# PNC FINANCIAL SERVICES GROUP, INC. (PNC) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from PNC FINANCIAL SERVICES GROUP, INC.'s 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/713676/000071367622000019/pnc-20211231.htm Accession: 0000713676-22-000019 Filing date: 2022-02-25 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/PNC/ All MD&A years: /company/PNC/mda/ Next year: /company/PNC/mda/fy2022/ (FY 2022) ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A) EXECUTIVE SUMMARY Key Strategic Goals At PNC we manage our company for the long term. We are focused on the fundamentals of growing customers, loans, deposits and revenue and improving profitability, while investing for the future and managing risk, expenses and capital. We continue to invest in our products, markets and brand, and embrace our commitments to our customers, shareholders, employees and the communities where we do business. We strive to serve our customers and expand and deepen relationships by offering a broad range of deposit, credit and fee-based products and services. We are focused on delivering those products and services to our customers with the goal of addressing their financial objectives and needs. Our business model is built on customer loyalty and engagement, understanding our customers’ financial goals and offering our diverse products and services to help them achieve financial well-being. Our approach is concentrated on organically growing and deepening client relationships across our businesses that meet our risk/return measures. We are focused on our strategic priorities, which are designed to enhance value over the long term, and consist of: •Expanding our leading banking franchise to new markets and digital platforms, •Deepening customer relationships by delivering a superior banking experience and financial solutions, and •Leveraging technology to innovate and enhance products, services, security and processes. Our capital and liquidity priorities are to support customers, fund business investments and return excess capital to shareholders, while maintaining appropriate capital in light of economic conditions, the Basel III framework and other regulatory expectations. For more detail, see the Supervision and Regulation section in Item 1 Business, the Capital Highlights portion of this Executive Summary and the Liquidity and Capital Management portion of the Risk Management section in this Item 7. Key Factors Affecting Financial Performance We face a variety of risks that may impact various aspects of our risk profile from time to time. The extent of such impacts may vary depending on factors such as the current business and economic conditions, political and regulatory environment and operational challenges. Many of these risks and our risk management strategies are described in more detail elsewhere in this Report. Our success will depend upon, among other things, the following factors that we manage or control: •Effectively managing capital and liquidity including: •Continuing to maintain and grow our deposit base as a low-cost stable funding source, •Prudent liquidity and capital management to meet evolving regulatory capital, capital planning, stress testing and liquidity standards, and •Actions we take within the capital and other financial markets. •Execution of our strategic priorities, •Management of credit risk in our portfolio, •Our ability to manage and implement strategic business objectives within the changing regulatory environment, •The impact of legal and regulatory-related contingencies, •The appropriateness of reserves needed for critical accounting estimates and related contingencies, and •The integration of BBVA's businesses into PNC and PNC Bank. Our financial performance is also substantially affected by a number of external factors outside of our control, including the following: •Global and domestic economic conditions, including the length and extent of the economic impacts of the pandemic, •The actions by the Federal Reserve, U.S. Treasury and other government agencies, including those that impact money supply and market interest rates and inflation, •The level of, and direction, timing and magnitude of movement in, interest rates and the shape of the interest rate yield curve, •The functioning and other performance of, and availability of liquidity in, U.S. and global financial markets, including capital markets, •The impact of tariffs and other trade policies of the U.S. and its global trading partners, 38    The PNC Financial Services Group, Inc. – 2021 Form 10-K •Changes in the competitive landscape, •Impacts of changes in federal, state and local governmental policy, including on the regulatory landscape, capital markets, taxes, infrastructure spending and social programs, •The impact of market credit spreads on asset valuations, •The ability of customers, counterparties and issuers to perform in accordance with contractual terms, and the resulting impact on our asset quality, •Loan demand, utilization of credit commitments and standby letters of credit, and •The impact on customers and changes in customer behavior due to changing business and economic conditions or regulatory or legislative initiatives. For additional information on the risks we face, see the Cautionary Statement Regarding Forward-Looking Information section in this Item 7 and Item 1A Risk Factors in this Report. Acquisition of BBVA USA Bancshares, Inc. On June 1, 2021, PNC acquired BBVA, a U.S. financial holding company conducting its business operations primarily through its U.S. banking subsidiary, BBVA USA. PNC paid $11.5 billion in cash as consideration for the acquisition. On October 8, 2021, BBVA USA merged into PNC Bank. On October 12, 2021, PNC converted approximately 2.6 million customers, 9,000 employees and over 600 branches across seven states. Our results for the twelve months ended December 31, 2021 reflect the impact of BBVA's acquired business operations for the period since the acquisition closed on June 1, 2021. PNC’s balance sheet at December 31, 2021 includes balances from BBVA. For additional information on the acquisition of BBVA, see Note 2 Acquisition and Divestiture Activity in the Notes to Consolidated Financial Statements included in Item 8 of this Report. Discontinued Operations In the second quarter of 2020, PNC divested its entire 22.4% equity investment in BlackRock. Net proceeds from the sale were $14.2 billion with an after-tax gain on sale of $4.3 billion. BlackRock’s historical results are reported as discontinued operations. For additional details on the divestiture of our equity investment in BlackRock, see Note 2 Acquisition and Divestiture Activity in the Notes to Consolidated Financial Statements in Item 8 of this Report. Income Statement Highlights Net income from continuing operations for 2021 was $5.7 billion, or $12.70 per diluted common share, an increase of $2.7 billion compared to net income from continuing operations of $3.0 billion, or $6.36 per diluted common share, for 2020. The increase was primarily driven by lower provision for credit losses in 2021 and higher noninterest income, including the benefit of BBVA, partially offset by expenses related to the BBVA acquisition and increased business activity. •Total revenue increased $2.3 billion to $19.2 billion. •Net interest income increased $0.7 billion, or 7%, to $10.6 billion, including the benefit of BBVA. •Net interest margin decreased to 2.29% for 2021 compared to 2.53% for 2020. •Noninterest income increased $1.6 billion, or 23%, to $8.6 billion, primarily due to the benefit of BBVA and higher merger and acquisition advisory fees. •Provision recapture was $0.8 billion in 2021, driven by portfolio changes, including improved credit quality and changes in portfolio composition, along with the impact from an improved economic environment, partially offset by the additional provision for credit losses related to the BBVA acquisition. Provision for credit losses was $3.2 billion for 2020. •Noninterest expense increased $2.7 billion, or 26%, to $13.0 billion, reflecting expenses related to the BBVA acquisition and increased business activity. For additional detail, see the Consolidated Income Statement Review section of this Item 7. The PNC Financial Services Group, Inc. – 2021 Form 10-K  39 Balance Sheet Highlights Our balance sheet was strong and well positioned at December 31, 2021 and 2020. In comparison to December 31, 2020, changes in our balance sheet were primarily driven by the BBVA acquisition. •Total assets increased $90.5 billion, or 19%, to $557.2 billion. •Total loans increased $46.4 billion, or 19%, to $288.4 billion. •Total commercial loans grew $25.9 billion, or 15%, to $193.1 billion, driven by BBVA loans and organic growth in PNC's corporate banking and business credit businesses, partially offset by PPP loan forgiveness. •PNC had $3.4 billion of PPP loans outstanding at December 31, 2021, compared to $12.0 billion at December 31, 2020. •Total consumer loans increased $20.5 billion, or 28%, to $95.3 billion, primarily due to the addition of BBVA loans and increased originations of residential mortgages, partially offset by declines in the remaining PNC legacy portfolios as paydowns outpaced new originations. •Investment securities increased $44.2 billion, or 50%, to $133.0 billion due to increased purchase activity and securities from BBVA. •Interest earning deposits with banks, primarily with the Federal Reserve Bank, decreased $10.9 billion to $74.3 billion primarily due to increased securities purchases. •Total deposits increased $91.9 billion, or 25%, to $457.3 billion, reflecting deposits from BBVA and growth in consumer and commercial liquidity. •Borrowed funds of $30.8 billion decreased $6.4 billion, or 17%, due to lower bank notes and senior debt and lower FHLB borrowings, reflecting the use of liquidity from deposit growth, which more than offset borrowed funds from BBVA. For additional detail, see the Consolidated Balance Sheet Review section of this Item 7. Credit Quality Highlights We maintained solid credit quality metrics in 2021. •At December 31, 2021 compared to December 31, 2020: •Nonperforming assets of $2.5 billion increased $169 million, or 7%, due to nonperforming assets from BBVA, partially offset by lower PNC legacy nonperforming assets reflecting improved credit performance. •Overall loan delinquencies of $2.0 billion increased $622 million, or 46%, as lower delinquencies in the PNC legacy portfolio were more than offset by delinquencies attributable to BBVA, including increases from BBVA conversion-related administrative and operational delays. •The ACL related to loans, which consists of the ALLL and the allowance for unfunded lending related commitments, decreased to $5.5 billion, or 1.92% of total loans at December 31, 2021, compared to $5.9 billion, or 2.46% of total loans at December 31, 2020. The decrease was primarily driven by impacts from portfolio changes and an improved economic environment, partially offset by the addition of reserves related to the BBVA acquisition. •Net charge-offs of $657 million or 0.24% of average loans in 2021 decreased 21% compared to net charge-offs of $832 million or 0.33% of average loans, for 2020. Commercial loan net charge-offs increased $15 million and consumer loan net charge-offs decreased $190 million compared to 2020. For additional detail, see the Credit Risk Management portion of the Risk Management section of this Item 7. Capital Highlights We maintained a strong capital position during 2021. •The Basel III CET1 capital ratio decreased to 10.3% at December 31, 2021 from 12.2% at December 31, 2020, primarily due to the BBVA acquisition. •Capital was impacted by our election of a five-year transition period for CECL’s estimated impact on CET1         capital. CECL’s estimated impact on CET1 capital is defined as the change in retained earnings at adoption plus or minus 25% of the change in CECL ACL at the balance sheet date, excluding the initial allowance for PCD loans from BBVA, compared to CECL ACL at transition. The estimated CECL impact was added to CET1 capital through December 31, 2021 and will be phased-out over the following three years. •Common shareholders' equity increased to $50.7 billion at December 31, 2021, compared to $50.5 billion at December 31, 2020. •In 2021, we returned $3.0 billion of capital to shareholders through dividends on common shares of $2.0 billion and repurchases of 5 million common shares for $1.0 billion. •In June 2021, we announced the reinstatement of share repurchase programs with repurchases of up to $2.9 billion for the four-quarter period beginning in the third quarter of 2021. •On January 5, 2022, the PNC Board of Directors declared a quarterly cash dividend on common stock of $1.25 per share paid on February 5, 2022. 40    The PNC Financial Services Group, Inc. – 2021 Form 10-K PNC’s ability to take certain capital actions, including returning capital to shareholders, is subject to PNC meeting or exceeding a SCB established by the Federal Reserve Board in connection with the Federal Reserve Board’s CCAR process. See additional discussion of the CCAR process in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of this Report. See the Liquidity and Capital Management portion of the Risk Management section of this Item 7 for more detail on our 2021 capital and liquidity actions as well as our capital ratios. Business Outlook Statements regarding our business outlook are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory contingencies. These statements are based on our view that: •The U.S. economy continues to recover from the pandemic-caused recession in the first half of 2020. Growth is likely to be softer in the first quarter of 2022 due to the omicron variant, and then pick up in the spring, remaining above the economy’s long-run average throughout this year. Consumer spending growth will remain solid in 2022 due to good underlying fundamentals. •Supply-chain difficulties, which weighed on growth in the second half of 2021, will gradually ease over the course of 2022. Labor shortages will remain a constraint this year, although strong wage growth will support consumer spending. •Inflation accelerated in the second half of 2021 to its fastest pace in decades due to strong demand but limited supplies coming out of the pandemic for some goods and services. Inflation will slow in 2022 as supply and demand for these goods and services normalize, but also broaden throughout the economy due to wage growth. Inflation will end 2022 above the Federal Reserve’s long-run objective of 2%. •PNC expects the FOMC to raise the federal funds rate by 0.25 percentage points five times in 2022 to reach a range of 1.25% to 1.50% by the end of the year, and then further increase the federal funds rate in 2023. The Federal Reserve will also end its purchases of long-term Treasuries and mortgage-backed securities in March 2022, and then start to reduce its balance sheet in mid-2022. See the Cautionary Statement Regarding Forward-Looking Information section in this Item 7 and Item 1A Risk Factors in this Report for other factors that could cause future events to differ, perhaps materially, from those anticipated in these forward-looking statements. Full year guidance for 2022 includes the impact of twelve months of BBVA operations compared to seven months in 2021. For the full year 2022, compared to full year 2021, we expect: •Average loan growth of approximately 10%, •Period-end loans to be up approximately 5%, •Revenue growth to be 8% to 10% (we now expect revenue growth to be on the higher end of this range based on our revised projection of the number of increases to the federal funds rate in 2022), •Expenses, excluding integration expense, to be up 4% to 6%, •The effective tax rate to be approximately 18%, and •To generate positive operating leverage. For the first quarter of 2022, compared to the fourth quarter of 2021, we expect: •Average loans, excluding PPP, to be up approximately 1% to 2%, •Net interest income to be down approximately 1% to 2%, •Fee income to be down 4% to 6%, •Other noninterest income, excluding integration costs, net securities and Visa activity, to be between $375 million and $425 million, •Total revenue to decline approximately 3% to 5%, •Noninterest expense, excluding approximately $30 million of integration expense, to be down approximately 4% to 6%, and •Net loan charge-offs to be between $100 million and $150 million. Additionally, as of year-end 2021, actions that will drive our $900 million of anticipated savings related to the BBVA acquisition have been substantially completed, and we expect the savings to be fully realized in 2022. Since the announcement of the acquisition, we have incurred approximately 95% of the total $980 million expected integration costs, which include $120 million of write-offs for capitalized items. The PNC Financial Services Group, Inc. – 2021 Form 10-K  41 CONSOLIDATED INCOME STATEMENT REVIEW Our Consolidated Income Statement is presented in Item 8 of this Report. For the comparison of 2020 over 2019, see the Consolidated Income Statement Review section in our 2020 Form 10-K. Net income from continuing operations for 2021 was $5.7 billion, or $12.70 per diluted common share, an increase of $2.7 billion compared to net income from continuing operations of $3.0 billion, or $6.36 per diluted common share, for 2020. The increase was primarily driven by lower provision for credit losses in 2021 and higher noninterest income, including the benefit of BBVA, partially offset by expenses related to the BBVA acquisition and increased business activity. Net Interest Income Table 1: Summarized Average Balances and Net Interest Income (a) [[GREPCENT_TABLE]] [["","2021","","2020"],["Year ended December 31 Dollars in millions","Average Balances","Average Yields/ Rates","Interest Income/ Expense","","Average Balances","Average Yields/ Rates","Interest Income/ Expense"],["Assets"],["Interest-earning assets"],["Investment securities","$","110,974","","1.67","%","$","1,855","","","$","87,279","","2.36","%","$","2,064"],["Loans","268,696","","3.37","%","9,060","","","252,633","","3.55","%","8,979"],["Interest-earning deposits with banks","79,869","","0.13","%","103","","","47,333","","0.21","%","100"],["Other","8,539","","2.23","%","190","","","9,553","","2.50","%","239"],["Total interest-earning assets/interest income","$","468,078","","2.39","%","11,208","","","$","396,798","","2.87","%","11,382"],["Liabilities"],["Interest-bearing liabilities"],["Interest-bearing deposits","$","279,228","","0.05","%","126","","","$","238,771","","0.27","%","643"],["Borrowed funds","34,508","","1.05","%","361","","","47,938","","1.50","%","718"],["Total interest-bearing liabilities/interest expense","$","313,736","","0.16","%","487","","","$","286,709","","0.47","%","1,361"],["Net interest margin/income (Non-GAAP)","","2.29","%","10,721","","","","2.53","%","10,021"],["Taxable-equivalent adjustments","","","(74)","","","","","(75)"],["Net interest income (GAAP)","","","$","10,647","","","","","$","9,946"]] [[/GREPCENT_TABLE]] (a)Interest income calculated as taxable-equivalent interest income. To provide more meaningful comparisons of interest income and yields for all interest-earning assets, as well as net interest margins, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margins by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP on the Consolidated Income Statement. For more information, see Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP) in the Statistical Information (Unaudited) section in Item 8 of this Report. Changes in net interest income and margin result from the interaction of the volume and composition of interest-earning assets and related yields, interest-bearing liabilities and related rates paid, and noninterest-bearing sources of funding. See the Statistical Information (Unaudited) – Average Consolidated Balance Sheet And Net Interest Analysis and Analysis Of Year-To-Year Changes In Net Interest Income in Item 8 of this Report. Net interest income increased $701 million, or 7% in 2021 compared with 2020. The increase was primarily due to the benefit of BBVA interest-earning asset balances and lower deposit rates, partially offset by lower yields on securities. Net interest margin decreased 24 basis points, largely due to lower yields on interest-earning assets as well as higher balances held at the Federal Reserve Bank, partially offset by lower rates paid on deposits and borrowings. Average investment securities grew $23.7 billion, or 27%, primarily as a result of increased purchase activity and the BBVA acquisition. Average investment securities represented 24% of average interest-earning assets in 2021, compared to 22% in 2020. Average loans increased $16.1 billion, or 6%, primarily as a result of the BBVA acquisition, partially offset by lower utilization of loan commitments by commercial customers and declines in home equity, credit card and auto loans as paydowns outpaced new originations. Average loans represented 57% of average interest-earning assets in 2021 compared to 64% in 2020. Average interest-earning deposits with banks grew $32.5 billion as average balances held with the Federal Reserve Bank increased primarily due to higher liquidity from deposit growth. Average interest-bearing deposits grew $40.5 billion, or 17%, due to overall growth in commercial and consumer liquidity, including deposits from BBVA. In total, average interest-bearing deposits represented 89% of average interest-bearing liabilities in 2021 compared to 83% in 2020. 42    The PNC Financial Services Group, Inc. – 2021 Form 10-K Average borrowed funds decreased $13.4 billion, or 28%, primarily due to a decline in FHLB borrowings reflecting the use of liquidity from deposit growth. Further details regarding average loans and deposits are included in the Business Segments Review section of this Item 7. Noninterest Income Table 2: Noninterest Income [[GREPCENT_TABLE]] [["Year ended December 31","","","Change"],["Dollars in millions","2021","2020","$","%"],["Noninterest income"],["Asset management","$","964","","$","836","","$","128","","15","%"],["Consumer services","1,845","","1,484","","361","","24","%"],["Corporate services","2,924","","2,167","","757","","35","%"],["Residential mortgage","456","","604","","(148)","","(25)","%"],["Service charges on deposits","535","","500","","35","","7","%"],["Other","1,840","","1,364","","476","","35","%"],["Total noninterest income","$","8,564","","$","6,955","","$","1,609","","23","%"]] [[/GREPCENT_TABLE]] Noninterest income as a percentage of total revenue was 45% for 2021 and 41% for 2020. Asset management revenue increased due to the impact of higher average equity markets and the benefit of the BBVA acquisition. PNC’s discretionary client assets under management increased to $192 billion at December 31, 2021, compared with $170 billion at December 31, 2020, primarily attributable to higher equity markets and the impact of the BBVA acquisition. Consumer services revenue increased reflecting the addition of BBVA customers and the impacts of higher consumer spending on debit cards, merchant services revenue, credit card fees, and growth in brokerage fees primarily due to higher average equity markets. Growth in corporate services revenue was driven by higher capital markets-related revenue, primarily from increased merger and acquisition advisory fees. The increase was also attributable to the addition of BBVA, higher treasury management product revenue and higher revenue from commercial mortgage banking activities. Residential mortgage revenue declined as higher loan sales were more than offset by lower servicing fees and lower mortgage servicing rights valuation, net of economic hedge. Service charges on deposits increased primarily due to the addition of BBVA customers, partially offset by lower transaction volumes including the impact of Low Cash Mode® on overdraft revenue. For additional information on Low Cash Mode®, see the Business Segments Review section of this Item 7. Other noninterest income increased primarily due to higher private equity revenue, partially offset by lower net securities gains. Other noninterest income typically fluctuates from period to period depending on the nature and magnitude of transactions completed. Further details regarding our customer-related trading activities are included in the Market Risk Management – Customer-Related Trading Risk portion of the Risk Management section of this Item 7. Further details regarding private and other equity investments are included in the Market Risk Management – Equity and Other Investment Risk section. Noninterest Expense Table 3: Noninterest Expense [[GREPCENT_TABLE]] [["Year ended December 31","","","Change"],["Dollars in millions","2021","2020","$","%"],["Noninterest expense"],["Personnel","$","7,141","","$","5,673","","$","1,468","","26","%"],["Occupancy","940","","826","","114","","14","%"],["Equipment","1,411","","1,176","","235","","20","%"],["Marketing","319","","236","","83","","35","%"],["Other","3,191","","2,386","","805","","34","%"],["Total noninterest expense","$","13,002","","$","10,297","","$","2,705","","26","%"]] [[/GREPCENT_TABLE]] The PNC Financial Services Group, Inc. – 2021 Form 10-K  43 The increase in noninterest expense reflected BBVA operating and integration expenses as well as increased business activity. We achieved our 2021 continuous improvement program savings goal of $300 million. In 2022, our goal will once again be $300 million in cost savings. As of year-end 2021, actions that will drive our $900 million of anticipated savings related to the BBVA acquisition have been substantially completed, and we expect the savings to be fully realized in 2022. Effective Income Tax Rate The effective income tax rate from continuing operations was 18.1% for 2021 compared with 12.4% for 2020. The increase was primarily due to overall higher pre-tax income in 2021 and the favorable resolution of certain tax matters in 2020. The effective tax rate is generally lower than the statutory rate primarily due to tax credits we receive from our investments in low income housing and new markets investments, as well as earnings on other tax exempt investments. Additional information regarding our effective tax rate is included in the Reconciliation of Statutory and Effective Tax Rates table in Note 19 Income Taxes in Item 8 of this Report. Provision for Credit Losses Table 4: Provision for (Recapture of) Credit Losses [[GREPCENT_TABLE]] [["Year ended December 31"],["Dollars in millions","2021","2020"],["Provision for (recapture of) credit losses"],["Loans and leases","$","(887)","","$","2,985"],["Unfunded lending related commitments","32","","87"],["Investment securities","51","","80"],["Other financial assets","25","","23"],["Total provision for (recapture of) credit losses","$","(779)","","$","3,175"]] [[/GREPCENT_TABLE]] Provision recapture was $0.8 billion in 2021, driven by portfolio changes, including improved credit quality and changes in portfolio composition, along with the impact from an improved economic environment, partially offset by the additional provision for credit losses related to the BBVA acquisition. Net interest income less the provision for credit losses was $11.4 billion, $6.8 billion and $9.2 billion for 2021, 2020 and 2019, respectively. Net Income from Discontinued Operations For additional details on the divestiture of our equity investment in BlackRock, see Note 2 Acquisition and Divestiture Activity in the Notes to Consolidated Financial Statements in Item 8 of this Report. 