasury stock issuances |
252 | 244 | 158 | |||||||||
Acquisition of treasury stock |
(1,176 | ) | (24 | ) | (216 | ) | ||||||
Preferred stock cash dividends paid |
(232 | ) | (237 | ) | (177 | ) | ||||||
Common stock cash dividends paid |
(1,000 | ) | (911 | ) | (820 | ) | ||||||
Net cash provided (used) by financing activities |
(1,348 | ) | (3,193 | ) | 569 | |||||||
Increase (decrease) in cash and due from banks |
(1 | ) | ||||||||||
Cash held at banking subsidiary at beginning of year |
1 | 2 | 2 | |||||||||
Cash held at banking subsidiary at end of year |
$ | 1 | $ | 1 | $ | 2 |
(a) | Amounts for 2013 and 2012 periods have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. See Note 1 Accounting Policies for further detail of the adoption. |
We have six reportable business segments:
|
Retail Banking |
|
Corporate & Institutional Banking |
|
Asset Management Group |
|
Residential Mortgage Banking |
|
BlackRock |
|
Non-Strategic Assets Portfolio |
Results of individual businesses are presented based on our internal management reporting practices. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of our individual businesses are not necessarily comparable with similar information for any other company. We periodically refine our internal methodologies as management reporting practices are enhanced. To the extent practicable, retrospective application of new methodologies is made to prior period reportable business segment results and disclosures to create comparability with the current period.
Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. Additionally, we have aggregated the results for corporate support functions within Other for financial reporting purposes.
Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product maturities, duration and other factors. Starting in the first quarter of 2015, we will enhance the funding charge to include consideration of the cost related to the Liquidity Coverage Ratio. Please see the Supervision and Regulation section in Item 1 and the Liquidity Risk Management section in Item 7 of this Report for more information about the ratio. A portion of capital is intended to cover unexpected losses and is assigned to our business segments using our risk-based economic capital model, including consideration of the goodwill at those business segments, as well as the diversification of risk among the business segments, ultimately reflecting PNCs portfolio risk adjusted capital allocation.
We have allocated the allowances for loan and lease losses and for unfunded loan commitments and letters of credit based on the loan exposures within each business segments portfolio. Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, and economic conditions. Key reserve assumptions are periodically updated.
Our allocation of the costs incurred by operations and other shared support areas not directly aligned with the businesses is primarily based on the use of services.
The PNC Financial Services Group, Inc. Form 10-K 219 |
Total business segment financial results differ from total consolidated net income. The impact of these differences is reflected in the Other category in the business segment tables. Other includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as gains or losses related to BlackRock transactions, integration costs, asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities and certain trading activities, exited businesses, private equity investments, intercompany eliminations, most corporate overhead, tax adjustments that are not allocated to business segments, and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests as the segments results exclude their portion of net income attributable to noncontrolling interests. Assets, revenue and earnings attributable to foreign activities were not material in the periods presented for comparative purposes.
Business Segment Products and Services
Retail Banking provides deposit, lending, brokerage, investment management and cash management services to consumer and small business customers within our primary geographic markets. Our customers are serviced through our branch network, ATMs, call centers, online banking and mobile channels. The branch network is located primarily in Pennsylvania, Ohio, New Jersey, Michigan, Illinois, Maryland, Indiana, North Carolina, Florida, Kentucky, Washington, D.C., Delaware, Virginia, Alabama, Missouri, Georgia, Wisconsin and South Carolina.
Corporate & Institutional Banking provides lending, treasury management, and capital markets-related products and services to mid-sized and large corporations, government and not-for-profit entities. Lending products include secured and unsecured loans, letters of credit and equipment leases. Treasury management services include cash and investment management, receivables management, disbursement services, funds transfer services, information reporting and global trade services. Capital markets-related products and services include foreign exchange, derivatives, securities, loan syndications, mergers and acquisitions advisory, equity capital markets advisory and related services. We also provide commercial loan servicing and real estate advisory and technology solutions for the commercial real estate finance industry. Products and services are generally provided within our primary geographic markets, with certain products and services offered nationally and internationally.
Asset Management Group includes personal wealth management for high net worth and ultra high net worth clients and institutional asset management. Wealth management products and services include investment and retirement planning, customized investment management, private banking, tailored credit solutions, and trust management and
administration for individuals and their families. Hawthorn provides multi-generational family planning including wealth strategy, investment management, private banking, tax and estate planning guidance, performance reporting and personal administration services to ultra high net worth families. Institutional asset management provides investment management, custody administration and retirement administration services. Institutional clients include corporations, unions, municipalities, non-profits, foundations and endowments, primarily located in our geographic footprint.
Residential Mortgage Banking directly originates first lien residential mortgage loans on a nationwide basis with a significant presence within the retail banking footprint. Mortgage loans represent loans collateralized by one-to-four family residential real estate. These loans are typically underwritten to government agency and/or third-party standards, and either sold, servicing retained, or held on PNCs balance sheet. Loan sales are primarily to secondary mortgage conduits of FNMA, FHLMC, Federal Home Loan Banks and third-party investors, or are securitized and issued under the GNMA program. The mortgage servicing operation performs all functions related to servicing mortgage loans, primarily those in first lien position, for various investors and for loans owned by PNC.
BlackRock , is a leading publicly traded investment management firm providing a broad range of investment and risk management services to institutional and retail clients worldwide. Using a diverse platform of active and index investment strategies across asset classes, BlackRock develops investment outcomes and asset allocation solutions for clients. Product offerings include single- and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. BlackRock also offers an investment and risk management technology platform, risk analytics and advisory services and solutions to a broad base of institutional investors.
We hold an equity investment in BlackRock, which is a key component of our diversified revenue strategy. BlackRock is a publicly traded company, and additional information regarding its business is available in its filings with the Securities and Exchange Commission (SEC). At December 31, 2014, our economic interest in BlackRock was 22%.
PNC received cash dividends from BlackRock of $285 million, $249 million and $225 million during 2014, 2013 and 2012, respectively.
Non-Strategic Assets Portfolio includes a consumer portfolio of mainly residential mortgage and brokered home equity loans and lines of credit, and a small commercial/commercial real estate loan and lease portfolio. We obtained a significant portion of these non-strategic assets through acquisitions of other companies.
220 The PNC Financial Services Group, Inc. Form 10-K |
Table 159: Results Of Businesses
Year ended December 31 In millions |
Retail
Banking |
Corporate &
Institutional Banking |
Asset
Management Group |
Residential
Mortgage Banking |
BlackRock |
Non-Strategic
Assets Portfolio |
Other (a) | Consolidated (a) | ||||||||||||||||||||||||
2014 |
||||||||||||||||||||||||||||||||
I NCOME S TATEMENT |
||||||||||||||||||||||||||||||||
Net interest income |
$ | 3,923 | $ | 3,605 | $ | 289 | $ | 149 | $ | 547 | $ | 12 | $ | 8,525 | ||||||||||||||||||
Noninterest income |
2,125 | 1,743 | 818 | 651 | $ | 703 | 40 | 770 | 6,850 | |||||||||||||||||||||||
Total revenue |
6,048 | 5,348 | 1,107 | 800 | 703 | 587 | 782 | 15,375 | ||||||||||||||||||||||||
Provision for credit losses (benefit) |
277 | 107 | (1 | ) | (2 | ) | (119 | ) | 11 | 273 | ||||||||||||||||||||||
Depreciation and amortization |
176 | 135 | 42 | 12 | 411 | 776 | ||||||||||||||||||||||||||
Other noninterest expense |
4,449 | 1,929 | 779 | 734 | 125 | 696 | 8,712 | |||||||||||||||||||||||||
Income (loss) before income taxes and noncontrolling interests |
1,146 | 3,177 | 287 | 56 | 703 | 581 | (336 | ) | 5,614 | |||||||||||||||||||||||
Income taxes (benefit) |
418 | 1,071 | 106 | 21 | 173 | 214 | (596 | ) | 1,407 | |||||||||||||||||||||||
Net income |
$ | 728 | $ | 2,106 | $ | 181 | $ | 35 | $ | 530 | $ | 367 | $ | 260 | $ | 4,207 | ||||||||||||||||
Inter-segment revenue |
$ | 2 | $ | 23 | $ | 11 | $ | 17 | $ | 16 | $ | (10 | ) | $ | (59 | ) | ||||||||||||||||
Average Assets (b) |
$ | 75,046 | $ | 122,927 | $ | 7,745 | $ | 7,857 | $ | 6,640 | $ | 8,338 | $ | 99,300 | $ | 327,853 | ||||||||||||||||
2013 |
||||||||||||||||||||||||||||||||
I NCOME S TATEMENT |
||||||||||||||||||||||||||||||||
Net interest income |
$ | 4,077 | $ | 3,680 | $ | 288 | $ | 194 | $ | 689 | $ | 219 | $ | 9,147 | ||||||||||||||||||
Noninterest income |
2,021 | 1,702 | 752 | 906 | $ | 621 | 53 | 810 | 6,865 | |||||||||||||||||||||||
Total revenue |
6,098 | 5,382 | 1,040 | 1,100 | 621 | 742 | 1,029 | 16,012 | ||||||||||||||||||||||||
Provision for credit losses (benefit) |
657 | (25 | ) | 10 | 21 | (21 | ) | 1 | 643 | |||||||||||||||||||||||
Depreciation and amortization |
186 | 128 | 42 | 11 | 348 | 715 | ||||||||||||||||||||||||||
Other noninterest expense |
4,390 | 1,871 | 732 | 834 | 163 | 976 | 8,966 | |||||||||||||||||||||||||
Income (loss) before income taxes and noncontrolling interests |
865 | 3,408 | 256 | 234 | 621 | 600 | (296 | ) | 5,688 | |||||||||||||||||||||||
Income taxes (benefit) |
315 | 1,144 | 94 | 86 | 152 | 221 | (536 | ) | 1,476 | |||||||||||||||||||||||
Net income |
$ | 550 | $ | 2,264 | $ | 162 | $ | 148 | $ | 469 | $ | 379 | $ | 240 | $ | 4,212 | ||||||||||||||||
Inter-segment revenue |
$ | 3 | $ | 28 | $ | 12 | $ | 8 | $ | 17 | $ | (10 | ) | $ | (58 | ) | ||||||||||||||||
Average Assets (b) |
$ | 74,971 | $ | 112,970 | $ | 7,366 | $ | 9,896 | $ | 6,272 | $ | 9,987 | $ | 84,202 | $ | 305,664 | ||||||||||||||||
2012 |
||||||||||||||||||||||||||||||||
I NCOME S TATEMENT |
||||||||||||||||||||||||||||||||
Net interest income |
$ | 4,314 | $ | 3,991 | $ | 297 | $ | 209 | $ | 830 | $ | (1 | ) | $ | 9,640 | |||||||||||||||||
Noninterest income |
2,012 | 1,598 | 676 | 317 | $ | 512 | 13 | 744 | 5,872 | |||||||||||||||||||||||
Total revenue |
6,326 | 5,589 | 973 | 526 | 512 | 843 | 743 | 15,512 | ||||||||||||||||||||||||
Provision for credit losses (benefit) |
800 | 11 | (5 | ) | 181 | 987 | ||||||||||||||||||||||||||
Depreciation and amortization |
194 | 141 | 41 | 11 | 320 | 707 | ||||||||||||||||||||||||||
Other noninterest expense |
4,392 | 1,887 | 691 | 981 | 287 | 1,541 | 9,779 | |||||||||||||||||||||||||
Income (loss) before income taxes and noncontrolling interests |
940 | 3,561 | 230 | (461 | ) | 512 | 375 | (1,118 | ) | 4,039 | ||||||||||||||||||||||
Income taxes (benefit) |
344 | 1,233 | 85 | (153 | ) | 117 | 138 | (719 | ) | 1,045 | ||||||||||||||||||||||
Net income (loss) |
$ | 596 | $ | 2,328 | $ | 145 | $ | (308 | ) | $ | 395 | $ | 237 | $ | (399 | ) | $ | 2,994 | ||||||||||||||
Inter-segment revenue |
$ | 1 | $ | 33 | $ | 12 | $ | 7 | $ | 15 | $ | (10 | ) | $ | (58 | ) | ||||||||||||||||
Average Assets (b) |
$ | 72,573 | $ | 102,962 | $ | 6,735 | $ | 11,529 | $ | 5,857 | $ | 12,050 | $ | 83,248 | $ | 294,954 |
(a) | Amounts for 2013 and 2012 periods have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
(b) | Period-end balances for BlackRock. |
On February 23, 2015, PNC Bank issued:
|
$750 million of senior notes with a maturity date of February 23, 2025. Interest is payable semi-annually at a fixed rate of 2.950% on February 23 and August 23 of each year, beginning on August 23, 2015, and |
|
$1.0 billion of senior notes with a maturity date of February 23, 2018. Interest is payable semi-annually at a fixed rate of 1.500% on February 23 and August 23 of each year, beginning on August 23, 2015. |
The PNC Financial Services Group, Inc. Form 10-K 221 |
STATISTICAL INFORMATION (UNAUDITED)
THE PNC FINANCIAL SERVICES GROUP, INC.
Selected Quarterly Financial Data
Dollars in millions, except per share data |
2014 | 2013 | ||||||||||||||||||||||||||||||
Fourth | Third | Second | First | Fourth | Third | Second | First | |||||||||||||||||||||||||
Summary Of Operations |
|
|||||||||||||||||||||||||||||||
Interest income |
$ | 2,337 | $ | 2,328 | $ | 2,356 | $ | 2,410 | $ | 2,479 | $ | 2,448 | $ | 2,469 | $ | 2,611 | ||||||||||||||||
Interest expense |
240 | 224 | 227 | 215 | 213 | 214 | 211 | 222 | ||||||||||||||||||||||||
Net interest income |
2,097 | 2,104 | 2,129 | 2,195 | 2,266 | 2,234 | 2,258 | 2,389 | ||||||||||||||||||||||||
Noninterest income (a) |
1,850 | 1,737 | 1,681 | 1,582 | 1,807 | 1,686 | 1,806 | 1,566 | ||||||||||||||||||||||||
Total revenue |
3,947 | 3,841 | 3,810 | 3,777 | 4,073 | 3,920 | 4,064 | 3,955 | ||||||||||||||||||||||||
Provision for credit losses |
52 | 55 | 72 | 94 | 113 | 137 | 157 | 236 | ||||||||||||||||||||||||
Noninterest expense (b) |
2,539 | 2,357 | 2,328 | 2,264 | 2,514 | 2,394 | 2,405 | 2,368 | ||||||||||||||||||||||||
Income before income taxes and noncontrolling interests |
1,356 | 1,429 | 1,410 | 1,419 | 1,446 | 1,389 | 1,502 | 1,351 | ||||||||||||||||||||||||
Income taxes (b) |
299 | 391 | 358 | 359 | 372 | 361 | 387 | 356 | ||||||||||||||||||||||||
Net income (b) |
1,057 | 1,038 | 1,052 | 1,060 | 1,074 | 1,028 | 1,115 | 995 | ||||||||||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests (b) |
21 | 1 | 3 | (2 | ) | 13 | 2 | 4 | (8 | ) | ||||||||||||||||||||||
Preferred stock dividends and discount accretion and redemptions |
48 | 71 | 48 | 70 | 50 | 71 | 53 | 75 | ||||||||||||||||||||||||
Net income attributable to common shareholders |
$ | 988 | $ | 966 | $ | 1,001 | $ | 992 | $ | 1,011 | $ | 955 | $ | 1,058 | $ | 928 | ||||||||||||||||
Per Common Share Data |
||||||||||||||||||||||||||||||||
Book value (b) |
$ | 77.61 | $ | 76.71 | $ | 75.62 | $ | 73.73 | $ | 72.07 | $ | 69.75 | $ | 68.32 | $ | 68.10 | ||||||||||||||||
Basic earnings from net income (b) (c) |
1.88 | 1.82 | 1.88 | 1.86 | 1.90 | 1.80 | 2.00 | 1.76 | ||||||||||||||||||||||||
Diluted earnings from net income (b) (c) |
1.84 | 1.79 | 1.85 | 1.82 | 1.87 | 1.77 | 1.98 | 1.74 |
(a) | Noninterest income included private equity gains/(losses) and net gains on sales of securities in each quarter as follows: |
2014 | 2013 | |||||||||||||||||||||||||||||||
in millions | Fourth | Third | Second | First | Fourth | Third | Second | First | ||||||||||||||||||||||||
Private equity gains/(losses) |
$ | 61 | $ | 70 | $ | 35 | $ | 42 | $ | 99 | $ | 43 | $ | 33 | $ | 27 | ||||||||||||||||
Net gains on sales of securities |
| | (6 | ) | 10 | 3 | 21 | 61 | 14 |
(b) | Amounts for 2013 periods have been updated to reflect the first quarter 2014 adoption of Accounting Standards Update (ASU) 2014-01 related to investments in low income housing tax credits. |
(c) | The sum of the quarterly amounts for 2014 and 2013 does not equal the respective years amount because the quarterly calculations are based on a changing number of average shares. |
222 The PNC Financial Services Group, Inc. Form 10-K |
Average Consolidated Balance Sheet And Net Interest Analysis (a) (b) (c)
2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||
Taxable-equivalent basis Dollars in millions |
Average
Balances |
Interest
Income/ Expense |
Average
Yields/ Rates |
Average
Balances |
Interest
Income/ Expense |
Average
Yields/ Rates |
Average
Balances |
Interest
Income/ Expense |
Average
Yields/ Rates |
|||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
Investment securities |
||||||||||||||||||||||||||||||||||||
Securities available for sale |
||||||||||||||||||||||||||||||||||||
Residential mortgage-backed |
||||||||||||||||||||||||||||||||||||
Agency (d) |
$ | 18,935 | $ | 503 | 2.66 | % | $ | 22,746 | $ | 562 | 2.47 | % | $ | 24,976 | $ | 725 | 2.90 | % | ||||||||||||||||||
Non-agency |
5,106 | 244 | 4.78 | 5,828 | 317 | 5.44 | 6,506 | 350 | 5.38 | |||||||||||||||||||||||||||
Commercial mortgage-backed (d) |
5,461 | 192 | 3.52 | 5,228 | 222 | 4.25 | 5,228 | 246 | 4.71 | |||||||||||||||||||||||||||
Asset-backed |
5,321 | 105 | 1.97 | 5,857 | 110 | 1.88 | 5,227 | 106 | 2.03 | |||||||||||||||||||||||||||
U.S. Treasury and government agencies |
4,837 | 57 | 1.18 | 2,326 | 37 | 1.59 | 2,733 | 55 | 2.01 | |||||||||||||||||||||||||||
State and municipal |
2,148 | 96 | 4.47 | 2,250 | 97 | 4.31 | 1,920 | 91 | 4.74 | |||||||||||||||||||||||||||
Other debt |
2,016 | 52 | 2.58 | 2,632 | 64 | 2.43 | 3,019 | 82 | 2.72 | |||||||||||||||||||||||||||
Corporate stocks and other |
402 | | | 342 | | | 350 | | | |||||||||||||||||||||||||||
Total securities available for sale |
44,226 | 1,249 | 2.82 | 47,209 | 1,409 | 2.98 | 49,959 | 1,655 | 3.31 | |||||||||||||||||||||||||||
Securities held to maturity |
||||||||||||||||||||||||||||||||||||
Residential mortgage-backed |
5,885 | 207 | 3.52 | 4,374 | 153 | 3.50 | 4,423 | 156 | 3.53 | |||||||||||||||||||||||||||
Commercial mortgage-backed |
2,502 | 99 | 3.96 | 3,422 | 151 | 4.41 | 4,288 | 195 | 4.55 | |||||||||||||||||||||||||||
Asset-backed |
908 | 14 | 1.54 | 983 | 16 | 1.63 | 892 | 17 | 1.91 | |||||||||||||||||||||||||||
U.S. Treasury and government agencies |
243 | 9 | 3.70 | 235 | 9 | 3.83 | 226 | 9 | 3.98 | |||||||||||||||||||||||||||
State and municipal |
1,727 | 95 | 5.50 | 749 | 42 | 5.61 | 670 | 28 | 4.18 | |||||||||||||||||||||||||||
Other |
329 | 10 | 3.04 | 347 | 11 | 3.17 | 358 | 10 | 2.79 | |||||||||||||||||||||||||||
Total securities held to maturity |
11,594 | 434 | 3.74 | 10,110 | 382 | 3.78 | 10,857 | 415 | 3.82 | |||||||||||||||||||||||||||
Total investment securities |
55,820 | 1,683 | 3.02 | 57,319 | 1,791 | 3.12 | 60,816 | 2,070 | 3.40 | |||||||||||||||||||||||||||
Loans |
||||||||||||||||||||||||||||||||||||
Commercial |
92,411 | 3,029 | 3.28 | 86,047 | 3,243 | 3.77 | 76,654 | 3,447 | 4.50 | |||||||||||||||||||||||||||
Commercial real estate |
22,646 | 919 | 4.06 | 19,469 | 937 | 4.81 | 18,115 | 1,005 | 5.55 | |||||||||||||||||||||||||||
Equipment lease financing |
7,567 | 278 | 3.67 | 7,329 | 292 | 3.98 | 6,674 | 307 | 4.60 | |||||||||||||||||||||||||||
Consumer |
62,529 | 2,609 | 4.17 | 62,125 | 2,744 | 4.42 | 59,752 | 2,801 | 4.69 | |||||||||||||||||||||||||||
Residential real estate |
14,495 | 721 | 4.97 | 15,003 | 773 | 5.15 | 15,423 | 832 | 5.39 | |||||||||||||||||||||||||||
Total loans |
199,648 | 7,556 | 3.78 | 189,973 | 7,989 | 4.21 | 176,618 | 8,392 | 4.75 | |||||||||||||||||||||||||||
Interest-earning deposits with banks |
19,204 | 49 | .26 | 4,910 | 12 | .24 | 1,913 | 4 | .21 | |||||||||||||||||||||||||||
Loans held for sale |
2,123 | 99 | 4.66 | 2,909 | 157 | 5.40 | 2,977 | 168 | 5.64 | |||||||||||||||||||||||||||
Federal funds sold and resale agreements |
1,446 | 5 | .35 | 960 | 8 | .83 | 1,594 | 22 | 1.38 | |||||||||||||||||||||||||||
Other |
5,064 | 228 | 4.50 | 4,574 | 218 | 4.77 | 4,636 | 222 | 4.79 | |||||||||||||||||||||||||||
Total interest-earning assets/interest income |
283,305 | 9,620 | 3.40 | 260,645 | 10,175 | 3.90 | 248,554 | 10,878 | 4.38 | |||||||||||||||||||||||||||
Noninterest-earning assets: |
||||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses |
(3,482 | ) | (3,796 | ) | (4,157 | ) | ||||||||||||||||||||||||||||||
Cash and due from banks |
3,945 | 3,953 | 3,877 | |||||||||||||||||||||||||||||||||
Other |
44,085 | 44,862 | 46,680 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 327,853 | $ | 305,664 | $ | 294,954 | ||||||||||||||||||||||||||||||
Liabilities and Equity |
||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Interest-bearing deposits |
||||||||||||||||||||||||||||||||||||
Money market |
$ | 75,513 | $ | 140 | .19 | % | $ | 70,567 | $ | 128 | .18 | % | $ | 65,933 | $ | 138 | .21 | % | ||||||||||||||||||
Demand |
43,367 | 22 | .05 | 40,144 | 18 | .04 | 34,342 | 14 | .04 | |||||||||||||||||||||||||||
Savings |
11,990 | 14 | .12 | 10,954 | 10 | .09 | 9,863 | 9 | .09 | |||||||||||||||||||||||||||
Retail certificates of deposit |
19,636 | 145 | .74 | 22,274 | 180 | .81 | 26,609 | 210 | .79 | |||||||||||||||||||||||||||
Time deposits in foreign offices and other time |
2,308 | 4 | .17 | 2,061 | 8 | .39 | 3,195 | 15 | .47 | |||||||||||||||||||||||||||
Total interest-bearing deposits |
152,814 | 325 | .21 | 146,000 | 344 | .24 | 139,942 | 386 | .28 | |||||||||||||||||||||||||||
Borrowed funds |
||||||||||||||||||||||||||||||||||||
Federal funds purchased and repurchase agreements |
3,560 | 3 | .08 | 3,884 | 6 | .15 | 4,542 | 10 | .22 | |||||||||||||||||||||||||||
Federal Home Loan Bank borrowings |
14,863 | 73 | .49 | 8,617 | 45 | .52 | 9,678 | 72 | .74 | |||||||||||||||||||||||||||
Bank notes and senior debt |
14,114 | 202 | 1.43 | 11,221 | 191 | 1.70 | 10,275 | 236 | 2.30 | |||||||||||||||||||||||||||
Subordinated debt |
8,559 | 219 | 2.56 | 7,373 | 205 | 2.78 | 7,019 | 320 | 4.56 | |||||||||||||||||||||||||||
Commercial paper |
4,861 | 14 | .29 | 6,902 | 16 | .23 | 8,383 | 23 | .27 | |||||||||||||||||||||||||||
Other |
2,860 | 70 | 2.45 | 2,025 | 53 | 2.62 | 1,947 | 47 | 2.41 | |||||||||||||||||||||||||||
Total borrowed funds |
48,817 | 581 | 1.19 | 40,022 | 516 | 1.29 | 41,844 | 708 | 1.69 | |||||||||||||||||||||||||||
Total interest-bearing liabilities/interest expense |
201,631 | 906 | .45 | 186,022 | 860 | .46 | 181,786 | 1,094 | .60 | |||||||||||||||||||||||||||
Noninterest-bearing liabilities and equity: |
||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits |
70,108 | 66,168 | 61,610 | |||||||||||||||||||||||||||||||||
Allowance for unfunded loan commitments and letters of credit |
238 | 241 | 237 | |||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities |
10,530 | 10,918 | 11,321 | |||||||||||||||||||||||||||||||||
Equity |
45,346 | 42,315 | 40,000 | |||||||||||||||||||||||||||||||||
Total liabilities and equity |
$ | 327,853 | $ | 305,664 | $ | 294,954 | ||||||||||||||||||||||||||||||
Interest rate spread |
2.95 | 3.44 | 3.78 | |||||||||||||||||||||||||||||||||
Impact of noninterest-bearing sources |
.13 | .13 | .16 | |||||||||||||||||||||||||||||||||
Net interest income/margin |
$ | 8,714 | 3.08 | % | $ | 9,315 | 3.57 | % | $ | 9,784 | 3.94 | % |
(continued on following page)
The PNC Financial Services Group, Inc. Form 10-K 223 |
(a) | Nonaccrual loans are included in loans, net of unearned income. The impact of financial derivatives used in interest rate risk management is included in the interest income/expense and average yields/rates of the related assets and liabilities. Basis adjustments related to hedged items are included in noninterest-earning assets and noninterest-bearing liabilities. Average balances of securities are based on amortized historical cost (excluding adjustments to fair value, which are included in other assets). Average balances for certain loans and borrowed funds accounted for at fair value, with changes in fair value recorded in trading noninterest income, are included in noninterest-earning assets and noninterest-bearing liabilities. |
(b) | Loan fees for the years ended December 31, 2014, 2013 and 2012 were $162 million, $230 million and $217 million, respectively. |
(c) | Interest income includes the effects of taxable-equivalent adjustments using a statutory federal income tax rate of 35% to increase tax-exempt interest income to a taxable-equivalent basis. The taxable-equivalent adjustments to interest income for the years ended December 31, 2014, 2013 and 2012 were $189 million, $168 million and $144 million, respectively. |
(d) | These line items were corrected for all periods presented due to a misclassification of Government National Mortgage Association (GNMA) securities collateralized by project loans, which were previously reported as residential mortgage-backed agency securities and have been reclassified to commercial mortgage-backed securities. |
224 The PNC Financial Services Group, Inc. Form 10-K |
Analysis Of Year-To-Year Changes In Net Interest Income (a) (b)
2014/2013 | 2013/2012 | |||||||||||||||||||||||
Increase/(Decrease) in Income/ Expense Due to Changes in: |
Increase/(Decrease) in Income/ Expense Due to Changes in: |
|||||||||||||||||||||||
Taxable-equivalent basis in millions | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest-Earning Assets |
||||||||||||||||||||||||
Investment securities |
||||||||||||||||||||||||
Securities available for sale |
||||||||||||||||||||||||
Residential mortgage-backed |
||||||||||||||||||||||||
Agency |
$ | (99 | ) | $ | 40 | $ | (59 | ) | $ | (62 | ) | $ | (101 | ) | $ | (163 | ) | |||||||
Non-agency |
(37 | ) | (36 | ) | (73 | ) | (37 | ) | 4 | (33 | ) | |||||||||||||
Commercial mortgage-backed |
10 | (40 | ) | (30 | ) | (24 | ) | (24 | ) | |||||||||||||||
Asset-backed |
(10 | ) | 5 | (5 | ) | 12 | (8 | ) | 4 | |||||||||||||||
U.S. Treasury and government agencies |
32 | (12 | ) | 20 | (8 | ) | (10 | ) | (18 | ) | ||||||||||||||
State and municipal |
(5 | ) | 4 | (1 | ) | 15 | (9 | ) | 6 | |||||||||||||||
Other debt |
(16 | ) | 4 | (12 | ) | (10 | ) | (8 | ) | (18 | ) | |||||||||||||
Total securities available for sale |
(86 | ) | (74 | ) | (160 | ) | (87 | ) | (159 | ) | (246 | ) | ||||||||||||
Securities held to maturity |
||||||||||||||||||||||||
Residential mortgage-backed |
53 | 1 | 54 | (2 | ) | (1 | ) | (3 | ) | |||||||||||||||
Commercial mortgage-backed |
(38 | ) | (14 | ) | (52 | ) | (38 | ) | (6 | ) | (44 | ) | ||||||||||||
Asset-backed |
(1 | ) | (1 | ) | (2 | ) | 2 | (3 | ) | (1 | ) | |||||||||||||
State and municipal |
54 | (1 | ) | 53 | 3 | 11 | 14 | |||||||||||||||||
Other |
(1 | ) | (1 | ) | 1 | 1 | ||||||||||||||||||
Total securities held to maturity |
56 | (4 | ) | 52 | (29 | ) | (4 | ) | (33 | ) | ||||||||||||||
Total investment securities |
(49 | ) | (59 | ) | (108 | ) | (115 | ) | (164 | ) | (279 | ) | ||||||||||||
Loans |
||||||||||||||||||||||||
Commercial |
228 | (442 | ) | (214 | ) | 394 | (598 | ) | (204 | ) | ||||||||||||||
Commercial real estate |
140 | (158 | ) | (18 | ) | 72 | (140 | ) | (68 | ) | ||||||||||||||
Equipment lease financing |
9 | (23 | ) | (14 | ) | 28 | (43 | ) | (15 | ) | ||||||||||||||
Consumer |
18 | (153 | ) | (135 | ) | 108 | (165 | ) | (57 | ) | ||||||||||||||
Residential real estate |
(26 | ) | (26 | ) | (52 | ) | (23 | ) | (36 | ) | (59 | ) | ||||||||||||
Total loans |
399 | (832 | ) | (433 | ) | 601 | (1,004 | ) | (403 | ) | ||||||||||||||
Interest-earning deposits with banks |
36 | 1 | 37 | 7 | 1 | 8 | ||||||||||||||||||
Loans held for sale |
(38 | ) | (20 | ) | (58 | ) | (4 | ) | (7 | ) | (11 | ) | ||||||||||||
Federal funds sold and resale agreements |
3 | (6 | ) | (3 | ) | (7 | ) | (7 | ) | (14 | ) | |||||||||||||
Other |
22 | (12 | ) | 10 | 3 | (1 | ) | (4 | ) | |||||||||||||||
Total interest-earning assets |
$ | 829 | $ | (1,384 | ) | $ | (555 | ) | $ | 518 | $ | (1,221 | ) | $ | (703 | ) | ||||||||
Interest-Bearing Liabilities |
||||||||||||||||||||||||
Interest-bearing deposits |
||||||||||||||||||||||||
Money market |
$ | 7 | $ | 5 | $ | 12 | $ | 10 | $ | (20 | ) | $ | (10 | ) | ||||||||||
Demand |
1 | 3 | 4 | 4 | 4 | |||||||||||||||||||
Savings |
1 | 3 | 4 | 1 | 1 | |||||||||||||||||||
Retail certificates of deposit |
(20 | ) | (15 | ) | (35 | ) | (35 | ) | 5 | (30 | ) | |||||||||||||
Time deposits in foreign offices and other time |
1 | (5 | ) | (4 | ) | (4 | ) | (3 | ) | (7 | ) | |||||||||||||
Total interest-bearing deposits |
18 | (37 | ) | (19 | ) | 16 | (58 | ) | (42 | ) | ||||||||||||||
Borrowed funds |
||||||||||||||||||||||||
Federal funds purchased and repurchase agreements |
(3 | ) | (3 | ) | (1 | ) | (3 | ) | (4 | ) | ||||||||||||||
Federal Home Loan Bank borrowings |
31 | (3 | ) | 28 | (7 | ) | (20 | ) | (27 | ) | ||||||||||||||
Bank notes and senior debt |
44 | (33 | ) | 11 | 21 | (66 | ) | (45 | ) | |||||||||||||||
Subordinated debt |
31 | (17 | ) | 14 | 15 | (130 | ) | (115 | ) | |||||||||||||||
Commercial paper |
(6 | ) | 4 | (2 | ) | (4 | ) | (3 | ) | (7 | ) | |||||||||||||
Other |
20 | (3 | ) | 17 | 2 | 4 | 6 | |||||||||||||||||
Total borrowed funds |
107 | (42 | ) | 65 | (30 | ) | (162 | ) | (192 | ) | ||||||||||||||
Total interest-bearing liabilities |
66 | (20 | ) | 46 | 25 | (259 | ) | (234 | ) | |||||||||||||||
Change in net interest income |
$ | 767 | $ | (1,368 | ) | $ | (601 | ) | $ | 461 | $ | (930 | ) | $ | (469 | ) |
(a) | Changes attributable to rate/volume are prorated into rate and volume components. |
(b) | Interest income includes the effects of taxable-equivalent adjustments using a statutory federal income tax rate of 35% to increase tax-exempt interest income to a taxable-equivalent basis. The taxable-equivalent adjustments to interest income for the years ended December 31, 2014, 2013 and 2012 were $189 million, $168 million and $144 million, respectively. |
The PNC Financial Services Group, Inc. Form 10-K 225 |
Loans Summary
December 31 in millions | 2014 | 2013 | 2012 (a) | 2011 | 2010 | |||||||||||||||
Commercial lending |
||||||||||||||||||||
Commercial |
$ | 97,420 | $ | 88,378 | $ | 83,040 | $ | 65,694 | $ | 55,177 | ||||||||||
Commercial real estate |
23,262 | 21,191 | 18,655 | 16,204 | 17,934 | |||||||||||||||
Equipment lease financing |
7,686 | 7,576 | 7,247 | 6,416 | 6,393 | |||||||||||||||
Total commercial lending |
128,368 | 117,145 | 108,942 | 88,314 | 79,504 | |||||||||||||||
Consumer lending |
||||||||||||||||||||
Home equity |
34,677 | 36,447 | 35,920 | 33,089 | 34,226 | |||||||||||||||
Residential real estate |
14,407 | 15,065 | 15,240 | 14,469 | 15,999 | |||||||||||||||
Credit card |
4,612 | 4,425 | 4,303 | 3,976 | 3,920 | |||||||||||||||
Other consumer |
22,753 | 22,531 | 21,451 | 19,166 | 16,946 | |||||||||||||||
Total consumer lending |
76,449 | 78,468 | 76,914 | 70,700 | 71,091 | |||||||||||||||
Total loans |
$ | 204,817 | $ | 195,613 | $ | 185,856 | $ | 159,014 | $ | 150,595 |
(a) | Includes the impact of the RBC Bank (USA) acquisition, which we acquired on March 2, 2012. |
Impact to 2013 and 2012 Periods from Adoption of ASU 2014-01 (Investments in Low Income Housing Tax Credits) (a)
Income Statement
Year ended | ||||||||
In millions |
December 31
2013 |
December 31
2012 |
||||||
Noninterest Expense |
||||||||
Previously reported |
$ | 9,801 | $ | 10,582 | ||||
Adjustment from adoption of ASU 2014-01 |
(120 | ) | (96 | ) | ||||
Revised |
$ | 9,681 | $ | 10,486 | ||||
Net Income |
||||||||
Previously reported |
$ | 4,227 | $ | 3,001 | ||||
Adjustment from adoption of ASU 2014-01 |
(15 | ) | (7 | ) | ||||
Revised |
$ | 4,212 | $ | 2,994 | ||||
Diluted Earnings per Share |
||||||||
Previously reported |
$ | 7.39 | $ | 5.36 | ||||
Adjustment from adoption of ASU 2014-01 |
(.03 | ) | (.03 | ) | ||||
Revised |
$ | 7.36 | $ | 5.33 | ||||
Efficiency |
||||||||
Previously reported |
61 | % | 68 | % | ||||
Adjustment from adoption of ASU 2014-01 |
(1 | ) | ||||||
Revised |
60 | % | 68 | % | ||||
Effective Tax Rate |
||||||||
Previously reported |
24.1 | % | 23.9 | % | ||||
Adjustment from adoption of ASU 2014-01 |
1.8 | 2.0 | ||||||
Revised |
25.9 | % | 25.9 | % |
Balance Sheet
In millions |
December 31
2013 |
December 31
2012 |
||||||
Retained Earnings |
||||||||
Previously reported |
$ | 23,325 | 20,265 | |||||
Adjustment from adoption of ASU 2014-01 |
(74 | ) | (55 | ) | ||||
Revised |
$ | 23,251 | 20,210 |
(a) | We adopted the guidance in ASU 2014-01, Investments Equity Method and Joint Ventures (Topic 323): Accounting For Investments in Qualified Affordable Housing Projects in the first quarter of 2014. Retrospective application is required. |
226 The PNC Financial Services Group, Inc. Form 10-K |
Tangible Book Value per Common Share Ratio (Non-GAAP)
December 31 dollars in millions, except per share data | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Book value per common share (a) |
$ | 77.61 | $ | 72.07 | $ | 66.95 | $ | 61.44 | $ | 56.22 | ||||||||||
Tangible book value per common share |
||||||||||||||||||||
Common shareholders equity (a) |
$ | 40,605 | $ | 38,392 | $ | 35,358 | $ | 32,374 | $ | 29,560 | ||||||||||
Goodwill and Other Intangible Assets (b) |
(9,595 | ) | (9,654 | ) | (9,798 | ) | (9,027 | ) | (9,052 | ) | ||||||||||
Deferred tax liabilities on Goodwill and Other |
||||||||||||||||||||
Intangible Assets (b) |
320 | 333 | 354 | 431 | 461 | |||||||||||||||
Tangible common shareholders equity |
$ | 31,330 | $ | 29,071 | $ | 25,914 | $ | 23,778 | $ | 20,969 | ||||||||||
Period-end common shares outstanding (in millions) |
523 | 533 | 528 | 527 | 526 | |||||||||||||||
Tangible book value per common share (Non-GAAP) (c) |
$ | 59.88 | $ | 54.57 | $ | 49.07 | $ | 45.13 | $ | 39.88 |
(a) | Amounts for prior periods have been updated to reflect the first quarter 2014 adoption of Accounting Standards Update (ASU) 2014-01 related to investments in low income housing tax credits. |
(b) | Excludes the impact from mortgage servicing rights of $1.4 billion, $1.6 billion, $1.1 billion, $1.1 billion and $1.7 billion at December 31, 2014, 2013, 2012, 2011 and 2010, respectively. |
(c) | We believe this non-GAAP financial measure serves as a useful tool to help evaluate the strength and discipline of a companys capital management strategies and as an additional conservative measure of total company value. |
Estimated Pro forma Fully Phased-In Basel III Common Equity Tier 1 Capital Ratio (a)
Pro forma Fully Phased-In Basel III | ||||||||
Dollars in millions |
December 31
2013 |
December 31
2012 |
||||||
Common stock, related surplus and retained earnings, net of treasury stock |
$ | 38,031 | $ | 34,579 | ||||
Less regulatory capital adjustments: |
||||||||
Goodwill and disallowed intangibles, net of deferred tax liabilities |
(9,321 | ) | (9,445 | ) | ||||
Basel III total threshold deductions |
(1,386 | ) | (2,330 | ) | ||||
Accumulated other comprehensive income (b) |
196 | 276 | ||||||
All other adjustments (c) |
(64 | ) | (579 | ) | ||||
Estimated Basel III Common equity Tier 1 capital |
$ | 27,456 | $ | 22,501 | ||||
Estimated Basel III standardized approach risk-weighted assets (d) |
$ | 291,977 | N/A | |||||
Estimated Basel III advanced approaches risk-weighted assets (e) |
$ | 290,080 | $ | 301,006 | ||||
Estimated Basel III Common equity Tier 1 capital ratio |
9.4 | % | 7.5 | % | ||||
Risk-weighted assets utilized |
Standardized | Advanced |
(a) | Amounts have not been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
(b) | Represents net adjustments related to accumulated other comprehensive income for securities currently and previously held as available for sale, as well as pension and other postretirement plans. |
(c) | Includes adjustments as required based on whether the standardized approach or advanced approaches is utilized. |
(d) | Basel III standardized approach risk-weighted assets were estimated based on the Basel III standardized approach rules and include credit and market risk-weighted assets. |
(e) | Basel III advanced approaches risk-weighted assets were estimated based on the Basel III advanced approaches rules, and include credit, market and operational risk-weighted assets. |
Basel I Tier 1 Common Capital Ratio (a) (b)
Dollars in millions |
December 31
2013 |
December 31
2012 |
December 31
2011 |
December 31
2010 |
||||||||||||
Basel I Tier 1 common capital |
$ | 28,484 | $ | 24,951 | $ | 23,732 | $ | 21,188 | ||||||||
Basel I risk-weighted assets |
272,169 | 260,847 | 230,705 | 216,283 | ||||||||||||
Basel I Tier 1 common capital ratio |
10.5 | % | 9.6 | % | 10.3 | % | 9.8 | % |
(a) | Effective January 1, 2014, the Basel I Tier 1 common capital ratio no longer applies to PNC (except for stress testing purposes). Our 2013 Form 10-K included additional information regarding our Basel I capital ratios. |
(b) | Amounts have not been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits. |
The PNC Financial Services Group, Inc. Form 10-K 227 |
Nonperforming Assets and Related Information
December 31 dollars in millions | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Nonperforming loans |
||||||||||||||||||||
Commercial |
$ | 290 | $ | 457 | $ | 590 | $ | 899 | $ | 1,253 | ||||||||||
Commercial real estate |
334 | 518 | 807 | 1,345 | 1,835 | |||||||||||||||
Equipment lease financing |
2 | 5 | 13 | 22 | 77 | |||||||||||||||
Total commercial lending |
626 | 980 | 1,410 | 2,266 | 3,165 | |||||||||||||||
Consumer lending (a) |
||||||||||||||||||||
Home equity (b) (c) |
1,112 | 1,139 | 951 | 529 | 448 | |||||||||||||||
Residential real estate (b) |
706 | 904 | 845 | 726 | 818 | |||||||||||||||
Credit card (d) |
3 | 4 | 5 | 8 | ||||||||||||||||
Other consumer (b) |
63 | 61 | 43 | 31 | 35 | |||||||||||||||
Total consumer lending (e) |
1,884 | 2,108 | 1,844 | 1,294 | 1,301 | |||||||||||||||
Total nonperforming loans (f) |
2,510 | 3,088 | 3,254 | 3,560 | 4,466 | |||||||||||||||
OREO and foreclosed assets |
||||||||||||||||||||
Other real estate owned (OREO) (g) |
351 | 360 | 507 | 561 | 589 | |||||||||||||||
Foreclosed and other assets |
19 | 9 | 33 | 35 | 68 | |||||||||||||||
Total OREO and foreclosed assets |
370 | 369 | 540 | 596 | 657 | |||||||||||||||
Total nonperforming assets |
$ | 2,880 | $ | 3,457 | $ | 3,794 | $ | 4,156 | $ | 5,123 | ||||||||||
Nonperforming loans to total loans |
1.23 | % | 1.58 | % | 1.75 | % | 2.24 | % | 2.97 | % | ||||||||||
Nonperforming assets to total loans, OREO and foreclosed assets |
1.40 | 1.76 | 2.04 | 2.60 | 3.39 | |||||||||||||||
Nonperforming assets to total assets |
0.83 | 1.08 | 1.24 | 1.53 | 1.94 | |||||||||||||||
Interest on nonperforming loans |
||||||||||||||||||||
Computed on original terms |
$ | 125 | $ | 163 | $ | 212 | $ | 278 | $ | 329 | ||||||||||
Recognized prior to nonperforming status |
25 | 30 | 30 | 47 | 53 | |||||||||||||||
Troubled Debt Restructurings |
||||||||||||||||||||
Nonperforming |
$ | 1,370 | $ | 1,511 | $ | 1,589 | $ | 1,141 | $ | 784 | ||||||||||
Performing |
1,213 | 1,228 | 1,270 | 1,062 | 874 | |||||||||||||||
Past due loans |
||||||||||||||||||||
Accruing loans past due 90 days or more (h) |
$ | 1,105 | $ | 1,491 | $ | 2,351 | $ | 2,973 | $ | 2,709 | ||||||||||
As a percentage of total loans |
.54 | % | .76 | % | 1.26 | % | 1.87 | % | 1.80 | % | ||||||||||
Past due loans held for sale |
||||||||||||||||||||
Accruing loans held for sale past due 90 days or more (i) |
$ | 9 | $ | 4 | $ | 38 | $ | 49 | $ | 65 | ||||||||||
As a percentage of total loans held for sale |
.40 | % | .18 | % | 1.03 | % | 1.67 | % | 1.86 | % |
(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) | Pursuant to alignment with interagency supervisory guidance on practices for loans and lines of credit related to consumer lending in the first quarter of 2013, nonperforming home equity loans increased $214 million, nonperforming residential mortgage loans increased $187 million and nonperforming other consumer loans increased $25 million. Charge-offs were taken on these loans where the fair value less costs to sell the collateral was less than the recorded investment of the loan and were $134 million. |
(c) | In the first quarter of 2012, we adopted a policy stating that Home equity loans past due 90 days or more would be placed on nonaccrual status. Prior policy required that these loans be past due 180 days before being placed on nonaccrual status. |
(d) | Effective in the second quarter 2011, the commercial nonaccrual policy was applied to certain small business credit card balances. This change resulted in loans being placed on nonaccrual status when they become 90 days or more past due. We continue to charge off these loans at 180 days past due. |
(e) | Pursuant to regulatory guidance, issued in the third quarter of 2012, nonperforming consumer loans, primarily home equity and residential mortgage, increased $288 million in 2012 related to changes in treatment of certain loans classified as TDRs, net of charge-offs, resulting from bankruptcy where no formal reaffirmation was provided by the borrower and therefore a concession has been granted based upon discharge from personal liability. Charge-offs have been taken where the fair value less costs to sell the collateral was less than the recorded investment of the loan and were $128 million. |
(f) | Nonperforming loans exclude certain government insured or guaranteed loans, loans held for sale, loans accounted for under the fair value option and purchased impaired loans. |
(g) | OREO excludes $194 million, $245 million, $380 million, $280 million and $178 million at December 31, 2014, December 31, 2013, December 31, 2012, December 31, 2011 and December 31, 2010, respectively, related to residential real estate that was acquired by us upon foreclosure of serviced loans because they are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or guaranteed by the Department of Housing and Urban Development. |
(h) | Amounts include certain government insured or guaranteed consumer loans totaling $996 million, $995 million, $2,236 million, $2,474 million and $2,167 million at December 31, 2014, December 31, 2013, December 31, 2012, December 31, 2011 and December 31, 2010, respectively. Past due loan amounts exclude purchased impaired loans as they are considered current loans due to the accretion of interest income. |
(i) | Amounts include certain government insured or guaranteed consumer loans held for sale totaling $9 million, $4 million, zero, $15 million and $22 million at December 31, 2014, December 31, 2013, December 31, 2012, December 31, 2011 and December 31, 2010, respectively. |
228 The PNC Financial Services Group, Inc. Form 10-K |
Summary of Loan Loss Experience
Year ended December 31 dollars in millions | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Allowance for loan and lease losses January 1 |
$ | 3,609 | $ | 4,036 | $ | 4,347 | $ | 4,887 | $ | 5,072 | ||||||||||
Charge-offs |
||||||||||||||||||||
Commercial |
(276 | ) | (395 | ) | (474 | ) | (700 | ) | (1,227 | ) | ||||||||||
Commercial real estate |
(70 | ) | (203 | ) | (314 | ) | (464 | ) | (670 | ) | ||||||||||
Equipment lease financing |
(14 | ) | (8 | ) | (16 | ) | (35 | ) | (120 | ) | ||||||||||
Home equity |
(275 | ) | (486 | ) | (560 | ) | (484 | ) | (488 | ) | ||||||||||
Residential real estate |
(40 | ) | (133 | ) | (110 | ) | (153 | ) | (406 | ) | ||||||||||
Credit card |
(163 | ) | (178 | ) | (200 | ) | (235 | ) | (335 | ) | ||||||||||
Other consumer |
(183 | ) | (185 | ) | (196 | ) | (193 | ) | (246 | ) | ||||||||||
Total charge-offs |
(1,021 | ) | (1,588 | ) | (1,870 | ) | (2,264 | ) | (3,492 | ) | ||||||||||
Recoveries |
||||||||||||||||||||
Commercial |
207 | 248 | 300 | 332 | 294 | |||||||||||||||
Commercial real estate |
84 | 93 | 115 | 105 | 77 | |||||||||||||||
Equipment lease financing |
14 | 16 | 30 | 50 | 56 | |||||||||||||||
Home equity |
78 | 73 | 61 | 48 | 41 | |||||||||||||||
Residential real estate |
26 | 4 | (1 | ) | 11 | 19 | ||||||||||||||
Credit card |
21 | 22 | 26 | 23 | 20 | |||||||||||||||
Other consumer |
60 | 55 | 50 | 56 | 49 | |||||||||||||||
Total recoveries |
490 | 511 | 581 | 625 | 556 | |||||||||||||||
Net charge-offs |
(531 | ) | (1,077 | ) | (1,289 | ) | (1,639 | ) | (2,936 | ) | ||||||||||
Provision for credit losses |
273 | 643 | 987 | 1,152 | 2,502 | |||||||||||||||
Net change in allowance for unfunded loan commitments and letters of credit |
(17 | ) | 8 | (10 | ) | (52 | ) | 108 | ||||||||||||
Adoption of ASU 2009-17, Consolidations |
141 | |||||||||||||||||||
Other |
(3 | ) | (1 | ) | 1 | (1 | ) | |||||||||||||
Allowance for loan and lease losses December 31 |
$ | 3,331 | $ | 3,609 | $ | 4,036 | $ | 4,347 | $ | 4,887 | ||||||||||
Allowance as a percent of December 31: |
||||||||||||||||||||
Loans |
1.63 | % | 1.84 | % | 2.17 | % | 2.73 | % | 3.25 | % | ||||||||||
Nonperforming loans |
133 | 117 | 124 | 122 | 109 | |||||||||||||||
As a percent of average loans |
||||||||||||||||||||
Net charge-offs |
.27 | .57 | .73 | 1.08 | 1.91 | |||||||||||||||
Provision for credit losses |
.14 | .34 | .56 | .76 | 1.63 | |||||||||||||||
Allowance for loan and lease losses |
1.67 | 1.90 | 2.28 | 2.86 | 3.18 | |||||||||||||||
Allowance as a multiple of net charge-offs |
6.27 | x | 3.35 | x | 3.13 | x | 2.65 | x | 1.66 | x |
The PNC Financial Services Group, Inc. Form 10-K 229 |
The following table presents the assignment of the allowance for loan and lease losses and the categories of loans as a percentage of total loans. Changes in the allocation over time reflect the changes in loan portfolio composition, risk profile and refinements to reserve methodologies.
