PNC FINANCIAL SERVICES GROUP, INC. MD&A REPORT (Form 10-K)

0

ABSTRACT

Key Strategic Objectives


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.

The 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.

At October 8, 2021, BBVA United States merged into NCP Bank. At October 12, 2021, PNC has converted approximately 2.6 million customers, 9,000 employees and more than 600 branches in seven states. Our results for the twelve months ended December 31, 2021 reflect the impact of the business activities acquired from BBVA for the period since the closing of the acquisition on June 1, 2021. PNC balance sheet at
December 31, 2021 includes BBVA balances.

For more information on the acquisition of BBVA, see note 2 Acquisition and disposal activity in the notes to the consolidated financial statements included in section 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 more details, 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 more details, see the Credit risk management part of the Risk management section of this section 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
--------------------------------------------------------------------------------

EXAMINATION OF THE CONSOLIDATED INCOME STATEMENT

Our consolidated income statement is presented in section 8 of this report. For the comparison of 2020 versus 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: Average Balances and Summarized Net Interest Income (a)

                                                                     2021                                           2020
                                                                        Average    Interest                            Average     Interest
Year ended December 31                                  Average         Yields/     Income/            Average         Yields/      Income/
Dollars in millions                                    Balances           Rates     Expense           Balances           Rates      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

Passives

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


(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-bearing deposits with banks increased $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 PNC Financial Services Group, Inc. – 2021 Form 10-K ———————————————————– ——————————————

Average funds borrowed decreased $13.4 billionor 28%, primarily due to lower FHLB borrowing reflecting the use of cash from deposit growth.

Further details regarding average loans and deposits are included in the Industry Review section of this Item 7.

Noninterest Income

Table 2: Noninterest Income

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  %


Non-interest revenue 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.

Business services revenue growth was driven by higher capital markets revenue, primarily due to higher M&A advisory fees. The increase was also attributable to the addition of BBVA, higher income from cash management products and higher income from commercial mortgage banking.


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.

Non-interest expenses

Table 3: Non-interest expenses

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  %



                      The PNC Financial Services Group, Inc. - 2021 Form 10-K 43
--------------------------------------------------------------------------------

The increase in non-interest expenses reflects BBVA’s operating and integration expenses as well as increased commercial 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 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: Allowance for (recovery of) credit losses


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 (recovery from) credit losses ($779) $3,175




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 allowance 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

© Edgar Online, source Previews

Share.

About Author

Comments are closed.