44    The PNC Financial Services Group, Inc. – 2021 Form 10-K CONSOLIDATED BALANCE SHEET REVIEW The summarized balance sheet data in Table 5 is based upon our Consolidated Balance Sheet in Item 8 of this Report. For additional detail of the comparison of 2020 over 2019, see the Consolidated Balance Sheet Review section in our 2020 Form 10-K. Table 5: Summarized Balance Sheet Data [[GREPCENT_TABLE]] [["","December 31","","December 31","","Change"],["Dollars in millions","2021","","2020","","$","%"],["Assets"],["Interest-earning deposits with banks","$","74,250","","","$","85,173","","","$","(10,923)","","(13)","%"],["Loans held for sale","2,231","","","1,597","","","634","","40","%"],["Investment securities","132,962","","","88,799","","","44,163","","50","%"],["Loans","288,372","","","241,928","","","46,444","","19","%"],["Allowance for loan and lease losses","(4,868)","","","(5,361)","","","493","","9","%"],["Mortgage servicing rights","1,818","","","1,242","","","576","","46","%"],["Goodwill","10,916","","","9,233","","","1,683","","18","%"],["Other, net","51,510","","","44,068","","","7,442","","17","%"],["Total assets","$","557,191","","","$","466,679","","","$","90,512","","19","%"],["Liabilities"],["Deposits","$","457,278","","","$","365,345","","","$","91,933","","25","%"],["Borrowed funds","30,784","","","37,195","","","(6,411)","","(17)","%"],["Allowance for unfunded lending related commitments","662","","","584","","","78","","13","%"],["Other","12,741","","","9,514","","","3,227","","34","%"],["Total liabilities","501,465","","","412,638","","","88,827","","22","%"],["Equity"],["Total shareholders\u2019 equity","55,695","","","54,010","","","1,685","","3","%"],["Noncontrolling interests","31","","","31","","","","\u2014"],["Total equity","55,726","","","54,041","","","1,685","","3","%"],["Total liabilities and equity","$","557,191","","","$","466,679","","","$","90,512","","19","%"]] [[/GREPCENT_TABLE]] Our balance sheet was strong and well-positioned at December 31, 2021 and December 31, 2020. •Total asset growth reflected the addition of assets from the BBVA acquisition and increased securities purchases, partially offset by a decrease in interest-earning deposits with banks and PPP loan forgiveness. •Total liabilities increased primarily due to deposit growth reflecting higher consumer and commercial deposits driven by the acquisition of BBVA, partially offset by lower borrowed funds. •Total equity increased as net income and the issuance of preferred stock was partially offset by lower AOCI, dividends paid on common and preferred stock and share repurchases. The ACL related to loans totaled $5.5 billion at December 31, 2021, a decrease of $415 million since December 31, 2020. The decrease was primarily driven by impacts from portfolio changes and an improved economic environment, partially offset by the addition of reserves related to the BBVA acquisition. See the following for additional information regarding our ACL related to loans: •Allowance for Credit Losses in the Credit Risk Management section of this Item 7, •Critical Accounting Estimates and Judgements section of this Item 7, and •Note 1 Accounting Policies and Note 4 Loans and Related Allowance for Credit Losses in the Notes to Consolidated Financial Statements included in Item 8 of this Report. The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and regulatory compliance is included in the Liquidity and Capital Management portion of the Risk Management section of this Item 7 and in Note 20 Regulatory Matters in the Notes to Consolidated Financial Statements in Item 8 of this Report. The PNC Financial Services Group, Inc. – 2021 Form 10-K  45 Loans Table 6: Loans [[GREPCENT_TABLE]] [["","December 31","","December 31","","Change"],["Dollars in millions","2021","","2020","","$","%"],["Commercial"],["Commercial and industrial","$","152,933","","","$","132,073","","","$","20,860","","16","%"],["Commercial real estate","34,015","","","28,716","","5,299","","18","%"],["Equipment lease financing","6,130","","","6,414","","(284)","","(4)","%"],["Total commercial","193,078","","","167,203","","","25,875","","15","%"],["Consumer"],["Residential real estate","39,712","","","22,560","","17,152","","76","%"],["Home equity","24,061","","","24,088","","(27)","","\u2014"],["Automobile","16,635","","","14,218","","2,417","","17","%"],["Credit card","6,626","","","6,215","","411","","7","%"],["Education","2,533","","","2,946","","(413)","","(14)","%"],["Other consumer","5,727","","","4,698","","1,029","","22","%"],["Total consumer","95,294","","","74,725","","","20,569","","28","%"],["Total loans","$","288,372","","","$","241,928","","","$","46,444","","19","%"]] [[/GREPCENT_TABLE]] Commercial loans increased primarily due to the impact of the BBVA acquisition and organic growth in PNC’s corporate banking and business credit businesses, partially offset by PPP loan forgiveness. PNC had $3.4 billion of PPP loans outstanding at December 31 2021, compared to $12.0 billion at December 31, 2020. For commercial and industrial loans by industry and commercial real estate loans by geography and property type, see Loan Portfolio Characteristics and Analysis in the Credit Risk Management portion of the Risk Management section in this Item 7. Consumer loans increased primarily due to the addition of BBVA loans and increased originations of residential mortgages, partially offset by declines in the remaining PNC legacy portfolios as paydowns outpaced new originations. For information on home equity and residential real estate portfolios, including loans by geography, and our auto loan portfolio, see Loan Portfolio Characteristics and Analysis in the Credit Risk Management portion of the Risk Management section in this Item 7. For additional information regarding our loan portfolio, see the Credit Risk Management portion of the Risk Management section in this Item 7 and Note 1 Accounting Policies, Note 4 Loans and Related Allowance for Credit Losses in our Notes to Consolidated Financial Statements included in Item 8 of this Report. Investment Securities Investment securities of $133.0 billion at December 31, 2021 increased $44.2 billion, or 50%, compared to December 31, 2020, due primarily to net purchases of agency residential mortgage-backed securities and U.S. Treasury and government agency securities, including the impact of the BBVA acquisition. The level and composition of the investment securities portfolio fluctuates over time based on many factors including market conditions, loan and deposit growth, and balance sheet management activities. We manage our investment securities portfolio to optimize returns, while providing a reliable source of liquidity for our banking and other activities, considering the LCR, NSFR and other internal and external guidelines and constraints. 46    The PNC Financial Services Group, Inc. – 2021 Form 10-K Table 7: Investment Securities [[GREPCENT_TABLE]] [["","December 31, 2021","","December 31, 2020","","Ratings as of December 31, 2021 (a)"],["Dollars in millions","Amortized Cost (b)","","Fair Value","","Amortized Cost (b)","","Fair Value","","AAA/ AA","","A","","BBB","","BB and Lower","","No Rating"],["U.S. Treasury and government agencies","$","47,024","","","$","47,054","","","$","20,616","","","$","21,631","","","100","%"],["Agency residential mortgage-backed","67,326","","","67,632","","","47,355","","","48,911","","","100","%"],["Non-agency residential mortgage-backed","927","","","1,158","","","1,272","","","1,501","","","6","%","","1","%","","2","%","","48","%","","43","%"],["Agency commercial mortgage-backed","1,740","","","1,773","","","2,571","","","2,688","","","100","%"],["Non-agency commercial mortgage-backed (c)","3,423","","","3,436","","","3,678","","","3,689","","","85","%","","1","%","","2","%","","","","12","%"],["Asset-backed (d)","6,380","","","6,409","","","5,060","","","5,150","","","95","%","","1","%","","","","4","%"],["Other debt (e)","5,404","","","5,596","","","5,061","","","5,393","","","52","%","","27","%","","17","%","","","","4","%"],["Total investment securities (f)","$","132,224","","","$","133,058","","","$","85,613","","","$","88,963","","","96","%","","1","%","","1","%","","1","%","","1","%"]] [[/GREPCENT_TABLE]] (a)Ratings percentages allocated based on amortized cost, net of allowance for investment securities. (b)Amortized cost is presented net of the allowance for investment securities, which totaled $133 million at December 31, 2021 and primarily related to non-agency commercial mortgage-backed securities. The comparable amount at December 31, 2020 was $82 million. (c)Collateralized primarily by office buildings, multifamily housing, retail properties, lodging properties and industrial properties. (d)Collateralized primarily by corporate debt, government guaranteed education loans and other consumer credit products. (e)Includes state and municipal securities. (f)Includes available for sale and held to maturity securities, which are recorded on our balance sheet at fair value and amortized cost, respectively. Table 7 presents the distribution of our investment securities portfolio by amortized cost and fair value, as well as by credit rating. We have included credit ratings information because we believe that the information is an indicator of the degree of credit risk to which we are exposed. Changes in credit ratings classifications could indicate increased or decreased credit risk and could be accompanied by a reduction or increase in the fair value of our investment securities portfolio. We continually monitor the credit risk in our portfolio and maintain the allowance for investment securities at an appropriate level to absorb expected credit losses on our investment securities portfolio for the remaining contractual term of the securities adjusted for expected prepayments. See Note 1 Accounting Policies and Note 3 Investment Securities in the Notes to Consolidated Financial Statements included in Item 8 of this Report for additional details regarding the methodology for determining the allowance and the amount of the allowance for investment securities, respectively. The duration of investment securities was 3.7 years at December 31, 2021. We estimate that at December 31, 2021 the effective duration of investment securities was 3.8 years for an immediate 50 basis points parallel increase in interest rates and 3.5 years for an immediate 50 basis points parallel decrease in interest rates. Comparable amounts at December 31, 2020 for the effective duration of investment securities were 3.1 years and 2.0 years, respectively. Based on expected prepayment speeds, the weighted-average expected maturity of the investment securities portfolio was 4.4 years at December 31, 2021 compared to 3.4 years at December 31, 2020. Table 8: Weighted-Average Expected Maturities of Mortgage and Asset-Backed Debt Securities [[GREPCENT_TABLE]] [["December 31, 2021","Years"],["Agency residential mortgage-backed","4.6"],["Non-agency residential mortgage-backed","6.8"],["Agency commercial mortgage-backed","4.5"],["Non-agency commercial mortgage-backed","1.8"],["Asset-backed","3.2"]] [[/GREPCENT_TABLE]] Additional information regarding our investment securities portfolio is included in Note 3 Investment Securities and Note 15 Fair Value in the Notes to Consolidated Financial Statements included in Item 8 of this Report. The PNC Financial Services Group, Inc. – 2021 Form 10-K  47 Funding Sources Table 9: Details of Funding Sources [[GREPCENT_TABLE]] [["","December 31","","December 31","","Change"],["Dollars in millions","2021","","2020","","$","%"],["Deposits"],["Noninterest-bearing","$","155,175","","","$","112,637","","","$","42,538","","38","%"],["Interest-bearing"],["Money market","61,229","","","59,737","","","1,492","","2","%"],["Demand","115,910","","","92,294","","","23,616","","26","%"],["Savings","107,598","","","80,985","","","26,613","","33","%"],["Time deposits","17,366","","","19,692","","","(2,326)","","(12)","%"],["Total interest-bearing deposits","302,103","","","252,708","","","49,395","","20","%"],["Total deposits","457,278","","","365,345","","","91,933","","25","%"],["Borrowed funds"],["Federal Home Loan Bank borrowings","","","3,500","","","(3,500)","","(100)","%"],["Bank notes and senior debt","20,661","","","24,271","","","(3,610)","","(15)","%"],["Subordinated debt","6,996","","","6,403","","","593","","9","%"],["Other","3,127","","","3,021","","","106","","4","%"],["Total borrowed funds","30,784","","","37,195","","","(6,411)","","(17)","%"],["Total funding sources","$","488,062","","","$","402,540","","","$","85,522","","21","%"]] [[/GREPCENT_TABLE]] Total deposits increased reflecting deposits from BBVA and growth in consumer and commercial liquidity. Borrowed funds decreased due to lower bank notes and senior debt and lower FHLB borrowings, reflecting the use of liquidity from deposit growth, which more than offset borrowed funds from BBVA. The level and composition of borrowed funds fluctuates over time based on many factors including market conditions, loan, investment securities and deposit growth and capital considerations. We manage our borrowed funds to provide a reliable source of liquidity for our banking and other activities, considering our LCR and NSFR requirements and other internal and external guidelines and constraints. See the Liquidity and Capital Management portion of the Risk Management section of this Item 7 for additional information regarding our 2021 liquidity and capital activities. See Note 10 Borrowed Funds in the Notes to Consolidated Financial Statements in Item 8 of this Report for additional information related to our borrowings. Shareholders’ Equity Total shareholders’ equity was $55.7 billion at December 31, 2021, an increase of $1.7 billion, compared to December 31, 2020. The increase resulted primarily from net income of $5.7 billion and a preferred stock issuance of $1.5 billion, partially offset by lower AOCI of $2.4 billion reflecting the impact of higher rates on net unrealized securities gains, common and preferred stock dividends of $2.3 billion and common share repurchases of $1.0 billion. 48    The PNC Financial Services Group, Inc. – 2021 Form 10-K BUSINESS SEGMENTS REVIEW We have three reportable business segments: •Retail Banking •Corporate & Institutional Banking •Asset Management Group Business segment results and a description of each business are included in Note 23 Segment Reporting in the Notes to Consolidated Financial Statements included in Item 8 of this Report. Certain amounts included in this Business Segments Review differ from those amounts shown in Note 23, primarily due to the presentation in this Item 7 of business net interest income on a taxable-equivalent basis. Note 23 presents results of businesses for 2021, 2020 and 2019. Net interest income in business segment results reflects our internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors. Total business segment financial results differ from total consolidated net income. The impact of these differences is reflected in the “Other” category as shown in Table 119 in Note 23 Segment Reporting in the Notes to Consolidated Financial Statements included in Item 8 of this Report. “Other” includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as asset and liability management activities including net securities gains or losses, ACL for investment securities, certain trading activities, certain runoff consumer loan portfolios, private equity investments, intercompany eliminations, certain corporate overhead, tax adjustments that are not allocated to business segments, exited businesses, and differences between business segment performance reporting and financial statement reporting (GAAP). The PNC Financial Services Group, Inc. – 2021 Form 10-K  49 Retail Banking Retail Banking’s core strategy is to help all of our consumer and small business customers move financially forward. We aim to grow our primary checking and transaction relationships through strong customer acquisition and retention. We seek to deepen relationships by meeting the broad range of our customers’ financial needs with savings, liquidity, lending, investment and retirement solutions. A strategic priority for us is to differentiate the customer experience, leveraging technology to make banking easier for our customers. A key element of our strategy is to expand the use of lower-cost alternative distribution channels, with an emphasis on digital capabilities, while continuing to optimize the traditional branch network. In addition, we are focused on consistently engaging both our employees and customers, which is a strong driver of customer growth, retention and relationship expansion. Table 10: Retail Banking Table [[GREPCENT_TABLE]] [["(Unaudited)"],["Year ended December 31","","","","","Change"],["Dollars in millions, except as noted","2021","","2020","","$","","%"],["Income Statement"],["Net interest income","$","6,206","","","$","5,609","","","$","597","","","11","%"],["Noninterest income","2,796","","","2,519","","","277","","","11","%"],["Total revenue","9,002","","","8,128","","","874","","","11","%"],["Provision for (recapture of) credit losses","(101)","","","968","","","(1,069)","","","*"],["Noninterest expense","6,916","","","6,019","","","897","","","15","%"],["Pretax earnings","2,187","","","1,141","","","1,046","","","92","%"],["Income taxes","508","","","266","","","242","","","91","%"],["Noncontrolling interests","31","","","31","","","\u2014","","","\u2014"],["Earnings","$","1,648","","","$","844","","","$","804","","","95","%"],["Average Balance Sheet"],["Loans held for sale","$","1,328","","","$","745","","","$","583","","","78","%"],["Loans"],["Consumer"],["Residential real estate","$","25,230","","","$","18,171","","","$","7,059","","","39","%"],["Home equity","22,387","","","22,633","","","(246)","","","(1)","%"],["Automobile","15,787","","","15,968","","","(181)","","","(1)","%"],["Credit card","6,182","","","6,629","","","(447)","","","(7)","%"],["Education","2,770","","","3,176","","","(406)","","","(13)","%"],["Other consumer","2,397","","","2,334","","","63","","","3","%"],["Total consumer","74,753","","","68,911","","","5,842","","","8","%"],["Commercial","14,321","","","12,573","","","1,748","","","14","%"],["Total loans","$","89,074","","","$","81,484","","","$","7,590","","","9","%"],["Total assets","$","106,331","","","$","97,643","","","$","8,688","","","9","%"],["Deposits"],["Noninterest-bearing","$","57,729","","","$","39,754","","","$","17,975","","","45","%"],["Interest-bearing","184,040","","","150,482","","","33,558","","","22","%"],["Total deposits","$","241,769","","","$","190,236","","","$","51,533","","","27","%"],["Performance Ratios"],["Return on average assets","1.55","%","","0.86","%"],["Noninterest income to total revenue","31","%","","31","%"],["Efficiency","77","%","","74","%"]] [[/GREPCENT_TABLE]] (continued on following page) 50    The PNC Financial Services Group, Inc. – 2021 Form 10-K (continued from previous page) [[GREPCENT_TABLE]] [["Year ended December 31","","","","","Change"],["Dollars in millions, except as noted","2021","","2020","","$","","%"],["Supplemental Noninterest Income Information"],["Consumer services","$","1,752","","","$","1,427","","","$","325","","","23","%"],["Residential mortgage","$","456","","","$","604","","","$","(148)","","","(25)","%"],["Service charges on deposits","$","542","","","$","497","","","$","45","","","9","%"],["Residential Mortgage Information"],["Residential mortgage servicing statistics (in billions, except as noted) (a)"],["Serviced portfolio balance (b)","$","133","","","$","121","","","$","12","","","10","%"],["Serviced portfolio acquisitions","$","44","","","$","33","","","$","11","","","33","%"],["MSR asset value (b)","$","1.1","","","$","0.7","","","$","0.4","","","57","%"],["MSR capitalization value (in basis points) (b)","81","","","56","","","25","","","45","%"],["Servicing income: (in millions)"],["Servicing fees, net (c)","$","34","","","$","118","","","$","(84)","","","(71)","%"],["Mortgage servicing rights valuation, net of economic hedge","$","64","","","$","137","","","$","(73)","","","(53)","%"],["Residential mortgage loan statistics"],["Loan origination volume (in billions)","$","24.8","","","$","15.1","","","$","9.7","","","64","%"],["Loan sale margin percentage","2.84","%","","3.57","%"],["Percentage of originations represented by:"],["Purchase volume (d)","43","%","","40","%"],["Refinance volume","57","%","","60","%"],["Other Information (b)"],["Customer-related statistics (average) (e)"],["Non-teller deposit transactions (f)","65","%","","64","%"],["Digital consumer customers (g)","79","%","","74","%"],["Credit-related statistics"],["Nonperforming assets","$","1,220","","","$","1,211","","","$","9","","","1","%"],["Net charge-offs - loans and leases","$","393","","","$","569","","","$","(176)","","","(31)","%"],["Other statistics"],["ATMs","9,523","","","8,900","","","623","","","7","%"],["Branches (h)","2,629","","","2,162","","","467","","","22","%"],["Brokerage account client assets (in billions) (i)","$","78","","","$","59","","","$","19","","","32","%"]] [[/GREPCENT_TABLE]] * - Not Meaningful (a)Represents mortgage loan servicing balances for third parties and the related income. (b)Presented as of period end, except for average customer-related statistics and net charge-offs, which are both shown for the year ended, respectively. (c)Servicing fees net of impact of decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan payments, prepayments, and loans that were paid down or paid off during the period. (d)Mortgages with borrowers as part of residential real estate purchase transactions. (e)Statistics for 2021 include BBVA activity subsequent to the conversion on October 12, 2021. (f)Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application. (g)Represents consumer checking relationships that process the majority of their transactions through non-teller channels. (h)Excludes stand-alone mortgage offices and satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services. (i)Includes cash and money market balances. Retail Banking earnings increased $804 million in 2021 compared with the same period in 2020. The increase in earnings was attributable to a provision recapture, higher net interest income and higher noninterest income, partially offset by higher noninterest expense. The 2021 amounts reflect the benefit of BBVA's business operations since the acquisition closed on June 1, 2021. Net interest income increased primarily due to growth in average deposits and loan balances, reflecting the BBVA acquisition, along with wider interest rate spreads on the value of loans, partially offset by narrower interest rate spreads on the value of deposits. Noninterest income increased due to higher consumer services revenue driven by debit card and brokerage fees and higher service charges on deposits which benefited from the addition of BBVA customers and higher business activity. The increase in noninterest income was partially offset by declines in residential mortgage revenue, driven by lower net servicing fees primarily due to higher payoffs and lower revenue from residential mortgage servicing rights valuation, net of economic hedge. The PNC Financial Services Group, Inc. – 2021 Form 10-K  51 Provision recapture in 2021 was driven by portfolio changes, including improved credit quality and changes in portfolio composition, along with the impact from an improved economic environment, partially offset by the additional provision for credit losses related to the BBVA acquisition. Noninterest expense increased, primarily as a result of the impact of BBVA operating expenses, increased marketing activity and additions to litigation reserves. The deposit strategy of Retail Banking is to remain disciplined on pricing and focused on growing and retaining relationship-based balances, executing on market-specific deposit growth strategies and providing a source of low-cost funding and liquidity to PNC. In 2021, average total deposits increased compared to the same period in 2020 primarily driven by growth in demand and savings deposits which benefited from the impact of the BBVA acquisition and continued government stimulus payments. Retail Banking average total loans increased in 2021 compared with the same period in 2020 due to the impact of the BBVA acquisition on all loan classes except education loans, which BBVA did not have in their loan portfolio. The below outlines portfolio drivers excluding the impact of BBVA. •Average residential real estate loans increased primarily due to originations outpacing paydowns. •Average commercial loans increased primarily due to PPP loans. •Average other consumer loans decreased due to liquidations outpacing new volumes. •Average credit card balances decreased due to changes in customer behavior resulting in higher balance paydowns driven by government stimulus combined with credit tightening actions taken as a result of the pandemic. •Average education loans decreased driven by a decline in the runoff portfolio of government guaranteed education loans. •Average home equity loans decreased as paydowns and payoffs exceeded new originated volume. •Average auto loan balances decreased due to the impacts of the pandemic on the auto industry and proactive credit tightening. Our national expansion strategy is designed to grow customers with digitally-led banking and a thin branch network as we expand into new markets. In 2018, we began offering our digital high yield savings deposit product and opened our first solution center in Kansas City. Solution centers are an emerging branch operating model with a distinctive layout, where routine transactions are supported through a combination of technology and skilled banker assistance to create personalized experiences. The primary focus of the solution center is to bring a community element to our digital banking capabilities. The solution center provides a collaborative environment that connects our customers with our digital solutions and services, beyond deposits and withdrawals. In 2021, we opened 13 new solution centers, including in three new markets, Denver, Minneapolis and Phoenix. In total, we have 33 open solution centers within the markets of Boston, Dallas/Fort Worth, Denver, Houston, Kansas City, Minneapolis, Nashville and Phoenix. We also offer digital unsecured installment and small business loans in the expansion markets. As a result of the BBVA acquisition, we have become a coast-to-coast Retail Bank and added over 600 branches across seven states to our network. Retail Banking continues to enhance the customer experience with refinements to product and service offerings that drive value for consumers and small businesses. We are focused on meeting the financial needs of our customers by providing a broad range of liquidity, banking and investment products. In April 2021, we announced our Low Cash Mode® Virtual Wallet® feature which gives all Virtual Wallet® customers the ability to avoid unnecessary overdraft fees through real-time intelligent alerts, extra time to prevent or address overdrafts, and controls to choose whether to return certain debits rather than the bank making the decision. Through the end of December, we have successfully rolled out Low Cash Mode® to all Virtual Wallet® customers. Upon conversion, BBVA customers became eligible for the full suite of PNC products and services, including Low Cash Mode®. Retail Banking continued to execute on its strategy of transforming the customer experience through transaction channel migration, branch network and home lending process transformations and multi-channel engagement and service strategies. We are also continually assessing our current branch network for optimization opportunities as usage of alternative channels has increased and as a result closed 196 branches, consistent with our plan. These branch closures included two solution centers due to their proximity to pre-existing BBVA USA branch locations. 