Allocation of Allowance for Loan and Lease Losses
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||||||||||||||
December 31 Dollars in millions |
Allowance |
Loans to
Total Loans |
Allowance |
Loans to
Total Loans |
Allowance |
Loans to
Total Loans |
Allowance |
Loans to
Total Loans |
Allowance |
Loans to
Total Loans |
||||||||||||||||||||||||||||||||||||||
Commercial |
$ | 1,209 | 47.6 | % | $ | 1,100 | 45.2 | % | $ | 1,131 | 44.7 | % | $ | 1,180 | 41.3 | % | $ | 1,387 | 36.7 | % | ||||||||||||||||||||||||||||
Commercial real estate |
318 | 11.4 | 400 | 10.8 | 589 | 10.0 | 753 | 10.2 | 1,086 | 11.9 | ||||||||||||||||||||||||||||||||||||||
Equipment lease financing |
44 | 3.7 | 47 | 3.9 | 54 | 3.9 | 62 | 4.0 | 94 | 4.2 | ||||||||||||||||||||||||||||||||||||||
Home equity |
872 | 16.9 | 1,051 | 18.6 | 1,044 | 19.3 | 1,095 | 20.8 | 684 | 22.7 | ||||||||||||||||||||||||||||||||||||||
Residential real estate |
561 | 7.0 | 642 | 7.7 | 847 | 8.2 | 894 | 9.1 | 1,093 | 10.6 | ||||||||||||||||||||||||||||||||||||||
Credit card |
173 | 2.3 | 169 | 2.3 | 199 | 2.3 | 202 | 2.5 | 361 | 2.6 | ||||||||||||||||||||||||||||||||||||||
Other consumer |
154 | 11.1 | 200 | 11.5 | 172 | 11.6 | 161 | 12.1 | 182 | 11.3 | ||||||||||||||||||||||||||||||||||||||
Total |
$ | 3,331 | 100.0 | % | $ | 3,609 | 100.0 | % | $ | 4,036 | 100.0 | % | $ | 4,347 | 100.0 | % | $ | 4,887 | 100.0 | % |
Selected Loan Maturities and Interest Sensitivity
December 31, 2014 In millions |
1 Year or
Less |
1 Through
5 Years |
After
5 Years |
Gross
Loans |
||||||||||||
Commercial |
$ | 26,245 | $ | 60,715 | $ | 10,460 | $ | 97,420 | ||||||||
Commercial real estate Real estate projects |
6,613 | 12,290 | 4,359 | 23,262 | ||||||||||||
Total |
$ | 32,858 | $ | 73,005 | $ | 14,819 | $ | 120,682 | ||||||||
Loans with: |
||||||||||||||||
Predetermined rate |
$ | 5,454 | $ | 10,623 | $ | 7,275 | $ | 23,352 | ||||||||
Floating or adjustable rate |
27,404 | 62,382 | 7,544 | 97,330 | ||||||||||||
Total |
$ | 32,858 | $ | 73,005 | $ | 14,819 | $ | 120,682 |
At December 31, 2014, we had no pay-fixed interest rate swaps designated to commercial loans as part of fair value hedge strategies. At December 31, 2014, $20.0 billion notional amount of receive-fixed interest rate swaps were designated as part of cash flow hedging strategies that converted the floating rate (1 month and 3 month LIBOR) on the underlying commercial loans to a fixed rate as part of risk management strategies.
Time Deposits of $100,000 Or More
The aggregate amount of time deposits with a denomination of $100,000 or more was $8.8 billion at December 31, 2014, which included time deposits in foreign offices totaling $2.4 billion at December 31, 2014. Domestic time deposits of $100,000 or more were $6.4 billion with the following maturities:
December 31, 2014 in millions |
Domestic
Certificates of Deposit |
|||
|
|
|||
Three months or less |
$ | 1,651 | ||
Over three through six months |
960 | |||
Over six through twelve months |
1,721 | |||
Over twelve months |
2,040 | |||
Total |
$ | 6,372 |
Common Stock Prices/Dividends Declared
The table below sets forth by quarter the range of high and low sale and quarter-end closing prices for The PNC Financial Services Group, Inc. common stock and the cash dividends declared per common share.
High | Low | Close |
Cash
Dividends Declared |
|||||||||||||
2014 Quarter |
||||||||||||||||
First |
$ | 87.80 | $ | 76.06 | $ | 87.00 | $ | .44 | ||||||||
Second |
89.85 | 79.80 | 89.05 | .48 | ||||||||||||
Third |
90.00 | 80.43 | 85.58 | .48 | ||||||||||||
Fourth |
93.45 | 76.69 | 91.23 | .48 | ||||||||||||
Total |
$ | 1.88 | ||||||||||||||
2013 Quarter |
||||||||||||||||
First |
$ | 66.93 | $ | 58.96 | $ | 66.50 | $ | .40 | ||||||||
Second |
74.19 | 63.69 | 72.92 | .44 | ||||||||||||
Third |
77.93 | 71.48 | 72.45 | .44 | ||||||||||||
Fourth |
78.36 | 70.63 | 77.58 | .44 | ||||||||||||
Total |
$ | 1.72 |
230 The PNC Financial Services Group, Inc. Form 10-K |
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
M ANAGEMENT S R EPORT ON I NTERNAL C ONTROL OVER F INANCIAL R EPORTING
The management of The PNC Financial Services Group, Inc. and subsidiaries (PNC) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rule 13a-15(f).
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We performed an evaluation under the supervision and with the participation of our management, including the Chairman, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of PNCs internal control over financial reporting as of December 31, 2014. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that PNC maintained effective internal control over financial reporting as of December 31, 2014.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited our consolidated financial statements as of and for the year ended December 31, 2014 included in this Report, has also audited the effectiveness of PNCs internal control over financial reporting as of December 31, 2014. The report of PricewaterhouseCoopers LLP is included under Item 8 of this Report.
D ISCLOSURE C ONTROLS AND P ROCEDURES AND C HANGES IN I NTERNAL C ONTROL OVER F INANCIAL R EPORTING
As of December 31, 2014, we performed an evaluation under the supervision and with the participation of our management, including the Chairman, President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures and of changes in our internal control over financial reporting.
Based on that evaluation, our Chairman, President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended) were effective as of December 31, 2014, and that there has been no change in PNCs internal control over financial reporting that occurred during the fourth quarter of 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain of the information regarding our directors (or nominees for director), executive officers and Audit Committee (and Audit Committee financial experts), required by this item is included under the captions Election of Directors (Item 1), and Corporate Governance Board committees Audit Committee , and Director and Executive Officer Relationships Family relationships in our Proxy Statement to be filed for the 2015 annual meeting of shareholders and is incorporated herein by reference.
Information regarding our compliance with Section 16(a) of the Securities Exchange Act of 1934 is included under the caption Director and Executive Officer Relationships Section 16(a) beneficial ownership reporting compliance in our Proxy Statement to be filed for the 2015 annual meeting of shareholders and is incorporated herein by reference.
Additional information regarding our executive officers and our directors is included in Part I of this Report under the captions Executive Officers of the Registrant and Directors of the Registrant.
Certain information regarding our PNC Code of Business Conduct and Ethics required by this item is included under the caption Corporate Governance Our code of ethics in our Proxy Statement to be filed for the 2015 annual meeting of shareholders and is incorporated herein by reference. Our PNC Code of Business Conduct and Ethics is available on our corporate website at www.pnc.com/corporategovernance. In addition, any future amendments to, or waivers from, a provision of the PNC Code of Business Conduct and Ethics that applies to our directors or executive officers (including our principal executive officer, principal financial officer, and principal accounting officer or controller) will be posted at this internet address.
The PNC Financial Services Group, Inc. Form 10-K 231 |
ITEM 11 EXECUTIVE COMPENSATION
The information required by this item is included under the captions Corporate Governance Board committees Personnel and Compensation Committee Compensation committee interlocks and insider participation, Director Compensation, Compensation Discussion and Analysis, Compensation Committee Report, Compensation and Risk, Compensation Tables, and Change in Control and Termination of Employment in our Proxy Statement to be filed for the 2015 annual meeting of shareholders and is incorporated herein by reference. In accordance with Item 407(e)(5) of Regulation S-K, the information set forth under the caption Compensation Committee Report in such Proxy Statement will be deemed to be furnished in this Report and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act as a result of furnishing the disclosure in this manner.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item regarding security ownership of certain beneficial owners and management is included under the caption Security Ownership of Directors and Executive Officers in our Proxy Statement to be filed for the 2015 annual meeting of shareholders and is incorporated herein by reference.
Information regarding our compensation plans under which PNC equity securities are authorized for issuance as of December 31, 2014 is included in the table which follows. Also included in the notes to the table is information regarding awards or portions of awards under our 2006 Incentive Award Plan that, by their terms, are payable only in cash. Additional information regarding these plans is included in Note 14 Stock Based Compensation Plans in the Notes To Consolidated Financial Statements in Item 8 of this Report.
Equity Compensation Plan Information
At December 31, 2014
(a) | (b) | (c) | ||||||||||||
Number of securities
exercise of
outstanding options,
|
Weighted-average
exercise price of outstanding options, warrants and rights |
Number of securities
for future issuance
|
||||||||||||
Equity compensation plans approved by security holders |
||||||||||||||
1997 Long-Term Incentive Award Plan |
(Note 1 | ) | ||||||||||||
Stock Options |
524,723 | $ | 66.56 | |||||||||||
2006 Incentive Award Plan |
(Note 2 and Note 3) | |||||||||||||
Stock Options |
6,163,632 | $ | 55.50 | 17,997,353 | ||||||||||
Incentive Performance Unit Awards |
(Note 4) | 596,991 | N/A | |||||||||||
Stock-Payable Restricted Stock Units |
(Note 5) | 3,773,079 | N/A | |||||||||||
1996 Executive Incentive Award Plan |
||||||||||||||
Incentive Awards |
N/A | (Note 6 | ) | |||||||||||
Employee Stock Purchase Plan |
(Note 7) | 1,019,704 | ||||||||||||
Total approved by security holders |
11,058,425 | 19,017,057 | ||||||||||||
Equity compensation plans not approved by security holders |
(Note 8) | |||||||||||||
Former National City Corporation Equity-Based Compensation Plans, including stock options |
1,817,776 | $ | 585.23 | |||||||||||
Former Sterling Financial Corporation Stock Option Plan |
12,948 | $ | 78.56 | |||||||||||
Total not approved by security holders |
1,830,724 | |||||||||||||
Total |
12,889,149 | 19,017,057 |
N/A not applicable
232 The PNC Financial Services Group, Inc. Form 10-K |
Note 1 After shareholder approval of the 2006 Incentive Award Plan at the 2006 annual meeting of PNCs shareholders on April 25, 2006 (see Note 2 below), no further grants were permitted under the 1997 Long-Term Incentive Award Plan, with certain exceptions that are no longer applicable.
Note 2 The 2006 Incentive Award Plan was adopted by the Board on February 15, 2006 and approved by the PNC shareholders at the 2006 annual meeting on April 25, 2006. The plan initially authorized up to 40,000,000 shares of common stock for issuance under the plan, subject to adjustment in certain circumstances. If and to the extent that stock options and stock appreciation rights (SARs) granted under the plan, or granted under the prior plan and outstanding on the approval date of the plan, terminate, expire or are cancelled, forfeited, exchanged or surrendered after the effective date of the plan without being exercised or if any share awards, share units, dividend equivalents or other share-based awards are forfeited or terminated, or otherwise not paid in full, after the effective date of the plan, the shares subject to such grants become available again for purposes of the plan. Shares available for issuance under this plan are also reduced by the number of any shares used in payment of bonuses under the 1996 Executive Incentive Award Plan.
The plan was most recently amended and restated incorporating amendments adopted by the Board and approved by PNCs shareholders at the 2011 annual meeting of shareholders, effective as of March 11, 2011. These amendments incorporate, among other things, an increase to the overall limit on the number of shares that may be awarded under the plan to 46,000,000, and a new requirement that each award of a share (other than pursuant to a stock option or SAR) granted under the plan after that effective date will reduce the aggregate plan limit by 2.5 shares, while each award of a share pursuant to a stock option or SAR will reduce the aggregate plan limit by one share.
Note 3 Under the 2006 Incentive Award Plan, awards or portions of awards that, by their terms, are payable only in cash do not reduce the number of shares that remain available for issuance under the plan (the number in column (c)). During 2014, a total of 397,929 cash-payable share units plus cash-payable dividend equivalents with respect to 268,488 of those share units were granted under the plan. This number includes an incremental change in the cash-payable portion of the 2012 incentive performance unit award grant described in Note 4 below (net of forfeitures), a separate 2014
incentive performance unit award grant payable solely in cash, 2013 and 2014 grants of share units (all of which include rights to cash dividend equivalents) payable solely in cash and fractional units payable solely in cash. Payments are subject to the conditions of the individual grants, including, where applicable, the achievement of any performance goals or service requirement established for such grants. The comparable amount for 2013 was 505,343 cash-payable share units plus cash-payable dividend equivalents with respect to
391,520 cash-payable restricted share units, and the comparable amount for 2012 was 543,959 cash-payable share units plus cash-payable dividend equivalents with respect to 418,665 cash-payable restricted share units.
Note 4 These incentive performance unit awards provide for the issuance of shares of common stock (up to a target number of shares) based on the degree to which corporate performance goals established by the Personnel and Compensation Committee have been achieved, subject to potential negative adjustment based on certain risk-related performance metrics, and, if a premium level of such performance is achieved, for further payment in cash. The numbers in column (a) of this table for these awards reflect the maximum number of shares that could be issued pursuant to grants outstanding at December 31, 2014 upon achievement of the performance goals and other conditions of the grants. At the premium level of performance, a further maximum payout of cash equivalents for 100%, 25% and 25%, respectively, of the same number of share units for the 2012 grant, 2013 grant and 2014 grant, respectively, plus the incremental change described in Note 3, could also be payable subject to the other conditions of the grants. Grants under the 2006 Incentive Award Plan were made in the first quarter of 2012, 2013 and 2014.
Note 5 These stock-payable restricted stock units include 2011, 2012, 2013 and 2014 grants of performance-based restricted share units (with the units payable solely in stock and related dividend equivalents payable solely in cash) that have a service condition, an external and also in the later grants an internal risk-related performance condition and a market condition and also include grants of other stock-payable restricted share units, some of which are time-based, others which are performance-based and some of which also include related dividend equivalents payable solely in cash. The number in column (a) includes the maximum number of shares that could be issued pursuant to grants of this type of award outstanding at December 31, 2014 upon achievement of the performance and market conditions, where applicable, and other conditions of the grants. Cash-payable dividend equivalents were granted with respect to most of these stock-payable restricted stock units. Where stock-payable restricted share units include a fractional share interest, such fractional share interest is payable only in cash share equivalents. During 2014, a total of 39 cash share equivalents were paid in the aggregate for fractional share interests, including any for award grants described in Note 4.
Note 6 The 1996 Executive Incentive Award Plan is a shareholder-approved plan that enables PNC to pay annual bonuses to its senior executive officers based upon the achievement of specified levels of performance. The plan as amended and restated as of January 1, 2007 was adopted by the Board on February 14, 2007 and approved by the PNC shareholders at the 2007 annual meeting on April 24, 2007. The plan does not specify a fixed share amount for awards under the plan. Rather, it provides for maximum bonus awards
The PNC Financial Services Group, Inc. Form 10-K 233 |
for a given period (generally a year) for each individual plan participant of 0.2% of incentive income for that period. Incentive income is based on PNCs consolidated pre-tax net income as further adjusted for the impact of changes in tax law, extraordinary items, discontinued operations, acquisition and merger integration costs, and for the impact of PNCs obligation to fund a portion of certain BlackRock long-term incentive programs. Although the size of awards under the plan is dollar-denominated, payment may be made in cash, in shares of PNC common stock, or in a combination of cash and stock.
Note 7 The purchase price for shares of PNC common stock sold under the plan represents 95% of the fair market value on the last day of each six-month offering period.
Note 8 The plans in this section of the table reflect awards under pre-acquisition plans of National City Corporation and Sterling Financial Corporation, respectively. National City was merged into PNC on December 31, 2008 and Sterling was merged into PNC on April 4, 2008. Pursuant to the respective merger agreements for these acquisitions, common shares of National City or Sterling, as the case may be, issuable upon the exercise or settlement of various equity awards granted under the National City or Sterling plans were converted into corresponding awards covering PNC common stock. Additional information is included in Note 14 Stock Based Compensation Plans in the Notes To Consolidated Financial Statements in Item 8 of this Report and in Note 16 Stock Based Compensation Plans in the Notes To Consolidated Financial Statements in Item 8 of our 2008 10-K.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is included under the captions Director and Executive Officer Relationships Director independence, Transactions with directors, Family relationships, Indemnification and advancement of costs, and Related person transactions policies and procedures in our Proxy Statement to be filed for the 2015 annual meeting of shareholders and is incorporated herein by reference.
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is included under the caption Ratification of Independent Registered Public Accounting Firm (Item 2) Audit, audit-related and permitted non-audit fees in our Proxy Statement to be filed for the 2015 annual meeting of shareholders and is incorporated herein by reference.
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
F INANCIAL S TATEMENTS , F INANCIAL S TATEMENT S CHEDULES
Our consolidated financial statements required in response to this Item are incorporated by reference from Item 8 of this Report.
Audited consolidated financial statements of BlackRock, Inc. as of December 31, 2014 and 2013 and for each of the three years in the period ended December 31, 2014 are filed with this Report as Exhibit 99.1 and incorporated herein by reference.
E XHIBITS
Our exhibits listed on the Exhibit Index on pages E-1 through E-8 of this Form 10-K are filed with this Report or are incorporated herein by reference.
234 The PNC Financial Services Group, Inc. Form 10-K |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The PNC Financial Services Group, Inc.
(Registrant)
By: |
/s/ Robert Q. Reilly | |
Robert Q. Reilly | ||
Executive Vice President and Chief Financial Officer | ||
February 27, 2015 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of The PNC Financial Services Group, Inc. and in the capacities indicated on February 27, 2015.
Signature |
Capacities |
|
/s/ William S. Demchak William S. Demchak |
Chairman, President, Chief Executive Officer and Director (Principal Executive Officer) |
|
/s/ Robert Q. Reilly Robert Q. Reilly |
Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
|
/s/ Gregory H. Kozich Gregory H. Kozich |
Senior Vice President and Controller
|
|
* Richard O. Berndt; Charles E. Bunch; Paul W. Chellgren; Marjorie Rodgers Cheshire; Andrew T. Feldstein; Kay Coles James; Richard B. Kelson; Anthony A. Massaro; Jane G. Pepper; Donald J. Shepard; Lorene K. Steffes; Dennis F. Strigl; Thomas J. Usher; George H. Walls, Jr.; and Helge H. Wehmeier |
Directors |
*By: |
/s/ Christi Davis | |
Christi Davis, Attorney-in-Fact,
|
The PNC Financial Services Group, Inc. Form 10-K 235 |
E XHIBIT I NDEX
Exhibit No. |
Description |
Method of Filing + |
||
3.1.1 |
Articles of Incorporation of the Corporation, as amended effective as of January 2, 2009 |
Incorporated herein by reference to Exhibit 3.1 to the Corporations Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K) |
||
3.1.2 |
Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series O dated July 21, 2011 |
Incorporated herein by reference to Exhibit 3.1 of the Corporations Current Report on Form 8-K filed July 27, 2011 |
||
3.1.3 |
Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series P dated April 19, 2012 |
Incorporated herein by reference to Exhibit 3.1 of the Corporations Current Report on Form 8-K filed April 24, 2012 |
||
3.1.4 |
Statement with Respect to Shares of 5.375% Non-Cumulative Perpetual Preferred Stock, Series Q dated September 14, 2012 |
Incorporated herein by reference to Exhibit 3.1 of the Corporations Current Report on Form 8-K filed September 21, 2012 |
||
3.1.5 |
Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series R dated May 2, 2013 |
Incorporated herein by reference to Exhibit 3.1 of the Corporations Current Report on Form 8-K filed May 7, 2013 |
||
3.2 |
By-Laws of the Corporation, as amended and restated, effective as of August 15, 2013 |
Incorporated herein by reference to Exhibit 3.2 of the Corporations Current Report on Form 8-K filed August 15, 2013 |
||
4.1 |
There are no instruments with respect to long-term debt of the Corporation and its subsidiaries that involve a total amount of securities authorized thereunder that exceed 10 percent of the total assets of the Corporation and its subsidiaries on a consolidated basis. The Corporation agrees to provide the SEC with a copy of instruments defining the rights of holders of long-term debt of the Corporation and its subsidiaries on request. |
|||
4.2 |
Terms of $1.80 Cumulative Convertible Preferred Stock, Series B |
Incorporated herein by reference to Exhibit 3.1 the Corporations 2008 Form 10-K |
||
4.3 |
Terms of 7.00% Non-Cumulative Preferred Stock, Series H |
Incorporated herein by reference to Exhibit 3.1 the Corporations 2008 Form 10-K |
||
4.4 |
Terms of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series I |
Incorporated herein by reference to Exhibit 3.1 the Corporations 2008 Form 10-K |
||
4.5 |
Terms of Fixed-to-Floating Non-Cumulative Perpetual Preferred Stock, Series K |
Incorporated herein by reference to Exhibit 3.1 the Corporations 2008 Form 10-K |
||
4.6 |
Terms of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series O |
Incorporated herein by reference to Exhibit 3.1 of the Corporations Current Report on Form 8-K filed July 27, 2011 |
||
4.7 |
Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series P dated April 19, 2012 |
Incorporated herein by reference to Exhibit 3.1 of the Corporations Current Report on Form 8-K filed April 24, 2012 |
||
4.8 |
Statement with Respect to Shares of 5.375% Non-Cumulative Perpetual Preferred Stock, Series Q dated September 14, 2012 |
Incorporated herein by reference to Exhibit 3.1 of the Corporations Current Report on Form 8-K filed September 21, 2012 |
PNC Financial Services Group, Inc. Form 10-K E-1
4.9 |
Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series R dated May 2, 2013 |
Incorporated herein by reference to Exhibit 3.1 of the Corporations Current Report on Form 8-K filed May 7, 2013 |
||
4.10 |
Warrants for Purchase of Shares of PNC Common Stock |
Incorporated herein by reference to Exhibit 4.2 (included as part of Exhibit 4.1) of the Corporations Form 8-A filed April 30, 2010 |
||
4.11 |
Deposit Agreement dated May 21, 2008, between the Corporation, PNC Bank, National Association, and the holders from time to time of the Depositary Receipts representing interests in the Series K preferred stock |
Incorporated herein by reference to Exhibit 4.3 of the Corporations Current Report on Form 8-K filed May 27, 2008 |
||
4.12 |
Deposit Agreement dated July 27, 2011, between the Corporation, Computershare Trust Company, N.A., Computershare Inc. and the holders from time to time of the Depositary Receipts representing interests in the Series O preferred stock |
Incorporated herein by reference to Exhibit 4.2 of the Corporations Current Report on Form 8-K filed July 27, 2011 |
||
4.13 |
Deposit Agreement, dated April 24, 2012, between the Corporation, Computershare Trust Company, N.A., Computershare Inc. and the holders from time to time of the Depositary Receipts representing interests in the Series P preferred stock |
Incorporated herein \by reference to Exhibit 4.2 of the Corporations Current Report on Form 8-K filed April 24, 2012 |
||
4.14 |
Deposit Agreement, dated September 21, 2012, between the Corporation, Computershare Trust Company, N.A., Computershare Inc. and the holders from time to time of the Depositary Receipts representing interests in the Series Q preferred stock |
Incorporated by reference to Exhibit 4.2 of the Corporations Current Report on Form 8-K filed September 21, 2012 |
||
4.15 |
Deposit Agreement, dated May 7, 2013, between the Corporation, Computershare Trust Company, N.A., Computershare Inc. and the holders from time to time of the Depositary Receipts representing interests in the Series R preferred stock |
Incorporated herein by reference to Exhibit 4.2 of the Corporations Current Report on Form 8-K filed May 7, 2013 |
||
4.16 |
Form of PNC Bank, National Association Global Bank Note for Fixed Rate Global Senior Bank Note issued prior to January 16, 2014 with Maturity of more than Nine Months from Date of Issuance |
Incorporated herein by reference to Exhibit 4.9 of the Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (3rd Quarter 2004 Form 10-Q) |
||
4.17 |
Form of PNC Bank, National Association Global Bank Note for Floating Rate Global Senior Bank Note issued prior to January 16, 2014 with Maturity of more than Nine Months from Date of Issuance |
Incorporated herein by reference to Exhibit 4.10 of the Corporations 3rd Quarter 2004 Form 10-Q |
||
4.18 |
Form of PNC Bank, National Association Global Bank Note for Fixed Rate Global Subordinated Bank Note issued prior to January 16, 2014 with Maturity of more than Nine Months from Date of Issuance |
Incorporated herein by reference to Exhibit 4.11 of the Corporations 3rd Quarter 2004 Form 10-Q |
||
4.19 |
Form of PNC Bank, National Association Global Bank Note for Floating Rate Global Subordinated Bank Note issued prior to January 16, 2014 with Maturity of more than Nine Months from Date of Issuance |
Incorporated herein by reference to Exhibit 4.12 of the Corporations 3rd Quarter 2004 Form 10-Q |
||
4.20 |
Form of PNC Bank, National Association Global Bank Note for Extendible Floating Rate Global Senior Bank Note issued prior to January 16, 2014 with Maturity of more than Nine Months from Date of Issuance |
Incorporated herein by reference to Exhibit 4.1 of the Corporations Current Report on Form 8-K filed June 21, 2012 |
E-2 PNC Financial Services Group, Inc. Form 10-K
4.21 |
Issuing and Paying Agency Agreement, dated January 16, 2014, between PNC Bank, National Association and PNC Bank, National Association, relating to the $25 billion Global Bank Note Program for the Issue of Senior and Subordinated Bank Notes |
Incorporated by reference to Exhibit 4.25 of the Corporations Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K) |
||
4.22 |
Form of PNC Bank, National Association Global Bank Note for Fixed Rate Global Senior Bank Note issued after January 16, 2014 with Maturity of more than Nine Months from Date of Issuance (included in Exhibit 4.21) |
Incorporated by reference to Exhibit 4.25 of the Corporations 2013 Form 10-K |
||
4.23 |
Form of PNC Bank, National Association Global Bank Note for Floating Rate Global Senior Bank Note issued after January 16, 2014 with Maturity of more than Nine Months from Date of Issuance (included in Exhibit 4.21) |
Incorporated by reference to Exhibit 4.25 of the Corporations 2013 Form 10-K |
||
4.24 |
Form of PNC Bank, National Association Global Bank Note for Extendible Floating Rate Global Senior Bank Note issued after January 16, 2014 with Maturity of more than Nine Months from Date of Issuance |
Incorporated by reference to Exhibit 4.28 of the Corporations 2013 Form 10-K |
||
4.25 |
Form of PNC Bank, National Association Global Bank Note for Fixed Rate Global Subordinated Bank Note issued after January 16, 2014 with Maturity of five years or more from Date of Issuance (included in Exhibit 4.21) |
Incorporated by reference to Exhibit 4.25 of the Corporations 2013 Form 10-K |
||
4.26 |
Form of PNC Bank, National Association Global Bank Note for Floating Rate Global Subordinated Bank Note issued after January 16, 2014 with Maturity of five years or more from Date of Issuance (included in Exhibit 4.21) |
Incorporated by reference to Exhibit 4.25 of the Corporations 2013 Form 10-K |
||
4.27 |
Exchange Agreement, dated as of March 29, 2007, by and among the Corporation, PNC Bank, National Association, and PNC Preferred Funding Trust II |
Incorporated herein by reference to Exhibit 4.16 of the Corporations Current Report on Form 8-K filed March 30, 2007 |
||
10.1.1 |
The Corporations Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2009 |
Incorporated herein by reference to Exhibit 10.2 to the Corporations 2008 Form 10-K* |
||
10.1.2 |
Amendment 2009-1 to the Corporations Supplemental Executive Retirement Plan as amended and restated as of January 1, 2009 |
Incorporated herein by reference to Exhibit 10.3 to the Corporations Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K)* |
||
10.1.3 |
Amendment 2013-1 to the Corporations Supplemental Executive Retirement Plan as amended and restated as of January 1, 2009 |
Incorporated by reference to Exhibit 10.1.3 of the Corporations 2013 Form 10-K* |
||
10.2.1 |
The Corporations ERISA Excess Pension Plan, as amended and restated effective January 1, 2009 |
Incorporated herein by reference to Exhibit 10.4 to the Corporations 2008 Form 10-K* |
||
10.2.2 |
Amendment 2009-1 to the Corporations ERISA Excess Plan as amended and restated effective January 1, 2009 |
Incorporated herein by reference to Exhibit 10.6 to the Corporations 2009 Form 10-K* |
||
10.2.3 |
Amendment 2011-1 to the Corporations ERISA Excess Pension Plan, as amended and restated effective January 1, 2009 |
Incorporated herein by reference to Exhibit 10.8 to the Corporations Annual Report on Form 10-K for the year ended December 31, 2011 (2011 Form 10-K)* |
||
10.2.4 |
Amendment 2013-1 to the Corporations ERISA Excess Pension Plan, as amended and restated effective January 1, 2009 |
Incorporated by reference to Exhibit 10.2.4 of the Corporations 2013 Form 10-K* |
PNC Financial Services Group, Inc. Form 10-K E-3
10.3.1 |
The Corporations Key Executive Equity Program, as amended and restated effective January 1, 2009 |
Incorporated herein by reference to Exhibit 10.6 to the Corporations 2008 Form 10-K* |
||
10.3.2 |
Amendment 2009-1 to the Corporations Key Executive Equity Program as amended and restated as of January 1, 2009 |
Incorporated herein by reference to Exhibit 10.9 to the Corporations 2009 Form 10-K* |
||
10.4.1 |
The Corporations Supplemental Incentive Savings Plan, as amended and restated effective January 1, 2010 |
Incorporated herein by reference to Exhibit 10.17 of the Corporations 2011 Form 10-K* |
||
10.4.2 |
Amendment 2013-1 to the Corporations Supplemental Incentive Savings Plan, as amended and restated effective January 1, 2010 |
Incorporated by reference to Exhibit 10.4.2 of the Corporations 2013 Form 10-K* |
||
10.5.1 |
The Corporation and Affiliates Deferred Compensation Plan, as amended and restated May 5, 2009 |
Incorporated herein by reference to Exhibit 10.62 to the Corporations 2nd Quarter 2009 Form 10-Q* |
||
10.5.2 |
Amendment 2009-1 to the Corporation and Affiliates Deferred Compensation Plan, as amended and restated May 5, 2009 |
Incorporated herein by reference to Exhibit 10.17 to the Corporations 2009 Form 10-K* |
||
10.5.3 |
Amendment 2010-1 to the Corporation and Affiliates Deferred Compensation Plan, as amended and restated May 5, 2009 |
Incorporated herein by reference to Exhibit 10.20 of the Corporations 2010 Form 10-K* |
||
10.5.4 |
Amendment 2011-1 to the Corporation and Affiliates Deferred Compensation Plan, as amended and restated May 5, 2009 |
Incorporated herein by reference to Exhibit 10.23 of the Corporations 2011 Form 10-K* |
||
10.5.5 |
Amendment 2012-1 to the Corporation and Affiliates Deferred Compensation Plan, as amended and restated May 5, 2009 |
Incorporated herein by reference to Exhibit 10.24 to the Corporations Annual Report on Form 10-K for the year ended December 31, 2012 (2012 Form 10-K)* |
||
10.5.6 |
Amendment 2013-1 to the Corporation and Affiliates Deferred Compensation Plan, as amended and restated May 5, 2009 |
Incorporated by reference to Exhibit 10.5.6 of the Corporations 2013 Form 10-K* |
||
10.6.1 |
The Corporation and Affiliates Deferred Compensation and Incentive Plan, effective as of January 1, 2012 |
Incorporated herein by reference to Exhibit 4.4 of the Corporations Registration Statement on Form S-8 No.333-177896 filed November 10, 2011* |
||
10.6.2 |
Amendment 2013-1 to the Corporation and Affiliates Deferred Compensation and Incentive Plan, effective as of January 1, 2012 |
Incorporated by reference to Exhibit 10.6.2 of the Corporations 2013 Form 10-K* |
||
10.7.1 |
The Corporations 2006 Incentive Award Plan, as amended and restated effective as of March 11, 2011 |
Incorporated herein by reference to Exhibit 10.70 of the Corporations Quarterly Report on Form 1O-Q for the quarter ended March 31, 2011 (1st Quarter 2011 Form 10-Q)* |
||
10.7.2 |
Addendum to the Corporations 2006 Incentive Award Plan, effective as of January 26, 2012 |
Incorporated herein by reference to Exhibit 10.28 of the Corporations 2011 Form 10-K* |
||
10.8 |
The Corporations 1997 Long-Term Incentive Award Plan, as amended and restated |
Incorporated herein by reference to Exhibit 10.5 of the Corporations 2nd Quarter 2004 Form 10-Q* |
||
10.9 |
The Corporations 1996 Executive Incentive Award Plan, as amended and restated effective as of January 1, 2007 |
Incorporated herein by reference to Exhibit 10.10 of the Corporations Annual Report on Form 10-K for the year ended December 31, 2007 (2007 Form 10-K)* |
||
10.10 |
The Corporations Directors Deferred Compensation Plan, as amended and restated effective January 1, 2012 |
Incorporated herein by reference to Exhibit 10.32 of the Corporations 2011 Form 10-K* |
||
10.11 |
The Corporations Directors Deferred Compensation Plan, as amended and restated effective January 1, 2015 |
Incorporated herein by reference to Exhibit 10.52 of the Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (3rd Quarter 2014 10-Q)* |
E-4 PNC Financial Services Group, Inc. Form 10-K
10.12 |
The Corporations Outside Directors Deferred Stock Unit Plan, as amended and restated effective January 1, 2012 |
Incorporated herein by reference to Exhibit 10.34 of the Corporations 2011 Form 10-K* |
||
10.13 |
The Corporations Outside Directors Deferred Stock Unit Plan, as amended and restated effective January 1, 2015 |
Incorporated herein by reference to Exhibit 10.53 of the Corporations 3rd Quarter 2014 10-Q* |
||
10.14 |
Amended and Restated Trust Agreement between PNC Investment Corp., as settlor, and Hershey Trust Company, as trustee |
Incorporated herein by reference to Exhibit 10.35 of the Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (3rd Quarter 2005 Form 10-Q)* |
||
10.15 |
Trust Agreement between PNC Investment Corp., as settlor, and PNC Bank, National Association, as trustee |
Incorporated herein by reference to Exhibit 10.34 of the Corporations 3rd Quarter 2005 Form 10-Q* |
||
10.16 |
Certificate of Corporate Action for Grantor Trusts effective January 1, 2012 |
Incorporated herein by reference to Exhibit 10.37 of the Corporations 2011 Form 10-K* |
||
10.17 |
The Corporations Employee Stock Purchase Plan, as amended and restated as of January 1, 2014 |
Incorporated by reference to Exhibit 10.16 of the Corporations 2013 Form 10-K |
||
10.18 |
2004 forms of employee restricted deferral agreements |
Incorporated herein by reference to the employee restricted deferral agreements portions of Exhibit 10.30 of the Corporations 3rd Quarter 2004 Form 10-Q* |
||
10.19 |
2005 forms of employee stock option and restricted deferral agreements |
Incorporated herein by reference to the employee stock option and restricted deferral agreements portions of Exhibit 10.28 of the Corporations Annual Report on Form 10-K for the year ended December 31, 2004 (2004 Form 10-K)* |
||
10.20 |
2006 forms of employee stock option and restricted deferral agreements |
Incorporated herein by reference to the employee stock option and restricted deferral agreements portions of Exhibit 10.17 of the Corporations 2005 Form 10-K* |
||
10.21 |
Forms of employee stock option agreements under 2006 Incentive Award Plan |
Incorporated by reference to the employee stock option agreements portion of Exhibit 10.40 of the Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2006* |
||
10.22 |
2006 forms of senior officer change in control severance agreements |
Incorporated herein by reference to the senior officer change in control severance agreements portion of Exhibit 10.20 of the Corporations Annual Report on Form 10-K for the year ended December 31, 2006 as filed on March 1, 2007 (2006 Form 10-K)* |
||
10.23 |
2007 forms of employee stock option agreements |
Incorporated herein by reference to the employee stock option agreements portion of Exhibit 10.21 of the Corporations 2006 Form 10-K* |
||
10.24 |
2008 forms of employee stock option and restricted share unit agreements |
Incorporated herein by reference to the employee stock option and restricted share units agreements portions of Exhibit 10.26 of the Corporations 2007 Form 10-K* |
||
10.25 |
Form of employee stock option agreement with varied vesting schedule or circumstances |
Incorporated herein by reference to Exhibit 10.50 of the Corporations Current Report on Form 8-K filed April 18, 2008* |
||
10.26 |
Form of employee restricted stock agreement with varied vesting schedule or circumstances |
Incorporated herein by reference to Exhibit 10.51 of the Corporations Current Report on Form 8-K filed April 18, 2008* |
PNC Financial Services Group, Inc. Form 10-K E-5
10.27 |
Form of employee stock option agreement with performance vesting schedule |
Incorporated herein by reference to Exhibit 10.54 of the Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2008* |
||
10.28 |
2009 forms of employee stock option, restricted stock and restricted share unit agreements |
Incorporated by reference to the employee stock option, restricted stock and restricted share unit agreements portions of Exhibit 10.61 to the Corporations Quarterly Report on Form 10-Q for the quarter ended March 31, 2009* |
||
10.29 |
2010 forms of employee stock option, restricted stock, and restricted share unit agreements |
Incorporated herein by reference to Exhibit 10.48 to the Corporations 2009 Form 10-K* |
||
10.30 |
2011 forms of employee stock option, restricted stock, restricted share unit and performance unit agreements |
Incorporated herein by reference to Exhibit 10.71 of the Corporations 1st Quarter 2011 Form 10-Q* |
||
10.31 |
2012 forms of employee stock option, restricted stock and restricted share unit agreements |
Incorporated herein by reference to Exhibit 10.77 of the Corporations Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (1st Quarter 2012 Form 10-Q)* |
||
10.32 |
Forms of employee stock option, restricted stock and restricted share unit agreements with varied vesting, payment and other circumstances |
Incorporated herein by reference to Exhibit 10.78 of the Corporations 1st Quarter 2012 Form 10-Q* |
||
10.33 |
Additional 2012 forms of employee performance unit, restricted stock and restricted share unit agreements |
Incorporated herein by reference to Exhibit 10.79 of the Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (2nd Quarter 2012 Form 10-Q)* |
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10.34 |
2013 forms of employee stock option and restricted share unit agreements |
Incorporated herein by reference to Exhibit 10.64 of the Corporations 2012 Form 10-K* |
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10.35 |
Additional 2013 forms of employee stock option, performance unit, restricted stock and restricted share unit agreements |
Incorporated herein by reference to Exhibit 10.82 of the Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2013* |
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10.36 |
Additional 2013 forms of employee restricted share unit agreements |
Incorporated by reference to Exhibit 10.83 of the Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 2013* |
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10.36 |
Additional 2013 and 2014 forms of employee restricted share unit and performance unit agreements |
Incorporated by reference to Exhibit 10.36 of the Corporations 2013 Form 10-K* |
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10.37 |
Additional 2014 Forms of Employee Performance Unit and Restricted Share Unit Agreements |
Incorporated herein by reference to Exhibit 10.50 of the Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2014* |
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10.38 |
Additional 2014 Forms of Employee Restricted Share Unit Agreements |
Incorporated herein by reference to Exhibit 10.51 of the Corporations 3rd Quarter 2014 10-Q* |
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10.39 |
Forms of director stock option agreements |
Incorporated herein by reference to the director stock option agreements portion of Exhibit 10.32 of the Corporations 3rd Quarter 2004 Form 10-Q* |
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10.40 |
2005 form of director stock option agreement |
Incorporated herein by reference to Exhibit 10.33 of the Corporations Quarterly Report on Form 10-Q for the quarter ended March 31, 2005* |
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10.41 |
Form of time sharing agreements between the Corporation and certain executives |
Incorporated herein by reference to Exhibit 10.39 to the Corporations 2008 Form 10-K* |
E-6 PNC Financial Services Group, Inc. Form 10-K
10.42 |
Form of Time-Sharing Agreement between the Corporation and certain executives |
Incorporated by reference to Exhibit 10.49 of the Corporations Current Report on Form 8-K filed April 4, 2014* |
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10.42 |
Form of change of control employment agreements |
Incorporated herein by reference to Exhibit 10.72 of the Corporations 1st Quarter 2011 Form 10-Q* |
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10.43.1 |
The National City Corporation 2004 Deferred Compensation Plan, as amended and restated effective January 1, 2005 |
Incorporated herein by reference to Exhibit 10.35 to National City Corporations Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 |
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10.43.2 |
Amendment to The National City Corporation 2004 Deferred Compensation Plan, as amended and restated effective January 1, 2005 |
Incorporated herein by reference to Exhibit 10.56 of the Corporations 2010 Form 10-K |
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10.44.1 |
Share Surrender Agreement, dated October 10, 2002, among Old BlackRock, PNC Asset Management, Inc., and the Corporation |
Incorporated herein by reference to the Quarterly Report on Form 10-Q of BlackRock Holdco 2, Inc. (Commission File No. 001-15305) (referred to herein as Old BlackRock) for the quarter ended September 30, 2002 (Old BlackRock 3rd Quarter 2002 Form 10-Q) |
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10.44.2 |
First Amendment, dated as of February 15, 2006, to the Share Surrender Agreement among Old BlackRock, PNC Bancorp, Inc. and the Corporation |
Incorporated herein by reference to the Current Report on Form 8-K of Old BlackRock (Commission File No. 001-15305) filed February 22, 2006 (Old BlackRock February 22, 2006 Form 8-K) |
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10.44.3 |
Second Amendment to Share Surrender Agreement made and entered into as of June 11, 2007 by and between the Corporation, BlackRock, Inc., and PNC Bancorp, Inc. |
Incorporated herein by reference to Exhibit 10.50 of the Corporations Current Report on Form 8-K filed June 14, 2007 |
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10.44.4 |
Third Amendment to Share Surrender Agreement, dated as of February 27, 2009, between the Corporation and BlackRock, Inc. |
Incorporated herein by reference to Exhibit 10.3 of BlackRock, Inc.s Current Report on Form 8-K filed February 27, 2009 |
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10.44.5 |
Fourth Amendment to Share Surrender Agreement, dated as of August 7, 2012, among BlackRock, Inc., the Corporation and PNC Bancorp, Inc. |
Incorporated herein by reference to Exhibit 10.1 of BlackRock, Inc.s Form 10-Q for the quarter ended June 30, 2012 |
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10.45.1 |
Amended and Restated Implementation and Stockholder Agreement, dated as of February 27, 2009, between the Corporation and BlackRock, Inc. |
Incorporated herein by reference to Exhibit 10.2 of BlackRock, Inc.s Current Report on Form 8-K filed February 27, 2009 |
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10.45.2 |
Amendment No. 1, dated as of June 11, 2009, to the Amended and Restated Implementation and Stockholder Agreement between the Corporation and BlackRock, Inc. |
Incorporated herein by reference to Exhibit 10.2 of BlackRock, Inc.s Current Report on Form 8-K filed June 17, 2009 |
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10.46 |
Exchange Agreement dated as of May 21, 2012 by and among PNC Bancorp, Inc., the Corporation and BlackRock, Inc. |
Incorporated herein by reference to Exhibit 10.3 of BlackRock, Inc.s Current Report on Form 8-K filed May 23, 2012 |
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10.47 |
Distribution Agreement, dated January 16, 2014, between PNC Bank, National Association and the Dealers named therein, relating to the $25 billion Global Bank Note Program for the Issue of Senior and Subordinated Bank Notes |
Filed herewith |
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10.48 |
Stock Purchase Agreement, dated as of June 19, 2011, among the corporation, RBC USA Holdco Corporation and Royal Bank of Canada (the schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K) |
Incorporated herein by reference to Exhibit 2.1 of the Corporations Current Report on Form 8-K filed June 20, 2011 |
PNC Financial Services Group, Inc. Form 10-K E-7
10.49 |
Stock Purchase Agreement, dated as of February 1, 2010, by and between the Corporation and The Bank of New York Mellon Corporation |
Incorporated herein by reference to Exhibit 2.1 to the Corporations Current Report on Form 8-K filed February 3, 2010 |
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12.1 |
Computation of Ratio of Earnings to Fixed Charges |
Filed herewith |
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12.2 |
Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends |
Filed herewith |
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21 |
Schedule of Certain Subsidiaries of the Corporation |
Filed herewith |
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23.1 |
Consent of PricewaterhouseCoopers LLP, the Corporations Independent Registered Public Accounting Firm |
Filed herewith |
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23.2 |
Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm of BlackRock, Inc. |
Filed herewith |
||
24 |
Powers of Attorney |
Filed herewith |
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31.1 |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
Filed herewith |
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31.2 |
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
Filed herewith |
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32.1 |
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 |
Filed herewith |
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32.2 |
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 |
Filed herewith |
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99.1 |
Audited consolidated financial statements of BlackRock, Inc. as of December 31, 2014 and 2013 and for each of the three years ended December 31, 2014 |
Filed herewith |
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99.2 |
Consent order between The PNC Financial Services Group, Inc. and the Board of Governors of the Federal Reserve System |
Incorporated herein by reference to Exhibit 99.1 of the Corporations Current Report on Form 8-K filed April 14, 2011 |
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99.3 |
Consent order between PNC Bank, National Association and the Office of the Comptroller of the Currency |
Incorporated herein by reference to Exhibit 99.2 of the Corporations Current Report on Form 8-K filed April 14, 2011 |
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101 |
Interactive Data File (XBRL) |
Filed herewith |
+ | Incorporated document references to filings by the Corporation are to SEC File No. 001-09718, to filings by National City Corporation are to SEC File No. 001-10074, to filings by BlackRock through its second quarter 2006 Form 10-Q (referred to herein as Old BlackRock) are to BlackRock Holdco 2, Inc. SEC File No. 001-15305, and to filings by BlackRock, Inc. are to SEC File No. 001-33099. |
* | Denotes management contract or compensatory plan. |
You can obtain copies of these Exhibits electronically at the SECs website at www.sec.gov or by mail from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. The Exhibits are also available as part of this Form 10-K on PNCs corporate website at www.pnc.com/secfilings. Shareholders and bondholders may also obtain copies of Exhibits without charge by contacting Shareholder Relations at (800) 843-2206 or via e-mail at investor.relations@pnc.com. The Interactive Data File (XBRL) exhibit is only available electronically.
