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 intoPNC andPNC 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 theFederal 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 theU.S. and its global trading partners, 38The 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
OnJune 1, 2021 , PNC acquired BBVA, aU.S. financial holding company conducting its business operations primarily through itsU.S. banking subsidiary,BBVA USA . PNC paid$11.5 billion in cash as consideration for the acquisition.
At
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
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Balance Sheet Highlights
Our balance sheet was strong and well positioned atDecember 31, 2021 and 2020. In comparison toDecember 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 atDecember 31, 2021 , compared to$12.0 billion atDecember 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 theFederal 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. •AtDecember 31, 2021 compared toDecember 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 atDecember 31, 2021 , compared to$5.9 billion , or 2.46% of total loans atDecember 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% atDecember 31, 2021 from 12.2% atDecember 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 throughDecember 31, 2021 and will be phased-out over the following three years. •Common shareholders' equity increased to$50.7 billion atDecember 31, 2021 , compared to$50.5 billion atDecember 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 . •InJune 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. •OnJanuary 5, 2022 , the PNC Board of Directors declared a quarterly cash dividend on common stock of$1.25 per share paid onFebruary 5, 2022 . 40The 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 theFederal Reserve Board in connection with theFederal 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: •TheU.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 theFederal Reserve's long-run objective of 2%. •PNC expects theFOMC 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. TheFederal Reserve will also end its purchases of long-term Treasuries and mortgage-backed securities inMarch 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 andVisa 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 from 2020 to 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 theFederal 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
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.
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Average funds borrowed decreased
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 atDecember 31, 2021 , compared with$170 billion atDecember 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$900 million of anticipated savings related to the BBVA acquisition have been substantially completed, and we expect the savings to be fully realized in 2022.
Effective tax rate
The effective income tax rate from continuing operations was 18.1% for 2021 compared with 12.4% for 2020. The increase was primarily due to overall higher pre-tax income in 2021 and the favorable resolution of certain tax matters in 2020. The effective tax rate is generally lower than the statutory rate primarily due to tax credits we receive from our investments in low income housing and new markets investments, as well as earnings on other tax exempt investments. Additional information regarding our effective tax rate is included in the Reconciliation of Statutory and Effective Tax Rates table in Note 19 Income Taxes in Item 8 of this Report.
Provision for credit losses
Table 4: Allowance for (recovery of) credit losses
Year endedDecember 31 Dollars in millions 2021 2020 Provision for (recapture of) credit losses Loans and leases$ (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
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
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
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