52    The PNC Financial Services Group, Inc. – 2021 Form 10-K Corporate & Institutional Banking Corporate & Institutional Banking’s strategy is to be the leading relationship-based provider of traditional banking products and services to its customers through the economic cycles. We aim to grow our market share and drive higher returns by delivering value-added solutions that help our clients better run their organizations, all while maintaining prudent risk and expense management. We continue to focus on building client relationships where the risk-return profile is attractive. Table 11: Corporate & Institutional Banking Table [[GREPCENT_TABLE]] [["(Unaudited)"],["Year ended December 31","","","","","Change"],["Dollars in millions","2021","","2020","","$","","%"],["Income Statement"],["Net interest income","$","4,571","","","$","4,049","","","$","522","","","13","%"],["Noninterest income","3,783","","","3,062","","","721","","","24","%"],["Total revenue","8,354","","","7,111","","","1,243","","","17","%"],["Provision for (recapture of) credit losses","(646)","","","2,088","","","(2,734)","","","*"],["Noninterest expense","3,479","","","2,856","","","623","","","22","%"],["Pretax earnings","5,521","","","2,167","","","3,354","","","155","%"],["Income taxes","1,183","","","483","","","700","","","145","%"],["Noncontrolling interests","14","","","10","","","4","","","40","%"],["Earnings","$","4,324","","","$","1,674","","","$","2,650","","","158","%"],["Average Balance Sheet"],["Loans held for sale","$","583","","","$","762","","","$","(179)","","","(23)","%"],["Loans"],["Commercial"],["Commercial and industrial","$","126,928","","","$","125,426","","","$","1,502","","","1","%"],["Commercial real estate","31,584","","","27,180","","","4,404","","","16","%"],["Equipment lease financing","6,286","","","6,813","","","(527)","","","(8)","%"],["Total commercial","164,798","","","159,419","","","5,379","","","3","%"],["Consumer","13","","","10","","","3","","","30","%"],["Total loans","$","164,811","","","$","159,429","","","$","5,382","","","3","%"],["Total assets","$","188,470","","","$","183,189","","","$","5,281","","","3","%"],["Deposits"],["Noninterest-bearing demand","$","79,109","","","$","53,681","","","$","25,428","","","47","%"],["Interest-bearing demand","72,210","","","70,622","","","1,588","","","2","%"],["Total deposits","$","151,319","","","$","124,303","","","$","27,016","","","22","%"],["Performance Ratios"],["Return on average assets","2.29","%","","0.91","%"],["Noninterest income to total revenue","45","%","","43","%"],["Efficiency","42","%","","40","%"],["Other Information"],["Consolidated revenue from: (a)"],["Treasury Management (b)","$","2,169","","","$","1,884","","","$","285","","","15","%"],["Capital Markets (b)","$","1,983","","","$","1,607","","","$","376","","","23","%"],["Commercial mortgage banking activities:"],["Commercial mortgage loans held for sale (c)","$","145","","","$","162","","","$","(17)","","","(10)","%"],["Commercial mortgage loan servicing income (d)","334","","","294","","","40","","","14","%"],["Commercial mortgage servicing rights valuation, net of economic hedge (e)","80","","","72","","","8","","","11","%"],["Total","$","559","","","$","528","","","$","31","","","6","%"],["MSR asset value (f)","$","740","","","$","569","","","$","171","","","30","%"],["Average Loans by C&IB business"],["Corporate Banking","$","81,069","","","$","81,977","","","$","(908)","","","(1)","%"],["Real Estate","42,936","","","40,381","","","2,555","","","6","%"],["Business Credit","24,047","","","22,589","","","1,458","","","6","%"],["Commercial Banking","12,054","","","10,415","","","1,639","","","16","%"],["Other","4,705","","","4,067","","","638","","","16","%"],["Total average loans","$","164,811","","","$","159,429","","","$","5,382","","","3","%"],["Credit-related statistics"],["Nonperforming assets (f)","$","1,007","","","$","827","","","$","180","","","22","%"],["Net charge-offs - loans and leases","$","289","","","$","280","","","$","9","","","3","%"]] [[/GREPCENT_TABLE]] * - Not Meaningful (a)See the additional revenue discussion regarding treasury management, capital markets-related products and services, and commercial mortgage banking activities in the Product Revenue section of this Corporate & Institutional Banking section. (b)Amounts are reported in net interest income and noninterest income. (c)Represents other noninterest income for valuations on commercial mortgage loans held for sale and related commitments, derivative valuations, originations fees, gains on sale of loans held for sale and net interest income on loans held for sale. (d)Represents net interest income and noninterest income (primarily in corporate service fees) from loan servicing net of reduction in commercial mortgage servicing rights due to amortization expense and payoffs. Commercial mortgage servicing rights valuation, net of economic hedge is shown separately. The PNC Financial Services Group, Inc. – 2021 Form 10-K  53 (e)Amounts are reported in corporate service fees. (f)As of December 31. Corporate & Institutional Banking earnings increased $2.7 billion in 2021 compared with the same period in 2020, driven by a provision recapture and higher total revenue, partially offset by higher noninterest expense. Results for 2021 reflect the benefit of BBVA's business operations since the acquisition closed on June 1, 2021. Net interest income increased in the comparison primarily due to higher average deposit and loan balances reflecting the BBVA acquisition and wider interest rate spreads on the value of loans, partially offset by narrower interest rate spreads on the value of deposits. Growth in noninterest income in the comparison reflected broad-based increases, including the benefit from BBVA, in capital markets-related revenue, treasury management product revenue and revenue from commercial mortgage banking activities. Provision recapture in 2021 was driven by portfolio changes, including improved credit quality and changes in portfolio composition, along with the impact from an improved economic environment, partially offset by the additional provision for credit losses related to the BBVA acquisition. Noninterest expense increased in the comparison largely due to higher variable costs associated with increased business activity and the BBVA acquisition. Average loans increased compared with 2020 due to increases in Real Estate, Commercial Banking and Business Credit, partially offset by a decline in Corporate Banking: •Real Estate provides banking, financing, and servicing solutions for commercial real estate clients across the country. Average loans for this business increased reflecting loans from BBVA, partially offset by lower commercial mortgage and multifamily agency warehouse lending. •Commercial Banking provides lending, treasury management and capital markets-related products and services to smaller corporations and businesses. Average loans for this business increased primarily driven by loans from BBVA, partially offset by lower average utilization of loan commitments. •Business Credit provides asset-based lending and equipment financing solutions. The loan and lease portfolio is relatively high yielding, with acceptable risk as the loans are mainly secured by business assets. Average loans for this business increased primarily driven by new production and loans from BBVA, partially offset by lower average utilization of loan commitments. •Corporate Banking provides lending, equipment finance, treasury management and capital markets-related products and services to mid-sized and large corporations and government, and not-for-profit entities. Average loans for this business declined slightly reflecting lower average utilization of loan commitments, mostly offset by loans from BBVA and new production. The deposit strategy of Corporate & Institutional Banking is to remain disciplined on pricing and focused on growing and retaining relationship-based balances over time, executing on customer and segment-specific deposit growth strategies and continuing to provide funding and liquidity to PNC. Average total deposits increased in the comparison reflecting deposits from BBVA and customers maintaining liquidity due to the economic impacts of the pandemic. We continue to actively monitor the interest rate environment and make adjustments in response to evolving market conditions, bank funding needs and client relationship dynamics. Corporate & Institutional Banking continues to expand its Corporate Banking business, focused on the middle market and larger sectors. We executed on our expansion plans into the Seattle and Portland markets in 2020, and in 2021, the BBVA acquisition accelerated our expansion efforts across the Southwest; however, this has not changed our strategy regarding our de novo expansion efforts. This follows offices opened in Boston and Phoenix in 2019, Denver, Houston and Nashville in 2018, and Dallas, Kansas City and Minneapolis in 2017. These locations complement Corporate & Institutional Banking national businesses with a significant presence in these cities, and build on past successes in the markets where PNC’s retail banking presence was limited, such as in the Southeast. Our full suite of commercial products and services is offered in these locations. Product Revenue In addition to credit and deposit products for commercial customers, Corporate & Institutional Banking offers other services, including treasury management, capital markets-related products and services, and commercial mortgage banking activities, for customers of all business segments. On a consolidated basis, the revenue from these other services is included in net interest income, corporate service fees and other noninterest income. From a business perspective, the majority of the revenue and expense related to these services is reflected in the Corporate & Institutional Banking segment results and the remainder is reflected in the results of other businesses. The Other Information section in Table 11 includes the consolidated revenue to PNC for these services. A discussion of the consolidated revenue from these services follows. 54    The PNC Financial Services Group, Inc. – 2021 Form 10-K The Treasury Management business provides corporations with cash and investment management services, receivables and disbursement management services, funds transfer services, international payment services and access to online/mobile information management and reporting services. Within Treasury Management, PNC Global Transfers (formerly BBVA Transfer Services, Inc.) provides wholesale money transfer processing capabilities between the U.S. and Mexico and other countries primarily in Central and South America. Treasury management revenue is reported in noninterest income and net interest income. Noninterest income includes treasury management product revenue less earnings credits provided to customers on compensating deposit balances used to pay for products and services. Net interest income primarily includes revenue from all treasury management customer deposit balances. Compared with 2020, treasury management revenue increased primarily due to higher noninterest income and higher deposit balances including the impact of the BBVA acquisition, partially offset by narrower interest rate spreads on the value of deposits. Capital markets-related products and services include foreign exchange, derivatives, fixed income, securities underwriting, loan syndications, mergers and acquisitions advisory and equity capital markets advisory related services. The increase in capital markets-related revenue in the comparison was mostly driven by higher merger and acquisition fees, higher loan syndications and higher equity capital market advisory fees. These increases were partially offset by lower fees and credit valuations on customer-related derivative activities. Commercial mortgage banking activities include revenue derived from commercial mortgage servicing (both net interest income and noninterest income) and revenue derived from commercial mortgage loans held for sale and related hedges. Total revenue from commercial mortgage banking activities increased in the comparison primarily due to higher commercial mortgage loan servicing income, partially offset by lower revenue from commercial mortgage loans held for sale. The PNC Financial Services Group, Inc. – 2021 Form 10-K  55 Asset Management Group The Asset Management Group strives to be the leading relationship-based provider of investment, planning, credit and cash management solutions and fiduciary services to wealthy individuals and institutions by endeavoring to proactively deliver value-added ideas, solutions and exceptional service. Asset Management Group’s priorities are to serve our clients’ financial objectives, grow and deepen customer relationships and deliver solid financial performance with prudent risk and expense management. Table 12: Asset Management Group Table [[GREPCENT_TABLE]] [["(Unaudited)"],["Year ended December 31","","","","","Change"],["Dollars in millions, except as noted","2021","","2020","","$","","%"],["Income Statement"],["Net interest income","$","476","","","$","357","","","$","119","","","33","%"],["Noninterest income","987","","","854","","","133","","","16","%"],["Total revenue","1,463","","","1,211","","","252","","","21","%"],["Provision for (recapture of) credit losses","(7)","","","21","","","(28)","","","*"],["Noninterest expense","941","","","858","","","83","","","10","%"],["Pretax earnings","529","","","332","","","197","","","59","%"],["Income taxes","123","","","77","","","46","","","60","%"],["Earnings","$","406","","","$","255","","","$","151","","","59","%"],["Average Balance Sheet"],["Loans"],["Consumer"],["Residential real estate","$","5,033","","","$","2,832","","","$","2,201","","","78","%"],["Other consumer","4,321","","","4,042","","","279","","","7","%"],["Total consumer","9,354","","","6,874","","","2,480","","","36","%"],["Commercial","1,746","","","831","","","915","","","110","%"],["Total loans","$","11,100","","","$","7,705","","","$","3,395","","","44","%"],["Total assets","$","11,677","","","$","8,186","","","$","3,491","","","43","%"],["Deposits"],["Noninterest-bearing demand","$","2,919","","","$","1,568","","","$","1,351","","","86","%"],["Interest-bearing demand","22,782","","","17,347","","","5,435","","","31","%"],["Total deposits","$","25,701","","","$","18,915","","","$","6,786","","","36","%"],["Performance Ratios"],["Return on average assets","3.48","%","","3.12","%"],["Noninterest income to total revenue","67","%","","71","%"],["Efficiency","64","%","","71","%"],["Supplemental Noninterest Income Information"],["Asset management fees","$","964","","","$","836","","","$","128","","","15","%"],["Brokerage fees","9","","","","","9","","","*"],["Total","$","973","","","$","836","","","$","137","","","16","%"],["Other Information"],["Nonperforming assets (a)","$","62","","","$","66","","","$","(4)","","","(6)","%"],["Net charge-offs - loans and leases","$","2","","","$","1","","","$","1","","","100","%"],["Brokerage account client assets (in billions) (a)","$","5","","","","","","","*"],["Client Assets Under Administration (in billions) (a) (b)"],["Discretionary client assets under management","$","192","","","$","170","","","$","22","","","13","%"],["Nondiscretionary client assets under administration","175","","","154","","","21","","","14","%"],["Total","$","367","","","$","324","","","$","43","","","13","%"],["Discretionary client assets under management"],["PNC Private Bank","$","123","","","$","108","","","$","15","","","14","%"],["Institutional Asset Management","69","","","62","","","7","","","11","%"],["Total","$","192","","","$","170","","","$","22","","","13","%"]] [[/GREPCENT_TABLE]] * - Not Meaningful (a)As of December 31. (b)Excludes brokerage account client assets. 56    The PNC Financial Services Group, Inc. – 2021 Form 10-K The Asset Management Group consists of two primary businesses: PNC Private Bank and Institutional Asset Management. The PNC Private Bank is focused on being a premier private bank in each of the markets it serves. The business seeks to deliver high quality banking, trust, and investment management services to our emerging affluent, high net worth, and ultra-high net worth clients through a broad array of products and services. Institutional Asset Management provides outsourced chief investment officer, custody, private real estate, cash and fixed income client solutions, and retirement plan fiduciary investment services to institutional clients including corporations, healthcare systems, insurance companies, unions, municipalities, and non-profits. With the inclusion of BBVA, PNC Private Bank has approximately 100 offices operating in nine out of the ten most affluent states in the U.S. with a majority co-located with retail banking branches. Asset Management Group earnings increased $151 million in 2021 compared with the same period in 2020, driven by higher revenue and lower provision for credit losses, partially offset by an increase in noninterest expense. Results for 2021 reflect the benefit of BBVA's business operations since the acquisition closed on June 1, 2021. Net interest income increased due to growth in average loan and deposit balances, reflecting the BBVA acquisition and wider interest rate spreads on the value of loans. This was partially offset by narrower interest rate spreads on the value of deposits. The private banking business continues to refine and offer banking products targeted to the emerging affluent, the affluent and the ultra-affluent client segments. A key focus of the lending business is to drive growth within both the residential real estate product and securities-based lines of credit product. In addition, the deposit strategy focuses on liquidity management for optimizing a client’s overall portfolio. The increase in noninterest income was primarily attributable to increases in the average equity markets and the benefit of BBVA. Noninterest expense increased due to the impact of BBVA operations and higher operational loss reserves, partially offset by intangible asset amortization run-off. Provision recapture in 2021 was driven by improvements in credit quality and the economic environment, partially offset by the additional provision for credit losses related to the BBVA acquisition. Discretionary client assets under management increased in comparison to the prior year primarily attributable to higher equity markets and the benefit from BBVA as of December 31, 2021. RISK MANAGEMENT Enterprise Risk Management We encounter risk as part of the normal course of operating our business. Accordingly, we design our risk governance framework, referred to as the ERM Framework, and risk management processes to help manage this risk. We manage risk in light of our risk appetite to optimize long-term shareholder value while supporting our employees, customers and communities. Our ERM Framework is structurally aligned with regulatory enhanced prudential standards and heightened standards, promulgated by the Federal Reserve and OCC, respectively, which establish minimum requirements for the design and implementation of a risk governance framework. This Risk Management section describes our ERM Framework, which consists of seven core components that provide executive management and the Board of Directors with an aggregate view of significant risks impacting the organization. The seven core components are risk culture, enterprise strategy (including risk appetite, strategic planning, capital planning and stress testing), risk governance and oversight, risk identification, risk assessments, risk controls and monitoring, and risk aggregation and reporting (see the figure below). The overall Risk Management section of this Item 7 also provides an analysis of the firm’s Capital Management and our key areas of risk, which include, but are not limited to Credit, Market, Liquidity and Operational (including Compliance and Information Security). Our use of financial derivatives as part of our overall asset and liability risk management process is also addressed within this Risk Management section. We operate within a rapidly evolving regulatory environment. Accordingly, we are actively focused on the timely incorporation of applicable regulatory pronouncements into our ERM Framework. The PNC Financial Services Group, Inc. – 2021 Form 10-K  57 Risk Culture A strong risk culture helps us make well-informed decisions, helps ensure individuals conform to the established culture, reduces an individual’s ability to do something for personal gain, and rewards employees for working toward a common goal rather than individual interests. Our risk culture reinforces the appropriate protocols for responsible and ethical behavior. These protocols are especially critical in terms of our risk awareness, risk-taking behavior and risk management practices. Managing risk is every employee’s responsibility. All of our employees individually and collectively are responsible for ensuring the organization is performing with the utmost integrity, is applying sound risk management practices and is striving to achieve our stated objectives rather than pursuing individual interests. All employees are also responsible for understanding our Enterprise Risk Appetite Statement, the ERM Framework and how risk management applies to their respective roles and responsibilities. Employees are encouraged to collaborate across groups to identify and mitigate risks and elevate issues as required. We reinforce risk management responsibilities through a performance management system where employee performance goals include risk management objectives and incentives for employees to reinforce balanced measures of risk-adjusted performance. Proactive and open communication, between groups and up to the Board of Directors, facilitates timely identification and resolution of risk issues. Our multi-level risk committee structure provides formal channels to identify and report risk. Enterprise Strategy We seek to ensure that our overall enterprise strategy is within acceptable risk parameters through our risk appetite, strategic planning, capital planning and stress testing processes. These components are reviewed and approved at least