E-8 PNC Financial Services Group, Inc. Form 10-K
EXHIBIT 10.47
EXECUTION COPY
PNC BANK, NATIONAL ASSOCIATION
US$25,000,000,000
Global Bank Note Program
for the Issue of Senior and Subordinated Bank Notes
with Maturities of more than nine months from Date of Issue
DISTRIBUTION AGREEMENT
January 16, 2014
CITIGROUP GLOBAL MARKETS INC.
388 Greenwich Street
New York, NY 10013
AND EACH OF THE DEALERS LISTED
ON SCHEDULE I HERETO
Ladies and Gentlemen:
PNC Bank, National Association (the Issuing Bank ), a national bank organized under the laws of the United States, confirms its agreement with Citigroup Global Markets Inc. and each of the other dealers listed on Schedule I hereto (each referred to as a Dealer and collectively referred to as the Dealers ) with respect to the issue and sale by the Issuing Bank of (i) senior unsecured debt obligations, with maturities of more than nine months, not insured by the Federal Deposit Insurance Corporation (the Senior Notes ) and (ii) subordinated unsecured debt obligations, with maturities of five years or more from their date of issue, not insured by the Federal Deposit Insurance Corporation (the Subordinated Notes and, together with the Senior Notes, the Bank Notes ). The Issuing Bank is a subsidiary of The PNC Financial Services Group, Inc., a Pennsylvania corporation (the Parent ).
SECTION 1. Appointment as Dealers .
(a) Appointment of Dealers . Subject to the terms and conditions stated herein, the Issuing Bank hereby appoints each Dealer as a dealer for the purpose of soliciting purchases of the Bank Notes from the Issuing Bank by others. Whenever the Issuing Bank agrees to sell Bank Notes directly to a Dealer as principal for resale to others, such sale shall be made in accordance with the provisions of Section 3(a) hereof. No Dealer is authorized to appoint sub-dealers; however, any Dealer may engage the services of any other broker or dealer in connection with the offer or sale of the Bank Notes. The appointment of the Dealers hereunder is not exclusive and the Issuing Bank may from time to time offer Bank Notes for sale otherwise than to or through a Dealer. The Issuing Bank may appoint one or more other dealers for the purpose of soliciting purchases of the Bank Notes upon the terms of this Agreement by execution of a Dealer Agreement (which may be in the form of Exhibit E-1 hereto) or pursuant to a Syndicated Terms Agreement (as defined below). It is understood, however, that if from
time to time the Issuing Bank is approached by a prospective agent offering to solicit a specific purchase of Bank Notes, the Issuing Bank may enter into an agreement with such agent with respect to such specific purchase upon such terms as the Issuing Bank and such agent may agree. Each Dealer is acting in connection with the Bank Notes individually and not collectively or jointly.
(b) Aggregate Principal Amount in Relation to Sale of Bank Notes . The Issuing Bank shall not approve the solicitation of purchases of Bank Notes in excess of the aggregate principal amount of such Bank Notes which shall be authorized. Bank Notes may be outstanding at any one time in an aggregate maximum principal amount equal to US$25,000,000,000, inclusive of any notes outstanding which have been issued prior to the date of this Offering Circular by the Bank or entities that have been acquired by the Bank. The Dealers will have no responsibility for maintaining records with respect to the aggregate principal amount of Bank Notes sold or at any time outstanding or of otherwise monitoring the availability of Bank Notes for sale.
(c) Purchases as Principal . The Dealers shall not have any obligation to purchase Bank Notes from the Issuing Bank as principal, but the Dealers may agree from time to time to purchase Bank Notes as principal. Any such purchase of Bank Notes by a Dealer as principal shall be made in accordance with Section 3(a) hereof.
(d) Solicitations as Agent . The Issuing Bank and each Dealer will, in connection with the offering of the Bank Notes on behalf of the Issuing Bank, comply with the restrictions on the offering of Bank Notes and distribution of documents relating thereto set forth in the Disclosure Package and the Offering Circular under the caption Plan of Distribution or such other restrictions agreed to by the Issuing Bank and such Dealer. The Dealer will communicate to the Issuing Bank, orally, each offer to purchase Bank Notes solicited by such Dealer on an agency basis, other than those offers rejected by the Dealer. The Dealer shall have the right, in its absolute discretion, to reject any proposed purchase of Bank Notes, as a whole or in part, and any such rejection shall not be deemed a breach of any Dealers agreement contained herein. The Issuing Bank may accept or reject any proposed purchase of the Bank Notes, in whole or in part. The Dealer shall make reasonable efforts to assist the Issuing Bank in obtaining performance by each purchaser whose offer to purchase Bank Notes has been solicited by the Dealer and accepted by the Issuing Bank. A Dealer shall not have any liability to the Issuing Bank in the event any such agency purchase is not consummated for any reason other than as a result of the default by the applicable Dealer of its obligations hereunder. If the Issuing Bank shall default on its obligation to deliver Bank Notes to a purchaser whose offer it has accepted, the Issuing Bank shall (i) hold the Dealer harmless against any loss, claim or damage arising from or as a result of such default by the Issuing Bank and (ii) notwithstanding such default, pay to the Dealer any commission to which it would be entitled in connection with such sale.
(e) Reliance . The Issuing Bank and the Dealers agree that any Bank Notes purchased by any Dealer shall be purchased, and any Bank Notes the placement of which a Dealer arranges shall be placed, by such Dealer in reliance on the representations, warranties, covenants and agreements of the Issuing Bank contained herein and on the terms and conditions and in the manner provided herein.
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SECTION 2. Representations and Warranties .
(a) The Issuing Bank represents and warrants to each Dealer as of the date hereof, as of the date of each acceptance by the Issuing Bank of an offer for the purchase of Bank Notes (whether to a Dealer as principal or through a Dealer as agent), as of the date of each delivery of Bank Notes (whether to a Dealer as principal or through a Dealer as agent) (the date of each such delivery to a Dealer as principal being hereafter referred to as a Settlement Date ), as of each Applicable Time (as defined below) and as of each time the Offering Circular or the Disclosure Package shall be amended or supplemented (each of the times referenced above being referred to hereafter as a Representation Date ), as follows:
(i) Offering Circular; Disclosure Package . The Issuing Bank has caused to be prepared an offering circular, dated January 16, 2014, to be used by the Dealers in connection with the Dealers solicitation of purchasers of or offering of the Bank Notes. Such offering circular, in the form transmitted for filing with the Office of the Comptroller of the Currency of the United States (the OCC ) pursuant to 12 C.F.R. Section 16.6 is referred to herein as the Offering Circular ; provided , however , that if any amendment or supplement shall be provided to the Dealers by the Issuing Bank expressly for use from and after the time it is first provided to the Dealers in connection with the offering of the Bank Notes, whether or not the same is required to be filed with the OCC pursuant to 12 C.F.R. Section 16.6 or otherwise, the term Offering Circular shall be deemed to refer to and include such amendment or supplement from and after the time it is first provided to the Dealers for use. Any reference to the Offering Circular shall be deemed to refer to and include all documents incorporated by reference including the Call Reports and the Periodic Reports (as such terms are hereinafter defined) incorporated by reference therein, and any reference herein to the terms amend, amendment or supplement with respect to the Offering Circular shall be deemed to include the filing of any Call Report or Periodic Report with any bank regulatory agency or the SEC after the date of this Agreement or the Offering Circular, as the case may be.
The Issuing Bank has been authorized by the Parent to incorporate by reference in the Offering Circular, and will incorporate by reference in the Offering Circular, the Parents annual reports on Form 10-K for its most recently ended fiscal year, quarterly reports on Form 10-Q since the last day of its most recently ended fiscal year, current reports on Form 8-K since the last day of its most recently ended fiscal year (other than information therein that, under the rules of the SEC, is deemed not to have been filed) and any other document filed by the Parent with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the 1934 Act ), and the rules and regulations thereunder (the Periodic Reports ). The Offering Circular, as of the date hereof, does not and, as of the applicable Representation Date, will not, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they are made, not misleading; provided , however , that the representations and warranties in this subsection shall not apply to statements in the Offering Circular made in reliance upon and in conformity with information furnished to the Issuing Bank in writing by or on behalf of the Dealers expressly for use therein (as of the date hereof all such information so provided by the Dealers is set forth in Schedule 2(a)(i) hereto).
3
The Issuing Bank will incorporate by reference in the Offering Circular the publicly available portions of each of its Consolidated Reports of Condition and Income (each, a Call Report and collectively, the Call Reports ) (i) for the period ended December 31 st for each of the three most recently completed years, and (ii) all Call Reports and any amendments or supplements thereto filed or published after December 31 st of the most recently completed year, to and including the most recent Call Report filed or published prior to the offering of any Bank Notes. The publicly available portions of any Call Reports filed by the Issuing Bank subsequent to the date of the Offering Circular and prior to the termination of the offering of the Bank Notes will be incorporated therein by reference.
The Disclosure Package as of the Applicable Time will not include any untrue statement of material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading; provided , however , that the representations and warranties in this subsection shall not apply to statements in the Disclosure Package made in reliance upon and in conformity with information furnished to the Issuing Bank in writing by or on behalf of the Dealers expressly for use therein (as of the date hereof all such information so provided by the Dealers is set forth in Schedule 2(a)(i) hereto).
Any individual Supplemental Offering Materials (as defined herein) when considered together with the Disclosure Package, will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided , however , that the representations and warranties in this subsection shall not apply to statements in such Supplemental Offering Materials made in reliance upon and in conformity with information furnished to the Issuing Bank in writing by or on behalf of the Dealers expressly for use therein.
As used herein, Supplemental Offering Materials means any written communication (within the meaning of the regulations of the SEC under the 1933 Act), other than the Offering Circular and the Disclosure Package, prepared by or on behalf of the Parent or the Issuing Bank, that constitutes an offer to sell or a solicitation of an offer to buy the Bank Notes, including without limitation any road show as defined in Rule 433 under the Securities Act relating to the Bank Notes that constitutes such a written communication.
Applicable Time means such time as agreed between the Issuing Bank and the Dealers to whom or through whom the issue of Bank Notes are being sold in (i) a Syndicated Terms Agreement (as defined in Section 3(a)) or (ii) any other written agreement of the Issuing Bank and such Dealers.
Disclosure Package means the Offering Circular, together with the information, if any, identified as being part of the Disclosure Package in (i) a Syndicated Terms Agreement or (ii) any other written agreement of the Issuing Bank and the Dealers to whom or through whom the issue of Bank Notes is being sold.
4
The documents of the Issuing Bank incorporated by reference in the Offering Circular or the Disclosure Package, at the time they were or hereafter are filed with the applicable federal regulatory authorities (as amended prior to the date hereof or, if amended hereafter, prior to the applicable Representation Date), complied, or when so filed will comply, in all material respects, with all applicable laws, rules and regulations. The documents of the Parent incorporated by reference in the Offering Circular or the Disclosure Package, at the time they were or hereafter are filed with the U.S. Securities and Exchange Commission (the SEC) (as amended prior to the date hereof or, if amended hereafter, prior to the applicable Representation Date), complied or when so filed will comply in all material respects with the 1934 Act and the rules and regulations thereunder. Such documents of the Bank and the Parent, when read together with the other information in the Offering Circular and the Disclosure Package, did not and, when so filed, will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were or are made, not misleading.
(ii) Due Organization, Valid Existence and Good Standing . The Issuing Bank is a national banking association duly organized, validly existing and in good standing under the laws of the United States and is licensed, registered or qualified to conduct the business in which it is engaged in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such license, registration or qualification, except to the extent that the failure to be so licensed, registered or qualified or to be in good standing would not have a material adverse effect on the Issuing Bank and its subsidiaries taken as a whole. The Issuing Bank is an insured depository institution under the provisions of the Federal Deposit Insurance Act, as amended (the FDI Act ). The deposit accounts at the Issuing Bank are insured by the Federal Deposit Insurance Corporation ( FDIC ) to the fullest extent permitted by law and the rules and regulations of the FDIC, and no proceedings for the termination or revocation of such insurance are pending, or, to the knowledge of the Issuing Bank, threatened. The Issuing Bank is a subsidiary of the Parent, a Pennsylvania corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, which has securities registered under the 1934 Act.
(iii) Due Authorization, Execution and Delivery of this Agreement, the Agency Agreement and the Interest Calculation Agreement . The Issuing Bank has all corporate power and authority necessary to execute, deliver and perform, and it has duly authorized, executed and delivered, this Agreement, the Issuing and Paying Agency Agreement dated as of January 16, 2014 (the Agency Agreement ), between the Issuing Bank and PNC Bank, National Association, as issuing and paying agent, and the Interest Calculation Agreement dated as of January 16, 2014 (the Interest Calculation Agreement ), between the Issuing Bank and PNC Bank, National Association, as the interest calculation agent (in such capacity, the Calculation Agent , which term shall include any successor thereto). This Agreement, the Agency Agreement and the Interest Calculation Agreement are valid and legally binding agreements of the Issuing Bank, enforceable against the Issuing Bank in accordance with their respective terms, subject to applicable bankruptcy, liquidation, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to, or affecting, the rights of creditors of national banking associations, including laws relating to conservatorship and receivership of insured depository institutions, and to general equity principles.
5
(iv) Due Authorization, Execution and Delivery of the Bank Notes . The Bank Notes have been duly authorized and, when duly completed, executed, authenticated, issued and delivered against payment of the consideration therefor in accordance with the provisions of the Agency Agreement and this Agreement, as specified in the Offering Circular or pursuant to any agreement with respect to the purchase of such Bank Notes, will constitute valid and legally binding obligations of the Issuing Bank enforceable in accordance with their respective terms, subject to applicable bankruptcy, liquidation, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to, or affecting, the rights of creditors of national banking associations, including laws relating to conservatorship and receivership of insured depository institutions, and to general equity principles.
(v) Regulatory Exemptions . The Bank Notes to be issued by the Issuing Bank are exempt from registration under the Securities Act of 1933, as amended (the 1933 Act ) by virtue of Section 3(a)(2) thereof. Qualification of an indenture under the Trust Indenture Act of 1939, as amended (the Trust Indenture Act ), is not required in connection with the offer, sale, issuance and delivery of the Bank Notes as contemplated hereby. Assuming compliance by the Dealers with the covenant set forth in Section 3(e) and Section 3(f) hereof (but with respect to such Section 3(f), only insofar as a failure to comply therewith would result in the creation of an offering document or any amendments (as such terms are defined for purposes of 12 C.F.R. Section 16.6(a)(5)) that the Bank has not filed and is unable to file with the OCC on or prior to the fifth business day after such offering document or amendment is first used), the Bank Notes are eligible for offer and sale pursuant to 12 C.F.R. Part 16 (including 12 C.F.R. Section 16.6), and all requirements of 12 C.F.R. Part 16 (including 12 C.F.R. Section 16.6) have been and will be satisfied in connection with the offer, sale, issuance or delivery of the Bank Notes pursuant to this Agreement and any agreement with a Dealer to purchase such Bank Notes as principal, except that the Offering Circular and any amendments thereto (other than amendments which contain only pricing information relating to a particular transaction, updated financial information concerning the Issuing Bank or non-material information relating to the Bank Note program) must be filed by the Issuing Bank with the OCC no later than the fifth business day after first use pursuant to 12 C.F.R. Section 16.6.
(vi) Exemption from Investment Company Act . The Issuing Bank is not required to register under the provisions of the Investment Company Act of 1940, as amended (the Investment Company Act ).
(vii) No Defaults . Neither the Issuing Bank or any of its subsidiaries nor the Parent or any of its subsidiaries is in violation of its charter or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage loan agreement, note, lease or other instrument to which it is a party or by which it or any of them or their properties are bound, except to the extent that such defaults would not in the aggregate have a material adverse effect on
6
the Issuing Bank and its subsidiaries taken as a whole or on the Parent and its subsidiaries taken as a whole or materially and adversely affect the consummation of the transactions contemplated by, or the ability of the Issuing Bank to perform its obligations under, this Agreement, the Bank Notes, the Issuing and Paying Agency Agreement, the Interest Calculation Agreement or any applicable terms agreement (Material Adverse Effect). The execution, delivery and performance by the Issuing Bank of this Agreement, the Agency Agreement, the Interest Calculation Agreement, the Bank Notes and any agreement with a Dealer to purchase such Bank Notes as principal, will not (A) constitute a breach of, or default under, the articles of association or by-laws or other organizational documents of the Issuing Bank or any of its subsidiaries or the Parent or any of its subsidiaries (B) constitute a breach of, or default under, any obligation, agreement, covenant or condition in any contract, indenture, mortgage loan agreement or other instrument relating to indebtedness for money borrowed to which the Issuing Bank or the Parent is a party, or (C) violate any law, order, rule, regulation or decree applicable to the Issuing Bank or any of its subsidiaries or the Parent or any of its subsidiaries or any property of the Issuing Bank or any of its subsidiaries or the Parent or any of its subsidiaries except with respect to (B) and (C) for those breaches, defaults or violations that would result in a Material Adverse Effect.
(viii) No Other Approvals Required . Assuming for purposes of 12 C.F.R. Part 16 compliance by the Dealers with the covenants set forth in Section 3(e) and Section 3(f) hereof (but with respect to such Section 3(f), only insofar as a failure to comply therewith would result in the creation of an offering document or any amendments (as such terms are defined for purposes of 12 C.F.R. Section 16.6(a)(5)) that the Bank has not filed and is unable to file with the OCC on or prior to the fifth business day after such offering document or amendment is first used), no consent, approval, authorization, order, registration or qualification of, or filing or notice with, any court or governmental body or agency is required for the offering and sale of the Bank Notes or the performance by the Bank of its obligations under this Agreement, any applicable Terms Agreement, the Bank Notes, the Agency Agreement, or the Interest Calculation Agreement, except (A) such as may be required by the securities or Blue Sky laws of the various states, (B) that the Offering Circular and any amendments thereto (other than amendments which contain only pricing information relating to a particular transaction, updated financial information concerning the Issuing Bank or non material information relating to the Bank Note program) must be filed by the Issuing Bank with the OCC no later than the fifth business day after first use pursuant to 12 C.F.R. Section 16.6, (c) with respect to Subordinated Notes, notice must be filed with the OCC pursuant to 12 C.F.R. Section 5.47 in order for such Subordinated Notes to be counted as Tier 2 capital of the Issuing Bank, (d) for the Issuing Bank, pursuant to Section 38(h)(2) of the FDI Act, to make payment on the Subordinated Notes in the event the Issuing Bank becomes critically undercapitalized within the meaning of Section 38(b)(1)(E) of the FDI Act and (e) to the extent that the failure to obtain any consent, approval or authorization, or make any filing, would not in the aggregate have a Material Adverse Effect. Except for those that have been obtained prior to the date hereof or the applicable Representation Date, no approval or authorization of the Parent is required for the Issuing Bank to enter into, or to perform any of its obligations under, this Agreement, the Bank Notes, the Issuing and Paying Agency Agreement, the Interest Calculation Agreement and any applicable terms agreement.
7
(ix) OCC Notice . The Issuing Bank has not received notice from the OCC that the OCCs prior approval to issue or prepay Subordinated Notes is required under Section 5.47(f) of 12 C.F.R. Part 5.
(x) Description of Bank Notes . The Bank Notes are substantially in the form heretofore delivered to the Dealers and conform to the description thereof contained in the Offering Circular and the Disclosure Package under the caption Description of the Notes.
(xi) Priority of Bank Notes . The Senior Notes are unsecured and unsubordinated debt obligations of the Issuing Bank and rank pari passu among themselves and with all other unsecured and unsubordinated debt obligations of the Issuing Bank except, pursuant to Section 11(d)(11) of the Federal Deposit Insurance Act, the Issuing Banks unsecured deposit liabilities (including any claims by the FDIC as the subrogee of insured depositors) and claims for administrative expenses of the FDIC as receiver for the Issuing Bank; the Subordinated Notes are unsecured and subordinated debt obligations of the Issuing Bank and rank pari passu among themselves and with all other debt obligations of the Issuing Bank which are subordinate and junior in right of payment to the Issuing Banks obligations to depositors and general creditors, other than obligations which, by their express terms, rank junior to the Subordinated Notes.
(xii) No Material Adverse Change . Since the respective dates as of which information is given in the Offering Circular or the Disclosure Package, as each may be amended or supplemented prior to the Applicable Time, there has not been any material adverse change in the condition, financial or otherwise, business affairs, business prospects or results of operations, or any development reasonably likely to result in a prospective material adverse change in the condition, financial or otherwise, business affairs, business prospects or results of operations of the Issuing Bank and its subsidiaries, or the Parent and its subsidiaries, as the case may be, considered as one enterprise, whether or not arising in the ordinary course of business, other than as set forth or contemplated in the Offering Circular or the Disclosure Package.
(xiii) Financial Statements and Financial Information . The consolidated financial statements and other financial information of the Parent and its consolidated subsidiaries included or incorporated by reference in the Offering Circular or the Disclosure Package, together with the related schedules and notes, fairly present in all material respects the consolidated financial position of the Parent and its consolidated subsidiaries as of the dates indicated therein and the consolidated results of their operations for the periods specified therein; and, except as stated therein, such financial statements have been prepared in conformity with generally accepted accounting principles in the United States applied on a consistent basis, and in the case of interim financial statements subject to year-end adjustments. The Call Reports and other financial information of the Issuing Bank included or incorporated by reference in the Offering Circular or the Disclosure Package fairly present in all material respects the
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financial position of the Issuing Bank and the results of its operations for the periods specified therein; and, except as stated therein, have been prepared in conformity with regulatory instructions issued by the Federal Financial Institution Examination Council applied on a consistent basis. The financial information of certain financial institutions, if any, acquired or proposed to be acquired by the Parent or the Issuing Bank included or incorporated by reference in the Offering Circular or the Disclosure Package fairly present in all material respects the financial positions of such financial institutions as of the dates indicated therein and the results of their operations for the periods specified therein.
(xiv) Legal Proceedings . Except as may be set forth in the Offering Circular or the Disclosure Package, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Issuing Bank, threatened against, the Parent or the Issuing Bank or any of their respective subsidiaries which could reasonably be expected to have a Material Adverse Effect.
(xv) Relationship with Agents . The Issuing Bank acknowledges and agrees that (a) the offering or purchase and sale of the Bank Notes pursuant to this Agreement from time to time, including the determination of the terms of the Bank Notes and the offering thereof, is an arms-length commercial transaction between the Issuing Bank, on the one hand, and the several Dealers, on the other hand, (b) in connection with any offering pursuant to this Agreement and the process leading to such offering each Dealer is and has been acting solely as a principal or placement agent, as the case may be, and not a fiduciary of the Parent or the Issuing Bank, or their respective stockholders, creditors, employees or any other party, (c) no Dealer has assumed or will assume an advisory or fiduciary responsibility in favor of the Parent or the Issuing Bank with respect to any offering pursuant to this Agreement or the process leading thereto (irrespective of whether such Dealer has advised or is currently advising the Parent or the Issuing Bank on other matters) and no Dealer has any obligation to the Issuing Bank with respect to any offering pursuant to this Agreement except the obligations expressly set forth in this Agreement, (d) the Dealers and their respective affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Parent or the Issuing Bank and (e) the Dealers have not provided any legal, accounting, regulatory or tax advice with respect to any offering contemplated hereby and each of the Parent and the Issuing Bank has consulted its own legal, accounting, regulatory and tax advisors to the extent it deemed appropriate.
(xvi) Internal Controls . Parent and its subsidiaries maintain (i) disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) that it evaluates on a regular basis as required under the Exchange Act and, as a result of its most recent review thereof required under the Exchange Act, determined that such controls and procedures were effective, (ii) internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) that it evaluates on a regular basis as required under the Exchange Act and, as a result of its most recent review thereof required under the Exchange Act, determined that such internal control over financial reporting was effective and (iii) a system of internal accounting controls
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sufficient to provide reasonable assurance that (A) transactions are executed in accordance with managements general or specific authorizations; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (C) access to assets is permitted only in accordance with managements general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Other than as disclosed in the Offering Circular and the Disclosure Package, Parent is not aware of any material weaknesses in the internal control over financial reporting of Parent and its subsidiaries.
(xvii) No Unlawful Contributions or Other Payments . Neither the Issuing Bank nor any of its subsidiaries nor, to the knowledge of the Issuing Bank, any director, officer, agent (in its capacity as such), employee or affiliate of the Issuing Bank or any of its subsidiaries has taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended (the FCPA), including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any foreign official (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA and the Issuing Bank, its subsidiaries and, to the knowledge of the Issuing Bank, its affiliates have conducted their businesses in compliance with the FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.
(xviii) No Conflict with Money Laundering Laws . To the knowledge of the Issuing Bank, the operations of the Issuing Bank and its subsidiaries are in material compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines issued, administered or enforced by any governmental agency (collectively, the Money Laundering Laws), and there is no action, suit or proceeding by a governmental agency, authority or body involving the Issuing Bank or any of its subsidiaries with respect to the Money Laundering Laws pending or, to the best knowledge of the Issuing Bank, threatened.
(xix) No Conflict with OFAC Laws . None of the Issuing Bank, any of its subsidiaries or, to the knowledge of the Issuing Bank, any director, officer, agent (in its capacity as such), employee or affiliate of the Issuing Bank or any of its subsidiaries is currently subject to any U.S. sanctions administered or enforced by the Office of Foreign Assets Control of the U.S. Department of the Treasury (OFAC) or the U.S. Department of State; and the Issuing Bank will not directly or indirectly use the proceeds of the offering of the Bank Notes hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other individual, entity or vessel, for the purpose of financing the activities or business of or with any individual, entity or vessel, or in any country or territory, if such financing is, at the time thereof prohibited by any U.S. sanctions administered or enforced by OFAC or the U.S. Department of State.
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(b) Additional Certifications . Any certificate signed by any officer of the Issuing Bank or the Parent and delivered to the Dealers or to counsel for the Dealers in connection with an offering of Bank Notes, or the sale of Bank Notes to a Dealer as principal, contemplated by this Agreement shall be deemed a representation and warranty at the time made by the Issuing Bank to the Dealers as to the matters covered thereby on the date of such certificate and at each Representation Date referred to in Section 2(a) hereof subsequent thereto relating to such offering or sale.
SECTION 3. Purchases as Principal; Solicitations as Agents .
(a) Purchases as Principal . Unless otherwise agreed by a Dealer and the Issuing Bank, Bank Notes shall be purchased by the Dealer as principal. Such purchases shall be made in accordance with terms agreed upon by the Dealer and the Issuing Bank with respect to such information (as applicable) as is specified in Exhibit A hereto (which terms shall be agreed upon orally, with written confirmation prepared by the Dealer and sent via electronic transmission to the Issuing Bank) and, in the case of sales to Dealers on a syndicated basis, a separate terms agreement substantially in the form of Exhibit E-2 hereto (a Syndicated Terms Agreement ). The Dealers commitment to purchase Bank Notes as principal from the Issuing Bank shall be deemed to have been made on the basis of the representations and warranties of the Issuing Bank herein contained and shall be subject to the terms and conditions herein set forth. Each purchase of Bank Notes shall be at a discount from the principal amount of each such Bank Note with such discount being agreed upon between the Issuing Bank and the applicable Dealer at the time of commencement of the applicable solicitation. The Dealer may engage the services of any other broker or dealer in connection with the resale of the Bank Notes purchased as principal and may allow any portion of the discount received from the Issuing Bank in connection with such purchases to such brokers and dealers. At the time of each purchase of Bank Notes by a Dealer as principal, the applicable Terms Agreement shall also specify the requirements for the opinions of counsel, officers certificates, representations certificates, and comfort letters pursuant to Sections 6(a), 6(b), 6(c) and 6(e) hereof. The resale of any Bank Notes acquired by such Dealer as principal shall be subject to all of the applicable selling restrictions set forth in the Disclosure Package and the Offering Circular under the caption Plan of Distribution or such other restrictions agreed to by the Issuing Bank and such Dealer.
(b) Solicitations as Agents . On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, in the Disclosure Package and in the Offering Circular , when agreed upon by the Issuing Bank and a Dealer, such Dealer, as an agent of the Issuing Bank, will use its reasonable efforts to solicit offers to purchase the Bank Notes upon the terms and conditions set forth herein and in the Offering Circular and to consummate any agency purchase resulting from the acceptance of such an offer by the Bank. All Bank Notes sold through a Dealer as agent will be sold at 100% of their principal amount unless otherwise agreed to by the Issuing Bank and the Dealer.
The Issuing Bank reserves the right, in its sole discretion, to suspend solicitation of purchases of the Bank Notes through the Dealers, as agents, commencing at any time for any
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period of time or permanently. Upon receipt of instructions from the Issuing Bank, the Dealers will forthwith suspend solicitation of purchases from the Issuing Bank until such time as the Issuing Bank has advised the Dealers that such solicitation may be resumed.
The Issuing Bank agrees to pay each Dealer a commission, in the form of a discount, equal to the applicable percentage of the principal amount of each Bank Note sold by the Issuing Bank as a result of a solicitation made by such Dealer as agreed by the Issuing Bank and the applicable Dealer at the time of commencement of the applicable solicitation. The amount of such commission shall be set forth in the written confirmation relating to such sale and in the pricing supplement referred to in Section 4(f). The Dealers may reallow any portion of the commission payable pursuant hereto to dealers in connection with the offer and sale of any Bank Notes.
(c) Administrative Procedures . The purchase price, interest rate or formula, maturity date, discount or commission amount and other terms of the Bank Notes (as applicable) shall be agreed upon by the Issuing Bank and the applicable Dealer and set forth in a pricing supplement to the Offering Circular, substantially in the form attached hereto as Exhibit A , to be prepared in connection with each sale of Bank Notes. Administrative procedures with respect to the sale of Bank Notes shall be set forth in Exhibit A to the Agency Agreement (the Procedures ). The Dealers and the Issuing Bank agree to perform the respective duties and obligations specifically provided to be performed by the Dealers and the Issuing Bank herein and in the Procedures.
(d) Delivery . The documents required to be delivered pursuant to Section 6 hereof on the date hereof shall be delivered at the office of Cravath, Swaine & Moore LLP, 825 Eighth Avenue, New York, New York 10019, on the date hereof at 10:00 a.m. New York time, or at such other place and time as the Dealers and the Issuing Bank may agree upon in writing (the Closing Time ).
(e) Offering and Sale of Bank Notes . The Issuing Bank and the Dealers agree that the Bank Notes are to be offered and sold as set forth in the Offering Circular. Each Dealer hereby severally represents and warrants to, and agrees with, the Issuing Bank that, in relation to Bank Notes to be issued and sold in reliance upon 12 C.F.R. Part 16.6(a), it will only offer and sell Bank Notes to, or accept offers to purchase Bank Notes from, persons it reasonably believes are accredited investors (as defined in Rule 501(a) under the 1933 Act) in minimum denominations of not less than $250,000, and it will deliver the Offering Circular or the Disclosure Package within the timeframe required by 12 C.F.R. Part 16.6(a)(5) to each such participating investor.
(f) Limitation on Other Offering Documents . No Dealer is authorized by the Issuing Bank, without the consent of the Issuing Bank, to provide any information or to make any representations relating to the Bank Notes not contained or incorporated by reference in the Offering Circular, the Disclosure Package or any Supplemental Offering Materials (or any amendment or supplement thereto) or in any material published or supplied by a rating agency to any purchaser or potential purchaser in connection with the sale or solicitation of offers to purchase any Bank Note of the Issuing Bank.
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SECTION 4. Covenants of the Issuing Bank .
The Issuing Bank covenants with the Dealers as follows:
(a) Amending Offering Circular or Disclosure Package . The Issuing Bank will give the Dealers notice of its intention to prepare any additional offering circular supplement with respect to the sale of Bank Notes or any amendment or supplement to the Offering Circular, the Disclosure Package or any Supplemental Offering Material (excluding pricing supplements with respect to those Dealers not involved with respect to the sale of the Bank Notes covered thereby, and excluding any deemed amendment of the Offering Circular resulting from future filings of any documents incorporated by reference other than any such filings after the date on which the Issuing Bank has agreed to issue Bank Notes and prior to the Settlement Date for such issuance) and will furnish the Dealers with copies of any such amendment or supplement or other documents proposed to be distributed a reasonable time in advance of such distribution and will not distribute any such amendment or supplement or other documents in a form to which the Dealers or counsel for the Dealers shall reasonably object (it being understood that the foregoing shall not be construed to prevent the Issuing Bank or the Parent from making any filing with the OCC or the SEC of any such documents to be incorporated by reference to the extent that the Issuing Bank or the Parent determines such filings are required by the applicable law, rule or regulation). The Issuing Bank will promptly cause such amendment or supplement to the Offering Circular, the Disclosure Package or any Supplemental Offering Material to be filed with the OCC when and to the extent required by 12 C.F.R. Part 16 and will promptly advise the Dealers of the filing of any such amendment or supplement to the Offering Circular or the Disclosure Package with the OCC. In addition, the Issuing Bank will advise the Dealers of (i) any request of any bank regulatory agency or the SEC for any amendment of or supplement to the Offering Circular or the Disclosure Package (including, without limitation, the documents incorporated by reference therein) or for any additional information with respect to such documents or otherwise related to the offering of the Bank Notes; (ii) the institution or threat by any bank regulatory agency or the SEC of any proceeding with respect to the Offering Circular or the Disclosure Package (including, without limitation, the documents incorporated by reference therein) or any amendment or supplement thereto or the offering or sale of the Bank Notes, and (iii) the receipt by the Issuing Bank of any notification with respect to the suspension of the qualification of the Bank Notes for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. The Issuing Bank will use its reasonable best efforts to prevent the issuance of any order or similar action interfering with the offering or sale of the Bank Notes or the use of the Offering Circular or the Disclosure Package, and, if issued, to obtain as soon as possible the withdrawal thereof.
(b) Copies of Offering Circular and Disclosure Package . The Issuing Bank will deliver to the Dealers as many copies of the Offering Circular and the Disclosure Package (as amended or supplemented, including documents incorporated by reference therein) as the Dealers shall reasonably request in connection with sales or solicitations of offers to purchase the Bank Notes.
(c) Revisions of Offering Circular or Disclosure Package Material Changes . Except as otherwise provided in subsection (d) of this Section 4, if any event shall occur or condition exist as a result of which it is necessary to (i) amend or supplement the
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Offering Circular in order that the Offering Circular will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances existing at any Representation Date or the time it is delivered to a purchaser or (ii) amend or supplement the Disclosure Package in order that the Disclosure Package will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein not misleading in the light of the circumstances existing at any Representation Date or the time it is delivered to a purchaser, in each case prompt notice shall be given, to the Dealers to cease the solicitation of offers to purchase the Bank Notes in their capacity as agents and to cease sales of any Bank Notes the Dealers may then own as principal, and the Issuing Bank will promptly prepare such amendment or supplement as may be necessary to correct such untrue statement or omission. The Dealers shall, at such time as the Issuing Bank shall have furnished to the Dealers an amended or supplemented Offering Circular or an amended or supplemented Disclosure Package, as the case may be, in each case in form reasonably satisfactory to the Dealers and their counsel, resume solicitation of offers to purchase Bank Notes using the Offering Circular or the Disclosure Package, as the case may be, as so amended and supplemented.
(d) Suspension of Certain Obligations . The Issuing Bank shall not be required to comply with the provisions of subsection (c) of this Section 4 or the provisions of Section 8(b), 8(c),8(d), or 8(e) hereof (it being understood that the Issuing Bank may not resume any solicitation hereunder until such provisions are complied with) during any period from the later of the time (i) the Dealers shall have suspended solicitation of purchases of the Bank Notes in their capacity as agents pursuant to a request from the Issuing Bank and (ii) no Dealer shall then hold any Bank Notes purchased as principal pursuant hereto, until the time the Issuing Bank shall determine the solicitation of purchases of the Bank Notes should be resumed or the Dealers shall subsequently purchase Bank Notes from the Issuing Bank as principal pursuant hereto.
(e) Regulatory Reports . The Issuing Bank shall provide the Dealers upon request with copies of the publicly available portions of the Issuing Banks Call Reports and copies of any Periodic Reports of the Parent as promptly as practicable after such reports become publicly available except for Call Reports and Periodic Reports that are filed electronically and available without charge on a publicly accessible Internet web site.
(f) Preparation of Pricing Supplements . The Issuing Bank will prepare, with respect to any Bank Notes to be sold through or to the Dealers pursuant to this Agreement, a pricing supplement with respect to such Bank Notes substantially in the form attached hereto as Exhibit A , and, if required by 12 C.F.R. Section 16.6, will file such pricing supplement with the OCC no later than the time required for such filing.
(g) Blue Sky Qualifications . The Issuing Bank will endeavor, in cooperation with the Dealers, to qualify the Bank Notes for offering and sale under the applicable securities laws of such States and other jurisdictions of the United States as the Dealers may reasonably designate, and will maintain such qualifications in effect for as long as may be required for the distribution of the Bank Notes; provided , however , that the Issuing Bank shall not be required to take any action which would subject it to general or unlimited service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified or become subject to taxation in any jurisdiction in which it is not otherwise subject. The Issuing Bank will file such
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statements and reports as may be required by the laws of each jurisdiction in which the Bank Notes have been qualified as above provided. The Issuing Bank will promptly advise the Dealers of the receipt by it of any notification with respect to the suspension of the qualification of the Bank Notes for sale in any such State or jurisdiction or the initiating or threatening of any proceeding for such purpose.
(h) Required Filings . The Issuing Bank will make the filings required by 12 C.F.R. Section 16.6 with respect to the Bank Notes and by 12 C.F.R. Section 5.47 with respect to inclusion of the Subordinated Notes in Tier 2 capital when and as required by such provisions. Without limiting the foregoing, the Issuing Bank agrees to file the Offering Circular, any Disclosure Package and any Supplemental Offering Materials with the OCC when and as required by 12 C.F.R. Part 16.
(i) Stand-Off Agreement . In connection with a purchase by a Dealer of Bank Notes as principal, between the date of the agreement to purchase such Bank Notes and the Settlement Date with respect to such purchase, the Issuing Bank will not, without the prior consent of the Dealer who is a party to such agreement, offer or sell, or enter into any agreement to sell, any debt securities of the Issuing Bank substantially similar to the Bank Notes (other than the Bank Notes that are to be sold pursuant to such agreement, Bank Notes sold to Parent or to any other subsidiary of Parent, deposit and other bank obligations issued and sold directly by the Issuing Bank in the ordinary course of its business and debt instruments described in Section 3(a)(3) of the 1933 Act).
(j) Termination of Purchaser Obligations . The Issuing Bank agrees that any person who has agreed to purchase Bank Notes as the result of an offer to purchase solicited by a Dealer has the right, exercisable only prior to such purchase, to refuse to purchase and pay for such Bank Notes if, on the related Settlement Date fixed pursuant to the Procedures, any event or condition set forth in Section 12(b) hereof shall have occurred and be continuing on such date (it being understood that the judgment of such person with respect to the impracticability of such purchase of the Bank Notes shall be substituted, for purposes of this Section 4(j), for the respective judgment of such Dealer with respect to certain matters referred to in such Section 12(b), and that such Dealer shall have no duty or obligation whatsoever to exercise the judgment permitted under such Section 12(b) on behalf of any such person).
(k) No Other Offering Documents . The Issuing Bank will not, unless it obtains the prior consent of the Dealers to whom or through whom a particular issue of Bank Notes is to be sold, use any Supplemental Offering Materials with respect to such Bank Notes.
SECTION 5. Payment of Expenses .
Whether or not the transactions contemplated hereunder are consummated or this Agreement or any agreement by a Dealer to purchase Bank Notes as principal is terminated, the Issuing Bank agrees to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement including: (a) the printing, preparation and delivery of the Offering Circular, the Disclosure Package, any Supplemental Offering Materials and all amendments and supplements thereto; (b) the preparation and reproduction of this Agreement; (c) the preparation, issuance and delivery of the Bank Notes, including any fees and expenses
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related to the use of book-entry notes; (d) the fees and disbursements of the Issuing Banks counsel and accountants and of any calculation agents or exchange rate agents; (e) any reasonable advertising and other out-of-pocket expenses of the Dealers incurred with the approval of the Issuing Bank; (f) the qualification of the Bank Notes under state securities laws in accordance with the provisions of Section 4(g) hereof, including the filing fees and the reasonable fees and disbursements of counsel for the Dealers in connection therewith and in connection with the preparation of any Blue Sky Survey and any Legal Investment Survey; (g) the fees and expenses, if any, incurred with respect to compliance with any applicable requirements of the Financial Industry Regulatory Authority Rule 5100 or any successor rule, including the filing fees and the fees and disbursements of counsel to the Dealers in connection therewith; (h) all fees paid to exchanges in connection with the listing of the Bank Notes on any exchange; and (i) the cost of preparing and providing any CUSIP or other identification numbers for the Bank Notes.
Whether or not the transactions contemplated hereunder are consummated or this Agreement is terminated, the Issuing Bank also agrees to pay all fees charged by rating agencies for the rating of any of the Bank Notes as well as the fees, expenses and disbursements of counsel to the Dealers incurred in connection with the establishment of, but not subsequent issuances under, the Global Bank Note Program described in the Offering Circular.
SECTION 6. Conditions of Dealers Obligations .
The obligations of the Dealers to solicit offers to purchase the Bank Notes as agents of the Issuing Bank, the obligations of any purchasers of Bank Notes sold through a Dealer as agent, and any obligation of a Dealer to purchase Bank Notes pursuant to any agreement by such Dealer to purchase Bank Notes as principal (or otherwise), will be subject at all times to the accuracy of the representations and warranties contained herein on the part of the Issuing Bank and to the accuracy of the statements of the Issuing Banks and the Parents officers made in any certificate furnished pursuant to the provisions hereof, to the performance and observance by the Issuing Bank of all covenants and agreements herein contained in all material respects and to the following additional conditions precedent:
(a) Legal Opinions .
(i) Opinions of Counsel to the Issuing Bank and the Parent . On the date hereof, the Dealers shall have received the following legal opinions and disclosure statements, dated as of the date hereof, in form and substance satisfactory to the Dealers, and on the dates set forth in Section 8(c) or Section 8(d), the Dealers shall have received the following legal opinions and disclosure statements to the extent required by such Sections, dated as of the date required therein, in form and substance reasonably satisfactory to the Dealers:
(A) the legal opinion of internal counsel to the Issuing Bank and the Parent, substantially in the form of Exhibit B-1 hereto,
(B) the disclosure statement of internal counsel to the Issuing Bank and the Parent, substantially in the form of Exhibit B-2 hereto, and
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(C) the legal opinion and disclosure statement of Wachtell, Lipton, Rosen & Katz LLP, external counsel to the Issuing Bank and the Parent, substantially in the form of Exhibit B-3 hereto.
(ii) Opinion of Counsel to the Dealers . On the date hereof and on each Settlement Date, the Dealers shall have received a customary legal opinion and disclosure statement of Cravath, Swaine & Moore LLP, counsel to the Dealers, or other counsel reasonably acceptable to the Dealers, covering such matters as the Dealers may reasonably request, dated as of the date hereof, or as of such Settlement Date, as the case may be.
(b) Officers Certificates . On the date hereof and, if required pursuant to Section 8(b) hereof, on each other applicable date, as the case may be, the Dealers shall have received a certificate of the President, a Senior Vice President or a Vice President, or the equivalent thereof, of the Issuing Bank reasonably satisfactory to the Dealers, substantially in the form of Exhibit C hereto.
