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Acquisition and Divestiture Activity | 6 Months Ended
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Jun. 30, 2021
Business Combinations [Abstract] |
Acquisition and Divestiture Activity | ACQUISITION A ND D IVESTITURE A CTIVITY Acquisition of BBVA USA Bancshares, Inc. On June 1, 2021, PNC acquired BBVA including its U.S. banking subsidiary, BBVA USA, for $11.5 billion in cash. PNC did not acquire the following entities as part of the acquisition: BBVA Securities, Inc., Propel Venture Partners Fund I, L.P. and BBVA Processing Services, Inc. This transaction has been accounted for as a business combination. Accordingly, the assets and liabilities from BBVA were recorded at fair value as of the acquisition date. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. Fair value estimates related to the assets and liabilities from BBVA are subject to adjustment for up to one year after the closing date of the acquisition as additional information becomes available. Valuations subject to adjustment include, but are not limited to, loans, certain deposits, certain other assets, customer relationships and the core deposit intangibles. PNC incurred $111 million and $117 million in costs for the three and six months ended June 30, 2021, in connection with the transaction. These expenses are primarily comprised of legal, advisory and technology related costs. Cumulative nonrecurring merger and integration costs through June 30, 2021 were $124 million. The following table includes the preliminary fair value of the identifiable tangible and intangible assets and liabilities from BBVA: Table 35: Acquisition Consideration
|  | June 1, 2021
In millions |  | Fair Value
Fair value of acquisition consideration |  | $ | 11,480 |
Assets |  |
Cash and due from banks |  | $ | 969 |
Interest-earning deposits with banks |  | 13,313 |
Loans held for sale |  | 446 |
Investment securities – available for sale |  | 18,358 |
Net loans |  | 61,370 |
Equity investments |  | 723 |
Mortgage servicing rights |  | 35 |
Core deposit intangibles and other intangible assets |  | 399 |
Other |  | 3,531 |
Total assets |  | $ | 99,144 |
Liabilities |  |
Deposits |  | $ | 85,562 |
Borrowed funds |  | 2,449 |
Accrued expenses and other liabilities |  | 1,271 |
Total liabilities |  | $ | 89,282 |
Noncontrolling interests |  | 22 |
Less: Net assets |  | $ | 9,840 |
Goodwill |  | $ | 1,640 |
Preliminary goodwill of $1.6 billion recorded in connection with the transaction resulted from the reputation, operating model and expertise of BBVA. The amount of goodwill recorded reflects the increased market share and related synergies that are expected to result from the acquisition, and represents the excess purchase price over the estimated fair value of the net assets from BBVA. The goodwill was allocated to each of our three business segments on a preliminary basis and is not deductible for income tax purposes. See Note 6 Goodwill and Mortgage Servicing Rights for additional information on the allocation of goodwill to the segments. The following table includes the fair value and unpaid principal balance of the loans from the BBVA acquisition: Table 36: Fair Value and Unpaid Principal Balance of Loans from the BBVA Acquisition
| June 1, 2021
In millions | Unpaid Principal Balance | Fair Value
Loans |  |
Commercial |  |
Commercial and industrial | $ | 29,864 |  | $ | 29,372 |
Commercial real estate | 10,632 |  | 10,250 |
Equipment lease financing | 48 |  | 48 |
Total commercial | 40,544 |  | 39,670 |
Consumer |  |
Residential real estate | 12,871 |  | 12,983 |
Home equity | 2,430 |  | 2,417 |
Automobile | 3,916 |  | 3,912 |
Credit card | 820 |  | 758 |
Other consumer | 1,688 |  | 1,630 |
Total consumer | 21,725 |  | 21,700 |
Total | $ | 62,269 |  | $ | 61,370 |
Other intangible assets from the BBVA acquisition, as of June 1, 2021 consisted of the following: Table 37: Intangible Assets
In millions | Fair Value | Weighted Life (years) | Amortization Method |
Residential mortgage servicing rights | $ | 35 |  | 5.5 | (a) |
Core deposits | $ | 283 |  | 10.0 | Accelerated |
Other | 116 |  | 9.8 | Straight-line |
Total core deposits and other | $ | 399 |  |  |  |
(a) Intangible asset accounted for at fair value. The following is a description of the methods used to determine the fair values of significant assets and liabilities. Cash and and Due from Banks and Interest-earning Deposits with Banks The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets. Loans Held for Sale Residential mortgage loans are valued based on quoted market prices, where available, prices for other traded mortgage loans with similar characteristics, and purchase commitments and bid information received from market participants. The prices are adjusted as necessary to include the embedded servicing value in the loans and to take into consideration the specific characteristics of certain loans that are priced based on the pricing of similar loans. Personal installment loans are pooled based on delinquency status, and fair value of individual loans is calculated based on traded consumer unsecured loans, dealer research and loan level performance characteristics. Available For Sale Securities All investment securities from the BBVA acquisition were classified within the available for sale portfolio at acquisition. Fair value estimates for available for sale securities were determined by third-party pricing vendors. The third-party vendors use a variety of methods when pricing securities that incorporate relevant market data to arrive at an estimate of what a buyer in the marketplace would pay for a security under current market conditions. These methods include the use of quoted prices for the identical or a similar security, an alternative market-based approach or an income approach, such as a discounted cash flow pricing model. Loans Fair value for loans is based on a discounted cash flow methodology that considered credit loss and prepayment expectations, market interest rates and other market factors, such as liquidity, from the perspective of a market participant. Loan cash flows were generated on an individual loan basis. The PD, LGD, exposure at default and prepayment assumptions are the key factors driving credit losses which are embedded into the estimated cash flows. Equity Investments Equity investments primarily include LIHTC investments and preservation fund investments. The