annually by the Board of Directors. Risk Appetite: Our risk appetite represents the organization’s desired enterprise risk position, set within our capital-based risk and liquidity capacity to achieve our strategic objectives and business plans. The Enterprise Risk Appetite Statement qualitatively describes the aggregate level of risk we are willing to accept in order to execute our business strategies. Qualitative guiding principles further define each of the risks within our taxonomy to support the risk appetite statement. Risk appetite metrics and limits, including forward-looking metrics, quantitatively measure whether we are operating within our stated Risk Appetite. Our risk appetite metrics reflect material risks, align with our established Risk Appetite Framework, balance risk and reward, leverage analytics, and are adjusted to changes in the external and internal risk environments. Strategic Planning: Our enterprise and line of business strategic plans outline major objectives, strategies and goals which are expected to be achieved over the next five years while seeking to ensure we remain compliant with all capital, risk appetite and liquidity targets and guidelines. Our chief executive officer and chief financial officer lead the development of the corporate strategic plan, the strategic objectives and the comprehensive identification of material risks that could hinder successful implementation and execution of strategies. Strategic planning is linked to our risk management and capital planning processes. Capital Planning and Stress Testing: Capital planning helps to ensure we are maintaining safe and sound operations and viability. The capital planning process and the resulting capital plan evolve as our overall risks, activities and risk management practices change. Capital planning aligns with our strategic planning process. Stress testing is an essential element of the capital planning process. Effective stress testing enables us to consider the estimated effect on capital of various hypothetical scenarios. Risk Governance and Oversight We employ a comprehensive risk management governance framework to help ensure that risks are identified, balanced decisions are made that consider risk and return, and risks are adequately monitored and managed. Risk committees established within this risk governance and oversight framework provide oversight for risk management activities at the Board of Directors, executive, corporate 58    The PNC Financial Services Group, Inc. – 2021 Form 10-K and business levels. Committee composition is designed to provide effective oversight balanced across the three lines of defense in accordance with the OCC’s heightened standards and the Federal Reserve Board's enhanced prudential standards rules. See the Supervision and Regulation section in Item 1 of this Report for more information. To ensure appropriate risks are being taken and effectively managed and controlled, risk is managed across three lines of defense. The Board of Directors’ and each line of defense’s responsibilities are detailed below: Board of Directors – The Board of Directors oversees our risk-taking activities, holds management accountable for adhering to the ERM Framework and is responsible for exercising sound, independent judgment when assessing risk. First line of defense – The front line units are accountable for identifying, owning and managing risks to within acceptable levels while adhering to the ERM Framework. Our businesses strive to enhance risk management and internal control processes within their areas. Integrated and comprehensive processes are designed to adequately manage the business’ risk profile and risk appetite through identifying, assessing, monitoring and reporting risks that may significantly impact each business. Second line of defense – The second line of defense is independent from the first line of defense and is responsible for establishing the risk governance framework and the standards within each independent risk area for identifying, measuring, monitoring, controlling and reporting aggregate risks. As the second line of defense, the independent risk areas monitor the risks generated by the first line of defense, review and challenge the implementation of effective risk management practices, and report any issues or exceptions. The risk areas help to ensure processes and controls owned by the businesses are designed and operating as intended, and they may intervene directly to modify and develop first line of defense risk processes and controls. Third line of defense – As the third line of defense, Internal Audit is independent from the first and second lines of defense. Internal Audit provides the Board of Directors and executive management comprehensive assurance on the effectiveness of the ERM Framework and the risk management practices across the organization. Within the three lines of defense, the independent risk organization has sufficient authority to influence material decisions. Our business oversight and decision-making is supported through a governance structure at the Board of Directors and management level. Specific responsibilities include: Board of Directors – Our Board of Directors oversees our business and affairs as managed by our officers and employees. The Board of Directors may receive assistance in carrying out its duties and may delegate authority through the following standing committees: •Audit Committee: monitors the integrity of our consolidated financial statements; monitors internal control over financial reporting; monitors compliance with our code of ethics; evaluates and monitors the qualifications and independence of our independent auditors; and evaluates and monitors the performance of our Internal Audit function and our independent auditors. •Nominating and Governance Committee: oversees the implementation of sound corporate governance principles and practices while promoting our best interests and those of our shareholders. •Human Resources Committee: oversees the compensation of our executive officers and other specified responsibilities related to talent and human capital matters affecting us. The committee is also responsible for evaluating the relationship between risk-taking activities and incentive compensation plans. •Risk Committee: oversees our enterprise-wide risk structure and the processes established to identify, measure, monitor and manage the organization’s risks and evaluates and approves our risk governance framework. The Risk Committee has formed a Technology Subcommittee and a Compliance Subcommittee to facilitate Board-level oversight of risk management in these areas. •Special Committee on Equity & Inclusion: oversees management’s equity and inclusion efforts, internally and externally, focusing on our systemic processes (including for employees and suppliers); low and moderate income communities (including community development banking, and product offerings and financial support for such communities); and advocacy (including partnerships with leading organizations, and advocacy for necessary structural changes to help provide greater access to the banking system and end systemic racism). Management Level Executive Committee – The Management Level Executive Committee is responsible for guiding the creation and execution of our business strategy across the company. With this responsibility, the Management Level Executive Committee executes various strategic approval and review activities, with a focus on capital deployment, business performance and risk management. This Committee also helps ensure PNC is staffed with sufficient resources and talent to operate within its risk appetite. Corporate Committees – The Corporate Committees generally operate based on the delegated approval authority from a Board-level Committee, the Management Level Executive Committee or other Corporate Committees. These Committees operate at the The PNC Financial Services Group, Inc. – 2021 Form 10-K  59 senior management level and are designed to facilitate the review, evaluation, oversight and approval of key business and risk activities. Working Committees – The Working Committees generally operate on delegated approval authority from a Corporate Committee or other Working Committees. Working Committees are intended to provide oversight of regulatory/legal matters, assist in the implementation of key enterprise-level activities within a business or function and support the oversight of the businesses key risk activities. Transactional Committees – Transactional Committees generally operate based on delegated approval authority from a Corporate or Working Committee to approve individual transactions, transactional related activities or movements on the organization's balance sheet. Policies and Procedures – We have established risk management Policies and Procedures to support our ERM Framework, articulate our risk culture, define the parameters and processes within which employees are to manage risk and conduct our business activities and to provide direction, guidance and clarity on roles and responsibilities to management and the Board of Directors. These Policies and Procedures are organized in a multi-tiered framework and require periodic review and approval by relevant Committees, including where appropriate Committees of the Board of Directors, or management. Risk Identification Risk identification takes place across a variety of risk types throughout the organization. These risk types include, but are not limited to, credit, liquidity and capital, market and operational (which includes, among other types of risk, compliance and information security). 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 our risk appetite. Multiple tools and approaches are used to help identify and prioritize risks, including Risk Appetite Metrics, Key Risk Indicators, Key Performance Indicators, Risk and Control Self-Assessments, scenario analysis, stress testing and special investigations. Risks are aggregated and assessed within and across risk functions and businesses. The aggregated risk information is reviewed and reported at an enterprise level to the Board of Directors or appropriate committees. This enterprise aggregation and reporting approach promotes the identification and appropriate escalation of material risks across the organization and supports an understanding of the cumulative impact of risk in relation to our risk appetite. Risk Assessment Once risks are identified, they are evaluated based on quantitative and qualitative analysis to determine whether they are material. Risk assessments support the overall management of an effective ERM Framework and allow us to control and monitor our actual risk level and risk management effectiveness through the use of risk measures. Comprehensive, accurate and timely assessments of risk are essential to an effective ERM Framework. Effective risk measurement practices are designed to uncover recurring risks that have been experienced in the past; facilitate the monitoring, understanding, analysis and reporting of known risks; and reveal unanticipated risks that may not be easy to understand or predict. Risk Controls and Monitoring Our ERM Framework consists of policies, processes, personnel and control systems. Risk controls and limits provide the linkage from our Risk Appetite Statement and associated guiding principles to the risk-taking activities of our businesses. In addition to risk appetite limits, a system of more detailed internal controls exists which oversees and monitors our various processes and functions. These control systems measure performance, help employees make correct decisions, help ensure information is accurate and reliable and facilitate compliance with laws and regulations. We design our monitoring and evaluation of risks and controls to provide assurance that policies, procedures and controls are effective and also to result in the identification of control improvement recommendations. Risk monitoring is a daily, ongoing process used by both the first and second line of defense to help ensure compliance with our ERM Framework. Risk monitoring is accomplished in many ways, including performing risk assessments at the prime process and risk assessment unit level, monitoring an area’s key controls, the timely reporting of issues, and establishing a quality control and/or quality assurance function, as applicable. Risk Aggregation and Reporting Risk reporting is a comprehensive way to: (i) aggregate risks; (ii) identify concentrations; (iii) help ensure we remain within our established risk appetite; (iv) monitor our risk profile in relation to our risk appetite and (v) communicate risks and views on the effectiveness of our risk management activities to the Board of Directors and executive management. Risk reports are produced at the line of business, functional risk and enterprise levels. The enterprise level risk report aggregates material risks identified in the risk area reports and in the business reports to define the enterprise risk profile. The enterprise risk profile is a point-in-time assessment of enterprise risk and represents our overall risk position in relation to the desired enterprise risk 60    The PNC Financial Services Group, Inc. – 2021 Form 10-K appetite. 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 risk reports from the risk areas and lines of business to inform our risk profile is designed to provide a clear view of our risk level relative to our quantitative risk appetite. The enterprise level report is provided through the governance structure to the Risk Committee of the Board of Directors. Each individual risk report includes an assessment of inherent risk, quality of risk management, residual risk, risk appetite and risk outlook. The enterprise level risk report includes an aggregate view of material risks identified in the individual reports and provides a summary of our overall risk profile compared to our risk appetite. Credit Risk Management Credit risk represents the possibility that a customer, counterparty or issuer may not perform in accordance with the contractual terms of their loan, extension of credit or other financial obligation with PNC. Credit risk is inherent in the financial services business and results from extending credit to customers, purchasing securities, and entering into financial derivative transactions and certain guarantee contracts. Credit risk is one of our most significant risks. Our processes for managing credit risk are designed to be embedded in our risk culture and in our decision-making processes using a systematic approach whereby credit risks and related exposures are identified and assessed, managed through specific policies and processes, measured and evaluated against our risk appetite and credit concentration limits, and reported, along with specific mitigation activities, to management and the Board of Directors through our governance structure. Our most significant concentration of credit risk is in our loan portfolio. Credit Risk Management employs a governance, policy and monitoring framework for environmental and social risk topics that includes periodic updates to PNC’s Credit Portfolio Strategy Committee. Outcomes from those updates may be incorporated into credit policies and risk procedures that govern our risk appetite, credit decisioning, portfolio management and reserve processes. Credit Risk Management is currently evaluating how it may best understand the impacts to credit risk that may accelerate or be introduced as a result of climate change, including impacts from physical risk events and risks associated with the transition to a low-carbon economy. These risk events may impact a borrower’s income, cash flow or collateral due to frequency or severity of weather events, changing market conditions, consumer preferences and demand for products, or changes to the legislative and regulatory landscape. As disruptive events occur, PNC follows a process to determine if enhanced portfolio monitoring, reporting and executive communication is warranted to ensure appropriate oversight and action. In commercial lending, PNC limits new originations in sectors that are no longer consistent with our strategic direction, such as mountain-top removal coal mining, Arctic oil and gas and private prisons. Corporate & Institutional Banking transactions are subject to an Environmental and Social Risk Management assessment designed to help us better identify and mitigate environmental, human rights and other social risks early in the credit application process. Transactions identified as having a potential environmental, human rights or other social risk are evaluated to determine whether enhanced due diligence is warranted. In consumer lending, PNC strives to ensure adequate insurance is present for properties exposed to flooding while also monitoring other water-related risks such as the increased shoreline (and coastal) erosion and weather related events such as hurricanes and wildfires. The PNC Financial Services Group, Inc. – 2021 Form 10-K  61 Loan Portfolio Characteristics and Analysis Table 13: Details of Loans In billions We use several credit quality indicators, as further detailed in Note 4 Loans and Related Allowance for Credit Losses in the Notes to Consolidated Financial Statements included in Item 8 of this Report, to monitor and measure our exposure to credit risk within our loan portfolio. The following provides additional information about the significant loan classes that comprise our Commercial and Consumer portfolio segments. Commercial Commercial and Industrial Commercial and industrial loans comprised 53% and 55% of our total loan portfolio at December 31, 2021 and 2020, respectively. The majority of our commercial and industrial loans are secured by collateral that provides a secondary source of repayment for the loan should the borrower experience cash generation difficulties. Examples of this collateral include short-term assets, such as accounts receivable, inventory and securities, and long-lived assets, such as equipment, owner-occupied real estate and other business assets. We actively manage our commercial and industrial loans to assess any changes (both positive and negative) in the level of credit risk at both the borrower and portfolio level. To evaluate the level of credit risk, we assign internal risk ratings reflecting our estimates of the borrower’s PD and LGD for each related credit facility. This two-dimensional credit risk rating methodology provides granularity in the risk monitoring process and is updated on an ongoing basis through our credit risk management processes. In addition to monitoring the level of credit risk, we also monitor concentrations of credit risk pertaining to both specific industries and geography that may exist in our portfolio. Our commercial and industrial portfolio is well-diversified as shown in the following table which provides a breakout by industry classification (classified based on the North American Industry Classification System). Table 14: Commercial and Industrial Loans by Industry [[GREPCENT_TABLE]] [["","December 31, 2021","","","December 31, 2020"],["Dollars in millions","Amount","","% of Total","","","Amount","","% of Total"],["Commercial and industrial"],["Retail/wholesale trade","$","22,803","","","15","%","","","$","20,218","","","15","%"],["Manufacturing","22,597","","","15","","","","20,712","","","16"],["Service providers","20,750","","","14","","","","19,419","","","15"],["Financial services","17,950","","","12","","","","14,909","","","11"],["Real estate related (a)","15,123","","","10","","","","13,369","","","10"],["Technology, media & telecommunications","10,070","","","7","","","","7,242","","","5"],["Health care","9,944","","","7","","","","8,987","","","7"],["Transportation and warehousing","7,136","","","5","","","","7,095","","","5"],["Other industries","26,560","","","15","","","","20,122","","","16"],["Total commercial and industrial loans","$","152,933","","","100","%","","","$","132,073","","","100","%"]] [[/GREPCENT_TABLE]] (a)Represents loans to customers in the real estate and construction industries. 62    The PNC Financial Services Group, Inc. – 2021 Form 10-K The increase in commercial and industrial loans compared to December 31, 2020, primarily reflects the acquisition of BBVA along with organic loan growth in the PNC legacy portfolio, partially offset by PPP loan forgiveness. Amounts include $3.4 billion and $12.0 billion of PPP loans outstanding at December 31, 2021 and 2020. See the Commercial High Impact Industries discussion within this Credit Risk Management section for additional discussion of the impact of COVID-19 on our commercial portfolio and how we are evaluating and monitoring the portfolio for elevated levels of credit risk. Commercial Real Estate Commercial real estate loans comprised $18.6 billion related to commercial mortgages on income-producing properties, $7.3 billion of real estate construction project loans and $8.1 billion of intermediate term financing loans as of December 31, 2021. Comparable amounts as of December 31, 2020 were $17.3 billion, $6.3 billion and $5.1 billion, respectively. We monitor credit risk associated with our commercial real estate loans similar to commercial and industrial loans by analyzing PD and LGD. Additionally, risks associated with these types of credit activities tend to be correlated to the loan structure, collateral location and quality, project progress and business environment. These attributes are also monitored and utilized in assessing credit risk. The portfolio is geographically diverse due to the nature of our business involving clients throughout the U.S. The following table presents our commercial real estate loans by geography and property type: Table 15: Commercial Real Estate Loans by Geography and Property Type [[GREPCENT_TABLE]] [["","December 31, 2021","","","December 31, 2020"],["Dollars in millions","Amount","","% of Total","","","Amount","","% of Total"],["Geography (a)"],["California","$","5,561","","","16","%","","","$","4,458","","","16","%"],["Texas","3,458","","","10","","","","2,031","","","7"],["Florida","2,987","","","9","","","","2,991","","","10"],["Virginia","1,720","","","5","","","","1,586","","","6"],["Maryland","1,557","","","5","","","","1,770","","","6"],["Pennsylvania","1,482","","","4","","","","1,425","","","5"],["Ohio","1,219","","","4","","","","1,247","","","4"],["Colorado","1,126","","","3","","","","584","","","2"],["Georgia","1,015","","","3","","","","859","","","3"],["New York","985","","","3","","","","725","","","3"],["Other","12,905","","","38","","","","11,040","","","38"],["Total commercial real estate loans","$","34,015","","","100","%","","","$","28,716","","","100","%"],["Property Type (a)"],["Multifamily","$","10,581","","","31","%","","","$","9,617","","","33","%"],["Office","9,547","","","28","","","","7,691","","","27"],["Retail","3,570","","","10","","","","3,490","","","12"],["Seniors housing","2,602","","","8","","","","1,417","","","5"],["Industrial/warehouse","2,413","","","7","","","","1,999","","","7"],["Hotel/motel","2,008","","","6","","","","1,954","","","7"],["Mixed use","724","","","2","","","","835","","","3"],["Other","2,570","","","8","","","","1,713","","","6"],["Total commercial real estate loans","$","34,015","","","100","%","","","$","28,716","","","100","%"]] [[/GREPCENT_TABLE]] (a)Presented in descending order based on loan balances at December 31, 2021. Commercial High Impact Industries In light of the economic circumstances related to COVID-19, we are continuing to evaluate and monitor our entire commercial portfolio for elevated levels of credit risk; however, the industry sectors that have been most impacted by the effects of the pandemic are: •Non-real estate related •Leisure recreation: restaurants, casinos, hotels, convention centers •Non-essential retail: retail excluding auto, gas, staples •Healthcare facilities: elective, private practices •Consumer services: religious organizations, childcare •Leisure travel: cruise, airlines, other travel/transportation •Other impacted areas: shipping, senior living, specialty education The PNC Financial Services Group, Inc. – 2021 Form 10-K  63 •Real estate related •Non-essential retail and restaurants: malls, lifestyle centers, outlets, restaurants •Hotel: full service, limited service, extended stay •Seniors housing: assisted living, independent living As of December 31, 2021, our outstanding loan balances in these industries totaled $19.3 billion, or approximately 7% of our total loan portfolio, while additional unfunded loan commitments totaled $12.9 billion. Included in our outstanding loan balances are $0.9 billion of loans that are funded through the PPP and guaranteed by the Small Business Administration. We continue to carefully monitor and manage the loans in these industries, and we believe uncertainty relative to the timing and level of long-term recovery for leisure recreation and leisure travel remains high. As the impact from COVID-19 persists, real estate related to the office sector is an area of growing uncertainty. Notable portions of leased office space remain vacant and the mass work-from-home experience continues to be a feasible alternative, suggesting a structural change for office demand moving forward. However, the change is anticipated to be slow moving and could evolve over a number of years. PNC continues to closely monitor our exposure in the office sector as these concerns develop, and while internal risk assessments have moved moderately higher, we have not seen a notable change in performance. Consumer Residential Real Estate Residential real estate loans primarily consisted of residential mortgage loans at both December 31, 2021 and 2020. We obtain loan attributes at origination, including FICO scores and LTVs, and we update these and other credit metrics at least quarterly. We track borrower performance monthly. We also segment the mortgage portfolio into pools based on product type (e.g., nonconforming, conforming). This information is used for internal reporting and risk management. As part of our overall risk analysis and monitoring, we also segment the portfolio based upon loan delinquency, nonperforming status, modification and bankruptcy status, FICO scores, LTV and geographic concentrations. Loan performance is evaluated by source originators and loan servicers. The following table presents certain key statistics related to our residential real estate portfolio: Table 16: Residential Real Estate Statistics [[GREPCENT_TABLE]] [["","December 31, 2021","","","December 31, 2020"],["Dollars in millions","Amount","","% of Total","","","Amount","","% of Total"],["Geography (a)"],["California","$","15,041","","","38","%","","","$","7,828","","","35","%"],["Texas","4,397","","","11","","","","409","","","2"],["Florida","3,124","","","8","","","","1,620","","","7"],["Washington","1,909","","","5","","","","1,104","","","5"],["New Jersey","1,660","","","4","","","","1,635","","","7"],["Arizona","1,435","","","4","","","","163","","","1"],["New York","1,279","","","3","","","","1,020","","","5"],["Colorado","1,145","","","3","","","","262","","","1"],["Pennsylvania","1,069","","","3","","","","1,036","","","5"],["Illinois","957","","","2","","","","1,039","","","5"],["Other","7,696","","","19","","","","6,444","","","27"],["Total residential real estate loans","$","39,712","","","100","%","","","$","22,560","","","100","%"],["","December 31, 2021","","","December 31, 2020"],["Weighted-average loan origination statistics (b)"],["Loan origination FICO score","","","775","","","","","775"],["LTV of loan originations","","","67","%","","","","","67","%"]] [[/GREPCENT_TABLE]] (a)Presented in descending order based on loan balances at December 31, 2021. (b)Weighted-averages calculated for the twelve months ended December 31, 2021 and 2020, respectively. We originate residential mortgage loans nationwide through our national mortgage business as well as within our branch network. Residential mortgage loans underwritten to agency standards, including conforming loan amount limits, are typically sold with servicing retained by us. We also originate nonconforming residential mortgage loans that do not meet agency standards, which we retain on our balance sheet. Our portfolio of originated nonconforming residential mortgage loans totaled $34.9 billion at December 31, 2021 with 42% located in California. Comparable amounts at December 31, 2020 were $17.9 billion and 41%, respectively. 