(c) Representations Certificate . On the date hereof and, if required pursuant to Section 8(b) hereof, on each other applicable date, as the case may be the Dealers shall have received a certificate of the President, a Senior Vice President or a Vice President of the Parent, substantially in the form of Exhibit D hereto.
(d) Secretarys Certificate . On the date hereof the Dealers shall have received a certificate of the Corporate Secretary of the Issuing Bank that includes the following exhibits:
(i) Articles of Association of the Issuing Bank,
(ii) Bylaws of the Issuing Bank,
(iii) Resolutions of the Board of Directors of the Issuing Bank authorizing entrance into the Bank Note program, and
(iv) Incumbency Certificate of the Issuing Bank.
(e) Accountants Comfort Letter . On the date hereof and, if required pursuant to Section 8(e) hereof, the Dealers shall have received a letter dated the date hereof or such other applicable date as the case may be and in form and substance reasonably satisfactory to the Dealers, from the independent accountants to the Parent, containing statements and information of the type ordinarily included in accountants comfort letters to underwriters with respect to the financial statements and certain financial information contained or incorporated by reference in the Offering Circular, and confirming that they are independent certified public accountants with respect to the Parent pursuant to the Code of Professional Conduct of the American Institute of Certified Public Accountants.
(f) Ratings . The Bank Notes shall have been rated investment grade by at least one nationally recognized statistical rating organization.
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(g) Other Documents . On the date hereof and on each Settlement Date, counsel to the Dealers shall have been furnished with such documents and opinions as such counsel may reasonably request for the purpose of enabling such counsel to pass upon the issuance and sale of the Bank Notes as herein contemplated and related proceedings, or in order to evidence the accuracy and completeness of any of the representations and warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Issuing Bank in connection with the issuance and sale of the Bank Notes as herein contemplated shall be reasonably satisfactory in form and substance to the Dealers and to counsel to the Dealers.
(h) Termination . If any condition specified in this Section 6 shall not have been fulfilled when and as required to be fulfilled, this Agreement (or, at the option of the Dealer, any applicable agreement by such Dealer to purchase Bank Notes as principal) may be terminated, insofar as this Agreement or such agreement relates to a particular Dealer, by such Dealer, by notice to the Issuing Bank at any time prior to the fulfillment of such condition and any such termination shall be without liability of any party to any other party, except that the provisions under Section 5 hereof, the indemnity and contribution agreements set forth in Sections 9 and 10 hereof, the provisions of Section 11 hereof, the termination procedures of Section 12(c) hereof, the notice provisions of Section 13 hereof, the provisions set forth under Parties of Section 14 hereof and the governing law provisions set forth under Section 17 hereof shall remain in effect.
SECTION 7. Delivery of and Payment for Bank Notes Sold through a Dealer .
Delivery of Bank Notes sold by the Issuing Bank through a Dealer as agent shall be made by the Issuing Bank to such Dealer for the account of any purchaser only against payment therefor in immediately available funds. In the event that a purchaser shall fail either to accept delivery of or to make payment for a Bank Note on the date fixed for settlement, the Dealer shall promptly notify the Issuing Bank and deliver the Bank Note to the Issuing Bank, and, if the Dealer has theretofore paid the Issuing Bank for such Bank Note, the Issuing Bank will promptly return such funds to the Dealer. If such failure shall have occurred for any reason other than as a result of the default by the applicable Dealer with respect to its obligations hereunder, the Issuing Bank will reimburse such Dealer on an equitable basis for its loss of the use of funds during the period when the funds were credited to the account of the Issuing Bank.
SECTION 8. Additional Covenants of the Issuing Bank .
The Issuing Bank covenants and agrees with each Dealer that:
(a) Reaffirmation of Representations and Warranties . Each acceptance by the Issuing Bank of an offer for the purchase of Bank Notes (whether to a Dealer as principal or through the Dealer as agent), and each delivery of such Bank Notes to the Dealers, shall be deemed to be an affirmation that the representations and warranties of the Issuing Bank contained in this Agreement and in any certificate theretofore delivered to the Dealers pursuant hereto are true and correct at the time of such acceptance or delivery, as the case may be, and an undertaking that such representations and warranties will be true and correct at the time of delivery by the Issuing Bank to the purchaser or his agent, or to the applicable Dealer, of such Bank Notes relating to such acceptance or delivery, as though made at and as of each such time
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(and it is understood that such representations and warranties shall relate to the Offering Circular or the Disclosure Package, as the case may be, each as amended and supplemented to each such time, including any amendment resulting from incorporation by reference of documents filed by the Issuing Bank or the Parent).
(b) Subsequent Delivery of Certificates . On each Settlement Date, the Issuing Bank shall furnish or cause to be furnished to the Dealers forthwith certificates from each of the Issuing Bank and the Parent dated such Settlement Date, in form reasonably satisfactory to the Dealers to the effect that the statements contained in the certificates referred to in Sections 6(b) and 6(c) hereof which were last furnished to the Dealers are true and correct at the time of such amendment or supplement or filing or sale, as the case may be, as though made at and as of such time (except that such statements shall be deemed to relate to the Offering Circular as amended and supplemented to such time, including any amendment resulting from incorporation by reference of documents filed by the Issuing Bank and the Parent), or, in lieu of such certificates, certificates of the same form as the certificates referred to in said Sections 6(b) and 6(c), modified as necessary to relate to the Offering Circular or the Disclosure Package, as the case may be, each as amended and supplemented to the time of delivery of such certificates; provided , however , no certificates need be given during any period in which the Dealers have been instructed to or have suspended the solicitation and receipt of offers to purchase Notes but shall be required to be given before the Dealers shall again resume solicitation and receipt of offers to purchase Notes.
On each Settlement Date, the Dealers shall have received a certificate of the Corporate Secretary of the Issuing Bank substantially in the form of Exhibit F hereto, certifying that as of the Settlement Date, none of the documents listed in Section 6(d)(i) through (iv) above has been modified, updated or amended; provided , however , that if any such documents have been modified, updated or amended, the Issuing Bank shall attach such modified, updated or amended document as an exhibit to the certificate described in this paragraph of Section 8(b).
On each date on which the Issuing Bank has agreed to issue Bank Notes (each such date, a Pricing Date ) and Settlement Date that occurs after the date on which Parent files a press release with the SEC disclosing its financial results for a completed fiscal period but prior to the date on which Parent files its Form 10-K or Form 10-Q for such period (each such Pricing Date and Settlement Date, a Post-Earnings Date), the Dealers shall have received a certificate of the Controller of the Parent substantially in the form of Exhibit G hereto.
(c) Subsequent Delivery of Legal Opinions . On each Settlement Date, the Issuing Bank shall furnish or cause to be furnished forthwith to the Dealers and their counsel a written opinion from counsel last furnishing the opinion referred to in Section 6(a)(i)(A) hereof, or other counsel reasonably satisfactory to the Dealers, dated the Settlement Date, in form satisfactory to the Dealers, of the same form as the opinion referred to in Section 6(a)(i)(A) hereof but modified, as necessary, to relate to the Offering Circular or the Disclosure Package as amended and supplemented to the time of delivery of such opinion; provided , however , that no opinions need be given during any period in which the Dealers have been instructed to or have suspended the solicitation and receipt of offers to purchase Notes but shall be required to be given before the Dealers shall again resume solicitation and receipt of offers to purchase Notes.
19
(d) Subsequent Delivery of Disclosure Statements . On each Settlement Date, the Issuing Bank shall furnish or cause to be furnished forthwith to the Dealers and their counsel a written disclosure statement from counsel last furnishing the disclosure statement referred to in Section 6(a)(i)(B) hereof, or other counsel reasonably satisfactory to the Dealers, dated the Settlement Date, as the case may be, in form reasonably satisfactory to the Dealers, of the same form as the disclosure statement referred to in Section 6(a)(i)(B) hereof but modified, as necessary, to relate to the Offering Circular or the Disclosure Package as amended and supplemented to the time of delivery of such disclosure statement; provided , however , that no disclosure statement need be given during any period in which the Dealers have been instructed to or have suspended the solicitation and receipt of offers to purchase Notes but shall be required to be given before the Dealers shall again resume solicitation and receipt of offers to purchase Notes.
(e) Subsequent Delivery of Comfort Letters . On each (i) Pricing Date, and (ii) Settlement Date, the Issuing Bank shall cause the independent accountants to the Parent forthwith to furnish the Dealers a letter, dated the Pricing Date or the Settlement Date, as the case may be, in form reasonably satisfactory to the Dealers, of the same tenor as the letter referred to in Section 6(e) hereof with such changes as may be necessary to reflect the amended and supplemented financial information included or incorporated by reference in the Offering Circular or the Disclosure Package, as amended or supplemented to the date of such letter; provided , however , that if the Offering Circular is amended or supplemented solely to include financial information as of and for a fiscal quarter, the independent accountants to the Parent may limit the scope of such letter to the unaudited financial statements included in such amendment or supplement unless any other information included therein of an accounting, financial or statistical nature is of such a nature that, in the Dealers judgment, such letter should cover such other information; provided , however , that no letters need be given during any period in which the Dealers have been instructed to or have suspended the solicitation and receipt of offers to purchase Notes but shall be required to be given before the Dealers shall again resume solicitation and receipt of offers to purchase Notes.
SECTION 9. Indemnification .
(a) Indemnification of Dealers . Subject to Section 9(c) below, the Issuing Bank agrees to indemnify and hold harmless each Dealer, its respective directors and affiliates and each person, if any, who controls each Dealer within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Offering Circular, the Disclosure Package or any Supplemental Offering Materials (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and
(ii) against any and all expense whatsoever (including the fees and disbursements of counsel chosen by the Dealers), as incurred in investigating, preparing or defending against any litigation, or investigation or proceeding by any governmental
20
agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) above;
provided , however , that this indemnity does not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Issuing Bank by the Dealers expressly for use in the Offering Circular, the Disclosure Package or any Supplemental Offering Materials (or any amendment or supplement thereto). This indemnity will be in addition to any liability that the Issuing Bank may otherwise have.
(b) Indemnification of the Issuing Bank . Each Dealer agrees, severally and not jointly, to indemnify and hold harmless the Issuing Bank, its respective directors and each person, if any, who controls the Issuing Bank within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense whatsoever described in the indemnity contained in subsection (a) of this Section 9, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Offering Circular, the Disclosure Package or any Supplemental Offering Materials (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Issuing Bank by such Dealer expressly for use in the Offering Circular, the Disclosure Package or any Supplemental Offering Materials (or any amendment or supplement thereto). This indemnity will be in addition to any liability that any Dealer may otherwise have.
(c) Actions Against Parties; Notification . Promptly after receipt by an indemnified party under Sections 9(a) or (b) of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission to so notify the indemnifying party will not relieve the indemnifying party from any liability that it may have to any indemnified party otherwise than under Sections 9(a) or (b) except to the extent that the indemnifying party is prejudiced as a result thereof. In case any such action is brought against any indemnified party, the indemnifying party will be entitled to participate therein, and to the extent that it may elect by written notice delivered to the indemnified party promptly after receiving the notice from such indemnified party required by the preceding sentence, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties that are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assert such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election to so assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under Sections 9(a) or (b) for any legal or other expenses subsequently incurred by such indemnified party (other than reasonable costs of investigation) in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in connection with the assertion of legal defenses in
21
accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate national counsel (in addition to any local counsel) representing the indemnified parties who are parties to such action), (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party; and except that, if clause (i) or (iii) is applicable, such liability shall be only in respect of the counsel referred to in such clause (i) or (iii).
No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 9 or Section 10 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.
SECTION 10. Contribution .
If the indemnification provided for in Section 9 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Issuing Bank, on the one hand, and the applicable Dealer(s), on the other hand, from the offering of the Bank Notes that were the subject of the claim for indemnification or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Issuing Bank, on the one hand, and the applicable Dealer(s), on the other hand, in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Issuing Bank, on the one hand, and the applicable Dealer(s), on the other hand, in connection with the offering of the Bank Notes that were the subject of the claim for indemnification shall be deemed to be in the same respective proportions as the total net proceeds from the offering of such Bank Notes (before deducting expenses) received by the Issuing Bank and the total discount or commission received by each applicable Dealer, as the case may be, bears to the aggregate initial offering price of such Bank Notes.
The relative fault of the Issuing Bank, on the one hand, and the applicable Dealer(s), on the other hand, shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of a material fact or omission or alleged omission to state
22
a material fact relates to information supplied by the Issuing Bank or by the applicable Dealer(s) and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
The Issuing Bank and the Dealers agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata allocation (even if the applicable Dealer(s) were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 10. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 10 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any applicable untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 10, (i) no Dealer shall be required to contribute any amount in excess of the amount by which the total discount or commission received by such Dealer in connection with the offering of the Bank Notes that were the subject of the claim for indemnification exceeds the amount of any damages which such Dealer has otherwise been required to pay by reason of any applicable untrue or alleged untrue statement or omission or alleged omission and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 10, each person, if any, who controls a Dealer within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Dealer, and each person, if any, who controls the Issuing Bank within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Issuing Bank. The obligations of each of the Dealers and the Issuing Bank under this Section 10 to contribute are several in proportion to the respective purchases or sales made by or through it to which such loss, claim, damage or liability (or action in respect thereof) relates and are not joint.
SECTION 11. Representations, Warranties and Agreements to Survive Delivery .
All representations, warranties and agreements contained in this Agreement, or contained in certificates of officers of the Issuing Bank or the Parent pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of the Dealers or any controlling person of a Dealer, or by or on behalf of the Issuing Bank, and shall survive each delivery of and payment for any of the Bank Notes.
SECTION 12. Termination .
(a) Termination of this Agreement . This Agreement (excluding any agreement hereunder by a Dealer to purchase Bank Notes as principal) may be terminated for any reason, at any time by the Issuing Bank or any of the Dealers, in each case as to itself, immediately upon the giving of 30 days written notice of such termination to the other parties hereto in accordance with the provisions of Section 13 hereof.
23
(b) Termination of an Agreement to Purchase Bank Notes as Principal . A Dealer may terminate an agreement hereunder by such Dealer to purchase Bank Notes as principal, immediately upon notice to the Issuing Bank, at any time prior to the Settlement Date relating thereto:
(i) if there has been, since the date of such agreement or since the respective dates as of which information is given in the Offering Circular or the Disclosure Package as it exists immediately prior to such agreement, any material adverse change in the condition, financial or otherwise, business affairs, business prospects or results of operations, or any development reasonably likely to result in a prospective material adverse change in the condition, financial or otherwise, business affairs, business prospects or results of operations, of the Issuing Bank and its subsidiaries, or of the Parent and its subsidiaries, as the case may be, considered as one enterprise, whether or not arising in the ordinary course of business, which is, in the judgment of such Dealer, so material and adverse as to make it impractical or inadvisable to proceed with the offering or the delivery of the Bank Notes as contemplated by the Offering Circular (exclusive of any amendment thereof) and the Disclosure Package (exclusive of any supplement thereto);
(ii) if since the date of any such agreement by such Dealer to purchase Bank Notes, there shall have occurred any material adverse change in the financial markets in the United States or in international financial markets, or any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war, or other national or international calamity or crisis the effect of which , which is, in the judgment of such Dealer, so material and adverse as to make it impractical or inadvisable to proceed with the offering or the delivery of the Bank Notes as contemplated by the Offering Circular (exclusive of any amendment thereof) and the Disclosure Package (exclusive of any supplement thereto);
(iii) if since the date of any such agreement by such Dealer to purchase Bank Notes, trading in any securities of the Issuing Bank or the Parent shall have been suspended by the SEC or a national securities exchange, or if trading generally on the New York Stock Exchange, the Nasdaq Market or the Chicago Board of Trade shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, by any of said exchanges or by order of the SEC or any other governmental authority, or a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States, or if a banking moratorium shall have been declared by federal, New York or Pennsylvania authorities;
(iv) if the rating assigned by any nationally recognized statistical rating agency (as defined by the SEC in Section 3(a)(62) of the 1934 Act) to any debt securities of the Issuing Bank as of the date of such agreement shall have been lowered since that date or if any such rating agency shall have publicly announced that it has placed under surveillance or review, other than with positive implications, its rating of any debt securities or deposits of the Issuing Bank or the Parent; or
24
(v) if there shall have come to such Dealers attention any facts that would cause such Dealer to believe that the Offering Circular or the Disclosure Package or any amendment thereto or supplement thereof, at the time it was required to be delivered to a purchaser of Bank Notes, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time of such delivery, not misleading.
(c) General . In the event of any such termination described in Section 12(a) or Section 12(b) hereto, none of the parties will have any liability to the other parties hereto, except that (i) the Dealers shall be entitled to any commissions earned in accordance with the third paragraph of Section 3(b) hereof, (ii) if at the time of termination (a) a Dealer shall own any Bank Notes purchased with the intention of reselling them or (b) an offer to purchase any of the Bank Notes has been accepted by the Issuing Bank but the time of delivery to the purchaser or his agent of such Bank Notes relating thereto has not occurred, the covenants set forth in Sections 4 and 8 hereof shall remain in effect until such Bank Notes are so resold or delivered, as the case may be, and (iii) the provisions of Section 5 hereof, the indemnity and contribution agreements set forth in Sections 9 and 10 hereof, and the provisions of Sections 11, 12(c), 13, 14 and 17 hereof shall remain in effect.
SECTION 13. Notices .
Unless otherwise provided herein, all notices required under the terms and provisions hereof shall be in writing, either delivered by hand, by mail or by telex, telecopier or telegram, and any such notice shall be effective when received at the address specified below.
If to the Issuing Bank:
PNC Bank, National Association
Three PNC Plaza
225 Fifth Avenue
6th Floor
Pittsburgh, PA 15222
Attention: Lisa Kovac, SVP & Funding Manager
Facsimile Number: (412) 762-1728
Telephone Number: (412) 762-8400
25
If to the Parent:
The PNC Financial Services Group, Inc.
Three PNC Plaza
225 Fifth Avenue
6th Floor
Pittsburgh, PA 15222
Attention: Lisa Kovac
Facsimile Number: (412) 762-1728
Telephone Number: (412) 762-8400
If to Citigroup Global Markets Inc.:
Citigroup Global Markets Inc.
388 Greenwich Street
New York, NY 10013
Attention: Transaction Execution Group
Facsimile Number: (646) 291-5209
Telephone Number: (212) 816-1135
If to any other Dealer: at its notice address(es) specified on Schedule I hereto or at such other address as such party may designate from time to time by notice duly given in accordance with the terms of this Section 13.
SECTION 14. Parties .
This Agreement shall inure to the benefit of and be binding upon the Dealers and the Issuing Bank and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the parties hereto and their respective successors and the controlling persons, directors and affiliates referred to in Sections 9 and 10 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein or therein contained.
This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the parties hereto and their respective successors and said controlling persons, directors and affiliates and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Bank Notes shall be deemed to be a successor by reason merely of such purchase. Notwithstanding the foregoing, the purchasers referred to in Section 4(j) shall have the rights set forth therein.
SECTION 15. Default by One or More of the Agents Acting as Principal.
If one or more of the Dealers acting as principal pursuant to Section 3(a) hereof shall fail at any Settlement Date to purchase the Bank Notes that it or they are obligated to purchase under this Agreement (the Defaulted Notes), then the non-defaulting Dealer(s) acting as principal shall have the right, within 24 hours thereafter, to make arrangements for one or
26
more of the non-defaulting Dealers acting as principal, or any other underwriters, to purchase all, but not less than all, of the Defaulted Notes in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the non-defaulting Dealers acting as principal shall not have completed such arrangements within such 24-hour period, then:
(a) if the aggregate principal amount of Defaulted Notes does not exceed 10% of the aggregate principal amount of the Notes to be purchased hereunder, each of the non-defaulting Dealers acting as principal shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their initial respective underwriting obligations under the applicable terms agreement bear to the underwriting obligations of all non-defaulting Dealers acting as principal, or
(b) if the aggregate principal amount of Defaulted Notes exceeds 10% of the aggregate principal amount of the Notes to be purchased under the applicable terms agreement entered into pursuant to Section 3(a) hereof shall terminate without liability on the part of any non-defaulting Dealers acting as principal.
No action taken pursuant to this Section 15 shall relieve any defaulting Dealers acting as principal from liability in respect of its default.
In the event of any such default that does not result in a termination of the applicable terms agreement entered into pursuant to Section 3(a) hereof, either the non-defaulting Dealer(s) acting as principal or the Issuing Bank shall have the right to postpone the Settlement Date for a period not exceeding seven days in order to effect any required changes in any documents or arrangements relating thereto.
SECTION 16. Waiver of Jury Trial .
The Issuing Bank and each of the Dealers hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
SECTION 17. Governing Law .
This Agreement and all the rights and obligations of the parties shall be governed by and construed in accordance with the laws of the State of New York, excluding any choice-of-law principles that would otherwise require the application of the law of any other jurisdiction.
SECTION 18. Counterparts .
This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.
27
If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Issuing Bank a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement between the Issuing Bank and each of the Dealers in accordance with its terms.
Very truly yours, | ||||||
PNC BANK, NATIONAL ASSOCIATION | ||||||
by |
/s/ Randall C. King |
|||||
Name: | Randall C. King | |||||
Title: | Executive Vice President |
28
CONFIRMED AND ACCEPTED, | ||||
as of the date first above written: | ||||
CITIGROUP GLOBAL MARKETS INC. | ||||
by |
/s/ Jack D. McSpadden, Jr. |
|||
Name: | Jack D. McSpadden, Jr. | |||
Title: | Managing Director | |||
BARCLAYS CAPITAL INC. | ||||
by |
/s/ Paige Maire |
|||
Name: | Paige Maire | |||
Title: | Managing Director | |||
CREDIT SUISSE SECURITIES (USA) LLC | ||||
by |
/s/ Sharon Harrison |
|||
Name: | Sharon Harrison | |||
Title: | Director | |||
DEUTSCHE BANK SECURITIES INC. | ||||
by |
/s/ Anguel Zaprianov |
|||
Name: | Anguel Zaprianov | |||
Title: | Managing Director | |||
by |
/s/ Tom Criqui |
|||
Name: | Tom Criqui | |||
Title: | Director | |||
GOLDMAN, SACHS & CO. | ||||
by |
/s/ Adam Green |
|||
Name: | Adam Green | |||
Title: | Vice President |
29
JEFFERIES LLC | ||||
by |
Frank Cican |
|||
Name: | Frank Cican | |||
Title: | Managing Director | |||
J.P. MORGAN SECURITIES LLC | ||||
by |
/s/ Stephen L. Sheiner |
|||
Name: | Stephen L. Sheiner | |||
Title: | Executive Director | |||
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED | ||||
by |
/s/ Matt Basler |
|||
Name: | Matt Basler | |||
Title: | Managing Director | |||
MORGAN STANLEY & CO. LLC | ||||
by |
/s/ Yurij Slyz |
|||
Name: | Yurij Slyz | |||
Title: | Executive Director | |||
PNC CAPITAL MARKETS LLC | ||||
by |
/s/ Robert W. Thomas |
|||
Name: | Robert W. Thomas | |||
Title: | Managing Director | |||
SANDLER ONEILL & PARTNERS, L.P. | ||||
by |
/s/ Robert A. Kleinert |
|||
Name: | Robert A. Kleinert | |||
Title: | An Officer of the Corporation |
30
U.S. BANCORP INVESTMENTS, INC. | ||||
by |
/s/ Douglas Fink |
|||
Name: | Douglas Fink | |||
Title: | Managing Director | |||
WELLS FARGO SECURITIES, LLC | ||||
by |
/s/ Carolyn Hurley |
|||
Name: | Carolyn Hurley | |||
Title: | Director |
31
EXHIBIT A
PRICING SUPPLEMENT
$
PNC BANK, NATIONAL ASSOCIATION
$ [Senior][Subordinated][Floating Rate] Notes due
[Senior][Subordinated][Floating Rate] Notes Issue Price: %
This pricing supplement supplements the terms and conditions in, and incorporates by reference, the offering circular dated January 16, 2014(the Offering Circular), and all documents incorporated by reference in the Offering Circular, and should be read in conjunction with the Offering Circular.
CUSIP No.: | ||
Form of Note: | ||
[ ] Book-Entry | ||
[ ] Certificated | ||
[ ] Senior | ||
[ ] Subordinated |
Principal Amount: |
|
Trade Date: |
|
Original Issue Date: |
|
Maturity Date: |
|
|
Interest Rate: | ||
[ ] Fixed Rate | ||
[ ] Federal Funds Rate (effective) (open) (target) | ||
[ ] LIBOR | ||
[ ] Other Base Rate (as described below) | ||
Dealers Commission: | ||
Proceeds (after discount and commissions and before issuer expenses): | ||
Dealer | Principal Amount of Notes | |
Repayment and Redemption Terms: |
Issue Price (Dollar Amount and Percentage of Principal Amount): | ||
Amount: $ / | ||
% |
Interest Rate/Initial Interest Rate: |
|
Interest Payment Dates: |
|
Regular Record Dates: |
|
Interest Determination Dates: |
|
Interest Reset Dates: |
|
Index Source: |
|
Index Maturity: |
|
Spread: |
|
Spread Multiplier: |
|
Day Count: |
|
Minimum Interest Rate: |
|
Maximum Interest Rate: |
|
For Extendible Notes: |
Initial Maturity Date: |
|
Extension Feature: |
|
For Discount Notes: Original Issue Discount: % |
Yield to maturity: |
|
|
Discount Notes: | ||
[ ] Subject to special provisions set forth therein with respect to the principal amount thereof payable upon any redemption or acceleration of the maturity thereof. | ||
[ ] For Federal income tax purposes only. | ||
Applicable (for further information see pages [ ] of the Offering Circular) |
The Notes will not be listed on any securities exchange. Currently there is no trading market for the Notes.
The Notes are not deposits and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. The Notes are issued by the PNC Bank, National Association (the Bank) and are not obligations of, or otherwise guaranteed by, the Banks ultimate parent company, The PNC Financial Services Group, Inc., or any of the Banks other affiliates.
A-1
Investing in the Notes involves risks. See Risk Factors on pages [ ] of the Offering Circular.
None of the Securities and Exchange Commission (the SEC), the Office of the Comptroller of the Currency (the OCC) or any state securities commission has approved or disapproved of the Notes or determined if the Offering Circular is truthful or complete. Any representation to the contrary is a criminal offense.
The Notes have not been registered under the Securities Act of 1933, as amended (the Securities Act), or Part 16 of the Regulations of the OCC. The Notes are being offered and sold pursuant to an exemption from registration with the SEC pursuant to Section 3(a)(2) of the Securities Act and the abbreviated securities registration procedures of the OCC set forth in Part 16 of the OCCs regulations. Accordingly, the Notes are being offered only to investors that are accredited investors as defined in Rule 501 under the Securities Act, and each owner of a beneficial interest in a Note will be required to hold such beneficial interest in a minimum principal amount of $250,000.
[Because our affiliate PNC Capital Markets LLC is participating in this offering, PNC Capital Markets LLC is deemed to have a conflict of interest within the meaning of Financial Industry Regulatory Authority (FINRA) Rule 5121. Accordingly, the offering is being conducted in compliance with FINRA Rule 5121 regarding a FINRA member firms participation in the distribution of securities of an affiliate. In accordance with Rule 5121, PNC Capital Markets LLC may not make sales in this offering to any discretionary account without the prior approval of the customer.]
The dealers expect to deliver the Senior Notes to purchasers in book-entry form through the facilities of The Depository Trust Company and its direct participants on or about
A-2
EXHIBIT B-1
OPINION OF INTERNAL COUNSEL TO THE ISSUING BANK AND THE PARENT
Pursuant to Section 6(a)(i)(A) (and to the extent required by Sections 3(a) and 8(c)) of the Distribution Agreement, internal counsel to the Issuing Bank shall furnish to the Dealers an opinion, to the effect that:
Upon the basis of the foregoing, it is my opinion that:
(i) The Issuing Bank is a national banking association duly organized, validly existing and in good standing under the laws of the United States. The Parent is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. The Parent is a corporation duly organized, and presently subsisting under the laws of the Commonwealth of Pennsylvania. The Issuing Bank is a wholly owned direct or indirect subsidiary of the Parent. The Parent has securities registered under the Securities Act of 1934, as amended (the 1934 Act).
(ii) Each of the Distribution Agreement [if syndicated: the Syndicated Terms Agreement], the Agency Agreement and the Interest Calculation Agreement have been duly authorized, executed and delivered by the Issuing Bank and is a valid and legally binding agreement of the Issuing Bank, enforceable in accordance with its terms.
(iii) The Bank Notes have been duly authorized and, when issued and authenticated against payment of the consideration therefore in accordance with the provisions of the [if syndicated: the Syndicated Terms Agreement] Agency Agreement and the Distribution Agreement, will be valid and binding obligations of the Issuing Bank, enforceable in accordance their respective terms.
(iv) Assuming that Bank Notes are (a) offered and sold in minimum denominations of $250,000 only to persons who are accredited investors, as defined in Rule 501(a) under the 1933 Act, (b) purchasers receive an Offering Circular, excluding the documents incorporated by reference therein, and (c) the Issuing Bank files the Offering Circular and any amendments thereto, excluding the documents incorporated by reference therein, with the Office of the Comptroller of the Currency (OCC) no later than the fifth business day after they are first used, then the offer and sale of the Bank Notes will comply with 12 C.F.R. Part 16.6(a).
(v) The Bank Notes are exempt from registration under Section 3(a)(2) of the 1933 Act. Neither registration of the Bank Notes under the 1933 Act nor qualification of an indenture under the Trust Indenture Act of 1939, as amended, will be required in connection with the offer, sale, issuance or delivery of such Bank Notes pursuant to the Distribution Agreement or any applicable agreement by a Dealer party to the Distribution Agreement to purchase the Bank Notes as principal.
B-1-1
(vi) The Bank Notes conform to the description thereof contained in the Offering Circular under the caption Description of Notes.
(vii) The Issuing Bank is not required to register under the provisions of the Investment Company Act of 1940, as amended.
(viii) Assuming that Bank Notes are both (a) offered and sold in minimum denominations of $250,000 only to persons who are accredited investors, as defined in Rule 501(a) under the 1933 Act and (b) purchasers receive an Offering Circular, excluding the documents incorporated by reference therein, no consent, authorization, or filing with any court or governmental agency or body is required for the entering into or performance by the Issuing Bank of any obligation under the Distribution Agreement, the Terms Agreement or the Bank Notes except (a) such as have been obtained or made prior to the date hereof, (b) such as may be required under applicable state or foreign securities or Blue Sky laws and the rules and the regulations of the Financial Industry Regulatory Authority, Inc. (as to which such counsel need express no opinion) and (c) the Offering Circular and any amendments thereto (other than amendments which contain only pricing information relating to a particular transaction, updated financial information concerning the Issuing Bank or non-material information relating to the Bank Note program) must be filed by the Issuing Bank with the OCC no later than the fifth business day after first use pursuant to 12 C.F.R. Section 16.6, (d) with respect to Subordinated Notes, notice must be filed with the OCC pursuant to 12 C.F.R. Section 5.47 in order for such Subordinated Notes to be counted as Tier 2 capital of the Issuing Bank , (e) for the Issuing Bank, pursuant to Section 38(h)(2) of the FDI Act, to make payment on the Subordinated Notes in the event the Issuing Bank becomes critically undercapitalized within the meaning of Section 38(b)(1)(E) of the FDI Act and (f) to the extent that the failure to obtain any consent, approval or authorization, or make any filing, would not in the aggregate have a material adverse effect on the Issuing Bank and its subsidiaries taken as a whole or on the Parent and its subsidiaries taken as a whole or materially and adversely affect the consummation of the transactions contemplated by, or the ability of the Issuing Bank to perform its obligations under, this Agreement, the Bank Notes, the Issuing and Paying Agency Agreement, the Interest Calculation Agreement or any applicable terms agreement. Except as have been obtained prior to the date hereof, no approval or authorization of the Parent is required for the Issuing Bank to enter into, or the performance by the Issuing Bank of its obligations under, this Agreement, the Bank Notes, the Issuing and Paying Agency Agreement, the Interest Calculation Agreement and any applicable terms agreement.
B-1-2
(ix) The execution, issuance, delivery and performance by the Issuing Bank of the Bank Notes and the execution, delivery and performance by the Issuing Bank of the Distribution Agreement, [if syndicated: the Syndicated Terms Agreement,] the Agency Agreement, the Interest Calculation Agreement and any agreement by a Dealer party to the Distribution Agreement to purchase the Bank Notes as principal, will not conflict with or result in a breach of (a) any provision of the Issuing Banks or the Parents Bylaws or Articles of Association or Articles of Incorporation, (b) any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which Parent or the Issuing Bank, or the property of any of the Issuing Bank is bound or (c) any law, rule, or regulation, order, judgment or decree applicable to the the Issuing Bank and its subsidiaries, except in the case of (b) and (c) where such breach or default would not reasonably be expected to prevent the consummation of the Distribution Agreement and Terms Agreement, the issuance of the Bank Notes or the transactions contemplated thereby or have a material adverse effect on the business, management, results of operations, or financial condition of the Issuing Bank and its subsidiaries, taken as a whole.
(x) Except as may be set forth in the Offering Circular or the Disclosure Package, or in the documents incorporated therein by reference, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now known to me to be pending, or, to my knowledge, threatened against, the Parent or any of its subsidiaries or the Issuing Bank or any of its subsidiaries which would reasonably be expected to prevent the consummation of this Agreement, the Agency Agreement, the Interest Calculation Agreement, the issuance of the Bank Notes or any transaction contemplated thereby.
(xi) The Representations Certificate has been duly executed and delivered by a duly authorized officer of the Parent.
(xii) Each document filed pursuant to the Securities Exchange Act of 1934, as amended (the 1934 Act) and incorporated by reference in the Offering Circular complied as to form when filed with the Securities and Exchange Commission (the SEC) in all material respects with the 1934 Act and the rules and regulations of the SEC promulgated thereunder.
B-1-3
EXHIBIT B-2
DISCLOSURE OPINION OF INTERNAL COUNSEL TO THE ISSUING BANK AND THE PARENT
Pursuant to Section 6(a)(i)(B) (and to the extent required by Sections 3(a) and 8(d)) of the Distribution Agreement, internal counsel to the Issuing Bank shall furnish to the Dealers a statement, to the effect that:
(i) In the course of such counsels [participation in the preparation of the Offering Circular and Disclosure Package, such counsel has participated in conferences with officers and other representatives of Parent and the Issuing Bank, representatives of and counsel for the Agents and representatives of the registered independent public accounting firm of Parent, during which the contents of the Offering Circular and Disclosure Package were discussed] 1 . Although such counsel has not independently checked or verified, and is not passing upon and assumes no responsibility for, the accuracy, completeness or fairness thereof (except as set forth in paragraph (vi) above), or otherwise verified the statements made therein, nothing has come to such counsels attention that would lead such counsel to believe that the Disclosure Package (including the documents incorporated by reference therein), as of [ ] [AM/PM] Eastern Time on [ ],[ ], and the Offering Circular as of its date and as of the date hereof contained or contain, as applicable, any untrue statement of a material fact or omitted or omit, as applicable, to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, except such counsel need not express any opinion or belief as to the financial statements, related notes or schedules or other data of a statistical or financial nature included in or omitted from the Offering Circular and the Disclosure Package.
1 | Introduction to be modified as appropriate for future issuances. |
B-2-1
EXHIBIT B-3
OPINION OF EXTERNAL COUNSEL TO THE ISSUING BANK AND THE PARENT
Pursuant to Section 6(a)(i)(C) of the Distribution Agreement, external counsel to the Issuing Bank shall furnish to the Dealers an opinion, with respect to the Issuing Bank, to the effect that:
(i) Assuming the Distribution Agreement, the Agency Agreement and the Interest Calculation Agreement have been duly authorized, executed and delivered by the Issuing Bank, they are valid and legally binding agreements of the Issuing Bank, enforceable in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to, or affecting, the rights of creditors of national banking associations, including laws relating to conservatorship and receivership of insured depository institutions, and general equity principles and except as rights under the Distribution Agreement and the Agency Agreement to indemnity and contribution may be limited by federal or state laws.
(ii) Assuming that Bank Notes are (a) offered and sold in minimum denominations of $250,000 only to persons who are accredited investors, as defined in Rule 501(a) under the 1933 Act, (b) purchasers receive an Offering Circular, excluding the documents incorporated by reference therein, as required by 12 C.F.R. part 16.6(a), and (c) the Issuing Bank files the Offering Circular and any amendments thereto, excluding the documents incorporated by reference therein, with the Office of the Comptroller of the Currency (OCC) no later than the fifth business day after they are first used, then the offer and sale of the Bank Notes will comply with 12 C.F.R. Part 16.6(a).
(iii) Assuming the Bank Notes are issued on the terms contemplated by the Distribution Agreement and the Offering Circular, the Bank Notes are exempt from registration under Section 3(a)(2) of the 1933 Act. Neither registration of the Bank Notes under the 1933 Act nor qualification of an indenture under the Trust Indenture Act of 1939, as amended, will be required in connection with the offer, sale, issuance or delivery of such Bank Notes pursuant to the Distribution Agreement or any applicable agreement by a Dealer party to the Distribution Agreement to purchase the Bank Notes as principal.
(iv) The statements contained in the Offering Circular under the heading Certain U.S. Federal Tax Considerations to the extent that they constitute matters of U.S. federal income tax law or legal conclusions with respect thereto, and under the heading ERISA Considerations, subject to the qualifications set forth therein to the extent that they constitute matters of United States law or legal conclusions with respect thereto, are correct in all material respects.
B-3-1
In the course of such counsels participation in the preparation of the Offering Circular and Disclosure Package, such counsel has participated in conferences with officers and other representatives of Parent and the Issuing Bank, representatives of and counsel for the Agents and representatives of the registered independent public accounting firm of Parent, during which the contents of the Offering Circular and Disclosure Package were discussed. Although such counsel has not independently checked or verified, and is not passing upon and assumes no responsibility for, the accuracy, completeness or fairness thereof, or otherwise verified the statements made therein (except as set forth in paragraph (iv) above), nothing has come to such counsels attention that would lead such counsel to believe that the Disclosure Package (including the documents incorporated by reference therein), as of [ ] [AM/PM] Eastern Time on [ ],[ ], and the Offering Circular as of its date and as of the date hereof contained or contain, as applicable, any untrue statement of a material fact or omitted or omit, as applicable, to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, except such counsel need not express any opinion or belief as to the financial statements, related notes or schedules or other data of a statistical or financial nature included in or omitted from the Offering Circular and the Disclosure Package.
B-3-2
EXHIBIT C
ISSUING BANK
OFFICERS CERTIFICATE
Pursuant to Section 6(b) of the Distribution Agreement, dated January 16, 2014, (the Distribution Agreement), among PNC Bank, National Association (the Issuing Bank), Citigroup Global Markets Inc. and each of the other Dealers listed on Schedule I thereto, the undersigned officer hereby certifies, on behalf of the Issuing Bank, that:
(i) since the respective dates as of which information is given in the Offering Circular [if a Settlement Date: and the Disclosure Package] , there has not been any material adverse change in the condition, financial or otherwise, business affairs, business prospects or results of operations, or any development reasonably likely to result in a prospective material adverse change in the financial condition or results of operations, of the Issuing Bank and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, other than as set forth or contemplated in the Offering Circular [ if a Settlement Date: and the Disclosure Package ] as amended or supplemented to the date hereof, including the material incorporated by reference therein;
(ii) the representations and warranties of the Issuing Bank contained in Section 2 of the Distribution Agreement are true and correct with the same force and effect as though expressly made at and as of the date hereof except for those representations and warranties that expressly relate to an earlier date, which are true and correct as of such date; and
(iii) the Issuing Bank has performed or complied with all agreements and satisfied all conditions on its part to be performed or satisfied pursuant to the Distribution Agreement at or prior to the date hereof in all material respects.
For the purpose hereof, capitalized terms used herein which have been defined in the Distribution Agreement shall have the meanings ascribed to them in the Distribution Agreement.
C-1
EXHIBIT C
IN WITNESS WHEREOF, this certificate has been executed and delivered this day of .
PNC BANK, NATIONAL ASSOCIATION | ||||
by |
|
|||
Name: Title: |
C-2
EXHIBIT D
THE PNC FINANCIAL SERVICES GROUP, INC.
REPRESENTATIONS CERTIFICATE
Pursuant to Section 6(c) of the Distribution Agreement, dated January 16, 2014(the Distribution Agreement), among PNC Bank, National Association (the Issuing Bank), Citigroup Global Markets Inc. and each of the other dealers listed on Schedule I thereto (collectively, the Dealers), the undersigned officer of The PNC Financial Services Group, Inc. (the Parent), hereby represents and warrants on behalf of the Parent to each Dealer, as of the date hereof, as of each time that there is filed with the Securities and Exchange Commission (the SEC) any document relating to the Parent incorporated by reference in the Offering Circular or the Disclosure Package, as of the date of each acceptance by the Issuing Bank of an offer for the purchase of Bank Notes (whether through such Dealer as agent or to such Dealer as principal), as of each applicable Settlement Date and as of each applicable Representation Date as follows:
(i) Authorization To Incorporate by Reference . The Parent has authorized the Issuing Bank to incorporate by reference in the Offering Circular or the Disclosure Package the Parents annual reports on Form 10-K for its most recently ended fiscal year, quarterly reports on Form 10-Q since the last day of its most recently ended fiscal year, current reports on Form 8-K since the last day of its most recently ended fiscal year (and any and all amendments or supplements thereto, other than information therein that, under the SECs rules, is deemed not to have been filed) and any other document filed by the Parent with the SEC pursuant to the Securities Exchange Act of 1934 (the 1934 Act) and the rules and regulations thereunder (the Incorporated Documents).
(ii) Incorporated Documents . The Incorporated Documents, at the time they were filed with the applicable federal regulatory authorities, complied in all material respects with the requirements of the 1934 Act and the rules and regulations promulgated thereunder, or the rules and regulations otherwise applicable thereto, as the case may be, and, when read together with the other information in the Offering Circular or the Disclosure Package, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
(iii) Financial Statements . The financial statements and other financial information of the Parent and its consolidated subsidiaries included or incorporated by reference in the Offering Circular or the Disclosure Package fairly present, in all material respects the consolidated financial condition of the Parent and its consolidated subsidiaries as of the dates indicated therein and the consolidated results of their operations for the periods specified therein; and such financial statements have been prepared in conformity with generally accepted accounting principles in the United States except as otherwise disclosed therein.
D-1
(iv) No Material Adverse Change . Since the respective dates as of which information is given in the Offering Circular or the Disclosure Package, there has not been any material adverse change in the condition, financial or otherwise, business affairs, business prospects or results of operations, or any development that could be expected to result in a prospective material adverse change in the condition, financial or otherwise, business affairs, business prospects or results of operations, of the Parent and its subsidiaries considered as one enterprise whether or not arising in the ordinary course of business, other than as set forth or contemplated in the Offering Circular or the Disclosure Package (including the Incorporated Documents).
All representations and warranties contained in this certificate shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of the Dealers or any controlling person of the Dealers, or by or on behalf of the Parent and, shall survive each delivery of and payment for any of the Bank Notes.
For the purpose hereof, capitalized terms used herein which have been defined in the Distribution Agreement shall have the meanings ascribed to them in the Distribution Agreement.
IN WITNESS WHEREOF, this certificate has been executed and delivered on behalf of the Parent this day of .
THE PNC FINANCIAL SERVICES GROUP, INC. | ||||
by |
|
|||
Name: Title: |
D-2
EXHIBIT E-1
PNC BANK, NATIONAL ASSOCIATION
Bank Notes with Maturities of
More than nine months from Date of Issue
Dealer Agreement
[date]
[Name of Dealer]
[Address of Dealer]
Ladies and Gentlemen:
Reference is made to the Distribution Agreement (including the exhibits thereto) dated, as of January 16, 2014(the Distribution Agreement), among PNC Bank, National Association (the Issuing Bank), a bank organized under the laws of the United States, Citigroup Global Markets Inc. and each of the other Dealers listed on Schedule I thereto with respect to the issue and sale by the Issuing Bank of the Bank Notes (as such term is defined in the Distribution Agreement). A conformed copy of the Distribution Agreement has been attached hereto as Annex A.
WHEREAS the Issuing Bank is permitted under the terms of the Distribution Agreement to appoint additional dealers for the purpose of soliciting purchases of the Bank Notes upon such terms as the Issuing Bank and such dealers may agree; and
WHEREAS [Name of dealer] and the Issuing Bank wish to enter into an agreement appointing [Name of Dealer] as an additional dealer with respect to the Bank Notes.
NOW, THEREFORE, in consideration of the mutual agreements set forth herein, the Issuing Bank hereby agrees that [Name of Dealer] shall become an additional Dealer (as defined herein) with respect to the Bank Notes and [Name of Dealer] hereby agrees to become a Dealer with respect to the Bank Notes and to be bound by the terms and conditions of the Distribution Agreement, which terms and conditions are hereby incorporated by reference herein except that the terms Dealer and Dealers shall instead mean or include [Name of Dealer]. No person other than [Name of Dealer] shall be deemed to be a Dealer under this Agreement.
This Agreement may be signed in counterparts, each of which shall be deemed an original, which taken together shall constitute one and the same instrument.
If the foregoing is in accordance with your understanding of our agreement please sign and return to us the enclosed duplicate hereof, whereupon this letter, including Annex A, and your acceptance shall represent a binding agreement between you and the Issuing Bank in accordance with its terms.
E-1-1
Very truly yours, | ||||
PNC BANK, NATIONAL ASSOCIATION | ||||
by |
|
|||
Name: Title: |
The foregoing Agreement is hereby confirmed and accepted as of the date first above written. | ||||
[Name of Dealer] | ||||
by |
|
|||
Name: | ||||
Title: |
E-1-2
EXHIBIT E-2
FORM OF SYNDICATED TERMS AGREEMENT
[Date]
To: The Dealers Listed on Annex 1 Hereto
In care of , (the Lead Dealer)
PNC Bank, National Association (the Issuer)
U.S.$ 25,000,000,000 Global Bank Note Program
Ladies and Gentlemen:
Subject to the terms and conditions of the Distribution Agreement, dated January 16, 2014, among the Issuer, Citigroup Global Markets Inc. and the other dealers listed on Schedule I thereto (together with the dealers named in Annex 1 hereto, the Dealers) concerning the sale of Bank Notes to be issued by the Issuer, as amended or supplemented (the Distribution Agreement), the dealers named in Annex 1 hereto agree to purchase on a syndicated basis the Bank Notes due of the Issuer (the Notes), described in the Pricing Supplement attached as Annex 2 hereto, on the terms set out in such Pricing Supplement and on the terms set out below. Unless otherwise defined herein, all terms used herein have the meanings given to them in the Distribution Agreement.
1. Subject to the terms and conditions of the Distribution Agreement and this Agreement, the Issuer hereby agrees to issue the Notes, and the Dealers severally agree to purchase the Notes at the purchase price of % per Note (being equal to the issue price of % of the principal amount less a management and underwriting fee of % of the principal amount and a selling concession of % of the principal amount).
2. The Applicable Time for purposes of this Agreement is [ ] [AM/PM] (Eastern time) on .
3. The purchase price specified above will be paid by the Lead Dealer on behalf of the Dealers by wire transfer in immediately available funds to the Issuer at [ time] on , or at such other time and/or date as the Issuer and the Lead Dealer on behalf of the Dealers may agree (the Settlement Time) against delivery of the Notes to or upon your order in the manner contemplated in the Distribution Agreement and the Agency Agreement.