fair value of the LIHTC investments was estimated based on LIHTC pricing observed for recent transactions in markets where the properties underlying the LIHTC investments from the BBVA acquisition are located. The fair value of the preservation investments was estimated based on appraisals and valuations of the properties in the investment portfolio using income and market projections. Mortgage Servicing Rights The fair value of mortgage servicing rights from the BBVA acquisition 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. Core Deposit Intangible This intangible asset represents the value of certain client deposit relationships. The fair value was estimated utilizing the cost method. Appropriate consideration was given to deposit costs including servicing costs, client retention and alternative funding source costs at the time of acquisition. The discount rate used was derived taking into account the estimated cost of equity, risk-free return rate and risk premium for the market and specific risk related to the asset’s cash flows. The core deposit intangible is being amortized over 10 years using an accelerated depreciation methodology. Deposits The fair values for time deposits were estimated by discounting contractual cash flows using current market rates for instruments with similar maturities. For deposits with no defined maturity, carrying values approximate fair values. Borrowed Funds The fair values of long-term debt instruments were estimated based on quoted market prices. The following table presents financial results of BBVA included in the Consolidated Statement of Income from the date of acquisition through June 30, 2021. Table 38: BBVA Financial Results
In millions | One month ended June 30, 2021 |
Net interest income | $ | 236 |  |
Noninterest income | $ | 80 |  |
Net income | $ | 153 |  |
The following table presents unaudited pro forma results as if the acquisition of BBVA by PNC had occurred on January 1, 2020 and includes the impact of amortizing and accreting certain estimated purchase accounting adjustments such as intangible assets as well as fair value adjustments to loans, deposits and long-term debt. Acquisition costs of $117 million that have been incurred since January 1, 2021 are included in the pro forma results. PNC's financial results include the divestiture of BlackRock of $4.3 billion recorded in net income. Additionally, BBVA's financial results through the six months ended June 30, 2020 included a $2.2 billion goodwill impairment charge recorded in noninterest expense. The pro forma information does not necessarily reflect the results that would have occurred had PNC acquired BBVA on January 1, 2020. Table 39: Unaudited Pro Forma Results
| Three months ended June 30 | Six months ended June 30 |
In millions | 2021 | 2020 | 2021 | 2020 |
Net interest income | $ | 2,984 |  | $ | 3,126 |  | $ | 5,975 |  | $ | 6,250 |  |
Noninterest income | $ | 2,258 |  | $ | 1,757 |  | $ | 4,354 |  | $ | 3,825 |  |
Net income | $ | 2,097 |  | $ | 3,327 |  | $ | 4,226 |  | $ | 851 |  |
Under CECL, PNC is required to determine whether purchased loans held for investment have experienced more-than-insignificant deterioration in credit quality since origination. PNC considers a variety of factors in connection with the identification of more-than-insignificant deterioration in credit quality, including but not limited to nonperforming status, delinquency, risk ratings, TDR classification, FICO scores and other qualitative factors that indicate deterioration in credit quality since origination. PNC initially measures the amortized cost of a PCD loan by adding the acquisition date estimate of expected credit losses to the loan's purchase price. The initial ACL for PCD loans of $1.2 billion was established through an adjustment to the BBVA loan balance and related purchase accounting mark. Non-PCD loans and PCD loans had a fair value of $52.1 billion and $9.3 billion at the acquisition date and unpaid principal balance of $52.0 billion and $10.3 billion, respectively. In accordance with U.S. GAAP, there was no carryover of the ACL that had been previously recorded by BBVA. Subsequent to acquisition, PNC recorded an ACL on non-PCD loans of $1.0 billion through an increase to the provision for credit losses. Table 40: PCD Loan Activity
| June 1, 2021 |
In millions |
Principal Balance | $ | 10,253 |  |
ACL at acquisition | (1,161) |  |
Non-credit premium | 224 |  |
Purchase price | $ | 9,316 |  |
Sale of Equity Investment in BlackRock, Inc. In May 2020, PNC completed the sale of its 31.6 million shares of BlackRock, Inc. common and preferred stock through a registered secondary offering at a price of $420 per share. In addition, BlackRock repurchased 2.65 million shares from PNC at a price of $414.96 per share. The total proceeds from the sale were $14.2 billion in cash, net of $0.2 billion in expenses, and resulted in a gain on sale of $4.3 billion. Additionally, PNC contributed 500,000 BlackRock shares to the PNC Foundation. Following the sale and donation, PNC has divested its entire investment in BlackRock and only holds shares of BlackRock stock in a fiduciary capacity for clients of PNC. The following table summarizes the results from the discontinued operations of BlackRock included in the Consolidated Income Statement: Table 41: Consolidated Income Statement - Discontinued Operations
| Three months ended June 30 |  |  | Six months ended June 30 |
In millions | 2020 |  |  | 2020 |
Noninterest income | $ | 5,596 |  |  |  | $ | 5,777 |  |
Total revenue | 5,596 |  |  |  | 5,777 |  |
Income from discontinued operations before income taxes and noncontrolling interests | 5,596 |  |  |  | 5,777 |  |
Income taxes | 1,197 |  |  |  | 1,222 |  |
Net income from discontinued operations | $ | 4,399 |  |  |  | $ | 4,555 |  |
The following table summarizes the cash flows of discontinued operations of BlackRock included in the Consolidated Statement of Cash Flows: Table 42: Consolidated Statement of Cash Flows - Discontinued Operations
| Six months ended June 30
In millions | 2020
Cash from discontinued operations |
Net cash provided (used) by operating activities of discontinued operations | $ | 74 |
Net cash provided by investing activities of discontinued operations | $ | 14,225 |

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=2122178 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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