64    The PNC Financial Services Group, Inc. – 2021 Form 10-K Home Equity Home equity loans comprised $15.8 billion of primarily variable-rate home equity lines of credit and $8.3 billion of closed-end home equity installment loans at December 31, 2021. Comparable amounts were $12.6 billion and $11.5 billion, as of December 31, 2020, respectively. We track borrower performance of this portfolio monthly similarly to residential real estate loans. We also segment the population into pools based on product type (e.g., home equity loans, brokered home equity loans, home equity lines of credit, brokered home equity lines of credit) and track the historical performance of any related mortgage loans regardless of whether we hold the lien. This information is used for internal reporting and risk management. As part of our overall risk analysis and monitoring, we also segment the portfolio based upon loan delinquency, nonperforming status, modification and bankruptcy status, FICO scores, LTV, lien position and geographic concentration. The credit performance of the majority of the home equity portfolio where we hold the first lien position is superior to the portion of the portfolio where we hold the second lien position, but do not hold the first lien. Lien position information is generally determined at the time of origination and monitored on an ongoing basis for risk management purposes. We use a third-party service provider to obtain updated loan information, including lien and collateral data that is aggregated from public and private sources. The following table presents certain key statistics related to our home equity portfolio: Table 17: Home Equity Loan Statistics [[GREPCENT_TABLE]] [["","December 31, 2021","","","December 31, 2020"],["Dollars in millions","Amount","","% of Total","","","Amount","","% of Total"],["Geography (a)"],["Pennsylvania","$","5,108","","","21","%","","","$","5,602","","","23","%"],["New Jersey","3,117","","","13","","","","3,462","","","14"],["Ohio","2,398","","","10","","","","2,753","","","11"],["Florida","1,701","","","7","","","","1,536","","","6"],["Michigan","1,246","","","5","","","","1,398","","","6"],["Maryland","1,206","","","5","","","","1,332","","","6"],["Illinois","1,154","","","5","","","","1,411","","","6"],["Texas","978","","","4","","","","7"],["North Carolina","918","","","4","","","","1,043","","","4"],["Kentucky","777","","","3","","","","922","","","4"],["Other","5,458","","","23","","","","4,622","","","20"],["Total home equity loans","$","24,061","","","100","%","","","$","24,088","","","100","%"],["Lien type"],["1st lien","","","62","%","","","","","63","%"],["2nd lien","","","38","","","","","","37"],["Total","","","100","%","","","","","100","%"],["","December 31, 2021","","","December 31, 2020"],["Weighted-average loan origination statistics (b)"],["Loan origination FICO score","","","782","","","","","776"],["LTV of loan originations","","","66","%","","","","","67","%"]] [[/GREPCENT_TABLE]] (a)Presented in descending order based on loan balances at December 31, 2021. (b)Weighted-averages calculated for the twelve months ended December 31, 2021 and 2020, respectively. Automobile Auto loans comprised $15.4 billion in the indirect auto portfolio and $1.2 billion in the direct auto portfolio as of December 31, 2021. Comparable amounts as of December 31, 2020 were $12.7 billion and $1.5 billion, respectively. The indirect auto portfolio consists of loans originated through franchised dealers, including from expansion into new markets. This business is strategically aligned with our core retail banking business. The PNC Financial Services Group, Inc. – 2021 Form 10-K  65 The following table presents certain key statistics related to our indirect and direct auto portfolios: Table 18: Auto Loan Statistics [[GREPCENT_TABLE]] [["","December 31, 2021","December 31, 2020"],["Weighted-average loan origination FICO score (a) (b)"],["Indirect auto","791","784"],["Direct auto","775","768"],["Weighted-average term of loan originations - in months (a)"],["Indirect auto","72","72"],["Direct auto","62","62"]] [[/GREPCENT_TABLE]] (a)Weighted-averages calculated for the twelve months ended December 31, 2021 and 2020, respectively. (b)Calculated using the auto enhanced FICO scale. We continue to focus on borrowers with strong credit profiles as evidenced by the weighted-average loan origination FICO scores noted in Table 18. We offer both new and used auto financing to customers through our various channels. At December 31, 2021, the portfolio balance was composed of 53% new vehicle loans and 47% used vehicle loans. Comparable amounts at December 31, 2020 were 56% and 44%, respectively. The auto loan portfolio’s performance is measured monthly, including updated collateral values that are obtained monthly and updated FICO scores that are obtained at least quarterly. For internal reporting and risk management, we analyze the portfolio by product channel and product type and regularly evaluate default and delinquency experience. As part of our overall risk analysis and monitoring, we segment the portfolio by geography, channel, collateral attributes and credit metrics which include FICO score, LTV and term. Nonperforming Assets and Loan Delinquencies Nonperforming Assets Nonperforming assets include nonperforming loans and leases for which ultimate collectability of the full amount of contractual principal and interest is not probable and include nonperforming TDRs and PCD loans, OREO and foreclosed assets. Loans held for sale, certain government insured or guaranteed loans and loans accounted for under the fair value option are excluded from nonperforming loans. See Note 1 Accounting Policies in the Notes to Consolidated Financial Statements included in Item 8 of this Report for details on our nonaccrual policies. The following table presents a summary of nonperforming assets by major category: Table 19: Nonperforming Assets by Type [[GREPCENT_TABLE]] [["","","December 31 2021","","December 31 2020","","Change"],["Dollars in millions","","$","","%"],["Nonperforming loans"],["Commercial","","$","1,168","","","$","923","","","$","245","","","27%"],["Consumer (a)","","1,312","","","1,363","","","(51)","","","(4)%"],["Total nonperforming loans","","2,480","","","2,286","","","194","","","8%"],["OREO and foreclosed assets","","26","","","51","","","(25)","","","(49)%"],["Total nonperforming assets","","$","2,506","","","$","2,337","","","$","169","","","7%"],["TDRs included in nonperforming loans","","$","988","","","$","902","","","$","86","","","10%"],["Percentage of total nonperforming loans","","40","%","","39","%"],["Nonperforming loans to total loans","","0.86","%","","0.94","%"],["Nonperforming assets to total loans, OREO and foreclosed assets","","0.87","%","","0.97","%"],["Nonperforming assets to total assets","","0.45","%","","0.50","%"],["Allowance for loan and lease losses to nonperforming loans","","196","%","","235","%"],["Allowance for credit losses to nonperforming loans (b)","","223","%","","260","%"]] [[/GREPCENT_TABLE]] (a)Excludes most unsecured consumer loans and lines of credit, which are charged off after 120 to 180 days past due and are not placed on nonperforming status. (b)Calculated excluding allowances for investment securities and other financial assets. The increase in nonperforming assets from December 31, 2020 primarily reflects the impact of BBVA, partially offset by improved credit performance throughout 2021. 66    The PNC Financial Services Group, Inc. – 2021 Form 10-K The following table provides details on the change in nonperforming assets for the years ended December 31, 2021 and 2020: Table 20: Change in Nonperforming Assets     [[GREPCENT_TABLE]] [["In millions","","2021","","2020"],["January 1","","$","2,337","","","$","1,752"],["Acquired nonperforming assets (a)","","880"],["New nonperforming assets","","1,216","","","1,947"],["Charge-offs and valuation adjustments","","(255)","","","(421)"],["Principal activity, including paydowns and payoffs","","(1,023)","","","(603)"],["Asset sales and transfers to loans held for sale","","(134)","","","(82)"],["Returned to performing status","","(515)","","","(256)"],["December 31","","$","2,506","","","$","2,337"]] [[/GREPCENT_TABLE]] (a)Represents the June 30, 2021 balance of nonperforming assets attributable to BBVA. Changes in this acquired portfolio for the six months ended December 31, 2021 are reflected in the appropriate category based on activity. As of December 31, 2021, approximately 98% of total nonperforming loans were secured by collateral which lessened reserve requirements and is expected to reduce credit losses. Within consumer nonperforming loans, residential real estate TDRs comprised 42% of total residential real estate nonperforming loans, while home equity TDRs comprised 36% of home equity nonperforming loans at December 31, 2021. Comparable amounts at December 31, 2020 were 47% and 41%, respectively. TDRs generally remain in nonperforming status until a borrower has made at least six consecutive months of both principal and interest payments under the modified terms or ultimate resolution occurs. Loans where borrowers have been discharged from personal liability through Chapter 7 bankruptcy and have not formally reaffirmed their loan obligations to us and loans to borrowers not currently obligated to make both principal and interest payments under the restructured terms are not returned to accrual status. Loans that have been restructured for COVID-19 related hardships and meet certain criteria under the CARES Act are not identified as TDRs. Refer to the Troubled Debt Restructurings and Loan Modifications discussion in this Credit Risk Management section for more information on the treatment of loan modifications under the CARES Act. Loan Delinquencies We regularly monitor the level of loan delinquencies and believe these levels may be a key indicator of credit quality in our loan portfolio. Measurement of delinquency status is based on the contractual terms of each loan. Loans that are 30 days or more past due in terms of payment are considered delinquent. Loan delinquencies include government insured or guaranteed loans, loans accounted for under the fair value option and PCD loans. Amounts exclude loans held for sale. We manage credit risk based on the risk profile of the borrower, repayment sources, underlying collateral, and other support given current events, economic conditions and expectations. We refine our practices to meet the changing environment and the continuing effects of the COVID-19 pandemic. To mitigate losses and enhance customer support, we have customer assistance, loan modification and collection programs that align with the CARES Act and subsequent interagency guidance. As a result, under the CARES Act credit reporting rules, certain loans modified due to COVID-19 related hardships are not being reported as past due as of December 31, 2021 and 2020 based on the contractual terms of the loan, even where borrowers may not be making payments on their loans during the modification period. Loan modifications due to COVID-19 related hardships that permanently reduce either the contractual interest rate or the principal balance of a loan do not qualify for TDR relief under the CARES Act or the interagency guidance. Table 21: Accruing Loans Past Due (a) [[GREPCENT_TABLE]] [["","","Amount","","","","","","% of Total Loans Outstanding"],["","","December 31 2021","","December 31 2020","","Change","","December 31 2021","","December 31 2020"],["Dollars in millions","","","","$","","%"],["Early stage loan delinquencies"],["Accruing loans past due 30 to 59 days","","$","1,011","","","$","620","","","$","391","","","63","%","","0.35","%","","0.26","%"],["Accruing loans past due 60 to 89 days","","355","","","234","","","121","","","52","%","","0.12","%","","0.10","%"],["Total early stage loan delinquencies","","1,366","","","854","","","512","","","60","%","","0.47","%","","0.35","%"],["Late stage loan delinquencies"],["Accruing loans past due 90 days or more","","619","","","509","","","110","","","22","%","","0.21","%","","0.21","%"],["Total accruing loans past due","","$","1,985","","","$","1,363","","","$","622","","","46","%","","0.69","%","","0.56","%"]] [[/GREPCENT_TABLE]] (a)Past due loan amounts include government insured or guaranteed loans of $0.5 billion and $0.6 billion at December 31, 2021 and 2020, respectively. The increase in accruing loans past due from December 31, 2020 was the result of lower delinquencies in the PNC legacy portfolio being more than offset by delinquencies attributable to BBVA, including increases from BBVA conversion-related administrative and operational delays. The PNC Financial Services Group, Inc. – 2021 Form 10-K  67 Accruing loans past due 90 days or more continue to accrue interest because they are (i) well secured by collateral and are in the process of collection, (ii) managed in homogeneous portfolios with specified charge-off timeframes adhering to regulatory guidelines, or (iii) certain government insured or guaranteed loans. As such, they are excluded from nonperforming loans. Troubled Debt Restructurings and Loan Modifications Troubled Debt Restructurings A TDR is a loan whose terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs result from our loss mitigation activities and include rate reductions, principal forgiveness, postponement/reduction of scheduled amortization and extensions, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Additionally, TDRs also result from court-imposed concessions (e.g., a Chapter 7 bankruptcy where the debtor is discharged from personal liability to us and a court approved Chapter 13 bankruptcy repayment plan). Loans to borrowers experiencing COVID-19 related hardships that have been restructured but that meet certain criteria under the CARES Act are not categorized as TDRs at December 31, 2021 and 2020. The following table provides a summary of troubled debt restructurings at December 31, 2021 and 2020, respectively: Table 22: Summary of Troubled Debt Restructurings (a) [[GREPCENT_TABLE]] [["","","December 31 2021","","December 31 2020","","Change"],["Dollars in millions","","$","","%"],["Commercial","","$","672","","","$","528","","","$","144","","","27%"],["Consumer","","919","","","1,116","","","(197)","","","(18)%"],["Total TDRs","","$","1,591","","","$","1,644","","","$","(53)","","","(3)%"],["Nonperforming","","$","988","","","$","902","","","$","86","","","10%"],["Accruing (b)","","603","","","742","","","(139)","","","(19)%"],["Total TDRs","","$","1,591","","","$","1,644","","","$","(53)","","","(3)%"]] [[/GREPCENT_TABLE]] (a)Amounts in table do not include associated valuation allowances. (b)Accruing loans include consumer credit card loans and certain loans that have demonstrated a period of at least six months of performance under the restructured terms and are excluded from nonperforming loans. Nonperforming TDRs represented approximately 40% of total nonperforming loans and 62% of total TDRs at December 31, 2021. Comparable amounts at December 31, 2020 were 39% and 55%, respectively. The remaining portion of TDRs represents TDRs that have been returned to accrual status after performing under the restructured terms for at least six consecutive months. See Note 1 Accounting Policies and Note 4 Loans and Related Allowance for Credit Losses in the Notes to Consolidated Financial Statements included in Item 8 of this Report for additional information on TDRs. Loan Modifications Since the onset of the pandemic in 2020, PNC has provided relief to our consumer customers from the economic impacts of COVID-19 through a variety of solutions under our hardship relief programs. Throughout 2021, consumer loan modifications were being granted in response to customer hardships that extended beyond the initial relief programs and included all hardship related modifications. At December 31, 2021, consumer loans in active assistance under hardship relief programs on our balance sheet had an unpaid principal balance of $494 million and primarily related to residential real estate. Excluded from this amount are government insured or guaranteed loans of $205 million and $278 million in the Residential real estate and Education loan classes, respectively, as these loans present minimal credit risk to PNC. The comparable unpaid principal balance on our balance sheet at December 31, 2020 was $1.0 billion. Under the CARES Act, loan modifications meeting certain criteria qualify the loan for relief from TDR treatment. Loans that do not meet this criteria may also be evaluated under interagency guidance. Loan modifications that permanently reduce either the contractual interest rate and/or principal balance of the loan would not meet the qualifications for relief from TDR treatment under the CARES Act. Consumer loan modifications that qualified for TDR accounting amounted to $93 million and $149 million at December 31, 2021 and 2020, respectively. The impact of these modifications was considered within the quarterly reserve determination. See the Allowance for Credit Losses discussion within the Critical Accounting Estimates and Judgments section of this Report for additional information. Refer to the Loan Delinquencies discussion in this Credit Risk Management section for information on how these hardship related loan modifications are reported from a delinquency perspective. 68    The PNC Financial Services Group, Inc. – 2021 Form 10-K Allowance for Credit Losses Our ACL is based on historical loss and performance experience, which is captured through current PD, as well as current borrower risk characteristics, including borrower repayment status, consumer credit scores, collateral type and quality, current economic conditions, reasonable and supportable forecasts of future conditions and other relevant factors. We maintain the ACL at an appropriate level for expected losses on our existing investment securities, loans, equipment finance leases, trade receivables and other financial assets and off-balance sheet credit exposures and determine this allowance based on quarterly assessments of the remaining estimated contractual term of the assets or exposures as of the balance sheet date. Expected losses are estimated primarily using a combination of (i) the expected losses over a reasonable and supportable forecast period, (ii) a period of reversion to long run average expected losses where applicable and (iii) long run average expected losses for the remaining estimated contractual term. We use forward-looking information in estimating expected credit losses for our reasonable and supportable forecast period. For this purpose, we have established a framework which includes a three year forecast period and the use of four economic scenarios and associated probability weights, which in combination create a forecast of expected economic outcomes over the forecasted period. Forward looking information, such as forecasted relevant macroeconomic variables, is incorporated into the expected credit loss estimates using quantitative macroeconomic models, as well as through analysis from PNC’s economists and management’s judgment in qualitatively assessing the ACL. The reversion period is used to bridge our three year reasonable and supportable forecast period and the long run average expected credit losses. We may consider a number of factors in determining the duration of the reversion period, such as contractual maturity of the asset, observed historical patterns and the estimated credit loss rates at the end of the forecast period relative to the beginning of the long run average period. The reversion period is typically 1-3 years, if not immediate. The long run average expected credit losses are derived from our available historical credit information. We use long run average expected loss for the portfolio over the estimated remaining contractual term beyond our forecast period and the reversion period. The following discussion provides additional information related to our reserves under CECL for loans and leases as well as unfunded lending related commitments. See Note 1 Accounting Policies in the Notes to Consolidated Financial Statements in Item 8 of this Report for further discussion on our ACL, including details of our methodologies and discussion of the allowances for investment securities and other financial assets. See also the Critical Accounting Estimates and Judgments section for further discussion of the assumptions used in the determination of the ACL. Allowance for Loan and Lease Losses Our pooled expected credit loss methodology is based upon the quantification of PD, LGD, EAD and the remaining estimated contractual term for a loan or loan segment. We also consider the impact of prepayments and amortization on contractual maturity in our expected loss estimates. We use historical data, current borrower characteristics and forecasted economic variables in quantitative methods to estimate these risk parameters by loan or loan segments. PDs represent a quantification of risk that a borrower may not be able to pay their contractual obligation over a defined period of time. LGD describes the estimate of potential loss if a borrower were to default, and EAD (or utilization rates for revolving loans) is the estimated balance outstanding at the time of default. These parameters are calculated for each forecasted scenario, and are combined to generate expected loss estimates by scenario in proportion to the scenario weights. We use a discounted cash flow methodology for our consumer real estate related loan classes and for certain commercial and consumer TDR loans. For non-TDR residential real estate loans and lines, we determine effective interest rates considering contractual cash flows adjusted for prepayments and market interest rates. We then determine the net present value of expected cash flows and ALLL by discounting contractual cash flows adjusted for both prepayments and expected credit losses using the effective interest rates. For loans and leases that do not share similar risk characteristics with a pool of loans, we establish individually assessed reserves using methods prescribed by GAAP. Reserves for individual commercial nonperforming loans and commercial TDRs exceeding a defined dollar threshold are based on an analysis of the present value of the loan’s expected future cash flows or the fair value of the collateral, if appropriate under our policy for collateral dependent loans. Commercial loans that are below the defined threshold and accruing TDRs are collectively reserved for, as we believe these loans continue to share similar risk characteristics. For consumer nonperforming loans classified as collateral dependent, charge-off and ALLL related to recovery of amounts previously charged-off are evaluated through an analysis of the fair value of the collateral less costs to sell. While our reserve methodologies strive to reflect all relevant credit risk factors, there continues to be uncertainty associated with, but The PNC Financial Services Group, Inc. – 2021 Form 10-K  69 not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal variations between expected and actual outcomes. We may hold additional reserves that are designed to provide coverage for losses attributable to such risks. A portion of the allowance is related to qualitative measurement factors. These factors may include, but are not limited to, the following: •Industry concentrations and conditions, including the impacts of COVID-19 on highly impacted segments, •Changes in market conditions, including regulatory and legal requirements, •Changes in the nature and volume of our portfolio, •Recent credit quality trends, including the impact of COVID-19 hardship related loan modifications, •Recent loss experience in particular portfolios, including specific and unique events, •Recent macroeconomic factors that may not be reflected in the forecast information, •Limitations of available input data, including historical loss information and recent data such as collateral values, •Model imprecision and limitations, •Changes in lending policies and procedures, including changes in loss recognition and mitigation policies and procedures, and •Timing of available information, including the performance of first lien positions. Allowance for Unfunded Lending Related Commitments We maintain the allowance for unfunded lending related commitments on off-balance sheet credit exposures that are not unconditionally cancelable, (e.g., unfunded loan commitments, letters of credit and certain financial guarantees) at a level we believe is appropriate as of the balance sheet date to absorb expected credit losses on these exposures. Other than the estimation of the probability of funding, this reserve is estimated in a manner similar to the methodology used for determining reserves for loans and leases. The allowance for unfunded lending related commitments is recorded as a liability on the Consolidated Balance Sheet. Net adjustments to this reserve are included in the provision for credit losses. The following table summarizes our ACL related to loans: Table 23: Allowance for Credit Losses by Loan Class (a) [[GREPCENT_TABLE]] [["","","December 31, 2021","","December 31, 2020"],["Dollars in millions","","Allowance Amount","","Total Loans","% of Total Loans","","Allowance Amount","","Total Loans","% of Total Loans"],["Allowance for loans and lease losses"],["Commercial"],["Commercial and industrial","","$","1,879","","","$","152,933","","1.23","%","","$","2,300","","","$","132,073","","1.74","%"],["Commercial real estate","","1,216","","","34,015","","3.57","%","","880","","","28,716","","3.06","%"],["Equipment lease financing","","90","","","6,130","","1.47","%","","157","","","6,414","","2.45","%"],["Total commercial","","3,185","","","193,078","","1.65","%","","3,337","","","167,203","","2.00","%"],["Consumer"],["Residential real estate","","21","","","39,712","","0.05","%","","28","","","22,560","","0.12","%"],["Home equity","","149","","","24,061","","0.62","%","","313","","","24,088","","1.30","%"],["Automobile","","372","","","16,635","","2.24","%","","379","","","14,218","","2.67","%"],["Credit card","","712","","","6,626","","10.75","%","","816","","","6,215","","13.13","%"],["Education","","71","","","2,533","","2.80","%","","129","","","2,946","","4.38","%"],["Other consumer","","358","","","5,727","","6.25","%","","359","","","4,698","","7.64","%"],["Total consumer","","1,683","","","95,294","","1.77","%","","2,024","","","74,725","","2.71","%"],["Total","","$","4,868","","","$","288,372","","1.69","%","","$","5,361","","","$","241,928","","2.22","%"],["Allowance for unfunded lending related commitments","","662","","","","","","584"],["Allowance for credit losses","","$","5,530","","","","","","$","5,945"],["Allowance for credit losses to total loans","","","","","1.92","%","","","","","2.46","%"],["Commercial","","","","","1.94","%","","","","","2.29","%"],["Consumer","","","","","1.87","%","","","","","2.84","%"]] [[/GREPCENT_TABLE]] (a)        Excludes allowances for investment securities and other financial assets, which together totaled $171 million and $109 million at December 31, 2021 and 2020, respectively. 