4. The Dealers obligations hereunder are conditioned on (a) the receipt of: (i) opinions of counsel described in Section 6(a)(i)(A) of the Distribution Agreement, dated as of the Settlement Time, (ii) a comfort letter described in Section 6(e) of the
E-2-1
Distribution Agreement, dated as of the Settlement Time, (iii) the officers certificates described in Section 6(b) and Section 6(c) of the Distribution Agreement, dated as of the Settlement Time; (b) since the date of this Agreement, there having not occurred, in the opinion of the Dealers, a change in financial, political or economic conditions as would be likely to prejudice materially the sale by the Dealers of the Notes; and (c) such other opinions, certificates and documents as may be agreed by the Issuer and the Dealers on or prior to the date of this Agreement.
5. The Issuer hereby appoints each Dealer party hereto which is not a party to the Distribution Agreement (each a New Dealer) as a Dealer under the Distribution Agreement solely for the purposes of the issue of the Notes (the Issue), pursuant to Section 1(a) of the Distribution Agreement. Each such New Dealer shall be vested, in relation to the Issue, with all authority, rights, powers, duties and obligations of a Dealer purchasing Bank Notes pursuant to the Distribution Agreement, as if originally named as a Dealer under the Distribution Agreement.
In consideration of the Issuer appointing each New Dealer as a Dealer with respect to the Issue, each New Dealer hereby undertakes for the benefit of the Issuer and each of the other Dealers, that, in relation to the Issue it will perform and comply with all of the duties and obligations expressed to be assumed by a Dealer under the Distribution Agreement, a copy of which it acknowledges it has received.
Each New Dealer acknowledges that such appointment is limited to the Issue and is not for any other issue of Bank Notes of the Issuer pursuant to the Distribution Agreement and that such appointment will terminate upon issue of the Bank Notes comprising the Issue but without prejudice to any rights, duties or obligations which have arisen prior to such termination.
For the purposes hereof, the notice details of each New Dealer are as follows (insert name, address, telephone, telecopy and attention):
[insert notice details]
This Agreement is a Syndicated Terms Agreement referred to in the Distribution Agreement and shall be governed by and construed in accordance with the law of the State of New York, without regard to conflicts of law principles.
Very truly yours, | ||||
[DEALERS] [NEW DEALERS], | ||||
by |
|
|||
Name: Title: |
E-2-2
Accepted: [Date] | ||||
PNC BANK, NATIONAL ASSOCIATION | ||||
by |
|
|||
Name: | ||||
Title: |
E-2-3
ANNEX 1
DEALER |
PRINCIPAL AMOUNT
OF NOTES |
|||
TOTAL |
||||
|
|
E-2-4
ANNEX 2
[ATTACH PRICING SUPPLEMENT]
E-2-5
EXHIBIT F
PNC BANK, NATIONAL ASSOCIATION
Certificate of Secretary
I, [ ], Secretary of PNC Bank, National Association (the Company), do hereby certify as follows:
1. The Companys Amended and Restated Articles of Association and all amendments thereto, as attached to the Certificate of Secretary of the Company, dated [ ], 2013, have not been amended, modified, rescinded or revoked and are in full force and effect on the date hereof.
2. The By-Laws of the Company, as attached to the Certificate of Secretary of the Company, dated [ ], 2013, have not been amended, modified, rescinded or revoked and are in full force and effect on the date hereof.
3. The resolutions adopted by the Board of Directors of the Company dated [ ] 2013, and attached to the Certificate of Secretary of the Company, dated [ ], 2013, have not been amended, modified, rescinded or revoked and are in full force and effect on the date hereof.
4. Each person who, as an officer of the Company, signed any certificate or other document delivered in connection with the base offering circular dated [ ], 2013, the preliminary offering circular supplement dated [ ] or the final offering circular supplement dated [ ] was duly elected and appointed to, and the incumbent of, the office he or she purported to hold at the time of such execution, and those officers signatures as set forth in the Certificate of Incumbency attached to the Certificate of Secretary of the Company, dated [ ], 2013 are each such officers genuine signature.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Company as of this [ ] day of [ ].
|
Name: |
Position: |
F-1
EXHIBIT G
CONTROLLERS CERTIFICATE
The undersigned, Controller of The PNC Financial Services Group, Inc. (the Corporation ), hereby certifies that as of the date hereof:
1. | I have reviewed the information set forth in the final offering circular supplement of PNC Bank, National Association, dated [ ], under the caption [ ], (the Supplement Section ). The information presented in the Supplement Section, when viewed together with the documents incorporated by reference therein, provides a fair and accurate summary of the Corporations financial position and results of operations for the quarter ended [ ], and the financial data presented therein is accurately derived from the Corporations accounting records. |
2. | I have compared each item marked on the attached copies of the Supplement Section with the amount included in the Corporations accounting records or on a schedule or report prepared by the Corporation from its accounting records and found them to be in agreement. |
3. | No facts have come to my attention that have caused me to believe that the historical financial data presented in the Supplement Section is not prepared in accordance with generally accepted accounting principles on a basis substantially consistent with that of the consolidated financial statements of the Corporation and its subsidiaries audited by PricewaterhouseCoopers LLP and included in the [ ] Annual Report of the Corporation on Form 10-K. |
[ Signature Page Follows ]
G-1
IN WITNESS WHEREOF, the undersigned has executed this Controllers Certificate as of the date first set forth above.
THE PNC FINANCIAL SERVICES GROUP, INC., | ||||||
by |
|
|||||
Name: | ||||||
Title: | Controller |
G-2
SCHEDULE 2(a)(i)
Information provided by the Dealers
to the Issuing Bank for use in
the Offering Circular
The information in the sixth and seventh paragraphs of the Plan of Distribution section of the Offering Circular.
S-2(a)(i)-1
SCHEDULE I
Contact Information for
Notices to Dealers
Citigroup Global Markets Inc.
388 Greenwich Street
New York, New York 10013
Attention: Transaction Execution Group
Phone: 212-816-1135
Fax: 646-291-5209
Barclays Capital Inc.
745 Seventh Avenue, 5th Floor
New York, New York 10019
Attention: Syndicate Registration
Phone: 888-603-5847
Fax: 636-284-0844
Credit Suisse Securities (USA) LLC
Eleven Madison Avenue
New York, New York 10010-3629
Attention: Short and Medium Term Finance
Phone: 212-325-7198
Fax: 212-743-5825
Deutsche Bank Securities Inc.
60 Wall Street
New York, New York 10005
Attention: Debt Capital Markets Syndicate
Fax: 212-797-2202
with a copy to:
General Counsel
Fax: 212-797-4561
Goldman, Sachs & Co.
200 West Street
New York, New York 10282
Attention: Prospectus Department
Phone: 866-471-2526
Fax: 212-902-9316
E-mail: prospectus-ny@ny.email.gs.com
S-I-1
Jefferies LLC
520 Madison Avenue
New York, New York 10022
Attention: General Counsel
Phone: 212-284-8188
Fax: 646-785-5992
J.P. Morgan Securities LLC
383 Madison Avenue
New York, New York 10179
Attention: Investment Grade Syndicate Desk
Phone: 212-834-4533
Fax: 212-834-6081
Merrill Lynch, Pierce, Fenner & Smith Incorporated
50 Rockefeller Plaza
NY1-050-12-01
New York, NY 10020
Attention: High Grade Debt Capital markets Transaction Management/Legal
Phone: 646-855-0724
Fax: 212-901-7881
Morgan Stanley & Co. LLC
1585 Broadway
New York, New York 10036
Attention: Investment Banking Division
Phone: 212-761-6691
Fax: 212-507-8999
PNC Capital Markets LLC
225 Fifth Avenue, 5th Floor
Pittsburgh, PA 15222
Attention: Jimil B. Wilson
Phone: 412-762-8420
Fax: 412-762-9124
with a copy to:
Leonard S. Ferleger
One PNC Plaza, 21st Floor
249 Fifth Avenue
Pittsburgh, PA 15222
Phone: 412-768-7194
Fax: 412-705-2148
S-I-2
Sandler ONeill & Partners, L.P.
1251 Avenue of the Americas, 6th Floor
New York, NY 10020
Attention: Syndicate
Phone: 212-466-7800
Fax: 212-466-7991
U.S. Bancorp Investments, Inc.
214 North Tryon Street, 26th Floor
Charlotte, North Carolina 28202
Attention: High Grade Syndicate
Phone: 877-558-2607
Fax: 877-774-3642
Wells Fargo Securities, LLC
550 S. Tryon Street, 5th Floor
Charlotte, North Carolina 28202
Attention: Transaction Management
Phone: 704-410-4792
Fax: 704-410-0326
S-I-3
The PNC Financial Services Group, Inc. and Subsidiaries | EXHIBIT 12.1 | |
Computation of Ratio of Earnings to Fixed Charges (1) |
Year Ended December 31 | ||||||||||||||||||||||||||||||||||||||||
Dollars in millions | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||
Earnings |
||||||||||||||||||||||||||||||||||||||||
Pretax income from continuing operations before adjustment for noncontrolling interests in consolidated subsidiaries or income or loss from equity investees |
$ | 4,993 | $ | 5,148 | $ | 3,594 | $ | 3,785 | $ | 3,680 | ||||||||||||||||||||||||||||||
Add: |
||||||||||||||||||||||||||||||||||||||||
Distributed income of equity investees |
275 | 242 | 216 | 198 | 167 | |||||||||||||||||||||||||||||||||||
Fixed charges excluding interest on deposits |
734 | 664 | 853 | 951 | 1,092 | |||||||||||||||||||||||||||||||||||
Less: |
||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests in pretax income of subsidiaries that have not incurred fixed charges |
96 | 112 | 137 | 154 | 148 | |||||||||||||||||||||||||||||||||||
Interest capitalized |
1 | 1 | ||||||||||||||||||||||||||||||||||||||
Earnings excluding interest on deposits |
5,905 | 5,942 | 4,526 | 4,780 | 4,790 | |||||||||||||||||||||||||||||||||||
Interest on deposits |
325 | 344 | 386 | 668 | 963 | |||||||||||||||||||||||||||||||||||
Total earnings |
$ | 6,230 | $ | 6,286 | $ | 4,912 | $ | 5,448 | $ | 5,753 | ||||||||||||||||||||||||||||||
Fixed charges |
||||||||||||||||||||||||||||||||||||||||
Interest on borrowed funds |
$ | 581 | $ | 516 | $ | 696 | $ | 791 | $ | 918 | ||||||||||||||||||||||||||||||
Interest component of rentals |
152 | 148 | 145 | 125 | 134 | |||||||||||||||||||||||||||||||||||
Amortization of notes and debentures |
12 | 35 | 39 | |||||||||||||||||||||||||||||||||||||
Interest capitalized |
1 | 1 | ||||||||||||||||||||||||||||||||||||||
Fixed charges excluding interest on deposits |
734 | 664 | 853 | 951 | 1,092 | |||||||||||||||||||||||||||||||||||
Interest on deposits |
325 | 344 | 386 | 668 | 963 | |||||||||||||||||||||||||||||||||||
Total fixed charges |
$ | 1,059 | $ | 1,008 | $ | 1,239 | $ | 1,619 | $ | 2,055 | ||||||||||||||||||||||||||||||
Ratio of earnings to fixed charges |
||||||||||||||||||||||||||||||||||||||||
Excluding interest on deposits |
8.04 | x | 8.95 | x | 5.31 | x | 5.03 | x | 4.39 | x | ||||||||||||||||||||||||||||||
Including interest on deposits |
5.88 | 6.24 | 3.96 | 3.37 | 2.80 | |||||||||||||||||||||||||||||||||||
(1) | As defined in Item 503(d) of Regulation S-K. |
The PNC Financial Services Group, Inc. and Subsidiaries | EXHIBIT 12.2 | |
Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (1) |
Year Ended December 31 | ||||||||||||||||||||||||||||||||||||||||
Dollars in millions | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||
Earnings |
||||||||||||||||||||||||||||||||||||||||
Pretax income from continuing operations before adjustment for noncontrolling interests in consolidated subsidiaries or income or loss from equity investees |
$ | 4,993 | $ | 5,148 | $ | 3,594 | $ | 3,785 | $ | 3,680 | ||||||||||||||||||||||||||||||
Add: |
||||||||||||||||||||||||||||||||||||||||
Distributed income of equity investees |
275 | 242 | 216 | 198 | 167 | |||||||||||||||||||||||||||||||||||
Fixed charges and preferred stock dividends excluding interest on deposits |
1,091 | 1,028 | 1,125 | 1,037 | 1,316 | |||||||||||||||||||||||||||||||||||
Less: |
||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests in pretax income of subsidiaries that have not incurred fixed charges |
96 | 112 | 137 | 154 | 148 | |||||||||||||||||||||||||||||||||||
Interest capitalized |
1 | 1 | ||||||||||||||||||||||||||||||||||||||
Preferred stock dividend requirements |
357 | 364 | 272 | 86 | 224 | |||||||||||||||||||||||||||||||||||
Earnings excluding interest on deposits |
5,905 | 5,942 | 4,526 | 4,780 | 4,790 | |||||||||||||||||||||||||||||||||||
Interest on deposits |
325 | 344 | 386 | 668 | 963 | |||||||||||||||||||||||||||||||||||
Total earnings |
$ | 6,230 | $ | 6,286 | $ | 4,912 | $ | 5,448 | $ | 5,753 | ||||||||||||||||||||||||||||||
Fixed charges and preferred stock dividends |
||||||||||||||||||||||||||||||||||||||||
Interest on borrowed funds |
$ | 581 | $ | 516 | $ | 696 | $ | 791 | $ | 918 | ||||||||||||||||||||||||||||||
Interest component of rentals |
152 | 148 | 145 | 125 | 134 | |||||||||||||||||||||||||||||||||||
Amortization of notes and debentures |
12 | 35 | 39 | |||||||||||||||||||||||||||||||||||||
Interest capitalized |
1 | 1 | ||||||||||||||||||||||||||||||||||||||
Preferred stock dividend requirements |
357 | 364 | 272 | 86 | 224 | |||||||||||||||||||||||||||||||||||
Fixed charges and preferred stock dividends excluding interest on deposits |
1,091 | 1,028 | 1,125 | 1,037 | 1,316 | |||||||||||||||||||||||||||||||||||
Interest on deposits |
325 | 344 | 386 | 668 | 963 | |||||||||||||||||||||||||||||||||||
Total fixed charges and preferred stock dividends |
$ | 1,416 | $ | 1,372 | $ | 1,511 | $ | 1,705 | $ | 2,279 | ||||||||||||||||||||||||||||||
Ratio of earnings to fixed charges and preferred stock dividends |
||||||||||||||||||||||||||||||||||||||||
Excluding interest on deposits |
5.41 | x | 5.78 | x | 4.02 | x | 4.61 | x | 3.64 | x | ||||||||||||||||||||||||||||||
Including interest on deposits |
4.40 | 4.58 | 3.25 | 3.20 | 2.52 | |||||||||||||||||||||||||||||||||||
(1) | As defined in Item 503(d) of Regulation S-K. |
EXHIBIT 21
THE PNC FINANCIAL SERVICES GROUP, INC.
SCHEDULE OF CERTAIN SUBSIDIARIES
(As of December 31, 2014)
Name |
State or Other Jurisdiction of Incorporation or Organization |
|
PNC Bancorp, Inc. (1) | Delaware | |
PNC Bank, National Association (1) |
United States | |
PNC REIT Corp. |
Delaware | |
PNC Bank Capital Securities, LLC |
Delaware | |
PNC Capital Leasing, LLC |
Delaware | |
PNC Preferred Funding LLC |
Delaware | |
PNC Equipment Finance, LLC |
Delaware | |
PNC Merchant Services Company |
Delaware | |
PNC NCNVINV, Inc. |
Delaware | |
PNC Holding, LLC (1) | Delaware | |
PNC Funding Corp |
Pennsylvania | |
PNC Investment Company LLC (1) |
Delaware | |
PNC Capital Markets, LLC |
Pennsylvania | |
PNC Capital Finance, LLC |
Delaware | |
National City Equity Partners, Inc. |
Delaware |
(1) | The names of the subsidiaries of the indicated entities are omitted because such subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on
|
Form S-3 (No. 333-185555, No. 333-185555-01, No. 333-136807, No. 333-156345, and No. 333-130744) |
|
Form S-4 (No. 333-155248 and No. 333-149076) |
|
Form S-8 (No. 33-28828, No. 33-54960, No. 333-53806, No. 333-110758, No. 333-25867, No. 333-156540, No. 333-18069, No. 333-65040, No. 333-136808, No. 333-172931, No. 333-156886, No. 333-177896, No. 333-74666, No. 333-172930, No. 333-134169, No. 333-139345, No. 333-143182, No. 333-177898, No. 333-156527, No. 333-149076, and No. 333-198461) |
of The PNC Financial Services Group, Inc. of our report dated February 27, 2015 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 27, 2015
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference of our report dated February 27, 2015, relating to the consolidated financial statements of BlackRock, Inc. appearing in Exhibit 99.1 to this Annual Report on Form 10-K of The PNC Financial Services Group, Inc. (the Corporation) for the year ended December 31, 2014, in the following Registration Statements of the Corporation:
| Form S-3 relating to the shelf registration of debt securities, purchase contracts, units, and warrants to be issued by PNC Funding Corp and debt securities, common stock, preferred stock, purchase contracts, units, warrants, guarantees, and depositary shares to be issued by the Corporation (Nos. 333-185555 and 333-185555-01) |
| Forms S-8 relating to the Corporations 1997 Long-Term Incentive Award Plan (formerly the Corporations 1987 Senior Executive Long-Term Incentive Award Plan, as amended, the 1992 Long-Term Incentive Award Plan ) (Nos. 33-28828, 33-54960, 333-53806, and 333-110758) |
| Forms S-3 relating to the Corporations Dividend Reinvestment and Stock Purchase Plan (Nos. 333-136807 and 333-156345) |
| Forms S-8 relating to the Corporations Employee Stock Purchase Plan (Nos. 333-25867 and 333-156540) |
| Forms S-8 relating to the Corporations Supplemental Incentive Savings Plan and the Corporation and Affiliates Deferred Compensation Plan (Nos. 333-18069, 333-65040, 333-136808, and 333-172931) |
| Form S-8 relating to the Corporations Supplemental Incentive Savings Plan and the Corporation and Affiliates Deferred Compensation Plan (No. 333-156886) |
| Form S-8 relating to the Corporations Deferred Compensation and Incentive Plan (Nos. 333-177896 and 333-198461) |
| Form S-8 relating to the Corporations 1996 Executive Incentive Award Plan (Nos. 333-74666 and 333-172930) |
| Form S-3 relating to the shelf registration of securities of the Corporation that may be offered for sale from time to time by shareholders of the Corporation who acquired those shares in connection with the Corporations acquisition of Harris Williams & Co. (No. 333-130744) |
| Forms S-8 relating to the Corporations 2006 Incentive Award Plan (Nos. 333-134169, 333-139345, 333-143182 and 333-177898) |
| Form S-4 relating to the Corporations acquisition of National City Corporation (No. 333-155248) |
| Form S-8 relating to various National City plans (No. 333-156527) |
| Form S-4 relating to the Corporations acquisition of Sterling Financial Corporation (No. 333-149076) |
| Form S-8 relating to the Sterling Financial Corporation 1996 Stock Incentive Plan (No. 333-149076) |
/s/ Deloitte and Touche LLP |
New York, New York |
February 27, 2015 |
EXHIBIT 24
POWER OF ATTORNEY
The PNC Financial Services Group, Inc.
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned Directors and/or Officers of The PNC Financial Services Group, Inc. (the Corporation), a Pennsylvania corporation, hereby names, constitutes and appoints Robert Q. Reilly, Gregory H. Kozich, Edward S. Rosenthal, Christi Davis, and Karen M. Barrett, and each of them, as such persons true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his or her name, place and stead, in any and all capacities, and to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission (the Commission), in connection with the filing with the Commission of an Annual Report on Form 10-K of the Corporation for the fiscal year ended December 31, 2014 (the 2014 Form 10-K); including specifically, but without limiting the generality of the foregoing, the power and authority to sign his or her name in his or her capacity as a member of the Board of Directors of the Corporation and/or as an Officer of the Corporation to the 2014 Form 10-K and such other form or forms as may be appropriate to be filed with the Commission as he or she may deem appropriate, together with all exhibits thereto, and to any and all amendments or supplements thereto and to any other documents filed with the Commission, as fully for all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all that said attorney-in-fact and agent, acting alone may lawfully do or cause to be done by virtue hereof.
This Power of Attorney will be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. The execution of this Power of Attorney is not intended to, and does not, revoke any prior powers of attorney other than the revocation, in accordance with applicable laws, of any power of attorney previously granted specifically in connection with the filing of the 2014 Form 10-K (and any and all related documents, including any amendments or supplements to the 2014 Form 10-K).
IN WITNESS WHEREOF, the following persons have duly signed this Power of Attorney in the capacities indicated as of this 13th day of February, 2015.
Name/Signature |
Capacity |
|||
/s/ William S. Demchak |
Chairman, Chief Executive Officer and President (Principal Executive Officer) and Director | |||
William S. Demchak | ||||
/s/ Robert Q. Reilly |
Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||
Robert Q. Reilly | ||||
/s/ Gregory H. Kozich |
Senior Vice President and Controller (Principal Accounting Officer) | |||
Gregory H. Kozich |
/s/ Richard O. Berndt |
Director | |||
Richard O. Berndt | ||||
/s/ Charles E. Bunch |
Director | |||
Charles E. Bunch | ||||
/s/ Paul W. Chellgren |
Director | |||
Paul W. Chellgren | ||||
/s/ Marjorie Rodgers Cheshire |
Director | |||
Marjorie Rodgers Cheshire | ||||
/s/ Andrew T. Feldstein |
Director | |||
Andrew T. Feldstein | ||||
/s/ Kay Coles James |
Director | |||
Kay Coles James | ||||
/s/ Richard B. Kelson |
Director | |||
Richard B. Kelson | ||||
/s/ Anthony A. Massaro |
Director | |||
Anthony A. Massaro | ||||
/s/ Jane G. Pepper |
Director | |||
Jane G. Pepper |
/s/ Donald J. Shepard |
Director | |||
Donald J. Shepard | ||||
/s/ Lorene K. Steffes |
Director | |||
Lorene K. Steffes | ||||
/s/ Dennis F. Strigl |
Director | |||
Dennis F. Strigl | ||||
/s/ Thomas J. Usher |
Director | |||
Thomas J. Usher | ||||
/s/ George H. Walls, Jr. |
Director | |||
George H. Walls, Jr. | ||||
/s/ Helge H. Wehmeier |
Director | |||
Helge H. Wehmeier |
EXHIBIT 31.1
In accordance with Exchange Act Rules 13a-14(f) and 15d-14(f), this certification does not relate to Interactive Data Files as defined in Rule 11 of Regulation S-T.
C ERTIFICATION OF C HIEF E XECUTIVE O FFICER
I, William S. Demchak, certify that:
1. | I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2014 of The PNC Financial Services Group, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 27, 2015
/s/ William S. Demchak |
William S. Demchak |
Chairman, President and Chief Executive Officer |
EXHIBIT 31.2
In accordance with Exchange Act Rules 13a-14(f) and 15d-14(f), this certification does not relate to Interactive Data Files as defined in Rule 11 of Regulation S-T.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Robert Q. Reilly, certify that:
1. | I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2014 of The PNC Financial Services Group, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 27, 2015
/s/ Robert Q. Reilly |
Robert Q. Reilly |
Executive Vice President and Chief Financial Officer |
EXHIBIT 32.1
In accordance with Exchange Act Rules 13a-14(f) and 15d-14(f), this certification does not relate to Interactive Data Files as defined in Rule 11 of Regulation S-T.
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the year ended December 31, 2014 of The PNC Financial Services Group, Inc. (Corporation) as filed with the Securities and Exchange Commission on the date hereof (Report), I, William S. Demchak, Chairman, President and Chief Executive Officer of the Corporation, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation for the dates and periods covered by the Report.
This certificate is being made for the exclusive purpose of compliance by the Chief Executive Officer of the Corporation with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be used by any person or for any reason other than as specifically required by law.
/s/ William S. Demchak |
William S. Demchak |
Chairman, President and Chief Executive Officer |
February 27, 2015
EXHIBIT 32.2
In accordance with Exchange Act Rules 13a-14(f) and 15d-14(f), this certification does not relate to Interactive Data Files as defined in Rule 11 of Regulation S-T.
CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the year ended December 31, 2014 of The PNC Financial Services Group, Inc. (Corporation) as filed with the Securities and Exchange Commission on the date hereof (Report), I, Robert Q. Reilly, Executive Vice President and Chief Financial Officer of the Corporation, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation for the dates and periods covered by the Report.
This certificate is being made for the exclusive purpose of compliance by the Chief Financial Officer of the Corporation with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be used by any person or for any reason other than as specifically required by law.
/s/ Robert Q. Reilly |
Robert Q. Reilly |
Executive Vice President and Chief Financial Officer |
February 27, 2015
EXHIBIT 99.1
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm |
F-2 | |||
Consolidated Statements of Financial Condition |
F-3 | |||
Consolidated Statements of Income |
F-4 | |||
Consolidated Statements of Comprehensive Income |
F-5 | |||
Consolidated Statements of Changes in Equity |
F-6 | |||
Consolidated Statements of Cash Flows |
F-9 | |||
Notes to the Consolidated Financial Statements |
F-10 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of BlackRock, Inc.:
We have audited the accompanying consolidated statements of financial condition of BlackRock, Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of BlackRock, Inc. and subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2015 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ Deloitte & Touche LLP
New York, New York
February 27, 2015
F-2
BlackRock, Inc.
Consolidated Statements of Financial Condition
(in millions, except shares and per share data) |
December 31,
2014 |
December 31,
2013 |
||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 5,723 | $ | 4,390 | ||||
Accounts receivable |
2,120 | 2,247 | ||||||
Investments |
1,921 | 2,151 | ||||||
Assets of consolidated variable interest entities: |
||||||||
Cash and cash equivalents |
278 | 161 | ||||||
Bank loans, other investments and other assets |
3,352 | 2,325 | ||||||
Separate account assets |
161,287 | 155,113 | ||||||
Separate account collateral held under securities lending agreements |
33,654 | 21,788 | ||||||
Property and equipment (net of accumulated depreciation of $587 and $611 at December 31,
|
467 | 525 | ||||||
Intangible assets (net of accumulated amortization of $1,040 and $1,057 at December 31,
|
17,344 | 17,501 | ||||||
Goodwill |
12,961 | 12,980 | ||||||
Other assets |
701 | 692 | ||||||
Total assets |
$ | 239,808 | $ | 219,873 | ||||
Liabilities |
||||||||
Accrued compensation and benefits |
$ | 1,865 | $ | 1,747 | ||||
Accounts payable and accrued liabilities |
1,035 | 1,084 | ||||||
Liabilities of consolidated variable interest entities: |
||||||||
Borrowings |
3,389 | 2,369 | ||||||
Other liabilities |
245 | 74 | ||||||
Borrowings |
4,938 | 4,939 | ||||||
Separate account liabilities |
161,287 | 155,113 | ||||||
Separate account collateral liabilities under securities lending agreements |
33,654 | 21,788 | ||||||
Deferred income tax liabilities |
4,989 | 5,085 | ||||||
Other liabilities |
886 | 1,004 | ||||||
Total liabilities |
212,288 | 193,203 | ||||||
Commitments and contingencies (Note 13) |
||||||||
Temporary equity |
||||||||
Redeemable noncontrolling interests |
35 | 54 | ||||||
Permanent Equity |
||||||||
BlackRock, Inc. stockholders equity |
||||||||
Common stock, $ 0.01 par value; |
2 | 2 | ||||||
Shares authorized: 500,000,000 at December 31, 2014 and 2013; Shares issued: 171,252,185 at December 31, 2014 and 2013; Shares outstanding: 164,786,788 and 166,589,688 at December 31, 2014 and 2013, respectively; |
||||||||
Series B nonvoting participating preferred stock, $0.01 par value; |
| | ||||||
Shares authorized: 150,000,000 at December 31, 2014 and 2013; Shares issued and outstanding: 823,188 at December 31, 2014 and 2013; |
||||||||
Series C nonvoting participating preferred stock, $0.01 par value; |
| | ||||||
Shares authorized: 6,000,000 at December 31, 2014 and 2013; Shares issued and outstanding: 1,311,887 at December 31, 2014 and 2013 |
||||||||
Additional paid-in capital |
19,386 | 19,473 | ||||||
Retained earnings |
10,164 | 8,208 | ||||||
Appropriated retained earnings |
(19 | ) | 22 | |||||
Accumulated other comprehensive loss |
(273 | ) | (35 | ) | ||||
Treasury stock, common, at cost (6,465,397 and 4,662,497 shares held at December 31, 2014 and 2013, respectively) |
(1,894 | ) | (1,210 | ) | ||||
Total BlackRock, Inc. stockholders equity |
27,366 | 26,460 | ||||||
Nonredeemable noncontrolling interests |
104 | 135 | ||||||
Nonredeemable noncontrolling interests of consolidated variable interest entities |
15 | 21 | ||||||
Total permanent equity |
27,485 | 26,616 | ||||||
Total liabilities, temporary equity and permanent equity |
$ | 239,808 | $ | 219,873 |
See accompanying notes to consolidated financial statements.
F-3
BlackRock, Inc.
Consolidated Statements of Income
Year ended December 31, | ||||||||||||
(in millions, except shares and per share data) | 2014 | 2013 | 2012 | |||||||||
Revenue |
||||||||||||
Investment advisory, administration fees and securities lending revenue |
||||||||||||
Related parties |
$ | 6,738 | $ | 5,991 | $ | 5,292 | ||||||
Other third parties |
2,851 | 2,748 | 2,780 | |||||||||
Total investment advisory, administration fees and securities lending revenue |
9,589 | 8,739 | 8,072 | |||||||||
Investment advisory performance fees |
550 | 561 | 463 | |||||||||
BlackRock Solutions and advisory |
635 | 577 | 518 | |||||||||
Distribution fees |
70 | 73 | 71 | |||||||||
Other revenue |
237 | 230 | 213 | |||||||||
Total revenue |
11,081 | 10,180 | 9,337 | |||||||||
Expense |
||||||||||||
Employee compensation and benefits |
3,829 | 3,560 | 3,287 | |||||||||
Distribution and servicing costs |
364 | 353 | 364 | |||||||||
Amortization of deferred sales commissions |
56 | 52 | 55 | |||||||||
Direct fund expenses |
748 | 657 | 591 | |||||||||
General and administration |
1,453 | 1,540 | 1,359 | |||||||||
Amortization of intangible assets |
157 | 161 | 157 | |||||||||
Total expense |
6,607 | 6,323 | 5,813 | |||||||||
Operating income |
4,474 | 3,857 | 3,524 | |||||||||
Nonoperating income (expense) |
||||||||||||
Net gain (loss) on investments |
165 | 305 | 163 | |||||||||
Net gain (loss) on consolidated variable interest entities |
(41 | ) | | (38 | ) | |||||||
Interest and dividend income |
29 | 22 | 36 | |||||||||
Interest expense |
(232 | ) | (211 | ) | (215 | ) | ||||||
Total nonoperating income (expense) |
(79 | ) | 116 | (54 | ) | |||||||
Income before income taxes |
4,395 | 3,973 | 3,470 | |||||||||
Income tax expense |
1,131 | 1,022 | 1,030 | |||||||||
Net income |
3,264 | 2,951 | 2,440 | |||||||||
Less: |
||||||||||||
Net income (loss) attributable to redeemable noncontrolling interests |
2 | (1 | ) | 9 | ||||||||
Net income (loss) attributable to nonredeemable noncontrolling interests |
(32 | ) | 20 | (27 | ) | |||||||
Net income attributable to BlackRock, Inc. |
$ | 3,294 | $ | 2,932 | $ | 2,458 | ||||||
Earnings per share attributable to BlackRock, Inc. common stockholders: |
||||||||||||
Basic |
$ | 19.58 | $ | 17.23 | $ | 14.03 | ||||||
Diluted |
$ | 19.25 | $ | 16.87 | $ | 13.79 | ||||||
Cash dividends declared and paid per share |
$ | 7.72 | $ | 6.72 | $ | 6.00 | ||||||
Weighted-average common shares outstanding: |
||||||||||||
Basic |
168,225,154 | 170,185,870 | 174,961,018 | |||||||||
Diluted |
171,112,261 | 173,828,902 | 178,017,679 |
See accompanying notes to consolidated financial statements.
F-4
BlackRock, Inc.
Consolidated Statements of Comprehensive Income
Year ended December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Net income |
$ | 3,264 | $ | 2,951 | $ | 2,440 | ||||||
Other comprehensive income: |
||||||||||||
Change in net unrealized gains (losses) from available-for-sale investments, net of tax: |
||||||||||||
Unrealized holding gains (losses), net of tax (1) |
3 | 4 | 26 | |||||||||
Less: reclassification adjustment included in net income (1) |
8 | 13 | 6 | |||||||||
Net change from available-for-sale investments, net of tax |
(5 | ) | (9 | ) | 20 | |||||||
Benefit plans, net (1) |
(2 | ) | 10 | (5 | ) | |||||||
Foreign currency translation adjustments |
(231 | ) | 23 | 53 | ||||||||
Other comprehensive income (loss) |
(238 | ) | 24 | 68 | ||||||||
Comprehensive income |
3,026 | 2,975 | 2,508 | |||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests |
(30 | ) | 19 | (18 | ) | |||||||
Comprehensive income attributable to BlackRock, Inc. |
$ | 3,056 | $ | 2,956 | $ | 2,526 |
(1) | The tax benefit (expense) was not material in 2014, 2013 and 2012. |
See accompanying notes to consolidated financial statements.
F-5
BlackRock, Inc.
Consolidated Statements of Changes in Equity
(in millions) |
Addi
tional Paid-in Capital (1) |
Retained
Earnings |
Appro
priated Retained Earnings |
Accum
ulated Other Compre hensive Income (Loss) |
Common
Shares Held in Escrow |
Treasury
Stock Common |
Total
Stock holders Equity |
Non
redeemable Non controlling Interests |
Non
redeemable Non controlling Interests of Conso lidated VIEs |
Total
Permanent Equity |
Redeemable
Non controlling Interests / Temporary Equity (2) |
|||||||||||||||||||||||||||||||||
December 31, 2011 |
$ | 20,276 | $ | 5,046 | $ | 72 | $ | (127 | ) | $ | (1 | ) | $ | (218 | ) | $ | 25,048 | $ | 184 | $ | 38 | $ | 25,270 | $ | 92 | |||||||||||||||||||
Net income |
| 2,458 | | | | | 2,458 | 11 | (38 | ) | 2,431 | 9 | ||||||||||||||||||||||||||||||||
Allocation of losses of consolidated collateralized loan obligations |
| | (43 | ) | | | | (43 | ) | | 43 | | | |||||||||||||||||||||||||||||||
Release of common stock from escrow |
(1 | ) | | | | 1 | | | | | | | ||||||||||||||||||||||||||||||||
Dividends paid |
| (1,060 | ) | | | | | (1,060 | ) | | | (1,060 | ) | | ||||||||||||||||||||||||||||||
Stock-based compensation |
451 | | | | | | 451 | | | 451 | | |||||||||||||||||||||||||||||||||
Merrill Lynch cash capital contribution |
7 | | | | | | 7 | | | 7 | | |||||||||||||||||||||||||||||||||
Issuance of common shares related to employee stock transactions |
(376 | ) | | | | | 432 | 56 | | | 56 | | ||||||||||||||||||||||||||||||||
Employee tax withholdings related to employee stock transactions |
| | | | | (146 | ) | (146 | ) | | | (146 | ) | | ||||||||||||||||||||||||||||||
Shares repurchased |
(1,000 | ) | | | | | (500 | ) | (1,500 | ) | | | (1,500 | ) | | |||||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation |
64 | | | | | | 64 | | | 64 | | |||||||||||||||||||||||||||||||||
Subscriptions (redemptions/ distributions) noncontrolling interest holders |
| | | | | | | (33 | ) | (10 | ) | (43 | ) | 343 | ||||||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds |
| | | | | | | (7 | ) | (6 | ) | (13 | ) | (412 | ) | |||||||||||||||||||||||||||||
Other comprehensive income (loss) |
| | | 68 | | | 68 | | | 68 | | |||||||||||||||||||||||||||||||||
December 31, 2012 |
$ | 19,421 | $ | 6,444 | $ | 29 | $ | (59 | ) | $ | | $ | (432 | ) | $ | 25,403 | $ | 155 | $ | 27 | $ | 25,585 | $ | 32 |
(1) | Amount includes $2 million and $1 million of common stock at December 31, 2012 and 2011, respectively. |
(2) | Amounts include $89 million of redemptions and $89 million of net consolidations related to consolidated variable interest entities (VIEs). |
See accompanying notes to consolidated financial statements.
F-6
BlackRock, Inc.
Consolidated Statements of Changes in Equity
(in millions) |
Addi
tional Paid-in Capital (1) |
Retained
Earnings |
Appro
priated Retained Earnings |
Accu
mulated Other Compre hensive Income (Loss) |
Treasury
Stock Common |
Total
BlackRock Stock holders Equity |
Non
redeemable Non controlling Interests |
Non
redeemable Non controlling Interests of Consolidated VIEs |
Total
Permanent Equity |
Redeemable
No ncontrolling Interests / Temporary Equity |
||||||||||||||||||||||||||||||
December 31, 2012 |
$ | 19,421 | $ | 6,444 | $ | 29 | $ | (59 | ) | $ | (432 | ) | $ | 25,403 | $ | 155 | $ | 27 | $ | 25,585 | $ | 32 | ||||||||||||||||||
Net income |
| 2,932 | | | | 2,932 | 20 | | 2,952 | (1 | ) | |||||||||||||||||||||||||||||
Consolidation of a collateralized loan obligation |
| | (4 | ) | | | (4 | ) | | | (4 | ) | | |||||||||||||||||||||||||||
Allocation of gains (losses) of consolidated collateralized loan obligations |
| | (3 | ) | | | (3 | ) | | 3 | | | ||||||||||||||||||||||||||||
Dividends paid |
| (1,168 | ) | | | | (1,168 | ) | | | (1,168 | ) | | |||||||||||||||||||||||||||
Stock-based compensation |
447 | | | | 1 | 448 | | | 448 | | ||||||||||||||||||||||||||||||
Issuance of common shares related to employee stock transactions |
(429 | ) | | | | 464 | 35 | | | 35 | | |||||||||||||||||||||||||||||
Employee tax withholdings related to employee stock transactions |
| | | | (243 | ) | (243 | ) | | | (243 | ) | | |||||||||||||||||||||||||||
Shares repurchased |
| | | | (1,000 | ) | (1,000 | ) | | | (1,000 | ) | | |||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation |
36 | | | | | 36 | | | 36 | | ||||||||||||||||||||||||||||||
Subscriptions (redemptions/distributions) noncontrolling interest holders |
| | | | | | (59 | ) | 125 | 66 | 137 | |||||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds |
| | | | | | 19 | (134 | ) | (115 | ) | (114 | ) | |||||||||||||||||||||||||||
Other comprehensive income (loss) |
| | | 24 | | 24 | | | 24 | | ||||||||||||||||||||||||||||||
December 31, 2013 |
$ | 19,475 | $ | 8,208 | $ | 22 | $ | (35) | $ | (1,210) | $ | 26,460 | $ | 135 | $ | 21 | $ | 26,616 | $ | 54 |
(1) | Amounts include $2 million of common stock at both December 31, 2013 and 2012. |
See accompanying notes to consolidated financial statements.
F-7
BlackRock, Inc.
Consolidated Statements of Changes in Equity
(in millions) |
Additional Paid-in Capital (1) |
Retained Earnings |
Appro
Retained Earnings |
Accumulated Other
Compre
Income (Loss) |
Treasury Stock Common |
Total BlackRock
Stock
Equity |
Non
Non
Interests |
Non
redeemable Non controlling Interests of Consolidated VIEs |
Total
Permanent Equity |
Redeemable
Non controlling Interests / Temporary Equity (2) |
||||||||||||||||||||||||||||||
December 31, 2013 |
$ | 19,475 | $ | 8,208 | $ | 22 | $ | (35 | ) | $ | (1,210 | ) | $ | 26,460 | $ | 135 | $ | 21 | $ | 26,616 | $ | 54 | ||||||||||||||||||
Net income |
| 3,294 | | | | 3,294 | 9 | (41 | ) | 3,262 | 2 | |||||||||||||||||||||||||||||
Allocation of gains (losses) of consolidated collateralized loan obligations |
| | (41 | ) | | | (41 | ) | | 41 | | | ||||||||||||||||||||||||||||
Dividends paid |
| (1,338 | ) | | | | (1,338 | ) | | | (1,338 | ) | | |||||||||||||||||||||||||||
Stock-based compensation |
453 | | | | | 453 | | | 453 | | ||||||||||||||||||||||||||||||
Issuance of common shares related to employee stock transactions |
(646 | ) | | | | 660 | 14 | | | 14 | | |||||||||||||||||||||||||||||
Employee tax withholdings related to employee stock transactions |
| | | | (344 | ) | (344 | ) | | | (344 | ) | | |||||||||||||||||||||||||||
Shares repurchased |
| | | | (1,000 | ) | (1,000 | ) | | | (1,000 | ) | | |||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation |
106 | | | | | 106 | | | 106 | | ||||||||||||||||||||||||||||||
Subscriptions (redemptions/distributions) noncontrolling interest holders |
| | | | | | (40 | ) | (6 | ) | (46 | ) | 248 | |||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds |
| | | | | | | | | (269 | ) | |||||||||||||||||||||||||||||
Other comprehensive income (loss) |
| | | (238 | ) | | (238 | ) | | | (238 | ) | | |||||||||||||||||||||||||||
December 31, 2014 |
$ | 19,388 | $ | 10,164 | $ | (19 | ) | $ | (273 | ) | $ | (1,894 | ) | $ | 27,366 | $ | 104 | $ | 15 | $ | 27,485 | $ | 35 |
(1) | Amounts include $2 million of common stock at both December 31, 2014 and 2013. |
(2) | Amounts include $75 million of redemptions and $75 million of net consolidations related to consolidated VIEs. |
See accompanying notes to consolidated financial statements.
F-8
BlackRock, Inc.
Consolidated Statements of Cash Flows
(in millions) | Year ended December 31, | |||||||||||
2014 | 2013 | 2012 | ||||||||||
Cash flows from operating activities |
||||||||||||
Net income |
$ | 3,264 | $ | 2,951 | $ | 2,440 | ||||||
Adjustments to reconcile net income to cash flows from operating activities: |
||||||||||||
Depreciation and amortization |
278 | 291 | 295 | |||||||||
Amortization of deferred sales commissions |
56 | 52 | 55 | |||||||||
Stock-based compensation |
453 | 448 | 451 | |||||||||
Deferred income tax expense (benefit) |
(104 | ) | (193 | ) | (61 | ) | ||||||
Net (gains) losses on nontrading investments |
(37 | ) | (73 | ) | (43 | ) | ||||||
Purchases of investments within consolidated sponsored investment funds |
(160 | ) | (195 | ) | (108 | ) | ||||||
Proceeds from sales and maturities of investments within consolidated sponsored investment funds |
137 | 145 | 96 | |||||||||
Gain related to PennyMac initial public offering |
| (39 | ) | | ||||||||
Gain related to the charitable contribution |
| (80 | ) | | ||||||||
Charitable contribution |
| 124 | | |||||||||
Assets and liabilities of consolidated VIEs: |
||||||||||||
Change in cash and cash equivalents |
168 | 143 | (24 | ) | ||||||||
Net (gains) losses within consolidated VIEs |
41 | | 38 | |||||||||
Net (purchases) proceeds within consolidated VIEs |
(599 | ) | 142 | (203 | ) | |||||||
(Earnings) losses from equity method investees |
(158 | ) | (158 | ) | (175 | ) | ||||||
Distributions of earnings from equity method investees |
57 | 80 | 42 | |||||||||
Other adjustments |
5 | 10 | (4 | ) | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
78 | 14 | (292 | ) | ||||||||
Investments, trading |
(416 | ) | (218 | ) | (664 | ) | ||||||
Other assets |
(1 | ) | (92 | ) | (10 | ) | ||||||
Accrued compensation and benefits |
101 | 203 | 138 | |||||||||
Accounts payable and accrued liabilities |
(69 | ) | 7 | 114 | ||||||||
Other liabilities |
(13 | ) | 80 | 155 | ||||||||
Cash flows from operating activities |
3,081 | 3,642 | 2,240 | |||||||||
Cash flows from investing activities |
||||||||||||
Purchases of investments |
(369 | ) | (412 | ) | (402 | ) | ||||||
Proceeds from sales and maturities of investments |
654 | 286 | 695 | |||||||||
Distributions of capital from equity method investees |
143 | 83 | 73 | |||||||||
Net consolidations (deconsolidations) of sponsored investment funds |
(123 | ) | (48 | ) | (215 | ) | ||||||
Acquisitions, net of cash acquired |
| (298 | ) | (267 | ) | |||||||
Purchases of property and equipment |
(66 | ) | (94 | ) | (150 | ) | ||||||
Cash flows from investing activities |
239 | (483 | ) | (266 | ) | |||||||
Cash flows from financing activities |
||||||||||||
Repayments of short-term borrowings |
| (100 | ) | | ||||||||
Repayments of long-term borrowings |
(1,000 | ) | (750 | ) | (500 | ) | ||||||
Proceeds from long-term borrowings |
997 | | 1,495 | |||||||||
Cash dividends paid |
(1,338 | ) | (1,168 | ) | (1,060 | ) | ||||||
Proceeds from stock options exercised |
4 | 28 | 47 | |||||||||
Repurchases of common stock |
(1,344 | ) | (1,243 | ) | (1,645 | ) | ||||||
Net proceeds from (repayments of) borrowings by consolidated VIEs |
512 | (410 | ) | 331 | ||||||||
Net (redemptions/distributions paid)/subscriptions received from noncontrolling interest holders |
202 | 203 | 300 | |||||||||
Excess tax benefit from stock-based compensation |
106 | 41 | 74 | |||||||||
Other financing activities |
6 | 7 | 14 | |||||||||
Cash flows from financing activities |
(1,855 | ) | (3,392 | ) | (944 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
(132 | ) | 17 | 70 | ||||||||
Net increase (decrease) in cash and cash equivalents |
1,333 | (216 | ) | 1,100 | ||||||||
Cash and cash equivalents, beginning of year |
4,390 | 4,606 | 3,506 | |||||||||
Cash and cash equivalents, end of year |
$ | 5,723 | $ | 4,390 | $ | 4,606 | ||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid for: |
||||||||||||
Interest |
$ | 216 | $ | 202 | $ | 201 | ||||||
Interest on borrowings of consolidated VIEs |
$ | 142 | $ | 102 | $ | 75 | ||||||
Income taxes (net of refunds) |
$ | 1,227 | $ | 1,064 | $ | 976 | ||||||
Supplemental schedule of noncash investing and financing transactions: |
||||||||||||
Issuance of common stock |
$ | 646 | $ | 429 | $ | 378 | ||||||
Increase (decrease) in noncontrolling interests due to net consolidation (deconsolidation) of sponsored investment funds |
$ | (269 | ) | $ | (229 | ) | $ | (425 | ) | |||
Increase (decrease) in borrowings due to consolidation of VIEs |
$ | 585 | $ | 363 | $ | 406 |
See accompanying notes to consolidated financial statements.
F-9
BlackRock, Inc.
Notes to the Consolidated Financial Statements
1. Introduction and Basis of Presentation
Business . BlackRock, Inc. (together, with its subsidiaries, unless the context otherwise indicates, BlackRock or the Company) is a leading publicly traded investment management firm providing a broad range of investment and risk management services to institutional and retail clients worldwide.
BlackRocks diverse platform of active (alpha) and index (beta) investment strategies across asset classes enables the Company to tailor investment outcomes and asset allocation solutions for clients. Product offerings include single- and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. Products are offered directly and through intermediaries in a variety of vehicles, including open-end and closed-end mutual funds, iShares ® exchange-traded funds (ETFs), separate accounts, collective investment funds and other pooled investment vehicles. BlackRock also offers the BlackRock Solutions ® investment and risk management technology platform, Aladdin ® , risk analytics and advisory services and solutions to a broad base of institutional investors.
At December 31, 2014, The PNC Financial Services Group, Inc. (PNC) held 21.0% of the Companys voting common stock and 22.0% of the Companys capital stock, which includes outstanding common and nonvoting preferred stock.
Basis of Presentation. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and include the accounts of the Company and its controlled subsidiaries. Noncontrolling interests on the consolidated statements of financial condition represents the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. Accounts and transactions between consolidated entities have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. Actual results could differ from those estimates.
Certain items previously reported have been reclassified to conform to the current year presentation.
2. Significant Accounting Policies
Cash and Cash Equivalents . Cash and cash equivalents primarily consists of cash, money market funds and short-term, highly liquid investments with original maturities of three months or less in which the Company is exposed to market and credit risk. Cash and cash equivalent balances that are legally restricted from use by the Company are recorded in other assets on the consolidated statements of financial condition. Cash balances maintained by consolidated sponsored investment funds are not considered legally restricted and are included in cash and
cash equivalents on the consolidated statements of financial condition. Cash balances maintained by consolidated variable interest entities (VIEs) are included in assets of consolidated variable interest entities on the consolidated statements of financial condition.
Investments. Investments in Debt and Marketable Equity Securities. BlackRock classifies debt and marketable equity investments as trading, available-for-sale, or held-to-maturity based on the Companys intent to sell the security or, for a debt security, the Companys intent and ability to hold the debt security to maturity.
Trading securities are those investments that are purchased principally for the purpose of selling them in the near term. Trading securities are carried at fair value on the consolidated statements of financial condition with changes in fair value recorded in nonoperating income (expense) on the consolidated statements of income in the period of the change.
Held-to-maturity debt securities are purchased with the positive intent and ability to be held to maturity and are recorded at amortized cost on the consolidated statements of financial condition.
Available-for-sale securities are those securities that are not classified as trading or held-to-maturity. Available-for-sale securities are carried at fair value on the consolidated statements of financial condition with changes in fair value recorded in the accumulated other comprehensive income (loss) component of stockholders equity in the period of the change. Upon the disposition of an available-for-sale security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income (loss) to nonoperating income (expense) on the consolidated statements of income.
Equity Method . For equity investments where BlackRock does not control the investee, and where it is not the primary beneficiary (PB) of a VIE, but can exert significant influence over the financial and operating policies of the investee, the Company follows the equity method of accounting. BlackRocks share of the investees underlying net income or loss is recorded as net gain (loss) on investments within nonoperating income (expense) and as other revenue for certain strategic investments since such companies are considered to be an extension of BlackRocks core business. BlackRocks share of net income of the investee is recorded based upon the most current information available at the time, which may precede the date of the consolidated statement of financial condition. Distributions received from the investment reduce the Companys carrying value of the investee and the cost basis if deemed to be a return of capital.
Cost Method . For nonmarketable equity investments where BlackRock neither controls nor has significant influence over the investee, the investments are accounted for using the cost method of accounting. Dividends received from the investment are recorded as dividend income within nonoperating income (expense).
Impairments of Investments . Management periodically assesses equity method, available-for-sale, held-to-maturity and cost investments for impairment. If circumstances indicate that impairment may exist, investments are evaluated using market values, where available, or the expected future cash flows of the
F-10
investment. If the undiscounted expected future cash flows are lower than the Companys carrying value of the investment and the Company determines an impairment exists, an impairment charge is recorded on the consolidated statement of income.
When the fair value of available-for-sale securities is lower than cost, the Company evaluates the securities to determine whether the impairment is considered other-than-temporary.
In making this determination for equity securities, the Company considers, among other factors, the length of time the security has been in a loss position, the extent to which the securitys market value is less than cost, the financial condition and near-term prospects of the securitys issuer and the Companys ability and intent to hold the security for a length of time sufficient to allow for recovery of such unrealized losses. If the impairment is considered other-than-temporary, an impairment charge is recorded in nonoperating income (expense) on the consolidated statements of income.
In making this determination for debt securities, the Company considers whether: (1) it has the intent to sell the security; (2) it is more likely than not that it will be required to sell the security before recovery; or (3) it expects to recover the entire amortized cost basis of the security. If the Company does not intend to sell a security and it is not more likely than not that it will be required to sell the security but the security has suffered a credit loss, the credit loss will be bifurcated from the total impairment and recorded in earnings with the remaining portion recorded in accumulated other comprehensive income.
Consolidation. For investment products in which BlackRocks voting interest is less than 50%, an analysis is performed to determine if the investment product is a VIE or a voting rights entity.
Consolidation of Variable Interest Entities . Certain investment products for which a controlling financial interest is achieved through arrangements that do not involve or are not directly linked to voting interests are deemed VIEs. BlackRock reviews factors, including whether the entity has equity that is sufficient to permit the entity to finance its activities without additional subordinated support from other parties and the rights and obligations of the equity holders to receive expected residual returns or absorb expected losses, to determine if the investment product is a VIE. BlackRock continuously evaluates such factors as facts and circumstances change. BlackRock is required to consolidate a VIE when it is deemed to be the PB.
The Company uses two methods for determining whether it is the PB of VIEs in accordance with current accounting guidance depending on the nature and characteristics of the VIE. For collateralized loan obligations (CLOs), the Company is deemed to be PB if it has the power to direct activities of the entity that most significantly impact the entitys economic performance and has the obligation to absorb losses or the right to receive benefits that potentially could be significant to the VIE. For certain sponsored investment funds, including money markets, the Company is deemed to be the PB, if it absorbs the majority of the entitys expected losses, receives a majority of the entitys expected residual returns, or both.
Consolidation of Voting Rights Entities . To the extent that BlackRock can exert control over the financial and operating policies of the investee, which generally exists if there is a 50% or greater voting interest or if partners or members of
certain products do not have substantive rights, BlackRock consolidates the investee.
The Company, as general partner or managing member of certain sponsored investment funds, generally is presumed to control funds that are limited partnerships or limited liability companies. The Company reviews such investment vehicles to determine if such a presumption can be overcome by determining whether other nonaffiliated partners or members of the limited partnership or limited liability company have the substantive ability to dissolve (liquidate) the investment vehicle, or to otherwise remove BlackRock as the general partner or managing member without cause based on an unaffiliated simple majority vote, or have other substantive participating rights. If the presumption of control is not overcome, BlackRock will consolidate the investment vehicle.
Retention of Specialized Accounting Principles. Upon consolidation of certain sponsored investment funds, the Company retains the specialized accounting principles of the underlying funds. All of the underlying investments held by such consolidated sponsored investment funds are carried at fair value with corresponding changes in the investments fair values reflected in nonoperating income (expense) on the consolidated statements of income. When the Company no longer controls these funds due to reduced ownership percentage or other reasons, the funds are deconsolidated and accounted for under another accounting method if the Company still maintains an investment.
Separate Account Assets and Liabilities . Separate account assets are maintained by BlackRock Life Limited, a wholly owned subsidiary of the Company, which is a registered life insurance company in the United Kingdom, and represent segregated assets held for purposes of funding individual and group pension contracts. The life insurance company does not underwrite any insurance contracts that involve any insurance risk transfer from the insured to the life insurance company. The separate account assets primarily include equity securities, debt securities, money market funds and derivatives. The separate account assets are not subject to general claims of the creditors of BlackRock. These separate account assets and the related equal and offsetting liabilities are recorded as separate account assets and separate account liabilities on the consolidated statements of financial condition .
The net investment income attributable to separate account assets supporting individual and group pension contracts accrues directly to the contract owner and is not reported on the consolidated statements of income. While BlackRock has no economic interest in these separate account assets and liabilities, BlackRock earns policy administration and management fees associated with these products, which are included in investment advisory, administration fees and securities lending revenue on the consolidated statements of income.
Separate Account Collateral Assets Held and Liabilities Under Securities Lending Agreements. The Company facilitates securities lending arrangements whereby securities held by separate accounts maintained by BlackRock Life Limited are lent to third parties under global master securities lending agreements. In exchange, the Company receives collateral with minimum values generally ranging from approximately 102% to 112% of the value of the securities lent in order to reduce counterparty risk. The required collateral value is calculated on a daily basis. The
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global master securities lending agreements provide the Company the right to request additional collateral or, in the event of borrower default, the right to liquidate collateral. Under the Companys securities lending arrangements, the Company can resell or repledge the collateral and the borrower can resell or repledge the loaned securities. The securities lending transactions entered into by the Company are accompanied by an agreement that entitles the Company to request the borrower to return the securities at any time; therefore, these transactions are not reported as sales .
As a result of the Companys ability to resell or repledge the collateral, the Company records on the consolidated statements of financial condition the cash and noncash collateral received under these BlackRock Life Limited securities lending arrangements as its own asset in addition to an equal and offsetting collateral liability for the obligation to return the collateral. During 2014 and 2013, the Company had not resold or repledged any of the collateral received under these arrangements. At December 31, 2014 and 2013, the fair value of loaned securities held by separate accounts was approximately $30.6 billion and $19.7 billion, respectively, and the fair value of the collateral held under these securities lending agreements was approximately $33.7 billion and $21.8 billion, respectively.
Property and Equipment . Property and equipment are recorded at cost less accumulated depreciation. Depreciation is generally determined by cost less any estimated residual value using the straight-line method over the estimated useful lives of the various classes of property and equipment. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life or the remaining lease term.
BlackRock develops a variety of risk management, investment analytic and investment system services for internal use, utilizing proprietary software that is hosted and maintained by BlackRock. The Company capitalizes certain costs incurred in connection with developing or obtaining software for internal use. Capitalized software costs are included within property and equipment on the consolidated statements of financial condition and are amortized, beginning when the software project is put into production, over the estimated useful life of the software of approximately three years.
Goodwill and Intangible Assets . Goodwill represents the cost of a business acquisition in excess of the fair value of the net assets acquired. In its assessment of goodwill for impairment, the Company considers such factors as the book value and market capitalization of the Company. On a quarterly basis, the Company considers if triggering events have occurred that may indicate a potential goodwill impairment. If a triggering event has occurred, the Company performs assessments, which may include reviews of significant valuation assumptions, to determine if goodwill may be impaired. The Company performs an impairment assessment of its goodwill at least annually as of July 31 st .
Intangible assets are comprised of indefinite-lived intangible assets and finite-lived intangible assets acquired in a business acquisition. The value of contracts to manage assets in proprietary open-end funds and collective trust funds and certain other commingled products without a specified termination date is generally classified as indefinite-lived intangible assets. The assignment of indefinite lives to such contracts primarily is based upon the
following: (i) the assumption that there is no foreseeable limit on the contract period to manage these products; (ii) the Company expects to, and has the ability to, continue to operate these products indefinitely; (iii) the products have multiple investors and are not reliant on a single investor or small group of investors for their continued operation; (iv) current competitive factors and economic conditions do not indicate a finite life; and (v) there is a high likelihood of continued renewal based on historical experience. In addition, trade names/trademarks are considered indefinite-lived intangible assets when they are expected to generate cash flows indefinitely.
Indefinite-lived intangible assets and goodwill are not amortized. Finite-lived management contracts, which relate to acquired separate accounts and funds with a specified termination date, are amortized over their remaining useful lives.
The Company performs assessments to determine if any intangible assets are potentially impaired and whether the indefinite-lived and finite-lived classifications are still appropriate. The carrying value of finite-lived management contracts and their remaining useful lives are reviewed at least annually to determine if circumstances exist which may indicate a potential impairment. The Company performs such impairment assessments of its intangible assets including indefinite-lived management contracts and trade names/trademarks, at least annually, as of July 31 st . In evaluating whether it is more likely than not that the fair value of indefinite-lived intangibles is less than its carrying value, BlackRock assesses various significant qualitative factors, including assets under management (AUM), revenue basis points, projected AUM growth rates, operating margins, tax rates and discount rates. In addition, the Company considers other factors, including (i) macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets; (ii) industry and market considerations such as a deterioration in the environment in which the entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics, a change in the market for an entitys services, or regulatory, legal or political developments; and (iii) entity-specific events, such as a change in management or key personnel, overall financial performance and litigation that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.
If potential impairment circumstances are considered to exist, the Company will perform an impairment test using an undiscounted cash flow analysis. Actual results could differ from these cash flow estimates, which could materially impact the impairment conclusion. If the asset is determined to be impaired, the difference between the carrying value of the asset and its current fair value would be recognized as an expense in the period in which the impairment occurs.
Noncontrolling Interests. The Company reports noncontrolling interests as equity, separate from the parents equity, on the consolidated statements of financial condition. In addition, the Companys consolidated net income on the consolidated statements of income includes the income (loss) attributable to noncontrolling interest holders of the Companys consolidated sponsored investment funds and CLOs. Income (loss) attributable to noncontrolling interests is not adjusted for income taxes for
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consolidated sponsored investment funds and CLOs that are treated as pass-through entities for tax purposes.
Classification and Measurement of Redeemable Securities. The Company includes redeemable noncontrolling interests related to certain consolidated sponsored investment funds in temporary equity on the consolidated statements of financial condition.
Appropriated Retained Earnings . Upon the consolidation of CLOs, BlackRock records an adjustment to appropriated retained earnings on the consolidated statements of financial condition equal to the difference between the fair value of the CLOs assets and the fair value of their liabilities. Such amounts are recorded as appropriated retained earnings as the CLO noteholders ultimately will receive the benefits or absorb the losses associated with the CLOs assets and liabilities. The net change in the fair value of the CLOs assets and liabilities is recorded as net income (loss) attributable to nonredeemable noncontrolling interests and as a change to appropriated retained earnings.
Treasury Stock . The Company records common stock purchased for treasury at cost. At the date of subsequent reissuance, the treasury stock account is reduced by the cost of such stock using the average cost method.
Revenue Recognition
Investment Advisory, Administration Fees and Securities Lending Revenue . Investment advisory and administration fees are recognized as the services are performed. Such fees are primarily based on pre-determined percentages of the market value of AUM or committed capital. Investment advisory and administration fees are affected by changes in AUM, including market appreciation or depreciation, foreign exchange translation and net inflows or outflows. Investment advisory and administration fees for investment funds are shown net of fees waived pursuant to contractual expense limitations of the funds or voluntary waivers.
The Company contracts with third parties and related parties for various mutual fund distribution and shareholder servicing to be performed on behalf of certain funds the Company manages. Such arrangements generally are priced as a portion of the management fee paid by the fund. In certain cases, the fund (primarily international funds) takes on the primary responsibility for payment for services such that the Company bears no credit risk to the third party. The Company accounts for such retrocession arrangements in accordance with Accounting Standards Codification (ASC) 605-45, Revenue Recognition Principal Agent Considerations, and records its management fees net of retrocessions. Retrocessions for 2014, 2013 and 2012 were $891 million, $785 million and $793 million, respectively, and were reflected net in investment advisory, administration fees and securities lending revenue on the consolidated statements of income.
The Company also earns revenue by lending securities as an agent on behalf of clients, primarily to brokerage institutions. Revenue is accounted for on an accrual basis. The revenue earned is shared between the Company and the funds or other third-party accounts managed by the Company from which the securities are borrowed.
Investment Advisory Performance Fees / Carried Interest . The Company receives investment advisory performance fees or incentive allocations from certain actively managed
investment funds and certain separately managed accounts (SMAs). These performance fees are dependent upon exceeding specified relative or absolute investment return thresholds. Such fees are recorded upon completion of the measurement period, which varies by product or account, and could be monthly, quarterly, annually or longer.
In addition, the Company receives carried interest from certain alternative investment products upon exceeding performance thresholds. BlackRock may be required to return all, or part, of such carried interest depending upon future performance of these funds. Therefore, BlackRock records carried interest subject to such clawback provisions in investments or cash, to the extent that it is distributed, on its consolidated statements of financial condition. Carried interest is recorded as performance fee revenue upon the earlier of the termination of the investment fund or when the likelihood of clawback is considered mathematically improbable.
The Company records a deferred carried interest liability to the extent it receives cash or capital allocations related to carried interest prior to meeting the revenue recognition criteria. At December 31, 2014 and 2013, the Company had $105 million and $108 million, respectively, of deferred carried interest recorded in other liabilities on the consolidated statements of financial condition. The ultimate recognition of performance fee revenue, if any, for these products is unknown.
BlackRock Solutions and Advisory . BlackRock provides a variety of risk management, investment analytic, enterprise investment system and financial markets advisory services to financial institutions, pension funds, asset managers, foundations, consultants, mutual fund sponsors, real estate investment trusts and government agencies. These services are provided under the brand name BlackRock Solutions and include a wide array of risk management services, valuation of illiquid securities, disposition and workout assignments (including long-term portfolio liquidation assignments), strategic planning and execution, and enterprise investment system outsourcing to clients. Fees earned for BlackRock Solutions and advisory services are recorded as services are performed and are determined using some, or all, of the following methods: (i) percentages of various attributes of advisory AUM or value of positions on the Aladdin platform, (ii) fixed fees and (iii) performance fees if contractual thresholds are met. The fees earned for BlackRock Solutions and advisory services are recorded in BlackRock Solutions and advisory on the consolidated statements of income.
Other Revenue . The Company earns fees for transition management services comprised of commissions from acting as an introducing broker-dealer in buying and selling securities on behalf of the Companys customers. Commissions related to transition management services are recorded on a trade-date basis as securities transactions occur and are reflected in other revenue on the consolidated statements of income.
The Company earns commissions revenue upon the sale of unit trusts and Class A mutual funds. Revenue is recorded at the time of the sale of the product.
Other revenue also includes equity method investment earnings related to certain strategic investments and marketing fees earned for services to distribute iPath ® products, which are exchange-traded notes issued by Barclays.
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Stock-based Compensation . Entities are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The compensation cost is recognized over the period during which an employee is required to provide service (usually the vesting period) in exchange for the stock-based award.
The Company measures the grant-date fair value of restricted stock units (RSUs) using the Companys share price on the date of grant. For employee share options and instruments with market conditions, the Company uses pricing models. If an equity award is modified after the grant date, incremental compensation cost is recognized for an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. Awards under the Companys stock-based compensation plans vest over various periods. Compensation cost is recorded by the Company on a straight-line basis over the requisite service period for each separate vesting portion of the award as if the award is, in-substance, multiple awards. Compensation cost is reduced by the number of awards expected to be forfeited prior to vesting. Forfeiture estimates generally are derived using historical forfeiture information, where available, and are reviewed for reasonableness at least quarterly.
The Company amortizes the grant-date fair value of stock-based compensation awards made to retirement-eligible employees over the requisite service period. Upon notification of retirement, the Company accelerates the unamortized portion of the award over the contractually required retirement notification period, if applicable.
Distribution and Servicing Costs . Distribution and servicing costs include payments to third parties, primarily associated with distribution and servicing of client investments in certain BlackRock products. Distribution and servicing costs are expensed when incurred.
Amortization of Deferred Sales Commissions . The Company holds the rights to receive certain cash flows from sponsored mutual funds sold without a front-end sales charge (back-end load shares). The carrying value of these deferred mutual fund commissions is recorded within other assets on the consolidated statements of financial condition and is being amortized over periods between one and six years. The Company receives distribution fees from these funds and contingent deferred sales commissions (CDSCs) upon shareholder redemption of certain back-end load shares that are recorded within distribution fees on the consolidated statements of income. Upon receipt of CDSCs, the Company records revenue and the remaining unamortized deferred sales commission is expensed.
Direct Fund Expenses . Direct fund expenses, which are expensed as incurred, primarily consist of third-party nonadvisory expenses incurred by BlackRock related to certain funds for the use of certain index trademarks, reference data for certain indices, custodial services, fund administration, fund accounting, transfer agent services, shareholder reporting services, audit and tax services as well as other fund-related expenses directly attributable to the nonadvisory operations of the fund.
Leases . The Company accounts for its operating leases, which may include escalation clauses, in accordance with ASC 840-10, Leases . The Company expenses the lease payments associated with operating leases evenly during
the lease term (including rent-free periods) commencing when the Company obtains the right to control the use of the leased property.
Foreign Exchange . Monetary assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at exchange rates at the date of the consolidated statements of financial condition. Nonmonetary assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at historical exchange rates. Revenue and expenses are translated at average exchange rates during the period. Gains or losses resulting from translating foreign currency financial statements into U.S. dollars are included in accumulated other comprehensive income, a separate component of stockholders equity, on the consolidated statements of financial condition. Gains or losses resulting from foreign currency transactions are included in general and administration expense on the consolidated statements of income. For 2014, 2013 and 2012, the gains (losses) from foreign currency transactions were immaterial.
Income Taxes . Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using currently enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized on the consolidated statements of income in the period that includes the enactment date.
Management periodically assesses the recoverability of its deferred income tax assets based upon expected future earnings, taxable income in prior carryback years, future deductibility of the asset, changes in applicable tax laws and other factors. If management determines that it is not more likely than not that the deferred tax asset will be fully recoverable in the future, a valuation allowance will be established for the difference between the asset balance and the amount expected to be recoverable in the future. This allowance will result in additional income tax expense. Further, the Company records its income taxes receivable and payable based upon its estimated income tax position.
Excess tax benefits related to stock-based compensation are recognized as additional paid-in capital and are reflected as financing cash flows on the consolidated statements of cash flows. If the Company does not have additional paid-in capital credits (cumulative tax benefits recorded to additional paid-in capital), the Company will record an expense for any deficit, or shortfall, between the recorded tax benefit and tax return benefit. At December 31, 2014 and 2013, BlackRock had excess additional paid-in capital credits to absorb potential future deficits between recorded tax benefits and tax return benefits.
Earnings per Share (EPS) . Basic EPS is calculated by dividing net income applicable to common shareholders by the weighted-average number of shares outstanding during the period. Diluted EPS includes the determinants of basic EPS and common stock equivalents outstanding during the period. Diluted EPS is computed using the treasury stock method.
Due to the similarities in terms between BlackRocks nonvoting participating preferred stock and the Companys common stock, the Company considers its nonvoting participating preferred stock to be a common stock
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equivalent for purposes of EPS calculations. As such, the Company has included the outstanding nonvoting participating preferred stock in the calculation of average basic and diluted shares outstanding.
Prior to 2013, the Company calculated EPS pursuant to the two-class method, which specifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends or dividend equivalents are considered participating securities and should be included in the computation of EPS. The Companys participating securities consisted of its unvested share-based payment awards that contained rights to nonforfeitable dividends or dividend equivalents. The dilutive effect of participating securities was calculated under the more dilutive of either the treasury stock method or the two-class method. The Companys remaining participating securities vested in January 2013.
Business Segments . The Companys management directs BlackRocks operations as one business, the asset management business. As such, the Company operates in one business segment as defined in ASC 280-10, Segment Reporting (ASC 280-10).
Fair Value Measurements.
Hierarchy of Fair Value Inputs . The Company uses a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 Inputs:
Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.
| Level 1 assets may include listed mutual funds (including those accounted for under the equity method of accounting as these mutual funds are investment companies that have publicly available net asset values (NAVs), which in accordance with GAAP, are calculated under fair value measures and the changes in fair values are equal to the earnings of such funds), ETFs, listed equities and certain exchange-traded derivatives. |
Level 2 Inputs:
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price are observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. As a practical expedient, the Company uses the NAV (or its equivalent) of certain investments as their fair value.
| Level 2 assets may include debt securities, bank loans, short-term floating-rate notes, asset-backed securities, securities held within consolidated hedge funds, certain equity method limited partnership interests in hedge funds valued based on NAV (or its |
equivalent) where the Company has the ability to redeem at the measurement date or within the near term without redemption restrictions, restricted public securities valued at a discount, as well as over-the-counter derivatives, including interest and inflation rate swaps and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data. |
Level 3 Inputs:
Unobservable inputs for the valuation of the asset or liability, which may include nonbinding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. Certain investments that are valued using a NAV (or its equivalent) and are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3.
| Level 3 assets may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, funds of hedge funds, direct private equity investments held within consolidated funds, bank loans and bonds. |
| Level 3 liabilities include borrowings of consolidated CLOs valued based upon nonbinding single-broker quotes and contingent liabilities related to acquisitions valued based upon discounted cash flow analysis using unobservable market data. |
| Level 3 inputs include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, opportunistic funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices. |
Significance of Inputs . The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
Valuation Techniques. The fair values of certain Level 3 assets and liabilities were determined using various methodologies as appropriate, including NAVs of underlying investments, third-party pricing vendors, broker quotes and market and income approaches. Such quotes and modeled prices are evaluated for reasonableness through various procedures, including due diligence reviews of third-party pricing vendors, variance analyses, consideration of the current market environment and other analytical procedures.
As a practical expedient, the Company uses NAV as the fair value for certain investments. The inputs to value these investments may include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, opportunistic funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices. The various partnerships generally are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation
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information from third-party sources, including independent appraisals. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.
A significant number of inputs used to value equity, debt securities and bank loans is sourced from third-party pricing vendors. Generally, prices obtained from pricing vendors are categorized as Level 1 inputs for identical securities traded in active markets and as Level 2 for other similar securities if the vendor uses observable inputs in determining the price. Annually, BlackRocks internal valuation committee or other designated groups review both the valuation methodologies, including the general assumptions and methods used to value various asset classes, and operational processes with these vendors. On a quarterly basis, meetings are held with key vendors to identify any significant changes to the vendors processes.
In addition, quotes obtained from brokers generally are nonbinding and categorized as Level 3 inputs. However, if the Company is able to determine that market participants have transacted for the asset in an orderly manner near the quoted price or if the Company can determine that the inputs used by the broker are observable, the quote is classified as a Level 2 input.
Fair Value Option . The Company applies the fair value option provisions for eligible assets and liabilities, including bank loans and borrowings, held by consolidated CLOs to mitigate accounting mismatches between the carrying value of the assets and liabilities and to achieve operational simplification. To the extent there is a difference between the change in fair value of the assets and liabilities, the difference is reflected as net income (loss) attributable to nonredeemable noncontrolling interests on the consolidated statements of income and offset by a change in appropriated retained earnings on the consolidated statements of financial condition.
Derivative Instruments and Hedging Activities . The Company does not use derivative financial instruments for trading or speculative purposes. The Company may use derivative financial instruments primarily for purposes of hedging exposures to fluctuations in foreign currency exchange rates of certain assets and liabilities, and market exposures for certain seed investments. The Company may also use derivatives within its separate account assets, which are segregated funds held for purposes of funding individual and group pension contracts. In addition, certain consolidated sponsored investment funds may also invest in derivatives as a part of their investment strategy.
Changes in the fair value of the Companys derivative financial instruments are generally recognized in earnings and, where applicable, are offset by the corresponding gain or loss on the related foreign-denominated assets or liabilities or hedged investments, on the consolidated statements of income.
Accounting Pronouncements Adopted in 2014
Cumulative Translation Adjustment. In March 2013, the FASB issued Accounting Standards Update (ASU) 2013-05,
Parents Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (ASU 2013-05). ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The adoption of ASU 2013-05 on January 1, 2014 was not material to the consolidated financial statements.
Investment Company Guidance. In June 2013, the FASB issued ASU 2013-08, Financial Services Investment Companies: Amendments to the Scope, Measurement, and Disclosure Requirements (ASU 2013-08). ASU 2013-08 amends the current criteria for an entity to qualify as an investment company, creates new disclosure requirements and amends the measurement criteria for certain interests in other investment companies. The adoption of ASU 2013-08 on January 1, 2014 was not material to the consolidated financial statements.
Presentation of an Unrecognized Tax Benefit. In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). The adoption of ASU 2013-11 on January 1, 2014 was not material to the consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Revenue from Contracts with Customers. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The Company is currently evaluating the impact of adopting ASU 2014-09, which is effective for the Company on January 1, 2017.
Amendments to the Consolidation Analysis and Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. In August 2014, the FASB issued ASU 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (ASU 2014-13). ASU 2014-13 provides an entity that consolidates a collateralized financing entity (CFE) that had elected the fair value option for the financial assets and financial liabilities of such CFE an alternative to current fair value measurement guidance. If elected, the Company could measure both the financial assets and the financial liabilities of the CFE by using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The election would effectively eliminate any measurement difference previously recorded as net income (loss) attributable to nonredeemable noncontrolling interests and as an adjustment to appropriated retained earnings.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (ASU 2015-02), which significantly amends the consolidation analysis required under current consolidation guidance. The amendments include changes to: (i) the VIE analysis for limited partnerships; (ii) the criteria for evaluating whether fees paid to a decision maker or a service provider are a variable interest; (iii) the effect of fee arrangements on the
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PB determination; (iv) the effect of related parties on the PB determination; and (v) the consolidation evaluation for certain investment funds. This includes a scope exception for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.
ASU 2014-13 and ASU 2015-02 are effective for the Company on January 1, 2016, with retrospective or modified retrospective approach required. ASU 2014-13 permits early adoption as of the beginning of an annual period. ASU 2015-02 permits early adoption in an interim period with any adjustments reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact to the consolidated financial statements of adopting all of the provisions of ASU 2015-02 and ASU 2014-13.
3. Investments
A summary of the carrying value of total investments is as follows:
(in millions) |
December 31,
2014 |
December 31,
2013 |
||||||
Available-for-sale investments |
$ | 201 | $ | 183 | ||||
Held-to-maturity investments |
79 | 83 | ||||||
Trading investments: |
||||||||
Consolidated sponsored investment funds |
443 | 385 | ||||||
Other equity and debt securities |
29 | 43 | ||||||
Deferred compensation plan mutual funds |
64 | 58 | ||||||
Total trading investments |
536 | 486 | ||||||
Other investments: |
||||||||
Consolidated sponsored investment funds |
270 | 441 | ||||||
Equity method investments |
633 | 697 | ||||||
Deferred compensation plan equity method investments |
21 | 39 | ||||||
Cost method investments (1) |
96 | 119 | ||||||
Carried interest |
85 | 103 | ||||||
Total other investments |
1,105 | 1,399 | ||||||
Total investments |
$ | 1,921 | $ | 2,151 |
(1) | Amounts primarily include Federal Reserve Bank (FRB) Stock. |
At December 31, 2014, the Company consolidated $713 million of investments held by consolidated sponsored investment funds (excluding VIEs) of which $443 million and $270 million were classified as trading investments and other investments, respectively. At December 31, 2013, the Company consolidated $826 million of investments held by consolidated sponsored investment funds (excluding VIEs) of which $385 million and $441 million were classified as trading investments and other investments, respectively.
Available-for-Sale Investments
A summary of the cost and carrying value of investments classified as available-for-sale investments is as follows:
(in millions) | Gross Unrealized |
Carrying
Value |
||||||||||||||
December 31, 2014 | Cost | Gains | Losses | |||||||||||||
Equity securities of sponsored investment funds |
$ | 205 | $ | 5 | $ | (9 | ) | $ | 201 | |||||||
December 31, 2013 | ||||||||||||||||
Equity securities of sponsored investment funds |
$ | 180 | $ | 4 | $ | (4 | ) | $ | 180 | |||||||
Other securities |
1 | 2 | | 3 | ||||||||||||
Total available-for-sale investments |
$ | 181 | $ | 6 | $ | (4 | ) | $ | 183 |
Available-for-sale investments primarily included seed investments in BlackRock sponsored mutual funds.
A summary of sale activity in available-for-sale securities during 2014, 2013 and 2012 is shown below.
Year ended December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Sales proceeds |
$ | 155 | $ | 139 | $ | 134 | ||||||
Net realized gain (loss): |
||||||||||||
Gross realized gains |
$ | 14 | $ | 20 | $ | 8 | ||||||
Gross realized losses |
(3 | ) | (1 | ) | (1 | ) | ||||||
Net realized gain (loss) |
$ | 11 | $ | 19 | $ | 7 |
Held-to-Maturity Investments
The carrying value of held-to-maturity investments was $79 million and $83 million at December 31, 2014 and 2013, respectively. Held-to-maturity investments included foreign government debt held for regulatory purposes and the amortized cost (carrying value) of these investments approximated fair value. At December 31, 2014, $66 million of these investments mature in one year or less and $13 million mature after 10 years.
Trading Investments
A summary of the cost and carrying value of trading investments is as follows:
December 31, 2014 | December 31, 2013 | |||||||||||||||
(in millions) | Cost |
Carrying
Value |
Cost |
Carrying
Value |
||||||||||||
Trading investments: |
||||||||||||||||
Deferred compensation plan mutual funds |
$ | 48 | $ | 64 | $ | 49 | $ | 58 | ||||||||
Equity securities/multi-asset mutual funds |
210 | 239 | 174 | 184 | ||||||||||||
Debt securities/fixed income mutual funds: |
||||||||||||||||
Corporate debt |
109 | 110 | 128 | 128 | ||||||||||||
Government debt |
100 | 103 | 121 | 116 | ||||||||||||
Asset/mortgage backed debt |
20 | 20 | | | ||||||||||||
Total trading investments |
$ | 487 | $ | 536 | $ | 472 | $ | 486 |
F-17
At December 31, 2014, trading investments included $220 million of equity securities and $223 million of debt securities held by consolidated sponsored investment funds, $64 million of certain deferred compensation plan mutual fund investments and $29 million of other equity and debt securities.
At December 31, 2013, trading investments included $172 million of equity securities and $213 million of debt securities held by consolidated sponsored investment funds, $58 million of certain deferred compensation plan mutual fund investments and $43 million of other equity and debt securities.
Other Investments
A summary of the cost and carrying value of other investments is as follows:
December 31, 2014 | December 31, 2013 | |||||||||||||||
(in millions) | Cost |
Carrying
Value |
Cost |
Carrying
Value |
||||||||||||
Other investments: |
||||||||||||||||
Consolidated sponsored investment funds |
$ | 268 | $ | 270 | $ | 420 | $ | 441 | ||||||||
Equity method |
518 | 633 | 613 | 697 | ||||||||||||
Deferred compensation plan equity method investments |
21 | 21 | 37 | 39 | ||||||||||||
Cost method investments: |
||||||||||||||||
Federal Reserve Bank stock |
92 | 92 | 90 | 90 | ||||||||||||
Other |
4 | 4 | 17 | 29 | ||||||||||||
Total cost method investments |
96 | 96 | 107 | 119 | ||||||||||||
Carried interest |
| 85 | | 103 | ||||||||||||
Total other investments |
$ | 903 | $ | 1,105 | $ | 1,177 | $ | 1,399 |
Consolidated sponsored investment funds include third-party private equity funds, direct investments in private companies and third-party hedge funds held by BlackRock sponsored investment funds.
Equity method investments primarily include BlackRocks direct investments in certain BlackRock sponsored investment funds. See Note 11, Other Assets , for information on the Companys investment in PennyMac Financial Services, Inc. (PennyMac), which is included in other assets on the consolidated statements of financial condition.
Cost method investments include nonmarketable securities, including FRB stock, which is held for regulatory purposes and is restricted from sale. At December 31, 2014 and 2013, there were no indicators of impairment on these investments.
Carried interest represents allocations to BlackRocks general partner capital accounts from certain funds. These balances are subject to change upon cash distributions, additional allocations or reallocations back to limited partners within the respective funds.
4. Consolidated Sponsored Investment Funds
The Company consolidates certain sponsored investment funds primarily because it is deemed to control such funds. The investments owned by these consolidated sponsored investment funds are classified as trading or other investments. The following table presents the balances related to these consolidated funds that were included on the consolidated statements of financial condition as well as BlackRocks net interest in these funds:
(in millions) |
December 31,
2014 |
December 31,
2013 |
||||||
Cash and cash equivalents |
$ | 120 | $ | 114 | ||||
Investments: |
||||||||
Trading investments |
443 | 385 | ||||||
Other investments |
270 | 441 | ||||||
Other assets |
20 | 20 | ||||||
Other liabilities |
(18 | ) | (39 | ) | ||||
Noncontrolling interests |
(139 | ) | (189 | ) | ||||
BlackRocks net interests in consolidated investment funds |
$ | 696 | $ | 732 |
BlackRocks total exposure to consolidated sponsored investment funds represents the value of its economic ownership interest in these sponsored investment funds. Valuation changes associated with investments held at fair value by these consolidated investment funds are reflected in nonoperating income (expense) and partially offset in net income (loss) attributable to noncontrolling interests for the portion not attributable to BlackRock.
In addition, at December 31, 2014 and 2013, several consolidated CLOs and one sponsored investment fund, which were deemed to be VIEs, were excluded from the balances in the table above as the balances for these investment products are reported separately on the consolidated statements of financial condition. See Note 6, Variable Interest Entities , for further discussion on these consolidated investment products.
The Company may not be readily able to access cash and cash equivalents held by consolidated sponsored investment funds to use in its operating activities. In addition, the Company may not be readily able to sell investments held by consolidated sponsored investment funds in order to obtain cash for use in the Companys operations.
F-18
5. Fair Value Disclosures
Fair Value Hierarchy
Assets and liabilities measured at fair value on a recurring basis and other assets not held at fair value
December 31, 2014 (in millions) |
Quoted Prices in Active
Markets for
(Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Other Assets
Not Held at Fair Value (1) |
December 31, 2014 |
|||||||||||||||
Assets: |
||||||||||||||||||||
Investments |
||||||||||||||||||||
Available-for-sale: |
||||||||||||||||||||
Equity securities of sponsored investment funds |
$ | 198 | $ | 3 | $ | | $ | | $ | 201 | ||||||||||
Held-to-maturity debt securities |
| | | 79 | 79 | |||||||||||||||
Trading: |
||||||||||||||||||||
Deferred compensation plan mutual funds |
64 | | | | 64 | |||||||||||||||
Equity/Multi-asset mutual funds |
239 | | | | 239 | |||||||||||||||
Debt securities / fixed income mutual funds |
11 | 222 | | | 233 | |||||||||||||||
Total trading |
314 | 222 | | | 536 | |||||||||||||||
Other investments: |
||||||||||||||||||||
Consolidated sponsored investment funds private / public equity (2) |
11 | 11 | 248 | | 270 | |||||||||||||||
Equity method: |
||||||||||||||||||||
Hedge funds / Funds of hedge funds |
| 213 | 64 | 5 | 282 | |||||||||||||||
Private equity investments |
| | 107 | | 107 | |||||||||||||||
Real estate funds |
| 21 | 88 | 8 | 117 | |||||||||||||||
Fixed income mutual funds |
29 | | | | 29 | |||||||||||||||
Other |
98 | | | | 98 | |||||||||||||||
Total equity method |
127 | 234 | 259 | 13 | 633 | |||||||||||||||
Deferred compensation plan equity method investments |
| | 21 | | 21 | |||||||||||||||
Cost method investments |
| | | 96 | 96 | |||||||||||||||
Carried interest |
| | | 85 | 85 | |||||||||||||||
Total investments |
650 | 470 | 528 | 273 | 1,921 | |||||||||||||||
Separate account assets |
113,566 | 46,866 | | 855 | 161,287 | |||||||||||||||
Separate account collateral held under securities lending agreements: |
||||||||||||||||||||
Equity securities |
30,387 | | | | 30,387 | |||||||||||||||
Debt securities |
| 3,267 | | | 3,267 | |||||||||||||||
Total separate account collateral held under securities lending agreements |
30,387 | 3,267 | | | 33,654 | |||||||||||||||
Assets of consolidated VIEs: |
||||||||||||||||||||
Bank loans and other assets |
| 2,958 | 302 | 32 | 3,292 | |||||||||||||||
Bonds |
| 29 | 18 | | 47 | |||||||||||||||
Private / public equity (3) |
| 3 | 10 | | 13 | |||||||||||||||
Total assets of consolidated VIEs |
| 2,990 | 330 | 32 | 3,352 | |||||||||||||||
Total |
$ | 144,603 | $ | 53,593 | $ | 858 | $ | 1,160 | $ | 200,214 | ||||||||||
Liabilities: |
||||||||||||||||||||
Borrowings of consolidated VIEs |
$ | | $ | | $ | 3,389 | $ | | $ | 3,389 | ||||||||||
Separate account collateral liabilities under securities lending agreements |
30,387 | 3,267 | | | 33,654 | |||||||||||||||
Other liabilities (4) |
| 5 | 39 | | 44 | |||||||||||||||
Total |
$ | 30,387 | $ | 3,272 | $ | 3,428 | $ | | $ | 37,087 |
(1) | Amounts are comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include sponsored investment funds and other assets, which are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and liabilities under fair value measures; therefore, the Companys investment in such equity method investees may not represent fair value. |
(2) | Level 3 amounts include $168 million and $80 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively. |
(3) | Level 3 amounts include $10 million of underlying third-party private equity funds held by a consolidated private equity fund of fund. |
(4) | Amounts include a derivative (see Note 7, Derivatives and Hedging , for more information) and contingent liabilities related to the acquisitions of the Credit Suisse ETF franchise and MGPA (see Note 13, Commitments and Contingencies , for more information). |
F-19
Assets and liabilities measured at fair value on a recurring basis and other assets not held at fair value
December 31, 2013 (in millions) |
Quoted Prices
Markets for
(Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Other Assets
Not Held at Fair Value (1) |
December 31, 2013 |
|||||||||||||||
Assets: |
||||||||||||||||||||
Investments |
||||||||||||||||||||
Available-for-sale: |
||||||||||||||||||||
Equity securities of sponsored investment funds |
$ | 180 | $ | | $ | | $ | | $ | 180 | ||||||||||
Other securities |
| 3 | | | 3 | |||||||||||||||
Total available-for-sale |
180 | 3 | | | 183 | |||||||||||||||
Held-to-maturity debt securities |
| | | 83 | 83 | |||||||||||||||
Trading: |
||||||||||||||||||||
Deferred compensation plan mutual funds |
58 | | | | 58 | |||||||||||||||
Equity/Multi-asset mutual funds |
184 | | | | 184 | |||||||||||||||
Debt securities / fixed income mutual funds |
31 | 213 | | | 244 | |||||||||||||||
Total trading |
273 | 213 | | | 486 | |||||||||||||||
Other investments: |
||||||||||||||||||||
Consolidated sponsored investment funds: |
||||||||||||||||||||
Hedge funds / Funds of funds |
| 135 | 24 | | 159 | |||||||||||||||
Private / public equity (2) |
5 | 13 | 223 | 41 | 282 | |||||||||||||||
Total consolidated sponsored investment funds |
5 | 148 | 247 | 41 | 441 | |||||||||||||||
Equity method: |
||||||||||||||||||||
Hedge funds / Funds of hedge funds |
| 177 | 99 | 63 | 339 | |||||||||||||||
Private equity investments |
| | 101 | | 101 | |||||||||||||||
Real estate funds |
| 20 | 98 | 7 | 125 | |||||||||||||||
Fixed income mutual funds |
113 | | | | 113 | |||||||||||||||
Equity/Multi-asset, alternative mutual funds |
19 | | | | 19 | |||||||||||||||
Total equity method |
132 | 197 | 298 | 70 | 697 | |||||||||||||||
Deferred compensation plan equity method investments |
| 10 | 29 | | 39 | |||||||||||||||
Cost method investments |
| | | 119 | 119 | |||||||||||||||
Carried interest |
| | | 103 | 103 | |||||||||||||||
Total investments |
590 | 571 | 574 | 416 | 2,151 | |||||||||||||||
Separate account assets |
113,382 | 40,841 | | 890 | 155,113 | |||||||||||||||
Separate account collateral held under securities lending agreements: |
||||||||||||||||||||
Equity securities |
20,856 | | | | 20,856 | |||||||||||||||
Debt securities |
| 932 | | | 932 | |||||||||||||||
Total separate account collateral held under securities lending agreements |
20,856 | 932 | | | 21,788 | |||||||||||||||
Other assets (3) |
| 39 | | | 39 | |||||||||||||||
Assets of consolidated VIEs: |
||||||||||||||||||||
Bank loans and other assets |
| 2,047 | 129 | 19 | 2,195 | |||||||||||||||
Bonds |
| 71 | 35 | | 106 | |||||||||||||||
Private / public equity (4) |
| 10 | 14 | | 24 | |||||||||||||||
Total assets of consolidated VIEs |
| 2,128 | 178 | 19 | 2,325 | |||||||||||||||
Total |
$ | 134,828 | $ | 44,511 | $ | 752 | $ | 1,325 | $ | 181,416 | ||||||||||
Liabilities: |
||||||||||||||||||||
Borrowings of consolidated VIEs |
$ | | $ | | $ | 2,369 | $ | | $ | 2,369 | ||||||||||
Separate account collateral liabilities under securities lending agreements |
20,856 | 932 | | | 21,788 | |||||||||||||||
Other liabilities (5) |
18 | 4 | 42 | | 64 | |||||||||||||||
Total |
$ | 20,874 | $ | 936 | $ | 2,411 | $ | | $ | 24,221 |
(1) | Amounts are comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include sponsored investment funds and other assets, which are not accounted for under a fair value measure. Certain equity method investees do not account for both their financial assets and liabilities under fair value measures; therefore, the Companys investment in such equity method investees may not represent fair value. |
F-20
(2) | Level 3 amounts include $195 million and $28 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively. |
(3) | Amount includes company-owned and split-dollar life insurance policies and unrealized gains on forward foreign currency exchange contracts. |
(4) | Level 3 amounts include $14 million of underlying third-party private equity funds held by a sponsored private equity fund of fund. |
(5) | Amounts include a derivative (see Note 7, Derivatives and Hedging , for more information), securities sold short within consolidated sponsored investment funds and contingent liabilities related to the acquisitions of the Credit Suisse ETF franchise and MGPA (see Note 13, Commitments and Contingencies , for more information). |
Level 3 Assets. Level 3 investments of $528 million and $574 million at December 31, 2014 and 2013, respectively, primarily related to equity method investments and private equity funds held by consolidated sponsored investment funds. Level 3 assets within investments, except for direct investments in private equity companies held by private equity funds described below, were primarily valued based upon NAVs received from internal and third-party fund managers.
Direct investments in private equity companies held by private equity funds totaled $80 million and $28 million at December 31, 2014 and 2013, respectively. Direct investments in private equity companies may be valued using the market approach or the income approach, or a combination thereof, and were valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third-party financing, changes in valuations of comparable peer companies, the business environment of the companies, market indices, assumptions relating to appropriate risk adjustments for nonperformance and legal restrictions on disposition, among other factors. The fair value derived from the methods used is evaluated and weighted, as appropriate, considering the reasonableness of the range of values indicated. Under the market approach, fair value may be determined by reference to multiples of market-comparable companies or transactions, including earnings before interest, taxes, depreciation and amortization (EBITDA) multiples. Under the income approach, fair value may be determined by
discounting the expected cash flows to a single present value amount using current expectations about those future amounts. Unobservable inputs used in a discounted cash flow model may include projections of operating performance generally covering a five-year period and a terminal value of the private equity direct investment. For investments utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation could result in a significantly lower (higher) fair value measurement. For investments utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation could result in a significantly higher (lower) fair value measurement.