70    The PNC Financial Services Group, Inc. – 2021 Form 10-K The following table summarizes our loan charge-offs and recoveries: Table 24: Loan Charge-Offs and Recoveries [[GREPCENT_TABLE]] [["Year ended December 31 Dollars in millions","","Gross Charge-offs","","Recoveries","","Net Charge-offs / (Recoveries)","","% of Average Loans"],["2021"],["Commercial"],["Commercial and industrial","","$","385","","","$","88","","","$","297","","","0.21","%"],["Commercial real estate","","36","","","7","","","29","","","0.09","%"],["Equipment lease financing","","13","","","11","","","2","","","0.03","%"],["Total Commercial","","434","","","106","","","328","","","0.18","%"],["Consumer"],["Residential real estate","","15","","","28","","","(13)","","","(0.04)","%"],["Home equity","","20","","","86","","","(66)","","","(0.27)","%"],["Automobile","","169","","","143","","","26","","","0.16","%"],["Credit card","","256","","","46","","","210","","","3.39","%"],["Education","","15","","","8","","","7","","","0.25","%"],["Other consumer","","192","","","27","","","165","","","3.05","%"],["Total Consumer","","$","667","","","$","338","","","$","329","","","0.38","%"],["Total","","$","1,101","","","$","444","","","$","657","","","0.24","%"],["2020"],["Commercial"],["Commercial and industrial","","$","382","","","$","75","","","$","307","","","0.22","%"],["Commercial real estate","","2","","","9","","","(7)","","","(0.02)","%"],["Equipment lease financing","","23","","","10","","","13","","","0.19","%"],["Total Commercial","","407","","","94","","","313","","","0.18","%"],["Consumer"],["Residential real estate","","10","","","16","","","(6)","","","(0.03)","%"],["Home equity","","42","","","61","","","(19)","","","(0.08)","%"],["Automobile","","265","","","128","","","137","","","0.86","%"],["Credit card","","300","","","35","","","265","","","3.99","%"],["Education","","16","","","8","","","8","","","0.25","%"],["Other consumer","","152","","","18","","","134","","","2.75","%"],["Total Consumer","","$","785","","","$","266","","","$","519","","","0.67","%"],["Total","","$","1,192","","","$","360","","","$","832","","","0.33","%"]] [[/GREPCENT_TABLE]] Total net charge-offs decreased $175 million, or 21%, in 2021 compared to 2020. The decline in the comparison was attributable to the continued favorable impact of government stimulus programs benefiting consumers, as well as the increases in automobile collateral values and home prices which has limited our losses in those respective consumer portfolios. See Note 1 Accounting Policies and Note 4 Loans and Related Allowance for Credit Losses in the Notes to Consolidated Financial Statements in Item 8 of this Report for additional information. Liquidity and Capital Management Liquidity risk has two fundamental components. The first is potential loss assuming we were unable to meet our funding requirements at a reasonable cost. The second is the potential inability to operate our businesses because adequate contingent liquidity is not available. We manage liquidity risk at the consolidated company level (bank, parent company and all subsidiaries combined) to help ensure that we can obtain cost-effective funding to meet current and future obligations under both normal “business as usual” and stressful circumstances, and to help ensure that we maintain an appropriate level of contingent liquidity. Management monitors liquidity through a series of early warning indicators that may indicate a potential market, or PNC-specific, liquidity stress event. In addition, management performs a set of liquidity stress tests over multiple time horizons with varying levels of severity and maintains a contingency funding plan to address a potential liquidity stress event. In the most severe liquidity stress simulation, we assume that our liquidity position is under pressure, while the market in general is under systemic pressure. The simulation considers, among other things, the impact of restricted access to both secured and unsecured external sources of funding, accelerated runoff of customer deposits, valuation pressure on assets and heavy demand to fund committed obligations. Parent company liquidity guidelines are designed to help ensure that sufficient liquidity is available to meet our parent company obligations over the succeeding 24-month period. Liquidity-related risk limits are established within our Enterprise Liquidity Management Policy The PNC Financial Services Group, Inc. – 2021 Form 10-K  71 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, we also monitor our liquidity by reference to the LCR, which is calculated on a daily basis, and the NSFR which are further described in the Supervision and Regulation section in Item 1 of this Report. As of December 31, 2021, the LCR and NSFR for PNC and PNC Bank exceeded the requirement of 100%. We provide additional information regarding regulatory liquidity requirements and their potential impact on us in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of this Report. Sources of Liquidity Our largest source of liquidity on a consolidated basis is the customer deposit base generated by our banking businesses. These deposits provide relatively stable and low-cost funding. Total deposits increased to $457.3 billion at December 31, 2021 from $365.3 billion at December 31, 2020, driven by growth in interest-bearing and noninterest-bearing deposits, primarily as a result of the BBVA acquisition. See the Funding Sources section of the Consolidated Balance Sheet Review in this Item 7 for additional information related to our deposits. Additionally, certain assets determined by us to be liquid as well as unused borrowing capacity from a number of sources are also available to manage our liquidity position. At December 31, 2021, our liquid assets consisted of cash and due from banks and short-term investments (federal funds sold, resale agreements, trading securities and interest-earning deposits with banks) totaling $84.8 billion and securities available for sale totaling $131.5 billion. The level of liquid assets fluctuates over time based on many factors, including market conditions, loan and deposit growth and balance sheet management activities. Our liquid assets included $27.3 billion of securities available for sale and trading securities pledged as collateral to secure public and trust deposits, repurchase agreements and for other purposes. In addition, $0.1 billion of securities held to maturity were also pledged as collateral for these purposes. We also obtain liquidity through various forms of funding, including long-term debt (senior notes, subordinated debt and FHLB borrowings) and short-term borrowings (securities sold under repurchase agreements, commercial paper and other short-term borrowings). See Note 10 Borrowed Funds in the Notes to Consolidated Financial Statements in Item 8 and the Funding Sources section of the Consolidated Balance Sheet Review in this Item 7 for additional information related to our borrowings. Total senior and subordinated debt, on a consolidated basis, decreased due to the following activity: Table 25: Senior and Subordinated Debt [[GREPCENT_TABLE]] [["In billions","2021"],["January 1","$","30.7"],["Issuances","1.7"],["Calls and maturities","(6.0)"],["Other","(0.9)"],["Impact from BBVA Acquisition","2.2"],["December 31","$","27.7"]] [[/GREPCENT_TABLE]] Bank Liquidity Under PNC Bank’s 2014 bank note program, as amended, PNC Bank may from time to time offer up to $40.0 billion aggregate principal amount outstanding at any one time of its unsecured senior and subordinated notes with maturity dates more than nine months (in the case of senior notes) and five years or more (in the case of subordinated notes) from their date of issue. At December 31, 2021, PNC Bank had $13.7 billion of notes outstanding under this program of which $8.7 billion were senior bank notes and $5.0 billion were subordinated bank notes. 72    The PNC Financial Services Group, Inc. – 2021 Form 10-K The following table details PNC Bank note redemptions in 2021: Table 26: PNC Bank Notes Redeemed [[GREPCENT_TABLE]] [["Redemption Date","Amount","Description of Redemption"],["March 30, 2021","$1.25 billion","$1.25 billion of all outstanding Senior Notes with an original scheduled maturity date of April 29, 2021. The securities had a distribution rate of 2.150%. The redemption price was equal to $1,000 per $1,000 in principal amount, plus any accrued and unpaid distributions to the redemption date of March 30, 2021."],["July 22, 2021","$900 million","All outstanding Senior Floating Rate Notes with an original scheduled maturity date of July 22, 2022. The redemption price was equal to $1,000 per $1,000 in principal amount, plus any accrued and unpaid distributions to the redemption date of July 22, 2021."],["July 22, 2021","$600 million","All outstanding Senior Fixed Rate/Floating Rate Notes with an original scheduled maturity date of July 22, 2022. The securities had a distribution rate of 2.232%. The redemption price was equal to $1,000 per $1,000 in principal amount, plus any accrued and unpaid distributions to the redemption date of July 22, 2021."],["November 9, 2021","$750 million","$750 million of all outstanding Senior Notes with an original scheduled maturity date of December 9, 2021. The securities have a distribution rate of 2.550%. The redemption price was equal to $1,000 per $1,000 in principal amount, plus any accrued and unpaid distributions to the redemption date of November 9, 2021."],["December 9, 2021","$650 million","$650 million of all outstanding Senior Fixed Rate/Floating Rate Notes with an original scheduled maturity date of December 9, 2022. The securities have a distribution rate of 2.028%. The redemption price was equal to $1,000 per $1,000 in principal amount, plus any accrued and unpaid distributions to the redemption date of December 9, 2021."],["December 9, 2021","$750 million","$750 million of all outstanding Senior Floating Rate Notes with an original scheduled maturity date of December 9, 2022. The redemption price was equal to $1,000 per $1,000 in principal amount, plus any accrued and unpaid interest to the redemption date of December 9, 2021."]] [[/GREPCENT_TABLE]] See Note 25 Subsequent Events in the Notes to the Consolidated Financial Statements in Item 8 of this Report for details on the $1.25 billion bank note redemption announced on January 6, 2022 and the $500 million and $1.0 billion bank note redemptions both announced on February 11, 2022. PNC Bank maintains additional secured borrowing capacity with the FHLB and through the Federal Reserve Bank discount window. The Federal Reserve Bank, however, is not viewed as a primary means of funding our routine business activities, but rather as a potential source of liquidity in a stressed environment or during a market disruption. At December 31, 2021, our unused secured borrowing capacity at the FHLB and the Federal Reserve Bank totaled $78.8 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, 2021, there were no issuances outstanding under this program. Additionally, PNC Bank may also access funding from the parent company through deposits placed at the bank, or through issuing senior unsecured notes. Parent Company Liquidity In addition to managing liquidity risk at the bank level, we monitor the parent company’s liquidity. The parent company’s contractual obligations consist primarily of debt service related to parent company borrowings and funding non-bank affiliates. Additionally, the parent company maintains liquidity to fund discretionary activities such as paying dividends to our shareholders, share repurchases and acquisitions. As of December 31, 2021, available parent company liquidity totaled $9.0 billion. Parent company liquidity is held in intercompany cash and investments. For investments with longer durations, the related maturities are aligned with scheduled cash needs, such as the maturity of parent company debt obligations. The principal source of parent company liquidity is the dividends it receives from PNC Bank, which may be impacted by the following: •Bank-level capital needs, •Laws, regulations and the results of supervisory activities, •Corporate policies, •Contractual restrictions, and •Other factors. There are statutory and regulatory limitations on the ability of a national bank to pay dividends or make other capital distributions or to extend credit to the parent company or its non-bank subsidiaries. The amount available for dividend payments by PNC Bank to the parent company without prior regulatory approval was approximately $2.4 billion at December 31, 2021. 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. The PNC Financial Services Group, Inc. – 2021 Form 10-K  73 On October 14, 2021, following completion of the bank merger on October 8, 2021, PNC Bank completed a return of capital of $3.0 billion to the parent company. In addition to dividends from PNC Bank, other sources of parent company liquidity include cash and investments, as well as dividends and loan repayments from other subsidiaries and dividends or distributions from equity investments. We can also generate liquidity for the parent company and PNC’s non-bank subsidiaries through the issuance of debt and equity securities, including certain capital instruments, in public or private markets and commercial paper. Authorized by the Board of Directors, the parent company has the ability to offer up to $5.0 billion of commercial paper to provide additional liquidity. As of December 31, 2021 there were no commercial paper issuances outstanding. The following table details Parent Company note issuances in 2021: Table 27: Parent Company Notes Issued [[GREPCENT_TABLE]] [["Issuance Date","Amount","Description of Issuance"],["April 23, 2021","$1.0 billion","$1.0 billion of senior fixed-to-floating rate notes with a maturity date of April 23, 2032. Interest is payable semi-annually in arrears at a fixed rate of 2.307% per annum, on April 23 and October 23 of each year, beginning on October 23, 2021. Beginning on April 23, 2031, interest is payable quarterly in arrears at a floating rate per annum equal to Compounded SOFR (determined with respect to each quarterly interest period using the SOFR Index), plus 0.97926%, on July 23, 2031, October 23, 2031, January 23, 2032 and at the maturity date."],["August 13, 2021","$700 million","$700 million of senior notes with a maturity date of August 13, 2026. Interest is payable semi-annually in arrears at a fixed rate of 1.15% per annum, on August 13 and February 13 of each year, beginning on February 13, 2022."]] [[/GREPCENT_TABLE]] On August 4, 2021, PNC redeemed all of the outstanding senior notes due September 3, 2021 issued by PNC in the amount of $500 million. The securities had a distribution rate of 3.250%. The redemption price was equal to $1,000 per $1,000 in principal amount, plus any accrued and unpaid distributions to the redemption date. See Note 25 Subsequent Events for details on the $1.0 billion parent company note redemption announced on January 6, 2022. Parent company senior and subordinated debt outstanding totaled $11.4 billion at December 31, 2021 compared with $10.6 billion at December 31, 2020. Contractual Obligations and Commitments The following tables set forth contractual obligations and various other commitments as of December 31, 2021: Table 28: Contractual Obligations [[GREPCENT_TABLE]] [["","","","Payment Due By Period"],["December 31, 2021 \u2013 in millions","Total","","Less than one year","","One to three years","","Four to five years","","After five years"],["Remaining contractual maturities of time deposits","$","17,366","","","$","15,403","","","$","1,334","","","$","422","","","$","207"],["Borrowed funds (a)","30,784","","","7,182","","","7,539","","","5,001","","","11,062"],["Minimum annual rentals on noncancellable operating leases","2,412","","","416","","","719","","","516","","","761"],["Nonqualified pension and postretirement benefits","440","","","48","","","96","","","92","","","204"],["Purchase obligations (b)","1,439","","","743","","","533","","","145","","","18"],["Total contractual cash obligations","$","52,441","","","$","23,792","","","$","10,221","","","$","6,176","","","$","12,252"]] [[/GREPCENT_TABLE]] (a)Includes adjustments related to accounting hedges and purchase accounting. (b)Includes purchase obligations for goods and services covered by noncancellable contracts and contracts including cancellation fees. Table 29: Other Commitments (a) [[GREPCENT_TABLE]] [["","","","Amount Of Commitment Expiration By Period"],["December 31, 2021 \u2013 in millions","Total Amounts Committed","","Less than one year","","One to three years","","Four to five years","","After five years"],["Commitments to extend credit (b)","$","237,238","","","$","109,326","","","$","67,433","","","$","59,076","","","$","1,403"],["Net outstanding standby letters of credit (c)","9,303","","","5,671","","","2,982","","","643","","","7"],["Standby bond purchase agreements","1,268","","","249","","","797","","","222"],["Other commitments (d)","3,045","","","1,822","","","661","","","408","","","154"],["Total commitments","$","250,854","","","$","117,068","","","$","71,873","","","$","60,349","","","$","1,564"]] [[/GREPCENT_TABLE]] (a)Other commitments are funding commitments that could potentially require performance in the event of demands by third parties or contingent events. Loan commitments are reported net of syndications, assignments and participations. (b)Commitments to extend credit, or net unfunded loan commitments, represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. (c)Includes $3.3 billion of standby letters of credit that support remarketing programs for customers’ variable rate demand notes. (d)Includes other commitments of $0.8 billion that were not on our Consolidated Balance Sheet. The remaining $2.2 billion of other commitments were included in Other liabilities on our Consolidated Balance Sheet. 74    The PNC Financial Services Group, Inc. – 2021 Form 10-K Credit Ratings PNC’s credit ratings affect the cost and availability of short and long-term funding, collateral requirements for certain derivative instruments and the ability to offer certain products. In general, rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, level and quality of earnings, and the current legislative and regulatory environment, including implied government support. A decrease, or potential decrease, in credit ratings could impact access to the capital markets and/or increase the cost of debt, and thereby adversely affect liquidity and financial condition. The following table presents credit ratings for PNC and PNC Bank as of December 31, 2021: Table 30: Credit Ratings for PNC and PNC Bank [[GREPCENT_TABLE]] [["","December 31, 2021"],["","Moody\u2019s","Standard & Poor\u2019s","Fitch"],["PNC"],["Senior debt","A3","A-","A"],["Subordinated debt","A3","BBB+","A-"],["Preferred stock","Baa2","BBB-","BBB"],["PNC Bank"],["Senior debt","A2","A","A+"],["Subordinated debt","A3","A-","A"],["Long-term deposits","Aa3","A","AA-"],["Short-term deposits","P-1","A-1","F1+"],["Short-term notes","P-1","A-1","F1"]] [[/GREPCENT_TABLE]] On July 12, 2021, Moody’s downgraded PNC Bank’s long-term deposit rating from Aa2 to Aa3. The rating action was driven by a change in Moody’s rating methodology and no impact to PNC or its businesses is expected as a result of this downgrade. PNC Bank’s senior unsecured and subordinated debt ratings were affirmed at A2 and A3, respectively. At the same time, the Moody’s rating outlook on PNC Bank’s long-term deposit, senior unsecured debt and issuer ratings were raised from negative to stable. Capital Management We manage our funding and capital positions by making adjustments to our balance sheet size and composition, issuing or redeeming debt, issuing equity or other capital instruments, executing treasury stock transactions and capital redemptions or repurchases and managing dividend policies and retaining earnings. On September 13, 2021, PNC issued 1,500,000 depositary shares each representing 1/100th ownership in a share of 3.400% fixed-rate reset non-cumulative perpetual preferred stock, Series T, with a par value of $1 per share. In 2021, we returned $3.0 billion of capital to shareholders through dividends on common shares of $2.0 billion and repurchases of 5 million common shares for $1.0 billion. We repurchase shares of PNC common stock under a share repurchase authorization provided by our Board of Directors in the amount of up to 100 million shares. Our repurchases are made on the open market or in privately negotiated transactions and the extent and timing of share repurchases under authorizations depend on a number of factors including, among others, market and general economic conditions, economic and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, contractual and regulatory limitations, and the results of supervisory assessments of capital adequacy and capital planning processes undertaken by the Federal Reserve and the OCC as part of the CCAR and DFAST processes. Repurchases of common stock are subject to regulatory requirements, including compliance with SCB requirements. In the first quarter of 2021, the Federal Reserve extended the special limitations on dividends and share repurchases by CCAR-participating BHCs that were put in place in 2020 as a result of ongoing uncertainty from COVID-19. While these restrictions permitted share repurchases based on income, we refrained from repurchasing shares until the close of the BBVA transaction. These restrictions ended on June 30, 2021 for firms with capital levels above those required by the 2021 stress tests, such as PNC. In June 2021, we announced the reinstatement of our share repurchase programs with repurchases of up to $2.9 billion for the four-quarter period beginning in the third quarter of 2021. On January 5, 2022, the PNC Board of Directors declared a quarterly cash dividend on common stock of $1.25 per share paid on February 5, 2022. The PNC Financial Services Group, Inc. – 2021 Form 10-K  75 See the Supervision and Regulation section of Item 1 Business in this Report for further information concerning the CCAR and DFAST process and the factors the Federal Reserve takes into consideration in its evaluation of capital plans. Table 31: Basel III Capital [[GREPCENT_TABLE]] [["","December 31, 2021"],["Dollars in millions","Basel III (a)","(Fully Implemented) (estimated) (b)"],["Common equity Tier 1 capital"],["Common stock plus related surplus, net of treasury stock","$","49","","$","49"],["Retained earnings","51,193","","50,228"],["Goodwill, net of associated deferred tax liabilities","(10,702)","","(10,702)"],["Other disallowed intangibles, net of deferred tax liabilities","(435)","","(435)"],["Other adjustments/(deductions)","(39)","","(45)"],["Common equity Tier 1 capital","$","40,066","","$","39,095"],["Additional Tier 1 capital"],["Preferred stock plus related surplus","5,010","","5,010"],["Other adjustments/(deductions)","(1)","","(1)"],["Tier 1 capital","$","45,075","","$","44,104"],["Additional Tier 2 capital"],["Qualifying subordinated debt","3,417","","3,417"],["Trust preferred capital securities","20"],["Eligible credit reserves includable in Tier 2 capital","3,939","","4,817"],["Total Basel III capital","$","52,451","","$","52,338"],["Risk-weighted assets"],["Basel III standardized approach risk-weighted assets (c)","$","388,769","","$","389,068"],["Average quarterly adjusted total assets","$","548,453","","$","547,483"],["Supplementary leverage exposure (d)","$","648,310","","$","648,304"],["Basel III risk-based capital and leverage ratios (a)(e)"],["Common equity Tier 1","10.3","%","10.0","%"],["Tier 1","11.6","%","11.3","%"],["Total (f)","13.5","%","13.5","%"],["Leverage (g)","8.2","%","8.1","%"],["Supplementary leverage ratio (d)","7.0","%","6.8","%"]] [[/GREPCENT_TABLE]] (a)The ratios are calculated to reflect PNC’s election to adopt the CECL five-year transition provision. (b)The ratios are calculated to reflect the full impact of CECL and excludes the benefits of the optional five-year transition. (c)Basel III standardized approach weighted-assets are based on the Basel III standardized approach rules and include credit and market risk-weighted assets. (d)The Supplementary leverage ratio is calculated based on Tier 1 capital divided by Supplementary leverage exposure, which takes into account the quarterly average of both on balance sheet assets as well as certain off-balance sheet items, including loan commitments and potential future exposure under derivative contracts. (e)All ratios are calculated using the regulatory capital methodology applicable to PNC and calculated based on the standardized approach. (f)The Basel III Total risk-based capital ratios include nonqualifying trust preferred capital securities of $20 million that are subject to a phase-out period that runs through 2021. (g)Leverage ratio is calculated based on Tier 1 capital divided by Average quarterly adjusted total assets. As of January 1, 2020, the 2019 Tailoring Rules became effective for PNC. The most significant changes involved PNC’s election to exclude specific AOCI items from CET1 capital and higher thresholds used to calculate CET1 capital deductions. As a result, PNC deducts from CET1 capital investments in unconsolidated financial institutions, MSRs and deferred tax assets (in each case, net of associated deferred tax liabilities) to the extent such items individually exceed 25% of its adjusted CET1 capital. PNC’s regulatory risk-based capital ratios are calculated using the standardized approach for determining risk-weighted assets. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, nonaccruals, TDRs, past due exposures and equity exposures are generally subject to higher risk weights than other types of exposures. The regulatory agencies have adopted a rule permitting banks to delay the estimated impact on regulatory capital stemming from implementing CECL. CECL’s estimated impact on CET1 capital, as defined by the rule, is the change in retained earnings at adoption plus or minus 25% of the change in CECL ACL at the balance sheet date compared to the CECL ACL at transition. The estimated CECL impact was added to CET1 capital through December 31, 2021, and will be phased-out over the following three years. PNC elected to adopt this optional transition provision effective as of March 31, 2020. See additional discussion of this rule in the Supervision and Regulation section of Item 1 Business and Item 1A Risk Factors of this Report. 76    The PNC Financial Services Group, Inc. – 2021 Form 10-K At December 31, 2021, PNC and PNC Bank, our sole bank subsidiary, were both considered “well capitalized,” based on applicable U.S. regulatory capital ratio requirements. To qualify as “well capitalized”, PNC must have Basel III capital ratios of at least 6% for Tier 1 risk-based capital and 10% for Total risk-based capital, and PNC Bank must have Basel III capital ratios of at least 6.5% for CET1 risk-based capital, 8% for Tier 1 risk-based capital, 10% for Total risk-based capital and a Leverage ratio of at least 5%. Federal banking regulators have stated that they expect the largest U.S. BHCs, including PNC, to have a level of regulatory capital well in excess of the regulatory minimum and have required the largest U.S. BHCs, including PNC, to have a capital buffer sufficient to withstand losses and allow them to meet the credit needs of their customers through estimated stress scenarios. We seek to manage our capital consistent with these regulatory principles, and believe that our December 31, 2021 capital levels were aligned with them. We provide additional information regarding regulatory capital requirements and some of their potential impacts on us in the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors and Note 20 Regulatory Matters in the Notes to Consolidated Financial Statements in Item 8 of this Report. Market Risk Management Market risk is the risk of a loss in earnings or economic value due to adverse movements in market factors such as interest rates, credit spreads, foreign exchange rates, commodity prices and equity prices. We are exposed to market risk primarily by our involvement in the following activities, among others: •Traditional banking activities of gathering deposits and extending loans, •Equity and other investments and activities whose economic values are directly impacted by market factors, and •Fixed income securities, derivatives and foreign exchange activities, as a result of customer activities and securities underwriting. We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. Market Risk Management provides independent oversight by monitoring compliance with established guidelines and reporting significant risks in the business to the Risk Committee of the Board of Directors. Market Risk Management – Interest Rate Risk Interest rate risk results primarily from our traditional banking activities of gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest that we earn on assets and the interest that we pay on liabilities and the level of our noninterest-bearing funding sources. Due to the repricing term mismatches and embedded options inherent in certain of these products, changes in market interest rates not only affect expected near-term earnings, but also the economic values of these assets and liabilities. Our Asset and Liability Management group centrally manages interest rate risk as prescribed in our risk management policies, which are approved by management’s Asset and Liability Committee and the Risk Committee of the Board of Directors. Sensitivity results and market interest rate benchmarks for the fourth quarters of 2021 and 2020 follow: Table 32: Interest Sensitivity Analysis [[GREPCENT_TABLE]] [["","Fourth Quarter 2021","","Fourth Quarter 2020"],["Net Interest Income Sensitivity Simulation (a)"],["Effect on net interest income in first year from gradual interest rate change over the following 12 months of:"],["100 basis point increase","3.7","%","","4.7","%"],["Effect on net interest income in second year from gradual interest rate change over the preceding 12 months of:"],["100 basis point increase","9.9","%","","12.5","%"]] [[/GREPCENT_TABLE]] (a)Given the inherent limitations in certain of these measurement tools and techniques, results become less meaningful as interest rates approach zero. Senior management approved the suspension of the 100bps decrease in rate change sensitivities considering the current low rate environment. In addition to measuring the effect on net interest income assuming parallel changes in current interest rates, we routinely simulate the effects of a number of nonparallel interest rate environments. Table 33 reflects the percentage change in net interest income over the next two 12-month periods assuming (i) the PNC Economist’s most likely rate forecast, (ii) implied market forward rates and (iii) yield curve slope flattening (a 50 basis point yield curve slope flattening between one-month and ten-year rates superimposed on current base rates) scenario. All changes in forecasted net interest income are relative to results in a base rate scenario where current market rates are assumed to remain unchanged over the forecast horizon. The PNC Financial Services Group, Inc. – 2021 Form 10-K  77 Table 33: Net Interest Income Sensitivity to Alternative Rate Scenarios [[GREPCENT_TABLE]] [["","December 31, 2021"],["","PNC Economist","","Market Forward","","Slope Flattening"],["First year sensitivity","4.1","%","","1.6","%","","(2.3)","%"],["Second year sensitivity","11.2","%","","6.4","%","","(7.2)","%"]] [[/GREPCENT_TABLE]] 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 32 and 33. These simulations assume that as assets and liabilities mature, they are replaced or repriced at then current market rates. The following graph presents the LIBOR/Swap yield curves for the base rate scenario and each of the alternate scenarios one year forward. Table 34: Alternate Interest Rate Scenarios: One Year Forward The fourth quarter 2021 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. As discussed in Item 1A Risk Factors, the scheduled discontinuance of the requirement that banks submit rates for the calculation of LIBOR after June 30, 2023 presents risks to the financial instruments originated, held or serviced by PNC that use LIBOR as a reference rate. PNC holds instruments and services its instruments and instruments owned by others that may be impacted by the likely discontinuance of LIBOR, including loans, investments, hedging products, floating-rate obligations, and other financial instruments that use LIBOR as a reference rate. The transition from LIBOR as an interest rate benchmark will subject PNC, like other financial participants, to financial, legal, operational, and reputational risks. In order to address LIBOR cessation and the associated risks, PNC has established a cross-functional governance structure to oversee the overall strategy for the transition from LIBOR and mitigate risks associated with the transition. A LIBOR impact and risk assessment has been performed, which identified the associated risks across products, systems, models, and processes. PNC also established an enterprise-level program, which is actively monitoring PNC’s overall firm-wide exposure to LIBOR and using these results to plan transitional strategies and track progress versus these goals. Program workstreams were formed by Line of Business to ensure accountability and alignment with the appropriate operational, technology, and customer-facing stakeholders, while establishing a centralized Program Management Office to ensure consistency in execution and communication. Project plans and established milestones have been developed and have continued to evolve and be refined in line with industry developments and internal decisions and progress. PNC is also involved in industry discussions, preparing milestones for readiness and assessing progress against those milestones, along with developing and delivering on internal and external LIBOR cessation communication plans. Key efforts to date have included: •Enhancing fallback language in new contracts and reviewing existing legal contracts/agreements to assess fallback language impacts, •Making preparations for internal operational readiness, •Making necessary enhancements to PNC's infrastructure, including systems, models, valuation tools and processes, 78    The PNC Financial Services Group, Inc. – 2021 Form 10-K •Developing and delivering on internal and external LIBOR cessation communication plans, •Engaging with PNC clients, industry working groups and regulators, •Monitoring developments associated with LIBOR alternatives and industry practices related to LIBOR-indexed instruments, •Incorporating BBVA into PNC’s LIBOR transition effort, and •Initiating the offering of instruments referencing alternative rates in order to align with regulatory guidance encouraging the transition away from the use of USD LIBOR in new contracts after December 31, 2021. PNC also was an active participant in efforts with the Federal Reserve and other regulatory agencies to explore the potential need for a credit-sensitive rate or add-on to SOFR for use in commercial loans. Those efforts led to the formation of the Credit Sensitivity Group, which held a series of workshops to assess how a credit-sensitive rate or add-on to SOFR might be constructed and discuss associated implementation issues. PNC began offering conforming adjustable rate mortgages using SOFR instead of USD LIBOR, in line with Fannie Mae and Freddie Mac requirements, and nonconforming adjustable rate residential mortgages using SOFR and private student loans using Prime. Alternative rates including, but not limited to, the BSBY Index and SOFR are currently being offered to our corporate and commercial customers. The majority of PNC’s LIBOR exposure maturing after June 30, 2023 is represented by approximately $100 billion in loans outstanding, most of which reside in Corporate & Institutional Banking, and approximately $370 billion in derivatives, most of which include language defining the new rate upon cessation. The focus for 2022 will be planning for the cessation event in 2023 for all lines of business. Corporate & Institutional Banking will also be amending contracts with inadequate fallback language, working on systems enhancements and continuing with client outreach and education. PNC has provided regular updates to Federal Reserve, OCC and FDIC examination staff regarding its LIBOR cessation and transition plans. Market Risk Management – Customer-Related Trading Risk We engage in fixed income securities, derivatives and foreign exchange transactions to support our customers’ investing and hedging activities. These transactions, related hedges and the credit valuation adjustment related to our customer derivatives portfolio are marked-to-market daily and reported as customer-related trading activities. We do not engage in proprietary trading of these products. We use VaR as the primary means to measure and monitor market risk in customer-related trading activities. VaR is used to estimate the probability of portfolio losses based on the statistical analysis of historical market risk factors. A diversified VaR reflects empirical correlations across different asset classes. We calculate a diversified VaR at a 95% confidence interval and the results for 2021 and 2020 were within our acceptable limits. To help ensure the integrity of the models used to calculate VaR for each portfolio and enterprise-wide, we use a process known as backtesting. The backtesting process consists of comparing actual observations of gains or losses against the VaR levels that were calculated at the close of the prior day. Our VaR measure assumes that exposures remain constant and that recent market variability is a good predictor of future variability. Actual observations include customer-related revenue and intraday hedging which helps to reduce losses and can reduce the number of instances actual losses exceed the prior day VaR measure. There were no instances during 2021 and minimal instances during 2020 under our diversified VaR measure where actual losses exceeded the prior day VaR measure and those losses were insignificant. Our portfolio and enterprise-wide VaR models utilize a historical approach with a 500 day look back period. Customer-related trading revenue was $372 million in 2021 compared with $466 million in 2020 and is recorded in Other noninterest income and Other interest income on our Consolidated Income Statement. The decrease was primarily due to the impact of the changes in credit valuations for customer-related derivative activities and lower client-related derivatives sales revenues, partially offset by higher foreign exchange client sales revenues. Market Risk Management – Equity And Other Investment Risk Equity investment risk is the risk of potential losses associated with investing in both private and public equity markets. In addition to extending credit, taking deposits, underwriting securities and trading financial instruments, we make and manage direct investments in a variety of transactions, including management buyouts, recapitalizations and growth financings in a variety of industries. We also have investments in affiliated and non-affiliated funds that make similar investments in private equity, consistent with regulatory limitations. The economic and/or book value of these investments and other assets are directly affected by changes in market factors. Various PNC business units manage our equity and other investment activities. Our businesses are responsible for making investment decisions within the approved policy limits and associated guidelines. The PNC Financial Services Group, Inc. – 2021 Form 10-K  79 A summary of our equity investments follows: Table 35: Equity Investments Summary [[GREPCENT_TABLE]] [["Dollars in millions","December 31 2021","","December 31 2020","","Change"],["","$","","%"],["Tax credit investments","$","3,954","","","$","2,870","","","$","1,084","","","38","%"],["Private equity and other","4,226","","","3,182","","","1,044","","","33","%"],["Total","$","8,180","","","$","6,052","","","$","2,128","","","35","%"]] [[/GREPCENT_TABLE]] Tax Credit Investments Included in our equity investments are direct tax credit investments and equity investments held by consolidated entities. These tax credit investment balances included unfunded commitments totaling $2.2 billion and $1.4 billion at December 31, 2021 and 2020, respectively. These unfunded commitments are included in Other liabilities on our Consolidated Balance Sheet. Note 5 Loan Sale and Servicing Activities and Variable Interest Entities in the Notes to Consolidated Financial Statements in Item 8 of this Report has further information on tax credit investments. Private Equity and Other The largest component of our other equity investments is our private equity portfolio. The private equity portfolio is an illiquid portfolio consisting of mezzanine and equity investments that vary by industry, stage and type of investment. Private equity investments carried at estimated fair value totaled $1.8 billion and $1.5 billion at December 31, 2021 and 2020, respectively. As of December 31, 2021, $1.7 billion was invested directly in a variety of companies and $0.1 billion was invested indirectly through various private equity funds. See the Supervision and Regulation section in Item 1 of this Report for discussion of the potential impacts of the Volcker Rule on our interests in and relationships with private funds covered by the Volcker Rule. Included in our other equity investments are Visa Class B common shares, which are recorded at cost. Visa Class B common shares that we own are transferable only under limited circumstances until they can be converted into shares of the publicly-traded Class A common shares, which cannot happen until the resolution of the pending interchange litigation. Based upon the December 31, 2021 per share closing price of $216.71 for a Visa Class A common share, the estimated value of our total investment in the Class B common shares was approximately $1.2 billion at the current conversion rate of Visa B shares to Visa A shares, while our cost basis was insignificant. See Note 15 Fair Value and Note 21 Legal Proceedings in the Notes to Consolidated Financial Statements in Item 8 of this Report for additional information regarding our Visa agreements. The estimated value does not represent fair value of the Visa B common shares given the shares’ limited transferability and the lack of observable transactions in the marketplace. We also have certain other equity investments, the majority of which represent investments in affiliated and non-affiliated funds with both traditional and alternative investment strategies. Net gains related to these investments were $50 million in 2021 and were insignificant in 2020. 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. When 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. In the second half of 2021, inflation accelerated to its fastest pace in decades due to strong demand but limited supplies as a result of the pandemic. Financial Derivatives We use a variety of financial derivatives as part of the overall asset and liability risk management process to help manage exposure to market (primarily interest rate) and credit risk inherent in our business activities. We also enter into derivatives with customers to facilitate their risk management activities. Financial derivatives involve, to varying degrees, market and credit risk. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional and an underlying as specified in the contract. Therefore, cash requirements and exposure to credit risk are significantly less than the notional amount on these instruments. Further information on our financial derivatives is presented in Note 1 Accounting Policies, Note 15 Fair Value and Note 16 Financial Derivatives in the Notes to Consolidated Financial Statements in Item 8 of this Report. 80    The PNC Financial Services Group, Inc. – 2021 Form 10-K Not all elements of market and credit risk are addressed through the use of financial derivatives, and such instruments may be ineffective for their intended purposes due to unanticipated market changes, among other reasons. Operational Risk Management Operational risk is the risk to the current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, human errors or misconduct or adverse external events. Operational risk is inherent to the entire organization. Operational risk management is embedded in our culture and decision-making processes through a systematic approach whereby operational risks and exposures are: i) identified and assessed; ii) managed through the design and implementation of controls; iii) measured and evaluated against our risk tolerance limits; and iv) appropriately reported to management and the Risk Committee. Strong operational risk management and well-informed risk-based decisions benefit us by improving the customer experience, enhancing compliance, reducing reputational risk, minimizing losses and establishing an appropriate amount of required operational risk capital held by us. The Operational Risk Management Framework is designed to provide effective and consistent management of operational risk. The primary purpose of the framework is to enable us to understand our operational risks and manage them to the desired risk profile, in line with our Risk Appetite. Additionally, the guidance established within the framework enables management to make well-informed risk-based business decisions. The framework provides a disciplined and structured process for us to manage operational risk across eight operational risk domains. These domains provide a comprehensive view of operational risk and allow us to discuss operational risk in a standard way, facilitating reporting and ongoing risk mitigation. The operational risk domains are: •Operations: Risk resulting from inadequate or failed internal processes, misconduct or errors of people or fraud. •Compliance: Risk of legal or regulatory sanctions, financial loss, or damage to reputation resulting from failure to comply with laws, regulations, rules, self-regulatory standards or other regulatory requirements. •Data Management: Risk associated with incomplete or inaccurate data. •Model: Risk associated with the design, implementation and ongoing use and management of models. •Technology and Systems: Risk associated with the use, operation and adoption of technology. •Information Security: Risk resulting from the failure to protect information and ensure appropriate access to, and use and handling of information assets. •Business Continuity: Risk of potential disruptive events to business activities. •Third Party: Risk arising from failure of third party providers to conduct activity in a safe and sound manner and in compliance with contract provisions and applicable laws and regulations. We utilize operational risk management programs within the framework, including Risk and Control Self-Assessments, scenario analysis, and internal and external loss event reviews and analysis, to assess existing risks, determine potential/emerging risks and evaluate the effectiveness of internal controls. The program tools and methodology enable our business managers to identify potential risks and control gaps. Lines of business are responsible for identifying, owning, managing and monitoring the operational risks and controls associated with their business activities and product or service offerings to within acceptable levels. Centralized functions, such as Business Continuity, Enterprise Third Party Management, and Information Security, are responsible for the development, implementation and management of their individual programs and for the development and maintenance of the policies, procedures, methodologies, tools and technology utilized across the enterprise to identify, assess, monitor and report program risks. Additionally, independent risk management reviews and challenges line of business adherence to the framework to help ensure proper controls are in place and appropriate risk mitigation plans are established as necessary. Conduct, Reputational and Strategic Risk PNC’s risk culture seeks to reinforce the appropriate protocols for responsible and ethical behavior through sound processes and controls. In order to promote a robust risk culture, the Board and executive management establish code of conduct and professional standards to which all employees must adhere. A strong risk culture discourages misconduct and supports conduct risk management at PNC. Conduct risk is defined as the risk that employees fail to comply with the ethical standards expected of them. Strong conduct risk management is important in supporting PNC’s reputation and PNC maintains a corporate culture that emphasizes complying with laws, regulations, and managing reputational risks. Reputational risk is the risk to the franchise and/or shareholder value based on a negative perception of PNC by its stakeholders and/or the changing expectations of its stakeholders. Strategic risk is another component of the ERM Framework that is also critical to optimizing shareholder returns. Strategic risk is the risk to earnings that may arise from adverse business decisions, improper implementation of business decisions and/or inadequate response to changes in the business environment. Strategic risk is considered and assessed by our businesses in the annual strategic planning processes and monitored on an on-going basis as those plans are carried out. The PNC Financial Services Group, Inc. – 2021 Form 10-K  81 Compliance Risk Enterprise Compliance is responsible for oversight of compliance risk for the organization. Compliance issues are identified and tracked through enterprise-wide monitoring and testing activities. Compliance risk issues are escalated through a comprehensive risk reporting process at both a business and enterprise level and incorporated, as appropriate, into the development and assessment of our operational risk profile. A management committee, chaired by the Chief Compliance Officer, is responsible for oversight of compliance and fiduciary risk management programs across PNC. Enterprise Compliance, through the Regulatory Change Program, helps PNC understand and proactively address emerging regulatory topics and risks as well as respond to changes in applicable laws and regulations. To understand emerging issues impacting the industry, Enterprise Compliance communicates regularly with various regulators having supervisory or regulatory responsibilities with respect to us, our subsidiaries, or businesses and participates in forums focused on regulatory and compliance matters in the financial services industry. Information Security Risk The Information Security component of our Operational Risk Management Framework is responsible for protecting information assets to achieve business objectives, which includes cyber security. PNC’s cyber security program is designed to identify risks to sensitive information, protect that information, detect threats and events, and maintain an appropriate response and recovery capability to help ensure resilience against information security incidents. The program includes, among other things, annual security and privacy training for all PNC employees and quarterly phishing exercises to raise employee awareness. Our security program is also regularly examined by federal regulators for compliance with financial regulations and standards. The program also establishes expectations for information asset management, system development security, identity and access management, incident management, threat and vulnerability management, security operations management and third and fourth party security. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Our consolidated financial statements are prepared by applying certain accounting policies. Note 1 Accounting Policies in the Notes to Consolidated Financial Statements in Item 8 of this Report describes the most significant accounting policies that we use. Certain of these policies require us to make estimates or economic assumptions that may vary under different assumptions or conditions, and such variations may significantly affect our reported results and financial position for the period or in future periods. Allowance for Credit Losses We maintain the ACL at levels that we believe to be appropriate as of the balance sheet date to absorb expected credit losses on our existing investment securities, loans, equipment finance leases, other financial assets and unfunded lending related commitments, for the remaining contractual term of the assets or exposures, taking into consideration expected prepayments. Our determination of the ACL is based on historical loss and performance experience, as well as current borrower and transaction characteristics including collateral type and quality, current economic conditions, reasonable and supportable forecasts of future conditions and other relevant factors. We use methods sensitive to changes in economic conditions to interpret these factors and to estimate expected credit losses. We evaluate and, when appropriate, enhance the quality of our data and models and other methods used to estimate ACL on an ongoing basis. We apply qualitative factors to reflect in the ACL our best estimate of amounts that we do not expect to collect because of, among other things, idiosyncratic risk factors, changes in economic conditions that may not be reflected in forecasted results, or other potential methodology limitations. The major drivers of ACL estimates include, but are not limited to: •Current economic conditions: Our forecast of expected losses depends on economic conditions as of the estimation date. As current economic conditions evolve, forecasted losses could be materially affected. •Scenario weights and design: Our loss estimates are sensitive to the shape, direction and rate of change of macroeconomic forecasts and thus vary significantly between upside and downside scenarios. Change to probability weights assigned to these scenarios and timing of peak business cycles reflected by the scenarios could materially affect our loss estimates. •Current borrower quality: Our forecast of expected losses depends on current borrower and transaction characteristics, including credit metrics and collateral type/quality. As borrower quality evolves, forecasted losses could be materially affected. •Portfolio volume and mix: Changes to portfolio volume and mix could materially affect our estimates, as CECL reserves would be recognized upon origination or acquisition. For all assets and unfunded lending related commitments within the scope of the CECL standard, the applicable ACL is composed of one or a combination of the following components: (i) collectively assessed or pooled reserves, (ii) individually assessed reserves, and (iii) qualitative (judgmental) reserves. Our methodologies and key assumptions for each of these components are discussed in Note 1 Accounting Policies in the Notes to Consolidated Financial Statements in Item 8 of this Report. Reasonable and Supportable Economic Forecast Under CECL, we are required to consider reasonable and supportable forecasts in estimating expected credit losses. For this purpose, we have established a framework which includes a three year forecast period and the use of four economic scenarios with associated probability weights, which in combination create a forecast of expected economic outcomes over our reasonable and supportable 82    The PNC Financial Services Group, Inc. – 2021 Form 10-K forecast period. Credit losses estimated in our reasonable and supportable forecast period are sensitive to the shape and severity of the scenarios used and weights assigned to them. To generate the four economic forecast scenarios we use a combination of quantitative macroeconomic models, other measures of economic activity and forward-looking expert judgment to forecast the distribution of economic outcomes over the reasonable and supportable forecast period. Each scenario is then given an associated probability (weight) in order to represent our current expectation within that distribution over the forecast period. This process is informed by current economic conditions, expected business cycle evolution and the expert judgment of PNC’s RAC. This approach seeks to provide a reasonable representation of the forecast of expected economic outcomes and is used to estimate expected credit losses across a variety of loans and securities. Each quarter the scenarios are presented for approval to PNC’s RAC, and the committee determines and approves CECL scenarios’ weights for use for the current reporting period. The scenarios used for the period ended December 31, 2021 reflect an improved near-term economic outlook compared to the scenarios used for the period ended December 31, 2020. The overall improvement in the comparison was driven largely by improvements in both the outlook for consumer spending and the labor market, along with the impact from continued vaccine distribution, while also considering the lingering effects of COVID-19 that slowed the momentum of economic recovery in recent months and the impacts of supply-chain disruptions. We used a number of economic variables in our scenarios, with the most significant drivers being Real GDP and the U.S. unemployment rate. The following table presents a comparison of these two economic variables based on the weighted-average scenario forecasts used in determining our ACL at December 31, 2021 and 2020. Table 36: Key Macroeconomic Variables in CECL Weighted-Average Scenarios [[GREPCENT_TABLE]] [["","Assumptions as of December 31, 2021"],["","2022","2023","2024"],["U.S. Real GDP (a) (b)","2.8%","1.4%","1.3%"],["U.S. Unemployment Rate (c)","4.4%","4.1%","3.9%"],["","Assumptions as of December 31, 2020"],["","2021","2022","2023"],["U.S. Real GDP (a) (d)","2.3%","2.7%","2.2%"],["U.S. Unemployment Rate (c)","6.8%","5.7%","5.0%"]] [[/GREPCENT_TABLE]] (a)Represents year-over-year growth rates. (b)Year-over-year growth for 2022 in the assumptions used at December 31, 2021 reflects 5.4% growth above pre-recession levels. (c)Represents quarterly average rate at December 31. (d)Year-over-year growth for 2021 in the assumptions used at December 31, 2020 reflected growth that remained 0.5% below pre-recession levels. Real GDP growth is expected to remain robust in 2022, with output expanding 2.8% on a weighted-average basis, similar to the 2.7% weighted-average expectation this time last year, before slowing to 1.4% and 1.3% in 2023 and 2024, respectively. The improvement in the labor market has outpaced expectations over the past year. As such, the weighted-average projection of the unemployment rate is expected to end 2022 at 4.4% and 2023 at 4.1%. This is an improvement from the weighted-average projections taken as of December 31, 2020, which had the unemployment rate reaching 5.7% and 5.0% in 2022 and 2023, respectively. The economy has seen significant recovery from the onset of the pandemic. National macroeconomic indicators, forecasts and performance expectations have all steadily improved, helping to lower overall loss expectations. These improvements have been reflected in the reserve releases throughout 2021, including in certain segments initially impacted by COVID-19 related restrictions. However, for certain portions of our commercial and consumer portfolios, considerable uncertainty remains regarding lifetime losses. For commercial borrowers, there are still lingering concerns around industries that have been affected by COVID-19 related restrictions and emerging secular changes. For these industries, where unrestricted commerce has recently returned, the recovery will lag the broader economy. Where restrictions persist and/or secular changes have emerged, the impact and eventual level of recovery are less certain. For consumer borrowers, payment behavior upon expiration of government stimulus, including expired enhanced unemployment benefits is still difficult to predict. As such, for both our commercial and consumer loan portfolios, PNC identified and performed significant analysis around these segments to ensure our reserves are adequate in the current economic environment. We believe the economic scenarios have effectively provided sufficient variation to capture probable recovery paths. Additionally, through in-depth and granular analysis of COVID-19 related impacts, we have addressed reserve requirements for specific populations most affected in the current environment. Through this approach, we believe the reserve levels appropriately reflect the expected credit losses in the portfolio as of the balance sheet date. To provide additional context regarding the sensitivity of the ACL to a more pessimistic forecast of expected economic outcomes, we considered what our ACL would be when applying a 100% probability weighting to the most severely adverse scenario. This severely adverse scenario estimated that Real GDP contracted in 2022 ending the year down 2.1% compared to 2021 levels, with growth The PNC Financial Services Group, Inc. – 2021 Form 10-K  83 picking up again beginning in 2023, while the unemployment rate increased to end 2022 at 7.9% before gradually improving again through 2023 and 2024. Excluding consideration of qualitative adjustments, this sensitivity analysis would result in a hypothetical increase in our ACL of $2.4 billion at December 31, 2021. This scenario was not our expectation at December 31, 2021 and does not reflect our current expectation, nor does it capture all the potential unknown variables that could arise in the forecast period, but it provides an approximation of a possible outcome under hypothetical severe conditions. The CECL methodology inherently requires a high degree of judgment, and as a result, it is possible that we may, at another point in time, reach different conclusions regarding our credit loss estimates. Residential and Commercial Mortgage Servicing Rights We elect to measure our MSRs at fair value. This election was made to be consistent with our risk management strategy to hedge changes in the fair value of these assets. The fair value of our MSRs is estimated by using a discounted cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other factors which are determined based on current market conditions. We employ risk management strategies designed to protect the value of MSRs from changes in interest rates and related market factors. The values of the MSRs are economically hedged with securities and derivatives, including interest-rate swaps, options, and forward mortgage-backed and futures contracts. As interest rates change, these financial instruments are expected to have changes in fair value negatively correlated to the change in fair value of the hedged MSR portfolios. The hedge relationships are actively managed in response to changing market conditions over the life of the MSRs. Selecting appropriate financial instruments to economically hedge residential or commercial MSRs requires significant management judgment to assess how mortgage rates and prepayment speeds could affect the future values of MSRs. Hedging results can frequently be less predictable in the short term, but over longer periods of time are expected to protect the economic value of the MSRs. For information on how each estimate has changed and a sensitivity analysis of the hypothetical effect of the fair value of MSRs to immediate adverse changes in key assumptions, see Note 6 Goodwill and Mortgage Servicing Rights in the Notes to Consolidated Financial Statements in Item 8 of this Report. For additional information on our residential and commercial MSRs, see Note 1 Accounting Policies, Note 6 Goodwill and Mortgage Servicing Rights and Note 15 Fair Value in the Notes to Consolidated Financial Statements in Item 8 of this Report. Fair Value Measurements - Level 3 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. When observable price and 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 valuation techniques could materially impact our future financial condition and results of operations. We apply ASC 820 – Fair Value Measurements. This guidance defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. This guidance requires a three level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable. Level 3 assets and liabilities are those where the fair value is estimated using significant unobservable inputs. While estimating potential sensitivities around fair value measurements is inherently challenging, we provide a summary of the key unobservable inputs in Note 15 Fair Value in the Notes to Consolidated Financial Statements in Item 8 of this Report. For additional information on Level 3 fair value measurements, see Note 15 Fair Value in the Notes to Consolidated Financial Statements in Item 8 of this Report. Recently Adopted Accounting Pronouncements See Note 1 Accounting Policies in the Notes to Consolidated Financial Statements in Item 8 of this Report regarding the impact of new accounting pronouncements which we have adopted. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION We make statements in this Report, and we may from time to time make other statements, regarding our outlook for financial performance, such as earnings, revenues, expenses, tax rates, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting us and our future business and operations that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “look,” “intend,” “outlook,” “project,” “forecast,” “estimate,” “goal,” “will,” “should” and other similar words and expressions. 84    The PNC Financial Services Group, Inc. – 2021 Form 10-K Forward-looking statements are necessarily subject to numerous assumptions, risks and uncertainties, which change over time. Future events or circumstances may change our outlook and may also affect the nature of the assumptions, risks and uncertainties to which our forward-looking statements are subject. Forward-looking statements speak only as of the date made. We do not assume any duty and do not undertake any obligation to update forward-looking statements. Actual results or future events could differ, possibly materially, from those anticipated in forward-looking statements, as well as from historical performance. As a result, we caution against placing undue reliance on any forward-looking statements. Our forward-looking statements are subject to the following principal risks and uncertainties. ▪Our businesses, financial results and balance sheet values are affected by business and economic conditions, including: –Changes in interest rates and valuations in debt, equity and other financial markets, –Disruptions in the U.S. and global financial markets, –Actions by the Federal Reserve Board, U.S. Treasury and other government agencies, including those that impact money supply and market interest rates and inflation, –Changes in customer behavior due to changing business and economic conditions or legislative or regulatory initiatives, –Changes in customers’, suppliers’ and other counterparties’ performance and creditworthiness, –Impacts of tariffs and other trade policies of the U.S. and its global trading partners, –The length and extent of the economic impacts of the COVID-19 pandemic, –Impacts of changes in federal, state and local governmental policy, including on the regulatory landscape, capital markets, taxes, infrastructure spending and social programs, and –Commodity price volatility. ▪Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory contingencies. These statements are based on our views that: –The U.S. economy continues to recover from the pandemic-caused recession in the first half of 2020. Growth is likely to be softer in the first quarter of 2022 due to the omicron variant, and then pick up in the spring, remaining above the economy’s long-run average throughout this year. Consumer spending growth will remain solid in 2022 due to good underlying fundamentals. –Supply-chain difficulties, which weighed on growth in the second half of 2021, will gradually ease over the course of 2022. Labor shortages will remain a constraint this year, although strong wage growth will support consumer spending. –Inflation accelerated in the second half of 2021 to its fastest pace in decades due to strong demand but limited supplies coming out of the pandemic for some goods and services. Inflation will slow in 2022 as supply and demand for these goods and services normalize, but also broaden throughout the economy due to wage growth. Inflation will end 2022 above the Federal Reserve’s long-run objective of 2%. –PNC expects the FOMC to raise the federal funds rate by 0.25 percentage points five times in 2022 to reach a range of 1.25% to 1.50% by the end of the year, and then further increase the federal funds rate in 2023. The Federal Reserve will also end its purchases of long-term Treasuries and mortgage-backed securities in March 2022, and then start to reduce its balance sheet in mid-2022. •PNC’s ability to take certain capital actions, including returning capital to shareholders, is subject to PNC meeting or exceeding a SCB established by the Federal Reserve Board in connection with the Federal Reserve Board’s CCAR process. •PNC’s regulatory capital ratios in the future will depend on, among other things, the company’s financial performance, the scope and terms of final capital regulations then in effect and management actions affecting the composition of PNC’s balance sheet. In addition, PNC’s ability to determine, evaluate and forecast regulatory capital ratios, and to take actions (such as capital distributions) based on actual or forecasted capital ratios, will be dependent at least in part on the development, validation and regulatory review of related models. •Legal and regulatory developments could have an impact on our ability to operate our businesses, financial condition, results of operations, competitive position, reputation or pursuit of attractive acquisition opportunities. Reputational impacts could affect matters such as business generation and retention, liquidity, funding, and ability to attract and retain management. These developments could include: –Changes to laws and regulations, including changes affecting oversight of the financial services industry, consumer protection, bank capital and liquidity standards, pension, bankruptcy and other industry aspects, and changes in accounting policies and principles. –Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries. These matters may result in monetary judgments or settlements or other remedies, including fines, penalties, restitution or alterations in our business practices, and in additional expenses and collateral costs, and may cause reputational harm to PNC. –Results of the regulatory examination and supervision process, including our failure to satisfy requirements of agreements with governmental agencies. –Impact on business and operating results of any costs associated with obtaining rights in intellectual property claimed by others and of adequacy of our intellectual property protection in general. The PNC Financial Services Group, Inc. – 2021 Form 10-K  85 •Business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through effective use of systems and controls, third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards. •Our acquisition of BBVA presents us with risks and uncertainties related to the integration of the acquired business into PNC including: –The business of BBVA going forward may not perform as we project or in a manner consistent with historical performance. As a result, the anticipated benefits, including estimated cost savings, of the transaction may be significantly more difficult or take longer to achieve than expected or may not be achieved in their entirety as a result of unexpected factors or events, including those that are outside of our control. –The integration of BBVA, including its U.S. banking subsidiary, BBVA USA, with that of PNC and PNC Bank may be more difficult to achieve than anticipated or have unanticipated adverse results. Our ability to integrate BBVA, including its U.S. banking subsidiary, BBVA USA, successfully may be adversely affected by the fact that this transaction results in us entering several geographical markets where we did not previously have any meaningful presence. •In addition to the BBVA transaction, we grow our business in part through acquisitions and new strategic initiatives. Risks and uncertainties include those presented by the nature of the business acquired and strategic initiative, including in some cases those associated with our entry into new businesses or new geographic or other markets and risks resulting from our inexperience in those new areas, as well as risks and uncertainties related to the acquisition transactions themselves, regulatory issues, and the integration of the acquired businesses into PNC after closing. •Competition can have an impact on customer acquisition, growth and retention and on credit spreads and product pricing, which can affect market share, deposits and revenues. Our ability to anticipate and respond to technological changes can also impact our ability to respond to customer needs and meet competitive demands. •Business and operating results can also be affected by widespread natural and other disasters, pandemics, dislocations, terrorist activities, system failures, security breaches, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically. We provide greater detail regarding these as well as other factors in this Report, including in Item 1A Risk Factors, the Risk Management section of Item 7 and Note 21 Legal Proceedings in the Notes to Consolidated Financial Statements in Item 8 of this Report. Our forward-looking statements may also be subject to other risks and uncertainties, including those discussed elsewhere in this Report or in our other filings with the SEC.