Level 3 assets of consolidated VIEs include bank loans and bonds valued based on single-broker nonbinding quotes and direct private equity investments and private equity funds valued based upon internal as well as third-party fund managers, which may be adjusted by using the returns of certain market indices.
Level 3 Liabilities. Level 3 borrowings of consolidated VIEs include CLO borrowings valued based upon single-broker nonbinding quotes.
Level 3 other liabilities include contingent liabilities related to the acquisitions of the Credit Suisse ETF franchise and MGPA, which were valued based upon discounted cash flow analyses using unobservable market data inputs.
F-21
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for 2014
(in millions) |
December 31,
2013 |
Realized
and unrealized gains (losses) in earnings and OCI |
Purchases |
Sales and
maturities |
Issuances
and other settlements (1) |
Transfers
into Level 3 |
Transfers
out of Level 3 |
December 31,
2014 |
Total net
unrealized gains (losses) included in earnings (3) |
|||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Investments: |
||||||||||||||||||||||||||||||||||||
Consolidated sponsored investment funds: |
||||||||||||||||||||||||||||||||||||
Hedge funds / Funds of funds |
$ | 24 | $ | | $ | | $ | (23 | ) | $ | (1 | ) | $ | | $ | | $ | | $ | | ||||||||||||||||
Private equity |
223 | 12 | 45 | (72 | ) | (1 | ) | 41 | (2) | | 248 | 7 | ||||||||||||||||||||||||
Equity method: |
||||||||||||||||||||||||||||||||||||
Hedge funds / Funds of hedge funds |
99 | 5 | 19 | (19 | ) | (40 | ) | | | 64 | 5 | |||||||||||||||||||||||||
Private equity investments |
101 | 15 | 17 | | (26 | ) | | | 107 | 15 | ||||||||||||||||||||||||||
Real estate funds |
98 | 13 | 8 | (5 | ) | (26 | ) | | | 88 | 12 | |||||||||||||||||||||||||
Deferred compensation plan equity method investments |
29 | | | | (8 | ) | | | 21 | | ||||||||||||||||||||||||||
Total Level 3 investments |
574 | 45 | 89 | (119 | ) | (102 | ) | 41 | | 528 | 39 | |||||||||||||||||||||||||
Assets of consolidated VIEs: |
||||||||||||||||||||||||||||||||||||
Bank loans |
129 | (9 | ) | 210 | (96 | ) | 46 | 302 | (280 | ) | 302 | |||||||||||||||||||||||||
Bonds |
35 | | | (17 | ) | | | | 18 | |||||||||||||||||||||||||||
Private equity |
14 | 1 | | (5 | ) | | | | 10 | |||||||||||||||||||||||||||
Total Level 3 assets of consolidated VIEs |
178 | (8 | ) | 210 | (118 | ) | 46 | 302 | (280 | ) | 330 | n/a | (4) | |||||||||||||||||||||||
Total Level 3 assets |
$ | 752 | $ | 37 | $ | 299 | $ | (237 | ) | $ | (56 | ) | $ | 343 | $ | (280 | ) | $ | 858 | $ | 39 | |||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||||||||
Borrowings of consolidated VIEs |
$ | 2,369 | $ | 77 | $ | | $ | | $ | 1,097 | $ | | $ | | $ | 3,389 | n/a | (4) | ||||||||||||||||||
Other liabilities |
42 | (1 | ) | | | (4 | ) | | | 39 | n/a | |||||||||||||||||||||||||
Total Level 3 liabilities |
$ | 2,411 | $ | 76 | $ | | $ | | $ | 1,093 | $ | | $ | | $ | 3,428 |
n/a | not applicable |
(1) | Amount primarily includes distributions from equity method investees and loans and net proceeds from borrowings of consolidated VIEs. |
(2) | Includes investments previously held at cost. |
(3) | Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date. |
(4) | The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the consolidated statements of income. |
F-22
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for 2013
(in millions) |
December 31,
2012 |
Realized
and unrealized gains (losses) in earnings and OCI |
Purchases |
Sales and
maturities |
Issuances
and other settlements (1) |
Transfers
into Level 3 |
Transfers
out of Level 3 |
December 31,
2013 |
Total net
unrealized gains (losses) included in earnings (2) |
|||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Investments: |
||||||||||||||||||||||||||||||||||||
Available-for-sale: |
||||||||||||||||||||||||||||||||||||
Equity securities of sponsored investment funds |
$ | 1 | $ | | $ | | $ | | $ | (1 | ) | $ | | $ | | $ | | $ | | |||||||||||||||||
Consolidated sponsored investment funds: |
||||||||||||||||||||||||||||||||||||
Hedge funds / Funds of funds |
73 | 8 | 12 | (19 | ) | (34 | ) | | (16 | ) | 24 | 4 | ||||||||||||||||||||||||
Private equity |
266 | 37 | 16 | (82 | ) | | | (14 | ) | 223 | 25 | |||||||||||||||||||||||||
Equity method: |
||||||||||||||||||||||||||||||||||||
Hedge funds / Funds of hedge funds |
161 | 16 | 7 | (11 | ) | (74 | ) | | | 99 | 9 | |||||||||||||||||||||||||
Private equity investments |
90 | 21 | 14 | (10 | ) | (14 | ) | | | 101 | 21 | |||||||||||||||||||||||||
Real estate funds |
88 | 20 | 7 | | (17 | ) | | | 98 | 20 | ||||||||||||||||||||||||||
Deferred compensation plan equity method investments |
| | | | 29 | | | 29 | | |||||||||||||||||||||||||||
Total Level 3 investments |
679 | 102 | 56 | (122 | ) | (111 | ) | | (30 | ) | 574 | 79 | ||||||||||||||||||||||||
Separate account assets: |
2 | | | (2 | ) | | | | | n/a | (3) | |||||||||||||||||||||||||
Assets of consolidated VIEs: |
||||||||||||||||||||||||||||||||||||
Bank loans |
106 | | 109 | (60 | ) | 16 | 117 | (159 | ) | 129 | ||||||||||||||||||||||||||
Bonds |
46 | 1 | 4 | (16 | ) | | | | 35 | |||||||||||||||||||||||||||
Private equity |
22 | 2 | | (7 | ) | | | (3 | ) | 14 | ||||||||||||||||||||||||||
Funds of hedge funds |
| | 134 | | (134 | ) | | | | |||||||||||||||||||||||||||
Total Level 3 assets of consolidated VIEs |
174 | 3 | 247 | (83 | ) | (118 | ) | 117 | (162 | ) | 178 | n/a | (4) | |||||||||||||||||||||||
Total Level 3 assets |
$ | 855 | $ | 105 | $ | 303 | $ | (207 | ) | $ | (229 | ) | $ | 117 | $ | (192 | ) | $ | 752 | $ | 79 | |||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||||||||
Borrowings of consolidated VIEs |
$ | 2,402 | $ | (14 | ) | $ | | $ | | $ | (47 | ) | $ | | $ | | $ | 2,369 | n/a | (4) | ||||||||||||||||
Other liabilities |
| | | | 42 | | | 42 | | |||||||||||||||||||||||||||
Total Level 3 liabilities |
$ | 2,402 | $ | (14 | ) | $ | | $ | | $ | (5 | ) | $ | | $ | | $ | 2,411 |
n/a | not applicable |
(1) | Amounts include distributions from equity method investees, repayments of borrowings of consolidated VIEs, loans and borrowings related to the consolidation of one additional CLO, elimination of investment related to a deconsolidation of a consolidated VIE and a reclassification of an investment from a consolidated sponsored investment fund to an equity method investment due to a change in ownership percentage. Amounts also include the acquisition of deferred compensation plan equity method investments and contingent liabilities related to the acquisitions of Credit Suisses ETF franchise and MGPA. |
(2) | Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date. |
(3) | The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the consolidated statements of income. |
(4) | The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the consolidated statements of income. |
Realized and Unrealized Gains (Losses) for Level 3 Assets and Liabilities. Realized and unrealized gains (losses) recorded for Level 3 assets and liabilities are reported in nonoperating income (expense) on the consolidated statements of income. A portion of net income (loss) for consolidated sponsored investments and all of the net income (loss) for consolidated VIEs are allocated to noncontrolling interests to reflect net income (loss) not attributable to the Company.
Transfers in and/or out of Levels. Transfers in and/or out of levels are reflected when significant inputs, including market inputs or performance attributes, used for the fair value measurement become observable/unobservable, or when the Company determines it has the ability, or no longer has the ability, to redeem, in the near term, certain investments that the Company values using a NAV (or a capital account), or when the carrying value of certain equity
F-23
method investments no longer represents fair value as determined under valuation methodologies.
Assets of Consolidated VIEs . In 2014, there were $280 million of transfers out of Level 3 to Level 2 related to bank loans. In addition, in 2014, there were $302 million of transfers into Level 3 from Level 2 related to bank loans. In 2013, there were $159 million of transfers out of Level 3 to Level 2 related to bank loans. In addition, in 2013, there were $117 million of transfers into Level 3 from Level 2 related to bank loans. These transfers in and out of levels for both 2014 and 2013 were primarily due to availability/unavailability of observable market inputs, including inputs from pricing vendors and brokers.
Significant Issuances and Other Settlements. In 2014, other settlements included $1,582 million of borrowings due to consolidation of CLOs and $485 million of repayments of borrowings of consolidated CLOs. In 2013, other settlements included $363 million of borrowings due to a consolidation of
one additional CLO and $410 million of repayments of borrowings of consolidated CLOs.
In 2014 and 2013, there were $92 million and $105 million, respectively, of distributions from equity method investees categorized in Level 3.
In 2013, other settlements included $134 million related to a deconsolidation of a consolidated fund of hedge funds, which was previously classified as a VIE. This fund was deconsolidated during the second quarter of 2013 due to the granting of additional substantive rights to unaffiliated investors of the fund.
In 2013, there was a $28 million reclassification of a Level 3 investment from a consolidated sponsored investment fund to an equity method investment due to a change in BlackRocks ownership percentage.
In 2013, issuances and other settlements included $29 million of acquired Level 3 deferred compensation plan equity method investments.
Disclosures of Fair Value for Financial Instruments Not Held at Fair Value . At December 31, 2014 and 2013, the fair value of the Companys financial instruments not held at fair value are categorized in the table below.
December 31, 2014 | December 31, 2013 | |||||||||||||||||||
(in millions) |
Carrying
Amount |
Estimated
Fair Value |
Carrying
Amount |
Estimated Fair Value |
Fair Value
Hierarchy |
|||||||||||||||
Financial Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 5,723 | $ | 5,723 | $ | 4,390 | $ | 4,390 | Level 1 | (1),(2) | ||||||||||
Accounts receivable |
2,120 | 2,120 | 2,247 | 2,247 | Level 1 | (3) | ||||||||||||||
Cash and cash equivalents of consolidated VIEs |
278 | 278 | 161 | 161 | Level 1 | (1) | ||||||||||||||
Financial Liabilities: |
||||||||||||||||||||
Accounts payable and accrued liabilities |
1,035 | 1,035 | 1,084 | 1,084 | Level 1 | (3) | ||||||||||||||
Long-term borrowings |
4,938 | 5,309 | 4,939 | 5,284 | Level 2 | (4) |
(1) | Cash and cash equivalents are carried at either cost or amortized cost, which approximates fair value due to their short-term maturities. |
(2) | At December 31, 2014 and 2013, approximately $100 million and $64 million, respectively, of money market funds were recorded within cash and cash equivalents on the consolidated statements of financial condition. Money market funds are valued based on quoted market prices, or $1.00 per share, which generally is the NAV of the fund. |
(3) | The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term nature. |
(4) | Long-term borrowings are recorded at amortized cost. The fair value of the long-term borrowings, including the current portion of long-term borrowings, is estimated using market prices at the end of December 2014 and 2013, respectively. See Note 12, Borrowings , for the fair value of each of the Companys long-term borrowings. |
Investments in Certain Entities that Calculate Net Asset Value Per Share
As a practical expedient to value certain investments that do not have a readily determinable fair value and have attributes of an investment company, the Company uses NAV as the fair value. The following tables list information regarding all investments that use a fair value measurement to account for both their financial assets and financial liabilities in their calculation of a NAV per share (or equivalent).
December 31, 2014
(in millions) | Ref | Fair Value |
Total Unfunded
Commitments |
Redemption
Frequency |
Redemption
Notice Period |
|||||||||||||||
Consolidated sponsored investment funds: |
||||||||||||||||||||
Private equity funds of funds |
(a | ) | $ | 168 | $ | 22 | n/r | n/r | ||||||||||||
Equity method: (1) |
||||||||||||||||||||
Hedge funds/funds of hedge funds |
(b | ) | 277 | 39 |
|
Monthly
Quarterly n/r |
(29%)
(48%) (23%) |
1 90 days | ||||||||||||
Private equity funds |
(c | ) | 107 | 61 | n/r | n/r | ||||||||||||||
Real estate funds |
(d | ) | 109 | 1 |
|
Quarterly
n/r |
(19%)
(81%) |
60 days | ||||||||||||
Deferred compensation plan investments |
(e | ) | 21 | 5 | n/r | n/r | ||||||||||||||
Consolidated VIEs: |
||||||||||||||||||||
Private equity fund |
(f | ) | 10 | 1 | n/r | n/r | ||||||||||||||
Total |
$ | 692 | $ | 129 |
F-24
December 31, 2013
(in millions) | Ref | Fair Value |
Total Unfunded
Commitments |
Redemption
Frequency |
Redemption
Notice Period |
|||||||||||||||
Consolidated sponsored investment funds: |
||||||||||||||||||||
Private equity funds of funds |
(a | ) | $ | 195 | $ | 23 | n/r | n/r | ||||||||||||
Other funds of hedge funds |
(g | ) | 155 | |
|
Monthly
Quarterly n/r |
(13%),
(78%), (9%) |
30 90 days | ||||||||||||
Equity method: (1) |
||||||||||||||||||||
Hedge funds/funds of hedge funds |
(b | ) | 276 | 84 |
|
Monthly
Quarterly n/r |
(55%),
(11%) (34%) |
15 90 days | ||||||||||||
Private equity funds |
(c | ) | 101 | 62 | n/r | n/r | ||||||||||||||
Real estate funds |
(d | ) | 118 | 12 |
|
Quarterly
n/r |
(17%)
(83%) |
60 days | ||||||||||||
Deferred compensation plan investments |
(e | ) | 39 | 7 |
|
Monthly
Quarterly n/r |
(8%),
(18%) (74%) |
60 90 days | ||||||||||||
Consolidated VIEs: |
||||||||||||||||||||
Private equity fund |
(f | ) | 14 | 1 | n/r | n/r | ||||||||||||||
Total |
$ | 898 | $ | 189 |
n/r | not redeemable |
(1) | Comprised of equity method investments, which include investment companies, which account for their financial assets and most financial liabilities under fair value measures; therefore, the Companys investment in such equity method investees approximates fair value. |
(a) | This category includes the underlying third-party private equity funds within consolidated BlackRock sponsored private equity funds of funds. The fair values of the investments in the third-party funds have been estimated using capital accounts representing the Companys ownership interest in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption; however, for certain funds, the Company may sell or transfer its interest, which may need approval by the general partner of the underlying funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately seven years at both December 31, 2014 and 2013. The total remaining unfunded commitments to other third-party funds were $22 million and $23 million at December 31, 2014 and 2013, respectively. The Company had contractual obligations to the consolidated funds of $31 million and $30 million at December 31, 2014 and 2013, respectively. |
(b) | This category includes hedge funds and funds of hedge funds that invest primarily in equities, fixed income securities, distressed credit, opportunistic and mortgage instruments and other third-party hedge funds. The fair values of the investments have been estimated using the NAV of the Companys ownership interest in partners capital. It was estimated that the investments in the funds that are not subject to redemption will be liquidated over a weighted-average period of approximately two and three years at December 31, 2014 and 2013, respectively. |
(c) | This category includes several private equity funds that initially invest in nonmarketable securities of private companies, which ultimately may become public in the future. The fair values of these investments have been estimated using capital accounts representing the Companys ownership interest in the funds as well as other performance inputs. The Companys investment in each fund is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying assets of the private equity funds. It was estimated that the investments in these funds will be liquidated over a weighted-average period of approximately four years and five years at December 31, 2014 and 2013, respectively. |
(d) | This category includes several real estate funds that invest directly in real estate and real estate related assets. The fair values of the investments have been estimated using capital accounts representing the Companys ownership interest in the funds. A majority of the Companys investments are not subject to redemption or are not currently redeemable and are normally returned through distributions as a result of the liquidation of the underlying assets of the real estate funds. It is estimated that the investments in these funds not subject to redemptions will be liquidated over a weighted-average period of approximately seven years at both December 31, 2014 December 31, 2013. |
(e) | This category includes investments in several real estate funds and certain hedge funds that invest in energy and health science related equity securities. The fair values of the investments in this category have been estimated using capital accounts representing the Companys ownership interest in partners capital as well as performance inputs. The investments in hedge funds will be redeemed upon settlement of certain deferred compensation liabilities. The real estate investments are not subject to redemption; however, distributions as a result of the liquidation of the underlying assets will be used to settle certain deferred compensation liabilities over time. |
(f) | This category includes the underlying third-party private equity funds within one consolidated BlackRock sponsored private equity fund of funds. The fair values of the investments in the third-party funds have been estimated using capital accounts representing the Companys ownership interest in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption; however, for certain funds the Company may sell or transfer its interest, which may need approval by the general partner of the underlying third-party funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately one year at December 31, 2014 and two years at December 31, 2013. Total remaining unfunded commitments to other third-party funds were not material at both December 31, 2014 and 2013, which commitments are required to be funded by capital contributions from noncontrolling interest holders. |
(g) | At December 31, 2013, this category included consolidated funds of hedge funds that invested in multiple strategies to diversify risks. The fair values of the investments had been estimated using the NAV of the funds ownership interest in partners capital of each fund in the portfolio. Certain of the underlying funds could be redeemed as long as there were no restrictions in place. The underlying funds that were currently restricted from redemptions within one year would become redeemable in approximately 12 to 24 months. This category also included a consolidated offshore feeder fund that invested in a master fund with multiple alternative investment strategies. The fair value of this investment had been estimated using the NAV of the master offshore fund held by the feeder fund. The investment was currently subject to restrictions in place by the underlying master fund. |
F-25
Fair Value Option. Upon the initial consolidation of certain CLOs, the Company elected to adopt the fair value option provisions for eligible assets and liabilities, including bank loans and borrowings of the CLOs to mitigate accounting mismatches between the carrying value of the assets and liabilities and to achieve operational simplification. To the extent there is a difference between the change in fair value of the assets and liabilities, the difference will be reflected as net income (loss) attributable to nonredeemable noncontrolling interests on the consolidated statements of income and offset by a change in appropriated retained earnings on the consolidated statements of financial condition.
The following table summarizes information related to those assets and liabilities selected for fair value accounting at December 31, 2014 and 2013:
(in millions) |
December 31,
2014 |
December 31,
2013 |
||||||
CLO Bank Loans: |
||||||||
Aggregate principal amounts outstanding |
$ | 3,338 | $ | 2,181 | ||||
Fair value |
3,260 | 2,176 | ||||||
Aggregate unpaid principal balance in excess of (less than) fair value |
$ | 78 | $ | 5 | ||||
Unpaid principal balance of loans more than 90 days past due |
$ | 6 | $ | 14 | ||||
Aggregate fair value of loans more than 90 days past due |
2 | 9 | ||||||
Aggregate unpaid principal balance in excess of fair value for loans more than 90 days past due |
$ | 4 | $ | 5 | ||||
CLO Borrowings: |
||||||||
Aggregate principal amounts outstanding |
$ | 3,508 | $ | 2,455 | ||||
Fair value |
$ | 3,389 | $ | 2,369 |
At December 31, 2014, the principal amounts outstanding of the borrowings issued by the CLOs mature between 2016 and 2027.
During 2014, 2013 and 2012, the change in fair value of the bank loans and bonds held by the CLOs resulted in a $69 million, $153 million and $154 million gain, respectively, which were offset by a $65 million, $117 million and $166 million loss, respectively, from the change in fair value of the CLO borrowings.
The net gains (losses) were recorded in net gain (loss) on consolidated VIEs on the consolidated statements of income.
The change in fair value of the assets and liabilities included interest income and expense, respectively.
6. Variable Interest Entities
In the normal course of business, the Company is the manager of various types of sponsored investment vehicles, including collateralized debt obligations (CDOs)/CLOs and sponsored investment funds, which may be considered VIEs. The Company receives advisory fees and/or other incentive-related fees for its services and may from time to time own
equity or debt securities or enter into derivatives with the vehicles, each of which are considered variable interests. The Company enters into these variable interests principally to address client needs through the launch of such investment vehicles. The VIEs are primarily financed via capital contributed by equity and debt holders. The Companys involvement in financing the operations of the VIEs is generally limited to its equity interests.
In order to determine whether the Company is the PB of a VIE, management must make significant estimates and assumptions of probable future cash flows of the VIEs. Assumptions made in such analyses may include, but are not limited to, market prices of securities, market interest rates, potential credit defaults on individual securities or default rates on a portfolio of securities, prepayments, realization of gains, liquidity or marketability of certain securities, discount rates and the probability of certain other outcomes. See Note 2, Significant Accounting Policies , for more information.
Consolidated VIEs . Consolidated VIEs included CLOs in which BlackRock did not have an investment; however, BlackRock, as the collateral manager, was deemed to have both the power to control the activities of the CLOs and the right to receive benefits that could potentially be significant to the CLOs. In addition, BlackRock was the PB of one investment fund because it absorbed the majority of the variability due to its de-facto related-party relationships with other partners in the fund. The assets of these VIEs are not available to creditors of the Company. In addition, the investors in these VIEs have no recourse to the credit of the Company. At December 31, 2014 and 2013, the following balances related to VIEs were recorded on the consolidated statements of financial condition:
(in millions) |
December 31,
2014 |
December 31,
2013 |
||||||
Assets of consolidated VIEs: |
||||||||
Cash and cash equivalents |
$ | 278 | $ | 161 | ||||
Bank loans |
3,260 | 2,176 | ||||||
Bonds |
47 | 106 | ||||||
Other investments and other assets |
45 | 43 | ||||||
Total bank loans, bonds, other investments and other assets |
3,352 | 2,325 | ||||||
Liabilities of consolidated VIEs: |
||||||||
Borrowings |
(3,389 | ) | (2,369 | ) | ||||
Other liabilities |
(245 | ) | (74 | ) | ||||
Appropriated retained earnings |
19 | (22 | ) | |||||
Noncontrolling interests of consolidated VIEs |
(15 | ) | (21 | ) | ||||
Total BlackRock net interests in consolidated VIEs |
$ | | $ | |
The Company recorded $41 million, $0 and $38 million of nonoperating expense and an equal and offsetting loss attributable to nonredeemable noncontrolling interests related to consolidated VIEs during 2014, 2013 and 2012, respectively. At December 31, 2014 and 2013, the weighted-average maturity of the bank loans and bonds was approximately 4.9 years and 4.7 years, respectively.
F-26
Non-Consolidated VIEs. At December 31, 2014 and 2013, the Companys carrying value of assets and liabilities pertaining to its variable interests in VIEs and its maximum risk of loss related to VIEs for which it was the sponsor or in which it held a variable interest, but for which it was not the PB, was as follows:
(in millions) |
Variable Interests on the Consolidated
Statement of Financial Condition |
|||||||||||||||
At December 31, 2014 | Investments |
Advisory
Fee Receivables |
Other Net
Assets (Liabilities) |
Maximum
Risk of Loss (1) |
||||||||||||
CDOs/CLOs |
$ | | $ | 2 | $ | (5 | ) | $ | 19 | |||||||
Other sponsored investment funds: |
||||||||||||||||
Collective trusts |
| 191 | | 191 | ||||||||||||
Other |
57 | 177 | (3 | ) | 234 | |||||||||||
Total |
$ | 57 | $ | 370 | $ | (8 | ) | $ | 444 | |||||||
At December 31, 2013 |
||||||||||||||||
CDOs/CLOs |
$ | | $ | 1 | $ | (4 | ) | $ | 18 | |||||||
Other sponsored investment funds: |
||||||||||||||||
Collective trusts |
| 184 | | 184 | ||||||||||||
Other |
37 | 137 | (6 | ) | 174 | |||||||||||
Total |
$ | 37 | $ | 322 | $ | (10 | ) | $ | 376 |
(1) | At December 31, 2014 and 2013, BlackRocks maximum risk of loss associated with these VIEs primarily related to collecting advisory fee receivables and BlackRocks investments. |
The net assets of the above CDOs/CLOs that the Company does not consolidate were as follows:
CDOs/CLOs
(in billions) |
December 31,
2014 |
December 31,
2013 |
||||||
Assets at fair value |
$ | 1 | $ | 1 | ||||
Liabilities (1) |
2 | 2 | ||||||
Net assets |
$ | (1 | ) | $ | (1 | ) |
(1) | Amounts primarily comprised of unpaid principal debt obligations to CDO/CLO debt holders. |
The net assets of other sponsored investment funds that are nonconsolidated VIEs approximated $1.7 trillion to $1.8 trillion at December 31, 2014 and $1.6 trillion to $1.7 trillion at December 31, 2013. Net assets included approximately $1.4 trillion of collective trusts at both December 31, 2014 and December 31, 2013. Each collective trust has been aggregated separately and may include collective trusts that invest in other collective trusts. The net assets of these VIEs primarily are comprised of cash and cash equivalents and investments, partially offset by liabilities primarily comprised of various accruals for the sponsored investment vehicles.
7. Derivatives and Hedging
The Company maintains a program to enter into swaps to hedge against market price and interest rate exposures with respect to certain seed investments in sponsored investment products. At December 31, 2014, the Company had outstanding total return swaps and interest rate swaps with an aggregate notional value of approximately $238 million and $84 million, respectively. At December 31, 2013, the Company had outstanding total return swaps and interest rate swaps with an aggregate notional value of approximately $117 million and $71 million, respectively.
The Company has entered into a derivative, providing credit protection to a counterparty of approximately $17 million,
representing the Companys maximum risk of loss with respect to the provision of credit protection. The Company carries the derivative at fair value based on the expected future cash flows under the arrangement.
The fair values of the outstanding derivatives mentioned above were not material to the consolidated statements of financial condition at December 31, 2014 and 2013.
The Company executes forward foreign currency exchange contracts to mitigate the risk of certain foreign exchange movements. At December 31, 2014, the Company had outstanding forward foreign currency exchange contracts with an aggregate notional value of approximately $201 million. The fair value of the forward foreign currency exchange contracts at December 31, 2014 was not material to the consolidated statement of financial condition. At December 31, 2013, the Company had outstanding forward foreign currency exchange contracts with an aggregate notional value of approximately $792 million and a fair value of approximately $26 million.
Gains (losses) on total return swaps are recorded in nonoperating income (expense) and were $(26) million, $(15) million and $(23) million for 2014, 2013 and 2012, respectively.
Gains (losses) on forward foreign currency exchange contracts are recorded in other general and administration expense and were $(26) million for 2013. Gains (losses) were not material to the consolidated statements of income for 2014 and 2012.
Gains (losses) on the interest rate swaps are recorded in nonoperating income (expense) and were $(21) million for 2014. Gains (losses) were not material for 2013 and 2012.
The Company consolidates certain sponsored investment funds, which may utilize derivative instruments as a part of the funds investment strategies. The fair value of such derivatives at December 31, 2014 and 2013 was not material. The change in fair value of such derivatives, which is recorded in nonoperating income (expense), was not material for 2014, 2013 and 2012.
F-27
8. Property and Equipment
Property and equipment consists of the following:
(in millions) |
Estimated useful life-in years |
December 31, | ||||||||||
2014 | 2013 | |||||||||||
Property and equipment: |
||||||||||||
Building |
39 | $ | 17 | $ | 17 | |||||||
Building improvements |
15 | 14 | 14 | |||||||||
Leasehold improvements |
1-15 | 478 | 501 | |||||||||
Equipment and computer software |
3 | 387 | 451 | |||||||||
Other transportation equipment |
10 | 56 | 56 | |||||||||
Furniture and fixtures |
7 | 93 | 93 | |||||||||
Other |
N/A | 9 | 4 | |||||||||
Total |
1,054 | 1,136 | ||||||||||
Less: accumulated depreciation and amortization |
587 | 611 | ||||||||||
Property and equipment, net |
$ | 467 | $ | 525 |
N/A | Not Applicable |
Qualifying software costs of approximately $45 million, $35 million and $36 million have been capitalized within equipment and computer software during 2014, 2013 and 2012, respectively, and are being amortized over an estimated useful life of three years.
Depreciation and amortization expense was $117 million, $128 million and $129 million for 2014, 2013 and 2012, respectively.
9. Goodwill
Goodwill activity during 2014 and 2013 was as follows:
(in millions) | 2014 | 2013 | ||||||
Beginning of year balance |
$ | 12,980 | $ | 12,910 | ||||
Acquisitions (1) |
| 73 | ||||||
Goodwill adjustments related to Quellos and other (2) |
(19 | ) | (3 | ) | ||||
End of year balance |
$ | 12,961 | $ | 12,980 |
(1) | The 2013 amount primarily represents $29 million of goodwill from the Companys acquisition of MGPA, an independently managed private equity real estate investment advisory company primarily in Asia and Europe, on October 4, 2013 for approximately $66 million (the MGPA Transaction) and $44 million of goodwill from the Companys acquisition of Credit Suisses ETF franchise on July 1, 2013 for approximately $273 million (the Credit Suisse ETF Transaction). |
(2) | The decrease in goodwill during both 2014 and 2013 primarily resulted from a decline of approximately $20 million related to tax benefits realized from tax-deductible goodwill in excess of book goodwill from the acquisition of the fund-of-funds business of Quellos Group, LLC in October 2007 (the Quellos Transaction). Goodwill related to the Quellos Transaction will continue to be reduced in future periods by the amount of tax benefits realized from tax-deductible goodwill in excess of book goodwill from the Quellos Transaction. The balance of the Quellos tax-deductible goodwill in excess of book goodwill was approximately $263 million and $293 million at December 31, 2014 and 2013, respectively. |
BlackRock assessed its goodwill for impairment on July 31, 2014, 2013 and 2012 and considered such factors as the book value and the market capitalization of the Company. The impairment assessment indicated no impairment charges were required. The Company continues to monitor its book value per share compared with closing prices of its common stock for potential indicators of impairment. At December 31, 2014, the Companys common stock closed at $357.56, which exceeded its book value, after excluding appropriated retained earnings, of approximately $164.06 per share.
F-28
10. Intangible Assets
Intangible assets at December 31, 2014 and 2013 consisted of the following:
(in millions) |
Remaining
Weighted- Average Estimated Useful Life |
Gross Carrying
Amount |
Accumulated
Amortization |
Net Carrying
Amount |
||||||||||||
At December 31, 2014 |
||||||||||||||||
Indefinite-lived intangible assets: |
||||||||||||||||
Management contracts |
N/A | $ | 15,579 | $ | | $ | 15,579 | |||||||||
Trade names / trademarks |
N/A | 1,403 | | 1,403 | ||||||||||||
License |
N/A | 6 | | 6 | ||||||||||||
Total indefinite-lived intangible assets |
16,988 | | 16,988 | |||||||||||||
Finite-lived intangible assets: |
||||||||||||||||
Management contracts |
3.8 | 1,390 | 1,036 | 354 | ||||||||||||
Intellectual property |
3.6 | 6 | 4 | 2 | ||||||||||||
Total finite-lived intangible assets |
3.8 | 1,396 | 1,040 | 356 | ||||||||||||
Total intangible assets |
$ | 18,384 | $ | 1,040 | $ | 17,344 | ||||||||||
At December 31, 2013 |
||||||||||||||||
Indefinite-lived intangible assets: |
||||||||||||||||
Management contracts |
N/A | $ | 15,582 | $ | | $ | 15,582 | |||||||||
Trade names / trademarks |
N/A | 1,403 | | 1,403 | ||||||||||||
License |
N/A | 6 | | 6 | ||||||||||||
Total indefinite-lived intangible assets |
16,991 | | 16,991 | |||||||||||||
Finite-lived intangible assets: |
||||||||||||||||
Management contracts |
4.3 | 1,561 | 1,054 | 507 | ||||||||||||
Intellectual property |
4.6 | 6 | 3 | 3 | ||||||||||||
Total finite-lived intangible assets |
4.3 | 1,567 | 1,057 | 510 | ||||||||||||
Total intangible assets |
$ | 18,558 | $ | 1,057 | $ | 17,501 |
N/A | Not Applicable |
The impairment tests performed for intangible assets as of July 31, 2014, 2013 and 2012 indicated no impairment charges were required.
Estimated amortization expense for finite-lived intangible assets for each of the five succeeding years is as follows:
(in millions) | ||||
Year | Amount | |||
2015 |
$ | 126 | ||
2016 |
91 | |||
2017 |
74 | |||
2018 |
24 | |||
2019 |
22 |
Indefinite-Lived Acquired Management Contracts
In July 2013, in connection with the Credit Suisse ETF Transaction, the Company acquired $231 million of indefinite-lived management contracts.
Finite-Lived Acquired Management Contracts
In October 2013, in connection with the MGPA Transaction, the Company acquired $29 million of finite-lived management contracts with a weighted-average estimated useful life of approximately eight years.
11. Other Assets
At March 31, 2013, BlackRock held an approximately one-third economic equity interest in Private National Mortgage Acceptance Company, LLC (PNMAC), which is accounted
for as an equity method investment and is included in other assets on the consolidated statements of financial condition. On May 8, 2013, PennyMac became the sole managing member of PNMAC in connection with an initial public offering of PennyMac (the PennyMac IPO). As a result of the PennyMac IPO, BlackRock recorded a noncash, nonoperating pre-tax gain of $39 million related to the carrying value of its equity method investment.
Subsequent to the PennyMac IPO, the Company contributed 6.1 million units of its PennyMac investment to a new donor advised fund (the Charitable Contribution). The fair value of the Charitable Contribution was $124 million and is included in general and administration expense on the consolidated statements of income for 2013. In connection with the Charitable Contribution, the Company also recorded a noncash, nonoperating pre-tax gain of $80 million related to the contributed investment and a tax benefit of approximately $48 million for 2013.
The carrying value and fair value of the Companys interest (approximately 20% or 16 million shares and units) was approximately $167 million and $269 million, respectively, at December 31, 2014 and approximately $127 million and $273 million, respectively, at December 31, 2013. The fair value of the Companys interest reflected the PennyMac stock price at December 31, 2014 and 2013, respectively (a Level 1 input).
12. Borrowings
Short-Term Borrowings
2014 Revolving Credit Facility. In March 2011, the Company entered into a five-year $3.5 billion unsecured revolving
F-29
credit facility, which was amended in 2013 and 2012. In March 2014, the Companys credit facility was further amended to extend the maturity date to March 2019. The amount of the aggregate commitment is $3.990 billion (the 2014 credit facility). The 2014 credit facility permits the Company to request up to an additional $1.0 billion of borrowing capacity, subject to lender credit approval, increasing the overall size of the 2014 credit facility to an aggregate principal amount not to exceed $4.990 billion. Interest on borrowings outstanding accrues at a rate based on the applicable London Interbank Offered Rate plus a spread. The 2014 credit facility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to earnings before interest, taxes, depreciation and amortization, where net debt equals total debt less unrestricted cash) of 3 to 1, which was satisfied with a ratio of less than 1 to 1 at December 31, 2014. The 2014 credit facility provides back-up liquidity, funds ongoing working capital for general corporate purposes and funds various
investment opportunities. At December 31, 2014, the Company had no amount outstanding under the 2014 credit facility.
Commercial Paper Program. On October 14, 2009, BlackRock established a commercial paper program (the CP Program) under which the Company could issue unsecured commercial paper notes (the CP Notes) on a private placement basis up to a maximum aggregate amount outstanding at any time of $3.0 billion. BlackRock increased the maximum aggregate amount that could be borrowed under the CP Program to $3.5 billion in 2011 and to $3.785 billion in 2012. In April 2013, BlackRock increased the maximum aggregate amount for which the Company could issue unsecured CP Notes on a private-placement basis up to a maximum aggregate amount outstanding at any time of $3.990 billion. The CP Program is currently supported by the 2014 credit facility. At December 31, 2014, BlackRock had no CP Notes outstanding.
Long-Term Borrowings
The carrying value and fair value of long-term borrowings estimated using market prices at December 31, 2014 included the following:
(in millions) | Maturity Amount |
Unamortized
Discount |
Carrying Value | Fair Value | ||||||||||||
1.375% Notes due 2015 |
$ | 750 | $ | | $ | 750 | $ | 753 | ||||||||
6.25% Notes due 2017 |
700 | (1 | ) | 699 | 785 | |||||||||||
5.00% Notes due 2019 |
1,000 | (2 | ) | 998 | 1,134 | |||||||||||
4.25% Notes due 2021 |
750 | (3 | ) | 747 | 825 | |||||||||||
3.375% Notes due 2022 |
750 | (3 | ) | 747 | 783 | |||||||||||
3.50% Notes due 2024 |
1,000 | (3 | ) | 997 | 1,029 | |||||||||||
Total Long-term Borrowings |
$ | 4,950 | $ | (12 | ) | $ | 4,938 | $ | 5,309 |
Long-term borrowings at December 31, 2013 had a carrying value of $4.939 billion and a fair value of $5.284 billion determined using market prices at the end of December 2013.
2024 Notes . In March 2014, the Company issued $1.0 billion in aggregate principal amount of 3.50% senior unsecured and unsubordinated notes maturing on March 18, 2024 (the 2024 Notes). The net proceeds of the 2024 Notes were used to refinance certain indebtedness which matured in the fourth quarter of 2014. Interest is payable semi-annually in arrears on March 18 and September 18 of each year, or approximately $35 million per year. The 2024 Notes may be redeemed prior to maturity at any time in whole or in part at the option of the Company at a make-whole redemption price. The 2024 Notes were issued at a discount of $3 million that is being amortized over the term of the notes. The Company incurred approximately $6 million of debt issuance costs, which are being amortized over the term of the 2024 Notes. At December 31, 2014, $6 million of unamortized debt issuance costs was included in other assets on the consolidated statement of financial condition.
2015 and 2022 Notes. In May 2012, the Company issued $1.5 billion in aggregate principal amount of unsecured unsubordinated obligations. These notes were issued as two separate series of senior debt securities, including $750 million of 1.375% notes maturing in June 2015 (the 2015 Notes) and $750 million of 3.375% notes maturing in June 2022 (the 2022 Notes). Net proceeds were used to fund the repurchase of BlackRocks common stock and Series B Preferred from Barclays and affiliates and for
general corporate purposes. Interest on the 2015 Notes and the 2022 Notes of approximately $10 million and $25 million per year, respectively, is payable semi-annually on June 1 and December 1 of each year, which commenced December 1, 2012. The 2015 Notes and 2022 Notes may be redeemed prior to maturity at any time in whole or in part at the option of the Company at a make-whole redemption price. The make-whole redemption price represents a price, subject to the specific terms of the 2015 and 2022 Notes and related indenture, that is the greater of (a) par value and (b) the present value of future payments that will not be paid because of an early redemption, which is discounted at a fixed spread over a comparable Treasury security. The 2015 Notes and 2022 Notes were issued at a discount of $5 million that is being amortized over the term of the notes. The Company incurred approximately $7 million of debt issuance costs, which are being amortized over the respective terms of the 2015 Notes and 2022 Notes. At December 31, 2014, $4 million of unamortized debt issuance costs was included in other assets on the consolidated statement of financial condition.
2021 Notes. In May 2011, the Company issued $1.5 billion in aggregate principal amount of unsecured unsubordinated obligations. These notes were issued as two separate series of senior debt securities, including $750 million of 4.25% notes maturing in May 2021 and $750 million of floating rate notes (2013 Floating Rate Notes), which were repaid in May 2013 at maturity. Net proceeds of this offering were used to fund the repurchase of BlackRocks Series B Preferred from affiliates of Merrill Lynch & Co., Inc. (Merrill Lynch). Interest
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on the 4.25% notes due in 2021 (2021 Notes) is payable semi-annually on May 24 and November 24 of each year, which commenced November 24, 2011, and is approximately $32 million per year. The 2021 Notes may be redeemed prior to maturity at any time in whole or in part at the option of the Company at a make-whole redemption price. The 2021 Notes were issued at a discount of $4 million. At December 31, 2014, $3 million of unamortized debt issuance costs was included in other assets on the consolidated statement of financial condition and are being amortized over the remaining term of the 2021 Notes.
In May 2011, in conjunction with the issuance of the 2013 Floating Rate Notes, the Company entered into a $750 million notional interest rate swap maturing in 2013 to hedge the future cash flows of its obligation at a fixed rate of 1.03%. During the second quarter of 2013, the interest rate swap matured and the 2013 Floating Rate Notes were fully repaid.
2019 Notes. In December 2009, the Company issued $2.5 billion in aggregate principal amount of unsecured and unsubordinated obligations. These notes were issued as three separate series of senior debt securities including $0.5 billion of 2.25% notes, which were repaid in December 2012, $1.0 billion of 3.50% notes, which were repaid in December 2014 at maturity, and $1.0 billion of 5.0% notes maturing in December 2019 (the 2019 Notes). Net proceeds of this offering were used to repay borrowings under the CP Program, which was used to finance a portion of the acquisition of Barclays Global Investors (BGI) from Barclays on December 1, 2009 (the BGI Transaction), and for general corporate purposes. Interest on the 2019 Notes of approximately $50 million per year is payable semi-annually in arrears on June 10 and December 10 of each year. These notes may be redeemed prior to maturity at any time in whole or in part at the option of the Company at a make-whole redemption price. These notes were issued collectively at a discount of $5 million. At December 31, 2014, $3 million of unamortized debt issuance costs was included in other assets on the consolidated statement of financial condition and are being amortized over the remaining term of the 2019 Notes.
2017 Notes. In September 2007, the Company issued $700 million in aggregate principal amount of 6.25% senior unsecured and unsubordinated notes maturing on September 15, 2017 (the 2017 Notes). A portion of the net proceeds of the 2017 Notes was used to fund the initial cash payment for the acquisition of the fund-of-funds business of Quellos and the remainder was used for general corporate purposes. Interest is payable semi-annually in arrears on March 15 and September 15 of each year, or approximately $44 million per year. The 2017 Notes may be redeemed prior to maturity at any time in whole or in part at the option of the Company at a make-whole redemption price. The 2017 Notes were issued at a discount of $6 million, which is being amortized over their ten-year term. The Company incurred approximately $4 million of debt issuance costs, which are being amortized over ten years. At December 31, 2014, $1 million of unamortized debt issuance costs was included in other assets on the consolidated statement of financial condition.
13. Commitments and Contingencies
Operating Lease Commitments
The Company leases its primary office spaces under
agreements that expire through 2035. Future minimum commitments under these operating leases are as follows:
(in millions) | ||||
Year | Amount | |||
2015 |
$ | 126 | ||
2016 |
111 | |||
2017 |
112 | |||
2018 |
111 | |||
2019 |
105 | |||
Thereafter |
613 | |||
Total |
$ | 1,178 |
Rent expense and certain office equipment expense under agreements amounted to $132 million, $137 million and $133 million in 2014, 2013 and 2012, respectively.
Investment Commitments . At December 31, 2014, the Company had $161 million of various capital commitments to fund sponsored investment funds, including funds of private equity funds, real estate funds, infrastructure funds, opportunistic funds and distressed credit funds. This amount excludes additional commitments made by consolidated funds of funds to underlying third-party funds as third-party noncontrolling interest holders have the legal obligation to fund the respective commitments of such funds of funds. In addition to the capital commitments of $161 million, the Company had approximately $35 million of contingent commitments for certain funds which have investment periods that have expired. Generally, the timing of the funding of these commitments is unknown and the commitments are callable on demand at any time prior to the expiration of the commitment. These unfunded commitments are not recorded on the consolidated statements of financial condition. These commitments do not include potential future commitments approved by the Company that are not yet legally binding. The Company intends to make additional capital commitments from time to time to fund additional investment products for, and with, its clients.
Contingencies
Contingent Payments. The Company acts as the portfolio manager in a series of derivative transactions and has a maximum potential exposure of $17 million under a derivative between the Company and counterparty. See Note 7, Derivatives and Hedging , for further discussion.
Contingent Payments Related to Business Acquisitions. In connection with the Credit Suisse ETF Transaction, BlackRock is required to make contingent payments annually to Credit Suisse, subject to achieving specified thresholds during a seven-year period, subsequent to the 2013 acquisition date. In addition, BlackRock is required to make contingent payments related to the MGPA Transaction during a five-year period, subject to achieving specified thresholds, subsequent to the 2013 acquisition date. The fair value of the remaining contingent payments at December 31, 2014 is not significant to the consolidated statement of financial condition and is included in other liabilities.
Legal Proceedings. From time to time, BlackRock receives subpoenas or other requests for information from various U.S. federal, state governmental and domestic and
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international regulatory authorities in connection with certain industry-wide or other investigations or proceedings. It is BlackRocks policy to cooperate fully with such inquiries. The Company and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations and other litigation arising in connection with BlackRocks activities. Additionally, certain BlackRock-sponsored investment funds that the Company manages are subject to lawsuits, any of which potentially could harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.
Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of regulatory matters or lawsuits, will have a material effect on BlackRocks results of operations, financial position, or cash flows. However, there is no assurance as to whether any such pending or threatened matters will have a material effect on BlackRocks results of operations, financial position or cash flows in any future reporting period. Due to uncertainties surrounding the outcome of these matters, management cannot reasonably estimate the possible loss or range of loss that may arise from these matters
Indemnifications. In the ordinary course of business or in connection with certain acquisition agreements, BlackRock enters into contracts pursuant to which it may agree to indemnify third parties in certain circumstances. The terms of these indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined or the likelihood of any liability is considered remote. Consequently, no liability has been recorded on the consolidated statements of financial condition.
In connection with securities lending transactions, BlackRock has issued certain indemnifications to certain securities lending clients against potential loss resulting from a borrowers failure to fulfill its obligations under the securities lending agreement should the value of the collateral pledged by the borrower at the time of default be insufficient to cover the borrowers obligation under the securities lending agreement. At December 31, 2014, the Company indemnified certain of its clients for their securities lending loan balances of approximately $145.7 billion. The Company held as agent, cash and securities totaling $155.8 billion as collateral for indemnified securities on loan at December 31, 2014. The fair value of these indemnifications was not material at December 31, 2014.
14. Stock-Based Compensation
The components of stock-based compensation expense are as follows:
Year ended December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Stock-based compensation: |
||||||||||||
Restricted stock and RSUs |
$ | 421 | $ | 415 | $ | 429 | ||||||
Long-term incentive plans to be funded by PNC |
32 | 33 | 22 | |||||||||
Total stock-based compensation |
$ | 453 | $ | 448 | $ | 451 |
Stock Award and Incentive Plan. Pursuant to the BlackRock, Inc. 1999 Stock Award and Incentive Plan (the Award Plan), options to purchase shares of the Companys common stock at an exercise price not less than the market value of BlackRocks common stock on the date of grant in the form of stock options, restricted stock or RSUs may be granted to employees and nonemployee directors. A maximum of 34,500,000 shares of common stock were authorized for issuance under the Award Plan. Of this amount, 9,134,678 shares remain available for future awards at December 31, 2014. Upon exercise of employee stock options, the issuance of restricted stock or the vesting of RSUs, the Company issues shares out of treasury to the extent available.
Restricted Stock and RSUs. Pursuant to the Award Plan, restricted stock grants and RSUs may be granted to certain employees. Substantially all restricted stock and RSUs vest over periods ranging from one to three years and are expensed using the straight-line method over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards. Prior to 2009, the Company awarded restricted stock and RSUs with nonforfeitable dividend equivalent rights. Restricted stock and RSUs awarded beginning in 2009 are not considered participating securities for purposes of calculating EPS as the dividend equivalents are subject to forfeiture prior to vesting of the award.
Restricted stock and RSU activity for 2014 is summarized below.
Outstanding at |
Restricted
Stock and Units |
Weighted
Average Grant Date Fair Value |
||||||
December 31, 2013 |
4,612,813 | $ | 207.94 | |||||
Granted |
1,476,276 | $ | 319.48 | |||||
Converted |
(2,593,251 | ) | $ | 205.87 | ||||
Forfeited |
(93,929 | ) | $ | 241.02 | ||||
December 31, 2014 (1) |
3 ,401,909 | $ | 257.01 |
(1) | At December 31, 2014, approximately 3.2 million awards are expected to vest and 0.2 million awards have vested but have not been converted. |
The Company values restricted stock and RSUs at their grant-date fair value as measured by BlackRocks common stock price. The total fair market value of RSUs granted to employees during 2014, 2013 and 2012 was $472 million, $390 million and $348 million, respectively. The total fair market value of RSUs converted to common stock during 2014, 2013 and 2012 was $534 million, $528 million and $297 million, respectively.
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At December 31, 2014, the intrinsic value of outstanding RSUs was $1.2 billion, reflecting a closing stock price of $357.56 at December 31, 2014.
RSUs granted under the Award Plan primarily related to the following:
Year ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Awards granted as part of annual incentive compensation that vest ratably over three years from the date of grant |
1,022,295 | 1,172,381 | 1,365,691 | |||||||||
Awards granted that cliff vest 100% on: |
||||||||||||
January 31, 2015 |
| | 418,038 | |||||||||
January 31, 2016 |
| 370,812 | | |||||||||
January 31, 2017 |
287,963 | | | |||||||||
1,310,258 | 1,543,193 | 1,783,729 |
In addition the Company also granted RSUs of 166,018, 117,339 and 111,389 during 2014, 2013 and 2012, respectively.
At December 31, 2014, there was $292 million in total unrecognized stock-based compensation expense related to unvested RSUs. The unrecognized compensation cost is expected to be recognized over the remaining weighted-average period of 0.9 years.
In January 2015, the Company granted under the Award Plan
| 952,329 RSUs to employees as part of annual incentive compensation that vest ratably over three years from the date of grant; |
| 303,999 RSUs to employees that cliff vest 100% on January 31, 2018; and |
| 262,847 RSUs to employees that cliff vest 100% on January 31, 2018. The number of shares distributed at vesting could be higher or lower than the original grant based on the level of attainment of predetermined Company performance measures. |
Market Performance-based RSUs. Pursuant to the Award Plan, market performance-based RSUs may be granted to certain employees. The market performance-based RSUs require that separate 15%, 25% and 35% share price appreciation targets be achieved during the six-year term of the awards. The awards are split into three tranches and each tranche may vest if the specified target increase in share price is met. Eligible delivery dates for each tranche are the fourth, fifth or sixth anniversaries of the grant date. Certain awards are forfeited if the employee leaves BlackRock before the vesting date. These awards are amortized over a service period of four years, which is the longer of the explicit service period or the period in which the market target is expected to be met. Market performance-based RSUs are not considered participating securities as the dividend equivalents are subject to forfeiture prior to vesting of the award. In 2013 and 2012, the Company granted 556,581 and 616,117 market performance-based RSUs, respectively, which will be funded primarily by shares currently held by PNC (see Long-Term Incentive Plans Funded by PNC below).
Market performance-based RSU activity for 2014 is summarized below.
Outstanding at |
Market
Performance- Based RSUs |
Weighted
Average Grant Date Fair Value |
||||||
December 31, 2013 |
1,132,113 | $ | 120.80 | |||||
Granted |
315,961 | $ | 195.30 | |||||
Forfeited |
(22,755 | ) | $ | 121.13 | ||||
December 31, 2014 (1) |
1,425,319 | $ | 137.31 |
(1) | At December 31, 2014, approximately 1.4 million awards are expected to vest and an immaterial amount of awards have vested and have not been converted. |
At December 31, 2014, total unrecognized stock-based compensation expense related to unvested market performance-based awards was $99 million. The unrecognized compensation cost is expected to be recognized over the remaining weighted-average period of 1.9 years.
The grant-date fair value of the awards was $62 million in 2014 and $71 million in both 2013 and 2012. The fair value was calculated using a Monte Carlo simulation with the following assumptions:
Grant Year |
Risk-Free
Interest Rate |
Performance
Period |
Expected
Stock Volatility |
Expected
Dividend Yield |
||||||||||||
2012 |
1.21 | % | 6 | 33.63 | % | 2.99 | % | |||||||||
2013 |
1.05 | % | 6 | 25.85 | % | 2.89 | % | |||||||||
2014 |
2.05 | % | 6 | 27.40 | % | 2.42 | % |
The Companys expected stock volatility assumption was based upon an average of the historical stock price fluctuations of BlackRocks common stock and an implied volatility at the grant date. The dividend yield assumption was derived using estimated dividends over the expected term and the stock price at the date of grant. The risk-free interest rate is based on the U.S. Treasury yield at date of grant.
Long-Term Incentive Plans Funded by PNC. Under a share surrender agreement, PNC committed to provide up to 4 million shares of BlackRock stock, held by PNC, to fund certain BlackRock long-term incentive plans (LTIP). The current share surrender agreement commits PNC to provide BlackRock series C nonvoting participating preferred stock to fund the remaining committed shares. As of December 31, 2014, 2.7 million shares had been surrendered by PNC. At December 31, 2014, the remaining shares committed by PNC of 1.3 million were available to fund certain future long-term incentive awards.
Stock Options. Stock option grants were made to certain employees pursuant to the Award Plan in 1999 through 2007. Options granted have a ten-year life, vested ratably over periods ranging from two to five years and became exercisable upon vesting. The Company has not granted any stock options subsequent to the January 2007 grant, which
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vested on September 29, 2011. Stock option activity for 2014 is summarized below.
Outstanding at |
Shares
under option |
Weighted
average exercise price |
||||||
December 31, 2013 |
931,758 | $ | 167.76 | |||||
Exercised (1) |
(25,039 | ) | $ | 167.76 | ||||
December 31, 2014 (1) |
906,719 | $ | 167.76 |
(1) | The aggregate intrinsic value of options exercised during 2014, 2013 and 2012 was $4 million, $19 million and $157 million, respectively. At December 31, 2014, all options were vested. |
Stock options outstanding and exercisable at December 31, 2014 were as follows:
Options Outstanding and Exercisable | ||||||||
Exercise
Prices |
Options Outstanding |
Weighted
Average Remaining Life (years) |
Weighted
Average Exercise Price |
Aggregate
Intrinsic Value of Exercisable Shares (1) (in millions) |
||||
$ 167.76 |
906,719 | 2.09 | $ 167.76 | $ 172 |
(1) | The aggregate intrinsic value of exercisable shares reflects a closing stock price of $357.56 at December 31, 2014. |
As of December 31, 2014, the Company had no remaining unrecognized stock-based compensation expense related to stock options.
Employee Stock Purchase Plan (ESPP). The ESPP allows eligible employees to purchase the Companys common stock at 95% of the fair market value on the last day of each three-month offering period. The Company does not record compensation expense related to employees purchasing shares under the ESPP.
15. Employee Benefit Plans
Deferred Compensation Plans
Voluntary Deferred Compensation Plan. The Company adopted a Voluntary Deferred Compensation Plan (VDCP) that allows participants to elect to defer between 1% and 100% of their annual cash incentive compensation. The participants must specify a deferral period of up to 10 years from the year of deferral and additionally, elect a lump sum distribution or in up to 10 annual installments. The Company may fund the obligation through the rabbi trust on behalf of the plans participants.
The rabbi trust established for the VDCP, with assets totaling $64 million and $65 million at December 31, 2014 and 2013, respectively, is reflected in investments on the consolidated statements of financial condition. Such investments are classified as trading and other investments. The corresponding liability balance of $78 million and $64 million at December 31, 2014 and 2013, respectively, is reflected on the consolidated statements of financial condition as accrued compensation and benefits. Earnings in the rabbi trust, including unrealized appreciation or depreciation, are reflected as nonoperating income (expense) and changes in the corresponding liability are reflected as employee compensation and benefits expense on the consolidated statements of income.
Other Deferred Compensation Plans. The Company has additional compensation plans for the purpose of providing deferred compensation and retention incentives to certain employees. For these plans, the final value of the deferred amount to be distributed in cash upon vesting is associated with investment returns of certain investment funds. The liabilities for these plans were $126 million and $100 million at December 31, 2014 and 2013, respectively, and are reflected in the consolidated statements of financial condition as accrued compensation and benefits. In January 2015, the Company granted approximately $125 million of additional deferred compensation that will fluctuate with investment returns and will vest ratably over three years from the date of grant.
Defined Contribution Plans
The Company has several defined contribution plans primarily in the United States and United Kingdom.
Certain of the Companys U.S. employees participate in a defined contribution plan (U.S. Plan). Employee contributions of up to 8% of eligible compensation, as defined by the plan and subject to Internal Revenue Code (IRC) limitations, are matched by the Company at 50% up to a maximum of $5,000 annually. In addition, the Company makes an annual retirement contribution to eligible participants equal to 3-5% of eligible compensation. In 2014, 2013 and 2012, the Companys expense related to the U.S. Plan was $67 million, $63 million and $59 million, respectively.
BlackRock Investment Management (UK) Limited (BIM), a wholly owned subsidiary of the Company, contributes to a defined contribution plan for all employees of BIM (U.K. Plan). BIM contributes between 6% and 15% of each employees eligible compensation. In 2014, 2013 and 2012, the Companys expense related to this plan was $33 million, $29 million and $27 million, respectively.
Defined Benefit Plans. The Company has several defined benefit pension plans primarily in Japan and Germany. All accrued benefits under the Germany defined benefit plan are currently frozen and the plan is closed to new participants. The participant benefits under the Germany plan will not change with salary increases or additional years of service. At December 31, 2014 and 2013, the plan assets for both these plans were approximately $21 million and $22 million, respectively. The underfunded obligations at December 31, 2014 and 2013 were not material. Benefit payments for the next five years and in aggregate for the five years thereafter are not expected to be material.
The plan assets for the defined benefit plan in Japan (the Japan Plan) are invested using a total return investment approach whereby a mix of equity securities, debt securities and other investments are used to preserve asset values, diversify risk and achieve the target investment return benchmark. Investment strategies and asset allocations are based on consideration of plan liabilities and the funded status of the plan. Investment performance and asset allocation are measured and monitored on an ongoing basis. The current target allocations for the plan assets are 22% for U.S. and international equity securities, 76% for U.S. and international fixed income securities and 2% for other. The table below provides the fair value of the plan assets of the Japan Plan at December 31, 2014 and 2013 by asset
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category and identifies the level of inputs used to determine the fair value of assets in each category.
(in millions) |
Quoted Prices
in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Total | |||||||||
At December 31, 2014 |
||||||||||||
Equity securities |
$ | 5 | $ | | $ | 5 | ||||||
Fixed income securities |
| 13 | 13 | |||||||||
Fair value of plan assets |
$ | 5 | $ | 13 | $ | 18 | ||||||
At December 31, 2013 |
||||||||||||
Equity securities |
$ | 6 | | $ | 6 | |||||||
Fixed income securities |
| 13 | 13 | |||||||||
Fair value of plan assets |
$ | 6 | $ | 13 | $ | 19 |
16. Related Party Transactions
Determination of Related Parties
PNC. The Company considers PNC, along with its affiliates, to be related parties based on the level of its ownership of BlackRock capital stock. At December 31, 2014, PNC owned approximately 21.0% of the Companys voting common stock and held approximately 22.0% of the total capital stock.
Registered Investment Companies and Equity Method Investments. The Company considers the registered investment companies that it manages, which include mutual funds and exchange-traded funds, to be related parties as a result of the Companys advisory relationship. In addition, equity method investments are considered related parties, due to the Companys influence over the financial and operating policies of the investee.
Barclays. The Company considered Barclays, along with its affiliates, to be related parties, based on its level of capital stock ownership prior to the secondary offering in May 2012 by Barclays of shares of the Companys stock. Since May 2012, Barclays has not owned any of the Companys capital stock and is no longer considered a related party.
Revenue from Related Parties
Revenues for services provided by the Company to these and other related parties are as follows:
Year ended December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Investment advisory, administration fees and securities lending revenue: |
||||||||||||
PNC and affiliates |
$ | 5 | $ | 5 | $ | 4 | ||||||
Barclays and affiliates |
| | 5 | |||||||||
Registered investment companies/equity method investees |
6,733 | 5,986 | 5,283 | |||||||||
Total investment advisory, administration fees, and securities lending revenue |
6,738 | 5,991 | 5,292 | |||||||||
Investment advisory performance fees |
173 | 185 | 120 | |||||||||
BlackRock Solutions and advisory: |
||||||||||||
PNC and affiliates |
7 | 7 | 7 | |||||||||
Equity method investees |
6 | 11 | 13 | |||||||||
Other |
| 5 | 3 | |||||||||
Total BlackRock Solutions and advisory |
13 | 23 | 23 | |||||||||
Other revenue: |
||||||||||||
PNC and affiliates |
3 | 3 | 3 | |||||||||
Barclays and affiliates |
| | 11 | |||||||||
Equity method investees |
67 | 58 | 52 | |||||||||
Total other revenue |
70 | 61 | 66 | |||||||||
Total revenue from related parties |
$ | 6,994 | $ | 6,260 | $ | 5,501 |
The Company provides investment advisory and administration services to its open- and closed-end funds and other commingled or pooled funds and separate accounts in which related parties invest. In addition, the Company provides investment advisory and administration services to Barclays and PNC and its affiliates for fees based on AUM. Further, the Company provides risk management services to PNC. The Company records its investment advisory and administration fees net of retrocessions.
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Aggregate Expenses for Transactions with Related Parties
Aggregate expenses included in the consolidated statements of income for transactions with related parties are as follows:
Year ended December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Expenses with related parties: |
||||||||||||
Distribution and servicing costs |
||||||||||||
PNC and affiliates |
$ | 2 | $ | 2 | $ | 3 | ||||||
Barclays and affiliates |
| | 1 | |||||||||
Total distribution and servicing costs |
2 | 2 | 4 | |||||||||
Direct fund expenses |
||||||||||||
Barclays and affiliates |
| | 4 | |||||||||
Total direct fund expenses |
| | 4 | |||||||||
General and administration expenses |
||||||||||||
Barclays and affiliates |
| | 5 | |||||||||
Other registered investment companies |
55 | 50 | 49 | |||||||||
Other (1) |
5 | | 33 | |||||||||
Total general and administration expenses |
60 | 50 | 87 | |||||||||
Total expenses with related parties |
$ | 62 | $ | 52 | $ | 95 |
(1) | Amount in 2012 included a one-time pre-tax charge of $30 million related to a contribution to certain of the Companys bank managed short-term investment funds. |
Certain Agreements and Arrangements with Barclays and PNC
PNC. On February 27, 2009, BlackRock entered into an amended and restated implementation and stockholder agreement with PNC, and a third amendment to the share surrender agreement with PNC. See Note 19, Capital Stock , for further discussion.
The changes contained in the amended and restated stockholder agreement with PNC, in relation to the prior agreement, among other things, (i) revised the definitions of Fair Market Value, Ownership Cap, Ownership Percentage, Ownership Threshold and Significant Stockholder; and (ii) amended or supplemented certain other provisions therein to incorporate series B preferred stock and series C preferred stock, respectively.
The amendment to the share surrender agreement with PNC provided for the substitution of series C preferred stock for the shares of common stock subject to the share surrender agreement.
In June 2009, in connection with the BGI Transaction, certain additional amendments were made to the amended and restated stockholder agreement with PNC.
The amended and restated stockholder agreement with PNC was changed to, among other things, (i) revise the definitions of Ownership Cap and Ownership Threshold, (ii) amend or supplement certain other definitions and provisions therein to incorporate series D participating preferred stock, (iii) provide that none of the transfer restriction provisions set forth in the amended and restated stockholder agreement with PNC apply to the shares purchased by PNC as part of the financing for the BGI Transaction, (iv) amend the provision relating to the composition of BlackRocks Board of Directors and (v) provide that the amended and
restated stockholder agreement with PNC shall terminate upon the later of (A) the five year anniversary of the amended and restated stockholder agreement with PNC and (B) the first date on which PNC and its affiliates beneficially own less than 5% of the outstanding BlackRock capital stock, subject to certain other conditions specified therein.
Barclays . In connection with the completion of its acquisition of BGI, BlackRock entered into a Stockholder Agreement, dated as of December 1, 2009 (the Barclays Stockholder Agreement), with Barclays and Barclays BR Holdings S.à.r.l. (BR Holdings, and together with Barclays, the Barclays Parties). Pursuant to the terms of the Barclays Stockholder Agreement, the Barclays Parties agreed, among other things, to certain transfer and voting restrictions with respect to shares of BlackRock common stock and preferred stock owned by them and their affiliates, to limits on the ability of the Barclays Parties and their affiliates to acquire additional shares of BlackRock common stock and preferred stock and to certain other restrictions. The Barclays Stockholder Agreement was terminated on May 29, 2012 in connection with its sale and capital exchange (see Note 19).
In addition, Barclays and certain of its affiliates have been engaged by the Company to provide the use of certain indices for certain BlackRock investment funds and for a fee to provide indemnification to clients related to potential losses in connection with lending of client securities. For the five months ended May 31, 2012 fees incurred for these agreements were $9 million and were recorded within direct fund expenses and general and administration expenses.
Receivables and Payables with Related Parties. Due from related parties, which is included within other assets on the consolidated statements of financial condition was $89 million and $74 million at December 31, 2014 and 2013, respectively, and primarily represented receivables from certain investment products managed by BlackRock. Accounts receivable at December 31, 2014 and 2013 included $747 million and $745 million, respectively, related to receivables from BlackRock mutual funds, including iShares , for investment advisory and administration services.
Due to related parties, which is included within other liabilities on the consolidated statements of financial condition, was $12 million and $13 million at December 31, 2014 and 2013, respectively, and primarily represented payables to certain investment products managed by BlackRock.
17. Net Capital Requirements
The Company is required to maintain net capital in certain regulated subsidiaries within a number of jurisdictions, which is partially maintained by retaining cash and cash equivalent investments in those subsidiaries or jurisdictions. As a result, such subsidiaries of the Company may be restricted in their ability to transfer cash between different jurisdictions and to their parents. Additionally, transfers of cash between international jurisdictions, including repatriation to the United States, may have adverse tax consequences that could discourage such transfers.
Banking Regulatory Requirements. BlackRock Institutional Trust Company, N.A. (BTC), a wholly owned subsidiary of the Company, is chartered as a national bank whose powers are limited to trust activities. BTC is subject to regulatory capital requirements administered by the Office of the
F-36
Comptroller of the Currency. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, BTC must meet specific capital guidelines that invoke quantitative measures of BTCs assets, liabilities, and certain off-balance sheet items as calculated under the regulatory accounting practices. BTCs
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulators to ensure capital adequacy require BTC to maintain a minimum Tier 1 capital and Tier 1 leverage ratio, as well as Tier 1 and total risk-based capital ratios. Based on BTCs calculations as of December 31, 2014 and 2013, it exceeded the applicable capital adequacy requirements.
Actual |
For Capital
Adequacy Purposes |
To Be Well
Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||||||||
(in millions) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||
Total capital (to risk weighted assets) |
$ | 775 | 142.0 | % | $ | 44 | 8.0 | % | $ | 56 | 10.0 | % | ||||||||||||
Tier 1 capital (to risk weighted assets) |
$ | 775 | 142.0 | % | $ | 22 | 4.0 | % | $ | 33 | 6.0 | % | ||||||||||||
Tier 1 capital (to average assets) |
$ | 775 | 72.1 | % | $ | 43 | 4.0 | % | $ | 54 | 5.0 | % | ||||||||||||
December 31, 2013 |
||||||||||||||||||||||||
Total capital (to risk weighted assets) |
$ | 660 | 112.7 | % | $ | 47 | 8.0 | % | $ | 59 | 10.0 | % | ||||||||||||
Tier 1 capital (to risk weighted assets) |
$ | 660 | 112.7 | % | $ | 23 | 4.0 | % | $ | 35 | 6.0 | % | ||||||||||||
Tier 1 capital (to average assets) |
$ | 660 | 63.4 | % | $ | 42 | 4.0 | % | $ | 52 | 5.0 | % |
Broker-dealers. BlackRock Investments, LLC and BlackRock Execution Services are registered broker-dealers and wholly owned subsidiaries of BlackRock that are subject to the Uniform Net Capital requirements under the Securities Exchange Act of 1934, which requires maintenance of certain minimum net capital levels.
Capital Requirements. At both December 31, 2014 and 2013, the Company was required to maintain approximately $1.1 billion in net capital in certain regulated subsidiaries, including BTC, entities regulated by the Financial Conduct Authority and Prudential Regulation Authority in the United Kingdom, and the Companys broker-dealers. The Company was in compliance with all applicable regulatory net capital requirements.
18. Accumulated Other Comprehensive Income (Loss)
The following table presents changes in AOCI by component for 2014 and 2013:
(in millions) |
Unrealized Gains
(Losses) on Available-for-sale Investments |
Benefit Plans |
Foreign
Currency Translation Adjustments |
Total (1) | ||||||||||||
December 31, 2012 |
$ | 16 | $ | (4 | ) | $ | (71 | ) | $ | (59 | ) | |||||
Other comprehensive income (loss) before
|
4 | 10 | 23 | 37 | ||||||||||||
Amount reclassified from AOCI (2),(3) |
(13 | ) | | | (13 | ) | ||||||||||
Net other comprehensive income (loss) for 2013 |
(9 | ) | 10 | 23 | 24 | |||||||||||
December 31, 2013 |
$ | 7 | $ | 6 | $ | (48 | ) | $ | (35 | ) | ||||||
Other comprehensive income (loss) before
|
3 | (2 | ) | (231 | ) | (230 | ) | |||||||||
Amount reclassified from AOCI (2),(3) |
(8 | ) | | | (8 | ) | ||||||||||
Net other comprehensive income (loss) for 2014 |
(5 | ) | (2 | ) | (231 | ) | (238 | ) | ||||||||
December 31, 2014 |
$ | 2 | $ | 4 | $ | (279 | ) | $ | (273 | ) |
(1) | All amounts are net of tax. |
(2) | The tax benefit (expense) was not material for 2014 and 2013. |
(3) | The pre-tax amount reclassified from AOCI was included in net gain (loss) on investments on the consolidated statements of income. |
F-37
19. Capital Stock
The Companys authorized common stock and nonvoting participating preferred stock, $0.01 par value, (Preferred) consisted of the following:
December 31,
2014 |
December 31,
2013 |
|||||||
Common Stock |
500,000,000 | 500,000,000 | ||||||
Nonvoting Participating Preferred Stock |
||||||||
Series A Preferred |
20,000,000 | 20,000,000 | ||||||
Series B Preferred |
150,000,000 | 150,000,000 | ||||||
Series C Preferred |
6,000,000 | 6,000,000 | ||||||
Series D Preferred |
20,000,000 | 20,000,000 |
May 2012 Barclays Sale and Capital Exchange. BlackRock completed the secondary offering of 26,211,335 shares of common stock held by Barclays at a price of $160.00 per share, which included 23,211,335 shares of common stock issued upon the conversion of Series B Preferred by a subsidiary of Barclays.
Upon completion of this offering, BlackRock repurchased 6,377,552 shares directly from Barclays outside the publicly announced share repurchase program at a price of $156.80 per share (consisting of 6,346,036 of Series B Preferred and 31,516 shares of common stock). The total transactions, including the full exercise of the underwriters option to
purchase 2,621,134 additional shares in the secondary offering, amounted to 35,210,021 shares, resulting in Barclays exiting its entire ownership position in BlackRock.
May 2012 PNC Capital Exchange. In May 2012, PNC exchanged 2,000,000 shares of Series B Preferred for an equal number of shares of common stock.
Other Changes. In September and October 2012, 593,786 and 2,594,070 shares of Series B Preferred, respectively, converted into an equal number of shares of common stock.
January 2013 PNC Capital Contribution. In January 2013, PNC surrendered to BlackRock 205,350 shares of BlackRock Series C Preferred to fund certain LTIP awards in accordance with the share surrender agreement between PNC and BlackRock.
Cash Dividends for Common and Preferred Shares / RSUs. During 2014, 2013 and 2012, the Company paid cash dividends of $7.72 per share (or $1,338 million), $6.72 per share (or $1,168 million) and $6.00 per share (or $1,060 million), respectively.
Share Repurchases. The Company repurchased 3.2 million common shares in open market-transactions under its share repurchase program for $1.0 billion during 2014. At December 31, 2014, there were 3.4 million shares still authorized to be repurchased.
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The Companys common and preferred shares issued and outstanding and related activity consist of the following:
Shares Issued | Shares Outstanding | |||||||||||||||||||||||||||||||
Common
Shares |
Escrow
Common Shares |
Treasury
Common Shares |
Series B
Preferred |
Series C
Preferred |
Common
Shares |
Series B
Preferred |
Series C
Preferred |
|||||||||||||||||||||||||
December 31, 2011 |
139,880,380 | (3,603 | ) | (1,413,642 | ) | 38,328,737 | 1,517,237 | 138,463,135 | 38,328,737 | 1,517,237 | ||||||||||||||||||||||
Exchange of Series B Preferred for common shares |
31,159,513 | | | (31,159,513 | ) | | 31,159,513 | (31,159,513 | ) | | ||||||||||||||||||||||
Shares repurchased |
(31,516 | ) | | (2,726,600 | ) | (6,346,036 | ) | | (2,758,116 | ) | (6,346,036 | ) | | |||||||||||||||||||
Net issuance of common shares related to employee stock transactions |
247,411 | | 1,763,361 | | | 2,010,772 | | | ||||||||||||||||||||||||
Release of common shares from escrow |
(3,603 | ) | 3,603 | | | | | | | |||||||||||||||||||||||
December 31, 2012 |
171,252,185 | | (2,376,881 | ) | 823,188 | 1,517,237 | 168,875,304 | 823,188 | 1,517,237 | |||||||||||||||||||||||
Shares repurchased |
| | (3,689,845 | ) | | | (3,689,845 | ) | | | ||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions |
| | 1,404,229 | | | 1,404,229 | | | ||||||||||||||||||||||||
PNC LTIP capital contribution |
| | | | (205,350 | ) | | | (205,350 | ) | ||||||||||||||||||||||
December 31, 2013 |
171,252,185 | | (4,662,497 | ) | 823,188 | 1,311,887 | 166,589,688 | 823,188 | 1,311,887 | |||||||||||||||||||||||
Shares repurchased |
| | (3,175,088 | ) | | | (3,175,088 | ) | | | ||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions |
| | 1,372,188 | | | 1,372,188 | | | ||||||||||||||||||||||||
December 31, 2014 |
171,252,185 | | (6,465,397 | ) | 823,188 | 1,311,887 | 164,786,788 | 823,188 | 1,311,887 |
F-39
20. Income Taxes
The components of income tax expense for 2014, 2013 and 2012, are as follows:
(in millions) | 2014 | 2013 | 2012 | |||||||||
Current income tax expense: |
||||||||||||
Federal |
$ | 923 | $ | 869 | $ | 856 | ||||||
State and local |
54 | 39 | 49 | |||||||||
Foreign |
258 | 307 | 186 | |||||||||
Total net current income tax expense |
1,235 | 1,215 | 1,091 | |||||||||
Deferred income tax expense (benefit): |
||||||||||||
Federal |
(73 | ) | (68 | ) | 4 | |||||||
State and local |
(9 | ) | 13 | 13 | ||||||||
Foreign |
(22 | ) | (138 | ) | (78 | ) | ||||||
Total net deferred income tax expense (benefit) |
(104 | ) | (193 | ) | (61 | ) | ||||||
Total income tax expense |
$ | 1,131 | $ | 1,022 | $ | 1,030 |
Income tax expense has been based on the following components of income before taxes, less net income (loss) attributable to noncontrolling interests:
(in millions) | 2014 | 2013 | 2012 | |||||||||
Domestic |
$ | 2,946 | $ | 2,814 | $ | 2,690 | ||||||
Foreign |
1,479 | 1,140 | 798 | |||||||||
Total |
$ | 4,425 | $ | 3,954 | $ | 3,488 |
The foreign income before taxes includes countries that have statutory tax rates that are lower than the U.S. federal statutory tax rate of 35%, such as the United Kingdom, Luxembourg, Canada and the Netherlands.
A reconciliation of income tax expense with expected federal income tax expense computed at the applicable federal income tax rate of 35% is as follows:
(in millions) | 2014 | % | 2013 | % | 2012 | % | ||||||||||||||||||
Statutory income tax expense |
$ | 1,549 | 35 | % | $ | 1,383 | 35 | % | $ | 1,221 | 35 | % | ||||||||||||
Increase (decrease) in income taxes resulting from: |
||||||||||||||||||||||||
State and local taxes (net of federal benefit) |
51 | 1 | 39 | 1 | 49 | 2 | ||||||||||||||||||
Impact of foreign, state, and local tax rate changes on deferred taxes |
(4 | ) | | (69 | ) | (2 | ) | (50 | ) | (2 | ) | |||||||||||||
Effect of foreign tax rates |
(434 | ) | (10 | ) | (329 | ) | (8 | ) | (221 | ) | (5 | ) | ||||||||||||
Other |
(31 | ) | | (2 | ) | | 31 | | ||||||||||||||||
Income tax expense |
$ | 1,131 | 26 | % | $ | 1,022 | 26 | % | $ | 1,030 | 30 | % |
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. These temporary differences result in taxable or deductible amounts in future years.
The components of deferred income tax assets and liabilities are shown below
December 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Deferred income tax assets: |
||||||||
Compensation and benefits |
$ | 323 | $ | 345 | ||||
Unrealized investment losses |
157 | 99 | ||||||
Loss carryforwards |
47 | 42 | ||||||
Foreign tax credit carryforwards |
40 | 28 | ||||||
Other |
253 | 290 | ||||||
Gross deferred tax assets |
820 | 804 | ||||||
Less: deferred tax valuation allowances |
(29 | ) | (48 | ) | ||||
Deferred tax assets net of valuation allowances |
791 | 756 | ||||||
Deferred income tax liabilities: |
||||||||
Goodwill and acquired indefinite-lived intangibles |
5,616 | 5,594 | ||||||
Acquired finite-lived intangibles |
65 | 110 | ||||||
Other |
89 | 133 | ||||||
Gross deferred tax liabilities |
5,770 | 5,837 | ||||||
Net deferred tax (liabilities) |
$ | (4,979 | ) | $ | (5,081 | ) |
Deferred income tax assets and liabilities are recorded net when related to the same tax jurisdiction. At December 31, 2014, the Company recorded on the consolidated statement of financial condition deferred income tax assets, within other assets, and deferred income tax liabilities of $10 million and $4,989 million, respectively. At December 31, 2013, the Company recorded on the consolidated statement of financial condition deferred income tax assets, within other assets, and deferred income tax liabilities of $4 million and $5,085 million, respectively.
During 2014, state and local tax changes resulted in a $4 million net noncash benefit related to the revaluation of certain deferred income tax liabilities. During 2013, tax legislation enacted in the United Kingdom and domestic state tax law changes resulted in a $69 million net noncash benefit related to the revaluation of certain deferred income tax liabilities.
The Company had a deferred income tax asset related to unrealized investment losses of approximately $157 million and $99 million at December 31, 2014 and 2013, respectively, reflecting the Companys conclusion that based on the weight of available evidence, it is more likely than not that the deferred tax asset will be realized. U.S. Federal realized capital losses may be carried back three years and carried forward five years and offset against realized capital gains for federal income tax purposes. The Company expects to hold certain fixed income securities over a period sufficient for them to recover their unrealized losses, and to generate future capital gains sufficient to offset the unrealized capital losses.
F-40
At December 31, 2014 and 2013, the Company had available state net operating loss carryforwards of $1.2 billion and $935 million, respectively, which will begin to expire in 2017. At December 31, 2014 and December 31, 2013, the Company had foreign net operating loss carryforwards of $137 million and $109 million, respectively, of which $8 million will begin to expire in 2017 and the balance will carry forward indefinitely. At December 31, 2014, the Company had foreign tax credit carryforwards for income tax purposes of $40 million which will begin to expire in 2023.
At December 31, 2014 and 2013, the Company had $29 million and $48 million of valuation allowances for deferred income tax assets, respectively, recorded on the consolidated statements of financial condition. The year-over-year decrease in the valuation allowance primarily related to the realization of tax loss carryforwards and certain foreign deferred income tax assets.
Goodwill recorded in connection with the Quellos Transaction has been reduced during the period by the amount of tax benefit realized from tax-deductible goodwill. See Note 9, Goodwill , for further discussion.
Current income taxes are recorded net on the consolidated statements of financial condition when related to the same tax jurisdiction. At December 31, 2014, the Company had current income taxes receivable and payable of $117 million and $125 million, respectively, recorded in other assets and accounts payable and accrued liabilities, respectively. At December 31, 2013, the Company had current income taxes receivable and payable of $89 million and $168 million, respectively, recorded in other assets and accounts payable and accrued liabilities, respectively.
The Company does not provide deferred taxes on the excess of the financial reporting over tax basis on its investments in foreign subsidiaries that are essentially permanent in duration. The excess totaled $3,871 million and $3,074 million at December 31, 2014 and 2013, respectively. The determination of the additional deferred income taxes on the excess has not been provided because it is not practicable due to the complexities associated with its hypothetical calculation.
The following tabular reconciliation presents the total amounts of gross unrecognized tax benefits:
Year ended December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Balance at January 1 |
$ | 467 | $ | 404 | $ | 349 | ||||||
Additions for tax positions of prior years |
21 | 11 | 4 | |||||||||
Reductions for tax positions of prior years |
(24 | ) | (5 | ) | (1 | ) | ||||||
Additions based on tax positions related to current year |
85 | 67 | 69 | |||||||||
Lapse of statute of limitations |
(2 | ) | | | ||||||||
Settlements |
(168 | ) | (12 | ) | (29 | ) | ||||||
Positions assumed in acquisitions |
| 2 | 12 | |||||||||
Balance at December 31 |
$ | 379 | $ | 467 | $ | 404 |
Included in the balance of unrecognized tax benefits at December 31, 2014, 2013 and 2012, respectively, are $283 million, $304 million and $250 million of tax benefits that, if recognized, would affect the effective tax rate.
The Company recognizes interest and penalties related to income tax matters as a component of income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued interest and penalties of $(25) million during 2014 and in total, as of December 31, 2014, had recognized a liability for interest and penalties of $44 million. The Company accrued interest and penalties of $(1) million during 2013 and in total, as of December 31, 2013, had recognized a liability for interest and penalties of $68 million. The Company accrued interest and penalties of $3 million during 2012 and in total, as of December 31, 2012, had recognized a liability for interest and penalties of $69 million.
BlackRock is subject to U.S. federal income tax, state and local income tax, and foreign income tax in multiple jurisdictions. Tax years after 2009 remain open to U.S. federal income tax examination. The Internal Revenue Service (IRS) completed its examination of BlackRocks 2008 and 2009 tax years in 2014. In addition, in 2014 the IRS completed its examination of the BGI group for tax years 2007 through December 1, 2009.
In June 2014, the IRS commenced its examination of BlackRocks 2010 through 2012 tax years, and while the impact on the consolidated financial statements is undetermined, it is not expected to be material.
The Company is currently under audit in several state and local jurisdictions. The significant state and local income tax examinations are in California for tax years 2009 through 2010, New York State and New York City for tax years 2009 through 2011, and New Jersey for tax years 2007 through 2009. No state and local income tax audits cover years earlier than 2007. No state and local income tax audits are expected to result in an assessment material to BlackRocks consolidated financial statements.
Her Majestys Revenue and Customs (HMRC) United Kingdom income tax audit for various U.K. BlackRock subsidiaries is in progress for tax years 2009 through 2011. While the impact on the consolidated financial statements is undetermined, it is not expected to be material.
At December 31, 2014, it is reasonably possible the total amounts of unrecognized tax benefits will change within the next twelve months due to completion of tax authorities exams or the expiration of statues of limitations. Management estimates that the existing liability for uncertain tax positions could decrease by approximately $2 million to $20 million within the next twelve months.
21. Earnings Per Share
The following table sets forth the computation of basic and diluted EPS for 2014 and 2013 under the treasury stock method:
(in millions, except shares and per share
data) |
2014 | 2013 | ||||||
Net income attributable to BlackRock |
$ | 3,294 | $ | 2,932 | ||||
Basic weighted-average shares outstanding |
168,225,154 | 170,185,870 | ||||||
Dilutive effect of nonparticipating RSUs and stock options |
2,887,107 | 3,643,032 | ||||||
Total diluted weighted-average shares outstanding |
171,112,261 | 173,828,902 | ||||||
Basic earnings per share |
$ | 19.58 | $ | 17.23 | ||||
Diluted earnings per share |
$ | 19.25 | $ | 16.87 |
F-41
The following table sets forth the computation of basic and diluted EPS for 2012 under the two-class method:
(in millions, except shares and per share data) | 2012 | |||
Net income attributable to BlackRock |
$ | 2,458 | ||
Less: |
||||
Dividends distributed to common shares |
1,059 | |||
Dividends distributed to participating RSUs |
1 | |||
Undistributed net income attributable to BlackRock |
1,398 | |||
Percentage of undistributed net income allocated to common shares (1) |
99.9 | % | ||
Undistributed net income allocated to common shares |
1,396 | |||
Plus: |
||||
Common share dividends |
1,059 | |||
Net income attributable to common shares |
$ | 2,455 | ||
Basic weighted-average shares outstanding |
174,961,018 | |||
Dilutive effect of nonparticipating RSUs and stock options |
3,056,661 | |||
Total diluted weighted-average shares outstanding |
178,017,679 | |||
Basic earnings per share |
$ | 14.03 | ||
Diluted earnings per share |
$ | 13.79 |
(1) | Allocation to common stockholders was based on the total of common shares and participating securities (which represent unvested RSUs that contain nonforfeitable rights to dividends). For 2012, average outstanding participating securities were 0.2 million. |
There were no anti-dilutive RSUs for 2013. Amounts of anti-dilutive RSUs for 2014 and 2012 were immaterial. In addition, there were no anti-dilutive stock options for 2014, 2013 and 2012.
22. Segment Information
The following table illustrates investment advisory, administration fees, securities lending revenue and performance fees, BlackRock Solutions and advisory revenue, distribution fees and other revenue for 2014, 2013 and 2012.
(in millions) | 2014 | 2013 | 2012 | |||||||||
Equity |
$ | 5,337 | $ | 4,816 | $ | 4,334 | ||||||
Fixed income |
2,171 | 1,996 | 1,900 | |||||||||
Multi-asset |
1,236 | 1,063 | 972 | |||||||||
Alternatives |
1,103 | 1,104 | 968 | |||||||||
Cash management |
292 | 321 | 361 | |||||||||
Total investment advisory, administration fees, securities lending revenue and performance fees |
10,139 | 9,300 | 8,535 | |||||||||
BlackRock Solutions and advisory |
635 | 577 | 518 | |||||||||
Distribution fees |
70 | 73 | 71 | |||||||||
Other revenue |
237 | 230 | 213 | |||||||||
Total revenue |
$ | 11,081 | $ | 10,180 | $ | 9,337 |
The following table illustrates total revenue for 2014, 2013 and 2012 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the customer resides.
(in millions) | ||||||||||||
Revenue | 2014 | 2013 | 2012 | |||||||||
Americas |
$ | 7,286 | $ | 6,829 | $ | 6,429 | ||||||
Europe |
3,246 | 2,832 | 2,460 | |||||||||
Asia-Pacific |
549 | 519 | 448 | |||||||||
Total revenue |
$ | 11,081 | $ | 10,180 | $ | 9,337 |
The following table illustrates long-lived assets that consist of goodwill and property and equipment at December 31, 2014, 2013 and 2012 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located.
(in millions) | ||||||||||||
Long-lived Assets | 2014 | 2013 | 2012 | |||||||||
Americas |
$ | 13,151 | $ | 13,204 | $ | 13,238 | ||||||
Europe |
194 | 214 | 166 | |||||||||
Asia-Pacific |
83 | 87 | 63 | |||||||||
Total long-lived assets |
$ | 13,428 | $ | 13,505 | $ | 13,467 |
Americas primarily is comprised of the United States, Canada, Brazil, Chile and Mexico, while Europe primarily is comprised of the United Kingdom. Asia-Pacific is comprised of Japan, Australia, Singapore, Hong Kong, Taiwan, Korea, India, Malaysia and China.
F-42
23. Selected Quarterly Financial Data (unaudited)
(in millions, except shares and per share data) | ||||||||||||||||
2014 | 1 st Quarter | 2 nd Quarter (1),(4) | 3 rd Quarter (2),(5) | 4 th Quarter (3) | ||||||||||||
Revenue |
$ | 2,670 | $ | 2,778 | $ | 2,849 | $ | 2,784 | ||||||||
Operating income |
$ | 1,051 | $ | 1,122 | $ | 1,157 | $ | 1,144 | ||||||||
Net income |
$ | 744 | $ | 841 | $ | 873 | $ | 806 | ||||||||
Net income attributable to BlackRock |
$ | 756 | $ | 808 | $ | 917 | $ | 813 | ||||||||
Earnings per share attributable to BlackRock, Inc. common stockholders: |
||||||||||||||||
Basic |
$ | 4.47 | $ | 4.79 | $ | 5.46 | $ | 4.86 | ||||||||
Diluted |
$ | 4.40 | $ | 4.72 | $ | 5.37 | $ | 4.77 | ||||||||
Weighted-average common shares outstanding: |
||||||||||||||||
Basic |
169,081,421 | 168,712,221 | 167,933,040 | 167,197,844 | ||||||||||||
Diluted |
171,933,803 | 171,150,153 | 170,778,766 | 170,367,445 | ||||||||||||
Dividend declared per share |
$ | 1.93 | $ | 1.93 | $ | 1.93 | $ | 1.93 | ||||||||
Common stock price per share: |
||||||||||||||||
High |
$ | 323.89 | $ | 319.85 | $ | 336.47 | $ | 364.40 | ||||||||
Low |
$ | 286.39 | $ | 293.71 | $ | 301.10 | $ | 303.91 | ||||||||
Close |
$ | 314.48 | $ | 319.60 | $ | 328.32 | $ | 357.56 |
2013 | ||||||||||||||||
Revenue |
$ | 2,449 | $ | 2,482 | $ | 2,472 | $ | 2,777 | ||||||||
Operating income |
$ | 909 | $ | 849 | $ | 966 | $ | 1,133 | ||||||||
Net income |
$ | 666 | $ | 706 | $ | 729 | $ | 850 | ||||||||
Net income attributable to BlackRock |
$ | 632 | $ | 729 | $ | 730 | $ | 841 | ||||||||
Earnings per share attributable to BlackRock, Inc. common stockholders: |
||||||||||||||||
Basic |
$ | 3.69 | $ | 4.27 | $ | 4.30 | $ | 4.98 | ||||||||
Diluted |
$ | 3.62 | $ | 4.19 | $ | 4.21 | $ | 4.86 | ||||||||
Weighted-average common shares outstanding: |
||||||||||||||||
Basic |
171,301,800 | 170,648,731 | 169,811,633 | 169,010,606 | ||||||||||||
Diluted |
174,561,132 | 173,873,583 | 173,371,508 | 172,999,529 | ||||||||||||
Dividend declared per share |
$ | 1.68 | $ | 1.68 | $ | 1.68 | $ | 1.68 | ||||||||
Common stock price per share: |
||||||||||||||||
High |
$ | 258.70 | $ | 291.69 | $ | 286.62 | $ | 316.47 | ||||||||
Low |
$ | 212.77 | $ | 245.30 | $ | 255.26 | $ | 262.75 | ||||||||
Close |
$ | 256.88 | $ | 256.85 | $ | 270.62 | $ | 316.47 |
(1) | The second quarter of 2014 included a $23 million net noncash tax expense, primarily associated with the revaluation of certain deferred income tax liabilities arising from the state and local tax effect of changes in the Companys organizational structure. In addition, the second quarter of 2014 benefited from an improvement in the geographic mix of earnings and included a $34 million net tax benefit related to several favorable nonrecurring items. |
(2) | The third quarter of 2014 included a $32 million noncash tax benefit, primarily associated with the revaluation of certain deferred income tax liabilities related to intangible assets and goodwill as a result of domestic state and local tax changes. |
In addition, the third quarter of 2014 included a $94 million tax benefit, primarily due to the resolution of certain outstanding tax matters related to the acquisition of BGI. In connection with the acquisition, BlackRock recorded a $50 million indemnification asset for unrecognized tax benefits. Due to the resolution of such tax matters, BlackRock recorded $50 million of general and administration expense to reflect the reduction of the indemnification asset and an offsetting $50 million tax benefit. |
(3) | The fourth quarter of 2014 benefited from $39 million of nonrecurring tax items. |
(4) | In the second quarter of 2013 in connection with the PennyMac IPO the Company recorded a noncash, nonoperating pre-tax gain of $39 million related to the carrying value of its equity method investment. In connection with the Charitable Contribution, the Company recorded an expense of $124 million and a noncash, nonoperating pre-tax gain of $80 million related to the contributed investment. For further information, see Note 11, Other Assets . |
In addition, the second quarter of 2013 included a tax benefit of approximately $57 million recognized in connection with the Charitable Contribution and a tax benefit of approximately $29 million, primarily due to the realization of tax loss carryforwards. |
(5) | The third quarter of 2013 included a $64 million net noncash tax benefit primarily related to the revaluation of certain deferred income tax liabilities, including the effect of legislation enacted in the United Kingdom and domestic state and local income tax changes. |
24. Subsequent Events
Share Repurchase Approval. In January 2015, the Board of Directors (the Board) approved an increase in the availability of shares that may be repurchased under the Companys existing share repurchase program to allow for the repurchase of up to a total of 9.4 million additional shares of BlackRock common stock.
Dividend Approval. On January 14, 2015, the Board approved BlackRocks quarterly dividend of $2.18 to be paid on March 24, 2015 to stockholders of record on March 6, 2015.
Other. The Company conducted a review for additional subsequent events and determined that no additional subsequent events had occurred that would require accrual or additional disclosures.
F-43